International Finance vs Imperial Textile Date: November 15, 2005 Petitioner: International Finance Corporation Respondent: Imperial Textile

Mills Inc Ponente: Panganiban Facts: - On December 17, 1974, IFC and Philippine Polyamide Industrial Corporation entered into a loan agreement wherein IFC extended to PPIC a loan of US$7,000,000 payable in sixteen (16) semi-annual installments of US$437,500.00 each, with 10% interest. The interest shall be paid in US dollars semi-annually. A Guarantee Agreement was executed with ITM, Grand Textile Manufacturing Corporation and IFC as parties. ITM and Grandtex agreed to guarantee PPICs obligations under the loan agreement. PPIC defaulted payments. By virtue of PPICs failure to pay, IFC, together with DBP, applied for the extrajudicial foreclosure of mortgages on the real estate, buildings, machinery, equipment plant and all improvements owned by PPIC. During the public sale, IFCs bid was for P99,269,100 which was equivalent to US$5,250,000. The outstanding loan, however, amounted to US$8,083,967, thus leaving a balance of US$2,833,967 PPIC failed to pay the remaining balance. Consequently, IFC demanded ITM and Grandtex, as guarantors of PPIC, to pay the outstanding balance. However, the two failed to pay. - IFC filed a complaint against PPIC and ITM for the payment of the outstanding balance plus interests and attorneys fees. The trial court dismissed the complaint against ITM. The CA reversed and held that ITM bound itself under the Guarantee Agreement. The CA, however, held that ITMs liability as a guarantor would arise only if and when PPIC could not pay. Since PPICs inability to comply with its obligation was not sufficiently established, ITM could not immediately be made to assume the liability. Issue: WON ITM and Grandtex are sureties and therefore, jointly and severally liable with PPIC, for the payment of the loan. Held: Yes Ratio: - IFC claims that, under the Guarantee Agreement, ITM bound itself as a surety to PPICs obligations proceeding from the Loan Agreement. For its part, ITM asserts that, by the terms of the Guarantee Agreement, it was merely a guarantor and not a surety. Moreover, any ambiguity in the Agreement should be construed against IFC -- the party that drafted it. - The Agreement uses guarantee and guarantors, prompting ITM to base its argument on those words. This Court is not convinced that the use of the two words limits the Contract to a mere guaranty. The specific stipulations in the Contract show otherwise. While referring to ITM as a guarantor, the Agreement specifically stated that the corporation was jointly and severally liable. To put emphasis on the nature of that liability, the Contract further stated that ITM was a primary obligor, not a mere surety. Those stipulations meant only one thing: that at bottom, and to all legal intents and purposes, it was a surety. - Indubitably therefore, ITM bound itself to be solidarily liable with PPIC for the latters obligations under the Loan Agreement with IFC. ITM thereby brought itself to the level of PPIC and could not be deemed merely secondarily liable. - Initially, ITM was a stranger to the Loan Agreement between PPIC and IFC. ITMs liability commenced only when it guaranteed PPICs obligation. It became a surety when it bound itself solidarily with the principal obligor. Thus, the applicable law is Art 2047 CC. Pursuant to this provision, petitioner (as creditor) was justified in taking action directly against respondent. - The Court does not find any ambiguity in the provisions of the Guarantee Agreement. When qualified by the term jointly and severally, the use of the word guarantor to refer to a surety does not violate the law. As Art 2047 provides, a suretyship is created when a guarantor binds itself solidarily with the principal obligor. Likewise, the phrase in the Agreement -- as primary obligor and not merely as surety -- stresses that ITM is being placed on the same level as PPIC. Those words emphasize the nature of their liability, which the law characterizes as a suretyship.

- The use of the word guarantee does not ipso facto make the contract one of guaranty. This Court has recognized that the word is frequently employed in business transactions to describe the intention to be bound by a primary or an independent obligation. The very terms of a contract govern the obligations of the parties or the extent of the obligors liability. Thus, this Court has ruled in favor of suretyship, even though contracts were denominated as a Guarantors Undertaking or a Continuing Guaranty. - Indeed, the finding of solidary liability is in line with the premise provided in the Whereas clause of the Guarantee Agreement. The execution of the Agreement was a condition precedent for the approval of PPICs loan from IFC. Consistent with the position of IFC as creditor was its requirement of a higher degree of liability from ITM in case PPIC committed a breach. ITM agreed with the stipulation in Section 2.01 and is now estopped from feigning ignorance of its solidary liability. The literal meaning of the stipulations control when the terms of the contract are clear and there is no doubt as to the intention of the parties. - We note that the CA denied solidary liability, on the theory that the parties would not have executed a Guarantee Agreement if they had intended to name ITM as a primary obligor. The appellate court opined that ITMs undertaking was collateral to and distinct from the Loan Agreement. On this point, the Court stresses that a suretyship is merely an accessory or a collateral to a principal obligation. Although a surety contract is secondary to the principal obligation, the liability of the surety is direct, primary and absolute; or equivalent to that of a regular party to the undertaking. A surety becomes liable to the debt and duty of the principal obligor even without possessing a direct or personal interest in the obligations constituted by the latter. - With the present finding that ITM is a surety, it is clear that the CA erred in declaring the former secondarily liable. A surety is considered in law to be on the same footing as the principal debtor in relation to whatever is adjudged against the latter. Evidently, the dispositive portion of the assailed Decision should be modified to require ITM to pay the amount adjudged in favor of IFC.