[ G.R. No.

189563, April 07, 2014 ]

GILAT SATELLITE NETWORKS, LTD., PETITIONER, VS. UNITED COCONUT

PLANTERS BANK GENERAL INSURANCE CO., INC., RESPONDENT.

This is an appeal via a Petition for Review on Certiorari[1] filed 6 November 2009 assailing
the Decision[2] and Resolution[3] of the Court of Appeals (CA) in CA-G.R. CV No. 89263,
which reversed the Decision[4] of the Regional Trial Court (RTC), Branch 141, Makati City
in Civil Case No. 02-461, ordering respondent to pay petitioner a sum of money.

The antecedent facts, as culled from the CA, are as follows:

FACTS:
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 Virtual's conformity, an
amendment to the surety bond, Annex "A" thereof, correcting its expiry date from May 30,
2001 to July 30, 2001.

One Virtual failed to pay GILAT the amount of Four Hundred Thousand Dollars
(US$400,000.00) on the due date of May 30, 2000 in accordance with the payment
schedule attached as Annex "A" to the surety bond, prompting GILAT to write the
surety defendant UCPB on June 5, 2000, a demand letter (Exhibit "G") for payment
of the said amount of US$400,000.00. No part of the amount set forth in this demand
has been paid to date by either One Virtual or defendant UCPB. One Virtual likewise
failed to pay on the succeeding payment instalment date of 30 November 2000 as set out
in Annex "A" of the surety bond, prompting GILAT to send a second demand letter dated
January 24, 2001, for the payment of the full amount of US$1,200,000.00 guaranteed
under the surety bond, plus interests and expenses (Exhibits "H") and which letter was
received by the defendant surety on January 25, 2001. However, defendant UCPB failed
to settle the amount of US$1,200,000.00 or a part thereof, hence, the instant
complaint."[5](Emphases in the original)
On 24 April 2002, petitioner Gilat Satellite Networks, Ltd., filed a
Complaint[6] against respondent UCPB General Insurance Co., Inc., to recover the
amounts supposedly covered by the surety bond, plus interests and expenses.
After due hearing, the RTC rendered its Decision,[7] the dispositive portion of which is
herein quoted:

WHEREFORE, premises considered, the Court hereby renders judgment for the plaintiff,
and against the defendant, ordering, to wit:

1. The defendant surety to pay the plaintiff the amount of One Million Two Hundred
Thousand Dollars (US$1,200,000.00) representing the principal debt under the
Surety Bond, with legal interest thereon at the rate of 12% per annum computed
from the time the judgment becomes final and executory until the obligation is fully
settled; and

2. The defendant surety to pay the plaintiff the amount of Forty Four Thousand Four
Dollars and Four Cents (US$44,004.04) representing attorney's fees and litigation
expenses.
Accordingly, defendant's counterclaim is hereby dismissed for want of merit.

SO ORDERED. (Emphasis in the original)

In so ruling, the RTC reasoned that there is "no dispute that plaintiff [petitioner] delivered
all the subject equipments [sic] and the same was installed. Even with the delivery and
installation made, One Virtual failed to pay any of the payments agreed upon. Demand
notwithstanding, defendant failed and refused and continued to fail and refused to settle
the obligation."[8] Considering that its liability was indeed that of a surety, as "spelled
out in the Surety Bond executed by and between One Virtual as Principal, UCPB as
Surety and GILAT as Creditor/Bond Obligee,"[9] respondent agreed and bound
itself to pay in accordance with the Payment Milestones. This obligation was not
made dependent on any condition outside the terms and conditions of the Surety
Bond and Payment Milestones.[10]

Insofar as the interests were concerned, the RTC denied petitioner's claim on the
premise that while a surety can be held liable for interest even if it becomes more
onerous than the principal obligation, the surety shall only accrue when the delay
or refusal to pay the principal obligation is without any justifiable cause.[11] Here,
respondent failed to pay its surety obligation because of the advice of its principal (One
Virtual) not to pay.[12] The RTC then obligated respondent to pay 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 attorney's fees and litigation
expenses.

On 18 October 2007, respondent appealed to the CA.[13] The appellate court rendered a
Decision[14] in the following manner:

WHEREFORE, this appealed case is DISMISSED for lack of jurisdiction. The trial
court's Decision dated December 28, 2006 is VACATED. Plaintiff-appellant Gilat Satellite
Networks Ltd., and One Virtual are ordered to proceed to arbitration, the outcome of which
shall necessary bind the parties, including the surety, defendant-appellant United
Coconut Planters Bank General Insurance Co., Inc.

SO ORDERED. (Emphasis in the original)

The CA ruled that in "enforcing a surety contract, the 'complementary-contracts-

construed-together' doctrine finds application." According to this doctrine, the
accessory contract must be construed with the principal agreement.[15] In this case,
the appellate court considered the Purchase Agreement entered into between petitioner
and One Virtual as the principal contract,[16] whose stipulations are also binding on the
parties to the suretyship.[17] Bearing in mind the arbitration clause contained in the
Purchase Agreement[18] and pursuant to the policy of the courts to encourage alternative
dispute resolution methods,[19] the trial court's Decision was vacated; petitioner and One
Virtual were ordered to proceed to arbitration.

On 9 September 2008, petitioner filed a Motion for Reconsideration with Motion for Oral
Argument. The motion was denied for lack of merit in a Resolution [20] issued by the CA
on 16 September 2009.

Hence, the instant Petition.

On 31 August 2010, respondent filed a Comment[21] on the Petition for Review. On 24

November 2010, petitioner filed a Reply.[22]

ISSUES

From the foregoing, we reduce the issues to the following:

1. Whether or not the CA erred in dismissing the case and ordering petitioner and
One Virtual to arbitrate; and
 2. Whether or not petitioner is entitled to legal interest due to the delay in the
fulfilment by respondent of its obligation under the Suretyship Agreement.

THE COURT'S 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 CA's
order to arbitrate.

Moreover, Articles 1216 and 2047 of the Civil Code[25] clearly provide that the
creditor may proceed against the surety without having first sued the principal
debtor.[26] Even the Surety Agreement itself states that respondent becomes liable upon
"mere failure of the Principal to make such prompt payment." [27] Thus, petitioner should
not be ordered to make a separate claim against One Virtual (via arbitration) before
proceeding against respondent.[28]

On the other hand, respondent maintains that a surety contract is merely an

accessory contract, which cannot exist without a valid obligation.[29] Thus, the
surety may avail itself of all the defenses available to the principal debtor and inherent in
the debt[30] that is, the right to invoke the arbitration clause in the Purchase Agreement.

We agree with petitioner.

In suretyship, the oft-repeated rule is that a surety's liability is joint and solidary
with that of the principal debtor. This undertaking makes a surety agreement an
ancillary contract, as it presupposes the existence of a principal
contract.[31] Nevertheless, although the contract of a surety is in essence secondary
only to a valid principal obligation, its liability to the creditor or "promise" of the
principal is said to be direct, primary and absolute; in other words, a surety is
directly and equally bound with the principal.[32] He becomes liable for the debt and
duty of the principal obligor, even without possessing a direct or personal interest
in the obligations constituted by the latter.[33]Thus, a surety is not entitled to a
separate notice of default or to the benefit of excussion.[34] It may in fact be sued
separately or together with the principal debtor.[35]
After a thorough examination of the pieces of evidence presented by both parties,[36] the
RTC found that petitioner had delivered all the goods to One Virtual and installed
them. Despite these compliances, One Virtual still failed to pay its obligation, [37] triggering
respondent's liability to petitioner as the former's surety. In other words, the failure of
One Virtual, as the principal debtor, to fulfill its monetary obligation to petitioner
gave the latter an immediate right to pursue respondent as the surety.

Consequently, we cannot sustain respondent's claim that the Purchase Agreement, being
the principal contract to which the Suretyship Agreement is accessory, must take
precedence over arbitration as the preferred mode of settling disputes.

First, we have held in Stronghold Insurance Co. Inc. v. Tokyu Construction Co.
Ltd.,[38] that "[the] acceptance [of a surety agreement], however, does not change in any
material way the creditor's relationship with the principal debtor nor does it make the
surety an active party to the principal creditor-debtor relationship. In other words, the
acceptance does not give the surety the right to intervene in the principal
contract. The surety's role arises only upon the debtor's default, at which time, it can be
directly held liable by the creditor for payment as a solidary obligor." Hence, the surety
remains a stranger to the Purchase Agreement. We agree with petitioner that respondent
cannot invoke in its favor the arbitration clause in the Purchase Agreement, because it is
not a party to that contract.[39] An arbitration agreement being contractual in nature,[40] it
is binding only on the parties thereto, as well as their assigns and heirs. [41]

Second, Section 24 of Republic Act No. 9285[42] is clear in stating that a referral to
arbitration may only take place "if at least one party so requests not later than the pre-
trial conference, or upon the request of both parties thereafter." Respondent has not
presented even an iota of evidence to show that either petitioner or One Virtual submitted
its contesting claim for arbitration.

Third, sureties do not insure the solvency of the debtor, but rather the debt itself.[43] They
are contracted precisely to mitigate risks of 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 latter's obligation, provided that the
delay is inexcusable.

Anent the issue of interests, petitioner alleges that it deserves to be paid legal interest of
12% per annum from the time of its first demand on respondent on 5 June 2000 or at
most, from the second demand on 24 January 2001 because of the latter's delay in
discharging its monetary obligation.[47] Citing Article 1169 of the Civil Code, petitioner
insists that the delay started to run from the time it demanded the fulfilment of
respondent's obligation under the suretyship contract. Significantly, respondent does not
contest this point, but instead argues that it is only liable for legal interest of 6% per
annum from the date of petitioner's last demand on 24 January 2001.

In rejecting petitioner's position, the RTC stated that interests may only accrue when the
delay or the refusal of a party to pay is without any justifiable cause.[48] In this case,
respondent's failure to heed the demand was due to the advice of One Virtual that
petitioner allegedly breached its undertakings as stated in the Purchase
Agreement.[49] The CA, however, made no pronouncement on this matter.

We sustain petitioner.

Article 2209 of the Civil Code is clear: "[i]f an obligation consists in the payment of a
sum of money, and the debtor incurs a delay, the indemnity for damages, there being
no 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 respondent's
delay was indeed justified by the circumstances that is, One Virtual's advice
regarding petitioner's alleged breach of obligations. The lower court's Decision itself
belied this contention when it said that "plaintiff is not disputing that it did not complete
commissioning work on one of the two systems because One Virtual at that time is already
in default and has not paid GILAT."[58] Assuming arguendo that the commissioning work
was not completed, 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.
CA[63] 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. 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.

x x x x

3. When the judgment of the court awarding a sum of money becomes final and
executory, the rate of legal interest, whether the case falls under paragraph 1 or
paragraph 2, above, shall be 6% per annum from such finality until its satisfaction, this
interim period being deemed to be by then an equivalent to a forbearance of credit.

Applying the above-discussed concepts and in the absence of an agreement as to

interests, we are hereby compelled to award petitioner legal interest at the rate of
6% per annum from 5 June 2000, its first date of extrajudicial demand, until the
satisfaction of the debt in accordance with the revised guidelines enunciated
in Nacar.

WHEREFORE, the Petition for Review on Certiorari is hereby GRANTED. The assailed
Decision and Resolution of the Court of Appeals in 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.

Leonardo-De Castro, Bersamin, Villarama, Jr., and Reyes, JJ., concur.

G.R. No. 126490 March 31, 1998

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 Osmeña and Merlyn Azarraga,
together with petitioner Estrella Palmares, in the amount of P30,000.00 payable on
or before May 12, 1990, with compounded interest at the rate 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 party-
defendant, 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.

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
RTC: Dismissed
Thereafter, the parties agreed to submit the case for decision based on the pleadings
filed and the memoranda to be submitted by them. On November 26, 1992, the Regional
Trial Court of Iloilo City, Branch 23, rendered judgment dismissing the complaint without
prejudice to the filing of a separate action for a sum of money against the spouses
Osmeña 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.

CA: Reversed
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 above-quoted loan, have

fully understood the contents of this Promissory Note for Short-Term Loan:

That as Co-maker, I am fully aware that I shall be jointly and severally or

solidarily liable with the above principal maker of this note;

That in fact, I hereby agree that M.B. LENDING CORPORATION may

demand payment of the above loan from me in case the principal maker,
Mrs. Merlyn Azarraga defaults in 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 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.

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 co-maker immediately follows

the terms and conditions stipulated between respondent corporation, as creditor, and the
principal obligors. A surety is usually bound with his principal by the same instrument,
executed at the same time and upon the same consideration; 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'être 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 Osmeña Azarraga.
At the same time, I offered to pay MB Lending the outstanding balance of the principal
obligation should he fail to collect from Merlyn and Osmeña Azarraga. Mr. Banusing
advised me not to worry because he will try to collect first from Merlyn and Osmeña
Azarraga.

10. A year thereafter, I received a telephone call from the secretary of Mr. Banusing
who reminded that the loan of Merlyn and Osmeña Azarraga, together with interest and
penalties thereon, has not been paid. Since I had no available funds at that time, I offered
to pay MB Lending by delivering to them a parcel of land which I own. Mr. Banusing's
secretary, however, refused my offer for the reason that they are not interested in real
estate.

11. In March 1992, I received a copy of the summons and of the complaint filed against
me by MB Lending before the RTC-Iloilo. After learning that a complaint was filed against
me, I instructed Sheila Gatia to go to MB Lending and reiterate my first offer to pay the
outstanding balance of the principal obligation of Merlyn Azarraga in the amount of
P30,000.00.

12. Ms. Gatia talked to the secretary of Mr. Banusing who referred her to Atty. Venus,
counsel of MB Lending.

13. Atty. Venus informed Ms. Gatia that he will consult Mr. Banusing if my offer to pay
the outstanding balance of the principal obligation loan (sic) of Merlyn and Osmeña
Azarraga is acceptable. Later, Atty. Venus informed Ms. Gatia that my offer is not
acceptable to Mr. Banusing.

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.

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 interest of 3% per month is hereby deleted and the
award of attorney's fees is reduced to P10,000.00.

SO ORDERED.

SECOND DIVISION

[G.R. No. 103066. April 25, 1996]

WILLEX PLASTIC INDUSTRIES, CORPORATION, petitioner, vs. HON. COURT OF
APPEALS and INTERNATIONAL CORPORATE BANK, respondents.
SYLLABUS
1. REMEDIAL LAW; EVIDENCE; PAROL EVIDENCE RULE; FAILURE TO OBJECT
TO THE PRESENTATION OF PAROL EVIDENCE CONSTITUTES A WAIVER
THEREOF. - It has been held that explanatory evidence may be received to show the
circumstances under which a document has been made and to what debt it relates. At
all events, Willex Plastic cannot now claim that its liability is limited to any amount
which Interbank, as creditor, might give directly to Inter-Resin Industrial as debtor
because, by failing to object to the parol evidence presented, Willex Plastic waived
the protection of the parol evidence rule.
2. ID.; ID.; FINDINGS OF FACT OF THE TRIAL COURT; RULE; APPLICABLE IN
CASE AT BAR. 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. Similarly, the Court of Appeals found it to be an
undisputed fact that to secure the guarantee undertaken by plaintiff-appellee
[Interbank] of the credit accommodation granted to Inter-Resin Industrial by
Manilabank, plaintiff-appellee required defendant-appellant 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.
3. CIVIL LAW; SPECIAL CONTRACTS; GUARANTY; THE CONSIDERATION
NECESSARY TO SUPPORT A SURETY OBLIGATION NEED NOT PASS
DIRECTLY TO THE SURETY, A CONSIDERATION MOVING TO THE PRINCIPAL
ALONE IS SUFFICIENT. - Willex Plastic argues that the Continuing Guaranty, being
an accessory contract, cannot legally exist because of the absence of a valid principal
obligation. Its contention is based on the fact that it is not a party either to the
Continuing Surety Agreement or to the loan agreement between Manilabank and
Inter-Resin Industrial. Put in another way the consideration necessary to support a
surety obligation need not pass directly to the surety, a consideration moving to the
principal alone being sufficient. For a guarantor or surety is bound by the same
consideration that makes the contract effective between the principal parties thereto.
. . . It is never necessary that a guarantor or surety should receive any part or benefit,
if such there be, accruing to his principal.
4. ID.; ID.; ID.; ALTHOUGH A CONTRACT OF SURETY IS ORDINARILY NOT TO BE
CONSTRUED AS RETROSPECTIVE, IN THE END THE INTENTION OF THE
PARTIES AS REVEALED BY THE EVIDENCE IS CONTROLLING. - Willex Plastic
contends that the Continuing Guaranty cannot be retroactively applied so as to secure
the payments made by Interbank under the two Continuing Surety Agreements.
Willex Plastic invokes the ruling in El Vencedor v. Canlas (44 Phil. 699 [1923])
and Dio v. Court of Appeals (216 SCRA 9 [1992]) in support of its contention that a
contract of suretyship or guaranty should be applied prospectively. The cases cited
are, however, distinguishable from the present case. In El Vencedor v. Canlas we
held that a contract of suretyship is not retrospective and no liability attaches for
defaults occurring before it is entered into unless an intent to be so liable is
indicated. There we found nothing in the contract to show that the parties intended
the surety bonds to answer for the debts contracted previous to the execution of the
bonds. In contrast, in this case, the parties to the Continuing Guaranty clearly
provided that the guaranty would cover sums obtained and/or to be obtained by Inter-
Resin Industrial from Interbank. On the other hand, in 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
contract of guaranty or suretyship should be prospective in application. Indeed, as we
also held in Bank of the Philippine Islands v. Foerster, (49 Phil. 843 [1926]) 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 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.
APPEARANCES OF COUNSEL
Tangle-Chua, Cruz & Aquino for petitioner.
Fe B. Macalino & Associates for respondent Interbank.

DECISION
MENDOZA, J.:
This is a petition for review on certiorari of the decision [1] of the Court of Appeals in
C.A.-G.R. CV No. 19094, affirming the decision of the Regional Trial Court of the National
Capital Judicial Region, Branch XLV, Manila, which ordered petitioner Willex Plastic
Industries Corporation and the Inter-Resin Industrial Corporation, jointly and severally, to
pay private respondent International Corporate Bank certain sums of money, and the
appellate courts resolution of October 17, 1989 denying petitioners motion for
reconsideration.
The facts are as follows:
Sometime in 1978, Inter-Resin Industrial Corporation opened a letter of credit with
the Manila Banking Corporation. To secure payment of the credit accommodation, Inter-
Resin Industrial and the Investment and Underwriting Corporation of the Philippines
(IUCP) executed two documents, both entitled Continuing Surety Agreement and dated
December 1, 1978, whereby they bound themselves solidarily to pay Manilabank
obligations of every kind, on which the [Inter-Resin Industrial] may now be indebted or
hereafter become indebted to the [Manilabank]. The two agreements (Exhs. J and K) are
the same in all respects, except as to the limit of liability of the surety, the first surety
agreement being limited to US$333,830.00, while the second one is limited to
US$334,087.00.
On April 2, 1979, Inter-Resin Industrial, together with Willex Plastic Industries Corp.,
executed a Continuing Guaranty in favor of IUCP whereby For and in consideration of the
sum or sums obtained and/or to be obtained by Inter-Resin Industrial Corporation from
IUCP, Inter-Resin Industrial and Willex Plastic jointly and severally guaranteed the prompt
and punctual payment at maturity of the NOTE/S issued by the DEBTOR/S . . . to the
extent of the aggregate principal sum of FIVE MILLION PESOS (P5,000,000.00)
Philippine Currency and such interests, charges and penalties as hereafter may be
specified.
On January 7, 1981, following demand upon it, IUCP paid to Manilabank the sum of
P4,334,280.61 representing Inter-Resin Industrials outstanding obligation. (Exh. M-1) On
February 23 and 24, 1981, Atrium Capital Corp., which in the meantime had succeeded
IUCP, demanded from Inter-Resin Industrial and Willex Plastic the payment of what it
(IUCP) had paid to Manilabank. As neither one of the sureties paid, Atrium filed this case
in the court below against Inter-Resin Industrial and Willex Plastic.
On August 11, 1982, Inter-Resin Industrial paid Interbank, which had in turn
succeeded Atrium, the sum of P687,500.00 representing the proceeds of its fire insurance
policy for the destruction of its properties.
In its answer, Inter-Resin Industrial admitted that the Continuing Guaranty was
intended to secure payment to Atrium of the amount of P4,334,280.61 which the latter
had paid to Manilabank. It claimed, however, that it had already fully paid its obligation to
Atrium Capital.
On the other hand, Willex Plastic denied the material allegations of the complaint and
interposed the following Special Affirmative Defenses:

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

(b) Again, assuming arguendo, that the main defendant is indebted to plaintiff, its account
is now very much lesser than those stated in the complaint because of some payments
made by the former;

(c) The complaint states no cause of action against WILLEX;

(d) WILLEX is only a guarantor of the principal obligor, and thus, its liability is only
secondary to that of the principal;

(e) Plaintiff failed to exhaust the ultimate remedy in pursuing its claim against the principal
obligor;

(f) Plaintiff has no personality to sue.

On April 29, 1986, Interbank was substituted as plaintiff in the action. The case then
proceeded to trial.
On March 4, 1988, the trial court declared Inter-Resin Industrial to have waived the
right to present evidence for its failure to appear at the hearing despite due notice. On the
other hand, Willex Plastic rested its case without presenting any evidence. Thereafter
Interbank and Willex Plastic submitted their respective memoranda.
 On April 5, 1988, the trial court rendered judgment, ordering Inter-Resin Industrial
and Willex Plastic jointly and severally to pay to Interbank the following amounts:

(a) P3,646,780.61, representing their indebtedness to the plaintiff, with interest of 17%
per annum from August 11, 1982, when Inter-Resin Industrial paid P687,500.00 to the
plaintiff, until full payment of the said amount;

(b) Liquidated damages equivalent to 17% of the amount due; and

(c) Attorneys fees and expenses of litigation equivalent to 20% of the total amount due.
Inter-Resin Industrial and Willex Plastic appealed to the Court of Appeals. Willex
Plastic filed its brief, while Inter-Resin Industrial presented a Motion to Conduct Hearing
and to Receive Evidence to Resolve Factual Issues and to Defer Filing of the Appellants
Brief. After its motion was denied, Inter-Resin Industrial did not file its brief anymore.
On February 22, 1991, the Court of Appeals rendered a decision affirming the ruling
of the trial court.
Willex Plastic filed a motion for reconsideration praying that it be allowed to present
evidence to show that Inter-Resin Industrial had already paid its obligation to Interbank,
but its motion was denied on December 6, 1991:

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

Industrials motion for reception of evidence because the situation or situations in which
we could exercise the power under B.P. 129 did not exist. Movant here has not presented
any argument which would show otherwise.
Hence, this petition by Willex Plastic for the review of the decision of February 22,
1991 and the resolution of December 6,1991 of the Court of Appeals.
Petitioner raises a number of issues.
[1] The main issue raised is whether under the Continuing Guaranty signed on April
2, 1979 petitioner Willex Plastic may be held jointly and severally liable with Inter-Resin
Industrial for the amount paid by Interbank to Manilabank.
As already stated, the amount had been paid by Interbanks 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, Interbanks predecessor-
in-interest. Atrium Capital, alleged:
5. to secure the guarantee made by plaintiff of the credit accommodation granted
to defendant IRIC [Inter-Resin Industrial] by Manilabank, the plaintiff required
defendant IRIC [Inter-Resin Industrial] to execute a chattel mortgage in its
favor and a Continuing Guaranty which was signed by the other defendant
WPIC [Willex Plastic].
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 Plastics 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. Interbanks witness testified under cross-
examination by counsel for Willex Plastic that Willex guaranteed the exposure/of
whatever exposure of ACP [Atrium Capital] will later be made because of the guarantee
to Manila Banking Corporation.[3]
It has been held that explanatory evidence may be received to show the
circumstances under which a document has been made and to what debt it relates.[4] At
all events, Willex Plastic cannot now claim that its liability is limited to any amount
which Interbank, as creditor, might give directly to Inter-Resin Industrial as debtor
because, by failing to object to the parol evidence presented, Willex Plastic waived the
protection of the parol evidence rule.[5]
Accordingly, the trial court found that it was to secure the guarantee made by plaintiff
of the credit accommodation granted to defendant IRIC [Inter-Resin Industrial] by
Manilabank, [that] the plaintiff required defendant IRIC to execute a chattel mortgage in
its favor and a Continuing Guaranty which was signed by the defendant Willex Plastic
Industries Corporation.[6]
Similarly, the Court of Appeals found it to be an undisputed fact that to secure the
guarantee undertaken by plaintiff-appellee [Interbank] of the credit accommodation
granted to Inter-Resin Industrial by Manilabank, plaintiff-appellee required 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
Inter-Resin Industrial and Willex Plastic intended to indemnify Interbank for amounts
which it may have paid Manilabank on behalf of Inter-Resin Industrial.
Indeed, in its Petition for Review in this Court, Willex Plastic admitted that it was to
secure the aforesaid guarantee, that INTERBANK required principal debtor IRIC [Inter-
Resin Industrial] to execute a chattel mortgage in its favor, and so a Continuing Guaranty
was executed on April 2, 1979 by WILLEX PLASTIC INDUSTRIES CORPORATION
(WILLEX for brevity) in favor of INTERBANK for and in consideration of the loan obtained
by IRIC [Inter-Resin Industrial].
[2] Willex Plastic argues that the Continuing Guaranty, being an accessory contract,
cannot legally 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 Inter-Resin Industrial.
Put in another way the consideration necessary to support a surety obligation need
not pass directly to the surety, a consideration moving to the principal alone being
sufficient. For a guarantor or surety is bound by the same consideration that makes the
contract effective between the principal parties thereto. . . . It is never necessary that a
guarantor or surety should receive any part or benefit, if such there be, accruing to his
principal.[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 retroactively
applied so as to secure the payments made by Interbank under the two Continuing Surety
Agreements. Willex Plastic invokes the ruling m 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 parties intended the surety bonds
to answer for the debts contracted previous to the execution of the bonds. In contrast, in
this case, the parties to the Continuing Guaranty clearly provided that the guaranty would
cover sums obtained and/or to be obtained by Inter-Resin Industrial from Interbank.
On the other hand, in 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 contract 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;

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

Considering that, as shown by the records, the Court had exerted every earnest effort to
cause the service of notice or subpoena on the defendant Inter-Resin Industrial but to no
avail, even with the assistance of the defendant Willex. . . the defendant Inter-Resin
Industrial is hereby deemed to have waived the right to present its evidence.
On the other hand, Willex Plastic announced it was resting its case without presenting
any evidence.
Upon motion of Inter-Resin Industrial, however, the trial court reconsidered its order
and set the hearing anew on July 23, 1987. But Inter-Resin Industrial again moved for the
postponement of the hearing to August 11, 1987. The hearing 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 Industrials counsel did not
appear. The trial court, therefore, finally declared Inter-Resin Industrial to have waived
the right to present its evidence. On the other hand, Willex Plastic, as before, manifested
that it was not presenting evidence and requested instead for time to file a memorandum.
There is therefore no basis for the plea made by Willex Plastic that it be given the
opportunity of showing that Inter-Resin Industrial has already paid its obligation to
Interbank.
WHEREFORE, the decision of the Court of Appeals is AFFIRMED, with costs against
the petitioner.
SO ORDERED.

FIRST DIVISION

[G.R. No. 113564. June 20, 2001]

INOCENCIA YU DINO and her HUSBAND doing business under the trade name
"CANDY CLAIRE FASHION GARMENTS", petitioners, vs. COURT OF
APPEALS and ROMAN SIO, doing business under the name "UNIVERSAL
TOY MASTER MANUFACTURING", respondents.

D E C I S I O N*
PUNO, J.:
Though people say, "better late than never", the law frowns upon those who assert
their rights past the eleventh hour. For failing to timely institute their action, the petitioners
are forever barred from claiming a sum of money from the respondent.
This is a petition for review on certiorari to annul and set aside the amended decision
of the respondent court dated January 24, 1994 reversing its April 30, 1993 decision and
dismissing the plaintiff-petitioners' Complaint on the ground of prescription.
The following undisputed facts gave rise to the case at bar:
Petitioners spouses Dino, doing business under the trade name "Candy Claire
Fashion Garment" are engaged in the business of manufacturing and selling
shirts.[1] Respondent Sio is part owner and general manager of a manufacturing
corporation doing business under the trade name "Universal Toy Master
Manufacturing."[2]
Petitioners and respondent Sio entered into a contract whereby the latter would
manufacture for the petitioners 20,000 pieces of vinyl frogs and 20,000 pieces of vinyl
mooseheads at P7.00 per piece in accordance with the sample approved by the
petitioners. These frogs and mooseheads were to be attached to the shirts petitioners
would manufacture and sell.[3]
Respondent Sio delivered in several installments the 40,000 pieces of frogs and
mooseheads. The last delivery was made on September 28, 1988. Petitioner fully paid
the agreed price.[4] Subsequently, petitioners returned to respondent 29,772 pieces of
frogs and mooseheads for failing to comply with the approved sample. [5] The return was
made on different dates: the initial one on December 12, 1988 consisting of 1,720
pieces,[6] the second on January 11, 1989,[7] and the last on January 17, 1989.[8]
Petitioners then demanded from the respondent a refund of the purchase price of the
returned goods in the amount of P208,404.00. As respondent Sio refused to
pay,[9] petitioners filed on July 24, 1989 an action for collection of a sum of money in the
Regional Trial Court of Manila, Branch 38.
The trial court ruled in favor of the petitioners, viz:

"WHEREFORE, judgment is hereby rendered in favor of the plaintiffs Vicente and

Inocencia Dino and against defendant Toy Master Manufacturing, Inc. ordering the latter
to pay the former:

1. The amount of Two Hundred Eight Thousand Four Hundred Four (P208,404.00) Pesos
with legal interest thereon from July 5, 1989, until fully paid; and

2. The amount of Twenty Thousand (P20,000.00) Pesos as attorney's fees and the costs
of this suit.

The counterclaim on the other hand is hereby dismissed for lack of merit." [10]
Respondent Sio sought recourse in the Court of Appeals. In its April 30, 1993
decision, the appellate court affirmed the trial court decision. Respondent then filed a
Motion for Reconsideration and a Supplemental Motion for Reconsideration alleging
therein that the petitioners' action for collection of sum of money based on a breach of
warranty had already prescribed. On January 24, 1994, the respondent court reversed its
decision and dismissed petitioners' Complaint for having been filed beyond the
prescriptive period. The amended decision read in part, viz:

"Even if there is failure to raise the affirmative defense of prescription in a motion to

dismiss or in an appropriate pleading (answer, amended or supplemental answer) and an
amendment would no longer be feasible, still prescription, if apparent on the face of the
complaint may be favorably considered (Spouses Matias B. Aznar, III, et al. vs. Hon.
Juanito A. Bernad, etc., supra, G.R. 81190, May 9, 1988). The rule in Gicano vs. Gegato
(supra) was reiterated in Severo v. Court of Appeals, (G.R. No. 84051, May 19, 1989).

WHEREFORE the Motion For Reconsideration is granted. The judgment of this Court is
set aside and judgment is hereby rendered REVERSING the judgment of the trial court
and dismissing plaintiff's complaint."[11]
Hence, this petition with the following assignment of errors:
I.

The respondent Court of Appeals seriously erred in dismissing the complaint of the
Petitioners on the ground that the action had prescribed.
II.

The respondent Court of Appeals seriously erred in holding that the defense of
prescription would still be considered despite the fact that it was not raised in the
answer, if apparent on the face of the complaint.
We first determine the nature of the action filed in the trial court to resolve the issue
of prescription. Petitioners claim that the Complaint they filed in the trial court on July 24,
1989 was one for the collection of a sum of money.Respondent contends that it was an
action for breach of warranty as the sum of money petitioners sought to collect was
actually a refund of the purchase price they paid for the alleged defective goods they
bought from the respondent.
We uphold the respondent's contention.
The following provisions of the New Civil Code are apropos:

"Art. 1467. A contract for the delivery at a certain price of an article which the vendor in
the ordinary course of his business manufactures or procures for the general market,
whether the same is on hand at the time or not, is a contract of sale, but if the goods are
to be manufactured specially for the customer and upon his special order, and not for the
general market, it is a contract for a piece of work."

"Art. 1713. By the contract for a piece of work the contractor binds himself to execute a
piece of work for the employer, in consideration of a certain price or compensation. The
contractor may either employ only his labor or skill, or also furnish the material."
As this Court ruled in Engineering & Machinery Corporation v. Court of Appeals,
et al.,[12] "a contract for a piece of work, labor and materials may be distinguished from a
contract of sale by the inquiry as to whether the thing transferred is one not in existence
and which would never have existed but for the order of the person desiring it. In such
case, the contract is one for a piece of work, not a sale. On the other hand, if the thing
subject of the contract would have existed and been the subject of a sale to some other
person even if the order had not been given then the contract is one of sale." [13] The
contract between the petitioners and respondent stipulated that respondent would
manufacture upon order of the petitioners 20,000 pieces of vinyl frogs and 20,000 pieces
of vinyl mooseheads according to the samples specified and approved by the
petitioners. Respondent Sio did not ordinarily manufacture these products, but only upon
order of the petitioners and at the price agreed upon.[14] Clearly, the contract executed by
and between the petitioners and the respondent was a contract for a piece of work. At
any rate, whether the agreement between the parties was one of a contract of sale or a
piece of work, the provisions on warranty of title against hidden defects in a contract of
sale apply to the case at bar, viz:

"Art. 1714. If the contractor agrees to produce the work from material furnished by him,
he shall deliver the thing produced to the employer and transfer dominion over the
thing. This contract shall be governed by the following articles as well as by the pertinent
provisions on warranty of title and against hidden defects and the payment of price in a
contract of sale."

"Art. 1561. The vendor shall be responsible for warranty against the hidden defects which
the thing sold may have, should they render it unfit for the use for which it is intended, or
should they diminish its fitness for such use to such an extent that, had the vendee been
aware thereof, he would not have acquired it or would have given a lower price for it; but
said vendor shall not be answerable for patent defects or those which may be visible, or
for those which are not visible if the vendee is an expert who, by reason of his trade or
profession, should have known them."
Petitioners aver that they discovered the defects in respondent's products when
customers in their (petitioners') shirt business came back to them complaining that the
frog and moosehead figures attached to the shirts they bought were torn. Petitioners
allege that they did not readily see these hidden defects upon their acceptance. A hidden
defect is one which is unknown or could not have been known to the
vendee.[15] Petitioners then returned to the respondent 29,772 defective pieces of vinyl
products and demanded a refund of their purchase price in the amount
of P208,404.00. Having failed to collect this amount, they filed an action for collection of
a sum of money.
Article 1567 provides for the remedies available to the vendee in case of hidden
defects, viz:

"Art. 1567. In the cases of Articles 1561, 1562, 1564, 1565 and 1566, the vendee may
elect between withdrawing from the contract and demanding a proportionate reduction of
the price, with damages in either case."
By returning the 29,772 pieces of vinyl products to respondent and asking for a return
of their purchase price, petitioners were in effect "withdrawing from the contract" as
provided in Art. 1567. The prescriptive period for this kind of action is provided in Art.
1571 of the New Civil Code, viz:

"Art. 1571. Actions arising from the provisions of the preceding ten articles shall be
barred after six months from the delivery of the thing sold." (Emphasis supplied)
 There is no dispute that respondent made the last delivery of the vinyl products to
petitioners on September 28, 1988. It is also settled that the action to recover the
purchase price of the goods petitioners returned to the respondent was filed on July 24,
1989,[16] more than nine months from the date of last delivery. Petitioners having filed the
action three months after the six-month period for filing actions for breach of warranty
against hidden defects stated in Art. 1571,[17] the appellate court dismissed the action.
Petitioners fault the ruling on the ground that it was too late in the day for respondent
to raise the defense of prescription. The law then applicable to the case at bar, Rule 9,
Sec. 2 of the Rules of Court, provides:

"Defenses and objections not pleaded either in a motion to dismiss or in the answer
are deemed waived; except the failure to state a cause of action . . . "
Thus, they claim that since the respondent failed to raise the defense of prescription in a
motion to dismiss or in its answer, it is deemed waived and cannot be raised for the first
time on appeal in a motion for reconsideration of the appellate court's decision.
As a rule, the defense of prescription cannot be raised for the first time on
appeal. Thus, we held in Ramos v. Osorio,[18] viz:

"It is settled law in this jurisdiction that the defense of prescription is waivable, and that if
it was not raised as a defense in the trial court, it cannot be considered on appeal, the
general rule being that the appellate court is not authorized to consider and resolve any
question not properly raised in the lower court (Subido vs. Lacson, 55 O.G. 8281, 8285;
Moran, Comments on the Rules of Court, Vol. I, p. 784, 1947 Edition)."
However, this is not a hard and fast rule. In Gicano v. Gegato,[19] we held:

". . .(T)rial courts have authority and discretion to dimiss an action on the ground of
prescription when the parties' pleadings or other facts on record show it to be indeed time-
barred; (Francisco v. Robles, Feb, 15, 1954; Sison v. McQuaid, 50 O.G. 97; Bambao v.
Lednicky, Jan. 28, 1961; Cordova v. Cordova, Jan. 14, 1958; Convets, Inc. v. NDC, Feb.
28, 1958; 32 SCRA 529; Sinaon v. Sorongan, 136 SCRA 408); and it may do so on the
basis of a motion to dismiss (Sec. 1,f, Rule 16, Rules of Court), or an answer which sets
up such ground as an affirmative defense (Sec. 5, Rule 16), or even if the ground is
alleged after judgment on the merits, as in a motion for reconsideration (Ferrer v.
Ericta, 84 SCRA 705); or even if the defense has not been asserted at all, as where
no statement thereof is found in the pleadings (Garcia v. Mathis, 100 SCRA 250;
PNB v. Pacific Commission House, 27 SCRA 766; Chua Lamco v. Dioso, et al., 97
Phil. 821); or where a defendant has been declared in default (PNB v. Perez, 16 SCRA
270). What is essential only, to repeat, is that the facts demonstrating the lapse of
the prescriptive period be otherwise sufficiently and satisfactorily apparent on the
record; either in the averments of the plaintiff's complaint, or otherwise established
by the evidence." (emphasis supplied)
In Aldovino, et al. v. Alunan, et al.,[20] the Court en banc reiterated the Garcia v.
Mathis doctrine cited in the Gicano case that when the plaintiff's own complaint shows
clearly that the action has prescribed, the action may be dismissed even if the defense of
prescription was not invoked by the defendant.
It is apparent in the records that respondent made the last delivery of vinyl products
to the petitioners on September 28, 1988. Petitioners admit this in their Memorandum
submitted to the trial court and reiterate it in their Petition for Review.[21] It is also apparent
in the Complaint that petitioners instituted their action on July 24, 1989. The issue for
resolution is whether or not the respondent Court of Appeals could dismiss the petitioners'
action if the defense of prescription was raised for the first time on appeal but is apparent
in the records.
Following the Gicano doctrine that allows dismissal of an action on the ground of
prescription even after judgment on the merits, or even if the defense was not raised at
all so long as the relevant dates are clear on the record, we rule that the action filed by
the petitioners has prescribed. The dates of delivery and institution of the action are
undisputed. There are no new issues of fact arising in connection with the question of
prescription, thus carving out the case at bar as an exception from the general rule that
prescription if not impleaded in the answer is deemed waived.[22]
Even if the defense of prescription was raised for the first time on appeal in
respondent's Supplemental Motion for Reconsideration of the appellate court's decision,
this does not militate against the due process right of the petitioners. On appeal, there
was no new issue of fact that arose in connection with the question of prescription, thus
it cannot be said that petitioners were not given the opportunity to present evidence in the
trial court to meet a factual issue. Equally important, petitioners had the opportunity to
oppose the defense of prescription in their Opposition to the Supplemental Motion for
Reconsideration filed in the appellate court and in their Petition for Review in this Court.
This Court's application of the Osorio and Gicano doctrines to the case at bar is
confirmed and now enshrined in Rule 9, Sec. 1 of the 1997 Rules of Civil Procedure, viz:

"Section 1. Defense and objections not pleaded. - Defenses and objections not pleaded
whether in a motion to dismiss or in the answer are deemed waived. However, when it
appears from the pleadings that the court has no jurisdiction over the subject matter, that
there is another action pending between the same parties for the same cause, or that the
action is barred by a prior judgment or by statute of limitations, the court shall dismiss
the claim." (Emphasis supplied)
WHEREFORE, the petition is DENIED and the impugned decision of the Court of
Appeals dated January 24, 1994 is AFFIRMED. No costs.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION

G.R. No. L-49401 July 30, 1982

RIZAL COMMERCIAL BANKING CORPORATION, petitioner,

vs.
HON. JOSE P. ARRO, Judge of the Court of First instance of Davao, and RESIDORO
CHUA, respondents.

Laurente C. Ilagan for petitioner.

Victor A. Clapano for respondents.

DE CASTRO, J.:

Petition for certiorari to annul the orders of respondent judge dated October 6, 1978 and
November 7, 1978 in Civil Case No. 11-154 of the Court of First Instance of Davao, which
granted the motion filed by private respondent to dismiss the complaint of petitioner for a
sum of money, on the ground that the complaint states no cause of action as against
private respondent.

After the petition had been filed, petitioner, on December 14, 1978 mailed a manifestation
and motion requesting the special civil action for certiorari be treated as a petition for
review. 1 Said manifestation and motion was noted in the resolution of January 10, 1979. 2

It appears that on October 19, 1976 Residoro Chua and Enrique Go, Sr. executed a
comprehensive surety agreements 3 to guaranty among others, any existing
indebtedness of Davao Agricultural Industries Corporation (referred to therein as
Borrower, and as Daicor in this decision), and/or induce the bank at any time or from time
to time thereafter, to make loans or advances or to extend credit in other manner to, or at
the request, or for the account of the Borrower, either with or without security, and/or to
purchase on discount, or to make any loans or advances evidenced or secured by any
notes, bills, receivables, drafts, acceptances, checks or other evidences of indebtedness
(all hereinafter called "instruments") upon which the Borrower is or may become liable,
provided that the liability shall not exceed at any one time the aggregate principal sum of
P100,000.00.

On April 29, 1977 a promissory note 4 in the amount of P100,000.00 was issued in favor
of petitioner payable on June 13, 1977. Said note was signed by Enrique Go, Sr. in his
personal capacity and in behalf of Daicor. The promissory note was not fully paid despite
repeated demands; hence, on June 30, 1978, petitioner filed a complaint for a sum of
money against Daicor, Enrique Go, Sr. and Residoro Chua. A motion to dismiss dated
September 23, 1978 was filed by respondent Residoro Chua on the ground that the
complaint states no cause of action as against him. 5 It was alleged in the motion that he
can not be held liable under the promissory note because it was only Enrique Go, Sr. who
signed the same in behalf of Daicor and in his own personal capacity.

In an opposition dated September 26, 1978 6 petitioner alleged that by virtue of the
execution of the comprehensive surety agreement, private respondent is liable because
said agreement covers not merely the promissory note subject of the complaint, but is
continuing; and it encompasses every other indebtedness the Borrower may, from time
to time incur with petitioner bank.

On October 6, 1978 respondent court rendered a decision granting private respondent's

motion to dismiss the complaint. 7 Petitioner filed a motion for reconsideration dated
October 12, 1978 and on November 7, 1978 respondent court issued an order denying
the said motion. 8

The sole issue resolved by respondent court was the interpretation of the comprehensive
surety agreement, particularly in reference to the indebtedness evidenced by the
promissory note involved in the instant case, said comprehensive surety agreement
having been signed by Enrique Go, Sr. and private respondent, binding themselves as
solidary debtors of said corporation not only to existing obligations but to future ones.
Respondent court said that corollary to that agreement must be another instrument
evidencing the obligation in a form of a promissory note or any other evidence of
indebtedness without which the said agreement serves no purpose; that since the
promissory notes, which is primarily the basis of the cause of action of petitioner, is not
signed by private respondent, the latter can not be liable thereon.

Contesting the aforecited decision and order of respondent judge, the present petition
was filed before this Court assigning the following as errors committed by respondent
court:

1. That the respondent court erred in dismissing the complaint against Chua
simply on the reasons that 'Chua is not a signatory to the promissory note"
of April 29, 1977, or that Chua could not be held liable on the note under
the provisions of the comprehensive surety agreement of October 29, 1976;
and/or

2. That the respondent court erred in interpreting the provisions of the

Comprehensive Surety Agreement towards the conclusion that respondent
Chua is not liable on the promissory note because said note is not
conformable to the Comprehensive Surety Agreement; and/or

3. That the respondent court erred in ordering that there is no cause of

action against respondent Chua in the petitioner's complaint.

The main issue involved in this case is whether private respondent is liable to pay the
obligation evidence by the promissory note dated April 29,1977 which he did not sign, in
the light of the provisions of the comprehensive surety agreement which petitioner and
private respondent had earlier executed on October 19, 1976.

We find for the petitioner. The comprehensive surety agreement was jointly executed by
Residoro Chua and Enrique Go, Sr., President and General Manager, respectively of
Daicor, on October 19, 1976 to cover existing as well as future obligations which Daicor
may incur with the petitioner bank, subject only to the proviso that their liability shall not
exceed at any one time the aggregate principal sum of P100,000.00. Thus, paragraph I
of the agreement provides:

For and in consideration of any existing indebtedness to you of Davao

Agricultural Industries Corporation with principal place of business and
postal address at 530 J. P. Cabaguio Ave., Davao City (hereinafter called
the "Borrower), and/or in order to induce, you in your discretion, at any time
or from time to time hereafter, to make loans or advances or to extend credit
in any other manner to, or at he request or for the account of the Borrower,
either with or without security, and/or to purchase or discount or to make
any loans or advances evidenced or secured by any notes, bills,
receivables, drafts, acceptances, checks or other instruments or evidences
of indebtedness (all hereinafter called "instruments") upon which the
Borrower is or may become liable as maker, endorser, acceptor, or
otherwise) the undersigned agrees to guarantee, and does hereby
guarantee in joint and several capacity, the punctual payment at maturity to
you of any and all such instruments, loans, advances, credits and/or other
obligations herein before referred to, and also any and all other
indebtedness of every kind which is now or may hereafter become due or
owing to you by the Borrower, together with any and all expenses which
may be incurred by you in collecting an such instruments or other
indebtedness or obligations hereinbefore referred to ..., provided, however,
that the liability of the undersigned shag not exceed at any one time the
aggregate principal sum of P100,000.00 ...

The agreement was executed obviously to induce petitioner to grant any application for a
loan Daicor may desire to obtain from petitioner bank. The guaranty is a continuing one
which shall remain in full force and effect until the bank is notified of its termination.

This is a continuing guaranty and shall remain in fun force and effect until
written notice shall have been received by you that it has been revoked by
the undersigned, ... 9

At the time the loan of P100,000.00 was obtained from petitioner by Daicor, for the
purpose of having an additional capital for buying and selling coco-shell charcoal and
importation of activated carbon, 10 the comprehensive surety agreement was admittedly
in full force and effect. The loan was, therefore, covered by the said agreement, and
private respondent, even if he did not sign the promisory note, is liable by virtue of the
surety agreement. The only condition that would make him liable thereunder is that the
Borrower "is or may become liable as maker, endorser, acceptor or otherwise". There is
no doubt that Daicor is liable on the promissory note evidencing the indebtedness.

The surety agreement which was earlier signed by Enrique Go, Sr. and private
respondent, is an accessory obligation, it being dependent upon a principal one which, in
this case is the loan obtained by Daicor as evidenced by a promissory note. What
obviously induced petitioner bank to grant the loan was the surety agreement whereby
Go and Chua bound themselves solidarily to guaranty the punctual payment of the loan
at maturity. By terms that are unequivocal, it can be clearly seen that the surety
agreement was executed to guarantee future debts which Daicor may incur with
petitioner, as is legally allowable under the Civil Code. Thus —

Article 2053. — A guaranty may also be given as security for future debts,
the amount of which is not yet known; there can be no claim against the
guarantor until the debt is liquidated. A conditional obligation may also be
secured.

In view of the foregoing, the decision (which should have been a mere "order"), dismissing
the complaint is reversed and set side. The case is remanded to the court of origin with
instructions to set aside the motion to dismiss, and to require defendant Residoro Chua
to answer the complaint after which the case shall proceed as provided by the Rules of
Court. No costs.

SO ORDERED.

THIRD DIVISION

G.R. No. 80078 May 18, 1993

ATOK FINANCE CORPORATION, petitioner,

vs.
COURT OF APPEALS, SANYU CHEMICAL CORPORATION, DANILO E. ARRIETA,
NENITA B. ARRIETA, PABLITO BERMUNDO and LEOPOLDO HALILI, respondents.

Syquia Law Offices for petitioner.

Batino, Angala, Allaga & Zara Law Offices for private respondents.

FELICIANO, J.:

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:

(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.

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 set-off or to enforce
such lien, or by any delay in so doing, and every right of set-off or lien shall continue in
full force and effect until such right of set-off of lien is specifically waived or released by
an instrument in writing executed by the Creditor.

(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 xxx2

(Emphases supplied)

On 27 November 1981, Sanyu Chemical assigned its trade receivables outstanding as of

27 November 1981 with a total face value of P125,871.00, to Atok Finance in
consideration of receipt from Atok Finance of the amount of P105,000.00. The assigned
receivables carried a standard term of thirty (30) days; it appeared, however, that the
standard commercial practice was to grant an extension up to one hundred twenty (120)
days without penalties. The relevant portions of this Deed of Assignment read as follows:

1. FOR VALUE RECEIVED, the ASSIGNOR does hereby SELL, TRANSFER and
ASSIGN all his/its rights, title and interest in the contracts, receivables, accounts, notes,
leases, deeds of sale with reservation of title, invoices, mortgages, checks, negotiable
instruments and evidences of indebtedness listed in the schedule forming part hereinafter
called "Contract" or "Contracts."

2. To induce the ASSIGNEE to purchase the above Contracts, the ASSIGNOR does
hereby certify, warrant and represent that :

(a). He/It is the sole owner of the assigned Contracts free and clear of claims of any
other party except the herein ASSIGNEE and has the right to transfer absolute title thereto
the ASSIGNEE;

(b). Each assigned Contract is bonafide and the amount owing and to become due on
each contract is correctly stated upon the schedule or other evidences of the Contract
delivered pursuant thereto;

(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 (semi-monthly) until November 1,
1982.

P110,550.00 balloon payment after 12 months.3 (Emphasis supplied)

Later, additional trade receivables were assigned by Sanyu Chemical to Atok Finance
with a total face value of P100,378.45.

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

(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 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."

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.

We turn, therefore, to a consideration of the first substantive issue addressed by the Court
of Appeals in rendering its Decision on the merits of the appeal: whether the individual
private respondents may be held solidarily liable with Sanyu Chemical under the
provisions of the Continuing Suretyship Agreement, or whether that Agreement must be
held null and void as having been executed without consideration and without a pre-
existing principal obligation to sustain it.

The Court of Appeals held on this first issue as follows:

It is the contention of private appellants that the suretyship agreement is null and void
because it is not in consonance with the laws on guaranty and security. The said
agreement was entered into by the parties two years before the Deed of Assignment was
executed. Thus, allegedly, it ran counter to the provision that guaranty cannot exist
independently because by nature it is merely an accessory contract. The law on guaranty
is applicable to surety to some extent Manila Surety and Fidelity Co. v. Baxter
Construction & Co., 53 O.G. 8836; and, Arran v. Manila Fidelity & Surety Co., 53 O.G.
7247.

We find merit in this contention.

Although obligations arising from contracts have the force of law between the contracting
parties, (Article 1159 of the Civil Code) this does not mean that the law is inferior to it; the
terms of the contract could not be 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.

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

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:
The surety agreement which was earlier signed by Enrique Go, Sr. and private
respondent, is an accessory obligation, it being dependent upon a principal one, which,
in this case is the loan obtained by Daicor as evidenced by a promissory note. What
obviously induced petitioner bank to grant the loan was the surety agreement whereby
Go and Chua bound themselves solidarily to guaranty the punctual payment of the loan
at maturity. By terms that are unequivocal, it can be clearly seen that the surety
agreement was executed to guarantee future debts which Daicor may incur with
petitioner, as is legally allowable under the Civil Code. Thus —

Article 2053. — A guarantee may also be given as security for future debts, the amount
of which is not yet known; there can be no claim against the guarantor until the debt is
liquidated. A conditional obligation may also be secured.13 (Emphasis supplied)

It is clear to us that the Rizal Commercial Banking Corporation and the NARIC cases
rejected the distinction which the Court of Appeals in the case at bar sought to make with
respect to Article 2053, that is, that the "future debts" referred to in that Article relate to
"debts already existing at the time of the constitution of the agreement but the amount [of
which] is unknown," and not to debts not yet incurred and existing at that time. Of course,
a surety is not bound under any particular principal obligation until that principal obligation
is born. But there is no theoretical or doctrinal difficulty inherent in saying that the
suretyship agreement itself is valid and binding even before the principal obligation
intended to be secured thereby is born, any more that there would be in saying that
obligations which are subject to a condition precedent are valid and binding before the
occurrence of the condition precedent.14

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..

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 other applicable laws. Any violation thereof shall render
the ASSIGNOR immediately and unconditionally liable to pay the ASSIGNEE jointly and
severally with the debtors under the assigned contracts, the amounts due thereon.

xxx xxx xxx

(Emphasis supplied)

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.

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

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.

DECISION
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. 83-21994, the dispositive portion of which reads:

WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the
defendants, by ordering the latter to pay, jointly and severally, the plaintiff the following
amounts:

1. The sum of P1,348,033.89, plus interest thereon at the rate of P922.53 per day starting
April 1, 1985 until the said principal amount is fully paid;

2. The amount of P50,000.00 as attorneys 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 latters 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 attorneys 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 courts 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 x x x;

x x x The defendants (referring to Rodrigueza and Chua) are not parties to the trust
receipts agreements since they are ONLY sureties x x x.[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, x x x x by which you may purchase or otherwise require from, and or enter into
with obligor x x x trust receipt x x x arising out of wholesale and/or retail transactions by
or with obligor, the undersigned x x x absolutely, unconditionally, and solidarily guarantee
to you x x x the full, faithful and prompt performance, payment and discharge of any and
all obligations x x x of obligor under and with respect to any and all such contracts and
any and all agreements (whether by way of guaranty or otherwise) of obligor with you x x
x now in force or hereafter made. (Underlinings 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 plaintiffs 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:

x x x In the case at bar, the surety undertakings in question unequivocally state that Chua
and Rodrigueza absolutely, unconditionally and solidarily guarantee to Filinvest the full,
faithful and prompt performance, payment and discharge of any and all obligations and
agreements of Fortune under or with respect to any and all such contracts and any and
all other agreements (whether by way of guaranty or otherwise) of the latter with Filinvest
in force at the time of the execution of the Surety Undertakings or made
thereafter. Indeed, if Chua and Rodrigueza did not intend to guarantee all of Fortunes
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
Fortunes 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 Fortunes 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 Fortunes 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 Courts 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] x x
x to the Creditor. Subsequently, Sanyu Chemical assigned its trade receivables
outstanding with a total face value of P125,871.00 to Atok Finance in consideration of
receipt of the amount of P105,000.00. Later, additional trade receivables with a total face
value of P100,378.45 were also assigned. Due to nonpayment upon maturity, Atok
Finance commenced action against Sanyu Chemical, the Arrieta spouses, Bermundo and
Halili to collect the sum of P120,240.00 plus penalty charges due and payable. The
individual private respondents contended that the continuing suretyship agreement, being
an accessory contract, was null and void since, at the time of its execution, Sanyu
Chemical had no pre-existing obligation due to Atok Finance. The trial court rendered a
decision in favor of Atok Finance and ordered defendants to pay, jointly and severally,
aforesaid amount to Atok.
On appeal, the then Intermediate Appellate Court reversed the trial court and
dismissed the complaint on the ground that there was no proof that when the suretyship
agreement was entered into, there was a pre-existing obligation which served as the
principal obligation between the parties. Furthermore, the future debts alluded to in Article
2053 refer to debts already existing at the time of the constitution of the agreement but
the amount thereof is unknown, unlike in the case at bar where the obligation was
acquired two years after the agreement.
We ruled then that the appellate court was in serious error. The distinction which said
court sought to make with respect to Article 2053 (that future debts referred to therein
relate to debts already existing at the time of the constitution of the agreement but the
amount [of which] is unknown and not to debts not yet incurred and existing at that time)
has previously been rejected, citing the RCBC and NARIC cases. We further said:

x x x Of course, a surety is not bound under any particular principal obligation until that
principal obligation is born. But there is no theoretical or doctrinal difficulty inherent in
saying that the suretyship agreement itself is valid and binding even before the principal
obligation intended to be secured thereby is born, any more than there would be in saying
that obligations which are subject to a condition precedent are valid and binding before
the occurrence of the condition precedent.

Comprehensive or continuing surety agreements are in fact quite commonplace in

present day financial and commercial practice. A bank or financing company which
anticipates entering into a series of credit transactions with a particular company,
commonly requires the projected principal debtor to execute a continuing surety
agreement along with its sureties. By executing such an agreement, the principal places
itself in a position to enter into the projected series of transactions with its creditor; with
such suretyship agreement, there would be no need to execute a separate surety contract
or bond for each financing or credit accommodation extended to the principal debtor.
In Dio vs. Court of Appeals,[19] 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; 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.

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.[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
with respect to any and all such contracts and any and all other agreements (whether by
way of guaranty or otherwise) of the latter with Filinvest and its affiliated and subsidiary
companies now in force or hereafter made.
Moreover, Petitioner Rodrigueza and Joseph Chua knew exactly where they stood at
the time they executed their respective surety undertakings in favor of Fortune. As stated
in the petition:

Before the execution of the new agreement, Edgar L. Rodrigueza and Joseph Chua were
required to sign blank surety agreements, without informing them how much amount they
would be liable as sureties. However, because of the desire of petitioners, Chua and
Rodrigueza to have the cars delivered to petitioner, Fortune, they signed the blank
promissory notes.[21] (underscoring 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 pre-existing 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 Fortunes
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 no qualifications, conditions or reservations stated
therein as to the extent of the suretyship. The Financing Agreement, on the other hand,
merely detailed the obligations of Fortune to CARCO (succeeded by Filinvest as
assignee). The allegation of novation by petitioners is, therefore, misplaced. There is no
incompatibility of obligations to speak of in the two contracts. They can stand together
without conflict.
Furthermore, the parties have not performed any explicit and unequivocal act to
manifest their agreement or intention to novate their contract. Neither did the sureties
object to the Financing Agreement nor try to avoid liability thereunder at the time of its
execution. As aptly discussed by the Court of Appeals:

x x x For another, if Chua and Rodrigueza truly believed that the surety undertakings they
executed should not cover Fortunes 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 Fortunes 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 Fortunes obligations in the aforementioned AWFA, trust receipts or demand
drafts.[26]

Third Issue: Amount of Claim Substantiated

The contest on the correct amount of the liability of petitioners is a purely factual
issue. It is an oft repeated maxim that the jurisdiction of this Court in cases brought before
it from the Court of Appeals under Rule 45 of the Rules of Court is limited to reviewing or
revising errors of law. It is not the function of this Court to analyze or weigh evidence all
over again unless there is a showing that the findings of the lower court are totally devoid
of support or are glaringly erroneous as to constitute serious abuse of discretion. Factual
findings of the Court of Appeals are conclusive on the parties and carry 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.
Melo, and Francisco, JJ., concur.
Narvasa, C.J. (Chairman), took no part due to personal relationship to party.
Davide, Jr., took no part due to close relationship of a party.