VII.

Guaranty and Suretyship (Articles 2047-2084, NCC)

A. Nature and Extent

Escao vs. Ortigas G.R. No. 151953 (June 29, 2007) VELASCO
DOCTRINE
In case of concurrence of two or more creditors or of two or more debtors in one and the same
obligation, and in the absence of express and indubitable terms characterizing the obligation as
solidary, the presumption is that the obligation is only joint.

FACTS
Private Development Corporation of the Philippines (PDCP) entered into a loan agreement with
Falcon Minerals, Inc. (Falcon).
Three stockholders-officers of Falcon, namely: respondent Rafael Ortigas, Jr. (Ortigas), George
A. Scholey and George T. Scholey executed an Assumption of Solidary Liability whereby they
agreed to assume in [their] individual capacity, solidary liability with [Falcon] for the due and
punctual payment of the loan contracted by Falcon with PDCP.
Two separate guaranties were executed to guarantee the payment of the same loan by other
stockholders and officers of Falcon, acting in their personal and individual capacities.
One Guaranty was executed by petitioner Salvador Escao (Escao).
Two years later, an agreement developed to cede control of Falcon to Escao, Silos and Joseph
M. Matti.
Contracts were executed whereby Ortigas, George A. Scholey, Inductivo and the heirs of then
already deceased George T. Scholey assigned their shares of stock in Falcon to Escao, Silos
and Matti.
An Undertaking was executed by Escao, Silos and Matti identified in the document as
SURETIES, on one hand, and Ortigas, Inductivo and the Scholeys as OBLIGORS, on the
other.
Falcon availed of the sum of US$178,655.59 from the credit line extended by PDCP.
It executed a chattel mortgage over its personal properties to further secure the loan.
Falcon subsequently defaulted in its payments.
PDCP foreclosed on the chattel mortgage.
There remained a subsisting deficiency on the loan, which Falcon did not satisfy despite
demand.
ISSUE: WON the liability under the 1982 Undertaking is joint and not solidary.
HELD: YES, joint.

In this case, there is a concurrence of two or more creditors or of two or more debtors in one
and the same obligation.
Article 1207 of the Civil Code states that among them, [t]here is a solidary liability only when
the obligation expressly so states, or when the law or the nature of the obligation requires
solidarity.

Article 1210 supplies further caution against the broad interpretation of solidarity by providing:
The indivisibility of an obligation does not necessarily give rise to solidarity. Nor does solidarity
of itself imply indivisibility.
These Civil Code provisions establish that in case of concurrence of two or more creditors
or of two or more debtors in one and the same obligation, and in the absence of express
and indubitable terms characterizing the obligation as solidary, the presumption is that
the obligation is only joint. It thus becomes incumbent upon the party alleging that the
obligation is indeed solidary in character to prove such fact with a preponderance of evidence.
As provided in Article 2047 in a surety agreement the surety undertakes to be bound solidarily
with the principal debtor. Thus, a surety agreement is an ancillary contract as it presupposes
the existence of a principal contract.
Article 2047 itself specifically calls for the application of the provisions on joint and solidary
obligations to suretyship contracts. Article 1217 of the Civil Code thus comes into play,
recognizing the right of reimbursement from a co-debtor (the principal debtor, in case of
suretyship) in favor of the one who paid (i.e., the surety).
However, a significant distinction still lies between a joint and several debtor, on one hand, and
a surety on the other. Solidarity signifies that the creditor can compel any one of the joint and
several debtors or the surety alone to answer for the entirety of the principal debt. The
difference lies in the respective faculties of the joint and several debtor and the surety to seek
reimbursement for the sums they paid out to the creditor.

In the case of joint and several debtors, Article 1217 makes plain that the solidary debtor who
effected the payment to the creditor may claim from his co-debtors only the share which
corresponds to each, with the interest for the payment already made.
Such solidary debtor will not be able to recover from the co-debtors the full amount already paid
to the creditor, because the right to recovery extends only to the proportional share of the other
co-debtors, and not as to the particular proportional share of the solidary debtor who already
paid.
In contrast, even as the surety is solidarily bound with the principal debtor to the creditor, the
surety who does pay the creditor has the right to recover the full amount paid, and not just any
proportional share, from the principal debtor or debtors. Such right to full reimbursement falls
within the other rights, actions and benefits which pertain to the surety by reason of the
subsidiary obligation assumed by the surety.

Asset Builders vs. Stronghold G.R. No. 187116 (Oct. 18, 2010) VILLAFUERTE

Doctrine: Although the contract of a surety is in essence secondary only to a valid principal
obligation, the surety becomes liable for the debt or duty of another although it possesses no
direct or personal interest over the obligations nor does it receive any benefit therefrom.

Parties: Asset Builders Corp (ABC) obligee, petitioner

Lucky Star Drilling & Construction Corporation (Lucky Star) - obligor
Stronghold Insurance Company (Stronghold) surety, respondent

Facts:
ABC entered into an agreement with Lucky Star as part of the completion of its project to
construct the ACG Commercial Complex. Lucky Star was to supply labor, materials, tools, and
equipment including technical supervision to drill one (1) exploratory production well on the
project site.
To guarantee faithful compliance with their agreement, Lucky Star engaged respondent
Stronghold which issued two (2) bonds in favor of petitioner ABC.
ABC paid Lucky Star P575,000.00 as advance payment, representing 50% of the contract price.
Lucky Star, thereafter, commenced the drilling work.
On agreed completion date, Lucky Star managed to accomplish only 10% of the drilling work.
ABC sent a demand letter to Lucky Star for the immediate completion of the drilling work.
However, Lucky Star failed to fulfill its obligation.
ABC sent Notice of Rescission of Contract with Demand for Damages to Lucky Star and a
Notice of Claim for payment to Stronghold to make good its obligation under its bonds.
Despite notice, ABC did not receive any reply either from Lucky Star or Stronghold, prompting it
to file its Complaint for Rescission with Damages against both before the RTC.
RTC rendered the assailed decision ordering Lucky Star to pay ABC but absolving Stronghold
from liability. Relevant part of the decision reads: The surety bond and performance bond
executed by defendants Lucky Star and Stronghold Insurance are in the nature of accessory
contracts which depend for its existence upon another contract. Thus, when the agreement
between the plaintiff Asset Builders and defendant Lucky Star was rescinded, the surety and
performance bond were automatically cancelled.
Thus, Asset Builders filed this present petition for review on certiorari assailing decision of RTC
which orders defendant Lucky Star to pay petitioner Asset Builders the sum of P575,000.00 with
damages, but absolving respondent Stronghold Insurance of any liability on its Surety Bond and
Performance Bond.
Issue: Whether or not respondent insurance company, as surety, can be held liable under its
bonds.

Held: Yes.
As provided in Article 2047, the surety undertakes to be bound solidarily with the principal
obligor. That undertaking makes a surety agreement an ancillary contract as it presupposes the
existence of a principal contract. Although the contract of a surety is in essence secondary only
to a valid principal obligation, the surety becomes liable for the debt or duty of another although
it possesses no direct or personal interest over the obligations nor does it receive any benefit
therefrom. Let it be stressed that notwithstanding the fact that the surety contract is secondary
to the principal obligation, the surety assumes liability as a regular party to the undertaking.
Suretyship, in essence, contains two types of relationship the principal relationship between
the obligee (petitioner) and the obligor (Lucky Star), and the accessory surety relationship

between the principal (Lucky Star) and the surety (respondent). In this arrangement, the
obligee accepts the suretys solidary undertaking to pay if the obligor does not pay. Such
acceptance, however, does not change in any material way the obligees relationship with the
principal obligor. Neither does it make the surety an active party to the principal obligee-obligor
relationship. Thus, the acceptance does not give the surety the right to intervene in the principal
contract. The suretys role arises only upon the obligors default, at which time, it can be directly
held liable by the obligee for payment as a solidary obligor.
In the case at bench, when Lucky Star failed to finish the drilling work within the agreed time
frame despite petitioners demand for completion, it was already in delay. Due to this default,
Lucky Stars liability attached and, as a necessary consequence, respondents liability under the
surety agreement arose.
Undeniably, when Lucky Star reneged on its undertaking with the petitioner and further failed to
return the P575,000.00 downpayment that was already advanced to it, respondent, as surety,
became solidarily bound with Lucky Star for the repayment of the said amount to petitioner.
Contrary to the trial courts ruling, respondent insurance company was not automatically
released from any liability when petitioner resorted to the rescission of the principal contract for
failure of the other party to perform its undertaking. Precisely, the liability of the surety arising
from the surety contracts comes to life upon the solidary obligors default. It should be
emphasized that petitioner had to choose rescission in order to prevent further loss that may
arise from the delay of the progress of the project. Without a doubt, Lucky Stars unsatisfactory
progress in the drilling work and its failure to complete it in due time amount to non-performance
of its obligation.
In fine, respondent should be answerable to petitioner on account of Lucky Stars nonperformance of its obligation as guaranteed by the performance bond.
Finally, Article 1217 of the New Civil Code acknowledges the right of reimbursement from a codebtor (the principal co-debtor, in case of suretyship) in favor of the one who paid (the surety).
Thus, respondent is entitled to reimbursement from Lucky Star for the amount it may be
required to pay petitioner arising from its bonds.
WHEREFORE, Decision of the RTC, is AFFIRMED with MODIFICATION. Respondent
Stronghold Insurance is hereby declared jointly and severally liable with Lucky Star for the
payment of P575,000.00 and the payment of P345,000.00 on the basis of its performance bond.

Castellvi de Higgins vs. Sellner G.R. No. 15825 ( November 5, 1920) ATIENZA

DOCTRINE:
The obligation of the surety is primary; the obligation of the guarantor is secondary.
FACTS:
This is an action brought by plaintiffs to recover from defendant from of P10.000.
The basis of plaintiffs action is a letter written by defendant George C. Sellner to John T.
Macleod, agent for Mrs. Horace L. Higgins, on May 31, 1915, of the following tenor:
"DEAR SIR: I hereby obligate and bind myself, my heirs successors and assigns that if the
promissory note executed the 29th day of May 1915 by the Keystone Mining Co W. H. Clarke,

and John Maye, jointly and severally, in your favor and due six months after date for P10,000 is
not fully paid at maturity with interest, I will, within fifteen days after notice of such default, pay
you in cash the sum of P10,000 and interest upon your surrendering to me the three thousand
shares of stock of the Keystone Mining Co. held by you as security for the payment of said note.
"Respectfully,
(Sgd.) "GEO. C. SELLNER."
Counsel for both parties agree that the only point at issue is the determination of defendants
status in the transaction referred to. Plaintiffs contend that he is a surety; defendant contends
that he is a guarantor.
ISSUE:
WON it is a contract of guaranty or surety
HELD: Guaranty
The SC distinguished a surety and a guaranty as follows: A surety and a guarantor are alike in
that each promises to answer for the debt or default of another. A surety and a guarantor are
unlike in that the surety assumes liability as a regular party to the undertaking, while the liability
of the guarantor depends upon an independent agreement to pay the obligation if the primary
payor fails to do so. A surety is charged as an original promissor; the engagement of the
guarantor is a collateral undertaking. The obligation of the surety is primary; the obligation of the
guarantor is secondary.
Applying the difference between a surety and a guaranty, the SC ruled that it is perfectly clear
that the obligation assumed by defendant was simply that of a guarantor. The letter of Mr.
Sellner recites that if the promissory note is not paid at maturity, then, within fifteen days after
notice of such default and upon surrender to him if the three thousand shares of Keystone
Mining Company stock, he will assume responsibility. Sellner is not bound with the principals by
the same instrument executed at the same time and on the same consideration, but his
responsibility is a secondary one found in an independent collateral agreement. Neither is
Sellner jointly and severally liable with the principal debtors.

Palmares vs. Court of Appeals G.R. No. 126490 (March 31, 1998) CARIAGA

DOCTRINE: 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. It is called a suretyship if
a person binds himself solidarily with the principal debtor.
FACTS: Pursuant to a promissory note dated March 13, 1990, private respondent M.B. Lending
Corporation extended a loan to the spouses Osmea and Merlyn Azarraga, together with

petitioner Estrella Palmares, in the amount of P30,000.00 payable on or before May 12, 1990,
with compounded interest at the rate of 6% per annum to be computed every 30 days from the
date thereof. 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.
On the basis of petitioner's solidary liability under the promissory note, respondent corporation
filed a complaint 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, 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.
The RTC rendered judgment dismissing the complaint of respondent corporation.
CA reversed the decision of the trial court, and rendered judgment declaring herein petitioner
Palmares liable to pay respondent corporation.
Hence, this petition for review on certiorari by petitioner Palmares.
ISSUE: Whether Palmares is liable as a surety or guarantor.
HELD: Palmares is liable as a surety.
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.
Art. 2047 of the Civil Code provides: 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. 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.
A surety is an insurer of the debt, whereas a guarantor is an insurer of the solvency of the
debtor. A suretyship is an undertaking that the debt shall be paid; a guaranty, an undertaking
that the debtor shall pay. 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.
The undertaking to pay upon default of the principal debtor does not automatically remove it
from the ambit of a contract of suretyship. 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.
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. 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. For another, petitioner presented the
receipts of the payments already made which were all issued in her name and of the Azarraga
spouses. 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.
In this regard, we need only to reiterate the rule that a surety is bound equally and absolutely
with the principal, and as such is deemed an original promisor and debtor from the beginning.
This is because in suretyship there is but one contract, and the surety is bound by the same
agreement which binds the principal. In essence, the contract of a surety starts with the
agreement, which is precisely the situation obtaining in this case before the Court.
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.
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.
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.
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. 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.
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. 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.
The raison d etre for the rule is that there is nothing to prevent the creditor from proceeding
against the principal at any time. 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.
The purported offer to pay made by petitioner cannot be deemed sufficient and substantial in
order to effectively discharge her from liability. 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.

Machetti vs. Hospicio de San Jose G.R. No. L-16666 (April 10, 1922) DORIA
DOCTRINE:
While a surety undertakes to pay if the principal does not pay, the guarantor only binds himself
to pay if the principal cannot pay. The one is the insurer of the debt, the other an insurer of the
solvency of the debtor.
FACTS:

July 1916: By a written agreement, Romulo Machetti undertook to construct a building for the
Hospicio de San Jose for P64K.
One of the conditions of the agreement was for Machetti to obtain the "guarantee" of Fidelity
and Surety Company of the Philippine Islands for P128,800.
After construction was completed, it was found out that the work had not been carried out in
accordance with the specifications and that the workmanship was not of the standard required.
Hospicio de San Jose refused to pay the balance due to Machetti for the services the latter
rendered.
Machetti filed a claim.
Hospicio filed a cross-claim.
February 1918: Machetti, on petition of his creditors, was declared insolvent.
The proceedings in the main case were suspended in accordance with Sec. 60 of the
Insolvency Law, Act No. 1956.
January 1919: Hospicio de San Jose filed a motion asking that the Fidelity and Surety Company
be made cross-defendant, to the exclusion of Machetti, and that the proceedings be continued
as to said company.
This motion was granted. Hospicio filed a complaint against Fidelity and Surety Company.
CFI: in favor of Hospicio de San Jose.
Hence, this appeal by Fidelity & Surety Company.
(The original action by Machetti has been converted into one in which Hospicio de San Jose is
plaintiff and the Fidelity and Surety Company, the original plaintiff's guarantor, is the defendant.
Machetti having been practically eliminated from the case.)
ISSUE: Whether the undertaking assumed by Fidelity and Surety Company was a guaranty or a
surety. GUARANTY
HELD:
Notwithstanding the use of the words "guarantee" or "guaranty", circumstances may be shown
which convert the contract into one of suretyship, but such circumstances do not exist in the
present case. On the contrary, it appears that: (1) the contract is the guarantor's separate
undertaking in which the principal does not join; (2) it rests on a separate consideration moving
from the principal; and (3) although it is written in continuation of the contract for the
construction of the building, it is a collateral undertaking separate and distinct from the latter. All
of these circumstances are distinguishing features of contracts of guaranty.
While a surety undertakes to pay if the principal does not pay, the guarantor only binds himself
to pay if the principal cannot pay. The one is the insurer of the debt, the other an insurer of the
solvency of the debtor. This latter liability is what the Fidelity and Surety Company assumed in
the present case.
The undertaking is perhaps not exactly that of a fianza under the Civil Code, but is a perfectly
valid contract and must be given the legal effect it ordinarily carries. The Fidelity and Surety
Company having bound itself to pay only the event its principal, Machetti, cannot pay, it follows
that it cannot be compelled to pay until it is shown that Machetti is unable to pay. Such ability
may be proven by the return of a writ of execution unsatisfied or by other means, but is not
sufficiently established by the mere fact that he has been declared insolvent in insolvency

proceedings the extent of the insolvent's inability to pay is not determined until the final
liquidation of his estate.
SC: the judgment appealed from is reversed

Gilat Satellite vs. UCPB G.R. No. 189563 (April 7, 2014) 2047 FRANCISCO
Doctrine:
In suretyship, the oft-repeated rule is that a suretys liability is joint and solidary with that of the
principal debtor.
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. 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. Thus, a surety is not entitled to a separate notice of
default or to the benefit of excussion. It may in fact be sued separately or together with the
principal debtor.
Sureties do not insure the solvency of the debtor, but rather the debt itself; The effect is that the
creditor is given the right to directly proceed against either principal debtor or surety.

Facts:
One Virtual placed with Gilat a purchase order for various telecommunications products and
equipment for a total purchase price of US$2M. Of the said purchase price, One Virtual
promised to pay a portion thereof totalling $1.2M.
To ensure prompt payment, it obtained from UCPB a surety bond in favor of Gilat.
One Virtual failed to pay $400k on the due date.
Gilat wrote UCPB a demand letter for payment of the amount.
The amount was left unpaid thus prompting Gilat to send a second demand letter for the
payment of the full amount of $1.2M guaranteed under the surety bond plus interests and
expenses.
UCPB failed to settle the amount.
Gilat filed a complaint with RTC.
RTC: favored Gilat.
CA: vacated the RTCs ruling and ordered the parties to proceed to arbitration.
Issue:
W/n Gilat was entitled to legal interest due to the delay of UCPB of its obligation under the
suretyship agreement.

Held:
Yes.
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.

Article 2209 of the CC: if 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.
In order for the debtor (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.
Interest accrues from the time judicial or extrajudicial demand is made on the surety.
Considering that UCPB failed to pay its obligation on 30 May 2000 in accordance with the
Purchase Agreement, and that the extrajudicial demand of Gilat was sent on 5 June 2000
interest must start to run from the time Gilat sent its first demand letter (5 June 2000)
As to the interest rate to be imposed, Nacar v. Gallery Frames modified Eastern Shipping v. CA
in relation to Bangko Sentral Monetary Board Circular 799 (S. 2013): (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.
(2) 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.
SC: Petition GRANTED. The assailed Decision of CA is REVERSED.RTCs Decision is
REINSTATED, with MODIFICATION insofar as the award of legal interest is concerned. UCPB
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.

Willex vs. CA G.R. No. 103066 (April 25, 1996) GATCHALIAN

FACTS:
Inter-Resin Industrial Corporation opened a letter of credit with the Manila Banking Corporation.
To secure payment, Inter-Resin and Underwriting Corporation of the Philippines (IUCP)
executed two Continuing Surety Agreements.
They bound themselves solidarily to pay Manilabank "obligations of every kind, on which the
Inter-Resin may be indebted or hereafter become indebted to the Manilabank."
Inter-Resin, together with Willex Plastic Industries Corp., executed a "Continuing Guaranty" in
favor of IUCP whereby they jointly and severally agreed to pay IUCP for the payment the latter
made in favor of Inter-Resin.
IUCP paid to Manilabank the sum of P4,334,280.61 representing Inter-Resin Industrial's
outstanding obligation.
Atrium Capital Corp., which 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 them
Inter-Resin Industrial paid Interbank(which had in turn succeeded Atrium) the sum of
P687,600.00 representing the proceeds of its fire insurance policy for the destruction of its
properties.

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.
However, Willex denied any liability.
TC: ordered Inter-Resin and Willex jointly and severally liable to pay Interbank
CA: affirmed the ruling

ISSUE:
1. WON under the Continuing Guaranty, Petitioner Willes may be held jointly and severally liable
with Inter-Resin? YES
2. WON the Continuing Guaranty being an accessory contract cannot legally exist because of the
absence of a valid principal obligation? NO, it can legally exist
3. WON the Continuing Guaranty can be retroactively applied so as to secure payments made by
Interbank under the 2 Continuing Surety Agreements? YES
4. WON the exhaustion of all property of Inter-Resin should be done first before proceeding
against Willex? NO
HELD:
FIRST ISSUE: WILLEX IS JOINTLY AND SEVERALLY LIABLE WITH INTER-RESIN
Contention of Willex: 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.
SC: The contention is untenable. What Willex Plastic has overlooked is the fact that evidence
aliunde was introduced in the trial court to explain that the Continuing Guaranty (CG) was
actually to secure payment to Interbank (formerly IUCP) of amounts paid by the latter to
Manilabank. 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
Accordingly, the trial court found that the CG 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-appellants to sign a Continuing
Guaranty." These factual findings of the trial court and of the Court of Appeals are binding on us.
SECOND ISSUE: CONTINUING GUARANTY CAN LEGALLY EXIST

Contention of Willex: It is not a party either to the "Continuing Surety Agreement" or to the
loan agreement between Manilabank and Interbank Industrial.
SC: 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."
THIRD ISSUE: CONTINUING GUARANTY CAN BE APPLIE RETROSPECTIVELY
Contention of Willex: It should be applied prospectively
SC: 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. In this case, the
parties intended that the Continuing Guaranty be applied retrospectively. 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.
FOURTH ISSUE: CAN PROCEED AGAINST WILLEX
Contention of Willex: Willex Plastic claims the benefit of excussion.
SC: The Civil Code provides, however:
Art. 2059. This excussion shall not take place:
(1) If the guarantor has expressly renounced it;
(2) If he has bound himself solidarily with the debtor;
The Continuing Guaranty has a stipulation that 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.
RCBC vs. Judge Arro G.R. No. L- 49401 (July 30, 1982) HAUTEA

FACTS:
- CHUA and GO executed a surety agreement to guaranty any existing debts of DAVAO
AGRICULTURAL INDUSTRIES CORPORATION (DAVAO AGRI)... provided that the liability
shall not exceed at any one time the aggregate principal sum of P100,000.00
- A promissory note in the amount of P100,000.00 was issued in favor of RCBC signed by GO in
his personal capacity and in behalf of DAVAO AGRI.
- The promissory note bounced
- RCBC filed a complaint against CHUA and GO

- CHUA alleges in his motion that he cannot be held liable under the promissory note because it
was only GO who signed in behalf of DAVAO AGRI.
- RCBC 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.
ISSUE & HELD:
1. Whether CHUA is liable to pay the obligation evidenced by the promissory note which
he did not sign, in the light of the provisions of the comprehensive surety agreement
which petitioner and private respondent had earlier executed?
YES. The comprehensive surety agreement was jointly executed by Residoro Chua and
Enrique Go, Sr., 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.
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.
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.

Atok vs. CA G.R. No. 80078 (May 18, 1993) LIM

FACTS
Atok and Sanyu Chemical entered into a Continuing Suretyship Agreement in favor of Atok Finance with
the latter being the creditor and Sanyu Chemical and several stockholders as sureties. Sanyu Chemical,
in consideration of receipt from Atok Finance of the amount of P105,000.00, assigned several receivables
in favor of Atok. Later, additional trade receivables were assigned by Sanyu Chemical to Atok Finance
with a total face value of P100,378.45.

Atok Finance commenced action against Sanyu Chemical, and the sureties before the RTC to collect the
sum of P120,240.00. Atok Finance alleged that Sanyu Chemical had failed to collect and remit the
amounts due under the trade receivables.
Sanyu Chemical and the individual private respondents sought dismissal of Atok's claim upon the ground
that such claim had prescribed under Article 1629 of the Civil Code and for lack of cause of action. The
private respondents contended that the Continuing Suretyship Agreement, being an accessory contract,
was null and void since, at the time of its execution, Sanyu Chemical had no pre-existing obligation due to
Atok Finance.
It is the contention of respondents 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: 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.
ISSUES
W/N a surety agreement, being an accessory contract, be effected to secure future (non-existing) debts?
(YES) May the continuing suretyship agreement be declared null and void for alleged lack of
consideration since there was still no pre-existing obligation for the surety to attach to?
W/N private respondents are liable under the Deed of Assignment which they, along with the principal
debtor Sanyu Chemical, executed in favor of petitioner, on the receivables thereby assigned.
HELD
1. Surety agreements may secure future debts. It is true that a guaranty or a suretyship agreement is an
accessory contract in the sense that it is entered into for the purpose of securing the performance of
another obligation which is denominated as the principal obligation. It is also true that Article 2052 of the
Civil Code states that "a guarantee cannot exist without a valid obligation." 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.
The argument of respondents has been debunked in the cases of National Rice and Corn Corporation
(NARIC) v. Jose A. Fojas and Alto Surety Co., Inc. and in Rizal Commercial Banking Corporation v. Arro.
In NARIC v Fojas:
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.
In RCBC v Arro:
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.
These 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 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 a financing company which anticipates entering into a series of credit
transactions with a particular company, commonly requires the projected principal debtor to execute a
continuing surety agreement along with its sureties. By executing such an agreement, the principal places
itself in a position to enter into the projected series of transactions with its creditor; with such suretyship
agreement, there would be no need to execute a separate surety contract or bond for each financing or
credit accommodation extended to the principal debtor. As we understand it, this is precisely what
happened in the case at bar
2. They are liable. 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 based on article 1629 where it is provided that 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.
Article 1629 of the Civil Code invoked by private respondents and accepted by the Court of Appeals is not
material in the case at bar. 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 a breach of
warranty of solvency by Sanyu Chemical, resulting in turn in the assumption of solidary liability by the
assignor under the receivables assigned.
In other words, the assignor Sanyu Chemical becomes a solidary debtor under the terms of the
receivables covered and transferred by virtue of the Deed of Assignment. 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), ALSO became solidarily liable for that obligation of Sanyu Chemical, by virtue of the
operation of the Continuing Suretyship Agreement. The solidary liability of Sanyu Chemical is not subject
to the limiting period set out in Article 1629 of the Civil Code.

Dino vs. CA G.R. No. 89775 (Nov. 26, 1992) MANCIA

Doctrine:
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. 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.
Facts:
It appears that in 1977, Uy Tiam Enterprises and Freight Services (UTEFS), thru its representative Uy
Tiam, applied for and obtained credit accommodations (letter of credit and trust receipt accommodations)
from the Metropolitan Bank and Trust Company (METROBANK) in the sum of P700, 000.00. To secure
the aforementioned credit accommodations Norberto Uy and Jacinto Uy Dio executed separate. Under
the aforesaid agreements, Norberto Uy and Jacinto Uy Dio agreed to pay METROBANK any
indebtedness of UTFS.
Having paid the obligation under the above letter of credit, UTEFS, through Uy Tiam, obtained another
credit accommodation from METROBANK.
The Irrevocable Letter of Credit in the sum of P815, 600.00, covered UTEFS' purchase of "8,000 Bags
Planters Urea and 4,000 Bags Planters 21-0-0." It was applied for and obtain by UTEFS without the
participation of Norberto Uy and Jacinto Uy Dio as they did not sign the document. Also, they were not
asked to execute any suretyship to guarantee its payment. Neither did METROBANK nor UTEFS inform
them that the 1979 Letter of Credit has been opened and the Continuing Suretyships separately executed
in February, 1977 shall guarantee its payment
The 1979 letter of credit was negotiated. METROBANK paid Planters Products the amount of P815,
600.00 which payment was covered by a Bill of Exchange.
UTEFS executed and delivered to METROBANK and Trust Receipt whereby the former acknowledged
receipt in trust from the latter of the aforementioned goods from Planters Products which amounted to
P815, 600.00. Being the entrusted, the former agreed to deliver to METROBANK the entrusted goods in
the event of non-sale or, if sold, the proceeds of the sale thereof, on or before September 2, 1979.
However, UTEFS did not comply with the obligatory stipulations in the trust receipt. METROBANK sent
letters to the said principal obligor and its sureties, Norberto Uy and Jacinto Uy Dio, demanding payment
of the amount due.
Dio denied his liability and requested METROBANK to send him copies of documents. METROBANK
then informed him that the source of his liability is the Continuing Suretyship which he executed in 1977.
Dio stated that he cannot be liable since the 1979 credit accommodation since it is a new an obligation
without his participation and the 1977 credit accommodation is already fully paid.

METROBANK filed a complaint for collection of a sum of money with a prayer for the issuance of a writ of
preliminary attachment, against Uy Tiam, representative of UTEFS and impleaded Dio and Uy as
parties-defendants.
Norberto Uy and Jacinto Uy Dio filed a motion to dismiss the complaint on the ground of lack of cause of
action.
The Trial Court dismissed the complaint against the petitioners.
Court of Appeals reversed the decision.
Issue:
1. Whether petitioners are liable as sureties for the 1979 obligations of Uy Tiam to METROBANK by virtue
of the Continuing Suretyship Agreements they separately signed in 1977
2. On the assumption that they are, what is the extent of their liabilities for said 1979 obligations.
Held:
1. Yes. Under the Civil Code, a guaranty may be given to secure even future debts, the amount of which
may not known at the time the guaranty is executed. This is the basis for contracts denominated as
continuing guaranty or suretyship.
The stipulations unequivocally reveal that the suretyship agreement in the case at bar are continuing in
nature. Petitioners do not deny this; in fact, they candidly admitted it. Neither have they denied the fact
that they had not revoked the suretyship agreements.
Petitioners maintain that their Continuing Suretyship Agreements cannot be made applicable to the 1979
obligation because the latter was not yet in existence when the agreements were executed in 1977; under
Article 2052 of the Civil Code, a guaranty "cannot exist without a valid obligation." We cannot agree. First
of all, the succeeding article provides that "[a] guaranty may also be given as security for future debts, the
amount of which is not yet known." Secondly, Article 2052 speaks about a valid obligation, as
distinguished from a void obligation, and not an existing or current obligation.
2.The limit of the petitioners respective liabilities must be determined from the suretyship agreement each
had signed. Indeed, the Continuing Suretyship Agreements signed by petitioner Dio and petitioner Uy fix
the aggregate amount of their liability, at any given time, at P800,000.00 and P300,000.00, respectively.
The law is clear that a guarantor may bond himself for less, but not for more than the principal debtor,
both as regards the amount and the onerous nature of the conditions.
Thus, by express mandate of the Continuing Suretyship Agreements which they had signed, petitioners
separately bound themselves to pay interest, expenses, attorney's fees and costs. The last two items are
pegged at not less than ten percent (10%) of the amount due.
Even without such stipulations, the petitioners would, nevertheless, be liable for the interest and judicial
costs. Article 2055 of the Civil Code provides:
Art. 2055. A guaranty is not presumed; it must be express and cannot extend to more than what is
stipulated therein.

If it be simple or indefinite, it shall comprise not only the principal obligation, but also all its accessories,
including the judicial costs, provided with respect to the latter, that the guarantor shall only be liable for
those costs incurred after he has been judicially required to pay

Fortune Motors vs. CA G.R. No. 112191 (February 7, 1997) MORA

Joseph L. G. Chua and Petitioner Edgar Lee Rodrigueza ("Petitioner Rodrigueza") each
executed an undated "Surety Undertaking" whereunder they "absolutely, unconditionally and
solidarily guaranteed" to Respondent Filinvest Credit Corporation 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 "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."
Sometime after the the execution of the Surety Undertaking, Petitioner Fortune, Respondent
Filinvest and Canlubang Automotive Resources Corporation ("CARCO") entered into an
"Automotive Wholesale Financing Agreement" under which CARCO will deliver motor vehicles
to Fortune for the purpose of resale in the latter's ordinary course of business; Fortune, in turn,
will execute trust receipts over said vehicles and accept drafts drawn by CARCO, which will
discount the same together with the trust receipts and invoices and assign them in favor of
Respondent Filinvest, which will pay the motor vehicles for Fortune. Under the same
agreement, Petitioner Fortune, as trustee of the motor vehicles, was to report and remit
proceeds of any sale for cash or on terms to Respondent Filinvest immediately without
necessity of demand.
Subsequently, several motor vehicles were delivered by CARCO to Fortune, and trust receipts
covered by demand drafts and deeds of assignment were executed in favor of Respondent
Filinvest. However, when the demand drafts matured, not all the proceeds of the vehicles which
Petitioner Fortune had sold were remitted to Respondent Filinvest. Fortune likewise failed to
turn over to Filinvest several unsold motor vehicles covered by the trust receipts. Thus, Filinvest
through counsel, sent a demand letter to Fortune for the payment of its unsettled account.
Filinvest sent similar demand letters separately to Chua and Rodrigueza as sureties. Despite
said demands, the amount was not paid. Hence, Filinvest filed a complaint for a sum of money
with preliminary attachment against Fortune, Chua and Rodrigueza.
Petitioners herein instead of presenting evidence filed a Motion for Judgment on Demurrer of
Evidence. They aver that the Surety Undertakings were null and void because at the time they
were executed, there was no principal obligation existing.
RTC: denied the motion and ordered Fortune, Chua and Rodrigueza to pay Filinvest, jointly and
severally.
CA: Affirmed RTCs decision in toto
ISSUE:

W/N CA erred in declaring that surety can exist even if there was no existing indebtedness at
the time of its execution? ---YES
HELD:
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. The Court said:
. . . Of course, a surety is not bound under any particular principal obligation until that principal
obligation is born. But there is no theoretical or doctrinal difficulty inherent in saying that the
suretyship agreement itself is valid and binding even before the principal obligation intended to
be secured thereby is born, any more than there would be in saying that obligations which are
subject to a condition precedent are valid and binding before the occurrence of the condition
precedent.
Comprehensive or continuing surety agreements are in fact quite commonplace in present day
financial and commercial practice. A bank or financing company which anticipates entering into
a series of credit transactions with a particular company, commonly requires the projected
principal debtor to execute a continuing surety agreement along with its sureties. By executing
such an agreement, the principal places itself in a position to enter into the projected series of
transactions with its creditor; with such suretyship 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 Dino vs. Court of Appeals, The Court again had occasion to discourse on continuing
guaranty/suretyship thus:
. . . A continuing guaranty is one which is not limited to a single transaction, but which
contemplates a future course of dealing, covering a series of transactions, generally for an
indefinite time or until revoked. It is prospective in its operation and is generally intended to
provide security with respect to future transactions within certain limits, and contemplates a
succession of liabilities, for which, as they accrue, the guarantor becomes liable. Otherwise
stated, a continuing guaranty is one which covers all transactions, including those arising in the
future, which are within the description or contemplation of the contract, of guaranty, until the
expiration or termination thereof. A guaranty shall be construed as continuing when by the terms
thereof it is evident that the object is to give a standing credit to the principal debtor to be used
from time to time either indefinitely or until a certain period; especially if the right to recall the
guaranty is expressly reserved. Hence, where the contract of guaranty states that the same is to
secure advances to be made 'from time to time' the guaranty will be construed to be a
continuing one.
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.

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 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.
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. Both sureties knew the purpose of the
surety undertaking which they signed and they must have had an estimate of the amount
involved at that time. Their undertaking by way of the surety contracts was critical in enabling
Fortune to acquire credit facility from Filinvest and to procure cars for resale, which was the
business of Fortune. Respondent Filinvest, for its part, relied on the surety contracts when it
agreed to be the assignee of CARCO with respect to the liabilities of Fortune with CARCO. After
benefiting therefrom, petitioners cannot now impugn the validity of the surety contracts on the
ground that there was no preexisting obligation to be guaranteed at the time said surety
contracts were executed. They cannot resort to equity to escape liability for their voluntary acts,
and to heap injustice to Filinvest, which relied on their signed word.
This is a clear case of estoppel by deed. By the acts of petitioners, Filinvest was made to
believe that it can collect from Chua and/or Rodrigueza in case of Fortune's default. Filinvest
relied upon the surety contracts when it demanded payment from the sureties of the unsettled
liabilities of Fortune. A refusal to enforce said surety contracts would virtually sanction the
perpetration of fraud or injustice.

Bank of Commerce vs. Flores - G.R. No. 174006 (December 8, 2010) MORENO

Facts:

Spouse Flores borrowed money from petitioner bank in the amount of Nine Hundred Thousand
Pesos (P900,000.00) on Oct 1993. Respondents executed a Real Estate Mortgage over the
condominium unit as collateral, and the same was annotated at the back of CCT No. 2130. Two
years later again the spouses borrowed One Million One Hundred Thousand Pesos
(P1,100,000.00) from petitioner bank, which was also secured by a mortgage over the same
property annotated at the back of CCT No. 2130.
On Jan 1996 respondents paid One Million Eleven Thousand Five Hundred Fifty-Five Pesos
and 54 centavos (P1,011,555.54), as evidenced by Official Receipt No. 1477417 issued by
petitioner bank. On the face of the receipt, it was written that the payment was "in full payment
of the loan and interest." Respondents then asked petitioner bank to cancel the mortgage
annotations on CCT No. 2130 since the loans secured by the real estate mortgage were already
paid in full. However, the bank refused to cancel the same and demanded payment of Four
Million Six Hundred Thirty-Three Thousand Nine Hundred Sixteen Pesos and Sixty-Seven
Centavos (P4,633,916.67), then petitioner bank applied for extra-judicial foreclosure of the
mortgages over the condominium unit. The public auction sale was scheduled on September 4,
1998.
Respondents filed suit with the RTC, Quezon City, assailing the validity of the foreclosure and
auction sale of the property.
RTC granted respondents prayer for issuance of a writ of preliminary injunction, restraining
petitioner bank from foreclosing on the mortgage and ordered that specific performance with
damages and injunction filed by plaintiffs, Sps. Andres and Eliza Flores against defendants,
Bank of Commerce and Stephen Z. Taala, is hereby DISMISSED. Likewise, the counterclaim
filed by defendants, Bank of Commerce and Stephen Z. Taala against plaintiffs, Sps. Andres
and Eliza Flores is DISMISSED for insufficiency of evidence.
Upon appeal, CA rendered a Decision reversing the decision and the resolution of the RTC
entering a new order:
(a) ordering the cancellation of the real estate mortgage annotations on the dorsal side of CCT
No. 2130 of the Registry of Deeds of Quezon City;
(b) ordering appellee Bank to issue a corresponding release of mortgages to plaintiffsappellants CCT No. 2130;
(c) declaring null and void the challenged extra-judicial foreclosure and public auction sale held
on March 25, 2004 together with the Certificate of Sale dated April 14, 2004 issued in favor of
appellee Bank; and,
(d) appellees counterclaims are ordered dismissed, for lack of sufficient basis therefor.
Issue:
WON the real estate mortgage over the subject condominium unit is a continuing guaranty for
the future loans of respondent spouses despite the full payment of the principal loans annotated
on the title of the subject property.

Held:
Yes, A continuing guaranty is a recognized exception to the rule that an action to foreclose a
mortgage must be limited to the amount mentioned in the mortgage contract.23 Under Article
2053 of the Civil Code, a guaranty may be given to secure even future debts, the amount of
which may not be known at the time the guaranty is executed. This is the basis for contracts
denominated as a continuing guaranty or suretyship. A continuing guaranty is not limited to a
single transaction, but 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. In other words, a continuing guaranty is one that 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.
The language of the real estate mortgage unambiguously reveals that the security provided in
the real estate mortgage is continuing in nature. Thus, it was intended as security for the
payment of the loans annotated at the back of CCT No. 2130, and as security for all amounts
that respondents may owe petitioner bank. It is well settled that mortgages given to secure
future advance or loans are valid and legal contracts, and that the amounts named as
consideration in said contracts do not limit the amount for which the mortgage may stand as
security if from the four corners of the instrument the intent to secure future and other
indebtedness can be gathered.
Respondents full payment of the loans annotated on the title of the property shall not effect the
release of the mortgage because, by the express terms of the mortgage, it was meant to secure
all future debts of the spouses and such debts had been obtained and remain unpaid. Unless
full payment is made by the spouses of all the amounts that they have incurred from petitioner
bank, the property is burdened by the mortgage.
Decision of the CA is REVERSED and SET ASIDE. The decision of the Regional Trial Court
dated December 4, 2002 is hereby REINSTATED.

South City Homes vs. Finance G.R. No. 135462 (December 7, 2001) SANTOS

1. Joseph L. G. Chua, President of Fortune Motors Corporation,

2. Palawan Lumber Manufacturing Corporation, and
3. South City Homes, Inc.
executed in favor of plaintiff-appellant a Continuing Suretyship Agreement in which, said
corporation "jointly and severally unconditionally" guaranteed the "full, faithful and prompt
payment and discharge of any and all indebtedness of Fortune Motors Corporation to BA
Finance Corporation.

Fortune Motors Corporation thereafter executed trust receipts covering the motor vehicles
delivered to it by Canlubang Automotive Resources Corporation under which it agreed to remit
to the Entruster (CARCO) the proceeds of any sale and immediately surrender the remaining
unsold vehicles. The drafts and trust receipts were assigned to plaintiff-appellant, under Deeds
of Assignment executed by CARCO.
Upon failure of the defendant-appellant Fortune Motors Corporation to pay the amounts due
under the drafts and to remit the proceeds of motor vehicles sold or to return those remaining
unsold in accordance with the terms of the trust receipt agreements, BA Finance Corporation
sent demand letter to Edgar C. Rodrigueza, South City Homes, Inc., Aurelio Tablante, Palawan
Lumber Manufacturing Corporation, Joseph L. G. Chua, George D. Tan and Joselito C. Baltazar.
Since the defendants-appellants failed to settle their outstanding account with plaintiff-appellant,
the latter filed a complaint for a sum of money with prayer for preliminary attachment, with the
Regional Trial Court of Manila.
Petitioners assert that the suretyship agreement they signed is void because there was no
principal obligation at the time of signing as the principal obligation was signed six (6) months
later.
ISSUE: Whether the suretyship agreement was valid. (Since it was executed prior to the
principal obligation in question)
HELD: YES! It was valid, a prior suretyship agreement may guaranty a future obligation.
The Civil Code, however, allows a suretyship agreement to secure future loans even if the
amount is not yet known.
Article 2053 of the Civil Code provides that:
Art. 2053 A guaranty may also be given as security for future debts, the amount of which is
not yet known. x x x
In Fortune Motors (Phils.) Corporation v. Court of Appeals, we held:
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.

Pacific Banking vs. IAC G.R. No. 72275 (Nov. 13, 1991) SUPAPO
DOCTRINES:

1.
As distinguished from a contract of guaranty where the guarantor binds himself to
the creditor to fulfill the obligation of the principal debtor only in case the latter should fail to
do so, in a contract of suretyship, the surety binds himself solidarily with the principal
debtor.
2.
The nature and extent of the liabilities of a guarantor or a surety is determined by
the clauses in the contract of suretyship.
FACTS:
1.
Celia Regala applied for a Pacificard credit card with Roberto Regala Jr. (spouse
of Celia) as a guarantor for the payment, upon demand, of all indebtedness, obligations,
charges or liabilities due and incurred by Celia with the use of the Pacificard, or renewals
thereof, issued in her favor by the Pacific Banking Corporation.
2.
It was stated that Roberto is jointly and severally liable with Celia.
3.
Upon failure of Celia to settle her account, a written demand was sent to Roberto
in accordance with the terms stated in the Guarantors undertaking
4.
A complaint was subsequently filed in Court for Celias repeated failure to settle
the obligation.
5.
Robert argued that when he signed the Guarantor's Understanding" it is with the
understanding that his liability would be limited to P2,000.00 per month, which is the credit
limit.
6.
Accordingly, the court held the spouses Regala solidarily liable to Pacific
Banking.
7.
On appeal, the CA modified the decision and held Roberto liable to the extent of
the monthly credit limit granted to Celia Regala, i.e., at P2,000.00 a month and only for the
advances made during the one year period of the card's effectivity.
8.
Pacific Banking now challenged the decision with regard to limiting the liability of
Roberto.
ISSUE: Should Roberto be solidarily liable with his wife?
HELD: Yes! Roberto is not a guarantor but a surety.
The undertaking signed by Roberto although denominated "Guarantor's Undertaking," was in
substance a contract of surety. As distinguished from a contract of guaranty where the guarantor
binds himself to the creditor to fulfill the obligation of the principal debtor only in case the latter
should fail to do so, in a contract of suretyship, the surety binds himself solidarily with the
principal debtor.
As a surety he bound himself jointly and severally with the debtor Celia Regala "to pay the
Pacific Banking Corporation upon demand, any and all indebtedness, obligations, charges or
liabilities due and incurred by said Celia Syjuco Regala with the use of Pacificard or renewals
thereof issued in (her) favor by Pacific Banking Corporation." This undertaking was also
provided as a condition in the issuance of the Pacificard to Celia Regala,

It is true that under Article 2054 of the Civil Code, "(A) guarantor may bind himself for less, but
not for more than the principal debtor, both as regards the amount and the onerous nature of the
conditions. We do not agree however, that Robertos liability should be limited to extent of the
monthly credit limit (P2,000). Roberto, as surety of his wife, expressly bound himself up to the
extent of the debtor's (Celia) indebtedness likewise expressly waiving any "discharge in case of
any change or novation of the terms and conditions in connection with the issuance of the
Pacificard credit card." Roberto, in fact, made his commitment as a surety a continuing one,
binding upon himself until all the liabilities of Celia have been fully paid. All these were clear
under the "Guarantor's Undertaking" Roberto signed.
Roberto had been made aware by the terms of the undertaking of future changes in the terms
and conditions governing the issuance of the credit card to his wife and that, notwithstanding, he
voluntarily agreed to be bound as a surety. As in guaranty, a surety may secure additional and
future debts of the principal debtor the amount of which is not yet known.
A guarantor or surety does not incur liability unless the principal debtor is held liable. It is in this
sense that a surety, although solidarily liable with the principal debtor, is different from the
debtor. It does not mean, however, that the surety cannot be held liable to the same extent as
the principal debtor. The nature and extent of the liabilities of a guarantor or a surety is
determined by the clauses in the contract of suretyship

Molino vs. Security G.R. No. 136780 (August 16, 2001) VELASCO

DOCTRINE
The extent of a suretys liability is determined by the language of the suretyship contract or bond
itself.

FACTS
Security Diners International Corporation (SDIC) operates a credit card system.
It issues two types of credit cards:
the Regular (Local) Card which entitles the cardholder to purchase goods and pay services from
member establishments in an amount not exceeding P10,000.00
the Diamond (Edition) Card which entitles the cardholder to purchase goods and pay services
from member establishments in unlimited amounts.
One of the requirements for the issuance of either of these cards is that an applicant should
have a surety.
Danilo A. Alto applied for a Regular (Local) Card with SDIC.
He got as his surety his own sister-in-law Jeanette Molino Alto.
SDIC issued to Danilo a Diners Card.
Danilo requested to upgrade his Regular (Local) Diners Club Card to a Diamond (Edition).
As a requirement of SDIC, Danilo secured from Jeanette her approval.
The latter obliged.
Danilos request was granted and he was issued a Diamond (Edition) Diners Club Card.
Danilo had incurred credit charged plus appropriate interest and service charges in the
aggregate amount of P166,408.31.

He defaulted in the payment of this obligation.

SDIC demanded of Danilo and Jeanette to pay said obligation but they did not pay.
SDIC filed an action to collect said indebtedness against Danilo and Jeanette.
Defendant Danilo Alto failed to file an Answer, he moved to have the complaint dismissed
against him, without prejudice to a subsequent re-filing.
Petitioner was left as the lone defendant, sued in her capacity as surety of Danilo.
Jeanette claimed that her liability under the Surety Undertaking was limited to P10,000.00 and
that she did not expressly and categorically agree to act as surety for Danilo in an amount
higher than P10,000.00,
RTC: in favor of Jeanette
CA: Reversed
The terms of the said Surety Undertaking stated that any change or novation in the agreement
on the use of the Diners Club card does not release the surety from his obligations, it being
understood that the undertaking is a continuing one which subsists until all obligations and
charges under the subject credit card are paid and satisfied.
ISSUE: Whether Jeanette is liable as a surety for Danilos purchases on his Diamond card

HELD: YES
On Novation (Main Issue of the Case)
There is no doubt that the upgrading was a novation of the original agreement covering the
first credit card issued to Danilo Alto, basically since it was committed with the intent of
cancelling and replacing the said card.
However, the novation did not serve to release petitioner from her surety obligations
because in the Surety Undertaking she expressly waived discharge in case of change or
novation in the agreement governing the use of the first credit card.
The nature and extent of petitioners obligations are set out in clear and unmistakable terms in
the Surety Undertaking:
She declared that any change or novation in the Agreement or any extension of time
granted by SECURITY DINERS to pay such obligation, charges, and fees, shall not
release (her) from this Surety Undertaking;
There can be no additional meaning to the plain language of the subject undertaking. The extent
of a suretys liability is determined by the language of the suretyship contract or bond itself.
Article 1370 of the Civil Code provides: If the terms of a contract are clear and leave no doubt
upon the intention of the contracting parties, the literal meaning of its stipulations shall control.
On Solidary Liability of Surety
The Surety Undertaking expressly provides that petitioners liability is solidary.
A surety is considered in law as being the same party as the debtor in relation to whatever is
adjudged touching the obligation of the latter, and their liabilities are interwoven as to be
inseparable.
Although the contract of a surety is in essence secondary only to a valid principal
obligation, his liability to the creditor is direct, primary and absolute; he becomes liable for

the debt and duty of another although he possesses no direct or personal interest over the
obligations nor does he receive any benefit therefrom.

Under Article 1216 of the Civil Code:

The creditor may proceed against any one of the solidary debtors or some or all of them
simultaneously. The demand made against one of them shall not be an obstacle to those which
may be subsequently directed against the others, so long as the debt has not been fully
collected.

Gateway vs. Asiabank G.R. No. 172041 (Dec. 18, 2008) VILLAFUERTE

Doctrine: A surety undertakes directly for the payment and is so responsible at once if the
principal debtor makes default. (In this case, the surety was held liable for the debt although the
principal debtor corporation has been judicially declared insolvent).
Parties:
Gateway Corporation- debtor
Asianbank-creditor
Geronimo-surety

FACTS:
Petitioner Gateway Electronics Corporation (Gateway) is a domestic corporation that used to be
engaged in the semi-conductor business. During the period material, petitioner Geronimo delos
Reyes was its president and one Andrew delos Reyes its executive vice-president. On July 23,
1996, Geronimo and Andrew executed separate but almost identical deeds of suretyship for
Gateway in favor of respondent Asianbank for Domestic Bills Purchased Line and the Omnibus
Credit Line.
Later developments saw Asianbank extending to Gateway several export packing loans .This
loan package was later consolidated with A Dollar Promissory Note (and secured by a chattel
mortgage over Gateways equipment.
Gateway initially made payments on its loan obligations, but eventually defaulted. Upon
Gateways request, Asianbank extended the maturity dates of the loan several times. These
extensions bore the conformity of three of Gateways officers, among them Andrew.
Gateway issued two Philippine Commercial International Bank checks as payment for its
arrearages and but both checks were dishonored for insufficiency of funds. Asianbanks
demands for payment made upon Gateway and its sureties went unheeded. As of November
23, 1999, Gateways obligation to Asianbank, inclusive of principal, interest, and penalties,
totaled USD 2,235,452.17.
Thus Asianbank filed with the RTC in Makati City a complaint for a sum of money against
Gateway, Geronimo, and Andrew.
In its answer to the amended complaint, Gateway traced the cause of its financial difficulties,
described the steps it had taken to address its mounting problem, and faulted Asianbank for
trying to undermine its efforts toward recovery.
Geronimo, on the other hand, alleged that the subject deed of suretyship, assuming the
authenticity of his signature on it, was signed without his wifes consent and should, thus, be

considered as a mere continuing offer. Like Andrew, Geronimo argued that he ought to be
relieved of his liability under the surety agreement inasmuch as he too never consented to the
repeated loan maturity date extensions given by Asianbank to Gateway.
After due hearing, the RTC rendered judgment holding Gateway, Geronimo and Andrew jointly
and severally liable to pay Asianbank.
Petitioners herein appealed to the CA. Following the filing of its and Geronimos joint appellants
brief, Gateway filed on a petition for voluntary insolvency with the RTC in Imus, Cavite, which
was granted. CA affirmed the decision of the lower court. MR was denied, hence this petition for
review under Rule 45.
ISSUE: WON Geronimo discharged from liability because of the insolvency of Gateway, the
principal debtor.

HELD: NO.
Asianbank argues that the stay of the collection suit against Gateway (because its case is
transferred to an insolvency court) is without bearing on the liability of Geronimo as a surety.
Pursuing the point, Asianbank avers that Geronimo may not invoke the insolvency of Gateway
as a defense to evade liability.
Geronimo counters with the argument that his liability as a surety cannot be separated from
Gateways liability. As surety, he continues, he is entitled to avail himself of all the defenses
pertaining to Gateway, including its insolvency, suggesting that if Gateway is eventually released
from what it owes Asianbank, he, too, should also be so relieved.
Geronimos above contention is untenable.
Suretyship is covered by Article 2047 of the Civil Code, which states:
By guaranty a person, called the guarantor, binds himself to the creditor to fulfill the obligation of
the principal debtor in case the latter should fail to do so.
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.
The Courts disquisition in Palmares v. Court of Appeals on suretyship is instructive, thus:
A surety is an insurer of the debt, whereas a guarantor is an insurer of the solvency of the
debtor. A suretyship is an undertaking that the debt shall be paid x x x. Stated differently, a
surety promises to pay the principals debt if the principal will not pay, while a guarantor agrees
that the creditor, after proceeding against the principal, may proceed against the guarantor if the
principal is unable to pay. A surety binds himself to perform if the principal does not, without
regard to his ability to do so. x x x In other words, a surety undertakes directly for the payment
and is so responsible at once if the principal debtor makes default x x x.
A creditors right to proceed against the surety exists independently of his right to proceed
against the principal. Under Article 1216 of the Civil Code, the creditor may proceed against any
one of the solidary debtors or some or all of them simultaneously. The rule, therefore, is that if
the obligation is joint and several, the creditor has the right to proceed even against the surety
alone.
A Suretyship contract refers to an agreement whereunder one person, the surety, engages to be
answerable for the debt, default, or miscarriage of another known as the principal. Geronimos
position that a surety cannot be made to pay when the principal is unable to pay is clearly
specious and must be rejected.

Security Bank vs. Cuenca G.R. No. 133544 (October 3, 2000) ATIENZA

DOCTRINE:
Being an onerous undertaking, a surety agreement is strictly construed against the creditor, and
every doubt is resolved in favor of the solidary debtor. The fundamental rules of fair play require
the creditor to obtain the consent of the surety to any material alteration in the principal loan
agreement, or at least to notify it thereof
FACTS:
Defendant-appellant Sta. Ines Melale (Sta. Ines/SIMC) is a corporation engaged in logging
operations. It was a holder of a Timber License Agreement issued by the DENR
On 10 November 1980, Security Bank and Trust Co. granted appellant Sta. Ines a credit line in
the amount of (P8,000,000.00) effective until November 30, 1981 to assist the latter in meeting
the additional capitalization requirements of its logging operations.To secure payment, it
executed a chattel mortgage over some of its machineries and equipments. And as an
additional security, its President and Chairman of the Board of Directors Rodolfo Cuenca,
executed an Indemnity agreement in favor of Security Bank whereby he bound himself jointly
and severally with Sta. Ines.Specific stipulations:
The bank reserves the right to amend any of the aforementioned terms and conditions upon
written notice to the Borrower.
As additional security for the payment of the loan,
Rodolfo M. Cuenca executed an Indemnity Agreementdated 17 December 1980
solidary binding himself:
Rodolfo M. Cuenca x x x hereby binds himself x x x
jointly and severally with the client (SIMC) in favor of thebank for the payment, upon demand
and without the benefit of excussion of whatever amount x x x the client maybe indebted to the
bank x x x by virtue of aforesaid credit accommodation(s) including the substitutions, renewals,
extensions, increases, amendments, conversions and revivals of the aforesaid credit
accommodation(s) x x x .
1985: Cuenca resigned as President and Chairman of the Board of Directors of defendantappellant Sta. Ines. Subsequently, the shareholdings of Cuenca in Sta. Ines were sold at a
public auction to Adolfo Angala. Before and after this, Sta Ines availed of its credit line. Sta Ines
encountered difficulty in making the amortization payments on its loans and requested SBTC for
a complete restructuring of its indebtedness

SBTC accommodated SIMCs request and signified its approval in a letter dated
18February 1988 wherein SBTC and Sta. Ines, without notice to or the prior consent of ]
Cuenca, agreed to restructure the past due obligations of defendant-appellant Sta. Ines. To
formalize their agreement to restructure the loan obligations of Sta. Ines, Security Bank and
Sta. Ines executed a Loan Agreement dated 31 October 1989.
Sta Ines made payments up to (P1,757,000.00) and defaulted in the payment of its restructured
loan obligations to SBTC despite demands made upon appellant SIMC and CUENCA,SBTC
filed a complaint for collection of sum of resulting after trial on the merits in a decision by the
court a quo, from which Cuenca appealed
CA: Released Cuenca from liability because 1989 Loan Agreement novated the 1980 credit
accommodation which extinguished the Indemnity Agreement for which Cuenca was liable
solidarily. No notice/consent to restructure. No notice to surety therefore released from liability.
ISSUE:
(a) Whether the 1989 Loan Agreement, without notice to Cuenca, novated the original credit
accommodation and Cuencas liability under the Indemnity Agreement YES
HELD:
The SC held that as per the testimony of the bank representative, the proceeds of the 1989
Loan Agreement were used to pay-off the original indebtedness. The 1989 Loan Agreement
expressly stipulated that its purpose was to liquidate, not to renew or extend, the outstanding
indebtedness. That means there is novation as to the 1980 loan. Moreover, Curnca did not sign
or consent to the 1989 Loan Agreement, which had allegedly extended the original P8 million
credit facility. Hence, his obligation as a surety should be deemed extinguished, pursuant to
Article 2079 of the Civil Code, which specifically states that [a]n extension granted to the debtor
by the creditor without the consent of the guarantor extinguishes the guaranty. There were also
inconsistencies in the 1989 and 1980 loan. Among which is the increase of the amount of
indebtedness from 8 million.
The SC explains that: The theory behind Article 2079 is that an extension of time given to the
principal debtor by the creditor without the suretys consent would deprive the surety of his right
to pay the creditor and to be immediately subrogated to the creditors remedies against the
principal debtor upon the maturity date. The surety is said to be entitled to protect himself
against the contingency of the principal debtor or the indemnitors becoming insolvent during the
extended period.

Piczon vs. Piczon G.R. No. L- 29139 (Nov. 15, 1974) CARIAGA

DOCTRINE: A guaranty must be express, and it would be violative of the law to consider a party
to be bound as a surety when the very word used in the agreement is "guarantor.

FACTS: This is an appeal from the decision sentencing defendants-appellees, Sosing Lobos
and Co., Inc., as principal, and Esteban Piczon, as guarantor, to pay plaintiffs-appellants "the
sum of P12,500.00 with 12% interest from August 6, 1964 until said principal amount of
P12,500.00 shall have been duly paid, and the costs."
When called for pre-trial, plaintiffs and defendants through their lawyers, appeared and entered
into the following agreement:
1.

That defendants admit the due execution of Annexes "A" and "B" of the complaint;

2.
That consequently defendant Sosing-Lobos and Co., Inc. binds itself to the plaintiffs for
P12,500.00, the same to be paid on or before October 31, 1967 together with the interest that
this court may determine.
Annex "A", the actionable document of appellants reads:
AGREEMENT OF LOAN
That I, ESTEBAN PICZON, x x x, in my capacity as the President of the corporation known as
the "SOSING-LOBOS and CO., INC.," as controlling stockholder, and at the same time as
GUARANTOR for the same, contract a loan of P12,500.00, the receipt of which is hereby
acknowledged, from the "Piczon and Co., Inc." another corporation, for which I undertake, bind
and agree to use the loan as surety cash deposit for registration with the SEC of the
incorporation papers relative to the "Sosing-Lobos and Co., Inc.," and to return or pay the same
amount with 12% interest per annum, commencing from the date of execution hereof, to the
"Piczon and Co., Inc., as soon as the said incorporation papers are duly registered and the
Certificate of Incorporation issued by the aforesaid Commission.
I hereunto signed my name this 28th day of September, 1956. (Sgd.) ESTEBAN PICZON
RTC rendered judgment in favor of ESTEBAN PICZON.
Thus, this APPEAL by plaintiffs-appellants CONSUELO PICZON, RUBEN PICZON and AIDA P.
ALCANTARA questioning the decision of the RTC in ordering the payment of 12% interest on
the P12,500 from August 6, 1964 only instead of from September 28, 1956 when Annex A was
executed. They also aver that ESTEBAN PICZON is a surety, not a guarantor.
ISSUE: Whether ESTEBAN PICZON is a guarantor or a surety.
HELD: ESTEBAN PICZON is a guarantor.
The trial court should have adhered to the terms of the agreement which plainly provides that
Esteban Piczon had obligated Sosing-Lobos and Co., Inc. and himself to "return or pay to
Piczon and Co., Inc. the same amount (P12,500.00) with 12% interest per annum commencing
from the date of the execution hereof", Annex A, which was on September 28, 1956.
Under Article 2209 of the Civil Code "(i)f the obligation consists in the payment of a sum of
money, and the debtor incurs in delay, the indemnity for damages, there being no stipulation to

the contrary, shall be the payment of the interest agreed upon, and in the absence of stipulation,
the legal interest, which is six per cent per annum." In the case at bar, the "interest agreed
upon" by the parties in Annex A was to commence from the execution of said document.
Under the terms of the contract, Annex A, Esteban Piczon expressly bound himself only as
guarantor, and there are no circumstances in the record from which it can be deduced that his
liability could be that of a surety. A guaranty must be express, (Article 2055, Civil Code) and it
would be violative of the law to consider a party to be bound as a surety when the very word
used in the agreement is "guarantor.

BA Finance vs. CA G.R. No. 94566 (July 3, 1992) DORIA

DOCTRINE:
Guaranty is not presumed; it must be expressed and cannot be extended beyond its specified
limits.
Persons dealing with an assumed agent, whether on a general or special agency, are bound at
their peril to ascertain not only the fact of agency but also the nature and extent of authority. In
case either the fact of agency or the nature and extent of authority is controverted, the burden of
proof is upon them to establish it.
FACTS:
December 1980: Renato Gaytano, doing business under the name Gebbs International, applied
for and was granted a 25-month term loan of P60K by respondent Traders Royal Bank.
As security for the loan, the Gaytano spouses executed a Deed of Suretyship whereby they
agreed to pay jointly and severally to the bank the amount of the loan including interests,
penalty and other bank charges.
In a letter addressed to the bank, Philip Wong (BA Finance credit administrator), for and in
behalf of BA Finance Corporation, undertook to unconditionally guarantee the loan of the
Gaytano spouses, up to a maximum amount of P60K.
Partial payments were made leaving an unpaid balance of P85K. Since the Gaytano spouses
refused to pay, the bank filed a complaint for sum of money against them and BA Finance as
alternative defendant.
BA Finance raised the defense of lack of authority of its credit administrator to bind the
corporation.
TC: in favor of the bank and against the Gaytano spouses, ordering the latter to jointly and
severally pay; the case was dismissed as against BA Finance Corporation.
Not satisfied, Traders Royal Bank appealed to the CA.
CA: modified TC decision
Ordered the Gaytano spouses and BA Finance Corporation, jointly and severally, to pay the
bank
BA Finance appealed to the SC.
BA Finances contentions: The letter-guaranty is ultra vires and unenforceable as it was issued
by an employee beyond the scope of his authority. The corporation itself is not even
empowered by its articles of incorporation and by-laws to issue guaranties. Also, it is not liable
through estoppel because it had no knowledge or notice of such letter-guaranty.

ISSUE: WON BA Finance is bound by the letter-guaranty issued by its employee. NO

HELD:
It is a rule that persons dealing with an assumed agent, whether the assumed agency be a
general or special one are bound at their peril, if they would hold the principal liable, to ascertain
not only the fact of agency but also the nature and extent of authority, and in case either is
controverted, the burden of proof is upon them to establish it.
The burden is on the bank to satisfactorily prove that the credit administrator, with whom they
transacted, acted within the authority given to him by his principal.
The only evidence presented by the bank was the testimony of Wong, who testified that he had
authority to issue guarantees as can be deduced from the wording of the memorandum given to
him by the corporation on his lending authority.
Although Wong was clearly authorized to approve loans even up to P350K without any security
requirement, nothing in the said memorandum expressly vests on the credit administrator the
power to issue guarantees.
We cannot agree with the banks contention that the phrase "contingent commitment" in the
memorandum means guarantees.
Guaranty is not presumed; it must be expressed and cannot be extended beyond its specified
limits.
The sole allegation of Wong in the absence of any other proof that he is authorized to bind BA
Finance in a contract of guaranty with third persons should not be given weight.
The representation of one who acts as agent cannot by itself serve as proof of his authority to
act as agent or of the extent of his authority.
Anent the conclusion of the CA that BA Finance is estopped from alleging lack of authority, the
said conclusion has no basis.
The bank had not shown any evidence aside from Wongs testimony that the disputed
transaction of guaranty was entered into the official records/files of the corporation, which will
show notice or knowledge on the latter's part and its consequent ratification of the transaction.
In the absence of clear proof, it would be unfair to hold the corporation guilty of estoppel in
allowing its credit administrator to act as though the latter had power to guarantee.
SC: petition is GRANTED; CA decision was REVERSED and SET ASIDE; complaint for sum of
money against BA Finance Corporation was dismissed.

Texas Company vs. Tomas Alonso G.R. No. 47495 (August 14, 1941) FRANCISCO
Doctrine:
Please see held, second bullet.

Facts:
November 1935, Leonor Bantug and Tomas Alonso were sued by Texas Company for the
recovery of P629.

The said amount was the unpaid balance of Bantug in connection with her agency contract with
Texas which Alonso also signed.
"For value received, we jointly and severally do hereby bind ourselves and each of us, in
solidum, with Leonor S. Bantug the agent named in the within and foregoing agreement, for full
and complete performance of same hereby waiving notice of non- performance by or demand
upon said agent, and consent to any and all extensions of time for performance. Liability under
this undertaking, however, shall not exceed the sum of P2,000, Philippine currency."
Bantug was declared in default.
Alonso filed an Answer setting up general denial and averred that Bantug made him believe that
he was merely a co-security of one Palanca and that he was never notified of the acceptance of
his bond by the Texas.
CFI: Bantug and Alonso ordered to pay jointly and severally to the Texas the sum of P629 with
6% interest rate from the date of filing of the complaint.
Alonso appealed.
CA: Bantug was held solely liable for the same amount,CA held that there was merely an offer
of guaranty on the part of Alonso and that he cannot be held liable because he was never
notified by the Texas of its acceptance.
CA found as a fact that the bond in question was executed at the request of Texas by virtue of
the Additional Security Clause, which states: (Exhibit A additional security clause)
The Agent shall whenever requested by the Company in addition to the guaranty herewith
provided, furnish further guaranty or bond, conditioned upon the Agent's faithful performance of
this contract, in such form and amount and with such bank as surety or with such individuals of
firms as joint and several sureties as shall be satisfactory to the Company."
Issue:
W/n there was a contract of guaranty on the part of Alonso

Held:
None.
In view of the Additional Security Clause, which should be the law between the parties, it is
obvious that, before a bond is accepted by the Texas, it has to be in such form and amount and
with such sureties as shall be satisfactory thereto; in other words, the bond is subject to Texas
approval. The logical implication arising from this requirement is that, if the Texas is satisfied
with any such bond, notice of its acceptance or approval should necessarily be given to the
proper party in interest, namely, the surety or guarantor.
In this connection, we are likewise bound by the finding of the CA that there is no evidence in
this case tending to show that Alonso, ever had knowledge of any act on the part of the Texas
amounting to an implied acceptance, so as to justify the application of our decision in National
Bank vs. Escueta (50 Phil., 991).
Where there is merely an offer of, or proposition for, a guaranty, or merely a con- ditional
guaranty in the sense that it requires action by the creditor before the obligation becomes fixed,
it does not become a binding obligation until it is accepted and, unless there is a waiver of
notice, until notice of such acceptance is given to, or acquired by, the guarantor, or until he has
notice or knowledge that the creditor has performed the conditions and intends to act upon
the guaranty.
SC: Affirmed CAs decision.

Dissenting Opinion:
The "guaranty herewith provided" was obviously the bond or guaranty given by Alonso on the
same date and in the same document. It appears clear to us, therefore, that the bond Exhibit A,
being the original guaranty, could not be the "additional guaranty" mentioned in clause 15 of
said Exhibit A.
CAs judgment, as well as the affirming decision of the majority of this court, is based on the
conclusion that the bond sued upon was an additional guaranty; that it constituted a mere offer
of guaranty and, therefore, had to be accepted by the Texas; and that, not having been
accepted, it is inefficacious. We have shown that such conclusion is unwarranted.

Visayan Surety vs. CA G.R. No. 127261 (Sept. 7, 2001) GATCHALIAN

DOCTRINE: The obligation of a surety cannot be extended by implication beyond its specified
limits. "When a surety executes a bond, it does not guarantee that the plaintiffs cause of action
is meritorious, and that it will be responsible for all the costs that may be adjudicated against its
principal in case the action fails. The extent of a suretys liability is determined only by the
clause of the contract of suretyship." A contract of surety is not presumed; it cannot extend to
more than what is stipulated.

FACTS:
Spouses Ibajan filed a complaint against spouses Bartolome, for replevin to recover from them
the possession of an Isuzu jeepney, Plaintiffs Ibajan alleged that they were the owners of an
Isuzu jeepney which was forcibly and unlawfully taken by spouses Bartolome while parked at
their residence.
Plaintiffs filed a replevin bond through petitioner Visayan Surety & Insurance Corporation. Both
bound themselves to be jointly severally liable in the sum of 300,000php for the return of the
property to the defendant, if the return thereof be adjudged and for the payment to the
defendant of such sum as he/she may recover from the plaintiff in the action.
Trial court granted issuance of a writ of replevin and the vehicle was turned over to spouses
Ibajan
Spouses Bartolome filed with the trial court a motion to quash the writ of replevin and to order
the return of the jeepney to them.
Dominador V. Ibajan, father of plaintiff Danilo Ibajan, filed with the trial court a motion for leave
of court to intervene, stating that he has a right superior to the plaintiffs over the ownership and
possession of the subject vehicle. Court granted motion to intervene
Trial court issued an order granting the motion to quash the writ of replevin and ordering
plaintiff Mila Ibajan to return the subject jeepney to the intervenor Dominador Ibajan.
Trial court issued a writ of replevin in favor of intervenor Dominador Ibajan but it was returned
unsatisfied
Intervenor Dominador Ibajan filed with the trial court a motion/application for judgment against
plaintiffs bond. Court ruled in his favor and ordered that spouses Ibajan and Visayan Surety be
held jointly and severally liable of 150,000php.
CA: affirmed decision

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

Estate of Hemady vs. Luzon Surety G.R. No. L-8437 (Nov. 28, 1956) HAUTEA

Luzon Surety filed a claim against the estate of K.H. Hemady based on indemnity
agreements (counterbonds) subscribed by distinct principals and by the deceased K.H.
Hemady as surety (solidary guarantor). As a contingent claim, Luzon Surety prayed for
the allowance of the value of the indemnity agreements it had executed. The lower court

dismissed the claim of Luzon Surety on the ground that whatever losses may occur
after Hemadys death, are not chargeable to his estate, because upon his death he
ceased to be a guarantor.
Issue & Held:
1. Whether the claims of Luzon Surety are chargeable to the Estate of Hemady?
YES .Under the present Civil Code (Article 1311), the rule is that Contracts take effect
only as between the parties, their assigns and heirs, except in case where the rights
andobligations arising from the contract are not transmissible by their nature, or by
stipulation or by provision of law. While in our successional system the responsibility of
the heirs for the debts of their decedent cannot exceed the value of the inheritance they
receive from him, the principle remains intact that these heirs succeed not only to the
rights of the deceased but also to his obligations. Articles 774 and 776 of the New Civil
Code expressly so provide, thereby confirming Article 1311.
In Mojica v. Fernandez, the Supreme Court ruled Under the Civil Code the heirs, by
virtue of the rights of succession are subrogated to all the rights and obligations of the
deceased (Article 661) and can not be regarded as third parties with respect to a
contract to which the deceased was a party, touching the estate of the deceased x x x
which comes in to their hands by right of inheritance; they take such property subject to
all the obligations resting thereon in the hands of him from whom they derive their
rights. The third exception to the transmissibility of obligations under Article 1311 exists
when they are not transmissible by operation of law. The provision makes reference to
those cases where the law expresses that the rights or obligations are extinguished by
death, as is the case in legal support, parental authority, usufruct, contracts for a piece
of work, partnership and agency. By contrast, the articles of the Civil Code that regulate
guaranty or suretyship contain no provision that the guaranty is extinguished upon the
death of the guarantor or the surety.
The contracts of suretyship in favor of Luzon Surety Co. not being rendered
intransmissible due to the nature of the undertaking, nor by stipulations of the contracts
themselves, nor by provision of law, his eventual liability therefrom necessarily passed
upon his death to his heirs. The contracts, therefore, give rise to contingent claims
provable against his estate. A contingent liability of a deceased person is part and
parcel of the mass of obligations that must be paid if and when the contingent liability is
converted into a real liability. Therefore, the settlement or final liquidation of the estate
must be deferred until such time as the bonded indebtedness is paid.
Our conclusion is that the solidary guarantors liability is not extinguished by his death, and that
in such event, the Luzon Surety Co., had the right to file aagainst the estate a contingent claim
for reimbursement. It becomes unnecessary now to discuss the estates liability for premiums

and stamp taxes, because irrespective of the solution to this question, the Luzon Suretys claim
did state a cause of action, and its dismissal was erroneous.

B.

Effects of Guaranty
Wise Co. vs. Tanglao G.R. No. 42518 (August 29, 1936) LIM

FACTS
Cornelio David is an agent of Wise & Co. He was indebted to the company due to a liquidation of
accounts indicating his said liability. The company was able to secure a writ of attachment on his property.
In an effort to avoid the execution of the attachment, David had his attorney (Dionisio Tanglao) sign a
power of attorney in his favor. It contained the following proviso:
To sign for me (Tanglao) as guarantor for himself (David) in his indebtedness to Wise & Company of
Manila, which indebtedness appears in civil case No. 41129, of the Court of First Instance of Manila, and
to mortgage my lot (No. 517-F of the subdivision plan Psd-20, being a portion of lot No. 517 of the
cadastral survey of Angeles, G. L. R. O. Cad. Rec. No. 124), to guarantee the said obligations to the Wise
& Company, Inc., of Manila.
David then executed a compromise agreement with Wise & Co. which named some of his properties
(including the ones he mortgaged to Tanglao) as security for his indebtedness.
As Cornelio David paid only a part of the indebtedness, Wise & Co. filed an action against Atty. Tanglao to
recover the unpaid balance.
ISSUE: W/N Tanglao is liable for the balance
HELD:
No. Nothing is stated in the compromise agreement to the effect that Atty. Tanglao become Davids surety
for the payment of the judgment debt.
Tanglao did not contract any personal responsibility for the payment of the sum of P640. The only
obligation which he contracted was that resulting from the mortgage. However, a foreclosure suit was not
instituted against Atty. Tanglao but a purely personal action for the recovery of the amount still owned by
Atty. Tanglao.
Even granting that Atty. Tanglao may be considered a surety (or guarantor), the action does not lie against
him on the ground that all the legal remedies against him have not previously been asked for and David
has property sufficient to pay the balance of the debt the payment of which is sought of Tanglao in his
alleged capacity as surety.
A guaranty or surety must be expressed and cannot be presumed. Further, the guarantor cannot be
compelled to pay the creditor unless the latter has exhausted all the property of the debtor, and has
resorted to all legal remedies against the debtor.

PBCOM vs CA G.R. No. 90267 (March 22, 1991) MANCIA

Facts:
On April 14, 1976, Fortune Motors (Phils.), Inc. executed a Surety Agreement in favor of Philippine Bank
of Communications (PBCOM) with defendant-appellee Joseph L.G. Chua, as one of the sureties. October
1, 1981, Fortune Motors (Phils.), Inc. executed another Surety Agreement in favor of PBCOM with Chua
likewise acting as one of the sureties.
From March 7, 1983 to May 3, 1983 Fortune Motors, (Phils.) thru its authorized officers and/or
representatives executed several trust receipts in favor of PBCOM.
On March 6, 1981, Forte Merchant Finance, Inc., executed a Surety Agreement in favor of PBCOM with
Joseph L.G. Chua as one of the sureties.
On May 13, 1983 to March 16, 1984, Forte Merchant Finance, Inc. obtained credit accommodations from
PBCOM in the form of trust receipt and loans represented by promissory notes.
On October 24, 1983 Chua executed a Deed of Exchange transferring a parcel of land with improvements
to JALECO Development, Inc., in exchange for 12,000 shares of said Corporation. As a result, Register of
Deeds of Rizal covering the aforementioned parcel of land was issued in the name of JALECO
Development, Inc.
Chua sold 6,000 shares of JALECO Development, Inc., to Mr. Chua Tiong King and another 6,000 shares
of JALECO Development, Inc. to Guillermo Jose, Jr. and Caw Le Ja Chua, wife of Chua sold the 6,000
share of JALECO Development, Inc., to Chua Tiong King.
In the meanwhile, for failure of both Fortune Motors (Phils.), Inc. and Forte Merchant Finance, Inc. to
meet their respective financial obligations with PBCOM, the latter filed Civil Case against Fortune Motors
(Phils.), Inc., Joseph L. G. Chua, George D. Tan, Edgar L. Rodriguez and Jose C. Alcantara and Civil
Case against Forte Merchant Finance, Inc., Joseph L. G. Chua, George O. Tan and Edgar L. Rodriguez
with the Regional Trial Court of Manila, both for Sum of Money with Writ of Preliminary Attachment where
PBCOM was able to obtain a notice of levy on the properties of Fortune Motors (Phils.). When plaintiff
was able to locate Chua's former property situated in Dasmarias, Makati, Metro Manila which was
already transferred to JALECO Development, Inc., by virtue of the Deed of Exchange.
PBCOM filed Civil Case for annulment of Deed of Exchange with the Regional Trial Court of Makati,
Metro Manila.
A decision was rendered on September 18, 1986 dismissing said case.
Issue:
Whether or not the Deed of Exchange between Jaleco and Chua was used to defraud PBCOM
Held:
Yes. As surety for the financial obligations of Fortune Motors (Phils.), Inc. and the Forte Merchant
Finance, Inc., with the petitioner, respondent Chua bound himself solidarily liable with the two (2) principal
debtors. (Article 2047, Civil Code) The petitioner may therefore demand payment of the whole financial
obligations of Fortune Motors (Phils.), Inc. and Forte Finance, Inc., from Chua, if the petitioner chooses to
go directly after him. Hence, since the only property of Chua was sold to JALECO after the debts became

due, the petitioner has the right to file an annulment of the deed of exchange between Chua and JALECO
wherein Chua sold his only property to JALECO to protect his interests.
Upon investigation with the Securities and Exchange Commission (SEC), the petitioner gathered the
following facts based on the SEC records: a) JALECO was organized on November 2, 1982 with a capital
stock of P5,000,000.00; b) the stockholders of said corporation were mostly members of the immediate
family of Joseph L. G. Chua; c) on April 4, 1983, a Board Resolution was passed authorizing the issuance
of 12,000 shares of stocks worth Pl,200,000.00 to a new subscriber and non-stockholder Joseph L. G.
Chua; and d) prior to the acquisition by the corporation of the property located at Dasmarias Village,
Makati, the percentage of the shareholding of the members of the family of Joseph L. G. Chua was 88%
while after the acquisition of the property and the issuance of the shares to Chua, they owned 94% of the
corporation.
In the instant case, the evidence clearly shows that Chua and his immediate family control JALECO. The
Deed of Exchange executed by Chua and JALECO had for its subject matter the sale of the only property
of Chua at the time when Chua's financial obligations became due and demandable. The records also
show that despite the "sale", respondent Chua continued to stay in the property, subject matter of the
Deed of Exchange.
These circumstances tend to show that the Deed of Exchange was not what it purports to be. Instead,
they tend to show that the Deed of Exchange was executed with the sole intention to defraud Chua's
creditorthe petitioner. It was not a bona fide transaction between JALECO and Chua. Chua entered a
sham or simulated transaction with JALECO for the sole purpose of transferring the title of the property to
JALECO without really divesting himself of the title and control of the said property.

Prudential Bank vs. IAC G.R. No. 74886 (Dec. 8, 1992) MORA

Defendant-appellant Philippine Rayon Mills, Inc. entered into a contract with Nissho Co., Ltd. of
Japan for the importation of textile machineries under a five-year deferred payment plan. To
effect payment for said machineries, the defendant-appellant applied for a commercial letter of
credit with the Prudential Bank and Trust Company in favor of Nissho. By virtue of said
application, the Prudential Bank opened Letter of Credit. Against this letter of credit, drafts were
drawn and issued by Nissho, which were all paid by the Prudential Bank.
Upon the arrival of the machineries, the Prudential Bank indorsed the shipping documents to the
defendant-appellant which accepted delivery of the same. To enable the defendant-appellant to
take delivery of the machineries, it executed, by prior arrangement with the Prudential Bank, a
trust receipt which was signed by Anacleto R. Chi in his capacity as President (sic) of
defendant-appellant company.
At the back of the trust receipt is a printed form to be accomplished by two sureties who, by the
very terms and conditions thereof, were to be jointly and severally liable to the Prudential Bank
should the defendant-appellant fail to pay the total amount or any portion of the drafts issued by
Nissho and paid for by Prudential Bank.

The statement at the dorsal portion of the said trust receipt, which petitioner describes as a
"solidary guaranty clause", reads:
In consideration of the PRUDENTIAL BANK AND TRUST COMPANY complying with the foregoing, we jointly
and severally agree and undertake to pay on demand to the PRUDENTIAL BANK AND TRUST COMPANY all
sums of money which the said PRUDENTIAL BANK AND TRUST COMPANY may call upon us to pay arising
out of or pertaining to, and/or in any event connected with the default of and/or non-fulfillment in any respect of
the undertaking of the aforesaid:
PHILIPPINE RAYON MILLS, INC.
We further agree that the PRUDENTIAL BANK AND TRUST COMPANY does not have to take any steps or
exhaust its remedy against aforesaid:
before making demand on me/us.
(Sgd.) Anacleto R. Chi

Philippine Rayon Mills (defendant-appellant) ceased operation. However, despite repeated

formal demands, its obligation arising from the letter of credit and trust receipt remain unpaid.
Hence the filing of an action for collection of a sum of money against Philippine Rayon Mills and
Anacleto Chi.
RTC: Dismissed the case as to Chi. Ordered Philippine Rayon Mills to pay the amounts due.
IAC: Affirmed the RTC in all respects. It held that Chi is not liable on the trust receipt either as
surety or as guarantor. This is because his signature at the dorsal portion thereof was useless;
and even if he could be bound by such signature as a simple guarantor, he cannot, pursuant to
Article 2058 of the Civil Code, be compelled to pay until after petitioner has exhausted and
resorted all legal remedies against the principal debtor, Philippine Rayon Mills.
ISSUE:
W/N Anacleto Chi is merely a simple guarantor; and if so has his liability as such already
attach?
W/N Anacleto Chi is solidarily liable with Philippine Rayon Mills?
HELD:
Chi is not solidarily liable with Philippine Rayon Mills. His obligation is only that of a guarantor.
The questioned solidary guaranty clause yields no other conclusion than that the obligation of
Chi is only that of a guarantor. This is further bolstered by the last sentence which speaks of
waiver of exhaustion, which, nevertheless, is ineffective in this case because the space therein
for the party whose property may not be exhausted was not filled up. Under Article 2058 of the
Civil Code, the defense of exhaustion (excussion) may be raised by a guarantor before he may
be held liable for the obligation. Petitioner likewise admits that the questioned provision is a
solidary guaranty clause, thereby clearly distinguishing it from a contract of surety. It, however,
described the guaranty as solidary between the guarantors; this would have been correct if two

(2) guarantors had signed it. The clause "we jointly and severally agree and undertake" refers to
the undertaking of the two (2) parties who are to sign it or to the liability existing between
themselves. It does not refer to the undertaking between either one or both of them on the one
hand and the petitioner on the other with respect to the liability described under the trust receipt.
Elsewise stated, their liability is not divisible as between them, i.e., it can be enforced to its full
extent against any one of them.
Furthermore, any doubt as to the import, or true intent of the solidary guaranty clause should be
resolved against the petitioner. The trust receipt, together with the questioned solidary guaranty
clause, is on a form drafted and prepared solely by the petitioner; Chi's participation therein is
limited to the affixing of his signature thereon. It is, therefore, a contract of adhesion; as such, it
must be strictly construed against the party responsible for its preparation.
The Court disagrees with the IAC that solidary guaranty clause was effectively disregarded
simply because it was not signed and witnessed by two (2) persons and acknowledged before a
notary public. While indeed, the clause ought to have been signed by two (2) guarantors, the
fact that it was only Chi who signed the same did not make his act an idle ceremony or render
the clause totally meaningless. By his signing, Chi became the sole guarantor. The attestation
by witnesses and the acknowledgement before a notary public are not required by law to make
a party liable on the instrument. The rule is that contracts shall be obligatory in whatever form
they may have been entered into, provided all the essential requisites for their validity are
present; however, when the law requires that a contract be in some form in order that it may be
valid or enforceable, or that it be proved in a certain way, that requirement is absolute and
indispensable. With respect to a guaranty, which is a promise to answer for the debt or default
of another, the law merely requires that it, or some note or memorandum thereof, be in writing.
Otherwise, it would be unenforceable unless ratified. While the acknowledgement of a surety
before a notary public is required to make the same a public document, under Article 1358 of
the Civil Code, a contract of guaranty does not have to appear in a public document.
Excussion is not a condition sine qua non for the institution of an action against a guarantor. In
Southern Motors, Inc. vs. Barbosa, this Court stated:
4.
Although an ordinary personal guarantor not a mortgagor or pledgor may
demand the aforementioned exhaustion, the creditor may, prior thereto, secure a judgment
against said guarantor, who shall be entitled, however, to a deferment of the execution of
said judgment against him until after the properties of the principal debtor shall have been
exhausted to satisfy the obligation involved in the case.
Chi's liability is limited to the principal obligation in the trust receipt plus all the accessories
thereof including judicial costs; with respect to the latter, he shall only be liable for those costs
incurred after being judicially required to pay. Interest and damages, being accessories of the
principal obligation, should also be paid; these, however, shall run only from the date of the filing
of the complaint. Attorney's fees may even be allowed in appropriate cases.
SC:

Philippine Rayon Mills is principally liable on the 12 drafts and the trust receipt.
Anacleto Chi is secondarily liable on the trust receipt. The Court ordered him to pay the face
value thereof if the writ of execution for the enforcement of judgment is returned unsatisfied.

Bitanga vs. Pyramid G.R. No. 173526 (Aug. 28, 2008) MORENO
FACTS: Pyramid filed with the RTC a Complaint for specific performance and damages with
application for the issuance of a writ of preliminary attachment against the petitioner and wife
Marilyn.
Respondent alleged in its Complaint that, it entered into an agreement with Macrogen Realty, of
which Bitanga is the President, to construct for the latter the Shoppers Gold Building located in
Paraaque City. Respondent commenced civil, structural, and architectural works on the
construction project. However, Macrogen failed to settle respondents progress billings.
Petitioner, through his representatives and agents, assured respondent that the outstanding
account of Macrogen would be paid and relying on the assurances made by petitioner,
respondent continued the construction project.
Later, respondent suspended work on the construction project since the conditions that it
imposed for the continuation thereof, including payment of unsettled accounts, had not been
complied with by Macrogen. Respondent instituted with the Construction Industry Arbitration
Commission (CIAC) a case for arbitration against Macrogen Realty seeking payment by the
latter of its unpaid billings and project costs. Before the arbitration case could be set for trial,
Pyramid and Macrogen entered into a Compromise Agreement with petitioner acting as
signatory for and in behalf of Macrogen Realty.
Under the Compromise Agreement, Macrogen Realty agreed to pay respondent the total
amount of P6,000,000.00 by installments. Petitioner guaranteed the obligations of
Macrogen Realty under the Compromise Agreement by executing a Contract of Guaranty
in favor of respondent, by virtue of which he irrevocably and unconditionally guaranteed the full

and complete payment of the principal amount of liability of Macrogen. Upon joint motion of
respondent and Macrogen Realty, the CIAC approved the Compromise Agreement.
Macrogen Realty failed and refused to pay all the monthly installments agreed upon in the
Compromise Agreement. Hence respondent moved for the issuance of a writ of execution
against Macrogen, which CIAC granted.
The sheriff filed a return stating that he was unable to locate any property of Macrogen Realty,
except its bank deposit of P20,242.33, with the Planters Bank, Buendia Branch.
Respondent then made, a written demand on petitioner, as guarantor of Macrogen to pay the
liability or to point out available properties of the Macrogen within the Philippines sufficient to
cover the obligation guaranteed. It also made verbal demands on petitioner. Yet, respondents
demands were left unheeded.
Petitioner filed with the RTC his Answer to respondents Complaint. As a special and affirmative
defense, petitioner argued that the benefit of excussion was still available to him as a guarantor
since he had set it up prior to any judgment against him. According to petitioner, respondent
failed to exhaust all legal remedies to collect from Macrogen the amount due under the
Compromise Agreement, considering that Macrogen Realty still had uncollected credits which
were more than enough to pay for the same. Given these premise, petitioner could not be held
liable as guarantor.
ISSUE: WON petitioner cam avail of the benefit of excussion

HELD: NO.
Under a contract of guarantee, the guarantor binds himself to the creditor to fulfill the obligation
of the principal debtor in case the latter should fail to do so. The guarantor who pays for a
debtor, in turn, must be indemnified by the latter. However, the guarantor cannot be compelled
to pay the creditor unless the latter has exhausted all the property of the debtor and resorted to

all the legal remedies against the debtor. This is what is otherwise known as the benefit of
excussion.
Article 2060 of the Civil Code reads:
Art. 2060. In order that the guarantor may make use of the benefit of excussion, he must
set it up against the creditor upon the latters demand for payment from him, and point
out to the creditor available property of the debtor within Philippine territory, sufficient to
cover the amount of the debt

It must be stressed that despite having been served a demand letter at his office, petitioner still
failed to point out to the respondent properties of Macrogen Realty sufficient to cover its debt as
required under Article 2060 of the Civil Code. Such failure on petitioners part forecloses his
right to set up the defense of excussion.
Worthy of note as well is the Sheriffs return stating that the only property of Macrogen Realty
which he found was its deposit of P20,242.23 with the Planters Bank.
Article 2059(5) of the Civil Code thus finds application and precludes petitioner from interposing
the defense of excussion. We quote:
Art. 2059. This excussion shall not take place:
xxxx
(5) If it may be presumed that an execution on the property of the principal debtor would
not result in the satisfaction of the obligation.

As the Court of Appeals correctly ruled:

We find untenable the claim that the Bitanga cannot be compelled to pay Pyramid because the
Macrogen Realty has allegedly sufficient assets. Reason: The said [petitioner] had not genuinely
controverted the return made by Sheriff Bisnar, who affirmed that, after exerting diligent efforts,

he was not able to locate any property belonging to the Macrogen Realty, except for a bank
deposit with the Planters Bank at Buendia, in the amount of P20,242.23. It is axiomatic that the
liability of the guarantor arises when the insolvency or inability of the debtor to pay the amount
of debt is proven by the return of the writ of execution that had not been unsatisfied.

Petition denied for lack of merit; CA affirmed; Bitanga (alone; not including his wife who is not a
party to the compromise agreement) is liable as per Compromise Agreement or the contract of
guaranty.

JN Devt. vs. Phil Export G.R. No. 151060 (Aug. 31, 2005) SANTOS

NB: This case has 4 issues regarding guarantee.

Important Dates:
Loan
Dec. 13, 1979
Guarantee
Dec. 17, 1979 Dec. 17, 1979 (1 year)
TRB Demand
Oct. 8, 1980
PhilGuarantee paid TRB
Mar. 10, 1981
FACTS: On 13 December 1979 Traders Royal Bank (TRB) extend to JN Development
Corporation (JN) an Export Packing Credit Line for P2m. The loan was covered by several
securities, including a real estate mortgage, and a letter of guarantee from respondent
PhilGuarantee.
JN failed to pay the loan to TRB upon its maturity, thus, on 8 October 1980 TRB requested
PhilGuarantee to make good its guarantee. PhilGuarantee paid TRB P934,824.34 on 10 March
1981. Subsequently, PhilGuarantee made several demands on JN, but the latter failed to pay.
JN, proposed to settle the obligation by way of development and sale of the mortgaged
property.
PhilGuarantee thus filed a Complaint for collection of money and damages against herein
petitioners.
RTC: held that since PhilGuarantees guarantee was good for only one year from 17 December
1979 until 17 December 1980, and since it was not renewed after the expiry of said period,
PhilGuarantee had no more legal duty to pay TRB on 10 March 1981.

ISSUE(1/4): Whether the date of default, not the actual date of payment, determines the liability
of the guarantor.
HELD: DATE OF DEFAULT determines the liability of the guarantor!
The guarantee was only up to 17 December 1980. JNs obligation with TRB fell due on 30 June
1980, and demand on PhilGuarantee was made by TRB on 08 October 1980. That payment
was actually made only on 10 March 1981 does not take it out of the terms of the guarantee.
What is controlling is that default and demand on PhilGuarantee had taken place while the
guarantee was still in force.
ISSUE(2/4): Whether PhilGuarantee was correct in paying the guarantee, without TRB
exhausting the property of JN.
HELD: YES! PhilGuarantee was correct and may demand recovery of what it has paid to TRB
from JN. Excussion is a waivable right of a guarantor.
Under a contract of guarantee, the guarantor binds himself to the creditor to fulfill the obligation
of the principal debtor in case the latter should fail to do so. The guarantor who pays for a
debtor, in turn, must be indemnified by the latter. However, the guarantor cannot be compelled
to pay the creditor unless the latter has exhausted all the property of the debtor and resorted to
all the legal remedies against the debtor. This is what is otherwise known as the benefit of
excussion.
While a guarantor enjoys the benefit of excussion, nothing prevents him from paying the
obligation once demand is made on him. Excussion, after all, is a right granted to him by law
and as such he may opt to make use of it or waive it. PhilGuarantees waiver of the right of
excussion cannot prevent it from demanding reimbursement from petitioners. The law clearly
requires the debtor to indemnify the guarantor what the latter has paid.
ISSUE(3/4): Whether PhilGuarantees failure to give its express consent to the alleged
extensions granted by TRB to JN had extinguished the guarantee.
HELD: NO! Right is waivable by guarantor.
The requirement that the guarantor should consent to any extension granted by the creditor to
the debtor under Art. 2079 is for the benefit of the guarantor and is waivable. Indeed, a
guarantor is not precluded from waiving his right to be notified of or to give his consent to
extensions obtained by the debtor. Such waiver is not contrary to public policy as it is purely
personal and does not affect public interest.
In the instant case, PhilGuarantees waiver can be inferred from its actual payment to TRB after
the latters demand, despite JNs failure to pay the renewal/guarantee fee as indicated in the
guarantee.
ISSUE(4/4): Whether TRBs foreclosure of the real estate mortgage executed as security for the
loan agreement had extinguished PhilGuarantees obligation; thus, PhilGuarantees recourse
should be directed against TRB, as per the pari-passu provision in the contract of guarantee.

HELD: NO! It did not extinguish the obligation.

Petitioners cannot invoke the pari-passu clause in the guarantee, not being parties to the said
agreement. The clause is clearly for the benefit of the guarantor and no other.
The complaint a quo was filed by PhilGuarantee as guarantor for JN, and its cause of action
was premised on its payment of JNs obligation after the latters default. PhilGuarantee was
well within its rights to demand reimbursement for such payment made, regardless of whether
the creditor, TRB, was subsequently able to obtain payment from JN. If double payment was
indeed made, then it is JN which should go after TRB, and not PhilGuarantee. Petitioners have
no one to blame but themselves, having allowed the foreclosure of the property for the full value
of the loan despite knowledge of PhilGuarantees payment to TRB. Having been aware of such
payment, they should have opposed the foreclosure, or at the very least, filed a supplemental
pleading with the trial court informing the same of the foreclosure sale.

Mira Hermanos vs. Manila G.R. No. 48979 (Sept. 29, 1943) SUPAPO
(Note: Art 1837 CC is similar to Art 2065 NCC)
DOCTRINE:
The right to the benefit of division against the co-sureties for their respective shares ceases in
the same cases and for the same reason as that to an exhaustion of property against the
principal debtor.
FACTS:
1.
By virtue of a written contract, Mira Hermanos, Inc. delivered to Manila
Tobacconists, Inc. merchandise for sale on consignment.
2.
Mira required Tobacconists, a bond of P3,000, which was executed by the
Provident Insurance Co., to secure the fulfillment of the obligation of the Tobacconists
under the contract.
3.
When the value of the consigned merchandise exceeded P3,000, Mira required
Tobacconists an additional bond of P2,000.
4.
In compliance with the requirement, Manila Compaia de Seguros, executed a
bond of P2,000 with the same terms and conditions (except as to the amount) as the bond
of the Provident Insurance Co.
5.
After liquidation, a balance of P2,272.79 due from Tobacconists was found.
6.
Tobacconists was unable to pay.
7.
Thereupon, Mira Hermanos made a demand upon the two surety companies for
the payment of said sum.
8.
Provident paid only the sum of P1,363.67, which is 60% of the amount, alleging
that the remaining 40% should be paid by the other surety in accordance with article 1837
of the Civil Code. (Pro rated: 3000:2000)
9.
Manila Compaia refused to pay contending that so long as the liability of the
Tobacconists did not exceed P3,000, it was not bound to pay anything because its bond
referred only to the obligation of the Tobacconists in excess of P3,000 and up to P5,000.

ISSUE: Is Manila Compaias solidarily liable with Provident for the balance due from
Tobacconists?
HELD: NO! Manila Compaia is liable only to an amount in excess of P3,000.
The right to the benefit of division against the co-sureties for their respective shares ceases in
the same cases and for the same reason as that to an exhaustion of property against the
principal debtor.
As the trial court observed, there would have been no need for the additional bond of P2,000 if
its purpose were to cover the first P2,000 already covered by the P3,000 bond of the Provident
Insurance Co. Indeed, we might add, if the purpose of the additional bond of P2,000 were to
cover not the excess over and above P3,000 but the first P2,000 of the obligation of the
principal debtor like the bond of P3,000 which covered only the first P3,000 of said obligation,
then it would result that had the obligation of the Tobacconists exceeded P3,000, neither of the
two bonds would have responded for the excess, and that was precisely the event against
which Mira Hermanos wanted to protect itself by demanding the additional bond of P2,000. For
instance, suppose that the obligation of the principal debtor, the Tobacconists, amounted to
P5,000; if both bonds were co-extensive up to P2,000 as would logically follow if appellant's
contention were correct the result would be that the first P2,000 of the obligation would have
to be divided between and paid equally by the two surety companies, which should pay P1,000
each, and of the balance of P3,000 the Provident Insurance Co. would have to pay only P1,000
more because its liability is limited to the first P3,000, thus leaving the plaintiff in the lurch as to
the excess of P2,000. That was manifestly not the intention of the parties. As a matter of fact,
when the Provident gave its bond and fixed the premiums thereon it assumed an obligation of
P3,000 in solidum with the Tobacconists without any expectation of any benefit of division with
any other surety. The additional bond of P2,000 was, more than a year later, required by the
creditor of the principal debtor for the protection of said creditor and certainly not for the benefit
of the original surety, which was not entitled to expect any such benefit.
The foregoing considerations, which fortify the trial court's conclusion as to the real intent and
agreement of the parties with regard to the bond of P2,000 given by the Manila Compaia de
Seguros, destroys at the same time the theory of the appellant regarding the applicability of
article 1837 of the Civil Code.
Article 1837 refers to several sureties of only one debtor for the same debt. In the instant
case, although the two bonds on their face appear to guarantee the same debt co-extensively
up to P2,000 that of the Provident Insurance Co. alone extending beyond that sum up to
P3,000 it was pleaded and conclusively proven that in reality said bonds, or the two
sureties, do not guarantee the same debt because the Provident Insurance Co.
guarantees only the first P3,000 and the Manila Compaia de Seguros, only the excess
over and above said amount up to P5,000. Article 1837 does not apply to this factual
situation.

Tuason vs. Machuca G.R. No. L- 22177 (Dec.2, 1924) VELASCO

DOCTRINE
Although the plaintiff has not as yet paid "Manila Compaia de Seguros", the plaintiff is entitled
to the relief sought by virtue of a final judgment rendering it liable to pay the value of the note
executed by it in favor of "Manila Compaia de Seguros."

FACTS
Manila Compaia de Seguros issued a bond that allowed the Universal Trading Company to
withdraw from the customhouse sundry goods imported by it and consigned through BPI.
Subsequently, BPI claimed the value of the goods.
The Insular Collector of Customs obligated the Manila Compaia de Seguros to pay the sum of
P9,663, the amount of the bond.
Before paying, the "Manila Compaia de Seguros" obtained from the Universal Trading
Company and Tuason, Tuason & Co. a solidary note for the sum.
Before signing said note, Tuason, Tuason & Co. caused the Universal Trading Company and its
president Antonio Machuca, personally, to sign a document wherein they bound themselves
solidarily to settle any obligations that may have been incurred with Manila Compaia de
Seguros.
The Universal Trading Company having been declared insolvent, Manila Compaia de Seguros
brought an action in the lower court against Tuason, Tuason & Co. to recover the value of the
note for P9,663.
Tuason, Tuason, Inc. (former Tuason, Tuason & Co.) then brought this action to recover from
Antonio Machuca the sum it allegedly paid to Manila Compaia, amounting to P12,197.27
(including litigation expenses and interest).
LC: in favor of Tuason, Inc.
ISSUE: Whether Antonio Machuca is liable to pay Tuason, Inc.
HELD: YES, but only to P9,663.
Not Liable to Pay under A. 1843
It appears from the evidence that the plaintiff has not in fact paid the amount of the
judgment to "Manila Compaia de Seguros."

The plaintiff company argues that, at all events, it is entitled to bring this action under article
1843 of the Civil Code, which provides that the surety may, even before making payment, bring
action against the principal debtor. This contention is untenable.
The present action, according to the terms of the complaint, is clearly based on the fact
of payment.
Article 1843 provided several cumulative remedies in favor of the surety, at his election, and the
surety who brings an action under this article must choose the remedy and apply for it
specifically.
It does not provide for the reimbursement of any amount, as is sought by the plaintiff.

Liable to Pay by Virtue of Final Judgment

Although the plaintiff has not as yet paid "Manila Compaia de Seguros" the amount of the
judgment against it, and even considering that this action cannot be held to come under article
1843 of the Civil Code, the plaintiff is entitled to the relief sought.
The plaintiff became bound, by virtue of a final judgment, to pay the value of the note executed
by it in favor of "Manila Compaia de Seguros."
According to the document executed solidarily by the defendant and the Universal Trading
Company, the defendant bound himself to pay the plaintiff as soon as the latter may have
become bound and liable, whether or not it shall have actually paid.
Plaintiff became bound and liable by a final judgment to pay the value of the note to
"Manila Compaia de Seguros."
On Novation
The defendant contends that the document executed by Albina Tuason in favor of "Manila
Compaia de Seguros" assuming and making hers the obligation of Tuason, Tuason & Co., was
a novation of the contract by substitution of the debtor, and relieved Tuason, Tuason & Co. from
all obligation in favor of "Manila Compaia de Seguros."
Evidently it was not what "Manila Compaia de Seguros" accepted.
"Manila Compaia de Seguros" accepted this document only as additional security for
its credit and not as a novation of the contract.
Amount of Recovery and Basis
The plaintiff has the right to recover of the defendant the sum of P9,663, the value of the
note which it is under the obligation to pay by virtue of final judgment.
The defendant is not obliged to pay the plaintiff the expenses incurred by it in its litigation with
"Manila Compaia de Seguros."
That litigation was originated by the plaintiff having failed to fulfill its obligation with "Manila
Compaia de Seguros," and it cannot charge the defendant with expenses which it was
compelled to make by reason of its own fault.
It is entitled, however, to the expenses incurred by it in this action brought against the
defendant, which are fixed at P1,653.65 as attorney's fees.

Kuenzle vs. Sunco G.R. No. 5208 (Dec. 1, 1909) VILLAFUERTE

Doctrine: A surety, even before having paid obligee/creditor, may proceed against the principal
debtor, when the debt has become demandable by reason of the expiration of period of
payment. (Article 2071)
Parties:
Kuenzel- obligee, plaintiff
Chung Chu Sing- obligor
Tan Sunco- surety, defendant

Facts:
Defendant Tan Sunco bound himself as surety for Chung Chu Sing for the payment by the latter
of the purchase price of merchandise which the latter purchased from Ed. A. Keller & Co.
Chung Chu Sing defaulted and his four invoices (P395.50, P450, P565, and P320.20) remained
unpaid. Thus, plaintiff filed suit against Chung Chu Sing for recovery of sums based on the
latter's indebtedness.
However, shortly before judgment in that action was secured, defendant filed 4 separate actions
against Chung Chu Sing based on the four invoices representing the latter's indebtedness to
herein plaintiff. At trial, Chung Chu Sing confessed judgment in favor of Tan Sunco. Upon
obtaining a favorable judgments, Tan Sunco was then able to levy thereunder execution upon all
of the property of Chung Chu Sing.
Plaintiff now comes before the court seeking that the four judgments issued in favor of Tan
Sunco be set aside. He claimed that the judgments were obtained through collusion with the
purpose of defrauding him (plaintiff) since Chung Chu Sing did not owe Tan Sunco anything.
ISSUE: WON Tan Sunco, as surety, can obtain judgments for sums of money against Chung
Chu Sing, the principal debtor, despite not having himself paid any amount to Kuenzel (plaintiff
obligee).

HELD:
Yes. However, Tan Sunco should not be allowed to realize on said judgments to the point of
actual collection until he has satisfied the obligation the payment of which he assures. Tan
Sunco may not execute on the judgments until he himself has paid the debt for which he stands
surety.
The SC affirmed the decision of the lower court citing Art 1843 (now 2071) of the Civil Code.
The Court said that though Art 1838 (now 2066) provided for the enforcement of the surety's
rights against the debtor after he has paid the debt, Art 1843 (2071) provided for his protection
even before he has paid but after he has become liable to do so.
Pertinent parts of the SC decision read:
We think that the Art 1843 (2071) of the Civil Code is applicable to this case. In their purposes
articles 1838 (2066) and 1843 (2071) are quite distinct, although in perfect harmony, the latter
making more clearly effective the purpose of the former. Art 1838 (2066) provides for the
enforcement of the right of the surety against the debtor after he has paid the debt. Art 1843
(2071) provides for his protection before he has paid but after he has become liable to do so.
The one gives a right of action after payment, the other a protective remedy before payment.
The one is a substantive right, the other of the nature of a preliminary remedy. The one gives a
right of action which, without the provisions of the other, might be worthless. The remedy given
in Art 1843 (2071) purposes to obtain for the surety relief from the burden of his suretyship or a
guaranty to defend him against any proceedings of the creditor and from the danger of
insolvency of the debtor. Art 1838 (2066), speaking under this article become available, he is
past the point where a preliminary protective remedy is of any value to him.
It being evident that the purpose of Art 1843 (2071) is to give to the surety a remedy in
anticipation of the payment of the debt, which debt, being due, he could be called upon to pay at
any time, it remains only to say, in this connection, that the only procedure known under our
present practice to enforce that right is by action.

The defendant Sunco availed himself of that right against the debtor. The methods employed by
him to realize his end were unusual but not of themselves fraudulent. We agree with the trial
court that the evidence adduced is entirely insufficient to establish such fraud and collusion as
would justify a decision setting aside the judgment assailed.

Manila Surety vs. Batu G.R. No. L- 9353 (May 21, 1957) ATIENZA

Manila Surety is a company engaged in posting bonds for government projects

Batu Construction & Company is a company that is building a bridge for the government
Manila Surety paid a P8,812 bond for Batu Construction Companys bridge project. This project was not finished by
Batu on 30 May 1951 and because of the unsatisfactory progress of the work on the bridge, the Director of Public
Works, with the approval of the Secretary of Public Works and Communications, annulled, the construction contract
referred to and notified the plaintiff Company that the Government would hold it (the Company) liable for any amount
incurred by the Government for the completion of the bridge, in excess of the contract price
On 19 December 1951 (should be 23 November 1951), Ricardo Fernandez and 105 other persons brought an action
in the Justice of the Peace Court of Laoag, Ilocos Norte, against the partnership, the individual partners and the
herein plaintiff Manila Surety for the collection of unpaid wages amounting to P5,960.10
Manila Surety then asked for a levy on the property of Batu Construction. At the hearing, the plaintiff presented its
evidence. After the plaintiff had rested its case, defendant Gonzalo P. Amboy moved for the dismissal of the
complaint, on the ground that the remedy provided for in the last paragraph of article 2071 of the new Civil Code may
be availed of by the guarantor only and not by a surety.
NOTE: Art. 2071 The gurantor, even before having paid, may proceed against the principal debtor:
(1)When he is sued for payment
The Lower Court dismissed the case and dissolved the writ on attachment on the opinion that the provisions of article
2071 of the new Civil Code may be availed of by a guarantor only and not by a surety the complaint
ISSUE: The main question to determine is whether the last paragraph of article 2071 of the new Civil Code taken
from article 1843 of the old Civil Code may be availed of by a surety.
HELD: YES!
According to the SC, a guarantor is the insurer of the solvency of the debtor; a surety is an insurer of the debt. A
guarantor binds himself to pay if the principal is unable to pay; a surety undertakes to pay if the principal does not
pay. In suretyship the surety becomes liable to the creditor without the benefit of the principal debtor's exclusion of his
properties, for he (the surety) maybe sued independently. So, he is an insurer of the debt and as such he has
assumed or undertaken a responsibility or obligation greater or more onerous than that of guarantor. Such being the
case, the provisions of article 2071, under guaranty, are applicable and available to a surety.
The SC adds that The reference in article 2047 to, the provisions of Section 4, Chapter 3, Title 1, Book IV of the new
Civil Code, on solidary or several obligations, does not mean that suretyship which is a solidary obligation is
withdrawn from the applicable provisions governing guaranty.
Manila Suretys cause of action comes under paragraph 1 of article 2071 of the new Civil Code, because the action
brought by Ricardo Fernandez and 105 persons in the Justice of the Peace Court of Laoag, province of Ilocos Norte,
for the collection of unpaid wages amounting to P5,960.10, is in connection with the construction of the Bacarra
Bridge, Project PR-72 (3), undertaken by the Batu Construction & Company, and one of the defendants therein is the
herein plaintiff, the Manila Surety and Fidelity Co., Inc., and paragraph 1 of article 2071 of the new Civil Code

provides that the guarantor, even before having paid, may proceed against the principal debtor "to obtain release
from the guaranty, or to demand a security that shall protect him from any proceedings by the creditor or from the
danger of insolvency of the debtor, when he (the guarantor) is sued for payment.
The case was remanded to the court below for determination of the amount of security that would protect Manila
Surety from any proceedings by the creditor or from the danger of insolvency of the defendants

C. Extinguishment

PNB vs. Manila Surety G.R. No. L- 20567 (July 30, 1965) CARIAGA
DOCTRINE: The guarantors, even though they be solidary, are released from their obligation
whenever by some act of the creditor they cannot be subrogated to the rights, mortgages and
preferences of the latter.
FACTS: The PNB had opened a letter of credit and advanced thereon $120,000.00 to
Edgington Oil Refinery for 8,000 tons of hot asphalt. Of this amount, 2,000 tons worth
P279,000.00 were released and delivered to Adams & Taguba Corporation (ATACO) under a
trust receipt guaranteed by Manila Surety up to the amount of P75,000.00. To pay for the
asphalt, ATACO constituted PNB as its assignee and attorney-in-fact to receive and collect from
the Bureau of Public Works the amount aforesaid out of funds payable to the assignor. This
assignment stipulated that:
1. The same shall remain irrevocable until the said credit accommodation is fully liquidated.
2. The PNB is hereby appointed as our Attorney-in-Fact for us and in our name, place and
stead, to collect and to receive the payments to be made by virtue of the aforesaid Purchase
Order, with full power and authority to execute and deliver on our behalf, receipt for all payments
made to it; to endorse for deposit or encashment checks, money order and treasury warrants
which said Bank may receive, and to apply said payments to the settlement of said credit
accommodation.
This power of attorney shall also remain irrevocable until our total indebtedness to the said
Bank have been fully liquidated.
ATACO delivered to the Bureau of Public Works, and the latter accepted, asphalt to the total
value of P431,466.52. Of this amount the Bank regularly collected, from April 21, 1948 to
November 18, 1948, P106,382.01. Thereafter, for unexplained reasons, the Bank ceased to
collect, until in 1952, its investigators found that more moneys were payable to ATACO from the
Public Works office, because the latter had allowed mother creditor (Edgington Oil Refinery) to
collect funds due to ATACO under the same purchase order to a total of P311,230.41.
Its demands on ATACO and Manila Surety having been refused, PNB sued both to recover the
balance of P158,563.18 as of February 15, 1950, plus interests and costs.
Trial court favored PNB.

Only Manila Surety appealed. CA rendered an adverse decision and modified the judgment of
the court as to the surety's liability. It found the Bank to have been negligent in having stopped
collecting from the Bureau of Public Works the moneys falling due in favor of the principal
debtor, ATACO, before the debt was fully collected, thereby allowing such funds to be taken and
exhausted by other creditors to the prejudice of the surety, and held that the Bank's negligence
resulted in exoneration of respondent Manila Surety.
Thus, PNB appealed to this Court.
ISSUE: Whether Manila Suretys obligation was extinguished.
HELD: YES, Manila Suretys obligation was extinguished. PNB contends that the power of
attorney obtained from ATACO was merely in additional security in its favor, and that it was the
duty of the surety, and not that of the creditor, owed see to it that the obligor fulfills his
obligation, and that the creditor owed the surety no duty of active diligence to collect any, sum
from the principal debtor.
This argument of appellant Bank misses the point. The CA did not hold the Bank answerable for
negligence in failing to collect from the principal debtor but for its neglect in collecting the sums
due to the debtor from the Bureau of Public Works, contrary to its duty as holder of an exclusive
and irrevocable power of attorney to make such collections, since an agent is required to act
with the care of a good father of a family (Civ. Code, Art. 1887) and becomes liable for the
damages which the principal may suffer through his non-performance (Civ. Code, Art. 1884).
Certainly, the Bank could not expect that the Bank would diligently perform its duty under its
power of attorney, but because they could not have collected from the Bureau even if they had
attempted to do so. It must not be forgotten that the Bank's power to collect was expressly
made irrevocable, so that the Bureau of Public Works could very well refuse to make payments
to the principal debtor itself, and a fortiori reject any demands by the surety.
Even if the assignment with power of attorney from the principal debtor were considered as
mere additional security still, by allowing the assigned funds to be exhausted without notifying
the surety, the Bank deprived the former of any possibility of recoursing against that security.
The Bank thereby exonerated the surety, pursuant to Article 2080 of the Civil Code:
ART. 2080. The guarantors, even though they be solidary, are released from their obligation
whenever by some act of the creditor they cannot be subrogated to the rights, mortgages and
preferences of the latter.
PNB points out to its letter of demand addressed to the Bureau of Public Works and its letter to
ATACO, informing the debtor of its outstanding balance. Said Exhibit has no bearing on the
issue whether the Bank has exercised due diligence in collecting from the Bureau of Public
Works, since the letter was addressed to ATACO, and the funds were to come from elsewhere.
As to the letter of demand on the Public Works office, it does not appear that any reply thereto
was made; nor that the demand was pressed, nor that the debtor or the surety were ever
apprised that payment was not being made. The fact remains that because of the Bank's

inactivity the other creditors were enabled to collect P173,870.31, when the balance due to
appellant Bank was only P158,563.18.
The rules on application of payments, giving preference to secured obligations are only
operative in cases where there are several distinct debts, and not where there is only one that is
partially secured, the error is of no importance, since the principal reason based on the Bank's
negligence furnishes adequate support to the decision of the CA that the surety was thereby
released.

Stronghold vs. Republic Asahi G.R. No. 147561 (June 22, 2006) DORIA
DOCTRINE: A surety companys liability under the performance bond it issues is solidary. The
death of the principal obligor does not extinguish the obligation and the solidary nature of that
liability.

FACTS:
Republic-Asahi Glass Corporation (Asahi) entered into a contract with Jose D. Santos, Jr.,
proprietor of JDS Construction (JDS), for the construction of roadways and a drainage system in
Asahis compound in Pasig City.
Asahi was to pay JDS P5.3M for the construction, which was supposed to be completed within
240 days beginning May 8, 1989.
To guarantee the faithful and satisfactory performance of its undertakings, JDS executed a
Performance Bond of P795,000, jointly and severally with Stronghold Insurance Co., Inc.
Dissatisfied with the progress of the work (alarmingly slow pace of the construction will not
meet 240-day deadline), Asahi extrajudicially rescinded the contract as allowed under its
provisions, and wrote JDS a letter informing it of the rescission.
According to the contract, such rescission shall not be construed as a waiver of Asahis right to
recover damages from JDS and the latters sureties.
As a result of JDSs failure to comply, Asahi had to hire another contractor to finish the project
additional expense of P3,256,874.
Asahi sent Stronghold 2 letters: one filing its claim under the bond and another reiterating such
demand for payment. Both letters went unheeded.
Asahi filed a complaint against JDS and Stronghold.
From JDS: payment of the additional expenses incurred for the completion of the project using
another contractor
From JDS and Stronghold: jointly and severally; payment of damages in accordance with the
performance bond.
According to the Sheriffs Return submitted to the lower court, summons were duly served on
Stronghold. However, Jose D. Santos, Jr. have already died a year ago, and JDS Construction
was no longer at its address and its whereabouts were unknown.
Strongholds answer: Asahis money claims against it and JDS have been extinguished by the
death of Jose D. Santos, Jr.
Even if this were not the case, Stronghold had been released from its liability under the
performance bond because there was no liquidation with the active participation and/or
involvement of the surety and the contractor, hence, there was no ascertainment of the
corresponding liabilities of Santos and Stronghold under the performance bond.

TC: dismissed the complaint of Asahi as against Stronghold

CA: Reversed TC decision.
Strongholds obligation under the surety agreement was not extinguished by the death of Jose
D. Santos, Jr. Asahi could still go after Stronghold for the bond.
Stronghold appealed to the SC.
ISSUE:
Whether Strongholds liability under the performance bond was automatically extinguished by
the death of Santos. NO

HELD:
General Rule: Death of either the creditor or the debtor does not extinguish the obligation.
Obligations are transmissible to the heirs, except when the transmission is prevented by the law,
the stipulations of the parties, or the nature of the obligation. Only obligations that are personal
or are identified with the persons themselves are extinguished by death.
Section 5, Rule 86 of the Rules of Court expressly allows the prosecution of money claims
arising from a contract against the estate of a deceased debtor.
Those claims are not actually extinguished. What is extinguished is only the obligees action or
suit filed before the court, which is not then acting as a probate court.
In the present case, whatever monetary liabilities or obligations Santos had under his contracts
with Asahi were not intransmissible by their nature, by stipulation, or by provision of law. Hence,
his death did not result in the extinguishment of those obligations or liabilities, which merely
passed on to his estate.
Death is not a defense that he or his estate can set up to wipe out the obligations under the
performance bond.
Stronghold as surety cannot use his death to escape its monetary obligation under its
performance bond.
The liability of petitioner is contractual in nature, as according to the performance bond.
As a surety, petitioner is solidarily liable with Santos in accordance with Articles 2047 and 1216
the Civil Code.
In Garcia v. CA: "The suretys obligation is not an original and direct one for the performance of
his own act, but merely accessory or collateral to the obligation contracted by the principal.
Nevertheless, although the contract of a surety is in essence secondary only to a valid principal
obligation, his liability to the creditor or promisee of the principal is said to be direct, primary and
absolute; in other words, he is directly and equally bound with the principal
Under the law and jurisprudence, Asahi may sue, separately or together, the principal debtor
and Stronghold, in view of the solidary nature of their liability. The death of the principal debtor
will not work to convert, decrease or nullify the substantive right of the solidary creditor. Despite
the death of the principal debtor, Asahi may still sue Stronghold alone, in accordance with the
solidary nature of the latters liability under the performance bond.
SC: CA decision AFFIRMED.

 Spouses Toh vs. Solid Bank (SB), First Business Paper Corporation (FBPC), and Spouses
Ng G.R. No. 154183 (Aug. 7, 2003) FRANCISCO
Doctrine:
An extension of the period for enforcing the indebtedness does not by itself bring about
the discharge of the sureties.
An extension granted to the debtor by the creditor without the consent of the guarantor
extinguishes the guaranty.

Facts:
Spouses Toh - Chairman of the Board and VP of FBPC
Spouses Ng Li - President and General Manager of FBPC
SB agreed to extend an omnibus line credit facility worth P10M in favor of FBPC.
All the terms and conditions of the agreement were stipulated in a letter-advise of SB.
The essential document for the credit facility:
xxx (c) Continuing Guaranty for any and all amounts signed by spouses Toh and Spouses Ng
xxx
The Continuing Guaranty set forth no max limit on the indebtedness that FBPC may incur.
To strengthen that security, the Continuing Guaranty waived rights of the sureties against delay
or absence of notice or demand on the part of SB and gave future consent to the Banks action
to extend the time payment, manner, place or terms of payment.
May 10 1993, more than thirty (30) days from date of the letter-advise, Spouses Toh and
Spouses Ng Li signed the required Continuing Guaranty, which was embodied in a public
document prepared solely by SB.
June 1993, FBPC started to avail the credit facility and secured letters of credit (LOC).
It opened 13 LOC and executed series of 13 receipts over the goods purchased from the
proceeds of the loans.
Jan. 13, 1994, SB received info that Spouse Ng Li had fraudulently left from their home.
Immediately, SB served demand letter upon FBPC and Spouses Toh invoking the acceleration
clause in the trust receipts of FBPC and claimed payment for P10,539,758.68 as unpaid
overdue accounts on the LOC + interest and penalties w/n 24 hours from receipt thereof.
It also invoked the Continuing Guaranty executed by Spouses Toh
Jan. 17. 1994 - SB FILED A COMPLAINT FOR SUM OF MONEY
Spouses Toh, in their joint answer, contended that thru FBPC Board Resolution, Luis Toh was
removed as an authorized signatory for FBPC and was replaced by Spouse Ng Li and one
Padilla for all transaction of FBPC with SB.
That they (Toh) resigned from their respective positions in FBPC.
Lastly, they (Toh) obtained from Spouses Ng Li their exclusion from several surety agreements
they had entered into on June 1993.
RTC: Found FBPC liable to pay SB P10,539,758.68 + 12% interest/annum from finality of the
Decision until fully paid, but absolving Luis Toh and Vicky Tan Toh of any liability to SB.
Spouses Toh were not bound by the surety contract since the LOC it was supposed to secure
were opened long after petitioners had ceased to be part of FBPC.

CA: modified RTCs decision and held that by signing the Continuing Guaranty, Apouses Toh
became solidarily liable with FBPC to pay SB the amount of P10,539,758.68 + 12%
interest/annum from finality of the judgment until completely paid.
Spouses Toh failed to execute any written revocation of the Continuing Guaranty with notice to
SB, the instrument remained in full force and effect when the LOC were availed of by
respondent FBPC.
Issue:
W/n Spouses Toh were relieved of their obligations as sureties under the Continuing
Guaranty.

Held:
Yes.
An extension of the period for enforcing the indebtedness does not by itself bring about the
discharge of the sureties unless the extra time is not permitted within the terms of the waiver,
i.e., where there is no payment or there is deficient settlement of the marginal deposit and the
twenty-five percent (25%) consideration, in which case the illicit extension releases the sureties.
Under Art. 2055 of the Civil Code, the liability of a surety is measured by the terms of his
contract, and while he is liable to the full extent thereof, his accountability is strictly limited to
that assumed by its terms.
It is admitted in the Complaint of SB before the trial court that several LOC were irrevocably
extended for ninety (90) days with alarmingly flawed and inadequate considerationthe
indispensable marginal deposit of fifteen percent (15%) and the twenty-five percent (25%)
prerequisite for each extension of thirty (30) days. It bears stressing that the requisite marginal
deposit and security for every thirty (30)-day extension specified in the letter-advise were not
set aside or abrogated nor was there any prior notice of such fact, if any was done.
The foregoing extensions of the LOC made by SB without observing the rigid restrictions for
exercising the privilege are not covered by the waiver stipulated in the Continuing Guaranty.
Evidently, they constitute illicit extensions prohibited under Art. 2079 of the Civil Code, an
extension granted to the debtor by the creditor without the consent of the guarantor extinguishes
the guaranty.
As a result of these illicit extensions, Spouses Toh are relieved of their obligations as
sureties of FBPC under Art. 2079 of the Civil Code.
For the same reason, the grace period granted by SB represents unceremonious abandonment
and forfeiture of the fifteen percent (15%) marginal deposit and the twenty-five percent (25%)
partial payment as fixed in the letter-advise. These payments are unmistakably additional
securities intended to protect both SB and the sureties in the event that the principal debtor
FBPC becomes insolvent during the extension period. Compliance with these requisites was not
waived by Toh in the Continuing Guaranty.
For this unwarranted exercise of discretion, SB bears the loss; due to its unauthorized
extensions to pay granted to FBPC, Spouses Toh are discharged as sureties under the
Continuing Guaranty.
SC: Petition granted. RTCs decision was reinstated.

D. Legal and Judicial Bonds