SECOND DIVISION
Victoria Ng Li and Redentor Padilla as signatories executed a series of trust receipts over the
[G.R. No. 154183. August 7, 2003]
SPOUSES VICKY TAN TOH and LUIS TOH, petitioners, vs. SOLID BANK CORPORATION, FIRST
BUSINESS PAPER CORPORATION, KENNETH NG LI and MA. VICTORIA NG LI, respondents.
DECISION
BELLOSILLO, J.:
RESPONDENT SOLID BANK CORPORATION AGREED TO EXTEND an omnibus line credit facility
worth P10 million in favor of respondent First Business Paper Corporation (FBPC).The terms and
conditions of the agreement as well as the checklist of documents necessary to open the credit line
were stipulated in a letter-advise of the Bank dated 16 May 1993 addressed to FBPC and to its
President, respondent Kenneth Ng Li.[1] The letter-advise[2] was effective upon compliance with the
documentary requirements.[3]
The documents essential for the credit facility and submitted for this purpose were the (a) Board
Resolution or excerpts of the Board of Directors Meeting, duly ratified by a Notary Public, authorizing
the loan and security arrangement as well as designating the officers to negotiate and sign for FBPC
specifically stating authority to mortgage, pledge and/or assign the properties of the corporation; (b)
agreement to purchase Domestic Bills; and, (c) Continuing Guaranty for any and all amounts signed
by petitioner-spouses Luis Toh and Vicky Tan Toh, and respondent-spouses Kenneth and Ma. Victoria
Ng Li.[4] The spouses Luis Toh and Vicky Tan Toh were then Chairman of the Board and Vice-President,
respectively, of FBPC, while respondent-spouses Kenneth Ng Li and Ma. Victoria Ng Li were President
and General Manager, respectively, of the same corporation.[5]
It is not disputed that the credit facility as well as its terms and conditions was not cancelled or
terminated, and that there was no prior notice of such fact as required in the letter-advise, if any was
done.
On 10 May 1993, more than thirty (30) days from date of the letter-advise, petitioner-spouses Luis
Toh and Vicky Tan Toh and respondent-spouses Kenneth Ng Li and Ma. Victoria Ng Li signed the
required Continuing Guaranty, which was embodied in a public document prepared solely by
respondent Bank.[6] The terms of the instrument defined the contract arising therefrom as a surety
agreement and provided for the solidary liability of the signatories thereto for and in consideration of
loans or advances and credit in any other manner to, or at the request or for the account of FBPC.
The Continuing Guaranty set forth no maximum limit on the indebtedness that respondent FBPC may
incur and for which the sureties may be liable, stating that the credit facility covers any and all
existing indebtedness of, and such other loans and credit facilities which may hereafter be granted to
FIRST BUSINESS PAPER CORPORATION. The surety also contained a de facto acceleration clause if
default be made in the payment of any of the instruments, indebtedness, or other obligation
guaranteed by petitioners and respondents. So as to strengthen this security, the Continuing
Guaranty waived rights of the sureties against delay or absence of notice or demand on the part of
respondent Bank, and gave future consent to the Banks action to extend or change the time
payment, and/or the manner, place or terms of payment, including renewal, of the credit facility or
any part thereof in such manner and upon such terms as the Bank may deem proper without notice
to or further assent from the sureties.
The effectivity of the Continuing Guaranty was not contingent upon any event or cause other than
the written revocation thereof with notice to the Bank that may be executed by the sureties.
On 16 June 1993 respondent FBPC started to avail of the credit facility and procure letters of
credit.[7] On 17 November 1993 FBPC opened thirteen (13) letters of credit and obtained loans
totaling P15,227,510.00.[8] As the letters of credit were secured, FBPC through its officers Kenneth Ng
Li, Ma.
goods allegedly purchased from the proceeds of the loans.[9]
On 13 January 1994 respondent Bank received information that respondent-spouses Kenneth Ng Li
and Ma. Victoria Ng Li had fraudulently departed from their conjugal home.[10] On 14 January 1994
the Bank served a demand letter upon FBPC and petitioner Luis Toh invoking the acceleration
clause[11] in the trust receipts of FBPC and claimed payment for P10,539,758.68 as unpaid overdue
accounts on the letters of credit plus interests and penalties within twenty-four (24) hours from
receipt thereof.[12] The Bank also invoked the Continuing Guaranty executed by petitioner-spouses
Luis Toh and Vicky Tan Toh who were the only parties known to be within national jurisdiction to
answer as sureties for the credit facility of FBPC.[13]
On 17 January 1994 respondent Bank filed a complaint for sum of money with ex parte application
for a writ of preliminary attachment against FBPC, spouses Kenneth Ng Li and Ma. Victoria Ng Li, and
spouses Luis Toh and Vicky Tan Toh, docketed as Civil Case No. 64047 of RTC-Br. 161, Pasig
City.[14] Alias summonses were served upon FBPC and spouses Luis Toh and Vicky Tan Toh but not
upon Kenneth Ng Li and Ma. Victoria Ng Li who had apparently absconded.[15]
Meanwhile, with the implementation of the writ of preliminary attachment resulting in the
impounding of purported properties of FBPC, the trial court was deluged with third-party claims
contesting the propriety of the attachment.[16] In the end, the Bank relinquished possession of all the
attached properties to the third-party claimants except for two (2) insignificant items as it allegedly
could barely cope with the yearly premiums on the attachment bonds.[17]
Petitioner-spouses Luis Toh and Vicky Tan Toh filed a joint answer to the complaint where they
admitted being part of FBPC from its incorporation on 29 August 1991, which was then known as
MNL Paper, Inc., until its corporate name was changed to First Business Paper Corporation.[18] They
also acknowledged that on 6 March 1992 Luis Toh was designated as one of the authorized corporate
signatories for transactions in relation to FBPCs checking account with respondent
Bank.[19] Meanwhile, for failing to file an answer, respondent FBPC was declared in default.[20]
Petitioner-spouses however could not be certain whether to deny or admit the due execution and
authenticity of the Continuing Guaranty.[21] They could only allege that they were made to sign
papers in blank and the Continuing Guaranty could have been one of them.
Still, as petitioners asserted, it was impossible and absurd for them to have freely and consciously
executed the surety on 10 May 1993, the date appearing on its face[22] since beginning March of that
year they had already divested their shares in FBPC and assigned them in favor of respondent
Kenneth Ng Li although the deeds of assignment were notarized only on 14 June 1993.[23] Petitioners
also contended that through FBPC Board Resolution dated 12 May 1993 petitioner Luis Toh was
removed as an authorized signatory for FBPC and replaced by respondent-spouses Kenneth Ng Li and
Ma. Victoria Ng Li and Redentor Padilla for all the transactions of FBPC with respondent Bank.[24] They
even resigned from their respective positions in FBPC as reflected in the 12 June 1993 Secretarys
Certificate submitted to the Securities and Exchange Commission[25] as petitioner Luis Toh was
succeeded as Chairman by respondent Ma. Victoria Ng Li, while one Mylene C. Padilla took the place
of petitioner Vicky Tan Toh as Vice-President.[26]
Finally, petitioners averred that sometime in June 1993 they obtained from respondent Kenneth Ng Li
their exclusion from the several surety agreements they had entered into with different banks, i.e.,
Hongkong and Shanghai Bank, China Banking Corporation, Far East Bank and Trust Company, and
herein respondent Bank.[27] As a matter of record, these other banks executed written surety
agreements that showed respondent Kenneth Ng Li as the only surety of FBPCs indebtedness.[28]
On 16 May 1996 the trial court promulgated its Decision in Civil Case No. 64047 finding respondent
FBPC liable to pay respondent Solid Bank Corporation the principal of P10,539,758.68 plus twelve
percent (12%) interest per annum from finality of the Decision until fully paid, but absolving
petitioner-spouses Luis Toh and Vicky Tan Toh of any liability to respondent Bank.[29] The court a
quo found that petitioners voluntarily affixed their signature[s] on the Continuing Guaranty and were
thus at some given point in time willing to be liable under those forms,[30] although it held that
petitioners were not bound by the surety contract since the letters of credit it was supposed to
secure were opened long after petitioners had ceased to be part of FBPC.[31]
The trial court described the Continuing Guaranty as effective only while petitioner-spouses were
stockholders and officers of FBPC since respondent Bank compelled petitioners to underwrite FBPCs
indebtedness as sureties without the requisite investigation of their personal solvency and capability
to undertake such risk.[32] The lower court also believed that the Bank knew of petitioners divestment
of their shares in FBPC and their subsequent resignation as officers thereof as these facts were
obvious from the numerous public documents that detailed the changes and substitutions in the list
of authorized signatories for transactions between FBPC and the Bank, including the many trust
receipts being signed by persons other than petitioners,[33] as well as the designation of new FBPC
officers which came to the notice of the Banks Vice-President Jose Chan Jr. and other officers.[34]
On 26 September 1996 the RTC-Br. 161 of Pasig City denied reconsideration of its Decision.[35]
On 9 October 1996 respondent Bank appealed the Decision to the Court of Appeals, docketed as CA-
G.R. CV No. 55957.[36] Petitioner-spouses did not move for reconsideration nor appeal the finding of
the trial court that they voluntarily executed the Continuing Guaranty.
The appellate court modified the Decision of the trial court and held that by signing the Continuing
Guaranty, petitioner-spouses became solidarily liable with FBPC to pay respondent Bank the amount
of P10,539,758.68 as principal with twelve percent (12%) interest per annum from finality of the
judgment until completely paid.[37] The Court of Appeals ratiocinated that the provisions of the surety
agreement did not indicate that Spouses Luis and Vicky Toh x x x signed the instrument in their
capacities as Chairman of the Board and Vice-President, respectively, of FBPC only.[38] Hence, the
court a quo deduced, [a]bsent any such indication, it was error for the trial court to have presumed
that the appellees indeed signed the same not in their personal capacities.[39] The appellate court also
ruled that as petitioners failed to execute any written revocation of the Continuing Guaranty with
notice to respondent Bank, the instrument remained in full force and effect when the letters of credit
were availed of by respondent FBPC.[40]
Finally, the Court of Appeals rejected petitioners argument that there were material alterations in the
provisions of the letter-advise, i.e., that only domestic letters of credit were opened when the credit
facility was for importation of papers and other materials, and that marginal deposits were not paid,
contrary to the requirements stated in the letter-advise.[41] The simple response of the appellate
court to this challenge was, first, the letter-advise itself authorized the issuance of domestic letters of
credit, and second, the several waivers extended by petitioners in the Continuing Guaranty, which
included changing the time and manner of payment of the indebtedness, justified the action of
respondent Bank not to charge marginal deposits.[42]
Petitioner-spouses moved for reconsideration of the Decision, and after respondent Banks comment,
filed a lengthy Reply with Motion for Oral Argument.[43] On 2 July 2002 reconsideration of
the Decision was denied on the ground that no new matter was raised to warrant the reversal or
modification thereof.[44] Hence, this Petition for Review.
Petitioner-spouses Luis Toh and Vicky Tan Toh argue that the Court of Appeals denied them due
process when it did not grant their motion for reconsideration and without bother[ing] to consider
[their] Reply with Motion for Oral Argument. They maintain that the Continuing Guaranty is not
legally valid and binding against them for having been executed long after they had withdrawn from
FBPC. Lastly, they claim that the surety agreement has been extinguished by the material alterations
thereof and of the letter-advise which were allegedly brought about by (a) the provision of an
acceleration clause in the trust receipts; (b) the flight of their co-sureties, respondent-spouses
Kenneth Ng Li and Ma. Victoria Ng Li; (c) the grant of credit facility despite the non-payment of
marginal deposits in an amount beyond the credit limit of P10 million pesos; (d) the inordinate delay
of the Bank in demanding the payment of the indebtedness; (e) the presence of ghost deliveries and
fictitious purchases using the Banks letters of credit and trust receipts; (f) the extension of the due
dates of the letters of credit without the required 25% partial payment per extension; (g) the
approval of another letter of credit, L/C 93-0042, even after respondent-spouses Kenneth Ng Li and
Ma. Victoria Ng Li had defaulted on their previous obligations; and, (h) the unmistakable pattern of
fraud.
Respondent Solid Bank maintains on the other hand that the appellate court is presumed to have
passed upon all points raised by petitioners Reply with Motion for Oral Argument as this pleading
formed part of the records of the appellate court. It also debunks the claim of petitioners that they
were inexperienced and ignorant parties who were taken advantage of in the Continuing Guaranty
since petitioners are astute businessmen who are very familiar with the ins and outs of banking
practice. The Bank further argues that the notarization of the Continuing Guaranty discredits the
uncorroborated assertions against the authenticity and due execution thereof, and that
the Decision of the trial court in the civil case finding the surety agreement to be valid and binding is
now res judicata for failure of petitioners to appeal therefrom. As a final point, the Bank refers to the
various waivers made by petitioner-spouses in the Continuing Guaranty to justify the extension of the
due dates of the letters of credit.
To begin with, we find no merit in petitioners claim that the Court of Appeals deprived them of their
right to due process when the court a quo did not address specifically and explicitly
their Reply with Motion for Oral Argument. While the Resolution of the appellate court of 2 July
2002 made no mention thereof in disposing of their arguments on reconsideration, it is presumed
that all matters within an issue raised in a case were laid before the court and passed upon it.[45] In
the absence of evidence to the contrary, we must rule that the court a quo discharged its task
properly. Moreover, a reading of the assailed Resolution clearly makes reference to a careful review
of the records, which undeniably includes the Reply with Motion for Oral Argument, hence there is
no reason for petitioners to asseverate otherwise.
This Court holds that the Continuing Guaranty is a valid and binding contract of petitioner-spouses as
it is a public document that enjoys the presumption of authenticity and due execution. Although
petitioners as appellees may raise issues that have not been assigned as errors by respondent Bank as
party-appellant, i.e., unenforceability of the surety contract, we are bound by the consistent finding
of the courts a quo that petitioner-spouses Luis Toh and Vicky Tan Toh voluntarily affixed their
signature[s] on the surety agreement and were thus at some given point in time willing to be liable
under those forms.[46] In the absence of clear, convincing and more than preponderant evidence to
the contrary, our ruling cannot be otherwise.
Similarly, there is no basis for petitioners to limit their responsibility thereon so long as they were
corporate officers and stockholders of FBPC. Nothing in the Continuing Guaranty restricts their
contractual undertaking to such condition or eventuality. In fact the obligations assumed by them
therein subsist upon the undersigned, the heirs, executors, administrators, successors and assigns of
the undersigned, and shall inure to the benefit of, and be enforceable by you, your successors,
transferees and assigns, and that their commitment shall remain in full force and effect until written
notice shall have been received by [the Bank] that it has been revoked by the undersigned. Verily, if
petitioners intended not to be charged as sureties after their withdrawal from FBPC, they could have
simply terminated the agreement by serving the required notice of revocation upon the Bank as
expressly allowed therein.[47] In Garcia v. Court of Appeals[48] we ruled
Regarding the petitioners claim that he is liable only as a corporate officer of WMC, the surety
agreement shows that he signed the same not in representation of WMC or as its president but in his
personal capacity. He is therefore personally bound. There is no law that prohibits a corporate officer
from binding himself personally to answer for a corporate debt. While the limited liability doctrine is
intended to protect the stockholder by immunizing him from personal liability for the corporate
debts, he may nevertheless divest himself of this protection by voluntarily binding himself to the
payment of the corporate debts. The petitioner cannot therefore take refuge in this doctrine that he
has by his own acts effectively waived.
But as we bind the spouses Luis Toh and Vicky Tan Toh to the surety agreement they signed so must
we also hold respondent Bank to its representations in the letter-advise of 16 May 1993. Particularly,
as to the extension of the due dates of the letters of credit, we cannot exclude from the Continuing
Guaranty the preconditions of the Bank that were plainly stipulated in the letter-advise. Fairness and
justice dictate our doing so, for the Bank itself liberally applies the provisions of cognate agreements
whenever convenient to enforce its contractual rights, such as, when it harnessed a provision in the
trust receipts executed by respondent FBPC to declare its entire indebtedness as due and
demandable and thereafter to exact payment thereof from petitioners as sureties.[49] In the same
manner, we cannot disregard the provisions of the letter-advise in sizing up the panoply of
commercial obligations between the parties herein.
Insofar as petitioners stipulate in the Continuing Guaranty that respondent Bank may at any time, or
from time to time, in [its] discretion x x x extend or change the time payment, this provision even if
understood as a waiver is confined per se to the grant of an extension and does not surrender the
prerequisites therefor as mandated in the letter-advise. In other words, the authority of the Bank to
defer collection contemplates only authorized extensions, that is, those that meet the terms of the
letter-advise.
Certainly, while the Bank may extend the due date at its discretion pursuant to the Continuing
Guaranty, it should nonetheless comply with the requirements that domestic letters of credit be
supported by fifteen percent (15%) marginal deposit extendible three (3) times for a period of thirty
(30) days for each extension, subject to twenty-five percent (25%) partial payment per extension. This
reading of the Continuing Guaranty is consistent with Philippine National Bank v. Court of
Appeals[50] that any doubt on the terms and conditions of the surety agreement should be resolved in
favor of the surety.
Furthermore, the assurance of the sureties in the Continuing Guaranty that [n]o act or omission of
any kind on [the Banks] part in the premises shall in any event affect or impair this guaranty[51] must
also be read strictissimi juris for the reason that petitioners are only accommodation sureties, i.e.,
they received nothing out of the security contract they signed.[52] Thus said, the acts or omissions of
the Bank conceded by petitioners as not affecting nor impairing the surety contract refer only to
those occurring in the premises, or those that have been the subject of the waiver in the Continuing
Guaranty, and stretch to no other. Stated otherwise, an extension of the period for enforcing the
indebtedness does not by itself bring about the discharge of the sureties unless the extra time is not
permitted within the terms of the waiver, i.e., where there is no payment or there is deficient
settlement of the marginal deposit and the twenty-five percent (25%) consideration, in which case
the illicit extension releases the sureties. Under Art. 2055 of the Civil Code, the liability of a surety is
measured by the terms of his contract, and while he is liable to the full extent thereof, his
accountability is strictly limited to that assumed by its terms.
It is admitted in the Complaint of respondent Bank before the trial court that several letters of credit
were irrevocably extended for ninety (90) days with alarmingly flawed and inadequate consideration -
the indispensable marginal deposit of fifteen percent (15%) and the twenty-five percent (25%)
prerequisite for each extension of thirty (30) days. It bears stressing that the requisite marginal
deposit and security for every thirty (30) - day extension specified in the letter-advise were not set
aside or abrogated nor was there any prior notice of such fact, if any was done.
Moreover, these irregular extensions were candidly admitted by Victor Ruben L. Tuazon, an account
officer and manager of respondent Bank and its lone witness in the civil case
Q: You extended it even if there was no marginal deposit?
A: Yes.
Q: And even if partial payment is less than 25%?
A: Yes x x x x
Q: You have repeatedly extended despite the insufficiency partial payment requirement?
A: I would say yes.[53]
The foregoing extensions of the letters of credit made by respondent Bank without observing the
rigid restrictions for exercising the privilege are not covered by the waiver stipulated in the
Continuing Guaranty. Evidently, they constitute illicit extensions prohibited under Art. 2079 of
the Civil Code, [a]n extension granted to the debtor by the creditor without the consent of the
guarantor extinguishes the guaranty. This act of the Bank is not mere failure or delay on its part to
demand payment after the debt has become due, as was the case in unpaid five (5) letters of credit
which the Bank did not extend, defer or put off,[54] but comprises conscious, separate and binding
agreements to extend the due date, as was admitted by the Bank itself
Q: How much was supposed to be paid on 14 September 1993, the original LC of P1,655,675.13?
A: Under LC 93-0017 first matured on 14 September 1993. We rolled it over, extended it to December
13, 1993 but they made partial payment that is why we extended it.
Q: The question to you now is how much was paid? How much is supposed to be paid on September
14, 1993 on the basis of the original amount of P1,655,675.13?
A: Whenever this obligation becomes due and demandable except when you roll it over so there is
novation there on the original obligations[55] (underscoring supplied).
As a result of these illicit extensions, petitioner-spouses Luis Toh and Vicky Tan Toh are relieved of
their obligations as sureties of respondent FBPC under Art. 2079 of the Civil Code.
Further, we note several suspicious circumstances that militate against the enforcement of the
Continuing Guaranty against the accommodation sureties. Firstly, the guaranty was executed more
than thirty (30) days from the original acceptance period as required in the letter-advise. Thereafter,
barely two (2) days after the Continuing Guaranty was signed, corporate agents of FBPC were
replaced on 12 May 1993 and other adjustments in the corporate structure of FBPC ensued in the
month of June 1993, which the Bank did not investigate although such were made known to it.
By the same token, there is no explanation on record for the utter worthlessness of the trust receipts
in favor of the Bank when these documents ought to have added more security to the indebtedness
of FBPC. The Bank has in fact no information whether the trust receipts were indeed used for the
purpose for which they were obtained.[56] To be sure, the goods subject of the trust receipts were not
entirely lost since the security officer of respondent Bank who conducted surveillance of FBPC even
had the chance to intercept the surreptitious transfer of the items under trust: We saw two (2)
delivery vans with Plates Nos. TGH 257 and PAZ 928 coming out of the compound x x x [which were]
taking out the last supplies stored in the compound.[57] In addition, the attached properties of FBPC,
except for two (2) of them, were perfunctorily abandoned by respondent Bank although the bonds
therefor were considerably reduced by the trial court.[58]
The consequence of these omissions is to discharge the surety, petitioners herein, under Art. 2080 of AUTOCORP GROUP and PETER Y. G.R. No. 166662
the Civil Code,[59] or at the very least, mitigate the liability of the surety up to the value of the RODRIGUEZ,
property or lien released Petitioners, Present:
If the creditor x x x has acquired a lien upon the property of a principal, the creditor at once becomes
charged with the duty of retaining such security, or maintaining such lien in the interest of the surety, YNARES-SANTIAGO, J.,
Chairperson,
and any release or impairment of this security as a primary resource for the payment of a debt, will
- versus - AUSTRIA-MARTINEZ,
discharge the surety to the extent of the value of the property or lien released x x x x [for] there
CHICO-NAZARIO,
immediately arises a trust relation between the parties, and the creditor as trustee is bound to NACHURA, and
account to the surety for the value of the security in his hands.[60] REYES, JJ.
For the same reason, the grace period granted by respondent Bank represents unceremonious INTRA STRATA ASSURANCE
abandonment and forfeiture of the fifteen percent (15%) marginal deposit and the twenty-five CORPORATION and BUREAU OF Promulgated:
percent (25%) partial payment as fixed in the letter-advise. These payments are unmistakably CUSTOMS,
additional securities intended to protect both respondent Bank and the sureties in the event that the Respondents. June 27, 2008
principal debtor FBPC becomes insolvent during the extension period. Compliance with these x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x
requisites was not waived by petitioners in the Continuing Guaranty. For this unwarranted exercise of
discretion, respondent Bank bears the loss; due to its unauthorized extensions to pay granted to
FBPC, petitioner-spouses Luis Toh and Vicky Tan Toh are discharged as sureties under the Continuing DECISION
Guaranty.
Finally, the foregoing omission or negligence of respondent Bank in failing to safe-keep the security
provided by the marginal deposit and the twenty-five percent (25%) requirement results in the CHICO-NAZARIO, J.:
material alteration of the principal contract, i.e., the letter-advise, and consequently releases the
surety.[61] This inference was admitted by the Bank through the testimony of its lone witness that
This is a Petition for Review on Certiorari from the Decision[1] of the Court of Appeals dated 30 June
[w]henever this obligation becomes due and demandable, except when you roll it over, (so) there is
2004 in CA-G.R. CV No. 62564 which affirmed with modification the Decision [2] of the Regional Trial
novation there on the original obligations. As has been said, if the suretyship contract was made Court (RTC) of Makati City, Branch 150 in Civil Case No. 95-1584 dated 16 September 1998.
upon the condition that the principal shall furnish the creditor additional security, and the security
being furnished under these conditions is afterwards released by the creditor, the surety is wholly The factual and procedural antecedents of this case are as follows:
discharged, without regard to the value of the securities released, for such a transaction amounts to
an alteration of the main contract.[62] On 19 August 1990, petitioner Autocorp Group, represented by its President, petitioner Peter Y.
WHEREFORE, the instant Petition for Review is GRANTED. The Decision of the Court of Appeals dated Rodriguez, secured an ordinary re-export bond, Instrata Bond No. 5770, from private respondent Intra
12 December 2001 in CA-G.R. CV No. 55957, Solid Bank Corporation v. First Business Paper Strata Assurance Corporation (ISAC) in favor of public respondent Bureau of Customs (BOC), in the
Corporation, Kenneth Ng Li, Ma. Victoria Ng Li, Luis Toh and Vicky Tan Toh, holding petitioner- amount of P327,040.00, to guarantee the re-export of one unit of Hyundai Excel 4-door 1.5 LS and/or
spouses Luis Toh and Vicky Tan Toh solidarily liable with First Business Paper Corporation to pay Solid to pay the taxes and duties thereon.
Bank Corporation the amount of P10,539,758.68 as principal with twelve percent (12%) interest per
annum until fully paid, and its Resolution of 2 July 2002 denying reconsideration thereof are On 21 December 1990, petitioners obtained another ordinary re-export bond, Instrata Bond No. 7154,
REVERSED and SET ASIDE. from ISAC in favor of the BOC, in the amount of P447,671.00, which was eventually increased
The Decision dated 16 May 1996 of RTC-Br. 161 of Pasig City in Civil Case No. 64047, Solid Bank to P707,609.00 per Bond Endorsement No. BE-0912/91 dated 10 January 1991, to guarantee the re-
Corporation v. First Business Paper Corporation, Kenneth Ng Li, Ma. Victoria Ng Li, Luis Toh and Vicky export of one unit of Hyundai Sonata 2.4 GLS and/or to pay the taxes and duties thereon.
Tan Toh, finding First Business Paper Corporation liable to pay respondent Solid Bank Corporation the
Petitioners executed and signed two Indemnity Agreements with identical stipulations in favor of
principal of P10,539,758.68 plus twelve percent (12%) interest per annum until fully paid, but
ISAC, agreeing to act as surety of the subject bonds. Petitioner Rodriguez signed the Indemnity
absolving petitioner-spouses Luis Toh and Vicky Tan Toh of any liability to respondent Solid Bank
Agreements both as President of the Autocorp Group and in his personal capacity. Petitioners thus
Corporation is REINSTATED and AFFIRMED. No costs. agreed to the following provisions:
SO ORDERED.

INDEMNITY: - The undersigned agree at all times to jointly and severally indemnify the COMPANY
and keep it indemnified and hold and save it harmless from and against any and all damages, losses,
costs, stamps, taxes, penalties, charges and expenses of whatsoever kind and nature including counsel
or attorneys fee which the COMPANY shall or may at any time sustain or incur in consequence of
having become surety upon the bond herein above referred to or any extension, renewal, substitution or
alteration thereof, made at the instance of the undersigned or any of them, or any other bond executed
on behalf of the undersigned or any of them, and to pay; reimburse and make good to the COMPANY,
its successors and assigns, alls sums and amounts of money which it or its representatives shall pay or
cause to be paid, or become liable to pay on accounts of the undersigned or any of them, of whatsoever
kind and nature, including 25% of the amount involved in the litigation or other matters growing out of
or connected therewith, for and as attorneys fees, but in no case less than P300.00 and which shall be
payable whether or not the case be extrajudicially settled, it being understood that demand made upon
anyone of the undersigned herein is admitted as demand made on all of the signatories hereof. It is
hereby further agreed that in case of any extension or renewal of the bond, we equally bind ourselves
to the COMPANY under the same terms and conditions as therein provided without the necessity of
executing another indemnity agreement for the purpose and that we may be granted under this
indemnity agreement.
MATURITY OF OUR OBLIGATIONS AS CONTRACTED HEREWITH AND ACCRUAL OF
ACTION: - Notwithstanding of (sic) the next preceding paragraph where the obligation involves a
liquidated amount for the payment of which the COMPANY has become legally liable under the terms
of the obligation and its suretyship undertaking, or by the demand of the obligee or otherwise and the
latter has merely allowed the COMPANYs aforesaid liability irrespective of whether or not payment
has actually been made by the COMPANY, the COMPANY for the protection of its interest may
forthwith proceed against the undersigned or either of them by court action or otherwise to enforce
payment, even prior to making payment to the obligee which may hereafter be done by the
COMPANY.
INTEREST IN CASE OF DELAY: - In the event of delay in payment of the said sum or sums by the
undersigned they will pay interest at the rate of 12% per annum or same, which interest, if not paid,
will be liquidated and accumulated to the capital quarterly, and shall earn the same interest as the
capital; all this without prejudice to the COMPANYs right to demand judicially or extrajudicially the
full payment of its claims.
INCONTESTABILITY OF PAYMENT MADE BY THE COMPANY: - Any payment or
disbursement made by the COMPANY on account of the above-mentioned Bond, its renewals,
extensions or substitutions, replacement or novation in the belief either that the COMPANY was
obligated to make such payment or that said payment was necessary in order to avoid greater losses or
obligations for which the COMPANY might be liable by virtue of the terms of the above-mentioned
Bond, its renewal, extensions or substitutions, shall be final and will not be disputed by the
undersigned, who bind themselves to jointly and severally indemnify the COMPANY of any such
payments, as stated in the preceding clauses:
WAIVER OF VENUE OF ACTION: - We hereby agree that any question which may arise between
the COMPANY and the undersigned by reason of this document and which has to be submitted for
decision to a court of justice shall be brought before the court of competent jurisdiction in Makati,
Rizal, waiving for this purpose any other venue.
WAIVER: - The undersigned hereby waive all the rights[,] privileges and benefits that they have or
may have under Articles 2077, 2078, 2079, 2080 and 2081, of the Civil Code of the Philippines.
The undersigned, by this instrument, grant a special power of attorney in favor of all or any of the other
undersigned so that any of the undersigned may represent all the others in all transactions related to
this Bond, its renewals, extensions, or any other agreements in connection with this Counter-Guaranty,
without the necessity of the knowledge or consent of the others who hereby promise to accept as valid
each and every act done or executed by any of the attorneys-in-fact by virtue of the special power of
attorney.
OUR LIABILITY HEREUNDER: - It shall not be necessary for the COMPANY to bring suit against
the principal upon his default or to exhaust the property of the principal, but the liability hereunder of
the undersigned indemnitors shall be jointly and severally, a primary one, the same as that of the
principal, and shall be exigible immediately upon the occurrence of such default.
CANCELLATION OF BOND BY THE COMPANY: - The COMPANY may at any time cancel the
above-mentioned Bond, its renewals, extensions or substitutions, subject to any liability which might
have accrued prior to the date of cancellation refunding the proportionate amount of the premium
unearned on the date of cancellation.
RENEWALS, ALTERATIONS AND SUBSTITUTIONS: - The undersigned hereby empower and
authorize the COMPANY to grant or consent to the granting of any extension, continuation, increase,
modification, change, alteration and/or renewal of the original bond herein referred to, and to execute
or consent to the execution of any substitution for said Bond with the same or different, conditions and
parties, and the undersigned hereby hold themselves jointly and severally liable to the COMPANY for
the original Bond herein above-mentioned or for any extension, continuation, increase, modification,
change, alteration, renewal or substitution thereof without the necessary of any new indemnity
agreement being executed until the full amount including principal, interest, premiums, costs, and other
expenses due to the COMPANY thereunder is fully paid up.
SEVERABILITY OF PROVISIONS: - It is hereby agreed that should any provision or provisions of
this agreement be declared by competent public authority to be invalid or otherwise unenforceable, all
remaining provisions herein contained shall remain in full force and effect.
NOTIFICATION: - The undersigned hereby accept due notice of that the COMPANY has accepted
this guaranty, executed by the undersigned in favor of the COMPANY. [3]
In sum, ISAC issued the subject bonds to guarantee compliance by petitioners with their undertaking
with the BOC to re-export the imported vehicles within the given period and pay the taxes and/or
duties due thereon. In turn, petitioners agreed, as surety, to indemnify ISAC for the liability the latter
may incur on the said bonds.
Petitioner Autocorp Group failed to re-export the items guaranteed by the bonds and/or liquidate the
entries or cancel the bonds, and pay the taxes and duties pertaining to the said items despite repeated
demands made by the BOC, as well as by ISAC. By reason thereof, the BOC considered the two
bonds, with a total face value of P1,034,649.00, forfeited.
Failing to secure from petitioners the payment of the face value of the two bonds, despite several
demands sent to each of them as surety under the Indemnity Agreements, ISAC filed with the RTC on
24 October 1995 an action against petitioners to recover the sum of P1,034,649.00, plus 25% thereof
or P258,662.25 as attorneys fees. ISAC impleaded the BOC as a necessary party plaintiff in order that
the reward of money or judgment shall be adjudged unto the said necessary plaintiff. [4] The case was
docketed as Civil Case No. 95-1584.
Petitioners filed a Motion to Dismiss on 11 December 1995 on the grounds that (1) the Complaint
states no cause of action; and (2) the BOC is an improper party.
The RTC, in an Order[5] dated 27 February 1996, denied petitioners Motion to Dismiss. Petitioners thus
filed their Answer to the Complaint, claiming that they sought permission from the BOC for an
extension of time to re-export the items covered by the bonds; that the BOC has yet to issue an
assessment for petitioners alleged default; and that the claim of ISAC for payment is premature as the
subject bonds are not yet due and demandable.
During the pre-trial conference, petitioners admitted the genuineness and due execution of Instrata
Bonds No. 5770 and No. 7154, but specifically denied those of the corresponding Indemnity
Agreements. The parties agreed to limit the issue to whether or not these bonds are now due and
demandable.
On 16 September 1998, the RTC rendered its Decision ordering petitioners to pay ISAC and/or the
BOC the face value of the subject bonds in the total amount of P1,034,649.00, and to pay
ISAC P258,662.25 as attorneys fees, thus:
WHEREFORE, judgment is hereby rendered in favor of the [herein private respondent ISAC] and as
against the [herein petitioners] who are ordered to pay the [private respondent] Intra Strata Assurance
Corporation and/or the Bureau of Customs the amount of P1,034,649.00 which is the equivalent
amount of the subject bonds as well as to pay the plaintiff corporation the sum of P258,662.25 as and
for attorneys fees.[6]
Petitioners Motion for Reconsideration was denied by the RTC in a Resolution dated 15 January
1999.[7]
Petitioners appealed to the Court of Appeals. On 30 June 2004, the Court of Appeals rendered its
Decision affirming the RTC Decision, only modifying the amount of the attorneys fees awarded:
WHEREFORE, the appealed 16 September 1998 Decision is MODIFIED to reduce the award of
attorneys fees to One Hundred Three Thousand Four Hundred Sixty Four Pesos & Ninety Centavos
(P103,464.90). The rest is affirmed in toto. Costs against [herein petitioners].[8]
In a Resolution dated 5 January 2005, the Court of Appeals refused to reconsider its Decision.
Petitioners thus filed the instant Petition for Review on Certiorari, assigning the following errors
allegedly committed by the Court of Appeals:
I. THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN RENDERING
JUDGMENT AGAINST PETITIONERS BASED ON A PREMATURE ACTION AND/OR RULING
IN FAVOR OF RESPONDENTS WHO HAVE NO CAUSE OF ACTION AGAINST
PETITIONERS.
II. THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN AFFIRMING THE
DECISION OF BRANCH 150, REGIONAL TRIAL COURT OF MAKATI CITY BASED ON
MISAPPREHENSION OF FACTS, UNSUPPORTED BY EVIDENCE ON RECORD &
CONTRARY TO LAW.
III. THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN NOT GIVING
MERIT TO THE ISSUE RAISED BY PETITIONERS THAT THE BUREAU OF CUSTOMS IS
IMPROPERLY IMPLEADED BY INTRA STRATA.
IV. THE HONORABLE COURT OF APPEALS GRAVELY ERRED [IN] AFFIRMING THE
PORTION OF THE DECISION HOLDING PETITIONER PETER Y. RODRIGUEZ AS JOINTLY
LIABLE WHEN AMENDMENTS WERE INTRODUCED, WITHOUT HIS CONSENT AND
APPROVAL.[9]
The present Petition is without merit.
Absence of actual forfeiture of the subject bonds
Petitioners contend that their obligation to ISAC is not yet due and demandable. They cannot be made
liable by ISAC in the absence of an actual forfeiture of the subject bonds by the BOC and/or an explicit
pronouncement by the same bureau that ISAC is already liable on the said bonds. In this case, there is
yet no actual forfeiture of the bonds, but merely a recommendation of forfeiture, for no writ of
execution has been issued against such bonds.[10] Hence, Civil Case No. 95-1584 was prematurely filed
by ISAC.Petitioners further argue that:
Secondly, it bears emphasis that as borne by the records, not only is there no writ of forfeiture against
Surety Bond No. 7154, there is likewise no evidence adduced on record to prove that respondent Intra
Strata has made legal demand against Surety Bond No. 5770 neither is there a showing that respondent
BOC initiated a demand or issued notice for its forfeiture and/or confiscation. [11]
The Court of Appeals, in its assailed Decision, already directly addressed petitioners arguments by
ruling that an actual forfeiture of the subject bonds is not necessary for petitioners to be liable thereon
to ISAC as surety under the Indemnity Agreements.
According to the relevant provision of the Indemnity Agreements executed between petitioner and
ISAC, which reads:
[W]here the obligation involves a liquidated amount for the payment of which [ISAC] has become
legally liable under the terms of the obligation and its suretyship undertaking or by the demand of the
[BOC] or otherwise and the latter has merely allowed the [ISACs] aforesaid liability, irrespective of
whether or not payment has actually been made by the [ISAC], the [ISAC] for the protection of its
interest may forthwith proceed against [petitioners Autocorp Group and Rodriguez] or either of them
by court action or otherwise to enforce payment, even prior to making payment to the [BOC] which
may hereafter be done by [ISAC][,][12]
petitioners obligation to indemnify ISAC became due and demandable the moment the bonds issued by
ISAC became answerable for petitioners non-compliance with its undertaking with the BOC. Stated
differently, petitioners became liable to indemnify ISAC at the same time the bonds issued by ISAC
were placed at the risk of forfeiture by the BOC for non-compliance by petitioners with its
undertaking.
The subject bonds, Instrata Bonds No. 5770 and No. 7154, became due and demandable upon the
failure of petitioner Autocorp Group to comply with a condition set forth in its undertaking with the
BOC, specifically to re-export the imported vehicles within the period of six months from their date of
entry. Since it issued the subject bonds, ISAC then also became liable to the BOC. At this point, the
Indemnity Agreements already give ISAC the right to proceed against petitioners via court action or
otherwise.
The Indemnity Agreements, therefore, give ISAC the right to recover from petitioners the face value of
the subject bonds plus attorneys fees at the time ISAC becomes liable on the said bonds to the BOC,
regardless of whether the BOC had actually forfeited the bonds, demanded payment thereof and/or
received such payment. It must be pointed out that the Indemnity Agreements explicitly provide that
petitioners shall be liable to indemnify ISAC whether or not payment has actually been made by the
[ISAC] and ISAC may proceed against petitioners by court action or otherwise even prior to making
payment to the [BOC] which may hereafter be done by [ISAC].
Even when the BOC already admitted that it not only made a demand upon ISAC for the payment of
the bond but even filed a complaint against ISAC for such payment, [13] such demand and complaint are
not necessary to hold petitioners liable to ISAC for the amount of such bonds. Petitioners attempts to
prove that there was no actual forfeiture of the subject bonds are completely irrelevant to the case at
bar.
It is worthy to note that petitioners did not impugn the validity of the stipulation in the Indemnity
Agreements allowing ISAC to proceed against petitioners the moment the subject bonds become due
and demandable, even prior to actual forfeiture or payment thereof. Even if they did so, the Court
would be constrained to uphold the validity of such a stipulation for it is but a slightly expanded
contractual expression of Article 2071 of the Civil Code which provides, inter alia, that the guarantor
may proceed against the principal debtor the moment the debt becomes due and demandable. Article
2071 of the Civil Code provides:
Art. 2071. The guarantor, even before having paid, may proceed against the principal debtor:
(1) When he is sued for the payment;
(2) In case of insolvency of the principal debtor;
(3) When the debtor has bound himself to relieve him from the guaranty within a specified period, and
this period has expired;
(4) When the debt has become demandable, by reason of the expiration of the period for
payment;
(5) After the lapse of ten years, when the principal obligation has no fixed period for its maturity,
unless it be of such nature that it cannot be extinguished except within a period longer than ten years;
(6) If there are reasonable grounds to fear that the principal debtor intends to abscond;
(7) If the principal debtor is in imminent danger of becoming insolvent.
In all these cases, the action of the guarantor is to obtain release from the guaranty, or to demand a
security that shall protect him from any proceedings by the creditor and from the danger of insolvency
of the debtor. (Emphases ours.)
Petitioners also invoke the alleged lack of demand on the part of ISAC on petitioners as regards
Instrata Bond No. 5770 before it instituted Civil Case No. 95-1584. Even if proven true, such a fact
does not carry much weight considering that demand, whether judicial or extrajudicial, is not required
before an obligation becomes due and demandable.A demand is only necessary in order to put an
obligor in a due and demandable obligation in delay,[14] which in turn is for the purpose of making the
obligor liable for interests or damages for the period of delay.[15] Thus, unless stipulated otherwise, an
extrajudicial demand is not required before a judicial demand, i.e., filing a civil case for collection, can
be resorted to.
Inclusion of the Bureau of Customs as a party to the case
ISAC included the BOC as a necessary party plaintiff in order that the reward of money or judgment
shall be adjudged unto the said necessary plaintiff.[16]
Petitioners assail this inclusion of the BOC as a party in Civil Case No. 95-1584 on the ground that it
was not properly represented by the Solicitor General. Petitioners also contend that the inclusion of the
BOC as a party in Civil Case No. 95-1584 is highly improper and should not be countenanced as the
net result would be tantamount to collusion between Intra Strata and the Bureau of Customs which
would deny and deprive petitioners their personal defenses against the BOC. [17]
In its assailed Decision, the Court of Appeals did not find merit in petitioners arguments on the matter,
holding that when the BOC forfeited the subject bonds issued by ISAC, subrogation took place so that
whatever right the BOC had against petitioners were eventually transferred to ISAC. As ISAC merely
steps into the shoes of the BOC, whatever defenses petitioners may have against the BOC would still
be available against ISAC.
The Court likewise cannot sustain petitioners position.
The misjoinder of parties does not warrant the dismissal of the action. Section 11, Rule 3 of the Rules
of Court explicitly states:
SEC. 11. Misjoinder and non-joinder of parties.Neither misjoinder nor non-joinder of parties is
ground for dismissal of an action. Parties may be dropped or added by order of the court on motion
of any party or on its own initiative at any stage of the action and on such terms as are just. Any claim
against a misjoined party may be severed and proceeded with separately.
Consequently, the purported misjoinder of the BOC as a party cannot result in the dismissal of Civil
Case No. 95-1584. If indeed the BOC was improperly impleaded as a party in Civil Case No. 95-1584,
at most, it may be dropped by order of the court, on motion of any party or on its own initiative, at any
stage of the action and on such terms as are just.
Should the BOC then be dropped as a party to Civil Case No. 95-1584?
ISAC alleged in its Complaint[18] that the BOC is being joined as a necessary party in Civil Case No.
95-1584.
A necessary party is defined in Section 8, Rule 3 of the Rules of Court as follows:
SEC. 8. Necessary party.A necessary party is one who is not indispensable but who ought to be joined
as a party if complete relief is to be accorded as to those already parties, or for a complete
determination or settlement of the claim subject of the action.
The subject matter of Civil Case No. 95-1584 is the liability of Autocorp Group to the BOC, which
ISAC is also bound to pay as the guarantor who issued the bonds therefor. Clearly, there would be no
complete settlement of the subject matter of the case at bar the liability of Autocorp Group to the BOC
should Autocorp Group be merely ordered to pay its obligations with the BOC to ISAC. BOC is,
therefore, a necessary party in the case at bar, and should not be dropped as a party to the present case.
It can only be conceded that there was an irregularity in the manner the BOC was joined as a necessary
party in Civil Case No. 95-1584. As the BOC, through the Solicitor General, was not the one who
initiated Civil Case No. 95-1584, and neither was its consent obtained for the filing of the same, it may
be considered an unwilling co-plaintiff of ISAC in said action. The proper way to implead the BOC as
a necessary party to Civil Case No. 95-1584 should have been in accordance with Section 10, Rule 3 of
the Rules of Court, viz:
SEC. 10. Unwilling co-plaintiff. If the consent of any party who should be joined as plaintiff can not be
obtained, he may be made a defendant and the reason therefor shall be stated in the complaint.
Nonetheless, the irregularity in the inclusion of the BOC as a party to Civil Case No. 95-1584 would
not in any way affect the disposition thereof. As the Court already found that the BOC is a necessary
party to Civil Case No. 95-1584, it would be a graver injustice to drop it as a party.
Petitioners argument that the inclusion of the BOC as a party to this case would deprive them of their
personal defenses against the BOC is utterly baseless.
First, as ruled by the Court of Appeals, petitioners defenses against the BOC are completely available
against ISAC, since the right of the latter to seek indemnity from petitioner depends on the right of the
BOC to proceed against the bonds.
The Court, however, deems it essential to qualify that ISACs right to seek indemnity from petitioners
does not constitute subrogation under the Civil Code, considering that there has been no payment yet
by ISAC to the BOC. There are indeed cases in the aforementioned Article 2071 of the Civil Code
wherein the guarantor or surety, even before having paid, may proceed against the principal debtor, but
in all these cases, Article 2071 of the Civil Code merely grants the guarantor or surety an action to
obtain release from the guaranty, or to demand a security that shall protect him from any proceedings
by the creditor and from the danger of insolvency of the debtor. The benefit of subrogation, an
extinctive subjective novation by a change of creditor, which transfers to the person subrogated, the
credit and all the rights thereto appertaining, either against the debtor or against third persons, [19] is
granted by the Article 2067 of the Civil Code only to the guarantor (or surety) who pays. [20]
ISAC cannot be said to have stepped into the shoes of the BOC, because the BOC still retains said
rights until it is paid. ISACs right to file Civil Case No. 95-1584 is based on the express provision of
the Indemnity Agreements making petitioners liable to ISAC at the very moment ISACs bonds become
due and demandable for the liability of Autocorp Group to the BOC, without need for actual payment
by ISAC to the BOC. But it is still correct to say that all the defenses available to petitioners against
the BOC can likewise be invoked against ISAC because the latters contractual right to proceed against
petitioners only arises when the Autocorp Group becomes liable to the BOC for non-compliance with
its undertakings. Indeed, the arguments and evidence petitioners can present against the BOC to prove
that Autocorp Groups liability to the BOC is not yet due and demandable would also establish that
petitioners liability to ISAC under the Indemnity Agreements has not yet arisen.
Second, making the BOC a necessary party to Civil Case No. 95-1584 actually allows petitioners to
simultaneously invoke its defenses against both the BOC and ISAC. Instead of depriving petitioners of
their personal defenses against the BOC, Civil Case No. 95-1584 actually gave them the opportunity to
kill two birds with one stone: to disprove its liability to the BOC and, thus, negate its liability to ISAC.
Liability of petitioner Rodriguez
Petitioner Rodriguez posits that he is merely a guarantor, and that his liability arises only when the
person with whom he guarantees the credit, Autocorp Group in this case, fails to pay the
obligation. Petitioner Rodriguez invokes Article 2079 of the Civil Code on Extinguishment of
Guaranty, which states:
Art. 2079. An extension granted to the debtor by the creditor without the consent of the guarantor
extinguishes the guaranty. The mere failure on the part of the creditor to demand payment after the
debt has become due does not of itself constitute any extension of time referred to herein.
Petitioner Rodriguez argues that there was an amendment as to the effectivity of the bonds, and this
constitutes a modification of the agreement without his consent, thereby exonerating him from any
liability.
We must take note at this point that petitioners have not presented any evidence of this alleged
amendment as to the effectivity of the bonds.[21] Be that as it may, even if there was indeed such an
amendment, such would not cause the exoneration of petitioner Rodriguez from liability on the bonds.
The Court of Appeals, in its assailed Decision, held that the use of the term guarantee in a contract
does not ipso facto mean that the contract is one of guaranty. It thus ruled that both petitioners assumed
liability as a regular party and obligated themselves as original promissors, i.e., sureties, as shown in
the following provisions of the Indemnity Agreement:
INDEMNITY: - The undersigned [Autocorp Group and Rodriguez] agree at all times to jointly
and severally indemnify the COMPANY [ISAC] and keep it indemnified and hold and save it
harmless from and against any and all damages, losses, costs, stamps, taxes, penalties, charges and
expenses of whatsoever kind and nature including counsel or attorneys fee which the COMPANY
[ISAC] shall or may at any time sustain or incur in consequence of having become surety upon the
bond herein above referred to x x x
xxxx
OUR LIABILITY HEREUNDER: - It shall not be necessary for the COMPANY [ISAC] to bring suit
against the principal [Autocorp Group] upon his default or to exhaust the property of the principal
[Autocorp Group], but the liability hereunder of the undersigned indemnitors [Rodriguez] shall
be jointly and severally, a primary one, the same as that of the principal [Autocorp Group], and
shall be exigible immediately upon the occurrence of such default. (Emphases supplied.)
The foregoing provision in the Indemnity Agreements clearly authorized ISAC to consent to the
granting of any extension, modification, alteration and/or renewal of the subject bonds.
There is nothing illegal in such a provision. In Philippine American General Insurance Co., Inc. v.
Mutuc,[24] the Court held that an agreement whereby the sureties bound themselves to be liable in case
of an extension or renewal of the bond, without the necessity of executing another indemnity
agreement for the purpose and without the necessity of being notified of such extension or renewal, is
valid; and that there is nothing in it that militates against the law, good customs, good morals, public
order or public policy.
WHEREFORE, the instant Petition for Review on Certiorari is DENIED. The Decision of the Court
of Appeals dated 30 June 2004 in CA-G.R. CV No. 62564 which affirmed with modification the
Decision of the Regional Trial Court of Makati City, in Civil Case No. 95-1584 dated 16 September
1998 is AFFIRMED in toto. Costs against petitioners.
SO ORDERED.
FIRST DIVISION

The Court of Appeals concluded that since petitioner Rodriguez was a surety, Article 2079 of the Civil
Code does not apply. The appellate court further noted that both petitioners authorized ISAC to STRONGHOLD INSURANCE G.R. No. 147561
consent to the granting of an extension of the subject bonds. COMPANY,INC.,
Petitioner, Present:
The Court of Appeals committed a slight error on this point. The provisions of the Civil Code on Panganiban, CJ,
Guarantee, other than the benefit of excussion, are applicable and available to the surety. [22] The Court Chairman,
finds no reason why the provisions of Article 2079 would not apply to a surety. - versus - Ynares-Santiago,
Austria-Martinez,
This, however, would not cause a reversal of the Decision of the Court of Appeals. The Court of Callejo, Sr., and
Appeals was correct that even granting arguendo that there was a modification as to the effectivity of Chico-Nazario, JJ
the bonds, petitioners would still not be absolved from liability since they had authorized ISAC to
consent to the granting of any extension, modification, alteration and/or renewal of the subject bonds, REPUBLIC-ASAHI GLASS Promulgated:
as expressly set out in the Indemnity Agreements: CORPORATION,
Respondent. June 22, 2006
RENEWALS, ALTERATIONS AND SUBSTITUTIONS: - The undersigned [Autocorp Group and x -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- --- -- -- -- -- x
Rodriguez] hereby empower and authorize the COMPANY [ISAC] to grant or consent to the
granting of any extension, continuation, increase, modification, change, alteration and/or DECISION
renewal of the original bond herein referred to, and to execute or consent to the execution of any
substitution for said Bond with the same or different, conditions and parties, and the undersigned
[Autocorp Group and Rodriguez] hereby hold themselves jointly and severally liable to the PANGANIBAN, CJ:
COMPANY [ISAC] for the original Bond herein above-mentioned or for any extension,
A surety companys liability under the performance bond it issues is solidary. The death of the
continuation, increase, modification, change, alteration, renewal or substitution thereof without
principal obligor does not, as a rule, extinguish the obligation and the solidary nature of that liability.
the necessary of any new indemnity agreement being executed until the full amount including
principal, interest, premiums, costs, and other expenses due to the COMPANY [ISAC] thereunder is
fully paid up.[23] (Emphases supplied.)
The Case
Before us is a Petition for Review[1] under Rule 45 of the Rules of Court, seeking to reverse the March 13, 2001 On January 6, 1990, [respondent] sent a letter to [petitioner] SICI filing its claim under the bond for
Decision[2] of the Court of Appeals (CA) in CA-GR CV No. 41630. The assailed Decision disposed as follows: not less than P795,000.00. On March 22, 1991, [respondent] again sent another letter reiterating its
demand for payment under the aforementioned bond. Both letters allegedly went unheeded.
WHEREFORE, the Order dated January 28, 1993 issued by the lower court is REVERSED and SET ASIDE. Let the
records of the instant case be REMANDEDto the lower court for the reception of evidence of all parties.[3] [Respondent] then filed [a] complaint against x x x JDS and SICI. It sought from x x x JDS payment
of P3,256,874.00 representing the additional expenses incurred by [respondent] for the completion
of the project using another contractor, and from x x x JDS and SICI, jointly and severally, payment
The Facts of P750,000.00 as damages in accordance with the performance bond; exemplary damages in the
amount of P100,000.00 and attorneys fees in the amount of at least P100,000.00.
The facts of the case are narrated by the CA in this wise:
According to the Sheriffs Return dated June 14, 1991, submitted to the lower court by Deputy Sheriff
On May 24, 1989, [respondent] Republic-Asahi Glass Corporation (Republic-Asahi) entered into a
Rene R. Salvador, summons were duly served on defendant-appellee SICI. However, x x x Jose
contract with x x x Jose D. Santos, Jr., the proprietor of JDS Construction (JDS), for the construction of
D. Santos, Jr. died the previous year (1990), and x x x JDS Construction was no longer at its address at
roadways and a drainage system in Republic-Asahis compound in Barrio Pinagbuhatan, Pasig City,
2nd Floor, Room 208-A, San Buena Bldg. Cor. Pioneer St., Pasig, Metro Manila, and its whereabouts
where [respondent] was to pay x x x JDS five million three hundred thousand pesos (P5,300,000.00)
were unknown.
inclusive of value added tax for said construction, which was supposed to be completed within a
period of two hundred forty (240) days beginning May 8, 1989. In order to guarantee the faithful and
On July 10, 1991, [petitioner] SICI filed its answer, alleging that the [respondents] money claims
satisfactory performance of its undertakings x x x JDS, shall post a performance bond of seven
against [petitioner and JDS] have been extinguished by the death of Jose D. Santos, Jr. Even if this
hundred ninety five thousand pesos (P795,000.00). x x x JDS executed, jointly and severally with
were not the case, [petitioner] SICI had been released from its liability under the performance bond
[petitioner] Stronghold Insurance Co., Inc. (SICI) Performance Bond No. SICI-25849/g(13)9769.
because there was no liquidation, with the active participation and/or involvement, pursuant to
procedural due process, of herein surety and contractor Jose D. Santos, Jr., hence, there was no
On May 23, 1989, [respondent] paid to x x x JDS seven hundred ninety five thousand pesos
ascertainment of the corresponding liabilities of Santos and SICI under the performance bond. At this
(P795,000.00) by way of downpayment.
point in time, said liquidation was impossible because of the death of Santos, who as such can no
longer participate in any liquidation. The unilateral liquidation on the party (sic) of [respondent] of
Two progress billings dated August 14, 1989 and September 15, 1989, for the total amount of two
the work accomplishments did not bind SICI for being violative of procedural due process. The claim
hundred seventy four thousand six hundred twenty one pesos and one centavo (P274,621.01) were
of [respondent] for the forfeiture of the performance bond in the amount of P795,000.00 had no
submitted by x x x JDS to [respondent], which the latter paid. According to [respondent], these two
factual and legal basis, as payment of said bond was conditioned on the payment of damages which
progress billings accounted for only 7.301% of the work supposed to be undertaken by x x x JDS
[respondent] may sustain in the event x x x JDS failed to complete the contracted
under the terms of the contract.
works. [Respondent] can no longer prove its claim for damages in view of the death of Santos. SICI
was not informed by [respondent] of the death of Santos. SICI was not informed by [respondent] of
Several times prior to November of 1989, [respondents] engineers called the attention of x x x JDS to
the unilateral rescission of its contract with JDS, thus SICI was deprived of its right to protect its
the alleged alarmingly slow pace of the construction, which resulted in the fear that the construction
interests as surety under the performance bond, and therefore it was released from all liability. SICI
will not be finished within the stipulated 240-day period. However, said reminders went unheeded by
was likewise denied due process when it was not notified of plaintiff-appellants process of
x x x JDS.
determining and fixing the amount to be spent in the completion of the unfinished project. The
procedure contained in Article XV of the contract is against public policy in that it denies SICI the right
On November 24, 1989, dissatisfied with the progress of the work undertaken by x x x JDS,
to procedural due process. Finally, SICI alleged that [respondent] deviated from the terms and
[respondent] Republic-Asahi extrajudicially rescinded the contract pursuant to Article XIII of said
conditions of the contract without the written consent of SICI, thus the latter was released from all
contract, and wrote a letter to x x x JDS informing the latter of such rescission. Such rescission,
liability. SICI also prayed for the award of P59,750.00 as attorneys fees, and P5,000.00 as litigation
according to Article XV of the contract shall not be construed as a waiver of [respondents] right to
expenses.
recover damages from x x x JDS and the latters sureties.
On August 16, 1991, the lower court issued an order dismissing the complaint of [respondent] against
x x x JDS and SICI, on the ground that the claim against JDS did not survive the death of its sole
[Respondent] alleged that, as a result of x x x JDSs failure to comply with the provisions of the
proprietor, Jose D. Santos, Jr. The dispositive portion of the [O]rder reads as follows:
contract, which resulted in the said contracts rescission, it had to hire another contractor to finish the
project, for which it incurred an additional expense of three million two hundred fifty six thousand,
ACCORDINGLY, the complaint against the defendants Jose D. Santos, Jr., doing business under trade
eight hundred seventy four pesos (P3,256,874.00).
and style, JDS Construction and Stronghold Insurance Company, Inc. is ordered DISMISSED.
SO ORDERED.
On September 4, 1991, [respondent] filed a Motion for Reconsideration seeking reconsideration of
the lower courts August 16, 1991 order dismissing its complaint. [Petitioner] SICI field its Comment
and/or Opposition to the Motion for Reconsideration. On October 15, 1991, the lower court issued
an Order, the dispositive portion of which reads as follows:
WHEREFORE, premises considered, the Motion for Reconsideration is hereby given due course. The
Order dated 16 August 1991 for the dismissal of the case against Stronghold Insurance Company,
Inc., is reconsidered and hereby reinstated (sic). However, the case against defendant Jose D. Santos,
Jr. (deceased) remains undisturbed.
Motion for Preliminary hearing and Manifestation with Motion filed by [Stronghold] Insurance
Company Inc., are set for hearing on November 7, 1991 at 2:00 oclock in the afternoon.
SO ORDERED.
On June 4, 1992, [petitioner] SICI filed its Memorandum for Bondsman/Defendant SICI (Re: Effect of
Death of defendant Jose D. Santos, Jr.) reiterating its prayer for the dismissal of [respondents]
complaint.
On January 28, 1993, the lower court issued the assailed Order reconsidering its Order dated October
15, 1991, and ordered the case, insofar as SICI is concerned, dismissed. [Respondent] filed its motion
for reconsideration which was opposed by [petitioner] SICI. On April 16, 1993, the lower court denied
[respondents] motion for reconsideration. x x x.[4]
Ruling of the Court of Appeals
The CA ruled that SICIs obligation under the surety agreement was not extinguished by the death of Jose
D. Santos, Jr. Consequently, Republic-Asahi could still go after SICI for the bond.
The appellate court also found that the lower court had erred in pronouncing that the performance of the
Contract in question had become impossible by respondents act of rescission. The Contract was rescinded
because of the dissatisfaction of respondent with the slow pace of work and pursuant to Article XIII of its
Contract with JDS.
The CA ruled that [p]erformance of the [C]ontract was impossible, not because of [respondents] fault, but
because of the fault of JDS Construction and Jose D. Santos, Jr. for failure on their part to make
satisfactory progress on the project, which amounted to non-performance of the same. x x x [P]ursuant to
the [S]urety [C]ontract, SICI is liable for the non-performance of said [C]ontract on the part of JDS
Construction.[5]
Hence, this Petition.[6]
Issue
Petitioner states the issue for the Courts consideration in the following manner:
Death is a defense of Santos heirs which Stronghold could also adopt as its defense against obligees
claim.[7]
More precisely, the issue is whether petitioners liability under the performance bond was automatically
extinguished by the death of Santos, the principal.
The Courts Ruling
The Petition has no merit.
Sole Issue:
Effect of Death on the Suretys Liability
Petitioner contends that the death of Santos, the bond principal, extinguished his liability under the surety
bond. Consequently, it says, it is automatically released from any liability under the bond.
As a general rule, the death of either the creditor or the debtor does not extinguish the
obligation.[8] Obligations are transmissible to the heirs, except when the transmission is prevented by the
law, the stipulations of the parties, or the nature of the obligation.[9] Only obligations that are personal[10] or
are identified with the persons themselves are extinguished by death.[11]
Section 5 of Rule 86[12] of the Rules of Court expressly allows the prosecution of money claims arising
from a contract against the estate of a deceased debtor. Evidently, those claims are not actually
extinguished.[13] What is extinguished is only the obligees action or suit filed before the court, which is not
then acting as a probate court.[14]
In the present case, whatever monetary liabilities or obligations Santos had under his contracts with
respondent were not intransmissible by their nature, by stipulation, or by provision of law. Hence, his
death did not result in the extinguishment of those obligations or liabilities, which merely passed on to his
estate.[15] Death is not a defense that he or his estate can set up to wipe out the obligations under the
performance bond. Consequently, petitioner as surety cannot use his death to escape its monetary
obligation under its performance bond.
The liability of petitioner is contractual in nature, because it executed a performance bond worded as
follows:
KNOW ALL MEN BY THESE PRESENTS:
That we, JDS CONSTRUCTION of 208-A San Buena Building, contractor, of Shaw Blvd., Pasig,
MM Philippines, as principal and the STRONGHOLD INSURANCE COMPANY, INC. a corporation duly
organized and existing under and by virtue of the laws of the Philippines with head office at Makati,
as Surety, are held and firmly bound unto the REPUBLIC ASAHI GLASS CORPORATION and to any
individual, firm, partnership, corporation or association supplying the principal with labor or materials
in the penal sum of SEVEN HUNDRED NINETY FIVE THOUSAND (P795,000.00), Philippine Currency, for
the payment of which sum, well and truly to be made, we bind ourselves, our heirs, executors,
administrators, successors and assigns, jointly and severally, firmly by these presents.
The CONDITIONS OF THIS OBLIGATION are as follows;
WHEREAS the above bounden principal on the ___ day of __________, 19__ entered into a contract
with the REPUBLIC ASAHI GLASS CORPORATION represented by _________________, to fully and
faithfully. Comply with the site preparation works road and drainage system of Philippine Float Plant
at Pinagbuhatan, Pasig, Metro Manila.
Art. 2047. By guaranty a person, called the guarantor, binds himself to the creditor to fulfill the
obligation of the principal debtor in case the latter should fail to do so.
If a person binds himself solidarily with the principal debtor, the provisions of Section 4,[17] Chapter 3,
Title I of this Book shall be observed. In such case the contract is called a suretyship.
xxxxxxxxx
Art. 1216. The creditor may proceed against any one of the solidary debtors or some or all of them
simultaneously. The demand made against one of them shall not be an obstacle to those which may
subsequently be directed against the others, so long as the debt has not been fully collected.
Elucidating on these provisions, the Court in Garcia v. Court of Appeals[18] stated thus:

WHEREAS, the liability of the Surety Company under this bond shall in no case exceed the sum of x x x. The suretys obligation is not an original and direct one for the performance of his own act, but
PESOS SEVEN HUNDRED NINETY FIVE THOUSAND (P795,000.00) Philippine Currency, inclusive of merely accessory or collateral to the obligation contracted by the principal. Nevertheless, although
interest, attorneys fee, and other damages, and shall not be liable for any advances of the obligee to the contract of a surety is in essence secondary only to a valid principal obligation, his liability to the
the principal. creditor or promisee of the principal is said to be direct, primary and absolute; in other words, he
is directly and equally bound with the principal. x x x.[19]
WHEREAS, said contract requires the said principal to give a good and sufficient bond in the above-
stated sum to secure the full and faithfull performance on its part of said contract, and the
satisfaction of obligations for materials used and labor employed upon the work;
Under the law and jurisprudence, respondent may sue, separately or together, the principal debtor and the
NOW THEREFORE, if the principal shall perform well and truly and fulfill all the undertakings, petitioner aherein, in view of the solidary nature of their liability. The death of the principal debtor will not
work to convert, decrease or nullify the substantive right of the solidary creditor. Evidently, despite the
covenants, terms, conditions, and agreements of said contract during the original term of said
death of the principal debtor, respondent may still sue petitioner alone, in accordance with the solidary
contract and any extension thereof that may be granted by the obligee, with notice to the surety and nature of the latters liability under the performance bond.
during the life of any guaranty required under the contract, and shall also perform well and truly and
fulfill all the undertakings, covenants, terms, conditions, and agreements of any and all duly WHEREFORE, the Petition is DENIED and the Decision of the Court of Appeals AFFIRMED. Costs
authorized modifications of said contract that may hereinafter be made, without notice to the surety against petitioner.
except when such modifications increase the contract price; and such principal contractor or his or its
sub-contractors shall promptly make payment to any individual, firm, partnership, corporation or
association supplying the principal of its sub-contractors with labor and materials in the prosecution
of the work provided for in the said contract, then, this obligation shall be null and void; otherwise it
shall remain in full force and effect. Any extension of the period of time which may be granted by the
obligee to the contractor shall be considered as given, and any modifications of said contract shall be
considered as authorized, with the express consent of the Surety.

The right of any individual, firm, partnership, corporation or association supplying the contractor with
labor or materials for the prosecution of the work hereinbefore stated, to institute action on the
penal bond, pursuant to the provision of Act No. 3688, is hereby acknowledge and confirmed.[16]

As a surety, petitioner is solidarily liable with Santos in accordance with the Civil Code, which provides as
follows: