1

[G.R. No. 117660. December 18, 2000]

AGRO CONGLOMERATES, INC. and MARIO SORIANO, petitioners, vs. THE HON. COURT
OF APPEALS and REGENT SAVINGS and LOAN BANK, INC., respondents.

DECISION
QUISUMBING, J.:

This is a petition for review challenging the decision[1] dated October 17, 1994 of the Court of
Appeals in CA-G.R. No. 32933, which affirmed in toto the judgment of the Manila Regional Trial
Court, Branch 27, in consolidated Cases Nos. 86-37374, 86-37388, 86-37543.
This petition springs from three complaints for sums of money filed by respondent bank
against herein petitioners. In the decision of the Court of Appeals, petitioners were ordered to pay
respondent bank, as follows:

Wherefore, judgment is hereby rendered in favor of plaintiff and against defendants, as follows:

1) In Civil Case No. 86-37374, defendants [petitioners, herein] are ordered jointly and
severally, to pay to plaintiff the amount of P78,212.29, together with interest and
service charge thereon, at the rates of 14% and 3% per annum, respectively,
computed from November 10, 1982, until fully paid, plus stipulated penalty on unpaid
principal at the rate of 6% per annum, computed from November 10, 1982, plus 15%
as liquidated damage plus 10% of the total amount due, as attorneys fees, plus costs;
2) In Civil Case No. 86-37388, defendant is ordered to pay plaintiff the amount of
P632,911.39, together with interest and service charge thereon at the rate of 14%
and 3% per annum, respectively, computed from January 15, 1983, until fully paid,
plus stipulated penalty on unpaid principal at the rate of 6% per annum, computed
from January 15, 1983, plus liquidated damages equivalent to 15% of the total amount
due, plus attorneys fees equivalent to 10% of the total amount due, plus costs; and
3) In Civil Case No. 86-37543, defendant is ordered to pay plaintiff, on the first cause of
action, the amount of P510,000.00, together with interest and service charge thereon,
at the rates of 14% and 2% per annum, respectively, computed from March 13, 1983,
until fully paid, plus a penalty of 6% per annum, based on the outstanding principal of
the loan, computed from March 13, 1983, until fully paid; and on the second cause of
action, the amount of P494,936.71, together with interest and service charge thereon
at the rates of 14% and 2%, per annum, respectively, computed from March 30, 1983,
until fully paid, plus a penalty charge of 6% per annum, based on the unpaid principal,
computed from March 30, 1983, until fully paid, plus (on both causes of action) an
amount equal to 15% of the total amounts due, as liquidated damages, plus attorneys
fees equal to 10% of the total amounts due, plus costs.[2]
Based on the records, the following are the factual antecedents.
 2

On July 17, 1982, petitioner Agro Conglomerates, Inc. as vendor, sold two parcels of land to
Wonderland Food Industries, Inc. In their Memorandum of Agreement,[3] the parties covenanted
that the purchase price of Five Million (P5,000,000.00) Pesos would be settled by the vendee,
under the following terms and conditions: (1) One Million (P1,000,000.00) Pesos shall be paid in
cash upon the signing of the agreement; (2) Two Million (P2,000,000.00) Pesos worth of common
shares of stock of the Wonderland Food Industries, Inc.; and (3) The balance of P2,000,000.00
shall be paid in four equal installments, the first installment falling due, 180 days after the signing
of the agreement and every six months thereafter, with an interest rate of 18% per annum, to be
advanced by the vendee upon the signing of the agreement.
On July 19, 1982, the vendor, the vendee, and the respondent bank Regent Savings & Loan
Bank (formerly Summa Savings & Loan Association), executed an Addendum[4]to the previous
Memorandum of Agreement. The new arrangement pertained to the revision of settlement of the
initial payments of P1,000,000.00 and prepaid interest of P360,000.00 (18% of P2,000,000.00)
as follows:

Whereas, the parties have agreed to qualify the stipulated terms for the payment of the said
ONE MILLION THREE HUNDRED SIXTY THOUSAND (P1,360,000.00) PESOS.

WHEREFORE, in consideration of the mutual covenant and agreement of the parties, they do
further covenant and agree as follows:

1. That the VENDEE instead of paying the amount of ONE MILLION THREE HUNDRED
SIXTY THOUSAND (P1,360,000.00) PESOS in cash, hereby authorizes the
VENDOR to obtain a loan from Summa Savings and Loan Association with office
address at Valenzuela, Metro Manila, being represented herein by its President, Mr.
Jaime Cario and referred to hereafter as Financier; in the amount of ONE MILLION
THREE HUNDRED SIXTY THOUSAND (P1,360,000.00)PESOS, plus interest
thereon at such rate as the VENDEE and the Financier may agree, which amount
shall cover the ONE MILLION (P1,000,000.00) PESOS cash which was agreed to be
paid upon signing of the Memorandum of Agreement, plus 18% interest on the
balance of two million pesos stipulated upon in Item No. 1(c) of the said agreement;
provided however, that said loan shall be made for and in the name of the VENDOR.
2. The VENDEE also agrees that the full amount of ONE MILLION THREE HUNDRED
SIXTY THOUSAND (P1,360,000.00) PESOS be paid directly to the VENDOR;
however, the VENDEE hereby undertakes to pay the full amount of the said loan to
the Financier on such terms and conditions agreed upon by the Financier and the
VENDOR, it being understood that while the loan will be secured from and in the
name of the VENDOR, the VENDEE will be the one liable to pay the entire proceeds
thereof including interest and other charges.[5]
This addendum was not notarized.
Consequently, petitioner Mario Soriano signed as maker several promissory notes,[6] payable
to the respondent bank. Thereafter, the bank released the proceeds of the loan to
petitioners. However, petitioners failed to meet their obligations as they fell due. During that time,
the bank was experiencing financial turmoil and was under the supervision of the Central
Bank. Central Bank examiner and liquidator Cordula de Jesus, endorsed the subject promissory
notes to the banks counsel for collection. The bank gave petitioners opportunity to settle their
account by extending payment due dates. Mario Soriano manifested his intention to re-structure
the loan, yet did not show up nor submit his formal written request.
 3

Respondent bank filed three separate complaints before the Regional Trial Court of Manila
for Collection of Sums of money. The corresponding case histories are illustrated in the table
below:
Date of Amount Payment Payment
Loan Due Extension
Date Dates
Civil Case
86-37374 P78,212.29 Nov. 10, Feb. 8,
August 12, 1982 1983
1982 May 9,
1983
Aug. 7,
1983

Civil Case
86-37388 P632,911.39 Jan. 15, May 16,
July 19, 1983 1983
1982 Aug. 14,
1983

Civil Case
86-37543 P510,000.00 March June 11,
September 13, 1983 1983
14, 1982 Sept. 9,
P494,936.71 1983
March
October 1, 30, 1983 June 28,
1982 1983
Sept. 26,
1983
In their answer, petitioners interposed the defense of novation and insisted there was a valid
substitution of debtor. They alleged that the addendum specifically states that although the
promissory notes were in their names, Wonderland shall be responsible for the payment
thereof.
The trial court held that petitioners are liable, to wit:

The evidences, however, disclose that Wonderland did not comply with its obligation under said
Addendum (Exh. S) as the agreement to turn over the farmland to it, did not materialize (57 tsn,
May 29, 1990), and there was, actually no sale of the land (58 tsn, ibid). Hence, Wonderland is
not answerable. And since the loans obtained under the four promissory notes (Exhs. A, C, G,
and E) have not been paid, despite opportunities given by plaintiff to defendants to make
payments, it stands to reason that defendants are liable to pay their obligations thereunder to
plaintiff. In fact, defendants failed to file a third-party complaint against Wonderland, which
shows the weakness of its stand that Wonderland is answerable to make said payments.[7]

Petitioners appealed to the Court of Appeals. The trial courts decision was affirmed by the
appellate court.
Hence, this recourse, wherein petitioners raise the sole issue of:
 4

WHETHER THE COURT OF APPEALS ERRED IN NOT FINDING THAT THE ADDENDUM,
SIGNED BY THE PETITIONERS, RESPONDENT BANK AND WONDERLAND INC.,
CONSTITUTES A NOVATION OF THE CONTRACT BY SUBSTITUTION OF DEBTOR,
WHICH EXEMPTS THE PETITIONERS FROM ANY LIABILITY OVER THE PROMISSORY
NOTES.

Revealed by the facts on record, the conflict among the parties started from a contract of sale
of a farmland between petitioners and Wonderland Food Industries, Inc. As found by the trial
court, no such sale materialized.
A contract of sale is a reciprocal transaction. The obligation or promise of each party is the
cause or consideration for the obligation or promise by the other. The vendee is obliged to pay
the price, while the vendor must deliver actual possession of the land. In the instant case the
original plan was that the initial payments would be paid in cash. Subsequently, the parties (with
the participation of respondent bank) executed an addendum providing instead, that the
petitioners would secure a loan in the name of Agro Conglomerates Inc. for the total amount of
the initial payments, while the settlement of said loan would be assumed by
Wonderland. Thereafter, petitioner Soriano signed several promissory notes and received the
proceeds in behalf of petitioner-company.
By this time, we note a subsidiary contract of suretyship had taken effect since petitioners
signed the promissory notes as maker and accommodation party for the benefit of Wonderland.
Petitioners became liable as accommodation party. An accommodation party is a person who has
signed the instrument as maker, acceptor, or indorser, without receiving value therefor, and for
the purpose of lending his name to some other person and is liable on the instrument to a holder
for value, notwithstanding such holder at the time of taking the instrument knew (the signatory) to
be an accommodation party.[8] He has the right, after paying the holder, to obtain reimbursement
from the party accommodated, since the relation between them has in effect become one of
principal and surety, the accommodation party being the surety.[9] Suretyship is defined as the
relation which exists where one person has undertaken an obligation and another person is also
under the obligation or other duty to the obligee, who is entitled to but one performance, and as
between the two who are bound, one rather than the other should perform.[10] The suretys liability
to the creditor or promisee of the principal is said to be direct, primary and absolute; in other
words, he is directly and equally bound with the principal.[11] And the creditor may proceed against
any one of the solidary debtors.[12]
We do not give credence to petitioners assertion that, as provided by the addendum, their
obligation to pay the promissory notes was novated by substitution of a new debtor,
Wonderland. Contrary to petitioners contention, the attendant facts herein do not make a case of
novation.
Novation is the extinguishment of an obligation by the substitution or change of the obligation
by a subsequent one which extinguishes or modifies the first, either by changing the object or
principal conditions, or by substituting another in place of the debtor, or by subrogating a third
person in the rights of the creditor.[13] In order that a novation can take place, the concurrence of
the following requisites[14] are indispensable:
1) There must be a previous valid obligation;
2) There must be an agreement of the parties concerned to a new contract;
3) There must be the extinguishment of the old contract; and
4) There must be the validity of the new contract.
 5

In the instant case, the first requisite for a valid novation is lacking. There was no novation
by substitution of debtor because there was no prior obligation which was substituted by a new
contract. It will be noted that the promissory notes, which bound the petitioners to pay, were
executed after the addendum. The addendum modified the contract of sale, not the stipulations
in the promissory notes which pertain to the surety contract. At this instance, Wonderland
apparently assured the payment of future debts to be incurred by the petitioners.Consequently,
only a contract of surety arose. It was wrong for petitioners to presume a novation had taken
place. The well-settled rule is that novation is never presumed,[15] it must be clearly and
unequivocally shown.[16]
As it turned out, the contract of surety between Wonderland and the petitioners was
extinguished by the rescission of the contract of sale of the farmland. With the rescission, there
was confusion or merger in the persons of the principal obligor and the surety, namely the
petitioners herein. The addendum which was dependent thereon likewise lost its efficacy.
It is true that the basic and fundamental rule in the interpretation of contract is that, if the
terms thereof are clear and leave no doubt as to the intention of the contracting parties, the literal
meaning shall control. However, in order to judge the intention of the parties, their
contemporaneous and subsequent acts should be considered.[17]
The contract of sale between Wonderland and petitioners did not materialize. But it was
admitted that petitioners received the proceeds of the promissory notes obtained from respondent
bank.
Sec. 22 of the Civil Code provides:

Every person who through an act of performance by another, or any other means, acquires or
comes into possession of something at the expense of the latter without just or legal ground,
shall return the same to him.

Petitioners had no legal or just ground to retain the proceeds of the loan at the expense of
private respondent. Neither could petitioners excuse themselves and hold Wonderland still liable
to pay the loan upon the rescission of their sales contract. If petitioners sustained damages as a
result of the rescission, they should have impleaded Wonderland and asked damages. The non-
inclusion of a necessary party does not prevent the court from proceeding in the action, and the
judgment rendered therein shall be without prejudice to the rights of such necessary party.[18] But
respondent appellate court did not err in holding that petitioners are duty-bound under the law to
pay the claims of respondent bank from whom they had obtained the loan proceeds.
WHEREFORE, the petition is DENIED for lack of merit. The assailed decision of the Court of
Appeals dated October 17, 1994 is AFFIRMED. Costs against petitioners.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 126490 March 31, 1998

 6

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 Osmeña 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.

In her Amended Answer with Counterclaim,4 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
Osmeña 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
 7

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.
 8

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
 9

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:

 10

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
 11

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
 12

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
 13

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'être 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
 14

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 Osmeña
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 Osmeña
Azarraga. Mr. Banusing advised me not to worry because he will try to collect first
from Merlyn and Osmeña Azarraga.

10. A year thereafter, I received a telephone call from the secretary of Mr.
Banusing who reminded that the loan of Merlyn and Osmeña 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.
 15

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
Osmeña 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
 16

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, subject to the

MODIFICATION that the penalty interest of 3% per month is hereby deleted and the award
of attorney's fees is reduced to P10,000.00.

SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

FIRST DIVISION

G.R. No. L-30910 February 27, 1987

PEOPLE OF THE PHILIPPINES, plaintiff-appellee,

vs.
JULIA MANIEGO, accused-appellant.
 17

NARVASA, J.:

Application of the established rule in this jurisdiction, that the acquittal of an accused on
reasonable doubt is not generally an impediment to the imposition, in the same criminal action,
of civil liability for damages on said accused, is what is essentially called into question by the
appellant in this case.

The information which initiated the instant criminal proceedings in the Court of First Instance of
Rizal indicted three (3) persons — Lt. Rizalino M. Ubay, Mrs. Milagros Pamintuan, and Mrs.
Julia T. Maniego — for the crime of MALVERSATION committed as follows:

That on or about the period covering the month of May, 1957 up to and including
the month of August, 1957, in Quezon City, Philippines, the above-named
accused, conspiring together, confederating with and helping one another, with
intent of gain and without authority of law, did, then and there, willfully, unlawfully
and feloniously malverse, misappropriate and misapply public funds in the
amount of P 66,434.50 belonging to the Republic of the Philippines, in the
following manner, to wit: the accused, Lt. RIZALINO M. Ubay, a duly appointed
officer in the Armed Forces of the Philippines in active duty, who, during the
period specified above, was designated as Disbursing Officer in the Office of the
Chief of Finance, GHQ, Camp Murphy, Quezon City, and as such was entrusted
with and had under his custody and control public funds, conspiring and
confederating with co-accused, MILAGROS T. PAMINTUAN and JULIA T.
MANIEGO, did then and there, unlawfully, willfully and feloniously, with intent of
gain and without authority of law, and in pursuance of their conspiracy, take,
receive, and accept from his said co-accused several personal checks drawn
against the Philippine National Bank and the Bank of the Philippine Islands, of
which the accused, MILAGROS T. PAMINTUAN is the drawer and the accused,
JULIA T. MANIEGO, is the indorser, in the total amount of P66,434.50, cashing
said checks and using for this purpose the public funds entrusted to and placed
under the custody and control of the said Lt. Rizalino M. Ubay, all the said
accused knowing fully well that the said checks are worthless and are not
covered by funds in the aforementioned banks, for which reason the same were
dishonored and rejected by the said banks when presented for encashment, to
the damage and prejudice of the Republic of the Philippines, in the amount of
P66,434.50, Philippine currency. 1

Only Lt. Ubay and Mrs. Maniego were arraigned, Mrs. Pamintuan having apparently fled to the
United States in August, 1962. 2 Both Ubay and Maniego entered a plea of not guilty. 3

After trial judgment was rendered by the Court of First Instance, 4 the dispositive part whereof
reads:

There being sufficient evidence beyond reasonable doubt against the accused,
Rizalino M. Ubay, the Court hereby convicts him of the crime of malversation and
sentences him to suffer the penalty of reclusion temporal of TWELVE (12)
YEARS, ONE (1) DAY to FOURTEEN (14) YEARS, EIGHT (8) MONTHS, and a
 18

fine of P57,434.50 which is the amount malversed, and to suffer perpetual

special disqualification.

In the absence of evidence against accused Julia T. Maniego, the Court hereby
acquits her, but both she and Rizal T. Ubay are hereby ordered to pay jointly and
severally the amount of P57,434.50 to the government. 5

Maniego sought reconsideration of the judgment, praying that she be absolved from civil liability
or, at the very least, that her liability be reduced to P46,934.50. 6 The Court declined to negate
her civil liability, but did reduce the amount thereof to P 46,934.50. 7 She appealed to the Court
of Appeals 8 as Ubay had earlier done. 9

Ubay's appeal was subsequently dismissed by the Appellate Court because of his failure to file
brief. 10 On the other hand, Maniego submitted her brief in due course, and ascribed three (3)
errors to the Court a quo, to wit:

1) The Lower Court erred in holding her civilly liable to indemnify the Government
for the value of the cheeks after she had been found not guilty of the crime out of
which the civil liability arises.

2) Even assuming arguendo that she could properly be held civilly liable after her
acquittal, it was error for the lower Court to adjudge her liable as an indorser to
indemnify the government for the amount of the cheeks.

3) The Lower Court erred in declaring her civilly liable jointly and severally with
her co-defendant Ubay, instead of absolving her altogether. 11

Because, in the Appellate Court's view, Maniego's brief raised only questions of law, her appeal
was later certified to this Court pursuant to Section 17, in relation to Section 31, of the Judiciary
Act, as amended, and Section 3, Rule 50 of the Rules of Court. 12

The verdict must go against the appellant.

Well known is the principle that "any person criminally hable for felony is also civilly
liable." 13 But a person adjudged not criminally responsible may still be held to be civilly liable. A
person's acquittal of a crime on the ground that his guilt has not been proven beyond
reasonable doubt 14 does not bar a civil action for damages founded on the same acts involved
in the offense. 15 Extinction of the penal action does not carry with it extinction of the civil unless
the extinction proceeds from a declaration in a final judgment that the fact from which the civil
might arise did not exist. 16

Rule III SEC. 3(b) — Extinction of the penal action does not carry with it
extinction of the civil, unless the extinction proceeds from a declaration in a final
judgment that the fact from which the civil might arise did not exist. In other
cases, the person entitled to the civil action may institute it in the jurisdiction and
in the manner provided by law against the person who may be liable for
restitution of the thing and reparation of indemnity for the damage suffered. (1985
Rules on Criminal Procedure).
 19

Hence, contrary to her submission, 17 Maniego's acquittal on reasonable doubt of the crime of
Malversation imputed to her and her two (2) co-accused did not operate to absolve her from civil
liability for reimbursement of the amount rightfully due to the Government as owner thereof. Her
liability therefor could properly be adjudged, as it was so adjudged, by the Trial Court on the
basis of the evidence before it, which adequately establishes that she was an indorser of
several checks drawn by her sister, which were dishonored after they had been exchanged with
cash belonging to the Government, then in the official custody of Lt. Ubay.

Appellant's contention that as mere indorser, she may not be made liable on account of the
dishonor of the checks indorsed by her, is likewise untenable. Under the law, the holder or last
indorsee of a negotiable instrument has the right to "enforce payment of the instrument for the
full amount thereof against all parties liable thereon." 18 Among the "parties liable thereon" is an
indorser of the instrument i.e., "a person placing his signature upon an instrument otherwise
than as maker, drawer, or acceptor ** unless he clearly indicates by appropriate words his
intention to be bound in some other capacity. " 19 Such an indorser "who indorses without
qualification," inter alia "engages that on due presentment, ** (the instrument) shall be accepted
or paid, or both, as the case may be, according to its tenor, and that if it be dishonored, and the
necessary proceedings on dishonor be duly taken, he will pay the amount thereof to the holder,
or to any subsequent indorser who may be compelled to pay it." 20 Maniego may also be
deemed an "accommodation party" in the light of the facts, i.e., a person "who has signed the
instrument as maker, drawer, acceptor, or indorser, without receiving value therefor, and for the
purpose of lending his name to some other person." 21 As such, she is under the law "liable on
the instrument to a holder for value, notwithstanding such holder at the time of taking the
instrument knew ** (her) to be only an accommodation party," 22 although she has the right, after
paying the holder, to obtain reimbursement from the party accommodated, "since the relation
between them is in effect that of principal and surety, the accommodation party being the
surety." 23

One last word. The Trial Court acted correctly in adjudging Maniego to be civilly liable in the
same criminal action in which she had been acquitted of the felony of Malversation ascribed to
her, dispensing with the necessity of having a separate civil action subsequently instituted
against her for the purpose. 24

WHEREFORE, the judgment of the Trial Court, being entirely in accord with the facts and the
law, is hereby affirmed in toto, with costs against the appellant.

SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

SECOND DIVISION

G.R. No. L-45848 November 9,1977

TOWERS ASSURANCE CORPORATION, petitioner,

vs.
ORORAMA SUPERMART, ITS OWNER-PROPRIETOR, SEE HONG and JUDGE BENJAMIN
 20

K. GOROSPE, Presiding Judge, Court of First Instance of Misamis Oriental, Branch

I, respondents.

Benjamin Tabique & Zosimo T. Vasalla for petitioner.

Rodrigo F. Lim, Jr. for private respondent.

AQUINO, J.:

This case is about the liability of a surety in a counterbond for the lifting of a writ of preliminary
attachment.

On February 17, 1976 See Hong, the proprietor of Ororama Supermart in Cagayan de Oro City,
sued the spouses Ernesto Ong and Conching Ong in the Court of First Instance of Misamis
Oriental for the collection of the sum of P 58,400 plus litigation expenses and attorney's fees
(Civil Case No. 4930).

See Hong asked for a writ of preliminary attachment. On March 5, 1976, the lower court issued
an order of attachment. The deputy sheriff attached the properties of the Ong spouses in
Valencia, Bukidnon and in Cagayan de Oro City.

To lift the attachment, the Ong spouses filed on March 11, 1976 a counterbond in 'the amount of
P 58,400 with Towers Assurance Corporation as surety. In that undertaking, the Ong spouses
and Towers Assurance Corporation bound themselves to pay solidarity to See Hong the sum of
P 58,400.

On March 24, 1976 the Ong spouses filed an answer with a counterclaim. For non-appearance
at the pre- trial, the Ong spouses were declared in default.

On October 25, 1976, the lower court rendered a decision, ordering not only the Ong spouses
but also their surety, Towers Assurance Corporation, to pay solidarily to See Hong the sum of P
58,400. The court also ordered the Ong spouses to pay P 10,000 as litigation expenses and
attorney's fees.

Ernesto Ong manifested that he did not want to appeal. On March 8, 1977, Ororama Supermart
filed a motion for execution. The lower court granted that motion. The writ of execution was
issued on March 14 against the judgment debtors and their surety. On March 29, 1977, Towers
Assurance Corporation filed the instant petition for certiorari where it assails the decision and
writ of execution.

We hold that the lower court acted with grave abuse of discretion in issuing a writ of execution
against the surety without first giving it an opportunity to be heard as required in Rule 57 of tie
Rules of Court which provides:

SEC. 17. When execution returned unsatisfied, recovery had upon bound. — If
the execution be returned unsatisfied in whole or in part, the surety or sureties on
any counterbound given pursuant to the provisions of this rule to secure the
 21

payment of the judgment shall become charged on such counterbound, and

bound to pay to the judgment creditor upon demand, the amount due under the
judgment, which amount may be recovered from such surety or sureties after
notice and summary hearing in the same action.

Under section 17, in order that the judgment creditor might recover from the surety on the
counterbond, it is necessary (1) that execution be first issued against the principal debtor and
that such execution was returned unsatisfied in whole or in part; (2) that the creditor made a
demand upon the surety for the satisfaction of the judgment, and (3) that the surety be given
notice and a summary hearing in the same action as to his liability for the judgment under his
counterbond.

The first requisite mentioned above is not applicable to this case because Towers Assurance
Corporation assumed a solidary liability for the satisfaction of the judgment. A surety is not
entitled to the exhaustion of the properties of the principal debtor (Art. 2959, Civil Code; Luzon
Steel Corporation vs. Sia, L-26449, May 15, 1969, 28 SCRA 58, 63).

But certainly, the surety is entitled to be heard before an execution can be issued against him
since he is not a party in the case involving his principal. Notice and hearing constitute the
essence of procedural due process. (Martinez vs. Villacete 116 Phil. 326; Insurance & Surety
Co., Inc. vs. Hon. Piccio, 105 Phil. 1192, 1200, Luzon Surety Co., Inc. vs. Beson, L-26865-66,
January 30. 1970. 31 SCRA 313).

WHEREFORE, the order and writ of execution, insofar as they concern Towers Corporation, are
set aside. The lower court is directed to conduct a summary hearing on the surety's liability on
its counterbound. No costs.

SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

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

ROMULO MACHETTI, plaintiff-appelle,

vs.
HOSPICIO DE SAN JOSE, defendant-appellee, and
FIDELITY & SURETY COMPANY OF THE PHILIPPINE ISLANDS, defendant-appellant

Ross and Laurence and Wolfson & Scwarzkopf for appellant.

Gabriel La O for appellee Hospicio de San Jose.
No appearance for the other appellee.

OSTRAND, J.:
 22

It appears from the evidence that on July 17, 1916, one Romulo Machetti, by a written
agreement undertook to construct a building on Calle Rosario in the city of Manila for the
Hospicio de San Jose, the contract price being P64,000. One of the conditions of the agreement
was that the contractor should obtain the "guarantee" of the Fidelity and Surety Company of the
Philippine Islands to the amount of P128,800 and the following endorsement in the English
language appears upon the contract:

MANILA, July 15, 1916.

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

FIDELITY AND SURETY COMPANY OF THE PHILIPPINE ISLANDS.

(Sgd) OTTO VORSTER,

Vice-President.

Machetti constructed the building under the supervision of architects representing the Hospicio
de San Jose and, as the work progressed, payments were made to him from time to time upon
the recommendation of the architects, until the entire contract price, with the exception of the
sum of the P4,978.08, was paid. Subsequently it was found that the work had not been carried
out in accordance with the specifications which formed part of the contract and that the
workmanship was not of the standard required, and the Hospicio de San Jose therefore
answered the complaint and presented a counterclaim for damages for the partial
noncompliance with the terms of the agreement abovementioned, in the total sum of P71,350.
After issue was thus joined, Machetti, on petition of his creditors, was, on February 27, 1918,
declared insolvent and on March 4, 1918, an order was entered suspending the proceeding in
the present case in accordance with section 60 of the Insolvency Law, Act No. 1956.

The Hospicio de San Jose on January 29, 1919, filed a motion asking that the Fidelity and
Surety Company be made cross-defendant to the exclusion of Machetti and that the
proceedings be continued as to said company, but still remain suspended as to Machetti. This
motion was granted and on February 7, 1920, the Hospicio filed a complaint against the Fidelity
and Surety Company asking for a judgement for P12,800 against the company upon its
guaranty. After trial, the Court of First Instance rendered judgment against the Fidelity and
Surety Company for P12,800 in accordance with the complaint. The case is now before this
court upon appeal by the Fidelity and Surety Company form said judgment.

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

But in this instance the guarantor's case is even stronger than that of an ordinary surety. The
contract of guaranty is written in the English language and the terms employed must of course
be given the signification which ordinarily attaches to them in that language. In English the term
"guarantor" implies an undertaking of guaranty, as distinguished from suretyship. It is very true
that notwithstanding the use of the words "guarantee" or "guaranty" circumstances may be
shown which convert the contract into one of suretyship but such circumstances do not exist in
the present case; on the contrary it appear affirmatively that the contract is the guarantor's
 23

separate undertaking in which the principal does not join, that its rests on a separate
consideration moving from the principal and that although it is written in continuation of the
contract for the construction of the building, it is a collateral undertaking separate and distinct
from the latter. All of these circumstances are distinguishing features of contracts of guaranty.

Now, while a surety undertakes to pay if the principal does not pay, the guarantor only binds
himself to pay if the principal cannot pay. The one is the insurer of the debt, the other an insurer
of the solvency of the debtor. (Saint vs.Wheeler & Wilson Mfg. Co., 95 Ala., 362;
Campbell, vs. Sherman, 151 Pa. St., 70; Castellvi de Higgins and Higgins vs. Sellner, 41 Phil.,
142; ;U.S. vs. Varadero de la Quinta, 40 Phil., 48.) This latter liability is what the Fidelity and
Surety Company assumed in the present case. The undertaking is perhaps not exactly that of
a fianza under the Civil Code, but is a perfectly valid contract and must be given the legal effect
if ordinarily carries. The Fidelity and Surety Company having bound itself to pay only the event
its principal, Machetti, cannot pay it follows that it cannot be compelled to pay until it is shown
that Machetti is unable to pay. Such ability may be proven by the return of a writ of execution
unsatisfied or by other means, but is not sufficiently established by the mere fact that he has
been declared insolvent in insolvency proceedings under our statutes, in which the extent of the
insolvent's inability to pay is not determined until the final liquidation of his estate.

The judgment appealed from is therefore reversed without costs and without prejudice to such
right of action as the cross-complainant, the Hospicio de San Jose, may have after exhausting
its remedy against the plaintiff Machetti. So ordered.

Republic of the Philippines

SUPREME COURT
Manila

SECOND DIVISION

G.R. No. L-49401 July 30, 1982

RIZAL COMMERCIAL BANKING CORPORATION, petitioner,

vs.
HON. JOSE P. ARRO, Judge of the Court of First instance of Davao, and RESIDORO
CHUA, respondents.

Laurente C. Ilagan for petitioner.

Victor A. Clapano for respondents.

DE CASTRO, J.:

Petition for certiorari to annul the orders of respondent judge dated October 6, 1978 and
November 7, 1978 in Civil Case No. 11-154 of the Court of First Instance of Davao, which
granted the motion filed by private respondent to dismiss the complaint of petitioner for a sum of
money, on the ground that the complaint states no cause of action as against private
respondent.
 24

After the petition had been filed, petitioner, on December 14, 1978 mailed a manifestation and
motion requesting the special civil action for certiorari be treated as a petition for review. 1 Said
manifestation and motion was noted in the resolution of January 10, 1979. 2

It appears that on October 19, 1976 Residoro Chua and Enrique Go, Sr. executed a
comprehensive surety agreements 3 to guaranty among others, any existing indebtedness of
Davao Agricultural Industries Corporation (referred to therein as Borrower, and as Daicor in this
decision), and/or induce the bank at any time or from time to time thereafter, to make loans or
advances or to extend credit in other manner to, or at the request, or for the account of the
Borrower, either with or without security, and/or to purchase on discount, or to make any loans
or advances evidenced or secured by any notes, bills, receivables, drafts, acceptances, checks
or other evidences of indebtedness (all hereinafter called "instruments") upon which the
Borrower is or may become liable, provided that the liability shall not exceed at any one time the
aggregate principal sum of P100,000.00.

On April 29, 1977 a promissory note 4 in the amount of P100,000.00 was issued in favor of
petitioner payable on June 13, 1977. Said note was signed by Enrique Go, Sr. in his personal
capacity and in behalf of Daicor. The promissory note was not fully paid despite repeated
demands; hence, on June 30, 1978, petitioner filed a complaint for a sum of money against
Daicor, Enrique Go, Sr. and Residoro Chua. A motion to dismiss dated September 23, 1978
was filed by respondent Residoro Chua on the ground that the complaint states no cause of
action as against him. 5 It was alleged in the motion that he can not be held liable under the
promissory note because it was only Enrique Go, Sr. who signed the same in behalf of Daicor
and in his own personal capacity.

In an opposition dated September 26, 1978 6 petitioner alleged that by virtue of the execution of
the comprehensive surety agreement, private respondent is liable because said agreement
covers not merely the promissory note subject of the complaint, but is continuing; and it
encompasses every other indebtedness the Borrower may, from time to time incur with
petitioner bank.

On October 6, 1978 respondent court rendered a decision granting private respondent's motion
to dismiss the complaint. 7 Petitioner filed a motion for reconsideration dated October 12, 1978
and on November 7, 1978 respondent court issued an order denying the said motion. 8

The sole issue resolved by respondent court was the interpretation of the comprehensive surety
agreement, particularly in reference to the indebtedness evidenced by the promissory note
involved in the instant case, said comprehensive surety agreement having been signed by
Enrique Go, Sr. and private respondent, binding themselves as solidary debtors of said
corporation not only to existing obligations but to future ones. Respondent court said that
corollary to that agreement must be another instrument evidencing the obligation in a form of a
promissory note or any other evidence of indebtedness without which the said agreement
serves no purpose; that since the promissory notes, which is primarily the basis of the cause of
action of petitioner, is not signed by private respondent, the latter can not be liable thereon.

Contesting the aforecited decision and order of respondent judge, the present petition was filed
before this Court assigning the following as errors committed by respondent court:

1. That the respondent court erred in dismissing the complaint against Chua
simply on the reasons that 'Chua is not a signatory to the promissory note" of
 25

April 29, 1977, or that Chua could not be held liable on the note under the
provisions of the comprehensive surety agreement of October 29, 1976; and/or

2. That the respondent court erred in interpreting the provisions of the

Comprehensive Surety Agreement towards the conclusion that respondent Chua
is not liable on the promissory note because said note is not conformable to the
Comprehensive Surety Agreement; and/or

3. That the respondent court erred in ordering that there is no cause of action
against respondent Chua in the petitioner's complaint.

The main issue involved in this case is whether private respondent is liable to pay the obligation
evidence by the promissory note dated April 29,1977 which he did not sign, in the light of the
provisions of the comprehensive surety agreement which petitioner and private respondent had
earlier executed on October 19, 1976.

We find for the petitioner. The comprehensive surety agreement was jointly executed by
Residoro Chua and Enrique Go, Sr., President and General Manager, respectively of Daicor, on
October 19, 1976 to cover existing as well as future obligations which Daicor may incur with the
petitioner bank, subject only to the proviso that their liability shall not exceed at any one time the
aggregate principal sum of P100,000.00. Thus, paragraph I of the agreement provides:

For and in consideration of any existing indebtedness to you of Davao

Agricultural Industries Corporation with principal place of business and postal
address at 530 J. P. Cabaguio Ave., Davao City (hereinafter called the
"Borrower), and/or in order to induce, you in your discretion, at any time or from
time to time hereafter, to make loans or advances or to extend credit in any other
manner to, or at he request or for the account of the Borrower, either with or
without security, and/or to purchase or discount or to make any loans or
advances evidenced or secured by any notes, bills, receivables, drafts,
acceptances, checks or other instruments or evidences of indebtedness (all
hereinafter called "instruments") upon which the Borrower is or may become
liable as maker, endorser, acceptor, or otherwise) the undersigned agrees to
guarantee, and does hereby guarantee in joint and several capacity, the punctual
payment at maturity to you of any and all such instruments, loans, advances,
credits and/or other obligations herein before referred to, and also any and all
other indebtedness of every kind which is now or may hereafter become due or
owing to you by the Borrower, together with any and all expenses which may be
incurred by you in collecting an such instruments or other indebtedness or
obligations hereinbefore referred to ..., provided, however, that the liability of the
undersigned shag not exceed at any one time the aggregate principal sum of
P100,000.00 ...

The agreement was executed obviously to induce petitioner to grant any application for a loan
Daicor may desire to obtain from petitioner bank. The guaranty is a continuing one which shall
remain in full force and effect until the bank is notified of its termination.

This is a continuing guaranty and shall remain in fun force and effect until written
notice shall have been received by you that it has been revoked by the
undersigned, ... 9
 26

At the time the loan of P100,000.00 was obtained from petitioner by Daicor, for the purpose of
having an additional capital for buying and selling coco-shell charcoal and importation of
activated carbon, 10 the comprehensive surety agreement was admittedly in full force and effect.
The loan was, therefore, covered by the said agreement, and private respondent, even if he did
not sign the promisory note, is liable by virtue of the surety agreement. The only condition that
would make him liable thereunder is that the Borrower "is or may become liable as maker,
endorser, acceptor or otherwise". There is no doubt that Daicor is liable on the promissory note
evidencing the indebtedness.

The surety agreement which was earlier signed by Enrique Go, Sr. and private respondent, is
an accessory obligation, it being dependent upon a principal one which, in this case is the loan
obtained by Daicor as evidenced by a promissory note. What obviously induced petitioner bank
to grant the loan was the surety agreement whereby Go and Chua bound themselves solidarily
to guaranty the punctual payment of the loan at maturity. By terms that are unequivocal, it can
be clearly seen that the surety agreement was executed to guarantee future debts which Daicor
may incur with petitioner, as is legally allowable under the Civil Code. Thus —

Article 2053. — A guaranty may also be given as security for future debts, the
amount of which is not yet known; there can be no claim against the guarantor
until the debt is liquidated. A conditional obligation may also be secured.

In view of the foregoing, the decision (which should have been a mere "order"), dismissing the
complaint is reversed and set side. The case is remanded to the court of origin with instructions
to set aside the motion to dismiss, and to require defendant Residoro Chua to answer the
complaint after which the case shall proceed as provided by the Rules of Court. No costs.

SO ORDERED.

[G.R. No. 112191. February 7, 1997]

FORTUNE MOTORS (PHILS.) CORPORATION and EDGAR L. RODRIGUEZA, petitioners,

vs. THE HONORABLE COURT OF APPEALS and FILINVEST CREDIT
CORPORATION, respondents.

DECISION
PANGANIBAN, J.:

To fund their acquisition of new vehicles (which are later retailed or resold to the general
public), car dealers normally enter into wholesale automotive financing schemes whereby
vehicles are delivered by the manufacturer or assembler on the strength of trust receipts or drafts
executed by the car dealers, which are backed up by sureties. These trust receipts or drafts are
then assigned and/or discounted by the manufacturer to/with financing companies, which assume
payment of the vehicles but with the corresponding right to collect such payment from the car
dealers and/or the sureties. In this manner, car dealers are able to secure delivery of their stock-
in-trade without having to pay cash therefor; manufacturers get paid without any
receivables/collection problems; and financing companies earn their margins with the assurance
 27

of payment not only from the dealers but also from the sureties. When the vehicles are eventually
resold, the car dealers are supposed to pay the financing companies -- and the business goes
merrily on. However, in the event the car dealer defaults in paying the financing company, may
the surety escape liability on the legal ground that the obligations were incurred subsequent to
the execution of the surety contract?
This is the principal legal question raised in this petition for review (under Rule 45 of the Rules
of Court) seeking to set aside the Decision[1] of the Court of Appeals (Tenth
Division)[2]promulgated on September 30, 1993 in CA G.R. CV No. 09136 which affirmed in
toto the decision[3] of the Regional Trial Court of Manila - Branch 11[4] in Civil Case No. 83-21994,
the dispositive portion of which reads:

WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the defendants,
by ordering the latter to pay, jointly and severally, the plaintiff the following amounts:

1. The sum of P1,348,033.89, plus interest thereon at the rate of P922.53 per day starting April
1, 1985 until the said principal amount is fully paid;

2. The amount of P50,000.00 as attorneys fees and another P50,000.00 as liquidated damages;
and

3. That the defendants, although spared from paying exemplary damages, are further ordered to
pay, in solidum, the costs of this suit.

Plaintiff therein was the financing company and the defendants the car dealer and its sureties.

The Facts

On or about August 4, 1981, Joseph L. G. Chua and Petitioner Edgar Lee Rodrigueza
(Petitioner Rodrigueza) each executed an undated Surety Undertaking[5] whereunder they
absolutely, unconditionally and solidarily guarantee(d) to Respondent Filinvest Credit Corporation
(Respondent Filinvest) and its affiliated and subsidiary companies the full, faithful and prompt
performance, payment and discharge of any and all obligations and agreements of Fortune
Motors (Phils.) Corporation (Petitioner Fortune) under or with respect to any and all such contracts
and any and all other agreements (whether by way of guaranty or otherwise) of the latter with
Filinvest and its affiliated and subsidiary companies now in force or hereafter made.
The following year or on April[6] 5, 1982, Petitioner Fortune, Respondent Filinvest and
Canlubang Automotive Resources Corporation (CARCO) entered into an Automotive Wholesale
Financing Agreement[7] (Financing Agreement) under which CARCO will deliver motor vehicles
to Fortune for the purpose of resale in the latters ordinary course of business; Fortune, in turn,
will execute trust receipts over said vehicles and accept drafts drawn by CARCO, which will
discount the same together with the trust receipts and invoices and assign them in favor of
Respondent Filinvest, which will pay the motor vehicles for Fortune. Under the same agreement,
Petitioner Fortune, as trustee of the motor vehicles, was to report and remit proceeds of any sale
for cash or on terms to Respondent Filinvest immediately without necessity of demand.
Subsequently, several motor vehicles were delivered by CARCO to Fortune, and trust
receipts covered by demand drafts and deeds of assignment were executed in favor of
Respondent Filinvest. However, when the demand drafts matured, not all the proceeds of the
 28

vehicles which Petitioner Fortune had sold were remitted to Respondent Filinvest. Fortune
likewise failed to turn over to Filinvest several unsold motor vehicles covered by the trust
receipts. Thus, Filinvest through counsel, sent a demand letter[8] dated December 12, 1983 to
Fortune for the payment of its unsettled account in the amount of P1,302,811.00. Filinvest sent
similar demand letters[9] separately to Chua and Rodrigueza as sureties. Despite said demands,
the amount was not paid. Hence, Filinvest filed in the Regional Trial Court of Manila a complaint
for a sum of money with preliminary attachment against Fortune, Chua and Rodrigueza.
In an order dated September 26, 1984, the trial court declared that there was no factual issue
to be resolved except for the correct balance of defendants account with Filinvest as agreed upon
by the parties during pre-trial.[10] Subsequently, Filinvest presented testimonial and documentary
evidence. Defendants (petitioners herein), instead of presenting their evidence, filed a Motion for
Judgment on Demurrer to Evidence[11] anchored principally on the ground that the Surety
Undertakings were null and void because, at the time they were executed, there was no principal
obligation existing. The trial court denied the motion and scheduled the case for reception of
defendants evidence. On two scheduled dates, however, defendants failed to present their
evidence, prompting the court to deem them to have waived their right to present evidence. On
December 17, 1985, the trial court rendered its decision earlier cited ordering Fortune, Chua and
Rodrigueza to pay Filinvest, jointly and severally, the sum of P1,348,033.83 plus interest at the
rate of P922.53 per day from April 1, 1985 until fully paid, P50,000.00 in attorneys fees,
another P50,000.00 in liquidated damages and costs of suit.
As earlier mentioned, their appeal was dismissed by the Court of Appeals (Tenth Division)
which affirmed in toto the trial courts decision. Hence, this recourse.

Issues

Petitioners assign the following errors in the appealed Decision:

1. that the Court of Appeals erred in declaring that surety can exist even if there was no existing
indebtedness at the time of its execution.

2. that the Court of Appeals erred when it declared that there was no novation.

3. that the Court of Appeals erred when it declared, that the evidence was sufficient to prove the
amount of the claim.[12]

Petitioners argue that future debts which can be guaranteed under Article 2053 of the Civil
Code refer only to debts existing at the time of the constitution of the guaranty but the amount
thereof is unknown, and that a guaranty being an accessory obligation cannot exist without a
principal obligation. Petitioners claim that the surety undertakings cannot be made to cover the
Financing Agreement executed by Fortune, Filinvest and CARCO since the latter contract was
not yet in existence when said surety contracts were entered into.
Petitioners further aver that the Financing Agreement would effect a novation of the surety
contracts since it changed the principal terms of the surety contracts and imposed additional and
onerous obligations upon the sureties.
 29

Lastly, petitioners claim that no accounting of the payments made by Petitioner Fortune to
Respondent Filinvest was done by the latter. Hence, there could be no way by which the sureties
can ascertain the correct amount of the balance, if any.
Respondent Filinvest, on the other hand, imputes estoppel (by pleadings or by judicial
admission) upon petitioners when in their Motion to Discharge Attachment, they admitted their
liability as sureties thus:

Defendants Chua and Rodrigueza could not have perpetrated fraud because they are only
sureties of defendant Fortune Motors x x x;

x x x The defendants (referring to Rodrigueza and Chua) are not parties to the trust receipts
agreements since they are ONLY sureties x x x.[13]

In rejecting the arguments of petitioners and in holding that they (Fortune and the sureties)
were jointly and solidarily liable to Filinvest, the trial court declared:

As to the alleged non-existence of a principal obligation when the surety agreement was signed,
it is enought (sic) to state that a guaranty may also be given as security for future debts, the
amount of which is not known (Art. 2053, New Civil Code). In the case of NARIC vs. Fojas, L-
11517, promulgated April 10, 1958, it was ruled that a bond posted to secure additional credit
that the principal debtor had applied for, is not void just because the said bond was signed and
filed before the additional credit was extended by the creditor. The obligation of the sureties on
future obligations of Fortune is apparent from a proviso under the Surety Undertakings marked
Exhs. B and C that the sureties agree with the plaintiff as follows:

In consideration of your entering into an arrangement with the party (Fortune) named above, x x
x x by which you may purchase or otherwise require from, and or enter into with obligor x x
x trust receipt x x x arising out of wholesale and/or retail transactions by or with obligor, the
undersigned x x x absolutely, unconditionally, and solidarily guarantee to you x x x the full,
faithful and prompt performance, payment and discharge of any and all obligations x x x of
obligor under and with respect to any and all such contracts and any and all agreements
(whether by way of guaranty or otherwise) of obligor with you x x x now in force or hereafter
made. (Underlinings supplied).

On the matter of novation, this has already been ruled upon when this Court denied defendants
Motion to dismiss on the argument that what happened was really an assignment of credit, and
not a novation of contract, which does not require the consent of the debtors. The fact of
knowledge is enough. Besides, as explained by the plaintiff, the mother or the principal contract
was the Financing Agreement, whereas the trust receipts, the sight drafts, as well as the Deeds
of assignment were only collaterals or accidental modifications which do not extinguish the
original contract by way of novation. This proposition holds true even if the subsequent
agreement would provide for more onerous terms for, at any rate, it is the principal or mother
contract that is to be followed. When the changes refer to secondary agreements and not to the
object or principal conditions of the contract, there is no novation; such changes will produce
modifications of incidental facts, but will not extinguish the original obligation (Tolentino,
Commentaries on Jurisprudence of the Civil Code of the Philippines, 1973 Edition, Vol. IV, page
367; cited in plaintiffs Memorandum of September 6, 1985, p. 3).
 30

On the evidence adduced by the plaintiff to show the status of defendants accounts, which took
into consideration payments by defendants made after the filing of the case, it is enough to state
that a statement was carefully prepared showing a balance of the principal obligation plus
interest totalling P1,348,033.89 as of March 31, 1985 (Exh. M). This accounting has not been
traversed nor contradicted by defendants although they had the opportunity to do so. Likewise,
there was absolute silence on the part of defendants as to the correctness of the previous
statement of account made as of December 16, 1983 (referring to Exh. I), but more important,
however, is that defendants received demand letters from the plaintiff stating that, as of
December 1983 (Exhs. J, K and L), this total amount of obligation was P1,302,811,00, and yet
defendants were not heard to have responded to said demand letters, let alone have taken any
exception thereto. There is such a thing as evidence by silence (Sec. 23, Rule 130, Revised
Rules of Court).[14]

The Court of Appeals, affirming the above decision of the trial court, further explained:

x x x In the case at bar, the surety undertakings in question unequivocally state that Chua and
Rodrigueza absolutely, unconditionally and solidarily guarantee to Filinvest the full, faithful and
prompt performance, payment and discharge of any and all obligations and agreements of
Fortune under or with respect to any and all such contracts and any and all other agreements
(whether by way of guaranty or otherwise) of the latter with Filinvest in force at the time of the
execution of the Surety Undertakings or made thereafter. Indeed, if Chua and Rodrigueza did
not intend to guarantee all of Fortunes future obligation with Filinvest, then they should have
expressly stated in their respective surety undertakings exactly what said surety agreements
guaranteed or to which obligations of Fortune the same were intended to apply. For another, if
Chua and Rodrigueza truly believed that the surety undertakings they executed should not
cover Fortunes obligations under the AWFA, then why did they not inform Filinvest of such fact
when the latter sent them the aforementioned demand letters (Exhs. K and L) urging them to
pay Fortunes liability under the AWFA. Instead, quite uncharacteristic of persons who have just
been asked to pay an obligation to which they believe they are not liable, Chua and Rodrigueza
elected or chose not to answer said demand letters. Then, too, considering that appellant Chua
is the corporate president of Fortune and a signatory to the AWFA, he should have simply had it
stated in the AWFA or in a separate document that the Surety Undertakings do not cover
Fortunes obligations in the aforementioned AWFA, trust receipts or demand drafts.

Appellants argue that it was unfair for Filinvest to have executed the AWFA only after two (2)
years from the date of the Surety undertakings because Chua and Rodrigueza were thereby
made to wait for said number of years just to know what kind of obligation they had to
guarantee.

The argument cannot hold water. In the first place, the Surety Undertakings did not provide that
after a period of time the same will lose its force and effect. In the second place, if Chua and
Rodrigueza did not want to guarantee the obligations of Fortune under the AWFA, trust receipts
and demand drafts, then why did they not simply terminate the Surety Undertakings by serving
ten (10) days written notice to Filinvest as expressly allowed in said surety agreements. It is
highly plausible that the reason why the Surety Undertakings were not terminated was because
the execution of the same was part of the consideration why Filinvest and CARCO agreed to
enter into the AWFA with Fortune.[15]

The Courts Ruling

 31

We affirm the decisions of the trial and appellate courts.

First Issue: Surety May Secure Future Obligations

The case at bench falls on all fours with Atok Finance Corporation vs. Court of
Appeals[16] which reiterated our rulings in National Rice and Corn Corporation (NARIC) vs. Court
of Appeals[17] and Rizal Commercial Banking Corporation vs. Arro.[18] In Atok Finance, Sanyu
Chemical as principal, and Sanyu Trading along with individual private stockholders of Sanyu
Chemical, namely, spouses Daniel and Nenita Arrieta, Leopoldo Halili and Pablito Bermundo, as
sureties, executed a continuing suretyship agreement in favor of Atok Finance as creditor.Under
the agreement, Sanyu Trading and the individual private stockholders and officers of Sanyu
Chemical jointly and severally unconditionally guarantee(d) to Atok Finance Corporation
(hereinafter called Creditor), the full, faithful and prompt payment and discharge of any and all
indebtedness of [Sanyu Chemical] x x x to the Creditor. Subsequently, Sanyu Chemical assigned
its trade receivables outstanding with a total face value of P125,871.00 to Atok Finance in
consideration of receipt of the amount of P105,000.00. Later, additional trade receivables with a
total face value of P100,378.45 were also assigned. Due to nonpayment upon maturity, Atok
Finance commenced action against Sanyu Chemical, the Arrieta spouses, Bermundo and Halili
to collect the sum of P120,240.00 plus penalty charges due and payable. The individual private
respondents contended that the continuing suretyship agreement, being an accessory contract,
was null and void since, at the time of its execution, Sanyu Chemical had no pre-existing obligation
due to Atok Finance. The trial court rendered a decision in favor of Atok Finance and ordered
defendants to pay, jointly and severally, aforesaid amount to Atok.
On appeal, the then Intermediate Appellate Court reversed the trial court and dismissed the
complaint on the ground that there was no proof that when the suretyship agreement was entered
into, there was a pre-existing obligation which served as the principal obligation between the
parties. Furthermore, the future debts alluded to in Article 2053 refer to debts already existing at
the time of the constitution of the agreement but the amount thereof is unknown, unlike in the
case at bar where the obligation was acquired two years after the agreement.
We ruled then that the appellate court was in serious error. The distinction which said court
sought to make with respect to Article 2053 (that future debts referred to therein relate to debts
already existing at the time of the constitution of the agreement but the amount [of which] is
unknown and not to debts not yet incurred and existing at that time) has previously been rejected,
citing the RCBC and NARIC cases. We further said:

x x x Of course, a surety is not bound under any particular principal obligation until that principal
obligation is born. But there is no theoretical or doctrinal difficulty inherent in saying that the
suretyship agreement itself is valid and binding even before the principal obligation intended to
be secured thereby is born, any more than there would be in saying that obligations which are
subject to a condition precedent are valid and binding before the occurrence of the condition
precedent.

Comprehensive or continuing surety agreements are in fact quite commonplace in present day
financial and commercial practice. A bank or financing company which anticipates entering into
a series of credit transactions with a particular company, commonly requires the projected
principal debtor to execute a continuing surety agreement along with its sureties. By executing
such an agreement, the principal places itself in a position to enter into the projected series of
 32

transactions with its creditor; with such suretyship agreement, there would be no need to
execute a separate surety contract or bond for each financing or credit accommodation
extended to the principal debtor.

In Dio vs. Court of Appeals,[19] we again had occasion to discourse on continuing

guaranty/suretyship thus:

x x x A continuing guaranty is one which is not limited to a single transaction, but which
contemplates a future course of dealing, covering a series of transactions, generally for an
indefinite time or until revoked. It is prospective in its operation and is generally intended to
provide security with respect to future transactions within certain limits, and contemplates a
succession of liabilities, for which, as they accrue, the guarantor becomes liable. Otherwise
stated, a continuing guaranty is one which covers all transactions, including those arising in the
future, which are within the description or contemplation of the contract, of guaranty, until the
expiration or termination thereof. A guaranty shall be construed as continuing when by the terms
thereof it is evident that the object is to give a standing credit to the principal debtor to be used
from time to time either indefinitely or until a certain period; especially if the right to recall the
guaranty is expressly reserved. Hence, where the contract of guaranty states that the same is to
secure advances to be made from time to time the guaranty will be construed to be a continuing
one.

In other jurisdictions, it has been held that the use of particular words and expressions such as
payment of any debt, any indebtedness, any deficiency, or any sum, or the guaranty of any
transaction or money to be furnished the principal debtor at any time, or on such time that the
principal debtor may require, have been construed to indicate a continuing guaranty.[20]

We have no reason to depart from our uniform ruling in the above-cited cases. The facts of
the instant case bring us to no other conclusion than that the surety undertakings executed by
Chua and Rodrigueza were continuing guaranties or suretyships covering all future obligations of
Fortune Motors (Phils.) Corporation with Filinvest Credit Corporation. This is evident from the
written contract itself which contained the words absolutely, unconditionally and solidarily
guarantee(d) to Respondent Filinvest and its affiliated and subsidiary companies the full, faithful
and prompt performance, payment and discharge of any and all obligations and agreements of
Petitioner Fortune under or with respect to any and all such contracts and any and all other
agreements (whether by way of guaranty or otherwise) of the latter with Filinvest and its affiliated
and subsidiary companies now in force or hereafter made.
Moreover, Petitioner Rodrigueza and Joseph Chua knew exactly where they stood at the
time they executed their respective surety undertakings in favor of Fortune. As stated in the
petition:

Before the execution of the new agreement, Edgar L. Rodrigueza and Joseph Chua were
required to sign blank surety agreements, without informing them how much amount they would
be liable as sureties.However, because of the desire of petitioners, Chua and Rodrigueza to
have the cars delivered to petitioner, Fortune, they signed the blank promissory
notes.[21] (underscoring supplied)

It is obvious from the foregoing that Rodrigueza and Chua were fully aware of the business
of Fortune, an automobile dealer; Chua being the corporate president of Fortune and even a
signatory to the Financial Agreement with Filinvest.[22] Both sureties knew the purpose of the
surety undertaking which they signed and they must have had an estimate of the amount involved
 33

at that time. Their undertaking by way of the surety contracts was critical in enabling Fortune to
acquire credit facility from Filinvest and to procure cars for resale, which was the business of
Fortune. Respondent Filinvest, for its part, relied on the surety contracts when it agreed to be the
assignee of CARCO with respect to the liabilities of Fortune with CARCO. After benefiting
therefrom, petitioners cannot now impugn the validity of the surety contracts on the ground that
there was no pre-existing obligation to be guaranteed at the time said surety contracts were
executed. They cannot resort to equity to escape liability for their voluntary acts, and to heap
injustice to Filinvest, which relied on their signed word.
This is a clear case of estoppel by deed. By the acts of petitioners, Filinvest was made to
believe that it can collect from Chua and/or Rodrigueza in case of Fortunes default. Filinvest relied
upon the surety contracts when it demanded payment from the sureties of the unsettled liabilities
of Fortune. A refusal to enforce said surety contracts would virtually sanction the perpetration of
fraud or injustice.[23]

Second Issue: No Novation

Neither do we find merit in the averment of petitioners that the Financing Agreement
contained onerous obligations not contemplated in the surety undertakings, thus changing the
principal terms thereof and effecting a novation.
We have ruled previously that there are only two ways to effect novation and thereby
extinguish an obligation. First, novation must be explicitly stated and declared in unequivocal
terms. Novation is never presumed. Second, the old and new obligations must be incompatible
on every point. The test of incompatibility is whether the two obligations can stand together, each
one having its independent existence. If they cannot, they are incompatible and the latter
obligation novates the first.[24] Novation must be established either by the express terms of the
new agreement or by the acts of the parties clearly demonstrating the intent to dissolve the old
obligation as a consideration for the emergence of the new one. The will to novate, whether totally
or partially, must appear by express agreement of the parties, or by their acts which are too clear
and unequivocal to be mistaken.[25]
Under the surety undertakings however, the obligation of the sureties referred to absolutely,
unconditionally and solidarily guaranteeing the full, faithful and prompt performance, payment and
discharge of all obligations of Petitioner Fortune with respect to any and all contracts and other
agreements with Respondent Filinvest in force at that time or thereafter made.There were no
qualifications, conditions or reservations stated therein as to the extent of the suretyship. The
Financing Agreement, on the other hand, merely detailed the obligations of Fortune to CARCO
(succeeded by Filinvest as assignee). The allegation of novation by petitioners is, therefore,
misplaced. There is no incompatibility of obligations to speak of in the two contracts. They can
stand together without conflict.
Furthermore, the parties have not performed any explicit and unequivocal act to manifest
their agreement or intention to novate their contract. Neither did the sureties object to the
Financing Agreement nor try to avoid liability thereunder at the time of its execution. As aptly
discussed by the Court of Appeals:

x x x For another, if Chua and Rodrigueza truly believed that the surety undertakings they
executed should not cover Fortunes obligations under the AWFA (Financing Agreement), then
why did they not inform Filinvest of such fact when the latter sent them the aforementioned
 34

demand letters (Exhs. K and L) urging them to pay Fortunes liability under the AWFA. Instead,
quite uncharacteristic of persons who have just been asked to pay an obligation to which they
are not liable, Chua and Rodrigueza elected or chose not to answer said demand letters. Then,
too, considering that appellant Chua is the corporate president of Fortune and a signatory to the
AWFA, he should have simply had it stated in the AWFA or in a separate document that the
Surety Undertakings do not cover Fortunes obligations in the aforementioned AWFA, trust
receipts or demand drafts.[26]

Third Issue: Amount of Claim Substantiated

The contest on the correct amount of the liability of petitioners is a purely factual issue. It is
an oft repeated maxim that the jurisdiction of this Court in cases brought before it from the Court
of Appeals under Rule 45 of the Rules of Court is limited to reviewing or revising errors of law. It
is not the function of this Court to analyze or weigh evidence all over again unless there is a
showing that the findings of the lower court are totally devoid of support or are glaringly erroneous
as to constitute serious abuse of discretion. Factual findings of the Court of Appeals are
conclusive on the parties and carry even more weight when said court affirms the factual findings
of the trial court.[27]
In the case at bar, the findings of the trial court and the Court of Appeals with respect to the
assigned error are based on substantial evidence which were not refuted with contrary proof by
petitioners. Hence, there is no necessity to depart from the above judicial dictum.
WHEREFORE, premises considered, the petition is DENIED and the assailed Decision of
the Court of Appeals concurring with the decision of the trial court is hereby AFFIRMED.Costs
against petitioners.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 80078 May 18, 1993

ATOK FINANCE CORPORATION, petitioner,

vs.
COURT OF APPEALS, SANYU CHEMICAL CORPORATION, DANILO E. ARRIETA, NENITA
B. ARRIETA, PABLITO BERMUNDO and LEOPOLDO HALILI, respondents.

Syquia Law Offices for petitioner.

Batino, Angala, Allaga & Zara Law Offices for private respondents.
 35

FELICIANO, J.:

Atok Finance Corporation ("Atok Finance") asks us to review and set aside the Decision of the
Court of Appeals which reversed a decision of the trial court ordering private respondents to pay
jointly and severally to petitioner Atok Finance certain sums of money.

On 27 July 1979, private respondents Sanyu Chemical corporation ("Sanyu Chemical") as

principal and Sanyu Trading Corporation ("Sanyu Trading") along with individual private
stockholders of Sanyu Chemical, namely, private respondent spouses Danilo E. Halili and
Pablico Bermundo as sureties, executed in the continuing Suretyship Agreement in favor of
Atok Finance as creditor. Under this Agreement, Sanyu Trading and the individual private
respondents who were officers and stockholders of Sanyu Chemical did:

(1) For valuable and/or other consideration . . ., jointly and severally

unconditionally guarantee to ATOK FINANCE CORPORATION (hereinafter
called Creditor), the full, faithful and prompt payment and discharge of any and
all indebtedness of [Sanyu Chemical] . . . (hereinafter called Principal) to the
Creditor. The word "indebtedness" is used herein in its most comprehensive
sense and includes any and all advances, debts, obligations and liabilities of
Principal or any one or more of them, here[to]fore, now or hereafter made,
incurred or created, whether voluntary or involuntary and however arising,
whether direct or acquired by the Creditor by assignment or succession, whether
due or not due, absolute or contingent, liquidated or unliquidated, determined or
undetermined and whether the Principal may be may be liable individually of
jointly with others, or whether recovery upon such indebtedness may be or
hereafter become barred by any statute of limitations, or whether such
indebtedness may be or otherwise become unenforceable.1 (Emphasis supplied)

Other relevant provisions of the Continuing Suretyship Agreement follow:

(2) This is a continuing suretyship relating to any indebtedness, including that

arising under successive transactions which shall either continue the
indebtedness from time to time or renew it after it has been satisfied. This
suretyship is binding upon the heirs, successors, executors, administrators and
assigns of the surety, and the benefits hereof shall extend to and include the
successors and assigns of the Creditor.

(3) The obligations hereunder are joint and several and independent of the
obligations of the Principal. A separate action or actions may be prosecuted
against the Principal and whether or not the Principal be joined in any such
action or actions.

xxx xxx xxx.

(6) In addition to liens upon, and rights of set-off against the moneys, securities
or other property of the Surety given to the Creditor by law, the Creditor shall
have the lien upon and a right of self-off against all moneys, securities, and other
property of the Surety now and hereafter in the possession of the Creditor; and
every such lien or right of self-off may be exercised without need of demands
upon or notice to the Surety. No lien or right of set-off shall be deemed to have
 36

been waived by any act, omission or conduct on the part of the Creditor, or by
any neglect to exercise such right of set-off or to enforce such lien, or by any
delay in so doing, and every right of set-off or lien shall continue in full force and
effect until such right of set-off of lien is specifically waived or released by an
instrument in writing executed by the Creditor.

(7) Any indebtedness of the Principal now or hereafter held by the Surety is
hereby subordinated to the indebtedness of the Principal to the Creditor; and if
the Creditor so requests, such indebtedness of the Principal of the Surety shall
be collected, enforced and shall be paid over to the Creditor and shall be paid
over to the Creditor and shall be paid over to the Creditor on account of the
indebtedness of the Principal to the Creditor but without reducing or affecting in
any manner the liability of the Surety under the provisions of this suretyship.

xxx xxx xxx2

(Emphases supplied)

On 27 November 1981, Sanyu Chemical assigned its trade receivables outstanding as of 27

November 1981 with a total face value of P125,871.00, to Atok Finance in consideration of
receipt from Atok Finance of the amount of P105,000.00. The assigned receivables carried a
standard term of thirty (30) days; it appeared, however, that the standard commercial practice
was to grant an extension up to one hundred twenty (120) days without penalties. The relevant
portions of this Deed of Assignment read as follows:

1. FOR VALUE RECEIVED, the ASSIGNOR does hereby SELL, TRANSFER

and ASSIGN all his/its rights, title and interest in the contracts, receivables,
accounts, notes, leases, deeds of sale with reservation of title, invoices,
mortgages, checks, negotiable instruments and evidences of indebtedness listed
in the schedule forming part hereinafter called "Contract" or "Contracts."

2. To induce the ASSIGNEE to purchase the above Contracts, the ASSIGNOR

does hereby certify, warrant and represent that :

(a). He/It is the sole owner of the assigned

Contracts free and clear of claims of any other
party except the herein ASSIGNEE and has the
right to transfer absolute title thereto the
ASSIGNEE;

(b). Each assigned Contract is bonafide and the

amount owing and to become due on each contract
is correctly stated upon the schedule or other
evidences of the Contract delivered pursuant
thereto;

(c). Each assigned Contract arises out of the sale

of merchandise/s which had been delivered and/or
services which have been rendered and none of
the Contract is now, nor will at any time become,
 37

contingent upon the fulfillment of any contract or

condition whatsoever, or subject to any defense,
offset or counterclaim;

(d). No assigned Contract is represented by any

note or other evidence of indebtness or other
security document except such as may have been
endorsed, assigned and delivered by the
ASSIGNOR to the ASSIGNEE simultaneously with
the assignment of such Contract;

(e). No agreement has been made, or will be made,

with any debtor for any deduction discount or return
of merchandise, except as may be specifically
noted at the time of the assignment of the Contract;

(f). None of the terms or provisions of the assigned

Contracts have been amended, modified or waived;

(g). The debtor/s under the assigned Contract/s are

solvent and his/its/their failure to pay the assigned
Contracts and/or any installment thereon upon
maturity thereof shall be conclusively considered as
a violation of this warranty; and

(h). Each assigned Contract is a valid obligation of

the buyer of the merchandise and/or service
rendered under the Contract And that no Contract
is overdue.

The foregoing warranties and representations are in addition to those provided

for in the Negotiable Instruments Law and other applicable laws. Any violation
thereof shall render the ASSIGNOR immediately and unconditionally liable to pay
the ASSIGNEE jointly and severally with the debtors under the assigned
contracts, the amounts due thereon.

xxx xxx xxx

4. The ASSIGNOR shall without compensation or cost, collect and receive in

trust for the ASSIGNEE all payments made upon the assigned contracts and
shall remit to the ASSIGNEE all collections on the said Contracts as follows :

P5,450.00 due on January 2, 1982 on every 15th day (semi-

monthly) until November 1, 1982.

P110,550.00 balloon payment after 12 months.3 (Emphasis

supplied)

Later, additional trade receivables were assigned by Sanyu Chemical to Atok Finance with a
total face value of P100,378.45.
 38

On 13 January 1984, Atok Finance commenced action against Sanyu Chemical, the Arrieta
spouses, Pablito Bermundo and Leopoldo Halili before the Regional Trial Court of Manila to
collect the sum of P120,240.00 plus penalty charges amounting to P0.03 for every peso due
and payable for each month starting from 1 September 1983. Atok Finance alleged that Sanyu
Chemical had failed to collect and remit the amount due under the trade receivables.

Sanyu Chemical and the individual private respondents sought dismissal of Atok's claim upon
the ground that such claim had prescribed under Article 1629 of the Civil Code and for lack of
cause of action. The private respondents contended that the Continuing Suretyship Agreement,
being an accessory contract, was null and void since, at the time of its execution, Sanyu
Chemical had no pre-existing obligation due to Atok Finance.

At the trial, Sanyu Chemical and the individual private respondents failed to present any
evidence on their behalf, although the individual private respondents submitted a memorandum
in support of their argument. After trial, on 1 April 1985, the trial court rendered a decision in
favor of Atok Finance. The dispositive portion of this decision reads as follows:

ACCORDINGLY, judgment is hereby rendered in favor of the plaintiff ATOK

FINANCE CORPORATION; and against the defendants SANYU CHEMICAL
CORPORATION, DANILO E. ARRIETA, NENITA B. ARRIETA, PABLITO
BERMUNDO and LEOPOLDO HALILI, ordering the said defendants, jointly and
severally, to pay the plaintiff:

(1) P120,240.00 plus P0.03 for each peso for each month from September 1,
1983 until the whole amount is fully paid;

(2) P50,000.00 as attorney's fees; and

(3) To pay the costs.

SO ORDERED.4

Private respondents went on appeal before the then Intermediate Appellate Court ("IAC"), and
the appeal was there docketed as AC-G.R. No. 07005-CV. The case was raffled to the Third
Civil Cases Division of the IAC. In a resolution dated 21 March 1986, that Division dismissed the
appeal upon the ground of abandonment, since the private respondents had failed to file their
appeal brief notwithstanding receipt of the notice to do so. On 4 June 1986, entry of judgment
was made by the Clerk of Court of the IAC. Accordingly, Atok Finance went before the trial court
and sought a writ of execution to enforce the decision of the trial court of 1 April 1985. The trial
court issued a writ of execution on 23 July 1986.5 Petitioner alleged that the writ of execution
was served on private respondents.6

However, on 27 August 1986, private respondents filed a Petition for Relief from Judgment
before the Court of Appeals. This Petition was raffled off to the 15th Division of the Court of
Appeals. In that Petition, private respondents claimed that their failure to file their appeal brief
was due to excusable negligence, that is, that their previous counsel had entrusted the
preparation and filing of the brief to one of his associates, which associate, however, had
unexpectedly resigned from the law firm without returning the records of cases he had been
handling, including the appeal of private respondents. Atok Finance opposed the Petition for
 39

Relief arguing that no valid ground existed for setting aside the resolution of the Third Division of
the then IAC.

The 15th Division of the Court of Appeals nonetheless granted the Petition for Relief from
Judgment "in the paramount interest of justice,"7 set aside the resolution of the Third Civil Cases
Division of the then IAC, and gave private respondents a non-extendible period of fifteen (15)
days within which to file their appeal brief. Private respondents did file their appeal brief.

The 15th Division, on 18 August 1987, rendered a Decision on the merits of the appeal, and
reversed and set aside the decision of the trial court and entered a new judgment dismissing the
complaint of Atok Finance, ordering it to pay private respondents P3,000.00 as attorney's fees
and to pay the costs.

Atok Finance moved to set aside the decision of the 15th Division of the Court of Appeals,
inviting attention to the resolution of the IAC's Third Civil Cases Division of 21 March 1986
originally dismissing private respondent's appeal for abandonment thereof. In a resolution dated
18 August 1987, the 15th Division denied Atok Finance's motion stating that it had granted the
Petition for Relief from Judgment and given private respondents herein fifteen (15) days within
which to file an appeal brief, while Atok Finance did not file an appellee's brief, and that its
decision was arrived at "on the basis of appellant's brief and the original records of the appeal
case."

In the present Petition for Review, Atok Finance assigns the following as errors on the part of
the Court of Appeals in rendering its decision of 18 August 1987:

(1) that it had erred in ruling that a continuing suretyship agreement cannot be
effected to secure future debts;

(2) that it had erred in ruling that the continuing suretyship agreement was null
and void for lack of consideration without any evidence whatsoever [being]
adduced by private respondents;

(3) that it had erred in granting the Petition for Relief from Judgment while
execution proceedings [were] on-going on the trial court.8 (Emphasis in the
original)

As a preliminary matter, we note that a Division of the Court of Appeals is co-equal with any
other Division of the same court. Accordingly, a Division of the Court of Appeals has no
authority to consider and grant a petition for relief from a judgment rendered by another Division
of the same court. In the case at bar, however, we must note that an intervening event had
occurred between the resolution of 21 March 1986 of the Third Civil Cases Division of the IAC
dismissing private respondents' appeal and the 30 September 1986 order of the 15th Division of
the Court of Appeals granting the Petition for Relief from Judgment. On 28 July 1986, the old
Intermediate Appellate Court went out of existence and a new court, the Court of Appeals, came
into being, was organized and commenced functioning.9 This event, and the probability that
some confusion may have accompanied the period of transition from the IAC to the Court of
Appeals, lead us to believe that the defect here involved should be disregarded as being of
secondary importance. At the same time, nothing in this decision should be read as impliedly
holding that a petition from relief judgment is available in respect of a decision rendered by the
 40

Court of Appeals; this issue is best reserved for determination in some future cases where it
shall have been adequately argued by the parties.

We turn, therefore, to a consideration of the first substantive issue addressed by the Court of
Appeals in rendering its Decision on the merits of the appeal: whether the individual private
respondents may be held solidarily liable with Sanyu Chemical under the provisions of the
Continuing Suretyship Agreement, or whether that Agreement must be held null and void as
having been executed without consideration and without a pre-existing principal obligation to
sustain it.

The Court of Appeals held on this first issue as follows:

It is the contention of private appellants that the suretyship agreement is null and
void because it is not in consonance with the laws on guaranty and security. The
said agreement was entered into by the parties two years before the Deed of
Assignment was executed. Thus, allegedly, it ran counter to the provision that
guaranty cannot exist independently because by nature it is merely an accessory
contract. The law on guaranty is applicable to surety to some extent Manila
Surety and Fidelity Co. v.Baxter Construction & Co., 53 O.G. 8836; and, Arran
v. Manila Fidelity & Surety Co., 53 O.G. 7247.

We find merit in this contention.

Although obligations arising from contracts have the force of law between the
contracting parties, (Article 1159 of the Civil Code) this does not mean that the
law is inferior to it; the terms of the contract could not be enforces if not valid. So,
even if, as in this case, the agreement was for a continuing suretyship to include
obligations enumerated in paragraph 2 of the agreement, the same could not be
enforced. First, because this contract, just like guaranty, cannot exist without a
valid obligation (Art. 2052, Civil Code); and, second, although it may be given as
security for future debt (Art. 2053, C.C.), the obligation contemplated in the case
at bar cannot be considered "future debt" as envisioned by this law.

There is no proof that when the suretyship agreement was entered into, there
was a pre-existing obligation which served the principal obligation between the
parties. Furthermore, the "future debts" alluded to in Article 2053 refer to debts
already existing at the time of the constitution of the agreement but the amount
thereof is unknown, unlike in the case at bar where the obligation was acquired
two years after the agreement.10 (Emphasis supplied).

We consider that the Court of Appeals here was in serious error. It is true that a serious
guaranty or a suretyship agreement is an accessory contract in the sense that it is entered into
for the purpose of securing the performance of another obligation which is denominated as the
principal obligation. It is also true that Article 2052 of the Civil Code states that "a guarantee
cannot exist without a valid obligation." This legal proposition is not, however, like most legal
principles, to be read in an absolute and literal manner and carried to the limit of its logic. This is
clear from Article 2052 of the Civil Code itself:

Art. 2052. A guaranty cannot exist without a valid obligation.

 41

Nevertheless, a guaranty may be constituted to guarantee the performance of a

voidable or an unenforceable contract. It may also guaranty a natural obligation."
(Emphasis supplied).

Moreover, Article 2053 of the Civil Code states:

Art. 2053. A guaranty may also be given as security for future debts, the amount
of which is not yet known; there can be no claim against the guarantor until the
debt is liquidated. A conditional obligation may also be secured. (Emphasis
supplied)

The Court of Appeals apparently overlooked our caselaw interpreting Articles 2052 and 2053 of
the Civil Code. In National Rice and Corn Corporation (NARIC) v. Jose A. Fojas and Alto Surety
Co., Inc.,11 the private respondents assailed the decision of the trial court holding them liable
under certain surety bonds filed by private respondent Fojas and issued by private respondent
Alto Surety Co. in favor of petitioner NARIC, upon the ground that those surety bonds were null
and void "there being no principal obligation to be secured by said bonds." In affirming the
decision of the trial court, this Court, speaking through Mr. Justice J.B.L. Reyes, made short
shrift of the private respondents' doctrinaire argument:

Under his third assignment of error, appellant Fojas questions the validity of the
additional bonds (Exhs. D and D-1) on the theory that when they were executed,
the principal obligation referred to in said bonds had not yet been entered into, as
no copy thereof was attached to the deeds of suretyship. This defense is
untenable, because in its complaint the NARIC averred, and the appellant did not
deny that these bonds were posted to secure the additional credit that Fojas has
applied for, and the credit increase over his original contract was sufficient
consideration for the bonds. That the latter were signed and filed before the
additional credit was extended by the NARIC is no ground for complaint.Article
1825 of the Civil Code of 1889, in force in 1948, expressly recognized that "a
guaranty may also be given as security for future debts the amount of which is
not yet known." (Emphasis supplied)

In Rizal Commercial Banking Corporation v. Arro,12 the Court was confronted again with the
same issue, that is, whether private respondent was liable to pay a promissory note dated 29
April 1977 executed by the principal debtor in the light of the provisions of a comprehensive
surety agreement which petitioner bank and the private respondent had earlier entered into on
19 October 1976. Under the comprehensive surety agreement, the private respondents had
bound themselves as solidary debtors of the Diacor Corporation not only in respect of existing
obligations but also in respect of future ones. In holding private respondent surety (Residoro
Chua) liable under the comprehensive surety agreement, the Court said:

The surety agreement which was earlier signed by Enrique Go, Sr. and private
respondent, is an accessory obligation, it being dependent upon a principal one,
which, in this case is the loan obtained by Daicor as evidenced by a promissory
note. What obviously induced petitioner bank to grant the loan was the surety
agreement whereby Go and Chua bound themselves solidarily to guaranty the
punctual payment of the loan at maturity. By terms that are unequivocal, it can be
clearly seen that the surety agreement was executed to guarantee future debts
 42

which Daicor may incur with petitioner, as is legally allowable under the Civil
Code. Thus —

Article 2053. — A guarantee may also be given as security for

future debts, the amount of which is not yet known; there can be
no claim against the guarantor until the debt is liquidated. A
conditional obligation may also be secured.13 (Emphasis supplied)

It is clear to us that the Rizal Commercial Banking Corporation and the NARIC cases rejected
the distinction which the Court of Appeals in the case at bar sought to make with respect to
Article 2053, that is, that the "future debts" referred to in that Article relate to "debts already
existing at the time of the constitution of the agreement but the amount [of which] is unknown,"
and not to debts not yet incurred and existing at that time. Of course, a surety is not bound
under any particular principal obligation until that principal obligation is born. But there is no
theoretical or doctrinal difficulty inherent in saying that the suretyship agreement itself is valid
and binding even before the principal obligation intended to be secured thereby is born, any
more that there would be in saying that obligations which are subject to a condition precedent
are valid and binding before the occurrence of the condition precedent.14

Comprehensive or continuing surety agreements are in fact quite commonm place in present
day financial and commercial practice. A bank or a financing company which anticipates
entering into a series of credit transactions with a particular company, commonly requires the
projected principal debtor to execute a continuing surety agreement along with its sureties. By
executing such an agreement, the principal places itself in a position to enter into the projected
series of transactions with its creditor; with such surety agreement, there would be no need to
execute a separate surety contract or bond for each financing or credit accommodation
extended to the principal debtor. As we understand it, this is precisely what happened in the
case at bar.

We turn to the second substantive issue, that is, whether private respondents are liable under
the Deed of Assignment which they, along with the principal debtor Sanyu Chemical, executed
in favor of petitioner, on the receivables thereby assigned.

The contention of Sanyu Chemical was that Atok Finance had no cause of action under the
Deed of Assignment for the reason that Sanyu Chemical's warranty of the debtors' solvency had
ceased. In submitting this contention, Sanyu Chemical relied on Article 1629 of the Civil Code
which reads as follows:

Art. 1629. In case the assignor in good faith should have made himself
responsible for the solvency of the debtor, and the contracting parties should not
have agreed upon the duration of the liability, it shall last for one year only, from
the time of the assignment if the period had already expired.

If the credit should be payable within a term or period which has not yet expired,
the liability shall cease one year after maturity.

Once more, the Court of Appeals upheld the contention of private respondents and held that
Sanyu Chemical was free from liability under the Deed of Assignment. The Court of Appeals
said:
 43

. . . Article 1629 provides for the duration of assignor's warranty of debtor's

solvency depending on whether there was a period agreed upon for the
existence of such warranty, analyzing the law thus:

(1) if there is a period (or length of time) agreed upon, then for such period;

(2) if no period (or length of time) was agreed upon, then:

(a) one year from assignment — if debt was due at the time of the
assignment

(b) one year from maturity — if debt was not yet due at the time of
the assignment..

The debt referred to in this law is the debt under the assigned contract or the
original debts in favor of the assignor which were later assigned to the assignee.
The debt alluded to in the law, is not the debt incurred by the assignor to the
assignee as contended by the appellant.

Applying the said law to the case at bar, the records disclose that none of the
assigned receivables had matured on November 27, 1981 when the Deed of
Assignment was executed. The oldest debt then existing was that contracted on
November 3, 1981 and the latest was contracted on December 4, 1981.

Each of the invoices assigned to the assignee contained a term of 30 days

(Exhibits B-3-A to 5 and extended by the notation which appeared in the
"Schedule of Assigned Receivables" which states that the ". . . the terms stated
on our invoices were normally extended up to a period of 120 days
. . ." (Exhibit B-2). Considering the terms in the invoices plus the ordinary practice
of the company, thus, the assigned debts matured between April 3, 1982 to May
4, 1982. The assignor's warranty for debtor's warranty, in this case, would then
be from the maturity period up to April 3, 1983 or May 4, 1983 to cover all of the
receivables in the invoices.

The letter of demand executed by appellee was dated August 29, 1983 (Exhibit
D) and the complaint was filed on January 13, 1984. Both dates were beyond the
warranty period.

In effect, therefore, company-appellant was right when it claimed that appellee

had no cause of action against it or had lost its cause of
action. 15 (Emphasis supplied)

Once again, however, we consider that the Court of Appeals was in reversible error in so
concluding. The relevant provision of the Deed of Assignment may be quoted again in this
connection:

2. To induce the ASSIGNEE [Atok Finance] to purchase the above contracts, the
ASSIGNOR [Sanyu Chemical] does hereby certify, warrant and represent that . .
.
 44

(g) the debtor/s under the assigned contract/s are solvent and
his/its/their failure to pay the assigned contract/s and/or any
installment thereon upon maturity thereof shall be conclusively
considered as a violation of this warranty; and . . .

The foregoing warranties and representations are in addition to

those provided for in the Negotiable Instruments Law and other
applicable laws. Any violation thereof shall render the ASSIGNOR
immediately and unconditionally liable to pay the ASSIGNEE
jointly and severally with the debtors under the assigned
contracts, the amounts due thereon.

xxx xxx xxx

(Emphasis supplied)

It may be stressed as a preliminary matter that the Deed of Assignment was valid and binding
upon Sanyu Chemical. Assignment of receivables is a commonplace commercial transaction
today. It is an activity or operation that permits the assignee to monetize or realize the value of
the receivables before the maturity thereof. In other words, Sanyu Chemical received from Atok
Finance the value of its trade receivables it had assigned; Sanyu Chemical obviously benefitted
from the assignment. The payments due in the first instance from the trade debtors of Sanyu
Chemical would represent the return of the investment which Atok Finance had made when it
paid Sanyu Chemical the transfer value of such receivables.

Article 1629 of the Civil Code invoked by private respondents and accepted by the Court of
Appeals is not, in the case at bar, material. The liability of Sanyu Chemical to Atok Finance
rests not on the breach of the warranty of solvency; the liability of Sanyu Chemical was not ex
lege (ex Article 1629) but rather ex contractu. Under the Deed of Assignment, the effect of non-
payment by the original trade debtors was breach of warranty of solvency by Sanyu Chemical,
resulting in turn in the assumption of solidary liability by the assignor under the receivables
assigned. In other words, the assignor Sanyu Chemical becomes a solidary debtor under the
terms of the receivables covered and transferred by virtue of the Deed of Assignment. And
because assignor Sanyu Chemical became, under the terms of the Deed of Assignment,
solidary obligor under each of the assigned receivables, the other private respondents (the
Arrieta spouses, Pablito Bermundo and Leopoldo Halili), became solidarily liable for that
obligation of Sanyu Chemical, by virtue of the operation of the Continuing Suretyship
Agreement. Put a little differently, the obligations of individual private respondent officers and
stockholders of Sanyu Chemical under the Continuing Suretyship Agreement, were activated by
the resulting obligations of Sanyu Chemical as solidary obligor under each of the assigned
receivables by virtue of the operation of the Deed of Assignment. That solidary liability of Sanyu
Chemical is not subject to the limiting period set out in Article 1629 of the Civil Code.

It follows that at the time the original complaint was filed by Atok Finance in the trial court, it had
a valid and enforceable cause of action against Sanyu Chemical and the other private
respondents. We also agree with the Court of Appeals that the original obligors under the
receivables assigned to Atok Finance remain liable under the terms of such receivables.

WHEREFORE, for all the foregoing, the Petition for Review is hereby GRANTED DUE
COURSE, and the Decision of the Court of Appeals dated 18 August 1987 and its Resolution
 45

dated 30 September 1987 are hereby REVERSED and SET ASIDE. A new judgment is hereby
entered REINSTATING the Decision of the trial court in Civil Case No. 84-22198 dated 1 April
1985, except only that, in the exercise of this Court's discretionary authority equitably to mitigate
the penalty clause attached to the Deed of Assignment, that penalty is hereby reduced to
eighteen percent (18%) per annum (instead of P0.03 for every peso monthly [or 36% per
annum]). As so modified, the Decision of the trial court is hereby AFFIRMED. Costs against
private respondents.

SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 94566 July 3, 1992

BA FINANCE CORPORATION, petitioner,

vs.
HON. COURT OF APPEALS and TRADERS ROYAL BANK, respondents.

MEDIALDEA, J.:

This is a petition for review on certiorari of the decision of the respondent appellate court which
reversed the ruling of the trial court dismissing the case against petitioner.

The antecedent facts are as follows:

On December 17, 1980, Renato Gaytano, doing business under the name Gebbs International,
applied for and was granted a loan with respondent Traders Royal Bank in the amount of
P60,000.00. As security for the payment of said loan, the Gaytano spouses executed a deed of
suretyship whereby they agreed to pay jointly and severally to respondent bank the amount of
the loan including interests, penalty and other bank charges.

In a letter dated December 5, 1980 addressed to respondent bank, Philip Wong as credit
administrator of BA Finance Corporation for and in behalf of the latter, undertook to guarantee
the loan of the Gaytano spouses. The letter reads:

This is in reference to the application of Gebbs International for a twenty-five (25)

month term loan of 60,000.00 with your Bank.

In this connection, please be advised that we unconditionally guarantee full

payment in peso value the said accommodation (sic) upon non-payment by
subject up to a maximum amount of P60,000.00.
 46

Hoping this would meet your requirement and expedite the early processing of
their application.

(p. 12, Rollo)

Partial payments were made on the loan leaving an unpaid balance in the amount of
P85,807.25. Since the Gaytano spouses refused to pay their obligation, respondent bank filed
with the trial court complaint for sum of money against the Gaytano spouses and petitioner
corporation as alternative defendant.

The Gaytano spouses did not present evidence for their defense. Petitioner corporation, on the
other hand, raised the defense of lack of authority of its credit administrator to bind the
corporation.

On December 12, 1988, the trial court rendered a decision the dispositive portion of which
states:

IN VIEW OF THE FOREGOING, judgment is hereby rendered in favor of plaintiff

and against defendants/Gaytano spouses, ordering the latter to jointly and
severally pay the plaintiff the following:

1) EIGHTY FIVE THOUSAND EIGHT HUNDRED SEVEN AND 25/100

(P85,807.25), representing the total unpaid balance with accumulated interests,
penalties and bank charges as of September 22, 1987, plus interests, penalties
and bank charges thereafter until the whole obligation shall have been fully paid.

2) Attorney's fees at the stipulated rate of ten (10%) percent computed from the
total obligation; and

3) The costs of suit.

The dismissal of the case against defendant BA Finance Corporation is hereby

ordered without pronouncement as to cost.

SO ORDERED. (p. 31, Rollo)

Not satisfied with the decision, respondent bank appealed with the Court of Appeals. On March
13, 1990, respondent appellate court rendered judgment modifying the decision of the trial court
as follows:

In view of the foregoing, the judgment is hereby rendered ordering the

defendants Gaytano spouses and alternative defendant BA Finance Corporation,
jointly and severally, to pay the plaintiff the amount of P85,807.25 as of
September 8, 1987, including interests, penalties and other back (sic) charges
thereon, until the full obligation shall have been fully paid. No pronouncement as
to costs.

SO ORDERED. (p. 27 Rollo)

 47

Hence this petition was filed with the petitioner assigning the following errors committed by
respondent appellate court:

1. THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN RULING

THAT PETITIONER IS JOINTLY AND SEVERALLY LIABLE WITH GAYTANO
SPOUSES DESPITE ITS FINDINGS THAT THE LETTER GUARANTY (EXH.
"C") IS "INVALID AT ITS INCEPTION";

2. THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN RULING

THAT THE PETITIONER WAS GUILTY OF ESTOPPEL DESPITE THE FACT
THAT IT NEVER KNEW OF SUCH ALLEGED LETTER-GUARANTY;

3. THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN NOT

RULING THAT SUCH LETTER GUARANTY (EXHIBIT "C") BEING PATENTLY
ULTRA VIRES, IS UNENFORCEABLE;

4. THE HONORABLE COURT OF APPEALS ERRED IN NOT AWARDING

RELIEF ON PETITIONER'S COUNTERCLAIM
(p. 10, Rollo).

Since the issues are interrelated, it would be well to discuss them jointly.

Petitioner contends that the letter guaranty is ultra vires, and therefore unenforceable; that said
letter-guaranty was issued by an employee of petitioner corporation beyond the scope of his
authority since the petitioner itself is not even empowered by its articles of incorporation and by-
laws to issue guaranties. Petitioner also submits that it is not guilty of estoppel to make it liable
under the letter-guaranty because petitioner had no knowledge or notice of such letter-guaranty;
that the allegation of Philip Wong, credit administrator, that there was an audit was not
supported by evidence of any audit report or record of such transaction in the office files.

We find the petitioner's contentions meritorious. It is a settled rule that persons dealing with an
assumed agent, whether the assumed agency be a general or special one are bound at their
peril, if they would hold the principal liable, to ascertain not only the fact of agency but also the
nature and extent of authority, and in case either is controverted, the burden of proof is upon
them to establish it (Harry Keeler v. Rodriguez, 4 Phil. 19). Hence, the burden is on respondent
bank to satisfactorily prove that the credit administrator with whom they transacted acted within
the authority given to him by his principal, petitioner corporation. The only evidence presented
by respondent bank was the testimony of Philip Wong, credit administrator, who testified that he
had authority to issue guarantees as can be deduced from the wording of the memorandum
given to him by petitioner corporation on his lending authority. The said memorandum which
allegedly authorized Wong not only to approve and grant loans but also to enter into contracts of
guaranty in behalf of the corporation, partly reads:

To: Philip H. Wong, SAM

Credit Administrator

From: Hospicio B. Bayona, Jr., VP and

Head of Credit Administration

Re: Lending Authority

 48

I am pleased to delegate to you in your capacity as Credit Administrator the

following lending limits:

a) P650,000.00 — Secured Loans

b) P550,000.00 — Supported Loans
c) P350,000.00 — Truck Loans/Contracts/Leases
d) P350,000.00 — Auto Loan Contracts/Leases
e) P350,000.00 — Appliance Loan Contracts
f) P350,000.00 — Unsecured Loans

Total loans and/or credits [combination of (a) thru (f) extended to any one
borrower including parents, affiliates and/or subsidiaries, should not exceed
P750,000.00. In exercising the limits aforementioned, both direct and contingent
commitments to the borrower(s) should be considered.

All loans must be within the Company's established lending guideline and
policies.

xxx xxx xxx

LEVELS OF APPROVAL

All transactions in excess of any branch's limit must be recommended to you

through the Official Credit Report for approval. If the transaction exceeds your
limit, you must concur in application before submitting it to the Vice President,
Credit Administration for approval or concurrence.

. . . (pp. 62-63, Rollo) (Emphasis ours)

Although Wong was clearly authorized to approve loans even up to P350,000.00 without any
security requirement, which is far above the amount subject of the guaranty in the amount of
P60,000.00, nothing in the said memorandum expressly vests on the credit administrator power
to issue guarantees. We cannot agree with respondent's contention that the phrase "contingent
commitment" set forth in the memorandum means guarantees. It has been held that a power of
attorney or authority of an agent should not be inferred from the use of vague or general words.
Guaranty is not presumed, it must be expressed and cannot be extended beyond its specified
limits (Director v. Sing Juco, 53 Phil. 205). In one case, where it appears that a wife gave her
husband power of attorney to loan money, this Court ruled that such fact did not authorize him
to make her liable as a surety for the payment of the debt of a third person (Bank of Philippine
Islands v. Coster, 47 Phil. 594).

The sole allegation of the credit administrator in the absence of any other proof that he is
authorized to bind petitioner in a contract of guaranty with third persons should not be given
weight. The representation of one who acts as agent cannot by itself serve as proof of his
authority to act as agent or of the extent of his authority as agent (Velasco v. La Urbana, 58
Phil. 681). Wong's testimony that he had entered into similar transactions of guaranty in the past
for and in behalf of the petitioner, lacks credence due to his failure to show documents or
records of the alleged past transactions. The actuation of Wong in claiming and testifying that
he has the authority is understandable. He would naturally take steps to save himself from
personal liability for damages to respondent bank considering that he had exceeded his
 49

authority. The rule is clear that an agent who exceeds his authority is personally liable for
damages (National Power Corporation v. National Merchandising Corporation, Nos. L-33819
and
L-33897, October 23, 1982, 117 SCRA 789).

Anent the conclusion of respondent appellate court that petitioner is estopped from alleging lack
of authority due to its failure to cancel or disallow the guaranty, We find that the said conclusion
has no basis in fact. Respondent bank had not shown any evidence aside from the testimony of
the credit administrator that the disputed transaction of guaranty was in fact entered into the
official records or files of petitioner corporation, which will show notice or knowledge on the
latter's part and its consequent ratification of the said transaction. In the absence of clear proof,
it would be unfair to hold petitioner corporation guilty of estoppel in allowing its credit
administrator to act as though the latter had power to guarantee.

ACCORDINGLY, the petition is GRANTED and the assailed decision of the respondent
appellate court dated March 13, 1990 is hereby REVERSED and SET ASIDE and another one
is rendered dismissing the complaint for sum of money against BA Finance Corporation.

SO ORDERED.

FIRST DIVISION

[G.R. No. 88880. April 30, 1991.]

PHILIPPINE NATIONAL BANK, Petitioner, v. THE HON. COURT OF APPEALS and

AMBROSIO PADILLA, Respondents.

The Chief Legal Counsel for Petitioner.

Ambrosio Padilla, Mempin & Reyes Law Offices for Private Respondent.
DECISION

GRIÑO-AQUINO, J.:

The Philippine National Bank (PNB) has appealed by certiorari from the decision promulgated
on June 27, 1989 by the Court of Appeals in CA-G.R. CV No. 09791 entitled, "AMBROSIO
PADILLA, plaintiff-appellant versus PHILIPPINE NATIONAL BANK, defendant-appellee,"
reversing the decision of the trial court which had dismissed the private respondent’s complaint
"to annul interest increases." (p. 32, Rollo.) The Court of Appeals rendered
judgment:jgc:chanrobles.com.ph

". . . declaring the questioned increases of interest as unreasonable, excessive and arbitrary
and ordering the defendant-appellee [PNB] to refund to the plaintiff-appellant the amount of
interest collected from July, 1984 in excess of twenty-four percent (24%) per annum. Costs
against the defendant-appellee." (pp 14-15, Rollo.)

In July 1982, the private respondent applied for, and was granted by petitioner PNB, a credit line
 50

of 321.8 million, secured by a real estate mortgage, for a term of two (2) years, with 18%
interest per annum. Private respondent executed in favor of the PNB a Credit Agreement, two
(2) promissory notes in the amount of P900,000.00 each, and a Real Estate Mortgage Contract.

The Credit Agreement provided that

"9.06 Other Conditions. The Borrowers hereby agree to be bound by the rules and regulations
of the Central Bank and the current and general policies of the Bank and those which the Bank
may adopt in the future, which may have relation to or in any way affect the Line, which rules,
regulations and policies are incorporated herein by reference as if set forth herein in full.
Promptly upon receipt of a written request from the Bank, the Borrowers shall execute and
deliver such documents and instruments, in form and substance satisfactory to the Bank, in
order to effectuate or otherwise comply with such rules, regulations and policies." (p. 85, Rollo.)

The Promissory Notes, in turn, uniformly authorized the PNB to increase the stipulated 18%
interest per annum "within the limits allowed by law at any time depending on whatever policy it
[PNB] may adopt in the future; Provided, that, the interest rate on this note shall be
correspondingly decreased in the event that the applicable maximum interest rate is reduced by
law or by the Monetary Board." (pp. 85-86, Rollo; Emphasis ours.)

The Real Estate Mortgage Contract likewise provided that:jgc:chanrobles.com.ph

"(k) INCREASE OF INTEREST RATE

"The rate of interest charged on the obligation secured by this mortgage as well as the interest
on the amount which may have been advanced by the MORTGAGEE, in accordance with the
provisions hereof, shall be subject during the life of this contract to such an increase within the
rate allowed by law, as the Board of Directors of the MORTGAGEE may prescribe for its
debtors." (p. 86, Rollo; Emphasis supplied.)

Four (4) months advance interest and incidental expenses/charges were deducted from the
loan, the net proceeds of which were released to the private respondent by crediting or
transferring the amount to his current account with the bank.chanrobles.com : virtual law library

On June 20, 1984, PNB informed the private respondent that (1) his credit line of P1.8 million
"will expire on July 4, 1984," (2)" [i]f renewal of the line for another year is intended, please
submit soonest possible your request," and (3) the "present policy of the Bank requires at least
30% reduction of principal before your line can be renewed." (pp. 86-87, Rollo.) Complying,
private respondent on June 25, 1984, paid PNB P540,000 00 (30% of P1.8 million) and
requested that "the balance of P1,260,000.00 be renewed for another period of two (2) years
under the same arrangement" and that "the increase of the interest rate of my mortgage loan be
from 18% to 21%" (p. 87, Rollo.).

On July 4, 1984, private respondent paid PNB P360,000.00.

On July 18, 1984, private respondent reiterated in writing his request that "the increase in the
rate of interest from 18% be fixed at 21% of 24%. (p. 87, Rollo.)

On July 26, 1984, private respondent made an additional payment of P100,000.

On August 10, 1984, PNB informed private respondent that "we can not give due course to your
 51

request for preferential interest rate in view of the following reasons: Existing Loan Policies of
the bank requires 32% for loan of more than one year; our present cost of funds has
substantially increased." (pp. 8788, Rollo.)

On August 17, 1984, private respondent further paid PNB P150,000.00.

In a letter dated August 24, 1984 to PNB, private respondent announced that he would
"continue making further payments, and instead of a ‘loan of more than one year,’ I shall pay the
said loan before the lapse of one year or before July 4, 1985. . . . I reiterate my request that the
increase of my rate of interest from 18% ‘be fixed at 21% or 24%.’" (p. 88, Rollo.)

On September 12, 1984, private respondent paid PNB P160,000.00.

In letters dated September 12, 1984 and September 13, 1984, PNB informed private
respondent that "the interest rate on your outstanding line/loan is hereby adjusted from 32% p.a.
to 41% p.a. (35% prime rate + 6%) effective September 6, 1984;" and further explained "why we
can not grant your request for a lower rate of 21% or 24%." (pp. 88-89, Rollo.)

In a letter dated September 24, 1984 to PNB, private respondent registered his protest against
the increase of interest rate from 18% to 32% on July 4, 1984 and from 32% to 41% on
September 6, 1984.

On October 15, 1984, private respondent reiterated his request that the interest rate should not
be increased from 18% to 32% and from 32% to 41%. He also attached (as payment) a check
for P140,000.00.chanrobles.com.ph : virtual law library

Like rubbing salt on the private respondent’s wound, the petitioner informed private respondent
on October 29, 1984, that "the interest rate on your outstanding line/loan is hereby adjusted
from 41% p.a. to 48% p.a. (42% prime rate plus 6% spread) effective 25 October 1984." (p. 89,
Rollo.)

In November 1984, private respondent paid PNB P50,000.00 thus reducing his principal loan
obligation to P300,000.00.

On December 18, 1984, private respondent filed in the Regional Trial Court of Manila a
complaint against PNB entitled, "AMBROSIO PADILLA v. PHILIPPINE NATIONAL BANK" (Civil
Case No. 84-28391), praying that judgment be rendered:jgc:chanrobles.com.ph

"a. Declaring that the unilateral increase of interest rates from 18% to 32%, then to 41% and
again to 48% are illegal, not valid nor binding on plaintiff, and that an adjustment of his interest
rate from 18% to 24% is reasonable, fair and just;

"b. The interest rate on the P900,000.00 released on September 27, 1982 be counted from said
date and not from July 4, 1984;

"c. The excess of interest payment collected by defendant bank by debiting plaintiffs current
account be refunded to plaintiff or credited to his current account;

"d. Pending the determination of the merits of this case, a restraining order and or a writ of
preliminary injunction be issued (1) to restrain and or enjoin defendant bank for [sic] collecting
from plaintiff and/or debiting his current account with illegal and excessive increases of interest
 52

rates; and (2) to prevent defendant bank from declaring plaintiff in default for non-payment and
from instituting any foreclosure proceeding, extrajudicial or judicial, of the valuable commercial
property of plaintiff." (pp. 89-90, Rollo.)

In its answer to the complaint, PNB denied that the increases in interest rates were illegal,
unilateral excessive and arbitrary and recited the reasons justifying said increases.

On March 31, 1985, the private respondent paid the P300,000 balance of his obligation to
PNBN (Exh. 5).

The trial court rendered judgment on April 14, 1986, dismissing the complaint because the
increases of interest were properly made.

The private respondent appealed to the Court of Appeals. On June 27, 1989, the Court of
Appeals reversed the trial court, hence, NB’s recourse to this Court by a petition for review
under Rule 45 of the Rules of Court.

The assignments of error raised in PNB’s petition for review can be resolved into a single legal
issue of whether the bank, within the term of the loan which it granted to the private respondent,
may unilaterally change or increase the interest rate stipulated therein at will and as often as it
pleased.

The answer to that question is no.

In the first place, although Section 2, PD. No. 116 of January 29, 1973, authorizes the Monetary
Board to prescribe the maximum rate or rates of interest for loans or renewal thereof and to
change such rate or rates whenever warranted by prevailing economic and social conditions, it
expressly provides that "such changes shall not be made oftener than once every twelve
months."cralaw virtua1aw library

In this case, PNB, over the objection of the private respondent, and without authority from the
Monetary Board, within a period of only four (4) months, increased the 18% interest rate on the
private respondent’s loan obligation three (3) times: (a) to 32% in July 1984; (b) to 41% in
October 1984; and (c) to 48% in November 1984. Those increases were null and void, for if the
Monetary Board itself was not authorized to make such changes oftener than once a year, even
less so may a bank which is subordinate to the Board.chanrobles law library : red

Secondly, as pointed out by the Court of Appeals, while the private respondent-debtor did agree
in the Deed of Real Estate Mortgage (Exh. 5) that the interest rate may be increased during the
life of the contract "to such increase within the rate allowed by law, as the Board of Directors of
the MORTGAGEE may prescribe" (Exh. 5-e-1) or "within the limits allowed by law" (Promissory
Notes, Ex’s. 2, 3, and 4), no law was ever passed in July to November 1984 increasing the
interest rates on loans or renewals thereof to 32%, 41% and 48% (per annum), and no
documents were executed and delivered by the debtor to effectuate the increases. The Court of
Appeals observed.

". . . We focus Our attention first of all on the agreement between the parties as embodied in the
following instruments, to wit: (1) Exhibit ‘1’ — Credit Agreement dated July 1, 1982; (2) Exhibit
‘2’ — Promissory Note dated July 5, 1982; (3) Exhibit ‘(3)’ — Promissory Note dated January 3,
1983; (4) Exhibit ‘4’ — Promissory Note, dated December 13, 1983; and (5) Exhibit ‘5’ — Real
Estate Mortgage contract dated July 1, 1982.
 53

"Exhibit ‘1’ states in its portion marked Exhibit ‘1-g-1’:chanrob1es virtual 1aw library

‘9 .06 Other Conditions. The Borrowers hereby agree to be bound by the rules and regulations
of the Central Bank and the current and general policies of the Bank and those which the Bank
may adopt in the future, which may have relation to or in any way affect the Line, which rules,
regulations and policies are incorporated herein by reference as if set forth herein in full.
Promptly upon receipt of a written request from the Bank, the Borrowers shall execute and
deliver such documents and instruments, in form and substance satisfactory to the Bank, in
order to effectuate or otherwise comply with such rules, regulations and policies.’

"Exhibits ‘2,’ ‘3,’ and ‘4’ in their portions respectively marked Exhibits ‘2-B,’ ‘3-B,’ and ‘4-B’
uniformly authorize the defendant bank to increase the stipulated interest rate of 18% per
annum ‘within the limits allowed by law at any time depending on whatever policy it may adopt
in the future: Provided, that, the interest rate on this note shall be correspondingly decreased in
the event that the applicable maximum interest rate is reduced by law or by the Monetary
Board.’

"Exhibit ‘5’ in its portion marked Exhibit ‘5-e-1’ stipulates:chanrob1es virtual 1aw library

‘(k) INCREASE OF INTEREST RATE

‘The rate of interest charged on the obligation secured by this mortgage as well as the interest
on the amount which may have been advanced by the MORTGAGEE, in accordance with the
provisions hereof, shall be subject during the life of this contract to such an increase within the
rate allowed by law, as the Board of Directors of the MORTGAGEE may prescribe for its
debtors.’

"Clearly, then, the agreement between the parties authorized the defendant bank to increase
the interest rate beyond the original rate of 18% per annum but ‘within the limits allowed by law’
or ‘within the rate allowed by law,’ it being declared the obligation of the plaintiff as borrower to
execute and deliver the corresponding documents and instruments to effectuate the increase."
(pp. 11-12, Rollo.)

In Banco Filipino Savings and Mortgage Bank v. Navarro, 15 SCRA 346 (1987), this Court
disauthorized the bank from raising the interest rate on the borrowers’ loan from 12% to 17%
despite an escalation clause in the loan agreement signed by the debtors authorizing Banco
Filipino "to correspondingly increase the interest rate stipulated in this contract without advance
notice to me/us in the event a law should be enacted increasing the lawful rates of interest that
may be charged on this particular kind of loan." (Emphasis supplied.)chanrobles virtual
lawlibrary

In the Banco Filipino case, the bank relied on Section 3 of CB Circular No. 494 dated July 1,
1976 (72 O.G. No. 3, p. 676-J) which provided that "the maximum rate of interest, including
commissions premiums, fees and other charges on loans with a maturity of more than 730 days
by banking institution . . . shall be 19%."cralaw virtua1aw library

This Court disallowed the increase for the simple reason that said "Circular No. 494, although it
has the effect of law is not a law." Speaking through Mme. Justice Ameurfina M. Herrera, this
Court held:jgc:chanrobles.com.ph
 54

"It is now clear that from March 17, 1980, escalation clauses to be valid should specifically
provide: (1) that there can be an increase in interest if increased by law or by the Monetary
Board; and (2) in order for such stipulation to be valid, it must include a provision for reduction of
the stipulated interest ‘in the event that the applicable maximum rate of interest is reduced by
law or by the Monetary Board.’" p. 111, Rollo.).

In the present case, the PNB relied on its own Board Resolution No. 681 (Exh. 10), PNB
Circular No. 40-79-84 (Exh. 13), and PNB Circular No. 40-129-84 (Exh. 15), but those resolution
and circulars are neither laws nor resolutions of the Monetary Board.

CB Circular No. 905, Series of 1982 (Exh. 11) removed the Usury Law ceiling on interest rates
—

". . . increases in interest rates are not subject to any ceiling prescribed by the Usury
Law."cralaw virtua1aw library

but it did not authorize the PNB, or any bank for that matter, to unilaterally and successively
increase the agreed interest rates from 18% to 48% within a span of four (4) months, in violation
of PD. 116 which limits such changes to "once every twelve months."cralaw virtua1aw library

Besides violating PD. 116, the unilateral action of the PNB in increasing the interest rate on the
private respondent’s loan, violated the mutuality of contracts ordained in Article 1308 of the Civil
Code:jgc:chanrobles.com.ph

"ART. 1308. The contract must bind both contracting parties; its validity or compliance cannot
be left to the will of one of them."cralaw virtua1aw library

In order that obligations arising from contracts may have the force of law between the parties,
there must be mutuality between the parties based on their essential equality. A contract
containing a condition which makes its fulfillment dependent exclusively upon the uncontrolled
will of one of the contracting parties, is void (Garcia v. Rita Legarda, Inc., 21 SCRA 555).
Hence, even assuming that the P1.8 million loan agreement between the PNB and the private
respondent gave the PNB a license (although in fact there was none) to increase the interest
rate at will during the term of the loan, that license would have been null and void for being
violative of the principle of mutuality essential in contracts. It would have invested the loan
agreement with the character of a contract of adhesion, where the parties do not bargain on
equal footing, the weaker party’s (the debtor) participation being reduced to the alternative "to
take it or leave it" (Qua v. Law Union & Rock Insurance Co., 95 Phil. 85). Such a contract is a
veritable trap for the weaker party whom the courts of justice must protect against abuse and
imposition.

PNB’S successive increases of the interest rate on the private respondent’s loan, over the
latter’s protest, were arbitrary as they violated an express provision of the Credit Agreement
(Exh. 1) Section 9.01 that its terms "may be amended only by an instrument in writing signed by
the party to be bound as burdened by such amendment." The increases imposed by PNB also
contravene Art. 1956 of the Civil Code which provides that "no interest shall be due unless it
has been expressly stipulated in writing."cralaw virtua1aw library

The debtor herein never agreed in writing to pay the interest increases fixed by the PNB beyond
24% per annum, hence, he is not bound to pay a higher rate than that.
 55

That an increase in the interest rate from 18% to 48% within a period of four (4) months is
excessive, as found by the Court of Appeals, is indisputable.

WHEREFORE, finding no reversible error in the decision of the Court of Appeals in CA-G.R. CV
No. 09791, the Court resolved to deny the petition for review for lack of merit, with costs against
the petitioner.

SO ORDERED.

[G.R. No. 103066. April 25, 1996]

WILLEX PLASTIC INDUSTRIES, CORPORATION, petitioner, vs. HON. COURT OF

APPEALS and INTERNATIONAL CORPORATE BANK, respondents.
Tangle-Chua, Cruz & Aquino for petitioner.
Fe B. Macalino & Associates for respondent Interbank.

DECISION
MENDOZA, J.:

This is a petition for review on certiorari of the decision[1] of the Court of Appeals in C.A.-G.R.
CV No. 19094, affirming the decision of the Regional Trial Court of the National Capital Judicial
Region, Branch XLV, Manila, which ordered petitioner Willex Plastic Industries Corporation and
the Inter-Resin Industrial Corporation, jointly and severally, to pay private respondent International
Corporate Bank certain sums of money, and the appellate courts resolution of October 17, 1989
denying petitioners motion for reconsideration.
The facts are as follows:
Sometime in 1978, Inter-Resin Industrial Corporation opened a letter of credit with the Manila
Banking Corporation. To secure payment of the credit accommodation, Inter-Resin Industrial and
the Investment and Underwriting Corporation of the Philippines (IUCP) executed two documents,
both entitled Continuing Surety Agreement and dated December 1, 1978, whereby they bound
themselves solidarily to pay Manilabank obligations of every kind, on which the [Inter-Resin
Industrial] may now be indebted or hereafter become indebted to the [Manilabank]. The two
agreements (Exhs. J and K) are the same in all respects, except as to the limit of liability of the
surety, the first surety agreement being limited to US$333,830.00, while the second one is limited
to US$334,087.00.
On April 2, 1979, Inter-Resin Industrial, together with Willex Plastic Industries Corp., executed
a Continuing Guaranty in favor of IUCP whereby For and in consideration of the sum or sums
obtained and/or to be obtained by Inter-Resin Industrial Corporation from IUCP, Inter-Resin
Industrial and Willex Plastic jointly and severally guaranteed the prompt and punctual payment at
maturity of the NOTE/S issued by the DEBTOR/S . . . to the extent of the aggregate principal sum
of FIVE MILLION PESOS (P5,000,000.00) Philippine Currency and such interests, charges and
penalties as hereafter may be specified.
 56

On January 7, 1981, following demand upon it, IUCP paid to Manilabank the sum of
P4,334,280.61 representing Inter-Resin Industrials outstanding obligation. (Exh. M-1) On
February 23 and 24, 1981, Atrium Capital Corp., which in the meantime had succeeded IUCP,
demanded from Inter-Resin Industrial and Willex Plastic the payment of what it (IUCP) had paid
to Manilabank. As neither one of the sureties paid, Atrium filed this case in the court below against
Inter-Resin Industrial and Willex Plastic.
On August 11, 1982, Inter-Resin Industrial paid Interbank, which had in turn succeeded
Atrium, the sum of P687,500.00 representing the proceeds of its fire insurance policy for the
destruction of its properties.
In its answer, Inter-Resin Industrial admitted that the Continuing Guaranty was intended to
secure payment to Atrium of the amount of P4,334,280.61 which the latter had paid to Manilabank.
It claimed, however, that it had already fully paid its obligation to Atrium Capital.
On the other hand, Willex Plastic denied the material allegations of the complaint and
interposed the following Special Affirmative Defenses:

(a) Assuming arguendo that main defendant is indebted to plaintiff, the formers liability is
extinguished due to the accidental fire that destroyed its premises, which liability is covered by
sufficient insurance assigned to plaintiff;

(b) Again, assuming arguendo, that the main defendant is indebted to plaintiff, its account is
now very much lesser than those stated in the complaint because of some payments made by
the former;

(c) The complaint states no cause of action against WILLEX;

(d) WILLEX is only a guarantor of the principal obligor, and thus, its liability is only secondary to
that of the principal;

(e) Plaintiff failed to exhaust the ultimate remedy in pursuing its claim against the principal
obligor;

(f) Plaintiff has no personality to sue.

On April 29, 1986, Interbank was substituted as plaintiff in the action. The case then
proceeded to trial.
On March 4, 1988, the trial court declared Inter-Resin Industrial to have waived the right to
present evidence for its failure to appear at the hearing despite due notice. On the other hand,
Willex Plastic rested its case without presenting any evidence. Thereafter Interbank and Willex
Plastic submitted their respective memoranda.
On April 5, 1988, the trial court rendered judgment, ordering Inter-Resin Industrial and Willex
Plastic jointly and severally to pay to Interbank the following amounts:

(a) P3,646,780.61, representing their indebtedness to the plaintiff, with interest of 17% per
annum from August 11, 1982, when Inter-Resin Industrial paid P687,500.00 to the plaintiff, until
full payment of the said amount;

(b) Liquidated damages equivalent to 17% of the amount due; and

 57

(c) Attorneys fees and expenses of litigation equivalent to 20% of the total amount due.

Inter-Resin Industrial and Willex Plastic appealed to the Court of Appeals. Willex Plastic filed
its brief, while Inter-Resin Industrial presented a Motion to Conduct Hearing and to Receive
Evidence to Resolve Factual Issues and to Defer Filing of the Appellants Brief. After its motion
was denied, Inter-Resin Industrial did not file its brief anymore.
On February 22, 1991, the Court of Appeals rendered a decision affirming the ruling of the
trial court.
Willex Plastic filed a motion for reconsideration praying that it be allowed to present evidence
to show that Inter-Resin Industrial had already paid its obligation to Interbank, but its motion was
denied on December 6, 1991:

The motion is denied for lack of merit. We denied defendant-appellant Inter-Resin Industrials
motion for reception of evidence because the situation or situations in which we could exercise
the power under B.P. 129 did not exist. Movant here has not presented any argument which
would show otherwise.

Hence, this petition by Willex Plastic for the review of the decision of February 22, 1991 and
the resolution of December 6,1991 of the Court of Appeals.
Petitioner raises a number of issues.
[1] The main issue raised is whether under the Continuing Guaranty signed on April 2, 1979
petitioner Willex Plastic may be held jointly and severally liable with Inter-Resin Industrial for the
amount paid by Interbank to Manilabank.
As already stated, the amount had been paid by Interbanks predecessor-in-interest, Atrium
Capital, to Manilabank pursuant to the Continuing Surety Agreements made on December 1,
1978. In denying liability to Interbank for the amount, Willex Plastic argues that under the
Continuing Guaranty, its liability is for sums obtained by Inter-Resin Industrial from Interbank, not
for sums paid by the latter to Manilabank for the account of Inter-Resin Industrial. In support of
this contention Willex Plastic cites the following portion of the Continuing Guaranty:

For and in consideration of the sums obtained and/or to be obtained by INTER-RESIN

INDUSTRIAL CORPORATION, hereinafter referred to as the DEBTOR/S, from you and/or your
principal/s as may be evidenced by promissory note/s, checks, bills receivable/s and/or other
evidence/s of indebtedness (hereinafter referred to as the NOTE/S), I/We hereby jointly and
severally and unconditionally guarantee unto you and/or your principal/s, successor/s and
assigns the prompt and punctual payment at maturity of the NOTE/S issued by the DEBTOR/S
in your and/or your principal/s, successor/s and assigns favor to the extent of the aggregate
principal sum of FIVE MILLION PESOS (P5,000,000.00), Philippine Currency, and such
interests, charges and penalties as may hereinafter be specified.

The contention is untenable. What Willex Plastic has overlooked is the fact that
evidence aliunde was introduced in the trial court to explain that it was actually to secure payment
to Interbank (formerly IUCP) of amounts paid by the latter to Manilabank that the Continuing
Guaranty was executed. In its complaint below, Interbanks predecessor-in-interest. Atrium
Capital, alleged:
5. to secure the guarantee made by plaintiff of the credit accommodation granted to
defendant IRIC [Inter-Resin Industrial] by Manilabank, the plaintiff required defendant
 58

IRIC [Inter-Resin Industrial] to execute a chattel mortgage in its favor and a Continuing
Guaranty which was signed by the other defendant WPIC [Willex Plastic].
In its answer, Inter-Resin Industrial admitted this allegation although it claimed that it had
already paid its obligation in its entirety. On the other hand, Willex Plastic, while denying the
allegation in question, merely did so for lack of knowledge or information of the same. But, at the
hearing of the case on September 16, 1986, when asked by the trial judge whether Willex Plastic
had not filed a crossclaim against Inter-Resin Industrial, Willex Plastics counsel replied in the
negative and manifested that the plaintiff in this case [Interbank] is the guarantor and my client
[Willex Plastic] only signed as a guarantor to the guarantee.[2]
For its part Interbank adduced evidence to show that the Continuing Guaranty had been
made to guarantee payment of amounts made by it to Manilabank and not of any sums given by
it as loan to Inter-Resin Industrial. Interbanks witness testified under cross- examination by
counsel for Willex Plastic that Willex guaranteed the exposure/of whatever exposure of ACP
[Atrium Capital] will later be made because of the guarantee to Manila Banking Corporation. [3]
It has been held that explanatory evidence may be received to show the circumstances under
which a document has been made and to what debt it relates.[4] At all events, Willex Plastic cannot
now claim that its liability is limited to any amount which Interbank, as creditor, might give directly
to Inter-Resin Industrial as debtor because, by failing to object to the parol evidence presented,
Willex Plastic waived the protection of the parol evidence rule.[5]
Accordingly, the trial court found that it was to secure the guarantee made by plaintiff of the
credit accommodation granted to defendant IRIC [Inter-Resin Industrial] by Manilabank, [that] the
plaintiff required defendant IRIC to execute a chattel mortgage in its favor and a Continuing
Guaranty which was signed by the defendant Willex Plastic Industries Corporation.[6]
Similarly, the Court of Appeals found it to be an undisputed fact that to secure the guarantee
undertaken by plaintiff-appellee [Interbank] of the credit accommodation granted to Inter-Resin
Industrial by Manilabank, plaintiff-appellee required defendant-appellants to sign a Continuing
Guaranty. These factual findings of the trial court and of the Court of Appeals are binding on us
not only because of the rule that on appeal to the Supreme Court such findings are entitled to
great weight and respect but also because our own examination of the record of the trial court
confirms these findings of the two courts.[7]
Nor does the record show any other transaction under which Inter-Resin Industrial may have
obtained sums of money from Interbank. It can reasonably be assumed that Inter-Resin Industrial
and Willex Plastic intended to indemnify Interbank for amounts which it may have paid Manilabank
on behalf of Inter-Resin Industrial.
Indeed, in its Petition for Review in this Court, Willex Plastic admitted that it was to secure
the aforesaid guarantee, that INTERBANK required principal debtor IRIC [Inter-Resin Industrial]
to execute a chattel mortgage in its favor, and so a Continuing Guaranty was executed on April
2, 1979 by WILLEX PLASTIC INDUSTRIES CORPORATION (WILLEX for brevity) in favor of
INTERBANK for and in consideration of the loan obtained by IRIC [Inter-Resin Industrial].
[2] Willex Plastic argues that the Continuing Guaranty, being an accessory contract, cannot
legally exist because of the absence of a valid principal obligation.[8] Its contention is based on
the fact that it is not a party either to the Continuing Surety Agreement or to the loan agreement
between Manilabank and Inter-Resin Industrial.
Put in another way the consideration necessary to support a surety obligation need not pass
directly to the surety, a consideration moving to the principal alone being sufficient. For a
guarantor or surety is bound by the same consideration that makes the contract effective between
 59

the principal parties thereto. . . . It is never necessary that a guarantor or surety should receive
any part or benefit, if such there be, accruing to his principal.[9] In an analogous case,[10] this Court
held:

At the time the loan of P100,000.00 was obtained from petitioner by Daicor, for the purpose of
having an additional capital for buying and selling coco-shell charcoal and importation of
activated carbon, the comprehensive surety agreement was admittedly in full force and
effect. The loan was, therefore, covered by the said agreement, and private respondent, even if
he did not sign the promissory note, is liable by virtue of the surety agreement. The only
condition that would make him liable thereunder is that the Borrower is or may become liable as
maker, endorser, acceptor or otherwise. There is no doubt that Daicor is liable on the
promissory note evidencing the indebtedness.

The surety agreement which was earlier signed by Enrique Go, Sr. and private respondent, is
an accessory obligation, it being dependent upon a principal one which, in this case is the loan
obtained by Daicor as evidenced by a promissory note.

[3] Willex Plastic contends that the Continuing Guaranty cannot be retroactively applied so
as to secure the payments made by Interbank under the two Continuing Surety Agreements.
Willex Plastic invokes the ruling m El Vencedor v. Canlas[11] and Dio v. Court of Appeals[12] in
support of its contention that a contract of suretyship or guaranty should be applied prospectively.
The cases cited are, however, distinguishable from the present case. In El Vencedor v.
Canlas we held that a contract of suretyship is not retrospective and no liability attaches for
defaults occurring before it is entered into unless an intent to be so liable is indicated. There we
found nothing in the contract to show that the parties intended the surety bonds to answer for the
debts contracted previous to the execution of the bonds. In contrast, in this case, the parties to
the Continuing Guaranty clearly provided that the guaranty would cover sums obtained and/or to
be obtained by Inter-Resin Industrial from Interbank.
On the other hand, in Dio v. Court of Appeals the issue was whether the sureties could be
held liable for an obligation contracted after the execution of the continuing surety agreement.
It was held that by its very nature a continuing suretyship contemplates a future course of
dealing. It is prospective in its operation and is generally intended to provide security with respect
to future transactions. By no means, however, was it meant in that case that in all instances a
contract of guaranty or suretyship should be prospective in application.
Indeed, as we also held in Bank of the Philippine Islands v. Foerster,[13] although a contract
of suretyship is ordinarily not to be construed as retrospective, in the end the intention of the
parties as revealed by the evidence is controlling. What was said there[14] applies mutatis
mutandis to the case at bar:
In our opinion, the appealed judgment is erroneous. It is very true that bonds or other
contracts of suretyship are ordinarily not to be construed as retrospective, but that rule must yield
to the intention of the contracting parties as revealed by the evidence, and does not interfere with
the use of the ordinary tests and canons of interpretation which apply in regard to other contracts.
In the present case the circumstances so clearly indicate that the bond given by Echevarria
was intended to cover all of the indebtedness of the Arrocera upon its current account with the
plaintiff Bank that we cannot possibly adopt the view of the court below in regard to the effect of
the bond.
 60

[4] Willex Plastic says that in any event it cannot be proceeded against without first
exhausting all property of Inter-Resin Industrial. Willex Plastic thus claims the benefit of
excussion.The Civil Code provides, however:

Art. 2059. This excussion shall not take place:

(1) If the guarantor has expressly renounced it;

(2) If he has bound himself solidarily with the debtor;

xxxxxxxxx
The pertinent portion of the Continuing Guaranty executed by Willex Plastic and Inter-Resin
Industrial in favor of IUCP (now Interbank) reads:

If default be made in the payment of the NOTE/s herein guaranteed you and/or your principal/s
may directly proceed against Me/Us without first proceeding against and exhausting DEBTOR/s
properties in the same manner as if all such liabilities constituted My/Our direct and primary
obligations. (italics supplied)

This stipulation embodies an express renunciation of the right of excussion. In addition, Willex
Plastic bound itself solidarily liable with Inter-Resin Industrial under the same agreement:
For and in consideration of the sums obtained and/or to be obtained by INTER-RESIN
INDUSTRIAL CORPORATION, hereinafter referred to as the DEBTOR/S, from you and/or your
principal/s as may be evidenced by promissory note/s, checks, bills receivable/s and/or other
evidence/s of indebtedness (hereinafter referred to as the NOTE/S), I/We hereby jointly and
severally and unconditionally guarantee unto you and/ or your principal/s, successor/s and
assigns the prompt and punctual payment at maturity of the NOTE/S issued by the DEBTOR/S in
your and/or your principal/s, successor/s and assigns favor to the extent of the aggregate principal
sum of FIVE MILLION PESOS (P5,000,000.00), Philippine Currency, and such interests, charges
and penalties as may hereinafter he specified.
[5] Finally it is contended that Inter-Resin Industrial had already paid its indebtedness to
Interbank and that Willex Plastic should have been allowed by the Court of Appeals to adduce
evidence to prove this. Suffice it to say that Inter-Resin Industrial had been given generous
opportunity to present its evidence but it failed to make use of the same. On the other hand, Willex
Plastic rested its case without presenting evidence.
The reception of evidence of Inter-Resin Industrial was set on January 29, 1987, but because
of its failure to appear on that date, the hearing was reset on March 12, 26 and April 2, 1987.
On March 12, 1987 Inter-Resin Industrial again failed to appear. Upon motion of Willex
Plastic, the hearings on March 12 and 26, 1987 were cancelled and reset for the last time on April
2 and 30, 1987.
On April 2, 1987, Inter-Resin Industrial again failed to appear. Accordingly the trial court
issued the following order:

Considering that, as shown by the records, the Court had exerted every earnest effort to cause
the service of notice or subpoena on the defendant Inter-Resin Industrial but to no avail, even
with the assistance of the defendant Willex. . . the defendant Inter-Resin Industrial is hereby
deemed to have waived the right to present its evidence.
 61

On the other hand, Willex Plastic announced it was resting its case without presenting any
evidence.
Upon motion of Inter-Resin Industrial, however, the trial court reconsidered its order and set
the hearing anew on July 23, 1987. But Inter-Resin Industrial again moved for the postponement
of the hearing to August 11, 1987. The hearing was, therefore, reset on September 8 and 22,
1987 but the hearings were reset on October 13,1987, this time upon motion of Interbank. To give
Interbank time to comment on a motion filed by Inter-Resin Industrial, the reception of evidence
for Inter-Resin Industrial was again reset on November 17, 26 and December 11, 1987. However,
Inter-Resin Industrial again moved for the postponement of the hearing. Accordingly, the hearing
was reset on November 26 and December 11, 1987, with warning that the hearings were
intransferrable.
Again, the reception of evidence for Inter-Resin Industrial was reset on January 22, 1988 and
February 5, 1988 upon motion of its counsel. As Inter-Resin Industrial still failed to present its
evidence, it was declared to have waived its evidence.
To give Inter-Resin Industrial a last opportunity to present its evidence, however, the hearing
was postponed to March 4, 1988. Again Inter-Resin Industrials counsel did not appear. The trial
court, therefore, finally declared Inter-Resin Industrial to have waived the right to present its
evidence. On the other hand, Willex Plastic, as before, manifested that it was not presenting
evidence and requested instead for time to file a memorandum.
There is therefore no basis for the plea made by Willex Plastic that it be given the opportunity
of showing that Inter-Resin Industrial has already paid its obligation to Interbank.
WHEREFORE, the decision of the Court of Appeals is AFFIRMED, with costs against the
petitioner.
SO ORDERED.

[G.R. No. 138544. October 3, 2000]

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.
 62

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, plaintiff Security Bank & Trust Company
the sum of P39,129,124.73 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:
 63

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.
 64

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.
 65

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 our consideration:[8]

 66

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

The Petition has no merit.

Preliminary Matters: Procedural Questions

Motion for Reconsideration Not Pro Forma

 67

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.
 68

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:
 69

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.
 70

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 isreproduced
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
 71

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
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 authorization on the bank or Sta.
Ines to modify or extend the original obligation without the consent of the surety or notice thereto.

Continuing Surety

Contending that the Indemnity Agreement was in the nature of a continuing surety, petitioner
maintains that there was no need for respondent to execute another surety contract to secure the
1989 Loan Agreement.
This argument is incorrect. That the Indemnity Agreement is a continuing surety does not
authorize the bank to extend the scope of the principal obligation inordinately.[37] In Dino v.
CA,[38] the Court held that a continuing guaranty is one which covers all transactions, including
 72

those arising in the future, which are within the description or contemplation of the contract of
guaranty, until the expiration or termination thereof.
To repeat, in the present case, the Indemnity Agreement was subject to the two limitations of
the credit accommodation: (1) that the obligation should not exceed P8 million, and (2) that the
accommodation should expire not later than November 30, 1981. Hence, it was a continuing
surety only in regard to loans obtained on or before the aforementioned expiry date and not
exceeding the total of P8 million.
Accordingly, the surety of Cuenca secured only the first loan of P6.1 million obtained on
November 26, 1991. It did not secure the subsequent loans, purportedly under the 1980 credit
accommodation, that were obtained in 1986. Certainly, he could not have guaranteed the 1989
Loan Agreement, which was executed after November 30, 1981 and which exceeded the
stipulated P8 million ceiling.
Petitioner, however, cites the Dino ruling in which the Court found the surety liable for the
loan obtained after the payment of the original one, which was covered by a continuing surety
agreement. At the risk of being repetitious, we hold that in Dino, the surety Agreement specifically
provided that each suretyship is a continuing one which shall remain in full force and effect until
this bank is notified of its revocation. Since the bank had not been notified of such revocation, the
surety was held liable even for the subsequent obligations of the principal borrower.
No similar provision is found in the present case. On the contrary, respondents liability was
confined to the 1980 credit accommodation, the amount and the expiry date of which were set
down in the Credit Approval Memorandum.

Special Nature of the JSS

It is a common banking practice to require the JSS (joint and solidary signature) of a major
stockholder or corporate officer, as an additional security 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 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 bank to have required
the JSS of respondent, who was the chairman and president of Sta. Ines in 1980 when the credit
accommodation was granted. There was no reason or logic, however, for the bank or Sta. Ines to
assume that he would still agree to act as surety in the 1989 Loan Agreement, because at that
time, he was no longer an officer or a stockholder of the debtor-corporation. Verily, he was not in
a position then to ensure the payment of the obligation. Neither did he have any reason to bind
himself further to a bigger and more onerous obligation.
Indeed, the stipulation in the 1989 Loan Agreement providing for the surety of respondent,
without even informing him, smacks of negligence on the part of the bank and bad faith on that of
the principal debtor. Since that Loan Agreement constituted a new indebtedness, the old loan
having been already liquidated, the spirit of fair play should have impelled Sta. Ines to ask
somebody else to act as a surety for the new loan.
In the same vein, a little prudence should have impelled the bank to insist on the JSS of one
who was in a position to ensure the payment of the loan. Even a perfunctory attempt at credit
investigation would have revealed that respondent was no longer connected with the corporation
 73

at the time. As it is, the bank is now relying on an unclear Indemnity Agreement in order to collect
an obligation that could have been secured by a fairly obtained surety. For its defeat in this
litigation, the bank has only itself to blame.
In sum, we hold that the 1989 Loan Agreement extinguished by novation the obligation under
the 1980 P8 million credit accommodation. Hence, the Indemnity Agreement, which had been an
accessory to the 1980 credit accommodation, was also extinguished. Furthermore, we reject
petitioners submission that respondent waived his right to be notified of, or to give consent to, any
modification or extension of the 1980 credit accommodation.
In this light, we find no more need to resolve the issue of whether the loan obtained before
the expiry date of the credit accommodation has been paid.
WHEREFORE, the Petition is DENIED and the assailed Decision AFFIRMED. Costs against
petitioner.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-26473 February 29, 1972

REPUBLIC OF THE PHILIPPINES, plaintiff-appellee,

vs.
PAL-FOX LUMBER CO., INC. AND FAR EASTERN SURETY & INSURANCE COMPANY,
INC., defendants, FAR EASTERN SURETY & INSURANCE CO., INC., defendant-appellant;
FAR EASTERN SURETY & INSURANCE CO., INC., third-party plaintiff-appellant, vs.
GASPAR PALANCA & JOSEPH LEE, third-party defendants.

MAKALINTAL, J.:p

Claiming that the Pal-Fox Lumber Co., Inc. was indebted to the Bureau of Internal Revenue for
forest charges and surcharges amounting to P11,851.56, and that the Far Eastern Surety &
Insurance Co., Inc. was jointly and severally liable with the lumber company for the payment of
said forest charges up to P5,000.00 on account of a forestry bond which the surety company
executed in favor of the plaintiff on November 27, 1946, guaranteeing faithful compliance by the
principal with all the provisions of the Forest Law and National Internal Revenue Code, as well
as the "prompt and complete payment of all charges lawfully accruing on the forest products cut
or gathered by (Pal-Fox Lumber Co., Inc.), and of all fines and penalties imposed in accordance
with the provisions of law," the plaintiff commenced suit before the Court of First Instance of
Manila (Civil Case No. 32386) seeking to recover, jointly and severally, from Pal-Fox Lumber
Co., Inc. and the Far Eastern Surety & Insurance Co., Inc. the sum of P5,000.00 plus interest
from the filing of the complaint, and from the Pal-Fox Lumber Co., Inc. alone the balance of
P6,841.56 plus legal interest.
 74

The Far Eastern Surety & Insurance Co., Inc. filed its answer with a cross-claim against its co-
defendant Pal-Fox Lumber Co., Inc. which, due to the latter's failure to file an answer despite
valid service of summons, was subsequently declared in default. With leave of court, the surety
company later filed a third-party complaint against certain persons based on a separate
indemnity agreement wherein said third-party defendants appear to have bound themselves to
indemnify the surety company for all damages it may suffer by reason of the execution of the
forestry bond. In time, these third-party defendants were similarly declared in default.

After trial, the court a quo rendered a decision the dispositive portion of which reads: .

WHEREFORE, judgment is hereby rendered ordering defendants to pay to

plaintiff, jointly and severally, the sum of P5,000.00, with legal interest thereon
from the filing of the complaint until fully paid, and defendant Pal-Fox Lumber
Co., Inc. to pay to plaintiff the further sum of P6,841.56, with legal interest
thereon from the filing of the complaint until fully paid, plus costs; and likewise
ordering cross-defendant Pal-Fox Lumber Co., Inc. and third-party defendants
Gaspar G. Palanca and Joseph Lee to pay to defendant Far Eastern Surety &
Insurance Co., Inc., jointly and severally, any amount which the latter may pay to
plaintiff under his judgment, plus premium in the amount of P3,750.00 and
stipulated attorney's fees and interest at the rate of 15% and 12% per annum,
respectively, on the total amount due, the said interest to be compounded
quarterly from November 22, 1946, until fully paid.

Unable to secure, in a motion for reconsideration, a judgment absolving it from any and all
liability under Forestry Bond No. 7004, the surety company appealed to the Court of Appeals
(CA-G.R. No. 31338-R) which Court subsequently certified the case here on a finding that the
appeal involves only questions of law, to wit: .

The first legal point which arises in connection with said exhibits is: What is the
probative value of documents which were admitted only as part of the testimony
of the witness who identified them? Do they constitute evidence of the truth of
their contents or not? In other words, are they evidence of demands for payment
considering that Mr. Zalita merely testified that said exhibits are certified copies
of records and documents now in the possession of the Record Control Section
of the Bureau of Internal Revenue?

The next issue to resolve is who has the burden of proving that the claim of the
plaintiff is not yet paid?

xxx xxx xxx

In the third assigned error, appellant raises the question of prescription of action.
..." (Court of Appeals resolution prom. on August 15, 1966 in CA-G.R. No. 31338-
R, pp. 6-7).

During the pendency of this case before this Court, certain pertinent developments have come
about which practically render the resolution of appellant's assigned errors unnecessary. Thus
in a manifestation filed on February 10, 1967 the surety company expressed its willingness to
pay the sum of P5,000.00 under its forestry bond anytime "that an order is issued (by this Court)
directing the defendant surety to so pay according to this manifestation." In a resolution dated
 75

February 22, 1967 this Court granted appellant surety company's plea, thereby allowing it to pay
the Republic of the Philippines the sum of P5,000.00, in full payment of its liability under
Forestry Bond No. 7004, and dismissing the case insofar as said appellant was concerned.

On March 27, 1967 the plaintiff moved for reconsideration, pointing out that the surety
company's correct liability under the appealed decision was P5,000.00 plus legal interest from
the filing of the complaint. In other words, the plaintiff would want the surety company to pay the
legal interest adjudged by the trial court before the case may finally be considered dismissed
insofar as appellant surety was concerned. Despite the opposition registered by the surety
company this Court resolved on May 10, 1967 "... to MODIFY the resolution of February 22,
1967 in that the appellant Far Eastern Surety and Insurance Co., Inc. is further ordered to pay
the Republic of the Philippines interest on the P5,000.00 at the rate of 6% per annum computed
from April 24, 1957 when the complaint was filed until October 3, 1966 when the appellant
offered to pay the appellee the sum of P5,000.00 in settlement of its obligation but which offer
was ignored by the appellee; PROVIDED, that in case the appellant fails or refuses to pay the
interest herein stated the case against him would not be considered dismissed, thereby leaving
the matter on the liability of said appellant to pay interest subject to future orders by this Court
along with the other matters that may be resolved in this case." .

As things stand now, the contending parties are one in conceding that the decisive issue for
determination, in view of the surety company's willingness to pay the amount of P5,000.00
under its forestry bond, is its liability for the payment of legal interest thereon. 1 The said
company's denial of liability for such interest is based on the stipulation in the bond that it was
bound to the plaintiff "in the sum of P5,000.00." .

Judgment must go to the plaintiff. In the case of National Marketing Corporation vs. Marquez, et
al., L-25553, January 31, 1969, (26 SCRA 722, 726), this Court resolved a similar question as
follows: .

On the third and last issue (on whether the surety's liability can exceed the
amount of its bond), it is enough to remark that while the guarantee was for the
original amount of the debt of Gabino Marquez, the amount of the judgment by
the trial court in no way violates the rights of the surety. The judgment on the
principal was only for P10,000.00, while the remaining P9,990.91 represent
the moratoryinterest due on account of the failure to pay the principal obligation
from and after the same had fallen due, and default had taken place. Appellant
surety was fully aware that the obligation earned interest, since the note was
annexed to its contract, Exhibit "C". The contract of guaranty executed by the
appellant Company nowhere excludes this interest, and Article 2055, paragraph
2, of the Civil Code of the Philippines is clearly applicable.

If it (the guaranty) be simple or indefinite, it shall comprise not only

the principal obligation but also all its accessories, including
judicial costs, provided with respect to the latter, that the guarantor
shall only be liable for those costs incurred after he has been
judicially required to pay." (Emphasis supplied)" .

WHEREFORE, the decision appealed from is affirmed, with the modification that the appellant
should pay the interest adjudged in said decision up to the date of payment of the principal sum
of P5,000.00. No pronouncement as to costs.
 76

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-42518 August 29, 1936

WISE & CO., INC., plaintiff-appellee,

vs.
DIONISIO P. TANGLAO, defendant-appellant.

The appellant in his own behalf.

Franco and Reinoso for appellee.

AVANCEÑA, C. J.:

In the Court of First Instance of Manila, Wise & Co. instituted civil case No. 41129 against
Cornelio C. David for the recovery of a certain sum of money David was an agent of Wise & Co.
and the amount claimed from him was the result of a liquidation of accounts showing that he
was indebted in said amount. In said case Wise & Co. asked and obtained a preliminary
attachment of David's property. To avoid the execution of said attachment, David succeeded in
having his Attorney Tanglao execute on January 16, 1932, a power of attorney (Exhibit A) in his
favor, with the following clause:

To sign for me as guarantor for himself in his indebtedness to Wise & Company of
Manila, which indebtedness appears in civil case No. 41129, of the Court of First
Instance of Manila, and to mortgage my lot (No. 517-F of the subdivision plan Psd-20,
being a portion of lot No. 517 of the cadastral survey of Angeles, G. L. R. O. Cad. Rec.
No. 124), to guarantee the said obligations to the Wise & Company, Inc., of Manila.

On the 18th of said month David subscribed and on the 23d thereof, filed in court, the following
document (Exhibit B):

COMPROMISE

Come now the parties, plaintiff by the undersigned attorneys and defendants in his own
behalf and respectfully state:

I. That the defendant confesses judgment for the sum of six hundred forty pesos
(P640), payable at the rate of eighty pesos (P80) per month, the first payment to
be made on February 15, 1932 and successively thereafter until the full amount
is paid; the plaintiff accepts this stipulation.

II. That as security for the payment of said sum of P640, defendant binds in favor
of, and pledges to the plaintiff, the following real properties:
 77

1. House of light materials described under tax declaration No. 9650 of

the municipality of Angeles, Province of Pampanga, assessed at P320.

2. Accesoria apartments with a ground floor of 180 sq. m. with the first
story of cement and galvanized of iron roofing located on the lot
belonging to Mariano Tablante Geronimo, said accesoria is described
under tax declaration No. 11164 of the municipality of Angeles, Province
of Pampanga, assessed at P800.

3. Parcel of land described under Transfer Certificate of Title No. 2307 of

the Province of Pampanga recorded in the name of Dionisio Tanglao of
which defendant herein holds a special power of attorney to pledge the
same in favor of Wise & Co., Inc., as a guarantee for the payment of the
claim against him in the above entitled cause. The said parcel of land is
bounded as follows: NE. lot No. 517 "Part" de Narciso Garcia; SE. Calle
Rizal; SW. lot No. 517 "Part" de Bernardino Tiongco; NW. lot No. 508 de
Clemente Dayrit; containing 431 sq. m. and described in tax declaration
No. 11977 of the municipality of Angeles, Pampanga, assessed at P423.

That this guaranty is attached to the properties above mentioned as first lien and for this
reason the parties agree to register this compromise with the Register of Deeds of
Pampanga, said lien to be cancelled only on the payment of the full amount of the
judgment in this case.

Wherefore, the parties pray that the above compromise be admitted and that an order
issue requiring the register of Deeds of Pampanga to register this compromise previous
to the filing of the legal fees.

David paid the sum of P343.47 to Wise & Co., on account of the P640 which he bound himself
to pay under Exhibit B, leaving an unpaid balance of P296.53.

Wise & Co. now institutes this case against Tanglao for the recovery of said balance of
P296.53.

There is no doubt that under Exhibit, A, Tanglao empowered David, in his name, to enter into a
contract of suretyship and a contract of mortgage of the property described in the document,
with Wise & Co. However, David used said power of attorney only to mortgage the property and
did not enter into contract of suretyship. Nothing is stated in Exhibit B to the effect that Tanglao
became David's surety for the payment of the sum in question. Neither is this inferable from any
of the clauses thereof, and even if this inference might be made, it would be insufficient to
create an obligation of suretyship which, under the law, must be express and cannot be
presumed.

It appears from the foregoing that defendant, Tanglao could not have contracted any personal
responsibility for the payment of the sum of P640. The only obligation which Exhibit B, in
connection with Exhibit A, has created on the part of Tanglao, is that resulting from the
mortgage of a property belonging to him to secure the payment of said P640. However, a
foreclosure suit is not instituted in this case against Tanglao, but a purely personal action for the
recovery of the amount still owed by David.
 78

At any rate, even granting that defendant Tanglao may be considered as a surety under Exhibit
B, the action does not yet lie against him on the ground that all the legal remedies against the
debtor have not previously been exhausted (art. 1830 of the Civil Code, and decision of the
Supreme Court of Spain of March 2, 1891). The plaintiff has in its favor a judgment against
debtor David for the payment of debt. It does not appear that the execution of this judgment has
been asked for and Exhibit B, on the other hand, shows that David has two pieces of property
the value of which is in excess of the balance of the debt the payment of which is sought of
Tanglao in his alleged capacity as surety.

For the foregoing considerations, the appealed judgment is reversed and the defendant is
absolved from the complaint, with the costs to the plaintiff. So ordered.

EN BANC
[G.R. No. L-9306. May 25, 1956.]
SOUTHERN MOTORS, INC., Plaintiff-Appellee, vs. ELISEO BARBOSA, Defendant-
Appellant.

DECISION
CONCEPCION, J.:
This is an appeal from a decision of the Court of First Instance of Iloilo:chanroblesvirtuallawlibrary
“(a) Ordering the Defendant Eliseo Barbosa to pay to the Court, for the benefit of
the Plaintiffwithin a period of ninety (90) days from receipt by the Defendant hereof, the sum of
P2,889.53, with interest at the rate of 12% per annum computed on the basis of the amounts of
the installments mentioned in the mortgage and of the dates they respectively fell due, until fully
paid; chan roblesvirtualawlibrarythe sum of P200 by way of attorney’s fees, plus costs; chan
roblesvirtualawlibraryand (b) Upon failure of the Defendantto pay as aforesaid, ordering the land
described in the complaint and subject of the mortgage to be sold at public auction in accordance
with law in order to realize the amount of the judgment debt and costs.”
Although originally forwarded to the Court of Appeals, the same has certified the record to this
Court in view of the fact that the issues raised in the appeal involve merely questions of law.
Plaintiff, Southern Motors, Inc., brought this action against Eliseo Barbosa, to foreclose a real
estate mortgage, constituted by the latter in favor of the former, as security for the payment of the
sum of P2,889.53 due to said Plaintiff from one Alfredo Brillantes, who had failed to settle his
obligation in accordance with the terms and conditions of the corresponding deed of
mortgage. Defendant Eliseo Barbosa filed an answer admitting the allegations of the complaint
and alleging, by way of “special and affirmative” defense:chanroblesvirtuallawlibrary
“That the Defendant herein has executed the deed of mortgage Annex A for the only purpose of
guaranteeing — as surety and/or guarantor — the payment of the above mentioned debt of Mr.
Alfredo Brillantes in favor of the Plaintiff.
“That the Plaintiff until now has no right action against the herein Defendant on the ground that
said Plaintiff, without motive whatsoever, did not intent or intent to exhaust all recourses to collect
from the true debtor Mr. Alfredo Brillantes the debt contracted by the latter in favor of said Plaintiff,
and did not resort nor intends to resort all the legal remedies against the true debtor Mr. Alfredo
Brillantes, notwithstanding the fact that said Mr. Alfredo Brillantes is solvent and has many
properties within the Province of Iloilo.”
 79

Thereupon, Plaintiff moved for summary judgment which a branch of the Court of First Instance
of Iloilo, presided over by Hon. Roman Ibañez, Judge, denied upon the ground that it “is
premature”. Plaintiff moved for a reconsideration of the order to this effect. Soon later, he filed,
also, another motion praying that the case be transferred to another branch of said court, because
that of Judge Ibañez would be busy trying cadastral cases, and had adopted the “policy of
refraining from entertaining any other civil cases and all incidents related thereto, until after said
cadastral cases shall have been finally disposed of.” With the express authority of Judge Ibañez,
the case was referred to the branch of said court, presided over by Hon. Querube C. Makalintal,
Judge, for action, upon said motion for reconsideration. Thereafter, Judge Makalintal rendered
the aforementioned decision, from which the Defendant has appealed. He maintains, in his brief,
that:chanroblesvirtuallawlibrary
“1. The trial court erred in hearing Plaintiff-Appellee’s ‘motion for reconsideration’ dated June 9,
1951, notwithstanding the fact that Defendant-Appellant was not served with a copy thereof nor
served with notice of the hearing thereof.
2. “The trial court erred in rendering a ‘judgment on the pleadings’ in Appellee’s favor when no
issue was at all submitted to it for resolution, to the prejudice of the substantial rights of Appellant.
3. “The court a quo erred in depriving Defendant-Appellant of his property rights without due
process of law.”
The first assignment of error is based upon an erroneous predicate, for, contrary to Defendant’s
assertion, his counsel in the lower court, Atty. Manuel F. Zamora, through an employee of his
office, by the name of Agripino Aguilar, was actually served on June 9, 1951, with copy
of Plaintiff’s motion for reconsideration, with notice to the effect that said motion would be
submitted for the consideration and approval of the lower court, on Saturday, June 16, 1951, at
8:chanroblesvirtuallawlibrary00 a.m., or soon thereafter as counsel may be heard.
The second assignment of error is, likewise, untenable. It is not true that there was no issue
submitted for determination by the lower court when it rendered the decision appealed from.
It will be recalled that each one of the allegations made in Plaintiff’s complaint were expressly
admitted in Defendant’s answer, in which he merely alleged, as “special and affirmative” defense,
that Plaintiff is not entitled to foreclose the mortgage constituted in its favor by the Defendant,
because the property of Alfredo Brillantes, the principal debtors, had not been exhausted as yet,
and were not sought to be exhausted, for the satisfaction of Plaintiff’s credit. Thus, there was no
question of fact left for determination. The only issue set up by the pleadings was the sufficiency
of said affirmative defense. And such was the only point discussed by the Defendant in his
opposition to Plaintiff’s motion for a summary judgment, referring, evidently, to a judgment on the
pleadings.
Plaintiff’s motion for reconsideration of the order of Judge Roman Ibañez refusing to render said
judgment, upon the ground that it was premature, revived said issue of sufficiency of the
aforementioned affirmative defense, apart from calling for a reexamination of the question posed
by said order of Judge Ibañez, namely, whether it was proper, under the circumstances, to render
a judgment on the pleadings. In other words, said motion for reconsideration had the effect of
placing before then Judge Makalintal, for resolution, the following issues, to
wit:chanroblesvirtuallawlibrary (1) whether a summary judgment or a judgment on the pleadings
was in order, considering the allegations of Plaintiff’s complaint and those of Defendant’s
answer; chan roblesvirtualawlibraryand (2) whether the mortgage in question could be foreclosed
although Plaintiff had not exhausted, and did not intend to exhaust, the properties of his principal
debtor, Alfredo Brillantes.
 80

The third assignment of error is predicated upon the alleged lack of notice of the hearing
of Plaintiff’s motion for reconsideration. As stated in our discussion of the first assignment of error,
this pretense is refuted by the record. Moreover, it is obvious that Defendant’s affirmative defense
is devoid of merit for:chanroblesvirtuallawlibrary
1. The deed of mortgage executed by him specifically provides:chanroblesvirtuallawlibrary
“That if said Mr. Alfredo Brillantes or herein mortgagor, his heirs, executors, administrators and
assigns shall well and truly perform the full obligations above-stated according to the terms
thereof, then this mortgage shall be null and void, otherwise it shall remain in full force and effect,
in which event herein mortgagor authorizes and empowers herein mortgagee-company to take
any of the following actions to enforce said payment;.
“(a) Foreclose, judicially or extrajudicially, the chattel mortgage above referred to and/or also this
mortgage, applying the proceeds of the purchase price at public sale of the real property herein
mortgaged to any deficiency or difference between the purchase price of said chattel at public
auction and the amount of P2,889.53, together with its interest hereby secured; chan
roblesvirtualawlibraryor
“(b) Simply foreclose this mortgage judicially in accordance with the provisions of section 2, Rule
70, Rules of Court, or extra- judicially under the provisions of Act No. 3135 and Act No. 4118, to
satisfy the full amount of P2,889.53, together with its interest of 12 per cent per annum.”
2. The right of guarantors, under Article 2058 of the Civil Code of the Philippines, to demand
exhaustion of the property of the principal debtor, exists only when a pledge or a mortgage has
not been given as special security for the payment of the principal obligation. Guarantees, without
any such pledge or mortgage, are governed by Title XV of said Code, whereas pledges and
mortgages fall under Title XVI of the same Code, in which the following provisions, among others,
are found:chanroblesvirtuallawlibrary
ART. 2087. “It is also of the essence of these contracts that when the principal obligation
becomes due, the things in which the pledge or mortgage consists may be alienated for the
payment to the creditor.”
ART. 2126. “The mortgage directly and immediately subjects the property upon which it is
imposed, whoever the possessor may be, to the fulfillment of the obligation for whose security it
was constituted.”
3. It has been held already (Saavedra vs. Price, 68 Phil., 688), that a mortgagor is not entitled to
the exhaustion of the property of the principal debtor.
4. Although an ordinary personal guarantor — not a mortgagor or pledgor — may demand the
aforementioned exhaustion, the creditor may, prior thereto, secure a judgment against said
guarantor, who shall be entitled, however, to a deferment of the execution of said judgment
against him until after the properties of the principal debtor shall have been exhausted to satisfy
the obligation involved in the case.
Wherefore, the decision appealed from is hereby affirmed, with costs against the Defendant-
Appellant. It is SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

THIRD DIVISION
 81

G.R. No. 74886 December 8, 1992

PRUDENTIAL BANK, petitioner,

vs.
INTERMEDIATE APPELLATE COURT, PHILIPPINE RAYON MILLS, INC. and ANACLETO
R. CHI, respondents.

DAVIDE, JR., J.:

Petitioner seeks to review and set aside the decision 1 of public respondent; Intermediate
Appellate Court (now Court of Appeals), dated 10 March 1986, in AC-G.R. No. 66733 which
affirmed in toto the 15 June 1978 decision of Branch 9 (Quezon City) of the then Court of First
Instance (now Regional Trial Court) of Rizal in Civil Case No. Q-19312. The latter involved an
action instituted by the petitioner for the recovery of a sum of money representing the amount
paid by it to the Nissho Company Ltd. of Japan for textile machinery imported by the defendant,
now private respondent, Philippine Rayon Mills, Inc. (hereinafter Philippine Rayon), represented
by co-defendant Anacleto R. Chi.

The facts which gave rise to the instant controversy are summarized by the public respondent
as follows:

On August 8, 1962, defendant-appellant Philippine Rayon Mills, Inc. entered into

a contract with Nissho Co., Ltd. of Japan for the importation of textile machineries
under a five-year deferred payment plan (Exhibit B, Plaintiff's Folder of Exhibits, p
2). To effect payment for said machineries, the defendant-appellant applied for a
commercial letter of credit with the Prudential Bank and Trust Company in favor
of Nissho. By virtue of said application, the Prudential Bank opened Letter of
Credit No. DPP-63762 for $128,548.78 (Exhibit A, Ibid., p. 1). Against this letter
of credit, drafts were drawn and issued by Nissho (Exhibits X, X-1 to X-11, Ibid.,
pp. 65, 66 to 76), which were all paid by the Prudential Bank through its
correspondent in Japan, the Bank of Tokyo, Ltd. As indicated on their faces, two
of these drafts (Exhibit X and X-1, Ibid., pp. 65-66) were accepted by the
defendant-appellant through its president, Anacleto R. Chi, while the others were
not (Exhibits X-2 to X-11, Ibid., pp. 66 to 76).

Upon the arrival of the machineries, the Prudential Bank indorsed the shipping
documents to the defendant-appellant which accepted delivery of the same. To
enable the defendant-appellant to take delivery of the machineries, it executed,
by prior arrangement with the Prudential Bank, a trust receipt which was signed
by Anacleto R. Chi in his capacity as President (sic) of defendant-appellant
company (Exhibit C, Ibid., p. 13).

At the back of the trust receipt is a printed form to be accomplished by two

sureties who, by the very terms and conditions thereof, were to be jointly and
severally liable to the Prudential Bank should the defendant-appellant fail to pay
the total amount or any portion of the drafts issued by Nissho and paid for by
Prudential Bank. The defendant-appellant was able to take delivery of the textile
 82

machineries and installed the same at its factory site at 69 Obudan Street,
Quezon City.

Sometime in 1967, the defendant-appellant ceased business operation (sic). On

December 29, 1969, defendant-appellant's factory was leased by Yupangco
Cotton Mills for an annual rental of P200,000.00 (Exhibit I, Ibid., p. 22). The lease
was renewed on January 3, 1973 (Exhibit J, Ibid., p. 26). On January 5, 1974, all
the textile machineries in the defendant-appellant's factory were sold to AIC
Development Corporation for P300,000.00 (Exhibit K, Ibid., p. 29).

The obligation of the defendant-appellant arising from the letter of credit and the
trust receipt remained unpaid and unliquidated. Repeated formal demands
(Exhibits U, V, and W, Ibid., pp. 62, 63, 64) for the payment of the said trust
receipt yielded no result Hence, the present action for the collection of the
principal amount of P956,384.95 was filed on October 3, 1974 against the
defendant-appellant and Anacleto R. Chi. In their respective answers, the
defendants interposed identical special defenses, viz., the complaint states no
cause of action; if there is, the same has prescribed; and the plaintiff is guilty of
laches. 2

On 15 June 1978, the trial court rendered its decision the dispositive portion of which reads:

WHEREFORE, judgment is hereby rendered sentencing the defendant Philippine

Rayon Mills, Inc. to pay plaintiff the sum of P153,645.22, the amounts due under
Exhibits "X" & "X-1", with interest at 6% per annum beginning September 15,
1974 until fully paid.

Insofar as the amounts involved in drafts Exhs. "X" (sic) to "X-11", inclusive, the
same not having been accepted by defendant Philippine Rayon Mills, Inc.,
plaintiff's cause of action thereon has not accrued, hence, the instant case is
premature.

Insofar as defendant Anacleto R. Chi is concerned, the case is dismissed.

Plaintiff is ordered to pay defendant Anacleto R. Chi the sum of P20,000.00 as
attorney's fees.

With costs against defendant Philippine Rayon Mills, Inc.

SO ORDERED. 3

Petitioner appealed the decision to the then Intermediate Appellate Court. In urging the said
court to reverse or modify the decision, petitioner alleged in its Brief that the trial court erred in
(a) disregarding its right to reimbursement from the private respondents for the entire unpaid
balance of the imported machines, the total amount of which was paid to the Nissho Company
Ltd., thereby violating the principle of the third party payor's right to reimbursement provided for
in the second paragraph of Article 1236 of the Civil Code and under the rule against unjust
enrichment; (b) refusing to hold Anacleto R. Chi, as the responsible officer of defendant
corporation, liable under Section 13 of P.D No 115 for the entire unpaid balance of the imported
machines covered by the bank's trust receipt (Exhibit "C"); (c) finding that the solidary guaranty
clause signed by Anacleto R. Chi is not a guaranty at all; (d) controverting the judicial
 83

admissions of Anacleto R. Chi that he is at least a simple guarantor of the said trust receipt
obligation; (e) contravening, based on the assumption that Chi is a simple guarantor, Articles
2059, 2060 and 2062 of the Civil Code and the related evidence and jurisprudence which
provide that such liability had already attached; (f) contravening the judicial admissions of
Philippine Rayon with respect to its liability to pay the petitioner the amounts involved in the
drafts (Exhibits "X", "X-l" to "X-11''); and (g) interpreting "sight" drafts as requiring acceptance by
Philippine Rayon before the latter could be held liable thereon. 4

In its decision, public respondent sustained the trial court in all respects. As to the first and last
assigned errors, it ruled that the provision on unjust enrichment, Article 2142 of the Civil Code,
applies only if there is no express contract between the parties and there is a clear showing that
the payment is justified. In the instant case, the relationship existing between the petitioner and
Philippine Rayon is governed by specific contracts, namely the application for letters of credit,
the promissory note, the drafts and the trust receipt. With respect to the last ten (10) drafts
(Exhibits "X-2" to "X-11") which had not been presented to and were not accepted by Philippine
Rayon, petitioner was not justified in unilaterally paying the amounts stated therein. The public
respondent did not agree with the petitioner's claim that the drafts were sight drafts which did
not require presentment for acceptance to Philippine Rayon because paragraph 8 of the trust
receipt presupposes prior acceptance of the drafts. Since the ten (10) drafts were not presented
and accepted, no valid demand for payment can be made.

Public respondent also disagreed with the petitioner's contention that private respondent Chi is
solidarily liable with Philippine Rayon pursuant to Section 13 of P.D. No. 115 and based on his
signature on the solidary guaranty clause at the dorsal side of the trust receipt. As to the first
contention, the public respondent ruled that the civil liability provided for in said Section 13
attaches only after conviction. As to the second, it expressed misgivings as to whether Chi's
signature on the trust receipt made the latter automatically liable thereon because the so-called
solidary guaranty clause at the dorsal portion of the trust receipt is to be signed not by one (1)
person alone, but by two (2) persons; the last sentence of the same is incomplete and unsigned
by witnesses; and it is not acknowledged before a notary public. Besides, even granting that it
was executed and acknowledged before a notary public, Chi cannot be held liable therefor
because the records fail to show that petitioner had either exhausted the properties of Philippine
Rayon or had resorted to all legal remedies as required in Article 2058 of the Civil Code. As
provided for under Articles 2052 and 2054 of the Civil Code, the obligation of a guarantor is
merely accessory and subsidiary, respectively. Chi's liability would therefore arise only when the
principal debtor fails to comply with his obligation. 5

Its motion to reconsider the decision having been denied by the public respondent in its
Resolution of 11 June 1986, 6 petitioner filed the instant petition on 31 July 1986 submitting the
following legal issues:

I. WHETHER OR NOT THE RESPONDENT APPELLATE COURT

GRIEVOUSLY ERRED IN DENYING PETITIONER'S CLAIM FOR FULL
REIMBURSEMENT AGAINST THE PRIVATE RESPONDENTS FOR THE
PAYMENT PETITIONER MADE TO NISSHO CO. LTD. FOR THE BENEFIT OF
PRIVATE RESPONDENT UNDER ART. 1283 OF THE NEW CIVIL CODE OF
THE PHILIPPINES AND UNDER THE GENERAL PRINCIPLE AGAINST
UNJUST ENRICHMENT;
 84

II. WHETHER OR NOT RESPONDENT CHI IS SOLIDARILY LIABLE UNDER

THE TRUST RECEIPT (EXH. C);

III. WHETHER OR NOT ON THE BASIS OF THE JUDICIAL ADMISSIONS OF

RESPONDENT CHI HE IS LIABLE THEREON AND TO WHAT EXTENT;

IV. WHETHER OR NOT RESPONDENT CHI IS MERELY A SIMPLE

GUARANTOR; AND IF SO; HAS HIS LIABILITY AS SUCH ALREADY
ATTACHED;

V. WHETHER OR NOT AS THE SIGNATORY AND RESPONSIBLE OFFICER

OF RESPONDENT PHIL. RAYON RESPONDENT CHI IS PERSONALLY
LIABLE PURSUANT TO THE PROVISION OF SECTION 13, P.D. 115;

VI. WHETHER OR NOT RESPONDENT PHIL. RAYON IS LIABLE TO THE

PETITIONER UNDER THE TRUST RECEIPT (EXH. C);

VII. WHETHER OR NOT ON THE BASIS OF THE JUDICIAL ADMISSIONS

RESPONDENT PHIL. RAYON IS LIABLE TO THE PETITIONER UNDER THE
DRAFTS (EXHS. X, X-1 TO X-11) AND TO WHAT EXTENT;

VIII. WHETHER OR NOT SIGHT DRAFTS REQUIRE PRIOR ACCEPTANCE

FROM RESPONDENT PHIL. RAYON BEFORE THE LATTER BECOMES
LIABLE TO PETITIONER. 7

In the Resolution of 12 March 1990, 8 this Court gave due course to the petition after the filing
of the Comment thereto by private respondent Anacleto Chi and of the Reply to the latter by the
petitioner; both parties were also required to submit their respective memoranda which they
subsequently complied with.

As We see it, the issues may be reduced as follows:

1. Whether presentment for acceptance of the drafts was

indispensable to make Philippine Rayon liable thereon;

2. Whether Philippine Rayon is liable on the basis of the trust

receipt;

3. Whether private respondent Chi is jointly and severally liable

with Philippine Rayon for the obligation sought to be enforced and
if not, whether he may be considered a guarantor; in the latter
situation, whether the case should have been dismissed on the
ground of lack of cause of action as there was no prior exhaustion
of Philippine Rayon's properties.

Both the trial court and the public respondent ruled that Philippine Rayon could be held liable for
the two (2) drafts, Exhibits "X" and "X-1", because only these appear to have been accepted by
the latter after due presentment. The liability for the remaining ten (10) drafts (Exhibits "X-2" to
"X-11" inclusive) did not arise because the same were not presented for acceptance. In short,
 85

both courts concluded that acceptance of the drafts by Philippine Rayon was indispensable to
make the latter liable thereon. We are unable to agree with this proposition. The transaction in
the case at bar stemmed from Philippine Rayon's application for a commercial letter of credit
with the petitioner in the amount of $128,548.78 to cover the former's contract to purchase and
import loom and textile machinery from Nissho Company, Ltd. of Japan under a five-year
deferred payment plan. Petitioner approved the application. As correctly ruled by the trial court
in its Order of 6 March 1975: 9

. . . By virtue of said Application and Agreement for Commercial Letter of Credit,

plaintiff bank 10 was under obligation to pay through its correspondent bank in
Japan the drafts that Nisso (sic) Company, Ltd., periodically drew against said
letter of credit from 1963 to 1968, pursuant to plaintiff's contract with the
defendant Philippine Rayon Mills, Inc. In turn, defendant Philippine Rayon Mills,
Inc., was obligated to pay plaintiff bank the amounts of the drafts drawn by Nisso
(sic) Company, Ltd. against said plaintiff bank together with any accruing
commercial charges, interest, etc. pursuant to the terms and conditions stipulated
in the Application and Agreement of Commercial Letter of Credit Annex "A".

A letter of credit is defined as an engagement by a bank or other person made at the request of
a customer that the issuer will honor drafts or other demands for payment upon compliance with
the conditions specified in the credit. 11Through a letter of credit, the bank merely substitutes its
own promise to pay for one of its customers who in return promises to pay the bank the amount
of funds mentioned in the letter of credit plus credit or commitment fees mutually agreed
upon. 12 In the instant case then, the drawee was necessarily the herein petitioner. It was to the
latter that the drafts were presented for payment. In fact, there was no need for acceptance as
the issued drafts are sight drafts. Presentment for acceptance is necessary only in the cases
expressly provided for in Section 143 of the Negotiable Instruments Law (NIL). 13 The said
section reads:

Sec. 143. When presentment for acceptance must be made. — Presentment for
acceptance must be made:

(a) Where the bill is payable after sight, or in any

other case, where presentment for acceptance is
necessary in order to fix the maturity of the
instrument; or

(b) Where the bill expressly stipulates that it shall

be presented for acceptance; or

(c) Where the bill is drawn payable elsewhere than

at the residence or place of business of the drawee.

In no other case is presentment for acceptance necessary in order to render any

party to the bill liable.

Obviously then, sight drafts do not require presentment for acceptance.

 86

The acceptance of a bill is the signification by the drawee of his assent to the order of the
drawer; 14 this may be done in writing by the drawee in the bill itself, or in a separate
instrument. 15

The parties herein agree, and the trial court explicitly ruled, that the subject, drafts are sight
drafts. Said the latter:

. . . In the instant case the drafts being at sight, they are supposed to be payable
upon acceptance unless plaintiff bank has given the Philippine Rayon Mills Inc.
time within which to pay the same. The first two drafts (Annexes C & D, Exh. X &
X-1) were duly accepted as indicated on their face (sic), and upon such
acceptance should have been paid forthwith. These two drafts were not paid and
although Philippine Rayon Mills
ought to have paid the same, the fact remains that until now they are still
unpaid. 16

Corollarily, they are, pursuant to Section 7 of the NIL, payable on demand. Section 7 provides:

Sec. 7. When payable on demand. — An instrument is payable on demand —

(a) When so it is expressed to be payable on

demand, or at sight, or on presentation; or

(b) In which no time for payment in expressed.

Where an instrument is issued, accepted, or indorsed when overdue, it is, as

regards the person so issuing, accepting, or indorsing it, payable on demand.
(emphasis supplied)

Paragraph 8 of the Trust Receipt which reads: "My/our liability for payment at maturity of
any accepted draft, bill of exchange or indebtedness shall not be extinguished or
modified" 17 does not, contrary to the holding of the public respondent, contemplate prior
acceptance by Philippine Rayon, but by the petitioner. Acceptance, however, was not
even necessary in the first place because the drafts which were eventually issued were
sight drafts And even if these were not sight drafts, thereby necessitating acceptance, it
would be the petitioner — and not Philippine Rayon — which had to accept the same for
the latter was not the drawee. Presentment for acceptance is defined an the production
of a bill of exchange to a drawee for acceptance. 18The trial court and the public
respondent, therefore, erred in ruling that presentment for acceptance was an
indispensable requisite for Philippine Rayon's liability on the drafts to attach. Contrary to
both courts' pronouncements, Philippine Rayon immediately became liable thereon upon
petitioner's payment thereof. Such is the essence of the letter of credit issued by the
petitioner. A different conclusion would violate the principle upon which commercial
letters of credit are founded because in such a case, both the beneficiary and the issuer,
Nissho Company Ltd. and the petitioner, respectively, would be placed at the mercy of
Philippine Rayon even if the latter had already received the imported machinery and the
petitioner had fully paid for it. The typical setting and purpose of a letter of credit are
described in Hibernia Bank and Trust Co.vs. J. Aron & Co., Inc., 19 thus:
 87

Commercial letters of credit have come into general use in international sales
transactions where much time necessarily elapses between the sale and the
receipt by a purchaser of the merchandise, during which interval great price
changes may occur. Buyers and sellers struggle for the advantage of position.
The seller is desirous of being paid as surely and as soon as possible, realizing
that the vendee at a distant point has it in his power to reject on trivial grounds
merchandise on arrival, and cause considerable hardship to the shipper. Letters
of credit meet this condition by affording celerity and certainty of payment. Their
purpose is to insure to a seller payment of a definite amount upon presentation of
documents. The bank deals only with documents. It has nothing to do with the
quality of the merchandise. Disputes as to the merchandise shipped may arise
and be litigated later between vendor and vendee, but they may not impede
acceptance of drafts and payment by the issuing bank when the proper
documents are presented.

The trial court and the public respondent likewise erred in disregarding the trust receipt and in
not holding that Philippine Rayon was liable thereon. In People vs. Yu Chai Ho, 20 this Court
explains the nature of a trust receipt by quoting In re Dunlap Carpet Co., 21 thus:

By this arrangement a banker advances money to an intending importer, and

thereby lends the aid of capital, of credit, or of business facilities and agencies
abroad, to the enterprise of foreign commerce. Much of this trade could hardly be
carried on by any other means, and therefore it is of the first importance that the
fundamental factor in the transaction, the banker's advance of money and credit,
should receive the amplest protection. Accordingly, in order to secure that the
banker shall be repaid at the critical point — that is, when the imported goods
finally reach the hands of the intended vendee — the banker takes the full title to
the goods at the very beginning; he takes it as soon as the goods are bought and
settled for by his payments or acceptances in the foreign country, and he
continues to hold that title as his indispensable security until the goods are sold
in the United States and the vendee is called upon to pay for them. This security
is not an ordinary pledge by the importer to the banker, for the importer has
never owned the goods, and moreover he is not able to deliver the possession;
but the security is the complete title vested originally in the bankers, and this
characteristic of the transaction has again and again been recognized and
protected by the courts. Of course, the title is at bottom a security title, as it has
sometimes been called, and the banker is always under the obligation to
reconvey; but only after his advances have been fully repaid and after the
importer has fulfilled the other terms of the contract.

As further stated in National Bank vs. Viuda e Hijos de Angel Jose, 22 trust receipts:

. . . [I]n a certain manner, . . . partake of the nature of a conditional sale as

provided by the Chattel Mortgage Law, that is, the importer becomes absolute
owner of the imported merchandise as soon an he has paid its price. The
ownership of the merchandise continues to be vested in the owner thereof or in
the person who has advanced payment, until he has been paid in full, or if the
merchandise has already been sold, the proceeds of the sale should be turned
over to him by the importer or by his representative or successor in interest.
 88

Under P.D. No. 115, otherwise known an the Trust Receipts Law, which took effect on 29
January 1973, a trust receipt transaction is defined as "any transaction by and between a
person referred to in this Decree as the entruster, and another person referred to in this Decree
as the entrustee, whereby the entruster, who owns or holds absolute title or security interests'
over certain specified goods, documents or instruments, releases the same to the possession of
the entrustee upon the latter's execution and delivery to the entruster of a signed document
called the "trust receipt" wherein the entrustee binds himself to hold the designated goods,
documents or instruments in trust for the entruster and to sell or otherwise dispose of the goods,
documents or instruments with the obligation to turn over to the entruster the proceeds thereof
to the extent of the amount owing to the entruster or as appears in the trust receipt or the goods,
instruments themselves if they are unsold or not otherwise disposed of, in accordance with the
terms and conditions specified in the trusts receipt, or for other purposes substantially
equivalent to any one of the following: . . ."

It is alleged in the complaint that private respondents "not only have presumably put said
machinery to good use and have profited by its operation and/or disposition but very recent
information that (sic) reached plaintiff bank that defendants already sold the machinery covered
by the trust receipt to Yupangco Cotton Mills," and that "as trustees of the property covered by
the trust receipt, . . . and therefore acting in fiduciary (sic) capacity, defendants have willfully
violated their duty to account for the whereabouts of the machinery covered by the trust receipt
or for the proceeds of any lease, sale or other disposition of the same that they may have made,
notwithstanding demands therefor; defendants have fraudulently misapplied or converted to
their own use any money realized from the lease, sale, and other disposition of said
machinery." 23 While there is no specific prayer for the delivery to the petitioner by Philippine
Rayon of the proceeds of the sale of the machinery covered by the trust receipt, such relief is
covered by the general prayer for "such further and other relief as may be just and equitable on
the premises." 24 And although it is true that the petitioner commenced a criminal action for the
violation of the Trust Receipts Law, no legal obstacle prevented it from enforcing the civil liability
arising out of the trust, receipt in a separate civil action. Under Section 13 of the Trust Receipts
Law, the failure of an entrustee to turn over the proceeds of the sale of goods, documents or
instruments covered by a trust receipt to the extent of the amount owing to the entruster or as
appear in the trust receipt or to return said goods, documents or instruments if they were not
sold or disposed of in accordance with the terms of the trust receipt shall constitute the crime of
estafa, punishable under the provisions of Article 315, paragraph 1(b) of the Revised Penal
Code. 25 Under Article 33 of the Civil Code, a civil action for damages, entirely separate and
distinct from the criminal action, may be brought by the injured party in cases of defamation,
fraud and physical injuries. Estafa falls under fraud.

We also conclude, for the reason hereinafter discussed, and not for that adduced by the public
respondent, that private respondent Chi's signature in the dorsal portion of the trust receipt did
not bind him solidarily with Philippine Rayon. The statement at the dorsal portion of the said
trust receipt, which petitioner describes as a "solidary guaranty clause", reads:

In consideration of the PRUDENTIAL BANK AND TRUST COMPANY complying

with the foregoing, we jointly and severally agree and undertake to pay on
demand to the PRUDENTIAL BANK AND TRUST COMPANY all sums of money
which the said PRUDENTIAL BANK AND TRUST COMPANY may call upon us
to pay arising out of or pertaining to, and/or in any event connected with the
default of and/or non-fulfillment in any respect of the undertaking of the aforesaid:
 89

PHILIPPINE RAYON MILLS, INC.

We further agree that the PRUDENTIAL BANK AND TRUST COMPANY does
not have to take any steps or exhaust its remedy against aforesaid:

before making demand on me/us.

Petitioner insists that by virtue of the clear wording of the statement, specifically the clause ". . .
we jointly and severally agree and undertake . . .," and the concluding sentence on exhaustion,
Chi's liability therein is solidary.

In holding otherwise, the public respondent ratiocinates as follows:

With respect to the second argument, we have our misgivings as to whether the
mere signature of defendant-appellee Chi of (sic) the guaranty agreement,
Exhibit "C-1", will make it an actionable document. It should be noted that Exhibit
"C-1" was prepared and printed by the plaintiff-appellant. A perusal of Exhibit "C-
1" shows that it was to be signed and executed by two persons. It was signed
only by defendant-appellee Chi. Exhibit "C-1" was to be witnessed by two
persons, but no one signed in that capacity. The last sentence of the guaranty
clause is incomplete. Furthermore, the plaintiff-appellant also failed to have the
purported guarantee clause acknowledged before a notary public. All these show
that the alleged guaranty provision was disregarded and, therefore, not
consummated.

But granting arguendo that the guaranty provision in Exhibit "C-1" was fully
executed and acknowledged still defendant-appellee Chi cannot be held liable
thereunder because the records show that the plaintiff-appellant had neither
exhausted the property of the defendant-appellant nor had it resorted to all legal
remedies against the said defendant-appellant as provided in Article 2058 of the
Civil Code. The obligation of a guarantor is merely accessory under Article 2052
of the Civil Code and subsidiary under Article 2054 of the Civil Code. Therefore,
the liability of the defendant-appellee arises only when the principal debtor fails to
comply with his obligation. 27

Our own reading of the questioned solidary guaranty clause yields no other conclusion than that
the obligation of Chi is only that of a guarantor. This is further bolstered by the last sentence
which speaks of waiver of exhaustion, which, nevertheless, is ineffective in this case because
the space therein for the party whose property may not be exhausted was not filled up. Under
Article 2058 of the Civil Code, the defense of exhaustion (excussion) may be raised by a
guarantor before he may be held liable for the obligation. Petitioner likewise admits that the
questioned provision is a solidary guaranty clause, thereby clearly distinguishing it from a
contract of surety. It, however, described the guaranty as solidary between the guarantors; this
would have been correct if two (2) guarantors had signed it. The clause "we jointly and severally
agree and undertake" refers to the undertaking of the two (2) parties who are to sign it or to the
liability existing between themselves. It does not refer to the undertaking between either one or
both of them on the one hand and the petitioner on the other with respect to the liability
described under the trust receipt. Elsewise stated, their liability is not divisible as between
them, i.e., it can be enforced to its full extent against any one of them.
 90

Furthermore, any doubt as to the import, or true intent of the solidary guaranty clause should be
resolved against the petitioner. The trust receipt, together with the questioned solidary guaranty
clause, is on a form drafted and prepared solely by the petitioner; Chi's participation therein is
limited to the affixing of his signature thereon. It is, therefore, a contract of adhesion; 28 as such,
it must be strictly construed against the party responsible for its preparation. 29

Neither can We agree with the reasoning of the public respondent that this solidary guaranty
clause was effectively disregarded simply because it was not signed and witnessed by two (2)
persons and acknowledged before a notary public. While indeed, the clause ought to have been
signed by two (2) guarantors, the fact that it was only Chi who signed the same did not make his
act an idle ceremony or render the clause totally meaningless. By his signing, Chi became the
sole guarantor. The attestation by witnesses and the acknowledgement before a notary public
are not required by law to make a party liable on the instrument. The rule is that contracts shall
be obligatory in whatever form they may have been entered into, provided all the essential
requisites for their validity are present; however, when the law requires that a contract be in
some form in order that it may be valid or enforceable, or that it be proved in a certain way, that
requirement is absolute and indispensable. 30 With respect to a guaranty, 31 which is a promise
to answer for the debt or default of another, the law merely requires that it, or some note or
memorandum thereof, be in writing. Otherwise, it would be unenforceable unless
ratified. 32 While the acknowledgement of a surety before a notary public is required to make the
same a public document, under Article 1358 of the Civil Code, a contract of guaranty does not
have to appear in a public document.

And now to the other ground relied upon by the petitioner as basis for the solidary liability of Chi,
namely the criminal proceedings against the latter for the violation of P.D. No. 115. Petitioner
claims that because of the said criminal proceedings, Chi would be answerable for the civil
liability arising therefrom pursuant to Section 13 of P.D. No. 115. Public respondent rejected this
claim because such civil liability presupposes prior conviction as can be gleaned from the
phrase "without prejudice to the civil liability arising from the criminal offense." Both are wrong.
The said section reads:

Sec. 13. Penalty Clause. — The failure of an entrustee to turn over the proceeds
of the sale of the goods, documents or instruments covered by a trust receipt to
the extent of the amount owing to the entruster or as appears in the trust receipt
or to return said goods, documents or instruments if they were not sold or
disposed of in accordance with the terms of the trust receipt shall constitute the
crime of estafa, punishable under the provisions of Article Three hundred and
fifteen, paragraph one (b) of Act Numbered Three thousand eight hundred and
fifteen, as amended, otherwise known as the Revised Penal Code. If the violation
or offense is committed by a corporation, partnership, association or other
juridical entities, the penalty provided for in this Decree shall be imposed upon
the directors, officers, employees or other officials or persons therein responsible
for the offense, without prejudice to the civil liabilities arising from the criminal
offense.

A close examination of the quoted provision reveals that it is the last sentence which provides
for the correct solution. It is clear that if the violation or offense is committed by a corporation,
partnership, association or other juridical entities, the penalty shall be imposed upon the
directors, officers, employees or other officials or persons therein responsible for the offense.
The penalty referred to is imprisonment, the duration of which would depend on the amount of
 91

the fraud as provided for in Article 315 of the Revised Penal Code. The reason for this is
obvious: corporations, partnerships, associations and other juridical entities cannot be put in jail.
However, it is these entities which are made liable for the civil liability arising from the criminal
offense. This is the import of the clause "without prejudice to the civil liabilities arising from the
criminal offense." And, as We stated earlier, since that violation of a trust receipt constitutes
fraud under Article 33 of the Civil Code, petitioner was acting well within its rights in filing an
independent civil action to enforce the civil liability arising therefrom against Philippine Rayon.

The remaining issue to be resolved concerns the propriety of the dismissal of the case against
private respondent Chi. The trial court based the dismissal, and the respondent Court its
affirmance thereof, on the theory that Chi is not liable on the trust receipt in any capacity —
either as surety or as guarantor — because his signature at the dorsal portion thereof was
useless; and even if he could be bound by such signature as a simple guarantor, he cannot,
pursuant to Article 2058 of the Civil Code, be compelled to pay until
after petitioner has exhausted and resorted to all legal remedies against the principal debtor,
Philippine Rayon. The records fail to show that petitioner had done so 33 Reliance is thus placed
on Article 2058 of the Civil Code which provides:

Art. 2056. The guarantor cannot be compelled to pay the creditor unless the
latter has exhausted all the property of the debtor, and has resorted to all the
legal remedies against the debtor.

Simply stated, there is as yet no cause of action against Chi.

We are not persuaded. Excussion is not a condition sine qua non for the institution of an action
against a guarantor. In Southern Motors, Inc. vs. Barbosa, 34 this Court stated:

4. Although an ordinary personal guarantor — not a mortgagor or pledgor — may

demand the aforementioned exhaustion, the creditor may, prior thereto, secure a
judgment against said guarantor, who shall be entitled, however, to a deferment
of the execution of said judgment against him until after the properties of the
principal debtor shall have been exhausted to satisfy the obligation involved in
the case.

There was then nothing procedurally objectionable in impleading private respondent Chi as a
co-defendant in Civil Case No. Q-19312 before the trial court. As a matter of fact, Section 6,
Rule 3 of the Rules of Court on permissive joinder of parties explicitly allows it. It reads:

Sec. 6. Permissive joinder of parties. — All persons in whom or against whom

any right to relief in respect to or arising out of the same transaction or series of
transactions is alleged to exist, whether jointly, severally, or in the alternative,
may, except as otherwise provided in these rules, join as plaintiffs or be joined as
defendants in one complaint, where any question of law or fact common to all
such plaintiffs or to all such defendants may arise in the action; but the court may
make such orders as may be just to prevent any plaintiff or defendant from being
embarrassed or put to expense in connection with any proceedings in which he
may have no interest.
 92

This is the equity rule relating to multifariousness. It is based on trial convenience and is
designed to permit the joinder of plaintiffs or defendants whenever there is a common question
of law or fact. It will save the parties unnecessary work, trouble and expense. 35

However, Chi's liability is limited to the principal obligation in the trust receipt plus all the
accessories thereof including judicial costs; with respect to the latter, he shall only be liable for
those costs incurred after being judicially required to pay. 36 Interest and damages, being
accessories of the principal obligation, should also be paid; these, however, shall run only from
the date of the filing of the complaint. Attorney's fees may even be allowed in appropriate
cases.37

In the instant case, the attorney's fees to be paid by Chi cannot be the same as that to be paid
by Philippine Rayon since it is only the trust receipt that is covered by the guaranty and not the
full extent of the latter's liability. All things considered, he can be held liable for the sum of
P10,000.00 as attorney's fees in favor of the petitioner.

Thus, the trial court committed grave abuse of discretion in dismissing the complaint as against
private respondent Chi and condemning petitioner to pay him P20,000.00 as attorney's fees.

In the light of the foregoing, it would no longer necessary to discuss the other issues raised by
the petitioner

WHEREFORE, the instant Petition is hereby GRANTED.

The appealed Decision of 10 March 1986 of the public respondent in AC-G.R. CV No.
66733 and, necessarily, that of Branch 9 (Quezon City) of the then Court of First
Instance of Rizal in Civil Case No. Q-19312 are hereby REVERSED and SET ASIDE
and another is hereby entered:

1. Declaring private respondent Philippine Rayon Mills, Inc. liable

on the twelve drafts in question (Exhibits "X", "X-1" to "X-11",
inclusive) and on the trust receipt (Exhibit "C"), and ordering it to
pay petitioner: (a) the amounts due thereon in the total sum of
P956,384.95 as of 15 September 1974, with interest thereon at six
percent (6%) per annum from 16 September 1974 until it is fully
paid, less whatever may have been applied thereto by virtue of
foreclosure of mortgages, if any; (b) a sum equal to ten percent
(10%) of the aforesaid amount as attorney's fees; and (c) the
costs.

2. Declaring private respondent Anacleto R. Chi secondarily liable

on the trust receipt and ordering him to pay the face value thereof,
with interest at the legal rate, commencing from the date of the
filing of the complaint in Civil Case No. Q-19312 until the same is
fully paid as well as the costs and attorney's fees in the sum of
P10,000.00 if the writ of execution for the enforcement of the
above awards against Philippine Rayon Mills, Inc. is returned
unsatisfied.

Costs against private respondents.

 93

SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

FIRST DIVISION

G.R. No. L-28030 January 18, 1982

THE IMPERIAL INSURANCE, INC., petitioner,

vs.
HON. WALFRIDO DE LOS ANGELES, Judge of the Court of First Instance of Rizal,
Quezon City Branch IV, ROSA V. REYES, PEDRO V. REYES and CONSOLACION V.
REYES, respondents.

FERNANDEZ, J.:

This is a petition for certiorari to review the decision of the Court of Appeals in CA-G.R. No.
38824-R promulgated on July 19, 1967 entitled "The Imperial Insurance, Inc., petitioner vs. Hon.
Walfrido de los Angeles, Judge of the Court of First Instance of Rizal, Branch IV, Quezon City,
et al, respondents," the dispositive part of which reads:

WHEREFORE, the instant petition is dismissed and the writ of preliminary

injunction issued by the Court on January 31, 1967, is hereby dissolved, with
costs against petitioner.

SO ORDERED. 1

As found by the Court of Appeals, the uncontroverted facts are:

It appears that herein private respondent Rosa V. Reyes is the plaintiff in Civil
Case N. Q-8213 of the Court of First Instance of Rizal, Branch IV, Quezon City,
entitled, 'Rosa V. Reyes vs, Felicisimo V. Reyes, etc.,' where she obtained a writ
of preliminary attachment and, accordingly, levied upon all the properties of the
defendant, Felicisimo V. Reyes, in said case. The other two herein private
respondents, namely, Pedro V. Reyes and Consolacion V. Reyes, are the
plaintiffs in Civil Case No. Q-5214 of the same court entitled, 'Pedro V. Reyes,
etc.,' and likewise, obtained a writ of preliminary attachment and, accordingly,
levied upon all the properties of the defendant, Felicisimo V. Reyes, in said case.

For the dissolution of the attachments referred to above, the herein petitioner,
The Imperial Insurance, Inc., as surety, and Felicisimo V. Reyes, as principal,
posted a 'defendant's bond for dissolution of attachment' in the amount of
P60,000.00 in Civil Case No. Q-5213 and another bond of the same nature in the
amount of P40,000.00 in Civil Case No. Q-5214.
 94

Civil Cases Nos. Q-5213 and 5214 were jointly tried and the decision therein
rendered was in favor of the plaintiffs. This decision was affirmed by this Court on
appeal in cases CA-G.R. NOS. 33783-R and 33784-R. The decision of this
Court, having become final, the records of the cases were remanded to the Court
of First Instance of Rizal, Quezon City Branch, for execution of judgment.

Accordingly, on June 24, 1966, the Court below, presided by the herein
respondent Judge, Hon. Walfrido de los Angeles, issued the writs of execution of
judgment in said cases. However, on August 20, 1966, the Provincial Sheriff of
Bulacan returned the writs of execution' unsatisfied in whole or in part'.

On September 9, 1966, private respondents filed a 'motion for recovery on the

surety bonds'. Thereafter, said private respondents, thru counsel, sent a letter of
demand upon petitioner asking the latter to pay them the accounts on the
counter-bonds. On September 24, 1966, petitioner filed its 'opposition' to the
private respondents "Motion for recovery on the surety bonds'. Respondent
Judge, in his order, dated November 10, 1966, rendered judgment against the
counter-bonds.

On November 15, 1966, private respondents filed an ex parte motion for writ of
execution' without serving copy thereof on petitioner.

In the meantime, on or about November 23 1966, petitioner filed a 'motion for

reconsideration' of the order, dated November 10, 1966. This motion was,
however, denied by the respondent Judge on January 9, 1967.

On or about January 11, 1967, petitioner filed its 'notice of intention to appeal'
from the final orders of the respondent Judge, dated November 10, 1966 and
January 9. 1967.

On January 19, 1967, the respondent Judge issued an order granting the
issuance of the writ of execution against the bonds riled by the petitioner (Exhibit
J, petition). 2

On January 25, 1967, the petitioner filed a petition for certiorari with prayer for for preliminary
injunction with the Court of Appeals to restrain the enforcement of the writ of execution. 3

The petition was given due course and on January 30, 1967 a writ of preliminary injunction was
issued. 4 After the parties had submitted their respective pleadings and memoranda in lieu of
oral argument, the Court of Appeals rendered the decision now under review.

The defendant, Felicisimo V. Reyes, in the abovementioned cases died during the pendency of
the trial. He was duly substituted by his surviving spouse, Emilia T. David, an administratrix of
his intestate estate. 5

The petitioner assigns as errors allegedly committed by the Court of Appeals the following:

I
 95

THE COURT OF APPEALS GRAVELY ERRED IN HOLDING THAT THE

RESPONDENT JUDGE COULD LEGALLY ISSUE THE WRIT OF EXECUTION
AGAINST THE PETITIONER AS SURETY IN A COUNTERBOND (BOND TO
DISSOLVE ATTACHMENT) ON THE BASIS OF AN EX-PARTE MOTION FOR
EXECUTION WHICH WAS NEITHER SERVED UPON THE SURETY NOR SET
FOR HEARING.

II

THE COURT OF APPEALS GRAVELY ERRED IN HOLDING THAT THE

PLAINTIFF WHO OBTAINED A JUDGMENT AGAINST THE DEFENDANT MAY
LEGALLY CHOOSE 'TO GO DIRECTLY' AFTER THE SURETY IN A
COUNTERBOND WITHOUT PRIOR EXHAUSTION OF THE DEFENDANTS
PROPERTIES.

III

THE COURT OF APPEALS GRAVELY ERRED IN NOT HOLDING THAT THE

'JUDGMENT' RENDERED AGAINST THE MENTIONED COUNTERBONDS IS A
'FINAL ORDER' IN THE CONTEMPLATION OF SECTION 2, RULE 41 OF THE
REVISED RULES OF COURT AND, THEREFORE, APPEALABLE.

IV

THE COURT OF APPEALS GRAVELY ERRED IN NOT HOLDING THAT IN

THE ABSENCE OF AN EXPRESS PROVISION OF THE REVISED RULES OF
COURT, THE PROCEDURE FOLLOWED BY THE SHERIFF IN THE
EXECUTION OF THE JUDGMENT ON THE 'SURVIVING CLAIMS', WHEN THE
DEFENDANT DIED DURING THE PENDENCY OF THE TRIAL OF HIS CASE
AND BEFORE JUDGMENT WAS DULY SUBSTITUTED BY THE COURT
APPOINTED ADMINISTRATRIX OF HIS ESTATE, SHOULD HAVE BEEN THE
SAME AS THE PROCEDURE SET OUT IN SECTION (f), RULE 57
RESPECTING THE EXECUTION OF A WRIT OF PRELIMINARY
ATTACHMENT OF PROPERTIES IN CUSTODIALEGIS. 6

Anent the first error, the petitioner contends that the Court of Appeals erred in holding that the
respondent judge could legally issue the writ of execution against the petitioner as surety in a
counterbond (bond to dissolve attachment) on the basis of an ex parte motion for execution
which was allegedly never served upon the surety nor set for hearing. This contention is devoid
of merit.

The counterbonds filed to lift the writs of attachment executed by the herein petitioner, The
Imperial Insurance, Inc., for and in behalf of the deceased defendant Felicisimo V. Reyes in
favor of the plaintiffs, private respondents herein Rosa V. Reyes and Consolacion V. Reyes in
Civil Case No. Q-5214 docketed with the Court of First Instance of Rizal, Branch IV, Quezon
City, are clearly the bonds contemplated under Sec. 17, Rule 57 of the Rules of Court which
provides:

Sec. 17. When execution returned unsatisfied, recovery had upon bond. If the
execution be returned unsatisfied in whole or in part, the surety or sureties on
 96

any counterbond given pursuant to the provisions of this rule to secure the
payment of the judgment shall become charged on such counter-bond, and
bound to pay to the judgment creditor upon demand, the amount due under the
judgment, which amount may be recovered from such surety or sureties after
notice and summary hearing in the same action.

This section allows the counterbond filed to lift an attachment to be charged only after notice
and summary hearing in the same action.

The records show that the notice and hearing requirement was substantially complied with in
the instant case.

Prior to the filing of the ex parte motion for a writ of execution, the respondents filed a motion for
recovery on the surety bonds where the petitioner was duly notified and the said motion was
heard on September 24, 1966. 7Moreover, on November 23, 1966 the petitioner filed a motion
for reconsideration of the order dated November 10, 1966 rendering judgment against the
petitioner on its counter-bonds in the amount of P60,000.00 in Civil Case No. Q-5213 and
P40,000.00 in Civil Case No. Q-5214. 8 The respondent judge set the hearing of the ex
parte motion for writ of execution together with the motion for reconsideration of the order dated
November 10, 1966 on December 17, 1966 at 8:30 o'clock in the morning. 9 The petitioner
received the notice of the said hearing on December 9, 1966 as evidenced by Registry Return
Receipt No. 40122. 10 On January 9, 1967, the respondent Judge issued an order denying the
motion for reconsideration dated November 23, 1966 for lack of merit. 11 in an order dated
January 19, 1967, the motion for writ of execution was granted by the respondent judge. 12

It is thus clear from indubitable documents on record that the requirements of notice and
hearing had been satisfactorily complied with by the respondents. The first error assigned is
overruled.

The petitioner asserts that the Court of Appeals gravely erred in holding that the plaintiff who
obtained judgment against the defendant may legally choose "to go directly" after the surety in a
counterbond without prior exhaustion of the defendant's properties. This contention is likewise
not meritorious.

Although the counterbond contemplated in the aforequoted Sec. 17, Rule 57, of the Rules of
Court is an ordinary guaranty where the sureties assume a subsidiary liability, the rule cannot
apply to a counterbond where the surety bound itself "jointly and severally" (in solidum) with the
defendant as in the present case. The counterbond executed by the deceased defendant
Felicisimo V. Reyes, as principal, and the petitioner, The Imperial Insurance, Inc., as solidary
quarantor to lift the attachment in Civil Case No. Q-5213 is in the following terms:

WHEREFORE, WE, FELICISIMO V. REYES, of legal age, Filipino, and with

postal address at San Jose, San Miguel, Bulacan and/or 1480 Batangas Street,
Sta. Cruz, Manila, as PRINCIPAL and THE IMPERIAL INSURANCE, INC., a
corporation duly organized and existing under the laws of the Philippines, as
SURETY, in consideration of the dissolution of said attachment, hereby JOINTLY
AND SEVERALLY, bind ourselves in the sum of SIXTY THOUSAND PESOS
ONLY (P60,000.00), Philippine Currency, under the condition that in case the
plaintiff recovers judgment in the action, the defendant shall pay the sum of
SIXTY THOUSAND PESOS (P60,000.00), Philippine Currency, being the
 97

amount release for attachment, to be applied to the payment of the judgment, or

in default thereof, the Surety will, on demand, pay to the plaintiff said amount of
SIXTY THOUSAND PESOS ONLY (P60,000.00), Philippine Currency.
(Capitalizations supplied).

Manila, Philippines, June 30,1960. 13

The counterbond executed by the same parties in Civil Case No. Q-5214, likewise states.

WHEREFORE, we, FELICISIMO V. REYES, of legal age, Filipino, and with

postal address at San Jose, San Miguel, Bulacan, and/or 1480 Batangas Street,
Sta. Cruz, Manila, as PRINCIPAL and THE IMPERIAL INSURANCE, INC., a
corporation duly organized and existing under the laws of the Philippines, as
SURETY, in consideration of the dissolution of said attachment, hereby JOINTLY
and SEVERALLY, bind ourselves in the sum of FORTY THOUSAND PESOS
ONLY (P40,000.00), Philippine Currency, under the condition that in case the
plaintiff recover judgment in the action the defendant shall pay the sum of
FORTY THOUSAND PESOS ONLY (P40,000.00), Philippine Currency, being the
amount released for attachment, to be applied to the payment of the judgment, or
in default thereof, the Surety will, on demand, pay to the plaintiffs said amount of
FORTY THOUSAND PESOS ONLY (P40,000.00), Philippine Currency.
(Emphasis supplied).

Manila, Philippines, June 30th, 1960. 14

Clearly, the petitioner, the Imperial Insurance, Inc., had bound itself solidarily with the principal,
the deceased defendant Felicisimo V. Reyes. In accordance with Article 2059, par. 2 of the Civil
Code of the Philippines, 15excussion (previous exhaustion of the property of the debtor) shall not
take place "if he (the guarantor) has bound himself solidarily with the debtor." Section 17, Rule
57 of the Rules of Court cannot be construed that an "execution against the debtor be first
returned unsatisfied even if the bond were a solidary one, for a procedural rule may not amend
the substantive law expressed in the Civil Code, and further would nullify the express stipulation
of the parties that the surety's obligation should be solidary with that of the defendant." 16

Hence the petitioner cannot escape liability on its counter-bonds based on the second error
assigned.

As regards the third error, the petitioner submits that the Court of Appeals erred in not holding
that the order dated November 10, 1966 rendering judgment against the counter-bonds, as well
as the order dated January 9, 1967, denying the motion for reconsideration thereof, and the
order of the writ of execution dated January 19, 1967 are final and appealable in accordance
with Sec. 2, Rule 41 of the Rec. Rules of Court. This submission is also without merit.

To recover against the petitioner surety on its counter-bonds it is not necessary to file a
separate action. Recovery and execution may be had in the same Civil Cases Nos. Q-5213 and
Q-5214, as sanctioned by Sec. 17, Rule 57, of the Revised Rules of Court.

The decision in Civil Cases Nos. Q-5213 and Q-5214, having become final, the respondent judo
issued the writs of execution in said cases. On August 20, 1966, the Provincial Sheriff of
Bulacan returned the writs of execution "unsatisfied in whole or in part." 17
 98

Sec. 12, Rule 57 of the Revised Rules of Court 18 specifies that an attachment may be
discharged upon the making of a cash deposit or filing a counterbond "in an amount equal to the
value of the property attached as determined by the judge"; and that upon filing the counterbond
"the property attached shall be delivered to the party making the deposit or giving the
counterbond or the person appearing in his behalf, the deposit or counterbond standing in place
of the property so released."

The counter-bonds merely stand in place of the properties so released. They are mere
replacements of the properties formerly attached, and just as the latter may be levied upon after
final judgment in the case in order to realize the amount adjudged so is the liability of the
counter sureties ascertainable after the judgment has become final. 19

The judgment having been rendered against the defendant, Felicisimo V. Reyes, the counter-
bonds given by him and the surety, The Imperial Insurance, Inc., under Sec. 12, Rule 57 are
made liable after execution was returned unsatisfied. Under the said rule, a demand shall be
made upon the surety to pay the plaintiff the amount due on the judgment, and if no payment is
so made, the amount may be recovered from such surety after notice and hearing in the same
action. A separate action against the sureties is not necessary. 20

In the present case, the demand upon the petitioner surety was made with due notice and
hearing thereon when the private respondents filed the motion for recovery on the surety bonds
dated September 9, 1966 and to which the petitioner filed their opposition dated September 24,
1966. 21

Therefore, all the requisites under Sec. 17, Rule 57, being present, namely: (1) the writ of
execution must be returned unsatisfied, in whole or in part; (2) the plaintiff must demand the
amount due under the judgment from the surety or sureties, and (3) notice and hearing of such
demand although in a summary manner, complied with, the liability of the petitioner
automatically attaches.

In effect, the order dated November 10, 1966 rendering judgment against the counter-bonds
was a superfluity. The respondent judge could have issued immediately a writ of execution
against the petitioner surety upon demand.

As correctly held by the Court of Appeals:

In fact, respondent Judge could have even issued a writ of execution against
petitioner on its bond immediately after its failure to satisfy the judgment against
the defendant upon demand, since liability on the bond automatically attaches
after the writ of execution against the defendant was returned unsatisfied as held
in the case of Tijan vs. Sibonghanoy, CA-G.R. No. 23669-R, December 11,
1927. 22

Moreover, the finality and non-appealability of the order dated November 10, 1966 is made
certain and absolute with the issuance of the order of execution dated January 19, 1967 23 upon
the filing of the ex parte motion for writ of execution 24 of which the petitioner was duly notified
by the respondent Judge and which was duly heard. 25 The general rule is that an order of
execution is not appealable, otherwise a case would never end. The two exceptions 26 to this
rule are: (1) where the order of execution varies the tenor of the judgment; and (2) when the
terms of the judgment are not very clear, and there is room for interpretation. The case at bar
 99

does not fall under either exception. There is no showing that the order of execution varies the
tenor of the judgment in Civil Cases Nos. Q-5213 and Q-5214, nor of the order dated November
10, 1966, but is in fact, in consonance therewith and the terms of the judgment are clear and
definite, therefore, the general rule of non-appealability applies.

It is no longer necessary to discuss the fourth error assigned because of this Court's finding that
the liability expressly assumed by the petitioner on the counter-bonds is solidary with the
principal debtor, the deceased defendant, Felicisimo V. Reyes. As a solidary guarantor, the
petitioner, the Imperial Insurance, Inc., is liable to pay the amount due on such counter-bonds
should the creditors, private respondents herein, choose to go directly after it. 27

Under the law and under their own terms, the counter-bonds are only conditioned upon the
rendition of the judgment. As held by this Court in the aforecited case of Luzon Steel
Corporation vs. Sia 28 "where under the rule and the bond the undertaking is to pay the
judgment, the liability of the surety or sureties attaches upon the rendition of the judgment, and
the issue of an execution and its return nulla bona is not, and should not be a condition to the
right to resort to the bond." Thus, it matters not whether the Provincial Sheriff of Bulacan, in
making the return of the writ of execution served or did not serve a copy thereof with notice of
attachment on the administratrix of the intestate estate of Felicisimo V. Reyes and filed a copy
of said writ with the office of the clerk of court with notice in accordance with See. 7 (f), Rule 57
of the Revised Rules of Court. The petitioner surety as solidary obligor is liable just the same.

WHEREFORE, the decision of the Court of Appeals promulgated on July 19,1967 in CA-G.R.
NO. 38824-R is affirmed and the order of the respondent judge dated January 19, 1967 and all
writs or orders issued in consequence or in pursuance thereof are also affirmed. The court of
origin is hereby ordered to proceed with the execution against the petitioner surety, the Imperial
Insurance Inc., with costs against said petitioner.

SO ORDERED.

[G.R. No. 46702. October 6, 1939.]

ALEIDA SAAVEDRA, Petitioner, v. W. S. PRICE, FORTUNATO BORROMEO, Judge of the

Court of First Instance of Leyte, and ANASTASIO ANOVER, provincial Sheriff of
Leyte, Respondents. RAFAEL MARTINEZ, intervenor.
DECISION

IMPERIAL, J.:

This is a proceeding instituted by the petitioner to annul the order of May 8, 1939, entered by
the Court of First Instance of Leyte, which provided for the sale at public auction of the real
property described in Transfer Certificate of Title No. 395 issued in favor of the petitioner, so
that the proceeds thereof may be applied to the payment of the credit of the respondent W. S.
Price in the sum of P15,000.

In civil case No. 3569 of the Court of First Instance of Leyte, Saavedra Et. Al. v. Martinez Et. Al.
(58 Phil., 767), this court, on appeal, rendered judgment in case which reads as follows,
 100

"Wherefore, the judgment appealed from is hereby modified to the effect that the deed of sale,
Exhibit C, executed by Ceferino Ibañez in favor of Rafael Martinez is declared rescinded and
without force and effect, and the register of deeds of Leyte is hereby ordered to cancel transfer
certificate of title No. 294 issued in favor of the said Martinez, and to issue, in lieu thereof,
another transfer certificate of title in favor of Ceferino Ibañez and his wife, Aleida Saavedra, with
a notation thereon of (1) the mortgage constituted in favor of W. S. Price to secure the payment
of the sum of P15,000 and (2) the judgment rendered by this court in case G. R. No. 33795, civil
case No. 7957 of the Court of First Instance of Cebu; without prejudice to any right of action
which Rafael Martinez may have against Ceferino Ibañez in accordance with the law. As thus
modified, the judgment appealed from is hereby affirmed in all other respects, with the costs of
both instances against Ceferino Ibañez and Rafael Martinez."cralaw virtua1aw library

In civil case No. 3707 of the Court of First Instance of Leyte, W. S. Price, plaintiff v. Ceferino
Ibañez Et. Al., Defendants, said court rendered judgment ordering the defendants to pay the
plaintiff within ninety days the sum of P15,000, with the legal interest thereon from January 16,
1934, and in case of default on their part, that the real property subject matter of the mortgage
be sold at public auction so that the proceeds thereof may be applied to the payment of the sum
in question and the interest thereon. On appeal, this court, in case G. R. No. 44974, (38 Off.
Gaz., 2410), modified the judgment of the lower court as follows:jgc:chanrobles.com.ph

"The judgment appealed from is modified and Rafael Martinez and Ceferino Ibañez are ordered
to pay the sum of P15,000 to plaintiff within the period of ninety days to be counted from the
date this decision becomes final, with- out pronouncement as to costs."cralaw virtua1aw library

After the period of ninety days had elapsed and Rafael Martinez and Ceferino Ibañez failed to
pay the sum in question with the interest thereon, the respondent Price filed a motion praying
that the real property mortgaged be sold at public auction for the payment of his mortgage credit
and its interest. The motion was set for hearing on April 22, 1939, but on motion of the petitioner
the court postponed it definitely for May 6, 1939. On the 4th of said month, the attorneys for the
petitioner again sought the postponement of the hearing by reason of the bad weather then
prevailing, but the court proceeded with the hearing of the motion on the date fixed, and on the
8th of May it entered the order directing the sale of the mortgaged realty for the payment of the
judgment obtained by the respondent W. S. Price. The petitioner asked for the reconsideration
of the order and the court denied the motion filed to that effect.

The petitioner now claims that the respondent Judge acted with abuse of his discretion in not
transferring the hearing of the motion for the sale of the mortgaged realty and that he exceeded
his jurisdiction in ordering the sale of said property.

In connection with the first contention, we hold that the court made good use of its discretion in
denying the postponement on the ground that said hearing had already been postponed
definitely to another date upon petition of the petitioner herself. Furthermore, with respect to a
mere motion to sell the mortgaged realty, the court could hear it ex parte without the presence
of the petitioner because in the judgment rendered by the court and affirmed by this court, it had
already been ordered previously that if the defendants Rafael Martinez and Ceferino Ibañez
should fail to pay the debt of P15,000 within 90 days, the mortgaged realty must be sold in
accordance with the law (Government of the Philippine Islands v. De las Cajigas. 55 Phil., 667).

As to the second point, it is contended that since the petitioner is not the debtor and as she, on
the other hand is the owner of the mortgaged realty, she merely acted as surety to Rafael
 101

Martinez, the principal debtor, and as such she is entitled to the benefit of the exhaustion of the
property of the principal debtor, in accordance with the provisions of article 1830 of the Civil
Code. Basing her claim on this alleged defense, the petitioner contends that the court should
not have ordered the sale of the real property in question. We are of the opinion that this last
contention is likewise unfounded and untenable. In the first place, this alleged defense should
have been interposed before the judgment was rendered in this case and it is too late to raise it
for the first time as a ground for opposing the motion to sell the real property in question. In the
second place, the contention that the mortgaged real property belonging to the petitioner cannot
be sold to pay the debt for the reason that she is a mere surety of Rafael Martinez, finds no
support in the law. It is a fact that the principal debtors, according to the judgment of this court,
are Rafael Martinez and Ceferino Ibañez and that the mortgaged property belongs to the
petitioner, but the lien imposed upon the property was legal and valid in accordance with article
1857 (paragraph 3) of the Civil Code, and in case of default, which took place herein, said
property is subject to sale, in accordance with the provisions of articles 1858 and 1876 of the
same Code and of sections 256 and 257 of the Code of Civil Procedure. It is true that the
petitioner is a surety with regard to Rafael Martinez and as such surety she is entitled to resort
to the actions and remedies against him which the law affords her, but we should not lose sight
of the fact that she was sued not as a surety but as a mortgage debtor for being the owner of
the mortgaged property.

The order of May 8, 1939, appealed from, being in accordance with law, for the reason that it
was rendered by the respondent Judge in the exercise of his jurisdiction and discretion, the
petition for certiorari is hereby denied, with the costs to the petitioner. So ordered.

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-41320 November 9, 1934

CONCEPCION J. VIUDA DE SYQUIA, in her capacity as administratrix of the state of the

deceased Gregorio Syquia, plaintiff-appellee,
vs.
PERFECTO JACINTO, ET AL., defendants.
RAFAEL PALMA, appellants.

Francisco Dominguez for appellant.

Cardenas and Casal for appellee.

BUTTE, J.:

On December 15, 1924, the Bank of the Philippine Islands obtained a judgment against
Perfecto and Felipe Jacinto and Rafael Palma on a promissory note in its favor executed by the
defendants on May 27, 1922, for the sum of P22,000 with interest at the rate of 9 per cent per
 102

annum plus 10 per cent of the principal as costs and attorney's fees. The dispositive part of this
judgment is as follows:

Se condena a los Sres. P. y F. Jacinto y Rafael Palma a que paguen a la parte

demandante, los primeros como obligados principales y el ultimo como fiador, la suma
de veinticuatro mil pesos (P24,000) al interes de 9 por ciento al año desde el 27 de
mayo de 1923, mas el uno por ciento sobre el principal en concepto de honorarios de
abogado y costas.

No debe expedirse ejecucion contra el demandado Sr. Rafael Palma, sino despues de
haberse hecho excusion de los bienes de los senores P. y F. Jacinto.

On August 16, 1928, the Bank of the Philippine Islands "in consideration of the sum of P1 and
other valuable considerations" assigned and transferred said judgment to Gregorio Syquia.

On July 12, 1932, the widow of Gregorio Syquia, as administratrix of his estate, filed suit in the
Court of First Instance of Manila against Perfecto and Felipe Jacinto and Rafael Palma reciting
the aforementioned judgment and assignment and alleging that since the date of said judgment
none of the defendants had paid anything thereon and there remains still due the sum of
P24,000 with interest at 9 per cent since May 27, 1923. The plaintiff prayed that the judgment
be revived and that defendants Perfecto and Felipe Jacinto as principal and Rafael Palma as
guarantor be adjudged to pay the sum of P24,000 with interest since May 27, 1923, and costs.
To this petition were attached a copy of the judgment of December 15, 1924, Exhibit A, and a
copy of the assignment thereof to the plaintiff, Exhibit B.

The defendants filed a joint amended answer in which they admitted the judgment, Exhibit A,
and that said judgment had lapsed and it was necessary to revive the same; but they denied the
assignment to Syquia and the allegation that nothing had been paid on said judgment and that
the full amount thereof was still due. They set up as a special defense that the judgment which
the plaintiff was attempting to revive has been fully paid; that at the time of making the
assignment to Gregorio Syquia, the bank had no right or interest under said judgment, the same
having been fully paid, and that the partition does not state facts sufficient to constitute a cause
of action.

In the same answer they set up a counter-demand to the following effect: that in the month of
April, 925, the Bank of the Philippine Islands caused an execution to be issued under said
judgment and the sheriff on the request of the bank sold at public sale three properties
belonging to the defendants Jacinto which had been previously attached; that at said public sale
three properties belonging to the defendants Jacinto which had been previously attached; that
at said public sale the bank was the highest bidder crediting the amount of its bid on the said
judgment; that said parcels of land with their improvements consisting of four houses yielded a
monthly revenue of P880 or P10,560 a year; that during the year allowed the judgment debtors
for redemption the said bank took control and possession of the said parcels of land and
collected and retained the revenues thereof as aforesaid and that Gregorio Syquia has been
receiving the same since that time, though without any right whatever; that the said revenues
during the year of redemption in the sum of P10,560 were never applied by the bank as a credit
on said judgment. The defendants prayed that they be absolved from the demand of the
petitioner and that the estate of Gregorio Syquia be condemned to pay the sum of P10,560 with
costs. The answer concludes with a prayer for general relief.
 103

On the trial of this cause it was shown that at the execution sale held on April 18, 1925, the
bank bought two of the properties of the defendants Jacinto for the sum of P15,045. The third
property was sold to Rufino Reyes for P1,000 which was not credited on the judgment debt
pending the determination of Reyes' claim of priority. The trial court stated the judgment debt as
of April 18, 1925, as follows:

Loan
P24,000.00
..............................................................................................
Interest from May 27, 1923 to April 1, 1925 at 9 per cent ... 4,083.29
Cost including sheriff's sale
657.95
.....................................................

Total obligation ......................................... P28,741.24

from which is to be deducted P15,045 the value of the two parcels sold to the bank on April 18,
1925, leaving a balance due of P13,696.24. On September 2, 1925, the defendant Palma paid
the bank P100 leaving thus a net balance due of P13,596.24. The trial court entered the
following judgment:

Dictese sentencia condenando a los demandados, Perfecto Jacinto y Felipe Jacinto,

como obligados principales, y Rafael Palma como fiador, a pagar a la demandante la
cantidad de trece mil quinientos noventa y seis pesos con veinte y cuatro centimos
(P13,596.24), mas las costas del juicio.

Se sobresee la reconvencion de los demandados.

Asi se ordena.

Manila, I.F., 25 de septiembre de 1933.

From this judgment only defendant Palma appeals. He submits the following assignments of
error:

1. El Juzgado erro al no apreciar que la cuenta de los deudores P. y F. Jacinto quedo

liquidada con el banco al efectuarse la venta de las fincas embargadas por este a favor
de Gregorio Syquia por la suma de P45,000 y que, por consiguiente, la sentencia firme
de diciembre 14, 1924, quedo ipso facto saldada y con creces, en virtud de aquella
venta.

2. El Juzgado erro al no apreciar que el banco no transmitio ningun derecho, interes o

participacion en la sentencia referida al tiempo de hacerse el traspaso de los mismos a
Gregorio Syquia.

3. Aun suponiendo que la sentencia firme era subsistente contra los deudores y su
fiador al tiempo de hacerse el traspaso por el banco de cualquier titulo, derecho, interes
o participacion en dicha sentencia, el Juzgado erro al no apreciar que se ha constituido
 104

una novacion de la obligacion del fiador sin su conocimiento ni consentimiento, y, por

tanto, sin eficacia juridica contra el.

4. El Juzgado erro al no apreciar que el demandado Rafael Palma, como fiador, ha

quedado eximido de su obligacion no solo por efecto de la novacion hecha sin su
conocimiento ni consentimiento, sino tambien por efecto de la aceptacion por el banco
de los bienes inmuebles de los deudores P. y F. Jacinto, en pago de deuda.

It is to be noted that Palma filed no separate answer nor special defenses available to him as
guarantor but merely joined in the answer of his codefendants pleading that the bank had been
fully paid. It should be noted too that the execution which was issued under the judgment of
December 15, 1924, and under which said parcels of land were sold on April 18, 1925, was
directed solely against the principal debtors, Perfecto and Felipe Jacinto, Palma not being
mentioned therein.

Under his first and second assignments of error, the appellant argues that when the bank
acquired said properties at the sheriff's sale on April 18, 1925, for the sum of P15,045, it paid
much less than they were worth, in view of the fact that they yielded an annual revenue of
P10,560; and this is further established by the fact that the bank on August 16, 1928, sold and
conveyed said parcels to Gregorio Syquia for the sum of P45,000. Exhibits 2-A and 2-Bare
copies of pages of the "libro de diversas cuentas" of the bank, upon which appears the account
of Perfecto and Felipe Jacinto and Rafael Palma. From these it appears that after the sale by
the bank to Syquia, said account was marked as balanced and closed. From these facts the
appellant contends that the principal debtors, and therefore the guarantor, were discharged from
further liability on the judgment; and that being true, Syquia acquired nothing by the assignment
of the judgment to him by the bank. In strict law, it is obvious that the plea that the defendants
has paid their debt cannot be sustained. Indeed the appellant himself in arguing his first and
second assignments of error invokes the equitable principle that no person should enrich
himself unjustly at the expense of another. Clearly this equitable principle has no application to
a legally conducted sheriff's sale. The appellant does not question the regularity of the sale. A
purchaser at a sheriff's sale, when his title has once become vested, may dispose of the
property for such consideration as he sees fit or as he can obtain. The rule which the appellant
asks us to introduce into our jurisprudence with regard to sheriff's sales would cast such a doubt
upon such sales that bidders would abstain therefrom and even judgment creditors would offer
less, all to the prejudice of judgment debtors. The Code of Civil Procedure goes far in protecting
the judgment debtor. He may prevent the sale of the property on execution (sec. 456); or he
may redeem it from the purchaser at any time within twelve months after the sale(sec. 465). In
the instant case, although it was alleged the property was sold for greatly below its value, the
defendants did not exercise any right of redemption. We hold, therefore, that the judgment debt
in its entirety was not discharged before the action for the revival of the judgment was brought.

However, the majority of the court are of the opinion that there should be credited upon the
judgment for the benefit of the guarantor alone the sum of P10,560, being the revenues
collected and retained during the year of redemption by Gregorio Syquia from said properties,
according to the testimony of Perfecto Jacinto (t.s.n., 19, 20,22). This conclusion is based on
the interpretation given to the provisions of the Code of Civil Procedure by this court in the
cases of Pabico vs. Ong Pauco (43 Phil., 572); Flores vs. Lim (50 Phil. 738); Powell vs. National
Bank (54 Phil., 54). It is view of the writer that this defense so far as the guarantor is concerned
is premature.
 105

In his brief and upon the oral argument the appellant has pressed upon our attention several
defenses available to guarantors under our law which, he claims, entitle him to a reversal of the
judgment. With reference to all these defences, it suffices to say that it is conceded that Palma
as guarantor is still entitled to the benefits of articles 1830,1832 and 1852 of the Civil Code. Up
to the present, the judgment creditor has made no demand on Palma. Joining him in the suit
against the principal debtor is not the demand intended articles 1832 of the Civil Code. That
demand can be made only after judgment on the debt, for obviously the "exhaustion of the
principal's property" — the benefit of which the guarantor claims — cannot even begin to take
place before judgment has been obtained. Only then can the creditor "levy upon the property of
the principal" — only then can the liability of the creditor begin under article 1833 of the Civil
Code. It would be absurd and futile to point out "saleable property of the debtor" at the inception
of the suit, when it cannot be seized or sold, and require the creditor to make a "levy" upon it.

There is no competent evidence that the principal debtors, Perfecto and Felipe Jacinto, are
insolvent — even if they were now, there can be no certainty that they may not be in funds when
an exemption on the revived judgment is issued. So far as this record shows, the judgment
creditor has not exhausted his remedies against the principal debtors and he is still looking to
them for payment. It is not for the guarantor to anticipate that there will be a return of nulla
bona on the execution, when and if issued. Nor is it for him to anticipate a demand on him under
article 1832 and to offer defences thereto which have not matured. The occasion for these
defences may never arise. The present revived judgment could not therefore be res judicata as
to such future defences. The revived judgment does not foreclose any defence which the
guarantor may raise when "demand for payment" is made on him. Indeed, he cannot claim the
benefits of articles 1830, 1832, 1834 and 1852 of the Civil Code before demand is made on him;
they are all available to him only after "demand for payment" (art. 1832).

The appellant's defences may be all be considered when they are property presented at the
proper time. The case which he now presents, in anticipation of a demand which has not yet
been made, is purely hypothetical. The courts do not undertake to decide hypothetical cases.

It results that the judgment appealed from must be modified in the sense that Rafael Palma as
guarantor maybe held contingently liable only in the sum of P3,034.24 under said judgment,
which is in all other respects affirmed, without special pronouncement as to costs in this
instance.

Street, J., concurs.

Republic of the Philippines

SUPREME COURT
Manila

SECOND DIVISION

G.R. No. L-48820 May 25, 1979

MALAYAN INSURANCE CO., INC., petitioner,

vs.
HON. EMILIO V. SALAS, as Presiding Judge, Court of First Instance of Rizal, Branch I,
Pasig, Metro Manila, ROSENDO FERNANDO and JOHN DOE, respondents.
 106

Angara, Abello, Concepcion, Regata & Cruz for petitioner.

Lazaro, Abinoja & Associates for private respondents.

AQUINO, J.:

This case is about the surety company's liability on its replevin bond which was not included in
the final judgment against the principal in the bond. It is undisputed that in 1970 Makati Motor
Sales, Inc., as vendor mortgagee, sued Rosendo Fernando for the recovery of four diesel trucks
and the connection of the balance of his obligation plus damages (Civil Case No. 13874, Court
of First Instance of Rizal, Pasig Branch 1).

To obtain immediate possession of the trucks pending trial, Makati Motors Sales, Inc. posted a
replevin bond executed by the Malayan Insurance Co., Inc. In that bond the surety bound itself
to pay P362,775.92 "for the return of the property to the defendant, if the return thereof be
adjudged, and for the payment of such sum as may in the cause be recovered against the
plaintiff ". Pursuant to the order of the court, the sheriff seized the four trucks. Later, two of the
trucks were returned to Fernando.

After trial, or on March 2, 1973, the lower court rendered judgment ordering Makati Motor Sales,
Inc. to return to Fernando the other two trucks and to pay him for the seizure of each of them,
damages in the sum of three hundred pesos daily from September 25 and 26, 1970 (or six
hundred pesos for the two trucks from the latter date) until their return to Fernando plus P26,000
as actual and moral damages.

In turn, Fernando was ordered to pay Makati Motor Sales, Inc. the sum of P66,998.34, as the
balance of the price of the two trucks, with twelve percent interest from February 28, 1969 until
fully paid and the further sum of P15,730.20 as the cost of the repair with six percent interest
from September 11, 1970 until fully paid.

Makati Motor Sales, Inc. appealed to the Court of Appeals. It affirmed the lower court's
judgment in its decision of March 1, 1977 in CA-G. R. No. 54196-R.

Meanwhile, on May 11, 1973, or before the elevation of the record to the Court of Appeals,
Fernando filed in the trial court an application for damages against the replevin bond. It was
opposed by the surety on the ground that the trial court had lost jurisdiction over the case
because of the perfection of the appeal. The trial court denied the application on June 28, 1973.

On May 27, 1974 Fernando filed in the Court of Appeals his claim for damages against the
replevin bond. He prayed that the same be included in the judgment. The surety, which was
furnished with a copy of the claim, filed an opposition to it.

The Court of Appeals did not act immediately on that claim but in its 1977 decision it observed
that Fernando's motion or claim "was correct" and it ordered that his claim against Malayan
Insurance Co., Inc. "be heard before the trial court". That decision affirming the lower court's
judgment became final and executory on March 18, 1977.
 107

On April 6, 1977, or after the remand of the record to the trial court, Fernando filed a motion to
set for hearing his application for damages against the surety on its replevin bond. The
application was heard with notice to Makati Motor Sales, Inc. and Malayan Insurance Co., Inc.
Fernando submitted documentary evidence. On December 15, 1977 Malayan Insurance Co.,
Inc. moved to quash the proceeding regarding the claim for damages. It contended that the trial
court has no jurisdiction to alter or modify the final judgment of the Court of Appeals.

The trial court in its order of July 14, 1978 denied the motion to quash. It directed Malayan
Insurance Co., Inc. to pay Fernando the damages which it had adjudged against Makati Motor
Sales, Inc. The surety company appealed from that order to this Court pursuant to Republic Act
No. 5440.

Section 10, Rule 60 of the Rules of Court provides that in replevin cases, as in receivership and
injunction cases, the damages "to be awarded to either party upon any bond filed by the other"
"shall be claimed, ascertained, and granted" in accordance with section 20 of Rule 57 which
reads:

SEC. 20. Claim for damages on account of illegal attachment. — If the judgment
on the action be in favor of the party against whom attachment was issued, he
may recover, upon the bond given or deposit made by the attaching creditor, any
damages resulting from the attachment. Such damages may be awarded only
upon application and after proper hearing, and shall be included in the final
judgment. The application must be filed before the trial or before appeal is
perfected or before the judgment becomes executory, with due notice to the
attaching creditor and his surety or sureties, setting forth the facts showing his
right to damages and the amount thereof.

If the judgment of the appellate court be favorable to the party against whom the
attachment was issued, he must claim damages sustained during the pendency
of the appeal by filing an application with notice to the party in whose favor the
attachment was issued or his surety or sureties, before the judgment of the
appellate court becomes executory. The appellate court may allow the
application to be heard and decided by the trial court.

Under section 20, in order to recover damages on a replevin bond (or on a bond for preliminary
attachment, injunction or receivership) it is necessary (1) that the defendant-claimant has
secured a favorable judgment in the main action, meaning that the plaintiff has no cause of
action and was not, therefore, entitled to the provisional remedy of replevin; (2) that the
application for damages, showing claimant's right thereto and the amount thereof, be filed in the
same action before trial or before appeal is perfected or before the judgment becomes
executory; (3) that due notice be given to the other party and his surety or sureties, notice to the
principal not being sufficient and (4) that there should be a proper hearing and the award for
damages should be included in the final judgment (Luneta Motor Co. vs. Menendez 117 Phil.
970, 974; 3 Moran's Comments on the Rules of Court, 1970 Ed., pp. 54-56. See Cruz vs. Manila
Surety & Fidelity Co., Inc., 92 Phil. 699).

In this appeal, Malayan Insurance Co., Inc. contends that the trial court's judgment against it is
not warranted under section 20 of Rule 57. It assails the trial court's competence to render
judgment against the surety after the decision of the Court of Appeals against the surety's
principal had become final and executory.
 108

We hold that the trial court has jurisdiction to pass upon Fernando's application for the recovery
of damages on the surety's replevin bond. The reason is that Fernando seasonably filed his
application for damages in the Court of Appeals. It was not his fault that the damages claimed
by him against the surety were not included in the judgment of the Court of Appeals affirming
the trial court's award of damages to Fernando payable by the principal in the replevin bond.
The peculiar factual situation of this case makes it an exception to the settled rule that the
surety's liability for damages should be included in the final judgment to prevent duplicity of suits
or proceedings.

As may be gathered from section 20 of Rule 57, the application for damages against the surety
must be filed (with notice to the surety) in the Court of First Instance before the trial or before
appeal is perfected or before the judgment becomes executory.

If an appeal is taken, the application must be filed in the appellate court but always before the
judgment of that court becomes executory so that the award may be included in its judgment
(Luneta Motor Co. vs. Menendez 117 Phil. 970, 976).

But it is not always mandatory that the appellate court should include in its judgment the award
of damages against the surety. Thus, it was held that where the application for damages against
the surety is seasonably made in the appellate court, "the latter must either proceed to hear and
decide the application or refer "it" to the trial court and allow it to hear and decide the
same"(Rivera vs. Talavera, 112 Phil. 209, 219).

We have stated earlier that in the instant case Fernando in 1974 made a timely claim in the
Court of Appeals for an award of damages against Malayan Insurance Co., Inc. enforceable
against its replevin bond. The surety was notified of that application. It registered an opposition
to the claim. The Court of Appeals did not resolve the claim immediately but in its 1977 decision
it directed the trial court to hear that claim.

Obviously, the lower court has no choice but to implement that directive which is the law of the
case (See Compagnie Franco Indochinoise vs. Deutsch, etc., 39 Phil. 474, 476).

However, the trial court's implementation of that directive was incorrect. It set the claim for
hearing but the surety assailed its jurisdiction and did not consider itself bound by the mandate
of the appellate court. The merits of the claim for damages were not threshed out at the hearing
because the surety stood pat on its contention that the trial court has no jurisdiction to allow the
claim in view of the finality of the decision of the Court of Appeals.

This Court has held that, if the surety was not given notice when the claim for damages against
the principal in the replevin bond was heard, then as a matter of procedural due process the
surety is entitled to be heard when the judgment for damages against the principal is sought to
be enforced against the surety's replevin bond.

The hearing win be summary and win be limited to such new defense, not previously set up by
the principal, as the surety may allege and offer to prove. The oral proof of damages already
adduced by the claimant may be reproduced without the necessity of retaking the testimony, but
the surety should be given an opportunity to cross-examine the witness or witnesses if it so
desires." That procedure would forestall the perpetration of fraud or collusion against the surety
(Visayan Surety and Insurance Corporation vs. Pascual, 85 Phil. 779, 785-786).
 109

Inasmuch as in this case appellant Malayan Insurance Co., Inc. was not given the summary
hearing during which it could contest the reality or reasonableness of Fernando's claim for
damages, we have to set aside the trial court's order awarding damages against it and, in the
interest of justice, give it another opportunity to be heard on the merits of Fernando's claim for
damages.

Before closing, it may be useful to make a review and synthesis of the copious jurisprudence on
the surety's liability in attachment, injunction, replevin and receivership bonds. It was observed
in one case that once upon a time the rulings on that point were in a muddled state.

Section 20 of Rule 57 is a revised version of section 20, Rule 59 of the 1940 Rules of Court
which earlier section 20 is a restatement of this Court's rulings under sections 170, 177, 223,
272 and 439 of the Code of Civil Procedure regarding the damages recoverable in case of the
wrongful issuance of the writs of preliminary injunction, attachment, mandamus and replevin
and the appointment of a receiver.

Section 170 contains the provision that the damages suffered in connection with the issuance of
a preliminary injunction shall be ascertained by the court trying the action (meaning the court
where the action is pending) and shall be included in the final judgment "against the plaintiff and
against the sureties". As to damages in case of wrongful attachment, see section 439 of the
Code of Civil Procedure and Belzunce vs. Fernandez, 10 Phil. 452.

So, as held under the Code of Civil Procedure, if the preliminary injunction was issued by this
Court, the specification of damages should be filed in this Court. The petitioner and his
bondsmen should be served with copies of the specification (Somes vs. Crossfield, 9 Phil. 13
and Macatangay vs. Municipality of San Juan de Bocboc, 9 Phil. 19).

On the other hand, under section 439 of the Code of Civil Procedure, the damages caused by a
wrongful attachment may be adjudicated in a summary hearing but the better practice would be
to claim the damages in the answer and to offer evidence in support thereof during the trial
(Gasataya vs. Fallon 32 Phil. 245 and Raymundo vs. Carpio, 33 Phil. 395).

Note that under the second paragraph of section 20, Rule 57 of the present Rules of Court, the
damages suffered during the pendency of an appeal in a case where the writs of attachment,
injunction and replevin or an order of receivership were issued should be claimed in the
appellate court.

There is an old ruling that the sureties in an injunction bond are bound by a judgment for
damages against their principal even if the sureties were not heard at the time the claim for
damages was tried. The reason for that ruling is that the sureties in an injunction bond "assume
such a connection with the suit that they are included by a judgment in it in a suit at law upon
the bond, so far as the same issues are involved; and that, upon the entry of a judgment against
the principal, their liability is absolute" (Florentino vs. Domadag, 45 O.G. 4937, 81 Phil. 882).

Also, it was held that if damages were awarded against the principal in a replevin bond without
notice to the surety, that final judgment may be enforced against the surety after it has been
given an opportunity to be heard as to the reality or reasonableness of the alleged damages. In
such a case, the trial court must order the surety to show cause why the bond should not
answer for the judgment for damages. The hearing is summary and the surety may cross-
 110

examine the witnesses presented by the defendant (Visayan Surety & Insurance Corporation
vs. Pascual, 85 Phil 779).

Insofar as those rulings in the Florentino and Visayan Surety cases allowed a claim for
damages against the surety to be ventilated in a separate proceeding or after the finality of the
judgment for damages against the principal in the bond, those rulings were jettisoned and
abandoned in several subsequent cases because they are contrary to the explicit provision of
section 20 of Rule 59, now Rule 57, that the judgment for damages against the surety should be
included in the final judgment to avoid additional proceedings (Cruz vs. Manila Surety & Fidelity
Co., Inc., 92 Phil. 699; Japco vs. City of Manila, 48 Phil. 851, 855).

The damages are recoverable on the theory that an actionable wrong was committed by the
losing party. The recovery is limited to the amount of the bond (Pacis vs. Commission on
Elections, L-29026, August 22, 1969, 29 SCRA 24, 29).

The usual procedure is to file an application for damages with due notice to the other party and
his sureties. The other part may answer the application. Upon the issues thus being Joined, the
matter will be tried and determined. A court order declaring the bond confiscated without
adhering to that procedure is void ( Fabella vs. Tancinco 86 Phil. 543; Luzon Sureo Inc.
Guerrero, L-20705, June 20, 1966. 17 SCRA 100).

The claim for damages against the surety should be made it notice to the surety and before the
judgment against the principal becomes executory. The liability of the surety should be included
in the final judgment. That remedy is exclusive. If riot assailed of, the surety is released (Curilan
vs. Court of Appeals, 105 Phil. 1160 and De la Rama vs. Villarosa, 118 Phil. 42-1. 430:
Jesswani vs. Dialdas 91 Phil. 915: Estioco vs. Hamada, 103 Phil. 1145).

Therefore, the prevailing settled rule is that a court has no jurisdiction to entertain any
proceeding seeking to hold a surety upon its bond if such surety has not been given notice the
claim for damages against the principal and the judgment holding the latter liable has already
become executor (People's Surety & Insurance Co., Inc. vs. Court of Appeals, L-21627. June
29, 1961, 20 SCRA 481).

If the judgment awarding damages against the principal in a bond for the lifting of a preliminary
injunction had already become executory, that claim cannot be pressed against the surety by
setting it for hearing with notice to the surety. The failure to notify the surety of the claim for
damages against the principal relieves the surety from any liability on his bond (Sy vs. Ceniza,
115 Phil. 396; Pacis vs. Commission on Elections, L-29026, August 22, 1969, 29 SCRA 24; Dee
vs. Masloff, 116 Phil. 412).

To entertain the belated claim against the surety after the judgment for damages against the
principal has become executory would result in the alteration of that judgment. That should not
be done (De Guia vs. Alto Surety & Insurance Co., Inc., 117 Phil. 434; Visayan Surety &
Insurance Co., Inc. vs. De Aquino, 96 P1. 900; Port Motors, Inc. vs. Raposas and Alto Surety &
Insurance Co., Inc., 100 Phil. 732; Gerardo vs. Plaridel Surety & Insurance Co., Inc., 100 Phil.
178; Luneta Motor Co. vs. Lopez, 105 Phil. 327; Curilan vs. Court of Appeals, 105 Phil. 1160;
Riel vs. Lacson, 104 Phil. 1055).

Moreover, the damages claimed by the defendant should be pleaded as a compulsory

counterclaim in his answer. Hence, a separate action to claim those damages is unwarranted
 111

(Ty Tion and Yu vs. Marsman & Co. and Alpha Insurance & Surety Co., Inc., 115 Phil. 746, 749;
Medina vs. Maderera del Norte de Catanduanes, Inc., 51 Phil. 240; Nueva-España vs.
Montelibano, 58 Phil. 807; Tan Suyco vs. Javier, 21 Phil. 82).

It may be noted that in the Visayan Surety case, 85 Phil 779, Visayan Surety & Insurance
Corporation filed a replevin bond for one Yu Sip who sued Victoria Pascual for the recovery of a
truck. The trial court found that the writ of replevin was wrongfully procured, that Victoria
Pascual was the lawful owner of the truck and that she suffered damages on account of its
wrongful seizure by the sheriff at the instance of plaintiff Yu Sip.

The trial court ordered Yu Sip to return the truck to Victoria Pascual or to pay its value of P2,300
in case of his inability to return it and, in either case, to pay thirty pesos daily from January 6,
1947 up to the date of the return of the truck or until its value was fully paid. The Court of
Appeals affirmed that judgment.

After the return of the record to the trial court, Victoria Pascual filed a "petition for execution of
the surety bond" wherein she prayed for a writ of execution against the surety to satisfy the
judgment out of its replevin bond. The surety opposed that petition. It contended that it was
never notified by Victoria Pascual regarding her presentation of evidence covering the damages
which she had suffered. The trial court granted the petition and ordered the issuance of a writ of
execution against the surety. That order was assailed in a certiorari in this Court.

It was held that the writ of execution should be set aside and that the surety should be given a
chance to be heard in a summary proceeding. That proceeding was conducted after the
judgment against Yu Sip, the principal in the replevin bond, had become final and executory.

What was done in the Visayan Surety case, as recounted above, was not allowed in subsequent
cases. Thus, in Manila Underwriters Insurance Co., Inc. vs. Tan, 107 Phil. 911, the trial court
rendered in 1954 a judgment dissolving the preliminary attachment and ordering the plaintiff to
pay the defendant the damages which the latter suffered by reason of the wrongful attachment.
The surety in the attachment bond was not notified of the hearing but it was furnished with a
copy of the decision.

In 1957 the Court of Appeals affirmed that judgment. After it became final, the defendant filed in
the trial court against the surety a motion for execution winch the latter opposed. At the hearing
of the motion, the defendant offered to reproduce the evidence which he had presented at the
trial. The offer was accepted by the trial court. It issued the writ of execution against the surety.

It was held that, because the surety was not notified of the hearing on the damages suffered by
the defendant in the manner prescribed in section 20 of Rule 59, now Rule 57, it was not liable
for damages under its attachment bond.

The surety is notified so that he may cross-examine the witnesses testifying as to the damages
and question the evidence presented by the claimant and interpose any appropriate defense
(Riel vs. Lacson, 104 Phil. 1055; Liberty Construction Supply Co. vs. Pecson, 89 Phil. 50).

So, if plaintiff's claim for damages resulting from the wrongful lifting of the writ of preliminary
injunction was awarded in the main decision without notice to the surety and the decision had
become executory, the failure to notify the surety on time relieves him from liability under the
bond (Alliance Insurance & Surety Co., Inc. vs. Piccio, 105 Phil. 1192).
 112

The surety may be held liable only if before the judgment for damages against the principal
becomes executory, an order is entered against him after a hearing with notice to him. After the
judgment becomes executory, it is too late to file such claim for damages with notice to the
surety (Abelow vs. Riva 105 Phil. 159; Visayan Surety & Insurance Corp. vs. Lacson, 96 Phil.
878).

Where the Court of Appeals dismissed a mandamus action originally filed in that court and
dissolved the preliminary injunction which it had issued and after entry of judgment was made
the record was remanded to the trial court, it was error for the Court of Appeals to allow the
respondent in that case to file a claim for damages against the principal and surety in the
injunction bond. The claim should have been filed before the judgment of dismissal became final
(Luzon Surety Co. Inc. vs. Court of Appeals, 108 Phil. 157).

Section 20 of Rule 57 contemplates one judgment for damages against the principal and the
surety in the injunction, replevin, attachment and receivership bonds. Since the judicial
bondsman has no right to demand the exhaustion of the property of the principal debtor, there is
no justification for entering separate judgments against them. The claim for damages against
the surety should be made before entry of judgment (Del Rosario vs. Nava, 95 Phil. 637).

In the Del Rosario case a judgment for damages was rendered against the principal in an
attachment bond but there was no notice to the surety of the claim for damages. That judgment
became final. After the execution against the principal was returned unsatisfied, the claimant
filed a motion praying that the surety company be required to show cause why it should not
answer for the judgment against the principal.

It was held that, while the prevailing party may apply for an award of damages against the
surety even after the award has already been obtained against the principal, nevertheless, in
order that all awards for damages may be included in the final judgment, the application and
notice to the surety must be made before the judgment against the principal becomes final and
executory.

In another case, it was held that as the winning party sought to hold the surety liable on its
replevin bond almost a year after the judgment of the Court of Appeals became final, the trial
court erred in enforcing its judgment against the surety. "The surety may only be held liable if,
before judgment becomes final, an order against the surety is entered after a hearing with notice
to the surety". The claim against the surety should be included in the final judgment. It is not
sufficient that the surety be afforded an opportunity to oppose the writ of execution. (Plaridel
Surety & Insurance Company vs. De los Angeles, L-25550, July 31, 1968, 24 SCRA 487).

After this Court's judgment dissolving a preliminary injunction had become final and executory, it
would be too late to entertain in the trial court the defendant's application for damages allegedly
caused by the injunction (Santos vs. Moir 36 Phil. 350).

The defendant in a replevin case cannot file a separate action for damages due to the wrongful
issuance of the writ. He should have claimed the damages as a counterclaim in the original
replevin suit (Pascua vs. Sideco 24 Phil. 26, Ty Tion and Yu vs. Marsman & Co. and Alpha Ins.
& Surety Co. Inc., 115 Phil. 746).
 113

A final judgment for damages against the principal in a replevin bond cannot be enforced
against the surety company which was not notified of the claim for damages and was not
afforded a chance to be heard (People's Surety and Ins. Co., Inc. vs. Aragon, 117 Phil, 257).

Where an injunction was dissolved and only attorney's fees and costs were adjudged against
the principal, and the procedure for claiming damages against the surety was not followed, no
recourse could be had against the injunction bond in case the writ of execution against the
principal was not satisfied. Moreover, the attorney's fees and costs could be recovered from the
principal even without the filing of the bond (People's Surety & Insurance Co., Inc. vs. Bayona,
103 Phil. 1109).

Where after the dismissal of a petition for relief from the judgment of a municipal court, the
Court of First Instance ordered ex parte the issuance of a writ of execution against the
petitioner's injunction bond, that order is void because there was no formal claim for damages
and there was no hearing with notice to the petitioner and his surety. The court should hold a
hearing. (Luzon Surety Co., Inc. vs. Guerrero, L-20705, June 20, 1966, 17 SCRA 400).

Where on June 11, 1959 an action to stop the foreclosure of a chattel mortgage was dismissed,
without prejudice, for failure to prosecute and, before that dismissal became final, the defendant
did not prove any damages resulting from the issuance of the preliminary injunction, defendant's
motion of September 7, 1959 praying that judgment be rendered against the surety's bond could
no longer be entertained. The claim for damages should have been made before entry of final
judgment. It must be duly substantiated at the proper hearing with notice to the surety (Jao and
Sia vs. Royal Financing Corporation, 114 Phil. 1152; Visayan Surety & Insurance Corp. vs.
Lacson, 96 Phil. 878).

If the case wherein the injunction was issued was dismissed for failure to prosecute and no
damages were awarded to the defendant by reason of the issuance of the injunction, it was
error for the trial court to issue a writ of execution against the surety since there was no claim
nor evidence of damages suffered the defendant. The order of dismissal did not include in final
of damages. (Vet Bros. and Co., Inc. vs. Movido 11 4 Phil, 211).

The case of Vadil vs. De Venecia, 118 Phil. 1217, involves a queer situation. Plaintiff
corporation in that case filed an action to recover a sum of money. It asked for a writ of
attachment. Before any attachment could be issued, the defendant filed a counterbond. But this
bond provided that the defendant and his sureties would pay "all damages that
the defendant (sic) may suffer by reason of" the attachment. In other words, the defendant
executed a bond in favor of himself.

Judgment was rendered for the plaintiff. As the execution was returned unsatisfied, the trial
court on plaintiff's motion ordered execution against defendant's bond. It was held that the
execution was wrongfully issued.

However, where an injunction was issued in a forcible entry case but on certiorari to the Court of
First Instance, the justice of the peace court was held to be without jurisdiction to entertain the
ejectment case, that ejectment suit is not considered dismissed and it may still be regarded as
pending in the justice of the peace court for the purpose of allowing the defendant's claim for
damages on the injunction bond (Cruz vs. Manila Surety & Fidelity Co., 92 Phil. 699).
 114

Section 10 of Rule 60 makes section 20 of Rule 57 applicable not only to the replevin bond but
also to the redelivery bond posted by the defendant for the lifting of the order of seizure. The
requisites for holding the surety liable on the replevin bond are also the requisites for holding the
surety hable on the redelivery bond. So, if the surety on the redelivery bond was not notified of
the plaintiff's claim for damages, the surety cannot be held liable on its redelivery bond for the
damages adjudged against the principal. It is necessary that the surety be notified and that its
liability be included in the final judgment against the principal (Luneta Motor Co. vs. Menendez
117 Phil. 970).

The writ of execution issued against the counterbond for the dissolution of an injunction is void if
it was issued without notice to the surety and after the judgment on the merits had become
executory. The surety's liability should have been included in the final judgment (Cajefe vs.
Fernandez, 109 Phil. 743).

If the judgment awarding damages against the principals in the counterbonds filed for the lifting
of the receivership was appealed to the Court of Appeals and the plaintiff-appellee filed in the
trial court (not in the appellate court) his application for damages against the sureties in the
counterbonds, the trial court cannot hear the said application after the record is remanded to it
because, by then, the decision of the appellate court had become final and the damages to be
awarded against the sureties could no longer be included in that judgment. The application for
damages against the sureties should have been filed in the Court of Appeals (Luneta Motor Co.
vs. Menendez 117 Phil. 970, 976).

The procedure in section 20 of Rule 57 should not be confounded with the procedure in section
17 of the same rule regarding the surety's liability on the counterbond for the lifting of the
preliminary attachment. Under section 17, the surety may be held liable after notice and
summary hearing conducted after the judgment had become executory and the execution was
returned unsatisfied (Towers Assurance Corporation vs. Ororama Supermart, L-45848,
November 9, 1977, 80 SCRA 262; Vanguard Assurance Corporation vs. Court of Appeals, L-
25921, May 27, 1975, 64 SCRA 148).

The case contemplated in section 17 of Rule 57 is different from the case envisaged in section
20 of that rule (Dizon vs. Valdes, L-23920, April 25, 1968, 23 SCRA 200; Visayan Surety &
Insurance Corp. vs. De Aquino, 96 Phil. 900).

Nor does section 20 of Rule 57 apply to cases where the surety bound himself to abide by the
judgment against his principal and thereby renounced his right to be sued or cited, or where the
surety guaranteed the return of certain goods and he did not raise the issue of lack of notice, or
where the sureties bound themselves to pay the plaintiff a definite amount (Aguasin vs.
Velasquez, 88 Phil. 357; Lawyers Cooperative Publishing Co. vs. Periquet, 71 Phil. 204;
Mercado vs. Macapayag and Pineda, 69 Phil. 403 cited in Alliance Insurance case, 105 Phil.
1201).

Note that a different rule also obtains with respect to the surety in the bond of an administrator
or executor The nature of a surety's obligation on an administrator's bond, which makes him
privy to the proceeding against his principal, is such that he is bound and concluded, in the
absence of fraud or collusion, by a judgment against his principal, even though the surety was
not a party to the proceedings (Laurente vs. Rizal Surety & Insurance Co., Inc., L-21250, March
31, 1966, 16 SCRA 551, citing Philippine Trust Co. vs. Luzon Surety Co., Inc., 112 Phil. 44. See
Cosme de Mendoza vs. Pacheco and Cordero, 64 Phil. 34).
 115

It should be underscored that in the instant case, although the surety's liability was not included
in the final judgment, which became executory, nevertheless, there was a timely application for
damages in the Court of Appeals which in its decision ordered the trial court to hear defendant-
appellee Fernando's claim for damages against the surety. That feature of the case removes it
from the coverage of the rule that the surety should be heard before the judgment becomes
executory and that his liability should be included in the final judgment.

WHEREFORE, we hold that the trial court has jurisdiction to comply with the directive of the
Court of Appeals but we reverse and set aside its order of July 14, 1978, requiring petitioner-
appellant Malayan Insurance Co., Inc. to pay the damages which it had adjudged against Makati
Motor Sales, Inc.

The trial court is required to hold a summary hearing wherein appellant surety should be given a
chance to contest the reality or reasonableness of respondent-appellee Rosendo Fernando's
claim for damages. After such hearing, or if the surety should waive it, the trial court should
render the proper judgment. No costs.

SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-22177 December 2, 1924

TUASON, TUASON, INC., plaintiff-appellee,

vs.
ANTONIO MACHUCA, defendant-appellant.

Marcaida, Capili & Ocampo for appellant.

Antonio M. Opisso for appellee.

AVANCEÑA, J.:

By giving a bond in the sum of P9,663 executed by "Manila Compañia de Seguros," the
Universal Trading Company was allowed by the Insular Collector of Custom to withdraw from
the customhouse sundry goods imported by it and consigned through the bank of the Philippine
Islands. Subsequently, the Bank of the Philippine Islands claimed the value of the goods, and
the Insular Collector of Customs obligated the "Manila Compañia de Seguros" to pay the sum of
P9,663, the amount of the bond. Before paying this amount to the Insular Collector of Customs,
the "Manila Compañia de Seguros" obtained from the Universal Trading Company and Tuason,
Tuason & Co., a solidary note for the sum of P9,663 executed by said companies in its favor.
Before signing said note, Tuason, Tuason & Co., in turn, caused the Universal Trading
Company and its president Antonio Machuca, personally, to sign a document (Exhibit B),
wherein they bound themselves solidarily to pay, reimburse, and refund to the company all such
 116

sums or amounts of money as it, or its representative, may pay or become bound to pay, upon
its obligation with "Manila Compañia de Seguros," whether or not it shall have actually paid such
sum or sums or any part thereof. The Universal Trading Company having been declared
insolvent, "Manila Compañia de Seguros" brought an action in the lower court against Tuason,
Tuason & Co. to recover the value of the note for P9,663 and obtained final judgment therein,
which was affirmed by this court on appeal, for the total sum of P12,197.27, which includes the
value of the note with interest thereon. 1 Subsequently, all the rights of Tuason, Tuason & Co.
were transferred to the plaintiff Tuason, Tuason, Inc.

Later on Tuason, Tuason, Inc., brought this action to recover of Antonio Machuca the sum of
P12,197.27 which it was sentenced to pay in the case filed against it by "Manila Compañia de
Seguros," plus P3,000 attorney's fees, and P155.92 court's costs and sheriff's fees, that is, a
total of P15,353.19, together with P1,180.46 as interest upon the sum of P15,353.19 at the rate
of 10 per cent per annum from October 8, 1922, to July 8, 1923, and interest on the sum of
P16,535.65 at the rate of 10 per cent from July 8, 1923, until this sum was paid, and, in addition
the sum of P1,653.65 for attorney's fees in this case. For its cause of action, the plaintiff alleges
that it had paid "Manila Compañia de Seguros" the sum of P12,197.27, the amount of the
judgment against it. The dispositive part of the judgment appealed from is as follows:itc-a1f

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

It appears from the evidence that what the plaintiff alleged to be a payment made to "Manila
Compañia de Seguros", for the satisfaction of the judgment rendered in favor of the latter is the
execution by Albina Tuason of a document Exhibit D in favor of "Manila Compañia de Seguros."
In this document Albina Tuason declares that she assumes and makes hers the obligation to
pay the amount of said judgment to "Manila Compañia de Seguros" within one year and
mortgages a property described in the document as security for this obligation. This obligation of
Albina Tuason was accepted by the "Manila Compañia de Seguros," in the following terms: "I
accept the foregoing security executed by Miss Albina Tuason in favor of `Manila Compañia de
Seguros.'" It, thus, appears that the plaintiff has not in fact paid the amount of the judgment to
"Manila Compañia de Seguros." The action brought by the plaintiff is that which surety, who
pays the debt of the debtor, is entitled to bring to recover the amount thus paid (art. 1823, Civil
Code). It is evidence that such a payment not having been made the alleged cause of action
does not exist.

The plaintiff company argues that, at all events, it is entitled to bring this action under article
1843 of the Civil Code, which provides that the surety may, even before making payment, bring
action against the principal debtor. This contention of the plaintiff is untenable. The present
 117

action, according to the terms of the complaint, is clearly based on the fact of payment. It is true
that, under article 1843, an action lies against the principal debtor even before the surety pays
the debt, but it clearly appears in the complaint that this is not the action brought by the plaintiff.
Moreover this article 1843 provided several cumulative remedies in favor of the surety, at his
election, and the surety who brings an action under this article must choose the remedy and
apply for it specifically. At any rate this article does not provide for the reimbursement of any
amount, as is sought by the plaintiff.lawphi1.net

But although the plaintiff has not as yet paid "Manila Compañia de Seguros" the amount of the
judgment against it, and even considering that this action cannot be held to come under article
1843 of the Civil Code, yet the plaintiff is entitled to the relief sought in view of the facts
established by the evidence. The plaintiff became bound, by virtue of a final judgment, to pay
the value of the note executed by it in favor of "Manila Compañia de Seguros." According to the
document executed solidarily by the defendant and the Universal Trading Company, the
defendant bound himself to pay the plaintiff as soon as the latter may have become bound and
liable, whether or not it shall have actually paid. It is indisputable that the plaintiff became bound
and liable by a final judgment to pay the value of the note to "Manila Compañia de Seguros."

The defendant also contends that the document executed by Albina Tuason in favor of "Manila
Compañia de Seguros" assuming and making hers the obligation of Tuason, Tuason & Co., was
a novation of the contract by substitution of the debtor, and relieved Tuason, Tuason & Co. from
all obligation in favor of "Manila Compañia de Seguros." As to this, it is enough to say that if this
was what Albina Tuason contemplated in signing the document, evidently it was not what
"Manila Compañia de Seguros" accepted. As above stated, "Manila Compañia de Seguros"
accepted this document only as additional security for its credit and not as a novation of the
contract.

Our conclusion is that the plaintiff has the right to recover of the defendant the sum of P9,663,
the value of the note executed by the plaintiff in favor of "Manila Compañia de Seguros" which
the plaintiff is under obligation to pay by virtue of final judgment. We do not believe, however,
that the defendant must pay the plaintiff the expenses incurred by it in the litigation between it
and "Manila Compañia de Seguros." That litigation was originated by the plaintiff having failed to
fulfill its obligation with "Manila Compañia de Seguros," and it cannot charge the defendant with
expenses which it was compelled to make by reason of its own fault. It is entitled, however, to
the expenses incurred by it in this action brought against the defendant, which are fixed at
P1,653.65 as attorney's fees.

The judgment appealed from is modified, and the defendant is sentenced to pay the plaintiff the
sum of P9,663, with interest thereon at the rate of 10 per cent per annum from July 19, 1923,
when the complaint was filed until full payment thereof, plus the sum of P1,653.65 for attorney's
fees, without special pronouncement as to costs. So ordered.
 118

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-16550 January 31, 1962

ALLEN McCONN, plaintiff-appellant,

vs.
PAUL HARAGAN, ET AL., defendants,
ASSOCIATE INSURANCE and SURETY CO., INC., defendant-appellee.

Jose Desiderio, Jr., Andres E. Matias and Juan C. Nabong, Jr. for plaintiff-appellant.
M. Perez Cardenas for defendant-appellee.

CONCEPCION, J.:

On June 30, 1955 — pending hearing of Civil Case No. 24790 of the Court of First Instance of
Manila, entitled "Morris McConn v. Paul Haragan", which was scheduled to take place on
September 16, 1955 — the Bureau of Immigration advised said court that defendant Paul
Haragan had applied for an immigration clearance and a re-entry permit to enable him to leave
the Philippines for 15 days only and requested information whether the court had any objection
thereto. By an order dated July 11, 1955, the court required Haragan to file a bond of P4,000 "to
answer for his return to the Philippines and the prosecution of his case against him, with the
understanding, that upon his failure to return, said bond will answer pro tanto for any judgment
that may be rendered against him". Thereupon, or on July 12, 1955, Haragan submitted a bond,
subcribed by him and the Associated Insurance & Surety Co., as principal and surety,
respectively, reading: .

WHEREAS, the above-bounden PRINCIPAL, is intending to leave the Philippines on a

business trip to Hongkong and Tokyo, Japan, for a period of thirty (30) days from date of
his departure, in connection with his business;

WHEREAS, the above-bounden PRINCIPAL, has a pending case before the Court of
First Instance of Manila, Branch III, entitled: "Allen McConn, Plaintiff, vs. Paul Haragan,
Defendant", Civil Case No. 24790, which is scheduled for hearing on September 16,
1955;

WHEREAS, before the above-bounden PRINCIPAL could leave the Philippines for
Hongkong and Tokyo, Japan, the above-mentioned Court has required him to post a
Surety Bond, in the amount of PESOS FOUR THOUSAND ONLY (P4,000.00) Philippine
Currency, the guarantee that he will return to the Philippines on or before September 16,
1955;

NOW, THEREFORE, for and in consideration of the above premises, the PRINCIPAL
and the SURETY, hereby bind themselves, jointly and severally, in favor of the Republic
of the Philippines, or its authorized representatives, in the sum of PESOS FOUR
THOUSAND ONLY (P4,000.00) Philippine Currency, that the herein PRINCIPAL will
 119

return to the Philippines on or before September 16, 1955 and that should he fail to do
so, said bond will answer pro tanto for any judgment that may be rendered against him.

Soon thereafter, or on July 19, 1955, the court issued an order stating that "in view of said bond,
it would have no objection" to Haragan's "departure from the Philippines for a short stay abroad"
and that "formal leave" was thereby given him. On the date set for the hearing of the case,
Haragan's counsel moved for continuance, whereupon, the hearing was postponed to
November 14, 1955. On the date last mentioned, the same counsel informed the court that
Haragan had been unable to return to the Philippines because the Philippine Consulate in
Hongkong had advised Haragan of a communication from our Department of Foreign Affairs
banning him from returning to the Philippines. The court then postponed the hearing to January
6, 1956. Subsequently, Herbert T. Fallis was impleaded as defendant and, later on, one
Inocencio Ortiz Luis Jr. was allowed to intervene. In due course, thereafter, or on February 19,
1959, the court rendered judgment, which, inter alia, sentenced Haragan to pay to plaintiff the
sum of P5,500, with 6% interest thereon from December 8, 1954, until full payment, plus P1,000
as attorney's fees and costs. After this judgment had become final and executory, plaintiff
moved for the execution of the aforementioned bond to satisfy said judgment against Haragan.
The surety company objected thereto upon several grounds and, after due hearing, the lower
court issued an order dated October 13, 1959, releasing said company from liability under the
bond aforementioned and denying plaintiff's motion. A reconsideration of this order having been
denied, the case is now before us on record on appeal filed by the plaintiff.1äwphï1.ñët

The issue is whether the Surety Company is liable to plaintiff under the bond quoted above, in
view of the failure of Haragan to return to the Philippines. The lower court decided the issue in
the negative upon the following ground: .

... A careful reading of the surety bond, Exhibit F, indicates that the surety's principal
commitment is 'to guarantee that he (Haragan) will return to the Philippines on or before
September 16, 1955' (See the third 'Whereas'). In the last paragraph of said surety bond,
Exhibit F, it appears that said bond was executed in favor of the Republic of the
Philippines or its duly authorized representatives to guarantee 'thatthe herein principal
(Haragan) will return to the Philippines on or before September 16, 1955 and that should
he fail to do so, said bond will answer pro tanto for any judgment that may be rendered
against him.' As the terms of the bond so state, it appears clearly that the bond will only
answer for the judgment which may be rendered against defendant, should he
(defendant Haragan) fail to return to the Philippines. In other words, if defendant
Haragan should return to the Philippines on or before September 16, 1955, said bond
will not answer for the judgment. It is now the contention of the Associated Insurance
that since it was the Republic of the Philippines (obligee under the bond) who rendered
the return of defendantHaragan to the Philippines impossible, said surety company is
thereby released from its obligation, and cites in support thereof Articles 1266 and 2076
of the New Civil Code. Upon a consideration of this contention, the Court finds it tenable
and well grounded, for as the surety company has so well stated 'where the principal
obligation (of returning to the Philippines) has been extinguished by the action of the
obligee, Philippine Government in preventing such return, the accessory obligation of the
surety is likewise extinguished and the bond released of its liability.' Paraphrasing the
last paragraph of the bond in a negative way, it will read thus: 'should he (not) fail to do
so, said bond will (not) answer pro tanto for any judgment that may be rendered against
him.
 120

We are fully in agreement with the foregoing view, which is in accord with the principle that:

The debtor in obligation to do shall also be released when the prestationbecomes legally
or physically impossible without the fault of the obligor. (Article 1266, Civil Code of the
Philippines.).

Thus, in Tabora vs. Lazatin, (G.R. No. L-5245, May 29, 1953), we said:

This Court finds that despite his efforts to secure the necessary building permit for the
reconstruction, he failed because of the disapproval or unfavorable attitude of the Urban
Planning Commission toward reconstruction unless they conformed to the plan of
widening the city streets. Finding that defendant had done all he could to secure the
permit and to comply with his obligations, but because of the refusal of the government
authorities to issue said permit, he failed to fulfill his undertaking, he should be absolved
and released from said obligation.

To same effect, substantially, is the decision of this Court in House vs. De La Costa (40 Off.
Gaz. [3 S] 47).

WHEREFORE, the order appealed from is hereby affirmed, with the costs of this instance
against plaintiff-appellant. It is so ordered.

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-21109 June 26, 1967

NATIONAL SHIPYARDS & STEEL CORPORATION, plaintiff-appellee,

vs.
CARIDAD J. TORRENTO and MUTUAL SECURITY INSURANCE
CORPORATION, defendants-appellants.

Manuel A. Cammayo for defendants-appellants.

Augusto D. Trinidad for plaintiff-appellee.

MAKALINTAL, J.:

On December 5, 1958 defendant Caridad J. Torrento applied with the National Shipyards &
Steel Corporation (hereinafter referred to as NASSCO) for the purchase on credit of 60 tons of
steel bars, 3/8" deformed or plain, at P430.00 per ton, for a 120-day period.

A contract of purchase and sale was executed on January 13, 1959, but was subsequently
amended when plaintiff exhausted its stock of 3/8" plain steel bars. As amended, the quantity of
steel bars stated to be 60 metric tons in the original contract was changed to 59.31 metric tons;
the price was changed from P430.00 to P435.00 per metric ton; and the specification of the
steel bars was also changed from "plain, round or corrugated" to "deformed."
 121

Pursuant to the stipulation in the contract that the value of steel bars sold to defendant Torrento
should be secured by a surety bond issued by a reputable bonding company, defendant
Torrento as principal and Mutual Security Insurance Corporation, as surety executed in favor of
plaintiff a surety bond (S. 1754) on January 23, 1960. When it was noted that the undertaking
under the bond was only P25,000.00, whereas the contract called for the payment of
P25,800.00, defendant surety executed a supplemental bond increasing the amount of
P25,800.00.

On February 6, 1959, when NASSCO could no longer supply the steel bars called for in the
contract of purchase and sale inasmuch as its stock of 3/8" deformed steel bars had been
exhausted, the plaintiff and defendant Torrento executed a supplemental agreement, the
pertinent provisions of which read:

. . . Whereas the NASSCO has agreed to sell to the vendee and the vendee has agreed
to buy from the NASSCO . . . Fifty Nine and thirty one hundredths (59-31) metric tons of
steel bars on credit basis for size and price as follows:

3/8 deformed 20 ft or

30 ft. at P435.00 per tons

Whereas, after consummation of said contract, only the following amount of steel bars were
delivered to the vendee, as follows:

20-67 M.T. 3/8" deformed

and that there were no more available stock of steel bars of size 3/8" x 20' or 30' deformed.

Now therefore, for and in consideration of the foregoing premises, the parties hereby agree to
modify and/or amend their said contract as follows:

1. That the NASSCO shall sell to the vendee and the vendee shall buy from the NASSCO,
38.50 tons of steel bars on credit basis subject to availability of stock in the following sizes and
prices, to wit:

25 M.T. — 1/2" x 30 deformed at P440.00 per ton.

13.50 M.T. — 5/8" x 30 deformed at P430.00 per ton

2. That aside from the above amendment and/or modification, the said contract shall not be
affected, altered, or modified in any way.

Pursuant to the contract of purchase and sale and the supplemental contract, NASSCO
delivered to defendant Torrento steel bars in the total value of P25,794.09. The 120-day period
for payment lapsed. Demand letters were sent, but defendant surety made no reply. Defendant
Torrento did not question her liability, but only asked for a 3-month extension to settle her
account.
 122

Action was brought to recover the unpaid contract price from defendant Torrento and her surety.
On October 18, 1960, the lower court rendered judgment: "ordering the defendants, jointly and
severally, to pay the plaintiff the sum of P25,794.09, with interest thereon at the rate of 12% per
annum, from August 29, 1959 until full payment, and the costs of suit. On the cross-claim,
judgment is hereby rendered, ordering the cross-defendant Caridad J. Torrento to pay the
cross-plaintiff Mutual Security Insurance Corporation whatever sums the latter would pay the
plaintiff by virtue of this judgment, with interest thereon at the rate of 12% per annum, from the
date of payment to plaintiff, until full payment, and the costs of this suit."

Defendants interposed an appeal to the Court of Appeals, which later on certified the case to Us
on the ground that the errors assigned raise only questions of law.

Appellant Torrento maintains that plaintiff has no cause of action against her for the reason that
inasmuch as she had paid the corresponding premium on the surety bond, the right of action, in
case of her default, is exclusively against her surety. Further, with respect to the cross-claim of
the Surety, Torrento claims that it was error for the lower court to take cognizance of the same
even before payment by said surety to NASSCO had been made. In other words, Torrento
argues that the cause of action alleged in the cross-claim does not arise until after payment has
been made by the surety to the plaintiff.

We find both arguments without merit. The surety bond (Exhibits C and C-1) states in very clear
terms that both principal and surety are held and firmly bound unto the NASSCO in the sum of
P25,800.00 for the payment of which they bind themselves, jointly and severally. "If a person
binds himself solidarity with the principal debtor, . . . the contract is called suretyship" (Art. 2047,
C.C.) in which case the provisions of the Civil Code with respect to joint and solidary obligations
apply; and Article 1216 of the Civil Code provides that "the creditor may proceed against any of
the solidary debtors or all of them simultaneously. . . ." It has been repeatedly held that although
as a rule sureties . . . are only subsidiarily liable for an obligation, nevertheless, if they bind
themselves jointly and severally, or in solidum, with the principal debtor, the creditor may bring
an action against anyone of them, either alone or together with the principal debtor (Molina vs.
de la Riva, 7 Phil. 345; Chinese Chamber vs. Pua Te Ching, 16 Phil. 406; La Yebana vs.
Valenzuela, 67 Phil. 482; Chunaco vs. Tria, 63 Phil. 500).

With respect to the contention that the lower court erred in taking cognizance of the surety's
cross-claim, suffice it to say that this point was not raised in the court a quo and, consequently
may not be raised for the first time on appeal. Besides, as the lower court also stated in its
decision, "defendant Torrento made no effort to dispute this (cross-claim) of defendant surety
and did not even bother to cross-examine the witness who identified the said indemnity
agreement," which is the basis of the cross-claim.1äwphï1.ñët

For its part, appellant surety company maintains that the execution of the supplemental
agreement of February 6, 1959 without its knowledge and consent released it from any liability
under the surety bond as there was a material alteration of the principal contract. We find the
contention without merit. The court a quo analyzed the factual set-up as follow:

x x x An examination and comparison of the contract and the supplemental agreement

will reveal that the only change or alteration consists of the following: Instead of the
original stipulation for the purchase and sale of 3/8, 20' or 30', deformed steel bars, at
P435.00 per ton, which kind of steel bars were no longer available in stock, the
supplemental agreement provides for the sale by the plaintiff to defendant Torrento of
 123

other sizes of deformed steel bars at prices of P430.00 and P440.00 per metric ton.
Specifically, the changes are in the diameter of the steel bars which originally was 3/8",
to 1/2 and 5/8"; and the price from P435.00 per ton, to P430.00 per ton for the 1/211
bars. The amount of steel bars to be sold to defendant Torrento remained the same. The
length and the deformed quality of the bars likewise remained unchanged. It is even
specifically provided in Par. 2 of the supplemental agreement that "aside from the above
amendments and/or modifications, the said contract (referring to the original contract)
shall not be affected, altered or modified in any way." There was no alteration in the
principal condition of the contract. The period of payment was not changed, and the
amount of the liability of the principal debtor and of the surety was also untouched.
There was no added burden imposed upon or assumed by the buyer." (Emphasis
Supplied)

x x x In short, the supplemental agreement did not result in the principal debtor's
assuming more onerous conditions than those stipulated in the original contract, and for
which the surety furnished the bond. There was consequently, no material or essential
alteration of the original contract which could result in the release of the surety from the
obligation under the said bond.

We see no error in the ruling of the lower court just quoted.

In Pacific Tobacco Corporation vs. Lorenzana, et al., G.R. L-8086, October 31, 1961 it was held:
"for purposes of releasing a surety's obligation, there must be a material alteration of the
contract in connection with which the bond is given, a change which imposes some new
obligation on the party promising or takes away some obligation already imposed, changing the
legal effect of the original contract and not merely the form thereof . . . To allow compensated
surety companies to collect and retain premiums for their services and then repudiate their
obligations on slight pretexts which have no relation to the risk, would be most unjust and
immoral, and would be a perversion of the wise and just rules designed for the protection of
voluntary sureties."

While it is the rule that the liability of a surety is limited by the terms of the surety bond fixing its
liability and that such liability cannot be extended by implication, it should be noted in the
present case that although the technical specifications of the items to be purchased have been
changed, it clearly appears that such changes are not substantial and have not added any other
liability to that originally assumed. A surety is not released by a change in the contract which
does not have the effect of making its obligation more onerous (Visayan Distributors, Inc. vs.
Flores, 92 Phil. 145).

Wherefore, the appealed decision is hereby affirmed, with costs against defendants-appellants.

EN BANC
[G.R. No. L-8349. May 23, 1956.]
PHILIPPINE NATIONAL BANK, Plaintiff-Appellant, vs. MACAPANGA PRODUCERS
INC., Defendant. PLARIDEL SURETY AND INSURANCE CO., Defendant-Appellee.

DECISION
LABRADOR, J.:
 124

Appeal against an order of the Court of First Instance of Manila, Hon. Bienvenido A. Tan,
presiding, dismissing the complaint as against Plaridel Surety and Insurance Company.
Complaint is by Philippine National Bank against Macapanga Producers Inc. and Plaridel Surety
and Insurance Co. Principal allegations are:chanroblesvirtuallawlibrary On December 26, 1952,
Luzon Sugar Company leased a sugar mill located at Calumpit, Bulacan to Macapanga Producers
beginning with the crop year 1952-53 at a minimum annual royalty of P50,000, which shall be a
lien on the sugar produced by the lessee and shall be paid before sale or removal of sugar from
warehouse (copy of lease contract attached as Annex A to the Complaint); chan
roblesvirtualawlibraryon December 26, 1952, Macapanga Producers, as principal, and Plaridel
Surety & Insurance, as surety, executed and delivered to Plaintiff a performance bond in the
amount of P50,000 for the full and faithful compliance by Macapanga Producers of all terms and
conditions of the lease (copy of bond attached as Annex B to Complaint); chan
roblesvirtualawlibraryon December 21, 1953, Luzon Sugar assigned to Plaintiff the payment due
from Macapanga Producers in the sum of P50,000, representing royalty for the lease of the sugar
mill for the crop year 1952-53 (deed of assignment attached as Annex C to Complaint); chan
roblesvirtualawlibraryPlaintiffnotified Macapanga Producers and Plaridel Surety & Insurance of
said assignment; chan roblesvirtualawlibraryPlaintiff had demanded from Macapanga Producers
payment of said royalty of P50,000, but the latter has refused and refuses to make payment; chan
roblesvirtualawlibraryand Plaintiff also made demand on Plaridel Surety & Insurance for said
payment, but the latter refused and refuses to make payment.
Plaridel Surety & Insurance moved to dismiss the complaint for failure to state cause of action,
alleging that it is a guarantor and as such is responsible only if Macapanga Producers has no
property or assets to pay its obligation as lessee. Plaintiff opposed the motion calling attention to
the provision of the performance bond in which Macapanga Producers and Plaridel Surety &
Insurance, the former as principal and the latter as surety, agreed to be held and firmly bound
unto Luzon Sugar in the penal sum of P50,000, “for the payment of which, well and truly be made,
we bind ourselves, our heirs, executors, administrators, successors, and assigns, jointly and
severally.” Plaintiff contended that, as Plaridel Surety & Insurance bound itself solidarily with
Macapanga Producers, it became a surety in accordance with Article 2047, par. 2 of the Civil
Code.
The trial court dismissed the complaint against Plaridel Surety & Insurance and subsequently
denied a motion to reconsider the order of dismissal.
The action joining Plaridel Surety & Insurance as party Defendant is justified by the following
provisions and cases:chanroblesvirtuallawlibrary
“ART. 2047. cralaw
If a person binds himself solidarily with the principal debtor, the provisions of section 4, Charter
3, Title I of this Book shall be observed. In such case the contract is called a suretyship.” (Civil
Code.)
“The sureties on the superedeas bond given in this particular case, were jointly and severally
liable with principal debtor and that an execution might issue against their property concurrently
with the execution against the property of the principal.” (Molina vs. De la Riva, et al., 7 Phil., 345.)
“Article 1822, invoked by the Appellant, provides that ‘if the surety bound himself jointly with the
principal debtor, the provisions of section fourth, chapter third, title first of this book shall be
observed,’ that is of book fourth of the Civil Code. Section fourth of the chapter title, and book
mentioned provides that ‘a creditor may sue any of the joint debtor or all of them simultaneously.’
(Art. 1144). In conformity with this provision, the sureties Pua Ti and Yap Chatco having bound
themselves in solidum (jointly and severally) with the principal debtor Pua Te Ching, the creditor,
 125

that is, the Chinese Chamber of Commerce, may sue any of them or all of them
simultaneously; chan roblesvirtualawlibrarywhich is what the Chinese Chamber of Commerce did
in filing suit against the joint and several debtors.” (Chinese Chamber of Commerce vs. Pua Te
Ching, 16 Phil., 406.).
“As the principal debtor’s obligation’ is valid and has not been satisfied by his estate, and as
the Defendant sureties bound themselves solidarily, article 1144 of the Civil Code is applicable,
which provides, as follows:chanroblesvirtuallawlibrary
The creditor may sue any of the solidary debtors or all of them simultaneously. An action instituted
against one shall not be a bar to those which may be subsequently brought against the others,
as long as the debt has not been entirely satisfied. (Molina vs. De la Riva, 7 Phil., 345; chan
roblesvirtualawlibraryChinese Chamber of Commerce vs. Pua Te Ching, 16 Phil., 406; chan
roblesvirtualawlibraryInchausti & Co. vs. Yulo, 34 Phil., 978.)” (Ferrer vs. Lopez and Santos, 56
Phil., 592.)
It is also argued on behalf of Plaridel Surety and Insurance that as it was not a party to the
assignment, and same was made without its consent, it is, therefore, discharged from its
obligation. An assignment without knowledge or consent of the surety is not a material alteration
of the contract, sufficient to discharge the surety (Stearns Law of Suretyship, Elder, fifth edition,
p. 113.) There is, besides, no allegation in the complaint, or provision in the deed of assignment,
or any change therein that makes the obligation of Plaridel Surety & Insurance more onerous than
that stated in the performance bond. Such assignment did not, therefore, release the Plaridel
Surety & Insurance from its obligation under the surety bond. (Bank of P. I. vs. Albaladejo y Cia,
53 Phil., 141; chan roblesvirtualawlibraryBank of P. I. vs. Gooch, et al., 45 Phil., 514; chan
roblesvirtualawlibraryVisayan Distributors, Inc. vs. Flores, et al., 92 Phil., 145, 48 Off. Gaz.,
4784; chan roblesvirtualawlibraryDel Rosario vs. Nava, 95 Phil., 637, 50 Off. Gaz., 4189.)
It is lastly contended that as Plaintiff or the lessor had a lien in the sugar produced, and failed to
proceed against it or enforce such lien, Plaridel Surety & Insurance was released thereby. There
is no allegation to this effect in the complaint, that lessor or Plaintiff ever had possession or control
of the sugar, or ever waived or released the lien thereon. Appellee cannot raise the issue in a
motion to dismiss.
The order of dismissal is hereby reversed, and the Appellee ordered to answer the complaint,
with costs.
Paras, C.J., Bengzon, Padilla, Montemayor, Reyes, A., Jugo, Concepcion, Reyes, J.B.L.,
and Endencia, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. 42829 September 30, 1935

RADIO CORPORATION OF THE PHILIPPINES, plaintiff-appellee,

vs.
JESUS R. ROA, ET AL., defendants.
RAMON CHAVES, ANDRES ROA and MANUEL ROA, appellants.
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M.H. de Joya and Juan de Borja for appellants.

Barrera and Reyes for appellee.

GODDARD, J.:

This is an appeal from decision of the Court of First Instance of the City of Manila the dispositive
part of which reads:

In view of all the foregoing, judgment is hereby rendered in favor of the plaintiff Radio
Corporation of the Philippines and against the defendants Jesus R. Roa, Ramon
Chavez, Andes Roa and Manuel Roa: (a) Ordering the defendant Jesus R. Roa to pay
the plaintiff the sum of P22,935, plus P99.64, with legal interest thereon from the date of
the filing of the complaint until fully paid: (b) that upon failure of the defendant Jesus Roa
to pay the said sum indicated, the chattel described in the second cause of action shall
be sold at public auction to be applied to the satisfaction of the amount of this judgment;
(c) that the defendants Jesus R. Roa, Ramon Chavez, Andres Roa and Manuel Roa pay
jointly and severally to the plaintiff the amount of P10,000; (d) and that Jesus R. Roa pay
to the plaintiff the amount equivalent to 10 per cent of P22,935, as attorney's fees, and
that all the defendants in this case pay the costs of this action.

The defendants Ramon Chavez, Andres Roa and Manuel Roa have appealed from the
judgment against them for P10,00 and costs. These appellants make the following assignments
of error:

1. The court below erred in not finding that the balance of the total indebtedness became
immediately due and demandable upon the failure of the defendant Jesus R. Roa to pay
any installment on his note.

2. The court below erred in not finding that defendant Jesus R. Roa defaulted in the
payment of the installment due on February 27,1932, and that plaintiff corporation gave
him an extension of time for the payment of said installment.

3. The court below erred in not finding that the extension of time given to defendant
Jesus R. Roa for the payment of an overdue installment served as a release of
defendant sureties from liability on all the subsequent installments.

4. The court below erred in not finding that the sureties were discharged from their bond
when the plaintiff authorized Jesus R. Roa to remove the photophone equipment from
Cagayan, Misamis Oriental, to Silay, Occidental Negros, without the knowledge or
consent of said sureties.

5. The court below erred in condemning Ramon Chavez, Andres Roa and Manuel Roa
to pay jointly and severally the sum of P10,000 to the Radio Corporation of the
Philippines.

The defendant Jesus R. Roa became indebted to the Philippine Theatrical Enterprises, Inc., in
the sum of P28,400 payable in seventy-one equal monthly installments at the rate of P400 a
month commencing thirty days after December 11, 1931, with five days grace monthly until
complete payment of said sum. On that same date the Philippine Theatrical Enterprises, Inc.,
assigned all its right and interest in that contract to the Radio Corporation of the Philippines.
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The paragraph of that contract in which the accelerating clause appears reads as follows:

In case the vendee-mortgagor fails to make any of the payments as hereinbefore

provided, the whole amount remaining unpaid under this mortgage shall immediately
become due and payable and this mortgage on the property herein mentioned as well as
the Luzon Surety Bond may be foreclosed by the vendor-mortgagee; and, in such case,
the vendee-mortgager further agrees to pay the vendor- mortgagee an additional sum
equivalent to 25 per cent of the principal due unpaid as costs, expenses and liquidated
damages, which said sum, shall be added to the principal sum for which this mortgage is
given as security, and shall become a part, thereof.

On March 15, 1932, Erlanger & Galinger, Inc., acting in its capacity as attorney-in-fact of the
Radio Corporation of the Philippines wrote the following letter (Exhibit 13) to the principal debtor
Jesus R. Roa:

Mr. JESUS R. ROA

Cagayan, Oriental Misamis

Attention of Mrs. Amparo Chavez de Roa

DEAR SIR: We acknowledge with thanks the receipt of your letter of March 9th together
with your remittance of P200 for which we enclose receipt No. 7558. We are applying
this amount to the balance of your January installment.

We have no objection to the extension requested by you to pay the February installment
by the first week of April. We would, however, urge you to make every efforts to bring the
account up-to date as we are given very little discretion by the RCP in giving extension
of payment.

Very truly yours,

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

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

ART. 1851. An extension grated to the debtor by the creditor, without the consent of the
guarantor, extinguishes the latter's liability.

This court has held that mere delay in suing for the collection of the does not release the
sureties. (Sons of I. de la Rama vs. Estate of Benedicto, 5 Phil., 512; Banco Español
Filipino vs. Donaldson Sim & Co., 5 Phil., 418; Manzano vs. Tan Suanco, 13 Phil., 183;
Hongkong & Shanghai Baking Corporation vs. Aldecoa & Co., 30 Phil., 255.) In the case of Villa
vs. Garcia Bosque (49 Phil., 126, 134, 135), this court stated:
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. . . The rule that an extension of time granted to the debtor by the creditor, without the
consent of the sureties, extinguishes the latter's liability is common both to Spanish
jurisprudence and the common law; and it is well settled in English and American
jurisprudence that where a surety is liable for different payments, such as installments of
rent, or upon a series of promissory notes, an extension of time as to one or more will
not affect the liability of the surety for the others. . . .

There is one stipulation in the contract (Exhibit A) which, at first blush, suggests a doubt
as to the propriety of applying the doctrine above stated to the case before us. We refer
to clause (f) which declares that the non-fulfillment on the part of the debtors of the
stipulation with respect to the payment of any installment of the indebtedness, with
interest, will give to the creditor the right to treat and declare all of said installments as
immediately due. If the stipulation had been to the effect that the failure to pay any
installment when due would ipso facto cause the other installments to fall due at once, it
might be plausibly contended that after default of the payment of one installment the act
of the creditor in extending the time as to such installment would interfere with the right
of the surety to exercise his legal rights against the debtor, and that the surety would in
such case be discharged by the extension of time, in conformity with article 1851 and
1852 of the Civil Code. But it will be noted that in the contract now under consideration
the stipulation is not that the maturity of the latter installments shall be ipso
facto accelerated by default in the payment of a prior installment, but only that it shall
give the creditor a right treat the subsequent installments as due; and in this case it does
not appear that the creditor has exercised this election. On the contrary, this action was
not instituted until after all of the installments had fallen due in conformity with original
contract. It results that the stipulation contained in paragraph (f) does not effect the
application of the doctrine above enunciated to the case before us.

The stipulation in the contract under consideration, copied above, is to the effect that upon
failure to pay any installment when due the other installments ipso facto become due and
payable. In view of of the fact that under the express provision of the contract, quoted above,
the whole unpaid balance automatically becomes due and payable upon failure to pay one
installment, the act of the plaintiff in extending the payment of the installment corresponding to
February, 1932, to April, 1932, without the consent of the guarantors, constituted in fact an
extension of the payment of the whole amount of the indebtedness, as by that extension the
plaintiff could not have filed an action for the collection of the whole amount until after April,
1932. Therefore appellants' contention that after default of the payment of one installment the
act of the herein creditor in extending the time of payment discharges them as guarantors in
conformity with articles 1851 and 1852 of the Civil Code is correct.

It is a familiar rule that if a creditor, by positive contract with the principal debtor, and
without the consent of the surety, extends the time of payment, he thereby discharges
the surety. . . . The time of payment may be quite as important a consideration to the
surety as the amount he has promised conditionally to pay. . . .Again, a surety has the
right, on payment of the debt, to be subrogated to all the rights of the creditor, and to
proceed at once to collect it from the principal; but if the creditor has tied own hands
from proceeding promptly, by extending the time of collection, the hands of the surety
will equally be bound; and before they are loosed, by the expiration of the extended
credit, the principal debtor may have become insolvent and the right of subrogation
rendered worthless. It should be observed, however, that it is really unimportant
whewther the extension given has actually proved prejudicial to the surety or not. The
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rule stated is quite independent of the event, and the fact that the principal is insolvent or
that the extension granted promised to be beneficial to the surety would give no right to
the creditor to change the terms of the contract without the knowledge or consent of the
surety. Nor does it matter for how short a period the time of payment may be extended.
The principle is the same whether the time is long or short. The creditor must be in such
a situation that when the surety comes to be substituted in his place by paying the debt,
he may have an immediate right of action against the principal. The suspension of the
right to sue for a month, or even a day, is as effectual to release the surety as a year or
two years. (21 R.C.L., 1018-1020.)

Plaintiff's contention that the enforcement of the accelerating clause is potestative on the part of
the obligee, and not self-executing, is clearly untenable from a simple reading of the clause
copied above. What is potestative on the part of the obligee is the foreclosure of the mortgage
and not the accelerating clause.

Plaintiff-appellee contends that there was no consideration for the extension granted the
principal debtor. Article 1277 of the Civil Code provides that "even though the consideration
should be expressed in the contract, it shall be presumed that a consideration exists and that it
is licit, unless the debtor proves the contrary." It was incumbent upon the plaintiff to prove that
there was no valid consideration for the extension granted.

In view of the forgoing the judgment of the trial court is reversed as to the appellants Ramon
Chavez, Andres Roa and Manuel Roa, without costs.

[G.R. No. 113931. May 6, 1998]

E. ZOBEL, INC., petitioner, vs. THE COURT OF APPEALS, CONSOLIDATED BANK AND
TRUST CORPORATION, and SPOUSES RAUL and ELEA R.
CLAVERIA, respondents.

DECISION
MARTINEZ, J.:

This petition for review on certiorari seeks the reversal of the decision[1] of the Court of
Appeals dated July 13, 1993 which affirmed the Order of the Regional Trial Court of Manila,
Branch 51, denying petitioner's Motion to Dismiss the complaint, as well as the Resolution[2] dated
February 15, 1994 denying the motion for reconsideration thereto.
The facts are as follows:
Respondent spouses Raul and Elea Claveria, doing business under the name "Agro
Brokers," applied for a loan with respondent Consolidated Bank and Trust Corporation (now
SOLIDBANK) in the amount of Two Million Eight Hundred Seventy Five Thousand Pesos (P2,
875,000.00) to finance the purchase of two (2) maritime barges and one tugboat [3] which would
be used in their molasses business. The loan was granted subject to the condition that respondent
spouses execute a chattel mortgage over the three (3) vessels to be acquired and that a
continuing guarantee be executed by Ayala International Philippines, Inc., now herein petitioner
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E. Zobel, Inc. in favor of SOLIDBANK. The respondent spouses agreed to the arrangement.
Consequently, a chattel mortgage and a Continuing Guaranty[4] were executed.
Respondent spouses defaulted in the payment of the entire obligation upon maturity. Hence,
on January 31,1991, SOLIDBANK filed a complaint for sum of money with a prayer for a writ of
preliminary attachment, against respondents spouses and petitioner. The case was docketed as
Civil Case No. 91-55909 in the Regional Trial Court of Manila.
Petitioner moved to dismiss the complaint on the ground that its liability as guarantor of the
loan was extinguished pursuant to Article 2080 of the Civil Code of the Philippines. It argued that
it has lost its right to be subrogated to the first chattel mortgage in view of SOLIDBANK's failure
to register the chattel mortgage with the appropriate government agency.
SOLIDBANK opposed the motion contending that Article 2080 is not applicable because
petitioner is not a guarantor but a surety.
On February 18, 1993, the trial court issued an Order, portions of which reads:

"After a careful consideration of the matter on hand, the Court finds the ground of the motion to
dismiss without merit. The document referred to as 'Continuing Guaranty' dated August 21,1985
(Exh. 7) states as follows:

'For and in consideration of any existing indebtedness to you of Agro Brokers, a single
proprietorship owned by Mr. Raul Claveria for the payment of which the undersigned is now
obligated to you as surety and in order to induce you, in your discretion, at any other manner, to,
or at the request or for the account of the borrower, x x x '

"The provisions of the document are clear, plain and explicit.

"Clearly therefore, defendant E. Zobel, Inc. signed as surety. Even though the title of the
document is 'Continuing Guaranty', the Court's interpretation is not limited to the title alone but
to the contents and intention of the parties more specifically if the language is clear and positive.
The obligation of the defendant Zobel being that of a surety, Art. 2080 New Civil Code will not
apply as it is only for those acting as guarantor. In fact, in the letter of January 31, 1986 of the
defendants (spouses and Zobel) to the plaintiff it is requesting that the chattel mortgage on the
vessels and tugboat be waived and/or rescinded by the bank inasmuch as the said loan is
covered by the Continuing Guaranty by Zobel in favor of the plaintiff thus thwarting the claim of
the defendant now that the chattel mortgage is an essential condition of the guaranty. In its
letter, it said that because of the Continuing Guaranty in favor of the plaintiff the chattel
mortgage is rendered unnecessary and redundant.

"With regard to the claim that the failure of the plaintiff to register the chattel mortgage with the
proper government agency, i.e. with the Office of the Collector of Customs or with the Register
of Deeds makes the obligation a guaranty, the same merits a scant consideration and could not
be taken by this Court as the basis of the extinguishment of the obligation of the defendant
corporation to the plaintiff as surety. The chattel mortgage is an additional security and should
not be considered as payment of the debt in case of failure of payment. The same is true with
the failure to register, extinction of the liability would not lie.

"WHEREFORE, the Motion to Dismiss is hereby denied and defendant E. Zobel, Inc., is ordered
to file its answer to the complaint within ten (10) days from receipt of a copy of this Order."[5]
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Petitioner moved for reconsideration but was denied on April 26,1993.[6]

Thereafter, petitioner questioned said Orders before the respondent Court of Appeals,
through a petition for certiorari, alleging that the trial court committed grave abuse of discretion in
denying the motion to dismiss.
On July 13,1993, the Court of Appeals rendered the assailed decision the dispositive portion
of which reads:

"WHEREFORE, finding that respondent Judge has not committed any grave abuse of discretion
in issuing the herein assailed orders, We hereby DISMISS the petition."

A motion for reconsideration filed by petitioner was denied for lack of merit on February
15,1994.
Petitioner now comes to us via this petition arguing that the respondent Court of Appeals
erred in its finding: (1) that Article 2080 of the New Civil Code which provides: "The guarantors,
even though they be solidary, are released from their obligation whenever by some act of the
creditor they cannot be subrogated to the rights, mortgages, and preferences of the latter," is not
applicable to petitioner; (2) that petitioner's obligation to respondent SOLIDBANK under the
continuing guaranty is that of a surety; and (3) that the failure of respondent SOLIDBANK to
register the chattel mortgage did not extinguish petitioner's liability to respondent SOLIDBANK.
We shall first resolve the issue of whether or not petitioner under the "Continuing Guaranty"
obligated itself to SOLIDBANK as a guarantor or a surety.
A contract of surety is an accessory promise by which a person binds himself for another
already bound, and agrees with the creditor to satisfy the obligation if the debtor does not. [7] A
contract of guaranty, on the other hand, is a collateral undertaking to pay the debt of another in
case the latter does not pay the debt.[8]
Strictly speaking, guaranty and surety are nearly related, and many of the principles are
common to both. However, under our civil law, they may be distinguished thus: A surety is usually
bound with his principal by the same instrument, executed at the same time, and on the same
consideration. He is an original promissor and debtor from the beginning, and is held, ordinarily,
to know every default of his principal. Usually, he will not be discharged, either by the mere
indulgence of the creditor to the principal, or by want of notice of the default of the principal, no
matter how much he may be injured thereby. On the other hand, the contract of guaranty is the
guarantor's own separate undertaking, in which the principal does not join. It is usually entered
into before or after that of the principal, and is often supported on a separate consideration from
that supporting the contract of the principal. The original contract of his principal is not his contract,
and he is not bound to take notice of its non-performance. He is often discharged by the mere
indulgence of the creditor to the principal, and is usually not liable unless notified of the default of
the principal.[9]
Simply put, a surety is distinguished from a guaranty in that a guarantor is the insurer of the
solvency of the debtor and thus binds himself to pay if the principal is unable to pay while a surety
is the insurer of the debt, and he obligates himself to pay if the principal does not pay.[10]
Based on the aforementioned definitions, it appears that the contract executed by petitioner
in favor of SOLIDBANK, albeit denominated as a "Continuing Guaranty," is a contract of surety.
The terms of the contract categorically obligates petitioner as "surety" to induce SOLIDBANK to
extend credit to respondent spouses. This can be seen in the following stipulations.
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"For and in consideration of any existing indebtedness to you of AGRO BROKERS, a single
proprietorship owned by MR. RAUL P. CLAVERIA, of legal age, married and with business
address x x x (hereinafter called the Borrower), for the payment of which the undersigned is
now obligated to you as surety and in order to induce you, in your discretion, at any time or
from time to time hereafter, to make loans or advances or to extend credit in any other manner
to, or at the request or for the account of the Borrower, either with or without purchase or
discount, or to make any loans or advances evidenced or secured by any notes, bills receivable,
drafts, acceptances, checks or other instruments or evidences of indebtedness x x upon which
the Borrower is or may become liable as maker, endorser, acceptor, or otherwise, the
undersigned agrees to guarantee, and does hereby guarantee, the punctual payment, at
maturity or upon demand, to you of any and all such instruments, loans, advances,
credits and/or other obligations herein before referred to, and also any and all other
indebtedness of every kind which is now or may hereafter become due or owing to you
by the Borrower, together with any and all expenses which may be incurred by you in
collecting all or any such instruments or other indebtedness or obligations hereinbefore referred
to, and or in enforcing any rights hereunder, and also to make or cause any and all such
payments to be made strictly in accordance with the terms and provisions of any agreement (g),
express or implied, which has (have) been or may hereafter be made or entered into by the
Borrower in reference thereto, regardless of any law, regulation or decree, now or hereafter in
effect which might in any manner affect any of the terms or provisions of any such
agreements(s) or your right with respect thereto as against the Borrower, or cause or permit to
be invoked any alteration in the time, amount or manner of payment by the Borrower of any
such instruments, obligations or indebtedness; x x x " (Italics Ours)

One need not look too deeply at the contract to determine the nature of the undertaking and
the intention of the parties. The contract clearly disclose that petitioner assumed liability to
SOLIDBANK, as a regular party to the undertaking and obligated itself as an original promissor.
It bound itself jointly and severally to the obligation with the respondent spouses. In fact,
SOLIDBANK need not resort to all other legal remedies or exhaust respondent spouses'
properties before it can hold petitioner liable for the obligation. This can be gleaned from a reading
of the stipulations in the contract, to wit:

'x x x If default be made in the payment of any of the instruments, indebtedness or other
obligation hereby guaranteed by the undersigned, or if the Borrower, or the undersigned
should die, dissolve, fail in business, or become insolvent, x x x , or if any funds or other
property of the Borrower, or of the undersigned which may be or come into your
possession or control or that of any third party acting in your behalf as aforesaid should
be attached of distrained, or should be or become subject to any mandatory order of
court or other legal process, then, or any time after the happening of any such event any
or all of the instruments of indebtedness or other obligations hereby guaranteed shall, at
your option become (for the purpose of this guaranty) due and payable by the
undersigned forthwith without demand of notice, and full power and authority are hereby
given you, in your discretion, to sell, assign and deliver all or any part of the property upon
which you may then have a lien hereunder at any broker's board, or at public or private sale at
your option, either for cash or for credit or for future delivery without assumption by you of credit
risk, and without either the demand, advertisement or notice of any kind, all of which are hereby
expressly waived. At any sale hereunder, you may, at your option, purchase the whole or any
part of the property so sold, free from any right of redemption on the part of the undersigned, all
such rights being also hereby waived and released. In case of any sale and other disposition
of any of the property aforesaid, after deducting all costs and expenses of every kind for
care, safekeeping, collection, sale, delivery or otherwise, you may apply the residue of
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the proceeds of the sale and other disposition thereof, to the payment or reduction,
either in whole or in part, of any one or more of the obligations or liabilities hereunder of
the undersigned whether or not except for disagreement such liabilities or obligations
would then be due, making proper allowance or interest on the obligations and liabilities
not otherwise then due, and returning the overplus, if any, to the undersigned; all without
prejudice to your rights as against the undersigned with respect to any and all amounts
which may be or remain unpaid on any of the obligations or liabilities aforesaid at any
time (s)"

xxx xxx xxx

'Should the Borrower at this or at any future time furnish, or should be heretofore have
furnished, another surety or sureties to guarantee the payment of his obligations to you,
the undersigned hereby expressly waives all benefits to which the undersigned might be
entitled under the provisions of Article 1837 of the Civil Code (beneficio division), the
liability of the undersigned under any and all circumstances being joint and several;"
(Italics Ours)

The use of the term "guarantee" does not ipso facto mean that the contract is one of
guaranty. Authorities recognize that the word "guarantee" is frequently employed in business
transactions to describe not the security of the debt but an intention to be bound by a primary or
independent obligation.[11] As aptly observed by the trial court, the interpretation of a contract is
not limited to the title alone but to the contents and intention of the parties.
Having thus established that petitioner is a surety, Article 2080 of the Civil Code, relied upon
by petitioner, finds no application to the case at bar. In Bicol Savings and Loan Association vs.
Guinhawa,[12] we have ruled that Article 2080 of the New Civil Code does not apply where the
liability is as a surety, not as a guarantor.
But even assuming that Article 2080 is applicable, SOLIDBANK's failure to register the chattel
mortgage did not release petitioner from the obligation. In the Continuing Guaranty executed in
favor of SOLIDBANK, petitioner bound itself to the contract irrespective of the existence of any
collateral. It even released SOLIDBANK from any fault or negligence that may impair the
contract. The pertinent portions of the contract so provides:

"x x x the undersigned (petitioner) who hereby agrees to be and remain bound upon this
guaranty, irrespective of the existence, value or condition of any collateral, and
notwithstanding any such change, exchange, settlement, compromise, surrender, release, sale,
application, renewal or extension, and notwithstanding also that all obligations of the Borrower
to you outstanding and unpaid at any time (s) may exceed the aggregate principal sum herein
above prescribed.

'This is a Continuing Guaranty and shall remain in full force and effect until written notice shall
have been received by you that it has been revoked by the undersigned, but any such notice
shall not be released the undersigned from any liability as to any instruments, loans, advances
or other obligations hereby guaranteed, which may be held by you, or in which you may have
any interest, at the time of the receipt of such notice. No act or omission of any kind on your
part in the premises shall in any event affect or impair this guaranty, nor shall same be
affected by any change which may arise by reason of the death of the undersigned, of any
partner (s) of the undersigned, or of the Borrower, or of the accession to any such partnership of
any one or more new partners." (Italics supplied)
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In fine, we find the petition to be without merit as no reversible error was committed by
respondent Court of Appeals in rendering the assailed decision.
WHEREFORE, the decision of the respondent Court of Appeals is hereby AFFIRMED. Costs
against the petitioner.
SO ORDERED.