G.R. No.

160466

January 17, 2005

SPOUSES ALFREDO and SUSANA ONG, petitioners,

vs.
PHILIPPINE COMMERCIAL INTERNATIONAL BANK, respondent.
DECISION
PUNO, J.:
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 EquitablePhilippine Commercial International Bank or E-PCIB) filed a case for collection of a sum of
money1 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 BMCs
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 BMCs insolvency, or if it is declared to be in a state of suspension of
payments. Respondent bank granted BMCs loan applications.

Page

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

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, petitionersspouses filed their Answer.1awphi1.nt

Thereafter, petitioners-spouses moved to dismiss4 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 BMCs 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 courts 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 BMCs 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.

Page

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 BMCs
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

We find no merit in petitioners contentions.

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 banks 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 BMCs officers or sureties.1awphi1.nt
Clearly, the collection suit filed by respondent bank against petitioners-spouses as
sureties can prosper. The trial courts 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.

Page

Austria-Martinez, Callejo, Sr., Tinga, and Chico-Nazario, JJ., concur.

Page

G.R. No. 160324 November 15, 2005

INTERNATIONAL FINANCE CORPORATION, Petitioner,
vs.
IMPERIAL TEXTILE MILLS, INC.,* Respondent.
DECISION
PANGANIBAN, J.:
he 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 Review1 under Rule 45 of the Rules of Court, assailing the
February 28, 2002 Decision2 and September 30, 2003 Resolution3 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:

Page

(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;

(a) US$2,833,967.00 with accrued interests as provided in the Loan Agreement;

(c) P73,340.00 as attorneys 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) semi-annual 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 PPICs obligations under the loan
agreement.

Page

"By virtue of PPICs 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. IFCs bid
was for P99,269,100.00 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

"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.

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 attorneys 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 attorneys fees. However, the trial court relieved
ITM of its obligation as guarantor. Hence, the trial court dismissed IFCs 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 PPICs obligation upon default.6 ITM was not discharged
from its obligation as guarantor when PPIC mortgaged the latters properties to IFC.7 The
CA, however, held that ITMs liability as a guarantor would arise only if and when PPIC
could not pay. Since PPICs 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 Grandtex11 are sureties and therefore, jointly and severally
liable with PPIC, for the payment of the loan.

Page

"III. Whether or not the Petition raises a theory not raised in the lower court."12

"II. Whether or not the Petition raises a question of law.

The main issue is whether ITM is a surety, and thus solidarily liable with PPIC for the
payment of the loan.
The Courts 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 PPICs
obligations proceeding from the Loan Agreement.15 For its part, ITM asserts that, by the
terms of the Guarantee Agreement, it was merely a guarantor16 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,

The obligations of the guarantors are meticulously expressed in the following provision:

Page

"(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

"(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.

"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 solidarily21 liable with PPIC for the latters
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. ITMs liability
commenced only when it guaranteed PPICs 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:

Page

"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 obligors
liability. Thus, this Court has ruled in favor of suretyship, even though contracts were
denominated as a "Guarantors 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.

Page

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 ITMs 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

10

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 PPICs 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

debt and duty of the principal obligor even without possessing a direct or personal
interest in the obligations constituted by the latter.34
ITMs 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 corporations theory on appeal,
in violation of this Courts 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
Petitioners 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 IFCs allegations in the trial court and those in the
CA. Bare allegations without proof deserve no credence.
Review of Factual

Page

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

11

Findings Necessary

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.

Page

12

SO ORDERED.

G.R. No. 113931 May 6, 1998

E. ZOBEL, INC., petitioner,
vs.
THE COURT OF APPEALS, CONSOLIDATED BANK AND TRUST CORPORATION, and
SPOUSES RAUL and ELEA R. CLAVERIA, respondents.

MARTINEZ, J.:
This petition for review on certiorari seeks the reversal of the decision 1 of the Court of
Appeals dated July 13, 1993 which affirmed the Order of the Regional Trial Court of
Manila, Branch 51, denying petitioner's Motion to Dismiss the complaint, as well as the
Resolution 2 dated February 15, 1994 denying the motion for reconsideration thereto.
The facts are as follows:

Page

Respondent spouses defaulted in the payment of the entire obligation upon maturity.
Hence, on January 31, 1991, SOLIDBANK filed a complaint for sum of money with a prayer

13

Respondent spouses Raul and Elea Claveria, doing business under the name "Agro
Brokers," applied for a loan with respondent Consolidated Bank and Trust Corporation
(now SOLIDBANK) in the amount of Two Million Eight Hundred Seventy Five Thousand
Pesos (P2,875,000.00) to finance the purchase of two (2) maritime barges and one
tugboat 3 which would be used in their molasses business. The loan was granted subject to
the condition that respondent spouses execute a chattel mortgage over the three (3)
vessels to be acquired and that a continuing guarantee be executed by Ayala International
Philippines, Inc., now herein petitioner E. Zobel, Inc., in favor of SOLIDBANK. The
respondent spouses agreed to the arrangement. Consequently, a chattel mortgage and a
Continuing Guaranty 4 were executed.

for a writ of preliminary attachment, against respondents spouses and petitioner. The case
was docketed as Civil Case No. 91-55909 in the Regional Trial Court of Manila.
Petitioner moved to dismiss the complaint on the ground that its liability as guarantor of
the loan was extinguished pursuant to Article 2080 of the Civil Code of the Philippines. It
argued that it has lost its right to be subrogated to the first chattel mortgage in view of
SOLIDBANK's failure to register the chattel mortgage with the appropriate government
agency.
SOLIDBANK opposed the motion contending that Article 2080 is not applicable because
petitioner is not a guarantor but a surety.
On February 18, 1993, the trial court issued an Order, portions of which reads:
After a careful consideration of the matter on hand, the Court finds the ground of the
motion to dismiss without merit. The document referred to as "Continuing Guaranty"
dated August 21, 1985 (Exh. 7) states as follows:
For and in consideration of any existing indebtedness to you of Agro Brokers, a single
proprietorship owned by Mr. Raul Claveria for the payment of which the undersigned is
now obligated to you as surety and in order to induce you, in your discretion, at any other
manner, to, or at the request or for the account of the borrower, . . .
The provisions of the document are clear, plain and explicit.

Page

With regard to the claim that the failure of the plaintiff to register the chattel mortgage
with the proper government agency, i.e. with the Office of the Collector of Customs or with
the Register of Deeds makes the obligation a guaranty, the same merits a scant
consideration and could not be taken by this Court as the basis of the extinguishment of
the obligation of the defendant corporation to the plaintiff as surety. The chattel mortgage
is an additional security and should not be considered as payment of the debt in case of

14

Clearly therefore, defendant E. Zobel, Inc. signed as surety. Even though the title of the
document is "Continuing Guaranty", the Court's interpretation is not limited to the title
alone but to the contents and intention of the parties more specifically if the language is
clear and positive. The obligation of the defendant Zobel being that of a surety, Art. 2080
New Civil Code will not apply as it is only for those acting as guarantor. In fact, in the letter
of January 31, 1986 of the defendants (spouses and Zobel) to the plaintiff it is requesting
that the chattel mortgage on the vessels and tugboat be waived and/or rescinded by the
bank inasmuch as the said loan is covered by the Continuing Guaranty by Zobel in favor of
the plaintiff thus thwarting the claim of the defendant now that the chattel mortgage is an
essential condition of the guaranty. In its letter, it said that because of the Continuing
Guaranty in favor of the plaintiff the chattel mortgage is rendered unnecessary and
redundant.

failure of payment. The same is true with the failure to register, extinction of the liability
would not lie.
WHEREFORE, the Motion to Dismiss is hereby denied and defendant E. Zobel, Inc., is
ordered to file its answer to the complaint within ten (10) days from receipt of a copy of
this Order. 5
Petitioner moved for reconsideration but was denied on April 26, 1993. 6
Thereafter, petitioner questioned said Orders before the respondent Court of Appeals,
through a petition for certiorari, alleging that the trial court committed grave abuse of
discretion in denying the motion to dismiss.
On July 13, 1993, the Court of Appeals rendered the assailed decision the dispositive
portion of which reads:
WHEREFORE, finding that respondent Judge has not committed any grave abuse of
discretion in issuing the herein assailed orders, We hereby DISMISS the petition.
A motion for reconsideration filed by petitioner was denied for lack of merit on February
15, 1994.
Petitioner now comes to us via this petition arguing that the respondent Court of Appeals
erred in its finding: (1) that Article 2080 of the New Civil Code which provides: "The
guarantors, even though they be solidary, are released from their obligation whenever by
some act of the creditor they cannot be subrogated to the rights, mortgages, and
preferences of the latter," is not applicable to petitioner; (2) that petitioner's obligation to
respondent SOLIDBANK under the continuing guaranty is that of a surety; and (3) that the
failure of respondent SOLIDBANK to register the chattel mortgage did not extinguish
petitioner's liability to respondent SOLIDBANK.
We shall first resolve the issue of whether or not petitioner under the "Continuing
Guaranty" obligated itself to SOLIDBANK as a guarantor or a surety.

Page

Strictly speaking, guaranty and surety are nearly related, and many of the principles are
common to both. However, under our civil law, they may be distinguished thus: A surety is
usually bound with his principal by the same instrument, executed at the same time, and
on the same consideration. He is an original promissor and debtor from the beginning, and
is held, ordinarily, to know every default of his principal. Usually, he will not be

15

A contract of surety is an accessory promise by which a person binds himself for another
already bound, and agrees with the creditor to satisfy the obligation if the debtor does not.
7 A contract of guaranty, on the other hand, is a collateral undertaking to pay the debt of
another in case the latter does not pay the debt. 8

discharged, either by the mere indulgence of the creditor to the principal, or by want of
notice of the default of the principal, no matter how much he may be injured thereby. On
the other hand, the contract of guaranty is the guarantor's own separate undertaking, in
which the principal does not join. It is usually entered into before or after that of the
principal, and is often supported on a separate consideration from that supporting the
contract of the principal. The original contract of his principal is not his contract, and he is
not bound to take notice of its non-performance. He is often discharged by the mere
indulgence of the creditor to the principal, and is usually not liable unless notified of the
default of the principal. 9
Simply put, a surety is distinguished from a guaranty in that a guarantor is the insurer of
the solvency of the debtor and thus binds himself to pay if the principal is unable to pay
while a surety is the insurer of the debt, and he obligates himself to pay if the principal
does not pay. 10

Page

For and in consideration of any existing indebtedness to you of AGRO BROKERS, a single
proprietorship owned by MR. RAUL P. CLAVERIA, of legal age, married and with business
address . . . (hereinafter called the Borrower), for the payment of which the undersigned is
now obligated to you as surety and in order to induce you, in your discretion, at any time or
from time to time hereafter, to make loans or advances or to extend credit in any other
manner to, or at the request or for the account of the Borrower, either with or without
purchase or discount, or to make any loans or advances evidenced or secured by any
notes, bills receivable, drafts, acceptances, checks or other instruments or evidences of
indebtedness . . . upon which the Borrower is or may become liable as maker, endorser,
acceptor, or otherwise, the undersigned agrees to guarantee, and does hereby guarantee,
the punctual payment, at maturity or upon demand, to you of any and all such instruments,
loans, advances, credits and/or other obligations herein before referred to, and also any and
all other indebtedness of every kind which is now or may hereafter become due or owing to
you by the Borrower, together with any and all expenses which may be incurred by you in
collecting all or any such instruments or other indebtedness or obligations hereinbefore
referred to, and or in enforcing any rights hereunder, and also to make or cause any and
all such payments to be made strictly in accordance with the terms and provisions of any
agreement (g), express or implied, which has (have) been or may hereafter be made or
entered into by the Borrower in reference thereto, regardless of any law, regulation or
decree, now or hereafter in effect which might in any manner affect any of the terms or
provisions of any such agreements(s) or your right with respect thereto as against the
Borrower, or cause or permit to be invoked any alteration in the time, amount or manner

16

Based on the aforementioned definitions, it appears that the contract executed by

petitioner in favor of SOLIDBANK, albeit denominated as a "Continuing Guaranty," is a
contract of surety. The terms of the contract categorically obligates petitioner as "surety"
to induce SOLIDBANK to extend credit to respondent spouses. This can be seen in the
following stipulations.

of payment by the Borrower of any such instruments, obligations or indebtedness; . . .

(Emphasis Ours)
One need not look too deeply at the contract to determine the nature of the undertaking
and the intention of the parties. The contract clearly disclose that petitioner assumed
liability to SOLIDBANK, as a regular party to the undertaking and obligated itself as an
original promissor. It bound itself jointly and severally to the obligation with the
respondent spouses. In fact, SOLIDBANK need not resort to all other legal remedies or
exhaust respondent spouses' properties before it can hold petitioner liable for the
obligation. This can be gleaned from a reading of the stipulations in the contract, to wit:
. . . If default be made in the payment of any of the instruments, indebtedness or other
obligation hereby guaranteed by the undersigned, or if the Borrower, or the undersigned
should die, dissolve, fail in business, or become insolvent, . . ., or if any funds or other
property of the Borrower, or of the undersigned which may be or come into your
possession or control or that of any third party acting in your behalf as aforesaid should
be attached of distrained, or should be or become subject to any mandatory order of court
or other legal process, then, or any time after the happening of any such event any or all of
the instruments of indebtedness or other obligations hereby guaranteed shall, at your
option become (for the purpose of this guaranty) due and payable by the undersigned
forthwith without demand of notice, and full power and authority are hereby given you, in
your discretion, to sell, assign and deliver all or any part of the property upon which you
may then have a lien hereunder at any broker's board, or at public or private sale at your
option, either for cash or for credit or for future delivery without assumption by you of
credit risk, and without either the demand, advertisement or notice of any kind, all of
which are hereby expressly waived. At any sale hereunder, you may, at your option,
purchase the whole or any part of the property so sold, free from any right of redemption
on the part of the undersigned, all such rights being also hereby waived and released. In
case of any sale and other disposition of any of the property aforesaid, after deducting all
costs and expenses of every kind for care, safekeeping, collection, sale, delivery or
otherwise, you may apply the residue of the proceeds of the sale and other disposition
thereof, to the payment or reduction, either in whole or in part, of any one or more of the
obligations or liabilities hereunder of the undersigned whether or not except for
disagreement such liabilities or obligations would then be due, making proper allowance
or interest on the obligations and liabilities not otherwise then due, and returning the
overplus, if any, to the undersigned; all without prejudice to your rights as against the
undersigned with respect to any and all amounts which may be or remain unpaid on any
of the obligations or liabilities aforesaid at any time (s).

Page

Should the Borrower at this or at any future time furnish, or should be heretofore have
furnished, another surety or sureties to guarantee the payment of his obligations to you, the

17

xxx xxx xxx

undersigned hereby expressly waives all benefits to which the undersigned might be entitled
under the provisions of Article 1837 of the Civil Code (beneficio division), the liability of the
undersigned under any and all circumstances being joint and several; (Emphasis Ours)
The use of the term "guarantee" does not ipso facto mean that the contract is one of
guaranty. Authorities recognize that the word "guarantee" is frequently employed in
business transactions to describe not the security of the debt but an intention to be bound
by a primary or independent obligation. 11 As aptly observed by the trial court, the
interpretation of a contract is not limited to the title alone but to the contents and
intention of the parties.
Having thus established that petitioner is a surety, Article 2080 of the Civil Code, relied
upon by petitioner, finds no application to the case at bar. In Bicol Savings and Loan
Association vs. Guinhawa, 12 we have ruled that Article 2080 of the New Civil Code does not
apply where the liability is as a surety, not as a guarantor.
But even assuming that Article 2080 is applicable, SOLIDBANK's failure to register the
chattel mortgage did not release petitioner from the obligation. In the Continuing
Guaranty executed in favor of SOLIDBANK, petitioner bound itself to the contract
irrespective of the existence of any collateral. It even released SOLIDBANK from any fault
or negligence that may impair the contract. The pertinent portions of the contract so
provides:
. . . the undersigned (petitioner) who hereby agrees to be and remain bound upon this
guaranty, irrespective of the existence, value or condition of any collateral, and
notwithstanding any such change, exchange, settlement, compromise, surrender, release,
sale, application, renewal or extension, and notwithstanding also that all obligations of the
Borrower to you outstanding and unpaid at any time(s) may exceed the aggregate
principal sum herein above prescribed.

Page

In fine, we find the petition to be without merit as no reversible error was committed by
respondent Court of Appeals in rendering the assailed decision.

18

This is a Continuing Guaranty and shall remain in full force and effect until written notice
shall have been received by you that it has been revoked by the undersigned, but any such
notice shall not be released the undersigned from any liability as to any instruments,
loans, advances or other obligations hereby guaranteed, which may be held by you, or in
which you may have any interest, at the time of the receipt of such notice. No act or
omission of any kind on your part in the premises shall in any event affect or impair this
guaranty, nor shall same be affected by any change which may arise by reason of the death
of the undersigned, of any partner (s) of the undersigned, or of the Borrower, or of the
accession to any such partnership of any one or more new partners. (Emphasis supplied)

WHEREFORE, the decision of the respondent Court of Appeals is hereby AFFIRMED. Costs
against the petitioner.
SO ORDERED.
Regalado, Melo and Puno, JJ., concur.
Mendoza, J., took no part.

G.R. No. 127405

September 20, 2001

MARJORIE TOCAO and WILLIAM T. BELO, petitioners,

vs.
COURT OF APPEALS and NENITA A. ANAY, respondent.
RESOLUTION

Page

The inherent powers of a Court to amend and control its processes and orders so as to
make them conformable to law and justice includes the right to reverse itself, especially
when in its honest opinion it has committed an error or mistake in judgment, and that to
adhere to its decision will cause injustice to a party litigant.1

19

YNARES-SANTIAGO, J.:

On November 14, 2001, petitioners Marjorie Tocao and William T. Belo filed a Motion for
Reconsideration of our Decision dated October 4, 2000. They maintain that there was no
partnership between petitioner Belo, on the one hand, and respondent Nenita A. Anay, on
the other hand; and that the latter being merely an employee of petitioner Tocao.
After a careful review of the evidence presented, we are convinced that, indeed, petitioner
Belo acted merely as guarantor of Geminesse Enterprise. This was categorically affirmed
by respondent's own witness, Elizabeth Bantilan, during her cross-examination.
Furthermore, Bantilan testified that it was Peter Lo who was the company's financier.
Thus:
Q - You mentioned a while ago the name William Belo. Now, what is the role of William
Belo with Geminesse Enterprise?
A
- William Belo is the friend of Marjorie Tocao and he was the guarantor of the
company.
Q

- What do you mean by guarantor?

A - He guarantees the stocks that she owes somebody who is Peter Lo and he acts as
guarantor for us. We can borrow money from him.
Q

- You mentioned a certain Peter Lo. Who is this Peter Lo?

- Peter Lo is based in Singapore.

- What is the role of Peter Lo in the Geminesse Enterprise?

- He is the one fixing our orders that open the L/C.

- You mean Peter Lo is the financier?

- Yes, he is the financier.

Q - And the defendant William Belo is merely the guarantor of Geminesse Enterprise,
am I correct?

The foregoing was neither refuted nor contradicted by respondent's evidence. It should be
recalled that the business relationship created between petitioner Tocao and respondent
Anay was an informal partnership, which was not even recorded with the Securities and
Exchange Commission. As such, it was understandable that Belo, who was after all
petitioner Tocao's good friend and confidante, would occasionally participate in the affairs
of the business, although never in a formal or official capacity.3 Again, respondent's

20

- Yes, sir2

Page

witness, Elizabeth Bantilan, confirmed that petitioner Belo's presence in Geminesse

Enterprise's meetings was merely as guarantor of the company and to help petitioner
Tocao.4
Furthermore, no evidence was presented to show that petitioner Belo participated in the
profits of the business enterprise. Respondent herself professed lack of knowledge that
petitioner Belo received any share in the net income of the partnership.5 On the other
hand, petitioner Tocao declared that petitioner Belo was not entitled to any share in the
profits of Geminesse Enterprise.6 With no participation in the profits, petitioner Belo
cannot be deemed a partner since the essence of a partnership is that the partners share
in the profits and losses.7
Consequently, inasmuch as petitioner Belo was not a partner in Geminesse Enterprise,
respondent had no cause of action against him and her complaint against him should
accordingly be dismissed.
As regards the award of damages, petitioners argue that respondent should be deemed in
bad faith for failing to account for stocks of Geminesse Enterprise amounting to
P208,250.00 and that, accordingly, her claim for damages should be barred to that extent.
We do not agree. Given the circumstances surrounding private respondent's sudden
ouster from the partnership by petitioner Tocao, her act of withholding whatever stocks
were in her possession and control was justified, if only to serve as security for her claims
against the partnership. However, while we do not agree that the same renders private
respondent in bad faith and should bar her claim for damages, we find that the said sum of
P208,250.00 should be deducted from whatever amount is finally adjudged in her favor on
the basis of the formal account of the partnership affairs to be submitted to the Regional
Trial Court.
WHEREFORE, based on the foregoing, the Motion for Reconsideration of petitioners is
PARTIALLY GRANTED. The Regional Trial Court of Makati is hereby ordered to DISMISS
the complaint, docketed as Civil Case No. 88-509, as against petitioner William T. Belo
only. The sum of P208,250.00 shall be deducted from whatever amount petitioner
Marjorie Tocao shall be held liable to pay respondent after the normal accounting of the
partnership affairs.
SO ORDERED.
Davide, Jr., Kapunan, and Pardo; JJ., concur.
Puno, J., on official leave.

Page

ASTRO ELECTRONICS CORP. and PETER ROXAS, Petitioner, vs. PHILIPPINE EXPORT AND
FOREIGN LOAN GUARANTEE CORPORATION, respondent.

21

G.R. No. 136729. September 23 ,2003

DECISION
AUSTRIA-MARTINEZ, J.:
Assailed in this petition for review on certiorari under Rule 45 of the Rules of Court is the
decision of the Court of Appeals in CA-G.R. CV No. 41274,[1 affirming the decision of the
Regional Trial Court (Branch 147) of Makati, then Metro Manila, whereby petitioners
Peter Roxas and Astro Electronics Corp. (Astro for brevity) were ordered to pay
respondent Philippine Export and Foreign Loan Guarantee Corporation (Philguarantee),
jointly and severally, the amount of P3,621,187.52 with interests and costs.
The antecedent facts are undisputed.
Astro was granted several loans by the Philippine Trust Company (Philtrust) amounting to
P3,000,000.00 with interest and secured by three promissory notes: PN NO. PFX-254
dated December 14, 1981 for P600,000.00, PN No. PFX-258 also dated December 14, 1981
for P400,000.00 and PN No. 15477 dated August 27, 1981 for P2,000,000.00. In each of
these promissory notes, it appears that petitioner Roxas signed twice, as President of
Astro and in his personal capacity.[2 Roxas also signed a Continuing Surety ship
Agreement in favor of Philtrust Bank, as President of Astro and as surety.[3
Thereafter, Philguarantee, with the consent of Astro, guaranteed in favor of Philtrust the
payment of 70% of Astros loan,[4 subject to the condition that upon payment by
Philguanrantee of said amount, it shall be proportionally subrogated to the rights of
Philtrust against Astro.5
As a result of Astros failure to pay its loan obligations, despite demands, Philguarantee
paid 70% of the guaranteed loan to Philtrust. Subsequently, Philguarantee filed against
Astro and Roxas a complaint for sum of money with the RTC of Makati.
In his Answer, Roxas disclaims any liability on the instruments, alleging, inter alia, that he
merely signed the same in blank and the phrases in his personal capacity and in his official
capacity were fraudulently inserted without his knowledge.6

Page

WHEREFORE, in view of all the foregoing, the Court hereby renders judgment in favor or
(sic) the plaintiff and against the defendants Astro Electronics Corporation and Peter T.
Roxas, ordering the then (sic) to pay, jointly and severally, the plaintiff the sum of
P3,621.187.52 representing the total obligation of defendants in favor of plaintiff
Philguarantee as of December 31, 1984 with interest at the stipulated rate of 16% per

22

After trial, the RTC rendered its decision in favor of Philguarantee with the following
dispositive portion:

annum and stipulated penalty charges of 16% per annum computed from January 1, 1985
until the amount is fully paid. With costs.
SO ORDERED.[7
The trial court observed that if Roxas really intended to sign the instruments merely in his
capacity as President of Astro, then he should have signed only once in the promissory
note.[8
On appeal, the Court of Appeals affirmed the RTC decision agreeing with the trial court
that Roxas failed to explain satisfactorily why he had to sign twice in the contract and
therefore the presumption that private transactions have been fair and regular must be
sustained.[9
In the present petition, the principal issue to be resolved is whether or not Roxas should
be jointly and severally liable (solidary) with Astro for the sum awarded by the RTC.
The answer is in the affirmative.

As to the third promissory note, Exhibit C-4 and 5-A, the copy submitted is not clear so
that this Court could not discern the same observations on the notes, Exhibits A-4 and 3-A

Page

Unnoticed by both the trial court and the Court of Appeals, a closer examination of the
signatures affixed by Roxas on the promissory notes, Exhibits A-4 and 3-A and B-4 and 4-A
readily reveals that portions of his signatures covered portions of the typewritten words
personal capacity indicating with certainty that the typewritten words were already
existing at the time Roxas affixed his signatures thus demolishing his claim that the
typewritten words were just inserted after he signed the promissory notes. If what he
claims is true, then portions of the typewritten words would have covered portions of his
signatures, and not vice versa.

23

Astros loan with Philtrust Bank is secured by three promissory notes. These promissory
notes are valid and binding against Astro and Roxas. As it appears on the notes, Roxas
signed twice: first, as president of Astro and second, in his personal capacity. In signing his
name aside from being the President of Asro, Roxas became a co-maker of the promissory
notes and cannot escape any liability arising from it. Under the Negotiable Instruments
Law, persons who write their names on the face of promissory notes are makers,[10
promising that they will pay to the order of the payee or any holder according to its
tenor.11 Thus, even without the phrase personal capacity, Roxas will still be primarily
liable as a joint and several debtor under the notes considering that his intention to be
liable as such is manifested by the fact that he affixed his signature on each of the
promissory notes twice which necessarily would imply that he is undertaking the
obligation in two different capacities, official and personal.

and B-4 and 4-A.

Nevertheless, the following discussions equally apply to all three promissory notes.
The three promissory notes uniformly provide: FOR VALUE RECEIVED, I/We jointly,
severally and solidarily, promise to pay to PHILTRUST BANK or order...12 An instrument
which begins with I, We, or Either of us promise to pay, when signed by two or more
persons, makes them solidarily liable.13 Also, the phrase joint and several binds the
makers jointly and individually to the payee so that all may be sued together for its
enforcement, or the creditor may select one or more as the object of the suit.14 Having
signed under such terms, Roxas assumed the solidary liability of a debtor and Philtrust
Bank may choose to enforce the notes against him alone or jointly with Astro.
Roxas claim that the phrases in his personal capacity and in his official capacity were
inserted on the notes without his knowledge was correctly disregarded by the RTC and
the Court of Appeals. It is not disputed that Roxas does not deny that he signed the notes
twice. As aptly found by both the trial and appellate court, Roxas did not offer any
explanation why he did so. It devolves upon him to overcome the presumptions that
private transactions are presumed to be fair and regular[15 and that a person takes
ordinary care of his concerns.16 Aside from his self-serving allegations, Roxas failed to
prove the truth of such allegations. Thus, said presumptions prevail over his claims. Bare
allegations, when unsubstantiated by evidence, documentary or otherwise, are not
equivalent to proof under our Rules of Court.17

Subrogation is the transfer of all the rights of the creditor to a third person, who

Page

Lastly, Philguarantee has all the right to proceed against petitioner, it is subrogated to the
rights of Philtrust to demand for and collect payment from both Roxas and Astro since it
already paid the value of 70% of roxas and Astro Electronics Corp.s loan obligation. In
compliance with its contract of Guarantee in favor of Philtrust.

24

Roxas is the President of Astro and reasonably, a businessman who is presumed to take
ordinary care of his concerns. Absent any countervailing evidence, it cannot be gainsaid
that he will not sign document without first informing himself of its contents and
consequences. Clearly, he knew the nature of the transactions and documents involved as
he not only executed these notes on two different dates but he also executed, and again,
signed twice, a continuing Surety ship Agreement notarized on July 31, 1981, wherein he
guaranteed, jointly and severally with Astro the repayment of P3,000,000.00 due to
Philtrust. Such continuing suretyship agreement even re-enforced his solidary liability
Philtrust because as a surety, he bound himself jointly and severally with Astros
obligation.18 Roxas cannot now avoid liability by hiding under the convenient excuse that
he merely signed the notes in blank and the phrases in personal capacity and in his official
capacity were fraudulently inserted without his knowledge.

substitutes him in all his rights.19 It may either be legal or conventional. Legal
subrogation is that which takes place without agreement but by operation of law because
of certain acts.[20 Instances of legal subrogation are those provided in Article 1302 of the
Civil Code. Conventional subrogation, on the other hand, is that which takes place by
agreement of the parties.21
Roxas acquiescence is not necessary for subrogation to take place because the instant case
is one of the legal subrogation that occurs by operation of law, and without need of the
debtors knowledge.22 Further, Philguarantee, as guarantor, became the transferee of all
the rights of Philtrust as against Roxas and Astro because the guarantor who pays is
subrogated by virtue thereof to all the rights which the creditor had against the debtor.23
WHEREFORE, finding no error with the decision of the Court of Appeals dated December
10, 1998, the same is hereby AFFIRMED in toto.
SO ORDERED.
Bellosillo, (Chairman), Callejo, Sr., and Tinga, JJ., concur.

Page

25

Quisumbing, J., in the result.

G.R. No. 154183

August 7, 2003

SPOUSES VICKY TAN TOH and LUIS TOH, petitioners,

vs.
SOLID BANK CORPORATION, FIRST BUSINESS PAPER CORPORATION, KENNETH NG
LI and MA. VICTORIA NG LI, respondents.
BELLOSILLO, J.:
RESPONDENT SOLID BANK CORPORATION AGREED TO EXTEND an "omnibus line" credit
facility worth P10 million in favor of respondent First Business Paper Corporation (FBPC).
The terms and conditions of the agreement as well as the checklist of documents
necessary to open the credit line were stipulated in a "letter-advise" of the Bank dated 16
May 1993 addressed to FBPC and to its President, respondent Kenneth Ng Li.1 The "letteradvise"2 was effective upon "compliance with the documentary requirements."3
The documents essential for the credit facility and submitted for this purpose were the (a)
Board Resolution or excerpts of the Board of Directors Meeting, duly ratified by a Notary
Public, authorizing the loan and security arrangement as well as designating the officers to
negotiate and sign for FBPC specifically stating authority to mortgage, pledge and/or
assign the properties of the corporation; (b) agreement to purchase Domestic Bills; and,
(c) Continuing Guaranty for any and all amounts signed by petitioner-spouses Luis Toh
and Vicky Tan Toh, and respondent-spouses Kenneth and Ma. Victoria Ng Li.4 The spouses
Luis Toh and Vicky Tan Toh were then Chairman of the Board and Vice-President,
respectively, of FBPC, while respondent-spouses Kenneth Ng Li and Ma. Victoria Ng Li
were President and General Manager, respectively, of the same corporation.5

Page

On 10 May 1993, more than thirty (30) days from date of the "letter-advise," petitionerspouses Luis Toh and Vicky Tan Toh and respondent-spouses Kenneth Ng Li and Ma.
Victoria Ng Li signed the required Continuing Guaranty, which was embodied in a public
document prepared solely by respondent Bank.6 The terms of the instrument defined the
contract arising therefrom as a surety agreement and provided for the solidary liability of
the signatories thereto for and in consideration of "loans or advances" and "credit in any
other manner to, or at the request or for the account" of FBPC.

26

It is not disputed that the credit facility as well as its terms and conditions was not
cancelled or terminated, and that there was no prior notice of such fact as required in the
"letter-advise," if any was done.

The Continuing Guaranty set forth no maximum limit on the indebtedness that respondent
FBPC may incur and for which the sureties may be liable, stating that the credit facility
"covers any and all existing indebtedness of, and such other loans and credit facilities
which may hereafter be granted to FIRST BUSINESS PAPER CORPORATION." The surety
also contained a de facto acceleration clause if "default be made in the payment of any of
the instruments, indebtedness, or other obligation" guaranteed by petitioners and
respondents. So as to strengthen this security, the Continuing Guaranty waived rights of
the sureties against delay or absence of notice or demand on the part of respondent Bank,
and gave future consent to the Bank's action to "extend or change the time payment,
and/or the manner, place or terms of payment," including renewal, of the credit facility or
any part thereof in such manner and upon such terms as the Bank may deem proper
without notice to or further assent from the sureties.
The effectivity of the Continuing Guaranty was not contingent upon any event or cause
other than the written revocation thereof with notice to the Bank that may be executed by
the sureties.
On 16 June 1993 respondent FBPC started to avail of the credit facility and procure letters
of credit.7 On 17 November 1993 FBPC opened thirteen (13) letters of credit and obtained
loans totaling P15,227,510.00.8 As the letters of credit were secured, FBPC through its
officers Kenneth Ng Li, Ma. Victoria Ng Li and Redentor Padilla as signatories executed a
series of trust receipts over the goods allegedly purchased from the proceeds of the loans.9
On 13 January 1994 respondent Bank received information that respondent-spouses
Kenneth Ng Li and Ma. Victoria Ng Li had fraudulently departed from their conjugal
home.10 On 14 January 1994 the Bank served a demand letter upon FBPC and petitioner
Luis Toh invoking the acceleration clause11 in the trust receipts of FBPC and claimed
payment for P10,539,758.68 as unpaid overdue accounts on the letters of credit plus
interests and penalties within twenty-four (24) hours from receipt thereof.12 The Bank
also invoked the Continuing Guaranty executed by petitioner-spouses Luis Toh and Vicky
Tan Toh who were the only parties known to be within national jurisdiction to answer as
sureties for the credit facility of FBPC.13

Page

Meanwhile, with the implementation of the writ of preliminary attachment resulting in the
impounding of purported properties of FBPC, the trial court was deluged with third-party
claims contesting the propriety of the attachment.16 In the end, the Bank relinquished

27

On 17 January 1994 respondent Bank filed a complaint for sum of money with ex parte
application for a writ of preliminary attachment against FBPC, spouses Kenneth Ng Li and
Ma. Victoria Ng Li, and spouses Luis Toh and Vicky Tan Toh, docketed as Civil Case No.
64047 of RTC-Br. 161, Pasig City.14 Alias summonses were served upon FBPC and spouses
Luis Toh and Vicky Tan Toh but not upon Kenneth Ng Li and Ma. Victoria Ng Li who had
apparently absconded.15

possession of all the attached properties to the third-party claimants except for two (2)
insignificant items as it allegedly could barely cope with the yearly premiums on the
attachment bonds.17
Petitioner-spouses Luis Toh and Vicky Tan Toh filed a joint answer to the complaint
where they admitted being part of FBPC from its incorporation on 29 August 1991, which
was then known as "MNL Paper, Inc.," until its corporate name was changed to "First
Business Paper Corporation."18 They also acknowledged that on 6 March 1992 Luis Toh
was designated as one of the authorized corporate signatories for transactions in relation
to FBPC's checking account with respondent Bank.19 Meanwhile, for failing to file an
answer, respondent FBPC was declared in default.20
Petitioner-spouses however could not be certain whether to deny or admit the due
execution and authenticity of the Continuing Guaranty.21 They could only allege that they
were made to sign papers in blank and the Continuing Guaranty could have been one of
them.
Still, as petitioners asserted, it was impossible and absurd for them to have freely and
consciously executed the surety on 10 May 1993, the date appearing on its face 22 since
beginning March of that year they had already divested their shares in FBPC and assigned
them in favor of respondent Kenneth Ng Li although the deeds of assignment were
notarized only on 14 June 1993.23 Petitioners also contended that through FBPC Board
Resolution dated 12 May 1993 petitioner Luis Toh was removed as an authorized
signatory for FBPC and replaced by respondent-spouses Kenneth Ng Li and Ma. Victoria
Ng Li and Redentor Padilla for all the transactions of FBPC with respondent Bank.24 They
even resigned from their respective positions in FBPC as reflected in the 12 June 1993
Secretary's Certificate submitted to the Securities and Exchange Commission25 as
petitioner Luis Toh was succeeded as Chairman by respondent Ma. Victoria Ng Li, while
one Mylene C. Padilla took the place of petitioner Vicky Tan Toh as Vice-President.26

Page

On 16 May 1996 the trial court promulgated its Decision in Civil Case No. 64047 finding
respondent FBPC liable to pay respondent Solid Bank Corporation the principal of
P10,539,758.68 plus twelve percent (12%) interest per annum from finality of the Decision
until fully paid, but absolving petitioner-spouses Luis Toh and Vicky Tan Toh of any
liability to respondent Bank.29 The court a quo found that petitioners "voluntarily affixed
their signature[s]" on the Continuing Guaranty and were thus "at some given point in time

28

Finally, petitioners averred that sometime in June 1993 they obtained from respondent
Kenneth Ng Li their exclusion from the several surety agreements they had entered into
with different banks, i.e., Hongkong and Shanghai Bank, China Banking Corporation, Far
East Bank and Trust Company, and herein respondent Bank.27 As a matter of record, these
other banks executed written surety agreements that showed respondent Kenneth Ng Li
as the only surety of FBPC's indebtedness.28

willing to be liable under those forms,"30 although it held that petitioners were not bound
by the surety contract since the letters of credit it was supposed to secure were opened
long after petitioners had ceased to be part of FBPC.31
The trial court described the Continuing Guaranty as effective only while petitionerspouses were stockholders and officers of FBPC since respondent Bank compelled
petitioners to underwrite FBPC's indebtedness as sureties without the requisite
investigation of their personal solvency and capability to undertake such risk.32 The lower
court also believed that the Bank knew of petitioners' divestment of their shares in FBPC
and their subsequent resignation as officers thereof as these facts were obvious from the
numerous public documents that detailed the changes and substitutions in the list of
authorized signatories for transactions between FBPC and the Bank, including the many
trust receipts being signed by persons other than petitioners,33 as well as the designation
of new FBPC officers which came to the notice of the Bank's Vice-President Jose Chan Jr.
and other officers.34
On 26 September 1996 the RTC-Br. 161 of Pasig City denied reconsideration of its
Decision.35
On 9 October 1996 respondent Bank appealed the Decision to the Court of Appeals,
docketed as CA-G.R. CV No. 55957.36 Petitioner-spouses did not move for reconsideration
nor appeal the finding of the trial court that they voluntarily executed the Continuing
Guaranty.

Page

Finally, the Court of Appeals rejected petitioners' argument that there were "material
alterations" in the provisions of the "letter-advise," i.e., that only domestic letters of credit
were opened when the credit facility was for importation of papers and other materials,
and that marginal deposits were not paid, contrary to the requirements stated in the
"letter-advise."41 The simple response of the appellate court to this challenge was, first, the
"letter-advise" itself authorized the issuance of domestic letters of credit, and second, the

29

The appellate court modified the Decision of the trial court and held that by signing the
Continuing Guaranty, petitioner-spouses became solidarily liable with FBPC to pay
respondent Bank the amount of P10,539,758.68 as principal with twelve percent (12%)
interest per annum from finality of the judgment until completely paid.37 The Court of
Appeals ratiocinated that the provisions of the surety agreement did not "indicate that
Spouses Luis and Vicky Toh x x x signed the instrument in their capacities as Chairman of
the Board and Vice-President, respectively, of FBPC only."38 Hence, the court a quo
deduced, "[a]bsent any such indication, it was error for the trial court to have presumed
that the appellees indeed signed the same not in their personal capacities."39 The appellate
court also ruled that as petitioners failed to execute any written revocation of the
Continuing Guaranty with notice to respondent Bank, the instrument remained in full
force and effect when the letters of credit were availed of by respondent FBPC.40

several waivers extended by petitioners in the Continuing Guaranty, which included

changing the time and manner of payment of the indebtedness, justified the action of
respondent Bank not to charge marginal deposits.42
Petitioner-spouses moved for reconsideration of the Decision, and after respondent Bank's
comment, filed a lengthy Reply with Motion for Oral Argument.43 On 2 July 2002
reconsideration of the Decision was denied on the ground that no new matter was raised
to warrant the reversal or modification thereof.44 Hence, this Petition for Review.
Petitioner-spouses Luis Toh and Vicky Tan Toh argue that the Court of Appeals denied
them due process when it did not grant their motion for reconsideration and without
"bother[ing] to consider [their] Reply with Motion for Oral Argument." They maintain that
the Continuing Guaranty is not legally valid and binding against them for having been
executed long after they had withdrawn from FBPC. Lastly, they claim that the surety
agreement has been extinguished by the material alterations thereof and of the "letteradvise" which were allegedly brought about by (a) the provision of an acceleration clause
in the trust receipts; (b) the flight of their co-sureties, respondent-spouses Kenneth Ng Li
and Ma. Victoria Ng Li; (c) the grant of credit facility despite the non-payment of marginal
deposits in an amount beyond the credit limit of P10 million pesos; (d) the inordinate
delay of the Bank in demanding the payment of the indebtedness; (e) the presence of
ghost deliveries and fictitious purchases using the Bank's letters of credit and trust
receipts; (f) the extension of the due dates of the letters of credit without the required
25% partial payment per extension; (g) the approval of another letter of credit, L/C 930042, even after respondent-spouses Kenneth Ng Li and Ma. Victoria Ng Li had defaulted
on their previous obligations; and, (h) the unmistakable pattern of fraud.

Page

To begin with, we find no merit in petitioners' claim that the Court of Appeals deprived
them of their right to due process when the court a quo did not address specifically and
explicitly their Reply with Motion for Oral Argument. While the Resolution of the appellate
court of 2 July 2002 made no mention thereof in disposing of their arguments on

30

Respondent Solid Bank maintains on the other hand that the appellate court is presumed
to have passed upon all points raised by petitioners' Reply with Motion for Oral Argument
as this pleading formed part of the records of the appellate court. It also debunks the claim
of petitioners that they were inexperienced and ignorant parties who were taken
advantage of in the Continuing Guaranty since petitioners are astute businessmen who are
very familiar with the "ins" and "outs" of banking practice. The Bank further argues that
the notarization of the Continuing Guaranty discredits the uncorroborated assertions
against the authenticity and due execution thereof, and that the Decision of the trial court
in the civil case finding the surety agreement to be valid and binding is now res judicata
for failure of petitioners to appeal therefrom. As a final point, the Bank refers to the
various waivers made by petitioner-spouses in the Continuing Guaranty to justify the
extension of the due dates of the letters of credit.

reconsideration, it is presumed that "all matters within an issue raised in a case were laid
before the court and passed upon it."45 In the absence of evidence to the contrary, we must
rule that the court a quo discharged its task properly. Moreover, a reading of the assailed
Resolution clearly makes reference to a "careful review of the records," which undeniably
includes the Reply with Motion for Oral Argument, hence there is no reason for petitioners
to asseverate otherwise.
This Court holds that the Continuing Guaranty is a valid and binding contract of petitionerspouses as it is a public document that enjoys the presumption of authenticity and due
execution. Although petitioners as appellees may raise issues that have not been assigned
as errors by respondent Bank as party-appellant, i.e., unenforceability of the surety
contract, we are bound by the consistent finding of the courts a quo that petitionerspouses Luis Toh and Vicky Tan Toh "voluntarily affixed their signature[s]" on the surety
agreement and were thus "at some given point in time willing to be liable under those
forms."46 In the absence of clear, convincing and more than preponderant evidence to the
contrary, our ruling cannot be otherwise.
Similarly, there is no basis for petitioners to limit their responsibility thereon so long as
they were corporate officers and stockholders of FBPC. Nothing in the Continuing
Guaranty restricts their contractual undertaking to such condition or eventuality. In fact
the obligations assumed by them therein subsist "upon the undersigned, the heirs,
executors, administrators, successors and assigns of the undersigned, and shall inure to
the benefit of, and be enforceable by you, your successors, transferees and assigns," and
that their commitment "shall remain in full force and effect until written notice shall have
been received by [the Bank] that it has been revoked by the undersigned." Verily, if
petitioners intended not to be charged as sureties after their withdrawal from FBPC, they
could have simply terminated the agreement by serving the required notice of revocation
upon the Bank as expressly allowed therein.47 In Garcia v. Court of Appeals[48] we ruled

Page

But as we bind the spouses Luis Toh and Vicky Tan Toh to the surety agreement they
signed so must we also hold respondent Bank to its representations in the "letter-advise"
of 16 May 1993. Particularly, as to the extension of the due dates of the letters of credit,
we cannot exclude from the Continuing Guaranty the preconditions of the Bank that were

31

Regarding the petitioner's claim that he is liable only as a corporate officer of WMC, the
surety agreement shows that he signed the same not in representation of WMC or as its
president but in his personal capacity. He is therefore personally bound. There is no law
that prohibits a corporate officer from binding himself personally to answer for a
corporate debt. While the limited liability doctrine is intended to protect the stockholder
by immunizing him from personal liability for the corporate debts, he may nevertheless
divest himself of this protection by voluntarily binding himself to the payment of the
corporate debts. The petitioner cannot therefore take refuge in this doctrine that he has by
his own acts effectively waived.

plainly stipulated in the "letter-advise." Fairness and justice dictate our doing so, for the
Bank itself liberally applies the provisions of cognate agreements whenever convenient to
enforce its contractual rights, such as, when it harnessed a provision in the trust receipts
executed by respondent FBPC to declare its entire indebtedness as due and demandable
and thereafter to exact payment thereof from petitioners as sureties.49 In the same
manner, we cannot disregard the provisions of the "letter-advise" in sizing up the panoply
of commercial obligations between the parties herein.
Insofar as petitioners stipulate in the Continuing Guaranty that respondent Bank "may at
any time, or from time to time, in [its] discretion x x x extend or change the time payment,"
this provision even if understood as a waiver is confined per se to the grant of an extension
and does not surrender the prerequisites therefor as mandated in the "letter-advise." In
other words, the authority of the Bank to defer collection contemplates only authorized
extensions, that is, those that meet the terms of the "letter-advise."
Certainly, while the Bank may extend the due date at its discretion pursuant to the
Continuing Guaranty, it should nonetheless comply with the requirements that domestic
letters of credit be supported by fifteen percent (15%) marginal deposit extendible three
(3) times for a period of thirty (30) days for each extension, subject to twenty-five percent
(25%) partial payment per extension. This reading of the Continuing Guaranty is
consistent with Philippine National Bank v. Court of Appeals50 that any doubt on the terms
and conditions of the surety agreement should be resolved in favor of the surety.

Page

It is admitted in the Complaint of respondent Bank before the trial court that several
letters of credit were irrevocably extended for ninety (90) days with alarmingly flawed
and inadequate consideration - the indispensable marginal deposit of fifteen percent
(15%) and the twenty-five percent (25%) prerequisite for each extension of thirty (30)

32

Furthermore, the assurance of the sureties in the Continuing Guaranty that "[n]o act or
omission of any kind on [the Bank's] part in the premises shall in any event affect or
impair this guaranty"51 must also be read "strictissimi juris" for the reason that petitioners
are only accommodation sureties, i.e., they received nothing out of the security contract
they signed.52 Thus said, the acts or omissions of the Bank conceded by petitioners as not
affecting nor impairing the surety contract refer only to those occurring "in the premises,"
or those that have been the subject of the waiver in the Continuing Guaranty, and stretch
to no other. Stated otherwise, an extension of the period for enforcing the indebtedness
does not by itself bring about the discharge of the sureties unless the extra time is not
permitted within the terms of the waiver, i.e., where there is no payment or there is
deficient settlement of the marginal deposit and the twenty-five percent (25%)
consideration, in which case the illicit extension releases the sureties. Under Art. 2055 of
the Civil Code, the liability of a surety is measured by the terms of his contract, and while
he is liable to the full extent thereof, his accountability is strictly limited to that assumed
by its terms.

days. It bears stressing that the requisite marginal deposit and security for every thirty
(30) - day extension specified in the "letter-advise" were not set aside or abrogated nor
was there any prior notice of such fact, if any was done.
Moreover, these irregular extensions were candidly admitted by Victor Ruben L. Tuazon,
an account officer and manager of respondent Bank and its lone witness in the civil case
Q:

You extended it even if there was no marginal deposit?

A:

Yes.

Q:

And even if partial payment is less than 25%?

A:

Yes x x x x

Q:
You have repeatedly extended despite the insufficiency partial payment
requirement?
A:

I would say yes.53

The foregoing extensions of the letters of credit made by respondent Bank without
observing the rigid restrictions for exercising the privilege are not covered by the waiver
stipulated in the Continuing Guaranty. Evidently, they constitute illicit extensions
prohibited under Art. 2079 of the Civil Code, "[a]n extension granted to the debtor by the
creditor without the consent of the guarantor extinguishes the guaranty." This act of the
Bank is not mere failure or delay on its part to demand payment after the debt has become
due, as was the case in unpaid five (5) letters of credit which the Bank did not extend,
defer or put off,54 but comprises conscious, separate and binding agreements to extend the
due date, as was admitted by the Bank itself
Q:
How much was supposed to be paid on 14 September 1993, the original LC of
P1,655,675.13?
A:
Under LC 93-0017 first matured on 14 September 1993. We rolled it over,
extended it to December 13, 1993 but they made partial payment that is why we extended
it.

Page

A:
Whenever this obligation becomes due and demandable except when you roll it
over so there is novation there on the original obligations55 (underscoring supplied).

33

Q:
The question to you now is how much was paid? How much is supposed to be paid
on September 14, 1993 on the basis of the original amount of P1,655,675.13?

As a result of these illicit extensions, petitioner-spouses Luis Toh and Vicky Tan Toh are
relieved of their obligations as sureties of respondent FBPC under Art. 2079 of the Civil
Code.
Further, we note several suspicious circumstances that militate against the enforcement of
the Continuing Guaranty against the accommodation sureties. Firstly, the guaranty was
executed more than thirty (30) days from the original acceptance period as required in
the "letter-advise." Thereafter, barely two (2) days after the Continuing Guaranty was
signed, corporate agents of FBPC were replaced on 12 May 1993 and other adjustments in
the corporate structure of FBPC ensued in the month of June 1993, which the Bank did not
investigate although such were made known to it.
By the same token, there is no explanation on record for the utter worthlessness of the
trust receipts in favor of the Bank when these documents ought to have added more
security to the indebtedness of FBPC. The Bank has in fact no information whether the
trust receipts were indeed used for the purpose for which they were obtained. 56 To be
sure, the goods subject of the trust receipts were not entirely lost since the security officer
of respondent Bank who conducted surveillance of FBPC even had the chance to intercept
the surreptitious transfer of the items under trust: "We saw two (2) delivery vans with
Plates Nos. TGH 257 and PAZ 928 coming out of the compound x x x [which were] taking
out the last supplies stored in the compound."57 In addition, the attached properties of
FBPC, except for two (2) of them, were perfunctorily abandoned by respondent Bank
although the bonds therefor were considerably reduced by the trial court.58
The consequence of these omissions is to discharge the surety, petitioners herein, under
Art. 2080 of the Civil Code,59 or at the very least, mitigate the liability of the surety up to
the value of the property or lien released

Page

For the same reason, the grace period granted by respondent Bank represents
unceremonious abandonment and forfeiture of the fifteen percent (15%) marginal deposit
and the twenty-five percent (25%) partial payment as fixed in the "letter-advise." These
payments are unmistakably additional securities intended to protect both respondent
Bank and the sureties in the event that the principal debtor FBPC becomes insolvent
during the extension period. Compliance with these requisites was not waived by
petitioners in the Continuing Guaranty. For this unwarranted exercise of discretion,

34

If the creditor x x x has acquired a lien upon the property of a principal, the creditor at
once becomes charged with the duty of retaining such security, or maintaining such lien in
the interest of the surety, and any release or impairment of this security as a primary
resource for the payment of a debt, will discharge the surety to the extent of the value of
the property or lien released x x x x [for] there immediately arises a trust relation between
the parties, and the creditor as trustee is bound to account to the surety for the value of
the security in his hands.60

respondent Bank bears the loss; due to its unauthorized extensions to pay granted to
FBPC, petitioner-spouses Luis Toh and Vicky Tan Toh are discharged as sureties under the
Continuing Guaranty.
Finally, the foregoing omission or negligence of respondent Bank in failing to safe-keep
the security provided by the marginal deposit and the twenty-five percent (25%)
requirement results in the material alteration of the principal contract, i.e., the "letteradvise," and consequently releases the surety.61 This inference was admitted by the Bank
through the testimony of its lone witness that "[w]henever this obligation becomes due
and demandable, except when you roll it over, (so) there is novation there on the original
obligations." As has been said, "if the suretyship contract was made upon the condition
that the principal shall furnish the creditor additional security, and the security being
furnished under these conditions is afterwards released by the creditor, the surety is
wholly discharged, without regard to the value of the securities released, for such a
transaction amounts to an alteration of the main contract."62
WHEREFORE, the instant Petition for Review is GRANTED. The Decision of the Court of
Appeals dated 12 December 2001 in CA-G.R. CV No. 55957, Solid Bank Corporation v. First
Business Paper Corporation, Kenneth Ng Li, Ma. Victoria Ng Li, Luis Toh and Vicky Tan
Toh, holding petitioner-spouses Luis Toh and Vicky Tan Toh solidarily liable with First
Business Paper Corporation to pay Solid Bank Corporation the amount of P10,539,758.68
as principal with twelve percent (12%) interest per annum until fully paid, and its
Resolution of 2 July 2002 denying reconsideration thereof are REVERSED and SET ASIDE.
The Decision dated 16 May 1996 of RTC-Br. 161 of Pasig City in Civil Case No. 64047, Solid
Bank Corporation v. First Business Paper Corporation, Kenneth Ng Li, Ma. Victoria Ng Li,
Luis Toh and Vicky Tan Toh, finding First Business Paper Corporation liable to pay
respondent Solid Bank Corporation the principal of P10,539,758.68 plus twelve percent
(12%) interest per annum until fully paid, but absolving petitioner-spouses Luis Toh and
Vicky Tan Toh of any liability to respondent Solid Bank Corporation is REINSTATED and
AFFIRMED. No costs.
SO ORDERED.

Page

35

Quisumbing, Austria-Martinez, and Tinga, JJ., concur.

Callejo, Sr., J., on leave.

G.R. No. 119800

November 12, 2003

FILIPINAS TEXTILE MILLS, INC. and BERNARDINO VILLANUEVA, Petitioners,

vs.
COURT OF APPEALS and STATE INVESTMENT HOUSE, INC. Respondents.
DECISION

Page

Before this Court is a Petition for Review on Certiorari assailing the Decision1 and
Resolution2 of the Court of Appeals dated June 16, 1994 and April 19, 1995, respectively,
affirming the Decision3 of the Regional Trial Court dated July 23, 1990 which found the
petitioners Filipinas Textile Mills, Inc. ("Filtex") and Bernardino Villanueva ("Villanueva")

36

Tinga, J.:

jointly and severally liable to respondent State Investment House, Inc. ("SIHI") for the
amount of P7,868,881.11.
The antecedent facts are as follows:
On December 6, 1985, SIHI instituted a Complaint4 for the collection of the sum of
P3,118,949.75, with interest, penalties, exemplary damages, attorneys fees and costs of
suit against herein petitioners Filtex and Villanueva.
In its Complaint, SIHI alleged that sometime in 1983, Filtex applied for domestic letters of
credit to finance the purchase of various raw materials for its textile business. Finding the
application to be in order, SIHI issued on various dates domestic letters of credit5
authorizing Indo-Philippine Textile Mills, Inc. ("Indo-Phil"), Texfiber Corporation
("Texfiber"), and Philippine Polyamide Industrial Corporation ("Polyamide") "to value" on
SIHI such drafts as may be drawn by said corporations against Filtex for an aggregate
amount not exceeding P3,737,988.05.
Filtex used these domestic letters of credit to cover its purchase of various textile
materials from Indo-Phil, Texfiber and Polyamide. Upon the sale and delivery of the
merchandise, Indo-Phil, Texfiber and Polyamide issued several sight drafts6 on various
dates with an aggregate value of P3,736,276.71 payable to the order of SIHI, which were
duly accepted by Filtex. Subsequently, the sight drafts were negotiated to and acquired in
due course by SIHI which paid the value thereof to Indo-Phil, Texfiber and Polyamide for
the account of Filtex.

Page

In order to ensure the payment of the sight drafts aforementioned, Filtex executed and
issued to SIHI several trust receipts8 of various dates, which were later extended with the
issuance of replacement trust receipts all dated June 22, 1984, covering the merchandise
sold. Under the trust receipts, Filtex agreed to hold the merchandise in trust for SIHI, with
liberty to sell the same for SIHI's account but without authority to make any other
disposition of the said goods. Filtex likewise agreed to hand the proceeds, as soon as
received, to SIHI "to apply" against any indebtedness of the former to the latter. Filtex also
agreed to pay SIHI interest at the rate of 25% per annum from the time of release of the
amount to Indo-Phil, Texfiber and Polyamide until the same is fully paid, subject to SIHI's
option to reduce the interest rate. Furthermore, in case of delay in the payment at

37

Allegedly by way of inducement upon SIHI to issue the aforesaid domestic letters of credit
and "to value" the sight drafts issued by Indo-Phil, Texfiber and Polyamide, Villanueva
executed a comprehensive surety agreement7 on November 9, 1982, whereby he
guaranteed, jointly and severally with Filtex, the full and punctual payment at maturity to
SIHI of all the indebtedness of Filtex. The essence of the comprehensive surety agreement
was that it shall be a continuing surety until such time that the total outstanding
obligation of Filtex to SIHI had been fully settled.

maturity of the aggregate amount of the sight drafts negotiated to SIHI, said amount shall
be subject to two percent (2%) per month penalty charge payable from the date of default
until the amount is fully paid.
Because of Filtex's failure to pay its outstanding obligation despite demand, SIHI filed a
Complaint on December 6, 1985 praying that the petitioners be ordered to pay, jointly and
severally, the principal amount of P3,118,949.75, plus interest and penalties, attorney's
fees, exemplary damages, costs of suit and other litigation expenses.
In its Answer with Counterclaim,9 Filtex interposed special and affirmative defenses, i.e.,
the provisions of the trust receipts, as well as the comprehensive surety agreement, do not
reflect the true will and intention of the parties, full payment of the obligation, and lack of
cause of action. For his part, Villanueva interposed the same special and affirmative
defenses and added that the comprehensive surety agreement is null and void and
damages and attorney's fees are not legally demandable.10 The petitioners, however, failed
to specifically deny under oath the genuineness and due execution of the actionable
documents upon which the Complaint was based.
On July 23, 1990, the Regional Trial Court of Manila rendered judgment11 holding Filtex
and Villanueva jointly and severally liable to SIHI. Dissatisfied, Filtex and Villanueva filed
an Appeal,12 primarily contending that they have fully paid their indebtedness to SIHI and
asserting that the letters of credit, sight drafts, trust receipts and comprehensive surety
agreement upon which the Complaint is based are inadmissible in evidence supposedly
because of non-payment of documentary stamp taxes as required by the Internal Revenue
Code.13

Page

The appellate court denied the petitioners' Motion for Reconsideration16 in its Resolution,17
ruling that the petitioners failed to raise new and substantial matters that would warrant
the reversal of its Decision. However, due to certain typographical oversights, the Court of
Appeals modified its Decision and stated that the correct unpaid balance as of January 31,
1989 was actually P7,868,881.11, excluding litigation and other miscellaneous expenses
and filing fees.18

38

In its assailed Decision, the Court of Appeals debunked the petitioners' contention that the
letters of credit, sight drafts, trust receipts and comprehensive surety agreement are
inadmissible in evidence ruling that the petitioners had "in effect, admitted the
genuineness and due execution of said documents because of their failure to have their
answers placed under oath, the complaint being based on actionable documents in line
with Section 7, Rule 8 of the Rules of Court."14 The appellate court also ruled that there
remained an unpaid balance as of January 31, 1989 of P868,881.11 for which Filtex and
Villanueva are solidarily liable.15

In asking this Court to reverse and set aside the aforementioned Decision and Resolution of
the Court of Appeals, the petitioners argued that the appellate court should not have
admitted in evidence the letters of credit, sight drafts, trust receipts and comprehensive
surety agreement for lack of the requisite documentary stamps thereon. They
hypothesized that their implied admission of the genuineness and due execution of these
documents for failure to specifically deny the same under oath should not be equated with
an admission in evidence of the documents and an admission of their obligation. They also
maintained that they have fully paid the obligation and, in fact, have made an excess
payment in the amount of P415,722.53. In addition, Villanueva asserted that the
comprehensive surety agreement which he executed is null and void, inadmissible in
evidence and contains material alterations. Thus, he claimed that he should not be held
solidarily liable with Filtex.
Traversing the allegations in the instant petition, SIHI stated in its Comment19 that in their
respective answers to the complaint, the petitioners expressly admitted the due execution
of the letters of credit, sight drafts and trust receipts and their obligation arising from
these documents. Having done so, they could no longer question the admissibility of these
documents. Moreover, their allegation of inadmissibility of these documents is
inconsistent with their defense of full payment. SIHI also reasoned that the documentary
stamps, assuming they are required, are for the sole account of Filtex not only because the
letters of credit were issued at its instance and application but also because it was the
issuer and acceptor of the trust receipts and sight drafts, respectively. As regards the
petitioners' allegation of full payment, SIHI stressed that the appellate court had already
resolved this issue in its favor by ruling that there remained an unpaid balance of
P7,868,881.11 as of January 31, 1989 for which the petitioners were held solidarily liable.
Besides, by quoting substantial portions of their appellants' Brief in the instant petition,
the petitioners merely repeated the issues that have already been passed upon by the
appellate court. Finally, SIHI asserted the validity and admissibility of the comprehensive
surety agreement.

Page

We rule in the affirmative. As correctly noted by the respondent, the Answer with
Counterclaim21 and Answer,22 of Filtex and Villanueva, respectively, did not contain any
specific denial under oath of the letters of credit, sight drafts, trust receipts and
comprehensive surety agreement upon which SIHI's Complaint23 was based, thus giving
rise to the implied admission of the genuineness and due execution of these documents.
Under Sec. 8, Rule 8 of the Rules of Court, when an action or defense is founded upon a
written instrument, copied in or attached to the corresponding pleading as provided in the
preceding section, the genuineness and due execution of the instrument shall be deemed

39

The threshold issue in this case is whether or not the letters of credit, sight drafts, trust
receipts and comprehensive surety agreement are admissible in evidence despite the
absence of documentary stamps thereon as required by the Internal Revenue Code.20

admitted unless the adverse party, under oath, specifically denies them, and sets forth
what he claims to be the facts.
In Benguet Exploration, Inc. vs. Court of Appeals,24 this Court ruled that the admission of the
genuineness and due execution of a document means that the party whose signature it
bears admits that he voluntarily signed the document or it was signed by another for him
and with his authority; that at the time it was signed it was in words and figures exactly as
set out in the pleading of the party relying upon it; that the document was delivered; and
that any formalities required by law, such as a seal, an acknowledgment, or revenue
stamp, which it lacks, are waived by him.
Moreover, under Section 173 of the Internal Revenue Code the liability for payment of the
stamp taxes is imposed on "the person making, signing, issuing, accepting, or transferring"
the document. As correctly pointed out by SIHI, Filtex was the issuer and acceptor of the
trust receipts and sight drafts, respectively, while the letters of credit were issued upon its
application. On the other hand, Villanueva signed the comprehensive surety agreement.
Thus, being among the parties obliged to pay the documentary stamp taxes, the
petitioners are estopped from claiming that the documents are inadmissible in evidence
for non-payment thereof.
Interestingly, the petitioners questioned the admissibility of these documents rather
belatedly, at the appeal stage even. Their respective answers25 to SIHI's Complaint were
silent on this point. The rule is well-settled that points of law, theories, issues and
arguments not adequately brought to the attention of the trial court need not, and
ordinarily will not, be considered by a reviewing court as they cannot be raised for the
first time on appeal because this would be offensive to the basic rules of fair play, justice
and due process.26

Page

This brings us to the petitioners' contention that they have already fully paid their
obligation to SIHI and have, in fact, overpaid by P415,722.53. This matter is purely a
factual issue. In Fortune Motors (Phils.) Corporation vs. Court of Appeals,28 it was held that
"the jurisdiction of this Court in cases brought before it from the Court of Appeals under
Rule 45 of the Rules of Court is limited to reviewing or revising errors of law. It is not the
function of this Court to analyze or weigh evidence all over again unless there is a showing
that the findings of the lower court are totally devoid of support or are glaringly
erroneous as to constitute serious abuse of discretion. Factual findings of the Court of
Appeals are conclusive on the parties and carry even more weight when said court affirms
the factual findings of the trial court."29

40

Hence, the petitioners can no longer dispute the admissibility of the letters of credit, sight
drafts, trust receipts and comprehensive surety agreement. However, this does not
preclude the petitioners from impugning these documents by evidence of fraud, mistake,
compromise, payment, statute of limitations, estoppel and want of consideration.27

It should be noted that the issue of overpayment as well as the proof presented by the
petitioners on this point merely rehash those submitted before the Court of Appeals. The
appellate court affirmed the trial court and passed upon this issue by exhaustively
detailing the amounts paid as guaranty deposit, the payments made and the balance due
for every trust receipt. This Court shall not depart from the findings of the trial court and
the appellate court, supported by the preponderance of evidence and unsatisfactorily
refuted by the petitioners, as they are.
As a final issue, Villanueva contended that the comprehensive surety agreement is null
and void for lack of consent of Filtex and SIHI. He also alleged that SIHI materially altered
the terms and conditions of the comprehensive surety agreement by granting Filtex an
extension of the period for payment thereby releasing him from his obligation as surety.
We find these contentions specious.
In the first place, the consent of Filtex to the surety may be assumed from the fact that
Villanueva was the signatory to the sight drafts and trust receipts on behalf of Filtex.30
Moreover, in its Answer with Counterclaim,31 Filtex admitted the execution of the
comprehensive surety agreement with the only qualification that it was not a means to
induce SIHI to issue the domestic letters of credit. Clearly, had Filtex not consented to the
comprehensive surety agreement, it could have easily objected to its validity and
specifically denied the same. SIHI's consent to the surety is also understood from the fact
that it demanded payment from both Filtex and Villanueva.
As regards the purported material alteration of the terms and conditions of the
comprehensive surety agreement, we rule that the extension of time granted to Filtex to
pay its obligation did not release Villanueva from his liability. As this Court held in
Palmares vs. Court of Appeals:32
"The neglect of the creditor to sue the principal at the time the debt falls due does not
discharge the surety, even if such delay continues until the principal becomes insolvent

Page

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 extension of 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

41

The raison d'etre for the rule is that there is nothing to prevent the creditor 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 principal, he may pay
the debt himself and become subrogated to all the rights and remedies of the creditor.

at least hinders him in, enforcing the principal contract within the period during which he
could otherwise have enforced it, and precludes the surety from paying the debt."33
Lastly, with regard to Villanueva's assertion that the 25% annual interest to be paid by
Filtex in case it failed to pay the amount released to suppliers was inserted by SIHI
without his consent, suffice it to say that the trust receipts bearing the alleged insertion of
the 25% annual fee are countersigned by him. His pretension of lack of knowledge and
consent thereto is obviously contrived.
In view of the foregoing, we find the instant petition bereft of merit.1wphi1
WHEREFORE, premises considered, the petition is DENIED and the assailed Decision and
Resolution of the Court of Appeals concurring with the decision of the trial court are
hereby AFFIRMED. Costs against the petitioners.
SO ORDERED.

Page

42

Bellosillo, (Chairman), Quisumbing, Austria-Martinez and Callejo, Sr., JJ., concur.

G.R. No. 34642

September 24, 1931

FABIOLA SEVERINO, accompanied by her husband RICARDO VERGARA, plaintiffsappellees,

vs.
GUILLERMO SEVERINO, ET AL., defendants.
ENRIQUE ECHAUS, appellant.
R. Nepomuceno for appellant.
Jacinto E. Evidente for appellees.

Page

This action was instituted in the Court of First Instance of the Province of Iloilo by Fabiola
Severino, with whom is joined her husband Ricardo Vergara, for the purpose of recovering
the sum of P20,000 from Guillermo Severino and Enrique Echaus, the latter in the
character of guarantor for the former. Upon hearing he cause the trial court gave
judgment in favor of the plaintiffs to recover the sum of P20,000 with lawful from
November 15, 1929, the date of the filing of the complaint, with costs. But it was declared
that execution of this judgment should issue first against the property of Guillermo
Severino, and if no property should be found belonging to said defendant sufficient to
satisfy the judgment in whole or in part, execution for the remainder should be issued
against the property of Enrique Echaus as guarantor. From this judgment the defendant
Echaus appealed, but his principal, Guillermo Severino, did not.

43

STREET, J.:

The plaintiff Fabiola Severino is the recognized natural daughter of Melecio Severino,
deceased, former resident of Occidental Negros. Upon the death of Melecio Severino a
number of years ago, he left considerable property and litigation ensued between his
widow, Felicitas Villanueva, and Fabiola Severino, on the one part, and other heirs of the
deceased on the other part. In order to make an end of this litigation a compromise was
effected by which Guillermo Severino, a son of Melecio Severino, took over the property
pertaining to the estate of his father at the same time agreeing to pay P100,000 to Felicitas
Villanueva and Fabiola Severino. This sum of money was made payable, first, P40,000 in
cash upon the execution of the document of compromise, and the balance in three several
payments of P20,000 at the end of one year; two years, and three years respectively. To
this contract the appellant Enrique Echaus affixed his name as guarantor. The first
payment of P40,000 was made on July 11, 1924, the date when the contract of
compromise was executed; and of this amount the plaintiff Fabiola Severino received the
sum of P10,000. Of the remaining P60,000, all as yet unpaid, Fabiola Severino is entitled to
the sum of P20,000.
It appears that at the time of the compromise agreement above-mentioned was executed
Fabiola Severino had not yet been judicially recognized as the natural daughter of Melecio
Severino, and it was stipulated that the last P20,000 corresponding to Fabiola and the last
P5,000 corresponding to Felicitas Villanueva should retained on deposit until the definite
status of Fabiola Severino as natural daughter of Melecio Severino should be established.
The judicial decree to this effect was entered in the Court of First Instance of Occidental
Negros on June 16, 1925, and as the money which was contemplated to be held in
suspense has never in fact been paid to the parties entitled thereto, it results that the point
respecting the deposit referred to has ceased to be of moment.

Page

The point is not well taken. A guarantor or surety is bound by the same consideration that
makes the contract effective between the principal parties thereto. (Pyle vs. Johnson, 9
Phil., 249.) The compromise and dismissal of a lawsuit is recognized in law as a valuable
consideration; and the dismissal of the action which Felicitas Villanueva and Fabiola
Severino had instituted against Guillermo Severino was an adequate consideration to
support the promise on the part of Guillermo Severino to pay the sum of money stipulated
in the contract which is the subject of this action. The promise of the appellant Echaus as
guarantor therefore binding. It is never necessary that the guarantor or surety should
receive any part of the benefit, if such there be, accruing to his principal. But the true
consideration of this contract was the detriment suffered by the plaintiffs in the former

44

The proof shows that the money claimed in this action has never been paid and is still
owing to the plaintiff; and the only defense worth noting in this decision is the assertion
on the part of Enrique Echaus that he received nothing for affixing his signature as
guarantor to the contract which is the subject of suit and that in effect the contract was
lacking in consideration as to him.

action in dismissing that proceeding, and it is immaterial that no benefit may have accrued
either to the principal or his guarantor.
The judgment appealed from is in all respects correct, and the same will be affirmed, with
costs against the appellant. So ordered.
Avancea, C.J., Johnson, Malcolm, Villamor, Ostrand, Romualdez, Villa-Real and Imperial, JJ.,
concur.

G.R. No. 103066 April 25, 1996

WILLEX PLASTIC INDUSTRIES, CORPORATION, petitioner,
vs.
HON. COURT OF APPEALS and INTERNATIONAL CORPORATE BANK, respondents.

MENDOZA, J.:p

Page

The facts are as follows:

45

This is a petition for review on certiorari of the decision 1 of the Court of Appeals in C.A.G.R. CV No. 19094, affirming the decision of the Regional Trial Court of the National
Capital Judicial Region, Branch XLV, Manila, which ordered petitioner Willex Plastic
Industries Corporation and the Inter-Resin Industrial Corporation, jointly and severally, to
pay private respondent International Corporate Bank certain sums of money, and the
appellate court's resolution of October 17, 1989 denying petitioner's motion for
reconsideration.

Sometime in 1978, Inter-Resin Industrial Corporation opened a letter of credit with the
Manila Banking Corporation. To secure payment of the credit accomodation, Inter-Resin
Industrial and the Investment and Underwriting Corporation of the Philippines (IUCP)
executed two documents, both entitled "Continuing Surety Agreement" and dated
December 1, 1978, whereby they bound themselves solidarily to pay Manilabank
"obligations of every kind, on which the [Inter-Resin Industrial] may now be indebted or
hereafter become indebted to the [Manilabank]." The two agreements (Exhs. J and K) are
the same in all respects, except as to the limit of liability of the surety, the first surety
agreement being limited to US$333,830.00, while the second one is limited to
US$334,087.00.
On April 2, 1979, Inter-Resin Industrial, together with Willex Plastic Industries Corp.,
executed a "Continuing Guaranty" in favor of IUCP whereby "For and in consideration of
the sum or sums obtained and/or to be obtained by Inter-Resin Industrial Corporation"
from IUCP, Inter-Resin Industrial and Willex Plastic jointly and severally guaranteed "the
prompt and punctual payment at maturity of the NOTE/S issued by the DEBTOR/S . . . to
the extent of the aggregate principal sum of FIVE MILLION PESOS (P5,000,000.00)
Philippine Currency and such interests, charges and penalties as hereafter may be
specified."
On January 7, 1981, following demand upon it, IUCP paid to Manilabank the sum of
P4,334,280.61 representing Inter-Resin Industrial's outstanding obligation. (Exh. M-1) On
February 23 and 24, 1981, Atrium Capital Corp., which in the meantime had succeeded
IUCP, demanded from Inter-Resin Industrial and Willex Plastic the payment of what it
(IUCP) had paid to Manilabank. As neither one of the sureties paid, Atrium filed this case
in the court below against Inter-Resin Industrial and Willex Plastic.
On August 11, 1982, Inter-Resin Industrial paid Interbank, which had in turn succeeded
Atrium, the sum of P687,600.00 representing the proceeds of its fire insurance policy for
the destruction of its properties.
In its answer, Inter-Resin Industrial admitted that the "Continuing Guaranty" was
intended to secure payment to Atrium of the amount of P4,334,280.61 which the latter
had paid to Manilabank. It claimed, however, that it had already fully paid its obligation to
Atrium Capital.

Page

(a) Assuming arguendo that main defendant is indebted to plaintiff, the former's liability is
extinguished due to the accidental fire that destroyed its premises, which liability is
covered by sufficient insurance assigned to plaintiff;

46

On the other hand, Willex Plastic denied the material allegations of the complaint and
interposed the following Special Affirmative Defenses:

(b) Again, assuming arguendo, that the main defendant is indebted to plaintiff, its account
is now very much lesser than those stated in the complaint because of some payments
made by the former;
(c) The complaint states no cause of action against WILLEX;
(d) WLLLEX is only a guarantor of the principal obliger, and thus, its liability is only
secondary to that of the principal;
(e) Plaintiff failed to exhaust the ultimate remedy in pursuing its claim against the
principal obliger;
(f) Plaintiff has no personality to sue.
On April 29, 1986, Interbank was substituted as plaintiff in the action. The case then
proceeded to trial.
On March 4, 1988, the trial court declared Inter-Resin Industrial to have waived the right
to present evidence for its failure to appear at the hearing despite due notice. On the other
hand, Willex Plastic rested its case without presenting any evidence. Thereafter Interbank
and Willex Plastic submitted their respective memoranda.
On April 5, 1988, the trial court rendered judgment, ordering Inter-Resin Industrial and
Willex Plastic jointly and severally to pay to Interbank the following amounts:
(a) P3, 646,780.61, representing their indebtedness to the plaintiff, with interest of 17%
per annum from August 11, 1982, when Inter-Resin Industrial paid P687,500.00 to the
plaintiff, until full payment of the said amount;
(b) Liquidated damages equivalent to 178 of the amount due; and
(c) Attorney's fees and expenses of litigation equivalent to 208 of the total amount due.
Inter-Resin Industrial and Willex Plastic appealed to the Court of Appeals. Willex Plastic
filed its brief, while Inter-Resin Industrial presented a "Motion to Conduct Hearing and to
Receive Evidence to Resolve Factual Issues and to Defer Filing of the Appellant's Brief."
After its motion was denied, Inter-Resin Industrial did not file its brief anymore.

Page

Willex Plastic filed a motion for reconsideration praying that it be allowed to present
evidence to show that Inter-Resin Industrial had already paid its obligation to Interbank,
but its motion was denied on December 6, 1991:

47

On February 22, 1991, the Court of Appeals rendered a decision affirming the ruling of the
trial court.

The motion is denied for lack of merit. We denied defendant-appellant Inter-Resin

Industrial's motion for reception of evidence because the situation or situations in which
we could exercise the power under BP 129 did not exist. Movant here has not presented
any argument which would show otherwise.
Hence, this petition by Willex Plastic for the review of the decision of February 22, 1991
and the resolution of December 6, 1991 of the Court of Appeals.
Petitioner raises a number of issues.
[1] The main issue raised is whether under the "Continuing Guaranty" signed on April 2,
1979 petitioner Willex Plastic may be held jointly and severally liable with Inter-Resin
Industrial for the amount paid by Interbank to Manilabank.
As already stated, the amount had been paid by Interbank's predecessor-in-interest,
Atrium Capital, to Manilabank pursuant to the "Continuing Surety Agreements" made on
December 1, 1978. In denying liability to Interbank for the amount, Willex Plastic argues
that under the "Continuing Guaranty," its liability is for sums obtained by Inter-Resin
Industrial from Interbank, not for sums paid by the latter to Manilabank for the account of
Inter-Resin Industrial. In support of this contention Willex Plastic cites the following
portion of the "Continuing Guaranty":
For and in consideration of the sums obtained and/or to be obtained by INTER-RESIN
INDUSTRIAL CORPORATION, hereinafter referred to as the DEBTOR/S, from you and/or
your principal/s as may be evidenced by promissory note/s, checks, bills receivable/s
and/or other evidence/s of indebtedness (hereinafter referred to as the NOTE/S), I/We
hereby jointly and severally and unconditionally guarantee unto you and/or your
principal/s, successor/s and assigns the prompt and punctual payment at maturity of the
NOTE/S issued by the DEBTOR/S in your and/or your principal/s, successor/s and
assigns favor to the extent of the aggregate principal sum of FIVE MILLION PESOS
(P5,000,000.00), Philippine Currency, and such interests, charges and penalties as may
hereinafter be specified.

Page

5. to secure the guarantee made by plaintiff of the credit accommodation granted to

defendant IRIC [Inter-Resin Industrial] by Manilabank, the plaintiff required defendant
IRIC [Inter-Resin Industrial] to execute a chattel mortgage in its favor and a Continuing
Guaranty which was signed by the other defendant WPIC [Willex Plastic].

48

The contention is untenable. What Willex Plastic has overlooked is the fact that evidence
aliunde was introduced in the trial court to explain that it was actually to secure payment
to Interbank (formerly IUCP) of amounts paid by the latter to Manilabank that the
"Continuing Guaranty" was executed. In its complaint below, Interbank's predecessor-ininterest, Atrium Capital, alleged:

In its answer, Inter-Resin Industrial admitted this allegation although it claimed that it had
already paid its obligation in its entirety. On the other hand, Willex Plastic, while denying
the allegation in question, merely did so "for lack of knowledge or information of the
same." But, at the hearing of the case on September 16, 1986, when asked by the trial
judge whether Willex Plastic had not filed a crossclaim against Inter-Resin Industrial,
Willex Plastic's counsel replied in the negative and manifested that "the plaintiff in this
case [Interbank] is the guarantor and my client [Willex Plastic] only signed as a guarantor
to the guarantee." 2
For its part Interbank adduced evidence to show that the "Continuing Guaranty" had been
made to guarantee payment of amounts made by it to Manilabank and not of any sums
given by it as loan to Inter-Resin Industrial. Interbank's witness testified under cross
examination by counsel for Willex Plastic that Willex "guaranteed the exposure/of
whatever exposure of ACP [Atrium Capital] will later be made because of the guarantee to
Manila Banking Corporation." 3
It has been held that explanatory evidence may be received to show the circumstances
under which a document has been made and to what debt it relates. 4 At all events, Willex
Plastic cannot now claim that its liability is limited to any amount which Interbank, as
creditor, might give directly to Inter-Resin Industrial as debtor because, by failing to
object to the parol evidence presented, Willex Plastic waived the protection of the parol
evidence rule. 5
Accordingly, the trial court found that it was "to secure the guarantee made by plaintiff of
the credit accommodation granted to defendant IRIC [Inter-Resin Industrial] by
Manilabank, [that] the plaintiff required defendant IRIC to execute a chattel mortgage in
its favor and a Continuing Guaranty which was signed by the defendant Willex Plastic
Industries Corporation." 6
Similarly, the Court of Appeals found it to be an undisputed fact that "to secure the
guarantee undertaken by plaintiff-appellee [Interbank] of the credit accommodation
granted to Inter-Resin Industrial by Manilabank, plaintiff-appellee required defendantappellants to sign a Continuing Guaranty." These factual findings of the trial court and of
the Court of Appeals are binding on us not only because of the rule that on appeal to the
Supreme Court such findings are entitled to great weight and respect but also because our
own examination of the record of the trial court confirms these findings of the two courts.

Page

Nor does the record show any other transaction under which Inter-Resin Industrial may
have obtained sums of money from Interbank. It can reasonably be assumed that InterResin Industrial and Willex Plastic intended to indemnify Interbank for amounts which it
may have paid Manilabank on behalf of Inter-Resin Industrial.

49

Indeed, in its Petition for Review in this Court, Willex Plastic admitted that it was "to
secure the aforesaid guarantee, that INTERBANK required principal debtor IRIC [InterResin Industrial] to execute a chattel mortgage in its favor, and so a "Continuing Guaranty"
was executed on April 2, 1979 by WILLEX PLASTIC INDUSTRIES CORPORATION (WILLEX
for brevity) in favor of INTERBANK for and in consideration of the loan obtained by IRIC
[Inter-Resin Industrial]."
[2] Willex Plastic argues that the "Continuing Guaranty," being an accessory contract,
cannot legally exist because of the absence of a valid principal obligation. 8 Its contention
is based on the fact that it is not a party either to the "Continuing Surety Agreement" or to
the loan agreement between Manilabank and Interbank Industrial.
Put in another way the consideration necessary to support a surety obligation need not
pass directly to the surety, a consideration moving to the principal alone being sufficient.
For a "guarantor or surety is bound by the same consideration that makes the contract
effective between the principal parties thereto. It is never necessary that a guarantor or
surety should receive any part or benefit, if such there be, accruing to his principal." 9 In an
analogous case, 10 this Court held:
At the time the loan of P100,000.00 was obtained from petitioner by Daicor, for the
purpose of having an additional capital for buying and selling coco-shell charcoal and
importation of activated carbon, the comprehensive surety agreement was admittedly in
full force and effect. The loan was, therefore, covered by the said agreement, and private
respondent, even if he did not sign the promissory note, is liable by virtue of the surety
agreement. The only condition that would make him liable thereunder is that the
Borrower "is or may become liable as maker, endorser, acceptor or otherwise." There is
no doubt that Daicor is liable on the promissory note evidencing the indebtedness.
The surety agreement which was earlier signed by Enrique Go, Sr. and private respondent,
is an accessory obligation, it being dependent upon a principal one which, in this case is
the loan obtained by Daicor as evidenced by a promissory note.

Page

The cases cited are, however, distinguishable from the present case. In El Vencedor v.
Canlas we held that a contract of suretyship "is not retrospective and no liability attaches
for defaults occurring before it is entered into unless an intent to be so liable is indicated."
There we found nothing in the contract to show that the paries intended the surety bonds
to answer for the debts contracted previous to the execution of the bonds. In contrast, in

50

[3] Willex Plastic contends that the "Continuing Guaranty" cannot be retroactivelt applied
so as to secure payments made by Interbank under the two "Continuing Surety
Agreements." Willex Plastic invokes the ruling in El Vencedor v. Canlas 11 and Di o v.
Court of Appeals 12 in support of its contention that a contract of suretyship or guaranty
should be applied prospectively.

this case, the parties to the "Continuing Guaranty" clearly provided that the guaranty
would cover "sums obtained and/or to be obtained" by Inter-Resin Industrial from
Interbank.
On the other hand, in Di o v. Court of Appeals the issue was whether the sureties could
be held liable for an obligation contracted after the execution of the continuing surety
agreement. It was held that by its very nature a continuing suretyship contemplates a
future course of dealing. "It is prospective in its operation and is generally intended to
provide security with respect to future transactions." By no means, however, was it meant
in that case that in all instances a contrast of guaranty or suretyship should be prospective
in application.
Indeed, as we also held in Bank of the Philippine Islands v. Foerster, 13 although a contract
of suretyship is ordinarily not to be construed as retrospective, in the end the intention of
the parties as revealed by the evidence is controlling. What was said there 14 applies
mutatis mutandis to the case at bar:
In our opinion, the appealed judgment is erroneous. It is very true that bonds or other
contracts of suretyship are ordinarily not to be construed as retrospective, but that rule
must yield to the intention of the contracting parties as revealed by the evidence, and does
not interfere with the use of the ordinary tests and canons of interpretation which apply
in regard to other contracts.
In the present case the circumstances so clearly indicate that the bond given by Echevarria
was intended to cover all of the indebtedness of the Arrocera upon its current account
with the plaintiff Bank that we cannot possibly adopt the view of the court below in regard
to the effect of the bond.
[4] Willex Plastic says that in any event it cannot be proceeded against without first
exhausting all property of Inter-Resin Industrial. Willex Plastic thus claims the benefit of
excussion. The Civil Code provides, however:
Art. 2059. This excussion shall not take place:
(1) If the guarantor has expressly renounced it;
(2) If he has bound himself solidarily with the debtor;

Page

If default be made in the payment of the NOTE/s herein guaranteed you and/or your
principal/s may directly proceed against Me/Us without first proceeding against and

51

The pertinent portion of the "Continuing Guaranty" executed by Willex Plastic and InterResin Industrial in favor of IUCP (now Interbank) reads:

exhausting DEBTOR/s properties in the same manner as if all such liabilities constituted
My/Our direct and primary obligations. (emphasis supplied)
This stipulation embodies an express renunciation of the right of excussion. In addition,
Willex Plastic bound itself solidarily liable with Inter-Resin Industrial under the same
agreement:
For and in consideration of the sums obtained and/or to be obtained by INTER-RESIN
INDUSTRIAL CORPORATION, hereinafter referred to as the DEBTOR/S, from you and/or
your principal/s as may be evidenced by promissory note/s, checks, bills receivable/s
and/or other evidence/s of indebtedness (hereinafter referred to as the NOTE/S), I/We
hereby jointly and severally and unconditionally guarantee unto you and/or your
principal/s, successor/s and assigns the prompt and punctual payment at maturity of the
NOTE/S issued by the DEBTOR/S in your and/or your principal/s, successor/s and
assigns favor to the extent of the aggregate principal sum of FIVE MILLION PESOS
(P5,000,000.00), Philippine Currency, and such interests, charges and penalties as may
hereinafter he specified.
[5] Finally it is contended that Inter-Resin Industrial had already paid its indebtedness to
Interbank and that Willex Plastic should have been allowed by the Court of Appeals to
adduce evidence to prove this. Suffice it to say that Inter-Resin Industrial had been given
generous opportunity to present its evidence but it failed to make use of the same. On the
otherhand, Willex Plastic rested its case without presenting evidence.
The reception of evidence of Inter-Resin Industrial was set on January 29, 1987, but
because of its failure to appear on that date, the hearing was reset on March 12, 26 and
April 2, 1987.
On March 12, 1987 Inter-Resin Industrial again failed to appear. Upon motion of Willex
Plastic, the hearings on March 12 and 26, 1987 were cancelled and "reset for the last time"
on April 2 and 30, 1987.
On April 2, 1987, Inter-Resin Industrial again failed to appear. Accordingly the trial court
issued the following order:

Page

On the other hand, Willex Plastic announced it was resting its case without presenting any
evidence.

52

Considering that, as shown by the records, the Court had exerted every earnest effort to
cause the service of notice or subpoena on the defendant Inter-Resin Industrial but to no
avail, even with the assistance of the defendant Willex the defendant Inter-Resin
Industrial is hereby deemed to have waived the right to present its evidence.

Upon motion of Inter-Resin Industrial, however, the trial court reconsidered its order and
set the hearing anew on July 23, 1987. But Inter-Resin Industrial again moved for the
postponement of the hearing be postponed to August 11, 1987. The hearing was,
therefore, reset on September 8 and 22, 1987 but the hearings were reset on October 13,
1987, this time upon motion of Interbank. To give Interbank time to comment on a motion
filed by Inter-Resin Industrial, the reception of evidence for Inter-Resin Industrial was
again reset on November 17, 26 and December 11, 1987. However, Inter-Resin Industrial
again moved for the postponement of the hearing. Accordingly the hearing was reset on
November 26 and December 11, 1987, with warning that the hearings were
intransferrable.
Again, the reception of evidence for Inter-Resin Industrial was reset on January 22, 1988
and February 5, 1988 upon motion of its counsel. As Inter-Resin Industrial still failed to
present its evidence, it was declared to have waived its evidence.
To give Inter-Resin Industrial a last opportunity to present its evidence, however, the
hearing was postponed to March 4, 1988. Again Inter-Resin Industrial's counsel did not
appear. The trial court, therefore, finally declared Inter-Resin Industrial to have waived
the right to present its evidence. On the other hand, Willex Plastic, as before, manifested
that it was not presenting evidence and requested instead for time to file a memorandum.
There is therefore no basis for the plea made by Willex Plastic that it be given the
opportunity of showing that Inter-Resin Industrial has already paid its obligation to
Interbank.
WHEREFORE, the decision of the Court of Appeals is AFFIRMED, with costs against the
petitioner.
SO ORDERED.

Page

53

Regalado, Romero, Puno and Torres, Jr., JJ., concur.

G.R. No. 89775 November 26, 1992

JACINTO UY DIO and NORBERTO UY, petitioners,
vs.
HON. COURT OF APPEALS and METROPOLITAN BANK AND TRUST COMPANY,
respondents.

DAVIDE, JR., J.:

Continuing Suretyship Agreements signed by the petitioners set off this present
controversy.
Petitioners assail the 22 June 1989 Decision of the Court in CA-G.R. CV No. 17724 1 which
reversed the 2 December 1987 Decision of Branch 45 of the Regional Trial Court (RTC) of
Manila in a collection suit entitled "Metropolitan Bank and Trust Company vs. Uy Tiam,
doing business under the name of "UY TIAM ENTERPRISES & FREIGHT SERVICES," Jacinto
Uy Dio and Norberto Uy" and docketed as Civil Case No. 82-9303. They likewise challenge
public respondent's Resolution of 21 August 1989 2 denying their motion for the
reconsideration of the former.
The impugned Decision of the Court summarizes the antecedent facts as follows:

Page

Having paid the obligation under the above letter of credit in 1977, UTEFS, through Uy
Tiam, obtained another credit accommodation from METROBANK in 1978, which credit
accommodation was fully settled before an irrevocable letter of credit was applied for and
obtained by the abovementioned business entity in 1979 (September 8, 1987, tsn, pp. 1415).

54

It appears that in 1977, Uy Tiam Enterprises and Freight Services (hereinafter referred to
as UTEFS), thru its representative Uy Tiam, applied for and obtained credit
accommodations (letter of credit and trust receipt accommodations) from the
Metropolitan Bank and Trust Company (hereinafter referred to as METROBANK) in the
sum of P700,000.00 (Original Records, p. 333). To secure the aforementioned credit
accommodations Norberto Uy and Jacinto Uy Dio executed separate Continuing
Suretyships (Exhibits "E" and "F" respectively), dated 25 February 1977, in favor of the
latter. Under the aforesaid agreements, Norberto Uy agreed to pay METROBANK any
indebtedness of UTEFS up to the aggregate sum of P300,000.00 while Jacinto Uy Dio
agreed to be bound up to the aggregate sum of P800,000.00.

The Irrevocable Letter of Credit No. SN-Loc-309, dated March 30, 1979, in the sum of
P815, 600.00, covered UTEFS' purchase of "8,000 Bags Planters Urea and 4,000 Bags
Planters 21-0-0." It was applied for and obtain by UTEFS without the participation of
Norberto Uy and Jacinto Uy Dio as they did not sign the document denominated as
"Commercial Letter of Credit and Application." Also, they were not asked to execute any
suretyship to guarantee its payment. Neither did METROBANK nor UTEFS inform them
that the 1979 Letter of Credit has been opened and the Continuing Suretyships separately
executed in February, 1977 shall guarantee its payment (Appellees brief, pp. 2-3; rollo, p.
28).
The 1979 letter of credit (Exhibit "B") was negotiated. METROBANK paid Planters
Products the amount of P815,600.00 which payment was covered by a Bill of Exchange
(Exhibit "C"), dated 4 June 1979, in favor of (Original Records, p. 331).
Pursuant to the above commercial transaction, UTEFS executed and delivered to
METROBANK and Trust Receipt (Exh. "D"), dated 4 June 1979, whereby the former
acknowledged receipt in trust from the latter of the aforementioned goods from Planters
Products which amounted to P815, 600.00. Being the entrusted, the former agreed to
deliver to METROBANK the entrusted goods in the event of non-sale or, if sold, the
proceeds of the sale thereof, on or before September 2, 1979.
However, UTEFS did not acquiesce to the obligatory stipulations in the trust receipt. As a
consequence, METROBANK sent letters to the said principal obligor and its sureties,
Norberto Uy and Jacinto Uy Dio, demanding payment of the amount due. Informed of the
amount due, UTEFS made partial payments to the Bank which were accepted by the latter.
Answering one of the demand letters, Dio, thru counsel, denied his liability for the
amount demanded and requested METROBANK to send him copies of documents showing
the source of his liability. In its reply, the bank informed him that the source of his liability
is the Continuing Suretyship which he executed on February 25, 1977.

The court issued an order, dated 29 July 1983, granting the attachment writ, which writ
was returned unserved and unsatisfied as defendant Uy Tiam was nowhere to be found at

Page

Having sent the last demand letter to UTEFS, Dio and Uy and finding resort to
extrajudicial remedies to be futile, METROBANK filed a complaint for collection of a sum
of money (P613,339.32, as of January 31, 1982, inclusive of interest, commission penalty
and bank charges) with a prayer for the issuance of a writ of preliminary attachment,
against Uy Tiam, representative of UTEFS and impleaded Dio and Uy as partiesdefendants.

55

As a rejoinder, Dio maintained that he cannot be held liable for the 1979 credit
accommodation because it is a new obligation contracted without his participation.
Besides, the 1977 credit accommodation which he guaranteed has been fully paid.

his given address and his commercial enterprise was already non-operational (Original
Records, p. 37).
On April 11, 1984, Norberto Uy and Jacinto Uy Dio (sureties-defendant herein) filed a
motion to dismiss the complaint on the ground of lack of cause of action. They maintained
that the obligation which they guaranteed in 1977 has been extinguished since it has
already been paid in the same year. Accordingly, the Continuing Suretyships executed in
1977 cannot be availed of to secure Uy Tiam's Letter of Credit obtained in 1979 because a
guaranty cannot exist without a valid obligation. It was further argued that they can not be
held liable for the obligation contracted in 1979 because they are not privies thereto as it
was contracted without their participation (Records, pp. 42-46).
On April 24, 1984, METROBANK filed its opposition to the motion to dismiss. Invoking the
terms and conditions embodied in the comprehensive suretyships separately executed by
sureties-defendants, the bank argued that sureties-movants bound themselves as solidary
obligors of defendant Uy Tiam to both existing obligations and future ones. It relied on
Article 2053 of the new Civil Code which provides: "A guaranty may also be given as
security for future debts, the amount of which is not yet known; . . . ." It was further
asserted that the agreement was in full force and effect at the time the letter of credit was
obtained in 1979 as sureties-defendants did not exercise their right to revoke it by giving
notice to the bank. (Ibid., pp. 51-54).
Meanwhile, the resolution of the aforecited motion to dismiss was held in abeyance
pending the introduction of evidence by the parties as per order dated February 21, 1986
(Ibid., p. 71).
Having been granted a period of fifteen (15) days from receipt of the order dated March 7,
1986 within which to file the answer, sureties-defendants filed their responsive pleading
which merely rehashed the arguments in their motion to dismiss and maintained that they
are entitled to the benefit of excussion (Original Records, pp. 88-93).
On February 23, 1987, plaintiff filed a motion to dismiss the complaint against defendant
Uy Tiam on the ground that it has no information as to the heirs or legal representatives of
the latter who died sometime in December, 1986, which motion was granted on the
following day (Ibid., pp. 180-182).
After trial, . . . the court a quo, on December 2, 198, rendered its judgment, a portion of
which reads:

Page

Are the defendants Jacinto Uy Dioand Norberto Uy liable for the obligation contracted by
Uy Tiam under the Letter of Credit (Exh. B) issued on March 30, 1987 by virtue of the
Continuing Suretyships they executed on February 25, 1977?

56

The evidence and the pleadings, thus, pose the querry (sic):

Under the admitted proven facts, the Court finds that they are not.
a) When Uy and Dio executed the continuing suretyships, exhibits E and F, on February
25, 1977, Uy Tiam was obligated to the plaintiff in the amount of P700,000.00 and this
was the obligation which both obligation which both defendants guaranteed to pay. Uy
Tiam paid this 1977 obligation and such payment extinguished the obligation they
assumed as guarantors/sureties.
b) The 1979 Letter of Credit (Exh. B) is different from the 1977 Letter of Credit which
covered the 1977 account of Uy Tiam. Thus, the obligation under either is apart and
distinct from the obligation created in the other as evidenced by the fact that Uy Tiam
had to apply anew for the 1979 transaction (Exh. A). And Dio and Uy, being strangers
thereto, cannot be answerable thereunder.
c) The plaintiff did not serve notice to the defendants Dio and Uy when it extended to
Credit at least to inform them that the continuing suretyships they executed on
February 25, 1977 will be considered by the plaintiff to secure the 1979 transaction of Uy
Tiam.
d) There is no sufficient and credible showing that Dio and Uy were fully informed of the
import of the Continuing Suretyships when they affixed their signatures thereon that
they are thereby securing all future obligations which Uy Tiam may contract the plaintiff.
On the contrary, Dio and Uy categorically testified that they signed the blank forms in the
office of Uy Tiam at 623 Asuncion Street, Binondo, Manila, in obedience to the instruction
of Uy Tiam, their former employer. They denied having gone to the office of the plaintiff to
subscribe to the documents (October 1, 1987, tsn, pp. 5-7, 14; October 15, 1987, tsn, pp. 38, 13-16). (Records, pp. 333-334). 3
xxx xxx xxx
In its Decision, the trial court decreed as follows:
PREMISES CONSIDERED, judgment is hereby rendered:
a) dismissing the COMPLAINT against JACINTO UY DIO and NORBERTO UY;
b) ordering the plaintiff to pay to Dio and Uy the amount of P6,000.00 as attorney's fees
and expenses of litigation; and

Page

SO ORDERED. (Records, p. 336) 4

57

c) denying all other claims of the parties for want of legal and/or factual basis.

From the said Decision, the private respondent appealed to the Court of Appeals. The case
was docketed as CA-G.R. CV No. 17724. In support thereof, it made the following
assignment of errors in its Brief:
I. THE LOWER COURT SERIOUSLY ERRED IN NOT FINDING AND HOLDING THAT
DEFENDANTS-APPELLEES JACINTO UY DIO AND NORBERTO UY ARE SOLIDARILY
LIABLE TO PLAINTIFF-APPELLANT FOR THE OBLIGATION OF DEFENDANT UY TIAM
UNDER THE LETTER OF CREDIT ISSUED ON MARCH 30, 1979 BY VIRTUE OF THE
CONTINUING SURETYSHIPS THEY EXECUTED ON FEBRUARY 25, 1977.
II. THE LOWER COURT ERRED IN HOLDING THAT PLAINTIFF-APPELLANT IS
ANSWERABLE TO DEFENDANTS-APPELLEES JACINTO UY DIO AND NORBERTO UY FOR
ATTORNEY'S FEES AND EXPENSES OF LITIGATION. 5
On 22 June 1989, public respondent promulgated the assailed Decision the dispositive
portion of which reads:
WHEREFORE, premises considered, the judgment appealed from is hereby REVERSED
AND SET, ASIDE. In lieu thereof, another one is rendered:
1) Ordering sureties-appellees Jacinto Uy Dio and Norberto Uy to pay, jointly and
severally, to appellant METROBANK the amount of P2,397,883.68 which represents the
amount due as of July 17, 1987 inclusive of principal, interest and charges;
2) Ordering sureties-appellees Jacinto Uy Dio and Norberto Uy to pay, jointly and
severally, appellant METROBANK the accruing interest, fees and charges thereon from
July 18, 1987 until the whole monetary obligation is paid; and
3) Ordering sureties-appellees Jacinto Uy Dio and Norberto Uy to pay, jointly and
severally, to plaintiff P20,000.00 as attorney's fees.
With costs against appellees.

Page

In ruling for the herein private respondent (hereinafter METROBANK), public respondent
held that the Continuing Suretyship Agreements separately executed by the petitioners in
1977 were intended to guarantee payment of Uy Tiam's outstanding as well as future
obligations; each suretyship arrangement was intended to remain in full force and effect
until METROBANK would have been notified of its revocation. Since no such notice was
given by the petitioners, the suretyships are deemed outstanding and hence, cover even
the 1979 letter of credit issued by METROBANK in favor of Uy Tiam.

58

SO ORDERED. 6

Petitioners filed a motion to reconsider the foregoing Decision. They questioned the public
respondent's construction of the suretyship agreements and its ruling with respect to the
extent of their liability thereunder. They argued the even if the agreements were in full
force and effect when METROBANK granted Uy Tiam's application for a letter of credit in
1979, the public respondent nonetheless seriously erred in holding them liable for an
amount over and above their respective face values.
In its Resolution of 21 August 1989, public respondent denied the motion:
. . . considering that the issues raised were substantially the same grounds utilized by the
lower court in rendering judgment for defendants-appellees which We upon appeal found
and resolved to be untenable, thereby reversing and setting aside said judgment and
rendering another in favor of plaintiff, and no new or fresh issues have been posited to
justify reversal of Our decision herein, . . . . 7
Hence, the instant petition which hinges on the issue of whether or not the petitioners
may be held liable as sureties for the obligation contracted by Uy Tiam with METROBANK
on 30 May 1979 under and by virtue of the Continuing Suretyship Agreements signed on
25 February 1977.
Petitioners vehemently deny such liability on the ground that the Continuing Suretyship
Agreements were automatically extinguished upon payment of the principal obligation
secured thereby, i.e., the letter of credit obtained by Uy Tiam in 1977. They further claim
that they were not advised by either METROBANK or Uy Tiam that the Continuing
Suretyship Agreements would stand as security for the 1979 obligation. Moreover, it is
posited that to extend the application of such agreements to the 1979 obligation would
amount to a violation of Article 2052 of the Civil Code which expressly provides that a
guaranty cannot exist without a valid obligation. Petitioners further argue that even
granting, for the sake of argument, that the Continuing Suretyship Agreements still
subsisted and thereby also secured the 1979 obligations incurred by Uy Tiam, they cannot
be held liable for more than what they guaranteed to pay because it s axiomatic that the
obligations of a surety cannot extend beyond what is stipulated in the agreement.
On 12 February 1990, this Court resolved to give due course to the petition after
considering the allegations, issues and arguments adduced therein, the Comment thereon
by the private respondent and the Reply thereto by the petitioners; the parties were
required to submit their respective Memoranda.

Page

1. Whether petitioners are liable as sureties for the 1979 obligations of Uy Tiam to
METROBANK by virtue of the Continuing Suretyship Agreements they separately signed in
1977; and

59

The issues presented for determination are quite simple:

2. On the assumption that they are, what is the extent of their liabilities for said 1979
obligations.
Under the Civil Code, a guaranty may be given to secure even future debts, the amount of
which may not known at the time the guaranty is
executed. 8 This is the basis for contracts denominated as continuing guaranty or
suretyship. A continuing guaranty is one which is not limited to a single transaction, but
which contemplates a future course of dealing, covering a series of transactions, generally
for an indefinite time or until revoked. It is prospective in its operation and is generally
intended to provide security with respect to future transactions within certain limits, and
contemplates a succession of liabilities, for which, as they accrue, the guarantor becomes
liable. 9 Otherwise stated, a continuing guaranty is one which covers all transactions,
including those arising in the future, which are within the description or contemplation of
the contract, of guaranty, until the expiration or termination thereof. 10 A guaranty shall be
construed as continuing when by the terms thereof it is evident that the object is to give a
standing credit to the principal debtor to be used from time to time either indefinitely or
until a certain period, especially if the right to recall the guaranty is expressly reserved.
Hence, where the contract of guaranty states that the same is to secure advances to be
made "from time to time" the guaranty will be construed to be a continuing one. 11
In other jurisdictions, it has been held that the use of particular words and expressions
such as payment of "any debt," "any indebtedness," "any deficiency," or "any sum," or the
guaranty of "any transaction" or money to be furnished the principal debtor "at any time,"
or "on such time" that the principal debtor may require, have been construed to indicate a
continuing guaranty. 12

Page

I. For and in consideration of any existing indebtedness to the BANK of UY TIAM

(hereinafter called the "Borrower"), for the payment of which the SURETY is now
obligated to the BANK, either as guarantor or otherwise, and/or in order to induce the
BANK, in its discretion, at any time or from time to time hereafter, to make loans or advances
or to extend credit in any other manner to, or at the request, or for the account of the
Borrower, either with or without security, and/or to purchase or discount, or to make any
loans or advances evidence or secured by any notes, bills, receivables, drafts, acceptances,
checks, or other instruments or evidences of indebtedness (all hereinafter called
"instruments") upon which the Borrower is or may become liable as maker, endorser,
acceptor, or otherwise, the SURETY agrees to guarantee, and does hereby guarantee, the
punctual payment at maturity to the loans, advances credits and/or other obligations
hereinbefore referred to, and also any and all other indebtedness of every kind which is now
or may hereafter become due or owing to the BANK by the Borrower, together with any and
all expenses which may be incurred by the BANK in collecting all or any such instruments

60

In the case at bar, the pertinent portion of paragraph I of the suretyship agreement
executed by petitioner Uy provides thus:

or other indebtedness or obligations herein before referred to, and/or in enforcing any
rights hereunder, and the SURETY also agrees that the BANK may make or cause any and
all such payments to be made strictly in accordance with the terms and provisions of any
agreement(s) express or implied, which has (have) been or may hereafter be made or
entered into by the Borrow in reference thereto, regardless of any law, regulation or
decree, unless the same is mandatory and non-waivable in character, nor or hereafter in
effect, which might in any manner affect any of the terms or provisions of any such
agreement(s) or the Bank's rights with respect thereto as against the Borrower, or cause
or permit to be invoked any alteration in the time, amount or manner of payment by the
Borrower of any such instruments, obligations or indebtedness; provided, however, that
the liability of the SURETY hereunder shall not exceed at any one time the aggregate
principal sum of PESOS: THREE HUNDRED THOUSAND ONLY (P300,000.00) (irrespective
of the currenc(ies) in which the obligations hereby guaranteed are payable), and such
interest as may accrue thereon either before or after any maturity(ies) thereof and such
expenses as may be incurred by the BANK as referred to above. 13
Paragraph I of the Continuing Suretyship Agreement executed by petitioner Dio contains
identical provisions except with respect to the guaranteed aggregate principal amount
which is EIGHT THOUSAND PESOS (P800,000.00). 14
Paragraph IV of both agreements stipulate that:
VI. This is a continuing guaranty and shall remain in full force and effect until written notice
shall have been received by the BANK that it has been revoked by the SURETY, but any such
notice shall not release the SURETY, from any liability as to any instruments, loans,
advances or other obligations hereby guaranteed, which may be held by the BANK, or in
which the BANK may have any interest at the time of the receipt (sic) of such notice. No act
or omission of any kind on the BANK'S part in the premises shall in any event affect or
impair this guaranty, nor shall same (sic) be affected by any change which may arise by
reason of the death of the SURETY, or of any partner(s) of the SURETY, or of the Borrower,
or of the accession to any such partnership of any one or more new partners. 15

Page

Undoubtedly, the purpose of the execution of the Continuing Suretyships was to induce
appellant to grant any application for credit accommodation (letter of credit/trust receipt)
UTEFS may desire to obtain from appellant bank. By its terms, each suretyship is a
continuing one which shall remain in full force and effect until the bank is notified of its
revocation.

61

The foregoing stipulations unequivocally reveal that the suretyship agreement in the case
at bar are continuing in nature. Petitioners do not deny this; in fact, they candidly
admitted it. Neither have they denied the fact that they had not revoked the suretyship
agreements. Accordingly, as correctly held by the public respondent:

xxx xxx xxx

When the Irrevocable Letter of Credit No. SN-Loc-309 was obtained from appellant bank,
for the purpose of obtaining goods (covered by a trust receipt) from Planters Products, the
continuing suretyships were in full force and effect. Hence, even if sureties-appellees did
not sign the "Commercial Letter of Credit and Application, they are still liable as the credit
accommodation (letter of credit/trust receipt) was covered by the said suretyships. What
makes them liable thereunder is the condition which provides that the Borrower "is or
may become liable as maker, endorser, acceptor or otherwise." And since UTEFS which
(sic) was liable as principal obligor for having failed to fulfill the obligatory stipulations in
the trust receipt, they as insurers of its obligation, are liable thereunder. 16
Petitioners maintain, however, that their Continuing Suretyship Agreements cannot be
made applicable to the 1979 obligation because the latter was not yet in existence when
the agreements were executed in 1977; under Article 2052 of the Civil Code, a guaranty
"cannot exist without a valid obligation." We cannot agree. First of all, the succeeding
article provides that "[a] guaranty may also be given as security for future debts, the
amount of which is not yet known." Secondly, Article 2052 speaks about a valid obligation,
as distinguished from a void obligation, and not an existing or current obligation. This
distinction is made clearer in the second paragraph of Article 2052 which reads:
Nevertheless, a guaranty may be constituted to guarantee the performance of a voidable
or an unenforceable contract. It may also guarantee a natural obligation.
As to the amount of their liability under the Continuing Suretyship Agreements,
petitioners contend that the public respondent gravely erred in finding them liable for
more than the amount specified in their respective agreements, to wit: (a) P800,000.00 for
petitioner Dio and (b) P300,000.00 for petitioner Uy.

Page

Indeed, the Continuing Suretyship Agreements signed by petitioner Dio and petitioner
Uy fix the aggregate amount of their liability, at any given time, at P800,000.00 and
P300,000.00, respectively. The law is clear that a guarantor may bond himself for less, but
not for more than the principal debtor, both as regards the amount and the onerous
nature of the conditions. 18 In the case at bar, both agreements provide for liability for
interest and expenses, to wit:

62

The limit of the petitioners respective liabilities must be determined from the suretyship
agreement each had signed. It is undoubtedly true that the law looks upon the contract of
suretyship with a jealous eye, and the rule is settled that the obligation of the surety
cannot be extended by implication beyond its specified limits. To the extent, and in the
manner, and under the circumstances pointed out in his obligation, he is bound, and no
farther. 17

. . . and such interest as may accrue thereon either before or after any maturity(ies)
thereof and such expenses as may be incurred by the BANK referred to above. 19
They further provide that:
In the event of judicial proceedings being instituted by the BANK against the SURETY to
enforce any of the terms and conditions of this undertaking, the SURETY further agrees to
pay the BANK a reasonable compensation for and as attorney's fees and costs of collection,
which shall not in any event be less than ten per cent (10%) of the amount due (the same
to be due and payable irrespective of whether the case is settled judicially or
extrajudicially). 20
Thus, by express mandate of the Continuing Suretyship Agreements which they had
signed, petitioners separately bound themselves to pay interest, expenses, attorney's fees
and costs. The last two items are pegged at not less than ten percent (10%) of the amount
due.
Even without such stipulations, the petitioners would, nevertheless, be liable for the
interest and judicial costs. Article 2055 of the Civil Code provides: 21
Art. 2055. A guaranty is not presumed; it must be express and cannot extend to more than
what is stipulated therein.
If it be simple or indefinite, it shall comprise not only the principal obligation, but also all
its accessories, including the judicial costs, provided with respect to the latter, that the
guarantor shall only be liable for those costs incurred after he has been judicially required
to pay.
Interest and damages are included in the term accessories. However, such interest should
run only from the date when the complaint was filed in court. Even attorney's fees may be
imposed whenever appropriate, pursuant to Article 2208 of the Civil Code. Thus, in
Plaridel Surety & Insurance Co., Inc. vs. P.L. Galang Machinery Co., Inc., 22 this Court held:
Petitioner objects to the payment of interest and attorney's fees because: (1) they were
not mentioned in the bond; and (2) the surety would become liable for more than the
amount stated in the contract of suretyship.

Page

The objection has to be overruled, because as far back as the year 1922 this Court held in
Tagawa vs. Aldanese, 43 Phil. 852, that creditors suing on a suretyship bond may recover
from the surety as part of their damages, interest at the legal rate even if the surety would
thereby become liable to pay more than the total amount stipulated in the bond. The
theory is that interest is allowed only by way of damages for delay upon the part of the

63

xxx xxx xxx

sureties in making payment after they should have done so. In some states, the interest
has been charged from the date of the interest has been charged from the date of the
judgment of the appellate court. In this jurisdiction, we rather prefer to follow the general
practice, which is to order that interest begin to run from the date when the complaint
was filed in court, . . .
Such theory aligned with sec. 510 of the Code of Civil Procedure which was subsequently
recognized in the Rules of Court (Rule 53, section 6) and with Article 1108 of the Civil
Code (now Art. 2209 of the New Civil Code).
In other words the surety is made to pay interest, not by reason of the contract, but by
reason of its failure to pay when demanded and for having compelled the plaintiff to
resort to the courts to obtain payment. It should be observed that interest does not run
from the time the obligation became due, but from the filing of the complaint.
As to attorney's fees. Before the enactment of the New Civil Code, successful litigants could
not recover attorney's fees as part of the damages they suffered by reason of the litigation.
Even if the party paid thousands of pesos to his lawyers, he could not charge the amount
to his opponent (Tan Ti vs. Alvear, 26 Phil. 566).
However the New Civil Code permits recovery of attorney's fees in eleven cases
enumerated in Article 2208, among them, "where the court deems it just and equitable
that attorney's (sic) fees and expenses of litigation should be recovered" or "when the
defendant acted in gross and evident bad faith in refusing to satisfy the plaintiff's plainly
valid, just and demandable claim." This gives the courts discretion in apportioning
attorney's fees.

Since the complaint was filed on 18 May 1982, it is obvious that on that date, the
outstanding principal obligation of Uy Tiam, secured by the petitioners' Continuing

Page

Hence, they are jointly and severally liable to appellant METROBANK of UTEFS'
outstanding obligation in the sum of P2,397,883.68 (as of July 17, 1987) P651,092.82
representing the principal amount, P825,133.54, for past due interest (5-31-82 to 7-1787) and P921,657.32, for penalty charges at 12% per annum (5-31-82 to 7-17-87) as
shown in the Statement of Account (Exhibit I). 25

64

The records do not reveal the exact amount of the unpaid portion of the principal
obligation of Uy Tiam to MERTOBANK under Irrevocable Letter of Credit No. SN-Loc-309
dated 30 March 1979. In referring to the last demand letter to Mr. Uy Tiam and the
complaint filed in Civil Case No. 82-9303, the public respondent mentions the amount of
"P613,339.32, as of January 31, 1982, inclusive of interest commission penalty and bank
charges." 23 This is the same amount stated by METROBANK in its Memorandum. 24
However, in summarizing Uy Tiam's outstanding obligation as of 17 July 1987, public
respondent states:

Suretyship Agreements, was less than P613,339.32. Such amount may be fully covered by
the Continuing Suretyship Agreement executed by petitioner Dio which stipulates an
aggregate principal sum of not exceeding P800,000.00, and partly covered by that of
petitioner Uy which pegs his maximum liability at P300,000.00.
Consequently, the judgment of the public respondent shall have to be modified to conform
to the foregoing exposition, to which extent the instant petition is impressed with partial
merit.
WHEREFORE, the petition is partly GRANTED, but only insofar as the challenged decision
has to be modified with respect to the extend of petitioners' liability. As modified,
petitioners JACINTO UY DIO and NORBERTO UY are hereby declared liable for and are
ordered to pay, up to the maximum limit only of their respective Continuing Suretyship
Agreement, the remaining unpaid balance of the principal obligation of UY TIAM or UY
TIAM ENTERPRISES & FREIGHT SERVICES under Irrevocable Letter of Credit No. SN-Loc309, dated 30 March 1979, together with the interest due thereon at the legal rate
commencing from the date of the filing of the complaint in Civil Case No. 82-9303 with
Branch 45 of the Regional Trial Court of Manila, as well as the adjudged attorney's fees
and costs.
All other dispositions in the dispositive portion of the challenged decision not inconsistent
with the above are affirmed.
SO ORDERED.

Page

65

Gutierrez, Jr., Bidin, Romero and Melo, JJ., concur.

G.R. No. 80078 May 18, 1993

ATOK FINANCE CORPORATION, petitioner,
vs.
COURT OF APPEALS, SANYU CHEMICAL CORPORATION, DANILO E. ARRIETA, NENITA
B. ARRIETA, PABLITO BERMUNDO and LEOPOLDO HALILI, respondents.
Syquia Law Offices for petitioner.
Batino, Angala, Allaga & Zara Law Offices for private respondents.

FELICIANO, J.:

Page

On 27 July 1979, private respondents Sanyu Chemical corporation ("Sanyu Chemical") as

principal and Sanyu Trading Corporation ("Sanyu Trading") along with individual private

66

Atok Finance Corporation ("Atok Finance") asks us to review and set aside the Decision of
the Court of Appeals which reversed a decision of the trial court ordering private
respondents to pay jointly and severally to petitioner Atok Finance certain sums of money.

stockholders of Sanyu Chemical, namely, private respondent spouses Danilo E. Halili and
Pablico Bermundo as sureties, executed in the continuing Suretyship Agreement in favor
of Atok Finance as creditor. Under this Agreement, Sanyu Trading and the individual
private respondents who were officers and stockholders of Sanyu Chemical did:
(1) For valuable and/or other consideration . . ., jointly and severally unconditionally
guarantee to ATOK FINANCE CORPORATION (hereinafter called Creditor), the full, faithful
and prompt payment and discharge of any and all indebtedness of [Sanyu Chemical] . . .
(hereinafter called Principal) to the Creditor. The word "indebtedness" is used herein in its
most comprehensive sense and includes any and all advances, debts, obligations and
liabilities of Principal or any one or more of them, here[to]fore, now or hereafter made,
incurred or created, whether voluntary or involuntary and however arising, whether
direct or acquired by the Creditor by assignment or succession, whether due or not due,
absolute or contingent, liquidated or unliquidated, determined or undetermined and
whether the Principal may be may be liable individually of jointly with others, or whether
recovery upon such indebtedness may be or hereafter become barred by any statute of
limitations, or whether such indebtedness may be or otherwise become unenforceable. 1
(Emphasis supplied)
Other relevant provisions of the Continuing Suretyship Agreement follow:
(2) This is a continuing suretyship relating to any indebtedness, including that arising
under successive transactions which shall either continue the indebtedness from time to time
or renew it after it has been satisfied. This suretyship is binding upon the heirs, successors,
executors, administrators and assigns of the surety, and the benefits hereof shall extend to
and include the successors and assigns of the Creditor.
(3) The obligations hereunder are joint and several and independent of the obligations of
the Principal. A separate action or actions may be prosecuted against the Principal and
whether or not the Principal be joined in any such action or actions.

Page

(6) In addition to liens upon, and rights of set-off against the moneys, securities or other
property of the Surety given to the Creditor by law, the Creditor shall have the lien upon
and a right of self-off against all moneys, securities, and other property of the Surety now
and hereafter in the possession of the Creditor; and every such lien or right of self-off may
be exercised without need of demands upon or notice to the Surety. No lien or right of setoff shall be deemed to have been waived by any act, omission or conduct on the part of the
Creditor, or by any neglect to exercise such right of set-off or to enforce such lien, or by
any delay in so doing, and every right of set-off or lien shall continue in full force and effect
until such right of set-off of lien is specifically waived or released by an instrument in
writing executed by the Creditor.

67

xxx xxx xxx.

(7) Any indebtedness of the Principal now or hereafter held by the Surety is hereby
subordinated to the indebtedness of the Principal to the Creditor; and if the Creditor so
requests, such indebtedness of the Principal of the Surety shall be collected, enforced and
shall be paid over to the Creditor and shall be paid over to the Creditor and shall be paid
over to the Creditor on account of the indebtedness of the Principal to the Creditor but
without reducing or affecting in any manner the liability of the Surety under the
provisions of this suretyship.
xxx xxx xxx 2
(Emphases supplied)
On 27 November 1981, Sanyu Chemical assigned its trade receivables outstanding as of 27
November 1981 with a total face value of P125,871.00, to Atok Finance in consideration of
receipt from Atok Finance of the amount of P105,000.00. The assigned receivables carried
a standard term of thirty (30) days; it appeared, however, that the standard commercial
practice was to grant an extension up to one hundred twenty (120) days without
penalties. The relevant portions of this Deed of Assignment read as follows:
1. FOR VALUE RECEIVED, the ASSIGNOR does hereby SELL, TRANSFER and ASSIGN all
his/its rights, title and interest in the contracts, receivables, accounts, notes, leases, deeds
of sale with reservation of title, invoices, mortgages, checks, negotiable instruments and
evidences of indebtedness listed in the schedule forming part hereinafter called "Contract"
or "Contracts."
2. To induce the ASSIGNEE to purchase the above Contracts, the ASSIGNOR does hereby
certify, warrant and represent that :
(a). He/It is the sole owner of the assigned Contracts free and clear of claims of any other
party except the herein ASSIGNEE and has the right to transfer absolute title thereto the
ASSIGNEE;
(b). Each assigned Contract is bonafide and the amount owing and to become due on each
contract is correctly stated upon the schedule or other evidences of the Contract delivered
pursuant thereto;

Page

(d). No assigned Contract is represented by any note or other evidence of indebtness or

other security document except such as may have been endorsed, assigned and delivered
by the ASSIGNOR to the ASSIGNEE simultaneously with the assignment of such Contract;

68

(c). Each assigned Contract arises out of the sale of merchandise/s which had been
delivered and/or services which have been rendered and none of the Contract is now, nor
will at any time become, contingent upon the fulfillment of any contract or condition
whatsoever, or subject to any defense, offset or counterclaim;

(e). No agreement has been made, or will be made, with any debtor for any deduction
discount or return of merchandise, except as may be specifically noted at the time of the
assignment of the Contract;
(f). None of the terms or provisions of the assigned Contracts have been amended,
modified or waived;
(g). The debtor/s under the assigned Contract/s are solvent and his/its/their failure to pay
the assigned Contracts and/or any installment thereon upon maturity thereof shall be
conclusively considered as a violation of this warranty; and
(h). Each assigned Contract is a valid obligation of the buyer of the merchandise and/or
service rendered under the Contract And that no Contract is overdue.
The foregoing warranties and representations are in addition to those provided for in the
Negotiable Instruments Law and other applicable laws. Any violation thereof shall render
the ASSIGNOR immediately and unconditionally liable to pay the ASSIGNEE jointly and
severally with the debtors under the assigned contracts, the amounts due thereon.
xxx xxx xxx
4. The ASSIGNOR shall without compensation or cost, collect and receive in trust for the
ASSIGNEE all payments made upon the assigned contracts and shall remit to the
ASSIGNEE all collections on the said Contracts as follows :
P5,450.00 due on January 2, 1982 on every 15th day (semi-monthly) until November 1,
1982.
P110,550.00 balloon payment after 12 months. 3 (Emphasis supplied)
Later, additional trade receivables were assigned by Sanyu Chemical to Atok Finance with
a total face value of P100,378.45.

Page

Sanyu Chemical and the individual private respondents sought dismissal of Atok's claim
upon the ground that such claim had prescribed under Article 1629 of the Civil Code and
for lack of cause of action. The private respondents contended that the Continuing

69

On 13 January 1984, Atok Finance commenced action against Sanyu Chemical, the Arrieta
spouses, Pablito Bermundo and Leopoldo Halili before the Regional Trial Court of Manila
to collect the sum of P120,240.00 plus penalty charges amounting to P0.03 for every peso
due and payable for each month starting from 1 September 1983. Atok Finance alleged
that Sanyu Chemical had failed to collect and remit the amount due under the trade
receivables.

Suretyship Agreement, being an accessory contract, was null and void since, at the time of
its execution, Sanyu Chemical had no pre-existing obligation due to Atok Finance.
At the trial, Sanyu Chemical and the individual private respondents failed to present any
evidence on their behalf, although the individual private respondents submitted a
memorandum in support of their argument. After trial, on 1 April 1985, the trial court
rendered a decision in favor of Atok Finance. The dispositive portion of this decision reads
as follows:
ACCORDINGLY, judgment is hereby rendered in favor of the plaintiff ATOK FINANCE
CORPORATION; and against the defendants SANYU CHEMICAL CORPORATION, DANILO E.
ARRIETA, NENITA B. ARRIETA, PABLITO BERMUNDO and LEOPOLDO HALILI, ordering
the said defendants, jointly and severally, to pay the plaintiff:
(1) P120,240.00 plus P0.03 for each peso for each month from September 1, 1983 until
the whole amount is fully paid;
(2) P50,000.00 as attorney's fees; and
(3) To pay the costs.
SO ORDERED. 4

Page

However, on 27 August 1986, private respondents filed a Petition for Relief from
Judgment before the Court of Appeals. This Petition was raffled off to the 15th Division of
the Court of Appeals. In that Petition, private respondents claimed that their failure to file
their appeal brief was due to excusable negligence, that is, that their previous counsel had
entrusted the preparation and filing of the brief to one of his associates, which associate,
however, had unexpectedly resigned from the law firm without returning the records of
cases he had been handling, including the appeal of private respondents. Atok Finance
opposed the Petition for Relief arguing that no valid ground existed for setting aside the
resolution of the Third Division of the then IAC.

70

Private respondents went on appeal before the then Intermediate Appellate Court ("IAC"),
and the appeal was there docketed as AC-G.R. No. 07005-CV. The case was raffled to the
Third Civil Cases Division of the IAC. In a resolution dated 21 March 1986, that Division
dismissed the appeal upon the ground of abandonment, since the private respondents had
failed to file their appeal brief notwithstanding receipt of the notice to do so. On 4 June
1986, entry of judgment was made by the Clerk of Court of the IAC. Accordingly, Atok
Finance went before the trial court and sought a writ of execution to enforce the decision
of the trial court of 1 April 1985. The trial court issued a writ of execution on 23 July 1986.
5 Petitioner alleged that the writ of execution was served on private respondents. 6

The 15th Division of the Court of Appeals nonetheless granted the Petition for Relief from
Judgment "in the paramount interest of justice," 7 set aside the resolution of the Third Civil
Cases Division of the then IAC, and gave private respondents a non-extendible period of
fifteen (15) days within which to file their appeal brief. Private respondents did file their
appeal brief.
The 15th Division, on 18 August 1987, rendered a Decision on the merits of the appeal,
and reversed and set aside the decision of the trial court and entered a new judgment
dismissing the complaint of Atok Finance, ordering it to pay private respondents
P3,000.00 as attorney's fees and to pay the costs.
Atok Finance moved to set aside the decision of the 15th Division of the Court of Appeals,
inviting attention to the resolution of the IAC's Third Civil Cases Division of 21 March
1986 originally dismissing private respondent's appeal for abandonment thereof. In a
resolution dated 18 August 1987, the 15th Division denied Atok Finance's motion stating
that it had granted the Petition for Relief from Judgment and given private respondents
herein fifteen (15) days within which to file an appeal brief, while Atok Finance did not file
an appellee's brief, and that its decision was arrived at "on the basis of appellant's brief
and the original records of the appeal case."
In the present Petition for Review, Atok Finance assigns the following as errors on the part
of the Court of Appeals in rendering its decision of 18 August 1987:
(1) that it had erred in ruling that a continuing suretyship agreement cannot be effected to
secure future debts;
(2) that it had erred in ruling that the continuing suretyship agreement was null and void
for lack of consideration without any evidence whatsoever [being] adduced by private
respondents;

Page

As a preliminary matter, we note that a Division of the Court of Appeals is co-equal with
any other Division of the same court. Accordingly, a Division of the Court of Appeals has
no authority to consider and grant a petition for relief from a judgment rendered by
another Division of the same court. In the case at bar, however, we must note that an
intervening event had occurred between the resolution of 21 March 1986 of the Third
Civil Cases Division of the IAC dismissing private respondents' appeal and the 30
September 1986 order of the 15th Division of the Court of Appeals granting the Petition
for Relief from Judgment. On 28 July 1986, the old Intermediate Appellate Court went out
of existence and a new court, the Court of Appeals, came into being, was organized and
commenced functioning. 9 This event, and the probability that some confusion may have
accompanied the period of transition from the IAC to the Court of Appeals, lead us to

71

(3) that it had erred in granting the Petition for Relief from Judgment while execution
proceedings [were] on-going on the trial court. 8 (Emphasis in the original)

believe that the defect here involved should be disregarded as being of secondary
importance. At the same time, nothing in this decision should be read as impliedly holding
that a petition from relief judgment is available in respect of a decision rendered by the
Court of Appeals; this issue is best reserved for determination in some future cases where
it shall have been adequately argued by the parties.
We turn, therefore, to a consideration of the first substantive issue addressed by the Court
of Appeals in rendering its Decision on the merits of the appeal: whether the individual
private respondents may be held solidarily liable with Sanyu Chemical under the
provisions of the Continuing Suretyship Agreement, or whether that Agreement must be
held null and void as having been executed without consideration and without a preexisting principal obligation to sustain it.
The Court of Appeals held on this first issue as follows:
It is the contention of private appellants that the suretyship agreement is null and void
because it is not in consonance with the laws on guaranty and security. The said
agreement was entered into by the parties two years before the Deed of Assignment was
executed. Thus, allegedly, it ran counter to the provision that guaranty cannot exist
independently because by nature it is merely an accessory contract. The law on guaranty
is applicable to surety to some extent Manila Surety and Fidelity Co. v. Baxter Construction
& Co., 53 O.G. 8836; and, Arran v. Manila Fidelity & Surety Co., 53 O.G. 7247.
We find merit in this contention.
Although obligations arising from contracts have the force of law between the contracting
parties, (Article 1159 of the Civil Code) this does not mean that the law is inferior to it; the
terms of the contract could not be enforces if not valid. So, even if, as in this case, the
agreement was for a continuing suretyship to include obligations enumerated in paragraph
2 of the agreement, the same could not be enforced. First, because this contract, just like
guaranty, cannot exist without a valid obligation (Art. 2052, Civil Code); and, second,
although it may be given as security for future debt (Art. 2053, C.C.), the obligation
contemplated in the case at bar cannot be considered "future debt" as envisioned by this law.

Page

We consider that the Court of Appeals here was in serious error. It is true that a serious
guaranty or a suretyship agreement is an accessory contract in the sense that it is entered
into for the purpose of securing the performance of another obligation which is
denominated as the principal obligation. It is also true that Article 2052 of the Civil Code

72

There is no proof that when the suretyship agreement was entered into, there was a preexisting obligation which served the principal obligation between the parties. Furthermore,
the "future debts" alluded to in Article 2053 refer to debts already existing at the time of the
constitution of the agreement but the amount thereof is unknown, unlike in the case at bar
where the obligation was acquired two years after the agreement. 10 (Emphasis supplied).

states that "a guarantee cannot exist without a valid obligation." This legal proposition is
not, however, like most legal principles, to be read in an absolute and literal manner and
carried to the limit of its logic. This is clear from Article 2052 of the Civil Code itself:
Art. 2052. A guaranty cannot exist without a valid obligation.
Nevertheless, a guaranty may be constituted to guarantee the performance of a voidable or
an unenforceable contract. It may also guaranty a natural obligation." (Emphasis supplied).
Moreover, Article 2053 of the Civil Code states:
Art. 2053. A guaranty may also be given as security for future debts, the amount of which is
not yet known; there can be no claim against the guarantor until the debt is liquidated. A
conditional obligation may also be secured. (Emphasis supplied)
The Court of Appeals apparently overlooked our caselaw interpreting Articles 2052 and
2053 of the Civil Code. In National Rice and Corn Corporation (NARIC) v. Jose A. Fojas and
Alto Surety Co., Inc., 11 the private respondents assailed the decision of the trial court
holding them liable under certain surety bonds filed by private respondent Fojas and
issued by private respondent Alto Surety Co. in favor of petitioner NARIC, upon the
ground that those surety bonds were null and void "there being no principal obligation to
be secured by said bonds." In affirming the decision of the trial court, this Court, speaking
through Mr. Justice J.B.L. Reyes, made short shrift of the private respondents' doctrinaire
argument:

Page

In Rizal Commercial Banking Corporation v. Arro, 12 the Court was confronted again with
the same issue, that is, whether private respondent was liable to pay a promissory note
dated 29 April 1977 executed by the principal debtor in the light of the provisions of a
comprehensive surety agreement which petitioner bank and the private respondent had
earlier entered into on 19 October 1976. Under the comprehensive surety agreement, the
private respondents had bound themselves as solidary debtors of the Diacor Corporation
not only in respect of existing obligations but also in respect of future ones. In holding

73

Under his third assignment of error, appellant Fojas questions the validity of the additional
bonds (Exhs. D and D-1) on the theory that when they were executed, the principal
obligation referred to in said bonds had not yet been entered into, as no copy thereof was
attached to the deeds of suretyship. This defense is untenable, because in its complaint the
NARIC averred, and the appellant did not deny that these bonds were posted to secure the
additional credit that Fojas has applied for, and the credit increase over his original
contract was sufficient consideration for the bonds. That the latter were signed and filed
before the additional credit was extended by the NARIC is no ground for complaint. Article
1825 of the Civil Code of 1889, in force in 1948, expressly recognized that "a guaranty may
also be given as security for future debts the amount of which is not yet known." (Emphasis
supplied)

private respondent surety (Residoro Chua) liable under the comprehensive surety
agreement, the Court said:
The surety agreement which was earlier signed by Enrique Go, Sr. and private respondent,
is an accessory obligation, it being dependent upon a principal one, which, in this case is
the loan obtained by Daicor as evidenced by a promissory note. What obviously induced
petitioner bank to grant the loan was the surety agreement whereby Go and Chua bound
themselves solidarily to guaranty the punctual payment of the loan at maturity. By terms
that are unequivocal, it can be clearly seen that the surety agreement was executed to
guarantee future debts which Daicor may incur with petitioner, as is legally allowable under
the Civil Code. Thus
Article 2053. A guarantee may also be given as security for future debts, the amount of
which is not yet known; there can be no claim against the guarantor until the debt is
liquidated. A conditional obligation may also be secured. 13 (Emphasis supplied)
It is clear to us that the Rizal Commercial Banking Corporation and the NARIC cases
rejected the distinction which the Court of Appeals in the case at bar sought to make with
respect to Article 2053, that is, that the "future debts" referred to in that Article relate to
"debts already existing at the time of the constitution of the agreement but the amount [of
which] is unknown," and not to debts not yet incurred and existing at that time. Of course,
a surety is not bound under any particular principal obligation until that principal
obligation is born. But there is no theoretical or doctrinal difficulty inherent in saying that
the suretyship agreement itself is valid and binding even before the principal obligation
intended to be secured thereby is born, any more that there would be in saying that
obligations which are subject to a condition precedent are valid and binding before the
occurrence of the condition precedent. 14

Page

We turn to the second substantive issue, that is, whether private respondents are liable
under the Deed of Assignment which they, along with the principal debtor Sanyu
Chemical, executed in favor of petitioner, on the receivables thereby assigned.

74

Comprehensive or continuing surety agreements are in fact quite commonm place in

present day financial and commercial practice. A bank or a financing company which
anticipates entering into a series of credit transactions with a particular company,
commonly requires the projected principal debtor to execute a continuing surety
agreement along with its sureties. By executing such an agreement, the principal places
itself in a position to enter into the projected series of transactions with its creditor; with
such surety agreement, there would be no need to execute a separate surety contract or
bond for each financing or credit accommodation extended to the principal debtor. As we
understand it, this is precisely what happened in the case at bar.

The contention of Sanyu Chemical was that Atok Finance had no cause of action under the
Deed of Assignment for the reason that Sanyu Chemical's warranty of the debtors'
solvency had ceased. In submitting this contention, Sanyu Chemical relied on Article 1629
of the Civil Code which reads as follows:
Art. 1629. In case the assignor in good faith should have made himself responsible for the
solvency of the debtor, and the contracting parties should not have agreed upon the
duration of the liability, it shall last for one year only, from the time of the assignment if
the period had already expired.
If the credit should be payable within a term or period which has not yet expired, the
liability shall cease one year after maturity.
Once more, the Court of Appeals upheld the contention of private respondents and held
that Sanyu Chemical was free from liability under the Deed of Assignment. The Court of
Appeals said:
. . . Article 1629 provides for the duration of assignor's warranty of debtor's solvency
depending on whether there was a period agreed upon for the existence of such warranty,
analyzing the law thus:
(1) if there is a period (or length of time) agreed upon, then for such period;
(2) if no period (or length of time) was agreed upon, then:
(a) one year from assignment if debt was due at the time of the assignment
(b) one year from maturity if debt was not yet due at the time of the assignment..
The debt referred to in this law is the debt under the assigned contract or the original
debts in favor of the assignor which were later assigned to the assignee. The debt alluded
to in the law, is not the debt incurred by the assignor to the assignee as contended by the
appellant.

Page

Each of the invoices assigned to the assignee contained a term of 30 days (Exhibits B-3-A
to 5 and extended by the notation which appeared in the "Schedule of Assigned
Receivables" which states that the ". . . the terms stated on our invoices were normally
extended up to a period of 120 days
. . ." (Exhibit B-2). Considering the terms in the invoices plus the ordinary practice of the

75

Applying the said law to the case at bar, the records disclose that none of the assigned
receivables had matured on November 27, 1981 when the Deed of Assignment was
executed. The oldest debt then existing was that contracted on November 3, 1981 and the
latest was contracted on December 4, 1981.

company, thus, the assigned debts matured between April 3, 1982 to May 4, 1982. The
assignor's warranty for debtor's warranty, in this case, would then be from the maturity
period up to April 3, 1983 or May 4, 1983 to cover all of the receivables in the invoices.
The letter of demand executed by appellee was dated August 29, 1983 (Exhibit D) and the
complaint was filed on January 13, 1984. Both dates were beyond the warranty period.
In effect, therefore, company-appellant was right when it claimed that appellee had no
cause of action against it or had lost its cause of
action. 15 (Emphasis supplied)
Once again, however, we consider that the Court of Appeals was in reversible error in so
concluding. The relevant provision of the Deed of Assignment may be quoted again in this
connection:
2. To induce the ASSIGNEE [Atok Finance] to purchase the above contracts, the ASSIGNOR
[Sanyu Chemical] does hereby certify, warrant and represent that . . .
(g) the debtor/s under the assigned contract/s are solvent and his/its/their failure to pay
the assigned contract/s and/or any installment thereon upon maturity thereof shall be
conclusively considered as a violation of this warranty; and . . .
The foregoing warranties and representations are in addition to those provided for in the
Negotiable Instruments Law and other applicable laws. Any violation thereof shall render
the ASSIGNOR immediately and unconditionally liable to pay the ASSIGNEE jointly and
severally with the debtors under the assigned contracts, the amounts due thereon.
xxx xxx xxx
(Emphasis supplied)

Page

Article 1629 of the Civil Code invoked by private respondents and accepted by the Court of
Appeals is not, in the case at bar, material. The liability of Sanyu Chemical to Atok Finance
rests not on the breach of the warranty of solvency; the liability of Sanyu Chemical was not

76

It may be stressed as a preliminary matter that the Deed of Assignment was valid and
binding upon Sanyu Chemical. Assignment of receivables is a commonplace commercial
transaction today. It is an activity or operation that permits the assignee to monetize or
realize the value of the receivables before the maturity thereof. In other words, Sanyu
Chemical received from Atok Finance the value of its trade receivables it had assigned;
Sanyu Chemical obviously benefitted from the assignment. The payments due in the first
instance from the trade debtors of Sanyu Chemical would represent the return of the
investment which Atok Finance had made when it paid Sanyu Chemical the transfer value
of such receivables.

ex lege (ex Article 1629) but rather ex contractu. Under the Deed of Assignment, the effect of
non-payment by the original trade debtors was breach of warranty of solvency by Sanyu
Chemical, resulting in turn in the assumption of solidary liability by the assignor under the
receivables assigned. In other words, the assignor Sanyu Chemical becomes a solidary
debtor under the terms of the receivables covered and transferred by virtue of the Deed of
Assignment. And because assignor Sanyu Chemical became, under the terms of the Deed
of Assignment, solidary obligor under each of the assigned receivables, the other private
respondents (the Arrieta spouses, Pablito Bermundo and Leopoldo Halili), became
solidarily liable for that obligation of Sanyu Chemical, by virtue of the operation of the
Continuing Suretyship Agreement. Put a little differently, the obligations of individual
private respondent officers and stockholders of Sanyu Chemical under the Continuing
Suretyship Agreement, were activated by the resulting obligations of Sanyu Chemical as
solidary obligor under each of the assigned receivables by virtue of the operation of the
Deed of Assignment. That solidary liability of Sanyu Chemical is not subject to the limiting
period set out in Article 1629 of the Civil Code.
It follows that at the time the original complaint was filed by Atok Finance in the trial
court, it had a valid and enforceable cause of action against Sanyu Chemical and the other
private respondents. We also agree with the Court of Appeals that the original obligors
under the receivables assigned to Atok Finance remain liable under the terms of such
receivables.
WHEREFORE, for all the foregoing, the Petition for Review is hereby GRANTED DUE
COURSE, and the Decision of the Court of Appeals dated 18 August 1987 and its Resolution
dated 30 September 1987 are hereby REVERSED and SET ASIDE. A new judgment is
hereby entered REINSTATING the Decision of the trial court in Civil Case No. 84-22198
dated 1 April 1985, except only that, in the exercise of this Court's discretionary authority
equitably to mitigate the penalty clause attached to the Deed of Assignment, that penalty
is hereby reduced to eighteen percent (18%) per annum (instead of P0.03 for every peso
monthly [or 36% per annum]). As so modified, the Decision of the trial court is hereby
AFFIRMED. Costs against private respondents.
SO ORDERED.
Bidin, Davide, Jr., Romero and Melo, JJ., concur.

Page

77

"SO ORDERED."6

78

January 18, 2002

Page

G.R. No. 136603

EMILIO Y. TAEDO, petitioner,

vs.
ALLIED BANKING CORPORATION, respondent.
PARDO, J.:
Appeal via certiorari from the decision of the Court of Appeals1 reversing the ruling of the
trial court and holding petitioner liable solidarily with defendant Cheng Ban Yek Co., Inc.
for all items of the money judgment and costs of suit.
The Facts
The facts, as found by the Court of Appeals, are as follows:
"Appeal by both the plaintiff Allied Banking Corporation and the defendant Cheng Ban Yek
& Co., Inc. from the Order, as summary judgment, of the Regional Trial Court (Branch XLIV,
Manila), the decretal part whereof reads:
"WHEREFORE, and in view of the foregoing considerations, summary judgment is hereby
rendered in favor of the plaintiff, Allied Banking Corporation, and against defendant Cheng
Ban Yek and Co., Inc. as follows:
"1. On the first cause of action:
"Ordering the defendant Cheng Ban Yek Co., Inc. to pay plaintiff the sum of P2,000,000.00,
plus interest thereon at 14% per annum, 2% per annum as service charge, and penalty
charge of 1% per month from February 11, 1981 until fully paid;
"2. On the second cause of action:
"Ordering the defendant Cheng Ban Yek Co., Inc. to pay plaintiff the sum of P2,500,000.00,
plus interest thereon at 14% per annum, service charge of 2% per annum, and penalty
charge of 1 % per month, from February 3, 1981 until fully paid;
"3. On the third cause of action:
"Ordering the defendant Cheng Ban Yek Co., Inc. to pay plaintiff the sum of P1,000,000.00
plus interest thereon at 14% per annum, service charge of 2% per annum, and penalty
charge of 1 % per month, from February 12, 1981 until fully paid;

Page

"Ordering the defendant Cheng Ban Yek Co., Inc. to pay plaintiff the sum of P1,000,000.00
plus interest thereon at 14% per annum, service charge of 2% per annum, and penalty
charge of 1 % per month, from February 12, 1981 until fully paid;

79

"4. On the fourth cause of action:

"5. On the fifth cause of action:

"Ordering the defendant Cheng Ban Yek Co., Inc. to pay plaintiff the sum of P1,000,000.00
plus interest thereon at 14% per annum, service charge of 2% per annum, and penalty
charge of 1% per month, from February 12, 1981 until fully paid;
"6. On the sixth cause of action:
"Ordering the defendant Cheng Ban Yek Co., Inc. to pay plaintiff the sum of P1,000,000.00
plus interest thereon at 14% per annum, service charge of 2% per annum, and penalty
charge of 1% per month, from February 12, 1981 until fully paid;
"7. On the seventh cause of action:
" Ordering the defendant Cheng Ban Yek Co., Inc. to pay plaintiff the sum of P1,500,000.00
plus interest thereon at 14% per annum, service charge of 2% per annum, and penalty
charge of 1% per month, from February 12, 1981 until fully paid;
"8. On all the causes of action:
"Ordering the defendant Cheng Ban Yek Co., Inc. to pay plaintiff the sum equivalent to 25%
of the amount due and demandable as and for attorneys fees;
"9. Declaring the "Continuing Guaranty" as having been extinguished after plaintiff
branded it as a "worthless security" and preferred to avail, as it did avail, of the
provisional remedy of attachment; and declaring defendants Alfredo Ching and Emilio
Taedo relieved of their obligation under the said continuing Guaranty; and
"10. Ordering the defendant Cheng Ban Yek Co., Inc. to pay the costs of suit.
"SO ORDERED."2

Page

"The appeal of plaintiff bank is limited to paragraph 9 of the summary judgment (supra, p.
3) which declared defendants Aldredo Ching and Emilio Taedo as free from any liability
under the Continuing Guaranty since their respective liabilities thereunder became

80

"The foregoing summary judgment has its roots in a complaint with preliminary
attachment filed by plaintiff bank to recover sums of money from defendant corporation
on its seven past due promissory notes with principal amounts totaling P10,000,000.00,
from defendants Alfredo Ching and Emilio Taedo under a Continuing Guaranty providing
for joint and several liability relative to the said promissory notes. The preliminary
attachment sought was granted upon the required bond and was thereafter maintained
despite defendant corporations efforts to have it discharged.

extinguished when plaintiff bank in its pleading branded the Continuing Guaranty as
"worthless security".
"On the other hand, defendant corporations appeal is an attack on the summary nature of
the proceeding adopted by the lower court since, according to defendant corporation,
there was a petition for suspension of payment filed by it with the Securities and Exchange
Commission which, although dismissed, was duly appealed to the Court of Appeals.
"xxx
"Defendant corporations petition for suspension of payment was dismissed by the
Securities and Exchange Commission for lack of quorum. At the creditors meeting called
and accordingly held to approve the corporations petition for suspension of payment, out
of outstanding liabilities of P237,718,426.00, only the creditors representing
P110,355,607.37 thereof attended. This was far short of the three-fifths quorum
unqualifiedly required by law which should have been P142,631,055.60 (Act No. 1956,
Sec. 8) x x x ."3
On October 16, 1984, the trial court rendered a summary judgment, as quoted above.4
Both plaintiff Allied Banking Corporation and the defendant Cheng Ban Yek & Co., Inc.
appealed from the summary judgment to the Court of Appeals.5
On March 27, 1990, the Court of Appeals promulgated a decision, the dispositive portion
of which reads:
"WHEREFORE, the Order appealed from is in part REVERSED and MODIFIED by deleting
paragraph 9 from the dispositive portion thereof, and declaring the defendants Alfredo
Ching and Emilio Taedo solidarily liable with defendant Cheng Ban Yek Co., Inc. for all
items of the money judgment set forth in paragraphs one 91) to eight (8) inclusive, and
paragraph ten (10), of said dispositive portion. The Order is AFFIRMED in its other
aspects. No costs in this instance.

On November 27, 1998, the Court of Appeals denied the motion for lack of merit.8

Page

On April 11, 1990, petitioner Emilio Y. Taedo filed a motion for reconsideration of the
decision, contending that while the case was pending before the Court of Appeals the
Allied Bank and Cheng Ban Yek & Co., Inc. agreed to extend the time of payment of the
indebtedness, without the consent of petitioner, thereby relieving him of his obligation as
guarantor or surety of such obligation.7

81

"SO ORDERED."6

Hence, this appeal.9

The Issues
The basic issues raised are (a) whether the execution by the respondent Bank of the
Fourth Amendatory Agreement extinguished petitioners obligations as surety, and (b)
whether the "continuing guarantee" executed by the petitioner is a contract of (surety)
adhesion.10
The Courts Ruling
We find the petition without merit.
Resolving the first issue, we note that the amendatory agreement between the respondent
Allied Banking Corporation and Cheng Ban Yek & Co., Inc. extended the maturity of the
promissory notes without notice or consent of the petitioner as surety of the obligations.
However, the "continuing guarantee" executed by the petitioner provided that he consents
and agrees that the bank may, at any time or from time to time extend or change the time
of payments and/or the manner, place or terms of payment of all such instruments, loans,
advances, credits or other obligations guaranteed by the surety. Hence, the extensions of
the loans did not release the surety.11
As to the second issue, even if the "continuing guarantee" were considered as one of
adhesion, we find the contract of "surety" valid because petitioner was "free to reject it
entirely".12 Petitioner was a stockholder and officer of Cheng Ban Yek and Co., Inc. and it
was common business and banking practice to require "sureties" to guarantee corporate
obligations.
The Fallo
IN VIEW WHEREOF, the Court DENIES the petition and AFFIRMS the decision of the Court
of Appeals.13
No costs in this instance.
SO ORDERED.

[G.R. No. L-9306. May 25, 1956.]

Page

82

Davide, Jr., C.J., Puno, and Ynares-Santiago, JJ., concur.

Kapunan, J., no part.

SOUTHERN MOTORS, INC., Plaintiff-Appellee, vs. ELISEO BARBOSA, DefendantAppellant.

DECISION
CONCEPCION, J.:
This is an appeal from a decision of the Court of First Instance of Iloilo:
(a) Ordering the Defendant Eliseo Barbosa to pay to the Court, for the benefit of the
Plaintiff within a period of ninety (90) days from receipt by the Defendant hereof, the sum
of P2,889.53, with interest at the rate of 12% per annum computed on the basis of the
amounts of the installments mentioned in the mortgage and of the dates they respectively
fell due, until fully paid; the sum of P200 by way of attorneys fees, plus costs; and (b)
Upon failure of the Defendant to pay as aforesaid, ordering the land described in the
complaint and subject of the mortgage to be sold at public auction in accordance with law
in order to realize the amount of the judgment debt and costs.
Although originally forwarded to the Court of Appeals, the same has certified the record to
this Court in view of the fact that the issues raised in the appeal involve merely questions
of law.
Plaintiff, Southern Motors, Inc., brought this action against Eliseo Barbosa, to foreclose a
real estate mortgage, constituted by the latter in favor of the former, as security for the
payment of the sum of P2,889.53 due to said Plaintiff from one Alfredo Brillantes, who had
failed to settle his obligation in accordance with the terms and conditions of the
corresponding deed of mortgage. Defendant Eliseo Barbosa filed an answer admitting the
allegations of the complaint and alleging, by way of special and affirmative defense:
That the Defendant herein has executed the deed of mortgage Annex A for the only
purpose of guaranteeing as surety and/or guarantor the payment of the above
mentioned debt of Mr. Alfredo Brillantes in favor of the Plaintiff.

Page

Thereupon, Plaintiff moved for summary judgment which a branch of the Court of First
Instance of Iloilo, presided over by Hon. Roman Ibaez, Judge, denied upon the ground
that it is premature. Plaintiff moved for a reconsideration of the order to this effect. Soon
later, he filed, also, another motion praying that the case be transferred to another branch
of said court, because that of Judge Ibaez would be busy trying cadastral cases, and had
adopted the policy of refraining from entertaining any other civil cases and all incidents

83

That the Plaintiff until now has no right action against the herein Defendant on the
ground that said Plaintiff, without motive whatsoever, did not intent or intent to exhaust
all recourses to collect from the true debtor Mr. Alfredo Brillantes the debt contracted by
the latter in favor of said Plaintiff, and did not resort nor intends to resort all the legal
remedies against the true debtor Mr. Alfredo Brillantes, notwithstanding the fact that said
Mr. Alfredo Brillantes is solvent and has many properties within the Province of Iloilo.

related thereto, until after said cadastral cases shall have been finally disposed of. With
the express authority of Judge Ibaez, the case was referred to the branch of said court,
presided over by Hon. Querube C. Makalintal, Judge, for action, upon said motion for
reconsideration. Thereafter, Judge Makalintal rendered the aforementioned decision, from
which the Defendant has appealed. He maintains, in his brief, that:
1. The trial court erred in hearing Plaintiff-Appellees motion for reconsideration dated
June 9, 1951, notwithstanding the fact that Defendant-Appellant was not served with a
copy thereof nor served with notice of the hearing thereof.
2. The trial court erred in rendering a judgment on the pleadings in Appellees favor
when no issue was at all submitted to it for resolution, to the prejudice of the substantial
rights of Appellant.
3. The court a quo erred in depriving Defendant-Appellant of his property rights without
due process of law.
The first assignment of error is based upon an erroneous predicate, for, contrary to
Defendants assertion, his counsel in the lower court, Atty. Manuel F. Zamora, through an
employee of his office, by the name of Agripino Aguilar, was actually served on June 9,
1951, with copy of Plaintiffs motion for reconsideration, with notice to the effect that said
motion would be submitted for the consideration and approval of the lower court, on
Saturday, June 16, 1951, at 8: 00 a.m., or soon thereafter as counsel may be heard.
The second assignment of error is, likewise, untenable. It is not true that there was no
issue submitted for determination by the lower court when it rendered the decision
appealed from.

Page

Plaintiffs motion for reconsideration of the order of Judge Roman Ibaez refusing to
render said judgment, upon the ground that it was premature, revived said issue of
sufficiency of the aforementioned affirmative defense, apart from calling for a
reexamination of the question posed by said order of Judge Ibaez, namely, whether it was
proper, under the circumstances, to render a judgment on the pleadings. In other words,
said motion for reconsideration had the effect of placing before then Judge Makalintal, for
resolution, the following issues, to wit: (1) whether a summary judgment or a judgment
on the pleadings was in order, considering the allegations of Plaintiffs complaint and

84

It will be recalled that each one of the allegations made in Plaintiffs complaint were
expressly admitted in Defendants answer, in which he merely alleged, as special and
affirmative defense, that Plaintiff is not entitled to foreclose the mortgage constituted in
its favor by the Defendant, because the property of Alfredo Brillantes, the principal
debtors, had not been exhausted as yet, and were not sought to be exhausted, for the
satisfaction of Plaintiffs credit. Thus, there was no question of fact left for determination.
The only issue set up by the pleadings was the sufficiency of said affirmative defense. And
such was the only point discussed by the Defendant in his opposition to Plaintiffs motion
for a summary judgment, referring, evidently, to a judgment on the pleadings.

those of Defendants answer; chan roblesvirtualawlibraryand (2) whether the mortgage in

question could be foreclosed although Plaintiff had not exhausted, and did not intend to
exhaust, the properties of his principal debtor, Alfredo Brillantes.
The third assignment of error is predicated upon the alleged lack of notice of the hearing
of Plaintiffs motion for reconsideration. As stated in our discussion of the first assignment
of error, this pretense is refuted by the record. Moreover, it is obvious that Defendants
affirmative defense is devoid of merit for:
1. The deed of mortgage executed by him specifically provides:
That if said Mr. Alfredo Brillantes or herein mortgagor, his heirs, executors,
administrators and assigns shall well and truly perform the full obligations above-stated
according to the terms thereof, then this mortgage shall be null and void, otherwise it shall
remain in full force and effect, in which event herein mortgagor authorizes and empowers
herein mortgagee-company to take any of the following actions to enforce said payment;.
(a) Foreclose, judicially or extrajudicially, the chattel mortgage above referred to and/or
also this mortgage, applying the proceeds of the purchase price at public sale of the real
property herein mortgaged to any deficiency or difference between the purchase price of
said chattel at public auction and the amount of P2,889.53, together with its interest
hereby secured; chan roblesvirtualawlibraryor
(b) Simply foreclose this mortgage judicially in accordance with the provisions of section
2, Rule 70, Rules of Court, or extra- judicially under the provisions of Act No. 3135 and Act
No. 4118, to satisfy the full amount of P2,889.53, together with its interest of 12 per cent
per annum.
2. The right of guarantors, under Article 2058 of the Civil Code of the Philippines, to
demand exhaustion of the property of the principal debtor, exists only when a pledge or a
mortgage has not been given as special security for the payment of the principal obligation.
Guarantees, without any such pledge or mortgage, are governed by Title XV of said Code,
whereas pledges and mortgages fall under Title XVI of the same Code, in which the
following provisions, among others, are found:
ART. 2087. It is also of the essence of these contracts that when the principal obligation
becomes due, the things in which the pledge or mortgage consists may be alienated for the
payment to the creditor.
ART. 2126. The mortgage directly and immediately subjects the property upon which it
is imposed, whoever the possessor may be, to the fulfillment of the obligation for whose
security it was constituted.

Page

4. Although an ordinary personal guarantor not a mortgagor or pledgor may

demand the aforementioned exhaustion, the creditor may, prior thereto, secure a

85

3. It has been held already (Saavedra vs. Price, 68 Phil., 688), that a mortgagor is not
entitled to the exhaustion of the property of the principal debtor.

judgment against said guarantor, who shall be entitled, however, to a deferment of the
execution of said judgment against him until after the properties of the principal debtor
shall have been exhausted to satisfy the obligation involved in the case.
Wherefore, the decision appealed from is hereby affirmed, with costs against the
Defendant-Appellant. It is SO ORDERED.

Page

86

Paras, C.J., Bengzon, Padilla, Montemayor, Reyes, A., Jugo, Bautista Angelo, Labrador,
Reyes, J.B.L., and Endencia, JJ., concur.

Page

87

G.R. No. 109941

August 17, 1999

PACIONARIA C. BAYLON, petitioner,

vs.
THE HONORABLE COURT OF APPEALS (Former Ninth Division) and LEONILA
TOMACRUZ, respondents.
GONZAGA-REYES, J.:
This is a petition for review by way of certiorari under Rule 45 of the Revised Rules of
Court of the decision of the Court of Appeals1 dated November 29, 1991 in CA-G.R. CV No.
27779 affirming the decision2 of the Regional Trial Court of Quezon City, Branch 88, dated
June 14, 1990 in Civil Case No. Q-89-2483 and the Resolution of the Court of Appeals dated
April 27, 1993 denying petitioner's Motion for Reconsideration.1wphi1.nt
The pertinent facts, as found by the trial court and affirmed by respondent court, are
briefly narrated as follows:
Sometime in 1986, petitioner Pacionaria C. Baylon introduced private respondent Leonila
Tomacruz, the co-manager of her husband at PLDT, to Rosita B. Luanzon.3 Petitioner told
private respondent that Luanzon has been engaged in business as a contractor for twenty
years and she invited private respondent to lend Luanzon money at a monthly interest
rate of five percent (5%), to be used as capital for the latter's business. Private
respondent, persuaded by the assurances of petitioner that Luanzon's business was stable
and by the high interest rate, agreed to lend Luanzon money in the amount of P150,000.
On June 22, 1987, Luanzon issued and signed a promissory note acknowledging receipt of
the P150,000 from private respondent and obliging herself to pay the former the said
amount on or before August 22, 1987.4 Petitioner signed the promissory note, affixing her
signature under the word "guarantor." Luanzon also issued a postdated Solidbank check
no. CA418437 dated August 22, 1987 payable to Leonila Tomacruz in the amount of
P150,000.00.5 Subsequently, Luanzon replaced this check with another postdated
Solidbank check no. 432945 dated December 22, 1987, in favor of the same payee and
covering the same amount.6 Several check in the amount of P7,500 each were also issued
by Luanzon and made payable to private respondent.7

Page

In her answer, petitioner denied having guaranteed the payment of the promissory note
issued by Luanzon. She claimed that private respondent gave Luanzon the money, not as
loan, but rather as an investment in Art Enterprises and Construction, Inc. the

88

Private respondent made a written demand upon petitioner for payment, which petitioner
did not heed. Thus, on May 8, 1989, private respondent filed a case for the collection of a
sum of money with the Regional Trial Court (RTC) of Quezon City, Branch 88, against
Luanzon and petitioner herein, impleading Mariano Baylon, husband of petitioner, as an
additional defendant. However, summons was never served upon Luanzon.

construction business of Luanzon. Furthermore, petitioner avers that, granting arguendo

that there was a loan and petitioner guaranteed the same, private respondent has not
exhausted the property of the principal debtor nor has she resorted to all the legal
remedies against the principal debtor as required by law. Finally, petitioner claims that
there was an extension of the maturity date of the loan without her consent, thus releasing
from her obligation.8
After trial on the merits, the lower court ruled in favor of private respondent. In its
Decision dated June 14, 1990, it stated that
The evidence and the testimonies on record clearly established a (sic) fact that the
transaction between the plaintiff and defendants was a loan with five percent (5%)
monthly interest and not an investment. In fact they all admitted in their testimonies that
they are not given any stock certificate but only promissory notes similar to Exhibit "B"
wherein it was clearly stated that defendant Luanzon would pay the amount of
indebtedness on the date due. Postdated checks were issued simultaneously with the
promissory notes to enable the plaintiff and others to withdraw their money on a certain
fixed time. This shows that they were never participants in the business transaction of
defendant Luanzon but were creditors.
The evidences presented likewise show that plaintiff and others loan their money to
defendant Luanzon because of the assurance of the monthly income of five percent (5%)
of their money and that they could withdraw it anytime after the due date add to it the fact
that their friend, Pacionaria Baylon, expresses her unequivocal gurarantee to the payment
of the amount loaned.
xxx

xxx

xxx

WHEREFORE, premises considered, judgment is hereby rendered against the defendants

Pacionaria C. Baylon and Mariano Baylon, to pay the plaintiff the sum of P150,000.00, with
interest at the legal rate from the filing of this complaint until full payment thereof, to pay
the total sum of P21,000.00 as attorney's fees and costs of suit.9
On appeal, the trial court's decision was affirmed by the Court of Appeals. Hence, this
present case wherein petitioner makes the following assignment of errors

Page

II. GRANTING, WITHOUT ADMITTING, THAT PETITIONER-APPELLANT BAYLON WAS A

"GUARANTOR" AS APPEARING IN THE NOTE (EXH. "A") THE RESPONDENT COURT
ERRED IN RULING THAT PETITIONER-APPELLANT BAYLON IS LIABLE TO THE PRIVATE
RESPONDENT BECAUSE THE LATTER HAS NOT TAKEN STEPS TO EXHAUST THE

89

I. RESPONDENT COURT ERRED IN HOLDING THAT THE PRIVATE RESPONDENT

TOMACRUZ WAS A CREDITOR OF DEFENDANT LUANZON AND NOT AN INVESTOR IN
THE CONSTRUCTION BUSINESS OF ART ENTERPRISES & CONSTRUCTION, INC.

PROPERTY OF THE PRINCIPAL DEBTOR AND HAS NOT RESORTED TO ALL THE LEGAL
REMEDIES PROVIDED BY LAW AGAINST THE DEBTOR, DEFENDANT LUANZON.
III. GRANTING, WITHOUT ADMITTING THAT PETITIONER-APPELLANT BAYLON WAS A
GUARANTOR UNDER THAT NOTE (EXHIBIT "A") DATED JUNE 22, 1987, THE LOWER
COURT ERRED IN RESOLVING THAT SHE WAS NOT RELEASED FROM HER GUARANTY BY
THE SUBSEQUENT TRANSACTIONS BETWEEN THE RESPONDENT-APPELLANT AND
DEFENDANT LUANZON.
At the outset, we note that petitioner's claim that the factual findings of the lower court,
which were affirmed by the Court of Appeals, were based on a misapprehension of facts
and contradicted by the evidence on records10 is a bare allegation and devoid of merit. As
a rule, the conclusions of fact of the trial court, especially when affirmed by the Court of
Appeals, are final and conclusive and cannot be reviewed on appeal by the Supreme
Court.11 Although this rule admits of several exceptions,12 none of the exceptions are in
point in the present case. The factual findings of the respondent court are borne out by the
record and are based on substantial evidence.
Petitioner claims that there is no loan to begin with; that private respondent gave Luanzon
the amount of P150,000, not as a loan, but rather as an investment in the construction
project of the latter.13 In support of her claim, petitioner cites the use by private
respondent of the words "investment," "dividends," and "commission" in her testimony
before the lower court; the fact that private respondent received monthly checks from
Luanzon in the amount of P7,500 from July to December, 1987, representing dividends on
her investment; and the fact that other employees of the Development Bank of the
Philippines made similar investments in Luanzon's construction business.14
However, all the circumstances mentioned by petitioner cannot override the clear and
unequivocal terms of the June 22, 1987 promissory note whereby Luanzon promised to
pay private respondent the amount of P150,000 on or before August 22, 1987. The
promissory note states as follows:
June 22, 1987
To Whom It May Concern:

Page

The above amount is covered by __________ Check No. _______ dated August 22,
1987.

90

For value received, I hereby promise to pay Mrs. LEONILA TOMACRUZ the
amount of ONE HUNDRED FIFTY THOUSAND PESOS ONLY (P150,000.00) on
or before August 22, 1987.

(signed)
ROSITA B. LUANZON
GURARANTOR:
(signed)
PACIONARIA O. BAYLON
Tel. No. 801-28-00
18 P. Mapa St., DBP Village
Almanza, Las Pinas, M.M.15
If the terms of a contract are clear and leave no doubt as to the intention of the contracting
parties, the literal meaning of its stipulation shall control.16 Resort to extrinsic aids and
other extraneous sources are not necessary in order to ascertain the parties' intent when
there is no ambiguity in the terms of the agreement.17 Both petitioner and private
respondent do not deny the due execution and authenticity of the June 22, 1987
promissory note. All of petitioner's arguments are directed at uncovering the real
intention of the parties in executing the promissory note, but no amount of argumentation
will change the plain import of the terms thereof, and accordingly, no attempt to read into
it any alleged intention of the parties thereto may be justified.18 The clear terms of the
promissory note establish a creditor-debtor relationship between Luanzon and private
respondent. The transaction at bench is therefore a loan, not an investment.
It is petitioner's contention that, even though she is held to be a guarantor under the
terms of the promissory note, she is not liable because private respondent did not exhaust
the property of the principal debtor and has not resorted to all the legal remedies
provided by the law against the debtor.19 Petitioner is invoking the benefit of excussion
pursuant to article 2058 of the Civil Code, which provides that
The guarantor cannot be compelled to pay the creditor unless the latter has exhausted all
the property of the debtor, and has resorted to all the legal remedies against the debtor.

Page

Under the circumstances availing in the present case, we hold that it is premature for this
Court to even determine whether or not petitioner is liable as a guarantor and whether

91

It is axiomatic that the liability of the guarantor is only subsidiary.20 All the properties of
the principal debtor must first be exhausted before his own is levied upon. Thus, the
creditor may hold the guarantor liable only after judgment has been obtained against the
principal debtor and the latter is unable to pay, "for obviously the 'exhaustion of the
principal's property' the benefit of which the guarantor claims cannot even begin to
take place before judgment has been obtained."21 This rule is embodied in article 2062 of
the Civil Code which provides that the action brought by the creditor must be filed against
the principal debtor alone, except in some instances when the action may be brought
against both the debtor and the principal debtor.22

she is entitled to the concomitant rights as such, like the benefit of excussion, since the
most basic prerequisite is wanting that is, no judgment was first obtained against the
principal debtor Rosita B. Luanzon. It is useless to speak of a guarantor when no debtor
has been held liable for the obligation which is allegedly secured by such guarantee.
Although the principal debtor Luanzon was impleaded as defendant, there is nothing in
the records to show that summons was served upon her. Thus, the trial court never even
acquired jurisdiction over the principal debtor. We hold that private respondent must first
obtain a judgment against the principal debtor before assuming to run after the alleged
guarantor.
IN VIEW OF THE FOREGOING, the petition is granted and the questioned Decision of the
Court of Appeals dated November 29, 1991 and Resolution dated April 27, 1993 are SET
ASIDE. No pronouncement as to costs.1wphi1.nt
SO ORDERED.

Page

92

Melo, Vitug, Panganiban and Purisima, JJ., concur.

Page

93

G.R. No. L-42518

August 29, 1936

WISE & CO., INC., plaintiff-appellee,

vs.
DIONISIO P. TANGLAO, defendant-appellant.
The appellant in his own behalf.
Franco and Reinoso for appellee.
AVANCEA, C. J.:
In the Court of First Instance of Manila, Wise & Co. instituted civil case No. 41129 against
Cornelio C. David for the recovery of a certain sum of money David was an agent of Wise &
Co. and the amount claimed from him was the result of a liquidation of accounts showing
that he was indebted in said amount. In said case Wise & Co. asked and obtained a
preliminary attachment of David's property. To avoid the execution of said attachment,
David succeeded in having his Attorney Tanglao execute on January 16, 1932, a power of
attorney (Exhibit A) in his favor, with the following clause:
To sign for me as guarantor for himself in his indebtedness to Wise & Company of Manila,
which indebtedness appears in civil case No. 41129, of the Court of First Instance of
Manila, and to mortgage my lot (No. 517-F of the subdivision plan Psd-20, being a portion
of lot No. 517 of the cadastral survey of Angeles, G. L. R. O. Cad. Rec. No. 124), to guarantee
the said obligations to the Wise & Company, Inc., of Manila.
On the 18th of said month David subscribed and on the 23d thereof, filed in court, the
following document (Exhibit B):
COMPROMISE

Page

I. That the defendant confesses judgment for the sum of six hundred forty pesos (P640),
payable at the rate of eighty pesos (P80) per month, the first payment to be made on
February 15, 1932 and successively thereafter until the full amount is paid; the plaintiff
accepts this stipulation.

94

Come now the parties, plaintiff by the undersigned attorneys and defendants in his own
behalf and respectfully state:

II. That as security for the payment of said sum of P640, defendant binds in favor of, and
pledges to the plaintiff, the following real properties:
1. House of light materials described under tax declaration No. 9650 of the municipality of
Angeles, Province of Pampanga, assessed at P320.
2. Accesoria apartments with a ground floor of 180 sq. m. with the first story of cement
and galvanized of iron roofing located on the lot belonging to Mariano Tablante Geronimo,
said accesoria is described under tax declaration No. 11164 of the municipality of Angeles,
Province of Pampanga, assessed at P800.
3. Parcel of land described under Transfer Certificate of Title No. 2307 of the Province of
Pampanga recorded in the name of Dionisio Tanglao of which defendant herein holds a
special power of attorney to pledge the same in favor of Wise & Co., Inc., as a guarantee for
the payment of the claim against him in the above entitled cause. The said parcel of land is
bounded as follows: NE. lot No. 517 "Part" de Narciso Garcia; SE. Calle Rizal; SW. lot No.
517 "Part" de Bernardino Tiongco; NW. lot No. 508 de Clemente Dayrit; containing 431 sq.
m. and described in tax declaration No. 11977 of the municipality of Angeles, Pampanga,
assessed at P423.
That this guaranty is attached to the properties above mentioned as first lien and for this
reason the parties agree to register this compromise with the Register of Deeds of
Pampanga, said lien to be cancelled only on the payment of the full amount of the
judgment in this case.
Wherefore, the parties pray that the above compromise be admitted and that an order
issue requiring the register of Deeds of Pampanga to register this compromise previous to
the filing of the legal fees.
David paid the sum of P343.47 to Wise & Co., on account of the P640 which he bound
himself to pay under Exhibit B, leaving an unpaid balance of P296.53.

Page

There is no doubt that under Exhibit, A, Tanglao empowered David, in his name, to enter
into a contract of suretyship and a contract of mortgage of the property described in the
document, with Wise & Co. However, David used said power of attorney only to mortgage
the property and did not enter into contract of suretyship. Nothing is stated in Exhibit B to
the effect that Tanglao became David's surety for the payment of the sum in question.
Neither is this inferable from any of the clauses thereof, and even if this inference might be
made, it would be insufficient to create an obligation of suretyship which, under the law,
must be express and cannot be presumed.

95

Wise & Co. now institutes this case against Tanglao for the recovery of said balance of
P296.53.

It appears from the foregoing that defendant, Tanglao could not have contracted any
personal responsibility for the payment of the sum of P640. The only obligation which
Exhibit B, in connection with Exhibit A, has created on the part of Tanglao, is that resulting
from the mortgage of a property belonging to him to secure the payment of said P640.
However, a foreclosure suit is not instituted in this case against Tanglao, but a purely
personal action for the recovery of the amount still owed by David.
At any rate, even granting that defendant Tanglao may be considered as a surety under
Exhibit B, the action does not yet lie against him on the ground that all the legal remedies
against the debtor have not previously been exhausted (art. 1830 of the Civil Code, and
decision of the Supreme Court of Spain of March 2, 1891). The plaintiff has in its favor a
judgment against debtor David for the payment of debt. It does not appear that the
execution of this judgment has been asked for and Exhibit B, on the other hand, shows that
David has two pieces of property the value of which is in excess of the balance of the debt
the payment of which is sought of Tanglao in his alleged capacity as surety.
For the foregoing considerations, the appealed judgment is reversed and the defendant is
absolved from the complaint, with the costs to the plaintiff. So ordered.

Page

96

Villa-Real, Abad Santos, Imperial, Diaz, Recto, and Laurel, JJ., concur.

Page

97

G.R. No. L-41320

November 9, 1934

CONCEPCION J. VIUDA DE SYQUIA, in her capacity as administratrix of the state of

the deceased Gregorio Syquia, plaintiff-appellee,
vs.
PERFECTO JACINTO, ET AL., defendants.
RAFAEL PALMA, appellants.
Francisco Dominguez for appellant.
Cardenas and Casal for appellee.

BUTTE, J.:
On December 15, 1924, the Bank of the Philippine Islands obtained a judgment against
Perfecto and Felipe Jacinto and Rafael Palma on a promissory note in its favor executed by
the defendants on May 27, 1922, for the sum of P22,000 with interest at the rate of 9 per
cent per annum plus 10 per cent of the principal as costs and attorney's fees. The
dispositive part of this judgment is as follows:
Se condena a los Sres. P. y F. Jacinto y Rafael Palma a que paguen a la parte demandante,
los primeros como obligados principales y el ultimo como fiador, la suma de veinticuatro
mil pesos (P24,000) al interes de 9 por ciento al ao desde el 27 de mayo de 1923, mas el
uno por ciento sobre el principal en concepto de honorarios de abogado y costas.
No debe expedirse ejecucion contra el demandado Sr. Rafael Palma, sino despues de
haberse hecho excusion de los bienes de los senores P. y F. Jacinto.

Page

On July 12, 1932, the widow of Gregorio Syquia, as administratrix of his estate, filed suit in
the Court of First Instance of Manila against Perfecto and Felipe Jacinto and Rafael Palma
reciting the aforementioned judgment and assignment and alleging that since the date of
said judgment none of the defendants had paid anything thereon and there remains still
due the sum of P24,000 with interest at 9 per cent since May 27, 1923. The plaintiff

98

On August 16, 1928, the Bank of the Philippine Islands "in consideration of the sum of P1
and other valuable considerations" assigned and transferred said judgment to Gregorio
Syquia.

prayed that the judgment be revived and that defendants Perfecto and Felipe Jacinto as
principal and Rafael Palma as guarantor be adjudged to pay the sum of P24,000 with
interest since May 27, 1923, and costs. To this petition were attached a copy of the
judgment of December 15, 1924, Exhibit A, and a copy of the assignment thereof to the
plaintiff, Exhibit B.
The defendants filed a joint amended answer in which they admitted the judgment,
Exhibit A, and that said judgment had lapsed and it was necessary to revive the same; but
they denied the assignment to Syquia and the allegation that nothing had been paid on
said judgment and that the full amount thereof was still due. They set up as a special
defense that the judgment which the plaintiff was attempting to revive has been fully paid;
that at the time of making the assignment to Gregorio Syquia, the bank had no right or
interest under said judgment, the same having been fully paid, and that the partition does
not state facts sufficient to constitute a cause of action.
In the same answer they set up a counter-demand to the following effect: that in the
month of April, 925, the Bank of the Philippine Islands caused an execution to be issued
under said judgment and the sheriff on the request of the bank sold at public sale three
properties belonging to the defendants Jacinto which had been previously attached; that
at said public sale three properties belonging to the defendants Jacinto which had been
previously attached; that at said public sale the bank was the highest bidder crediting the
amount of its bid on the said judgment; that said parcels of land with their improvements
consisting of four houses yielded a monthly revenue of P880 or P10,560 a year; that
during the year allowed the judgment debtors for redemption the said bank took control
and possession of the said parcels of land and collected and retained the revenues thereof
as aforesaid and that Gregorio Syquia has been receiving the same since that time, though
without any right whatever; that the said revenues during the year of redemption in the
sum of P10,560 were never applied by the bank as a credit on said judgment. The
defendants prayed that they be absolved from the demand of the petitioner and that the
estate of Gregorio Syquia be condemned to pay the sum of P10,560 with costs. The answer
concludes with a prayer for general relief.
On the trial of this cause it was shown that at the execution sale held on April 18, 1925, the
bank bought two of the properties of the defendants Jacinto for the sum of P15,045. The
third property was sold to Rufino Reyes for P1,000 which was not credited on the
judgment debt pending the determination of Reyes' claim of priority. The trial court stated
the judgment debt as of April 18, 1925, as follows:

4,083.

Page

Interest from May 27, 1923 to April 1, 1925 at

99

Loan ..................................................................................... P24,00

.........
0.00

9 per cent ...

Cost including sheriff's
sale .....................................................

29
657.95

Total obligation .........................................

P28,74
1.24
from which is to be deducted P15,045 the value of the two parcels sold to the bank on
April 18, 1925, leaving a balance due of P13,696.24. On September 2, 1925, the defendant
Palma paid the bank P100 leaving thus a net balance due of P13,596.24. The trial court
entered the following judgment:
Dictese sentencia condenando a los demandados, Perfecto Jacinto y Felipe Jacinto, como
obligados principales, y Rafael Palma como fiador, a pagar a la demandante la cantidad de
trece mil quinientos noventa y seis pesos con veinte y cuatro centimos (P13,596.24), mas
las costas del juicio.
Se sobresee la reconvencion de los demandados.
Asi se ordena.
Manila, I.F., 25 de septiembre de 1933.
From this judgment only defendant Palma appeals. He submits the following assignments
of error:

3. Aun suponiendo que la sentencia firme era subsistente contra los deudores y su fiador
al tiempo de hacerse el traspaso por el banco de cualquier titulo, derecho, interes o

Page

2. El Juzgado erro al no apreciar que el banco no transmitio ningun derecho, interes o

participacion en la sentencia referida al tiempo de hacerse el traspaso de los mismos a
Gregorio Syquia.

100

1. El Juzgado erro al no apreciar que la cuenta de los deudores P. y F. Jacinto quedo

liquidada con el banco al efectuarse la venta de las fincas embargadas por este a favor de
Gregorio Syquia por la suma de P45,000 y que, por consiguiente, la sentencia firme de
diciembre 14, 1924, quedo ipso facto saldada y con creces, en virtud de aquella venta.

participacion en dicha sentencia, el Juzgado erro al no apreciar que se ha constituido una

novacion de la obligacion del fiador sin su conocimiento ni consentimiento, y, por tanto,
sin eficacia juridica contra el.
4. El Juzgado erro al no apreciar que el demandado Rafael Palma, como fiador, ha quedado
eximido de su obligacion no solo por efecto de la novacion hecha sin su conocimiento ni
consentimiento, sino tambien por efecto de la aceptacion por el banco de los bienes
inmuebles de los deudores P. y F. Jacinto, en pago de deuda.

Page

Under his first and second assignments of error, the appellant argues that when the bank
acquired said properties at the sheriff's sale on April 18, 1925, for the sum of P15,045, it
paid much less than they were worth, in view of the fact that they yielded an annual
revenue of P10,560; and this is further established by the fact that the bank on August 16,
1928, sold and conveyed said parcels to Gregorio Syquia for the sum of P45,000. Exhibits
2-A and 2-Bare copies of pages of the "libro de diversas cuentas" of the bank, upon which
appears the account of Perfecto and Felipe Jacinto and Rafael Palma. From these it appears
that after the sale by the bank to Syquia, said account was marked as balanced and closed.
From these facts the appellant contends that the principal debtors, and therefore the
guarantor, were discharged from further liability on the judgment; and that being true,
Syquia acquired nothing by the assignment of the judgment to him by the bank. In strict
law, it is obvious that the plea that the defendants has paid their debt cannot be sustained.
Indeed the appellant himself in arguing his first and second assignments of error invokes
the equitable principle that no person should enrich himself unjustly at the expense of
another. Clearly this equitable principle has no application to a legally conducted sheriff's
sale. The appellant does not question the regularity of the sale. A purchaser at a sheriff's
sale, when his title has once become vested, may dispose of the property for such
consideration as he sees fit or as he can obtain. The rule which the appellant asks us to
introduce into our jurisprudence with regard to sheriff's sales would cast such a doubt
upon such sales that bidders would abstain therefrom and even judgment creditors would
offer less, all to the prejudice of judgment debtors. The Code of Civil Procedure goes far in
protecting the judgment debtor. He may prevent the sale of the property on execution
(sec. 456); or he may redeem it from the purchaser at any time within twelve months after
the sale(sec. 465). In the instant case, although it was alleged the property was sold for
greatly below its value, the defendants did not exercise any right of redemption. We hold,
therefore, that the judgment debt in its entirety was not discharged before the action for
the revival of the judgment was brought.

101

It is to be noted that Palma filed no separate answer nor special defenses available to him
as guarantor but merely joined in the answer of his codefendants pleading that the bank
had been fully paid. It should be noted too that the execution which was issued under the
judgment of December 15, 1924, and under which said parcels of land were sold on April
18, 1925, was directed solely against the principal debtors, Perfecto and Felipe Jacinto,
Palma not being mentioned therein.

However, the majority of the court are of the opinion that there should be credited upon
the judgment for the benefit of the guarantor alone the sum of P10,560, being the
revenues collected and retained during the year of redemption by Gregorio Syquia from
said properties, according to the testimony of Perfecto Jacinto (t.s.n., 19, 20,22). This
conclusion is based on the interpretation given to the provisions of the Code of Civil
Procedure by this court in the cases of Pabico vs. Ong Pauco (43 Phil., 572); Flores vs. Lim
(50 Phil. 738); Powell vs. National Bank (54 Phil., 54). It is view of the writer that this
defense so far as the guarantor is concerned is premature.
In his brief and upon the oral argument the appellant has pressed upon our attention
several defenses available to guarantors under our law which, he claims, entitle him to a
reversal of the judgment. With reference to all these defences, it suffices to say that it is
conceded that Palma as guarantor is still entitled to the benefits of articles 1830,1832 and
1852 of the Civil Code. Up to the present, the judgment creditor has made no demand on
Palma. Joining him in the suit against the principal debtor is not the demand intended
articles 1832 of the Civil Code. That demand can be made only after judgment on the debt,
for obviously the "exhaustion of the principal's property" the benefit of which the
guarantor claims cannot even begin to take place before judgment has been obtained.
Only then can the creditor "levy upon the property of the principal" only then can the
liability of the creditor begin under article 1833 of the Civil Code. It would be absurd and
futile to point out "saleable property of the debtor" at the inception of the suit, when it
cannot be seized or sold, and require the creditor to make a "levy" upon it.

Page

The appellant's defences may be all be considered when they are property presented at
the proper time. The case which he now presents, in anticipation of a demand which has
not yet been made, is purely hypothetical. The courts do not undertake to decide
hypothetical cases.

102

There is no competent evidence that the principal debtors, Perfecto and Felipe Jacinto, are
insolvent even if they were now, there can be no certainty that they may not be in funds
when an exemption on the revived judgment is issued. So far as this record shows, the
judgment creditor has not exhausted his remedies against the principal debtors and he is
still looking to them for payment. It is not for the guarantor to anticipate that there will be
a return of nulla bona on the execution, when and if issued. Nor is it for him to anticipate a
demand on him under article 1832 and to offer defences thereto which have not matured.
The occasion for these defences may never arise. The present revived judgment could not
therefore be res judicata as to such future defences. The revived judgment does not
foreclose any defence which the guarantor may raise when "demand for payment" is made
on him. Indeed, he cannot claim the benefits of articles 1830, 1832, 1834 and 1852 of the
Civil Code before demand is made on him; they are all available to him only after "demand
for payment" (art. 1832).

It results that the judgment appealed from must be modified in the sense that Rafael
Palma as guarantor maybe held contingently liable only in the sum of P3,034.24 under
said judgment, which is in all other respects affirmed, without special pronouncement as
to costs in this instance.
Street, J., concurs.
Separate Opinions

AVANCEA, C.J., concurring:

I concur in this decision. Although I dissented in the decision in the case of Powell vs.
National Bank (54 Phil., 54), I have agree with it as long as it is not revoked by the
majority.
IMPERIAL, J., concurring:

Page

The guarantor appealed from the judgment rendered by the lower court whereby he was
condemned to pay, as guarantor, to the administratrix the sum of P13,596.24 plus costs of
the suit. His counterclaim for the rental was dismissed.

103

On December 15, 1924, judgment was rendered in civil cause No. 26942 of the Court of
First Instance of Manila in favor of the Bank of the Philippine Islands and againts Perfecto
Jacinto, as principals, and Rafael Palma, as guarantor, for the amount of P24,000 together
with interest at the rate of 9 per cent per annum from May 27, 1923, plus 1 per cent on the
said amount, as attorney's fees, and cots of the proceedings. It was ordered in the said
judgment that no execution shall be issued against the guarantor until after salable
properties of the principal debtors shall have been exhausted. The judgment became final
and the law between the parties. On February 20, 1925, execution of the judgment was
issued against the Jacintos and the sheriff levied upon real properties belonging to them
which were purchased at public auction by the Bank of the Philippine Islands for P15,045.
During the year of redemption the properties so sold earned rental amounting to P10,560
which were collected and actually received by Gregorio Syquia, with the knowledge and
consent of the judgment creditor. On August 16, 1928, the judgment creditor sold the
same date but in separate instrument it also sold to Gregorio Syquia for the nominal value
of P1 and for other valuable considerations all its rights, participation and interest on the
aforesaid judgment. This purchaser died without taking any further step and his
administratrix on July 12, 1932, after the lapse of about eight years from the date of the
judgment, instituted another action against the same debtors and guarantor for the revival
of the judgment.

The appellant, being a mere guarantor, no execution could be issued against him without
first exhausting the salable properties of his principal, as provided by article 1830 of the
Civil Code. Same provisions was made in the original judgment rendered against him.
Pursuant to article 1832 the benefit of exhaustion is not vailable to the guarantor until
demand for payment is made upon him by the creditor. In view of the change in our
procedural system in civil litigations the proper and only time for a formal demand for
payment could only be made at the time the execution of the judgment is issued; but it
happened that the execution actually issued has never been directed against the
guarantor.
This being the case and because both the Bank of the Philippine Islands and its assignee
remained inactive for many years and due to this attitude the principal debtors became
insolvent the guarantor cannot now be subrogated to the rights and privileges of said
creditors as againts the principal debtors and for this reason his obligation on the surety
has been released in accordance with the provisions of article 1852 of the said Code.
It is argued that the insolvency of the principal debtors has not been proven, but such fact
is virtually admitted by both parties and the circumstance that neither the Bank of the
Philippine Islands nor its assignee has taken any step to secure an alias writ of execution
against the principal debtors is a clear indication of the latter's insolvency.

There can be no question that the late Gregorio Syquia has collected the rents of the
properties assigned to him during the year allowed by the law for redemption. The

Page

The matter presents another feature which calls for solution under the principles of
justice and equity. The judgment of the bank was only for P24,000, plus interest and costs.
It bought the real properties of the principal debtors for P15,045 but afterwards it sold
them to Gregorio Syquia for the sum of P45,000.00, thus realizing a profit which amounted
to P29,955. As to the assignee, it is true that he paid P45,000, but the properties so bought
are worth more than P68,000 and in addition to this bargain he collected the rentals
during the year of redemption which amounted to the substantial sum of P10,560. Under
these circumstances and applying the principles of justice and equity it should have been
held that the judgment, which is sought to be revived, has fully been satisfied. Any other
determination on this particular point will encourage enrichment of a person to the
prejudice of an innocent one.

104

It is also estimated that inasmuch as there is no positive evidence of the principal debtors'
insolvency and that the guarantor failed to allege it in his answer as a special defense it is
now premature to pass upon the obligation contracted by the guarantor. On this point it
might be said that if guarantor has really been released by positive acts performed by the
Bank of the Philippine Islands and its assignee, as shown above, the right of the guarantor
to be exonerated has accrued and he is entitled right now to a complete discharge. Further
proceedings are useless and will only promote multiplicity of actions.

testimony of Perfecto Jacinto on this point is positive, clear and convincing and it was not
contradicted by nay evidence of the appellee. Said rentals amounted to P10,560 and it
should have been credited to the judgment debtors. (Pabico vs. Ong Pauco, 43 Phil., 572;
Flores vs. Lim, 50 Phil., 738; and Angeles and De Angeles vs. Lozada and Saguisag, 54 Phil.,
184.)
Other members of this court further maintain the opinion that the defendant-appellant
Rafael Palma has been relieved from further responsibility as surety through the failure of
the Bank of the Philippine Islands, the predecessor in interest of the herein plaintiffappellee, to secure a writ of execution after it was ascertained, through the levy of the writ
of execution issued against the principals Perfecto Jacinto et al. that the latter had not
sufficient property to satisfy the judgment, thus depriving the defendant-appellant of the
opportunity to point out other properties of the judgment debtor upon which a levy could
be made. To this I am also agreeable.
The foregoing reasons, as can readily be seen, call for a dissenting opinion, but in order to
expedite the matter with a sufficient number of votes and inasmuch as defendantappellant is given credit for the yearly rentals earned by the properties sold and his right
of exhaustion is upheld and reserved, I concur in the result of the majority decision.
Malcolm, Villa-Real and Abad Santos, JJ., concur.
GODDARD, J., dissenting:
I dissent.
Upon a sale of real property, under a writ of execution, the purchaser is substituted to and
acquires all the right, interest, title and claim of the judgment debtor thereto, subject only
to the right of redemption. The officer making the sale must give the purchaser a certificate
of sale containing a particular description of the property sold; the price paid for each
distinct lot or parcel; the whole price paid and the date when the right of redemption
expires. (Sec. 463, Code of Civil Procedure.)

Page

The purchaser, from the time of the sale until a redemption, is entitled to receive from the
tenant in possession the rents of the property sold or the value of the use and occupation
thereof. But when any rents have been received by the judgment creditor or purchaser

105

The judgment debtor, or the redemptioners mentioned in section 464 of the Code of Civil
Procedure, may redeem the property from the purchaser at any time within twelve months
after the sale, on paying the purchaser the amount of his purchase, with one per cent per
month interest thereon in addition, up to the time of redemption, together with the amount
of any assessments or taxes which the purchaser may have paid thereon after purchase,
and interest on such last-named amount at the same rate. (Section 465, Code of Civil
Procedure.)

from property thus sold preceding such redemption, the amounts of such rents and profits
shall be a credit upon the redemption money to be paid. (See. 469, Code of Civil Procedure.)
Is there any provision in our Code of Civil Procedure aside from that contained in section
469 of that Code, quoted above, that authorizes this court to allow a judgment debtor a
credit for the amount of the rents and profits of land sold under execution? No. Was there
any "redemption money" paid the purchaser by the judgment debtor in this case? No.
Have the above quoted sections of the Code of Civil Procedure been repealed or modified?
Not by the Legislature. "However, the majority of the court are of the opinion that there
should be credited upon the judgment for the benefit of the guarantor alone the sum of
P10,560, being the revenues collected and retained during the year of redemption by
Gregorio Syquia from said properties, according to the testimony of Perfecto Jacinto (t.s.n.,
19, 20, 22)." Majority opinion.

Page

The sections of our Code of Civil Procedure, cited above, are taken from the California
Code of Civil Procedure. The courts of that state, interpreting the phrase "upon a sale of
real property, the purchaser shall be substituted and acquire all the right, title, interest
and claim of the judgment debtor thereto", have held that it is by the sale that the title
passes, or, in other words, that at the sale the purchaser acquires the legal title to the land
subject to defeasance by the happening of the condition subsequent (redemption).
(McNutt vs. Nuevo Land Co., 167 Cal., 459; 140 Pac., 6; Leet vs. Armbruster, 143 Cal., 663;
77 Pac., 653; Pollard vs. Harlow, 138 Cal., 390; 71 Pac., 454, 648; Reynolds vs. London &
Lancashire F. Ins. Co., 128 Cal., 16; 79 Am. St. Rep., 17; 60 Pac., 467; Breedlove vs. Norwich
etc. Ins. Society, 124 Cal., 164; 58 Pac., 770 ["It is by the sale that the title passes"]; Leaver
vs. Smith, 47 Cal., App., 474; 190 Pac., 1050; Wangenheim vs. Garner, 42 Cal. App., 332; 183
Pac., 670; Youd vs. German Savings & Loan Society, 3 Cal. App., 706; 86 Pac., 991. In
McQueeney vs. Toomey, 36 Mont., 282; 122 Am. St. Rep., 358; 13 Ann. Cas., 316; 92 Pac.,
561, the courts holds that the title passes to the purchaser on the sale and notes that in
Simpson vs. Castle, 52 Cal., 664, the statute so providing was overlooked.)

106

In short the "majority are of the opinion" that the defendant-appellant, Rafael Palma, is
entitled to the rents and profits on the property during the year of redemption, although
the law clearly provides that the purchaser, from the time of the sale until a redemption, is
entitled to receive such rents and profits and, pursuant to that opinion, Palma is allowed a
credit of P10,560 upon the judgment against him, not upon "redemption money" which he
might have profitably paid the purchaser. I say might have profitably paid, because this
appellant, in his brief, puts the value of the property sold under execution at P88,000. The
purchaser only paid P15,045. Let us suppose the appellant had redeemed the property on
the last day of the year or redemption, he would have had to pay the purchaser the sum of
P15,045 plus 12 per cent, a total of P16,850.40 less a credit of P10,560, the alleged value
of the rents and profits for the year of redemption, or a total of only P6,290 for property
worth P88,000, a clear profit of P81,710.

It is also held that the various qualifications to the purchaser's title are not inconsistent
with the vesting of the legal title in him and that even the continued possession of the land
by the judgment debtor is no more incompatible with the existence of a legal title in
another than in the ordinary case of a tenant and his landlord. (Pollard vs. Harlow, 138
Cal., 390, 393; 71 Pac., 454, 648.)
It is undoubtedly true that independent of some express statutory provision to that effect
a purchaser at an execution sale would not be entitled to rents and profits during the time
allowed for redemption. In California, however, the courts have held that this right has
been expressly conferred upon purchasers at sales on civil judgments obtained in the
ordinary administration of justice, it being provided, in the Code of Civil Procedure of that
State, as it is in our Code, that "The purchaser from the time of the sale until a redemption .
. . is entitled to receive, from the tenant in possession, the rents of the property sold, or the
value of the use and occupation thereof. . . ." (Mayo vs. Woods, 31 Cal., 269; California Code
of Civil Procedure, section 707; Yndart vs. Den, 125 Cal., 85; Robinson vs. Thornton, 102
Cal., 675.)
The courts of California have also held that the "tenant in possession" is liable to the
purchaser at sheriff's sale for the rents and profits of the land sold. The phrase "tenant in
possession" has been held to be a generic term designed to apply to all cases of tenancy. In
a broad sense, a "tenant" is held to be "one that holds or possesses lands or tenements, by
any kind of title, either in fee, for life, years, or at will." Under this definition the owner in
fee in possession is no less, in legal contemplation, a tenant, than the one who occupies
under him. (Harris vs. Reynolds, 13 Cal., 514; 73 Am. Dec., 600.)1awphil.net

It is, however, evident that the majority of this court is of the opinion that the Legislature
of the State of California and the Philippine Legislature did not do enough for the

Page

In California, prior to 1869, the purchaser at an execution sale was given the rents and
profits of the property without any liability to account for them in case of a redemption.
(Page vs. Rogers, 31 Cal., 293; Kline vs. Chase, 17 Cal., 596, holding that a debtor who
received rent from his tenants between the sale and a redemption is liable to the
purchaser for the amount received.) In that year the rule was changed by the adoption of
an amendment to section 707 of the Code of Civil Procedure of that state under which the
amount of any rents or profits received by the judgment creditor or purchaser will be a
credit upon the redemption money to be paid. This section thus liberalized in favor of the
judgment debtor is section 496 of our Code of Civil Procedure.

107

The phrase "tenant in possession" also includes a mortgagee of the judgment debtor
(Knight vs. Truett, 18 Cal., 113), the trustee and his successor in interest under a trust
deed from the judgment debtor (Shores vs. Scott River Co., 21 Cal., 135) and the
administrator of the estate of the judgment debtor (Walls vs. Walker, 37 Cal., 424; 99 Am.
Dec., 290), when they are in possession after a sheriff's sale.

judgment debtor, who, for some reason or other, fails to redeem his property within a year
after it is sold under a writ of execution. Well, Mr. Judgment Debtor, cheer up! If you fail to
redeem your land within the year provided by law, your cruel judgment creditor, if he be
the purchaser of your property sold under execution, will now be obliged to allow you a
credit on his judgment against you equal to the amount of the rents and profits that he
may have received from your property during the year of redemption.
Suppose the judgment creditor is not the purchaser and a third party buys the property of
the judgment debtor at the execution sale, the former will receive the purchase price to be
credited against the amount of the judgment. In case the judgment debtor fails to redeem
from the third party purchaser, who has received the rents and profits during the
redemption period, would the majority of this court hold that the judgment debtor then
had a right to a credit against the judgment equal to the value of the rents and profits
received by the purchaser during the period of redemption? In other words would the
judgment creditor have to repay his judgment debtor the value of such rents and profits?
If it be legal and logical to allow such a credit in the case under consideration, the answer
to these questions must be in the affirmative. However, it would also be just as legal and
logical to compel the third party purchaser to return the rents and profits to the judgment
debtor even though the latter failed to redeem his property within the period fixed by law.
In view of the provisions of our Code of Civil Procedure and the decisions of the courts of
California, cited above, it is clear that in the case of a sale of real property, under a writ of
execution, the purchaser, whether he be the judgment creditor or a third party, is
regarded as the owner of such property during the period elapsing between the sale and
the time for redemption; that he is entitled to the rents and profits, or the value of the use
and occupation thereof during said period and that when such rents, etc. have been
received by the purchaser and the judgment debtor redeems the property within the
period provided by law, then and then only, is the latter entitled to a credit of the amount
of such rents, etc., upon the redemption money to be paid by him to the purchaser.
The judgment of the trial court should be affirmed with costs in both instances against the
defendant-appellant.

Page

108

Hull, Vickers and Diaz, JJ., concur.

G.R. No. L-10168

July 22, 1916

JOSE M. A. ARROYO, guardian of Tito Jocsing, an imbecile, plaintiff-appellee,

vs.
FLORENTINO HILARIO JUNGSAY, ET AL., defendants-appellants.
Perfecto J. Salas Rodriguez for appellants.
TRENT, J.:
The plaintiff in this case is the guardian of one Tito Jocsing, an imbecile, appointed by the
court to succeed Jungsay, the former guardian, who absconded with the funds of his ward.
The defendants are the absconding guardian and his bondsmen. From a judgment in favor
of the plaintiff and against the defendants for the sum of P6,000, together with interest
and costs, the bondsmen appealed.
The principal question presented for our consideration is whether the appellants should
be credited with P4,400, the alleged value of certain property attached as that of the
absconding guardian, all of which is in the exclusive possession of third parties under
claim of ownership.

Page

As explicitly stated in the article under consideration, it is not sufficient that the surety
claim the benefit of discussion in time, nor that is so doing he designate property of the
debtor wherein to satisfy the debt. It is also necessary that another condition be fulfilled,
to wit, that such property be realizable and that it be situated in Spanish territory. This is
not only logical, but just, because the attachment of property situated a great distance
away would be a lengthy and extremely difficult proceeding and one that, if actually not
opposed to, yet does not very well accord with the purpose of the bond, that is, to insure
the fulfillment of the obligation and at the same time furnish the creditor with the means
of obtaining its fulfillment without hindrance or delays. The same may be said of property
that is not readily realizable, and as the surety is the sole person who benefits by the
discussion and the one most interested in avoiding difficulties in its execution, it is he,
therefore, who should designate the property out of which the recovery is to be made, it

109

The appellants in contending for the credit, rely upon article 1834 of the Civil Code, which
gives to the surety the benefit of a levy (excusion), even when a judgment is rendered
against both the surety and the principal. But, according t article 1832, before the surety is
entitled to this benefit, he must point out to the creditor property of the principal debtor
which can be sold and which is sufficient to cover the amount of the debt. Upon this point
Manresa, in vol. 12, pp. 263-265, says:

being unquestionably convenient for him that the property he designates unite the
conditions indicated in order to facilitate the payment of the debt, whereby he will be
freed from the subsidiary obligation inherent in the bond.
In Hill & Co. vs. Bourcier and Pond (29 La. Ann., 841), where provisions similar to our Civil
Code were under consideration, the court said:
The surety has the right, under certain circumstances, to demand the discussion of the
property of the principal debtor. Where suit is brought against the surety alone, he may
interpose the plea, and compel the creditor to discuss the principal debtor. The effect of
this is to stay proceedings against the surety until judgment has been obtained against the
principal debtor, and execution against his property has proved insufficient. When the suit
is brought against the surety and the principal debtor the plea of discussion does not
require or authorize any suspension of the proceedings; but the judgment will be so
modified as to require the creditor to proceed by execution against the property of the
principal, and to exhaust it before resorting to the property of the surety. (Bernard vs.
Custis, 4 Martin, 215; Banks vs. Brander, 13 La., 276.)
In either case, the surety who desires to avail himself of this right must demand it in
limine, `on the institution of proceedings against him.' He must, moreover, point out to the
creditor property of the principal debtor, not incumbered, subject to seizure; and must
furnish a sufficient sum to have the discussion carried into effect. (R. C. C., 3045, 3046,
3047.) A plea which does not meet these requirements must be disregarded. (Robechot vs.
Folse, 11 La., 136; Banks vs. Brander, 13 La., 276.)
The property pointed out by the sureties is not sufficient to pay the indebtedness; it is not
salable; it is so incumbered that third parties have, as we have indicated, full possession
under claim of ownership without leaving to the absconding guardian a fractional or
reversionary interest without determining first whether the claim of one or more of the
occupants is well founded. In all these respects the sureties have failed to meet the
requirements of article 1832 of the Civil Code.

Torres, Johnson, Moreland, and Araullo, JJ., concur.

Page

The judgment appealed from, being in accordance with the law, the same is hereby
affirmed, with costs against the appellants. So ordered.

110

Where a guardian absconds or is beyond the jurisdiction of the court, the proper method,
under article 1834 of the Civil Code and section 577 of the Code of Civil Procedure, in
order to ascertain whether such guardian is liable and to what extent, in order to bind the
sureties on his official bond, is by a proceeding in the nature of a civil action wherein the
sureties are made parties and given an opportunity to be heard. All this was done in the
instant case.

G.R. No. L-26449

May 15, 1969

LUZON STEEL CORPORATION, represented by TOMAS AQUINO CU, plaintiff-appellant,

vs.
JOSE O. SIA, defendant,
TIMES SURETY & INSURANCE CO. INC., surety-appellee.
REYES, J.B.L., J.:
Direct appeal from two orders, dated 19 May and 5 June 1965, issued by the Court of First
Instance of Manila (Judge Francisco Arca presiding), in its Civil Case No. 54913, entitled
Luzon Steel Corporation, plaintiff vs. Metal Manufacturing of the Philippines, Inc., and Jose
O. Sia, defendants, whereby the court aforesaid quashed a writ of execution issued against
the Times Surety & Insurance Co., Inc., and cancelled the undertaking of said surety
company.
The essential and uncontroverted facts of the case may be summarized as follows:

Page

WHEREFORE, we JOSE O. SIA, as principal and the TIMES SURETY & INSURANCE CO., INC.,
as Surety, in consideration of the dissolution of attachment, hereby jointly and severally
bind ourselves in the sum of Twenty Five Thousand Pesos (P25,000.00), Philippine
Currency, to answer for the payment to the plaintiff of any judgment it may recover in the
action in accordance with Section 12, Rule 59, of the Rules of Court. (pp. 32, 45, Rec. on
Appeal.)

111

Luzon Steel Corporation has sued Metal Manufacturing of the Philippines and Jose O. Sia,
the former's manager, for breach of contract and damages. It obtained a writ of
preliminary attachment of the properties of the defendants, but the attachment was lifted
upon a P25,000.00 counterbond executed by the defendant Sia, as principal, and the Times
Surety & Insurance Co., Inc. (hereinafter designated as the surety), as solidary guarantor,
in the following terms:

Issues having been joined, plaintiff and defendant (without intervention of the surety)
entered into a compromise whereby defendant Sia agreed to settle the plaintiff's claim in
the following manner:
1. That the defendant shall settle with the Plaintiff the amount of TWENTY FIVE
THOUSAND (P25,000.00) PESOS, in the following manner: FIVE HUNDRED (P500.00)
PESOS, monthly for the first six (6) months to be paid at the end of every month and to
commence in January, 1965, and within one month after paying the last installment of
P500.00, the balance of P22,000.00 shall be paid in lump sum, without interest. It is
understood that failure of the Defendant to pay one or any installment will make the
whole obligation immediately due and demandable and that a writ of execution will be
issued immediately against Defendants bond.lawphi1.et
The compromise was submitted to the court and the latter approved it, rendered
judgment in conformity therewith, and directed the parties to comply with the same
(Record on Appeal, page 22).
Defendant having failed to comply, plaintiff moved for and obtained a writ of execution
against defendant and the joint and several counterbond. The surety, however, moved to
quash the writ of execution against it, averring that it was not a party to the compromise,
and that the writ was issued without giving the surety notice and hearing. The court,
overruling the plaintiff's opposition, set aside the writ of execution, and later cancelled the
counterbond, and denied the motion for reconsideration. Hence this appeal.
Main issues posed are (1) whether the judgment upon the compromise discharged the
surety from its obligation under its attachment counterbond and (2) whether the writ of
execution could be issued against the surety without previous exhaustion of the debtor's
properties.

Page

The italicized expressions constitute the key to the entire problem. Whether the judgment
be rendered after trial on the merits or upon compromise, such judgment undoubtedly
may be made effective upon the property released; and since the counterbond merely
stands in the place of such property, there is no reason why the judgment should not be
made effective against the counterbond regardless of the manner how the judgment was
obtained.

112

Both questions can be solved by bearing in mind that we are dealing with a counterbond
filed to discharge a levy on attachment. Rule 57, section 12, specifies that an attachment
may be discharged upon the making of a cash deposit or filing a counterbond "in an
amount equal to the value of the property attached as determined by the judge"; that upon
the filing of the counterbond "the property attached ... shall be delivered to the party
making the deposit or giving the counterbond, or the person appearing on his behalf, the
deposit or counterbond aforesaid standing in place of the property so released".

Squarely on the point, and rebutting the appellee's apprehension that the compromise
could be the result of a collusion between the parties to injure the surety, is our decision in
Anzures vs. Alto Surety & Insurance Co., Inc., et al., 92 Phil. 742, where this Court, through
former Chief Justice Paras, ruled as follows:
Under section 12, Rule 59, of the Rules of Court, the bond filed, as in this case, for the
discharge of an attachment is "to secure the payment to the plaintiff of any judgment he
may recover in the action," and stands "in place of the property so released". It follows
that the order of cancellation issued by the respondent judge is erroneous. Indeed,
judgment had already been rendered by the Court of First Instance of Manila in civil case
No. 11748, sentencing Benjamin Aguilar to pay the sum of P3,500.00 to the petitioner; and
it is not pretended that said judgment is a nullity. There is no point in the contention of the
respondent Surety Company that the compromise was entered into without its knowledge
and consent, thus becoming as to it essentially fraudulent. The Surety is not a party to civil
case No. 11748 and, therefore, need not be served with notice of the petition for judgment.
As against the conjecture of said respondent that the parties may easily connive by means
of a compromise to prejudice it, there is also the likelihood that the same end may be
attained by parties acting in bad faith through a simulated trial. At any rate, it is within the
power of the Surety Company to protect itself against a risk of the kind.
Wherefore, the order of the respondent Judge cancelling the bond in question is set aside.
So ordered with costs against the respondent Alto Surety & Insurance Co., Inc.

Page

The diverse rule in section 17 of Rule 59 for counterbonds posted to obtain the lifting of a
writ of attachment is due to these bonds being security for the payment of any judgment
that the attaching party may obtain; they are thus mere replacements of the property
formerly attached, and just as the latter may be levied upon after final judgment in the
case in order to realize the amount adjudged, so is the liability of the countersureties
ascertainable after the judgment has become final. This situation does not obtain in the
case of injunction counterbonds, since the sureties in the latter case merely undertake "to
pay all damages that the plaintiff may suffer by reason of the continuance ... of the acts
complained of" (Rule 60, section 6) and not to secure payment of the judgment
recovered.1

113

The lower court and the appellee herein appear to have relied on doctrines of this Court
concerning the liability of sureties in bonds filed by a plaintiff for the issuance of writs of
attachment, without discriminating between such bonds and those filed by a defendant for
the lifting of writs of attachment already issued and levied. This confusion is hardly
excusable considering that this Court has already called attention to the difference
between these kinds of bonds. Thus, in Cajefe vs. Judge Fernandez, et al., L-15709, 19
October 1960, this Court pointed out that

It was, therefore, error on the part of the court below to have ordered the surety bond
cancelled, on the theory that the parties' compromise discharged the obligation of the
surety.
As declared by us in Mercado vs. Macapayag, 69 Phil. 403, 405-406, in passing upon the
liability of counter sureties in replevin who bound themselves to answer solidarily for the
obligations of the defendants to the plaintiffs in a fixed amount of P912.04, to secure
payment of the amount that said plaintiff be adjudged to recover from the defendants,2
the liability of the sureties was fixed and conditioned on the finality of the judgment
rendered regardless of whether the decision was based on the consent of the parties or on
the merits. A judgment entered on a stipulation is nonetheless a judgment of the court
because consented to by the parties.
But the surety in the present case insists (and the court below so ruled) that the execution
issued against it was invalid because the writ issued against its principal, Jose O. Sia, et al.,
defendants below, had not been returned unsatisfied; and the surety invoked in its favor
Section 17 of Rule 57 of the Revised Rules of Court (old Rule 59), couched in the following
terms:
SEC. 17. When execution returned unsatisfied, recovery had upon bond. If the execution
be returned unsatisfied in whole or in part, the surety or sureties on any counterbond
given pursuant to the provisions of this rule to secure the payment of the judgment shall
become charged on such counter-bond, and bound to pay to the judgment creditor upon
demand, the amount due under the judgment, which amount may be recovered from such
surety or sureties after notice and summary hearing in the same action.

Page

A second reason against the stand of the surety and of the court below is that even if the
surety's undertaking were not solidary with that of the principal debtor, still he may not
demand exhaustion of the property of the latter, unless he can point out sufficient leviable

114

The surety's contention is untenable. The counterbond contemplated in the rule is

evidently an ordinary guaranty where the sureties assume a subsidiary liability. This is
not the case here, because the surety in the present case bound itself "jointly and
severally" (in solidum) with the defendant; and it is prescribed in Article 2059, paragraph
2, of the Civil Code of the Philippines that excusion (previous exhaustion of the property of
the debtor) shall not take place "if he (the guarantor) has bound himself solidarily with
the debtor". The rule heretofore quoted cannot be construed as requiring that an
execution against the debtor be first returned unsatisfied even if the bond were a solidary
one; for a procedural rule may not amend the substantive law expressed in the Civil Code,
and further would nullify the express stipulation of the parties that the surety's obligation
should be solidary with that of the defendant.

property of the debtor within Philippine territory. There is no record that the appellee
surety has done so. Says Article 2060 of the Civil Code of the Philippines:
ART. 2060. In order that the guarantor may make use of the benefit of excussion, he must
set it up against the creditor upon the latter's demand for payment from him, and point
out to the creditor available property of the debtor within Philippine territory, sufficient
to cover the amount of the debt.
A third reason against the thesis of appellee is that, under the rule and its own terms, the
counter-bond is only conditioned upon the rendition of the judgment. Payment under the
bond is not made to depend upon the delivery or availability of the property previously
attached, as it was under Section 440 of the old Code of Civil Procedure. Where under the
rule and the bond the undertaking is to pay the judgment, the liability of the surety or
sureties attaches upon the rendition of the judgment, and the issue of an execution and its
return nulla bona is not, and should not be, a condition to the right to resort to the bond. 3
It is true that under Section 17 recovery from the surety or sureties should be "after notice
and summary hearing in the same action". But this requirement has been substantially
complied with from the time the surety was allowed to move for the quashal of the writ of
execution and for the cancellation of their obligation.
WHEREFORE, the orders appealed from are reversed, and the court of origin is ordered to
proceed with the execution against the surety appellee, Times Surety & Insurance Co., Inc.
Costs against said appellee.
G.R. No. L-45848 November 9,1977
TOWERS ASSURANCE CORPORATION, petitioner,
vs.
ORORAMA SUPERMART, ITS OWNER-PROPRIETOR, SEE HONG and JUDGE BENJAMIN
K. GOROSPE, Presiding Judge, Court of First Instance of Misamis Oriental, Branch I,
respondents.
Benjamin Tabique & Zosimo T. Vasalla for petitioner.
Rodrigo F. Lim, Jr. for private respondent.

On February 17, 1976 See Hong, the proprietor of Ororama Supermart in Cagayan de Oro
City, sued the spouses Ernesto Ong and Conching Ong in the Court of First Instance of

Page

This case is about the liability of a surety in a counterbond for the lifting of a writ of
preliminary attachment.

115

AQUINO, J.:

Misamis Oriental for the collection of the sum of P 58,400 plus litigation expenses and
attorney's fees (Civil Case No. 4930).
See Hong asked for a writ of preliminary attachment. On March 5, 1976, the lower court
issued an order of attachment. The deputy sheriff attached the properties of the Ong
spouses in Valencia, Bukidnon and in Cagayan de Oro City.
To lift the attachment, the Ong spouses filed on March 11, 1976 a counterbond in 'the
amount of P 58,400 with Towers Assurance Corporation as surety. In that undertaking,
the Ong spouses and Towers Assurance Corporation bound themselves to pay solidarity to
See Hong the sum of P 58,400.
On March 24, 1976 the Ong spouses filed an answer with a counterclaim. For nonappearance at the pre- trial, the Ong spouses were declared in default.
On October 25, 1976, the lower court rendered a decision, ordering not only the Ong
spouses but also their surety, Towers Assurance Corporation, to pay solidarily to See Hong
the sum of P 58,400. The court also ordered the Ong spouses to pay P 10,000 as litigation
expenses and attorney's fees.
Ernesto Ong manifested that he did not want to appeal. On March 8, 1977, Ororama
Supermart filed a motion for execution. The lower court granted that motion. The writ of
execution was issued on March 14 against the judgment debtors and their surety. On
March 29, 1977, Towers Assurance Corporation filed the instant petition for certiorari
where it assails the decision and writ of execution.
We hold that the lower court acted with grave abuse of discretion in issuing a writ of
execution against the surety without first giving it an opportunity to be heard as required
in Rule 57 of tie Rules of Court which provides:

Page

Under section 17, in order that the judgment creditor might recover from the surety on
the counterbond, it is necessary (1) that execution be first issued against the principal
debtor and that such execution was returned unsatisfied in whole or in part; (2) that the
creditor made a demand upon the surety for the satisfaction of the judgment, and (3) that
the surety be given notice and a summary hearing in the same action as to his liability for
the judgment under his counterbond.

116

SEC. 17. When execution returned unsatisfied, recovery had upon bound. If the execution
be returned unsatisfied in whole or in part, the surety or sureties on any counterbound
given pursuant to the provisions of this rule to secure the payment of the judgment shall
become charged on such counterbound, and bound to pay to the judgment creditor upon
demand, the amount due under the judgment, which amount may be recovered from such
surety or sureties after notice and summary hearing in the same action.

The first requisite mentioned above is not applicable to this case because Towers
Assurance Corporation assumed a solidary liability for the satisfaction of the judgment. A
surety is not entitled to the exhaustion of the properties of the principal debtor (Art. 2959,
Civil Code; Luzon Steel Corporation vs. Sia, L-26449, May 15, 1969, 28 SCRA 58, 63).
But certainly, the surety is entitled to be heard before an execution can be issued against
him since he is not a party in the case involving his principal. Notice and hearing
constitute the essence of procedural due process. (Martinez vs. Villacete 116 Phil. 326;
Insurance & Surety Co., Inc. vs. Hon. Piccio, 105 Phil. 1192, 1200, Luzon Surety Co., Inc. vs.
Beson, L-26865-66, January 30. 1970. 31 SCRA 313).
WHEREFORE, the order and writ of execution, insofar as they concern Towers
Corporation, are set aside. The lower court is directed to conduct a summary hearing on
the surety's liability on its counterbound. No costs.
SO ORDERED.
Fernando (Chairman), Barredo, Antonio, Concepcion, Jr. and Santos, JJ., concur.

G.R. No. L-47369

JOSEPH COCHINGYAN, JR. and JOSE K. VILLANUEVA, petitioners,
vs.
R & B SURETY AND INSURANCE COMPANY, INC., respondent.

FELICIANO, J.:

Page

In November 1963, Pacific Agricultural Suppliers, Inc. (PAGRICO) applied for and was
granted an increase in its line of credit from P400,000.00 to P800,000.00 (the "Principal
Obligation"), with the Philippine National Bank (PNB). To secure PNB's approval,

117

This case was certified to us by the Court of Appeals in its resolution dated 11 November
1977 as one involving only questions of law and, therefore, falling within the exclusive
appellate jurisdiction of this Court under Section 17, Republic Act 296, as amended.

PAGRICO had to give a good and sufficient bond in the amount of P400,000.00,
representing the increment in its line of credit, to secure its faithful compliance with the
terms and conditions under which its line of credit was increased. In compliance with this
requirement, PAGRICO submitted Surety Bond No. 4765, issued by the respondent R & B
Surety and Insurance Co., Inc. (R & B Surety") in the specified amount in favor of the PNB.
Under the terms of the Surety Bond, PAGRICO and R & B Surety bound themselves jointly
and severally to comply with the "terms and conditions of the advance line [of credit]
established by the [PNB]." PNB had the right under the Surety Bond to proceed directly
against R & B Surety "without the necessity of first exhausting the assets" of the principal
obligor, PAGRICO. The Surety Bond also provided that R & B Surety's liability was not to
be limited to the principal sum of P400,000.00, but would also include "accrued interest"
on the said amount "plus all expenses, charges or other legal costs incident to collection of
the obligation [of R & B Surety]" under the Surety Bond.
In consideration of R & B Surety's issuance of the Surety Bond, two Identical indemnity
agreements were entered into with R & B Surety: (a) one agreement dated 23 December
1963 was executed by the Catholic Church Mart (CCM) and by petitioner Joseph
Cochingyan, Jr, the latter signed not only as President of CCM but also in his personal and
individual capacity; and (b) another agreement dated 24 December 1963 was executed by
PAGRICO, Pacific Copra Export Inc. (PACOCO), Jose K. Villanueva and Liu Tua Ben Mr.
Villanueva signed both as Manager of PAGRICO and in his personal and individual
capacity; Mr. Liu signed both as President of PACOCO and in his individual and personal
capacity.
Under both indemnity agreements, the indemnitors bound themselves jointly and
severally to R & B Surety to pay an annual premium of P5,103.05 and "for the faithful
compliance of the terms and conditions set forth in said SURETY BOND for a period
beginning ... until the same is CANCELLED and/or DISCHARGED." The Indemnity
Agreements further provided:

Page

(c) MATURITY OF OUR OBLIGATIONS AS CONTRACTED HEREWITH: The said

indemnities will be paid to the CORPORATION as soon as demand is received from the
Creditor or upon receipt of Court order or as soon as it becomes liable to make payment of
any sum under the terms of the above-mentioned Bond, its renewals, extensions,

118

(b) INDEMNITY: TO indemnify the SURETY COMPANY for any damage, prejudice, loss,
costs, payments, advances and expenses of whatever kind and nature, including [of]
attorney's fees, which the CORPORATION may, at any time, become liable for, sustain or
incur as consequence of having executed the above mentioned Bond, its renewals,
extensions or substitutions and said attorney's fees [shall] not be less than twenty [20%]
per cent of the total amount claimed by the CORPORATION in each action, the same to be
due, demandable and payable, irrespective of whether the case is settled judicially or
extrajudicially and whether the amount has been actually paid or not;

modifications or substitutions, whether the said sum or sums or part thereof, have been
actually paid or not.
We authorize the SURETY COMPANY, to accept in any case and at its entire discretion,
from any of us, payments on account of the pending obligations, and to grant extension to
any of us, to liquidate said obligations, without necessity of previous knowledge of [or]
consent from the other obligors.
xxx

xxx

xxx

(e) INCONTESTABILITY OF PAYMENTS MADE BY THE COMPANY. Any payment or

disbursement made by the SURETY COMPANY on account of the above-mentioned Bonds,
its renewals, extensions or substitutions, either in the belief that the SURETY COMPANY
was obligate[d] to make such payment or in the belief that said payment was necessary in
order to avoid greater losses or obligations for which the SURETY COMPANY might be
liable by virtue of the terms of the above-mentioned Bond, its renewals, extensions or
substitutions, shall be final and will not be disputed by the undersigned, who jointly and
severally bind themselves to indemnify the SURETY COMPANY of any and all such
payments as stated in the preceding clauses.
xxx

xxx

xxx

When PAGRICO failed to comply with its Principal Obligation to the PNB, the PNB
demanded payment from R & B Surety of the sum of P400,000.00, the full amount of the
Principal Obligation. R & B Surety made a series of payments to PNB by virtue of that
demand totalling P70,000.00 evidenced by detailed vouchers and receipts.
R & B Surety in turn sent formal demand letters to petitioners Joseph Cochingyan, Jr. and
Jose K. Villanueva for reimbursement of the payments made by it to the PNB and for a
discharge of its liability to the PNB under the Surety Bond. When petitioners failed to heed
its demands, R & B Surety brought suit against Joseph Cochingyan, Jr., Jose K. Villanueva
and Liu Tua Ben in the Court of First Instance of Manila, praying principally that judgment
be rendered:

Page

c. Ordering the defendants to pay jointly and severally, unto the plaintiff the sum of
P400,000.00 representing the total amount of the Surety Bond No. 4765 with interest
thereon at the rate of 12% per annum on the amount of P70,000.00 which had been paid
to the Phil. National Bank already, the interest to begin from the month of September,
1966;

119

b. Ordering defendants to pay jointly and severally, unto the plaintiff, the sum of
P20,412.20 representing the unpaid premiums for Surety Bond No. 4765 from 1965 up to
1968, and the additional amount of P5,103.05 yearly until the Surety Bond No. 4765 is
discharged, with interest thereon at the rate of 12% per annum; [and]

xxx

xxx

xxx

Petitioner Joseph Cochingyan, Jr. in his answer maintained that the Indemnity Agreement
he executed in favor of R & B Surety: (i) did not express the true intent of the parties
thereto in that he had been asked by R & B Surety to execute the Indemnity Agreement
merely in order to make it appear that R & B Surety had complied with the requirements
of the PNB that credit lines be secured; (ii) was executed so that R & B Surety could show
that it was complying with the regulations of the Insurance Commission concerning
bonding companies; (iii) that R & B Surety had assured him that the execution of the
agreement was a mere formality and that he was to be considered a stranger to the
transaction between the PNB and R & B Surety; and (iv) that R & B Surety was estopped
from enforcing the Indemnity Agreement as against him.
Petitioner Jose K. Villanueva claimed in his answer that. (i) he had executed the Indemnity
Agreement in favor of R & B Surety only "for accommodation purposes" and that it did not
express their true intention; (ii) that the Principal Obligation of PAGRICO to the PNB
secured by the Surety Bond had already been assumed by CCM by virtue of a Trust
Agreement entered into with the PNB, where CCM represented by Joseph Cochingyan, Jr.
undertook to pay the Principal Obligation of PAGRICO to the PNB; (iii) that his obligation
under the Indemnity Agreement was thereby extinguished by novation arising from the
change of debtor under the Principal Obligation; and (iv) that the filing of the complaint
was premature, considering that R & B Surety filed the case against him as indemnitor
although the PNB had not yet proceeded against R & B Surety to enforce the latter's
liability under the Surety Bond.
Petitioner Cochingyan, however, did not present any evidence at all to support his
asserted defenses. Petitioner Villanueva did not submit any evidence either on his
"accommodation" defense. The trial court was therefore constrained to decide the case on
the basis alone of the terms of the Trust Agreement and other documents submitted in
evidence.
In due time, the Court of First Instance of Manila, Branch 24 1 rendered a decision in favor
of R & B Surety, the dispositive portion of which reads as follows;
Premises considered, judgment is hereby rendered: (a) ordering the defendants Joseph
Cochingyan, Jr. and Jose K. Villanueva to pay, jointly and severally, unto the plaintiff the
sum of 400,000,00, representing the total amount of their liability on Surety Bond No.
4765, and interest at the rate of 6% per annum on the following amounts:

On P4,000.00 from November 28, 1966;

120

On P4,000.00 from December 14, 1966;

Page

On P14,000.00 from September 27, 1966;

On P4,000.00 from January 19, 1967;

On P8,000.00 from February 13, 1967;
On P4,000.00 from March 6, 1967;
On P8,000.00 from June 24, 1967;
On P8,000. 00 from September 14, 1967;
On P8,000.00 from November 28, 1967; and
On P8,000. 00 from February 26, 1968
until full payment; (b) ordering said defendants to pay, jointly and severally, unto the
plaintiff the sum of P20,412.00 as the unpaid premiums for Surety Bond No. 4765, with
legal interest thereon from the filing of plaintiff's complaint on August 1, 1968 until fully
paid, and the further sum of P4,000.00 as and for attorney's fees and expenses of litigation
which this Court deems just and equitable.
There being no showing the summons was duly served upon the defendant Liu Tua Ben
who has filed no answer in this case, plaintiff's complaint is hereby dismissed as against
defendant Liu Tua Ben without prejudice.
Costs against the defendants Joseph Cochingyan, Jr. and Jose K. Villanueva.
Not satisfied with the decision of the trial court, the petitioners took this appeal to the
Court of Appeals which, as already noted, certified the case to us as one raising only
questions of law.
The issues we must confront in this appeal are:
1. whether or not the Trust Agreement had extinguished, by novation, the obligation of R
& B Surety to the PNB under the Surety Bond which, in turn, extinguished the obligations
of the petitioners under the Indemnity Agreements;

We address these issues seriatim.

Page

3. whether or not the filing of this complaint was premature since the PNB had not yet
filed a suit against R & B Surety for the forfeiture of its Surety Bond.

121

2. whether the Trust Agreement extended the term of the Surety Bond so as to release
petitioners from their obligation as indemnitors thereof as they did not give their consent
to the execution of the Trust Agreement; and

1. The Trust Agreement referred to by both petitioners in their separate briefs, was
executed on 28 December 1965 (two years after the Surety Bond and the Indemnity
Agreements were executed) between: (1) Jose and Susana Cochingyan, Sr., doing business
under the name and style of the Catholic Church Mart, represented by Joseph Cochingyan,
Jr., as Trustor[s]; (2) Tomas Besa, a PNB official, as Trustee; and (3) the PNB as beneficiary.
The Trust Agreement provided, in pertinent part, as follows:
WHEREAS, the TRUSTOR has guaranteed a bond in the amount of P400,000.00 issued by
the R & B Surety and Insurance Co. (R & B) at the instance of Pacific Agricultural Suppliers,
Inc. (PAGRICO) on December 21, 1963, in favor of the BENEFICIARY in connection with
the application of PAGRICO for an advance line of P400,000.00 to P800,000.00;
WHEREAS, the TRUSTOR has also guaranteed a bond issued by the Consolacion Insurance
& Surety Co., Inc. (CONSOLACION) in the amount of P900,000.00 in favor of the
BENEFICIARY to secure certain credit facilities extended by the BENEFICIARY to the
Pacific Copra Export Co., Inc. (PACOCO);
WHEREAS, the PAGRICO and the PACOCO have defaulted in the payment of their respective
obligations in favor of the BENEFICIARY guaranteed by the bonds issued by the R & B and
the CONSOLACION, respectively, and by reason of said default, the BENEFICIARY has
demanded compliance by the R & B and the CONSOLACION of their respective obligations
under the aforesaid bonds;
WHEREAS, the TRUSTOR is, therefore, bound to comply with his obligation under the
indemnity agreements aforementioned executed by him in favor of R & B and the
CONSOLACION, respectively and in order to forestall impending suits by the BENEFICIARY
against said companies, he is willing as he hereby agrees to pay the obligations of said
companies in favor of the BENEFICIARY in the total amount of P1,300,000 without interest
from the net profits arising from the procurement of reparations consumer goods made
thru the allocation of WARVETS; . . .

xxx

xxx

6. THE BENEFICIARY agrees to hold in abeyance any action to enforce its claims against R
& B and CONSOLACION, subject of the bond mentioned above. In the meantime that this

Page

xxx

122

l. TRUSTOR hereby constitutes and appoints Atty. TOMAS BESA as TRUSTEE for the
purpose of paying to the BENEFICIARY Philippine National Bank in the manner stated
hereunder, the obligations of the R & B under the R & B Bond No. G-4765 for P400,000.00
dated December 23, 1963, and of the CONSOLACION under The Consolacion Bond No. G5938 of June 3, 1964 for P900,000.00 or the total amount of P1,300,000.00 without
interest from the net profits arising from the procurement of reparations consumer goods
under the Memorandum of Settlement and Deeds of Assignment of February 2, 1959
through the allocation of WARVETS;

TRUST AGREEMENT is being implemented, the BENEFICIARY hereby agrees to forthwith

reinstate the R & B and the CONSOLACION as among the companies duly accredited to do
business with the BENEFICIARY and its branches, unless said companies have been
blacklisted for reasons other than those relating to the obligations subject of the herein
TRUST AGREEMENT;
xxx

xxx

xxx

9. This agreement shall not in any manner release the R & B and CONSOLACION from their
respective liabilities under the bonds mentioned above. (emphasis supplied)
There is no question that the Surety Bond has not been cancelled or fully discharged 2 by
payment of the Principal Obligation. Unless, therefore, the Surety Bond has been
extinguished by another means, it must still subsist. And so must the supporting
Indemnity Agreements. 3
We are unable to sustain petitioners' claim that the Surety Bond and their respective
obligations under the Indemnity Agreements were extinguished by novation brought
about by the subsequent execution of the Trust Agreement.
Novation is the extinguishment of an obligation by the substitution or change of the
obligation by a subsequent one which terminates it, either by changing its object or
principal conditions, or by substituting a new debtor in place of the old one, or by
subrogating a third person to the rights of the creditor. 4 Novation through a change of the
object or principal conditions of an existing obligation is referred to as objective (or real)
novation. Novation by the change of either the person of the debtor or of the creditor is
described as subjective (or personal) novation. Novation may also be both objective and
subjective (mixed) at the same time. In both objective and subjective novation, a dual
purpose is achieved-an obligation is extinguished and a new one is created in lieu
thereof.5

Page

Again, if subjective novation by a change in the person of the debtor is to occur, it is not
enough that the juridical relation between the parties to the original contract is extended
to a third person. It is essential that the old debtor be released from the obligation, and the
third person or new debtor take his place in the new relation. If the old debtor is not
released, no novation occurs and the third person who has assumed the obligation of the
debtor becomes merely a co-debtor or surety or a co-surety. 8

123

If objective novation is to take place, it is imperative that the new obligation expressly
declare that the old obligation is thereby extinguished, or that the new obligation be on
every point incompatible with the old one. 6 Novation is never presumed: it must be
established either by the discharge of the old debt by the express terms of the new
agreement, or by the acts of the parties whose intention to dissolve the old obligation as a
consideration of the emergence of the new one must be clearly discernible. 7

Applying the above principles to the instant case, it is at once evident that the Trust
Agreement does not expressly terminate the obligation of R & B Surety under the Surety
Bond. On the contrary, the Trust Agreement expressly provides for the continuing
subsistence of that obligation by stipulating that "[the Trust Agreement] shall not in any
manner release" R & B Surety from its obligation under the Surety Bond.
Neither can the petitioners anchor their defense on implied novation. Absent an
unequivocal declaration of extinguishment of a pre-existing obligation, a showing of
complete incompatibility between the old and the new obligation (and nothing else)
would sustain a finding of novation by implication. 9 But where, as in this case, the parties
to the new obligation expressly recognize the continuing existence and validity of the old
one, where, in other words, the parties expressly negated the lapsing of the old obligation,
there can be no novation. The issue of implied novation is not reached at all.
What the trust agreement did was, at most, merely to bring in another person or personsthe Trustor[s]-to assume the same obligation that R & B Surety was bound to perform
under the Surety Bond. It is not unusual in business for a stranger to a contract to assume
obligations thereunder; a contract of suretyship or guarantee is the classical example. The
precise legal effect is the increase of the number of persons liable to the obligee, and not
the extinguishment of the liability of the first debtor. 10 Thus, in Magdalena Estates vs.
Rodriguez, 11 we held that:
[t]he mere fact that the creditor receives a guaranty or accepts payments from a third
person who has agreed to assume the obligation, when there is no agreement that the first
debtor shall be released from responsibility, does not constitute a novation, and the
creditor can still enforce the obligation against the original debtor.

Page

2. We turn to the contention of petitioner Jose K. Villanueva that his obligation as

indemnitor under the 24 December 1963 Indemnity Agreement with R & B Surety was
extinguished when the PNB agreed in the Trust Agreement "to hold in abeyance any action
to enforce its claims against R & B Surety .

124

In the present case, we note that the Trustor under the Trust Agreement, the CCM, was
already previously bound to R & B Surety under its Indemnity Agreement. Under the Trust
Agreement, the Trustor also became directly liable to the PNB. So far as the PNB was
concerned, the effect of the Trust Agreement was that where there had been only two,
there would now be three obligors directly and solidarily bound in favor of the PNB:
PAGRICO, R & B Surety and the Trustor. And the PNB could proceed against any of the
three, in any order or sequence. Clearly, PNB never intended to release, and never did
release, R & B Surety. Thus, R & B Surety, which was not a party to the Trust Agreement,
could not have intended to release any of its own indemnitors simply because one of those
indemnitors, the Trustor under the Trust Agreement, became also directly liable to the
PNB.

The Indemnity Agreement speaks of the several indemnitors "apply[ing] jointly and
severally (in solidum) to the R & B Surety] to become SURETY upon a SURETY BOND
demanded by and in favor of [PNB] in the sum of [P400,000.00] for the faithful compliance
of the terms and conditions set forth in said SURETY BOND ." This part of the
Agreement suggests that the indemnitors (including the petitioners) would become cosureties on the Security Bond in favor of PNB. The record, however, is bereft of any
indication that the petitioners-indemnitors ever in fact became co-sureties of R & B Surety
vis-a-vis the PNB. The petitioners, so far as the record goes, remained simply indemnitors
bound to R & B Surety but not to PNB, such that PNB could not have directly demanded
payment of the Principal Obligation from the petitioners. Thus, we do not see how Article
2079 of the Civil Code-which provides in part that "[a]n extension granted to the debtor by
the creditor without the consent of the guarantor extinguishes the guaranty" could apply
in the instant case.
The petitioner-indemnitors are, as, it were, second-tier parties so far as the PNB was
concerned and any extension of time granted by PNB to any of the first-tier obligators
(PAGRICO, R &B Surety and the trustors[s]) could not prejudice the second-tier parties.
There is no other reason why petitioner Villanueva's contention must fail. PNB's
undertaking under the Trust Agreement "to hold in abeyance any action to enforce its
claims" against R & B Surety did not extend the maturity of R & B Surety's obligation
under the Surety Bond. The Principal Obligation had in fact already matured, along with
that of R &B Surety, by the time the Trust Agreement was entered into. Petitioner's
Obligation had in fact already matured, for those obligations were to amture "as soon as [R
& B Surety] became liable to make payment of any sum under the terms of the [Surety
Bond] whether the said sum or sums or part thereof have been actually paid or not."
Thus, the situation was that precisely envisaged in Article 2079:

merely delay or negligence in proceeding against the principal will not discharge a surety
unless there is between the creditor and the principal debtor a valid and binding agreement

Page

The theory behind Article 2079 is that an extension of time given to the principal debtor
by the creditor without the surety of his right to pay the creditor and to be immediately
subrogated to the creditor's remedies against the principal debtor upon the original
maturity date. The surety is said to be entitled to protect himself against the principal
debtor upon the orginal maturity date. The surety is said to be entitled to protect himself
against the contingency of the principal debtor or the indemnitors becoming insolvent
during the extended period. The underlying rationale is not present in the instant case. As
this Court has held,

125

[t]he mere failure on the part of the creditor to demand payment after the debt has become
due does not of itself constitute any extension of the referred to herein.(emphasis
supplied)

therefor, one which tends to prejudice [the surety] or to deprive it of the power of obtaining
indemnity by presenting a legal objection for the time, to the prosecution of an action on
the original security.12
In the instant case, there was nothing to prevent the petitioners from tendering payment,
if they were so minded, to PNB of the matured obligation on behalf of R & B Surety and
thereupon becoming subrogated to such remedies as R & B Surety may have against
PAGRICO.
3. The last issue can be disposed of quicjly, Clauses (b) and (c) of the Indemnity
Agreements (quoted above) allow R & B Surety to recover from petitioners even before R
& B Surety shall have paid the PNB. We have previously held similar indemnity clauses to
be enforceable and not violative of any public policy. 13
The petitioners lose sight of the fact that the Indemnity Agreements are contracts of
indemnification not only against actual loss but against liability as well. 14 While in a
contract of indemnity against loss as indemnitor will not be liable until the person to be
indemnified makes payment or sustains loss, in a contract of indemnity against liability, as
in this case, the indemnitor's liability arises as soon as the liability of the person to be
indemnified has arisen without regard to whether or not he has suffered actual loss. 15
Accordingly, R & B Surety was entitled to proceed against petitioners not only for the
partial payments already made but for the full amount owed by PAGRICO to the PNB.
Summarizing, we hold that :
(1) The Surety Bond was not novated by the Trust Agreement. Both agreements can coexist. The Trust Agreement merely furnished to PNB another party obligor to the Principal
Obligation in addition to PAGRICO and R & B Surety.
(2) The undertaking of the PNB to 'hold in abeyance any action to enforce its claim"
against R & B Surety did not amount to an "extension granted to the debtor" without
petitioner's consent so as to release petitioner's from their undertaking as indemnitors of
R & B Surety under the INdemnity Agreements; and

SO ORDERED.

Page

WHEREFORE, the petitioner's appeal is DENIED for the lack of merit and the decision of
the trial court is AFFIRMED in toto. Costs against the petitioners.

126

(3) Petitioner's are indemnitors of R & B Surety against both payments to and liability for
payments to the PNB. The present suit is therefore not premature despite the fact that the
PNB has not instituted any action against R & B Surety for the collection of its matured
obligation under the Surety Bond.

Page

G.R. No. L-43862 January 13, 1989

127

Yap (Chairman), Narvasa, Melencio-Herrera, Cruz, Gancayco and Sarmiento, JJ., concur.

MERCANTILE INSURANCE CO., INC., plaintiff-appellee,

vs.
FELIPE YSMAEL, JR., & CO., INC., defendants-appellants.
Beltran, Evangelista & Cuasay for plaintiff-appellee.
Abraham F. Sarmiento Law Office for defendants-appellants.

BIDIN, J.:
This is an appeal from the decision** dated October 30, 1971 of the Court of First Instance
of Manila (now Regional Trial Court) in Civil Case No. 82168 entitled "Mercantile
Insurance Co., Inc. (herein referred to as the plaintiff-appellee) vs. Felipe Ysmael, Jr. &. Co.,
Inc., et al (hereinafter referred to as the defendant-appellant) ordering defendantsappellants Felipe Ysmael, Jr. & Co., Inc. and Felipe Ysmael, Jr., to pay jointly and severally
to the plaintiff the sum of P100,000.00 plus 15% thereof as attorney's fees, and costs. On
appeal to the Court of Appeals, this case which involves only a question of law, was
certified to this Court.
The factual milieu of this case as found by the trial court is as follows:

Page

As security and in consideration of the execution of the surety bonds, exhibits A and B,
Felipe Ysmael, Jr. & Co., Inc. and Magdalena Estate, lnc. represented by Felipe Ysmael, Jr. as
president and in his personal capacity executed with the plaintiff Mercantile Insurance
Co., Inc. an indemnity agreement (Exh. D) wherein the defendants Felipe Ysmael, Jr. & Co.,
Inc. and Felipe Ysmael, Jr. bound themselves jointly and severally to indemnify the
plaintiff, hold save it harmless from and against any and all payments, damages, costs,
losses, penalties, charges and expenses which said company as surety (relative to MERICO
Bond No. 0007) shall incur or become liable to pay plus an additional amount as

128

Felipe Ysmael, Jr. & Co., Inc., represented by Felipe Ysmael filed an application for an
overdraft line of Pl,000,000.00 and credit line of Pl,000,000.00 with the Philippine
National Bank. The latter was willing to grant credit accommodation of P2,000,000.00
applied for provided that the applicant shall have filed a bond in the sum of P140,000.00
to guarantee the payment of the said amount. Accordingly, on March 6, 1967, Felipe
Ysmael, Jr. & Co., Inc., represented by Felipe Ysmael filed surety bond No. G(16) 007 of
Mercantile Insurance Co., Inc. in the sum of P100,000.00 (Exh. A). On December 4, 1967,
Felipe Ysmael Jr. & Co., Inc. as principal and the Mercantile Insurance Co., Inc. executed
another surety bond MERICO Bond No. G (16) 0030 in the sum of P40,000.00. It is the
condition in both bonds that if the principal Felipe Ysmael, Jr. & Co., Inc. shall perform and
fulfill its undertakings with the Philippine National Bank, then these surety bonds shall be
null and void (Exh. B).

attorney's fees equal to 20% of the amount due to the company, Paragraph 3 of the
indemnity agreement expressly provides:
3) ACCRUAL OF ACTION: Notwithstanding the provisions of the next preceding
paragraph, where the obligation involves a liquidated amount for the payment of which
the company has become legally liable under the terms of the obligation and its suretyship
undertaking or by the demand of the obligee or otherwise and the latter has merely
allowed the COMPANY a term or extension for payment of the latter's demand the full
amount necessary to discharge the COMPANY's aforesaid liability irrespective of whether
or not payment has actually been made by the COMPANY, the COMPANY for the protection
of its interest may forthwith proceed against the undersigned or either of them by court
action or otherwise to enforce payment even prior to making payment to the obligee
which may hereafter be done by the COMPANY.
On September 6, 1967, Gabriel Daza, Jr., Edgardo L. Tordesillas and Augusta Torres in
their official capacities and the defendants executed another indemnity agreement (Exh.
E) with the plaintiff in consideration of the surety bond (referring to MERICO Bond No. G
(16) 0030. In the indemnity agreement (Exh. E) the same provisions of paragraph 3 found
in exhibit D is provided for.
By agreement dated September 5, 1967 (Exh. C), the amount of the Bond was reduced by
P40,000.00 so that the total liability of the plaintiff to the Philippine National Bank in view
of the aforesaid reduction is P100,000.00 (Exh. C), P60,000.00 on Surety Bond No. 0007
plus P40,000.00 on Surety Bond No. 0030.
In view of the failure of the defendants to pay the overdraft and credit line with the
Philippine National Bank demanded from the Mercantile Insurance Co., Inc. settlement of
its obligation under surety bonds No. (G-16)-0007 for P 60,000.00 which expired on
March 6, 1970 and No. G (-16)- 0030 for P 40,000.00 which expired since September 4,
1968 (Exh. P) otherwise drastic measures for collection to protect the interest of the bank
would be taken. Attached to the demand letter is a statement of account.

Page

Instead of filing their answer, the defendants (appellants herein) filed a motion to
DISMISS, which motion was subsequently denied. Thereafter, the defendants filed their
answer and the case was set for pre-trial. On the date scheduled for pre-trial, the

129

By letter of December 17, 1970, the Legal Department of plaintiff company wrote a letter
of demand to the defendants (Exhs. G and H) inviting their attention to the letter of
demand of the Philippine National Bank sent to the plaintiff and demanding from the
defendants the settlement of said account. These letters were received as shown by the
registry return receipts (Exhs. G-2 and H-2). Since the defendants failed to settle their
obligation with the Philippine National Bank, on February 10, 1971, plaintiff brought the
present action.

defendants and their counsel failed to appear, thus on motion of the plaintiff, they were
declared in default and plaintiff was allowed to present its evidence ex-parte. Upon motion
for reconsideration filed by the defendants, the case was ordered re-opened and the case
was scheduled for reception of defendant's evidence. Thereafter, the parties were
required to submit their respective memoranda and the case was submitted for decision.
On October 30, 1971, the trial court rendered its decision, the dispositive part of which
reads:
WHEREFORE, in view of the foregoing considerations, judgment is rendered for the
plaintiff and the defendants are ordered to pay jointly and severally the plaintiff the sum
of P100,000.00 plus the further sum of 15% thereof in the concept of reasonable
attorney's fees and the costs.
Plaintiff upon payment of this judgment, shall deliver the sum of P100,000.00 to the
Philippine National Bank in partial satisfaction of the obligation of the defendants to said
Bank.
SO ORDERED. (Record on Appeal, p. 96)
Said decision was appealed to the Court of Appeals on questions of facts and law. Acting
on the appeal and finding that the only question raised therein involves a question of law,
the Court of Appeals by resolution *** dated April 29, 1976, certified the same to this
Court, for proper disposition (Rollo, pp. 62-63).
This Court, thru its First Division by Resolution dated May 31, 1978, resolved to have the
case docketed and declared the same submitted for decision (Rollo, p. 65).
The defendants-appellants raised the following assignments of errors in the Court of
Appeals:
I
THE LOWER COURT ERRED IN NOT DISMISSING THE CASE FOR LACK OF CAUSE OF
ACTION, THE COMPLAINT BEING PREMATURE BECAUSE THE PLAINTIFF HAS PAID
NOTHING ON THE SURETY BONDS AND HAS SUFFERED NO ACTUAL DAMAGE.
II

Page

III

130

THE LOWER COURT ERRED IN NOT DECLARING THAT PARAGRAPH 3 OF THE

INDEMNITY AGREEMENTS IS VOID.

CONSEQUENTLY, THE TRIAL COURT ERRED IN ORDERING THE DEFENDANTSAPPELLANT'S TO PAY JOINTLY AND SEVERALLY TO THE PLAINTIFF THE SUM OF
P100,000.00 PLUS THE FURTHER SUM OF 15% THEREOF IN THE CONCEPT OF
REASONABLE ATTORNEY'S FEES AND THE COSTS. (Brief for Defendants-Appellants, CA,
pp. 1-2).
The crux of the controversy is whether or not the surety can be allowed indemnification
from the defendants-appellants, upon the latter's default even before the former has paid
to the creditor.
There is no dispute that the overdraft line of P1,000,000.00 and the credit line of
Pl,000,000.00 applied for by the defendant was granted by the Philippine National Bank
on the strength of the two surety bonds denominated as MERICO Bond No. G(16) 0007 for
one hundred thousand pesos (Exh. A) and MERICO Bond No. G(16) 0030 for forty
thousand pesos (Exh. B), later reduced as above stated on September 5, 1967 (Exh. C) by
P40,000.00 or a total amount of P100,000.00. As security and in consideration of the
execution of the surety bonds, the defendants executed with the plaintiff identical
indemnity agreements (Exhs. D and E) which provide, among others that payment of
indemnity or compensation may be claimed irrespective of whether or not plaintiff
company has actually paid the same.
Defendants-appellants maintain that the complaint is premature and that paragraph 3 of
the indemnity agreements is void for being contrary to law, public policy and good morals.
They argued that to allow plaintiff surety (appellee herein) to receive indemnity or
compensation for something it has not paid in its capacity as surety would constitute
unjust enrichment at the expense of another. (Brief for Defendants-Appellants, CA, p.6).

Page

The question as to whether or not under the Indemnity Agreement of the parties, the
Surety can demand indemnification from the principal, upon the latter's default, even
before the former has paid to the creditor, has long been settled by this Court in the
affirmative.

131

To bolster their contention, defendants-appellants argue that it is an indispensable

requisite for an action to prosper, that the party bringing the action must have a cause of
action against the other party; and that for a cause of action to be ripe for litigation, there
must be both wrongful violation and damages; all of which are not present in the case at
bar because plaintiff-appellee has not suffered any injury whatsoever, notwithstanding
the demand sent to it by the Philippine National Bank, nor has plaintiff-appellee made a
single actual payment to said bank. Hence, to allow plaintiff-appellee to recover from them
something which it has not paid in its capacity as surety would violate the fundamental
principle which states NEMOCUM ALTERIUS DETRIMENTO LOCOPLETARI POTEST (No
person should unjustly enrich himself at the expense of another). [Defendants-Appellants'
Brief, pp. 7-8; 49].

It has been held that:

The stipulation in the indemnity agreement allowing the surety to recover even before it
paid the creditor is enforceable. In accordance therewith, the surety may demand from the
indemnitors even before paying the creditors. (Cosmopolitan Ins. Co., Inc. v. Reyes, 15
SCRA 528 [1965] citing; Security Bank v. Globe Assurance, 58 Off. Gaz. 3709 [April 30,
1962]; Alto Surety and Ins. Co., v. Aguilar, et al., G.R. No. L-5625, March 16, 1954).
Hence, appellants contention that the action of the appellee (surety company) is
premature or that the complaint fails to state a cause of action because the surety has not
paid anything to the bank, cannot be sustained (Cosmopolitan Ins. Co., Inc. v. Reyes,
supra). In fact, such contention is belied not only by the allegations in the complaint but
also by the agreement entered into between the appellants and the appellee in favor of the
bank.
The records show that the cause of action is distinctly set forth in the complaint, the
pertinent portion of which states:
6. That defendants, by virtue of the two Surety Bonds (Annexes "A" and "B") were
extended by the Philippine National Bank, a credit accommodation in the sum of TWO
MILLION (P2,000,000.00) PESOS;
7. That the Philippine National Bank is demanding and collecting from the plaintiff the
sum of ONE HUNDRED THOUSAND (P100,000.00) PESOS which is the defendants' account
with the said bank that is secured and covered by the above-mentioned bonds (Annexes
"A" and "B");
8. That under the terms of the Indemnity Agreements (Annexes "D" and "E") more
particularly paragraph 3, plaintiff may forthwith proceed against the defendants to
impose payment, even prior to making payment to the Philippine National Bank;
9. That notwithstanding series of demands made by plaintiff, the defendants failed and
refused to pay the Philippine National Bank the sum of ONE HUNDRED THOUSAND (P
l00,000.00) PESOS;

Page

Correspondingly, it is readily apparent that said cause of action was derived from the
terms of the Indemnity Agreement, paragraph 3 thereof, as above quoted. By virtue of the
provisions of the Indemnity Agreement, defendants-appellants have undertaken to hold
plaintiff-appellee free and harmless from any suit, damage or liability which may be
incurred by reason of non-performance by the defendants-appellants of their obligation

132

10. That on account of defendants' default, plaintiff becomes liable to the Philippine
National Bank in the sum of ONE HUNDRED THOUSAND (P100,000.00) PESOS;' (Record
on Appeal, p. 2.)

with the Philippine National Bank. The Indemnity Agreement is principally entered into as
security of plaintiff-appellee in case of default of defendants-appellants; and the liability of
the parties under the surety bonds is joint and several, so that the obligee PNB may
proceed against either of them for the satisfaction of the obligation. (Brief for PlaintiffAppellee, p. 7).
II
Defendants-appellants have, by virtue of the Indemnity Agreement, given the plaintiffappellee the prerogative of filing an action even prior to the latter's making any payment
to the Philippine National Bank.
Contracts are respected as the law between the contracting parties (Henson v. IAC, 148
SCRA 11 [1987], citing Castro v. CA, 99 SCRA 722 [1980] and Escano v. CA, 100 SCRA 197
[1980]) It is settled that the parties may establish such stipulations, clauses, terms and
conditions as they may want to include, and as long as such agreements are not contrary
to law, morals, good customs, public policy or public order, they shall have the force of law
between them (Herrera v. Petrophil Corp., 146 SCRA [1986].
Contracts should be interpreted according to their literal meaning and should not be
interpreted beyond their obvious intentment (Ibid.). It is a basic and fundamental rule in
the interpretation of contracts that if the terms thereof are clear and leave no doubt as to
the intention of the contracting parties, the literal meaning of the stipulation shall control.
In the case at bar, there is no dispute as to meaning of the terms of the Indemnity
Agreement. The only bone of contention is whether or not such terms are null and void as
defendants-appellants would have this Court declare.
A careful analysis of the contract in question will show that the provisions therein do not
contravene any law or public policy much less do they militate against the public good. In
fact, as shown above, they are fully sanctioned by well-established jurisprudence. Having
voluntarily entered into such contract, the appellants cannot now be heard to complain.
Their indemnity agreement have the force and effect of law.

III

Page

...The indemnity agreement was not executed for the benefit of the creditors; it was rather
for the benefit of the surety and if the latter thought it necessary in its own interest to
impose this stipulation, and the indemnitors voluntarily agreed to the same, the court
should respect the agreement of the parties and require them to abide by their contract.
(Security Bank v. Globe Assurance, 107 Phil. 733 [1960].

133

Elucidating further on the obligations of the parties in agreements of this nature, this
Court ruled:

Finally, the trial court did not err in ordering defendants-appellants to pay jointly and
severally the plaintiff the sum of P100,000.00 plus 15% as attorney's fees.
It must be stressed that in the case at bar, the principal debtors, defendants-appellants
herein, are simultaneously the same persons who executed the Indemnity Agreement.
Thus, the position occupied by them is that of a principal debtor and indemnitor at the
same time, and their liability being joint and several with the plaintiff-appellee's, the
Philippine National Bank may proceed against either for fulfillment of the obligation as
covered by the surety bonds. There is, therefore, no principle of guaranty involved and,
therefore, the provision of Article 2071 of the Civil Code does not apply. Otherwise stated,
there is no more need for the plaintiff-appellee to exhaust all the properties of the
principal debtor before it may proceed against defendants-appellants.
As to the attorney's fees, it has been squarely ruled by this Court that the award of fifteen
(15) per cent for cases of this nature is not unreasonable (Cosmopolitan Insurance Co., Inc.
v. Reyes, supra).
WHEREFORE, the decision appealed from is hereby AFFIRMED.
SO ORDERED.

Page

134

Fernan, C.J., Gutierrez, Jr., Feliciano and Cortes, JJ., concur.

Page

135

G.R. No. L-30937 January 21, 1987

PHLIPPINE NATIONAL BANK, petitioner,
vs.
THE HONORABLE COURT OF APPEALS and the PHILIPPINE PHOENIX SURETY AND
INSURANCE, INC., respondents.
Conrado E. Medina, Edgardo M Magtalas, Andres L. Africa & Pablito D. Reynaldo for
petitioner.
Manuel O. Chan for private respondent.
RESOLUTION

Marino P. Rubin obtained from the Binalbagan Branch of petitioner Philippine National
Bank (Bank, for short) a 1954- 1955 sugar crop loan in the amount of P40,200.00, secured
by a chattel mortgage executed by Rubin as debtor-mortgagor and Jose A. Campos as
mortgagor. As additional security, private respondent Philippine Phoenix Surety and
Insurance, Inc, (Phoenix for short) issued Surety Bond No. 88 for P10,000.00 in favor of
petitioner Bank. Liability under said bond was to expire one (1) year from the date
thereof, unless within ten (10) days from its expiration, the surety is notified of any
existing obligations thereunder,
Three months later, petitioner Bank increased the loan from P40,200.00 to P56,800,00,
without the knowledge and consent of private respondent Phoenix.

Page

The trial court ruled in favor of petitioner Bank, ordering, among others, private
respondent Phoenix to pay petitioner the sum of P10,000 upon failure of the principal
debtor Rubin and his guarantors to pay the judgment amount. On appeal, the Court of
Appeals modified the trial court's decision by exonerating private respondent Phoenix
from liability under its surety bond. Hence, the instant petition for review.

136

When Rubin failed to liquidate said loan, petitioner Bank demanded of private respondent
Phoenix that it make good its undertaking as surety for Rubin up to the stated amount of
P10,000.00. Private respondent Phoenix denied liability, resulting in petitioner instituting
a collection case against Rubin, his guarantors and sureties, including private respondent
Phoenix.

The discharge of private respondent Phoenix from liability under Surety Bond No. 88 is
correct. Contrary to petitioner's thinking, the contract in question is not a continuing
chattel mortgage for which consent and knowledge of the surety is unnecessary for an
increase in the amount of the principal obligation. The contract of chattel mortgage itself
fixed the credits, loans, overdrafts, etc. and other valuable consideration received
thereunder at Forty Thousand Two Hundred Pesos [P40,200,00]. The undertaking under
said contract was "for the purpose of securing their payment including the interest
thereon, the cost of collection and other obligations owing by the Debtor-Mortgagor to the
mortgagee, whether direct or indirect, principal or secondary as appears in the accounts,
books and records of the mortgagee ... . " [p. 179, Record on Appeal]. Applying the
principle of ejusdem generis, the term "other obligations" must be limited to such as are of
the same nature as interest and costs of collection. The term cannot be enlarged to include
future additional advances to debtor-mortgagor, much less be interpreted as a previous
authorization from the surety to increase the principal amount fixed in the contract.
The increase in the indebtedness from P40,200.00 to P56,800.00 is material and
prejudicial to private respondent Phoenix. While the liability of private respondent under
the bond is limited to P10,000.00, the increase in the amount of the debt proportionally
decreased the probability of the principal debtor being able to liquidate the debt; thus,
increasing the risk undertaken by the surety to answer for the failure of the debtor to pay.
"A material alteration of the principal contract, effected by the creditor and principal
debtor without the knowledge and consent of the surety, completely discharges the surety
from all liability in the contract of suretyship." [Asiatic Petroleum Co. vs. Hizon and David,
45 Phil. 532; Phil. National Bank vs. Veraguth, 50 Phil. 253].

Page

137

ACCORDINGLY, the decision of the Court of Appeals under review is hereby affirmed.
Costs against petitioner.

G.R. No. L-29666 October 29, 1971

PFOPLES BANK AND TRUST COMPANY, plaintiff-appellee,
vs.
JOSE MARIA TAMBUNTING, MARIA PAZ TAMBUNTING, and FRANCISCO D. SANTANA,
defendants. FRANCISCO D. SANTANA, defendant-appellant.
Araneta, Mendoza & Papa for plaintiff-appellee.
Paredes, Poblador, Nazareno, Asada & Tomacruz for defendant-appellant.

FERNANDO, J.:

Page

The decision, now on appeal, after stating the nature of the action which as noted is for the
recovery of a sum of money due on an overdraft agreement set forth the undisputed facts
thus: "On September 9, 1968, plaintiff and defendants executed a contract denominated
'overdraft agreement and pledge' wherein the plaintiff granted to the spouses Jose Maria
Tambunting and Maria Paz Tambunting an overdraft from time to time on their current
account with the plaintiff bank not to exceed P200,000.00 with interest at the rate of 9%
per annum until September 10, 1964, ..., the proceeds of which were to be used by the
Tambuntings in their logging operations. Defendant Francisco D. Santana, as guarantor,

138

Appellant Francisco D. Santana was sued by plaintiff, now appellee, Peoples Bank & Trust
Company, along with the other defendants, Jose Maria Tambunting and Maria Paz
Tambunting, his son-in-law and his daughter, for the recovery of the sum of money due in
an overdraft agreement, with the Tambunting couple as principal debtors and appellant as
surety. The judgment went against him notwithstanding his plea based on Article 2080 of
the Civil Code, releasing guarantors, even if they be solidary, if by some act of the creditor
subrogation is thereby precluded. 1 The lower court, presided by the then Judge, now
Justice of the Court of Appeals, Jose N. Leuterio, in a well-written decision, found such a
defense untenable as in what was characterized by the lower courts as the "contract of
absolute guaranty", appellant had waived his rights to the benefit conferred by such a
provision. In this appeal, would vigorously contend that what was thus agreed to by him
was bereft of a binding force. The law in its wisdom does not lend its approval to such an
ill-disguised attempt for turn one's back to all obligation arising from a valid contract. We
have to affirm.

Page

Why such a contention was held devoid of merit was explained in such decision thus: "The
contract of absolute guaranty, ..., expressly authorized the plaintiff bank to extend the time
of payment and to release or surrender any security or part thereof held by it without
notice to, the consent of, Santana. He had consented in advance the release of the guaranty

139

and the spouses Tambuntings, conveyed to the bank shares of capital stock of the
International Sports Development Corporation collateral security for the payment of any
and all indebtedness incurred or arising from the overdraft, and all extensions, renewals,
amendments or applications thereof. On the same day, defendant Francisco D. Santana
executed a document denominated as absolute guaranty in which, in consideration of the
'overdraft agreement and pledge,' he bound himself to the bank, jointly and severally, with
the Tambunting spouses for the full and prompt payment of all the indebtedness incurred
or to be incurred by said spouses on account of the overdraft line. On July 24, 1964, Jose
Maria Tambunting wrote to the plaintiff bank [a] latter, ..., requesting renewal of the
overdraft agreement. Plaintiff bank, in a letter dated September 21, 1964, ..., granted the
Tambunting spouses an extension of the overdraft line for six (6) months from September
10, 1964, but reducing the overdraft line to P185,000.00 with the understanding that
other terms and conditions of the overdraft agreement would be in full force and effect.
Before the expiration of the six (6) months period, or on March 5, 1965, Jose Maria
Tambunting asked for another renewal of the overdraft line for another year, ... .
Apparently, this letter was granted by the plaintiff on March 15, 1965, for in another letter
of Jose Maria Tambunting to the bank, ... the defendant, on March 29, 1965, assured the
bank that he would comply with the requirements of the plaintiff. In a letter dated May 11,
1965, ... of the bank to Tambunting, the Manager of the Credit Department advised Jose
Maria Tambunting that the Board of Directors of the plaintiff bank approved his request
for an extension of the overdraft line in the amount of P185,000.00 for another year, or
until March 10, 1966, but with interest at the rate of 10% per annum; that in the same
meeting, the Board also approved the release of the pledge of 135 shares of stocks of the
International Sports Development Corporation. The defendants failed to pay the
indebtedness on the date due and demand for payment was made upon Francisco Santana
and Tambunting as per letters dated December 14, 1965, January 24, 1966 and March 4,
1966, ... . As of December 27, 1966, the total amount due from the defendants, including
interests, was P219,165.18, ... ." 2 The decision went on to state: "The Tambunting spouses
failed to answer the complaint and were declared in default. The defendant Santana does
not dispute the indebtedness. However, it is the contention that he had been released from
the guaranty for several reasons. Defendant Santana contends that he was released from
his obligation on the overdraft line because the plaintiff had extended the time of payment
and released to the Tambuntings without his consent, the 135 shares of stocks of the
International Sports Development Corporation which had been pledged to the bank to
secure the overdraft line. It is argued that, in accordance with Article 2080 of the New Civil
Code, 'The guarantors, even though they be solidary, are released from their obligation
whenever by some act of the creditor they cannot be subrogated to the rights, mortgages,
and preferences of the latter.' " 3

which the bank might make, Santana cannot now complain that the release of the pledge
was without his consent, and that it deprived him of the right to be subrogated to the
rights of the creditor. The waiver is not contrary to law, nor is it contrary to public policy.
The law does not prohibit the debtor-guarantor from agreeing in advance and without
notice to the release of any security which had been given to assure payment of the
obligation. The waiver is not contrary to public policy, because the right is purely
personal, and does not affect public interest nor does it violate any public policy. Neither
does the return of the shares of stocks novate the original contract for the obligation
remains the same; and if it is a novation, it is a novation made with the consent of Santana.
Moreover, the pledge is merely an accessory obligation, and its release does not vary the
terms of the principal obligation." 4
The appealed decision speaks for itself. It cannot, as was made plain in the opening
paragraph of this opinion be overturned.

Page

2. It could have been different if there were no such contract of absolute guaranty to which
appellant was a party under the aforesaid Article 2080. He would have been freed from
the obligation as a result of plaintiff releasing to the Tambuntings without his consent the
135 shares of the International Sports Development Corporation pledged to plaintiff bank
to secure the overdraft line. For thereby subrogation became meaningless. Such a
provision is intended for the benefit of a surety. That was a right he could avail of. He is
not precluded however from waiving it. That was what appellant did precisely when he
agreed to the contract of absolute guaranty. Again the law is clear. A right may be waived
unless it would be contrary to law, public order, public policy, morals or good customs. 6
There is no occasion here for the exceptions coming into play. It has been traditional in the
Philippine for parents to extend all available aid and assistance to their children. That is a
custom of long standing. Nor is there anything offensive to morals by an assumption of
contingent liability as thus worded. The law has not been thwarted. Neither is public order
nor public policy disregarded. The lower court was right thereto in yielding full assent to
the waiver in question. 7 The vigor with which counsel for appellant impugned the lower
decision cannot therefore be attended with success. It can stand its ground
notwithstanding such a sustained and spirited attack.

140

1. It is thus obvious that the contract of absolute guaranty executed by appellant Santana
is the measure of rights and duties. As it is with him, so it is with the plaintiff bank. What
was therein stipulated had to be complied with by both parties. Nor could appellant have
any valid cause for complaint. He had given his word; he must live up to it. Once the
validity of its terms is conceded, he cannot be indulged in his unilateral determination to
disregard his commitment. A promise to which the law accords binding force must be
fulfilled. It is as simple as that. So the Civil Code explicitly requires: "Obligations arising
from contracts have the force of law between the contracting parties and should be
complied with in good faith." 5

WHEREFORE, the decision of October 30, 1967, as modified on January 8, 1969, is

affirmed. With costs against appellant Francisco D. Santana.

Page

141

Concepcion C.J., Reyes, J.B.L., Makalintal, Zaldivar, Castro, Teehankee, Barredo, Villamor and
Makasiar, JJ., concur.

G.R. No. L-20567

July 30, 1965

PHILIPPINE NATIONAL BANK, petitioner,

vs.
MANILA SURETY and FIDELITY CO., INC. and THE COURT OF APPEALS (Second
Division), respondents.
Besa, Galang and Medina for petitioner.
De Santos and Delfino for respondents.
REYES, J.B.L., J.:
The Philippine National Bank petitions for the review and reversal of the decision
rendered by the Court of Appeals (Second Division), in its case CA-G.R. No. 24232-R,
dismissing the Bank's complaint against respondent Manila Surety & Fidelity Co., Inc., and
modifying the judgment of the Court of First Instance of Manila in its Civil Case No. 11263.

The conditions of this assignment are as follows:

Page

The Philippine National Bank had opened a letter of credit and advanced thereon
$120,000.00 to Edgington Oil Refinery for 8,000 tons of hot asphalt. Of this amount, 2,000
tons worth P279,000.00 were released and delivered to Adams & Taguba Corporation
(known as ATACO) under a trust receipt guaranteed by Manila Surety & Fidelity Co. up to
the amount of P75,000.00. To pay for the asphalt, ATACO constituted the Bank its assignee
and attorney-in-fact to receive and collect from the Bureau of Public Works the amount
aforesaid out of funds payable to the assignor under Purchase Order No. 71947. This
assignment (Exhibit "A") stipulated that:

142

The material facts of the case, as found by the appellate Court, are as follows:

1. The same shall remain irrevocable until the said credit accomodation is fully liquidated.
2. The PHILIPPINE NATIONAL BANK is hereby appointed as our Attorney-in-Fact for us
and in our name, place and stead, to collect and to receive the payments to be made by
virtue of the aforesaid Purchase Order, with full power and authority to execute and
deliver on our behalf, receipt for all payments made to it; to endorse for deposit or
encashment checks, money order and treasury warrants which said Bank may receive,
and to apply said payments to the settlement of said credit accommodation.
This power of attorney shall also remain irrevocable until our total indebtedness to the
said Bank have been fully liquidated. (Exhibit E)
ATACO delivered to the Bureau of Public Works, and the latter accepted, asphalt to the
total value of P431,466.52. Of this amount the Bank regularly collected, from April 21,
1948 to November 18, 1948, P106,382.01. Thereafter, for unexplained reasons, the Bank
ceased to collect, until in 1952 its investigators found that more moneys were payable to
ATACO from the Public Works office, because the latter had allowed mother creditor to
collect funds due to ATACO under the same purchase order to a total of P311,230.41.
Its demands on the principal debtor and the Surety having been refused, the Bank sued
both in the Court of First Instance of Manila to recover the balance of P158,563.18 as of
February 15, 1950, plus interests and costs.
On October 4, 1958, the trial court rendered a decision, the dispositive portion of which
reads:
WHEREFORE, judgment is hereby rendered as follows:
1. Ordering defendants, Adams & Taguba Corporation and Manila Surety & Fidelity Co.,
Inc., to pay plaintiff, Philippines National Bank, the sum of P174,462.34 as of February 24,
1956, minus the amount of P8,000 which defendant, Manila Surety Co., Inc. paid from
March, 1956 to October, 1956 with interest at the rate of 5% per annum from February
25, 1956, until fully paid provided that the total amount that should be paid by defendant
Manila Surety Co., Inc., on account of this case shall not exceed P75,000.00, and to pay the
costs;

4. Dismissing the counterclaim of defendants Adams & Taguba Corporation and Manila
Surety & Fidelity Co., Inc.

Page

3. Dismissing the complaint insofar as the claim for 17% special tax is concerned; and

143

2. Orderinq cross-defendant, Adams & Taguba Corporation, and third-party defendant,

Pedro A. Taguba, jointly and severally, to pay cross and third-party plaintiff, Manila Surety
& Fidelity Co., Inc., whatever amount the latter has paid or shall pay under this judgment;

From said decision, only the defendant Surety Company has duly perfected its appeal. The
Central Bank of the Philippines did not appeal, while defendant ATACO failed to perfect its
appeal.
The Bank recoursed to the Court of Appeals, which rendered an adverse decision and
modified the judgment of the court of origin as to the surety's liability. Its motions for
reconsideration having proved unavailing, the Bank appealed to this Court.
The Court of Appeals found the Bank to have been negligent in having stopped collecting
from the Bureau of Public Works the moneys falling due in favor of the principal debtor,
ATACO, from and after November 18, 1948, before the debt was fully collected, thereby
allowing such funds to be taken and exhausted by other creditors to the prejudice of the
surety, and held that the Bank's negligence resulted in exoneration of respondent Manila
Surety & Fidelity Company.
This holding is now assailed by the Bank. It contends the power of attorney obtained from
ATACO was merely in additional security in its favor, and that it was the duty of the surety,
and not that of the creditor, owed see to it that the obligor fulfills his obligation, and that
the creditor owed the surety no duty of active diligence to collect any, sum from the
principal debtor, citing Judge Advocate General vs. Court of Appeals, G.R. No. L-10671,
October 23, 1958.

Page

Even if the assignment with power of attorney from the principal debtor were considered
as mere additional security still, by allowing the assigned funds to be exhausted without
notifying the surety, the Bank deprived the former of any possibility of recoursing against
that security. The Bank thereby exonerated the surety, pursuant to Article 2080 of the
Civil Code:

144

This argument of appellant Bank misses the point. The Court of Appeals did not hold the
Bank answerable for negligence in failing to collect from the principal debtor but for its
neglect in collecting the sums due to the debtor from the Bureau of Public Works, contrary
to its duty as holder of an exclusive and irrevocable power of attorney to make such
collections, since an agent is required to act with the care of a good father of a family (Civ.
Code, Art. 1887) and becomes liable for the damages which the principal may suffer
through his non-performance (Civ. Code, Art. 1884). Certainly, the Bank could not expect
that the Bank would diligently perform its duty under its power of attorney, but because
they could not have collected from the Bureau even if they had attempted to do so. It must
not be forgotten that the Bank's power to collect was expressly made irrevocable, so that
the Bureau of Public Works could very well refuse to make payments to the principal
debtor itself, and a fortiori reject any demands by the surety.

ART. 2080. The guarantors, even though they be solidary, are released from their
obligation whenever by come act of the creditor they cannot be subrogated to the rights,
mortgages and preferences of the latter. (Emphasis supplied.)
The appellant points out to its letter of demand, Exhibit "K", addressed to the Bureau of
Public Works, on May 5, 1949, and its letter to ATACO, Exhibit "G", informing the debtor
that as of its date, October 31, 1949, its outstanding balance was P156,374.83. Said Exhibit
"G" has no bearing on the issue whether the Bank has exercised due diligence in collecting
from the Bureau of Public Works, since the letter was addressed to ATACO, and the funds
were to come from elsewhere. As to the letter of demand on the Public Works office, it
does not appear that any reply thereto was made; nor that the demand was pressed, nor
that the debtor or the surety were ever apprised that payment was not being made. The
fact remains that because of the Bank's inactivity the other creditors were enabled to
collect P173,870.31, when the balance due to appellant Bank was only P158,563.18. The
finding of negligence made by the Court of Appeals is thus not only conclusive on us but
fully supported by the evidence.
Even if the Court of Appeals erred on the second reason it advanced in support of the
decision now under appeal, because the rules on application of payments, giving
preference to secured obligations are only operative in cases where there are several
distinct debts, and not where there is only one that is partially secured, the error is of no
importance, since the principal reason based on the Bank's negligence furnishes adequate
support to the decision of the Court of Appeals that the surety was thereby released.
WHEREFORE, the appealed decision is affirmed, with costs against appellant Philippine
National Bank.

Page

145

Bengzon, C.J., Concepcion, Paredes, Dizon, Regala, Makalintal, Bengzon, J.P., and Zaldivar, JJ.,
concur.
Bautista Angelo and Barerra, JJ., took no part.

G.R. No. L-34539 July 14, 1986

EULALIO PRUDENCIO and ELISA T. PRUDENCIO, petitioners,
vs.
THE HONORABLE COURT OF APPEALS, THE PHILIPPINE NATIONAL BANK, RAMON C.
CONCEPCION and MANUEL M. TAMAYO, partners of the defunct partnership
Concepcion & Tamayo Construction Company, JOSE TORIBIO, Atty-in-Fact of
Concepcion & Tamayo Construction Company, and THE DISTRICT ENGINEER, Puerto
Princesa, Palawan, respondents.
Fernando R. Mangubat, Jr. for respondent PNB.

GUTIERREZ, JR., J.:

Page

The factual background of this case is stated in the decision of the appellate court:

146

This is a petition for review seeking to annul and set aside the decision of the Court of
Appeals, now the Intermediate Appellate Court, affirming the order of the trial court
which dismissed the petitioners' complaint for cancellation of their real estate mortgage
and held them jointly and severally liable with the principal debtors on a promissory note
which they signed as accommodation makers.

Appellants are the registered owners of a parcel of land located in Sampaloc, Manila, and
covered by T.C.T. 35161 of the Register of Deeds of Manila. On October 7, 1954, this
property was mortgaged by the appellants to the Philippine National Bank, hereinafter
called PNB, to guarantee a loan of P1,000.00 extended to one Domingo Prudencio.
Sometime in 1955, the Concepcion & Tamayo Construction Company, hereinafter called
Company, had a pending contract with the Bureau of Public Works, hereinafter called the
Bureau, for the construction of the municipal building in Puerto Princess, Palawan, in the
amount of P36,800.00 and, as said Company needed funds for said construction, Jose
Toribio, appellants' relative, and attorney-in-fact of the Company, approached the
appellants asking them to mortgage their property to secure the loan of P10,000.00 which
the Company was negotiating with the PNB.
After some persuasion appellants signed on December 23, 1955 the 'Amendment of Real
Estate Mortgage', mortgaging their said property to the PNB to guaranty the loan of
P10,000.00 extended to the Company. The terms and conditions of the original mortgage
for Pl,000.00 were made integral part of the new mortgage for P10,000.00 and both
documents were registered with the Register of Deeds of Manila. The promissory note
covering the loan of P10,000.00 dated December 29, 1955, maturing on April 27, 1956,
was signed by Jose Toribio, as attorney-in-fact of the Company, and by the appellants.
Appellants also signed the portion of the promissory note indicating that they are
requesting the PNB to issue the Check covering the loan to the Company. On the same date
(December 23, 1955) that the 'Amendment of Real Estate' was executed, Jose Toribio, in
the same capacity as attorney-in- fact of the Company, executed also the 'Deed of
Assignment' assigning all payments to be made by the Bureau to the Company on account
of the contract for the construction of the Puerto Princesa building in favor of the PNB.

Failing in their bid to have the real estate mortgage cancelled, appellants filed on June 27,
1959 this action against the PNB, the Company, the latter's attorney-in-fact Jose Toribio,

Page

The Company abandoned the work, as a consequence of which on June 30, 1956, the
Bureau rescinded the construction contract and assumed the work of completing the
building. On November 14, 1958, appellants wrote the PNB contending that since the PNB
authorized payments to the Company instead of on account of the loan guaranteed by the
mortgage there was a change in the conditions of the contract without the knowledge of
appellants, which entitled the latter to a cancellation of their mortgage contract.

147

This assignment of credit to the contrary notwithstanding, the Bureau; with approval, of
the PNB, conditioned, however that they should be for labor and materials, made three
payments to the Company on account of the contract price totalling P11,234.40. The
Bureau's last request for P5,000.00 on June 20, 1956, however, was denied by the PNB for
the reason that since the loan was already overdue as of April 28, 1956, the remaining
balance of the contract price should be applied to the loan.

and the District Engineer of Puerto Princesa, Palawan, seeking the cancellation of their
real estate mortgage. The complaint was amended to exclude the Company as defendant,
it having been shown that its life as a partnership had already expired and, in lieu thereof,
Ramon Concepcion and Manuel M. Tamayo, partners of the defunct Company, were
impleaded in their private capacity as defendants.
After hearing, the trial court rendered judgment, denying the prayer in the complaint that
the petitioners be absolved from their obligation under the mortgage contract and that the
said mortgage be released or cancelled. The petitioners were ordered to pay jointly and
severally with their co-makers Ramon C. Concepcion and Manuel M. Tamayo the sum of
P11,900.19 with interest at the rate of 6% per annum from the date of the filing of the
complaint on June 27, 1959 until fully paid and Pl,000.00 attorney's fees.
The decision also provided that if the judgment was not satisfied within 90 days from its
receipt, the mortgaged properties together with all the improvements thereon belonging
to the petitioners would be sold at public auction and applied to the judgment debt.
The Court of Appeals affirmed the trial court's decision in toto stating that, as
accommodation makers, the petitioners' liability is that of solidary co-makers and that
since "the amounts released to the construction company were used therein and,
therefore, were spent for the successful accomplishment of the work constructed for, the
authorization made by the Philippine National Bank of partial payments to the
construction company which was also one of the solidary debtors cannot constitute a valid
defense on the part of the other solidary debtors. Moreover, those who rendered services
and furnished materials in the construction are preferred creditors and have a lien on the
price of the contract." The appellate court further held that PNB had no obligation
whatsoever to notify the petitioners of its authorizing the three payments in the total
amount of Pll,234.00 in favor of the Company because aside from the fact that the
petitioners were not parties to the deed of assignment, there was no stipulation in said
deed making it obligatory on the part of the PNB to notify the petitioners everytime it
authorizes payment to the Company. It ruled that the petitioners cannot ask to be released
from the real estate mortgage.
In this petition, the petitioners raise the following issues which they present in the form of
errors:
I. First Assignment of Error.

Page

II. Second Assignment of Error.

148

THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT HEREIN PETITIONERS

WERE SOLIDARY CO-DEBTORS INSTEAD OF SURETIES:

THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT PETITIONERS WERE

NOT RELEASED FROM THEIR OBLIGATION TO THE RESPONDENT PNB, WHEN THE PNB,
WITHOUT THE KNOWLEDGE AND CONSENT OF PETITIONERS, CHANGED THE TENOR
AND CONDITION OF THE ASSIGNMENT OF PAYMENTS MADE BY THE PRINCIPAL
DEBTOR; CONCEPCION & TAMAYO CONSTRUCTION COMPANY; AND RELEASED TO SUCH
PRINCIPAL DEBTOR PAYMENTS FROM THE BUREAU OF PUBLIC WORKS WHICH WERE
MORE THAN ENOUGH TO WIPE OUT THE INDEBTEDNESS TO THE PNB.
The petitioners contend that as accommodation makers, the nature of their liability is only
that of mere sureties instead of solidary co-debtors such that "a material alteration in the
principal contract, effected by the creditor without the knowledge and consent of the
sureties, completely discharges the sureties from all liability on the contract of suretyship.
" They state that when respondent PNB did not apply the initial and subsequent payments
to the petitioners' debt as provided for in the deed of assignment, they were released from
their obligation as sureties and, therefore, the real estate mortgage executed by them
should have been cancelled.
Section 29 of the Negotiable Instrument Law provides:
Liability of accommodation party. An accommodation party is one who has signed the
instrument as maker, drawer, acceptor, or indorser, without receiving value therefor, and
for the purpose of lending his name to some other person. Such a person is liable on the
instrument to a holder for value, notwithstanding such holder at the time of taking the
instrument knew him to be only an accommodation party.
In the case of Philippine Bank of Commerce v. Aruego (102 SCRA 530, 539), we held that "...
in lending his name to the accommodated party, the accommodation party is in effect a
surety. ... . " However, unlike in a contract of suretyship, the liability of the accommodation
party remains not only primary but also unconditional to a holder for value such that even
if the accommodated party receives an extension of the period for payment without the
consent of the accommodation party, the latter is still liable for the whole obligation and
such extension does not release him because as far as a holder for value is concerned, he is
a solidary co- debtor.

Page

3. That the appellant, again assuming him to be an accommodation indorser, may obtain
security from the maker to protect himself against the danger of insolvency of the latter,
cannot in any manner affect his liability to the appellee, as the said remedy is a matter of
concern exclusively between accommodation indorser and accommodated party. So that
the appellant stands only as a surety in relation to the maker, granting this to be true for
the sake of argument, is immaterial to the claim of the appellee, and does not a whit

149

Expounding on the nature of the liability of an accommodation petition party under the
aforequoted section, we ruled in Ang Tiong v. Ting (22 SCRA 713, 716):

diminish nor defeat the rights of the latter who is a holder for value. The liability of the
appellant remains primary and unconditional. To sanction the appellant's theory is to give
unwarranted legal recognition to the patent absurdity of a situation where an indorser,
when sued on an instrument by a holder in due course and for value, can escape liability
on his indorsement by the convenient expedient of interposing the defense that he is a
mere accommodation indorser.
There is, therefore, no question that as accommodation makers, petitioners would be
primarily and unconditionally liable on the promissory note to a holder for value,
regardless of whether they stand as sureties or solidary co-debtors since such distinction
would be entirely immaterial and inconsequential as far as a holder for value is concerned.
Consequently, the petitioners cannot claim to have been released from their obligation
simply because the time of payment of such obligation was temporarily deferred by PNB
without their knowledge and consent. There has to be another basis for their claim of
having been freed from their obligation. The question which should be resolved in this
instant petition, therefore, is whether or not PNB can be considered a holder for value
under Section 29 of the Negotiable Instruments Law such that the petitioners must be
necessarily barred from setting up the defense of want of consideration or some other
personal defenses which may be set up against a party who is not a holder in due course.
A holder for value under Section 29 of the Negotiable Instruments Law is one who must
meet all the requirements of a holder in due course under Section 52 of the same law
except notice of want of consideration. (Agbayani, Commercial Laws of the Philippines,
1964, p. 208). If he does not qualify as a holder in due course then he holds the instrument
subject to the same defenses as if it were non-negotiable (Section 58, Negotiable
Instruments Law).
In the case at bar, can PNB, the payee of the promissory note be considered a holder in due
course?
Petitioners contend that the payee PNB is an immediate party and, therefore, is not a
holder in due course and stands on no better footing than a mere assignee.

Page

We conclude, therefore, that a payee who receives a negotiable promissory note, in good
faith, for value, before maturity, and without any notice of any infirmity, from a holder, not
the maker. to whom it was negotiated as a completed instrument, is a holder in due course
within the purview of a Negotiable Instruments law, so as to preclude the defense of fraud

150

In those cases where a payee was considered a holder in due course, such payee either
acquired the note from another holder or has not directly dealt with the maker thereof. As
was held in the case of Bank of Commerce and Savings v. Randell (186 NorthWestern
Reporter 71):

and failure of consideration between the maker and the holder to whom the instrument,
was delivered.
Similarly, in the case of Stone v. Goldberg & Lewis (60 Southern Reporter 748) on
rehearing and quoting Daniel on Negotiable Instruments, it was held:
It is a general principle of the law merchant that, as between the immediate parties to a
negotiable instrument-the parties between whom there is a privity-the consideration may
be inquired into; and as to them the only superiority of a bill or note over other unsealed
evidence of debt is that it prima facie imports a consideration.
Although as a general rule, a payee may be considered a holder in due course we think
that such a rule cannot apply with respect to the respondent PNB. Not only was PNB an
immediate party or in privy to the promissory note, that is, it had dealt directly with the
petitioners knowing fully well that the latter only signed as accommodation makers but
more important, it was the Deed of Assignment executed by the Construction Company in
favor of PNB which principally moved the petitioners to sign the promissory note also in
favor of PNB. Petitioners were made to believe and on that belief entered into the
agreement that no other conditions would alter the terms thereof and yet, PNB altered the
same. The Deed of Assignment specifically provided that Jose F. Toribio, on behalf of the
Company, "have assigned, transferred and conveyed and by these presents, do assign,
transfer and convey unto the said Philippine National Bank, its successors and assigns all
payments to be received from the Bureau of Public Works on account of contract for the
construction of the Puerto Princesa Municipal Building in Palawan, involving the total
amount of P 36,000.00" and that "This assignment shall be irrevocable and subject to the
terms and conditions of the promissory note and or any other kind of documents which
the Philippine National Bank have required or may require the assignor to execute to
evidence the above-mentioned obligation."

Page

This, notwithstanding, PNB approved the Bureau's release of three payments directly to
the Company instead of paying the same to the Bank. This approval was in violation of the
Deed of Assignment and without any notice to the petitioners who stood to lose their
property once the promissory note falls due without the same having been paid because
the PNB, in effect, waived payments of the first three releases. From the foregoing
circumstances, PNB can not be regarded as having acted in good faith which is also one of
the requisites of a holder in due course under Section 52 of the Negotiable Instruments
Law. The PNB knew that the promissory note which it took from the accommodation
makers was signed by the latter because of full reliance on the Deed of Assignment, which,

151

Under the terms of the above Deed, it is clear that there are no further conditions which
could possibly alter the agreement without the consent of the petitioners such as the grant
of greater priority to obligations other than the payment of the loan due to the PNB and
part of which loan was guaranteed by the petitioners in the amount of P10,000.00.

PNB had no intention to comply with strictly. Worse, the third payment to the Company in
the amount of P4,293.60 was approved by PNB although the promissory note was almost
a month overdue, an act which is clearly detrimental to the petitioners.
We, therefore, hold that respondent PNB is not a holder in due course. Thus, the
petitioners can validly set up their personal defense of release from the real estate
mortgage against PNB. The latter, in authorizing the third payment to the Company after
the promissory note became due, in effect, extended the term of the payment of the note
without the consent of the accommodation makers who stand as sureties to the
accommodated party and to all other parties who are not holders in due course or who do
not derive their right from the same, including PNB.
It may be argued that the Prudencios could have mortgaged their property even without
the promissory note. The records show, however, that they would not have mortgaged the
lot were it not for the sake of the Company whose attorney-in-fact was their relative. The
spouses did not need the money for themselves.
The attorney-in-fact tried twice to convince the Prudencios to mortgage their property in
order to secure a loan in favor of the Company but the Prudencios refused. It was only
when the deed of assignment was shown to the spouses that they consented to the
mortgage and signed the promissory note in the Bank's favor.
Article 2085 of the Civil Code enumerates the requisites of a valid mortgage contract.
Petitioners do not dispute the validity of the mortgage. They only want to have it cancelled
because the Bank violated the deed of assignment and extended the period of time of
payment of the promissory note without the petitioners' consent and to the latter's
detriment.
The mortgage cannot be separated from the promissory note for it is the latter which is
the basis of determining whether the mortgage should be foreclosed or cancelled. Without
the promissory note which determines the amount of indebtedness there would have
been no basis for the mortgage.

Page

Neither can PNB justify its acts on the ground that the Bureau of Public Works approved
the deed of assignment with the condition that the wages of laborers and materials
needed in the construction work must take precedence over the payment of the

152

True, if the Bank had not been the assignee, then the petition petitioners would be obliged
to pay the Bank as their creditor on the promissory note, irrespective of whether or not
the deed of assignment had been violated. However, the assignee and the creditor in this
case are one and the samethe Bank itself. When the Bank violated the deed of
assignment, it prejudiced itself because its very violation was the reason why it was not
paid on time in its capacity as creditor in the promissory note. It would be unfair to make
the petitioners now answer for the debt or to foreclose on their property.

promissory note. In the first place, PNB did not need the approval of the Bureau. But even
if it did, it should have informed the petitioners about the amendment of the deed of
assignment. Secondly, the wages and materials have already been paid. That issue is
academic. What is in dispute is who should bear the loss in this case. As between the
petitioners and the Bank, the law and the equities of the case favor the petitioners, And
thirdly, the wages and materials constitute a lien only on the constructed building but do
not enjoy preference over the loan unless there is a liquidation proceeding such as in
insolvency or settlement of estate. (See Philippine Savings Bank v. Lantin, 124 SCRA 476).
There were remedies available at the time if the laborers and the creditors had not been
paid. The fact is, they have been paid. Hence, when the PNB accepted the condition
imposed by the Bureau without the knowledge or consent of the petitioners, it amended
the deed of assignment which, as stated earlier, was the principal reason why the
petitioners consented to become accommodation makers.
WHEREFORE, the petition is GRANTED. The decision of the Court of Appeals affirming the
decision of the trial court is hereby REVERSED and SET ASIDE and a new one entered
absolving the petitioners from liability on the promissory note and under the mortgage
contract. The Philippine National Bank is ordered to release the real estate mortgage
constituted on the property of the petitioners and to pay the amount of THREE
THOUSAND PESOS (P3,000.00) as attorney's fees.
SO ORDERED.

Page

153

Feria (Chairman), Fernan, Alampay and Paras, JJ., concur.

SECURITY BANK AND TRUST COMPANY, Inc., petitioner,

vs.
RODOLFO M. CUENCA, respondent.
DECISION

154

October 3, 2000

Page

G.R. No. 138544

PANGANIBAN, J.:
Being an onerous undertaking, a surety agreement is strictly construed against the
creditor, and every doubt is resolved in favor of the solidary debtor. The fundamental
rules of fair play require the creditor to obtain the consent of the surety to any material
alteration in the principal loan agreement, or at least to notify it thereof. Hence, petitioner
bank cannot hold herein respondent liable for loans obtained in excess of the amount or
beyond the period stipulated in the original agreement, absent any clear stipulation
showing that the latter waived his right to be notified thereof, or to give consent thereto.
This is especially true where, as in this case, respondent was no longer the principal
officer or major stockholder of the corporate debtor at the time the later obligations were
incurred. He was thus no longer in a position to compel the debtor to pay the creditor and
had no more reason to bind himself anew to the subsequent obligations.
The Case
This is the main principle used in denying the present Petition for Review under Rule 45
of the Rules of Court. Petitioner assails the December 22, 1998 Decision 1 of the Court of
Appeals (CA) in CA-GR CV No. 56203, the dispositive portion of which reads as follows:
"WHEREFORE, the judgment appealed from is hereby amended in the sense that
defendant-appellant Rodolfo M. Cuenca [herein respondent] is RELEASED from liability to
pay any amount stated in the judgment.
"Furthermore, [Respondent] Rodolfo M. Cuencas counterclaim is hereby DISMISSED for
lack of merit.
"In all other respect[s], the decision appealed from is AFFIRMED."2
Also challenged is the April 14, 1999 CA Resolution,3 which denied petitioners Motion for
Reconsideration.
Modified by the CA was the March 6, 1997 Decision4 of the Regional Trial Court (RTC) of
Makati City (Branch 66) in Civil Case No. 93-1925, which disposed as follows:

The Facts

Page

SO ORDERED."

155

"WHEREFORE, judgment is hereby rendered ordering defendants Sta. Ines Melale

Corporation and Rodolfo M. Cuenca to pay, jointly and severally, plaintiff Security Bank &
Trust Company the sum of P39,129,124.73 representing the balance of the loan as of May
10, 1994 plus 12% interest per annum until fully paid, and the sum of P100,000.00 as
attorneys fees and litigation expenses and to pay the costs.

The facts are narrated by the Court of Appeals as follows:5

"The antecedent material and relevant facts are that defendant-appellant Sta. Ines Melale
(Sta. Ines) is a corporation engaged in logging operations. It was a holder of a Timber
License Agreement issued by the Department of Environment and Natural Resources
(DENR).
"On 10 November 1980, [Petitioner] Security Bank and Trust Co. granted appellant Sta.
Ines Melale Corporation [SIMC] a credit line in the amount of [e]ight [m]llion [p]esos
(P8,000,000.00) to assist the latter in meeting the additional capitalization requirements
of its logging operations.
"The Credit Approval Memorandum expressly stated that the P8M Credit Loan Facility
shall be effective until 30 November 1981:
JOINT CONDITIONS:
1. Against Chattel Mortgage on logging trucks and/or inventories (except logs) valued at
200% of the lines plus JSS of Rodolfo M. Cuenca.
2. Submission of an appropriate Board Resolution authorizing the borrowings, indicating
therein the companys duly authorized signatory/ies;
3. Reasonable/compensating deposit balances in current account shall be maintained at
all times; in this connection, a Makati account shall be opened prior to availment on lines;
4. Lines shall expire on November 30, 1981; and
5. The bank reserves the right to amend any of the aforementioned terms and conditions
upon written notice to the Borrower. (Emphasis supplied.)
"To secure the payment of the amounts drawn by appellant SIMC from the abovementioned credit line, SIMC executed a Chattel Mortgage dated 23 December 1980
(Exhibit A) over some of its machinery and equipment in favor of [Petitioner] SBTC. As
additional security for the payment of the loan, [Respondent] Rodolfo M. Cuenca executed
an Indemnity Agreement dated 17 December 1980 (Exhibit B) in favor of [Petitioner]
SBTC whereby he solidarily bound himself with SIMC as follows:
xxx

Rodolfo M. Cuenca x x x hereby binds himself x x x jointly and severally with the client
(SIMC) in favor of the bank for the payment, upon demand and without the benefit of
excussion of whatever amount x x x the client may be indebted to the bank x x x by virtue
of aforesaid credit accommodation(s) including the substitutions, renewals,

156

xxx

Page

xxx

extensions, increases, amendments, conversions and revivals of the aforesaid credit

accommodation(s) x x x . (Emphasis supplied).
"On 26 November 1981, four (4) days prior to the expiration of the period of effectivity of
the P8M-Credit Loan Facility, appellant SIMC made a first drawdown from its credit line
with [Petitioner] SBTC in the amount of [s]ix [m]illion [o]ne [h]undred [t]housand [p]esos
(P6,100,000.00). To cover said drawdown, SIMC duly executed promissory Note No.
TD/TLS-3599-81 for said amount (Exhibit C).
"Sometime in 1985, [Respondent] Cuenca resigned as President and Chairman of the
Board of Directors of defendant-appellant Sta. Ines. Subsequently, the shareholdings of
[Respondent] Cuenca in defendant-appellant Sta. Ines were sold at a public auction
relative to Civil Case No. 18021 entitled Adolfo A. Angala vs. Universal Holdings, Inc. and
Rodolfo M. Cuenca. Said shares were bought by Adolfo Angala who was the highest bidder
during the public auction.
"Subsequently, appellant SIMC repeatedly availed of its credit line and obtained six (6)
other loan[s] from [Petitioner] SBTC in the aggregate amount of [s]ix [m]illion [t]hree
[h]undred [s]ixty-[n]ine [t]housand [n]ineteen and 50/100 [p]esos (P6,369,019.50).
Accordingly, SIMC executed Promissory Notes Nos. DLS/74/760/85, DLS/74773/85,
DLS/74/78/85, DLS/74/760/85 DLS/74/12/86, and DLS/74/47/86 to cover the
amounts of the abovementioned additional loans against the credit line.
"Appellant SIMC, however, encountered difficulty6 in making the amortization payments
on its loans and requested [Petitioner] SBTC for a complete restructuring of its
indebtedness. SBTC accommodated appellant SIMCs request and signified its approval in
a letter dated 18 February 1988 (Exhibit G) wherein SBTC and defendant-appellant Sta.
Ines, without notice to or the prior consent of [Respondent] Cuenca, agreed to restructure
the past due obligations of defendant-appellant Sta. Ines. [Petitioner] Security Bank
agreed to extend to defendant-appellant Sta. Ines the following loans:

"It should be pointed out that in restructuring defendant-appellant Sta. Ines obligations to
[Petitioner] Security Bank, Promissory Note No. TD-TLS-3599-81 in the amount of [s]ix

Page

b. Term loan in the amount of [t]hree [m]illion [f]our [h]undred [t]housand [p]esos
(P3,400,000.00), to be applied to liquidate the past due interest and penalty portion of the
indebtedness of defendant-appellant Sta. Ines to [Petitioner] Security Bank (cf. Exhibit G,
Expediente, at Vol. II, p. 336; Exhibit 5-B-Cuenca, Expediente, at Vol. II, p. 33 to 34).

157

a. Term loan in the amount of [e]ight [m]illion [e]ight [h]undred [t]housand [p]esos
(P8,800,000.00), to be applied to liquidate the principal portion of defendant-appellant
Sta. Ines[] total outstanding indebtedness to [Petitioner] Security Bank (cf. P. 1 of Exhibit
G, Expediente, at Vol. II, p. 336; Exhibit 5-B-Cuenca, Expediente, et Vol I, pp. 33 to 34)
and

[m]illion [o]ne [h]undred [t]housand [p]esos (P6,100,000.00), which was the only loan
incurred prior to the expiration of the P8M-Credit Loan Facility on 30 November 1981 and
the only one covered by the Indemnity Agreement dated 19 December 1980 (Exhibit 3Cuenca, Expediente, at Vol. II, p. 331), was not segregated from, but was instead lumped
together with, the other loans, i.e., Promissory Notes Nos. DLS/74/12/86, DLS/74/28/86
and DLS/74/47/86 (Exhibits D, E, and F, Expediente, at Vol. II, pp. 333 to 335)
obtained by defendant-appellant Sta. Ines which were not secured by said Indemnity
Agreement.
"Pursuant to the agreement to restructure its past due obligations to [Petitioner] Security
Bank, defendant-appellant Sta. Ines thus executed the following promissory notes, both
dated 09 March 1988 in favor of [Petitioner] Security Bank:
PROMISSORY
NOTE NO.

AMOUNT

RL/74/596/88

P8,800,000
.00

P3,400,000
RL/74/597/88 .00

TOTAL

P12,200,00
0.00

(Exhibits H and I, Expediente, at Vol. II, pp. 338 to 343).

Page

1.01 Amount - The Lender agrees to grant loan to the Borrower in the aggregate amount
of TWELVE MILLION TWO HUNDRED THOUSAND PESOS (P12,200,000.00), Philippines
[c]urrency (the Loan). The loan shall be released in two (2) tranches of P8,800,000.00
for the first tranche (the First Loan) and P3,400,000.00 for the second tranche (the
Second Loan) to be applied in the manner and for the purpose stipulated hereinbelow.

158

"To formalize their agreement to restructure the loan obligations of defendant-appellant

Sta. Ines, [Petitioner] Security Bank and defendant-appellant Sta. Ines executed a Loan
Agreement dated 31 October 1989 (Exhibit 5-Cuenca, Expediente, at Vol. I, pp. 33 to 41).
Section 1.01 of the said Loan Agreement dated 31 October 1989 provides:

1.02. Purpose - The First Loan shall be applied to liquidate the principal portion of the
Borrowers present total outstanding indebtedness to the Lender (the indebtedness)
while the Second Loan shall be applied to liquidate the past due interest and penalty
portion of the Indebtedness. (Underscoring supplied.) (cf. p. 1 of Exhibit 5-Cuenca,
Expediente, at Vol. I, p. 33)
"From 08 April 1988 to 02 December 1988, defendant-appellant Sta. Ines made further
payments to [Petitioner] Security Bank in the amount of [o]ne [m]illion [s]even [h]undred
[f]ifty-[s]even [t]housand [p]esos (P1,757,000.00) (Exhibits 8, 9-P-SIMC up to 9-GGSIMC, Expediente, at Vol. II, pp. 38, 70 to 165)
"Appellant SIMC defaulted in the payment of its restructured loan obligations to
[Petitioner] SBTC despite demands made upon appellant SIMC and CUENCA, the last of
which were made through separate letters dated 5 June 1991 (Exhibit K) and 27 June
1991 (Exhibit L), respectively.
"Appellants individually and collectively refused to pay the [Petitioner] SBTC. Thus, SBTC
filed a complaint for collection of sum of money on 14 June 1993, resulting after trial on
the merits in a decision by the court a quo, x x x from which [Respondent] Cuenca
appealed."
Ruling of the Court of Appeals
In releasing Respondent Cuenca from liability, the CA ruled that the 1989 Loan Agreement
had novated the 1980 credit accommodation earlier granted by the bank to Sta. Ines.
Accordingly, such novation extinguished the Indemnity Agreement, by which Cuenca, who
was then the Board chairman and president of Sta. Ines, had bound himself solidarily
liable for the payment of the loans secured by that credit accommodation. It noted that the
1989 Loan Agreement had been executed without notice to, much less consent from,
Cuenca who at the time was no longer a stockholder of the corporation.
The appellate court also noted that the Credit Approval Memorandum had specified that
the credit accommodation was for a total amount of P8 million, and that its expiry date
was November 30, 1981. Hence, it ruled that Cuenca was liable only for loans obtained
prior to November 30, 1981, and only for an amount not exceeding P8 million.

Page

The CA also opined that the surety was entitled to notice, in case the bank and Sta. Ines
decided to materially alter or modify the principal obligation after the expiry date of the
credit accommodation.

159

It further held that the restructuring of Sta. Ines obligation under the 1989 Loan
Agreement was tantamount to a grant of an extension of time to the debtor without the
consent of the surety. Under Article 2079 of the Civil Code, such extension extinguished
the surety.

Hence, this recourse to this Court.7

The Issues
In its Memorandum, petitioner submits the following for our consideration:8
"A. Whether or not the Honorable Court of Appeals erred in releasing
Respondent Cuenca from liability as surety under the Indemnity Agreement
for the payment of the principal amount of twelve million two hundred
thousand pesos (P12,200,000.00) under Promissory Note No. RL/74/596/88
dated 9 March 1988 and Promissory Note No. RL/74/597/88 dated 9 March
1988, plus stipulated interests, penalties and other charges due thereon;
i. Whether or not the Honorable Court of Appeals erred in ruling that
Respondent Cuencas liability under the Indemnity Agreement covered only
availments on SIMCs credit line to the extent of eight million pesos
(P8,000,000.00) and made on or before 30 November 1981;
ii. Whether or not the Honorable Court of Appeals erred in ruling that the
restructuring of SIMC s indebtedness under the P8 million credit
accommodation was tantamount to an extension granted to SIMC without
Respondent Cuencas consent, thus extinguishing his liability under the
Indemnity Agreement pursuant to Article 2079 of the Civil Code;
iii. Whether or not the Honorable Court of appeals erred in ruling that the
restructuring of SIMC s indebtedness under the P8 million credit
accommodation constituted a novation of the principal obligation, thus
extinguishing Respondent Cuencas liability under the indemnity agreement;
B. Whether or not Respondent Cuencas liability under the Indemnity
Agreement was extinguished by the payments made by SIMC;
C. Whether or not petitioners Motion for Reconsideration was pro-forma;

Page

Distilling the foregoing, the Court will resolve the following issues: (a) whether the 1989
Loan Agreement novated the original credit accommodation and Cuencas liability under
the Indemnity Agreement; and (b) whether Cuenca waived his right to be notified of and
to give consent to any substitution, renewal, extension, increase, amendment, conversion
or revival of the said credit accommodation. As preliminary matters, the procedural
questions raised by respondent will also be addressed.

160

D. Whether or not service of the Petition by registered mail sufficiently

complied with Section 11, Rule 13 of the 1997 Rules of Civil Procedure."

The Courts Ruling

The Petition has no merit.
Preliminary Matters: Procedural Questions
Motion for Reconsideration Not Pro Forma
Respondent contends that petitioners Motion for Reconsideration of the CA Decision, in
merely rehashing the arguments already passed upon by the appellate court, was pro
forma; that as such, it did not toll the period for filing the present Petition for Review. 9
Consequently, the Petition was filed out of time.10
We disagree. A motion for reconsideration is not pro forma just because it reiterated the
arguments earlier passed upon and rejected by the appellate court. The Court has
explained that a movant may raise the same arguments, precisely to convince the court
that its ruling was erroneous.11
Moreover, there is no clear showing of intent on the part of petitioner to delay the
proceedings. In Marikina Valley Development Corporation v. Flojo,12 the Court explained
that a pro forma motion had no other purpose than to gain time and to delay or impede
the proceedings. Hence, "where the circumstances of a case do not show an intent on the
part of the movant merely to delay the proceedings, our Court has refused to characterize
the motion as simply pro forma." It held:
"We note finally that because the doctrine relating to pro forma motions for
reconsideration impacts upon the reality and substance of the statutory right of appeal,
that doctrine should be applied reasonably, rather than literally. The right to appeal,
where it exists, is an important and valuable right. Public policy would be better served by
according the appellate court an effective opportunity to review the decision of the trial
court on the merits, rather than by aborting the right to appeal by a literal application of
the procedural rules relating to pro forma motions for reconsideration."
Service by Registered Mail Sufficiently Explained

Page

"SEC. 11. Priorities in modes of service and filing. -- Whenever practicable, the service and
filing of pleadings and other papers shall be done personally. Except with respect to
papers emanating from the court, a resort to other modes must be accompanied by a
written explanation why the service or filing was not done personally. A violation of this
Rule may be cause to consider the paper as not filed."

161

Section 11, Rule 13 of the 1997 Rules of Court, provides as follows:

Respondent maintains that the present Petition for Review does not contain a sufficient
written explanation why it was served by registered mail.
We do not think so. The Court held in Solar Entertainment v. Ricafort13 that the aforecited
rule was mandatory, and that "only when personal service or filing is not practicable may
resort to other modes be had, which must then be accompanied by a written explanation
as to why personal service or filing was not practicable to begin with."
In this case, the Petition does state that it was served on the respective counsels of Sta.
Ines and Cuenca "by registered mail in lieu of personal service due to limitations in time
and distance."14 This explanation sufficiently shows that personal service was not
practicable. In any event, we find no adequate reason to reject the contention of petitioner
and thereby deprive it of the opportunity to fully argue its cause.
First Issue: Original Obligation Extinguished by Novation
An obligation may be extinguished by novation, pursuant to Article 1292 of the Civil Code,
which reads as follows:
"ART. 1292. In order that an obligation may be extinguished by another which substitute
the same, it is imperative that it be so declared in unequivocal terms, or that the old and
the new obligations be on every point incompatible with each other."
Novation of a contract is never presumed. It has been held that "[i]n the absence of an
express agreement, novation takes place only when the old and the new obligations are
incompatible on every point."15 Indeed, the following requisites must be established: (1)
there is a previous valid obligation; (2) the parties concerned agree to a new contract; (3)
the old contract is extinguished; and (4) there is a valid new contract.16
Petitioner contends that there was no absolute incompatibility between the old and the
new obligations, and that the latter did not extinguish the earlier one. It further argues
that the 1989 Agreement did not change the original loan in respect to the parties
involved or the obligations incurred. It adds that the terms of the 1989 Contract were "not
more onerous."17 Since the original credit accomodation was not extinguished, it
concludes that Cuenca is still liable under the Indemnity Agreement.

Page

"1.02. Purpose. The First Loan shall be applied to liquidate the principal portion of the
Borrowers present total outstanding Indebtedness to the Lender (the "Indebtedness")

162

We reject these contentions. Clearly, the requisites of novation are present in this case.
The 1989 Loan Agreement extinguished the obligation18 obtained under the 1980 credit
accomodation. This is evident from its explicit provision to "liquidate" the principal and
the interest of the earlier indebtedness, as the following shows:

while the Second Loan shall be applied to liquidate the past due interest and penalty
portion of the Indebtedness."19 (Italics supplied.)
The testimony of an officer20 of the bank that the proceeds of the 1989 Loan Agreement
were used "to pay-off" the original indebtedness serves to strengthen this ruling.21
Furthermore, several incompatibilities between the 1989 Agreement and the 1980
original obligation demonstrate that the two cannot coexist. While the 1980 credit
accommodation had stipulated that the amount of loan was not to exceed P8 million,22 the
1989 Agreement provided that the loan was P12.2 million. The periods for payment were
also different.
Likewise, the later contract contained conditions, "positive covenants" and "negative
covenants" not found in the earlier obligation. As an example of a positive covenant, Sta.
Ines undertook "from time to time and upon request by the Lender, [to] perform such
further acts and/or execute and deliver such additional documents and writings as may be
necessary or proper to effectively carry out the provisions and purposes of this Loan
Agreement."23 Likewise, SIMC agreed that it would not create any mortgage or
encumbrance on any asset owned or hereafter acquired, nor would it participate in any
merger or consolidation.24
Since the 1989 Loan Agreement had extinguished the original credit accommodation, the
Indemnity Agreement, an accessory obligation, was necessarily extinguished also,
pursuant to Article 1296 of the Civil Code, which provides:
"ART. 1296. When the principal obligation is extinguished in consequence of a novation,
accessory obligations may subsist only insofar as they may benefit third persons who did
not give their consent."
Alleged Extension

Page

This argument must be rejected. To begin with, the 1989 Loan Agreement expressly
stipulated that its purpose was to "liquidate," not to renew or extend, the outstanding
indebtedness. Moreover, respondent did not sign or consent to the 1989 Loan Agreement,
which had allegedly extended the original P8 million credit facility. Hence, his obligation
as a surety should be deemed extinguished, pursuant to Article 2079 of the Civil Code,
which specifically states that "[a]n extension granted to the debtor by the creditor without
the consent of the guarantor extinguishes the guaranty. x x x." In an earlier case, 26 the
Court explained the rationale of this provision in this wise:

163

Petitioner insists that the 1989 Loan Agreement was a mere renewal or extension of the
P8 million original accommodation; it was not a novation.25

"The theory behind Article 2079 is that an extension of time given to the principal debtor
by the creditor without the suretys consent would deprive the surety of his right to pay
the creditor and to be immediately subrogated to the creditors remedies against the
principal debtor upon the maturity date. The surety is said to be entitled to protect
himself against the contingency of the principal debtor or the indemnitors becoming
insolvent during the extended period."
Binding Nature of the Credit Approval Memorandum
As noted earlier, the appellate court relied on the provisions of the Credit Approval
Memorandum in holding that the credit accommodation was only for P8 million, and that
it was for a period of one year ending on November 30, 1981. Petitioner objects to the
appellate courts reliance on that document, contending that it was not a binding
agreement because it was not signed by the parties. It adds that it was merely for its
internal use.
We disagree. It was petitioner itself which presented the said document to prove the
accommodation. Attached to the Complaint as Annex A was a copy thereof "evidencing the
accommodation."27 Moreover, in its Petition before this Court, it alluded to the Credit
Approval Memorandum in this wise:
"4.1 On 10 November 1980, Sta. Ines Melale Corporation ("SIMC") was granted by the
Bank a credit line in the aggregate amount of Eight Million Pesos (P8,000,000.00) to assist
SIMC in meeting the additional capitalization requirements for its logging operations. For
this purpose, the Bank issued a Credit Approval Memorandum dated 10 November 1980."
Clearly, respondent is estopped from denying the terms and conditions of the P8 million
credit accommodation as contained in the very document it presented to the courts.
Indeed, it cannot take advantage of that document by agreeing to be bound only by those
portions that are favorable to it, while denying those that are disadvantageous.

At the outset, we should emphasize that an essential alteration in the terms of the Loan
Agreement without the consent of the surety extinguishes the latters obligation. As the

Page

Pursuing another course, petitioner contends that Respondent Cuenca "impliedly gave his
consent to any modification of the credit accommodation or otherwise waived his right to
be notified of, or to give consent to, the same."28 Respondents consent or waiver thereof is
allegedly found in the Indemnity Agreement, in which he held himself liable for the "credit
accommodation including [its] substitutions, renewals, extensions, increases, amendments,
conversions and revival." It explains that the novation of the original credit
accommodation by the 1989 Loan Agreement is merely its "renewal," which "connotes
cessation of an old contract and birth of another one x x x."29

164

Second Issue: Alleged Waiver of Consent

Court held in National Bank v. Veraguth,30 "[i]t is fundamental in the law of suretyship that
any agreement between the creditor and the principal debtor which essentially varies the
terms of the principal contract, without the consent of the surety, will release the surety
from liability."
In this case, petitioners assertion - that respondent consented to the alterations in the
credit accommodation -- finds no support in the text of the Indemnity Agreement, which is
reproduced hereunder:

Page

While respondent held himself liable for the credit accommodation or any modification
thereof, such clause should be understood in the context of the P8 million limit and the
November 30, 1981 term. It did not give the bank or Sta. Ines any license to modify the
nature and scope of the original credit accommodation, without informing or getting the
consent of respondent who was solidarily liable. Taking the banks submission to the
extreme, respondent (or his successors) would be liable for loans even amounting to, say,
P100 billion obtained 100 years after the expiration of the credit accommodation, on the
ground that he consented to all alterations and extensions thereof.

165

"Rodolfo M. Cuenca of legal age, with postal address c/o Sta. Ines Malale Forest Products
Corp., Alco Bldg., 391 Buendia Avenue Ext., Makati Metro Manila for and in consideration
of the credit accommodation in the total amount of eight million pesos (P8,000,000.00)
granted by the SECURITY BANK AND TRUST COMPANY, a commercial bank duly
organized and existing under and by virtue of the laws of the Philippine, 6778 Ayala
Avenue, Makati, Metro Manila hereinafter referred to as the BANK in favor of STA. INES
MELALE FOREST PRODUCTS CORP., x x x ---- hereinafter referred to as the CLIENT, with
the stipulated interests and charges thereon, evidenced by that/those certain
PROMISSORY NOTE[(S)], made, executed and delivered by the CLIENT in favor of the
BANK hereby bind(s) himself/themselves jointly and severally with the CLIENT in favor of
the BANK for the payment , upon demand and without benefit of excussion of whatever
amount or amounts the CLIENT may be indebted to the BANK under and by virtue of
aforesaid credit accommodation(s) including the substitutions, renewals, extensions,
increases, amendment, conversions and revivals of the aforesaid credit accommodation(s), as
well as of the amount or amounts of such other obligations that the CLIENT may owe the
BANK, whether direct or indirect, principal or secondary, as appears in the accounts,
books and records of the BANK, plus interest and expenses arising from any agreement or
agreements that may have heretofore been made, or may hereafter be executed by and
between the parties thereto, including the substitutions, renewals, extensions, increases,
amendments, conversions and revivals of the aforesaid credit accommodation(s), and
further bind(s) himself/themselves with the CLIENT in favor of the BANK for the faithful
compliance of all the terms and conditions contained in the aforesaid credit
accommodation(s), all of which are incorporated herein and made part hereof by
reference."

Indeed, it has been held that a contract of surety "cannot extend to more than what is
stipulated. It is strictly construed against the creditor, every doubt being resolved against
enlarging the liability of the surety."31 Likewise, the Court has ruled that "it is a wellsettled legal principle that if there is any doubt on the terms and conditions of the surety
agreement, the doubt should be resolved in favor of the surety x x x. Ambiguous contracts
are construed against the party who caused the ambiguity."32 In the absence of an
unequivocal provision that respondent waived his right to be notified of or to give consent
to any alteration of the credit accommodation, we cannot sustain petitioners view that
there was such a waiver.
It should also be observed that the Credit Approval Memorandum clearly shows that the
bank did not have absolute authority to unilaterally change the terms of the loan
accommodation. Indeed, it may do so only upon notice to the borrower, pursuant to this
condition:
"5. The Bank reserves the right to amend any of the aforementioned terms and conditions
upon written notice to the Borrower."33
We reject petitioners submission that only Sta. Ines as the borrower, not respondent, was
entitled to be notified of any modification in the original loan accommodation. 34 Following
the banks reasoning, such modification would not be valid as to Sta. Ines if no notice were
given; but would still be valid as to respondent to whom no notice need be given. The
latters liability would thus be more burdensome than that of the former. Such untenable
theory is contrary to the principle that a surety cannot assume an obligation more
onerous than that of the principal.35
The present controversy must be distinguished from Philamgen v. Mutuc,36 in which the
Court sustained a stipulation whereby the surety consented to be bound not only for the
specified period, "but to any extension thereafter made, an extension x x x that could be
had without his having to be notified."

Continuing Surety

Page

In the present case, there is no such express stipulation.1wphi1 At most, the alleged basis
of respondents waiver is vague and uncertain. It confers no clear authorization on the
bank or Sta. Ines to modify or extend the original obligation without the consent of the
surety or notice thereto.

166

In that case, the surety agreement contained this unequivocal stipulation: "It is hereby
further agreed that in case of any extension of renewal of the bond, we equally bind
ourselves to the Company under the same terms and conditions as herein provided
without the necessity of executing another indemnity agreement for the purpose and that
we hereby equally waive our right to be notified of any renewal or extension of the bond
which may be granted under this indemnity agreement."

Contending that the Indemnity Agreement was in the nature of a continuing surety,
petitioner maintains that there was no need for respondent to execute another surety
contract to secure the 1989 Loan Agreement.
This argument is incorrect. That the Indemnity Agreement is a continuing surety does not
authorize the bank to extend the scope of the principal obligation inordinately. 37 In Dino v.
CA,38 the Court held that "a continuing guaranty is one which covers all transactions,
including those arising in the future, which are within the description or contemplation of
the contract of guaranty, until the expiration or termination thereof."
To repeat, in the present case, the Indemnity Agreement was subject to the two limitations
of the credit accommodation: (1) that the obligation should not exceed P8 million, and (2)
that the accommodation should expire not later than November 30, 1981. Hence, it was a
continuing surety only in regard to loans obtained on or before the aforementioned expiry
date and not exceeding the total of P8 million.
Accordingly, the surety of Cuenca secured only the first loan of P6.1 million obtained on
November 26, 1991. It did not secure the subsequent loans, purportedly under the 1980
credit accommodation, that were obtained in 1986. Certainly, he could not have
guaranteed the 1989 Loan Agreement, which was executed after November 30, 1981 and
which exceeded the stipulated P8 million ceiling.
Petitioner, however, cites the Dino ruling in which the Court found the surety liable for the
loan obtained after the payment of the original one, which was covered by a continuing
surety agreement. At the risk of being repetitious, we hold that in Dino, the surety
Agreement specifically provided that "each suretyship is a continuing one which shall
remain in full force and effect until this bank is notified of its revocation." Since the bank
had not been notified of such revocation, the surety was held liable even for the
subsequent obligations of the principal borrower.
No similar provision is found in the present case. On the contrary, respondents liability
was confined to the 1980 credit accommodation, the amount and the expiry date of which
were set down in the Credit Approval Memorandum.

Page

It is a common banking practice to require the JSS ("joint and solidary signature") of a
major stockholder or corporate officer, as an additional security for loans granted to
corporations. There are at least two reasons for this. First, in case of default, the creditors
recourse, which is normally limited to the corporate properties under the veil of separate
corporate personality, would extend to the personal assets of the surety. Second, such
surety would be compelled to ensure that the loan would be used for the purpose agreed
upon, and that it would be paid by the corporation.

167

Special Nature of the JSS

Following this practice, it was therefore logical and reasonable for the bank to have
required the JSS of respondent, who was the chairman and president of Sta. Ines in 1980
when the credit accommodation was granted. There was no reason or logic, however, for
the bank or Sta. Ines to assume that he would still agree to act as surety in the 1989 Loan
Agreement, because at that time, he was no longer an officer or a stockholder of the
debtor-corporation. Verily, he was not in a position then to ensure the payment of the
obligation. Neither did he have any reason to bind himself further to a bigger and more
onerous obligation.
Indeed, the stipulation in the 1989 Loan Agreement providing for the surety of
respondent, without even informing him, smacks of negligence on the part of the bank and
bad faith on that of the principal debtor. Since that Loan Agreement constituted a new
indebtedness, the old loan having been already liquidated, the spirit of fair play should
have impelled Sta. Ines to ask somebody else to act as a surety for the new loan.
In the same vein, a little prudence should have impelled the bank to insist on the JSS of one
who was in a position to ensure the payment of the loan. Even a perfunctory attempt at
credit investigation would have revealed that respondent was no longer connected with
the corporation at the time. As it is, the bank is now relying on an unclear Indemnity
Agreement in order to collect an obligation that could have been secured by a fairly
obtained surety. For its defeat in this litigation, the bank has only itself to blame.
In sum, we hold that the 1989 Loan Agreement extinguished by novation the obligation
under the 1980 P8 million credit accommodation. Hence, the Indemnity Agreement, which
had been an accessory to the 1980 credit accommodation, was also extinguished.
Furthermore, we reject petitioners submission that respondent waived his right to be
notified of, or to give consent to, any modification or extension of the 1980 credit
accommodation.
In this light, we find no more need to resolve the issue of whether the loan obtained before
the expiry date of the credit accommodation has been paid.
WHEREFORE, the Petition is DENIED and the assailed Decision AFFIRMED. Costs against
petitioner.
SO ORDERED.

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168

Melo, (Chairman), Vitug, Purisima, and Gonzaga-Reyes, JJ., concur.