CIVIL LAW | C r e d i t T r a n s a c t i o n s
the records of the case reveal that herein Finman filed a
SECOND DIVISION
[G.R. No. 84084. August 20, 1990.]
FINMAN GENERAL ASSURANCE
CORPORATION, Petitioner, v. ABDULGANI SALIK,
BALABAGAN AMPILAN, ALI KUBA, GANDHI PUA,
DAUD MALANAO, THE ADMINISTRATOR,
PHILIPPINE OVERSEAS AND EMPLOYMENT
ADMINISTRATION, THE SECRETARY OF LABOR
AND EMPLOYMENT, Respondents.
David I. Unay, Jr. for Petitioner.
Kamid D. Abdul for Private Respondents.
SYLLABUS
1. LABOR LAW; LABOR CODE; RECRUITMENT; SECTION
4 RULE V BOOK I OF THE IMPLEMENTING RULES;
LIABILITY OF THE SURETY THEREUNDER IS SOLIDARY
WITH ITS PRINCIPAL; CASE AT BAR. — It remains
uncontroverted that herein petitioner and Pan Pacific
entered into a suretyship agreement, with the former
agreeing that the bond is conditioned upon the true and
faithful performance and observance of the bonded
principal (Pan Pacific) of its duties and obligations. It
was also understood that under the suretyship
agreement, herein petitioner undertook itself to be
jointly and severally liable for all claims arising from
recruitment violation of Pan Pacific (Ibid., p. 23), in
keeping with Section 4, Rule V, Book I of the
Implementing Rules of the Labor Code. Accordingly, the
nature of Finman’s obligation under the suretyship
agreement makes it privy to the proceedings against its
principal (Pan Pacific). As such Finman is bound, in the
absence of collusion, by a judgment against its principal
even though it was not a party to the proceedings
(Leyson v. Rizal Surety and Insurance Co., 16 SCRA 551
(1966). Furthermore, in Government of the Philippines
v. Tizon (20 SCRA 1182 [1967]), this Court ruled that
where the surety bound itself solidarily with the principal
obligor, the former is so dependent on the principal
debtor "that the surety is considered in law as being the
same party as the debtor in relation to whatever is
adjudged touching the obligation of the latter." Applying
the foregoing principles to the case at bar, it can be
very well said that even if herein Finman was not
impleaded in the instant case, still it (petitioner) can be
held jointly and severally liable for all claims arising
from recruitment violation of Pan Pacific. Moreover, as
correctly stated by the Solicitor General, private
respondents have a legal claim against Pan Pacific and
its insurer for the placement and processing fees they
paid, so much so that in order to provide a complete
relief to private respondents, petitioner had to be
impleaded in the case (Rollo, p. 87).
2. ID.; SECRETARY OF LABOR; JURISDICTION, LACK
OF; ISSUE THEREON MUST BE RAISED AT THE LOWER
PROCEEDINGS; CASE AT BAR. — While Finman
contends that herein respondent Secretary of Labor
cannot validly assume jurisdiction over the case at bar,
135 | P a g e #SJBL
motion for reconsideration of the adverse decision dated
March 18, 1988 of respondent Secretary of Labor. In the
said motion for reconsideration, no jurisdictional
challenge was made (Ibid., p. 22). It was only when it
filed this petition that it assailed the jurisdiction of the
respondent Secretary of Labor, and that of the POEA.
But then, it was too late. Estoppel had barred herein
petitioner from raising the issue, regardless of its merits
(Akay Printing Press v. Minister of Labor and
Employment, 140 SCRA 381 [1985]).
3. ID.; ID.; FACTUAL FINDINGS THEREOF GENERAL.
ACCORDED GREAT WEIGHT ON APPEAL; CASE AT BAR.
— Well-settled is the rule that findings of facts of the
respondent Secretary are generally accorded great
weight unless there was grave abuse of discretion or
lack of jurisdiction in arriving at such findings (Asia
world Publishing House, Inc. v. Ople, 152 SCRA 219
(1987). In the case at bar, it is undisputed that when
the case was first set for hearing, only the private
respondents appeared, despite summons having been
served upon both herein petitioner and Pan Pacific. This,
notwithstanding, both herein petitioner and Pan Pacific
were again notified of the scheduled hearing, but, as
aforestated they also failed to appear (Rollo, p. 15).
Accordingly, owing to the absence of any controverting
evidence, respondent Secretary of Labor admitted and
considered private respondents’ testimonies and
evidence as substantial. Under the circumstances, no
justifiable reason can be found to justify disturbance of
the findings of facts of the respondent Secretary of
Labor, supported as they are by substantial evidence
and in the absence of grave abuse of discretion (Asia
world Publishing House, Inc. v. Ople, supra); and in line
with the well established principle that the findings of
administrative agencies which have acquired expertise
because their jurisdiction is confined to specific matters
are generally accorded not only respect but at times
even finality. (National Federation of Labor Union
(NAFLU) v. Ople, 143 SCRA 124 [1986])
DECISION
PARAS, J.:
This is a petition for certiorari seeking to annul 1 the
Order dated March 28, 1988 of the Honorable Secretary
of Labor and Employment in POEA, LRO/RRD Case No.
87-09-1022-DP entitled Abdulgani Salik, Et. Al. v. Pan
Pacific Overseas and Recruiting Services and Finman
General Assurance Corporation, which directed herein
petitioner to pay jointly and severally with Pan Pacific
the claims of herein private respondents amounting to
P25,000.00 and 2) the Order dated June 7, 1988, which
denied petitioner’s motion for reconsideration (Rollo, p.
2).
The facts of the case are as follows:
cha nro b1es vi rtua l 1aw lib ra ry
Abdulgani Salik Et. Al., private respondents, allegedly
applied with Pan Pacific Overseas Recruiting Services,
Inc. (hereinafter referred to as Pan Pacific) on April 22,
1987 and were assured employment abroad by a certain
Mrs. Normita Egil. In consideration thereof, they
allegedly paid fees totalling P30,000.00. But despite
numerous assurances of employment abroad given by
Celia Arandia and Mrs. Egil, they were not employed
(Ibid., p. 15).
Guaranty
CIVIL LAW | C r e d i t T r a n s a c t i o n s

Accordingly, they filed a joint complaint with the 4. Gandhi Dua 5,000.00
Philippine Overseas Employment Administration (herein
referred to as POEA) against Pan Pacific for Violation of 5. Daud Malanao 5,000.00
Articles 32 and 34(a) of the Labor Code, as amended,
with claims for refund of a total amount of P30,000.00 Based on the records of this Administration, respondent
(Ibid.). agency is presently serving a total period of suspension
of seventeen (17) months imposed in three (3) separate
The POEA motu proprio impleaded and summoned orders issued on June 2, 1987, August 17, 1987 and
herein petitioner surety Finman General Assurance September 23, 1987. Under the new schedule of
Corporation (hereinafter referred to as Finman), in the penalties published on January 21, 1987 in the
latter’s capacity as Pan Pacific’s bonding company. Philippine Inquirer, the penalty of cancellation shall be
imposed when the offender has been previously
Summons were served upon both Pan Pacific and penalized with suspension the total period of which is 12
Finman, but they failed to answer. months or more. Moreover, the penalty impossible in
the case at bar is two (2) months suspension for each
On October 9, 1987, a hearing was called, but only the count of violation or a total period of suspension of ten
private respondents appeared. Despite being deemed in (10) months as the acts were committed in April 1987.
default for failing to answer, both Finman and Pan Thus, whether under the old schedule of penalties which
Pacific were still notified of the scheduled hearing. Again required a total period of suspension of twenty-four (24)
they failed to appear. Thus, ex-parte proceedings months for cancellation to be imposed or under the new
ensued. schedule which provides for a twelve (12) month total
suspension period, the penalty of cancellation may be
During the hearing, herein private respondents properly imposed upon the herein respondent agency.
virtua l law lib rary
chan roble s.com. ph :

reiterated the allegations in their complaint that they

first paid P20,000.00 thru Hadji Usop Kabagani for In view thereof, the license of Pan Pacific Overseas
which a receipt was issued signed by Engineer Arandia Recruiting Services is hereby cancelled, effective
and countersigned by Mrs. Egil and a certain Imelda immediately.
who are allegedly employed by Pan Pacific; that they
paid another P10,000.00 to Engr. Arandia who did not SO ORDERED. (Ibid., pp. 20-21).
issue any receipt therefor; that the total payment of
P30,000.00 allegedly represents payments for herein A motion for reconsideration having been denied (Ibid.,
private respondents in the amount of P5,000.00 each, p. 22), herein petitioner instituted the instant petition
and Abdulnasser Ali, who did not file any complaint for certiorari, raising the following assigned errors:
chan rob1e s virtual 1aw l ibra ry

against Pan Pacific (Ibid., pp. 15-16). chanro bles law lib rary : red nad

I
Herein private respondents presented as their witness,
Hadji Usop Kabagani who they identified as the one who
actually financed their application and who corroborated THE HONORABLE ADMINISTRATOR AND THE
their testimonies on all material points including the HONORABLE SECRETARY OF LABOR ACTED WITH
non-issuance of a receipt for P10,000.00 by Engr. GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK
Arandia. OF JURISDICTION IN MOTU PROPRIO IMPLEADING
FINMAN AS CO-RESPONDENT OF PAN PACIFIC IN POEA
Herein petitioner, Finman, in an answer which was not LRO/RRD CASE NO. 87-09-1022 DP WHICH WAS FILED
timely filed, alleged, among others, that herein private BY ABDULGANI SALIK, ET AL.;
respondents do not have a valid cause of action against
it; that Finman is not privy to any transaction
II
undertaken by Pan Pacific with herein private
respondents; that herein private respondents claims are
barred by the statute of frauds and by the fact that they
THE HONORABLE SECRETARY OF LABOR ACTED
executed a waiver; that the receipts presented by
WITHOUT OR IN EXCESS OF JURISDICTION AND WITH
herein private respondents are mere scraps of paper;
GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK
that it is not liable for the acts of Mrs. Egil; that Finman
OF JURISDICTION IN DIRECTING FINMAN TO PAY
has a cash bond of P75,000.00 only which is less than
JOINTLY AND SEVERALLY WITH PAN PACIFIC THE
the required amount of P100,000.00; and that herein
CLAIMS OF PRIVATE RESPONDENTS ON THE BASIS OF
private respondents should proceed directly against the
THE SURETYSHIP AGREEMENT BETWEEN FINMAN AND
cash bond of Pan Pacific or against Mrs. Egil (Ibid., pp.
PAN PACIFIC AND THE PHILIPPINE OVERSEAS
16-17).
EMPLOYMENT ADMINISTRATION (POEA FOR SHORT);
AND
On March 18, 1988, the Honorable Franklin M. Drilon,
then the Secretary of Labor and Employment, upon the
recommendation of the POEA hearing officer, issued an III
Order, the dispositive portion of which reads: jgc:chanrob les.c om.ph

"WHEREFORE, premises considered, both respondents THE FINDINGS OF FACT MADE BY THE POEA AND UPON
are hereby directed to pay jointly and severally the WHICH THE HONORABLE SECRETARY OF LABOR BASED
claims of complainants, as follows: ITS QUESTIONED ORDERS ARE NOT SUPPORTED BY
SUBSTANTIAL EVIDENCE AND ARE CONTRARY TO LAW.
c hanro b1es vi rtua l 1aw li bra ry

1. Abdulgani Salik P5,000.00 (Ibid., p. 101)

2. Balabagan Ampilan 5,000.00 As required by this Court, herein public respondents

filed their memorandum on July 28, 1989 (Ibid., p. 84);
3. Ali Kuba 5,000.00 while that of petitioner and private respondents were

136 | P a g e #SJBL Guaranty

CIVIL LAW | C r e d i t T r a n s a c t i o n s
filed on September 11, 1989 (Ibid., p. 89) and March
16, 1990 (Ibid., p. 120), respectively. cha nro bles vi rtua l lawli bra ry
The petition is devoid of merit.
In its first and second assigned errors, petitioner
maintains that POEA has no jurisdiction to directly
enforce the suretyship undertaking of FINMAN (herein
petitioner) under the surety bond (Ibid., p. 104).
In the case at bar, it remains uncontroverted that herein
petitioner and Pan Pacific entered into a suretyship
agreement, with the former agreeing that the bond is
conditioned upon the true and faithful performance and
observance of the bonded principal (Pan Pacific) of its
duties and obligations. It was also understood that
under the suretyship agreement, herein petitioner
undertook itself to be jointly and severally liable for all
claims arising from recruitment violation of Pan Pacific
(Ibid., p. 23), in keeping with Section 4, Rule V, Book I
of the Implementing Rules of the Labor Code, which
provides:jg c:chan roble s.com.p h
"Section 4. Upon approval of the application, the
applicant shall pay to the Ministry (now Department) a
license fee of P6,000.00, post a cash bond of
P50,000.00 or negotiable bonds of equivalent amount
convertible to cash issued by banking or financial
institution duly endorsed to the Ministry (now
Department) as well as a surety bond of P150,000.00
from an accredited bonding company to answer for valid
and legal claims arising from violations of the conditions
of the license or the contracts of employment and
guarantee compliance with the provisions of the Code,
its implementing rules and regulations and appropriate
issuances of the Ministry (now Department)." (Emphasis
Supplied)
Accordingly, the nature of Finman’s obligation under the
suretyship agreement makes it privy to the proceedings
against its principal (Pan Pacific). As such Finman is
bound, in the absence of collusion, by a judgment
against its principal even though it was not a party to
the proceedings (Leyson v. Rizal Surety and Insurance
Co., 16 SCRA 551 (1966). Furthermore, in Government
of the Philippines v. Tizon (20 SCRA 1182 [1967]), this
Court ruled that where the surety bound itself solidarily
with the principal obligor, the former is so dependent on
the principal debtor "that the surety is considered in law
as being the same party as the debtor in relation to
whatever is adjudged touching the obligation of the
latter." Applying the foregoing principles to the case at
bar, it can be very well said that even if herein Finman
was not impleaded in the instant case, still it (petitioner)
can be held jointly and severally liable for all claims
arising from recruitment violation of Pan Pacific.
Moreover, as correctly stated by the Solicitor General,
private respondents have a legal claim against Pan
Pacific and its insurer for the placement and processing
fees they paid, so much so that in order to provide a
complete relief to private respondents, petitioner had to
be impleaded in the case (Rollo, p. 87).
Furthermore, Finman contends that herein respondent
Secretary of Labor cannot validly assume jurisdiction
over the case at bar; otherwise, proceedings will be
railroaded resulting in the deprivation of the former of
any remedial measures under the law. chanro bles. com.ph : vi rtua l law lib rary
The records of the case reveal that herein Finman filed a
motion for reconsideration of the adverse decision dated
March 18, 1988 of respondent Secretary of Labor. In the
said motion for reconsideration, no jurisdictional
137 | P a g e
challenge was made (Ibid., p. 22). It was only when it
filed this petition that it assailed the jurisdiction of the
respondent Secretary of Labor, and that of the POEA.
But then, it was too late. Estoppel had barred herein
petitioner from raising the issue, regardless of its merits
(Akay Printing Press v. Minister of Labor and
Employment, 140 SCRA 381 [1985]).
Hence, Finman’s contention that POEA’s and respondent
Secretary’s actions in impleading and directing herein
petitioner to pay jointly and severally with Pan Pacific
the claims of private respondents constitute a grave
abuse of discretion amounting to lack of jurisdiction has
no basis. (Ibid., p. 101.)
As regards the third assigned error, herein petitioner
maintains that the findings of fact made by the POEA
upon which respondent Secretary of Labor based his
questioned Orders are not supported by substantial
evidence and are contrary to law, is likewise untenable.
Herein petitioner, in raising this third issue, is, in effect,
asking this Court to review the respondent Secretary’s
findings of facts.
Well-settled is the rule that findings of facts of the
respondent Secretary are generally accorded great
weight unless there was grave abuse of discretion or
lack of jurisdiction in arriving at such findings (Asia
world Publishing House, Inc. v. Ople, 152 SCRA 219
(1987). chan roble s virtual lawl ibra ry
In the case at bar, it is undisputed that when the case
was first set for hearing, only the private respondents
appeared, despite summons having been served upon
both herein petitioner and Pan Pacific. This,
notwithstanding, both herein petitioner and Pan Pacific
were again notified of the scheduled hearing, but, as
aforestated they also failed to appear (Rollo, p. 15).
Accordingly, owing to the absence of any controverting
evidence, respondent Secretary of Labor admitted and
considered private respondents’ testimonies and
evidence as substantial. Under the circumstances, no
justifiable reason can be found to justify disturbance of
the findings of facts of the respondent Secretary of
Labor, supported as they are by substantial evidence
and in the absence of grave abuse of discretion (Asia
world Publishing House, Inc. v. Ople, supra); and in line
with the well established principle that the findings of
administrative agencies which have acquired expertise
because their jurisdiction is confined to specific matters
are generally accorded not only respect but at times
even finality. (National Federation of Labor Union
(NAFLU) v. Ople, 143 SCRA 124 [1986])
PREMISES CONSIDERED, the questioned Orders of
respondent Secretary of Labor are hereby AFFIRMED in
toto.
SO ORDERED.
Melencio-Herrera, Padilla and Regalado, JJ., concur.
Sarmiento, J., on leave.
#SJBL Guaranty
CIVIL LAW | C r e d i t T r a n s a c t i o n s
SECOND DIVISION
[G.R. No. 130886 : January 29, 2004]
COMMONWEALTH INSURANCE
CORPORATION, Petitioner, v. COURT OF APPEALS
and RIZAL COMMERCIAL BANKING
CORPORATION, Respondents.
DECISION
AUSTRIA-MARTINEZ, J.:
Before us is a petition for review on certiorari assailing
the Decision1 of the Court of Appeals (CA), promulgated
on May 16, 1997 in CA-G.R. CV No. 444732, which
modified the decision dated March 5, 1993 of the
Regional Trial Court of Makati (Branch 64); and the
Resolution3 dated September 25, 1997, denying
petitioners motion for reconsideration.
The facts of the case as summarized by the Court of
Appeals are as follows:
In 1984, plaintiff-appellant Rizal Commercial Banking
Corporation (RCBC) granted two export loan lines, one,
for P2,500,000.00 to Jigs Manufacturing Corporation
(JIGS) and, the other, for P1,000,000.00 to Elba
Industries, Inc. (ELBA). JIGS and ELBA which are sister
corporations both drew from their respective credit
lines, the former in the amount of P2,499,992.00 and
the latter for P998,033.37 plus P478,985.05 from the
case-to-case basis and trust receipts. These loans were
evidenced by promissory notes (Exhibits A to L,
inclusive JIGS; Exhibits V to BB, inclusive ELBA) and
secured by surety bonds (Exhibits M to Q inclusive JIGS;
Exhibits CC to FF, inclusive ELBA) executed by
defendant-appellee Commonwealth Insurance Company
(CIC).
Specifically, the surety bonds issued by appellee CIC in
favor of appellant RCBC to secure the obligations of
JIGS totaled P2,894,128.00 while that securing ELBAs
obligation was P1,570,000.00. Hence, the total face
value of the surety bonds issued by appellee CIC
was P4,464,128.00.
JIGS and ELBA defaulted in the payment of their
respective loans. On October 30, 1984, appellant RCBC
made a written demand (Exhibit N) on appellee CIC to
pay JIGs account to the full extend (sic) of the
suretyship. A similar demand (Exhibit O) was made on
December 17, 1984 for appellee CIC to pay ELBAs
account to the full extend (sic) of the suretyship. In
response to those demands, appellee CIC made several
payments from February 25, 1985 to February 10, 1988
in the total amount of P2,000,000.00. There having
been a substantial balance unpaid, appellant RCBC
138 | P a g e #SJBL
made a final demand for payment (Exhibit P) on July 7,
1988 upon appellee CIC but the latter ignored it. Thus,
appellant RCBC filed the Complaint for a Sum of Money
on September 19, 1988 against appellee CIC.4
The trial court rendered a decision dated March 5, 1993,
the dispositive portion of which reads as follows:
WHEREFORE, premises considered, in the light of the
above facts, arguments, discussion, and more
important, the law and jurisprudence, the Court finds
the defendants Commonwealth Insurance Co. and
defaulted third party defendants Jigs Manufacturing
Corporation, Elba Industries and Iluminada de Guzman
solidarily liable to pay herein plaintiff Rizal Commercial
Banking Corporation the sum of Two Million Four
Hundred Sixty-Four Thousand One Hundred Twenty-
Eight Pesos (P2,464,128.00), to pay the plaintiff
attorneys fees of P10,000.00 and to pay the costs of
suit.
IT IS SO ORDERED.5
Not satisfied with the trial courts decision, RCBC filed a
motion for reconsideration praying that in addition to
the principal sum of P2,464,128.00, defendant CIC be
held liable to pay interests thereon from date of demand
at the rate of 12% per annum until the same is fully
paid. However, the trial court denied the motion.
RCBC then appealed to the Court of Appeals.
On May 16, 1997, the CA rendered the herein assailed
decision, ruling thus:
. ..
Being solidarily bound, a suretys obligation is primary so
that according to Art. 1216 of the Civil Code, he can be
sued alone for the entire obligation. However, one very
important characteristic of this contract is the fact that a
suretys liability shall be limited to the amount of the
bond (Sec. 176, Insurance Code). This does not mean
however that even if he defaults in the performance of
his obligation, the extend (sic) of his liability remains to
be the amount of the bond. If he pays his obligation at
maturity upon demand, then, he cannot be made to pay
more than the amount of the bond. But if he fails or
refuses without justifiable cause to pay his
obligation upon a valid demand so that he is in
mora solvendi (Art. 1169, CC), then he must pay
damages or interest in consequence thereof
according to Art. 1170. Even if this interest is in
excess of the amount of the bond, the defaulting
surety is liable according to settled jurisprudence.
.. .
Appellant RCBC contends that when appellee CIC failed
to pay the obligation upon extrajudicial demand, it
incurred in delay in consequence of which it became
liable to pay legal interest. The obligation to pay such
interest does not arise from the contract of
suretyship but from law as a result of delay or
mora. Such an interest is not, therefore, covered
by the limitation of appellees liability expressed in
the contract. Appellee CIC refutes this argument
stating that since the surety bonds expressly state that
its liability shall in no case exceed the amount stated
Guaranty
CIVIL LAW | C r e d i t T r a n s a c t i o n s
therein, then that stipulation controls. Therefore, it
cannot be made to assume an obligation more than
what it secured to pay.
The contention of appellant RCBC is correct because it is
supported by Arts. 1169 and 1170 of the Civil Code and
the case of Asia Surety & Insurance Co., Inc. and Manila
Surety & Fidelity Co. supra. On the other hand, the
position of appellee CIC which upholds the appealed
decision is untenable. The best way to show the
untenability of this argument is to give this hypothetical
case situation: Surety issued a bond for P1 million to
secure a Debtors obligation of P1 million to Creditor.
Debtor defaults and Creditor demands payment from
Surety. If the theory of appellee and the lower court is
correct, then the Surety may just as well not pay and
use the P1 million in the meantime. It can choose to pay
only after several years after all, his liability can never
exceed P1 million. That would be absurd and the law
could not have intended it.6 (Emphasis supplied)
and disposed of the case as follows:
WHEREFORE, the appealed Decision is MODIFIED in the
manner following:
The appellee Commonwealth Insurance Company shall
pay the appellant Rizal Commercial Banking
Corporation:
1. On the account of JIGS, P2,894,128.00 ONLY with
12% legal interest per annum from October 30, 1984
minus payments made by the latter to the former after
that date; and on the account of ELBA, P1,570,000.00
ONLY with 12% legal interest per annum from
December 17, 1984 minus payments made by the latter
to the former after that day; respecting in both accounts
the applications of payment made by appellant RCBC on
appellee CICs payments;
2. Defendant-appellee Commonwealth Insurance
Company shall pay plaintiff-appellant RIZAL
COMMERCIAL BANKING CORP. and (sic) attorneys fee
of P10,000.00 and cost of this suit;
3. The third-party defendants JIGS MANUFACTURING
CORPORATION, ELBA INDUSTRIES and ILUMINADA N.
DE GUZMAN shall respectively indemnify
COMMONWEALTH INSURANCE CORPORATION for
whatever it had paid and shall pay to RIZAL
COMMERCIAL BANKING CORPORATION of their
respective individual obligations pursuant to this
decision.
SO ORDERED.7
CIC filed a motion for reconsideration but the CA denied
the same.
Hence, herein petition by CIC raising a single
assignment of error, to wit:
Respondent Court of Appeals grievously erred in
ordering petitioner to pay respondent RCBC the amount
of the surety bonds plus legal interest of 12% per
annum minus payments made by the petitioner.8
139 | P a g e #SJBL
The sole issue is whether or not petitioner should be
held liable to pay legal interest over and above its
principal obligation under the surety bonds issued by it.
Petitioner argues that it should not be made to pay
interest because its issuance of the surety bonds was
made on the condition that its liability shall in no case
exceed the amount of the said bonds.
We are not persuaded. Petitioners argument is
misplaced.
Jurisprudence is clear on this matter. As early
as Tagawa vs. Aldanese and Union Gurantee Co.9 and
reiterated in Plaridel Surety & Insurance Co., Inc. vs.
P.L. Galang Machinery Co., Inc.10, and more recently,
in Republic vs. Court of Appeals and R & B Surety and
Insurance Company, Inc. 11, we have sustained the
principle that if a surety upon demand fails to pay, he
can be held liable for interest, even if in thus paying, its
liability becomes more than the principal obligation. The
increased liability is not because of the contract but
because of the default and the necessity of judicial
collection.12
Petitioners liability under the suretyship contract is
different from its liability under the law. There is no
question that as a surety, petitioner should not be made
to pay more than its assumed obligation under the
surety bonds.13 However, it is clear from the above-cited
jurisprudence that petitioners liability for the payment of
interest is not by reason of the suretyship agreement
itself but because of the delay in the payment of its
obligation under the said agreement.
Petitioner admits having incurred in delay. Nonetheless,
it insists that mere delay does not warrant the payment
of interest. Citing Section 244 of the Insurance
Code,14 petitioner submits that under the said provision
of law, interest shall accrue only when the delay or
refusal to pay is unreasonable; that the delay in the
payment of its obligation is not unreasonable because
such delay was brought about by negotiations being
made with RCBC for the amicable settlement of the
case.
We are not convinced.
It is not disputed that out of the principal sum
of P4,464,128.00 petitioner was only able to
pay P2,000,000.00. Letters demanding the payment of
the respective obligations of JIGS and ELBA were
initially sent by RCBC to petitioner on October 30,
198415 and December 17, 1984.16 Petitioner made
payments on an installment basis spanning a period of
almost three years, i.e., from February 25, 1985 until
February 10, 1988. On July 7, 1988, or after a period of
almost five months from its last payment, RCBC, thru its
legal counsel, sent a final letter of demand asking
petitioner to pay the remaining balance of its obligation
including interest.17 Petitioner failed to pay. As of the
date of the filing of the complaint on September 19,
1988, petitioner was even unable to pay the remaining
balance of P2,464,128.00 out of the principal amount it
owes RCBC.
Petitioners contention that what prevented it from
paying its obligation to RCBC is the fact that the latter
insisted on imposing interest and penalties over and
above the principal sum it seeks to recover is not
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CIVIL LAW | C r e d i t T r a n s a c t i o n s
plausible. Considering that petitioner admits its
obligation to pay the principal amount, then it should
have paid the remaining balance of P2,464,128.00,
notwithstanding any disagreements with RCBC
regarding the payment of interest. The fact that the
negotiations for the settlement of petitioners obligation
did not push through does not excuse it from paying the
principal sum due to RCBC.
The issue of petitioners payment of interest is a matter
that is totally different from its obligation to pay the
principal amount covered by the surety bonds it issued.
Petitioner offered no valid excuse for not paying the
balance of its principal obligation when demanded by
RCBC. Its failure to pay is, therefore, unreasonable.
Thus, we find no error in the appellate courts ruling that
petitioner is liable to pay interest.
As to the rate of interest, we do not agree with
petitioners contention that the rate should be 6% per
annum. The appellate court is correct in imposing 12%
interest. It is in accordance with our ruling in Eastern
Shipping Lines, Inc. vs. Court of Appeals,18 wherein we
have established certain guidelines in awarding interest
in the concept of actual and compensatory damages, to
wit:
I.When an obligation, regardless of its source, i.e., law,
contracts, quasi-contracts, delicts or quasi-delicts is
breached, the contravenor can be held liable for
damages. The provisions under Title XVIII on Damages
of the Civil Code govern in determining the measure of
recoverable damages.
II.With regard particularly to an award of interest in the
concept of actual and compensatory damages, the rate
of interest, as well as the accrual thereof, is imposed, as
follows
1.When the obligation is breached, and it consists
in the payment of a sum of money, i.e., a loan or
forbearance of money, the interest due should be
that which may have been stipulated in writing.
Furthermore, the interest due shall itself earn
legal interest from the time it is judicially
demanded. In the absence of stipulation, the rate
of interest shall be 12% per annum to be
computed from default, i.e. from judicial or
extrajudicial demand under and subject to the
provisions of Article 1169 of the Civil Code.
2.When an obligation, not constituting a loan or
forbearance of money, is breached, an interest on the
amount of damages awarded may be imposed at the
discretion of the court at the rate of 6% per annum. No
interest, however, shall be adjudged on unliquidated
claims or damages except when or until the demand can
be established with reasonable certainty. Accordingly,
where the demand is established with reasonable
certainty, the interest shall begin to run from the time
the claim is made judicially or extrajudicially (Art. 1169,
Civil Code) but when such certainty cannot be
reasonably established at the time the demand is made,
the interest shall begin to run only from the date the
judgment of the court is made (at which time the
quantification of damages may be deemed to have been
reasonably ascertained). The actual base for the
computation of legal interest shall, in any case, be on
the amount finally adjudged.
140 | P a g e #SJBL
3.When the judgment of the court awarding a sum of
money becomes final and executory, the rate of legal
interest, whether the case falls under paragraph 1 or
paragraph 2, above, shall be 12% per annum from such
finality until its satisfaction, this interim period being
deemed to be by then an equivalent to a forbearance of
credit.19 (Emphasis supplied)
In the present case, there is no dispute that petitioners
obligation consists of a loan or forbearance of money.
No interest has been agreed upon in writing between
petitioner and respondent. Applying the above-quoted
rule to the present case, the Court of Appeals correctly
imposed the rate of interest at 12% per annum to be
computed from the time the extra-judicial demand was
made. This is in accordance with the provisions of
Article 116920 of the Civil Code and of the settled rule
that where there has been an extra-judicial demand
before action for performance was filed, interest on the
amount due begins to run not from the date of the filing
of the complaint but from the date of such extra-judicial
demand.21 RCBCs extra-judicial demand for the
payment of JIGS obligation was made on October 30,
1984; while the extra-judicial demand for the payment
of ELBAs obligation was made on December 17, 1984.
On the other hand, the complaint for a sum of money
was filed by RCBC with the trial court only on
September 19, 1988.
WHEREFORE, the instant petition is DENIED and the
assailed Decision and Resolution of the Court of Appeals
are AFFIRMED in toto.
SO ORDERED.
Puno, (Chairman), Quisumbing, Callejo, Sr., and
Tinga, JJ., concur.
Endnotes:
1
Penned by Justice Hilarion L. Aquino, concurred in by
Justices Eubulo G. Verzola and Portia Alio-
Hormachuelos.
2
Entitled, Rizal Commercial Banking Corporation,
plaintiff-appellant, v. Commonwealth Insurance
Company, defendant-Appellee, Commonwealth,
third-party plaintiff, v.Jigs Manufacturing Corp., et
al., third-party defendants.
3
CA Rollo, p. 135.
4
CA Rollo, pp. 100-101.
5
Original Records, p. 334.
6
CA Rollo, pp. 99-103.
7
CA Rollo, pp. 103-104.
8
Rollo, p. 13.
9
43 Phil. 852, 859 (1922).
10
100 Phil. 679, 681-682 (1957).
Guaranty
CIVIL LAW | C r e d i t T r a n s a c t i o n s

11
354 SCRA 285, 289 (2001).

12
Ibid.

13
Section 176, Insurance Code.

14
Sec. 244. In case of any litigation for the enforcement
of any policy or contract of insurance, it shall be the
duty of the Commissioner or the Court, as the case may
be, to make a finding as to whether the payment of the
claim of the insured has been unreasonably denied or
withheld; and in the affirmative case, the insurance
company shall be adjudged to pay damages which shall
consist of attorneys fees and other expenses incurred by
the insured person by reason of such unreasonable
denial or withholding of payment plus interest of twice
the ceiling prescribed by the Monetary Board of the
amount of the claim due the insured, from the date
following the time prescribed in section two hundred
forty-two or in section two hundred forty-three, as the
case may be, until the claim is fully satisfied; Provided,
That the failure to pay any such claim within the time
prescribed in said sections shall be considered prima
facie evidence of unreasonable delay in payment.

15
Exhibit N, Original Records, p. 33.

16
Exhibit O, Original Records, p. 34.

17
Exhibit P, Original Records, p. 35.

18
234 SCRA 78 (1994).

19
Id., pp. 95-97.

20
Article 1169. Those obliged to deliver or to do
something incur in delay from the time the obligee
judicially or extrajudicially demands from them the
fulfillment of their obligation.

.. .

21
Tolentino, Commentaries and Jurisprudence on the
Civil Code of the Philippines, 1991 Reprint, Vol. IV, p.
103; Padilla, Civil Code Annotated, 1987 Edition, Vol.
IV, p. 61.

141 | P a g e #SJBL Guaranty

CIVIL LAW | C r e d i t T r a n s a c t i o n s

discovered that the CCA entered into by respondent-

spouses and Aegean contained an arbitration
clause.21 Hence, they filed separate Motions to
ςrνl 1

Dismiss22 on the grounds of lack of cause of action and

ς rνl1

lack of jurisdiction. c ralawli bra ry

Ruling of the Regional Trial Court

SECOND DIVISION
On May 5, 2006, the RTC denied both
motions.23 Petitioner and Intra Strata separately moved
[G.R. No. 179628, January 16, 2013]
ςrνl 1

for reconsideration but their motions were denied by the

RTC in its subsequent Order24 dated September 11, ς rν l1

THE MANILA INSURANCE COMPANY, 2006. cralawl ibra ry

INC., Petitioner. v. SPOUSES ROBERTO AND AIDA

AMURAO,Respondents. Aggrieved, petitioner elevated the case to the CA by
way of special civil action for certiorari.25 ς rν l1

DECISION
Ruling of the Court of Appeals

DEL CASTILLO, J.: On June 7, 2007, the CA rendered a

Decision26 dismissing the petition. The CA ruled that
ς rνl1

The jurisdiction of the Construction Industry Arbitration the presence of an arbitration clause in the CCA does
Commission (CIAC) is conferred by law. Section 41 of ςrν l1
not merit a dismissal of the case because under the
Executive Order (E.O.) No. I 008, otherwise known as CCA, it is only when there are differences in the
the Construction Industry Arbitration Law, "is broad interpretation of Article I of the construction agreement
enough to cover any dispute arising from, or connected that the parties can resort to arbitration.27 The CA also ςrν l1

with construction contracts, whether these involve mere found no grave abuse of discretion on the part of the
contractual money claims or execution of the works."2 ςrν l1
RTC when it disregarded the fact that the CCA was not
yet signed at the time petitioner issued the performance
This Petition for Review on Certiorari3 under Rule 45 of ςrνl 1
bond on February 29, 2000.28 The CA explained that ς rν l1

the Rules of Court assails the Decision4 dated June 7, ς rνl1

the performance bond was intended to be coterminous
2007 and the Resolution5 dated September 7, 2007 of ς rν l1
with the construction of the building.29 It pointed out ς rνl1

the Court of Appeals (CA) in CA-G.R. SP No. 96815. cralawlib rary

that "if the delivery of the original contract is
contemporaneous with the delivery of the surety's
Factual Antecedents obligation, each contract becomes completed at the
same time, and the consideration which supports the
On March 7, 2000, respondent-spouses Roberto and principal contract likewise supports the subsidiary
Aida Amurao entered into a Construction Contract one.―30 The CA likewise said that, although the
ςrνl1

Agreement (CCA)6 with Aegean Construction and ςrνl1

contract of surety is only an accessory to the principal
Development Corporation (Aegean) for the construction contract, the surety's liability is direct, primary and
of a six-storey commercial building in Tomas Morato absolute.31 Thus: ςrνl 1 chanroblesv irt ualawli bra ry

corner E. Rodriguez Avenue, Quezon City.7 To ςrν l1

guarantee its full and faithful compliance with the terms WHEREFORE, we resolve to DISMISS the petition as we
and conditions of the CCA, Aegean posted performance find that no grave abuse of discretion attended the
bonds secured by petitioner The Manila Insurance issuance of the order of the public respondent denying
Company, Inc.8 (petitioner) and Intra Strata Assurance
ςrνl 1
the petitioner's motion to dismiss. cralawli bra ry

Corporation (Intra Strata).9 ςrνl1

IT IS SO ORDERED.32 ςrνl1

On November 15, 2001, due to the failure of Aegean to

complete the project, respondent spouses filed with the Petitioner moved for reconsideration but the CA denied
Regional Trial Court (RTC) of Quezon City, Branch 217, the same in a Resolution33 dated September 7, 2007. ςrνl 1 cralawlib ra ry

a Complaint,10 docketed as Civil Case No. Q-01-45573,

ςrν l1

against petitioner and Intra Strata to collect on the Issues

performance bonds they issued in the amounts of
P2,760,000.00 and P4,440,000.00, respectively.11 ςrν l1

Hence, this petition raising the following issues:

Intra Strata, for its part, filed an Answer12 and later, a ςrν l1

Motion to Admit Third Party Complaint,13 with attached ςrνl1

A.
Third Party Complaint14 against Aegean, Ronald D. ςrνl1

Nicdao, and Arnel A. Mariano. cralawli bra ry

THE HONORABLE [CA] ERRED WHEN IT HELD THAT IT

IS ONLY WHEN THERE ARE DIFFERENCES IN THE
Petitioner, on the other hand, filed a Motion to INTERPRETATION OF ARTICLE I OF THE
Dismiss15 on the grounds that the Complaint states no
ς rνl1

CONSTRUCTION AGREEMENT THAT THE PARTIES MAY

cause of action16 and that the filing of the Complaint is
ςrνl 1

RESORT TO ARBITRATION BY THE CIAC.

premature due to the failure of respondent-spouses to
cralawlibra ry

implead the principal contractor, Aegean.17 The RTC,

B.
ςrν l1

however, denied the motion in an Order18 dated May 8, ςrν l1

2002. Thus, petitioner filed an Answer with

THE HONORABLE [CA] ERRED IN TREATING
Counterclaim and Cross-claim,19 followed by a Third
[PETITIONER] AS A SOLIDARY DEBTOR INSTEAD OF A
ςrνl 1

Party Complaint20 against Aegean and spouses Ronald

SOLIDARY GUARANTOR.
ςrν l1

and Susana Nicdao.

cralawlib rary

cralawlib rary

During the pre-trial, petitioner and Intra Strata C.

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CIVIL LAW | C r e d i t T r a n s a c t i o n s

bond, and determined strictly by the terms of contract

THE HONORABLE [CA] OVERLOOKED AND FAILED TO of suretyship in relation to the principal contract
CONSIDER THE FACT THAT THERE WAS NO ACTUAL between the obligor and the obligee.51 It bears ς rνl1

AND EXISTING CONSTRUCTION AGREEMENT AT THE stressing, however, that although the contract of
TIME THE MANILA INSURANCE BOND NO. G (13) 2082 suretyship is secondary to the principal contract, the
WAS ISSUED ON FEBRUARY 29, 2000.34 ςrνl 1 surety's liability to the obligee is nevertheless direct,
primary, and absolute.52 ςrνl1

Petitioner's Arguments
In this case, respondent-spouses (obligee) filed with the
Petitioner contends that the CA erred in ruling that the RTC a Complaint against petitioner (surety) to collect on
parties may resort to arbitration only when there is the performance bond it issued. Petitioner, however,
difference in the interpretation of the contract seeks the dismissal of the Complaint on the grounds of
documents stated in Article I of the CCA.35 Petitioner ςrνl1 lack of cause of action and lack of jurisdiction. cralaw lib rary

insists that under Section 4 of E.O. No. 1008, it is the

CIAC that has original and exclusive jurisdiction over The respondent-spouses have cause of action
construction disputes, such as the instant case.36 ςrν l1 against the petitioner; the performance bond
is coterminous with the CCA
Petitioner likewise imputes error on the part of the CA in
treating petitioner as a solidary debtor instead of a Petitioner claims that respondent-spouses have no
solidary guarantor.37 Petitioner argues that while a ςrνl 1 cause of action against it because at the time it issued
surety is bound solidarily with the obligor, this does not the performance bond, the CCA was not yet signed by
make the surety a solidary co-debtor.38 A surety or ςrνl 1 respondent-spouses and Aegean. cralawlib rary

guarantor is liable only if the debtor is himself

liable.39 In this case, since respondent-spouses and
ς rν l1 We do not agree. cralawli bra ry

Aegean agreed to submit any dispute for arbitration

before the CIAC, it is imperative that the dispute A careful reading of the Performance Bond reveals that
between respondent- spouses and Aegean must first be the "bond is coterminous with the final acceptance of
referred to arbitration in order to establish the liability of the project.―53 Thus, the fact that it was issued prior
ςrν l1

Aegean.40 In other words, unless the liability of Aegean

ςrνl1 to the execution of the CCA does not affect its validity or
is determined, the filing of the instant case is effectivity.
cra lawlib rary

premature.41 ς rν l1

But while there is a cause of action against petitioner,

Finally, petitioner puts in issue the fact that the the complaint must still be dismissed for lack of
performance bond was issued prior to the execution of jurisdiction. cralaw lib rary

the CCA.42 Petitioner claims that since there was no

ςrν l1

existing contract at the time the performance bond was The CIAC has jurisdiction over the case
executed, respondent- spouses have no cause of action
against petitioner.43 Thus, the complaint should be ς rνl1 Section 4 of E.O. No. 1008 provides that: chan roblesv irt ualawli bra ry

dismissed.44 ςrνl 1

SEC. 4. Jurisdiction. - The CIAC shall have original and

Respondent spouses' Arguments exclusive jurisdiction over disputes arising from, or
connected with, contracts entered into by parties
Respondent-spouses, on the other hand, maintain that involved in construction in the Philippines, whether the
the CIAC has no jurisdiction over the case because there dispute arises before or after the completion of the
is no ambiguity in the provisions of the CCA.45 Besides, ςrν l1
contract, or after the abandonment or breach thereof.
petitioner is not a party to the CCA.46 Hence, it cannot ςrν l1
These disputes may involve government or private
invoke Article XVII of the CCA, which provides for contracts. For the Board to acquire jurisdiction, the
arbitration proceedings.47 ς rν l1
parties to a dispute must agree to submit the same to
voluntary arbitration. cralawlib rary

Respondent-spouses also insist that petitioner as a

surety is directly and equally bound with the The jurisdiction of the CIAC may include but is not
principal.48 The fact that the performance bond was
ςrν l1
limited to violation of specifications for materials and
issued prior to the execution of the CCA also does not workmanship, violation of the terms of agreement,
affect the latter's validity because the performance bond interpretation and/or application of contractual time and
is coterminous with the construction of the building.49 ςrνl 1
delays, maintenance and defects, payment, default of
employer or contractor, and changes in contract cost. cralawlibra ry

Our Ruling
Excluded from the coverage of the law are disputes
The petition has merit. cralawl ibra ry arising from employer-employee relationships which
shall continue to be covered by the Labor Code of the
Nature of the liability of the surety Philippines.

A contract of suretyship is defined as "an agreement Based on the foregoing, in order for the CIAC to acquire
whereby a party, called the surety, guarantees the jurisdiction two requisites must concur: "first, the
performance by another party, called the principal or dispute must be somehow connected to a construction
obligor, of an obligation or undertaking in favor of a contract; and second, the parties must have agreed to
third party, called the obligee. It includes official submit the dispute to arbitration proceedings.―54 ς rν l1

recognizances, stipulations, bonds or undertakings

issued by any company by virtue of and under the In this case, both requisites are present. cralawl ibra ry

provisions of Act No. 536, as amended by Act No.

2206.―50 We have consistently held that a surety's
ςrνl1 The parties agreed to submit to arbitration proceedings
liability is joint and several, limited to the amount of the "[a]ny dispute arising in the course of the execution and

143 | P a g e #SJBL Guaranty

CIVIL LAW | C r e d i t T r a n s a c t i o n s

performance of [the CCA] by reason of difference in
interpretation of the Contract Documents x x x which
[the parties] are unable to resolve amicably between
themselves.―55 Article XVII of the CCA reads:
ςrνl 1
ARTICLE XVII - ARBITRATION
chanroblesv irt ualawli bra ry
Decision dated June 7, 2007 and the Resolution dated
September 7, 2007 of the Court of Appeals in CA-G.R.
SP No. 96815 are hereby ANNULLED and SET
ASIDE. The Presiding Judge of the Regional Trial Court
of Quezon City, Branch 217 ts DIRECTED to dismiss
Civil Case No. Q-01-45573 for lack of jurisdiction. c ralawli bra ry

17.1 Any dispute arising in the course of the execution SO ORDERED.

and performance of this Agreement by reason of
difference in interpretation of the Contract Documents Carpio, (Chairperson), Leonardo-De
set forth in Article I which the OWNER and the Castro,* Perez, and Leonen,** JJ., concur. ςrνl 1 ς rν l1 cralaw lib rary

CONTRACTOR are unable to resolve amicably between

themselves shall be submitted by either party to a board Endnotes:
of arbitrators composed of Three (3) members chosen
as follows: One (1) member shall be chosen by the
CONTRACTOR AND One (1) member shall be chosen by *
Per raffle dated January 14. 2013.
the OWNER. The said Two (2) members, in turn, shall
ςrν l1 cralawlib ra ry

select a third member acceptable to both of them. The **

Per Special Order No. 1408 dated January 15,
decision of the Board of Arbitrators shall be rendered
ς rν l1

2013.
within Ten (10) days from the first meeting of the
cralawl ibra ry

board, which decision when reached through the 1

SEC. 4. Jurisdiction– The CIAC shall have original and
affirmative vote of at least Two (2) members of the
ςrν l1

exclusive jurisdiction over disputes arising from. or

board shall be final and binding upon the OWNER and
connected with. contracts entered into by parties
CONTRACTOR.
involved in construction in the Philippines. whether the
cralawlib rary

dispute arises before or after the completion of the

17.2 Matters not otherwise provided for in this Contract
contract, or after the abandonment or breach thereof.
or by Special Agreement of the parties shall be
These disputes may involve government or private
governed by the provisions of the Arbitration Law,
contracts. For the Board to acquire jurisdiction. the
Executive Order No. 1008.56
parties to a dispute must agree to submit the same to
ς rνl1

voluntary arbitration.
In William Golangco Construction Corporation v. Ray
cralawlib rary

Burton Development Corporation,57 we declared that

The jurisdiction of the CIAC may include but is not
ςrνl1

monetary claims under a construction contract are

limited to violation of specifications tor materials and
disputes arising from "differences in interpretation of
workmanship. violation of the terms of agreement,
the contract" because "the matter of ascertaining the
interpretation and/or application of contractual time and
duties and obligations of the parties under their contract
delays. maintenance and defects, payment. default of
all involve interpretation of the provisions of the
employer or contractor, and changes in contract cost.
contract.―58 Following our reasoning in that case, we
cralawlibra ry

ςrνl1

find that the issue of whether respondent-spouses are

Excluded from the coverage of this law are disputes
entitled to collect on the performance bond issued by
arising from employer-employee relationships which
petitioner is a "dispute arising in the course of the
shall continue to be covered the Labor Code of the
execution and performance of [the CCA] by reason of
Philippines.
difference in the interpretation of the contract
cralaw lib rary

documents.― 2
LICOMCEN, lncorporated v. Foundation Specialists,
ςrν l1

Inc., G.R. Nos. 167022 and 169678, April 4. 2011, 647

The fact that petitioner is not a party to the CCA cannot
SCRA 83, 97.
remove the dispute from the jurisdiction of the CIAC
cralawlibra ry

because the issue of whether respondent- spouses are 3

Rollo, pp. 13-37.
entitled to collect on the performance bond, as we have
ςrν l1 cra lawlib rary

said, is a dispute arising from or connected to the 4

Id. at 39-47; penned by Associate Justice Apolinario
CCA.
ςrν l1

D. Bruselas, Jr. and concurred in by Associate Justices

cralawlibra ry

Bienvenido L. Reyes (now a member of this Court) and

In fact, in Prudential Guarantee and Assurance, Inc. v.
Aurora Santiago-Lagman.
Anscor Land, lnc.,59 we rejected the argument that the
cralawlib rary

ςrνl1

jurisdiction of CIAC is limited to the construction 5

Id. at 49.
industry, and thus, cannot extend to surety contracts.
ςrν l1 cralawlibra ry

In that case, we declared that "[a]lthough not the 6

Id. at 72-85.
construction contract itself, the performance bond is
ςrν l1 cralawlibra ry

deemed as an associate of the main construction 7

Id. at 39-40.
contract that it cannot be separated or severed fi ·om its
ςrν l1 cralawlibra ry

principal. The Performance Bond is significantly and 8

Id. at 68-69.
substantially connected to the construction contract that
ςrν l1 cralawlibra ry

there can be no doubt it is the CIAC, under Section 4 of 9

Id. at 70-71.
E.O. No. 1008, which has jurisdiction over any dispute
ςrν l1 cralawlibra ry

arising from or connected with it."60 10

Id. at 63-67.
ςrνl1

ς rν l1 cralawlibra ry

In view of the foregoing, we agree with the petitioner 11

Id. at 66.
that jurisdiction over the instant case lies with the CIAC,
ς rν l1 cralawlibra ry

and not with the RTC. Thus, the Complaint filed by 12

Records, Volume I, pp. 29-32.
respondent-spouses with the RTC must be dismissed.
ς rν l1 cralawl ibra ry

cralawli bra ry

13
Id. at 38-39.
WHEREFORE, the petition is hereby GRANTED. The
ς rν l1 cralawlibra ry

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CIVIL LAW | C r e d i t T r a n s a c t i o n s

14
ς rν l1 Id. at 40-42. cralawlibra ry
50
ς rν l1 INSURANCE CODE, Section 175. cralawlib ra ry

15
ς rν l1 Id. at 26-28. cralawlibra ry
51
Intra-Strata Assurance Corporation v. Republic, G.R.
ς rν l1

No. 156571, July 9, 2008, 557 SCRA 363, 369. cralawlibra ry

16
ς rν l1 Id. at 26. cralawlibra ry

52
Prudential Guarantee and Assurance, Inc. v. Equinox
ς rν l1

17
ς rν l1 Id. at 27. cralawlibra ry Land Corporation, G.R. Nos. 152505-06, September 13,
2007, 533 SCRA 257, 268. cralawlibra ry

18
Id. at 49-50; penned by Judge Lydia Querubin
ς rν l1

Layosa. cralawlibra ry
53
ς rν l1 Rollo, p. 86. cra lawlib rary

19
ς rν l1 Rollo, pp. 88-94. c ralawli bra ry
54
Prudential Guarantee and Assurance, Inc. v. Anscor
ς rν l1

Land, Inc., G.R. No. 177240, September 8, 2010, 630

20
ς rν l1 Id. at 97-100. cralawlibra ry SCRA 368, 376. cralawlibra ry

21
ς rν l1 Id. at 40. cralawlibra ry
55
ς rν l1 Rollo, p. 83. cra lawlib rary

22
ς rν l1 Id. at 117-124 and 110-116. cralawli bra ry
56
ς rν l1 Id. cralawlib ra ry

23
ς rν l1 Records, Volume II, pp. 544-546. cralawl ibra ry
57
ς rν l1 G.R. No. 163582, August 9, 2010, 627 SCRA 74. cralawlibra ry

24
ς rν l1 Id. at 589. cralawlibra ry
58
ς rν l1 Id. at 85. cralawlibra ry

25
ς rν l1 CA rollo, pp. 2-22. cra lawlib rary
59
ς rν l1 Supra note 54 at 373-379. cralawli bra ry

26
ς rν l1 Rollo, pp. 39-47. c ralawli bra ry
60
ς rν l1 Id. at 377.

27
ς rν l1 Id. at 42-44. cralawlibra ry

28
ς rν l1 Id. at 45-46. cralawlibra ry

29
ς rν l1 Id. at 46. cralawlibra ry

30
ς rν l1 Id. cralawlib ra ry

31
ς rν l1 Id. at 45. cralawlibra ry

32
ς rν l1 Id. at 46-47. cralawlibra ry

33
ς rν l1 Id. at 49. cralawlibra ry

34
ς rν l1 Id. at 168-169. cralawlibra ry

35
ς rν l1 Id. at 169. cralawlibra ry

36
ς rν l1 Id. at 171. cralawlibra ry

37
ς rν l1 Id. at 174. cralawlibra ry

38
ς rν l1 Id. at 175. cralawlibra ry

39
ς rν l1 Id. cralawlib ra ry

40
ς rν l1 Id. at 180. cralawlibra ry

41
ς rν l1 Id. at 182. cralawlibra ry

42
ς rν l1 Id. at 183. cralawlibra ry

43
ς rν l1 Id. at 185. cralawlibra ry

44
ς rν l1 Id. at 186. cralawlibra ry

45
ς rν l1 Id. at 192-193. cralawlibra ry

46
ς rν l1 Id. at 193. cralawlibra ry

47
ς rν l1 Id. cralawlib ra ry

48
ς rν l1 Id. at 195. cralawlibra ry

49
ς rν l1 Id. at 196. cralawlibra ry

145 | P a g e #SJBL Guaranty

CIVIL LAW | C r e d i t T r a n s a c t i o n s
SECOND DIVISION
[G.R. No. L-49401. July 30, 1982.]
RIZAL COMMERCIAL BANKING
CORPORATION, Petitioner, v. 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.
SYNOPSIS
Residoro Chua and Enrique Go, Sr. jointly executed a
comprehensive surety agreement to guaranty any
existing or future obligation of Davao Agricultural
Industries Corporation (DAICOR) with petitioner bank.
Thereafter, a promissory note in the amount of
P100,000.00 was issued in favor of petitioner bank
which was signed solely by Enrique Go, Sr. in his
personal capacity and in behalf of DAICOR. When
despite repeated demands the note was not fully paid,
petitioner bank filed a complaint against Daicor,
respondent Chua and Enrique Go, Sr. The trial court,
sustaining the private respondent, dismissed the
complaint on the ground that it states no cause of action
as against him since he did not sign the subject
promissory note, which is a necessary corollary to the
comprehensive surety agreement as evidence of
indebtedness, and without which the said agreement
served no purpose. Hence, this petition.
The Supreme Court held that DAICOR being liable on
the promissory note, private respondent was likewise
liable thereon even if he did not sign it, since under the
subsisting comprehensive surety agreement, he jointly
bound himself to guaranty existing and future
obligations of DAICOR subject only to the condition that
their obligation will not at any one time exceed the
aggregate principal sum of P100,000.00.
Petition granted. Assailed decision set aside and case
remanded to the court of origin with instruction to set
aside the motion to dismiss and to require Residoro
Chua to answer the complaint.
SYLLABUS
1. CIVIL LAW; GUARANTY; EFFECTS OF GUARANTY;
PRIVATE RESPONDENT IN CASE AT BAR LIABLE UNDER
COMPREHENSIVE SURETY AGREEMENT, ALTHOUGH NOT
A SIGNATORY TO PROMISSORY NOTE. — Where 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 obligation
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, respondent Chua is liable on a
P100,000.00 promissory note in favor of petitioner
146 | P a g e #SJBL
bank, signed only by Go in his personal capacity and in
behalf of DAICOR, to cover a loan of P100,000.00
obtained from petitioner by DAICOR. The surety
agreement 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.
2. ID.; ID.; ID.; GUARANTY TO SECURE FUTURE DEBTS,
ALLOWABLE UNDER THE CIVIL CODE: CASE AT BAR. —
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 Article 2053 of the Civil Code.
DECISION
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.
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
agreement 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. chanro bles lawl ibra ry : red nad
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
Guaranty
CIVIL LAW | C r e d i t T r a n s a c t i o n s
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: chan roble s.com:c ralaw:red
"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 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
comfortable 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." cra law virt ua 1aw libra ry
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 1 of the agreement provides:
147 | P a g e
"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 the 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 covecting all such
instruments or other indebtedness or obligations
hereinbefore referred to . . ., provided, however, that
the liability of the undersigned shall not exceed at any
one time the aggregate principal sum of P100,000.00 . .
."
cralaw virt ua1aw lib ra ry
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.
chanrob lesvi rtua lawlib rary
"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, . . ." 9
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
jgc:c hanro bles. com.ph known; there can be no claim against the guarantor
until the debt is liquidated. A conditional obligation may
#SJBL Guaranty
CIVIL LAW | C r e d i t T r a n s a c t i o n s

also be secured." cralaw virtua1aw l ibra ry

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.

Barredo (Chairman), Aquino, Concepcion Jr., Guerrero,

Abad Santos and Escolin, JJ., concur.

Endnotes:

1. p. 45, Rollo.

2. p. 54, Rollo.

3. p. 67, Rollo.

4. p. 68, Rollo.

5. Annex B, Petition, p. 17, Rollo.

6. Annex C, Petition, p. 19, Rollo.

7. Annex E, Petition, p. 23, Rollo.

8. Annex H, Petition, p. 39, Rollo.

9. Par. 6, Comprehensive Surety Agreement, p. 67,

Rollo.

10. p. 68, Rollo.

148 | P a g e #SJBL Guaranty

CIVIL LAW | C r e d i t T r a n s a c t i o n s
THIRD DIVISION
[G.R. No. 89775. November 26, 1992.]
JACINTO UY DIÑO and NORBERTO UY, Petitioners,
v. HON. COURT OF APPEALS and METROPOLITAN
BANK AND TRUST COMPANY, Respondents.
Guillermo B. Ilagan, for Petitioners.
Jorge, Perez & Associates for Private Respondent.
SYLLABUS
1. CIVIL LAW; GUARANTY; CONTINUING GUARANTY;
DEFINED; BASIS AND NATURE THEREOF; WHEN
GUARANTY CONSTRUED AS CONTINUING; CASE AT
BAR. — Under the Civil Code, a guaranty may be given
to secure even future debts, the amount of which may
not be known at the time the guaranty is executed. This
is the basis for contracts denominated as a continuing
guaranty or suretyship. 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 s 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. . . .
Petitioners maintain, however, that their Continuing
Suretyship Agreements cannot be made applicable to
the 1979 obligation because the latter was not yet in
existence when the agreements were executed in 1977;
under Article 2052 of the Civil Code, a guaranty "cannot
exist without a valid obligation." We cannot agree. First
of all, the succeeding article provides that" [a] guaranty
may also be given as security for future debts, the
amount of which is not yet known." Secondly. Article
2052 speaks about a valid obligations, as distinguished
from a void obligation, and not an existing or current
obligation. This distinction is made clearer in the second
paragraph of Article 2052 which reads: "Nevertheless, a
149 | P a g e #SJBL
guaranty may be constituted to guarantee the
performance of a voidable or an unenforceable contract.
It may also guarantee a natural obligation." cralaw vi rtua 1aw lib rary
2. ID.; ID.; GUARANTOR MAY BIND HIMSELF FOR LESS,
BUT NOT FOR MORE THAN PRINCIPAL DEBTOR; CASE
AT BAR. — The limit of the petitioners’ respective
liabilities must be determined from the suretyship
agreement each had signed. It is undoubtedly true that
the law looks upon the contract of suretyship with a
jealous eye, and the rule is settled that the obligation of
the surety cannot be extended by implication beyond its
specified limits. To the extent, and in the manner, and
under the circumstances pointed out in his obligation,
he is bound, and no farther. Indeed, the Continuing
Suretyship Agreements signed by petitioner Diño — and
petitioner Uy fix the aggregate amount of their liability,
at any given time, at P800,000.00 and P300,000.00,
respectively. The law is clear that a guarantor may bind
himself for less, but not for more than the principal
debtor, both as regards the amount and the onerous
nature of the conditions.
3. ID.; ID.; GUARANTOR’S LIABILITY FOR PRINCIPAL
OBLIGATION, ITS ACCESSORIES AND ATTORNEY’S
FEES; BASIS AND RATIONALE; ITEMS INCLUDED IN
TERM "ACCESSORIES" ; CASE AT BAR. — by express
mandate of the Continuing Suretyship Agreements
which they had signed, petitioners separately bound
themselves to pay interests, expenses, attorney’s fees
and costs. The last two items are pegged at not less
than ten percent (10%) of the amount due. Even
without such stipulations, the petitioners would,
nevertheless, be liable for the interest and judicial costs.
Article 2055 of the Civil Code provides: "ART. 2055. A
guaranty is not presumed; it must be express and
cannot extend to more than what is stipulated therein.
If it be simple or indefinite, it shall comprise not only
the principal obligation, but also all its accessories,
including the 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." Interests and damages are included in the term
accessories. However, such interest should run only
from the date when the complaint was filed in court.
Even attorney’s fees may be imposed whenever
appropriate, pursuant to Article 2208 of the Civil Code.
Thus; in Plaridel Surety & Insurance Co., Inc. v. P.L.
Galang Machinery Co., Inc., this Court held: "Petitioner
objects to the payment of interest and attorney’s fees
because: (1) they were not mentioned in the bond; and
(2) the surety would become liable for more than the
amount stated in the contract of suretyship. . . . The
objection has to be overruled, because as far back as
the year 1922 this Court held in Tagawa v. Aldanese, 43
Phil. 852, that creditors suing on a suretyship bond may
recover from the surety as part of their damages,
interest at the legal rate even if the surety would
thereby become liable to pay more than the total
amount stipulated in the bond.’The theory is that
interest is allowed only by way of damages for delay
upon the part of the sureties in making payment after
they should have done so. In some states, the interest
has been charged from the date of the judgment of the
appellate court. In this jurisdiction, we rather prefer to
follow the general practice, which is to order that
interest begin to run from the date when the complaint
was filed in court, . . . .’ Such theory aligned with sec.
510 of the Code of Civil Procedure which was
subsequently recognized in the Rules of Court (Rule 53,
section 6) and with Article 1108 of the Civil Code (now
Art. 2209 of the New Civil Code). In other words the
surety is made to pay interest, not by reason of the
Guaranty
CIVIL LAW | C r e d i t T r a n s a c t i o n s
contract, but by reason of its failure to pay when
demanded and for having compelled the plaintiff to
resort to the courts to obtain payment. It should be
observed that interest does not run from the time the
obligation became due, but from the filing of the
complaint. As to attorney’s fees. Before the enactment
of the New Civil Code, successful litigants could not
recover attorney’s fees as part of the damages they
suffered by reason of the litigation. Even if the party
paid thousands of pesos to his lawyers, he could not
charge the amount to his opponent (Tan Ti v. Alvear, 26
Phil. 566). However the New Civil Code permits recovery
of attorney’s fees in eleven cases enumerated in Article
2208, among them, ‘where the court deems it just and
equitable that attorney’s (sic) fees and expenses of
litigation should be recovered’ or ‘when the defendant
acted in gross and evident bad faith in refusing to
satisfy the plaintiff’s plainly valid, just and demandable
claim’. This gives the courts discretion in apportioning
attorney’s fees."
DECISION
DAVIDE, JR., J.:
Continuing Suretyship Agreements signed by the
petitioners set off this present controversy.
Petitioners assail the 22 June 1989 Decision of the Court
of Appeals in CA-G.R. CV No. 17729 1 which reversed
the 2 December 1987 Decision of Branch 45 of the
Regional Trial Court (RTC) of Manila in a collection suit
entitled "Metropolitan Bank and Trust Company v. Uy
Tiam doing business under the name of ‘UY TIAM
ENTERPRISES & FREIGHT SERVICES,’ Jacinto Uy Diño
and Norberto Uy" and docketed as Civil Case No. 82-
9303. They likewise challenge public respondent’s
Resolution of 21 August 1989 2 denying their motion for
the reconsideration of the former.
The impugned decision of the respondent Court
summarizes the antecedent facts as follows:
"It appears that in 1977, Uy Tiam Enterprises and
Freight Services (hereinafter referred to as UTEFS), thru
its representative Uy Tiam, applied for and obtained
credit accommodations (letter of credit and trust receipt
accommodations) from the Metropolitan Bank and Trust
Company (hereinafter referred to as METROBANK) in
the sum of P700,000.00 (Original Records, p. 333). To
secure the aforementioned credit accommodations,
Norberto Uy and Jacinto Uy Diño executed separate
Continuing Suretyships (Exhibits "E" and "F"
respectively), dated 25 February 1977, in favor of the
latter. Under the aforesaid agreements, Norberto Uy
agreed to pay METROBANK any indebtedness of UTEFS
up to the aggregate sum of P300,000.00 while Jacinto
Uy Diño agreed to be bound up to the aggregate sum of
P800,000.00. chanroble s virtualawl ibra ry cha nrob les.co m:chan roble s.com.p h
Having paid the obligation under the above letter of
credit in 1977, UTEFS, through Uy Tiam, obtained
another credit accommodation from METROBANK in
1978, which credit accommodation was fully settled
before an irrevocable letter of credit was applied for and
obtained by the abovementioned business entity in 1979
(September 8, 1987, tsn, pp. 14- 15).
The Irrevocable Letter of Credit No. SN-Loc-309, dated
150 | P a g e
March 30, 1979, in the sum of P815,600.00, covered
UTEFS’ purchase of ‘8,000 Bags Planters Urea and 4,000
Bags Planters 21-0-0.’ It was applied for and obtained
by UTEFS without the participation of Norberto Uy and
Jacinto Uy Diño as they did not sign the document
denominated as ‘Commercial Letter of Credit and
Application.’ Also, they were not asked to execute any
suretyship to guarantee its payment. Neither did
METROBANK nor UTEFS inform them that the 1979
Letter of Credit has been opened and that the
Continuing Suretyships separately executed in February,
1977 shall guarantee its payment (Appellees’ brief, pp.
2-3; Rollo, p. 28).
The 1979 letter of credit (Exhibit "B") was negotiated.
METROBANK paid Planters Products the amount of
P815,600.00 which payment was covered by a Bill of
Exchange (Exhibit "C"), dated 4 June 1979, in favor of
the former, drawn on and accepted by UTEFS (Original
Records, p. 331).
Pursuant to the above commercial transaction, UTEFS
executed and delivered to METROBANK a Trust Receipt
(Exh. "D"), dated 4 June 1979, whereby the former
acknowledged receipt in trust from the latter of the
aforementioned goods from Planters Products which
amounted to P815,600.00. Being the entrustee, the
former agreed to deliver to METROBANK the entrusted
goods in the event of non-sale or, if sold, the proceeds
of the sale thereof, on or before September 2, 1979.
However, UTEFS did not acquiesce to the obligatory
stipulations in the trust receipt. As a consequence,
METROBANK sent letters to the said principal obligor
and its sureties, Norberto Uy and Jacinto Uy Diño,
demanding payment of the amount due. Informed of the
amount due, UTEFS made partial payments to the Bank
which were accepted by the latter.
Answering one of the demand letters, Diño, thru
counsel, denied his liability for the amount demanded
and requested METROBANK to send him copies of
documents showing the source of his liability. In its
reply, the bank informed him that the source of his
liability is the Continuing Suretyship which he executed
jgc:chan roble s.com.p h on February 25, 1977.
As a rejoinder, Diño maintained that he cannot be held
liable for the 1979 credit accommodation because it is a
new obligation contracted without his participation.
Besides, the 1977 credit accommodation which he
guaranteed has been fully paid.
Having sent the last demand letter to UTEFS, Diño and
Uy and finding resort to extrajudicial remedies to be
futile, METROBANK filed a complaint for collection of a
sum of money (P613,339.32, as of January 31, 1982,
inclusive of interest, commission penalty and bank
charges) with a prayer for the issuance of a writ of
preliminary attachment, against Uy Tiam, representative
of UTEFS and impleaded Diño and Uy as parties-
defendants.
The court issued an order, dated 29 July 1983, granting
the attachment writ, which writ was returned unserved
and unsatisfied as defendant Uy Tiam was nowhere to
be found at his given address and his commercial
enterprise was already non-operational (Original
Records, p. 37).
On April 11, 1984, Norberto Uy and Jacinto Uy Diño
(sureties-defendants herein) filed a motion to dismiss
the complaint on the ground of lack of cause of action.
#SJBL Guaranty
CIVIL LAW | C r e d i t T r a n s a c t i o n s
They maintained that the obligation which they
guaranteed in 1977 has been extinguished since it has
already been paid in the same year. Accordingly, the
Continuing Suretyships executed in 1977 cannot be
availed of to secure Uy Tiam’s Letter of Credit obtained
in 1979 because a guaranty cannot exist without a valid
obligation. It was further argued that they can not be
held liable for the obligation contracted in 1979 because
they are not privies thereto as it was contracted without
their participation (Records, pp. 42-46).
On April 24, 1984, METROBANK filed its opposition to
the motion to dismiss. Invoking the terms and
conditions embodied in the comprehensive suretyships
separately executed by sureties-defendants, the bank
argued that sureties-movants bound themselves as
solidary obligors of defendant Uy Tiam to both existing
obligations and future ones. It relied on Article 2053 of
the new Civil Code which provides: ‘A guaranty may
also be given as security for future debts, the amount of
which is not yet known; . . . .’ It was further asserted
that the agreement was in full force and effect at the
time the letter of credit was obtained in 1979 as
sureties-defendants did not exercise their right to
revoke it by giving notice to the bank. (Ibid., pp. 51-
54).
Meanwhile, the resolution of the aforecited motion to
dismiss was held in abeyance pending the introduction
of evidence by the parties as per order dated February
21, 1986 (Ibid., p. 71).
Having been granted a period of fifteen (15) days from
receipt of the order dated March 7, 1986 within which to
file the answer, sureties-defendants filed their
responsive pleading which merely rehashed the
arguments in their motion to dismiss and maintained
that they are entitled to the benefit of excussion
(Original Records, pp. 88-93).
On February 23, 1987, plaintiff filed a motion to dismiss
the complaint against defendant Uy Tiam on the ground
that it has no information as to the heirs or legal
representatives of the latter who died sometime in
December, 1986, which motion was granted on the
following day (Ibid., pp 180-182).
After trial, . . . the court a quo, on December 2, 1987,
rendered its judgment, a portion of which reads: chan rob1es v irt ual 1aw l ibra ry
‘The evidence and the pleadings, thus, pose the querry
(sic):
cha nrob 1es vi rtua l 1aw lib rary
‘Are the defendants Jacinto Uy Diño and Norberto Uy
liable for the obligation contracted by Uy Tiam under the
Letter of Credit (Exh. B) issued on March 30, 1979 by
virtue of the Continuing Suretyships they executed on
February 25, 1977?
‘Under the admitted proven facts, the Court finds that
they are not.
‘a) When Uy and Diño executed the continuing
suretyships, exhibits E and F, on February 25, 1977, Uy
Tiam was obligated to the plaintiff in the amount of
P700,000.00 — and this was the obligation which both
defendants guaranteed to pay. Uy Tiam paid this 1977
obligation — and such payment extinguished the
obligation they assumed as guarantors/sureties.
‘b) The 1979 Letter of Credit (Exh. B) is different from
the 1977 Letter of Credit which covered the 1977
account of Uy Tiam. Thus, the obligation under either is
151 | P a g e
apart and distinct from the obligation created in the
other — as evidenced by the fact that Uy Tiam had to
apply anew for the 1979 transaction (Exh. A). And Diño
and Uy, being strangers thereto, cannot be answerable
thereunder.
‘c) The plaintiff did not serve notice to the defendants
Diño and Uy when it extended to Uy Tiam the 1979
Letter of Credit — at least to inform them that the
continuing suretyships they executed on February 25,
1977 will be considered by the plaintiff to secure the
1979 transaction of Uy Tiam.
‘d) There is no sufficient and credible showing that Diño
and Uy were fully informed of the import of the
Continuing Suretyships when they affixed their
signatures thereon — that they are thereby securing all
future obligations which Uy Tiam may contract with the
plaintiff. On the contrary, Diño and Uy categorically
testified that they signed the blank forms in the office of
Uy Tiam at 623 Asuncion Street, Binondo, Manila, in
obedience to the instruction of Uy Tiam, their former
employer. They denied having gone to the office of the
plaintiff to subscribe to the documents (October 1,
1987, tsn, pp. 5-7, 14; October 15, 1987, tsn, pp. 3-8,
13-16). (Records, pp. 333-334).’" 3
x x x
In its Decision, the trial court decreed as follows: jgc:c han robles. com.ph
"PREMISES CONSIDERED, judgment is hereby
rendered: chan rob1e s virtual 1aw l ibrary
‘a) dismissing the COMPLAINT against JACINTO UY
DIÑO and NORBERTO UY;
‘b) ordering the plaintiff to pay to Diño and Uy the
amount of P6,000.00 as attorney’s fees and expenses of
litigation; and
‘c) denying all other claims of the parties for want of
legal and/or factual basis.’ chanrobles law lib rary
‘SO ORDERED’. (Records, p. 336)." 4
From the said Decision, the private respondent appealed
to the Court of Appeals. The case was docketed as CA-
G.R. CV No. 17724. In support thereof, it made the
following assignment of errors in its Brief: jgc:c han robles. com.ph
"I. THE LOWER COURT SERIOUSLY ERRED IN NOT
FINDING AND HOLDING THAT DEFENDANTS-APPELLEES
JACINTO UY DIÑO AND NORBERTO UY ARE SOLIDARILY
LIABLE TO PLAINTIFF-APPELLANT FOR THE OBLIGATION
OF DEFENDANT UY TIAM UNDER THE LETTER OF
CREDIT ISSUED ON MARCH 30, 1979 BY VIRTUE OF
THE CONTINUING SURETYSHIPS THEY EXECUTED ON
FEBRUARY 25, 1977.
II. THE LOWER COURT ERRED IN HOLDING THAT
PLAINTIFF-APPELLANT IS ANSWERABLE TO
DEFENDANTS-APPELLEES JACINTO UY DIÑO AND
NORBERTO UY FOR ATTORNEY’S FEES AND EXPENSES
OF LITIGATION." 5
On 22 June 1989, public respondent promulgated the
assailed Decision the dispositive portion of which
reads:jgc:chan roble s.com.p h
"WHEREFORE, premises considered, the judgment
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CIVIL LAW | C r e d i t T r a n s a c t i o n s
appealed from is hereby REVERSED and SET ASIDE. In
lieu thereof, another one is rendered: chan rob1e s virtual 1aw l ibrary
1) Ordering sureties-appellees Jacinto Uy Diño and
Norberto Uy to pay, jointly and severally, to appellant
METROBANK the amount of P2,397,883.68 which
represents the amount due as of July 17, 1987 inclusive
of principal, interest and charges;
2) Ordering sureties-appellees Jacinto Uy Diño and
Norberto Uy to pay, jointly and severally, appellant
METROBANK the accruing interest, fees and charges
thereon from July 18, 1987 until the whole monetary
obligation is paid; and
3) Ordering sureties-appellees Jacinto Uy Diño and
Norberto Uy to pay, jointly and severally, to plaintiff
P20,000.00 as attorney’s fees.
With costs against appellees.
SO ORDERED." 6
In ruling for the herein private respondent (hereinafter
METROBANK), public respondent held that the
Continuing Suretyship Agreements separately executed
by the petitioners in 1977 were intended to guarantee
payment of Uy Tiam’s outstanding as well as future
obligations; each suretyship arrangement was intended
to remain in full force and effect until METROBANK
would have been notified of its revocation. Since no
such notice was given by the petitioners, the
suretyships are deemed outstanding and hence, cover
even the 1979 letter of credit issued by METROBANK in
favor of Uy Tiam.
Petitioners filed a motion to reconsider the foregoing
Decision. They questioned the public respondent’s
construction of the suretyship agreements and its ruling
with respect to the extent of their liability thereunder.
They argued that even if the agreements were in full
force and effect when METROBANK granted Uy Tiam’s
application for a letter of credit in 1979, the public
respondent nonetheless seriously erred in holding them
liable for an amount over and above their respective
face values.
In its Resolution of 21 August 1989, public respondent
denied the motion: jgc:c han robles. com.ph
". . . considering that the issues raised were
substantially the same grounds utilized by the lower
court in rendering judgment for defendants-appellees
which We upon appeal found and resolved to be
untenable, thereby reversing and setting aside said
judgment and rendering another in favor of plaintiff, and
no new or fresh issues have been posited to justify
reversal of Our decision herein, . . . ." 7
Hence, the instant petition which hinges on the issue of
whether or not the petitioners may be held liable as
sureties for the obligation contracted by Uy Tiam with
METROBANK on 30 May 1979 under and by virtue of the
Continuing Suretyship Agreements signed on 26
February 1977. cralawnad
Petitioners vehemently deny such liability on the ground
that the Continuing Suretyship Agreements were
automatically extinguished upon payment of the
principal obligation secured thereby, i.e., this letter of
credit obtained by Uy Tiam in 1977. They further claim
that they were not advised by either METROBANK or Uy
Tiam that the Continuing Suretyship Agreements would
152 | P a g e
stand as security for the 1979 obligation. Moreover, it is
posited that to extend the application of such
agreements to the 1979 obligation would amount to a
violation of Article 2052 of the Civil Code which
expressly provides that a guaranty cannot exist without
a valid obligation. Petitioners further argue that even
granting, for the sake of argument, that the Continuing
Suretyship Agreements still subsisted and thereby also
secured the 1979 obligations incurred by Uy Tiam, they
cannot be held liable for more than what they
guaranteed to pay because it is axiomatic that the
obligations of a surety cannot extend beyond what is
stipulated in the agreement.
On 12 February 1990, this Court resolved to give due
course to the petition after considering the allegations,
issues and arguments adduced therein, the Comment
thereon by the private respondent and the Reply thereto
by the petitioners; the parties were required to submit
their respective Memoranda.
The issues presented for determination are quite
simple:chan rob1es v irt ual 1aw l ibra ry
1. Whether petitioners are liable as sureties for the
1979 obligations of Uy Tiam to METROBANK by virtue of
the Continuing Suretyship Agreements they separately
signed in 1977; and
2. On the assumption that they are, what is the extent
of their liabilities for said 1979 obligations.
Under the Civil Code, a guaranty may be given to secure
even future debts, the amount of which may not be
known at the time the guaranty is executed. 8 This is
the basis for contracts denominated as a continuing
guaranty or suretyship. 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 s 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. 9 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. 10 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. 11
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. 12
In the case at bar, the pertinent portion of paragraph I
of the suretyship agreement executed by petitioner Uy
provides thus: jgc:cha nrob les.co m.ph
"I. For and in consideration of any existing indebtedness
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CIVIL LAW | C r e d i t T r a n s a c t i o n s
to the BANK of UY TIAM (hereinafter called the
‘Borrower’), for the payment of which the SURETY is
now obligated to the BANK, either as guarantor or
otherwise, and/or in order to induce the BANK, in its
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, of 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 SURETY agrees to guarantee, and does
hereby guarantee, the punctual payment at maturity to
the BANK of any and all such instruments, loans,
advances credits and/or other obligations hereinbefore
referred to, and also any and all other indebtedness of
every kind which is now or may hereafter become due
or owing to the BANK by the Borrower, together with
any and all expenses which may be incurred by the
BANK in collecting all or any such instruments or other
indebtedness or obligations hereinbefore referred to,
and/or in enforcing any rights hereunder, and the
SURETY also agrees that the BANK may make or cause
any and all such payments to be made strictly in
accordance with the terms and provisions of any
agreement(s) 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, unless the same is mandatory and
non-waivable in character, nor or hereafter in effect,
which might in any manner affect any of the terms or
provisions of any such agreement(s) or the BANK’s
rights 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;
provided, however, that the liability of the SURETY
hereunder shall not exceed at any one time the
aggregate principal sum of PESOS: THREE HUNDRED
THOUSAND ONLY (P300,000.00) (irrespective of the
currency(ies) in which the obligations hereby
guaranteed are payable), and such interest as may
accrue thereon either before or after any maturity(ies)
thereof and such expenses as may be incurred by the
BANK as referred to above." 13
Paragraph I of the Continuing Suretyship Agreement
executed by petitioner Diño contains identical provisions
except with respect to the guaranteed aggregate
principal amount which is EIGHT HUNDRED THOUSAND
PESOS (P800,000.00). 14
Paragraph IV of both agreements stipulate that: chanroble s law lib rary : red
"VI. This is a continuing guaranty and shall remain in
full force and effect until written notice shall have been
received by the BANK that it has been revoked by the
SURETY, but any such notice shall not release the
SURETY from any liability as to any instruments, loans,
advances or other obligations hereby guaranteed, which
may be held by the BANK, or in which the BANK may
have any interest at the time of the recept (sic) of such
notice. No act or omission of any kind on the BANK’s
part in the premises shall in any event affect or impair
this guaranty, nor shall same (sic) be affected by any
change which may arise by reason of the death of the
SURETY, or of any partner(s) of the SURETY, or of the
Borrower, or of the accession to any such partnership of
any one or more new partners." 15
153 | P a g e
The foregoing stipulations unequivocally reveal that the
suretyship agreements in the case at bar are continuing
in nature. Petitioners do not deny this; in fact, they
candidly admitted it. Neither have they denied the fact
that they had not revoked the suretyship agreements.
Accordingly, as correctly held by the public
respondent: jgc:cha nrob les.co m.ph
"Undoubtedly, the purpose of the execution of the
Continuing Suretyships was to induce appellant to grant
any application for credit accommodation (letter of
credit/trust receipt) UTEFS may desire to obtain from
appellant bank. By its terms, each suretyship is a
continuing one which shall remain in full force and effect
until the bank is notified of its revocation.
x x x
When the Irrevocable Letter of Credit No. SN-Loc-309
was obtained from appellant bank, for the purpose of
obtaining goods (covered by a trust receipt) from
Planters Products, the continuing suretyships were in full
force and effect. Hence, even if sureties-appellees did
not sign the ‘Commercial Letter of Credit and
Application, they are still liable as the credit
accommodation (letter of credit/trust receipt) was
covered by the said suretyships. What makes them
liable thereunder is the condition which provides that
the Borrower ‘is or may become liable as maker,
endorser, acceptor or otherwise.’ And since UTEFS
which (sic) was liable as principal obligor for having
failed to fulfill the obligatory stipulations in the trust
receipt, they as insurers of its obligation, are liable
thereunder." 16
Petitioners maintain, however, that their Continuing
Suretyship Agreements cannot be made applicable to
the 1979 obligation because the latter was not yet in
existence when the agreements were executed in 1977;
under Article 2052 of the Civil Code, a guaranty "cannot
exist without a valid obligation." We cannot agree. First
of all, the succeeding article provides that" [a] guaranty
may also be given as security for future debts, the
amount of which is not yet known." Secondly. Article
2052 speaks about a valid obligations, as distinguished
from a void obligation, and not an existing or current
obligation. This distinction is made clearer in the second
paragraph of Article 2052 which reads: jgc:chan roble s.com.p h
"Nevertheless, a guaranty may be constituted to
guarantee the performance of a voidable or an
unenforceable contract. It may also guarantee a natural
obligation."cralaw vi rtua 1aw lib rary
As to the amount of their liability under the Continuing
Suretyship Agreements, petitioners contend that the
public respondent gravely erred in finding them liable
for more than the amount specified in their respective
agreements, to wit: (a) P800,000.00 for petitioner Diño
and (b) P300,000.00 for petitioner Uy.
The limit of the petitioners’ respective liabilities must be
determined from the suretyship agreement each had
signed. It is undoubtedly true that the law looks upon
the contract of suretyship with a jealous eye, and the
rule is settled that the obligation of the surety cannot be
extended by implication beyond its specified limits. To
the extent, and in the manner, and under the
circumstances pointed out in his obligation, he is bound,
and no farther. 17
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CIVIL LAW | C r e d i t T r a n s a c t i o n s
Indeed, the Continuing Suretyship Agreements signed
by petitioner Diño — and petitioner Uy fix the aggregate
amount of their liability, at any given time, at
P800,000.00 and P300,000.00, respectively. The law is
clear that a guarantor may bind himself for less, but not
for more than the principal debtor, both as regards the
amount and the onerous nature of the conditions. 18 In
the case at bar, both agreements provide for liability for
interest and expenses, to wit:
". . . and such interest as may accrue thereon either
before or after any maturity(ies) thereof and such
expenses as may be incurred by the BANK referred to
above." 19
They further provide that: jgc:chan robles. com.p h
"In the event of judicial proceedings being instituted by
the BANK against the SURETY to enforce any of the
terms and conditions of this undertaking, the SURETY
further agrees to pay the BANK a reasonable
compensation for and as attorney’s fees and costs of
collection, which shall not in any event be less than ten
per cent (10%) of the amount due (the same to be due
and payable irrespective of whether the case is settled
judicially or extrajudicially)." 20
Thus, by express mandate of the Continuing Suretyship
Agreements which they had signed, petitioners
separately bound themselves to pay interests,
expenses, attorney’s fees and costs. The last two items
are pegged at not less than ten percent (10%) of the
amount due.
Even without such stipulations, the petitioners would,
nevertheless, be liable for the interest and judicial costs.
Article 2055 of the Civil Code provides: 21
"ARTICLE 2055. A guaranty is not presumed; it must be
express and cannot extend to more than what is
stipulated therein.
If it be simple or indefinite, it shall comprise not only
the principal obligation, but also all its accessories,
including the 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."cralaw virtua1aw lib rary
Interests and damages are included in the term
accessories. However, such interest should run only
from the date when the complaint was filed in court.
Even attorney’s fees may be imposed whenever
appropriate, pursuant to Article 2208 of the Civil Code.
Thus; in Plaridel Surety & Insurance Co., Inc. v. P.L.
Galang Machinery Co., Inc., 22 this Court held:
"Petitioner objects to the payment of interest and
attorney’s fees because: (1) they were not mentioned in
the bond; and (2) the surety would become liable for
more than the amount stated in the contract of
suretyship.
x x
The objection has to be overruled, because as far back
as the year 1922 this Court held in Tagawa v. Aldanese,
43 Phil. 852, that creditors suing on a suretyship bond
may recover from the surety as part of their damages,
interest at the legal rate even if the surety would
thereby become liable to pay more than the total
154 | P a g e
amount stipulated in the bond.’The theory is that
interest is allowed only by way of damages for delay
upon the part of the sureties in making payment after
they should have done so. In some states, the interest
has been charged from the date of the judgment of the
appellate court. In this jurisdiction, we rather prefer to
follow the general practice, which is to order that
interest begin to run from the date when the complaint
jgc:chan roble s.com.p h was filed in court, . . . .’
Such theory aligned with sec. 510 of the Code of Civil
Procedure which was subsequently recognized in the
Rules of Court (Rule 53, section 6) and with Article 1108
of the Civil Code (now Art. 2209 of the New Civil Code).
In other words the surety is made to pay interest, not
by reason of the contract, but by reason of its failure to
pay when demanded and for having compelled the
plaintiff to resort to the courts to obtain payment. It
should be observed that interest does not run from the
time the obligation became due, but from the filing of
the complaint.
As to attorney’s fees. Before the enactment of the New
Civil Code, successful litigants could not recover
attorney’s fees as part of the damages they suffered by
reason of the litigation. Even if the party paid thousands
of pesos to his lawyers, he could not charge the amount
to his opponent (Tan Ti v. Alvear, 26 Phil. 566).
However the New Civil Code permits recovery of
attorney’s fees in eleven cases enumerated in Article
2208, among them, ‘where the court deems it just and
equitable that attorney’s (sic) fees and expenses of
litigation should be recovered’ or ‘when the defendant
acted in gross and evident bad faith in refusing to
satisfy the plaintiff’s plainly valid, just and demandable
claim’. This gives the courts discretion in apportioning
attorney’s fees." cralaw virtua1aw l ib rary
The records do not reveal the exact amount of the
unpaid portion of the principal obligation of Uy Tiam to
METROBANK under Irrevocable Letter of Credit No. SN-
Loc-309 dated 30 March 1979. In referring to the last
demand letter to Mr. Uy Tiam and the complaint filed in
Civil Case No. 82-9303, the public respondent mentions
the amount of "P613,339.32, as of January 31, 1982,
inclusive of interest commission penalty and bank
charges." 23 This is the same amount stated by
METROBANK in its Memorandum. 24
However, in summarizing Uy Tiam’s outstanding
obligation as of 17 July 1987, public respondent
states:jgc:chanrob les.co m.ph
chan robles v irt ual lawl ibra ry "Hence, they are jointly and severally liable to appellant
METROBANK of UTEFS’ outstanding obligation in the
sum of P2,397,883.68 (as of July 17, 1987) —
P651,092.82 representing the principal amount,
P825,133.54, for past due interest (5-31-82 to 7-17-87)
and P921,657.32, for penalty charges at 12% per
annum (5-31-82 to 7-17-87) as shown in the Statement
of Account (Exhibit I)."25 cralaw:red
x
Since the complaint was filed on 18 May 1982, it is
obvious that on that date, the outstanding principal
obligation of Uy Tiam, secured by the petitioners’
Continuing Suretyship Agreements, was less than
P613,339.32. Such amount may be fully covered by the
Continuing Suretyship Agreement executed by petitioner
Diño which stipulates an aggregate principal sum of not
exceeding P800,000.00, and partly covered by that of
petitioner Uy which pegs his maximum liability at
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CIVIL LAW | C r e d i t T r a n s a c t i o n s

P300,000.00. [1914], and Miller v. Stewart, 9 Wheat., 680; 6 L. ed.,

Consequently, the judgment of the public respondent
shall have to be modified to conform to the foregoing
exposition, to which extent the instant petition is
impressed with partial merit.
WHEREFORE, the petition is partly GRANTED, but only
insofar as the challenged decision has to be modified
with respect to the extent of petitioners’ liability. As
modified, petitioners JACINTO UY DIÑO and NORBERTO
UY are hereby declared liable for and are ordered to
pay, up to the maximum limit only of their respective
Continuing Suretyship Agreement, the remaining unpaid
balance of the principal obligation of UY TIAM or UY
TIAM ENTERPRISES & FREIGHT SERVICES under
Irrevocable Letter of Credit No. SN-Loc-309, dated 30
March 1979, together with the interest due thereon at
the legal rate commencing from the date of the filing of
the complaint in Civil Case No. 82-9303 with Branch 45
of the Regional Trial Court of Manila, as well as the
adjudged attorney’s fees and costs.
189. See also Magdalena Estates, Inc. v. Rodriguez, 18
SCRA 967 [1966]; Republic v. Umali, 22 SCRA 922
[1968]; Zenith Insurance Corp. v. Court of Appeals, 119
SCRA 485 [1982]; Philippine Commercial and Industrial
Bank v. Court of Appeals, 159 SCRA 24 [1988]; Umali v.
Court of Appeals, 189 SCRA 529 [1990].
18. Article 2054, Civil Code.
19. Rollo, 69.
20. Id., 40.
21. See National Marketing Corp. v. Marquez, 26 SCRA
722 [1969] explaining the provisions; Republic v. Pal-
Fox Lumber Co., Inc., 43 SCRA 365 [1972].
22. 100 Phil. 679, 681-682 [1957]; Philippine National
Bank v. Luzon Surety Co., Inc. 68 SCRA 207 [1975].
23. Rollo, 48.

All other dispositions in the dispositive portion of the 24. Id., 128.
challenged decision not inconsistent with the above are
affirmed. 25. Rollo, 55.

SO ORDERED.

Gutierrez, Jr., Bidin, Romero and Melo, JJ., concur.

Endnotes:

1. Rollo, 46-56; per Associate Justice Segundino G.

Chua, ponente, concurred in by Associate Justices
Serafin E. Camilon and Justo P. Torres, Jr.

2. Id., 60.

3. Rollo, 46-50.

4. Id., 50.

5. Rollo, 51.

6. Rollo, 55-56.

7. Rollo, 60.

8. Article 2053, Civil Code; see Rizal Commercial

Banking Corp. v. Arro, 115 SCRA 777 [1982].

9. 38 C.J.S. 1142.

10. 38 C.J.S. 1206.

11. Id., 1209.

12. Id.

13. Rollo, 68-69; Emphasis supplied.

14. Rollo, 69.

15. Id., 70-71; Emphasis supplied.

16. Rollo, 52-53.

17. La Insular v. Machuca Go-Tauco, 39 Phil. 567, 570-

71 [1919], citing Uy Aloc v. Cho Jan Ling, 27 Phil. 427

155 | P a g e #SJBL Guaranty

CIVIL LAW | C r e d i t T r a n s a c t i o n s
EN BANC
[G.R. No. L-9073. November 17, 1958.]
TRADERS INSURANCE & SURETY
COMPANY, Plaintiff-Appellant, v. DY ENG GIOK,
PEDRO LOPEZ DEE and PEDRO E. DY-
LIACCO, Defendants-Appellees.
Sycip, Salazar, Atienza, Luna & Caparas
for Appellant.
Emigdio V. Arcilla for appellee, Dy Eng Giok.
Cezar Miraflor for appellee Pedro Lopez Dee.
Pascual G. Mier for appellee Pedro E. Dy-Liacco.
SYLLABUS
1. SURETYSHIP; DEBTS COVERED BY GUARANTY;
WHEN SURETY LIABLE FOR DEBTS INCURRED OUTSIDE
THE GUARANTEED PERIOD. — In the absence of express
stipulation, a guaranty or suretyship secures only the
debts contracted after the guaranty takes effect (El
Vencedor v. Canlas, 44 Phil. 699). To apply the
payments made by the principal debtor to the
obligations he contracted prior to the guaranty is, in
effect, to make the surety answer for debts incurred
outside of the guaranteed period, and this can not be
done without the express consent of the guarantor.
2. ID.; INCONTESTABILITY OF PAYMENTS MADE BY
SURETY; AGREEMENT VOID AS AGAINST PUBLIC
POLICY. — The provision in the indemnity agreement
that any payment made by the surety company on
account of the bond shall be final and incontestable, is
void and unenforceable as against public policy.
3. OBLIGATIONS AND CONTRACTS; ONEROUS
OBLIGATIONS; DEBTS DEEMED ONEROUS. — Debts
covered by a guaranty are deemed more onerous to the
debtor than the simple obligations because, in their
case, the debtor may be subjected to action not only by
the creditor, but also by the guarantor, and this even
before the guaranteed debt is paid by the guarantor
(Art. 2071, New Civil Code).
4. ID.; APPLICATION OF PAYMENT; PRIORITY OF
ONEROUS OBLIGATIONS. — In the absence of express
application by the debtor, or of any receipt issued by
the creditor specifying a particular imputation of the
payment (New Civil Code, Art. 1252), any partial
payments made by him should be imputed or applied to
the debts that were guaranteed, since they are regarded
as the more onerous debts from the standpoint of the
debtor (New Civil Code, Art. 1254).
5. ID.; ID.; ONE SINGLE DEBT OF WHICH ONLY A
PORTION IS GUARANTEED; PARTIAL PAYMENTS HOW
APPLIED. — Where the debtor owed the creditor one
single debt of which only a portion was guaranteed, the
guarantor had no right to demand that the partial
156 | P a g e #SJBL
payments made by the principal debtor should be
applied precisely to the portion guaranteed. The legal
rules of imputation of payments presuppose that the
debtor owes several distinct debts of the same nature;
and does not distinguish between portions of the same
debt.
6. ID.; ID.; APPLICATION OF PAYMENT BY THE
CREDITOR; WHEN VALID AND LAWFUL. — Where the
debtor has not expressly elected any particular
obligation to which the payment should be applied, the
application by the creditor, in order to be valid and
lawful, depends: (1) upon his expressing such
application in the corresponding receipt and (2) upon
the debtor’s assent, shown by his acceptance of the
receipt without protest. Ultimately, therefore, the
application by a creditor depends upon the debtor’s
acquiescene thereto.
DECISION
REYES, J.B.L., J.:
Appeal interposed against that part of the decision of
the Court of First Instance of Manila (in its civil case No.
20305) absolving Pedro Lopez Dee and Pedro E. Dy-
Liacco from the obligation to reimburse the plaintiff
Traders Insurance and Surety Co.
From the stipulation of facts made by the parties in the
court below, it appears that from 1948 to 1952 the
corporation "Destileria Lim Tuaco & Co., Inc." had one
Dy Eng Giok as its provincial sales agent, with the duty
of turning over the proceeds of his sales to the principal,
the distillery company. As of August 3, 1951, the agent
Dy Eng Giok had an outstanding running account in
favor of his principal in the sum of P12,898.61.
On August 4, 1951, a surety bond (Annex A, complaint)
was executed by Dy Eng Giok, as principal, and
appellant Traders Insurance and Surety Co., as solidary
guarantor, whereby they bound themselves, jointly and
severally, in the sum of P10,000.00 in favor of the
Destilleria Lim Tuaco & Co., Inc., under the following
terms:
chan rob1e s virtual 1aw l ibra ry
‘THE CONDITION OF THIS OBLIGATION IS SUCH THAT:
Whereas, the above bounden principal has entered in to
a contract with the aforementioned Company to act as
their provincial sales agent and to receive goods or their
products under the said Principal’s credit account. The
proceeds of the sales are to be turned over to the
Company.
WHEREAS, the contract requires the above bounden
principal to give a good and sufficient bond in the above
stated sum to secure the full and faithful fulfillment on
its part of said contract; namely, to guarantee the full
payment of the Principal’s obligation not to exceed the
above stated sum.
NOW, THEREFORE, if the above bounden principal shall
in all respects duly and fully observe and perform all
and singular the aforesaid covenants, conditions, and
agreements to the true intent and meaning thereof,
then this obligation shall be null and void; otherwise, to
remain in full force and effect.
LIABILITY of surety on this bond will expire on August 4,
Guaranty
CIVIL LAW | C r e d i t T r a n s a c t i o n s
1952 and said bond will be cancelled TEN DAYS after its
expiration, unless surety is notified in writing of any
existing obligations thereunder or otherwise extended
by the surety in writing." (Rec. App., pp. 7-8) (Emphasis
supplied)
On the same date, by Eng Giok, as principal, with Pedro
Lopez Dee and Pedro Dy-Liacco, as counterboundsmen,
subscribed an indemnity agreement (Annex B. of the
complaint) in favor of appellant Surety Company,
whereby, in consideration of its surety bond (Annex A),
the three agreed to be obligated to the surety company
— that the suretyship agreement, Annex A, did not
"INDEMNITY: — To indemnify the COMPANY for any
damages, prejudice, loss, costs, payments, advances
and expenses of whatever kind and nature, including
counsel or attorney’s fees, which the Company may, at
any time, sustain or incur, as a consequence of having
executed the abovementioned bond, its renewals,
extensions or substitutions, and said attorney’s fee shall
not be less than (15%) per cent of the amount claimed
by the Company in each action, the same to be due and
payable, irrespective of whether the case is settled
judicially or extrajudicially." (Rec. App. pp. 9-10)
From August 4, 1951 to August 3, 1952, agent Dy Eng
Giok contracted obligations in favor of the Destilleria
Lim Tuaco & Co., in the total amount of P41,449.93;
and during the same period, he made remittances
amounting to P41,864.49. The distillery company,
however, applied said remittances first to Dy Eng Giok’s
outstanding balance prior to August 4, 1951 (before the
suretyship agreement was executed) in the sum of
P12,898.61; and the balance of P28,965.88 to Dy’s
obligations between August 4, 1951 and August 3,
1952. It then demanded payment of the remainder
(P12,484.05) from the agent, and later, from the
appellant Surety Company. The latter paid P10,000.00
(the maximum of its bond) on July 17, 1953,
apparently, without questioning the demand; and then
sought reimbursement from Dy Eng Giok and his
counter guarantors, appellees herein. Upon their failure
to pay, it began the present action to enforce
collection.
After trial, the Court of First Instance of Manila absolved
the counter-guarantors Pedro Lopez Dee and Pedro Dy-
Liacco, on the theory that in so far as they are
concerned, the payments made by Dy Eng Giok from
August 4, 1951 to August 3, 1952, in the sum of
P41,864.49, should have been applied to his obligations
during that period, which were the ones covered by the
surety bond and the counter-guaranty; and as these
obligations only amounted to P41,449.93, so that the
payments exceeded the obligations, the court concluded
that the Surety Company incurred no liability and the
counterbondsmen in turn had nothing to answer for.
The trial court, however, sentenced Dy Eng Giok to
repay to the Surety Company P10,000 with interest at
12% per annum, plus P1,500 attorneys’ fee and the
costs of the suit.
Not satisfied with the decision, the Traders Insurance &
Surety Company appealed to this Court on points of
law.
We find the decision appealed from to be correct. There
are two reasons why the remittances by Dy Eng Giok in
the sum of P41,864.49 should be applied to the
obligation of P41,449.93 contracted by him during the
period covered by the suretyship agreement, Annex A.
The first is that, in the absence of express stipulation, a
157 | P a g e #SJBL
guaranty or suretyship operates prospectively and not
retroactively; that is to say, it secures only the debts
contracted after the guaranty takes effect (El Vencedor
v. Canlas, 44 Phil. 699). This rule is a consequence of
the statutory directive that a guaranty is not presumed,
but must be express, and can not extend to more than
what is stipulated. (New Civil Code, Art. 2055). To apply
the payments made by the principal debtor to the
obligations he contracted prior to the guaranty is, in
effect, to make the surety answer for debts incurred
outside of the guaranteed period, and this can not be
done without the express consent of the guarantor. Note
guarantee the payment of any outstanding balance due
from the principal debtor, Dy Eng Giok; but only that he
would turn over the proceeds of the sales to the
"Destileria Lim Tuaco & Co., Inc.", and this he has done,
since his remittances during the period of the guaranty
exceed the value of his sales. There is no evidence that
these remittances did not come from his sales.
A similar situation was dealt with in our decision in the
case of Municipality of Lemery v. Mendoza, 48 Phil. 415,
wherein we said (pp. 422-423): jgc:chan rob les.com. ph
"As we have previously stated Mendoza has paid to the
municipality the full sum of P23,000. In our opinion this
discharged the sureties from all further liability. The
circumstance that the sum of P23,000 which Mendoza
paid may have been applied by the municipality to
Mendoza’s indebtedness for the first year of the lease is
without significance as against the sureties, since the
sureties were not parties to the contract of lease
(Exhibit D) and are liable only upon the contract of
suretyship (Exhibit E), which calls for the payments of
only P23,000 by the principal. It is a just rule of
jurisprudence, recognized in article 1827 of the Civil
Code, that the obligation of a surety must be express
and cannot be extended by implication beyond its
specified limits.
We do not overlook the fact that the obligating clause in
Exhibit E binds the sureties in the amount of P46,000,
but, as in all bonds, that obligation was intended as an
assurance of the performance of the principal obligation
and when the principal obligation was discharged, the
larger obligation expressed in the contract of suretyship
ceased to have any vitality." cralaw virtua 1aw lib rary
The second reason is that, since the obligations of Dy
Eng Giok between August 4, 1951 to August 4, 1952,
were guaranteed, while his indebtedness prior to that
period was not secured, then in the absence of express
application by the debtor, or of any receipt issued by
the creditor specifying a particular imputation of the
payment (New Civil Code, Art. 1252), any partial
payments made by him should be imputed or applied to
the debts that were guaranteed, since they are regarded
as the more onerous debts from the standpoint of the
debtor (New Civil Code, Art. 1254).
"ART. 1254. When the payment cannot be applied in
accordance with the preceding rules, or if application
can not be inferred from other circumstances, the debt
which is most onerous to the debtor, among those due,
shall be deemed to have been satisfied.
If the debts due are of the same nature and burden, the
payment shall be applied to all of them
proportionately."cralaw vi rtua 1aw lib rary
Debts covered by a guaranty are deemed more onerous
to the debtor than the simple obligations because, in
Guaranty
CIVIL LAW | C r e d i t T r a n s a c t i o n s
their case, the debtor may be subjected to action not
only by the creditor, but also by the guarantor, and this
even before the guaranteed debt is paid by the
guarantor (Art. 2071, New Civil Code); hence, the
payment of the guaranteed debt liberates the debtor
from liability to the creditor as well as to the guarantor,
while payment of the unsecured obligation only
discharges him from possible action by only one party,
the unsecured creditor.
The rule that guaranteed debts are to be deemed more
onerous to the debtor than those not guaranteed, and
entitled to priority in the application of the debtor’s
payments, was already recognized in the Roman Law
(Ulpian, fr. ad Sabinum, Digest, Lib. 46, Tit 3, Law 4, in
fine), and has passed to us through the Spanish Civil
Code. Manresa in his Commentaries to Art. 1174 of that
Code (8 Manresa, Vol. I, 5th Ed., p. 603) expressly
says:jgc:chanrob les.com .ph
"Atendiendo al gravamen, la deuda garantida es mas
onerosa que la simple." cralaw vi rtua1aw l ib rary
And this is also the rule in Civil law countries, like
France (Dalloz, Jurisprudence Générale Vo. obligation,
sec. 2033; Planiol, Traité Elem. (2d Ed). Vol. 2, No.
454) and Louisiana (Caltex Oil & Gas, Co. v. Smith, 175
La. 678, 144 So. 243; Everett v. Graye, 3 La. App.
136): also Italy (7 Giorgi, Teoria delle Obbl. p. 167).
It is thus clear that the payment voluntarily made by
appellant was improper since it was not liable under its
bond; consequently, it can not demand reimbursement
from the counterbondsmen but only from Dy Eng Giok,
who was anyway benefited pro tanto by the Surety
Company’s payment.
The present case is to be clearly distinguished from
Hongkong Shanghai Bank v. Aldanese, 48 Phil., 990,
and Commonwealth v. Far Eastern Surety & Insurance
Co., 83 Phil., 305, 46 Off. Gaz. 4879 and similar rulings,
wherein the debtor in each case owned the creditor one
single debt of which only a portion was guaranteed. In
those cases, we have ruled that the guarantors had no
right to demand that the partial payments made by the
principal debtor should be applied precisely to the
portion guaranteed. The reason is apparent: the legal
rules of imputation of payments presuppose that the
debtor owes several distinct debts of the same nature;
and does not distinguish between portions of the same
debt. Hence, where the debtor only owes one debt, all
partial payments must necessarily be applied to that
debt, and the guarantor answers for any unpaid
balance, provided it does not exceed the limits of the
guaranty. Any other solution would defeat the purpose
of the security. In the case before us, however, the
guaranty secured the performance by the debtor of his
obligation to remit to the distillery company the
proceeds of his sales during the period of the guaranty
(August 4, 1951 to August 4, 1952). This obligation is
entirely distinct and separate from his obligation to
remit the proceeds of his sales during a different period,
say before August 4, 1951. The debtor, therefore,
actually owed two distinct debts: for the value of his
sales before August 4, 1951 and for the import of the
sales between that date and August 4, 1952. There
being two debts, his partial payments had necessarily to
be applied (in the absence of express imputation) first
to the obligation that was more onerous for him, which
was the one secured by the guaranty.
It is legally unimportant that the creditor should have
applied the payment to the prior indebtedness. Where
158 | P a g e
the debtor has not expressly elected any particular
obligation to which the payment should be applied, the
application by the creditor, in order to be valid and
lawful, depends: (1) upon his expressing such
application in the corresponding receipt and (2) upon
the debtor’s assent, shown by his acceptance of the
receipt without protest. This is the import of paragraph
2 of Art. 1252 of the New Civil Code: jgc:cha nro bles. com.ph
"If the debtor accepts from the creditor a receipt in
which an application of the payment is made, the former
cannot complain of the same, unless there is a cause for
invalidating the contract."
cralaw virtua1aw lib rary
Ultimately, therefore, the application by a creditor
depends upon the debtor acquiescence thereto. In the
present case, as already noted, there is no evidence
that the receipts for payment expressed any imputation,
or that the debtor agreed to the same.
The appellant Surety Company avers that the
counterbondsmen can not question the payment made
by it to Destileria Lim Tuaco on the debt of Dy Eng Giok,
because their counterbond or indemnity agreement
(Annex B, par. 7) provided that: jgc:chanrob les.com .ph
"INCONTESTABILITY OF PAYMENTS MADE BY THE
COMPANY: Any payment of disbursement made by the
COMPANY on account of the abovementioned Bond, its
renewals, extensions or substitutions, either in the belief
that the Company was obligated to make such payment
or in the belief that said payment was necessary in
order to avoid greater losses or obligations for which the
Company might be liable by virtue of the terms of the
abovementioned Bond, its renewals, extensions or
substitutions shall be final and will not be disputed by
the undersigned who jointly and severally bind
themselves to indemnify the COMPANY for any and all
such payments as stated in the preceding clauses."
(Rec. App., p. 11)
We agree with the appellee that this kind of clauses are
void and unenforceable, as against public policy,
"because they enlarge the field for fraud, because in
these instruments the promissor bargains away his right
to a day in court and because the effect of the
instrument is to strike down the right of appeal
accorded by the statute." (see National Bank v. Manila
Oil Refining Co., 43 Phil. 467)
Finding no error in the judgment appealed from, the
same is affirmed. Costs against appellant. So ordered.
Paras, C.J., Bengzon, Padilla, Montemayor, Bautista
Angelo, Labrador and Concepcion, JJ., concur.
#SJBL Guaranty
CIVIL LAW | C r e d i t T r a n s a c t i o n s
THIRD DIVISION
[G.R. No. 109941. August 17, 1999.]
PACIONARIA C. BAYLON, Petitioner, v. THE
HONORABLE COURT OF APPEALS (Former Ninth
Division) and LEONILA TOMACRUZ, Respondents.
DECISION
GONZAGA-REYES, J.:
This is a petition for review by way of certiorari under
Rule 45 of the Revised Rules of Court of the decision of
the Court of Appeals 1 dated November 29, 1991 in CA-
G.R. CV No. 27779 affirming the decision 2 of the
Regional Trial Court of Quezon City, Branch 88, dated
June 14, 1990 in Civil Case No. Q-89-2483 and the
Resolution of the Court of Appeals dated April 27, 1993
denying petitioner’s Motion for Reconsideration.
The pertinent facts, as found by the trial court and
affirmed by respondent court, are briefly narrated as
follows:
cha nro blesvi rtua l|awlib rary
Sometime in 1986, petitioner Pacionaria C. Baylon
introduced private respondent Leonila Tomacruz, the co-
manager of her husband at PLDT, to Rosita B. Luanzon.
3 Petitioner told private respondent that Luanzon has
been engaged in business as a contractor for twenty
years and she invited private respondent to lend
Luanzon money at a monthly interest rate of five
percent (5%), to be used as capital for the latter’s
business. Private respondent, persuaded by the
assurances of petitioner that Luanzon’s business was
stable and by the high interest rate, agreed to lend
Luanzon money in the amount of P150,000. On June 22,
1987, Luanzon issued and signed a promissory note
acknowledging receipt of the P150,000 from private
respondent and obliging herself to pay the former the
said amount on or before August 22, 1987. 4 Petitioner
signed the promissory note, affixing her signature under
the word "guarantor." Luanzon also issued a postdated
Solidbank check no. CA418437 dated August 22, 1987
payable to Leonila Tomacruz in the amount of P150,000.
5 Subsequently, Luanzon replaced this check with
another postdated Solidbank check no. 432945 dated
December 22, 1987, in favor of the same payee and
covering the same amount. 6 Several checks in the
amount of P7,500 each were also issued by Luanzon
and made payable to private Respondent. 7
Private respondent made a written demand upon
petitioner for payment, which petitioner did not heed.
Thus, on May 8, 1989, private respondent filed a case
for the collection of a sum of money with the Regional
Trial Court (RTC) of Quezon City, Branch 88, against
Luanzon and petitioner herein, impleading Mariano
Baylon, husband of petitioner, as an additional
defendant. However, summons was never served upon
Luanzon.
In her answer, petitioner denied having guaranteed the
159 | P a g e #SJBL
payment of the promissory note issued by Luanzon. She
claimed that private respondent gave Luanzon the
money, not as a loan, but rather as an investment in Art
Enterprises and Construction, Inc. — the construction
business of Luanzon. Furthermore, petitioner avers that,
granting arguendo that there was a loan and petitioner
guaranteed the same, private respondent has not
exhausted the property of the principal debtor nor has
she resorted to all the legal remedies against the
principal debtor as required by law. Finally, petitioner
claims that there was an extension of the maturity date
of the loan without her consent, thus releasing her from
her obligation. 8 cha nrob les vi rtua l lawlib ra ry
After trial on the merits, the lower court ruled in favor of
private Respondent. In its Decision dated June 14,
1990, it stated that —
The evidence and the testimonies on record clearly
established a (sic) fact that the transaction between the
plaintiff and defendants was a loan with five percent
(5%) monthly interest and not an investment. In fact
they all admitted in their testimonies that they are not
given any stock certificate but only promissory notes
similar to Exhibit "B" wherein it was clearly stated that
defendant Luanzon would pay the amount of
indebtedness on the date due. Postdated checks were
issued simultaneously with the promissory notes to
enable the plaintiff and others to withdraw their money
on a certain fixed time. This shows that they were never
participants in the business transaction of defendant
Luanzon but were creditors.
The evidences presented likewise show that plaintiff and
others loan their money to defendant Luanzon because
of the assurance of the monthly income of five percent
(5%) of their money and that they could withdraw it
anytime after the due date add to it the fact that their
friend, Pacionaria Baylon, expresses her unequivocal
guarantee to the payment of the amount loaned.
x x x
WHEREFORE, premises considered, judgment is hereby
rendered against the defendants Pacionaria C. Baylon
and Mariano Baylon, to pay the plaintiff the sum of
P150,000.00, with interest at the legal rate from the
filing of this complaint until full payment thereof, to pay
the total sum of P21,000.00 as attorney’s fees and costs
of suit. 9
chanrob les.com. ph : virtual law l ibrary
On appeal, the trial court’s decision was affirmed by the
Court of Appeals. Hence, this present case wherein
petitioner makes the following assignment of errors —
I. RESPONDENT COURT ERRED IN HOLDING THAT THE
PRIVATE RESPONDENT TOMACRUZ WAS A CREDITOR
OF DEFENDANT LUANZON AND NOT AN INVESTOR IN
THE CONSTRUCTION BUSINESS OF ART ENTERPRISES
& CONSTRUCTION, INC.
II. GRANTING, WITHOUT ADMITTING, THAT
PETITIONER-APPELLANT BAYLON WAS A "GUARANTOR"
AS APPEARING IN THE NOTE (EXH. "A") THE
RESPONDENT COURT ERRED IN RULING THAT
PETITIONER-APPELLANT BAYLON IS LIABLE TO THE
PRIVATE RESPONDENT BECAUSE THE LATTER HAS NOT
TAKEN STEPS TO EXHAUST THE PROPERTY OF THE
PRINCIPAL DEBTOR AND HAS NOT RESORTED TO ALL
THE LEGAL REMEDIES PROVIDED BY LAW AGAINST THE
DEBTOR, DEFENDANT LUANZON.
Guaranty
CIVIL LAW | C r e d i t T r a n s a c t i o n s
III. GRANTING, WITHOUT ADMITTING THAT
PETITIONER-APPELLANT BAYLON WAS A GUARANTOR
UNDER THAT NOTE (EXHIBIT "A") DATED JUNE 22,
1987, THE LOWER COURT ERRED IN RESOLVING THAT
SHE WAS NOT RELEASED FROM HER GUARANTY BY THE
SUBSEQUENT TRANSACTIONS BETWEEN THE
RESPONDENT-APPELLANT AND DEFENDANT
LUANZON. chanroblesvi rtua llawli bra ry
At the outset, we note that petitioner’s claim that the
factual findings of the lower court, which were affirmed
by the Court of Appeals, were based on a
misapprehension of facts and contradicted by the
evidence on records 10 is a bare allegation and devoid
of merit. As a rule, the conclusions of fact of the trial
court, especially when affirmed by the Court of Appeals,
are final and conclusive and cannot be reviewed on
appeal by the Supreme Court. 11 Although this rule
admits of several exceptions, 12 none of the exceptions
are in point in the present case. The factual findings of
the respondent court are borne out by the record and
are based on substantial evidence.
Petitioner claims that there is no loan to begin with; that
private respondent gave Luanzon the amount of
P150,000, not as a loan, but rather as an investment in
the construction project of the latter. 13 In support of
her claim, petitioner cites the use by private respondent
of the words "investment," "dividends," and
"commission" in her testimony before the lower court;
the fact that private respondent received monthly
checks from Luanzon in the amount of P7,500 from July
to December, 1987, representing dividends on her
investment; and the fact that other employees of the
Development Bank of the Philippines made similar
investments in Luanzon’s construction business. 14
However, all the circumstances mentioned by petitioner
cannot override the clear and unequivocal terms of the
June 22, 1987 promissory note whereby Luanzon
promised to pay private respondent the amount of
P150,000 on or before August 22, 1987. The promissory
note states as follows: chan roble svirtual lawlib rary:re d
June 22, 1987
To Whom It May Concern:
For value received, I hereby promise to pay Mrs.
LEONILA TOMACRUZ the amount of ONE HUNDRED
FIFTY THOUSAND PESOS ONLY (P150,000.00) on or
before August 22, 1987.
The above amount is covered by _____ Check No.
_____ dated August 22, 1987.
(signed)
ROSITA B. LUANZON
GURARANTOR: chanrob1es vi rt ual 1aw li bra ry
(signed)
PACIONARIA O. BAYLON
Tel. No. 801-28-00
18 P. Mapa St., DBP Village
Almanza, Las Pinas, M.M. 15
160 | P a g e
If the terms of a contract are clear and leave no doubt
as to the intention of the contracting parties, the literal
meaning of its stipulation shall control. 16 Resort to
extrinsic aids and other extraneous sources are not
necessary in order to ascertain the parties’ intent when
there is no ambiguity in the terms of the agreement. 17
Both petitioner and private respondent do not deny the
due execution and authenticity of the June 22, 1987
promissory note. All of petitioner’s arguments are
directed at uncovering the real intention of the parties in
executing the promissory note, but no amount of
argumentation will change the plain import of the terms
thereof, and accordingly, no attempt to read into it any
alleged intention of the parties thereto may be justified.
18 The clear terms of the promissory note establish a
creditor-debtor relationship between Luanzon and
private Respondent. The transaction at bench is
therefore a loan, not an investment. chanroble svi rtualawl ib rary
It is petitioner’s contention that, even though she is
held to be a guarantor under the terms of the
promissory note, she is not liable because private
respondent did not exhaust the property of the principal
debtor and has not resorted to all the legal remedies
provided by the law against the debtor. 19 Petitioner is
invoking the benefit of excussion pursuant to article
2058 of the Civil Code, which provides that —
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. chanroble s.com:c ralaw:re d
It is axiomatic that the liability of the guarantor is only
subsidiary. 20 All the properties of the principal debtor
must first be exhausted before his own is levied upon.
Thus, the creditor may hold the guarantor liable only
after judgment has been obtained against the principal
debtor and the latter is unable to pay, "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." 21 This rule
is embodied in article 2062 of the Civil Code which
provides that the action brought by the creditor must be
filed against the principal debtor alone, except in some
instances when the action may be brought against both
the debtor and the principal debtor. 22
chanrob 1es vi rtual 1aw libra ry
Under the circumstances availing in the present case,
we hold that it is premature for this Court to even
determine whether or not petitioner is liable as a
guarantor and whether she is entitled to the
concomitant rights as such, like the benefit of
excussion, since the most basic prerequisite is wanting
— that is, no judgment was first obtained against the
principal debtor Rosita B. Luanzon. It is useless to speak
of a guarantor when no debtor has been held liable for
the obligation which is allegedly secured by such
guarantee. Although the principal debtor Luanzon was
impleaded as defendant, there is nothing in the records
to show that summons was served upon her. Thus, the
trial court never even acquired jurisdiction over the
principal debtor. We hold that private respondent must
first obtain a judgment against the principal debtor
before assuming to run after the alleged guarantor.
IN VIEW OF THE FOREGOING, the petition is granted
and the questioned Decision of the Court of Appeals
dated November 29, 1991 and Resolution dated April
27, 1993 are SET ASIDE. No pronouncement as to
costs.chanroble s lawli bra ry : rednad
SO ORDERED.
#SJBL Guaranty
CIVIL LAW | C r e d i t T r a n s a c t i o n s

the principal debtor alone, except in the cases

Melo, Vitug, Panganiban and Purisima, JJ., concur.
Endnotes:
1. Ninth Division, composed of Associate Justices
Serafin V.C. Guingona (ponente), Luis A. Javellana and
Jorge S. Imperial.
mentioned in article 2059, the former shall ask the court
to notify the guarantor of the action. The guarantor may
appear so that he may, if he so desire, set up such
defenses as are granted him by law. The benefit of
excussion mentioned in article 2058 shall always be
unimpaired, even if judgment should be rendered
against the principal debtor and the guarantor in case of
appearance by the latter.

2. Penned by Judge Tirso D.C. Velasco.

3. Petition, p. 4; Rollo, p. 28.

4. Exhibit A.

5. Exhibit B.

6. Exhibit 15.

7. Exhibits E, F, G, H, I, J, and K.

8. Answer, pp. 2-3; Rollo, pp. 26-27.

9. RTC Records, pp. 128-133.

10. Petition, p. 9; Rollo, p. 33.

11. Fortune Motors Phils. Corp. v. Court of Appeals, 267

SCRA 653 (1997); Meneses v. Court of Appeals, 246
SCRA 162 (1995); Tan Chun Suy v. Court of Appeals,
229 SCRA 151 (1994).

12. Commissioner of Internal Revenue v. Embroidery

and Garments Industries, G.R. No. 96262 (1999);
Mangahas v. Court of Appeals, G.R. No. 95815 (1999);
Diaz v. Sandiganbayan, G.R. No. 125213 (1999).

13. Petition, p. 4; Rollo, p. 28.

14. Petition, pp. 3-9; Rollo, pp. 27-33.

15. Exhibit A.

16. Civil Code, Art. 1370; Cebu Shipyard and

Engineering Works, Inc. v. William Lines, Inc. and
Prudential Guarantee and Assurance Company, Inc.,
G.R. No. 132607 (1999); Rizal Commercial Banking
Corporation v. Court of Appeals and Lustre, G.R. No.
133107 (1999); Salvatierra v. Court of Appeals, 261
SCRA 45 (1996); Abella v. Court of Appeals, 257 SCRA
482 (1996).

17. Inter-Asia Services Corp. v. Court of Appeals, 263

SCRA 408 (1996).

18. Ascalon v. Court of Appeals, 158 SCRA 542 (1988);

Pichel v. Alonzo, 111 SCRA 341 (1982); San Mauricio
Mining Company v. Ancheta, 105 SCRA 371 (1981).

19. Petition, p. 9; Rollo, p. 33.

20. World Wide Ins. and Surety Corp. v. Jose, 96 Phil 45

(1954); Visayan Surety and Ins. Corp. v. De Laperal, 69
Phil 688 (1940).

21. Vda. de Syquia v. Jacinto, 60 Phil 861 (1934).

22. Civil Code, article 2062 provides —

In every action by the creditor, which must be against

161 | P a g e #SJBL Guaranty