26 Supreme Court Reports Annotated: Escaño vs. Ortigas, JR

1/3/2019 SUPREME COURT REPORTS ANNOTATED VOLUME 526
26 SUPREME COURT REPORTS ANNOTATED

Escaño vs. Ortigas, Jr.
*
G.R. No. 151953. June 29, 2007.
SALVADOR P. ESCAÑO and MARIO M. SILOS, petitioners, vs.

RAFAEL ORTIGAS, JR., respondent.
Contracts; Interpretation of Contracts; Under the Civil Code, the

various stipulations of a contract shall be interpreted together, attributing to
the doubtful ones that sense which may result from all of them taken jointly,
and likewise applicable is the provision that if some stipulation of any
contract should admit of several meanings, it shall be understood as
bearing that import which is most adequate to render it effectual.—There is
no argument to support petitioners’ position on the import of the phrase
“made to pay” in the Undertaking, other than an unduly literalist reading
that is clearly inconsistent with the thrust of the document. Under the Civil
Code, the various stipulations of a contract shall be interpreted together,
attributing to the doubtful ones that sense which may result from all of them
taken jointly. Likewise applicable is the provision that if some stipulation of
any contract should admit of several meanings, it shall be understood as
bearing that import which is most adequate to render it effectual. As a
means to effect the general intent of the document to relieve Ortigas from
liability to PDCP, it is his interpretation, not that of petitioners, that holds
sway with this Court.
Same; Joint and Solidary Obligations; In case of concurrence of two or
more creditors or of two or more debtors in one and the same obligation,
and in the absence of express and indubitable terms characterizing the
obligation as solidary, the presumption is that the obligation is only joint.—
In case there is a concurrence of two or more creditors or of two or more
debtors in one and the same obligation, Article 1207 of the Civil Code states
that among them, “[t]here is a solidary liability only when the obligation
expressly so states, or when the law or the nature of the obligation requires
solidarity.” Article 1210 supplies further caution against the broad
interpretation of solidarity by providing: “The indivisibility of an obligation
does not necessarily give rise to solidarity. Nor does solidarity of itself
imply indivisibility.” These Civil Code provisions establish that in case of
concurrence of two or more creditors or of two or more
_______________
http://www.central.com.ph/sfsreader/session/0000016810e1af3f46fd6fc3003600fb002c009e/t/?o=False 1/24
* SECOND DIVISION.
27
VOL. 526, JUNE 29, 2007 27
debtors in one and the same obligation, and in the absence of express and
indubitable terms characterizing the obligation as solidary, the presumption
is that the obligation is only joint. It thus becomes incumbent upon the party
alleging that the obligation is indeed solidary in character to prove such fact
with a preponderance of evidence.
Same; Same; Suretyship; A suretyship requires a principal debtor to
whom the surety is solidarily bound by way of an ancillary obligation of
segregate identity from the obligation between the principal debtor and the
creditor.—As provided in Article 2047 in a surety agreement the surety
undertakes to be bound solidarily with the principal debtor. Thus, a surety
agreement is an ancillary contract as it presupposes the existence of a
principal contract. It appears that Ortigas’s argument rests solely on the
solidary nature of the obligation of the surety under Article 2047. In tandem
with the nomenclature “SURETIES” accorded to petitioners and Matti in
the Undertaking, however, this argument can only be viable if the
obligations established in the Undertaking do partake of the nature of a
suretyship as defined under Article 2047 in the first place. That clearly is
not the case here, notwithstanding the use of the nomenclature
“SURETIES” in the Undertaking. Again, as indicated by Article 2047, a
suretyship requires a principal debtor to whom the surety is solidarily bound
by way of an ancillary obligation of segregate identity from the obligation
between the principal debtor and the creditor. The suretyship does bind the
surety to the creditor, inasmuch as the latter is vested with the right to
proceed against the former to collect the credit in lieu of proceeding against
the principal debtor for the same obligation. At the same time, there is also a
legal tie created between the surety and the principal debtor to which the
creditor is not privy or party to. The moment the surety fully answers to the
creditor for the obligation created by the principal debtor, such obligation is
extinguished. At the same time, the surety may seek reimbursement from
the principal debtor for the amount paid, for the surety does in fact “become
subrogated to all the rights and remedies of the creditor.”
Same; Same; Same; “Joint and Several Debtors” and “Surety,”
Distinguished; In the case of joint and several debtors, Article 1217 makes
plain that the solidary debtor who effected the payment to the creditor “may
claim from his co-debtors only the share which corresponds to each, with
the interest for the payment already made,”
28
while, in contrast, even as the surety is solidarily bound with the principal
debtor to the creditor, the surety who does not pay the creditor has the right
to recover the full amount paid, and not just any proportional share, from
the principal debtor or debtors.—Note that Article 2047 itself specifically
calls for the application of the provisions on joint and solidary obligations to
suretyship contracts. Article 1217 of the Civil Code thus comes into play,
recognizing the right of reimbursement from a co-debtor (the principal
debtor, in case of suretyship) in favor of the one who paid (i.e., the surety).
However, a significant distinction still lies between a joint and several
debtor, on one hand, and a surety on the other. Solidarity signifies that the
creditor can compel any one of the joint and several debtors or the surety
alone to answer for the entirety of the principal debt. The difference lies in
the respective faculties of the joint and several debtor and the surety to seek
reimbursement for the sums they paid out to the creditor. In the case of joint
and several debtors, Article 1217 makes plain that the solidary debtor who
effected the payment to the creditor “may claim from his co-debtors only
the share which corresponds to each, with the interest for the payment
already made.” Such solidary debtor will not be able to recover from the co-
debtors the full amount already paid to the creditor, because the right to
recovery extends only to the proportional share of the other co-debtors, and
not as to the particular proportional share of the solidary debtor who already
paid. In contrast, even as the surety is solidarily bound with the principal
debtor to the creditor, the surety who does pay the creditor has the right to
recover the full amount paid, and not just any proportional share, from the
principal debtor or debtors. Such right to full reimbursement falls within the
other rights, actions and benefits which pertain to the surety by reason of the
subsidiary obligation assumed by the surety.
Same; Same; Same; The rights to indemnification and subrogation as
established and granted to the guarantor by Articles 2066 and 2067 of Civil
Code extend as well to sureties as defined under Article 2047.—Articles
2066 and 2067 explicitly pertain to guarantors, and one might argue that the
provisions should not extend to sureties, especially in light of the qualifier in
Article 2047 that the provisions on joint and several obligations should
apply to sureties. We reject that argument, and instead adopt Dr. Tolentino’s
observation that “[t]he reference in the second paragraph of [Article 2047]
to the provisions of Section 4, Chapter 3, Title I, Book IV, on solidary or
29
VOL. 526, JUNE 29, 2007 29
several obligations, however, does not mean that suretyship is withdrawn

from the applicable provisions governing guaranty.” For if that were not the
implication, there would be no material difference between the surety as
defined under Article 2047 and the joint and several debtors, for both
classes of obligors would be governed by exactly the same rules and
limitations. Accordingly, the rights to indemnification and subrogation as
established and granted to the guarantor by Articles 2066 and 2067 extend
as well to sureties as defined under Article 2047. These rights granted to the
surety who pays materially differ from those granted under Article 1217 to
the solidary debtor who pays, since the “indemnification” that pertains to
the latter extends “only [to] the share which corresponds to each [co-
debtor].” It is for this reason that the Court cannot accord the conclusion
that because petitioners are identified in the Undertaking as “SURETIES,”
they are consequently joint and severally liable to Ortigas.
Attorney’s Fees; Article 2208(2) precisely allows for the recovery of
attorney’s fees “[w]hen the defendant’s act or omission has compelled the
plaintiff to litigate with third persons or to incur expenses to protect his
interest.”—As Ortigas points out, the acts or omissions of the petitioners led
to his being impleaded in the suit filed by PDCP. The Undertaking was
precisely executed as a means to obtain the release of Ortigas and the
Scholeys from their previous obligations as sureties of Falcon, especially
considering that they were already divesting their shares in the corporation.
Specific provisions in the Undertaking obligate petitioners to work for the
release of Ortigas from his surety agreements with Falcon. Specific
provisions likewise mandate the immediate repayment of Ortigas should he
still be made to pay PDCP by reason of the guaranty agreements from which
he was ostensibly to be released through the efforts of petitioners. None of
these provisions were complied with by petitioners, and Article 2208(2)
precisely allows for the recovery of attorney’s fees “[w]hen the defendant’s
act or omission has compelled the plaintiff to litigate with third persons or to
incur expenses to protect his interest.”
Interest Rates; Since what was constituted in the Undertaking consisted
of a payment in a sum of money, the rate of interest thereon shall be 12%
per annum to be computed from default, i.e., from judicial or extrajudicial
demand.—Since what was constituted in the Undertaking consisted of a
payment in a sum of money, the rate of
30
interest thereon shall be 12% per annum to be computed from default, i.e.,
from judicial or extrajudicial demand. The interest rate imposed by the RTC
is thus proper. However, the computation should be reckoned from judicial
or extrajudicial demand. Per records, there is no indication that Ortigas
made any extrajudicial demand to petitioners and Matti after he paid PDCP,
but on 14 March 1994, Ortigas made a judicial demand when he filed a
Third-Party Complaint praying that petitioners and Matti be made to
reimburse him for the payments made to PDCP. It is the filing of this Third
Party Complaint on 14 March 1994 that should be considered as the date of
judicial demand from which the computation of interest should be reckoned.
Since the RTC held that interest should be computed from 28 February
1994, the appropriate redefinition should be made.
PETITION for review on certiorari of a decision of the Court of

Appeals.
The facts are stated in the opinion of the Court.

Rey Nathaniel C. Ifurung for petitioners.
Santiago and Santiago Law Offices for respondent.
TINGA, J.:
The main contention raised in this petition is that petitioners are not
under obligation to reimburse respondent, a claim that can be easily
debunked. The more perplexing question is whether this obligation
to repay is solidary, as contended by respondent and the lower
courts, or merely joint as argued by petitioners.
On 28 April 1980, 1
Private Development Corporation of the
Philippines (PDCP) entered into a loan agreement with Falcon
Minerals, Inc. (Falcon) whereby PDCP agreed to make available and
lend to Falcon the amount of US$320,000.00, for specific purposes
and subject to certain terms and condi-
_______________
1 Now PDCP Development Bank.
31
VOL. 526, JUNE 29, 2007 31

2
tions. On the same day, three stockholders-officers of Falcon,
namely: respondent Rafael Ortigas, Jr. (Ortigas), George A. Scholey
and George T. Scholey executed an Assumption of Solidary Liability
whereby they agreed “to assume in [their] individual capacity,
solidary liability with [Falcon] for the due and
3
punctual payment” of
the loan contracted by Falcon with PDCP. In the meantime, two
separate guaranties were executed to guarantee the payment of the

same loan by other stockholders and officers of Falcon, acting 4
in
their personal and individual capacities. One Guaranty was 5
executed by petitioner Salvador Escaño (Escaño), while the other by
petitioner Mario M. Silos (Silos), Ricardo C. Silverio (Silverio),
Carlos L. Inductivo (Inductivo) and Joaquin J. Rodriguez
(Rodriguez).
Two years later, an agreement developed to cede control of
Falcon to Escaño, Silos and Joseph M. Matti (Matti). Thus, contracts
were executed whereby Ortigas, George A. Scholey, Inductivo and
the heirs of then already deceased George T. Scholey assigned6
their
shares of stock in Falcon to Escaño, Silos and Matti. Part of the
consideration that induced the sale of stock was a desire by Ortigas,
et al., to relieve themselves of all liability arising from their previous
joint and several undertakings with Falcon, including those related
to the loan with PDCP. Thus, an Undertaking 7
dated 11 June 1982
was executed by the concerned parties, namely: with Escaño, Silos
and Matti identified in the document as “SURETIES,” on one hand,
and Ortigas, Inductivo and the Scholeys as “OBLIGORS,” on the
other. The Undertaking reads in part:
_______________
2 See Rollo, p. 29.

3 Id., at p. 38.
4 Id., at p. 39.
5 Id., at p. 41.
6 See Id., at pp. 52-55.
7 See Id., at p. 54.
32

“3. That whether or not SURETIES are able to immediately cause PDCP
and PAIC to release OBLIGORS from their said guarantees [sic],
SURETIES hereby irrevocably agree and undertake to assume all of
OBLIGORs’ said guarantees [sic] to PDCP and PAIC under the
following terms and conditions:
a. Upon receipt by any of [the] OBLIGORS of any demand from

PDCP and/or PAIC for the payment of FALCON’s obligations with
it, any of [the] OBLIGORS shall immediately inform SURETIES
thereof so that the latter can timely take appropriate measures;
b. Should suit be impleaded by PDCP and/or PAIC against any and/or
all of OBLIGORS for collection of said loans and/or credit
facilities, SURETIES agree to defend OBLIGORS at their own
expense, without prejudice to any and/or all of OBLIGORS

impleading SURETIES therein for contribution, indemnity,
subrogation or other relief in respect to any of the claims of PDCP
and/or PAIC; and
c. In the event that any of [the] OBLIGORS is for any reason made to
pay any amount to PDCP and/or PAIC, SURE-TIES shall
reimburse OBLIGORS for said amount/s within seven (7) calendar
days from such payment;
4. OBLIGORS hereby waive in favor of SURETIES any and all fees

which may be due from 8
FALCON arising out of, or in connection with, their
said guarantees[sic].”
Falcon eventually availed of the sum of US$178,655.59 from the

credit line extended by PDCP. It would also execute a Deed of
Chattel Mortgage over its personal properties to further secure the
loan. However, Falcon subsequently defaulted in its payments. After
PDCP foreclosed on the chattel mortgage, there remained a
subsisting deficiency
9
of P5,031,004.07, which Falcon did not satisfy
despite demand.
On 28 April 1989, in order to recover the indebtedness, PDCP
filed a complaint for sum of money with the Regional Trial Court of
Makati (RTC) against Falcon, Ortigas, Escaño,
_______________
8 Id., at pp. 53-54. Emphasis supplied.

9 See Id., at pp. 29-30.
33
VOL. 526, JUNE 29, 2007 33

Silos, Silverio and Inductivo. The case was docketed as Civil Case
No. 89-5128. For his part, Ortigas filed together with his answer a
cross-claim against his co-defendants Falcon, Escaño and Silos, and
also manifested his intent
10
to file a third-party complaint against the
Scholeys and Matti. The cross-claim lodged against Escaño and
Silos was predicated on the 1982 Undertaking, wherein they agreed
to assume the liabilities of Ortigas with respect to the PDCP loan.
Escaño, Ortigas and Silos each sought to seek a settlement with
PDCP. The first to come to terms with PDCP was Escaño, who in
December of 1993, entered into a compromise agreement whereby
he agreed to pay the bank P1,000,000.00. In exchange, PDCP
waived or assigned in favor of Escaño one-third (1/3) of its entire
claim in the complaint against all of the other defendants in the
11
11
case. The12 compromise agreement was approved by the RTC in a
Judgment dated 6 January 1994.
Then on 24 February 13
1994, Ortigas entered into his own
compromise agreement with PDCP, allegedly without the
knowledge of Escaño, Matti and Silos. Thereby, Ortigas agreed to
pay PDCP P1,300,000.00
14
as “full satisfaction of the PDCP’s claim
against Ortigas,” in exchange for PDCP’s release of Ortigas from
any liability or claim arising from the Falcon loan agreement, and a
renunciation of its claims against Ortigas.
In 1995, Silos and PDCP entered into a Partial Compromise
Agreement whereby he agreed to pay P500,000.00
15
in exchange for
PDCP’s waiver of its claims against him.
_______________
10 See Id., at pp. 48-49.

11 See Id., at p. 56.
12 Id., at pp. 56-57.
13 Id., at pp. 58-60.
14 Id., at p. 59.
15 See Id., at pp. 62-63.
34

In the meantime, after having settled with PDCP, Ortigas pursued his
claims against Escaño, Silos and Matti, on the basis of the 1982
Undertaking.
16
He initiated a third-party complaint against Matti and
Silos, while he maintained his cross-claim against Escaño. In 1995,
Ortigas filed a motion for Summary Judgment in his favor against
Escaño, Silos and Matti. On 5 October 1995, the RTC issued the
Summary Judgment, ordering Escaño, Silos and Matti to pay
Ortigas, jointly and severally, the17amount of P1,300,000.00, as well
as P20,000.00 in attorney’s fees. The trial court ratiocinated that
none of the third-party defendants disputed the 1982 Undertaking,
and that “the mere denials of defendants with respect to non-
compliance of Ortigas of the terms and conditions of the
Undertaking, unaccompanied by any substantial fact which would
be admissible in evidence at a hearing, are not sufficient to raise
genuine issues of fact necessary to defeat a motion for summary18
judgment, even if such facts were raised in the pleadings.” In an
Order dated 7 March 1996, the trial court denied the motion for
reconsideration of the Summary Judgment and awarded Ortigas
legal 19interest of 12% per annum to be computed from 28 February
1994.
From the Summary Judgment, recourse was had by way of

appeal to the Court of Appeals. Escaño and Silos appealed
20
jointly
while Matti appealed by his lonesome. In a Decision dated 23
January 2002, the Court of Appeals dismissed the appeals and
affirmed the Summary Judgment. The appellate court found that the
RTC did not err in rendering the summary judgment since the three
appellants did not effectively
_______________
16 While apparently dropping his cross-claim against Silos.

17 Rollo, pp. 33-34.
18 Id., at p. 34.
19 Id., at pp. 35-36.
20 Id., at pp. 26-32. Penned by Associate Justice R. A. Barrios, concurred in by
then Presiding Justice of the Court of Appeals (now Supreme Court Associate Justice)
M. A. Austria-Martinez and Associate Justice B. L. Reyes.
35
VOL. 526, JUNE 29, 2007 35

deny their execution of the 1982 Undertaking. The special defenses

that were raised, “payment and excussion,” were characterized by
the Court of Appeals as “appear[ing] to be merely sham in21the light
of the pleadings and supporting documents and affidavits.” Thus, it
was concluded that there was no genuine issue that would still
require the rigors of trial, and that the appealed judgment was
decided on the bases of the undisputed and established facts of the
case. 22
Hence, the present petition for review filed by Escaño and Silos.
Two main issues are raised. First, petitioners dispute that they are
liable to Ortigas on the basis of the 1982 Undertaking, a document
which they do not disavow and have in fact annexed to their
petition. Second, on the assumption that they are liable to Ortigas
under the 1982 Undertaking, petitioners argue that they are jointly
liable only, and not solidarily. Further assuming that they are liable,
petitioners also submit that they are not liable for interest and if at
all, the proper interest rate is 6% and not 12%.
Interestingly, petitioners do not challenge, whether in their
petition or their memorandum before the Court, the appropriateness
of the summary judgment as a relief favorable to Ortigas. Under
Section 3, Rule 35 of the 1997 Rules of Civil Procedure, summary
judgment may avail if the pleadings, supporting affidavits,
depositions and admissions on file show that, except as to the
amount of damages, there is no genuine issue as to any material fact
and that the moving party is entitled to a judgment as a matter of
law. Petitioners have not attempted to demonstrate before us that

there existed a genuine issue as to any material fact that would
preclude summary judgment. Thus, we affirm with ease the common
rulings of the lower courts that summary judgment is an appropriate
recourse in this case.
_______________
21 Id., at p. 31.
22 Matti did not appeal. See Id., at p. 169.
36

The vital issue actually raised before us is whether petitioners were

correctly held liable to Ortigas on the basis of the 1982 Undertaking
in this Summary Judgment. An examination of the document reveals
several clauses that make it clear that the agreement was brought
forth by the desire of Ortigas, Inductivo and the Scholeys to be
released from their liability under the loan agreement which release
was, in turn, part of the consideration for the assignment of their
shares in Falcon to petitioners and Matti. The whereas clauses
manifest that Ortigas had bound himself with Falcon for the
payment of the loan with PDCP, and that “amongst the consideration
for OBLIGORS and/or their principals aforesaid selling is
SURETIES’ relieving OBLIGORS of any and all liability arising23
from their said joint and several undertakings with FALCON.”
Most crucial is the clause in Paragraph 3 of the Undertaking wherein
petitioners “irrevocably agree and undertake to assume all of
OBLIGORs’ said guarantees [sic] 24
to PDCP x x x under the
following terms and conditions.”
At the same time, it is clear that the assumption by petitioners of
Ortigas’s “guarantees” [sic] to PDCP is governed by stipulated terms
and conditions as set forth in sub-paragraphs (a) to (c) of Paragraph
3. First, upon receipt by “any of OBLIGORS” of any demand from
PDCP for the payment of Falcon’s obligations with it, “any of
OBLIGORS” was to immediately inform “SURETIES” thereof so
that the latter can timely take appropriate measures. Second, should
“any and/or all of OBLIGORS” be impleaded by PDCP in a suit for
collection of its loan, “SURETIES agree[d] to defend OBLIGORS at
their own expense, without prejudice to any and/or all of
OBLIGORS impleading SURETIES 25therein for contribution,
indemnity, subrogation or other relief” in respect to any of the
claims of PDCP. Third, if any of the “OBLIGORS is for any reason
made to pay any amount to [PDCP], SURE-
_______________
23 See Id., at p. 52.

24 Id., at p. 53.
25 Id.
37
VOL. 526, JUNE 29, 2007 37

TIES [were to] reimburse OBLIGORS for26 said amount/s within

seven (7) calendar days from such payment.”
Petitioners claim that, contrary to paragraph 3(c) of the
Undertaking, Ortigas was not “made to pay” PDCP the amount now
sought to be reimbursed, as Ortigas voluntarily paid PDCP the
amount of P1.3 Million as an amicable settlement of the claims
posed by the bank against him. However, the subject clause in
paragraph 3(c) actually reads “[i]n the event that any of OBLIGORS
27
is for any reason made to pay any amount to PDCP x x x” As
pointed out by Ortigas, the phrase “for any reason” reasonably
includes any extrajudicial settlement of obligation such as what
Ortigas had undertaken to pay to PDCP, as it is indeed obvious that
the phrase was incorporated in the clause to render the eventual
payment adverted to therein unlimited and unqualified.
The interpretation posed by petitioners would have held water
had the Undertaking made clear that the right of Ortigas to seek
reimbursement accrued only after he had delivered payment to
PDCP as a consequence of a final and executory judgment. On the
contrary, the clear intent of the Undertaking was for petitioners and
Matti to relieve the burden on Ortigas and his fellow “OBLIGORS”
as soon as possible, and not only after Ortigas had been subjected to
a final and executory adverse judgment.
Paragraph 1 of the Undertaking enjoins petitioners to “exert all
efforts to cause PDCP x x x to within a reasonable time release28 all
the OBLIGORS x x x from their guarantees [sic] to PDCP x x x” In
the event that Ortigas and his fellow “OBLIGORS” could not be
released from their guaranties, paragraph 2 commits petitioners and
Matti to cause the Board of Directors of Falcon to make a call on its
stockholders for the payment of their unpaid subscriptions and to
pledge or assign
_______________
26 Id., at p. 54.
27 Id., at p. 53.
28 Id.
38

such payments to Ortigas, et al., as security for whatever amounts

the latter may be held liable under their guaranties. In addition,
paragraph 1 also makes clear that nothing in the Undertaking “shall
prevent OBLIGORS, or any one of them, from themselves
negotiating
29
with PDCP x x x for the release of their said guarantees
[sic].”
There is no argument to support petitioners’ position on the
import of the phrase “made to pay” in the Undertaking, other than an
unduly literalist reading that is clearly inconsistent with the thrust of
the document. Under the Civil Code, the various stipulations of a
contract shall be interpreted together, attributing to the doubtful ones30
that sense which may result from all of them taken jointly.
Likewise applicable is the provision that if some stipulation of any
contract should admit of several meanings, it shall be understood as31
bearing that import which is most adequate to render it effectual.
As a means to effect the general intent of the document to relieve
Ortigas from liability to PDCP, it is his interpretation, not that of
petitioners, that holds sway with this Court.
Neither do petitioners impress us of the non-fulfillment of any of
the other conditions set in paragraph 3, as they claim. Following the
general assertion in the petition that Ortigas violated the terms of the
Undertaking, petitioners add that Ortigas “paid PDCP BANK the
amount of P1.3 million without
32
petitioners ESCAÑO and SILOS’s
knowledge and consent.” Paragraph 3(a) of the Undertaking does
impose a requirement that any of the “OBLIGORS” shall
immediately inform “SURETIES” if they received any demand for
payment of FALCON’s obligations to PDCP, but that requirement is
reasoned “so
33
that the [SURETIES] can timely take appropriate
measures” presumably to settle the obligation without
_______________
29 Id.
30 CIVIL CODE, Art. 1374.
32 Rollo, p. 18.
33 Id., at p. 53.
39
VOL. 526, JUNE 29, 2007 39

having to burden the “OBLIGORS.” This notice requirement in

paragraph 3(a) is markedly way off from the suggestion of
petitioners that Ortigas, after already having been impleaded as a
defendant in the collection suit, was obliged under the 1982
Undertaking to notify them before settling with PDCP.
The other arguments petitioners have offered to escape liability to
Ortigas are similarly weak.
Petitioners impugn Ortigas for having settled with PDCP in the
first place. They note that Ortigas had, in his answer, denied any
liability to PDCP and had alleged that he signed the Assumption of
Solidary Liability not in his personal capacity, but as an officer of
Falcon. However, such position, according to petitioners, could not
be justified since Ortigas later voluntarily paid PDCP the amount of
P1.3 Million. Such circumstances, according to petitioners,
amounted to estoppel on the part of Ortigas.
Even as we entertain this argument at depth, its premises are still
erroneous. The Partial Compromise Agreement between PDCP and
Ortigas expressly stipulated that Ortigas’s offer to pay PDCP was
conditioned “without [Ortigas’s] admitting liability to plaintiff
PDCP Bank’s complaint, 34and to terminate and dismiss the said case
as against Ortigas solely.” Petitioners profess it is “unthinkable” for
Ortigas 35to have voluntarily paid PDCP without admitting his
liability, yet such contention based on assumption cannot supersede
the literal terms of the Partial Compromise Agreement.
Petitioners further observe that Ortigas made the payment to
PDCP after he had already assigned his obligation to petitioners
through the 1982 Undertaking. Yet the fact is PDCP did pursue a
judicial claim against Ortigas notwithstanding the Undertaking he
executed with petitioners. Not being a party to such Undertaking,
PDCP was not precluded by a
_______________
34 Id., at p. 59.
35 Id.
40

contract from pursuing its claim against Ortigas based on the

original Assumption of Solidary Liability.
At the same time, the Undertaking did not preclude Ortigas from
relieving his distress through a settlement with the creditor bank.
Indeed, paragraph 1 of the Undertaking expressly states that
“nothing herein shall prevent OBLIGORS, or any one of them, from
themselves negotiating with PDCP x x x for the release of their said
36
36
guarantees [sic].” Simply put, the Undertaking did not bar Ortigas
from pursuing his own settlement with PDCP. Neither did the
Undertaking bar Ortigas from recovering from petitioners whatever
amount he may have paid PDCP through his own settlement. The
stipulation that if Ortigas was “for any reason made to pay any
amount to PDCP[,] x x x SURETIES shall reimburse OBLIGORS
for said 37amount/s within seven (7) calendar days from such
payment” makes it clear that petitioners remain liable to reimburse
Ortigas for the sums he paid PDCP.
We now turn to the set of arguments posed by petitioners, in the
alternative, that is, on the assumption that they are indeed liable.
Petitioners submit that they could only be held jointly, not
solidarily, liable to Ortigas, claiming that the Undertaking did not
provide for express solidarity. They cite Article 1207 of the New
Civil Code, which states in part that “[t]here is a solidary liability
only when the obligation expressly so states, or when the law or the
nature of the obligation requires solidarity.”
Ortigas in turn argues that petitioners, as well as Matti, are jointly
and severally liable for the Undertaking, as the language 38
used in the
agreement “clearly shows that it is a surety agreement” between the
obligors (Ortigas group) and the sureties (Escaño group). Ortigas
points out that the Un-
_______________
36 Id., at p. 53.
37 Supra note 26.
38 Rollo, p. 177.
41
VOL. 526, JUNE 29, 2007 41

dertaking uses the word “SURETIES” although the document, in

describing the parties. It is further contended that the principal
objective of the parties in executing the Undertaking cannot be
attained unless petitioners are solidarily liable “because the total
loan obligation can not be paid or settled to free or release the
OBLIGORS if one or any of39 the SURETIES default from their
obligation in the Undertaking.”
In case there is a concurrence of two or more creditors or of two
or more debtors in one and the same obligation, Article 1207 of the
Civil Code states that among them, “[t]here is a solidary liability
only when the obligation expressly so states, or when the law or the
nature of the obligation requires solidarity.” Article 1210 supplies
further caution against the broad interpretation of solidarity by
providing: “The indivisibility of an obligation does not necessarily
give rise to solidarity. Nor does solidarity of itself imply

indivisibility.”
These Civil Code provisions establish that in case of concurrence
of two or more creditors or of two or more debtors in one and the
same obligation, and in the absence of express and indubitable terms
characterizing the obligation as solidary, the presumption is that the
obligation is only joint. It thus becomes incumbent upon the party
alleging that the obligation is indeed solidary in character to prove
such fact with a preponderance of evidence.
The Undertaking does not contain any express stipulation that the
petitioners agreed “to bind themselves jointly and severally” in their
obligations to the Ortigas group, or any such terms to that effect.
Hence, such obligation established in the Undertaking is presumed
only to be joint. Ortigas, as the party alleging that the obligation is in
fact solidary, bears the burden to overcome the presumption of
jointness of obligations. We rule and so hold that he failed to
discharge such burden.
_______________
39 Rollo, p. 178.
42

Ortigas places primary reliance on the fact that the petitioners and
Matti identified themselves in the Undertaking as “SURETIES,” a
term repeated no less than thirteen (13) times in the document.
Ortigas claims that such manner of identification sufficiently
establishes that the obligation of petitioners to him was joint and
solidary in nature.
The term “surety” has a specific meaning under our Civil Code.
Article 2047 provides the statutory definition of a surety agreement,
thus:
“Art. 2047. By guaranty a person, called the guarantor, binds himself to the
creditor to fulfill the obligation of the principal debtor in case the latter
should fail to do so.
If a person binds himself solidarily with the principal debtor, the
provisions of Section 4, Chapter 3, Title I of this Book shall be observed.
40
In
such case the contract is called a suretyship. [Emphasis supplied]”
As provided in Article 2047 in a surety agreement the surety

undertakes to be bound solidarily with the principal debtor. Thus, a
surety agreement is an ancillary contract as it presupposes the
existence of a principal contract. It appears that Ortigas’s argument
rests solely on the solidary nature of the obligation of the surety

under Article 2047. In tandem with the nomenclature “SURETIES”
accorded to petitioners and Matti in the Undertaking, however, this
argument can only be viable if the obligations established in the
Undertaking do partake of the nature of a suretyship as defined
under Article 2047 in the first place. That clearly is not the case
here, notwithstanding the use of the nomenclature “SURETIES” in
the Undertaking.
Again, as indicated by Article 2047, a suretyship requires a
principal debtor to whom the surety is solidarily bound by way of an
ancillary obligation of segregate identity from the obligation
between the principal debtor and the creditor. The
_______________
43
VOL. 526, JUNE 29, 2007 43

suretyship does bind the surety to the creditor, inasmuch as the latter
is vested with the right to proceed against the for-mer to collect the
credit in lieu41
of proceeding against the principal debtor for the same
obligation. At the same time, there is also a legal tie created
between the surety and the principal debtor to which the creditor is
not privy or party to. The moment the surety fully answers to the
creditor for the obligation42 created by the principal debtor, such
obligation is extinguished. At the same time, the surety may seek
reimbursement from the principal debtor for the amount paid, for the
surety does in fact43
“become subrogated to all the rights and remedies
of the creditor.”
Note that Article 2047 itself specifically calls for the application
of the provisions
44
on joint and solidary obligations to suretyship
contracts. Article 1217 of the Civil Code thus comes into play,
recognizing the right of reimbursement from a co-debtor (the
principal debtor,45in case of suretyship) in favor of the one who paid
(i.e., the surety). However, a sig-
_______________
41 “Since, generally, it is not necessary for a creditor to proceed against a principal

in order to hold the surety liable, where, by the terms of the contract, the obligation of
the surety is the same as that of the principal, then as soon as the principal is in
default, the surety is likewise in default, and may be sued immediately and before any
proceedings are had against the principal.” Palmares v. Court of Appeals, 351 Phil.
664, 685; 288 SCRA 422, 440 (1998) citing Standard Accident Insurance Co. v.
Standard Oil Co., 133 So. 2d 539; School District No. 65 of Lincoln County v.
Universal Surety Co., 135 N.W. 2d 232; Depot Realty Syndicate v. Enterprise
Brewing Co., 171 P. 223.
42 “Payment made by one of the solidary debtors extinguishes the obligation.” See
CIVIL CODE, Art. 1217.
43 See Palmares v. Court of Appeals, supra note 41 at p. 686; p. 441; citing 74 AM
JUR 2d, PRINCIPAL AND SURETY, §§68, 53.
44 See note 49.
45 See Lapanday Agricultural v. Court of Appeals, 381 Phil. 41, 52; 324 SCRA 39,
50 (2000). Art. 1217 reads in part: “Payment made by one of the solidary debtors
extinguishes the obligation. If two or
44

nificant distinction still lies between a joint and several debtor, on

one hand, and a surety on the other. Solidarity signifies that the
creditor can compel any one of the joint and several debtors or the
surety alone to answer for the entirety of the principal debt. The
difference lies in the respective faculties of the joint and several
debtor and the surety to seek reimbursement for the sums they paid
out to the creditor.
Dr. Tolentino explains the differences between a solidary co-
debtor and a surety:
“A guarantor who binds himself in solidum with the principal debtor under
the provisions of the second paragraph does not become a solidary co-debtor
to all intents and purposes. There is a difference between a solidary co-
debtor and a fiador in solidum (surety). The latter, outside of the
liability he assumes to pay the debt before the property of the principal
debtor has been exhausted, retains all the other rights, actions and
benefits which pertain to him by reason of the fiansa; while a solidary
co-debtor has no other rights than those bestowed upon him in Section
4, Chapter 3, Title I, Book IV of the Civil Code.
The second paragraph of [Article 2047] is practically equivalent to the
contract of suretyship. The civil law suretyship is, accordingly, nearly
synonymous with the common law guaranty; and the civil law relationship
existing between46 the co-debtors liable in solidum is similar to the common
law suretyship.”
In the case of joint and several debtors, Article 1217 makes plain
that the solidary debtor who effected the payment to the creditor
“may claim from his co-debtors only the share
_______________
more solidary debtors offer to pay, the creditor may choose which offer to accept x
xx
He who made payment may claim from his co-debtors only the share which
corresponds to each, with interest for the payment already made. If the payment is
made before the debt is due, no interest for the intervening period may be demanded x
x x”
46 A. TOLENTINO,V CIVIL CODE OF THE PHILIPPINES (1992 ed.), at p. 502.
See also Inciong v. Court of Appeals, 327 Phil. 364, 373; 257 SCRA 578, 587 (1996).
45
VOL. 526, JUNE 29, 2007 45

which corresponds to each, with the interest for the payment

already made.” Such solidary debtor will not be able to recover from
the co-debtors the full amount already paid to the creditor, because
the right to recovery extends only to the proportional share of the
other co-debtors, and not as to the particular proportional share of
the solidary debtor who already paid. In contrast, even as the surety
is solidarily bound with the principal debtor to the creditor, the
surety who does pay the creditor has the right to recover the full
amount paid, and not just any proportional share, from the principal
debtor or debtors. Such right to full reimbursement falls within the
other rights, actions and benefits which pertain to the surety by
reason of the subsidiary obligation assumed by the surety.
What is the source of this right to full reimbursement by the
surety? We find the right under Article 2066 of the Civil Code,
which assures that “[t]he guarantor who pays for a debtor must be
indemnified by the latter,” such indemnity47
comprising of, among
others, “the total amount of the debt.” Further, Article 2067 of the
Civil Code likewise establishes that “[t]he guarantor who pays is
subrogated by virtue 48
thereof to all the rights which the creditor had
against the debtor.”
Articles 2066 and 2067 explicitly pertain to guarantors, and one
might argue that the provisions should not extend to sureties,
especially in light of the qualifier in Article 2047 that the provisions
on joint and several obligations should apply to sureties. We reject
that argument, and instead adopt Dr. Tolentino’s observation that
“[t]he reference in the second paragraph of [Article 2047] to the
provisions of Section 4, Chapter 3, Title I, Book IV, on solidary or
several obligations, however, does not mean that suretyship 49
is
withdrawn from the applicable provisions governing guaranty.” For
if that
_______________

49 A. TOLENTINO, supra note 46 citing Manila Surety & Fidelity Co. v. Barter
Construction & Co., et al., 53 Off. Gaz. 8836 & Arranz v. Manila Fidelity & Surety
Co., 53 Off. Gaz. 7247.
46

were not the implication, there would be no material difference

between the surety as defined under Article 2047 and the joint and
several debtors, for both classes of obligors would be governed by
exactly the same rules and limitations.
Accordingly, the rights to indemnification and subrogation as
established and granted to the guarantor by Articles 2066 and 2067
extend as well to sureties as defined under Article 2047. These rights
granted to the surety who pays materially differ from those granted
under Article 1217 to the solidary debtor who pays, since the
“indemnification” that pertains to the latter extends “only [to] the
share which corresponds to each [co-debtor].” It is for this reason
that the Court cannot accord the conclusion that because petitioners
are identified in the Undertaking as “SURETIES,” they are
consequently joint and severally liable to Ortigas.
In order for the conclusion espoused by Ortigas to hold, in light
of the general presumption favoring joint liability, the Court would
have to be satisfied that among the petitioners and Matti, there is one
or some of them who stand as the principal debtor to Ortigas and
another as surety who has the right to full reimbursement from the
principal debtor or debtors. No suggestion is made by the parties that
such is the case, and certainly the Undertaking is not revelatory of
such intention. If the Court were to give full fruition to the use of the
term “SURETIES” as conclusive indication of the existence of a
surety agreement that in turn gives rise to a solidary obligation to
pay Ortigas, the necessary implication would be to lay down a
corresponding set of rights and obligations as between the
“SURETIES” which petitioners and Matti did not clearly intend.
It is not impossible that as between Escaño, Silos and Matti, there
was an agreement whereby in the event that Ortigas were to seek
reimbursement from them per the terms of the Undertaking, one of
them was to act as surety and to pay Ortigas in full, subject to his
right to full reimbursement from the other two obligors. In such
case, there would have
47
VOL. 526, JUNE 29, 2007 47
been, in fact, a surety agreement which evinces a solidary obligation

in favor of Ortigas. Yet if there was indeed such an agreement, it
does not appear on the record. More consequentially, no such
intention is reflected in the Undertaking itself, the very document
that creates the conditional obligation that petitioners and Matti
reimburse Ortigas should he be made to pay PDCP. The mere
utilization of the term “SURETIES” could not work to such effect,
especially as it does not appear who exactly is the principal debtor
whose obligation is “assured” or “guaranteed” by the surety.
Ortigas further argues that the nature of the Undertaking requires
“solidary obligation of the Sureties,” since the Undertaking
expressly seeks to “reliev[e] obligors of any and all liability arising
from their said joint and several undertaking with [F]alcon,” and for
the “sureties” to “irrevocably agree50 and undertake to assume all of
obligors said guarantees to PDCP.” We do not doubt that a finding
of solidary liability among the petitioners works to the benefit of
Ortigas in the facilitation of these goals, yet the Undertaking itself
contains no stipulation or clause that establishes petitioners’
obligation to Ortigas as solidary. Moreover, the aims adverted to by
Ortigas do not by themselves establish that the nature of the
obligation requires solidarity. Even if the liability of petitioners and
Matti were adjudged as merely joint, the full relief and
reimbursement of Ortigas arising from his payment to PDCP would
still be accomplished through the complete execution of such a
judgment.
Petitioners further claim that they are not liable for attorney’s
fees since the Undertaking contained no such stipulation for
attorney’s fees, and that the situation did not fall under the instances
under Article 2208 of the Civil Code where attorney’s fees are
recoverable in the absence of stipulation.
_______________
50 Rollo, p. 89-90.
48

We disagree. As Ortigas points out, the acts or omissions of the

petitioners led to his being impleaded in the suit filed by PDCP. The
Undertaking was precisely executed as a means to obtain the release
of Ortigas and the Scholeys from their previous obligations as
sureties of Falcon, especially considering that they were already
divesting their shares in the corporation. Specific provisions in the
Undertaking obligate petitioners to work for the release of Ortigas

from his surety agreements with Falcon. Specific provisions
likewise mandate the immediate repayment of Ortigas should he still
be made to pay PDCP by reason of the guaranty agreements from
which he was ostensibly to be released through the efforts of
petitioners. None of these provisions were complied with by
petitioners, and Article 2208(2) precisely allows for the recovery of
attorney’s fees “[w]hen the defendant’s act or omission has
compelled the plaintiff to litigate with third persons or to incur
expenses to protect his interest.”
Finally, petitioners claim that they should not be liable for
interest since the Undertaking does not contain any stipulation for
interest, and assuming that they are liable, that the rate of interest
should not be 12% per annum, as adjudged by the RTC.
The seminal
51
ruling in Eastern Shipping Lines, Inc. v. Court of
Appeals set forth the rules with respect to the manner of
computing legal interest:
I. When an obligation, regardless of its source, i.e., law,

contracts, quasi-contracts, delicts or quasi-delicts is
breached, the contravenor can be held liable for damages.
The provisions under Title XVIII on “Damages” of the
Civil Code govern in determining the measure of
recoverable damages.
II. With regard particularly to an award of interest in the
concept of actual and compensatory damages, the rate of
interest, as well as the accrual thereof, is imposed, as
follows:
_______________
51 G.R. No. 97412, 12 July 1994, 234 SCRA 78.
49
VOL. 526, JUNE 29, 2007 49

1. When the obligation is breached, and it consists in the

payment of a sum of money, i.e., a loan or forbearance of
money, the interest due should be that which may have been
stipulated in writing. Furthermore, the interest due shall
itself earn legal interest from the time it is judicially
demanded. In the absence of stipulation, the rate of interest
shall be 12% per annum to be computed from default, i.e.,
from judicial or extra-judicial demand under and subject to
the provisions of Article 1169 of the Civil Code.
2. When an obligation, not constituting a loan or forbearance

of money, is breached, an interest on the amount of
damages awarded may be imposed at the discretion of the
court at the rate of 6% per annum. No interest, however,
shall be adjudged on unliquidated claims or damages except
when or until the demand can be established with
reasonable certainty. Accordingly, where the demand is
established with reasonable certainty, the interest shall
begin to run from the time the claim is made judicially or
extrajudicially (Art. 1169, Civil Code) but when such
certainty cannot be so reasonably established at the time the
demand is made, the interest shall begin to run only from
the date the judgment of the court is made (at which time
quantification of damages may be deemed to have been
reasonably ascertained). The actual base for the
computation of legal interest shall, in any case, be on the
amount finally adjudged.
3. When the judgment of the court awarding a sum of money
becomes final and executory, the rate of legal interest,
whether the case falls under paragraph 1 or paragraph 2,
above, shall be 12% per annum from such finality until its
satisfaction, this interim period being deemed
52
to be by then
an equivalent to a forbearance of credit.
Since what was the constituted in the Undertaking consisted of a

payment in a sum of money, the rate of interest thereon shall be 12%
per annum to be computed from default, i.e., from judicial or
extrajudicial demand. The interest rate imposed by the RTC is thus
proper. However, the computation should be reckoned from judicial
or extrajudicial demand.
_______________
52 Id., at pp. 95-97.
50

Per records, there is no indication that Ortigas made any

extrajudicial demand to petitioners and Matti after he paid PDCP,
but on 14 March 1994, Ortigas made a judicial demand when he
filed a Third-Party Complaint praying that petitioners and Matti be
made to reimburse him for the payments made to PDCP. It is the
filing of this Third Party Complaint on 14 March 1994 that should
be considered as the date of judicial demand53
from which the
computation of interest should be reckoned. Since the RTC held
that interest should be computed from 28 February 1994, the

appropriate redefinition should be made.
WHEREFORE, the Petition is GRANTED in PART. The Order
of the Regional Trial Court dated 5 October 1995 is MODIFIED by
declaring that petitioners and Joseph M. Matti are only jointly liable,
not jointly and severally, to respondent Rafael Ortigas, Jr. in the
amount of P1,300,000.00. The Order of the Regional Trial Court
dated 7 March 1996 is MODIFIED in that the legal interest of 12%
per annum on the amount of P1,300,000.00 is to be computed from
14 March 1994, the date of judicial demand, and not from 28
February 1994 as directed in the Order of the lower court. The
assailed rulings are affirmed in all other respects. Costs against
petitioners.
SO ORDERED.
Carpio, Carpio-Morales and Velasco, Jr., JJ., concur.

Quisumbing (Chairperson), J., On Official Leave.
Petition granted in part.
Notes.—Where the promissory note expressly states that the

three signatories therein are jointly and severally liable, any one,
some or all of them may be proceeded against for the entire
obligation—the choice is left to the solidary creditor to
_______________
53 See Records, pp. 429-436.
51
VOL. 526, JUNE 29, 2007 51

Fil-Estate Golf and Development, Inc. vs. Navarro
determine against whom he will enforce collection. (Inciong, Jr. vs.

Court of Appeals, 257 SCRA 578 [1996])
When there is no ambiguity in the language of a contract, there is
no room for construction, only compliance. (Insular Assurance
Company, Ltd. vs. Asset Builders Corporation, 422 SCRA 148
[2004])
——o0o——
© Copyright 2019 Central Book Supply, Inc. All rights reserved.
SO ORDERED.
Carpio (Chairperson), Nachura, Leonardo-De Castro** and

Peralta, JJ., concur.
Judgment and resolution affirmed.
Note.—The permanent total or partial disability suffered by a

seafarer during the term of his contract must be caused by work-
related illness or injury. (Masangcay vs. Trans-Global Maritime
Agency, Inc., 569 SCRA 592 [2008])
——o0o——
G.R. No. 187116. October 18, 2010.*
ASSET BUILDERS CORPORATION, petitioner, vs. STRONG‐

HOLD INSURANCE COMPANY, INCORPORATED, respondent.
Obligations and Contracts; Suretyship; Although the contract of a

surety is in essence secondary only to a valid principal obligation, the surety
becomes liable for the debt or duty of another although it possesses no
direct or personal interest over the obligations nor does it receive any
benefit therefrom.—As provided in Article 2047, the surety undertakes to be
bound solidarily with the principal obligor. That undertaking makes a surety
agreement an ancillary contract as it presupposes the existence of a principal
contract. Although the contract of a surety is in essence secondary only to a
valid principal obligation, the surety becomes liable for the debt or duty of
another although it possesses no direct or personal interest over the
obligations nor does it receive any benefit therefrom. Let it be stressed that
notwithstanding the fact that the surety contract is secondary
_______________
** Designated as an additional member in lieu of Justice Roberto A. Abad, per Special

Order No. 905 dated October 5, 2010.
* SECOND DIVISION.
371
VOL. 633, OCTOBER 18, 2010 371
http://www.central.com.ph/sfsreader/session/0000016810e86cbf99d4b5e5003600fb002c009e/t/?o=False 1/12
Asset Builders Corporation vs. Stronghold Insurance Company,

Incorporated
to the principal obligation, the surety assumes liability as a regular party to

the undertaking.
Same; Same; Suretyship, in essence, contains two types of relationship
—the principal relationship between the obligee and the obligor, and the
accessory surety relationship between the principal and the surety.—
Suretyship, in essence, contains two types of relationship—the principal
relationship between the obligee (petitioner) and the obligor (Lucky Star),
and the accessory surety relationship between the principal (Lucky Star) and
the surety (respondent). In this arrangement, the obligee accepts the surety’s
solidary undertaking to pay if the obligor does not pay. Such acceptance,
however, does not change in any material way the obligee’s relationship
with the principal obligor. Neither does it make the surety an active party to
the principal obligee-obligor relationship. Thus, the acceptance does not
give the surety the right to intervene in the principal contract. The surety’s
role arises only upon the obligor’s default, at which time, it can be directly
held liable by the obligee for payment as a solidary obligor.
PETITION for review on certiorari of a decision of the Regional

Trial Court of Pasig City, Br. 71.
Julio Arsenio V. Gonong III for petitioner.
Richie Q. Caranto for respondent.
MENDOZA, J.:
This petition for review on certiorari under Rule 45 of the 1997
Rules of Civil Procedure assails the February 27, 2009 Decision1 of
the Regional Trial Court, Pasig City, Branch 71 (RTC), in Civil Case
No. 71034, ordering defendant Lucky Star to pay petitioner Asset
Builders Corporation the sum of P575,000.00 with damages, but
absolving respondent Stronghold Insurance Company, Incorporated
(Stronghold) of any liability on its Surety Bond and Performance
Bond.
_______________
1 Rollo, pp. 8-12. Penned by RTC Judge Franco T. Falcon.
372

Incorporated
The Facts
On April 28, 2006, Asset Builders Corporation (ABC) entered

into an agreement with Lucky Star Drilling & Construction
Corporation (Lucky Star) as part of the completion of its project to
construct the ACG Commercial Complex on “NHA Avenue corner
Olalia Street, Barangay Dela Paz, Antipolo City.”2 As can be
gleaned from the “Purchase Order,”3 Lucky Star was to supply labor,
materials, tools, and equipment including technical supervision to
drill one (1) exploratory production well on the project site. The
total contract price for the said project was P1,150,000.00. The
salient terms and conditions of said agreement are as follows:
i. Lump sum price--------PHP1,150,000.00;

ii. 50% downpayment----upon submission of surety bond in an
equivalent amount and performance bond equivalent to 30 % of
contract amount;
iii. Completion date----60 calendar days;
iv. Penalty----2/10 of 1% of total contract amount for every day of
delay;
v. Terms----50% down payment to be released after submission of
bonds;
vi. Retention----Subject to 10% retention to be released after the
project is accepted by the owner;
To guarantee faithful compliance with their agreement, Lucky

Star engaged respondent Stronghold which issued two (2) bonds in
favor of petitioner. The first, SURETY BOND G(16) No. 141558,
dated May 9, 2006, covers the sum of P575,000.004 or the required
downpayment for the drilling work. The full text of the surety bond
is herein quoted:
_______________
2 Records, pp. 11-13.

3 Id.
4 Id., at pp. 60-61.
373
VOL. 633, OCTOBER 18, 2010 373

Incorporated
KNOW ALL MEN BY THESE PRESENTS:

That we, LUCKY STAR DRILLING & CONSTRUCTION CORP., 168
ACACIA St., Octagon Industrial Estate Subd., Pasig City as principal, and
STRONGHOLD INSURANCE COMPANY, INC., a corporation duly
organized and existing under and by virtue of laws of the Philippines, as
surety, are held and firmly bound unto ASSET BUILDERS
CORPORATION to the sum of Pesos FIVE HUNDRED SEVENTY FIVE

THOUSAND ONLY (P575,000.00) Philippine Currency, for the payment of
which, well and truly to be made, we bind ourselves, our heirs, executors,
administrators, successors and assigns, jointly and severally, firmly by these
presents.
THE CONDITIONS OF THIS OBLIGATION ARE AS FOLLOWS:
To fully and faithfully guarantee the repayment to be done
through deductions from periodic billings of the advance payment
made or to be made by the Obligee to the Principal in connection
with the supply of labor, materials, tools and equipment including
technical supervision to drill one (1) exploratory production well
located at NIA Ave. cor. Olalia St., Brgy. dela Paz, Antipolo City.
This bond is callable on demand.
The liability of the surety company upon determination under this
bond shall in no case exceed the penal sum of PESOS: FIVE
HUNDRED SEVENTY FIVE THOUSAND (P575,000.00) only,
Philippine Currency.
WHEREAS, the Obligee requires said principal to give a good and
sufficient bond in the above stated sum to secure the full and faithful
performance on his part of said undertakings.
NOW, THEREFORE, if the above bounden principal shall in all respects
duly and fully observe and perform all and singular the aforesaid [co]-
venants, conditions and agreements to the true intent and meaning thereof,
then this obligation shall be null and void, otherwise to remain in full force
and effect.
Liability of surety on this bond will expire on May 09, 2007 and said
bond will be cancelled five DAYS after its expiration, unless surety is
notified of and existing obligations hereunder.
x x x”5
_______________
5 Id., at p. 60. See also Records, p. 17.
374

Incorporated
With respect to the second contract, PERFORMANCE BOND G(13) No.

115388, dated May 09, 2006, it covers the sum of P345,000.00.6 Thus:
“KNOW ALL MEN BY THESE PRESENTS:
That we, LUCKY STAR DRILLING & CONSTRUCTION of 168
Acacia St., Octagon Ind’l., contractor, of Estate, Sub., Pasig City
Philippines, as principal and the STRONGHOLD INSURANCE
COMPANY, INC. a corporation duly organized and existing under and by
virtue of the laws of the Philippines, with head office at Makati, as Surety,
are held and firmly bound unto the ASSET BUILDERS CORPORATION
and to any individual, firm, partnership, corporation or association

supplying the principal with labor or materials in the penal sum of THREE
HUNDRED FORTY FIVE THOUSAND ONLY (P345,000.00), Philippine
Currency, for the payment of which sum, well and truly to be made, we bind
ourselves, our heirs, executors, administrators, successors and assigns,
jointly and severally, firmly by these presents.
The CONDITIONS OF THIS OBLIGATION are as follows;
WHEREAS the above bounden principal on the ___ day of
__________, 19__ entered into a contract with the ASSET
BUILDERS CORPORATION represented by _________________,
to fully and faithfully.
Comply with the supply of labor, materials, tools and equipment
including technical supervision to drill one (1) exploratory
production well located at NIA Ave. cor. Olalia St., Brgy. Dela Paz,
Antipolo City. This bond is callable on demand.
WHEREAS, the liability of the Surety Company under this bond shall in
no case exceed the sum of PESOS THREE HUNDRED FORTY FIVE
THOUSAND ONLY (P345,000.00) Philippine Currency, inclusive of
interest, attorney’s fee, and other damages, and shall not be liable for any
advances of the obligee to the principal.
WHEREAS, said contract requires the said principal to give a good and
sufficient bond in the above-stated sum to secure the full and faithfull
performance on its part of said contract, and the satis-
_______________
6 Id., at pp. 62-63.
375
VOL. 633, OCTOBER 18, 2010 375

Incorporated
faction of obligations for materials used and labor employed upon the work;
NOW THEREFORE, if the principal shall perform well and truly and
fulfill all the undertakings, covenants, terms, conditions, and agreements of
said contract during the original term of said contract and any extension
thereof that may be granted by the obligee, with notice to the surety and
during the life of any guaranty required under the contract, and shall also
perform well and truly and fulfill all the undertakings, covenants, terms,
conditions, and agreements of any and all duly authorized modifications of
said contract that may hereinafter be made, without notice to the surety
except when such modifications increase the contract price; and such
principal contractor or his or its sub-contractors shall promptly make
payment to any individual, firm, partnership, corporation or association
supplying the principal of its sub-contractors with labor and materials in the
prosecution of the work provided for in the said contract, then, this
obligation shall be null and void; otherwise it shall remain in full force and
effect. Any extension of the period of time which may be granted by the
obligee to the contractor shall be considered as given, and any modifications
of said contract shall be considered as authorized, with the express consent
of the Surety.
The right of any individual, firm, partnership, corporation or association
supplying the contractor with labor or materials for the prosecution of the
work hereinbefore stated, to institute action on the penal bond, pursuant to
the provision of Act No. 3688, is hereby acknowledge and confirmed. x x x”
On May 20, 2006, ABC paid Lucky Star P575,000.00 (with 2%

withholding tax) as advance payment, representing 50% of the
contract price.7 Lucky Star, thereafter, commenced the drilling work.
By July 18, 2006, just a few days before the agreed completion date
of 60 calendar days, Lucky Star managed to accomplish only ten
(10) % of the drilling work. On the same date, petitioner sent a
demand letter to Lucky Star for the immediate completion of the
drilling work8 with a
_______________
7 Id., at p. 64.
8 Id., at p. 65.
376

Incorporated
threat to cancel the agreement and forfeit the bonds should it still fail
to complete said project within the agreed period.
On August 3, 2006, ABC sent a Notice of Rescission of Contract
with Demand for Damages to Lucky Star.9 Pertinent portions of said
notice read:
“Pursuant to paragraph 1 of the Terms and Conditions of the service

contract, notice is hereby made on you of the rescission of the contract and
accordingly demand is hereby made on you, within seven (7) days from
receipt hereof:
(1) to refund the down payment of PHP563,500.00, plus legal interest
thereon;
(2) to pay liquidated damages equivalent to 2/10 of 1% of the contract
price for every day of delay, or a total of PHP138,000.00;
(3) to pay the amount guaranteed by your performance bond in the
amount of PHP345,000.00;
(4) to pay PHP150,000.00 in other consequential damages;
(5) to pay exemplary damages in the amount of PHP150,000.00;
(6) to vacate the project site, together with all your men and
equipment.
Should you refuse to comply with our demand within the above period,
we shall be constrained to sue you in court, in which event we shall demand
payment of attorney’s fees in the amount of at least PHP100,000.00.”
On August 16, 2006, ABC sent a Notice of Claim for payment to

Stronghold to make good its obligation under its bonds.10
Despite notice, ABC did not receive any reply either from Lucky
Star or Stronghold, prompting it to file its Complaint for Rescission
with Damages against both before the RTC11 on November 21,
2006.
_______________
9 Id., at pp. 66-67.

10 Id., at pp. 68-69.
11 Id., at pp. 70-79.
377
VOL. 633, OCTOBER 18, 2010 377

Incorporated
In its “Answer (with Compulsory Counterclaim and Cross-

Claim),” dated January 24, 2007, Stronghold denied any liability
arguing that ABC had not shown any proof that it made an advance
payment of 50% of the contract price of the project. It further
averred that ABC’s rescission of its contract with Lucky Star
virtually revoked the claims against the two bonds and absolved
them from further liability.12
Lucky Star, on the other hand, failed to file a responsive pleading
within the prescribed period and, thus, was declared in default by the
RTC in its Order dated August 24, 2007.13
On February 27, 2009, the RTC rendered the assailed decision
ordering Lucky Star to pay ABC but absolving Stronghold from
liability.14 Relevant parts of the decision, including the decretal
portion, read:
“On the liability of defendant Stronghold Insurance, the Court rules on the
negative.
The surety bond and performance bond executed by defendants Lucky Star and
Stronghold Insurance are in the nature of accessory contracts which depend for its
existence upon another contract. Thus, when the agreement (Exhibit ‘A’) between
the plaintiff and defendant Asset Builders was rescinded, the surety and performance
bond were automatically cancelled.
WHEREFORE, in view of the foregoing, judgment is hereby rendered in favor

of the plaintiff and against defendant Lucky Star Drilling & Construction, ordering
the latter as follows:
1. to pay plaintiff in the amount of PHP575,000.00 as actual damages plus
legal interest from the filing of the complaint;
2. to pay plaintiff in the amount of PHP100,000.00 as liquidated damages;
3. to pay plaintiff in the amount of PHP50,000.00 as exemplary damages;
_______________
12 Id., at pp. 92-101.

13 Id., at p. 102.
14 Id., at pp. 45-49.
378

Incorporated
4. to pay plaintiff in the amount of PHP 50,000.00 as attorney’s fees;

5. to pay the costs of the suit.
Defendant Stronghold Insurance Company, Inc.’s compulsory counterclaim and
cross-claim are dismissed.”15
Hence, this petition.

Petitioner ABC prays for the reversal of the challenged decision
based on the following
GROUNDS
A. The Lower Court seriously erred and unjustly ACTED
ARBITRARILY with manifest bias and grave abuse of discretion,
CONTRARY to applicable laws and established jurisprudence in
declaring the “automatic CANCELLATION” of respondent
Stronghold’s Surety Bond and Performance Bond, because:
(a) Despite rescission, there exists a continuing VALID
PRINCIPAL OBLIGATION guaranteed by Respondent’s Bonds,
arising out of the Contractor’s DEFAULT and Non-performance.
(b) Upon breach by its Principal/contractor, the
LIABILITIES of Respondent’s bonds had already ACCRUED,
automatically attached, and had become already DIRECT,
PRIMARY and ABSOLUTE, even before Petitioner’s legitimate
exercise of its option under Art. 1191 of the New Civil Code.
(c) Rescission does NOT AFFECT the liabilities of the
Respondent Stronghold as its LIABILITIES on its subject bonds
have already become INTERWOVEN and INSEPARABLE with
the liabilities of its Principal, the Contractor Lucky Star.
B. With the Lower Court’s completely erroneous ruling on the
liabilities of Respondent’s bonds, the Lower Court equally ERRED with
manifest bias and grave abuse, in its
_______________
15 Id., at p. 12.
379
VOL. 633, OCTOBER 18, 2010 379

Incorporated
FAILURE to comply with the “duty of court” to make a finding of

“unreasonable denial or withholding” by Respondent Stronghold or
Petitioner’s claims and impose upon the Respondent the penalties
provided for under Section 241 and 244 of the Insurance Code.16
Essentially, the primary issue is whether or not respondent

insurance company, as surety, can be held liable under its bonds.
The Court rules in the affirmative.
Respondent, along with its principal, Lucky Star, bound itself to
the petitioner when it executed in its favor surety and performance
bonds. The contents of the said contracts clearly establish that the
parties entered into a surety agreement as defined under Article 2047
of the New Civil Code. Thus:
“Art. 2047. By guaranty a person, called the guarantor, binds himself

to the creditor to fulfill the obligation of the principal debtor in case the
latter should fail to do so.
provisions of Section 4, Chapter 3, Title I of this Book shall be observed. In
such case the contract is called a suretyship.” [Emphasis supplied]
As provided in Article 2047, the surety undertakes to be bound

solidarily with the principal obligor. That undertaking makes a
surety agreement an ancillary contract as it presupposes the
existence of a principal contract. Although the contract of a surety is
in essence secondary only to a valid principal obligation, the surety
becomes liable for the debt or duty of another although it possesses
no direct or personal interest over the obligations nor does it receive
any benefit therefrom.17 Let it be stressed that notwithstanding the
fact that the surety contract is secondary to the principal obligation,
_______________
16 Id., at pp. 26-27.

17 Security Pacific Assurance Corporation v. Hon. Tria-Infante, 505 Phil. 609,
620; 468 SCRA 526, 537 (2005).
380

Incorporated
the surety assumes liability as a regular party to the undertaking.18

Stronghold Insurance Company, Inc. v. Republic-Asahi Glass
Corporation,19 reiterating the ruling in Garcia v. Court of Appeals,20
expounds on the nature of the surety’s liability:
“x x x. The surety’s obligation is not an original and direct one for the
performance of his own act, but merely accessory or collateral to the
obligation contracted by the principal. Nevertheless, although the contract
of a surety is in essence secondary only to a valid principal obligation, his
liability to the creditor or promisee of the principal is said to be direct,
primary and absolute; in other words, he is directly and equally bound
with the principal.”
Suretyship, in essence, contains two types of relationship—the

principal relationship between the obligee (petitioner) and the
obligor (Lucky Star), and the accessory surety relationship between
the principal (Lucky Star) and the surety (respondent). In this
arrangement, the obligee accepts the surety’s solidary undertaking to
pay if the obligor does not pay. Such acceptance, however, does not
change in any material way the obligee’s relationship with the
principal obligor. Neither does it make the surety an active party to
the principal obligee-obligor relationship. Thus, the acceptance does
not give the surety the right to intervene in the principal contract.
The surety’s role arises only upon the obligor’s default, at which
time, it can be directly held liable by the obligee for payment as a
solidary obligor.21
In the case at bench, when Lucky Star failed to finish the drilling
work within the agreed time frame despite peti-
_______________
18 Philippine Bank of Communications v. Lim, 495 Phil. 645, 651; 455 SCRA 714,
721-722 (2005).
19 G.R. No. 147561, June 22, 2006, 492 SCRA 179, 190.
20 G.R. No. 80201, November 20, 1990, 191 SCRA 493, 495-496.
21 Intra-Strata Assurance Corporation v. Republic, G.R. No. 156571, July 9,
2008, 557 SCRA 363, 375-376.
381
VOL. 633, OCTOBER 18, 2010 381

Incorporated
tioner’s demand for completion, it was already in delay. Due to this

default, Lucky Star’s liability attached and, as a necessary
consequence, respondent’s liability under the surety agreement
arose.
Undeniably, when Lucky Star reneged on its undertaking with the
petitioner and further failed to return the P575,000.00 downpayment
that was already advanced to it, respondent, as surety, became
solidarily bound with Lucky Star for the repayment of the said
amount to petitioner. The clause, “this bond is callable on demand,”
strongly speaks of respondent’s primary and direct responsibility to
the petitioner.
Accordingly, after liability has attached to the principal, the
obligee or, in this case, the petitioner, can exercise the right to
proceed against Lucky Star or respondent or both. Article 1216 of
the New Civil Code states:
“The creditor may proceed against any one of the solidary debtors or
some or all of them simultaneously. The demand made against one of them
shall not be an obstacle to those which may subsequently be directed against
the others, so long as the debt has not been fully collected.”
Contrary to the trial court’s ruling, respondent insurance

company was not automatically released from any liability when
petitioner resorted to the rescission of the principal contract for
failure of the other party to perform its undertaking. Precisely, the
liability of the surety arising from the surety contracts comes to life
upon the solidary obligor’s default. It should be emphasized that
petitioner had to choose rescission in order to prevent further loss
that may arise from the delay of the progress of the project. Without
a doubt, Lucky Star’s unsatisfactory progress in the drilling work
and its failure to complete it in due time amount to non-performance
of its obligation.
In fine, respondent should be answerable to petitioner on account
of Lucky Star’s non-performance of its obligation as guaranteed by
the performance bond.
382

Incorporated
Finally, Article 121722 of the New Civil Code acknowledges the

right of reimbursement from a co-debtor (the principal co-debtor, in
case of suretyship) in favor of the one who paid (the surety). Thus,
respondent is entitled to reimbursement from Lucky Star for the
amount it may be required to pay petitioner arising from its bonds.
WHEREFORE, the February 27, 2009 Decision of the Regional

Trial Court, Pasig City, Branch 71, is AFFIRMED with
MODIFICATION. Respondent Stronghold Insurance is hereby
declared jointly and severally liable with Lucky Star for the payment
of P575,000.00 and the payment of P345,000.00 on the basis of its
performance bond.
SO ORDERED.
Carpio (Chairperson), Nachura, Leonardo-De Castro** and

Peralta, JJ., concur.
Judgment affirmed with modification.
Note.—The liability of the surety is joint and several but limited

to the amount of the bond. (Intra-Strata Assurance Corporation vs.
Republic, 557 SCRA 363 [2008])
——o0o——
_______________
22 Art. 1217 reads in part: Payment made by one of the solidary debtors
extinguishes the obligation. If two or more solidary debtors offer to pay, the creditor
may choose which offer to accept.
He who made payment may claim from his co-debtors only on the share which
corresponds to each, with the interest for the payment already made. If the payment is
made before the debt is due, no interest for the intervening period may be demanded.
xxx
** Designated as an additional member in lieu of Associate Justice Roberto A.
Abad, per Special Order No. 905 dated October 5, 2010.
1/3/2019 G.R. No. L-158025
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SUPREME COURT
Manila
EN BANC
G.R. No. L-158025 November 5, 1920
CARMEN CASTELLVI DE HIGGINS and HORACE L. HIGGINS, plaintiffs-appellants,

vs.
GEORGE C. SELLNER, defendant-appellee.
Wolfson, Wolfson and Schwarzkopf for appellants.

William and Ferrier for appellee.
MALCOLM, J.:
This is an action brought by plaintiffs to recover from defendant the sum of P10,000. The brief decision of the trial
court held that the suit was premature, and absolved the defendant from the complaint, with the costs against the
plaintiffs.
The basis of plaintiff's action is a letter written by defendant George C. Sellner to John T. Macleod, agent for Mrs.
Horace L. Higgins, on May 31, 1915, of the following tenor: lawph!l.net
DEAR SIR: I hereby obligate and bind myself, my heirs, successors and assigns that if the
promissory note executed the 29th day of May, 1915 by the Keystone Mining Co., W.H. Clarke,
and John Maye, jointly and severally, in your favor and due six months after date for Pesos
10,000 is not fully paid at maturity with interest, I will, within fifteen days after notice of such
default, pay you in cash the sum of P10,000 and interest upon your surrendering to me the three
thousand shares of stock of the Keystone Mining Co. held by you as security for the payment of
said note.
Respectfully,
(Sgd.) GEO. C. SELLNER.
Counsel for both parties agree that the only point at issue is the determination of defendant's status in the
transaction referred to. Plaintiffs contend that he is a surety; defendant contends that he is a guarantor. Plaintiffs
also admit that if defendant is a guarantor, articles 1830, 1831, and 1834 of the Civil Code govern.
In the original Spanish of the Civil Code now in force in the Philippine Islands, Title XIV of Book IV is entitled "De la
Fianza." The Spanish word "fianza" is translated in the Washington and Walton editions of the Civil Code as
"security." "Fianza" appears in the Fisher translation as "suretyship." The Spanish world "fiador" is found in all of the
English translations of the Civil Code as "surety." The law of guaranty is not related of by that name in the Civil
Code, although indirect reference to the same is made in the Code of Commerce. In terminology at least, no
distinction is made in the Civil Code between the obligation of a surety and that of a guarantor.
As has been done in the State of Louisiana, where, like in the Philippines, the substantive law has a civil law origin,
we feel free to supplement the statutory law by a reference to the precepts of the law merchant.
The points of difference between a surety and a guarantor are familiar to American authorities. A surety and a
guarantor are alike in that each promises to answer for the debt or default of another. A surety and a guarantor are
unlike in that the surety assumes liability as a regular party to the undertaking, while the liability as a regular party to
upon an independent agreement to pay the obligation if the primary pay or fails to do so. A surety is charged as an
original promissory; the engagement of the guarantor is a collateral undertaking. The obligation of the surety is
primary; the obligation of the guarantor is secondary. (See U.S. vs. Varadero de la Quinta [1919], 40 Phil., 48;
Lachman vs. Block [1894], 46 La. Ann., 649; Bedford vs. Kelley [1913], 173 Mich., 492; Brandt, on Suretyship and
Guaranty, sec. 1, cited approvingly by many authorities.)
Turning back again to our Civil Code, we first note that according to article 1822 "By fianza (security or suretyship)
one person binds himself to pay or perform for a third person in case the latter should fail to do so." But "If the surety
binds himself in solidum with the principal debtor, the provisions of Section fourth, Chapter third, Title first, shall be
applicable." What the first portion of the cited article provides is, consequently, seen to be somewhat akin to the
contract of guaranty, while what is last provided is practically equivalent to the contract of suretyship. When in
subsequent articles found in section 1 of Chapter II of the title concerning fianza, the Code speaks of the effects of
suretyship between surety and creditor, it has, in comparison with the common law, the effect of guaranty between
guarantor and creditor. The civil law suretyship is, accordingly, nearly synonymous with the common law guaranty;
and the civil law relationship existing between codebtors liable in solidum is similar to the common law suretyship.
It is perfectly clear that the obligation assumed by defendant was simply that of a guarantor, or, to be more precise,
of the fiador whose responsibility is fixed in the Civil Code. The letter of Mr. Sellner recites that if the promissory note
is not paid at maturity, then, within fifteen days after notice of such default and upon surrender to him of the three
thousand shares of Keystone Mining Company stock, he will assume responsibility. Sellner is not bound with the
principals by the same instrument executed at the same time and on the same consideration, but his responsibility is
a secondary one found in an independent collateral agreement, Neither is Sellner jointly and severally liable with the
principal debtors.
With particular reference, therefore, to appellants assignments of error, we hold that defendant Sellner is a
guarantor within the meaning of the provisions of the Civil Code.
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There is also an equitable aspect to the case which reenforces this conclusion. The note executed by the Keystone
Mining Company matured on November 29, 1915. Interest on the note was not accepted by the makers until
September 30, 1916. When the note became due, it is admitted that the shares of stock used as collateral security
were selling at par; that is, they were worth pesos 30,000. Notice that the note had not been paid was not given to
and when the Keyston Mining Company stock was worthless. Defendant, consequently, through the laches of
plaintiff, has lost possible chance to recoup, through the sale of the stock, any amount which he might be compelled
to pay as a surety or guarantor. The "indulgence," as this word is used in the law of guaranty, of the creditors of the
principal, as evidenced by the acceptance of interest, and by failure promptly to notify the guarantor, may thus have
served to discharge the guarantor.
For quite different reasons, which, nevertheless, arrive at the same result, judgment is affirmed, with costs of this
instance against the appellants. So ordered.
Johnson, Araullo, and Villamor, JJ., concur.

Mapa, C.J. and Avanceña, J., concur in the result.
The Lawphil Project - Arellano Law Foundation
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1/3/2019 G.R. No. L-16666
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SUPREME COURT
Manila
EN BANC
G.R. No. L-16666 April 10, 1922
ROMULO MACHETTI, plaintiff-appelle,

vs.
HOSPICIO DE SAN JOSE, defendant-appellee, and
FIDELITY & SURETY COMPANY OF THE PHILIPPINE ISLANDS, defendant-appellant
Ross and Laurence and Wolfson & Scwarzkopf for appellant.

Gabriel La O for appellee Hospicio de San Jose.
No appearance for the other appellee.
OSTRAND, J.:
It appears from the evidence that on July 17, 1916, one Romulo Machetti, by a written agreement undertook to
construct a building on Calle Rosario in the city of Manila for the Hospicio de San Jose, the contract price being
P64,000. One of the conditions of the agreement was that the contractor should obtain the "guarantee" of the
Fidelity and Surety Company of the Philippine Islands to the amount of P128,800 and the following endorsement in
the English language appears upon the contract:
MANILA, July 15, 1916.
For value received we hereby guarantee compliance with the terms and conditions as outlined in
the above contract.
FIDELITY AND SURETY COMPANY OF THE PHILIPPINE ISLANDS.
(Sgd) OTTO VORSTER,

Vice-President.
Machetti constructed the building under the supervision of architects representing the Hospicio de San Jose and, as
the work progressed, payments were made to him from time to time upon the recommendation of the architects,
until the entire contract price, with the exception of the sum of the P4,978.08, was paid. Subsequently it was found
that the work had not been carried out in accordance with the specifications which formed part of the contract and
that the workmanship was not of the standard required, and the Hospicio de San Jose therefore answered the
complaint and presented a counterclaim for damages for the partial noncompliance with the terms of the agreement
abovementioned, in the total sum of P71,350. After issue was thus joined, Machetti, on petition of his creditors, was,
on February 27, 1918, declared insolvent and on March 4, 1918, an order was entered suspending the proceeding
in the present case in accordance with section 60 of the Insolvency Law, Act No. 1956.
The Hospicio de San Jose on January 29, 1919, filed a motion asking that the Fidelity and Surety Company be
made cross-defendant to the exclusion of Machetti and that the proceedings be continued as to said company, but
still remain suspended as to Machetti. This motion was granted and on February 7, 1920, the Hospicio filed a
complaint against the Fidelity and Surety Company asking for a judgement for P12,800 against the company upon
its guaranty. After trial, the Court of First Instance rendered judgment against the Fidelity and Surety Company for
P12,800 in accordance with the complaint. The case is now before this court upon appeal by the Fidelity and Surety
Company form said judgment.
As will be seen, the original action which Machetti was the plaintiff and the Hospicio de San Jose defendant, has
been converted into an action in which the Hospicio de San Jose is plaintiff and the Fidelity and Surety Company,
the original plaintiff's guarantor, is the defendant, Machetti having been practically eliminated from the case.
But in this instance the guarantor's case is even stronger than that of an ordinary surety. The contract of guaranty is
written in the English language and the terms employed must of course be given the signification which ordinarily
attaches to them in that language. In English the term "guarantor" implies an undertaking of guaranty, as
distinguished from suretyship. It is very true that notwithstanding the use of the words "guarantee" or "guaranty"
circumstances may be shown which convert the contract into one of suretyship but such circumstances do not exist
in the present case; on the contrary it appear affirmatively that the contract is the guarantor's separate undertaking
in which the principal does not join, that its rests on a separate consideration moving from the principal and that
although it is written in continuation of the contract for the construction of the building, it is a collateral undertaking
separate and distinct from the latter. All of these circumstances are distinguishing features of contracts of guaranty.
Now, while a surety undertakes to pay if the principal does not pay, the guarantor only binds himself to pay if the
principal cannot pay. The one is the insurer of the debt, the other an insurer of the solvency of the debtor. (Saint vs.
Wheeler & Wilson Mfg. Co., 95 Ala., 362; Campbell, vs. Sherman, 151 Pa. St., 70; Castellvi de Higgins and Higgins
vs. Sellner, 41 Phil., 142; ;U.S. vs. Varadero de la Quinta, 40 Phil., 48.) This latter liability is what the Fidelity and
Surety Company assumed in the present case. The undertaking is perhaps not exactly that of a fianza under the
Civil Code, but is a perfectly valid contract and must be given the legal effect if ordinarily carries. The Fidelity and
Surety Company having bound itself to pay only the event its principal, Machetti, cannot pay it follows that it cannot
be compelled to pay until it is shown that Machetti is unable to pay. Such ability may be proven by the return of a
writ of execution unsatisfied or by other means, but is not sufficiently established by the mere fact that he has been
declared insolvent in insolvency proceedings under our statutes, in which the extent of the insolvent's inability to pay
is not determined until the final liquidation of his estate.
The judgment appealed from is therefore reversed without costs and without prejudice to such right of action as the
cross-complainant, the Hospicio de San Jose, may have after exhausting its remedy against the plaintiff Machetti.
https://www.lawphil.net/judjuris/juri1922/apr1922/gr_l-16666_1922.html 1/2
1/3/2019 G.R. No. L-16666
So ordered.
Araullo, C.J., Malcolm, Villamor, Johns and Romualdez, JJ., concur.
https://www.lawphil.net/judjuris/juri1922/apr1922/gr_l-16666_1922.html 2/2
G.R. No. 189563. April 7, 2014.*

GILAT SATELLITE NETWORKS, LTD., petitioner, vs. UNITED
COCONUT PLANTERS BANK GENERAL INSURANCE CO.,
INC., respondent.
Civil Law; Suretyship; Solidary Liability; In suretyship, the oft-

repeated rule is that a surety’s liability is joint and solidary with that of the
principal debtor.—In suretyship, the oft-repeated rule is that a surety’s
liability is joint and solidary with that of the principal debtor. This
undertaking makes a surety agreement an ancillary contract, as it
presupposes the existence of a principal contract. Nevertheless, although the
contract of a surety is in essence secondary only to a valid principal
obligation, its liability to the creditor or “promise” of the principal is said to
be direct, primary and absolute; in other words, a surety is directly and
equally bound with the principal. He becomes liable for the debt and duty of
the principal obligor, even without possessing a direct or personal interest in
the obligations constituted by the latter. Thus, a surety is not entitled to a
separate notice of default or to the benefit of excussion. It may in fact be
sued separately or together with the principal debtor.
Same; Same; Same; The acceptance of a surety agreement does not

change in any material way the creditor’s relationship with the principal
debtor nor does it make the surety an active party to the principal creditor-
debtor relationship.—We have held in Stronghold Insurance Co., Inc. v.
Tokyu Construction Co. Ltd., 588 SCRA 410 (2009), that “[the] acceptance
[of a surety agreement], however, does
_______________
* FIRST DIVISION.
727
not change in any material way the creditor’s relationship with the principal
debtor nor does it make the surety an active party to the principal creditor-
debtor relationship. In other words, the acceptance does not give the
surety the right to intervene in the principal contract. The surety’s role
arises only upon the debtor’s default, at which time, it can be directly held
http://www.central.com.ph/sfsreader/session/0000016810ed92ca72ba1bd8003600fb002c009e/t/?o=False 1/15
liable by the creditor for payment as a solidary obligor.” Hence, the surety
remains a stranger to the Purchase Agreement. We agree with petitioner that
respondent cannot invoke in its favor the arbitration clause in the Purchase
Agreement, because it is not a party to that contract. An arbitration
agreement being contractual in nature, it is binding only on the parties
thereto, as well as their assigns and heirs.
Alternative Dispute Resolution Act of 2004 (Republic Act [R.A.] No.

9285); Arbitration; Section 24 of Republic Act No. 9285 is clear in stating
that a referral to arbitration may only take place “if at least one party so
requests not later than the pre-trial conference, or upon the request of both
parties thereafter.”—Section 24 of Republic Act No. 9285 is clear in stating
that a referral to arbitration may only take place “if at least one party so
requests not later than the pre-trial conference, or upon the request of both
parties thereafter.” Respondent has not presented even an iota of evidence to
show that either petitioner or One Virtual submitted its contesting claim for
arbitration.
Civil Law; Suretyship; Sureties do not insure the solvency of the debtor,
but rather the debt itself; The effect is that the creditor is given the right to
directly proceed against either principal debtor or surety.—Sureties do not
insure the solvency of the debtor, but rather the debt itself. They are
contracted precisely to mitigate risks of nonperformance on the part of the
obligor. This responsibility necessarily places a surety on the same level
as that of the principal debtor. The effect is that the creditor is given the
right to directly proceed against either principal debtor or surety. This is the
reason why excussion cannot be invoked. To require the creditor to proceed
to arbitration would render the very essence of suretyship nugatory and
diminish its value in commerce. At any rate, as we have held in Palmares v.
Court of Appeals, 288 SCRA 422 (1998), “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.”
728
Same; Delay; Interest Rates; If an obligation consists in the payment of

a sum of money, and the debtor incurs a delay, the indemnity for damages,
there being no stipulation to the contrary, shall be the payment of the
interest agreed upon, and in the absence of stipulation, the legal interest.—
Article 2209 of the Civil Code is clear: “[i]f an obligation consists in the
payment of a sum of money, and the debtor incurs a delay, the indemnity for
damages, there being no stipulation to the contrary, shall be the payment of
the interest agreed upon, and in the absence of stipulation, the legal
interest.”
Same; Same; Delay arises from the time the obligee judicially or
extrajudicially demands from the obligor the performance of the obligation,
and the latter fails to comply.—Delay arises from the time the obligee
judicially or extrajudicially demands from the obligor the performance of
the obligation, and the latter fails to comply. Delay, as used in Article 1169,
is synonymous with default or mora, which means delay in the fulfillment
of obligations. It is the nonfulfillment of an obligation with respect to time.
In order for the debtor (in this case, the surety) to be in default, it is
necessary that the following requisites be present: (1) that the obligation be
demandable and already liquidated; (2) that the debtor delays performance;
and (3) that the creditor requires the performance judicially or
extrajudicially.
Same; Same; The settled rule is that where there has been an
extrajudicial demand before an action for performance was filed, interest on
the amount due begins to run, not from the date of the filing of the
complaint, but from the date of that extrajudicial demand.—As to the issue
of when interest must accrue, our Civil Code is explicit in stating that it
accrues from the time judicial or extrajudicial demand is made on the surety.
This ruling is in accordance with the provisions of Article 1169 of the Civil
Code and of the settled rule that where there has been an extrajudicial
demand before an action for performance was filed, interest on the amount
due begins to run, not from the date of the filing of the complaint, but from
the date of that extrajudicial demand. Considering that respondent failed to
pay its obligation on 30 May 2000 in accordance with the Purchase
Agreement, and that the extrajudicial demand of petitioner was sent on 5
June 2000, we agree with the latter that interest must start to run from the
time petitioner sent its first demand letter (5 June 2000), because the
obligation was already due and demandable at that time.
729
PETITION for review on certiorari of the decision and resolution of

the Court of Appeals.
Sycip, Salazar, Hernandez & Gatmaitan for petitioner.
MCR Law Offices for respondent.
SERENO, CJ.:
This is an appeal via a Petition for Review on Certiorari[1] filed
6 November 2009 assailing the Decision[2] and Resolution[3] of the
Court of Appeals (CA) in C.A.-G.R. CV No. 89263, which reversed
the Decision[4] of the Regional Trial Court (RTC), Branch 141,
Makati City in Civil Case No. 02-461, ordering respondent to pay
petitioner a sum of money.
The antecedent facts, as culled from the CA, are as follows:
On September 15, 1999, One Virtual placed with GILAT a

purchase order for various telecommunications equipment (sic),
accessories, spares, services and software, at a total purchase price
of Two Million One Hundred Twenty Eight Thousand Two Hundred
Fifty Dollars (US$2,128,250.00). Of the said purchase price for the
goods delivered, One Virtual promised to pay a portion thereof
totalling US$1.2 Million in accordance with the payment schedule
dated 22 November 1999. To ensure the prompt payment of this
amount, it obtained defendant UCPB General Insurance Co., Inc.’s
surety bond dated 3 December 1999, in favor of GILAT.
During the period between [sic] September 1999 and June 2000,
GILAT shipped and delivered to One Virtual the purchased products
and equipment, as evidenced by airway bills/Bill of Lading
(Exhibits “F,” “F-1” to “F-8’’). All of the equipment (including
the
_______________
[1] Rollo, pp. 45-77.
[2] Id., at pp. 12-21; CA Decision dated 6 October 2008, penned by Associate
Justice Magdangal M. De Leon and concurred in by Associate Justices Josefina
Guevara-Salonga and Ramon R. Garcia.
[3] Id., at pp. 23-24; CA Resolution dated 16 September 2009.
[4] Id., at pp. 151-156; RTC Decision dated 28 December 2006 penned by Pairing
Judge Dina Pestaño Teves.
730
software components for which payment was secured by the surety

bond), was shipped by GILAT and duly received by One Virtual.
Under an endorsement dated December 23, 1999 (Exhibit “E’’), the
surety issued, with One Virtual’s conformity, an amendment to the
surety bond, Annex “A” thereof, correcting its expiry date from May
30, 2001 to July 30, 2001.
One Virtual failed to pay GILAT the amount of Four Hundred
Thousand Dollars (US$400,000.00) on the due date of May 30, 2000
in accordance with the payment schedule attached as Annex “A” to
the surety bond, prompting GILAT to write the surety defendant
UCPB on June 5, 2000, a demand letter (Exhibit “G”) for payment
of the said amount of US$400,000.00. No part of the amount set
forth in this demand has been paid to date by either One Virtual or
defendant UCPB. One Virtual likewise failed to pay on the
succeeding payment instalment date of 30 November 2000 as set out
in Annex “A” of the surety bond, prompting GILAT to send a
second demand letter dated January 24, 2001, for the payment of the
full amount of US$1,200,000.00 guaranteed under the surety bond,
plus interests and expenses (Exhibits “H’’) and which letter was
received by the defendant surety on January 25, 2001. However,
defendant UCPB failed to settle the amount of US$1,200,000.00 or a
part thereof, hence, the instant complaint.”[5] (Emphases in the

original)
On 24 April 2002, petitioner Gilat Satellite Networks, Ltd., filed
a Complaint[6] against respondent UCPB General Insurance Co.,
Inc., to recover the amounts supposedly covered by the surety bond,
plus interests and expenses. After due hearing, the RTC rendered its
Decision,[7] the dispositive portion of which is herein quoted:
WHEREFORE, premises considered, the Court hereby renders judgment

for the plaintiff, and against the defendant, ordering, to wit:
1. The defendant surety to pay the plaintiff the amount of One Million
Two Hundred Thousand Dollars (US$1,200,000.00) representing the
principal debt under the Surety Bond, with
_______________
[5] Id., at pp. 14-15.
[6] Id., at pp. 100-104.
[7] Supra note 4.
731
legal interest thereon at the rate of 12% per annum computed from the
time the judgment becomes final and executory until the obligation is
fully settled; and
2. The defendant surety to pay the plaintiff the amount of Forty Four
Thousand Four Dollars and Four Cents (US$44,004.04) representing
attorney’s fees and litigation expenses.
Accordingly, defendant’s counterclaim is hereby dismissed for want of
merit.
SO ORDERED. (Emphasis in the original)
In so ruling, the RTC reasoned that there is “no dispute that

plaintiff [petitioner] delivered all the subject equipments [sic] and
the same was installed. Even with the delivery and installation made,
One Virtual failed to pay any of the payments agreed upon. Demand
notwithstanding, defendant failed and refused and continued to fail
and refused to settle the obligation.”[8] Considering that its liability
was indeed that of a surety, as “spelled out in the Surety Bond
executed by and between One Virtual as Principal, UCPB as Surety
and GILAT as Creditor/Bond Obligee,”[9] respondent agreed and
bound itself to pay in accordance with the Payment Milestones. This
obligation was not made dependent on any condition outside the
terms and conditions of the Surety Bond and Payment Milestones.
[10]
Insofar as the interests were concerned, the RTC denied
petitioner’s claim on the premise that while a surety can be held
liable for interest even if it becomes more onerous than the principal
obligation, the surety shall only accrue when the delay or refusal to
pay the principal obligation is without any justifiable cause.[11]
Here, respondent failed to pay its surety obligation because of the
advice of its principal (One Virtual) not to pay.[12] The RTC then
obligated respondent to pay peti-
_______________
[8] Id., at p. 155.
[9] Id., at p. 154.
[10] Id., at p. 155.
[11] Id., at p. 156.
[12] Id.
732
tioner the amount of USD1,200,000.00 representing the principal

debt under the Surety Bond, with legal interest at the rate of 12% per
annum computed from the time the judgment becomes final and
executory, and USD44,004.04 representing attorney’s fees and
litigation expenses.
On 18 October 2007, respondent appealed to the CA.[13] The
appellate court rendered a Decision[14] in the following manner:
WHEREFORE, this appealed case is DISMISSED for lack of

jurisdiction. The trial court’s Decision dated December 28, 2006 is
VACATED. Plaintiff-appellant Gilat Satellite Networks Ltd., and One
Virtual are ordered to proceed to arbitration, the outcome of which shall
necessary bind the parties, including the surety, defendant-appellant United
Coconut Planters Bank General Insurance Co., Inc.
SO ORDERED. (Emphasis in the original)
The CA ruled that in “enforcing a surety contract, the

‘complementary-contracts-construed-together’ doctrine finds
application.” According to this doctrine, the accessory contract must
be construed with the principal agreement.[15] In this case, the
appellate court considered the Purchase Agreement entered into
between petitioner and One Virtual as the principal contract,[16]
whose stipulations are also binding on the parties to the suretyship.
[17] Bearing in mind the arbitration clause contained in the Purchase
Agreement[18] and pursuant
_______________
[13] Id., at pp. 176-191.
[14] Supra note 2.
[15] Rollo, p. 90.
[16] Id.
[17] Id., at p. 91.

[18] Id., at p. 92. The arbitration clause reads:
“20.1. In the event of a dispute between Buyer and Seller arising out of, or
relating to this Agreement, its interpretation or performance hereunder, the parties
shall exert their best efforts to resolve the dispute amicably through negotiations.
20.2. In the event that a dispute cannot be resolved amicably by the parties
through negotiations within sixty (60) days of the com-
733
to the policy of the courts to encourage alternative dispute resolution

methods,[19] the trial court’s Decision was vacated; petitioner and
One Virtual were ordered to proceed to arbitration.
On 9 September 2008, petitioner filed a Motion for
Reconsideration with Motion for Oral Argument. The motion was
denied for lack of merit in a Resolution[20] issued by the CA on 16
September 2009.
Hence, the instant Petition.
On 31 August 2010, respondent filed a Comment[21] on the
Petition for Review. On 24 November 2010, petitioner filed a Reply.
[22]
Issues
From the foregoing, we reduce the issues to the following:
1. Whether or not the CA erred in dismissing the case and
ordering petitioner and One Virtual to arbitrate; and
2. Whether or not petitioner is entitled to legal interest due to
the delay in the fulfilment by respondent of its obligation
under the Suretyship Agreement.
_______________
mencement of such negotiations, the dispute shall be submitted to arbitration in
accordance with the laws of the United States, with such arbitration to be held in New
York, United States. Each party shall select one arbitrator and then those two
arbitrators shall in good faith select a third arbitrator. The arbitration shall be
conducted in English. Any decision resulting from such arbitration shall be final and
binding upon the parties to this Agreement and on any other person participating in
the arbitration. Judgment upon the award may be entered in any court having
jurisdiction thereof.”
[19] Id., at p. 92.
[20] Supra note 3.
[21] Rollo, pp. 400-421.
[22] Id., at pp. 433-448.
734
The Court’s Ruling
The existence of a suretyship agree-

ment does not give the surety the right
to intervene in the principal contract,
nor can an arbitration clause between
the buyer and the seller be invoked by
a non-party such as the surety.
Petitioner alleges that arbitration laws mandate that no court can
compel arbitration, unless a party entitled to it applies for this relief.
[23] This referral, however, can only be demanded by one who is a
party to the arbitration agreement.[24] Considering that neither
petitioner nor One Virtual has asked for a referral, there is no basis
for the CA’s order to arbitrate.
Moreover, Articles 1216 and 2047 of the Civil Code[25] clearly
provide that the creditor may proceed against the surety without
having first sued the principal debtor.[26] Even the Surety
Agreement itself states that respondent becomes liable upon “mere
failure of the Principal to make such prompt payment.”[27] Thus,
petitioner should not be ordered to make a separate claim against
One Virtual (via arbitration) before proceeding against respondent.
[28]
_______________
[23] Id., at pp. 60-62.
[24] Id.
[25] C C , Art. 1216. 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.
C C , Art. 2047. x x x If a person binds himself solidarily with the
principal debtor, the provisions of Section 4, Chapter 3, Title I of this Book shall be
observed. In such case the contract is called a suretyship.
[26] Rollo, p. 54.
[27] Id., at p. 57.
[28] Id., at p. 59.
735
On the other hand, respondent maintains that a surety contract is

merely an accessory contract, which cannot exist without a valid
obligation.[29] Thus, the surety may avail itself of all the defenses
available to the principal debtor and inherent in the debt[30] — that
is, the right to invoke the arbitration clause in the Purchase
Agreement.
We agree with petitioner.
In suretyship, the oft-repeated rule is that a surety’s liability is
joint and solidary with that of the principal debtor. This undertaking
makes a surety agreement an ancillary contract, as it presupposes the
existence of a principal contract.[31] Nevertheless, although the
contract of a surety is in essence secondary only to a valid principal

obligation, its liability to the creditor or “promise” of the principal is
said to be direct, primary and absolute; in other words, a surety is
directly and equally bound with the principal.[32] He becomes liable
for the debt and duty of the principal obligor, even without
possessing a direct or personal interest in the obligations constituted
by the latter.[33] Thus, a surety is not entitled to a separate notice of
default or to the benefit of excussion.[34] It may in fact be sued
separately or together with the principal debtor.[35]
_______________
[29] Id., at p. 412.
[30] Id., at p. 413.
[31] Asset Builders Corporation v. Stronghold Insurance Co., Inc., G.R. No.
187116, 18 October 2010, 633 SCRA 370, citing Security Pacific Assurance
Corporation v. Hon. Tria-Infante, 505 Phil. 609, 620; 468 SCRA 526, 536 (2005).
[32] Id., citing Stronghold Insurance Company, Inc. v. Republic-Asahi Glass
Corporation, 525 Phil. 270; 492 SCRA 179 (2006).
[33] Totanes v. China Banking Corporation, G.R. No. 179880, 19 January 2009,
576 SCRA 323, citing Tiu Hiong Guan v. Metropolitan Bank and Trust Company, 530
Phil. 12; 498 SCRA 246 (2006).
[34] Intra-Strata Assurance Corporation & Philippine Home Assurance Corp. v.
Republic of the Philippines, 579 Phil. 631; 557 SCRA 363 (2008), citing 74 Am. Jur.
§ 35, and Manila Surety & Fidelity Co., Inc. v. Batu Construction & Co., 101 Phil.
494 (1957).
[35] Id., citing NASSCO v. Torrento, 126 Phil. 777; 20 SCRA 427 (1967); C
C , Article 1216.
736
After a thorough examination of the pieces of evidence presented

by both parties,[36] the RTC found that petitioner had delivered all
the goods to One Virtual and installed them. Despite these
compliances, One Virtual still failed to pay its obligation,[37]
triggering respondent’s liability to petitioner as the former’s surety.
In other words, the failure of One Virtual, as the principal debtor, to
fulfill its monetary obligation to petitioner gave the latter an
immediate right to pursue respondent as the surety.
Consequently, we cannot sustain respondent’s claim that the
Purchase Agreement, being the principal contract to which the
Suretyship Agreement is accessory, must take precedence over
arbitration as the preferred mode of settling disputes.
First, we have held in Stronghold Insurance Co. Inc. v. Tokyu
Construction Co. Ltd.,[38] that “[the] acceptance [of a surety
agreement], however, does not change in any material way the
creditor’s relationship with the principal debtor nor does it make the
surety an active party to the principal creditor-debtor relationship. In
other words, the acceptance does not give the surety the right to
intervene in the principal contract. The surety’s role arises only

upon the debtor’s default, at which time, it can be directly held liable
by the creditor for payment as a solidary obligor.” Hence, the surety
remains a stranger to the Purchase Agreement. We agree with
petitioner that respondent cannot invoke in its favor the arbitration
clause in the Purchase Agreement, because it is not a party to that
contract.[39] An arbitration agreement being
_______________
[36] Rollo, pp. 153-155.
[37] Id., at p. 155.
[38] G.R. Nos. 158820-21, 5 June 2009, 588 SCRA 410, 422.
[39] Rollo, p. 59.
737
contractual in nature,[40] it is binding only on the parties thereto, as

well as their assigns and heirs.[41]
Second, Section 24 of Republic Act No. 9285[42] is clear in
stating that a referral to arbitration may only take place “if at least
one party so requests not later than the pre-trial conference, or upon
the request of both parties thereafter.” Respondent has not presented
even an iota of evidence to show that either petitioner or One Virtual
submitted its contesting claim for arbitration.
Third, sureties do not insure the solvency of the debtor, but rather
the debt itself.[43] They are contracted precisely to mitigate risks of
nonperformance on the part of the obligor. This responsibility
necessarily places a surety on the same level as that of the
principal debtor.[44] The effect is that the creditor is given the right
to directly proceed against either principal debtor or surety. This is
the reason why excussion cannot be invoked.[45] To require the
creditor to proceed to arbitration would render the very essence of
suretyship nugatory and diminish its value in commerce. At any rate,
as we have held in Palmares v. Court of Appeals,[46] “if the surety is
dissatisfied with the degree of activity displayed by the credi-
_______________
[40] Gonzales v. Climax Mining Ltd., 541 Phil. 143; 512 SCRA 148 (2007). See
also Manila Electric Company v. Pasay Transportation Co., 57 Phil. 600, 603 (1932).
[41] Heirs of Augusto L. Salas, Jr. v. Laperal Realty Corp., 378 Phil. 369; 320
SCRA 610 (1999), citing Civil Code, Art. 1311.
[42] “An Act to Institutionalize the Use of an Alternative Dispute Resolution
System in the Philippines and to Establish the Office for Alternative Dispute
Resolution, and for Other Purposes” or the “Alternative Dispute Resolution Act of
2004.”
[43] Totanes v. China Banking Corporation, supra note 33.
[44] See International Finance Corporation v. Imperial Textile Mills, Inc., 511
Phil. 591; 475 SCRA 149 (2005).
[45] Intra-Strata Assurance Corp. v. Republic, 579 Phil. 631; 557 SCRA 363
(2008), citing Manila Surety & Fidelity Co., Inc. v. Batu Construction & Co., 101
Phil. 494 (1957).
[46] 351 Phil. 664, 686; 288 SCRA 422, 441-442 (1998), citing 74 Am. Jur. 2d,
Principal and Surety, § 68, 53.
738
tor in the pursuit of his principal, he may pay the debt himself and
become subrogated to all the rights and remedies of the creditor.”
Interest, as a form of indemnity, may

be awarded to a creditor for the delay
incurred by a debtor in the payment of
the latter’s obligation, provided that
the delay is inexcusable.
Anent the issue of interests, petitioner alleges that it deserves to
be paid legal interest of 12% per annum from the time of its first
demand on respondent on 5 June 2000 or at most, from the second
demand on 24 January 2001 because of the latter’s delay in
discharging its monetary obligation.[47] Citing Article 1169 of the
Civil Code, petitioner insists that the delay started to run from the
time it demanded the fulfilment of respondent’s obligation under the
suretyship contract. Significantly, respondent does not contest this
point, but instead argues that it is only liable for legal interest of 6%
per annum from the date of petitioner’s last demand on 24 January
2001.
In rejecting petitioner’s position, the RTC stated that interests
may only accrue when the delay or the refusal of a party to pay is
without any justifiable cause.[48] In this case, respondent’s failure to
heed the demand was due to the advice of One Virtual that petitioner
allegedly breached its undertakings as stated in the Purchase
Agreement.[49] The CA, however, made no pronouncement on this
matter.
We sustain petitioner.
Article 2209 of the Civil Code is clear: “[i]f an obligation
consists in the payment of a sum of money, and the debtor incurs a
delay, the indemnity for damages, there being no
_______________
[47] Rollo, pp. 69-75.
[48] Id., at p. 156.
[49] Id.
739
stipulation to the contrary, shall be the payment of the interest

agreed upon, and in the absence of stipulation, the legal interest.”
Delay arises from the time the obligee judicially or
extrajudicially demands from the obligor the performance of the
obligation, and the latter fails to comply.[50] Delay, as used in
Article 1169, is synonymous with default or mora, which means
delay in the fulfillment of obligations.[51] It is the non-fulfillment of
an obligation with respect to time.[52] In order for the debtor (in this
case, the surety) to be in default, it is necessary that the following
requisites be present: (1) that the obligation be demandable and
already liquidated; (2) that the debtor delays performance; and (3)
that the creditor requires the performance judicially or
extrajudicially.[53]
Having held that a surety upon demand fails to pay, it can be held
liable for interest, even if in thus paying, its liability becomes more
than the principal obligation.[54] The increased liability is not
because of the contract, but because of the default and the necessity
ofjudicial collection.[55]
However, for delay to merit interest, it must be inexcusable in
nature. In Guanio v. Makati-Shangri-la Hotel,[56] citing RCPI v.
Verchez,[57] we held thus:
_______________
[50] Social Security System v. Moonwalk Development & Housing Corp., G.R. No.
73345, 7 April 1993, 221 SCRA 119.
[51] Santos Ventura Hocorma Foundation, Inc. v. Santos, 484 Phil. 447; 441
SCRA 472 (2004), citing IV Arturo M. Tolentino, Civil Code of the Philippines, p.
101 (1987 ed.).
[52] Id.
[53] Id., citing Tolentino at p. 102.
[54] Commonwealth Insurance Corporation v. Court of Appeals, 466 Phil. 104;
421 SCRA 367 (2004), citing Republic vs. Court of Appeals and R & B Surety and
Insurance Company, Inc., 406 Phil. 745; 354 SCRA 285 (2001).
[55] Id.
[56] G.R. No. 190601, 7 February 2011, 641 SCRA 591, 596-597.
740
In culpa contractual x x x the mere proof of the existence of the contract

and the failure of its compliance justify, prima facie, a corresponding right
of relief. The law, recognizing the obligatory force of contracts, will not
permit a party to be set free from liability for any kind of misperformance of
the contractual undertaking or a contravention of the tenor thereof. A breach
upon the contract confers upon the injured party a valid cause for recovering
that which may have been lost or suffered. The remedy serves to preserve
the interests of the promissee that may include his “expectation interest,”
which is his interest in having the benefit of his bargain by being put in as
good a position as he would have been in had the contract been performed,
or his “reliance interest,” which is his interest in being reimbursed for loss
caused by reliance on the contract by being put in as good a position as he
would have been in had the contract not been made; or his “restitution
interest,” which is his interest in having restored to him any benefit that he
has conferred on the other party. Indeed, agreements can accomplish little,
either for their makers or for society, unless they are made the basis for
action. The effect of every infraction is to create a new duty, that is, to
make RECOMPENSE to the one who has been injured by the failure of
another to observe his contractual obligation unless he can show
extenuating circumstances, like proof of his exercise of due diligence
x x x or of the attendance of fortuitous event, to excuse him from his
ensuing liability. (Emphasis ours)
We agree with petitioner that records are bereft of proof to show

that respondent’s delay was indeed justified by the circumstances —
that is, One Virtual’s advice regarding petitioner’s alleged breach of
obligations. The lower court’s Decision itself belied this contention
when it said that “plaintiff is not disputing that it did not complete
commissioning work on one of the two systems because One Virtual
at that time is already in default and has not paid GILAT.”[58]
Assuming arguendo that the commissioning work was not
completed,
_______________
[57] 516 Phil. 725; 481 SCRA 384 (2006), citing FGU Insurance Corp. v. G.P.
Sarmiento Trucking Corp., 435 Phil. 333, 341-342; 386 SCRA 312, 320 (2002).
[58] Rollo, p. 156.
741
respondent has no one to blame but its principal, One Virtual; if only
it had paid its obligation on time, petitioner would not have been
forced to stop operations. Moreover, the deposition of Mr. Erez
Antebi, vice president of Gilat, repeatedly stated that petitioner had
delivered all equipment, including the licensed software; and that the
equipment had been installed and in fact, gone into operation.[59]
Notwithstanding these compliances, respondent still failed to pay.
As to the issue of when interest must accrue, our Civil Code is
explicit in stating that it accrues from the time judicial or
extrajudicial demand is made on the surety. This ruling is in
accordance with the provisions of Article 1169 of the Civil Code and
of the settled rule that where there has been an extrajudicial demand
before an action for performance was filed, interest on the amount
due begins to run, not from the date of the filing of the complaint,
but from the date of that extrajudicial demand.[60] Considering that
respondent failed to pay its obligation on 30 May 2000 in
accordance with the Purchase Agreement, and that the extrajudicial
demand of petitioner was sent on 5 June 2000,[61] we agree with the
latter that interest must start to run from the time petitioner sent its
first demand letter (5 June 2000), because the obligation was already
due and demandable at that time.
With regard to the interest rate to be imposed, we take cue from
Nacar v. Gallery Frames,[62] which modified the guidelines
established in Eastern Shipping Lines v. CA[63] in relation to Bangko
Sentral-Monetary Board Circular No. 799 (Series of 2013), to wit:
_______________
[59] Id., at pp. 461-481.
[60] Commonwealth Insurance Corporation v. Court of Appeals, supra note 54,
citing Tolentino, Commentaries and Jurisprudence on the Civil Code of the
Philippines, 1991 Reprint, Vol. IV, p. 103; Padilla, Civil Code Annotated, 1987
Edition, Vol. IV, p. 61.
[61] Rollo, pp. 48, 495.
[62] G.R. No. 189871, 13 August 2013, 703 SCRA 439.
[63] G.R. No. 97412, 12 July 1994, 234 SCRA 78, 95-97.
742
1. When the obligation is breached, and it consists in the payment of a

sum of money, i.e., a loan or forbearance of money, the interest due
should be that which may have been stipulated in writing. Furthermore,
the interest due shall itself earn legal interest from the time it is judicially
demanded. In the absence of stipulation, the rate of interest shall be 6%
per annum to be computed from default, i.e., from judicial or
extrajudicial demand under and subject to the provisions of Article 1169
of the Civil Code.
xxxx
3. When the judgment of the court awarding a sum of money becomes
final and executory, the rate of legal interest, whether the case falls under
paragraph 1 or paragraph 2, above, shall be 6% per annum from such
finality until its satisfaction, this interim period being deemed to be by
then an equivalent to a forbearance of credit.
Applying the above-discussed concepts and in the absence of an

agreement as to interests, we are hereby compelled to award
petitioner legal interest at the rate of 6% per annum from 5 June
2000, its first date of extrajudicial demand, until the satisfaction of
the debt in accordance with the revised guidelines enunciated in
Nacar.
WHEREFORE, the Petition for Review on Certiorari is hereby
GRANTED. The assailed Decision and Resolution of the Court of
Appeals in C.A.-G.R. CV No. 89263 are REVERSED. The
Decision of the Regional Trial Court, Branch 141, Makati City is
REINSTATED, with MODIFICATION insofar as the award of

legal interest is concerned. Respondent is hereby ordered to pay
legal interest at the rate of 6% per annum from 5 June 2000 until the
satisfaction of its obligation under the Suretyship Contract and
Purchase Agreement.
SO ORDERED.
Leonardo-De Castro, Bersamin, Villarama, Jr. and Reyes, JJ.,

concur.
743
Petition granted, judgment and resolution reversed.
Note.—The extent of a surety’s liability is determined by the

language of the suretyship contract or bond itself. It cannot be
extended by implication, beyond the terms of the contract. (First
Lepanto-Taisho Insurance Corporation vs. Chevron Philippines,
Inc., 663 SCRA 309 [2012])
——o0o——

Palmares vs. Court of Appeals
*
G.R. No. 126490. March 31, 1998.
ESTRELLA PALMARES, petitioner, vs. COURT OF APPEALS

and M. B. LENDING CORPORATION, respondents.
Civil Law; Contracts; It has been the consistent holding of the Court
that contracts of adhesion are not invalid per se and that on numerous
occasions the binding effects thereof have been upheld.—At the outset, let it
here be stressed that even assuming arguendo that the promissory note
executed between the parties is a contract of adhesion, it has been the
consistent holding of the Court that contracts of adhesion are not invalid per
se and that on numerous occasions the binding effects thereof have been
upheld. The peculiar nature of such contracts necessitate a close scrutiny of
the factual milieu to which the provisions are intended to apply. Hence, just
as consistently and unhesitatingly, but without categorically invalidating
such contracts, the Court has construed obscurities and ambiguities in the
restrictive provisions of contracts of adhesion strictly albeit not
unreasonably against the drafter thereof when justified in
____________________________
* SECOND DIVISION.
423
VOL. 288, MARCH 31, 1998 423
light of the operative facts and surrounding circumstances. The factual

scenario obtaining in the case before us warrants a liberal application of the
rule in favor of respondent corporation.
Same; Same; It is a cardinal rule in the interpretation of contracts that
if the terms of a contract are clear and leave no doubt upon the intention of
the contracting parties, the literal meaning of its stipulation shall control.—
http://www.central.com.ph/sfsreader/session/0000016810f11fbfa153d270003600fb002c009e/t/?o=False 1/24
It is a cardinal rule in the interpretation of contracts that if the terms of a

contract are clear and leave no doubt upon the intention of the contracting
parties, the literal meaning of its stipulation shall control. In the case at bar,
petitioner expressly bound herself to be jointly and severally or solidarily
liable with the principal maker of the note. The terms of the contract are
clear, explicit and unequivocal that petitioner’s liability is that of a surety.
Same; Same; Fraud must be established by clear and convincing
evidence, mere preponderance of evidence not even being adequate.—
Petitioner admits that she voluntarily affixed her signature thereto; ergo, she
cannot now be heard to claim otherwise. Any reference to the existence of
fraud is unavailing. Fraud must be established by clear and convincing
evidence, mere preponderance of evidence not even being adequate.
Petitioner’s attempt to prove fraud must, therefor, fail as it was evidenced
only by her own uncorroborated and, expectedly, self-serving allegations.
Same; Same; Suretyship; The rule that ignorance of the contents of an
instrument does not ordinarily affect the liability of one who signs it also
applies to contracts of suretyship.—Having entered into the contract with
full knowledge of its terms and conditions, petitioner is estopped to assert
that she did so under a misapprehension or in ignorance of their legal effect,
or as to the legal effect of the undertaking. The rule that ignorance of the
contents of an instrument does not ordinarily affect the liability of one who
signs it also applies to contracts of suretyship. And the mistake of a surety
as to the legal effect of her obligation is ordinarily no reason for relieving
her of liability.
Same; Same; Same; Guaranty; Suretyship and Guaranty
Distinguished.—A surety is an insurer of the debt, whereas a guarantor is an
insurer of the solvency of the debtor. A suretyship is an undertaking that the
debt shall be paid; a guaranty, an undertaking that
424
the debtor shall pay. Stated differently, a surety promises to pay the
principal’s debt if the principal will not pay, while a guarantor agrees that
the creditor, after proceeding against the principal, may proceed against the
guarantor if the principal is unable to pay. A surety binds himself to perform
if the principal does not, without regard to his ability to do so. A guarantor,
on the other hand, does not contract that the principal will pay, but simply
that he is able to do so. In other words, a surety undertakes directly for the
payment and is so responsible at once if the principal debtor makes default,
while a guarantor contracts to pay if, by the use of due diligence, the debt
cannot be made out of the principal debtor.
Same; Same; Same; It is a well-entrenched rule that in order to judge

the intention of the contracting parties, their contemporaneous and
subsequent acts shall also be principally considered.—It is a well-
entrenched rule that in order to judge the intention of the contracting parties,
their contemporaneous and subsequent acts shall also be principally
considered. Several attendant factors in that genre lend support to our
finding that petitioner is a surety. For one, when petitioner was informed
about the failure of the principal debtor to pay the loan, she immediately
offered to settle the account with respondent corporation. Obviously, in her
mind, she knew that she was directly and primarily liable upon default of
her principal. For another, and this is most revealing, petitioner presented
the receipts of the payments already made, from the time of initial payment
up to the last, which were all issued in her name and of the Azarraga
spouses. This can only be construed to mean that the payments made by the
principal debtors were considered by respondent corporation as creditable
directly upon the account and inuring to the benefit of petitioner. The
concomitant and simultaneous compliance of petitioner’s obligation with
that of her principals only goes to show that, from the very start, petitioner
considered herself equally bound by the contract of the principal makers.
Same; Same; Same; A surety is bound equally and absolutely with the
principal and as such is deemed an original promisor and debtor from the
beginning.—In this regard, we need only to reiterate the rule that a surety is
bound equally and absolutely with the principal, and as such is deemed an
original promisor and debtor from the beginning. This is because in
suretyship there is but one contract, and the surety is bound by the same
agreement which binds the principal. In essence, the contract of a surety
starts with
425
VOL. 288, MARCH 31, 1998 425
the agreement, which is precisely the situation obtaining in this case before
the Court.
Same; Same; Same; A surety is not even entitled, as a matter of rights
to be given notice of the principal’s default.—Even if it were otherwise,
demand on the sureties is not necessary before bringing suit against them,
since the commencement of the suit is a sufficient demand. On this point, it
may be worth mentioning that a surety is not even entitled, as a matter of
right, to be given notice of the principal’s default. Inasmuch as the creditor
owes no duty of active diligence to take care of the interest of the surety, his
mere failure to voluntarily give information to the surety of the default of
the principal cannot have the effect of discharging the surety. The surety is
bound to take notice of the principal’s default and to perform the obligation.
He cannot complain that the creditor has not notified him in the absence of a
special agreement to that effect in the contract of suretyship.
Same; Same; Same; A surety is liable as much as his principal is liable
and absolutely liable as soon as default is made without any demand upon
the principal whatsoever or nay notice of default.—The alleged failure of
respondent corporation to prove the fact of demand on the principal debtors,
by not attaching copies thereof to its pleadings, is likewise immaterial. In
the absence of a statutory or contractual requirement, it is not necessary that
payment or performance of his obligation be first demanded of the principal,
especially where demand would have been useless; nor is it a requisite,
before proceeding against the sureties, that the principal be called on to
account. The underlying principle therefor is that a suretyship is a direct
contract to pay the debt of another. A surety is liable as much as his
principal is liable, and absolutely liable as soon as default is made, without
any demand upon the principal whatsoever or any notice of default. As an
original promisor and debtor from the beginning, he is held ordinarily to
know every default of his principal.
Same; Same; Same; A creditor’s right to proceed against the surety
exists independently of his right to proceed against the principal; The rule,
therefore, is that if the obligation is joint and several, the creditor has the
right to proceed even against the surety alone.—A creditor’s right to
proceed against the surety exists independently of his right to proceed
against the principal. Under Article 1216 of the
426
Civil Code, the creditor may proceed against any one of the solidary debtors
or some or all of them simultaneously. The rule, therefore, is that if the
obligation is joint and several, the creditor has the right to proceed even
against the surety alone. Since, generally, it is not necessary for a creditor to
proceed against a principal in order to hold the surety liable, where, by the
terms of the contract, the obligation of the surety is the same as that of the
principal, then as soon as the principal is in default, the surety is likewise in
default, and may be sued immediately and before any proceedings are had
against the principal. Perforce, in accordance with the rule that, in the
absence of statute or agreement otherwise, a surety is primarily liable, and
with the rule that his proper remedy is to pay the debt and pursue the
principal for reimbursement, the surety cannot at law, unless permitted by
statute and in the absence of any agreement limiting the application of the
security, require the creditor or obligee, before proceeding against the
surety, to resort to and exhaust his remedies against the principal,
particularly where both principal and surety are equally bound.
Same; Same; Penalty; Court shall equitably reduce the penalty when
the principal obligation has been partly or irregularly complied with by the
debtor.—This notwithstanding, however, we find and so hold that the
penalty charge of 3% per month and attorney’s fees equivalent to 25% of the
total amount due are highly inequitable and unreasonable. It must be
remembered that from the principal loan of P30,000.00, the amount of
P16,300.00 had already been paid even before the filing of the present case.
Article 1229 of the Civil Code provides that the court shall equitably reduce
the penalty when the principal obligation has been partly or irregularly
complied with by the debtor. And, even if there has been no performance,
the penalty may also be reduced if it is iniquitous or leonine.
Same; Same; Attorney’s Fees; Court may reduce such attorney’s fees
fixed in the contract when the amount thereof appears to be unconscionable
or unreasonable.—With respect to the award of attorney’s fees, this Court
has previously ruled that even with an agreement thereon between the
parties, the court may nevertheless reduce such attorney’s fees fixed in the
contract when the amount thereof appears to be unconscionable or
unreasonable. To that end, it is not even necessary to show, as in other
contracts, that it is contrary to morals or public policy. The grant of
attorney’s fees equivalent to 25% of the total amount due is, in our opinion,
unrea-
427
VOL. 288, MARCH 31, 1998 427
sonable and immoderate, considering the minimal unpaid amount involved

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

Appeals.

Roco, Bunag, Kapunan & Migallos for petitioner.
Angelo E. Grasparil for private respondent.
REGALADO, J.:
Where a party signs a promissory note as a co-maker and binds

herself to be jointly and severally liable with the principal debtor in
case the latter defaults in the payment of the loan, is such
undertaking of the former deemed to be that of a surety as an insurer
of the debt, or of a guarantor who warrants the solvency of the

debtor?
Pursuant to a promissory note dated March 13, 1990, private
respondent M.B. Lending Corporation extended a loan to the
spouses Osmeña and Merlyn Azarraga, together with petitioner
Estrella Palmares, in the amount of P30,000.00 payable on or before
May 12, 1990, with compounded interest at the rate of1 6% per
annum to be computed every 30 days from the date thereof. On four
occasions after the execution of the promissory note and even after
the loan matured, petitioner and the Azarraga spouses were able to
pay a total of P16,300.00, thereby leaving a balance of P13,700.00.
No payments
2
were made after the last payment on September 26,
1991.
Consequently, on the basis of petitioner’s solidary liability under
the promissory note, respondent corporation filed a
____________________________
1 Annex C, Petition; Rollo, 49.

2 Rollo, 38.
428

3
complaint against petitioner Palmares as the lone partydefendant, to
the exclusion of the principal debtors, allegedly by reason of the
insolvency of the latter. 4
In her Amended Answer with Counterclaim, petitioner alleged
that sometime in August 1990, immediately after the loan matured,
she offered to settle the obligation with respondent corporation but
the latter informed her that they would try to collect from the
spouses Azarraga and that she need not worry about it; that there has
already been a partial payment in the amount of P17,010.00; that the
interest of 6% per month compounded at the same rate per month, as
well as the penalty charges of 3% per month, are usurious and
unconscionable; and that while she agrees to be liable on the note
but only upon default of the principal debtor, respondent corporation
acted in bad faith in suing her alone without including the Azarragas
when they were the only ones who benefited from the proceeds of
the loan.
During the pre-trial conference, the parties submitted the
following issues for the resolution of the trial court; (1) what the rate
of interest, penalty and damages should be; (2) whether the liability
of the defendant (herein petitioner) is primary or subsidiary; and (3)
whether the defendant Estrella Palmares is only a guarantor5 with a
subsidiary liability and not a co-maker with primary liability.
Thereafter, the parties agreed to submit the case for decision

based on the pleadings filed and the memoranda to be submitted by
them. On November 26, 1992, the Regional Trial Court of Iloilo
City, Branch 23, rendered judgment dismissing the complaint
without prejudice to the filing of a separate action for a sum of
money against the spouses Osmeña 6
and Merlyn Azarraga who are
primarily liable on the instrument. This was based on the findings
of the court a quo that the
____________________________
3 Annex D, id., ibid., 51.

4 Annex H, id., ibid., 69.
5 Rollo, 76.
6 Annex I, Petition; Rollo, 73; penned by Presiding Judge Tito G. Gustilo.
429
VOL. 288, MARCH 31, 1998 429

filing of the complaint against herein petitioner Estrella Palmares, to

the exclusion of the Azarraga spouses, amounted to a discharge of a
prior party; that the offer made by petitioner to pay the obligation is
considered a valid tender of payment sufficient to discharge a
person’s secondary liability on the instrument; that petitioner, as co-
maker, is only secondarily liable on the instrument; and that the
promissory note is a contract of adhesion.
Respondent Court of Appeals, however, reversed the decision of
the trial court, and rendered judgment declaring herein petitioner
Palmares liable to pay respondent corporation:
1. The sum of P13,700.00 representing the outstanding

balance still due and owing with interest at six percent (6%)
per month computed from the date the loan was contracted
until fully paid;
2. The sum equivalent to the stipulated penalty of three
percent (3%) per month, of the outstanding balance;
3. Attorney’s fees at 25% of the total amount due per
stipulations;
7
4. Plus costs of suit.
Contrary to the findings of the trial court, respondent appellate court

declared that petitioner Palmares is a surety since she bound herself
to be jointly and severally or solidarily liable with the principal
debtors, the Azarraga spouses, when she signed as a co-maker. As
such, petitioner is primarily liable on the note and hence may be
sued by the creditor corporation for the entire obligation. It also

adverted to the fact that the petitioner admitted her liability in her
Answer although she claims that the Azarraga spouses should have
been impleaded. Respondent court ordered the imposition of the
stipulated 6% interest and 3% penalty charges on the ground that the
Usury Law is no longer enforceable pursuant
____________________________
7 Annex A, id., ibid., 36; Associate Justice Jose C. de la Rama, ponente, with
Associate Justices Emeterio C. Cui and Eduardo G. Montenegro, concurring.
430

to Central Bank Circular No. 905. Finally, it rationalized that even if

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

surety and is therefore solidarily liable to pay the
promissory note.
1. The terms of the promissory note are vague. Its conflicting

provisions do not establish Palmares’ solidary liability.
2. The promissory note contains provisions which establish
the co-maker’s liability as that of a guarantor.
3. There is no sufficient basis for concluding that Palmares’
liability is solidary.
4. The promissory note is a contract of adhesion and should be
construed against M.B. Lending Corporation.
5. Palmares cannot be compelled to pay the loan at this point.
B. Assuming that Palmares’ liability is solidary, the Court of

Appeals erred in strictly imposing the interests and penalty
charges on the outstanding balance of the promissory note.
The foregoing contentions of petitioner are denied and contradicted

in their material points by respondent corporation. They are further
refuted by accepted doctrines in the American jurisdiction after
which we patterned our statutory law on suretyship and guaranty.
This case then affords us the opportunity to make an extended

exposition on the ramifications of these two specialized contracts,
for such guidance as may be taken therefrom in similar local
controversies in the future.
The basis of petitioner Palmares’ liability under the promissory
note is expressed in this wise:
431
VOL. 288, MARCH 31, 1998 431

ATTENTION TO CO-MAKERS: PLEASE READ WELL
I, Mrs. Estrella Palmares, as the Co-maker of the above-quoted loan, have

fully understood the contents of this Promissory Note for Short-Term Loan:
That as Co-maker, I am fully aware that I shall be jointly and severally or
solidarily liable with the above principal maker of this note;
That in fact, I hereby agree that M.B. LENDING CORPORATION may
demand payment of the above loan from me in case the principal maker,
Mrs. Merlyn Azarraga defaults in 8
the payment of the note subject to the
same conditions above-contained.
Petitioner contends that the provisions of the second and third

paragraph are conflicting in that while the second paragraph seems
to define her liability as that of a surety which is joint and solidary
with the principal maker, on the other hand, under the third
paragraph her liability is actually that of a mere guarantor because
she bound herself to fulfill the obligation only in case the principal
debtor should fail to do so, which is the essence of a contract of
guaranty. More simply stated, although the second paragraph says
that she is liable as a surety, the third paragraph defines the nature of
her liability as that of a guarantor. According to petitioner, these are
two conflicting provisions in the promissory note and the rule is that
clauses in the contract should be interpreted in relation to one
another and not by parts. In other words, the second paragraph
should not be taken in isolation, but should be read in relation to the
third paragraph.
In an attempt to reconcile the supposed conflict between the two
provisions, petitioner avers that she could be held liable only as a
guarantor for several reasons. First, the words “jointly and severally
or solidarily liable” used in the second paragraph are technical and
legal terms which are not fully appreciated by an ordinary layman
like herein petitioner, a 65-year old housewife who is likely to enter
into such transac-
____________________________
8 Rollo, 50.
432

tions without fully realizing the nature and extent of her liability. On
the contrary, the wordings used in the third paragraph are easier to
comprehend. Second, the law looks upon the contract of suretyship
with a jealous eye and the rule is that the obligation of the surety
cannot be extended by implication beyond specified limits, taking
into consideration the peculiar nature of a surety agreement which
holds the surety liable despite the absence of any direct
consideration received from either the principal obligor or the
creditor. Third, the promissory note is a contract of adhesion since it
was prepared by respondent M.B. Lending Corporation. The note
was brought to petitioner partially filled up, the contents thereof
were never explained to her, and her only participation was to sign
thereon. Thus, any apparent ambiguity in the contract should be
strictly construed
9
against private respondent pursuant to Art. 1377 of
the Civil Code.
Petitioner accordingly concludes that her liability should be
deemed restricted by the clause in the third paragraph of the
promissory note to be that of a guarantor.
Moreover, petitioner submits that she cannot as yet be compelled
to pay the loan because the principal debtors cannot be considered in
default in the absence of a judicial or extrajudicial demand. It is true
that the complaint alleges the fact of demand, but the purported
demand letters were never attached to the pleadings filed by private
respondent before the trial court. And, while petitioner may have
admitted in her Amended Answer that she received a demand letter
from respondent corporation sometime in 1990, the same did not
effectively put her or the principal debtors in default for the simple
reason that the latter subsequently made a partial payment on the
loan in September, 1991, a fact which was never controverted by
herein private respondent.
Finally, it is argued that the Court of Appeals gravely erred in
awarding the amount of P2,745,483.39 in favor of private
____________________________
9 Art. 1377. The interpretation of obscure words or stipulations in a contract shall

not favor the party who caused the obscurity.
433
VOL. 288, MARCH 31, 1998 433

respondent when, in truth and in fact, the outstanding balance of the

loan is only P13,700.00. Where the interest charged on the loan is
exorbitant, iniquitous or unconscionable, and the obligation has been10
partially complied with, the court may equitably reduce the penalty
on grounds of substantial justice. More importantly, respondent
corporation never refuted petitioner’s allegation that immediately
after the loan matured, she informed said respondent of her desire to
settle the obligation. The court should, therefore, mitigate the
damages to be 11
paid since petitioner has shown a sincere desire for a
compromise.
After a judicious evaluation of the arguments of the parties, we
are constrained to dismiss the petition for lack of merit, but to except
therefrom the issue anent the propriety of the monetary award
adjudged to herein respondent corporation.
At the outset, let it here be stressed that even assuming arguendo
that the promissory note executed between the parties is a contract
of adhesion, it has been the consistent holding of the Court that
contracts of adhesion are not invalid per se and that on numerous
occasions the binding effects thereof have been upheld. The peculiar
nature of such contracts necessitate a close scrutiny of the factual
milieu to which the provisions are intended to apply. Hence, just as
consistently and unhesitatingly, but without categorically
invalidating such contracts, the Court has construed obscurities and
ambiguities in the restrictive provisions of contracts of adhesion
strictly albeit not unreasonably against the drafter thereof when
justified in 12light of the operative facts and surrounding
circumstances. The factual scenario obtaining in the case before us
warrants a liberal application of the rule in favor of respondent
corporation.
____________________________
10 Article 1229, Civil Code.

11 Citing Article 2031, id.
12 Philippine Airlines, Inc. vs. Court of Appeals, et al., G.R. No. 119706, March
14, 1996, 255 SCRA 48.
434

The Civil Code pertinently provides:
Art. 2047. By guaranty, a person called the guarantor binds himself to the
creditor to fulfill the obligation of the principal debtor in case the latter
should fail to do so.

provisions of Section 4, Chapter 3, Title I of this Book shall be observed. In
such case the contract is called a suretyship.
It is a cardinal rule in the interpretation of contracts that if the terms

of a contract are clear and leave no doubt upon the intention of the
contracting
13
parties, the literal meaning of its stipulation shall
control. In the case at bar, petitioner expressly bound herself to be
jointly and severally or solidarily liable with the principal maker of
the note. The terms of the contract are clear, explicit and
unequivocal that petitioner’s liability is that of a surety.
Her pretension that the terms “jointly and severally or solidarily
liable” contained in the second paragraph of her contract are
technical and legal terms which could not be easily understood by an
ordinary layman like her is diametrically opposed to her
manifestation in the contract that she “fully understood the contents”
of the promissory note and that she is “fully aware” of her solidary
liability with the principal maker. Petitioner admits that she
voluntarily affixed her signature thereto; ergo, she cannot now be
heard to claim otherwise. Any reference to the existence of fraud is
unavailing. Fraud must be established by clear and convincing
evidence, mere preponderance of evidence not even being adequate.
Petitioner’s attempt to prove fraud must, therefor, fail as it was
evidenced only by14her own uncorroborated and, expectedly, self-
serving allegations.
____________________________
13 Abella vs. Court of Appeals, et al., G.R. No. 107606, June 20, 1996, 257 SCRA
482.
14 Inciong, Jr. vs. Court of Appeals, et al., G.R. No. 96405, June 26, 1996, 257
SCRA 578.
435
VOL. 288, MARCH 31, 1998 435

Having entered into the contract with full knowledge of its terms
and conditions, petitioner is estopped to assert that she did so under
a misapprehension or in ignorance 15
of their legal effect, or as to the
legal effect of the undertaking. The rule that ignorance of the
contents of an instrument does not ordinarily affect the liability of
one who signs it also applies to contracts of suretyship. And the
mistake of a surety as to the legal effect of16 her obligation is
ordinarily no reason for relieving her of liability.
Petitioner would like to make capital of the fact that although she
obligated herself to be jointly and severally liable with the principal
maker, her liability is deemed restricted by the provisions of the
third paragraph of her contract wherein she agreed “that M.B.
Lending Corporation may demand payment of the above loan from
me in case the principal maker, Mrs. Merlyn Azarraga defaults in the
payment of the note,” which makes her contract one of guaranty and
not suretyship. The purported discordance is more apparent than
real.
A surety is an insurer of the debt, whereas
17
a guarantor is an
insurer of the solvency of the debtor. A suretyship is an
undertaking that the debt 18shall be paid; a guaranty, an undertaking
that the debtor shall pay. Stated differently, a surety promises to
pay the principal’s debt if the principal will not pay, while a
guarantor agrees that the creditor, after proceeding against the
principal, may19 proceed against the guarantor if the principal is
unable to pay. A surety binds himself to perform if the principal
does not, without regard to his ability to do so. A guarantor, on the
other hand, does not contract that the principal will pay, but simply
that he is able
____________________________
15 72 CJS, Principal and Surety, § 83, 565.

16 Churchill vs. Bradley, 5 A. 189.
17 Northern State Bank of Grand Forks vs. Bellamy, 125 N.W. 888.
18 Shearer vs. R.S. Peele & Co., 36 N.E. 455.
19 W.T. Rawleigh Co. vs. Overstreet, et al., 32 S.E. 2d 574.
436

20
to do so. In other words, a surety undertakes directly for the
payment and is so responsible at once if the principal debtor makes
default, while a guarantor contracts to pay if, by the use 21of due
diligence, the debt cannot be made out of the principal debtor.
Quintessentially, the undertaking to pay upon default of the
principal debtor does not automatically remove it from the ambit of
a contract of suretyship. The second and third paragraphs of the
aforequoted portion of the promissory note do not contain any other
condition for the enforcement of respondent corporation’s right
against petitioner. It has not been shown, either in the contract or the
pleadings, that respondent corporation agreed to proceed against
herein petitioner only if and when the defaulting principal has
become insolvent. A contract of suretyship, to repeat, is that wherein
one lends his credit by joining in the principal debtor’s obligation, so
as to render himself directly and primarily responsible

22
with him, and
without reference to the solvency of the principal.
In a desperate effort to exonerate herself from liability, petitioner
erroneously invokes the rule on strictissimi juris, which holds that
when the meaning of a contract of indemnity or guaranty has once
been judicially determined under the rule of reasonable construction
applicable to all written contracts, then the liability of the surety,
under his contract, as thus interpreted
23
and construed, is not to be
extended beyond its strict meaning. The rule, however, will apply
only after it has been definitely ascertained that the contract is one of
suretyship and not a contract of guaranty. It cannot be used as an aid
in determining whether a party’s undertaking is that of a surety or a
guarantor.
____________________________
20 Manry vs. Waxelbaum Co., 33 S.E. 701.

21 40A Words and Phrases 429.
22 Erbelding vs. Noland Co., Inc., 64 S.E. 2d 218.
23 Covey, et al. vs. Schiesswohl, 114 P. 292.
437
VOL. 288, MARCH 31, 1998 437

Prescinding from these jurisprudential authorities, there can be no

doubt that the stipulation contained in the third paragraph of the
controverted suretyship contract merely elucidated on and made
more specific the obligation of petitioner as generally defined in the
second paragraph thereof. Resultantly, the theory advanced by
petitioner, that she is merely a guarantor because her liability
attaches only upon default of the principal debtor, must necessarily
fail for being incongruent with the judicial pronouncements adverted
to above.
It is a well-entrenched rule that in order to judge the intention of
the contracting parties, their contemporaneous
24
and subsequent acts
shall also be principally considered. Several attendant factors in
that genre lend support to our finding that petitioner is a surety. For
one, when petitioner was informed about the failure of the principal
debtor to pay the loan, she immediately offered to settle the account
with respondent corporation. Obviously, in her mind, she knew that
she was directly and primarily liable upon default of her principal.
For another, and this is most revealing, petitioner presented the
receipts of the payments already made, from the time of initial
payment up to the 25last, which were all issued in her name and of the
Azarraga spouses. This can only be construed to mean that the
payments made by the principal debtors were considered by
respondent corporation as creditable directly upon the account and

inuring to the benefit of petitioner. The concomitant and
simultaneous compliance of petitioner’s obligation with that of her
principals only goes to show that, from the very start, petitioner
considered herself equally bound by the contract of the principal
makers.
In this regard, we need only to reiterate the rule
26
that a surety is
bound equally and absolutely with the principal, and as such is
deemed an original promisor and debtor from
____________________________

25 Rollo, 67-68.
26 18A Words and Phrases 657.
438

27
the beginning. This is because in suretyship there is but one
contract, and 28the surety is bound by the same agreement which binds
the principal.
29
In essence, the contract of a surety starts with the
agreement, which is precisely the situation obtaining in this case
before the Court.
It will further be observed that petitioner’s undertaking as co-
maker immediately follows the terms and conditions stipulated
between respondent corporation, as creditor, and the principal
obligors. A surety is usually bound with his principal by the same
instrument, executed at the same time and upon the same
consideration;
30
he is an original debtor, and his liability is immediate
and direct. Thus, it has been held that where a written agreement on
the same sheet of paper with and immediately following the
principal contract between the buyer and seller is executed
simultaneously therewith, providing that the signers of the
agreement agreed to the terms of the principal 31
contract, the signers
were “sureties” jointly liable with the buyer. A surety usually enters
into the same obligation as that of his principal, and the signatures of
both usually appear upon the same instrument, and the same
consideration usually
32
supports the obligation for both the principal
and the surety.
There is no merit in petitioner’s contention that the complaint
was prematurely filed because the principal debtors cannot as yet be
considered in default, there having been no judicial or extrajudicial
demand made by respondent corporation. Petitioner has agreed that
respondent corporation may demand payment of the loan from her in
case the principal maker defaults, subject to the same conditions
expressed in the promissory note. Significantly, paragraph (G) of the

note states that “should I fail to pay in accordance with the above
____________________________
27 Hall, et al. vs. Weaver, 34 F. 104.

28 Howell vs. Commissioner of Internal Revenue, 39 F. 2d 447.
29 Shores-Mueller Co. vs. Palmer, et al., 216 S.W. 295.
30 Treweek vs. Howard, et al., 39 P. 20.
31 W.T. Rawleigh Co. vs. Overstreet, et al., 32 S.E. 2d 574.
32 Liquidating Midland Bank vs. Stecker, et al., 179 N.E. 504.
439
VOL. 288, MARCH 31, 1998 439

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

demand.” Hence, demand by the creditor is no longer necessary in
order that delay
33
may exist since the contract itself already expressly
so declares. As a surety, petitioner is equally bound by such waiver.
Even if it were otherwise, demand on the sureties is not necessary
before bringing suit against them,
34
since the commencement of the
suit is a sufficient demand. On this point, it may be worth
mentioning that a surety is not even entitled, as a matter of right, to
be given notice of the principal’s default. Inasmuch as the creditor
owes no duty of active diligence to take care of the interest of the
surety, his mere failure to voluntarily give information to the surety
of the default of the principal cannot have the effect of discharging
the surety. The surety is bound to take notice of the principal’s
default and to perform the obligation. He cannot complain that the
creditor has not notified him in the absence
35
of a special agreement to
that effect in the contract of suretyship.
The alleged failure of respondent corporation to prove the fact of
demand on the principal debtors, by not attaching copies thereof to
its pleadings, is likewise immaterial. In the absence of a statutory or
contractual requirement, it is not necessary that payment or
performance of his obligation be first demanded of the principal,
especially where demand would have been useless; nor is it a
requisite, before proceeding
36
against the sureties, that the principal be
called on to account. The underlying principle therefor is that a
suretyship is a direct contract to pay the debt of another. A surety is
liable as much as his principal is liable, and absolutely liable as soon
as default is made, without any37 demand upon the principal
whatsoever or any notice of default. As an original
____________________________

34 Rowe, et al. vs. Bank of New Brockton, 92 So. 643.
35 74 Am Jur 2d, Principal and Surety, § 35, 36.
36 Smith vs. US, 8 L Ed 130.
37 Rouse, et al. vs. Wooten, 53 S.E. 430.
440

promisor and debtor from the beginning,

38
he is held ordinarily to
know every default of his principal.
Petitioner questions the propriety of the filing of a complaint
solely against her to the exclusion of the principal debtors who
allegedly were the only ones who benefited from the proceeds of the
loan. What petitioner is trying to imply is that the creditor, herein
respondent corporation, should have proceeded first against the
principal before suing on her obligation as surety. We disagree.
A creditor’s right to proceed against the surety39 exists
independently of his right to proceed against the principal. Under
Article 1216 of the Civil Code, the creditor may proceed against any
one of the solidary debtors or some or all of them simultaneously.
The rule, therefore, is that if the obligation is joint and several, the40
creditor has the right to proceed even against the surety alone.
Since, generally, it is not necessary for a creditor to proceed against
a principal in order to hold the surety liable, where, by the terms of
the contract, the obligation of the surety is the same as that of the
principal, then as soon as the principal is in default, the surety is
likewise in default, and may be sued immediately
41
and before any
proceedings are had against the principal. Perforce, in accordance
with the rule that, in the absence of statute or agreement otherwise, a
surety is primarily liable, and with the rule that his proper remedy is
to pay the debt and pursue the principal for reimbursement, the
surety cannot at law, unless permitted by statute and in the absence
of any agreement limiting the application of the security, require the
creditor or obligee, before proceeding against the surety, to resort to
and
____________________________
38 Hall vs. Weaver, 34 F. 104.

39 Christenson vs. Diversified Builders, Inc., et al., 331 F. 2d 992.
41 Standard Accident Insurance Co. vs. Standard Oil Co., 133 So. 2d 539; School
District No. 65 of Lincoln County vs. universal Surety Co., 135 N.W. 2d 232; Depot
Realty Syndicate vs. Enterprise Brewing Co., 171 P. 223.
441
VOL. 288, MARCH 31, 1998 441

exhaust his remedies against the principal,

42
particularly where both
principal and surety are equally bound.
We agree with respondent corporation that its mere failure to
immediately sue petitioner on her obligation does not release her
from liability. Where a creditor refrains from proceeding against the
principal, the surety is not exonerated. In other words, mere want of
diligence or forbearance does not affect the creditor’s rights vis-a-vis
the surety, unless the surety requires him by appropriate notice to
sue on the obligation. Such gratuitous indulgence of the principal
does not discharge the surety whether given at the principal’s request
or without it, and whether it is yielded by the creditor through
sympathy or from an inclination to favor the principal, or is only the
result of passiveness. The neglect of the creditor to sue the principal
at the time the debt falls due does not discharge the surety, 43
even if
such delay continues until the principal becomes insolvent. And, in
the absence of proof of resultant injury, a surety is not discharged by
the creditor’s
44
mere statement that the creditor45
will not look to the
surety, or that he need not trouble himself. The consequences 46
of
the delay, such as the subsequent insolvency of the principal, or the
fact that the remedies47
against the principal may be lost by lapse of
time, are immaterial.
The raison d’être for the rule is that there is nothing to prevent
48
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 prin-
____________________________
42 72 CJS, Principal and Surety, § 287, 744-745.

43 74 Am Jur 2d, Principal and Surety, § 68, 53-54.
44 First National Bank of Huntington vs. Williams, et al., 26 N.E. 75.
45 National Bank of Commerce vs. Gilvin, 152 S.W. 652.
46 Kerby, et al. vs. State ex rel. Frohmiller, 157 P. 2d 698.
48 Scott vs. Gaulding, et al., 122 ALR 200.
442

cipal, he may pay the debt himself49and become subrogated to all the
rights and remedies of the creditor.
It may not be amiss to add that leniency shown to a debtor in
default, by delay permitted by the creditor without change in the
time when the debt might be demanded, does not constitute an50
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 at least hinders him in,
enforcing the principal contract within the period during which he
could otherwise have51 enforced it, and which precludes the surety
from paying the debt.
None of these elements are present in the instant case. Verily, the
mere fact that respondent corporation gave the principal debtors an
extended period of time within which to comply with their
obligation did not effectively absolve herein petitioner from the
consequences of her undertaking. Besides, the burden is on the
surety, herein petitioner, 52to show that she has been discharged by
some act of the creditor, herein respondent corporation, failing in
which we cannot grant the relief prayed for.
As a final issue, petitioner claims that assuming that her liability
is solidary, the interests and penalty charges on the outstanding
balance of the loan cannot be imposed for being illegal and
unconscionable. Petitioner additionally theorizes that respondent
corporation intentionally delayed the collection of the loan in order
that the interests and penalty
____________________________

50 Ibid., id., § 59, 48-49.
52 Op. cit., § 270, 723.
443
VOL. 288, MARCH 31, 1998 443

charges would accumulate. The statement, likewise traversed by said

respondent, is misleading.
53
In an affidavit executed by petitioner, which was attached to her
petition, she stated, among others, that:
8. During the latter part of 1990, I was surprised to learn that

Merlyn Azarraga’s loan has been released and that she has
not paid the same upon its maturity. I received a telephone
call from Mr. Augusto Banusing of MB Lending informing
me of this fact and of my liability arising from the
promissory note which I signed.
9. I requested Mr. Banusing to try to collect first from Merlyn
and Osmeña Azarraga. At the same time, I offered to pay
MB Lending the outstanding balance of the principal
obligation should he fail to collect from Merlyn and
Osmeña Azarraga. Mr. Banusing advised me not to worry
because he will try to collect first from Merlyn and Osmeña
Azarraga.
10. A year thereafter, I received a telephone call from the
secretary of Mr. Banusing who reminded that the loan of
Merlyn and Osmeña Azarraga, together with interest and
penalties thereon, has not been paid. Since I had no
available funds at that time, I offered to pay MB Lending
by delivering to them a parcel of land which I own. Mr.
Banusing’s secretary, however, refused my offer for the
reason that they are not interested in real estate.
11. In March 1992, I received a copy of the summons and of
the complaint filed against me by MB Lending before the
RTC-Iloilo. After learning that a complaint was filed
against me, I instructed Sheila Gatia to go to MB Lending
and reiterate my first offer to pay the outstanding balance of
the principal obligation of Merlyn Azarraga in the amount
of P30,000.00.
12. Ms. Gatia talked to the secretary of Mr. Banusing who
referred her to Atty. Venus, counsel of MB Lending.
13. Atty. Venus informed Ms. Gatia that he will consult Mr.
Banusing if my offer to pay the outstanding balance of the
principal obligation loan (sic) of Merlyn and Osmeña
Azarraga is acceptable. Later, Atty. Venus informed Ms.
Gatia that my offer is not acceptable to Mr. Banusing.
____________________________
53 Annex E, Petition; Rollo, 54.
444

The purported offer to pay made by petitioner can not be deemed

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

inveigh against her aforesaid theory.
1. Respondent corporation cannot be faulted for not

immediately demanding payment from petitioner. It was
petitioner who initially requested that the creditor try to
collect from her principal first, and she offered to pay only
in case the creditor fails to collect. The delay, if any, was
occasioned by the fact that respondent corporation merely
acquiesced to the request of petitioner. At any rate, there
was here no actual offer of payment to speak of but only a
commitment to pay if the principal does not pay.
2. Petitioner made a second attempt to settle the obligation by
offering a parcel of land which she owned. Respondent
corporation was acting well within its rights when it refused
to accept the offer. The debtor of a thing cannot compel the
creditor to receive a different one, although the latter may
be of54 the same value, or more valuable than that which is
due. The obligee is entitled to demand fulfillment of the
obligation or performance as stipulated. A change of the
object of the obligation would constitute
55
novation requiring
the express consent of the parties.
3. After the complaint was filed against her, petitioner
reiterated her offer to pay the outstanding balance of the
obligation in the amount of P30,000.00 but the same was
likewise rejected. Again, respondent corporation cannot be
blamed for refusing the amount being offered because it fell
way below the amount it had computed, based on the
stipulated interests and penalty charges, as owing and due
from herein petitioner. A debt shall not be understood to
have been paid unless the thing or service in which the
obligation consists has been completely delivered or
rendered, as the case
____________________________

55 Padilla, A., Civil Code Annotated, Vol. IV, 1987 ed., 434.
445
VOL. 288, MARCH 31, 1998 445

56
may be. In other words, the prestation must be fulfilled
completely. A person entering into a contract57
has a right to
insist on its performance in all particulars.
Petitioner cannot compel respondent corporation to accept the

amount she is willing to pay because the moment the latter accepts
the performance, knowing its incompleteness or irregularity, and
without expressing any protest or58 objection, then the obligation shall
be deemed fully complied with. Precisely, this is what respondent
corporation wanted to avoid when it continually refused to settle
with petitioner at less than what was actually due under their
contract.
This notwithstanding, however, we find and so hold that the
penalty charge of 3% per month and attorney’s fees equivalent to
25% of the total amount due are highly inequitable and
unreasonable.
It must be remembered that from the principal loan of
P30,000.00, the amount of P16,300.00 had already been paid even
before the filing of the present case. Article 1229 of the Civil Code
provides that the court shall equitably reduce the penalty when the
principal obligation has been partly or irregularly complied with by
the debtor. And, even if there has been no performance, the penalty
may also be reduced if it is iniquitous or leonine.
In a case previously decided by this Court which likewise
involved private respondent M.B. Lending Corporation, and which
is substantially on all fours with the one at bar, we decided to
eliminate altogether the penalty interest for being excessive and
unwarranted under the following rationalization:
Upon the matter of penalty interest, we agree with the Court of Appeals that
the economic impact of the penalty interest of three percent (3%) per month
on total amount due but unpaid should be
____________________________

57 Tolentino, A., Commentaries and Jurisprudence on the Civil Code of the Philippines, Vol.
IV, 1986 ed., 280.
446

equitably reduced. The purpose for which the penalty interest is intended—
that is, to punish the obligor—will have been sufficiently served by the
effects of compounded interest. Under the exceptional circumstances in the
case at bar, e.g., the original amount loaned was only P15,000.00; partial
payment of P8,600.00 was made on due date; and the heavy (albeit still
lawful) regular compensatory interest, the penalty interest stipulated in the
parties’ promissory note is iniquitous and unconscionable and may59 be
equitably reduced further by eliminating such penalty interest altogether.
Accordingly, the penalty interest of 3% per month being imposed on

petitioner should similarly be eliminated.
Finally, with respect to the award of attorney’s fees, this Court has
previously ruled that even with an agreement thereon between the
parties, the court may nevertheless reduce such attorney’s fees fixed
in the contract when the amount 60
thereof appears to be
unconscionable or unreasonable. To that end, it is not even
necessary to show,61
as in other contracts, that it is contrary to morals
or public policy. The grant of attorney’s fees equivalent to 25% of
the total amount due is, in our opinion, unreasonable and
immoderate, considering the minimal unpaid amount involved and
the extent of the work involved in this simple action for collection of
a sum of money. We, therefore, hold that the amount of62 P10,000.00
as and for attorney’s fee would be sufficient in this case.
WHEREFORE, the judgment appealed from is hereby
AFFIRMED, subject to the MODIFICATION that the penalty
interest of 3% per month is hereby deleted and the award of
attorney’s fees is reduced to P10,000.00.
____________________________
59 Magallanes, et al. vs. Court of Appeals, et al., G.R. No. 112614, May 16, 1994,
Third Division, Minute Resolution.
60 Security Bank & Trust Co., et al. vs. Court of Appeals, et al., G.R. No. 117009,
October 11, 1995, 249 SCRA 206.
61 Medco Industrial Corporation, et al. vs. The Hon. Court of Appeals, et al., G.R.
No. 84610, November 24, 1988, 167 SCRA 838.
62 Supra, fn. 59.
447
VOL. 288, MARCH 31, 1998 447

Osmeña vs. Commission on Elections
SO ORDERED.
Melo, Puno, Mendoza and Martinez, JJ., concur.
Appealed judgment affirmed with modification.
Note.—Although a contract of surety is ordinarily not to be

construed as retrospective in the end the intention of the parties as
revealed by the evidence is controlling. (Willex Plastic Industries
Corporation vs. Court of Appeals, 256 SCRA 478 [1996])
——o0o——
*
G.R. No. 103066. April 25, 1996.
WILLEX PLASTIC INDUSTRIES, CORPORATION, petitioner, vs.

HON. COURT OF APPEALS and INTERNATIONAL
CORPORATE BANK, respondents.
Contracts; Loans; Suretyships; Guarantees; Evidence; Parol Evidence

Rule; Explanatory evidence may be received to show the circumstances
under which a document has been made and to what debt it relates; A party,
by failing to object to the parol evidence presented, waives the protection of
the parol evidence rule.—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. 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.
Same; Same; Same; Same; Same; Factual findings of the trial court
and the Court of Appeals are binding on the Supreme Court.—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 defendant-appellants 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.
Same; Same; Same; Same; The consideration necessary to support a
surety obligation need not pass directly to the surety, a consideration
moving to the principal alone being sufficient—a guarantor or surety is
bound by the same consideration that makes the contract effective between
the principal parties thereto.—Willex Plastic argues that the “Continuing
Guaranty,” being an accessory contract, cannot legally exist because of the
absence of a valid
_______________
* SECOND DIVISION.
http://www.central.com.ph/sfsreader/session/0000016810f36afbdbbf81c6003600fb002c009e/t/?o=False 1/13
479
VOL. 256, APRIL 25, 1996 479
Willex Plastic Industries, Corp. vs. Court of Appeals
principal obligation. 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 Inter-Resin 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.”
Same; Same; Same; Same; 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.—Indeed, as we also
held in Bank of the Philippine Islands v. Foerster, 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.

Appeals.

Tagle-Chua, Cruz & Aquino for petitioner.
Fe B. Macalino & Associates for respondent Interbank.
MENDOZA, J.:
1
This is a petition for review on certiorari of the decision 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
______________
1 Penned by Justice Luis A. Javellana with Justices Alfredo M. Marigomen and

Artemon D. Luna, concurring.
480

17, 1989 denying petitioner’s motion for reconsideration.

The facts are as follows:
Sometime in 1978, Inter-Resin Industrial Corporation opened a
letter of credit with the Manila Banking Corporation. To secure
payment of the credit accommodation, 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 P687,500.00
481
VOL. 256, APRIL 25, 1996 481

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.
On the other hand, Willex Plastic denied the material allegations
of the complaint and interposed the following Special Affirmative
Defenses:
(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;
(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) WILLEX is only a guarantor of the principal obligor, 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 obligor;
(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:
482

(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 17% of the amount due;
and
(c) Attorney’s fees and expenses of litigation equivalent to 20%

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.
On February 22, 1991, the Court of Appeals rendered a decision
affirming the ruling of the trial court.
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:
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.
483
VOL. 256, APRIL 25, 1996 483

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.
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-in-interest, Atrium Capital, alleged:
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].
484

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 2
[Willex Plastic] only signed as a
guarantor to the guarantee.”
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 3 made because of the guarantee to Manila
Banking Corporation.”
It has been held that explanatory evidence may be received to

show the circumstances 4under which a document has been made and
to what debt it relates. 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,
5
Willex
Plastic waived the protection of the parol evidence rule.
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
_____________
2 TSN, Sept. 16, 1986, p. 4.

3 TSN, Oct. 16, 1986, p. 13.
4 PNB v. Barreto P. Po E. Jap, 53 Phil. 955 (1928).
5 Talosig v. Vda. de Nieba, 43 SCRA 472 (1972).
485
VOL. 256, APRIL 25, 1996 485

6
Corporation.”
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 defendant-
appellants 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 7record of the trial court confirms these
findings of the two courts.
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 Inter-Resin Industrial
and Willex Plastic intended to indemnify Interbank for amounts
which it may have paid Manilabank on behalf of Inter-Resin
Industrial.
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 [Inter-Resin
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 8exist because of the
absence of a valid principal obligation. Its contention is
______________
6 RTC Decision, p. 8.
7 Somodio v. Court of Appeals, 235 SCRA 307 (1994); Borillo v. Court of Appeals,
209 SCRA 130 (1992); Collado v. Intermediate Appellate Court, 206 SCRA 206
(1992); Philippine Commercial and Industrial Bank v. Court of Appeals, 193 SCRA
452 (1991).
8 Art. 2052 of the Civil Code provides:
A guaranty cannot exist without a valid obligation.
486

based on the fact that it is not a party either to the

“Continuing Surety Agreement” or to the loan agreement
between Manilabank and Inter-Resin 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 9
any part or
benefit,
10
if such there be, accruing to his principal.” In an analogous
case, 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.
[3] Willex Plastic contends that the “Continuing Guaranty”

cannot be retroactively applied so as to secure the payments
made by Interbank under the two “Continuing
______________
Nevertheless, a guaranty may be constituted to guarantee the performance of a voidable or an

unenforceable contract. It may also guarantee a natural obligation.
9 Severino v. Severino, 56 Phil. 185, 187-88 (1931). Accord, Garcia v. Court of

Appeals, 191 SCRA 493 (1990).
10 Rizal Commercial Banking Corp. v. Arro, 115 SCRA 777, 781-782 (1982).
487
VOL. 256, APRIL 25, 1996 487

Surety Agreements.”11 Willex Plastic invokes the ruling in

12
El
Vencedor v. Canlas and Diño v. Court of Appeals in
support of its contention that a contract of suretyship or
guaranty should be applied prospectively.
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 parties intended the
surety bonds to answer for the debts contracted previous to the
execution of the bonds. In contrast, in 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 Diño 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
contract of guaranty or suretyship should be prospective in
application.
Indeed,
13
as we also held in Bank of the Philippine Islands v.
Foerster, although a contract of suretyship is ordinarily not to be
construed as retrospective, in the end the intention of the parties as
14
14
revealed by the evidence is controlling. What was said there 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
______________
11 44 Phil. 699 (1923).

12 216 SCRA 9 (1992).
13 49 Phil. 843 (1926).
14 Supra note 13 at 848.
488

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;
....
The pertinent portion of the “Continuing Guaranty” executed by

Willex Plastic and Inter-Resin Industrial in favor of IUCP (now
Interbank) reads:
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 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
489
VOL. 256, APRIL 25, 1996 489

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
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.
[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 other hand, 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:
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.
On the other hand, Willex Plastic announced it was resting its case
without presenting any 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 to August 11, 1987. The hearing
490

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.
Regalado (Chairman), Romero, Puno and Torres, Jr., JJ.,

concur.
Judgment affirmed.
Notes.—Where obligee has accepted the surety bond, it becomes

valid and enforceable irrespective of whether or not the premium has
been paid by the obligor to the surety.
491
VOL. 256, APRIL 25, 1996 491

Philippine National Bank vs. Court of Appeals
(Philippine Pryce Assurance Corporation vs. Court of Appeals, 230

SCRA 164 [1994])
Even when a document appears on its face to be a sale with pacto
de retro the owner of the property may prove that the contract is
really a loan with mortgage by raising as an issue the fact that the
document does not express the true intent and agreement of the
parties, and parol evidence then becomes competent and admissible
to prove that the instrument was given merely as a security for the
repayment of the loan. (Olea vs. Court of Appeals, 247 SCRA 274
[1995])
——o0o——
VOL. 216, NOVEMBER 26, 1992 9

Diño vs. Court of Appeals
*
G.R. No. 89775.November 26, 1992.
JACINTO UY DIÑO and NORBERTO UY, petitioners, vs. HON.

COURT OF APPEALS and METROPOLITAN BANK AND
TRUST COMPANY, respondents.
Civil Law; Guaranty; Suretyship; Nature and basis for contracts

denominated as a continuing guaranty or suretyship.—Under the Civil
Code, a guaranty may be given to secure even future debts, the amount of
which may not be known at the time the guaranty is executed. This is the
basis for contracts denominated as a 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. 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. 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
_______________
* THIRD DIVISION.
10
10 Diño vs. Court of Appeals
SUPREME COURT REPORTS ANNOTATED
http://www.central.com.ph/sfsreader/session/0000016810f5e0dd1f055eb9003600fb002c009e/t/?o=False 1/16
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.
PETITION for review of the decision of the Court of Appeals.

Guillermo B. Ilagan for petitioners.
Jorge, Perez & Associates for private respondent.
DAVIDE, JR.,J.:
Continuing Suretyship Agreements signed by the petitioners set off

this present controversy.
Petitioners assail the 22 June 11989 Decision of the Court of
Appeals in CA-G.R. CV No. 17724 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 Diño and
Norberto Uy” and docketed as Civil Case No. 82-9303. They
likewise
2
challenge public respondent’s Resolution of 21 August
1989 denying their motion for the reconsideration of the former.
The impugned Decision of the respondent Court summarizes the
antecedent facts as follows:
“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 Diño
_______________
1 Rollo, 46-56; per Associate Justice Segundino G. Chua, ponente, concurred in by

Associate Justices Serafin E. Camilon and Justo P. Torres, Jr.
2 Id., 60.
11
VOL.216 , NOVEMBER 26, 1992 11

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 Diño agreed to be bound up to the aggregate sum of

P800,000.00.
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. 14-
15).
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
obtained by UTEFS without the participation of Norberto Uy and Jacinto
Uy Diño 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 that 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
the former, drawn on and accepted by UTEFS (Original Records, p. 331).
Pursuant to the above commercial transaction, UTEFS executed and
delivered to METROBANK a 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 entrustee, 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 Diño,
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, Diño, thru counsel, denied his
liability for the amount demanded and requested METROBANK
12

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.
As a rejoinder, Diño 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.
Having sent the last demand letter to UTEFS, Diño and Uy and finding
resort to extrajudicial remedies to be futile, METROBANK filed a
complaint for collection of a sum of money (613,339.32, 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 Diño and Uy as parties-
defendants.
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 his given address and his commercial
enterprise was already non-operational (Original Records, p. 37).
On April 11, 1984, Norberto Uy and Jacinto Uy Diño (sureties-
defendants 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; x x x.’ 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
13
VOL. 216, NOVEMBER 26, 1992 13

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, x x x the court a quo, on December 2, 1987, rendered its
judgment, a portion of which reads:
‘The evidence and the pleadings, thus, pose the querry (sic):
‘Are the defendants Jacinto Uy Diño and Norberto Uy liable for the
obligation contracted by Uy Tiam under the Letter of Credit (Exh.
B) issued on March 30, 1979 by virtue of the Continuing
Suretyships they executed on February 25, 1977?
‘Under the admitted proven facts, the Court finds that they are not.
‘a) When Uy and Diño 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 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 Diño and Uy,
being strangers thereto, cannot be answerable thereunder.
‘c) The plaintiff did not serve notice to the defendants Diño and Uy
when it extended to Uy Tiam the 1979 Letter of Credit—at least to
inform them that the continuing suretyships they executed on
February 25, 1977 will be
14

considered by the plaintiff to secure the 1979 transaction to Uy

Tiam.
‘d) There is no sufficient and credible showing that Diño 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 with
the plaintiff. On the contrary, Diño 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

3
15, 1987, tsn, pp. 3-8, 13-16).’
(Records, pp. 333-334).’”
xxx
In its Decision, the trial court decreed as follows:
“PREMISES CONSIDERED, judgment is hereby rendered:
‘a) dismissing the COMPLAINT against JACINTO UY DIÑO and

NORBERTO UY;
‘b) ordering the plaintiff to pay to Diño and Uy the amount of
P6,000.00 as attorney’s fees and expenses of litigation; and
‘c) denying all other claims of the parties for want of legal and/or
factual basis.’
4
‘SO ORDERED’. (Records, p. 336).”
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 DIÑO 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
________________
3 Rollo, 46-50.
4 Id., 50.
15
VOL. 216 , NOVEMBER 26, 1992 15

EXECUTED ON FEBRUARY 25, 1977.

II. THE LOWER COURT ERRED IN HOLDING THAT
PLAINTIFF-APPELLANT IS ANSWERABLE TO
DEFENDANTS-APPELLEES JACINTO UY DIÑO AND
NORBERTO UY FOR ATTORNEY’S
5
FEES AND
EXPENSES OF LITIGATION.”
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 Diño 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;
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
pay, jointly and severally, to plaintiff P20,000.00 as attorney’s fees.
With costs against6 appellees.

SO ORDERED.”
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.
________________
5 Rollo, 51.
6 Rollo, 55-56.
16

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 that 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:
“x x x 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
7
issues have been posited to justify reversal of
Our decision herein. x x x.”
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
_______________
7 Rollo, 60.
17
VOL. 216, NOVEMBER 26, 1992 17

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 is 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.
The issues presented for determination are quite simple:
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
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 of8 which may not be known at the time the
guaranty is executed. This is the basis for contracts denominated as
a 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 9liabilities, for which, as they accrue, the guarantor
becomes liable. 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 10
contract, of
guaranty, until the expiration or termination thereof. 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
_______________
8 Article 2053, Civil Code; see Rizal Commercial Banking Corp. vs. Arro, 115
SCRA 777 [1982].
9 38 C.J.S. 1142.
10 38 C.J.S. 1206.
18

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 11
to time” the guaranty will be construed to be a
continuing one.
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 debtor12 may require,
have been construed to indicate a continuing guaranty.
In the case at bar, the pertinent portion of paragraph I of the
suretyship agreement executed by petitioner Uy provides thus:
“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 a 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 evidenced 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 BANK of any and all such instruments, 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 or other indebtedness or obligations hereinbefore 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
______________
11 Id., 1209.
12 Id.
19
VOL. 216, NOVEMBER 26, 1992 19

may hereafter be made or entered into by the Borrower 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 currency(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 13
such expenses as may be incurred by the
BANK as referred to above.”
Paragraph I of the Continuing Suretyship Agreement executed by

petitioner Diño contains identical provisions except with respect to
the guaranteed aggregate principal amount which 14
is EIGHT
HUNDRED THOUSAND PESOS (P800,000.00).
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 recept (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, or15 of the accession to
any such partnership of any one or more new partners.”
The foregoing stipulations unequivocally reveal that the suretyship

agreements in the case at bar are continuing in nature.
_______________
13 Rollo, 68-69; italics supplied.

14 Rollo, 69.
15 Id., 70-71; italics supplied.
20

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:
“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.
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 surety-ships 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 stipulations16 in the trust
receipt, they as insurers of its obligation, are liable thereunder.”
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:
________________
16 Rollo, 52-53.
21
VOL. 216, NOVEMBER 26, 1992 21

“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
Diño and (b) P300,000.00 for petitioner Uy.
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

17
pointed out in his obligation, he is bound, and no farther.
Indeed, the Continuing Suretyship Agreements signed by
petitioner Diño 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 bind himself for
less, but not for more than the principal debtor, 18both as regards the
amount and the onerous nature of the conditions. In the case at bar,
both agreements provide for liability for interest and expenses, to
wit:
“x x x and such interest as may accrue thereon either before or after any
maturity(ies) thereof
19
and such expenses as may be incurred by the BANK
referred to above.”
_______________
17 La Insular vs. Machuca Go-Tauco, 39 Phil. 567, 570-71 [1919], citing Uy Aloc
vs. Cho Jan Ling, 27 Phil. 427 [1914], and Miller vs. Stewart, 9 Wheat., 680; 6 L. ed.,
189. See also Magdalena Estates, Inc. vs. Rodriguez, 18 SCRA 967 [1966]; Republic
vs. Umali, 22 SCRA 922 [1968]; Zenith Insurance Corp. vs. Court of Appeals, 119
SCRA 485 [1982]; Philippine Commercial and Industrial Bank vs. Court of Appeals,
159 SCRA 24 [1988]; Umali vs. Court of Appeals, 189 SCRA 529 [1990].
19 Rollo, 69.
22

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
20
of whether the case is settled judicially or
extrajudicially).”
Thus, by express mandate of the Continuing Suretyship Agreements

which they had signed, petitioners separately bound themselves to
pay interests, 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 21interest and judicial costs. Article
2055 of the Civil Code provides:
“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.”
Interests 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
22
& Insurance Co., Inc. vs. P.L. Galang
Machinery Co., Inc., this Court held:
______________
20 Id., 40.
21 See National Marketing Corp. vs. Marquez, 26 SCRA 722 [1969] explaining the
provisions; Republic vs. Pal-Fox Lumber Co., Inc., 43 SCRA 365 [1972].
22 100 Phil. 679, 681-682 [1957]; Philippine National Bank vs. Luzon Surety Co.,
Inc., 68 SCRA 207 [1975].
23
VOL . 216, NOVEMBER 26 , 1992 23

“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.
xxx
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
sureties in making payment after they should have done so. In some states,
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, x x x.’
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 attorny’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.”
The records do not reveal the exact amount of the unpaid portion of
the principal obligation of Uy Tiam to METROBANK under
Irrevocable Letter of Credit No. SN-Loc-309 dated 30 March 1979.
In referring to the last demand letter to Mr. Uy
24

Tiam and the complaint filed in Civil Case No. 82-9303, the public
respondent mentions the amount of “P613,339.32, as of January 31,23
1982, inclusive of interest commission penalty and bank charges.”
This is the 24same amount stated by METROBANK in its
Memorandum. However, in summarizing Uy Tiam’s outstanding
obligation as of 17 July 1987, public respondent states:
“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 7-17-87) and P921,657.32, for penalty charges
at 12% per annum 25(5-31-82 to 7-17-87) as shown in the Statement of
Account (Exhibit I).”
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 Suretyship Agreements, was less than
P613,339.32. Such amount may be fully covered by the Continuing
Suretyship Agreement executed by petitioner Diño 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 extent of petitioners’ liability. As modified, petitioners
JACINTO UY DIÑO 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
______________
23 Rollo, 48.
24 Id., 128.
25 Rollo, 55.
25
VOL. 216, NOVEMBER 26, 1992 25

Reyes vs. Court of Appeals
Irrevocable Letter of Credit No. SN-Loc-309, 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.
Gutierrez, Jr., Bidin, Romero and Melo, JJ., concur.
Petition partly granted.
Note.—Extent of Surety’s liability is determined only by the

clause of the contract of suretyship (Umali vs. Court of Appeals, 189
SCRA 529).
——o0o——
1/3/2019 G.R. No. L-49401
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SUPREME COURT
Manila
SECOND DIVISION
G.R. No. L-49401 July 30, 1982
RIZAL COMMERCIAL BANKING CORPORATION, petitioner,

vs.
HON. JOSE P. ARRO, Judge of the Court of First instance of Davao, and RESIDORO CHUA, respondents.
Laurente C. Ilagan for petitioner.
Victor A. Clapano for respondents.
DE CASTRO, J.:
Petition for certiorari to annul the orders of respondent judge dated October 6, 1978 and November 7, 1978 in Civil
Case No. 11-154 of the Court of First Instance of Davao, which granted the motion filed by private respondent to
dismiss the complaint of petitioner for a sum of money, on the ground that the complaint states no cause of action as
against private respondent.
After the petition had been filed, petitioner, on December 14, 1978 mailed a manifestation and motion requesting the
special civil action for certiorari be treated as a petition for review. 1 Said manifestation and motion was noted in the
resolution of January 10, 1979. 2
It appears that on October 19, 1976 Residoro Chua and Enrique Go, Sr. executed a comprehensive surety agreements 3 to
guaranty among others, any existing indebtedness of Davao Agricultural Industries Corporation (referred to therein as
Borrower, and as Daicor in this decision), and/or induce the bank at any time or from time to time thereafter, to make loans or
advances or to extend credit in other manner to, or at the request, or for the account of the Borrower, either with or without
security, and/or to purchase on discount, or to make any loans or advances evidenced or secured by any notes, bills,
receivables, drafts, acceptances, checks or other evidences of indebtedness (all hereinafter called "instruments") upon which
the Borrower is or may become liable, provided that the liability shall not exceed at any one time the aggregate principal sum
of P100,000.00.
On April 29, 1977 a promissory note 4 in the amount of P100,000.00 was issued in favor of petitioner payable on June 13,
1977. Said note was signed by Enrique Go, Sr. in his personal capacity and in behalf of Daicor. The promissory note was not
fully paid despite repeated demands; hence, on June 30, 1978, petitioner filed a complaint for a sum of money against
Daicor, Enrique Go, Sr. and Residoro Chua. A motion to dismiss dated September 23, 1978 was filed by respondent
Residoro Chua on the ground that the complaint states no cause of action as against him. 5 It was alleged in the motion that
he can not be held liable under the promissory note because it was only Enrique Go, Sr. who signed the same in behalf of
Daicor and in his own personal capacity.
In an opposition dated September 26, 1978 6 petitioner alleged that by virtue of the execution of the comprehensive
surety agreement, private respondent is liable because said agreement covers not merely the promissory note subject of the
complaint, but is continuing; and it encompasses every other indebtedness the Borrower may, from time to time incur with
petitioner bank.
On October 6, 1978 respondent court rendered a decision granting private respondent's motion to dismiss the
complaint. 7 Petitioner filed a motion for reconsideration dated October 12, 1978 and on November 7, 1978 respondent
court issued an order denying the said motion. 8
The sole issue resolved by respondent court was the interpretation of the comprehensive surety agreement,
particularly in reference to the indebtedness evidenced by the promissory note involved in the instant case, said
comprehensive surety agreement having been signed by Enrique Go, Sr. and private respondent, binding
themselves as solidary debtors of said corporation not only to existing obligations but to future ones. Respondent
court said that corollary to that agreement must be another instrument evidencing the obligation in a form of a
promissory note or any other evidence of indebtedness without which the said agreement serves no purpose; that
since the promissory notes, which is primarily the basis of the cause of action of petitioner, is not signed by private
respondent, the latter can not be liable thereon.
Contesting the aforecited decision and order of respondent judge, the present petition was filed before this Court
assigning the following as errors committed by respondent court:
1. That the respondent court erred in dismissing the complaint against Chua simply on the reasons that
'Chua is not a signatory to the promissory note" of April 29, 1977, or that Chua could not be held liable
on the note under the provisions of the comprehensive surety agreement of October 29, 1976; and/or
2. That the respondent court erred in interpreting the provisions of the Comprehensive Surety
Agreement towards the conclusion that respondent Chua is not liable on the promissory note because
said note is not conformable to the Comprehensive Surety Agreement; and/or
3. That the respondent court erred in ordering that there is no cause of action against respondent Chua
in the petitioner's complaint.
The main issue involved in this case is whether private respondent is liable to pay the obligation evidence by the
promissory note dated April 29,1977 which he did not sign, in the light of the provisions of the comprehensive surety
agreement which petitioner and private respondent had earlier executed on October 19, 1976.
https://www.lawphil.net/judjuris/juri1982/jul1982/gr_l_49401_1982.html 1/2
1/3/2019 G.R. No. L-49401
We find for the petitioner. The comprehensive surety agreement was jointly executed by Residoro Chua and Enrique
Go, Sr., President and General Manager, respectively of Daicor, on October 19, 1976 to cover existing as well as
future obligations which Daicor may incur with the petitioner bank, subject only to the proviso that their liability shall
not exceed at any one time the aggregate principal sum of P100,000.00. Thus, paragraph I of the agreement
provides:
For and in consideration of any existing indebtedness to you of Davao Agricultural Industries
Corporation with principal place of business and postal address at 530 J. P. Cabaguio Ave., Davao City
(hereinafter called the "Borrower), and/or 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 he
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 evidenced 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 undersigned agrees to guarantee, and does hereby guarantee in joint and several
capacity, the punctual payment at maturity 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 an such instruments or other
indebtedness or obligations hereinbefore referred to ..., provided, however, that the liability of the
undersigned shag not exceed at any one time the aggregate principal sum of P100,000.00 ...
The agreement was executed obviously to induce petitioner to grant any application for a loan Daicor may desire to
obtain from petitioner bank. The guaranty is a continuing one which shall remain in full force and effect until the bank
is notified of its termination.
This is a continuing guaranty and shall remain in fun force and effect until written notice shall have
been received by you that it has been revoked by the undersigned, ... 9
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, 10 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 promisory 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. 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 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.
In view of the foregoing, the decision (which should have been a mere "order"), dismissing the complaint is reversed
and set side. The case is remanded to the court of origin with instructions to set aside the motion to dismiss, and to
require defendant Residoro Chua to answer the complaint after which the case shall proceed as provided by the
Rules of Court. No costs.
SO ORDERED.
Barredo (Chairman), Aquino, Concepcion, Jr., Guerrero, Abad Santos and Escolin, JJ., concur.
Footnotes
1 p. 45, Rollo.
2 p. 54, Rollo.
3 p. 67, Rollo.
4 p. 68, Rollo.
5 Annex B, Petition, p. 17, Rollo.
6 Annex C, Petition, p. 19, Rollo.
7 Annex E, Petition, p. 23, Rollo.
8 Annex H, Petition, p. 39, Rollo.
9 Par. 6, Comprehensive Surety Agreement, p. 67, Rollo.
10 p. 68, Rollo.
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Atok Finance Corporation vs. Court of Appeals
*
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.
Contracts; Suretyship; Guaranty; Obligations; While a contract of

suretyship or guarantee is an accessory contract, it may be readily entered
into to warranty debts to be incurred or created in the future yet.—We
consider that the Court of Appeals here was in serious error. It is true that a
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 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 guarantee a natural
obligation. (Emphases 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
_______________
* THIRD DIVISION.
233
VOL. 222, MAY 18, 1993 233
http://www.central.com.ph/sfsreader/session/0000016810f8c96e7e3102a0003600fb002c009e/t/?o=False 1/18
guarantor until the debt is liquidated. A conditional obligation may also be

secured.”
Same; Same; Same; Same; Same.—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 than 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.
Same; Same; Same; Same; Same.—Comprehensive or continuing

surety agreements are in fact quite commonplace 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 suretyship 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.
Same; Same; Same; Same; Prescription; The period of limitations in

Art. 1629 of the New Civil Code does not apply where there is no breach of
warranty of solvency but the creation of solidary liability as per agreement
of the sureties with the creditor when principal defaults.—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 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 a 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
234
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.
PETITION for review of the decision of the Court of Appeals.

Syquia Law Offices for petitioner.
Batino, Angala, Allaga & Zara Law Offices for private
respondents.
FELICIANO, J.:
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.
On 27 July 1989, private respondents Sanyu Chemical
Corporation (“Sanyu Chemical”) as principal and Sanyu Trading
Corporation (“Sanyu Trading”) along with individual private
stockholders of Sanyu Chemical, namely, private respondents
spouses Danilo E. Arrieta and Nenita B. Arrieta, Leopoldo G. Halili
and Pablito Bermundo as sureties, executed a 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 x x x, jointly and severally

unconditionally guarantee to ATOK FINANCE CORPORATION
(hereinafter called Creditor), the full, faithful and prompt pay-
235
VOL. 222, MAY 18, 1993 235
ment and discharge of any and all indebtedness of [Sanyu Chemical] x x x

(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 liable individually or jointly with others, or
whether recovery upon such indebtedness may be or hereafter become
barred by any statute of limitations,1 or whether such indebtedness may be or
otherwise become unenforceable.” (Italics 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 brought and prosecuted against the
Principal and whether or not the Principal be joined in any
such action or actions.
xxx xxx xxx
(6) In addition to all 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 a lien upon and
a right of set-off against all moneys, securities, and other
property of the Surety now or hereafter in the possession of
the Creditor; and every such lien or right of set-off may be
exercised without need of demand upon or notice to the
Surety. No lien or right of set-off 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 or lien is specifically
waived or
_______________
1 Exhibit “A,” Records, p. 60.
236

released by an instrument in writing executed by the

Creditor.
(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 to the Surety shall be
collected, enforced and received by the Surety as trustee for
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 the2 other provisions of this suretyship.
xxx xxx xxx
(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 of 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’ of ‘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;
(c) Each assigned Contract arises out of the sale of
merchandise/s which has been delivered and/or services
which have
_______________
2 Id.
237
VOL. 222, MAY 18, 1993 237

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 counter-claim;
(d) No assigned Contract is represented by any note or other
evidence of indebtedness 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;
(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 (semimonthly) until November
1, 1982
3
“P110,550.00 balloon payment after 12 months.” (Emphases supplied)
Later, additional trade receivables were assigned by Sanyu Chemi-
_______________
3 Records, p. 63.
238

cal to Atok Finance with a total face value of P100,378.45.

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 amounts due under the trade
receivables.
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 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 own 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) P5,000.00 as attorney’s fees; and
(3) To pay the costs.
4
SO ORDERED.”
Private respondents went on appeal before the then Intermediate

Appellate Court (“IAC”), and the appeal was there docketed
_______________
4 Record, p. 136.
239
VOL. 222, MAY 18, 1993 239

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 April5
1985. The trial court issued a writ of execution on 23 July 1986.
Petitioner alleged
6
that the writ of execution was served on private
respondents.
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.
The 15th Division of the Court of Appeals nonetheless granted
the Petition
7
for Relief from Judgment “in the paramount interest of
justice,” 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.
_______________
5 Annex “F” of Petition, Rollo, p. 37.

6 Rollo, p. 12.
7 See Annex “J” of Petition, Rollo, p. 56.
240

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 respondents’ 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;
(3) that it had erred in granting the Petition for Relief from
Judgment while8 execution proceedings [were] on-going in
the trial court.” (Italics in the original)
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,9 came into being, was organized and
commenced functioning.
_______________
8 Rollo, pp. 13-14.

9 Letter of Associate Justice Reynato S. Puno, Court of Appeals,
241
VOL. 222, MAY 18, 1993 241

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 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 for relief from judgment is available in respect of a decision
rendered by the Court of Appeals; this issue is best reserved for
determination in some future case 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 pre-existing 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
enforced 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
_______________
dated 14 November 1990, A.M. No. 90-11-2697-CA, 29 June 1992, 210 SCRA 589 (1992).
242

obligation contemplated in the case at bar cannot be considered ‘future

debt’ as envisioned by this law.
There is no proof that when the suretyship agreement was entered into,
there was a pre-existing obligation which served as 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 10
at bar
where the obligation was acquired two years after the agreement.” (Italics
supplied)
We consider that the Court of Appeals here was in serious error. It is

true that a 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 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 viodable or an unenforceable contract. It may also
guarantee a natural obligation. (Emphases 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.” (Italics supplied)
The Court of Appeals apparently overlooked our case law

interpreting Articles 2052 and 2053 of the Civil Code. In National
Rice and Corn 11Corporation (NARIC) v. Jose A. Fojas and Alto
Surety Co., Inc., the private respondents assailed the decision of the
trial court holding them liable under certain surety bonds
_______________
10 Court of Appeals’ Decision, pp. 10-11; Rollo, pp. 52-53.

11 103 Phil. 1131(1958).
243
VOL. 222, MAY 18, 1993 243

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:
“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.’ ” (Italics
supplied)
12
In Rizal Commercial Banking Corporation v. Arro, 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 private respondent surety (Residoro Chua)
liable under the comprehensive surety agreement, the Court said:
“The surely 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
_______________
12 115 SCRA 777 (1982).
244

Diacor as evidence 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
13
the debt is liquidated. A conditional obligation may also be secured.’ ” (Italics
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 than there would be in saying that
obligations which are subject to a condition precedent are 14
valid and
binding before the occurrence of the condition precedent.
_______________
13 115 SCRA at 781-782.

14 Please see 12 Manresa, Comentarios al Codigo Civil Español (5th Revised
Edition, 1951), pp. 221-222. Scaevola offers the following terse comment on this
point:
“Se reduce a admitir la constitucion de fianza precediendo al nacimiento de la obligation

afianzada. Fidejussor et praecedere obligationem et sequi potest.
Ello es de lo mas natural, porque a la manera que puede contraerse una deuda para lo
futuro, deudas sujetas a condicion suspensiva, es logico que se admita la fianza de ahora bajo
el supuesto o condicion misma de que la deuda u obligation principal llegue a constituirse o
producirse efectivamente.
Despues de todo, aun en las obligaciones condicionales, que
245
VOL. 222, MAY 18, 1993 245

Comprehensive or continuing surety agreements are in fact quite

commonplace 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 suretyship
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.
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.
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 the maturity.”
_______________
pueden llegar a tener efectividad o no, segun el evento puesto en condicion, existe ya, desde
luego, una obligation, la de estar a las resultas del evento mismo, e igual, identicamente,
ocurrira con la fianza ofrecida en garantia de la obligation futura.
Donde podria haber duda, si la ley no lo previese cumplidamente, seria en el segundo inciso,
en lo de poder prestarse fianza por deudas de cuantia desconocida de momento.
xxx xxx xxx
(Vol. 28, Codigo Civil, pp. 540-541 [1953]; emphases supplied)
246

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:
“x x x 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 s uch 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.
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.
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 ‘x x x the terms
stated on our invoices were normally extended up to a period of 120 days x
x x.’ (Exhibit B-2). Considering the terms in the invoices plus the ordinary
practice of the 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 that15
appellee had no cause of action against it or had lost its cause of action.”
(Italics supplied)
_______________
15 Court of Appeals’ Decision, pp. 7-8; Rollo, pp. 49-50.
247
VOL. 222, MAY 18, 1993 247

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 x x x
(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 x x x
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
(Emphases supplied)
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.
Article 1629 of the Civil Code invoked by private respondents
and accepted by the Court of Appeals is not, in the case 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 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 a breach of warranty of solvency by
Sanyu Chemical, resulting in turn in the assumption of solidary
liability by the assignor under the receivables
248

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 solidarity 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.
Petition granted.
Notes.—A continuing guaranty is one not limited to a single
249
VOL. 222, MAY 18, 1993 249

People vs. Quiñones
a series of transactions, generally for an indefinite time or until

revoked (Diño vs. Court of Appeals, 216 SCRA 9).
A guarantor may bind himself for less but not for more than the
principal debtor, both as regards the amount and onerous nature of
the conditions (Pacific Banking Corporation vs. Intermediate
Appellate Court, 203 SCRA 496).
——o0o——
VOL. 267, FEBRUARY 7, 1997 653

Fortune Motors (Phils.) Corp. vs, Court of Appeals
*
G.R. No. 112191. February 7, 1997.
FORTUNE MOTORS (PHILS.) CORPORATION and EDGAR L.

RODRIGUEZA, petitioners, vs. THE HONORABLE COURT OF
APPEALS and FILINVEST CREDIT CORPORATION,
respondents.
Civil Law; Guaranty; Distinction which the appellate court sought to

make with respect to Article 2053 has previously been rejected.—We ruled
then that the appellate court was in serious error. The distinction which said
court sought to make with respect to Article 2053 (that “future debts”
referred to therein 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
_______________
* THIRD DIVISION.
654
Fortune Motors (Phils.) Corp. vs. Court of Appeals
and existing at that time) has previously been rejected, citing the RCBC and
NARIC cases.
Same; Same; 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.—ln Diño vs. Court of Appeals, we again had
occasion to discourse on continuing guaranty/suretyship thus: “x x x 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
http://www.central.com.ph/sfsreader/session/0000016810fa7e25466aeb31003600fb002c009e/t/?o=False 1/17

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.
Same; Same; The surety undertakings executed by Chua and
Rodrigueza were continuing guaranties or suretyships covering all future
obligations of Fortune Motors (Phils.) Corporation with Filinvest Credit
Corporation.—We have no reason to depart from our uniform ruling in the
abovecited cases. The facts of the instant case bring us to no other
conclusion than that the surety undertakings executed by Chua and
Rodrigueza were continuing guaranties or suretyships covering all future
obligations of Fortune Motors (Phils.) Corporation with Filinvest Credit
Corporation. This is evident from the written contract itself which contained
the words “absolutely, unconditionally and solidarily guarantee(d)" to
Respondent Filinvest and its affiliated and subsidiary companies the “full,
faithful and prompt performance, payment and discharge of any and all
obligations and agreements” of Petitioner Fortune “under or with respect to
any and all such contracts and any and all other agreements (whether by
way of guaranty or otherwise)" of the latter with Filin-
655
VOL. 267, FEBRUARY 7, 1997 655
vest and its affiliated and subsidiary companies “now in force or hereafter
made.”
Same; Navation; Novation must be established either by the express
terms of the new agreement or by the acts of the parties clearly
demonstrating the intent to dissolve the old obligation as a consideration for
the emergence of the new one.—We have ruled previously that there are only
two ways to effect novation and thereby extinguish an obligation. First,
novation must be explicitly stated and declared in unequivocal terms.
Novation is never presumed. Second, the old and new obligations must be
incompatible on every point. The test of incompatibility is whether the two
obligations can stand together, each one having its independent existence. If
they cannot, they are incompatible and the latter obligation novates the first.
Novation must be established either by the express terms of the new
agreement or by the acts of the parties clearly demonstrating the intent to
dissolve the old obligation as a consideration for the emergence of the new
one. The will to novate, whether totally or partially, must appear by express
agreement of the parties, or by their acts which are too clear and
unequivocal to be mistaken.
Remedial Law; Civil Procedure; Appeals; 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.—The contest
on the correct amount of the liability of petitioners is a purely factual issue.
It is an oft repeated maxim 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.

Appeals.

Quirante and Associates for petitioners.
656

Labaguis, Loyola, Atienza, Felipe, Santos & Associates for

private respondents.
PANGANIBAN, J.:
To fund their acquisition of new vehicles (which are later retailed or

resold to the general public), car dealers normally enter into
wholesale automotive financing schemes whereby vehicles are
delivered by the manufacturer or assembler on the strength of trust
receipts or drafts executed by the car dealers, which are backed up
by sureties. These trust receipts or drafts are then assigned and/or
discounted by the manufacturer to/with financing companies, which
assume payment of the vehicles but with the corresponding right to
collect such payment from the car dealers and/or the sureties. In this
manner, car dealers are able to secure delivery of their stockin-trade
without having to pay cash therefor; manufacturers get paid without
any receivables/collection problems; and financing companies earn

their margins with the assurance of payment not only from the
dealers but also from the sureties. When the vehicles are eventually
resold, the car dealers are supposed to pay the financing companies
—and the business goes merrily on. However, in the event the car
dealer defaults in paying the financing company, may the surety
escape liability on the legal ground that the obligations were
incurred subsequent to the execution of the surety contract?
This is the principal legal question raised in this petition for
review (under
1
Rule 45 of the Rules of Court) seeking
2
to set aside the
Decision of the Court of Appeals (Tenth Division) promulgated on
September 30, 1993
3
in CA G.R. CV No. 09136 which affirmed in
toto the decision of the Regional Trial
_______________
1 Rollo, pp. 24–32.

2 Composed of J. Cancio C. Garcia, ponente; JJ. Antonio M. Martinez (division
chairman) and Ramon U, Mabutas, Jr., concurring.
3 Records, pp. 262–269,
657
VOL. 267, FEBRUARY 7, 1997 657

Fortune Motors (Phils.) Corp. vs, Court of Appeals
4
Court of Manila—Branch 11 in Civil Case No. 83–21994, the
dispositive portion of which reads;
“WHEREFORE, judgment is hereby rendered in favor of the plaintiff and

against the defendants, by ordering the latter to pay, jointly and severally,
the plaintiff the following amounts:
1. The sum of P1,348,033.89, plus interest thereon at the rate of

P922.53 per day starting April 1, 1985 until the said principal
amount is fully paid;
2. The amount of P50,000.00 as attorney’s fees and another
P50,000.00 as liquidated damages; and
3. That the defendants, although spared from paying exemplary
damages, are further ordered to pay,’ in solidum, the costs of this
suit.”
Plaintiff therein was the financing company and the defendants the
car dealer and its sureties.
The Facts
On or about August 4, 1981, Joseph L.G. Chua and Petitioner Edgar

Lee Rodrigueza (“Petitioner
5
Rodrigueza”) each executed an undated
“Surety Undertaking" whereunder they “absolutely, unconditionally
and solidarily guarantee(d)" to Respondent Filinvest Credit
Corporation (“Respondent Filinvest”) and its affiliated and
subsidiary companies the “full, faithful and prompt performance,
payment and discharge of any and all obligations and agreements”
of Fortune Motors (Phils.) Corporation (“Petitioner Fortune”) “under
or with respect to any and all such contracts and any and all other
agreements (whether by way of guaranty or otherwise)" of the latter
with Filinvest and its affiliated and subsidiary companies “now in
force or hereinafter made.”
_______________
4 Presided by Judge Rosalio A. De Leon.

5 Acknowledged before a notary public on August 4, 1981; records, pp. 187 &
188.
658

6
The following year or on April 5, 1982, Petitioner Fortune,
Respondent Filinvest and Canlubang Automotive Resources
Corporation (“CARCO") 7
entered into an “Automotive Wholesale
Financing Agreement" (“Financing Agreement”) under which
CARCO will deliver motor vehicles to Fortune for the purpose of
resale in the latter’s ordinary course of business; Fortune, in turn,
will execute trust receipts over said vehicles and accept drafts drawn
by CARCO, which will discount the same together with the trust
receipts and invoices and assign them in favor of Respondent
Filinvest, which will pay the motor vehicles for Fortune. Under the
same agreement, Petitioner Fortune, as trustee of the motor vehicles,
was to report and remit proceeds of any sale for cash or on terms to
Respondent Filinvest immediately without necessity of demand.
Subsequently, several motor vehicles were delivered by CARCO
to Fortune, and trust receipts covered by demand drafts and deeds of
assignment were executed in favor of Respondent Filinvest.
However, when the demand drafts matured, not all the proceeds of
the vehicles which Petitioner Fortune had sold were remitted to
Respondent Filinvest. Fortune likewise failed to turn over to
Filinvest several unsold motor vehicles covered by the trust receipts.
8
Thus, Filin-vest through counsel, sent a demand letter dated
December 12, 1983 to Fortune For the payment of its unsettled
account in the9 amount of P1,302,811.00. Filinvest sent similar
demand letters separately to Chua and Rodrigueza as sureties.
Despite said demands, the amount was not paid. Hence, Filinvest
filed in the Regional Trial Court of Manila a complaint for a sum of
money with preliminary attachment against Fortune, Chua and
Rodrigueza.
In an order dated September 26, 1984, the trial court declared
that there was no factual issue to be resolved except for
________________
6 The assailed Decision states “August” but the date appearing in the Agreement is
April 5, 1982.
7 Records, pp. 178–186.
8 Records, p. 211.
9 Records, pp. 213 & 215.
659
VOL. 267, FEBRUARY 7, 1997 659

the correct balance of defendants’ account 10

with Filinvest as agreed
upon by the parties during pre-trial. Subsequently, Filinvest
presented testimonial and documentary evidence. Defendants
(petitioners herein), instead of presenting their evidence,
11
filed a
“Motion for Judgment on Demurrer to Evidence" anchored
principally on the ground that the Surety Undertakings were null and
void because, at the time they were executed, there was no principal
obligation existing. The trial court denied the motion and scheduled
the case for reception of defendants’ evidence. On two scheduled
dates, however, defendants failed to present their evidence,
prompting the court to deem them to have waived their right to
present evidence. On December 17, 1985, the trial court rendered its
decision earlier cited ordering Fortune, Chua and Rodrigueza to pay
Filinvest, jointly and severally, the sum of P1,348,033.83 plus
interest at the rate of P922.53 per day from April 1, 1985 until fully
paid, P50,000.00 in attorney’s fees, another P50,000.00 in liquidated
damages and costs of suit.
As earlier mentioned, their appeal was dismissed by the Court of
Appeals (Tenth Division) which affirmed in toto the trial court’s
decision. Hence, this recourse.
Issues
Petitioners assign the following errors in the appealed Decision:
“1. that the Court of Appeals erred in declaring that surety can
exist even if there was no existing indebtedness at the time
of its execution.
2. that the Court of Appeals erred when it declared that there

was no novation.
3. that the Court of Appeals erred when it declared, that the
12
evidence was sufficient to prove the amount of the claim.
________________
10 Records, p. 146.
11 Records, pp. 234–242.
12 Rollo, p. 12.
660

Petitioners argue that future debts which can be guaranteed under

Article 2053 of the Civil Code refer only to “debts existing at the
time of the constitution of the guaranty but the amount thereof is
unknown,” and that a guaranty being an accessory obligation cannot
exist without a principal obligation. Petitioners claim that the surety
undertakings cannot be made to cover the Financing Agreement
executed by Fortune, Filinvest and CARCO since the latter contract
was not yet in existence when said surety contracts were entered
into.
Petitioners further aver that the Financing Agreement would
effect a novation of the surety contracts since it changed the
principal terms of the surety contracts and imposed additional and
onerous obligations upon the sureties.
Lastly, petitioners claim that no accounting of the payments made
by Petitioner Fortune to Respondent Filinvest was done by the latter.
Hence, there could be no way by which the sureties can ascertain the
correct amount of the balance, if any.
Respondent Filinvest, on the other hand, imputes “estoppel (by
pleadings or by judicial admission)" upon petitioners when in their
“Motion to Discharge Attachment,” they admitted their liability as
sureties thus:
“Defendants Chua and Rodrigueza could not have perpetrated fraud because
they are only sureties of defendant Fortune Motors x x x;
x x x The defendants (referring to Rodrigueza and Chua) are not13 parties
to the trust receipts agreements since they are ONLY sureties x x x."
In rejecting the arguments of petitioners and in holding that they

(Fortune and the sureties) were jointly and solidarily liable to
Filinvest, the trial court declared:
“As to the alleged non-existence of a principal obligation when the surety

agreement was signed, it is enought (sic) to state that a guaranty may also be
given as security for future debts, the amount
________________
13 Respondent’s Comment, p. 11; rollo, p. 48.
661
VOL. 267, FEBRUARY 7, 1997 661

of which is not known (Art. 2053, New Civil Code). In the case of NARIC
vs. Fojas, L-11517, promulgated April 10, 1958, it was ruled that a bond
posted to secure additional credit that the principal debtor had applied for, is
not void just because the said bond was signed and filed before the
additional credit was extended by the creditor. The obligation of the sureties
on future obligations of Fortune is apparent from a proviso under the Surety
Undertakings marked Exhs. B and C that the sureties agree with the plaintiff
as follows:
In consideration of your entering into an arrangement with the party (Fortune)

named above, x x x x by which you may purchase or otherwise require from, and or
enter into with obligor x x x trust receipt x x x arising out of wholesale and/or retail
transactions by or with obligor, the undersigned x x x absolutely, unconditionally,
and solidarily guarantee to you x x x the full, faithful and prompt performance,
payment and discharge of any and all obligations x x x of obligor under and with
respect to any and all such contracts and any and all agreements (whether by way of
guaranty or otherwise) of obligor with you x x x now in force or hereafter made.
(Italics supplied).
On the matter of novation, this has already been ruled upon when this
Court denied defendants’ Motion to dismiss on the argument that what
happened was really an assignment of credit, and not a novation of contract,
which does not require the consent of the debtors. The fact of knowledge is
enough. Besides, as explained by the plaintiff, the mother or the principal
contract was the Financing Agreement, whereas the trust receipts, the sight
drafts, as well as the Deeds of assignment were only collaterals or accidental
modifi-cations which do not extinguish the original contract by way of
novation. This proposition holds true even if the subsequent agreement
would provide for more onerous terms for, at any rate, it is the principal or
mother contract that is to be followed. When the changes refer to secondary
agreements and not to the object or principal conditions of the contract,
there is no novation; such changes will produce modifications of incidental
facts, but will not extinguish the original obligation (Tolentino,
Commentaries on Jurisprudence of the Civil Code of the Philippines, 1973
Edition, Vol. IV, page 367; cited in plaintiff s Memorandum of September 6,
1985, p. 3).
On the evidence adduced by the plaintiff to show the status of

defendants’ accounts, which took into consideration payments by
662

defendants made after the filing of the case, it is enough to state that a
statement was carefully prepared showing a balance of the principal
obligation plus interest totalling P1,348,033.89 as of March 31, 1985 (Exh.
M). This accounting has not been traversed nor contradicted by defendants
although they had the opportunity to do so. Likewise, there was absolute
silence on the part of defendants as to the correctness of the previous
statement of account made as of December 16, 1983 (referring to Exh. I),
but more important, however, is that defendants received demand letters
from the plaintiff stating that, as of December 1983 (Exhs. J, K and L), this
total amount of obligation was P1,302,811.00, and yet defendants were not
heard to have responded to said demand letters, let alone have taken any
exception thereto. There is such a 14thing as evidence by silence (Sec. 23,
Rule 130, Revised Rules of Court)."
The Court of Appeals, affirming the above decision of the trial court,
further explained:
“x x x In the case at bar, the surety undertakings in question unequivocally

state that Chua and Rodrigueza ‘absolutely, unconditionally and solidarily
guarantee’ to Filinvest the ‘full, faithful and prompt performance, payment
and discharge of any and all obligations and agreements’ of Fortune ‘under
or with respect to any and all such contracts and any and all other
agreements (whether by way of guaranty or otherwise)' of the latter with
Filinvest in force at the time of the execution of the ‘Surety Undertakings’
or made thereafter. Indeed, if Chua and Rodrigueza did not intend to
guarantee all of Fortune’s future obligation with Filinvest, then they should
have expressly stated in their respective surety undertakings exactly what
said surety agreements guaranteed or to which obligations of Fortune the
same were intended to apply. For another, if Chua and Rodrigueza truly
believed that the surety undertakings they executed should not cover
Fortune’s obligations under the AWFA, then why did they not inform
Filinvest of such fact when the latter sent them the aforementioned demand
letters (Exhs. ‘K' and ‘L') urging them to pay Fortune’s liability under the
AWFA. Instead, quite uncharacteristic of persons who have just been asked
to pay an obligation to which they believe they are not liable, Chua and
Rodrigueza elected or chose not to answer said demand letters. Then, too,
considering that appellant Chua is the corporate presi-
________________
14 RTC Decision, supra note 3 at p. 2, pp. 6–8.
663
VOL. 267, FEBRUARY 7, 1997 663

dent of Fortune and a signatory to the AWFA, he should have simply had it
stated in the AWFA or in a separate document that the ‘Surety
Undertakings’ do not cover Fortune’s obligations in the aforementioned
AWFA, trust receipts or demand drafts.
Appellants argue that it was unfair for Filinvest to have executed the
AWFA only after two (2) years from the date of the ‘Surety undertakings’
because Chua and Rodrigueza were thereby made to wait for said number of
years just to know what kind of obligation they had to guarantee.
The argument cannot hold water. In the first place, the ‘Surety
Undertakings’ did not provide that after a period of time the same will lose
its force and effect. In the second place, if Chua and Rodrigueza did not
want to guarantee the obligations of Fortune under the AWFA, trust receipts
and demand drafts, then why did they not simply terminate the ‘Surety
Undertakings’ by serving ten (10) days written notice to Filinvest as
expressly allowed in said surety agreements. It is highly plausible that the
reason why the ‘Surety Undertakings’ were not terminated was because the
execution of the same was part of the consideration 15
why Filinvest and
CARCO agreed to enter into the AWFA with Fortune."
The Court’s Ruling
We affirm the decisions of the trial and appellate courts.
First Issue: Surety May Secure Future Obligations

The case at bench falls
16
on all fours with Atok Finance Corporation
vs. Court of Appeals which reiterated our rulings in National
17
Rice
and Corn Corporation (NARIC) vs. Court of18 Appeals and Rizal
Commercial Banking Corporation vs. Arro. In Atok Finance,
Sanyu Chemical as principal, and Sanyu Trading along with
individual private stockholders of Sanyu Chemical, namely, spouses
Daniel and Nenita Arrieta, Leopoldo Halili and Pablito Bermundo,
as sureties, executed a
________________
15 Assailed Decision, supra note 1 at p. 2, pp. 6–8.

16 222 SCRA 232, May 18, 1993.
17 103 Phil. 1131 (1958).
18 115 SCRA 777, July 30, 1982.
664

continuing suretyship agreement in favor of Atok Finance as

creditor. Under the agreement, Sanyu Trading and the individual
private stockholders and officers of Sanyu Chemical “jointly and
severally unconditionally guarantee(d) to Atok Finance Corporation
(hereinafter called Creditor), the full, faithful and prompt payment
and discharge of any and all indebtedness of [Sanyu Chemical] x x x
to the Creditor.” Subsequently, Sanyu Chemical assigned its trade
receivables outstanding with a total face value of P125,871.00 to
Atok Finance in consideration of receipt of the amount of
P105,000.00. Later, additional trade receivables with a total face
value of P100,378.45 were also assigned. Due to nonpayment upon
maturity, Atok Finance commenced action against Sanyu Chemical,
the Arrieta spouses, Bermundo and Halili to collect the sum of
P120,240.00 plus penalty charges due and payable. The individual
private respondents contended that the continuing 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. The trial court rendered a decision
in favor of Atok Finance and ordered defendants to pay, jointly and
severally, aforesaid amount to Atok.
On appeal, the then Intermediate Appellate Court reversed the
trial court and dismissed the complaint on the ground that there was
“no proof that when the suretyship agreement was entered into, there
was a pre-existing obligation which served as 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.”
We ruled then that the appellate court was in serious error. The
distinction which said court sought to make with respect to Article
2053 (that “future debts” referred to therein 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) has previ-
665
VOL. 267, FEBRUARY 7, 1997 665

ously been rejected, citing the RCBC and NARIC cases. We further
said:
“x x x 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 than 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.
Comprehensive or continuing surety agreements are in fact quite
commonplace in present day financial and commercial practice. A bank or
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 suretyship 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.”
19
In Diño vs. Court of Appeals, we again had occasion to discourse
on continuing guaranty/suretyship thus:
“x x x 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
certain period; especially if the
________________
19 216 SCRA 9, November 26,1902.
666

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.
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
20
may require, have been construed to indicate a continuing
guaranty."
We have no reason to depart from our uniform ruling in the

abovecited cases. The facts of the instant case bring us to no other
conclusion than that the surety undertakings executed by Chua and
Rodrigueza were continuing guaranties or suretyships covering all
future obligations of Fortune Motors (Phils.) Corporation with
Filinvest Credit Corporation. This is evident from the written
contract itself which contained the words “absolutely,
unconditionally and solidarily guarantee(d)" to Respondent Filinvest
and its affiliated and subsidiary companies the “full, faithful and
prompt performance, payment and discharge of any and all
obligations and agreements” of Petitioner Fortune “under or with
respect to any and all such contracts and any and all other
agreements (whether by way of guaranty or otherwise)" of the latter
with Filinvest and its affiliated and subsidiary companies “now in
force or hereafter made.”
Moreover, Petitioner Rodrigueza and Joseph Chua knew exactly
where they stood at the time they executed their respective surety
undertakings in favor of Fortune. As stated in the petition:
“Before the execution of the new agreement, Edgar L. Rodrigueza and

Joseph Chua were required to sign blank surety agreements, without
informing them how much amount they would be liable as sureties.
However, because of the desire of petitioners, Chua
_______________
20 Ibid. citing38 C.J.S. 1142, 1206, and 1209.
667
VOL. 267, FEBRUARY 7, 1997 667

and Rodrigueza to have the cars 21delivered to petitioner, Fortune, they

signed the blank promissory notes. “ (italics supplied)
It is obvious from the foregoing that Rodrigueza and Chua were

fully aware of the business of Fortune, an automobile dealer; Chua
being the corporate president of Fortune22 and even a signatory to the
Financial Agreement with Filinvest. Both sureties knew the
purpose of the surety undertaking which they signed and they must
have had an estimate of the amount involved at that time. Their
undertaking by way of the surety contracts was critical in enabling
Fortune to acquire credit facility from Filinvest and to procure cars
for resale, which was the business of Fortune. Respondent Filinvest,

for its part, relied on the surety contracts when it agreed to be the
assignee of CARCO with respect to the liabilities of Fortune with
CARCO. After benefiting therefrom, petitioners cannot now impugn
the validity of the surety contracts on the ground that there was no
preexisting obligation to be guaranteed at the time said surety
contracts were executed. They cannot resort to equity to escape
liability for their voluntary acts, and to heap injustice to Filinvest,
which relied on their signed word.
This is a clear case of estoppel by deed. By the acts of
petitioners, Filinvest was made to believe that it can collect from
Chua and/or Rodrigueza in case of Fortune’s default. Filinvest relied
upon the surety contracts when it demanded payment from the
sureties of the unsettled liabilities of Fortune. A refusal to enforce
said surety contracts
23
would virtually sanction the perpetration of
fraud or injustice.
Second Issue: No Novation

Neither do we find merit in the averment of petitioners that the
Financing Agreement contained onerous obligations
_______________
21 Petition, p. 4; rollo, p. 11.

22 Decision of the Court of Appeals, supra note 1 at p. 2, p. 7.
23 Komatsu Industries (Phil.), Inc. vs. Court of Appeals, 249 SCRA 361, October
18, 1995.
668

not contemplated in the surety undertakings, thus changing the

principal terms thereof and effecting a novation.
We have ruled previously that there are only two ways to effect
novation and thereby extinguish an obligation. First, novation must
be explicitly stated and declared in unequivocal terms. Novation is
never presumed. Second, the old and new obligations must be
incompatible on every point. The test of incompatibility is whether
the two obligations can stand together, each one having its
independent existence. If they cannot,
24
they are incompatible and the
latter obligation novates the first. Novation must be established
either by the express terms of the new agreement or by the acts of
the parties clearly demonstrating the intent to dissolve the old obli-
gation as a consideration for the emergence of the new one, The will
to novate, whether totally or partially, must appear by express
agreement of the parties, or25 by their acts which are too clear and
unequivocal to be mistaken.
Under the surety undertakings however, the obligation of the
sureties referred to absolutely, unconditionally and solidarily
guaranteeing the full, faithful and prompt perfonnance, payment and
discharge of all obligations of Petitioner Fortune with respect to any
and all contracts and other agreements with Respondent Filinvest in
force at that time or thereafter made. There were no qualifications,
conditions or reservations stated therein as to the extent of the
suretyship, The Financing Agreement, on the other hand, merely
detailed the obligations of Fortune to CARCO (succeeded by
Filinvest as assignee). The allegation of novation by petitioners is,
therefore, misplaced. There is no incompatibility of obliga-
________________
24 Nyco Sales Corporation vs. BA Finance Corporation, 200 SCRA 637, August
16, 1991, citing Mondragon vs. Intermediate Appellate Court, 184 SCRA 348, April
17, 1990, and Cañeda, Jr. vs. Court of Appeals, 181 SCRA 762, February 5, 1990.
25 Broadway Centrum vs. Tropical Hut, 224 SCRA 302, July 5, 1993; Ajax
Marketing vs. Court of Appeals, 248 SCRA 222, September 14, 1995.
669
VOL. 267, FEBRUARY 7, 1997 669

tions to speak of in the two contracts. They can stand together

without conflict.
Furthermore, the parties have not performed any explicit and
unequivocal act to manifest their agreement or intention to novate
their contract. Neither did the sureties object to the Financing
Agreement nor try to avoid liability thereunder at the time of its
execution. As aptly discussed by the Court of Appeals:
“x x x For another, if Chua and Rodrigueza truly believed that the surety
undertakings they executed should not cover Fortune’s obligations under the
AWFA (Financing Agreement), then why did they not inform Filinvest of
such fact when the latter sent them the aforementioned demand letters
(Exhs. ‘K' and ''L') urging them to pay Fortune’s liability under the AWFA,
Instead, quite uncharacteristic of persons who have just been asked to pay
an obligation to which they are not liable, Chua and Rodrigueza elected or
chose not to answer said demand letters. Then, too, considering that
appellant Chua is the corporate president of Fortune and a signatory to the
AWFA, he should have simply had it stated in the AWFA or in a separate
document that the ‘Surety Undertakings’ do not cover Fortune’s 26
obligations
in the aforementioned AWFA, trust receipts or demand drafts."
Third Issue: Amount of Claim Substantiated

The contest on the correct amount of the liability of petitioners is a
purely factual issue. It is an oft repeated maxim 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
________________
26 Supra note 22.
670

even more27weight when said court affirms the factual findings of the
trial court.
In the case at bar, the findings of the trial court and the Court of
Appeals with respect to the assigned error are based on substantial
evidence which were not refuted with contrary proof by petitioners.
Hence, there is no necessity to depart from the above judicial
dictum.
WHEREFORE, premises considered, the petition is DENIED
and the assailed Decision of the Court of Appeals concurring with
the decision of the trial court is hereby AFFIRMED. Costs against
petitioners.
SO ORDERED.
Melo and Francisco, JJ., concur.

Narvasa (C.J., Chairman), No part: Personal relationship to
party.
Davide, Jr., J., No part due to close relationship of a party.
Petition denied, judgment affirmed.
Note.—Novation will not be allowed unless it is clearly shown

by express agreement or by acts of equal import. (Ajax Marketing
and Development Corporation vs. Court of Appeals, 248 SCRA 222
[1995])
——o0o——
________________
27 Meneses vs. Court of Appeals, 246 SCRA 163, July 14, 1995; Heirs of Jose
Olviga vs. Court of Appeals, 227 SCRA 330, October 21, 1993; Pantranco vs. Court
of Appeals, 224 SCRA 477, July 5, 1993.
671

26 Supreme Court Reports Annotated: Escaño vs. Ortigas, JR

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1/3/2019 SUPREME COURT REPORTS ANNOTATED VOLUME 526

26 SUPREME COURT REPORTS ANNOTATED

SALVADOR P. ESCAÑO and MARIO M. SILOS, petitioners, vs.

Contracts; Interpretation of Contracts; Under the Civil Code, the

VOL. 526, JUNE 29, 2007 27

Escaño vs. Ortigas, Jr.

28 SUPREME COURT REPORTS ANNOTATED

Escaño vs. Ortigas, Jr.

VOL. 526, JUNE 29, 2007 29

Escaño vs. Ortigas, Jr.

several obligations, however, does not mean that suretyship is withdrawn

30 SUPREME COURT REPORTS ANNOTATED

Escaño vs. Ortigas, Jr.

PETITION for review on certiorari of a decision of the Court of

The facts are stated in the opinion of the Court.

1 Now PDCP Development Bank.

VOL. 526, JUNE 29, 2007 31

separate guaranties were executed to guarantee the payment of the

2 See Rollo, p. 29.

32 SUPREME COURT REPORTS ANNOTATED

a. Upon receipt by any of [the] OBLIGORS of any demand from

expense, without prejudice to any and/or all of OBLIGORS

4. OBLIGORS hereby waive in favor of SURETIES any and all fees

Falcon eventually availed of the sum of US$178,655.59 from the

8 Id., at pp. 53-54. Emphasis supplied.

VOL. 526, JUNE 29, 2007 33

10 See Id., at pp. 48-49.

34 SUPREME COURT REPORTS ANNOTATED

From the Summary Judgment, recourse was had by way of

16 While apparently dropping his cross-claim against Silos.

VOL. 526, JUNE 29, 2007 35

deny their execution of the 1982 Undertaking. The special defenses

law. Petitioners have not attempted to demonstrate before us that

36 SUPREME COURT REPORTS ANNOTATED

The vital issue actually raised before us is whether petitioners were

23 See Id., at p. 52.

VOL. 526, JUNE 29, 2007 37

TIES [were to] reimburse OBLIGORS for26 said amount/s within

38 SUPREME COURT REPORTS ANNOTATED

such payments to Ortigas, et al., as security for whatever amounts

VOL. 526, JUNE 29, 2007 39

having to burden the “OBLIGORS.” This notice requirement in

40 SUPREME COURT REPORTS ANNOTATED

contract from pursuing its claim against Ortigas based on the

VOL. 526, JUNE 29, 2007 41

dertaking uses the word “SURETIES” although the document, in

give rise to solidarity. Nor does solidarity of itself imply

42 SUPREME COURT REPORTS ANNOTATED

As provided in Article 2047 in a surety agreement the surety

rests solely on the solidary nature of the obligation of the surety

40 CIVIL CODE, Art. 2047.

VOL. 526, JUNE 29, 2007 43

41 “Since, generally, it is not necessary for a creditor to proceed against a principal

44 SUPREME COURT REPORTS ANNOTATED

nificant distinction still lies between a joint and several debtor, on

VOL. 526, JUNE 29, 2007 45

which corresponds to each, with the interest for the payment

47 CIVIL CODE, Art. 2066.

48 CIVIL CODE, Art. 2067.

46 SUPREME COURT REPORTS ANNOTATED

were not the implication, there would be no material difference

VOL. 526, JUNE 29, 2007 47

Escaño vs. Ortigas, Jr.