G.R. No. L-16666. April 10, 1922.

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FIRST
ROMULO MACHETTI, Plaintiff-Appellee, v. HOSPICIO DE SAN JOSE,
defendant and appellee, and FIDELITY & SURETY COMPANY OF THE
PHILIPPINE ISLANDS, Defendant-Appellant.

Ross & Lawrence and Wolfson, Wolfson & Schwarzkopf for Appellant.

Gabriel La O for appellee Hospicio de San Jose.

No appearance for the other appellee.

SYLLABUS
1. CONTRACT OF GUARANTY. Machetti, by contract in writing,
agreed to erect a building for the Hospicio de San Jose. The defendant
Surety Company made the following endorsement in the English language
upon the contract: "For value received we hereby guarantee compliance with
the terms and conditions as outlined in the above contract." Held: That the
terms of the endorsement must be given the signification which ordinarily
attaches to them in the language in which the endorsement was written and

that the obligation of the Surety Company was one of guaranty and not of
suretyship or fianza solidaria.

2. DISTINCTION BETWEEN GUARANTOR AND SURETY. 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.

3. LIABILITY OF GUARANTOR; INSOLVENCY OF PRINCIPAL. A

guarantor cannot be compelled to pay until it is shown that the principal is
unable to pay and such inability is not sufficiently shown by the mere fact that
he has been declared insolvent under the present Insolvency Law in which
the extent of the insolvents inability to pay is not determined until the final
liquidation of his estate.

DECISION

OSTRAND, J. :

It appears from the evidence that on July 17, 1916, one Romulo
Machetti, by a written agreement, undertook to construct a building on Calle
Rosario in the city of Manila for the Hospicio de San Jose, the contract price
being P64,000. One of the conditions of the agreement was that the
contractor should obtain the "guarantee" of the Fidelity and Surety Company
of the Philippine Islands to the amount of P12,800 and the following
endorsement in the English language appears upon the
contract:jgc:chanrobles.com.ph

"MANILA, July 15, 1916.

"For value received we hereby guarantee compliance with the terms and
conditions as outlined in the above contract.

"FIDELITY & SURETY COMPANY OF THE PHILIPPINE ISLANDS.

(Sgd.) "OTTO VORSTER,

"Vice-President,"

Machetti constructed the building under the supervision of architects

representing the Hospicio de San Jose and, as the work progressed,

payments were made to him from time to time upon the recommendation of
the architects, until the entire contract price, with the exception of the sum of
P4,978.08, was paid. Subsequently it was found that the work had not been
carried out in accordance with the specifications which formed part of the
contract and that the workmanship was not of the standard required, and the
Hospicio de San Jose therefore refused to pay the balance of the contract
price. Machetti thereupon brought this action, the complaint being filed May
28, 1917. On January 28, 1918, the Hospicio de San Jose answered the
complaint and presented a counterclaim for damages for the partial
noncompliance with the terms of the agreement above mentioned, in the
total sum of P71,350. After issue was thus joined, Machetti, on petition of his
creditors, was, on February 27,1918, declared insolvent and on March 4,
1918, an order was entered suspending the proceeding in the present case
in accordance with section 60 of the Insolvency Law, Act No. 1956.

The Hospicio de San Jose on January 29, 1919, 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, but
still remain suspended as to Machetti. This motion was granted and on
February 7, 1920, the Hospicio filed a complaint against the Fidelity and
Surety Company asking for a judgment for P12,800 against the company
upon its guaranty. After trial, the Court of First Instance rendered judgment

against the Fidelity and Surety Company for P12,800 in accordance with the
complaint. The case is now before this court upon appeal by the Fidelity and
Surety Company from said judgment.

As will be seen, the original action in which Machetti was the plaintiff and the
Hospicio de San Jose defendant, has been converted into an action in which
the Hospicio de San Jose is plaintiff and the Fidelity and Surety Company,
the original plaintiffs guarantor, is the defendant, Machetti having been
practically eliminated from the case.

We think the court below erred in proceeding with the case against the
guarantor while the proceedings were suspended as to the principal. The
guaranty in the present case was for a future debt of unknown amount and
even regarding the guaranty as an ordinary fianza under the Civil Code, the
surety cannot be held responsible until the debt is liquidated. (Civil Code, art.
1825.)

But in this instance the guarantors case is even stronger than that of an
ordinary surety. The contract of guaranty is written in the English language
and the terms employed must of course be given the signification which
ordinarily attaches to them in that language. In English the term "guarantor"
implies an undertaking of guaranty, as distinguished from suretyship. It is

very true that 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 affirmatively that the contract is the guarantors separate
undertaking in which the principal does not join, that it rests on a separate
consideration moving from the principal and that although it is written in
continuation of the contract for the construction of the building, it is a
collateral under taking separate and distinct from the latter. All of these
circumstances are distinguishing features of contracts of guaranty.
Now, 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. (Saint
v. Wheeler & Wilson Mfg. Co., 95 Ala., 362; Campbell v. Sherman, 151 Pa.
St., 70; Castellvi de Higgins and Higgins v. Sellner, 41, Phil., 142; U.S. v.
Varadero de la Quinta, 40 Phil., 48.) 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 it 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 in 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 inability 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 under our statutes, in which the extent of the
insolvents inability to pay is not determined until the final liquidation of his
estate.
The judgment appealed from is therefore reversed without costs and without
prejudice to such right of action as the cross-complainant, the Hospicio de
San Jose, may have after exhausting its remedy against the plaintiff
Machetti. So ordered.
THE INSOLVENCY LAW
Sec. 60. Creditors proving claims cannot use; Stay of action.
No creditor, proving his debt or claim, shall be allowed to maintain any
suit therefor against the debtor, but shall be deemed to have waived all
right of action and suit against him, and all proceedings already
commenced, or any unsatisfied judgment already obtained thereon,
shall be deemed to be discharged and surrendered thereby; and after
the debtor's discharge, upon proper application and proof to the court
having jurisdiction, all such proceedings shall be, dismissed, and such
unsatisfied judgments satisfied of record: Provided, That no valid lien
existing in good faith thereunder shall be thereby affected. A creditor
proving his debt or claim shall not be held to have waived his right of
action or suit against the debtor when a discharge has have been

refused or the proceedings have been determined to the without a

discharge. No creditor whose debt is provable under this Act shall be
allowed, after the commencement of proceedings in insolvency, to
prosecute to final judgment any action therefor against the debtor until
the question of the debtor's discharge shall have been determined, and
any such suit proceeding shall, upon the application of the debtor or of
any creditor, or the assignee, be stayed to await the determination of the
court on the question of discharge: Provided, That if the amount due the
creditor is in dispute, the suit, by leave of the court in insolvency, may
proceed to judgment for purpose of ascertaining the amount due, which
amount, when adjudged, may be allowed in the insolvency proceedings,
but execution shall be stayed aforesaid.