MACHETTI v.

HOSPICIO DE SAN JOSE It appears from the evidence that on July 17, 1916, one Romulo Machetti, by a written agreement undertook to construct a building on Calle Rosario in the city of Manila for the Hospicio de San Jose, the contract price being P64,000. One of the conditions of the agreement was that the contractor should obtain the "guarantee" of the Fidelity and Surety Company of the Philippine Islands to the amount of P128,800 and the following endorsement in the English language appears upon the contract: MANILA, July 15, 1916. FIDELITY AND SURETY COMPANY OF THE PHILIPPINE ISLANDS. (Sgd) OTTO VORSTER, Vice-President. Machetti constructed the building under the supervision of architects representing the Hospicio de San Jose and, as the work progressed, payments were made to him from time to time upon the recommendation of the architects, until the entire contract price, with the exception of the sum of the P4,978.08, was paid. Subsequently it was found that the work had not been carried out in accordance with the specifications which formed part of the contract and that the workmanship was not of the standard required, and the Hospicio de San Jose therefore answered the complaint and presented a counterclaim for damages for the partial noncompliance with the terms of the agreement abovementioned, in the total sum of P71,350. After issue was thus joined, 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 with section 60 of the Insolvency Law, Act No. 1956. The Hospicio de San Jose on January 29, 1919, filed a motion asking that the Fidelity and Surety Company be made cross-defendant to the exclusion of Machetti and that the proceedings be continued as to said company, but still remain suspended as to Machetti. This motion was granted and on February 7, 1920, the Hospicio filed a complaint against the Fidelity and Surety Company asking for a judgement for P12,800 against the company upon its guaranty. After trial, the Court of First Instance rendered judgment against the Fidelity and Surety Company for P12,800 in accordance with the complaint. The case is now before this court upon appeal by the Fidelity and Surety Company form said judgment. As will be seen, the original action which Machetti was the plaintiff and the Hospicio de San Jose defendant, has been converted into an action in which the Hospicio de San Jose is plaintiff and the Fidelity and Surety Company, the original plaintiff's guarantor, is the defendant, Machetti having been practically eliminated from the case. But in this instance the guarantor's case is even stronger than that of an ordinary surety. The contract of guaranty is written in the English language and the terms employed must of course be given the signification which ordinarily attaches to them in that language. In English the term "guarantor" implies an undertaking of guaranty, as distinguished from suretyship. It is very true that notwithstanding the use of the words "guarantee" or "guaranty" circumstances may be shown which convert the contract into one of suretyship but such circumstances do not exist in the present case; on the contrary it appear affirmatively that the contract is the guarantor's separate undertaking in which the principal does not join, that its rests on a separate consideration moving from the principal and that although it is written in continuation of the contract for the construction of the building, it is a collateral undertaking separate and distinct from the latter. All of these circumstances are distinguishing features of contracts of guaranty. Now, while a surety undertakes to pay if the principal does not pay, the guarantor only binds himself to pay if the principal cannot pay. The one is the insurer of the debt, the other an insurer of the solvency of the debtor. (Saintvs. Wheeler & Wilson Mfg. Co., 95 Ala., 362; Campbell, vs. Sherman, 151 Pa. St., 70; Castellvi de Higgins and Higgins vs. Sellner, 41 Phil., 142; ;U.S. vs. Varadero de la Quinta, 40 Phil., 48.) This latter liability is what the Fidelity and Surety Company assumed in the present case. The undertaking is perhaps not exactly that of a fianzaunder the Civil Code, but is a perfectly valid contract and must be given the legal effect if ordinarily carries. The Fidelity and Surety Company having bound itself to pay only the event its principal, Machetti, cannot pay it follows that it cannot be compelled to pay until it is shown that Machetti is unable to pay. Such ability may be proven by the return of a writ of execution unsatisfied or by other means, but is not sufficiently established by the mere fact that he has been declared insolvent in insolvency proceedings under our statutes, in which the extent of the insolvent's inability to pay is not determined until the final liquidation of his estate.

The judgment appealed from is therefore reversed without costs and without prejudice to such right of action as the cross-complainant, the Hospicio de San Jose, may have after exhausting its remedy against the plaintiff Machetti. So ordered.

EXERPT:

Romulo Machetti, in a written agreement with Hospicio de San Jose undertook to construct a bulding for P64,000, with the condition that the contractor should obtain a "guarantee" of the Fidelity and Surety Company of the Philippine Islands to the amount of 128,000 Php. For value received we hereby guarantee compliance with the terms and conditions as outlined in the above contract. Petitioner constructed building and payments were made to him from time to time until the contract price, except P4978.08 was paid. However, it was found out that the work had not been carried out in the standard required, so respondents answered the complaint and presented a counterclaim for damages for the partial non-compliance with terms of the agreement, in the total sum of P71,350. Machetti was then declared insolvent.

Respondent asked that F&S Co. be made cross-defendant to the exclusion of Machetti. The original action which Machetti was the plaintiff and the Hospicio de San Jose defendant, has been converted into an action in which the Hospicio de San Jose is plaintiff and the Fidelity and Surety Company, the original plaintiff's guarantor, is the defendant, Machetti having been practically eliminated from the case. English the term "guarantor" implies an undertaking of guaranty, as distinguished from suretyship. It is very true that notwithstanding the use of the words "guarantee" or "guaranty" circumstances may be shown which convert the contract into one of suretyship but such circumstances do not exist in the present case; on the contrary it appear affirmatively that the contract is the guarantor's separate undertaking in which the principal does not join, that its rests on a separate consideration moving from the principal and that although it is written in continuation of the contract for the construction of the building, it is a collateral undertaking separate and distinct from the latter. All of these circumstances are distinguishing features of contracts of guaranty. The guarantor only binds himself to pay if the principal cannot pay. The Fidelity and Surety Company having bound itself to pay only the event its principal, Machetti, cannot pay it follows that it cannot be compelled to pay until it is shown that Machetti is unable to pay. The judgment appealed from is therefore reversed without costs and without prejudice to such right of action as the cross-complainant, the Hospicio de San Jose, may have after exhausting its remedy against the plaintiff Machetti. So ordered.

PNB v. LUZON Surety Company This is an appeal from a judgment of the Court of First Instance of Nueva Ecija "declaring that the Philippine National Bank had acquired absolute ownership of the rights, interests, and participation of the spouses Paulino Candelaria and Dionisia Tecson in the parcels of land covered by Transfer Certificate of Title No. T-6241 now Transfer Certificate of Title No. T-12343 and Transfer Certificate of Title No. T6242 now Transfer Certificate Of Title No. T-12344; declaring that the defendant Luzon Surety Company acquired nothing by virtue of the final bill of sale executed in its favor by the Provincial Sheriff, Exhibits 6 and 7, except the right of redemption which had been lost; ordering the cancellation of the notice of attachment, Entry No. 15019 NT-6364 in favor of the Luzon Surety Company on Transfer Certificate of Title No. NT-12343, as well as the certificate of sale in favor of the Luzon Surety Company, Entry No. 32264, NT-6241, and the notice of attachment and certificate of sale on transfer Certificate of Title No. NT-12344, Entries Nos. 15019, NT-3664, and No. 32264, No. NT-6241; and finally declaring the rights of

the Philippine National Bank to the said properties free from any claim, lien or incumbrances in favor of the Luzon Surety Company. With costs against the defendant." Form this judgement, the defendant Luzon Surety Company appealed to this Court purely on question of law. Inasmuch as the questions of fact as found by the trial court are not disputed, we will quote hereunder the pertinent portion necessary for the decision of this case: In Civil Case No. 7647 of the Court of First Instance of Manila, entitled Philippine National Bank vs. Paulino Candelaria, et al., the Philippine National Bank attached the rights, interest and participation of Paulino Candelaria and Dionisia Tecson in the parcels of land covered by Transfer Certificates of Titles Nos. 21035 and 21045 of the Register of Deeds of Nueva Ecija Exhibit B. The writ of attachment which is dated March 25, 1949 was registered and annotated in Certificate of Title No. 21035, Exhibit F, and No. 21045, Exhibit G, on March 25, 1949. Transfer Certificates of Title No. 21035, Exhibit F, was cancelled by Transfer Certificates of Title No. NT6241, Exhibit H, which in turn was cancelled by Transfer Certificate of Title No. NT-12343, Exhibit J. Transfer Certificate of Title No. NT-6242, Exhibit I, which in turn was cancelled by Transfer Certificate of Title No. NT-12344, Exhibit K. All these certificates of title carry the attachment in favor of the Philippine National Bank. On October 13, 1950, Paulino Candelaria and Dionisia Tecson assigned and conveyed to the Philippine National Bank several parcels of land, among which were those covered by Transfer Certificates of Title No. 21035 and 21045 in consideration of the judgment rendered against them in Civil Case No. 7647. This deed of assignment had not been registered or annotated in the certificate of title. Pursuant to the judgment in Civil Case No. 7647, several parcels of land, including the parcels of land in question then covered by Transfer Certificates of Title No. N-6241 and NT-6242, were sold at public auction in which the Philippine National Bank was the highest bidder, and the Provincial Sheriffex-officio executed a certificate of sale in favor of the Philippine National Bank dated April 1, 1952, Exhibit D. This certificate of sale was registered and annotated on Transfer Certificates of Title No. NT-12348 and NT-12344 on December 24, 1954. In Civil Case No. 5633 of the Court of First Instance of Manila, entitled, Rafael Viola vs. Ricardo Linsangan, et al., the rights interest and participation of the spouses Paulino Candelaria and Dionisia Tecson in the parcels covered by T.C.T. Nos. 21035 and 21646 were attached by the Luzon Surety Company. The writ of attachment, Exhibit 2-A, was registered and annotated on certificate of title on April, 5, 1949. By virtue of the judgment rendered in the same Civil Case No. 5633, the properties of Paulino Candelaria, including his rights, participation, and interests in the lands now in question, covered by Transfer Certificates of Title Nos. 12343 and 12344, were sold public auction, in which the Luzon Surety Company was the highest bidder. The provincial Sheriff of the Province of Nueva Ecija executed a certificate of sale in favor of the Luzon Surety Company on October 10, 1951, Exhibit 5, which was registered on the same date. Paulino Candelaria and his wife having failed to redeem the property within the period prescribed by law, the Provincial Sheriff executed the final bill of sale on November 29, 1952, Exhibit 6, in favor of the Luzon Surety Company. Various incidents took place in Cadastral Case No. 51, G.L.R.O. Record No. 1045, with respect to the conflicting claims of the Philippine National Bank and the Luzon Surety Company over the parcels of land covered by Transfer Certificates of Title Nos. 12343 and 12344. The Court, being of the opinion that the controversy between the parties involved a contentious litigation, did not resolve the preference of the parties, but ordered the registration and annotation of the final bill of sale executed by the Provincial Sheriff in favor of the Philippine National Bank and the Luzon Surety Company. The Philippine National Rank registered the final bill of sale in its favor, but no action was taken by the Luzon Surety Company. (Decision Record on Appeal, pp. 38-41). The several errors assigned by appellant in its brief consist in substance in that the trial court failed to hold (1) that the deed of assignment, Exhibit 15, operated a complete payment and satisfaction of the judgment rendered in favor of the Philippine National Bank by the Court of First Instance of Manila in Civil Case No. 7647; (2) that said satisfaction of judgment served to extinguish or dissolve the writ of attachment issued in favor of said bank; (3) that the execution sale in favor of said bank was null and

void since the judgment sought to be executed had already been paid or satisfied; and (4) that appellant is the absolute owner of the parcels of land in question by virtue of the final bill of sale issued in its favor in Civil Case No. 5633. There is no dispute that the writ of preliminary attachment in favor of appellee in Civil Case No. 7647 of the Court of First Instance of Manila has preference over the preliminary attachment in favor of appellant issued: in Civil Case No. 5633, since appellees writ was registered prior to the registration of the attachment in favor of appellant. There is also no dispute, as admitted by appellant, that a sale by virtue of an attachment retroacts to the date of the registration of the writ of attachment, and that the preference of the attachment creditor is determined, not by the date of the execution sale, but by the date of the registration of the writ. With this premise, it would appear that appellee, has required a valid and preferential, title to the lands in question by virtue of the final bill of sale executed in its favor by the sheriff as a result of the auction sale held in Civil Case No. 76471. Since appellant was merely a redemptioner who stepped into the shoes of the judgment debtors in Civil Case No. 5633 and has failed to exercise the right of redemption within the period prescribe by law, its right, if any, to the properties in question has become forfeited. It is claimed however that after judgment was rendered in favor of appellee in Civil Case No. 7647 on September 12, 1950, the judgement debtors Paulino Candelaria and Dionisia Tecson made on October 30, 1950 an assignment of all their rights and interests over the parcels of land in question in satisfaction of the judgment rendered in favor of appellee and that said assignment has the effect of dissolving the writ of attachment issued in favor of appellee. And if we are to hold, it is contended, that the assignment thus made has the effect of dissolving the writ in favor of appellee, it follows that the writ issued in favor of appellant became prior and preferential and the sale made in its favor as a consequence thereof valid and absolute. While it is true that a deed of assignment was made in favor of appellee by its judgment debtors allegedly in satisfaction of the judgment render in its favor, it appears however that the deed was never registered in the registry of property and as such it has not ripened into a conveyance in contemplation of law. The assignment failed to bind the land. And since the purpose of the assignment is the transfer of the ownership of the land in payment of the amount of the judgment which amounted to P63,737.53 and the conveyance did not materialize because of failure of registration, it would be incongruous to hold that assignment in contemplation of law operated to dissolve the writ of attachment issued in favor of appellee. The best proof that appellee never intended to consider such an assignment as a full satisfaction of the judgment in its favor is the fact that it took steps to enforce its judgment through an auction sale where it bought the property as the highest bidder and was given a final bill of sale by the sheriff. Moreover, there is no incompatibility between the deed of assignment and the writ of attachment issued in favor of appellee, for the two can co-exist. The first is merely one of the means by which appellee may avail of to insure the transfer of the lands subject of the writ in satisfaction of the judgment without in any way relinquishing the priority it has acquired over them by virtue of the writ, whereas the second is a precautionary measure taken to assert its rights over the land against third persons. Ordinarily a deed of assignment may bind the assignee with regard to the land even if the deed is not registered, but not so when the right of a third party is involved (Section 50, Act 496). This is the situation herein obtained. Because of a conflicting right asserted by appellant, appellee deemed it best to carry out its writ of execution to the extent allowed by law so that it may derive the full benefit that the law grants to a prior lien holder. Under the law and equity, therefore, it is clear that the prior lien of appellee over the lands his not been lost with the execution of the deed of assignment Exhibit 15. Wherefore, the decision appealed from is affirmed, with costs against appellant. EXERPT:

ONG v. PCIB

This is a petition for review on certiorari under Rule 45 of the Rules of Court to set aside the Decision of the Court of Appeals in CA-G.R. SP No. 39255, dated February 17, 2003, affirming the decision of the trial court denying petitioners motion to dismiss. The facts: Baliwag Mahogany Corporation (BMC) is a domestic corporation engaged in the manufacture and export of finished wood products. Petitioners-spouses Alfredo and Susana Ong are its President and Treasurer, respectively. On April 20, 1992, respondent Philippine Commercial International Bank (now Equitable-Philippine Commercial International Bank or E-PCIB) filed a case for collection of a sum of money[1] against petitioners-spouses. Respondent bank sought to hold petitioners-spouses liable as sureties on the three (3) promissory notes they issued to secure some of BMC s loans, totalling five million pesos (P5,000,000.00). The complaint alleged that in 1991, BMC needed additional capital for its business and applied for various loans, amounting to a total of five million pesos, with the respondent bank. Petitioners-spouses acted as sureties for these loans and issued three (3) promissory notes for the purpose. Under the terms of the notes, it was stipulated that respondent bank may consider debtor BMC in default and demand payment of the remaining balance of the loan upon the levy, attachment or garnishment of any of its properties, or upon BMC s insolvency, or if it is declared to be in a state of suspension of payments. Respondent bank granted BMC s loan applications. On November 22, 1991, BMC filed a petition for rehabilitation and suspension of payments with the Securities and Exchange Commission (SEC) after its properties were attached by creditors. Respondent bank considered debtor BMC in default of its obligations and sought to collect payment thereof from petitioners-spouses as sureties. In due time, petitioners-spouses filed their Answer. On October 13, 1992, a Memorandum of Agreement (MOA)[2] was executed by debtor BMC, the petitioners-spouses as President and Treasurer of BMC, and the consortium of creditor banks of BMC (of which respondent bank is included). The MOA took effect upon its approval by the SEC on November 27, 1992.[3] Thereafter, petitioners-spouses moved to dismiss[4] the complaint. They argued that as the SEC declared the principal debtor BMC in a state of suspension of payments and, under the MOA, the creditor banks, including respondent bank, agreed to temporarily suspend any pending civil action against the debtor BMC, the benefits of the MOA should be extended to petitioners-spouses who acted as BMC s sureties in their contracts of loan with respondent bank. Petitioners-spouses averred that respondent bank is barred from pursuing its collection case filed against them. The trial court denied the motion to dismiss. Petitioners-spouses appealed to the Court of Appeals which affirmed the trial court s ruling that a creditor can proceed against petitioners-spouses as surety independently of its right to proceed against the principal debtor BMC. Hence this appeal. Petitioners-spouses claim that the collection case filed against them by respondent bank should be dismissed for three (3) reasons: First, the MOA provided that during its effectivity, there shall be a suspension of filing or pursuing of collection cases against the BMC and this provision should benefit petitioners as sureties. Second, principal debtor BMC has been placed under suspension of payment of debts by the SEC; petitioners contend that it would prejudice them if the principal debtor BMC would enjoy the suspension of payment of its debts while petitioners, who acted only as sureties for some of BMC s debts, would be compelled to make the payment; petitioners add that compelling them to pay is contrary to Article 2063 of the Civil Code which provides that a compromise between the creditor and principal debtor benefits the guarantor and should not prejudice the latter. Lastly, petitioners rely on Article 2081 of the Civil Code which provides that: the guarantor may set up against the creditor all the defenses which pertain to the principal debtor and are inherent in the debt; but not those which are purely personal to the debtor. Petitioners aver that if the principal debtor BMC can set up the defense of suspension of payment of debts and filing of collection suits against respondent bank, petitioners as sureties should likewise be allowed to avail of these defenses. We find no merit in petitioners contentions. Reliance of petitioners-spouses on Articles 2063 and 2081 of the Civil Code is misplaced as these provisions refer to contracts of guaranty. They do not apply to suretyship contracts. Petitioners-

spouses are not guarantors but sureties of BMC s debts. There is a sea of difference in the rights and liabilities of a guarantor and a surety. A guarantor insures the solvency of the debtor while a surety is an insurer of the debt itself. A contract of guaranty gives rise to a subsidiary obligation on the part of the guarantor. It is only after the creditor has proceeded against the properties of the principal debtor and the debt remains unsatisfied that a guarantor can be held liable to answer for any unpaid amount. This is the principle of excussion. In a suretyship contract, however,the benefit of excussion is not available to the surety as he is principally liable for the payment of the debt. As the surety insures the debt itself, he obligates himself to pay the debt if the principal debtor will not pay, regardless of whether or not the latter is financially capable to fulfill his obligation. Thus, a creditor can go directly against the surety although the principal debtor is solvent and is able to pay or no prior demand is made on the principal debtor. A surety is directly, equally and absolutely bound with the principal debtor for the payment of the debt and is deemed as an original promissor and debtor from the beginning.[5] Under the suretyship contract entered into by petitioners-spouses with respondent bank, the former obligated themselves to be solidarily bound with the principal debtor BMC for the payment of its debts to respondent bank amounting to five million pesos (P5,000,000.00). Under Article 1216 of the Civil Code,[6] respondent bank as creditor may proceed against petitioners-spouses as sureties despite the execution of the MOA which provided for the suspension of payment and filing of collection suits against BMC. Respondent bank s right to collect payment from the surety exists independently of its right to proceed directly against the principal debtor. In fact, the creditor bank may go against the surety alone without prior demand for payment on the principal debtor.[7] The provisions of the MOA regarding the suspension of payments by BMC and the non-filing of collection suits by the creditor banks pertain only to the property of the principal debtor BMC. Firstly, in the rehabilitation receivership filed by BMC, only the properties of BMC were mentioned in the petition with the SEC.[8] Secondly, there is nothing in the MOA that involves the liabilities of the sureties whose properties are separate and distinct from that of the debtor BMC. Lastly, it bears to stress that the MOA executed by BMC and signed by the creditor-banks was approved by the SEC whose jurisdiction is limited only to corporations and corporate assets. It has no jurisdiction over the properties of BMC s officers or sureties. Clearly, the collection suit filed by respondent bank against petitioners-spouses as sureties can prosper. The trial court s denial of petitioners motion to dismiss was proper. IN VIEW WHEREOF, the petition is DISMISSED for lack of merit. No pronouncement as to costs. SO ORDERED.

EXERPT:
Baliwag Mahogany Corporation (BMC) is a domestic corporation engaged in the manufacture and export of finished wood products. Petitioners-spouses Alfredo and Susana Ong are its President and Treasurer, respectively. E-PCIB filed a case for collection of a sum of money[1] against petitioners-spouse liable as sureties on the three (3) promissory notes they issued to secure some of BMC s loans, totalling five million pesos P5,000,000.00). The complaint alleged that in 1991, BMC needed additional capital for its business and applied for various loans, amounting to a total of five million pesos, with the respondent bank. Petitioners-spouses acted as sureties for these loans and issued three (3) promissory notes for the purpose. It was stipulated that respondent bank may consider debtor BMC in default and demand payment of the remaining balance of the loan upon the levy, attachment or garnishment of any of its properties, or upon BMC s insolvency, or if it is declared to be in a state of suspension of payments. Respondent bank granted BMC s loan applications. BMC filed a petition for rehabilitation and suspension after its properties were attached by creditors. Respondent bank considered debtor BMC in default of its obligations and sought to collect payment thereof from petitioners-spouses as sureties.

A Memorandum of Agreement (MOA)[2] was executed by debtor BMC, the petitioners-spouses as President and Treasurer of BMC, petitioners-spouses argued that as the SEC declared the principal debtor BMC in a state of suspension of payments and, under the MOA, the creditor banks, including respondent bank, agreed to temporarily suspend any pending civil action against the debtor BMC, the benefits of the MOA should be extended to petitioners-spouses who acted as BMC s sureties in their contracts of loan with respondent bank. Petitioners-spouses averred that respondent bank is barred from pursuing its collection case filed against them. ISSUE: Are the spouses primarily or secondarily liable? RULING: Article 2063 of the Civil Code which provides that a compromise between the creditor and principal debtor benefits the guarantor and should not prejudice the latter. Lastly, petitioners rely on Article 2081 of the Civil Code which provides that: the guarantor may set up against the creditor all the defenses which pertain to the principal debtor and are inherent in the debt; but not those which are purely personal to the debtor. Petitioners-spouses are not guarantors but sureties of BMC s debts. A guarantor insures the solvency of the debtor while a surety is an insurer of the debt itself. the benefit of exclusion is not available to the surety as he is principally liable for the payment of the debt. A surety is directly, equally and absolutely bound with the principal debtor for the payment of the debt and is deemed as an original promissor and debtor from the beginning, it exists independently of its right to proceed directly against the principal debtor Respondent bank as creditor may proceed against petitioners-spouses as sureties despite the execution of the MOA which provided for the suspension of payment and filing of collection suits against BMC. Clearly, the collection suit filed by respondent bank against petitioners-spouses as sureties can prosper.

INTERNATIONAL FINANCE CORP. v. IMPERIAL TEXTILE MILLS

The terms of a contract govern the rights and obligations of the contracting parties. When the obligor undertakes to be 'jointly and severally liable, it means that the obligation is solidary. If solidary liability was instituted to 'guarantee a principal obligation, the law deems the contract to be one of suretyship.

The creditor in the present Petition was able to show convincingly that, although denominated as a 'Guarantee Agreement, the Contract was actually a surety. Notwithstanding the use of the words 'guarantee and 'guarantor, the subject Contract was indeed a surety, because its terms were clear and left no doubt as to the intention of the parties.

The Case

Before us is a Petition for Review[1] under Rule 45 of the Rules of Court, assailing the February 28, 2002 Decision[2] and September 30, 2003 Resolution[3] of the Court of Appeals (CA) in CA-GR CV No. 58471. The challenged Decision disposed as follows: WHEREFORE, the appeal is PARTIALLY GRANTED. The decision of the trial court is MODIFIED to read as follows: 1. Philippine Polyamide Industrial Corporation is ORDERED to pay [Petitioner] International Finance Corporation, the following amounts: (a) US$2,833,967.00 with accrued interests as provided in the Loan Agreement; (b) Interest of 12% per annum on accrued interest, which shall be counted from the date of filing of the instant action up to the actual payment; (c) P73,340.00 as attorney's fees; (d) Costs of suit. 2. The guarantor Imperial Textile Mills, Inc. together with Grandtex is HELD secondarily liable to pay the amount herein adjudged to [Petitioner] International Finance Corporation.[4]

The assailed Resolution denied both parties' respective Motions for Reconsideration.

The Facts

The facts are narrated by the appellate court as follows: On December 17, 1974, [Petitioner] International Finance Corporation (IFC) and [Respondent] Philippine Polyamide Industrial Corporation (PPIC) entered into a loan agreement wherein IFC extended to PPIC a loan of US$7,000,000.00, payable in sixteen (16) semiannual installments of US$437,500.00 each, beginning June 1, 1977 to December 1, 1984, with interest at the rate of 10% per annum on the principal amount of the loan advanced and outstanding from time to time. The interest shall be paid in US dollars semi-annually on June 1 and December 1 in each year and interest for any period less than a year shall accrue and be pro-rated on the basis of a 360-day year of twelve 30day months. On December 17, 1974, a 'Guarantee Agreement was executed with x x x Imperial Textile Mills, Inc. (ITM), Grand Textile Manufacturing Corporation (Grandtex) and IFC as parties thereto. ITM and Grandtex agreed to guarantee PPIC's obligations under the loan agreement.

PPIC paid the installments due on June 1, 1977, December 1, 1977 and June 1, 1978. The payments due on December 1, 1978, June 1, 1979 and December 1, 1979 were rescheduled as requested by PPIC. Despite the rescheduling of the installment payments, however, PPIC defaulted. Hence, on April 1, 1985, IFC served a written notice of default to PPIC demanding the latter to pay the outstanding principal loan and all its accrued interests. Despite such notice, PPIC failed to pay the loan and its interests. By virtue of PPIC's failure to pay, IFC, together with DBP, applied for the extrajudicial foreclosure of mortgages on the real estate, buildings, machinery, equipment plant and all improvements owned by PPIC, located at Calamba, Laguna, with the regional sheriff of Calamba, Laguna. On July 30, 1985, the deputy sheriff of Calamba, Laguna issued a notice of extrajudicial sale. IFC and DBP were the only bidders during the auction sale. IFC's bid was forP99,269,100.00 which was equivalent to US$5,250,000.00 (at the prevailing exchange rate of P18.9084 = US$1.00). The outstanding loan, however, amounted to US$8,083,967.00 thus leaving a balance of US$2,833,967.00. PPIC failed to pay the remaining balance. Consequently, IFC demanded ITM and Grandtex, as guarantors of PPIC, to pay the outstanding balance. However, despite the demand made by IFC, the outstanding balance remained unpaid. Thereafter, on May 20, 1988, IFC filed a complaint with the RTC of Manila against PPIC and ITM for the payment of the outstanding balance plus interests and attorney's fees. The trial court held PPIC liable for the payment of the outstanding loan plus interests. It also ordered PPIC to pay IFC its claimed attorney's fees. However, the trial court relieved ITM of its obligation as guarantor. Hence, the trial court dismissed IFC's complaint against ITM. xxxxxxxxx Thus, apropos the decision dismissing the complaint against ITM, IFC appealed [to the CA].[5]

Ruling of the Court of Appeals

The CA reversed the Decision of the trial court, insofar as the latter exonerated ITM from any obligation to IFC. According to the appellate court, ITM bound itself under the 'Guarantee Agreement to pay PPIC's obligation upon default.[6] ITM was not discharged from its obligation as guarantor when PPIC mortgaged the latter's properties to IFC.[7] The CA, however, held that ITM's liability as a guarantor would arise only if and when PPIC could not pay. Since PPIC's inability to comply with its obligation was not sufficiently established, ITM could not immediately be made to assume the liability.[8]

The September 30, 2003 Resolution of the CA denied reconsideration.[9] Hence, this Petition.[10]

The Issues

Petitioner states the issues in this wise: I. Whether or not ITM and Grandtex[11] are sureties and therefore, jointly and severally liable with PPIC, for the payment of the loan. II. Whether or not the Petition raises a question of law. III. Whether or not the Petition raises a theory not raised in the lower court.[12]

The main issue is whether ITM is a surety, and thus solidarily liable with PPIC for the payment of the loan.

The Court's Ruling

The Petition is meritorious.

Main Issue: Liability of Respondent Under the Guarantee Agreement

The present controversy arose from the following Contracts: (1) the Loan Agreement dated December 17, 1974, between IFC and PPIC;[13] and (2) the Guarantee Agreement dated December 17, 1974, between ITM and Grandtex, on the one hand, and IFC on the other.[14]

IFC claims that, under the Guarantee Agreement, ITM bound itself as a surety to PPIC's obligations proceeding from the Loan Agreement.[15] For its part, ITM asserts that, by the terms of the Guarantee Agreement, it was merely a guarantor[16] and not a surety. Moreover, any ambiguity in the Agreement should be construed against IFC -- the party that drafted it.[17]

Language of the Contract

The premise of the Guarantee Agreement is found in its preambular clause, which reads: Whereas, (A) By an Agreement of even date herewith between IFC and PHILIPPINE POLYAMIDE INDUSTRIAL CORPORATION (herein called the Company), which agreement is herein called the Loan Agreement, IFC agrees to extend to the Company a loan (herein called the Loan) of seven million dollars ($7,000,000) on the terms therein set forth, including a provision that all or part of the Loan may be disbursed in a currency other than dollars, but only on condition that the Guarantors agree to guarantee the obligations of the Company in respect of the Loan as hereinafter provided. (B) The Guarantors, in order to induce IFC to enter into the Loan Agreement, and in consideration of IFC entering into said Agreement, have agreed so to guarantee such obligations of the Company.[18]

The obligations of the guarantors are meticulously expressed in the following provision: Section 2.01. The Guarantors jointly and severally, irrevocably, absolutely and unconditionally guarantee, as primary obligors and not as sureties merely, the due and punctual payment of the principal of, and interest and commitment charge on, the Loan, and the principal of, and interest on, the Notes, whether at stated maturity or upon prematuring, all as set forth in the Loan Agreement and in the Notes.[19]

The Agreement uses 'guarantee and guarantors, prompting ITM to base its argument on those words.[20] This Court is not convinced that the use of the two words limits the Contract to a mere guaranty. The specific stipulations in the Contract show otherwise.

Solidary Liability Agreed to by ITM

While referring to ITM as a guarantor, the Agreement specifically stated that the corporation was 'jointly and severally liable. To put emphasis on the nature of that liability, the Contract further stated that ITM was a primary obligor, not a mere surety. Those stipulations meant only one thing: that at bottom, and to all legal intents and purposes, it was a surety.

Indubitably therefore, ITM bound itself to be solidarily[21] liable with PPIC for the latter's obligations under the Loan Agreement with IFC. ITM thereby brought itself to the level of PPIC and could not be deemed merely secondarily liable.

Initially, ITM was a stranger to the Loan Agreement between PPIC and IFC. ITM's liability commenced only when it guaranteed PPIC's obligation. It became a surety when it bound itself solidarily with the principal obligor. Thus, the applicable law is as follows: Article 2047. By guaranty, a person, called the guarantor binds himself to the creditor to fulfill the obligation of the principal in case the latter should fail to do so. If a person binds himself solidarily with the principal debtor, the provisions of Section 4, Chapter 3, Title I of this Book shall be observed. In such case the contract shall be called suretyship.[22]

The aforementioned provisions refer to Articles 1207 to 1222 of the Civil Code on 'Joint and Solidary Obligations. Relevant to this case is Article 1216, which states: The creditor may proceed against any one of the solidary debtors or some or all of them simultaneously. The demand made against one of them shall not be an obstacle to those which may subsequently be directed against the others, so long as the debt has not been fully collected.

Pursuant to this provision, petitioner (as creditor) was justified in taking action directly against respondent.

No Ambiguity in the Undertaking

The Court does not find any ambiguity in the provisions of the Guarantee Agreement. When qualified by the term jointly and severally, the use of the word 'guarantor to refer to a 'surety does not violate the law.[23] As Article 2047 provides, a suretyship is created when a guarantor binds itself solidarily with the principal obligor. Likewise, the phrase in the Agreement -- 'as primary obligor and not merely as surety -- stresses that ITM is being placed on the same level as PPIC. Those words emphasize the nature of their liability, which the law characterizes as a suretyship. The use of the word guarantee does not ipso facto make the contract one of guaranty.[24] This Court has recognized that the word is frequently employed in business transactions to describe the intention to be bound by a primary or an independent obligation.[25] The very terms of a contract govern the obligations of the parties or the extent of the obligor's liability. Thus, this Court has ruled in favor of

suretyship, even though contracts were denominated as a 'Guarantor's Undertaking [26]or a 'Continuing Guaranty.[27]

Contracts have the force of law between the parties,[28] who are free to stipulate any matter not contrary to law, morals, good customs, public order or public policy.[29] None of these circumstances are present, much less alleged by respondent. Hence, this Court cannot give a different meaning to the plain language of the Guarantee Agreement.

Indeed, the finding of solidary liability is in line with the premise provided in the 'Whereas' clause of the Guarantee Agreement. The execution of the Agreement was a condition precedent for the approval of PPIC's loan from IFC. Consistent with the position of IFC as creditor was its requirement of a higher degree of liability from ITM in case PPIC committed a breach. ITM agreed with the stipulation in Section 2.01 and is now estopped from feigning ignorance of its solidary liability. The literal meaning of the stipulations control when the terms of the contract are clear and there is no doubt as to the intention of the parties.[30]

We note that the CA denied solidary liability, on the theory that the parties would not have executed a Guarantee Agreement if they had intended to name ITM as a primary obligor.[31] The appellate court opined that ITM's undertaking was collateral to and distinct from the Loan Agreement. On this point, the Court stresses that a suretyship is merely an accessory or a collateral to a principal obligation.[32] Although a surety contract is secondary to the principal obligation, the liability of the surety is direct, primary and absolute; or equivalent to that of a regular party to the undertaking.[33] A surety becomes liable to the debt and duty of the principal obligor even without possessing a direct or personal interest in the obligations constituted by the latter.[34]

ITM's Liability as Surety

With the present finding that ITM is a surety, it is clear that the CA erred in declaring the former secondarily liable.[35] A surety is considered in law to be on the same footing as the principal debtor in relation to whatever is adjudged against the latter.[36] Evidently, the dispositive portion of the assailed Decision should be modified to require ITM to pay the amount adjudged in favor of IFC.

Peripheral Issues

In addition to the main issue, ITM raised procedural infirmities allegedly justifying the denial of the present Petition. Before the trial court and the CA, IFC had allegedly instituted different arguments that effectively changed the corporation's theory on appeal, in violation of this Court's previous pronouncements.[37] ITM further claims that the main issue in the present case is a question of fact that is not cognizable by this Court.[38]

These contentions deserve little consideration.

Alleged Change of Theory on Appeal

Petitioner's arguments before the trial court (that ITM was a 'primary obligor') and before the CA (that ITM was a 'surety') were related and intertwined in the action to enforce the solidary liability of ITM under the Guarantee Agreement. We emphasize that the terms primary obligor and 'surety were premised on the same stipulations in Section 2.01 of the Agreement. Besides, both terms had the same legal consequences. There was therefore effectively no change of theory on appeal. At any rate, ITM failed to show to this Court a disparity between IFC's allegations in the trial court and those in the CA. Bare allegations without proof deserve no credence.

Review of Factual Findings Necessary

As to the issue that only questions of law may be raised in a Petition for Review,[39] the Court has recognized exceptions,[40] one of which applies to the present case. The assailed Decision was based on a misapprehension of facts,[41] which particularly related to certain stipulations in the Guarantee Agreement -- stipulations that had not been disputed by the parties. This circumstance compelled the Court to review the Contract firsthand and to make its own findings and conclusions accordingly.

WHEREFORE, the Petition is hereby GRANTED, and the assailed Decision and Resolution MODIFIED in the sense that Imperial Textile Mills, Inc. is declared a surety to Philippine Polyamide Industrial Corporation. ITM is ORDERED to pay International Finance Corporation the same amounts adjudged against PPIC in the assailed Decision. No costs.

SO ORDERED.

FACTS: Petitioner International Finance Corporation (IFC) and [Respondent] Philippine Polyamide Industrial Corporation (PPIC) entered into a loan agreement wherein IFC extended to PPIC a loan of US$7,000,000.00; ITM and Grandtex agreed to guarantee PPIC's obligations under the loan agreement. PPIC defaulted, hence, IFC served a written notice of default to PPIC demanding the latter to pay the outstanding principal loan and all its accrued interests. Despite such notice, PPIC failed to pay the loan and its interests.A foreclosure sale was held, however, IFC demanded ITM and Grandtex, as guarantors of PPIC, to pay the outstanding balance. However, despite the demand made by IFC, the outstanding balance remained unpaid. The trial court held PPIC liable for the payment of the outstanding loan plus interests. It also ordered PPIC to pay IFC its claimed attorney's fees. However, the trial court relieved ITM of its obligation as guarantor. Hence, the trial court dismissed IFC's complaint against ITM.

ISSUE: Whether or not ITM and Grandtex are sureties and therefore, jointly and severally liable with PPIC, for the payment of the loan.

HELD: YES. The Agreement uses 'guarantee and guarantors, prompting ITM to base its argument on those words. It specifically stated that the corporation was 'jointly and severally liable; that ITM was a primary obligor, not a mere surety. Those stipulations meant only one thing: that at bottom, and to all legal intents and purposes, it was a surety and could not be deemed merely secondarily liable.

A surety is considered in law to be on the same footing as the principal debtor in relation to whatever is adjudged against the latter. If a person binds himself solidarily with the principal debtor, the provisions of Section 4, Chapter 3, Title I of this Book shall be observed. In such case the contract shall be called suretyship The creditor may proceed against any one of the solidary debtors or some or all of them simultaneously. The demand made against one of them shall not be an obstacle to those which may subsequently be directed against the others, so long as the debt has not been fully collected. The use of the word 'guarantor to refer to a 'surety does not violate the law. The use of the word guarantee does not ipso facto make the contract one of guaranty.