G.R. No. 72275. November 13, 1991.

* future debts of the principal debtor the amount of

which is not yet known (see Article 2053, supra).

PACIFIC BANKING CORPORATION, petitioner,

vs. HON. INTERMEDIATE APPELLATE COURT Same; Same; Same.—A guarantor or surety does
AND ROBERTO REGALA, JR., respondents. not incur liability unless the principal debtor is
held liable. It is in this sense that a surety,
although solidarily liable with the principal debtor,
is different from the debtor. It does not mean,
Obligations and Contracts; Suretyship;
however, that the surety cannot be held liable to
Distinguished from Guaranty.—The undertaking
the same extent as the principal debtor. The
signed by Roberto Regala, Jr. although
nature and extent of the liabilities of a guarantor
denominated “Guarantor’s Undertaking,” was in
or a surety is determined by the clauses in the
substance a contract of surety. As distinguished
contract of suretyship (see PCIB v. CA, L-34959,
from a contract of guaranty where the guarantor
March 18, 1988, 159 SCRA 24).
binds himself to the creditor to fulfill the obligation
of the principal debtor only in case the latter
should fail to do so, in a contract of suretyship, the
surety binds himself solidarily with the principal PETITION for certiorari to review the decision of
debtor (Art. 2047, Civil Code of the Philippines). the then Intermediate Appellate Court.
We need not look elsewhere to determine the
nature and extent of private respondent Roberto
Regala, Jr.’s undertaking. As a surety he bound
The facts are stated in the opinion of the Court.
himself jointly and severally with the debtor Celia
Regala “to pay the Pacific Banking Corporation
upon demand, any and all indebtedness,
obligations, charges or liabilities due and incurred Ocampo, Dizon & Domingo for petitioner.
by said Celia Syjuco Regala with the use of
Pacificard or renewals thereof issued in (her) favor
by Pacific Banking Corporation.” Angara, Concepcion, Regala & Cruz for private
respondent.

Same; Same; Same.—It is true that under Article

2054 of the Civil Code, “(A) guarantor may bind MEDIALDEA, J.:
himself for less, but not for more than the
principal debtor, both as regards the amount and
the onerous nature of the conditions. It is likewise
not disputed by the parties that the credit limit This is a petition for review on certiorari of the
granted to Celia Regala was P2,000.00 per month decision (pp. 21-31, Rollo) of the Intermediate
and that Celia Regala succeeded in using the card Appellate Court (now Court of Appeals) in AC-G.R.
beyond the original period of its effectivity, C.V. No. 02753,1 which modified the decision of
October 29, 1979. We do not agree however, that the trial court against herein private respondent
Roberto Jr.’s liability should be limited to that Roberto Regala, Jr., one of the defendants in the
extent. Private respondent Roberto Regala, Jr., as case for sum of money filed by Pacific Banking
surety of his wife, expressly bound himself up to Corporation.
the extent of the debtor’s (Celia) indebtedness
likewise expressly waiving any “discharge in case
of any change or novation of the terms and The facts of the case as adopted by the
conditions in connection with the issuance of the respondent appellate court from herein
Pacificard credit card.” Roberto, in fact, made his petitioner’s brief before said court are as follows:
commitment as a surety a continuing one, binding
upon himself until all the liabilities of Celia Regala
have been fully paid.
“On October 24, 1975, defendant Celia Syjuco
Regala (hereinafter referred to as Celia Regala for
brevity), applied for and obtained from the
Same; Same; Same.—Private respondent Roberto plaintiff the issuance and use of Pacificard credit
Regala, Jr. had been made aware by the terms of card (Exhs. ‘A’, ‘A-1’), under the “Terms and
the undertaking of future changes in the terms Conditions Governing the Issuance and Use of
and conditions governing the issuance of the Pacificard (Exh. ‘B’ and hereinafter referred to as
credit card to his wife and that notwithstanding, Terms and Conditions), a copy of which was
he voluntarily agreed to be bound as a surety. As issued to and received by the said defendant on
in guaranty, a surety may secure additional and the date of the application and expressly agreed

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 1

that the use of the Pacificard is governed by said Answer with Counterclaim admitting his execution
Terms and Conditions. On the same date, the of the ‘Guarantor’s Understanding, ‘but with the
defendant-appelant Robert Regala, Jr., spouse of understanding that his liability would be limited to
defendant Celia Regala, executed a ‘Guarantor’s P2,000.00 per month.’
Undertaking’ (Exh. ‘A-1-a’) in favor of the appellee
Bank, whereby the latter agreed ‘jointly and
severally of Celia Aurora Syjuco Regala, to pay the
“In view of the solidary nature of the liability of the
Pacific Banking Corporation upon demand, any
parties, the presentation of evidence ex-parte as
and all indebtedness, obligations, charges or
against the defendant Celia Regala was jointly
liabilities due and incurred by said Celia Aurora
held with the trial of the case as against the
Syjuco Regala with the use of the Pacificard, or
defendant Roberto Regala.
renewals thereof, issued in her favor by the Pacific
Banking Corporation’. It was also agreed that ‘any
changes of or novation in the terms and conditions
in connection with the issuance or use of the “After the presentation of plaintiff’s testimonial
Pacificard, or any extension of time to pay such and documentary evidence, fire struck the City
obligations, charges or liabilities shall not in any Hall of Manila, including the court where the
manner release me/us from responsibility instant case was pending, as well as all its records.
hereunder, it being understood that I fully agree
to such charges, novation or extension, and that
this understanding is a continuing one and shall “Upon plaintiff-appellee’s petition for
subsist and bind me until the liabilities of the said reconstitution, the records of the instant case
Celia Syjuco Regala have been fully satisfied or were duly reconstituted. Thereafter, the case was
paid.’ set for pre-trial conference with respect to the
defendant-appellant Roberto Regala on
plaintiff-appellee’s motion, after furnishing the
“Plaintiff-appellee Pacific Banking Corporation has latter a copy of the same. No opposition thereto
contracted with accredited business having been interposed by defendant-appellant,
establishments to honor purchases of goods the trial court set the case for pre-trial conference.
and/or services by Pacificard holders and the cost Neither did said defendant-appellant nor his
thereof to be advanced by the plaintiff-appellee counsel appear on the date scheduled by the trial
for the account of the defendant cardholder, and court for said conference despite due notice.
the latter undertook to pay any statements of Consequently, plaintiff-appellee moved that the
account rendered by the plaintiff-appellee for the defendant-appellant Roberto Regala be declared
advances thus made within thirty (30) days from as in default and that it be allowed to present its
the date of the statement, provided that any evidence ex-parte, which motion was granted. On
overdue account shall earn interest at the rate of July 21, 1983, plaintiff-appellee presented its
14% per annum from date of default. evidence ex-parte. (pp. 23-26, Rollo)

“The defendant Celia Regala, as such Pacificard After trial, the court a quo rendered judgment on
holder, had purchased goods and/or services on December 5, 1983, the dispositive portion of
credit (Exh. ‘C’, ‘C-1’ to ‘C-112’) under her which reads:
Pacificard, for which the plaintiff advanced the
cost amounting to P92,803.98 at the time of the
filing of the complaint. “WHEREFORE, the Court renders judgment for the
plaintiff and against the defendants condemning
the latter, jointly and severally, to pay said
‘In view of defendant Celia Regala’s failure to plaintiff the amount of P92,803.98, with interest
settle her account for the purchases made thru the thereon at 14% per annum, compounded annually,
use of the Pacificard, a written demand (Exh. ‘D’) from the time of demand on November 17, 1978
was sent to the latter and also to the defendant until said principal amount is fully paid; plus 15%
Roberto Regala, Jr. (Exh. ‘ ’) under his of the principal obligation as and for attorney’s
‘Guarantor’s Undertaking’. fees and expense of suit; and the costs.

“A complaint was subsequently filed in Court for “The counterclaim of defendant Roberto Regala, Jr.
defendant’s (sic) repeated failure to settle their is dismissed for lack of merit.
obligation. Defendant Celia Regala was declared in
default for her failure to file her answer within the
reglementary period. Defendant-appellant “SO ORDERED.” (pp. 22-23, Rollo)
Roberto Regala, Jr., on the other hand, filed his
S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 2
 “I/We, the undersigned, hereby agree, jointly and
severally with Celia Syjuco Regala to pay the
The defendants appealed from the decision of the Pacific Banking Corporation upon demand any and
court a quo to the Intermediate Appellate Court. all indebtedness, obligations, charges or liabilities
due and incurred by said Celia Syjuco Regala with
the use of the Pacificard or renewals thereof
On August 12, 1985, respondent appellate court issued in his favor by the Pacific Banking
rendered judgment modifying the decision of the Corporation. Any changes of or Novation in the
trial court. Private respondent Roberto Regala, Jr. terms and conditions in connection with the
was made liable only to the extent of the monthly issuance or use of said Pacificard, or any extension
credit limit granted to Celia Regala, i.e., at of time to pay such obligations, charges or
P2,000.00 a month and only for the advances liabilities shall not in any manner release me/us
made during the one year period of the card’s from the responsibility hereunder, it being
effectivity counted from October 29, 1975 up to understood that the undertaking is a continuing
October 29, 1976. The dispositive portion of the one and shall subsist and bind me/us until all the
decision states: liabilities of the said Celia Syjuco Regala have
been fully satisfied or paid.” (p. 12, Rollo)

“WHEREFORE, the judgment of the trial court

dated December 5, 1983 is modified only as to The undertaking signed by Roberto Regala, Jr.
appellant Roberto Regala, Jr., so as to make him although denominated “Guarantor’s
liable only for the purchases made by defendant Undertaking,” was in substance a contract of
Celia Aurora Syjuco Regala with the use of the surety. As distinguished from a contract of
Pacificard from October 29, 1975 up to October 29, guaranty where the guarantor binds himself to the
1976 up to the amount of P2,000.00 per month creditor to fulfill the obligation of the principal
only, with interest from the filing of the complaint debtor only in case the latter should fail to do so,
up to the payment at the rate of 14% per annum in a contract of suretyship, the surety binds
without pronouncement as to costs.” (p. 32, Rollo) himself solidarily with the principal debtor (Art.
2047, Civil Code of the Philippines).

A motion for reconsideration was filed by Pacific

Banking Corporation which the respondent We need not look elsewhere to determine the
appellate court denied for lack of merit on nature and extent of private respondent Roberto
September 19, 1985 (p. 33, Rollo). Regala, Jr.’s undertaking. As a surety he bound
himself jointly and severally with the debtor Celia
Regala “to pay the Pacific Banking Corporation
upon demand, any and all indebtedness,
On November 8, 1985, Pacificard filed this petition.
obligations, charges or liabilities due and incurred
The petitioner contends that while the appellate
by said Celia Syjuco Regala with the use of
court correctly recognized Celia Regala’s
Pacificard or renewals thereof issued in (her) favor
obligation to Pacific Banking Corp. for the
by Pacific Banking Corporation.” This undertaking
purchases of goods and services with the use of a
was also provided as a condition in the issuance of
Pacificard credit card in the total amount of
the Pacificard to Celia Regala, thus:
P92,803.98 with 14% interest per annum, it erred
in limiting private respondent Roberto Regala,
Jr.’s liability only for purchases made by Celia
Regala with the use of the card from October 29, “5. A Pacificard is issued to a Pacificard-holder
1975 up to October 29, 1976 up to the amount of against the joint and several signature of a third
P2,000.00 per month with 14% interest from the party and as such, the Pacificard-holder and the
filing of the complaint. guarantor assume joint and several liabilities for
any and all amount arising out of the use of the
Pacificard.” (p. 14, Rollo)

There is merit in this petition.

The respondent appellate court held that “all the

other rights of the guarantor are not thereby lost
The pertinent portion of the “Guarantor’s
by the guarantor becoming liable solidarily and
Undertaking” which private respondent Roberto
therefore a surety.” It further ruled that although
Regala, Jr. signed in favor of Pacific Banking
the surety’s liability is like that of a joint and
Corporation provides:
several debtor, it does not make him the debtor
but still the guarantor (or the surety), relying on
the case of Government of the Philippines v. Tizon,
G.R. No. L-22108, August 30, 1967, 20 SCRA
S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 3
1182. Consequently, Article 2054 of the Civil Code principal obligor, should fail to comply with the
providing for a limited liability on the part of the contract. To paraphrase the ruling in the case of
guarantor or debtor still applies. Municipality of Orion vs. Concha, the liability of
the Surety is ‘consequent upon the liability’ of
Tizon, or ‘so dependent on that of the principal
debtor’ that the Surety ‘is considered in law as
It is true that under Article 2054 of the Civil Code,
being the same party as the debtor in relation to
“(A) guarantor may bind himself for less, but not
whatever is adjudged, touching the obligation of
for more than the principal debtor, both as
the latter’; or the liabilities of the two defendants
regards the amount and the onerous nature of the
herein ‘are so interwoven and dependent as to be
conditions.2 It is likewise not disputed by the
inseparable.’ Changing the expression, if the
parties that the credit limit granted to Celia Regala
defendants are held liable, their liability to pay the
was P2,000.00 per month and that Celia Regala
plaintiff would be solidary, but the nature of the
succeeded in using the card beyond the original
Surety’s undertaking is such that it does not incur
period of its effectivity, October 29, 1979. We do
liability unless and until the principal debtor is held
not agree however, that Roberto Jr.’s liability
liable.”
should be limited to that extent. Private
respondent Roberto Regala, Jr., as surety of his
wife, expressly bound himself up to the extent of
the debtor’s (Celia) indebtedness likewise A guarantor or surety does not incur liability
expressly waiving any “discharge in case of any unless the principal debtor is held liable. It is in
change or novation of the terms and conditions in this sense that a surety, although solidarily liable
connection with the issuance of the Pacificard with the principal debtor, is different from the
credit card.” Roberto, in fact, made his debtor. It does not mean, however, that the
commitment as a surety a continuing one, binding surety cannot be held liable to the same extent as
upon himself until all the liabilities of Celia Regala the principal debtor. The nature and extent of the
have been fully paid. All these were clear under liabilities of a guarantor or a surety is determined
the “Guarantor’s Undertaking” Roberto signed, by the clauses in the contract of suretyship (see
thus: PCIB v. CA, L-34959, March 18, 1988, 159 SCRA
24).

“x x x. Any changes of or novation in the terms

and conditions in connection with the issuance or ACCORDINGLY, the petition is GRANTED. The
use of said Pacificard, or any extension of time to questioned decision of respondent appellate court
pay such obligations, charges or liabilities shall is SET ASIDE and the decision of the trial court is
not in any manner release me/us from the REINSTATED.
responsibility hereunder, it being understood that
the undertaking is a continuing one and shall
subsist and bind me/us until all the liabilities of of
SO ORDERED.
the said Celia Syjuco Regala have been fully
satisfied or paid.” (p. 12, supra; italics supplied)

Narvasa (Chairman), Cruz, Feliciano and

Griño-Aquino, JJ., concur.
Private respondent Roberto Regala, Jr. had been
made aware by the terms of the undertaking of
future changes in the terms and conditions
governing the issuance of the credit card to his Petition granted. Decision set aside.
wife and that notwithstanding, he voluntarily
agreed to be bound as a surety. As in guaranty, a
surety may secure additional and future debts of Note.—The obligation of a surety cannot extend
the principal debtor the amount of which is not yet beyond what is stipulated in the surety bond.
known (see Article 2053, supra). (Central Surety and Insurance Co., Inc. vs. Ubay,
135 SCRA 58.)

The application by respondent court of the ruling

in Government v. Tizon, supra is misplaced. It was
held in that case that:

“x x x, although the defendants bound themselves

in solidum, the liability of the Surety under its
bond would arise only if its codefendants, the
S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 4
 Same; Same; Same; Same; Same; The use of the
term “guarantee” does not ipso facto mean that
G.R. No. 113931. May 6, 1998.* the contract is one of guaranty—authorities
recognize that the word “guarantee” is frequently
employed in business transactions to describe not
E. ZOBEL, INC., petitioner, vs. THE COURT OF the security of the debt but an intention to be
APPEALS, CONSOLIDATED BANK AND TRUST bound by a primary or independent
CORPORATION, and SPOUSES RAUL and obligation.—The use of the term “guarantee” does
ELEA R. CLAVERIA, respondents. not ipso facto mean that the contract is one of
guaranty. Authorities recognize that the word
“guarantee” is frequently employed in business
transactions to describe not the security of the
Obligations; Contracts; Surety; Guaranty; Words
debt but an intention to be bound by a primary or
and Phrases; “Surety” and “Guaranty,”
independent obligation. As aptly observed by the
Explained.—A contract of surety is an accessory
trial court, the interpretation of a contract is not
promise by which a person binds himself for
limited to the title alone but to the contents and
another already bound, and agrees with the
intention of the parties.
creditor to satisfy the obligation if the debtor does
not. A contract of guaranty, on the other hand, is a
collateral undertaking to pay the debt of another
in case the latter does not pay the debt. Same; Same; Same; Same; Article 2080 of the
New Civil Code does not apply where the liability is
as a surety, not as a guarantor.—Having thus
established that petitioner is a surety, Article 2080
Same; Same; Same; Same; Same; “Surety” and
of the Civil Code, relied upon by petitioner, finds
“Guaranty,” Distinguished; Simply put, a surety is
no application to the case at bar. In Bicol Savings
distinguished from a guaranty in that a guarantor
and Loan Association vs. Guinhawa, we have ruled
is the insurer of the solvency of the debtor and
that Article 2080 of the New Civil Code does not
thus binds himself to pay if the principal is unable
apply where the liability is as a surety, not as a
to pay while a surety is the insurer of the debt, and
guarantor.
he obligates himself to pay if the principal does not
pay.—Strictly speaking, guaranty and surety are
nearly related, and many of the principles are
common to both. However, under our civil law, Same; Same; Same; Same; Chattel Mortgages; A
they may be distinguished thus: A surety is creditor’s failure to register the chattel mortgage
usually bound with his principal by the same did not release a guarantor from his obligation
instrument, executed at the same time, and on where in the Continuing Guaranty the latter bound
the same consideration. He is an original itself to the contract irrespective of the existence
promissor and debtor from the beginning, and is of any collateral.—But even assuming that Article
held, ordinarily, to know every default of his 2080 is applicable, SOLIDBANK’s failure to
principal. Usually, he will not be discharged, either register the chattel mortgage did not release
by the mere indulgence of the creditor to the petitioner from the obligation. In the Continuing
principal, or by want of notice of the default of the Guaranty executed in favor of SOLIDBANK,
principal, no matter how much he may be injured petitioner bound itself to the contract irrespective
thereby. On the other hand, the contract of of the existence of any collateral. It even released
guaranty is the guarantor’s own separate SOLIDBANK from any fault or negligence that may
undertaking, in which the principal does not join. impair the contract.
It is usually entered into before or after that of the
principal, and is often supported on a separate
consideration from that supporting the contract of Notes.—Where obligee has accepted the surety
the principal. The original contract of his principal bond, it becomes valid and enforceable
is not his contract, and he is not bound to take irrespective of whether or not the premium has
notice of its non-performance. He is often been paid by the obligor to the surety. (Philippine
discharged by the mere indulgence of the creditor Pryce Assurance Corporation vs. Court of Appeals,
to the principal, and is usually not liable unless 230 SCRA 164 [1994])
notified of the default of the principal. Simply put,
a surety is distinguished from a guaranty in that a
guarantor is the insurer of the solvency of the
debtor and thus binds himself to pay if the The consideration necessary to support a surety
principal is unable to pay while a surety is the obligation need not pass directly to the surety, a
insurer of the debt, and he obligates himself to consideration moving to the principal alone being
pay if the principal does not pay. sufficient—a guarantor or surety is bound by the
same consideration that makes the contract
effective between the principal parties thereto.

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 5

(Willex Plastic Industries Corporation vs. Court of SOLIDBANK opposed the motion contending that
Appeals, 256 SCRA 478 [1996]) Article 2080 is not applicable because petitioner is
not a guarantor but a surety.
SECOND DIVISION
On February 18, 1993, the trial court issued an
G.R. No. 113931 May 6, 1998 Order, portions of which reads:

E. ZOBEL, INC., petitioner, After a careful consideration of the matter on hand,

vs. the Court finds the ground of the motion to
THE COURT OF APPEALS, CONSOLIDATED dismiss without merit. The document referred to
BANK AND TRUST CORPORATION, and as "Continuing Guaranty" dated August 21, 1985
SPOUSES RAUL and ELEA R. (Exh. 7) states as follows:
CLAVERIA, respondents.
For and in consideration of any existing
MARTINEZ, J.: indebtedness to you of Agro Brokers, a single
proprietorship owned by Mr. Raul Claveria for the
This petition for review on certiorari seeks the payment of which the undersigned is now
reversal of the decision 1 of the Court of Appeals obligated to you as surety and in order to induce
dated July 13, 1993 which affirmed the Order of you, in your discretion, at any other manner, to, or
the Regional Trial Court of Manila, Branch 51, at the request or for the account of the
denying petitioner's Motion to Dismiss the borrower, . . .
complaint, as well as the Resolution 2 dated
February 15, 1994 denying the motion for The provisions of the document are clear, plain
reconsideration thereto. and explicit.

The facts are as follows: Clearly therefore, defendant E. Zobel, Inc. signed
as surety. Even though the title of the document is
Respondent spouses Raul and Elea Claveria, doing "Continuing Guaranty", the Court's interpretation
business under the name "Agro Brokers," applied is not limited to the title alone but to the contents
for a loan with respondent Consolidated Bank and and intention of the parties more specifically if the
Trust Corporation (now SOLIDBANK) in the language is clear and positive. The obligation of
amount of Two Million Eight Hundred Seventy Five the defendant Zobel being that of a surety, Art.
Thousand Pesos (P2,875,000.00) to finance the 2080 New Civil Code will not apply as it is only for
purchase of two (2) maritime barges and one those acting as guarantor. In fact, in the letter of
tugboat 3 which would be used in their molasses January 31, 1986 of the defendants (spouses and
business. The loan was granted subject to the Zobel) to the plaintiff it is requesting that the
condition that respondent spouses execute a chattel mortgage on the vessels and tugboat be
chattel mortgage over the three (3) vessels to be waived and/or rescinded by the bank inasmuch as
acquired and that a continuing guarantee be the said loan is covered by the Continuing
executed by Ayala International Philippines, Inc., Guaranty by Zobel in favor of the plaintiff thus
now herein petitioner E. Zobel, Inc., in favor of thwarting the claim of the defendant now that the
SOLIDBANK. The respondent spouses agreed to chattel mortgage is an essential condition of the
the arrangement. Consequently, a chattel guaranty. In its letter, it said that because of the
mortgage and a Continuing Guaranty 4 were Continuing Guaranty in favor of the plaintiff the
executed. chattel mortgage is rendered unnecessary and
redundant.
Respondent spouses defaulted in the payment of
the entire obligation upon maturity. Hence, on With regard to the claim that the failure of the
January 31, 1991, SOLIDBANK filed a complaint plaintiff to register the chattel mortgage with the
for sum of money with a prayer for a writ of proper government agency, i.e. with the Office of
preliminary attachment, against respondents the Collector of Customs or with the Register of
spouses and petitioner. The case was docketed as Deeds makes the obligation a guaranty, the same
Civil Case No. 91-55909 in the Regional Trial Court merits a scant consideration and could not be
of Manila. taken by this Court as the basis of the
extinguishment of the obligation of the defendant
Petitioner moved to dismiss the complaint on the corporation to the plaintiff as surety. The chattel
ground that its liability as guarantor of the loan mortgage is an additional security and should not
was extinguished pursuant to Article 2080 of the be considered as payment of the debt in case of
Civil Code of the Philippines. It argued that it has failure of payment. The same is true with the
lost its right to be subrogated to the first chattel failure to register, extinction of the liability would
mortgage in view of SOLIDBANK's failure to not lie.
register the chattel mortgage with the appropriate
government agency.

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 6

WHEREFORE, the Motion to Dismiss is hereby discharged, either by the mere indulgence of the
denied and defendant E. Zobel, Inc., is ordered to creditor to the principal, or by want of notice of the
file its answer to the complaint within ten (10) default of the principal, no matter how much he
days from receipt of a copy of this Order. 5 may be injured thereby. On the other hand, the
contract of guaranty is the guarantor's own
Petitioner moved for reconsideration but was separate undertaking, in which the principal does
denied on April 26, 1993. 6 not join. It is usually entered into before or after
that of the principal, and is often supported on a
Thereafter, petitioner questioned said Orders separate consideration from that supporting the
before the respondent Court of Appeals, through a contract of the principal. The original contract of
petition for certiorari, alleging that the trial court his principal is not his contract, and he is not
committed grave abuse of discretion in denying bound to take notice of its non-performance. He is
the motion to dismiss. often discharged by the mere indulgence of the
creditor to the principal, and is usually not liable
On July 13, 1993, the Court of Appeals rendered unless notified of the default of the principal. 9
the assailed decision the dispositive portion of
which reads: Simply put, a surety is distinguished from a
guaranty in that a guarantor is the insurer of the
WHEREFORE, finding that respondent Judge has solvency of the debtor and thus binds himself to
not committed any grave abuse of discretion in pay if the principal is unable to pay while a surety
issuing the herein assailed orders, We hereby is the insurer of the debt, and he obligates himself
DISMISS the petition. to pay if the principal does not pay. 10

A motion for reconsideration filed by petitioner Based on the aforementioned definitions, it

was denied for lack of merit on February 15, 1994. appears that the contract executed by petitioner
in favor of SOLIDBANK, albeit denominated as a
Petitioner now comes to us via this petition "Continuing Guaranty," is a contract of surety. The
arguing that the respondent Court of Appeals terms of the contract categorically obligates
erred in its finding: (1) that Article 2080 of the petitioner as "surety" to induce SOLIDBANK to
New Civil Code which provides: "The guarantors, extend credit to respondent spouses. This can be
even though they be solidary, are released from seen in the following stipulations.
their obligation whenever by some act of the
creditor they cannot be subrogated to the rights, For and in consideration of any existing
mortgages, and preferences of the latter," is not indebtedness to you of AGRO BROKERS, a single
applicable to petitioner; (2) that petitioner's proprietorship owned by MR. RAUL P. CLAVERIA,
obligation to respondent SOLIDBANK under the of legal age, married and with business address . . .
continuing guaranty is that of a surety; and (3) (hereinafter called the Borrower), for the payment
that the failure of respondent SOLIDBANK to of which the undersigned is now obligated to you
register the chattel mortgage did not extinguish as surety and in order to induce you, in your
petitioner's liability to respondent SOLIDBANK. discretion, at any time or from time to time
hereafter, to make loans or advances or to extend
We shall first resolve the issue of whether or not credit in any other manner to, or at the request or
petitioner under the "Continuing Guaranty" for the account of the Borrower, either with or
obligated itself to SOLIDBANK as a guarantor or a without purchase or discount, or to make any
surety. loans or advances evidenced or secured by any
notes, bills receivable, drafts, acceptances, checks
A contract of surety is an accessory promise by or other instruments or evidences of
which a person binds himself for another already indebtedness . . . upon which the Borrower is or
bound, and agrees with the creditor to satisfy the may become liable as maker, endorser, acceptor,
obligation if the debtor does not. 7 A contract of or otherwise, the undersigned agrees to
guaranty, on the other hand, is a collateral guarantee, and does hereby guarantee, the
undertaking to pay the debt of another in case the punctual payment, at maturity or upon demand,
latter does not pay the debt. 8 to you of any and all such instruments, loans,
advances, credits and/or other obligations herein
Strictly speaking, guaranty and surety are nearly before referred to, and also any and all other
related, and many of the principles are common to indebtedness of every kind which is now or may
both. However, under our civil law, they may be hereafter become due or owing to you by the
distinguished thus: A surety is usually bound with Borrower, together with any and all expenses
his principal by the same instrument, executed at which may be incurred by you in collecting all or
the same time, and on the same consideration. He any such instruments or other indebtedness or
is an original promissor and debtor from the obligations hereinbefore referred to, and or in
beginning, and is held, ordinarily, to know every enforcing any rights hereunder, and also to make
default of his principal. Usually, he will not be or cause any and all such payments to be made

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 7

strictly in accordance with the terms and apply the residue of the proceeds of the sale and
provisions of any agreement (g), express or other disposition thereof, to the payment or
implied, which has (have) been or may hereafter reduction, either in whole or in part, of any one or
be made or entered into by the Borrower in more of the obligations or liabilities hereunder of
reference thereto, regardless of any law, the undersigned whether or not except for
regulation or decree, now or hereafter in effect disagreement such liabilities or obligations would
which might in any manner affect any of the terms then be due, making proper allowance or interest
or provisions of any such agreements(s) or your on the obligations and liabilities not otherwise
right with respect thereto as against the Borrower, then due, and returning the overplus, if any, to the
or cause or permit to be invoked any alteration in undersigned; all without prejudice to your rights
the time, amount or manner of payment by the as against the undersigned with respect to any
Borrower of any such instruments, obligations or and all amounts which may be or remain unpaid
indebtedness; . . . (Emphasis Ours) on any of the obligations or liabilities aforesaid at
any time (s).
One need not look too deeply at the contract to
determine the nature of the undertaking and the xxx xxx xxx
intention of the parties. The contract clearly
disclose that petitioner assumed liability to Should the Borrower at this or at any future time
SOLIDBANK, as a regular party to the undertaking furnish, or should be heretofore have furnished,
and obligated itself as an original promissor. It another surety or sureties to guarantee the
bound itself jointly and severally to the obligation payment of his obligations to you, the
with the respondent spouses. In fact, SOLIDBANK undersigned hereby expressly waives all benefits
need not resort to all other legal remedies or to which the undersigned might be entitled under
exhaust respondent spouses' properties before it the provisions of Article 1837 of the Civil Code
can hold petitioner liable for the obligation. This (beneficio division), the liability of the
can be gleaned from a reading of the stipulations undersigned under any and all circumstances
in the contract, to wit: being joint and several; (Emphasis Ours)

. . . If default be made in the payment of any of the The use of the term "guarantee" does not ipso
instruments, indebtedness or other obligation facto mean that the contract is one of guaranty.
hereby guaranteed by the undersigned, or if the Authorities recognize that the word "guarantee" is
Borrower, or the undersigned should die, dissolve, frequently employed in business transactions to
fail in business, or become insolvent, . . ., or if any describe not the security of the debt but an
funds or other property of the Borrower, or of the intention to be bound by a primary or independent
undersigned which may be or come into your obligation. 11 As aptly observed by the trial court,
possession or control or that of any third party the interpretation of a contract is not limited to the
acting in your behalf as aforesaid should be title alone but to the contents and intention of the
attached of distrained, or should be or become parties.
subject to any mandatory order of court or other
legal process, then, or any time after the Having thus established that petitioner is a surety,
happening of any such event any or all of the Article 2080 of the Civil Code, relied upon by
instruments of indebtedness or other obligations petitioner, finds no application to the case at bar.
hereby guaranteed shall, at your option become In Bicol Savings and Loan Association
(for the purpose of this guaranty) due and payable vs. Guinhawa, 12 we have ruled that Article 2080
by the undersigned forthwith without demand of of the New Civil Code does not apply where the
notice, and full power and authority are hereby liability is as a surety, not as a guarantor.
given you, in your discretion, to sell, assign and
deliver all or any part of the property upon which But even assuming that Article 2080 is applicable,
you may then have a lien hereunder at any SOLIDBANK's failure to register the chattel
broker's board, or at public or private sale at your mortgage did not release petitioner from the
option, either for cash or for credit or for future obligation. In the Continuing Guaranty executed
delivery without assumption by you of credit risk, in favor of SOLIDBANK, petitioner bound itself to
and without either the demand, advertisement or the contract irrespective of the existence of any
notice of any kind, all of which are hereby collateral. It even released SOLIDBANK from any
expressly waived. At any sale hereunder, you may, fault or negligence that may impair the contract.
at your option, purchase the whole or any part of The pertinent portions of the contract so provides:
the property so sold, free from any right of
redemption on the part of the undersigned, all . . . the undersigned (petitioner) who hereby
such rights being also hereby waived and released. agrees to be and remain bound upon this guaranty,
In case of any sale and other disposition of any of irrespective of the existence, value or condition of
the property aforesaid, after deducting all costs any collateral, and notwithstanding any such
and expenses of every kind for care, safekeeping, change, exchange, settlement, compromise,
collection, sale, delivery or otherwise, you may surrender, release, sale, application, renewal or

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 8

extension, and notwithstanding also that all following endorsement in the English language
obligations of the Borrower to you outstanding appears upon the contract:
and unpaid at any time(s) may exceed the
aggregate principal sum herein above prescribed. MANILA, July 15, 1916.

This is a Continuing Guaranty and shall remain in For value received we hereby
full force and effect until written notice shall have guarantee compliance with the
been received by you that it has been revoked by terms and conditions as outlined in
the undersigned, but any such notice shall not be the above contract.
released the undersigned from any liability as to
any instruments, loans, advances or other FIDELITY AND SURETY COMPANY
obligations hereby guaranteed, which may be held OF THE PHILIPPINE ISLANDS.
by you, or in which you may have any interest, at
the time of the receipt of such notice. No act or (Sgd) OTTO VORSTER,
omission of any kind on your part in the premises Vice-President.
shall in any event affect or impair this guaranty,
nor shall same be affected by any change which Machetti constructed the building under the
may arise by reason of the death of the supervision of architects representing the Hospicio
undersigned, of any partner (s) of the de San Jose and, as the work progressed,
undersigned, or of the Borrower, or of the payments were made to him from time to time
accession to any such partnership of any one or upon the recommendation of the architects, until
more new partners. (Emphasis supplied) the entire contract price, with the exception of the
sum of the P4,978.08, was paid. Subsequently it
In fine, we find the petition to be without merit as was found that the work had not been carried out
no reversible error was committed by respondent in accordance with the specifications which
Court of Appeals in rendering the assailed formed part of the contract and that the
decision. workmanship was not of the standard required,
and the Hospicio de San Jose therefore answered
WHEREFORE, the decision of the respondent Court the complaint and presented a counterclaim for
of Appeals is hereby AFFIRMED. Costs against the damages for the partial noncompliance with the
petitioner. terms of the agreement abovementioned, in the
total sum of P71,350. After issue was thus joined,
SO ORDERED. Machetti, on petition of his creditors, was, on
February 27, 1918, declared insolvent and on
March 4, 1918, an order was entered suspending
the proceeding in the present case in accordance
EN BANC with section 60 of the Insolvency Law, Act No.
1956.
G.R. No. L-16666 April 10, 1922
The Hospicio de San Jose on January 29, 1919,
ROMULO MACHETTI, plaintiff-appelle, filed a motion asking that the Fidelity and Surety
vs. Company be made cross-defendant to the
HOSPICIO DE SAN JOSE, defendant-appellee, exclusion of Machetti and that the proceedings be
and continued as to said company, but still remain
FIDELITY & SURETY COMPANY OF THE suspended as to Machetti. This motion was
PHILIPPINE ISLANDS, defendant-appellant granted and on February 7, 1920, the Hospicio
filed a complaint against the Fidelity and Surety
Ross and Laurence and Wolfson & Scwarzkopf for Company asking for a judgement for P12,800
appellant. against the company upon its guaranty. After trial,
Gabriel La O for appellee Hospicio de San Jose. the Court of First Instance rendered judgment
No appearance for the other appellee. against the Fidelity and Surety Company for
P12,800 in accordance with the complaint. The
OSTRAND, J.: case is now before this court upon appeal by the
Fidelity and Surety Company form said judgment.
It appears from the evidence that on July 17, 1916,
one Romulo Machetti, by a written agreement As will be seen, the original action which Machetti
undertook to construct a building on Calle Rosario was the plaintiff and the Hospicio de San Jose
in the city of Manila for the Hospicio de San Jose, defendant, has been converted into an action in
the contract price being P64,000. One of the which the Hospicio de San Jose is plaintiff and the
conditions of the agreement was that the Fidelity and Surety Company, the original
contractor should obtain the "guarantee" of the plaintiff's guarantor, is the defendant, Machetti
Fidelity and Surety Company of the Philippine having been practically eliminated from the case.
Islands to the amount of P128,800 and the

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 9

But in this instance the guarantor's case is even SPOUSES ALFREDO and SUSANA
stronger than that of an ordinary surety. The ONG, petitioners,
contract of guaranty is written in the English vs.
language and the terms employed must of course PHILIPPINE COMMERCIAL INTERNATIONAL
be given the signification which ordinarily attaches BANK, respondent.
to them in that language. In English the term
"guarantor" implies an undertaking of guaranty, DECISION
as distinguished from suretyship. It is very true
that notwithstanding the use of the words PUNO, J.:
"guarantee" or "guaranty" circumstances may be
shown which convert the contract into one of This is a petition for review on certiorari under
suretyship but such circumstances do not exist in Rule 45 of the Rules of Court to set aside the
the present case; on the contrary it appear Decision of the Court of Appeals in CA-G.R. SP No.
affirmatively that the contract is the guarantor's 39255, dated February 17, 2003, affirming the
separate undertaking in which the principal does decision of the trial court denying petitioners’
not join, that its rests on a separate consideration motion to dismiss.
moving from the principal and that although it is
written in continuation of the contract for the The facts: Baliwag Mahogany Corporation (BMC)
construction of the building, it is a collateral is a domestic corporation engaged in the
undertaking separate and distinct from the latter. manufacture and export of finished wood products.
All of these circumstances are distinguishing Petitioners-spouses Alfredo and Susana Ong are
features of contracts of guaranty. its President and Treasurer, respectively.

Now, while a surety undertakes to pay if the On April 20, 1992, respondent Philippine
principal does not pay, the guarantor only binds Commercial International Bank (now
himself to pay if the principal cannot pay. The one Equitable-Philippine Commercial International
is the insurer of the debt, the other an insurer of Bank or E-PCIB) filed a case for collection of a sum
the solvency of the debtor. (Saint vs. Wheeler & of money1 against petitioners-spouses.
Wilson Mfg. Co., 95 Ala., 362; Respondent bank sought to hold
Campbell, vs. Sherman, 151 Pa. St., 70; Castellvi petitioners-spouses liable as sureties on the three
de Higgins and Higgins vs. Sellner, 41 Phil., (3) promissory notes they issued to secure some
142; ;U.S. vs. Varadero de la Quinta, 40 Phil., 48.) of BMC’s loans, totalling five million pesos
This latter liability is what the Fidelity and Surety (₱5,000,000.00).
Company assumed in the present case. The
undertaking is perhaps not exactly that of The complaint alleged that in 1991, BMC needed
a fianza under the Civil Code, but is a perfectly additional capital for its business and applied for
valid contract and must be given the legal effect if various loans, amounting to a total of five million
ordinarily carries. The Fidelity and Surety pesos, with the respondent bank.
Company having bound itself to pay only the Petitioners-spouses acted as sureties for these
event its principal, Machetti, cannot pay it follows loans and issued three (3) promissory notes for
that it cannot be compelled to pay until it is shown the purpose. Under the terms of the notes, it was
that Machetti is unable to pay. Such ability may be stipulated that respondent bank may consider
proven by the return of a writ of execution debtor BMC in default and demand payment of the
unsatisfied or by other means, but is not remaining balance of the loan upon the levy,
sufficiently established by the mere fact that he attachment or garnishment of any of its properties,
has been declared insolvent in insolvency or upon BMC’s insolvency, or if it is declared to be
proceedings under our statutes, in which the in a state of suspension of payments. Respondent
extent of the insolvent's inability to pay is not bank granted BMC’s loan applications.
determined until the final liquidation of his estate.
On November 22, 1991, BMC filed a petition for
The judgment appealed from is therefore reversed rehabilitation and suspension of payments with
without costs and without prejudice to such right the Securities and Exchange Commission (SEC)
of action as the cross-complainant, the Hospicio after its properties were attached by creditors.
de San Jose, may have after exhausting its Respondent bank considered debtor BMC in
remedy against the plaintiff Machetti. So ordered. default of its obligations and sought to collect
payment thereof from petitioners-spouses as
sureties. In due time, petitioners-spouses filed
their Answer.1awphi1.nét
SECOND DIVISION
On October 13, 1992, a Memorandum of
G.R. No. 160466 January 17, 2005 Agreement (MOA)2 was executed by debtor BMC,
the petitioners-spouses as President and
Treasurer of BMC, and the consortium of creditor

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 10

banks of BMC (of which respondent bank is contracts. Petitioners-spouses are not
included). The MOA took effect upon its approval guarantors but sureties of BMC’s debts. There is a
by the SEC on November 27, 1992.3 sea of difference in the rights and liabilities of a
guarantor and a surety. A guarantor insures
Thereafter, petitioners-spouses moved to the solvency of the debtor while a surety is
dismiss4 the complaint. They argued that as the an insurer of the debt itself. A contract of
SEC declared the principal debtor BMC in a state of guaranty gives rise to a subsidiary obligation
suspension of payments and, under the MOA, the on the part of the guarantor. It is only after the
creditor banks, including respondent bank, agreed creditor has proceeded against the properties of
to temporarily suspend any pending civil action the principal debtor and the debt remains
against the debtor BMC, the benefits of the MOA unsatisfied that a guarantor can be held liable to
should be extended to petitioners-spouses who answer for any unpaid amount. This is the
acted as BMC’s sureties in their contracts of loan principle of excussion. In a suretyship contract,
with respondent bank. Petitioners-spouses however, the benefit of excussion is not
averred that respondent bank is barred from available to the surety as he is principally
pursuing its collection case filed against them. liable for the payment of the debt. As the
surety insures the debt itself, he obligates himself
The trial court denied the motion to dismiss. to pay the debt if the principal debtor will not pay,
Petitioners-spouses appealed to the Court of regardless of whether or not the latter is
Appeals which affirmed the trial court’s ruling that financially capable to fulfill his obligation. Thus, a
a creditor can proceed against petitioners-spouses creditor can go directly against the surety
as surety independently of its right to proceed although the principal debtor is solvent and is able
against the principal debtor BMC. to pay or no prior demand is made on the principal
debtor. A surety is directly, equally and
Hence this appeal. absolutely bound with the principal debtor
for the payment of the debt and is deemed as
Petitioners-spouses claim that the collection case an original promissor and debtor from the
filed against them by respondent bank should be beginning.5
dismissed for three (3) reasons: First, the MOA
provided that during its effectivity, there shall be a Under the suretyship contract entered into by
suspension of filing or pursuing of collection cases petitioners-spouses with respondent bank, the
against the BMC and this provision should benefit former obligated themselves to be solidarily
petitioners as sureties. Second, principal debtor bound with the principal debtor BMC for the
BMC has been placed under suspension of payment of its debts to respondent bank
payment of debts by the SEC; petitioners contend amounting to five million pesos (₱5,000,000.00).
that it would prejudice them if the principal debtor Under Article 1216 of the Civil
BMC would enjoy the suspension of payment of its Code, respondent bank as creditor may proceed
6

debts while petitioners, who acted only as sureties against petitioners-spouses as sureties despite
for some of BMC’s debts, would be compelled to the execution of the MOA which provided for the
make the payment; petitioners add that suspension of payment and filing of collection
compelling them to pay is contrary to Article suits against BMC. Respondent bank’s right to
2063 of the Civil Code which provides that a collect payment from the surety exists
compromise between the creditor and principal independently of its right to proceed directly
debtor benefits the guarantor and should not against the principal debtor. In fact, the creditor
prejudice the latter. Lastly, petitioners rely bank may go against the surety alone without
on Article 2081 of the Civil Code which provides prior demand for payment on the principal
that: "the guarantor may set up against the debtor.7
creditor all the defenses which pertain to the
principal debtor and are inherent in the debt; but The provisions of the MOA regarding the
not those which are purely personal to the suspension of payments by BMC and the
debtor." Petitioners aver that if the principal non-filing of collection suits by the creditor
debtor BMC can set up the defense of suspension banks pertain only to the property of the
of payment of debts and filing of collection suits principal debtor BMC. Firstly, in the
against respondent bank, petitioners as sureties rehabilitation receivership filed by BMC, only the
should likewise be allowed to avail of these properties of BMC were mentioned in the petition
defenses. with the SEC.8 Secondly, there is nothing in the
MOA that involves the liabilities of the sureties
We find no merit in petitioners’ contentions. whose properties are separate and distinct from
that of the debtor BMC. Lastly, it bears to stress
Reliance of petitioners-spouses on Articles that the MOA executed by BMC and signed by the
2063 and 2081 of the Civil Code is misplaced creditor-banks was approved by the SEC whose
as these provisions refer to contracts of jurisdiction is limited only to corporations and
guaranty. They do not apply to suretyship corporate assets. It has no jurisdiction over the

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 11

properties of BMC’s officers or Counsel for both parties agree that the only point
sureties.1awphi1.nét at issue is the determination of defendant's status
in the transaction referred to. Plaintiffs contend
Clearly, the collection suit filed by respondent that he is a surety; defendant contends that he is
bank against petitioners-spouses as sureties can a guarantor. Plaintiffs also admit that if defendant
prosper. The trial court’s denial of petitioners’ is a guarantor, articles 1830, 1831, and 1834 of
motion to dismiss was proper. the Civil Code govern.

IN VIEW WHEREOF, the petition is DISMISSED In the original Spanish of the Civil Code now in
for lack of merit. No pronouncement as to costs. force in the Philippine Islands, Title XIV of Book IV
is entitled "De la Fianza." The Spanish
SO ORDERED. word "fianza" is translated in the Washington and
Walton editions of the Civil Code as
"security." "Fianza" appears in the Fisher
translation as "suretyship." The Spanish
EN BANC world "fiador" is found in all of the English
translations of the Civil Code as "surety." The law
G.R. No. L-158025 November 5, of guaranty is not related of by that name in the
1920 Civil Code, although indirect reference to the same
is made in the Code of Commerce. In terminology
CARMEN CASTELLVI DE HIGGINS and at least, no distinction is made in the Civil Code
HORACE L. HIGGINS, plaintiffs-appellants, between the obligation of a surety and that of a
vs. guarantor.
GEORGE C. SELLNER, defendant-appellee.
As has been done in the State of Louisiana, where,
Wolfson, Wolfson and Schwarzkopf for appellants. like in the Philippines, the substantive law has a
William and Ferrier for appellee. civil law origin, we feel free to supplement the
statutory law by a reference to the precepts of the
MALCOLM, J.: law merchant.

This is an action brought by plaintiffs to recover The points of difference between a surety and a
from defendant the sum of P10,000. The brief guarantor are familiar to American authorities. A
decision of the trial court held that the suit was surety and a guarantor are alike in that each
premature, and absolved the defendant from the promises to answer for the debt or default of
complaint, with the costs against the plaintiffs. another. A surety and a guarantor are unlike in
that the surety assumes liability as a regular party
The basis of plaintiff's action is a letter written by to the undertaking, while the liability as a regular
defendant George C. Sellner to John T. Macleod, party to upon an independent agreement to pay
agent for Mrs. Horace L. Higgins, on May 31, 1915, the obligation if the primary pay or fails to do so. A
of the following tenor:lawph!l.net surety is charged as an original promissory; the
engagement of the guarantor is a collateral
DEAR SIR: I hereby obligate and undertaking. The obligation of the surety is
bind myself, my heirs, successors primary; the obligation of the guarantor is
and assigns that if the promissory secondary. (See U.S. vs. Varadero de la Quinta
note executed the 29th day of May, [1919], 40 Phil., 48; Lachman vs. Block [1894],
1915 by the Keystone Mining Co., 46 La. Ann., 649; Bedford vs. Kelley [1913], 173
W.H. Clarke, and John Maye, jointly Mich., 492; Brandt, on Suretyship and Guaranty,
and severally, in your favor and due sec. 1, cited approvingly by many authorities.)
six months after date for Pesos
10,000 is not fully paid at maturity Turning back again to our Civil Code, we first note
with interest, I will, within fifteen that according to article 1822 "By fianza (security
days after notice of such default, or suretyship) one person binds himself to pay or
pay you in cash the sum of P10,000 perform for a third person in case the latter should
and interest upon your fail to do so." But "If the surety binds himself in
surrendering to me the three solidum with the principal debtor, the provisions
thousand shares of stock of the of Section fourth, Chapter third, Title first, shall be
Keystone Mining Co. held by you as applicable." What the first portion of the cited
security for the payment of said article provides is, consequently, seen to be
note. somewhat akin to the contract of guaranty, while
what is last provided is practically equivalent to
Respectfully, the contract of suretyship. When in subsequent
articles found in section 1 of Chapter II of the title
(Sgd.) GEO. C. SELLNER. concerning fianza, the Code speaks of the effects

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 12

of suretyship between surety and creditor, it has, SALVADOR P. ESCAÑO and MARIO M.
in comparison with the common law, the effect of SILOS, petitioner,
guaranty between guarantor and creditor. The vs.
civil law suretyship is, accordingly, nearly RAFAEL ORTIGAS, JR., respondent.
synonymous with the common law guaranty; and
the civil law relationship existing between DECISION
codebtors liable in solidum is similar to the
common law suretyship. TINGA, J.:

It is perfectly clear that the obligation assumed by The main contention raised in this petition is that
defendant was simply that of a guarantor, or, to petitioners are not under obligation to reimburse
be more precise, of the fiador whose respondent, a claim that can be easily debunked.
responsibility is fixed in the Civil Code. The letter The more perplexing question is whether this
of Mr. Sellner recites that if the promissory note is obligation to repay is solidary, as contended by
not paid at maturity, then, within fifteen days after respondent and the lower courts, or merely joint
notice of such default and upon surrender to him as argued by petitioners.
of the three thousand shares of Keystone Mining
Company stock, he will assume responsibility. On 28 April 1980, Private Development
Sellner is not bound with the principals by the Corporation of the Philippines (PDCP) 1 entered
same instrument executed at the same time and into a loan agreement with Falcon Minerals, Inc.
on the same consideration, but his responsibility is (Falcon) whereby PDCP agreed to make available
a secondary one found in an independent and lend to Falcon the amount of US$320,000.00,
collateral agreement, Neither is Sellner jointly and for specific purposes and subject to certain terms
severally liable with the principal debtors. and conditions.2 On the same day, three
stockholders-officers of Falcon, namely:
With particular reference, therefore, to appellants respondent Rafael Ortigas, Jr. (Ortigas), George A.
assignments of error, we hold that defendant Scholey and George T. Scholey executed an
Sellner is a guarantor within the meaning of the Assumption of Solidary Liability whereby they
provisions of the Civil Code. agreed "to assume in [their] individual capacity,
solidary liability with [Falcon] for the due and
There is also an equitable aspect to the case which punctual payment" of the loan contracted by
reenforces this conclusion. The note executed by Falcon with PDCP.3 In the meantime, two separate
the Keystone Mining Company matured on guaranties were executed to guarantee the
November 29, 1915. Interest on the note was not payment of the same loan by other stockholders
accepted by the makers until September 30, 1916. and officers of Falcon, acting in their personal and
When the note became due, it is admitted that the individual capacities. One Guaranty 4 was
shares of stock used as collateral security were executed by petitioner Salvador Escaño (Escaño),
selling at par; that is, they were worth pesos while the other5 by petitioner Mario M. Silos
30,000. Notice that the note had not been paid (Silos), Ricardo C. Silverio (Silverio), Carlos L.
was not given to and when the Keyston Mining Inductivo (Inductivo) and Joaquin J. Rodriguez
Company stock was worthless. Defendant, (Rodriguez).
consequently, through the laches of plaintiff, has
lost possible chance to recoup, through the sale of Two years later, an agreement developed to cede
the stock, any amount which he might be control of Falcon to Escaño, Silos and Joseph M.
compelled to pay as a surety or guarantor. The Matti (Matti). Thus, contracts were executed
"indulgence," as this word is used in the law of whereby Ortigas, George A. Scholey, Inductivo
guaranty, of the creditors of the principal, as and the heirs of then already deceased George T.
evidenced by the acceptance of interest, and by Scholey assigned their shares of stock in Falcon to
failure promptly to notify the guarantor, may thus Escaño, Silos and Matti.6 Part of the consideration
have served to discharge the guarantor. that induced the sale of stock was a desire by
Ortigas, et al., to relieve themselves of all liability
For quite different reasons, which, nevertheless, arising from their previous joint and several
arrive at the same result, judgment is affirmed, undertakings with Falcon, including those related
with costs of this instance against the appellants. to the loan with PDCP. Thus, an Undertaking dated
So ordered. 11 June 1982 was executed by the concerned
parties,7 namely: with Escaño, Silos and Matti
identified in the document as "SURETIES," on one
hand, and Ortigas, Inductivo and the Scholeys as
SECOND DIVISION "OBLIGORS," on the other. The Undertaking reads
in part:
G.R. No. 151953 June 29, 2007
3. That whether or not SURETIES are able to
immediately cause PDCP and PAIC to release

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 13

OBLIGORS from their said guarantees [sic], exchange, PDCP waived or assigned in favor of
SURETIES hereby irrevocably agree and Escaño one-third (1/3) of its entire claim in the
undertake to assume all of OBLIGORs’ said complaint against all of the other defendants in
guarantees [sic] to PDCP and PAIC under the the case.11 The compromise agreement was
following terms and conditions: approved by the RTC in a Judgment12 dated 6
January 1994.
a. Upon receipt by any of [the] OBLIGORS of any
demand from PDCP and/or PAIC for the payment Then on 24 February 1994, Ortigas entered into
of FALCON’s obligations with it, any of [the] his own compromise agreement13 with PDCP,
OBLIGORS shall immediately inform SURETIES allegedly without the knowledge of Escaño, Matti
thereof so that the latter can timely take and Silos. Thereby, Ortigas agreed to pay PDCP
appropriate measures; ₱1,300,000.00 as "full satisfaction of the PDCP’s
claim against Ortigas,"14 in exchange for PDCP’s
b. Should suit be impleaded by PDCP and/or PAIC release of Ortigas from any liability or claim
against any and/or all of OBLIGORS for collection arising from the Falcon loan agreement, and a
of said loans and/or credit facilities, SURETIES renunciation of its claims against Ortigas.
agree to defend OBLIGORS at their own expense,
without prejudice to any and/or all of OBLIGORS In 1995, Silos and PDCP entered into a Partial
impleading SURETIES therein for contribution, Compromise Agreement whereby he agreed to
indemnity, subrogation or other relief in respect to pay ₱500,000.00 in exchange for PDCP’s waiver of
any of the claims of PDCP and/or PAIC; and its claims against him.15

c. In the event that any of [the] OBLIGORS is for In the meantime, after having settled with PDCP,
any reason made to pay any amount to PDCP Ortigas pursued his claims against Escaño, Silos
and/or PAIC, SURETIES shall reimburse and Matti, on the basis of the 1982 Undertaking.
OBLIGORS for said amount/s within seven (7) He initiated a third-party complaint against Matti
calendar days from such payment; and Silos,16 while he maintained his cross-claim
against Escaño. In 1995, Ortigas filed a motion for
4. OBLIGORS hereby waive in favor of SURETIES Summary Judgment in his favor against Escaño,
any and all fees which may be due from FALCON Silos and Matti. On 5 October 1995, the RTC
arising out of, or in connection with, their said issued the Summary Judgment, ordering Escaño,
guarantees[sic].8 Silos and Matti to pay Ortigas, jointly and
severally, the amount of ₱1,300,000.00, as well
Falcon eventually availed of the sum of as ₱20,000.00 in attorney’s fees.17 The trial court
US$178,655.59 from the credit line extended by ratiocinated that none of the third-party
PDCP. It would also execute a Deed of Chattel defendants disputed the 1982 Undertaking, and
Mortgage over its personal properties to further that "the mere denials of defendants with respect
secure the loan. However, Falcon subsequently to non-compliance of Ortigas of the terms and
defaulted in its payments. After PDCP foreclosed conditions of the Undertaking, unaccompanied by
on the chattel mortgage, there remained a any substantial fact which would be admissible in
subsisting deficiency of ₱5,031,004.07, which evidence at a hearing, are not sufficient to raise
Falcon did not satisfy despite demand.9 genuine issues of fact necessary to defeat a
motion for summary judgment, even if such facts
On 28 April 1989, in order to recover the were raised in the pleadings."18 In an Order dated
indebtedness, PDCP filed a complaint for sum of 7 March 1996, the trial court denied the motion for
money with the Regional Trial Court of Makati reconsideration of the Summary Judgment and
(RTC) against Falcon, Ortigas, Escaño, Silos, awarded Ortigas legal interest of 12% per annum
Silverio and Inductivo. The case was docketed as to be computed from 28 February 1994.19
Civil Case No. 89-5128. For his part, Ortigas filed
together with his answer a cross-claim against his From the Summary Judgment, recourse was had
co-defendants Falcon, Escaño and Silos, and also by way of appeal to the Court of Appeals. Escaño
manifested his intent to file a third-party and Silos appealed jointly while Matti appealed by
complaint against the Scholeys and Matti.10 The his lonesome. In a Decision20 dated 23 January
cross-claim lodged against Escaño and Silos was 2002, the Court of Appeals dismissed the appeals
predicated on the 1982 Undertaking, wherein they and affirmed the Summary Judgment. The
agreed to assume the liabilities of Ortigas with appellate court found that the RTC did not err in
respect to the PDCP loan. rendering the summary judgment since the three
appellants did not effectively deny their execution
Escaño, Ortigas and Silos each sought to seek a of the 1982 Undertaking. The special defenses
settlement with PDCP. The first to come to terms that were raised, "payment and excussion," were
with PDCP was Escaño, who in December of 1993, characterized by the Court of Appeals as
entered into a compromise agreement whereby he "appear[ing] to be merely sham in the light of the
agreed to pay the bank ₱1,000,000.00. In pleadings and supporting documents and

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 14

affidavits."21 Thus, it was concluded that there PDCP is governed by stipulated terms and
was no genuine issue that would still require the conditions as set forth in sub-paragraphs (a) to (c)
rigors of trial, and that the appealed judgment of Paragraph 3. First, upon receipt by "any of
was decided on the bases of the undisputed and OBLIGORS" of any demand from PDCP for the
established facts of the case. payment of Falcon’s obligations with it, "any of
OBLIGORS" was to immediately inform
Hence, the present petition for review filed by "SURETIES" thereof so that the latter can timely
Escaño and Silos.22 Two main issues are raised. take appropriate measures. Second, should "any
First, petitioners dispute that they are liable to and/or all of OBLIGORS" be impleaded by PDCP in
Ortigas on the basis of the 1982 Undertaking, a a suit for collection of its loan, "SURETIES agree[d]
document which they do not disavow and have in to defend OBLIGORS at their own expense,
fact annexed to their petition. Second, on the without prejudice to any and/or all of OBLIGORS
assumption that they are liable to Ortigas under impleading SURETIES therein for contribution,
the 1982 Undertaking, petitioners argue that they indemnity, subrogation or other relief"25 in
are jointly liable only, and not solidarily. Further respect to any of the claims of PDCP. Third, if any
assuming that they are liable, petitioners also of the "OBLIGORS is for any reason made to pay
submit that they are not liable for interest and if at any amount to [PDCP], SURETIES [were to]
all, the proper interest rate is 6% and not 12%. reimburse OBLIGORS for said amount/s within
seven (7) calendar days from such payment."26
Interestingly, petitioners do not challenge,
whether in their petition or their memorandum Petitioners claim that, contrary to paragraph 3(c)
before the Court, the appropriateness of the of the Undertaking, Ortigas was not "made to pay"
summary judgment as a relief favorable to Ortigas. PDCP the amount now sought to be reimbursed,
Under Section 3, Rule 35 of the 1997 Rules of Civil as Ortigas voluntarily paid PDCP the amount of
Procedure, summary judgment may avail if the ₱1.3 Million as an amicable settlement of the
pleadings, supporting affidavits, depositions and claims posed by the bank against him. However,
admissions on file show that, except as to the the subject clause in paragraph 3(c) actually reads
amount of damages, there is no genuine issue as "[i]n the event that any of OBLIGORS is for any
to any material fact and that the moving party is reason made to pay any amount to PDCP x x
entitled to a judgment as a matter of law. x"27 As pointed out by Ortigas, the phrase "for any
Petitioner have not attempted to demonstrate reason" reasonably includes any extra-judicial
before us that there existed a genuine issue as to settlement of obligation such as what Ortigas had
any material fact that would preclude summary undertaken to pay to PDCP, as it is indeed obvious
judgment. Thus, we affirm with ease the common that the phrase was incorporated in the clause to
rulings of the lower courts that summary render the eventual payment adverted to therein
judgment is an appropriate recourse in this case. unlimited and unqualified.

The vital issue actually raised before us is whether The interpretation posed by petitioners would
petitioners were correctly held liable to Ortigas on have held water had the Undertaking made clear
the basis of the 1982 Undertaking in this that the right of Ortigas to seek reimbursement
Summary Judgment. An examination of the accrued only after he had delivered payment to
document reveals several clauses that make it PDCP as a consequence of a final and executory
clear that the agreement was brought forth by the judgment. On the contrary, the clear intent of the
desire of Ortigas, Inductivo and the Scholeys to be Undertaking was for petitioners and Matti to
released from their liability under the loan relieve the burden on Ortigas and his fellow
agreement which release was, in turn, part of the "OBLIGORS" as soon as possible, and not only
consideration for the assignment of their shares in after Ortigas had been subjected to a final and
Falcon to petitioners and Matti. The whereas executory adverse judgment.
clauses manifest that Ortigas had bound himself
with Falcon for the payment of the loan with PDCP, Paragraph 1 of the Undertaking enjoins petitioners
and that "amongst the consideration for to "exert all efforts to cause PDCP x x x to within a
OBLIGORS and/or their principals aforesaid selling reasonable time release all the OBLIGORS x x x
is SURETIES’ relieving OBLIGORS of any and all from their guarantees [sic] to PDCP x x x" 28 In the
liability arising from their said joint and several event that Ortigas and his fellow "OBLIGORS"
undertakings with FALCON."23 Most crucial is the could not be released from their guaranties,
clause in Paragraph 3 of the Undertaking wherein paragraph 2 commits petitioners and Matti to
petitioners "irrevocably agree and undertake to cause the Board of Directors of Falcon to make a
assume all of OBLIGORs’ said guarantees [sic] to call on its stockholders for the payment of their
PDCP x x x under the following terms and unpaid subscriptions and to pledge or assign such
conditions."24 payments to Ortigas, et al., as security for
whatever amounts the latter may be held liable
At the same time, it is clear that the assumption under their guaranties. In addition, paragraph 1
by petitioners of Ortigas’s "guarantees" [sic] to also makes clear that nothing in the Undertaking

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 15

"shall prevent OBLIGORS, or any one of them, Compromise Agreement between PDCP and
from themselves negotiating with PDCP x x x for Ortigas expressly stipulated that Ortigas’s offer to
the release of their said guarantees [sic]." 29 pay PDCP was conditioned "without [Ortigas’s]
admitting liability to plaintiff PDCP Bank’s
There is no argument to support petitioners’ complaint, and to terminate and dismiss the said
position on the import of the phrase "made to pay" case as against Ortigas solely."34 Petitioners
in the Undertaking, other than an unduly literalist profess it is "unthinkable" for Ortigas to have
reading that is clearly inconsistent with the thrust voluntarily paid PDCP without admitting his
of the document. Under the Civil Code, the various liability,35 yet such contention based on
stipulations of a contract shall be interpreted assumption cannot supersede the literal terms of
together, attributing to the doubtful ones that the Partial Compromise Agreement.
sense which may result from all of them taken
jointly.30 Likewise applicable is the provision that Petitioners further observe that Ortigas made the
if some stipulation of any contract should admit of payment to PDCP after he had already assigned
several meanings, it shall be understood as his obligation to petitioners through the 1982
bearing Undertaking. Yet the fact is PDCP did pursue a
judicial claim against Ortigas notwithstanding the
that import which is most adequate to render it Undertaking he executed with petitioners. Not
effectual.31 As a means to effect the general intent being a party to such Undertaking, PDCP was not
of the document to relieve Ortigas from liability to precluded by a contract from pursuing its claim
PDCP, it is his interpretation, not that of against Ortigas based on the original Assumption
petitioners, that holds sway with this Court. of Solidary Liability.

Neither do petitioners impress us of the At the same time, the Undertaking did not
non-fulfillment of any of the other conditions set in preclude Ortigas from relieving his distress
paragraph 3, as they claim. Following the general through a settlement with the creditor bank.
assertion in the petition that Ortigas violated the Indeed, paragraph 1 of the Undertaking expressly
terms of the Undertaking, petitioners add that states that "nothing herein shall prevent
Ortigas "paid PDCP BANK the amount of ₱1.3 OBLIGORS, or any one of them, from themselves
million without petitioners ESCANO and SILOS’s negotiating with PDCP x x x for the release of their
knowledge and consent."32 Paragraph 3(a) of the said guarantees [sic]."36 Simply put, the
Undertaking does impose a requirement that any Undertaking did not bar Ortigas from pursuing his
of the "OBLIGORS" shall immediately inform own settlement with PDCP. Neither did the
"SURETIES" if they received any demand for Undertaking bar Ortigas from recovering from
payment of FALCON’s obligations to PDCP, but petitioners whatever amount he may have paid
that requirement is reasoned "so that the PDCP through his own settlement. The stipulation
[SURETIES] can timely take appropriate that if Ortigas was "for any reason made to pay
measures"33 presumably to settle the obligation any amount to PDCP[,] x x x SURETIES shall
without having to burden the "OBLIGORS." This reimburse OBLIGORS for said amount/s within
notice requirement in paragraph 3(a) is markedly seven (7) calendar days from such
way off from the suggestion of petitioners that payment" makes it clear that petitioners remain
37

Ortigas, after already having been impleaded as a liable to reimburse Ortigas for the sums he paid
defendant in the collection suit, was obliged under PDCP.
the 1982 Undertaking to notify them before
settling with PDCP. We now turn to the set of arguments posed by
petitioners, in the alternative, that is, on the
The other arguments petitioners have offered to assumption that they are indeed liable.
escape liability to Ortigas are similarly weak.
Petitioners submit that they could only be held
Petitioners impugn Ortigas for having settled with jointly, not solidarily, liable to Ortigas, claiming
PDCP in the first place. They note that Ortigas had, that the Undertaking did not provide for express
in his answer, denied any liability to PDCP and had solidarity. They cite Article 1207 of the New Civil
alleged that he signed the Assumption of Solidary Code, which states in part that "[t]here is a
Liability not in his personal capacity, but as an solidary liability only when the obligation
officer of Falcon. However, such position, expressly so states, or when the law or the nature
according to petitioners, could not be justified of the obligation requires solidarity."
since Ortigas later voluntarily paid PDCP the
amount of ₱1.3 Million. Such circumstances, Ortigas in turn argues that petitioners, as well as
according to petitioners, amounted to estoppel on Matti, are jointly and severally liable for the
the part of Ortigas. Undertaking, as the language used in the
agreement "clearly shows that it is a surety
Even as we entertain this argument at depth, its agreement"38 between the obligors (Ortigas group)
premises are still erroneous. The Partial and the sureties (Escaño group). Ortigas points

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 16

out that the Undertaking uses the word If a person binds himself solidarily with the
"SURETIES" although the document, in describing principal debtor, the provisions of Section 4,
the parties. It is further contended that the Chapter 3, Title I of this Book shall be observed. In
principal objective of the parties in executing the such case the contract is called a suretyship.
Undertaking cannot be attained unless petitioners [Emphasis supplied]40
are solidarily liable "because the total loan
obligation can not be paid or settled to free or As provided in Article 2047 in a surety agreement
release the OBLIGORS if one or any of the the surety undertakes to be bound solidarily with
SURETIES default from their obligation in the the principal debtor. Thus, a surety agreement is
Undertaking."39 an ancillary contract as it presupposes the
existence of a principal contract. It appears that
In case, there is a concurrence of two or more Ortigas’s argument rests solely on the solidary
creditors or of two or more debtors in one and the nature of the obligation of the surety under Article
same obligation, Article 1207 of the Civil Code 2047. In tandem with the nomenclature
states that among them, "[t]here is a solidary "SURETIES" accorded to petitioners and Matti in
liability only when the obligation expressly so the Undertaking, however, this argument can only
states, or when the law or the nature of the be viable if the obligations established in the
obligation requires solidarity." Article 1210
supplies further caution against the broad Undertaking do partake of the nature of a
interpretation of solidarity by providing: "The suretyship as defined under Article 2047 in the
indivisibility of an obligation does not necessarily first place. That clearly is not the case here,
give rise to solidarity. Nor does solidarity of itself notwithstanding the use of the nomenclature
imply indivisibility." "SURETIES" in the Undertaking.

These Civil Code provisions establish that in case Again, as indicated by Article 2047, a suretyship
of concurrence of two or more creditors or of two requires a principal debtor to whom the surety is
or more debtors in one and the same obligation, solidarily bound by way of an ancillary obligation
and in the absence of express and indubitable of segregate identity from the obligation between
terms characterizing the obligation as solidary, the principal debtor and the creditor. The
the presumption is that the obligation is only joint. suretyship does bind the surety to the creditor,
It thus becomes incumbent upon the party inasmuch as the latter is vested with the right to
alleging that the obligation is indeed solidary in proceed against the former to collect the credit in
character to prove such fact with a preponderance lieu of proceeding against the principal debtor for
of evidence. the same obligation.41 At the same time, there is
also a legal tie created between the surety and the
The Undertaking does not contain any express principal debtor to which the creditor is not privy
stipulation that the petitioners agreed "to bind or party to. The moment the surety fully answers
themselves jointly and severally" in their to the creditor for the obligation created by the
obligations to the Ortigas group, or any such principal debtor, such obligation is
terms to that effect. Hence, such obligation extinguished.42 At the same time, the surety may
established in the Undertaking is presumed only to seek reimbursement from the principal debtor for
be joint. Ortigas, as the party alleging that the the amount paid, for the surety does in fact
obligation is in fact solidary, bears the burden to "become subrogated to all the rights and remedies
overcome the presumption of jointness of of the creditor."43
obligations. We rule and so hold that he failed to
discharge such burden. Note that Article 2047 itself specifically calls for
the application of the provisions on joint and
Ortigas places primary reliance on the fact that solidary obligations to suretyship
the petitioners and Matti identified themselves in contracts. Article 1217 of the Civil Code thus
44

the Undertaking as "SURETIES", a term repeated comes into play, recognizing the right of
no less than thirteen (13) times in the document. reimbursement from a co-debtor (the principal
Ortigas claims that such manner of identification debtor, in case of suretyship) in favor of the one
sufficiently establishes that the obligation of who paid (i.e., the surety).45 However, a
petitioners to him was joint and solidary in nature. significant distinction still lies between a joint and
several debtor, on one hand, and a surety on the
The term "surety" has a specific meaning under other. Solidarity signifies that the creditor can
our Civil Code. Article 2047 provides the statutory compel any one of the joint and several debtors or
definition of a surety agreement, thus: the surety alone to answer for the entirety of the
principal debt. The difference lies in the respective
Art. 2047. By guaranty a person, called the faculties of the joint and several debtor and the
guarantor, binds himself to the creditor to fulfill surety to seek reimbursement for the sums they
the obligation of the principal debtor in case the paid out to the creditor.
latter should fail to do so.

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 17

Dr. Tolentino explains the differences between a especially in light of the qualifier in Article 2047
solidary co-debtor and a surety: that the provisions on joint and several obligations
should apply to sureties. We reject that argument,
A guarantor who binds himself in solidum with the and instead adopt Dr. Tolentino’s observation that
principal debtor under the provisions of the "[t]he reference in the second paragraph of
second paragraph does not become a solidary [Article 2047] to the provisions of Section 4,
co-debtor to all intents and purposes. There is a Chapter 3, Title I, Book IV, on solidary or several
difference between a solidary co-debtor and a obligations, however, does not mean that
fiador in solidum (surety). The latter, outside of suretyship is withdrawn from the applicable
the liability he assumes to pay the debt before the provisions governing guaranty."49 For if that were
property of the principal debtor has been not the implication, there would be no material
exhausted, retains all the other rights, actions and difference between the surety as defined under
benefits which pertain to him by reason of the Article 2047 and the joint and several debtors, for
fiansa; while a solidary co-debtor has no other both classes of obligors would be governed by
rights than those bestowed upon him in Section 4, exactly the same rules and limitations.
Chapter 3, Title I, Book IV of the Civil Code.
Accordingly, the rights to indemnification and
The second paragraph of [Article 2047] is subrogation as established and granted to the
practically equivalent to the contract of suretyship. guarantor by Articles 2066 and 2067 extend as
The civil law suretyship is, accordingly, nearly well to sureties as defined under Article 2047.
synonymous with the common law guaranty; and These rights granted to the surety who pays
the civil law relationship existing between the materially differ from those granted under Article
co-debtors liable in solidum is similar to the 1217 to the solidary debtor who pays, since the
common law suretyship.46 "indemnification" that pertains to the latter
extends "only [to] the share which corresponds to
In the case of joint and several debtors, Article each [co-debtor]." It is for this reason that the
1217 makes plain that the solidary debtor who Court cannot accord the conclusion that because
effected the payment to the creditor "may claim petitioners are identified in the Undertaking as
from his co-debtors only the share which "SURETIES," they are consequently joint and
corresponds to each, with the interest for the severally liable to Ortigas.
payment already made." Such solidary debtor will
not be able to recover from the co-debtors the full In order for the conclusion espoused by Ortigas to
amount already paid to the creditor, because the hold, in light of the general presumption favoring
right to recovery extends only to the proportional joint liability, the Court would have to be satisfied
share of the other co-debtors, and not as to the that among the petitioners and Matti, there is one
particular proportional share of the solidary debtor or some of them who stand as the principal debtor
who already paid. In contrast, even as the surety to Ortigas and another as surety who has the right
is solidarily bound with the principal debtor to the to full reimbursement from the principal debtor or
creditor, the surety who does pay the creditor has debtors. No suggestion is made by the parties that
the right to recover the full amount paid, and not such is the case, and certainly the Undertaking is
just any proportional share, from the principal not revelatory of such intention. If the Court were
debtor or debtors. Such right to full to give full fruition to the use of the term "sureties"
reimbursement falls within the other rights, as conclusive indication of the existence of a
actions and benefits which pertain to the surety by surety agreement that in turn gives rise to a
reason of the subsidiary obligation assumed by solidary obligation to pay Ortigas, the necessary
the surety. implication would be to lay down a corresponding
set of rights and obligations as between the
What is the source of this right to full "SURETIES" which petitioners and Matti did not
reimbursement by the surety? We find the right clearly intend.
under Article 2066 of the Civil Code, which assures
that "[t]he guarantor who pays for a debtor must It is not impossible that as between Escaño, Silos
be indemnified by the latter," such indemnity and Matti, there was an agreement whereby in the
comprising of, among others, "the total amount of event that Ortigas were to seek reimbursement
the debt."47 Further, Article 2067 of the Civil Code from them per the terms of the Undertaking, one
likewise establishes that "[t]he guarantor who of them was to act as surety and to pay Ortigas in
pays is subrogated by virtue thereof to all the full, subject to his right to full reimbursement from
rights which the creditor had against the the other two obligors. In such case, there would
debtor."48 have been, in fact, a surety agreement which
evinces a solidary obligation in favor of Ortigas.
Yet if there was indeed such an agreement, it does
Articles 2066 and 2067 explicitly pertain to not appear on the record. More consequentially,
guarantors, and one might argue that the no such intention is reflected in the Undertaking
provisions should not extend to sureties, itself, the very document that creates the

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 18

conditional obligation that petitioners and Matti that they are liable, that the rate of interest should
reimburse Ortigas should he be made to pay PDCP. not be 12% per annum, as adjudged by the RTC.
The mere utilization of the term "SURETIES" could
not work to such effect, especially as it does not The seminal ruling in Eastern Shipping Lines, Inc.
appear who exactly is the principal debtor whose v. Court of Appeals51 set forth the rules with
obligation is "assured" or "guaranteed" by the respect to the manner of computing legal interest:
surety.
I. When an obligation, regardless of its source, i.e.,
Ortigas further argues that the nature of the law, contracts, quasi-contracts, delicts or
Undertaking requires "solidary obligation of the quasi-delicts is breached, the contravenor can be
Sureties," since the Undertaking expressly seeks held liable for damages. The provisions under Title
to "reliev[e] obligors of any and all liability arising XVIII on "Damages" of the Civil Code govern in
from their said joint and several undertaking with determining the measure of recoverable
[F]alcon," and for the "sureties" to "irrevocably damages.
agree and undertake to assume all of obligors said
guarantees to PDCP."50 We do not doubt that a II. With regard particularly to an award of interest
finding of solidary liability among the petitioners in the concept of actual and compensatory
works to the benefit of Ortigas in the facilitation of damages, the rate of interest, as well as the
these goals, yet the Undertaking itself contains no accrual thereof, is imposed, as follows:
stipulation or clause that establishes petitioners’
obligation to Ortigas as solidary. Moreover, the 1. When the obligation is breached, and it consists
aims adverted to by Ortigas do not by themselves in the payment of a sum of money, i.e., a loan or
establish that the nature of the obligation requires forbearance of money, the interest due should be
solidarity. Even if the liability of petitioners and that which may have been stipulated in writing.
Matti were adjudged as merely joint, the full relief Furthermore, the interest due shall itself earn
and reimbursement of Ortigas arising from his legal interest from the time it is judicially
payment to PDCP would still be accomplished demanded. In the absence of stipulation, the rate
through the complete execution of such a of interest shall be 12% per annum to be
judgment. computed from default, i.e., from judicial or
extrajudicial demand under and subject to the
Petitioners further claim that they are not liable for provisions of Article 1169 of the Civil Code.
attorney’s fees since the Undertaking contained
no such stipulation for attorney’s fees, and that 2. When an obligation, not constituting a loan or
the situation did not fall under the instances under forbearance of money, is breached, an interest on
Article 2208 of the Civil Code where attorney’s the amount of damages awarded may be imposed
fees are recoverable in the absence of stipulation. at the discretion of the court at the rate of 6% per
annum. No interest, however, shall be adjudged
We disagree. As Ortigas points out, the acts or on unliquidated claims or damages except when or
omissions of the petitioners led to his being until the demand can be established with
impleaded in the suit filed by PDCP. The reasonable certainty. Accordingly, where the
Undertaking was precisely executed as a means to demand is established with reasonable certainty,
obtain the release of Ortigas and the Scholeys the interest shall begin to run from the time the
from their previous obligations as sureties of claim is made judicially or extrajudicially (Art.
Falcon, especially considering that they were 1169, Civil Code) but when such certainty cannot
already divesting their shares in the corporation. be so reasonably established at the time the
Specific provisions in the Undertaking obligate demand is made, the interest shall begin to run
petitioners to work for the release of Ortigas from only from the date the judgment of the court is
his surety agreements with Falcon. Specific made (at which time quantification of damages
provisions likewise mandate the immediate may be deemed to have been reasonably
repayment of Ortigas should he still be made to ascertained). The actual base for the computation
pay PDCP by reason of the guaranty agreements of legal interest shall, in any case, be on the
from which he was ostensibly to be released amount finally adjudged.
through the efforts of petitioners. None of these
provisions were complied with by petitioners, and 3. When the judgment of the court awarding a
Article 2208(2) precisely allows for the recovery of sum of money becomes final and executory, the
attorney’s fees "[w]hen the defendant’s act or rate of legal interest, whether the case falls under
omission has compelled the plaintiff to litigate with paragraph 1 or paragraph 2, above, shall be 12%
third persons or to incur expenses to protect his per annum from such finality until its satisfaction,
interest." this interim period being deemed to be by then an
equivalent to a forbearance of credit.52
Finally, petitioners claim that they should not be
liable for interest since the Undertaking does not Since what was the constituted in the Undertaking
contain any stipulation for interest, and assuming consisted of a payment in a sum of money, the

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 19

rate of interest thereon shall be 12% per annum to Sosing Lobos and Co., Inc., as principal, and
be computed from default, i.e., from judicial or Esteban Piczon, as guarantor, to pay
extrajudicial demand. The interest rate imposed plaintiffs-appellants "the sum of P12,500.00 with
by the RTC is thus proper. However, the 12% interest from August 6, 1964 until said
computation should be reckoned from judicial or principal amount of P12,500.00 shall have been
extrajudicial demand. Per records, there is no duly paid, and the costs."
indication that Ortigas made any extrajudicial
demand to petitioners and Matti after he paid After issues were joined and at the end of the
PDCP, but on 14 March 1994, Ortigas made a pre-trial held on August 22, 1967, the trial court
judicial demand when he filed a Third-Party issued the following order:
Complaint praying that petitioners and Matti be
made to reimburse him for the payments made to "When this case was called for pre-trial, plaintiffs
PDCP. It is the filing of this Third Party Complaint and defendants through their lawyers, appeared
on 14 March 1994 that should be considered as and entered into the following agreement:
the date of judicial demand from which the
computation of interest should be 1. That defendants admit the due execution of
reckoned. Since the RTC held that interest
53
Annexes "A" and "B" of the complaint;
should be computed from 28 February 1994, the
appropriate redefinition should be made. 2. That consequently defendant Sosing-Lobos and
Co., Inc. binds itself to the plaintiffs for
WHEREFORE, the Petition is GRANTED in PART. P12,500.00, the same to be paid on or before
The Order of the Regional Trial Court dated 5 October 31, 1967 together with the interest that
October 1995 is modified by declaring that this court may determine.
petitioners and Joseph M. Matti are only jointly
liable, not jointly and severally, to respondent That the issues in this case are legal ones namely:
Rafael Ortigas, Jr. in the amount of ₱1,300,000.00.
The Order of the Regional Trial Court dated 7 (a) Will the payment of twelve per cent interest of
March 1996 is MODIFIED in that the legal interest P12,500.00 commence to run from August 6,
of 12% per annum on the amount of 1964 when plaintiffs made the first demand or
₱1,300,000.00 is to be computed from 14 March from August 29, 1956 when the obligation
1994, the date of judicial demand, and not from becomes due and demandable?
28 February 1994 as directed in the Order of the
lower court. The assailed rulings are affirmed in all (b) Is defendant Esteban Piczon liable as a
other respects. Costs against petitioners. guarantor or a surety?

SO ORDERED. That the parties are hereby required to file their

respective memorandum if they so desire on or
before September 15, 1967 to discuss the legal
issues and therewith the case will be considered
SECOND DIVISION submitted for decision.

G.R. No. L-29139 November 15, 1974 WHEREFORE, the instant case is hereby
considered submitted based on the aforesaid facts
CONSUELO P. PICZON, RUBEN O. PICZON agreed upon and upon submission of the parties of
and AIDA P. ALCANTARA, plaintiffs-appellants, their respective memorandum on or before
vs. September 15, 1967.
ESTEBAN PICZON and SOSING-LOBOS & CO.,
INC., defendants-appellees. SO ORDERED.1 (Record on Appeal pp. 28-30.)

Vicente C. Santos for plaintiffs-appellants. Annex "A", the actionable document of appellants
reads thus:
Jacinto R. Bohol for defendant-appellee
Sosing-Lobos & Co., Inc. AGREEMENT OF LOAN

Vicente M. Macabidang for defendant-appellee KNOW YE ALL MEN BY THESE PRESENTS:

Esteban Piczon.
That I, ESTEBAN PICZON, of legal age, married,
BARREDO, J.:p Filipino, and resident of and with postal address in
the municipality of Catbalogan, Province of Samar,
Appeal from the decision of the Court of First Philippines, in my capacity as the President of the
Instance of Samar in its Civil Case No. 5156, corporation known as the "SOSING-LOBOS and
entitled Consuelo P. Piczon, et al. vs. Esteban CO., INC.," as controlling stockholder, and at the
Piczon, et al., sentencing defendants-appellees, same time as guarantor for the same, do by these

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 20

presents contract a loan of Twelve Thousand Five incurs in delay, the indemnity for damages, there
Hundred Pesos (P12,500.00), Philippine Currency, being no stipulation to the contrary, shall be the
the receipt of which is hereby acknowledged, from payment of the interest agreed upon, and in the
the "Piczon and Co., Inc." another corporation, the absence of stipulation, the legal interest, which is
main offices of the two corporations being in six per cent per annum." In the case at bar, the
Catbalogan, Samar, for which I undertake, bind "interest agreed upon" by the parties in Annex A
and agree to use the loan as surety cash deposit was to commence from the execution of said
for registration with the Securities and Exchange document.
Commission of the incorporation papers relative to
the "Sosing-Lobos and Co., Inc.," and to return or Appellees' contention that the reference in Article
pay the same amount with Twelve Per Cent (12%) 2209 to delay incurred by the debtor which can
interest per annum, commencing from the date of serve as the basis for liability for interest is to that
execution hereof, to the "Piczon and Co., Inc., as defined in Article 1169 of the Civil Code reading
soon as the said incorporation papers are duly thus:
registered and the Certificate of Incorporation
issued by the aforesaid Commission. Those obliged to deliver or to do something incur
in delay from the time the obligee judicially or
IN WITNESS WHEREOF, I hereunto signed my extrajudicially demands from them the fulfillment
name in Catbalogan, Samar, Philippines, this 28th of their obligation.
day of September, 1956.
However, the demand by the creditor shall not be
(Sgd.) ESTEBAN PICZON necessary in order that delay may exist:

(Record on Appeal, pp. 6-7.) (1) When the obligation or the law expressly so
declares; or
The trial court having rendered judgment in the
tenor aforequoted, appellants assign the following (2) When from the nature and the circumstances
alleged errors: of the obligation it appears that the designation of
the time when the thing is to be delivered or the
I service is to be rendered was a controlling motive
for the establishment of the contract; or
THE TRIAL COURT ERRED IN ORDERING THE
PAYMENT OF 12% INTEREST ON THE PRINCIPAL (3) When demand would be useless, as when the
OF P12,500.00 FROM AUGUST 6, 1964, ONLY, obligor has rendered it beyond his power to
INSTEAD OF FROM SEPTEMBER 28, 1956, WHEN perform.
ANNEX "A" WAS DULY EXECUTED.
In reciprocal obligations, neither party incurs in
II delay if the other does not comply or is not ready
to comply in a proper manner with what is
THE TRIAL COURT ERRED IN CONSIDERING incumbent upon him. From the moment one of the
DEFENDANT ESTEBAN PICZON AS GUARANTOR parties fulfills his obligation, delay by the other
ONLY AND NOT AS SURETY. begins.

III is untenable. In Quiroz vs. Tan Guinlay, 5 Phil.

675, it was held that the article cited by appellees
THE TRIAL COURT ERRED IN NOT ADJUDICATING (which was Article 1100 of the Old Civil Code read
DAMAGES IN FAVOR OF THE in relation to Art. 1101) is applicable only when
PLAINTIFFS-APPELLANTS. (Appellants' Brief, pp. a the obligation is to do something other than the
to b.) payment of money. And in Firestone Tire & Rubber
Co. (P.I.) vs. Delgado, 104 Phil. 920, the Court
Appellants' first assignment of error is well taken. squarely ruled that if the contract stipulates from
Instead of requiring appellees to pay interest at what time interest will be counted, said stipulated
12% only from August 6, 1964, the trial court time controls, and, therefore interest is payable
should have adhered to the terms of the from such time, and not from the date of the filing
agreement which plainly provides that Esteban of the complaint (at p. 925). Were that not the law,
Piczon had obligated Sosing-Lobos and Co., Inc. there would be no basis for the provision of Article
and himself to "return or pay (to Piczon and Co., 2212 of the Civil Code providing that "(I)nterest
Inc.) the same amount (P12,500.00) with Twelve due shall earn legal interest from the time it is
Per Cent (12%) interest per annum commencing judicially demanded, although the obligation may
from the date of the execution hereof", Annex A, be silent upon this point." Incidentally, appellants
which was on September 28, 1956. Under Article would have been entitled to the benefit of this
2209 of the Civil Code "(i)f the obligation consists article, had they not failed to plead the same in
in the payment of a sum of money, and the debtor their complaint. Their prayer for it in their brief is

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 21

much too late. Appellees had no opportunity to such undertaking of the former deemed to be that
meet the issue squarely at the pre-trial. of a surety as an insurer of the debt, or of a
guarantor who warrants the solvency of the
As regards the other two assignments of error, debtor?
appellants' pose cannot be sustained. Under the
terms of the contract, Annex A, Esteban Piczon Pursuant to a promissory note dated March 13,
expressly bound himself only as guarantor, and 1990, private respondent M.B. Lending
there are no circumstances in the record from Corporation extended a loan to the spouses
which it can be deduced that his liability could be Osmeña and Merlyn Azarraga, together with
that of a surety. A guaranty must be express, petitioner Estrella Palmares, in the amount of
(Article 2055, Civil Code) and it would be violative P30,000.00 payable on or before May 12, 1990,
of the law to consider a party to be bound as a with compounded interest at the rate of 6% per
surety when the very word used in the agreement annum to be computed every 30 days from the
is "guarantor." date thereof.1 On four occasions after the
execution of the promissory note and even after
Moreover, as well pointed out in appellees' brief, the loan matured, petitioner and the Azarraga
under the terms of the pre-trial order, appellants spouses were able to pay a total of P16,300.00,
accepted the express assumption of liability by thereby leaving a balance of P13,700.00. No
Sosing-Lobos & Co., Inc. for the payment of the payments were made after the last payment on
obligation in question, thereby modifying their September 26, 1991.2
original posture that inasmuch as that corporation
did not exist yet at the time of the agreement, Consequently, on the basis of petitioner's solidary
Piczon necessarily must have bound himself as liability under the promissory note, respondent
insurer. corporation filed a complaint3 against petitioner
Palmares as the lone party-defendant, to the
As already explained earlier, appellants' prayer for exclusion of the principal debtors, allegedly by
payment of legal interest upon interest due from reason of the insolvency of the latter.
the filing of the complaint can no longer be
entertained, the same not having been made an In her Amended Answer with
issue in the pleadings in the court below. We do Counterclaim,4 petitioner alleged that sometime
not believe that such a substantial matter can be in August 1990, immediately after the loan
deemed included in a general prayer for "any matured, she offered to settle the obligation with
other relief just and equitable in the premises", respondent corporation but the latter informed
especially when, as in this case, the pre-trial order her that they would try to collect from the spouses
does not mention it in the enumeration of the Azarraga and that she need not worry about it;
issues to be resolved by the court. that there has already been a partial payment in
the amount of P17,010.00; that the interest of 6%
PREMISES CONSIDERED, the judgment of the trial per month compounded at the same rate per
court is modified so as to make appellees liable for month, as well as the penalty charges of 3% per
the stipulated interest of 12% per annum from month, are usurious and unconscionable; and that
September 28, 1956, instead of August 6, 1964. while she agrees to be liable on the note but only
In all other respects, said judgment is affirmed. upon default of the principal debtor, respondent
Costs against appellees. corporation acted in bad faith in suing her alone
without including the Azarragas when they were
the only ones who benefited from the proceeds of
the loan.

During the pre-trial conference, the parties

SECOND DIVISION submitted the following issues for the resolution of
the trial court: (1) what the rate of interest,
G.R. No. 126490 March 31, 1998 penalty and damages should be; (2) whether the
liability of the defendant (herein petitioner) is
ESTRELLA PALMARES, petitioner, primary or subsidiary; and (3) whether the
vs. defendant Estrella Palmares is only a guarantor
COURT OF APPEALS and M.B. LENDING with a subsidiary liability and not a co-maker with
CORPORATION, respondents. primary liability.5

REGALADO, J.: Thereafter, the parties agreed to submit the case

for decision based on the pleadings filed and the
Where a party signs a promissory note as a memoranda to be submitted by them. On
co-maker and binds herself to be jointly and November 26, 1992, the Regional Trial Court of
severally liable with the principal debtor in case Iloilo City, Branch 23, rendered judgment
the latter defaults in the payment of the loan, is dismissing the complaint without prejudice to the

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 22

filing of a separate action for a sum of money 1. The terms of the promissory note are vague. Its
against the spouses Osmeña and Merlyn Azarraga conflicting provisions do not establish Palmares'
who are primarily liable on the instrument.6 This solidary liability.
was based on the findings of the court a quo that
the filing of the complaint against herein petitioner 2. The promissory note contains provisions which
Estrella Palmares, to the exclusion of the Azarraga establish the co-maker's liability as that of a
spouses, amounted to a discharge of a prior party; guarantor.
that the offer made by petitioner to pay the
obligation is considered a valid tender of payment 3. There is no sufficient basis for concluding that
sufficient to discharge a person's secondary Palmares' liability is solidary.
liability on the instrument; as co-maker, is only
secondarily liable on the instrument; and that the 4. The promissory note is a contract of adhesion
promissory note is a contract of adhesion. and should be construed against M. B. Lending
Corporation.
Respondent Court of Appeals, however, reversed
the decision of the trial court, and rendered 5. Palmares cannot be compelled to pay the loan
judgment declaring herein petitioner Palmares at this point.
liable to pay respondent corporation:
B. Assuming that Palmares' liability is solidary, the
1. The sum of P13,700.00 representing the Court of Appeals erred in strictly imposing the
outstanding balance still due and owing with interests and penalty charges on the outstanding
interest at six percent (6%) per month computed balance of the promissory note.
from the date the loan was contracted until fully
paid; The foregoing contentions of petitioner are denied
and contradicted in their material points by
2. The sum equivalent to the stipulated penalty of respondent corporation. They are further refuted
three percent (3%) per month, of the outstanding by accepted doctrines in the American jurisdiction
balance; after which we patterned our statutory law on
surety and guaranty. This case then affords us the
3. Attorney's fees at 25% of the total amount due opportunity to make an extended exposition on
per stipulations; the ramifications of these two specialized
contracts, for such guidance as may be taken
4. Plus costs of suit.7 therefrom in similar local controversies in the
future.
Contrary to the findings of the trial court,
respondent appellate court declared that The basis of petitioner Palmares' liability under the
petitioner Palmares is a surety since she bound promissory note is expressed in this wise:
herself to be jointly and severally or solidarily
liable with the principal debtors, the Azarraga ATTENTION TO CO-MAKERS: PLEASE READ WELL
spouses, when she signed as a co-maker. As such,
petitioner is primarily liable on the note and hence I, Mrs. Estrella Palmares, as the Co-maker of the
may be sued by the creditor corporation for the above-quoted loan, have fully understood the
entire obligation. It also adverted to the fact that contents of this Promissory Note for Short-Term
petitioner admitted her liability in her Answer Loan:
although she claims that the Azarraga spouses
should have been impleaded. Respondent court That as Co-maker, I am fully aware that I shall be
ordered the imposition of the stipulated 6% jointly and severally or solidarily liable with the
interest and 3% penalty charges on the ground above principal maker of this note;
that the Usury Law is no longer enforceable
pursuant to Central Bank Circular No. 905. Finally, That in fact, I hereby agree that M.B. LENDING
it rationalized that even if the promissory note CORPORATION may demand payment of the
were to be considered as a contract of adhesion, above loan from me in case the principal
the same is not entirely prohibited because the maker, Mrs. Merlyn Azarraga defaults in the
one who adheres to the contract is free to reject it payment of the note subject to the same
entirely; if he adheres, he gives his consent. conditions above-contained.8

Hence this petition for review Petitioner contends that the provisions of the
on certiorari wherein it is asserted that: second and third paragraph are conflicting in that
while the second paragraph seems to define her
A. The Court of Appeals erred in ruling that liability as that of a surety which is joint and
Palmares acted as surety and is therefore solidary with the principal maker, on the other
solidarily liable to pay the promissory note. hand, under the third paragraph her liability is
actually that of a mere guarantor because she

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 23

bound herself to fulfill the obligation only in case loan in September, 1991, a fact which was never
the principal debtor should fail to do so, which is controverted by herein private respondent.
the essence of a contract of guaranty. More simply
stated, although the second paragraph says that Finally, it is argued that the Court of Appeals
she is liable as a surety, the third paragraph gravely erred in awarding the amount of
defines the nature of her liability as that of a P2,745,483.39 in favor of private respondent
guarantor. According to petitioner, these are two when, in truth and in fact, the outstanding balance
conflicting provisions in the promissory note and of the loan is only P13,700.00. Where the interest
the rule is that clauses in the contract should be charged on the loan is exorbitant, iniquitous or
interpreted in relation to one another and not by unconscionable, and the obligation has been
parts. In other words, the second paragraph partially complied with, the court may equitably
should not be taken in isolation, but should be reduce the penalty10 on grounds of substantial
read in relation to the third paragraph. justice. More importantly, respondent corporation
never refuted petitioner's allegation that
In an attempt to reconcile the supposed conflict immediately after the loan matured, she informed
between the two provisions, petitioner avers that said respondent of her desire to settle the
she could be held liable only as a guarantor for obligation. The court should, therefore, mitigate
several reasons. First, the words "jointly and the damages to be paid since petitioner has shown
severally or solidarily liable" used in the second a sincere desire for a compromise.11
paragraph are technical and legal terms which are
not fully appreciated by an ordinary layman like After a judicious evaluation of the arguments of
herein petitioner, a 65-year old housewife who is the parties, we are constrained to dismiss the
likely to enter into such transactions without fully petition for lack of merit, but to except therefrom
realizing the nature and extent of her liability. On the issue anent the propriety of the monetary
the contrary, the wordings used in the third award adjudged to herein respondent corporation.
paragraph are easier to comprehend. Second, the
law looks upon the contract of suretyship with a At the outset, let it here be stressed that even
jealous eye and the rule is that the obligation of assuming arguendo that the promissory note
the surety cannot be extended by implication executed between the parties is a contract of
beyond specified limits, taking into consideration adhesion, it has been the consistent holding of the
the peculiar nature of a surety agreement which Court that contracts of adhesion are not
holds the surety liable despite the absence of any invalid per se and that on numerous occasions the
direct consideration received from either the binding effects thereof have been upheld. The
principal obligor or the creditor. Third, the peculiar nature of such contracts necessitate a
promissory note is a contract of adhesion since it close scrutiny of the factual milieu to which the
was prepared by respondent M.B. Lending provisions are intended to apply. Hence, just as
Corporation. The note was brought to petitioner consistently and unhesitatingly, but without
partially filled up, the contents thereof were never categorically invalidating such contracts, the
explained to her, and her only participation was to Court has construed obscurities and ambiguities in
sign thereon. Thus, any apparent ambiguity in the the restrictive provisions of contracts of adhesion
contract should be strictly construed against strictly albeit not unreasonably against the drafter
private respondent pursuant to Art. 1377 of the thereof when justified in light of the operative
Civil Code.9 facts and surrounding circumstances.12 The
factual scenario obtaining in the case before us
Petitioner accordingly concludes that her liability warrants a liberal application of the rule in favor of
should be deemed restricted by the clause in the respondent corporation.
third paragraph of the promissory note to be that
of a guarantor. The Civil Code pertinently provides:

Moreover, petitioner submits that she cannot as Art. 2047. By guaranty, a person called the
yet be compelled to pay the loan because the guarantor binds himself to the creditor to fulfill the
principal debtors cannot be considered in default obligation of the principal debtor in case the latter
in the absence of a judicial or extrajudicial demand. should fail to do so.
It is true that the complaint alleges the fact of
demand, but the purported demand letters were If a person binds himself solidarily with the
never attached to the pleadings filed by private principal debtor, the provisions of Section 4,
respondent before the trial court. And, while Chapter 3, Title I of this Book shall be observed. In
petitioner may have admitted in her Amended such case the contract is called a suretyship.
Answer that she received a demand letter from
respondent corporation sometime in 1990, the It is a cardinal rule in the interpretation of
same did not effectively put her or the principal contracts that if the terms of a contract are clear
debtors in default for the simple reason that the and leave no doubt upon the intention of the
latter subsequently made a partial payment on the contracting parties, the literal meaning of its

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 24

stipulation shall control.13 In the case at bar, without regard to his ability to do so. A guarantor,
petitioner expressly bound herself to be jointly on the other hand, does not contract that the
and severally or solidarily liable with the principal principal will pay, but simply that he is able to do
maker of the note. The terms of the contract are so.20 In other words, a surety undertakes directly
clear, explicit and unequivocal that petitioner's for the payment and is so responsible at once if
liability is that of a surety. the principal debtor makes default, while a
guarantor contracts to pay if, by the use of due
Her pretension that the terms "jointly and diligence, the debt cannot be made out of the
severally or solidarily liable" contained in the principal debtor.21
second paragraph of her contract are technical
and legal terms which could not be easily Quintessentially, the undertaking to pay upon
understood by an ordinary layman like her is default of the principal debtor does not
diametrically opposed to her manifestation in the automatically remove it from the ambit of a
contract that she "fully understood the contents" contract of suretyship. The second and third
of the promissory note and that she is "fully paragraphs of the aforequoted portion of the
aware" of her solidary liability with the principal promissory note do not contain any other
maker. Petitioner admits that she voluntarily condition for the enforcement of respondent
affixed her signature thereto; ergo, she cannot corporation's right against petitioner. It has not
now be heard to claim otherwise. Any reference to been shown, either in the contract or the
the existence of fraud is unavailing. Fraud must be pleadings, that respondent corporation agreed to
established by clear and convincing evidence, proceed against herein petitioner only if and
mere preponderance of evidence not even being when the defaulting principal has become
adequate. Petitioner's attempt to prove fraud insolvent. A contract of suretyship, to repeat, is
must, therefore, fail as it was evidenced only by that wherein one lends his credit by joining in the
her own uncorroborated and, expectedly, principal debtor's obligation, so as to render
self-serving allegations.14 himself directly and primarily responsible with him,
and without reference to the solvency of the
Having entered into the contract with full principal.22
knowledge of its terms and conditions, petitioner
is estopped to assert that she did so under a In a desperate effort to exonerate herself from
misapprehension or in ignorance of their legal liability, petitioner erroneously invokes the rule
effect, or as to the legal effect of the on strictissimi juris, which holds that when the
undertaking.15 The rule that ignorance of the meaning of a contract of indemnity or guaranty
contents of an instrument does not ordinarily has once been judicially determined under the rule
affect the liability of one who signs it also applies of reasonable construction applicable to all written
to contracts of suretyship. And the mistake of a contracts, then the liability of the surety, under his
surety as to the legal effect of her obligation is contract, as thus interpreted and construed, is not
ordinarily no reason for relieving her of liability.16 to be extended beyond its strict meaning.23 The
rule, however, will apply only after it has been
Petitioner would like to make capital of the fact definitely ascertained that the contract is one of
that although she obligated herself to be jointly suretyship and not a contract of guaranty. It
and severally liable with the principal maker, her cannot be used as an aid in determining whether a
liability is deemed restricted by the provisions of party's undertaking is that of a surety or a
the third paragraph of her contract wherein she guarantor.
agreed "that M.B. Lending Corporation may
demand payment of the above loan from me in Prescinding from these jurisprudential authorities,
case the principal maker, Mrs. Merlyn Azarraga there can be no doubt that the stipulation
defaults in the payment of the note," which makes contained in the third paragraph of the
her contract one of guaranty and not suretyship. controverted suretyship contract merely
The purported discordance is more apparent than elucidated on and made more specific the
real. obligation of petitioner as generally defined in the
second paragraph thereof. Resultantly, the theory
A surety is an insurer of the debt, whereas a advanced by petitioner, that she is merely a
guarantor is an insurer of the solvency of the guarantor because her liability attaches only upon
debtor.17 A suretyship is an undertaking that the default of the principal debtor, must necessarily
debt shall be paid; a guaranty, an undertaking fail for being incongruent with the judicial
that the debtor shall pay.18 Stated differently, a pronouncements adverted to above.
surety promises to pay the principal's debt if the
principal will not pay, while a guarantor agrees It is a well-entrenched rule that in order to judge
that the creditor, after proceeding against the the intention of the contracting parties, their
principal, may proceed against the guarantor if contemporaneous and subsequent acts shall also
the principal is unable to pay.19 A surety binds be principally considered.24 Several attendant
himself to perform if the principal does not, factors in that genre lend support to our finding

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 25

that petitioner is a surety. For one, when expressed in the promissory note. Significantly,
petitioner was informed about the failure of the paragraph (G) of the note states that "should I fail
principal debtor to pay the loan, she immediately to pay in accordance with the above schedule of
offered to settle the account with respondent payment, I hereby waive my right to notice and
corporation. Obviously, in her mind, she knew that demand." Hence, demand by the creditor is no
she was directly and primarily liable upon default longer necessary in order that delay may exist
of her principal. For another, and this is most since the contract itself already expressly so
revealing, petitioner presented the receipts of the declares.33 As a surety, petitioner is equally bound
payments already made, from the time of initial by such waiver.
payment up to the last, which were all issued in
her name and of the Azarraga spouses.25 This can Even if it were otherwise, demand on the sureties
only be construed to mean that the payments is not necessary before bringing suit against them,
made by the principal debtors were considered by since the commencement of the suit is a sufficient
respondent corporation as creditable directly upon demand.34 On this point, it may be worth
the account and inuring to the benefit of petitioner. mentioning that a surety is not even entitled, as a
The concomitant and simultaneous compliance of matter of right, to be given notice of the principal's
petitioner's obligation with that of her principals default. Inasmuch as the creditor owes no duty of
only goes to show that, from the very start, active diligence to take care of the interest of the
petitioner considered herself equally bound by the surety, his mere failure to voluntarily give
contract of the principal makers. information to the surety of the default of the
principal cannot have the effect of discharging the
In this regard, we need only to reiterate the rule surety. The surety is bound to take notice of the
that a surety is bound equally and absolutely with principal's default and to perform the obligation.
the principal,26 and as such is deemed an original He cannot complain that the creditor has not
promisor and debtor from the beginning.27 This is notified
because in suretyship there is but one contract, him in the absence of a special agreement to that
and the surety is bound by the same agreement effect in the contract of suretyship.35
which binds the principal.28 In essence, the
contract of a surety starts with the The alleged failure of respondent corporation to
agreement,29 which is precisely the situation prove the fact of demand on the principal debtors,
obtaining in this case before the Court. by not attaching copies thereof to its pleadings, is
likewise immaterial. In the absence of a statutory
It will further be observed that petitioner's or contractual requirement, it is not necessary
undertaking as co-maker immediately follows the that payment or performance of his obligation be
terms and conditions stipulated between first demanded of the principal, especially where
respondent corporation, as creditor, and the demand would have been useless; nor is it a
principal obligors. A surety is usually bound with requisite, before proceeding against the sureties,
his principal by the same instrument, executed at that the principal be called on to account.36 The
the same time and upon the same consideration; underlying principle therefor is that a suretyship is
he is an original debtor, and his liability is a direct contract to pay the debt of another. A
immediate and direct.30 Thus, it has been held surety is liable as much as his principal is liable,
that where a written agreement on the same sheet and absolutely liable as soon as default is made,
of paper with and immediately following the without any demand upon the principal
principal contract between the buyer and seller is whatsoever or any notice of default.37 As an
executed simultaneously therewith, providing that original promisor and debtor from the beginning,
the signers of the agreement agreed to the terms he is held ordinarily to know every default of his
of the principal contract, the signers were principal.38
"sureties" jointly liable with the buyer.31 A surety
usually enters into the same obligation as that of Petitioner questions the propriety of the filing of a
his principal, and the signatures of both usually complaint solely against her to the exclusion of the
appear upon the same instrument, and the same principal debtors who allegedly were the only ones
consideration usually supports the obligation for who benefited from the proceeds of the loan. What
both the principal and the surety.32 petitioner is trying to imply is that the creditor,
herein respondent corporation, should have
There is no merit in petitioner's contention that proceeded first against the principal before suing
the complaint was prematurely filed because the on her obligation as surety. We disagree.
principal debtors cannot as yet be considered in
default, there having been no judicial or A creditor's right to proceed against the surety
extrajudicial demand made by respondent exists independently of his right to proceed
corporation. Petitioner has agreed that against the principal.39 Under Article 1216 of the
respondent corporation may demand payment of Civil Code, the creditor may proceed against any
the loan from her in case the principal maker one of the solidary debtors or some or all of them
defaults, subject to the same conditions simultaneously. The rule, therefore, is that if the

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 26

obligation is joint and several, the creditor has the might be demanded, does not constitute an
right to proceed even against the surety extension of the time of payment, which would
alone.40 Since, generally, it is not necessary for release the surety.50 In order to constitute an
the creditor to proceed against a principal in order extension discharging the surety, it should appear
to hold the surety liable, where, by the terms of that the extension was for a definite period,
the contract, the obligation of the surety is the pursuant to an enforceable agreement between
same that of the principal, then soon as the the principal and the creditor, and that it was
principal is in default, the surety is likewise in made without the consent of the surety or with a
default, and may be sued immediately and before reservation of rights with respect to him. The
any proceedings are had against the contract must be one which precludes the creditor
principal. Perforce, in accordance with the rule
41
from, or at least hinders him in, enforcing the
that, in the absence of statute or agreement principal contract within the period during which
otherwise, a surety is primarily liable, and with the he could otherwise have enforced it, and which
rule that his proper remedy is to pay the debt and precludes the surety from paying the debt.51
pursue the principal for reimbursement, the
surety cannot at law, unless permitted by statute None of these elements are present in the instant
and in the absence of any agreement limiting the case. Verily, the mere fact that respondent
application of the security, require the creditor or corporation gave the principal debtors an
obligee, before proceeding against the surety, to extended period of time within which to comply
resort to and exhaust his remedies against the with their obligation did not effectively absolve
principal, particularly where both principal and here in petitioner from the consequences of her
surety are equally bound.42 undertaking. Besides, the burden is on the surety,
herein petitioner, to show that she has been
We agree with respondent corporation that its discharged by some act of the creditor, 52 herein
mere failure to immediately sue petitioner on her respondent corporation, failing in which we cannot
obligation does not release her from liability. grant the relief prayed for.
Where a creditor refrains from proceeding against
the principal, the surety is not exonerated. In As a final issue, petitioner claims that assuming
other words, mere want of diligence or that her liability is solidary, the interests and
forbearance does not affect the creditor's penalty charges on the outstanding balance of the
rights vis-a-vis the surety, unless the surety loan cannot be imposed for being illegal and
requires him by appropriate notice to sue on the unconscionable. Petitioner additionally theorizes
obligation. Such gratuitous indulgence of the that respondent corporation intentionally delayed
principal does not discharge the surety whether the collection of the loan in order that the interests
given at the principal's request or without it, and and penalty charges would accumulate. The
whether it is yielded by the creditor through statement, likewise traversed by said respondent,
sympathy or from an inclination to favor the is misleading.
principal, or is only the result of passiveness. The
neglect of the creditor to sue the principal at the In an affidavit53 executed by petitioner, which was
time the debt falls due does not discharge the attached to her petition, she stated, among others,
surety, even if such delay continues until the that:
principal becomes insolvent.43 And, in the absence
of proof of resultant injury, a surety is not 8. During the latter part of 1990, I was surprised
discharged by the creditor's mere statement that to learn that Merlyn Azarraga's loan has been
the creditor will not look to the surety,44 or that he released and that she has not paid the same upon
need not trouble himself.45 The consequences of its maturity. I received a telephone call from Mr.
the delay, such as the subsequent insolvency of Augusto Banusing of MB Lending informing me of
the principal,46 or the fact that the remedies this fact and of my liability arising from the
against the principal may be lost by lapse of time, promissory note which I signed.
are immaterial.47
9. I requested Mr. Banusing to try to collect first
The raison d'être for the rule is that there is from Merlyn and Osmeña Azarraga. At the same
nothing to prevent the creditor from proceeding time, I offered to pay MB Lending the outstanding
against the principal at any time.48 At any rate, if balance of the principal obligation should he fail to
the surety is dissatisfied with the degree of activity collect from Merlyn and Osmeña Azarraga. Mr.
displayed by the creditor in the pursuit of his Banusing advised me not to worry because he will
principal, he may pay the debt himself and try to collect first from Merlyn and Osmeña
become subrogated to all the rights and remedies Azarraga.
of the creditor.49
10. A year thereafter, I received a telephone call
It may not be amiss to add that leniency shown to from the secretary of Mr. Banusing who reminded
a debtor in default, by delay permitted by the that the loan of Merlyn and Osmeña Azarraga,
creditor without change in the time when the debt together with interest and penalties thereon, has

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 27

not been paid. Since I had no available funds at blamed for refusing the amount being offered
that time, I offered to pay MB Lending by because it fell way below the amount it had
delivering to them a parcel of land which I own. Mr. computed, based on the stipulated interests and
Banusing's secretary, however, refused my offer penalty charges, as owing and due from herein
for the reason that they are not interested in real petitioner. A debt shall not be understood to have
estate. been paid unless the thing or service in which the
obligation consists has been completely delivered
11. In March 1992, I received a copy of the or rendered, as the case may be.56 In other words,
summons and of the complaint filed against me by the prestation must be fulfilled completely. A
MB Lending before the RTC-Iloilo. After learning person entering into a contract has a right to insist
that a complaint was filed against me, I instructed on its performance in all particulars.57
Sheila Gatia to go to MB Lending and reiterate my
first offer to pay the outstanding balance of the Petitioner cannot compel respondent corporation
principal obligation of Merlyn Azarraga in the to accept the amount she is willing to pay because
amount of P30,000.00. the moment the latter accepts the performance,
knowing its incompleteness or irregularity, and
12. Ms. Gatia talked to the secretary of Mr. without expressing any protest or objection, then
Banusing who referred her to Atty. Venus, counsel the obligation shall be deemed fully complied
of MB Lending. with.58 Precisely, this is what respondent
corporation wanted to avoid when it continually
13. Atty. Venus informed Ms. Gatia that he will refused to settle with petitioner at less than what
consult Mr. Banusing if my offer to pay the was actually due under their contract.
outstanding balance of the principal obligation
loan (sic) of Merlyn and Osmeña Azarraga is This notwithstanding, however, we find and so
acceptable. Later, Atty. Venus informed Ms. Gatia hold that the penalty charge of 3% per month and
that my offer is not acceptable to Mr. Banusing. attorney's fees equivalent to 25% of the total
amount due are highly inequitable and
The purported offer to pay made by petitioner can unreasonable.
not be deemed sufficient and substantial in order
to effectively discharge her from liability. There It must be remembered that from the principal
are a number of circumstances which conjointly loan of P30,000.00, the amount of P16,300.00
inveigh against her aforesaid theory. had already been paid even before the filing of the
present case. Article 1229 of the Civil Code
1. Respondent corporation cannot be faulted for provides that the court shall equitably reduce the
not immediately demanding payment from penalty when the principal obligation has been
petitioner. It was petitioner who initially requested partly or irregularly complied with by the debtor.
that the creditor try to collect from her principal And, even if there has been no performance, the
first, and she offered to pay only in case the penalty may also be reduced if it is iniquitous or
creditor fails to collect. The delay, if any, was leonine.
occasioned by the fact that respondent
corporation merely acquiesced to the request of In a case previously decided by this Court which
petitioner. At any rate, there was here no actual likewise involved private respondent M.B. Lending
offer of payment to speak of but only a Corporation, and which is substantially on all fours
commitment to pay if the principal does not pay. with the one at bar, we decided to eliminate
altogether the penalty interest for being excessive
2. Petitioner made a second attempt to settle the and unwarranted under the following
obligation by offering a parcel of land which she rationalization:
owned. Respondent corporation was acting well
within its rights when it refused to accept the offer. Upon the matter of penalty interest, we agree with
The debtor of a thing cannot compel the creditor to the Court of Appeals that the economic impact of
receive a different one, although the latter may be the penalty interest of three percent (3 %) per
of the same value, or more valuable than that month on total amount due but unpaid should be
which is due.54 The obligee is entitled to demand equitably reduced. The purpose for which the
fulfillment of the obligation or performance as penalty interest is intended — that is, to punish
stipulated. A change of the object of the obligation the obligor — will have been sufficiently served by
would constitute novation requiring the express the effects of compounded interest. Under the
consent of the parties.55 exceptional circumstances in the case at bar, e.g.,
the original amount loaned was only P15,000.00;
3. After the complaint was filed against her, partial payment of P8,600.00 was made on due
petitioner reiterated her offer to pay the date; and the heavy (albeit still lawful) regular
outstanding balance of the obligation in the compensatory interest, the penalty interest
amount of P30,000.00 but the same was likewise stipulated in the parties' promissory note is
rejected. Again, respondent corporation cannot be iniquitous and unconscionable and may be

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 28

equitably reduced further by eliminating such issue first against the property of Guillermo
penalty interest altogether.59 Severino, and if no property should be found
belonging to said defendant sufficient to satisfy
Accordingly, the penalty interest of 3% per month the judgment in whole or in part, execution for the
being imposed on petitioner should similarly be remainder should be issued against the property
eliminated. of Enrique Echaus as guarantor. From this
judgment the defendant Echaus appealed, but his
Finally, with respect to the award of attorney's principal, Guillermo Severino, did not.
fees, this Court has previously ruled that even
with an agreement thereon between the parties, The plaintiff Fabiola Severino is the recognized
the court may nevertheless reduce such natural daughter of Melecio Severino, deceased,
attorney's fees fixed in the contract when the former resident of Occidental Negros. Upon the
amount thereof appears to be unconscionable or death of Melecio Severino a number of years ago,
unreasonable.60 To that end, it is not even he left considerable property and litigation ensued
necessary to show, as in other contracts, that it is between his widow, Felicitas Villanueva, and
contrary to morals or public policy.61 The grant of Fabiola Severino, on the one part, and other heirs
attorney's fees equivalent to 25% of the total of the deceased on the other part. In order to
amount due is, in our opinion, unreasonable and make an end of this litigation a compromise was
immoderate, considering the minimal unpaid effected by which Guillermo Severino, a son of
amount involved and the extent of the work Melecio Severino, took over the property
involved in this simple action for collection of a pertaining to the estate of his father at the same
sum of money. We, therefore, hold that the time agreeing to pay P100,000 to Felicitas
amount of P10,000.00 as and for attorney's fee Villanueva and Fabiola Severino. This sum of
would be sufficient in this case.62 money was made payable, first, P40,000 in cash
upon the execution of the document of
WHEREFORE, the judgment appealed from is compromise, and the balance in three several
hereby AFFIRMED, subject to the MODIFICATION payments of P20,000 at the end of one year; two
that the penalty interest of 3% per month is years, and three years respectively. To this
hereby deleted and the award of attorney's fees is contract the appellant Enrique Echaus affixed his
reduced to P10,000.00. name as guarantor. The first payment of P40,000
was made on July 11, 1924, the date when the
SO ORDERED. contract of compromise was executed; and of this
amount the plaintiff Fabiola Severino received the
sum of P10,000. Of the remaining P60,000, all as
yet unpaid, Fabiola Severino is entitled to the sum
EN BANC of P20,000.

G.R. No. 34642 September 24, 1931 It appears that at the time of the compromise
agreement above-mentioned was executed
FABIOLA SEVERINO, accompanied by her Fabiola Severino had not yet been judicially
husband RICARDO recognized as the natural daughter of Melecio
VERGARA, plaintiffs-appellees, Severino, and it was stipulated that the last
vs. P20,000 corresponding to Fabiola and the last
GUILLERMO SEVERINO, ET AL., defendants. P5,000 corresponding to Felicitas Villanueva
ENRIQUE ECHAUS, appellant. should retained on deposit until the definite status
of Fabiola Severino as natural daughter of Melecio
R. Nepomuceno for appellant. Severino should be established. The judicial
Jacinto E. Evidente for appellees. decree to this effect was entered in the Court of
First Instance of Occidental Negros on June 16,
STREET, J.: 1925, and as the money which was contemplated
to be held in suspense has never in fact been paid
This action was instituted in the Court of First to the parties entitled thereto, it results that the
Instance of the Province of Iloilo by Fabiola point respecting the deposit referred to has
Severino, with whom is joined her husband ceased to be of moment.
Ricardo Vergara, for the purpose of recovering the
sum of P20,000 from Guillermo Severino and The proof shows that the money claimed in this
Enrique Echaus, the latter in the character of action has never been paid and is still owing to the
guarantor for the former. Upon hearing he cause plaintiff; and the only defense worth noting in this
the trial court gave judgment in favor of the decision is the assertion on the part of Enrique
plaintiffs to recover the sum of P20,000 with Echaus that he received nothing for affixing his
lawful from November 15, 1929, the date of the signature as guarantor to the contract which is the
filing of the complaint, with costs. But it was subject of suit and that in effect the contract was
declared that execution of this judgment should lacking in consideration as to him.

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 29

The point is not well taken. A guarantor or surety 1925, against the Philippine-American
is bound by the same consideration that makes Construction Company and its co-partners, for the
the contract effective between the principal recovery of the loan, plus interest thereon and
parties thereto. (Pyle vs. Johnson, 9 Phil., 249.) stipulated attorney's fees. On January 25, 1926,
The compromise and dismissal of a lawsuit is the said court rendered judgment therein
recognized in law as a valuable consideration; and sentencing all the defendants to pay the plaintiff,
the dismissal of the action which Felicitas jointly and severally, the sum of P9,317, with legal
Villanueva and Fabiola Severino had instituted interest thereon from the filing of the complaint,
against Guillermo Severino was an adequate plus P500 as liquidated damages and P1,000 as
consideration to support the promise on the part attorney's fees. On appeal this judgment was
of Guillermo Severino to pay the sum of money affirmed by this court on December 17, 1926 (G.R.
stipulated in the contract which is the subject of No. 26131). A writ of execution of the affirmed
this action. The promise of the appellant Echaus as judgment having been issued, the herein plaintiff,
guarantor therefore binding. It is never necessary in her capacity as judicial administratrix of the
that the guarantor or surety should receive any deceased Santiago Lucero, on February 10, 1932,
part of the benefit, if such there be, accruing to his paid to be creditor Paulino Candelaria the sum of
principal. But the true consideration of this P5,665.55 on account of the judgment.
contract was the detriment suffered by the
plaintiffs in the former action in dismissing that Upon filing of the complaint in civil case No. 3838,
proceeding, and it is immaterial that no benefit Paulino Candeleria obtained a writ of attachment
may have accrued either to the principal or his against the then defendants by virtue of which the
guarantor. sheriff attached properties of Jerry O. Toole
valued at P50; of Antonio K. Abad valued at
The judgment appealed from is in all respects P12,150; and of Anastacio R. Santos valued at
correct, and the same will be affirmed, with costs P2,733. No property of the partnership
against the appellant. So ordered. Philippine-American Construction Company was
attached. In view of these attachments, the
Philippine-American Construction Company
moved for the discharge of the attached
EN BANC properties and offered to post a bond for P10,000.
The court granted the motion and fixed the bond
G.R. No. L-45571 June 30, 1939 at the amount offered. On May 29, 1925, the
Philippine-American Construction Company, as
FLORENTINA DE GUZMAN, as administratrix principal, then represented by the partner Antonio
of the intestate estate of the deceased K. Abad, and Santiago Lucero and Meliton Carlos,
Santiago Lucero, plaintiff-appellee, as guarantors, executed a bond for P10,000 in
vs. favor of Paulino Candelaria for the lifting of the
ANASTACIO R. SANTOS, defendant-appellant. attachment under section 440 of the Code of Civil
Procedure. In the bond thus executed, the
E.V. Filamor appellant. defendant Anastacio R. Santos neither intervened
Antonio G. Lucero for appellee. nor signed individually, but Abad testified that the
former was the one who induced him to get the
IMPERIAL, J.: signature of Lucero by taking advantage of his
good relations with him. Upon the approval of the
This is an appeal taken by the defendant from the bond, the attachment was discharged and the
decision of the Court of First Instance of Nueva attached properties were returned to their
Ecija which sentenced him to pay the plaintiff the owners.
sum of P3,665.55, plus legal interest thereon from
February 10, 1932, until fully paid, and the costs. After the issuance of the writ for the execution of
the judgment rendered in civil case No. 3838, the
On October 28, 1924, Jerry O. Toole, Antonio K. sheriff returned the same with the statement that
Abad and Anastacio R. Santos, the defendant, the writ could not be executed as he found no
formed a general mercantile partnership under property of the judgment debtors. In view of this,
the style Philippine-American Construction Paulino Candelaria moved for the issuance of a
Company, with a capital of P14,000, P10,000 of writ of execution against the guarantors of the
which were taken by way of loan from Paulino defendants. The court granted the motion and
Candelaria. The partnership and the co-partners issued a writ of execution against the plaintiff, as
undertook and bound themselves to pay, jointly judicial administratrix of the deceased Santiago
and severally, the said indebtedness in or before Lucero, and the other guarantor Meliton Carlos.
June, 1925. Having violated the conditions of the The plaintiff tenaciously refused to pay the
contract executed for the purpose, Paulino judgment obtained by Paulino Candelaria, but
Candelaria brought civil case No. 3838 of the after all her efforts had failed, she was eventually
Court of First Instance of Nueva Ecija on May 15, compelled to pay to said creditor the sum of

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 30

P5,565.55, the co-guarantor Meliton Carlos also is unaware of it. Any person who makes a
paid upon the bond signed by him the sum of payment for the account of another may recover
P5,135. The plaintiff and Carlos later recovered from the debtor the amount of the payment,
from Antonio K. Abad, one of the defendants in the unless it was made against the express will of the
said civil case, the sum of P3,800 which they latter. In the latter case he can only recover from
divided equally. It thus appears that the payment the debtor in so far as the payment has been
made by the plaintiff to Candelaria was reduced to beneficial to the latter." According to this legal
the sum of P3,665.55. The plaintiff, in her said provision, it is evident that the plaintiff-appellant
capacity, demanded of the defendant Anastacio R. is bound to pay to the plaintiff what the latter had
Santos the return of the aforesaid sum and, upon advanced to the creditor upon the judgment, and
the latter's refusal, she brought the action which this is the more so because it appears that
culminated in the appealed judgment. although Lucero executed the bond without his
knowledge, nevertheless he did not object thereto
The four errors assigned by the appellant raise or repudiate the same at any time. From the
only one legal question, namely, whether under proven facts it cannot logically be deduced that
the proven facts admitted by the parties, he is the appellant did not have knowledge of the bond,
bound to pay to the plaintiff what the latter had first, because his properties were attached and
advanced to Paulino Candelaria upon the bond the attachment could not have been levied
which the deceased Santiago Lucero had executed. without his knowledge, and, secondly, because
The appellant vigorously insists that he is not so the said properties were returned to him and in
bound under the law, because he neither applied receiving them he was necessarily apprized of the
for nor intervened in the bond in any capacity. It is fact that a bond had been filed to discharge the
beyond question that the appellant neither attachment.
intervened nor signed the bond which was filed to
discharge the attachment of the properties of the The appellant questions the application by the
judgment debtors, but it is clear, and this is court of article 127 of the Code of Commerce,
admitted, that the bond was filed to release the overlooking article 128. This assignment of error
attached properties, it was approved by the court is of no consequence and does not affect the result
and it resulted in the discharge of the attachment of the case. As already stated, the rights of the
and the return of the attached properties to their parties must be governed by the aforesaid articles
respective owners. When the sheriff attempted to of the Civil Code. Assuming the inapplicability of
execute judgment and looked for the discharged article 127 of the Code of Commerce, in view of
properties, he found that they had disappeared, the fact that the action is not addressed to the
for which reason the court subsequently issued a appellant as general partner of the
writ of execution against the guarantors. As a Philippine-American Construction Company, it
result of this last execution, the plaintiff was nevertheless appears that his liability to the
forced to pay and in fact paid the said sum to the plaintiff, as debtor in solidum of Paulino
creditor Candelaria. Now, then, under article 1822 Candelaria, is recognized and countenanced by
of the Civil Code, by guaranty one person binds articles 1158 and 1838 of the Civil Code.
himself to pay or perform for a third person in case
the latter should fail to do so; and the article 1838 In view of the foregoing, the appealed judgment is
provides that any guarantor who pays for the affirmed, with costs of this instance to the
debtor shall be indemnified by the latter even defendant appellant. So ordered.
should the guaranty have been undertaken
without the knowledge of the debtor. In the
present case, the guarantor was the deceased
Santiago Lucero, now represented by the plaintiff FIRST DIVISION
in her capacity as judicial administratrix, and the
debtor is the defendant-appellant. Applying the
provision of the last cited article, it is obvious that
the appellant is legally bound to pay what the G.R. No. L-29587 November 28, 1975
plaintiff had advanced to the creditor upon the
judgment, notwithstanding the fact that the bond PHILIPPINE NATIONAL BANK, petitioner,
had given without his knowledge. vs.
LUZON SURETY CO., INC. and THE
The obligation of the appellant to pay the plaintiff HONORABLE COURT OF APPEALS, respondent.
what the latter had advanced is further sanctioned
by the general provisions of the Civil Code Medina and Magtalas for petitioner.
regarding obligations. Article 1158 provides that
"payment may be made by any person, whether Tolentino, Garcia, Cruz and Reyes for private
he has an interest in the performance of the respondent.
obligation or not, and whether the payment is
known and approved by the debtor or whether he

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 31

ESGUERRA, J.: notes Exhibits C-10 to C-30 were based on the
increased credit line; and as of 27 September,
Petitioner Philippine National Bank seeks a review 1953 as shown in the accounts, Exhibits D and D-1,
and reversal of the decision dated June 26, 1968, there was a balance of P63,222.78 but as of the
of the Court of Appeals in its case CA-G.R. No. date when the complaint was filed on 8 June, 1960,
30282-R, absolving Luzon Surety Co., Inc. of its because of the interest accrued, it had reached a
liability to said petitioner and thus reversing the much higher sum; that was why due to its
decision of the Court of First Instance of Negros non-payment, plaintiff filed this complaint, as has
Occidental, the dispositive portion of which reads been said, on 8 June, 1960; now the complaint
as follows: sought relief not only against the planter but also
against the three (3) bondsmen, Luzon Surety,
IN VIEW THEREOF, judgment is hereby rendered Central Surety and Associated Surety because
ordering defendant Augusto R. Villarosa to pay Luzon Surety had filed the bond Exhibit E dated 18
plaintiff PHILIPPINE NATIONAL BANK the sum of February, 1952 in the sum of P10,000; Central
P81,200.00 plus accrued interest of 5% per Surety Exhibit F dated 24 February, 1952 in the
annum on P63,222.78 from August 31, 1959; to sum of P20,000 and Associated Surety the bond
pay 10% of said amount as attorney's fees and to Exhibit G dated 11 September, 1952 in the sum of
pay the costs. Defendant Luzon Surety Co., Inc. is P15,000; in gist, the obligation of each of the
hereby ordered to pay jointly and severally with bondsmen being to guarantee the faithful
defendant Villarosa to the plaintiff the sum of performance of the obligation of the planter with
P10,000.00; defendant Central Surety and PNB; now each of the defendants in their answers
Insurance Company jointly and severally with raised various defenses but as far as principal
defendant Villarosa the sum of P20,000 to the defendant Augusto R. Villarosa and other
plaintiff, and Associated Surety And Insurance Co. defendants Central Surety and Associated Surety
jointly and severally with defendant Villarosa the are concerned, their liability is no longer material
sum of P15,000.00 to the plaintiff, with the because they have not appealed; and in the trial of
understanding that should said bonding the case, plaintiff submitted Exhibits A to J-1 and
companies pay the aforementioned amounts of witness Romanito Brillantes; but the defense of
their respective bonds to the plaintiff, said Luzon Surety thru its witness Jose Arroyo and
amounts should be deducted from the total Exhibits 1 to 3 being 1st that the evidence of the
outstanding obligation of defendant Villarosa in plaintiff did not establish a cause of action to make
favor of the plaintiff. Luzon Surety liable and 2ndly, in any case that
there had been material alteration in the principal
Above-quoted decision was modified in an order of obligation, if any, guaranteed by it; ... .
the Court of First Instance dated June 5, 1961,
granting petitioner Philippine National Bank (PNB) Unable to obtain reconsideration of the decision of
the right to recover accrued interest at the rate of the Appellate Court, PNB came to this Court and
5% per annum from December 24, 1953, from the alleged the following errors.
defendants bonding companies.
1. The Court of Appeals erred in the application of
The facts as found by the Court of Appeals are as the law involved by invoking Article 2055 of the
follows: New Civil Code, which properly should have been
the law on suretyship which are covered by
... sometime prior to 27 November 1951, Section 4, Chapter 3, Title 1, Book IV of the New
defendant Augusto R. Villarosa, a sugar planter Civil Code;
adhered to the Lopez Sugar Central Milling
Company, Inc. applied for a crop loan with the 2. Consequently, when the Court of Appeals
plaintiff, Philippine National Bank, Exhibit A; this released the surety from liability, it committed a
application was approved on 6 March, 1952 in the grave or gross misappreciation of facts amounting
amount of P32,400, according to the complaint; to an error of law;
but the document of approval has not been
exhibited; at any rate, the planter Villarosa 3. The Court of Appeals erred when it held that
executed a Chattel Mortgage on standing crops to there must have been a principal crop loan
guarantee the crop loan, Exhibit B and as shown in contract, guaranteed by the surety bonds;
Exhibits C to C-30 on various dates from 28
January, 1952 to 9 January, 1953, in 4. The Court of Appeals erred when it released the
consideration of periodical sums of money by him surety from liability. The above assigned errors
received from PNB, planter Villarosa executed boil down to the single question of whether or not
these promissory notes from which will be seen the Court of Appeals was justified in absolving
that the credit line was that the original amount of Luzon Surety Co., Inc., from liability to petitioner
P32,400 and was thus maintained up to the Philippine National Bank. We have examined the
promissory note Exhibit C-9 dated 30 May, 1952 record thoroughly and found the appealed
but afterwards it was increased and promissory decision to be erroneous.

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 32

Excerpt of the Chattel Mortgage executed to and Augusto Villarosa and respondent Luzon
guarantee the crop loan clearly provided as Surety Company, Inc. on the other, is hereby
follows: reproduced, viz:

xxx xxx xxx That we Augusto Villarosa of Bacolod City, as

principal and Luzon Surety Company, Inc. a
1. That the Mortgagor does by these presents corporation duly organized and existing under and
grant, cede and convey unto the Mortgagee by by virtue of the laws of the Philippines, as surety,
way of First Mortgage free from any are held firmly bound unto Philippine National
encumbrances, all the crops of the absolute Bank, Bacolod City, Philippines, in the sum of Ten
property of the Mortgagor, corresponding to the Thousand Pesos (P10,000.00) Philippine Currency,
1952-53 and subsequent yearly sugar crops for the payment of which sum, well and truly to be
agricultural season at present growing in the Hda. made, we bind ourselves, our heirs, executors,
known as San Antonio, Washington (P) Audit administrators, successors, and assigns jointly
24-124 and 24-16 la and Hda. Aliwanay and severally, firmly by these presents:
(non-quota land); milling with LSMC and CAD
Municipality of Sagay, and Escalante, Province of The condition of the obligation are as follows:
Negros Occidental covered by cadastral lots no.
Various of the Cadastral Survey at the Municipality WHEREAS, the above bounden principal, on the —
of Sagay, Escalante particularly bounded and day of February, 1952, entered into a crop loan
described in Transfer Certificate of Title No. contract with obligee Philippine National Bank,
Various issued by the Register of Deeds of said Bacolod Branch of Bacolod City, Philippines to fully
province. The said mortgage crops consist of all and faithfully —
the Mortgagor's first available entire net share of
the 1952-53 and subsequent yearly sugar crops Comply with all the terms and condition stipulated
thereafter conservatively estimated at but not less in said crop loan contract which are hereby
than Three Thousand Four Hundred Twenty and incorporated as essential parts hereof, and
14/00 (3,420.14) piculs of export and domestic principally to meet and pay from the proceeds of
sugar, including whatever addition thereto, and the sugar produced from his Hda. Antonio and Hda.
such aids, subsidies, indemnity payments and Aliwanay, Escalante, Occidental Negros credit
other benefits as maybe awarded to the advances made by the Philippine National Bank
Mortgagor, coming from any source, Bacolod Branch not to exceed P32,800 as stated in
governmental or otherwise. said contract. Provided further that the liability
under this bond shall not exceed the amount of
xxx xxx xxx P10,000.00

4. This Mortgage is executed to secure payment WHEREAS, said Philippine National Bank Bacolod
by the Mortgagor to the Mortgagee at the latter's Branch requires said principal to give a good and
office of a loan herein granted to the Mortgagor in sufficient bond in the above stated sum to secure
the sum of Thirty Two Thousand Four Hundred the full and faithful performance on his part of said
(P32,400.00) Pesos, Philippine Currency, with crop loan contract.
interest at the rate of five per cent per annum,
which loan shall be given to the Mortgagor either NOW, THEREFORE, if the principal shall well and
in lump sum or in installments as the mortgagee truly perform and fulfill all the undertakings,
may determine. The Mortgagee may increase or covenants, terms and conditions and agreement
decrease the amount of the loan as well as the stipulated in said crop loan contract then, this
installments as it may deem convenient and the obligation shall be null and void, otherwise it shall
Mortgagor shall submit such periodical reports on remain in full force and effect.
the crops mortgaged as the Mortgagee may
require. In the event that the loan is increased xxx xxx xxx
such increase shall likewise be secured by
Mortgage. This Mortgage shall also secure any The foregoing evidences clearly the liability of
other loans or advances that the Mortgagee may Luzon Surety to petitioner Philippine National
extend to the Mortgagor, including interest and Bank not merely as a guarantor but as
expenses or any other obligation owing to the surety-liable as a regular party to the undertaking
Mortgagee, whether direct or indirect, principal or (Castelvi de Higgins vs. Sellner 41 Phil. 142). The
secondary as appears in the account books and Court of Appeals, however, in absolving the
records of the Mortgagee. bonding company ratiocinates that the Surety
Bond executed on February 18, 1952, made
xxx xxx xxx specific references to a crop loan contract
executed by Augusto Villarosa sometime in
Likewise an extract from the Surety Bond February 1952. And, therefore, the Chattel
executed by and between the PNB on one hand Mortgage, Exhibit B dated March 6, 1952, could

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 33

not have been the obligations guaranteed by the 8. The terms and conditions of the surety bond as
surety bond. Thus the Court of Appeals stated: well as the contract it guaranteed was materially
altered and or novated without the knowledge and
... one is really at a loss to impose any liability consent of the surety thereby releasing the latter
upon Luzon Surety in the absence of the principal from liability.
obligation which was a crop loan contract
executed in February, 1952, and to which there 11. The maximum liability, if any, of defendant
was made an express reference in the surety bond, LUZON is P10.000.00.
Exhibit E; let it not be overlooked further that one
can secure a crop loan without executing a Chattel The principal obligation, therefore, has never been
Mortgage on his crops because the crop loan is the put in issue by then defendant now respondent
principal obligation while the Chattel Mortgage is Luzon Surety Co., Inc. On the other hand it raised
only an ancillary and secondary contract to as its defense the alleged material alteration of the
guarantee fulfillment of a crop loan; stated terms and conditions of the contract as the basis
otherwise and as Luzon Surety never intervened of its prayer for release. Even this defense of
in the execution of the Chattel Mortgage, Exhibit B, respondent Luzon Surety Co., Inc. is untenable
there is no way under the evidence from which it under the facts obtaining. As a surety, said
can be made to answer for liability to Augusto bonding company is charged as an original
Villarosa under Exhibit E; ... " promissory and is an insurer of the debt. While it is
an accepted rule in our jurisdiction that an
The Court of Appeals, to Our mind did not give alteration of the contract is a ground for release,
credence to an otherwise significant and this alteration, We stress must be material. A
unrebutted testimony of petitioner's witness, cursory examination of the record shows that the
Romanito Brillantes, that Exhibit B was the only alterations in the form of increases were made
chattel mortgage executed by Augusto Villarosa with the full consent of Luzon Surety Co., Inc.
evidencing the crop loan contract and upon which Paragraph 4 of the Chattel Mortgage explicitly
Luzon Surety agreed to assume liability up to the provided for this increase(s), viz:
amount of P10,000 by posting the said surety
bond. Moreover Article 1354 of our New Civil Code ... the Mortgagee may increase or decrease the
which provides: amount of the loan as well as the installment as it
may deem convenient ...
Art. 1354.— Although the cause is not stated in
the contract., it is presumed that it exist and is and this contract, Exhibit "B", was precisely
lawful, unless the debtor proves the contrary. referred to and mentioned in the Surety Bond
itself. In the case of Lim Julian vs. Tiburcio Lutero,
bolster petitioner's stand. Considering too that et al No. 25235, 49 Phil. 703, 717, 718, this Court
Luzon Surety company is engaged in the business held:
of furnishing guarantees, for a consideration,
there is no reason that it should be entitled to a It has been decided in many cases that the
rule of strictissimi juris or a strained and consideration named in a mortgage for future
over-strict interpretation of its undertaking. The advancements does not limit the amount for which
presumption indulged in by the law in favor of such contract may stand as security, if from the
guarantors was premised on the fact that four corners of the document, the intent to secure
guarantees were originally gratuitous obligations, future indebtedness is apparent. Where, by the
which is not true at present, at least in the great plain terms of the contract, such an intent is
majority of cases. (Aurelio Montinola vs. Alejo evident, it will control. ...
Gatila, et al, G.R. No L-7558, October 31, 1955).
The next question to take up is the liability of
We have likewise gone over the answer of Luzon Luzon Surety Co. for interest which, it contends,
Surety Company dated June 17, 1960 (p. 73 would increase its liability to more than P10,000
Record on Appeal) and noted the following: which is the maximum of its bond. We cannot
agree to this reasoning. In the cases of Tagawa vs.
xxx xxx xxx Aldanese, 43 Phil. 852, 859; Plaridel Surety
Insurance Co. vs. P. L. Galang Machinery Co., 100
3. Defendant LUZON admits the portion of Phil. 679, 682, cited in Paras Civil Code of the
paragraph 3 referring to the grant of P32,400 Philippines, Vol. V, 7th Ed. 1972, p. 772, it was
secured by a Chattel Mortgage dated March 6, held:
1952, copy of which is attached as Annex "A" of
the complaint. If a surety upon demand fails to pay, he can be
held liable for interest, even if in thus paying, the
xxx xxx xxx liability becomes more than that in the principal
obligation. The increased liability is not because of
As special defenses: the contract but because of the default and the

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 34

necessity of judicial collection. It should be noted, "1. Philippine Polyamide Industrial Corporation
however, that the interest runs from the time the is ORDERED to pay [Petitioner] International
complaint is filed, not from the time the debt Finance Corporation, the following amounts:
becomes due and demandable.
‘(a) US$2,833,967.00 with accrued interests as
PREMISES CONSIDERED, the judgment appealed provided in the Loan Agreement;
from is reversed and set aside. In lieu thereof
another is rendered reinstating the judgment of ‘(b) Interest of 12% per annum on accrued
the Court of First Instance of Negros Occidental, interest, which shall be counted from the date of
12th Judicial District, dated March 29, 1961, filing of the instant action up to the actual
holding Luzon Surety liable for the amount of payment;
P10,000.00 with the modification that interest
thereon shall be computed at the legal rate from ‘(c) ₱73,340.00 as attorney’s fees;
June 8, 1960 when the complaint was filed.
‘(d) Costs of suit.’
SO ORDERED.
"2. The guarantor Imperial Textile Mills, Inc.
together with Grandtex is HELD secondarily liable
to pay the amount herein adjudged to [Petitioner]
THIRD DIVISION International Finance Corporation."4

G.R. No. 160324 November 15, 2005 The assailed Resolution denied both parties’
respective Motions for Reconsideration.
INTERNATIONAL FINANCE
CORPORATION, Petitioner, The Facts
vs.
IMPERIAL TEXTILE MILLS, INC.,* Respondent. The facts are narrated by the appellate court as
follows:
DECISION
"On December 17, 1974, [Petitioner]
PANGANIBAN, J.: International Finance Corporation (IFC) and
[Respondent] Philippine Polyamide Industrial
he terms of a contract govern the rights and Corporation (PPIC) entered into a loan agreement
obligations of the contracting parties. When the wherein IFC extended to PPIC a loan of
obligor undertakes to be "jointly and severally" US$7,000,000.00, payable in sixteen (16)
liable, it means that the obligation is solidary. semi-annual installments of US$437,500.00 each,
If solidary liability was instituted to "guarantee" a beginning June 1, 1977 to December 1, 1984, with
principal obligation, the law deems the contract to interest at the rate of 10% per annum on the
be one of suretyship. principal amount of the loan advanced and
outstanding from time to time. The interest shall
The creditor in the present Petition was able to be paid in US dollars semi-annually on June 1 and
show convincingly that, although denominated as December 1 in each year and interest for any
a "Guarantee Agreement," the Contract was period less than a year shall accrue and be
actually a surety. Notwithstanding the use of the pro-rated on the basis of a 360-day year of twelve
words "guarantee" and "guarantor," the subject 30-day months.
Contract was indeed a surety, because its terms
were clear and left no doubt as to the intention of "On December 17, 1974, a ‘Guarantee Agreement’
the parties. was executed with x x x Imperial Textile Mills, Inc.
(ITM), Grand Textile Manufacturing Corporation
The Case (Grandtex) and IFC as parties thereto. ITM and
Grandtex agreed to guarantee PPIC’s obligations
Before us is a Petition for Review1 under Rule 45 of under the loan agreement.
the Rules of Court, assailing the February 28,
2002 Decision2 and September 30, 2003 "PPIC paid the installments due on June 1, 1977,
Resolution3 of the Court of Appeals (CA) in CA-GR December 1, 1977 and June 1, 1978. The
CV No. 58471. The challenged Decision disposed payments due on December 1, 1978, June 1, 1979
as follows: and December 1, 1979 were rescheduled as
requested by PPIC. Despite the rescheduling of
"WHEREFORE, the appeal is PARTIALLY the installment payments, however, PPIC
GRANTED. The decision of the trial court defaulted. Hence, on April 1, 1985, IFC served a
is MODIFIED to read as follows: written notice of default to PPIC demanding the
latter to pay the outstanding principal loan and all

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 35

its accrued interests. Despite such notice, PPIC Petitioner states the issues in this wise:
failed to pay the loan and its interests.
"I. Whether or not ITM and Grandtex11 are
"By virtue of PPIC’s failure to pay, IFC, together sureties and therefore, jointly and severally liable
with DBP, applied for the extrajudicial foreclosure with PPIC, for the payment of the loan.
of mortgages on the real estate, buildings,
machinery, equipment plant and all improvements "II. Whether or not the Petition raises a question
owned by PPIC, located at Calamba, Laguna, with of law.
the regional sheriff of Calamba, Laguna. On July
30, 1985, the deputy sheriff of Calamba, Laguna "III. Whether or not the Petition raises a theory
issued a notice of extrajudicial sale. IFC and DBP not raised in the lower court."12
were the only bidders during the auction sale.
IFC’s bid was for ₱99,269,100.00 which was The main issue is whether ITM is a surety, and
equivalent to US$5,250,000.00 (at the prevailing thus solidarily liable with PPIC for the payment of
exchange rate of ₱18.9084 = US$1.00). The the loan.
outstanding loan, however, amounted to
US$8,083,967.00 thus leaving a balance of The Court’s Ruling
US$2,833,967.00. PPIC failed to pay the
remaining balance. The Petition is meritorious.

"Consequently, IFC demanded ITM and Grandtex, Main Issue:

as guarantors of PPIC, to pay the outstanding
balance. However, despite the demand made by Liability of Respondent Under
IFC, the outstanding balance remained unpaid.
the Guarantee Agreement
"Thereafter, on May 20, 1988, IFC filed a
complaint with the RTC of Manila against PPIC and The present controversy arose from the following
ITM for the payment of the outstanding balance Contracts: (1) the Loan Agreement dated
plus interests and attorney’s fees. December 17, 1974, between IFC and PPIC;13 and
(2) the Guarantee Agreement dated December 17,
"The trial court held PPIC liable for the payment of 1974, between ITM and Grandtex, on the one
the outstanding loan plus interests. It also ordered hand, and IFC on the other.14
PPIC to pay IFC its claimed attorney’s fees.
However, the trial court relieved ITM of its IFC claims that, under the Guarantee Agreement,
obligation as guarantor. Hence, the trial court ITM bound itself as a surety to PPIC’s obligations
dismissed IFC’s complaint against ITM. proceeding from the Loan Agreement. 15 For its
part, ITM asserts that, by the terms of the
xxxxxxxxx Guarantee Agreement, it was merely a
guarantor16 and not a surety. Moreover, any
"Thus, apropos the decision dismissing the ambiguity in the Agreement should be construed
complaint against ITM, IFC appealed [to the CA]."5 against IFC -- the party that drafted it.17

Ruling of the Court of Appeals Language of the

The CA reversed the Decision of the trial court, Contract

insofar as the latter exonerated ITM from any
obligation to IFC. According to the appellate court, The premise of the Guarantee Agreement is found
ITM bound itself under the "Guarantee in its preambular clause, which reads:
Agreement" to pay PPIC’s obligation upon
default.6 ITM was not discharged from its "Whereas,
obligation as guarantor when PPIC mortgaged the
latter’s properties to IFC.7 The CA, however, held "(A) By an Agreement of even date herewith
that ITM’s liability as a guarantor would arise only between IFC and PHILIPPINE POLYAMIDE
if and when PPIC could not pay. Since PPIC’s INDUSTRIAL CORPORATION (herein called the
inability to comply with its obligation was not Company), which agreement is herein called the
sufficiently established, ITM could not Loan Agreement, IFC agrees to extend to the
immediately be made to assume the liability. 8
Company a loan (herein called the Loan) of seven
million dollars ($7,000,000) on the terms therein
The September 30, 2003 Resolution of the CA set forth, including a provision that all or part of
denied reconsideration.9 Hence, this Petition.10 the Loan may be disbursed in a currency other
than dollars, but only on condition that the
The Issues Guarantors agree to guarantee the obligations of

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 36

the Company in respect of the Loan as hereinafter such case the contract shall be called
provided. suretyship."22

"(B) The Guarantors, in order to induce IFC to The aforementioned provisions refer to Articles
enter into the Loan Agreement, and in 1207 to 1222 of the Civil Code on "Joint and
consideration of IFC entering into said Agreement, Solidary Obligations." Relevant to this case is
have agreed so to guarantee such obligations of Article 1216, which states:
the Company."18
"The creditor may proceed against any one of the
The obligations of the guarantors are meticulously solidary debtors or some or all of them
expressed in the following provision: simultaneously. The demand made against one of
them shall not be an obstacle to those which may
"Section 2.01. The Guarantors jointly and subsequently be directed against the others, so
severally, irrevocably, absolutely and long as the debt has not been fully collected."
unconditionally guarantee, as primary obligors
and not as sureties merely, the due and punctual Pursuant to this provision, petitioner (as creditor)
payment of the principal of, and interest and was justified in taking action directly against
commitment charge on, the Loan, and the respondent.
principal of, and interest on, the Notes, whether at
stated maturity or upon prematuring, all as set No Ambiguity in the
forth in the Loan Agreement and in the Notes." 19
Undertaking
The Agreement uses "guarantee" and
"guarantors," prompting ITM to base its argument The Court does not find any ambiguity in the
on those words.20 This Court is not convinced that provisions of the Guarantee Agreement. When
the use of the two words limits the Contract to a qualified by the term "jointly and severally," the
mere guaranty. The specific stipulations in the use of the word "guarantor" to refer to a "surety"
Contract show otherwise. does not violate the law.23 As Article 2047
provides, a suretyship is created when a
Solidary Liability guarantor binds itself solidarily with the principal
obligor. Likewise, the phrase in the Agreement --
Agreed to by ITM "as primary obligor and not merely as surety" --
stresses that ITM is being placed on the same level
While referring to ITM as a guarantor, the as PPIC. Those words emphasize the nature of
Agreement specifically stated that the corporation their liability, which the law characterizes as a
was "jointly and severally" liable. To put emphasis suretyship.
on the nature of that liability, the Contract further
stated that ITM was a primary obligor, not The use of the word "guarantee" does not ipso
a mere surety. Those stipulations meant only one facto make the contract one of guaranty.24 This
thing: that at bottom, and to all legal intents and Court has recognized that the word is frequently
purposes, it was a surety. employed in business transactions to describe the
intention to be bound by a primary or an
Indubitably therefore, ITM bound itself to be independent obligation.25 The very terms of a
solidarily21 liable with PPIC for the latter’s contract govern the obligations of the parties or
obligations under the Loan Agreement with IFC. the extent of the obligor’s liability. Thus, this Court
ITM thereby brought itself to the level of PPIC and has ruled in favor of suretyship, even though
could not be deemed merely secondarily liable. contracts were denominated as a "Guarantor’s
Undertaking" 26 or a "Continuing Guaranty."27
Initially, ITM was a stranger to the Loan
Agreement between PPIC and IFC. ITM’s liability Contracts have the force of law between the
commenced only when it guaranteed PPIC’s parties,28 who are free to stipulate any matter not
obligation. It became a surety when it bound itself contrary to law, morals, good customs, public
solidarily with the principal obligor. Thus, the order or public policy.29 None of these
applicable law is as follows: circumstances are present, much less alleged by
respondent. Hence, this Court cannot give a
"Article 2047. By guaranty, a person, called the different meaning to the plain language of the
guarantor binds himself to the creditor to fulfill the Guarantee Agreement.
obligation of the principal in case the latter should
fail to do so. Indeed, the finding of solidary liability is in line
with the premise provided in the "Whereas" clause
"If a person binds himself solidarily with the of the Guarantee Agreement. The execution of the
principal debtor, the provisions of Section 4, Agreement was a condition precedent for the
Chapter 3, Title I of this Book shall be observed. In approval of PPIC’s loan from IFC. Consistent with

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 37

the position of IFC as creditor was its requirement stipulations in Section 2.01 of the Agreement.
of a higher degree of liability from ITM in case PPIC Besides, both terms had the same legal
committed a breach. ITM agreed with the consequences. There was therefore effectively no
stipulation in Section 2.01 and is now estopped change of theory on appeal. At any rate, ITM failed
from feigning ignorance of its solidary liability. The to show to this Court a disparity between IFC’s
literal meaning of the stipulations control when allegations in the trial court and those in the CA.
the terms of the contract are clear and there is no Bare allegations without proof deserve no
doubt as to the intention of the parties.30 credence.

We note that the CA denied solidary liability, on Review of Factual

the theory that the parties would not have
executed a Guarantee Agreement if they had Findings Necessary
intended to name ITM as a primary obligor.31 The
appellate court opined that ITM’s undertaking was As to the issue that only questions of law may be
collateral to and distinct from the Loan Agreement. raised in a Petition for Review,39 the Court has
On this point, the Court stresses that a suretyship recognized exceptions,40 one of which applies to
is merely an accessory or a collateral to a principal the present case. The assailed Decision was based
obligation.32 Although a surety contract is on a misapprehension of facts,41 which
secondary to the principal obligation, the liability particularly related to certain stipulations in the
of the surety is direct, primary and absolute; or Guarantee Agreement -- stipulations that had not
equivalent to that of a regular party to the been disputed by the parties. This circumstance
undertaking.33 A surety becomes liable to the debt compelled the Court to review the Contract
and duty of the principal obligor even without firsthand and to make its own findings and
possessing a direct or personal interest in the conclusions accordingly.
obligations constituted by the latter.34
WHEREFORE, the Petition is hereby GRANTED,
ITM’s Liability as Surety and the assailed Decision and
Resolution MODIFIED in the sense that Imperial
With the present finding that ITM is a surety, it is Textile Mills, Inc. is declared a surety to Philippine
clear that the CA erred in declaring the former Polyamide Industrial Corporation. ITM
secondarily liable.35 A surety is considered in law is ORDERED to pay International Finance
to be on the same footing as the principal debtor in Corporation the same amounts adjudged against
relation to whatever is adjudged against the PPIC in the assailed Decision. No costs.SO
latter.36 Evidently, the dispositive portion of the ORDERED.
assailed Decision should be modified to require
ITM to pay the amount adjudged in favor of IFC.

Peripheral Issues EN BANC

In addition to the main issue, ITM raised G.R. No. L-47495 August 14, 1941
procedural infirmities allegedly justifying the
denial of the present Petition. Before the trial court THE TEXAS COMPANY (PHIL.),
and the CA, IFC had allegedly instituted different INC., petitioner,
arguments that effectively changed the vs.
corporation’s theory on appeal, in violation of this TOMAS ALONSO, respondent.
Court’s previous pronouncements.37 ITM further
claims that the main issue in the present case is a C. D. Johnston & A. P. Deen for petitioner.
question of fact that is not cognizable by this Tomas Alonso in his own behalf.
Court.38
LAUREL, J.:
These contentions deserve little consideration.
On November 5, 1935 Leonor S. Bantug and
Alleged Change of Tomas Alonso were sued by the Texas Company
(P.I.), Inc. in the Court of First Instance of Cebu
Theory on Appeal for the recovery of the sum of P629, unpaid
balance of the account of Leonora S. Bantug in
Petitioner’s arguments before the trial court (that connection with the agency contract with the
ITM was a "primary obligor") and before the CA Texas Company for the faithful performance of
(that ITM was a "surety") were related and which Tomas Alonso signed the following:
intertwined in the action to enforce the solidary
liability of ITM under the Guarantee Agreement. For value received, we jointly and severally do
We emphasize that the terms "primary obligor" hereby bind ourselves and each of us, in solidum,
and "surety" were premised on the same with Leonor S. Bantug the agent named in the

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 38

within and foregoing agreement, for full and Additional Security. — The Agent shall whenever
complete performance of same hereby waiving requested by the Company in addition to the
notice of non-performance by or demand upon guaranty herewith provided, furnish further
said agent, and the consent to any and all guaranty or bond, conditioned upon the Agent's
extensions of time for performance. Liability under faithful performance of this contract, in such
this undertaking, however, shall not exceed the individuals of firms as joint and several sureties as
sum of P2,000, Philippine currency. shall be satisfactory to the Company.

Witness the hand and seal of the undersigned In view of the foregoing clause which should be
affixed in the presence of two witness, this 12th the law between the parties, it is obvious that,
day of August, 1929. before a bond is accepted by the petitioner, it has
to be in such form and amount and with such
Leonor S. Bantug was declared in default as a sureties as shall be satisfactory hereto; in other
result of her failure to appear or answer, but words, the bond is subject to petitioner's approval.
Tomas Alonso filed an answer setting up a general The logical implication arising from this
denial and the special defenses that Leonor S. requirement is that, if the petitioner is satisfied
Bantug made him believe that he was merely a with any such bond, notice of its acceptance or
co-security of one Vicente Palanca and he was approval should necessarily be given to the
never notified of the acceptance of his bond by the property party in interest, namely, the surety or
Texas Company. After trial, the Court of First guarantor. In this connection, we are likewise
Instance of Cebu rendered judgment on July 10, bound by the finding of the Court of Appeals that
1973, which was amended on February 1, 1938, there is no evidence in this case tending to show
sentencing Leonor S. Bantug and Tomas Alonso to that the respondent, Tomas Alonso, ever had
pay jointly and severally to the Texas Company knowledge of any act on the part of petitioner
the sum of P629, with interest at the rate of six per amounting to an implied acceptance, so as to
cent (6%) from the date of filing of the complaint, justify the application of our decision in National
and with proportional costs. Upon appeal by Bank vs. Escueta (50 Phil., 991).
Tomas Alonso, the Court of Appeals modified the
judgment of the Court of First Instance of Cebu in While unnecessary to this decision, we choose to
the sense that Leonor S. Bantug was held solely add a few words explanatory of the rule regarding
liable for the payment of the aforesaid sum of the necessity of acceptance in case of bonds.
P629 to the Texas Company, with the consequent Where there is merely an offer of, or proposition
absolution of Tomas Alonso. This case is now for, a guaranty, or merely a conditional guaranty
before us on petition for review by certiorari of the in the sense that it requires action by the creditor
decision of the Court of Appeals. It is contended by before the obligation becomes fixed, it does not
the petitioner that the Court of Appeals erred in become a binding obligation until it is accepted
holding that there was merely an offer of guaranty and, unless there is a waiver of notice of such
on the part of the respondent, Tomas Alonso, and acceptance is given to, or acquired by, the
that the latter cannot be held liable thereunder guarantor, or until he has notice or knowledge
because he was never notified by the Texas that the creditor has performed the conditions and
Company of its acceptance. intends to act upon the guaranty. (National
Bank vs. Garcia, 47 Phil., 662; C. J., sec. 21, p.
The Court of Appeals has placed reliance upon our 901; 24 Am. Jur., sec. 37, p. 899.) The acceptance
decision in National Bank vs. Garcia (47 Phil., need not necessarily be express or in writing, but
662), while the petitioner invokes the case may be indicated by acts amounting to acceptance.
of National Bank vs. Escueta, (50 Phil., 991). In (National Bank vs. Escueta, 50 Phil., 991.) Where,
the first case, it was held that there was merely an upon the other hand, the transaction is not merely
offer to give bond and, as there was no acceptance an offer of guaranty but amounts to direct or
of the offer, this court refused to give effect to the unconditional promise of guaranty, unless notice
bond. In the second case, the sureties were held of acceptance is made a condition of the guaranty,
liable under their surety agreement which was all that is necessary to make the promise binding
found to have been accepted by the creditor, and is that the promise should act upon it, and notice
it was therein ruled that an acceptance need not of acceptance is not necessary (28 C. J., sec. 25, p.
always be express or in writing. For the purpose of 904; 24 Am. Jur., sec 37, p. 899), the reason
this decision, it is not indispensable for us to being that the contract of guaranty is unilateral
invoke one or the other case above cited. The (Visayan Surety and Insurance Corporation vs.
Court of Appeals found as a fact, and this is Laperal, G.R. No. 46515, promulgated June 14,
conclusive in this instance, that the bond in 1940).
question was executed at the request of the
petitioner by virtue of the following clause of the The decision appealed from will be, as the same is
agency contract: hereby, affirmed, with costs of this instance
against the petitioner. So ordered.

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 39

 notice on September 9, 1988, while the notice
addressed to its counsel was returned to the trial
SECOND DIVISION court with the notation "Return to Sender,
Unclaimed." 2
G.R. No. 107062 February 21, 1994
On the scheduled date for pre-trial conference,
PHILIPPINE PRYCE ASSURANCE only the counsel for petitioner appeared while
CORPORATION, petitioner, both the representative of respondent and its
vs. counsel were present. The counsel for petitioner
THE COURT OF APPEALS, (Fourteenth manifested that he was unable to contract the
Division) and GEGROCO, INC., respondents. Vice-President for operations of petitioner,
although his client intended to file a third party
Ocampo, Dizon & Domingo and Rey Nathaniel C. complaint against its principal. Hence, the
Ifurung for petitioner. pre-trial was re-set to October 14, 1988. 3

A.M. Sison, Jr. & Associates for private On October 14, 1988, petitioner filed a "Motion
respondent. with Leave to Admit Third-Party Complaint" with
the Third-Party Complaint attached. On this same
NOCON, J.: day, in the presence of the representative for both
petitioner and respondent and their counsel, the
Two purely technical, yet mandatory, rules of pre-trial conference was re-set to December 1,
procedure frustrated petitioner's bid to get a 1988. Meanwhile on November 29, 1988, the
favorable decision from the Regional Trial Court court admitted the Third Party Complaint and
and then again in the Court of Appeals. 1 These ordered service of summons on third party
are non-appearance during the pre-trial despite defendants. 4
due notice, and non-payment of docket fees upon
filing of its third-party complaint. Just how strict On scheduled conference in December, petitioner
should these rules be applied is a crucial issue in and its counsel did not appear notwithstanding
this present dispute. their notice in open court. 5 The pre-trial was
nevertheless re-set to February 1, 1989. However,
Petitioner, Interworld Assurance Corporation (the when the case was called for pre-trial conference
company now carries the corporate name on February 1, 1989, petitioner was again nor
Philippine Pryce Assurance Corporation), was the presented by its officer or its counsel, despite
butt of the complaint for collection of sum of being duly notified. Hence, upon motion of
money, filed on May 13, 1988 by respondent, respondent, petitioner was considered as in
Gegroco, Inc. before the Makati Regional Trial default and respondent was allowed to present
Court, Branch 138. The complaint alleged that evidence ex-parte, which was calendared on
petitioner issued two surety bonds (No. 0029, February 24, 1989. 6 Petitioner received a copy of
dated July 24, 1987 and No. 0037, dated October the Order of Default and a copy of the Order
7, 1987) in behalf of its principal Sagum General setting the reception of respondent's
Merchandise for FIVE HUNDRED THOUSAND evidence ex-parte, both dated February 1, 1989,
(P500,000.00) PESOS and ONE MILLION on February 16, 1989. 7
(1,000,000.00) PESOS, respectively.
On March 6, 1989, a decision was rendered by the
On June 16, 1988, summons, together with the trial court, the dispositive portion reads:
copy of the complaint, was served on petitioner.
Within the reglementary period, two successive WHEREFORE, judgment is hereby rendered in
motions were filed by petitioner praying for a total favor of the plaintiff and against the defendant
of thirty (30) days extention within which to file a Interworld Assurance Corporation to pay the
responsible pleading. amount of P1,500,000.00 representing the
principal of the amount due, plus legal interest
In its Answer, dated July 29, 1988, but filed only thereon from April 7, 1988, until date of payment;
on August 4, 1988, petitioner admitted having and P20,000.00 as and for attorney's fees. 8
executed the said bonds, but denied liability
because allegedly 1) the checks which were to pay Petitioner's "Motion for Reconsideration and New
for the premiums bounced and were dishonored Trial" dated April 17, 1989, having been denied it
hence there is no contract to speak of between elevated its case to the Court of Appeals which
petitioner and its supposed principal; and 2) that however, affirmed the decision of the trial court as
the bonds were merely to guarantee payment of well as the latter's order denying petitioner's
its principal's obligation, thus, excussion is motion for reconsideration.
necessary. After the issues had been joined, the
case was set for pre-trial conference on Before us, petitioner assigns as errors the
September 29, 1988. the petitioner received its following:

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 40

I. The respondent Court of Appeals gravely erred expedite trial, if not to fully dispense with it. Hence,
in declaring that the case was already ripe for consistent with its mandatory character the Rules
pre-trial conference when the trial court set it for oblige not only the lawyers but the parties as well
the holding thereof. to appear for this purpose before the Court 10 and
when a party fails to appear at a pre-trial
II. The respondent Court of Appeals gravely erred conference he may be non-suited or considered as
in affirming the decision of the trial court by in default. 11
relying on the ruling laid down by this Honorable
Court in the case of Manchester Development Records show that even at the very start,
Corporation v. Court of Appeals, 149 SCRA 562, petitioner could have been declared as in default
and disregarding the doctrine laid down in the since it was not properly presented during the first
case of Sun Insurance Office, Ltd. (SIOL) v. scheduled pre-trial on September 29, 1988.
Asuncion, 170 SCRA 274. Nothing in the record is attached which would
show that petitioner's counsel had a special
III. The respondent Court of Appeals gravely erred authority to act in behalf of his client other than as
in declaring that it would be useless and a waste of its lawyer.
time to remand the case for further proceedings
as defendant-appellant has no meritorious We have said that in those instances where a party
defense. may not himself be present at the pre-trial, and
another person substitutes for him, or his lawyer
We do not find any reversible error in the undertakes to appear not only as an attorney but
conclusion reached by the court a quo. in substitution of the client's person, it is
imperative for that representative or the lawyer to
Relying on Section 1, Rule 20 of the Rules of court, have "special authority" to enter into agreements
petitioner argues that since the last pleading, which otherwise only the client has the capacity to
which was supposed to be the third-party make. 12
defendant's answer has not been filed, the case is
not yet ripe for pre-trial. This argument must fail Third, the court of Appeals properly considered
on three points. First, the trial court asserted, and the third-party complaint as a mere scrap of paper
we agree, that no answer to the third party due to petitioner's failure to pay the requisite
complaint is forthcoming as petitioner never docket fees. Said the court a quo:
initiated the service of summons on the third party
defendant. The court further said: A third-party complaint is one of the pleadings for
which Clerks of court of Regional Trial Courts are
. . . Defendant's claim that it was not aware of the mandated to collect docket fees pursuant to
Order admitting the third-party complaint is Section 5, Rule 141 of the Rules of Court. The
preposterous. Sec. 8, Rule 13 of the Rules, record is bereft of any showing tha(t) the
provides: appellant paid the corresponding docket fees on
its third-party complaint. Unless and until the
Completeness of service — . . . Service by corresponding docket fees are paid, the trial court
registered mail is complete upon actual receipt by would not acquire jurisdiction over the third-party
the addressee, but if he fails to claim his mail from complaint (Manchester Development Corporation
the post office within five (5) days from the date of vs. Court of Appeals, 149 SCRA 562). The
first notice of the postmaster, service shall take third-party complaint was thus reduced to a mere
effect at the expiration of such time. 9 scrap of paper not worthy of the trial court's
attention. Hence, the trial court can and correctly
Moreover, we observed that all copies of notices set the case for pre-trial on the basis of the
and orders issued by the court for petitioner's complaint, the answer and the answer to the
counsel were returned with the notation "Return counterclaim.13
to Sender, Unclaimed." Yet when he chose to, he
would appear in court despite supposed lack of It is really irrelevant in the instant case whether
notice. the ruling in Sun Insurance Office, Ltd. (SIOL) v.
Asuncion 14 or that in Manchester Development
Second, in the regular course of events, the Corp. v. C.A. 15 was applied. Sun Insurance and
third-party defendant's answer would have been Manchester are mere reiteration of old
regarded as the last pleading referred to in Sec. 1, jurisprudential pronouncements on the effect of
Rule 20. However, petitioner cannot just disregard non-payment of docket fees. 16 In previous cases,
the court's order to be present during the pre-trial we have consistently ruled that the court cannot
and give a flimsy excuse, such as that the answer acquire jurisdiction over the subject matter of a
has yet to be filed. case, unless the docket fees are paid.

The pre-trial is mandatory in any action, the main

objective being to simplify, abbreviate and

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 41

Moreover, the principle laid down in Manchester although the amount tendered were found to be
could have very well been applied in Sun insufficient considering the amounts of the reliefs
Insurance. We then said: sought in their complaints. In the present case,
petitioner did not and never attempted to pay the
The principle in Manchester [Manchester requisite docket fee. Neither is there any showing
Development Corp. v. C.A., 149 SCRA 562 (1987)] that petitioner even manifested to be given time
could very well be applied in the present case. The to pay the requisite docket fee, as in fact it was not
pattern and the intent to defraud the government present during the scheduled pre-trial on
of the docket fee due it is obvious not only in the December 1, 1988 and then again on February 1,
filing of the original complaint but also in the filing 1989. Perforce, it is as if the third-party complaint
of the second amended complaint. was never filed.

xxx xxx xxx Finally, there is reason to believe that partitioner

does not really have a good defense. Petitioner
In the present case, a more liberal interpretation hinges its defense on two arguments, namely: a)
of the rules is called for considering that, unlike that the checks issued by its principal which were
Manchester, private respondent demonstrated his supposed to pay for the premiums, bounced,
willingness to abide by the rules by paying the hence there is no contract of surety to speak of;
additional docket fees as required. The and 2) that as early as 1986 and covering the time
promulgation of the decision in Manchester must of the Surety Bond, Interworld Assurance
have had that sobering influence on private Company (now Phil. Pryce) was not yet authorized
respondent who thus paid the additional docket by the insurance Commission to issue such bonds.
fee as ordered by the respondent court. It
triggered his change of stance by manifesting his The Insurance Code states that:
willingness to pay such additional docket fees as
may be ordered. 17 Sec. 177. The surety is entitled to payment of the
premium as soon as the contract of suretyship or
Thus, we laid down the rules as follows: bond is perfected and delivered to the obligor. No
contract of suretyship or bonding shall be valid
1. It is not simply the filing of the complaint or and binding unless and until the premium therefor
appropriate initiatory pleading, but the payment has been paid, except where the obligee has
of the prescribed docket fee, that vests a trial accepted the bond, in which case the bond
court with jurisdiction over the subject-matter or becomes valid and enforceable irrespective of
nature of the action. Where the filing of the whether or not the premium has been paid by the
initiatory pleading is not accompanied by payment obligor to the surety. . . . (emphasis added)
of the docket fee, the court may allow payment of
the fee within a reasonable time, but in no case The above provision outrightly negates
beyond the applicable prescriptive or petitioner's first defense. In a desperate attempt
reglamentary period. to escape liability, petitioner further asserts that
the above provision is not applicable because the
2. The same rule applies to permissive respondent allegedly had not accepted the surety
counterclaims, third-party claims and similar bond, hence could not have delivered the goods to
pleadings, which shall not be considered filed until Sagum Enterprises. This statement clearly intends
and unless the filing fee prescribed therefor is paid. to muddle the facts as found by the trial court and
The court may also allow payment of said fee which are on record.
within a prescriptive or reglementary period.
In the first place, petitioner, in its
3. Where the trial court acquires jurisdiction over a answer, admitted to have issued the bonds
claim by the filing of the appropriate pleading and subject matter of the original action. 19 Secondly,
payment of the prescribed filing fee, but the testimony of Mr. Leonardo T. Guzman, witness
subsequently, the judgment awards a claim nor for the respondent, reveals the following:
specified in the pleading, or if specified the same
has not been left for determination by the court, Q. What are the conditions and terms of sales you
the additional filing fee therefor shall constitute a extended to Sagum General Merchandise?
lien on the judgment. It shall be the responsibility
of the clerk of court or his duly authorized deputy A. First, we required him to submit to us Surety
to enforce said lien and assess and collect the Bond to guaranty payment of the spare parts to be
additional purchased. Then we sell to them on 90 days credit.
fee. 18 Also, we required them to issue post-dated
checks.
It should be remembered that both in Manchester
and Sun Insurance plaintiffs therein paid docket Q. Did Sagum General merchandise comply with
fees upon filing of their respective pleadings, your surety bond requirement?

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 42

A. Yes. They submitted to us and which we have The Court of First Instance of Marinduque, which
accepted two surety bonds. tried the case, rendered a decision adverse to the
defendants, sentencing them to pay jointly to the
Q Will you please present to us the aforesaid plaintiff said sum of P3,780 with legal interest
surety bonds? thereon from August 19, 1932, until fully paid,
plus the costs of the suit. From said judgment, the
A. Interworld Assurance Corp. Surety Bond No. defendants appealed to this court, attributing to
0029 for P500,000 dated July 24, 1987 and the lower court the five alleged errors relied upon
Interworld Assurance Corp. Surety Bond No. 0037 in their brief, as follows:
for P1,000.000 dated October 7, 1987. 20
I. The court a quo erred in holding and
Likewise attached to the record are exhibits C to maintaining that, notwithstanding the fact that
C-18 21 consisting of delivery invoices addressed resolution No. 161 of the municipal council of
to Sagum General Merchandise proving that parts Gasan which gave rise to the contract and bond,
were purchased, delivered and received. Exhibits A and B, respectively, of the complaint,
has been declared null and void by the provincial
On the other hand, petitioner's defense that it did board and by the Executive Bureau, the contract
not have authority to issue a Surety Bond when it and bond in question are valid and, consequently,
did is an admission of fraud committed against enforceable on the ground that said resolution No.
respondent. No person can claim benefit from the 161 is within or had been adopted within the
wrong he himself committed. A representation powers of the council.
made is rendered conclusive upon the person
making it and cannot be denied or disproved as II. The court a quo erred in holding that even
against the person relying thereon. 22 granting that the contract Exhibit A is not valid de
jure, it is a de facto contract as to the defendants,
WHEREFORE, in view of the foregoing, the particularly the defendant-grantee Miguel
decision of the Court of Appeals dismissing the Marasigan.
petition before them and affirming the decision of
the trial court and its order denying petitioner's III. The court a quo erred in not absolving the
Motion for Reconsideration are hereby AFFIRMED. defendants Angel R. Sevilla and Gonzalo L. Luna,
The present petition is DISMISSED for lack of sureties of the defendant Miguel Marasigan,
merit.SO ORDERED. notwithstanding the fact that resolution No. 161,
by virtue of which said defendant subscribed the
bond Exhibit B of the complaint, had been
declared null and void by the provincial board and
by the Executive Bureau.

EN BANC IV. The court a quo erred in holding that the

herein defendant Miguel Marasigan had taken
G.R. No. 43486 September 30, 1936 advantage of the privilege to catch or gather
whitefish spawn in the jurisdictional waters of the
THE MUNICIPALITY OF municipality of Gasan, during the period from
GASAN, plaintiff-appellee, January 1, to December 31, 1931,
vs. notwithstanding the fact that counsel for the
MIGUEL MARASIGAN, ANGEL R. SEVILLA and plaintiff municipality failed to present evidence,
GONZALO L. LUNA, defendants-appellants. either documentary or oral, to justify said fact.

Luis Atienza Bijis for appellants. V. The court a quo erred in not absolving each and
Provincial Fiscal Noel of Marinduque for appellee. every one of the herein defendants from the
complaint, and in not ordering the plaintiff
DIAZ, J.: municipality to return to the defendant Miguel
Marasigan the sums of four hundred twenty pesos
This is an action brought by the municipality of (P420) and eight hundred forty pesos (P840)
Gasan of the Province of Marinduque, against deposited with said plaintiff, with interest thereon
Miguel Marasigan, Angel R. Sevilla and Gonzalo L. from the respective dates of their deposit, until
Luna, to recover from them the sum of P3,780, their return.
alleging that it forms a part of the license fees
which Miguel Marasigan failed to pay for the The case was tried by the lower court with no
privilege granted him of gathering whitefish other evidence than the admissions made by the
spawn (semillas de bañgus) in the jurisdictional parties in the stipulation of facts mentioned in the
waters of the plaintiff municipality during the body of the decision, the pertinent parts of which
period from January 1, 1931, to December 31 of will be discussed later. Said stipulation and the
said year. attached papers forming a part thereof enables

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 43

this court to narrate the material facts of the case, which the municipal council of Gasan rejected
as follows: Graciano Napa's bid and accepted that of Miguel
Marasigan, notwithstanding the fact that the latter
The plaintiff-appellee municipality, on December 9, offered to pay less, was invalid, and suggested
1930, put up at auction the privilege of gathering that the privilege should be, awarded to Graciano
whitefish spawn in its jurisdictional waters for the Napa who, in its opinion, appeared to be the
period of one year from January 1, 1931. Two highest bidder in accordance with the provisions of
bidders, Graciano Napa and Miguel Marasigan, sections 2323 and 2319 of the Administrative
appeared at the auction. Both attached to their Code (Exhibit 9). The Executive Bureau,
respective bids the certificate of not being behind concurring with the provincial board's points of
in the payment of any tax, issued by the municipal view, declared, in turn, that the concession made
treasurer of Gasan, Marinduque, as required by to Marasigan was illegal in view of the fact that
the provisions of resolution No. 42, series of 1930, Graciano Napa was the highest bidder (Exhibit
of the council of said municipality. Graciano Napa 13).
proposed to accept the privilege by paying P5,000
therefor, Miguel Marasigan proposed to do The plaintiff municipality, through its municipal
likewise, but by paying only P4,200. council, exerted efforts to obtain the
reconsideration of the decisions of the provincial
The council of the plaintiff-appellee municipality, board of Marinduque and of the Executive Bureau
in its resolution No. 161 (Exhibit 1) of December but, as these two entities maintained their
11, 1930 rejected Graciano Napa's bid and decisions (Exhibits 14, 15, 16, 17 and 18), it
accepted that of the appellant Miguel Marasigan, decided, in its resolution No. 11, series of 1931
granting and selling to the latter the privilege put (Exhibit 19), to award the privilege of gathering
up at auction for the sum of P4,200, payable whitefish spawn within its waters to Graciano
quarterly in advance at the rate of P1,050 a Napa, giving him a period of six days, which was
quarter (Exhibit A). To secure his compliance with later extended to seven days, from January 8,
the terms of the contract which was immediately 1931 (Exhibit 19-A), to deposit the sum of P500,
formalized by him and the plaintiff, and pursuant equivalent to 10 per cent of his bid of P5,000, with
to the provisions of section 8 of resolution No. 128, the municipal treasurer of Gasan, so as to comply
series of 1925, of the council of said plaintiff, with the provisions of section 8 of the conditions of
Miguel Marasigan filed the bond, Exhibit B, the public auction at which he was a bidder,
subscribed on December 15, 1930, by the warning him that if he failed to do so, the contract
defendants-appellants Angel R. Sevilla and entered into by the plaintiff, through its president,
Gonzalo L. Luna, who bound themselves in said and the appellant Miguel Marasigan (Exhibit A),
document to pay to the plaintiff the sum of P8,400, would automatically take effect. Graciano Napa
if Miguel Marasigan failed to deposit one-fourth of not only failed to make the deposit required by the
P4,200 quarterly in advance in the municipal plaintiff in its two above-stated resolutions Nos.
treasury of Gasan, in violation of the terms of the 11 and 12, series of 1931 (Exhibits 19 and 19-A),
contract executed and entered into by him and the but he formally declared, through his duly
plaintiff on December 11, 1930 (Exhibit A), for the authorized representative, that he yielded the
compliance with which they became sureties. privilege granted him to Miguel Marasigan or to
any other person selected by the municipal
Before the plaintiff municipality and Miguel authorities (Exhibit 20).
Marasigan entered into their contract, and also
before the latter's sureties executed the One day later, or on January 15, 1931, the
above-stated bond, Graciano Napa, whose bid was president of the plaintiff-appellee municipality
rejected for the reason that he had not attached sent the letter Exhibit 21 to Miguel Marasigan,
thereto the certificate that he is not behind in the which reads:
payment of any tax which he should have obtained
from the municipal treasurer of Lemery, his native SIR:
town, forwarded a protest (Exhibit 4) to the
provincial board, which protest was later indorsed By virtue of Res. No. 11, c. s., as amended by Res.
by said provincial board to the Chief of the No. 12, same series, and communication of Mr. J.
Executive Bureau, alleging that the plaintiff Zaguirre dated January 14, 1931 copy of which is
municipality violated the provisions of section hereto attached, you are hereby advised that the
2323 of the Administrative Code in rejecting his contract entered into between you and the
bid. municipality of Gasan for the lease of
the bañgus fishery privilege for the year 1931
The provincial board, passing upon Graciano becomes effective on January 14, 1931, to run
Napa's protest and acting under the authority until December 31, 1931.
which, in its opinion, was granted to it by section
2233 of the Administrative Code, held that You are hereby requested to appear before the
resolution No. 161, series of 1930, by virtue of session of the Municipal Council to be held at the

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 44

office of the undersigned tomorrow, January 16, a period of seven days to comply with said
1931, bringing with yourself the contract and bond requirement (Exhibits 19 and 19-A). Furthermore,
executed in your favor for ratification. when the plaintiff received Graciano Napa's notice
informing it that he ceded the privilege just
You are further informed that you are given 10 granted him to appellant Miguel Marasigan or to
days from the date hereof, within which time you any other person that it might choose, said
are to pay the amount of P1,050, as per tax plaintiff, through its municipal president, required
corresponding to the first quarter, 1931. Miguel Marasigan to appear before its municipal
council to present his formerly prepared contract
Prior to this, but after the adoption by the as well as his bond in order that both documents
municipal council of Gazan of its resolution No. might be ratified (Exhibit 21). It should be added
163 (Exhibit 7) on December 16, 1930, and two to the foregoing that on December 18, 1930, the
days before the provincial board declared said plaintiff, also through its municipal president
council's resolutions Nos. 161 and 163 invalid, the notified appellant Marasigan that his contract
president of the plaintiff-appellee municipality should, in the meantime, be considered ineffectual
notified the appellant Miguel Marasigan that the and that he should do nothing to put it in
contract whereby he was granted the privilege of execution because the case was still undecided by
gathering whitefish spawn during the year 1931, the provincial board and by the Executive Bureau
upon his offer to pay P4,200 a year therefor, was (Exhibit 8). It is clear that it may be logically
suspended and that he should consider it inferred from these facts that the contract
ineffective in the meantime in view of the fact that regarding fishing privilege entered into between
the question whether he (Miguel Marasigan) or the plaintiff and appellant Marasigan on December
Graciano Napa was the highest bidder still 11, 1930 (Exhibit A), not only was not
remained undecided by the provincial board of consummated but was cancelled. Consequently, it
Marinduque and by the Executive Bureau. The now appears useless and futile to discuss whether
English translation of the letter sent by the or not resolution No. 161 (Exhibit 1) is valid and
municipal president to Miguel Marasigan, which legal. In either case, it is a fact that, said contract
was written in Tagalog (Exhibit 8), reads: ceased to have life or force to bind each of the
contracting parties. It ceased to be valid from the
SIR: time it was cancelled and this being so, neither the
appellant Marasigan nor his sureties or the
In view of the fact that the whitefish (bañgus) case appellants were bound to comply with the terms of
has not been decided or determined by the their respective contracts of fishing privilege and
provincial board and is still pending action to date, suretyship. This is so, particularly with respect to
and in view of the instructions given me by the the sureties-appellants, because suretyship
representative of the Executive Bureau, Mr. Jose cannot exist without a valid obligation (art. 1824
Zaguirre, I beg to inform you, with due respect, of the Civil Code). The obligation whose
that you should refrain from carrying out and compliance by the appellant Marasigan was
giving efficacy to the contract signed by me in the guaranteed by the sureties-appellants, was
name of the municipality, relative to the privilege exclusively that appearing in Exhibit A, which
of gathering whitefish in your favor, from this date should begin on January 1, 1931, not on the 14th
until further notice, because this case is still of said month and year, and end on December
pending action. 31st next. They intervened in no other subsequent
contract which the plaintiff and Miguel Marasigan
Knowing the above-stated facts, let us now turn to might have entered into on or after January 14,
the consideration of the alleged errors attributed 1931. Guaranty is not, presume; it must be
to the lower court by the appellants. expressed and cannot be extended beyond its
specified limits (art. 1827 of the Civil Code).
The first and third errors should be considered Therefore, after eliminating the obligation for
jointly on account of the close relation existing which said sureties-appellants desired to answer
between them. The determination of one depends with their bond, the bond necessarily ceased and it
upon that of the other. ceases to have effects. Consequently, said errors I
and III are true and well founded.
This court believes that there is no necessity of
even discussing the first error because the plaintiff As to the second error it must be known that
itself accepted the conclusions and decision of the among the stipulations contained in the stipulation
provincial board and of the Executive Bureau, so of facts submitted to the court are the following:
much so that in its resolution No. 11, series of
1931, it thereafter considered Graciano Napa as 21. That on July 20, 1931, Miguel Marasigan paid
the highest bidder, going to the extent of requiring the sum of P16.20 to the municipal treasurer of
him, as it in fact required him, to make the deposit Gasan, as internal revenue tax on sales of
of P500 prescribed by the conditions of the auction whitefish (bañgus) spawn amounting to P1,080
sale in which he had intervened, and granting him during the months of April, May and June, 1931;

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 45

and that on August 22, 1931, said Miguel be, he would have so stated in the stipulations of
Marasigan presented his sales book to the facts. Not having done so and, furthermore, the
municipal treasurer of Gasan, Mr. Gregorio D. practice generally observed being to pay an
Chavez, it appearing therein that said Miguel obligation in the municipality where the payment
Marasigan, in the month of July, 1931, sold is due, the only conclusion possible is that said
whitefish spawn amounting to P85; in the month appellant made all such payments on account of
of August, 1931, none, and in the month of the-tacit contract entered into by him and the
September, 1931, none. plaintiff after he had received the letter of January
15, 1931 (Exhibit 21), sent to him by said plaintiff
22. That Miguel Marasigan is he concessionaire of through its municipal president. This conclusion is
the privilege to gather whitefish spawn in the all the more logical because appellant Marasigan
jurisdictional waters of the municipality of Boac, insisted in his answer, and still continues to insist
Marinduque, during the period from January 1, in his brief, that the plaintiff is obliged to refund to
1931, to December 31 of said year, and that him the amount of P1,260 which he claims to have
during said period of time he had paid the sales paid to it, and which is no other than the amount
tax on the whitefish spawn in question only in the of the two sums of P420 and P840 stated in the
municipality of Gasan, without having made any last two paragraphs of the abovestated stipulation
payment in the municipality of Boac. of facts. If it were really true, as said appellant
contends, that the sum of P840 was paid by him
23. That defendant Miguel Marasigan, as bidder at on account of his contract for privilege of
the auction of December 9, 1930, deposited in the gathering whitefish spawn, executed in his favor
municipal treasury of Gasan the sum of P420, by the municipality of Boac, he would not have
equivalent to 10 per cent of his bid at said auction, insisted in his answer, nor would he now insist in
and that said sum has not yet been returned to his brief, that said sum be refunded to him,
him to date. because in the absence of evidence to the contrary,
it must be presumed that it was transmitted by the
24. That on June 29, 1931, said Miguel Marasigan municipal treasurer of Gasan to that of Boac,
delivered another sum of P840 to the municipal inasmuch as accepting his contention, he was
treasurer of Gasan, making the total amount obliged to pay something to the latter municipality
delivered by him to said municipal treasurer by virtue of his alleged contract with it.
P1,260, the corresponding receipt having been
issued to Miguel Marasigan to that effect. For the foregoing reasons, the conclusion of this
court with respect to the second error attributed to
The facts resulting from the stipulations in the lower court by appellant Marasigan is that said
question warrant and justify the inference that the error is without merit. The truth is that between
appellant Miguel Marasigan practically enjoyed the him and the plaintiff, there was a tacit contract for
privilege of gathering whitefish spawn in the the privilege of gathering whitefish spawn in he
jurisdictional waters of the municipality of Gasan, jurisdictional waters of the municipality of Gasan,
under the terms of the contract executed by him based upon Exhibit A but without the intervention
on December 11, 1930, but which was cancelled of the sureties-appellants, for the above-stated
later by virtue of Graciano Napa's protest, at least period, or from April to July, 1931, inclusive,
from the month of April to the month of July, 1931, which is equivalent to one and one-third quarter.
inclusive. If this were not true, he would not have Said contract was one which, by its nature, need
paid, as he spontaneously paid to the municipal not be in writing (sec. 335 of Act No. 190); but it is
treasurer of Gasan, the following sums: P840 on binding because it has all the essential requisites
June 29, 1931, and P16.20 on July 20 of said year, of a valid contract (art. 1278 of the Civil Code).
nor presented, as he in fact presented to said
official for inspection, his sales book wherein it The fourth error is practically disposed of by the
appears that his sales of whitefish spawn during same reasons stated in passing upon the second
the month of July of said year amounted to P85. error.
The stipulation of facts, however, is silent as to
whether or not he enjoyed the privilege in As to the fifth error, it must be stated that
question during the rest of the year. On the appellant Marasigan really deposited in the
contrary, it states he sold no whitefish spawn in municipal treasury of Gasan, as stated in
August or September. paragraph 23 of the stipulation of facts, the sum of
P420 on account of his cancelled original contract
The excuse now offered by appellant Marasigan in (Exhibit A), and that said deposit has not yet been
his brief that the above-stated amounts were on returned to him. Therefore, he is entitled to be
account of license fees or taxes on the privilege of credited with said sum.
gathering whitefish spawn in the jurisdictional
waters of Boac, obtained by him from said Summarizing all that has been stated heretofore,
municipality, is not supported by the evidence. If this court holds that appellant Miguel Marasigan
the payments made by him as he claims them to owes and is bound to pay to the plaintiff

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 46

municipality the proceeds of one and one-third and SETTING ASIDE the March 15, 2002 Order of
quarter, for the privilege of gathering whitefish the Regional Trial Court, Branch 58, Makati City in
spawn enjoyed by him in 1931, at the rate of Civil Case No. 99-1061."4
P4,200 a year or P1,400 (P1,050 for one quarter
and P350 for one-third of a quarter); but he is, in The assailed Resolution denied reconsideration.
turn, entitled to be credited with the sum of P420
deposited by him on December 9, 1930, and P840 The Facts
paid by him on June 29, 1931, or the total amount
of P1,260. In other words, appellant Marasigan is On September 19, 1995, Petitioners Selegna
bound to pay the sum of P140 to the plaintiff. Management and Development Corporation and
Spouses Edgardo and Zenaida Angeles were
In view of the foregoing considerations, this court granted a credit facility in the amount of P70
absolves the defendants-appellants Angel R. million by Respondent United Coconut Planters
Sevilla and Gonzalo L. Luna from the complaint Bank (UCPB). As security for this credit facility,
and orders the defendant-appellant Miguel petitioners executed real estate mortgages over
Marasigan to pay the sum of P140 to the plaintiff several parcels of land located in the cities of
municipality. Muntinlupa, Las Piñas, Antipolo and Quezon; and
over several condominium units in Makati.
It is considered unnecessary to expressly mention Petitioners were likewise required to execute a
appellant Miguel Marasigan's counterclaim promissory note in favor of respondent every time
because, as may be seen, he is credited in this they availed of the credit facility. As required in
judgment with the sum of P1,260 which is all that these notes, they paid the interest in monthly
he claims therein, without special pronouncement amortizations.
as to costs. So ordered.
The parties stipulated in their Credit Agreement
dated September 19, 1995,5 that failure to pay
"any availment of the accommodation or interest,
FIRST DIVISION or any sum due" shall constitute an event of
default,6 which shall consequently allow
G.R. No. 165662 May 3, 2006 respondent bank to "declare [as immediately due
and payable] all outstanding availments
SELEGNA MANAGEMENT AND DEVELOPMENT
CORPORATION; and Spouses EDGARDO and of the accommodation together with accrued
ZENAIDA ANGELES, Petitioners, interest and any other sum payable." 7
vs.
UNITED COCONUT PLANTERS In need of further business capital, petitioners
BANK,* Respondent. obtained from UCPB an increase in their credit
facility.8 For this purpose, they executed a
DECISION Promissory Note for P103,909,710.82, which was
to mature on March 26, 1999.9 In the same note,
PANGANIBAN, CJ: they agreed to an interest rate of 21.75 percent
per annum, payable by monthly amortizations.
A writ of preliminary injunction is issued to
prevent an extrajudicial foreclosure, only upon a On December 21, 1998, respondent sent
clear showing of a violation of the mortgagor’s petitioners a demand letter, worded as follows:
unmistakable right. Unsubstantiated allegations of
denial of due process and prematurity of a loan "Gentlemen:
are not sufficient to defeat the mortgagee’s
unmistakable right to an extrajudicial foreclosure. "With reference to your loan with principal
outstanding balance of [P103,909,710.82], it
The Case appears from the records of United Coconut
Planters Bank that you failed to pay interest
Before us is a Petition for Review1 under Rule 45 of amortizations amounting to [P14,959,525.10] on
the Rules of Court, assailing the May 4, 2004 the Promissory Note on its due date, 30 May 1998.
Amended Decision2 and the October 12, 2004
Resolution3 of the Court of Appeals (CA) in CA-GR "x x x xxx
SP No. 70966. The challenged Amended Decision xxx
disposed thus:
"Accordingly, formal demand is hereby made upon
"WHEREFORE, the Motion for Reconsideration is you to pay your outstanding obligations in the
GRANTED. The July 18, 2003 Decision is hereby total amount of P14,959,525.10, which includes
REVERSED and SET ASIDE and another one unpaid interest and penalties as of 21 December
entered GRANTING the petition and REVERSING

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 47

1998 due on the promissory note, eight (8) days to restructure or, in the alternative, to negotiate
from date hereof."10 for a takeout of their account.14

Respondent decided to invoke the acceleration On May 25, 1999, the Bank denied petitioners’
provision in their Credit Agreement. Accordingly, request in these words:
through counsel, it relayed its move to petitioners
on January 25, 1999 in a letter, which we quote: "This is to reply to your letter dated May 20, 1999,
which confirms the request you made the previous
"Gentlemen: day when you paid us a visit.

"x x x "As earlier advised, your account has been

xxx xxx referred to external counsel for appropriate legal
action. Demand has also been made for the full
"It appears from the record of settlement of your account.
[UCPB] that you failed to pay the
monthly interest due on said "We regret that the Bank is unable to grant your
obligation since May 30, 1998 as request unless a definite offer is made for
well as the penalty charges due settlement."15
thereon. Despite repeated
demands, you refused and continue In order to forestall the extrajudicial foreclosure
to refuse to pay the same. Under scheduled for May 31, 1999, petitioners filed a
the Credit Agreements/Letter Complaint16 (docketed as Civil Case No. 99-1061)
Agreements you executed, failure for "Damages, Annulment of Interest, Penalty
to pay when due any installments of Increase and Accounting with Prayer for
the loan or interest or any sum due Temporary Restraining Order/Preliminary
thereunder, is an event of default. Injunction." All subsequent proceedings in the
trial court and in the CA involved only the
"Consequently, we hereby inform propriety of issuing a TRO and a writ of
you that our client has declared preliminary injunction.
your principal obligation in the
amount of [P103,909,710.82], Judge Josefina G. Salonga,17 then executive judge
interest and sums payable under of the Regional Trial Court (RTC) of Makati City,
the Credit Agreement/Letter denied the Urgent Ex-parte Motion for Immediate
Agreement/Promissory Note to be Issuance of a Temporary Restraining Order (TRO),
immediately due and payable. filed by petitioners. Judge Salonga denied their
motion on the ground that no great or irreparable
"Accordingly, formal demand is injury would be inflicted on them if the parties
hereby made upon you to please would first be heard.18 Unsatisfied, petitioners
pay within five (5) days from date filed an Ex-Parte Motion for Reconsideration, by
hereof or up to January 29, 1999 reason of which the case was eventually raffled to
the principal amount of Branch 148, presided by Judge Oscar B.
[P103,909,710.82], with the Pimentel.19
interest, penalty and other charges
due thereon, which as of January After due hearing, Judge Pimentel issued an Order
25, 1999 amounts to dated May 31, 1999, granting a 20-day TRO on
[P17,351,478.55]."11 the scheduled foreclosure of the Antipolo
properties, on the ground that the Notice of
Respondent sent another letter of demand on Foreclosure had indicated an inexistent auction
March 4, 1999. It contained a final demand on venue.20 To resolve that issue, respondent filed a
petitioners "to settle in full [petitioners’] said past Manifestation21 that it would withdraw all its
due obligation to [UCPB] within five (5) days from notices relative to the foreclosure of the
[petitioners’] receipt of [the] letter." 12 mortgaged properties, and that it would re-post or
re-publish a new set of notices. Accordingly, in an
In response, petitioners paid respondent the Order dated September 6, 1999,22 Judge Pimentel
amount of P10,199,473.96 as partial payment of denied petitioners’ application for a TRO for having
the accrued interests.13 Apparently unsatisfied, been rendered moot by respondent’s
UCPB applied for extrajudicial foreclosure of Manifestation. 23

petitioners’ mortgaged properties.

Subsequently, respondent filed new applications
When petitioners received the Notice of Extra for foreclosure in the cities where the mortgaged
Judicial Foreclosure Sale on May 18, 1999, they properties were located. Undaunted, petitioners
requested UCPB to give them a period of sixty (60) filed another Motion for the Issuance of a
days to update their accrued interest charges; and TRO/Injunction and a Supplementary Motion for

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 48

the Issuance of TRO/Injunction with Motion to Plaintiff’s seeks to enjoin defendants for an
Clarify Order of September 6, 1999.24 indefinite period pending trial of the case.

On October 27, 1999, Judge Pimentel issued an "Be that as it may, the Court actually did not have
Order25 granting a 20-day TRO in favor of any intention of restraining the defendants from
petitioners. After several hearings, he issued his foreclosing plaintiff[s’] property for an indefinite
November 26, 1999 Order,26 granting their prayer period and during the entire proceeding of the
for a writ of preliminary injunction on the case x x x.
foreclosures, but only for a period of twenty (20)
days. The Order states: "x x x xxx
xxx
"Admitted by defendant witness is the fact that in
all the notices of foreclosure sale of the properties "What the [c]ourt wanted the defendants to do
of the plaintiffs x x x it is stated in each notice that was to merely modify the notice of [the] auction
the property will be sold at public auction to satisfy sale in order that the amount of P131,854,773.98
the mortgage indebtedness of plaintiffs which as x x x would not appear to be the value of each
of August 31, 1999 amounts to P131,854,773.98. property being sold on auction. x x x.30

"x x x xxx "WHEREFORE, premises considered and after

xxx finding merit on the arguments raised by herein
defendants to be impressed with merit, and
"As the court sees it, this is the problem that having stated in the Order dated 26 November
should be addressed by the defendant in this case 1999 that no other alternative recourse is
and in the meantime, the notice of foreclosure sale available than to allow the defendants to proceed
should be held in abeyance until such time as with their intended action, the Court hereby rules:
these matters are clarified and cleared by the
defendants x x x Should the defendant be able to "1.] To give due course to defendant[‘]s motion
remedy the situation this court will have no more for reconsideration, as the same is hereby
alternative but to allow the defendant to proceed GRANTED, however, with reservation that this
to its intended action. Order shall take effect upon after its[] finality[.]"31

"x x x xxx Consequently, respondent proceeded with the

xxx foreclosure sale of some of the mortgaged
properties. On the other hand, petitioners filed an
"WHEREFORE, premises considered, and finding "[O]mnibus [M]otion [for Reconsideration] and to
compelling reason at this point in time to grant the [S]pecify the [A]pplication of the P92 [M]illion
application for preliminary injunction, the same is [R]ealized from the [F]oreclosure [S]ale x x
hereby granted upon posting of a preliminary x."32 Before this Omnibus Motion could be
injunction bond in the amount of P3,500,000.00 resolved, Judge Pimentel inhibited himself from
duly approved by the court, let a writ of hearing the case.33
preliminary injunction be issued."27
The case was then re-raffled to Branch 58 of the
The corresponding Writ of Preliminary RTC of Makati City, presided by Judge Escolastico
Injunction28 was issued on November 29, 1999. U. Cruz.34 The proceedings before him were,
however, all nullified by the Supreme Court in its
Respondent moved for reconsideration. On the En Banc Resolution dated September 18,
other hand, petitioners filed a Motion to Clarify 2001.35 He was eventually dismissed from
Order of November 26, 1999. Conceding that the service.36
November 26 Order had granted an injunction
during the pendency of the case, respondent The case was re-raffled to the pairing judge of
contended that the injunctive writ merely Branch 58, Winlove M. Dumayas. On March 15,
restrained it for a period of 20 (twenty) days. 2002, Judge Dumayas granted petitioners’
Omnibus Motion for Reconsideration and
On December 29, 2000, Judge Pimentel issued an Specification of the Foreclosure Proceeds, as
Order29 granting respondent’s Motion for follows:
Reconsideration and clarifying his November 26,
1999 Order in this manner: "WHEREFORE, premises considered, the Motion to
Reconsider the Order dated December 29, 2000 is
"There may have been an error in the Writ of hereby granted and the Order of November 26,
Preliminary Injunction issued dated November 29, 1999 granting the preliminary injunction is
1999 as the same [appeared to be actually] an reinstated subject however to the condition that
extension of the TRO issued by this Court dated 27 all properties of plaintiffs which were
October 1999 for another 20 days period. extrajudicially foreclosed though public bidding

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 49

are subject to an accounting. [A]nd for this accounting -- for the purpose of determining
purpose defendant bank is hereby given fifteen whether the proceeds of the auction would suffice
(15) days from notice hereof to render an to cover the indebtedness -- would not justify an
accounting on the proceeds realized from the injunction on the foreclosure.
foreclosure of plaintiffs’ mortgaged properties
located in Antipolo, Makati, Muntinlupa and Las Petitioners filed a Motion for Reconsideration
Piñas."37 dated May 31, 2004, which the appellate court
denied.46
The aggrieved respondent filed before the Court of
Appeals a Petition for Certiorari, seeking the Hence, this Petition.47
nullification of the RTC Order dated March 15,
2002, on the ground that it was issued with grave Issues
abuse of discretion.38
Petitioners raise the following issues for our
The Special Fifteenth Division, speaking through consideration:
Justice Rebecca de Guia-Salvador, affirmed the
ruling of Judge Dumayas. It held that petitioners p align="center">"I
had a clear right to an injunction, based on the
fact that respondent had kept them in the dark as "Whether or not the Honorable
to how and why their principal obligation had Court of Appeals denied the
ballooned to almost P132 million. The CA held that petitioners of due process.
respondent’s refusal to give them a detailed
accounting had prevented the determination of "II
the maturity of the obligation and precluded the
possibility of a foreclosure of the mortgaged "Whether or not the Honorable
properties. Moreover, their payment of P10 million Court of Appeals supported its
had the effect of updating, and thereby averting Amended Decision by invoking
the maturity of, the outstanding obligation.39 jurisprudence not applicable and
completely identical with the
Respondent filed a Motion for Reconsideration, instant case.
which was granted by a Special Division of Five of
the Former Special Fifteenth Division. "III

Ruling of the Court of Appeals "Whether or not the Honorable

Court of Appeals failed to establish
Citing China Banking Corporation v. Court of its finding that RTC Judge Winlove
Appeals,40 the appellate court held in its Amended Dumayas has acted with grave
Decision41 that the foreclosure proceedings should abuse of discretion."48
not be enjoined in the light of the clear failure of
petitioners to meet their obligations upon The resolution of this case hinges on two issues: 1)
maturity.42 whether petitioners are in default; and 2) whether
there is basis for preliminarily enjoining the
Also citing Zulueta v. Reyes,43 the CA, through extrajudicial foreclosure. The other issues raised
Justice Jose Catral Mendoza, went on to say that a will be dealt with in the resolution of these two
pending question on accounting did not warrant main questions.
an injunction on the foreclosure.
The Court’s Ruling
Parenthetically, the CA added that petitioners
were not without recourse or protection. Further, The Petition has no merit.
it noted their pending action for annulment of
interest, damages and accounting. It likewise said First Issue:
that they could protect themselves by causing the
annotation of lis pendens on the titles of the Default
mortgaged or foreclosed properties.
The resolution of the present controversy
In his Separate Concurring Opinion,44 Justice necessarily begins with a determination of
Magdangal M. de Leon added that a prior respondent’s right to foreclose the mortgaged
accounting was not essential to extrajudicial properties extrajudicially.
foreclosure. He cited Abaca Corporation v.
Garcia,45 which had ruled that Act No. 3135 did It is a settled rule of law that foreclosure is proper
not require mortgaged properties to be sold by lot when the debtors are in default of the payment of
or by only as much as would cover just the their obligation. In fact, the parties stipulated in
obligation. Thus, he concluded that a request for their credit agreements, mortgage contracts and

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 50

promissory notes that respondent was authorized "If, at any time, an event of default as defined in
to foreclose on the mortgages, in case of a default the credit agreements, promissory notes and
by petitioners. That this authority was granted is other related loan documents referred to in
not disputed. paragraph 5 of ARTICLE I hereof (sic), or the
MORTGAGOR and/or DEBTOR shall fail or refuse to
Mora solvendi, or debtor’s default, is defined as a pay the SECURED OBLIGATIONS, or any of the
delay49 in the fulfillment of an obligation, by amortization of such indebtedness when due, or to
reason of a cause imputable to the debtor. 50 There comply any (sic) of the conditions and stipulations
are three requisites necessary for a finding of herein agreed, x x x then all the obligations of the
default. First, the obligation is demandable and MORTGAGOR secured by this MORTGAGE and all
liquidated; second, the debtor delays performance; the amortizations thereof shall immediately
third, the creditor judicially or extrajudicially become due, payable and defaulted and the
requires the debtor’s performance.51 MORTGAGEE may immediately foreclose this
MORTGAGE judicially in accordance with the Rules
Mortgagors’ Default of Monthly Interest of Court, or extrajudicially in accordance with Act
Amortizations No. 3135, as amended, and Presidential Decree
No. 385. For the purpose of extrajudicial
In the present case, the Promissory Note executed foreclosure, the MORTGAGOR hereby appoints the
on March 29, 1998, expressly states that MORTGAGEE his/her/its attorney-in-fact to sell
petitioners had an obligation to pay monthly the property mortgaged under Act No. 3135, as
interest on the principal obligation. From amended, to sign all documents and perform any
respondent’s demand letter,52 it is clear and act requisite and necessary to accomplish said
undisputed by petitioners that they failed to meet purpose and to appoint its substitutes as such
those monthly payments since May 30, 1998. attorney-in-fact with the same powers as above
Their nonpayment is defined as an "event of specified. x x x[.]"58
default" in the parties’ Credit Agreement, which
we quote: The foregoing discussion satisfactorily shows that
UCPB had every right to apply for extrajudicial
"Section 8.01. Events of Default. Each of the foreclosure on the basis of petitioners’ undisputed
following events and occurrences shall constitute and continuing default.
an Event of Default of this AGREEMENT:
Petitioners’ Debt Considered Liquidated Despite
"1. The CLIENT shall fail to pay, when due, any the Alleged
availment of the Accommodation or interest, or
any other sum due thereunder in accordance with Lack of Accounting
the terms thereof;1avvphil.net
Petitioners do not even attempt to deny the
"x x x xxx aforementioned matters. They assert, though,
x x x" that they have a right to a detailed accounting
before they can be declared in default. As regards
"Section 8.02. Consequences of Default. (a) If an the three requisites of default, they say that the
Event of Default shall occur and be continuing, the first requisite -- liquidated debt -- is absent.
Bank may: Continuing with foreclosure on the basis of an
unliquidated obligation allegedly violates their
"1. By written notice to the CLIENT, declare all right to due process. They also maintain that their
outstanding availments of the Accommodation partial payment of P10 million averted the
together with accrued interest and any other sum maturity of their obligation.59
payable hereunder to be immediately due and
payable without presentment, demand or notice On the other hand, respondent asserts that
of any kind, other than the notice specifically questions regarding the running balance of the
required by this Section, all of which are expressly obligation of petitioners are not valid reasons for
waived by the CLIENT[.]"53 restraining the foreclosure. Nevertheless, it
maintains that it has furnished them a detailed
Considering that the contract is the law between monthly statement of account.
the parties,54 respondent is justified in invoking
the acceleration clause declaring the entire A debt is liquidated when the amount is known or
obligation immediately due and payable.55 That is determinable by inspection of the terms and
clause obliged petitioners to pay the entire loan on conditions of the relevant promissory notes and
January 29, 1999, the date fixed by respondent. 56 related documentation.60 Failure to furnish a
debtor a detailed statement of account does not
Petitioners’ failure to pay on that date set into ipso facto result in an unliquidated obligation.
effect Article IX of the Real Estate
Mortgage, worded thus:
57

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 51

Petitioners executed a Promissory Note, in which Maturity of the Loan Not Averted by Partial
they stated that their principal obligation was in Compliance with Respondent’s Demand
the amount of P103,909,710.82, subject to an
interest rate of 21.75 percent per Petitioners allege that their partial payment of P10
61
annum. Pursuant to the parties’ Credit million on March 25, 1999, had the effect of
Agreement, petitioners likewise know that any forestalling the maturity of the loan; 69 hence the
delay in the payment of the principal obligation foreclosure proceedings are premature. 70 We
will subject them to a penalty charge of one disagree.
percent per month, computed from the due date
until the obligation is paid in full.62 To be sure, their partial payment did not
extinguish the obligation. The Civil Code states
It is in fact clear from the agreement of the parties that a debt is not paid "unless the thing x x x in
that when the payment is accelerated due to an which the obligation consists has been completely
event of default, the penalty charge shall be based delivered x x x."71 Besides, a late partial payment
on the total principal amount outstanding, to be could not have possibly forestalled a long-expired
computed from the date of acceleration until the maturity date.
obligation is paid in full.63 Their Credit Agreement
even provides for the application of payments.64 It The only possible legal relevance of the partial
appears from the agreements that the amount of payment was to evidence the mortgagee’s
total obligation is known or, at the very least, amenability to granting the mortgagor a grace
determinable. period. Because the partial payment would
constitute a waiver of the mortgagee’s vested
Moreover, when they made their partial payment, right to foreclose, the grant of a grace period
petitioners did not question the principal, interest cannot be casually assumed;72 the bank’s
or penalties demanded from them. They only agreement must be clearly shown. Without a
sought additional time to update their interest doubt, no express agreement was entered into by
payments or to negotiate a possible restructuring the parties. Petitioners only assumed that their
of their account.65 Hence, there is no basis for partial payment had satisfied respondent’s
their allegation that a statement of account was demand and obtained for them more time to
necessary for them to know their obligation. We update their account.73
cannot impair respondent’s right to foreclose the
properties on the basis of their unsubstantiated Petitioners are mistaken. When creditors receive
allegation of a violation of due process. partial payment, they are not ipso facto deemed to
have abandoned their prior demand for full
In Spouses Estares v. CA,66 we did not find any payment. Article 1235 of the Civil Code provides:
justification to grant a preliminary injunction,
even when the mortgagors were disputing the "When the obligee accepts the performance,
amount being sought from them. We held in that knowing its incompleteness or irregularity, and
case that "[u]pon the nonpayment of the loan, without expressing any protest or objection, the
which was secured by the mortgage, the obligation is deemed fully complied with."
mortgaged property is properly subject to a
foreclosure sale."67 Thus, to imply that creditors accept partial
payment as complete performance of their
Compared with Estares, the denial of injunctive obligation, their acceptance must be made under
relief in this case is even more imperative, circumstances that indicate their intention to
because the present petitioners do not even assail consider the performance complete and to
the amounts due from them. Neither do they renounce their claim arising from the defect.74
contend that a detailed accounting would show
that they are not in default. A pending question There are no circumstances that would indicate a
regarding the due amount was not a sufficient renunciation of the right of respondent to
reason to enjoin the foreclosure in Estares. Hence, foreclose the mortgaged properties extrajudicially,
with more reason should injunction be denied in on the basis of petitioners’ continuing default. On
the instant case, in which there is no dispute as to the contrary, it asserted its right by filing an
the outstanding obligation of petitioners. application for extrajudicial foreclosure after
receiving the partial payment. Clearly, it did not
At any rate, whether respondent furnished them a intend to give petitioners more time to meet their
detailed statement of account is a question of fact obligation.
that this Court need not and will not resolve in this
instance. As held in Zulueta v. Reyes,68 in which Parenthetically, respondent cannot be reproved
there was no genuine controversy as to the for accepting their partial payment. While Article
amounts due and demandable, the foreclosure 1248 of the Civil Code states that creditors cannot
should not be restrained by the unnecessary be compelled to accept partial payments, it does
question of accounting. not prohibit them from accepting such payments.

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 52

Second Issue: enforcing its undeniable right to foreclose the
mortgaged properties.
Enjoining the Extrajudicial Foreclosure
In any case, petitioners will not be deprived
A writ of preliminary injunction is a provisional outrightly of their property. Pursuant to Section 47
remedy that may be resorted to by litigants, only of the General Banking Law of 2000,81 mortgagors
to protect or preserve their rights or interests who have judicially or extrajudicially sold their real
during the pendency of the principal action. To property for the full or partial payment of their
authorize a temporary injunction, the plaintiff obligation have the right to redeem the property
must show, at least prima facie, a right to the final within one year after the sale. They can redeem
relief.75 Moreover, it must show that the invasion their real estate by paying the amount due, with
of the right sought to be protected is material and interest rate specified, under the mortgage deed;
substantial, and that there is an urgent and as well as all the costs and expenses incurred by
paramount necessity for the writ to prevent the bank.82
serious damage.76
Moreover, in extrajudicial foreclosures, petitioners
In the absence of a clear legal right, the issuance have the right to receive any surplus in the selling
of the injunctive writ constitutes grave abuse of price. This right was recognized in Sulit v. CA, 83 in
discretion. Injunction is not designed to protect which the Court held that "if the mortgagee is
contingent or future rights. It is not proper when retaining more of the proceeds of the sale than he
the complainant’s right is doubtful or disputed.77 is entitled to, this fact alone will not affect the
validity of the sale but simply gives the mortgagor
As a general rule, courts should avoid issuing this a cause of action to recover such surplus."84
writ, which in effect disposes of the main case
without trial.78 In Manila International Airport Petitioners failed to demonstrate the prejudice
Authority v. CA,79 we urged courts to exercise they would probably suffer by reason of the
caution in issuing the writ, as follows: foreclosure. Also, it is clear that they would be
adequately protected by law. Hence, we find no
"x x x. We remind trial courts that while generally legal basis to reverse the assailed Amended
the grant of a writ of preliminary injunction rests Decision of the CA dated May 4, 2004.
on the sound discretion of the court taking
cognizance of the case, extreme caution must be WHEREFORE, the Petition is DENIED and the
observed in the exercise of such discretion. The assailed Amended Decision and Resolution
discretion of the court a quo to grant an injunctive AFFIRMED. Costs against petitioners.SO
writ must be exercised based on the grounds and ORDERED.
in the manner provided by law. Thus, the Court
declared in Garcia v. Burgos:

‘It has been consistently held that there is no SECOND DIVISION

power the exercise of which is more delicate,
which requires greater caution, deliberation and G.R. No. L-49401 July 30, 1982
sound discretion, or more dangerous in a doubtful
case, than the issuance of an injunction. It is the RIZAL COMMERCIAL BANKING
strong arm of equity that should never be CORPORATION, petitioner,
extended unless to cases of great injury, where vs.
courts of law cannot afford an adequate or HON. JOSE P. ARRO, Judge of the Court of
commensurate remedy in damages. First instance of Davao, and RESIDORO
CHUA, respondents.
‘Every court should remember that an injunction is
a limitation upon the freedom of action of the Laurente C. Ilagan for petitioner.
defendant and should not be granted lightly or
precipitately. It should be granted only when the Victor A. Clapano for respondents.
court is fully satisfied that the law permits it and
the emergency demands it.’"80 (Citations omitted)

Petitioners do not have any clear right to be DE CASTRO, J.:

protected. As shown in our earlier findings, they
failed to substantiate their allegations that their Petition for certiorari to annul the orders of
right to due process had been violated and the respondent judge dated October 6, 1978 and
maturity of their obligation forestalled. Since they November 7, 1978 in Civil Case No. 11-154 of the
indisputably failed to meet their obligations in Court of First Instance of Davao, which granted
spite of repeated demands, we hold that there is the motion filed by private respondent to dismiss
no legal justification to enjoin respondent from the complaint of petitioner for a sum of money, on

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 53

the ground that the complaint states no cause of The sole issue resolved by respondent court was
action as against private respondent. the interpretation of the comprehensive surety
agreement, particularly in reference to the
After the petition had been filed, petitioner, on indebtedness evidenced by the promissory note
December 14, 1978 mailed a manifestation and involved in the instant case, said comprehensive
motion requesting the special civil action for surety agreement having been signed by Enrique
certiorari be treated as a petition for Go, Sr. and private respondent, binding
review. 1 Said manifestation and motion was themselves as solidary debtors of said corporation
noted in the resolution of January 10, 1979. 2 not only to existing obligations but to future ones.
Respondent court said that corollary to that
It appears that on October 19, 1976 Residoro agreement must be another instrument
Chua and Enrique Go, Sr. executed a evidencing the obligation in a form of a promissory
comprehensive surety agreements 3 to guaranty note or any other evidence of indebtedness
among others, any existing indebtedness of without which the said agreement serves no
Davao Agricultural Industries Corporation purpose; that since the promissory notes, which is
(referred to therein as Borrower, and as Daicor in primarily the basis of the cause of action of
this decision), and/or induce the bank at any time petitioner, is not signed by private respondent,
or from time to time thereafter, to make loans or the latter can not be liable thereon.
advances or to extend credit in other manner to,
or at the request, or for the account of the Contesting the aforecited decision and order of
Borrower, either with or without security, and/or respondent judge, the present petition was filed
to purchase on discount, or to make any loans or before this Court assigning the following as errors
advances evidenced or secured by any notes, bills, committed by respondent court:
receivables, drafts, acceptances, checks or other
evidences of indebtedness (all hereinafter called 1. That the respondent court erred in dismissing
"instruments") upon which the Borrower is or may the complaint against Chua simply on the reasons
become liable, provided that the liability shall not that 'Chua is not a signatory to the promissory
exceed at any one time the aggregate principal note" of April 29, 1977, or that Chua could not be
sum of P100,000.00. held liable on the note under the provisions of the
comprehensive surety agreement of October 29,
On April 29, 1977 a promissory note 4 in the 1976; and/or
amount of P100,000.00 was issued in favor of
petitioner payable on June 13, 1977. Said note 2. That the respondent court erred in interpreting
was signed by Enrique Go, Sr. in his personal the provisions of the Comprehensive Surety
capacity and in behalf of Daicor. The promissory Agreement towards the conclusion that
note was not fully paid despite repeated demands; respondent Chua is not liable on the promissory
hence, on June 30, 1978, petitioner filed a note because said note is not conformable to the
complaint for a sum of money against Daicor, Comprehensive Surety Agreement; and/or
Enrique Go, Sr. and Residoro Chua. A motion to
dismiss dated September 23, 1978 was filed by 3. That the respondent court erred in ordering that
respondent Residoro Chua on the ground that the there is no cause of action against respondent
complaint states no cause of action as against Chua in the petitioner's complaint.
him. 5 It was alleged in the motion that he can not
be held liable under the promissory note because The main issue involved in this case is whether
it was only Enrique Go, Sr. who signed the same in private respondent is liable to pay the obligation
behalf of Daicor and in his own personal capacity. evidence by the promissory note dated April
29,1977 which he did not sign, in the light of the
In an opposition dated September 26, provisions of the comprehensive surety
1978 petitioner alleged that by virtue of the
6
agreement which petitioner and private
execution of the comprehensive surety agreement, respondent had earlier executed on October 19,
private respondent is liable because said 1976.
agreement covers not merely the promissory note
subject of the complaint, but is continuing; and it We find for the petitioner. The comprehensive
encompasses every other indebtedness the surety agreement was jointly executed by
Borrower may, from time to time incur with Residoro Chua and Enrique Go, Sr., President and
petitioner bank. General Manager, respectively of Daicor, on
October 19, 1976 to cover existing as well as
On October 6, 1978 respondent court rendered a future obligations which Daicor may incur with the
decision granting private respondent's motion to petitioner bank, subject only to the proviso that
dismiss the complaint. 7 Petitioner filed a motion their liability shall not exceed at any one time the
for reconsideration dated October 12, 1978 and on aggregate principal sum of P100,000.00. Thus,
November 7, 1978 respondent court issued an paragraph I of the agreement provides:
order denying the said motion. 8

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 54

For and in consideration of any existing accessory obligation, it being dependent upon a
indebtedness to you of Davao Agricultural principal one which, in this case is the loan
Industries Corporation with principal place of obtained by Daicor as evidenced by a promissory
business and postal address at 530 J. P. Cabaguio note. What obviously induced petitioner bank to
Ave., Davao City (hereinafter called the grant the loan was the surety agreement whereby
"Borrower), and/or in order to induce, you in your Go and Chua bound themselves solidarily to
discretion, at any time or from time to time guaranty the punctual payment of the loan at
hereafter, to make loans or advances or to extend maturity. By terms that are unequivocal, it can be
credit in any other manner to, or at he request or clearly seen that the surety agreement was
for the account of the Borrower, either with or executed to guarantee future debts which Daicor
without security, and/or to purchase or discount may incur with petitioner, as is legally allowable
or to make any loans or advances evidenced or under the Civil Code. Thus —
secured by any notes, bills, receivables, drafts,
acceptances, checks or other instruments or Article 2053. — A guaranty may also be given as
evidences of indebtedness (all hereinafter called security for future debts, the amount of which is
"instruments") upon which the Borrower is or may not yet known; there can be no claim against the
become liable as maker, endorser, acceptor, or guarantor until the debt is liquidated. A
otherwise) the undersigned agrees to guarantee, conditional obligation may also be secured.
and does hereby guarantee in joint and several
capacity, the punctual payment at maturity to you In view of the foregoing, the decision (which
of any and all such instruments, loans, advances, should have been a mere "order"), dismissing the
credits and/or other obligations herein before complaint is reversed and set side. The case is
referred to, and also any and all other remanded to the court of origin with instructions
indebtedness of every kind which is now or may to set aside the motion to dismiss, and to require
hereafter become due or owing to you by the defendant Residoro Chua to answer the complaint
Borrower, together with any and all expenses after which the case shall proceed as provided by
which may be incurred by you in collecting an such the Rules of Court. No costs.SO ORDERED.
instruments or other indebtedness or obligations
hereinbefore referred to ..., provided, however,
that the liability of the undersigned shag not
exceed at any one time the aggregate principal THIRD DIVISION
sum of P100,000.00 ...

The agreement was executed obviously to induce

petitioner to grant any application for a loan G.R. No. 89775 November 26, 1992
Daicor may desire to obtain from petitioner bank.
The guaranty is a continuing one which shall JACINTO UY DIÑO and NORBERTO
remain in full force and effect until the bank is UY, petitioners,
notified of its termination. vs.
HON. COURT OF APPEALS and
This is a continuing guaranty and shall remain in METROPOLITAN BANK AND TRUST
fun force and effect until written notice shall have COMPANY, respondents.
been received by you that it has been revoked by
the undersigned, ... 9

At the time the loan of P100,000.00 was obtained DAVIDE, JR., J.:
from petitioner by Daicor, for the purpose of
having an additional capital for buying and selling Continuing Suretyship Agreements signed by the
coco-shell charcoal and importation of activated petitioners set off this present controversy.
carbon, 10 the comprehensive surety agreement
was admittedly in full force and effect. The loan Petitioners assail the 22 June 1989 Decision of the
was, therefore, covered by the said agreement, Court in CA-G.R. CV No. 17724 1 which reversed
and private respondent, even if he did not sign the the 2 December 1987 Decision of Branch 45 of the
promisory note, is liable by virtue of the surety Regional Trial Court (RTC) of Manila in a collection
agreement. The only condition that would make suit entitled "Metropolitan Bank and Trust
him liable thereunder is that the Borrower "is or Company vs. Uy Tiam, doing business under the
may become liable as maker, endorser, acceptor name of "UY TIAM ENTERPRISES & FREIGHT
or otherwise". There is no doubt that Daicor is SERVICES," Jacinto Uy Diño and Norberto Uy" and
liable on the promissory note evidencing the docketed as Civil Case No. 82-9303. They likewise
indebtedness. challenge public respondent's Resolution of 21
August 1989 2 denying their motion for the
The surety agreement which was earlier signed by reconsideration of the former.
Enrique Go, Sr. and private respondent, is an

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 55

The impugned Decision of the Court summarizes event of non-sale or, if sold, the proceeds of the
the antecedent facts as follows: sale thereof, on or before September 2, 1979.

It appears that in 1977, Uy Tiam Enterprises and However, UTEFS did not acquiesce to the
Freight Services (hereinafter referred to as obligatory stipulations in the trust receipt. As a
UTEFS), thru its representative Uy Tiam, applied consequence, METROBANK sent letters to the said
for and obtained credit accommodations (letter of principal obligor and its sureties, Norberto Uy and
credit and trust receipt accommodations) from the Jacinto Uy Diño, demanding payment of the
Metropolitan Bank and Trust Company amount due. Informed of the amount due, UTEFS
(hereinafter referred to as METROBANK) in the made partial payments to the Bank which were
sum of P700,000.00 (Original Records, p. 333). To accepted by the latter.
secure the aforementioned credit
accommodations Norberto Uy and Jacinto Uy Diño Answering one of the demand letters, Diño, thru
executed separate Continuing Suretyships counsel, denied his liability for the amount
(Exhibits "E" and "F" respectively), dated 25 demanded and requested METROBANK to send
February 1977, in favor of the latter. Under the him copies of documents showing the source of his
aforesaid agreements, Norberto Uy agreed to pay liability. In its reply, the bank informed him that
METROBANK any indebtedness of UTEFS up to the the source of his liability is the Continuing
aggregate sum of P300,000.00 while Jacinto Uy Suretyship which he executed on February 25,
Diño agreed to be bound up to the aggregate sum 1977.
of P800,000.00.
As a rejoinder, Diño maintained that he cannot be
Having paid the obligation under the above letter held liable for the 1979 credit accommodation
of credit in 1977, UTEFS, through Uy Tiam, because it is a new obligation contracted without
obtained another credit accommodation from his participation. Besides, the 1977 credit
METROBANK in 1978, which credit accommodation which he guaranteed has been
accommodation was fully settled before an fully paid.
irrevocable letter of credit was applied for and
obtained by the abovementioned business entity Having sent the last demand letter to UTEFS, Diño
in 1979 (September 8, 1987, tsn, pp. 14-15). and Uy and finding resort to extrajudicial remedies
to be futile, METROBANK filed a complaint for
The Irrevocable Letter of Credit No. SN-Loc-309, collection of a sum of money (P613,339.32, as of
dated March 30, 1979, in the sum of P815, 600.00, January 31, 1982, inclusive of interest,
covered UTEFS' purchase of "8,000 Bags Planters commission penalty and bank charges) with a
Urea and 4,000 Bags Planters 21-0-0." It was prayer for the issuance of a writ of preliminary
applied for and obtain by UTEFS without the attachment, against Uy Tiam, representative of
participation of Norberto Uy and Jacinto Uy Diño UTEFS and impleaded Diño and Uy as
as they did not sign the document denominated as parties-defendants.
"Commercial Letter of Credit and Application."
Also, they were not asked to execute any The court issued an order, dated 29 July 1983,
suretyship to guarantee its payment. Neither did granting the attachment writ, which writ was
METROBANK nor UTEFS inform them that the returned unserved and unsatisfied as defendant
1979 Letter of Credit has been opened and the Uy Tiam was nowhere to be found at his given
Continuing Suretyships separately executed in address and his commercial enterprise was
February, 1977 shall guarantee its payment already non-operational (Original Records, p. 37).
(Appellees brief, pp. 2-3; rollo, p. 28).
On April 11, 1984, Norberto Uy and Jacinto Uy
The 1979 letter of credit (Exhibit "B") was Diño (sureties-defendant herein) filed a motion to
negotiated. METROBANK paid Planters Products dismiss the complaint on the ground of lack of
the amount of P815,600.00 which payment was cause of action. They maintained that the
covered by a Bill of Exchange (Exhibit "C"), dated obligation which they guaranteed in 1977 has
4 June 1979, in favor of (Original Records, p. been extinguished since it has already been paid
331). in the same year. Accordingly, the Continuing
Suretyships executed in 1977 cannot be availed of
Pursuant to the above commercial transaction, to secure Uy Tiam's Letter of Credit obtained in
UTEFS executed and delivered to METROBANK 1979 because a guaranty cannot exist without a
and Trust Receipt (Exh. "D"), dated 4 June 1979, valid obligation. It was further argued that they
whereby the former acknowledged receipt in trust can not be held liable for the obligation contracted
from the latter of the aforementioned goods from in 1979 because they are not privies thereto as it
Planters Products which amounted to P815, was contracted without their participation
600.00. Being the entrusted, the former agreed to (Records, pp. 42-46).
deliver to METROBANK the entrusted goods in the

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 56

On April 24, 1984, METROBANK filed its opposition extinguished the obligation they assumed as
to the motion to dismiss. Invoking the terms and guarantors/sureties.
conditions embodied in the comprehensive
suretyships separately executed by b) The 1979 Letter of Credit (Exh. B) is different
sureties-defendants, the bank argued that from the 1977 Letter of Credit which covered the
sureties-movants bound themselves as solidary 1977 account of Uy Tiam. Thus, the obligation
obligors of defendant Uy Tiam to both existing under either is apart and distinct from the
obligations and future ones. It relied on Article obligation created in the other — as evidenced by
2053 of the new Civil Code which provides: "A the fact that Uy Tiam had to apply anew for the
guaranty may also be given as security for future 1979 transaction (Exh. A). And Diño and Uy, being
debts, the amount of which is not yet strangers thereto, cannot be answerable
known; . . . ." It was further asserted that the thereunder.
agreement was in full force and effect at the time
the letter of credit was obtained in 1979 as c) The plaintiff did not serve notice to the
sureties-defendants did not exercise their right to defendants Diño and Uy when it extended to
revoke it by giving notice to the bank. (Ibid., pp. Credit — at least to inform them that the
51-54). continuing suretyships they executed on February
25, 1977 will be considered by the plaintiff to
Meanwhile, the resolution of the aforecited motion secure the 1979 transaction of Uy Tiam.
to dismiss was held in abeyance pending the
introduction of evidence by the parties as per d) There is no sufficient and credible showing that
order dated February 21, 1986 (Ibid., p. 71). Diño and Uy were fully informed of the import of
the Continuing Suretyships when they affixed
Having been granted a period of fifteen (15) days their signatures thereon –– that they are thereby
from receipt of the order dated March 7, 1986 securing all future obligations which Uy Tiam may
within which to file the answer, contract the plaintiff. On the contrary, Diño and Uy
sureties-defendants filed their responsive categorically testified that they signed the blank
pleading which merely rehashed the arguments in forms in the office of Uy Tiam at 623 Asuncion
their motion to dismiss and maintained that they Street, Binondo, Manila, in obedience to the
are entitled to the benefit of excussion (Original instruction of Uy Tiam, their former employer.
Records, pp. 88-93). They denied having gone to the office of the
plaintiff to subscribe to the documents (October 1,
On February 23, 1987, plaintiff filed a motion to 1987, tsn, pp. 5-7, 14; October 15, 1987, tsn, pp.
dismiss the complaint against defendant Uy Tiam 3-8, 13-16). (Records, pp. 333-334). 3
on the ground that it has no information as to the
heirs or legal representatives of the latter who xxx xxx xxx
died sometime in December, 1986, which motion
was granted on the following day (Ibid., pp. In its Decision, the trial court decreed as follows:
180-182).
PREMISES CONSIDERED, judgment is hereby
After trial, . . . the court a quo, on December 2, rendered:
198, rendered its judgment, a portion of which
reads: a) dismissing the COMPLAINT against JACINTO UY
DIÑO and NORBERTO UY;
The evidence and the pleadings, thus, pose the
querry (sic): b) ordering the plaintiff to pay to Diño and Uy the
amount of P6,000.00 as attorney's fees and
Are the defendants Jacinto Uy Diñoand Norberto expenses of litigation; and
Uy liable for the obligation contracted by Uy Tiam
under the Letter of Credit (Exh. B) issued on c) denying all other claims of the parties for want
March 30, 1987 by virtue of the Continuing of legal and/or factual basis.
Suretyships they executed on February 25, 1977?
SO ORDERED. (Records, p. 336) 4

Under the admitted proven facts, the Court finds

that they are not. From the said Decision, the private respondent
appealed to the Court of Appeals. The case was
a) When Uy and Diño executed the continuing docketed as CA-G.R. CV No. 17724. In support
suretyships, exhibits E and F, on February 25, thereof, it made the following assignment of
1977, Uy Tiam was obligated to the plaintiff in the errors in its Brief:
amount of P700,000.00 — and this was the
obligation which both obligation which both I. THE LOWER COURT SERIOUSLY ERRED IN NOT
defendants guaranteed to pay. Uy Tiam paid this FINDING AND HOLDING THAT
1977 obligation –– and such payment DEFENDANTS-APPELLEES JACINTO UY DIÑO AND

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 57

NORBERTO UY ARE SOLIDARILY LIABLE TO application for a letter of credit in 1979, the public
PLAINTIFF-APPELLANT FOR THE OBLIGATION OF respondent nonetheless seriously erred in holding
DEFENDANT UY TIAM UNDER THE LETTER OF them liable for an amount over and above their
CREDIT ISSUED ON MARCH 30, 1979 BY VIRTUE respective face values.
OF THE CONTINUING SURETYSHIPS THEY
EXECUTED ON FEBRUARY 25, 1977. In its Resolution of 21 August 1989, public
respondent denied the motion:
II. THE LOWER COURT ERRED IN HOLDING THAT
PLAINTIFF-APPELLANT IS ANSWERABLE TO . . . considering that the issues raised were
DEFENDANTS-APPELLEES JACINTO UY DIÑO AND substantially the same grounds utilized by the
NORBERTO UY FOR ATTORNEY'S FEES AND lower court in rendering judgment for
EXPENSES OF LITIGATION. 5 defendants-appellees which We upon appeal
found and resolved to be untenable, thereby
On 22 June 1989, public respondent promulgated reversing and setting aside said judgment and
the assailed Decision the dispositive portion of rendering another in favor of plaintiff, and no new
which reads: or fresh issues have been posited to justify
reversal of Our decision herein, . . . . 7
WHEREFORE, premises considered, the judgment
appealed from is hereby REVERSED AND SET, Hence, the instant petition which hinges on the
ASIDE. In lieu thereof, another one is rendered: issue of whether or not the petitioners may be
held liable as sureties for the obligation contracted
1) Ordering sureties-appellees Jacinto Uy Diño by Uy Tiam with METROBANK on 30 May 1979
and Norberto Uy to pay, jointly and severally, to under and by virtue of the Continuing Suretyship
appellant METROBANK the amount of Agreements signed on 25 February 1977.
P2,397,883.68 which represents the amount due
as of July 17, 1987 inclusive of principal, interest Petitioners vehemently deny such liability on the
and charges; ground that the Continuing Suretyship
Agreements were automatically extinguished
2) Ordering sureties-appellees Jacinto Uy Diño upon payment of the principal obligation secured
and Norberto Uy to pay, jointly and severally, thereby, i.e., the letter of credit obtained by Uy
appellant METROBANK the accruing interest, fees Tiam in 1977. They further claim that they were
and charges thereon from July 18, 1987 until the not advised by either METROBANK or Uy Tiam that
whole monetary obligation is paid; and the Continuing Suretyship Agreements would
stand as security for the 1979 obligation.
3) Ordering sureties-appellees Jacinto Uy Diño Moreover, it is posited that to extend the
and Norberto Uy to pay, jointly and severally, to application of such agreements to the 1979
plaintiff P20,000.00 as attorney's fees. obligation would amount to a violation of Article
2052 of the Civil Code which expressly provides
With costs against appellees. that a guaranty cannot exist without a valid
obligation. Petitioners further argue that even
SO ORDERED. 6
granting, for the sake of argument, that the
Continuing Suretyship Agreements still subsisted
In ruling for the herein private respondent and thereby also secured the 1979 obligations
(hereinafter METROBANK), public respondent held incurred by Uy Tiam, they cannot be held liable for
that the Continuing Suretyship Agreements more than what they guaranteed to pay because it
separately executed by the petitioners in 1977 s axiomatic that the obligations of a surety cannot
were intended to guarantee payment of Uy Tiam's extend beyond what is stipulated in the
outstanding as well as future obligations; each agreement.
suretyship arrangement was intended to remain in
full force and effect until METROBANK would have On 12 February 1990, this Court resolved to give
been notified of its revocation. Since no such due course to the petition after considering the
notice was given by the petitioners, the allegations, issues and arguments adduced
suretyships are deemed outstanding and hence, therein, the Comment thereon by the private
cover even the 1979 letter of credit issued by respondent and the Reply thereto by the
METROBANK in favor of Uy Tiam. petitioners; the parties were required to submit
their respective Memoranda.
Petitioners filed a motion to reconsider the
foregoing Decision. They questioned the public The issues presented for determination are quite
respondent's construction of the suretyship simple:
agreements and its ruling with respect to the
extent of their liability thereunder. They argued 1. Whether petitioners are liable as sureties for
the even if the agreements were in full force and the 1979 obligations of Uy Tiam to METROBANK by
effect when METROBANK granted Uy Tiam's

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 58

virtue of the Continuing Suretyship Agreements instruments or evidences of indebtedness (all
they separately signed in 1977; and hereinafter called "instruments") upon which the
Borrower is or may become liable as maker,
2. On the assumption that they are, what is the endorser, acceptor, or otherwise, the SURETY
extent of their liabilities for said 1979 obligations. agrees to guarantee, and does hereby guarantee,
the punctual payment at maturity to the loans,
Under the Civil Code, a guaranty may be given to advances credits and/or other obligations
secure even future debts, the amount of which hereinbefore referred to, and also any and all
may not known at the time the guaranty is other indebtedness of every kind which is now or
executed. 8 This is the basis for contracts may hereafter become due or owing to the BANK
denominated as continuing guaranty or suretyship. by the Borrower, together with any and all
A continuing guaranty is one which is not limited expenses which may be incurred by the BANK in
to a single transaction, but which contemplates a collecting all or any such instruments or other
future course of dealing, covering a series of indebtedness or obligations herein before referred
transactions, generally for an indefinite time or to, and/or in enforcing any rights hereunder, and
until revoked. It is prospective in its operation and the SURETY also agrees that the BANK may make
is generally intended to provide security with or cause any and all such payments to be made
respect to future transactions within certain limits, strictly in accordance with the terms and
and contemplates a succession of liabilities, for provisions of any agreement(s) express or implied,
which, as they accrue, the guarantor becomes which has (have) been or may hereafter be made
liable.9 Otherwise stated, a continuing guaranty is or entered into by the Borrow in reference thereto,
one which covers all transactions, including those regardless of any law, regulation or decree, unless
arising in the future, which are within the the same is mandatory and non-waivable in
description or contemplation of the contract, of character, nor or hereafter in effect, which might
guaranty, until the expiration or termination in any manner affect any of the terms or
thereof. 10 A guaranty shall be construed as provisions of any such agreement(s) or the Bank's
continuing when by the terms thereof it is evident rights with respect thereto as against the
that the object is to give a standing credit to the Borrower, or cause or permit to be invoked any
principal debtor to be used from time to time alteration in the time, amount or manner of
either indefinitely or until a certain period, payment by the Borrower of any such instruments,
especially if the right to recall the guaranty is obligations or indebtedness; provided, however,
expressly reserved. Hence, where the contract of that the liability of the SURETY hereunder shall not
guaranty states that the same is to secure exceed at any one time the aggregate principal
advances to be made "from time to time" the sum of PESOS: THREE HUNDRED THOUSAND
guaranty will be construed to be a continuing ONLY (P300,000.00) (irrespective of the
one. 11 currenc(ies) in which the obligations hereby
guaranteed are payable), and such interest as
In other jurisdictions, it has been held that the use may accrue thereon either before or after any
of particular words and expressions such as maturity(ies) thereof and such expenses as may
payment of "any debt,""any indebtedness,""any be incurred by the BANK as referred to above. 13
deficiency," or "any sum," or the guaranty of "any
transaction" or money to be furnished the Paragraph I of the Continuing Suretyship
principal debtor "at any time," or "on such time" Agreement executed by petitioner Diño contains
that the principal debtor may require, have been identical provisions except with respect to the
construed to indicate a continuing guaranty. 12 guaranteed aggregate principal amount which is
EIGHT THOUSAND PESOS (P800,000.00). 14
In the case at bar, the pertinent portion of
paragraph I of the suretyship agreement executed Paragraph IV of both agreements stipulate that:
by petitioner Uy provides thus:
VI. This is a continuing guaranty and shall remain
I. For and in consideration of any existing in full force and effect until written notice shall
indebtedness to the BANK of UY TIAM (hereinafter have been received by the BANK that it has been
called the "Borrower"), for the payment of which revoked by the SURETY, but any such notice shall
the SURETY is now obligated to the BANK, either not release the SURETY, from any liability as to
as guarantor or otherwise, and/or in order to any instruments, loans, advances or other
induce the BANK, in its discretion, at any time or obligations hereby guaranteed, which may be held
from time to time hereafter, to make loans or by the BANK, or in which the BANK may have any
advances or to extend credit in any other manner interest at the time of the receipt (sic) of such
to, or at the request, or for the account of the notice. No act or omission of any kind on the
Borrower, either with or without security, and/or BANK'S part in the premises shall in any event
to purchase or discount, or to make any loans or affect or impair this guaranty, nor shall same (sic)
advances evidence or secured by any notes, bills, be affected by any change which may arise by
receivables, drafts, acceptances, checks, or other reason of the death of the SURETY, or of any

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 59

partner(s) of the SURETY, or of the Borrower, or of As to the amount of their liability under the
the accession to any such partnership of any one Continuing Suretyship Agreements, petitioners
or more new partners. 15 contend that the public respondent gravely erred
in finding them liable for more than the amount
The foregoing stipulations unequivocally reveal specified in their respective agreements, to wit: (a)
that the suretyship agreement in the case at bar P800,000.00 for petitioner Diño and (b)
are continuing in nature. Petitioners do not deny P300,000.00 for petitioner Uy.
this; in fact, they candidly admitted it. Neither
have they denied the fact that they had not The limit of the petitioners respective liabilities
revoked the suretyship agreements. Accordingly, must be determined from the suretyship
as correctly held by the public respondent: agreement each had signed. It is undoubtedly true
that the law looks upon the contract of suretyship
Undoubtedly, the purpose of the execution of the with a jealous eye, and the rule is settled that the
Continuing Suretyships was to induce appellant to obligation of the surety cannot be extended by
grant any application for credit accommodation implication beyond its specified limits. To the
(letter of credit/trust receipt) UTEFS may desire to extent, and in the manner, and under the
obtain from appellant bank. By its terms, each circumstances pointed out in his obligation, he is
suretyship is a continuing one which shall remain bound, and no farther. 17
in full force and effect until the bank is notified of
its revocation. Indeed, the Continuing Suretyship Agreements
signed by petitioner Diño and petitioner Uy fix the
xxx xxx xxx aggregate amount of their liability, at any given
time, at P800,000.00 and P300,000.00,
When the Irrevocable Letter of Credit No. respectively. The law is clear that a guarantor may
SN-Loc-309 was obtained from appellant bank, for bond himself for less, but not for more than the
the purpose of obtaining goods (covered by a trust principal debtor, both as regards the amount and
receipt) from Planters Products, the continuing the onerous nature of the conditions. 18 In the
suretyships were in full force and effect. Hence, case at bar, both agreements provide for liability
even if sureties-appellees did not sign the for interest and expenses, to wit:
"Commercial Letter of Credit and Application, they
are still liable as the credit accommodation (letter . . . and such interest as may accrue thereon
of credit/trust receipt) was covered by the said either before or after any maturity(ies) thereof
suretyships. What makes them liable thereunder and such expenses as may be incurred by the
is the condition which provides that the Borrower BANK referred to above.19
"is or may become liable as maker, endorser,
acceptor or otherwise." And since UTEFS which They further provide that:
(sic) was liable as principal obligor for having
failed to fulfill the obligatory stipulations in the In the event of judicial proceedings being
trust receipt, they as insurers of its obligation, are instituted by the BANK against the SURETY to
liable thereunder. 16 enforce any of the terms and conditions of this
undertaking, the SURETY further agrees to pay
Petitioners maintain, however, that their the BANK a reasonable compensation for and as
Continuing Suretyship Agreements cannot be attorney's fees and costs of collection, which shall
made applicable to the 1979 obligation because not in any event be less than ten per cent (10%) of
the latter was not yet in existence when the the amount due (the same to be due and payable
agreements were executed in 1977; under Article irrespective of whether the case is settled
2052 of the Civil Code, a guaranty "cannot exist judicially or extrajudicially). 20
without a valid obligation." We cannot agree. First
of all, the succeeding article provides that "[a] Thus, by express mandate of the Continuing
guaranty may also be given as security for future Suretyship Agreements which they had signed,
debts, the amount of which is not yet known." petitioners separately bound themselves to pay
Secondly, Article 2052 speaks about a valid interest, expenses, attorney's fees and costs. The
obligation, as distinguished from a void obligation, last two items are pegged at not less than ten
and not an existing or current obligation. This percent (10%) of the amount due.
distinction is made clearer in the second
paragraph of Article 2052 which reads: Even without such stipulations, the petitioners
would, nevertheless, be liable for the interest and
Nevertheless, a guaranty may be constituted to judicial costs. Article 2055 of the Civil Code
guarantee the performance of a voidable or an provides: 21
unenforceable contract. It may also guarantee a
natural obligation. Art. 2055. A guaranty is not presumed; it must be
express and cannot extend to more than what is
stipulated therein.

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 60

If it be simple or indefinite, it shall comprise not However the New Civil Code permits recovery of
only the principal obligation, but also all its attorney's fees in eleven cases enumerated in
accessories, including the judicial costs, provided Article 2208, among them, "where the court
with respect to the latter, that the guarantor shall deems it just and equitable that attorney's (sic)
only be liable for those costs incurred after he has fees and expenses of litigation should be
been judicially required to pay. recovered" or "when the defendant acted in gross
and evident bad faith in refusing to satisfy the
Interest and damages are included in the plaintiff's plainly valid, just and demandable
term accessories. However, such interest should claim." This gives the courts discretion in
run only from the date when the complaint was apportioning attorney's fees.
filed in court. Even attorney's fees may be
imposed whenever appropriate, pursuant to The records do not reveal the exact amount of the
Article 2208 of the Civil Code. Thus, in Plaridel unpaid portion of the principal obligation of Uy
Surety & Insurance Co., Inc. vs. P.L. Galang Tiam to MERTOBANK under Irrevocable Letter of
Machinery Co., Inc., 22 this Court held: Credit No. SN-Loc-309 dated 30 March 1979. In
referring to the last demand letter to Mr. Uy Tiam
Petitioner objects to the payment of interest and and the complaint filed in Civil Case No. 82-9303,
attorney's fees because: (1) they were not the public respondent mentions the amount of
mentioned in the bond; and (2) the surety would "P613,339.32, as of January 31, 1982, inclusive of
become liable for more than the amount stated in interest commission penalty and bank
the contract of suretyship. charges." 23
This is the same amount stated by
METROBANK in its Memorandum. 24 However, in
xxx xxx xxx summarizing Uy Tiam's outstanding obligation as
of 17 July 1987, public respondent states:
The objection has to be overruled, because as far
back as the year 1922 this Court held in Tagawa vs. Hence, they are jointly and severally liable to
Aldanese, 43 Phil. 852, that creditors suing on a appellant METROBANK of UTEFS' outstanding
suretyship bond may recover from the surety as obligation in the sum of P2,397,883.68 (as of July
part of their damages, interest at the legal rate 17, 1987) — P651,092.82 representing the
even if the surety would thereby become liable to principal amount, P825,133.54, for past due
pay more than the total amount stipulated in the interest (5-31-82 to 7-17-87) and P921,657.32,
bond. The theory is that interest is allowed only by for penalty charges at 12% per annum (5-31-82
way of damages for delay upon the part of the to 7-17-87) as shown in the Statement of Account
sureties in making payment after they should (Exhibit I). 25
have done so. In some states, the interest has
been charged from the date of the interest has Since the complaint was filed on 18 May 1982, it is
been charged from the date of the judgment of the obvious that on that date, the outstanding
appellate court. In this jurisdiction, we rather principal obligation of Uy Tiam, secured by the
prefer to follow the general practice, which is to petitioners' Continuing Suretyship Agreements,
order that interest begin to run from the date was less than P613,339.32. Such amount may be
when the complaint was filed in court, . . . fully covered by the Continuing Suretyship
Agreement executed by petitioner Diño which
Such theory aligned with sec. 510 of the Code of stipulates an aggregate principal sum of not
Civil Procedure which was subsequently exceeding P800,000.00, and partly covered by
recognized in the Rules of Court (Rule 53, section that of petitioner Uy which pegs his maximum
6) and with Article 1108 of the Civil Code (now Art. liability at P300,000.00.
2209 of the New Civil Code).
Consequently, the judgment of the public
In other words the surety is made to pay interest, respondent shall have to be modified to conform
not by reason of the contract, but by reason of its to the foregoing exposition, to which extent the
failure to pay when demanded and for having instant petition is impressed with partial merit.
compelled the plaintiff to resort to the courts to
obtain payment. It should be observed that WHEREFORE, the petition is partly GRANTED, but
interest does not run from the time the obligation only insofar as the challenged decision has to be
became due, but from the filing of the complaint. modified with respect to the extend of petitioners'
liability. As modified, petitioners JACINTO UY
As to attorney's fees. Before the enactment of the DIÑO and NORBERTO UY are hereby declared
New Civil Code, successful litigants could not liable for and are ordered to pay, up to the
recover attorney's fees as part of the damages maximum limit only of their respective Continuing
they suffered by reason of the litigation. Even if Suretyship Agreement, the remaining unpaid
the party paid thousands of pesos to his lawyers, balance of the principal obligation of UY TIAM or
he could not charge the amount to his opponent UY TIAM ENTERPRISES & FREIGHT SERVICES
(Tan Ti vs. Alvear, 26 Phil. 566). under Irrevocable Letter of Credit No. SN-Loc-309,

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 61

dated 30 March 1979, together with the interest On January 2, 1996, respondents paid One Million
due thereon at the legal rate commencing from Eleven Thousand Five Hundred Fifty-Five Pesos
the date of the filing of the complaint in Civil Case and 54 centavos (₱1,011,555.54), as evidenced
No. 82-9303 with Branch 45 of the Regional Trial by Official Receipt No. 1477417 issued by
Court of Manila, as well as the adjudged attorney's petitioner bank. On the face of the receipt, it was
fees and costs. written that the payment was "in full payment of
the loan and interest." Respondents then asked
All other dispositions in the dispositive portion of petitioner bank to cancel the mortgage
the challenged decision not inconsistent with the annotations on CCT No. 2130 since the loans
above are affirmed. secured by the real estate mortgage were already
paid in full. However, the bank refused to cancel
SO ORDERED. the same and demanded payment of Four Million
Six Hundred Thirty-Three Thousand Nine Hundred
Sixteen Pesos and Sixty-Seven Centavos (₱
4,633,916.67), representing the outstanding
SECOND DIVISION obligation of respondents as of February 27, 1998.
Respondents requested for an accounting which
G.R. No. 174006 December 8, would explain how the said amount was arrived at.
2010 However, instead of heeding respondents’ request,
petitioner bank applied for extra-judicial
BANK OF COMMERCE and STEPHEN Z. foreclosure of the mortgages over the
TAALA, Petitioners, condominium unit. The public auction sale was
vs. scheduled on September 4, 1998. Petitioner
Spouses ANDRES and ELIZA Stephen Z. Taala, a notary public, was tasked to
FLORES, Respondents. preside over the auction sale.8

DECISION Respondents filed suit with the RTC, Quezon City,

assailing the validity of the foreclosure and
NACHURA, J.: auction sale of the property. They averred that the
loans secured by the property had already been
Before the Court is a petition for review on paid in full. Furthermore, they claimed that the
certiorari under Rule 45 of the Rules of Court, Notice of Auction Sale by Notary Public9 failed to
assailing the Decision1 dated February 28, 2006 comply with the provisions of Act No. 3135, as
and the Resolution2 dated August 9, 2006 of the amended by Act No. 4118, requiring the
Court of Appeals (CA) in CA-G.R. CV No. 80362. publication and posting of the notice of auction
sale in at least three (3) public places in Quezon
The facts of the case are as follows: City.10 Respondents likewise prayed for the
payment of moral and exemplary damages, and
Respondents filed a case for specific performance attorney’s fees, and for the issuance of a
against petitioners before the Regional Trial Court temporary restraining order and/or writ of
(RTC) of Quezon City, docketed as Civil Case No. preliminary injunction to enjoin the extra-judicial
Q-98-35425. Respondents are the registered foreclosure sale of the property.11
owners of a condominium unit in Embassy Garden
Homes, West Triangle, Quezon City, registered On October 23, 1998, the RTC granted
under Condominium Certificate of Title (CCT) No. respondents’ prayer for issuance of a writ of
2130,3 issued by the Register of Deeds of Quezon preliminary injunction, restraining petitioner bank
City.4 from foreclosing on the mortgage.12

On October 22, 1993, respondents borrowed Petitioner bank admitted that there were only two
money from petitioner bank in the amount of Nine (2) mortgage loans annotated at the back of CCT
Hundred Thousand Pesos (₱900,000.00). No. 2130, but denied that respondents had
Respondents executed a Real Estate already fully settled their outstanding obligations
Mortgage over the condominium unit as collateral,
5
with the bank.13 It averred that several credit lines
and the same was annotated at the back of CCT were granted to respondent Andres Flores by
No. 2130. petitioner bank that were secured by promissory
notes executed by him, and which were either
On October 3, 1995, respondents again borrowed increased or extended from time to time. The loan
One Million One Hundred Thousand Pesos that was paid on January 2, 1996, in the amount
(₱1,100,000.00) from petitioner bank, which was of ₱1,011,555.54, was only one of his loans with
also secured by a mortgage over the same the bank. There were remaining loans already due
property annotated at the back of CCT No. 2130.6 and demandable, and had not been paid by
respondents despite repeated demands by
petitioner bank. The remaining loans, although

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 62

not availed of at the same time, were similarly Meanwhile, on March 25, 2004, the auction sale of
secured by the subject real estate mortgage as the subject property was conducted, and
provided in the continuing guaranty agreement petitioner bank was awarded the property, as the
therein.14 highest bidder.

Petitioner bank alleged that respondents On February 28, 2006, the CA rendered a
requested and were granted an increase in their Decision19 reversing the decision and the
Bills Discounted Line from Nine Hundred Thousand resolution of the RTC. The dispositive portion of
Pesos (₱900,000.00) to Two Million Pesos the CA Decision reads:
(₱2,000,000.00), which was secured by the same
real estate mortgage on CCT No. 2130. However, IN VIEW OF ALL THE FOREGOING, the instant
the subject condominium unit commanded only a appeal is GRANTED; the challenged Decision
market value of One Million Seven Hundred dated December 4, 2002, is REVERSED and SET
Twenty-Three Thousand Six Hundred Pesos ASIDE; and a new one entered:
(₱1,723,600.00), and a loan value of Nine
Hundred Fifty-Nine Thousand Six Hundred Sixteen (a) ordering the cancellation of the real estate
Pesos (₱959,616.00). Since the market value of mortgage annotations on the dorsal side of CCT
the condominium unit was lower than the No. 2130 of the Registry of Deeds of Quezon City;
combined loans, the parties agreed to fix the
amount of the real estate mortgage at (b) ordering appellee Bank to issue a
₱1,100,000.00. Moreover, petitioner bank corresponding release of mortgages to
stressed that under the terms of the two real plaintiffs-appellants’ CCT No. 2130;
estate mortgages, future loans of respondents
were also covered.151avvphi1 (c) declaring null and void the challenged
extra-judicial foreclosure and public auction sale
On December 4, 2002, the RTC rendered a held on March 25, 2004 together with the
resolution,16 the fallo of which reads: Certificate of Sale dated April 14, 2004 issued in
favor of appellee Bank; and,
FROM THE FOREGOING MILIEU, the present case
for specific performance with damages and (d) appellees’ counterclaims are ordered
injunction filed by plaintiffs, Sps. Andres and Eliza dismissed, for lack of sufficient basis therefor.
Flores against defendants, Bank of Commerce and
Stephen Z. Taala, is hereby DISMISSED. Likewise, No costs.
the counterclaim filed by defendants, Bank of
Commerce and Stephen Z. Taala against plaintiffs, SO ORDERED.20
Sps. Andres and Eliza Flores is DISMISSED for
insufficiency of evidence. The CA ratiocinated that the principal obligation or
loan was already extinguished by the full payment
SO ORDERED.17 thereof. Consequently, the real estate mortgages
securing the principal obligation were also
In denying respondents’ complaint for specific extinguished. A real estate mortgage, being an
performance, the RTC ratiocinated that accessory contract, cannot survive without the
respondents’ right of action hinged mainly on the principal obligation it secures. The CA also noted
veracity of their claim that they faithfully complied that the two mortgages were individually
with their loan obligations and had fully paid them annotated at the back of CCT No. 2130. Thus, the
in January 1996. The RTC stated that the evidence CA opined that the individual annotations clearly
submitted by petitioner bank, specifically the indicated that the said mortgages were not meant
promissory notes and statement of account dated to serve as a continuing guaranty for any future
February 27, 1998, negated this contention. The loan that respondents would obtain from
RTC declared that respondents incurred other petitioner bank.
debts from petitioner bank, which must be paid
first before they could be absolved of liability, and, Petitioners filed a motion for reconsideration. On
consequently, demand the release of the August 9, 2006, the CA issued a
mortgage. The RTC also struck down respondents’ Resolution21 denying the same.
assertion that petitioner bank did not comply with
the posting and publication requirements under Hence, the instant petition.
Act No. 3135, as amended.
The sole issue for resolution is whether the real
Respondents filed a motion for reconsideration, estate mortgage over the subject condominium
which was, however, denied by the RTC in a unit is a continuing guaranty for the future loans of
decision18 dated August 8, 2003. respondent spouses despite the full payment of
the principal loans annotated on the title of the
Aggrieved, respondents appealed to the CA. subject property.

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 63

We resolve this issue in the affirmative. constructed thereon, including all
other rights or benefits annexed to
The contested portion of the Deed of Real Estate or inherent therein now existing or
Mortgage dated October 22, 1993 for the principal which may hereafter exist, situated
obligation of ₱900,000.00 and of the second one in Embassy Garden Homes, Quezon
dated October 3, 1995 for the sum of City, Philippines, and more
₱1,100,000.00, uniformly read: particularly described in
Original/Transfer Certificate(s) of
WITNESSETH: That Title No. CCT No. 2130 of the
Registry of Deeds [of] Quezon City,
for and in consideration of the as follows:
credit accommodations granted by
the MORTGAGEE [Bank of CCT No. 2130
Commerce] to the MORTGAGOR
[Andres Flores] and/or Unit No. L-2, located on Building L,
_____________________ hereby consisting of Ninety Five point
initially fixed at Twenty (95.20) Square Meters,
___________________________ more of less, with Parking Space No.
__PESOS: (P____________), L-2.22
Philippine Currency, and as security
for the payment of the same, on It is petitioner bank’s contention that the said
demand or at maturity as the case undertaking, stipulated in the Deed of Real Estate
may be, be the interest accruing Mortgage dated October 22, 1993 and October 3,
thereon, the cost of collecting the 1995, is a continuing guaranty meant to secure
same, the cost of keeping the future debts or credit accommodations granted by
mortgaged property(ies), of all petitioner bank in favor of respondents. On the
amounts now owed or hereafter other hand, respondents posit that, since they
owing by the MORTGAGOR to the have already paid the loans secured by the real
MORTGAGEE under this or separate estate mortgages, the mortgage should not be
instruments and agreements, or in foreclosed because it does not include future debts
respect of any bill, note, check, of the spouses or debts not annotated at the back
draft accepted, paid or discounted, of CCT No. 2130.
or advances made and all other
obligations to every kind already A continuing guaranty is a recognized exception to
incurred or which may hereafter be the rule that an action to foreclose a mortgage
incurred, for the use or must be limited to the amount mentioned in the
accommodation of the mortgage contract.23 Under Article 2053 of the
MORTGAGOR, as well as the faithful Civil Code, a guaranty may be given to secure
performance of the terms and even future debts, the amount of which may not
conditions of this mortgage and of be known at the time the guaranty is executed.
the separate instruments and/or This is the basis for contracts denominated as a
documents under which credits continuing guaranty or suretyship. A continuing
have been or may hereafter be guaranty is not limited to a single transaction, but
advanced by the MORTGAGEE to contemplates a future course of dealing, covering
the MORTGAGOR, including their a series of transactions, generally for an indefinite
renewals, extensions and time or until revoked. It is prospective in its
substitutions, any and all of which operation and is generally intended to provide
separate instruments and/or security with respect to future transactions within
documents and their renewals, certain limits, and contemplates a succession of
extensions and substitutions are liabilities, for which, as they accrue, the guarantor
hereunto incorporated and made becomes liable. In other words, a continuing
integral parts hereof, the guaranty is one that covers all transactions,
MORTGAGOR [Andres Flores] has including those arising in the future, which are
transferred and conveyed, as by within the description or contemplation of the
these presents it/he does hereby contract of guaranty, until the expiration or
transfer and convey, by way of First termination thereof.24
Mortgage, to the MORTGAGEE
[Bank of Commerce], its successors A guaranty shall be construed as continuing when,
and assigns, all its/ his rights, title by the terms thereof, it is evident that the object is
and interest to that parcel(s) of to give a standing credit to the principal debtor to
land, together with all the buildings be used from time to time either indefinitely or
and improvements now existing or until a certain period, especially if the right to
which may hereafter be erected or recall the guaranty is expressly reserved. In other

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 64

jurisdictions, it has been held that the use of This is a petition for review on certiorari of the
particular words and expressions, such as decision1 of the Court of Appeals in C.A.-G.R. CV
payment of "any debt,""any indebtedness,""any No. 19094, affirming the decision of the Regional
deficiency," or "any sum," or the guaranty of "any Trial Court of the National Capital Judicial Region,
transaction" or money to be furnished the Branch XLV, Manila, which ordered petitioner
principal debtor "at any time" or "on such time" Willex Plastic Industries Corporation and the
that the principal debtor may require, has been Inter-Resin Industrial Corporation, jointly and
construed to indicate a continuing guaranty.25 severally, to pay private respondent International
Corporate Bank certain sums of money, and the
In the instant case, the language of the real estate appellate court's resolution of October 17, 1989
mortgage unambiguously reveals that the security denying petitioner's motion for reconsideration.
provided in the real estate mortgage is continuing
in nature. Thus, it was intended as security for the The facts are as follows:
payment of the loans annotated at the back of CCT
No. 2130, and as security for all amounts that Sometime in 1978, Inter-Resin Industrial
respondents may owe petitioner bank. It is well Corporation opened a letter of credit with the
settled that mortgages given to secure future Manila Banking Corporation. To secure payment of
advance or loans are valid and legal contracts, and the credit accomodation, Inter-Resin Industrial
that the amounts named as consideration in said and the Investment and Underwriting Corporation
contracts do not limit the amount for which the of the Philippines (IUCP) executed two documents,
mortgage may stand as security if from the four both entitled "Continuing Surety Agreement" and
corners of the instrument the intent to secure dated December 1, 1978, whereby they bound
future and other indebtedness can be gathered.26 themselves solidarily to pay Manilabank
"obligations of every kind, on which the
A mortgage given to secure advancements is a [Inter-Resin Industrial] may now be indebted or
continuing security and is not discharged by hereafter become indebted to the [Manilabank]."
repayment of the amount named in the mortgage The two agreements (Exhs. J and K) are the same
until the full amounts of the advancements are in all respects, except as to the limit of liability of
paid.27 Respondents’ full payment of the loans the surety, the first surety agreement being
annotated on the title of the property shall not limited to US$333,830.00, while the second one is
effect the release of the mortgage because, by the limited to US$334,087.00.
express terms of the mortgage, it was meant to
secure all future debts of the spouses and such On April 2, 1979, Inter-Resin Industrial, together
debts had been obtained and remain unpaid. with Willex Plastic Industries Corp., executed a
Unless full payment is made by the spouses of all "Continuing Guaranty" in favor of IUCP whereby
the amounts that they have incurred from "For and in consideration of the sum or sums
petitioner bank, the property is burdened by the obtained and/or to be obtained by Inter-Resin
mortgage. Industrial Corporation" from IUCP, Inter-Resin
Industrial and Willex Plastic jointly and severally
WHEREFORE, in view of the foregoing, the guaranteed "the prompt and punctual payment at
Decision dated February 28, 2006 and the maturity of the NOTE/S issued by the
Resolution dated August 9, 2006 of the Court of DEBTOR/S . . . to the extent of the aggregate
Appeals in CA-G.R. CV No. 80362 are hereby principal sum of FIVE MILLION PESOS
REVERSED and SET ASIDE. The decision of the (P5,000,000.00) Philippine Currency and such
Regional Trial Court dated December 4, 2002 is interests, charges and penalties as hereafter may
hereby REINSTATED. be specified."

SO ORDERED. On January 7, 1981, following demand upon it,

IUCP paid to Manilabank the sum of
P4,334,280.61 representing Inter-Resin
Industrial's outstanding obligation. (Exh. M-1) On
SECOND DIVISION February 23 and 24, 1981, Atrium Capital Corp.,
which in the meantime had succeeded IUCP,
G.R. No. 103066 April 25, 1996 demanded from Inter-Resin Industrial and Willex
Plastic the payment of what it (IUCP) had paid to
WILLEX PLASTIC INDUSTRIES, Manilabank. As neither one of the sureties paid,
CORPORATION, petitioner, Atrium filed this case in the court below against
vs. Inter-Resin Industrial and Willex Plastic.
HON. COURT OF APPEALS and
INTERNATIONAL CORPORATE On August 11, 1982, Inter-Resin Industrial paid
BANK, respondents. Interbank, which had in turn succeeded Atrium,
the sum of P687,600.00 representing the
MENDOZA, J.:p

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 65

proceeds of its fire insurance policy for the (b) Liquidated damages equivalent to 178 of the
destruction of its properties. amount due; and

In its answer, Inter-Resin Industrial admitted that (c) Attorney's fees and expenses of litigation
the "Continuing Guaranty" was intended to secure equivalent to 208 of the total amount due.
payment to Atrium of the amount of
P4,334,280.61 which the latter had paid to Inter-Resin Industrial and Willex Plastic appealed
Manilabank. It claimed, however, that it had to the Court of Appeals. Willex Plastic filed its brief,
already fully paid its obligation to Atrium Capital. while Inter-Resin Industrial presented a "Motion
to Conduct Hearing and to Receive Evidence to
On the other hand, Willex Plastic denied the Resolve Factual Issues and to Defer Filing of the
material allegations of the complaint and Appellant's Brief." After its motion was denied,
interposed the following Special Affirmative Inter-Resin Industrial did not file its brief
Defenses: anymore.

(a) Assuming arguendo that main defendant is On February 22, 1991, the Court of Appeals
indebted to plaintiff, the former's liability is rendered a decision affirming the ruling of the trial
extinguished due to the accidental fire that court.
destroyed its premises, which liability is covered
by sufficient insurance assigned to plaintiff; Willex Plastic filed a motion for reconsideration
praying that it be allowed to present evidence to
(b) Again, assuming arguendo, that the main show that Inter-Resin Industrial had already paid
defendant is indebted to plaintiff, its account is its obligation to Interbank, but its motion was
now very much lesser than those stated in the denied on December 6, 1991:
complaint because of some payments made by the
former; The motion is denied for lack of merit. We denied
defendant-appellant Inter-Resin Industrial's
(c) The complaint states no cause of action against motion for reception of evidence because the
WILLEX; situation or situations in which we could exercise
the power under BP 129 did not exist. Movant here
(d) WLLLEX is only a guarantor of the principal has not presented any argument which would
obliger, and thus, its liability is only secondary to show otherwise.
that of the principal;
Hence, this petition by Willex Plastic for the review
(e) Plaintiff failed to exhaust the ultimate remedy of the decision of February 22, 1991 and the
in pursuing its claim against the principal obliger; resolution of December 6, 1991 of the Court of
Appeals.
(f) Plaintiff has no personality to sue.
Petitioner raises a number of issues.
On April 29, 1986, Interbank was substituted as
plaintiff in the action. The case then proceeded to [1] The main issue raised is whether under the
trial. "Continuing Guaranty" signed on April 2, 1979
petitioner Willex Plastic may be held jointly and
On March 4, 1988, the trial court declared severally liable with Inter-Resin Industrial for the
Inter-Resin Industrial to have waived the right to amount paid by Interbank to Manilabank.
present evidence for its failure to appear at the
hearing despite due notice. On the other hand, As already stated, the amount had been paid by
Willex Plastic rested its case without presenting Interbank's predecessor-in-interest, Atrium
any evidence. Thereafter Interbank and Willex Capital, to Manilabank pursuant to the "Continuing
Plastic submitted their respective memoranda. Surety Agreements" made on December 1, 1978.
In denying liability to Interbank for the amount,
On April 5, 1988, the trial court rendered Willex Plastic argues that under the "Continuing
judgment, ordering Inter-Resin Industrial and Guaranty," its liability is for sums obtained by
Willex Plastic jointly and severally to pay to Inter-Resin Industrial from Interbank, not for
Interbank the following amounts: sums paid by the latter to Manilabank for the
account of Inter-Resin Industrial. In support of
(a) P3, 646,780.61, representing their this contention Willex Plastic cites the following
indebtedness to the plaintiff, with interest of portion of the "Continuing Guaranty":
17% per annum from August 11, 1982, when
Inter-Resin Industrial paid P687,500.00 to the For and in consideration of the sums obtained
plaintiff, until full payment of the said amount; and/or to be obtained by INTER-RESIN
INDUSTRIAL CORPORATION, hereinafter referred
to as the DEBTOR/S, from you and/or your

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 66

principal/s as may be evidenced by promissory Inter-Resin Industrial as debtor because, by
note/s, checks, bills receivable/s and/or other failing to object to the parol evidence presented,
evidence/s of indebtedness (hereinafter referred Willex Plastic waived the protection of the parol
to as the NOTE/S), I/We hereby jointly and evidence rule.5
severally and unconditionally guarantee unto you
and/or your principal/s, successor/s and assigns Accordingly, the trial court found that it was "to
the prompt and punctual payment at maturity of secure the guarantee made by plaintiff of the
the NOTE/S issued by the DEBTOR/S in your credit accommodation granted to defendant IRIC
and/or your principal/s, successor/s and assigns [Inter-Resin Industrial] by Manilabank, [that] the
favor to the extent of the aggregate principal sum plaintiff required defendant IRIC to execute a
of FIVE MILLION PESOS (P5,000,000.00), chattel mortgage in its favor and a Continuing
Philippine Currency, and such interests, charges Guaranty which was signed by the defendant
and penalties as may hereinafter be specified. Willex Plastic Industries Corporation."6

The contention is untenable. What Willex Plastic Similarly, the Court of Appeals found it to be an
has overlooked is the fact that evidence aliunde undisputed fact that "to secure the guarantee
was introduced in the trial court to explain that it undertaken by plaintiff-appellee [Interbank] of
was actually to secure payment to Interbank the credit accommodation granted to Inter-Resin
(formerly IUCP) of amounts paid by the latter to Industrial by Manilabank, plaintiff-appellee
Manilabank that the "Continuing Guaranty" was required defendant-appellants to sign a
executed. In its complaint below, Interbank's Continuing Guaranty." These factual findings of
predecessor-in-interest, Atrium Capital, alleged: the trial court and of the Court of Appeals are
binding on us not only because of the rule that on
5. to secure the guarantee made by plaintiff of the appeal to the Supreme Court such findings are
credit accommodation granted to defendant IRIC entitled to great weight and respect but also
[Inter-Resin Industrial] by Manilabank, the because our own examination of the record of the
plaintiff required defendant IRIC [Inter-Resin trial court confirms these findings of the two
Industrial] to execute a chattel mortgage in its courts.7
favor and a Continuing Guaranty which was signed
by the other defendant WPIC [Willex Plastic]. Nor does the record show any other transaction
under which Inter-Resin Industrial may have
In its answer, Inter-Resin Industrial admitted this obtained sums of money from Interbank. It can
allegation although it claimed that it had already reasonably be assumed that Inter-Resin Industrial
paid its obligation in its entirety. On the other and Willex Plastic intended to indemnify Interbank
hand, Willex Plastic, while denying the allegation for amounts which it may have paid Manilabank on
in question, merely did so "for lack of knowledge behalf of Inter-Resin Industrial.
or information of the same." But, at the hearing of
the case on September 16, 1986, when asked by Indeed, in its Petition for Review in this Court,
the trial judge whether Willex Plastic had not filed Willex Plastic admitted that it was "to secure the
a crossclaim against Inter-Resin Industrial, Willex aforesaid guarantee, that INTERBANK required
Plastic's counsel replied in the negative and principal debtor IRIC [Inter-Resin Industrial] to
manifested that "the plaintiff in this case execute a chattel mortgage in its favor, and so a
[Interbank] is the guarantor and my client [Willex "Continuing Guaranty" was executed on April 2,
Plastic] only signed as a guarantor to the 1979 by WILLEX PLASTIC INDUSTRIES
guarantee."2 CORPORATION (WILLEX for brevity) in favor of
INTERBANK for and in consideration of the loan
For its part Interbank adduced evidence to show obtained by IRIC [Inter-Resin Industrial]."
that the "Continuing Guaranty" had been made to
guarantee payment of amounts made by it to [2] Willex Plastic argues that the "Continuing
Manilabank and not of any sums given by it as loan Guaranty," being an accessory contract, cannot
to Inter-Resin Industrial. Interbank's witness legally exist because of the absence of a valid
testified under cross examination by counsel for principal obligation.8 Its contention is based on
Willex Plastic that Willex "guaranteed the the fact that it is not a party either to the
exposure/of whatever exposure of ACP [Atrium "Continuing Surety Agreement" or to the loan
Capital] will later be made because of the agreement between Manilabank and Interbank
guarantee to Manila Banking Corporation."3 Industrial.

It has been held that explanatory evidence may be Put in another way the consideration necessary to
received to show the circumstances under which a support a surety obligation need not pass directly
document has been made and to what debt it to the surety, a consideration moving to the
relates.4 At all events, Willex Plastic cannot now principal alone being sufficient. For a "guarantor
claim that its liability is limited to any amount or surety is bound by the same consideration that
which Interbank, as creditor, might give directly to makes the contract effective between the principal

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 67

parties thereto. It is never necessary that a however, was it meant in that case that in all
guarantor or surety should receive any part or instances a contrast of guaranty or suretyship
benefit, if such there be, accruing to his should be prospective in application.
principal."9 In an analogous case, 10 this Court
held: Indeed, as we also held in Bank of the Philippine
Islands v. Foerster, 13 although a contract of
At the time the loan of P100,000.00 was obtained suretyship is ordinarily not to be construed as
from petitioner by Daicor, for the purpose of retrospective, in the end the intention of the
having an additional capital for buying and selling parties as revealed by the evidence is controlling.
coco-shell charcoal and importation of activated What was said there 14 applies mutatis
carbon, the comprehensive surety agreement was mutandis to the case at bar:
admittedly in full force and effect. The loan was,
therefore, covered by the said agreement, and In our opinion, the appealed judgment is
private respondent, even if he did not sign the erroneous. It is very true that bonds or other
promissory note, is liable by virtue of the surety contracts of suretyship are ordinarily not to be
agreement. The only condition that would make construed as retrospective, but that rule must
him liable thereunder is that the Borrower "is or yield to the intention of the contracting parties as
may become liable as maker, endorser, acceptor revealed by the evidence, and does not interfere
or otherwise." There is no doubt that Daicor is with the use of the ordinary tests and canons of
liable on the promissory note evidencing the interpretation which apply in regard to other
indebtedness. contracts.

The surety agreement which was earlier signed by In the present case the circumstances so clearly
Enrique Go, Sr. and private respondent, is an indicate that the bond given by Echevarria was
accessory obligation, it being dependent upon a intended to cover all of the indebtedness of the
principal one which, in this case is the loan Arrocera upon its current account with the plaintiff
obtained by Daicor as evidenced by a promissory Bank that we cannot possibly adopt the view of the
note. court below in regard to the effect of the bond.

[3] Willex Plastic contends that the "Continuing [4] Willex Plastic says that in any event it cannot
Guaranty" cannot be retroactivelt applied so as to be proceeded against without first exhausting all
secure payments made by Interbank under the property of Inter-Resin Industrial. Willex Plastic
two "Continuing Surety Agreements." Willex thus claims the benefit of excussion. The Civil
Plastic invokes the ruling in El Vencedor Code provides, however:
v. Canlas 11 and Diño v. Court of Appeals 12 in
support of its contention that a contract of Art. 2059. This excussion shall not take place:
suretyship or guaranty should be applied
prospectively. (1) If the guarantor has expressly renounced it;

The cases cited are, however, distinguishable (2) If he has bound himself solidarily with the
from the present case. In El Vencedor debtor;
v. Canlas we held that a contract of suretyship "is
not retrospective and no liability attaches for The pertinent portion of the "Continuing
defaults occurring before it is entered into unless Guaranty" executed by Willex Plastic and
an intent to be so liable is indicated." There we Inter-Resin Industrial in favor of IUCP (now
found nothing in the contract to show that the Interbank) reads:
paries intended the surety bonds to answer for the
debts contracted previous to the execution of the If default be made in the payment of the NOTE/s
bonds. In contrast, in this case, the parties to the herein guaranteed you and/or your principal/s
"Continuing Guaranty" clearly provided that the may directly proceed against Me/Us without first
guaranty would cover "sums obtained and/or to proceeding against and exhausting DEBTOR/s
be obtained" by Inter-Resin Industrial from properties in the same manner as if all such
Interbank. liabilities constituted My/Our direct and primary
obligations. (emphasis supplied)
On the other hand, in Diño v. Court of Appeals the
issue was whether the sureties could be held liable This stipulation embodies an express renunciation
for an obligation contracted after the execution of of the right of excussion. In addition, Willex Plastic
the continuing surety agreement. It was held that bound itself solidarily liable with Inter-Resin
by its very nature a continuing suretyship Industrial under the same agreement:
contemplates a future course of dealing. "It is
prospective in its operation and For and in consideration of the sums obtained
is generally intended to provide security with and/or to be obtained by INTER-RESIN
respect to future transactions." By no means, INDUSTRIAL CORPORATION, hereinafter referred

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 68

to as the DEBTOR/S, from you and/or your by Inter-Resin Industrial, the reception of
principal/s as may be evidenced by promissory evidence for Inter-Resin Industrial was again
note/s, checks, bills receivable/s and/or other reset on November 17, 26 and December 11,
evidence/s of indebtedness (hereinafter referred 1987. However, Inter-Resin Industrial again
to as the NOTE/S), I/We hereby jointly and moved for the postponement of the hearing.
severally and unconditionally guarantee unto Accordingly the hearing was reset on November
you and/or your principal/s, successor/s and 26 and December 11, 1987, with warning that the
assigns the prompt and punctual payment at hearings were intransferrable.
maturity of the NOTE/S issued by the DEBTOR/S
in your and/or your principal/s, successor/s and Again, the reception of evidence for Inter-Resin
assigns favor to the extent of the aggregate Industrial was reset on January 22, 1988 and
principal sum of FIVE MILLION PESOS February 5, 1988 upon motion of its counsel. As
(P5,000,000.00), Philippine Currency, and such Inter-Resin Industrial still failed to present its
interests, charges and penalties as may evidence, it was declared to have waived its
hereinafter he specified. evidence.

[5] Finally it is contended that Inter-Resin To give Inter-Resin Industrial a last opportunity to
Industrial had already paid its indebtedness to present its evidence, however, the hearing was
Interbank and that Willex Plastic should have been postponed to March 4, 1988. Again Inter-Resin
allowed by the Court of Appeals to adduce Industrial's counsel did not appear. The trial court,
evidence to prove this. Suffice it to say that therefore, finally declared Inter-Resin Industrial to
Inter-Resin Industrial had been given generous have waived the right to present its evidence. On
opportunity to present its evidence but it failed to the other hand, Willex Plastic, as before,
make use of the same. On the otherhand, Willex manifested that it was not presenting evidence
Plastic rested its case without presenting and requested instead for time to file a
evidence. memorandum.

The reception of evidence of Inter-Resin Industrial There is therefore no basis for the plea made by
was set on January 29, 1987, but because of its Willex Plastic that it be given the opportunity of
failure to appear on that date, the hearing was showing that Inter-Resin Industrial has already
reset on March 12, 26 and April 2, 1987. paid its obligation to Interbank.

On March 12, 1987 Inter-Resin Industrial again WHEREFORE, the decision of the Court of Appeals
failed to appear. Upon motion of Willex Plastic, the is AFFIRMED, with costs against the petitioner.
hearings on March 12 and 26, 1987 were cancelled
and "reset for the last time" on April 2 and 30, SO ORDERED.
1987.

On April 2, 1987, Inter-Resin Industrial again

failed to appear. Accordingly the trial court issued EN BANC
the following order:
G.R. No. 4465 September 10, 1908
Considering that, as shown by the records, the
Court had exerted every earnest effort to cause MARCELA ALVARAN, plaintiff-appellee,
the service of notice or subpoena on the defendant vs.
Inter-Resin Industrial but to no avail, even with BERNARDO MARQUEZ, defendant-appellant.
the assistance of the defendant Willex the
defendant Inter-Resin Industrial is hereby F. Manalo for appellant.
deemed to have waived the right to present its B. G. Zoboli for appellee.
evidence.
TORRES, J.:
On the other hand, Willex Plastic announced it was
resting its case without presenting any evidence. On the 5th of March, 1906, Marcela Alvaran, the
wife of Isabelo Reyes, filed a written complaint
Upon motion of Inter-Resin Industrial, however, while the court of First Instance of La Laguna,
the trial court reconsidered its order and set the stating that her husband had no interest, nor
hearing anew on July 23, 1987. But Inter-Resin could he have any right in the matter that she
Industrial again moved for the postponement of brought before the court of the attachment of a
the hearing be postponed to August 11, 1987. The parcel of land that was exclusively and absolutely
hearing was, therefore, reset on September 8 and her property. The said land is situated in the barrio
22, 1987 but the hearings were reset on October of San Gregorio, pueblo of San Pablo, and is
13, 1987, this time upon motion of Interbank. To bounded on the north by the property to the barrio
give Interbank time to comment on a motion filed of Santa Maria; on the south by the properties of

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 69

Mamerto Evangelista, Tranquilino Gapuno, and Evidence have been adduced by both parties, their
Rufino Calabia; and on the west, by the properties exhibits were made of record. On the 22d of March,
of Maria Nieves Calabia and Leoncia Evangelista. 1907, judgment was rendered by the court below
annulling the attachment and the adjudication of
The said parcel of land was attached by the the land in controversy to the defendant,
municipal sheriff on the 17th of February, 1906, at Bernardo Marquez, and sentencing the latter to
the request of Bernardo Marquez, as being the return the said land described in the complaint to
property of the said Marcela's husband, in the its owner, the plaintiff Marcela Alvaran, to pay the
conformity with the judgment entered against the latter P90, received for 4,500 cocoanuts, when the
latter in an oral action brought by said Marquez costs of the proceedings.
against Reyes, in the court of the justice of the
peace, for the recovery of a certain sum of money. The defendant excepted to the above judgment
the creditor, Marquez, insisted upon maintaining and moved for a new trial; the motion was
the attachment, and furnished the necessary bond overruled for the 30th of April, 1907, and it does
in accordance with the provision of section 451 of not appears that the petitioner excepted thereto.
Act No. 190, notwithstanding the claim made by
the plaintiff, and the fact that her title was entered Before dealing in this decision with the main points
in the registry of property in accordance with Act in controversy, and should be stated that as to the
No, 496; therefore, she asked that judgment be form the petitioner has not excepted to the order
rendered ordering the defendant to recognize the of the 30th of April, 1907, overruling the motion
plaintiff as the sole owner of the land in question; for the new trial, this court can not review the
that the attachment thereof be annulled, and that evidence nor examined the findings of the court
the defendant be sentenced to indemnify her for below to see if they are in accordance with the law
damages incurred and the costs of the and the merits of the case; it must limit itself to
proceedings, together with any other remedy that deciding only the questions of law referred to in
might be considered just and equitable. appeal of exceptions, contained in the assignment
of errors set out in the appellant's proof. (Sec. 497
The defendant, Bernardo Marquez, on the 29th of of Act No. 190 as amended by Act No. 1596.)
March, 1906, answered the complaint, and denied
all and each of the facts stated in the same in so It is fully proven that the land in question is owned
far as they did not agree with those in the answer; exclusively by the plaintiff, Marcela Alvaran, as
that in the execution of the judgment entered duly shown by the title issued by the Court of Land
against Isabelo Reyes, the plaintiff's husband, the Registration, and produced in due course in this
sheriff of San Pablo had not levied upon the litigation. The plaintiff was in possession thereof
property described in the complaint, and which for fifteen years prior to the time when it was
does not belong to the plaintiff, since the land claimed: that is, since she inherited it from her
attached is situated in the barrio of San Gregorio, mother, Maria Banayo, she being then already
municipality of San Pablo, and is planted with 300 married to her present husband, Isabelo Reyes.
cocoanut trees, all of which bear more or less fruit,
and the boundaries of which are; On the north, the Under these circumstances it is understood at
lands of Damiana Briones and Lucio Evangelista; once that the matter at issue refers to the
on the east the "Vecinal" street of said barrio; on property of the right, acquired by her during
the west of the land of Leon Briones, and on the marriage, and brought into the conjugal
south of the lands of Mamreto Evangelista and partnership apart from the dowry and without
Tranquilino Gapuno; that the land attached was being included therein. Said inheritance is
the property of Isabelo Reyes, who was in the included among the property that the law
possession and enjoyment thereof; that the classifies as paraphernal. (Arts. 1381, 1396, No. 2
execution and attachment was limited to the Civil Code.) Article 1823 of the Civil Code reads:
property of Isabelo Reyes by virtue of the
obligation contracted by him while united in The wife retains the ownership of the paraphernal
marriage to the plaintiff; that the plaintiff was property.
cognizant of said obligation; that at the time her
husband contracted it the plaintiff intervened and So that, according to the provisions of article 1834
verbally guaranteed the solvency of her husband, of the said code, even if the land in question was
and assured creditor that her husband was the administered by Isabelo Reyes, his wife, Alvaran,
owner of the said land with 300 cocoanut trees; has not lost her right of dominion thereto, no can it
that, owing to the fact that the complaint does not be attached for a debt contracted by her husband
set forth the title of the dominion alleged by the at the instance of a creditor of the latter.
plaintiff, the same does not contain facts sufficient
to constitute a costs of action, depriving the The doctrine has been established in a decision of
defendant of the power to answer and refute the the case of Lopez Villanueva vs. Alvarez Perez et
supposed title of dominion. therefore prayed that al., (9 Phil. Rep., 28) and it is a settled rule that it
the complaint be dismissed with costs. is a legal condition n attachments of all kinds that

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 70

the thing attached must be the property of the affirmed with the costs against the appellant. So
debtor, and from no provision of the Mortgage Law ordered.
can a conclusion be derived contrary to such
principle. EN BANC

If the aforesaid estate was not the property of G.R. No. L-42518 August 29, 1936
Reyes, the husband, but of his wife, the plaintiff,
as concluded by the court below in view of the WISE & CO., INC., plaintiff-appellee,
evidence, in no manner could the same have been vs.
attached at the request of Bernardo, nor DIONISIO P. TANGLAO, defendant-appellant.
adjudicated to him, inasmuch as no legal reason
existed whereby the plaintiff was obliged to make The appellant in his own behalf.
him any payment or loan; therefore, the Franco and Reinoso for appellee.
proceedings from which it resulted that the
plaintiff was unjustly deprived of her property on AVANCEÑA, C. J.:
account of a debt for which she was not
responsible are entirely null and void. In the Court of First Instance of Manila, Wise & Co.
instituted civil case No. 41129 against Cornelio C.
Inasmuch as in the case at bar no question has David for the recovery of a certain sum of money
been set up relative to the nature and destination David was an agent of Wise & Co. and the amount
of the fruits obtained from the said land, nor in claimed from him was the result of a liquidation of
connection with the kind and the conditions of the accounts showing that he was indebted in said
indebtedness of Isabelo Reyes to the defendant amount. In said case Wise & Co. asked and
Marquez, it is our opinion that we are not obtained a preliminary attachment of David's
permitted to decide points of law defined by property. To avoid the execution of said
articles 1385 and 1386 of the Civil Code outside or attachment, David succeeded in having his
beyond what has been decided in the judgment Attorney Tanglao execute on January 16, 1932, a
appealed from with respect to the value of the power of attorney (Exhibit A) in his favor, with the
cocoanuts harvested by the defendant, following clause:

Section 20 of the Rules of this Court provides that To sign for me as guarantor for himself in his
— indebtedness to Wise & Company of Manila, which
indebtedness appears in civil case No. 41129, of
No error not affecting the jurisdiction over the the Court of First Instance of Manila, and to
subject matter will be considered unless stated in mortgage my lot (No. 517-F of the subdivision
the assignment of errors and relied upon the brief. plan Psd-20, being a portion of lot No. 517 of the
cadastral survey of Angeles, G. L. R. O. Cad. Rec.
The defendant alleges that the plaintiff stood as No. 124), to guarantee the said obligations to the
surety for her husband, but, as the judgment Wise & Company, Inc., of Manila.
appealed from rightly states, there is no evidence
on record that such a bond, which would be an On the 18th of said month David subscribed and
actual contract, was ever undertaken, and without on the 23d thereof, filed in court, the following
the consent of the party supposed to be bound document (Exhibit B):
thereby its existence can not be conceived.
Moreover under article 1827 of the code security is COMPROMISE
not presumed; it must be expressed, and can not
be interfered or presumed because of the Come now the parties, plaintiff by the undersigned
existence of a contract or principal obligations. attorneys and defendants in his own behalf and
From mere presumption it is not possible to respectfully state:
establish contractual relations and liens which
presuppose a willingness to buy oneself. This I. That the defendant confesses judgment for the
requisite is not present in the case at bar, since it sum of six hundred forty pesos (P640), payable at
does not appear that Marcela Alvaran had the rate of eighty pesos (P80) per month, the first
voluntarily guaranteed the solvency of her payment to be made on February 15, 1932 and
husband, and therefore the attachment successively thereafter until the full amount is
proceedings, the sale and adjudication of said land paid; the plaintiff accepts this stipulation.
to the defendant, in payment of a debt to which
the owner of the land is in no manner liable, are II. That as security for the payment of said sum of
notoriously contrary to law. P640, defendant binds in favor of, and pledges to
the plaintiff, the following real properties:
For the above reasons, and accepting the
conclusions contained in the judgment appealed 1. House of light materials described under tax
from, it is our opinion that the same should be declaration No. 9650 of the municipality of

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 71

Angeles, Province of Pampanga, assessed at It appears from the foregoing that defendant,
P320. Tanglao could not have contracted any personal
responsibility for the payment of the sum of P640.
2. Accesoria apartments with a ground floor of 180 The only obligation which Exhibit B, in connection
sq. m. with the first story of cement and with Exhibit A, has created on the part of Tanglao,
galvanized of iron roofing located on the lot is that resulting from the mortgage of a property
belonging to Mariano Tablante Geronimo, said belonging to him to secure the payment of said
accesoria is described under tax declaration No. P640. However, a foreclosure suit is not instituted
11164 of the municipality of Angeles, Province of in this case against Tanglao, but a purely personal
Pampanga, assessed at P800. action for the recovery of the amount still owed by
David.
3. Parcel of land described under Transfer
Certificate of Title No. 2307 of the Province of At any rate, even granting that defendant Tanglao
Pampanga recorded in the name of Dionisio may be considered as a surety under Exhibit B, the
Tanglao of which defendant herein holds a special action does not yet lie against him on the ground
power of attorney to pledge the same in favor of that all the legal remedies against the debtor have
Wise & Co., Inc., as a guarantee for the payment not previously been exhausted (art. 1830 of the
of the claim against him in the above entitled Civil Code, and decision of the Supreme Court of
cause. The said parcel of land is bounded as Spain of March 2, 1891). The plaintiff has in its
follows: NE. lot No. 517 "Part" de Narciso Garcia; favor a judgment against debtor David for the
SE. Calle Rizal; SW. lot No. 517 "Part" de payment of debt. It does not appear that the
Bernardino Tiongco; NW. lot No. 508 de Clemente execution of this judgment has been asked for and
Dayrit; containing 431 sq. m. and described in tax Exhibit B, on the other hand, shows that David has
declaration No. 11977 of the municipality of two pieces of property the value of which is in
Angeles, Pampanga, assessed at P423. excess of the balance of the debt the payment of
which is sought of Tanglao in his alleged capacity
That this guaranty is attached to the properties as surety.
above mentioned as first lien and for this reason
the parties agree to register this compromise with For the foregoing considerations, the appealed
the Register of Deeds of Pampanga, said lien to be judgment is reversed and the defendant is
cancelled only on the payment of the full amount absolved from the complaint, with the costs to the
of the judgment in this case. plaintiff. So ordered.

Wherefore, the parties pray that the above

compromise be admitted and that an order issue
requiring the register of Deeds of Pampanga to EN BANC
register this compromise previous to the filing of
the legal fees. G.R. No. 42490 September 9, 1937

David paid the sum of P343.47 to Wise & Co., on VALERIANO SOLON, NATIVIDAD SOLON and
account of the P640 which he bound himself to pay MANUEL IBAÑEZ, plaintiff-appellants,
under Exhibit B, leaving an unpaid balance of vs.
P296.53. APOLONIA SOLON, ZOILO SOLON, ROBERTA
SOLON, FELISA SUICO (minor), and THE
Wise & Co. now institutes this case against DIRECTOR OF LANDS, defendants-appellees.
Tanglao for the recovery of said balance of
P296.53. Jose Delgado and Vickers, Ohnick, Opisso and
Velilla for appellants.
There is no doubt that under Exhibit, A, Tanglao Cuenco and Cuenco for appellees.
empowered David, in his name, to enter into a
contract of suretyship and a contract of mortgage DIAZ, J.:
of the property described in the document, with
Wise & Co. However, David used said power of In his lifetime Eugenio Solon, father of the parties
attorney only to mortgage the property and did surnamed Solon, grandfather of defendant Felisa
not enter into contract of suretyship. Nothing is Suico, and husband of the plaintiff Manuela Ibañez
stated in Exhibit B to the effect that Tanglao in second marriage contract on May 23, 1899,
became David's surety for the payment of the sum bought, on installments, from the Bureau of Lands
in question. Neither is this inferable from any of the parcel of land described as "Lot No. 903 of the
the clauses thereof, and even if this inference Banilad Friar Lands Estate" in transfer certificate
might be made, it would be insufficient to create of title No. 8379 of the registry of Cebu, situated in
an obligation of suretyship which, under the law, the barrio of Cogon, municipality of Cebu, Cebu
must be express and cannot be presumed. Province having an area of 6 hectares, 46 ares and
13 centares, and assessed by said bureau at P403.

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 72

The sale took place on December 12, 1919, and motion for new trial on the ground that the
the time stipulated for the complete payment of its judgment was contrary to law and not sufficiently
price was thirteen years, the first annual supported by the evidence was denied.
installment being P31, and the subsequent twelve
installments to be paid every year being P21 each. In support of their appeal appellants assigned
On July 30, 1925, with the amount of P126 as part eight errors as committed by the lower court
of the agreed purchase price still unpaid Eugenio which may be summed up as follows: (1) In giving
Solon, after securing the consent and approval of no credit to the witnesses for the plaintiffs and in
the Bureau of Lands, sold and conveyed for the making no mention of the falsehoods committed
sum of P1,00 all his rights, title and interest in the by the witnesses for the appellees in their
land acquired by him executing for that purpose in testimony; (2) in failing to consider the real value
favor of Apolonia Solon who agreed to pay the of the land in question by reason of its location and
installments still owing to the Bureau of Lands, the value in 1925 when the alleged transfer took place;
deed of transfer appearing in the record as Exhibit (3) in failing to take into account the conclusion at
B. Apolonia Solon paid to the Bureau of Lands on which it had arrived during trial, that the land in
the same date of the execution of the deed the question, being located near the Osmeña bridge,
amount of P21, and the balance of P105 at one was worth P0.25 per square meter in 1925, and
time only a month thereafter. The year following, declaring afterwards in its decision that it is
or on July 10, 1926, Eugenio Solon died, leaving worthless than P0.01 per square meter; (4) in not
no will, and two years, eight months and eight declaring that Eugenio Solon, like other owners of
days later, or on March 18, 1929, the register of lands adjacent to his, knew of the plan to
deeds of Cebu, upon compliance with the construct the provincial capitol on lot No. 850
formalities of law, issued transfer certificate of adjoining lot No. 903 in question; (5) in holding
title No. 8379 in the name of Apolonia Solon. The that appellants weakened their side of the case
latter took charge of the property occupying it as when, after contending that the document Exhibit
her own through tenants from the time she bought B is false and simulated they conceded that
the same, according to the evidence for the although the same may have been executed, it
defendants, and from the death of Eugenio Solon, must, at all events, be declared void by reason of
according to the evidence for the defendants, and the disproportion between the price paid for the
from the death of Eugenio Solon, according to that land and its true value at the time; (6) in failing to
for the plaintiffs. take into account the various facts and
circumstances showing that the transaction which
Plaintiffs surnamed Solon, all of whom are children took place according to Exhibit B, is fraudulent and
of the deceased Eugenio, Solon in his marriage false, in view of the fact that the supposed grantor
with his widow Manuela Ibañez, joining with the under said deed was an illiterate, 88 years of age
latter in maintaining that Exhibit B is false and and was furthermore the father of Apolonia Solon,
simulated and that if the same had been executed and also of the fact that the whole transaction was
by Eugenio Solon, it was without just carried out without the knowledge of his wife and
consideration, commenced this suit praying (1) other children; (7) in not holding that Exhibit B is
that said document be declared null and void fraudulent and false and that Eugenio Solon, who
because false and simulated, (2) that they be was 88 years old, ignorant and illiterate was
adjudged the absolute owners pro indiviso of the induced to sign it; and finally (8) in not holding
land in question together with the other heir of null and void the deed in question and in not
Eugenio Solon, (3) that defendants Apolonia Solon, finding that the land to which the same refers
Zoilo Solon, Roberta Solon and the latter's belongs to all the heirs of the deceased Eugenio
husband Andres Montalban, be sentenced to pay Solon.
jointly and severally, to the plaintiffs the value of
the fruits of the land in question from the death of 1. It is fact clearly shown by the evidence for the
Eugenio Solon, and (4) that said defendants be defendants, which appears to us to have more
sentenced to pay, also jointly and severally to the weight than that for the plaintiffs notwithstanding
plaintiffs the sum of P30,000 as damages, besides the latter's efforts to show the contrary, that the
the costs of the suit. transfer of the land in question made by Eugenio
Solon to Apolonia Solon, according to Exhibit B,
Defendants, by way of defense, filed an answer had taken place long before the commencement
containing a general denial and the special of the suit of MaCleod and Co., against Andres
defense of prescription based on the exercising Montalban, husband of Roberta Solon, as principal,
their right of action. and Eugenio Solon, as surely of said Montalban. It
cannot, therefore, be believed, and the lower
After trial the lower court rendered judgment court did well in refusing to believe, that Andres
dismissing plaintiffs' complaint, without any Montalban had been making statements to the
pronouncement as to costs, and declaring valid in effect that Apolonia Solon had paid nothing for the
effect the transfer made by Eugenio Solon in favor reason that the same was not real but only
of Apolonia Solon appealed to this court after their simulated and that it was made solely for the sole

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 73

purpose of placing the land in question beyond the Rodriguez in that year at P0.25 per square meter.
reach of any action that might be brought by it should be noted that, upon cross-examination
Macleod and Company against said Eugenio Solon; said witness had to admit that all he knew
and Apolonia Solon had been telling her tenant concerning the transaction had been obtained
named Eugenio Labra that there had been an from said lady. Although the lower spite of a
understanding among her brothers of the whole timely motion by defendants to that effect,
blood that they would cede the said land to her as inasmuch as it limited itself to saying: "It will be
part of her inheritance from their father, because, taken into consideration," the truth is that when it
in the first place there was an action against decided the case dismissing plaintiffs' complaint, it
Eugenio Solon for the collection of an amount completely disregarded said evidence which is
himself to pay; and, in the second place, Apolonia tantamount to having ordered its exclusion on
Solon could not have made the above statement account of its incompentency.
attributed to her for the simple reason that she
was then already the owner of the land aforesaid The sales made in 1926 and 1927 of lots Nos. 900
by virtue of the purchase appearing in Exhibit B. and 1009-A by Jose Vaño to Soledad, Salud and
Mercedes Espina, and by Maria Solon to Zenon
When Eugenio Solon bound himself as surely for Diaz, respectively, at the rate of P0.20 and P0.24
Andres Montalban for the payment to Macleod and per square meter, according to Exhibits BB and X,
Company of the amount of P5,000 which and the sale made by Viscal S. Duterte to the
Montalban owed to the latter, he limited himself to spouses Severino Rodriguez and Consolacion Alba,
giving as security, by way of mortgage, the land, of lot No. 1009-B, in October, 1925, at P0.25 per
and no other, belonging to him and described as square meter, according to Exhibit Y, do not
lot No. 892 of the Banilad Friar Lands Estate in necessarily prove that the land in question was
case No. 5988 of the Court of Land Registration worth that mush on the date of its sale. It must be
and in transfer certificate of title No. 2499 of the remembered that this had taken place three
registry of property of the Province of Cebu. It is months before the sale of the land referred to in
not possible that Macleod and Company could Exhibit Y, and one and two years before those set
have ever contemplated bringing an action forth in Exhibits BB and Y, respectively. Those who
against Eugenio Solon to obtain possession not acquired said lands, according to their own
only of the land expressly mortgaged to it, which, testimony, desired to speculate because they had
as has been said, is lot No. 892 described in the heard that the capitol of Cebu would be erected
certificate of title above-mentioned, which is nearby. It is, nevertheless, a fact that since then
distinct from lot No. 903, but also of any other until the date of the decision appealed from — in
land belonging to him or of lot No. 903 itself, for the words of the lower court — the capitol had not
the purpose of collecting its credit against Andres been erected, nor had any road been opened
Montalban, because it would not have failed to through said parcels, nor had the rumors that the
know, better than any one else, that the contract capitol would be construed sooner or later in the
of suretyship in its favor does not admit of the vicinity had any appearance of truth. However,
interpretation that it could make Eugenio Solon although there may have been a proposal to erect
liable for an amount greater than P5,000 and that the capitol thereon, the evidence does not show
it could require him to pay Montalban's that Eugenio Solon had never had acknowledge of
indebtedness, should the latter fail to do so, with that fact. Furthermore, knowing that he had paid
lands other than that he had mortgaged. This is so for the land only P270.70, it is only reasonable to
because the clauses of a contract of suretyship suppose that he was more than satisfied when he
determine the extent of the liability of the surely received an offer of P1,000 therefor and was paid
(Government of the Philippine Islands vs. Herrero, that amount which is, no doubt, almost three
38 Phil., 410); because said liability should not be times that which he had invested, not at one time,
extended farther than the clear terms of the of course, but in six years. On the other hand, the
contract of guarantee by mere implication; and person to whom he transferred the land was no
because the surety should be liable only in the other than his own daugther. For these reasons,
manner and to the extent, and under the we believe and so hold that the second error is
circumstances pointed out in the contract of without merit.
suretyship or which may be clearly deduced
therefrom (La Insular vs. Machuca Go-Tauco and 3. There is nothing in the record which proves that
Nubla Co-Siong 39 Phil., 567). the court found that the value of the land in
dispute in 1925 was P0.25 per square meter. All
2. Plaintiffs believe having proved that the value of that the lower court said during the trial, and it
the land in question in 1925 was P0.25 per square appears only incidentally, in ruling on the
meter. The evidence upon which they rely was the objection to a question made for the purpose of
testimony of the engineer, surveyor and real finding out the amount at which the land would
estate broker Thomas F. Breslin, who affirmed quote per square meter in case the capitol were
that a parcel adjacent to the one under discussion construed on parcel No. 850 which is a adjacent to
had been sold to a lady named Consolacion Albade the parcel in question, was the following:

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 74

That is extremely remote. I believe that the best the prejudice of Eugenio Solon because he was
proof is that of P0.25 per square meter, in 1925. I paid much more than he really paid therefor to the
believe that that is the real value, and it depends Bureau of Lands nor withstanding that he had not
upon whether or not a street will be opened and on made any improvements thereon or completed
whether or not a capitol will be constructed, and if the payment he had agreed to make to said office.
it be depression time, as it is now, it can not
possibly sell at P2, so that it is all too 6. The sixth error attributed by appellants to the
problematical. lower court has been practically shown not to exist
for the reasons given in discussing the first five
And it should be added that the lower court said error. In addition thereto, it may be said transfer
this before hearing the other evidence of plaintiffs did not take place. On the other hand, defendants
and before having any idea of what the evidence proved that it did take place by means of Exhibit B
of defendants would be. It surely corrected the which, it may be truthfully said, was executed was
same thereafter in the manner set forth in the all the formalities law before a notary public and in
decision appealed from. We hold that the third the presence of an official of the Bureau of Lands
error is likewise not well taken. in the very office of the latter in Talisay, Cebu, and
in that of another witness, and by means of the
4. The fourth error is imaginary. As has been said, approval of said transfer by the Directors of Lands.
there is no evidence of record to show that They further proved through one of the
Eugenio Solon had any knowledge of the plan to instrumental witness to said document and
construct the capitol of Cebu near the land in through Apolonia Solon herself that the price
dispute upon selling the same to Apolonia Solon. appearing in said document Exhibit B was paid to
The argument of plaintiffs that it must be Eugenio Solon; and that the latter had tried to sell
presumed that every land owner has knowledge of the land before that date to other P750. All the
all the improvements which are to be made in foregoing, together with the fact that the last
properties near his own, does not prove anything annual payments which Eugenio Solon should
because it does nowhere appears as a fact that the made to the Bureau of Lands were effected by
capitol of Cebu was to be constructed sooner or Apolonia Solon and that said defendant took
later in the immediate vicinity of the land in possession of the land immediately after the
question. But even supposing that Eugenio Solon execution of Exhibit B conclusively show that said
had guessed that there would be such a plan, this document was neither fraudulent nor false. And it
does not imply that the transfer he made to is not true that Eugenio Solon was then 8 years old
Apolonia Solon was void because the owner has and, therefore, could be easily imposed upon by
the right to sell what belongs to him to whomever reason of his mental and physical weakness
he chooses and for whatever price satisfactory to because the best evidence appearing of record
him. with respect to his age, Exhibit F, shows that he
was only 66 years, 2 months and 7 days at the
5. And it is no error for the lower court to have time of the transfer.
considered that the cause of the plaintiffs was
weakened on account of the fact that they 7 and 8. The seventh and eight errors need no
maintain two propositions which are, in reality, further discussion. The reasons above given
incompatible with each other. That the clearly show that they do not exist. The
documentary of transfer Exhibit B was false and inescapable conclusion, therefore, is that the
simulated, and that it must simply be declared appeal taken by plaintiffs is unfounded and
void for the reason that the price paid therefor is without merit for the reason that the judgment
disproportionate to its value in 1925 are two appealed from is in accordance with law and
irreconcilable things. If the latter were true, then it supported by the evidence.
would be useless to insist that the said document
is false or simulated. But the truth is that there is In view of the foregoing, the judgment appealed
no disproportion between the price paid for it and from is affirmed with the costs of the appeal
its real value in 1925. The Bureau of Lands itself against the plaintiffs and appellants. So ordered.
sold, on July 28, 1924, lot No. 887 of the same
Banilad Friar Lands Estate, located near the land EN BANC
in question and having an area of 3 hectares, 43
ares, 62 centares for the small sum of P190 of less G.R. No. L-13873 January 31, 1963
than 6/10 centavo per square meter. (Exhibit II-A.)
There is no occasion to repeat here the same GENERAL INSURANCE and SURETY
reasons for the statement that there is no CORPORATION, petitioner,
evidence of record in support of the conclusion vs.
that there was a proposal on the part of the REPUBLIC OF THE PHILIPPINES and
Province of Cebu to construct its capitol on lot No. CENTRAL LUZON EDUCATIONAL
850. If there was any disproportion between the FOUNDATION, INC., respondents.
price paid and real value of the land, it was not to

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 75

Guido Advincula for petitioner. payment of the amount
Office of the Solicitor General for respondents. above-specified, we bind ourselves,
our heirs, executors, successors,
REGALA, J.: administrators, and assigns, jointly
and severally.
On May 15, 1954, the Central Luzon Educational
Foundation, Inc. and the General Insurance and We further bind ourselves, by these
Surety Corporation posted in favor of the presents, to give the Department of
Department of Education a bond, the terms of Education at least sixty (60) days
which read as follows: notice of the intended withdrawal or
cancellation of this bond, in order
KNOW ALL MEN BY THESE that the Department can take such
PRESENTS: action as may be necessary to
protect the interests of such
WHEREAS, the Department of teachers, employees or creditors of
Education has required the Central the school and of the Government.
Luzon Educational Foundation, Inc.,
operating the Sison & Aruego LIABILITY of Surety under this bond
Colleges, of Urdaneta, Pangasinan, will expire on June 15, 1955, unless
Philippines, an institution of sooner revoked.
learning to file a bond to guarantee
the adequate and efficient IN WITNESS WHEREOF, we signed
administration of said school or this present guarranty at the City of
college and the observance of all Manila, Philippines, this 15th day of
regulations prescribed by the May, 1954.
Secretary of Education and
compliance with all obligations, On the same day, May 15, 1954, the Central Luzon
including the payment of the Educational Foundation, Inc., Teofilo Sison and
salaries of all its teachers and Jose M. Aruego executed an indemnity agreement
employees, past, present, and binding themselves jointly and severally to
future, and the payment of all other indemnify the surety of "any damages, prejudices,
obligations incurred by, or in behalf loss, costs, payments, advances and expenses of
of said school. whatever kind and nature, including attorney's
fees and legal costs, which the COMPANY may, at
NOW, THEREFORE, in compliance any time sustain or incur, as well as to reimburse
with said requirement, we, to said COMPANY all sums and amounts of money
CENTRAL LUZON EDUCATIONAL which the COMPANY or its representatives shall or
FOUNDATION, INC., operating the may pay or cause to be paid or become liable to
Sison and Aruego Colleges, pay, on account of or arising from the execution of
represented Dr. Jose Aruego, its the above mentioned Bond."
Vice-Chairman, as principal, and
the GENERAL INSURANCE AND On June 25, 1954, the surety advised the
SURETY CORPORATION, a Secretary of Education that it was withdrawing
corporation duly organized and and cancelling its bond. Copies of the letter were
existing under and by virtue the sent to the Bureau of Private Schools and to the
laws of the Philippines, as surety, Central Luzon Educational Foundation, Inc.
are held and firmly bound, jointly
and firmly, unto the Department of It appears that on the date of execution of the
Education of the Republic of the bond, the Foundation was indebted to two of its
Philippines in the sum of TEN teachers for salaries, to wit: to Remedios Laoag, in
THOUSAND PESOS (P10,000.00) the sum of P685.64, and to H.B. Arandia, in the
Philippine currency, for the sum of P820.00, or a total of P1,505.64.
payment thereof we bind ourselves,
our heirs, executors, administrators, Demand for the above amount having been
successors, and assigns, jointly and refused, the Solicitor General, in behalf of the
severally firmly by these presents; Republic of the Philippines, filed a complaint for
the forfeiture of the bond, in the Court of First
WHEN the Secretary of Education is Instance of Manila on July 11, 1956.
satisfied that said institution of
learning had defaulted in any of the In due time, the surety filed its answer in which it
foregoing particulars, this bond set up special defenses and a cross-claim against
may immediately thereafter be the Foundation and prayed that the complaint be
declared forfeited and for the dismissed and that it be indemnified by the

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 76

Foundation of any amount it might be required to latest, after June 15, 1955. For support, the surety
pay the Government, plus attorney's fees. invokes the following provisions of the bond:

For its part, the Foundation denied the cross-claim WE, further bind ourselves, by these presents to
and contended that, because Remedios Laoag give the Department of Education at least sixty
owed Fr. Cinense the amount of P820.65, there (60) days notice of the intended withdrawal or
was no basis for the action; that the bond is illegal cancellation of this bond, in order that the
and that the Government has no capacity to sue. Department can take such action as may be
necessary to protect the interest of such teachers,
The surety also filed a third-party complaint employees, Creditors to the government.
against Teofilo Sison and Jose M. Aruego on the
basis of the indemnity agreement. While LIABILITY of the Surety under this bond will expire
admitting the allegations of the third-party on June 15, 1955, unless sooner revoked.
complaint, Sison and Aruego claimed that because
of the cancellation and withdrawal of the bond, the On the other hand, the Government contends that
indemnity agreement ceased to be of force and since the salaries of the teachers were due and
effect. payable when the bond was still in force, the
surety has become liable on its bond from the
Hearing was held and on December 18, 1956, the moment of its execution on May 15,1954.
Court of First Instance rendered judgment holding
the principal and the surety jointly and severally We agree with this contention of the Government.
liable to the Government in the sum of P10,000.00
with legal interest from the date of filing of the It must be remembered that, by the terms of the
complaint, until the sum is fully paid and ordering bond the surety guaranteed to the Government
the principal to reimburse the surety whatever "compliance (by the Foundation) with all
amount it may be compelled to pay to the obligations, including the payment of the salaries
Government by reason of the judgment, with of its teachers and employees, past, present and
costs against both principal and the surety. future, and the payment of all other obligations
incurred by, or in behalf of said school." Now, it is
The surety filed a motion for reconsideration and a not disputed that even before the execution of the
request to decide the third-party complaint which bond the Foundation was already indebted to two
the trial court denied. of its teachers for past salaries. From the moment,
therefore, the bond was executed, the right of the
On appeal, the Court of Appeals rendered a Government to proceed against the bond accrued
decision, the dispositive portion of which reads: because since then, there has been violation of the
terms of the bond regarding payment of past
WHEREFORE, the appealed judgment is hereby salaries of teachers at the Sison and Aruego
modified in the following manner: Colleges. The fact that the action was filed only on
July 11, 1956 does not militate against this
(a) Ordering Central Luzon Educational position because actions based on written
Foundation, Inc., and General Insurance and contracts prescribe in ten years. (Art. 1144, par. 1,
Surety Corporation to pay jointly and severally the Civil Code). The surety also cites our decision in
Republic of the Philippines the sum of P10,000.00, the case of Jollye v. Barcelon and Luzon Surety
plus costs and legal interests from July 11, 1956 Co., Inc., 68 Phil. 164 and National Rice & Corn
until fully paid; and Corp. (NARIC) v. Rivera, et al., G.R. No. L-4023,
February 29, 1952. But there is nothing in these
(b) Ordering Central Luzon Educational cases that supports the proposition that the
Foundation, Inc., Teofilo Sison and Jose M. Aruego liability of a surety for obligations arising during
to reimburse, jointly an severally, the General the life of a bond ceases upon the expiration of the
Insurance and Surety Corporation of all amounts it bond.
may be forced to pay the Republic of the
Philippines by virtue of this judgment, plus costs In the Jollye case, the bond provided:
and P2,000.00 for counsel's fees.
Whereas, the above bounded principal, on 13th
From this decision, the surety appealed to this day of February, 1933 entered into an agreement
Court by way of certiorari, raising questions of with H. P. L. Jollye of Manila, P. I., to fully and
law.1 faithfully refund to said Mr. H. P. L. Jollye the
above stated sum of P7,500 representing the
In its first four assignments of error, the surety purchase price of the 74 shares of the capital stock
contends that it was no longer liable on its bond of the North Electric Company (certificate No. 38)
after August 24, 1954 (when the 60-day notice of paid by said Mr. H. P. L. Jollye to the undersigned
cancellation and withdrawal ended), or, at the principal, Mr. Emeterio Barcelon, in the event
ofthe title thereto of said Mr. Barcelon is

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 77

invalidated by any judgement which may be and We held that the surety could not be held
rendered by the court of Cavite against Vicente liable because the bond was cancelled when no
Diosomito or in the event that any of the notice of existing obligations was given within ten
warranties contained in that certain deed of sale days.
executed by the undersigned principal on this 13th
day of February, 1933,be invalidated, a copy of In the present case, there is no provision that the
which is hereto attached and made an integralpart bond will be cancelled unless the surety is notified
hereof, market Exhibit A. of any claim and so no condition precedent has to
be complied with by the Government before it can
Wherefore, the parties respectfully pray that the bring an action. Indeed, the provision of the bond
foregoing stipulation of facts be admitted and in the NARIC and Santos cases that it would be
approved by this Honorable Court, without cancelled ten days after its expiration unless
prejudice to the parties adducing other evidence notice of claim was given was inserted precisely
to prove their case not covered by this stipulation because, without such a provision, the surety's
of facts. 1äwphï1.ñët liability for obligations arising while the bond was
in force would subsist even after its expiration.
According to the bond, "the liability of Luzon
Surety Company, Inc. under this bond will expire Thus, in Pao Chuan Wek v. Nomorosa, 54 O.G. No.
(12) months from date hereof." The date referred 11, 3490, We held that under a provision that the
to was February 13, 1933. This Court absolved the surety "will not be liable for any claim not
surety of liability because the acts for which the discovered and presented to the company within
bond was posted happened after its expiration. three months from the expiration of this bond and
Thus, We held in that case: that the obligee hereby waives his right to file any
court action against the surety after the
... The acts provided therein by reason of which termination of the period of three months above
the contract of suretyship was executed could mentioned," the giving of notice is a condition
have taken place within the stipulated period precedent to be complied with.
twelve months. Hence, the parties fixed that
period exactly at twelve months, limiting thereby And suppose this action were filed while the bond
the obligation of the appellee to answer for the was in force, as the surety would have the
payment to the appellant of the aforesaid sum of Government do, but the same remained pending
P7,500.00 to not more than the stipulated after June 15, 1955, would the surety suggest that
period. . . . the judgment that may be rendered in such action
could no longer be enforced against it because the
Here, on the other hand, the right of the bond says that its liability under it has expired?
Government to collect on the bond arose while the
bond was in force, because, as earlier noted, even And what of the provision on 60-day notice? The
before the execution of the bond, the principal had surety urges that all actions on the bond must be
already been indebted to its teachers. brought within that period or they would all be
barred. The surety misread the provision. The
Neither does the NARIC case support the surety's 60-day notice is not a period of prescription of
position. In that case, the bond provided that — action. The provision merely means that the
surety can withdraw — as in fact it did in this case
This bond expires on March 20th, 1949 and will be — even before June 15, 1955 provided it gave
cancelled TEN DAYS after the expiration, unless notice of its intention to do so at least 60 days in
the surety is notified of any existing obligation advance. If at all, the condition is a limitation on
thereunder, or unless the surety renews or the right of the surety to withdraw rather than a
extends it in writing for another term. limitation of action on the bond. This is clear also
from the Manual of Information for Private
and We held that giving notice of existing Schools2 which states that "The bond furnished by
obligation was a condition precedent to further a school may not be withdrawn by either or both
liability of the surety and that in default of such the bondsmen except by giving the Director of
notice, liability on the bond automatically ceased. Private Schools sixty days notice."

Similarly, in the case of Santos, et. al. v. Mejia, et In its fifth assignment of error, the surety
al., G.R. No. L-6383, December 29, 1953, the contends:
bond provided that —
1. That the bond is void for being contrary to
Liability of the surety on this bond will expire in public policy insofar as it requires the surety to
THIRTEEN DAYS and said bond will be cancelled pay P10,000.00 regardless of the amount of the
10 DAYS after its expiration unless surety is salaries of the teachers.3 It is claimed that to
notified of any existing obligation thereunder. enforce forfeiture of the bond for the full amount
would be to allow the Government to enrich itself

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 78

since the unpaid salaries of the teachers amount teachers but the Department of Education or the
to P1,318.84 only. Government.

2. That, under Article 1311 of the Civil Even granting that an extension of time was
Code,4 since teachers of Sison and Aruego granted without the consent of the surety, still
Colleges are not parties to the bond, "the bond is that fact would not help the surety, because as
not effective, and binding upon the obligors earlier pointed out, the Foundation was also
(principal and surety) as far as it guarantees arrears in the payment of the salaries of H. B.
payment of the 'past salaries' of the teachers of Arandia. The case of Arandia alone would be
said school." This is the same as saying that the enough basis for the Government to proceed
surety is not liable to teachers of Sison and Aruego against the bond.
Colleges because the latter are not parties to the
bond nor are they beneficiaries of a Lastly, in its third and fourth "alternative
stipulation pour autrui. But this argument is based assignments of error," the surety contends that it
on the false premise that the teachers are trying cannot be made answer for more than the unpaid
to enforce the obligation of the bond, which is not salaries of H. B. Arandia, which it claimed
the case here. This is not an action filed by the amounted to P720.00 only, because Article 2054
teachers against the surety. This is an action states that —
brought by the Government, of which the
Department of Education is an instrumentality, to A guarantor may bind himself for less, but not for
hold the surety liable on its bond for the same has more than the principal debtor, both as regards
been violated when the principal failed to comply the amount and the onerous nature of the
"with all obligations, including the payment of conditions.
salaries of its teachers, past, present and future."
Should he have bound himself for more, his
There is nothing against public policy in forfeiting obligations shall be reduced to the limits of that of
the bond for the amount. The bond is penal in the debtor.
nature. Article 1226 of the Code states that in
obligation with a penal clause, the penalty shall What We said about the penal nature of the bond
substitute the indemnity for damages and the would suffice to dispose of this claim. For
payment of interests in case of non-compliance, if whatever may be the amount of salaries due the
there is no stipulation to the contrary, and the teachers, the fact remains that the condition of the
party to whom payment is to be made is entitled bond was violated and so the surety became liable
to recover the sum stipulated without need of for the penalty provided for therein.
proving damages because one of the primary
purposes of a penalty clause is to avoid such WHEREFORE, the decision of the Court of Appeals
necessity. (Art. 1228, Civil Code; Lambert v. Fox, is hereby affirmed, with costs against the surety.
26 Phil. 588; Palacios v. Municipality of Cavite, 12
Phil. 140; Manila Racing Club v. Manila Jockey SECOND DIVISION
Club, 69 Phil. 55). The mere non-performance of
the principal obligation gives rise to the right to G.R. No. 130886 January 29,
the penalty, (IV Tolentino, Civil Code of the 2004
Philippines, p. 247.)
COMMONWEALTH INSURANCE
In its first and second "alternative assignments of CORPORATION, Petitioner,
error," the surety contends that it was released vs.
from its obligation under the bond when on COURT OF APPEALS and RIZAL COMMERCIAL
February 4, 1955, Remedios Laoag and the BANKING CORPORATION, Respondents.
Foundation agreed that the latter would pay the
former's salaries, which were then already due, on DECISION
March 1, 1955. In support of this proposition, the
surety cites Article 2079 of the Code which AUSTRIA-MARTINEZ, J.:
provides as follows:
Before us is a petition for review on certiorari
An extension granted to the debtor by the creditor assailing the Decision1 of the Court of Appeals
without the consent of the guarantor extinguishes (CA), promulgated on May 16, 1997 in CA-G.R. CV
the guaranty. . . . No. 444732 , which modified the decision dated
March 5, 1993 of the Regional Trial Court of Makati
But the above provision does not apply to this case. (Branch 64); and the Resolution3 dated
The supposed extension of time was granted not September 25, 1997, denying petitioner’s motion
by the Department of Education or the for reconsideration.
Government but by the teachers. As already
stated, the creditors on the bond are not the

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 79

The facts of the case as summarized by the Court attorney’s fees of P10,000.00 and to pay the costs
of Appeals are as follows: of suit.

In 1984, plaintiff-appellant Rizal Commercial "IT IS SO ORDERED."5

Banking Corporation (RCBC) granted two export
loan lines, one, for ₱2,500,000.00 to Jigs Not satisfied with the trial court’s decision, RCBC
Manufacturing Corporation (JIGS) and, the other, filed a motion for reconsideration praying that in
for ₱1,000,000.00 to Elba Industries, Inc. (ELBA). addition to the principal sum of ₱2,464,128.00,
JIGS and ELBA which are sister corporations both defendant CIC be held liable to pay interests
drew from their respective credit lines, the former thereon from date of demand at the rate of 12%
in the amount of ₱2,499,992.00 and the latter for per annum until the same is fully paid. However,
₱998,033.37 plus ₱478,985.05 from the the trial court denied the motion.
case-to-case basis and trust receipts. These loans
were evidenced by promissory notes (Exhibits ‘A’ RCBC then appealed to the Court of Appeals.
to ‘L’, inclusive – JIGS; Exhibits ‘V’ to ‘BB’,
inclusive – ELBA) and secured by surety bonds On May 16, 1997, the CA rendered the herein
(Exhibits ‘M’ to ‘Q’ inclusive – JIGS; Exhibits ‘CC’ assailed decision, ruling thus:
to ‘FF’, inclusive – ELBA) executed by
defendant-appellee Commonwealth Insurance ...
Company (CIC).
Being solidarily bound, a surety’s obligation is
Specifically, the surety bonds issued by appellee primary so that according to Art. 1216 of the Civil
CIC in favor of appellant RCBC to secure the Code, he can be sued alone for the entire
obligations of JIGS totaled ₱2,894,128.00 while obligation. However, one very important
that securing ELBA’s obligation was characteristic of this contract is the fact that a
₱1,570,000.00. Hence, the total face value of the surety’s liability shall be limited to the amount of
surety bonds issued by appellee CIC was the bond (Sec. 176, Insurance Code). This does
₱4,464,128.00. not mean however that even if he defaults in the
performance of his obligation, the extend (sic) of
JIGS and ELBA defaulted in the payment of their his liability remains to be the amount of the bond.
respective loans. On October 30, 1984, appellant If he pays his obligation at maturity upon demand,
RCBC made a written demand (Exhibit ‘N’) on then, he cannot be made to pay more than the
appellee CIC to pay JIG’s account to the full amount of the bond. But if he fails or refuses
extend (sic) of the suretyship. A similar demand without justifiable cause to pay his
(Exhibit ‘O’) was made on December 17, 1984 for obligation upon a valid demand so that he is
appellee CIC to pay ELBA’s account to the full in mora solvendi (Art. 1169, CC), then he
extend (sic) of the suretyship. In response to must pay damages or interest in
those demands, appellee CIC made several consequence thereof according to Art. 1170.
payments from February 25, 1985 to February 10, Even if this interest is in excess of the
1988 in the total amount of ₱2,000,000.00. There amount of the bond, the defaulting surety is
having been a substantial balance unpaid, liable according to settled jurisprudence.
appellant RCBC made a final demand for payment
(Exhibit ‘P’) on July 7, 1988 upon appellee CIC but ...
the latter ignored it. Thus, appellant RCBC filed
the Complaint for a Sum of Money on September Appellant RCBC contends that when appellee CIC
19, 1988 against appellee CIC.4 failed to pay the obligation upon extrajudicial
demand, it incurred in delay in consequence of
The trial court rendered a decision dated March 5, which it became liable to pay legal interest. The
1993, the dispositive portion of which reads as obligation to pay such interest does not arise
follows: from the contract of suretyship but from law
as a result of delay or mora. Such an interest
"WHEREFORE, premises considered, in the light of is not, therefore, covered by the limitation of
the above facts, arguments, discussion, and more appellee’s liability expressed in the
important, the law and jurisprudence, the Court contract. Appellee CIC refutes this argument
finds the defendants Commonwealth Insurance Co. stating that since the surety bonds expressly state
and defaulted third party defendants Jigs that its liability shall in no case exceed the amount
Manufacturing Corporation, Elba Industries and stated therein, then that stipulation controls.
Iluminada de Guzman solidarily liable to pay Therefore, it cannot be made to assume an
herein plaintiff Rizal Commercial Banking obligation more than what it secured to pay.
Corporation the sum of Two Million Four Hundred
Sixty-Four Thousand One Hundred Twenty-Eight The contention of appellant RCBC is correct
Pesos (P2,464,128.00), to pay the plaintiff because it is supported by Arts. 1169 and 1170 of
the Civil Code and the case of Asia Surety &

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 80

Insurance Co., Inc. and Manila Surety & Fidelity 12% per annum minus payments made by the
Co. supra. On the other hand, the position of petitioner.8
appellee CIC which upholds the appealed decision
is untenable. The best way to show the The sole issue is whether or not petitioner should
untenability of this argument is to give this be held liable to pay legal interest over and above
hypothetical case situation: Surety issued a bond its principal obligation under the surety bonds
for P1 million to secure a Debtor’s obligation of P1 issued by it.
million to Creditor. Debtor defaults and Creditor
demands payment from Surety. If the theory of Petitioner argues that it should not be made to pay
appellee and the lower court is correct, then the interest because its issuance of the surety bonds
Surety may just as well not pay and use the P1 was made on the condition that its liability shall in
million in the meantime. It can choose to pay only no case exceed the amount of the said bonds.
after several years – after all, his liability can
never exceed P1 million. That would be absurd We are not persuaded. Petitioner’s argument is
and the law could not have intended it.6 misplaced.
(Emphasis supplied)
Jurisprudence is clear on this matter. As early
and disposed of the case as follows: as Tagawa vs. Aldanese and Union Gurantee Co.9
and reiterated in Plaridel Surety & Insurance Co.,
WHEREFORE, the appealed Decision is MODIFIED Inc. vs. P.L. Galang Machinery Co., Inc.10 , and
in the manner following: more recently, in Republic vs. Court of Appeals
and R & B Surety and Insurance Company,
The appellee Commonwealth Insurance Company Inc.11 , we have sustained the principle that if a
shall pay the appellant Rizal Commercial Banking surety upon demand fails to pay, he can be held
Corporation: liable for interest, even if in thus paying, its
liability becomes more than the principal
1. On the account of JIGS, ₱2,894,128.00 ONLY obligation. The increased liability is not because of
with 12% legal interest per annum from October the contract but because of the default and the
30, 1984 minus payments made by the latter to necessity of judicial collection.12
the former after that date; and on the account of
ELBA, ₱1,570,000.00 ONLY with 12% legal Petitioner’s liability under the suretyship contract
interest per annum from December 17, 1984 is different from its liability under the law. There is
minus payments made by the latter to the former no question that as a surety, petitioner should not
after that day; respecting in both accounts the be made to pay more than its assumed obligation
applications of payment made by appellant RCBC under the surety bonds.13 However, it is clear
on appellee CIC’s payments; from the above-cited jurisprudence that
petitioner’s liability for the payment of interest is
2. Defendant-appellee Commonwealth Insurance not by reason of the suretyship agreement itself
Company shall pay plaintiff-appellant RIZAL but because of the delay in the payment of its
COMMERCIAL BANKING CORP. and (sic) obligation under the said agreement.
attorney’s fee of ₱10,000.00 and cost of this suit;
Petitioner admits having incurred in delay.
3. The third-party defendants JIGS Nonetheless, it insists that mere delay does not
MANUFACTURING CORPORATION, ELBA warrant the payment of interest. Citing Section
INDUSTRIES and ILUMINADA N. DE GUZMAN shall 244 of the Insurance Code,14 petitioner submits
respectively indemnify COMMONWEALTH that under the said provision of law, interest shall
INSURANCE CORPORATION for whatever it had accrue only when the delay or refusal to pay is
paid and shall pay to RIZAL COMMERCIAL unreasonable; that the delay in the payment of its
BANKING CORPORATION of their respective obligation is not unreasonable because such delay
individual obligations pursuant to this decision. was brought about by negotiations being made
with RCBC for the amicable settlement of the case.
SO ORDERED.7
We are not convinced.
CIC filed a motion for reconsideration but the CA
denied the same. It is not disputed that out of the principal sum of
₱4,464,128.00 petitioner was only able to pay
Hence, herein petition by CIC raising a single ₱2,000,000.00. Letters demanding the payment
assignment of error, to wit: of the respective obligations of JIGS and ELBA
were initially sent by RCBC to petitioner on
Respondent Court of Appeals grievously erred in October 30, 198415 and December 17, 1984.16
ordering petitioner to pay respondent RCBC the Petitioner made payments on an installment basis
amount of the surety bonds plus legal interest of spanning a period of almost three years, i.e., from
February 25, 1985 until February 10, 1988. On

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 81

July 7, 1988, or after a period of almost five the absence of stipulation, the rate of
months from its last payment, RCBC, thru its legal interest shall be 12% per annum to be
counsel, sent a final letter of demand asking computed from default, i.e. from judicial or
petitioner to pay the remaining balance of its extrajudicial demand under and subject to
obligation including interest.17 Petitioner failed to the provisions of Article 1169 of the Civil
pay. As of the date of the filing of the complaint on Code.
September 19, 1988, petitioner was even unable
to pay the remaining balance of P2,464,128.00 2. When an obligation, not constituting a loan or
out of the principal amount it owes RCBC. forbearance of money, is breached, an interest on
the amount of damages awarded may be imposed
Petitioner’s contention that what prevented it from at the discretion of the court at the rate of 6% per
paying its obligation to RCBC is the fact that the annum. No interest, however, shall be adjudged
latter insisted on imposing interest and penalties on unliquidated claims or damages except when or
over and above the principal sum it seeks to until the demand can be established with
recover is not plausible. Considering that reasonable certainty. Accordingly, where the
petitioner admits its obligation to pay the principal demand is established with reasonable certainty,
amount, then it should have paid the remaining the interest shall begin to run from the time the
balance of ₱2,464,128.00, notwithstanding any claim is made judicially or extrajudicially (Art.
disagreements with RCBC regarding the payment 1169, Civil Code) but when such certainty cannot
of interest. The fact that the negotiations for the be reasonably established at the time the demand
settlement of petitioner’s obligation did not push is made, the interest shall begin to run only from
through does not excuse it from paying the the date the judgment of the court is made (at
principal sum due to RCBC. which time the quantification of damages may be
deemed to have been reasonably ascertained).
The issue of petitioner’s payment of interest is a The actual base for the computation of legal
matter that is totally different from its obligation interest shall, in any case, be on the amount
to pay the principal amount covered by the surety finally adjudged.
bonds it issued. Petitioner offered no valid excuse
for not paying the balance of its principal 3. When the judgment of the court awarding a
obligation when demanded by RCBC. Its failure to sum of money becomes final and executory, the
pay is, therefore, unreasonable.1âwphi1 Thus, we rate of legal interest, whether the case falls under
find no error in the appellate court’s ruling that paragraph 1 or paragraph 2, above, shall be 12%
petitioner is liable to pay interest. per annum from such finality until its satisfaction,
this interim period being deemed to be by then an
As to the rate of interest, we do not agree with equivalent to a forbearance of credit.19 (Emphasis
petitioner’s contention that the rate should be 6% supplied)
per annum. The appellate court is correct in
imposing 12% interest. It is in accordance with In the present case, there is no dispute that
our ruling in Eastern Shipping Lines, Inc. vs. Court petitioner’s obligation consists of a loan or
of Appeals,18 wherein we have established certain forbearance of money. No interest has been
guidelines in awarding interest in the concept of agreed upon in writing between petitioner and
actual and compensatory damages, to wit: respondent. Applying the above-quoted rule to
the present case, the Court of Appeals correctly
I. When an obligation, regardless of its source, i.e., imposed the rate of interest at 12% per annum to
law, contracts, quasi-contracts, delicts or be computed from the time the extra-judicial
quasi-delicts is breached, the contravenor can be demand was made. This is in accordance with the
held liable for damages. The provisions under Title provisions of Article 116920 of the Civil Code and
XVIII on "Damages" of the Civil Code govern in of the settled rule that where there has been an
determining the measure of recoverable extra-judicial demand before action for
damages. performance was filed, interest on the amount due
begins to run not from the date of the filing of the
II. With regard particularly to an award of interest complaint but from the date of such extra-judicial
in the concept of actual and compensatory demand.21 RCBC’s extra-judicial demand for the
damages, the rate of interest, as well as the payment of JIGS’ obligation was made on October
accrual thereof, is imposed, as follows 30, 1984; while the extra-judicial demand for the
payment of ELBA’s obligation was made on
1. When the obligation is breached, and it December 17, 1984. On the other hand, the
consists in the payment of a sum of money, complaint for a sum of money was filed by RCBC
i.e., a loan or forbearance of money, the with the trial court only on September 19, 1988.
interest due should be that which may have
been stipulated in writing. Furthermore, the WHEREFORE, the instant petition is DENIED and
interest due shall itself earn legal interest the assailed Decision and Resolution of the Court
from the time it is judicially demanded. In of Appeals are AFFIRMED in toto.

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 82

SO ORDERED. issued on March 14 against the judgment debtors
and their surety. On March 29, 1977, Towers
SECOND DIVISION Assurance Corporation filed the instant petition for
certiorari where it assails the decision and writ of
G.R. No. L-45848 November 9,1977 execution.

TOWERS ASSURANCE We hold that the lower court acted with grave
CORPORATION, petitioner, abuse of discretion in issuing a writ of execution
vs. against the surety without first giving it an
ORORAMA SUPERMART, ITS opportunity to be heard as required in Rule 57 of
OWNER-PROPRIETOR, SEE HONG and JUDGE tie Rules of Court which provides:
BENJAMIN K. GOROSPE, Presiding Judge,
Court of First Instance of Misamis Oriental, SEC. 17. When execution returned unsatisfied,
Branch I, respondents. recovery had upon bound. — If the execution be
returned unsatisfied in whole or in part, the surety
Benjamin Tabique & Zosimo T. Vasalla for or sureties on any counterbound given pursuant to
petitioner. the provisions of this rule to secure the payment of
the judgment shall become charged on such
Rodrigo F. Lim, Jr. for private respondent. counterbound, and bound to pay to the judgment
creditor upon demand, the amount due under the
AQUINO, J.: judgment, which amount may be recovered from
such surety or sureties after notice and summary
This case is about the liability of a surety in a hearing in the same action.
counterbond for the lifting of a writ of preliminary
attachment. Under section 17, in order that the judgment
creditor might recover from the surety on the
On February 17, 1976 See Hong, the proprietor of counterbond, it is necessary (1) that execution be
Ororama Supermart in Cagayan de Oro City, sued first issued against the principal debtor and that
the spouses Ernesto Ong and Conching Ong in the such execution was returned unsatisfied in whole
Court of First Instance of Misamis Oriental for the or in part; (2) that the creditor made a demand
collection of the sum of P 58,400 plus litigation upon the surety for the satisfaction of the
expenses and attorney's fees (Civil Case No. judgment, and (3) that the surety be given notice
4930). and a summary hearing in the same action as to
his liability for the judgment under his
See Hong asked for a writ of preliminary counterbond.
attachment. On March 5, 1976, the lower court
issued an order of attachment. The deputy sheriff The first requisite mentioned above is not
attached the properties of the Ong spouses in applicable to this case because Towers Assurance
Valencia, Bukidnon and in Cagayan de Oro City. Corporation assumed a solidary liability for the
satisfaction of the judgment. A surety is not
To lift the attachment, the Ong spouses filed on entitled to the exhaustion of the properties of the
March 11, 1976 a counterbond in 'the amount of P principal debtor (Art. 2959, Civil Code; Luzon
58,400 with Towers Assurance Corporation as Steel Corporation vs. Sia, L-26449, May 15, 1969,
surety. In that undertaking, the Ong spouses and 28 SCRA 58, 63).
Towers Assurance Corporation bound themselves
to pay solidarity to See Hong the sum of P 58,400. But certainly, the surety is entitled to be heard
before an execution can be issued against him
On March 24, 1976 the Ong spouses filed an since he is not a party in the case involving his
answer with a counterclaim. For non-appearance principal. Notice and hearing constitute the
at the pre- trial, the Ong spouses were declared in essence of procedural due process. (Martinez vs.
default. Villacete 116 Phil. 326; Insurance & Surety Co.,
Inc. vs. Hon. Piccio, 105 Phil. 1192, 1200, Luzon
On October 25, 1976, the lower court rendered a Surety Co., Inc. vs. Beson, L-26865-66, January
decision, ordering not only the Ong spouses but 30. 1970. 31 SCRA 313).
also their surety, Towers Assurance Corporation,
to pay solidarily to See Hong the sum of P 58,400. WHEREFORE, the order and writ of execution,
The court also ordered the Ong spouses to pay P insofar as they concern Towers Corporation, are
10,000 as litigation expenses and attorney's fees. set aside. The lower court is directed to conduct a
summary hearing on the surety's liability on its
Ernesto Ong manifested that he did not want to counterbound. No costs.
appeal. On March 8, 1977, Ororama Supermart
filed a motion for execution. The lower court SO ORDERED.
granted that motion. The writ of execution was

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 83

 SECOND DIVISION Summons were served upon both Pan Pacific
and Finman, but they failed to answer.
G.R. No. 84084 August 20, 1990
On October 9, 1987, a hearing was called,
FINMAN GENERAL ASSURANCE but only the private respondents appeared.
CORPORATION, petitioner, Despite being deemed in default for failing to
vs. answer, both Finman and Pan Pacific were
ABDULGANI SALIK, BALABAGAN AMPILAN still notified of the scheduled hearing. Again
ALI KUBA GANDHI PUA, DAVID MALANAO, they failed to appear. Thus, ex-parte
THE ADMINISTRATOR, PHILIPPINE proceedings ensued.
OVERSEAS AND EMPLOYMENT
ADMINISTRATION, THE SECRETARY OF During the hearing, herein private
LABOR AND EMPLOYMENT, respondents. respondents reiterated the allegations in
their complaint that they first paid
David I. Unay, Jr. for petitioner. P20,000.00 thru Hadji Usop Kabagani for
which a receipt was issued signed by
Kamid D. Abdul for private respondents. Engineer Arandia and countersigned by Mrs.
Egil and a certain Imelda who are allegedly
PARAS, J.: employed by Pan Pacific; that they paid
another P10,000.00 to Engr. Arandia who did
This is a petition for certiorari seeking to not issue any receipt therefor; that the total
annul 1) the Order dated March 28, 1988 of payment of P30,000.00 allegedly represents
the Honorable Secretary of Labor and payments for herein private respondents in
Employment in POEA, LRO/RRD Case No. the amount of P5,000.00 each, and
87-09-1022-DP entitled Abdulgani Salik, et Abdulnasser Ali, who did not file any
al, v. Pan Pacific Overseas and Recruiting complaint against Pan Pacific (Ibid., pp.
Services and Finman General Assurance 15-16).
Corporation, which directed herein
petitioner to pay jointly and severally with Herein private respondents presented as
Pan Pacific the claims of herein private their witness, Hadji Usop Kabagani who they
respondents amounting to P25,000.00 and 2) Identified as the one who actually financed
the Order dated June 7, 1988, which denied their application and who corroborated their
petitioner's motion for reconsideration testimonies on all material points including
(Rollo, p. 2). the non-issuance of a receipt for P10,000.00
by Engr. Arandia.
The facts of the case are as follows:
Herein petitioner, Finman, in an answer
Abdulgani Salik et al., private respondents, which was not timely filed, alleged, among
allegedly applied with Pan Pacific Overseas others, that herein private respondents do
Recruiting Services, Inc. (hereinafter not have a valid cause of action against it;
referred to as Pan Pacific) on April 22, 1987 that Finman is not privy to any transaction
and were assured employment abroad by a undertaken by Pan Pacific with herein
certain Mrs. Normita Egil. In consideration private respondents; that herein private
thereof, they allegedly paid fees totalling respondents claims are barred by the statute
P30,000.00. But despite numerous of frauds and by the fact that they executed a
assurances of employment abroad given by waiver; that the receipts presented by herein
Celia Arandia and Mrs. Egil, they were not private respondents are mere scraps of
employed (Ibid., p. 15). paper; that it is not liable for the acts of Mrs.
Egil that Finman has a cashbond of
Accordingly, they filed a joint complaint with P75,000.00 only which is less than the
the Philippine Overseas Employment required amount of P100,000.00; and that
Administration (herein referred to as POEA) herein private respondents should proceed
against Pan Pacific for Violation of Articles directly against the cash bond of Pan Pacific
32 and 34(a) of the Labor Code, as amended, or against Mrs. Egil (Ibid., pp. 1617).
with claims for refund of a total amount of
P30,000.00 (Ibid.). On March 18,1988, the Honorable Franklin M.
Drilon, then the Secretary of Labor and
The POEA motu proprio impleaded and Employment, upon the recommendation of
summoned herein petitioner surety Finman the POEA hearing officer, issued an Order,
General Assurance Corporation (hereinafter the dispositive portion of which reads:
referred to as Finman), in the latter's
capacity as Pan Pacific's bonding company. WHEREFORE, premises considered, both
respondents are hereby directed to pay

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 84

jointly and severally the claims of THE HONORABLE SECRETARY OF LABOR
complainants, as follows: ACTED WITHOUT OR IN EXCESS OF
JURISDICTION AND WITH GRAVE ABUSE OF
1. Abdulgani Salik P5,000.00 DISCRETION AMOUNTING TO LACK OF
JURISDICTION IN DIRECTING FINMAN TO
2. Balabagan Ampilan 5,000.00 PAY JOINTLY AND SEVERALLY WITH PAN
PACIFIC THE CLAIMS OF PRIVATE
3. Ali Kuba 5,000.00 RESPONDENTS ON THE BASIS OF THE
SURETYSHIP AGREEMENT BETWEEN
4. Gandhi Dua 5,000.00 FINMAN AND PAN PACIFIC AND THE
PHILIPPINE OVERSEAS EMPLOYMENT
5. David Malanao 5,000.00 ADMINISTRATION (POEA FOR SHORT); AND

Based on the records of this Administration, III

respondent agency is presently serving a
total period of suspension of seventeen (1 7) THE FINDINGS OF FACT MADE BY THE POEA
months imposed in three (3) separate orders AND UPON WHICH THE HONORABLE
issued on June 2, 1987, August 17, 1987 and SECRETARY OF LABOR BASED ITS
September 23, 1987. Under the new QUESTIONED ORDERS ARE NOT SUPPORTED
schedule of penalties published on January BY SUBSTANTIAL EVIDENCE AND ARE
21, 1987 in the Philippine Inquirer, the CONTRARY TO LAW. (Ibid., p. 101)
penalty of cancellation shall be imposed
when the offender has been previously As required by this Court, herein public
penalized with suspension the total period of respondents filed their memorandum on July
which is 12 months or more. Moreover, the 28, 1989 (Ibid., p. 84); while that of
penalty imposable in the case at bar is two (2) petitioner and private respondents were
months suspension for each count of filed on September 11, 1989 (Ibid., p. 89)
violation or a total period of suspension of and March 16, 1990 (Ibid., p. 120),
ten (10) months as the acts were committed respectively.
in April 1987. Thus, whether under the old
schedule of penalties which required a total The petition is devoid of merit.
period of suspension of twenty-four (24)
months for cancellation to be imposed or In its first and second assigned errors,
under the new schedule which provides for a petitioner maintains that POEA has no
twelve (12) month total suspension period, jurisdiction to directly enforce the
the penalty of cancellation may be properly suretyship undertaking of FINMAN (herein
imposed upon the herein respondent agency. petitioner) under the surety bond (Ibid., p.
104).
In view thereof, the license of Pan Pacific
Overseas Recruiting Services is hereby In the case at bar, it remains uncontroverted
cancelled, effective immediately. that herein petitioner and Pan Pacific
entered into a suretyship agreement, with
SO ORDERED. (Ibid., pp. 20-21). the former agreeing that the bond is
conditioned upon the true and faithful
A motion for reconsideration having been performance and observance of the bonded
denied (Ibid., p. 22), herein petitioner principal (Pan Pacific) of its duties and
instituted the instant petition for certiorari, obligations. It was also understood that
raising the following assigned errors: under the suretyship agreement, herein
petitioner undertook itself to be jointly and
I severally liable for all claims arising from
recruitment violation of Pan Pacific (Ibid., p.
THE HONORABLE ADMINISTRATOR AND THE 23), in keeping with Section 4, Rule V, Book I
HONORABLE, SECRETARY OF LABOR ACTED of the Implementing Rules of the Labor Code,
WITH GRAVE ABUSE OF DISCRETION which provides:
AMOUNTING TO LACK OF JURISDICTION IN
MOTU PROPRIO IMPLEADING FINMAN AS Section 4. Upon approval of the application,
CO-RESPONDENT OF PAN PACIFIC IN POEA the applicant shall pay to the Ministry (now
LRO/RRD CASE NO. 87-09-1022 DP WHICH Department) a license fee of P6,000.00, post
WAS FILED BY ABDULGANI SALIK, ET AL.; a cash bond of P50,000.00 or negotiable
bonds of equivalent amount convertible to
II cash issued by banking or financial
institution duly endorsed to the Ministry
(now Department) as well as a surety bond

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 85

of P150,000.00 from an accredited bonding Hence, Finman's contention that POEA's and
company to answer for valid and legal claims respondent Secretary's actions in
arising from violations of the conditions of impleading and directing herein petitioner to
the license or the contracts of employment pay jointly and severally with Pan Pacific the
and guarantee compliance with the claims of private respondents constitute a
provisions of the Code, its implementing grave abuse of discretion amounting to lack
rules and regulations and appropriate of jurisdiction has no basis. (Ibid., p. 101.)
issuances of the Ministry (now
Department). (Emphasis supplied) As regards the third assigned error, herein
petitioner maintains that the findings of fact
Accordingly, the nature of Finman's made by the POEA upon which respondent
obligation under the suretyship agreement Secretary of Labor based his questioned
makes it privy to the proceedings against its Orders are not supported by substantial
principal (Pan Pacific). As such Finman is evidence and are contrary to law, is likewise
bound, in the absence of collusion, by a untenable.
judgment against its principal even though it
was not a party to the proceedings Leyson v. Herein petitioner, in raising this third issue,
Rizal Surety and Insurance Co., 16 SCRA 551 is, in effect, asking this Court to review the
(1966). Furthermore, in Government of the respondent Secretary's findings of facts.
Philippines v. Tizon (20 SCRA 1182 [1967]),
this Court ruled that where the surety bound Well-settled is the rule that findings of facts
itself solidarily with the principal obligor the of the respondent Secretary are generally
former is so dependent on the principal accorded great weight unless there was
debtor "that the surety is considered in law grave abuse of discretion or lack of
as being the same party as the debtor in jurisdiction in arriving at such findings
relation to whatever is adjudged touching (Asiaworld Publishing House, Inc. vs. Ople,
the obligation of the latter." Applying the 152 SCRA 219 (1987).
foregoing principles to the case at bar, it can
be very well said that even if herein Finman In the case at bar, it is undisputed that when
was not impleaded in the instant case, still it the case was first set for hearing, only the
(petitioner) can be held jointly and severally private respondents appeared, despite
liable for all claims arising from recruitment summons having been served upon both
violation of Pan Pacific. Moreover, as herein petitioner and Pan Pacific. This,
correctly stated by the Solicitor General, notwithstanding, both herein petitioner and
private respondents have a legal claim Pan Pacific were again notified of the
against Pan Pacific and its insurer for the scheduled hearing, but, as aforestated they
placement and processing fees they paid, so also' failed to a pear (Rollo, p. 15).
much so that in order to provide a complete Accordingly, owing to the absence of any
relief to private respondents, petitioner had controverting evidence, respondent
to be impleaded in the case (Rollo, p. 87). Secretary of Labor admitted and considered
private respondents' testimonies and
Furthermore, Finman contends that herein evidence as substantial. Under the
respondent Secretary of Labor cannot validly circumstances, no justifiable reason can be
assume jurisdiction over the case at bar; found to justify disturbance of the findings of
otherwise, proceedings will be railroaded facts of the respondent Secretary of Labor,
resulting in the deprivation of the former of supported as they are by substantial
any remedial measures under the law. evidence and in the absence of grave abuse
of discretion (Asiaworld Publishing House,
The records of the case reveal that herein Inc. v. Ople, supra); and in line with the well
Finman filed a motion for reconsideration of established principle that the findings of
the adverse decision dated March 18, 1988 administrative agencies which have
of respondent Secretary of Labor. In the said acquired expertise because their jurisdiction
motion for reconsideration, no jurisdictional is confined to specific matters are generally
challenge was made (Ibid., p. 22). It was accorded not only respect but at times even
only when it filed this petition that it assailed finality. (National Federation of Labor Union
the jurisdiction of the respondent Secretary (NAFLU) v. Ople, 143 SCRA 124 [1986])
of Labor, and that of the POEA. But then, it
was too late. Estoppel had barred herein PREMISES CONSIDERED, the questioned
petitioner from raising the issue, regardless Orders of respondent Secretary of Labor are
of its merits (Akay Printing Press v. Minister hereby AFFIRMED in toto,
of Labor and Employment, 140 SCRA 381
[1985]). SO ORDERED.

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 86

 SECOND DIVISION property.11 PhilGuarantee, however, rejected the
proposal.
G.R. No. 151060. August 31, 2005
PhilGuarantee thus filed a Complaint12 for
JN DEVELOPMENT CORPORATION, and SPS. collection of money and damages against herein
RODRIGO and LEONOR STA. ANA, Petitioners, petitioners.
vs.
PHILIPPINE EXPORT AND FOREIGN LOAN In its Decision dated 20 August 1998, the RTC
GUARANTEE CORPORATION, respondent. dismissed PhilGuarantee’s Complaint as well as
the counterclaim of petitioners. It ruled that
G.R. No. 151311. August 31, 2005 petitioners are not liable to reimburse
PhilGuarantee what it had paid to TRB. Crucial to
NARCISO V. CRUZ, Petitioners, this holding was the court’s finding that TRB was
vs. able to foreclose the real estate mortgage
PHILIPPINE EXPORT and FOREIGN LOAN executed by JN, thus extinguishing petitioners’
GUARANTEE CORPORATION, Respondent. obligation.13 Moreover, there was no showing that
after the said foreclosure, TRB had demanded
DECISION from JN any deficiency or the payment of the
difference between the proceeds of the
TINGA, J.: foreclosure sale and the actual loan.14 In addition,
the RTC held that since PhilGuarantee’s guarantee
Before us are consolidated petitions questioning was good for only one year from 17 December
the Decision1 of the Court of Appeals (CA) in 1979, or until 17 December 1980, and since it was
CA-G.R. CV No. 61318, entitled Philippine Export not renewed after the expiry of said period,
and Foreign Loan Guarantee Corporation v. JN PhilGuarantee had no more legal duty to pay TRB
Development Corporation, et al., which reversed on 10 March 1981.15 The RTC likewise ruled that
the Decision of the Regional Trial Court (RTC) of Cruz cannot be held liable under the Undertaking
Makati, Branch 60. since he was not the one who signed the
document, in line with its finding that his signature
On 13 December 1979, petitioner JN Development found in the records is totally different from the
Corporation ("JN") and Traders Royal Bank (TRB) signature on the Undertaking.16
entered into an agreement whereby TRB would
extend to JN an Export Packing Credit Line for Two According to the RTC, the failure of TRB to sue JN
Million Pesos (₱2,000,000.00). The loan was for the recovery of the loan precludes
covered by several securities, including a real PhilGuarantee from seeking recoupment from the
estate mortgage2 and a letter of guarantee from spouses Sta. Ana and Cruz what it paid to TRB.
respondent Philippine Export and Foreign Loan Thus, PhilGuarantee’s payment to TRB amounts to
Guarantee Corporation ("PhilGuarantee"), now a waiver of its right under Art. 2058 of the Civil
Trade and Investment Development Corporation Code.17
of the Philippines, covering seventy percent (70%)
of the credit line.3 With PhilGuarantee issuing a Aggrieved by the RTC Decision, PhilGuarantee
guarantee in favor of TRB,4 JN, petitioner spouses appealed to the CA. The appellate court reversed
Rodrigo and Leonor Sta. Ana5 and petitioner the RTC and ordered petitioners to pay
Narciso Cruz6 executed a Deed of Undertaking7 PhilGuarantee Nine Hundred Thirty Four Thousand
(Undertaking) to assure repayment to Six Hundred Twenty Four Pesos and Thirty Four
PhilGuarantee. Centavos (₱934,624.34), plus service charge and
interest.18
It appears that JN failed to pay the loan to TRB
upon its maturity; thus, on 8 October 1980 TRB In reaching its denouement, the CA held that the
requested PhilGuarantee to make good its RTC’s finding that the loan was extinguished by
guarantee.8 PhilGuarantee informed JN about the virtue of the foreclosure sale of the mortgaged
call made by TRB, and inquired about the action of property had no factual support,19 and that such
JN to settle the loan.9 Having received no finding is negated by Rodrigo Sta. Ana’s testimony
response from JN, on 10 March 1981 that JN did not receive any notice of foreclosure
PhilGuarantee paid TRB Nine Hundred Thirty Four from PhilGuarantee or from TRB. 20 Moreover, Sta.
Thousand Eight Hundred Twenty Four Pesos and Ana even offered the same mortgaged property to
Thirty Four Centavos (₱934,824.34).10 PhilGuarantee to settle its obligations with the
Subsequently, PhilGuarantee made several latter.21
demands on JN, but the latter failed to pay. On 30
May 1983, JN, through Rodrigo Sta. Ana, The CA also ruled that JN’s obligation had become
proposed to settle the obligation "by way of due and demandable within the one-year period of
development and sale" of the mortgaged effectivity of the guarantee; thus, PhilGuarantee’s
payment to TRB conformed with its guarantee,

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 87

although the payment itself was effected one year evidence proving the alleged forgery of Cruz’s
after the maturity date of the loan.22 Contrary to signature on the Undertaking, which is a notarized
the trial court’s finding, the CA ruled that the document and as such must be accorded the
contract of guarantee was not extinguished by the presumption of regularity.33
alleged lack of evidence on PhilGuarantee’s
consent to the extensions granted by TRB to JN.23 The Court finds for PhilGuarantee.
Interpreting Art. 2058 of the Civil Code,24 the
appellate court explained that while the provision Under a contract of guarantee, the guarantor
states that the guarantor cannot be compelled to binds himself to the creditor to fulfill the obligation
pay unless the properties of the debtor are of the principal debtor in case the latter should fail
exhausted, the guarantor is not precluded from to do so.34 The guarantor who pays for a debtor, in
waiving the benefit of excussion and paying the turn, must be indemnified by the latter.35
obligation altogether.25 However, the guarantor cannot be compelled to
pay the creditor unless the latter has exhausted all
Finally, the CA found that Narciso Cruz was unable the property of the debtor and resorted to all the
to prove the alleged forgery of his signature in the legal remedies against the debtor.36 This is what is
Undertaking, the evidence presented not being otherwise known as the benefit of excussion.
sufficient to overcome the presumption of
regularity of the Undertaking which is a notarized It is clear that excussion may only be invoked
document. 26 after legal remedies against the principal debtor
have been expanded. Thus, it was held that the
Petitioners sought reconsideration of creditor must first obtain a judgment against the
the Decision and prayed for the admission of principal debtor before assuming to run after the
documents evidencing the foreclosure of the real alleged guarantor, "for obviously the ‘exhaustion
estate mortgage, but the motion for of the principal’s property’ cannot even begin to
reconsideration was denied by the CA for lack of take place before judgment has been obtained." 37
merit. The CA ruled that the documentary The law imposes conditions precedent for the
evidence presented by petitioners cannot be invocation of the defense. Thus, in order that the
considered as newly discovered evidence, it being guarantor may make use of the benefit of
already in existence while the case was pending excussion, he must set it up against the creditor
before the trial court, the very forum before which upon the latter’s demand for payment and point
it should have been presented. Besides, a out to the creditor available property of the debtor
foreclosure sale per se is not proof of petitioners’ within the Philippines sufficient to cover the
payment of the loan to PhilGuarantee, the CA amount of the debt.38
added.27
While a guarantor enjoys the benefit of excussion,
So now before the Court are the separate petitions nothing prevents him from paying the obligation
for review of the CA Decision. JN and the spouses once demand is made on him. Excussion, after all,
Sta. Ana, petitioners in G.R. No. 151060, posit is a right granted to him by law and as such he
that the CA erred in interpreting Articles 2079, may opt to make use of it or waive it.
2058, and 2059 of the Civil Code in its Decision.28 PhilGuarantee’s waiver of the right of excussion
Meanwhile, petitioner Narciso Cruz in G.R. No. cannot prevent it from demanding reimbursement
151311 claims that the CA erred when it held that from petitioners. The law clearly requires the
petitioners are liable to PhilGuarantee despite its debtor to indemnify the guarantor what the latter
payment after the expiration of its contract of has paid.39
guarantee and the lack of PhilGuarantee’s consent
to the extensions granted by TRB to JN. Moreover, Petitioners’ claim that PhilGuarantee had no more
Cruz questions the reversal of the ruling of the obligation to pay TRB because of the alleged
trial court anent his liability as a signatory to the expiration of the contract of guarantee is
Undertaking.29 untenable. The guarantee, dated17 December
1979, states:
On the other hand, PhilGuarantee maintains that
the date of default, not the actual date of payment, In the event of default by JNDC and as a
determines the liability of the guarantor and that consequence thereof, PHILGUARANTEE is made to
having paid TRB when the loan became due, it pay its obligation arising under the aforesaid
should be indemnified by petitioners. 30 It argues guarantee PHILGUARANTEE shall pay the BANK
that, contrary to petitioners’ claim, there could be the amount of ₱1.4 million or 70% of the total
no waiver of its right to excussion more explicit obligation unpaid…
than its act of payment to TRB very directly.31
Besides, the right to excussion is for the benefit of ....
the guarantor and is not a defense for the debtor
to raise and use to evade liability.32 Finally, This guarantee shall be valid for a period of one (1)
PhilGuarantee maintains that there is no sufficient year from date hereof but may be renewed upon

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 88

payment by JNDC of the guarantee fee at the is a protective device pertaining to and conferred
same rate of 1.5% per annum.40 on the guarantor. These may be invoked by the
guarantor against the creditor as defenses to bar
The guarantee was only up to 17 December 1980. the unwarranted enforcement of the guarantee.
JN’s obligation with TRB fell due on 30 June 1980, However, PhilGuarantee did not avail of these
and demand on PhilGuarantee was made by TRB defenses when it paid its obligation according to
on 08 October 1980. That payment was actually the tenor of the guarantee once demand was
made only on 10 March 1981 does not take it out made on it. What is peculiar in the instant case is
of the terms of the guarantee. What is controlling that petitioners, the principal debtors themselves,
is that default and demand on PhilGuarantee had are muddling the issues and raising the same
taken place while the guarantee was still in force. defenses against the guarantor, which only the
guarantor may invoke against the creditor, to
There is likewise no merit in petitioners’ claim that avoid payment of their own obligation to the
PhilGuarantee’s failure to give its express consent guarantor. The Court cannot countenance their
to the alleged extensions granted by TRB to JN self-seeking desire to be exonerated from the duty
had extinguished the guarantee. The requirement to reimburse PhilGuarantee after it had paid TRB
that the guarantor should consent to any on their behalf and to unjustly enrich themselves
extension granted by the creditor to the debtor at the expense of PhilGuarantee.
under Art. 2079 is for the benefit of the guarantor.
As such, it is likewise waivable by the guarantor. Petitioners assert that TRB’s alleged foreclosure of
Thus, even assuming that extensions were indeed the real estate mortgage over the land executed
granted by TRB to JN, PhilGuarantee could have as security for the loan agreement had
opted to waive the need for consent to such extinguished PhilGuarantee’s obligation; thus,
extensions. Indeed, a guarantor is not precluded PhilGuarantee’s recourse should be directed
from waiving his right to be notified of or to give against TRB, as per the pari-passu provision46 in
his consent to extensions obtained by the debtor. the contract of guarantee.47 We disagree.
Such waiver is not contrary to public policy as it is
purely personal and does not affect public The foreclosure was made on 27 August 1993,
interest.41 In the instant case, PhilGuarantee’s "after the case was submitted for decision in 1992
waiver can be inferred from its actual payment to and before the issuance of the decision of the
TRB after the latter’s demand, despite JN’s failure court a quo in 1998".48 Thus, foreclosure was
to pay the renewal/guarantee fee as indicated in resorted to by TRB against JN when they both had
the guarantee.42 become aware that PhilGuarantee had already
paid TRB and that there was a pending case filed
For the above reasons, there is no basis for by PhilGuarantee against petitioners. This matter
petitioner’s claim that PhilGuarantee was a mere was not raised and proved in the trial court, nor in
volunteer payor and had no legal obligation to pay the appeal before the CA, but raised for the first
TRB. The law does not prohibit the payment by a time in petitioners’ motion for reconsideration in
guarantor on his own volition, heedless of the the CA. In their appellants’ Brief, petitioners
benefit of excussion. In fact, it recognizes the right claimed that "there was no need for the
of a guarantor to recover what it has paid, even if defendant-appellee JNDC to present any evidence
payment was made before the debt becomes before the lower court to show that indeed
due,43 or if made without notice to the debtor, 44 foreclosure of the REM took place."49 As properly
subject of course to some conditions. held by the CA,

Petitioners’ invocation of our ruling in Willex … Firstly, the documents evidencing foreclosure of
Plastic Industries, Corp. v. Court of Appeals45 is mortgage cannot be considered as newly
misplaced, if not irrelevant. In the said case, the discovered evidence. The said documents were
guarantor claimed that it could not be proceeded already subsisting and should have been
against without first exhausting all of the presented during the trial of the case. The alleged
properties of the debtor. The Court, finding that foreclosure sale was made on August 23, 1993 …
there was an express renunciation of the benefit of while the decision was rendered by the trial court
excussion in the contract of guarantee, ruled on August 20, 1998 about five (5) years thereafter.
against the guarantor. These documents were likewise not submitted by
the defendants-appellees when they submitted
The cited case finds no application in the case a their appellees’ Brief to this Court. Thus, these
quo. PhilGuarantee is not invoking the benefit of cannot be considered as newly discovered
excussion. It cannot be overemphasized that evidence but are more correctly ascribed as
excussion is a right granted to the guarantor and, suppressed forgotten evidence… Secondly, the
therefore, only he may invoke it at his discretion. alleged foreclosure sale is not proof of payment of
the loan by defendant-appellees to the
The benefit of excussion, as well as the plaintiffs-appellants.50
requirement of consent to extensions of payment,

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 89

Besides, the complaint a quo was filed by SO ORDERED.
PhilGuarantee as guarantor for JN, and its cause of
action was premised on its payment of JN’s FIRST DIVISION
obligation after the latter’s default. PhilGuarantee
was well within its rights to demand G.R. No. 145578 November 18, 2005
reimbursement for such payment made,
regardless of whether the creditor, TRB, was JOSE C. TUPAZ IV and PETRONILA C.
subsequently able to obtain payment from JN. If TUPAZ, Petitioners,
double payment was indeed made, then it is JN vs.
which should go after TRB, and not PhilGuarantee. THE COURT OF APPEALS and BANK OF THE
Petitioners have no one to blame but themselves, PHILIPPINE ISLANDS, Respondents.
having allowed the foreclosure of the property for
the full value of the loan despite knowledge of DECISION
PhilGuarantee’s payment to TRB. Having been
aware of such payment, they should have opposed CARPIO, J.:
the foreclosure, or at the very least, filed a
supplemental pleading with the trial court The Case
informing the same of the foreclosure sale.
This is a petition for review1 of the Decision2 of the
Likewise, petitioners cannot invoke Court of Appeals dated 7 September 2000 and its
the pari-passu clause in the guarantee, not being Resolution dated 18 October 2000. The 7
parties to the said agreement. The clause is clearly September 2000 Decision affirmed the ruling of
for the benefit of the guarantor and no other. the Regional Trial Court, Makati, Branch 144 in a
case for estafa under Section 13, Presidential
The Court notes the letter51 of Rodrigo Sta. Ana Decree No. 115. The Court of Appeals’ Resolution
offering, by way of settlement of JN’s obligations of 18 October 2000 denied petitioners’ motion for
to PhilGuarantee, the very same parcel of land reconsideration.
mortgaged as security for the loan agreement.
This further weakens the position of petitioners, The Facts
since it becomes obvious that they acknowledged
the payment made by PhilGuarantee on their Petitioners Jose C. Tupaz IV and Petronila C.
behalf and that they were in fact willing to Tupaz ("petitioners") were Vice-President for
negotiate with PhilGuarantee for the settlement of Operations and Vice-President/Treasurer,
the said obligation before the filing of the respectively, of El Oro Engraver Corporation ("El
complaint a quo. Oro Corporation"). El Oro Corporation had a
contract with the Philippine Army to supply the
Anent the issue of forgery, the CA is correct in latter with "survival bolos."
reversing the decision of the trial court. Save for
the denial of Narciso Cruz that it was not his To finance the purchase of the raw materials for
signature in the Undertaking and the perfunctory the survival bolos, petitioners, on behalf of El Oro
comparison of the signatures, nothing in the Corporation, applied with respondent Bank of the
records would support the claim of forgery. Philippine Islands ("respondent bank") for two
Forgery cannot be presumed and must be proved commercial letters of credit. The letters of credit
by clear, positive and convincing evidence and the were in favor of El Oro Corporation’s suppliers,
burden of proof lies on the party alleging Tanchaoco Manufacturing
forgery.52 Mere denial will not suffice to overcome Incorporated3 ("Tanchaoco Incorporated") and
the positive value of the Undertaking, which is a Maresco Rubber and Retreading
notarized document, has in its favor the Corporation4 ("Maresco Corporation").
presumption of regularity, and carries the Respondent bank granted petitioners’ application
evidentiary weight conferred upon it with respect and issued Letter of Credit No. 2-00896-3 for
to its due execution.53 Even in cases where the ₱564,871.05 to Tanchaoco Incorporated and
alleged forged signature was compared to Letter of Credit No. 2-00914-5 for ₱294,000 to
samples of genuine signatures to show its Maresco Corporation.
variance therefrom, this Court still found such
evidence insufficient.54 Mere variance of the Simultaneous with the issuance of the letters of
signatures cannot be considered as conclusive credit, petitioners signed trust receipts in favor of
proof that the same were forged.55 respondent bank. On 30 September 1981,
petitioner Jose C. Tupaz IV ("petitioner Jose
WHEREFORE, the consolidated petitions are Tupaz") signed, in his personal capacity, a trust
DENIED. The Decision of the Court of Appeals in receipt corresponding to Letter of Credit No.
CA-G.R. CV No. 61318 is AFFIRMED. 2-00896-3 (for ₱564,871.05). Petitioner Jose
Tupaz bound himself to sell the goods covered by
No pronouncement as to costs. the letter of credit and to remit the proceeds to

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respondent bank, if sold, or to return the goods, if annum; plus 10% of the total amount due as
not sold, on or before 29 December 1981. attorney’s fees; ₱5,000.00 as expenses of
litigation; and costs of the suit.8
On 9 October 1981, petitioners signed, in their
capacities as officers of El Oro Corporation, a trust In holding petitioners civilly liable with El Oro
receipt corresponding to Letter of Credit No. Corporation, the trial court held:
2-00914-5 (for ₱294,000). Petitioners bound
themselves to sell the goods covered by that letter [S]ince the civil action for the recovery of the civil
of credit and to remit the proceeds to respondent liability is deemed impliedly instituted with the
bank, if sold, or to return the goods, if not sold, on criminal action, as in fact the prosecution thereof
or before 8 December 1981. was actively handled by the private prosecutor,
the Court believes that the El Oro Engraver
After Tanchaoco Incorporated and Maresco Corporation and both accused Jose C. Tupaz and
Corporation delivered the raw materials to El Oro Petronila Tupaz, jointly and solidarily should be
Corporation, respondent bank paid the former held civilly liable to the Bank of the Philippine
₱564,871.05 and ₱294,000, respectively. Islands. The mere fact that they were unable to
collect in full from the AFP and/or the Department
Petitioners did not comply with their undertaking of National Defense the proceeds of the sale of the
under the trust receipts. Respondent bank made delivered survival bolos manufactured from the
several demands for payments but El Oro raw materials covered by the trust receipt
Corporation made partial payments only. On 27 agreements is no valid defense to the civil claim of
June 1983 and 28 June 1983, respondent bank’s the said complainant and surely could not wipe out
counsel5 and its representative6 respectively sent their civil obligation. After all, they are free to
final demand letters to El Oro Corporation. El Oro institute an action to collect the same.9
Corporation replied that it could not fully pay its
debt because the Armed Forces of the Philippines Petitioners appealed to the Court of Appeals.
had delayed paying for the survival bolos. Petitioners contended that: (1) their acquittal
"operates to extinguish [their] civil liability" and (2)
Respondent bank charged petitioners with estafa at any rate, they are not personally liable for El
under Section 13, Presidential Decree No. 115 Oro Corporation’s debts.
("Section 13")7 or Trust Receipts Law ("PD 115").
After preliminary investigation, the then Makati The Ruling of the Court of Appeals
Fiscal’s Office found probable cause to indict
petitioners. The Makati Fiscal’s Office filed the In its Decision of 7 September 2000, the Court of
corresponding Informations (docketed as Criminal Appeals affirmed the trial court’s ruling. The
Case Nos. 8848 and 8849) with the Regional Trial appellate court held:
Court, Makati, on 17 January 1984 and the cases
were raffled to Branch 144 ("trial court") on 20 It is clear from [Section 13, PD 115] that civil
January 1984. Petitioners pleaded not guilty to the liability arising from the violation of the trust
charges and trial ensued. During the trial, receipt agreement is distinct from the criminal
respondent bank presented evidence on the civil liability imposed therein. In the case of Vintola vs.
aspect of the cases. Insular Bank of Asia and America, our Supreme
Court held that acquittal in the estafa case (P.D.
The Ruling of the Trial Court 115) is no bar to the institution of a civil action for
collection. This is because in such cases, the civil
On 16 July 1992, the trial court rendered liability of the accused does not arise ex
judgment acquitting petitioners of estafa on delicto but rather based ex contractu and as such
reasonable doubt. However, the trial court found is distinct and independent from any criminal
petitioners solidarily liable with El Oro Corporation proceedings and may proceed regardless of the
for the balance of El Oro Corporation’s principal result of the latter. Thus, an independent civil
debt under the trust receipts. The dispositive action to enforce the civil liability may be filed
portion of the trial court’s Decision provides: against the corporation aside from the criminal
action against the responsible officers or
WHEREFORE, judgment is hereby rendered employees.
ACQUITTING both accused Jose C. Tupaz, IV and
Petronila Tupaz based upon reasonable doubt. xxx

However, El Oro Engraver Corporation, Jose C. [W]e hereby hold that the acquittal of the
Tupaz, IV and Petronila Tupaz, are hereby ordered, accused-appellants from the criminal charge of
jointly and solidarily, to pay the Bank of the estafa did not operate to extinguish their civil
Philippine Islands the outstanding principal liability under the letter of credit-trust receipt
obligation of ₱624,129.19 (as of January 23, 1992) arrangement with plaintiff-appellee, with which
with the stipulated interest at the rate of 18% per they dealt both in their personal capacity and as

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 91

officers of El Oro Engraver Corporation, the letter 2. GRANTING WITHOUT ADMITTING THAT THE
of credit applicant and principal debtor. QUESTIONED OBLIGATION WAS INCURRED BY
THE CORPORATION, THE SAME IS NOT YET DUE
Appellants argued that they cannot be held AND PAYABLE;
solidarily liable with their corporation, El Oro
Engraver Corporation, alleging that they executed 3. GRANTING THAT THE QUESTIONED
the subject documents including the trust receipt OBLIGATION WAS ALREADY DUE AND PAYABLE,
agreements only in their capacity as such xxx PETITIONERS ARE NOT PERSONALLY LIABLE
corporate officers. They said that these TO xxx RESPONDENT BANK, SINCE THEY SIGNED
instruments are mere pro-forma and that they THE LETTER[S] OF CREDIT AS ‘SURETY’ AS
executed these instruments on the strength of a OFFICERS OF EL ORO, AND THEREFORE, AN
board resolution of said corporation authorizing EXCLUSIVE LIABILITY OF EL ORO; [AND]
them to apply for the opening of a letter of credit
in favor of their suppliers as well as to execute the 4. IN THE ALTERNATIVE, THE QUESTIONED
other documents necessary to accomplish the TRANSACTIONS ARE SIMULATED AND VOID.11
same.
The Issues
Such contention, however, is contradicted by the
evidence on record. The trust receipt agreement The petition raises these issues:
indicated in clear and unmistakable terms that the
accused signed the same as surety for the (1) Whether petitioners bound themselves
corporation and that they bound themselves personally liable for El Oro Corporation’s debts
directly and immediately liable in the event of under the trust receipts;
default with respect to the obligation under the
letters of credit which were made part of the said (2) If so —
agreement, without need of demand. Even in the
application for the letter of credit, it is likewise (a) whether petitioners’ liability is solidary with El
clear that the undertaking of the accused is that of Oro Corporation; and
a surety as indicated [in] the following words: "In
consideration of your establishing the commercial (b) whether petitioners’ acquittal of estafa under
letter of credit herein applied for substantially in Section 13, PD 115 extinguished their civil
accordance with the foregoing, the undersigned liability.
Applicant and Surety hereby agree, jointly and
severally, to each and all stipulations, provisions The Ruling of the Court
and conditions on the reverse side hereof."
The petition is partly meritorious. We affirm the
xxx Court of Appeals’ ruling with the modification that
petitioner Jose Tupaz is liable as guarantor of El
Having contractually agreed to hold themselves Oro Corporation’s debt under the trust receipt
solidarily liable with El Oro Engraver Corporation dated 30 September 1981.
under the subject trust receipt agreements with
appellee Bank of the Philippine Islands, herein On Petitioners’ Undertaking Under
accused-appellants may not, therefore, invoke the
separate legal personality of the said corporation the Trust Receipts
to evade their civil liability under the letter of
credit-trust receipt arrangement with said A corporation, being a juridical entity, may act
appellee, notwithstanding their acquittal in the only through its directors, officers, and employees.
criminal cases filed against them. The trial court Debts incurred by these individuals, acting as such
thus did not err in holding the appellants solidarily corporate agents, are not theirs but the direct
liable with El Oro Engraver Corporation for the liability of the corporation they represent.12 As an
outstanding principal obligation of ₱624,129.19 exception, directors or officers are personally
(as of January 23, 1992) with the stipulated liable for the corporation’s debts only if they so
interest at the rate of 18% per annum, plus 10% contractually agree or stipulate.13
of the total amount due as attorney’s fees,
₱5,000.00 as expenses of litigation and costs of Here, the dorsal side of the trust receipts contains
suit.10 the following stipulation:

Hence, this petition. Petitioners contend that: To the Bank of the Philippine Islands

1. A JUDGMENT OF ACQUITTAL OPERATE[S] TO In consideration of your releasing

EXTINGUISH THE CIVIL LIABILITY OF to ………………………………… under the terms of this
PETITIONERS[;] Trust Receipt the goods described herein, I/We,
jointly and severally, agree and promise to pay to

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 92

you, on demand, whatever sum or sums of money Under the Trust Receipt Dated 30 September
which you may call upon me/us to pay to you, 1981
arising out of, pertaining to, and/or in any way
connected with, this Trust Receipt, in the event of As stated, the dorsal side of the trust receipt dated
default and/or non-fulfillment in any respect of 30 September 1981 provides:
this undertaking on the part of the
said ……………………………………. I/we further agree To the Bank of the Philippine Islands
that my/our liability in this guarantee shall be
DIRECT AND IMMEDIATE, without any need In consideration of your releasing
whatsoever on your part to take any steps or to ………………………………… under the terms of this
exhaust any legal remedies that you may have Trust Receipt the goods described herein,
against the said …………………………………. before I/We, jointly and severally, agree and promise to
making demand upon me/us.14 (Capitalization in pay to you, on demand, whatever sum or sums of
the original) money which you may call upon me/us to pay to
you, arising out of, pertaining to, and/or in any
In the trust receipt dated 9 October 1981, way connected with, this Trust Receipt, in the
petitioners signed below this clause as officers of event of default and/or non-fulfillment in any
El Oro Corporation. Thus, under petitioner respect of this undertaking on the part of the
Petronila Tupaz’s signature are the words said ……………………………………. I/we further agree
"Vice-Pres–Treasurer" and under petitioner Jose that my/our liability in this guarantee shall be
Tupaz’s signature are the words DIRECT AND IMMEDIATE, without any need
"Vice-Pres–Operations." By so signing that trust whatsoever on your part to take any steps or
receipt, petitioners did not bind themselves exhaust any legal remedies that you may have
personally liable for El Oro Corporation’s against the said …………………………………………….
obligation. In Ong v. Court of Appeals,15 a Before making demand upon me/us. (Underlining
corporate representative signed a solidary supplied; capitalization in the original)
guarantee clause in two trust receipts in his
capacity as corporate representative. There, the The lower courts interpreted this to mean that
Court held that the corporate representative did petitioner Jose Tupaz bound himself solidarily
not undertake to guarantee personally the liable with El Oro Corporation for the latter’s debt
payment of the corporation’s debts, thus: under that trust receipt.

[P]etitioner did not sign in his personal capacity This is error.

the solidary guarantee clause found on the dorsal
portion of the trust receipts. Petitioner placed his In Prudential Bank v. Intermediate Appellate
signature after the typewritten words "ARMCO Court,16 the Court interpreted a substantially
INDUSTRIAL CORPORATION" found at the end of identical clause17 in a trust receipt signed by a
the solidary guarantee clause. Evidently, corporate officer who bound himself personally
petitioner did not undertake to guaranty liable for the corporation’s obligation. The
personally the payment of the principal and petitioner in that case contended that the
interest of ARMAGRI’s debt under the two trust stipulation "we jointly and severally agree and
receipts. undertake" rendered the corporate officer
solidarily liable with the corporation. We dismissed
Hence, for the trust receipt dated 9 October 1981, this claim and held the corporate officer liable as
we sustain petitioners’ claim that they are not guarantor only. The Court further ruled that had
personally liable for El Oro Corporation’s there been more than one signatories to the trust
obligation. receipt, the solidary liability would exist between
the guarantors. We held:
For the trust receipt dated 30 September 1981,
the dorsal portion of which petitioner Jose Tupaz Petitioner [Prudential Bank] insists that by virtue
signed alone, we find that he did so in his personal of the clear wording of the xxx clause "x x x we
capacity. Petitioner Jose Tupaz did not indicate jointly and severally agree and undertake x x x,"
that he was signing as El Oro Corporation’s and the concluding sentence on exhaustion,
Vice-President for Operations. Hence, petitioner [respondent] Chi’s liability therein is solidary.
Jose Tupaz bound himself personally liable for El
Oro Corporation’s debts. Not being a party to the xxx
trust receipt dated 30 September 1981, petitioner
Petronila Tupaz is not liable under such trust Our xxx reading of the questioned solidary
receipt. guaranty clause yields no other conclusion than
that the obligation of Chi is only that of
The Nature of Petitioner Jose Tupaz’s a guarantor. This is further bolstered by the last
Liability sentence which speaks of waiver of exhaustion,
which, nevertheless, is ineffective in this case

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 93

because the space therein for the party whose under the letters of credit are subject to interest at
property may not be exhausted was not filled up. the rate of 18% per annum.22
Under Article 2058 of the Civil Code, the defense
of exhaustion (excussion) may be raised by a The lower courts correctly applied the 18%
guarantor before he may be held liable for the interest rate per annum considering that the face
obligation. Petitioner likewise admits that the value of each of the trust receipts is based on the
questioned provision is a solidary guaranty clause, drafts drawn under the letters of credit. Based on
thereby clearly distinguishing it from a contract of the guidelines laid down in
surety. It, however, described the guaranty as
solidary between the guarantors; this would have Eastern Shipping Lines, Inc. v. Court of
been correct if two (2) guarantors had signed Appeals,23 the accrued stipulated interest earns
it. The clause "we jointly and severally agree and 12% interest per annum from the time of the
undertake" refers to the undertaking of the two (2) filing of the Informations in the Makati Regional
parties who are to sign it or to the liability existing Trial Court on 17 January 1984. Further, the total
between themselves. It does not refer to the amount due as of the date of the finality of this
undertaking between either one or both of them Decision will earn interest at 18% per annum until
on the one hand and the petitioner on the other fully paid since this was the stipulated rate in the
with respect to the liability described under the applications for the letters of credit.24
trust receipt. xxx
The accounting of El Oro Corporation’s debts as of
Furthermore, any doubt as to the import or true 23 January 1992, which the trial court used, is no
intent of the solidary guaranty clause should be longer useful as it does not specify the amounts
resolved against the petitioner. The trust receipt, owing under each of the trust receipts. Hence, in
together with the questioned solidary guaranty the execution of this Decision, the trial court shall
clause, is on a form drafted and prepared solely by compute El Oro Corporation’s total liability under
the petitioner; Chi’s participation therein is limited each of the trust receipts dated 30 September
to the affixing of his signature thereon. It is, 1981 and 9 October 1981 based on the following
therefore, a contract of adhesion; as such, it must formula:25
be strictly construed against the party responsible
for its preparation.18 (Underlining supplied; TOTAL AMOUNT DUE = [principal + interest +
italicization in the original) interest on interest] – partial payments made26

However, respondent bank’s suit against Interest = principal x 18 % per annum x no. of
petitioner Jose Tupaz stands despite the Court’s years from due date27 until finality of judgment
finding that he is liable as guarantor only. First,
excussion is not a pre-requisite to secure Interest on interest = interest computed as of the
judgment against a guarantor. The guarantor can filing of the complaint (17 January 1984) x 12% x
still demand deferment of the execution of the no. of years until finality of judgment
judgment against him until after the assets of the
principal debtor shall have been Attorney’s fees is 10% of the total amount
exhausted. Second, the benefit of excussion
19
computed as of finality of judgment
may be waived.20 Under the trust receipt dated 30
September 1981, petitioner Jose Tupaz waived Total amount due as of the date of finality of
excussion when he agreed that his "liability in [the] judgment will earn an interest of 18% per annum
guaranty shall be DIRECT AND IMMEDIATE, until fully paid.
without any need whatsoever on xxx [the] part [of
respondent bank] to take any steps or exhaust In so delegating this task, we reiterate what we
any legal remedies xxx." The clear import of this said in Rizal Commercial Banking Corporation
stipulation is that petitioner Jose Tupaz waived the v. Alfa RTW Manufacturing
benefit of excussion under his guarantee. Corporation28 where we also ordered the trial
court to compute the amount of obligation due
As guarantor, petitioner Jose Tupaz is liable for El based on a formula substantially similar to that
Oro Corporation’s principal debt and other indicated above:
accessory liabilities (as stipulated in the trust
receipt and as provided by law) under the trust The total amount due xxx [under] the xxx
receipt dated 30 September 1981. That trust contract[] xxx may be easily determined by the
receipt (and the trust receipt dated 9 October trial court through a simple mathematical
1981) provided for payment of attorney’s fees computation based on the formula specified above.
equivalent to 10% of the total amount due and an Mathematics is an exact science, the application of
"interest at the rate of 7% per annum, or at such which needs no further proof from the parties.
other rate as the bank may fix, from the date due
until paid xxx."21 In the applications for the letters Petitioner Jose Tupaz’s Acquittal did not
of credit, the parties stipulated that drafts drawn

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 94

 Extinguish his Civil Liability Branch 144, upon finality of this Decision, based
on the formula provided above;
The rule is that where the civil action is impliedly
instituted with the criminal action, the civil liability 2) Petitioner Jose C. Tupaz IV is liable for El Oro
is not extinguished by acquittal — Engraver Corporation’s total debt under the trust
receipt dated 30 September 1981 as thus
[w]here the acquittal is based on reasonable computed by the Regional Trial Court, Makati,
doubt xxx as only preponderance of evidence is Branch 144; and
required in civil cases; where the court expressly
declares that the liability of the accused is not 3) Petitioners Jose C. Tupaz IV and Petronila C.
criminal but only civil in nature xxx as, for instance, Tupaz are not liable under the trust receipt dated 9
in the felonies of estafa, theft, and malicious October 1981.
mischief committed by certain relatives who
thereby incur only civil liability (See Art. 332, SO ORDERED.
Revised Penal Code); and, where the civil liability
does not arise from or is not based upon the THIRD DIVISION
criminal act of which the accused was
acquitted xxx.29 (Emphasis supplied) G.R. No. 173526 August 28, 2008

Here, respondent bank chose not to file a separate BENJAMIN BITANGA, petitioner,
civil action30 to recover payment under the trust vs.
receipts. Instead, respondent bank sought to PYRAMID CONSTRUCTION ENGINEERING
recover payment in Criminal Case Nos. 8848 and CORPORATION, respondent.
8849. Although the trial court acquitted petitioner
Jose Tupaz, his acquittal did not extinguish his DECISION
civil liability. As the Court of Appeals correctly held,
his liability arose not from the criminal act of which CHICO-NAZARIO, J.:
he was acquitted (ex delito) but from the trust
receipt contract (ex contractu) of 30 September Assailed in this Petition for Review under Rule
1981. Petitioner Jose Tupaz signed the trust 451 of the Revised Rules of Court are: (1) the
receipt of 30 September 1981 in his personal Decision2 dated 11 April 2006 of the Court of
capacity. Appeals in CA-G.R. CV No. 78007 which affirmed
with modification the partial Decision 3 dated 29
On the other Matters Petitioners Raise November 2002 of the Regional Trial Court (RTC),
Branch 96, of Quezon City, in Civil Case No.
Petitioners raise for the first time in this appeal the Q-01-45041, granting the motion for summary
contention that El Oro Corporation’s debts under judgment filed by respondent Pyramid
the trust receipts are not yet due and demandable. Construction and Engineering Corporation and
Alternatively, petitioners assail the trust receipts declaring petitioner Benjamin Bitanga and his wife,
as simulated. These assertions have no merit. Marilyn Bitanga (Marilyn), solidarily liable to
Under the terms of the trust receipts dated 30 pay P6,000,000.000 to respondent; and (2) the
September 1981 and 9 October 1981, El Oro Resolution4 dated 5 July 2006 of the appellate
Corporation’s debts fell due on 29 December 1981 court in the same case denying petitioner’s Motion
and 8 December 1981, respectively. for Reconsideration.

Neither is there merit to petitioners’ claim that the The generative facts are:
trust receipts were simulated. During the trial,
petitioners did not deny applying for the letters of On 6 September 2001, respondent filed with the
credit and subsequently executing the trust RTC a Complaint for specific performance and
receipts to secure payment of the drafts drawn damages with application for the issuance of a writ
under the letters of credit. of preliminary attachment against the petitioner
and Marilyn. The Complaint was docketed as Civil
WHEREFORE, we GRANT the petition in part. Case No. Q-01-45041.
We AFFIRM the Decision of the Court of Appeals
dated 7 September 2000 and its Resolution dated Respondent alleged in its Complaint that on 26
18 October 2000 with the March 1997, it entered into an agreement with
following MODIFICATIONS: Macrogen Realty, of which petitioner is the
President, to construct for the latter the Shoppers
1) El Oro Engraver Corporation is principally liable Gold Building, located at Dr. A. Santos Avenue
for the total amount due under the trust receipts corner Palayag Road, Sucat, Parañaque City.
dated 30 September 1981 and 9 October 1981, as Respondent commenced civil, structural, and
computed by the Regional Trial Court, Makati, architectural works on the construction project by
May 1997. However, Macrogen Realty failed to

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 95

settle respondent’s progress billings. Petitioner, Respondent then made, on 3 January 2001, a
through his representatives and agents, assured written demand10 on petitioner, as guarantor of
respondent that the outstanding account of Macrogen Realty, to pay the P6,000,000.00, or to
Macrogen Realty would be paid, and requested point out available properties of the Macrogen
respondent to continue working on the Realty within the Philippines sufficient to cover the
construction project. Relying on the assurances obligation guaranteed. It also made verbal
made by petitioner, who was no less than the demands on petitioner. Yet, respondent’s
President of Macrogen Realty, respondent demands were left unheeded.
continued the construction project.
Thus, according to respondent, petitioner’s
In August 1998, respondent suspended work on obligation as guarantor was already due and
the construction project since the conditions that demandable. As to Marilyn’s liability, respondent
it imposed for the continuation thereof, including contended that Macrogen Realty was owned and
payment of unsettled accounts, had not been controlled by petitioner and Marilyn and/or by
complied with by Macrogen Realty. On 1 corporations owned and controlled by them.
September 1999, respondent instituted with the Macrogen Realty is 99% owned by the Asian
Construction Industry Arbitration Commission Appraisal Holdings, Inc. (AAHI), which in turn is
(CIAC) a case for arbitration against Macrogen 99% owned by Marilyn. Since the completion of
Realty seeking payment by the latter of its unpaid the construction project would have redounded to
billings and project costs. Petitioner, through the benefit of both petitioner and Marilyn and/or
counsel, then conveyed to respondent his their corporations; and considering, moreover,
purported willingness to amicably settle the Marilyn’s enormous interest in AAHI, the
arbitration case. On 17 April 2000, before the corporation which controls Macrogen Realty,
arbitration case could be set for trial, respondent Marilyn cannot be unaware of the obligations
and Macrogen Realty entered into a Compromise incurred by Macrogen Realty and/or petitioner in
Agreement,5 with petitioner acting as signatory the course of the business operations of the said
for and in behalf of Macrogen Realty. Under the corporation.
Compromise Agreement, Macrogen Realty agreed
to pay respondent the total amount Respondent prayed in its Complaint that the RTC,
of P6,000,000.00 in six equal monthly after hearing, render a judgment ordering
installments, with each installment to be delivered petitioner and Marilyn to comply with their
on the 15th day of the month, beginning 15 June obligation under the Contract of Guaranty by
2000. Macrogen Realty also agreed that if it would paying respondent the amount of P6,000,000.000
default in the payment of two successive monthly (less the bank deposit of Macrogen Realty with
installments, immediate execution could issue Planter’s Bank in the amount of P20,242.23)
against it for the unpaid balance, without need of and P400,000.000 for attorneys fees and
judgment or decree from any court or tribunal. expenses of litigation. Respondent also sought the
Petitioner guaranteed the obligations of Macrogen issuance of a writ of preliminary attachment as
Realty under the Compromise Agreement by security for the satisfaction of any judgment that
executing a Contract of Guaranty6 in favor of may be recovered in the case in its favor.
respondent, by virtue of which he irrevocably and
unconditionally guaranteed the full and complete Marilyn filed a Motion to Dismiss,11 asserting that
payment of the principal amount of liability of respondent had no cause of action against her,
Macrogen Realty in the sum of P6,000,000.00. since she did not co-sign the Contract of Guaranty
Upon joint motion of respondent and Macrogen with her husband; nor was she a party to the
Realty, the CIAC approved the Compromise Compromise Agreement between respondent and
Agreement on 25 April 2000.7 Macrogen Realty. She had no part at all in the
execution of the said contracts. Mere ownership
However, contrary to petitioner’s assurances, by a single stockholder or by another corporation
Macrogen Realty failed and refused to pay all the of all or nearly all of the capital stock of another
monthly installments agreed upon in the corporation is not by itself a sufficient ground for
Compromise Agreement. Hence, on 7 September disregarding the separate personality of the latter
2000, respondent moved for the issuance of a writ corporation. Respondent misread Section 4, Rule
of execution8 against Macrogen Realty, which 3 of the Revised Rules of Court.
CIAC granted.
The RTC denied Marilyn’s Motion to Dismiss for
On 29 November 2000, the sheriff filed a return
9
lack of merit, and in its Order dated 24 January
stating that he was unable to locate any property 2002 decreed that:
of Macrogen Realty, except its bank deposit
of P20,242.33, with the Planters Bank, Buendia The Motion To Dismiss Complaint Against
Branch. Defendant Marilyn Andal Bitanga filed on
November 12, 2001 is denied for lack of merit

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 96

considering that Sec. 4, Rule 3, of the Rules of (5) whether the benefit of excussion can still be
Court (1997) specifically provides, as follows: invoked by the defendant guarantor even after the
notice has been allegedly sent by the plaintiff
"SEC. 4. Spouses as parties. – Husband and wife although proper receipt is denied.14
shall sue or be sued jointly, except as provided by
law." On 20 September 2002, prior to the trial proper,
respondent filed a Motion for Summary
and that this case does not come within the Judgment.15 Respondent alleged therein that it
exception.12 was entitled to a summary judgment on account
of petitioner’s admission during the pre-trial of the
Petitioner filed with the RTC on 12 November 2001, genuineness and due execution of the Contract of
his Answer13 to respondent’s Complaint averring Guaranty. The contention of petitioner and Marilyn
therein that he never made representations to that they were entitled to the benefit of excussion
respondent that Macrogen Realty would faithfully was not a genuine issue. Respondent had already
comply with its obligations under the Compromise exhausted all legal remedies to collect from
Agreement. He did not offer to guarantee the Macrogen Realty, but its efforts proved
obligations of Macrogen Realty to entice unsuccessful. Given that the inability of Macrogen
respondent to enter into the Compromise Realty as debtor to pay the amount of its debt was
Agreement but that, on the contrary, it was already proven by the return of the writ of
respondent that required Macrogen Realty to offer execution to CIAC unsatisfied, the liability of
some form of security for its obligations before petitioner as guarantor already arose. 16 In any
agreeing to the compromise. Petitioner further event, petitioner and Marilyn were deemed to
alleged that his wife Marilyn was not aware of the have forfeited their right to avail themselves of the
obligations that he assumed under both the benefit of excussion because they failed to comply
Compromise Agreement and the Contract of with Article 206017 of the Civil Code when
Guaranty as he did not inform her about said petitioner ignored respondent’s demand letter
contracts, nor did he secure her consent thereto at dated 3 January 2001 for payment of the amount
the time of their execution. he guaranteed.18 The duty to collect the supposed
receivables of Macrogen Realty from its creditors
As a special and affirmative defense, petitioner could not be imposed on respondent, since
argued that the benefit of excussion was still petitioner and Marilyn never informed respondent
available to him as a guarantor since he had set it about such uncollected credits even after receipt
up prior to any judgment against him. According of the demand letter for payment. The allegation
to petitioner, respondent failed to exhaust all legal of petitioner and Marilyn that they could not
remedies to collect from Macrogen Realty the respond to respondent’s demand letter since they
amount due under the Compromise Agreement, did not receive the same was unsubstantiated and
considering that Macrogen Realty still had insufficient to raise a genuine issue of fact which
uncollected credits which were more than enough could defeat respondent’s Motion for Summary
to pay for the same. Given these premise, Judgment. The claim that Marilyn never
petitioner could not be held liable as guarantor. participated in the transactions that culminated in
Consequently, petitioner presented his petitioner’s execution of the Contract of Guaranty
counterclaim for damages. was nothing more than a sham.

At the pre-trial held on 5 September 2002, the In opposing respondent’s foregoing Motion for
parties submitted the following issues for the Summary Judgment, petitioner and Marilyn
resolution of the RTC: countered that there were genuinely disputed
facts that would require trial on the merits. They
(1) whether the defendants were liable under the appended thereto an affidavit executed by
contract of guarantee dated April 17, 2000 petitioner, in which he declared that his spouse
entered into between Benjamin Bitanga and the Marilyn could not be held personally liable under
plaintiff; the Contract of Guaranty or the Compromise
Agreement, nor should her share in the conjugal
(2) whether defendant wife Marilyn Bitanga is partnership be made answerable for the guaranty
liable in this action; petitioner assumed, because his undertaking of
the guaranty did not in any way redound to the
(3) whether the defendants are entitled to the benefit of their family. As guarantor, petitioner
benefit of excussion, the plaintiff on the one hand was entitled to the benefit of excussion, and he did
claiming that it gave due notice to the guarantor, not waive his right thereto. He never received the
Benjamin Bitanga, and the defendants contending respondent’s demand letter dated 3 January 2001,
that no proper notice was received by Benjamin as Ms. Dette Ramos, the person who received it,
Bitanga; was not an employee of Macrogen Realty nor was
she authorized to receive the letter on his behalf.
(4) if damages are due, which party is liable; and As a guarantor, petitioner could resort to the

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 97

benefit of excussion at any time before judgment THE COURT OF APPEALS GRAVELY ERRED IN
was rendered against him.19 Petitioner reiterated AFFIRMING THE VALIDITY OF THE PARTIAL
that Macrogen Realty had uncollected credits SUMMARY JUDGMENT BY THE REGIONAL TRIAL
which were more than sufficient to satisfy the COURT OF QUEZON CITY, BRANCH 96, DESPITE
claim of respondent. THE CLEAR EXISTENCE OF DISPUTED GENUINE
AND MATERIAL FACTS OF THE CASE THAT
On 29 November 2002, the RTC rendered a partial SHOULD HAVE REQUIRED A TRIAL ON THE
Decision, the dispositive portion of which MERITS.
provides:
II
WHEREFORE, summary judgment is rendered
ordering defendants SPOUSES BENJAMIN THE COURT OF APPEALS GRAVELY ERRED IN NOT
BITANGA and MARILYN ANDAL BITANGA to pay UPHOLDING THE RIGHT OF PETITIONER
the [herein respondent], jointly and severally, the BENJAMIN M. BITANGA AS A MERE GUARANTOR
amount of P6,000,000.00, less P20,242.23 TO THE BENEFIT OF EXCUSSION UNDER
(representing the amount garnished bank deposit ARTICLES 2058, 2059, 2060, 2061, AND 2062 OF
of MACROGEN in the Planters Bank, Buendia THE CIVIL CODE OF THE PHILIPPINES.25
Branch); and the costs of suit.
As in the two courts below, it is petitioner’s
Within 10 days from receipt of this partial decision, position that summary judgment is improper in
the [respondent] shall inform the Court whether it Civil Case No. Q-01-45041 because there are
shall still pursue the rest of the claims against the genuine issues of fact which have to be threshed
defendants. Otherwise, such claims shall be out during trial, to wit:
considered waived.20
(A) Whether or not there was proper service of
Petitioner and Marilyn filed a Motion for notice to petitioner considering the said letter of
Reconsideration of the afore-quoted Decision, demand was allegedly received by one Dette
which the RTC denied in an Order dated 26 Ramos at Macrogen office and not by him at his
January 2003.21 residence.

In time, petitioner and Marilyn filed an appeal with (B) Whether or not petitioner is entitled to the
the Court of Appeals, docketed as CA-G.R. CV benefit of excussion?26
78007. In its Decision dated 11 April 2006, the
appellate court held: We are not persuaded by petitioner’s arguments.

UPON THE VIEW WE TAKE OF THIS CASE, THUS, Rule 35 of the Revised Rules of Civil Procedure
the judgment appealed from must be, as it hereby provides:
is, MODIFIED to the effect that
defendant-appellant Marilyn Bitanga is adjudged Section 1. Summary judgment for claimant. – A
not liable, whether solidarily or otherwise, with party seeking to recover upon a claim,
her husband the defendant-appellant Benjamin counterclaim, or cross-claim or to obtain a
Bitanga, under the compromise agreement or the declaratory relief may, at any time after the
contract of guaranty. No costs in this instance.22 pleading in answer thereto has been served, move
with supporting affidavits, depositions or
In holding that Marilyn Bitanga was not liable, the admissions for a summary judgment in his favor
Court of Appeals cited Ramos v. Court of upon all or any part thereof.
Appeals,23 in which it was declared that a contract
cannot be enforced against one who is not a party For a summary judgment to be proper, the
to it. The Court of Appeals stated further that the movant must establish two requisites: (a) there
substantial ownership of shares in Macrogen must be no genuine issue as to any material fact,
Realty by Marilyn Bitanga was not enough basis to except for the amount of damages; and (b) the
hold her liable. party presenting the motion for summary
judgment must be entitled to a judgment as a
The Court of Appeals, in its Resolution dated 5 July matter of law. Where, on the basis of the
2006, denied petitioner’s Motion for pleadings of a moving party, including documents
Reconsideration24 of its earlier Decision. appended thereto, no genuine issue as to a
material fact exists, the burden to produce a
Petitioner is now before us via the present Petition genuine issue shifts to the opposing party. If the
with the following assignment of errors: opposing party fails, the moving party is entitled
to a summary judgment.27
I

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 98

In a summary judgment, the crucial question is: Senator Gil Puyat Avenue, Makati City. I
are the issues raised by the opposing party not delivered the said letter to Ms. Dette Ramos, a
genuine so as to justify a summary judgment?28 person of sufficient age and discretion, who
introduced herself as one of the employees of Mr.
First off, we rule that the issue regarding the Bitanga and/or of the latter’s
propriety of the service of a copy of the demand companies.31 (Emphasis supplied.)
letter on the petitioner in his office is a sham issue.
It is not a bar to the issuance of a summary We emphasize that when petitioner signed the
judgment in respondent’s favor. Contract of Guaranty and assumed obligation as
guarantor, his address in the said contract was the
A genuine issue is an issue of fact which requires same address where the demand letter was
the presentation of evidence as distinguished from served.32 He does not deny that the said place of
an issue which is a sham, fictitious, contrived or service, which is the office of Macrogen, was also
false claim. To forestall summary judgment, it is the address that he used when he signed as
essential for the non-moving party to confirm the guarantor in the Contract of Guaranty. Nor does
existence of genuine issues, as to which he has he deny that this is his office address; instead, he
substantial, plausible and fairly arguable merely insists that the person who received the
defense, i.e.,29 issues of fact calling for the letter and signed the receiving copy is not an
presentation of evidence upon which reasonable employee of his company. Petitioner could have
findings of fact could return a verdict for the easily substantiated his allegation by a submission
non-moving party, although a mere scintilla of of an affidavit of the personnel manager of his
evidence in support of the party opposing office that no such person is indeed employed by
summary judgment will be insufficient to preclude petitioner in his office, but that evidence was not
entry thereof. submitted.33 All things are presumed to have been
done correctly and with due formality until the
Significantly, petitioner does not deny the receipt contrary is proved. This juris tantum presumption
of the demand letter from the respondent. He stands even against the most well-reasoned
merely raises a howl on the impropriety of service allegation pointing to some possible irregularity or
thereof, stating that "the address to which the said anomaly.34 It is petitioner’s burden to overcome
letter was sent was not his residence but the office the presumption by sufficient evidence, and so far
of Macrogen Realty, thus it cannot be considered we have not seen anything in the record to
as the correct manner of conveying a letter of support petitioner’s charges of anomaly beyond
demand upon him in his personal capacity."30 his bare allegation. Petitioner cannot now be
heard to complain that there was an irregular
Section 6, Rule 13 of the Rules of Court states: service of the demand letter, as it does not escape
our attention that petitioner himself indicated
SEC. 6. Personal service. – Service of the papers "314 Sen. Gil Puyat Avenue, Makati City" as his
may be made by delivering personally a copy to office address in the Contract of Guaranty.
the party or his counsel, or by leaving it in his
office with his clerk or with a person having Moreover, under Section 6, Rule 13 of the Rules of
charge thereof. If no person is found in his office, Court, there is sufficiency of service when the
or his office is not known, or he has no office, then papers, or in this case, when the demand letter is
by leaving the copy, between the hours of eight in personally delivered to the party or his counsel, or
the morning and six in the evening, at the party’s by leaving it in his office with his clerk or with a
or counsel’s residence, if known, with a person of person having charge thereof, such as what
sufficient age and discretion then residing therein. was done in this case.

The affidavit of Mr. Robert O. Pagdilao, messenger We have consistently expostulated that in
of respondent’s counsel states in part: summary judgments, the trial court can
determine a genuine issue on the basis of the
2. On 4 January 2001, Atty. Jose Vicente B. pleadings, admissions, documents, affidavits or
Salazar, then one of the Associates of the ACCRA counter affidavits submitted by the parties. When
Law Offices, instructed me to deliver to the office the facts as pleaded appear uncontested or
of Mr. Benjamin Bitanga a letter dated 3 January undisputed, then there is no real or genuine issue
2001, pertaining to Construction Industry or question as to any fact, and summary judgment
Arbitration Commission (hereafter, "CIAC") Case is called for.35
No. 99-56, entitled "Pyramid Construction
Engineering Corporation vs. Macrogen Realty The Court of Appeals was correct in holding that:
Corporation."
Here, the issue of non-receipt of the letter of
3. As instructed, I immediately proceeded to the demand is a sham or pretended issue, not a
office of Mr. Bitanga located at the 12th Floor, genuine and substantial issue. Indeed, against the
Planters Development Bank Building, 314 positive assertion of Mr. Roberto O. Pagdilao (the

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 99

private courier) in his affidavit that he delivered Art. 2059. This excussion shall not take place:
the subject letter to a certain Ms. Dette Ramos
who introduced herself as one of the employees of xxxx
[herein petitioner] Mr. Benjamin Bitanga and/or of
the latter’s companies, said [petitioner] merely (5) If it may be presumed that an execution on the
offered a bare denial. But bare denials, property of the principal debtor would not result in
unsubstantiated by facts, which would be the satisfaction of the obligation.
admissible in evidence at a hearing, are not
sufficient to raise a genuine issue of fact sufficient As the Court of Appeals correctly ruled:
to defeat a motion for summary judgment.36
We find untenable the claim that the [herein
We further affirm the findings of both the RTC and petitioner] Benjamin Bitanga cannot be compelled
the Court of Appeals that, given the settled facts to pay Pyramid because the Macrogen Realty has
of this case, petitioner cannot avail himself of the allegedly sufficient assets. Reason: The said
benefit of excussion. [petitioner] had not genuinely controverted the
return made by Sheriff Joseph F. Bisnar, who
Under a contract of guarantee, the guarantor affirmed that, after exerting diligent efforts, he
binds himself to the creditor to fulfill the obligation was not able to locate any property belonging to
of the principal debtor in case the latter should fail the Macrogen Realty, except for a bank deposit
to do so. The guarantor who pays for a debtor, in with the Planter’s Bank at Buendia, in the amount
turn, must be indemnified by the latter. However, of P20,242.23. It is axiomatic that the liability of
the guarantor cannot be compelled to pay the the guarantor arises when the insolvency or
creditor unless the latter has exhausted all the inability of the debtor to pay the amount of debt is
property of the debtor and resorted to all the legal proven by the return of the writ of execution that
remedies against the debtor. This is what is had not been unsatisfied.40
otherwise known as the benefit of excussion.37
WHEREFORE, premises considered, the instant
Article 2060 of the Civil Code reads: petition is DENIED for lack of merit. The Decision
of the Court of Appeals dated 11 April 2006 and its
Art. 2060. In order that the guarantor may make Resolution dated 5 July 2006 are AFFIRMED.
use of the benefit of excussion, he must set it up Costs against petitioner.
against the creditor upon the latter’s demand for
payment from him, and point out to the creditor SO ORDERED.
available property of the debtor within Philippine
territory, sufficient to cover the amount of the EN BANC
debt.38
G.R. No. L-48979 September 29,
The afore-quoted provision imposes a condition 1943
for the invocation of the defense of excussion.
Article 2060 of the Civil Code clearly requires that MIRA HERMANOS, INC., plaintiff-appellee,
in order for the guarantor to make use of the vs.
benefit of excussion, he must set it up against the MANILA TOBACCONISTS, INC., ET
creditor upon the latter’s demand for payment and AL., defendants.
point out to the creditor available property of the PROVIDENT INSURANCE
debtor within the Philippines sufficient to cover the CO., defendant-appellant.
amount of the debt.39
E. V. Filamor for appellant.
It must be stressed that despite having been Ramirez and Ortigas for appellee.
served a demand letter at his office, petitioner still Ernesto Zaragoza for defendant, Manila Compañia
failed to point out to the respondent properties of de Seguras.
Macrogen Realty sufficient to cover its debt as
required under Article 2060 of the Civil Code. Such OZAETA, J.:
failure on petitioner’s part forecloses his right to
set up the defense of excussion. This appeal has been certified to this court by the
Court of Appeals because it involves only a
Worthy of note as well is the Sheriff’s return question of law arising from the following facts:
stating that the only property of Macrogen Realty
which he found was its deposit of P20,242.23 with By virtue of a written contract (Exhibit A) entered
the Planters Bank. into between Mira Hermanos, Inc., and Manila
Tobacconists, Inc., the former agreed to deliver to
Article 2059(5) of the Civil Code thus finds the latter merchandise for sale on consignment
application and precludes petitioner from under certain specified terms and the latter
interposing the defense of excussion. We quote: agreed to pay to the former on or before the 20th

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 100

day of each month the invoice value of all the por la otra demandada Provident Insurance Co.;
merchandise sold during the preceding month. por lo que quedo entendido entre la demandante y
Mira Hermanos, Inc., required of the Manila las tres demandadas que la fianza de P2,000
Tobacconists, Inc., a bond of P3,000, which was prestada el Octubre de 1940 por esta demandada,
executed by the Provident Insurance Co., on 'Manila Compañia de Seguros', se limitaba y era
September 2, 1939 (Exhibit B), to secure the para responder solamente del importe de
fulfillment of the obligation of the Tobacconists mercancias servidad a la demandada Manila
under the contract (Exhibit A) up to the sum of Tobacconists, Inc., en tanto en cuanto el valor de
P3,000. esas mercancias excediese de P3,000 asegurada
por la fianza P3,000 de la Manila Tobacconists,
In the month of October, 1940, the volume of the Inc.
business of the Tobacconists having increased so
that the merchandise received by it on To that the defendant Provident Insurance Co.
consignment from Mira Hermanos exceeded replied:
P3,000 in value, Mira Hermanos required of the
Tobacconist an additional bond of P2,000, and in Que no es verdad el hecho alegado por la
compliance with that requirement the defendant demandada 'Manila Compañia de Seguros' en el
Manila Compañia de Seguros, on October 16, parrafo 4 de su contestacion que dice: 'que quedo
1940, executed a bond of P2,000 (Exhibit C) with entendido entre la demandante y las tres
the same terms and conditions (except as to the demandadas que la fianza de P2,000 prestada el
amount) as the bond of the Provident Insurance Octubre de 1940 por esta demandada "Manila
Co. Compañia de Seguros" se limitaba y era para
responder solamente del importe de mercancias
On June 1, 1941, a final and complete liquidation servidas a la demandada Manila Tocacconists, Inc.,
was made of the transactions between Mira en tanto en cuanto el valor de esas mercancias
Hermanos and the Tobacconists, as a result of excediese de P3,000 asegurada por la fianza de
which there was found a balance due from the P3,000 de la "Manila Tobacconists, Inc."
latter to the former of P2,272.79, which
indebtedness the Tobacconists recognized but was Que la demandada, aqui compareciente, nunca ha
unable to pay. Thereupon Mira Hermanos made a tenido conocimiento ni menos prestado su
demand upon the two surety companies for the consentimiento a esa supuesta inteligencia.
payment of said sum.
Que esta demandada no puede ser privada del
The Provident Insurance Co., paid only the sum of beneficio de division a que tiene derecho como
P1,363.67, which is 60% of the amount owned by co-fiador, sin que conste expresamente, por
the Tobacconists to Mira Hermanos, alleging that escrito, su conformidad y consentimiento de
the remaining 40% should be paid by the other renunciar a su derecho.
surety, Manila Compañia de Seguros, in
accordance with article 8137 of the Civil Code. The Thus there was an issue of fact between the two
Manila Compañia de Seguros refused to pay the surety companies, viz.: whether the
balance, contending that so long as the liability of understanding between the plaintiff and the three
the Tobacconists did not exceed P3,000, it was not defendants was, that the bond of P2,000 given by
bound to pay anything because its bond referred the Manila Compañia de Seguros was limited to
only to the obligation of the Tobacconists in excess and responded for the obligation of the
of P3,000 and up to P5,000. Hence Mira Hermanos, Tobacconists only insofar as it might exceed the
Inc., brought this action against the Manila amount of P3,000 secured by the bond of the
Tobacconists, Inc., Provident Insurance Co., and Provident Insurance Co. That issue of fact was
Manila Compañia de Seguros to recover from decided by the trial court in favor of the contention
them jointly and severally the sum of P909.12 of the Manila Compañia de Seguros; and
with legal interest thereon from the date of the judgment was rendered by it against the Provident
complaint. Insurance Co. alone for the amount claimed by the
plaintiff.
The controversy is mainly between the two surety
companies. In its answer the defendant Manila Appellant's first two assignments of error (the
Compañia de Seguros alleged as a special third being a mere consequence of the first two)
defense: read as follows:

4. — Que la fianza otorgada por esta demandada 1. El juzgado inferior incurrio en error al hacer
'Manila Compania de Seguros', el Octubre de 1940 caso omiso del beneficio de division reclamado por
fue exigida por la demandante solo cuando el la demandada Provident Insurance Co. of the
importe de las mercancias servidas por esta y Philippines con arreglo a lo dispuesto en el Art.
pedidas por la demandada Manila Tobacconists, 1837 del Codigo Civil.
Inc., excedio de la suma de P3,000 garantizada

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2. El juzgado erro al aplicar, en lugar de lo en lo que respecta a la Manila Tobacconists, Inc., y
dispuesto en el Art. 1837 del Codigo Civil, una la Manila Compañia de Seguros, era la de que esta
teoria suya, declarando que la fianza de P3,000.00 fianza de P2,000 habria de responder solamente
prestada por Provident Insurance Co. of the por todo aquello que excediera de los P3,000."
Philippines y la fianza de P2,000 de Manila
Compañia de Seguros, cada una tiene una esfera The evidence upon which that finding is based is
de responsabilidad propia e independiente la una not only undisputed but perfectly reasonable and
de la otra. convincing. For, as the trial court observed, there
would have been no need for the additional bond
Discussing these two assignments of error jointly, of P2,000 if its purpose were to cover the first
counsel says: P2,000 already covered by the P3,000 bond of the
Provident Insurance Co. Indeed, we might add, if
La unica cuestion que se presenta en esta causa es the purpose of the additional bond of P2,000 were
puramente de derecho. Si el saldo deudor de to cover not the excess over and above P3,000 but
P2,272.79 que Tobacconists ha dejado de pagar, the first P2,000 of the obligation of the principal
deben pagarlo en su lugar, los dos fiadores debtor like the bond of P3,000 which covered only
proporcionalmente a la cuantia en que se the first P3,000 of said obligation, then it would
obligaron o debe pagarlo sola y exclusivamente la result that had the obligation of the Tobacconists
fiadora Provident Insurance Co., como ordena la exceeded P3,000, neither of the two bonds would
sentencia opelada. have responded for the excess, and that was
precisely the event against which Mira Hermanos
Thus it appears that the issue of fact raised by and wanted to protect itself by demanding the
between the two surety companies before the trial additional bond of P2,000. For instance, suppose
court and decided by the latter in favor of the that the obligation of the principal debtor, the
appellee Manila Compañia de Seguros is no longer Tobacconists, amounted to P5,000; if both bonds
raised before this Court, appellant Provident were co-extensive up to P2,000 — as would
Insurance Co. having limited the issue in this logically follow if appellant's contention were
appeal to whether or not it is entitled to the correct — the result would be that the first P2,000
"benefit of division" provided in article 1837 of the of the obligation would have to be divided between
Civil Code, which reads as follows: and paid equally by the two surety companies,
which should pay P1,000 each, and of the balance
Art. 1837. Should there be several sureties of only of P3,000 the Provident Insurance Co. would have
one debtor for the same debt, the liability therefor to pay only P1,000 more because its liability is
shall be divided among them all. The creditor can limited to the first P3,000, thus leaving the
claim from each surety only his proportional part plaintiff in the lurch as to the excess of P2,000.
unless liability in solidum has been expressly That was manifestly not the intention of the
stipulated. parties. As a matter of fact, when the Provident
gave its bond and fixed the premiums thereon it
The right to the benefit of division against the assumed an obligation of P3,000 in solidum with
co-sureties for their respective shares ceases in the Tobacconists without any expectation of any
the same cases and for the same reason as that to benefit of division with any other surety. The
an exhaustion of property against the principal additional bond of P2,000 was, more than a year
debtor. later, required by the creditor of the principal
debtor for the protection of said creditor and
With particular reference to the second certainly not for the benefit of the original surety,
assignment of error, we find that the statement of which was not entitled to expect any such benefit.
the trial court to the effect that the bond of P3,000
responded for the obligation of the Tobacconists The foregoing considerations, which fortify the
up to the sum of P3,000 and the bond of P2,000 trial court's conclusion as to the real intent and
responded for the obligation of the Tobacconists agreement of the parties with regard to the bond
only insofar as it might exceed P3,000 and up to of P2,000 given by the Manila Compañia de
P5,000, is not a mere theory but a finding of fact Seguros, destroys at the same time the theory of
based upon the undisputed testimony of the the appellant regarding the applicability of article
witnesses called by the defendant Manila 1837 of the Civil Code.
Compañia de Seguros in support of its special
defense hereinbefore quoted. While on its face the That article refers to several sureties of only one
bond given by the Manila Compañia de Seguros debtor for the same debt. In the instant case,
contains the same terms and conditions (except altho the two bonds on their face appear to
as to the amount) as those of the bond given by guarantee the same debt co-extensively up to
the Provident Insurance Co., nevertheless it was P2,000 — that of the Provident Insurance Co.
pleaded by the Manila Compañia de Seguros and alone extending beyond that sum up to P3,000 —
found proven by the trial court "que la intencion it was pleaded and conclusively proven that in
realmente que se habia perseguido, por lo menos reality said bonds, or the two sureties, do not

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 102

guarantee the same debt because the Provident Public Works, with the approval of the Secretary of
Insurance Co. guarantees only the first P3,000 Public Works and Communications, annulled, the
and the Manila Compañia de Seguros, only the construction contract referred to and notified the
excess over and above said amount up to P5,000. plaintiff Company that the Government would
Article 1837 does not apply to this factual hold it (the Company) liable for any amount
situation. incurred by the Government for the completion of
the bridge, in excess of the contract price (Exhibit
The judgment of the trial court is affirmed, with D); that on 19 December 1951 (should be 23
the only modification that it shall be entered November 1951), Ricardo Fernandez and 105
against the defendants Manila Tobacconists, Inc., other persons brought an action in the Justice of
and Provident Insurance Co. jointly and severally. the Peace Court of Laoag, Ilocos Norte, against
Appellant shall pay the costs of this instance. the partnership, the individual partners and the
herein plaintiff Company for the collection of
EN BANC unpaid wages amounting to P5,960.10, lawful
interests thereon and costs (Exhibit E); that the
G.R. No. L-9353 May 21, 1957 defendants are in imminent danger of becoming
insolvent, and are removing and disposing, or
MANILA SURETY AND FIDELITY, about to remove and dispose, of their properties
INC., plaintiff-appellant, with intent to defraud their creditors, particularly
vs. the plaintiff Company; and that the latter has no
BATU CONSTRUCTION AND COMPANY, other sufficient security to protect its rights
CARLOS N. BAQUIRAN, GONZALO P. AMBOY against the defendants. Upon these allegations,
and ANDRES TUNAC, defendants-appellees. the plaintiff prays that, upon the approval of a
bond and on the strength of the allegations of the
De Santos and Herrera for appellant. verified complaint, a writ attachment be issued
Bienvenido C. Castro and Ruiz, Ruiz, Ruiz and Ruiz and levied upon the properties of the defendants;
for appellees. and that after hearing, judgment be rendered "
ordering the defendants to deliver to the plaintiff
PADILLA, J.: such sufficient security as shall protect plaintiff
from the any proceedings by the creditors on the
In a complaint filed in the Court of First Instance of Surety Bond aforementioned and from the danger
Manila, the plaintiff, a domestic corporation of insolvency of the defendants; and to allow costs
engaged in the bonding business, hereafter called to the herein plaintiff," and " for such other
the company, alleges that the Batu Construction & measures of relief as may be proper and just in the
Company, a partnership the members of which premises." Attached to the complaint are a
are the other three defendants, requested it to verification and affidavit of attachment; and
post, as it did, a surety bond for P8,812 in favor of copies of the surety bond marked Annex A; of the
the Government of the Philippines to secure the indemnity contract marked Annex B; and of the
faithful Performance of the construction of the letter of the Acting Director of Public Works to the
Bacarra Bridge, Project PR-72 (3), in Ilocos Norte, plaintiff dated 30 May 1951, marked Annex C.
undertaken by the partnership, as stipulated in a
construction on contract entered into on 11 July Andres Tunac admits in his answer the allegations
1950 by and between the partnership and the in paragraphs 1, 2, 3 and 4 of the complaint, but
Government of the Philippines, on condition that denies the allegations in paragraphs 5, 6, 7, 8 and
the defendants would "indemnify the COMPANY 9 of the complaint, because he has never
for any damage, loss, costs, or charges, or promised to put up an indemnity bond in favor of
expenses of whatever kind and nature, including the plaintiff nor has he ever entered into any
counsel or attorney's fees, which the COMPANY indemnity agreement with it; because the
may, at any time, sustain or incur, as a partnership or the Batu Construction & Company
consequence of having become surety upon the was fulfilling its obligations in accordance with the
above mentioned bond; said attorney's fees shall terms of the construction contract; because the
not be less than fifteen (15%) per cent of the total Republic of the Philippines, through the Director of
amount claimed in any action which the COMPANY Public, Works, had no authority to annul the
may institute against the undersigned (the contract at its own initiative; because the Justice
defendants except Andres Tunac) in Court," and of the Peace court of Laoag, Ilocos Norte had no
that "Said indemnity shall be paid to the COMPANY jurisdiction to hear and decide a case for collection
as soon as it has become liable for the payment of of P5,960.10; and because the defendants were
any amount, under the above-mentioned bond, not in imminent danger of insolvency, neither did
whether or not it shall have paid such sum or sums they remove or dispose of their properties with
of money, or any part thereof," as stipulated in a intent to defraud their creditors. By way of
contract executed on 8 July 1950 (Exhibit B); that affirmative defenses, he alleges that the signing
on 30 May 1951 because of the unsatisfactory by Carlos N. Baquiran of the indemnity agreement
progress of the work on the bridge, the Director of for and in behalf of the partnership Batu

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 103

Construction & Company did not bind the latter to specifically paragraphs 8, 9 and 10 of the
the plaintiff and as the partnership is not bound, complaint. By way of special defenses he alleges
he (Andres Tunac), as a member thereof, is also that there has been no liquidation by and between
not bound; that he not being a party to the said the defendants and the Bureau of Public Works on
agreement, the plaintiff has no cause of action Project PR-72(3) to determine whether the total
against him; that in the event the partnership is amount spent for the construction of the bridge
bound by the indemnity agreement he invokes his exceeded the contract price; that after the
right of exhaustion of the property of the determination of the respective liabilities of the
partnership before the plaintiff may proceed parties in civil case No. 198 of the Justice of the
against his property. And as a counterclaim he Peace Court of Laoag, Ilocos Norte, if any there be
alleges that the plaintiff brought the action against against the defendants herein, and such liability
him maliciously and in bad faith for the purpose of could not be paid out of the balance of the contract
annoying him and damaging his professional price of Project PR-72(3), the defendants are
reputation, he having a flourishing and successful ready and willing to assume their respective
practice as engineer in Ilocos Norte, thereby responsibilities. Upon these allegations he prays
compelling him to defend himself; that to secure that the complaint of the plaintiff be dismissed;
the issuance of a writ of attachment the plaintiff that the issuance of the writ of attachment prayed
made false representations; and that the issuance for be denied; and that he be granted such other
of the writ upon such false representations of the relief as may be just and equitable, with costs
plaintiff caused him damages in the sum of against the plaintiff.
P10,000 including expenses of litigation and
attorney's fees. Upon the foregoing he prays that At the hearing, the plaintiff presented its evidence.
the complaint be dismissed as to him and the After the plaintiff had rested its case, defendant
defendant Batu Construction & Company, with Gonzalo P. Amboy moved for the dismissal of the
costs against the plaintiff; that the latter be complaint, on the ground that the remedy
ordered to pay him the sum of P10,000; and that provided for in the last paragraph of article 2071
he be granted such other remedies as may be just, of the new Civil Code may be availed of by the
equitable and proper. guarantor only and not by a surety.

Gonzalo P. Amboy denies in his answer the Acting upon this motion to dismiss the trial court
allegations of the complaint, except those that made the following findings:
may be deemed admitted in the special defenses,
and alleges that he is not in imminent danger of . . . That on July 8, 1950, the defendant Batu
insolvency and is not removing and disposing or Construction & Company, as principal, and the
about to remove and dispose of his properties, plaintiff Manila Surety & Fidelity Co. Inc., as surety,
because he has no property; that has been no executed a surety bond for the sum of P8,812.00
liquidation of the expenses incurred in the to insure faithful performance of the former's
construction of the Bacarra Bridge, Project obligation as contractor for the construction of the
PR-72(3) to determine whether there would be a Bacarra Bridge, Project PR-72 (No. 3) Ilocos Norte
balance of the contract price which may be applied Province. On the same date, July 8,1950, the Batu
to pay the claim for unpaid wages of Ricardo Construction & Company and the defendants
Fernandez et al. sought to be collected in civil case Carlos N. Baquiran and Gonzales P. Amboy
No. 198 of the Justice of the Peace Court of Laoag, executed an indemnity agreement to protect the
Ilocos Norte, and not until after such liquidation Manila Surety & Fidelity Co. Inc.., against damage,
shall have been made could his liability and that of loss or expenses which it may sustain as a
his co-defendants be determined and fixed; that if consequence of the surety bond executed by it
after proper liquidation's there be a deficit of the jointly with Batu Construction & Company.
contract price the defendants are willing to pay
the claim for unpaid wages of Ricardo Fernandez On or about May 30, 1951, the plaintiff received a
et al. Upon these allegations he prays that the notice from the Director of Public Works (Exhibit B)
issuance of the writ of attachment prayed for by annulling its contract with the Government for the
the plaintiff be held in abeyance until after civil construction of the Bacarra Bridge because of its
case No. 198 of the Justice of the Peace Court of failure to make satisfactory progress in the
Laoag, Ilocos Norte, shall have been disposed of. execution of the works, with the warning that ,any
amount spent by the Government in the
Carlos N. Baquiran admits in his answer the continuation of the work, in excess of the contract
allegations in paragraphs 1, 2, 3,4, 5, 6, and 11 of price, will be charged against the surety bond
the complaint but alleges that he has no sufficient furnished by the plaintiff. It also appears that a
knowledge to form a belief as to the truth of the complaint by the laborers in said project of the
claim of Ricardo Fernandez et al. set forth in Batu Construction & Company was filed against it
paragraph 7 of the complaint, for there has never and the Manila Surety and Fidelity Co., Inc., for
been a liquidation between the defendants and the unpaid wages amounting to P5,960.10.
Bureau of Public Works. He further denies

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 104

and, being of the opinion that the provisions of obligations, does not mean that suretyship which
article 2071 of the new Civil Code may be availed is a solidary obligation is withdrawn from the
of by a guarantor only and not by a surety the applicable provisions governing guaranty.
complaint, with costs against the plaintiff.
The plaintiff's cause of action does not fall under
From this order the plaintiff Company has paragraph 2 of article 2071 of the new Civil Code,
appealed to this Court, because it proposes to because there is no proof of the defendants'
raise only a question of law. insolvency. The fact that the contract was
annulled because of lack of progress in the
After the order dismissing the complaint had been construction of the bridge is no proof of such
entered, on 16 and 20 July 1953, the defendants insolvency. It does not fall under paragraph 3,
Gonzalo P. Amboy and Andres Tunac moved for because the defendants have not bound
leave to prove damages they allegedly suffered as themselves to relieve the plaintiff from the
a result of the attachment levied upon their guaranty within a specified period which already
properties. On 15 August 1953 the Court heard has expired, because the surety bond does not fix
the evidence on damages. On 23 September 1953 any period of time and the indemnity agreement
the Court found and held that the defendant stipulates one year extendible or renewable until
Gonzalo P. Amboy is entitled to recover from the the bond be completely cancelled by the person or
plaintiff damages equivalent to 6 per cent interest entity in whose behalf the bond was executed or
per annum on the sum of P35 in possession of the by a Court of competent jurisdiction. It does not
Provincial Treasurer of Ilocos Norte, which was come under paragraph 4, because the debt has
garnished pursuant to the writ of attachment, not become demandable by reason of the
from the date of garnishment until its charge; but expiration of the period for payment. It does not
the claims for damages of Andres Tunac and come under paragraph 5 because of the lapse of
Gonzalo P. Amboy allegedly suffered by them in 10 years, when the principal obligation has no
their business, moral damages and attorney's fees period for its maturity, etc., for 10 years have not
were without basis in law and in fact. Hence their yet elapsed. It does not fall under paragraph 6,
recovery was denied. The Court dissolved the writ because there is no proof that "there are
of attachment. From this last order only the reasonable grounds to fear that the principal
plaintiff Company has appealed. debtor intends to abscond." It does not come
under paragraph 7, because the defendants, as
The main question to determine is whether the principal debtors, are not in imminent danger of
last paragraph of article 2071 of the new Civil becoming insolvent, there being no proof to that
Code taken from article 1843 of the old Civil Code effect.
may be availed of by a surety.
But the plaintiff's cause of action comes under
A guarantor is the insurer of the solvency of the paragraph 1 of article 2071 of the new Civil Code,
debtor; a surety is an insurer of the debt. A because the action brought by Ricardo Fernandez
guarantor binds himself to pay if the principal is and 105 persons in the Justice of the Peace Court
unable to pay; a surety undertakes to pay if the of Laoag, province of Ilocos Norte, for the
principal does not pay.1 The reason which could be collection of unpaid wages amounting to
invoked for the non-availability to a surety of the P5,960.10, is in connection with the construction
provisions of the last paragraph of article 2071 of of the Bacarra Bridge, Project PR-72 (3),
the new Civil Code would be the fact that guaranty undertaken by the Batu Construction & Company,
like commodatum2 is gratuitous. But guaranty and one of the defendants therein is the herein
could also be for a price or consideration as plaintiff, the Manila Surety and Fidelity Co., Inc.,
provided for in article 2048. So, even if there and paragraph 1 of article 2071 of the new Civil
should be a consideration or price paid to a Code provides that the guarantor, even before
guarantor for him to insure the performance of an having paid, may proceed against the principal
obligation by the principal debtor, the provisions debtor "to obtain release from the guaranty, or to
of article 2071 would still be available to the demand a security that shall protect him from any
guarantor. In suretyship the surety becomes liable proceedings by the creditor or from the danger of
to the creditor without the benefit of the principal insolvency of the debtor, when he (the guarantor)
debtor's exclusion of his properties, for he (the is sued for payment. It does not provide that the
surety) maybe sued independently. So, he is an guarantor be sued by the creditor for the payment
insurer of the debt and as such he has assumed or of the debt. It simply provides that the guarantor
undertaken a responsibility or obligation greater of surety be sued for the payment of an amount
or more onerous than that of guarantor. Such for which the surety bond was put up to secure the
being the case, the provisions of article 2071, fulfillment of the obligation undertaken by the
under guaranty, are applicable and available to a principal debtor. So, the suit filed by Ricardo
surety. The reference in article 2047 to, the Fernandez and 105 persons in the Justice of the
provisions of Section 4, Chapter 3, Title 1, Book IV Peace Court of Laoag, province of Ilocos Norte, for
of the new Civil Code, on solidary or several the collection of unpaid wages earned in

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 105

connection with the work done by them in the Benj. S. Ohnick for the appellants France and
construction of the Bacarra Bridge, Project Goulette.
PR-72(3), is a suit for the payment of an amount Fisher, DeWitt, Perkins and Brady and John R.
for which the surety bond was put up or posted to McFie, jr., for appellee.
secure the faithful performance of the obligation
undertaken by the principal debtors (the STREET, J.:
defendants) in favor of the creditor, the
Government of the Philippines. This action was instituted in the Court of First
Instance of Manila by Rosa Villa y Monna, widow of
The order appealed from dismissing the complaint Enrique Bota, for the purpose of recovering from
is reversed and set aside, and the case remanded the defendants, Guillermo Garcia Bosque and Jose
to the court below for determination of the amount Romar Ruiz, as principals, and from the
of security that would protect the plaintiff defendants R. G. France and F. H. Goulette, as
Company from any proceedings by the creditor or solidary sureties for said principals, the sum of
from the danger of insolvency of the defendants, P20,509.71, with interest, as a balance alleged to
the principal debtors, and direction to the be due to the plaintiff upon the purchase price of a
defendants to put up such amount of security as printing establishment and bookstore located at
may be established by competent evidence, 89 Escolta, Manila, which had been sold to Bosque
without pronouncement as to costs. and Ruiz by the plaintiff, acting through her
attorney in fact, one Manuel Pirretas y Monros.
The writ of attachment having been issued The defendant Ruiz put in no appearance, and
improvidently because, although there is an after publication judgment by default was entered
allegation in the verified complaint that the against him. The other defendants answered with
defendants were in imminent danger of insolvency a general denial and various special defenses.
and that they were removing or disposing, or Upon hearing the cause the trial judge gave
about to remove or dispose, of their properties, judgment in favor of the plaintiff, requiring all of
with intent to defraud their creditors, particularly the defendants, jointly and severally, to pay to the
the plaintiff Company, still such allegation was not plaintiff the sum of P19,230.01, as capital, with
proved, the fact that a complaint had been filed stipulated interest at the rate of 7 per centum per
against the defendants and the plaintiff Company annum, plus the further sum of P1,279.70 as
in the Justice of the Peace Court of Laoag, Ilocos interest already accrued and unpaid upon the date
Norte, for the collection of an amount for unpaid of the institution of the action, with interest upon
wages of the plaintiffs therein who claimed to have the latter amount at the rate of 6 per centum per
worked in the construction of the bridge, being annum. From this judgment Guillermo Garcia
insufficient to prove it, and because the relief Bosque, as principal, and R. G. France and F.H.
prayed for in the complaint for security that shall Goulette, as sureties. appealed.
protect it from any proceedings by the creditor
and from the danger of the defendants becoming It appears that prior to September 17, 1919, the
insolvent is inconsistent with the state of plaintiff, Rosa Villa y Monna, viuda de E. Bota, was
insolvency of the defendants or their being in the owner of a printing establishment and
imminent danger of insolvency, the order bookstore located at 89 Escolta, Manila, and
awarding 6 per cent on the sum of P35 in known as La Flor de Cataluna, Viuda de E.
possession of the Provincial Treasurer owned by Bota, with the machinery, motors, bindery, type
the defendant Gonzalo P. Amboy garnished by material furniture, and stock appurtenant thereto.
virtue of the writ of attachment, from the date of Upon the date stated, the plaintiff, then and now a
the garnishment until its discharge, and denying resident of Barcelona, Spain, acting through
recovery of the amounts of damages claimed to Manuel Pirretas, as attorney in fact, sold the
have been suffered by the defendants, is affirmed, establishment above-mentioned to the
the defendants not having appealed therefrom. defendants Guillermo Garcia Bosque and Jose
Pomar Ruiz, residents of the City of Manila, for the
EN BANC stipulated sum of P55,000, payable as follows:
Fifteen thousand pesos (P15,000) on November 1,
G.R. No. L-24543 July 12, 1926 next ensuing upon the execution of the contract,
being the date when the purchasers were to take
ROSA VILLA MONNA, plaintiff-appellee, possession; ten thousand pesos (P10,000) at one
vs. year from the same date; fifteen thousand pesos
GUILLERMO GARCIA BOSQUE, ET (P15,000) at two years; and the remaining fifteen
AL., defendants. thousand pesos (P15,000) at the end of three
GUILLERMO GARCIA BOSQUE, F. H. years. By the contract of sale the deferred
GOULETTE, and R. G. FRANCE, appellants. installments bear interest at the rate of 7 per
centum per annum. In the same document the
Eiguren and Razon for the appellant Garcia defendants France and Goulette obligated
Bosque. themselves as solidary sureties with the principals

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 106

Bosque and Ruiz, to answer for any balance, without being paid. Induced by this dilatoriness on
including interest, which should remain due and the part the debtor and supposedly animated by a
unpaid after the dates stipulated for payment of desire to get the matter into better shape, M. T.
said installments, expressly renouncing the Figueras entered into the agreement attached as
benefit of exhaustion of the property of the Exhibit 1 to the answer of Bosque. In this
principals. The first installment of P15,000 was document it is recited that Guillermo Garcia
paid conformably to agreement. Bosque. S. en C., is indebted to Rosa Villa, viuda
de E. Bota, in the amount of P32,000 for which R.
In the year 1920, Manuel Pirretas y Monros, the G. France and F. H. Goulette are bound as joint
attorney in fact of the plaintiff, absented himself and several sureties, and that the partnership
from the Philippine Islands on a prolonged visit to mentioned had transferred all its assets to the
Spain; and in contemplation of his departure he Bota Printing Company, Inc., of which one George
executed a document, dated January 22, 1920, Andrews was a principal stockholder. It is then
purporting to be a partial substitution of agency, stipulated that France and Goulette shall be
whereby he transferred to "the mercantile entity relieved from all liability on their contract as
Figueras Hermanos, or the person, or persons, sureties and that in lieu thereof the creditor, Doña
having legal representation of the same," the Rosa Villa y Monna, accepts the Bota Printing
powers that had been previously conferred on Company, Inc., as debtor to the extent of P20,000,
Pirretas by the plaintiff "in order that," so the which indebtedness was expressly assumed by it,
document runs, "they may be able to effect the and George Andrews as debtor to the extent of
collection of such sums of money as may be due to P12,000, which he undertook to pay at the rate of
the plaintiff by reason of the sale of the bookstore P200 per month thereafter. To this contract the
and printing establishment already mentioned, name of the partnership Guillermo Garcia Bosque,
issuing for such purpose the receipts, vouchers, S. en C., was affixed by Guillermo Garcia Bosque
letters of payment, and other necessary while the name of the Bota Printing Company, Inc.,
documents for whatever they shall have received was signed by G. Andrews, the latter also signing
and collected of the character indicated." in his individual capacity. The name of the plaintiff
was affixed by M.T. Figueras in the following style:
When the time came for the payment of the "p.p. Rosa Villa, viuda de E. Bota, M. T. Figueras,
second installment and accrued interest due at the party of the second part."
time, the purchasers were unable to comply with
their obligation, and after certain negotiations No question is made as to the authenticity of this
between said purchasers and one Alfredo Rocha, document or as to the intention of Figueras to
representative of Figueras Hermanos, acting as release the sureties; and the latter rely upon the
attorney in fact for the plaintiff, an agreement was discharge as complete defense to the action. The
reached, whereby Figueras Hermanos accepted defendant Bosque also relies upon the same
the payment of P5,800 on November 10, 1920, agreement as constituting a novation such as to
and received for the balance five promissory notes relieve him from personal liability. All of the
payable, respectively, on December 1, 1920, defendants furthermore maintain that even
January 1, 1921, February 1, 1921, March 1, 1921, supposing that M. T. Figueras authority to novate
and April 1, 1921. The first three of these notes the original contract and discharge the sureties
were in the amount of P1,000 each, and the last therefrom, nevertheless the plaintiff has ratified
two for P2,000 each, making a total of P7,000. It the agreement by accepting part payment of the
was furthermore agreed that the debtors should amount due thereunder with full knowledge of its
pay 9 per centum per annum on said deferred terms. In her amended complaint the plaintiff
installments, instead of the 7 per centum asserts that Figueras had no authority to execute
mentioned in the contract of sale. These notes the contract containing the release (Exhibit 1) and
were not paid promptly at maturity but the that the same had never been ratified by her.
balance due upon them was finally paid in full by
Bosque on December 24, 1921. The question thus raised as to whether the
plaintiff is bound by Exhibit 1 constitutes the main
About this time the owners of the business La Flor controversy in the case, since if this point should
de Cataluña, appear to have converted it into a be determined in the affirmative the plaintiff
limited partnership under the style of Guillermo obviously has no right of action against any of the
Garcia Bosque, S. en C.;" and presently a defendants. We accordingly address ourselves to
corporation was formed to take over the business this point first.
under the name "Bota Printing Company, Inc." By
a document executed on April 21, 1922, the The partial substitution of agency (Exhibit B to
partnership appears to have conveyed all its amended complaint) purports to confer on
assets to this corporation for the purported Figueras Hermanos or the person or persons
consideration of P15,000, Meanwhile the seven exercising legal representation of the same all of
notes representing the unpaid balance of the the powers that had been conferred on Pirretas by
second installment and interest were failing due the plaintiff in the original power of attorney. This

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 107

original power of attorney is not before us, but guaranty of France and Goulette." From this it is
assuming, as is stated in Exhibit B, that this obvious that Figueras had no actual authority
document contained a general power to Pirretas to whatever to release the sureties or to make a
sell the business known as La Flor de novation of the contract without their additional
Cataluña upon conditions to be fixed by him and guaranty.
power to collect money due to the plaintiff upon
any account, with a further power of substitution, But it is asserted that the plaintiff ratified the
yet it is obvious upon the face of the act of contract (Exhibit 1) by accepting and retaining the
substitution (Exhibit B) that the sole purpose was sum of P14,000 which, it is asserted, was paid by
to authorize Figueras Hermanos to collect the the Bota Printing Co., Inc., under that contract. In
balance due to the plaintiff upon the price of La this connection it should be noted that when the
Flor de Cataluña, the sale of which had already firm of Guillermo Garcia Bosque, S. en C.,
been affected by Pirretas. The words of Exhibit B conveyed all it assets on April 21, 1922 to the
on this point are quite explicit ("to the end that the newly formed corporation, Bota Printing Co., Inc.,
said lady may be able to collect the balance of the the latter obligated itself to pay al the debts of the
selling price of the Printing Establishment and partnership, including the sum of P32,000 due to
Bookstore above-mentioned, which has been sold the plaintiff. On April 23, thereafter, Bosque,
to Messrs. Bosque and Pomar"). There is nothing acting for the Bota Printing Co., Inc., paid to
here that can be construed to authorize Figueras Figueras the sum of P8,000 upon the third
Hermanos to discharge any of the debtors without installment due to the plaintiff under the original
payment or to novate the contract by which their contract of sale, and the same was credited by
obligation was created. On the contrary the terms Figueras accordingly. On May 16 a further sum of
of the substitution shows the limited extent of the P5,000 was similarly paid and credited; and on
power. A further noteworthy feature of the May 25, a further sum of P200 was likewise paid,
contract Exhibit 1 has reference to the personality making P14,000 in all. Now, it will be remembered
of the purported attorney in fact and the manner that in the contract (Exhibit 1), executed on May
in which the contract was signed. Under the 17, 1922, the Bota Printing Co., Inc., undertook to
Exhibit B the substituted authority should be pay the sum of P20,00; and the parties to the
exercised by the mercantile entity Figueras agreement considered that the sum of P13,800
Hermanos or the person duly authorized to then already paid by the Bota Printing Co., Inc.,
represent the same. In the actual execution of should be treated as a partial satisfaction of the
Exhibit 1, M. T. Figueras intervenes as purpoted larger sum of P20,000 which the Bota Printing Co.,
attorney in fact without anything whatever to Inc., had obligated itself to pay. In the light of
show that he is in fact the legal representative of these facts the proposition of the defendants to
Figueras Hermanos or that he is there acting in the effect that the plaintiff has ratified Exhibit 1 by
such capacity. The act of substitution conferred no retaining the sum of P14,000, paid by the Bota
authority whatever on M. T. Figueras as an Printing Co., Inc., as above stated, is untenable.
individual. In view of these defects in the granting By the assumption of the debts of its predecessor
and exercise of the substituted power, we agree the Bota Printing Co., Inc., had become a primary
with the trial judge that the Exhibit 1 is not binding debtor to the plaintiff; and she therefore had a
on the plaintiff. Figueras had no authority to right to accept the payments made by the latter
execute the contract of release and novation in the and to apply the same to the satisfaction of the
manner attempted; and apart from this it is shown third installment of the original indebtedness.
that in releasing the sureties Figueras acted Nearly all of this money was so paid prior to the
contrary to instructions. For instance, in a letter execution of Exhibit 1 and although the sum of
from Figueras in Manila, dated March 4, 1922, to P200 was paid a few days later, we are of the
Pirretas, then in Barcelona, the former stated that opinion that the plaintiff was entitled to accept and
he was attempting to settle the affair to the best retain the whole, applying it in the manner above
advantage and expected to put through an stated. In other words the plaintiff may lawfully
arrangement whereby Doña Rosa would receive retain that money notwithstanding her refusal to
P20,000 in cash, the balance to be paid in be bound by Exhibit 1.
installments, "with the guaranty of France and
Goulette." In his reply of April 29 to this letter, A contention submitted exclusively in behalf of
Pirretas expresses the conformity of Doña Rosa in France and Goulette, the appellant sureties, is
any adjustment of the claim that Figueras should that they were discharged by the agreement
see fit to make, based upon payment of P20,000 between the principal debtor and Figueras
in cash, the balance in installments, payable in the Hermanos, as attorney in fact for the plaintiff,
shortest practicable periods, it being understood, whereby the period for the payment of the second
however, that the guaranty of Messrs. France and installment was extended, without the assent of
Goulette should remain intact. Again, on May 9, the sureties, and new promissory notes for unpaid
Pirretas repeats his assurance that the plaintiff balance were executed in the manner already
would be willing to accept P20,000 down with the mentioned in this opinion. The execution of these
balance in interest-bearing installments "with the new promissory notes undoubtedly constituted

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 108

and extension of time as to the obligation included does not affect the application of the doctrine
therein, such as would release a surety, even above enunciated to the case before us.
though of the solidary type, under article 1851 of
the Civil Code. Nevertheless it is to be borne in Finally, it is contended by the appellant sureties
mind that said extension and novation related only that they were discharged by a fraud practiced
to the second installment of the original obligation upon them by the plaintiff in failing to require the
and interest accrued up to that time. Furthermore, debtor to execute a mortgage upon the printing
the total amount of these notes was afterwards establishment to secure the debt which is the
paid in full, and they are not now the subject of subject of this suit. In this connection t is insisted
controversy. It results that the extension thus that at the time France and Goulette entered into
effected could not discharge the sureties from the contract of suretyship, it was represented to
their liability as to other installments upon which them that they would be protected by the
alone they have been sued in this action. The rule execution of a mortgage upon the printing
that an extension of time granted to the debtor by establishment by the purchasers Bosque and
the creditor, without the consent of the sureties, Pomar. No such mortgage was in fact executed
extinguishes the latter's liability is common both and in the end another creditor appears to have
to Spanish jurisprudence and the common law; obtained a mortgage upon the plant which is
and it is well settled in English and American admitted to be superior to the claim of the plaintiff.
jurisprudence that where a surety is liable for The failure of the creditor to require a mortgage is
different payments, such as installments of rent, alleged to operate as a discharge of the sureties.
or upon a series of promissory notes, an extension With this insistence we are unable to agree, for the
of time as to one or more will not affect the liability reason that the proof does not show, in our
of the surety for the others. (32 Cyc., 196; opinion, that the creditor, on her attorney in fact,
Hopkirk vs. McConico, 1 Brock., 220; 12 Fed. Cas., was a party to any such agreement. On the other
No. 6696; Coe vs. Cassidy, 72 N. Y., 133; Cohn vs. hand it is to be collected from the evidence that
Spitzer, 129 N. Y. Supp., 104; Shephard Land Co. the suggestion that a mortgage would be
vs. Banigan, 36 R. I., 1; I. J. Cooper Rubber Co. vs. executed on the plant to secure the purchase price
Johnson, 133 Tenn., 562; Bleeker vs. Johnson, and that this mortgage would operate for the
190, N. W. 1010.) The contention of the sureties protection of the sureties came from the principal
on this point is therefore untenable. and not from any representative of the plaintiff.

There is one stipulation in the contract (Exhibit A) As a result of our examination of the case we find
which, at first suggests a doubt as to propriety of no error in the record prejudicial to any of the
applying the doctrine above stated to the case appellants, and the judgment appealed from will
before us. We refer to cause (f) which declares be affirmed, So ordered, with costs against the
that the non-fulfillment on the part of the debtors appellants.
of the stipulation with respect to the payment of
any installment of the indebtedness, with interest, EN BANC
will give to the creditor the right to treat and
declare all of said installments as immediately due. G.R. No. 42829 September 30, 1935
If the stipulation had been to the effect that the
failure to pay any installment when due would ipso RADIO CORPORATION OF THE
facto cause to other installments to fall due at PHILIPPINES, plaintiff-appellee,
once, it might be plausibly contended that after vs.
default of the payment of one installment the act JESUS R. ROA, ET AL., defendants.
of the creditor in extending the time as to such RAMON CHAVES, ANDRES ROA and MANUEL
installment would interfere with the right of the ROA, appellants.
surety to exercise his legal rights against the
debtor, and that the surety would in such case be M.H. de Joya and Juan de Borja for appellants.
discharged by the extension of time, in conformity Barrera and Reyes for appellee.
with articles 1851 and 1852 of the Civil Code. But
it will be noted that in the contract now under GODDARD, J.:
consideration the stipulation is not that the
maturity of the later installments shall be ipso This is an appeal from decision of the Court of First
facto accelerated by default in the payment of a Instance of the City of Manila the dispositive part
prior installment, but only that it shall give the of which reads:
creditor a right to treat the subsequent
installments as due, and in this case it does not In view of all the foregoing, judgment is hereby
appear that the creditor has exercised this election. rendered in favor of the plaintiff Radio Corporation
On the contrary, this action was not instituted of the Philippines and against the defendants
until after all of the installments had fallen due in Jesus R. Roa, Ramon Chavez, Andes Roa and
conformity with the original contract. It results Manuel Roa: (a) Ordering the defendant Jesus R.
that the stipulation contained in paragraph (f) Roa to pay the plaintiff the sum of P22,935, plus

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 109

P99.64, with legal interest thereon from the date The paragraph of that contract in which the
of the filing of the complaint until fully paid: (b) accelerating clause appears reads as follows:
that upon failure of the defendant Jesus Roa to
pay the said sum indicated, the chattel described In case the vendee-mortgagor fails to make any of
in the second cause of action shall be sold at public the payments as hereinbefore provided, the whole
auction to be applied to the satisfaction of the amount remaining unpaid under this mortgage
amount of this judgment; (c) that the defendants shall immediately become due and payable and
Jesus R. Roa, Ramon Chavez, Andres Roa and this mortgage on the property herein mentioned
Manuel Roa pay jointly and severally to the as well as the Luzon Surety Bond may be
plaintiff the amount of P10,000; (d) and that Jesus foreclosed by the vendor-mortgagee; and, in such
R. Roa pay to the plaintiff the amount equivalent case, the vendee-mortgager further agrees to pay
to 10 per cent of P22,935, as attorney's fees, and the vendor- mortgagee an additional sum
that all the defendants in this case pay the costs of equivalent to 25 per cent of the principal due
this action. unpaid as costs, expenses and liquidated damages,
which said sum, shall be added to the principal
The defendants Ramon Chavez, Andres Roa and sum for which this mortgage is given as security,
Manuel Roa have appealed from the judgment and shall become a part, thereof.
against them for P10,00 and costs. These
appellants make the following assignments of On March 15, 1932, Erlanger & Galinger, Inc.,
error: acting in its capacity as attorney-in-fact of the
Radio Corporation of the Philippines wrote the
1. The court below erred in not finding that the following letter (Exhibit 13) to the principal debtor
balance of the total indebtedness became Jesus R. Roa:
immediately due and demandable upon the failure
of the defendant Jesus R. Roa to pay any Mr. JESUS R. ROA
installment on his note. Cagayan, Oriental Misamis

2. The court below erred in not finding that Attention of Mrs. Amparo Chavez de Roa
defendant Jesus R. Roa defaulted in the payment
of the installment due on February 27,1932, and DEAR SIR: We acknowledge with thanks the
that plaintiff corporation gave him an extension of receipt of your letter of March 9th together with
time for the payment of said installment. your remittance of P200 for which we enclose
receipt No. 7558. We are applying this amount to
3. The court below erred in not finding that the the balance of your January installment.
extension of time given to defendant Jesus R. Roa
for the payment of an overdue installment served We have no objection to the extension requested
as a release of defendant sureties from liability on by you to pay the February installment by the first
all the subsequent installments. week of April. We would, however, urge you to
make every efforts to bring the account up-to date
4. The court below erred in not finding that the as we are given very little discretion by the RCP in
sureties were discharged from their bond when giving extension of payment.
the plaintiff authorized Jesus R. Roa to remove the
photophone equipment from Cagayan, Misamis
Very truly yours,
Oriental, to Silay, Occidental Negros, without the
RADIO CORP. OF THE
knowledge or consent of said sureties.
PHIL.
By: ERLANGER & GALINGER,
5. The court below erred in condemning Ramon
INC.
Chavez, Andres Roa and Manuel Roa to pay jointly
(Sgd.) H.N. SALET
and severally the sum of P10,000 to the Radio
Vice-President
Corporation of the Philippines.

The defendant Jesus R. Roa became indebted to Under the above assignments of error the
the Philippine Theatrical Enterprises, Inc., in the principal question to be decided is whether or not
sum of P28,400 payable in seventy-one equal the extension granted in the above copied letter
monthly installments at the rate of P400 a month by the plaintiff, without the consent of the
commencing thirty days after December 11, 1931, guarantors, the herein appellants, extinguishes
with five days grace monthly until complete the latter's liability not only as to the installments
payment of said sum. On that same date the due at that time, as held by the trial court, but also
Philippine Theatrical Enterprises, Inc., assigned all as to the whole amount of their obligation. Articles
its right and interest in that contract to the Radio 1851 of the Civil Code reads as follows:
Corporation of the Philippines.
ART. 1851. An extension grated to the debtor by
the creditor, without the consent of the guarantor,
extinguishes the latter's liability.
S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 110
This court has held that mere delay in suing for the payable upon failure to pay one installment, the
collection of the does not release the sureties. act of the plaintiff in extending the payment of the
(Sons of I. de la Rama vs. Estate of Benedicto, 5 installment corresponding to February, 1932, to
Phil., 512; Banco Español Filipino vs. Donaldson April, 1932, without the consent of the guarantors,
Sim & Co., 5 Phil., 418; Manzano vs. Tan Suanco, constituted in fact an extension of the payment of
13 Phil., 183; Hongkong & Shanghai Baking the whole amount of the indebtedness, as by that
Corporation vs. Aldecoa & Co., 30 Phil., 255.) In extension the plaintiff could not have filed an
the case of Villa vs. Garcia Bosque (49 Phil., 126, action for the collection of the whole amount until
134, 135), this court stated: after April, 1932. Therefore appellants' contention
that after default of the payment of one
. . . The rule that an extension of time granted to installment the act of the herein creditor in
the debtor by the creditor, without the consent of extending the time of payment discharges them
the sureties, extinguishes the latter's liability is as guarantors in conformity with articles 1851 and
common both to Spanish jurisprudence and the 1852 of the Civil Code is correct.
common law; and it is well settled in English and
American jurisprudence that where a surety is It is a familiar rule that if a creditor, by positive
liable for different payments, such as installments contract with the principal debtor, and without the
of rent, or upon a series of promissory notes, an consent of the surety, extends the time of
extension of time as to one or more will not affect payment, he thereby discharges the surety. . . .
the liability of the surety for the others. . . . The time of payment may be quite as important a
consideration to the surety as the amount he has
There is one stipulation in the contract (Exhibit A) promised conditionally to pay. . . .Again, a surety
which, at first blush, suggests a doubt as to the has the right, on payment of the debt, to be
propriety of applying the doctrine above stated to subrogated to all the rights of the creditor, and to
the case before us. We refer to clause (f) which proceed at once to collect it from the principal; but
declares that the non-fulfillment on the part of the if the creditor has tied own hands from proceeding
debtors of the stipulation with respect to the promptly, by extending the time of collection, the
payment of any installment of the indebtedness, hands of the surety will equally be bound; and
with interest, will give to the creditor the right to before they are loosed, by the expiration of the
treat and declare all of said installments as extended credit, the principal debtor may have
immediately due. If the stipulation had been to the become insolvent and the right of subrogation
effect that the failure to pay any installment when rendered worthless. It should be observed,
due would ipso facto cause the other installments however, that it is really unimportant whewther
to fall due at once, it might be plausibly contended the extension given has actually proved
that after default of the payment of one prejudicial to the surety or not. The rule stated is
installment the act of the creditor in extending the quite independent of the event, and the fact that
time as to such installment would interfere with the principal is insolvent or that the extension
the right of the surety to exercise his legal rights granted promised to be beneficial to the surety
against the debtor, and that the surety would in would give no right to the creditor to change the
such case be discharged by the extension of time, terms of the contract without the knowledge or
in conformity with article 1851 and 1852 of the consent of the surety. Nor does it matter for how
Civil Code. But it will be noted that in the contract short a period the time of payment may be
now under consideration the stipulation is not that extended. The principle is the same whether the
the maturity of the latter installments shall be ipso time is long or short. The creditor must be in such
facto accelerated by default in the payment of a a situation that when the surety comes to be
prior installment, but only that it shall give the substituted in his place by paying the debt, he
creditor a right treat the subsequent installments may have an immediate right of action against the
as due; and in this case it does not appear that the principal. The suspension of the right to sue for a
creditor has exercised this election. On the month, or even a day, is as effectual to release the
contrary, this action was not instituted until after surety as a year or two years. (21 R.C.L.,
all of the installments had fallen due in conformity 1018-1020.)
with original contract. It results that the
stipulation contained in paragraph (f) does not Plaintiff's contention that the enforcement of the
effect the application of the doctrine above accelerating clause is potestative on the part of
enunciated to the case before us. the obligee, and not self-executing, is clearly
untenable from a simple reading of the clause
The stipulation in the contract under consideration, copied above. What is potestative on the part of
copied above, is to the effect that upon failure to the obligee is the foreclosure of the mortgage and
pay any installment when due the other not the accelerating clause.
installments ipso facto become due and payable.
In view of of the fact that under the express Plaintiff-appellee contends that there was no
provision of the contract, quoted above, the whole consideration for the extension granted the
unpaid balance automatically becomes due and principal debtor. Article 1277 of the Civil Code

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 111

provides that "even though the consideration and Fausto S. Alberto, executed an indemnity
should be expressed in the contract, it shall be agreement in favor of the plaintiff, ... . The
presumed that a consideration exists and that it is duration of the surety bond, ... was for the period
licit, unless the debtor proves the contrary." It was beginning July 16, 1957 to July 17, 1958, but at
incumbent upon the plaintiff to prove that there the instance of the defendant, Manuel C. Mutuc, it
was no valid consideration for the extension was renewed for three successive one year
granted. periods, the last period of which was from July 17,
1960 to July 17, 1961. The prior consent of the
In view of the forgoing the judgment of the trial defendant Fausto S. Alberto to the aforesaid
court is reversed as to the appellants Ramon renewal extension was not obtained by the
Chavez, Andres Roa and Manuel Roa, without defendant Manuel C. Mutuc or by the plaintiff.
costs. According to the letter of the Immigration and
Naturalization Service, United States Department
SECOND DIVISION of Justice, ... Manuel C. Mutuc was not aboard the
vessel M/S Merit Maersk when it departed from
G.R. No. L-19632 November 13, 1974 New York at 3:00 o'clock P.M. for Charleston,
South Carolina, and was presumed to be a
THE PHILIPPINE AMERICAN GENERAL deserter. The Compania General de Tabacos de
INSURANCE COMPANY, INC., plaintiff-appellee, Filipinas which represented the Maersk Lines
vs. forwarded this letter to the plaintiff and asked for
MANUEL MUTUC DOROTEO Q. MOJICA, and the remittance of the forfeited bond of P1,000. On
FAUSTO S. ALBERTO, defendants, FAUSTO S. October 6, 1960, the plaintiff wrote a letter to the
ALBERTO, defendant-appellant. defendants Doroteo Q. Mojica and Fausto S.
Alberto demanding the payment of the amount of
Manuel Lim, Manuel Y Macias & Ricardo T. Bancod P1,000 in accordance with the indemnity
for plaintiff-appellee. agreement. On October 25, 1960, plaintiff paid
the Tabacalera the sum of P5,000 in full
V. A. Francisco & Associates for settlement of the latter's claim against the
defendant-appellant. bond ... .This action is for the recovery of the
amount of P1,000 against the defendants Mojica
FERNANDO, J.:p and Alberto based on the indemnity agreement ... .
From the judgment against them by the Municipal
There is an obstacle, rather formidable in Court, defendant Alberto appealed alleging that
character, that stands in the way of the plea of the renewal was made without his consent." 2
appellant Fausto S. Alberto,1 to have this Court
reverse a lower court decision of February 14, The indemnity agreement was insofar as pertinent
1962, holding him liable on an indemnity set forth therein in this wise: "[Indemnity]:— The
agreement. As pointed out therein, the language undersigned agree at all times to jointly and
of his undertaking is clear and unmistakable and, severally indemnify the [Company] and keep it
therefore, leaves no alternative for a court except indemnified and hold and save it harmless from
to enforce its terms. The attempt to impugn such a and against any and all damages, losses, costs,
judgment based on the ground that the stipulation stamps, taxes, penalties, charges and expenses of
relied upon is contrary to morals and to public whatsoever kind and nature which the [Company]
order and policy, while vigorously pressed, is none shall or may, at any time sustain or incur in
too successful. Accordingly, we affirm. consequence of having become surety upon this
bond herein above referred to or any extension,
The facts as stipulated by the parties may be renewal, substitution or alteration thereof, made
gleaned from the appealed decision. Thus: "On at the instance of the undersigned or any of them,
July 16, 1957, defendant Manuel C. Mutuc as or any other bond executed on behalf of the
principal, and plaintiff, as surety, executed a undersigned or any of them; and to pay,
surety bond in the amount of P1,000 in behalf of reimburse and make good to the [Company] its
defendant Mutuc and in favor of the Maersk Line, successors and assigns, all sums and amount of
in which the surety company guaranteed the money which it or its representatives shall pay or
faithful performance by said Manuel C. Mutuc of cause to be paid, or become liable to pay, on
his duties in connection with his employment as account of the undersigned or any of them, of
crewmember of the vessel of the Maersk Line, and whatsoever kind and nature, including 15% of the
more particularly, that he would not desert said amount involved in the litigation or other matters
vessel while he was engaged as such crewmember growing out of or connected therewith, for and as
while outside of the Philippines. To protect the attorney's fees, but in no case less than P25.00. It
plaintiff company, on July 17, 1957, in is hereby further agreed that in case of any
consideration of plaintiff's becoming surety of the extension or renewal of the bond we equally bind
defendant Manuel C. Mutuc, under the bond, ... ourselves to the [Company] under the same terms
the defendant Manuel C. Mutuc, Doroteo Q. Mojica, and conditions as herein provided without the

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 112

necessity of executing another indemnity categorically put forth in Hernandez v.
agreement for the purpose and that we hereby Antonio: "The literal sense of its stipulations
11

equally waive our right to be notified of any must be observed."12 It was so succinctly
renewal or extension of the bond which may be observed by Chief Justice Arellano in Velasco v.
granted under this indemnity agreement. Lao Tam 13 that such is the "first rule on the
[Renewals, alterations and substitutions]:— The matter ... ." 14 There is this excerpt
undersigned hereby empower and authorize the from Chinchilla v. Rafel: "That the terms
15

Company to grant or consent to the granting of employed in the contract Exhibit 1 are clear and
any extension, continuation, increase modification, leave no doubt as to the true genuine intention of
change, alteration, and/or renewal of the original the contracting parties, it is sufficient, in the
bond herein referred to, and to execute or consent opinion of this court, to demonstrate it by a simple
to the execution of any substitution for said Bond reading of the document Exhibit 1 from the
with the same or different conditions and parties, wording of which it is not possible to find any
and the undersigned hereby hold themselves meaning contrary or opposed to the evident
jointly and severally liable to the Company for the intention of the contracting parties, Rafel and
Original Bond herein abovementioned or for any Verdaguer. ... From the literal wording of the
extension, continuation, increase, modification, document in question, it is not possible under any
change, alteration, renewal or substitution thereof, circumstance whatsoever to infer a contract
until the full amount including principal, interests, distinct from that which really and truly appears to
premiums, costs and other expenses due to the have been specified in the said document."16 Thus,
Company thereunder is fully paid up."3 contracts, according to Feliciano v.
Limjuco,17 which are the private laws of the
The lower court after referring to the above contracting parties, should be fulfilled according to
stipulation as to "Renewals" which refers not to a the literal sense of their stipulations, if their terms
single extension but to "any extension" agreed to are clear and leave no room for doubt as to the
in advance by defendant, now appellant, found for intention of the contracting parties, for contracts
plaintiff, now appellee. As set forth in the decision: are obligatory, no matter what their form may be,
"The defendant having expressly empowered or whenever the essential requisites for their validity
authorized his principal to the granting of any are present.18 A terse summary of the matter is
extension, his liability under the indemnity that of the then Justice, later Chief Justice, Moran:
agreement necessarily follows."4 It is from that "A writing must be interpreted according to the
decision in favor of plaintiff that this appeal is legal meaning of its language."19
taken. As set forth at the outset, there is no legal
ground for a reversal. 2. There was no other valid conclusion that could
be reached by the lower court. Even appellant
1. Appellant was not compelled to enter into an must have seen that so it ought to be. That would
indemnity agreement. He did so of his own free account for the contention in his brief that the
will. He agreed to hold himself liable for the stipulation as to "any extension" without the need
amount therein specified. What is more, he did for his being notified was "null and void being
consent likewise to be so bound not only for the contrary to law, morals, good customs, public
one year period specified but to any extension order or public policy."20 That is a pretty tall order.
thereafter made, an extension moreover that There is more than just a hint of hyperbole in such
could be had without his having to be notified. a sweeping allegation. Appellant though ought to
That was what the contract provided. He gave his have realized that assertion is not the equivalent
plighted word. The terms were definite and certain. of proof. A little more objectivity on his part should
There was no ambiguity. All that was necessary bring the realization that no offense to law or
was to see its enforcement. The Civil Code morals could be imputed to such a contractual
explicitly provides: "If the terms of a contract are provision. As to good customs, that category
clear and leave no doubt upon the intention of the requires something to substantiate it. A mere
contracting parties, the literal meaning of its denunciatory characterization certainly cannot
interpretation shall control."5 that was how it was suffice. That leaves public order or public policy. It
worded under the Civil Code of Spain of 1899 is difficult to follow appellant's train of reasoning.
formerly in force in this jurisdiction.6 He would premise it on the indemnity agreement
being a contract of adhesion. He was not at all
A provision like the above exemplifies according to compelled to agree to it. He was free to act either
the leading case of Perez v. Pomar7 the principle way. He had a choice. It may be more offensive to
that "the will of the contracting parties is public policy, let alone morals or good customs, if
law, ... ."8 It is understandable then why in Alburo thereafter he would be allowed to go back on his
v. Villanueva,9 this Court affirmed that where the word. Besides the policy underlying such a
terms of a contract are "clear and explicit," they stipulation in this litigation is clear. What was
"do not justify an attempt to read into it any guaranteed was the faithful performance of
alleged intention of the parties other than that defendant Mutuc of his employment as a member
which appears upon its face." 10 As was so of the crew of a vessel plying overseas. What was

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 113

more logical considering the difficulty of approached the appellants asking them to
contacting him then for the party concerned, here mortgage their property to secure the loan of
appellant, to agree in advance to any extension P10,000.00 which the Company was negotiating
without the need for notification. So the parties with the PNB.
agreed. There could be thus nothing that did
offend public policy or public order when such an After some persuasion appellants signed on
arrangement was explicitly provided for. Appellant, December 23, 1955 the 'Amendment of Real
clearly, has not made out a case for reversal.21 Estate Mortgage', mortgaging their said property
to the PNB to guaranty the loan of P10,000.00
WHEREFORE, the lower court decision of February extended to the Company. The terms and
14, 1962 is affirmed. Costs against appellant. conditions of the original mortgage for Pl,000.00
were made integral part of the new mortgage for
SECOND DIVISION P10,000.00 and both documents were registered
with the Register of Deeds of Manila. The
G.R. No. L-34539 July 14, 1986 promissory note covering the loan of P10,000.00
dated December 29, 1955, maturing on April 27,
EULALIO PRUDENCIO and ELISA T. 1956, was signed by Jose Toribio, as
PRUDENCIO, petitioners, attorney-in-fact of the Company, and by the
vs. appellants. Appellants also signed the portion of
THE HONORABLE COURT OF APPEALS, THE the promissory note indicating that they are
PHILIPPINE NATIONAL BANK, RAMON C. requesting the PNB to issue the Check covering
CONCEPCION and MANUEL M. TAMAYO, the loan to the Company. On the same date
partners of the defunct partnership (December 23, 1955) that the 'Amendment of
Concepcion & Tamayo Construction Real Estate' was executed, Jose Toribio, in the
Company, JOSE TORIBIO, Atty-in-Fact of same capacity as attorney-in- fact of the Company,
Concepcion & Tamayo Construction executed also the 'Deed of Assignment' assigning
Company, and THE DISTRICT ENGINEER, all payments to be made by the Bureau to the
Puerto Princesa, Palawan, respondents. Company on account of the contract for the
construction of the Puerto Princesa building in
Fernando R. Mangubat, Jr. for respondent PNB. favor of the PNB.

GUTIERREZ, JR., J.: This assignment of credit to the contrary

notwithstanding, the Bureau; with approval, of
This is a petition for review seeking to annul and the PNB, conditioned, however that they should be
set aside the decision of the Court of Appeals, now for labor and materials, made three payments to
the Intermediate Appellate Court, affirming the the Company on account of the contract price
order of the trial court which dismissed the totalling P11,234.40. The Bureau's last request for
petitioners' complaint for cancellation of their real P5,000.00 on June 20, 1956, however, was denied
estate mortgage and held them jointly and by the PNB for the reason that since the loan was
severally liable with the principal debtors on a already overdue as of April 28, 1956, the
promissory note which they signed as remaining balance of the contract price should be
accommodation makers. applied to the loan.

The factual background of this case is stated in the The Company abandoned the work, as a
decision of the appellate court: consequence of which on June 30, 1956, the
Bureau rescinded the construction contract and
Appellants are the registered owners of a parcel of assumed the work of completing the building. On
land located in Sampaloc, Manila, and covered by November 14, 1958, appellants wrote the PNB
T.C.T. 35161 of the Register of Deeds of Manila. contending that since the PNB authorized
On October 7, 1954, this property was mortgaged payments to the Company instead of on account
by the appellants to the Philippine National Bank, of the loan guaranteed by the mortgage there was
hereinafter called PNB, to guarantee a loan of a change in the conditions of the contract without
P1,000.00 extended to one Domingo Prudencio. the knowledge of appellants, which entitled the
latter to a cancellation of their mortgage contract.
Sometime in 1955, the Concepcion & Tamayo
Construction Company, hereinafter called Failing in their bid to have the real estate
Company, had a pending contract with the Bureau mortgage cancelled, appellants filed on June 27,
of Public Works, hereinafter called the Bureau, for 1959 this action against the PNB, the Company,
the construction of the municipal building in the latter's attorney-in-fact Jose Toribio, and the
Puerto Princess, Palawan, in the amount of District Engineer of Puerto Princesa, Palawan,
P36,800.00 and, as said Company needed funds seeking the cancellation of their real estate
for said construction, Jose Toribio, appellants' mortgage. The complaint was amended to exclude
relative, and attorney-in-fact of the Company, the Company as defendant, it having been shown

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 114

that its life as a partnership had already expired THE HONORABLE COURT OF APPEALS ERRED IN
and, in lieu thereof, Ramon Concepcion and HOLDING THAT PETITIONERS WERE NOT
Manuel M. Tamayo, partners of the defunct RELEASED FROM THEIR OBLIGATION TO THE
Company, were impleaded in their private RESPONDENT PNB, WHEN THE PNB, WITHOUT
capacity as defendants. THE KNOWLEDGE AND CONSENT OF
PETITIONERS, CHANGED THE TENOR AND
After hearing, the trial court rendered judgment, CONDITION OF THE ASSIGNMENT OF PAYMENTS
denying the prayer in the complaint that the MADE BY THE PRINCIPAL DEBTOR; CONCEPCION
petitioners be absolved from their obligation & TAMAYO CONSTRUCTION COMPANY; AND
under the mortgage contract and that the said RELEASED TO SUCH PRINCIPAL DEBTOR
mortgage be released or cancelled. The PAYMENTS FROM THE BUREAU OF PUBLIC WORKS
petitioners were ordered to pay jointly and WHICH WERE MORE THAN ENOUGH TO WIPE OUT
severally with their co-makers Ramon C. THE INDEBTEDNESS TO THE PNB.
Concepcion and Manuel M. Tamayo the sum of
P11,900.19 with interest at the rate of 6% per The petitioners contend that as accommodation
annum from the date of the filing of the complaint makers, the nature of their liability is only that of
on June 27, 1959 until fully paid and Pl,000.00 mere sureties instead of solidary co-debtors such
attorney's fees. that "a material alteration in the principal contract,
effected by the creditor without the knowledge
The decision also provided that if the judgment and consent of the sureties, completely discharges
was not satisfied within 90 days from its receipt, the sureties from all liability on the contract of
the mortgaged properties together with all the suretyship. " They state that when respondent
improvements thereon belonging to the PNB did not apply the initial and subsequent
petitioners would be sold at public auction and payments to the petitioners' debt as provided for
applied to the judgment debt. in the deed of assignment, they were released
from their obligation as sureties and, therefore,
The Court of Appeals affirmed the trial court's the real estate mortgage executed by them should
decision in toto stating that, as accommodation have been cancelled.
makers, the petitioners' liability is that of solidary
co-makers and that since "the amounts released Section 29 of the Negotiable Instrument Law
to the construction company were used therein provides:
and, therefore, were spent for the successful
accomplishment of the work constructed for, the Liability of accommodation party. —An
authorization made by the Philippine National accommodation party is one who has signed the
Bank of partial payments to the construction instrument as maker, drawer, acceptor, or
company which was also one of the solidary indorser, without receiving value therefor, and for
debtors cannot constitute a valid defense on the the purpose of lending his name to some other
part of the other solidary debtors. Moreover, those person. Such a person is liable on the instrument
who rendered services and furnished materials in to a holder for value, notwithstanding such holder
the construction are preferred creditors and have at the time of taking the instrument knew him to
a lien on the price of the contract." The appellate be only an accommodation party.
court further held that PNB had no obligation
whatsoever to notify the petitioners of its In the case of Philippine Bank of Commerce v.
authorizing the three payments in the total Aruego (102 SCRA 530, 539), we held that "... in
amount of Pll,234.00 in favor of the Company lending his name to the accommodated party, the
because aside from the fact that the petitioners accommodation party is in effect a surety. ... . "
were not parties to the deed of assignment, there However, unlike in a contract of suretyship, the
was no stipulation in said deed making it liability of the accommodation party remains not
obligatory on the part of the PNB to notify the only primary but also unconditional to a holder for
petitioners everytime it authorizes payment to the value such that even if the accommodated party
Company. It ruled that the petitioners cannot ask receives an extension of the period for payment
to be released from the real estate mortgage. without the consent of the accommodation party,
the latter is still liable for the whole obligation and
In this petition, the petitioners raise the following such extension does not release him because as
issues which they present in the form of errors: far as a holder for value is concerned, he is a
solidary co- debtor.
I. First Assignment of Error.
Expounding on the nature of the liability of an
THE HONORABLE COURT OF APPEALS ERRED IN accommodation petition party under the
HOLDING THAT HEREIN PETITIONERS WERE aforequoted section, we ruled in Ang Tiong v.
SOLIDARY CO-DEBTORS INSTEAD OF SURETIES: Ting (22 SCRA 713, 716):

II. Second Assignment of Error.

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 115

3. That the appellant, again assuming him to be an Petitioners contend that the payee PNB is an
accommodation indorser, may obtain security immediate party and, therefore, is not a holder in
from the maker to protect himself against the due course and stands on no better footing than a
danger of insolvency of the latter, cannot in any mere assignee.
manner affect his liability to the appellee, as the
said remedy is a matter of concern exclusively In those cases where a payee was considered a
between accommodation indorser and holder in due course, such payee either acquired
accommodated party. So that the appellant the note from another holder or has not directly
stands only as a surety in relation to the maker, dealt with the maker thereof. As was held in the
granting this to be true for the sake of argument, case of Bank of Commerce and Savings v.
is immaterial to the claim of the appellee, and Randell (186 NorthWestern Reporter 71):
does not a whit diminish nor defeat the rights of
the latter who is a holder for value. The liability of We conclude, therefore, that a payee who receives
the appellant remains primary and unconditional. a negotiable promissory note, in good faith, for
To sanction the appellant's theory is to give value, before maturity, and without any notice of
unwarranted legal recognition to the patent any infirmity, from a holder, not the maker. to
absurdity of a situation where an indorser, when whom it was negotiated as a completed
sued on an instrument by a holder in due course instrument, is a holder in due course within the
and for value, can escape liability on his purview of a Negotiable Instruments law, so as to
indorsement by the convenient expedient of preclude the defense of fraud and failure of
interposing the defense that he is a mere consideration between the maker and the holder
accommodation indorser. to whom the instrument, was delivered.

There is, therefore, no question that as Similarly, in the case of Stone v. Goldberg &
accommodation makers, petitioners would be Lewis (60 Southern Reporter 748) on rehearing
primarily and unconditionally liable on the and quoting Daniel on Negotiable Instruments, it
promissory note to a holder for value, regardless was held:
of whether they stand as sureties or solidary
co-debtors since such distinction would be entirely It is a general principle of the law merchant that,
immaterial and inconsequential as far as a holder as between the immediate parties to a negotiable
for value is concerned. Consequently, the instrument-the parties between whom there is a
petitioners cannot claim to have been released privity-the consideration may be inquired into;
from their obligation simply because the time of and as to them the only superiority of a bill or note
payment of such obligation was temporarily over other unsealed evidence of debt is that it
deferred by PNB without their knowledge and prima facie imports a consideration.
consent. There has to be another basis for their
claim of having been freed from their obligation. Although as a general rule, a payee may be
The question which should be resolved in this considered a holder in due course we think that
instant petition, therefore, is whether or not PNB such a rule cannot apply with respect to the
can be considered a holder for value under Section respondent PNB. Not only was PNB an immediate
29 of the Negotiable Instruments Law such that party or in privy to the promissory note, that is, it
the petitioners must be necessarily barred from had dealt directly with the petitioners knowing
setting up the defense of want of consideration or fully well that the latter only signed as
some other personal defenses which may be set accommodation makers but more important, it
up against a party who is not a holder in due was the Deed of Assignment executed by the
course. Construction Company in favor of PNB which
principally moved the petitioners to sign the
A holder for value under Section 29 of the promissory note also in favor of PNB. Petitioners
Negotiable Instruments Law is one who must were made to believe and on that belief entered
meet all the requirements of a holder in due into the agreement that no other conditions would
course under Section 52 of the same law except alter the terms thereof and yet, PNB altered the
notice of want of consideration. (Agbayani, same. The Deed of Assignment specifically
Commercial Laws of the Philippines, 1964, p. 208). provided that Jose F. Toribio, on behalf of the
If he does not qualify as a holder in due course Company, "have assigned, transferred and
then he holds the instrument subject to the same conveyed and by these presents, do assign,
defenses as if it were non-negotiable (Section 58, transfer and convey unto the said Philippine
Negotiable Instruments Law). National Bank, its successors and assigns all
payments to be received from the Bureau of Public
In the case at bar, can PNB, the payee of the Works on account of contract for the construction
promissory note be considered a holder in due of the Puerto Princesa Municipal Building in
course? Palawan, involving the total amount of P
36,000.00" and that "This assignment shall be
irrevocable and subject to the terms and

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 116

conditions of the promissory note and or any other assignment was shown to the spouses that they
kind of documents which the Philippine National consented to the mortgage and signed the
Bank have required or may require the assignor to promissory note in the Bank's favor.
execute to evidence the above-mentioned
obligation." Article 2085 of the Civil Code enumerates the
requisites of a valid mortgage contract. Petitioners
Under the terms of the above Deed, it is clear that do not dispute the validity of the mortgage. They
there are no further conditions which could only want to have it cancelled because the Bank
possibly alter the agreement without the consent violated the deed of assignment and extended the
of the petitioners such as the grant of greater period of time of payment of the promissory note
priority to obligations other than the payment of without the petitioners' consent and to the latter's
the loan due to the PNB and part of which loan was detriment.
guaranteed by the petitioners in the amount of
P10,000.00. The mortgage cannot be separated from the
promissory note for it is the latter which is the
This, notwithstanding, PNB approved the Bureau's basis of determining whether the mortgage should
release of three payments directly to the Company be foreclosed or cancelled. Without the
instead of paying the same to the Bank. This promissory note which determines the amount of
approval was in violation of the Deed of indebtedness there would have been no basis for
Assignment and without any notice to the the mortgage.
petitioners who stood to lose their property once
the promissory note falls due without the same True, if the Bank had not been the assignee, then
having been paid because the PNB, in effect, the petition petitioners would be obliged to pay
waived payments of the first three releases. From the Bank as their creditor on the promissory note,
the foregoing circumstances, PNB can not be irrespective of whether or not the deed of
regarded as having acted in good faith which is assignment had been violated. However, the
also one of the requisites of a holder in due course assignee and the creditor in this case are one and
under Section 52 of the Negotiable Instruments the same—the Bank itself. When the Bank violated
Law. The PNB knew that the promissory note the deed of assignment, it prejudiced itself
which it took from the accommodation makers because its very violation was the reason why it
was signed by the latter because of full reliance on was not paid on time in its capacity as creditor in
the Deed of Assignment, which, PNB had no the promissory note. It would be unfair to make
intention to comply with strictly. Worse, the third the petitioners now answer for the debt or to
payment to the Company in the amount of foreclose on their property.
P4,293.60 was approved by PNB although the
promissory note was almost a month overdue, an Neither can PNB justify its acts on the ground that
act which is clearly detrimental to the petitioners. the Bureau of Public Works approved the deed of
assignment with the condition that the wages of
We, therefore, hold that respondent PNB is not a laborers and materials needed in the construction
holder in due course. Thus, the petitioners can work must take precedence over the payment of
validly set up their personal defense of release the promissory note. In the first place, PNB did not
from the real estate mortgage against PNB. The need the approval of the Bureau. But even if it did,
latter, in authorizing the third payment to the it should have informed the petitioners about the
Company after the promissory note became due, amendment of the deed of assignment. Secondly,
in effect, extended the term of the payment of the the wages and materials have already been paid.
note without the consent of the accommodation That issue is academic. What is in dispute is who
makers who stand as sureties to the should bear the loss in this case. As between the
accommodated party and to all other parties who petitioners and the Bank, the law and the equities
are not holders in due course or who do not derive of the case favor the petitioners, And thirdly, the
their right from the same, including PNB. wages and materials constitute a lien only on the
constructed building but do not enjoy preference
It may be argued that the Prudencios could have over the loan unless there is a liquidation
mortgaged their property even without the proceeding such as in insolvency or settlement of
promissory note. The records show, however, that estate. (See Philippine Savings Bank v. Lantin,
they would not have mortgaged the lot were it not 124 SCRA 476). There were remedies available at
for the sake of the Company whose the time if the laborers and the creditors had not
attorney-in-fact was their relative. The spouses been paid. The fact is, they have been paid. Hence,
did not need the money for themselves. when the PNB accepted the condition imposed by
the Bureau without the knowledge or consent of
The attorney-in-fact tried twice to convince the the petitioners, it amended the deed of
Prudencios to mortgage their property in order to assignment which, as stated earlier, was the
secure a loan in favor of the Company but the principal reason why the petitioners consented to
Prudencios refused. It was only when the deed of become accommodation makers.

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 117

WHEREFORE, the petition is GRANTED. The have belonging to Shannon or to his wife. Jones
decision of the Court of Appeals affirming the did not receive monthly payments from Shannon
decision of the trial court is hereby REVERSED and under this agreement, but instead he deducted
SET ASIDE and a new one entered absolving the them from the monthly interest which, on the
petitioners from liability on the promissory note other hand, the Philippine Lumber &
and under the mortgage contract. The Philippine Transportation Co., Inc., of which he was the
National Bank is ordered to release the real estate president, was bound to pay. These operations
mortgage constituted on the property of the were entered in the books of said corporation.
petitioners and to pay the amount of THREE
THOUSAND PESOS (P3,000.00) as attorney's As the Philippine Lumber & Transportation Co.,
fees. Inc., and its sureties had not paid the principal and
the stipulated interest from November 1, 1929,
SO ORDERED. the Shannons brought suit against the debtor
corporation and the surety, E.E. Elser, for the
EN BANC recovery of said amounts. The Philippine Lumber
& Transportation Co., Inc., neither appeared nor
G.R. No. L-41795 August 30, 1935 answered the complaint, and it was declared in
default. Neither did it intervene nor defend itself at
J.W. SHANNON and MRS. J.W. the trial. E.E. Elser appealed from the judgment
SHANNON, plaintiffs-appellees, ordering the Philippine Lumber & Transportation
vs. Co., Inc., to pay to the plaintiff the sum of P12,000
THE PHILIPPINE LUMBER & with interest at 10 per cent annum from
TRANSPORTATION CO., INC., and E.E. November 1, 1929, minus the sum of P1,062
ELSER, defendants. which had been recovered from the estate of the
E.E. ELSER, appellant. deceased Walter E. Jones, plus another 10 per
cent as attorney's fees, and the costs, and likewise
Gibbs and McDonough for appellant. requiring the said E.E. Elser to pay to the plaintiffs
DeWitt, Perkins and Ponce Enrile for appellees. one-half of all the aforesaid sums of money,
except attorney's fees, which the Philippine
IMPERIAL, J.: Lumber & Transportation Co., Inc., should fail to
pay.
On March 1, 1926, the Philippine Lumber &
Transportation Co., Inc., obtained a loan of The appellant argues that the judgment is
P12,000 from Mrs. J.W. Shannon and executed a erroneous: in not holding that after the note
note promising to pay the said sum to the creditor became due, the plaintiffs had received from the
or to her husband, J.W. Shannon, on or before Philippine Lumber & Transportation Co., Inc.,
March 1, 1927, with interest at 10 per cent per payments in advance of the stipulated interest for
annum, payable monthly and in advance on the a relatively long period of time, and that,
first day of each month. The obligation with its consequently, said plaintiffs, as creditors,
terms was secured, jointly and severally, by extended the period fixed for the payment of the
Walter E. Jones and E.E. Elser who signed the note. principal without his consent; in not permitting
This note was ratified before the notary public, him to adduce evidence on his defense of laches
Juan L. Diaz, in the City of Manila, on March 22, whereby he attempted to show that in 1927 and
1926. The principal was not paid on its due date or 1928 the principal debtor had property and money
thereafter, but the stipulated interest up to with which to pay its entire obligation; in not
October, 1929, inclusive, was paid. Walter E. holding that the plaintiffs were guilty of
Jones died on November 24, 1929, and the unreasonable delay in bringing their action,
plaintiffs filed a claim and recovered from his thereby causing him damages, and in not
estate P1,062 in part payment of occurred interest absolving him from the complaint.
due.
The first assigned error relates to the loans made
On August 1, 1927, while the principal obligation by Jones to Shannon up to the amount of P4,656.
was pending payment, J.W. Shannon obtained a The appellant contends that these loans were in
loan of P1,000 from Walter E. Jones; on April 9, truth payments in advance of the stipulated
1928, he obtained another loan of P2,000, and on interest which the principal debtor had to pay
April 28, 1928, he made Jones pay on his account monthly and which had the effect of extending the
a certain bill of exchange drawn upon him in the stated period for the payment of the indebtedness,
sum of P1,656, making Shannon's total loan from thereby relieving him of his obligation as surety
Jones P4,656. Both agreed that this amount under article 1851 of the Civil Code, because his
should be paid at the rate of P125 a month, with consent was not first obtained; and in support of
10 per cent interest per annum, failing which, his contention cites the decision of this court
Jones was authorized to retain and apply to the in Banco Español Filipino vs. Donaldson Sim &
monthly payments whatever amounts he might Co. (5 Phil., 418). The facts, as we find them, do

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 118

not support the contention. It indisputably without demonstration or proof to the contrary,
appears that those amounts of money were respite, waiting, courtesy, leniency, passivity,
obtained by Shannon not as payments in advance inaction. It does not constitute novation, because
of the interest which the principal debtor was this must be express. It does not engender liability,
bound to pay, but as independent loans which because on the part of the creditor such can not
Jones granted to him. The only connection of arise except from delay, and for this class of delay
these loans with the interest of the indebtedness interpellation on the part of the party who
of the Philippine Lumber & Transportation Co., considers himself injured thereby is necessary. In
Inc., consisted in the agreement between Jones order that this waiting or inaction, of itself
and Shannon to the effect that in case the latter beneficial to the parties obligated, can be
should fail to pay the monthly interest, the former interpreted as injurious to any of them, it is
was authorized to deduct it from any amount altogether necessary that this be represented by
which he might have at his disposal belonging to means of a protest or interpellation against the
Shannon or to his wife. As, on the other hand, delay. Without action of this kind it continues to be
Jones was the president of the principal debtor, what it is merely a failure of the creditor to act,
and the latter had to pay monthly interest on its which it itself does not create liability. It can not do
indebtedness, Jones deducted monthly from this so, as we see in the aforesaid sentencia de
last interest that which Shannon failed to pay. It is casacion. `.... In accordance with the provisions
therefore, evident that neither the provisions of of number 4 of article 1843, the surety, even
article 1851 of the Civil Code nor the doctrine on before payment, may proceed against the
the matter enunciated in the Banco Español principal debtor when the debt has become
Filipino case is squarely in point. demandable because the term in which it should
have been paid has expired.' In view of this action,
The appellant attempted to prove at the trial that which is a protection against the risk of possible
the plaintiffs had been guilty of laches and had insolvency on the part of the principal debtor, it is
brought their action against him tardily, because very clearly seen that the law does not even grant
in 1927 and 1928 the principal debtor had the surety the right to sue the creditor for delay,
sufficient property and money with which it could as protection against the risks of possible
have fully paid its obligation, and in so acting the insolvency on the part of the debtor; but in view of
plaintiffs caused him damages. This kind of the efficacy of the action of the contract against
evidence was timely objected to, and the the surety, beginning with the date when the
objection was sustained by the court. This ruling is obligation becomes due, his vigilance must be
the subject of the second and third assigned errors. exercised rather against the principal debtor." (5
We hold that the judgment is not erroneous on Phil., 422, 423.)
these grounds. True, the plaintiffs let pass some
years from the maturity of the note before In Clark vs. Sellner (42 Phil., 384), this court had
bringing the action for the recovery of its amount. occasion to reiterate the same doctrine as follows:
But we hold that the delay does not constitute "The trial judge took into account the fact that at
laches in the sense that it had the effect of the time of the maturity of the note, the collateral
releasing both the principal debtor and its sureties security given to guarantee the payment was
from their obligations, nor did it occasion loss of worth more than what was due on the note, but is
rights and privileges of such moment as to give depreciated to such an extent that, at the time of
rise to the discharge of the obligation contracted the institution of this action, it was entirely
by the appellant. In the aforecited Banco Español valueless. And taking this circumstance, together
Filipino case, in ruling upon a similar question, we with the fact that this case was not commenced
said: "The decision en casacion of the Supreme until after the lapse of four years from the date on
Court of Spain is jurisprudence properly which the payment fell due, and with the further
interpreting the Spanish Civil Code. The following fact that the defendant had not received any part
doctrine is laid down in the judgment of March 22, of the amount mentioned in the note, he was of
1901: `The court which pronounced sentence in the opinion, and so decided, that the defendant
this case has not violated article 1851 of the Civil could not be held liable. The theory of the judge a
Code, because the mere circumstance that the quo was that the plaintiff's failure to enforce the
creditor does not demand the compliance with the guaranty for the payment of the debt, and his
obligation immediately upon the same becoming delay in instituting this action constitute laches,
due, and that he more or less delays his action, which had the effect of extinguishing his right of
does not mean or reveal an intention to grant an action. We see no sufficient ground for applying
extension to the debtor, as according to article such a theory to the case before us. As stated, the
1847 the obligation of the surety extinguishes at defendant's position being, as it is, that of a joint
the same time as that of the debtor, and for the surety, he may, at any time after the maturity of
same causes as the other obligations. ...' the note, make payment, thus subrogating
Deferring the filing of the action does not imply a himself in the place of the creditor with the right to
change in the efficacy of the contract or liability of enforce the guaranty against the other signers of
any kind on the part of the debtor. It is merely, the note for the reimbursement of what he is

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 119

entitled to recover from them. The mere delay of we defer to. The construction, moreover,
the creditor in enforcing the guaranty has not by expresses the rule that obtains in other
any means impaired his action against the jurisdictions."
defendant. It should not be lost sight of that the
defendant's signature on the note is an assurance The last ground of the remedy requires no
to the creditor that the collateral guaranty will extended consideration. Under the conclusions we
remain good, and that otherwise, he, the have arrived at, it is evident that the judgment is
defendant, will be personally responsible for the not erroneous is not absolving the appellant.
payment. True, that if the creditor had done any
act whereby the guaranty was impaired in its The plaintiffs suggest in their brief that we amend
value, or discharged, such an act would have the appealed judgment by ordering the appellant
wholly or partially released the surety; but it must to pay one-half of the attorney's fees which the
be borne in mind that it is a recognized doctrine in principal debtor should fail to pay. We are of the
the matter of suretyship that with respect to the opinion that the contention is untenable because
surety, the creditor is under no obligation to the plaintiffs did not appeal from the judgment but
display any diligence in the enforcement of his accepted and abided by it.
rights as a creditor. His mere inaction, indulgence,
passiveness, or delay in proceeding against the In view of the foregoing, the appealed judgment is
principal debtor, or the fact that he did not enforce affirmed, with the costs of this instance to the
the guaranty or apply on the payment of such appellant. So ordered.
funds as were available, constitute no defense at
all for the surety, unless the contract expressly FIRST DIVISION
requires diligence and promptness on the part of
the creditor, which is not the case in the present June 30, 1987
action. There is in some decisions a tendency
toward holding that the creditor's laches may G.R. No. L-47369
discharge the surety, meaning by laches a
negligent forbearance. This theory, however, is JOSEPH COCHINGYAN, JR. and JOSE K.
not generally accepted and the courts almost VILLANUEVA, petitioners,
universally consider it essentially inconsistent with vs.
the relation of the parties to the note. (21 R.C.L., R & B SURETY AND INSURANCE COMPANY,
1032-1034.)" INC., respondent.

And in Ibañez de Aldecoa vs. Hongkong & FELICIANO, J.:

Shanghai Banking Corporation (42 Phil., 1000;
246 U.S., 627; 62 Law. ed., 907), the Supreme This case was certified to us by the Court of
Court of the United States in affirming a decision Appeals in its resolution dated 11 November 1977
of this court on the same legal question, said: "The as one involving only questions of law and,
appellant Isabel Palet assigns as error that the therefore, falling within the exclusive appellate
Supreme Court failed to hold (1) that her liability jurisdiction of this Court under Section 17,
as surety of Aldecoa and Company had been Republic Act 296, as amended.
extinguished in accordance with the provisions of
article 1851 of the Civil Code, which provides that In November 1963, Pacific Agricultural Suppliers,
`the extension granted to a debtor by the creditor, Inc. (PAGRICO) applied for and was granted an
without the consent of the surety, extinguishes increase in its line of credit from P400,000.00 to
the security.' (2) Refused to order for her benefit P800,000.00 (the "Principal Obligation"), with the
that the property of the company should be Philippine National Bank (PNB). To secure PNB's
exhausted before resort be had to her property for approval, PAGRICO had to give a good and
satisfaction of the bank's claim. It will be observe sufficient bond in the amount of P400,000.00,
at once that the defense have some dependence representing the increment in its line of credit, to
upon questions of fact upon which the two courts secure its faithful compliance with the terms and
below concurred. From article 1851 of the Civil conditions under which its line of credit was
Code, abstractly considered, nothing can be increased. In compliance with this requirement,
deduced. Both the trial and supreme courts held PAGRICO submitted Surety Bond No. 4765, issued
that `the mere failure to bring an action upon a by the respondent R & B Surety and Insurance Co.,
credit, as soon as the same or any part of it Inc. (R & B Surety") in the specified amount in
matures, does not constitute an extension of the favor of the PNB. Under the terms of the Surety
term of the obligation.' And it was further held that Bond, PAGRICO and R & B Surety bound
the extension, to produce the extinction of the themselves jointly and severally to comply with
liability, `must be based on some new agreement the "terms and conditions of the advance line [of
by which the creditor deprives himself of the right credit] established by the [PNB]." PNB had the
to immediately enforce the claim.' This right under the Surety Bond to proceed directly
interpretation of the local courts of the local law against R & B Surety "without the necessity of first

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 120

exhausting the assets" of the principal obligor, obligations, and to grant extension to any of us, to
PAGRICO. The Surety Bond also provided that R & liquidate said obligations, without necessity of
B Surety's liability was not to be limited to the previous knowledge of [or] consent from the other
principal sum of P400,000.00, but would also obligors.
include "accrued interest" on the said amount
"plus all expenses, charges or other legal costs xxx xxx xxx
incident to collection of the obligation [of R & B
Surety]" under the Surety Bond. (e) INCONTESTABILITY OF PAYMENTS MADE BY
THE COMPANY. — Any payment or disbursement
In consideration of R & B Surety's issuance of the made by the SURETY COMPANY on account of the
Surety Bond, two Identical indemnity agreements above-mentioned Bonds, its renewals, extensions
were entered into with R & B Surety: (a) one or substitutions, either in the belief that the
agreement dated 23 December 1963 was SURETY COMPANY was obligate[d] to make such
executed by the Catholic Church Mart (CCM) and payment or in the belief that said payment was
by petitioner Joseph Cochingyan, Jr, the latter necessary in order to avoid greater losses or
signed not only as President of CCM but also in his obligations for which the SURETY COMPANY might
personal and individual capacity; and (b) another be liable by virtue of the terms of the
agreement dated 24 December 1963 was above-mentioned Bond, its renewals, extensions
executed by PAGRICO, Pacific Copra Export Inc. or substitutions, shall be final and will not be
(PACOCO), Jose K. Villanueva and Liu Tua Ben Mr. disputed by the undersigned, who jointly and
Villanueva signed both as Manager of PAGRICO severally bind themselves to indemnify the
and in his personal and individual capacity; Mr. Liu SURETY COMPANY of any and all such payments
signed both as President of PACOCO and in his as stated in the preceding clauses.
individual and personal capacity.
xxx xxx xxx
Under both indemnity agreements, the
indemnitors bound themselves jointly and When PAGRICO failed to comply with its Principal
severally to R & B Surety to pay an annual Obligation to the PNB, the PNB demanded
premium of P5,103.05 and "for the faithful payment from R & B Surety of the sum of
compliance of the terms and conditions set forth in P400,000.00, the full amount of the Principal
said SURETY BOND for a period beginning ... until Obligation. R & B Surety made a series of
the same is CANCELLED and/or DISCHARGED." payments to PNB by virtue of that demand
The Indemnity Agreements further provided: totalling P70,000.00 evidenced by detailed
vouchers and receipts.
(b) INDEMNITY: — TO indemnify the SURETY
COMPANY for any damage, prejudice, loss, costs, R & B Surety in turn sent formal demand letters to
payments, advances and expenses of whatever petitioners Joseph Cochingyan, Jr. and Jose K.
kind and nature, including [of] attorney's fees, Villanueva for reimbursement of the payments
which the CORPORATION may, at any time, made by it to the PNB and for a discharge of its
become liable for, sustain or incur as consequence liability to the PNB under the Surety Bond. When
of having executed the above mentioned Bond, its petitioners failed to heed its demands, R & B
renewals, extensions or substitutions and said Surety brought suit against Joseph Cochingyan,
attorney's fees [shall] not be less than twenty Jr., Jose K. Villanueva and Liu Tua Ben in the Court
[20%] per cent of the total amount claimed by the of First Instance of Manila, praying principally that
CORPORATION in each action, the same to be due, judgment be rendered:
demandable and payable, irrespective of whether
the case is settled judicially or extrajudicially and b. Ordering defendants to pay jointly and
whether the amount has been actually paid or not; severally, unto the plaintiff, the sum of
P20,412.20 representing the unpaid premiums for
(c) MATURITY OF OUR OBLIGATIONS AS Surety Bond No. 4765 from 1965 up to 1968, and
CONTRACTED HEREWITH: — The said indemnities the additional amount of P5,103.05 yearly until
will be paid to the CORPORATION as soon as the Surety Bond No. 4765 is discharged, with
demand is received from the Creditor or upon interest thereon at the rate of 12% per annum;
receipt of Court order or as soon as it becomes [and]
liable to make payment of any sum under the
terms of the above-mentioned Bond, its renewals, c. Ordering the defendants to pay jointly and
extensions, modifications or substitutions, severally, unto the plaintiff the sum of
whether the said sum or sums or part thereof, P400,000.00 representing the total amount of the
have been actually paid or not. Surety Bond No. 4765 with interest thereon at the
rate of 12% per annum on the amount of
We authorize the SURETY COMPANY, to accept in P70,000.00 which had been paid to the Phil.
any case and at its entire discretion, from any of National Bank already, the interest to begin from
us, payments on account of the pending the month of September, 1966;

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 121

 xxx xxx xxx On P14,000.00 from September 27, 1966;

Petitioner Joseph Cochingyan, Jr. in his answer On P4,000.00 from November 28, 1966;
maintained that the Indemnity Agreement he
executed in favor of R & B Surety: (i) did not On P4,000.00 from December 14, 1966;
express the true intent of the parties thereto in
that he had been asked by R & B Surety to execute On P4,000.00 from January 19, 1967;
the Indemnity Agreement merely in order to make
it appear that R & B Surety had complied with the On P8,000.00 from February 13, 1967;
requirements of the PNB that credit lines be
secured; (ii) was executed so that R & B Surety On P4,000.00 from March 6, 1967;
could show that it was complying with the
regulations of the Insurance Commission On P8,000.00 from June 24, 1967;
concerning bonding companies; (iii) that R & B
Surety had assured him that the execution of the On P8,000. 00 from September 14, 1967;
agreement was a mere formality and that he was
to be considered a stranger to the transaction On P8,000.00 from November 28, 1967; and
between the PNB and R & B Surety; and (iv) that R
& B Surety was estopped from enforcing the On P8,000. 00 from February 26, 1968
Indemnity Agreement as against him.
until full payment; (b) ordering said defendants to
Petitioner Jose K. Villanueva claimed in his answer pay, jointly and severally, unto the plaintiff the
that. (i) he had executed the Indemnity sum of P20,412.00 as the unpaid premiums for
Agreement in favor of R & B Surety only "for Surety Bond No. 4765, with legal interest thereon
accommodation purposes" and that it did not from the filing of plaintiff's complaint on August 1,
express their true intention; (ii) that the Principal 1968 until fully paid, and the further sum of
Obligation of PAGRICO to the PNB secured by the P4,000.00 as and for attorney's fees and expenses
Surety Bond had already been assumed by CCM of litigation which this Court deems just and
by virtue of a Trust Agreement entered into with equitable.
the PNB, where CCM represented by Joseph
Cochingyan, Jr. undertook to pay the Principal There being no showing the summons was duly
Obligation of PAGRICO to the PNB; (iii) that his served upon the defendant Liu Tua Ben who has
obligation under the Indemnity Agreement was filed no answer in this case, plaintiff's complaint is
thereby extinguished by novation arising from the hereby dismissed as against defendant Liu Tua
change of debtor under the Principal Obligation; Ben without prejudice.
and (iv) that the filing of the complaint was
premature, considering that R & B Surety filed the Costs against the defendants Joseph Cochingyan,
case against him as indemnitor although the PNB Jr. and Jose K. Villanueva.
had not yet proceeded against R & B Surety to
enforce the latter's liability under the Surety Bond. Not satisfied with the decision of the trial court,
the petitioners took this appeal to the Court of
Petitioner Cochingyan, however, did not present Appeals which, as already noted, certified the case
any evidence at all to support his asserted to us as one raising only questions of law.
defenses. Petitioner Villanueva did not submit any
evidence either on his "accommodation" defense. The issues we must confront in this appeal are:
The trial court was therefore constrained to decide
the case on the basis alone of the terms of the 1. whether or not the Trust Agreement had
Trust Agreement and other documents submitted extinguished, by novation, the obligation of R & B
in evidence. Surety to the PNB under the Surety Bond which, in
turn, extinguished the obligations of the
In due time, the Court of First Instance of Manila, petitioners under the Indemnity Agreements;
Branch 24 1 rendered a decision in favor of R & B
Surety, the dispositive portion of which reads as 2. whether the Trust Agreement extended the
follows; term of the Surety Bond so as to release
petitioners from their obligation as indemnitors
Premises considered, judgment is hereby thereof as they did not give their consent to the
rendered: (a) ordering the defendants Joseph execution of the Trust Agreement; and
Cochingyan, Jr. and Jose K. Villanueva to pay,
jointly and severally, unto the plaintiff the sum of 3. whether or not the filing of this complaint was
400,000,00, representing the total amount of premature since the PNB had not yet filed a suit
their liability on Surety Bond No. 4765, and against R & B Surety for the forfeiture of its Surety
interest at the rate of 6% per annum on the Bond.
following amounts:

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 122

We address these issues seriatim. P900,000.00 or the total amount of
P1,300,000.00 without interest from the net
1. The Trust Agreement referred to by both profits arising from the procurement of
petitioners in their separate briefs, was executed reparations consumer goods under the
on 28 December 1965 (two years after the Surety Memorandum of Settlement and Deeds of
Bond and the Indemnity Agreements were Assignment of February 2, 1959 through the
executed) between: (1) Jose and Susana allocation of WARVETS;
Cochingyan, Sr., doing business under the name
and style of the Catholic Church Mart, represented xxx xxx xxx
by Joseph Cochingyan, Jr., as Trustor[s]; (2)
Tomas Besa, a PNB official, as Trustee; and (3) 6. THE BENEFICIARY agrees to hold in abeyance
the PNB as beneficiary. The Trust Agreement any action to enforce its claims against R & B and
provided, in pertinent part, as follows: CONSOLACION, subject of the bond mentioned
above. In the meantime that this TRUST
WHEREAS, the TRUSTOR has guaranteed a bond AGREEMENT is being implemented, the
in the amount of P400,000.00 issued by the R & B BENEFICIARY hereby agrees to forthwith reinstate
Surety and Insurance Co. (R & B) at the instance the R & B and the CONSOLACION as among the
of Pacific Agricultural Suppliers, Inc. (PAGRICO) companies duly accredited to do business with the
on December 21, 1963, in favor of the BENEFICIARY and its branches, unless said
BENEFICIARY in connection with the application of companies have been blacklisted for reasons other
PAGRICO for an advance line of P400,000.00 to than those relating to the obligations subject of
P800,000.00; the herein TRUST AGREEMENT;

WHEREAS, the TRUSTOR has also guaranteed a xxx xxx xxx

bond issued by the Consolacion Insurance &
Surety Co., Inc. (CONSOLACION) in the amount of 9. This agreement shall not in any manner release
P900,000.00 in favor of the BENEFICIARY to the R & B and CONSOLACION from their
secure certain credit facilities extended by the respective liabilities under the bonds mentioned
BENEFICIARY to the Pacific Copra Export Co., Inc. above. (emphasis supplied)
(PACOCO);
There is no question that the Surety Bond has not
WHEREAS, the PAGRICO and the PACOCO have been cancelled or fully discharged 2 by payment of
defaulted in the payment of their respective the Principal Obligation. Unless, therefore, the
obligations in favor of the BENEFICIARY Surety Bond has been extinguished by another
guaranteed by the bonds issued by the R & B means, it must still subsist. And so must the
and the CONSOLACION, respectively, and by supporting Indemnity Agreements. 3
reason of said default, the BENEFICIARY has
demanded compliance by the R & B and the We are unable to sustain petitioners' claim that
CONSOLACION of their respective obligations the Surety Bond and their respective obligations
under the aforesaid bonds; under the Indemnity Agreements were
extinguished by novation brought about by the
WHEREAS, the TRUSTOR is, therefore, bound to subsequent execution of the Trust Agreement.
comply with his obligation under the indemnity
agreements aforementioned executed by him in Novation is the extinguishment of an obligation by
favor of R & B and the CONSOLACION, the substitution or change of the obligation by a
respectively and in order to forestall impending subsequent one which terminates it, either by
suits by the BENEFICIARY against said companies, changing its object or principal conditions, or by
he is willing as he hereby agrees to pay the substituting a new debtor in place of the old one,
obligations of said companies in favor of the or by subrogating a third person to the rights of
BENEFICIARY in the total amount of the creditor. 4 Novation through a change of the
P1,300,000 without interest from the net profits object or principal conditions of an existing
arising from the procurement of reparations obligation is referred to as objective (or real)
consumer goods made thru the allocation of novation. Novation by the change of either the
WARVETS; . . . person of the debtor or of the creditor is described
as subjective (or personal) novation. Novation
l. TRUSTOR hereby constitutes and appoints Atty. may also be both objective and subjective (mixed)
TOMAS BESA as TRUSTEE for the purpose of at the same time. In both objective and subjective
paying to the BENEFICIARY Philippine National novation, a dual purpose is achieved-an obligation
Bank in the manner stated hereunder, the is extinguished and a new one is created in lieu
obligations of the R & B under the R & B Bond No. thereof.5
G-4765 for P400,000.00 dated December 23,
1963, and of the CONSOLACION under The If objective novation is to take place, it is
Consolacion Bond No. G-5938 of June 3, 1964 for imperative that the new obligation expressly

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 123

declare that the old obligation is thereby there is no agreement that the first debtor shall be
extinguished, or that the new obligation be on released from responsibility, does not constitute a
every point incompatible with the old novation, and the creditor can still enforce the
one. 6 Novation is never presumed: it must be obligation against the original debtor.
established either by the discharge of the old debt
by the express terms of the new agreement, or by In the present case, we note that the
the acts of the parties whose intention to dissolve Trustor under the Trust Agreement, the CCM, was
the old obligation as a consideration of the already previously bound to R & B Surety under its
emergence of the new one must be clearly Indemnity Agreement. Under the Trust
discernible. 7 Agreement, the Trustor also became directly
liable to the PNB. So far as the PNB was concerned,
Again, if subjective novation by a change in the the effect of the Trust Agreement was that where
person of the debtor is to occur, it is not enough there had been only two, there would now
that the juridical relation between the parties to be three obligors directly and solidarily bound in
the original contract is extended to a third person. favor of the PNB: PAGRICO, R & B Surety and the
It is essential that the old debtor be released from Trustor. And the PNB could proceed against any of
the obligation, and the third person or new debtor the three, in any order or sequence. Clearly, PNB
take his place in the new relation. If the old debtor never intended to release, and never did release,
is not released, no novation occurs and the third R & B Surety. Thus, R & B Surety, which was not a
person who has assumed the obligation of the party to the Trust Agreement, could not have
debtor becomes merely a co-debtor or surety or a intended to release any of its own indemnitors
co-surety. 8 simply because one of those indemnitors, the
Trustor under the Trust Agreement, became also
Applying the above principles to the instant case, directly liable to the PNB.
it is at once evident that the Trust Agreement does
not expressly terminate the obligation of R & B 2. We turn to the contention of petitioner Jose K.
Surety under the Surety Bond. On the contrary, Villanueva that his obligation as indemnitor under
the Trust Agreement expressly provides for the the 24 December 1963 Indemnity Agreement with
continuing subsistence of that obligation by R & B Surety was extinguished when the PNB
stipulating that "[the Trust Agreement] shall not agreed in the Trust Agreement "to hold in
in any manner release" R & B Surety from its abeyance any action to enforce its claims against
obligation under the Surety Bond. R & B Surety .

Neither can the petitioners anchor their defense The Indemnity Agreement speaks of the several
on implied novation. Absent an unequivocal indemnitors "apply[ing] jointly and severally (in
declaration of extinguishment of a pre-existing solidum) to the R & B Surety] — to become
obligation, a showing of complete incompatibility SURETY upon a SURETY BOND demanded by and
between the old and the new obligation (and in favor of [PNB] in the sum of [P400,000.00] for
nothing else) would sustain a finding of novation the faithful compliance of the terms and conditions
by implication. 9 But where, as in this case, the set forth in said SURETY BOND — ." This part of
parties to the new obligation expressly recognize the Agreement suggests that the indemnitors
the continuing existence and validity of the old (including the petitioners) would become
one, where, in other words, the parties expressly co-sureties on the Security Bond in favor of PNB.
negated the lapsing of the old obligation, there The record, however, is bereft of any indication
can be no novation. The issue of implied novation that the petitioners-indemnitors ever in fact
is not reached at all. became co-sureties of R & B Surety vis-a-vis the
PNB. The petitioners, so far as the record goes,
What the trust agreement did was, at most, remained simply indemnitors bound to R & B
merely to bring in another person or persons-the Surety but not to PNB, such that PNB could not
Trustor[s]-to assume the same obligation that R & have directly demanded payment of the Principal
B Surety was bound to perform under the Surety Obligation from the petitioners. Thus, we do not
Bond. It is not unusual in business for a stranger see how Article 2079 of the Civil Code-which
to a contract to assume obligations thereunder; a provides in part that "[a]n extension granted to
contract of suretyship or guarantee is the classical the debtor by the creditor without the consent of
example. The precise legal effect is the increase of the guarantor extinguishes the guaranty" could
the number of persons liable to the obligee, and apply in the instant case.
not the extinguishment of the liability of the first
debtor. 10 Thus, in Magdalena Estates vs. The petitioner-indemnitors are, as, it were,
Rodriguez, 11
we held that: second-tier parties so far as the PNB was
concerned and any extension of time granted by
[t]he mere fact that the creditor receives a PNB to any of the first-tier obligators (PAGRICO, R
guaranty or accepts payments from a third person &B Surety and the trustors[s]) could not prejudice
who has agreed to assume the obligation, when the second-tier parties.

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 124

There is no other reason why petitioner indemnification not only against actual loss but
Villanueva's contention must fail. PNB's against liability as well. 14 While in a contract of
undertaking under the Trust Agreement "to hold in indemnity against loss as indemnitor will not be
abeyance any action to enforce its claims" against liable until the person to be indemnified makes
R & B Surety did not extend the maturity of R & B payment or sustains loss, in a contract of
Surety's obligation under the Surety Bond. The indemnity against liability, as in this case,
Principal Obligation had in fact already matured, the indemnitor's liability arises as soon as the
along with that of R &B Surety, by the time the liability of the person to be indemnified has arisen
Trust Agreement was entered into. Petitioner's without regard to whether or not he has suffered
Obligation had in fact already matured, for those actual loss. 15 Accordingly, R & B Surety was
obligations were to amture "as soon as [R & B entitled to proceed against petitioners not only for
Surety] became liable to make payment of any the partial payments already made but for the full
sum under the terms of the [Surety Bond] amount owed by PAGRICO to the PNB.
— whether the said sum or sums or part thereof
have been actually paid or not." Thus, the Summarizing, we hold that :
situation was that precisely envisaged in Article
2079: (1) The Surety Bond was not novated by the Trust
Agreement. Both agreements can co-exist. The
[t]he mere failure on the part of the creditor to Trust Agreement merely furnished to PNB another
demand payment after the debt has become party obligor to the Principal Obligation in addition
due does not of itself constitute any extension of to PAGRICO and R & B Surety.
the referred to herein.(emphasis supplied)
(2) The undertaking of the PNB to 'hold in
The theory behind Article 2079 is that an abeyance any action to enforce its claim" against
extension of time given to the principal debtor by R & B Surety did not amount to an "extension
the creditor without the surety of his right to pay granted to the debtor" without petitioner's
the creditor and to be immediately subrogated to consent so as to release petitioner's from their
the creditor's remedies against the principal undertaking as indemnitors of R & B Surety under
debtor upon the original maturity date. The surety the INdemnity Agreements; and
is said to be entitled to protect himself against the
principal debtor upon the orginal maturity date. (3) Petitioner's are indemnitors of R & B Surety
The surety is said to be entitled to protect himself against both payments to and liability for
against the contingency of the principal debtor or payments to the PNB. The present suit is therefore
the indemnitors becoming insolvent during the not premature despite the fact that the PNB has
extended period. The underlying rationale is not not instituted any action against R & B Surety for
present in the instant case. As this Court has held, the collection of its matured obligation under the
Surety Bond.
merely delay or negligence in proceeding against
the principal will not discharge a surety unless WHEREFORE, the petitioner's appeal is DENIED for
there is between the creditor and the principal the lack of merit and the decision of the trial court
debtor a valid and binding agreement therefor, is AFFIRMED in toto. Costs against the petitioners.
one which tends to prejudice [the surety] or to
deprive it of the power of obtaining indemnity by SO ORDERED.
presenting a legal objection for the time, to the
prosecution of an action on the original security.12 EN BANC

In the instant case, there was nothing to prevent G.R. No. L-22071 October 9, 1924
the petitioners from tendering payment, if they
were so minded, to PNB of the matured obligation THE HONGKONG & SHANGHAI BANKING
on behalf of R & B Surety and thereupon becoming CORPORATION, plaintiff-cross-defendant,
subrogated to such remedies as R & B Surety may vs.
have against PAGRICO. VICENTE ALDANESE, defendant and
cross-plaintiff-appellee,
3. The last issue can be disposed of quicjly, VAMENTA & CO., ISIDORO VAMENTA and
Clauses (b) and (c) of the Indemnity Agreements THE UNION GUARANTEE CO.,
(quoted above) allow R & B Surety to recover from LTD., cross-defendants;
petitioners even before R & B Surety shall have THE UNION GUARANTEE CO., LTD., appellant.
paid the PNB. We have previously held similar
indemnity clauses to be enforceable and not J. W. Ferrier for appellant.
violative of any public policy. 13 Attorney-General Villa-Real for appellee.

The petitioners lose sight of the fact that the ROMUALDEZ, J.:
Indemnity Agreements are contracts of

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 125

There arrived at the port of Manila on October 15, . . .We think that this case requires further
1919, certain merchandise consigned to the Hong evidence, and to do justice to all parties interested,
Kong & Shanghai Banking Corporation. we have decided to remand the record to the court
of origin in order that the proper party may
Before the receipt of the bill of lading of the introduce competent evidence as to the existence,
merchandise, Messrs. Vamenta & Co. and Isidro conditions and amount of the alleged bond given
Vamenta declared that the value of said by the Union Guarantee Co., Ltd.
merchandise was P6,854.40, and succeeded in
withdrawing the merchandise from the The judgment appealed from is reversed and this
customhouse by giving a bond executed by the cause ordered remanded to the court below for
Union Guarantee Co., Ltd., as surety for the sum the holding of anew trial for the purposes above
of P9,450, promising to present the bill of lading indicated . . . 1
within four months from the date of said bond. The
period expired without said bill of lading having The Collector of Customs had already paid to the
been presented, notwithstanding the repeated herein plaintiff the sum of P20,334.91 as the value
demands made for the purpose. of the merchandise in question, with interest
thereon in compliance with the judgment above
The herein plaintiff corporation presented said bill set out.
of lading, with the invoice annexed thereto,
according to which the value of merchandise in The cause having been remanded to the court
question was P18,681.60, and claimed it from the below, according to the judgment of this court,
Collector of Customs, but the latter could not new trial was held there, whereat the bond given
deliver the same, having delivered it previously to by Vamenta & Co., and Isidoro Vamenta and the
Vamenta & Co. and Isidro Vamenta as above Union Guarantee Co., Ltd., was presented as
stated, and an action was brought against him by evidence. The latter company did not introduce
the herein plaintiff. any evidence. In compliance with the judgment
rendered against him, Isidro Vamenta paid the
At the instance of the Collector of Customer, Collector of Customs P8,000 on account. After a
Vamenta & Co., Isidro Vamenta and the surety hearing, the court sentenced Vamenta & Co.,
company, the Union Guarantee Co., Ltd., were Isidro Vamenta and the Union Guarantee Co., Ltd.,
included as defendants, against whom, as well as Isidro Vamenta and the Union Guarantee Co., Ltd.,
against the plaintiff, said Collector of Customs to pay the Collector of Customer jointly and
filed a cross-complaint. severally the balance of P20,334.91 paid by said
Collector of Customs, after deducting the P8,000
After trial, the court of First Instance of Manila paid to the latter by Isidro Vamenta, that is, the
rendered judgment, the dispositive part of which sum P12,334,91 with legal interest upon the
is as follows: P20,224.91 paid by the Collector of Customs,
computed from October 24, 1921, when said
The defendant Vicente Aldanese, in his capacity as payment was made, and with interest also at the
Collector of Customs, is sentenced to pay the legal rate on the sum of P12,334.91 from August
Hong Kong & Shanghai Banking Corporation the 30, 1992 by Isidoro Vamenta.
sum of $9,840.80, United States currency, with
costs. Messrs. Vamenta & Co., Isidro Vamenta and In said judgment, the Union Guarantee Co., Ltd.,
Union Guarantee co., Ltd., are sentenced to pay was sentenced as aforesaid, but only up to the
the same sum to Mr. Vicente Aldanese in his amount of the bond given, that is, up to the sum of
aforesaid capacity, with the costs. In the event P9,450. 1awph!l.net
that the Union Guarantee Co., Ltd., be compelled
to pay the whole or any part of the said sum to the The Union Guarantee Co., Ltd., appeals from this
defendant Mr. Aldanese by reason of insolvency or judgment, assigning thereto the following errors,
inability to pay Messrs. Vamenta & Co. and Isidro to wit: (a)The fact that it was sentenced to pay the
Vamenta, the latter are sentenced to pay said aforesaid sum; and (b) the denial of its motion for
surety company all such sum as it may have paid new trial.
as aforesaid, together with the costs. Each and
every payment to be made under this judgment In support of the first assignment of error, the
shall be with legal interest at the rate of 6 per appellant alleges that the defendant Aldanese is
centum per annum from April 29, 1920. not entitled to recover, because the money paid
by him is not his but of the Government. It must
This judgment became final, except as to the be noted that the judgment appealed from is in
Union Guarantee Co., Ltd., which appealed from favor of "Mr. Aldanese in his capacity as Collector
said judgment, as a result of which a decision was of Customs," and not as private individual.
rendered by this court, containing the following
disposition: The appellant also alleges that the liability of
Vamenta & Co. and Isidro Vamenta being joint and

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 126

several, the P8,000 paid by Isidro Vamenta must Asurety company’s liability under the performance
be applied upon the bond for P9,450 by them. And bond it issues is solidary. The death of the
deducting said P8,000 from the amount of the principal obligor does not, as a rule, extinguish the
bond, there remains only the sum of P1,450 to be obligation and the solidary nature of that liability.
paid by the appellant.
The Case
The fact, however, is that Vamenta & Co. and
Isidoro Vamenta incurred and recognized the Before us is a Petition for Review1 under Rule 45 of
obligation to indemnify the Collector of Customs, the Rules of Court, seeking to reverse the March
defendant herein, for what he has paid, 13, 2001 Decision2 of the Court of Appeals (CA) in
amounting to P20,334.91; and on account of said CA-GR CV No. 41630. The assailed Decision
liability, Isidoro Vamenta paid said collector of disposed as follows:
Customs the sum of P8,000.
"WHEREFORE, the Order dated January 28, 1993
There remains, therefore the sum of P12,334.91 issued by the lower court is REVERSED and SET
for which the Collector of Customs has the right to ASIDE. Let the records of the instant case be
be reimbursed. To determine who are liable for REMANDED to the lower court for the reception of
this sum and to what extent, the following must be evidence of all parties."3
borne in mind:
The Facts
For the total sum of P20,334.91, Vamenta & Co.
and Isidoro Vamenta are liable although jointly The facts of the case are narrated by the CA in this
and severally with the herein appellant up to the wise:
sum of P9,450, the amount of the bond given by
them. "On May 24, 1989, [respondent] Republic-Asahi
Glass Corporation (Republic-Asahi) entered into a
From the standpoint of view of Vamenta & Co. and contract with x x x Jose D. Santos, Jr., the
Isidoro Vamenta, their liability in connection with proprietor of JDS Construction (JDS), for the
said total sum is more onerous with regard to the construction of roadways and a drainage system
amount for which they are liable alone and in Republic-Asahi’s compound in Barrio
separately from the surety the Union Guarantee Pinagbuhatan, Pasig City, where [respondent]
Co., Ltd., that is, the sum of P10,844.91. To this was to pay x x x JDS five million three hundred
amount, therefore, must the payment of P8,000 thousand pesos (P5,300,000.00) inclusive of
made by them be applied, for it is so provided by value added tax for said construction, which was
article 1174 of the Civil Code. supposed to be completed within a period of two
hundred forty (240) days beginning May 8, 1989.
Therefore, Vamenta & Co., Isidro Vamenta and In order ‘to guarantee the faithful and satisfactory
the Union Guarantee Co., Ltd., are jointly and performance of its undertakings’ x x x JDS, shall
severally liable for the balance of P12,334.91 up post a performance bond of seven hundred ninety
to the sum of P9,450, Vamenta & Co. and Isidoro five thousand pesos (P795,000.00). x x x JDS
Vamenta being liable only for the remaining sum, executed, jointly and severally with [petitioner]
that is, P2,884.91. Stronghold Insurance Co., Inc. (SICI)
Performance Bond No. SICI-25849/g(13)9769.
As this is the result arrived at in the judgment
appealed from, we see no reason for altering it. "On May 23, 1989, [respondent] paid to x x x JDS
The assignments of error not being of any merit, seven hundred ninety five thousand pesos
the judgment appealed from is affirmed, with the (P795,000.00) by way of downpayment.
costs against the appellant. So ordered.
"Two progress billings dated August 14, 1989 and
FIRST DIVISION September 15, 1989, for the total amount of two
hundred seventy four thousand six hundred
G.R. No. 147561 June 22, 2006 twenty one pesos and one centavo (P274,621.01)
were submitted by x x x JDS to [respondent],
STRONGHOLD INSURANCE COMPANY, which the latter paid. According to [respondent],
INC., Petitioner, these two progress billings accounted for only
vs. 7.301% of the work supposed to be undertaken by
REPUBLIC-ASAHI GLASS x x x JDS under the terms of the contract.
CORPORATION, Respondent.
"Several times prior to November of 1989,
DECISION [respondent’s] engineers called the attention of x
x x JDS to the alleged alarmingly slow pace of the
PANGANIBAN, CJ: construction, which resulted in the fear that the
construction will not be finished within the

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 127

stipulated 240-day period. However, said hence, there was no ascertainment of the
reminders went unheeded by x x x JDS. corresponding liabilities of Santos and SICI under
the performance bond. At this point in time, said
"On November 24, 1989, dissatisfied with the liquidation was impossible because of the death of
progress of the work undertaken by x x x JDS, Santos, who as such can no longer participate in
[respondent] Republic-Asahi extrajudicially any liquidation. The unilateral liquidation on the
rescinded the contract pursuant to Article XIII of party (sic) of [respondent] of the work
said contract, and wrote a letter to x x x JDS accomplishments did not bind SICI for being
informing the latter of such rescission. Such violative of procedural due process. The claim of
rescission, according to Article XV of the contract [respondent] for the forfeiture of the performance
shall not be construed as a waiver of bond in the amount of P795,000.00 had no factual
[respondent’s] right to recover damages from x x and legal basis, as payment of said bond was
x JDS and the latter’s sureties. conditioned on the payment of damages which
[respondent] may sustain in the event x x x JDS
"[Respondent] alleged that, as a result of x x x failed to complete the contracted works.
JDS’s failure to comply with the provisions of the [Respondent] can no longer prove its claim for
contract, which resulted in the said contract’s damages in view of the death of Santos. SICI was
rescission, it had to hire another contractor to not informed by [respondent] of the death of
finish the project, for which it incurred an Santos. SICI was not informed by [respondent] of
additional expense of three million two hundred the unilateral rescission of its contract with JDS,
fifty six thousand, eight hundred seventy four thus SICI was deprived of its right to protect its
pesos (P3,256,874.00). interests as surety under the performance bond,
and therefore it was released from all liability.
"On January 6, 1990, [respondent] sent a letter to SICI was likewise denied due process when it was
[petitioner] SICI filing its claim under the bond for not notified of plaintiff-appellant’s process of
not less than P795,000.00. On March 22, 1991, determining and fixing the amount to be spent in
[respondent] again sent another letter reiterating the completion of the unfinished project. The
its demand for payment under the procedure contained in Article XV of the contract is
aforementioned bond. Both letters allegedly went against public policy in that it denies SICI the right
unheeded. to procedural due process. Finally, SICI alleged
that [respondent] deviated from the terms and
"[Respondent] then filed [a] complaint against x x conditions of the contract without the written
x JDS and SICI. It sought from x x x JDS payment consent of SICI, thus the latter was released from
of P3,256,874.00 representing the additional all liability. SICI also prayed for the award
expenses incurred by [respondent] for the of P59,750.00 as attorney’s fees, and P5,000.00
completion of the project using another contractor, as litigation expenses.
and from x x x JDS and SICI, jointly and severally,
payment of P750,000.00 as damages in "On August 16, 1991, the lower court issued an
accordance with the performance bond; order dismissing the complaint of [respondent]
exemplary damages in the amount against x x x JDS and SICI, on the ground that the
of P100,000.00 and attorney’s fees in the amount claim against JDS did not survive the death of its
of at least P100,000.00. sole proprietor, Jose D. Santos, Jr. The dispositive
portion of the [O]rder reads as follows:
"According to the Sheriff’s Return dated June 14,
1991, submitted to the lower court by Deputy ‘ACCORDINGLY, the complaint against the
Sheriff Rene R. Salvador, summons were duly defendants Jose D. Santos, Jr., doing business
served on defendant-appellee SICI. However, x x under trade and style, ‘JDS Construction’ and
x Jose D. Santos, Jr. died the previous year (1990), Stronghold Insurance Company, Inc. is ordered
and x x x JDS Construction was no longer at its DISMISSED.
address at 2nd Floor, Room 208-A, San Buena
Bldg. Cor. Pioneer St., Pasig, Metro Manila, and its ‘SO ORDERED.’
whereabouts were unknown.
"On September 4, 1991, [respondent] filed a
"On July 10, 1991, [petitioner] SICI filed its Motion for Reconsideration seeking
answer, alleging that the [respondent’s] money reconsideration of the lower court’s August 16,
claims against [petitioner and JDS] have been 1991 order dismissing its complaint. [Petitioner]
extinguished by the death of Jose D. Santos, Jr. SICI field its ‘Comment and/or Opposition to the
Even if this were not the case, [petitioner] SICI Motion for Reconsideration.’ On October 15, 1991,
had been released from its liability under the the lower court issued an Order, the dispositive
performance bond because there was no portion of which reads as follows:
liquidation, with the active participation and/or
involvement, pursuant to procedural due process, ‘WHEREFORE, premises considered, the Motion for
of herein surety and contractor Jose D. Santos, Jr., Reconsideration is hereby given due course. The

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 128

Order dated 16 August 1991 for the dismissal of "Death is a defense of Santos’ heirs which
the case against Stronghold Insurance Company, Stronghold could also adopt as its defense against
Inc., is reconsidered and hereby reinstated (sic). obligee’s claim."7
However, the case against defendant Jose D.
Santos, Jr. (deceased) remains undisturbed. More precisely, the issue is whether petitioner’s
liability under the performance bond was
‘Motion for Preliminary hearing and Manifestation automatically extinguished by the death of Santos,
with Motion filed by [Stronghold] Insurance the principal.
Company Inc., are set for hearing on November 7,
1991 at 2:00 o’clock in the afternoon. The Court’s Ruling

‘SO ORDERED.’ The Petition has no merit.

"On June 4, 1992, [petitioner] SICI filed its Sole Issue:

‘Memorandum for Bondsman/Defendant SICI (Re:
Effect of Death of defendant Jose D. Santos, Jr.)’ Effect of Death on the Surety’s Liability
reiterating its prayer for the dismissal of
[respondent’s] complaint. Petitioner contends that the death of Santos, the
bond principal, extinguished his liability under the
"On January 28, 1993, the lower court issued the surety bond. Consequently, it says, it is
assailed Order reconsidering its Order dated automatically released from any liability under the
October 15, 1991, and ordered the case, insofar bond.
as SICI is concerned, dismissed. [Respondent]
filed its motion for reconsideration which was As a general rule, the death of either the creditor
opposed by [petitioner] SICI. On April 16, 1993, or the debtor does not extinguish the
the lower court denied [respondent’s] motion for obligation.8 Obligations are transmissible to the
reconsideration. x x x."4 heirs, except when the transmission is prevented
by the law, the stipulations of the parties, or the
Ruling of the Court of Appeals nature of the obligation.9 Only obligations that are
personal10 or are identified with the persons
The CA ruled that SICI’s obligation under the themselves are extinguished by death.11
surety agreement was not extinguished by the
death of Jose D. Santos, Jr. Consequently, Section 5 of Rule 8612 of the Rules of Court
Republic-Asahi could still go after SICI for the expressly allows the prosecution of money claims
bond. arising from a contract against the estate of a
deceased debtor. Evidently, those claims are not
The appellate court also found that the lower court actually extinguished.13 What is extinguished is
had erred in pronouncing that the performance of only the obligee’s action or suit filed before the
the Contract in question had become impossible court, which is not then acting as a probate
by respondent’s act of rescission. The Contract court.14
was rescinded because of the dissatisfaction of
respondent with the slow pace of work and In the present case, whatever monetary liabilities
pursuant to Article XIII of its Contract with JDS. or obligations Santos had under his contracts with
respondent were not intransmissible by their
The CA ruled that "[p]erformance of the nature, by stipulation, or by provision of law.
[C]ontract was impossible, not because of Hence, his death did not result in the
[respondent’s] fault, but because of the fault of extinguishment of those obligations or liabilities,
JDS Construction and Jose D. Santos, Jr. for which merely passed on to his estate. 15 Death is
failure on their part to make satisfactory progress not a defense that he or his estate can set up to
on the project, which amounted to wipe out the obligations under the performance
non-performance of the same. x x x [P]ursuant to bond. Consequently, petitioner as surety cannot
the [S]urety [C]ontract, SICI is liable for the use his death to escape its monetary obligation
non-performance of said [C]ontract on the part of under its performance bond.
JDS Construction."5
The liability of petitioner is contractual in nature,
Hence, this Petition.6 because it executed a performance bond worded
as follows:
Issue
"KNOW ALL MEN BY THESE
Petitioner states the issue for the Court’s PRESENTS:
consideration in the following manner:
"That we, JDS CONSTRUCTION of
208-A San Buena Building,

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 129

 contractor, of Shaw Blvd., Pasig, the original term of said contract
MM Philippines, as principal and the and any extension thereof that may
STRONGHOLD INSURANCE be granted by the obligee, with
COMPANY, INC. a corporation duly notice to the surety and during the
organized and existing under and life of any guaranty required under
by virtue of the laws of the the contract, and shall also perform
Philippines with head office at well and truly and fulfill all the
Makati, as Surety, are held and undertakings, covenants, terms,
firmly bound unto the REPUBLIC conditions, and agreements of any
ASAHI GLASS CORPORATION and and all duly authorized
to any individual, firm, partnership, modifications of said contract that
corporation or association may hereinafter be made, without
supplying the principal with labor or notice to the surety except when
materials in the penal sum of such modifications increase the
SEVEN HUNDRED NINETY FIVE contract price; and such principal
THOUSAND (P795,000.00), contractor or his or its
Philippine Currency, for the sub-contractors shall promptly
payment of which sum, well and make payment to any individual,
truly to be made, we bind ourselves, firm, partnership, corporation or
our heirs, executors, administrators, association supplying the principal
successors and assigns, jointly and of its sub-contractors with labor
severally, firmly by these presents. and materials in the prosecution of
the work provided for in the said
"The CONDITIONS OF THIS contract, then, this obligation shall
OBLIGATION are as follows; be null and void; otherwise it shall
remain in full force and effect. Any
"WHEREAS the above bounden extension of the period of time
principal on the ___ day of which may be granted by the
__________, 19__ entered into a obligee to the contractor shall be
contract with the REPUBLIC ASAHI considered as given, and any
GLASS CORPORATION represented modifications of said contract shall
by _________________, to fully be considered as authorized, with
and faithfully. Comply with the site the express consent of the Surety.
preparation works road and
drainage system of Philippine Float "The right of any individual, firm, partnership,
Plant at Pinagbuhatan, Pasig, Metro corporation or association supplying the
Manila. contractor with labor or materials for the
prosecution of the work hereinbefore stated, to
"WHEREAS, the liability of the institute action on the penal bond, pursuant to the
Surety Company under this bond provision of Act No. 3688, is hereby acknowledge
shall in no case exceed the sum of and confirmed."16
PESOS SEVEN HUNDRED NINETY
FIVE THOUSAND (P795,000.00) As a surety, petitioner is solidarily liable with
Philippine Currency, inclusive of Santos in accordance with the Civil Code, which
interest, attorney’s fee, and other provides as follows:
damages, and shall not be liable for
any advances of the obligee to the "Art. 2047. By guaranty a person, called the
principal. guarantor, binds himself to the creditor to fulfill
the obligation of the principal debtor in case the
"WHEREAS, said contract requires latter should fail to do so.
the said principal to give a good and
sufficient bond in the above-stated "If a person binds himself solidarily with the
sum to secure the full and faithfull principal debtor, the provisions of Section
performance on its part of said 4,17 Chapter 3, Title I of this Book shall be
contract, and the satisfaction of observed. In such case the contract is called a
obligations for materials used and suretyship."
labor employed upon the work;
xxxxxxxxx
"NOW THEREFORE, if the principal
shall perform well and truly and "Art. 1216. The creditor may proceed against any
fulfill all the undertakings, one of the solidary debtors or some or all of them
covenants, terms, conditions, and simultaneously. The demand made against one of
agreements of said contract during them shall not be an obstacle to those which may

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 130

subsequently be directed against the others, so Antecedent Facts
long as the debt has not been fully collected."
This case stems from an action to compel Ching to
Elucidating on these provisions, the Court in pay TRB the following amounts:
Garcia v. Court of Appeals18 stated thus:
1. ₱959,611.96 under Letter of Credit No. 479 AD
"x x x. The surety’s obligation is not an original covered by Trust Receipt No. 106;4
and direct one for the performance of his own act,
but merely accessory or collateral to the obligation 2. ₱1,191,137.13 under Letter of Credit No. 563
contracted by the principal. Nevertheless, AD covered by Trust Receipt No. 113;5 and
although the contract of a surety is in essence
secondary only to a valid principal obligation, his 3. ₱3,500,000 under the trust loan covered by a
liability to the creditor or promisee of the principal notarized Promissory Note.6
is said to be direct, primary and absolute; in other
words, he is directly and equally bound with the Ching was the Senior Vice President of PBM. In his
principal. x x x."19 personal capacity and not as a corporate officer,
Ching signed a Deed of Suretyship dated 21 July
Under the law and jurisprudence, respondent may 1977 binding himself as follows:
sue, separately or together, the principal debtor
and the petitioner herein, in view of the solidary xxx as primary obligor(s) and not as mere
nature of their liability. The death of the principal guarantor(s), hereby warrant to the TRADERS
debtor will not work to convert, decrease or nullify ROYAL BANK, its successors and assigns, the due
the substantive right of the solidary creditor. and punctual payment by the following individuals
Evidently, despite the death of the principal debtor, and/or companies/firms, hereinafter called the
respondent may still sue petitioner alone, in DEBTOR(S), of such amounts whether due or not,
accordance with the solidary nature of the latter’s as indicated opposite their respective names, to
liability under the performance bond. wit:

WHEREFORE, the Petition is DENIED and the AMOUNT OF

Decision of the Court of Appeals AFFIRMED. Costs NAME OF DEBTOR(S)
OBLIGATION
against petitioner.

PHIL. BLOOMING MILLS

SO ORDERED. TEN MILLION PESOS
CORP.

FIRST DIVISION
(₱ 10,000,000.00)
G.R. No. 142381 October 15, 2003

PHILIPPINE BLOOMING MILLS, INC., and owing to said TRADERS ROYAL BANK, hereafter
ALFREDO CHING, petitioners, called the CREDITOR, as evidenced by all notes,
vs. drafts, overdrafts and other credit obligations of
COURT OF APPEALS and TRADERS ROYAL every kind and nature contracted/incurred by said
BANK, respondents. DEBTOR(S) in favor of said CREDITOR.

DECISION In case of default by any and/or all of the

DEBTOR(S) to pay the whole or part of said
CARPIO, J.: indebtedness herein secured at maturity, I/We,
jointly and severally, agree and engage to the
The Case CREDITOR, its successors and assigns, the prompt
payment, without demand or notice from said
This is a petition for review on certiorari 1 to annul CREDITOR, of such notes, drafts, overdrafts and
the Decision2 dated 16 July 1999 of the Court of other credit obligations on which the DEBTOR(S)
Appeals in CA-G.R. CV No. 39690, as well as its may now be indebted or may hereafter become
Resolution dated 17 February 2000 denying the indebted to the CREDITOR, together with all
motion for reconsideration. The Court of Appeals interests, penalty and other bank charges as may
affirmed with modification the Decision 3 dated 31 accrue thereon and all expenses which may be
August 1992 rendered by Branch 113 of the incurred by the latter in collecting any or all such
Regional Trial Court of Pasay City ("trial court"). instruments.
The trial court’s Decision declared petitioner
Alfredo Ching ("Ching") liable to respondent I/WE further warrant the due and faithful
Traders Royal Bank ("TRB") for the payment of the performance by the DEBTOR(S) of all the
credit accommodations extended to Philippine obligations to be performed under any contracts,
Blooming Mills, Inc. ("PBM"). evidencing indebtedness/obligations and any
supplements, amendments, charges or
S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 131
modifications made thereto, including but not said BANK may call upon them to pay arising out
limited to, the due and punctual payment by the of, pertaining to, and/or in any manner connected
said DEBTOR(S). with this receipt. In case it is necessary to collect
the draft covered by the Trust Receipt by or
I/WE hereby expressly waive notice of acceptance through an attorney-at-law, the undersigned
of this suretyship, and also presentment, demand, hereby further agree(s) to pay an additional of
protest and notice of dishonor of any and all such 10% of the total amount due on the draft as
instruments, loans, advances, credits, or other attorney’s fees, exclusive of all costs, fees and
indebtedness or obligations hereinbefore referred other expenses of collection but shall in no case be
to. less than ₱200.00"8 (Emphasis supplied)

MY/OUR liability on this Deed of Suretyship shall On 27 April 1981, PBM obtained a ₱3,500,000
be solidary, direct and immediate and not trust loan from TRB. Ching signed as co-maker in
contingent upon the pursuit by the CREDITOR, its the notarized Promissory Note evidencing this
successors or assigns, of whatever remedies it or trust loan. The Promissory Note reads:
they may have against the DEBTOR(S) or the
securities or liens it or they may possess; and FOR VALUE RECEIVED THIRTY (30) DAYS after
I/WE hereby agree to be and remain bound upon date, I/We, jointly and severally, promise to pay
this suretyship, irrespective of the existence, the TRADERS ROYAL BANK or order, at its Office in
value or condition of any collateral, and 4th Floor, Kanlaon Towers Bldg., Roxas Blvd.,
notwithstanding also that all obligations of the Pasay City, the sum of Pesos: THREE MILLION
DEBTOR(S) to you outstanding and unpaid at any FIVE HUNDRED THOUSAND ONLY
time may exceed the aggregate principal sum (₱3,500,000.00), Philippine Currency, with the
herein above stated. interest rate of Eighteen Percent (18%) per
annum until fully paid.
In the event of judicial proceedings, I/WE hereby
expressly agree to pay the creditor for and as In case of non-payment of this note at
attorney’s fees a sum equivalent to TEN PER maturity, I/We, jointly and severally, agree
CENTUM (10%) of the total indebtedness to pay an additional amount equivalent to
(principal and interest) then unpaid, exclusive of two per cent (2%) of the principal sum per
all costs or expenses for collection allowed by annum, as penalty and collection charges in
law.7 (Emphasis supplied) the form of liquidated damages until fully
paid, and the further sum of ten percent (10%)
On 24 March and 6 August 1980, TRB granted PBM thereof in full, without any deduction, as and for
letters of credit on application of Ching in his attorney’s fees whether actually incurred or not,
capacity as Senior Vice President of PBM. Ching exclusive of costs and other judicial/extrajudicial
later accomplished and delivered to TRB trust expenses; moreover, I/We jointly and severally,
receipts, which acknowledged receipt in trust for further empower and authorize the TRADERS
TRB of the merchandise subject of the letters of ROYAL BANK at its option, and without notice to
credit. Under the trust receipts, PBM had the right set off or to apply to the payment of this note any
to sell the merchandise for cash with the and all funds, which may be in its hands on deposit
obligation to turn over the entire proceeds of the or otherwise belonging to anyone or all of us, and
sale to TRB as payment of PBM’s indebtedness. to hold as security therefor any real or personal
Letter of Credit No. 479 AD, covered by Trust property which may be in its possession or control
Receipt No. 106, has a face value of US$591,043, by virtue of any other contract.9 (Emphasis
while Letter of Credit No. 563 AD, covered by supplied)
Trust Receipt No. 113, has a face value of
US$155,460.34. PBM defaulted in its payment of Trust Receipt No.
106 (Letter of Credit No. 479 AD) for ₱959,611.96,
Ching further executed an Undertaking for each and of Trust Receipt No. 113 (Letter of Credit No.
trust receipt, which uniformly provided that: 563 AD) for ₱1,191,137.13. PBM also defaulted on
its ₱3,500,000 trust loan.
xxx
On 1 April 1982, PBM and Ching filed a petition for
6. All obligations of the undersigned under the suspension of payments with the Securities and
agreement of trusts shall bear interest at the rate Exchange Commission ("SEC"), docketed as SEC
of __ per centum ( __%) per annum from the date Case No. 2250.10 The petition sought to suspend
due until paid. payment of PBM’s obligations and prayed that the
SEC allow PBM to continue its normal business
7. [I]n consideration of the Trust Receipt, the operations free from the interference of its
undersigned hereby jointly and severally creditors. One of the listed creditors of PBM was
undertake and agree to pay on demand on the TRB.11
said BANK, all sums and amounts of money which

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 132

On 9 July 1982, the SEC placed all of PBM’s assets, and affirmed its dismissal of the case with respect
liabilities, and obligations under the rehabilitation to PBM. The trial court stressed that TRB was
receivership of Kalaw, Escaler and Associates.12 holding Ching liable under the Deed of Suretyship.
As Ching’s obligation was solidary, the trial court
On 13 May 1983, ten months after the SEC placed ruled that TRB could proceed against Ching as
PBM under rehabilitation receivership, TRB filed surety upon default of the principal debtor PBM.
with the trial court a complaint for collection The trial court also held that PD No. 1758 applied
against PBM and Ching. TRB asked the trial court only to corporations, partnerships and
to order defendants to pay solidarily the following associations and not to individuals.
amounts:
Upon the trial court’s denial of his Motion for
(1) ₱6,612,132.74 exclusive of interests, Reconsideration, Ching filed a Petition for
penalties, and bank charges [representing its Certiorari and Prohibition20 before the Court of
indebtedness arising from the letters of credit Appeals. The appellate court granted Ching’s
issued to its various suppliers]; petition and ordered the dismissal of the case. The
appellate court ruled that the SEC assumed
(2) ₱4,831,361.11, exclusive of interests, jurisdiction over Ching and PBM to the exclusion of
penalties, and other bank charges [due and owing courts or tribunals of coordinate rank.
from the trust loan of 27 April 1981 evidenced by a
promissory note]; TRB assailed the Court of Appeals’ Decision21
before this Court. In Traders Royal Bank v.
(3) ₱783,300.00 exclusive of interests, penalties, Court of Appeals,22 this Court upheld TRB and
and other bank charges [due and owing from the ruled that Ching was merely a nominal party in
money market loan of 1 April 1981 evidenced by a SEC Case No. 2250. Creditors may sue individual
promissory note]; sureties of debtor corporations, like Ching, in a
separate proceeding before regular courts despite
(4) To order defendant Ching to pay the pendency of a case before the SEC involving
₱10,000,000.00 under the Deed of Suretyship in the debtor corporation.
the event plaintiff can not recover the full amount
of PBM’s indebtedness from the latter; In his Answer dated 6 November 1989, Ching
denied liability as surety and accommodation
(5) The sum equivalent to 10% of the total sum co-maker of PBM. He claimed that the SEC had
due as and for attorney’s fees; already issued a decision23 approving a revised
rehabilitation plan for PBM’s creditors, and that
(6) Such other amounts that may be proven by PBM obtained the credit accommodations for
the plaintiff during the trial, by way of damages corporate purposes that did not redound to his
and expenses for litigation.13 personal benefit. He further claimed that even as a
surety, he has the right to the defenses personal
On 25 May 1983, TRB moved to withdraw the to PBM. Thus, his liability as surety would attach
complaint against PBM on the ground that the SEC only if, after the implementation of payments
had already placed PBM under receivership.14 The scheduled under the rehabilitation plan, there
trial court thus dismissed the complaint against would remain a balance of PBM’s debt to TRB.24
PBM.15 Although Ching admitted PBM’s availment of the
credit accommodations, he did not show any proof
On 23 June 1983, PBM and Ching also moved to of payment by PBM or by him.
dismiss the complaint on the ground that the trial
court had no jurisdiction over the subject matter TRB admitted certain partial payments on the PBM
of the case. PBM and Ching invoked the account made by PBM itself and by the
assumption of jurisdiction by the SEC over all of SEC-appointed receiver.25 Thus, the trial court
PBM’s assets and liabilities.16 had to resolve the following remaining issues:

TRB filed an opposition to the Motion to Dismiss. 1. How much exactly is the corporate defendant’s
TRB argued that (1) Ching is being sued in his outstanding obligation to the plaintiff?
personal capacity as a surety for PBM; (2) the SEC
decision declaring PBM in suspension of payments 2. Is defendant Alfredo Ching personally
is not binding on TRB; and (3) Presidential Decree answerable, and for exactly how much?26
No. 1758 ("PD No. 1758"),17 which Ching relied on
to support his assertion that all claims against PBM TRB presented Mr. Lauro Francisco, loan officer of
are suspended, does not apply to Ching as the the Remedial Management Department of TRB,
decree regulates corporate activities only.18 and Ms. Carla Pecson, manager of the
International Department of TRB, as witnesses.
In its order dated 15 August 1983,19 the trial court Both witnesses testified to the following:
denied the motion to dismiss with respect to Ching

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 133

1. The existence of a Deed of Suretyship dated 21 the deposits to be remitted to the Bank for a
July 1977 executed by Ching for PBM’s liabilities to period of 17 years.34
TRB up to ₱10,000,000;27
However, Atty. Aranda himself testified that both
2. The application of PBM and grant by TRB on 13 items (a) and (b) quoted above were never
March 1980 of Letter of Credit No. 479 AD for complied with or implemented. Not only was there
US$591,043, and the actual availment by PBM of no initial deposit of ₱150,000 as required in the
the full proceeds of the credit accommodation;28 resolution, TRB also disapproved the document
prepared by the receiver, which would have
3. The application of PBM and grant by TRB on 6 released Ching from his suretyship.35
August 1980 of Letter of Credit No. 563 AD for
US$156,000, and the actual availment by PBM of The Ruling of the Trial Court
the full proceeds of the credit accommodation; 29
and The trial court found Ching liable to TRB for
₱19,333,558.16 under the Deed of Suretyship.
4. The existence of a trust loan of ₱3,500,000 The trial court explained:
evidenced by a notarized Promissory Note dated
27 April 1981 wherein Ching bound himself [T]he liability of Ching as a surety attaches
solidarily with PBM;30 and independently from his capacity as a stockholder
of the Philippine Blooming Mills. Indisputably,
5. Per TRB’s computation, Ching is liable for under the Deed of Suretyship defendant Ching
₱19,333,558.16 as of 31 October 1991.31 unconditionally agreed to assume PBM’s liability to
the plaintiff in the event PBM defaulted in the
Ching presented Atty. Vicente Aranda, corporate payment of the said obligation in addition to
secretary and First Vice President of the Human whatever penalties, expenses and bank charges
Resources Department of TRB, as witness. Ching that may occur by reason of default. Clear enough,
sought to establish that TRB’s Board of Directors under the Deed of Suretyship (Exh. J), defendant
adopted a resolution fixing the PBM account at an Ching bound himself jointly and severally with
amount lower than what TRB wanted to collect PBM in the payment of the latter’s obligation to the
from Ching. The trial court allowed Atty. Aranda to plaintiff. The obligation being solidary, the plaintiff
testify over TRB’s manifestation that the Answer Bank can hold Ching liable upon default of the
failed to plead the subject matter of his testimony. principal debtor. This is explicitly provided in
Atty. Aranda produced TRB Board Resolution No. Article 1216 of the New Civil Code already quoted
5935, series of 1990, which contained the minutes above.36
of the special meeting of TRB’s Board of Directors
held on 8 June 1990.32 In the resolution, the The dispositive portion of the trial court’s Decision
Board of Directors advised TRB’s Management reads:
"not to release Alfredo Ching from his JSS liability
to the bank."33 The resolution also stated the WHEREFORE, judgment is hereby rendered
following: declaring defendant Alfredo Ching liable to
plaintiff bank in the amount of ₱19,333,558.16
a) Accept the ₱1.373 million deposits remitted (NINETEEN MILLION THREE HUNDRED THIRTY
over a period of 17 years or until 2006 which shall THREE THOUSAND FIVE HUNDRED FIFTY EIGHT &
be applied directly to the account (as remitted per 16/100) as of October 31, 1991, and to pay the
hereto attached schedule). The amount of ₱1.373 legal interest thereon from such date until it is
million shall be considered as full payment of fully paid. To pay plaintiff 5% of the entire amount
PBM’s account. (The receiver is amenable to this by way of attorney’s fees.
alternative)
SO ORDERED.37
The initial deposit/remittance which amounts to
₱150,000.00 shall be remitted upon approval of The Ruling of the Court of Appeals
the above and conforme to PISCOR and PBM.
Subsequent deposits shall start on the 3rd year On appeal, Ching stated that as surety and
and annually thereafter (every June 30th of the solidary debtor, he should benefit from the
year) until June 30, 2006. changed nature of the obligation as provided in
Article 1222 of the Civil Code, which reads:
Failure to pay one annual installment shall make
the whole obligation due and demandable. Article 1222. A solidary debtor may, in actions
filed by the creditor, avail himself of all defenses
b) Write-off immediately ₱4.278 million. The which are derived from the nature of the
balance [of] ₱1.373 million to remain outstanding obligation and of those which are personal to him,
in the books of the Bank. Said balance will equal or pertain to his own share. With respect to those
which personally belong to the others, he may

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 134

avail himself thereof only as regards that part of The dispositive portion of the Decision of the Court
the debt for which the latter are responsible. of Appeals reads:

Ching claimed that his liability should likewise be WHEREFORE, the judgment of the lower court is
reduced since the equitable apportionment of hereby AFFIRMED but modified with respect to the
PBM’s remaining assets among its creditors under amount of liability of defendant Alfredo Ching
the rehabilitation proceedings would have the which is lowered from ₱19,333,558.16 to
effect of reducing PBM’s liability. He also claimed ₱15,773,708.78 with legal interest of 12% per
that the amount for which he was being held liable annum until it is fully paid.
was excessive. He contended that the outstanding
principal balance, as stated in TRB Board SO ORDERED.44
Resolution No. 5893-1990, was only
₱5,650,749.09. Ching also contended that he
38
The Court of Appeals denied Ching’s Motion for
was not liable for interest, as the loan documents Reconsideration for lack of merit.
did not stipulate the interest rate, pursuant to
Article 1956 of the Civil Code.39 Finally, Ching Hence, this petition.
asserted that the Deed of Suretyship executed on
21 July 1977 could not guarantee obligations Issues
incurred after its execution.40
Ching assigns the following as errors of the Court
TRB did not file its appellee’s brief. Thus, the Court of Appeals:
of Appeals resolved to submit the case for
decision.41 1. THE COURT OF APPEALS COMMITTED AN
ERROR WHEN IT RULED THAT PETITIONER
The Court of Appeals considered the following ALFREDO CHING WAS LIABLE FOR OBLIGATIONS
issues for its determination: CONTRACTED BY PBM LONG AFTER THE
EXECUTION OF THE DEED OF SURETYSHIP.
1. Whether the Answer of Ching amounted to an
admission of liability. 2. THE COURT OF APPEALS COMMITTED AN
ERROR WHEN IT RULED THAT THE PETITIONERS
2. Whether Ching can still be sued as a surety WERE LIABLE FOR THE TRUST RECEIPTS DESPITE
after the SEC placed PBM under rehabilitation THE FACT THAT PRIVATE RESPONDENT HAD
receivership, and if in the affirmative, for how PREVENTED THEIR FULFILLMENT.
much.42
3. THE COURT OF APPEALS COMMITTED AN
The Court of Appeals resolved the first two ERROR WHEN IT FOUND PETITIONER ALFREDO
questions in favor of TRB. The appellate court CHING LIABLE FOR ₱15,773,708.78 WITH LEGAL
stated: INTEREST AT 12% PER ANNUM UNTIL FULLY PAID
DESPITE THE FACT THAT UNDER THE
Ching did not deny under oath the genuineness REHABILITATION PLAN OF PETITIONER PBM,
and due execution of the L/Cs, Trust Receipts, WHICH WAS APPROVED BY THE SECURITIES AND
Undertaking, Deed of Surety, and the 3.5 Million EXCHANGE COMMISSION, PRIVATE RESPONDENT
Peso Promissory Note upon which TRB’s action IS ONLY ENTITLED TO ₱1,373,415.00.45
rested. He is, therefore, presumed to be liable
unless he presents evidence showing payment, Ching asserted that the Deed of Suretyship dated
partially or in full, of these obligations 21 July 1977 could not answer for obligations not
(Investment and Underwriting Corporation of the yet in existence at the time of its execution.
Philippines v. Comptronics Philippines, Inc. and Specifically, Ching maintained that the Deed of
Gene v. Tamesis, 192 SCRA 725 [1990]). Suretyship could not answer for debts contracted
by PBM in 1980 and 1981. Ching contended that
As surety of a corporation placed under no accessory contract of suretyship could arise
rehabilitation receivership, Ching can answer without an existing principal contract of loan.
separately for the obligations of debtor PBM (Rizal Ching likewise argued that TRB could no longer
Banking Corporation v. Court of Appeals, claim on the trust receipts because TRB had
Philippine Blooming Mills, Inc., and Alfredo Ching, already taken the properties subject of the trust
178 SCRA 738 [1990], and Traders Royal Bank v. receipts. Ching likewise maintained that his
Philippine Blooming Mills and Alfredo Ching, 177 obligation as surety could not exceed the
SCRA 788 [1989]). ₱1,373,415 apportioned to PBM under the
SEC-approved rehabilitation plan.
Even a[n] SEC injunctive order cannot suspend
payment of the surety’s obligation since the In its Comment, TRB asserted that the first two
rehabilitation receivers are limited to the existing assigned errors raised factual issues not brought
assets of the corporation.43 before the trial court. Furthermore, TRB pointed

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out that Ching never presented PBM’s Ching’s act of joining as a co-petitioner with PBM
rehabilitation plan before the trial court. TRB also in SEC Case No. 2250 did not vest in the SEC
stated that the Supreme Court ruling in Traders jurisdiction over his person or property, for
Royal Bank v. Court of Appeals46 constitutes jurisdiction does not depend on the consent or
res judicata between the parties. Therefore, TRB acts of the parties but upon express provision of
could proceed against Ching separately from PBM law (Tolentino vs. Social Security System, 138
to enforce in full Ching’s liability as surety.47 SCRA 428; Lee vs. Municipal Trial Court of Legaspi
City, Br. I, 145 SCRA 408). (Emphasis supplied)
The Ruling of the Court
Traders Royal Bank has fully resolved the issue
The petition has no merit. regarding Ching’s liability as a surety of the credit
accommodations TRB extended to PBM. The
The case before us is an offshoot of the trial court’s decision amounts to res judicata49 which bars
denial of Ching’s motion to have the case Ching from raising the same issue again. Hence,
dismissed against him. The petition is a thinly the only question that remains is the amount of
veiled attempt to make this Court reconsider its Ching’s liability. Nevertheless, we shall resolve the
decision in the prior case of Traders Royal Bank v. issues Ching has raised in his attempt to escape
Court of Appeals.48 This Court has already liability under his surety.
resolved the issue of Ching’s separate liability as a
surety despite the rehabilitation proceedings Whether Ching is liable for obligations PBM
before the SEC. We held in Traders Royal Bank contracted after execution of the Deed of
that: Suretyship

Although Ching was impleaded in SEC Case No. Ching is liable for credit obligations contracted by
2250, as a co-petitioner of PBM, the SEC could not PBM against TRB before and after the execution of
assume jurisdiction over his person and properties. the 21 July 1977 Deed of Suretyship. This is
The Securities and Exchange Commission was evident from the tenor of the deed itself, referring
empowered, as rehabilitation receiver, to take to amounts PBM "may now be indebted or may
custody and control of the assets and properties of hereafter become indebted" to TRB.
PBM only, for the SEC has jurisdiction over
corporations only [and] not over private The law expressly allows a suretyship for "future
individuals, except stockholders in an debts". Article 2053 of the Civil Code provides:
intra-corporate dispute (Sec. 5, P.D. 902-A and
Sec. 2 of P.D. 1758). Being a nominal party in SEC A guaranty may also be given as security for
Case No. 2250, Ching’s properties were not future debts, the amount of which is not yet
included in the rehabilitation receivership that the known; there can be no claim against the
SEC constituted to take custody of PBM’s assets. guarantor until the debt is liquidated. A
Therefore, the petitioner bank was not barred conditional obligation may also be secured.
from filing a suit against Ching, as a surety for (Emphasis supplied)
PBM. An anomalous situation would arise if
individual sureties for debtor corporations may Furthermore, this Court has ruled in Diño v.
escape liability by simply co-filing with the Court of Appeals50 that:
corporation a petition for suspension of payments
in the SEC whose jurisdiction is limited only to Under the Civil Code, a guaranty may be given to
corporations and their corporate assets. secure even future debts, the amount of which
may not be known at the time the guaranty is
xxx executed. This is the basis for contracts
denominated as continuing guaranty or suretyship.
Ching can be sued separately to enforce his A continuing guaranty is one which is not limited
liability as surety for PBM, as expressly to a single transaction, but which contemplates a
provided by Article 1216 of the New Civil future course of dealing, covering a series of
Code. transactions, generally for an indefinite time or
until revoked. It is prospective in its operation and
xxx is generally intended to provide security with
respect to future transactions within certain limits,
It is elementary that a corporation has a and contemplates a succession of liabilities, for
personality distinct and separate from its which, as they accrue, the guarantor becomes
individual stockholders and members. Being an liable. Otherwise stated, a continuing guaranty is
officer or stockholder of a corporation does not one which covers all transactions, including those
make one’s property the property also of the arising in the future, which are within the
corporation, for they are separate entities (Adelio description or contemplation of the contract of
Cruz vs. Quiterio Dalisay, 152 SCRA 482). guaranty, until the expiration or termination
thereof. A guaranty shall be construed as

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continuing when by the terms thereof it is evident ₱1.373 million subject to certain conditions like
that the object is to give a standing credit to the the payment of ₱150,000 initial payment.51 The
principal debtor to be used from time to time resolution also states that TRB should not release
either indefinitely or until a certain period; Ching’s solidary liability under his surety. The
especially if the right to recall the guaranty is resolution even directs TRB’s management to
expressly reserved. Hence, where the contract study Ching’s criminal liability under the trust
states that the guaranty is to secure advances to documents.52
be made "from time to time," it will be construed
to be a continuing one. Ching’s own witness testified that Resolution No.
5935 was never implemented. For one, PBM or its
In other jurisdictions, it has been held that the use receiver never paid the ₱150,000 initial payment
of particular words and expressions such as to TRB. TRB also rejected the document that
payment of "any debt,""any indebtedness," or PBM’s receiver presented which would have
"any sum," or the guaranty of "any transaction," released Ching from his suretyship. Clearly, Ching
or money to be furnished the principal debtor "at cannot rely on Resolution No. 5935 to escape
any time," or "on such time" that the principal liability under his suretyship.
debtor may require, have been construed to
indicate a continuing guaranty. Ching’s attempts to have this Court review the
factual issues of the case are improper. It is not a
Whether Ching’s liability is limited to the amount function of the Supreme Court to assess and
stated in PBM’s rehabilitation plan evaluate again the evidence, testimonial and
evidentiary, adduced by the parties particularly
Ching would like this Court to rule that his liability where the findings of both the trial court and the
is limited, at most, to the amount stated in PBM’s appellate court coincide on the matter.53
rehabilitation plan. In claiming this reduced
liability, Ching invokes Article 1222 of the Civil Whether Ching is liable for the trust receipts
Code which reads:
Ching is still liable for the amounts stated in the
Art. 1222. A solidary debtor may, in actions filed letters of credit covered by the trust receipts.
by the creditor, avail himself of all defenses which Other than his bare allegations, Ching has not
are derived from the nature of the obligation and shown proof of payment or settlement with TRB.
of those which are personal to him, or pertain to Atty. Vicente Aranda, TRB’s corporate secretary
his own share. With respect to those which and First Vice President of its Human Resource
personally belong to the others, he may avail Management Department, testified that the
himself thereof only as regards that part of the conditions in the TRB board resolution presented
debt for which the latter are responsible. by Ching were not met or implemented, thus:

In granting the loan to PBM, TRB required Ching’s ATTY. AZURA

surety precisely to insure full recovery of the loan
in case PBM becomes insolvent or fails to pay in Q Going into the resolution itself. A certain
full. This was the very purpose of the surety. Thus, stipulation ha[s] been outlined, and may I refer
Ching cannot use PBM’s failure to pay in full as you to condition or step No. 1, which reads: "a)
justification for his own reduced liability to TRB. As Accept the ₱1.373 million deposits remitted over a
surety, Ching agreed to pay in full PBM’s loan in period of 17 years or until 2006 which shall be
case PBM fails to pay in full for any reason, applied directly to the account (as remitted per
including its insolvency. hereto attached schedule). The amount of ₱1.373
million shall be considered as full payment of
TRB, as creditor, has the right under the surety to PBM’s account. (The receiver is amenable to this
proceed against Ching for the entire amount of alternative.) The initial deposit/remittance which
PBM’s loan. This is clear from Article 1216 of the amounts to ₱150,000.00 shall be remitted upon
Civil Code: approval of the above and conforme of PISCOR
[xxx] and PBM. Subsequent deposits shall start on
ART. 1216. The creditor may proceed against any the 3rd year and annually thereafter (every June
one of the solidary debtors or some or all of them 30th of the year) until June 30, 2006.
simultaneously. The demand made against one of
them shall not be an obstacle to those which may Failure to pay one annual installment shall make
subsequently be directed against the others, so the whole obligation due and demandable. Now Mr.
long as the debt has not been fully collected. Witness, would you be in a position to inform [the
(Emphasis supplied) court] if these conditions listed in item (a) in
Resolution No. 5935, series of 1990, were
Ching further claims a reduced liability under TRB implemented or met?
Board Resolution No. 5935. This resolution states
that PBM’s outstanding loans may be reduced to

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 137

A Yes. I know for a fact that the conditions, more took hold of PBM’s inventories, including the
particularly the initial deposit/remittance in the goods covered by the trust receipts. Ching asserts
amount of ₱150,000.00 which have to be done that this act of TRB released him from liability
with approval was not remitted or met. under the suretyship. Ching forgets that he
executed, on behalf of PBM, separate
Q Will you clarify your answer. Would you be in a Undertakings for each trust receipt expressly
position to inform the court if those conditions granting to TRB the right to take possession of the
were met? Because your initial answer was yes. goods at any time to protect TRB’s interests. TRB
may exercise such right without waiving its right
A Yes sir, I am in a position to state that these to collect the full amount of the loan to PBM. The
conditions were not met. Undertakings also provide that any suspension of
payment or any assignment by PBM for the benefit
Q Let me refer you to the condition listed as item of creditors renders the loan due and demandable.
(b) of the same resolution which I read and quote: Thus, the separate Undertakings uniformly
"Write off immediately ₱4.278 million. The provide:
balance of ₱1.373 million to remain outstanding in
the books of the bank. Said balance will be 2. That the said BANK may at any time cancel
remitted to the Bank for a period of 17 years." Mr. the foregoing trust and take possession of
Witness, would you be in a position to inform the said merchandise with the right to sell and
court if the bank implemented that particular dispose of the same under such terms and
condition? conditions it may deem best, or of the
proceeds of such of the same as may then
A In the implementation of this settlement the have been sold, wherever the said merchandise
receiver prepared a document for approval and or proceeds may then be found and all the
conformity of the bank. The said document would provisions of the Trust Receipt shall apply to and
in effect release the suretyship of Alfredo Ching be deemed to include said above-mentioned
and for that reason the bank refused or denied merchandise if the same shall have been made up
fixing its conformity and approval with the court. or used in the manufacture of any other goods, or
merchandise, and the said BANK shall have the
xxx same rights and remedies against the said
merchandise in its manufactured state, or the
ATTY. ATIENZA ON REDIRECT EXAMINATION product of said manufacture as it would have had
in the event that such merchandise had remained
Q Mr. Witness you stated that the reason why the [in] its original state and irrespective of the fact
plaintiff bank did not implement these that other and different merchandise is used in
conditionalities [sic] was because the former completing such manufacture. In the event of any
defendant corporation requested that the suspension, or failure or assignment for the
suretyship of Alfredo Ching be released, is that benefit of creditors on the part of the
correct? undersigned or of the non-fulfillment of any
obligation, or of the non-payment at
A I did not say that. I said that in effect the maturity of any acceptance made under said
document prepared by the lawyer of the receiver credit, or any other credit issued by the said BANK
xxx the bank would release the suretyship of on account of the undersigned or of
Alfredo Ching, that is why the bank is not the non-payment of any indebtedness on the
amenable to such a document. part of the undersigned to the said BANK, all
obligations, acceptances, indebtedness and
Q Despite this approved resolution the bank, liabilities whatsoever shall thereupon
because of said requirement or conformity did not without notice mature and become due and
seek to implement these conditionalities [sic]? payable and the BANK may avail of the
remedies provided herein.55 (Emphasis
A Yes sir because the conditions imposed by the supplied)
board is not being followed in that document
because it was the condition of the board that the Presidential Decree No. 115 ("PD No. 115"),
suretyship should not be released but the otherwise known as the Trust Receipts Law,
document being presented to the bank for expressly allows TRB to take possession of the
signature and conformity in effect if signed would goods covered by the trust receipts. Thus, Section
release the suretyship. So it would be a violation of 7 of PD No. 115 states:
with the approval of the board so the bank did not
sign the conformity.54 SECTION 7. Rights of the entruster. — The
entruster shall be entitled to the proceeds from
Ching also claims that TRB prevented PBM from the sale of the goods, documents or instruments
fulfilling its obligations under the trust receipts released under a trust receipt to the entrustee to
when TRB, together with other creditor banks, the extent of the amount owing to the entruster or

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 138

as appears in the trust receipt, or to the return of be twelve per cent (12%) per annum. (Emphasis
the goods, documents or instruments in case of supplied)
non-sale, and to the enforcement of all other
rights conferred on him in the trust receipt On the other hand, the Promissory Note
provided such are not contrary to the provisions of evidencing the ₱3,500,000 trust loan provides for
this Decree. 18% interest per annum plus 2% penalty interest
per annum in case of default. This stipulated
The entruster may cancel the trust and take interest should continue to run until full payment
possession of the goods, documents or of the ₱3,500,000 trust loan. In addition, the
instruments subject of the trust or of the accrued interest on all the credit accommodations
proceeds realized therefrom at any time should earn legal interest from the date of filing of
upon default or failure of the entrustee to the complaint pursuant to Article 2212 of the Civil
comply with any of the terms and conditions Code.
of the trust receipt or any other agreement
between the entruster and the Art. 2212. Interest due shall earn legal interest
entrustee, and the entruster in possession of the from the time it is judicially demanded, although
goods, documents or instruments may, on or after the obligation may be silent upon this point.
default, give notice to the entrustee of the
intention to sell, and may, not less than five days The trial court found and the appellate court
after serving or sending of such notice, sell the affirmed that the outstanding principal amounts
goods, documents or instruments at public or as of the filing of the complaint with the trial court
private sale, and the entruster may, at a public on 13 May 1983 were ₱959,611.96 under Trust
sale, become a purchaser. The proceeds of any Receipt No. 106, ₱1,191,137.13 under Trust
such sale, whether public or private, shall be Receipt No. 113, and ₱3,500,000 for the trust loan.
applied (a) to the payment of the expenses As extracted from TRB’s Statement of Account as
thereof; (b) to the payment of the expenses of 31 October 1991,58 the accrued interest on the
of re-taking, keeping and storing the goods, trust receipts and the trust loan as of the filing of
documents or instruments; (c) to the the complaint on 13 May 1983 were
satisfaction of the entrustee’s indebtedness ₱311,387.5159 under Trust Receipt No. 106,
to the entruster. The entrustee shall receive ₱338,739.8160 under Trust Receipt No. 113, and
any surplus but shall be liable to the ₱1,287,616.4461 under the trust loan. The penalty
entruster for any deficiency. Notice of sale interest on the trust loan amounted to
shall be deemed sufficiently given if in writing, and ₱137,315.07.62 Ching did not rebut this
either personally served on the entrustee or sent Statement of Account which TRB presented during
by post-paid ordinary mail to the entrustee’s last trial.
known business address. (Emphasis supplied)
Thus, the following is the summary of Ching’s
Thus, even though TRB took possession of the liability under the suretyship as of 13 May 1983,
goods covered by the trust receipts, PBM and the date of filing of TRB’s complaint with the trial
Ching remained liable for the entire amount of the court:
loans covered by the trust receipts.
1. On Trust Receipt No. 106 (Letter of Credit No.
Absent proof of payment or settlement of PBM and 479 AD)
Ching’s credit obligations with TRB, Ching’s
liability is what the Deed of Suretyship stipulates, Outstanding Principal ₱ 959,611.96
plus the applicable interest and penalties. The
trust receipts, as well as the Letter of Undertaking Accrued Interest (12% per annum) 311,387.51
dated 16 April 198056 executed by PBM, stipulate
in writing the payment of interest without 2. On Trust Receipt No. 113 (Letter of Credit No.
specifying the rate. In such a case, the applicable 563 AD)
interest rate shall be the legal rate, which is now
12% per annum.57 This is in accordance with Outstanding Principal ₱ 1,191,137.13
Central Bank Circular No. 416, which states:
Accrued Interest (12% per annum) 338,739.82
By virtue of the authority granted to it under
Section 1 of Act No. 2655, as amended, otherwise 3. On the Trust Loan (Promissory Note)
known as the "Usury Law," the Monetary Board, in
its Resolution No. 1622 dated July 29, 1974, has Outstanding Principal ₱ 3,500,000.00
prescribed that the rate of interest for the loan or
forbearance of any money, goods or credits and Accrued Interest (18% per annum) 1,287,616.44
the rate allowed in judgments, in the absence of
express contract as to such rate of interest, shall Accrued Penalty Interest (2% per annum)
137,315.07

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 139

WHEREFORE, we AFFIRM the decision of the Court
of Appeals with MODIFICATION. Petitioner Alfredo
Ching shall pay respondent Traders Royal Bank
the following (1) on the credit accommodations
under the trust receipts, the total principal amount
of ₱2,150,749.09 with legal interest at 12% per
annum from 14 May 1983 until full payment; (2)
on the trust loan evidenced by the Promissory
Note, the principal sum of ₱3,500,000 with 20%
interest per annum from 14 May 1983 until full
payment; (3) on the total accrued interest as of 13
May 1983, ₱2,075,058.84 with 12% interest per
annum from 14 May 1983 until full payment.
Petitioner Alfredo Ching shall also pay attorney’s
fees to respondent Traders Royal Bank equivalent
to 5% of the total principal and interest.

SO ORDERED.

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 140