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422 SUPREME COURT REPORTS ANNOTATED

Palmares vs. Court of Appeals

*
G.R. No. 126490. March 31, 1998.

ESTRELLA PALMARES, petitioner, vs. COURT OF

APPEALS and M. B. LENDING CORPORATION,
respondents.

Civil Law; Contracts; It has been the consistent holding of the

Court that contracts of adhesion are not invalid per se and that on
numerous occasions the binding effects thereof have been upheld.
·At the outset, let it here be stressed that even assuming arguendo
that the promissory note executed between the parties is a contract
of adhesion, it has been the consistent holding of the Court that
contracts of adhesion are not invalid per se and that on numerous
occasions the binding effects thereof have been upheld. The peculiar
nature of such contracts necessitate a close scrutiny of the factual
milieu to which the provisions are intended to apply. Hence, just as
consistently and unhesitatingly, but without categorically
invalidating such contracts, the Court has construed obscurities
and ambiguities in the restrictive provisions of contracts of
adhesion strictly albeit not unreasonably against the drafter thereof
when justified in

____________________________

* SECOND DIVISION.

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light of the operative facts and surrounding circumstances. The

factual scenario obtaining in the case before us warrants a liberal
application of the rule in favor of respondent corporation.
Same; Same; It is a cardinal rule in the interpretation of
contracts that if the terms of a contract are clear and leave no doubt
upon the intention of the contracting parties, the literal meaning of
its stipulation shall control.·It is a cardinal rule in the
interpretation of contracts that if the terms of a contract are clear
and leave no doubt upon the intention of the contracting parties,
the literal meaning of its stipulation shall control. In the case at
bar, petitioner expressly bound herself to be jointly and severally or
solidarily liable with the principal maker of the note. The terms of
the contract are clear, explicit and unequivocal that petitionerÊs
liability is that of a surety.
Same; Same; Fraud must be established by clear and
convincing evidence, mere preponderance of evidence not even being
adequate.·Petitioner admits that she voluntarily affixed her
signature thereto; ergo, she cannot now be heard to claim
otherwise. Any reference to the existence of fraud is unavailing.
Fraud must be established by clear and convincing evidence, mere
preponderance of evidence not even being adequate. PetitionerÊs
attempt to prove fraud must, therefor, fail as it was evidenced only
by her own uncorroborated and, expectedly, self-serving allegations.
Same; Same; Suretyship; The rule that ignorance of the contents
of an instrument does not ordinarily affect the liability of one who
signs it also applies to contracts of suretyship.·Having entered into
the contract with full knowledge of its terms and conditions,
petitioner is estopped to assert that she did so under a
misapprehension or in ignorance of their legal effect, or as to the
legal effect of the undertaking. The rule that ignorance of the
contents of an instrument does not ordinarily affect the liability of
one who signs it also applies to contracts of suretyship. And the
mistake of a surety as to the legal effect of her obligation is
ordinarily no reason for relieving her of liability.
Same; Same; Same; Guaranty; Suretyship and Guaranty
Distinguished.·A surety is an insurer of the debt, whereas a
guarantor is an insurer of the solvency of the debtor. A suretyship is
an undertaking that the debt shall be paid; a guaranty, an
undertaking that

424

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Palmares vs. Court of Appeals

the debtor shall pay. Stated differently, a surety promises to pay the
principalÊs debt if the principal will not pay, while a guarantor
agrees that the creditor, after proceeding against the principal, may
proceed against the guarantor if the principal is unable to pay. A
surety binds himself to perform if the principal does not, without
regard to his ability to do so. A guarantor, on the other hand, does
not contract that the principal will pay, but simply that he is able to
do so. In other words, a surety undertakes directly for the payment
and is so responsible at once if the principal debtor makes default,
while a guarantor contracts to pay if, by the use of due diligence,
the debt cannot be made out of the principal debtor.
Same; Same; Same; It is a well-entrenched rule that in order to
judge the intention of the contracting parties, their contemporaneous
and subsequent acts shall also be principally considered.·It is a
well-entrenched rule that in order to judge the intention of the
contracting parties, their contemporaneous and subsequent acts
shall also be principally considered. Several attendant factors in
that genre lend support to our finding that petitioner is a surety.
For one, when petitioner was informed about the failure of the
principal debtor to pay the loan, she immediately offered to settle
the account with respondent corporation. Obviously, in her mind,
she knew that she was directly and primarily liable upon default of
her principal. For another, and this is most revealing, petitioner
presented the receipts of the payments already made, from the time
of initial payment up to the last, which were all issued in her name
and of the Azarraga spouses. This can only be construed to mean
that the payments made by the principal debtors were considered
by respondent corporation as creditable directly upon the account
and inuring to the benefit of petitioner. The concomitant and
simultaneous compliance of petitionerÊs obligation with that of her
principals only goes to show that, from the very start, petitioner
considered herself equally bound by the contract of the principal
makers.
Same; Same; Same; A surety is bound equally and absolutely
with the principal and as such is deemed an original promisor and
debtor from the beginning.·In this regard, we need only to
reiterate the rule that a surety is bound equally and absolutely with
the principal, and as such is deemed an original promisor and
debtor from the beginning. This is because in suretyship there is
but one contract, and the surety is bound by the same agreement

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which binds the principal. In essence, the contract of a surety starts

with

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Palmares vs. Court of Appeals

the agreement, which is precisely the situation obtaining in this

case before the Court.
Same; Same; Same; A surety is not even entitled, as a matter of
rights to be given notice of the principalÊs default.·Even if it were
otherwise, demand on the sureties is not necessary before bringing
suit against them, since the commencement of the suit is a
sufficient demand. On this point, it may be worth mentioning that a
surety is not even entitled, as a matter of right, to be given notice of
the principalÊs default. Inasmuch as the creditor owes no duty of
active diligence to take care of the interest of the surety, his mere
failure to voluntarily give information to the surety of the default of
the principal cannot have the effect of discharging the surety. The
surety is bound to take notice of the principalÊs default and to
perform the obligation. He cannot complain that the creditor has
not notified him in the absence of a special agreement to that effect
in the contract of suretyship.
Same; Same; Same; A surety is liable as much as his principal
is liable and absolutely liable as soon as default is made without any
demand upon the principal whatsoever or nay notice of default.
·The alleged failure of respondent corporation to prove the fact of
demand on the principal debtors, by not attaching copies thereof to
its pleadings, is likewise immaterial. In the absence of a statutory
or contractual requirement, it is not necessary that payment or
performance of his obligation be first demanded of the principal,
especially where demand would have been useless; nor is it a
requisite, before proceeding against the sureties, that the principal
be called on to account. The underlying principle therefor is that a
suretyship is a direct contract to pay the debt of another. A surety is
liable as much as his principal is liable, and absolutely liable as
soon as default is made, without any demand upon the principal
whatsoever or any notice of default. As an original promisor and
debtor from the beginning, he is held ordinarily to know every
default of his principal.
Same; Same; Same; A creditorÊs right to proceed against the

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surety exists independently of his right to proceed against the

principal; The rule, therefore, is that if the obligation is joint and
several, the creditor has the right to proceed even against the surety
alone.·A creditorÊs right to proceed against the surety exists
independently of his right to proceed against the principal. Under
Article 1216 of the

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Palmares vs. Court of Appeals

Civil Code, the creditor may proceed against any one of the solidary
debtors or some or all of them simultaneously. The rule, therefore,
is that if the obligation is joint and several, the creditor has the
right to proceed even against the surety alone. Since, generally, it is
not necessary for a creditor to proceed against a principal in order
to hold the surety liable, where, by the terms of the contract, the
obligation of the surety is the same as that of the principal, then as
soon as the principal is in default, the surety is likewise in default,
and may be sued immediately and before any proceedings are had
against the principal. Perforce, in accordance with the rule that, in
the absence of statute or agreement otherwise, a surety is primarily
liable, and with the rule that his proper remedy is to pay the debt
and pursue the principal for reimbursement, the surety cannot at
law, unless permitted by statute and in the absence of any
agreement limiting the application of the security, require the
creditor or obligee, before proceeding against the surety, to resort to
and exhaust his remedies against the principal, particularly where
both principal and surety are equally bound.
Same; Same; Penalty; Court shall equitably reduce the penalty
when the principal obligation has been partly or irregularly
complied with by the debtor.·This notwithstanding, however, we
find and so hold that the penalty charge of 3% per month and
attorneyÊs fees equivalent to 25% of the total amount due are highly
inequitable and unreasonable. It must be remembered that from
the principal loan of P30,000.00, the amount of P16,300.00 had
already been paid even before the filing of the present case. Article
1229 of the Civil Code provides that the court shall equitably reduce
the penalty when the principal obligation has been partly or
irregularly complied with by the debtor. And, even if there has been
no performance, the penalty may also be reduced if it is iniquitous

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or leonine.
Same; Same; AttorneyÊs Fees; Court may reduce such attorneyÊs
fees fixed in the contract when the amount thereof appears to be
unconscionable or unreasonable.·With respect to the award of
attorneyÊs fees, this Court has previously ruled that even with an
agreement thereon between the parties, the court may nevertheless
reduce such attorneyÊs fees fixed in the contract when the amount
thereof appears to be unconscionable or unreasonable. To that end,
it is not even necessary to show, as in other contracts, that it is
contrary to morals or public policy. The grant of attorneyÊs fees
equivalent to 25% of the total amount due is, in our opinion, unrea-

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Palmares vs. Court of Appeals

sonable and immoderate, considering the minimal unpaid amount

involved and the extent of the work involved in this simple action
for collection of a sum of money. We, therefore, hold that the amount
of P10,000.00 as and for attorneyÊs fee would be sufficient in this
case.

PETITION for review on certiorari of a decision of the

Court of Appeals.

The facts are stated in the opinion of the Court.

Roco, Bunag, Kapunan & Migallos for petitioner.
Angelo E. Grasparil for private respondent.

REGALADO, J.:

Where a party signs a promissory note as a co-maker and

binds herself to be jointly and severally liable with the
principal debtor in case the latter defaults in the payment
of the loan, is such undertaking of the former deemed to be
that of a surety as an insurer of the debt, or of a guarantor
who warrants the solvency of the debtor?
Pursuant to a promissory note dated March 13, 1990,
private respondent M.B. Lending Corporation extended a
loan to the spouses Osmeña and Merlyn Azarraga, together
with petitioner Estrella Palmares, in the amount of
P30,000.00 payable on or before May 12, 1990, with

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compounded interest at the rate of 6% per annum 1

to be
computed every 30 days from the date thereof. On four
occasions after the execution of the promissory note and
even after the loan matured, petitioner and the Azarraga
spouses were able to pay a total of P16,300.00, thereby
leaving a balance of P13,700.00. No payments 2
were made
after the last payment on September 26, 1991.
Consequently, on the basis of petitionerÊs solidary
liability under the promissory note, respondent corporation
filed a

____________________________

1 Annex C, Petition; Rollo, 49.

2 Rollo, 38.

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3
complaint against petitioner Palmares as the lone
partydefendant, to the exclusion of the principal debtors,
allegedly by reason of the insolvency of the latter.4
In her Amended Answer with Counterclaim, petitioner
alleged that sometime in August 1990, immediately after
the loan matured, she offered to settle the obligation with
respondent corporation but the latter informed her that
they would try to collect from the spouses Azarraga and
that she need not worry about it; that there has already
been a partial payment in the amount of P17,010.00; that
the interest of 6% per month compounded at the same rate
per month, as well as the penalty charges of 3% per month,
are usurious and unconscionable; and that while she agrees
to be liable on the note but only upon default of the
principal debtor, respondent 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 submitted
the following issues for the resolution of the trial court; (1)
what the rate of interest, penalty and damages should be;
(2) whether the liability of the defendant (herein petitioner)
is primary or subsidiary; and (3) whether the defendant
Estrella Palmares is only a guarantor with a subsidiary

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5
liability and not a co-maker with primary liability.
Thereafter, the parties agreed to submit the case for
decision based on the pleadings filed and the memoranda to
be submitted by them. On November 26, 1992, the Regional
Trial Court of Iloilo City, Branch 23, rendered judgment
dismissing the complaint without prejudice to the filing of a
separate action for a sum of money against the spouses
Osmeña and Merlyn 6
Azarraga who are primarily liable on
the instrument. This was based on the findings of the
court a quo that the

____________________________

3 Annex D, id., ibid., 51.

4 Annex H, id., ibid., 69.
5 Rollo, 76.
6 Annex I, Petition; Rollo, 73; penned by Presiding Judge Tito G.
Gustilo.

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VOL. 288, MARCH 31, 1998 429

Palmares vs. Court of Appeals

filing of the complaint against herein petitioner Estrella

Palmares, to the exclusion of the Azarraga spouses,
amounted to a discharge of a prior party; that the offer
made by petitioner to pay the obligation is considered a
valid tender of payment sufficient to discharge a personÊs
secondary liability on the instrument; that petitioner, as co-
maker, is only secondarily liable on the instrument; and
that the promissory note is a contract of adhesion.
Respondent Court of Appeals, however, reversed the
decision of the trial court, and rendered judgment declaring
herein petitioner Palmares liable to pay respondent
corporation:

1. The sum of P13,700.00 representing the

outstanding balance still due and owing with
interest at six percent (6%) per month computed
from the date the loan was contracted until fully
paid;
2. The sum equivalent to the stipulated penalty of
three percent (3%) per month, of the outstanding
balance;
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3. AttorneyÊs fees at 25% of the total amount due per

stipulations;
7
4. Plus costs of suit.

Contrary to the findings of the trial court, respondent

appellate court declared that petitioner Palmares is a
surety since she bound herself to be jointly and severally or
solidarily liable with the principal debtors, the Azarraga
spouses, when she signed as a co-maker. As such, petitioner
is primarily liable on the note and hence may be sued by
the creditor corporation for the entire obligation. It also
adverted to the fact that the petitioner admitted her
liability in her Answer although she claims that the
Azarraga spouses should have been impleaded. Respondent
court ordered the imposition of the stipulated 6% interest
and 3% penalty charges on the ground that the Usury Law
is no longer enforceable pursuant

____________________________

7 Annex A, id., ibid., 36; Associate Justice Jose C. de la Rama, ponente,

with Associate Justices Emeterio C. Cui and Eduardo G. Montenegro,
concurring.

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430 SUPREME COURT REPORTS ANNOTATED

Palmares vs. Court of Appeals

to Central Bank Circular No. 905. Finally, it rationalized

that even if the promissory note were to be considered as a
contract of adhesion, the same is not entirely prohibited
because the one who adheres to the contract is free to reject
it entirely; if he adheres, he gives his consent.
Hence, this petition for review on certiorari wherein it is
asserted that:

A. The Court of Appeals erred in ruling that Palmares

acted as surety and is therefore solidarily liable to
pay the promissory note.

1. The terms of the promissory note are vague. Its

conflicting provisions do not establish PalmaresÊ
solidary liability.

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2. The promissory note contains provisions which

establish the co-makerÊs liability as that of a
guarantor.
3. There is no sufficient basis for concluding that
PalmaresÊ liability is solidary.
4. The promissory note is a contract of adhesion and
should be construed against M.B. Lending
Corporation.
5. Palmares cannot be compelled to pay the loan at
this point.

B. Assuming that PalmaresÊ liability is solidary, the

Court of Appeals erred in strictly imposing the
interests and penalty charges on the outstanding
balance of the promissory note.

The foregoing contentions of petitioner are denied and

contradicted in their material points by respondent
corporation. They are further refuted by accepted doctrines
in the American jurisdiction after which we patterned our
statutory law on suretyship and guaranty. This case then
affords us the opportunity to make an extended exposition
on the ramifications of these two specialized contracts, for
such guidance as may be taken therefrom in similar local
controversies in the future.
The basis of petitioner PalmaresÊ liability under the
promissory note is expressed in this wise:

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Palmares vs. Court of Appeals

ATTENTION TO CO-MAKERS: PLEASE READ WELL

I, Mrs. Estrella Palmares, as the Co-maker of the above-quoted

loan, have fully understood the contents of this Promissory Note for
Short-Term Loan:
That as Co-maker, I am fully aware that I shall be jointly and
severally or solidarily liable with the above principal maker of this
note;
That in fact, I hereby agree that M.B. LENDING
CORPORATION may demand payment of the above loan from me
in case the principal maker, Mrs. Merlyn Azarraga defaults in the

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payment of the note subject to the same conditions above-

8
contained.

Petitioner contends that the provisions of the second and

third paragraph are conflicting in that while the second
paragraph seems to define her liability as that of a surety
which is joint and solidary with the principal maker, on the
other hand, under the third paragraph her liability is
actually that of a mere guarantor because she bound
herself to fulfill the obligation only in case the principal
debtor should fail to do so, which is the essence of a
contract of guaranty. More simply stated, although the
second paragraph says that she is liable as a surety, the
third paragraph defines the nature of her liability as that
of a guarantor. According to petitioner, these are two
conflicting provisions in the promissory note and the rule is
that clauses in the contract should be interpreted in
relation to one another and not by parts. In other words,
the second paragraph should not be taken in isolation, but
should be read in relation to the third paragraph.
In an attempt to reconcile the supposed conflict between
the two provisions, petitioner avers that she could be held
liable only as a guarantor for several reasons. First, the
words „jointly and severally or solidarily liable‰ used in the
second paragraph are technical and legal terms which are
not fully appreciated by an ordinary layman like herein
petitioner, a 65-year old housewife who is likely to enter
into such transac-

____________________________

8 Rollo, 50.

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Palmares vs. Court of Appeals

tions without fully realizing the nature and extent of her

liability. On the contrary, the wordings used in the third
paragraph are easier to comprehend. Second, the law looks
upon the contract of suretyship with a jealous eye and the
rule is that the obligation of the surety cannot be extended
by implication beyond specified limits, taking into
consideration the peculiar nature of a surety agreement

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which holds the surety liable despite the absence of any

direct consideration received from either the principal
obligor or the creditor. Third, the promissory note is a
contract of adhesion since it was prepared by respondent
M.B. Lending Corporation. The note was brought to
petitioner partially filled up, the contents thereof were
never explained to her, and her only participation was to
sign thereon. Thus, any apparent ambiguity in the contract
should be strictly construed against 9private respondent
pursuant to Art. 1377 of the Civil Code.
Petitioner accordingly concludes that her liability should
be deemed restricted by the clause in the third paragraph
of the promissory note to be that of a guarantor.
Moreover, petitioner submits that she cannot as yet be
compelled to pay the loan because the principal debtors
cannot be considered in default in the absence of a judicial
or extrajudicial demand. It is true that the complaint
alleges the fact of demand, but the purported demand
letters were never attached to the pleadings filed by private
respondent before the trial court. And, while petitioner
may have admitted in her Amended Answer that she
received a demand letter from respondent corporation
sometime in 1990, the same did not effectively put her or
the principal debtors in default for the simple reason that
the latter subsequently made a partial payment on the loan
in September, 1991, a fact which was never controverted by
herein private respondent.
Finally, it is argued that the Court of Appeals gravely
erred in awarding the amount of P2,745,483.39 in favor of
private

____________________________

9 Art. 1377. The interpretation of obscure words or stipulations in a

contract shall not favor the party who caused the obscurity.

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Palmares vs. Court of Appeals

respondent when, in truth and in fact, the outstanding

balance of the loan is only P13,700.00. Where the interest
charged on the loan is exorbitant, iniquitous or
unconscionable, and the obligation has been partially

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10
complied with, the court may equitably reduce the penalty
on grounds of substantial justice. More importantly,
respondent corporation never refuted petitionerÊs allegation
that immediately after the loan matured, she informed said
respondent of her desire to settle the obligation. The court
should, therefore, mitigate the damages to be paid since 11
petitioner has shown a sincere desire for a compromise.
After a judicious evaluation of the arguments of the
parties, we are constrained to dismiss the petition for lack
of merit, but to except therefrom the issue anent the
propriety of the monetary award adjudged to herein
respondent corporation.
At the outset, let it here be stressed that even assuming
arguendo that the promissory note executed between the
parties is a contract of adhesion, it has been the consistent
holding of the Court that contracts of adhesion are not
invalid per se and that on numerous occasions the binding
effects thereof have been upheld. The peculiar nature of
such contracts necessitate a close scrutiny of the factual
milieu to which the provisions are intended to apply.
Hence, just as consistently and unhesitatingly, but without
categorically invalidating such contracts, the Court has
construed obscurities and ambiguities in the restrictive
provisions of contracts of adhesion strictly albeit not
unreasonably against the drafter thereof when justified in
light of the
12
operative facts and surrounding
circumstances. The factual scenario obtaining in the case
before us warrants a liberal application of the rule in favor
of respondent corporation.

____________________________

10 Article 1229, Civil Code.

11 Citing Article 2031, id.
12 Philippine Airlines, Inc. vs. Court of Appeals, et al., G.R. No.
119706, March 14, 1996, 255 SCRA 48.

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Palmares vs. Court of Appeals

The Civil Code pertinently provides:

Art. 2047. By guaranty, a person called the guarantor binds himself

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to the creditor to fulfill the obligation of the principal debtor in case

the latter should fail to do so.
If a person binds himself solidarily with the principal debtor, the
provisions of Section 4, Chapter 3, Title I of this Book shall be
observed. In such case the contract is called a suretyship.

It is a cardinal rule in the interpretation of contracts that if

the terms of a contract are clear and leave no doubt upon
the intention of the contracting parties,
13
the literal meaning
of its stipulation shall control. In the case at bar,
petitioner expressly bound herself to be jointly and
severally or solidarily liable with the principal maker of the
note. The terms of the contract are clear, explicit and
unequivocal that petitionerÊs liability is that of a surety.
Her pretension that the terms „jointly and severally or
solidarily liable‰ contained in the second paragraph of her
contract are technical and legal terms which could not be
easily understood by an ordinary layman like her is
diametrically opposed to her manifestation in the contract
that she „fully understood the contents‰ of the promissory
note and that she is „fully aware‰ of her solidary liability
with the principal maker. Petitioner admits that she
voluntarily affixed her signature thereto; ergo, she cannot
now be heard to claim otherwise. Any reference to the
existence of fraud is unavailing. Fraud must be established
by clear and convincing evidence, mere preponderance of
evidence not even being adequate. PetitionerÊs attempt to
prove fraud must, therefor, fail as it was evidenced only by
her own uncorroborated
14
and, expectedly, self-serving
allegations.

____________________________

13 Abella vs. Court of Appeals, et al., G.R. No. 107606, June 20, 1996,
257 SCRA 482.
14 Inciong, Jr. vs. Court of Appeals, et al., G.R. No. 96405, June 26,
1996, 257 SCRA 578.

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Having entered into the contract with full knowledge of its

terms and conditions, petitioner is estopped to assert that

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she did so under a misapprehension or in ignorance of their 15

legal effect, or as to the legal effect of the undertaking.
The rule that ignorance of the contents of an instrument
does not ordinarily affect the liability of one who signs it
also applies to contracts of suretyship. And the mistake of a
surety as to the legal effect of her obligation
16
is ordinarily no
reason for relieving her of liability.
Petitioner would like to make capital of the fact that
although she obligated herself to be jointly and severally
liable with the principal maker, her liability is deemed
restricted by the provisions of the third paragraph of her
contract wherein she agreed „that M.B. Lending
Corporation may demand payment of the above loan from
me in case the principal maker, Mrs. Merlyn Azarraga
defaults in the payment of the note,‰ which makes her
contract one of guaranty and not suretyship. The purported
discordance is more apparent than real.
A surety is an insurer of the debt, whereas17
a guarantor
is an insurer of the solvency of the debtor. A suretyship is
an undertaking that the debt shall be paid;
18
a guaranty, an
undertaking that the debtor shall pay. Stated differently,
a surety promises to pay the principalÊs debt if the principal
will not pay, while a guarantor agrees that the creditor,
after proceeding against the principal, may proceed 19
against
the guarantor if the principal is unable to pay. A surety
binds himself to perform if the principal does not, without
regard to his ability to do so. A guarantor, on the other
hand, does not contract that the principal will pay, but
simply that he is able

____________________________

15 72 CJS, Principal and Surety, § 83, 565.

16 Churchill vs. Bradley, 5 A. 189.
17 Northern State Bank of Grand Forks vs. Bellamy, 125 N.W. 888.
18 Shearer vs. R.S. Peele & Co., 36 N.E. 455.
19 W.T. Rawleigh Co. vs. Overstreet, et al., 32 S.E. 2d 574.

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436 SUPREME COURT REPORTS ANNOTATED

Palmares vs. Court of Appeals

20
to do so. In other words, a surety undertakes directly for
the payment and is so responsible at once if the principal

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debtor makes default, while a guarantor contracts to pay if,

by the use of due diligence,
21
the debt cannot be made out of
the principal debtor.
Quintessentially, the undertaking to pay upon default of
the principal debtor does not automatically remove it from
the ambit of a contract of suretyship. The second and third
paragraphs of the aforequoted portion of the promissory
note do not contain any other condition for the enforcement
of respondent corporationÊs right against petitioner. It has
not been shown, either in the contract or the pleadings,
that respondent corporation agreed to proceed against
herein petitioner only if and when the defaulting principal
has become insolvent. A contract of suretyship, to repeat, is
that wherein one lends his credit by joining in the principal
debtorÊs obligation, so as to render himself directly and
primarily responsible with him,22
and without reference to
the solvency of the principal.
In a desperate effort to exonerate herself from liability,
petitioner erroneously invokes the rule on strictissimi juris,
which holds that when the meaning of a contract of
indemnity or guaranty has once been judicially determined
under the rule of reasonable construction applicable to all
written contracts, then the liability of the surety, under his
contract, as thus interpreted and construed,
23
is not to be
extended beyond its strict meaning. The rule, however,
will apply only after it has been definitely ascertained that
the contract is one of suretyship and not a contract of
guaranty. It cannot be used as an aid in determining
whether a partyÊs undertaking is that of a surety or a
guarantor.

____________________________

20 Manry vs. Waxelbaum Co., 33 S.E. 701.

21 40A Words and Phrases 429.
22 Erbelding vs. Noland Co., Inc., 64 S.E. 2d 218.
23 Covey, et al. vs. Schiesswohl, 114 P. 292.

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Palmares vs. Court of Appeals

Prescinding from these jurisprudential authorities, there

can be no doubt that the stipulation contained in the third

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paragraph of the controverted suretyship contract merely

elucidated on and made more specific the obligation of
petitioner as generally defined in the second paragraph
thereof. Resultantly, the theory advanced by petitioner,
that she is merely a guarantor because her liability
attaches only upon default of the principal debtor, must
necessarily fail for being incongruent with the judicial
pronouncements adverted to above.
It is a well-entrenched rule that in order to judge the
intention of the contracting parties, their contemporaneous 24
and subsequent acts shall also be principally considered.
Several attendant factors in that genre lend support to our
finding that petitioner is a surety. For one, when petitioner
was informed about the failure of the principal debtor to
pay the loan, she immediately offered to settle the account
with respondent corporation. Obviously, in her mind, she
knew that she was directly and primarily liable upon
default of her principal. For another, and this is most
revealing, petitioner presented the receipts of the payments
already made, from the time of initial payment up to the
last, which
25
were all issued in her name and of the Azarraga
spouses. This can only be construed to mean that the
payments made by the principal debtors were considered
by respondent corporation as creditable directly upon the
account and inuring to the benefit of petitioner. The
concomitant and simultaneous compliance of petitionerÊs
obligation with that of her principals only goes to show
that, from the very start, petitioner considered herself
equally bound by the contract of the principal makers.
In this regard, we need only to reiterate the rule that 26
a
surety is bound equally and absolutely with the principal,
and as such is deemed an original promisor and debtor
from

____________________________

24 Article 1371, Civil Code.

25 Rollo, 67-68.
26 18A Words and Phrases 657.

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27
the beginning. This is because in suretyship there is but
one contract, and the surety is bound 28
by the same
agreement which binds the principal. In essence, 29
the
contract of a surety starts with the agreement, which is
precisely the situation obtaining in this case before the
Court.
It will further be observed that petitionerÊs undertaking
as co-maker immediately follows the terms and conditions
stipulated between respondent corporation, as creditor, and
the principal obligors. A surety is usually bound with his
principal by the same instrument, executed at the same
time and upon the same consideration; he is an 30
original
debtor, and his liability is immediate and direct. Thus, it
has been held that where a written agreement on the same
sheet of paper with and immediately following the
principal contract between the buyer and seller is executed
simultaneously therewith, providing that the signers of the
agreement agreed to the terms of the principal contract, 31
the signers were „sureties‰ jointly liable with the buyer. A
surety usually enters into the same obligation as that of his
principal, and the signatures of both usually appear upon
the same instrument, and the same consideration usually
supports32
the obligation for both the principal and the
surety.
There is no merit in petitionerÊs contention that the
complaint was prematurely filed because the principal
debtors cannot as yet be considered in default, there having
been no judicial or extrajudicial demand made by
respondent corporation. Petitioner has agreed that
respondent corporation may demand payment of the loan
from her in case the principal maker defaults, subject to
the same conditions expressed in the promissory note.
Significantly, paragraph (G) of the note states that „should
I fail to pay in accordance with the above

____________________________

27 Hall, et al. vs. Weaver, 34 F. 104.

28 Howell vs. Commissioner of Internal Revenue, 39 F. 2d 447.
29 Shores-Mueller Co. vs. Palmer, et al., 216 S.W. 295.
30 Treweek vs. Howard, et al., 39 P. 20.
31 W.T. Rawleigh Co. vs. Overstreet, et al., 32 S.E. 2d 574.
32 Liquidating Midland Bank vs. Stecker, et al., 179 N.E. 504.

439

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VOL. 288, MARCH 31, 1998 439

Palmares vs. Court of Appeals

schedule of payment, I hereby waive my right to notice and

demand.‰ Hence, demand by the creditor is no longer
necessary in order that delay may 33exist since the contract
itself already expressly so declares. As a surety, petitioner
is equally bound by such waiver.
Even if it were otherwise, demand on the sureties is not
necessary before bringing suit against them, since 34
the
commencement of the suit is a sufficient demand. On this
point, it may be worth mentioning that a surety is not even
entitled, as a matter of right, to be given notice of the
principalÊs default. Inasmuch as the creditor owes no duty
of active diligence to take care of the interest of the surety,
his mere failure to voluntarily give information to the
surety of the default of the principal cannot have the effect
of discharging the surety. The surety is bound to take
notice of the principalÊs default and to perform the
obligation. He cannot complain that the creditor has not
notified him in the absence of a special
35
agreement to that
effect in the contract of suretyship.
The alleged failure of respondent corporation to prove
the fact of demand on the principal debtors, by not
attaching copies thereof to its pleadings, is likewise
immaterial. In the absence of a statutory or contractual
requirement, it is not necessary that payment or
performance of his obligation be first demanded of the
principal, especially where demand would have been
useless; nor is it a requisite, before proceeding against36
the
sureties, that the principal be called on to account. The
underlying principle therefor is that a suretyship is a direct
contract to pay the debt of another. A surety is liable as
much as his principal is liable, and absolutely liable as
soon as default is made, without any demand upon 37
the
principal whatsoever or any notice of default. As an
original

____________________________

33 Article 1169, Civil Code.

34 Rowe, et al. vs. Bank of New Brockton, 92 So. 643.
35 74 Am Jur 2d, Principal and Surety, § 35, 36.
36 Smith vs. US, 8 L Ed 130.
37 Rouse, et al. vs. Wooten, 53 S.E. 430.

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440 SUPREME COURT REPORTS ANNOTATED

Palmares vs. Court of Appeals

promisor and debtor from the beginning, he 38

is held
ordinarily to know every default of his principal.
Petitioner questions the propriety of the filing of a
complaint solely against her to the exclusion of the
principal debtors who allegedly were the only ones who
benefited from the proceeds of the loan. What petitioner is
trying to imply is that the creditor, herein respondent
corporation, should have proceeded first against the
principal before suing on her obligation as surety. We
disagree.
A creditorÊs right to proceed against the surety exists
independently
39
of his right to proceed against the
principal. Under Article 1216 of the Civil Code, the
creditor may proceed against any one of the solidary
debtors or some or all of them simultaneously. The rule,
therefore, is that if the obligation is joint and several, the
creditor
40
has the right to proceed even against the surety
alone. Since, generally, it is not necessary for a creditor to
proceed against a principal in order to hold the surety
liable, where, by the terms of the contract, the obligation of
the surety is the same as that of the principal, then as soon
as the principal is in default, the surety is likewise in
default, and may be sued immediately and 41
before any
proceedings are had against the principal. Perforce, in
accordance with the rule that, in the absence of statute or
agreement otherwise, a surety is primarily liable, and with
the rule that his proper remedy is to pay the debt and
pursue the principal for reimbursement, the surety cannot
at law, unless permitted by statute and in the absence of
any agreement limiting the application of the security,
require the creditor or obligee, before proceeding against
the surety, to resort to and

____________________________

38 Hall vs. Weaver, 34 F. 104.

39 Christenson vs. Diversified Builders, Inc., et al., 331 F. 2d 992.
40 74 Am Jur 2d, Principal and Surety, § 144, 103.
41 Standard Accident Insurance Co. vs. Standard Oil Co., 133 So. 2d

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539; School District No. 65 of Lincoln County vs. universal Surety Co.,
135 N.W. 2d 232; Depot Realty Syndicate vs. Enterprise Brewing Co., 171
P. 223.

441

VOL. 288, MARCH 31, 1998 441

Palmares vs. Court of Appeals

exhaust his remedies against the principal, particularly

42
where both principal and surety are equally bound.
We agree with respondent corporation that its mere
failure to immediately sue petitioner on her obligation does
not release her from liability. Where a creditor refrains
from proceeding against the principal, the surety is not
exonerated. In other words, mere want of diligence or
forbearance does not affect the creditorÊs rights vis-a-vis
the surety, unless the surety requires him by appropriate
notice to sue on the obligation. Such gratuitous indulgence
of the principal does not discharge the surety whether
given at the principalÊs request or without it, and whether
it is yielded by the creditor through sympathy or from an
inclination to favor the principal, or is only the result of
passiveness. The neglect of the creditor to sue the principal
at the time the debt falls due does not discharge the surety,
even if such
43
delay continues until the principal becomes
insolvent. And, in the absence of proof of resultant injury,
a surety is not discharged by the creditorÊs mere44
statement
that the creditor will not45 look to the surety, or that he
need not trouble himself. The consequences of the 46
delay,
such as the subsequent insolvency of the principal, or the
fact that the remedies against47 the principal may be lost by
lapse of time, are immaterial.
The raison dÊêtre for the rule is that there is nothing to
prevent the 48creditor from proceeding against the principal
at any time. At any rate, if the surety is dissatisfied with
the degree of activity displayed by the creditor in the
pursuit of his prin-

____________________________

42 72 CJS, Principal and Surety, § 287, 744-745.

43 74 Am Jur 2d, Principal and Surety, § 68, 53-54.
44 First National Bank of Huntington vs. Williams, et al., 26 N.E. 75.
45 National Bank of Commerce vs. Gilvin, 152 S.W. 652.

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46 Kerby, et al. vs. State ex rel. Frohmiller, 157 P. 2d 698.

47 72 CJS, Principal and Surety, § 208, 673.
48 Scott vs. Gaulding, et al., 122 ALR 200.

442

442 SUPREME COURT REPORTS ANNOTATED

Palmares vs. Court of Appeals

cipal, he may pay the debt himself and become 49

subrogated
to all the rights and remedies of the creditor.
It may not be amiss to add that leniency shown to a
debtor in default, by delay permitted by the creditor
without change in the time when the debt might be
demanded, does not constitute an extension50of the time of
payment, which would release the surety. In order to
constitute an extension discharging the surety, it should
appear that the extension was for a definite period,
pursuant to an enforceable agreement between the
principal and the creditor, and that it was made without
the consent of the surety or with a reservation of rights
with respect to him. The contract must be one which
precludes the creditor from, or at least hinders him in,
enforcing the principal contract within the period during
which he could otherwise have enforced 51
it, and which
precludes the surety from paying the debt.
None of these elements are present in the instant case.
Verily, the mere fact that respondent corporation gave the
principal debtors an extended period of time within which
to comply with their obligation did not effectively absolve
herein petitioner from the consequences of her
undertaking. Besides, the burden is on the surety, herein
petitioner, to show52that she has been discharged by some
act of the creditor, herein respondent corporation, failing
in which we cannot grant the relief prayed for.
As a final issue, petitioner claims that assuming that
her liability is solidary, the interests and penalty charges
on the outstanding balance of the loan cannot be imposed
for being illegal and unconscionable. Petitioner additionally
theorizes that respondent corporation intentionally delayed
the collection of the loan in order that the interests and
penalty

____________________________

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49 74 Am Jur 2d, Principal and Surety, § 68, 53.

50 Ibid., id., § 59, 48-49.
51 72 CJS, Principal and Surety, § 173, 651.
52 Op. cit., § 270, 723.

443

VOL. 288, MARCH 31, 1998 443

Palmares vs. Court of Appeals

charges would accumulate. The statement, likewise

traversed by said respondent,
53
is misleading.
In an affidavit executed by petitioner, which was
attached to her petition, she stated, among others, that:

8. During the latter part of 1990, I was surprised to

learn that Merlyn AzarragaÊs loan has been
released and that she has not paid the same upon
its maturity. I received a telephone call from Mr.
Augusto Banusing of MB Lending informing me of
this fact and of my liability arising from the
promissory note which I signed.
9. I requested Mr. Banusing to try to collect first from
Merlyn and Osmeña Azarraga. At the same time, I
offered to pay MB Lending the outstanding balance
of the principal obligation should he fail to collect
from Merlyn and Osmeña Azarraga. Mr. Banusing
advised me not to worry because he will try to
collect first from Merlyn and Osmeña Azarraga.
10. A year thereafter, I received a telephone call from
the secretary of Mr. Banusing who reminded that
the loan of Merlyn and Osmeña Azarraga, together
with interest and penalties thereon, has not been
paid. Since I had no available funds at that time, I
offered to pay MB Lending by delivering to them a
parcel of land which I own. Mr. BanusingÊs
secretary, however, refused my offer for the reason
that they are not interested in real estate.
11. In March 1992, I received a copy of the summons
and of the complaint filed against me by MB
Lending before the RTC-Iloilo. After learning that a
complaint was filed against me, I instructed Sheila
Gatia to go to MB Lending and reiterate my first
offer to pay the outstanding balance of the principal

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obligation of Merlyn Azarraga in the amount of

P30,000.00.
12. Ms. Gatia talked to the secretary of Mr. Banusing
who referred her to Atty. Venus, counsel of MB
Lending.
13. Atty. Venus informed Ms. Gatia that he will consult
Mr. Banusing if my offer to pay the outstanding
balance of the principal obligation loan (sic) of
Merlyn and Osmeña Azarraga is acceptable. Later,
Atty. Venus informed Ms. Gatia that my offer is not
acceptable to Mr. Banusing.

____________________________

53 Annex E, Petition; Rollo, 54.

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444 SUPREME COURT REPORTS ANNOTATED

Palmares vs. Court of Appeals

The purported offer to pay made by petitioner can not be

deemed sufficient and substantial in order to effectively
discharge her from liability. There are a number of
circumstances which conjointly inveigh against her
aforesaid theory.

1. Respondent corporation cannot be faulted for not

immediately demanding payment from petitioner. It
was petitioner who initially requested that the
creditor try to collect from her principal first, and
she offered to pay only in case the creditor fails to
collect. The delay, if any, was occasioned by the fact
that respondent corporation merely acquiesced to
the request of petitioner. At any rate, there was
here no actual offer of payment to speak of but only
a commitment to pay if the principal does not pay.
2. Petitioner made a second attempt to settle the
obligation by offering a parcel of land which she
owned. Respondent corporation was acting well
within its rights when it refused to accept the offer.
The debtor of a thing cannot compel the creditor to
receive a different one, although the latter may be
of the same value, or more valuable than that

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54
which is due. The obligee is entitled to demand
fulfillment of the obligation or performance as
stipulated. A change of the object of the obligation
would constitute novation
55
requiring the express
consent of the parties.
3. After the complaint was filed against her, petitioner
reiterated her offer to pay the outstanding balance
of the obligation in the amount of P30,000.00 but
the same was likewise rejected. Again, respondent
corporation cannot be blamed for refusing the
amount being offered because it fell way below the
amount it had computed, based on the stipulated
interests and penalty charges, as owing and due
from herein petitioner. A debt shall not be
understood to have been paid unless the thing or
service in which the obligation consists has been
completely delivered or rendered, as the case

____________________________

54 Article 1244, Civil Code.

55 Padilla, A., Civil Code Annotated, Vol. IV, 1987 ed., 434.

445

VOL. 288, MARCH 31, 1998 445

Palmares vs. Court of Appeals
56
may be. In other words, the prestation must be
fulfilled completely. A person entering into a
contract has a 57right to insist on its performance in
all particulars.

Petitioner cannot compel respondent corporation to accept

the amount she is willing to pay because the moment the
latter accepts the performance, knowing its incompleteness
or irregularity, and without expressing any protest or
objection, then 58 the obligation shall be deemed fully
complied with. Precisely, this is what respondent
corporation wanted to avoid when it continually refused to
settle with petitioner at less than what was actually due
under their contract.
This notwithstanding, however, we find and so hold that
the penalty charge of 3% per month and attorneyÊs fees

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equivalent to 25% of the total amount due are highly

inequitable and unreasonable.
It must be remembered that from the principal loan of
P30,000.00, the amount of P16,300.00 had already been
paid even before the filing of the present case. Article 1229
of the Civil Code provides that the court shall equitably
reduce the penalty when the principal obligation has been
partly or irregularly complied with by the debtor. And, even
if there has been no performance, the penalty may also be
reduced if it is iniquitous or leonine.
In a case previously decided by this Court which
likewise involved private respondent M.B. Lending
Corporation, and which is substantially on all fours with
the one at bar, we decided to eliminate altogether the
penalty interest for being excessive and unwarranted
under the following rationalization:

Upon the matter of penalty interest, we agree with the Court of

Appeals that the economic impact of the penalty interest of three
percent (3%) per month on total amount due but unpaid should be

____________________________

56 Article 1233, Civil Code.

57 Tolentino, A., Commentaries and Jurisprudence on the Civil Code of the
Philippines, Vol. IV, 1986 ed., 280.
58 Article 1235, Civil Code.

446

446 SUPREME COURT REPORTS ANNOTATED

Palmares vs. Court of Appeals

equitably reduced. The purpose for which the penalty interest is

intended·that is, to punish the obligor·will have been sufficiently
served by the effects of compounded interest. Under the exceptional
circumstances in the case at bar, e.g., the original amount loaned
was only P15,000.00; partial payment of P8,600.00 was made on
due date; and the heavy (albeit still lawful) regular compensatory
interest, the penalty interest stipulated in the partiesÊ promissory
note is iniquitous and unconscionable and may be equitably reduced
59
further by eliminating such penalty interest altogether.

Accordingly, the penalty interest of 3% per month being

imposed on petitioner should similarly be eliminated.
Finally, with respect to the award of attorneyÊs fees, this

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Court has previously ruled that even with an agreement

thereon between the parties, the court may nevertheless
reduce such attorneyÊs fees fixed in the contract when the
amount thereof 60
appears to be unconscionable or
unreasonable. To that end, it is not even necessary to
show, as in other
61
contracts, that it is contrary to morals or
public policy. The grant of attorneyÊs fees equivalent to
25% of the total amount due is, in our opinion,
unreasonable and immoderate, considering the minimal
unpaid amount involved and the extent of the work
involved in this simple action for collection of a sum of
money. We, therefore, hold that the amount of P10,000.00 62
as and for attorneyÊs fee would be sufficient in this case.
WHEREFORE, the judgment appealed from is hereby
AFFIRMED, subject to the MODIFICATION that the
penalty interest of 3% per month is hereby deleted and the
award of attorneyÊs fees is reduced to P10,000.00.

____________________________

59 Magallanes, et al. vs. Court of Appeals, et al., G.R. No. 112614, May
16, 1994, Third Division, Minute Resolution.
60 Security Bank & Trust Co., et al. vs. Court of Appeals, et al., G.R.
No. 117009, October 11, 1995, 249 SCRA 206.
61 Medco Industrial Corporation, et al. vs. The Hon. Court of Appeals,
et al., G.R. No. 84610, November 24, 1988, 167 SCRA 838.
62 Supra, fn. 59.

447

VOL. 288, MARCH 31, 1998 447

Osmeña vs. Commission on Elections

SO ORDERED.

Melo, Puno, Mendoza and Martinez, JJ., concur.

Appealed judgment affirmed with modification.

Note.·Although a contract of surety is ordinarily not to

be construed as retrospective in the end the intention of the
parties as revealed by the evidence is controlling. (Willex
Plastic Industries Corporation vs. Court of Appeals, 256
SCRA 478 [1996])

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