plaintiff Security Bank & Trust Company the sum of P39,129,124.
73
SECURITY BANK AND TRUST COMPANY, Inc., petitioner, vs. RODOLFO
M. CUENCA, respondent.
DECISION
PANGANIBAN, J.:
Being an onerous undertaking, a surety agreement is strictly construed
against the creditor, and every doubt is resolved in favor of the solidary
debtor. The fundamental rules of fair play require the creditor to obtain the
consent of the surety to any material alteration in the principal loan agreement,
or at least to notify it thereof. Hence, petitioner bank cannot hold herein
respondent liable for loans obtained in excess of the amount or beyond the
period stipulated in the original agreement, absent any clear stipulation
showing that the latter waived his right to be notified thereof, or to give consent
thereto. This is especially true where, as in this case, respondent was no
longer the principal officer or major stockholder of the corporate debtor at the
time the later obligations were incurred. He was thus no longer in a position to
compel the debtor to pay the creditor and had no more reason to bind himself
anew to the subsequent obligations.
The Case
This is the main principle used in denying the present Petition for Review
under Rule 45 of the Rules of Court. Petitioner assails the December 22, 1998
Decision[1] of the Court of Appeals (CA) in CA-GR CV No. 56203, the
dispositive portion of which reads as follows:
WHEREFORE, the judgment appealed from is hereby amended in the sense
that defendant-appellant Rodolfo M. Cuenca [herein respondent]
is RELEASED from liability to pay any amount stated in the judgment.
Furthermore, [Respondent] Rodolfo M. Cuencas counterclaim is
hereby DISMISSED for lack of merit.
In all other respect[s], the decision appealed from is AFFIRMED.[2]
Also challenged is the April 14, 1999 CA Resolution, [3] which denied
petitioners Motion for Reconsideration.
Modified by the CA was the March 6, 1997 Decision[4] of the Regional
Trial Court (RTC) of Makati City (Branch 66) in Civil Case No. 93-1925, which
disposed as follows:
WHEREFORE, judgment is hereby rendered ordering defendants Sta. Ines
Melale Corporation and Rodolfo M. Cuenca to pay, jointly and severally,
representing the balance of the loan as of May 10, 1994 plus 12% interest
per annum until fully paid, and the sum of P100,000.00 as attorneys fees and
litigation expenses and to pay the costs.
SO ORDERED.
The Facts
The facts are narrated by the Court of Appeals as follows:[5]
The antecedent material and relevant facts are that defendant-appellant Sta.
Ines Melale (Sta. Ines) is a corporation engaged in logging operations. It was
a holder of a Timber License Agreement issued by the Department of
Environment and Natural Resources (DENR).
On 10 November 1980, [Petitioner] Security Bank and Trust Co. granted
appellant Sta. Ines Melale Corporation [SIMC] a credit line in the amount of
[e]ight [m]llion [p]esos (P8,000,000.00) to assist the latter in meeting the
additional capitalization requirements of its logging operations.
The Credit Approval Memorandum expressly stated that the P8M Credit
Loan Facility shall be effective until 30 November 1981:
JOINT CONDITIONS:
1. Against Chattel Mortgage on logging trucks and/or inventories (except
logs) valued at 200% of the lines plus JSS of Rodolfo M. Cuenca.
2. Submission of an appropriate Board Resolution authorizing the
borrowings, indicating therein the companys duly authorized signatory/ies;
3. Reasonable/compensating deposit balances in current account shall be
maintained at all times; in this connection, a Makati account shall be opened
prior to availment on lines;
4. Lines shall expire on November 30, 1981; and
5. The bank reserves the right to amend any of the aforementioned terms
and conditions upon written notice to the Borrower. (Emphasis supplied.)
To secure the payment of the amounts drawn by appellant SIMC from the
above-mentioned credit line, SIMC executed a Chattel Mortgage dated 23
December 1980 (Exhibit A) over some of its machinery and equipment in
favor of [Petitioner] SBTC. As additional security for the payment of the loan,
[Respondent] Rodolfo M. Cuenca executed an Indemnity Agreement dated
17 December 1980 (Exhibit B) in favor of [Petitioner] SBTC whereby he
solidarily bound himself with SIMC as follows:
xxxxxxxxx
Rodolfo M. Cuenca x x x hereby binds himself x x x jointly and
severally with the client (SIMC) in favor of the bank for the payment, upon
demand and without the benefit of excussion of whatever amount x x x the
client may be indebted to the bank x x x by virtue of aforesaid credit
accommodation(s) including the substitutions, renewals, extensions,
increases, amendments, conversions and revivals of the aforesaid
credit accommodation(s) x x x . (Emphasis supplied).
On 26 November 1981, four (4) days prior to the expiration of the period of
effectivity of the P8M-Credit Loan Facility, appellant SIMC made a first
drawdown from its credit line with [Petitioner] SBTC in the amount of [s]ix
[m]illion [o]ne [h]undred [t]housand [p]esos (P6,100,000.00). To cover said
drawdown, SIMC duly executed promissory Note No. TD/TLS-3599-81 for
said amount (Exhibit C).
Sometime in 1985, [Respondent] Cuenca resigned as President and
Chairman of the Board of Directors of defendant-appellant Sta.
Ines. Subsequently, the shareholdings of [Respondent] Cuenca in defendant-
appellant Sta. Ines were sold at a public auction relative to Civil Case No.
18021 entitled Adolfo A. Angala vs. Universal Holdings, Inc. and Rodolfo M.
Cuenca. Said shares were bought by Adolfo Angala who was the highest
bidder during the public auction.
Subsequently, appellant SIMC repeatedly availed of its credit line and
obtained six (6) other loan[s] from [Petitioner] SBTC in the aggregate amount
of [s]ix [m]illion [t]hree [h]undred [s]ixty-[n]ine [t]housand [n]ineteen and
50/100 [p]esos (P6,369,019.50).Accordingly, SIMC executed Promissory
Notes Nos. DLS/74/760/85, DLS/74773/85, DLS/74/78/85, DLS/74/760/85
DLS/74/12/86, and DLS/74/47/86 to cover the amounts of the
abovementioned additional loans against the credit line.
Appellant SIMC, however, encountered difficulty[6] in making the amortization
payments on its loans and requested [Petitioner] SBTC for a complete
restructuring of its indebtedness. SBTC accommodated appellant SIMCs
request and signified its approval in a letter dated 18 February 1988 (Exhibit
G) wherein SBTC and defendant-appellant Sta. Ines, without notice to or the
prior consent of [Respondent] Cuenca, agreed to restructure the past due
obligations of defendant-appellant Sta. Ines. [Petitioner] Security Bank
agreed to extend to defendant-appellant Sta. Ines the following loans:
a. Term loan in the amount of [e]ight [m]illion [e]ight [h]undred
[t]housand [p]esos (P8,800,000.00), to be applied to liquidate the
principal portion of defendant-appellant Sta. Ines[] total outstanding
indebtedness to [Petitioner] Security Bank (cf. P. 1 of Exhibit G,
Expediente, at Vol. II, p. 336; Exhibit 5-B-Cuenca, Expediente, et Vol I,
pp. 33 to 34) and
b. Term loan in the amount of [t]hree [m]illion [f]our [h]undred [t]housand
[p]esos (P3,400,000.00), to be applied to liquidate the past due interest
and penalty portion of the indebtedness of defendant-appellant Sta.
Ines to [Petitioner] Security Bank (cf. Exhibit G, Expediente, at Vol. II, p.
336; Exhibit 5-B-Cuenca, Expediente, at Vol. II, p. 33 to 34).
It should be pointed out that in restructuring defendant-appellant Sta. Ines
obligations to [Petitioner] Security Bank, Promissory Note No. TD-TLS-3599-
81 in the amount of [s]ix [m]illion [o]ne [h]undred [t]housand [p]esos
(P6,100,000.00), which was the only loan incurred prior to the expiration of
the P8M-Credit Loan Facility on 30 November 1981 and the only one
covered by the Indemnity Agreement dated 19 December 1980 (Exhibit 3-
Cuenca, Expediente, at Vol. II, p. 331), was not segregated from, but was
instead lumped together with, the other loans, i.e., Promissory Notes Nos.
DLS/74/12/86, DLS/74/28/86 and DLS/74/47/86 (Exhibits D, E, and F,
Expediente, at Vol. II, pp. 333 to 335) obtained by defendant-appellant Sta.
Ines which were not secured by said Indemnity Agreement.
Pursuant to the agreement to restructure its past due obligations to
[Petitioner] Security Bank, defendant-appellant Sta. Ines thus executed the
following promissory notes, both dated 09 March 1988 in favor of [Petitioner]
Security Bank:
PROMISSORY NOTE NO. AMOUNT
RL/74/596/88 P8,800,000.00
RL/74/597/88 P3,400,000.00
-------------------
TOTAL P12,200,000.00
(Exhibits H and I, Expediente, at Vol. II, pp. 338 to 343).
To formalize their agreement to restructure the loan obligations of defendant-
appellant Sta. Ines, [Petitioner] Security Bank and defendant-appellant Sta.
Ines executed a Loan Agreement dated 31 October 1989 (Exhibit 5-Cuenca,
Expediente, at Vol. I, pp. 33 to 41). Section 1.01 of the said Loan Agreement
dated 31 October 1989 provides:
1.01 Amount - The Lender agrees to grant loan to the Borrower in the
aggregate amount of TWELVE MILLION TWO HUNDRED THOUSAND
PESOS (P12,200,000.00), Philippines [c]urrency (the Loan). The loan shall
be released in two (2) tranches of P8,800,000.00 for the first tranche (the
First Loan) and P3,400,000.00 for the second tranche (the Second Loan) to
be applied in the manner and for the purpose stipulated hereinbelow.
1.02. Purpose - The First Loan shall be applied to liquidate the principal
portion of the Borrowers present total outstanding indebtedness to the
Lender (the indebtedness) while the Second Loan shall be applied to
liquidate the past due interest and penalty portion of the Indebtedness.
(Underscoring supplied.) (cf. p. 1 of Exhibit 5-Cuenca, Expediente, at Vol. I,
p. 33)
From 08 April 1988 to 02 December 1988, defendant-appellant Sta. Ines
made further payments to [Petitioner] Security Bank in the amount of [o]ne
[m]illion [s]even [h]undred [f]ifty-[s]even [t]housand [p]esos (P1,757,000.00)
(Exhibits 8, 9-P-SIMC up to 9-GG-SIMC, Expediente, at Vol. II, pp. 38, 70 to
165)
Appellant SIMC defaulted in the payment of its restructured loan obligations
to [Petitioner] SBTC despite demands made upon appellant SIMC and
CUENCA, the last of which were made through separate letters dated 5 June
1991 (Exhibit K) and 27 June 1991 (Exhibit L), respectively.
Appellants individually and collectively refused to pay the [Petitioner]
SBTC. Thus, SBTC filed a complaint for collection of sum of money on 14
June 1993, resulting after trial on the merits in a decision by the court a quo,
x x x from which [Respondent] Cuenca appealed.
Ruling of the Court of Appeals
In releasing Respondent Cuenca from liability, the CA ruled that the 1989
Loan Agreement had novated the 1980 credit accommodation earlier granted
by the bank to Sta. Ines. Accordingly, such novation extinguished the
Indemnity Agreement, by which Cuenca, who was then the Board chairman
and president of Sta. Ines, had bound himself solidarily liable for the payment
of the loans secured by that credit accommodation. It noted that the 1989 Loan
Agreement had been executed without notice to, much less consent from,
Cuenca who at the time was no longer a stockholder of the corporation.
The appellate court also noted that the Credit Approval Memorandum had
specified that the credit accommodation was for a total amount of P8 million,
and that its expiry date was November 30, 1981. Hence, it ruled that Cuenca
was liable only for loans obtained prior to November 30, 1981, and only for an
amount not exceeding P8 million.
It further held that the restructuring of Sta. Ines obligation under the 1989
Loan Agreement was tantamount to a grant of an extension of time to the
debtor without the consent of the surety. Under Article 2079 of the Civil Code,
such extension extinguished the surety.
The CA also opined that the surety was entitled to notice, in case the bank
and Sta. Ines decided to materially alter or modify the principal obligation after
the expiry date of the credit accommodation.
Hence, this recourse to this Court.[7]
The Issues
In its Memorandum, petitioner submits the following for
consideration:[8]
A. Whether or not the Honorable Court of Appeals erred in releasing
Respondent Cuenca from liability as surety under the Indemnity
Agreement for the payment of the principal amount of twelve
million two hundred thousand pesos (P12,200,000.00) under
Promissory Note No. RL/74/596/88 dated 9 March 1988 and
Promissory Note No. RL/74/597/88 dated 9 March 1988, plus
stipulated interests, penalties and other charges due thereon;
i. Whether or not the Honorable Court of Appeals erred
in ruling that Respondent Cuencas liability under the
Indemnity Agreement covered only availments on
SIMCs credit line to the extent of eight million pesos
(P8,000,000.00) and made on or before 30 November
1981;
ii. Whether or not the Honorable Court of Appeals erred
in ruling that the restructuring of SIMCs indebtedness
under the P8 million credit accommodation was
tantamount to an extension granted to SIMC without
Respondent Cuencas consent, thus extinguishing his
liability under the Indemnity Agreement pursuant to
Article 2079 of the Civil Code;
iii. Whether or not the Honorable Court of appeals erred
in ruling that the restructuring of SIMCs indebtedness
under the P8 million credit accommodation
constituted a novation of the principal obligation, thus
extinguishing Respondent Cuencas liability under the
indemnity agreement;
B. Whether or not Respondent Cuencas liability under the Indemnity
Agreement was extinguished by the payments made by SIMC;
C. Whether or not petitioners Motion for Reconsideration was pro-
forma;
D. Whether or not service of the Petition by registered mail
sufficiently complied with Section 11, Rule 13 of the 1997 Rules
of Civil Procedure.
Distilling the foregoing, the Court will resolve the following issues: (a)
whether the 1989 Loan Agreement novated the original credit accommodation
and Cuencas liability under the Indemnity Agreement; and (b) whether Cuenca
waived his right to be notified of and to give consent to any substitution,
renewal, extension, increase, amendment, conversion or revival of the said
credit accommodation. As preliminary matters, the procedural questions
raised by respondent will also be addressed.
The Courts Ruling
our
 The Petition has no merit.
Preliminary Matters: Procedural Questions
Motion for Reconsideration Not Pro Forma
Respondent contends that petitioners Motion for Reconsideration of the
CA Decision, in merely rehashing the arguments already passed upon by the
appellate court, was pro forma; that as such, it did not toll the period for filing
the present Petition for Review.[9] Consequently, the Petition was filed out of
time.[10]
We disagree. A motion for reconsideration is not pro forma just because
it reiterated the arguments earlier passed upon and rejected by the appellate
court. The Court has explained that a movant may raise the same arguments,
precisely to convince the court that its ruling was erroneous.[11]
Moreover, there is no clear showing of intent on the part of petitioner to
delay the proceedings. In Marikina Valley Development Corporation v.
Flojo,[12] the Court explained that a pro forma motion had no other purpose
than to gain time and to delay or impede the proceedings. Hence, where the
circumstances of a case do not show an intent on the part of the movant merely
to delay the proceedings, our Court has refused to characterize the motion as
simply pro forma. It held:
We note finally that because the doctrine relating to pro forma motions for
reconsideration impacts upon the reality and substance of the statutory right
of appeal, that doctrine should be applied reasonably, rather than
literally. The right to appeal, where it exists, is an important and valuable
right. Public policy would be better served by according the appellate court
an effective opportunity to review the decision of the trial court on the merits,
rather than by aborting the right to appeal by a literal application of the
procedural rules relating to pro forma motions for reconsideration.
Service by Registered Mail Sufficiently Explained
Section 11, Rule 13 of the 1997 Rules of Court, provides as follows:
SEC. 11. Priorities in modes of service and filing. -- Whenever practicable,
the service and filing of pleadings and other papers shall be done
personally. Except with respect to papers emanating from the court, a resort
to other modes must be accompanied by a written explanation why the
service or filing was not done personally. A violation of this Rule may be
cause to consider the paper as not filed.
Respondent maintains that the present Petition for Review does not
contain a sufficient written explanation why it was served by registered mail.
We do not think so. The Court held in Solar Entertainment v.
Ricafort[13] that the aforecited rule was mandatory, and that only when personal
service or filing is not practicable may resort to other modes be had, which
must then be accompanied by a written explanation as to why personal service
or filing was not practicable to begin with.
In this case, the Petition does state that it was served on the respective
counsels of Sta. Ines and Cuenca by registered mail in lieu of personal service
due to limitations in time and distance. [14] This explanation sufficiently shows
that personal service was not practicable. In any event, we find no adequate
reason to reject the contention of petitioner and thereby deprive it of the
opportunity to fully argue its cause.
First Issue: Original Obligation Extinguished by Novation
An obligation may be extinguished by novation, pursuant to Article 1292
of the Civil Code, which reads as follows:
ART. 1292. In order that an obligation may be extinguished by another which
substitute the same, it is imperative that it be so declared in unequivocal
terms, or that the old and the new obligations be on every point incompatible
with each other.
Novation of a contract is never presumed. It has been held that [i]n the
absence of an express agreement, novation takes place only when the old and
the new obligations are incompatible on every point.[15] Indeed, the following
requisites must be established: (1) there is a previous valid obligation; (2) the
parties concerned agree to a new contract; (3) the old contract is extinguished;
and (4) there is a valid new contract.[16]
Petitioner contends that there was no absolute incompatibility between
the old and the new obligations, and that the latter did not extinguish the earlier
one. It further argues that the 1989 Agreement did not change the original loan
in respect to the parties involved or the obligations incurred. It adds that the
terms of the 1989 Contract were not more onerous.[17] Since the original credit
accomodation was not extinguished, it concludes that Cuenca is still
liable under the Indemnity Agreement.
We reject these contentions. Clearly, the requisites of novation are
present in this case. The 1989 Loan Agreement extinguished the
obligation[18] obtained under the 1980 credit accomodation. This is evident
from its explicit provision to liquidate the principal and the interest of the earlier
indebtedness, as the following shows:
1.02. Purpose. The First Loan shall be applied to liquidate the principal
portion of the Borrowers present total outstanding Indebtedness to the
Lender (the Indebtedness) while the Second Loan shall be applied
to liquidate the past due interest and penalty portion of the
Indebtedness.[19] (Italics supplied.)
The testimony of an officer[20] of the bank that the proceeds of the 1989
Loan Agreement were used to pay-off the original indebtedness serves to
strengthen this ruling.[21]
Furthermore, several incompatibilities between the 1989 Agreement and
the 1980 original obligation demonstrate that the two cannot coexist. While the
1980 credit accommodation had stipulated that the amount of loan was not to
exceed P8 million,[22] the 1989 Agreement provided that the loan was P12.2
million. The periods for payment were also different.
Likewise, the later contract contained conditions, positive covenants and
negative covenants not found in the earlier obligation. As an example of a
positive covenant, Sta. Ines undertook from time to time and upon request by
the Lender, [to] perform such further acts and/or execute and deliver such
additional documents and writings as may be necessary or proper to effectively
carry out the provisions and purposes of this Loan Agreement. [23] Likewise,
SIMC agreed that it would not create any mortgage or encumbrance on any
asset owned or hereafter acquired, nor would it participate in any merger or
consolidation.[24]
Since the 1989 Loan Agreement had extinguished the original credit
accommodation, the Indemnity Agreement, an accessory obligation, was
necessarily extinguished also, pursuant to Article 1296 of the Civil Code, which
provides:
ART. 1296. When the principal obligation is extinguished in consequence of
a novation, accessory obligations may subsist only insofar as they may
benefit third persons who did not give their consent.
Alleged Extension
Petitioner insists that the 1989 Loan Agreement was a mere renewal or
extension of the P8 million original accommodation; it was not a novation.[25]
This argument must be rejected. To begin with, the 1989 Loan Agreement
expressly stipulated that its purpose was to liquidate, not to renew or extend,
the outstanding indebtedness. Moreover, respondent did not sign or consent
to the 1989 Loan Agreement, which had allegedly extended the original P8
million credit facility. Hence, his obligation as a surety should be deemed
extinguished, pursuant to Article 2079 of the Civil Code, which specifically
states that [a]n extension granted to the debtor by the creditor without the
consent of the guarantor extinguishes the guaranty. x x x. In an earlier
case,[26] the Court explained the rationale of this provision in this wise:
The theory behind Article 2079 is that an extension of time given to the
principal debtor by the creditor without the suretys consent would deprive the
surety of his right to pay the creditor and to be immediately subrogated to the
creditors remedies against the principal debtor upon the maturity date. The
surety is said to be entitled to protect himself against the contingency of the
principal debtor or the indemnitors becoming insolvent during the extended
period.
Binding Nature of the Credit Approval Memorandum
As noted earlier, the appellate court relied on the provisions of the Credit
Approval Memorandum in holding that the credit accommodation was only
for P8 million, and that it was for a period of one year ending on November 30,
1981. Petitioner objects to the appellate courts reliance on that document,
contending that it was not a binding agreement because it was not signed by
the parties. It adds that it was merely for its internal use.
We disagree. It was petitioner itself which presented the said document
to prove the accommodation. Attached to the Complaint as Annex A was a
copy thereof evidencing the accommodation.[27] Moreover, in its Petition
before this Court, it alluded to the Credit Approval Memorandum in this wise:
4.1 On 10 November 1980, Sta. Ines Melale Corporation (SIMC) was granted
by the Bank a credit line in the aggregate amount of Eight Million Pesos
(P8,000,000.00) to assist SIMC in meeting the additional capitalization
requirements for its logging operations. For this purpose, the Bank issued a
Credit Approval Memorandum dated 10 November 1980.
Clearly, respondent is estopped from denying the terms and conditions of
the P8 million credit accommodation as contained in the very document it
presented to the courts. Indeed, it cannot take advantage of that document by
agreeing to be bound only by those portions that are favorable to it, while
denying those that are disadvantageous.
Second Issue: Alleged Waiver of Consent
Pursuing another course, petitioner contends that Respondent
Cuenca impliedly gave his consent to any modification of the credit
accommodation or otherwise waived his right to be notified of, or to give
consent to, the same.[28]Respondents consent or waiver thereof is allegedly
found in the Indemnity Agreement, in which he held himself liable for the credit
accommodation including [its] substitutions, renewals, extensions, increases,
amendments, conversions and revival. It explains that the novation of the
original credit accommodation by the 1989 Loan Agreement is merely
its renewal, which connotes cessation of an old contract and birth of another
one x x x.[29]
At the outset, we should emphasize that an essential alteration in the
terms of the Loan Agreement without the consent of the surety extinguishes
the latters obligation. As the Court held in National Bank v. Veraguth,[30] [i]t is
fundamental in the law of suretyship that any agreement between the creditor
and the principal debtor which essentially varies the terms of the principal
contract, without the consent of the surety, will release the surety from liability.
In this case, petitioners assertion - that respondent consented to the
alterations in the credit accommodation -- finds no support in the text of the
Indemnity Agreement, which is reproduced hereunder:
Rodolfo M. Cuenca of legal age, with postal address c/o Sta. Ines Malale
Forest Products Corp., Alco Bldg., 391 Buendia Avenue Ext., Makati Metro
Manila for and in consideration of the credit accommodation in the total
amount of eight million pesos (P8,000,000.00) granted by the SECURITY
BANK AND TRUST COMPANY, a commercial bank duly organized and
existing under and by virtue of the laws of the Philippine, 6778 Ayala Avenue,
Makati, Metro Manila hereinafter referred to as the BANK in favor of STA.
INES MELALE FOREST PRODUCTS CORP., x x x ---- hereinafter referred
to as the CLIENT, with the stipulated interests and charges thereon,
evidenced by that/those certain PROMISSORY NOTE[(S)], made, executed
and delivered by the CLIENT in favor of the BANK hereby bind(s)
himself/themselves jointly and severally with the CLIENT in favor of the
BANK for the payment , upon demand and without benefit of excussion of
whatever amount or amounts the CLIENT may be indebted to the BANK
under and by virtue of aforesaid credit accommodation(s) including the
substitutions, renewals, extensions, increases, amendment, conversions and
revivals of the aforesaid credit accommodation(s), as well as of the amount
or amounts of such other obligations that the CLIENT may owe the BANK,
whether direct or indirect, principal or secondary, as appears in the accounts,
books and records of the BANK, plus interest and expenses arising from any
agreement or agreements that may have heretofore been made, or may
hereafter be executed by and between the parties thereto, including the
substitutions, renewals, extensions, increases, amendments, conversions
and revivals of the aforesaid credit accommodation(s), and further bind(s)
himself/themselves with the CLIENT in favor of the BANK for the faithful
compliance of all the terms and conditions contained in the aforesaid credit
accommodation(s), all of which are incorporated herein and made part hereof
by reference.
While respondent held himself liable for the credit accommodation or any
modification thereof, such clause should be understood in the context of
the P8 million limit and the November 30, 1981 term. It did not give the bank
or Sta. Ines any license to modify the nature and scope of the original credit
accommodation, without informing or getting the consent of respondent who
was solidarily liable. Taking the banks submission to the extreme, respondent
(or his successors) would be liable for loans even amounting to, say, P100
billion obtained 100 years after the expiration of the credit accommodation, on
the ground that he consented to all alterations and extensions thereof.
Indeed, it has been held that a contract of surety cannot extend to more
than what is stipulated. It is strictly construed against the creditor, every doubt
being resolved against enlarging the liability of the surety. [31] Likewise, the
Court has ruled that it is a well-settled legal principle that if there is any doubt
on the terms and conditions of the surety agreement, the doubt should be
resolved in favor of the surety x x x. Ambiguous contracts are construed
against the party who caused the ambiguity.[32] In the absence of an
unequivocal provision that respondent waived his right to be notified of or to
give consent to any alteration of the credit accommodation, we cannot sustain
petitioners view that there was such a waiver.
It should also be observed that the Credit Approval Memorandum clearly
shows that the bank did not have absolute authority to unilaterally change the
terms of the loan accommodation. Indeed, it may do so only upon notice to the
borrower, pursuant to this condition:
5. The Bank reserves the right to amend any of the aforementioned terms
and conditions upon written notice to the Borrower.[33]
We reject petitioners submission that only Sta. Ines as the borrower, not
respondent, was entitled to be notified of any modification in the original loan
accommodation.[34] Following the banks reasoning, such modification would
not be valid as to Sta. Ines if no notice were given; but would still be valid as
to respondent to whom no notice need be given. The latters liability would thus
be more burdensome than that of the former. Such untenable theory is
contrary to the principle that a surety cannot assume an obligation more
onerous than that of the principal.[35]
The present controversy must be distinguished from Philamgen v.
Mutuc,[36] in which the Court sustained a stipulation whereby the surety
consented to be bound not only for the specified period, but to any extension
thereafter made, an extension x x x that could be had without his having to be
notified.
In that case, the surety agreement contained this unequivocal
stipulation: It is hereby further agreed that in case of any extension of renewal
of the bond, we equally bind ourselves to the Company under the same terms
and conditions as herein provided without the necessity of executing another
indemnity agreement for the purpose and that we hereby equally waive our
 Special Nature of the JSS
right to be notified of any renewal or extension of the bond which may be
granted under this indemnity agreement.
In the present case, there is no such express stipulation. At most, the
alleged basis of respondents waiver is vague and uncertain. It confers no clear It is a common banking practice to require the JSS (joint and solidary
authorization on the bank or Sta. Ines to modify or extend the original signature) of a major stockholder or corporate officer, as an additional security
obligation without the consent of the surety or notice thereto. for loans granted to corporations. There are at least two reasons for this. First,
in case of default, the creditors recourse, which is normally limited to the
corporate properties under the veil of separate corporate personality, would
Continuing Surety
extend to the personal assets of the surety. Second, such surety would be
compelled to ensure that the loan would be used for the purpose agreed upon,
and that it would be paid by the corporation.
Following this practice, it was therefore logical and reasonable for the
Contending that the Indemnity Agreement was in the nature of a
bank to have required the JSS of respondent, who was the chairman and
continuing surety, petitioner maintains that there was no need for respondent
president of Sta. Ines in 1980 when the credit accommodation was
to execute another surety contract to secure the 1989 Loan Agreement.
granted. There was no reason or logic, however, for the bank or Sta. Ines to
This argument is incorrect. That the Indemnity Agreement is a continuing
assume that he would still agree to act as surety in the 1989 Loan Agreement,
surety does not authorize the bank to extend the scope of the principal
because at that time, he was no longer an officer or a stockholder of the debtor-
obligation inordinately.[37] In Dino v. CA,[38] the Court held that a continuing
corporation. Verily, he was not in a position then to ensure the payment of the
guaranty is one which covers all transactions, including those arising in the
obligation. Neither did he have any reason to bind himself further to a bigger
future, which are within the description or contemplation of the contract of
and more onerous obligation.
guaranty, until the expiration or termination thereof.
Indeed, the stipulation in the 1989 Loan Agreement providing for the
To repeat, in the present case, the Indemnity Agreement was subject to
surety of respondent, without even informing him, smacks of negligence on
the two limitations of the credit accommodation: (1) that the obligation should
the part of the bank and bad faith on that of the principal debtor. Since that
not exceed P8 million, and (2) that the accommodation should expire not later
Loan Agreement constituted a new indebtedness, the old loan having been
than November 30, 1981. Hence, it was a continuing surety only in regard to
already liquidated, the spirit of fair play should have impelled Sta. Ines to ask
loans obtained on or before the aforementioned expiry date and not exceeding
somebody else to act as a surety for the new loan.
the total of P8 million.
In the same vein, a little prudence should have impelled the bank to insist
Accordingly, the surety of Cuenca secured only the first loan of P6.1
on the JSS of one who was in a position to ensure the payment of the
million obtained on November 26, 1991. It did not secure the subsequent
loan. Even a perfunctory attempt at credit investigation would have revealed
loans, purportedly under the 1980 credit accommodation, that were obtained
that respondent was no longer connected with the corporation at the time. As
in 1986.Certainly, he could not have guaranteed the 1989 Loan Agreement,
it is, the bank is now relying on an unclear Indemnity Agreement in order to
which was executed after November 30, 1981 and which exceeded the
collect an obligation that could have been secured by a fairly obtained
stipulated P8 million ceiling.
surety. For its defeat in this litigation, the bank has only itself to blame.
Petitioner, however, cites the Dino ruling in which the Court found the
In sum, we hold that the 1989 Loan Agreement extinguished by novation
surety liable for the loan obtained after the payment of the original one, which
the obligation under the 1980 P8 million credit accommodation. Hence, the
was covered by a continuing surety agreement. At the risk of being repetitious,
Indemnity Agreement, which had been an accessory to the 1980 credit
we hold that in Dino, the surety Agreement specifically provided that each
accommodation, was also extinguished. Furthermore, we reject petitioners
suretyship is a continuing one which shall remain in full force and effect until
submission that respondent waived his right to be notified of, or to give consent
this bank is notified of its revocation. Since the bank had not been notified of
to, any modification or extension of the 1980 credit accommodation.
such revocation, the surety was held liable even for the subsequent obligations
In this light, we find no more need to resolve the issue of whether the loan
of the principal borrower.
obtained before the expiry date of the credit accommodation has been paid.
No similar provision is found in the present case. On the contrary,
WHEREFORE, the Petition is DENIED and the assailed
respondents liability was confined to the 1980 credit accommodation, the
Decision AFFIRMED. Costs against petitioner.
amount and the expiry date of which were set down in the Credit Approval
Memorandum. SO ORDERED.
G.R. No. 126490 March 31, 1998
ESTRELLA PALMARES, petitioner,
vs.
COURT OF APPEALS and M.B. LENDING CORPORATION, respondents.
REGALADO, J.:
Where a party signs a promissory note as a co-maker and binds herself to be
jointly and severally liable with the principal debtor in case the latter defaults
in the payment of the loan, is such undertaking of the former deemed to be
that of a surety as an insurer of the debt, or of a guarantor who warrants the
solvency of the debtor?
Pursuant to a promissory note dated March 13, 1990, private respondent
M.B. Lending Corporation extended a loan to the spouses Osmea and
Merlyn Azarraga, together with petitioner Estrella Palmares, in the amount of
P30,000.00 payable on or before May 12, 1990, with compounded interest at
the rate of 6% per annum to be computed every 30 days from the date
thereof.1 On four occasions after the execution of the promissory note and
even after the loan matured, petitioner and the Azarraga spouses were able
to pay a total of P16,300.00, thereby leaving a balance of P13,700.00. No
payments were made after the last payment on September 26, 1991.2
Consequently, on the basis of petitioner's solidary liability under the
promissory note, respondent corporation filed a complaint3 against
petitioner Palmares as the lone party-defendant, to the exclusion of the
principal debtors, allegedly by reason of the insolvency of the latter.
4
In her Amended Answer with Counterclaim, petitioner alleged that
sometime in August 1990, immediately after the loan matured, she
offered to settle the obligation with respondent corporation but the
latter informed her that they would try to collect from the spouses
Azarraga and that she need not worry about it; that there has already
been a partial payment in the amount of P17,010.00; that the interest of
6% per month compounded at the same rate per month, as well as the
penalty charges of 3% per month, are usurious and unconscionable;
and that while she agrees to be liable on the note but only upon default
of the principal debtor, respondent corporation acted in bad faith in
suing her alone without including the Azarragas when they were the
only ones who benefited from the proceeds of the loan.
During the pre-trial conference, the parties submitted the following
issues for the resolution of the trial court: (1) what the rate of interest,
penalty and damages should be; (2) whether the liability of the
defendant (herein petitioner) is primary or subsidiary; and (3) whether
the defendant Estrella Palmares is only a guarantor with a subsidiary
liability and not a co-maker with primary liability.5
Thereafter, the parties agreed to submit the case for decision based on
the pleadings filed and the memoranda to be submitted by them. On
November 26, 1992, the Regional Trial Court of Iloilo City, Branch 23,
rendered judgment dismissing the complaint without prejudice to the
filing of a separate action for a sum of money against the spouses
Osmea and Merlyn Azarraga who are primarily liable on the
instrument.6 This was based on the findings of the court a quo that the
filing of the complaint against herein petitioner Estrella Palmares, to the
exclusion of the Azarraga spouses, amounted to a discharge of a prior
party; that the offer made by petitioner to pay the obligation is
considered a valid tender of payment sufficient to discharge a person's
secondary liability on the instrument; as co-maker, is only secondarily
liable on the instrument; and that the promissory note is a contract of
adhesion.
Respondent Court of Appeals, however, reversed the decision of the
trial court, and rendered judgment declaring herein petitioner Palmares
liable to pay respondent corporation:
1. The sum of P13,700.00 representing the outstanding balance
still due and owing with interest at six percent (6%) per month
computed from the date the loan was contracted until fully paid;
2. The sum equivalent to the stipulated penalty of three percent
(3%) per month, of the outstanding balance;
3. Attorney's fees at 25% of the total amount due per
stipulations;
4. Plus costs of suit.7
Contrary to the findings of the trial court, respondent appellate court
declared that petitioner Palmares is a surety since she bound herself to
be jointly and severally or solidarily liable with the principal debtors,
the Azarraga spouses, when she signed as a co-maker. As such,
petitioner is primarily liable on the note and hence may be sued by the
creditor corporation for the entire obligation. It also adverted to the fact
that petitioner admitted her liability in her Answer although she claims
that the Azarraga spouses should have been impleaded. Respondent
court ordered the imposition of the stipulated 6% interest and 3%
penalty charges on the ground that the Usury Law is no longer
enforceable pursuant to Central Bank Circular No. 905. Finally, it
rationalized that even if the promissory note were to be considered as a
contract of adhesion, the same is not entirely prohibited because the
one who adheres to the contract is free to reject it entirely; if he
adheres, he gives his consent.
Hence this petition for review on certiorari wherein it is asserted that:
A. The Court of Appeals erred in ruling that Palmares acted as
surety and is therefore solidarily liable to pay the promissory
note.
1. The terms of the promissory note are vague. Its conflicting
provisions do not establish Palmares' solidary liability.
2. The promissory note contains provisions which establish the
co-maker's liability as that of a guarantor.
3. There is no sufficient basis for concluding that Palmares'
liability is solidary.
4. The promissory note is a contract of adhesion and should be
construed against M. B. Lending Corporation.
5. Palmares cannot be compelled to pay the loan at this point.
B. Assuming that Palmares' liability is solidary, the Court of
Appeals erred in strictly imposing the interests and penalty
charges on the outstanding balance of the promissory note.
The foregoing contentions of petitioner are denied and contradicted in
their material points by respondent corporation. They are further
refuted by accepted doctrines in the American jurisdiction after which
we patterned our statutory law on surety and guaranty. This case then
affords us the opportunity to make an extended exposition on the
ramifications of these two specialized contracts, for such guidance as
may be taken therefrom in similar local controversies in the future.
The basis of petitioner Palmares' liability under the promissory note is
expressed in this wise:
ATTENTION TO CO-MAKERS: PLEASE READ WELL
I, Mrs. Estrella Palmares, as the Co-maker of the above-quoted
loan, have fully understood the contents of this Promissory
Note for Short-Term Loan:
That as Co-maker, I am fully aware that I shall be jointly and
severally or solidarily liable with the above principal maker of
this note;
That in fact, I hereby agree that M.B. LENDING CORPORATION
may demand payment of the above loan from me in case the
principal maker, Mrs. Merlyn Azarraga defaults in the payment
of the note subject to the same conditions above-contained.8
Petitioner contends that the provisions of the second and third
paragraph are conflicting in that while the second paragraph seems to
define her liability as that of a surety which is joint and solidary with the
principal maker, on the other hand, under the third paragraph her
liability is actually that of a mere guarantor because she bound herself
to fulfill the obligation only in case the principal debtor should fail to do
so, which is the essence of a contract of guaranty. More simply stated,
although the second paragraph says that she is liable as a surety, the
third paragraph defines the nature of her liability as that of a guarantor.
According to petitioner, these are two conflicting provisions in the
promissory note and the rule is that clauses in the contract should be
interpreted in relation to one another and not by parts. In other words,
the second paragraph should not be taken in isolation, but should be
read in relation to the third paragraph.
In an attempt to reconcile the supposed conflict between the two
provisions, petitioner avers that she could be held liable only as a
guarantor for several reasons. First, the words "jointly and severally or
solidarily liable" used in the second paragraph are technical and legal
terms which are not fully appreciated by an ordinary layman like herein
petitioner, a 65-year old housewife who is likely to enter into such
transactions without fully realizing the nature and extent of her liability.
On the contrary, the wordings used in the third paragraph are easier to
comprehend. Second, the law looks upon the contract of suretyship
with a jealous eye and the rule is that the obligation of the surety
cannot be extended by implication beyond specified limits, taking into
consideration the peculiar nature of a surety agreement which holds
the surety liable despite the absence of any direct consideration
received from either the principal obligor or the creditor. Third, the
promissory note is a contract of adhesion since it was prepared by
respondent M.B. Lending Corporation. The note was brought to
petitioner partially filled up, the contents thereof were never explained
to her, and her only participation was to sign thereon. Thus, any
apparent ambiguity in the contract should be strictly construed against
private respondent pursuant to Art. 1377 of the Civil Code.9
Petitioner accordingly concludes that her liability should be deemed
restricted by the clause in the third paragraph of the promissory note to
be that of a guarantor.
Moreover, petitioner submits that she cannot as yet be compelled to
pay the loan because the principal debtors cannot be considered in
default in the absence of a judicial or extrajudicial demand. It is true
that the complaint alleges the fact of demand, but the purported
demand letters were never attached to the pleadings filed by private
respondent before the trial court. And, while petitioner may have
admitted in her Amended Answer that she received a demand letter
from respondent corporation sometime in 1990, the same did not
effectively put her or the principal debtors in default for the simple
reason that the latter subsequently made a partial payment on the loan
in September, 1991, a fact which was never controverted by herein
private respondent.
Finally, it is argued that the Court of Appeals gravely erred in awarding
the amount of P2,745,483.39 in favor of private respondent when, in
truth and in fact, the outstanding balance of the loan is only P13,700.00.
Where the interest charged on the loan is exorbitant, iniquitous or
unconscionable, and the obligation has been partially complied with,
the court may equitably reduce the penalty10 on grounds of substantial
justice. More importantly, respondent corporation never refuted
petitioner's allegation that immediately after the loan matured, she
informed said respondent of her desire to settle the obligation. The
court should, therefore, mitigate the damages to be paid since
petitioner has shown a sincere desire for a compromise.11
After a judicious evaluation of the arguments of the parties, we are
constrained to dismiss the petition for lack of merit, but to except
therefrom the issue anent the propriety of the monetary award
adjudged to herein respondent corporation.
At the outset, let it here be stressed that even assuming arguendo that
the promissory note executed between the parties is a contract of
adhesion, it has been the consistent holding of the Court that contracts
of adhesion are not invalid per se and that on numerous occasions the
binding effects thereof have been upheld. The peculiar nature of such
contracts necessitate a close scrutiny of the factual milieu to which the
provisions are intended to apply. Hence, just as consistently and
unhesitatingly, but without categorically invalidating such contracts,
the Court has construed obscurities and ambiguities in the restrictive
provisions of contracts of adhesion strictly albeit not unreasonably
against the drafter thereof when justified in light of the operative facts
and surrounding circumstances.12 The factual scenario obtaining in the
case before us warrants a liberal application of the rule in favor of
respondent corporation.
The Civil Code pertinently provides:
Art. 2047. By guaranty, a person called the guarantor binds
himself to the creditor to fulfill the obligation of the principal
debtor in case the latter should fail to do so.
If a person binds himself solidarily with the principal debtor, the
provisions of Section 4, Chapter 3, Title I of this Book shall be
observed. In such case the contract is called a suretyship.
It is a cardinal rule in the interpretation of contracts that if the terms of
a contract are clear and leave no doubt upon the intention of the
contracting parties, the literal meaning of its stipulation shall
control.13 In the case at bar, petitioner expressly bound herself to be
jointly and severally or solidarily liable with the principal maker of the
note. The terms of the contract are clear, explicit and unequivocal that
petitioner's liability is that of a surety.
Her pretension that the terms "jointly and severally or solidarily liable"
contained in the second paragraph of her contract are technical and
legal terms which could not be easily understood by an ordinary
layman like her is diametrically opposed to her manifestation in the
contract that she "fully understood the contents" of the promissory
note and that she is "fully aware" of her solidary liability with the
principal maker. Petitioner admits that she voluntarily affixed her
signature thereto; ergo, she cannot now be heard to claim otherwise.
Any reference to the existence of fraud is unavailing. Fraud must be
established by clear and convincing evidence, mere preponderance of
evidence not even being adequate. Petitioner's attempt to prove fraud
must, therefore, fail as it was evidenced only by her own
uncorroborated and, expectedly, self-serving allegations.14
Having entered into the contract with full knowledge of its terms and
conditions, petitioner is estopped to assert that she did so under a
misapprehension or in ignorance of their legal effect, or as to the legal
effect of the undertaking.15 The rule that ignorance of the contents of an
instrument does not ordinarily affect the liability of one who signs it
also applies to contracts of suretyship. And the mistake of a surety as
to the legal effect of her obligation is ordinarily no reason for relieving
her of liability.16
Petitioner would like to make capital of the fact that although she
obligated herself to be jointly and severally liable with the principal
maker, her liability is deemed restricted by the provisions of the third
paragraph of her contract wherein she agreed "that M.B. Lending
Corporation may demand payment of the above loan from me in case
the principal maker, Mrs. Merlyn Azarraga defaults in the payment of
the note," which makes her contract one of guaranty and not
suretyship. The purported discordance is more apparent than real.
A surety is an insurer of the debt, whereas a guarantor is an insurer of
the solvency of the debtor.17 A suretyship is an undertaking that the
debt shall be paid; a guaranty, an undertaking that the debtor shall
pay.18 Stated differently, a surety promises to pay the principal's debt if
the principal will not pay, while a guarantor agrees that the creditor,
after proceeding against the principal, may proceed against the
guarantor if the principal is unable to pay.19 A surety binds himself to
perform if the principal does not, without regard to his ability to do so.
A guarantor, on the other hand, does not contract that the principal will
pay, but simply that he is able to do so.20 In other words, a surety
undertakes directly for the payment and is so responsible at once if the
principal debtor makes default, while a guarantor contracts to pay if, by
the use of due diligence, the debt cannot be made out of the principal
debtor.21
Quintessentially, the undertaking to pay upon default of the principal
debtor does not automatically remove it from the ambit of a contract of
suretyship. The second and third paragraphs of the aforequoted
portion of the promissory note do not contain any other condition for
the enforcement of respondent corporation's right against petitioner. It
has not been shown, either in the contract or the pleadings, that
respondent corporation agreed to proceed against herein
petitioner only if and when the defaulting principal has become
insolvent. A contract of suretyship, to repeat, is that wherein one lends
his credit by joining in the principal debtor's obligation, so as to render
himself directly and primarily responsible with him, and without
reference to the solvency of the principal.22
In a desperate effort to exonerate herself from liability, petitioner
erroneously invokes the rule on strictissimi juris, which holds that
when the meaning of a contract of indemnity or guaranty has once
been judicially determined under the rule of reasonable construction
applicable to all written contracts, then the liability of the surety, under
his contract, as thus interpreted and construed, is not to be extended
beyond its strict meaning.23 The rule, however, will apply only after it
has been definitely ascertained that the contract is one of suretyship
and not a contract of guaranty. It cannot be used as an aid in
determining whether a party's undertaking is that of a surety or a
guarantor.
Prescinding from these jurisprudential authorities, there can be no
doubt that the stipulation contained in the third paragraph of the
controverted suretyship contract merely elucidated on and made more
specific the obligation of petitioner as generally defined in the second
paragraph thereof. Resultantly, the theory advanced by petitioner, that
she is merely a guarantor because her liability attaches only upon
default of the principal debtor, must necessarily fail for being
incongruent with the judicial pronouncements adverted to above.
It is a well-entrenched rule that in order to judge the intention of the
contracting parties, their contemporaneous and subsequent acts shall
also be principally considered.24 Several attendant factors in that genre
lend support to our finding that petitioner is a surety. For one, when
petitioner was informed about the failure of the principal debtor to pay
the loan, she immediately offered to settle the account with respondent
corporation. Obviously, in her mind, she knew that she was directly and
primarily liable upon default of her principal. For another, and this is
most revealing, petitioner presented the receipts of the payments
already made, from the time of initial payment up to the last, which
were all issued in her name and of the Azarraga spouses.25 This can
only be construed to mean that the payments made by the principal
debtors were considered by respondent corporation as creditable
directly upon the account and inuring to the benefit of petitioner. The
concomitant and simultaneous compliance of petitioner's obligation
with that of her principals only goes to show that, from the very start,
petitioner considered herself equally bound by the contract of the
principal makers.
In this regard, we need only to reiterate the rule that a surety is bound
equally and absolutely with the principal,26 and as such is deemed an
original promisor and debtor from the beginning.27 This is because in
suretyship there is but one contract, and the surety is bound by the
same agreement which binds the principal.28 In essence, the contract of
a surety starts with the agreement,29 which is precisely the situation
obtaining in this case before the Court.
It will further be observed that petitioner's undertaking as co-maker
immediately follows the terms and conditions stipulated between
respondent corporation, as creditor, and the principal obligors. A
surety is usually bound with his principal by the same instrument,
executed at the same time and upon the same consideration; he is an
original debtor, and his liability is immediate and direct.30 Thus, it has
been held that where a written agreement on the same sheet of paper
with and immediately following the principal contract between the
buyer and seller is executed simultaneously therewith, providing that
the signers of the agreement agreed to the terms of the principal
contract, the signers were "sureties" jointly liable with the buyer.31 A
surety usually enters into the same obligation as that of his principal,
and the signatures of both usually appear upon the same instrument,
and the same consideration usually supports the obligation for both the
principal and the surety.32
There is no merit in petitioner's contention that the complaint was
prematurely filed because the principal debtors cannot as yet be
considered in default, there having been no judicial or extrajudicial
demand made by respondent corporation. Petitioner has agreed that
respondent corporation may demand payment of the loan from her in
case the principal maker defaults, subject to the same conditions
expressed in the promissory note. Significantly, paragraph (G) of the
note states that "should I fail to pay in accordance with the above
schedule of payment, I hereby waive my right to notice and demand."
Hence, demand by the creditor is no longer necessary in order that
delay may exist since the contract itself already expressly so
declares.33 As a surety, petitioner is equally bound by such waiver.
Even if it were otherwise, demand on the sureties is not necessary
before bringing suit against them, since the commencement of the suit
is a sufficient demand.34 On this point, it may be worth mentioning that
a surety is not even entitled, as a matter of right, to be given notice of
the principal's default. Inasmuch as the creditor owes no duty of active
diligence to take care of the interest of the surety, his mere failure to
voluntarily give information to the surety of the default of the principal
cannot have the effect of discharging the surety. The surety is bound to
take notice of the principal's default and to perform the obligation. He
cannot complain that the creditor has not notified
him in the absence of a special agreement to that effect in the contract
of suretyship.35
The alleged failure of respondent corporation to prove the fact of
demand on the principal debtors, by not attaching copies thereof to its
pleadings, is likewise immaterial. In the absence of a statutory or
contractual requirement, it is not necessary that payment or
performance of his obligation be first demanded of the principal,
especially where demand would have been useless; nor is it a requisite,
before proceeding against the sureties, that the principal be called on
to account.36 The underlying principle therefor is that a suretyship is a
direct contract to pay the debt of another. A surety is liable as much as
his principal is liable, and absolutely liable as soon as default is made,
without any demand upon the principal whatsoever or any notice of
default.37 As an original promisor and debtor from the beginning, he is
held ordinarily to know every default of his principal.38
Petitioner questions the propriety of the filing of a complaint solely
against her to the exclusion of the principal debtors who allegedly were
the only ones who benefited from the proceeds of the loan. What
petitioner is trying to imply is that the creditor, herein respondent
corporation, should have proceeded first against the principal before
suing on her obligation as surety. We disagree.
A creditor's right to proceed against the surety exists independently of
his right to proceed against the principal.39 Under Article 1216 of the
Civil Code, the creditor may proceed against any one of the solidary
debtors or some or all of them simultaneously. The rule, therefore, is
that if the obligation is joint and several, the creditor has the right to
proceed even against the surety alone.40 Since, generally, it is not
necessary for the creditor to proceed against a principal in order to
hold the surety liable, where, by the terms of the contract, the
obligation of the surety is the same that of the principal, then soon as
the principal is in default, the surety is likewise in default, and may be
sued immediately and before any proceedings are had against the
principal.41 Perforce, in accordance with the rule that, in the absence of
statute or agreement otherwise, a surety is primarily liable, and with the
rule that his proper remedy is to pay the debt and pursue the principal
for reimbursement, the surety cannot at law, unless permitted by
statute and in the absence of any agreement limiting the application of
the security, require the creditor or obligee, before proceeding against
the surety, to resort to and exhaust his remedies against the principal,
particularly where both principal and surety are equally bound.42
We agree with respondent corporation that its mere failure to
immediately sue petitioner on her obligation does not release her from
liability. Where a creditor refrains from proceeding against the
principal, the surety is not exonerated. In other words, mere want of
diligence or forbearance does not affect the creditor's rights vis-a-
vis the surety, unless the surety requires him by appropriate notice to
sue on the obligation. Such gratuitous indulgence of the principal does
not discharge the surety whether given at the principal's request or
without it, and whether it is yielded by the creditor through sympathy or
from an inclination to favor the principal, or is only the result of
passiveness. The neglect of the creditor to sue the principal at the time
the debt falls due does not discharge the surety, even if such delay
continues until the principal becomes insolvent.43 And, in the absence
of proof of resultant injury, a surety is not discharged by the creditor's
mere statement that the creditor will not look to the surety, 44 or that he
need not trouble himself.45 The consequences of the delay, such as the
subsequent insolvency of the principal,46 or the fact that the remedies
against the principal may be lost by lapse of time, are immaterial.47
The raison d'tre for the rule is that there is nothing to prevent the
creditor from proceeding against the principal at any time.48 At any rate,
if the surety is dissatisfied with the degree of activity displayed by the
creditor in the pursuit of his principal, he may pay the debt himself and
become subrogated to all the rights and remedies of the creditor. 49
It may not be amiss to add that leniency shown to a debtor in default,
by delay permitted by the creditor without change in the time when the
debt might be demanded, does not constitute an extension of the time
of payment, which would release the surety.50 In order to constitute an
extension discharging the surety, it should appear that the extension
was for a definite period, pursuant to an enforceable agreement
between the principal and the creditor, and that it was made without the
consent of the surety or with a reservation of rights with respect to him.
The contract must be one which precludes the creditor from, or at least
hinders him in, enforcing the principal contract within the period during
which he could otherwise have enforced it, and which precludes the
surety from paying the debt.51
None of these elements are present in the instant case. Verily, the mere
fact that respondent corporation gave the principal debtors an
extended period of time within which to comply with their obligation did
not effectively absolve here in petitioner from the consequences of her
undertaking. Besides, the burden is on the surety, herein petitioner, to
show that she has been discharged by some act of the
creditor,52 herein respondent corporation, failing in which we cannot
grant the relief prayed for.
As a final issue, petitioner claims that assuming that her liability is
solidary, the interests and penalty charges on the outstanding balance
of the loan cannot be imposed for being illegal and unconscionable.
Petitioner additionally theorizes that respondent corporation
intentionally delayed the collection of the loan in order that the
interests and penalty charges would accumulate. The statement,
likewise traversed by said respondent, is misleading.
In an affidavit53 executed by petitioner, which was attached to her
petition, she stated, among others, that:
8. During the latter part of 1990, I was surprised to learn that
Merlyn Azarraga's loan has been released and that she has not
paid the same upon its maturity. I received a telephone call from
Mr. Augusto Banusing of MB Lending informing me of this fact
and of my liability arising from the promissory note which I
signed.
9. I requested Mr. Banusing to try to collect first from Merlyn
and Osmea Azarraga. At the same time, I offered to pay MB
Lending the outstanding balance of the principal obligation
should he fail to collect from Merlyn and Osmea Azarraga. Mr.
Banusing advised me not to worry because he will try to collect
first from Merlyn and Osmea Azarraga.
10. A year thereafter, I received a telephone call from the
secretary of Mr. Banusing who reminded that the loan of Merlyn
and Osmea Azarraga, together with interest and penalties
thereon, has not been paid. Since I had no available funds at
that time, I offered to pay MB Lending by delivering to them a
parcel of land which I own. Mr. Banusing's secretary, however,
refused my offer for the reason that they are not interested in
real estate.
11. In March 1992, I received a copy of the summons and of the
complaint filed against me by MB Lending before the RTC-Iloilo.
After learning that a complaint was filed against me, I instructed
Sheila Gatia to go to MB Lending and reiterate my first offer to
pay the outstanding balance of the principal obligation of
Merlyn Azarraga in the amount of P30,000.00.
12. Ms. Gatia talked to the secretary of Mr. Banusing who
referred her to Atty. Venus, counsel of MB Lending.
13. Atty. Venus informed Ms. Gatia that he will consult Mr.
Banusing if my offer to pay the outstanding balance of the
principal obligation loan (sic) of Merlyn and Osmea Azarraga is
acceptable. Later, Atty. Venus informed Ms. Gatia that my offer
is not acceptable to Mr. Banusing.
The purported offer to pay made by petitioner can not be deemed
sufficient and substantial in order to effectively discharge her from
liability. There are a number of circumstances which conjointly inveigh
against her aforesaid theory.
1. Respondent corporation cannot be faulted for not immediately
demanding payment from petitioner. It was petitioner who initially
requested that the creditor try to collect from her principal first, and she
offered to pay only in case the creditor fails to collect. The delay, if any,
was occasioned by the fact that respondent corporation merely
acquiesced to the request of petitioner. At any rate, there was here no
actual offer of payment to speak of but only a commitment to pay if the
principal does not pay.
2. Petitioner made a second attempt to settle the obligation by offering
a parcel of land which she owned. Respondent corporation was acting
well within its rights when it refused to accept the offer. The debtor of a
thing cannot compel the creditor to receive a different one, although
the latter may be of the same value, or more valuable than that which is
due.54 The obligee is entitled to demand fulfillment of the obligation or
performance as stipulated. A change of the object of the obligation
would constitute novation requiring the express consent of the
parties.55
3. After the complaint was filed against her, petitioner reiterated her
offer to pay the outstanding balance of the obligation in the amount of
P30,000.00 but the same was likewise rejected. Again, respondent
corporation cannot be blamed for refusing the amount being offered
because it fell way below the amount it had computed, based on the
stipulated interests and penalty charges, as owing and due from herein
petitioner. A debt shall not be understood to have been paid unless the
thing or service in which the obligation consists has been completely
delivered or rendered, as the case may be.56 In other words, the
prestation must be fulfilled completely. A person entering into a
contract has a right to insist on its performance in all particulars.57
Petitioner cannot compel respondent corporation to accept the amount
she is willing to pay because the moment the latter accepts the
performance, knowing its incompleteness or irregularity, and without
expressing any protest or objection, then the obligation shall be
deemed fully complied with.58 Precisely, this is what respondent
corporation wanted to avoid when it continually refused to settle with
petitioner at less than what was actually due under their contract.
This notwithstanding, however, we find and so hold that the penalty
charge of 3% per month and attorney's fees equivalent to 25% of the
total amount due are highly inequitable and unreasonable.
It must be remembered that from the principal loan of P30,000.00, the
amount of P16,300.00 had already been paid even before the filing of
the present case. Article 1229 of the Civil Code provides that the court
shall equitably reduce the penalty when the principal obligation has
been partly or irregularly complied with by the debtor. And, even if
there has been no performance, the penalty may also be reduced if it is
iniquitous or leonine.
In a case previously decided by this Court which likewise involved
private respondent M.B. Lending Corporation, and which is
substantially on all fours with the one at bar, we decided to eliminate
altogether the penalty interest for being excessive and unwarranted
under the following rationalization:
Upon the matter of penalty interest, we agree with the Court of
Appeals that the economic impact of the penalty interest of
three percent (3 %) per month on total amount due but unpaid
should be equitably reduced. The purpose for which the penalty
interest is intended that is, to punish the obligor will have
been sufficiently served by the effects of compounded interest.
Under the exceptional circumstances in the case at bar, e.g., the
original amount loaned was only P15,000.00; partial payment of
P8,600.00 was made on due date; and the heavy (albeit still
lawful) regular compensatory interest, the penalty interest
stipulated in the parties' promissory note is iniquitous and
unconscionable and may be equitably reduced further by
eliminating such penalty interest altogether.59
Accordingly, the penalty interest of 3% per month being imposed on
petitioner should similarly be eliminated.
Finally, with respect to the award of attorney's fees, this Court has
previously ruled that even with an agreement thereon between the
parties, the court may nevertheless reduce such attorney's fees fixed in
the contract when the amount thereof appears to be unconscionable or
unreasonable.60 To that end, it is not even necessary to show, as in
other contracts, that it is contrary to morals or public policy.61 The
grant of attorney's fees equivalent to 25% of the total amount due is, in
our opinion, unreasonable and immoderate, considering the minimal
unpaid amount involved and the extent of the work involved in this
simple action for collection of a sum of money. We, therefore, hold that
the amount of P10,000.00 as and for attorney's fee would be sufficient
in this case.62
WHEREFORE, the judgment appealed from is hereby AFFIRMED, personal and individual capacities. One Guaranty[4] was executed by petitioner
subject to the MODIFICATION that the penalty interest of 3% per month Salvador Escao (Escao), while the other[5] by petitioner Mario M. Silos (Silos),
is hereby deleted and the award of attorney's fees is reduced to Ricardo C. Silverio (Silverio), Carlos L. Inductivo (Inductivo) and Joaquin J.
P10,000.00. Rodriguez (Rodriguez).

SO ORDERED. Two years later, an agreement developed to cede control of Falcon to Escao,
Silos and Joseph M. Matti (Matti). Thus, contracts were executed whereby
SALVADOR P. ESCAO G. R. No. 151953 Ortigas, George A. Scholey, Inductivo and the heirs of then already deceased
and MARIO M. SILOS, George T. Scholey assigned their shares of stock in Falcon to Escao, Silos
and Matti.[6] Part of the consideration that induced the sale of stock was a
Petitioners,
desire by Ortigas, et al., to relieve themselves of all liability arising from their
Present:
previous joint and several undertakings with Falcon, including those related to
QUISUMBING,
- versus - Chairperson, the loan with PDCP. Thus, an Undertaking dated 11 June 1982 was executed
CARPIO, by the concerned parties,[7] namely: with Escao, Silos and Matti identified in
CARPIO MORALES, the document as SURETIES, on one hand, and Ortigas, Inductivo and the
Scholeys as OBLIGORS, on the other. The Undertaking reads in part:
TINGA, and
RAFAEL ORTIGAS, JR., VELASCO, JR., JJ.
3. That whether or not SURETIES are able to immediately
Respondent.
cause PDCP and PAIC to release OBLIGORS from their
Promulgated:
said guarantees [sic], SURETIES hereby irrevocably
agree and undertake to assume all of OBLIGORs said
June 29, 2007
guarantees [sic] to PDCP and PAIC under the following
terms and conditions:
x---------------------------------------------------------------------------------x
a. Upon receipt by any of [the] OBLIGORS of
DECISION any demand from PDCP and/or PAIC for the
payment of FALCONs obligations with it, any
TINGA, J.: of [the] OBLIGORS shall immediately inform
SURETIES thereof so that the latter can
timely take appropriate measures;
The main contention raised in this petition is that petitioners are not
under obligation to reimburse respondent, a claim that can be easily
debunked. The more perplexing question is whether this obligation to repay is b. Should suit be impleaded by PDCP and/or
PAIC against any and/or all of OBLIGORS for
solidary, as contended by respondent and the lower courts, or merely joint as
collection of said loans and/or credit facilities,
argued by petitioners.
SURETIES agree to defend OBLIGORS at
their own expense, without prejudice to any
On 28 April 1980, Private Development Corporation of the Philippines
(PDCP)[1] entered into a loan agreement with Falcon Minerals, Inc. (Falcon) and/or all of OBLIGORS impleading
whereby PDCP agreed to make available and lend to Falcon the amount of SURETIES therein for contribution,
indemnity, subrogation or other relief in
US$320,000.00, for specific purposes and subject to certain terms and
respect to any of the claims of PDCP and/or
conditions.[2] On the same day, three stockholders-officers of Falcon, namely:
PAIC; and
respondent Rafael Ortigas, Jr. (Ortigas), George A. Scholey and George T.
Scholey executed an Assumption of Solidary Liability whereby they agreed to
assume in [their] individual capacity, solidary liability with [Falcon] for the due c. In the event that any of [the]
OBLIGORS is for any reason made to pay
and punctual payment of the loan contracted by Falcon with PDCP.[3] In the
any amount to PDCP and/or PAIC,
meantime, two separate guaranties were executed to guarantee the payment
SURETIES shall reimburse OBLIGORS for
of the same loan by other stockholders and officers of Falcon, acting in their
 said amount/s within seven (7) calendar days
from such payment;
4. OBLIGORS hereby waive in favor of SURETIES
any and all fees which may be due from FALCON arising out
of, or in connection with, their said guarantees[sic].[8]
Falcon eventually availed of the sum of US$178,655.59 from the credit line
extended by PDCP. It would also execute a Deed of Chattel Mortgage over its
personal properties to further secure the loan. However, Falcon subsequently
defaulted in its payments. After PDCP foreclosed on the chattel mortgage,
there remained a subsisting deficiency of P5,031,004.07, which Falcon did not
satisfy despite demand.[9]
On 28 April 1989, in order to recover the indebtedness, PDCP filed a
complaint for sum of money with the Regional Trial Court of Makati (RTC)
against Falcon, Ortigas, Escao, Silos, Silverio and Inductivo. The case was
docketed as Civil Case No. 89-5128. For his part, Ortigas filed together with
his answer a cross-claim against his co-defendants Falcon, Escao and Silos,
and also manifested his intent to file a third-party complaint against the
Scholeys and Matti.[10] The cross-claim lodged against Escao and Silos was
predicated on the 1982 Undertaking, wherein they agreed to assume the
liabilities of Ortigas with respect to the PDCP loan.
Escao, Ortigas and Silos each sought to seek a settlement with PDCP.
The first to come to terms with PDCP was Escao, who in December of 1993,
entered into a compromise agreement whereby he agreed to pay the
bank P1,000,000.00. In exchange, PDCP waived or assigned in favor of Escao
one-third (1/3) of its entire claim in the complaint against all of the other
defendants in the case.[11] The compromise agreement was approved by the
RTC in a Judgment[12] dated 6 January 1994.
Then on 24 February 1994, Ortigas entered into his own compromise
agreement[13] with PDCP, allegedly without the knowledge of Escao, Matti and
Silos. Thereby, Ortigas agreed to pay PDCP P1,300,000.00 as full satisfaction
of the PDCPs claim against Ortigas,[14] in exchange for PDCPs release of
Ortigas from any liability or claim arising from the Falcon loan agreement, and
a renunciation of its claims against Ortigas.
In 1995, Silos and PDCP entered into a Partial Compromise
Agreement whereby he agreed to pay P500,000.00 in exchange for PDCPs
waiver of its claims against him.[15]
In the meantime, after having settled with PDCP, Ortigas pursued his
claims against Escao, Silos and Matti, on the basis of the 1982 Undertaking.
He initiated a third-party complaint against Matti and Silos,[16] while he
maintained his cross-claim against Escao. In 1995, Ortigas filed a motion for
Summary Judgment in his favor against Escao, Silos and Matti. On 5 October
1995, the RTC issued the Summary Judgment, ordering Escao, Silos and Matti
to pay Ortigas, jointly and severally, the amount of P1,300,000.00, as well
as P20,000.00 in attorneys fees.[17] The trial court ratiocinated that none of the
third-party defendants disputed the 1982 Undertaking, and that the mere
denials of defendants with respect to non-compliance of Ortigas of the terms
and conditions of the Undertaking, unaccompanied by any substantial fact
which would be admissible in evidence at a hearing, are not sufficient to raise
genuine issues of fact necessary to defeat a motion for summary judgment,
even if such facts were raised in the pleadings.[18] In an Order dated 7 March
1996, the trial court denied the motion for reconsideration of the Summary
Judgment and awarded Ortigas legal interest of 12% per annum to be
computed from 28 February 1994.[19]
From the Summary Judgment, recourse was had by way of appeal to
the Court of Appeals. Escao and Silos appealed jointly while Matti appealed
by his lonesome. In a Decision[20] dated 23 January 2002, the Court of Appeals
dismissed the appeals and affirmed the Summary Judgment. The appellate
court found that the RTC did not err in rendering the summary judgment since
the three appellants did not effectively deny their execution of the 1982
Undertaking. The special defenses that were raised, payment and excussion,
were characterized by the Court of Appeals as appear[ing] to be merely sham
in the light of the pleadings and supporting documents and affidavits.[21] Thus,
it was concluded that there was no genuine issue that would still require the
rigors of trial, and that the appealed judgment was decided on the bases of the
undisputed and established facts of the case.
Hence, the present petition for review filed by Escao and Silos.[22] Two
main issues are raised. First, petitioners dispute that they are liable to Ortigas
on the basis of the 1982 Undertaking, a document which they do not disavow
and have in fact annexed to their petition. Second, on the assumption that they
are liable to Ortigas under the 1982 Undertaking, petitioners argue that they
are jointly liable only, and not solidarily. Further assuming that they are liable,
petitioners also submit that they are not liable for interest and if at all, the
proper interest rate is 6% and not 12%.
Interestingly, petitioners do not challenge, whether in their petition or
their memorandum before the Court, the appropriateness of the summary
judgment as a relief favorable to Ortigas. Under Section 3, Rule 35 of the 1997
Rules of Civil Procedure, summary judgment may avail if the pleadings,
supporting affidavits, depositions and admissions on file show that, except as
to the amount of damages, there is no genuine issue as to any material fact
and that the moving party is entitled to a judgment as a matter of law. Petitioner
have not attempted to demonstrate before us that there existed a genuine
issue as to any material fact that would preclude summary judgment. Thus, we
affirm with ease the common rulings of the lower courts that summary
judgment is an appropriate recourse in this case.
The vital issue actually raised before us is whether petitioners were
correctly held liable to Ortigas on the basis of the 1982 Undertaking in this
Summary Judgment. An examination of the document reveals several clauses
that make it clear that the agreement was brought forth by the desire of
Ortigas, Inductivo and the Scholeys to be released from their liability under the
loan agreement which release was, in turn, part of the consideration for the
assignment of their shares in Falcon to petitioners and Matti. The whereas
clauses manifest that Ortigas had bound himself with Falcon for the payment
of the loan with PDCP, and that amongst the consideration for OBLIGORS
and/or their principals aforesaid selling is SURETIES relieving OBLIGORS of
any and all liability arising from their said joint and several undertakings with
FALCON.[23] Most crucial is the clause in Paragraph 3 of the Undertaking
wherein petitioners irrevocably agree and undertake to assume all of
OBLIGORs said guarantees [sic] to PDCP x x x under the following terms and
conditions.[24]
At the same time, it is clear that the assumption by petitioners of
Ortigass guarantees [sic] to PDCP is governed by stipulated terms and
conditions as set forth in sub-paragraphs (a) to (c) of Paragraph 3. First, upon
receipt by any of OBLIGORS of any demand from PDCP for the payment of
Falcons obligations with it, any of OBLIGORS was to immediately inform
SURETIES thereof so that the latter can timely take appropriate measures.
Second, should any and/or all of OBLIGORS be impleaded by PDCP in a suit
for collection of its loan, SURETIES agree[d] to defend OBLIGORS at their
own expense, without prejudice to any and/or all of OBLIGORS impleading
SURETIES therein for contribution, indemnity, subrogation or other relief [25] in
respect to any of the claims of PDCP. Third, if any of the OBLIGORS is for any
reason made to pay any amount to [PDCP], SURETIES [were to] reimburse
OBLIGORS for said amount/s within seven (7) calendar days from such
payment.[26]
Petitioners claim that, contrary to paragraph 3(c) of the Undertaking,
Ortigas was not made to pay PDCP the amount now sought to be reimbursed,
as Ortigas voluntarily paid PDCP the amount of P1.3 Million as an amicable
settlement of the claims posed by the bank against him. However, the subject
clause in paragraph 3(c) actually reads [i]n the event that any of OBLIGORS
is for any reason made to pay any amount to PDCP x x x[27] As pointed out
by Ortigas, the phrase for any reason reasonably includes any extra-judicial
settlement of obligation such as what Ortigas had undertaken to pay to PDCP,
as it is indeed obvious that the phrase was incorporated in the clause to render
the eventual payment adverted to therein unlimited and unqualified.
The interpretation posed by petitioners would have held water had the
Undertaking made clear that the right of Ortigas to seek reimbursement
accrued only after he had delivered payment to PDCP as a consequence of a
final and executory judgment. On the contrary, the clear intent of the
Undertaking was for petitioners and Matti to relieve the burden on Ortigas and
his fellow OBLIGORS as soon as possible, and not only after Ortigas had been
subjected to a final and executory adverse judgment.
Paragraph 1 of the Undertaking enjoins petitioners to exert all efforts
to cause PDCP x x x to within a reasonable time release all the OBLIGORS x
x x from their guarantees [sic] to PDCP x x x [28] In the event that Ortigas and
his fellow OBLIGORS could not be released from their guaranties, paragraph
2 commits petitioners and Matti to cause the Board of Directors of Falcon to
make a call on its stockholders for the payment of their unpaid subscriptions
and to pledge or assign such payments to Ortigas, et al., as security for
whatever amounts the latter may be held liable under their guaranties. In
addition, paragraph 1 also makes clear that nothing in the Undertaking shall
prevent OBLIGORS, or any one of them, from themselves negotiating with
PDCP x x x for the release of their said guarantees [sic].[29]
There is no argument to support petitioners position on the import of
the phrase made to pay in the Undertaking, other than an unduly literalist
reading that is clearly inconsistent with the thrust of the document. Under the
Civil Code, the various stipulations of a contract shall be interpreted together,
attributing to the doubtful ones that sense which may result from all of them
taken jointly.[30] Likewise applicable is the provision that if some stipulation of
any contract should admit of several meanings, it shall be understood as
bearing
that import which is most adequate to render it effectual.[31] As a means to
effect the general intent of the document to relieve Ortigas from liability to
PDCP, it is his interpretation, not that of petitioners, that holds sway with this
Court.
Neither do petitioners impress us of the non-fulfillment of any of the
other conditions set in paragraph 3, as they claim. Following the general
assertion in the petition that Ortigas violated the terms of the Undertaking,
petitioners add that Ortigas paid PDCP BANK the amount of P1.3 million
without petitioners ESCANO and SILOSs knowledge and
consent.[32] Paragraph 3(a) of the Undertaking does impose a requirement that
any of the OBLIGORS shall immediately inform SURETIES if they received
any demand for payment of FALCONs obligations to PDCP, but that
requirement is reasoned so that the [SURETIES] can timely take appropriate
measures[33] presumably to settle the obligation without having to burden the
OBLIGORS. This notice requirement in paragraph 3(a) is markedly way off
from the suggestion of petitioners that Ortigas, after already having been
impleaded as a defendant in the collection suit, was obliged under the 1982
Undertaking to notify them before settling with PDCP.
The other arguments petitioners have offered to escape liability to
Ortigas are similarly weak.
Petitioners impugn Ortigas for having settled with PDCP in the first
place. They note that Ortigas had, in his answer, denied any liability to PDCP
and had alleged that he signed the Assumption of Solidary Liability not in his
personal capacity, but as an officer of Falcon. However, such position,
according to petitioners, could not be justified since Ortigas later voluntarily
paid PDCP the amount of P1.3 Million. Such circumstances, according to
petitioners, amounted to estoppel on the part of Ortigas.
Even as we entertain this argument at depth, its premises are still
erroneous. The Partial Compromise Agreement between PDCP and Ortigas
expressly stipulated that Ortigass offer to pay PDCP was conditioned without
[Ortigass] admitting liability to plaintiff PDCP Banks complaint, and to
terminate and dismiss the said case as against Ortigas solely. [34] Petitioners
profess it is unthinkable for Ortigas to have voluntarily paid PDCP without
admitting his liability,[35] yet such contention based on assumption cannot
supersede the literal terms of the Partial Compromise Agreement.
Petitioners further observe that Ortigas made the payment to PDCP
after he had already assigned his obligation to petitioners through the 1982
Undertaking. Yet the fact is PDCP did pursue a judicial claim against Ortigas
notwithstanding the Undertaking he executed with petitioners. Not being a
party to such Undertaking, PDCP was not precluded by a contract from
pursuing its claim against Ortigas based on the original Assumption of Solidary
Liability.
At the same time, the Undertaking did not preclude Ortigas from
relieving his distress through a settlement with the creditor bank. Indeed,
paragraph 1 of the Undertaking expressly states that nothing herein shall
prevent OBLIGORS, or any one of them, from themselves negotiating with
PDCP x x x for the release of their said guarantees [sic].[36] Simply put, the
Undertaking did not bar Ortigas from pursuing his own settlement with PDCP.
Neither did the Undertaking bar Ortigas from recovering from petitioners
whatever amount he may have paid PDCP through his own settlement. The
stipulation that if Ortigas was for any reason made to pay any amount to
PDCP[,] x x x SURETIES shall reimburse OBLIGORS for said amount/s within
seven (7) calendar days from such payment[37] makes it clear that petitioners
remain liable to reimburse Ortigas for the sums he paid PDCP.
We now turn to the set of arguments posed by petitioners, in the
alternative, that is, on the assumption that they are indeed liable.
Petitioners submit that they could only be held jointly, not solidarily,
liable to Ortigas, claiming that the Undertaking did not provide for express
solidarity. They cite Article 1207 of the New Civil Code, which states in part
that [t]here is a solidary liability only when the obligation expressly so states,
or when the law or the nature of the obligation requires solidarity.
Ortigas in turn argues that petitioners, as well as Matti, are jointly and
severally liable for the Undertaking, as the language used in the agreement
clearly shows that it is a surety agreement[38] between the obligors (Ortigas
group) and the sureties (Escao group). Ortigas points out that the Undertaking
uses the word SURETIES although the document, in describing the parties. It
is further contended that the principal objective of the parties in executing the
Undertaking cannot be attained unless petitioners are solidarily liable because
the total loan obligation can not be paid or settled to free or release the
OBLIGORS if one or any of the SURETIES default from their obligation in the
Undertaking.[39]
In case, there is a concurrence of two or more creditors or of two or more
debtors in one and the same obligation, Article 1207 of the Civil Code states
that among them, [t]here is a solidary liability only when the obligation
expressly so states, or when the law or the nature of the obligation requires
solidarity. Article 1210 supplies further caution against the broad interpretation
of solidarity by providing: The indivisibility of an obligation does not necessarily
give rise to solidarity. Nor does solidarity of itself imply indivisibility.
These Civil Code provisions establish that in case of concurrence of two or
more creditors or of two or more debtors in one and the same obligation, and
in the absence of express and indubitable terms characterizing the obligation
as solidary, the presumption is that the obligation is only joint. It thus becomes
incumbent upon the party alleging that the obligation is indeed solidary in
character to prove such fact with a preponderance of evidence.
 The Undertaking does not contain any express stipulation that the
petitioners agreed to bind themselves jointly and severally in their obligations
to the Ortigas group, or any such terms to that effect. Hence, such obligation
established in the Undertaking is presumed only to be joint. Ortigas, as the
party alleging that the obligation is in fact solidary, bears the burden to
overcome the presumption of jointness of obligations. We rule and so hold that
he failed to discharge such burden.
Ortigas places primary reliance on the fact that the petitioners and
Matti identified themselves in the Undertaking as SURETIES, a term repeated
no less than thirteen (13) times in the document. Ortigas claims that such
manner of identification sufficiently establishes that the obligation of petitioners
to him was joint and solidary in nature.
The term surety has a specific meaning under our Civil Code. Article
2047 provides the statutory definition of a surety agreement, thus:
Art. 2047. By guaranty a person, called the guarantor,
binds himself to the creditor to fulfill the obligation of the
principal debtor in case the latter should fail to do so.
If a person binds himself solidarily with the principal
debtor, the provisions of Section 4, Chapter 3, Title I of this
Book shall be observed. In such case the contract is called
a suretyship. [Emphasis supplied][40]
As provided in Article 2047 in a surety agreement the surety
undertakes to be bound solidarily with the principal debtor. Thus, a surety
agreement is an ancillary contract as it presupposes the existence of a
principal contract. It appears that Ortigass argument rests solely on the
solidary nature of the obligation of the surety under Article 2047. In tandem
with the nomenclature SURETIES accorded to petitioners and Matti in the
Undertaking, however, this
argument can only be viable if the obligations established in the
Undertaking do partake of the nature of a suretyship as defined under Article
2047 in the first place. That clearly is not the case here, notwithstanding the
use of the nomenclature SURETIES in the Undertaking.
Again, as indicated by Article 2047, a suretyship requires a principal
debtor to whom the surety is solidarily bound by way of an ancillary obligation
of segregate identity from the obligation between the principal debtor and the
creditor. The suretyship does bind the surety to the creditor, inasmuch as the
latter is vested with the right to proceed against the former to collect the credit
in lieu of proceeding against the principal debtor for the same obligation.[41] At
the same time, there is also a legal tie created between the surety and the
principal debtor to which the creditor is not privy or party to. The moment the
surety fully answers to the creditor for the obligation created by the principal
debtor, such obligation is extinguished.[42] At the same time, the surety may
seek reimbursement from the principal debtor for the amount paid, for the
surety does in fact become subrogated to all the rights and remedies of the
creditor.[43]
Note that Article 2047 itself specifically calls for the application of the
provisions on joint and solidary obligations to suretyship contracts. [44] Article
1217 of the Civil Code thus comes into play, recognizing the right of
reimbursement from a co-debtor (the principal debtor, in case of suretyship) in
favor of the one who paid (i.e., the surety).[45] However, a significant distinction
still lies between a joint and several debtor, on one hand, and a surety on the
other. Solidarity signifies that the creditor can compel any one of the joint and
several debtors or the surety alone to answer for the entirety of the principal
debt. The difference lies in the respective faculties of the joint and several
debtor and the surety to seek reimbursement for the sums they paid out to the
creditor.
Dr. Tolentino explains the differences between a solidary co-debtor
and a surety:
A guarantor who binds himself in solidum with the principal
debtor under the provisions of the second paragraph does not
become a solidary co-debtor to all intents and
purposes. There is a difference between a solidary co-
debtor and a fiador in solidum (surety). The latter, outside
of the liability he assumes to pay the debt before the
property of the principal debtor has been exhausted,
retains all the other rights, actions and benefits which
pertain to him by reason of the fiansa; while a solidary co-
debtor has no other rights than those bestowed upon him
in Section 4, Chapter 3, Title I, Book IV of the Civil Code.
The second paragraph of [Article 2047] is practically
equivalent to the contract of suretyship. The civil law
suretyship is, accordingly, nearly synonymous with the
common law guaranty; and the civil law relationship existing
 between the co-debtors liable in solidum is similar to the
common law suretyship.[46]
In the case of joint and several debtors, Article 1217 makes plain that
the solidary debtor who effected the payment to the creditor may claim from
his co-debtors only the share which corresponds to each, with the interest
for the payment already made. Such solidary debtor will not be able to recover
from the co-debtors the full amount already paid to the creditor, because the
right to recovery extends only to the proportional share of the other co-debtors,
and not as to the particular proportional share of the solidary debtor who
already paid. In contrast, even as the surety is solidarily bound with the
principal debtor to the creditor, the surety who does pay the creditor has the
right to recover the full amount paid, and not just any proportional share, from
the principal debtor or debtors. Such right to full reimbursement falls within the
other rights, actions and benefits which pertain to the surety by reason of the
subsidiary obligation assumed by the surety.
What is the source of this right to full reimbursement by the surety?
We find the right under Article 2066 of the Civil Code, which assures that [t]he
guarantor who pays for a debtor must be indemnified by the latter, such
indemnity comprising of, among others, the total amount of the
debt.[47] Further, Article 2067 of the Civil Code likewise establishes that [t]he
guarantor who pays is subrogated by virtue thereof to all the rights which the
creditor had against the debtor.[48]
Articles 2066 and 2067 explicitly pertain to guarantors, and one might argue
that the provisions should not extend to sureties, especially in light of the
qualifier in Article 2047 that the provisions on joint and several obligations
should apply to sureties. We reject that argument, and instead adopt Dr.
Tolentinos observation that [t]he reference in the second paragraph of [Article
2047] to the provisions of Section 4, Chapter 3, Title I, Book IV, on solidary or
several obligations, however, does not mean that suretyship is withdrawn from
the applicable provisions governing guaranty.[49] For if that were not the
implication, there would be no material difference between the surety as
defined under Article 2047 and the joint and several debtors, for both classes
of obligors would be governed by exactly the same rules and limitations.
Accordingly, the rights to indemnification and subrogation as
established and granted to the guarantor by Articles 2066 and 2067 extend as
well to sureties as defined under Article 2047. These rights granted to the
surety who pays materially differ from those granted under Article 1217 to the
solidary debtor who pays, since the indemnification that pertains to the latter
extends only [to] the share which corresponds to each [co-debtor]. It is for this
reason that the Court cannot accord the conclusion that because petitioners
are identified in the Undertaking as SURETIES, they are consequently joint
and severally liable to Ortigas.
In order for the conclusion espoused by Ortigas to hold, in light of the
general presumption favoring joint liability, the Court would have to be satisfied
that among the petitioners and Matti, there is one or some of them who stand
as the principal debtor to Ortigas and another as surety who has the right to
full reimbursement from the principal debtor or debtors. No suggestion is made
by the parties that such is the case, and certainly the Undertaking is not
revelatory of such intention. If the Court were to give full fruition to the use of
the term SURETIES as conclusive indication of the existence of a surety
agreement that in turn gives rise to a solidary obligation to pay Ortigas, the
necessary implication would be to lay down a corresponding set of rights and
obligations as between the SURETIES which petitioners and Matti did not
clearly intend.
It is not impossible that as between Escao, Silos and Matti, there was
an agreement whereby in the event that Ortigas were to seek reimbursement
from them per the terms of the Undertaking, one of them was to act as surety
and to pay Ortigas in full, subject to his right to full reimbursement from the
other two obligors. In such case, there would have been, in fact, a surety
agreement which evinces a solidary obligation in favor of Ortigas. Yet if there
was indeed such an agreement, it does not appear on the record. More
consequentially, no such intention is reflected in the Undertaking itself, the
very document that creates the conditional obligation that petitioners and Matti
reimburse Ortigas should he be made to pay PDCP. The mere utilization of
the term SURETIES could not work to such effect, especially as it does not
appear who exactly is the principal debtor whose obligation is assured or
guaranteed by the surety.
Ortigas further argues that the nature of the Undertaking requires
solidary obligation of the Sureties, since the Undertaking expressly seeks to
reliev[e] obligors of any and all liability arising from their said joint and several
undertaking with [F]alcon, and for the sureties to irrevocably agree and
undertake to assume all of obligors said guarantees to PDCP.[50] We do not
doubt that a finding of solidary liability among the petitioners works to the
benefit of Ortigas in the facilitation of these goals, yet the Undertaking itself
contains no stipulation or clause that establishes petitioners obligation to
Ortigas as solidary. Moreover, the aims adverted to by Ortigas do not by
themselves establish that the nature of the obligation requires solidarity. Even
if the liability of petitioners and Matti were adjudged as merely joint, the full
relief and reimbursement of Ortigas arising from his payment to PDCP would
still be accomplished through the complete execution of such a judgment.
Petitioners further claim that they are not liable for attorneys fees since
the Undertaking contained no such stipulation for attorneys fees, and that the
situation did not fall under the instances under Article 2208 of the Civil Code shall itself earn legal interest from the
where attorneys fees are recoverable in the absence of stipulation. time it is judicially demanded. In the
absence of stipulation, the rate of interest
shall be 12% per annum to be computed
We disagree. As Ortigas points out, the acts or omissions of the from default, i.e., from judicial or
petitioners led to his being impleaded in the suit filed by PDCP. The extrajudicial demand under and subject
Undertaking was precisely executed as a means to obtain the release of to the provisions of Article 1169 of the
Ortigas and the Scholeys from their previous obligations as sureties of Falcon, Civil Code.
especially considering that they were already divesting their shares in the
corporation. Specific provisions in the Undertaking obligate petitioners to work 2. When an obligation, not constituting a loan
for the release of Ortigas from his surety agreements with Falcon. Specific or forbearance of money, is breached, an
provisions likewise mandate the immediate repayment of Ortigas should he interest on the amount of damages
still be made to pay PDCP by reason of the guaranty agreements from which awarded may be imposed at the
he was ostensibly to be released through the efforts of petitioners. None of discretion of the court at the rate of 6%
these provisions were complied with by petitioners, and Article 2208(2) per annum. No interest, however, shall
precisely allows for the recovery of attorneys fees [w]hen the defendants act be adjudged on unliquidated claims or
or omission has compelled the plaintiff to litigate with third persons or to incur damages except when or until the
expenses to protect his interest. demand can be established with
reasonable certainty. Accordingly, where
Finally, petitioners claim that they should not be liable for interest since the demand is established with
the Undertaking does not contain any stipulation for interest, and assuming reasonable certainty, the interest shall
that they are liable, that the rate of interest should not be 12% per annum, as begin to run from the time the claim is
adjudged by the RTC. made judicially or extrajudicially (Art.
1169, Civil Code) but when such
The seminal ruling in Eastern Shipping Lines, Inc. v. Court of certainty cannot be so reasonably
Appeals[51] set forth the rules with respect to the manner of computing legal established at the time the demand is
interest: made, the interest shall begin to run only
from the date the judgment of the court is
made (at which time quantification of
damages may be deemed to have been
I. When an obligation, regardless of its source, i.e., reasonably ascertained). The actual
law, contracts, quasi-contracts, delicts or quasi-delicts is base for the computation of legal interest
breached, the contravenor can be held liable for damages. shall, in any case, be on the amount
The provisions under Title XVIII on Damages of the Civil Code finally adjudged.
govern in determining the measure of recoverable damages.
3. When the judgment of the court awarding
II. With regard particularly to an award of interest in a sum of money becomes final and
the concept of actual and compensatory damages, the rate of executory, the rate of legal interest,
interest, as well as the accrual thereof, is imposed, as follows: whether the case falls under paragraph 1
or paragraph 2, above, shall be 12% per
1. When the obligation is breached, and it annum from such finality until its
consists in the payment of a sum of satisfaction, this interim period being
money, i.e., a loan or forbearance of deemed to be by then an equivalent to a
money, the interest due should be that forbearance of credit.[52]
which may have been stipulated in
writing. Furthermore, the interest due
 Since what was the constituted in the Undertaking consisted of a
payment in a sum of money, the rate of interest thereon shall be 12% per
annum to be computed from default, i.e., from judicial or extrajudicial demand.
The interest rate imposed by the RTC is thus proper. However, the
computation should be reckoned from judicial or extrajudicial demand. Per
records, there is no indication that Ortigas made any extrajudicial demand to
petitioners and Matti after he paid PDCP, but on 14 March 1994, Ortigas made
a judicial demand when he filed a Third-Party Complaint praying that
petitioners and Matti be made to reimburse him for the payments made to
PDCP. It is the filing of this Third Party Complaint on 14 March 1994 that
should be considered as the date of judicial demand from which the
computation of interest should be reckoned.[53] Since the RTC held that
interest should be computed from 28 February 1994, the appropriate
redefinition should be made.

WHEREFORE, the Petition is GRANTED in PART. The Order of the

Regional Trial Court dated 5 October 1995 is MODIFIED by declaring that
petitioners and Joseph M. Matti are only jointly liable, not jointly and severally,
to respondent Rafael Ortigas, Jr. in the amount of P1,300,000.00. The Order
of the Regional Trial Court dated 7 March 1996 is MODIFIED in that the legal
interest of 12% per annum on the amount of P1,300,000.00 is to be computed
from 14 March 1994, the date of judicial demand, and not from 28 February
1994 as directed in the Order of the lower court. The assailed rulings are
affirmed in all other respects. Costs against petitioners.

SO ORDERED.