1. Atok Finance Corp. v. Court of Appeals, G.R. No.

80078, [May 18, 1993]

Facts: On 27 July 1979, private respondents Sanyu Chemical Corporation as principal and Sanyu Trading
Corporation along with individual private stockholders of Sanyu Chemical as sureties, executed a Continuing
Suretyship Agreement in favor of Atok Finance as creditor.

In 1981, Sanyu Chemical assigned its trade receivables outstanding to Atok Finance in consideration of receipt from
Atok Finance of the amount of P105,000.00. The assigned receivables carried a standard term of thirty (30) days; it
appeared, however, that the standard commercial practice was to grant an extension of up to one hundred twenty
(120) days without penalties.

In 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 a sum of money plus penalty charges starting from
1 September 1983. Atok Finance alleged that Sanyu Chemical had failed to collect and remit the amounts due under
the trade receivables.

Sanyu Chemical and the individual private respondents sought dismissal of Atok's claim upon the ground that such
claim had prescribed under Article 1629 of the Civil Code and for lack of cause of action. The private respondents
contended that the Continuing Suretyship Agreement, being an accessory contract, was null and void since, at the
time of its execution, Sanyu Chemical had no pre-existing obligation due to Atok Finance.

After trial the trial court rendered a decision in favor of Atok Finance. On appeal the CA reversed and set aside the
decision of the trial court and entered a new judgment dismissing the complaint of Atok Finance.

Issue: 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.

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.

Held: Although obligations arising from contracts have the force of law between the contracting parties, (Article 1159
of the Civil Code) this does not mean that the law is inferior to it; the terms of the contract could not be enforced if not
valid. So, even if, as in this case, the agreement was for a continuing suretyship to include obligations enumerated in
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 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."

A guaranty or a suretyship agreement is an accessory contract in the sense that it is entered into for the purpose of
securing the performance of another obligation which is denominated as the principal obligation. It is also true that
Article 2052 of the Civil Code states that "a guarantee cannot exist without a valid obligation." Nevertheless, a
guaranty may be constituted to guarantee the performance of a voidable or an unenforceable contract. It may also
guarantee a natural obligation." Moreover, Article 2053 of the Civil Code states that 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."

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

As regards the second issue, 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. It relied
on Article 1629 of the Civil Code which provides: In case the assignor in good faith should have made himself
responsible for the solvency of the debtor, and the contracting parties should not have agreed upon the duration of
the liability, it shall last for one year only, from the time of the assignment if the period had already expired. If the
credit should be payable within a term or period which has not yet expired, the liability shall cease one year after the
maturity."

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 when the Deed of Assignment was executed.

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 is not 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 but rather ex contractu. Under the Deed of
Assignment, the effect of non-payment by the original trade debtors was a breach of warranty of solvency by Sanyu
Chemical, resulting in turn in the assumption of solidary liability by the assignor under the receivables assigned. In
other words, the assignor Sanyu Chemical becomes a solidary debtor under the terms of the receivables covered and
transferred by virtue of the Deed of Assignment. 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.

2. Ongsiako v. World Wide Insurance & Surety Co., Inc., G.R. No. L-12077, [June 27, 1958]
Facts: On November 10, 1951, Catalina de Leon executed in favor of Augusto V. Ongsiako a promissory note in the
amount of P1,200.00, payable ninety (90) days after date, with interest at 1 per cent per month. On the same date, a
surety bond was executed by Catalina de Leon, as principal, and the World Wide Insurance & Surety Co., Inc., as
surety, whereby they bound to pay said amount jointly and severally to Augusto V. Ongsiako. As the obligation was
not paid on its date of maturity either by Catalina de Leon or by the surety notwithstanding the demands made upon
them, Ongsiako brought this action on March 6, 1953 in the Municipal Court of Manila to recover the same from both
the principal and the surety. Judgment having been rendered for the ,plaintiff, both defendants appealed to the court
of first instance. In the latter court, Catalina de Leon failed to answer and so she was declared in default. In due time
the surety company filed its answer setting up a counterclaim against plaintiff and a cross-claim against its co-
defendant.

After hearing, the court rendered judgment ordering Catalina de Leon to pay plaintiff the sum of P1,200.00, with
interest at the rate of 1 per cent per month from February 10, 1952, and the sum of P300.00 as attorneys' fees, and
costs. Defendant surety company was likewise ordered to pay to plaintiff the same judgment but with the proviso that
"execution should not issue against defendant The World-Wide Insurance & Surety Co. Inc., until a return is made by
the Sheriff upon execution against defendant Catalina de Leon showing that the judgment against her remained
unsatisfied in whole or in part; and provided, further, that defendant Catalina de Leon shall reimburse to defendant
Company whatever amount the latter might pay under this judgment together with such expenses as may be
necessary to effectuate said reimbursement." From this judgment, the surety company appealed and the case is now
before us because, as certified by the Court of Appeals, it only involves questions of law. Augusto V. Ongsiako,
having died in the meantime, was substituted by his special administrators Emmanuel Ongsiako and Severino
Santiangco.

The surety bond in question was executed in November 10, 1951 and among the important provisions it contains is
the following: that the principal and the surety "are held and firmly bound unto Dr. Augusto V. Ongsiako in the sum of
One Thousand Two Hundred Pesos (P1,200.00), Philippine Currency, for the payment of which well and truly to be
made, we bind ourselves . . . jointly and severally, firmly by these presents (and referring to the Promissory Note)
"whose terms and conditions are made parts hereof.' In said bond there also appears a special condition which
recites: The Liability of the World-Wide Insurance & Surety Co. Inc. under this bond will expire on February 10, 1952."
The note therein referred to, on the other hand, provides that the obligation is payable ninety days from date of issue,
November 10, 1951, which means that its date of maturity is February 10, 1952. The evidence shows that neither the
principal nor the surety paid the obligation on said date of maturity and immediately thereafter demands for payment
were made upon them. Thus, it appears that as early as February 12, 1952, or two days thereafter, the creditor wrote
to the surety company a letter notifying it of the failure of its principal to pay the obligation and requesting that it make
good its guaranty under the bond, which demand was reiterated in subsequent letters. To these demands, the
company merely set up the defense that it only acted as a guarantor and as such its liability cannot be exacted until
after the property of the principal shall have been exhausted.

Issue: Whether or not stipulation in the bond was unfair and unreasonable?

Held: Yes. Where one of the conditions of the bond filed by the surety provides that the latter's liability will expire on
the date of the maturity of the obligation," which it interposed as a defense to an action instituted therefor, such
stipulation is unfair and unreasonable for it practically nullifies the nature of the undertaking it had assumed. And yet it
appealed from said judgment just to put up the additional defense that its liability under the bond has already expired
because of the condition that its liability shall expire on February 10, 1952. Even if this were true, we consider
however this stipulation as unfair and unreasonable for it practically nullifies the nature of the undertaking assumed
by appellant. It should be noted that the principal obligation is payable ninety days from date of issue, which falls on
February 10, 1952. Only on this date can demand for payment be made on the principal debtor. If the debtor should
fail to pay and resort is made to the surety for payment on the next day, it would be unfair for the latter to allege that
its liability has already expired. And yet such is the stand taken by appellant. As the terms of the bond should be
given a reasonable interpretation, it is logical to hold that the liability of the surety attaches as soon as the principal
debtor defaults, and notice thereof is given the surety within reasonable time to enable it to take steps to protect its
interest. This is what was done by appellee in the present case. After all, the surety has a remedy under the law
which is to foreclose the counterbond put up by the principal debtor. This is in effect what was done by the lower
court.

This Court has taken note of the reprehensible attitude adopted by the surety company in this case by resorting to
improper means in an effort to evade its clear responsibility under the law. An instance of such attitude is the insertion
in the bond of a provision which in essence tends to nullify its commitment. This is a subtle way of making money thru
trickery and deception. Such practice should be stopped if only to protect honest dealers or people in financial stress
because of such improper conduct, this Court finds no justification for the present appeal and considers it frivolous
and unnecessary. For this appellant should be made to pay treble costs.

3. Citizens Surety and Insurance Co., Inc. v. Court of Appeals, G.R. No. L-48958, [June 28, 1988]

Facts: On December 4, 1959, the petitioner issued two (2) surety bonds to guarantee compliance by the principal
Pascual M. Perez Enterprises of its obligation under a "Contract of Sale of Goods" entered into with the Singer
Sewing Machine Co. In consideration of the issuance of the aforesaid bonds, Pascual M. Perez, in his personal
capacity and as attorney-in-fact of his wife, Nicasia Sarmiento and in behalf of the Pascual M. Perez Enterprises
executed on the same date two (2) indemnity agreements wherein he obligated himself and the Enterprises to
indemnify the petitioner jointly and severally, whatever payments advances and damage it may suffer or pay as a
result of the issuance of the surety bonds.

In addition to the two indemnity agreements, Pascual M. Perez Enterprises was also required to put up a collateral
security to further insure reimbursement to the petitioner of whatever losses or liabilities it may be made to pay under
the surety bonds. Pascual M. Perez therefore executed a deed of assignment on the same day, December 4, 1959, of
his stock of lumber with a total value of P400,000.00. On April 12, 1960, a second real estate mortgage was further
executed in favor of the petitioner to guarantee the fulfillment of said obligation.

Pascual M. Perez Enterprises failed to comply with its obligation under the contract of sale of goods with Singer
Sewing Machine Co., Ltd. Consequently, the petitioner was compelled to pay, as it did pay, the fair value of the two
surety bonds in the total amount of P144,000.00. Except for partial payments in the total sum of P55,600.00 and
notwithstanding several demands, Pascual M. Perez Enterprises failed to reimburse the petitioner for the losses it
sustained under the said surety bonds.

The petitioner filed a claim for sum of money against the estate of the late Nicasia Sarmiento which was being
administered by Pascual M. Perez.In opposing the money claim, Pascual M. Perez asserts that the surety bonds and
the indemnity agreements had been extinguished by the execution of the deed of assignment.

Issue: Whether or not the administrator's obligation under the surety bonds and indemnity agreements had been
extinguished by reason of the execution of the deed of assignment.

Held: No. The deed of assignment cannot be regarded as an absolute conveyance whereby the obligation under the
surety bonds was automatically extinguished. The subsequent acts of the private respondent bolster the fact that the
deed of assignment was intended merely as a security for the issuance of the two bonds. Partial payments amounting
to P55,600.00 were made after the execution of the deed of assignment to satisfy the obligation under the two surety
bonds. Since later payments were made to pay the indebtedness, it follows that no debt was extinguished upon the
execution of the deed of assignment. Moreover, a second real estate mortgage was executed on April 12, 1960 and
eventually cancelled only on May 15, 1962. If indeed the deed of assignment extinguished the obligation, there was
no reason for a second mortgage to still have to be executed. We agree with the two dissenting opinions in the Court
of Appeals that the only conceivable reason for the execution of still another mortgage on April 12, 1960 was because
the obligation under the indemnity bonds still existed. It was not yet extinguished when the deed of assignment was
executed on December 4, 1959. The deed of assignment was therefore intended merely as another collateral security
for the issuance of the two surety bonds.

Recapitulating the facts of the case, the records show that the petitioner surety company paid P144,000.00 to Singer
on the basis of the two surety bonds it had issued in behalf of Pascual Perez Enterprises. Perez in turn was able to
indemnify the petitioner for its payment to Singer in the amount of P55,600.00 thus leaving a balance of only
P88,400.00.

The petitioner surety company was more than adequately protected. Lumber worth P400,000.00 was assigned to it as
collateral. A second real estate mortgage was also given by Perez although it was later cancelled obviously because
the P400,000.00 worth of lumber was more than enough guaranty for the obligations assumed by the petitioner. As
pointed out by Justice Paras in his separate opinion, the proper procedure was for Citizens' Insurance and Surety
Co., to collect the remaining P88,400.00 from the sales of lumber and to return whatever remained to Perez. We
cannot order the return in this decisions because the Estate of Mrs. Perez has not asked for any return of excess
lumber or its value. There appears to have been other transactions, surety bonds, and performance bonds between
the petitioner and Perez Enterprises but these are extraneous matters which, the records show, have absolutely no
bearing on the resolution of the issues in this petition.

Pascual M. Perez executed an instrument denominated as "Deed of Assignment." Pertinent portions of the deed read
as follows.

"I, Pascual M. Perez, Filipino, of legal age, married, with residence and postal address at 115 D. Silang, Batangas, as the owner and operator of a business styled
'PASCUAL M. PEREZ ENTERPRISES,' with office at R-31 Madrigal Building, Escolta, Manila, hereinafter referred to as ASSIGNOR, for and in consideration of
the issuance in my behalf and in favor of the SINGER SEWING MACHINE COMPANY, LTD., of two Surety Bonds (C.S.I.C. Bond Nos. 2631 and 2632 each in the
amount of SEVENTY TWO THOUSAND PESOS (P72,000.00), or with a total sum of ONE HUNDRED FORTY-FOUR THOUSAND PESOS (P144,000.00),
Philippine Currency, by the CITIZENS' SURETY AND INSURANCE CO., INC., a corporation duly organized and existing under and by virtue of the laws of the
Republic of the Philippines, with principal office at R-306 Samanillo Building, Escolta, Manila, Philippines, and duly represented in the act by its Vice-President
and General Manager, ARISTEO L. LAT, hereinafter referred to as ASSIGNEE, assign by these presents, unto said ASSIGNEE, its heirs, successors,
administrators or assigns the herein ASSIGNOR'S stock (Insured) of low grade lumber, class 'No. 2 COMMON' kept and deposited at Tableria Tan Tao at
Batangas, Batangas, with a total measurement of Two Million (2,000,000.00) board feet and valued of P0.20 per board feet or with a total value of P400,000.00
which lumber is intended by the ASSIGNOR for exportation under a Commodity Trade Permit, the condition being that in the event that the herein assignor
exports said lumber and as soon as he gets the necessary export shipping and related and pertinent documents therefor, the ASSIGNOR will turn said papers
over to the herein ASSIGNEE, conserving all of the latter's dominion, rights and interests in said exportation.

4. Garcia, Jr. v. Court of Appeals, G.R. No. 80201, [November 20, 1990]

Facts: On April 15, 1977, the Western Minolco Corporation (WMC) obtained from the Philippine Investments Systems
Organization (PISO) two loans for P2,500,000.00 and P1,000,000.00 for which it issued the corresponding
promissory notes payable on May 30, 1977. On the same date, Antonio Garcia and Ernest Kahn executed a surety
agreement binding themselves jointly and severally for the payment of the loan of P2,500,000.00 on due date.

Upon failure of WMC to pay after repeated demands, demand was made on Garcia pursuant to the surety
agreement. Garcia also failed to pay. Hence, on April 5, 1983, Lasal Development Corporation (to which the credit
had been assigned earlier by PISO) sued Garcia for recovery of the debt in the Regional Trial Court of Makati.
On May 18, 1983, Garcia moved to dismiss on the grounds that: (a) the complaint stated no cause of action; (b) the
suit would result in unjust enrichment of the plaintiff because he had not received any consideration from PISO; (c)
the surety agreement violated the doctrine of the limited liability of corporations; and (d) the principal obligation had
been novated. After considering the arguments and evidence of the parties, the trial court granted the motion and
dismissed the complaint on the ground that the surety agreement was invalid for absence of consideration.

Issue: Whether or not petitioner is bound in their surety agreement.

Held: Yes. The petitioner's first ground is that, as found by the trial court, the surety agreement was invalid because
no consideration had been paid to him by PISO for executing the contract and that the amount of the entire loan had
been received and enjoyed by WMC. He cites the following articles of the Civil Code in support of his contention that
lack of consideration was a personal defense available to him as surety. The point is not well taken in view of the
nature and purpose of a surety agreement. 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. The surety's obligation is not an original and direct one for the performance of his own act, but merely
accessory or collateral to the obligation contracted by the principal. Nevertheless, although the contract of a surety is
in essence secondary only to a valid principal obligation, his liability to the creditor or promise of the principal is said
to be direct, primary and absolute; in other words, he is directly and equally bound with the principal. The surety
therefore becomes liable for the debt or duty of another although he possesses no direct or personal interest over the
obligations nor does he receive any benefit therefrom.

The peculiar nature of a surety agreement is that it is regarded as valid despite the absence of any direct
consideration received by the surety either from the principal obligor or from the creditor. A contract of surety, like any
other contract, must generally be supported by a sufficient consideration. However, the consideration necessary to
support a surety obligation need not pass directly to the surety; a consideration moving to the principal alone will
suffice.

It has been held that if the delivery of the original contract is contemporaneous with the delivery of the surety's
obligation, each contract becomes completed at the same time, and the consideration which supports the principal
contract likewise supports the subsidiary one. And this is the kind of surety contract to which the rule of strict
construction applies as opposed to a compensated surety contract undertaken by surety corporations which are
organized for the purpose of conducting an indemnity business at established rates and compensation unlike an
ordinary surety agreement where the surety binds his name through motives of friendship and accommodation.

It follows from the above principles that Lasal would not be unjustly enriched if the petitioner were to be held liable for
the obligation contracted by WMC. The creditor would only be recovering the amount of its loan plus its increments.
The petitioner, for his part, can still go against WMC for the amount he may have to pay Lasal as assignee of the
PISO credit.

Regarding the petitioner's claim that he is liable only as a corporate officer of WMC, the surety agreement shows that
he signed the same not in representation of WMC or as its president but in his personal capacity. He is therefore
personally bound. There is no law that prohibits a corporate officer from binding himself personally to answer for a
corporate debt. While the limited liability doctrine is intended to protect the stockholder by immunizing him from
personal liability for the corporate debts, he may nevertheless divest himself of this protection by voluntarily binding
himself to the payment of the corporate debts. The petitioner cannot therefore take refuge in this doctrine that he has
by his own acts effectively waived.
 OBLIGATIONS AND CONTRACTS; NOVATION; REQUISITES THEREOF; NOT ESTABLISHED IN THE
CASE AT BAR. The petitioner cites other supposed agreements in support of his theory of novation such as the
prepayment of the restructured loans of WMC before the distribution of dividends to the common stockholders, the
proposed sale on installments of its assets to Negros Occidental Copperfield Mines, and the preference given to other
creditors of WMC over PISO. But we do not think these are material as, to be so, the alteration must change the legal
effects of the original contract. The alleged alterations do not have that effect. The most important argument against
the alleged novation is the failure of the petitioner to establish the validity of the new contract, an essential requisite
for the novation of a previous valid obligation. Petitioner insists that the various communications made by WMC with
DBP, together with the memorandum of agreement (Annexes 1 to 7), are sufficient to establish the new undertaking
made by WMC with all its creditors, including DBP. We do not think so. It is true as a general rule no form of words or
writing is necessary to give effect to a novation. (Re Dissolution of F. Yeager Bridge Culvert Co., 150 Mich. App. 386,
NW 2d 99). Nevertheless, since the parties involved here are corporations, it must first be proved that the contracts,
assuming they were made, were executed by the persons possessing the proper authority to bind their respective
principals. Annexes 1-4 are a mere exchange of correspondence between the officers of WMC and DBP. Although
they contain the provisions and proposals that, according to petitioner, should suffice to establish that the original
contract between WMC and PISO has been materially altered, they cannot be considered per se sufficient to give rise
to a valid new obligation. WMC was in fact directed by Joseph W. Edralin, the Assistant Executive Officer of the DBP,
to communicate with Atty. Hilario Oraolino of the Office of the Chief Legal Counsel for the preparation and execution
of the necessary legal documents to cover the approval and confirmation of the several proposals made. No such
documents, as duly signed by the parties, were ever presented in court. Annexes 5 to 7 are also incomplete
documents and not binding without the signatures of the supposed contracting parties. We approve the following
observations made by the Court of Appeals: Novation of contract cannot be presumed. In order that an obligation
may be extinguished by another which substitutes 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 (Art. 1292, Civil Code).
In every novation there are four essential requisites. (1) a previous valid obligation; (2) the agreement of all the parties
to the new contract; (3) the extinguishment of the old contract; and (4) validity of the new one. Novation requires the
creation of new contractual relations as well as the extinguishment of the old. There must be a consent of all the
parties to the substitution, resulting in the extinction of the old obligation and the creation of a valid new one (Tiu
Siuco v. Habana, 45 Phil. 707). The acceptance of the promissory note by the plaintiff is not novation of the contract.
The legal doctrine is that an obligation to pay a sum of money is not novated in a new instrument by changing the
term of payment and adding other obligations not incompatible with the old one (Inchausti & Co. v. Yulo, 34 Phil. 978).
It is not proper to consider an obligation novated as in the case at bar by the mere granting of extension of payment
which did not even alter its essence. To sustain novation necessitates that the same be so declared in unequivocal
terms or that there is complete and substantial incompatibility between the two obligations (Sandico v. Paquing, 42
SCRA 322). An obligation to pay a sum of money is not novated in a new instrument wherein the old is ratified by
changing only the terms of payment and adding other obligations not incompatible with the old one or wherein the old
contract is merely supplementing the new one.

5. Visayan Surety & Insurance Corp. v. Court of Appeals, G.R. No. 127261, [September 7, 2001]

Facts: Spouses Danilo Ibajan and Mila Ambe Ibajan filed with the Regional Trial Court, Bian, Laguna, 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. The
Ibajans also filed a replevin bond through petitioner Visayan Surety & Insurance Corporation. The contract of surety
provided that Sps. Danilo Ibajan and Mila Ibajan and the Visayan Surety & Insurance Corporation, of Cebu, jointly
and severally bind themselves 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. 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. The trial court granted the motion to intervene.

Intervenor Dominador Ibajan also filed with the trial court a motion/application for judgment against plaintiffs'
bond. The trial court rendered judgment in favor of Dominador Ibajan and against Mila Ibajan and the Visayan Surety
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. Visayan Surety and Mila Ibajan filed with
the trial court their respective motions for reconsideration. The trial court denied both motions. On appeal, the Court
of Appeals promulgated its decision affirming the judgment of the trial court. Petitioner filed a motion for
reconsideration. The Court of Appeals denied the motion for reconsideration for lack of merit. Hence, the present
petition. 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. Respondent Dominador Ibajan asserted that as intervenor, he assumed the personality of the
original defendants in relation to the plaintiff's bond for the issuance of a writ of replevin.

Issue: whether or not the surety is liable to an intervenor on a replevin bond posted by petitioner in favor of
respondents.

Held: No. 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.
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. 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.

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. 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.

The obligation of a surety cannot be extended by implication beyond its specified limits. "When a surety executes a
bond, it does not guarantee that the plaintiff's 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 surety's liability is
determined only by the clause of the contract of suretyship." A contract of surety is not presumed; it cannot extend to
more than what is stipulated.

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.

6. Philippine National Bank v. Court of Appeals, G.R. No. L-33174, [July 4, 1991]

Facts: On August 6, 1955, Estanislao Depusoy, doing business under the name of E. E. Depusoy Construction, and
the Republic of the Philippines, represented by the Director of Public Works, entered into a building contract, Exhibit
2-Luzon, for the construction of the GSIS building at Arroceros Street, Manila, Depusoy to furnish all materials, labor,
plans, and supplies needed in the construction. Depusoy applied for credit accommodation with the plaintiff. This was
approved by the Board of Directors in various resolutions subject to the conditions that he would assign all payments
to be received from the Bureau of Public Works of the GSIS to the bank, furnish a surety bond, and the surety to
deposit P10,000.00 to the plaintiff. The total accommodation granted to Depusoy was P100,000.00. This was later
extended by another P10,000.00 and P25,000.00, but in no case should the loan exceed P100,000.00. In compliance
with these conditions, Depusoy executed a Deed of Assignment of all money to be received by him from the GSIS as
follows:

'That I, Estanislao Depusoy, of legal age, Filipino, married to Lourdes G. Gonzales, doing business under the style of E. E. San Beda Subdivision, Manila, for and
in consideration of certain loans, overdrafts or other credit accommodations to be granted by the PHILIPPINE NATIONAL BANK Manila, have assigned,
transferred and conveyed and by these presents do hereby assign, transfer and convey unto the said PHILIPPINE NATIONAL BANK its successors and assigns
all payment to be received from my contract with the Bureau of Public Works, Republic of the Philippines date (sic) August 6, 1955.

By virtue of this assignment it is hereby understood that the assignor hereby acknowledges the monies, sums or payments due from the Bureau of Public Works,
Republic of the Philippines, and which are hereby assigned to the PHILIPPINE NATIONAL BANK, as monies, sums and payments belonging to the PHILIPPINE
NATIONAL BANK, and that any act or misappropriation or conversion which the assignor or the latter's representatives may commit with respect to the said sums,
monies and payments will subject the assignor or the latter's representatives to the criminal liabilities imposed by the Penal Code and such other damages which
the Civil Code provides.

It is further understood that the PHILIPPINE NATIONAL BANK can collect and receive any and all sums, monies and payments above-mentioned from the
Bureau of Public Works, Republic of the Philippines, and for that matter said bank is hereby authorized to indorse for deposit or for encashment any and all
checks, treasury warrants, money orders, drafts and other kinds of negotiable instruments that might be issued in connection with the payment herein assigned.

This assignment shall be irrevocable subject to the terms and conditions of the promissory notes, overdrafts and any other kind of documents which the
PHILIPPINE NATIONAL BANK have (sic) required or may require the assignor to execute to evidence the above-mentioned obligation.'

Luzon thereafter executed two surety bonds, one for the sum of P40,000.00 Exhibit D, and the other for P60,000.00, Exhibit E. Exhibits D and E, except for the
amount, are expressed in the same words as follows:

'That we, E.E. DEPUSOY CONSTRUCTION CO., of 32 2nd Street, San Beda Subdv., Manila, as principal and LUZON SURETY COMPANY, INC., a corporation
duly organized and existing under and by virtue of the laws of the Philippines, as surety, are held and firmly bound unto the PHILIPPINE NATIONAL BANK of
Manila in the sum of SIXTY THOUSAND PESOS ONLY (P60,000.00), 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 the obligation are as follows:

WHEREAS, the above bounden principal, on the . . . day of September, 1956 in consideration of a certain loan of (P60,000.00) executed a Deed of Assignment in
favor of the Philippine National Bank on all payments to be received by him from the Bureau of Public Works in connection with a contract dated August 6, 1956.

WHEREAS, said PHILIPPINE NATIONAL BANK 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 Agreement.

NOW, THEREFORE, if the principal shall well and truly perform and fulfill all the undertakings, covenants, terms, conditions and agreement stipulated in said
Agreement then, this obligation shall be null and void; otherwise, it shall remain in full force and effect.

The liability of LUZON SURETY COMPANY, INC., under this bond will expire January 31, 1957. Furthermore, it is
hereby agreed and understood that the LUZON SURETY COMPANY, INC. will not be liable for any claim not
discovered and presented to the company within THREE (3) months from the expiration of this bond and that the
obligee hereby waives his right to file any court action against the surety after the termination of the period of the
three months above mentioned.'

With the consent of Luzon, the bond was extended for another 6 months from January 31, 1957.

Under the credit accommodation granted by the plaintiff bank, Depusoy obtained several amounts from the bank. On
January 14, 1957, Depusoy received P50,000.00 from the bank which he promised to pay in installments on the
dates therein indicated, Exhibit A. On January 17, 1957, he received another P50,000.00 under the same conditions
as the promissory note Exhibit A, except with respect to the time of payment. Under this arrangement all payments
made by the GSIS were payable to the Philippine National Bank. The treasury warrants or checks, however, were not
sent directly to the plaintiff. They were received by Depusoy, who in turn delivered them to the plaintiff bank. The
plaintiff then applied the money thus received, first, to the payment of the amount due on the promissory notes at the
time of the receipt of the treasury warrants or checks, and the balance was credited to the current account of
Depusoy with the plaintiff bank. A total of P1,309,461.89 were (sic) paid by the GSIS to the plaintiff bank for the
account of Estanislao Depusoy, Exhibit 1 -Luzon. Of this amount, P246,408.91 were (sic) paid according to Exhibit 1
for the importation of construction materials, and P1,063,408.91 were (sic) received by the Loans and Discounts
Department of the plaintiff bank.

Depusoy defaulted in his building contract with the Bureau of Public Works, and sometime in September, 1957, the
Bureau of Public Works rescinded its contract with Depusoy. No further amounts were thereafter paid by the GSIS to
the plaintiff bank. The amount of the loan of Depusoy which remains unpaid, including interest, is over P100,000.00.
Demands for payment were made upon Depusoy and Luzon, and as no payment was made.

7. Lim v. Security Bank Corp., G.R. No. 188539, [March 12, 2014]

Facts: Petitioner executed a Continuing Suretyship in favor of respondent to secure "any and all types of credit
accommodation that may be granted by the bank hereinto and hereinafter" in favor of Raul Arroyo for the amount of
P2,000,000.00 which is covered by a Credit Agreement/Promissory Note. 3 Said promissory note stated that the
interest on the loan shall be 19% per annum, compounded monthly, for the first 30 days from the date thereof, and if
the note is not fully paid when due, an additional penalty of 2% per month of the total outstanding principal and
interest due and unpaid, shall be imposed.

In turn, the Continuing Suretyship 4 executed by petitioner stipulated that:

3. Liability of the Surety. The liability of the Surety is solidary and not contingent upon the pursuit of the Bank of whatever remedies it may have against the
Debtor or the collaterals/liens it may possess. If any of the Guaranteed Obligations is not paid or performed on due date (at stated maturity or by acceleration),
the Surety shall, without need for any notice, demand or any other act or deed, immediately become liable therefor and the Surety shall pay and perform the
same.

Guaranteed Obligations are defined in the same document as follows:

a) "Guaranteed Obligations" the obligations of the Debtor arising from all credit accommodations extended by the Bank to the Debtor, including increases,
renewals, roll-overs, extensions, restructurings, amendments or novations thereof, as well as (i) all obligations of the Debtor presently or hereafter owing to the
Bank, as appears in the accounts, books and records of the Bank, whether direct or indirect, and (ii) any and all expenses which the Bank may incur in enforcing
any of its rights, powers and remedies under the Credit Instruments as defined hereinbelow.

The debtor, Raul Arroyo, defaulted on his loan obligation. Thereafter, petitioner received a Notice of Final Demand
dated August 2, 2001, informing him that he was liable to pay the loan obtained by Raul and Edwina Arroyo, including
the interests and penalty fees amounting to P7,703,185.54, and demanding payment thereof. For failure of petitioner
to comply with said demand, respondent filed a complaint for collection of sum of money against him and the Arroyo
spouses. Since the Arroyo spouses can no longer be located, summons was not served on them, hence, only
petitioner actively participated in the case.

Petitioner appealed to the CA, but the appellate court, in its Decision dated July 30, 2008, affirmed the RTC judgment
with the modification that interest be computed from August 1, 1997; the penalty should start only from August 28,
1997; the award of attorney's fees is set at 10% of the total amount due; and the award for litigation expenses
increased to P92,321.10. 9 Petitioner's motion for reconsideration of the CA Decision was denied per Resolution
dated June 1, 2009.

Issue: whether or not petitioner may validly be held liable for the principal debtor's loan obtained six months after the
execution of the Continuing Suretyship.
Held: Yes. The essence of a continuing surety has been highlighted in the case of Totanes v. China Banking
Corporation in this wise:
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, normally requires the projected principal debtor to execute a continuing surety agreement along
with its sureties. By executing such an agreement, the principal places itself in a position to enter into the projected
series of transactions with its creditor; with such suretyship agreement, there would be no need to execute a separate
surety contract or bond for each financing or credit accommodation extended to the principal debtor.

The terms of the Continuing Suretyship executed by petitioner, quoted earlier, are very clear. It states that petitioner,
as surety, shall, without need for any notice, demand or any other act or deed, immediately become liable and shall
pay "all credit accommodations extended by the Bank to the Debtor, including increases, renewals, roll-overs,
extensions, restructurings, amendments or novations thereof, as well as (i) all obligations of the Debtor presently or
hereafter owing to the Bank, as appears in the accounts, books and records of the Bank, whether direct or indirect,
and (ii) any and all expenses which the Bank may incur in enforcing any of its rights, powers and remedies under the
Credit Instruments as defined hereinbelow." 15 Such stipulations are valid and legal and constitute the law between
the parties, as Article 2053 of the Civil Code provides that "[a] guaranty may also be given as security for future
debts, the amount of which is not yet known; . . . ." Thus, petitioner is unequivocally bound by the terms of the
Continuing Suretyship. There can be no cavil then that petitioner is liable for the principal of the loan, together with the
interest and penalties due thereon, even if said loan was obtained by the principal debtor even after the date of
execution of the Continuing Suretyship.

With regard to the award of attorney's fees, it should be noted that Article 2208 of the Civil Code does not prohibit
recovery of attorney's fees if there is a stipulation in the contract for payment of the same. The award of attorney's
fees amounting to ten percent (10%) of the principal debt, plus interest and penalty charges, would definitely exceed
the principal amount; thus, making the attorney's fees manifestly exorbitant. Hence, we reduce the amount of
attorney's fees to ten percent (10%) of the principal debt only.

8. Towers Assurance Corp. v. Ororama Supermart, G.R. No. L-45848, [November 9, 1977]

Facts: On February 17, 1976 See Hong, the proprietor of Ororama Supermart in Cagayan de Oro City, sued the
spouses Ernesto Ong and Conching Ong in the Court of First Instance of Misamis Oriental for the collection of the
sum of P58,400 plus litigation expenses and attorney's fees (Civil Case No. 4930). See Hong asked for a writ of
preliminary attachment. On March 5, 1976, the lower court issued an order of attachment. The deputy sheriff
attached the properties of the Ong spouses in Valencia, Bukidnon and in Cagayan de Oro City.

To lift the attachment, the Ong spouses filed on March 11, 1976 a counterbond in the amount of P58,400 with Towers
Assurance Corporation as surety. In that undertaking, the Ong spouses and Towers Assurance Corporation bound
themselves to pay solidarily to See Hong the sum of P58,400.On March 24, 1976 the Ong spouses filed an answer
with a counterclaim. For non-appearance at the pre-trial, the Ong spouses were declared in default.

On October 25, 1976, the lower court rendered a decision, ordering not only the Ong spouses but also their surety,
Towers Assurance Corporation, to pay solidarily to See Hong the sum of P58,400. The court also ordered the Ong
spouses to pay P10,000 as litigation expenses and attorney's fees. Ernesto Ong manifested that he did not want to
appeal. On March 8, 1977, Ororama Supermart filed a motion for execution. The lower court granted that motion. The
writ of execution was issued on March 14 against the judgment debtors and their surety. On March 29, 1977, Towers
Assurance Corporation filed the instant petition for certiorari where it assails the decision and writ of execution.
Issue: Whether or not lower court acted with grave abuse of discretion in issuing a writ of execution against the surety
without first giving it an opportunity to be heard as required in Rule 57 of the Rules of Court.

Held: No. "SEC. 17. When execution returned unsatisfied, recovers had upon bond. If the execution be returned unsatisfied in whole or in part, the surety
or sureties on any counterbond given pursuant to the provisions of this rule to secure the payment of the judgment shall become charged on such counterbond,
and bound to pay to the judgment creditor upon demand, the amount due under the judgment, which amount may be recovered from such surety or sureties after
notice and summary hearing in the action."

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

The first requisite mentioned above is not applicable to this case because Towers Assurance Corporation assumed a
solidary liability for the satisfaction of the judgment. A surety is not entitled to the exhaustion of the properties of the
principal debtor (Art. 2959, Civil Code; Luzon Steel Corporation vs. Sia, L-26449, May 15, 1969, 28 SCRA 58, 63).

But certainly, the surety is entitled to be, heard before an execution can be issued against him since he is not a party
in the case involving his principal. Notice and hearing constitute the essence of procedural due process.

WHEREFORE, the order and writ of execution, insofar as they concern Towers Assurance Corporation, are set aside.
The lower court is directed to conduct a summary hearing on the surety's liability on its counterbond. No costs.

9. Finman General Assurance Corp. v. Salik, G.R. No. 84084, [August 20, 1990]

Facts: Abdulgani Salik et al., private respondents, allegedly applied with Pan Pacific Overseas Recruiting Services,
Inc. (hereinafter referred to as Pan Pacific) on April 22, 1987 and were assured employment abroad by a certain Mrs.
Normita Egil. In consideration thereof, they allegedly paid fees totalling P30,000.00. But despite numerous
assurances of employment abroad given by Celia Arandia and Mrs. Egil, they were not employed.Accordingly, they
filed a joint complaint with the Philippine Overseas Employment Administration against Pan Pacific for Violation of
Articles 32 and 34(a) of the Labor Code, as amended, with claims for refund of a total amount of P30,000.00 (Ibid.).

The POEA motu proprio impleaded and summoned herein petitioner surety Finman General Assurance Corporation
(hereinafter referred to as Finman), in the latter's capacity as Pan Pacific's bonding company.
Summons were served upon both Pan Pacific and Finman, but they failed to answer. On October 9, 1987, a hearing
was called, but only the private respondents appeared. Despite being deemed in default for failing to answer, both
Finman and Pan Pacific were still notified of the scheduled hearing. Again they failed to appear. Thus, ex-parte
proceedings ensued.

During the hearing, herein private respondents reiterated the allegations in their complaint that they first paid
P20,000.00 thru Hadji Usop Kabagani for which a receipt was issued signed by Engineer Arandia and countersigned
by Mrs. Egil and a certain Imelda who are allegedly employed by Pan Pacific; that they paid another P10,000.00 to
Engr. Arandia who did not issue any receipt therefor; that the total payment of P30,000.00 allegedly represents
payments for herein private respondents in the amount of P5,000.00 each, and Abdulnasser Ali, who did not file any
complaint against Pan Pacific. Herein private respondents presented as their witness, Hadji Usop Kabagani who they
identified as the one who actually financed their application and who corroborated their testimonies on all material
points including the non-issuance of a receipt for P10,000.00 by Engr. Arandia.
Herein petitioner, Finman, in an answer which was not timely filed, alleged, among others, that herein private
respondents do not have a valid cause of action against it; that Finman is not privy to any transaction undertaken by
Pan Pacific with herein private respondents; that herein private respondents claims are barred by the statute of frauds
and by the fact that they executed a waiver; that the receipts presented by herein private respondents are mere
scraps of paper; that it is not liable for the acts of Mrs. Egil; that Finman has a cash bond of P75,000.00 only which is
less than the required amount of P100,000.00; and that herein private respondents should proceed directly against
the cash bond of Pan Pacific or against Mrs. Egil.

Issue: WHETHER OR NOT FINMAN IS JOINTLY AND SEVERALLY LIABLE WITH PAN PACIFIC ON THE CLAIMS
OF PRIVATE RESPONDENTS ON THE BASIS OF THE SURETYSHIP AGREEMENT BETWEEN FINMAN AND
PAN PACIFIC AND THE PHILIPPINE OVERSEAS EMPLOYMENT ADMINISTRATION

Held: Yes. In the case at bar, it remains uncontroverted that herein petitioner and Pan Pacific entered into a
suretyship agreement, with the former agreeing that the bond is conditioned upon the true and faithful performance
and observance of the bonded principal (Pan Pacific) of its duties and obligations. It was also understood that under
the suretyship agreement, herein petitioner undertook itself to be jointly and severally liable for all claims arising from
recruitment violation of Pan Pacific (Ibid., p. 23), in keeping with Section 4, Rule V, Book I of the Implementing Rules
of the Labor Code, which provides:
"Section 4. Upon approval of the application, the applicant shall pay to the Ministry (now Department) a license fee of
P6,000.00, post a cash bond of P50,000.00 or negotiable bonds of equivalent amount convertible to cash issued by
banking or financial institution duly endorsed to the Ministry (now Department) as well as a surety bond of
P150,000.00 from an accredited bonding company to answer for valid and legal claims arising from violations of the
conditions of the license or the contracts of employment and guarantee compliance with the provisions of the Code,
its implementing rules and regulations and appropriate issuances of the Ministry (now Department)."

Accordingly, the nature of Finman's obligation under the suretyship agreement makes it privy to the proceedings
against its principal (Pan Pacific). As such Finman is bound, in the absence of collusion, by a judgment against its
principal even though it was not a party to the proceedings (Leyson v. Rizal Surety and Insurance Co., 16 SCRA 551
(1966). Furthermore, in Government of the Philippines v. Tizon (20 SCRA 1182 [1967]), this Court ruled that where
the surety bound itself solidarily with the principal obligor, the former is so dependent on 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." Applying the foregoing principles to the case at bar, it can be very well said that even if herein
Finman was not impleaded in the instant case, still it (petitioner) can be held jointly and severally liable for all claims
arising from recruitment violation of Pan Pacific. Moreover, as correctly stated by the Solicitor General, private
respondents have a legal claim against Pan Pacific and its insurer for the placement and processing fees they paid,
so much so that in order to provide a complete relief to private respondents, petitioner had to be impleaded in the
case.

10. South City Homes, Inc. v. BA Finance Corp., G.R. No. 135462, [December 7, 2001]

Facts: Joseph L.G. Chua, President of petitioner Fortune Motors Corporation (Fortune), executed in favor of private
respondent BA Finance Corporation (BA) 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 to BA. Six months later, 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. Fortune
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.
Fortune failed 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 filed a complaint for a sum
of money against Fortune, 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. Petitioners filed a motion to
dismiss the complaint. The lower court rendered judgment ordering petitioners jointly and severally to pay BA the
amounts due under the draft. On appeal, the Court of Appeals affirmed the judgment of the trial court. Hence, the
present petition.

Issues: whether or not the suretyship agreement is valid; (2) whether or not there was a novation of the obligation so
as to extinguish the liability of the sureties.

Held: 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: A guaranty may also be given as security for future debts, the amount of
which is not yet known. . . ."

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?

". . . 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.

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:

". . . 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).

"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.

"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.

"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."

11. Palmares v. Court of Appeals, G.R. No. 126490, [March 31, 1998]

12. Estate of K.H. Hemady v. Luzon Surety Co., Inc., G.R. No. L-8437, [November 28, 1956]

Facts: The Luzon Surety Co. had filed a claim against the Estate based on twenty different indemnity agreements, or
counter bonds, each subscribed by a distinct principal and by the deceased K. H. Hemady, a surety solidary
guarantor) in all of them, in consideration of the Luzon Surety Co.'s of having guaranteed, the various principals in
favor of different creditors. The Luzon Surety Co., prayed for allowance, as a contingent claim, of the value of the
twenty bonds it had executed in consideration of the counterbonds, and further asked for judgment for the unpaid
premiums and documentary stamps affixed to the bonds, with 12 per cent interest thereon.
Before answer was filed, and upon motion of the administratrix of Hemady's estate, the lower court, by order of
September 23, 1953, dismissed the claims of Luzon Surety Co., on two grounds: (1) that the premiums due and cost
of documentary stamps were not contemplated under the indemnity agreements to be a part of the undertaking of the
guarantor (Hemady), since they were not liabilities incurred after the execution of the counterbonds; and (2) that
"whatever losses may occur after Hemady's death, are not chargeable to his estate, because upon his death he
ceased to be guarantor."
Taking up the latter point first, since it is the one more far reaching in effects, the reasoning of the court below ran as
follows:
"The administratrix further contends that upon the death of Hemady, his liability as a guarantor terminated, and therefore, in the absence of a showing
that a loss or damage was suffered, the claim cannot be considered contingent. This Court believes that there is merit in this contention and finds support in
Article 2046 of the new Civil Code. It should be noted that a new requirement has been added for a person to qualify as a guarantor, that is: integrity. As correctly
pointed out by the Administratrix, integrity is something purely personal and is not transmissible. Upon the death of Hemady, his integrity was not transmitted to
his estate or successors. Whatever loss therefore, may occur after Hemady's death, are not chargeable to his estate because upon his death he ceased to be a
guarantor.

Another clear and strong indication that the surety company has exclusively relied on the personality, character, honesty and integrity of the now
deceased K. H. Hemady, was the fact that in the printed form of the indemnity agreement there is a paragraph entitled 'Security by way of first mortgage, which
was expressly waived and renounced by the security company. The security company has not demanded from K. H. Hemady to comply with this requirement of
giving security by way of first mortgage. In the supporting papers of the claim presented by Luzon Surety Company, no real property was mentioned in the list of
properties mortgaged which appears at the back of the indemnity agreement."

Issue: Whether or not guarantor;s liability is extinguished by his death?

Held: No. Under our law, therefore, the general rule is that a party's contractual rights and obligations are
transmissible to the successor. The third exception to the transmissibility of obligations under Article 1311 exists when
they are "not transmissible by operation of law". The provision makes reference to those cases where the law
expresses that the rights or obligations are extinguished by death, as is the case in legal support (Article 300),
parental authority (Article 327), usufruct (Article 603), contracts for a piece of work (Article 1726), partnership (Article
1830 and agency (Article 1919). By contract, the articles of the Civil Code that regulate guaranty or suretyship
(Articles 2047 to 2084) contain no provision that the guaranty is extinguished upon the death of the guarantor or the
surety.

The lower court sought to infer such a limitation from Art. 2056, to the effect that "one who is obliged to furnish a
guarantor must present a person who possesses integrity, capacity to bind himself, and sufficient property to answer
for the obligation which he guarantees". It will be noted, however, that the law requires these qualities to be present
only at the time of the perfection of the contract of guaranty. It is self-evident that once the contract has become
perfected and binding, the supervening incapacity of the guarantor would not operate to exonerate him of the
eventual liability he has contracted; and if that be true of his capacity to bind himself, it should also be true of his
integrity, which is a quality mentioned in the article alongside the capacity.

The foregoing concept is confirmed by the next Article 2057, that runs as follows:

"ART. 2057. If the guarantor should be convicted in first instance of a crime involving dishonesty or should become insolvent, the creditor may
demand another who has all the qualifications required in the preceding article. The case is excepted where the creditor has required and stipulated that a
specified person should be guarantor."

From this article it should be immediately apparent that the supervening dishonesty of the guarantor (that is to
say, the disappearance of his integrity after he has become bound) does not terminate the contract but merely entitles
the creditor to demand a replacement of the guarantor. But the step remains optional in the creditor: it is his right, not
his duty; he may waive it if he chooses, and hold the guarantor to his bargain. Hence Article 2057 of the present Civil
Code is incompatible with the trial court's stand that the requirement of integrity in the guarantor or surety makes the
latter's undertaking strictly personal, so linked to his individuality that the guaranty automatically terminates upon his
death.
The contracts of suretyship entered into by K. H. Hemady in favor of Luzon Surety Co. not being rendered
intransmissible due to the nature of the undertaking, nor by the stipulations of the contracts themselves, nor by
provision of law, his eventual liability thereunder necessarily passed upon his death to his heirs. The contracts,
therefore, give rise to contingent claims provable against his estate under section 5, Rule 87.

"The most common example of the contigent claim is that which arises when a person is bound as surety or guarantor for a principal who is insolvent or
dead. Under the ordinary contract of suretyship the surety has no claim whatever against his principal until he himself pays something by way of satisfaction upon
the obligation which is secured. When he does this, there instantly arises in favor of the surety the right to compel the principal to exonerate the surety. But until
the surety has contributed something to the payment of the debt, or has performed the secured obligation in whole or in part, he has no right of action against
anybody no claim that could be reduced to judgment.

For defendant administratrix it is averred that the above doctrine refers to a case where the surety files claims
against the estate of the principal debtor; and it is urged that the rule does not apply to the case before us, where the
late Hemady was a surety, not a principal debtor. The argument evinces a superficial view of the relations between
parties. If under the Gaskell ruling, the Luzon Surety Co., as guarantor, could file a contingent claim against the estate
of the principal debtors if the latter should die, there is absolutely no reason why it could not file such a claim against
the estate of Hemady, since Hemady is a solidary co-debtor of his principals. What the Luzon Surety Co. may claim
from the estate of a principal debtor it may equally claim from the estate of Hemady, since, in view of the existing
solidarity, the latter does not even enjoy the benefit of exhaustion of the assets of the principal debtor.

13. General Insurance and Surety Corp. v. Republic, G.R. No. L-13873, January 31, 1963

Facts: Central Luzon Educational Foundation, Inc. and the General Insurance and Surety Corporation posted in favor
of the Department of Education a bond.

On the same day, May 15, 1954, the Central Luzon Educational Foundation, Inc., Teofilo Sison and Jose M. Aruego
executed an indemnity agreement binding themselves jointly and severally to indemnify the surety of "any damages,
prejudices, loss, costs, payments, advances and expenses of whatever kind and nature, including attorney's fees and
legal costs, which the COMPANY may, at any time sustain or incur, as well as to reimburse to said COMPANY all
sums and amounts of money which the COMPANY or its representatives shall or may pay or cause to be paid or
become liable to pay, on account of or arising from the execution of the above mentioned Bond."On June 25, 1954,
the surety advised the Secretary of Education that it was withdrawing and cancelling its bond. Copies of the letter
were sent to the Bureau of Private Schools and to the Central Luzon Educational Foundation, Inc.
It appears that on the date of execution of the bond, the Foundation was indebted to two of its teachers for salaries, to
wit: to Remedios Laoag, in the sum of P685.64, and to H.B. Arandia, in the sum of P820.00, or a total of P1,505.64.
Demand for the above amount having been refused, the Solicitor General, in behalf of the Republic of the Philippines,
filed a complaint for the forfeiture of the bond, in the Court of First Instance of Manila on July 11, 1956.

In due to surety the Foundation and prayed that the complaint be dismissed and that it be indemnified by the
Foundation of any amount it might be required to pay the Government, plus attorney's fees. For its part, the
Foundation denied the cross-claim and contended that, because Remedios Laoag owed Fr. Cinense the amount of
P820.65, there was no basis for the action; that the bond is illegal and that the Government has no capacity to sue.

The surety also filed a third-party complaint against Teofilo Sison and Jose M. Aruego on the basis of the indemnity
agreement. While admitting the allegations of the third-party complaint, Sison and Aruego claimed that because of
the cancellation and withdrawal of the bond, the indemnity agreement ceased to be of force and effect.

Issue: Whether or not a surety may be held liable for the penalty provided for in a bond for violation of the condition
therein?

Held: Yes. A bond, which is penal in nature, may be forfeited for its full amount of P10,000.00 although the amount
involved in connection with its violation is considerably much less, pursuant to Article 1226 of the Civil Code, which
provides that in obligations with penal clause the penalty shall substitute the indemnity for damages and the payment
of interests in case of non-compliance, if there is no stipulation to the contrary, and the party to whom payment is to
be made is entitled to recover the sum stipulated without need of proving damages because one of the primary
purposes of a penalty clause is to avoid such necessity.

What We said about the penal nature of the bond would suffice to dispose of this claim. For whatever may be the
amount of salaries due the teachers, the fact remains that the condition of the bond was violated and so the surety
became liable for the penalty provided for therein. Government contends that since the salaries of the teachers were
due and payable when the bond was still in force, the surety has become liable on its bond from the moment of its
execution on May 15, 1954. We agree with this contention of the Government.

It must be remembered that, by the terms of the bond, the surety guaranteed to the Government "compliance (by the
Foundation) with all obligations, including the payment of the salaries of its teachers and employees, past, present
and future, and the payment of all other obligations incurred by, or in behalf of said school." Now, it is not disputed
that even before the execution of the bond, the Foundation was already indebted to two of its teachers for past
salaries. From the moment, therefore, the bond was executed, the right of the Government to proceed against the
bond accrued because since then, there has been violation of the terms of the bond regarding payment of past
salaries of teachers at the Sison and Aruego Colleges. The fact that the action was filed only on July 11, 1956 does
not militate against this position because actions based on written contracts prescribe in ten years. (Art. 1144, par. 1,
Civil Code).
According to the bond, "the liability of Luzon Surety Company, Inc., under this bond will expire twelve (12) months
from date hereof." The date referred to was February 13, 1933. This Court absolved the surety of liability because the
acts for which the bond was posted happened after its expiration. Thus, We held in that case: ". . . The acts provided therein
by reason of which the contract of suretyship was executed could have taken place within the stipulated period of twelve months. Hence, the parties fixed that
period exactly at twelve months, limiting thereby the obligation of the appellee to answer for the payment to the appellant of the aforesaid sum of P7,500 to not
more than the stipulated period. . . ."

Here, on the other hand, the right of the Government to collect on the bond arose while the bond was in force,
because, as earlier noted, even before the execution of the bond, the principal had already been in debt to its
teachers.
In the present case, there is no provision that the bond will be cancelled unless the surety is notified of any claim and
so no condition precedent has to be complied with by the Government before it can bring an action. Indeed, the
provision of the bond in the NARIC and Santos cases that it would be cancelled ten days after its expiration unless
notice of claim was given was inserted precisely because, without such a provision, the surety's liability for obligations
arising while the bond was in force would subsist even after its expiration.

And suppose this action were filed while the bond was in force, as the surety would have the Government do, but the
same remained pending after June 15, 1955, would the surety suggest that the judgment that may be rendered in
such action could not longer be enforced against it because the bond says that its liability under it has expired?

And what of the provision on 60-day notice? The surety urges that all actions on the bond must be brought within that
period or they would all be barred. The surety misread the provision. The 60-day notice is not a period of prescription
of action. The provision merely means that the surety can withdraw as in fact it did in this case even before
June 15, 1955 provided it gave notice of its intention to do so at least 60 days in advance. If at all, the condition is a
limitation on the right of the surety to withdraw rather than a limitation of action on the bond. This is clear also from
the Manual of Information of Private Schools 2 which states that "The bond furnished by a school may not be
withdrawn by either or both of the bondsmen except by giving the Director of Private Schools sixty days notice."

14. Hongkong & Shanghai Banking Corp. v. Aldecoa & Co., G.R. No. 8437, [March 23, 1915]

Facts: