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Beastly Digests: Cred Trans


G.R. No. 34642 Sept 24, 1931 his widow, Felicitas Villanueva, and Fabiola Severino, on the one
FABIOLA SEVERINO, accompanied by her husband part, and other heirs of the deceased on the other part. In order to
RICARDO VERGARA, plaintiffs-appellees, v. make an end of this litigation a compromise was effected by
GUILLERMO SEVERINO, ET AL., defendants. which Guillermo Severino, a son of Melecio Severino, took over
ENRIQUE ECHAUS, appellant. the property pertaining to the estate of his father at the same time
agreeing to pay P100,000 to Felicitas Villanueva and Fabiola
Syllabus Severino.
1. CONTRACT; CONSIDERATION; SUETY OR GUARANTOR.
This sum of money was made payable, first, P40,000 in cash
It is nit necessary that surety or guarantor should participate upon the execution of the document of compromise, and the
in the benefit which constitutes the consideration as between balance in three several payments of P20,000 at the end of one
the principal parties to the contract. year; two years, and three years respectively.

STREET, J.: To this contract the appellant Enrique Echaus affixed his name as
This action was instituted in the CFI of the Province of Iloilo by guarantor.
Fabiola Severino, with whom is joined her husband Ricardo
Vergara, for the purpose of recovering the sum of P20,000 from The first payment of P40,000 was made on July 11, 1924, the
Guillermo Severino and Enrique Echaus, the latter in the date when the contract of compromise was executed; and of this
character of guarantor for the former. amount the plaintiff Fabiola Severino received the sum of
P10,000.
Upon hearing he cause the trial court gave judgment in favor of
the plaintiffs to recover the sum of P20,000 with lawful from Of the remaining P60,000, all as yet unpaid, Fabiola Severino is
Nov15, 1929, the date of the filing of the complaint, with costs. entitled to the sum of P20,000.

But it was declared that execution of this judgment should issue It appears that at the time of the compromise agreement above-
first against the property of Guillermo Severino, and if no property mentioned was executed Fabiola Severino had not yet been
should be found belonging to said defendant sufficient to satisfy judicially recognized as the natural daughter of Melecio Severino,
the judgment in whole or in part, execution for the remainder and it was stipulated that the last P20,000 corresponding to
should be issued against the property of Enrique Echaus as Fabiola and the last P5,000 corresponding to Felicitas Villanueva
guarantor. should retained on deposit until the definite status of Fabiola
Severino as natural daughter of Melecio Severino should be
From this judgment the defendant Echaus appealed, but his established.
principal, Guillermo Severino, did not.
The judicial decree to this effect was entered in the CFI of
The plaintiff Fabiola Severino is the recognized natural daughter Occidental Negros on June 16, 1925, and as the money which
of Melecio Severino, deceased, former resident of Occidental was contemplated to be held in suspense has never in fact been
Negros. Upon the death of Melecio Severino a number of years paid to the parties entitled thereto, it results that the point
ago, he left considerable property and litigation ensued between respecting the deposit referred to has ceased to be of moment.
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The proof shows that the money claimed in this action has never
been paid and is still owing to the plaintiff; and the only defense
worth noting in this decision is the assertion on the part of Garcia v. CA, 191 SCRA 493
Enrique Echaus that he received nothing for affixing his signature
as guarantor to the contract which is the subject of suit and that in
effect the contract was lacking in consideration as to him. 1. CIVIL LAW; SPECIAL CONTRACTS; SURETYSHIP;
NATURE AND PURPOSE THEREOF.
The point is not well taken. A guarantor or surety is bound by the The petitioners first ground is that, as found by the trial court,
same consideration that makes the contract effective between the the surety agreement was invalid because no consideration had
principal parties thereto. (Pyle vs. Johnson, 9 Phil., 249.) been paid to him by PISO for executing the contract and that the
amount of the entire loan had been received and enjoyed by
The compromise and dismissal of a lawsuit is recognized in law WMC.
as a valuable consideration; and the dismissal of the action which
Felicitas Villanueva and Fabiola Severino had instituted against He cites the following articles of the Civil Code in support of his
Guillermo Severino was an adequate consideration to support the contention that lack of consideration was a personal defense
promise on the part of Guillermo Severino to pay the sum of available to him as surety.
money stipulated in the contract which is the subject of this
action. The point is not well taken in view of the nature and purpose of a
surety agreement.
The promise of the appellant Echaus as guarantor therefore
binding. Suretyship is a contractual relation resulting from an agreement
whereby one person, the surety, engages to be answerable for
It is never necessary that the guarantor or surety should receive the debt, default or miscarriage of another, known as the
any part of the benefit, if such there be, accruing to his principal. principal.
But the true consideration of this contract was the detriment
suffered by the plaintiffs in the former action in dismissing that The peculiar nature of a surety agreement is that it is regarded as
proceeding, and it is immaterial that no benefit may have accrued valid despite the absence of any direct consideration received by
either to the principal or his guarantor. the surety either from the principal obligor or from the creditor.

The judgment appealed from is in all respects correct, and the A contract of surety, like any other contract, must generally be
same will be affirmed, with costs against the appellant. So supported by a sufficient consideration.
ordered.
However, the consideration necessary to support a surety
obligation need not pass directly to the surety; a consideration
moving to the principal alone will suffice. It has been held that if
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the delivery of the original contract is contemporaneous with the THE PRINCIPAL DEBTOR. As for the compounded interest,
delivery of the suretys obligation, each contract becomes we apply by analogy the case of Bank of the Philippine Islands v.
completed at the same time, and the consideration which Gooch and Redfern, (45 Phil. 514) which was affirmed in the later
supports the principal contract likewise supports the subsidiary case of the Bank of the Philippine Islands v. Albaladejo & Cia (53
one. (Faust v. Rodelheim, 77 NJL 740, 73 A 491; Ballard v. Phil. 141). In the said cases, the respective sureties claimed that
Burton, 64 Vt 387, 24 A 769). since the creditor changed the rate of interest in the principal
obligation without their knowledge or consent, they were relieved
And this is the kind of surety contract to which the rule of strict from liability under their contract.
construction applies as opposed to a compensated surety It was held, however, that the change in the rate of interest was
contract undertaken by surety corporations which are organized merely a collateral agreement between the creditor bank and the
for the purpose of conducting an indemnity business at principal debtor that did not affect the surety.
established rates and compensation unlike an ordinary surety
agreement where the surety binds his name through motives of When the debtor promised to pay the extra rate of interest on
friendship and accomodation. (Pastoral v. Mutual Security demand of the plaintiff, the liability he assumed was his alone and
Insurance Corp., 14 SCRA 1011). was separate and apart from the original contract.

His agreement to pay the additional rate of interest was an


2. ID.; ID.; ID.; OBLIGATION AND LIABILITY OF A SURETY. additional burden upon him and him only. That obligation in no
The suretys obligation is not an original and direct one for the way affected the original contract of the surety, whose liability
performance of his own act, but merely accessory or collateral to remained unchanged. (Keenes Admr. v. Miller, 103 Ky, 628;
the obligation contracted by the principal. Parson on Bills and Notes, 571, Chitty on Bills, 212; Malteson v.
Ellsworth, 33 Wis 488).
Nevertheless, although the contract of a surety is in essence
secondary only to a valid principal obligation, his liability to the 4. ID.; OBLIGATIONS AND CONTRACTS; NOVATION;
creditor or promisee of the principal is said to be direct, primary REQUISITES THEREOF; NOT ESTABLISHED IN THE CASE AT
and absolute; (Sykes v. Everett, 167 NC 600), in other words, he BAR. The petitioner cites other supposed agreements in
is directly and equally bound with the principal. support of his theory of novation such as the prepayment of the
restructured loans of WMC before the distribution of dividends to
The surety therefore becomes liable for the debt or duty of the common stockholders, the proposed sale on installments of
another although he possesses no direct or personal interest over its assets to Negros Occidental Copperfield Mines, and the
the obligations nor does he receive any benefit therefrom. preference given to other creditors of WMC over PISO.
(Miners Merchants Bank v. Gidley, 150 WVa 229, 144 SE 2d
711). But we do not think these are material as, to be so, the alteration
must change the legal effects of the original contract. The alleged
alterations do not have that effect. T
3. ID.; ID.; ID.; SURETY NOT AFFECTED BY THE CHANGE IN
THE RATE OF INTEREST, SUCH BEING MERELY A he most important argument against the alleged novation is the
COLLATERAL AGREEMENT BETWEEN THE CREDITOR AND failure of the petitioner to establish the validity of the new
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contract, an essential requisite for the novation of a previous valid incompatible with each other (Art. 1292, Civil Code).
obligation.
In every novation there are four essential requisites.
Petitioner insists that the various communications made by WMC (1) a previous valid obligation;
with DBP, together with the memorandum of agreement (Annexes (2) the agreement of all the parties to the new contract;
1 to 7), are sufficient to establish the new undertaking made by (3) the extinguishment of the old contract; and
WMC with all its creditors, including DBP. We do not think so. It is (4) validity of the new one. Novation requires the creation of
true as a general rule no form of words or writing is necessary to new contractual relations as well as the extinguishment of
give effect to a novation. ( the old.
Re Dissolution of F. Yeager Bridge Culvert Co., 150 Mich. App.
386, NW 2d 99).
There must be a consent of all the parties to the substitution,
Nevertheless, since the parties involved here are corporations, it resulting in the extinction of the old obligation and the creation of
must first be proved that the contracts, assuming they were a valid new one (Tiu Siuco v. Habana, 45 Phil. 707).
made, were executed by the persons possessing the proper
authority to bind their respective principals. The acceptance of the promissory note by the plaintiff is not
novation of the contract. The legal doctrine is that an obligation to
Annexes 1-4 are a mere exchange of correspondence between pay a sum of money is not novated in a new instrument by
the officers of WMC and DBP. Although they contain the changing the term of payment and adding other obligations not
provisions and proposals that, according to petitioner, should incompatible with the old one (Inchausti & Co. v. Yulo, 34 Phil.
suffice to establish that the original contract between WMC and 978).
PISO has been materially altered, they cannot be considered per
se sufficient to give rise to a valid new obligation. WMC was in It is not proper to consider an obligation novated as in the case at
fact directed by Joseph W. Edralin, the Assistant Executive bar by the mere granting of extension of payment which did not
Officer of the DBP, to communicate with Atty. Hilario Oraolino of even alter its essence.
the Office of the Chief Legal Counsel for the preparation and
execution of the necessary legal documents to cover the approval To sustain novation necessitates that the same be so declared in
and confirmation of the several proposals made. No such unequivocal terms or that there is complete and substantial
documents, as duly signed by the parties, were ever presented in incompatibility between the two obligations (Sandico v. Paquing,
court. Annexes 5 to 7 are also incomplete documents and not 42 SCRA 322).
binding without the signatures of the supposed contracting
parties. An obligation to pay a sum of money is not novated in a new
instrument wherein the old is ratified by changing only the terms
We approve the following observations made by the Court of of payment and adding other obligations not incompatible with the
Appeals: Novation of contract cannot be presumed. In order that old one or wherein the old contract is merely supplementing the
an obligation may be extinguished by another which substitutes new one (Dungo v. Lopea, L-19377, Dec. 29, 1962, 6 SCRA
the same, it is imperative that it be so declared in unequivocal 1007; Magdalena Estates, Inc. v. Rodriguez, 18 SCRA 967; Rizal
terms, or that the old and the new obligations be on every point Commercial Banking Corp. v. Militante, AC GR CV 04077, Sept.
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20, 1985; Investors Finance Corp. v. Cruz, AC GR CV 04710, must be paid first before dividends may be distributed among the
Nov. 27, 1985). stockholders.

Unsecured creditors are given preference in bankruptcy or


insolvency proceedings because secured creditors can after all
go against the security given by the debtor.

As for the installment sale of WMCs assets to Negros Occidental


Copperfield Mines, which might make it difficult for the petitioner
to recover any amount it may have to pay on the loan of WMC,
this was a risk he took when he signed the surety agreement.

5. COMMERCIAL LAW; CORPORATIONS; LIMITED LIABILITY As it did not prohibit the alienation of the properties of the
DOCTRINE; MAY BE WAIVED WHEN THE CORPORATE principal debtor, the sale to Negros cannot be considered a
OFFICER VOLUNTARILY BINDS HIMSELF TO ANSWER FOR novation of the original agreement. In fact, the proposed sale was
CORPORATE DEBTS. Regarding the petitioners claim that he intended precisely to enable WMC to meet its pending
is liable only as a corporate officer of WMC, the surety agreement obligations.
shows that he signed the same not in representation of WMC or
as its president but in his personal capacity.
7. REMEDIAL LAW; ISSUE NOT RAISED IN THE COURT A
He is therefore personally bound. There is no law that prohibits a QUO CANNOT BE RAISED FOR THE FIRST TIME ON APPEAL.
corporate officer from binding himself personally to answer for a The argument of subrogation cannot be considered at this
corporate debt. stage as it is being invoked only now. It is settled that an issue not
raised in the court a quo cannot be raised for the first time on
While the limited liability doctrine is intended to protect the appeal because this would be offensive to the basic rules of fair
stockholder by immunizing him from personal liability for the play. (Filipino Merchants v. Court of Appeals, G.R. No. 85141,
corporate debts, he may nevertheless divest himself of this November 28, 1989; Ramos v. IAC, 175 SCRA 70)
protection by voluntarily binding himself to the payment of the
corporate debts. The petitioner cannot therefore take refuge in On April 15, 1977, the Western Minolco Corporation (WMC)
this doctrine that he has by his own acts effectively waived. obtained from the Philippine Investments Systems Organization
(PISO) two loans for P2,500,000.00 and P1,000,000.00 for which
it issued the corresponding promissory notes payable on May 30,
6. ID.; ID.; CREDITORS MUST BE PAID FIRST BEFORE 1977. On the same date, Antonio Garcia and Ernest Kahn
DISTRIBUTION OF DIVIDENDS AMONG STOCKHOLDERS; executed a surety agreement binding themselves jointly and
UNSECURED CREDITORS, GIVEN PREFERENCE IN severally for the payment of the loan of P2,500,000.00 on due
BANKRUPTCY OR INSOLVENCY PROCEEDINGS. date.
It is axiomatic, and only fair, that the creditors of a corporation
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Upon failure of WMC to pay after repeated demands, demand in case the latter should fail to do so.
was made on Garcia pursuant to the surety agreement. Garcia
also failed to pay. Hence, on April 5, 1983, Lasal Development If a person binds himself solidarily with the principal debtor, the
Corporation (to which the credit had been assigned earlier by provisions of Section 4, Chapter 3, Title I of this Book shall be
PISO) sued Garcia for recovery of the debt in the Regional Trial observed. In such case the contract is called a suretyship.
Court of Makati.
Art. 1222. A solidary debtor may, in action filed by the creditor,
On May 18, 1983, Garcia moved to dismiss on the grounds that: avail himself of all defenses which are derived from the nature of
(a) the complaint stated no cause of action; (b) the suit would the obligation and of those which are personal to him, or pertain
result in unjust enrichment of the plaintiff because he had not to his own share. With respect to those which personally belong
received any consideration from PISO; (c) the surety agreement to the others, he may avail himself thereof only as regards that
violated the doctrine of the limited liability of corporations; and (d) part of the debt for which the latter are responsible.
the principal obligation had been novated.
The point is not well taken in view of the nature and purpose of a
surety agreement.
After considering the arguments and evidence of the parties, the
trial court granted the motion and dismissed the complaint on the Suretyship is a contractual relation resulting from an agreement
ground that the surety agreement was invalid for absence of whereby one person, the surety, engages to be answerable for
consideration. the debt, default or miscarriage of another, known as the
principal. The suretys obligation is not an original and direct one
The plaintiff moved for reconsideration and when this was denied for the performance of his own act, but merely accessory or
elevated the matter to the Court of Appeals. In a decision dated collateral to the obligation contracted by the principal.
June 23, 1987, the respondent court reversed Judge Jesus M. Nevertheless, although the contract of a surety is in essence
Elbinias and remanded the records of the case for trial on the secondary only to a valid principal obligation, his liability to the
merits. Garcia then came to this Court in this petition for review creditor or promisee of the principal is said to be direct, primary
on certiorari, pleading the same arguments raised in the trial and absolute; 1 in other words, he is directly and equally bound
court. with the principal. The surety therefore becomes liable for the
debt or duty of another although he possesses no direct or
The petitioners first ground is that, as found by the trial court, the personal interest over the obligations nor does he receive any
surety agreement was invalid because no consideration had been benefit therefrom. 2
paid to him by PISO for executing the contract and that the
amount of the entire loan had been received and enjoyed by The peculiar nature of a surety agreement is that it is regarded as
WMC. He cites the following articles of the Civil Code in support valid despite the absence of any direct consideration received by
of his contention that lack of consideration was a personal the surety either from the principal obligor or from the creditor. A
defense available to him as surety: contract of surety, like any other contract, must generally be
supported by a sufficient consideration. However, the
Art. 2047. By guaranty a person, called the guarantor, binds consideration necessary to support a surety obligation need not
himself to the creditor to fulfill the obligation of the principal debtor pass directly to the surety; a consideration moving to the principal
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alone will suffice.
IV. Release of JSS
It has been held that if the delivery of the original contract is
contemporaneous with the delivery of the suretys obligation, The CREDITORS expressly agree to release and hereby release
each contract becomes completed at the same time, and the the Joint and Several Signatories (JSS) of MINOLCOs officers
consideration which supports the principal contract likewise from any liability whatsoever on the obligations which they have
supports the subsidiary one. 3 And this is the kind of surety personally guaranteed or secured. Any action therefore against all
contract to which the rule of strict construction applies as the aforesaid signatories are waived in view of the promissory
opposed to a compensated surety contract undertaken by surety notes to be issued by NDC which are fully and unconditionally
corporations which are organized for the purpose of conducting guaranteed by the Philippine Government, in payment of
an indemnity business at established rates and compensation MINOLCOs obligations to said CREDITORS.
unlike an ordinary surety agreement where the surety binds his
name through motives of friendship and accomodation. 4 x x x

It follows from the above principles that Lasal would not be VI. The CREDITORS who have filed cases in court against
unjustly enriched if the petitioner were to be held liable for the MINOLCO and who are signatories to this agreement agree to
obligation contracted by WMC. The creditor would only be dismiss the case with prejudice,
recovering the amount of its loan plus its increments. The accepting the repayment scheme set forth in paragraph II as a
petitioner, for his part, can still go against WMC for the amount he just and equitable procedure for collecting their credits.
may have to pay Lasal as assignee of the PISO credit.
Significantly, however, the agreement (Annex 5) was signed only
Regarding the petitioners claim that he is liable only as a by Don M. Ferry as chairman of the board of directors of WMC
corporate officer of WMC, the surety agreement shows that he and does not carry the signature of any of the creditors. 5 Hence,
signed the same not in representation of WMC or as its president it has no binding force whatsoever on such creditors.
but in his personal capacity. He is therefore personally bound.
There is no law that prohibits a corporate officer from binding The petitioner cites other developments or transactions between
himself personally to answer for a corporate debt. While the the parties to the original loans that he contends had the effect of
limited liability doctrine is intended to protect the stockholder by novating the said contracts and consequently extinguished the
immunizing him from personal liability for the corporate debts, he surety agreement. Among these are the extension of the original
may nevertheless divest himself of this protection by voluntarily period of payment and the compounding of the interest on the
binding himself to the payment of the corporate debts. The principal obligations, both of which operated to the prejudice of
petitioner cannot therefore take refuge in this doctrine that he has the petitioner.
by his own acts effectively waived.
The petitioner invokes Article 2079 of the Civil Code, which
Concerning the issue of novation, we note first the following provides:
provisions of the memorandum of agreement supposedly entered
into by WMC and its creditors which the petitioner argues had the Art. 2079. An extension granted to the debtor by the creditor
effect of releasing him from the surety agreement: without the consent of the guarantor extinguishes the guaranty.
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The mere failure on the part of the creditor to demand payment original contract. His agreement to pay the additional rate of
after the debt has become due does not of itself constitute any interest was an additional burden upon him and him only. That
extension of time referred to herein. obligation in no way affected the original contract of the surety,
whose liability remained unchanged. 8
However, Paragraph 5 of the surety agreement clearly stipulated
as follows: Thus, despite the compounding of the interest, the liability of the
surety remains only up to the original uncompounded interest, as
The sureties expressly waive all rights to demand payment and stipulated in the promissory note, that is, 17% per annum, with a
notice of non-payment and protest, and agree that the securities penalty charge of 2 1/2% per month until full payment.
of every kind, that now or may hereafter be left with the lender, its
successors, indorsees or assigns, as collateral, for the said loan, The petitioner cites other supposed agreements in support of his
or any evidence of debt or obligations, or upon which a lien may theory of novation such as the prepayment of the restructured
exist may be withdrawn or surrendered at any time, and the time loans of WMC before the distribution of dividends to the common
of payment thereof extended, without notice to or consent by the stockholders, the proposed sale on installments of its assets to
sureties, and the liability on this suretyship shall be solidary, direct Negros Occidental Copperfield Mines, and the preference given
and immediate and not contingent upon any pursuit by the lender, to other creditors of WMC over PISO.
its successors,
indorsees or assigns, of whatever remedies the lender may have But we do not think these are material as, to be so, the alteration
against the principal or the securities or liens it may possess. must change the legal effects of the original contract. The alleged
alterations do not have that effect.
Since in the surety contract, the petitioner not only consented to
an extension in the payment of the obligation but even waived his It is axiomatic, and only fair, that the creditors of a corporation
right to be notified of such extension, he cannot now claim that he must be paid first before dividends may be distributed among the
has been released from his undertaking because of the extension stockholders.
granted to the principal.
Unsecured creditors are given preference in bankruptcy or
As for the compounded interest, we apply by analogy the case of insolvency proceedings because secured creditors can after all
Bank of the Philippine Islands v. Gooch and Redfern, 6 which was go against the security given by the debtor.
affirmed in the later case of the Bank of the Philippine Islands v.
Albaladejo & Cia. 7 In the said cases, the respective sureties As for the installment sale of WMCs assets to Negros Occidental
claimed that since the creditor changed the rate of interest in the Copperfield Mines, which might make it difficult for the petitioner
principal obligation without their knowledge or consent, they were to recover any amount it may have to pay on the loan of WMC,
relieved from liability under their contract. It was held, however, this was a risk he took when he signed the surety agreement.
that the change in the rate of interest was merely a collateral
agreement between the creditor bank and the principal debtor As it did not prohibit the alienation of the properties of the
that did not affect the surety. When the debtor promised to pay principal debtor, the sale to Negros cannot be considered a
the extra rate of interest on demand of the plaintiff, the liability he novation of the original agreement. In fact, the proposed sale was
assumed was his alone and was separate and apart from the intended precisely to enable WMC to meet its pending
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obligations. appeal because this would be offensive to the basic rules of fair
play. 11
The most important argument against the alleged novation is the
failure of the petitioner to establish the validity of the new As for the alleged substitution of debtors, nowhere in the record
contract, an essential requisite for the novation of a previous valid can we find evidence of this claim.
obligation. Petitioner insists that the various communications
made by WMC with DBP, together with the memorandum of The commitment made by DBP to the creditors of WMC was that,
agreement (Annexes 1 to 7), are sufficient to establish the new although they had a first mortgage lien over substantially all the
undertaking made by WMC with all its creditors, including DBP. assets of WMC (which if foreclosed would leave most of its
We do not think so. creditors without recourse), they would nevertheless defer
proceedings against those assets and instead allow their sale to
It is true as a general rule no form of words or writing is NDC (with better terms) to enable WMC to meet the obligations.
necessary to give effect to a novation. 9 Nevertheless, since the 12 In effect, what DBP did was merely to restructure its credit with
parties involved here are corporations, it must first be proved that WMC and make additional accommodations in the form of
the contracts, assuming they were made, were executed by the investments on preferred and common shares of stock of WMC. It
persons possessing the proper authority to bind their respective was clearly an effort to assist WMC perform its obligations with its
principals. Annexes 1-4 are a mere exchange of correspondence creditors. But not more than that.
between the officers of WMC and DBP.

Although they contain the provisions and proposals that,


according to petitioner, should suffice to establish that the original Concerning the promissory notes supposedly issued by NDC to
contract between WMC and PISO has been materially altered, the creditors of WMC and with the full and unconditional guaranty
they cannot be considered per se sufficient to give rise to a valid of the Philippine Government as contained in Annex 5, suffice it to
new obligation. WMC was in fact directed by Joseph W. Edralin, repeat that such Annex 5 (memorandum of agreement between
the Assistant Executive Officer of the DBP, to communicate with WMC and DBP), as well as Annex 6 (addendum to Annex 5,
Atty. Hilario Oraolino of the Office of the Chief Legal Counsel for making NOCOMIN, instead of NDC as the buyer) and Annex 7
the preparation and execution of the necessary legal documents (contract of sale between WMC and NOCOMIN), are all not
to cover the approval and confirmation of the several proposals signed by the contracting parties and therefore have no
made. evidentiary weight or binding force.

No such documents, as duly signed by the parties, were ever We approve the following observations made by the Court of
presented in court. Annexes 5 to 7 10 are also incomplete Appeals:
documents and not binding without the signatures of the
supposed contracting parties. Novation of contract cannot be presumed. In order that an
obligation may be extinguished by another which substitutes the
The argument of subrogation cannot be considered at this stage same, it is imperative that it be so declared in unequivocal terms,
as it is being invoked only now. It is settled that an issue not or that the old and the new obligations be on every point
raised in the court a quo cannot be raised for the first time on incompatible with each other (Art. 1292, Civil Code). In every
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novation there are four essential requisites. (1) a previous valid BUMANGLAG, respondents.
obligation; (2) the agreement of all the parties to the new contract;
(3) the extinguishment of the old contract; and (4) validity of the GRIO-AQUINO, J.:
new one. Novation requires the creation of new contractual The petitioner seeks to annul the Order dated August 3, 1989 of
relations as well as the extinguishment of the old. There must be the Honorable Secretary of Labor and Employment, denying its
a consent of all the parties to the substitution, resulting in the appeal from the Order dated May 31, 1989 of the POEA
extinction of the old obligation and the creation of a valid new one Administrator in POEA (L) RRB Case No. 88-03-474 entitled,
(Tiu Siuco v. Habana, 45 Phil. 707). The acceptance of the "Romeo Galiza and Milagros Bumanglag vs. Pan Pacific
promissory note by the plaintiff is not novation of the contract. Overseas Recruitment/Finman General Assurance Corporation"
The legal doctrine is that an obligation to pay a sum of money is directing the respondents to pay jointly and severally the
not novated in a new instrument by changing the term of payment complainants' claims, reiterating the ban earlier imposed on Pan
and adding other obligations not incompatible with the old one Pacific Overseas Recruitment, and imposing a penalty fine of
(Inchausti & Co. v. Yulo, 34 Phil. 978). It is not proper to consider P40,000 on it.
an obligation novated as in the case at bar by the mere granting
of extension of payment which did not even alter its essence. To The record shows that on July 23, 1987, Romeo Galiza and
sustain novation necessitates that the same be so declared in Milagros Bumanglag applied with Pan Pacific Overseas
unequivocal terms or that there is complete and substantial Recruitment, a placement agency with office registered at Feros
incompatibility between the two obligations (Sandico v. Paquing, Building, 176 Salcedo Street, Makati, Metro Manila, for jobs as
42 SCRA 322). An obligation to pay a sum of money is not airport porter and domestic helper respectively.
novated in a new instrument wherein the old is ratified by Galiza was required by the agency's General Manager, Engr.
changing only the terms of payment and adding other obligations Celia Aranda, to pay a placement fee of P6,000 which he paid on
not incompatible with the old one or wherein the old contract is July 23, 1987 to the Recruitment Director of the agency, Normita
merely supplementing the new one (Dungo v. Lopea, L-19377, Egil, evidenced by a receipt issued in his favor.
Dec. 29, 1962, 6 SCRA 1007; Magdalena Estates, Inc. v.
Rodriguez, 18 SCRA 967; Rizal Commercial Banking Corp. v. Milagros Bumanglag was required to pay P3,000 as "processing
Militante, AC GR CV 04077, Sept. 20, 1985; Investors Finance fee" for which no receipt was issued to her by the agency.
Corp. v. Cruz, AC GR CV 04710, Nov. 27,
1985).chanrobles.com : virtual law library After several months, Bumanglag followed up her application with
the agency. Since the latter failed to deploy her, she withdrew her
WHEREFORE, the petition is DENIED and the challenged travel documents on January 23, 1988 and demanded a refund of
decision of the respondent court AFFIRMED, with costs against her P3,000 placement fee. Instead of returning her money, the
the petitioner. agency advised her to return on March 12, 1988 for the refund of
P2,400 only, explaining that deductions had been made from her
SO ORDERED. initial deposit of P3,000 to cover expenses for her pictures. The
agency issued in her favor a note scheduling such refund.
G.R. No. 94588 July 2, 1992 FINMAN GENERAL
ASSURANCE CORPORATION, petitioner, vs. When it appeared that the recruitment agency merely furnished
NLRC (POEA), ROMEO GALIZA and MILAGROS false information relating to their recruitment and placement for
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jobs overseas, Galiza and Bumanglag filed individual complaints agency's note scheduling the refund of Bumanglag's P2,400
against Pan Pacific before the Philippine Overseas Employment placement fees, while not strictly a receipt, was sufficient proof
Administration (POEA) [(L) RRB Case No. 88-03-474)] for that she had indeed paid that amount to the agency, particularly
violation of Articles 32 and 34(a) of the Labor Code, as amended, since it had been established in several other cases in the POEA
which provide: against the respondent agency that it issued such "notes" to
applicants claiming refund of fees paid to the agency.
ART. 32. Fees to be paid by workers. Any person applying with
a private fee-charging employment agency for employment On the other hand. a receipt for P6,000 and a similar note
assistance shall not be charged any fee until he has obtained scheduling the refund for the same amount issued by the agency
employment through its efforts or has actually commenced to Galiza substantially established his payment of P6,000 which
employment. Such fee shall be always covered with the approved was in excess of the allowable recruitment fee of P5,000 from
receipt clearly showing the amount paid. The Secretary of Labor each hired worker. That the agency furnished false information
shall promulgate a schedule of allowable fees. relating to recruitment and placement to the complainants when it
promised available employment for them, was established
ART. 34. Prohibited practices. beyond cavil. The respondents were ordered to pay jointly and
(a) To charge or accept, directly or indirectly, any amount greater severally the sum of P6,000 to Galiza and P2.400 to Bumanglag.
than that specified in the schedule of allowable fees prescribed by Pan Pacific was ordered to pay a fine of P40,000 and the ban
the Secretary of Labor, or to make a worker pay any amount earlier imposed upon it was reiterated.
greater than actually received by him as a loan or advance.
Motu proprio, POEA impleaded as party-respondent, Pan
Pacific's surety. FINMAN GENERAL ASSURANCE FINMAN appealed the POEA Order of May 31, 1989 to the
CORPORATION (FINMAN for brevity), which had bound itself to Department of Labor and Employment. On August 3, 1989, DOLE
be jointly and severally liable for claims that may arise should the Secretary Franklin Drilon dismissed the appeal for lack of merit. A
recruitment agency violate the conditions of its license. Summons writ of execution was issued by the POEA.
were sent to the respondents at their respective official
addresses. However, the summons for Pan Pacific was returned FINMAN filed this petition for certiorari with preliminary mandatory
unserved with a notation "Company moved out." injunction and/or restraining order to stop the implementation of
the Orders of the POEA Administrator and the Secretary of Labor.
FINMAN filed an Answer denying liability for the claims, and FINMAN alleges that the POEA acted with grave abuse of
alleging POEA's lack of jurisdiction to enforce the surety's discretion amounting to lack of jurisdiction:
undertaking. During the hearing that followed. FINMAN further
alleged that the note which the agency issued to Bumanglag 1. in motu proprio impleading FINHAN as a co-respondent with
indicating her refund schedule, was not a receipt because it did Pan Pacific in POEA (L) RRB Case No. 88-03-474; and
not acknowledge payment of any fee.
2. in directing FINMAN to pay jointly and severally with Pan
On May 31, 1989, POEA Administrator Tomas Achacoso issued Pacific the claims of Galiza and Bumanglag on the basis of the
an Order finding Pan Pacific liable for violation of Articles 32 and suretyship agreement executed by FINMAN, Pan Pacific and the
34(a) of the Labor Code, as amended. He observed that the POEA.
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its principal, Pan Pacific.
Petitioner alleges that the POEA has no authority under its own
Rules and Regulations to implead the surety of any recruitment or FINMAN is bound by a judgment against its principal eventhough
placement agency in actions and/or complaints for suspension, it was not a party to the proceedings, for a surety is considered in
cancellation or revocation of license or authority of the latter; that law as being the same party as the debtor in relation to whatever
on the contrary, the authority of the POEA is limited to a is adjudged touching the obligation of the latter, and their liabilities
determination of whether there is sufficient cause for an action are interwoven as to be inseparable (PNB vs. Hon. Pineda.197
upon the agency's license; that POEA's jurisdiction to hear and SCRA 1, citing Lirag Textile Mills. Inc. vs. SSS, 153 SCRA 338
decide money claims is confined to employer-employee relations and Gov't. of the Phil. vs. Tizon, 20 SCRA 1187 Finman General
arising out of, or by virtue of, any law or contract, and not money Assurance Corporation vs. Salik, 188 SCRA 740).
claims arising from pre-employment or during recruitment
conducted by the respondent agency; and finally, that if ever the WHEREFORE, the petition is DISMISSED for lack of merit. Costs
surety bond may be held liable for infractions or violations of the against the petitioner.
Labor Code and POEA rules and regulations, it shall be SO ORDERED
answerable only for the sanctions, penalties or fines imposed
upon the agency but definitely not for money claims of applicants
not arising from employment contracts.
Tod

G.R. No. L-22108 August 30, 1967


The petition for certiorari is without merit. The POEA GOVERNMENT OF THE REPUBLIC OF THE
Administrator did not exceed his jurisdiction nor act with grave PHILIPPINES, represented by the BUREAU OF
abuse of discretion in impleading FINMAN as a co-respondent in SUPPLY COORDINATION plaintiff-appellee, vs.
(L) RRB Case No. 88-03-474 and directing it to pay jointly and MARCELINO TIZON, ET AL., defendants. CAPITAL
severally with Pan Pacific the claims of the private respondents, INSURANCE and SURETY CO., INC., defendant-
Galiza and Bumanglag, on the basis of the surety bond it issued appellant.
for Pan Pacific. Said surety bond guarantees the faithful
compliance by Pan Pacific of all laws relating to the use of its ANGELES, J.:
license and its recruitment activities. Appeal from an order of the CFI Manila, dated September 11,
1963, expunging from the record of the case the answer of the
The bond is conditioned upon the true and faithful performance Capital Insurance & Surety, Co., Inc. and remanding said record
and observance by Pan Pacific of its duties and obligations as a to the City Court of Manila for execution against the Surety of the
licensed placement agency (Art. 31, Title I, Book One, Labor decision rendered by the latter court.
Code of the Phils.).
It appears that in a bidding conducted by the Bureau of Supply
Accordingly, the nature of FINMAN's obligation under the Coordination of the Department of General Services, for the
suretyship agreement makes it privy to the proceedings against supply of "one (1) Baylift portable heavy-duty truck and auto lift,
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fully air operated, 500 lbs. capacity, and two (2) Baylift Ramps, the present case."
U.S. manufacture", Tizon engineering, of which Marcelino Tizon
was the sole owner and proprietor, won the bid, having offered The defendant Surety, in answer to the complaint, admitted
the lowest bid of P4,000.00. To guarantee faithful performance of having executed a bond in favor of the Republic of the Philippines
the conditions of the bid, the Bureau of Supply Coordination for the purpose as therein stated, but denied "that it failed and
required Tizon Engineering to give a bond in the sum of refused to pay the demand (of the plaintiff), the truth of the matter
P10,000.00. being that its co-defendant, Marcelino Tizon, doing business
under the name of Tizon Engineering, has put it on notice not to
On September 12, 1958, the Surety issued its bond for the said settle the claim because he is not in any way whatsoever liable to
amount in favor of the Republic of the Philippines. Tizon plaintiff." As cross-claim against defendant Tizon, the Surety
Engineering failed to comply with the conditions of the bid, failing asserted that if it is made liable to the plaintiff on its bond,
as he did to deliver the equipment called for in the Buyer's order Marcelino Tizon should be ordered to make the corresponding
No. 42546 of the Bureau of Supply, constraining the latter to reimbursement, with interest of 12%, plus attorney's fees.
purchase the equipment from Fema Trading, the second lowest
bidder, resulting in a loss of P2,975.00 to the Government. After trial, judgment was rendered in favor of the plaintiff and
Notwithstanding demands made by the Bureau of Supply on against the defendants, ordering the latter to pay, jointly and
defendants Marcelino Tizon and the Surety to pay said amount, severally, the sum of P2,972.00 with legal interests from
they failed and refused. November 12, 1960, and the costs of suit. On the cross-claim of
the Surety, defendant Tizon was ordered to reimburse the cross-
plaintiff of whatever amount the latter might have paid to the
plaintiff, plus P100.00 as attorney's fees.
Hence, complaint was filed in the City Court of Manila by the
Republic of the Philippines to recover the said sum with legal Only defendant Tizon appealed from the decision to the Court of
interests, plus attorney's fees and costs. First Instance of Manila.

Defendant Tizon averred in his answer that: (a) "the alleged Within fifteen days from receipt of notice from the clerk of the
bidding conducted by the Bureau of Supply is in utter disregard Court of First Instance of Manila, that the case has been received
and wanton violation of the Rules and Regulations of the said and docketed in said court, the defendants, Tizon and the Surety,
office"; (b) "that assuming that a corresponding buyer's order was each filed separate manifestations that they were reproducing
prepared, the same was not delivered to and duly received by their respective answers filed in the City Court.
him, such that there has never been a binding contract between
plaintiff and the answering defendant; furthermore, the plaintiff On August 29, 1963, the plaintiff filed a motion praying "(a) To
deliberately failed to notify the answering defendant as to the strike out the answer filed by the Surety reproducing its answer
acceptance of his bid, thus again violating the Rules and filed in the City Court; (b) To remand the case to the City Court,
Regulations mentioned above"; (c) that the bond-issued by the as concerns the Surety, for execution of the judgment rendered in
Surety "answers only (for) those contracts legally entered into by said court."
the herein defendants with the Bureau of Supply and certainly not
those contracts and/or bids which are of doubtful legality, as in The Surety opposed the motion on two grounds: (a) that although
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it did not appeal from the decision of the inferior court, the appeal liability depended upon the liability of the principal. That example
interposed by its co-defendant inured to its benefit, because the gives us a clear case, showing that the effect of the appeal of the
obligation sued on "is so dependent on that of the principal one of the judgment debtors would necessarily have the effect of
debtor, that the Surety is considered in law as being the same releasing his co-judgment debtors.
party in relation to whatever is adjudged, touching the obligation
of its co-defendant"; and (b) the appeal of its co-defendant, the xxx xxx xxx
principal debtor, "should be considered in law as to include the As we have already said, whether an appeal by one of several
defendant Surety, in view of the latter's cross-claim against the judgment debtors will affect the liability of those who did not
former." The opposition was over-ruled in the order appealed appeal must depend upon the facts in each particular case. If the
from. judgment can only be sustained upon the liability of the one who
appeals and the liability of the other co-judgment debtors
The issue at this instance is whether an appeal by one of the depends solely upon the question whether or not the appellant is
parties sentenced to pay solidarily a sum of money, inures to the liable, and the judgment is revoked as to that appellant, then the
benefit of the other who did not appeal. The pronouncements in result of his appeal will inure to the benefit of all. . . .
the case of Municipality of Orion vs. Concha, 50 Phil. 682,
provide ample guideposts in the resolution of the issue at bar. In The rule is quite general that a reversal as to parties appealing
said case this Court held: does not necessitate a reversal as to parties not appealing, but
that the judgment may be affirmed or left undisturbed as to them.
The judgment was joint and several, which means that they are An exception to the rule exists, however, where a judgment
severally liable. We have made a careful examination of cannot be reversed as to the party appealing without affecting the
numerous authorities and believe that we are correct in saying rights of his co-debtor. (4 C.J. 1184)
that the effect of the appeal by one judgment debtor upon the co-
debtors depends upon the particular facts and conditions in each
case.
The difference in the apparently conflicting opinions may be well A reversal of a judgment on appeal is binding on the parties to the
illustrated in this very case. suit, but does not inure to the benefit of parties against whom
judgment was rendered in the lower court who did not join in the
Suppose, for example, that F. B. Concha, the contractor, had appeal, unless their rights and liabilities and those of the parties
appealed from the judgment of the lower court upon the ground appealing are so interwoven and dependent as to be inseparable,
that he had either completed his contract within time or that the in which case a reversal as to one operates as a reversal as to
municipality had suffered no damages whatever, and the all. (4 C.J., 1206; Alling vs. Wenzel, 133 Ill., 264-278.)
Supreme Court had reversed the judgment of the lower court on
his appeal. Certainly that judgment would have the effect of In the case of Brashear vs. Carlin, Curator (19 La. 395) a
relieving the bondsmen from any liability whatever, for the reason judgment was rendered in the lower court against the principal
that their liability was consequent upon the liability of the debtor and his surety to pay damages. The principal debtor alone
contractor; and the court having declared that no liability for appealed and the judgment was reversed. When the question of
damages had resulted from the execution of said contract, then the liability of the surety under the judgment of the lower court
certainly the bondsmen would have been relieved because their was raised, the court said:
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appeal of the principal debtor, if successful, may inure to the
"It is obvious, that the judgment of the inferior court could not be benefit of the surety. Held this Court in that case:
reversed as to the principal debtor in this case, and continue in
force against the surety. The latter could not remain bound, after Although the appeal taken from said decision by the importer
the former had been released; although the surety had not joined (principal debtor) might have, perhaps, inured to the benefit of the
in the appeal, the judgment rendered in this court inured to his surety, if, the result of that appeal had been favorable to said
benefit. The obligation of a surety is so dependent on that of the importer, the fact is he had failed in his appeal.
principal debtor, that he is considered in law as being the same
party as the debtor in relation to whatever is adjudged, touching Solution of the question posed in this appeal hinges on the nature
the obligation of the latter; provided it be not on grounds personal of the obligation assumed by the Surety under its bond. As Article
to such principal debtor; it is for this reason, that a judgment in 1222 of the new Civil Code provides:
favor of the principal debtor can be invoked as res judicata by the
surety." A solidary debtor may, in actions filed by the creditor, avail himself
of all defenses which are derived from the nature of the obligation
In the case of Schoenberger vs. White (75 Con. 605) a joint and of those which are personal to him, or pertain to his own
judgment was rendered against husband and wife for a sum of share. With respect to those which personally belong to the
money in an action ex contractu. The wife appealed. As to the others, he may avail himself thereof only as regards that part of
effect of the appeal of the wife upon the liability of both, the court the debt for which the latter are responsible.
said:
Pertinent parts of the surety bond provides:
"Such a judgment is an entirety, and upon appeal to this court That we, Tizon Engineering, as principal, and the Capital
must be affirmed or set aside in toto." Insurance & Surety Co., Inc., as surety, . . . are held and firmly
bound unto the Republic of the Philippines, in the penal sum of
P10,000.00, for the payment of which sum, well and truly to be
"That the husband was not so made a party does not vary this made,
rule. After the filing of the notice of appeal, he had the right to be we bind ourselves, Jointly and Severally, by these presents.
heard in this court as to all the questions brought up for review. Whereas, the principal agrees to comply with all the terms and
As he has not exercised this right, it may be assumed that he is conditions of the proposal with the Bureau of Supply;
content with the judgment against him as it stands; but he might
complain of it, were we to modify it by reducing the amount which NOW THEREFORE, the conditions of this obligations are such
it requires his wife to pay, and thus reducing the amount of the that if the above bounden principal shall, in case he becomes the
contribution which he might be able to call upon her to make, in successful bidder in any of the proposal of the Bureau of Supply
case he paid all that it requires of him." (a) accept a contract with the Republic of the Philippines,
represented by the Bureau of Supply; (b) faithfully and truly
In the case of Philippines International Surety Co., Inc. vs. performs in good faith the contract; (c) to pay to the Republic of
Commissioner of Customs, L-22790, December 17, 1966, this the Philippines, in case of delay and/or default in the execution of
Court, speaking through Chief Justice Concepcion, sanctioned the contract, any loss or damages which the latter may suffer by
the view, albeit impliedly, that under a given set of facts, the reason thereof, not to exceed the sum of P10,000.00, Philippine
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currency, then this obligation shall be void, otherwise it shall liability of the principal debtor. The principal debtor might succeed
remain in full force and effect. in his appeal; in such eventuality, the judgment of the inferior
court could not continue in force against the Surety.
It thus appears that the Surety bound itself, jointly and severally, Consequently, it is premature at this juncture to execute said
with the principal obligor to pay the Republic of the Philippines judgment against the Surety.
any loss or damage the latter may suffer, not exceeding
P10,000.00, "in case of delay and/or default in the execution of The situation of the Surety may be likened to that of a defaulting
the contract." defendant whose right is protected under Section 4, Rule 18 of
However, although the defendants bound themselves in solidum, the Rules of Court as follows:
the liability of the Surety under its bond would arise only if its co-
defendant, the principal obligor, should fail to comply with the Judgment When Some Defendants Answer and Others make
contract. To paraphrase the ruling in the case of Municipality of Default.When a complaint states a common cause of action
Orion vs. Concha, the liability of the Surety is "consequent upon against several defendants, some of whom answer, and the
the liability" of Tizon, or "so dependent on that of the principal others fail to do so, the court shall try the case against all upon
debtor" that the Surety "is considered in law as being the same the answer thus filed and render judgment upon the evidence
party as the debtor in relation to whatever is adjudged, touching presented. The same procedure applies when a common cause
the obligation of the latter"; or the liabilities of the two defendants of action is pleaded in a counterclaim, cross-claim and third-party
herein "are so interwoven and dependent as to be inseparable." claim.
Changing the expression, if the defendants are held liable, their
liability to pay the plaintiff would be solidary, but the nature of the Albeit it may not personally be allowed to file an answer in the
Surety's undertaking is such that it does not incur liability unless Court of First Instance, having failed to interpose an appeal, the
and until the principal debtor is held liable. Surety can rely on the answer of its co-defendant and derive
benefit therefrom if the judgment on appeal should turn out to be
favorable to the answering defendant (Castro vs. Pea, 80 Phil.
488, 502).

True, it is that the Surety did not appeal the decision of the The decision in Ishar Singh vs. Liberty Insurance Corp. and
inferior court to the Court of First Instance, and on account of its Leonardo Anne, et al., (third-party defendants in the third-party
failure to appeal, it lost its personality to appear in the latter court complaint of Liberty Insurance Corp.), L-16860, July 31, 1963,
or to file an answer therein. relied upon by the appellee, is not applicable to the facts of the
case at bar. In said case, Liberty Insurance Corp. was the only
However this may be, it is not certain at this stage of the defendant and the decision was against said defendant alone.
proceeding that the Surety's liability unto plaintiff has attached. The third party defendants were impleaded as such upon the third
The principal debtor has asserted on appeal that it has no liability party complaint filed against them by the Liberty Insurance Corp.
whatsoever to the plaintiff, and, if this assertion be proven and And as stated in the decision in said case, "the record does not
sustained, the reversal of the judgment of the inferior court would disclose whether the third-party defendants filed an answer to the
operate as a reversal on the Surety, even though it did not third-party complaint or not." Moreover, the liability of the third-
appeal, in view of the dependency of its obligation upon the party defendants to the third-party plaintiff stemmed from the
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indemnity agreement executed by them in favor of the Liberty choice is left to the solidary creditor to determine against whom
Insurance Corp., and the third-party defendants did not have he will enforce collection.
privity of contract with the creditor Ishar Singh.
Facts: Baldomero Inciong, Jr. (D) cosigned a P50,000-
Upon the foregoing considerations, that portion of the appealed promissory note with Rene Naybe and Gregorio Pantanosas
order remanding the record of the case to the City Court of Manila holding themselves jointly and severally liable to creditor
for execution of the decision of said court is hereby set aside, Philippine Bank of Communications (P)PBCOM, Cagayan de
without costs. Oro City branch.

INCIONG V. CA The due date expired without the promissors paying their
257 SCRA 578 obligation. Consequently, creditor PBCOM (P) demanded
payment from the obligors who did not respond. So, creditor
FACTS: PBCOM (P) filed for collection of the sum of P50,000.00 against
A promissory note was issued by petitioner together with 2 the three obligors.
others jointly and severally, to make them liable to PBC.
Thereafter was a default on the payment of the note. PBC The complaint was dismissed for failure of the plaintiff to
proceeded against Inciong and in the action filed by the bank, the prosecute the case, but the lower court reconsidered and the
court decided in its favor. summonses were eventually served. As prayed for by PBCOM (P),
the lower court dismissed the case against defendant Pantanosas.
HELD: With co-defendant Naybe in Saudi Arabia, only the summons to
Where the promissory note expressly states that the three co-maker Inciong (D) was duly served.
signatures therein are jointly and severally liable, any one or
some or all of them may be proceeded against for the entire Inciong (D) contended that he only agreed to limit his liability to
P5,000 and that his consent was vitiated by fraud. On appeal, he
obligationthe choice is left to the solidary creditor to
annexed to his petition an affidavit supporting his claim of fraud.
determine against whom he will enforce collection.
Issues: Can the creditor file a claim for the entire obligation
against a co-maker to a loan?
Version 2
Ruling: Yes. Because the promissory note involved in this case
Co-maker (D) vs. Creditor (P)
expressly states that the three signatories therein are jointly and
severally liable, any one, some or all of them may be proceeded
Summary: A co-maker to a loan is facing collection demands
against for the entire obligation. The choice is left to the solidary
from a creditor bank. One of his co-defendant is outside the
creditor to determine against whom he will enforce collection.
Philippine jurisdiction while the creditor chose to dismiss their
claim against the other.
Consequently, the dismissal of the case against co-defendant
Pantanosas may not be deemed as having discharged petitioner
Rule of Law: In solidary obligations, any one, some or all of the
from liability. As regards co-defendant Naybe, suffice it to say
debtors may be proceeded against for the entire obligation. The
that the court never acquired jurisdiction over him. Therefore,
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PBCOM (P) only have recourse against his co-makers, as provided when the law or the nature of the obligation requires
by law. solidarity.

Inciong (D) signed the promissory note as a solidary co-maker Salvador P. Escao and Mario M. Silos vs. Rafael
and not as a guarantor. Ortigas, Jr.
G. R. No. 151953, June 29, 2007
A solidary or joint and several obligation is one in which each
debtor is liable for the entire obligation, and each creditor is Facts:
entitled to demand the whole obligation. On April 28, 1980, Private Development Corporation of
Tolention, Civil Code of the Philippines, Vol. IV, 1991, p. 217. the Philippines (PDCP) entered into a loan agreement
with Falcon Minerals, Inc. (Falcon) amounting to
On the other hand, Article 2047 of the Civil Code states: $320,000.00 subject to terms and conditions
By guaranty a person, called the guarantor, binds himself to the
creditor to fulfill the obligation of the principal debtor in case the On the same day, three (3) stockholder-officers of Falcon:
latter should fail to do so. Ortigas Jr., George A. Scholey, and George T. Scholey
executed an Assumption of Solidary Liability to assume
If a person binds himself solidarily with the principal debtor, the in their individual capacity, solidary liability with Falcon
provisions of Section 4, Chapter 3, Title I of this Book shall be for due and punctual payment of the loan contracted by
observed. In such a case the contract is called a suretyship.
Falcon with PDCP. Two (2) separate guaranties were
executed to guarantee payment of the same loan by
other stockholders and officers of Falcon, acting in their
Section 4, Chapter 3, Title I, Book IV of the Civil Code states the
personal and individual capacities.
law on joint and several obligations.
When there are two or more debtors in one and the same
obligation, the presumption is that the obligation is joint so that One guaranty was executed by Escao, Silos, Silverio,
each of the debtors is liable only for a proportionate part of the Inductivo and Rodriguez. Two years later, an agreement
debt. There is a solidary liability only when the obligation was developed to cede control of Falcon to Escao, Silos
expressly so states, when the law so provides or when the nature and Matti. Contracts were executed whereby Ortigas,
of the obligation so requires. George A. Scholey, Inductivo and the heirs of then
Article 1207 of the New Civil Code already deceased George T. Scholey assigned their
shares of stock in Falcon to Escao, Silos and Matti.
Art. 1207, Civil Code of the Philippines
The concurrence of two or more creditors or of two or An Undertaking dated June 11, 1982 was executed by the
more debtors in one and the same obligation does not concerned parties, namely: with Escao, Silos and Matti
imply that each one of the former has a right to demand, as sureties and Ortigas, Inductivo and Scholeys as
or that each one of the latter is bound to render, entire obligors.
compliance with the prestation. There is a solidary Falcon eventually availed of the sum of $178,655.59 from
liability only when the obligation expressly so states, or the credit line extended by PDCP. It would also execute a
Deed of Chattel Mortgage over its personal properties to
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further secure the loan. However, Falcon subsequently
defaulted in its payments. After PDCP foreclosed on the However, a significant distinction still lies between a joint
chattel mortgage, there remained a subsisting deficiency and several debtor, on one hand, and a surety on the
of Php 5,031,004.07 which falcon did not satisfy despite other. Solidarity signifies that the creditor can compel any
demands. one of the joint and several debtors or the surety alone to
answer for the entirety of the principal debt. The
Issue: difference lies in the respective faculties of the joint and
Whether the obligation to repay is solidary, as contended several debtor and the surety to seek reimbursement for
by respondent and the lower courts, or merely joint as the sums they paid out to the creditor. In the case of joint
argued by petitioners. and several debtors, Article1217 makes plain that the
solidary debtor who effected the payment to the creditor
Ruling: may claim from his co-debtors only the share which
The obligation to repay is only jointly as declared by the corresponds to each, with the interest for the payment
Court. In case there is a concurrence of two or more already made. Such solidary debtor will not be able to
creditors or of two or more debtors in one and the same recover from the co-debtors the full amount already paid
obligation, Article 1207 of the Civil Code states that to the creditor, because the right to recovery extends
among them, there is a solidary liability only when the only to the proportional share of the other co-debtors,
obligation expressly so states, or when the law or the and not as to the particular proportional share of the
nature of the obligation requires solidarity. Article 1210 solidary debtor who already paid. In contrast, even as the
supplies further caution against the broad interpretation surety is solidarily bound with the principal debtor to the
of solidarity by providing: The indivisibility of an creditor, the surety who does pay the creditor has the
obligation does not necessarily give rise to solidarity. Nor right to recover the full amount paid, and not just any
does solidarity of itself imply indivisibility. These Civil proportional share, from the principal debtor or debtors.
Code provisions establish that in case of concurrence of Such right to full reimbursement falls within the other
two or more creditors or of two or more debtors in one rights, actions and benefits which pertain to the surety by
and the same obligation, and in the absence of express reason of the subsidiary obligation assumed by the
and indubitable terms characterizing the obligation as surety.
solidary, the presumption is that the obligation is only
joint. It thus becomes incumbent upon the party alleging Decision:
that the obligation is indeed solidary in character to Petitioners and Matti are jointly liable to Ortigas, Jr. in the
prove such fact with a preponderance of evidence. Note amount of P1.3M; Legal interest of 12% per annum on P
that Article 2047 itself specifically calls for the application 1.3M computed from March 14, 1994. Assailed rulings are
of the provisions on joint and solidary obligations to affirmed. Costs against petitioners.
surety ship contracts. Article 1217 of the Civil Code thus
comes into play, recognizing the right of reimbursement G.R. No. 89775 November 26, 1992
from a co-debtor (the principal debtor, in case of JACINTO UY DIO and NORBERTO UY, petitioners, vs.
suretyship) in favor of the one who paid (i.e. the surety). HON. COURT OF APPEALS and METROPOLITAN BANK AND
TRUST COMPANY, respondents.
20
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1979, in the sum of P815, 600.00, covered UTEFS' purchase of
Continuing Suretyship Agreements signed by the petitioners set "8,000 Bags Planters Urea and 4,000 Bags Planters 21-0-0." It
off this present controversy. was applied for and obtain by UTEFS without the participation of
Petitioners assail the 22 June 1989 Decision of the Court in CA- Norberto Uy and Jacinto Uy Dio as they did not sign the
G.R. CV No. 17724 1 which reversed the 2 December 1987 document denominated as "Commercial Letter of Credit and
Decision of Branch 45 of the Regional Trial Court (RTC) of Manila Application." Also, they were not asked to execute any suretyship
in a collection suit entitled "Metropolitan Bank and Trust to guarantee its payment. Neither did METROBANK nor UTEFS
Company vs. Uy Tiam, doing business under the name of "UY inform them that the 1979 Letter of Credit has been opened and
TIAM ENTERPRISES & FREIGHT SERVICES," Jacinto Uy Dio the Continuing Suretyships separately executed in February,
and Norberto Uy" and docketed as Civil Case No. 82-9303. They 1977 shall guarantee its payment (Appellees brief, pp. 2-3; rollo,
likewise challenge public respondent's Resolution of 21 August p. 28).
1989 2 denying their motion for the reconsideration of the former. The 1979 letter of credit (Exhibit "B") was negotiated.
The impugned Decision of the Court summarizes the antecedent METROBANK paid Planters Products the amount of P815,600.00
facts as follows: which payment was covered by a Bill of Exchange (Exhibit "C"),
dated 4 June 1979, in favor of (Original Records, p. 331).
It appears that in 1977, Uy Tiam Enterprises and Freight Services
(hereinafter referred to as UTEFS), thru its representative Uy Pursuant to the above commercial transaction, UTEFS executed
Tiam, applied for and obtained credit accommodations (letter of and delivered to METROBANK and Trust Receipt (Exh. "D"),
credit and trust receipt accommodations) from the Metropolitan dated 4 June 1979, whereby the former acknowledged receipt in
Bank and Trust Company (hereinafter referred to as trust from the latter of the aforementioned goods from Planters
METROBANK) in the sum of P700,000.00 (Original Records, p. Products which amounted to P815, 600.00. Being the entrusted,
333). To secure the aforementioned credit accommodations the former agreed to deliver to METROBANK the entrusted goods
Norberto Uy and Jacinto Uy Dio executed separate Continuing in the event of non-sale or, if sold, the proceeds of the sale
Suretyships (Exhibits "E" and "F" respectively), dated 25 thereof, on or before September 2, 1979.
February 1977, in favor of the latter. Under the aforesaid
agreements, Norberto Uy agreed to pay METROBANK any However, UTEFS did not acquiesce to the obligatory stipulations
indebtedness of UTEFS up to the aggregate sum of P300,000.00 in the trust receipt. As a consequence, METROBANK sent letters
while Jacinto Uy Dio agreed to be bound up to the aggregate to the said principal obligor and its sureties, Norberto Uy and
sum of P800,000.00. Jacinto Uy Dio, demanding payment of the amount due.
Informed of the amount due, UTEFS made partial payments to
Having paid the obligation under the above letter of credit in the Bank which were accepted by the latter.
1977, UTEFS, through Uy Tiam, obtained another credit
accommodation from METROBANK in 1978, which credit Answering one of the demand letters, Dio, thru counsel, denied
accommodation was fully settled before an irrevocable letter of his liability for the amount demanded and requested
credit was applied for and obtained by the abovementioned METROBANK to send him copies of documents showing the
business entity in 1979 (September 8, 1987, tsn, pp. 14-15). source of his liability. In its reply, the bank informed him that the
source of his liability is the Continuing Suretyship which he
The Irrevocable Letter of Credit No. SN-Loc-309, dated March 30, executed on February 25, 1977.
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Beastly Digests: Cred Trans
themselves as solidary obligors of defendant Uy Tiam to both
As a rejoinder, Dio maintained that he cannot be held liable for existing obligations and future ones. It relied on Article 2053 of
the 1979 credit accommodation because it is a new obligation the new Civil Code which provides: "A guaranty may also be
contracted without his participation. Besides, the 1977 credit given as security for future debts, the amount of which is not yet
accommodation which he guaranteed has been fully paid. known; . . . ." It was further asserted that the agreement was in
full force and effect at the time the letter of credit was obtained in
1979 as sureties-defendants did not exercise their right to revoke
it by giving notice to the bank. (Ibid., pp. 51-54).
Having sent the last demand letter to UTEFS, Dio and Uy and Meanwhile, the resolution of the aforecited motion to dismiss was
finding resort to extrajudicial remedies to be futile, METROBANK held in abeyance pending the introduction of evidence by the
filed a complaint for collection of a sum of money (P613,339.32, parties as per order dated February 21, 1986 (Ibid., p. 71).
as of January 31, 1982, inclusive of interest, commission penalty
and bank charges) with a prayer for the issuance of a writ of Having been granted a period of fifteen (15) days from receipt of
preliminary attachment, against Uy Tiam, representative of the order dated March 7, 1986 within which to file the answer,
UTEFS and impleaded Dio and Uy as parties-defendants. sureties-defendants filed their responsive pleading which merely
rehashed the arguments in their motion to dismiss and
The court issued an order, dated 29 July 1983, granting the maintained that they are entitled to the benefit of excussion
attachment writ, which writ was returned unserved and (Original Records, pp. 88-93).
unsatisfied as defendant Uy Tiam was nowhere to be found at his
given address and his commercial enterprise was already non- On February 23, 1987, plaintiff filed a motion to dismiss the
operational (Original Records, p. 37). complaint against defendant Uy Tiam on the ground that it has no
information as to the heirs or legal representatives of the latter
On April 11, 1984, Norberto Uy and Jacinto Uy Dio (sureties- who died sometime in December, 1986, which motion was
defendant herein) filed a motion to dismiss the complaint on the granted on the following day (Ibid., pp. 180-182).
ground of lack of cause of action. They maintained that the
obligation which they guaranteed in 1977 has been extinguished After trial, . . . the court a quo, on December 2, 198, rendered its
since it has already been paid in the same year. Accordingly, the judgment, a portion of which reads:
Continuing Suretyships executed in 1977 cannot be availed of to The evidence and the pleadings, thus, pose the querry (sic):
secure Uy Tiam's Letter of Credit obtained in 1979 because a Are the defendants Jacinto Uy Dioand Norberto Uy liable for the
guaranty cannot exist without a valid obligation. It was further obligation contracted by Uy Tiam under the Letter of Credit (Exh.
argued that they can not be held liable for the obligation B) issued on March 30, 1987 by virtue of the Continuing
contracted in 1979 because they are not privies thereto as it was Suretyships they executed on February 25, 1977?
contracted without their participation (Records, pp. 42-46). Under the admitted proven facts, the Court finds that they are not.
a) When Uy and Dio executed the continuing suretyships,
On April 24, 1984, METROBANK filed its opposition to the motion exhibits E and F, on February 25, 1977, Uy Tiam was obligated to
to dismiss. Invoking the terms and conditions embodied in the the plaintiff in the amount of P700,000.00 and this was the
comprehensive suretyships separately executed by sureties- obligation which both obligation which both defendants
defendants, the bank argued that sureties-movants bound guaranteed to pay. Uy Tiam paid this 1977 obligation and such
22
Beastly Digests: Cred Trans
payment extinguished the obligation they assumed as errors in its Brief:
guarantors/sureties. I. THE LOWER COURT SERIOUSLY ERRED IN NOT FINDING
b) The 1979 Letter of Credit (Exh. B) is different from the 1977 AND HOLDING THAT DEFENDANTS-APPELLEES JACINTO UY
Letter of Credit which covered the 1977 account of Uy Tiam. DIO AND NORBERTO UY ARE SOLIDARILY LIABLE TO
Thus, the obligation under either is apart and distinct from the PLAINTIFF-APPELLANT FOR THE OBLIGATION OF
obligation created in the other as evidenced by the fact that Uy DEFENDANT UY TIAM UNDER THE LETTER OF CREDIT
Tiam had to apply anew for the 1979 transaction (Exh. A). And ISSUED ON MARCH 30, 1979 BY VIRTUE OF THE
Dio and Uy, being strangers thereto, cannot be answerable CONTINUING SURETYSHIPS THEY EXECUTED ON
thereunder. FEBRUARY 25, 1977.
c) The plaintiff did not serve notice to the defendants Dio and Uy II. THE LOWER COURT ERRED IN HOLDING THAT PLAINTIFF-
when it extended to Credit at least to inform them that the APPELLANT IS ANSWERABLE TO DEFENDANTS-APPELLEES
continuing suretyships they executed on February 25, 1977 will JACINTO UY DIO AND NORBERTO UY FOR ATTORNEY'S
be considered by the plaintiff to secure the 1979 transaction of Uy FEES AND EXPENSES OF LITIGATION. 5
Tiam. On 22 June 1989, public respondent promulgated the assailed
d) There is no sufficient and credible showing that Dio and Uy Decision the dispositive portion of which reads:
were fully informed of the import of the Continuing Suretyships WHEREFORE, premises considered, the judgment appealed
when they affixed their signatures thereon that they are from is hereby REVERSED AND SET, ASIDE. In lieu thereof,
thereby securing all future obligations which Uy Tiam may another one is rendered:
contract the plaintiff. On the contrary, Dio and Uy categorically 1) Ordering sureties-appellees Jacinto Uy Dio and Norberto Uy
testified that they signed the blank forms in the office of Uy Tiam to pay, jointly and severally, to appellant METROBANK the
at 623 Asuncion Street, Binondo, Manila, in obedience to the amount of P2,397,883.68 which represents the amount due as of
instruction of Uy Tiam, their former employer. They denied having July 17, 1987 inclusive of principal, interest and charges;
gone to the office of the plaintiff to subscribe to the documents 2) Ordering sureties-appellees Jacinto Uy Dio and Norberto Uy
(October 1, 1987, tsn, pp. 5-7, 14; October 15, 1987, tsn, pp. 3-8, to pay, jointly and severally, appellant METROBANK the accruing
13-16). (Records, pp. 333-334). 3 interest, fees and charges thereon from July 18, 1987 until the
xxx xxx xxx whole monetary obligation is paid; and
In its Decision, the trial court decreed as follows: 3) Ordering sureties-appellees Jacinto Uy Dio and Norberto Uy
PREMISES CONSIDERED, judgment is hereby rendered: to pay, jointly and severally, to plaintiff P20,000.00 as attorney's
a) dismissing the COMPLAINT against JACINTO UY DIO and fees.
NORBERTO UY; With costs against appellees.
b) ordering the plaintiff to pay to Dio and Uy the amount of SO ORDERED. 6
P6,000.00 as attorney's fees and expenses of litigation; and In ruling for the herein private respondent (hereinafter
c) denying all other claims of the parties for want of legal and/or METROBANK), public respondent held that the Continuing
factual basis. Suretyship Agreements separately executed by the petitioners in
SO ORDERED. (Records, p. 336) 4 1977 were intended to guarantee payment of Uy Tiam's
From the said Decision, the private respondent appealed to the outstanding as well as future obligations; each suretyship
Court of Appeals. The case was docketed as CA-G.R. CV No. arrangement was intended to remain in full force and effect until
17724. In support thereof, it made the following assignment of METROBANK would have been notified of its revocation. Since
23
Beastly Digests: Cred Trans
no such notice was given by the petitioners, the suretyships are also secured the 1979 obligations incurred by Uy Tiam, they
deemed outstanding and hence, cover even the 1979 letter of cannot be held liable for more than what they guaranteed to pay
credit issued by METROBANK in favor of Uy Tiam. because it s axiomatic that the obligations of a surety cannot
Petitioners filed a motion to reconsider the foregoing Decision. extend beyond what is stipulated in the agreement.
They questioned the public respondent's construction of the On 12 February 1990, this Court resolved to give due course to
suretyship agreements and its ruling with respect to the extent of the petition after considering the allegations, issues and
their liability thereunder. They argued the even if the agreements arguments adduced therein, the Comment thereon by the private
were in full force and effect when METROBANK granted Uy respondent and the Reply thereto by the petitioners; the parties
Tiam's application for a letter of credit in 1979, the public were required to submit their respective Memoranda.
respondent nonetheless seriously erred in holding them liable for The issues presented for determination are quite simple:
an amount over and above their respective face values. 1. Whether petitioners are liable as sureties for the 1979
In its Resolution of 21 August 1989, public respondent denied the obligations of Uy Tiam to METROBANK by virtue of the
motion: Continuing Suretyship Agreements they separately signed in
. . . considering that the issues raised were substantially the same 1977; and
grounds utilized by the lower court in rendering judgment for 2. On the assumption that they are, what is the extent of their
defendants-appellees which We upon appeal found and resolved liabilities for said 1979 obligations.
to be untenable, thereby reversing and setting aside said Under the Civil Code, a guaranty may be given to secure even
judgment and rendering another in favor of plaintiff, and no new future debts, the amount of which may not known at the time the
or fresh issues have been posited to justify reversal of Our guaranty is executed. 8 This is the basis for contracts
decision herein, . . . . 7 denominated as continuing guaranty or suretyship. A continuing
Hence, the instant petition which hinges on the issue of whether guaranty is one which is not limited to a single transaction, but
or not the petitioners may be held liable as sureties for the which contemplates a future course of dealing, covering a series
obligation contracted by Uy Tiam with METROBANK on 30 May of transactions, generally for an indefinite time or until revoked. It
1979 under and by virtue of the Continuing Suretyship is prospective in its operation and is generally intended to provide
Agreements signed on 25 February 1977. security with respect to future transactions within certain limits,
Petitioners vehemently deny such liability on the ground that the and contemplates a succession of liabilities, for which, as they
Continuing Suretyship Agreements were automatically accrue, the guarantor becomes liable. 9 Otherwise stated, a
extinguished upon payment of the principal obligation secured continuing guaranty is one which covers all transactions,
thereby, i.e., the letter of credit obtained by Uy Tiam in 1977. including those arising in the future, which are within the
They further claim that they were not advised by either description or contemplation of the contract, of guaranty, until the
METROBANK or Uy Tiam that the Continuing Suretyship expiration or termination thereof. 10 A guaranty shall be construed
Agreements would stand as security for the 1979 obligation. as continuing when by the terms thereof it is evident that the
Moreover, it is posited that to extend the application of such object is to give a standing credit to the principal debtor to be
agreements to the 1979 obligation would amount to a violation of used from time to time either indefinitely or until a certain period,
Article 2052 of the Civil Code which expressly provides that a especially if the right to recall the guaranty is expressly reserved.
guaranty cannot exist without a valid obligation. Petitioners further Hence, where the contract of guaranty states that the same is to
argue that even granting, for the sake of argument, that the secure advances to be made "from time to time" the guaranty will
Continuing Suretyship Agreements still subsisted and thereby be construed to be a continuing one. 11
24
Beastly Digests: Cred Trans
agreement(s) or the Bank's rights with respect thereto as against
In other jurisdictions, it has been held that the use of particular the Borrower, or cause or permit to be invoked any alteration in
words and expressions such as payment of "any debt," "any the time, amount or manner of payment by the Borrower of any
indebtedness," "any deficiency," or "any sum," or the guaranty of such instruments, obligations or indebtedness; provided,
"any transaction" or money to be furnished the principal debtor "at however, that the liability of the SURETY hereunder shall not
any time," or "on such time" that the principal debtor may require, exceed at any one time the aggregate principal sum of PESOS:
have been construed to indicate a continuing guaranty. 12 THREE HUNDRED THOUSAND ONLY (P300,000.00)
In the case at bar, the pertinent portion of paragraph I of the (irrespective of the currenc(ies) in which the obligations hereby
suretyship agreement executed by petitioner Uy provides thus: guaranteed are payable), and such interest as may accrue
I. For and in consideration of any existing indebtedness to the thereon either before or after any maturity(ies) thereof and such
BANK of UY TIAM (hereinafter called the "Borrower"), for the expenses as may be incurred by the BANK as referred to above.
13
payment of which the SURETY is now obligated to the BANK,
either as guarantor or otherwise, and/or in order to induce the Paragraph I of the Continuing Suretyship Agreement executed by
BANK, in its discretion, at any time or from time to time hereafter, petitioner Dio contains identical provisions except with respect to
to make loans or advances or to extend credit in any other the guaranteed aggregate principal amount which is EIGHT
manner to, or at the request, or for the account of the Borrower, THOUSAND PESOS (P800,000.00). 14
either with or without security, and/or to purchase or discount, or Paragraph IV of both agreements stipulate that:
to make any loans or advances evidence or secured by any VI. This is a continuing guaranty and shall remain in full force and
notes, bills, receivables, drafts, acceptances, checks, or other effect until written notice shall have been received by the BANK
instruments or evidences of indebtedness (all hereinafter called that it has been revoked by the SURETY, but any such notice
"instruments") upon which the Borrower is or may become liable shall not release the SURETY, from any liability as to any
as maker, endorser, acceptor, or otherwise, the SURETY agrees instruments, loans, advances or other obligations hereby
to guarantee, and does hereby guarantee, the punctual payment guaranteed, which may be held by the BANK, or in which the
at maturity to the loans, advances credits and/or other obligations BANK may have any interest at the time of the receipt (sic) of
hereinbefore referred to, and also any and all other indebtedness such notice. No act or omission of any kind on the BANK'S part in
of every kind which is now or may hereafter become due or the premises shall in any event affect or impair this guaranty, nor
owing to the BANK by the Borrower, together with any and all shall same (sic) be affected by any change which may arise by
expenses which may be incurred by the BANK in collecting all or reason of the death of the SURETY, or of any partner(s) of the
any such instruments or other indebtedness or obligations herein SURETY, or of the Borrower, or of the accession to any such
before referred to, and/or in enforcing any rights hereunder, and partnership of any one or more new partners. 15
the SURETY also agrees that the BANK may make or cause any The foregoing stipulations unequivocally reveal that the
and all such payments to be made strictly in accordance with the suretyship agreement in the case at bar are continuing in nature.
terms and provisions of any agreement(s) express or implied, Petitioners do not deny this; in fact, they candidly admitted it.
which has (have) been or may hereafter be made or entered into Neither have they denied the fact that they had not revoked the
by the Borrow in reference thereto, regardless of any law, suretyship agreements. Accordingly, as correctly held by the
regulation or decree, unless the same is mandatory and non- public respondent:
waivable in character, nor or hereafter in effect, which might in Undoubtedly, the purpose of the execution of the Continuing
any manner affect any of the terms or provisions of any such Suretyships was to induce appellant to grant any application for
25
Beastly Digests: Cred Trans
credit accommodation (letter of credit/trust receipt) UTEFS may specified in their respective agreements, to wit: (a) P800,000.00
desire to obtain from appellant bank. By its terms, each for petitioner Dio and (b) P300,000.00 for petitioner Uy.
suretyship is a continuing one which shall remain in full force and The limit of the petitioners respective liabilities must be
effect until the bank is notified of its revocation. determined from the suretyship agreement each had signed. It is
xxx xxx xxx undoubtedly true that the law looks upon the contract of
When the Irrevocable Letter of Credit No. SN-Loc-309 was suretyship with a jealous eye, and the rule is settled that the
obtained from appellant bank, for the purpose of obtaining goods obligation of the surety cannot be extended by implication beyond
(covered by a trust receipt) from Planters Products, the continuing its specified limits. To the extent, and in the manner, and under
suretyships were in full force and effect. Hence, even if sureties- the circumstances pointed out in his obligation, he is bound, and
appellees did not sign the "Commercial Letter of Credit and no farther. 17
Application, they are still liable as the credit accommodation
(letter of credit/trust receipt) was covered by the said suretyships. Indeed, the Continuing Suretyship Agreements signed by
What makes them liable thereunder is the condition which petitioner Dio and petitioner Uy fix the aggregate amount of their
provides that the Borrower "is or may become liable as maker, liability, at any given time, at P800,000.00 and P300,000.00,
endorser, acceptor or otherwise." And since UTEFS which (sic) respectively.
was liable as principal obligor for having failed to fulfill the
obligatory stipulations in the trust receipt, they as insurers of its The law is clear that a guarantor may bond himself for less, but
obligation, are liable thereunder. 16 not for more than the principal debtor, both as regards the amount
and the onerous nature of the conditions. 18 In the case at bar,
Petitioners maintain, however, that their Continuing Suretyship both agreements provide for liability for interest and expenses, to
Agreements cannot be made applicable to the 1979 obligation wit:
because the latter was not yet in existence when the agreements . . . and such interest as may accrue thereon either before or after
were executed in 1977; under Article 2052 of the Civil Code, a any maturity(ies) thereof and such expenses as may be incurred
guaranty "cannot exist without a valid obligation." We cannot by the BANK referred to above. 19
agree. First of all, the succeeding article provides that "[a] They further provide that:
guaranty may also be given as security for future debts, the
amount of which is not yet known." Secondly, Article 2052 speaks In the event of judicial proceedings being instituted by the BANK
about a valid obligation, as distinguished from a void obligation, against the SURETY to enforce any of the terms and conditions
and not an existing or current obligation. This distinction is made of this undertaking, the SURETY further agrees to pay the BANK
clearer in the second paragraph of Article 2052 which reads: a reasonable compensation for and as attorney's fees and costs
of collection, which shall not in any event be less than ten per
Nevertheless, a guaranty may be constituted to guarantee the cent (10%) of the amount due (the same to be due and payable
performance of a voidable or an unenforceable contract. It may irrespective of whether the case is settled judicially or
also guarantee a natural obligation. extrajudicially). 20

As to the amount of their liability under the Continuing Suretyship Thus, by express mandate of the Continuing Suretyship
Agreements, petitioners contend that the public respondent Agreements which they had signed, petitioners separately bound
gravely erred in finding them liable for more than the amount themselves to pay interest, expenses, attorney's fees and costs.
26
Beastly Digests: Cred Trans
The last two items are pegged at not less than ten percent (10%) some states, the interest has been charged from the date of the
of the amount due. interest has been charged from the date of the judgment of the
appellate court. In this jurisdiction, we rather prefer to follow the
Even without such stipulations, the petitioners would, general practice, which is to order that interest begin to run from
nevertheless, be liable for the interest and judicial costs. Article the date when the complaint was filed in court, . . .
2055 of the Civil Code provides: 21
Such theory aligned with sec. 510 of the Code of Civil Procedure
Art. 2055. A guaranty is not presumed; it must be express and which was subsequently recognized in the Rules of Court (Rule
cannot extend to more than what is stipulated therein. 53, section 6) and with Article 1108 of the Civil Code (now Art.
If it be simple or indefinite, it shall comprise not only the principal 2209 of the New Civil Code).
obligation, but also all its accessories, including the judicial costs,
provided with respect to the latter, that the guarantor shall only be In other words the surety is made to pay interest, not by reason of
liable for those costs incurred after he has been judicially required the contract, but by reason of its failure to pay when demanded
to pay. and for having compelled the plaintiff to resort to the courts to
obtain payment. It should be observed that interest does not run
from the time the obligation became due, but from the filing of the
complaint.
Interest and damages are included in the term accessories.
However, such interest should run only from the date when the As to attorney's fees. Before the enactment of the New Civil
complaint was filed in court. Even attorney's fees may be Code, successful litigants could not recover attorney's fees as
imposed whenever appropriate, pursuant to Article 2208 of the part of the damages they suffered by reason of the litigation.
Civil Code. Thus, in Plaridel Surety & Insurance Co., Inc. vs. P.L. Even if the party paid thousands of pesos to his lawyers, he could
Galang Machinery Co., Inc., 22 this Court held: not charge the amount to his opponent (Tan Ti vs. Alvear, 26 Phil.
566).
Petitioner objects to the payment of interest and attorney's fees
because: (1) they were not mentioned in the bond; and (2) the However the New Civil Code permits recovery of attorney's fees
surety would become liable for more than the amount stated in in eleven cases enumerated in Article 2208, among them, "where
the contract of suretyship. the court deems it just and equitable that attorney's (sic) fees and
xxx xxx xxx expenses of litigation should be recovered" or "when the
defendant acted in gross and evident bad faith in refusing to
The objection has to be overruled, because as far back as the satisfy the plaintiff's plainly valid, just and demandable claim."
year 1922 this Court held in Tagawa vs. Aldanese, 43 Phil. 852, This gives the courts discretion in apportioning attorney's fees.
that creditors suing on a suretyship bond may recover from the
surety as part of their damages, interest at the legal rate even if The records do not reveal the exact amount of the unpaid portion
the surety would thereby become liable to pay more than the total of the principal obligation of Uy Tiam to MERTOBANK under
amount stipulated in the bond. The theory is that interest is Irrevocable Letter of Credit No. SN-Loc-309 dated 30 March
allowed only by way of damages for delay upon the part of the 1979. In referring to the last demand letter to Mr. Uy Tiam and the
sureties in making payment after they should have done so. In complaint filed in Civil Case No. 82-9303, the public respondent
27
Beastly Digests: Cred Trans
mentions the amount of "P613,339.32, as of January 31, 1982, date of the filing of the complaint in Civil Case No. 82-9303 with
inclusive of interest commission penalty and bank charges." 23 Branch 45 of the Regional Trial Court of Manila, as well as the
This is the same amount stated by METROBANK in its adjudged attorney's fees and costs.
Memorandum. 24 However, in summarizing Uy Tiam's outstanding
obligation as of 17 July 1987, public respondent states: All other dispositions in the dispositive portion of the challenged
decision not inconsistent with the above are affirmed.
Hence, they are jointly and severally liable to appellant SO ORDERED.
METROBANK of UTEFS' outstanding obligation in the sum of
P2,397,883.68 (as of July 17, 1987) P651,092.82 representing
the principal amount, P825,133.54, for past due interest (5-31-82
to 7-17-87) and P921,657.32, for penalty charges at 12% per
annum (5-31-82 to 7-17-87) as shown in the Statement of
Account (Exhibit I). 25

Since the complaint was filed on 18 May 1982, it is obvious that


on that date, the outstanding principal obligation of Uy Tiam,
secured by the petitioners' Continuing Suretyship Agreements,

was less than P613,339.32. Such amount may be fully covered


by the Continuing Suretyship Agreement executed by petitioner FORTUNE MOTORS (PHILS.) CORPORATION and
Dio which stipulates an aggregate principal sum of not EDGAR L. RODRIGUEZA, petitioners, vs. THE
exceeding P800,000.00, and partly covered by that of petitioner HONORABLE COURT OF APPEALS and FILINVEST
Uy which pegs his maximum liability at P300,000.00. CREDIT CORPORATION, respondents.
Consequently, the judgment of the public respondent shall have G.R. No. 112191. February 7, 1997.
to be modified to conform to the foregoing exposition, to which
extent the instant petition is impressed with partial merit. Art 1292 New Civil Code. In order that an obligation may be
extinguished by another which substitute the same, it is
WHEREFORE, the petition is partly GRANTED, but only insofar imperative that it be so declared in unequivocal terms, or that the
as the challenged decision has to be modified with respect to the old and the new obligations be on every point incompatible with
extend of petitioners' liability. As modified, petitioners JACINTO each other.
UY DIO and NORBERTO UY are hereby declared liable for and
are ordered to pay, up to the maximum limit only of their Facts:
respective Continuing Suretyship Agreement, the remaining Petitioners herein executed an undated Surety Undertaking
unpaid balance of the principal obligation of UY TIAM or UY TIAM where they absolutely, unconditionally and solidarily guarantee
ENTERPRISES & FREIGHT SERVICES under Irrevocable Letter the full, faithful and prompt performance, payment and discharge
of Credit No. SN-Loc-309, dated 30 March 1979, together with of any and all obligations and agreements of Fortune Motor
the interest due thereon at the legal rate commencing from the (Phils) Corporation to Respondent and its affiliated and subsidiary
28
Beastly Digests: Cred Trans
companies. Filinvest presented testimonial and documentary evidence but
defendants, instead of presenting their evidence filed a motion
The following year, Petitioner Fortune, Respondent Filinvest and for judgement on demurrer to evidence anchored principally on
Canlubang Automotive Resources Corporation (CARCO) the ground that the Surety Undertakings were null and void
entered into an Automotive Wholesale Financing because at the time they were executed, there was no principal
Agreement wherein CARCO will deliver motor vehicles to obligation existing. The trial court denied the motion and
Fortune for the purpose of resale in the latters ordinary course of scheduled the case for reception of defendants evidence,
business; Fortune, in turn, will execute trust receipts over said however, defendats failed to present their evidence prompting the
vehicles and accept drafts drawn by CARCO, which will discount court to deem them have waived their right to present evidence.
the same together with the trust receipts and invoices and assign Issue: Whether or no the Court of Appeals erred when it declared
them in favor of Respondent Filinvest, which will pay the motor that there was no novation?
vehicles for Fortune. Under the same agreement, Petitioner
Fortune, as trustee of the motor vehicles, was to report and remit Ruling: NO
proceeds of any sale for cash or on terms to Respondent Filinvest
immediately without necessity of demand. On the matter of novation, this has already been ruled upon when
this Court denied defendants Motion to dismiss on the argument
Several vehicles were delivered by CARCO to Petitioner Fortune that what happened was really an assignment of credit, and
and trust receipts covered by demand drafts and deeds of not a novation of contract, which does not require the consent
assignment were executed in favor of Respondent Filinvest. of the debtors. The fact of knowledge is enough. Besides, as
But when the demand drafts matured, not all the proceeds of the explained by the plaintiff, the mother or the principal contract was
vehicles which petitioner had sold were remitted and likewise the Financing Agreement, whereas the trust receipts, the sight
failed to turn over several unsold vehicles covered by the trust drafts, as well as the Deeds of assignment were only collaterals
receipts. or accidental modifications which do not extinguish the original
contract by way of novation.
Thus, Respondent Filinvest through counsel, sent a demand This proposition holds true even if the subsequent agreement
letter to petitioner fortune. Despite said demands, the amount would provide for more onerous terms for, at any rate, it is the
was still not paid. Hence, respondent filed in the RTC of Manila a principal or mother contract that is to be followed. When the
complaint for a sum of money with preliminary attachment against changes refer to secondary agreements and not to the object or
the petitioners. principal conditions of the contract, there is no novation; such
changes will produce modifications of incidental facts, but will not
The trial court declared that there was no factual issue to be extinguish the original obligation.
resolved except for the correct balance of defendants account
with Filinvest as agreed upon by the parties during pre-trial.

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