Republic of the Philippines rate from the date of the filing of the complaint, a further sum of
SUPREME COURT P400 as attorney's fees, and costs."
Manila
EN BANC
G.R. No. L-26767 February 22, 1968
ANG TIONG, plaintiff-appellee,
vs.
LORENZO TING, doing business under the name and style of
PRUNES PRESERVED MFG., and FELIPE ANG, defendants.
FELIPE ANG, defendant-appellant.
Chipeco & Alcaraz, Jr. for plaintiff-appellee.
Ang, Atienza & Tabora for defendant-appellant.
CASTRO, J.:
On August 15, 1960 Lorenzo Ting issued Philippine Bank
of Communications check K-81618, for the sum of P4,000,
payable to "cash or bearer". With Felipe Ang's signature
(indorsement in blank) at the back thereof, the instrument was
received by the plaintiff Ang Tiong who thereafter presented it to
the drawee bank for payment. The bank dishonored it. The
plaintiff then made written demands on both Lorenzo Ting and
Felipe Ang that they make good the amount represented by the
check. These demands went unheeded; so he filed in the
municipal court of Manila an action for collection of the sum of
P4,000, plus P500 attorney's fees. On March 6, 1962 the
municipal court adjudged for the plaintiff against the two
defendants.
Only Felipe Ang appealed to the Court of First Instance of
Manila (civil case 50018), which rendered judgment on July 31,
1962, amended by an order dated August 9, 1962, directing him
to pay to the plaintiff "the sum of P4,000, with interest at the legal
Felipe Ang then elevated the case to the Court of Appeals,
which certified it to this Court because the issues raised are
purely of law.
The appellant imputes to the court a quo three errors,
namely, (1) that it refused to apply article 2071 of the new Civil
Code to the case at bar; (2) that it adjudged him a general
indorser under the Negotiable Instruments Law (Act 2031); and
(3) that it held that he "cannot obtain his release from the contract
of suretyship or obtain security to protect himself against any
proceedings on the part of the creditor and against the danger of
insolvency of the principal debtor," because he is "jointly and
severally liable on the instrument."
This, appeal is absolutely without merit.
1. The genuineness and due execution of the instrument
are not controverted. That the appellee is a holder thereof for
value is admitted.
Having arisen from a bank check which is indisputably a
negotiable instrument, the present case is, therefore, in so far as
the indorsee is concerned vis-a-vis the indorser, governed solely
plaintiff the Negotiable Instruments Law (see secs. 1 and 185).
Article 2071 of the new Civil Code, invoked by the appellant, the
pertinent portion of which states, "The guarantor, even before
been paid, may proceed against the principal debtor; (1) when he
is sued for the payment; . . . the action of the guarantor is to
obtain release from the guaranty, to demand a security that shall
protect him from any proceedings by the creditor . . .," is here
completely irrelevant and can have no application whatsoever.
We are in agreement with the trial judge that nothing in the
check in question indicates that the appellant is not a general
indorser within the purview of section 63 of the Negotiable
Instruments Law which makes "a person placing his signature
upon an instrument otherwise than as maker, drawer or acceptor"
a general indorser, — "unless he clearly indicates plaintiff
appropriate words his intention to be bound in some other
capacity," which he did not do. And section 66 ordains that "every
indorser who indorses without qualification, warrants to all
subsequent holders in due course" (a) that the instrument is
genuine and in all respects what it purports to be; (b) that he has
a good title to it; (c) that all prior parties have capacity to contract;
and (d) that the instrument is at the time of his indorsement valid
and subsisting. In addition, "he engages that on due presentment,
it shall be accepted or paid, or both, as the case may be, and that
if it be dishonored, he will pay the amount thereof to the holder." 1
diminish nor defeat the rights of the latter who is a holder for
value. The liability of the appellant remains primary and
unconditional. To sanction the appellant's theory is to give
unwarranted legal recognition to the patent absurdity of a
situation where an indorser, when sued on an instrument by a
holder in due course and for value, can escape liability on his
indorsement by the convenient expedient of interposing the
defense that he is a mere accomodation indorser.
ACCORDINGLY, the judgment a quo is affirmed in toto, at
appellant's cost.
Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Bengzon,
J.P., Zaldivar, Sanchez, Angeles and Fernando, JJ., concur.

2. Even on the assumption that the appellant is a mere

accommodation party, as he professes to be, he is nevertheless,
by the clear mandate of section 29 of the Negotiable Instruments
Law, yet "liable on the instrument to a holder for value,
notwithstanding that such holder at the time of taking the
instrument knew him to be only an accommodation party." To
paraphrase, the accommodation party is liable to a holder for
value as if the contract was not for accommodation. It is not a
valid defense that the accommodation party did not receive any
valuable consideration when he executed the instrument. Nor is it
correct to say that the holder for value is not a holder in due
course merely because at the time he acquired the instrument, he
knew that the indorser was only an accommodation party. 2

3. That the appellant, again assuming him to be an

accommodation indorser, may obtain security from the maker to
protect himself against the danger of insolvency of the latter,
cannot in any manner affect his liability to the appellee, as the
said remedy is a matter of concern exclusively between
accommodation indorser and accommodated party. So that the
fact that the appellant stands only as a surety in relation to the
maker, granting this to be true for the sake of argument, is
immaterial to the claim of the appellee, and does not a whit
 Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. L-56169 June 26, 1992
TRAVEL-ON, INC., petitioner,
vs.
COURT OF APPEALS and ARTURO S.
MIRANDA, respondents.
RESOLUTION
FELICIANO, J.:
Petitioner Travel-On. Inc. ("Travel-On") is a travel agency selling
airline tickets on commission basis for and in behalf of different
airline companies. Private respondent Arturo S. Miranda had a
revolving credit line with petitioner. He procured tickets from
petitioner on behalf of airline passengers and derived
commissions therefrom.
On 14 June 1972, Travel-On filed suit before the Court of First
Instance ("CFI") of Manila to collect on six (6) checks issued by
private respondent with a total face amount of P115,000.00. The
complaint, with a prayer for the issuance of a writ of preliminary
attachment and attorney's fees, averred that from 5 August 1969
to 16 January 1970, petitioner sold and delivered various airline
tickets to respondent at a total price of P278,201.57; that to settle
said account, private respondent paid various amounts in cash
and in kind, and thereafter issued six (6) postdated checks
amounting to P115,000.00 which were all dishonored by the
drawee banks. Travel-On further alleged that in March 1972,
private respondent made another payment of P10,000.00
reducing his indebtedness to P105,000.00. The writ of attachment
was granted by the court a quo.
In his answer, private respondent admitted having had
transactions with Travel-On during the period stipulated in the
complaint. Private respondent, however, claimed that he had
already fully paid and even overpaid his obligations and that
refunds were in fact due to him. He argued that he had issued the
postdated checks for purposes of accommodation, as he had in
the past accorded similar favors to petitioner. During the
proceedings, private respondent contested several tickets alleged
to have been erroneously debited to his account. He claimed
reimbursement of his alleged over payments, plus litigation
expenses, and exemplary and moral damages by reason of the
allegedly improper attachment of his properties.
In support of his theory that the checks were issued for
accommodation, private respondent testified that he bad issued
the checks in the name of Travel-On in order that its General
Manager, Elita Montilla, could show to Travel-On's Board of
Directors that the accounts receivable of the company were still
good. He further stated that Elita Montilla tried to encash the
same, but that these were dishonored and were subsequently
returned to him after the accommodation purpose had been
attained.
Travel-On's witness, Elita Montilla, on the other hand explained
that the "accommodation" extended to Travel-On by private
respondent related to situations where one or more of its
passengers needed money in Hongkong, and upon request of
Travel-On respondent would contact his friends in Hongkong to
advance Hongkong money to the passenger. The passenger then
paid Travel-On upon his return to Manila and which payment
would be credited by Travel-On to respondent's running account
with it.
In its decision dated 31 January 1975, the court a quo ordered
Travel-On to pay private respondent the amount of P8,894.91
representing net overpayments by private respondent, moral
damages of P10,000.00 for the wrongful issuance of the writ of
attachment and for the filing of this case, P5,000.00 for attorney's
fees and the costs of the suit.
The trial court ruled that private respondent's indebtedness to
petitioner was not satisfactorily established and that the
postdated checks were issued not for the purpose of encashment
to pay his indebtedness but to accommodate the General
Manager of Travel-On to enable her to show to the Board of
Directors that Travel-On was financially stable.
Petitioner filed a motion for reconsideration that was, however,
denied by the trial court, which in fact then increased the award of
moral damages to P50,000.00.
On appeal, the Court of Appeals affirmed the decision of the trial
court, but reduced the award of moral damages to P20,000.00,
with interest at the legal rate from the date of the filing of the
Answer on 28 August 1972.
Petitioner moved for reconsideration of the Court of Appeal's'
decision, without success.
In the instant Petition for Review, it is urged that the postdated
checks are per se evidence of liability on the part of private
respondent. Petitioner further argues that even assuming that the
checks were for accommodation, private respondent is still liable
thereunder considering that petitioner is a holder for value.
Both the trial and appellate courts had rejected the checks as
evidence of indebtedness on the ground that the various
statements of account prepared by petitioner did not show that
Private respondent had an outstanding balance of P115,000.00
which is the total amount of the checks he issued. It was pointed
out that while the various exhibits of petitioner showed various
accountabilities of private respondent, they did not satisfactorily
establish the amount of the outstanding indebtedness of private
respondent. The appellate court made much of the fact that the
figures representing private respondent's unpaid accounts found
in the "Schedule of Outstanding Account" dated 31 January 1970
did not tally with the figures found in the statement which showed
private respondent's transactions with petitioner for the years
1969 and 1970; that there was no satisfactory explanation as to
why the total outstanding amount of P278,432.74 was still used
as basis in the accounting of 7 April 1972 considering that
according to the table of transactions for the year 1969 and 1970,
the total unpaid account of private respondent amounted
to P239,794.57.
We have, however, examined the record and it shows that the 7
April 1972 Statement of Account had simply not been updated;
that if we use as basis the figure as of 31 January 1970 which is
P278,432.74 and from it deduct P38,638.17 which represents
some of the payments subsequently made by private respondent,
the figure — P239,794.57 will be obtained.
Also, the fact alone that the various statements of account had
variances in figures, simply did not mean that private respondent
had no more financial obligations to petitioner. It must be stressed
that private respondent's account with petitioner was
a running or open one, which explains the varying figures in each
of the statements rendered as of a given date.
The appellate court erred in considering only the statements of
account in determining whether private respondent was indebted
to petitioner under the checks. By doing so, it failed to give due
importance to the most telling piece of evidence of private
respondent's indebtedness — the checks themselves which he
had issued.
Contrary to the view held by the Court of Appeals, this Court finds
that the checks are the all important evidence of petitioner's case;
that these checks clearly established private respondent's
indebtedness to petitioner; that private respondent was liable
thereunder.
It is important to stress that a check which is regular on its face is
deemed prima facie to have been issued for a valuable
consideration and every person whose signature appears thereon
is deemed to have become a party thereto for value. 1 Thus, the
mere introduction of the instrument sued on in evidence prima
facie entitles the plaintiff to recovery. Further, the rule is quite
settled that a negotiable instrument is presumed to have been
given or indorsed for a sufficient consideration unless otherwise
contradicted and overcome by other competent evidence. 2
In the case at bar, the Court of Appeals, contrary to these
established rules, placed the burden of proving the existence of
valuable consideration upon petitioner. This cannot be
countenanced; it was up to private respondent to show that he
had indeed issued the checks without sufficient consideration.
The Court considers that Private respondent was unable to rebut
satisfactorily this legal presumption. It must also be noted that
those checks were issued immediately after a letter demanding
payment had been sent to private respondent by petitioner
Travel-On.
The fact that all the checks issued by private respondent to
petitioner were presented for payment by the latter would lead to
no other conclusion than that these checks were intended for
encashment. There is nothing in the checks themselves (or in any
other document for that matter) that states otherwise.
We are unable to accept the Court of Appeals' conclusion that the
checks here involved were issued for "accommodation" and that
accordingly private respondent maker of those checks was not
liable thereon to petitioner payee of those checks.
In the first place, while the Negotiable Instruments Law does refer
to accommodation transactions, no such transaction was here
shown. Section 29 of the Negotiable Instruments Law provides as
follows:
Sec. 29. Liability of accommodation party. — An
accommodation party is one who has signed the
instrument as maker, drawer, acceptor, or
indorser, without receiving value therefor, and for
the purpose of lending his name to some other
person. Such a person is liable on the instrument
to a holder for value, notwithstanding such holder,
at the time of taking the instrument, knew him to
be only an accommodation party.
In accommodation transactions recognized by the
Negotiable Instruments Law, an accommodating party
lends his credit to the accommodated party, by issuing or
indorsing a check which is held by a payee or indorsee as
a holder in due course, who gave full value therefor to the
accommodated party. The latter, in other words, receives
or realizes full value which the accommodated party then
must repay to the accommodating party, unless of course
the accommodating party intended to make a donation to
the accommodated party. But the accommodating party is
bound on the check to the holder in due course who is
necessarily a third party and is not the accommodated
party. Having issued or indorsed the check, the
accommodating party has warranted to the holder in due
course that he will pay the same according to its tenor. 3
In the case at bar, Travel-On was payee of all six (6) checks, it
presented these checks for payment at the drawee bank but the
checks bounced. Travel-On obviously was not an accommodated
party; it realized no value on the checks which bounced.
Travel-On was entitled to the benefit of the statutory presumption
that it was a holder in due course, 4 that the checks were
supported by valuable consideration. 5 Private respondent maker
of the checks did not successfully rebut these presumptions. The
only evidence aliunde that private respondent offered was his
own self-serving uncorroborated testimony. He claimed that he
had issued the checks to Travel-On as payee to "accommodate"
its General Manager who allegedly wished to show those checks
to the Board of Directors of Travel-On to "prove" that Travel-On's
account receivables were somehow "still good." It will be seen
that this claim was in fact a claim that the checks were merely
simulated, that private respondent did not intend to bind himself
thereon. Only evidence of the clearest and most convincing kind
will suffice for that purpose; 6 no such evidence was submitted by
private respondent. The latter's explanation was denied by
Travel-On's General Manager; that explanation, in any case,
appears merely contrived and quite hollow to us. Upon the other
hand, the "accommodation" or assistance extended to Travel-
On's passengers abroad as testified by petitioner's General
Manager involved, not the accommodation transactions
recognized by the NIL, but rather the circumvention of then
existing foreign exchange regulations by passengers booked by
Travel-On, which incidentally involved receipt of full consideration
by private respondent.
on the part of Travel-On. If anyone was in bad faith, it was private
respondent who issued bad checks and then pretended to have
"accommodated" petitioner's General Manager by assisting her in
a supposed scheme to deceive petitioner's Board of Directors and
to misrepresent Travel-On's financial condition.
ACCORDINGLY, the Court Resolved to GRANT due course to
the Petition for Review on Certiorari and to REVERSE and SET
ASIDE the Decision dated 22 October 1980 and the Resolution of
23 January 1981 of the Court of Appeals, as well as the Decision
dated 31 January 1975 of the trial court, and to enter a new
decision requiring private respondent Arturo S. Miranda to pay to
petitioner Travel-On the amount of P105,000.00 with legal
interest thereon from 14 June 1972, plus ten percent (10%) of the
total amount due as attorney's fees. Costs against Private
respondent.
Gutierrez, Jr., Bidin, Davide, Jr. and Romero, JJ., concur.

Thus, we believe and so hold that private respondent must be

held liable on the six (6) checks here involved. Those checks in
themselves constituted evidence of indebtedness of private
respondent, evidence not successfully overturned or rebutted by
private respondent.

Since the checks constitute the best evidence of private

respondent's liability to petitioner Travel-On, the amount of such
liability is the face amount of the checks, reduced only by the
P10,000.00 which Travel-On admitted in its complaint to have
been paid by private respondent sometime in March 1992.

The award of moral damages to Private respondent must be set

aside, for the reason that Petitioner's application for the writ of
attachment rested on sufficient basis and no bad faith was shown
G.R. No. 117660 December 18, 2000
AGRO CONGLOMERATES, INC. and MARIO
SORIANO, petitioners,
vs.
THE HON. COURT OF APPEALS and REGENT SAVINGS and
LOAN BANK, INC., respondents.
DECISION
QUISUMBING, J.:
This is a petition for review challenging the decision1 dated
October 17, 1994 of the Court of Appeals in CA-G.R. No. 32933,
which affirmed in toto the judgment of the Manila Regional Trial
Court, Branch 27, in consolidated Cases Nos. 86-37374, 86-
37388, 86-37543.
This petition springs from three complaints for sums of money
filed by respondent bank against herein petitioners. In the
decision of the Court of Appeals, petitioners were ordered to pay
respondent bank, as follows:
Wherefore, judgment is hereby rendered in favor of plaintiff and
against defendants, as follows:
1) In Civil Case No. 86-37374, defendants [petitioners,
herein] are ordered jointly and severally, to pay to plaintiff
the amount of P78,212.29, together with interest and
service charge thereon, at the rates of 14% and 3% per
annum, respectively, computed from November 10, 1982,
until fully paid, plus stipulated penalty on unpaid principal
at the rate of 6% per annum, computed from November
10, 1982, plus 15% as liquidated damage plus 10% of the
total amount due, as attorney’s fees, plus costs;
2) In Civil Case No. 86-37388, defendant is ordered to
pay plaintiff the amount of P632,911.39, together with
interest and service charge thereon at the rate of 14%
and 3% per annum, respectively, computed from January
15, 1983, until fully paid, plus stipulated penalty on unpaid
principal at the rate of 6% per annum, computed from
January 15, 1983, plus liquidated damages equivalent to
15% of the total amount due, plus attorney’s fees
equivalent to 10% of the total amount due, plus costs; and
3) In Civil Case No. 86-37543, defendant is ordered to
pay plaintiff, on the first cause of action, the amount of
P510,000.00, together with interest and service charge
thereon, at the rates of 14% and 2% per annum,
respectively, computed from March 13, 1983, until fully
paid, plus a penalty of 6% per annum, based on the
outstanding principal of the loan, computed from March
13, 1983, until fully paid; and on the second cause of
action, the amount of P494,936.71, together with interest
and service charge thereon at the rates of 14% and
2%, per annum, respectively, computed from March 30,
1983, until fully paid, plus a penalty charge of 6% per
annum, based on the unpaid principal, computed from
March 30, 1983, until fully paid, plus (on both causes of
action) an amount equal to 15% of the total amounts due,
as liquidated damages, plus attorney’s fees equal to 10%
of the total amounts due, plus costs.2
Based on the records, the following are the factual antecedents.
On July 17, 1982, petitioner Agro Conglomerates, Inc. as vendor,
sold two parcels of land to Wonderland Food Industries, Inc. In
their Memorandum of Agreement,3 the parties covenanted that the
purchase price of Five Million (P5,000,000.00) Pesos would be
settled by the vendee, under the following terms and conditions:
(1) One Million (P1,000,000.00) Pesos shall be paid in cash upon
the signing of the agreement; (2) Two Million (P2,000,000.00)
Pesos worth of common shares of stock of the Wonderland Food
Industries, Inc.; and (3) The balance of P2,000,000.00 shall be
paid in four equal installments, the first installment falling due,
180 days after the signing of the agreement and every six months
thereafter, with an interest rate of 18% per annum, to be
advanced by the vendee upon the signing of the agreement.
On July 19, 1982, the vendor, the vendee, and the respondent
bank Regent Savings & Loan Bank (formerly Summa Savings &
Loan Association), executed an Addendum4 to the previous
Memorandum of Agreement. The new arrangement pertained to
the revision of settlement of the initial payments of P1,000,000.00
and prepaid interest of P360,000.00 (18% of P2,000,000.00) as
follows:
Whereas, the parties have agreed to qualify the stipulated terms
for the payment of the said ONE MILLION THREE HUNDRED
SIXTY THOUSAND (P1,360,000.00) PESOS.
WHEREFORE, in consideration of the mutual covenant and
agreement of the parties, they do further covenant and agree as
follows:
1. That the VENDEE instead of paying the amount of
ONE MILLION THREE HUNDRED SIXTY THOUSAND
(P1,360,000.00) PESOS in cash, hereby authorizes the
VENDOR to obtain a loan from Summa Savings and Loan
Association with office address at Valenzuela, Metro
Manila, being represented herein by its President, Mr.
Jaime Cariño and referred to hereafter as Financier; in the
amount of ONE MILLION THREE HUNDRED SIXTY
THOUSAND (P1,360,000.00)PESOS, plus interest
thereon at such rate as the VENDEE and the Financier
may agree, which amount shall cover the ONE MILLION
(P1,000,000.00) PESOS cash which was agreed to be
paid upon signing of the Memorandum of Agreement, plus
18% interest on the balance of two million pesos
stipulated upon in Item No. 1(c) of the said agreement;
provided however, that said loan shall be made for and in
the name of the VENDOR.
2. The VENDEE also agrees that the full amount of ONE
MILLION THREE HUNDRED SIXTY THOUSAND
(P1,360,000.00) PESOS be paid directly to the VENDOR;
however, the VENDEE hereby undertakes to pay the full
amount of the said loan to the Financier on such terms
and conditions agreed upon by the Financier and the
VENDOR, it being understood that while the loan will be
secured from and in the name of the VENDOR, the
VENDEE will be the one liable to pay the entire proceeds
thereof including interest and other charges.5
This addendum was not notarized.
Consequently, petitioner Mario Soriano signed as maker several
promissory notes,6 payable to the respondent bank. Thereafter,
the bank released the proceeds of the loan to petitioners.
However, petitioners failed to meet their obligations as they fell
due. During that time, the bank was experiencing financial turmoil
and was under the supervision of the Central Bank. Central Bank
examiner and liquidator Cordula de Jesus, endorsed the subject
promissory notes to the bank’s counsel for collection. The bank
gave petitioners opportunity to settle their account by extending
payment due dates. Mario Soriano manifested his intention to re-
structure the loan, yet did not show up nor submit his formal
written request.
Respondent bank filed three separate complaints before the
Regional Trial Court of Manila for Collection of Sums of money.
The corresponding case histories are illustrated in the table
below:
 The evidences, however, disclose that Wonderland did not
Date Amount Paymen Payment comply with its obligation under said ‘Addendum’ (Exh. ‘S’) as the
of t Extensio agreement to turn over the farmland to it, did not materialize (57
Loan Due n tsn, May 29, 1990), and there was, actually no sale of the land
Date Dates (58 tsn, ibid). Hence, Wonderland is not answerable. And since
the loans obtained under the four promissory notes (Exhs. ‘A’, ‘C’,
‘G’, and ‘E’) have not been paid, despite opportunities given by
Civil P Nov. 10, Feb. 8, plaintiff to defendants to make payments, it stands to reason that
Case 86- 78,212.29 1982 1983 defendants are liable to pay their obligations thereunder to
37374 May 9, plaintiff. In fact, defendants failed to file a third-party complaint
August 1983 against Wonderland, which shows the weakness of its stand that
12, 1982 Aug. 7, Wonderland is answerable to make said payments.7
1983
Petitioners appealed to the Court of Appeals. The trial court’s
Civil P Jan. 15, May 16, decision was affirmed by the appellate court.
Case 86- 632,911.3 1983 1983
37388 9 Aug. 14, Hence, this recourse, wherein petitioners raise the sole issue of:
July 19, 1983
1982 WHETHER THE COURT OF APPEALS ERRED IN NOT
FINDING THAT THE ADDENDUM, SIGNED BY THE
PETITIONERS, RESPONDENT BANK AND WONDERLAND
Civil P March June 11, INC., CONSTITUTES A NOVATION OF THE CONTRACT BY
Case 86- 510,000.0 13, 1983 SUBSTITUTION OF DEBTOR, WHICH EXEMPTS THE
37543 0 1983 Sept. 9, PETITIONERS FROM ANY LIABILITY OVER THE
Septemb P March 1983 PROMISSORY NOTES.
er 14, 494,936.7 30, June 28,
1982 1 1983 1983 Revealed by the facts on record, the conflict among the parties
October Sept. 26, started from a contract of sale of a farmland between petitioners
1, 1982 1983 and Wonderland Food Industries, Inc. As found by the trial court,
no such sale materialized.

In their answer, petitioners interposed the defense of novation
and insisted there was a valid substitution of debtor. They alleged
that the addendum specifically states that although the
promissory notes were in their names, Wonderland shall be
responsible for the payment thereof.
The trial court held that petitioners are liable, to wit:
A contract of sale is a reciprocal transaction. The obligation or
promise of each party is the cause or consideration for the
obligation or promise by the other. The vendee is obliged to pay
the price, while the vendor must deliver actual possession of the
land. In the instant case the original plan was that the initial
payments would be paid in cash. Subsequently, the parties (with
the participation of respondent bank) executed an addendum
providing instead, that the petitioners would secure a loan in the
name of Agro Conglomerates Inc. for the total amount of the
initial payments, while the settlement of said loan would be
assumed by Wonderland. Thereafter, petitioner Soriano signed
several promissory notes and received the proceeds in behalf of
petitioner-company.
By this time, we note a subsidiary contract of suretyship had
taken effect since petitioners signed the promissory notes as
maker and accommodation party for the benefit of Wonderland.
Petitioners became liable as accommodation party. An
accommodation party is a person who has signed the instrument
as maker, acceptor, or indorser, without receiving value therefor,
and for the purpose of lending his name to some other person
and is liable on the instrument to a holder for value,
notwithstanding such holder at the time of taking the instrument
knew (the signatory) to be an accommodation party.8 He has the
right, after paying the holder, to obtain reimbursement from the
party accommodated, since the relation between them has in
effect become one of principal and surety, the accommodation
party being the surety.9 Suretyship is defined as the relation which
exists where one person has undertaken an obligation and
another person is also under the obligation or other duty to the
obligee, who is entitled to but one performance, and as between
the two who are bound, one rather than the other should
perform.10 The surety’s liability to the creditor or promisee of the
principal is said to be direct, primary and absolute; in other words,
he is directly and equally bound with the principal.11 And the
creditor may proceed against any one of the solidary debtors.12
We do not give credence to petitioners’ assertion that, as
provided by the addendum, their obligation to pay the promissory
notes was novated by "substitution" of a new debtor, Wonderland.
Contrary to petitioners’ contention, the attendant facts herein do
not make a case of novation.
Novation is the extinguishment of an obligation by the substitution
or change of the obligation by a subsequent one which
extinguishes or modifies the first, either by changing the object or
principal conditions, or by substituting another in place of the
debtor, or by subrogating a third person in the rights of the
creditor.13 In order that a novation can take place, the concurrence
of the following requisites14 are indispensable:
1) There must be a previous valid obligation;
2) There must be an agreement of the parties concerned
to a new contract;
3) There must be the extinguishment of the old contract;
and
4) There must be the validity of the new contract.
In the instant case, the first requisite for a valid novation is
lacking. There was no novation by "substitution" of debtor
because there was no prior obligation which was substituted by a
new contract. It will be noted that the promissory notes, which
bound the petitioners to pay, were executed after the addendum.
The addendum modified the contract of sale, not the stipulations
in the promissory notes which pertain to the surety contract. At
this instance, Wonderland apparently assured the payment of
future debts to be incurred by the petitioners. Consequently, only
a contract of surety arose. It was wrong for petitioners to presume
a novation had taken place. The well-settled rule is that novation
is never presumed,15 it must be clearly and unequivocally shown.16
As it turned out, the contract of surety between Wonderland and
the petitioners was extinguished by the rescission of the contract
of sale of the farmland. With the rescission, there was confusion
or merger in the persons of the principal obligor and the surety,
namely the petitioners herein. The addendum which was
dependent thereon likewise lost its efficacy.
It is true that the basic and fundamental rule in the interpretation SO ORDERED.
of contract is that, if the terms thereof are clear and leave no
doubt as to the intention of the contracting parties, the literal
meaning shall control. However, in order to judge the intention of
the parties, their contemporaneous and subsequent acts should 1äw phï1.ñët

be considered.17

The contract of sale between Wonderland and petitioners did not

materialize. But it was admitted that petitioners received the
proceeds of the promissory notes obtained from respondent
bank.

Sec. 22 of the Civil Code provides:

Every person who through an act of performance by another, or

any other means, acquires or comes into possession of
something at the expense of the latter without just or legal
ground, shall return the same to him.

Petitioners had no legal or just ground to retain the proceeds of

the loan at the expense of private respondent. Neither could
petitioners excuse themselves and hold Wonderland still liable to
pay the loan upon the rescission of their sales contract. If
petitioners sustained damages as a result of the rescission, they
should have impleaded Wonderland and asked damages. The
non-inclusion of a necessary party does not prevent the court
from proceeding in the action, and the judgment rendered therein
shall be without prejudice to the rights of such necessary
party.18 But respondent appellate court did not err in holding that
petitioners are duty-bound under the law to pay the claims of
respondent bank from whom they had obtained the loan
proceeds.

WHEREFORE, the petition is DENIED for lack of merit. The

assailed decision of the Court of Appeals dated October 17, 1994
is AFFIRMED. Costs against petitioners.