G.R. No.

L-5470

March 22, 1910

LUIS SAENZ DE VIZMANOS ONG-QUICO, plaintiff-appellant,

vs.
YAP CHUAN, ET AL., defendants-appellants.
Ortigas and Fisher, for plaintiff.
Chicote and Miranda, for defendants.
ARELLANO, C.J.:
Engracio Palanca, while judicial administrator of the estate of Margarita Jose, gave bond, by order of
the court before which the proceedings thereon were had, to guarantee his administration, which
bond was executed by Engracio Palanca himself, Luis S. de Vizmanos Ong-Quico, Alejandra
Palanca, and Juan Fernandez Lim Quin Chuang, jointly and severally, in favor of the Government of
the United States in the Philippine Islands, for the sum of P60,000, Philippine currency.
On the same date the said Engracio Palanca and five others executed in favor of Luis S. de
Vizmanos the following bond: Yap Chuangco, for P20,000; Yap Chutco, for P5,000; Palanca Yap
Poco, for P5,000; Palanca Tanguinlay, for P5,000; and Lim Pongco, for P5,000. All of them signed
the bond except the first named, Yap Chuangco, who did not personally execute the bond; this was
done for him by his attorney, Yap Chengtua.
In the said instrument the following appears:
. . . and, it being possible that the case occur that Mr. Vizmanos shall have to pay the said
bond or a part thereof, as such surety, whose responsibility or solvency in such capacity has
been accepted by the court up to the amount of forty thousand pesos, Philippine currency,
for the purpose of guaranteeing to the same the reimbursement of the sum or sums which by
reason of the said bond he might have to pay, the executors of this instrument have agreed
that Messr. Yap Chuangco, Yap Chutco, Carlos Palanca Tanguinlay, Serafin Palanca Yap
Poco, and Lim Biampung, known as Lim Pongco, shall be the sureties of Don Engracio
Palanca in favor of Mr. Luis S. Vizmanos Ong-Quico, binding themselves jointly as such to
reimburse or to pay to the said Mr. Vizmanos, his heirs and successors in interest, whatever
sums the said Vizmanos may have to pay or shall have paid by reason of the judicial bond
herein mentioned, subscribed by him in favor of Mr. Palanca, up to the amount of forty
thousand pesos, Philippine currency, in the proportion of not exceeding P20,000 by Yap
Chungangco and P5,000 by each one of the other four herein above mentioned.
On March 9, 1908, the court which tried the case concerning the estate ordered Luis Saenz de
Vizmanos Ong-Quico, as surety in solidum of the ex-administrator Engracio Palanca, to pay to the
estate the sum of P41,690.15, Philippine currency, also the interest on the said sum at the rate of 8
per cent per annum, counting from December 27, 1905, with other sums set out in the sentence.
This judgment became final.
On March 31, 1908, Vizmanos Ong-Quico paid to the administrator of the estate eight thousand
pesos (P8,000), Philippine currency, by the conveyance of the property belonging to him, he still
owing P40,975.92, with interest on the said amount at 8 per cent per annum from the 9th day of
March, 1908, the date of the judgment.
On April 2, 1908, he instituted suit against the five sureties above named who, with Engracio
Palanca, executed the bond before mentioned in his favor, praying the Court of First Instance of the
city of Manila to sentence them to pay him: Yap Chuangco, P20,000, and the other four sureties, Yap
Chutco, Carlos Palanca Tanguinaly, Serafin Palanca Yap Poco, and Lim Pongco, each P5,000, that
is, these four together P20,000 more, and jointly the costs of the action.
The court, in its judgment, acquitted Yap Chuingco from the claim of the P20,000, assessing against
the plaintiff the part of the costs pertaining to this defendant, and ordered each one of the four
remaining defendants, Yap Chutco, Carlos Palanca Tanguinlay, Serafin Palanca Yap Poco, and Lim
Biang Pon (alias Lim Pongco), to pay to the plaintiff, Luis Sanez de Vizmanos, the sum of P2,000,
with legal interest at 6 per cent per annum on the said respective sums from March 31, 1908, the
date on which the plaintiff paid to the present administrator of the estate the said sum of P8,000,
until its complete payment. The said four defendants had also to pay jointly, that is, in equal shares,
the costs pertaining to them.

Both parties appealed from this sentence, each one forwarding to this court his respective bill of
exceptions, together with all the evidence taken at the trial, besides the stenographic notes which
were also forwarded by special order of the trial court.
The appeal having been heard before this court, it appears that:
The defendants appealed on account of their having been ordered to pay, each of them, P2,000,
instead of only P1,000, which according to the terms of the contract, each one of them was bound to
pay to the plaintiff. (Only error alleged.)
The plaintiff appealed because the court refused to render judgment against the defendants for the
maximum sum for which each one had bound himself in the contract, which he calls a counterbound
or subbond, that is, each one of the four to pay P5,000. (Only error alleged.)
The share of P20,000 which the plaintiff claimed from Yap Chuangco is not included in the former's
appeal, from the payment of which amount the latter is relieved in the judgment, for he expressly
states in his brief that he conforms to this part of the judgment and that "his appeal solely relates to
the other defendants." (Brief, 4.)
With respect to the other four defendants, the plaintiff and appellant claims that, notwithstanding his
having paid only P8,000 of his bond, the defendants ought to reimburse him at the rate of P5,000
each, that is, all together to the amount of P20,000. As above stated, the lower court only sentenced
them to reimburse their proportional share of the P8,000 paid, to wit, P2,000 each, P8,000 all
together. Thus they would be paying even the proportional share corresponding to Yap Chuangco,
which is P4,000, whereas the plaintiff appellant agrees that the share of the bond concerning Yap
Chuangco should be void by reason of its having been executed by an attorney in fact of the latter
who did not possess sufficient power for this purpose.
Hence the only error alleged by the defendants in their brief, inasmuch as, having deducted the
P4,000 which Yap Chuangco would have to pay, the other four defendants must pay only P4,000,
that is, P1,000 each.
We can not but agree with this claim of the attorneys for the defendants say those of the
plaintiff if this court, disregarding the reasons contained in our brief, should declare that
the plaintiff is only entitled to recover the money that he really and actually has expended, to
wit, P8,000, then it appears unquestionable that the defendants and appellants are only
compelled to pay P1,0000 each, as their attorneys state in their brief. (Brief, 2.)
With regard to the sole error alleged by the attorneys for the plaintiff, it must first be considered that
the bond which the four defendants in turn executed in favor of the plaintiff bondsman is not a
subbond; it is not of the same nature as that given by the latter in favor of Engracio Palanca in the
probate proceedings in connection with the will of Margarita Jose. Although one bond is subordinate
to another, not for this reason are they of the same nature. That of Vizmanos for Engracio Palanca in
favor of the estate is judicial and was approved by the probate judge; that of the defendants for
Engracio Palanca in favor of Vizmanos was extrajudicial and the probate judge had nothing to do
with it. The new administrator of the estate had a right of action, and he exercised it against
Vizmanos to enforce the payment of the bond given by the latter, but he has none nor can he
exercise any whatsoever against the four who gave bond for Engracio Palanca in favor of Vizmanos.
The only relation that exists between the one bond and the other is merely that of antecedent and
consequent, in so far as that of Vizmanos in favor of the estate was the cause of debt of that of the
defendants in favor of Vizmanos. The first one was strictly judicial, the second merely contractual
between the parties.
When a surety pays for the party under bond, he has a right of action against such party for the
recovery of the amount paid by him.
A surety who pays for a debtor shall be identified by the latter. (Art. 1838, Civil Code.)
The surety Vizmanos who paid for the debtor Palanca must be identified by Palanca. And it was
evident, when Vizmanos became surety for Palanca, that the latter could not pay him, Palanca
obligated himself by the four defendants, or, better said, the four defendants assumed the obligation
that rested upon Palanca to indemnify Vizmanos for what the latter might pay for Palanca. This is in
fact the obligation that is nor exercised. The action of the surety against the party under bond or the
debtor to require the obligation of indemnity, has no other name nor other nature in law than that of

subrogation; it is an unquestionable doctrine. The action of subrogation is regulated in article 1839 of

the Civil Code:
By virtue of such payment the surety is subrogated in all the rights which the creditor had
against the debtor.
But be it well understood says a commentator that this subrogation can not be
interpreted in such absolute terms as to include more than the surety has paid, for, though it
is true that he puts himself in the place of the creditor and should have the same rights as
the latter in consequence of the subrogation, it is no less certain that there would be an
unjust enrichment to the prejudice of the debtor, if the surety who pays for him were
permitted to claim more than what he paid. Moreover, the benefit of subrogation is the
means of utilizing the right of reimbursement, and he could not collect as such the excess
from the rights and actions of the creditor over and above the advance made by him. (12
Manresa, Civil Code, 304.)
The contract law says no more than this:
Being that the case may occur say those obligated that the said Vizmanos may have to
pay the said bond or a part thereof . . . for the purpose of guaranteeing
the resimbursement of the sum or sums which by reason of the bond he may have to pay,
the executors have agreed and stipulated that . . . they shall be the sureties of Don Engracio
Palanca in favor of Sr. Luis S. Vizmanos, binding themselves as such conjointly
to reimburse or to pay . . whatever amounts the latter might have to pay or shall have paid by
reason of the judicial bond aforementioned. . . .
Being as it is an action of subrogation, it is not exercisable except in the case of payment. The surety
is subrogated by the payment, says the law, in all the rights that the creditor had against the debtor.
Being as it is an action of indemnity it is not conceived how, rationally, the damage not yet caused
can be anticipated. When the purse of the surety has suffered no detriment, to sue the debtor in
order that he provide funds for the surety in expectancy of the action of the creditor, is not to ask an
indemnity, but to demand a guaranty to recover the loss when it may occur, and this guaranty is that
already obtained by the surety Vizmanos from Engracio Palanca on the latter's placing beforehand
four parties in his stead in order that they may the proper time ensure him of the restitution, the
reimbursement of what he shall have paid. To ask an indemnity of twenty, when the loss to be
indemnified is but eight, can in no wise be authorized either by law or by reason.
The Civil Code specifies five cases as exceptions wherein the surety, even before paying, may
proceed against the principal debtor, but "in all these cases the action of the surety tends to obtain
his release from the security or a guaranty to defend him against any proceedings of the creditor and
from the danger of insolvency of the debtor." (Art. 1843, Civil Code.) The security or bond given by
the four defendants in favor of the plaintiff Vizmanos had no other purpose than, in case he should
make payment to the estate of Margarita Jose, to defend himself against the proceedings of the
administrator of the estate and from the danger of insolvency of the debtor Palanca.
Although, in principle, by virtue of the contract in question, the four defendants are obligated to the
plaintiff in the sum of P20,000, that is, at the rate of P5,000 each, the action ad cautelam is,
precisely, covered by such a contract, and the action of subrogation, the only one exercisable, is
only available in the quality of a restitution or reimbursement of the payment effected. In the present
case the plaintiff, by virtue of the contract ad cautelam, is entitled to an action against the four
defendants for recovery from each of them up to the maximum amount of P5,000, but he can not by
such action, as surety for the principal debtor, collect more than the sum which he himself was
actually compelled to pay.
In virtue of the foregoing, the judgment appealed from is reversed in so far as it sentences each one
of the four defendants, Yap Chutco, Carlos Palanca Tanguinlay, Serafin Palanca Yap Poco, and Lim
Biang Pong (alias Lim Pongco), to pay to the plaintiff, Luis Saenz de Vizmanos, the sum of P2,000.
The amount to be paid is hereby fixed at P1,000, to the payment of which, in favor of the aforesaid
plaintiff, each of the four defendants mentioned were sentenced, "with legal interest at the rate of 6
per cent per annum on the said respective sums, from March 31, 1908, the date on which the
plaintiff paid to the present administrator of the said estate the said sum of P8,000, until its complete
payment. The said four defendants shall pay the costs in equal shares." the costs of this instance
shall be assessed against the plaintiff and appellant Vizmanos. So ordered.

G.R. No. L-22177

December 2, 1924

TUASON, TUASON, INC., plaintiff-appellee,

vs.
ANTONIO MACHUCA, defendant-appellant.
Marcaida, Capili & Ocampo for appellant.
Antonio M. Opisso for appellee.

AVANCEA, J.:
By giving a bond in the sum of P9,663 executed by "Manila Compaia de Seguros," the Universal
Trading Company was allowed by the Insular Collector of Custom to withdraw from the customhouse
sundry goods imported by it and consigned through the bank of the Philippine Islands. Subsequently,
the Bank of the Philippine Islands claimed the value of the goods, and 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 this amount to the Insular Collector of Customs, the "Manila Compaia de
Seguros" obtained from the Universal Trading Company and Tuason, Tuason & Co., a solidary note
for the sum of P9,663 executed by said companies in its favor. Before signing said note, Tuason,
Tuason & Co., in turn, caused the Universal Trading Company and its president Antonio Machuca,
personally, to sign a document (Exhibit B), wherein they bound themselves solidarily to pay,
reimburse, and refund to the company all such sums or amounts of money as it, or its
representative, may pay or become bound to pay, upon its obligation with "Manila Compaia de
Seguros," whether or not it shall have actually paid such sum or sums or any part thereof. 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 and obtained final judgment therein, which was affirmed by this court on appeal, for the total
sum of P12,197.27, which includes the value of the note with interest thereon. 1 Subsequently, all the
rights of Tuason, Tuason & Co. were transferred to the plaintiff Tuason, Tuason, Inc.
Later on Tuason, Tuason, Inc., brought this action to recover of Antonio Machuca the sum of
P12,197.27 which it was sentenced to pay in the case filed against it by "Manila Compaia de
Seguros," plus P3,000 attorney's fees, and P155.92 court's costs and sheriff's fees, that is, a total of
P15,353.19, together with P1,180.46 as interest upon the sum of P15,353.19 at the rate of 10 per
cent per annum from October 8, 1922, to July 8, 1923, and interest on the sum of P16,535.65 at the
rate of 10 per cent from July 8, 1923, until this sum was paid, and, in addition the sum of P1,653.65
for attorney's fees in this case. For its cause of action, the plaintiff alleges that it had paid "Manila
Compaia de Seguros" the sum of P12,197.27, the amount of the judgment against it. The
dispositive part of the judgment appealed from is as follows:
itc-a1f

Judgment is rendered against the defendant Antonio Machuca, and he is hereby ordered to
pay the plaintiff company the sum of fifteen thousand three hundred fifty-three pesos and
nineteen centavos (15,353.19), with compound interest thereon at the rate of ten per cent
(10%) per annum, to be computed quarterly, that is, one thousand one hundred eighty pesos
and forty-six centavos (1,180.46), which is ten per cent interest on the amount of fifteen
thousand three hundred fifty-three pesos and nineteen centavos (P15,353.19) from October
8, 1922, to July 8, 1923, and ten per cent on the sum of sixteen thousand five hundred thirtythree pesos and sixty-five centavos (P16,533.65) from July 8, 1923, until full payment, to be
computed quarterly, besides the sum of one thousand six hundred fifty-three pesos and
sixty-five centavos (P1,653.65), which is ten per cent (10%) on the amount due and the
interest thereon, which said defendant promised to pay as penalty and attorney's fees in the
event of a suit being necessary to recover the debt, and the costs. So ordered.

It appears from the evidence that what the plaintiff alleged to be a payment made to "Manila
Compaia de Seguros", for the satisfaction of the judgment rendered in favor of the latter is the
execution by Albina Tuason of a document Exhibit D in favor of "Manila Compaia de Seguros." In
this document Albina Tuason declares that she assumes and makes hers the obligation to pay the
amount of said judgment to "Manila Compaia de Seguros" within one year and mortgages a
property described in the document as security for this obligation. This obligation of Albina Tuason
was accepted by the "Manila Compaia de Seguros," in the following terms: "I accept the foregoing
security executed by Miss Albina Tuason in favor of `Manila Compaia de Seguros.'" It, thus,
appears that the plaintiff has not in fact paid the amount of the judgment to "Manila Compaia de
Seguros." The action brought by the plaintiff is that which surety, who pays the debt of the debtor, is
entitled to bring to recover the amount thus paid (art. 1823, Civil Code). It is evidence that such a
payment not having been made the alleged cause of action does not exist.
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 of the plaintiff is untenable. The present action,
according to the terms of the complaint, is clearly based on the fact of payment. It is true that, under
article 1843, an action lies against the principal debtor even before the surety pays the debt, but it
clearly appears in the complaint that this is not the action brought by the plaintiff. Moreover this
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. At
any rate this article does not provide for the reimbursement of any amount, as is sought by the
plaintiff.
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But 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, yet the plaintiff is entitled to the relief sought in view of the facts established by the
evidence. 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. It is indisputable that the plaintiff became bound and liable by a final judgment to pay
the value of the note to "Manila Compaia de Seguros."
The defendant also 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." As to this, it is enough to say that if this was
what Albina Tuason contemplated in signing the document, evidently it was not what "Manila
Compaia de Seguros" accepted. As above stated, "Manila Compaia de Seguros" accepted this
document only as additional security for its credit and not as a novation of the contract.
Our conclusion is that the plaintiff has the right to recover of the defendant the sum of P9,663, the
value of the note executed by the plaintiff in favor of "Manila Compaia de Seguros" which the
plaintiff is under obligation to pay by virtue of final judgment. We do not believe, however, that the
defendant must pay the plaintiff the expenses incurred by it in the litigation between it and "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.
The judgment appealed from is modified, and the defendant is sentenced to pay the plaintiff the sum
of P9,663, with interest thereon at the rate of 10 per cent per annum from July 19, 1923, when the
complaint was filed until full payment thereof, plus the sum of P1,653.65 for attorney's fees, without
special pronouncement as to costs. So ordered.

G.R. No. L-5208 December 1, 1909

KUENZLE AND STREIFF, plaintiff-appellant,
vs.
JOSE TAN SUNCO ET AL., defendants-appellees.
Hartigan and Rohde, and Roman Lacson, for appellant.
Antonio Constantino, for appellees.
MORELAND, J.:
This is an action to set aside four judgments rendered by a justice of the peace of the city of Manila
upon the ground that they were procured by collision and fraud, to the injury and damage of the
plaintiff.
The court below, after hearing the evidence offered upon the trial, found against the plaintiff and
rendered a judgment in favor of the defendant dismissing the plaintiff's complaint, with costs.
The plaintiff did not make a motion for a new trial in the court below and this court can not, therefore,
look into the evidence but must confine itself to the facts stated in the opinion of the court below for
the purpose of ascertaining whether or not the judgment of that court can be sustained.
It appears from the opinion of the court below that Tan Sunco was a surety for Chung Chu Sing for
the payment by the latter of the purchase price of certain merchandise purchased by said Chung
Chu Sing of Ed. and A. Keller and Co., that the time within which said merchandise was to be paid
for under the terms of its purchase had expired long before said four judgments were obtained, and
that the debt remained unpaid; that the total debt was composed of four invoices of varying amounts
P395.50, P450, P565, and P320.20; that an action had been commenced against the said debtor,
Chung Chu Sing, by the present plaintiff for the recovery of the indebtedness due it; that shortly
before judgment was secured in that action the said Tan Sunco began four separate action against
the said debtor upon the said invoices in the court of the justice of the peace of the city of Manila;
that soon thereafter the said sunco and the said debtor appeared before the said court, and the said
debtor then and there confessed judgment in favor of said Tan Sunco in each one of said actions,
Tan Sunco thereby obtaining against the said debtor four separate judgments; that immediately upon
the recovery of said judgments the plaintiff in those actions, Sunco caused to be levied thereunder
executions upon all of the property of said debtor, which property was not more than sufficient to pay
to the judgments under which the levies were made; that thereupon the action at bar was begun and
the sales under said executions were enjoined pending the determination thereof. These are the
admitted facts.
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The plaintiff in this action contends that said four judgments ought to be set wholly aside on account
of their having been obtained, as he claims, by collusion and fraud, because the debtor did not owe
anything to Sunco at the time the four judgments were secured, basing that contention on the fact,
which is admitted, that Sunco and not yet paid the sums for which he had become surety and in
connection with which he obtained the judgments.

We think that the article 1843 of the Civil Code is applicable to this case. In their purposes articles
1838 and 1843 are quite distinct, although in perfect harmony, the latter making more clearly
effective the purpose of the former. Article 1838 provides for the enforcement of the right of the
surety against the debtor after he has paid the debt. Article 1843 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. (Supreme court of Spain, March 22, 1901.) 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 of the other, might be worthless. The remedy given in article
1843 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."
(Last paragraph of art. 1843.) article 1838, speaking under this article become available, he is past
the point where a preliminary protective remedy is of any value to him.
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lawphi1.net

It being evident that the purpose of article 1843 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. (Manresa, Civil Code, vol. 12, p. 320.) 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. (Arts. 1291, 1297, Civil Code; Pena vs. Mitchell, 9 Phil. Rep., 587; Jones vs.
Brittan, 13 Fed. Cas., No. 7455; Oberly vs. Oberly, 190 Pa. st., 341; Caldwell vs. Finfield, 24 n. J. L.,
150.) The facts stated in the opinion of the court below abundantly justify the conclusion.
But while the surety has the right to obtain as he did the judgments against the principal debtor, he
ought not to be allowed to realize the said judgments to the point of actual collection of the same
until he has satisfied or caused to be satisfied the obligation the payment of which he assures.
Otherwise, a great opportunity for collusion and improper practices between the surety and his
principal would be offered which might result to the injury and prejudice of the creditor who holds the
claim against them.
The judgement of the court below is, therefore, affirmed, with costs against the appellant. But the
said Sunco shall not execute said judgments against the property of the judgment debtor until he has
paid the debt for which he stands surety. So ordered.

G.R. No. L-47369 June 30, 1987

JOSEPH COCHINGYAN, JR. and JOSE K. VILLANUEVA, petitioners,
vs.
R & B SURETY AND INSURANCE COMPANY, INC., respondent.

FELICIANO, J.:
This case was certified to us by the Court of Appeals in its resolution dated 11 November 1977 as
one involving only questions of law and, therefore, falling within the exclusive appellate jurisdiction of
this Court under Section 17, Republic Act 296, as amended.
In November 1963, Pacific Agricultural Suppliers, Inc. (PAGRICO) applied for and was granted an
increase in its line of credit from P400,000.00 to P800,000.00 (the "Principal Obligation"), with the
Philippine National Bank (PNB). To secure PNB's approval, PAGRICO had to give a good and
sufficient bond in the amount of P400,000.00, representing the increment in its line of credit, to
secure its faithful compliance with the terms and conditions under which its line of credit was
increased. In compliance with this requirement, PAGRICO submitted Surety Bond No. 4765, issued
by the respondent R & B Surety and Insurance Co., Inc. (R & B Surety") in the specified amount in
favor of the PNB. Under the terms of the Surety Bond, PAGRICO and R & B Surety bound
themselves jointly and severally to comply with the "terms and conditions of the advance line [of
credit] established by the [PNB]." PNB had the right under the Surety Bond to proceed directly
against R & B Surety "without the necessity of first exhausting the assets" of the principal obligor,
PAGRICO. The Surety Bond also provided that R & B Surety's liability was not to be limited to the
principal sum of P400,000.00, but would also include "accrued interest" on the said amount "plus all
expenses, charges or other legal costs incident to collection of the obligation [of R & B Surety]"
under the Surety Bond.
In consideration of R & B Surety's issuance of the Surety Bond, two Identical indemnity agreements
were entered into with R & B Surety: (a) one agreement dated 23 December 1963 was executed by
the Catholic Church Mart (CCM) and by petitioner Joseph Cochingyan, Jr, the latter signed not only
as President of CCM but also in his personal and individual capacity; and (b) another agreement
dated 24 December 1963 was executed by PAGRICO, Pacific Copra Export Inc. (PACOCO), Jose K.
Villanueva and Liu Tua Ben Mr. Villanueva signed both as Manager of PAGRICO and in his personal
and individual capacity; Mr. Liu signed both as President of PACOCO and in his individual and
personal capacity.
Under both indemnity agreements, the indemnitors bound themselves jointly and severally to R & B
Surety to pay an annual premium of P5,103.05 and "for the faithful compliance of the terms and
conditions set forth in said SURETY BOND for a period beginning ... until the same is CANCELLED
and/or DISCHARGED." The Indemnity Agreements further provided:

(b) INDEMNITY: TO indemnify the SURETY COMPANY for any damage,

prejudice, loss, costs, payments, advances and expenses of whatever kind and
nature, including [of] attorney's fees, which the CORPORATION may, at any time,
become liable for, sustain or incur as consequence of having executed the above
mentioned Bond, its renewals, extensions or substitutions and said attorney's fees
[shall] not be less than twenty [20%] per cent of the total amount claimed by the
CORPORATION in each action, the same to be due, demandable and payable,
irrespective of whether the case is settled judicially or extrajudicially and whether the
amount has been actually paid or not;
(c) MATURITY OF OUR OBLIGATIONS AS CONTRACTED HEREWITH: The said
indemnities will be paid to the CORPORATION as soon as demand is received from
the Creditor or upon receipt of Court order or as soon as it becomes liable to make
payment of any sum under the terms of the above-mentioned Bond, its renewals,
extensions, modifications or substitutions, whether the said sum or sums or part
thereof, have been actually paid or not.
We authorize the SURETY COMPANY, to accept in any case and at its entire
discretion, from any of us, payments on account of the pending obligations, and to
grant extension to any of us, to liquidate said obligations, without necessity of
previous knowledge of [or] consent from the other obligors.
xxx xxx xxx
(e) INCONTESTABILITY OF PAYMENTS MADE BY THE COMPANY. Any
payment or disbursement made by the SURETY COMPANY on account of the
above-mentioned Bonds, its renewals, extensions or substitutions, either in the belief
that the SURETY COMPANY was obligate[d] to make such payment or in the belief
that said payment was necessary in order to avoid greater losses or obligations for
which the SURETY COMPANY might be liable by virtue of the terms of the abovementioned Bond, its renewals, extensions or substitutions, shall be final and will not
be disputed by the undersigned, who jointly and severally bind themselves to
indemnify the SURETY COMPANY of any and all such payments as stated in the
preceding clauses.
xxx xxx xxx
When PAGRICO failed to comply with its Principal Obligation to the PNB, the PNB demanded
payment from R & B Surety of the sum of P400,000.00, the full amount of the Principal Obligation. R
& B Surety made a series of payments to PNB by virtue of that demand totalling P70,000.00
evidenced by detailed vouchers and receipts.
R & B Surety in turn sent formal demand letters to petitioners Joseph Cochingyan, Jr. and Jose K.
Villanueva for reimbursement of the payments made by it to the PNB and for a discharge of its
liability to the PNB under the Surety Bond. When petitioners failed to heed its demands, R & B
Surety brought suit against Joseph Cochingyan, Jr., Jose K. Villanueva and Liu Tua Ben in the Court
of First Instance of Manila, praying principally that judgment be rendered:
b. Ordering defendants to pay jointly and severally, unto the plaintiff, the sum of
P20,412.20 representing the unpaid premiums for Surety Bond No. 4765 from 1965
up to 1968, and the additional amount of P5,103.05 yearly until the Surety Bond No.
4765 is discharged, with interest thereon at the rate of 12% per annum; [and]
c. Ordering the defendants to pay jointly and severally, unto the plaintiff the sum of
P400,000.00 representing the total amount of the Surety Bond No. 4765 with interest
thereon at the rate of 12% per annum on the amount of P70,000.00 which had been
paid to the Phil. National Bank already, the interest to begin from the month of
September, 1966;
xxx xxx xxx
Petitioner Joseph Cochingyan, Jr. in his answer maintained that the Indemnity Agreement he
executed in favor of R & B Surety: (i) did not express the true intent of the parties thereto in that he
had been asked by R & B Surety to execute the Indemnity Agreement merely in order to make it
appear that R & B Surety had complied with the requirements of the PNB that credit lines be

secured; (ii) was executed so that R & B Surety could show that it was complying with the
regulations of the Insurance Commission concerning bonding companies; (iii) that R & B Surety had
assured him that the execution of the agreement was a mere formality and that he was to be
considered a stranger to the transaction between the PNB and R & B Surety; and (iv) that R & B
Surety was estopped from enforcing the Indemnity Agreement as against him.
Petitioner Jose K. Villanueva claimed in his answer that. (i) he had executed the Indemnity
Agreement in favor of R & B Surety only "for accommodation purposes" and that it did not express
their true intention; (ii) that the Principal Obligation of PAGRICO to the PNB secured by the Surety
Bond had already been assumed by CCM by virtue of a Trust Agreement entered into with the PNB,
where CCM represented by Joseph Cochingyan, Jr. undertook to pay the Principal Obligation of
PAGRICO to the PNB; (iii) that his obligation under the Indemnity Agreement was thereby
extinguished by novation arising from the change of debtor under the Principal Obligation; and (iv)
that the filing of the complaint was premature, considering that R & B Surety filed the case against
him as indemnitor although the PNB had not yet proceeded against R & B Surety to enforce the
latter's liability under the Surety Bond.
Petitioner Cochingyan, however, did not present any evidence at all to support his asserted
defenses. Petitioner Villanueva did not submit any evidence either on his "accommodation" defense.
The trial court was therefore constrained to decide the case on the basis alone of the terms of the
Trust Agreement and other documents submitted in evidence.
In due time, the Court of First Instance of Manila, Branch 24

1 rendered a decision in favor of R & B Surety, the

dispositive portion of which reads as follows;

Premises considered, judgment is hereby rendered: (a) ordering the defendants

Joseph Cochingyan, Jr. and Jose K. Villanueva to pay, jointly and severally, unto the
plaintiff the sum of 400,000,00, representing the total amount of their liability on
Surety Bond No. 4765, and interest at the rate of 6% per annum on the following
amounts:
On P14,000.00 from September 27, 1966;
On P4,000.00 from November 28, 1966;
On P4,000.00 from December 14, 1966;
On P4,000.00 from January 19, 1967;
On P8,000.00 from February 13, 1967;
On P4,000.00 from March 6, 1967;
On P8,000.00 from June 24, 1967;
On P8,000. 00 from September 14, 1967;
On P8,000.00 from November 28, 1967; and
On P8,000. 00 from February 26, 1968
until full payment; (b) ordering said defendants to pay, jointly and severally, unto the
plaintiff the sum of P20,412.00 as the unpaid premiums for Surety Bond No. 4765,
with legal interest thereon from the filing of plaintiff's complaint on August 1, 1968
until fully paid, and the further sum of P4,000.00 as and for attorney's fees and
expenses of litigation which this Court deems just and equitable.
There being no showing the summons was duly served upon the defendant Liu Tua
Ben who has filed no answer in this case, plaintiff's complaint is hereby dismissed as
against defendant Liu Tua Ben without prejudice.
Costs against the defendants Joseph Cochingyan, Jr. and Jose K. Villanueva.
Not satisfied with the decision of the trial court, the petitioners took this appeal to the Court of
Appeals which, as already noted, certified the case to us as one raising only questions of law.

The issues we must confront in this appeal are:

1. whether or not the Trust Agreement had extinguished, by novation, the obligation of R & B Surety
to the PNB under the Surety Bond which, in turn, extinguished the obligations of the petitioners
under the Indemnity Agreements;
2. whether the Trust Agreement extended the term of the Surety Bond so as to release petitioners
from their obligation as indemnitors thereof as they did not give their consent to the execution of the
Trust Agreement; and
3. whether or not the filing of this complaint was premature since the PNB had not yet filed a suit
against R & B Surety for the forfeiture of its Surety Bond.
We address these issues seriatim.
1. The Trust Agreement referred to by both petitioners in their separate briefs, was executed on 28
December 1965 (two years after the Surety Bond and the Indemnity Agreements were executed)
between: (1) Jose and Susana Cochingyan, Sr., doing business under the name and style of the
Catholic Church Mart, represented by Joseph Cochingyan, Jr., as Trustor[s]; (2) Tomas Besa, a PNB
official, as Trustee; and (3) the PNB as beneficiary. The Trust Agreement provided, in pertinent part,
as follows:
WHEREAS, the TRUSTOR has guaranteed a bond in the amount of P400,000.00
issued by the R & B Surety and Insurance Co. (R & B) at the instance of Pacific
Agricultural Suppliers, Inc. (PAGRICO) on December 21, 1963, in favor of the
BENEFICIARY in connection with the application of PAGRICO for an advance line of
P400,000.00 to P800,000.00;
WHEREAS, the TRUSTOR has also guaranteed a bond issued by the Consolacion
Insurance & Surety Co., Inc. (CONSOLACION) in the amount of P900,000.00 in
favor of the BENEFICIARY to secure certain credit facilities extended by the
BENEFICIARY to the Pacific Copra Export Co., Inc. (PACOCO);
WHEREAS, the PAGRICO and the PACOCO have defaulted in the payment of their
respective obligations in favor of the BENEFICIARY guaranteed by the bonds issued
by the R & B and the CONSOLACION, respectively, and by reason of said default,
the BENEFICIARY has demanded compliance by the R & B and the
CONSOLACION of their respective obligations under the aforesaid bonds;
WHEREAS, the TRUSTOR is, therefore, bound to comply with his obligation under
the indemnity agreements aforementioned executed by him in favor of R & B and the
CONSOLACION, respectively and in order to forestall impending suits by the
BENEFICIARY against said companies, he is willing as he hereby agrees to pay the
obligations of said companies in favor of the BENEFICIARY in the total amount of
P1,300,000 without interest from the net profits arising from the procurement of
reparations consumer goods made thru the allocation of WARVETS; . . .
l. TRUSTOR hereby constitutes and appoints Atty. TOMAS BESA as TRUSTEE for
the purpose of paying to the BENEFICIARY Philippine National Bank in the manner
stated hereunder, the obligations of the R & B under the R & B Bond No. G-4765 for
P400,000.00 dated December 23, 1963, and of the CONSOLACION under The
Consolacion Bond No. G-5938 of June 3, 1964 for P900,000.00 or the total amount
of P1,300,000.00 without interest from the net profits arising from the procurement of
reparations consumer goods under the Memorandum of Settlement and Deeds of
Assignment of February 2, 1959 through the allocation of WARVETS;
xxx xxx xxx
6. THE BENEFICIARY agrees to hold in abeyance any action to enforce its claims
against R & B and CONSOLACION, subject of the bond mentioned above. In the
meantime that this TRUST AGREEMENT is being implemented, the BENEFICIARY
hereby agrees to forthwith reinstate the R & B and the CONSOLACION as among
the companies duly accredited to do business with the BENEFICIARY and its
branches, unless said companies have been blacklisted for reasons other than those
relating to the obligations subject of the herein TRUST AGREEMENT;

xxx xxx xxx

9. This agreement shall not in any manner release the R & B and CONSOLACION
from their respective liabilities under the bonds mentioned above. (emphasis
supplied)
There is no question that the Surety Bond has not been cancelled or fully discharged 2 by payment of
the Principal Obligation. Unless, therefore, the Surety Bond has been extinguished by another means, it
must still subsist. And so must the supporting Indemnity Agreements. 3
We are unable to sustain petitioners' claim that the Surety Bond and their respective obligations
under the Indemnity Agreements were extinguished by novation brought about by the subsequent
execution of the Trust Agreement.
Novation is the extinguishment of an obligation by the substitution or change of the obligation by a
subsequent one which terminates it, either by changing its object or principal conditions, or by
substituting a new debtor in place of the old one, or by subrogating a third person to the rights of the
creditor. 4 Novation through a change of the object or principal conditions of an existing obligation is
referred to as objective (or real) novation. Novation by the change of either the person of the debtor or of
the creditor is described as subjective (or personal) novation. Novation may also be both objective and
subjective (mixed) at the same time. In both objective and subjective novation, a dual purpose is
achieved-an obligation is extinguished and a new one is created in lieu thereof. 5
If objective novation is to take place, it is imperative that the new obligation expressly declare that
the old obligation is thereby extinguished, or that the new obligation be on every point incompatible
with the old one. 6Novation is never presumed: it must be established either by the discharge of the old
debt by the express terms of the new agreement, or by the acts of the parties whose intention to dissolve
the old obligation as a consideration of the emergence of the new one must be clearly discernible. 7
Again, if subjective novation by a change in the person of the debtor is to occur, it is not enough that
the juridical relation between the parties to the original contract is extended to a third person. It is
essential that the old debtor be released from the obligation, and the third person or new debtor take
his place in the new relation. If the old debtor is not released, no novation occurs and the third
person who has assumed the obligation of the debtor becomes merely a co-debtor or surety or a cosurety. 8
Applying the above principles to the instant case, it is at once evident that the Trust Agreement does
not expressly terminate the obligation of R & B Surety under the Surety Bond. On the contrary, the
Trust Agreement expressly provides for the continuing subsistence of that obligation by stipulating
that "[the Trust Agreement] shall not in any manner release" R & B Surety from its obligation under
the Surety Bond.
Neither can the petitioners anchor their defense on implied novation. Absent an unequivocal
declaration of extinguishment of a pre-existing obligation, a showing of complete incompatibility
between the old and the new obligation (and nothing else) would sustain a finding of novation by
implication. 9 But where, as in this case, the parties to the new obligation expressly recognize the
continuing existence and validity of the old one, where, in other words, the parties expressly negated the
lapsing of the old obligation, there can be no novation. The issue of implied novation is not reached at all.
What the trust agreement did was, at most, merely to bring in another person or persons-the
Trustor[s]-to assume the same obligation that R & B Surety was bound to perform under the Surety
Bond. It is not unusual in business for a stranger to a contract to assume obligations thereunder; a
contract of suretyship or guarantee is the classical example. The precise legal effect is the increase
of the number of persons liable to the obligee, and not the extinguishment of the liability of the first
debtor. 10 Thus, in Magdalena Estates vs. Rodriguez, 11 we held that:
[t]he mere fact that the creditor receives a guaranty or accepts payments from a third
person who has agreed to assume the obligation, when there is no agreement that
the first debtor shall be released from responsibility, does not constitute a novation,
and the creditor can still enforce the obligation against the original debtor.
In the present case, we note that the Trustor under the Trust Agreement, the CCM, was already
previously bound to R & B Surety under its Indemnity Agreement. Under the Trust Agreement, the
Trustor also became directly liable to the PNB. So far as the PNB was concerned, the effect of the
Trust Agreement was that where there had been only two, there would now be three obligors directly

and solidarily bound in favor of the PNB: PAGRICO, R & B Surety and the Trustor. And the PNB
could proceed against any of the three, in any order or sequence. Clearly, PNB never intended to
release, and never did release, R & B Surety. Thus, R & B Surety, which was not a party to the Trust
Agreement, could not have intended to release any of its own indemnitors simply because one of
those indemnitors, the Trustor under the Trust Agreement, became also directly liable to the PNB.
2. We turn to the contention of petitioner Jose K. Villanueva that his obligation as indemnitor under
the 24 December 1963 Indemnity Agreement with R & B Surety was extinguished when the PNB
agreed in the Trust Agreement "to hold in abeyance any action to enforce its claims against R & B
Surety .
The Indemnity Agreement speaks of the several indemnitors "apply[ing] jointly and severally (in
solidum) to the R & B Surety] to become SURETY upon a SURETY BOND demanded by and in
favor of [PNB] in the sum of [P400,000.00] for the faithful compliance of the terms and conditions set
forth in said SURETY BOND ." This part of the Agreement suggests that the indemnitors
(including the petitioners) would become co-sureties on the Security Bond in favor of PNB. The
record, however, is bereft of any indication that the petitioners-indemnitors ever in fact became cosureties of R & B Surety vis-a-vis the PNB. The petitioners, so far as the record goes, remained
simply indemnitors bound to R & B Surety but not to PNB, such that PNB could not have directly
demanded payment of the Principal Obligation from the petitioners. Thus, we do not see how Article
2079 of the Civil Code-which provides in part that "[a]n extension granted to the debtor by the
creditor without the consent of the guarantor extinguishes the guaranty" could apply in the instant
case.
The petitioner-indemnitors are, as, it were, second-tier parties so far as the PNB was concerned and
any extension of time granted by PNB to any of the first-tier obligators (PAGRICO, R &B Surety and
the trustors[s]) could not prejudice the second-tier parties.
There is no other reason why petitioner Villanueva's contention must fail. PNB's undertaking under
the Trust Agreement "to hold in abeyance any action to enforce its claims" against R & B Surety did
not extend the maturity of R & B Surety's obligation under the Surety Bond. The Principal Obligation
had in fact already matured, along with that of R &B Surety, by the time the Trust Agreement was
entered into. Petitioner's Obligation had in fact already matured, for those obligations were to amture
"as soon as [R & B Surety] became liable to make payment of any sum under the terms of the
[Surety Bond] whether the said sum or sums or part thereof have been actually paid or not." Thus,
the situation was that precisely envisaged in Article 2079:
[t]he mere failure on the part of the creditor to demand payment after the debt has
become due does not of itself constitute any extension of the referred to herein.
(emphasis supplied)
The theory behind Article 2079 is that an extension of time given to the principal debtor by the
creditor without the surety of his right to pay the creditor and to be immediately subrogated to the
creditor's remedies against the principal debtor upon the original maturity date. The surety is said to
be entitled to protect himself against the principal debtor upon the orginal 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. The underlying rationale is not present
in the instant case. As this Court has held,
merely delay or negligence in proceeding against the principal will not discharge a
surety unless there is between the creditor and the principal debtor a valid and
binding agreement therefor, one which tends to prejudice [the surety] or to deprive it
of the power of obtaining indemnity by presenting a legal objection for the time, to the
prosecution of an action on the original security. 12
In the instant case, there was nothing to prevent the petitioners from tendering payment, if they were
so minded, to PNB of the matured obligation on behalf of R & B Surety and thereupon becoming
subrogated to such remedies as R & B Surety may have against PAGRICO.
3. The last issue can be disposed of quicjly, Clauses (b) and (c) of the Indemnity Agreements
(quoted above) allow R & B Surety to recover from petitioners even before R & B Surety shall have
paid the PNB. We have previously held similar indemnity clauses to be enforceable and not violative
of any public policy. 13

The petitioners lose sight of the fact that the Indemnity Agreements are contracts of indemnification
not only against actual loss but against liability as well. 14 While in a contract of indemnity against loss as indemnitor
will not be liable until the person to be indemnified makes payment or sustains loss, in a contract of indemnity against liability, as in this case,
the indemnitor's liability arises as soon as the liability of the person to be indemnified has arisen without regard to whether or not he has
suffered actual loss. 15 Accordingly, R & B Surety was entitled to proceed against petitioners not only for the partial payments already made
but for the full amount owed by PAGRICO to the PNB.

Summarizing, we hold that :

(1) The Surety Bond was not novated by the Trust Agreement. Both agreements can co-exist. The
Trust Agreement merely furnished to PNB another party obligor to the Principal Obligation in addition
to PAGRICO and R & B Surety.
(2) The undertaking of the PNB to 'hold in abeyance any action to enforce its claim" against R & B
Surety did not amount to an "extension granted to the debtor" without petitioner's consent so as to
release petitioner's from their undertaking as indemnitors of R & B Surety under the INdemnity
Agreements; and
(3) Petitioner's are indemnitors of R & B Surety against both payments to and liability for payments
to the PNB. The present suit is therefore not premature despite the fact that the PNB has not
instituted any action against R & B Surety for the collection of its matured obligation under the Surety
Bond.
WHEREFORE, the petitioner's appeal is DENIED for the lack of merit and the decision of the trial
court is AFFIRMED in toto. Costs against the petitioners.
SO ORDERED.

G.R. No. L-43862 January 13, 1989

MERCANTILE INSURANCE CO., INC., plaintiff-appellee,
vs.
FELIPE YSMAEL, JR., & CO., INC., defendants-appellants.
Beltran, Evangelista & Cuasay for plaintiff-appellee.
Abraham F. Sarmiento Law Office for defendants-appellants.

BIDIN, J.:
This is an appeal from the decision** dated October 30, 1971 of the Court of First Instance of Manila
(now Regional Trial Court) in Civil Case No. 82168 entitled "Mercantile Insurance Co., Inc. (herein
referred to as the plaintiff-appellee) vs. Felipe Ysmael, Jr. &. Co., Inc., et al (hereinafter referred to as
the defendant-appellant) ordering defendants-appellants Felipe Ysmael, Jr. & Co., Inc. and Felipe
Ysmael, Jr., to pay jointly and severally to the plaintiff the sum of P100,000.00 plus 15% thereof as
attorney's fees, and costs. On appeal to the Court of Appeals, this case which involves only a
question of law, was certified to this Court.
The factual milieu of this case as found by the trial court is as follows:

Felipe Ysmael, Jr. & Co., Inc., represented by Felipe Ysmael filed an application for
an overdraft line of Pl,000,000.00 and credit line of Pl,000,000.00 with the Philippine
National Bank. The latter was willing to grant credit accommodation of P2,000,000.00
applied for provided that the applicant shall have filed a bond in the sum of
P140,000.00 to guarantee the payment of the said amount. Accordingly, on March 6,
1967, Felipe Ysmael, Jr. & Co., Inc., represented by Felipe Ysmael filed surety bond
No. G(16) 007 of Mercantile Insurance Co., Inc. in the sum of P100,000.00 (Exh. A).
On December 4, 1967, Felipe Ysmael Jr. & Co., Inc. as principal and the Mercantile
Insurance Co., Inc. executed another surety bond MERICO Bond No. G (16) 0030 in
the sum of P40,000.00. It is the condition in both bonds that if the principal Felipe
Ysmael, Jr. & Co., Inc. shall perform and fulfill its undertakings with the Philippine
National Bank, then these surety bonds shall be null and void (Exh. B).
As security and in consideration of the execution of the surety bonds, exhibits A and
B, Felipe Ysmael, Jr. & Co., Inc. and Magdalena Estate, lnc. represented by Felipe
Ysmael, Jr. as president and in his personal capacity executed with the plaintiff
Mercantile Insurance Co., Inc. an indemnity agreement (Exh. D) wherein the
defendants Felipe Ysmael, Jr. & Co., Inc. and Felipe Ysmael, Jr. bound themselves
jointly and severally to indemnify the plaintiff, hold save it harmless from and against
any and all payments, damages, costs, losses, penalties, charges and expenses
which said company as surety (relative to MERICO Bond No. 0007) shall incur or
become liable to pay plus an additional amount as attorney's fees equal to 20% of
the amount due to the company, Paragraph 3 of the indemnity agreement expressly
provides:
3) ACCRUAL OF ACTION: Notwithstanding the provisions of the next preceding
paragraph, where the obligation involves a liquidated amount for the payment of
which the company has become legally liable under the terms of the obligation and
its suretyship undertaking or by the demand of the obligee or otherwise and the latter
has merely allowed the COMPANY a term or extension for payment of the latter's
demand the full amount necessary to discharge the COMPANY's aforesaid liability
irrespective of whether or not payment has actually been made by the COMPANY,
the COMPANY for the protection of its interest may forthwith proceed against the
undersigned or either of them by court action or otherwise to enforce payment even
prior to making payment to the obligee which may hereafter be done by the
COMPANY.
On September 6, 1967, Gabriel Daza, Jr., Edgardo L. Tordesillas and Augusta Torres
in their official capacities and the defendants executed another indemnity agreement
(Exh. E) with the plaintiff in consideration of the surety bond (referring to MERICO
Bond No. G (16) 0030. In the indemnity agreement (Exh. E) the same provisions of
paragraph 3 found in exhibit D is provided for.
By agreement dated September 5, 1967 (Exh. C), the amount of the Bond was
reduced by P40,000.00 so that the total liability of the plaintiff to the Philippine
National Bank in view of the aforesaid reduction is P100,000.00 (Exh. C), P60,000.00
on Surety Bond No. 0007 plus P40,000.00 on Surety Bond No. 0030.
In view of the failure of the defendants to pay the overdraft and credit line with the
Philippine National Bank demanded from the Mercantile Insurance Co., Inc.
settlement of its obligation under surety bonds No. (G-16)-0007 for P 60,000.00
which expired on March 6, 1970 and No. G (-16)- 0030 for P 40,000.00 which
expired since September 4, 1968 (Exh. P) otherwise drastic measures for collection
to protect the interest of the bank would be taken. Attached to the demand letter is a
statement of account.
By letter of December 17, 1970, the Legal Department of plaintiff company wrote a
letter of demand to the defendants (Exhs. G and H) inviting their attention to the letter
of demand of the Philippine National Bank sent to the plaintiff and demanding from
the defendants the settlement of said account. These letters were received as shown
by the registry return receipts (Exhs. G-2 and H-2). Since the defendants failed to
settle their obligation with the Philippine National Bank, on February 10, 1971,
plaintiff brought the present action.

Instead of filing their answer, the defendants (appellants herein) filed a motion to DISMISS, which
motion was subsequently denied. Thereafter, the defendants filed their answer and the case was set
for pre-trial. On the date scheduled for pre-trial, the defendants and their counsel failed to appear,
thus on motion of the plaintiff, they were declared in default and plaintiff was allowed to present its
evidence ex-parte. Upon motion for reconsideration filed by the defendants, the case was ordered
re-opened and the case was scheduled for reception of defendant's evidence. Thereafter, the parties
were required to submit their respective memoranda and the case was submitted for decision. On
October 30, 1971, the trial court rendered its decision, the dispositive part of which reads:
WHEREFORE, in view of the foregoing considerations, judgment is rendered for the
plaintiff and the defendants are ordered to pay jointly and severally the plaintiff the
sum of P100,000.00 plus the further sum of 15% thereof in the concept of reasonable
attorney's fees and the costs.
Plaintiff upon payment of this judgment, shall deliver the sum of P100,000.00 to the
Philippine National Bank in partial satisfaction of the obligation of the defendants to
said Bank.
SO ORDERED. (Record on Appeal, p. 96)
Said decision was appealed to the Court of Appeals on questions of facts and law. Acting on the
appeal and finding that the only question raised therein involves a question of law, the Court of
Appeals by resolution *** dated April 29, 1976, certified the same to this Court, for proper disposition
(Rollo, pp. 62-63).
This Court, thru its First Division by Resolution dated May 31, 1978, resolved to have the case
docketed and declared the same submitted for decision (Rollo, p. 65).
The defendants-appellants raised the following assignments of errors in the Court of Appeals:
I
THE LOWER COURT ERRED IN NOT DISMISSING THE CASE FOR LACK OF
CAUSE OF ACTION, THE COMPLAINT BEING PREMATURE BECAUSE THE
PLAINTIFF HAS PAID NOTHING ON THE SURETY BONDS AND HAS SUFFERED
NO ACTUAL DAMAGE.
II
THE LOWER COURT ERRED IN NOT DECLARING THAT PARAGRAPH 3 OF THE
INDEMNITY AGREEMENTS IS VOID.
III
CONSEQUENTLY, THE TRIAL COURT ERRED IN ORDERING THE
DEFENDANTS-APPELLANT'S TO PAY JOINTLY AND SEVERALLY TO THE
PLAINTIFF THE SUM OF P100,000.00 PLUS THE FURTHER SUM OF 15%
THEREOF IN THE CONCEPT OF REASONABLE ATTORNEY'S FEES AND THE
COSTS. (Brief for Defendants-Appellants, CA, pp. 1-2).
The crux of the controversy is whether or not the surety can be allowed indemnification from the
defendants-appellants, upon the latter's default even before the former has paid to the creditor.
There is no dispute that the overdraft line of P1,000,000.00 and the credit line of Pl,000,000.00
applied for by the defendant was granted by the Philippine National Bank on the strength of the two
surety bonds denominated as MERICO Bond No. G(16) 0007 for one hundred thousand pesos (Exh.
A) and MERICO Bond No. G(16) 0030 for forty thousand pesos (Exh. B), later reduced as above
stated on September 5, 1967 (Exh. C) by P40,000.00 or a total amount of P100,000.00. As security
and in consideration of the execution of the surety bonds, the defendants executed with the plaintiff
identical indemnity agreements (Exhs. D and E) which provide, among others that payment of
indemnity or compensation may be claimed irrespective of whether or not plaintiff company has
actually paid the same.
Defendants-appellants maintain that the complaint is premature and that paragraph 3 of the
indemnity agreements is void for being contrary to law, public policy and good morals. They argued

that to allow plaintiff surety (appellee herein) to receive indemnity or compensation for something it
has not paid in its capacity as surety would constitute unjust enrichment at the expense of another.
(Brief for Defendants-Appellants, CA, p.6).
To bolster their contention, defendants-appellants argue that it is an indispensable requisite for an
action to prosper, that the party bringing the action must have a cause of action against the other
party; and that for a cause of action to be ripe for litigation, there must be both wrongful violation and
damages; all of which are not present in the case at bar because plaintiff-appellee has not suffered
any injury whatsoever, notwithstanding the demand sent to it by the Philippine National Bank, nor
has plaintiff-appellee made a single actual payment to said bank. Hence, to allow plaintiff-appellee to
recover from them something which it has not paid in its capacity as surety would violate the
fundamental principle which states NEMOCUM ALTERIUS DETRIMENTO LOCOPLETARI
POTEST (No person should unjustly enrich himself at the expense of another). [DefendantsAppellants' Brief, pp. 7-8; 49].
The question as to whether or not under the Indemnity Agreement of the parties, the Surety can
demand indemnification from the principal, upon the latter's default, even before the former has paid
to the creditor, has long been settled by this Court in the affirmative.
It has been held that:
The stipulation in the indemnity agreement allowing the surety to recover even before
it paid the creditor is enforceable. In accordance therewith, the surety may demand
from the indemnitors even before paying the creditors. (Cosmopolitan Ins. Co., Inc. v.
Reyes, 15 SCRA 528 [1965] citing; Security Bank v. Globe Assurance, 58 Off. Gaz.
3709 [April 30, 1962]; Alto Surety and Ins. Co., v. Aguilar, et al., G.R. No. L-5625,
March 16, 1954).
Hence, appellants contention that the action of the appellee (surety company) is premature or that
the complaint fails to state a cause of action because the surety has not paid anything to the bank,
cannot be sustained (Cosmopolitan Ins. Co., Inc. v. Reyes, supra). In fact, such contention is belied
not only by the allegations in the complaint but also by the agreement entered into between the
appellants and the appellee in favor of the bank.
The records show that the cause of action is distinctly set forth in the complaint, the pertinent portion
of which states:
6. That defendants, by virtue of the two Surety Bonds (Annexes "A" and "B") were
extended by the Philippine National Bank, a credit accommodation in the sum of
TWO MILLION (P2,000,000.00) PESOS;
7. That the Philippine National Bank is demanding and collecting from the plaintiff the
sum of ONE HUNDRED THOUSAND (P100,000.00) PESOS which is the
defendants' account with the said bank that is secured and covered by the abovementioned bonds (Annexes "A" and "B");
8. That under the terms of the Indemnity Agreements (Annexes "D" and "E") more
particularly paragraph 3, plaintiff may forthwith proceed against the defendants to
impose payment, even prior to making payment to the Philippine National Bank;
9. That notwithstanding series of demands made by plaintiff, the defendants failed
and refused to pay the Philippine National Bank the sum of ONE HUNDRED
THOUSAND (P l00,000.00) PESOS;
10. That on account of defendants' default, plaintiff becomes liable to the Philippine
National Bank in the sum of ONE HUNDRED THOUSAND (P100,000.00) PESOS;'
(Record on Appeal, p. 2.)
Correspondingly, it is readily apparent that said cause of action was derived from the terms of the
Indemnity Agreement, paragraph 3 thereof, as above quoted. By virtue of the provisions of the
Indemnity Agreement, defendants-appellants have undertaken to hold plaintiff-appellee free and
harmless from any suit, damage or liability which may be incurred by reason of non-performance by
the defendants-appellants of their obligation with the Philippine National Bank. The Indemnity
Agreement is principally entered into as security of plaintiff-appellee in case of default of defendantsappellants; and the liability of the parties under the surety bonds is joint and several, so that the

obligee PNB may proceed against either of them for the satisfaction of the obligation. (Brief for
Plaintiff-Appellee, p. 7).
II
Defendants-appellants have, by virtue of the Indemnity Agreement, given the plaintiff-appellee the
prerogative of filing an action even prior to the latter's making any payment to the Philippine National
Bank.
Contracts are respected as the law between the contracting parties (Henson v. IAC, 148 SCRA 11
[1987], citing Castro v. CA, 99 SCRA 722 [1980] and Escano v. CA, 100 SCRA 197 [1980]) It is
settled that the parties may establish such stipulations, clauses, terms and conditions as they may
want to include, and as long as such agreements are not contrary to law, morals, good customs,
public policy or public order, they shall have the force of law between them (Herrera v. Petrophil
Corp., 146 SCRA [1986].
Contracts should be interpreted according to their literal meaning and should not be interpreted
beyond their obvious intentment (Ibid.). It is a basic and fundamental rule in the interpretation of
contracts that if the terms thereof are clear and leave no doubt as to the intention of the contracting
parties, the literal meaning of the stipulation shall control.
In the case at bar, there is no dispute as to meaning of the terms of the Indemnity Agreement. The
only bone of contention is whether or not such terms are null and void as defendants-appellants
would have this Court declare.
A careful analysis of the contract in question will show that the provisions therein do not contravene
any law or public policy much less do they militate against the public good. In fact, as shown above,
they are fully sanctioned by well-established jurisprudence. Having voluntarily entered into such
contract, the appellants cannot now be heard to complain. Their indemnity agreement have the force
and effect of law.
Elucidating further on the obligations of the parties in agreements of this nature, this Court ruled:
...The indemnity agreement was not executed for the benefit of the creditors; it was
rather for the benefit of the surety and if the latter thought it necessary in its own
interest to impose this stipulation, and the indemnitors voluntarily agreed to the
same, the court should respect the agreement of the parties and require them to
abide by their contract. (Security Bank v. Globe Assurance, 107 Phil. 733 [1960].
III
Finally, the trial court did not err in ordering defendants-appellants to pay jointly and severally the
plaintiff the sum of P100,000.00 plus 15% as attorney's fees.
It must be stressed that in the case at bar, the principal debtors, defendants-appellants herein, are
simultaneously the same persons who executed the Indemnity Agreement. Thus, the position
occupied by them is that of a principal debtor and indemnitor at the same time, and their liability
being joint and several with the plaintiff-appellee's, the Philippine National Bank may proceed
against either for fulfillment of the obligation as covered by the surety bonds. There is, therefore, no
principle of guaranty involved and, therefore, the provision of Article 2071 of the Civil Code does not
apply. Otherwise stated, there is no more need for the plaintiff-appellee to exhaust all the properties
of the principal debtor before it may proceed against defendants-appellants.
As to the attorney's fees, it has been squarely ruled by this Court that the award of fifteen (15) per
cent for cases of this nature is not unreasonable (Cosmopolitan Insurance Co., Inc. v. Reyes, supra).
WHEREFORE, the decision appealed from is hereby AFFIRMED.
G.R. No. 151953

June 29, 2007

SALVADOR P. ESCAO and MARIO M. SILOS, petitioner,

vs.
RAFAEL ORTIGAS, JR., respondent.
DECISION

TINGA, J.:
The main contention raised in this petition is that petitioners are not under obligation to reimburse
respondent, a claim that can be easily debunked. The more perplexing question is whether this
obligation to repay is solidary, as contended by respondent and the lower courts, or merely joint as
argued by petitioners.
On 28 April 1980, Private Development Corporation of the Philippines (PDCP) 1 entered into a loan
agreement with Falcon Minerals, Inc. (Falcon) whereby PDCP agreed to make available and lend to
Falcon the amount of US$320,000.00, for specific purposes and subject to certain terms and
conditions.2 On the same day, 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.3 In the meantime,
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
Guaranty4 was executed by petitioner Salvador Escao (Escao), while the other 5 by petitioner Mario
M. Silos (Silos), Ricardo C. Silverio (Silverio), Carlos L. Inductivo (Inductivo) and Joaquin J.
Rodriguez (Rodriguez).
Two years later, an agreement developed to cede control of Falcon to Escao, Silos and Joseph M.
Matti (Matti). Thus, 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.6 Part of the consideration that induced the sale of stock was a desire by
Ortigas, et al., to relieve themselves of all liability arising from their previous joint and several
undertakings with Falcon, including those related to the loan with PDCP. Thus, an Undertaking dated
11 June 1982 was executed by the concerned parties,7 namely: with Escao, Silos and Matti
identified in the document as "SURETIES," on one hand, and Ortigas, Inductivo and the Scholeys as
"OBLIGORS," on the other. The Undertaking reads in part:
3. That whether or not SURETIES are able to immediately cause PDCP and PAIC to release
OBLIGORS from their said guarantees [sic], SURETIES hereby irrevocably agree and undertake to
assume all of OBLIGORs said guarantees [sic] to PDCP and PAIC under the following terms and
conditions:
a. Upon receipt by any of [the] OBLIGORS of any demand from PDCP and/or PAIC for the payment
of FALCONs obligations with it, any of [the] OBLIGORS shall immediately inform SURETIES thereof
so that the latter can timely take appropriate measures;
b. Should suit be impleaded by PDCP and/or PAIC against any and/or all of OBLIGORS for
collection of said loans and/or credit facilities, SURETIES agree to defend OBLIGORS at their own
expense, without prejudice to any and/or all of OBLIGORS impleading SURETIES therein for
contribution, indemnity, subrogation or other relief in respect to any of the claims of PDCP and/or
PAIC; and
c. In the event that any of [the] OBLIGORS is for any reason made to pay any amount to PDCP
and/or PAIC, SURETIES shall reimburse OBLIGORS for said amount/s within seven (7) calendar
days from such payment;
4. OBLIGORS hereby waive in favor of SURETIES any and all fees which may be due from
FALCON arising out of, or in connection with, their said guarantees[sic]. 8
Falcon eventually availed of the sum of US$178,655.59 from the credit line extended by PDCP. It
would also execute a Deed of Chattel Mortgage over its personal properties to further secure the
loan. However, Falcon subsequently defaulted in its payments. After PDCP foreclosed on the chattel
mortgage, there remained a subsisting deficiency of P5,031,004.07, which Falcon did not satisfy
despite demand.9
On 28 April 1989, in order to recover the indebtedness, PDCP filed a complaint for sum of money
with the Regional Trial Court of Makati (RTC) against Falcon, Ortigas, Escao, Silos, Silverio and
Inductivo. The case was docketed as Civil Case No. 89-5128. For his part, Ortigas filed together with
his answer a cross-claim against his co-defendants Falcon, Escao and Silos, and also manifested
his intent to file a third-party complaint against the Scholeys and Matti. 10 The cross-claim lodged
against Escao and Silos was predicated on the 1982 Undertaking, wherein they agreed to assume
the liabilities of Ortigas with respect to the PDCP loan.

Escao, Ortigas and Silos each sought to seek a settlement with PDCP. The first to come to terms
with PDCP was Escao, who in December of 1993, entered into a compromise agreement whereby
he agreed to pay the bankP1,000,000.00. In exchange, PDCP waived or assigned in favor of
Escao one-third (1/3) of its entire claim in the complaint against all of the other defendants in the
case.11 The compromise agreement was approved by the RTC in a Judgment 12 dated 6 January
1994.
Then on 24 February 1994, Ortigas entered into his own compromise agreement 13 with PDCP,
allegedly without the knowledge of Escao, Matti and Silos. Thereby, Ortigas agreed to pay
PDCP P1,300,000.00 as "full satisfaction of the PDCPs claim against Ortigas,"14 in exchange for
PDCPs release of Ortigas from any liability or claim arising from the Falcon loan agreement, and a
renunciation of its claims against Ortigas.
In 1995, Silos and PDCP entered into a Partial Compromise Agreement whereby he agreed to
pay P500,000.00 in exchange for PDCPs waiver of its claims against him.15
In the meantime, after having settled with PDCP, Ortigas pursued his claims against Escao, Silos
and Matti, on the basis of the 1982 Undertaking. He initiated a third-party complaint against Matti
and Silos,16 while he maintained his cross-claim against Escao. In 1995, Ortigas filed a motion for
Summary Judgment in his favor against Escao, Silos and Matti. On 5 October 1995, the RTC
issued the Summary Judgment, ordering Escao, Silos and Matti to pay Ortigas, jointly and
severally, the amount of P1,300,000.00, as well as P20,000.00 in attorneys fees.17 The trial court
ratiocinated that none of the third-party defendants disputed the 1982 Undertaking, and that "the
mere denials of defendants with respect to non-compliance of Ortigas of the terms and conditions of
the Undertaking, unaccompanied by any substantial fact which would be admissible in evidence at a
hearing, are not sufficient to raise genuine issues of fact necessary to defeat a motion for summary
judgment, even if such facts were raised in the pleadings." 18 In an Order dated 7 March 1996, the
trial court denied the motion for reconsideration of the Summary Judgment and awarded Ortigas
legal interest of 12% per annum to be computed from 28 February 1994. 19
From the Summary Judgment, recourse was had by way of appeal to the Court of Appeals. Escao
and Silos appealed jointly while Matti appealed by his lonesome. In a Decision 20 dated 23 January
2002, the Court of Appeals dismissed the appeals and affirmed the Summary Judgment. The
appellate court found that the RTC did not err in rendering the summary judgment since the three
appellants did not effectively deny their execution of the 1982 Undertaking. The special defenses
that were raised, "payment and excussion," were characterized by the Court of Appeals as
"appear[ing] to be merely sham in the light of the pleadings and supporting documents and
affidavits."21 Thus, it was concluded that there was no genuine issue that would still require the rigors
of trial, and that the appealed judgment was decided on the bases of the undisputed and established
facts of the case.
Hence, the present petition for review filed by Escao and Silos.22 Two main issues are raised. First,
petitioners dispute that they are liable to Ortigas on the basis of the 1982 Undertaking, a document
which they do not disavow and have in fact annexed to their petition. Second, on the assumption
that they are liable to Ortigas under the 1982 Undertaking, petitioners argue that they are jointly
liable only, and not solidarily. Further assuming that they are liable, petitioners also submit that they
are not liable for interest and if at all, the proper interest rate is 6% and not 12%.
Interestingly, petitioners do not challenge, whether in their petition or their memorandum before the
Court, the appropriateness of the summary judgment as a relief favorable to Ortigas. Under Section
3, Rule 35 of the 1997 Rules of Civil Procedure, summary judgment may avail if the pleadings,
supporting affidavits, depositions and admissions on file show that, except as to the amount of
damages, there is no genuine issue as to any material fact and that the moving party is entitled to a
judgment as a matter of law. Petitioner have not attempted to demonstrate before us that there
existed a genuine issue as to any material fact that would preclude summary judgment. Thus, we
affirm with ease the common rulings of the lower courts that summary judgment is an appropriate
recourse in this case.
The vital issue actually raised before us is whether petitioners were correctly held liable to Ortigas on
the basis of the 1982 Undertaking in this Summary Judgment. An examination of the document
reveals several clauses that make it clear that the agreement was brought forth by the desire of
Ortigas, Inductivo and the Scholeys to be released from their liability under the loan agreement
which release was, in turn, part of the consideration for the assignment of their shares in Falcon to
petitioners and Matti. The whereas clauses manifest that Ortigas had bound himself with Falcon for
the payment of the loan with PDCP, and that "amongst the consideration for OBLIGORS and/or their

principals aforesaid selling is SURETIES relieving OBLIGORS of any and all liability arising from
their said joint and several undertakings with FALCON." 23 Most crucial is the clause in Paragraph 3 of
the Undertaking wherein petitioners "irrevocably agree and undertake to assume all of OBLIGORs
said guarantees [sic] to PDCP x x x under the following terms and conditions." 24
At the same time, it is clear that the assumption by petitioners of Ortigass "guarantees" [sic] to
PDCP is governed by stipulated terms and conditions as set forth in sub-paragraphs (a) to (c) of
Paragraph 3. First, upon receipt by "any of OBLIGORS" of any demand from PDCP for the payment
of Falcons obligations with it, "any of OBLIGORS" was to immediately inform "SURETIES" thereof
so that the latter can timely take appropriate measures. Second, should "any and/or all of
OBLIGORS" be impleaded by PDCP in a suit for collection of its loan, "SURETIES agree[d] to
defend OBLIGORS at their own expense, without prejudice to any and/or all of OBLIGORS
impleading SURETIES therein for contribution, indemnity, subrogation or other relief" 25 in respect to
any of the claims of PDCP. Third, if any of the "OBLIGORS is for any reason made to pay any
amount to [PDCP], SURETIES [were to] reimburse OBLIGORS for said amount/s within seven (7)
calendar days from such payment."26
Petitioners claim that, contrary to paragraph 3(c) of the Undertaking, Ortigas was not "made to pay"
PDCP the amount now sought to be reimbursed, as Ortigas voluntarily paid PDCP the amount
of P1.3 Million as an amicable settlement of the claims posed by the bank against him. However, the
subject clause in paragraph 3(c) actually reads "[i]n the event that any of OBLIGORS is for any
reason made to pay any amount to PDCP x x x"27 As pointed out by Ortigas, the phrase "for any
reason" reasonably includes any extra-judicial settlement of obligation such as what Ortigas had
undertaken to pay to PDCP, as it is indeed obvious that the phrase was incorporated in the clause to
render the eventual payment adverted to therein unlimited and unqualified.
The interpretation posed by petitioners would have held water had the Undertaking made clear that
the right of Ortigas to seek reimbursement accrued only after he had delivered payment to PDCP as
a consequence of a final and executory judgment. On the contrary, the clear intent of the
Undertaking was for petitioners and Matti to relieve the burden on Ortigas and his fellow
"OBLIGORS" as soon as possible, and not only after Ortigas had been subjected to a final and
executory adverse judgment.
Paragraph 1 of the Undertaking enjoins petitioners to "exert all efforts to cause PDCP x x x to within
a reasonable time release all the OBLIGORS x x x from their guarantees [sic] to PDCP x x x" 28 In the
event that Ortigas and his fellow "OBLIGORS" could not be released from their guaranties,
paragraph 2 commits petitioners and Matti to cause the Board of Directors of Falcon to make a call
on its stockholders for the payment of their unpaid subscriptions and to pledge or assign such
payments to Ortigas, et al., as security for whatever amounts the latter may be held liable under their
guaranties. In addition, paragraph 1 also makes clear that nothing in the Undertaking "shall prevent
OBLIGORS, or any one of them, from themselves negotiating with PDCP x x x for the release of
their said guarantees [sic]."29
There is no argument to support petitioners position on the import of the phrase "made to pay" in the
Undertaking, other than an unduly literalist reading that is clearly inconsistent with the thrust of the
document. Under the Civil Code, the various stipulations of a contract shall be interpreted together,
attributing to the doubtful ones that sense which may result from all of them taken jointly.30 Likewise
applicable is the provision that if some stipulation of any contract should admit of several meanings,
it shall be understood as bearing
that import which is most adequate to render it effectual. 31 As a means to effect the general intent of
the document to relieve Ortigas from liability to PDCP, it is his interpretation, not that of petitioners,
that holds sway with this Court.
Neither do petitioners impress us of the non-fulfillment of any of the other conditions set in paragraph
3, as they claim. Following the general assertion in the petition that Ortigas violated the terms of the
Undertaking, petitioners add that Ortigas "paid PDCP BANK the amount of P1.3 million without
petitioners ESCANO and SILOSs knowledge and consent."32 Paragraph 3(a) of the Undertaking
does impose a requirement that any of the "OBLIGORS" shall immediately inform "SURETIES" if
they received any demand for payment of FALCONs obligations to PDCP, but that requirement is
reasoned "so that the [SURETIES] can timely take appropriate measures" 33 presumably to settle the
obligation without having to burden the "OBLIGORS." This notice requirement in paragraph 3(a) is
markedly way off from the suggestion of petitioners that Ortigas, after already having been
impleaded as a defendant in the collection suit, was obliged under the 1982 Undertaking to notify
them before settling with PDCP.

The other arguments petitioners have offered to escape liability to Ortigas are similarly weak.
Petitioners impugn Ortigas for having settled with PDCP in the first place. They note that Ortigas
had, in his answer, denied any liability to PDCP and had alleged that he signed the Assumption of
Solidary Liability not in his personal capacity, but as an officer of Falcon. However, such position,
according to petitioners, could not be justified since Ortigas later voluntarily paid PDCP the amount
of P1.3 Million. Such circumstances, according to petitioners, amounted to estoppel on the part of
Ortigas.
Even as we entertain this argument at depth, its premises are still erroneous. The Partial
Compromise Agreement between PDCP and Ortigas expressly stipulated that Ortigass offer to pay
PDCP was conditioned "without [Ortigass] admitting liability to plaintiff PDCP Banks complaint, and
to terminate and dismiss the said case as against Ortigas solely." 34 Petitioners profess it is
"unthinkable" for Ortigas to have voluntarily paid PDCP without admitting his liability,35 yet such
contention based on assumption cannot supersede the literal terms of the Partial Compromise
Agreement.
Petitioners further observe that Ortigas made the payment to PDCP after he had already assigned
his obligation to petitioners through the 1982 Undertaking. Yet the fact is PDCP did pursue a judicial
claim against Ortigas notwithstanding the Undertaking he executed with petitioners. Not being a
party to such Undertaking, PDCP was not precluded by a contract from pursuing its claim against
Ortigas based on the original Assumption of Solidary Liability.
At the same time, the Undertaking did not preclude Ortigas from relieving his distress through a
settlement with the creditor bank. Indeed, paragraph 1 of the Undertaking expressly states that
"nothing herein shall prevent OBLIGORS, or any one of them, from themselves negotiating with
PDCP x x x for the release of their said guarantees [sic]."36 Simply put, the Undertaking did not bar
Ortigas from pursuing his own settlement with PDCP. Neither did the Undertaking bar Ortigas from
recovering from petitioners whatever amount he may have paid PDCP through his own settlement.
The stipulation that if Ortigas was "for any reason made to pay any amount to PDCP[,] x x x
SURETIES shall reimburse OBLIGORS for said amount/s within seven (7) calendar days from such
payment"37 makes it clear that petitioners remain liable to reimburse Ortigas for the sums he paid
PDCP.
We now turn to the set of arguments posed by petitioners, in the alternative, that is, on the
assumption that they are indeed liable.
Petitioners submit that they could only be held jointly, not solidarily, liable to Ortigas, claiming that the
Undertaking did not provide for express solidarity. They cite Article 1207 of the New Civil Code,
which states in part that "[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."
Ortigas in turn argues that petitioners, as well as Matti, are jointly and severally liable for the
Undertaking, as the language used in the agreement "clearly shows that it is a surety
agreement"38 between the obligors (Ortigas group) and the sureties (Escao group). Ortigas points
out that the Undertaking uses the word "SURETIES" although the document, in describing the
parties. It is further contended that the principal objective of the parties in executing the Undertaking
cannot be attained unless petitioners are solidarily liable "because the total loan obligation can not
be paid or settled to free or release the OBLIGORS if one or any of the SURETIES default from their
obligation in the Undertaking."39
In 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.

The Undertaking does not contain any express stipulation that the petitioners agreed "to bind
themselves jointly and severally" in their obligations to the Ortigas group, or any such terms to that
effect. Hence, such obligation established in the Undertaking is presumed only to be joint. Ortigas,
as the party alleging that the obligation is in fact solidary, bears the burden to overcome the
presumption of jointness of obligations. We rule and so hold that he failed to discharge such burden.
Ortigas places primary reliance on the fact that the petitioners and Matti identified themselves in the
Undertaking as "SURETIES", a term repeated no less than thirteen (13) times in the document.
Ortigas claims that such manner of identification sufficiently establishes that the obligation of
petitioners to him was joint and solidary in nature.
The term "surety" has a specific meaning under our Civil Code. Article 2047 provides the statutory
definition of a surety agreement, thus:
Art. 2047. By guaranty a person, called the guarantor, binds himself to the creditor to fulfill the
obligation of the principal debtor in case the latter should fail to do so.
If a person binds himself solidarily with the principal debtor, the provisions of Section 4, Chapter 3,
Title I of this Book shall be observed. In such case the contract is called a suretyship. [Emphasis
supplied]40
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. It appears that Ortigass argument rests solely on the solidary
nature of the obligation of the surety under Article 2047. In tandem with the nomenclature
"SURETIES" accorded to petitioners and Matti in the Undertaking, however, this argument can only
be viable if the obligations established in the
Undertaking do partake of the nature of a suretyship as defined under Article 2047 in the first place.
That clearly is not the case here, notwithstanding the use of the nomenclature "SURETIES" in the
Undertaking.
Again, as indicated by Article 2047, a suretyship requires a principal debtor to whom the surety is
solidarily bound by way of an ancillary obligation of segregate identity from the obligation between
the principal debtor and the creditor. The suretyship does bind the surety to the creditor, inasmuch
as the latter is vested with the right to proceed against the former to collect the credit in lieu of
proceeding against the principal debtor for the same obligation.41 At the same time, there is also a
legal tie created between the surety and the principal debtor to which the creditor is not privy or party
to. The moment the surety fully answers to the creditor for the obligation created by the principal
debtor, such obligation is extinguished.42 At the same time, the surety may seek reimbursement from
the principal debtor for the amount paid, for the surety does in fact "become subrogated to all the
rights and remedies of the creditor."43
Note that Article 2047 itself specifically calls for the application of the provisions on joint and solidary
obligations to suretyship contracts.44 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).45However, 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.
Dr. Tolentino explains the differences between a solidary co-debtor and a surety:
A guarantor who binds himself in solidum with the principal debtor under the provisions of the
second paragraph does not become a solidary co-debtor to all intents and purposes. There is a
difference between a solidary co-debtor and a fiador in solidum (surety). The latter, outside of the
liability he assumes to pay the debt before the property of the principal debtor has been exhausted,
retains all the other rights, actions and benefits which pertain to him by reason of the fiansa; while a
solidary co-debtor has no other rights than those bestowed upon him in Section 4, Chapter 3, Title I,
Book IV of the Civil Code.
The second paragraph of [Article 2047] is practically equivalent to the contract of suretyship. The
civil law suretyship is, accordingly, nearly synonymous with the common law guaranty; and the civil

law relationship existing between the co-debtors liable in solidum is similar to the common law
suretyship.46
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.
What is the source of this right to full reimbursement by the surety? We find the right under Article
2066 of the Civil Code, which assures that "[t]he guarantor who pays for a debtor must be
indemnified by the latter," such indemnity comprising of, among others, "the total amount of the
debt."47 Further, Article 2067 of the Civil Code likewise establishes that "[t]he guarantor who pays is
subrogated by virtue thereof to all the rights which the creditor had against the debtor." 48

Articles 2066 and 2067 explicitly pertain to guarantors, and one might argue that the provisions
should not extend to sureties, especially in light of the qualifier in Article 2047 that the provisions on
joint and several obligations should apply to sureties. We reject that argument, and instead adopt Dr.
Tolentinos observation that "[t]he reference in the second paragraph of [Article 2047] to the
provisions of Section 4, Chapter 3, Title I, Book IV, on solidary or several obligations, however, does
not mean that suretyship is withdrawn from the applicable provisions governing guaranty." 49 For if
that were not the implication, there would be no material difference between the surety as defined
under Article 2047 and the joint and several debtors, for both classes of obligors would be governed
by exactly the same rules and limitations.
Accordingly, the rights to indemnification and subrogation as established and granted to the
guarantor by Articles 2066 and 2067 extend as well to sureties as defined under Article 2047. These
rights granted to the surety who pays materially differ from those granted under Article 1217 to the
solidary debtor who pays, since the "indemnification" that pertains to the latter extends "only [to] the
share which corresponds to each [co-debtor]." It is for this reason that the Court cannot accord the
conclusion that because petitioners are identified in the Undertaking as "SURETIES," they are
consequently joint and severally liable to Ortigas.
In order for the conclusion espoused by Ortigas to hold, in light of the general presumption favoring
joint liability, the Court would have to be satisfied that among the petitioners and Matti, there is one
or some of them who stand as the principal debtor to Ortigas and another as surety who has the
right to full reimbursement from the principal debtor or debtors. No suggestion is made by the parties
that such is the case, and certainly the Undertaking is not revelatory of such intention. If the Court
were to give full fruition to the use of the term "sureties" as conclusive indication of the existence of a
surety agreement that in turn gives rise to a solidary obligation to pay Ortigas, the necessary
implication would be to lay down a corresponding set of rights and obligations as between the
"SURETIES" which petitioners and Matti did not clearly intend.
It is not impossible that as between Escao, Silos and Matti, there was an agreement whereby in the
event that Ortigas were to seek reimbursement from them per the terms of the Undertaking, one of
them was to act as surety and to pay Ortigas in full, subject to his right to full reimbursement from
the other two obligors. In such case, there would have been, in fact, a surety agreement which
evinces a solidary obligation in favor of Ortigas. Yet if there was indeed such an agreement, it does
not appear on the record. More consequentially, no such intention is reflected in the Undertaking
itself, the very document that creates the conditional obligation that petitioners and Matti reimburse
Ortigas should he be made to pay PDCP. The mere utilization of the term "SURETIES" could not
work to such effect, especially as it does not appear who exactly is the principal debtor whose
obligation is "assured" or "guaranteed" by the surety.
Ortigas further argues that the nature of the Undertaking requires "solidary obligation of the
Sureties," since the Undertaking expressly seeks to "reliev[e] obligors of any and all liability arising
from their said joint and several undertaking with [F]alcon," and for the "sureties" to "irrevocably
agree and undertake to assume all of obligors said guarantees to PDCP." 50 We do not doubt that a
finding of solidary liability among the petitioners works to the benefit of Ortigas in the facilitation of

these goals, yet the Undertaking itself contains no stipulation or clause that establishes petitioners
obligation to Ortigas as solidary. Moreover, the aims adverted to by Ortigas do not by themselves
establish that the nature of the obligation requires solidarity. Even if the liability of petitioners and
Matti were adjudged as merely joint, the full relief and reimbursement of Ortigas arising from his
payment to PDCP would still be accomplished through the complete execution of such a judgment.
Petitioners further claim that they are not liable for attorneys fees since the Undertaking contained
no such stipulation for attorneys fees, and that the situation did not fall under the instances under
Article 2208 of the Civil Code where attorneys fees are recoverable in the absence of stipulation.
We disagree. As Ortigas points out, the acts or omissions of the petitioners led to his being
impleaded in the suit filed by PDCP. The Undertaking was precisely executed as a means to obtain
the release of Ortigas and the Scholeys from their previous obligations as sureties of Falcon,
especially considering that they were already divesting their shares in the corporation. Specific
provisions in the Undertaking obligate petitioners to work for the release of Ortigas from his surety
agreements with Falcon. Specific provisions likewise mandate the immediate repayment of Ortigas
should he still be made to pay PDCP by reason of the guaranty agreements from which he was
ostensibly to be released through the efforts of petitioners. None of these provisions were complied
with by petitioners, and Article 2208(2) precisely allows for the recovery of attorneys fees "[w]hen
the defendants act or omission has compelled the plaintiff to litigate with third persons or to incur
expenses to protect his interest."
Finally, petitioners claim that they should not be liable for interest since the Undertaking does not
contain any stipulation for interest, and assuming that they are liable, that the rate of interest should
not be 12% per annum, as adjudged by the RTC.
The seminal ruling in Eastern Shipping Lines, Inc. v. Court of Appeals 51 set forth the rules with
respect to the manner of computing legal interest:
I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or quasidelicts is breached, the contravenor can be held liable for damages. The provisions under Title XVIII
on "Damages" of the Civil Code govern in determining the measure of recoverable damages.
II. With regard particularly to an award of interest in the concept of actual and compensatory
damages, the rate of interest, as well as the accrual thereof, is imposed, as follows:
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 12% per annum to be computed from default,
i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the
Civil Code.
2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on
the amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per
annum. No interest, however, shall be adjudged on unliquidated claims or damages except when or
until the demand can be established with reasonable certainty. Accordingly, where the demand is
established with reasonable certainty, the interest shall begin to run from the time the claim is made
judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so reasonably
established at the time the demand is made, the interest shall begin to run only from the date the
judgment of the court is made (at which time quantification of damages may be deemed to have
been reasonably ascertained). The actual base for the computation of legal interest shall, in any
case, be on the amount finally adjudged.
3. When the judgment of the court awarding a sum of money becomes final and executory, the rate
of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per
annum from such finality until its satisfaction, this interim period being deemed to be by then an
equivalent to a forbearance of credit.52
Since what was the constituted in the Undertaking consisted of a payment in a sum of money, the
rate of interest thereon shall be 12% per annum to be computed from default, i.e., from judicial or
extrajudicial demand. The interest rate imposed by the RTC is thus proper. However, the
computation should be reckoned from judicial or extrajudicial demand. Per records, there is no
indication that Ortigas made any extrajudicial demand to petitioners and Matti after he paid PDCP,
but on 14 March 1994, Ortigas made a judicial demand when he filed a Third-Party Complaint

praying that petitioners and Matti be made to reimburse him for the payments made to PDCP. It is
the filing of this Third Party Complaint on 14 March 1994 that should be considered as the date of
judicial demand from which the computation of interest should be reckoned. 53 Since the RTC held
that interest should be computed from 28 February 1994, the appropriate redefinition should be
made.
WHEREFORE, the Petition is GRANTED in PART. The Order of the Regional Trial Court dated 5
October 1995 is modified by declaring that petitioners and Joseph M. Matti are only jointly liable, not
jointly and severally, to respondent Rafael Ortigas, Jr. in the amount of P1,300,000.00. The Order of
the Regional Trial Court dated 7 March 1996 is MODIFIED in that the legal interest of 12% per
annum on the amount of P1,300,000.00 is to be computed from 14 March 1994, the date of judicial
demand, and not from 28 February 1994 as directed in the Order of the lower court. The assailed
rulings are affirmed in all other respects. Costs against petitioners.
SO ORDERED.

G.R. No. L-20588 December 17, 1923

THE ASIATIC PETROLEUM COMPANY (PHILIPPINE ISLANDS), LTD., plaintiff-appellant,
vs.
FRANCISCO HIZON Y SINGIAN and JUSTINO A. DAVID, defendants. FRANCISCO HIZON Y
SINGIAN,defendant-appellant.
Jose Gutierrez David for plaintiff-appellant.
Araneta and Zaragoza for defendant-appellant.

STREET, J.:
This civil action was instituted in the Court of First Instance of the Province of Pampanga by the
Asiatic Petroleum Company (Philippine Islands), Ltd., to recover of Justino A. David, as principal,
and of Francisco Hizon y Singian, as security, the sum of P51,560.12, an alleged balance due upon
liquidation of accounts between the plaintiff and said David, and for which Francisco Hizon y Singian
is alleged to be obligated as joint and several surety with the principal debtor. At the hearing
judgment was rendered in favor of the plaintiff to recover of Justino A. David, as principal, the sum
P40,786.98, and of Francisco Hizon y Singian, as surety, a portion of the same debt not to exceed
the sum of P5,000. From this judgment Justino A. David did not appeal, and his obligation, as
principal debtor, to the extent adjudged by the trial court, is not now in question. As regards the
liability declared by the trial court against Francisco Hizon y Singian, an appeal was taken both by
the plaintiff and by said Hizon, the plaintiff contending that the court should have held Hizon jointly
and severally responsible for the entire sum adjudged against the principal debtor, while Hizon
claims that he should have been wholly absolved.
It appears in evidence that the plaintiff is a corporation lawfully engaged in the selling of petroleum
products in the Philippine Islands. In the year 1916 the plaintiff made a contract (Exhibit B) with
Justino A. David, whereby the latter became the selling agent of the plaintiff at San Fernando, in the
Province of Pampanga, with authority extending not only over the municipality of San Fernando but
over the neighboring places of Guagua, Angeles, San Simon, Capas, Magalang, and Mabalakat, in
the same province. In accordance with this contract and in conformity with the practices of the
contracting parties thereunder, the said Justino A. David from time to time over a period of about five
years received for sale and distribution at the places mentioned various consignments of kerosene,
gasoline, and similar petroleum products, which were sold and disposed of by Justino A. David as
selling agent. The relation thus established was continued without interruption until in the year 1921,
when all the transactions between the two parties were gone over, and it was found that David was
indebted to the plaintiff in the amount of nearly P60,000, a sum which, by subsequent payments,
was reduced to P40,786.98, as found and adjudged by the trial court.

The alleged liability of the appellant, Francisco Hizon y Singian, is planted upon a document (Exhibit
B-1), which, as appearing in evidence, is pasted to the Exhibit B. By the said exhibit B-1, Francisco
Hizon y Singian obligates himself to answer jointly and severally with the agent (Justino A. David) for
all the obligations contracted or to be contracted by the latter in accordance with the terms of the
contract of agency (Exhibit B), and the said Francisco Hizon y Singian further agrees finally to
answer for any balance that should be due to the plaintiff from said agent upon liquidation of the
account, or accounts, between said two parties.
The contract of suretyship (Exhibit B-1) consists of a single sheet of paper and the agreement
therein expressed consists of a printed form completed by the interpolation, with pen and ink, of the
names of the parties and the date of the transaction. It purports to have been signed on November
13, 1916, but the notarial acknowledgment appended thereto bears date of November 17, 1916,
which is the same as the date upon which the contract Exhibit B was acknowledged. As already
stated the document B-1 is pasted to the contract Exhibit B, also made upon a printed form, but the
two documents do not form integral parts of the same sheet, or sheets. However, the document B-1
refers to the contract of agency to which it is appended; and when the two are considered together, it
would appear that the contract Exhibit B is the identical instrument referred to in Exhibit B-1 and that
the former was executed in relation with the latter. Upon this point, however, a question is made,
which constitutes in our opinion the decisive feature of the case.
1awphi1.net

As already stated the contract Exhibit B declares that David shall serve the plaintiff company as its
only selling agent at San Fernando, Guagua, Angeles, San Simon, Capas, Magalang, and
Mabalakat, in the Province of Pampanga; and the indebtedness which is the subject of this action
was incurred by said David as selling agent of the plaintiff at all the places named.
From the time demand was first made upon the present appellant, Hizon, for the satisfaction of the
balance due to the plaintiff upon liquidation of the account of David, the appellant has insisted that
he had obligated himself to answer for indebtedness to be incurred by David as selling agent at and
for the town of San Fernando and that he had been given to understand, at the time he contracted
the obligation, that the indebtedness so incurred would not be in excess of P5,000.
The representation as to the amount into which the indebtedness would run a representation
which seems to have come exclusively from David we consider unimportant, since the written
contract places no limit upon the amount of the obligation; but the defendant's contention concerning
the place, or places, over which David's agency extended is of a more serious character.
In this connection it is important to note that in the principal contract (Exhibit B), as submitted in
evidence, the words "Guagua, Angeles, San Simon, Capas, Magalang, Mabalakat" (after the words
San Fernando), have been inserted in the printed form by means of a typewriting machine, and
owing to lack of space in the printed form, it was necessary for the typist to interline the words
"Guagua, Angeles, and San Simon." Furthermore, the word "Mabalakat" as written by the typist,
overlaps and obscures the succeeding printed words, "in the," standing before "Province of
Pampanga." There is of course nothing particularly suspicious about this, but the situation thus
revealed suggests the possibility that the words Guagua, Angeles, San Simon, Capas, Magalang,
and Mabalakat may have been inserted after the contract of suretyship had been signed and
acknowledged by the appellant Hizon. Conclusive proof on this point comes, however, from another
quarter and from a source not at all dependent upon the credibility of the oral testimony of the
appellant Hizon. Said proof consists in the fact now to be stated.
It appears that at the time the appellant acknowledged the contract of suretyship (Exhibit B-1),
duplicate copies of the principal contract were produced before the notary public and were there
present for the inspection of the parties. The notary who acted in the matter was one A.E. Cuyugan,
an attorney, who, at the time of the incident now in question, was engaged in the exercise of the
legal profession, and at the time he was examined as a witness was filing the office of assistant
attorney of the Bureau of Justice. This witness was introduced by the plaintiff, and his testimony has
every appearance of being candid and truthful. He states that the two copies of the principal contract
which were produced at the time the acknowledgment of Hizon to the contract of suretyship was
taken were the same.
Now, after the principal contract had been acknowledged by Justino A. David, as appears from the
notarial certificate appended thereto, and after the contract of suretyship had been at the same time
acknowledged by the appellant, as appears from the contemporaneous notarial certificate appended
thereto, the notary public delivered to David one copy of the principal contract, together with one
copy of the contract of suretyship acknowledged by the appellant; and these two documents went to
the hands of the plaintiff and have appeared in evidence as Exhibits B and B-1, as already stated.

The other copy of the principal contract was retained in possession of the notary, in accordance with
notarial usage in such matters. It thus became a part of his official records and, with other
documents, was afterwards delivered by the notary to the clerk of court, of the Province of
Pampanga, by whom it was transmitted to the division of archives of the Philippine Library and
Museum.
In the course of the trial of this case, a duly authenticated copy of said contract, as appearing in the
official archives of said division, was introduced in evidence in this case; and upon comparison of
said copy with the Exhibit B, the two documents are found to differ in the sole circumstance that the
words Guagua, Angeles, San Simon, Capas, Magalang, and Mabalakat, are wanting in the
instrument now preserved in the division of archives.
Upon this circumstance, in relation with the testimony of the notary public and the appellant, the trial
judge reached the conclusion that at the time the appellant signed and acknowledged the contract of
suretyship the principal contract made no mention of other places than San Fernando, had been
interpolated in the document Exhibit B after the contract of suretyship had been acknowledged. We
believe that there can be little doubt as to the correctness of this conclusion, and it completely bears
out the contention of the appellant to the effect that he really obligated himself only to answer for
such indebtedness as might be incurred by David as agent at San Fernando. We may add that no
witness was produced by the plaintiff for the purpose of explaining in any way the discrepancy
between the two documents above referred to.
The circumstance should not pass unnoticed that the appellant's contention concerning the extent of
the agency at the time he obligated himself was formulated at a time when he did not know of the
existence of a copy of the contract of agency in the files of the division of archives; and the
subsequent discovery of this piece of evidence is strongly suggestive of the appellant's good faith in
claiming that he had obligated himself only for the results of an agency to be established at San
Fernando. Our conclusion upon a careful consideration of the evidence is that, when the appellant
acknowledged the contract of suretyship, the principal contract was limited to the agency at that
place and that the document Exhibit B was subsequently amended by agreement between the
plaintiff and Justino A. David, but without the knowledged or consent of the appellant, by the
insertion therein of the names of the other places mentioned in said exhibit.
It is fundamental in the law of suretyship that any agreement between the creditor and the principal
debtor which essentially varies the terms of the principal contract, without the consent of the surety,
will release the surety from liability. (21 R.C.L., 1004.) This principle is equally valid under the civil as
under the common law; and though not specifically expressed in the Civil Code, it may be deduced,
so far as its application to the facts of this case is concerned, from the second paragraph of article
1822 in relation with article 1143 of the same Code. It requires no argument to show that the
increase of liability incident to the extension of the agency to other places that San Fernando was
prejudicial to the interest of the appellant, and the change could not be lawfully made without his
consent.
The trial judge was therefore not in error in holding that the appellant was in effect discharged from
liability under the contract of suretyship (Exhibit B-1); but his Honor nevertheless gave judgment
against the defendant for the sum of P5,000. In doing so he proceeded upon the idea that the
defendant admitted that he had intended to obligate himself to the extent of P5,000, and his Honor
concluded that by entering into the contract of suretyship the defendant had induced the plaintiff to
make the contract of agency which appears to have been signed by the representative of the
plaintiff after it had been signed and acknowledged by David; for which reason his Honor considered
it just to hold the defendant to the extent at least in which he had intended to bind himself. The
validity of this conclusion cannot be admitted. The only obligation which was created on the part of
the defendant was the contract of suretyship (Exhibit B-1), and when that obligation was nullified by
the subsequent alteration of the principal contract, the appellant was discharged in toto.
In the course of this decision the fact has not escaped our attention that the answer of the appellant
does not specially plead the alteration of the contract of agency. But this is sufficiently explained by
the circumstance that the document which conclusively proves the fact of alteration had not been
discovered in the division of archives at the time the answer was filed. We note further that when a
copy of said document was finally produced, it was introduced in evidence and admitted without
question. Upon this state of facts it would be permissible, if necessary, for this court to direct an
amendment of the answer, as was done in Harty vs. Macabuhay (39 Phil., 495). But as the point is
purely defensive and the right clear, we consider it unnecessary to require the appellant to go
through the form of this technicality.

In the light of what has been said it becomes necessary to reverse the appealed judgment in so far
as it awards the sum of P5,000 against the appellant Francisco Hizon y Singian, and he will be
completely absolved from the complaint.
So ordered, without special pronouncement as to costs.

G.R. No. 42829

September 30, 1935

RADIO CORPORATION OF THE PHILIPPINES, plaintiff-appellee,

vs.
JESUS R. ROA, ET AL., defendants.
RAMON CHAVES, ANDRES ROA and MANUEL ROA, appellants.
M.H. de Joya and Juan de Borja for appellants.
Barrera and Reyes for appellee.
GODDARD, J.:
This is an appeal from decision of the Court of First Instance of the City of Manila the dispositive part
of which reads:
In view of all the foregoing, judgment is hereby rendered in favor of the plaintiff Radio
Corporation of the Philippines and against the defendants Jesus R. Roa, Ramon Chavez,
Andes Roa and Manuel Roa: (a) Ordering the defendant Jesus R. Roa to pay the plaintiff the
sum of P22,935, plus P99.64, with legal interest thereon from the date of the filing of the
complaint until fully paid: (b) that upon failure of the defendant Jesus Roa to pay the said
sum indicated, the chattel described in the second cause of action shall be sold at public
auction to be applied to the satisfaction of the amount of this judgment; (c) that the
defendants Jesus R. Roa, Ramon Chavez, Andres Roa and Manuel Roa pay jointly and
severally to the plaintiff the amount of P10,000; (d) and that Jesus R. Roa pay to the plaintiff
the amount equivalent to 10 per cent of P22,935, as attorney's fees, and that all the
defendants in this case pay the costs of this action.
The defendants Ramon Chavez, Andres Roa and Manuel Roa have appealed from the judgment
against them for P10,00 and costs. These appellants make the following assignments of error:

1. The court below erred in not finding that the balance of the total indebtedness became
immediately due and demandable upon the failure of the defendant Jesus R. Roa to pay any
installment on his note.
2. The court below erred in not finding that defendant Jesus R. Roa defaulted in the payment
of the installment due on February 27,1932, and that plaintiff corporation gave him an
extension of time for the payment of said installment.
3. The court below erred in not finding that the extension of time given to defendant Jesus R.
Roa for the payment of an overdue installment served as a release of defendant sureties
from liability on all the subsequent installments.
4. The court below erred in not finding that the sureties were discharged from their bond
when the plaintiff authorized Jesus R. Roa to remove the photophone equipment from
Cagayan, Misamis Oriental, to Silay, Occidental Negros, without the knowledge or consent of
said sureties.
5. The court below erred in condemning Ramon Chavez, Andres Roa and Manuel Roa to
pay jointly and severally the sum of P10,000 to the Radio Corporation of the Philippines.
The defendant Jesus R. Roa became indebted to the Philippine Theatrical Enterprises, Inc., in the
sum of P28,400 payable in seventy-one equal monthly installments at the rate of P400 a month
commencing thirty days after December 11, 1931, with five days grace monthly until complete
payment of said sum. On that same date the Philippine Theatrical Enterprises, Inc., assigned all its
right and interest in that contract to the Radio Corporation of the Philippines.
The paragraph of that contract in which the accelerating clause appears reads as follows:
In case the vendee-mortgagor fails to make any of the payments as hereinbefore provided,
the whole amount remaining unpaid under this mortgage shall immediately become due and
payable and this mortgage on the property herein mentioned as well as the Luzon Surety
Bond may be foreclosed by the vendor-mortgagee; and, in such case, the vendee-mortgager
further agrees to pay the vendor- mortgagee an additional sum equivalent to 25 per cent of
the principal due unpaid as costs, expenses and liquidated damages, which said sum, shall
be added to the principal sum for which this mortgage is given as security, and shall become
a part, thereof.
On March 15, 1932, Erlanger & Galinger, Inc., acting in its capacity as attorney-in-fact of the Radio
Corporation of the Philippines wrote the following letter (Exhibit 13) to the principal debtor Jesus R.
Roa:
Mr. JESUS R. ROA
Cagayan, Oriental Misamis
Attention of Mrs. Amparo Chavez de Roa
DEAR SIR: We acknowledge with thanks the receipt of your letter of March 9th together with
your remittance of P200 for which we enclose receipt No. 7558. We are applying this amount
to the balance of your January installment.
We have no objection to the extension requested by you to pay the February installment by
the first week of April. We would, however, urge you to make every efforts to bring the
account up-to date as we are given very little discretion by the RCP in giving extension of
payment.

Very truly yours,

RADIO CORP. OF THE PHIL.
By: ERLANGER & GALINGER, INC.
(Sgd.) H.N. SALET
Vice-President

Under the above assignments of error the principal question to be decided is whether or not the
extension granted in the above copied letter by the plaintiff, without the consent of the guarantors,
the herein appellants, extinguishes the latter's liability not only as to the installments due at that time,
as held by the trial court, but also as to the whole amount of their obligation. Articles 1851 of the Civil
Code reads as follows:

ART. 1851. An extension grated to the debtor by the creditor, without the consent of the
guarantor, extinguishes the latter's liability.
This court has held that mere delay in suing for the collection of the does not release the sureties.
(Sons of I. de la Rama vs. Estate of Benedicto, 5 Phil., 512; Banco Espaol Filipino vs. Donaldson
Sim & Co., 5 Phil., 418; Manzano vs. Tan Suanco, 13 Phil., 183; Hongkong & Shanghai Baking
Corporation vs. Aldecoa & Co., 30 Phil., 255.) In the case of Villa vs. Garcia Bosque (49 Phil., 126,
134, 135), this court stated:
. . . The rule that an extension of time granted to the debtor by the creditor, without the
consent of the sureties, extinguishes the latter's liability is common both to Spanish
jurisprudence and the common law; and it is well settled in English and American
jurisprudence that where a surety is liable for different payments, such as installments of
rent, or upon a series of promissory notes, an extension of time as to one or more will not
affect the liability of the surety for the others. . . .
There is one stipulation in the contract (Exhibit A) which, at first blush, suggests a doubt as to
the propriety of applying the doctrine above stated to the case before us. We refer to clause
(f) which declares that the non-fulfillment on the part of the debtors of the stipulation with
respect to the payment of any installment of the indebtedness, with interest, will give to the
creditor the right to treat and declare all of said installments as immediately due. If the
stipulation had been to the effect that the failure to pay any installment when due would ipso
facto cause the other installments to fall due at once, it might be plausibly contended that
after default of the payment of one installment the act of the creditor in extending the time as
to such installment would interfere with the right of the surety to exercise his legal rights
against the debtor, and that the surety would in such case be discharged by the extension of
time, in conformity with article 1851 and 1852 of the Civil Code. But it will be noted that in the
contract now under consideration the stipulation is not that the maturity of the latter
installments shall be ipso facto accelerated by default in the payment of a prior installment,
but only that it shall give the creditor a right treat the subsequent installments as due; and in
this case it does not appear that the creditor has exercised this election. On the contrary, this
action was not instituted until after all of the installments had fallen due in conformity with
original contract. It results that the stipulation contained in paragraph (f) does not effect the
application of the doctrine above enunciated to the case before us.
The stipulation in the contract under consideration, copied above, is to the effect that upon failure to
pay any installment when due the other installments ipso facto become due and payable. In view of
of the fact that under the express provision of the contract, quoted above, the whole unpaid balance
automatically becomes due and payable upon failure to pay one installment, the act of the plaintiff in
extending the payment of the installment corresponding to February, 1932, to April, 1932, without the
consent of the guarantors, constituted in fact an extension of the payment of the whole amount of
the indebtedness, as by that extension the plaintiff could not have filed an action for the collection of
the whole amount until after April, 1932. Therefore appellants' contention that after default of the
payment of one installment the act of the herein creditor in extending the time of payment discharges
them as guarantors in conformity with articles 1851 and 1852 of the Civil Code is correct.
It is a familiar rule that if a creditor, by positive contract with the principal debtor, and without
the consent of the surety, extends the time of payment, he thereby discharges the surety. . . .
The time of payment may be quite as important a consideration to the surety as the amount
he has promised conditionally to pay. . . .Again, a surety has the right, on payment of the
debt, to be subrogated to all the rights of the creditor, and to proceed at once to collect it
from the principal; but if the creditor has tied own hands from proceeding promptly, by
extending the time of collection, the hands of the surety will equally be bound; and before
they are loosed, by the expiration of the extended credit, the principal debtor may have
become insolvent and the right of subrogation rendered worthless. It should be observed,
however, that it is really unimportant whewther the extension given has actually proved
prejudicial to the surety or not. The rule stated is quite independent of the event, and the fact
that the principal is insolvent or that the extension granted promised to be beneficial to the
surety would give no right to the creditor to change the terms of the contract without the
knowledge or consent of the surety. Nor does it matter for how short a period the time of
payment may be extended. The principle is the same whether the time is long or short. The
creditor must be in such a situation that when the surety comes to be substituted in his place
by paying the debt, he may have an immediate right of action against the principal. The
suspension of the right to sue for a month, or even a day, is as effectual to release the surety
as a year or two years. (21 R.C.L., 1018-1020.)
Plaintiff's contention that the enforcement of the accelerating clause is potestative on the part of the
obligee, and not self-executing, is clearly untenable from a simple reading of the clause copied
above. What is potestative on the part of the obligee is the foreclosure of the mortgage and not the
accelerating clause.

Plaintiff-appellee contends that there was no consideration for the extension granted the principal
debtor. Article 1277 of the Civil Code provides that "even though the consideration should be
expressed in the contract, it shall be presumed that a consideration exists and that it is licit, unless
the debtor proves the contrary." It was incumbent upon the plaintiff to prove that there was no valid
consideration for the extension granted.
In view of the forgoing the judgment of the trial court is reversed as to the appellants Ramon
Chavez, Andres Roa and Manuel Roa, without costs.

G.R. No. L-29666 October 29, 1971

PFOPLES BANK AND TRUST COMPANY, plaintiff-appellee,
vs.
JOSE MARIA TAMBUNTING, MARIA PAZ TAMBUNTING, and FRANCISCO D. SANTANA,
defendants. FRANCISCO D. SANTANA, defendant-appellant.
Araneta, Mendoza & Papa for plaintiff-appellee.
Paredes, Poblador, Nazareno, Asada & Tomacruz for defendant-appellant.

FERNANDO, J.:
Appellant Francisco D. Santana was sued by plaintiff, now appellee, Peoples Bank & Trust
Company, along with the other defendants, Jose Maria Tambunting and Maria Paz Tambunting, his
son-in-law and his daughter, for the recovery of the sum of money due in an overdraft agreement,
with the Tambunting couple as principal debtors and appellant as surety. The judgment went against
him notwithstanding his plea based on Article 2080 of the Civil Code, releasing guarantors, even if
they be solidary, if by some act of the creditor subrogation is thereby precluded. 1 The lower court,
presided by the then Judge, now Justice of the Court of Appeals, Jose N. Leuterio, in a well-written
decision, found such a defense untenable as in what was characterized by the lower courts as the
"contract of absolute guaranty", appellant had waived his rights to the benefit conferred by such a
provision. In this appeal, would vigorously contend that what was thus agreed to by him was bereft of a
binding force. The law in its wisdom does not lend its approval to such an ill-disguised attempt for turn
one's back to all obligation arising from a valid contract. We have to affirm.
The decision, now on appeal, after stating the nature of the action which as noted is for the recovery
of a sum of money due on an overdraft agreement set forth the undisputed facts thus: "On

September 9, 1968, plaintiff and defendants executed a contract denominated 'overdraft agreement
and pledge' wherein the plaintiff granted to the spouses Jose Maria Tambunting and Maria Paz
Tambunting an overdraft from time to time on their current account with the plaintiff bank not to
exceed P200,000.00 with interest at the rate of 9% per annum until September 10, 1964, ..., the
proceeds of which were to be used by the Tambuntings in their logging operations. Defendant
Francisco D. Santana, as guarantor, and the spouses Tambuntings, conveyed to the bank shares of
capital stock of the International Sports Development Corporation collateral security for the payment
of any and all indebtedness incurred or arising from the overdraft, and all extensions, renewals,
amendments or applications thereof. On the same day, defendant Francisco D. Santana executed a
document denominated as absolute guaranty in which, in consideration of the 'overdraft agreement
and pledge,' he bound himself to the bank, jointly and severally, with the Tambunting spouses for the
full and prompt payment of all the indebtedness incurred or to be incurred by said spouses on
account of the overdraft line. On July 24, 1964, Jose Maria Tambunting wrote to the plaintiff bank [a]
latter, ..., requesting renewal of the overdraft agreement. Plaintiff bank, in a letter dated September
21, 1964, ..., granted the Tambunting spouses an extension of the overdraft line for six (6) months
from September 10, 1964, but reducing the overdraft line to P185,000.00 with the understanding that
other terms and conditions of the overdraft agreement would be in full force and effect. Before the
expiration of the six (6) months period, or on March 5, 1965, Jose Maria Tambunting asked for
another renewal of the overdraft line for another year, ... . Apparently, this letter was granted by the
plaintiff on March 15, 1965, for in another letter of Jose Maria Tambunting to the bank, ... the
defendant, on March 29, 1965, assured the bank that he would comply with the requirements of the
plaintiff. In a letter dated May 11, 1965, ... of the bank to Tambunting, the Manager of the Credit
Department advised Jose Maria Tambunting that the Board of Directors of the plaintiff bank
approved his request for an extension of the overdraft line in the amount of P185,000.00 for another
year, or until March 10, 1966, but with interest at the rate of 10% per annum; that in the same
meeting, the Board also approved the release of the pledge of 135 shares of stocks of the
International Sports Development Corporation. The defendants failed to pay the indebtedness on the
date due and demand for payment was made upon Francisco Santana and Tambunting as per
letters dated December 14, 1965, January 24, 1966 and March 4, 1966, ... . As of December 27,
1966, the total amount due from the defendants, including interests, was P219,165.18, ... ." 2The
decision went on to state: "The Tambunting spouses failed to answer the complaint and were declared in
default. The defendant Santana does not dispute the indebtedness. However, it is the contention that he
had been released from the guaranty for several reasons. Defendant Santana contends that he was
released from his obligation on the overdraft line because the plaintiff had extended the time of payment
and released to the Tambuntings without his consent, the 135 shares of stocks of the International Sports
Development Corporation which had been pledged to the bank to secure the overdraft line. It is argued
that, in accordance with Article 2080 of the New Civil Code, '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.' " 3
Why such a contention was held devoid of merit was explained in such decision thus: "The contract
of absolute guaranty, ..., expressly authorized the plaintiff bank to extend the time of payment and to
release or surrender any security or part thereof held by it without notice to, the consent of, Santana.
He had consented in advance the release of the guaranty which the bank might make, Santana
cannot now complain that the release of the pledge was without his consent, and that it deprived him
of the right to be subrogated to the rights of the creditor. The waiver is not contrary to law, nor is it
contrary to public policy. The law does not prohibit the debtor-guarantor from agreeing in advance
and without notice to the release of any security which had been given to assure payment of the
obligation. The waiver is not contrary to public policy, because the right is purely personal, and does
not affect public interest nor does it violate any public policy. Neither does the return of the shares of
stocks novate the original contract for the obligation remains the same; and if it is a novation, it is a
novation made with the consent of Santana. Moreover, the pledge is merely an accessory obligation,
and its release does not vary the terms of the principal obligation." 4
The appealed decision speaks for itself. It cannot, as was made plain in the opening paragraph of
this opinion be overturned.
1. It is thus obvious that the contract of absolute guaranty executed by appellant Santana is the
measure of rights and duties. As it is with him, so it is with the plaintiff bank. What was therein
stipulated had to be complied with by both parties. Nor could appellant have any valid cause for
complaint. He had given his word; he must live up to it. Once the validity of its terms is conceded, he
cannot be indulged in his unilateral determination to disregard his commitment. A promise to which
the law accords binding force must be fulfilled. It is as simple as that. So the Civil Code explicitly
requires: "Obligations arising from contracts have the force of law between the contracting parties
and should be complied with in good faith." 5

2. It could have been different if there were no such contract of absolute guaranty to which appellant
was a party under the aforesaid Article 2080. He would have been freed from the obligation as a
result of plaintiff releasing to the Tambuntings without his consent the 135 shares of the International
Sports Development Corporation pledged to plaintiff bank to secure the overdraft line. For thereby
subrogation became meaningless. Such a provision is intended for the benefit of a surety. That was
a right he could avail of. He is not precluded however from waiving it. That was what appellant did
precisely when he agreed to the contract of absolute guaranty. Again the law is clear. A right may be
waived unless it would be contrary to law, public order, public policy, morals or good customs. 6 There
is no occasion here for the exceptions coming into play. It has been traditional in the Philippine for parents
to extend all available aid and assistance to their children. That is a custom of long standing. Nor is there
anything offensive to morals by an assumption of contingent liability as thus worded. The law has not
been thwarted. Neither is public order nor public policy disregarded. The lower court was right thereto in
yielding full assent to the waiver in question. 7 The vigor with which counsel for appellant impugned the
lower decision cannot therefore be attended with success. It can stand its ground notwithstanding such a
sustained and spirited attack.
WHEREFORE, the decision of October 30, 1967, as modified on January 8, 1969, is affirmed. With
costs against appellant Francisco D. Santana.

G.R. No. L-20567

July 30, 1965

PHILIPPINE NATIONAL BANK, petitioner,

vs.
MANILA SURETY and FIDELITY CO., INC. and THE COURT OF APPEALS (Second
Division), respondents.
Besa, Galang and Medina for petitioner.
De Santos and Delfino for respondents.
REYES, J.B.L., J.:
The Philippine National Bank petitions for the review and reversal of the decision rendered by the
Court of Appeals (Second Division), in its case CA-G.R. No. 24232-R, dismissing the Bank's
complaint against respondent Manila Surety & Fidelity Co., Inc., and modifying the judgment of the
Court of First Instance of Manila in its Civil Case No. 11263.
The material facts of the case, as found by the appellate Court, are as follows:
The Philippine National Bank 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 (known as ATACO) under a trust

receipt guaranteed by Manila Surety & Fidelity Co. up to the amount of P75,000.00. To pay for the
asphalt, ATACO constituted the Bank 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 under Purchase
Order No. 71947. This assignment (Exhibit "A") stipulated that:
The conditions of this assignment are as follows:
1. The same shall remain irrevocable until the said credit accomodation is fully liquidated.
2. The PHILIPPINE NATIONAL BANK 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. (Exhibit E)
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 to collect funds due to ATACO under the same purchase order
to a total of P311,230.41.
Its demands on the principal debtor and the Surety having been refused, the Bank sued both in the
Court of First Instance of Manila to recover the balance of P158,563.18 as of February 15, 1950,
plus interests and costs.
On October 4, 1958, the trial court rendered a decision, the dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered as follows:
1. Ordering defendants, Adams & Taguba Corporation and Manila Surety & Fidelity Co., Inc.,
to pay plaintiff, Philippines National Bank, the sum of P174,462.34 as of February 24, 1956,
minus the amount of P8,000 which defendant, Manila Surety Co., Inc. paid from March, 1956
to October, 1956 with interest at the rate of 5% per annum from February 25, 1956, until fully
paid provided that the total amount that should be paid by defendant Manila Surety Co., Inc.,
on account of this case shall not exceed P75,000.00, and to pay the costs;
2. Orderinq cross-defendant, Adams & Taguba Corporation, and third-party defendant, Pedro
A. Taguba, jointly and severally, to pay cross and third-party plaintiff, Manila Surety & Fidelity
Co., Inc., whatever amount the latter has paid or shall pay under this judgment;
3. Dismissing the complaint insofar as the claim for 17% special tax is concerned; and
4. Dismissing the counterclaim of defendants Adams & Taguba Corporation and Manila
Surety & Fidelity Co., Inc.
From said decision, only the defendant Surety Company has duly perfected its appeal. The Central
Bank of the Philippines did not appeal, while defendant ATACO failed to perfect its appeal.
The Bank recoursed to the Court of Appeals, which rendered an adverse decision and modified the
judgment of the court of origin as to the surety's liability. Its motions for reconsideration having
proved unavailing, the Bank appealed to this Court.
The Court of Appeals 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, from and
after November 18, 1948, 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 & Fidelity Company.
This holding is now assailed by the Bank. It contends 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, citing Judge Advocate General
vs. Court of Appeals, G.R. No. L-10671, October 23, 1958.
This argument of appellant Bank misses the point. The Court of Appeals 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 come act of the creditor they cannot be subrogated to the rights,
mortgages and preferences of the latter. (Emphasis supplied.)
The appellant points out to its letter of demand, Exhibit "K", addressed to the Bureau of Public
Works, on May 5, 1949, and its letter to ATACO, Exhibit "G", informing the debtor that as of its date,
October 31, 1949, its outstanding balance was P156,374.83. Said Exhibit "G" 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
finding of negligence made by the Court of Appeals is thus not only conclusive on us but fully
supported by the evidence.
Even if the Court of Appeals erred on the second reason it advanced in support of the decision now
under appeal, because 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 Court of Appeals that the
surety was thereby released.
WHEREFORE, the appealed decision is affirmed, with costs against appellant Philippine National
Bank.

G.R. No. 154183

August 7, 2003

SPOUSES VICKY TAN TOH and LUIS TOH, petitioners,

vs.
SOLID BANK CORPORATION, FIRST BUSINESS PAPER CORPORATION, KENNETH NG LI and
MA. VICTORIA NG LI, respondents.
BELLOSILLO, J.:
RESPONDENT SOLID BANK CORPORATION AGREED TO EXTEND an "omnibus line" credit
facility worth P10 million in favor of respondent First Business Paper Corporation (FBPC). The terms
and conditions of the agreement as well as the checklist of documents necessary to open the credit
line were stipulated in a "letter-advise" of the Bank dated 16 May 1993 addressed to FBPC and to its

President, respondent Kenneth Ng Li.1 The "letter-advise"2 was effective upon "compliance with the
documentary requirements."3
The documents essential for the credit facility and submitted for this purpose were the (a) Board
Resolution or excerpts of the Board of Directors Meeting, duly ratified by a Notary Public, authorizing
the loan and security arrangement as well as designating the officers to negotiate and sign for FBPC
specifically stating authority to mortgage, pledge and/or assign the properties of the corporation; (b)
agreement to purchase Domestic Bills; and, (c) Continuing Guaranty for any and all amounts signed
by petitioner-spouses Luis Toh and Vicky Tan Toh, and respondent-spouses Kenneth and Ma.
Victoria Ng Li.4 The spouses Luis Toh and Vicky Tan Toh were then Chairman of the Board and VicePresident, respectively, of FBPC, while respondent-spouses Kenneth Ng Li and Ma. Victoria Ng Li
were President and General Manager, respectively, of the same corporation. 5
It is not disputed that the credit facility as well as its terms and conditions was not cancelled or
terminated, and that there was no prior notice of such fact as required in the "letter-advise," if any
was done.
On 10 May 1993, more than thirty (30) days from date of the "letter-advise," petitioner-spouses Luis
Toh and Vicky Tan Toh and respondent-spouses Kenneth Ng Li and Ma. Victoria Ng Li signed the
required Continuing Guaranty, which was embodied in a public document prepared solely by
respondent Bank.6 The terms of the instrument defined the contract arising therefrom as a surety
agreement and provided for the solidary liability of the signatories thereto for and in consideration of
"loans or advances" and "credit in any other manner to, or at the request or for the account" of
FBPC.
The Continuing Guaranty set forth no maximum limit on the indebtedness that respondent FBPC
may incur and for which the sureties may be liable, stating that the credit facility "covers any and all
existing indebtedness of, and such other loans and credit facilities which may hereafter be granted to
FIRST BUSINESS PAPER CORPORATION." The surety also contained a de facto acceleration
clause if "default be made in the payment of any of the instruments, indebtedness, or other
obligation" guaranteed by petitioners and respondents. So as to strengthen this security, the
Continuing Guaranty waived rights of the sureties against delay or absence of notice or demand on
the part of respondent Bank, and gave future consent to the Bank's action to "extend or change the
time payment, and/or the manner, place or terms of payment," including renewal, of the credit facility
or any part thereof in such manner and upon such terms as the Bank may deem proper without
notice to or further assent from the sureties.
The effectivity of the Continuing Guaranty was not contingent upon any event or cause other than
the written revocation thereof with notice to the Bank that may be executed by the sureties.
On 16 June 1993 respondent FBPC started to avail of the credit facility and procure letters of
credit.7 On 17 November 1993 FBPC opened thirteen (13) letters of credit and obtained loans
totaling P15,227,510.00.8 As the letters of credit were secured, FBPC through its officers Kenneth Ng
Li, Ma. Victoria Ng Li and Redentor Padilla as signatories executed a series of trust receipts over the
goods allegedly purchased from the proceeds of the loans.9
On 13 January 1994 respondent Bank received information that respondent-spouses Kenneth Ng Li
and Ma. Victoria Ng Li had fraudulently departed from their conjugal home. 10 On 14 January 1994 the
Bank served a demand letter upon FBPC and petitioner Luis Toh invoking the acceleration
clause11 in the trust receipts of FBPC and claimed payment for P10,539,758.68 as unpaid overdue
accounts on the letters of credit plus interests and penalties within twenty-four (24) hours from
receipt thereof.12 The Bank also invoked the Continuing Guaranty executed by petitioner-spouses
Luis Toh and Vicky Tan Toh who were the only parties known to be within national jurisdiction to
answer as sureties for the credit facility of FBPC.13
On 17 January 1994 respondent Bank filed a complaint for sum of money with ex parte application
for a writ of preliminary attachment against FBPC, spouses Kenneth Ng Li and Ma. Victoria Ng Li,
and spouses Luis Toh and Vicky Tan Toh, docketed as Civil Case No. 64047 of RTC-Br. 161, Pasig
City.14 Alias summonses were served upon FBPC and spouses Luis Toh and Vicky Tan Toh but not
upon Kenneth Ng Li and Ma. Victoria Ng Li who had apparently absconded. 15
Meanwhile, with the implementation of the writ of preliminary attachment resulting in the impounding
of purported properties of FBPC, the trial court was deluged with third-party claims contesting the
propriety of the attachment.16 In the end, the Bank relinquished possession of all the attached

properties to the third-party claimants except for two (2) insignificant items as it allegedly could
barely cope with the yearly premiums on the attachment bonds.17
Petitioner-spouses Luis Toh and Vicky Tan Toh filed a joint answer to the complaint where they
admitted being part of FBPC from its incorporation on 29 August 1991, which was then known as
"MNL Paper, Inc.," until its corporate name was changed to "First Business Paper
Corporation."18 They also acknowledged that on 6 March 1992 Luis Toh was designated as one of
the authorized corporate signatories for transactions in relation to FBPC's checking account with
respondent Bank.19 Meanwhile, for failing to file an answer, respondent FBPC was declared in
default.20
Petitioner-spouses however could not be certain whether to deny or admit the due execution and
authenticity of the Continuing Guaranty.21 They could only allege that they were made to sign papers
in blank and the Continuing Guaranty could have been one of them.
Still, as petitioners asserted, it was impossible and absurd for them to have freely and consciously
executed the surety on 10 May 1993, the date appearing on its face22 since beginning March of that
year they had already divested their shares in FBPC and assigned them in favor of respondent
Kenneth Ng Li although the deeds of assignment were notarized only on 14 June 1993. 23 Petitioners
also contended that through FBPC Board Resolution dated 12 May 1993 petitioner Luis Toh was
removed as an authorized signatory for FBPC and replaced by respondent-spouses Kenneth Ng Li
and Ma. Victoria Ng Li and Redentor Padilla for all the transactions of FBPC with respondent
Bank.24 They even resigned from their respective positions in FBPC as reflected in the 12 June 1993
Secretary's Certificate submitted to the Securities and Exchange Commission 25 as petitioner Luis Toh
was succeeded as Chairman by respondent Ma. Victoria Ng Li, while one Mylene C. Padilla took the
place of petitioner Vicky Tan Toh as Vice-President.26
Finally, petitioners averred that sometime in June 1993 they obtained from respondent Kenneth Ng
Li their exclusion from the several surety agreements they had entered into with different banks, i.e.,
Hongkong and Shanghai Bank, China Banking Corporation, Far East Bank and Trust Company, and
herein respondent Bank.27As a matter of record, these other banks executed written surety
agreements that showed respondent Kenneth Ng Li as the only surety of FBPC's indebtedness. 28
On 16 May 1996 the trial court promulgated its Decision in Civil Case No. 64047 finding respondent
FBPC liable to pay respondent Solid Bank Corporation the principal of P10,539,758.68 plus twelve
percent (12%) interest per annum from finality of the Decision until fully paid, but absolving
petitioner-spouses Luis Toh and Vicky Tan Toh of any liability to respondent Bank. 29 The court a quo
found that petitioners "voluntarily affixed their signature[s]" on the Continuing Guaranty and were
thus "at some given point in time willing to be liable under those forms,"30although it held that
petitioners were not bound by the surety contract since the letters of credit it was supposed to
secure were opened long after petitioners had ceased to be part of FBPC. 31
The trial court described the Continuing Guaranty as effective only while petitioner-spouses were
stockholders and officers of FBPC since respondent Bank compelled petitioners to underwrite
FBPC's indebtedness as sureties without the requisite investigation of their personal solvency and
capability to undertake such risk.32 The lower court also believed that the Bank knew of petitioners'
divestment of their shares in FBPC and their subsequent resignation as officers thereof as these
facts were obvious from the numerous public documents that detailed the changes and substitutions
in the list of authorized signatories for transactions between FBPC and the Bank, including the many
trust receipts being signed by persons other than petitioners,33 as well as the designation of new
FBPC officers which came to the notice of the Bank's Vice-President Jose Chan Jr. and other
officers.34
On 26 September 1996 the RTC-Br. 161 of Pasig City denied reconsideration of its Decision. 35
On 9 October 1996 respondent Bank appealed the Decision to the Court of Appeals, docketed as
CA-G.R. CV No. 55957.36 Petitioner-spouses did not move for reconsideration nor appeal the finding
of the trial court that they voluntarily executed the Continuing Guaranty.
The appellate court modified the Decision of the trial court and held that by signing the Continuing
Guaranty, petitioner-spouses became solidarily liable with FBPC to pay respondent Bank the amount
of P10,539,758.68 as principal with twelve percent (12%) interest per annum from finality of the
judgment until completely paid.37 The Court of Appeals ratiocinated that the provisions of the surety
agreement did not "indicate that Spouses Luis and Vicky Toh x x x signed the instrument in their
capacities as Chairman of the Board and Vice-President, respectively, of FBPC only." 38 Hence, the

court a quo deduced, "[a]bsent any such indication, it was error for the trial court to have presumed
that the appellees indeed signed the same not in their personal capacities." 39 The appellate court
also ruled that as petitioners failed to execute any written revocation of the Continuing Guaranty with
notice to respondent Bank, the instrument remained in full force and effect when the letters of credit
were availed of by respondent FBPC.40
Finally, the Court of Appeals rejected petitioners' argument that there were "material alterations" in
the provisions of the "letter-advise," i.e., that only domestic letters of credit were opened when the
credit facility was for importation of papers and other materials, and that marginal deposits were not
paid, contrary to the requirements stated in the "letter-advise."41 The simple response of the
appellate court to this challenge was, first, the "letter-advise" itself authorized the issuance of
domestic letters of credit, and second, the several waivers extended by petitioners in the Continuing
Guaranty, which included changing the time and manner of payment of the indebtedness, justified
the action of respondent Bank not to charge marginal deposits. 42
Petitioner-spouses moved for reconsideration of the Decision, and after respondent Bank's
comment, filed a lengthy Reply with Motion for Oral Argument.43 On 2 July 2002 reconsideration of
the Decision was denied on the ground that no new matter was raised to warrant the reversal or
modification thereof.44 Hence, this Petition for Review.
Petitioner-spouses Luis Toh and Vicky Tan Toh argue that the Court of Appeals denied them due
process when it did not grant their motion for reconsideration and without "bother[ing] to consider
[their] Reply with Motion for Oral Argument." They maintain that the Continuing Guaranty is not
legally valid and binding against them for having been executed long after they had withdrawn from
FBPC. Lastly, they claim that the surety agreement has been extinguished by the material alterations
thereof and of the "letter-advise" which were allegedly brought about by (a) the provision of an
acceleration clause in the trust receipts; (b) the flight of their co-sureties, respondent-spouses
Kenneth Ng Li and Ma. Victoria Ng Li; (c) the grant of credit facility despite the non-payment of
marginal deposits in an amount beyond the credit limit of P10 million pesos; (d) the inordinate delay
of the Bank in demanding the payment of the indebtedness; (e) the presence of ghost deliveries and
fictitious purchases using the Bank's letters of credit and trust receipts; (f) the extension of the due
dates of the letters of credit without the required 25% partial payment per extension; (g) the approval
of another letter of credit, L/C 93-0042, even after respondent-spouses Kenneth Ng Li and Ma.
Victoria Ng Li had defaulted on their previous obligations; and, (h) the unmistakable pattern of fraud.
Respondent Solid Bank maintains on the other hand that the appellate court is presumed to have
passed upon all points raised by petitioners' Reply with Motion for Oral Argument as this pleading
formed part of the records of the appellate court. It also debunks the claim of petitioners that they
were inexperienced and ignorant parties who were taken advantage of in the Continuing Guaranty
since petitioners are astute businessmen who are very familiar with the "ins" and "outs" of banking
practice. The Bank further argues that the notarization of the Continuing Guaranty discredits the
uncorroborated assertions against the authenticity and due execution thereof, and that the Decision
of the trial court in the civil case finding the surety agreement to be valid and binding is now res
judicata for failure of petitioners to appeal therefrom. As a final point, the Bank refers to the various
waivers made by petitioner-spouses in the Continuing Guaranty to justify the extension of the due
dates of the letters of credit.
To begin with, we find no merit in petitioners' claim that the Court of Appeals deprived them of their
right to due process when the court a quo did not address specifically and explicitly
their Reply with Motion for Oral Argument. While the Resolution of the appellate court of 2 July 2002
made no mention thereof in disposing of their arguments on reconsideration, it is presumed that "all
matters within an issue raised in a case were laid before the court and passed upon it." 45 In the
absence of evidence to the contrary, we must rule that the court a quodischarged its task properly.
Moreover, a reading of the assailed Resolution clearly makes reference to a "careful review of the
records," which undeniably includes the Reply with Motion for Oral Argument, hence there is no
reason for petitioners to asseverate otherwise.
This Court holds that the Continuing Guaranty is a valid and binding contract of petitioner-spouses
as it is a public document that enjoys the presumption of authenticity and due execution. Although
petitioners as appellees may raise issues that have not been assigned as errors by respondent Bank
as party-appellant, i.e., unenforceability of the surety contract, we are bound by the consistent
finding of the courts a quo that petitioner-spouses Luis Toh and Vicky Tan Toh "voluntarily affixed
their signature[s]" on the surety agreement and were thus "at some given point in time willing to be
liable under those forms."46 In the absence of clear, convincing and more than preponderant
evidence to the contrary, our ruling cannot be otherwise.

Similarly, there is no basis for petitioners to limit their responsibility thereon so long as they were
corporate officers and stockholders of FBPC. Nothing in the Continuing Guaranty restricts their
contractual undertaking to such condition or eventuality. In fact the obligations assumed by them
therein subsist "upon the undersigned, the heirs, executors, administrators, successors and assigns
of the undersigned, and shall inure to the benefit of, and be enforceable by you, your successors,
transferees and assigns," and that their commitment "shall remain in full force and effect until written
notice shall have been received by [the Bank] that it has been revoked by the undersigned." Verily, if
petitioners intended not to be charged as sureties after their withdrawal from FBPC, they could have
simply terminated the agreement by serving the required notice of revocation upon the Bank as
expressly allowed therein.47 In Garcia v. Court of Appeals[48] we ruled
Regarding the petitioner's claim that he is liable only as a corporate officer of WMC, the
surety agreement shows that he signed the same not in representation of WMC or as its
president but in his personal capacity. He is therefore personally bound. There is no law that
prohibits a corporate officer from binding himself personally to answer for a corporate debt.
While the limited liability doctrine is intended to protect the stockholder by immunizing him
from personal liability for the corporate debts, he may nevertheless divest himself of this
protection by voluntarily binding himself to the payment of the corporate debts. The petitioner
cannot therefore take refuge in this doctrine that he has by his own acts effectively waived.
But as we bind the spouses Luis Toh and Vicky Tan Toh to the surety agreement they signed so
must we also hold respondent Bank to its representations in the "letter-advise" of 16 May 1993.
Particularly, as to the extension of the due dates of the letters of credit, we cannot exclude from the
Continuing Guaranty the preconditions of the Bank that were plainly stipulated in the "letter-advise."
Fairness and justice dictate our doing so, for the Bank itself liberally applies the provisions of
cognate agreements whenever convenient to enforce its contractual rights, such as, when it
harnessed a provision in the trust receipts executed by respondent FBPC to declare its entire
indebtedness as due and demandable and thereafter to exact payment thereof from petitioners as
sureties.49 In the same manner, we cannot disregard the provisions of the "letter-advise" in sizing up
the panoply of commercial obligations between the parties herein.
Insofar as petitioners stipulate in the Continuing Guaranty that respondent Bank "may at any time, or
from time to time, in [its] discretion x x x extend or change the time payment," this provision even if
understood as a waiver is confined per se to the grant of an extension and does not surrender the
prerequisites therefor as mandated in the "letter-advise." In other words, the authority of the Bank to
defer collection contemplates only authorizedextensions, that is, those that meet the terms of the
"letter-advise."
Certainly, while the Bank may extend the due date at its discretion pursuant to the Continuing
Guaranty, it should nonetheless comply with the requirements that domestic letters of credit be
supported by fifteen percent (15%) marginal deposit extendible three (3) times for a period of thirty
(30) days for each extension, subject to twenty-five percent (25%) partial payment per extension.
This reading of the Continuing Guaranty is consistent withPhilippine National Bank v. Court of
Appeals50 that any doubt on the terms and conditions of the surety agreement should be resolved in
favor of the surety.
Furthermore, the assurance of the sureties in the Continuing Guaranty that "[n]o act or omission of
any kind on [the Bank's] part in the premises shall in any event affect or impair this guaranty" 51 must
also be read "strictissimi juris" for the reason that petitioners are only accommodation sureties, i.e.,
they received nothing out of the security contract they signed.52 Thus said, the acts or omissions of
the Bank conceded by petitioners as not affecting nor impairing the surety contract refer only to
those occurring "in the premises," or those that have been the subject of the waiver in the Continuing
Guaranty, and stretch to no other. Stated otherwise, 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 illicitextension 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 respondent Bank before the trial court that several letters of credit
were irrevocably extended for ninety (90) days with alarmingly flawed and inadequate consideration
- the 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.
Moreover, these irregular extensions were candidly admitted by Victor Ruben L. Tuazon, an account
officer and manager of respondent Bank and its lone witness in the civil case
Q:

You extended it even if there was no marginal deposit?

A:

Yes.

Q:

And even if partial payment is less than 25%?

A:

Yes x x x x

Q:
You have repeatedly extended despite the insufficiency partial payment
requirement?
A:

I would say yes.53

The foregoing extensions of the letters of credit made by respondent Bank 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, "[a]n extension granted to the debtor by the creditor without the consent of the guarantor
extinguishes the guaranty." This act of the Bank is not mere failure or delay on its part to demand
payment after the debt has become due, as was the case in unpaid five (5) letters of credit which the
Bank did not extend, defer or put off,54 but comprises conscious, separate and binding agreements to
extend the due date, as was admitted by the Bank itself
Q:
How much was supposed to be paid on 14 September 1993, the original LC of
P1,655,675.13?
A:
Under LC 93-0017 first matured on 14 September 1993. We rolled it over, extended it
to December 13, 1993 but they made partial payment that is why we extended it.
Q:
The question to you now is how much was paid? How much is supposed to be paid
on September 14, 1993 on the basis of the original amount of P1,655,675.13?
A:
Whenever this obligation becomes due and demandable except when you roll it over
so there is novation there on the original obligations55 (underscoring supplied).
As a result of these illicit extensions, petitioner-spouses Luis Toh and Vicky Tan Toh are relieved of
their obligations as sureties of respondent FBPC under Art. 2079 of the Civil Code.
Further, we note several suspicious circumstances that militate against the enforcement of the
Continuing Guaranty against the accommodation sureties. Firstly, the guaranty was executed more
than thirty (30) days from the original acceptance period as required in the "letter-advise." Thereafter,
barely two (2) days after the Continuing Guaranty was signed, corporate agents of FBPC were
replaced on 12 May 1993 and other adjustments in the corporate structure of FBPC ensued in the
month of June 1993, which the Bank did not investigate although such were made known to it.
By the same token, there is no explanation on record for the utter worthlessness of the trust receipts
in favor of the Bank when these documents ought to have added more security to the indebtedness
of FBPC. The Bank has in fact no information whether the trust receipts were indeed used for the
purpose for which they were obtained.56To be sure, the goods subject of the trust receipts were not
entirely lost since the security officer of respondent Bank who conducted surveillance of FBPC even
had the chance to intercept the surreptitious transfer of the items under trust: "We saw two (2)
delivery vans with Plates Nos. TGH 257 and PAZ 928 coming out of the compound x x x [which
were] taking out the last supplies stored in the compound."57 In addition, the attached properties of
FBPC, except for two (2) of them, were perfunctorily abandoned by respondent Bank although the
bonds therefor were considerably reduced by the trial court. 58
The consequence of these omissions is to discharge the surety, petitioners herein, under Art. 2080
of the Civil Code,59 or at the very least, mitigate the liability of the surety up to the value of the
property or lien released

If the creditor x x x has acquired a lien upon the property of a principal, the creditor at once
becomes charged with the duty of retaining such security, or maintaining such lien in the
interest of the surety, and any release or impairment of this security as a primary resource for
the payment of a debt, will discharge the surety to the extent of the value of the property or
lien released x x x x [for] there immediately arises a trust relation between the parties, and
the creditor as trustee is bound to account to the surety for the value of the security in his
hands.60
For the same reason, the grace period granted by respondent Bank 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 respondent Bank 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 petitioners in the Continuing Guaranty. For this unwarranted exercise of discretion,
respondent Bank bears the loss; due to its unauthorized extensions to pay granted to FBPC,
petitioner-spouses Luis Toh and Vicky Tan Toh are discharged as sureties under the Continuing
Guaranty.
Finally, the foregoing omission or negligence of respondent Bank in failing to safe-keep the security
provided by the marginal deposit and the twenty-five percent (25%) requirement results in the
material alteration of the principal contract, i.e., the "letter-advise," and consequently releases the
surety.61 This inference was admitted by the Bank through the testimony of its lone witness that
"[w]henever this obligation becomes due and demandable, except when you roll it over, (so) there is
novation there on the original obligations." As has been said, "if the suretyship contract was made
upon the condition that the principal shall furnish the creditor additional security, and the security
being furnished under these conditions is afterwards released by the creditor, the surety is wholly
discharged, without regard to the value of the securities released, for such a transaction amounts to
an alteration of the main contract."62
WHEREFORE, the instant Petition for Review is GRANTED. The Decision of the Court of Appeals
dated 12 December 2001 in CA-G.R. CV No. 55957, Solid Bank Corporation v. First Business Paper
Corporation, Kenneth Ng Li, Ma. Victoria Ng Li, Luis Toh and Vicky Tan Toh, holding petitionerspouses Luis Toh and Vicky Tan Toh solidarily liable with First Business Paper Corporation to pay
Solid Bank Corporation the amount of P10,539,758.68 as principal with twelve percent (12%)
interest per annum until fully paid, and its Resolution of 2 July 2002 denying reconsideration thereof
are REVERSED and SET ASIDE.
The Decision dated 16 May 1996 of RTC-Br. 161 of Pasig City in Civil Case No. 64047, Solid Bank
Corporation v. First Business Paper Corporation, Kenneth Ng Li, Ma. Victoria Ng Li, Luis Toh and
Vicky Tan Toh, finding First Business Paper Corporation liable to pay respondent Solid Bank
Corporation the principal of P10,539,758.68 plus twelve percent (12%) interest per annum until fully
paid, but absolving petitioner-spouses Luis Toh and Vicky Tan Toh of any liability to respondent Solid
Bank Corporation is REINSTATED and AFFIRMED. No costs.
SO ORDERED.

G.R. No. 166662

June 27, 2008

AUTOCORP GROUP and PETER Y. RODRIGUEZ, petitioner,

vs.
INTRA STRATA ASSURANCE CORPORATION and BUREAU OF CUSTOMS, respondents.
DECISION
CHICO-NAZARIO, J.:
This is a Petition for Review on Certiorari from the Decision1 of the Court of Appeals dated 30 June
2004 in CA-G.R. CV No. 62564 which affirmed with modification the Decision 2 of the Regional Trial
Court (RTC) of Makati City, Branch 150 in Civil Case No. 95-1584 dated 16 September 1998.
The factual and procedural antecedents of this case are as follows:
On 19 August 1990, petitioner Autocorp Group, represented by its President, petitioner Peter Y.
Rodriguez, secured an ordinary re-export bond, Instrata Bond No. 5770, from private respondent
Intra Strata Assurance Corporation (ISAC) in favor of public respondent Bureau of Customs (BOC),
in the amount of P327,040.00, to guarantee the re-export of one unit of Hyundai Excel 4-door 1.5 LS
and/or to pay the taxes and duties thereon.
On 21 December 1990, petitioners obtained another ordinary re-export bond, Instrata Bond No.
7154, from ISAC in favor of the BOC, in the amount of P447,671.00, which was eventually increased
to P707,609.00 per Bond Endorsement No. BE-0912/91 dated 10 January 1991, to guarantee the
re-export of one unit of Hyundai Sonata 2.4 GLS and/or to pay the taxes and duties thereon.
Petitioners executed and signed two Indemnity Agreements with identical stipulations in favor of
ISAC, agreeing to act as surety of the subject bonds. Petitioner Rodriguez signed the Indemnity
Agreements both as President of the Autocorp Group and in his personal capacity. Petitioners thus
agreed to the following provisions:
INDEMNITY: - The undersigned agree at all times to jointly and severally indemnify the
COMPANY and keep it indemnified and hold and save it harmless from and against any and
all damages, losses, costs, stamps, taxes, penalties, charges and expenses of whatsoever
kind and nature including counsel or attorneys fee which the COMPANY shall or may at any
time sustain or incur in consequence of having become surety upon the bond herein above
referred to or any extension, renewal, substitution or alteration thereof, made at the instance
of the undersigned or any of them, or any other bond executed on behalf of the undersigned
or any of them, and to pay; reimburse and make good to the COMPANY, its successors and
assigns, alls sums and amounts of money which it or its representatives shall pay or cause
to be paid, or become liable to pay on accounts of the undersigned or any of them, of
whatsoever kind and nature, including 25% of the amount involved in the litigation or other
matters growing out of or connected therewith, for and as attorneys fees, but in no case less
than P300.00 and which shall be payable whether or not the case be extrajudicially settled, it
being understood that demand made upon anyone of the undersigned herein is admitted as
demand made on all of the signatories hereof. It is hereby further agreed that in case of any
extension or renewal of the bond, we equally bind ourselves to the COMPANY under the
same terms and conditions as therein provided without the necessity of executing another
indemnity agreement for the purpose and that we may be granted under this indemnity
agreement.
MATURITY OF OUR OBLIGATIONS AS CONTRACTED HEREWITH AND ACCRUAL OF
ACTION: - Notwithstanding of (sic) the next preceding paragraph where the obligation
involves a liquidated amount for the payment of which the COMPANY has become legally

liable under the terms of the obligation and its suretyship undertaking, or by the demand of
the obligee or otherwise and the latter has merely allowed the COMPANYs aforesaid liability
irrespective of whether or not payment has actually been made by the COMPANY, the
COMPANY for the protection of its interest may forthwith proceed against the undersigned or
either of them by court action or otherwise to enforce payment, even prior to making
payment to the obligee which may hereafter be done by the COMPANY.
INTEREST IN CASE OF DELAY: - In the event of delay in payment of the said sum or sums
by the undersigned they will pay interest at the rate of 12% per annum or same, which
interest, if not paid, will be liquidated and accumulated to the capital quarterly, and shall earn
the same interest as the capital; all this without prejudice to the COMPANYs right to demand
judicially or extrajudicially the full payment of its claims.
INCONTESTABILITY OF PAYMENT MADE BY THE COMPANY: - Any payment or
disbursement made by the COMPANY on account of the above-mentioned Bond, its
renewals, extensions or substitutions, replacement or novation in the belief either that the
COMPANY was obligated to make such payment or that said payment was necessary in
order to avoid greater losses or obligations for which the COMPANY might be liable by virtue
of the terms of the above-mentioned Bond, its renewal, extensions or substitutions, shall be
final and will not be disputed by the undersigned, who bind themselves to jointly and
severally indemnify the COMPANY of any such payments, as stated in the preceding
clauses:
WAIVER OF VENUE OF ACTION: - We hereby agree that any question which may arise
between the COMPANY and the undersigned by reason of this document and which has to
be submitted for decision to a court of justice shall be brought before the court of competent
jurisdiction in Makati, Rizal, waiving for this purpose any other venue.
WAIVER: - The undersigned hereby waive all the rights[,] privileges and benefits that they
have or may have under Articles 2077, 2078, 2079, 2080 and 2081, of the Civil Code of the
Philippines.
The undersigned, by this instrument, grant a special power of attorney in favor of all or any of
the other undersigned so that any of the undersigned may represent all the others in all
transactions related to this Bond, its renewals, extensions, or any other agreements in
connection with this Counter-Guaranty, without the necessity of the knowledge or consent of
the others who hereby promise to accept as valid each and every act done or executed by
any of the attorneys-in-fact by virtue of the special power of attorney.
OUR LIABILITY HEREUNDER: - It shall not be necessary for the COMPANY to bring suit
against the principal upon his default or to exhaust the property of the principal, but the
liability hereunder of the undersigned indemnitors shall be jointly and severally, a primary
one, the same as that of the principal, and shall be exigible immediately upon the occurrence
of such default.
CANCELLATION OF BOND BY THE COMPANY: - The COMPANY may at any time cancel
the above-mentioned Bond, its renewals, extensions or substitutions, subject to any liability
which might have accrued prior to the date of cancellation refunding the proportionate
amount of the premium unearned on the date of cancellation.
RENEWALS, ALTERATIONS AND SUBSTITUTIONS: - The undersigned hereby empower
and authorize the COMPANY to grant or consent to the granting of any extension,
continuation, increase, modification, change, alteration and/or renewal of the original bond
herein referred to, and to execute or consent to the execution of any substitution for said
Bond with the same or different, conditions and parties, and the undersigned hereby hold
themselves jointly and severally liable to the COMPANY for the original Bond herein abovementioned or for any extension, continuation, increase, modification, change, alteration,
renewal or substitution thereof without the necessary of any new indemnity agreement being
executed until the full amount including principal, interest, premiums, costs, and other
expenses due to the COMPANY thereunder is fully paid up.
SEVERABILITY OF PROVISIONS: - It is hereby agreed that should any provision or
provisions of this agreement be declared by competent public authority to be invalid or
otherwise unenforceable, all remaining provisions herein contained shall remain in full force
and effect.

NOTIFICATION: - The undersigned hereby accept due notice of that the COMPANY has
accepted this guaranty, executed by the undersigned in favor of the COMPANY.3
In sum, ISAC issued the subject bonds to guarantee compliance by petitioners with their undertaking
with the BOC to re-export the imported vehicles within the given period and pay the taxes and/or
duties due thereon. In turn, petitioners agreed, as surety, to indemnify ISAC for the liability the latter
may incur on the said bonds.
Petitioner Autocorp Group failed to re-export the items guaranteed by the bonds and/or liquidate the
entries or cancel the bonds, and pay the taxes and duties pertaining to the said items despite
repeated demands made by the BOC, as well as by ISAC. By reason thereof, the BOC considered
the two bonds, with a total face value ofP1,034,649.00, forfeited.
Failing to secure from petitioners the payment of the face value of the two bonds, despite several
demands sent to each of them as surety under the Indemnity Agreements, ISAC filed with the RTC
on 24 October 1995 an action against petitioners to recover the sum of P1,034,649.00, plus 25%
thereof or P258,662.25 as attorneys fees. ISAC impleaded the BOC "as a necessary party plaintiff in
order that the reward of money or judgment shall be adjudged unto the said necessary plaintiff." 4 The
case was docketed as Civil Case No. 95-1584.
Petitioners filed a Motion to Dismiss on 11 December 1995 on the grounds that (1) the Complaint
states no cause of action; and (2) the BOC is an improper party.
The RTC, in an Order5 dated 27 February 1996, denied petitioners Motion to Dismiss. Petitioners
thus filed their Answer to the Complaint, claiming that they sought permission from the BOC for an
extension of time to re-export the items covered by the bonds; that the BOC has yet to issue an
assessment for petitioners alleged default; and that the claim of ISAC for payment is premature as
the subject bonds are not yet due and demandable.
During the pre-trial conference, petitioners admitted the genuineness and due execution of Instrata
Bonds No. 5770 and No. 7154, but specifically denied those of the corresponding Indemnity
Agreements. The parties agreed to limit the issue to "whether or not these bonds are now due and
demandable."
On 16 September 1998, the RTC rendered its Decision ordering petitioners to pay ISAC and/or the
BOC the face value of the subject bonds in the total amount of P1,034,649.00, and to pay
ISAC P258,662.25 as attorneys fees, thus:
WHEREFORE, judgment is hereby rendered in favor of the [herein private respondent ISAC]
and as against the [herein petitioners] who are ordered to pay the [private respondent] Intra
Strata Assurance Corporation and/or the Bureau of Customs the amount of P1,034,649.00
which is the equivalent amount of the subject bonds as well as to pay the plaintiff corporation
the sum of P258,662.25 as and for attorneys fees.6
Petitioners Motion for Reconsideration was denied by the RTC in a Resolution dated 15 January
1999.7
Petitioners appealed to the Court of Appeals. On 30 June 2004, the Court of Appeals rendered its
Decision affirming the RTC Decision, only modifying the amount of the attorneys fees awarded:
WHEREFORE, the appealed 16 September 1998 Decision is MODIFIED to reduce the
award of attorneys fees to One Hundred Three Thousand Four Hundred Sixty Four Pesos &
Ninety Centavos (P103,464.90). The rest is affirmed in toto. Costs against [herein
petitioners].8
In a Resolution dated 5 January 2005, the Court of Appeals refused to reconsider its Decision.
Petitioners thus filed the instant Petition for Review on Certiorari, assigning the following errors
allegedly committed by the Court of Appeals:
I. THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN RENDERING
JUDGMENT AGAINST PETITIONERS BASED ON A PREMATURE ACTION AND/OR
RULING IN FAVOR OF RESPONDENTS WHO HAVE NO CAUSE OF ACTION AGAINST
PETITIONERS.

II. THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN AFFIRMING THE

DECISION OF BRANCH 150, REGIONAL TRIAL COURT OF MAKATI CITY BASED ON
MISAPPREHENSION OF FACTS, UNSUPPORTED BY EVIDENCE ON RECORD &
CONTRARY TO LAW.
III. THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN NOT GIVING MERIT
TO THE ISSUE RAISED BY PETITIONERS THAT THE BUREAU OF CUSTOMS IS
IMPROPERLY IMPLEADED BY INTRA STRATA.
IV. THE HONORABLE COURT OF APPEALS GRAVELY ERRED [IN] AFFIRMING THE
PORTION OF THE DECISION HOLDING PETITIONER PETER Y. RODRIGUEZ AS
JOINTLY LIABLE WHEN AMENDMENTS WERE INTRODUCED, WITHOUT HIS CONSENT
AND APPROVAL.9
The present Petition is without merit.
Absence of actual forfeiture of the subject bonds
Petitioners contend that their obligation to ISAC is not yet due and demandable. They cannot be
made liable by ISAC in the absence of an actual forfeiture of the subject bonds by the BOC and/or
an explicit pronouncement by the same bureau that ISAC is already liable on the said bonds. In this
case, there is yet no actual forfeiture of the bonds, but merely a recommendation of forfeiture, for no
writ of execution has been issued against such bonds.10Hence, Civil Case No. 95-1584 was
prematurely filed by ISAC. Petitioners further argue that:
Secondly, it bears emphasis that as borne by the records, not only is there no writ of
forfeiture against Surety Bond No. 7154, there is likewise no evidence adduced on record to
prove that respondent Intra Strata has made legal demand against Surety Bond No.
5770 neither is there a showing that respondent BOC initiated a demand or issued notice for
its forfeiture and/or confiscation.11
The Court of Appeals, in its assailed Decision, already directly addressed petitioners arguments by
ruling that an actual forfeiture of the subject bonds is not necessary for petitioners to be liable
thereon to ISAC as surety under the Indemnity Agreements.
According to the relevant provision of the Indemnity Agreements executed between petitioner and
ISAC, which reads:
[W]here the obligation involves a liquidated amount for the payment of which [ISAC] has
become legally liable under the terms of the obligation and its suretyship undertaking or by
the demand of the [BOC] or otherwise and the latter has merely allowed the [ISACs]
aforesaid liability, irrespective of whether or not payment has actually been made by the
[ISAC], the [ISAC] for the protection of its interest may forthwith proceed against [petitioners
Autocorp Group and Rodriguez] or either of them by court action or otherwise to enforce
payment, even prior to making payment to the [BOC] which may hereafter be done by [ISAC]
[,]12
petitioners obligation to indemnify ISAC became due and demandable the moment the bonds issued
by ISAC became answerable for petitioners non-compliance with its undertaking with the BOC.
Stated differently, petitioners became liable to indemnify ISAC at the same time the bonds issued by
ISAC were placed at the risk of forfeiture by the BOC for non-compliance by petitioners with its
undertaking.
The subject bonds, Instrata Bonds No. 5770 and No. 7154, became due and demandable upon the
failure of petitioner Autocorp Group to comply with a condition set forth in its undertaking with the
BOC, specifically to re-export the imported vehicles within the period of six months from their date of
entry. Since it issued the subject bonds, ISAC then also became liable to the BOC. At this point, the
Indemnity Agreements already give ISAC the right to proceed against petitioners via court action or
otherwise.
The Indemnity Agreements, therefore, give ISAC the right to recover from petitioners the face value
of the subject bonds plus attorneys fees at the time ISAC becomes liable on the said bonds to the
BOC, regardless of whether the BOC had actually forfeited the bonds, demanded payment thereof
and/or received such payment. It must be pointed out that the Indemnity Agreements explicitly
provide that petitioners shall be liable to indemnify ISAC "whether or not payment has actually been

made by the [ISAC]" and ISAC may proceed against petitioners by court action or otherwise "even
prior to making payment to the [BOC] which may hereafter be done by [ISAC]."
Even when the BOC already admitted that it not only made a demand upon ISAC for the payment of
the bond but even filed a complaint against ISAC for such
payment,13 such demand and complaint are not necessary to hold petitioners liable to ISAC for the
amount of such bonds. Petitioners attempts to prove that there was no actual forfeiture of the
subject bonds are completely irrelevant to the case at bar.
It is worthy to note that petitioners did not impugn the validity of the stipulation in the Indemnity
Agreements allowing ISAC to proceed against petitioners the moment the subject bonds become
due and demandable, even prior to actual forfeiture or payment thereof. Even if they did so, the
Court would be constrained to uphold the validity of such a stipulation for it is but a slightly expanded
contractual expression of Article 2071 of the Civil Code which provides, inter alia, that the guarantor
may proceed against the principal debtor the moment the debt becomes due and demandable.
Article 2071 of the Civil Code provides:
Art. 2071. The guarantor, even before having paid, may proceed against the principal
debtor:
(1) When he is sued for the payment;
(2) In case of insolvency of the principal debtor;
(3) When the debtor has bound himself to relieve him from the guaranty within a specified
period, and this period has expired;
(4) When the debt has become demandable, by reason of the expiration of the period
for payment;
(5) After the lapse of ten years, when the principal obligation has no fixed period for its
maturity, unless it be of such nature that it cannot be extinguished except within a period
longer than ten years;
(6) If there are reasonable grounds to fear that the principal debtor intends to abscond;
(7) If the principal debtor is in imminent danger of becoming insolvent.
In all these cases, the action of the guarantor is to obtain release from the guaranty, or to
demand a security that shall protect him from any proceedings by the creditor and from the
danger of insolvency of the debtor. (Emphases ours.)
Petitioners also invoke the alleged lack of demand on the part of ISAC on petitioners as regards
Instrata Bond No. 5770 before it instituted Civil Case No. 95-1584. Even if proven true, such a fact
does not carry much weight considering that demand, whether judicial or extrajudicial, is not required
before an obligation becomes due and demandable. A demand is only necessary in order to put an
obligor in a due and demandable obligation in delay,14 which in turn is for the purpose of making the
obligor liable for interests or damages for the period of delay.15 Thus, unless stipulated otherwise, an
extrajudicial demand is not required before a judicial demand, i.e., filing a civil case for collection,
can be resorted to.
Inclusion of the Bureau of Customs as a party to the case
ISAC included the BOC "as a necessary party plaintiff in order that the reward of money or judgment
shall be adjudged unto the said necessary plaintiff." 16
Petitioners assail this inclusion of the BOC as a party in Civil Case No. 95-1584 on the ground that it
was not properly represented by the Solicitor General. Petitioners also contend that the inclusion of
the BOC as a party in Civil Case No. 95-1584 "is highly improper and should not be countenanced
as the net result would be tantamount to collusion between Intra Strata and the Bureau of Customs
which would deny and deprive petitioners their personal defenses against the BOC." 17
In its assailed Decision, the Court of Appeals did not find merit in petitioners arguments on the
matter, holding that when the BOC forfeited the subject bonds issued by ISAC, subrogation took
place so that whatever right the BOC had against petitioners were eventually transferred to ISAC. As

ISAC merely steps into the shoes of the BOC, whatever defenses petitioners may have against the
BOC would still be available against ISAC.
The Court likewise cannot sustain petitioners position.
The misjoinder of parties does not warrant the dismissal of the action. Section 11, Rule 3 of the
Rules of Court explicitly states:
SEC. 11. Misjoinder and non-joinder of parties.Neither misjoinder nor non-joinder of
parties is ground for dismissal of an action. Parties may be dropped or added by order of
the court on motion of any party or on its own initiative at any stage of the action and on such
terms as are just. Any claim against a misjoined party may be severed and proceeded with
separately.
Consequently, the purported misjoinder of the BOC as a party cannot result in the dismissal of Civil
Case No. 95-1584. If indeed the BOC was improperly impleaded as a party in Civil Case No. 951584, at most, it may be dropped by order of the court, on motion of any party or on its own initiative,
at any stage of the action and on such terms as are just.
Should the BOC then be dropped as a party to Civil Case No. 95-1584?
ISAC alleged in its Complaint18 that the BOC is being joined as a necessary party in Civil Case No.
95-1584.
A necessary party is defined in Section 8, Rule 3 of the Rules of Court as follows:
SEC. 8. Necessary party.A necessary party is one who is not indispensable but who ought
to be joined as a party if complete relief is to be accorded as to those already parties, or for a
complete determination or settlement of the claim subject of the action.
The subject matter of Civil Case No. 95-1584 is the liability of Autocorp Group to the BOC, which
ISAC is also bound to pay as the guarantor who issued the bonds therefor. Clearly, there would be
no complete settlement of the subject matter of the case at bar the liability of Autocorp Group to
the BOC should Autocorp Group be merely ordered to pay its obligations with the BOC to ISAC.
BOC is, therefore, a necessary party in the case at bar, and should not be dropped as a party to the
present case.
It can only be conceded that there was an irregularity in the manner the BOC was joined as a
necessary party in Civil Case No. 95-1584. As the BOC, through the Solicitor General, was not the
one who initiated Civil Case No. 95-1584, and neither was its consent obtained for the filing of the
same, it may be considered an unwilling co-plaintiff of ISAC in said action. The proper way to
implead the BOC as a necessary party to Civil Case No. 95-1584 should have been in accordance
with Section 10, Rule 3 of the Rules of Court, viz:
SEC. 10. Unwilling co-plaintiff. If the consent of any party who should be joined as plaintiff
can not be obtained, he may be made a defendant and the reason therefor shall be stated in
the complaint.
Nonetheless, the irregularity in the inclusion of the BOC as a party to Civil Case No. 95-1584 would
not in any way affect the disposition thereof. As the Court already found that the BOC is a necessary
party to Civil Case No. 95-1584, it would be a graver injustice to drop it as a party.
Petitioners argument that the inclusion of the BOC as a party to this case would deprive them of
their personal defenses against the BOC is utterly baseless.
First, as ruled by the Court of Appeals, petitioners defenses against the BOC are completely
available against ISAC, since the right of the latter to seek indemnity from petitioner depends on the
right of the BOC to proceed against the bonds.
The Court, however, deems it essential to qualify that ISACs right to seek indemnity from petitioners
does not constitute subrogation under the Civil Code, considering that there has been no payment
yet by ISAC to the BOC. There are indeed cases in the aforementioned Article 2071 of the Civil
Code wherein the guarantor or surety, even before having paid, may proceed against the principal
debtor, but in all these cases, Article 2071 of the Civil Code merely grants the guarantor or surety an
action "to obtain release from the guaranty, or to demand a security that shall protect him from any

proceedings by the creditor and from the danger of insolvency of the debtor." The benefit of
subrogation, an extinctive subjective novation by a change of creditor, which "transfers to the person
subrogated, the credit and all the rights thereto appertaining, either against the debtor or against
third persons,"19 is granted by the Article 2067 of the Civil Code only to the "guarantor (or surety) who
pays."20
ISAC cannot be said to have stepped into the shoes of the BOC, because the BOC still retains said
rights until it is paid. ISACs right to file Civil Case No. 95-1584 is based on the express provision of
the Indemnity Agreements making petitioners liable to ISAC at the very moment ISACs bonds
become due and demandable for the liability of Autocorp Group to the BOC, without need for actual
payment by ISAC to the BOC. But it is still correct to say that all the defenses available to petitioners
against the BOC can likewise be invoked against ISAC because the latters contractual right to
proceed against petitioners only arises when the Autocorp Group becomes liable to the BOC for
non-compliance with its undertakings. Indeed, the arguments and evidence petitioners can present
against the BOC to prove that Autocorp Groups liability to the BOC is not yet due and demandable
would also establish that petitioners liability to ISAC under the Indemnity Agreements has not yet
arisen.
Second, making the BOC a necessary party to Civil Case No. 95-1584 actually allows petitioners to
simultaneously invoke its defenses against both the BOC and ISAC. Instead of depriving petitioners
of their personal defenses against the BOC, Civil Case No. 95-1584 actually gave them the
opportunity to kill two birds with one stone: to disprove its liability to the BOC and, thus, negate its
liability to ISAC.
Liability of petitioner Rodriguez
Petitioner Rodriguez posits that he is merely a guarantor, and that his liability arises only when the
person with whom he guarantees the credit, Autocorp Group in this case, fails to pay the obligation.
Petitioner Rodriguez invokes Article 2079 of the Civil Code on Extinguishment of Guaranty, which
states:
Art. 2079. An extension granted to the debtor by the creditor without the consent of the
guarantor extinguishes the guaranty. The mere failure on the part of the creditor to demand
payment after the debt has become due does not of itself constitute any extension of time
referred to herein.
Petitioner Rodriguez argues that there was an amendment as to the effectivity of the bonds, and this
constitutes a modification of the agreement without his consent, thereby exonerating him from any
liability.
We must take note at this point that petitioners have not presented any evidence of this alleged
amendment as to the effectivity of the bonds.21 Be that as it may, even if there was indeed such an
amendment, such would not cause the exoneration of petitioner Rodriguez from liability on the
bonds.
The Court of Appeals, in its assailed Decision, held that the use of the term guarantee in a contract
does not ipso facto mean that the contract is one of guaranty. It thus ruled that both petitioners
assumed liability as a regular party and obligated themselves as original promissors, i.e., sureties,
as shown in the following provisions of the Indemnity Agreement:
INDEMNITY: - The undersigned [Autocorp Group and Rodriguez] agree at all times to
jointly and severally indemnify the COMPANY [ISAC] and keep it indemnified and hold
and save it harmless from and against any and all damages, losses, costs, stamps, taxes,
penalties, charges and expenses of whatsoever kind and nature including counsel or
attorneys fee which the COMPANY [ISAC] shall or may at any time sustain or incur in
consequence of having become surety upon the bond herein above referred to x x x
xxxx
OUR LIABILITY HEREUNDER: - It shall not be necessary for the COMPANY [ISAC] to bring
suit against the principal [Autocorp Group] upon his default or to exhaust the property of the
principal [Autocorp Group], but the liability hereunder of the undersigned indemnitors
[Rodriguez] shall be jointly and severally, a primary one, the same as that of the
principal [Autocorp Group], and shall be exigible immediately upon the occurrence of
such default. (Emphases supplied.)

The Court of Appeals concluded that since petitioner Rodriguez was a surety, Article 2079 of the Civil
Code does not apply. The appellate court further noted that both petitioners authorized ISAC to
consent to the granting of an extension of the subject bonds.
The Court of Appeals committed a slight error on this point. The provisions of the Civil Code on
Guarantee, other than the benefit of excussion, are applicable and available to the surety.22 The
Court finds no reason why the provisions of Article 2079 would not apply to a surety.
This, however, would not cause a reversal of the Decision of the Court of Appeals. The Court of
Appeals was correct that even granting arguendo that there was a modification as to the effectivity of
the bonds, petitioners would still not be absolved from liability since they had authorized ISAC to
consent to the granting of any extension, modification, alteration and/or renewal of the subject
bonds, as expressly set out in the Indemnity Agreements:
RENEWALS, ALTERATIONS AND SUBSTITUTIONS: - The undersigned [Autocorp Group
and Rodriguez] hereby empower and authorize the COMPANY [ISAC] to grant or
consent to the granting of any extension, continuation, increase, modification,
change, alteration and/or renewal of the original bond herein referred to, and to
execute or consent to the execution of any substitution for said Bond with the same or
different, conditions and parties, and the undersigned [Autocorp Group and Rodriguez]
hereby hold themselves jointly and severally liable to the COMPANY [ISAC] for the
original Bond herein above-mentioned or for any extension, continuation, increase,
modification, change, alteration, renewal or substitution thereof without the necessary
of any new indemnity agreement being executed until the full amount including principal,
interest, premiums, costs, and other expenses due to the COMPANY [ISAC] thereunder is
fully paid up.23 (Emphases supplied.)
The foregoing provision in the Indemnity Agreements clearly authorized ISAC to consent to the
granting of any extension, modification, alteration and/or renewal of the subject bonds.
There is nothing illegal in such a provision. In Philippine American General Insurance Co., Inc. v.
Mutuc,24 the Court held that an agreement whereby the sureties bound themselves to be liable in
case of an extension or renewal of the bond, without the necessity of executing another indemnity
agreement for the purpose and without the necessity of being notified of such extension or renewal,
is valid; and that there is nothing in it that militates against the law, good customs, good morals,
public order or public policy.
WHEREFORE, the instant Petition for Review on Certiorari is DENIED. The Decision of the Court of
Appeals dated 30 June 2004 in CA-G.R. CV No. 62564 which affirmed with modification the Decision
of the Regional Trial Court of Makati City, in Civil Case No. 95-1584 dated 16 September 1998
is AFFIRMED in toto. Costs against petitioners.

G.R. No. 147561

June 22, 2006

STRONGHOLD INSURANCE COMPANY, INC., Petitioner,

vs.
REPUBLIC-ASAHI GLASS CORPORATION, Respondent.
DECISION
PANGANIBAN, CJ:
Asurety companys liability under the performance bond it issues is solidary. The death of the
principal obligor does not, as a rule, extinguish the obligation and the solidary nature of that liability.
The Case
Before us is a Petition for Review1 under Rule 45 of the Rules of Court, seeking to reverse the March
13, 2001 Decision2 of the Court of Appeals (CA) in CA-GR CV No. 41630. The assailed Decision
disposed as follows:
"WHEREFORE, the Order dated January 28, 1993 issued by the lower court is REVERSED and
SET ASIDE. Let the records of the instant case be REMANDED to the lower court for the reception
of evidence of all parties."3
The Facts
The facts of the case are narrated by the CA in this wise:

"On May 24, 1989, [respondent] Republic-Asahi Glass Corporation (Republic-Asahi) entered into a
contract with x x x Jose D. Santos, Jr., the proprietor of JDS Construction (JDS), for the construction
of roadways and a drainage system in Republic-Asahis compound in Barrio Pinagbuhatan, Pasig
City, where [respondent] was to pay x x x JDS five million three hundred thousand pesos
(P5,300,000.00) inclusive of value added tax for said construction, which was supposed to be
completed within a period of two hundred forty (240) days beginning May 8, 1989. In order to
guarantee the faithful and satisfactory performance of its undertakings x x x JDS, shall post a
performance bond of seven hundred ninety five thousand pesos (P795,000.00). x x x JDS executed,
jointly and severally with [petitioner] Stronghold Insurance Co., Inc. (SICI) Performance Bond No.
SICI-25849/g(13)9769.
"On May 23, 1989, [respondent] paid to x x x JDS seven hundred ninety five thousand pesos
(P795,000.00) by way of downpayment.
"Two progress billings dated August 14, 1989 and September 15, 1989, for the total amount of two
hundred seventy four thousand six hundred twenty one pesos and one centavo (P274,621.01) were
submitted by x x x JDS to [respondent], which the latter paid. According to [respondent], these two
progress billings accounted for only 7.301% of the work supposed to be undertaken by x x x JDS
under the terms of the contract.
"Several times prior to November of 1989, [respondents] engineers called the attention of x x x JDS
to the alleged alarmingly slow pace of the construction, which resulted in the fear that the
construction will not be finished within the stipulated 240-day period. However, said reminders went
unheeded by x x x JDS.
"On November 24, 1989, dissatisfied with the progress of the work undertaken by x x x JDS,
[respondent] Republic-Asahi extrajudicially rescinded the contract pursuant to Article XIII of said
contract, and wrote a letter to x x x JDS informing the latter of such rescission. Such rescission,
according to Article XV of the contract shall not be construed as a waiver of [respondents] right to
recover damages from x x x JDS and the latters sureties.
"[Respondent] alleged that, as a result of x x x JDSs failure to comply with the provisions of the
contract, which resulted in the said contracts rescission, it had to hire another contractor to finish the
project, for which it incurred an additional expense of three million two hundred fifty six thousand,
eight hundred seventy four pesos (P3,256,874.00).
"On January 6, 1990, [respondent] sent a letter to [petitioner] SICI filing its claim under the bond for
not less thanP795,000.00. On March 22, 1991, [respondent] again sent another letter reiterating its
demand for payment under the aforementioned bond. Both letters allegedly went unheeded.
"[Respondent] then filed [a] complaint against x x x JDS and SICI. It sought from x x x JDS payment
ofP3,256,874.00 representing the additional expenses incurred by [respondent] for the completion of
the project using another contractor, and from x x x JDS and SICI, jointly and severally, payment
of P750,000.00 as damages in accordance with the performance bond; exemplary damages in the
amount of P100,000.00 and attorneys fees in the amount of at least P100,000.00.
"According to the Sheriffs Return dated June 14, 1991, submitted to the lower court by Deputy
Sheriff Rene R. Salvador, summons were duly served on defendant-appellee SICI. However, x x x
Jose D. Santos, Jr. died the previous year (1990), and x x x JDS Construction was no longer at its
address at 2nd Floor, Room 208-A, San Buena Bldg. Cor. Pioneer St., Pasig, Metro Manila, and its
whereabouts were unknown.
"On July 10, 1991, [petitioner] SICI filed its answer, alleging that the [respondents] money claims
against [petitioner and JDS] have been extinguished by the death of Jose D. Santos, Jr. Even if this
were not the case, [petitioner] SICI had been released from its liability under the performance bond
because there was no liquidation, with the active participation and/or involvement, pursuant to
procedural due process, of herein surety and contractor Jose D. Santos, Jr., hence, there was no
ascertainment of the corresponding liabilities of Santos and SICI under the performance bond. At
this point in time, said liquidation was impossible because of the death of Santos, who as such can
no longer participate in any liquidation. The unilateral liquidation on the party (sic) of [respondent] of
the work accomplishments did not bind SICI for being violative of procedural due process. The claim
of [respondent] for the forfeiture of the performance bond in the amount of P795,000.00 had no
factual and legal basis, as payment of said bond was conditioned on the payment of damages which
[respondent] may sustain in the event x x x JDS failed to complete the contracted works.
[Respondent] can no longer prove its claim for damages in view of the death of Santos. SICI was not

informed by [respondent] of the death of Santos. SICI was not informed by [respondent] of the
unilateral rescission of its contract with JDS, thus SICI was deprived of its right to protect its interests
as surety under the performance bond, and therefore it was released from all liability. SICI was
likewise denied due process when it was not notified of plaintiff-appellants process of determining
and fixing the amount to be spent in the completion of the unfinished project. The procedure
contained in Article XV of the contract is against public policy in that it denies SICI the right to
procedural due process. Finally, SICI alleged that [respondent] deviated from the terms and
conditions of the contract without the written consent of SICI, thus the latter was released from all
liability. SICI also prayed for the award of P59,750.00 as attorneys fees, andP5,000.00 as litigation
expenses.
"On August 16, 1991, the lower court issued an order dismissing the complaint of [respondent]
against x x x JDS and SICI, on the ground that the claim against JDS did not survive the death of its
sole proprietor, Jose D. Santos, Jr. The dispositive portion of the [O]rder reads as follows:
ACCORDINGLY, the complaint against the defendants Jose D. Santos, Jr., doing business under
trade and style, JDS Construction and Stronghold Insurance Company, Inc. is ordered DISMISSED.
SO ORDERED.
"On September 4, 1991, [respondent] filed a Motion for Reconsideration seeking reconsideration of
the lower courts August 16, 1991 order dismissing its complaint. [Petitioner] SICI field its Comment
and/or Opposition to the Motion for Reconsideration. On October 15, 1991, the lower court issued
an Order, the dispositive portion of which reads as follows:
WHEREFORE, premises considered, the Motion for Reconsideration is hereby given due course.
The Order dated 16 August 1991 for the dismissal of the case against Stronghold Insurance
Company, Inc., is reconsidered and hereby reinstated (sic). However, the case against defendant
Jose D. Santos, Jr. (deceased) remains undisturbed.
Motion for Preliminary hearing and Manifestation with Motion filed by [Stronghold] Insurance
Company Inc., are set for hearing on November 7, 1991 at 2:00 oclock in the afternoon.
SO ORDERED.
"On June 4, 1992, [petitioner] SICI filed its Memorandum for Bondsman/Defendant SICI (Re: Effect
of Death of defendant Jose D. Santos, Jr.) reiterating its prayer for the dismissal of [respondents]
complaint.
"On January 28, 1993, the lower court issued the assailed Order reconsidering its Order dated
October 15, 1991, and ordered the case, insofar as SICI is concerned, dismissed. [Respondent] filed
its motion for reconsideration which was opposed by [petitioner] SICI. On April 16, 1993, the lower
court denied [respondents] motion for reconsideration. x x x." 4
Ruling of the Court of Appeals
The CA ruled that SICIs obligation under the surety agreement was not extinguished by the death of
Jose D. Santos, Jr. Consequently, Republic-Asahi could still go after SICI for the bond.
The appellate court also found that the lower court had erred in pronouncing that the performance of
the Contract in question had become impossible by respondents act of rescission. The Contract was
rescinded because of the dissatisfaction of respondent with the slow pace of work and pursuant to
Article XIII of its Contract with JDS.
The CA ruled that "[p]erformance of the [C]ontract was impossible, not because of [respondents]
fault, but because of the fault of JDS Construction and Jose D. Santos, Jr. for failure on their part to
make satisfactory progress on the project, which amounted to non-performance of the same. x x x
[P]ursuant to the [S]urety [C]ontract, SICI is liable for the non-performance of said [C]ontract on the
part of JDS Construction."5
Hence, this Petition.6
Issue
Petitioner states the issue for the Courts consideration in the following manner:

"Death is a defense of Santos heirs which Stronghold could also adopt as its defense against
obligees claim."7
More precisely, the issue is whether petitioners liability under the performance bond was
automatically extinguished by the death of Santos, the principal.
The Courts Ruling
The Petition has no merit.
Sole Issue:
Effect of Death on the Suretys Liability
Petitioner contends that the death of Santos, the bond principal, extinguished his liability under the
surety bond. Consequently, it says, it is automatically released from any liability under the bond.
As a general rule, the death of either the creditor or the debtor does not extinguish the
obligation.8 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.9 Only obligations that are
personal10 or are identified with the persons themselves are extinguished by death. 11
Section 5 of Rule 8612 of the Rules of Court expressly allows the prosecution of money claims arising
from a contract against the estate of a deceased debtor. Evidently, those claims are not actually
extinguished.13 What is extinguished is only the obligees action or suit filed before the court, which is
not then acting as a probate court.14
In the present case, whatever monetary liabilities or obligations Santos had under his contracts with
respondent 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.15 Death is not a defense that he or his estate can set up to wipe out the obligations
under the performance bond. Consequently, petitioner as surety cannot use his death to escape its
monetary obligation under its performance bond.
The liability of petitioner is contractual in nature, because it executed a performance bond worded as
follows:
"KNOW ALL MEN BY THESE PRESENTS:
"That we, JDS CONSTRUCTION of 208-A San Buena Building, contractor, of Shaw Blvd., Pasig,
MM Philippines, as principal and the STRONGHOLD INSURANCE COMPANY, INC. a corporation
duly organized and existing under and by virtue of the laws of the Philippines with head office at
Makati, as Surety, are held and firmly bound unto the REPUBLIC ASAHI GLASS CORPORATION
and to any individual, firm, partnership, corporation or association supplying the principal with labor
or materials in the penal sum of SEVEN HUNDRED NINETY FIVE THOUSAND (P795,000.00),
Philippine Currency, for the payment of which sum, well and truly to be made, we bind ourselves, our
heirs, executors, administrators, successors and assigns, jointly and severally, firmly by these
presents.
"The CONDITIONS OF THIS OBLIGATION are as follows;
"WHEREAS the above bounden principal on the ___ day of __________, 19__ entered into a
contract with the REPUBLIC ASAHI GLASS CORPORATION represented by _________________,
to fully and faithfully. Comply with the site preparation works road and drainage system of Philippine
Float Plant at Pinagbuhatan, Pasig, Metro Manila.
"WHEREAS, the liability of the Surety Company under this bond shall in no case exceed the sum of
PESOS SEVEN HUNDRED NINETY FIVE THOUSAND (P795,000.00) Philippine Currency, inclusive
of interest, attorneys fee, and other damages, and shall not be liable for any advances of the obligee
to the principal.
"WHEREAS, said contract requires the said principal to give a good and sufficient bond in the
above-stated sum to secure the full and faithfull performance on its part of said contract, and the
satisfaction of obligations for materials used and labor employed upon the work;

"NOW THEREFORE, if the principal shall perform well and truly and fulfill all the undertakings,
covenants, terms, conditions, and agreements of said contract during the original term of said
contract and any extension thereof that may be granted by the obligee, with notice to the surety and
during the life of any guaranty required under the contract, and shall also perform well and truly and
fulfill all the undertakings, covenants, terms, conditions, and agreements of any and all duly
authorized modifications of said contract that may hereinafter be made, without notice to the surety
except when such modifications increase the contract price; and such principal contractor or his or
its sub-contractors shall promptly make payment to any individual, firm, partnership, corporation or
association supplying the principal of its sub-contractors with labor and materials in the prosecution
of the work provided for in the said contract, then, this obligation shall be null and void; otherwise it
shall remain in full force and effect. Any extension of the period of time which may be granted by the
obligee to the contractor shall be considered as given, and any modifications of said contract shall
be considered as authorized, with the express consent of the Surety.
"The right of any individual, firm, partnership, corporation or association supplying the contractor with
labor or materials for the prosecution of the work hereinbefore stated, to institute action on the penal
bond, pursuant to the provision of Act No. 3688, is hereby acknowledge and confirmed." 16
As a surety, petitioner is solidarily liable with Santos in accordance with the Civil Code, which
provides as follows:
"Art. 2047. By guaranty a person, called the guarantor, binds himself to the creditor to fulfill the
obligation of the principal debtor in case the latter should fail to do so.
"If a person binds himself solidarily with the principal debtor, the provisions of Section 4, 17 Chapter 3,
Title I of this Book shall be observed. In such case the contract is called a suretyship."
xxxxxxxxx
"Art. 1216. 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
subsequently be directed against the others, so long as the debt has not been fully collected."
Elucidating on these provisions, the Court in Garcia v. Court of Appeals 18 stated thus:
"x x x. 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. x x x."19
Under the law and jurisprudence, respondent may sue, separately or together, the principal debtor
and the petitioner herein, 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.
Evidently, despite the death of the principal debtor, respondent may still sue petitioner alone, in
accordance with the solidary nature of the latters liability under the performance bond.
WHEREFORE, the Petition is DENIED and the Decision of the Court of Appeals AFFIRMED. Costs
against petitioner.
SO ORDERED.