Cred Trans 5

CREDIT TRANSACTIONS (Atty.
Jazzie Sarona-Lozare) 1
2ND EXAM COVERAGE COMPILATION OF CASES
GUARANTY and SURETYSHIP
NATURE and EXTENT
ESCAO v. ORTIGAS
Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 151953
related to the loan with PDCP. Thus, an Undertaking dated

11 June 1982 was executed by the concerned parties,7
namely: with Escao, 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:
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:
June 29, 2007
SALVADOR P. ESCAO and MARIO M. SILOS, petitioner,

vs.
RAFAEL ORTIGAS, JR., respondent.
DECISION
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, Private Development Corporation of the
Philippines (PDCP)1 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 conditions.2 On the same day, three stockholdersofficers 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 punctual payment" of
the loan contracted by Falcon with PDCP.3 In the meantime,
two separate guaranties were executed to guarantee the
payment of the same loan by other stockholders and officers
of Falcon, acting in their personal and individual capacities.
One Guaranty4 was executed by petitioner Salvador Escao
(Escao), while the other5 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 Escao, 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 assigned their shares of stock in Falcon
to Escao, Silos and Matti. 6 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
a. Upon receipt by any of [the] OBLIGORS of any demand

from PDCP and/or PAIC for the payment of FALCONs
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, SURETIES
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 FALCON arising out of, or in
connection with, their said guarantees[sic].8
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 of
P5,031,004.07, which Falcon did not satisfy despite
demand.9
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, Escao,
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,
Escao and Silos, and also manifested his intent to file a
third-party complaint against the Scholeys and Matti.10 The
cross-claim lodged against Escao and Silos was predicated
on the 1982 Undertaking, wherein they agreed to assume
the liabilities of Ortigas with respect to the PDCP loan.
Escao, Ortigas and Silos each sought to seek a settlement
with PDCP. The first to come to terms with PDCP was
Escao, who in December of 1993, entered into a
CREDIT TRANSACTIONS (Atty. Jazzie Sarona-Lozare) 2

compromise agreement whereby he agreed to pay the bank
P1,000,000.00. In exchange, PDCP waived or assigned in
favor of Escao one-third (1/3) of its entire claim in the
complaint against all of the other defendants in the case.11
The compromise agreement was approved by the RTC in a
Judgment12 dated 6 January 1994.
Then on 24 February 1994, Ortigas entered into his own
compromise agreement13 with PDCP, allegedly without the
knowledge of Escao, Matti and Silos. Thereby, Ortigas
agreed to pay PDCP P1,300,000.00 as "full satisfaction of
the PDCPs claim against Ortigas,"14 in exchange for PDCPs
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 in
exchange for PDCPs waiver of its claims against him.15
In the meantime, after having settled with PDCP, Ortigas
pursued his claims against Escao, Silos and Matti, on the
basis of the 1982 Undertaking. He initiated a third-party
complaint against Matti and Silos,16 while he maintained his
cross-claim against Escao. In 1995, Ortigas filed a motion
for Summary Judgment in his favor against Escao, Silos
and Matti. On 5 October 1995, the RTC issued the Summary
Judgment, ordering Escao, Silos and Matti to pay Ortigas,
jointly and severally, the amount of P1,300,000.00, as well as
P20,000.00 in attorneys fees.17 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 summary judgment, even if
such facts were raised in the pleadings." 18 In an Order dated
7 March 1996, the trial court denied the motion for
reconsideration of the Summary Judgment and awarded
Ortigas legal interest of 12% per annum to be computed
from 28 February 1994.19
From the Summary Judgment, recourse was had by way of
appeal to the Court of Appeals. Escao and Silos appealed
jointly while Matti appealed by his lonesome. In a Decision 20
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 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 in the light of the pleadings and
supporting documents and affidavits."21 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.
Hence, the present petition for review filed by Escao and

Silos.22 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.
Petitioner 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.
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 arising from their said joint and several
undertakings with FALCON."23 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] to PDCP x x x under the
following terms and conditions."24
At the same time, it is clear that the assumption by
petitioners of Ortigass "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 Falcons 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 therein for
contribution, indemnity, subrogation or other relief" 25 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], SURETIES [were to] reimburse OBLIGORS for said
amount/s within seven (7) calendar days from such
payment."26
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 is for any reason made
to pay any amount to PDCP x x x" 27 As pointed out by
Ortigas, the phrase "for any reason" reasonably includes any
extra-judicial 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
release all the OBLIGORS x x x from their guarantees [sic] to
PDCP x x x"28 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 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 with PDCP x x x for the release of their said
guarantees [sic]."29
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.30 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. 31 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 petitioners ESCANO and SILOSs knowledge and
consent."32 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 FALCONs obligations to PDCP, but that
requirement is reasoned "so that the [SURETIES] can timely
take appropriate measures"33 presumably to settle the
obligation without 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
Ortigass offer to pay PDCP was conditioned "without
[Ortigass] admitting liability to plaintiff PDCP Banks
complaint, and to terminate and dismiss the said case as
against Ortigas solely."34 Petitioners profess it is
"unthinkable" for Ortigas to have voluntarily paid PDCP
without admitting his liability,35 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 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

guarantees [sic]."36 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 amount/s
within seven (7) calendar days from such payment"37 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 used in the agreement "clearly shows that it is a
surety agreement"38 between the obligors (Ortigas group)
and the sureties (Escao group). Ortigas points out that the
Undertaking 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 of the SURETIES default from their obligation in the
Undertaking."39
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.
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. In such case the contract is called a
suretyship. [Emphasis supplied]40
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 Ortigass 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.41 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.42 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."43
Note that Article 2047 itself specifically calls for the
application of the provisions on joint and solidary obligations

to suretyship contracts.44 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). 45 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.
Dr. Tolentino explains the differences between a solidary codebtor 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
between the co-debtors liable in solidum is similar to the
common law suretyship.46
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.
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 indemnity
comprising of, among others, "the total amount of the debt." 47
Further, Article 2067 of the Civil Code likewise establishes
that "[t]he guarantor who pays is subrogated by virtue thereof

to all the rights which the creditor had against the debtor."48
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.
Tolentinos 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 is withdrawn from
the applicable provisions governing guaranty."49 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.
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 Escao, 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 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 agree and undertake to assume all of obligors
said guarantees to PDCP."50 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 attorneys
fees since the Undertaking contained no such stipulation for
attorneys fees, and that the situation did not fall under the
instances under Article 2208 of the Civil Code where
attorneys fees are recoverable in the absence of stipulation.
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 attorneys fees "[w]hen
the defendants 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 ruling in Eastern Shipping Lines, Inc. v. Court of
Appeals51 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:
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
extrajudicial 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 to be by then
an equivalent to a forbearance of credit.52
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. 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. 53 Since the RTC
held that interest should be computed from 28 February
1994, the appropriate redefinition should be made.
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:
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.
i. Lump sum price--------PHP1,150,000.00;
SO ORDERED.
ASSET BUILDERS v. STRONGHOLD
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 187116
October 18, 2010
ASSET BUILDERS CORPORATION, Petitioner,

vs.
STRONGHOLD INSURANCE COMPANY,
INCORPORATED, Respondent.
DECISION
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.
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
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. RetentionSubject 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:
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
(P575,000.00) only, Philippine Currency.
THOUSAND
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 x5
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 Indl., 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, attorneys 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 satisfaction 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 work 8 with a
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;
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:
(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;
1. to pay plaintiff in the amount of PHP575,000.00 as actual

damages plus legal interest from the filing of the complaint;
(3) to pay the amount guaranteed by your performance bond

in the amount of PHP345,000.00;
2. to pay plaintiff in the amount of PHP100,000.00 as

liquidated damages;
(4) to pay PHP150,000.00 in other consequential damages;
3. to pay plaintiff in the amount of PHP50,000.00 as

exemplary damages;
(5) to pay exemplary

PHP150,000.00;
damages
in
the
amount
of
(6) to vacate the project site, together with all your men and
equipment.
4. to pay plaintiff in the amount of PHP 50,000.00 as

attorneys fees;
5. to pay the costs of the suit.
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 attorneys fees in
the amount of at least PHP100,000.0.
Defendant
Stronghold
Insurance
Company,
Inc.s
compulsory counterclaim and cross-claim are dismissed.15
On August 16, 2006, ABC sent a Notice of Claim for payment

to Stronghold to make good its obligation under its bonds.10
Petitioner ABC prays for the reversal of the challenged

decision based on the following
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.
GROUNDS
In its "Answer (with Complusory Counterclaim and CrossClaim)," 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 ABCs 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.
Hence, this petition.
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 Strongholds Surety
Bond and Performance Bond, because:
(a) Despite rescission, there exists a continuing VALID
PRINCIPAL OBLIGATION guaranteed by Respondents
Bonds, arising out of the Contractors DEFAULT and
Non-performance.
(b) Upon breach by its Principal/contractor, the
LIABILITIES of Respondents bonds had already
ACCRUED, automatically attached, and had become
already DIRECT, PRIMARY and ABSOLUTE, even before
Petitioners 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 Courts completely erroneous ruling
on the liabilities of Respondents bonds, the Lower
Court equally ERRED with manifest bias and grave
abuse, in its FAILURE to comply with the "duty of court"
to make a finding of "unreasonable denial or
withholding" by Respondent Stronghold or Petitioners

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
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, 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 suretys liability:
X x x. The suretys 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 suretys solidary undertaking to pay if the obligor does
not pay. Such acceptance, however, does not change in any
material way the obligees 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 suretys role arises only upon the obligors
default, at which time, it can be directly held liable by the
obligee for payment as a solidary obligor.211avvphi1
In the case at bench, when Lucky Star failed to finish the
drilling work within the agreed time frame despite petitioners
demand for completion, it was already in delay. Due to this
default, Lucky Stars liability attached and, as a necessary
consequence, respondents 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
respondents primary and direct responsibility to the
petitioner.1avvphil
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 courts 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 obligors
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 Stars unsatisfactory progress in the drilling
work and its failure to complete it in due time amount to nonperformance of its obligation.
In fine, respondent should be answerable to petitioner on
account of Lucky Stars non-performance of its obligation as
guaranteed by the performance bond.
Finally, Article 121722 of the New Civil Code acknowledges
the right of reimbursement from a co-debtor (the principal codebtor, 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.
CASTELLVI DE HIGGINS v. SELLNER
EN BANC
[G.R. No. 15825. November 5, 1920. ]
CARMEN CASTELLVI DE HIGGINS and HORACE L.
HIGGINS, Plaintiffs-Appellants, v. GEORGE C. SELLNER,
Defendant-Appellee.
Wolfson, Wolfson & Schwarzkopf for Appellants.
Williams & Ferrier for Appellee.
DECISION
MALCOLM, J. :
This is an action brought by plaintiffs to recover from

defendant from 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 plaintiffs 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:
"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 P10,000 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,
In the original Spanish of the Civil Code now in force in the

Philippine Islands, Title XIV of Book IV is entitled "De la
Fuenza." 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 word "fador" is found in all of the
English translations of the Civil Code as "surety." The law of
guaranty is not treated 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 of the guarantor depends upon
an independent agreement to pay the obligation if the
primary payor fails to do so. A surety is charged as an
original promissor; 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. v.
Varadero de la Quinta [1919], 40 Phil., 48; Lachman v. Block
[1894], 46 La. Ann., 649; Bedford v. 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 le in solidum is similar to the common
law suretyship.
(Sgd.) "GEO. C. SELLNER."

Counsel for both parties agree that the only point at issue is
the determination of defendants 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.
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 if 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.
There is also an equitable aspect to the case which
reenforces this conclusion. The note executed by the Key
stone Mining Company matured on November 29, 1916.
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 P30,000. Notice
that the note had not been paid was not given to the
defendant until just about three years, after it matured and
when the Keystone 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.
ESTRELLA PALMARES, petitioner,

vs.
COURT OF APPEALS and M.B. LENDING
CORPORATION, respondents.
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 Osmea 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 of 6% per annum to be computed every
30 days from the date thereof.1 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 were made after the last payment
on September 26, 1991.2
Consequently, on the basis of petitioner's solidary liability
under the promissory note, respondent corporation filed a
complaint3 against petitioner Palmares as the lone partydefendant, to the exclusion of the principal debtors, allegedly
by reason of the insolvency of the latter.
In her Amended Answer with Counterclaim,4 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.
PALMARES v. CA
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 126490
March 31, 1998
During the pre-trial conference, the parties submitted the

following issues for the resolution of the trial court: (1) what
the rate of interest, penalty and damages should be; (2)
whether the liability of the defendant (herein petitioner) is
primary or subsidiary; and (3) whether the defendant Estrella
Palmares is only a guarantor with a subsidiary liability and
not a co-maker with primary liability.5
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
Osmea and Merlyn Azarraga who are primarily liable on the
instrument.6 This was based on the findings of the court a
quo that the 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; 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;
4. Plus costs of suit.7
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 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 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 surety 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:
ATTENTION TO CO-MAKERS: PLEASE READ WELL
I, Mrs. Estrella Palmares, as the Co-maker of the abovequoted loan, have fully understood the contents of this
Promissory Note for Short-Term Loan:
That as Co-maker, I am fully aware that I shall be jointly and
severally or solidarily liable with the above principal maker of
this note;
That in fact, I hereby agree that M.B. LENDING
CORPORATION may demand payment of the above loan
from me in case the principal maker, Mrs. Merlyn Azarraga
defaults in the payment of the note subject to the same
conditions above-contained.8
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
transactions 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 against
private respondent pursuant to Art. 1377 of the Civil Code.9
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
respondent when, in truth and in fact, the outstanding
balance of the loan is only P13,700.00. Where the interest
charged on the loan is exorbitant, iniquitous or
unconscionable, and the obligation has been partially
complied with, the court may equitably reduce the penalty10
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 paid since
petitioner has shown a sincere desire for a compromise.11
After a judicious evaluation of the arguments of the parties,
we are constrained to dismiss the petition for lack of merit,
but to except therefrom the issue anent the propriety of the
monetary award adjudged to herein respondent corporation.
At the outset, let it here be stressed that even assuming
arguendo that the promissory note executed between the
parties is a contract of adhesion, it has been the consistent
holding of the Court that contracts of adhesion are not invalid
per se and that on numerous occasions the binding effects
thereof have been upheld. The peculiar nature of such
contracts necessitate a close scrutiny of the factual milieu to
which the provisions are intended to apply. Hence, just as
consistently and unhesitatingly, but without categorically
invalidating such contracts, the Court has construed
obscurities and ambiguities in the restrictive provisions of
contracts of adhesion strictly albeit not unreasonably against
the drafter thereof when justified in light of the operative facts
and surrounding circumstances.12 The factual scenario
obtaining in the case before us warrants a liberal application
of the rule in favor of respondent corporation.
The Civil Code pertinently provides:
Art. 2047. By guaranty, a person called the guarantor binds
suretyship.
It is a cardinal rule in the interpretation of contracts that if the
terms of a contract are clear and leave no doubt upon the
intention of the contracting parties, the literal meaning of its
stipulation shall control.13 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, therefore, fail as it was evidenced only by her own
uncorroborated and, expectedly, self-serving allegations.14
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.15
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.16
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 a guarantor is an
insurer of the solvency of the debtor.17 A suretyship is an
undertaking that the debt shall be paid; a guaranty, an
undertaking that the debtor shall pay.18 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.19 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.20 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.21
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 with him, and without reference to the
solvency of the principal.22
In a desperate effort to exonerate herself from liability,
petitioner erroneously invokes the rule on strictissimi juris,
which holds that when the meaning of a contract of
indemnity or guaranty has once been judicially determined
under the rule of reasonable construction applicable to all

written contracts, then the liability of the surety, under his
contract, as thus interpreted and construed, is not to be
extended beyond its strict meaning.23 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.
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 and
subsequent acts shall also be principally considered.24
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.25 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 that a surety
is bound equally and absolutely with the principal,26 and as
such is deemed an original promisor and debtor from the
beginning.27 This is because in suretyship there is but one
contract, and the surety is bound by the same agreement
which binds the principal.28 In essence, the contract of a
surety starts with the agreement,29 which is precisely the
situation obtaining in this case before the Court.
It will further be observed that petitioner's undertaking as comaker immediately follows the terms and conditions
stipulated between respondent corporation, as creditor, and
the principal obligors. A surety is usually bound with his
principal by the same instrument, executed at the same time
and upon the same consideration; he is an original debtor,
and his liability is immediate and direct.30 Thus, it has been
held that where a written agreement on the same sheet of
paper with and immediately following the principal contract

between the buyer and seller is executed simultaneously
therewith, providing that the signers of the agreement agreed
to the terms of the principal contract, the signers were
"sureties" jointly liable with the buyer.31 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 supports the
obligation for both the principal and the surety.32
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
schedule of payment, I hereby waive my right to notice and
demand." Hence, demand by the creditor is no longer
necessary in order that delay may exist since the contract
itself already expressly so declares.33 As a surety, petitioner
is equally bound by such waiver.
Even if it were otherwise, demand on the sureties is not
necessary before bringing suit against them, since the
commencement of the suit is a sufficient demand.34 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.35
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.36 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.37 As an original promisor and debtor from the
beginning, he is held ordinarily to know every default of his
principal.38
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 surety exists
independently of his right to proceed against the principal.39
Under Article 1216 of the Civil Code, the creditor may
proceed against any one of the solidary debtors or some or
all of them simultaneously. The rule, therefore, is that if the
obligation is joint and several, the creditor has the right to
proceed even against the surety alone.40 Since, generally, it
is not necessary for the 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
that of the principal, then 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.41 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.42
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, even if such delay continues until the
principal becomes insolvent.43 And, in the absence of proof
of resultant injury, a surety is not discharged by the creditor's
mere statement that the creditor will not look to the surety,44
or that he need not trouble himself.45 The consequences of
the delay, such as the subsequent insolvency of the
principal,46 or the fact that the remedies against the principal
may be lost by lapse of time, are immaterial.47
The raison d'tre for the rule is that there is nothing to
prevent the creditor from proceeding against the principal at
any time.48 At any rate, if the surety is dissatisfied with the
degree of activity displayed by the creditor in the pursuit of
his principal, he may pay the debt himself and become
subrogated to all the rights and remedies of the creditor.49
It may not be amiss to add that leniency shown to a debtor in
default, by delay permitted by the creditor without change in
the time when the debt might be demanded, does not

constitute an extension of the time of payment, which would
release the surety.50 In order to constitute an extension
discharging the surety, it should appear that the extension
was for a definite period, pursuant to an enforceable
agreement between the principal and the creditor, and that it
was made without the consent of the surety or with a
reservation of rights with respect to him. The contract must
be one which precludes the creditor from, or at least hinders
him in, enforcing the principal contract within the period
during which he could otherwise have enforced it, and which
precludes the surety from paying the debt.51
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 here in
petitioner from the consequences of her undertaking.
Besides, the burden is on the surety, herein petitioner, to
show that she has been discharged by some act of the
creditor,52 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
charges would accumulate. The statement, likewise
traversed by said respondent, is misleading.
In an affidavit53 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 Osmea 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 Osmea Azarraga.
Mr. Banusing advised me not to worry because he will try to
collect first from Merlyn and Osmea Azarraga.
10. A year thereafter, I received a telephone call from the
secretary of Mr. Banusing who reminded that the loan of
Merlyn and Osmea 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 Osmea
Azarraga is acceptable. Later, Atty. Venus informed Ms.
Gatia that my offer is not acceptable to Mr. Banusing.
The purported offer to pay made by petitioner can not be
deemed sufficient and substantial in order to effectively
discharge her from liability. There are a number of
circumstances which conjointly inveigh against her aforesaid
theory.
1. Respondent corporation cannot be faulted for not
immediately demanding payment from petitioner. It was
petitioner who initially requested that the creditor try to
collect from her principal first, and she offered to pay only in
case the creditor fails to collect. The delay, if any, was
occasioned by the fact that respondent corporation merely
acquiesced to the request of petitioner. At any rate, there
was here no actual offer of payment to speak of but only a
commitment to pay if the principal does not pay.
2. Petitioner made a second attempt to settle the obligation
by offering a parcel of land which she owned. Respondent
corporation was acting well within its rights when it refused to
accept the offer. The debtor of a thing cannot compel the
creditor to receive a different one, although the latter may be
of the same value, or more valuable than that which is
due.54 The obligee is entitled to demand fulfillment of the
obligation or performance as stipulated. A change of the
object of the obligation would constitute novation requiring
the express consent of the parties.55
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 may be.56 In other words, the prestation must be
fulfilled completely. A person entering into a contract has a
right to insist on its performance in all particulars.57
Petitioner cannot compel respondent corporation to accept
the amount she is willing to pay because the moment the
latter accepts the performance, knowing its incompleteness
or irregularity, and without expressing any protest or
objection, then the obligation shall be deemed fully complied

with.58 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.
interest of 3% per month is hereby deleted and the award of

attorney's fees is reduced to P10,000.00.
SO ORDERED.
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 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 may
be equitably reduced further by eliminating such penalty
interest altogether.59
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 thereof appears to be unconscionable or
unreasonable.60 To that end, it is not even necessary to
show, as in other contracts, that it is contrary to morals or
public policy.61 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 of P10,000.00 as and for attorney's fee
would be sufficient in this case.62
WHEREFORE, the judgment appealed from is hereby
AFFIRMED, subject to the MODIFICATION that the penalty
MACHETTI v. HOSPICIO DE SAN JOSE

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. So
ordered.
GILAT SATELLITE v. UCPB
SUPREME COURT
Baguio City
FIRST DIVISION
G.R. No. 189563
April 7, 2014
GILAT SATELLITE NETWORKS, LTD., Petitioner,

vs.
UNITED COCONUT PLANTERS BANK GENERAL
INSURANCE CO., INC., Respondent.
DECISION
SERENO, CJ:
This is an appeal via a Petition for Review on Certiorari1 filed
6 November 2009 assailing the Decision2 and Resolution3
of the Court of Appeals (CA) in CA-G.R. CV No. 89263,
which reversed the Decision4 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 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 Virtuals 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 Complaint6 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 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 attorneys fees and litigation
expenses.
Accordingly, defendants 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
petitioners 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
petitioner 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 attorneys fees and litigation expenses.
On 18 October 2007, respondent appealed to the CA.13 The
appellate court rendered a Decision14 in the following
manner:
WHEREFORE, this appealed case is DISMISSED for lack of
jurisdiction. The trial courts 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
Agreement18 and pursuant to the policy of the courts to
encourage alternative dispute resolution methods,19 the trial
courts 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 Resolution20 issued by the
CA on 16 September 2009.
Hence, the instant Petition.
On 31 August 2010, respondent filed a Comment21 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.
THE COURTS RULING
The existence of a suretyship agreement 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 CAs order to arbitrate.
Moreover, Articles 1216 and 2047 of the Civil Code25 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
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 debt30 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 suretys 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
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 respondents liability to petitioner as
the formers surety.1wphi1 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 respondents 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 creditors relationship with the principal debtor nor does it
make the surety an active party to the principal creditordebtor relationship. In other words, the acceptance does not
give the surety the right to intervene in the principal contract.
The suretys role arises only upon the debtors 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
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. 928542 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 non-performance 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 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."
Interest, as a form of indemnity, may be awarded to a
creditor for the delay incurred by a debtor in the payment of
the latters 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 latters 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 respondents 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 petitioners
last demand on 24 January 2001.
In rejecting petitioners 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,
respondents 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
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 fulfilment of obligations.51 It is the
nonfulfillment 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 of judicial 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:
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 respondents delay was indeed justified by the
circumstances that is, One Virtuals advice regarding
petitioners alleged breach of obligations. The lower courts
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, 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
extra-judicial 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
extra-judicial 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. CA63 in
relation to Bangko Sentral-Monetary Board Circular No. 799
(Series of 2013), to wit:
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.1wphi1 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 extra judicial 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 CA-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.
G.R. No. 103066
April 25, 1996
WILLEX PLASTIC INDUSTRIES, CORPORATION,

petitioner,
vs.
HON. COURT OF APPEALS and INTERNATIONAL
CORPORATE BANK, respondents.
MENDOZA, J.:p
This is a petition for review on certiorari of the decision 1 of
the Court of Appeals in C.A.-G.R. CV No. 19094, affirming
the decision of the Regional Trial Court of the National
Capital Judicial Region, Branch XLV, Manila, which ordered
petitioner Willex Plastic Industries Corporation and the InterResin Industrial Corporation, jointly and severally, to pay
private respondent International Corporate Bank certain
sums of money, and the appellate court's resolution of
October 17, 1989 denying petitioner's motion for
reconsideration.
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 accomodation, Inter-Resin
Industrial and the Investment and Underwriting Corporation
of the Philippines (IUCP) executed two documents, both
entitled "Continuing Surety Agreement" and dated December
1, 1978, whereby they bound themselves solidarily to pay
Manilabank "obligations of every kind, on which the [InterResin 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."
WILLEX v. CA
SUPREME COURT
Baguio City
SECOND DIVISION
On January 7, 1981, following demand upon it, IUCP paid to

Manilabank the sum of P4,334,280.61 representing InterResin 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.
(c) Attorney's fees and expenses of litigation equivalent to

208 of the total amount due.
On August 11, 1982, Inter-Resin Industrial paid Interbank,

which had in turn succeeded Atrium, the sum of P687,600.00
representing the proceeds of its fire insurance policy for the
destruction of its properties.
Inter-Resin Industrial and Willex Plastic appealed to the

Court of Appeals. Willex Plastic filed its brief, while InterResin 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.
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;
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 defendantappellant 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.
(c) The complaint states no cause of action against WILLEX;

Petitioner raises a number of issues.
(d) WLLLEX is only a guarantor of the principal obliger, and
thus, its liability is only secondary to that of the principal;
(e) Plaintiff failed to exhaust the ultimate remedy in pursuing
its claim against the principal obliger;
(f) Plaintiff has no personality to sue.
On April 29, 1986, Interbank was substituted as plaintiff in
the action. The case then proceeded to trial.
On March 4, 1988, the trial court declared Inter-Resin
Industrial to have waived the right to present evidence for its
failure to appear at the hearing despite due notice. On the
other hand, Willex Plastic rested its case without presenting
any evidence. Thereafter Interbank and Willex Plastic
submitted their respective memoranda.
On April 5, 1988, the trial court rendered judgment, ordering
Inter-Resin Industrial and Willex Plastic jointly and severally
to pay to Interbank the following amounts:
(a) P3, 646,780.61, representing their indebtedness to the
plaintiff, with interest of 17% per annum from August 11,
1982, when Inter-Resin Industrial paid P687,500.00 to the
plaintiff, until full payment of the said amount;
(b) Liquidated damages equivalent to 178 of the amount due;
and
[1] The main issue raised is whether under the "Continuing

Guaranty" signed on April 2, 1979 petitioner Willex Plastic
may be held jointly and severally liable with Inter-Resin
Industrial for the amount paid by Interbank to Manilabank.
As already stated, the amount had been paid by Interbank's
predecessor-in-interest, Atrium Capital, to Manilabank
pursuant to the "Continuing Surety Agreements" made on
December 1, 1978. In denying liability to Interbank for the
amount, Willex Plastic argues that under the "Continuing
Guaranty," its liability is for sums obtained by Inter-Resin
Industrial from Interbank, not for sums paid by the latter to
Manilabank for the account of Inter-Resin Industrial. In
support of this contention Willex Plastic cites the following
portion of the "Continuing Guaranty":
For and in consideration of the sums obtained and/or to be
obtained by INTER-RESIN INDUSTRIAL CORPORATION,
hereinafter referred to as the DEBTOR/S, from you and/or
your principal/s as may be evidenced by promissory note/s,
checks, bills receivable/s and/or other evidence/s of
indebtedness (hereinafter referred to as the NOTE/S), I/We
hereby jointly and severally and unconditionally guarantee
unto you and/or your principal/s, successor/s and assigns
the prompt and punctual payment at maturity of the NOTE/S
issued by the DEBTOR/S in your and/or your principal/s,
successor/s and assigns favor to the extent of the aggregate
principal sum of FIVE MILLION PESOS (P5,000,000.00),

Philippine Currency, and such interests, charges and
penalties as may hereinafter be specified.
The contention is untenable. What Willex Plastic has
overlooked is the fact that evidence aliunde was introduced
in the trial court to explain that it was actually to secure
payment to Interbank (formerly IUCP) of amounts paid by the
latter to Manilabank that the "Continuing Guaranty" was
executed. In its complaint below, Interbank's predecessor-ininterest, Atrium Capital, alleged:
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].
In its answer, Inter-Resin Industrial admitted this allegation
although it claimed that it had already paid its obligation in its
entirety. On the other hand, Willex Plastic, while denying the
allegation in question, merely did so "for lack of knowledge
or information of the same." But, at the hearing of the case
on September 16, 1986, when asked by the trial judge
whether Willex Plastic had not filed a crossclaim against
Inter-Resin Industrial, Willex Plastic's counsel replied in the
negative and manifested that "the plaintiff in this case
[Interbank] is the guarantor and my client [Willex Plastic] only
signed as a guarantor to the guarantee." 2
For its part Interbank adduced evidence to show that the
"Continuing Guaranty" had been made to guarantee
payment of amounts made by it to Manilabank and not of
any sums given by it as loan to Inter-Resin Industrial.
Interbank's witness testified under cross examination by
counsel for Willex Plastic that Willex "guaranteed the
exposure/of whatever exposure of ACP [Atrium Capital] will
later be made because of the guarantee to Manila Banking
Corporation." 3
It has been held that explanatory evidence may be received
to show the circumstances under which a document has
been made and to what debt it relates. 4 At all events, Willex
Plastic cannot now claim that its liability is limited to any
amount which Interbank, as creditor, might give directly to
Inter-Resin Industrial as debtor because, by failing to object
to the parol evidence presented, Willex Plastic waived the
protection of the parol evidence rule. 5
Accordingly, the trial court found that it was "to secure the
guarantee made by plaintiff of the credit accommodation
granted to defendant IRIC [Inter-Resin Industrial] by
Manilabank, [that] the plaintiff required defendant IRIC to
execute a chattel mortgage in its favor and a Continuing
Guaranty which was signed by the defendant Willex Plastic
Industries Corporation." 6
Similarly, the Court of Appeals found it to be an undisputed
fact that "to secure the guarantee undertaken by plaintiffappellee [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. 7
Nor does the record show any other transaction under which
Inter-Resin Industrial may have obtained sums of money
from Interbank. It can reasonably be assumed that InterResin Industrial and Willex Plastic intended to indemnify
Interbank for amounts which it may have paid Manilabank on
behalf of Inter-Resin Industrial.
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 exist because of
the absence of a valid principal obligation. 8 Its contention is
based on the fact that it is not a party either to the
"Continuing Surety Agreement" or to the loan agreement
between Manilabank and Interbank Industrial.
Put in another way the consideration necessary to support a
surety obligation need not pass directly to the surety, a
consideration moving to the principal alone being sufficient.
For a "guarantor or surety is bound by the same
consideration that makes the contract effective between the
principal parties thereto. It is never necessary that a
guarantor or surety should receive any part or benefit, if such
there be, accruing to his principal." 9 In an analogous case, 10
this Court held:
At the time the loan of P100,000.00 was obtained from
petitioner by Daicor, for the purpose of having an additional
capital for buying and selling coco-shell charcoal and
importation of activated carbon, the comprehensive surety
agreement was admittedly in full force and effect. The loan
was, therefore, covered by the said agreement, and private
respondent, even if he did not sign the promissory note, is
liable by virtue of the surety agreement. The only condition
that would make him liable thereunder is that the Borrower
"is or may become liable as maker, endorser, acceptor or
otherwise." There is no doubt that Daicor is liable on the
promissory note evidencing the indebtedness.
The surety agreement which was earlier signed by Enrique
Go, Sr. and private respondent, is an accessory obligation, it
being dependent upon a principal one which, in this case is
the loan obtained by Daicor as evidenced by a promissory
note.

[3] Willex Plastic contends that the "Continuing Guaranty"
cannot be retroactivelt applied so as to secure payments
made by Interbank under the two "Continuing Surety
Agreements." Willex Plastic invokes the ruling in El
Vencedor v. Canlas 11 and Dio v. Court of Appeals 12 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 paries 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 Dio v. Court of Appeals the issue was
whether the sureties could be held liable for an obligation
contracted after the execution of the continuing surety
agreement. It was held that by its very nature a continuing
suretyship contemplates a future course of dealing. "It is
prospective in its operation and is generally intended to
provide security with respect to future transactions." By no
means, however, was it meant in that case that in all
instances a contrast of guaranty or suretyship should be
prospective in application.
Indeed, as we also held in Bank of the Philippine Islands v.
Foerster, 13 although a contract of suretyship is ordinarily not
to be construed as retrospective, in the end the intention of
the parties as revealed by the evidence is controlling. What
was said there 14 applies mutatis mutandis to the case at bar:
In our opinion, the appealed judgment is erroneous. It is very
true that bonds or other contracts of suretyship are ordinarily
not to be construed as retrospective, but that rule must yield
to the intention of the contracting parties as revealed by the
evidence, and does not interfere with the use of the ordinary
tests and canons of interpretation which apply in regard to
other contracts.
In the present case the circumstances so clearly indicate that
the bond given by Echevarria was intended to cover all of the
indebtedness of the Arrocera upon its current account with
the plaintiff Bank that we cannot possibly adopt the view of
the court below in regard to the effect of the bond.
[4] Willex Plastic says that in any event it cannot be
proceeded against without first exhausting all property of
Inter-Resin Industrial. Willex Plastic thus claims the benefit of
excussion. The Civil Code provides, however:
Art. 2059. This excussion shall not take place:
(1) If the guarantor has expressly renounced it;
(2) If he has bound himself solidarily with the debtor;

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 guarantee
unto you and/or your principal/s, successor/s and assigns
the prompt and punctual payment at maturity of the NOTE/S
issued by the DEBTOR/S in your and/or your principal/s,
successor/s and assigns favor to the extent of the aggregate
principal sum of FIVE MILLION PESOS (P5,000,000.00),
Philippine Currency, and such interests, charges and
penalties as may hereinafter he specified.
[5] Finally it is contended that Inter-Resin Industrial had
already paid its indebtedness to Interbank and that Willex
Plastic should have been allowed by the Court of Appeals to
adduce evidence to prove this. Suffice it to say that InterResin Industrial had been given generous opportunity to
present its evidence but it failed to make use of the same.
On the otherhand, Willex Plastic rested its case without
presenting evidence.
The reception of evidence of Inter-Resin Industrial was set
on January 29, 1987, but because of its failure to appear on
that date, the hearing was reset on March 12, 26 and April 2,
1987.
On March 12, 1987 Inter-Resin Industrial again failed to
appear. Upon motion of Willex Plastic, the hearings on
March 12 and 26, 1987 were cancelled and "reset for the last
time" on April 2 and 30, 1987.
On April 2, 1987, Inter-Resin Industrial again failed to
appear. Accordingly the trial court issued the following order:
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.
HON. JOSE P. ARRO, Judge of the Court of First

instance of Davao, and RESIDORO CHUA, respondents.
On the other hand, Willex Plastic announced it was resting

its case without presenting any evidence.
Laurente C. Ilagan for petitioner.

Victor A. Clapano for respondents.
Upon motion of Inter-Resin Industrial, however, the trial court

reconsidered its order and set the hearing anew on July 23,
1987. But Inter-Resin Industrial again moved for the
postponement of the hearing be postponed to August 11,
1987. The hearing was, therefore, reset on September 8 and
22, 1987 but the hearings were reset on October 13, 1987,
this time upon motion of Interbank. To give Interbank time to
comment on a motion filed by Inter-Resin Industrial, the
reception of evidence for Inter-Resin Industrial was again
reset on November 17, 26 and December 11, 1987.
However, Inter-Resin Industrial again moved for the
postponement of the hearing. Accordingly the hearing was
reset on November 26 and December 11, 1987, with warning
that the hearings were intransferrable.
Again, the reception of evidence for Inter-Resin Industrial
was reset on January 22, 1988 and February 5, 1988 upon
motion of its counsel. As Inter-Resin Industrial still failed to
present its evidence, it was declared to have waived its
evidence.
To give Inter-Resin Industrial a last opportunity to present its
evidence, however, the hearing was postponed to March 4,
1988. Again Inter-Resin Industrial's counsel did not appear.
The trial court, therefore, finally declared Inter-Resin
Industrial to have waived the right to present its evidence.
On the other hand, Willex Plastic, as before, manifested that
it was not presenting evidence and requested instead for
time to file a memorandum.
There is therefore no basis for the plea made by Willex
Plastic that it be given the opportunity of showing that InterResin 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.
RCBC v. JUDGE ARRO
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. L-49401
July 30, 1982
RIZAL COMMERCIAL BANKING CORPORATION,

petitioner,
vs.
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.
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.
being dependent upon a principal one which, in this case is

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
ATOK FINANCE CORPORATION, petitioner,

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

respondents.
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.
FELICIANO, J.:
SO ORDERED.
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 1979, 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
respondent spouses Danilo E. Halili and Pablico Bermundo
as sureties, executed in the continuing Suretyship
Agreement in favor of Atok Finance as creditor. Under this
Agreement, Sanyu Trading and the individual private
respondents who were officers and stockholders of Sanyu
Chemical did:
ATOK v. CA
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 80078
Syquia Law Offices for petitioner.
May 18, 1993
(1) For valuable and/or other consideration . . ., jointly and

severally unconditionally guarantee to ATOK FINANCE
CORPORATION (hereinafter called Creditor), the full, faithful
and prompt payment and discharge of any and all
indebtedness of [Sanyu Chemical] . . . (hereinafter called
Principal) to the Creditor. The word "indebtedness" is used
herein in its most comprehensive sense and includes any
and all advances, debts, obligations and liabilities of
Principal or any one or more of them, here[to]fore, now or
hereafter made, incurred or created, whether voluntary or
involuntary and however arising, whether direct or acquired
by the Creditor by assignment or succession, whether due or
not due, absolute or contingent, liquidated or unliquidated,
determined or undetermined and whether the Principal may
be may be liable individually of jointly with others, or whether
recovery upon such indebtedness may be or hereafter
become barred by any statute of limitations, or whether such
indebtedness may be or otherwise become unenforceable. 1
(Emphasis supplied)
Other relevant provisions of the Continuing Suretyship
Agreement follow:
(2) This is a continuing suretyship relating to any
indebtedness, including that arising under successive
transactions which shall either continue the indebtedness
from time to time or renew it after it has been satisfied. This

suretyship is binding upon the heirs, successors, executors,
administrators and assigns of the surety, and the benefits
hereof shall extend to and include the successors and
assigns of the Creditor.
(3) The obligations hereunder are joint and several and
independent of the obligations of the Principal. A separate
action or actions may be prosecuted against the Principal
and whether or not the Principal be joined in any such action
or actions.
indebtedness listed in the schedule forming part hereinafter

called "Contract" or "Contracts."
2. To induce the ASSIGNEE to purchase the above
Contracts, the ASSIGNOR does hereby certify, warrant and
represent that :
(a). He/It is the sole owner of the assigned Contracts free
and clear of claims of any other party except the herein
ASSIGNEE and has the right to transfer absolute title thereto
the ASSIGNEE;
xxx xxx xxx.

(6) In addition to liens upon, and rights of set-off against the
moneys, securities or other property of the Surety given to
the Creditor by law, the Creditor shall have the lien upon and
a right of self-off against all moneys, securities, and other
property of the Surety now and hereafter in the possession
of the Creditor; and every such lien or right of self-off may be
exercised without need of demands upon or notice to the
Surety. No lien or right of 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 setoff or to enforce such lien, or by any delay in so doing, and
every right of set-off or lien shall continue in full force and
effect until such right of set-off of lien is specifically waived or
released by an instrument in writing executed by the
Creditor.
(7) Any indebtedness of the Principal now or hereafter held
by the Surety is hereby subordinated to the indebtedness of
the Principal to the Creditor; and if the Creditor so requests,
such indebtedness of the Principal of the Surety shall be
collected, enforced and shall be paid over to the Creditor and
shall be paid over to the Creditor and shall be paid over to
the Creditor on account of the indebtedness of the Principal
to the Creditor but without reducing or affecting in any
manner the liability of the Surety under the provisions of this
suretyship.
xxx xxx xxx 2
(Emphases supplied)
On 27 November 1981, Sanyu Chemical assigned its trade
receivables outstanding as of 27 November 1981 with a total
face value of P125,871.00, to Atok Finance in consideration
of receipt from Atok Finance of the amount of P105,000.00.
The assigned receivables carried a standard term of thirty
(30) days; it appeared, however, that the standard
commercial practice was to grant an extension up to one
hundred twenty (120) days without penalties. The relevant
portions of this Deed of Assignment read as follows:
1. FOR VALUE RECEIVED, the ASSIGNOR does hereby
SELL, TRANSFER and ASSIGN all his/its rights, title and
interest in the contracts, receivables, accounts, notes,
leases, deeds of sale with reservation of title, invoices,
mortgages, checks, negotiable instruments and evidences of
(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 had been delivered and/or services
which have been rendered and none of the Contract is now,
nor will at any time become, contingent upon the fulfillment
of any contract or condition whatsoever, or subject to any
defense, offset or counterclaim;
(d). No assigned Contract is represented by any note or
other evidence of indebtness or other security document
except such as may have been endorsed, assigned and
delivered by the ASSIGNOR to the ASSIGNEE
simultaneously with the assignment of such Contract;
(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.
P110,550.00 balloon payment after 12 months. 3 (Emphasis
supplied)
Later, additional trade receivables were assigned by Sanyu
Chemical to Atok Finance with a total face value of
P100,378.45.
On 13 January 1984, Atok Finance commenced action
against Sanyu Chemical, the Arrieta spouses, Pablito
Bermundo and Leopoldo Halili before the Regional Trial
Court of Manila to collect the sum of P120,240.00 plus
penalty charges amounting to P0.03 for every peso due and
payable for each month starting from 1 September 1983.
Atok Finance alleged that Sanyu Chemical had failed to
collect and remit the amount due under the trade
receivables.
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 behalf,
although the individual private respondents submitted a
memorandum in support of their argument. After trial, on 1
April 1985, the trial court rendered a decision in favor of Atok
Finance. The dispositive portion of this decision reads as
follows:
ACCORDINGLY, judgment is hereby rendered in favor of the
plaintiff ATOK FINANCE CORPORATION; and against the
defendants SANYU CHEMICAL CORPORATION, DANILO
E. ARRIETA, NENITA B. ARRIETA, PABLITO BERMUNDO
and LEOPOLDO HALILI, ordering the said defendants,
jointly and severally, to pay the plaintiff:
(1) P120,240.00 plus P0.03 for each peso for each month
from September 1, 1983 until the whole amount is fully paid;
(2) P50,000.00 as attorney's fees; and
raffled to the Third Civil Cases Division of the IAC. In a

resolution dated 21 March 1986, that Division dismissed the
appeal upon the ground of abandonment, since the private
respondents had failed to file their appeal brief
notwithstanding receipt of the notice to do so. On 4 June
1986, entry of judgment was made by the Clerk of Court of
the IAC. Accordingly, Atok Finance went before the trial court
and sought a writ of execution to enforce the decision of the
trial court of 1 April 1985. The trial court issued a writ of
execution on 23 July 1986. 5 Petitioner alleged that the writ of
execution was served on private respondents. 6
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 for Relief from Judgment "in the
paramount interest of justice," 7 set aside the resolution of the
Third Civil Cases Division of the then IAC, and gave private
respondents a non-extendible period of fifteen (15) days
within which to file their appeal brief. Private respondents did
file their appeal brief.
The 15th Division, on 18 August 1987, rendered a Decision
on the merits of the appeal, and reversed and set aside the
decision of the trial court and entered a new judgment
dismissing the complaint of Atok Finance, ordering it to pay
private respondents P3,000.00 as attorney's fees and to pay
the costs.
Atok Finance moved to set aside the decision of the 15th
Division of the Court of Appeals, inviting attention to the
resolution of the IAC's Third Civil Cases Division of 21 March
1986 originally dismissing private respondent's appeal for
abandonment thereof. In a resolution dated 18 August 1987,
the 15th Division denied Atok Finance's motion stating that it
had granted the Petition for Relief from Judgment and given
private respondents herein fifteen (15) days within which to
file an appeal brief, while Atok Finance did not file an
appellee's brief, and that its decision was arrived at "on the
basis of appellant's brief and the original records of the
appeal case."
(3) To pay the costs.

SO ORDERED. 4
Private respondents went on appeal before the then
Intermediate Appellate Court ("IAC"), and the appeal was
there docketed as AC-G.R. No. 07005-CV. The case was
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 while execution proceedings [were] on-going on
the trial court. 8 (Emphasis 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, came into being, was organized and
commenced functioning. 9 This event, and the probability that
some confusion may have accompanied the period of
transition from the IAC to the Court of Appeals, lead us to
believe that the defect here involved should be disregarded
as being of secondary importance. At the same time, nothing
in this decision should be read as impliedly holding that a
petition from relief judgment is available in respect of a
decision rendered by the Court of Appeals; this issue is best
reserved for determination in some future cases where it
shall have been adequately argued by the parties.
Code) this does not mean that the law is inferior to it; the
terms of the contract could not be enforces if not valid. So,
even if, as in this case, the agreement was for a continuing
suretyship to include obligations enumerated in paragraph 2
of the agreement, the same could not be enforced. First,
because this contract, just like guaranty, cannot exist without
a valid obligation (Art. 2052, Civil Code); and, second,
although it may be given as security for future debt (Art.
2053, C.C.), the obligation contemplated in the case at bar
cannot be considered "future debt" as envisioned by this law.
There is no proof that when the suretyship agreement was
entered into, there was a pre-existing obligation which
served the principal obligation between the parties.
Furthermore, the "future debts" alluded to in Article 2053
refer to debts already existing at the time of the constitution
of the agreement but the amount thereof is unknown, unlike
in the case at bar where the obligation was acquired two
years after the agreement. 10 (Emphasis supplied).
We consider that the Court of Appeals here was in serious
error. It is true that a serious guaranty or a suretyship
agreement is an accessory contract in the sense that it is
entered into for the purpose of securing the performance of
another obligation which is denominated as the principal
obligation. It is also true that Article 2052 of the Civil Code
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.
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
Nevertheless, a guaranty may be constituted to guarantee

the performance of a voidable or an unenforceable contract.
It may also guaranty a natural obligation." (Emphasis
supplied).
Moreover, Article 2053 of the Civil Code states:
Art. 2053. A guaranty may also be given as security for
future debts, the amount of which is not yet known; there can
be no claim against the guarantor until the debt is liquidated.
A conditional obligation may also be secured. (Emphasis
supplied)
The Court of Appeals apparently overlooked our caselaw
interpreting Articles 2052 and 2053 of the Civil Code. In
National Rice and Corn Corporation (NARIC) v. Jose A.
Fojas and Alto Surety Co., Inc., 11 the private respondents
assailed the decision of the trial court holding them liable
under certain surety bonds filed by private respondent Fojas
and issued by private respondent Alto Surety Co. in favor of
petitioner NARIC, upon the ground that those surety bonds
were null and void "there being no principal obligation to be
secured by said bonds." In affirming the decision of the trial
court, this Court, speaking through Mr. Justice J.B.L. Reyes,
made short shrift of the private respondents' doctrinaire
argument:

Under his third assignment of error, appellant Fojas
questions the validity of the additional bonds (Exhs. D and D1) on the theory that when they were executed, the principal
obligation referred to in said bonds had not yet been entered
into, as no copy thereof was attached to the deeds of
suretyship. This defense is untenable, because in its
complaint the NARIC averred, and the appellant did not deny
that these bonds were posted to secure the additional credit
that Fojas has applied for, and the credit increase over his
original contract was sufficient consideration for the bonds.
That the latter were signed and filed before the additional
credit was extended by the NARIC is no ground for
complaint. Article 1825 of the Civil Code of 1889, in force in
1948, expressly recognized that "a guaranty may also be
given as security for future debts the amount of which is not
yet known." (Emphasis supplied)
In Rizal Commercial Banking Corporation v. Arro, 12 the Court
was confronted again with the same issue, that is, whether
private respondent was liable to pay a promissory note dated
29 April 1977 executed by the principal debtor in the light of
the provisions of a comprehensive surety agreement which
petitioner bank and the private respondent had earlier
entered into on 19 October 1976. Under the comprehensive
surety agreement, the private respondents had bound
themselves as solidary debtors of the Diacor Corporation not
only in respect of existing obligations but also in respect of
future ones. In holding private respondent surety (Residoro
Chua) liable under the comprehensive surety agreement, the
Court said:
being dependent upon a principal one, which, in this case is
note. What obviously induced petitioner bank to grant the
loan was the surety agreement whereby Go and Chua
bound themselves solidarily to guaranty the punctual
payment of the loan at maturity. By terms that are
unequivocal, it can be clearly seen that the surety agreement
was executed to guarantee future debts which Daicor may
incur with petitioner, as is legally allowable under the Civil
Code. Thus
Article 2053. A guarantee may also be given as security
for future debts, the amount of which is not yet known; there
can be no claim against the guarantor until the debt is
liquidated. A conditional obligation may also be secured. 13
(Emphasis supplied)
It is clear to us that the Rizal Commercial Banking
Corporation and the NARIC cases rejected the distinction
which the Court of Appeals in the case at bar sought to make
with respect to Article 2053, that is, that the "future debts"
referred to in that Article relate to "debts already existing at
the time of the constitution of the agreement but the amount
[of which] is unknown," and not to debts not yet incurred and
existing at that time. Of course, a surety is not bound under
any particular principal obligation until that principal
obligation is born. But there is no theoretical or doctrinal
difficulty inherent in saying that the suretyship agreement

itself is valid and binding even before the principal obligation
intended to be secured thereby is born, any more that there
would be in saying that obligations which are subject to a
condition precedent are valid and binding before the
occurrence of the condition precedent. 14
Comprehensive or continuing surety agreements are in fact
quite commonm place in present day financial and
commercial practice. A bank or a financing company which
anticipates entering into a series of credit transactions with a
particular company, commonly requires the projected
principal debtor to execute a continuing surety agreement
along with its sureties. By executing such an agreement, the
principal places itself in a position to enter into the projected
series of transactions with its creditor; with such surety
agreement, there would be no need to execute a separate
surety contract or bond for each financing or credit
accommodation extended to the principal debtor. As we
understand it, this is precisely what happened in the case at
bar.
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
maturity.
Once more, the Court of Appeals upheld the contention of
private respondents and held that Sanyu Chemical was free
from liability under the Deed of Assignment. The Court of
Appeals said:
. . . Article 1629 provides for the duration of assignor's
warranty of debtor's solvency depending on whether there
was a period agreed upon for the existence of such warranty,
analyzing the law thus:
(1) if there is a period (or length of time) agreed upon, then
for such period;
(2) if no period (or length of time) was agreed upon, then:

(a) one year from assignment if debt was due at the time
of the assignment
(b) one year from maturity if debt was not yet due at the
time of the assignment..
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
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 ". . . the terms stated on
our invoices were normally extended up to a period of 120
days
. . ." (Exhibit B-2). Considering the terms in the invoices plus
the ordinary practice of the company, thus, the assigned
debts matured between April 3, 1982 to May 4, 1982. The
assignor's warranty for debtor's warranty, in this case, would
then be from the maturity period up to April 3, 1983 or May
4, 1983 to cover all of the receivables in the invoices.
The letter of demand executed by appellee was dated
August 29, 1983 (Exhibit D) and the complaint was filed on
January 13, 1984. Both dates were beyond the warranty
period.
In effect, therefore, company-appellant was right when it
claimed that appellee had no cause of action against it or
had
lost
its
cause
of
action. 15 (Emphasis supplied)
Once again, however, we consider that the Court of Appeals
was in reversible error in so concluding. The relevant
provision of the Deed of Assignment may be quoted again in
this connection:
2. To induce the ASSIGNEE [Atok Finance] to purchase the
above contracts, the ASSIGNOR [Sanyu Chemical] does
hereby certify, warrant and represent that . . .
(g) the debtor/s under the assigned contract/s are solvent
and his/its/their failure to pay the assigned contract/s and/or
any installment thereon upon maturity thereof shall be
conclusively considered as a violation of this warranty;
and . . .
The foregoing warranties and representations are in addition
to those provided for in the Negotiable Instruments Law and
(Emphasis 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 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
breach of warranty of solvency by Sanyu Chemical, resulting
in turn in the assumption of solidary liability by the assignor
under the receivables assigned. In other words, the assignor
Sanyu Chemical becomes a solidary debtor under the terms
of the receivables covered and transferred by virtue of the
Deed of Assignment. And because assignor Sanyu Chemical
became, under the terms of the Deed of Assignment,
solidary obligor under each of the assigned receivables, the
other private respondents (the Arrieta spouses, Pablito
Bermundo and Leopoldo Halili), became solidarily liable for
that obligation of Sanyu Chemical, by virtue of the operation
of the Continuing Suretyship Agreement. Put a little
differently, the obligations of individual private respondent
officers and stockholders of Sanyu Chemical under the
Continuing Suretyship Agreement, were activated by the
resulting obligations of Sanyu Chemical as solidary obligor
under each of the assigned receivables by virtue of the
operation of the Deed of Assignment. That solidary liability of
Sanyu Chemical is not subject to the limiting period set out in
Article 1629 of the Civil Code.
It follows that at the time the original complaint was filed by
Atok Finance in the trial court, it had a valid and enforceable
cause of action against Sanyu Chemical and the other
private respondents. We also agree with the Court of
Appeals that the original obligors under the receivables
assigned to Atok Finance remain liable under the terms of
such receivables.

WHEREFORE, for all the foregoing, the Petition for Review
is hereby GRANTED DUE COURSE, and the Decision of the
Court of Appeals dated 18 August 1987 and its Resolution
dated 30 September 1987 are hereby REVERSED and SET
ASIDE. A new judgment is hereby entered REINSTATING
the Decision of the trial court in Civil Case No. 84-22198
dated 1 April 1985, except only that, in the exercise of this
Court's discretionary authority equitably to mitigate the
penalty clause attached to the Deed of Assignment, that
penalty is hereby reduced to eighteen percent (18%) per
annum (instead of P0.03 for every peso monthly [or 36% per
annum]). As so modified, the Decision of the trial court is
hereby AFFIRMED. Costs against private respondents.
SO ORDERED.
the aforementioned credit accommodations Norberto Uy and

Jacinto Uy Dio executed separate Continuing Suretyships
(Exhibits "E" and "F" respectively), dated 25 February 1977,
in favor of the latter. Under the aforesaid agreements,
Norberto Uy agreed to pay METROBANK any indebtedness
of UTEFS up to the aggregate sum of P300,000.00 while
Jacinto Uy Dio agreed to be bound up to the aggregate
sum of P800,000.00.
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).
DIO v. CA
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 89775
November 26, 1992
JACINTO UY DIO and NORBERTO UY, petitioners,

vs.
HON. COURT OF APPEALS and METROPOLITAN BANK
AND TRUST COMPANY, respondents.
DAVIDE, JR., J.:

Continuing Suretyship Agreements signed by the petitioners
set off this present controversy.
Petitioners assail the 22 June 1989 Decision of the Court in
CA-G.R. CV No. 17724 1 which reversed the 2 December
1987 Decision of Branch 45 of the Regional Trial Court
(RTC) of Manila in a collection suit entitled "Metropolitan
Bank and Trust Company vs. Uy Tiam, doing business under
the name of "UY TIAM ENTERPRISES & FREIGHT
SERVICES," Jacinto Uy Dio and Norberto Uy" and
docketed as Civil Case No. 82-9303. They likewise challenge
public respondent's Resolution of 21 August 1989 2 denying
their motion for the reconsideration of the former.
The impugned Decision of the Court summarizes the
antecedent facts as follows:
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 Irrevocable Letter of Credit No. SN-Loc-309, dated

March 30, 1979, in the sum of P815, 600.00, covered
UTEFS' purchase of "8,000 Bags Planters Urea and 4,000
Bags Planters 21-0-0." It was applied for and obtain by
UTEFS without the participation of Norberto Uy and Jacinto
Uy Dio as they did not sign the document denominated as
"Commercial Letter of Credit and Application." Also, they
were not asked to execute any suretyship to guarantee its
payment. Neither did METROBANK nor UTEFS inform them
that the 1979 Letter of Credit has been opened and the
Continuing Suretyships separately executed in February,
1977 shall guarantee its payment (Appellees brief, pp. 2-3;
rollo, p. 28).
The 1979 letter of credit (Exhibit "B") was negotiated.
METROBANK paid Planters Products the amount of
P815,600.00 which payment was covered by a Bill of
Exchange (Exhibit "C"), dated 4 June 1979, in favor of
(Original Records, p. 331).
Pursuant to the above commercial transaction, UTEFS
executed and delivered to METROBANK and Trust Receipt
(Exh. "D"), dated 4 June 1979, whereby the former
acknowledged receipt in trust from the latter of the
aforementioned goods from Planters Products which
amounted to P815, 600.00. Being the entrusted, the former
agreed to deliver to METROBANK the entrusted goods in the
event of non-sale or, if sold, the proceeds of the sale thereof,
on or before September 2, 1979.
However, UTEFS did not acquiesce to the obligatory
stipulations in the trust receipt. As a consequence,
METROBANK sent letters to the said principal obligor and its
sureties, Norberto Uy and Jacinto Uy Dio, demanding
payment of the amount due. Informed of the amount due,
UTEFS made partial payments to the Bank which were
accepted by the latter.
Answering one of the demand letters, Dio, thru counsel,
denied his liability for the amount demanded and requested
METROBANK to send him copies of documents showing the
source of his liability. In its reply, the bank informed him that

the source of his liability is the Continuing Suretyship which
he executed on February 25, 1977.
motion to dismiss and maintained that they are entitled to the

benefit of excussion (Original Records, pp. 88-93).
As a rejoinder, Dio maintained that he cannot be held liable

for the 1979 credit accommodation because it is a new
obligation contracted without his participation. Besides, the
1977 credit accommodation which he guaranteed has been
fully paid.
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).
Having sent the last demand letter to UTEFS, Dio and Uy

and finding resort to extrajudicial remedies to be futile,
METROBANK filed a complaint for collection of a sum of
money (P613,339.32, as of January 31, 1982, inclusive of
interest, commission penalty and bank charges) with a
prayer for the issuance of a writ of preliminary attachment,
against Uy Tiam, representative of UTEFS and impleaded
Dio and Uy as parties-defendants.
After trial, . . . the court a quo, on December 2, 198,

rendered its judgment, a portion of which reads:
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 Dio
(sureties-defendant herein) filed a motion to dismiss the
complaint on the ground of lack of cause of action. They
maintained that the obligation which they guaranteed in 1977
has been extinguished since it has already been paid in the
same year. Accordingly, the Continuing Suretyships executed
in 1977 cannot be availed of to secure Uy Tiam's Letter of
Credit obtained in 1979 because a guaranty cannot exist
without a valid obligation. It was further argued that they can
not be held liable for the obligation contracted in 1979
because they are not privies thereto as it was contracted
without their participation (Records, pp. 42-46).
On April 24, 1984, METROBANK filed its opposition to the
motion to dismiss. Invoking the terms and conditions
embodied in the comprehensive suretyships separately
executed by sureties-defendants, the bank argued that
sureties-movants bound themselves as solidary obligors of
defendant Uy Tiam to both existing obligations and future
ones. It relied on Article 2053 of the new Civil Code which
provides: "A guaranty may also be given as security for
future debts, the amount of which is not yet known; . . . ." It
was further asserted that the agreement was in full force and
effect at the time the letter of credit was obtained in 1979 as
sureties-defendants did not exercise their right to revoke it by
giving notice to the bank. (Ibid., pp. 51-54).
Meanwhile, the resolution of the aforecited motion to dismiss
was held in abeyance pending the introduction of evidence
by the parties as per order dated February 21, 1986 (Ibid., p.
71).
Having been granted a period of fifteen (15) days from
receipt of the order dated March 7, 1986 within which to file
the answer, sureties-defendants filed their responsive
pleading which merely rehashed the arguments in their
The evidence and the pleadings, thus, pose the querry (sic):
Are the defendants Jacinto Uy Dioand Norberto Uy liable
for the obligation contracted by Uy Tiam under the Letter of
Credit (Exh. B) issued on March 30, 1987 by virtue of the
Continuing Suretyships they executed on February 25,
1977?
Under the admitted proven facts, the Court finds that they
are not.
a) When Uy and Dio executed the continuing suretyships,
exhibits E and F, on February 25, 1977, Uy Tiam was
obligated to the plaintiff in the amount of P700,000.00 and
this was the obligation which both obligation which both
defendants guaranteed to pay. Uy Tiam paid this 1977
obligation and such payment extinguished the obligation
they assumed as guarantors/sureties.
b) The 1979 Letter of Credit (Exh. B) is different from the
1977 Letter of Credit which covered the 1977 account of Uy
Tiam. Thus, the obligation under either is apart and distinct
from the obligation created in the other as evidenced by
the fact that Uy Tiam had to apply anew for the 1979
transaction (Exh. A). And Dio and Uy, being strangers
thereto, cannot be answerable thereunder.
c) The plaintiff did not serve notice to the defendants Dio
and Uy when it extended to Credit at least to inform them
that the continuing suretyships they executed on February
25, 1977 will be considered by the plaintiff to secure the
1979 transaction of Uy Tiam.
d) There is no sufficient and credible showing that Dio and
Uy were fully informed of the import of the Continuing
Suretyships when they affixed their signatures thereon
that they are thereby securing all future obligations which Uy
Tiam may contract the plaintiff. On the contrary, Dio and Uy
categorically testified that they signed the blank forms in the
office of Uy Tiam at 623 Asuncion Street, Binondo, Manila, in
obedience to the instruction of Uy Tiam, their former
employer. They denied having gone to the office of the
plaintiff to subscribe to the documents (October 1, 1987, tsn,
pp. 5-7, 14; October 15, 1987, tsn, pp. 3-8, 13-16). (Records,
pp. 333-334). 3
xxx xxx xxx

In its Decision, the trial court decreed as follows:
SO ORDERED. 6
PREMISES CONSIDERED, judgment is hereby rendered:
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.
a) dismissing the COMPLAINT against JACINTO UY DIO

and NORBERTO UY;
b) ordering the plaintiff to pay to Dio and Uy the amount of
P6,000.00 as attorney's fees and expenses of litigation; and
c) denying all other claims of the parties for want of legal
and/or factual basis.
SO ORDERED. (Records, p. 336) 4
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
DEFENDANTSAPPELLEES JACINTO UY DIO AND NORBERTO UY ARE
SOLIDARILY LIABLE TO PLAINTIFF-APPELLANT FOR
THE OBLIGATION OF DEFENDANT UY TIAM UNDER THE
LETTER OF CREDIT ISSUED ON MARCH 30, 1979 BY
VIRTUE OF THE CONTINUING SURETYSHIPS THEY
EXECUTED ON FEBRUARY 25, 1977.
II. THE LOWER COURT ERRED IN HOLDING THAT
PLAINTIFF-APPELLANT
IS
ANSWERABLE
TO
DEFENDANTS-APPELLEES JACINTO UY DIO AND
NORBERTO UY FOR ATTORNEY'S FEES AND EXPENSES
OF LITIGATION. 5
On 22 June 1989, public respondent promulgated the
assailed Decision the dispositive portion of which reads:
WHEREFORE, premises considered, the judgment appealed
from is hereby REVERSED AND SET, ASIDE. In lieu thereof,
another one is rendered:
1) Ordering sureties-appellees Jacinto Uy Dio and Norberto
Uy to pay, jointly and severally, to appellant METROBANK
the amount of P2,397,883.68 which represents the amount
due as of July 17, 1987 inclusive of principal, interest and
charges;
Uy to pay, jointly and severally, appellant METROBANK the
accruing interest, fees and charges thereon from July 18,
1987 until the whole monetary obligation is paid; and
Uy to pay, jointly and severally, to plaintiff P20,000.00 as
attorney's fees.
With costs against appellees.
Petitioners filed a motion to reconsider the foregoing

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

On 12 February 1990, this Court resolved to give due course
to the petition after considering the allegations, issues and
arguments adduced therein, the Comment thereon by the
private respondent and the Reply thereto by the petitioners;
the parties were required to submit their respective
Memoranda.
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 of which may not known at the
time
the
guaranty
is
executed. 8 This is the basis for contracts denominated as
continuing guaranty or suretyship. A continuing guaranty is
one which is not limited to a single transaction, but which
contemplates a future course of dealing, covering a series of
transactions, generally for an indefinite time or until revoked.
It is prospective in its operation and is generally intended to
provide security with respect to future transactions within
certain limits, and contemplates a succession of liabilities, for
which, as they accrue, the guarantor becomes liable. 9
Otherwise stated, a continuing guaranty is one which covers
all transactions, including those arising in the future, which
are within the description or contemplation of the contract, of
guaranty, until the expiration or termination thereof. 10 A
guaranty shall be construed as continuing when by the terms
thereof it is evident that the object is to give a standing credit
to the principal debtor to be used from time to time either
indefinitely or until a certain period, especially if the right to
recall the guaranty is expressly reserved. Hence, where the
contract of guaranty states that the same is to secure
advances to be made "from time to time" the guaranty will be
construed to be a continuing one. 11
In other jurisdictions, it has been held that the use of
particular words and expressions such as payment of "any
debt," "any indebtedness," "any deficiency," or "any sum," or
the guaranty of "any transaction" or money to be furnished
the principal debtor "at any time," or "on such time" that the
principal debtor may require, have been construed to
indicate a continuing guaranty. 12
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 as guarantor or otherwise, and/or in order to
induce the BANK, in its discretion, at any time or from time to
time hereafter, to make loans or advances or to extend credit
in any other manner to, or at the request, or for the account

of the Borrower, either with or without security, and/or to
purchase or discount, or to make any loans or advances
evidence or secured by any notes, bills, receivables, drafts,
acceptances, checks, or other instruments or evidences of
indebtedness (all hereinafter called "instruments") upon
which the Borrower is or may become liable as maker,
endorser, acceptor, or otherwise, the SURETY agrees to
guarantee, and does hereby guarantee, the punctual
payment at maturity to the loans, advances credits and/or
other obligations hereinbefore referred to, and also any and
all other indebtedness of every kind which is now or may
hereafter become due or owing to the BANK by the
Borrower, together with any and all expenses which may be
incurred by the BANK in collecting all or any such
instruments or other indebtedness or obligations herein
before referred to, and/or in enforcing any rights hereunder,
and the SURETY also agrees that the BANK may make or
cause any and all such payments to be made strictly in
accordance with the terms and provisions of any
agreement(s) express or implied, which has (have) been or
may hereafter be made or entered into by the Borrow in
reference thereto, regardless of any law, regulation or
decree, unless the same is mandatory and non-waivable in
character, nor or hereafter in effect, which might in any
manner affect any of the terms or provisions of any such
agreement(s) or the Bank's rights with respect thereto as
against the Borrower, or cause or permit to be invoked any
alteration in the time, amount or manner of payment by the
Borrower of any such instruments, obligations or
indebtedness; provided, however, that the liability of the
SURETY hereunder shall not exceed at any one time the
aggregate principal sum of PESOS: THREE HUNDRED
THOUSAND ONLY (P300,000.00) (irrespective of the
currenc(ies) in which the obligations hereby guaranteed are
payable), and such interest as may accrue thereon either
before or after any maturity(ies) thereof and such expenses
as may be incurred by the BANK as referred to above. 13
Paragraph I of the Continuing Suretyship Agreement
executed by petitioner Dio contains identical provisions
except with respect to the guaranteed aggregate principal
amount which is EIGHT THOUSAND PESOS (P800,000.00).
14
Paragraph IV of both agreements stipulate that:

VI. This is a continuing guaranty and shall remain in full force
and effect until written notice shall have been received by
the BANK that it has been revoked by the SURETY, but any
such notice shall not release the SURETY, from any liability
as to any instruments, loans, advances or other obligations
hereby guaranteed, which may be held by the BANK, or in
which the BANK may have any interest at the time of the
receipt (sic) of such notice. No act or omission of any kind on
the BANK'S part in the premises shall in any event affect or
impair this guaranty, nor shall same (sic) be affected by any
change which may arise by reason of the death of the
SURETY, or of any partner(s) of the SURETY, or of the
Borrower, or of the accession to any such partnership of any
one or more new partners. 15

The foregoing stipulations unequivocally reveal that the
suretyship agreement in the case at bar are continuing in
nature. Petitioners do not deny this; in fact, they candidly
admitted it. Neither have they denied the fact that they had
not revoked the suretyship agreements. Accordingly, as
correctly held by the public respondent:
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 xxx xxx
When the Irrevocable Letter of Credit No. SN-Loc-309 was
obtained from appellant bank, for the purpose of obtaining
goods (covered by a trust receipt) from Planters Products,
the continuing suretyships were in full force and effect.
Hence, even if sureties-appellees did not sign the
"Commercial Letter of Credit and Application, they are still
liable as the credit accommodation (letter of credit/trust
receipt) was covered by the said suretyships. What makes
them liable thereunder is the condition which provides that
the Borrower "is or may become liable as maker, endorser,
acceptor or otherwise." And since UTEFS which (sic) was
liable as principal obligor for having failed to fulfill the
obligatory stipulations in the trust receipt, they as insurers of
its obligation, are liable thereunder. 16
Petitioners maintain, however, that their Continuing
Suretyship Agreements cannot be made applicable to the
1979 obligation because the latter was not yet in existence
when the agreements were executed in 1977; under Article
2052 of the Civil Code, a guaranty "cannot exist without a
valid obligation." We cannot agree. First of all, the
succeeding article provides that "[a] guaranty may also be
given as security for future debts, the amount of which is not
yet known." Secondly, Article 2052 speaks about a valid
obligation, as distinguished from a void obligation, and not
an existing or current obligation. This distinction is made
clearer in the second paragraph of Article 2052 which reads:
Nevertheless, a guaranty may be constituted to guarantee
the performance of a voidable or an unenforceable contract.
It may also guarantee a natural obligation.
As to the amount of their liability under the Continuing
Suretyship Agreements, petitioners contend that the public
respondent gravely erred in finding them liable for more than
the amount specified in their respective agreements, to wit:
(a) P800,000.00 for petitioner Dio and (b) P300,000.00 for
petitioner Uy.
The limit of the petitioners respective liabilities must be
determined from the suretyship agreement each had signed.
It is undoubtedly true that the law looks upon the contract of
suretyship with a jealous eye, and the rule is settled that the
obligation of the surety cannot be extended by implication

beyond its specified limits. To the extent, and in the manner,
and under the circumstances pointed out in his obligation, he
is bound, and no farther. 17
Indeed, the Continuing Suretyship Agreements signed by
petitioner Dio and petitioner Uy fix the aggregate amount of
their liability, at any given time, at P800,000.00 and
P300,000.00, respectively. The law is clear that a guarantor
may bond himself for less, but not for more than the principal
debtor, both as regards the amount and the onerous nature
of the conditions. 18 In the case at bar, both agreements
provide for liability for interest and expenses, to wit:
. . . and such interest as may accrue thereon either before or
after any maturity(ies) thereof and such expenses as may be
incurred by the BANK referred to above. 19
They further provide that:
In the event of judicial proceedings being instituted by the
BANK against the SURETY to enforce any of the terms and
conditions of this undertaking, the SURETY further agrees to
pay the BANK a reasonable compensation for and as
attorney's fees and costs of collection, which shall not in any
event be less than ten per cent (10%) of the amount due (the
same to be due and payable irrespective of whether the case
is settled judicially or extrajudicially). 20
Thus, by express mandate of the Continuing Suretyship
Agreements which they had signed, petitioners separately
bound themselves to pay interest, expenses, attorney's fees
and costs. The last two items are pegged at not less than ten
percent (10%) of the amount due.
Even without such stipulations, the petitioners would,
nevertheless, be liable for the interest and judicial costs.
Article 2055 of the Civil Code provides: 21
Art. 2055. A guaranty is not presumed; it must be express
and cannot extend to more than what is stipulated therein.
If it be simple or indefinite, it shall comprise not only the
principal obligation, but also all its accessories, including the
judicial costs, provided with respect to the latter, that the
guarantor shall only be liable for those costs incurred after
he has been judicially required to pay.
Interest and damages are included in the term accessories.
However, such interest should run only from the date when
the complaint was filed in court. Even attorney's fees may be
imposed whenever appropriate, pursuant to Article 2208 of
the Civil Code. Thus, in Plaridel Surety & Insurance Co., Inc.
vs. P.L. Galang Machinery Co., Inc., 22 this Court held:
Petitioner objects to the payment of interest and attorney's
fees because: (1) they were not mentioned in the bond; and
(2) the surety would become liable for more than the amount
stated in the contract of suretyship.

xxx xxx 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 interest has been charged
from the date of the judgment of the appellate court. In this
jurisdiction, we rather prefer to follow the general practice,
which is to order that interest begin to run from the date
when the complaint was filed in court, . . .
Such theory aligned with sec. 510 of the Code of Civil
Procedure which was subsequently recognized in the Rules
of Court (Rule 53, section 6) and with Article 1108 of the Civil
Code (now Art. 2209 of the New Civil Code).
In other words the surety is made to pay interest, not by
reason of the contract, but by reason of its failure to pay
when demanded and for having compelled the plaintiff to
resort to the courts to obtain payment. It should be observed
that interest does not run from the time the obligation
became due, but from the filing of the complaint.
As to attorney's fees. Before the enactment of the New Civil
Code, successful litigants could not recover attorney's fees
as part of the damages they suffered by reason of the
litigation. Even if the party paid thousands of pesos to his
lawyers, he could not charge the amount to his opponent
(Tan Ti vs. Alvear, 26 Phil. 566).
However the New Civil Code permits recovery of attorney's
fees in eleven cases enumerated in Article 2208, among
them, "where the court deems it just and equitable that
attorney's (sic) fees and expenses of litigation should be
recovered" or "when the defendant acted in gross and
evident bad faith in refusing to satisfy the plaintiff's plainly
valid, just and demandable claim." This gives the courts
discretion in apportioning attorney's fees.
The records do not reveal the exact amount of the unpaid
portion of the principal obligation of Uy Tiam to
MERTOBANK under Irrevocable Letter of Credit No. SN-Loc309 dated 30 March 1979. In referring to the last demand
letter to Mr. Uy Tiam and the complaint filed in Civil Case No.
82-9303, the public respondent mentions the amount of
"P613,339.32, as of January 31, 1982, inclusive of interest
commission penalty and bank charges." 23 This is the same
amount stated by METROBANK in its Memorandum. 24
However, in summarizing Uy Tiam's outstanding obligation
as of 17 July 1987, public respondent states:
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 (5-31-82 to 7-17-87) as shown in
the Statement of Account (Exhibit I). 25
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 Dio which stipulates an aggregate
principal sum of not exceeding P800,000.00, and partly
covered by that of petitioner Uy which pegs his maximum
liability at P300,000.00.
Consequently, the judgment of the public respondent shall
have to be modified to conform to the foregoing exposition,
to which extent the instant petition is impressed with partial
merit.
WHEREFORE, the petition is partly GRANTED, but only
insofar as the challenged decision has to be modified with
respect to the extend of petitioners' liability. As modified,
petitioners JACINTO UY DIO and NORBERTO UY are
hereby declared liable for and are ordered to pay, up to the
maximum limit only of their respective Continuing Suretyship
Agreement, the remaining unpaid balance of the principal
obligation of UY TIAM or UY TIAM ENTERPRISES &
FREIGHT SERVICES under Irrevocable Letter of Credit No.
SN-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.
FORTUNE MOTORS v. CA
SUPREME COURT
Manila
THIRD DIVISION
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.

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 stock-in-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 Rule 45 of the Rules of Court) seeking to set
aside the Decision 1 of the Court of Appeals (Tenth Division) 2
promulgated on September 30, 1993 in CA G.R. CV No.
09136 which affirmed in toto the decision 3 of the Regional
Trial Court of Manila Branch 11 4 in Civil Case No. 8321994, 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 Rodrigueza")
each executed an undated "Surety Undertaking" 5
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
hereafter made."
The following year or on April 6 5, 1982, Petitioner Fortune,
Respondent Filinvest and Canlubang Automotive Resources
Corporation ("CARCO") entered into an "Automotive
Wholesale Financing Agreement" 7 ("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. Thus, Filinvest
through counsel, sent a demand letter 8 dated December 12,
1983 to Fortune for the payment of its unsettled account in
the amount of P1,302,811.00. Filinvest sent similar demand
letters 9 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 the correct balance of defendants' account with
Filinvest as agreed upon by the parties during pre-trial. 10
Subsequently,
Filinvest
presented
testimonial
and
documentary evidence. Defendants (petitioners herein),
instead of presenting their evidence, filed a "Motion for
Judgment on Demurrer to Evidence" 11 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
evidence was sufficient to prove the amount of the claim. 12
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 . . .;
. . . The defendants (referring to Rodrigueza and Chua) are
not parties to the trust receipts agreements since they are
ONLY sureties. . . . 13
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 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, . . . by which you may
purchase or otherwise require from, and or enter into with
obligor . . . trust receipt . . . arising out of wholesale and/or
retail transactions by or with obligor, the undersigned . . .
absolutely, unconditionally, and solidarily guarantee to you . .
. the full, faithful and prompt performance, payment and
discharge of any and all obligations . . . 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 . . . now in force or hereafter made.
(Emphasis 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 modifications
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 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 thing as evidence by
silence (Sec. 23, Rule 130, Revised Rules of Court). 14
The Court of Appeals, affirming the above decision of the trial
court, further explained:
. . . 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
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 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 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 why
Filinvest and CARCO agreed to enter into the AWFA with
Fortune. 15
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 on all fours with Atok Finance
Corporation vs. Court of Appeals 16 which reiterated our
rulings in National Rice and Corn Corporation (NARIC) vs.
Court of Appeals 17 and Rizal Commercial Banking
Corporation vs. Arro. 18 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 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] . . . 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
previously been rejected, citing the RCBC and NARIC cases.
We further said:
. . . 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
accommodation extended to the principal debtor.
In Dino vs. Court of Appeals, 19 we again had occasion to
discourse on continuing guaranty/suretyship thus:
. . . 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 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.
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
indicate a continuing guaranty. 20
We have no reason to depart from our uniform ruling in the

above-cited 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
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 and Rodrigueza to have
the cars delivered to petitioner. Fortune, they signed the
blank promissory notes. 21 (emphasis 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 Fortune and
even a signatory to the Financial Agreement with Filinvest. 22
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 would
virtually sanction the perpetration of fraud or injustice. 23
Second Issue: No Novation

Neither do we find merit in the averment of petitioners that
the Financing Agreement contained onerous obligations 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, they are incompatible and the latter obligation
novates the first. 24 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. 25
Under the surety undertakings however, the obligation of the
sureties referred to absolutely, unconditionally and solidarily
guaranteeing the full, faithful and prompt performance,
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 to 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 obligations to speak of in the two contracts.
They can stand together without conflict.
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. 27
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.
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:
. . . 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 obligations in
the aforementioned AWFA, trust receipts or demand drafts. 26
Third Issue: Amount of Claim Substantiated
SOUTH CITY HOMES v. BA FINANCE

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 135462
December 7, 2001
SOUTH CITY HOMES, INC., FORTUNE MOTORS (PHILS.),

PALAWAN LUMBER MANUFACTURING CORPORATION,
petitioners,
vs.
BA FINANCE CORPORATION, respondent.

PARDO, J.:
The Case
The case is a petition to set aside the decision 1 of the Court
of Appeals, the dispositive portion of which reads:
"WHEREFORE, premises considered, the appealed
Decision (as amended by that Order of July 22, 1992) of the
lower court in Civil Case No. 21944 is hereby AFFIRMED
with the MODIFICATION that defendant-appellee South City
Homes, Inc. is hereby ordered to pay, jointly and severally,
with Fortune Motors Corporation, Palawan Lumber
Manufacturing Corporation and Joseph L. G. Chua, the
outstanding amounts due under the six (6) drafts and trust
receipts, with interest thereon at the legal rate from the date
of filing of this case until said amounts shall have been fully
paid, as follows:
xxxxx
and the attorney's fees and costs of suit.
"SO ORDERED."2
The Facts
The facts, as found by the Court of Appeals, are as follows:
"The present controversy relates to the rights of an assignee
(financing company) of drafts and trust receipts backed up
by sureties, in the event of default by the debtor (car dealer)
to whom the assignor creditor (car manufacturer) sold and
delivered motor vehicles for resale. A consistent ruling on
these cases is hereby reiterated: that a surety may secure
obligations incurred subsequent to the execution of the
surety contract.
"Prior to the transactions covered by the subject drafts and
trust receipts,
defendant-appellant
Fortune Motors
Corporation (Phils.) has been availing of the credit facilities
of plaintiff-appellant BA Finance Corporation. On January 17,
1983, Joseph L. G. Chua, President of Fortune Motors
Corporation, executed in favor of plaintiff-appellant a
Continuing Suretyship Agreement, in which he "jointly and
severally unconditionally" guaranteed the "full, faithful and
prompt payment and discharge of any and all indebtedness"
of Fortune Motors Corporation to BA Finance Corporation
(Folder of Exhibits, pp. 21-22).
"On February 3, 1983, Palawan Lumber Manufacturing
Corporation represented by Joseph L.G. Chua, George D.
Tan, Edgar C. Rodrigueza and Joselito C. Baltazar, executed
in favor of plaintiff-appellant a Continuing Suretyship
Agreement in which, said corporation "jointly and severally
unconditionally" guaranteed the "full, faithful and prompt
payment and discharge of any and all indebtedness of
Fortune Motors Corporation to BA Finance Corporation
(Folder of Exhibits, pp. 19-20). On the same date, South City
Homes, Inc. represented by Edgar C. Rodrigueza and

Aurelio F. Tablante, likewise executed a Continuing
Suretyship Agreement in which said corporation "jointly and
severally unconditionally" guaranteed the "full, faithful and
prompt payment and discharge of any and all indebtedness"
of Fortune Motors Corporation to BA Finance Corporation
(Folder of Exhibits, pp. 17-18).
"Subsequently,
Canlubang
Automotive
Resources
Corporation (CARCO) drew six (6) Drafts in its own favor,
payable thirty (30) days after sight, charged to the account of
Fortune Motors Corporation, as follows:
xxxxx
"(Folder of Exhibits, pp. 1, 4, 7, 8, 11 and 14).
"Fortune Motors Corporation thereafter executed trust
receipts covering the motor vehicles delivered to it by
CARCO under which it agreed to remit to the Entruster
(CARCO) the proceeds of any sale and immediately
surrender the remaining unsold vehicles (Folder of Exhibits,
pp. 2, 5, 7-A, 9, 12 and 15). The drafts and trust receipts
were assigned to plaintiff-appellant, under Deeds of
Assignment executed by CARCO (Folder of Exhibits, pp. 3,
6, 7-B, 10, 13 and 16).
"Upon failure of the defendant-appellant Fortune Motors
Corporation to pay the amounts due under the drafts and to
remit the proceeds of motor vehicles sold or to return those
remaining unsold in accordance with the terms of the trust
receipt agreements, BA Finance Corporation sent demand
letter to Edgar C. Rodrigueza, South City Homes, Inc.,
Aurelio
Tablante,
Palawan
Lumber
Manufacturing
Corporation, Joseph L. G. Chua, George D. Tan and Joselito
C. Baltazar (Folder of Exhibits, pp. 29-37). Since the
defendants-appellants failed to settle their outstanding
account with plaintiff-appellant, the latter filed on December
22, 1983 a complaint for a sum of money with prayer for
preliminary attachment, with the Regional Trial Court of
Manila, Branch 1, which was docketed as Civil Case No. 8321944 (Record, pp. 1-12). Plaintiff-appellant filed a surety
bond in the amount of P3,391,546.56 and accordingly, Judge
Rosalio C. Segundo ordered the issuance of a writ of
preliminary attachment on January 3, 1984 (Record, pp. 3747). Defendants Fortune Motors Corporation, South City
Homes, Inc., Edgar C. Rodrigueza, Aurelio F. Tablante,
Palawan Lumber Manufacturing Corporation, Joseph L. G.
Chua, George D. Tan and Joselito C. Baltazar filed a Motion
to Discharge Attachment, which was opposed by plaintiffappellant (Record, pp. 49-56). In an Order dated January 11,
1984, Judge Segundo dissolved the writ of attachment
except as against defendant Fortune Motors Corporation and
set the said incident for hearing (Record, p. 57). On January
19, 1984, the defendants filed a Motion to Dismiss. Therein,
they alleged that conventional subrogation effected a
novation without the consent of the debtor (Fortune Motors
Corporation) and thereby extinguished the latter's liability;
that pursuant to the trust receipt transaction, it was
premature under P. D. No. 115 to immediately file a

complaint for a sum of money as the remedy of the entruster
is an action for specific performance; that the suretyship
agreements are null and void for having been entered into
without an existing principal obligation; and that being such
sureties does not make them solidary debtors (Record, pp.
58-64).
"After due hearing, the court denied the motion to discharge
attachment with respect to defendant Fortune Motors
Corporation as well as the motion to dismiss by the
defendants (Record, pp. 68 and 87). In their Answer,
defendants stressed that their obligations to the creditor
(CARCO) was extinguished by the assignment of the drafts
and trust receipts to plaintiff-appellant without their
knowledge and consent, and pursuant to legal provision on
conventional subrogation a novation was effected, thereby
extinguishing the liability of the sureties; that plaintiffappellant failed to immediately demand the return of the
goods under the trust receipt agreements or exercise the
courses of action by the entruster as provided for under P. D.
No. 115; and that at the time the suretyship agreements were
entered into, there were no principal obligations, thus
rendering them null and void. A counterclaim for the award of
actual, moral and exemplary damages was prayed for by
defendants (Record, pp. 91-110).
"During the pre-trial, efforts to reach a compromise was not
successful, and in view of the retirement of Judge Rosalio C.
Segundo of RTC Manila, Branch 1, the case was-re-raffled
off to Branch XXXIII, presided over by Judge Felix V. Barbers
(Record, pp. 155-160).
"Fortune Motors Corporation filed a motion to lift the writ of
attachment covering three (3) vehicles described in the
Third-Party Claim filed with the Office of Deputy Sheriff Jorge
C. Victorino (RTC, Branch 1) by Fortune Equipment, Inc.
which was opposed by plaintiff-appellant (Record, pp. 173181). On June 15, 1984, Deputy Sheriff Jorge C. Victorino
issued a "Notice of Levy Upon Personal Properties Pursuant
to Order of Attachment" which was duly served on defendant
Fortune Motors Corporation (Record, pp. 191-199). In an
Order dated April 28, 1986, the court a quo denied the
motion to lift the writ of attachment on three (3) vehicles
described in the Third-Party Claim filed by Fortune
Equipment Inc. (Record, p. 207). On motion of their
respective counsel, the trial court granted the parties time to
sit down and appraise the machineries and spare parts
owned by defendant Fortune Motors Corporation which are
now in the possession of plaintiff corporation by virtue of the
attachment. A series of conferences was allowed by the
court, as means toward possible compromise agreement. In
an Order dated June 2, 1987, the case was returned to
Branch I, now presided over by Judge Rebecca G. Salvador
(Record, p. 237). The pre-trial period was terminated and the
case was set for trial on the merits (Record, p. 259).
"Acting on the motion to sell levied properties filed by
defendant George D. Tan, the trial court ordered the public
sale of the attached properties (Record, p. 406). The court
likewise allowed the complaint-in-intervention filed by
Fortune Equipment Inc. and South Fortune Motors

Corporation who claimed ownership of four (4) vehicles
earlier seized and attached (Record, p. 471-475). Plaintiff
corporation admitted the allegations contained in the
complaint-in-intervention only with respect to one truck so
attached but denied the rest of intervenors' allegations
(Record, pp. 479-482). Thereafter, the parties submitted their
respective pre-trial briefs on the complaint-in-intervention,
and after the submission of evidence thereon, the case was
submitted for decision (Record, pp. 573-577).
"On November 25, 1991, the lower court rendered its
judgment, the dispositive portion of which reads as follows:
"WHEREFORE, judgment is hereby rendered:
"1. Ordering defendants Fortune Motors, Palawan Lumber
Manufacturing Corporation and Joseph Chua, jointly and
severally to pay the plaintiff on the July 27, 1983 Draft, the
sum of P324,767.41 with the interest thereon at the legal
rate from the date of filing of this case, December 21, 1983
until the amount shall have been fully paid;
"2. Ordering defendants Fortune Motors, Palawan
Manufacturing Corporation and Joseph Chua jointly and
severally to pay to the plaintiff on the July 26, 1983 Draft, the
sum of P198,659.52 with interest thereon at the legal rate
from the date of filing of this case, until the amount shall
have been fully paid;
"3. Ordering defendant Fortune Motors, Palawan
severally to pay to the plaintiff on the July 28, 1983 Draft the
sum of P1,138,941.00 with interest thereon at the legal rate
from the date of filing of this case, until the amount shall
severally to pay to the plaintiff on the August 2, 1983 Draft,
the sum of P244,269.00 with interest thereon at the legal
rate from the date of filing of this case, until the amount shall
severally to pay to the plaintiff on the August 5, 1983 Draft
the sum of P275,079.60 with interest thereon at the legal
rate from the date of the filing of this case, until the amount
shall have been fully paid;
severally to pay to the plaintiff on the August 8, 1983 Draft
the sum of P475,046.10 with interest thereon at legal rate
from the date of the filing of this case, until the amount shall
been fully paid;
"7. Ordering defendant Fortune Motors, Palawan Lumber

severally to pay the sum of P300,000.00 as attorney's fees
and the costs of this suit;
"x x x" (Records, pp. 664-665)
"8. Dismissing plaintiff's complaint against South City

Homes, Aurelio Tablante, Joselito Baltazar, George Tan and
Edgar Rodrigueza and the latter's counterclaim for lack of
basis;
"Plaintiffs BA Finance Corporation, defendants Fortune

Motors Corp. (Phils.) and Palawan Lumber Manufacturing
Corporation, and intervenors Fortune Equipment and South
Fortune Motors, interposed the present appeal and filed their
respective Briefs."3
"9. Ordering Deputy Sheriff Jorge Victorino to return to

Intervenor Fortune Equipment the Mitsubishi Truck Canter
with Motor No. 310913 and Chassis No. 513234;
On September 8, 1998, the Court of Appeals promulgated a

decision, the dispositive portion of which is quoted in the
opening paragraph of this decision.
"10. Dismissing the complaint-in-intervention in so far as the

three other vehicles mentioned in the complaint-inintervention are concerned for lack of cause of action;
Hence, this appeal.4
"11. Dismissing the complaint-in-intervention against Fortune

Motor for lack of basis; and
The issues presented are: (1) whether the suretyship

agreement is valid; (2) whether there was a novation of the
obligation so as to extinguish the liability of the sureties; and
(3) whether respondent BAFC has a valid cause of action for
a sum of money following the drafts and trust receipts
transactions.5
"12. Ordering the parties-in-intervention to bear their

respective damages, attorneys fees and the costs of the suit.
"Upon execution, the sheriff may cause the judgment to be
satisfied out of the properties attached with the exception of
one (1) unit Mitsubishi Truck Canter with Motor No. 310913
and Chassis No. 513234, if they be sufficient for that
purpose. The officer shall make a return in writing to the
court of his proceedings. Whenever the judgment shall have
been paid, the officer, upon reasonable demand must return
to the judgment debtor the attached properties remaining in
his hand, and any of the proceeds of the properties not
applied to the judgment.
"SO ORDERED.
"On two (2) separate motions for reconsideration, one filed
by plaintiffs-intervenors dated December 18, 1991 and the
other by plaintiff dated December 26, 1991, the trial court
issued an Order dated July 22, 1992 amending its Decision
dated November 25, 1991. Specifically, said Order amended
paragraphs 9 and 10 thereof and deleted the last paragraph
of the said Decision.
"Paragraphs 9 and 10 now read:
"9. Ordering Deputy Sheriff Jorge C. Victorino to return to
Intervenor Fortune Equipment, Inc. the Mitsubishi Truck
Canter with Motor No. 310913 and Chassis No. 513234;
Mitsubishi Truck Canter with Motor No. 4D30-313012 and
Chassis No. 513696, and Fuso Truck with Motor No. 006769
and Chassis No. 20756, and to Intervenor South Fortune
Motors Corporation the Cimaron Jeepney with Plate No.
NET-849;
"10. Ordering the plaintiff, in the event the motor vehicles
could no longer be returned to pay the estimated value
thereof i.e., P750,000.00 for the three trucks, and P5,000.00
for the Cimaron Jeepney, to the plaintiffs-intervenors.
The Issues
The Court's Ruling

On the first issue, petitioners assert that the suretyship
agreement they signed is void because there was no
principal obligation at the time of signing as the principal
obligation was signed six (6) months later. The Civil Code,
however, allows a suretyship agreement to secure future
loans even if the amount is not yet known.
Article 2053 of the Civil Code provides that:
"Art. 2053. A guaranty may also be given as security for
future debts, the amount of which is not yet known. x x x"
In Fortune Motors (Phils.) Corporation v. Court of Appeals,6
we held:
"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 stock-in-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?
"x x x Of course, a surety is not bound under any particular
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
accommodation extended to the principal debtor."
Petitioners next posit (second issue) that a novation, as a
result of the assignment of the drafts and trust receipts by
the creditor (CARCO) in favor of respondent BAFC without
the consent of the principal debtor (Fortune Motors),
extinguished their liabilities.
An assignment of credit is an agreement by virtue of which
the owner of a credit, known as the assignor, by a legal
cause, such as sale, dacion en pago, exchange or donation,
and without the consent of the debtor, transfers his credit
and accessory rights to another, known as the assignee, who
acquires the power to enforce it to the same extent as the
assignor could enforce it against the debtor.7 As a
consequence, the third party steps into the shoes of the
original creditor as subrogee of the latter. Petitioners'
obligations were not extinguished. Thus:
"We have ruled in Sison & Sison vs. Yap Tico and Avancea,
37 Phil. 587 [1918] that definitely, consent is not necessary in
order that assignment may fully produce legal effects.
Hence, the duty to pay does not depend on the consent of
the debtor. Otherwise, all creditors would be prevented from
assigning their credits because of the possibility of the
debtor's refusal to give consent.
"What the law requires in an assignment of credit is not the
consent of the debtor but merely notice to him. A creditor
may, therefore, validly assign his credit and its accessories
without the debtor's consent (National Investment and
Development Co. v. De Los Angeles, 40 SCRA 489 [1971].
The purpose of the notice is only to inform that debtor from
the date of the assignment, payment should be made to the
assignee and not to the original creditor."8
Petitioners finally posit (third issue) that as an entruster,
respondent BAFC must first demand the return of the unsold
vehicles from Fortune Motors Corporation, pursuant to the
terms of the trust receipts. Having failed to do so, petitioners
had no cause of action whatsoever against Fortune Motors
Corporation and the action for collection of sum of money
was, therefore, premature. A trust receipt is a security
transaction intended to aid in financing importers and retail
dealers who do not have sufficient funds or resources to
finance the importation or purchase of merchandise, and
who may not be able to acquire credit except through
utilization, as collateral, of the merchandise imported or
purchased.9 In the event of default by the entrustee on his
obligations under the trust receipt agreement, it is not
absolutely necessary that the entruster cancel the trust and
take possession of the goods to be able to enforce his rights
thereunder. We ruled:
"x x x Significantly, the law uses the word "may" in granting
to the entruster the right to cancel the trust and take
possession of the goods. Consequently, petitioner has the
discretion to avail of such right or seek any alternative action,
such as a third party claim or a separate civil action which it
deems best to protect its right, at any time upon default or
failure of the entrustee to comply with any of the terms and
conditions of the trust agreement."10
"x x x Moreover, in assignment, the debtor's consent is not

essential for the validity of the assignment (Art. 1624 in
relation to Art. 1475, Civil Code), his knowledge thereof
affecting only the validity of the payment he might make
(Article 1626, Civil Code).
PACIFIC BANKING v. IAC
"Article 1626 also shows that payment of an obligation which

is already existing does not depend on the consent of the
debtor. It, in effect, mandates that such payment of the
existing obligation shall already be made to the new creditor
from the time the debtor acquires knowledge of the
assignment of the obligation.
FIRST DIVISION
"The law is clear that the debtor had the obligation to pay
and should have paid from the date of notice whether or not
he consented.

SUPREME COURT
Manila
G.R. No. 72275
November 13, 1991
PACIFIC BANKING CORPORATION, petitioner,

vs.
HON INTERMEDIATE APPELLATE COURT AND
ROBERTO REGALA, JR., respondents.

Ocampo, Dizon & Domingo for petitioner.
Angara, Concepcion, Regala & Cruz for private respondent.
MEDIALDEA, J.:p
This is a petition for review on certiorari of the decision (pp
21-31, Rollo) of the Intermediate Appellate Court (now Court
of Appeals) in AC-G.R. C.V. No. 02753, 1 which modified the
decision of the trial court against herein private respondent
Roberto Regala, Jr., one of the defendants in the case for
sum of money filed by Pacific Banking Corporation.
The facts of the case as adopted by the respondent
appellant court from herein petitioner's brief before said court
are as follows:
On October 24, 1975, defendant Celia Syjuco Regala
(hereinafter referred to as Celia Regala for brevity), applied
for and obtained from the plaintiff the issuance and use of
Pacificard credit card (Exhs. "A", "A-l",), under the Terms and
Conditions Governing the Issuance and Use of Pacificard
(Exh. "B" and hereinafter referred to as Terms and
Conditions), a copy of which was issued to and received by
the said defendant on the date of the application and
expressly agreed that the use of the Pacificard is governed
by said Terms and Conditions. On the same date, the
defendant-appelant Robert Regala, Jr., spouse of defendant
Celia Regala, executed a "Guarantor's Undertaking" (Exh.
"A-1-a") in favor of the appellee Bank, whereby the latter
agreed "jointly and severally of Celia Aurora Syjuco Regala,
to pay the Pacific Banking Corporation upon demand, any
and all indebtedness, obligations, charges or liabilities due
and incurred by said Celia Aurora Syjuco Regala with the
use of the Pacificard, or renewals thereof, issued in her favor
by the Pacific Banking Corporation". It was also agreed that
"any changes of or novation in the terms and conditions in
connection with the issuance or use of the Pacificard, or any
extension of time to pay such obligations, charges or
liabilities shall not in any manner release me/us from
responsibility hereunder, it being understood that I fully agree
to such charges, novation or extension, and that this
understanding is a continuing one and shall subsist and bind
me until the liabilities of the said Celia Syjuco Regala have
been fully satisfied or paid.
Plaintiff-appellee Pacific Banking Corporation has contracted
with accredited business establishments to honor purchases
of goods and/or services by Pacificard holders and the cost
thereof to be advanced by the plaintiff-appellee for the
account of the defendant cardholder, and the latter
undertook to pay any statements of account rendered by the
plaintiff-appellee for the advances thus made within thirty
(30) days from the date of the statement, provided that any
overdue account shall earn interest at the rate of 14% per
annum from date of default.
The defendant Celia Regala, as such Pacificard holder, had

purchased goods and/or services on credit (Exh. "C", "C-l" to
"C-112") under her Pacificard, for which the plaintiff
advanced the cost amounting to P92,803.98 at the time of
the filing of the complaint.
In view of defendant Celia Regala's failure to settle her
account for the purchases made thru the use of the
Pacificard, a written demand (Exh. "D") was sent to the latter
and also to the defendant Roberto Regala, Jr. (Exh. " ")
under his "Guarantor's Undertaking."
A complaint was subsequently filed in Court for defendant's
(sic) repeated failure to settle their obligation. Defendant
Celia Regala was declared in default for her failure to file her
answer within the reglementary period. Defendant-appellant
Roberto Regala, Jr., on the other hand, filed his Answer with
Counterclaim admitting his execution of the "Guarantor's
Understanding", "but with the understanding that his liability
would be limited to P2,000.00 per month."
In view of the solidary nature of the liability of the parties, the
presentation of evidence ex-parte as against the defendant
Celia Regala was jointly held with the trial of the case as
against defendant Roberto Regala.
After the presentation of plaintiff's testimonial and
documentary evidence, fire struck the City Hall of Manila,
including the court where the instant case was pending, as
well as all its records.
Upon plaintiff-appellee's petition for reconstitution, the
records of the instant case were duly reconstituted.
Thereafter, the case was set for pre-trial conference with
respect to the defendant-appellant Roberto Regala on
plaintiff-appellee's motion, after furnishing the latter a copy of
the same. No opposition thereto having been interposed by
defendant-appellant, the trial court set the case for pre-trial
conference. Neither did said defendant-appellant nor his
counsel appear on the date scheduled by the trial court for
said conference despite due notice. Consequently, plaintiffappellee moved that the defendant-appellant Roberto
Regala he declared as in default and that it be allowed to
present its evidence ex-parte, which motion was granted. On
July 21, 1983, plaintiff-appellee presented its evidence exparte. (pp. 23-26, Rollo)
After trial, the court a quo rendered judgment on December
5, 1983, the dispositive portion of which reads:
WHEREFORE, the Court renders judgment for the plaintiff
and against the defendants condemning the latter, jointly and
severally, to pay said plaintiff the amount of P92,803.98, with
interest thereon at 14% per annum, compounded annually,
from the time of demand on November 17, 1978 until said
principal amount is fully paid; plus 15% of the principal
obligation as and for attorney's fees and expense of suit; and
the costs.

The counterclaim of defendant Roberto Regala, Jr. is
dismissed for lack of merit.
the undertaking is a continuing one and shall subsist and

bind me/us until all the liabilities of the said Celia Syjuco
Regala have been fully satisfied or paid. (p. 12, Rollo)
SO ORDERED. (pp. 22-23, Rollo)

The defendants appealed from the decision of the court a
quo to the Intermediate Appellate Court.
On August 12, 1985, respondent appellate court rendered
judgment modifying the decision of the trial court. Private
respondent Roberto Regala, Jr. was made liable only to the
extent of the monthly credit limit granted to Celia Regala, i.e.,
at P2,000.00 a month and only for the advances made
during the one year period of the card's effectivity counted
from October 29, 1975 up to October 29, 1976. The
dispositive portion of the decision states:
WHEREFORE, the judgment of the trial court dated
December 5, 1983 is modified only as to appellant Roberto
Regala, Jr., so as to make him liable only for the purchases
made by defendant Celia Aurora Syjuco Regala with the use
of the Pacificard from October 29, 1975 up to October 29,
1976 up to the amount of P2,000.00 per month only, with
interest from the filing of the complaint up to the payment at
the rate of 14% per annum without pronouncement as to
costs. (p. 32, Rollo)
A motion for reconsideration was filed by Pacific Banking
Corporation which the respondent appellate court denied for
lack of merit on September 19, 1985 (p. 33, Rollo).
On November 8, 1985, Pacificard filed this petition. The
petitioner contends that while the appellate court correctly
recognized Celia Regala's obligation to Pacific Banking
Corp. for the purchases of goods and services with the use
of a Pacificard credit card in the total amount of P92,803.98
with 14% interest per annum, it erred in limiting private
respondent Roberto Regala, Jr.'s liability only for purchases
made by Celia Regala with the use of the card from October
29, 1975 up to October 29, 1976 up to the amount of
P2,000.00 per month with 14% interest from the filing of the
complaint.
There is merit in this petition.
The pertinent portion of the "Guarantor's Undertaking" which
private respondent Roberto Regala, Jr. signed in favor of
Pacific Banking Corporation provides:
I/We, the undersigned, hereby agree, jointly and severally
with Celia Syjuco Regala to pay the Pacific Banking
Corporation upon demand any and all indebtedness,
obligations, charges or liabilities due and incurred by said
Celia Syjuco Regala with the use of the Pacificard or
renewals thereof issued in his favor by the Pacific Banking
Corporation. Any changes of or Novation in the terms and
conditions in connection with the issuance or use of said
Pacificard, or any extension of time to pay such obligations,
charges or liabilities shall not in any manner release me/us
from the responsibility hereunder, it being understood that
The undertaking signed by Roberto Regala, Jr. although

denominated "Guarantor's Undertaking," was in substance a
contract of surety. As distinguished from a contract of
guaranty where the guarantor binds himself to the creditor to
fulfill the obligation of the principal debtor only in case the
latter should fail to do so, in a contract of suretyship, the
surety binds himself solidarily with the principal debtor (Art.
2047, Civil Code of the Philippines).
We need not look elsewhere to determine the nature and
extent of private respondent Roberto Regala, Jr.'s
undertaking. As a surety he bound himself jointly and
severally with the debtor Celia Regala "to pay the Pacific
Banking Corporation upon demand, any and all
indebtedness, obligations, charges or liabilities due and
incurred by said Celia Syjuco Regala with the use of
Pacificard or renewals thereof issued in (her) favor by Pacific
Banking Corporation." This undertaking was also provided as
a condition in the issuance of the Pacificard to Celia Regala,
thus:
5. A Pacificard is issued to a Pacificard-holder against the
joint and several signature of a third party and as such, the
Pacificard holder and the guarantor assume joint and several
liabilities for any and all amount arising out of the use of the
Pacificard. (p. 14, Rollo)
The respondent appellate court held that "all the other rights
of the guarantor are not thereby lost by the guarantor
becoming liable solidarily and therefore a surety." It further
ruled that although the surety's liability is like that of a joint
and several debtor, it does not make him the debtor but still
the guarantor (or the surety), relying on the case of
Government of the Philippines v. Tizon. G.R. No. L-22108,
August 30, 1967, 20 SCRA 1182. Consequently, Article 2054
of the Civil Code providing for a limited liability on the part of
the guarantor or debtor still applies.
It is true that under Article 2054 of the Civil Code, "(A)
guarantor may bind himself for less, but not for more than
the principal debtor, both as regards the amount and the
onerous nature of the conditions. 2 It is likewise not disputed
by the parties that the credit limit granted to Celia Regala
was P2,000.00 per month and that Celia Regala succeeded
in using the card beyond the original period of its effectivity,
October 29, 1979. We do not agree however, that Roberto
Jr.'s liability should be limited to that extent. Private
respondent Roberto Regala, Jr., as surety of his wife,
expressly bound himself up to the extent of the debtor's
(Celia) indebtedness likewise expressly waiving any
"discharge in case of any change or novation of the terms
and conditions in connection with the issuance of the
Pacificard credit card." Roberto, in fact, made his
commitment as a surety a continuing one, binding upon
himself until all the liabilities of Celia Regala have been fully

paid. All these were clear under
Undertaking" Roberto signed, thus:
the
"Guarantor's
. . . Any changes of or novation in the terms and conditions

in connection with the issuance or use of said Pacificard, or
any extension of time to pay such obligations, charges or
liabilities shall not in any manner release me/us from the
responsibility hereunder, it being understood that the
undertaking is a continuing one and shall subsist and bind
me/us until all the liabilities of the said Celia Syjuco Regala
have been fully satisfied or paid. (p. 12, supra; emphasis
supplied)
Private respondent Roberto Regala, Jr. had been made
aware by the terms of the undertaking of future changes in
the terms and conditions governing the issuance of the credit
card to his wife and that, notwithstanding, he voluntarily
agreed to be bound as a surety. As in guaranty, a surety may
secure additional and future debts of the principal debtor the
amount of which is not yet known (see Article 2053, supra).
The application by respondent court of the ruling in
Government v. Tizon, supra is misplaced. It was held in that
case that:
. . . although the defendants bound themselves in solidum,
the liability of the Surety under its bond would arise only if its
co-defendants, the principal obligor, should fail to comply
with the contract. To paraphrase the ruling in the case of
Municipality of Orion vs. Concha, the liability of the Surety is
"consequent upon the liability" of Tizon, or "so dependent on
that of the principal debtor" that the Surety "is considered in
law as being the same party as the debtor in relation to
whatever is adjudged, touching the obligation of the latter";
or the liabilities of the two defendants herein "are so
interwoven and dependent as to be inseparable." Changing
the expression, if the defendants are held liable, their liability
to pay the plaintiff would be solidary, but the nature of the
Surety's undertaking is such that it does not incur liability
unless and until the principal debtor is held liable.
A guarantor or surety does not incur liability unless the
principal debtor is held liable. It is in this sense that a surety,
although solidarily liable with the principal debtor, is different
from the debtor. It does not mean, however, that the surety
cannot be held liable to the same extent as the principal
debtor. The nature and extent of the liabilities of a guarantor
or a surety is determined by the clauses in the contract of
suretyship(see PCIB v. CA, L-34959, March 18, 1988, 159
SCRA 24).
ACCORDINGLY, the petition is GRANTED. The questioned
decision of respondent appellate court is SET ASIDE and the
decision of the trial court is REINSTATED.
SO ORDERED.
MOLINO v. SECURITY

SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 136780
August 16, 2001
JEANETTE D. MOLINO, petitioner,

vs.
SECURITY DINERS INTERNATIONAL CORPORATION,
respondent.
GONZAGA-REYES, J.:
Assailed by this petition for review on certiorari is the
decision of the Court of Appeals dated September 28, 19981
which held petitioner liable as surety for the outstanding
credit card debts of Danilo Alto with herein respondent
corporation.
The decision of the Court of Appeals satisfactorily sums up
the facts that led to the filing of this case:
The Security Diners International Corporation ("SDIC')
operates a credit card system under the name of Diners Club
through which it extends credit accommodation to its
cardholders for the purchase of goods and payment of
services from its member establishments to be reimbursed
later on by the cardholder upon proper billing. There are two
types of credit cards issued: one, the Regular (Local) Card
which entitles the cardholder to purchase goods and pay
services from member establishments in an amount not
exceeding P10,000.00; and two, the Diamond (Edition) Card
which entitles the cardholder to purchase goods and pay
services from member establishments in unlimited amounts.
One of the requirements for the issuance of either of these
cards is that an applicant should have a surety.
On July 24, 1987, Danilo A. Alto applied for a Regular (Local)
Card with SDIC. He got as his surety his own sister-in-law
Jeanette Molino Alto. Thus, Danilo signed the printed
application form (Exhibit 'A') and Jeanette signed the Surety
Undertaking (Exhibit 'A-5"). Attached to the Application Form
was an Agreement (Use of Diners' Club Card), paragraph 16
of which reads:
16. SURETY. The cardholder shall furnish an adequate
surety or sureties acceptable to Security Diners who shall be
jointly and severally liable with the cardholder to pay Security
Diners all the obligations and charges incurred and credit
extended on the basis of the card. In the event the
surety/sureties furnished the cardholder are discharged the
cardholder must furnish a new surety or sureties acceptable
to Security Diners within thirty (30) days. Otherwise the
cardholder's privileges shall be automatically terminated in
accordance with Section 11 hereof."

The Surety Undertaking signed by Jeanette states:
"I/WE, the undersigned, bind myself/ourselves jointly and
severally with Mr. Danilo Alto to pay SECURITY DINERS
INTERNATIONAL CORPORATION, hereinafter referred to
as 'Security Diners' all the obligations and charges including
but not limited to fees, interest, attorney's fees and all other
costs incurred by him/her in connection with the use of the
DINERS CLUB CARD in accordance with the terms and
conditions governing the issuance and use of the Diners
Club Card. Any change or novation in the agreement or any
extension of time granted by SECURITY DINERS to pay
such obligations, charges and fees, shall not release me/us
from this Surety Undertaking, it being understood that said
undertaking is a continuing one and shall subsist and bind
me/us until all such obligations, charges and fees have been
fully paid and satisfied.
It is understood that the indication of a credit limit to the
cardholder shall not relieve me/us of liability for charges and
all other amounts voluntarily incurred by the cardholder in
excess of the credit limit.
Surety Undertaking was limited to P10,000.00 and that she

did not expressly and categorically agree to act as surety for
Danilo in an amount higher than P10,000.00. 3 By way of
counterclaim, she asked for moral and exemplary damages.
On August 19, 1991, the trial court rendered a decision
dismissing the complaint for failure of respondent to prove its
case by a preponderance of the evidence. It found that while
petitioner clearly bound herself as surety under the terms of
Danilo Alto's Regular Diners Club Card, there was no
evidence that after the card had been upgraded to Diamond
(Edition) petitioner consented or agreed to act as surety for
Danilo. Exhibit "C" or Exhibit "1", inter alia, which was a note
bearing petitioner's signature certifying to her approval of
Danilo's request to have his card upgraded should be read
simply as a statement of and objection to his request for
upgrading, and not as an assumption of liability for the debts
that Danilo may later owe through the said card. 4 The trial
court also took note of the testimony of Alfredo Vicente, an
officer of respondent, who opined that the consent to be
bound as surety to an upgraded card should be categorical 5
and not in a simple "no objection" form.
On the basis of the completed and signed Application Form

and Surety Undertaking, the SDIC issued to Danilo Diners
Card No. 36510293216-0006. The latter used this card and
initially paid his obligations to SDIC. On February 8, 1988,
Danilo wrote SDIC a letter (Exhibit "B") requesting it to
upgrade his Regular (Local) Diners Club Card to a Diamond
(Edition) one. As a requirement of SDIC, Danilo secured
from Jeanette her approval. The latter obliged and so on
March 2, 1988, she signed a Note (Exhibit 'C') which states:
The trial court went on further to state that petitioner was not
liable for any amount, not even for P10,000.00 which is the
maximum credit limit for Regular Diners Club Cards, since at
the time of the upgrading Danilo had no outstanding credit
card debts.6 This is evident from the fact that Danilo's
request for upgrading was approved, since one of the
requirements for the approval of a request for the upgrading
of a credit card from Regular to Diamond is that the applicant
must have paid all his billings for the last three months prior
to his request.
"This certifies that I, Jeanette D. Molino, approve of the

request of Danilo and Gloria Alto with Card No. 3651-203216
0006 and 3651-203412-5007 to upgrade their card from
regular to diamond edition."
Hence, the trial court disposed of the case with these

pronouncements:
Danilo's request was granted and he was issued a Diamond

(Edition) Diners Club Card. He used this card and made
purchases (Exhibits "D", "D-1" to "D-7") from member
establishments. On October 1, 1988 Danilo had incurred
credit charged plus appropriate interest and service charges
in the aggregate amount of P166,408.31. He defaulted in the
payment of this obligation.
SDIC demanded of Danilo and Jeanette to pay said
obligation but they did not pay. So, on November 9, 1988,
SDIC filed an action to collect said indebtedness against
Danilo and Jeanette. This was docketed in the Regional Trial
Court of Makati, Branch 145 as Civil Case No. 88-2381 x x x2
Defendant Danilo Alto failed to file an Answer, and during the
pre-trial conference respondent moved to have the complaint
dismissed against him, without prejudice to a subsequent refiling. Petitioner was left as the lone defendant, sued in her
capacity as surety of Danilo.
In the Answer with Compulsory Counterclaim that she filed
with the RTC, petitioner claimed that her liability under the
WHEREFORE, judgment is rendered dismissing the

complaint against defendant Jeanette D. Molino-Alto for
failure of the plaintiff to prove its case by a clear
preponderance of evidence.
Said defendants counterclaim is also dismissed.
No pronouncement as to costs.
SO ORDERED.7
The Court of Appeals found contrary to the lower court, and
declared that the Surety Undertaking signed by petitioner
when Danilo Alto first applied for a Regular Diners Club Card
clearly applied to the unpaid purchases of Danilo Alto under
the Diamond card. In holding thus, the Court of Appeals
referred to the terms of the said Surety Undertaking, which
stated that any change or novation in the agreement on the
use of the Diners Club card does not release the surety from
his obligations, it being understood that the undertaking is a
continuing one which subsists until all obligations and
charges under the subject credit card are paid and satisfied.
It also cited Pacific Banking Corporation vs. Intermediate

Appellate Court,8 a 1991 decision which held the surety liable
to the extent of the credit cardholder's indebtedness, under
the clear terms of the Guarantor's Undertaking that the
surety signed with the credit card company.
The Court of Appeals further declared that it was erroneous
of the trial court to conclude that petitioner was completely
relieved of liability under Danilo Alto's credit card since the
Surety Undertaking she signed remained valid and
enforceable even after the upgrading of the said card;
besides, petitioner herself admitted that she was liable to the
extent of P10,000.00.
Additionally, the Court of Appeals reduced the attorney's fees
(stipulated in the Agreement for the Use of Diners Club Card)
from 25% to 10% of the amount due, judging this to be a
more reasonable rate under the circumstances.
The dispositive portion of the decision of the Court of
Appeals reads:
WHEREFORE, the appealed Decision is REVERSED and
one is rendered ordering defendant-appellee Jeanette D.
Molino-Alto to pay plaintiff-appellant Security Diners
Intentional, Inc. the following:
1. The sum of P166,408.31 plus interest of 3% per annum
and 2% per month from November 9, 1988 until the
obligation is fully paid;
2. The amount equivalent to 10% of the obligation mentioned
in the preceding paragraph as attorneys fees; and
3. Costs.
SO ORDERED.9
Petitioner's motion for reconsideration of the above decision
was denied for lack of merit on December 1, 1998. Hence,
the petition before us, which assigns the following errors:
I.
The material findings of the Court of Appeals, which are
contrary to those of the lower court are erroneous.
II.
The findings of the Court of Appeals are conflicting and/or
without citation of specific evidence on which they are based.
III.
The Court of Appeals erred in disregarding the applicable
legal principle established by this Honorable Court that,
unlike in ordinary solidary debtors, the surety does not incur
liability unless the principal debtor is held liable.10
Petitioner posits that she did not expressly give her consent
to be bound as surety under the upgraded card. She points
out that the note she signed, marked as Exhibit "C",
registering her approval of the request of Danilo Alto to
upgrade his card, renders the Surety Undertaking she signed
under the terms of the previous card "without probative
value, immaterial and irrelevant as it covers only the liability
of the surety in the use of the regular credit card by the
principal debtor x x x.11 " She argues further that because the
principal debtor, Danilo Alto, was not held liable, having been
dropped as a defendant, she could not be said to have
incurred liability as surety.
The petition is devoid of merit.
The resolution of whether petitioner is liable as surety under
the Diamond card revolves around the effect of the
upgrading by Danilo Alto of his card. Was the upgrading a
novation of the original agreement governing the use of
Danilo Alto's first credit card, as to extinguish that obligation
and the Surety Undertaking which was simply accessory to
it?
Novation, as a mode of extinguishing obligations, may be
done in two ways: by explicit declaration, or by material
incompatibility (implied novation). As we stated in Fortune
Motors vs. Court of Appeals, supra:
x x x 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 or unequivocal to
be mistaken.
There is no doubt that the upgrading was a novation of the
original agreement covering the first credit card issued to
Danilo Alto, basically since it was committed with the intent
of canceling and replacing the said card. However, the
novation did not serve to release petitioner from her surety
obligations because in the Surety Undertaking she expressly
waived discharge in case of change or novation in the
agreement governing the use of the first credit card.
The nature and extent of petitioner's obligations are set out
in clear and unmistakable terms in the Surety Undertaking.
Thus:
1. She bound herself jointly and severally with Danilo Alto to
pay SDIC all obligations and charges in the use of the Diners
Club Card, including fees, interest, attorney's fees, and
costs;
2. She declared that "any change or novation in the
Agreement or any extension of time granted by SECURITY

DINERS to pay such obligation, charges, and fees, shall not
release (her) from this Surety Undertaking";
3. "(S)aid undertaking is a continuous one and shall subsist
and bind (her) until all such obligations, charges and fees
have been fully paid and satisfied"; and
4. "The indication of a credit limit to the cardholder shall not
relieve (her) of liability for charges and all other amounts
voluntarily incurred by the cardholder in excess of said credit
limit."12
We cannot give any additional meaning to the plain language
of the subject undertaking. The extent of a surety's liability is
determined by the language of the suretyship contract or
bond itself.13 Article 1370 of the Civil Code provides: "If the
terms of contract are clear and leave no doubt upon the
intention of the contracting parties, the literal meaning of its
stipulations shall control."
This case is no different from Pacific Banking Corporation
vs. IAC, supra, correctly applied by the Court of Appeals,
which involved a Guarantor's Undertaking (although thus
denominated, it was in substance a contract of surety signed
by the husband for the credit card application of his wife.
Like herein petitioner, the husband also argued that his
liability should be limited to the credit limit allowed under his
wife's card but the Court declared him liable to the full extent
of his wife's indebtedness. Thus:
We need not look elsewhere to determine the nature and
extent of private respondent Roberto Regala, Jr.'s
undertaking. As a surety he bound himself jointly and
severally with the debtor Celia Regala "to pay the Pacific
Banking Corporation upon demand, any and all
indebtedness, obligations, charges or liabilities due and
incurred by said Celia Syjuco Regala with the use of
Pacificard or renewals thereof issued in (her) favor by Pacific
Banking Corporation. x x x.
xxx
xxx
xxx
It is likewise not disputed by the parties that the credit limit

granted to Celia Regala was P2,000.00 per month and that
Celia Regala succeeded in using the card beyond the
original period of its effectivity, October 29, 1979. We do not
agree, however, that Roberto Jr.'s liability should be limited
to that extent. Private respondent Roberto Regala, Jr., as
surety of his wife, expressly bound himself up to the extent
of the debtor's (Celia's) indebtedness likewise expressly
waiving any "discharge in case of any change or novation of
the terms and conditions in connection with the issuance of
the Pacificard credit card." Roberto, in fact, made his
commitment as a surety a continuing one, binding upon
himself until all the liabilities of Celia Regala have been fully
paid. All these were clear under the "Guarantor's
Undertaking" Roberto signed, thus:
"x x x Any changes of or novation in the terms and
conditions in connection with the issuance or use of said
Pacificard, or any extension of time to pay such obligations,

charges or liabilities shall not in any manner release me/us
from the responsibility hereunder, it being understood that
the undertaking is a continuing one and shall subsist and
bind me/us until all the liabilities of the said Celia Syjuco
Regala have been fully satisfied or paid." (italics supplied)
As a last-ditch measure, petitioner asseverates that, being
merely a surety, a pronouncement should first be made
declaring the principal debtor liable before she herself can be
proceeded against. The argument, which is hinged upon the
dropping of Danilo as defendant in the complaint, is bereft of
merit.
The Surety Undertaking expressly provides that petitioner's
liability is solidary. A surety is considered in law as being the
same party as the debtor in relation to whatever is adjudged
touching the obligation of the latter, and their liabilities are
interwoven as to be inseparable.14 Although the contract of a
surety is in essence secondary only to a valid principal
obligation, his liability to the creditor is direct, primary and
absolute; he becomes liable for the debt and duty of another
although he possesses no direct or personal interest over
the obligations nor does he receive any benefit therefrom.15
There being no question that Danilo Alto incurred debts of
P166,408.31 in credit card advances, an obligation shared
solidarily by petitioner, respondent was certainly within its
rights to proceed singly against petitioner, as surety and
solidary debtor, without prejudice to any action it may later
file against Danilo Alto, until the obligation is fully satisfied.
This is so provided 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 demand
made against one of them shall not be an obstacle to those
which may be subsequently directed against the others, so
long as the debt has not been fully collected.
Petitioner is a graduate of business administration, and
possesses considerable work experience in several banks.
She knew the full import and consequence of the Surety
Undertaking that she executed. She had the option to
withdraw her suretyship when Danilo upgraded his card to
one that permitted unlimited purchases, but instead she
approved the upgrading. While we commiserate in the
financial predicament she now faces, it is also evident that
the liability she incurred is only the legitimate consequence
of an undertaking that she freely and intelligently obliged to.
Prospective sureties to credit card applicants would be welladvised to study carefully the terms of the agreements
prepared by the credit card companies before giving their
consent, and pay heed to speculations that could lead to
onerous effects, like in the present case where the credit
applied for was limitless. At the same time, it bears
articulating that although courts in appropriate cases may
equitably reduce the award for penalty as provided under
such suretyship agreements if the same is iniquitous or
unconscionable,16 we are unable to give relief to petitioner by
way of reducing the amount of the principal liability as surety
under the circumstances of this case.

WHEREFORE, the petition is dismissed for lack of merit The
decision of the Court of Appeals is AFFIRMED in all
respects.
SO ORDERED.
GATEWAY v. ASIANBANK
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 172041
December 18, 2008
GATEWAY ELECTRONICS CORPORATION and

GERONIMO B. DELOS REYES, JR., petitioners,
vs.
ASIANBANK CORPORATION, respondent.
DECISION
VELASCO, JR., J.:
This petition for review under Rule 45 seeks to nullify and set
aside the Decision1 dated October 28, 2005 of the Court of
Appeals (CA) in CA-G.R. CV No. 80734 and its Resolution 2
of March 17, 2006 denying petitioners motion for
reconsideration.
The Facts
Petitioner Gateway Electronics Corporation (Gateway) is a
domestic corporation that used to be engaged in the semiconductor business. During the period material, petitioner
Geronimo B. delos Reyes, Jr. was its president and one
Andrew delos Reyes its executive vice-president.
On July 23, 1996, Geronimo and Andrew executed separate
but almost identical deeds of suretyship for Gateway in favor
of respondent Asianbank Corporation (Asianbank),
pertinently providing:
I/We Geronimo B. de los Reyes, Jr. x x x warrant to the
ASIANBANK CORPORATION, x x x due and punctual
payment by the following individuals/companies/firms,
hereinafter called the DEBTOR(S), of such amounts whether
due or not, as indicated opposite their respective names, to
wit:
xxxxx
owing to the said ASIANBANK CORPORATION, hereafter
called the CREDITOR, as evidenced by all notes, drafts,
overdrafts and other [credit] obligations of every kind and
nature contracted/incurred by said DEBTOR(S) in favor of

said CREDITOR.
In case of default by any and/or all of the DEBTOR(S) to pay
the whole part of said indebt
nbsp
nbsp
nbsp
nbsp
erein secured at maturity, I/WE BR
vs.
and severally agree and engage to the CREDITOR, its
successors and assigns, the prompt payment, x x x of such
notes, drafts, overdrafts and other credit obligations on which
the DEBTOR(S) may now be indebted or may hereafter
become indebted to the CREDITOR, together with all
interests, penalty and other bank charges as may accrue
thereon x x x.
I/WE further warrant the due and faithful performance by the
DEBTOR(S) of all obligations to be performed under any
contracts evidencing indebtedness/obligations and any
supplements, amendments, changes or modifications made
thereto, including but not limited to, the due and punctual
payment by the said DEBTOR(S).
MY/OUR liability on this Deed of Suretyship shall be solidary,
direct and immediate and not contingent upon the pursuit by
the CREDITOR x x x of whatever remedies it or they may
have against the DEBTOR(S) or the securities or liens it or
they may possess; and I/WE hereby agree to be and remain
bound upon this suretyship, x x x and notwithstanding also
that all obligations of the DEBTOR(S) to you outstanding and
unpaid at any time may exceed the aggregate principal sum
hereinabove stated.3
Later developments saw Asianbank extending to Gateway
several export packing loans in the total aggregate amount
of USD 1,700,883.48. This loan package was later
consolidated with Dollar Promissory Note (PN) No. FCD0599-27494 for the amount of USD 1,700,883.48 and
secured by a chattel mortgage over Gateways equipment for
USD 2 million.
Gateway initially made payments on its loan obligations, but
eventually defaulted. Upon Gateways request, Asianbank
extended the maturity dates of the loan several times. These
extensions bore the conformity of three of Gateways
officers, among them Andrew.
On July 15 and 30, 1999, Gateway issued two Philippine
Commercial International Bank checks for the amounts of
USD 40,000 and USD 20,000, respectively, as payment for
its arrearages and interests for the periods June 30 and July
30, 1999; but both checks were dishonored for insufficiency
of funds. Asianbanks demands for payment made upon
Gateway and its sureties went unheeded. As of November
23, 1999, Gateways obligation to Asianbank, inclusive of
principal, interest, and penalties, totaled USD 2,235,452.17.
Thus, on December 15, 1999, Asianbank filed with the
Regional Trial Court (RTC) in Makati City a complaint for a
sum of money against Gateway, Geronimo, and Andrew. The
complaint, as later amended, was eventually raffled to

Branch 60 of the court and docketed as Civil Case No. 992102 entitled Asian Bank Corporation v. Gateway Electronics
Corporation, Geronimo B. De Los Reyes, Jr. and Andrew S.
De Los Reyes.
In its answer to the amended complaint, Gateway traced the
cause of its financial difficulties, described the steps it had
taken to address its mounting problem, and faulted
Asianbank for trying to undermine its efforts toward recovery.
Andrew also filed an answer alleging, among other things,
that the deed of suretyship he executed covering the PhP 10
million-Domestic Bills Purchased Line and the USD 3 millionOmnibus Credit Line did not include PN No. FCD-05992749, the payment of which was extended several times
without his consent.
Geronimo, on the other hand, alleged that the subject deed
of suretyship, assuming the authenticity of his signature on it,
was signed without his wifes consent and should, thus, be
considered as a mere continuing offer. Like Andrew,
Geronimo argued that he ought to be relieved of his liability
under the surety agreement inasmuch as he too never
consented to the repeated loan maturity date extensions
given by Asianbank to Gateway.
After due hearing, the RTC rendered judgment dated
October 7, 20035 in favor of Gateway, the dispositive portion
of which states:
WHEREFORE then, in view of the foregoing, judgment is
rendered
holding
defendants
Gateway
Electronics
Corporation, Geronimo De Los Reyes and Andrew De Los
Reyes jointly and severally liable to pay the plaintiff the
following:
a) The sum of $2,235,452.17 United States Currency with
interest to be added on at the prevailing market rate over a
given thirty day London Interbank Offered Rate (LIBOR) plus
a spread of 5.5358 percent or ten and [45,455/100,000]
percent per annum for the first 35 days and every thirty days
beginning November 23, 1999 until fully paid;
b) a penalty charge after November 23, 1999 of two percent
(2%) per month until fully paid;
c) attorneys fees of twenty percent (20%) of the total amount
due and unpaid; and
was listed in the attached Schedule of Obligations as one of

the creditors. On March 16, 2005, Metrobank, as successorin-interest of Asianbank, via a Notice of Creditors Claim,
prayed that it be allowed to participate in the Gatewayss
creditors meeting.
In its Decision dated October 28, 2005, the CA affirmed the
decision of the Makati City RTC. In time, Gateway and
Geronimo interposed a motion for reconsideration. This was
followed by a Supplemental Motion for Reconsideration
dated January 20, 2006, stating that in SEC Case No. 03704, the RTC in Imus, Cavite had issued an Order dated
December 2, 2004, declaring Gateway insolvent and
directing all its creditors to appear before the court on a
certain date for the purpose of choosing among themselves
the assignee of Gateways estate which the courts sheriff
has meanwhile placed in custodia legis.7 Gateway and
Geronimo thus prayed that the assailed decision of the
Makati City RTC be set aside, the insolvency court having
acquired exclusive jurisdiction over the properties of
Gateway by virtue of Section 60 of Act No. 1956, without
prejudice to Asianbank pursuing its claim in the insolvency
proceedings.
In its March 17, 2006 Resolution, however, the CA denied
the motion for reconsideration and its supplement.
Hence, Gateway and Geronimo filed this petition anchored
on the following grounds:
I
The [CA] erred in disregarding the established rule that an
action commenced by a creditor against a judicially declared
insolvent for the recovery of his claim should be dismissed
and referred to the insolvency court. Where, therefore, as in
this case, petitioner GEC [referring to Gateway] has been
declared insolvent x x x, respondent Asianbanks claim for
the payment of GECs loans should be ventilated before the
insolvency court x x x.
II
The [CA] erred in admitting as evidence the Deed of Surety
purportedly signed by petitioner GBR [referring to Geronimo]
despite the unexplained failure of respondent Asianbank to
present the originals of the Deed of Surety during the trial.
III
d) costs of the suit.

SO ORDERED.
Thereafter, Gateway, Geronimo, and Andrew appealed to the
CA, their recourse docketed as CA-G.R. CV No. 80734.
Following the filing of its and Geronimos joint appellants
brief, Gateway filed on November 10, 2004 a petition for
voluntary insolvency6 with the RTC in Imus, Cavite, Branch
22, docketed as SEC Case No. 037-04, in which Asianbank
The [CA] erred in holding that the repeated extensions

granted by respondent Asianbank to GEC without notice to
and the express consent of petitioner GBR did not discharge
petitioner GBR from his liabilities as surety GEC in that:
A. An extension granted to the debtor by the creditor without
the consent of the guarantor extinguishes the guaranty.

B. The [CA] interpreted the supposed Deed of Surety of
petitioner GBR as "too comprehensive and all encompassing
as to amount to absurdity."
C. The repeated extensions granted by Asianbank to GEC
prevented petitioner GBR from exercising his right of
subrogation under Article 2080 of the Civil Code. As such,
petitioner GBR should be released from his obligations as
surety of GEC.
IV
It is a well-settled rule that when a bank deviates from
normal banking practice in a transaction and sustains injury
as a result thereof, the bank is deemed to have assumed the
risk and no right of payment accrues to the latter against any
party to the transaction. By repeatedly extending the period
for the payment of GECs obligations and granting GEC
other loans after the suretyship agreement despite GECs
default and in failing to foreclose the chattel mortgage
constituted as security for GECs loan contrary to normal
banking practices, Asianbank failed to exercise reasonable
caution for its own protection and assumed the risk of nonpayment through its own acts, and thus has no right to
proceed against petitioner GBR as surety for the payment of
GECs loans.
V
In Agcaoili v. GSIS, this Honorable Court had occasion to
state that in determining the precise relief to give, the court
will "balance the equities" or the respective interests of the
parties and take into account the relative hardship that one
relief or another may occasion to them. Upon a balancing of
interests of both petitioner GBR and respondent Asianbank,
greater and irreparable harm and injury would be suffered by
petitioner GBR than respondent Asianbank if the assailed
Decision and Resolution of the [CA] would be upheld x x x.
This Honorable Court x x x should thus exercise its equity
jurisdiction in the instant case to the end that it may render
complete justice to both parties and declare petitioner GBR
as released and discharged from any liability in respect of
respondent Asianbanks claims.8
The Ruling of the Court
Gateway May Be Discharged from Liability But Not
Geronimo
Gateway, having been declared insolvent, argues that
jurisdiction over all claims against all of its properties and
assets properly pertains to the insolvency court. Accordingly,
Gateway adds, citing Sec. 60 of Act No. 1956,9 as amended,
or the Insolvency Law, any pending action against its
properties and assets must be dismissed, the claimant
relegated to the insolvency proceedings for the claimants
relief.
The contention, as formulated, is in a qualified sense
meritorious. Under Sec. 18 of Act No. 1956, as couched, the
issuance of an order declaring the petitioner insolvent after

the insolvency court finds the corresponding petition for
insolvency to be meritorious shall stay all pending civil
actions against the petitioners property. For reference, said
Sec. 18, setting forth the effects and contents of a voluntary
insolvency order,10 pertinently provides:
Section 18. Upon receiving and filing said petition, schedule,
and inventory, the court x x x shall make an order declaring
the petitioner insolvent, and directing the sheriff of the
province or city in which the petition is filed to take
possession of, and safely keep, until the appointment of a
receiver or assignee, all the deeds, vouchers, books of
account, papers, notes, bonds, bills, and securities of the
debtor and all his real and personal property, estate and
effects x x x. Said order shall further forbid the payment to
the creditor of any debts due to him and the delivery to the
debtor, or to any person for him, of any property belonging to
him, and the transfer of any property by him, and shall
further appoint a time and place for a meeting of the
creditors to choose an assignee of the estate. Said order
shall [be published] x x x. Upon the granting of said order,
all civil proceedings pending against the said insolvent
shall be stayed. When a receiver is appointed, or an
assignee chosen, as provided in this Act, the sheriff shall
thereupon deliver to such receiver or assignee, as the case
may be all the property, assets, and belongings of the
insolvent which have come into his possession x x x.
(Emphasis supplied.)
Complementing Sec. 18 which appropriately comes into play
"upon the granting of [the] order" of insolvency is the
succeeding Sec. 60 which properly applies to the period
"after the commencement of proceedings in insolvency." The
two provisions may be harmonized as follows: Upon the filing
of the petition for insolvency, pending civil actions against the
property of the petitioner are not ipso facto stayed, but the
insolvent may apply with the court in which the actions are
pending for a stay of the actions against the insolvents
property. If the court grants such application, pending civil
actions against the petitioners property shall be stayed;
otherwise, they shall continue. Once an order of insolvency
nevertheless issues, all civil proceedings against the
petitioners property are, by statutory command,
automatically stayed. Sec. 60 is reproduced below:
SECTION 60. Creditors proving claims cannot sue; Stay of
action.No creditor, proving his debt or claim, shall be
allowed to maintain any suit therefor against the debtor, but
shall be deemed to have waived all right of action and suit
against him, and all proceedings already commenced, or any
unsatisfied judgment already obtained thereon, shall be
deemed to be discharged and surrendered thereby; and after
the debtors discharge, upon proper application and proof to
the court having jurisdiction, all such proceedings shall be,
dismissed, and such unsatisfied judgments satisfied of
record: Provided, x x x. A creditor proving his debt or claim
shall not be held to have waived his right of action or suit
against the debtor when a discharge has have been refused
or the proceedings have been determined to the without a
discharge. No creditor whose debt is provable under this

Act shall be allowed, after the commencement of
proceedings in insolvency, to prosecute to final
judgment any action therefor against the debtor until the
question of the debtors discharge shall have been
determined, and any such suit proceeding shall, upon
the application of the debtor or of any creditor, or the
assignee, be stayed to await the determination of the
court on the question of discharge: Provided, That if the
amount due the creditor is in dispute, the suit, by leave
of the court in insolvency, may proceed to judgment for
purpose of ascertaining the amount due, which amount,
when adjudged, may be allowed in the insolvency
proceedings, but execution shall be stayed aforesaid.
(Emphasis supplied.)
Applying the aforequoted provisions, it can rightfully be said
that the issuance of the insolvency order of December 2,
2004 had the effect of automatically staying the civil action
for a sum of money filed by Asianbank against Gateway. In
net effect, the proceedings before the CA in CA-G.R. CV No.
80734, but only insofar as the claim against Gateway was
concerned, was, or ought to have been, suspended after
December 2, 2004, Asianbank having been duly notified of
and in fact was a participant in the insolvency proceedings.
The Court of course takes stock of the proviso in Sec. 60 of
Act No. 1956 which in a way provided the CA with a justifying
tool to continue and to proceed to judgment in CA-G.R. CV
No. 80734, but only for the purpose of ascertaining the
amount due from Gateway. At any event, on the postulate
that jurisdiction over the properties of the insolvent-declared
Gateway lies with the insolvency court, execution of the CA
insolvency judgment against Gateway can only be pursued
before the insolvency court. Asianbank, no less, tends to
agree to this conclusion when it stated: "[E]ven it if is
assumed that the declaration of insolvency of petitioner
Gateway can be taken cognizance of, such fact does relieve
petitioner Geronimo and/or Andrew delos Reyes from
performing their obligations based on the Deeds of
Suretyship x x x."11
Geronimo, however, is a different story.
Asianbank argues that the stay of the collection suit against
Gateway is without bearing on the liability of Geronimo as a
surety, adding that claims against a surety may proceed
independently from that against the principal debtor.
Pursuing the point, Asianbank avers that Geronimo may not
invoke the insolvency of Gateway as a defense to evade
liability.
Geronimo counters with the argument that his liability as a
surety cannot be separated from Gateways liability. As
surety, he continues, he is entitled to avail himself of all the
defenses pertaining to Gateway, including its insolvency,
suggesting that if Gateway is eventually released from what
it owes Asianbank, he, too, should also be so relieved.
Geronimos above contention is untenable.
Suretyship is covered by Article 2047 of the Civil Code,

which states:
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.
suretyship.
The Courts disquisition in Palmares v. Court of Appeals on
suretyship is instructive, thus:
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 x x x. Stated
differently, a surety promises to pay the principals 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. x x x In other words, a
surety undertakes directly for the payment and is so
responsible at once if the principal debtor makes default x x
x.
xxxx
A creditors right to proceed against the surety 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, the creditor has
the right to proceed even against the surety alone. Since,
generally, it is not necessary for the 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 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, x x x 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.12
Clearly, Asianbanks right to collect payment for the full
amount from Geronimo, as surety, exists independently of its
right against Gateway as principal debtor;13 it could thus
proceed against one of them or file separate actions against
them to recover the principal debt covered by the deed on
suretyship, subject to the rule prohibiting double recovery
from the same cause.14 This legal postulate becomes all the

more cogent in case of an insolvency situation where, as
here, the insolvency court is bereft of jurisdiction over the
sureties of the principal debtor. As Asianbank aptly points
out, a suit against the surety, insofar as the suretys solidary
liability is concerned, is not affected by an insolvency
proceeding instituted by or against the principal debtor. The
same principle holds true with respect to the surety of a
corporation in distress which is subject of a rehabilitation
proceeding before the Securities and Exchange Commission
(SEC). As we held in Commercial Banking Corporation v.
CA, a surety of the distressed corporation can be sued
separately to enforce his liability as such, notwithstanding an
SEC order declaring the former under a state of suspension
of payment.15
6. The loan was secured by the Deeds of Suretyship dated

July 23, 1996 that were executed by defendants Geronimo
B. De Los Reyes, Jr. and Andrew S. De Los Reyes. Attached
as Annexes "B" and "C," respectively, are photocopies of the
Deeds of Suretyship executed by defendants Geronimo B.
De Los Reyes, Jr. and Andrew S. De Los Reyes.
Subsequently, a chattel mortgage over defendant Gateways
equipment for $2 million, United States currency, was
executed.17
Geronimo also states that, as things stand, his liability, as

compared to that of Gateway, is contextually more onerous
and burdensome, precluded as he is from seeking recourse
against the insolvent corporation. From this premise,
Geronimo claims that since Gateway cannot, owing to the
order of insolvency, be made to pay its obligation, he, too,
being just a surety, cannot also be made to pay, obviously
having in mind Art. 2054 of the Civil Code, as follows:
The ensuing special and affirmative defenses were raised in

Gateways answer:
A guarantor may bind himself for less, but not for more than
the principal debtor, both as regards the amount and the
onerous nature of the conditions.
Should he have bound himself for more, his obligations shall
be reduced to the limits of that of the debtor.
The Court is not convinced. The above article enunciates the
rule that the obligation of a guarantor may be less, but
cannot be more than the obligation of the principal debtor.
The rule, however, cannot plausibly be stretched to mean
that a guarantor or surety is freed from liability as such
guarantor or surety in the event the principal debtor becomes
insolvent or is unable to pay the obligation. This
interpretation would defeat the very essence of a suretyship
contract which, by definition, refers to an agreement
whereunder one person, the surety, engages to be
answerable for the debt, default, or miscarriage of another
known as the principal.16 Geronimos position that a surety
cannot be made to pay when the principal is unable to pay is
clearly specious and must be rejected.
The CA Did Not Err in Admitting
the Deed of Suretyship as Evidence
Going to the next ground, Geronimo maintains that the CA
erred in admitting the Deed of Suretyship purportedly signed
by him, given that Asianbank failed to present its original
copy.
This contention is bereft of merit.
As may be noted, paragraph 6 of Asianbanks complaint
alleged the following:
Geronimo traversed in his answer the foregoing allegation in

the following wise: "2.5. Paragraph 6 is denied, subject to the
special and affirmative defenses and allegations hereinafter
set forth."
15. Granting even that [Geronimo] signed the Deed of

Suretyship, his wife x x x had not given her consent thereto.
Accordingly, the security created by the suretyship shall be
construed only as a continuing offer on the part of
[Geronimo] and plaintiff and may only be perfected as a
binding contract upon acceptance by Mrs. Delos Reyes. x x x
17. Moreover, assuming, gratia argumenti, that [Geronimo]
may be bound by the suretyship agreement, there is no
showing that he has consented to the repeated extensions
made by plaintiff in favor of GEC or to a waiver of notice of
such extensions. It should be pointed out that Mr. Geronimo
delos Reyes executed the suretyship agreement in his
personal capacity and not in his capacity as Chairman of the
Board of GEC. His consent, insofar as the continuing
application of the suretyship agreement to GECs obligations
in view of the repeated extension extended by plaintiff [is
concerned], is therefore necessary. Obviously, plaintiff
cannot now hold him liable as a surety to GECs
obligations.18
The Rules of Court prescribes, under its Secs. 7 and 8, Rule
8, the procedure should a suit or defense is predicated on a
written document, thus:
Sec. 7. Action or defense based on document.Whenever an
action or defense is based upon a written instrument or
document, the substance of such instrument or document
shall be set forth in the pleading, and the original or a copy
thereof shall be attached to the pleading as an exhibit,
which shall be deemed to be a part of the pleading, or said
copy may with like effect be set forth in the pleading.
Sec. 8. How to contest such documents.When an action or
defense is founded upon a written instrument, copied in or
attached to the corresponding pleading as provided in the
preceding section, the genuineness and due execution of
the instrument shall be deemed admitted unless the
adverse party, under oath, specifically denies them, and
sets forth what he claims to be the facts; but the
requirement of an oath does not apply when the adverse
party does not appear to be a party to the instrument or

when compliance with an order for an inspection of the
original instrument is refused. (Emphasis supplied.)
Given the above perspective, Asianbank, by attaching a
photocopy of the Deed of Suretyship to its underlying
complaint, hewed to the requirements of the above twin
provisions. Asianbank, thus, effectively alleged the due
execution and genuineness of the said deed. From that
point, Geronimo, if he intended to contest the surety deed,
should have specifically denied the due execution and
genuineness of the deed in the manner provided by Sec. 10,
Rule 8 of the Rules of Court, thus:
Sec. 10. Specific denial.A defendant must specify each
material allegation of fact the truth of which he does not
admit and, whenever practicable, shall set forth the
substance of the matters upon which he relies to
support his denial. Where a defendant desires to deny only
a part of an averment, he shall specify so much of it as is
true and material and shall deny only the remainder. Where
a defendant is without knowledge or information sufficient to
form a belief as to the truth of a material averment made in
the complaint, he shall so state, and this shall have the effect
of a denial. (Emphasis supplied.)
In the instant case, Geronimo should have categorically
stated that he did not execute the Deed of Suretyship and
that the signature appearing on it was not his or was
falsified. His Answer does not, however, contain any such
statement. Necessarily then, Geronimo had not specifically
denied, and, thus, is deemed to have admitted, the
genuineness and due execution of the deed in question. In
this regard, Sec. 11, Rule 8 of the Rules of Court states:
Sec. 11. Allegations not specifically denied deemed
admitted.Material averment in the complaint, other than
those as to the amount of unliquidated damages, shall be
deemed admitted when not specifically denied. x x x
Owing to Geronimos virtual admission of the genuineness
and due execution of the deed of suretyship, Asianbank,
contrary to the view of Gateway and Geronimo, need not
present the original of the deed during the hearings of the
case. Sec. 4, Rule 129 of the Rules says so:
Sec. 4. Judicial admissions.An admission, verbal or
written, made by the party in the course of the
proceedings in the same case, does not require proof.
The admission may be contradicted only by showing that it
was made through palpable mistake or that no such
admission was made. (Emphasis supplied.)
Geronimo Is Liable for PN No. FCD-0599-2749
under His Deed of Suretyship
This brings us to the third ground which involves the issue of
the coverage of the suretyship. Preliminarily, an overview on
the process of taking out loans should first be made.
Generally, especially for large loans, banks first approve a
line or facility out of which a client may avail itself of loans in
the form of promissory notes without need of further

processing and/or approval every time a draw down is made.
In the instant case, Asianbank approved in favor of Gateway
the PhP 10 million-Domestic Bills Purchased Line and the
USD 3 million-Omnibus Credit Line. Asianbank approved
these credit lines which were covered by a chattel mortgage
as well as the deeds of suretyship, such that loans extended
from these lines would already be secured and preapproved. In other words, these facilities are not financial
obligations yet. Asianbank did not yet lend out any money to
Gateway with the approval of these lines. The loan
transaction occurred or the principal obligation, as secured
by a surety agreement, was born after the execution of loan
documents, such as PN No. FCD-0599-2749.
Geronimo now excepts from the ruling that the deed of
suretyship he executed covered PN No. FCD-0599-2749
which embodied several export packing loans issued by
Asianbank to Gateway. He claims that the deed only secured
the PhP 10 million-Domestic Bills Purchased Line and the
USD 3 million-Omnibus Credit Line. Geronimo describes as
absurd the notion that a deed of suretyship would secure a
loan obligation contracted three (3) years after the execution
of the surety deed.
Geronimos thesis that the deed in question cannot be
accorded prospective application is erroneous. To be sure,
the provisions of the subject deed of suretyship indicate a
continuing suretyship. In Fortune Motors (Phils.) v. Court of
Appeals,19 the Court, citing cases, defined and upheld the
validity of a continuing suretyship in this wise:
"x x x Of course, a surety is not bound under any particular
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
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."20
In Dio vs. Court of Appeals,21 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 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 x x x.
EXPORT loan. Hence, petitioner cannot be held answerable

for the EXPORT loan.23 (Emphasis supplied.)
The Indemnity Agreement in Garcia specifically identified
loan documents evidencing obligations of the debtor that the
agreement was intended to secure. In the present case,
however, the suretyship Geronimo assumed did not limit
itself to a specific loan document to the exclusion of another.
The suretyship document merely mentioned the Domestic
Bills Purchased Line and Omnibus Credit Line as evidenced
by "all notes, drafts x x x contracted/incurred by [Gateway] in
favor of [Asianbank]."24 As explained earlier, such credit
facilities are not loans by themselves. Thus, the Deed of
Suretyship was intended to secure future loans for which
these facilities were opened in the first place.

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
indicate a continuing guaranty." (Emphasis supplied.)
Lest it be overlooked, both the trial and appellate courts

found the Omnibus Credit Line referred to in the Deed of
Suretyship as covering the export packing credit loans
Asianbank extended to Gateway. We agree with this factual
determination. By the very use of the term "omnibus," and in
practice, an omnibus credit line refers to a credit facility
whence a borrower may avail of various kinds of credit loans.
Defined as such, an omnibus line is broad enough to refer to
or cover an export packing credit loan.
By its nature, a continuing suretyship covers current and

future loans, provided that, with respect to future loan
transactions, they are, to borrow from Dio, as cited above,
"within the description or contemplation of the contract of
guaranty." The Deed of Suretyship Geronimo signed
envisaged a continuing suretyship when, by the express
terms of the deed, he warranted payment of the PhP 10
million-Domestic Bills Purchased Line and the USD 3 millionOmnibus Credit Line, as evidenced by:
Geronimos allegation that an export packing credit loan is

separate and distinct from an omnibus credit line is but a
bare and self-serving assertion bereft of any factual or legal
basis. One who alleges something must prove it: a mere
allegation is not evidence.25 Geronimo has not discharged
his burden of proof. His contention cannot be given any
weight.
x x x notes, drafts, overdrafts and other credit obligations on

which the DEBTOR(S) may now be indebted or may
hereafter become indebted to the CREDITOR, together with
all interests, penalty and other bank charges as may accrue
thereon and all expenses which may be incurred by the latter
in collecting any or all such instruments.22
Evidently, under the deed of suretyship, Geronimo undertook
to secure all obligations obtained under the Domestic Bills
Purchased Line and Omnibus Credit Line, without any
specification as to the period of the loan.
Geronimos application of Garcia v. Court of Appeals, a case
covering two separate loans, denominated as SWAP Loan
and Export Loan, is quite misplaced. There, the Court ruled
that the continuing suretyship only covered the SWAP Loan
as it was only this loan that was referred to in the continuing
suretyship. The Court wrote in Garcia:
Particular attention must be paid to the statement appearing
on the face of the Indemnity [Suretyship] Agreement x x x
"evidenced by those certain loan documents dated April
20, 1982" x x x. From this statement, it is clear that the
Indemnity Agreement refers only to the loan document of
April 20, 1982 which is the SWAP loan. It did not include the
As a final and major ground for his release as surety,

Geronimo alleges that Asianbank repeatedly extended the
maturity dates of the obligations of Gateway without his
knowledge and consent. Pressing this point, he avers that,
contrary to the findings of the CA, he did not waive his right
to notice of extensions of Gateways obligations.
Such contention is unacceptable as it glosses over the fact
that the waiver to be notified of extensions is embedded in
surety document itself, built in the ensuing provision:
In case of default by any and/or all of the DEBTOR(S) to pay
the whole part of said indebtedness herein secured at
maturity, I/WE jointly and severally, agree and engage to the
CREDITOR, its successors and assigns, the prompt
payment, without demand or notice from said CREDITOR
of such notes, drafts, overdrafts and other credit
obligations on which the DEBTOR(S) may now be
indebted or may hereafter become indebted to the
CREDITOR, together with all interests, penalty and other
bank charges as may accrue thereon and all expenses
which may be incurred by the latter in collecting any or all
such instruments.26 (Emphasis supplied.)
In light of the above provision, Geronimo verily waived his
right to notice of the maturity of notes, drafts, overdraft, and

other credit obligations for which Gateway shall become
indebted. This waiver necessarily includes new agreements
resulting from the novation of previous agreements due to
changes in their maturity dates.
Additionally, Geronimos lament about losing his right to
subrogation is erroneous. He argues that by virtue of the
order of insolvency issued by the insolvency court, title and
right to possession to all the properties and assets of
Gateway were vested upon Gateways assignee in
accordance with Sec. 32 of the Insolvency Law.
The transfer of Gateways property to the insolvency
assignee, if this be the case, does not negate Geronimos
right of subrogation, for such right may be had or exercised
in the insolvency proceedings. The possibility that he may
only recover a portion of the amount he is liable to pay is the
risk he assumed as a surety of Gateway. Such loss does not,
however, render ineffectual, let alone invalidate, his
suretyship.
Geronimos other arguments to escape liability are puerile
and really partake more of a plea for liberality. They need not
detain us long. In gist, Geronimo argues: first, that he is a
gratuitous surety of Gateway; second, Asianbank deviated
from normal banking practice, such as when it extended the
period for payment of Gateways obligation and when it
opted not to foreclose the chattel mortgage constituted as
guarantee of Gateways loan obligation; and third,
implementing the appealed CAs decision would cause him
great harm and injury.
Anent the first argument, suffice it to state that Geronimo
was then the president of Gateway and, as such, was
benefited, albeit perhaps indirectly, by the loan thus granted
by Asianbank. And as we said in Security Pacific Assurance
Corporation, the surety is liable for the debt of another
although the surety possesses no direct or personal interest
over the obligation nor does the surety receive any benefit
from it.27
Whether or not Asianbank really deviated from normal
banking practice by extending the period for Gateway to
comply with its loan obligation or by not going after the
chattel mortgage adverted to is really of no moment. Banks
are primarily in the business of extending loans and earn
income from their lending operations by way of service and
interest charges. This is why Asianbank opted to give
Gateway ample opportunity to pay its obligations instead of
foreclosing the chattel mortgage and in the process holding
on to assets of which the bank has really no direct use.
The following excerpts from Palmares are in point:
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 creditors rights vis--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 principals request
or without it, and whether it is yielded by the creditor through
sympathy or from an inclination to favor the principal x x x.
The neglect of the creditor to sue the principal at the time the
debt falls due does not discharge the surety, even if such
delay continues until the principal becomes insolvent. And, in
the absence of proof of resultant injury, a surety is not
discharged by the creditors mere statement that the creditor
will not look to the surety, or that he need not trouble himself.
The consequences of the delay, such as the subsequent
insolvency of the principal, or the fact that the remedies
against the principal may be lost by lapse of time, are
immaterial.28
The Courts Equity Jurisdiction
Finds No Application to the Instant Case
Geronimo urges the Court to release and discharge him from
any liability arising from Asianbanks claims if what he terms
as "complete justice" is to be served. He cites, as supporting
reference, Agcaoili v. GSIS,29 presenting in the same breath
the following arguments: first, the Deed of Suretyship is a
gratuitous contract from which he did not benefit; second,
Asianbank assured him that the deed would not be enforced
against him; third, the enforcement of the judgment of the CA
would reduce Geronimo and his family to a life of penury;
and fourth, Geronimo would be unable to exercise his right of
subrogation, Gateway having already been declared as
insolvent.
The first and last arguments have already been addressed
and found to be without merit. The second argument is a
matter of defense which has remained unproved and even
belied by Asianbank by its filing of the complaint. We see no
need to further belabor any of them.
As regards the third allegation, suffice it to state that the
predicament Geronimo finds himself in is his very own doing.
His misfortune is but the result of the implementation of a
bona fide contract he freely executed, the terms of which he
is presumed to have thoroughly examined. He was not at all
compelled to act as surety; he had a choice. It may be more
offensive to public policy or good customs if he be allowed to
go back on his undertaking under the surety contract. The
Court cannot be a party to the contracts impairment and
relieve a surety from the effects of an unwise but
nonetheless a valid surety contract.
WHEREFORE, the instant petition is hereby DENIED. The
appealed Decision dated October 28, 2005 of the CA and its
March 17, 2006 Resolution in CA-G.R. CV No. 80734 are
hereby AFFIRMED with the modification that any claim of
Asianbank or its successor-in-interest against Gateway, if
any, arising from the judgment in this suit shall be pursued
before the RTC, Branch 22 in Imus, Cavite as the insolvency
court.
Costs against petitioners.

Also challenged is the April 14, 1999 CA Resolution,3 which
denied petitioners Motion for Reconsideration.
SO ORDERED.
SECURITY BANK v. CUENCA
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 138544
October 3, 2000
SECURITY BANK AND TRUST COMPANY, Inc., petitioner,

vs.
RODOLFO M. CUENCA, respondent.
Modified by the CA was the March 6, 1997 Decision 4 of the

Regional Trial Court (RTC) of Makati City (Branch 66) in Civil
Case No. 93-1925, which disposed as follows:
"WHEREFORE, judgment is hereby rendered ordering
defendants Sta. Ines Melale Corporation and Rodolfo M.
Cuenca to pay, jointly and severally, plaintiff Security Bank &
Trust Company the sum of P39,129,124.73 representing the
balance of the loan as of May 10, 1994 plus 12% interest per
annum until fully paid, and the sum of P100,000.00 as
attorneys fees and litigation expenses and to pay the costs.
SO ORDERED."
The Facts
DECISION
PANGANIBAN, J.:
Being an onerous undertaking, a surety agreement is strictly
construed against the creditor, and every doubt is resolved in
favor of the solidary debtor. The fundamental rules of fair
play require the creditor to obtain the consent of the surety to
any material alteration in the principal loan agreement, or at
least to notify it thereof. Hence, petitioner bank cannot hold
herein respondent liable for loans obtained in excess of the
amount or beyond the period stipulated in the original
agreement, absent any clear stipulation showing that the
latter waived his right to be notified thereof, or to give
consent thereto. This is especially true where, as in this
case, respondent was no longer the principal officer or major
stockholder of the corporate debtor at the time the later
obligations were incurred. He was thus no longer in a
position to compel the debtor to pay the creditor and had no
more reason to bind himself anew to the subsequent
obligations.
The facts are narrated by the Court of Appeals as follows:5

"The antecedent material and relevant facts are that
defendant-appellant Sta. Ines Melale (Sta. Ines) is a
corporation engaged in logging operations. It was a holder of
a Timber License Agreement issued by the Department of
Environment and Natural Resources (DENR).
"On 10 November 1980, [Petitioner] Security Bank and Trust
Co. granted appellant Sta. Ines Melale Corporation [SIMC] a
credit line in the amount of [e]ight [m]llion [p]esos
(P8,000,000.00) to assist the latter in meeting the additional
capitalization requirements of its logging operations.
"The Credit Approval Memorandum expressly stated that the
P8M Credit Loan Facility shall be effective until 30 November
1981:
JOINT CONDITIONS:
The Case
1. Against Chattel Mortgage on logging trucks and/or

inventories (except logs) valued at 200% of the lines plus
JSS of Rodolfo M. Cuenca.
This is the main principle used in denying the present

Petition for Review under Rule 45 of the Rules of Court.
Petitioner assails the December 22, 1998 Decision1 of the
Court of Appeals (CA) in CA-GR CV No. 56203, the
dispositive portion of which reads as follows:
2. Submission of an appropriate Board Resolution

authorizing the borrowings, indicating therein the companys
duly authorized signatory/ies;
"WHEREFORE, the judgment appealed from is hereby

amended in the sense that defendant-appellant Rodolfo M.
Cuenca [herein respondent] is RELEASED from liability to
pay any amount stated in the judgment.
"Furthermore,
[Respondent]
Rodolfo
M.
Cuencas
counterclaim is hereby DISMISSED for lack of merit.
"In all other respect[s], the decision appealed from is
AFFIRMED."2
3. Reasonable/compensating deposit balances in current

account shall be maintained at all times; in this connection, a
Makati account shall be opened prior to availment on lines;
4. Lines shall expire on November 30, 1981; and
5. The bank reserves the right to amend any of the
aforementioned terms and conditions upon written notice to
the Borrower. (Emphasis supplied.)

"To secure the payment of the amounts drawn by appellant
SIMC from the above-mentioned credit line, SIMC executed
a Chattel Mortgage dated 23 December 1980 (Exhibit A)
over some of its machinery and equipment in favor of
[Petitioner] SBTC. As additional security for the payment of
the loan, [Respondent] Rodolfo M. Cuenca executed an
Indemnity Agreement dated 17 December 1980 (Exhibit B)
in favor of [Petitioner] SBTC whereby he solidarily bound
himself with SIMC as follows:
Security Bank agreed to extend to defendant-appellant Sta.

Ines the following loans:
xxx
b. Term loan in the amount of [t]hree [m]illion [f]our [h]undred

[t]housand [p]esos (P3,400,000.00), to be applied to liquidate
the past due interest and penalty portion of the indebtedness
of defendant-appellant Sta. Ines to [Petitioner] Security Bank
(cf. Exhibit G, Expediente, at Vol. II, p. 336; Exhibit 5-BCuenca, Expediente, at Vol. II, p. 33 to 34).
xxx
xxx
Rodolfo M. Cuenca x x x hereby binds himself x x x jointly

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

[h]undred [t]housand [p]esos (P8,800,000.00), to be applied
to liquidate the principal portion of defendant-appellant Sta.
Ines[] total outstanding indebtedness to [Petitioner] Security
Bank (cf. P. 1 of Exhibit G, Expediente, at Vol. II, p. 336;
Exhibit 5-B-Cuenca, Expediente, et Vol I, pp. 33 to 34) and
"It should be pointed out that in restructuring defendantappellant Sta. Ines obligations to [Petitioner] Security Bank,
Promissory Note No. TD-TLS-3599-81 in the amount of [s]ix
[m]illion [o]ne [h]undred [t]housand [p]esos (P6,100,000.00),
which was the only loan incurred prior to the expiration of the
P8M-Credit Loan Facility on 30 November 1981 and the only
one covered by the Indemnity Agreement dated 19
December 1980 (Exhibit 3-Cuenca, Expediente, at Vol. II, p.
331), was not segregated from, but was instead lumped
together with, the other loans, i.e., Promissory Notes Nos.
DLS/74/12/86, DLS/74/28/86 and DLS/74/47/86 (Exhibits D,
E, and F, Expediente, at Vol. II, pp. 333 to 335) obtained
by defendant-appellant Sta. Ines which were not secured by
said Indemnity Agreement.
"Pursuant to the agreement to restructure its past due
obligations to [Petitioner] Security Bank, defendant-appellant
Sta. Ines thus executed the following promissory notes, both
dated 09 March 1988 in favor of [Petitioner] Security Bank:
xxxxx
(Exhibits H and I, Expediente, at Vol. II, pp. 338 to 343).
"To formalize their agreement to restructure the loan
obligations of defendant-appellant Sta. Ines, [Petitioner]
Security Bank and defendant-appellant Sta. Ines executed a
Loan Agreement dated 31 October 1989 (Exhibit 5-Cuenca,
Expediente, at Vol. I, pp. 33 to 41). Section 1.01 of the said
Loan Agreement dated 31 October 1989 provides:
1.01 Amount - The Lender agrees to grant loan to the
Borrower in the aggregate amount of TWELVE MILLION
TWO HUNDRED THOUSAND PESOS (P12,200,000.00),
Philippines [c]urrency (the Loan). The loan shall be released
in two (2) tranches of P8,800,000.00 for the first tranche (the
First Loan) and P3,400,000.00 for the second tranche (the
Second Loan) to be applied in the manner and for the
purpose stipulated hereinbelow.
1.02. Purpose - The First Loan shall be applied to liquidate
the principal portion of the Borrowers present total
outstanding indebtedness to the Lender (the indebtedness)

while the Second Loan shall be applied to liquidate the past
due interest and penalty portion of the Indebtedness.
(Underscoring supplied.) (cf. p. 1 of Exhibit 5-Cuenca,
Expediente, at Vol. I, p. 33)
In its Memorandum, petitioner submits the following for our

consideration:8
"From 08 April 1988 to 02 December 1988, defendantappellant Sta. Ines made further payments to [Petitioner]
Security Bank in the amount of [o]ne [m]illion [s]even
[h]undred [f]ifty-[s]even [t]housand [p]esos (P1,757,000.00)
(Exhibits 8, 9-P-SIMC up to 9-GG-SIMC, Expediente, at
Vol. II, pp. 38, 70 to 165)
"A. Whether or not the Honorable Court of Appeals erred in

releasing Respondent Cuenca from liability as surety under
the Indemnity Agreement for the payment of the principal
amount of twelve million two hundred thousand pesos
(P12,200,000.00) under Promissory Note No. RL/74/596/88
dated 9 March 1988 and Promissory Note No. RL/74/597/88
dated 9 March 1988, plus stipulated interests, penalties and
other charges due thereon;
"Appellant SIMC defaulted in the payment of its restructured

loan obligations to [Petitioner] SBTC despite demands made
upon appellant SIMC and CUENCA, the last of which were
made through separate letters dated 5 June 1991 (Exhibit
K) and 27 June 1991 (Exhibit L), respectively.
i. Whether or not the Honorable Court of Appeals erred in

ruling that Respondent Cuencas liability under the Indemnity
Agreement covered only availments on SIMCs credit line to
the extent of eight million pesos (P8,000,000.00) and made
on or before 30 November 1981;
"Appellants individually and collectively refused to pay the

[Petitioner] SBTC. Thus, SBTC filed a complaint for
collection of sum of money on 14 June 1993, resulting after
trial on the merits in a decision by the court a quo, x x x from
which [Respondent] Cuenca appealed."
ii. Whether or not the Honorable Court of Appeals erred in

ruling that the restructuring of SIMCs indebtedness under
the P8 million credit accommodation was tantamount to an
extension granted to SIMC without Respondent Cuencas
consent, thus extinguishing his liability under the Indemnity
Agreement pursuant to Article 2079 of the Civil Code;
Ruling of the Court of Appeals

In releasing Respondent Cuenca from liability, the CA ruled
that the 1989 Loan Agreement had novated the 1980 credit
accommodation earlier granted by the bank to Sta. Ines.
Accordingly, such novation extinguished the Indemnity
Agreement, by which Cuenca, who was then the Board
chairman and president of Sta. Ines, had bound himself
solidarily liable for the payment of the loans secured by that
credit accommodation. It noted that the 1989 Loan
Agreement had been executed without notice to, much less
consent from, Cuenca who at the time was no longer a
stockholder of the corporation.
The appellate court also noted that the Credit Approval
Memorandum had specified that the credit accommodation
was for a total amount of P8 million, and that its expiry date
was November 30, 1981. Hence, it ruled that Cuenca was
liable only for loans obtained prior to November 30, 1981,
and only for an amount not exceeding P8 million.
It further held that the restructuring of Sta. Ines obligation
under the 1989 Loan Agreement was tantamount to a grant
of an extension of time to the debtor without the consent of
the surety. Under Article 2079 of the Civil Code, such
extension extinguished the surety.
iii. Whether or not the Honorable Court of appeals erred in

ruling that the restructuring of SIMCs indebtedness under
the P8 million credit accommodation constituted a novation
of the principal obligation, thus extinguishing Respondent
Cuencas liability under the indemnity agreement;
B. Whether or not Respondent Cuencas liability under the
Indemnity Agreement was extinguished by the payments
made by SIMC;
C. Whether or not petitioners Motion for Reconsideration
was pro-forma;
D. Whether or not service of the Petition by registered mail
sufficiently complied with Section 11, Rule 13 of the 1997
Rules of Civil Procedure."
Distilling the foregoing, the Court will resolve the following
issues: (a) whether the 1989 Loan Agreement novated the
original credit accommodation and Cuencas liability under
the Indemnity Agreement; and (b) whether Cuenca waived
his right to be notified of and to give consent to any
substitution, renewal, extension, increase, amendment,
conversion or revival of the said credit accommodation. As
preliminary matters, the procedural questions raised by
respondent will also be addressed.
The CA also opined that the surety was entitled to notice, in

case the bank and Sta. Ines decided to materially alter or
modify the principal obligation after the expiry date of the
credit accommodation.
The Courts Ruling
Hence, this recourse to this Court.7
Preliminary Matters: Procedural Questions
The Issues
Motion for Reconsideration Not Pro Forma
The Petition has no merit.

Respondent contends that petitioners Motion for
Reconsideration of the CA Decision, in merely rehashing the
arguments already passed upon by the appellate court, was
pro forma; that as such, it did not toll the period for filing the
present Petition for Review.9 Consequently, the Petition was
filed out of time.10
mail in lieu of personal service due to limitations in time and

distance."14 This explanation sufficiently shows that personal
service was not practicable. In any event, we find no
adequate reason to reject the contention of petitioner and
thereby deprive it of the opportunity to fully argue its cause.
First Issue: Original Obligation Extinguished by Novation
We disagree. A motion for reconsideration is not pro forma

just because it reiterated the arguments earlier passed upon
and rejected by the appellate court. The Court has explained
that a movant may raise the same arguments, precisely to
convince the court that its ruling was erroneous.11
Moreover, there is no clear showing of intent on the part of
petitioner to delay the proceedings. In Marikina Valley
Development Corporation v. Flojo,12 the Court explained that
a pro forma motion had no other purpose than to gain time
and to delay or impede the proceedings. Hence, "where the
circumstances of a case do not show an intent on the part of
the movant merely to delay the proceedings, our Court has
refused to characterize the motion as simply pro forma." It
held:
"We note finally that because the doctrine relating to pro
forma motions for reconsideration impacts upon the reality
and substance of the statutory right of appeal, that doctrine
should be applied reasonably, rather than literally. The right
to appeal, where it exists, is an important and valuable right.
Public policy would be better served by according the
appellate court an effective opportunity to review the decision
of the trial court on the merits, rather than by aborting the
right to appeal by a literal application of the procedural rules
relating to pro forma motions for reconsideration."
Service by Registered Mail Sufficiently Explained
Section 11, Rule 13 of the 1997 Rules of Court, provides as
follows:
"SEC. 11. Priorities in modes of service and filing. -Whenever practicable, the service and filing of pleadings and
other papers shall be done personally. Except with respect to
papers emanating from the court, a resort to other modes
must be accompanied by a written explanation why the
service or filing was not done personally. A violation of this
Rule may be cause to consider the paper as not filed."
Respondent maintains that the present Petition for Review
does not contain a sufficient written explanation why it was
served by registered mail.
We do not think so. The Court held in Solar Entertainment v.
Ricafort13 that the aforecited rule was mandatory, and that
"only when personal service or filing is not practicable may
resort to other modes be had, which must then be
accompanied by a written explanation as to why personal
service or filing was not practicable to begin with."
In this case, the Petition does state that it was served on the
respective counsels of Sta. Ines and Cuenca "by registered
An obligation may be extinguished by novation, pursuant to

Article 1292 of the Civil Code, which reads as follows:
"ART. 1292. In order that an obligation may be extinguished
by another which substitute the same, it is imperative that it
be so declared in unequivocal terms, or that the old and the
new obligations be on every point incompatible with each
other."
Novation of a contract is never presumed. It has been held
that "[i]n the absence of an express agreement, novation
takes place only when the old and the new obligations are
incompatible on every point."15 Indeed, the following
requisites must be established: (1) there is a previous valid
obligation; (2) the parties concerned agree to a new contract;
(3) the old contract is extinguished; and (4) there is a valid
new contract.16
Petitioner contends that there was no absolute
incompatibility between the old and the new obligations, and
that the latter did not extinguish the earlier one. It further
argues that the 1989 Agreement did not change the original
loan in respect to the parties involved or the obligations
incurred. It adds that the terms of the 1989 Contract were
"not more onerous."17 Since the original credit accomodation
was not extinguished, it concludes that Cuenca is still liable
under the Indemnity Agreement.
We reject these contentions. Clearly, the requisites of
novation are present in this case. The 1989 Loan Agreement
extinguished the obligation18 obtained under the 1980 credit
accomodation. This is evident from its explicit provision to
"liquidate" the principal and the interest of the earlier
indebtedness, as the following shows:
"1.02. Purpose. The First Loan shall be applied to liquidate
the principal portion of the Borrowers present total
outstanding Indebtedness to the Lender (the "Indebtedness")
while the Second Loan shall be applied to liquidate the past
due interest and penalty portion of the Indebtedness." 19
(Italics supplied.)
The testimony of an officer20 of the bank that the proceeds of
the 1989 Loan Agreement were used "to pay-off" the original
indebtedness serves to strengthen this ruling.21
Furthermore, several incompatibilities between the 1989
Agreement and the 1980 original obligation demonstrate that
the two cannot coexist. While the 1980 credit
accommodation had stipulated that the amount of loan was
not to exceed P8 million,22 the 1989 Agreement provided that

the loan was P12.2 million. The periods for payment were
also different.
Likewise, the later contract contained conditions, "positive
covenants" and "negative covenants" not found in the earlier
obligation. As an example of a positive covenant, Sta. Ines
undertook "from time to time and upon request by the
Lender, [to] perform such further acts and/or execute and
deliver such additional documents and writings as may be
necessary or proper to effectively carry out the provisions
and purposes of this Loan Agreement."23 Likewise, SIMC
agreed that it would not create any mortgage or
encumbrance on any asset owned or hereafter acquired, nor
would it participate in any merger or consolidation.24
Since the 1989 Loan Agreement had extinguished the
original credit accommodation, the Indemnity Agreement, an
accessory obligation, was necessarily extinguished also,
pursuant to Article 1296 of the Civil Code, which provides:
"ART. 1296. When the principal obligation is extinguished in
consequence of a novation, accessory obligations may
subsist only insofar as they may benefit third persons who
did not give their consent."
contending that it was not a binding agreement because it

was not signed by the parties. It adds that it was merely for
its internal use.
We disagree. It was petitioner itself which presented the said
document to prove the accommodation. Attached to the
Complaint as Annex A was a copy thereof "evidencing the
accommodation."27 Moreover, in its Petition before this Court,
it alluded to the Credit Approval Memorandum in this wise:
"4.1 On 10 November 1980, Sta. Ines Melale Corporation
("SIMC") was granted by the Bank a credit line in the
aggregate amount of Eight Million Pesos (P8,000,000.00) to
assist SIMC in meeting the additional capitalization
requirements for its logging operations. For this purpose, the
Bank issued a Credit Approval Memorandum dated 10
November 1980."
Clearly, respondent is estopped from denying the terms and
conditions of the P8 million credit accommodation as
contained in the very document it presented to the courts.
Indeed, it cannot take advantage of that document by
agreeing to be bound only by those portions that are
favorable to it, while denying those that are
disadvantageous.
Alleged Extension
Second Issue: Alleged Waiver of Consent
Petitioner insists that the 1989 Loan Agreement was a mere
renewal or extension of the P8 million original
accommodation; it was not a novation.25
This argument must be rejected. To begin with, the 1989
Loan Agreement expressly stipulated that its purpose was to
"liquidate," not to renew or extend, the outstanding
indebtedness. Moreover, respondent did not sign or consent
to the 1989 Loan Agreement, which had allegedly extended
the original P8 million credit facility. Hence, his obligation as
a surety should be deemed extinguished, pursuant to Article
2079 of the Civil Code, which specifically states that "[a]n
extension granted to the debtor by the creditor without the
consent of the guarantor extinguishes the guaranty. x x x." In
an earlier case,26 the Court explained the rationale of this
provision in this wise:
"The theory behind Article 2079 is that an extension of time
given to the principal debtor by the creditor without the
suretys consent would deprive the surety of his right to pay
the creditor and to be immediately subrogated to the
creditors remedies against the principal debtor upon the
maturity date. The surety is said to be entitled to protect
himself against the contingency of the principal debtor or the
indemnitors becoming insolvent during the extended period."
Binding Nature of the Credit Approval Memorandum
As noted earlier, the appellate court relied on the provisions
of the Credit Approval Memorandum in holding that the credit
accommodation was only for P8 million, and that it was for a
period of one year ending on November 30, 1981. Petitioner
objects to the appellate courts reliance on that document,
Pursuing another course, petitioner contends that

Respondent Cuenca "impliedly gave his consent to any
modification of the credit accommodation or otherwise
waived his right to be notified of, or to give consent to, the
same."28 Respondents consent or waiver thereof is allegedly
found in the Indemnity Agreement, in which he held himself
liable for the "credit accommodation including [its]
substitutions, renewals, extensions, increases, amendments,
conversions and revival." It explains that the novation of the
original credit accommodation by the 1989 Loan Agreement
is merely its "renewal," which "connotes cessation of an old
contract and birth of another one x x x."29
At the outset, we should emphasize that an essential
alteration in the terms of the Loan Agreement without the
consent of the surety extinguishes the latters obligation. As
the Court held in National Bank v. Veraguth,30 "[i]t is
fundamental in the law of suretyship that any agreement
between the creditor and the principal debtor which
essentially varies the terms of the principal contract, without
the consent of the surety, will release the surety from
liability."
In this case, petitioners assertion - that respondent
consented to the alterations in the credit accommodation -finds no support in the text of the Indemnity Agreement,
which is reproduced hereunder:
"Rodolfo M. Cuenca of legal age, with postal address c/o
Sta. Ines Malale Forest Products Corp., Alco Bldg., 391
Buendia Avenue Ext., Makati Metro Manila for and in
consideration of the credit accommodation in the total

amount of eight million pesos (P8,000,000.00) granted by
the SECURITY BANK AND TRUST COMPANY, a
commercial bank duly organized and existing under and by
virtue of the laws of the Philippine, 6778 Ayala Avenue,
Makati, Metro Manila hereinafter referred to as the BANK in
favor of STA. INES MELALE FOREST PRODUCTS CORP.,
x x x ---- hereinafter referred to as the CLIENT, with the
stipulated interests and charges thereon, evidenced by
that/those certain PROMISSORY NOTE[(S)], made,
executed and delivered by the CLIENT in favor of the BANK
hereby bind(s) himself/themselves jointly and severally with
the CLIENT in favor of the BANK for the payment , upon
demand and without benefit of excussion of whatever
amount or amounts the CLIENT may be indebted to the
BANK under and by virtue of aforesaid credit
accommodation(s) including the substitutions, renewals,
extensions, increases, amendment, conversions and revivals
of the aforesaid credit accommodation(s), as well as of the
amount or amounts of such other obligations that the
CLIENT may owe the BANK, whether direct or indirect,
principal or secondary, as appears in the accounts, books
and records of the BANK, plus interest and expenses arising
from any agreement or agreements that may have
heretofore been made, or may hereafter be executed by and
between the parties thereto, including the substitutions,
renewals, extensions, increases, amendments, conversions
and revivals of the aforesaid credit accommodation(s), and
further bind(s) himself/themselves with the CLIENT in favor
of the BANK for the faithful compliance of all the terms and
conditions
contained
in
the
aforesaid
credit
accommodation(s), all of which are incorporated herein and
made part hereof by reference."
While respondent held himself liable for the credit
accommodation or any modification thereof, such clause
should be understood in the context of the P8 million limit
and the November 30, 1981 term. It did not give the bank or
Sta. Ines any license to modify the nature and scope of the
original credit accommodation, without informing or getting
the consent of respondent who was solidarily liable. Taking
the banks submission to the extreme, respondent (or his
successors) would be liable for loans even amounting to,
say, P100 billion obtained 100 years after the expiration of
the credit accommodation, on the ground that he consented
to all alterations and extensions thereof.
Indeed, it has been held that a contract of surety "cannot
extend to more than what is stipulated. It is strictly construed
against the creditor, every doubt being resolved against
enlarging the liability of the surety."31 Likewise, the Court has
ruled that "it is a well-settled legal principle that if there is any
doubt on the terms and conditions of the surety agreement,
the doubt should be resolved in favor of the surety x x x.
Ambiguous contracts are construed against the party who
caused the ambiguity."32 In the absence of an unequivocal
provision that respondent waived his right to be notified of or
to give consent to any alteration of the credit
accommodation, we cannot sustain petitioners view that
there was such a waiver.
It should also be observed that the Credit Approval

Memorandum clearly shows that the bank did not have
absolute authority to unilaterally change the terms of the loan
accommodation. Indeed, it may do so only upon notice to the
borrower, pursuant to this condition:
"5. The Bank reserves the right to amend any of the
aforementioned terms and conditions upon written notice to
the Borrower."33
We reject petitioners submission that only Sta. Ines as the
borrower, not respondent, was entitled to be notified of any
modification in the original loan accommodation.34 Following
the banks reasoning, such modification would not be valid
as to Sta. Ines if no notice were given; but would still be valid
as to respondent to whom no notice need be given. The
latters liability would thus be more burdensome than that of
the former. Such untenable theory is contrary to the principle
that a surety cannot assume an obligation more onerous
than that of the principal.35
The present controversy must be distinguished from
Philamgen v. Mutuc,36 in which the Court sustained a
stipulation whereby the surety consented to be bound not
only for the specified period, "but to any extension thereafter
made, an extension x x x that could be had without his
having to be notified."
In that case, the surety agreement contained this
unequivocal stipulation: "It is hereby further agreed that in
case of any extension of renewal of the bond, we equally
bind ourselves to the Company under the same terms and
conditions as herein provided without the necessity of
executing another indemnity agreement for the purpose and
that we hereby equally waive our right to be notified of any
renewal or extension of the bond which may be granted
under this indemnity agreement."
In the present case, there is no such express
stipulation.1wphi1 At most, the alleged basis of
respondents waiver is vague and uncertain. It confers no
clear authorization on the bank or Sta. Ines to modify or
extend the original obligation without the consent of the
surety or notice thereto.
Continuing Surety
Contending that the Indemnity Agreement was in the nature
of a continuing surety, petitioner maintains that there was no
need for respondent to execute another surety contract to
secure the 1989 Loan Agreement.
This argument is incorrect. That the Indemnity Agreement is
a continuing surety does not authorize the bank to extend
the scope of the principal obligation inordinately.37 In Dino v.
CA,38 the Court held that "a continuing guaranty is one which
covers all transactions, including those arising in the future,
which are within the description or contemplation of the
contract of guaranty, until the expiration or termination
thereof."

To repeat, in the present case, the Indemnity Agreement was
subject to the two limitations of the credit accommodation:
(1) that the obligation should not exceed P8 million, and (2)
that the accommodation should expire not later than
November 30, 1981. Hence, it was a continuing surety only
in regard to loans obtained on or before the aforementioned
expiry date and not exceeding the total of P8 million.
Accordingly, the surety of Cuenca secured only the first loan
of P6.1 million obtained on November 26, 1991. It did not
secure the subsequent loans, purportedly under the 1980
credit accommodation, that were obtained in 1986. Certainly,
he could not have guaranteed the 1989 Loan Agreement,
which was executed after November 30, 1981 and which
exceeded the stipulated P8 million ceiling.
Petitioner, however, cites the Dino ruling in which the Court
found the surety liable for the loan obtained after the
payment of the original one, which was covered by a
continuing surety agreement. At the risk of being repetitious,
we hold that in Dino, the surety Agreement specifically
provided that "each suretyship is a continuing one which
shall remain in full force and effect until this bank is notified
of its revocation." Since the bank had not been notified of
such revocation, the surety was held liable even for the
subsequent obligations of the principal borrower.
No similar provision is found in the present case. On the
contrary, respondents liability was confined to the 1980
credit accommodation, the amount and the expiry date of
which were set down in the Credit Approval Memorandum.
Special Nature of the JSS
It is a common banking practice to require the JSS ("joint
and solidary signature") of a major stockholder or corporate
officer, as an additional security for loans granted to
corporations. There are at least two reasons for this. First, in
case of default, the creditors recourse, which is normally
limited to the corporate properties under the veil of separate
corporate personality, would extend to the personal assets of
the surety. Second, such surety would be compelled to
ensure that the loan would be used for the purpose agreed
upon, and that it would be paid by the corporation.
Following this practice, it was therefore logical and
reasonable for the bank to have required the JSS of
respondent, who was the chairman and president of Sta.
Ines in 1980 when the credit accommodation was granted.
There was no reason or logic, however, for the bank or Sta.
Ines to assume that he would still agree to act as surety in
the 1989 Loan Agreement, because at that time, he was no
longer an officer or a stockholder of the debtor-corporation.
Verily, he was not in a position then to ensure the payment of
the obligation. Neither did he have any reason to bind
himself further to a bigger and more onerous obligation.
Indeed, the stipulation in the 1989 Loan Agreement providing
for the surety of respondent, without even informing him,
smacks of negligence on the part of the bank and bad faith
on that of the principal debtor. Since that Loan Agreement

constituted a new indebtedness, the old loan having been
already liquidated, the spirit of fair play should have impelled
Sta. Ines to ask somebody else to act as a surety for the new
loan.
In the same vein, a little prudence should have impelled the
bank to insist on the JSS of one who was in a position to
ensure the payment of the loan. Even a perfunctory attempt
at credit investigation would have revealed that respondent
was no longer connected with the corporation at the time. As
it is, the bank is now relying on an unclear Indemnity
Agreement in order to collect an obligation that could have
been secured by a fairly obtained surety. For its defeat in this
litigation, the bank has only itself to blame.
In sum, we hold that the 1989 Loan Agreement extinguished
by novation the obligation under the 1980 P8 million credit
accommodation. Hence, the Indemnity Agreement, which
had been an accessory to the 1980 credit accommodation,
was also extinguished. Furthermore, we reject petitioners
submission that respondent waived his right to be notified of,
or to give consent to, any modification or extension of the
1980 credit accommodation.
In this light, we find no more need to resolve the issue of
whether the loan obtained before the expiry date of the credit
accommodation has been paid.
WHEREFORE, the Petition is DENIED and the assailed
Decision AFFIRMED. Costs against petitioner.
SO ORDERED.
PICZON v. PICZON
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. L-29139
November 15, 1974
CONSUELO P. PICZON, RUBEN O. PICZON and AIDA P.

ALCANTARA, plaintiffs-appellants,
vs.
ESTEBAN PICZON and SOSING-LOBOS & CO., INC.,
defendants-appellees.
Vicente C. Santos for plaintiffs-appellants.
Jacinto R. Bohol for defendant-appellee Sosing-Lobos &
Co., Inc.
Vicente M. Macabidang for defendant-appellee Esteban
Piczon.

BARREDO, J.:p
Appeal from the decision of the Court of First Instance of
Samar in its Civil Case No. 5156, entitled Consuelo P.
Piczon, et al. vs. Esteban Piczon, et al., sentencing
defendants-appellees, Sosing Lobos and Co., Inc., as
principal, and Esteban Piczon, as guarantor, to pay plaintiffsappellants "the sum of P12,500.00 with 12% interest from
August 6, 1964 until said principal amount of P12,500.00
shall have been duly paid, and the costs."
After issues were joined and at the end of the pre-trial held
on August 22, 1967, the trial court issued the following order:
"When this case was called for pre-trial, plaintiffs and
defendants through their lawyers, appeared and entered into
the following agreement:
1. That defendants admit the due execution of Annexes "A"
and "B" of the complaint;
2. That consequently defendant Sosing-Lobos and Co., Inc.
binds itself to the plaintiffs for P12,500.00, the same to be
paid on or before October 31, 1967 together with the interest
that this court may determine.
That the issues in this case are legal ones namely:
(a) Will the payment of twelve per cent interest of
P12,500.00 commence to run from August 6, 1964 when
plaintiffs made the first demand or from August 29, 1956
when the obligation becomes due and demandable?
(b) Is defendant Esteban Piczon liable as a guarantor or a
surety?
That the parties are hereby required to file their respective
memorandum if they so desire on or before September 15,
1967 to discuss the legal issues and therewith the case will
be considered submitted for decision.
WHEREFORE, the instant case is hereby considered
submitted based on the aforesaid facts agreed upon and
upon submission of the parties of their respective
memorandum on or before September 15, 1967.
SO ORDERED. 1 (Record on Appeal pp. 28-30.)
Annex "A", the actionable document of appellants reads
thus:
AGREEMENT OF LOAN
KNOW YE ALL MEN BY THESE PRESENTS:
That I, ESTEBAN PICZON, of legal age, married, Filipino,

and resident of and with postal address in the municipality of
Catbalogan, Province of Samar, Philippines, in my capacity
as the President of the corporation known as the "SOSINGLOBOS and CO., INC.," as controlling stockholder, and at
the same time as guarantor for the same, do by these
presents contract a loan of Twelve Thousand Five Hundred
Pesos (P12,500.00), Philippine Currency, the receipt of
which is hereby acknowledged, from the "Piczon and Co.,
Inc." another corporation, the main offices of the two
corporations being in Catbalogan, Samar, for which I
undertake, bind and agree to use the loan as surety cash
deposit for registration with the Securities and Exchange
Commission of the incorporation papers relative to the
"Sosing-Lobos and Co., Inc.," and to return or pay the same
amount with Twelve Per Cent (12%) interest per annum,
commencing from the date of execution hereof, to the
"Piczon and Co., Inc., as soon as the said incorporation
papers are duly registered and the Certificate of
Incorporation issued by the aforesaid Commission.
IN WITNESS WHEREOF, I hereunto signed my name in
Catbalogan, Samar, Philippines, this 28th day of September,
1956.
(Sgd.) ESTEBAN PICZON
(Record on Appeal, pp. 6-7.)
The trial court having rendered judgment in the tenor
aforequoted, appellants assign the following alleged errors:
I
THE TRIAL COURT ERRED IN ORDERING THE PAYMENT
OF 12% INTEREST ON THE PRINCIPAL OF P12,500.00
FROM AUGUST 6, 1964, ONLY, INSTEAD OF FROM
SEPTEMBER 28, 1956, WHEN ANNEX "A" WAS DULY
EXECUTED.
II
THE TRIAL COURT ERRED IN CONSIDERING
DEFENDANT ESTEBAN PICZON AS GUARANTOR ONLY
AND NOT AS SURETY.
III
THE TRIAL COURT ERRED IN NOT ADJUDICATING
DAMAGES IN FAVOR OF THE PLAINTIFFS-APPELLANTS.
(Appellants' Brief, pp. a to b.)
Appellants' first assignment of error is well taken. Instead of
requiring appellees to pay interest at 12% only from August
6, 1964, the trial court should have adhered to the terms of
the agreement which plainly provides that Esteban Piczon
had obligated Sosing-Lobos and Co., Inc. and himself to
"return or pay (to Piczon and Co., Inc.) the same amount
(P12,500.00) with Twelve Per Cent (12%) interest per annum

commencing from the date of the execution hereof", Annex
A, which was on September 28, 1956. Under Article 2209 of
the Civil Code "(i)f the obligation consists in the payment of a
sum of money, and the debtor incurs in 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, which is six per
cent per annum." In the case at bar, the "interest agreed
upon" by the parties in Annex A was to commence from the
execution of said document.
Appellees' contention that the reference in Article 2209 to
delay incurred by the debtor which can serve as the basis for
liability for interest is to that defined in Article 1169 of the Civil
Code reading thus:
Those obliged to deliver or to do something incur in delay
from the time the obligee judicially or extrajudicially demands
from them the fulfillment of their obligation.
However, the demand by the creditor shall not be necessary
in order that delay may exist:
(1) When the obligation or the law expressly so declares; or
(2) When from the nature and the circumstances of the
obligation it appears that the designation of the time when
the thing is to be delivered or the service is to be rendered
was a controlling motive for the establishment of the
contract; or
(3) When demand would be useless, as when the obligor
has rendered it beyond his power to perform.
As regards the other two assignments of error, appellants'

pose cannot be sustained. Under the terms of the contract,
Annex A, Esteban Piczon expressly bound himself only as
guarantor, and there are no circumstances in the record from
which it can be deduced that his liability could be that of a
surety. A guaranty must be express, (Article 2055, Civil
Code) and it would be violative of the law to consider a party
to be bound as a surety when the very word used in the
agreement is "guarantor."
Moreover, as well pointed out in appellees' brief, under the
terms of the pre-trial order, appellants accepted the express
assumption of liability by Sosing-Lobos & Co., Inc. for the
payment of the obligation in question, thereby modifying their
original posture that inasmuch as that corporation did not
exist yet at the time of the agreement, Piczon necessarily
must have bound himself as insurer.
As already explained earlier, appellants' prayer for payment
of legal interest upon interest due from the filing of the
complaint can no longer be entertained, the same not having
been made an issue in the pleadings in the court below. We
do not believe that such a substantial matter can be deemed
included in a general prayer for "any other relief just and
equitable in the premises", especially when, as in this case,
the pre-trial order does not mention it in the enumeration of
the issues to be resolved by the court.
PREMISES CONSIDERED, the judgment of the trial court is
modified so as to make appellees liable for the stipulated
interest of 12% per annum from September 28, 1956,
instead of August 6, 1964. In all other respects, said
judgment is affirmed. Costs against appellees.
In reciprocal obligations, neither party incurs in delay if the

other does not comply or is not ready to comply in a proper
manner with what is incumbent upon him. From the moment
one of the parties fulfills his obligation, delay by the other
begins.
is untenable. In Quiroz vs. Tan Guinlay, 5 Phil. 675, it was
held that the article cited by appellees (which was Article
1100 of the Old Civil Code read in relation to Art. 1101) is
applicable only when the obligation is to do something other
than the payment of money. And in Firestone Tire & Rubber
Co. (P.I.) vs. Delgado, 104 Phil. 920, the Court squarely ruled
that if the contract stipulates from what time interest will be
counted, said stipulated time controls, and, therefore interest
is payable from such time, and not from the date of the filing
of the complaint (at p. 925). Were that not the law, there
would be no basis for the provision of Article 2212 of the Civil
Code providing that "(I)nterest due shall earn legal interest
from the time it is judicially demanded, although the
obligation may be silent upon this point." Incidentally,
appellants would have been entitled to the benefit of this
article, had they not failed to plead the same in their
complaint. Their prayer for it in their brief is much too late.
Appellees had no opportunity to meet the issue squarely at
the pre-trial.
BA FINANCE v. CA
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 94566
July 3, 1992
BA FINANCE CORPORATION, petitioner,

vs.
HON. COURT OF APPEALS and TRADERS ROYAL
BANK, respondents.
MEDIALDEA, J.:
This is a petition for review on certiorari of the decision of the
respondent appellate court which reversed the ruling of the
trial court dismissing the case against petitioner.

The antecedent facts are as follows:
On December 17, 1980, Renato Gaytano, doing business
under the name Gebbs International, applied for and was
granted a loan with respondent Traders Royal Bank in the
amount of P60,000.00. As security for the payment of said
loan, the Gaytano spouses executed a deed of suretyship
whereby they agreed to pay jointly and severally to
respondent bank the amount of the loan including interests,
penalty and other bank charges.
1) EIGHTY FIVE THOUSAND EIGHT HUNDRED SEVEN

AND 25/100 (P85,807.25), representing the total unpaid
balance with accumulated interests, penalties and bank
charges as of September 22, 1987, plus interests, penalties
and bank charges thereafter until the whole obligation shall
have been fully paid.
2) Attorney's fees at the stipulated rate of ten (10%) percent
computed from the total obligation; and
3) The costs of suit.
In a letter dated December 5, 1980 addressed to respondent

bank, Philip Wong as credit administrator of BA Finance
Corporation for and in behalf of the latter, undertook to
guarantee the loan of the Gaytano spouses. The letter reads:
This is in reference to the application of Gebbs International
for a twenty-five (25) month term loan of 60,000.00 with your
Bank.
In this connection, please be advised that we unconditionally
guarantee full payment in peso value the said
accommodation (sic) upon non-payment by subject up to a
maximum amount of P60,000.00.
Hoping this would meet your requirement and expedite the
early processing of their application.
Thank you.
Very truly yours,
BA FINANCE CORPORATION
(signed)
PHILIP H. WONG
Credit Administrator
(p. 12, Rollo)
Partial payments were made on the loan leaving an unpaid
balance in the amount of P85,807.25. Since the Gaytano
spouses refused to pay their obligation, respondent bank
filed with the trial court complaint for sum of money against
the Gaytano spouses and petitioner corporation as
alternative defendant.
The Gaytano spouses did not present evidence for their
defense. Petitioner corporation, on the other hand, raised the
defense of lack of authority of its credit administrator to bind
the corporation.
On December 12, 1988, the trial court rendered a decision
the dispositive portion of which states:
IN VIEW OF THE FOREGOING, judgment is hereby
rendered in favor of plaintiff and against defendants/Gaytano
spouses, ordering the latter to jointly and severally pay the
plaintiff the following:
The dismissal of the case against defendant BA Finance

Corporation is hereby ordered without pronouncement as to
cost.
SO ORDERED. (p. 31, Rollo)
Not satisfied with the decision, respondent bank appealed
with the Court of Appeals. On March 13, 1990, respondent
appellate court rendered judgment modifying the decision of
the trial court as follows:
In view of the foregoing, the judgment is hereby rendered
ordering the defendants Gaytano spouses and alternative
defendant BA Finance Corporation, jointly and severally, to
pay the plaintiff the amount of P85,807.25 as of September
8, 1987, including interests, penalties and other back (sic)
charges thereon, until the full obligation shall have been fully
paid. No pronouncement as to costs.
SO ORDERED. (p. 27 Rollo)
Hence this petition was filed with the petitioner assigning the
following errors committed by respondent appellate court:
1. THE HONORABLE COURT OF APPEALS GRAVELY
ERRED IN RULING THAT PETITIONER IS JOINTLY AND
SEVERALLY LIABLE WITH GAYTANO SPOUSES DESPITE
ITS FINDINGS THAT THE LETTER GUARANTY (EXH. "C")
IS "INVALID AT ITS INCEPTION";
ERRED IN RULING THAT THE PETITIONER WAS GUILTY
OF ESTOPPEL DESPITE THE FACT THAT IT NEVER
KNEW OF SUCH ALLEGED LETTER-GUARANTY;
ERRED IN NOT RULING THAT SUCH LETTER GUARANTY
(EXHIBIT "C") BEING PATENTLY ULTRA VIRES, IS
UNENFORCEABLE;
4. THE HONORABLE COURT OF APPEALS ERRED IN
NOT
AWARDING
RELIEF
ON
PETITIONER'S
COUNTERCLAIM
(p. 10, Rollo).
Since the issues are interrelated, it would be well to discuss
them jointly.

Petitioner contends that the letter guaranty is ultra vires, and
therefore unenforceable; that said letter-guaranty was issued
by an employee of petitioner corporation beyond the scope
of his authority since the petitioner itself is not even
empowered by its articles of incorporation and by-laws to
issue guaranties. Petitioner also submits that it is not guilty of
estoppel to make it liable under the letter-guaranty because
petitioner had no knowledge or notice of such letterguaranty; that the allegation of Philip Wong, credit
administrator, that there was an audit was not supported by
evidence of any audit report or record of such transaction in
the office files.
We find the petitioner's contentions meritorious. It is a settled
rule that persons dealing with an assumed agent, whether
the assumed agency be a general or special one are bound
at their peril, if they would hold the principal liable, to
ascertain not only the fact of agency but also the nature and
extent of authority, and in case either is controverted, the
burden of proof is upon them to establish it (Harry Keeler v.
Rodriguez, 4 Phil. 19). Hence, the burden is on respondent
bank to satisfactorily prove that the credit administrator with
whom they transacted acted within the authority given to him
by his principal, petitioner corporation. The only evidence
presented by respondent bank was the testimony of Philip
Wong, credit administrator, who testified that he had
authority to issue guarantees as can be deduced from the
wording of the memorandum given to him by petitioner
corporation on his lending authority. The said memorandum
which allegedly authorized Wong not only to approve and
grant loans but also to enter into contracts of guaranty in
behalf of the corporation, partly reads:
To: Philip H. Wong, SAM
Credit Administrator
From: Hospicio B. Bayona, Jr., VP and
Head of Credit Administration
Re: Lending Authority
I am pleased to delegate to you in your capacity as Credit
Administrator the following lending limits:
a) P650,000.00 Secured Loans
b) P550,000.00 Supported Loans
c) P350,000.00 Truck Loans/Contracts/Leases
d) P350,000.00 Auto Loan Contracts/Leases
e) P350,000.00 Appliance Loan Contracts
f) P350,000.00 Unsecured Loans
Total loans and/or credits [combination of (a) thru (f)
extended to any one borrower including parents, affiliates
and/or subsidiaries, should not exceed P750,000.00. In
exercising the limits aforementioned, both direct and
contingent commitments to the borrower(s) should be
considered.
All loans must be within the Company's established lending
guideline and policies.
xxx xxx xxx

LEVELS OF APPROVAL
All transactions in excess of any branch's limit must be
recommended to you through the Official Credit Report for
approval. If the transaction exceeds your limit, you must
concur in application before submitting it to the Vice
President, Credit Administration for approval or concurrence.
. . . (pp. 62-63, Rollo) (Emphasis ours)
Although Wong was clearly authorized to approve loans
even up to P350,000.00 without any security requirement,
which is far above the amount subject of the guaranty in the
amount of P60,000.00, nothing in the said memorandum
expressly vests on the credit administrator power to issue
guarantees. We cannot agree with respondent's contention
that the phrase "contingent commitment" set forth in the
memorandum means guarantees. It has been held that a
power of attorney or authority of an agent should not be
inferred from the use of vague or general words. Guaranty is
not presumed, it must be expressed and cannot be extended
beyond its specified limits (Director v. Sing Juco, 53 Phil.
205). In one case, where it appears that a wife gave her
husband power of attorney to loan money, this Court ruled
that such fact did not authorize him to make her liable as a
surety for the payment of the debt of a third person (Bank of
Philippine Islands v. Coster, 47 Phil. 594).
The sole allegation of the credit administrator in the absence
of any other proof that he is authorized to bind petitioner in a
contract of guaranty with third persons should not be given
weight. The representation of one who acts as agent cannot
by itself serve as proof of his authority to act as agent or of
the extent of his authority as agent (Velasco v. La Urbana, 58
Phil. 681). Wong's testimony that he had entered into similar
transactions of guaranty in the past for and in behalf of the
petitioner, lacks credence due to his failure to show
documents or records of the alleged past transactions. The
actuation of Wong in claiming and testifying that he has the
authority is understandable. He would naturally take steps to
save himself from personal liability for damages to
respondent bank considering that he had exceeded his
authority. The rule is clear that an agent who exceeds his
authority is personally liable for damages (National Power
Corporation v. National Merchandising Corporation, Nos. L33819 and L-33897, October 23, 1982, 117 SCRA 789).
Anent the conclusion of respondent appellate court that
petitioner is estopped from alleging lack of authority due to
its failure to cancel or disallow the guaranty, We find that the
said conclusion has no basis in fact. Respondent bank had
not shown any evidence aside from the testimony of the
credit administrator that the disputed transaction of guaranty
was in fact entered into the official records or files of
petitioner corporation, which will show notice or knowledge
on the latter's part and its consequent ratification of the said
transaction. In the absence of clear proof, it would be unfair
to hold petitioner corporation guilty of estoppel in allowing its

credit administrator to act as though the latter had power to
guarantee.
for the faithful performance of which Tomas Alonso signed

the following:
ACCORDINGLY, the petition is GRANTED and the assailed

decision of the respondent appellate court dated March 13,
1990 is hereby REVERSED and SET ASIDE and another
one is rendered dismissing the complaint for sum of money
against BA Finance Corporation.
For value received, we jointly and severally do hereby bind

ourselves and each of us, in solidum, with Leonor S. Bantug
the agent named in the within and foregoing agreement, for
full and complete performance of same hereby waiving
notice of non-performance by or demand upon said agent,
and the consent to any and all extensions of time for
performance. Liability under this undertaking, however, shall
not exceed the sum of P2,000, Philippine currency.
SO ORDERED.
Witness the hand and seal of the undersigned affixed in the

presence of two witness, this 12th day of August, 1929.
TEXAS COMPANY v. ALONSO

SUPREME COURT
Manila
Leonor S. Bantug was declared in default as a result of her

failure to appear or answer, but Tomas Alonso filed an
answer setting up a general denial and the special defenses
that Leonor S. Bantug made him believe that he was merely
a co-security of one Vicente Palanca and he was never
notified of the acceptance of his bond by the Texas
Company. After trial, the Court of First Instance of Cebu
rendered judgment on July 10, 1973, which was amended on
February 1, 1938, sentencing Leonor S. Bantug and Tomas
Alonso to pay jointly and severally to the Texas Company the
sum of P629, with interest at the rate of six per cent (6%)
from the date of filing of the complaint, and with proportional
costs. Upon appeal by Tomas Alonso, the Court of Appeals
modified the judgment of the Court of First Instance of Cebu
in the sense that Leonor S. Bantug was held solely liable for
the payment of the aforesaid sum of P629 to the Texas
Company, with the consequent absolution of Tomas Alonso.
This case is now before us on petition for review by certiorari
of the decision of the Court of Appeals. It is contended by the
petitioner that the Court of Appeals erred in holding that
there was merely an offer of guaranty on the part of the
respondent, Tomas Alonso, and that the latter cannot be held
liable thereunder because he was never notified by the
Texas Company of its acceptance.
EN BANC
G.R. No. L-47495
August 14, 1941
THE TEXAS COMPANY (PHIL.), INC., petitioner,

vs.
TOMAS ALONSO, respondent.
C. D. Johnston & A. P. Deen for petitioner.
Tomas Alonso in his own behalf.
LAUREL, J.:
On November 5, 1935 Leonor S. Bantug and Tomas Alonso
were sued by the Texas Company (P.I.), Inc. in the Court of
First Instance of Cebu for the recovery of the sum of P629,
unpaid balance of the account of Leonora S. Bantug in
connection with the agency contract with the Texas Company
The Court of Appeals has placed reliance upon our decision

in National Bank vs. Garcia (47 Phil., 662), while the
petitioner invokes the case of National Bank vs. Escueta, (50
Phil., 991). In the first case, it was held that there was merely
an offer to give bond and, as there was no acceptance of the
offer, this court refused to give effect to the bond. In the
second case, the sureties were held liable under their surety
agreement which was found to have been accepted by the
creditor, and it was therein ruled that an acceptance need
not always be express or in writing. For the purpose of this
decision, it is not indispensable for us to invoke one or the
other case above cited. The Court of Appeals found as a
fact, and this is conclusive in this instance, that the bond in
question was executed at the request of the petitioner by
virtue of the following clause of the agency contract:
Additional Security. The Agent shall whenever requested
by the Company in addition to the guaranty herewith
provided, furnish further guaranty or bond, conditioned upon
the Agent's faithful performance of this contract, in such

individuals of firms as joint and several sureties as shall be
satisfactory to the Company.
In view of the foregoing clause which should be the law
between the parties, it is obvious that, before a bond is
accepted by the petitioner, it has to be in such form and
amount and with such sureties as shall be satisfactory
hereto; in other words, the bond is subject to petitioner's
approval. The logical implication arising from this
requirement is that, if the petitioner is satisfied with any such
bond, notice of its acceptance or approval should necessarily
be given to the property party in interest, namely, the surety
or guarantor. In this connection, we are likewise bound by
the finding of the Court of Appeals that there is no evidence
in this case tending to show that the respondent, Tomas
Alonso, ever had knowledge of any act on the part of
petitioner amounting to an implied acceptance, so as to
justify the application of our decision in National Bank vs.
Escueta (50 Phil., 991).
While unnecessary to this decision, we choose to add a few
words explanatory of the rule regarding the necessity of
acceptance in case of bonds. Where there is merely an offer
of, or proposition for, a guaranty, or merely a conditional
guaranty in the sense that it requires action by the creditor
before the obligation becomes fixed, it does not become a
binding obligation until it is accepted and, unless there is a
waiver of notice of such acceptance is given to, or acquired
by, the guarantor, or until he has notice or knowledge that the
creditor has performed the conditions and intends to act
upon the guaranty. (National Bank vs. Garcia, 47 Phil., 662;
C. J., sec. 21, p. 901; 24 Am. Jur., sec. 37, p. 899.) The
acceptance need not necessarily be express or in writing,
but may be indicated by acts amounting to acceptance.
(National Bank vs. Escueta, 50 Phil., 991.) Where, upon the
other hand, the transaction is not merely an offer of guaranty
but amounts to direct or unconditional promise of guaranty,
unless notice of acceptance is made a condition of the
guaranty, all that is necessary to make the promise binding is
that the promise should act upon it, and notice of acceptance
is not necessary (28 C. J., sec. 25, p. 904; 24 Am. Jur., sec
37, p. 899), the reason being that the contract of guaranty is
unilateral (Visayan Surety and Insurance Corporation vs.
Laperal, G.R. No. 46515, promulgated June 14, 1940).
The decision appealed from will be, as the same is hereby,
affirmed, with costs of this instance against the petitioner. So
ordered.
VISAYAN SURETY v. CA
SUPREME COURT
Manila
VISAYAN SURETY & INSURANCE CORPORATION,

petitioner,
vs.
THE HONORABLE COURT OF APPEALS, SPOUSES JUN
BARTOLOME+ and SUSAN BARTOLOME and
DOMINADOR V. IBAJAN+, respondents.
PARDO, J.:
The Case
The case is a petition to review and set aside a decision 1 of
the Court of Appeals affirming that of the Regional Trial
Court, Bian, Laguna, Branch 24, holding the surety liable to
the intervenor in lieu of the principal on a replevin bond.
The Facts
The facts, as found by the Court of Appeals,2 are as follows:
On February 2, 1993, the spouses Danilo Ibajan and Mila
Ambe Ibajan filed with the Regional Trial Court, Laguna,
Bian a complaint against spouses Jun and Susan
Bartolome, for replevin to recover from them the possession
of an Isuzu jeepney, with damages. Plaintiffs Ibajan alleged
that they were the owners of an Isuzu jeepney which was
forcibly and unlawfully taken by defendants Jun and Susan
Bartolome on December 8, 1992, while parked at their
residence.
On February 8, 1993, plaintiffs filed a replevin bond through
petitioner Visayan Surety & Insurance Corporation. The
contract of surety provided thus:
"WHEREFORE, we, sps. Danilo Ibajan and Mila Ibajan and
the VISAYAN SURETY & INSURANCE CORP., of Cebu,
Cebu, with branch office at Manila, jointly and severally bind
ourselves in the sum of Three Hundred Thousand Pesos
(P300,000.00) for the return of the property to the defendant,
if the return thereof be adjudged, and for the payment to the
defendant of such sum as he/she may recover from the
plaintiff in the action."3
On February 8, 1993, the trial court granted issuance of a
writ of replevin directing the sheriff to take the Isuzu jeepney
into his custody. Consequently, on February 22, 1993, Sheriff
Arnel Magat seized the subject vehicle and turned over the
same to plaintiff spouses Ibajan.4
On February 15, 1993, the spouses Bartolome filed with the
trial court a motion to quash the writ of replevin and to order
the return of the jeepney to them.
FIRST DIVISION
G.R. No. 127261
September 7, 2001
On May 3, 1993, Dominador V. Ibajan, father of plaintiff

Danilo Ibajan, filed with the trial court a motion for leave of
court to intervene, stating that he has a right superior to the

plaintiffs over the ownership and possession of the subject
vehicle.
On June 1, 1993, the trial court granted the motion to
intervene.
On August 8, 1993, the trial court issued an order granting
the motion to quash the writ of replevin and ordering plaintiff
Mila Ibajan to return the subject jeepney to the intervenor
Dominador Ibajan.5
On August 31, 1993, the trial court ordered the issuance of a
writ of replevin directing the sheriff to take into his custody
the subject motor vehicle and to deliver the same to the
intervenor who was the registered owner.6
On September 1, 1993, the trial court issued a writ of
replevin in favor of intervenor Dominador Ibajan but it was
returned unsatisfied.
On March 7, 1994, intervenor Dominador Ibajan filed with the
trial court a motion/application for judgment against plaintiffs
bond.
On June 6, 1994, the trial court rendered judgement the
dispositive portion of which reads:
"WHEREFORE, in the light of the foregoing premises,
judgment is hereby rendered in favor of Dominador Ibajan
and against Mila Ibajan and the Visayan Surety and
Insurance Corporation ordering them to pay the former jointly
and severally the value of the subject jeepney in the amount
of P150,000.00 and such other damages as may be proved
by Dominador Ibajan plus costs."7
On June 28, 1994, Visayan Surety and Insurance
Corporation and Mila Ibajan filed with the trial court their
respective motions for reconsideration.
On August 16, 1994, the trial court denied both motions.
On November 24, 1995, Visayan Surety and Insurance
Corporation (hereafter Visayan Surety) appealed the
decision to the Court of Appeals.8
On August 30, 1996, the Court of Appeals promulgated its
decision affirming the judgment of the trial court. 9 On
September 19, 1996, petitioner filed a motion for
reconsideration.10 On December 2, 1996, the Court of
Appeals denied the motion for reconsideration for lack of
merit.11
Hence, this petition.12
The Issue
The issue in this case is whether the surety is liable to an
intervenor on a replevin bond posted by petitioner in favor of
respondents.13
Respondent Dominador Ibajan asserts that as intervenor, he

assumed the personality of the original defendants in relation
to the plaintiffs bond for the issuance of a writ of replevin.
Petitioner Visayan Surety contends that it is not liable to the
intervenor, Dominador Ibajan, because the intervention of
the intervenor makes him a party to the suit, but not a
beneficiary to the plaintiffs bond. The intervenor was not a
party to the contract of surety, hence, he was not bound by
the contract.
The Courts Ruling
The petition is meritorious.
An intervenor is a person, not originally impleaded in a
proceeding, who has legal interest in the matter in litigation,
or in the success of either of the parties, or an interest
against both, or is so situated as to be adversely affected by
a distribution or other disposition of property in the custody of
the court or of an officer thereof.14
May an intervenor be considered a party to a contract of
surety which he did not sign and which was executed by
plaintiffs and defendants?
It is a basic principle in law that contracts can bind only the
parties who had entered into it; it cannot favor or prejudice a
third person.15 Contracts take effect between the parties,
their assigns, and heirs, except in cases where the rights
and obligations arising from the contract are not
transmissible by their nature, or by stipulation or by provision
of law.16
A contract of surety is an agreement where a party called the
surety guarantees the performance by another party called
the principal or obligor of an obligation or undertaking in
favor of a third person called the obligee. 17 Specifically,
suretyship is a contractual relation resulting from an
agreement whereby one person, the surety, engages to be
answerable for the debt, default or miscarriage of another,
known as the principal.18
The obligation of a surety cannot be extended by implication
beyond its specified limits.19 "When a surety executes a
bond, it does not guarantee that the plaintiffs cause of action
is meritorious, and that it will be responsible for all the costs
that may be adjudicated against its principal in case the
action fails. The extent of a suretys liability is determined
only by the clause of the contract of suretyship."20 A contract
of surety is not presumed; it cannot extend to more than
what is stipulated.21
Since the obligation of the surety cannot be extended by
implication, it follows that the surety cannot be held liable to
the intervenor when the relationship and obligation of the
surety is limited to the defendants specified in the contract of
surety.

WHEREFORE, the Court REVERSES and sets aside the
decision of the Court of Appeals in CA-G. R. CV No. 49094.
The Court rules that petitioner Visayan Surety & Insurance
Corporation is not liable under the replevin bond to the
intervenor, respondent Dominador V. Ibajan.1wphi1.nt
No costs.
SO ORDERED.
This action was brought on January 31, 1911, by the plaintiff

bank against the above-named defendants for the purpose
of recovering from the principal defendant, Aldecoa & Co., an
amount due from the latter as the balance to its debit in an
account current with the plaintiff, and to enforce the
subsidiary liability of the other defendants for the payment of
this indebtedness, as partners of Aldecoa & Co., and to
foreclose certain mortgages executed by the defendants to
secure the indebtedness sued upon.
Judgment was entered on the 10th of August, 1912, in favor
of the plaintiff and against the defendants for the sum of
P344,924.23, together with interest thereon at the rate of 7
per cent per annum from the date of the judgment until paid,
and for costs, and for the foreclosure of the mortgages. The
court decreed that in the event of there being a deficiency,
after the foreclosure of the mortgages, the plaintiff must
resort to and exhaust the property of the principal defendant
before taking out execution against the individual defendants
held to be liable in solidum with the principal defendant, but
subsidiarily. Judgment was also entered denying the relief
sought by the intervener. All of the defendants and the
intervener have appealed.
ESTATE OF HEMADY v. LUZON SURETY

SUPREME COURT
Manila
EN BANC
G.R. No. L-8437
March 23, 1915
THE HONGKONG & SHANGHAI BANKING

CORPORATION, plaintiff-appellee,
vs.
ALDECOA & CO., in liquidation, JOAQUIN IBAEZ DE
ALDECOA Y PALET, ZOILO IBAEZ DE ALDECOA Y
PALET, CECILIA IBAEZ DE ALDECOA Y PALET, and
ISABEL PALET DE GABARRO, defendants-appellants.
WILLIAM URQUHART, intervener-appellant.
Antonio Sanz and Chicote and Miranda for appellants.
Hausermann, Cohn and Fisher for appellee.
TRENT, J.:
The defendants, Joaquin Ibaez de Alcoa, Zoilo Ibaez de

Alcoa, and Cecilia Ibaez de Alcoa, were born in the
Philippine Islands on March 27, 1884, July 4, 1885, and . . . ,
1887, respectively, the legitimate children of Zoilo Ibaez de
Alcoa and the defendant, Isabel Palet. Both parents were
native of Spain. The father's domicile was in Manila, and he
died here on October 4, 1895. The widow, still retaining her
Manila domicile, left the Philippine Islands and went to Spain
in 1897 because of her health, and did not return until the
latter part of 1902. the firm of Aldecoa & Co., of which Zoilo
Ibaez de Aldecoa, deceased, had been a member and
managing director, was reorganized in December, 1896, and
the widow became one of the general or "capitalistic"
partners of the firm. The three children, above mentioned,
appear in the articles of agreement as industrial partners.
On July 31, 1903, Isabel Palet, the widowed mother of
Joaquin Ibaez de Aldecoa and Zoilo Ibaez de Aldecoa,
who were then over the age of 18 years, went before a
notary public and executed two instruments (Exhibits T and
U), wherein and whereby she emancipated her two sons,
with their consent and acceptance. No guardian of the
person or property of these two sons had ever been applied
for or appointed under or by virtue of the provisions of the
Code of Civil Procedure since the promulgation of the Code
in 1901. After the execution of Exhibit T and U, both Joaquin
Ibaez de Aldecoa and Zoilo Ibaez de Aldecoa participated
in the management of Aldecoa and Co, as partners by being
present and voting at meetings of the partners of the
company upon matters connected with its affairs.
On the 23rd of February, 1906, the defendant firm of Aldeco
and Co. obtained from the bank a credit in account current
up to the sum of P450,000 upon the terms and conditions set
forth in the instrument executed on that date (Exhibit A).
Later it was agreed that the defendants, Isabel Palet and her

two sons, Joaquin and Zoilo, should mortgage, in addition to
certain securities of Aldecoa and Co., as set forth in Exhibit
A, certain of their real properties as additional security for the
obligations of Aldecoa and Co. So, on March 23, 1906, the
mortgage, Exhibit B, was executed wherein certain
corrections in the description of some of the real property
mortgaged to the bank by Exhibit A were made and the
amount for which each of the mortgaged properties should
be liable was set forth. These two mortgages, Exhibits A and
B, were duly recorded in the registry of property of the city of
Manila on March 23, 1906.
On the 31st day of December, 1906, the firm of Aldecoa and
Co. went into liquidation on account of the expiration of the
term for which it had been organized, and the intervener,
Urquhart, was duly elected by the parties as liquidator, and
be resolution dated January 24, 1907, he was granted the
authority expressed in that resolution (Exhibit G).
On June 30, 1907, Aldeco and Co. in liquidation, for the
purposes of certain litigation about to be commenced in its
behalf, required an injunction bond in the sum of P50,000,
which was furnished by the bank upon the condition that any
liability incurred on the part of the bank upon this injunction
bond would be covered by the mortgage of February 23,
1906. An agreement to this effect was executed by Aldecoa
and Co. in liquidation, by Isabel Palet, by Joaquin Ibaez de
Aldecoa, who had then attained his full majority, and by Zoilo
Ibaez de Aldecoa, who was not yet twenty-three years of
age. In 1908, Joaquin Ibaez de Aldecoa, Zoilo Ibaez de
Aldecoa, and Cecilia Ibaez de Aldecoa commenced an
action against their mother, Isabel Palet, and Aldecoa and
Co., in which the bank was not a party, and in September of
that year procured a judgment of the Court of First Instance
annulling the articles of copartnership of Aldecoa and Co., in
so far as they were concerned, and decreeing that they were
creditors and not partners of that firm.
The real property of the defendant Isabel Palet, mortgaged
to the plaintiff, corporation by the instrument of March 23,
1906 (Exhibit B), was, at the instance of the defendant,
registered under the provisions of the Land Registration Act,
subject to the mortgage thereon in favor of the plaintiff, by
decree, of the land court dated March 8, 1907.
On the 6th of November, 1906, the defendants, Isabel Palet
and her three children, Joaquin Ibaez de Aldecoa, Zoilo
Ibaez de Aldecoa, and Cecilia Ibaez de Aldecoa, applied
to the land court for the registration of their title to the real
property described in paragraph 4 of the instrument of March
23, 1906 (Exhibit B), in which application they stated that the
undivided three-fourths of said properties belonging to the
defendants, Isabel Palet, Joaquin Ibaez de Aldecoa, and
Zoilo Ibaez de Aldecoa, were subject to the mortgage in
favor of the plaintiff to secure the sum of P203,985.97 under
the terms of the instrument dated March 22, 1906. Pursuant
to this petition the Court of Land Registration, by decree
dated September 8, 1907, registered the title to the
undivided three-fourths interest therein pertaining to the
defendants, Isabel Palet and her two sons, Joaquin and
Zoilo, to the mortgage in favor of the plaintiff to secure the

sun of P203,985.97.
On December 22, 1906, Aldecoa and Co., by a public
instrument executed before a notary public, as additional
security for the performance of the obligations in favor of the
plaintiff under the terms of the contracts Exhibits A and B,
mortgaged to the bank the right of mortgage pertaining to
Aldecoa and Co. upon certain real property in the Province
of Albay, mortgaged to said company by one Zubeldia to
secure an indebtedness to that firm. Subsequent to the
execution of this instrument, Zubeldia caused his title to the
mortgaged property to be registered under the provisions of
the Land Registration Act, subject to a mortgage of Aldecoa
and Co. to secure the sum of P103,943.84 and to the
mortgage of the mortgage right of Aldecoa and Co. to the
plaintiff.
As the result of the litigation Aldecoa and Co. and A. S.
Macleod, wherein the injunction bond for P50,000 was made
by the bank in the manner and for the purpose above set
forth, Aldecoa and Co. became the owner, through a
compromise agreement executed in Manila on the 14th of
August, 1907, of the shares of the Pasay Estate Company
Limited (referred to in the contract of March 13, 1907, Exhibit
V), and on the 30th day of August of that year Urquhart, as
liquidator, under the authority vested in him as such, and in
compliance with the terms of the contract of June 13, 1907,
mortgaged to the plaintiff, by way of additional security for
the performance of the obligations set forth in Exhibits A and
B, the 312 shares of the Pasay Estate Company, Limited,
acquired by Aldecoa and Co.
On the 31st day of March, 1907, Aldecoa and Co.
mortgaged, as additional security for the performance of
those obligations, to the plaintiff the right of mortgage,
pertaining to the firm of Aldecoa and Co., upon certain real
estate in that Province of Ambos Camarines, mortgaged to
Aldecoa and Co. by one Andres Garchitorena to secure a
balance of indebtedness to that firm of the sum of
P20,280.19. The mortgage thus created in favor of the bank
was duly recorded in the registry of deeds f that province. On
the 31st day of March, 1907, Aldecoa and Co. mortgaged as
further additional security for the performance of the
obligations set forth in Exhibits A and B, the right of mortgage
pertaining to the firm of Aldecoa and Co. upon other real
property in the same province, mortgaged by the firm of
Tremoya Hermanos and Liborio Tremoya, to secure the
indebtedness of that firm to the firm of Aldecoa and Co. of
P43,117.40 and the personal debt of the latter of P75,463.54.
the mortgage thus created in favor of the bank was filed for
record with the registrar of deeds of that province.
On the 30th day of January, 1907, Aldecoa and Co. duly
authorized the bank to collect from certain persons and
firms, named in the instrument granting this authority, any
and all debts owing by them to Aldecoa and Co. and to apply
all amounts so collected to the satisfaction, pro tanto, of any
indebtedness of Aldecoa and Co. to the bank.

By a public instrument dated February 18, 1907, Aldecoa
and Co. acknowledged as indebtedness to Joaquin Ibaez
de Aldecoa in the sum of P154,589.20, a like indebtedness
to Zoilo Ibaez de Aldecoa in the sum of P89,177.07. On
September 30, 1908, Joaquin, Zoilo, and Cecilia recovered a
judgment in the Court of First Instance of Manila for the
payment to them f the sum of P155,127.31, as the balance
due them upon the indebtedness acknowledged in the public
instrument dated February 18, 1907.
On November 30, 1907, Joaquin, Zoilo, and Cecilia instituted
an action in the Court of First Instance of the city of the
Manila against the plaintiff bank for the purpose of obtaining
a judicial declaration to the effect that the contract whereby
Aldecoa and Co. mortgaged to the bank the shares of the
Pasay Estate Company recovered from Alejandro S.
Macleod, was null and void, and for a judgment of that these
shares be sold and applied to the satisfaction of their
judgment obtained on September 30, 1908. Judgment was
rendered by the lower court in favor of the plaintiffs in that
action in accordance with their prayer, but upon appeal this
court reversed that judgment and declared that the mortgage
of the shares of stock in the Pasay Estate Co. to the bank
was valid.
In October, 1908, Joaquin and Zoilo Ibaez de Aldecoa
instituted an action against the plaintiff bank for the purpose
of obtaining a judgment annulling the mortgages created by
them upon their interest in the properties described in
Exhibits A and B, upon the ground that the emancipation buy
their mother was void and of no effect, and that, therefore,
they were minors incapable of creating a valid mortgage
upon their real property. The Court of First Instance
dismissed the complaint as to Joaquin upon the ground that
he had ratified those mortgages after becoming of age, but
entered a judgment annulling said mortgages with respect to
Zoilo. Both parties appealed from this decision and the case
was given registry No. 6889 in the Supreme Court.1
On the 31st day of December, 1906, on which date the
defendant Aldecoa and Co. went into liquidation, the amount
of indebtedness to the bank upon the overdraft created by
the terms of the contract, Exhibit A, was P516,517.98.
Neither the defendant Aldecoa and Co., nor any of the
defendants herein, have paid or caused to be paid to the
bank the yearly partial payments due under the terms of the
contract, Exhibit A. But from time to time the bank has
collected and received from provincial debtors of Aldecoa
and Co. the various sums shown in Exhibit Q, all of which
sums so received have been placed to the credit of Aldecoa
and Co. and notice duty given. Also, the bank, from time to
time, since the date upon which Aldecoa and Co. went into
liquidation, has received various other sums from, or for the
account of, Aldecoa and Co., all of which have been duly
placed to the credit of that firm, including the sum of
P22,552.63, the amount of the credit against one Achaval,
assigned to the bank by Aldecoa and Co. The balance to the
credit of the bank on the 31st day of December, 1911, as
shown on the books of Aldecoa and Co., was for the sum of
P416.853.46. It appeared that an error had been committed
by the bank in liquidating the interest charged to Aldecoa and
Co., and this error was corrected so that the actual amount
of the indebtedness of Aldecoa and Co. to the plaintiff on the
15th of February, 1912, with interest to December 10, 1912,
the date of the judgment, the amount was P344,924.23.
The trial court found that there was no competent evidence
that the bank induced, or attempted to induce, any customer
of Aldecoa and Co. to discontinue business relations with
that company. The court further found that Urquhart had
failed to show that he had any legal interest in the matter in
litigation between plaintiff and defendants, or in the success
of either of the parties, or an interest against both, as
required by section 121 of the Code of Civil Procedure. No
further findings, with respect to the facts alleged in the
complaint of the intervener, were made.
Aldecoa and Co. insist that the court erred:
1. In overruling the defendant's demurrer based upon the
alleged ambiguity and vagueness of the complaint.
2. In ruling that there was no competent evidence that the
plaintiff had induced Aldecoa and Co.'s provincial debtors to
cease making consignments to that firm.
3. In rendering a judgment in a special proceeding for the
foreclosure of a mortgage, Aldecoa and Co. not having
mortgaged any real estate of any kind within the jurisdiction
of the trial court, and the obligation of the persons who had
signed the contract of suretyship in favor of the bank having
been extinguished by operation of law.
The argument on behalf of the defendant in support of its
first assignment of error from the complaint that Aldecoa and
Co. authorized the plaintiff bank, by the instrument Exhibit G,
to make collections on behalf of this defendant, and that the
complaint failed to specify the amount obtained by the bank
in the exercise of the authority conferred upon it, the
complaint was thereby rendered vague and indefinite. Upon
this point it is sufficient to say that the complaint alleges that
a certain specific amount was due from the defendant firm as
a balance of its indebtedness to the plaintiff, and this
necessarily implies that there were no credits in favor of the
defendant firm of any kind whatsoever which had not already
been deducted from the original obligation.
With respect to the contention set forth in the second
assignment of error to the effect that the bank has prejudiced
Aldecoa and Co. by having induced customers of the latter to
cease their commercial relations with this defendant, the
ruling of the court that there is no evidence to show that
there was any such inducement is fully supported by the
record. It may be possible that some of Aldecoa and Co.'s
customers ceased doing business with that firm after it went
into liquidation. This is the ordinary effect of a commercial
firm going consideration, for the reason that it was a well
known fact that Aldecoa and Co. was insolvent. It is hardly
probable that the bank, with so large a claim against Aldecoa
and Co. and with unsatisfactory security for the payment of
its claim, would have taken any action whatever which might

have had the effect of diminishing Aldecoa and Co.'s ability
to discharge their claim. The contention that the customers of
Aldecoa and Co. included in the list of debtors ceased to
make consignments to the firm because they had been
advised by the bank that Aldecoa and Co. had authorized the
bank to collect these credits from the defendant's provincial
customers and apply the amounts so collected to the partial
discharge of the indebtedness of the defendant to the bank.
Furthermore, the bank was expressly empowered to take
any steps which might be necessary, judicially or
extrajudicially, for the collection of these credits. The real
reason which caused the defendant's provincial customers to
cease making shipments was due to the fact that the
defendant, being out of funds, could not give its customers
any further credit. It is therefore clear that the bank, having
exercised the authority conferred upon it by the company in
a legal manner, is not responsible for any damages which
might have resulted from the failure of the defendant's
provincial customers to continue doing business with that
firm.
In the third assignments of errors two propositions are
insisted upon: (1) that in these foreclosure proceedings the
court was without jurisdiction to render judgment against
Aldecoa and Co. for the reason that firm had mortgaged no
real property within the city of Manila to the plaintiff; and (2)
that the mortgages given by this defendant have been
extinguished by reason of the fact that the bank extended
the time within which the defendant's provincial debtors
might make their payments.
We understand that the bank is not seeking to exercise its
mortgages rights upon the mortgages which the defendant
firm holds upon certain real properties in the Provinces of
Albay and Ambros Camarines and to sell these properties at
public auction in these proceedings. Nor do we understand
that the judgment of the trial courts directs that this be done.
Before that property can be sold the original mortgagors will
have to be made parties. The banks is not trying to foreclose,
in this section, any mortgages on real property executed by
Aldecoa and Co. It is true that the bank sought and obtained
a money judgment against that firm, and at the same time
and in the same action obtained a foreclosure judgment
against the other defendants. If two or more persons are in
solidum the debtors mortgage any of their real property
situate in the jurisdiction of the court, the creditor, in case of
the solidary debtors in the same suit and secure a joint and
several judgment against them, as well as judgments of
foreclosure upon the respective mortgages.
The contention that the extensions granted to Aldecoa and
Co.'s debtors, with the consent and authority of that firm
itself, has resulted in extinguishment of the mortgages
created by Aldecoa and Co. or of the mortgages created by
partners of that company to secure its liabilities to the bank,
is not tenable. The record shows that all the sureties were
represented by Urquhart, the person elected by them as
liquidator of the firm, when he agreed with the bank upon the
extensions granted to those debtors. The authority to grant
these extensions was conferred upon the bank by the
liquidator, and he was given authority by all the sureties to

authorized the bank to proceed in this manner.
With respect to the contention that the bank should be
required to render an account of collections made under
authority of Exhibit G, it is sufficient to say that the bank has
properly accounted for all amounts collected from the
defendant's debtors, and has applied all such amounts to the
partial liquidation of the defendant's debt die to the bank. It is
true that the sum for which judgment was rendered against
Aldecoa and Co. is less than the amount originally
demanded in the complaint, but this difference is due to the
fact that certain amounts which had been collected from
Aldecoa and Co.'s provincial debtors by the bank were
credited to the latter between the date on which the
complaint was filed and the date when the case came on for
trial, and the further fact that it was necessary to correct an
entry concerning one of the claims inasmuch as it appears
that this claim had been assigned to the bank absolutely, and
not merely for the purposes of collection, as the bookkeeper
of the bank supposed, the result being that instead of
crediting Aldecoa and Co. with the full face value of this
claim, the bookkeeper had merely credited from time to time
the amounts collected from this debtor. We, therefore, find no
error prejudicial to the rights of this defendant.
Doa Isabel Palt makes the following assignment of errors:
1. That the court erred in failing to hold that her obligation as
surety had been extinguished in accordance with the
provisions of article 1851 of the Civil Code.
2. That the court erred in refusing to order for the benefit of
this appellant that the property of Aldecoa and Co. should be
exhausted before the plaintiff firm should be entitled to have
recourse to the property of this defendant and appellant for
the satisfaction of its judgment.
This appellant does not contend that she is not personally
liable in solidum with Aldecoa and Co. for the liability of the
latter firm to the plaintiff in the event that the appeal taken by
Aldecoa and Co. should unsuccessful. We have just held
that the judgment appealed from by Aldecoa and Co. should
be affirmed. But Doa Isabel Palet does not contend that her
liability as a partner for the obligations of Aldecoa and Co.,
although solidary, is subsidiary, and that she is entitled to
insist that the property of Aldecoa and Co. be first applied in
its entirety to the satisfaction of the firm's obligations before
the bank shall proceed against her in the execution of its
judgment.
The trial court directed that the mortgaged properties,
including the properties mortgaged in the event that Aldecoa
and Co. should fail to pay into court the amount of the
judgment within the time designated for that purpose. the
court recognized the subsidiary character of the personal
liability of Doa Isabel Palet as a member of the firm of
Aldecoa and Co. and decreed that as to any deficiency
which might result after the sale of the mortgaged properties,
execution should not issue against the properties of Doa

Isabel Palet until all the property of Aldecoa and Co. shall
have been exhausted. The properties mortgaged by Doa
Isabel Palet were so mortgaged not merely as security for
the performance of her own solidary subsidiary obligation as
a partner bound for all the debts of Aldecoa and Co., but for
the purpose of securing the direct obligation of the firm itself
to the bank. We are, therefore, of the opinion that the trial
court committed no error upon this point.
It is urged on behalf of Doa Isabel Palet that the mortgages
executed by her upon her individual property have been
canceled. The ground for this contention is that Aldecoa and
Co. undertook by the contract of February 23, 1906, to
discharge its liability to the plaintiff bank at the rate of not
less than P50,000 per annum, and that therefore it was the
duty of the bank to sue Aldecoa and Co. as soon as that firm
failed to pay at maturity any one of the partial payments
which it had promised to make, and to apply the proceeds,
from the sale of the property of Aldecoa and Co. to the
satisfaction of this indebtedness, and that the fact that the
bank failed to do so is equivalent to an extension of the term
of the principal debtor, and that the effect of this extension
has been to extinguish the obligation of this defendant as a
surety of Aldecoa and Co. It is also contended that the bank
expressly extended the term within which Aldecoa and Co.
was to satisfy its obligation by allowing Aldecoa and Co. to
furnish additional security. Doa Isabel Palet alleges that all
these acts were done without her knowledge or consent.
The extension of the term which, in accordance with the
provisions of article 1851 of the Civil Code produces the
extinction of the liability of the surety must of necessity be
based on some new agreement between the creditor and
principal debtor, by virtue of which the creditor deprives
himself of his right to immediately bring an action for the
enforcement of his claim. The mere failure to bring an action
upon a credit, as soon as the same or any part of its
matures, does not constitute an extension of the term of the
obligation.
Doa Isabel Palet is a personal debtor jointly and severally
with Aldecoa and Co. for the whole indebtedness of the latter
firm to the bank, and not a mere surety of the performance of
the obligations of Aldecoa and Co. without any solidary
liability. It is true that certain additional deeds of mortgage
and pledge were executed by Aldecoa and Co. in favor of the
bank as additional security after Aldecoa and Co. had failed
to meet its obligation to pay the first installment due under
the agreement of February 23, 1906, but there is no
stipulation whatever in any of these documents or deeds
which can in any way be interpreted in the sense of
constituting an extension which would bind the bank to
waiter for the expiration of any new term before suing upon
its claim against Aldecoa and Co. We find nothing in the
record showing either directly or indirectly that the bank at
any time has granted any extension in favor of Aldecoa and
Co. for the performance of its obligations. The liquidator of
Aldecoa and Co. authorized the bank to grant certain
extensions to some of the provincial debtors of Aldecoa and
Co. whose debts were to be paid to the bank under the
authority conferred upon the bank by Aldecoa and Co. There
is a marked difference between the extension of time within

which Aldecoa and Co.'s debtors might pay their respective
debts, and the extension of time for the payment of Aldecoa
and Co.'s own obligations to the bank. If the bank was had
brought suit on its credit against Aldecoa and Co., for the
amount then due, on the day following the extension of the
time of Aldecoa and Co.'s debtors for the payments of their
debts, it is evident that the fact of such extension having
been granted could not served in any sense as a defense in
favor of Aldecoa and Co. against the bank's action, although
this extension would have been available to Aldecoa and
Co.'s debtors if suit had been brought to enforce their
liabilities to Aldecoa and Co. We must, therefore, conclude
that the judgment appealed from, in so far as it relates to
Doa Isabel Palet, must likewise be affirmed.
The intervener, William Urquhart, assigns these errors:
1. The court erred in holding that the proof fails to show a
case for intervention within the meaning of section 121 of the
Code of Civil Procedure.
2. The court erred in failing to give preference to the credit of
the liquidator Urquhart for his salary.
The trial court found, as we have said, that Urquhart had
failed to show that he had any legal interest in the matter in
litigation between the plaintiffs and the defendants, or in the
success of any of the parties, or any interest against both.
The proof upon this branch of the case consists of the
following agreed statement of facts:
Mr. Urquhart is a creditor of Aldecoa and Co. in the sum of
P21,000 due him for money loaned by him to Aldecoa and
Co. before they went into liquidation.
Aldecoa and Co., in liquidation, owe Mr. Urquhart the
liquidator P14,000 as salary.
Section 121 of the Code of civil Procedure provides that:
A person may, at any period of a trial, upon motion, be
permitted by the court to intervene in an action or
proceeding, if he has legal interest in the matter in litigation,
or in the success of either of the parties, or an interest
against both.
The intervener is seeking to have himself declared a
preferred creditor over the bank. According to the abovequoted agreed statement of facts, he is a mere creditor of
Aldecoa and Co. for the sum of P21,000, loaned that firm
before it went into liquidation. This amount is not evidenced
by a public document, or any document for that matter, nor
secured by pledge or mortgage, while the amount due the
bank appears in a public instrument and is also secured by
pledges and mortgages on the property of Aldecoa and Co.,
out of which the intervener seeks to have his indebtedness
satisfied. It is, therefore, clear that the intervener is not
entitled to the relief sought, in so far as the P21,000 is
concerned.

The bank insists that, as the intervener had been in the
employ of Aldecoa and Co. for several years prior to the time
that the latter went into liquidation, it cannot be determined
what part of the P14,000 is for salary as such employee and
what part is for salary as liquidator. We find no trouble in
reaching the conclusion that all of the P14,000 represents
Urquhart's salary as liquidator of the firm of Aldecoa and Co.
The agreed statement of facts clearly supports this view. It is
there stated that Aldecoa and Co. in liquidation owed the
liquidator P14,000 as salary. The agreement does not say,
nor can it be even inferred from the same, that Aldecoa and
Co. owed Urquhart P14,000, or any other sum for salary as
an employee of that firm before it went into liquidation. Under
these facts, is the intervener a preferred creditor over the
bank for this amount?
In support of his contention that he should be declared a
preferred creditor over the bank for the P14,000, the
appellant cites the decision of the supreme court of Spain of
March 16, 1897, and quotes the following from the syllabus
of that case:
That the expense of maintenance of property is bound to
affect such persons as have an interest therein, whether they
be the owners or creditors of the property; therefore payment
for this object has preference over any other debt, since
such other debts are recoverable to the extent that the
property is preserved and maintained.
There can be no question about the correctness of this ruling
of the supreme court of Spain to the effect that the fees of a
receiver, appointed by the court to preserve property in
litigation, must be paid in preference to the claims of
creditors. But this is not at all the case under consideration,
for the reason that Urquhart was elected liquidator by the
members of the firm of Aldecoa and Co. Neither do we
believe that the contention of the appellant can be sustained
under article 1922 of the Civil Code, which provides that,
with regard to specified personal property of the debtor, the
following are preferred:
1. Credits for the construction, repair, preservation, or for the
amount of the sale of personal property which may be in the
possession of the debtor to the extent of the value of the
same.
The only personal property of Aldecoa and Co. is 16 shares
of the stock of the Banco-Espaol-Filipino; 450 shares of the
stock of the Compaia Maritima; 330 shares of the stock of
the Pasay Estate Co., Ltd; and certain claims against
debtors of Aldecoa and Co., mentioned in Exhibit G.
The shares of stock in the Banco Espaol-Filipino and the
Compaia Maritima were pledged to the bank before
Aldecoa and Co. went into liquidation, so Urquhart had
nothing to do with the preservation of these. The stock of the
Pasay Estate co., Ltd., was pledged to the bank on August
30, 1907, on the same day that it came into the possession
of Aldecoa and Co. and by the terms of the pledge the bank
was authorized to collect all dividends on the stock and apply
the proceeds to the satisfaction of its claim against Aldecoa

and Co. The credits set forth in Exhibit G were assigned to
the bank on January 30, 1907, so, it will be seen, that the
Pasay Estate shares were in the possession of Aldecoa and
Co., or its liquidator, only one day. Urquhart had been
liquidator twenty-eight days when the credits, mentioned in
Exhibit G, were assigned to the bank. If it could be held that
these two items bring him within the above quoted provisions
of article 1922, he could not be declared a preferred creditor
over the bank for the P14,000 salary for the reason that,
according to his own showing, he had been paid for his
services as liquidator up to January, 1910. It is the salary
since that date which is now in question. The only property of
Aldecoa and Co. which the liquidator had anything to do with
after 1910 was the real estate mortgages on real property
cannot be regarded as personal property, and it is only of
personal property that article 1922 speaks.
The judgment appealed from, in so far as it relates to
Urquhart, being in accordance with the law and the merits of
the case, is hereby affirmed.
The appellants, Joaquin and Zoilo Ibaez de Aldecoa, make
the following assignments of error:
1. The court erred in not sustaining the plea of lis pendens
with respect to the validity of mortgages claimed by the
plaintiff, which plea was set up as a special defense by the
defendants Joaquin and Zoilo Ibaez de Aldecoa, and in
taking jurisdiction of the case and in deciding therein a
matter already submitted for adjudication and not yet finally
disposed of.
2. The court erred in hot sustaining the plea of res adjudicata
set up as a special defense by these defendants with respect
to the contention of plaintiff that these defendants are
industrial and general partners of the firm of Aldecoa and Co.
3. The court erred in holding that the defendants Joaquin and
Zoilo Ibaez de Aldecoa were general partners (socios
colectivos) of the firm of Aldecoa and Co., and is rendering
judgment against them subsidiarily for the payment of the
amount claimed in the complaint.
The basis of the first alleged error is the pendency of an
action instituted by the appellants, Joaquin and Zoilo, in
1908, to have the mortgages which the bank seeks to
foreclose in the present action annulled in so far as their
liability thereon is concerned. That action was pending in this
Supreme Court on appeal when the present action was
instituted (1911), tried, and decided in the court below.
The principle upon which plea of another action pending is
sustained is that the latter action is deemed unnecessary
and vexatious. (Williams vs. Gaston, 148 Ala., 214; 42 Sou.,
552; 1 Cyc. 21; 1 R. C. L., sec. 1.) A statement of the rule to
which the litigant to its benefits, and which has often met with
approval, is found in Watson vs. Jones (13 Wall., 679, 715;
20 L. ed., 666):

But when the pendency of such a suit is set up to defeat
another, the case must be the same. There must be the
same parties, or at least such as represent the same
interest, there must be the same rights asserted, and the
same relief prayed for. This relief must be founded on the
same facts, and the title or essential basis of the relief
sought must be the same. The identity in these particulars
should be such that if the pending case has already been
disposed of, it could be pleaded in bar as a former
adjudication of the same matter between the same parties.
It will be noted that the cases must be identical in a number
of ways. It will be conceded that in so far as the plea is
concerned, the parties are the same in the case at bar as
they were in the action to have the mortgages annulled.
Their position is simple reversed, the defendants there being
the plaintiffs here, and vice versa. This fact does not affect
the application of the rule. The inquiry must therefore
proceed to the other requisites demanded by the rule. Are
the same rights asserted? Is the same relief prayed for?
The test of identity in these respects is thus stated in 1 Cyc.,
28:
A plea of the pendency of a prior action is not available
unless the prior action is of such a character that, had a
judgment been rendered therein on the merits, such a
judgment would be conclusive between the parties and could
be pleaded in bar of the second action.
This test has been approved, citing the quotation, in Williams
vs. Gaston (148 Ala., 214; 42 Sou., 552); Van Vleck vs.
Anderson (136 Iowa, 366; 113 N. W., 853); Wetzstein vs.
Mining Co. (28 Mont., 451; 72 P., 865). It seems to us that
unless the pending action, which the appellants refer to, can
be shown to approach the action at bar to this extent, the
plea ought to fail.
The former suit is one to annul the mortgages. The present
suit is one for the foreclosure of the mortgages. It may be
conceded that if the final judgment in the former action is that
the mortgages be annulled, such an adjudication will deny
the right of the bank to foreclose the mortgages. But will a
decree holding them valid prevent the bank from foreclosing
them. Most certainly not. In such an event, the judgment
would not be a bar to the prosecution of the present action.
The rule is not predicated upon such a contingency. It is
applicable, between the same parties, only when the
judgment to be rendered in the action first instituted will be
such that, regardless of which party is successful, it will
amount to res adjudicata against the second action. It has
often been held that a pending action upon an insurance
policy to recover its value is not a bar to the commencement
of an action to have the policy reformed. The effect is quite
different after final judgment has been rendered in an action
upon the policy. Such a judgment may be pleaded in bar to
an action seeking to reform the policy. The case are
collected in the note to National Fire Insurance Co. vs.
Hughes (12 L. R. A., [N. S.], 907). So, it was held in the
famous case of Sharon vs. Hill (26 Fed., 337), that the action
brought by Miss hill for the purpose of establishing the

genuineness of a writing purporting to be a declaration of
marriage and thereby establishing the relation of husband
and wife between the parties could not be pleaded in
abatement of Senator Sharon's action seeking to have the
writing declared false and forged. The court said:
This suit and the action of Sharon vs. Sharon are not brought
on the same claim or demand. The subject matter and the
relief sought are not identical. This suit is brought to cancel
and annul an alleged false and forged writing, and enjoin the
use of it by the defendant to the prejudice and injury of the
plaintiff, while the other is brought to establish the validity of
said writing as a declaration of marriage, as well as the
marriage itself, and also to procure a dissolution thereof, and
for a division of the common property, and for alimony.
Incidentally, it was held in this case that a judgment of the
trial court declaring the writing genuine was not res
adjudicata after an appeal had been taken from the judgment
of the Supreme Court. So, in the case ta bar, the fact that the
trial court in the former action holds the mortgages invalid as
to one of the herein appellants is not final by reason of the
appeal entered by the bank from that judgment.
Cases are also numerous in which an action for separation
has been held not to be a bar to an action for divorce or vice
versa. (Cook vs. Cook, [N. C.], 40 L. R. S., [N. S.], 83, and
cases collected in the note.) In Cook vs. Cook it was held
that a pending action for absolute divorce was not a bar to
the commencement of an action for separation. The above
authorities are so analogous in principle to the case at bar
that we deem the conclusion irresistible, that the pending
action to annul the liability of the two appellant children on
the mortgages cannot operates as a plea in abatement in the
case in hand which seeks to foreclose these mortgages. The
subject matter and the relief asked for are entirely different.
The facts do not conform to the rule and it is therefore not
applicable.
With reference to the second alleged error, it appears that a
certified copy of the judgment entered in the former case,
wherein it was declared that these two appellants, together
with their sister Cecilia, were creditors and partners of
Aldecoa and Co., was offered in evidence and marked
Exhibit 5. This evidence was objected to by the plaintiff on
the ground that it was res inter alios acta and not competent
evidence against the plaintiff or binding upon it in any way
because it was not a party to that action. This objection was
sustained and the proffered evidence excluded. If the
evidence had been admitted, what would be its legal effect?
That was an action in personam and the bank was not a
party. The judgment is, therefore, binding only upon the
parties to the suit and their successors in interest (sec. 306,
Code of Civil Procedure, No. 2).
The question raised by the third assignment of errors will be
dealt with in a separate opinion wherein the appeal of Cecilia
Ibaez de Aldecoa will be disposed of.

The appellants whose appeals are herein determined will
pay their respective portions of the cost. So ordered.

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CREDIT TRANSACTIONS (Atty.

related to the loan with PDCP. Thus, an Undertaking dated

June 29, 2007

SALVADOR P. ESCAO and MARIO M. SILOS, petitioner,

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

CREDIT TRANSACTIONS (Atty. Jazzie Sarona-Lozare) 2

Hence, the present petition for review filed by Escao and

CREDIT TRANSACTIONS (Atty. Jazzie Sarona-Lozare) 3

Neither do petitioners impress us of the non-fulfillment of any

CREDIT TRANSACTIONS (Atty. Jazzie Sarona-Lozare) 4

in the Undertaking is presumed only to be joint. Ortigas, as

CREDIT TRANSACTIONS (Atty. Jazzie Sarona-Lozare) 5

that "[t]he guarantor who pays is subrogated by virtue thereof

Articles 2066 and 2067 explicitly pertain to guarantors, and

CREDIT TRANSACTIONS (Atty. Jazzie Sarona-Lozare) 6

I. When an obligation, regardless of its source, i.e., law,

CREDIT TRANSACTIONS (Atty. Jazzie Sarona-Lozare) 7

including technical supervision to drill one (1) exploratory

WHEREFORE, the Petition is GRANTED in PART. The

i. Lump sum price--------PHP1,150,000.00;

October 18, 2010

ASSET BUILDERS CORPORATION, Petitioner,

ii. 50% downpayment---upon submission of surety bond in

CREDIT TRANSACTIONS (Atty. Jazzie Sarona-Lozare) 8

WHEREAS, the Obligee requires said principal to give a

HUNDRED FORTY FIVE THOUSAND ONLY (P345,000.00)

CREDIT TRANSACTIONS (Atty. Jazzie Sarona-Lozare) 9

WHEREFORE, in view of the foregoing, judgment is hereby

(2) to pay liquidated damages equivalent to 2/10 of 1% of the

1. to pay plaintiff in the amount of PHP575,000.00 as actual

(3) to pay the amount guaranteed by your performance bond

2. to pay plaintiff in the amount of PHP100,000.00 as

(4) to pay PHP150,000.00 in other consequential damages;

3. to pay plaintiff in the amount of PHP50,000.00 as

(5) to pay exemplary

4. to pay plaintiff in the amount of PHP 50,000.00 as

Should you refuse to comply with our demand within the

On August 16, 2006, ABC sent a Notice of Claim for payment

Petitioner ABC prays for the reversal of the challenged

Hence, this petition.

A. The Lower Court seriously erred and unjustly ACTED

CREDIT TRANSACTIONS (Atty. Jazzie Sarona-Lozare) 10

obligor. Neither does it make the surety an active party to the

CREDIT TRANSACTIONS (Atty. Jazzie Sarona-Lozare) 11

This is an action brought by plaintiffs to recover from

In the original Spanish of the Civil Code now in force in the

(Sgd.) "GEO. C. SELLNER."

It is perfectly clear that the obligation assumed by defendant

CREDIT TRANSACTIONS (Atty. Jazzie Sarona-Lozare) 12

ESTRELLA PALMARES, petitioner,

March 31, 1998

During the pre-trial conference, the parties submitted the

CREDIT TRANSACTIONS (Atty. Jazzie Sarona-Lozare) 13

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

CREDIT TRANSACTIONS (Atty. Jazzie Sarona-Lozare) 14

respondent of her desire to settle the obligation. The court

CREDIT TRANSACTIONS (Atty. Jazzie Sarona-Lozare) 15

under the rule of reasonable construction applicable to all

CREDIT TRANSACTIONS (Atty. Jazzie Sarona-Lozare) 16

the creditor, herein respondent corporation, should have

CREDIT TRANSACTIONS (Atty. Jazzie Sarona-Lozare) 17

me, I instructed Sheila Gatia to go to MB Lending and

CREDIT TRANSACTIONS (Atty. Jazzie Sarona-Lozare) 18