GUARANTY AND SURETY

CREDIT TRANSACTIONS

1. Velasquez vs. Court of Appeals, G.R. No. 124049, June 30, 1999

Ponente: Bellosillo, J.

Nature of the case: This case is a petition for review on certiorari of a decision of the CA
 Prays for the reversal of CA decision which affirmed the summary judgment of RTC - a default
judgment against petitioner; and CA resolution which denied petitioner’s MR

Petitioner: Rodolfo P. Velasquez (Velasquez)

Private respondent: Philippine Commercial International Bank (PCIB)

FACTS:
 This case arose from a complaint for a sum of money with preliminary attachment filed with
RTC Makati City by private respondent Philippine Commercial International Bank (PCIB)
against petitioner Rodolfo P. Velasquez together with Mariano N. Canilao, Jr., Inigo A. Nebrida,
Cesar R. Dean and Artemio L. Raymundo

 Sometime in December 1984, the Pick-up Fresh Farms, Inc. (PUFFI), of which petitioner
Velasquez was an officer and stockholder, filed an application for a loan of P7,500,000 with PCIB
under the government’s Guarantee Fund for Small and Medium Enterprises (GFSME)

 On April 16, 1985, the parties executed the corresponding loan agreement
 As security for the loan, promissory notes numbered TL 121231 and TL 121258 for the amounts
of P4,000,000 and P3,500,000, respectively, were signed by Inigo A. Nebrida and Mariano N.
Canilao, Jr. as officers of and for both PUFFI and Aircon and Refrigeration Industries, Inc. (ARII)
 A chattel mortgage was also executed by ARII over its equipment and machineries in favor of
PCIB
 Petitioner along with Nebrida and Canilao, Jr. also executed deeds of suretyship in favor of
PCIB
 Separate deeds of suretyship were further executed by Cesar R. Dean and Artemio L. Raymundo

 When PUFFI defaulted in the payment of its obligations, PCIB foreclosed the chattel mortgage
 The proceeds of the sale amounted to P678,000
 Thus, PCIB filed an action to recover the remaining balance of the entire obligation including
interests, penalties and other charges
 Exemplary damages and attorney’s fees of 25% of the total amount due were also sought
 On October 9, 1989, a writ of preliminary attachment was granted by the trial court

In Petitioner and Canilao’s Joint Answer:

 Petitioner and Canilao filed their joint answer with counterclaim denying personal liability and
interposing the defense of novation

 At the pre-trial on April 11, 1989, petitioner and counsel failed to appear despite due notice
 On that same date, upon motion of PCIB, petitioner was declared as in default and the trial
court granted the motion for summary judgment as against Canilao
o Both PCIB and Canilao submitted their respective position papers.

 Petitioner, who was still in default as he did not move to lift the order of default, adopted Canilao’s
position paper through an ex parte manifestation
 On November 8, 1989, an ex parte hearing was conducted as against petitioner
RTC decision
 On June 20, 1990, the trial court rendered a summary judgment in favor of PCIB holding
petitioner and Canilao solidarily liable to pay P7,227,624.48 plus annual interest of 17%, and
P700,000 as attorney’s fees and the costs of suit
 The case was dismissed without prejudice with regard to the other defendants as they were not
properly served with summons
 Petitioner’s MR was also denied due to lack of merit.

CA Decision
 On appeal, CA affirmed in toto the RTC judgment
 Petitioner’s MR was thereafter denied

 Hence, this petition

o It maintains that the appellate court committed reversible error in sustaining or affirming
the summary judgment despite the existence of genuine triable issues of facts and in
refusing to set aside the default order against petitioner

Petitioner’s arguments, among others:

 Petitioner insists that there are triable issues of fact raised in his answer, as follows:
(a) The denial of personal liability on his part in the deed of suretyship since he signed
thereon as an officer of ARII
(b) PCIB’s acceptance of royalties coming from the Franchise Agreement between PUFFI and
Arturo Rosales who novated the loan agreement and the deed of suretyship between
PUFFI and PCIB; and,
(c) The propriety of payment of the entire debt.
 The fact that the addresses stated under the names of petitioner and fellow surety signors were
those of ARII implies that they signed as officers of the corporation, otherwise, their personal
addresses would have been used
 Avers further that any ambiguity in the contract should be decided against PCIB under the contract
of adhesion doctrine

(Issue relevant to Topic on Surety)

ISSUE 1: Should the petitioner be held personally liable in the deed of suretyship?

RULING 1:
 Yes. The petitioner should be held personally liable in the deed of suretyship.
 A mere perusal of the deed of suretyship readily shows petitioner’s personal liability under the
loan contract, hence, proper for summary judgment.
 Moreover, the more appropriate doctrine in this case is that of the “COMPLEMENTARY
CONTRACTS CONSTRUED TOGETHER” doctrine which we enunciated in National Power
Corporation v. CA, as follows:
o The surety bond must be read in its entirety and together with the contract between the
NPC and the contractors.
o The provisions must be construed together to arrive at their true meaning.
o Certain stipulations cannot be segregated and then made to control.
 That the “complementary contracts construed together” doctrine applies in this case finds
support in the principle that the surety contract is merely an accessory contract and must be
interpreted with its principal contract, which in this case was the loan agreement.
 This doctrine closely adheres to the spirit of Art. 1374 of the Civil Code which states that—
o Art. 1374. The various stipulations of a contract shall be interpreted together, attributing to
the doubtful ones that sense which may result from all of them taken jointly.

Application
  Applying the “complementary contracts construed together” doctrine leaves no doubt that it was
the intention of the parties that petitioner would be personally liable in the deed of suretyship
because the loan agreement, among others, provided—
o “Article 3. LOAN SECURITY.—x x x x 3.4 Suretyship.—To further secure the obligations
of the BORROWER to the LENDER, Messrs. Nebrida, Raymundo, Canilao, Dean and
Velasquez and Aircon and Refrigeration Ind., Inc. shall each execute a suretyship
agreement in favor of the LENDER in form and substance acceptable to the LENDER.
 It would have been a different matter had petitioner properly contested the deed of suretyship under
Sec. 8, Rule 8, of the Rules of Court.
 But he did not.
o The omission, as properly noted by the trial court, was fatal for it resulted in petitioner’s
admission of the due execution and genuineness of the contract.
o The admission effectively eliminated any defense relating to the authenticity and due
execution of the document, e.g., that the document was spurious, counterfeit, or of different
import on its face as the one executed by the parties; or that the signatures appearing
thereon were forgeries; or that the signatures were unauthorized.

OTHER ISSUES

(Re: Novation)
ISSUE 2: Was PCIB’s acceptance of royalty fees constituted a novation of the loan agreement and deeds
of suretyship?

RULING 2:
 No.
 Extinctive novation has these requisites:
(a) The existence of a previous valid obligation;
(b) The agreement of all the parties to the new contract;
(c) The extinguishment of the old obligation or contract; and,
(d) The validity of the new one.
 Thus, novation is effected only when a new contract has extinguished an earlier contract between
the same parties
 Necessarily, there is no novation when the new contract is not between the same parties as in the
old contract.

Application
 In this case, the franchise agreement was only between PUFFI and Rosales
 PCIB was never mentioned therein; neither was there any reference to the subject loan agreement.
 What PCIB simply did was to accept royalty payments out of the franchise—an act which was
already beyond the scope of the franchise agreement but which was not in conflict with the payment
arrangement in the loan agreement.
 Our ruling in Magdalena Estates, Inc. v. Rodriguez is instructive, to wit —
o An obligation to pay a sum of money is not novated, in a new instrument wherein the old
is ratified, by changing only the terms of payment and adding other obligations not
incompatible with the old one, or wherein the old contract is merely supplemented by the
new one.
o The mere fact that the creditor receives a guaranty or accepts payments from a third person
who has agreed to assume the obligation, when there is no agreement that the first debtor
shall be released from responsibility, does not constitute a novation, and the creditor can
still enforce the obligation against the original debtor.

(Re Summary proceedings)

ISSUE 3: Should the summary judgment be sustained?
RULING 3:
 Yes. The summary judgment should be sustained.
o Petitioner, in raising the first error, invokes our ruling in Viajar v. Estenzo that a party who
moves for a summary proceeding has the burden of demonstrating clearly the absence of
any genuine issue of fact, or that the issue posed in the complaint is so patently
unsubstantial as not to constitute a genuine issue for trial, and any doubt as to the existence
of such an issue is resolved against the movant
 While this rule is true in the summary proceedings under Rule 34 of the Revised Rules of Court, it
does not apply to summary proceedings under Rule 35
 A different rationale operates in the latter for it arises out of facts already established or admitted
during the pre-trial held beforehand, unlike in the former where the judge merely relies on the merits
of the movant’s allegations
 Rule 34 pertains to a judgment on the pleadings while Rule 35 relates to a summary judgment,
which was the holding in this case.

 At this point, it must be stressed that insofar as petitioner is concerned, the RTC decision was not
a summary judgment but a judgment by default as hearing was held ex parte against him.
 Even so, the RTC decision is still without grave abuse of discretion.
 Thus, the CA could not be in error in upholding it despite claims by petitioner that the default order
should have been set aside because he could not be bound by the negligence of his counsel

(Re: Legal Ethics)

ISSUE 4: Was the petitioner bound by the mistakes of his counsel?

RULING 4:
 Yes.
 Petitioner attempts to avoid any personal blame by claiming that a special power of attorney in
favor of his lawyer was drawn up because he could not attend the pre-trial due to previous
commitments abroad.
 The lawyer, however, failed to attend thereby prejudicing his interests.
 However, the findings of CA, as fully substantiated by the records, showed that the lawyer was not
the only one negligent, thus –
o Velasquez appears to have appointed his counsel, Atty. Rodolfo Vega, as his attorney-in-
fact to represent him at the pre-trial but the said lawyer failed to appear, hence Velasquez
was declared as in default.
o The records show that the Order of April 11,1984 declaring him as in default was sent to
his counsel and was received by the latter as early as May 10, 1989.
o No steps were taken to have the said Order lifted or reconsidered.
o This is binding on Velasquez who is himself guilty of negligence when, after executing the
special power of attorney in favor of his lawyer, he left for abroad and apparently paid no
further attention to his case until he received the decision
o There is therefore no fraud, accident, mistake or excusable negligence which will warrant
a lifting of the Order of Default
 As a general rule, a client is bound by the mistakes of his counsel; more so by the result of his own
negligence.

Disposition: Petition denied.

 Ordered petitioner Velasquez and Canilao, Jr. to solidarily pay private respondent PCIB the amount
of P7,227,624.48 with annual interest of 17% and attorney’s fees of P700,000.00 plus costs of suit
 2. Zobel, Inc. v CA

Facts:
 Respondent spouses Raul and Elea Claveria, DBA "Agro Brokers," applied for a loan with
respondent SOLIDBANK in the amount of P2,875,000.00
 Loan used to finance the purchase of two (2) maritime barges and one tugboat which would be
used in their molasses business
 The loan was granted subject to a chattel mortgage over the three (3) vessels to be acquired and
that a continuing guarantee be executed by Ayala International Philippines, Inc., now herein
petitioner E. Zobel, Inc., in favor of SOLIDBANK
 The respondent spouses agreed to the arrangement
 Consequently, a chattel mortgage and a Continuing Guaranty were executed
 Respondent spouses defaulted in the payment of the entire obligation upon maturity
 Hence, on January 31, 1991, SOLIDBANK filed a complaint for sum of money with a prayer for a
writ of preliminary attachment, against respondents spouses and petitioner Zobel
 Zobel moved to dismiss the complaint on the ground that its liability as guarantor of the loan was
extinguished pursuant to Article 2080 of the Civil Code of the Philippines
o It argued that it has lost its right to be subrogated to the first chattel mortgage in view of
SOLIDBANK's failure to register the chattel mortgage with the appropriate government
agency
 SOLIDBANK opposed the motion contending that Article 2080 is not applicable because petitioner
is not a guarantor but a surety
 The document referred to as "Continuing Guaranty" states the following:
o “For and in consideration of any existing indebtedness to you of Agro Brokers, a single
proprietorship owned by Mr. Raul Claveria for the payment of which the undersigned is
now obligated to you as surety and in order to induce you, in your discretion, at any other
manner, to, or at the request or for the account of the borrower…”
 Article 2080 of the New Civil Code which provides:
o "The guarantors, even though they be solidary, are released from their obligation
whenever by some act of the creditor they cannot be subrogated to the rights, mortgages,
and preferences of the latter"

ISSUE: WON Zobel, Inc. obligated itself as a guarantor or surety?

Ruling:
 Surety, duhh
 A contract of surety is an accessory promise by which a person binds himself for another already
bound, and agrees with the creditor to satisfy the obligation if the debtor does not. A contract of
guaranty, on the other hand, is a collateral undertaking to pay the debt of another in case the
latter does not pay the debt
 Strictly speaking, guaranty and surety are nearly related, and many of the principles are common
to both. However, under our civil law, they may be distinguished thus:
o A surety is usually bound with his principal by the same instrument, executed at the same
time, and on the same consideration. He is an original promissor and debtor from the
beginning, and is held, ordinarily, to know every default of his principal. Usually, he will
not be discharged, either by the mere indulgence of the creditor to the principal, or by
 want of notice of the default of the principal, no matter how much he may be injured
thereby.
o On the other hand, the contract of guaranty is the guarantor's own separate undertaking,
in which the principal does not join. It is usually entered into before or after that of the
principal, and is often supported on a separate consideration from that supporting the
contract of the principal. The original contract of his principal is not his contract, and he
is not bound to take notice of its non-performance. He is often discharged by the mere
indulgence of the creditor to the principal, and is usually not liable unless notified of the
default of the principal.
 Simply put, a surety is distinguished from a guaranty in that a guarantor is the insurer of the
solvency of the debtor and thus binds himself to pay if the principal is unable to pay while a surety
is the insurer of the debt, and he obligates himself to pay if the principal does not pay
Application:
 Based on the aforementioned definitions, it appears that the contract executed by petitioner in
favor of SOLIDBANK, albeit denominated as a "Continuing Guaranty," is a contract of surety. The
terms of the contract categorically obligates petitioner as "surety" to induce SOLIDBANK to extend
credit to respondent spouses.
 This can be seen in the following stipulations.
o For and in consideration of any existing indebtedness to you of AGRO BROKERS, a single
proprietorship owned by MR. RAUL P. CLAVERIA, of legal age, married and with business
address . . . (hereinafter called the Borrower), for the payment of which the undersigned
is now obligated to you as surety and in order to induce you, in your discretion, at any
time or from time to time hereafter, to make loans or advances or to extend credit in any
other manner to, or at the request or for the account of the Borrower, either with or
without purchase or discount, or to make any loans or advances evidenced or secured by
any notes, bills receivable, drafts, acceptances, checks or other instruments or evidences
of indebtedness . . . upon which the Borrower is or may become liable as maker, endorser,
acceptor, or otherwise, the undersigned agrees to guarantee, and does hereby
guarantee, the punctual payment, at maturity or upon demand, to you of any and all
such instruments, loans, advances, credits and/or other obligations herein before
referred to, and also any and all other indebtedness of every kind which is now or may
hereafter become due or owing to you by the Borrower, together with any and all
expenses which may be incurred by you in collecting all or any such instruments or other
indebtedness or obligations hereinbefore referred to, and or in enforcing any rights
hereunder, and also to make or cause any and all such payments to be made strictly in
accordance with the terms and provisions of any agreement (g), express or implied, which
has (have) been or may hereafter be made or entered into by the Borrower in reference
thereto, regardless of any law, regulation or decree, now or hereafter in effect which
might in any manner affect any of the terms or provisions of any such agreements(s) or
your right with respect thereto as against the Borrower, or cause or permit to be invoked
any alteration in the time, amount or manner of payment by the Borrower of any such
instruments, obligations or indebtedness;
 One need not look too deeply at the contract to determine the nature of the undertaking and the
intention of the parties.
 The contract clearly disclose that petitioner assumed liability to SOLIDBANK, as a regular party to
the undertaking and obligated itself as an original promissor.
 It bound itself jointly and severally to the obligation with the respondent spouses.
  In fact, SOLIDBANK need not resort to all other legal remedies or exhaust respondent spouses'
properties before it can hold petitioner liable for the obligation.
 The use of the term "guarantee" does not ipso facto mean that the contract is one of guaranty.
Authorities recognize that the word "guarantee" is frequently employed in business transactions
to describe not the security of the debt but an intention to be bound by a primary or independent
obligation. As aptly observed by the trial court, the interpretation of a contract is not limited to
the title alone but to the contents and intention of the parties.
 Having thus established that petitioner is a surety, Article 2080 of the Civil Code, relied upon by
petitioner, finds no application to the case at bar. In Bicol Savings and Loan Association vs.
Guinhawa, 12 we have ruled that Article 2080 of the New Civil Code does not apply where the
liability is as a surety, not as a guarantor
Other Discussion:

 But even assuming that Article 2080 is applicable, SOLIDBANK's failure to register the
chattel mortgage did not release petitioner from the obligation. In the Continuing
Guaranty executed in favor of SOLIDBANK, petitioner bound itself to the contract
irrespective of the existence of any collateral. It even released SOLIDBANK from any fault
or negligence that may impair the contract. The pertinent portions of the contract so
provides:

. . . the undersigned (petitioner) who hereby agrees to be and remain bound

upon this guaranty, irrespective of the existence, value or condition of any
collateral, and notwithstanding any such change, exchange, settlement,
compromise, surrender, release, sale, application, renewal or extension, and
notwithstanding also that all obligations of the Borrower to you outstanding and
unpaid at any time(s) may exceed the aggregate principal sum herein above
prescribed.

This is a Continuing Guaranty and shall remain in full force and effect until
written notice shall have been received by you that it has been revoked by the
undersigned, but any such notice shall not be released the undersigned from any
liability as to any instruments, loans, advances or other obligations hereby
guaranteed, which may be held by you, or in which you may have any interest, at
the time of the receipt of such notice. No act or omission of any kind on your
part in the premises shall in any event affect or impair this guaranty, nor shall
same be affected by any change which may arise by reason of the death of the
undersigned, of any partner (s) of the undersigned, or of the Borrower, or of the
accession to any such partnership of any one or more new partners

3. Palmares vs. Court of Appeals

G.R. No. 126490. March 31, 1998.
REGALADO, J.:

FACTS:
  Pursuant to a promissory note dated March 13, 1990, private respondent M.B. Lending
Corporation extended a loan to the spouses Osmeña and Merlyn Azarraga, together with
petitioner Estrella Palmares, in the amount of P30,000.00 payable on or before May 12, 1990,
with compounded interest at the rate of 6% per annum to be computed every 30 days from the
date thereof.
 On four occasions after the execution of the promissory note and even after the loan matured,
petitioner and the Azarraga spouses were able to pay a total of P16,300.00, thereby leaving a
balance of P13,700.00.
 No payments were made after the last payment on September 26, 1991.
 Consequently, on the basis of petitioner's solidary liability under the promissory note, respondent
corporation filed a complaint against petitioner Palmares as the lone party-defendant, to the
exclusion of the principal debtors, allegedly by reason of the insolvency of the latter.
 petitioner alleged that sometime in August 1990, immediately after the loan matured, she offered
to settle the obligation with respondent corporation but the latter informed her that they would try
to collect from the spouses Azarraga and that she need not worry about it.
o there has already been a partial payment in the amount of P17,010.00;
o the interest of 6% per month compounded at the same rate per month, as well as the
penalty charges of 3% per month, are usurious and unconscionable;
o and she agrees to be liable on the note but only upon default of the principal debtor,
respondent corporation acted in bad faith in suing her alone without including the
Azarragas when they were the only ones who benefited from the proceeds of the loan.
 On November 26, 1992, the Regional Trial Court of Iloilo City rendered judgment dismissing the
complaint without prejudice to the filing of a separate action for a sum of money against the
spouses Osmeña and Merlyn Azarraga who are primarily liable on the instrument.
o This was based on the findings of the court a quo that the filing of the complaint
against herein petitioner Estrella Palmares, to the exclusion of the Azarraga
spouses, amounted to a discharge of a prior party;
o the offer made by petitioner to pay the obligation is considered a valid tender of payment
sufficient to discharge a person's secondary liability on the instrument;
o as co-maker, is only secondarily liable on the instrument; and that the promissory note is
a contract of adhesion.
 Respondent Court of Appeals, however, reversed the decision of the trial court, and rendered
judgment declaring herein petitioner Palmares liable to pay respondent corporation.
o respondent appellate court declared that petitioner Palmares is a surety since she
bound herself to be jointly and severally or solidarily liable with the principal
debtors, the Azarraga spouses, when she signed as a co-maker.
o As such, petitioner is primarily liable on the note and hence may be sued by the creditor
corporation for the entire obligation.
o It also adverted to the fact that petitioner admitted her liability in her Answer although she
claims that the Azarraga spouses should have been impleaded.
o Respondent court ordered the imposition of the stipulated 6% interest and 3% penalty
charges on the ground that the Usury Law is no longer enforceable pursuant to Central
Bank Circular No. 905.
o Finally, it rationalized that even if the promissory note were to be considered as a
contract of adhesion, the same is not entirely prohibited because the one who adheres to
the contract is free to reject it entirely; if he adheres, he gives his consent.
 Hence this petition for review on certiorari

CONTENTION OF PETITIONER:
o Petitioner contends that the provisions of the second and third paragraph are conflicting
in that while the second paragraph seems to define her liability as that of a surety which
is joint and solidary with the principal maker,
 o on the other hand, under the third paragraph her liability is actually that of a mere
guarantor because she bound herself to fulfill the obligation only in case the principal
debtor should fail to do so, which is the essence of a contract of guaranty.
o More simply stated, although the second paragraph says that she is liable as a surety,
the third paragraph defines the nature of her liability as that of a guarantor.
o According to petitioner, these are two conflicting provisions in the promissory note and
the rule is that clauses in the contract should be interpreted in relation to one another and
not by parts.
o In other words, the second paragraph should not be taken in isolation, but should be read
in relation to the third paragraph.

ISSUE: Whether or not the liability of petitioner is that of a surety?

RULING:
 Yes, the liability of petitioner if that of a surety.
 At the outset, let it here be stressed that even assuming arguendo that the promissory note
executed between the parties is a contract of adhesion, it has been the consistent holding of the
Court that contracts of adhesion are not invalid per se and that on numerous occasions the
binding effects thereof have been upheld.
 The peculiar nature of such contracts necessitate a close scrutiny of the factual milieu to which
the provisions are intended to apply.
 Hence, just as consistently and unhesitatingly, but without categorically invalidating such
contracts, the Court has construed obscurities and ambiguities in the restrictive provisions of
contracts of adhesion strictly albeit not unreasonably against the drafter thereof when justified in
light of the operative facts and surrounding circumstances.
 The factual scenario obtaining in the case before us warrants a liberal application of the rule in
favor of respondent corporation.
 The Civil Code pertinently provides:
o Art. 2047. By guaranty, a person called the guarantor binds himself to the creditor to fulfill
the obligation of the principal debtor in case the latter should fail to do so.
o If a person binds himself solidarily with the principal debtor, the provisions of Section 4,
Chapter 3, Title I of this Book shall be observed. In such case the contract is called a
suretyship.
 It is a cardinal rule in the interpretation of contracts that if the terms of a contract are clear and
leave no doubt upon the intention of the contracting parties, the literal meaning of its stipulation
shall control.
 In the case at bar, petitioner expressly bound herself to be jointly and severally or solidarily liable
with the principal maker of the note.
 The terms of the contract are clear, explicit and unequivocal that petitioner's liability is
that of a surety.
 Her pretension that the terms "jointly and severally or solidarily liable" contained in the second
paragraph of her contract are technical and legal terms which could not be easily understood by
an ordinary layman like her is diametrically opposed to her manifestation in the contract that she
"fully understood the contents" of the promissory note and that she is "fully aware" of her solidary
liability with the principal maker.
 Petitioner admits that she voluntarily affixed her signature thereto; ergo, she cannot now
be heard to claim otherwise.
 Any reference to the existence of fraud is unavailing.
 Fraud must be established by clear and convincing evidence, mere preponderance of evidence
not even being adequate.
 Petitioner's attempt to prove fraud must, therefore, fail as it was evidenced only by her own
uncorroborated and, expectedly, self-serving allegations.
 Having entered into the contract with full knowledge of its terms and conditions, petitioner is
estopped to assert that she did so under a misapprehension or in ignorance of their legal effect,
or as to the legal effect of the undertaking.
  The rule that ignorance of the contents of an instrument does not ordinarily affect the liability of
one who signs it also applies to contracts of suretyship.
 And the mistake of a surety as to the legal effect of her obligation is ordinarily no reason for
relieving her of liability.
DISCUSSION BY THE COURT OF SURETYSHIP
 A surety is an insurer of the debt, whereas a guarantor is an insurer of the solvency of the
debtor.
 A suretyship is an undertaking that the debt shall be paid; a guaranty, an undertaking that the
debtor shall pay.
 Stated differently, a surety promises to pay the principal's debt if the principal will not pay,
while a guarantor agrees that the creditor, after proceeding against the principal, may
proceed against the guarantor if the principal is unable to pay.
 A surety binds himself to perform if the principal does not, without regard to his ability to do so.
 A guarantor, on the other hand, does not contract that the principal will pay, but simply that he is
able to do so.
 In other words, a surety undertakes directly for the payment and is so responsible at once if
the principal debtor makes default, while a guarantor contracts to pay if, by the use of due
diligence, the debt cannot be made out of the principal debtor.
 Quintessentially, the undertaking to pay upon default of the principal debtor does not
automatically remove it from the ambit of a contract of suretyship. The second and third
paragraphs of the aforequoted portion of the promissory note do not contain any other condition
for the enforcement of respondent corporation's right against petitioner. It has not been shown,
either in the contract or the pleadings, that respondent corporation agreed to proceed against
herein petitioner only if and when the defaulting principal has become insolvent. A contract of
suretyship, to repeat, is that wherein one lends his credit by joining in the principal debtor's
obligation, so as to render himself directly and primarily responsible with him, and without
reference to the solvency of the principal.
 Prescinding from these jurisprudential authorities, there can be no doubt that the stipulation
contained in the third paragraph of the controverted suretyship contract merely elucidated on and
made more specific the obligation of petitioner as generally defined in the second paragraph
thereof.
 Resultantly, the theory advanced by petitioner, that she is merely a guarantor because her liability
attaches only upon default of the principal debtor, must necessarily fail for being incongruent with
the judicial pronouncements adverted to above.
 It is a well-entrenched rule that in order to judge the intention of the contracting parties, their
contemporaneous and subsequent acts shall also be principally considered.
 Several attendant factors in that genre lend support to our finding that petitioner is a surety. For
one, when petitioner was informed about the failure of the principal debtor to pay the loan, she
immediately offered to settle the account with respondent corporation.
 Obviously, in her mind, she knew that she was directly and primarily liable upon default of
her principal.
 For another, and this is most revealing, petitioner presented the receipts of the payments already
made, from the time of initial payment up to the last, which were all issued in her name and of the
Azarraga spouses.
 This can only be construed to mean that the payments made by the principal debtors were
considered by respondent corporation as creditable directly upon the account and inuring
to the benefit of petitioner.
 The concomitant and simultaneous compliance of petitioner's obligation with that of her principals
only goes to show that, from the very start, petitioner considered herself equally bound by the
contract of the principal makers.
 In this regard, we need only to reiterate the rule that a surety is bound equally and
absolutely with the principal, and as such is deemed an original promisor and debtor from
the beginning.
 This is because in suretyship there is but one contract, and the surety is bound by the same
agreement which binds the principal.
  In essence, the contract of a surety starts with the agreement, which is precisely the situation
obtaining in this case before the Court.
 It will further be observed that petitioner's undertaking as co-maker immediately follows the terms
and conditions stipulated between respondent corporation, as creditor, and the principal obligors.
 A surety is usually bound with his principal by the same instrument, executed at the same
time and upon the same consideration; he is an original debtor, and his liability is
immediate and direct.
 Thus, it has been held that where a written agreement on the same sheet of paper with and
immediately following the principal contract between the buyer and seller is executed
simultaneously therewith, providing that the signers of the agreement agreed to the terms of the
principal contract, the signers were "sureties" jointly liable with the buyer.
 A surety usually enters into the same obligation as that of his principal, and the signatures of both
usually appear upon the same instrument, and the same consideration usually supports the
obligation for both the principal and the surety.

ISSUE: Whether or not the complaint was prematurely filed?

RULING:
 There is no merit in petitioner's contention that the complaint was prematurely filed because the
principal debtors cannot as yet be considered in default, there having been no judicial or
extrajudicial demand made by respondent corporation.
 Petitioner has agreed that respondent corporation may demand payment of the loan from her in
case the principal maker defaults, subject to the same conditions expressed in the promissory
note.
 Significantly, paragraph (G) of the note states that "should I fail to pay in accordance with the
above schedule of payment, I hereby waive my right to notice and demand."
 Hence, demand by the creditor is no longer necessary in order that delay may exist since
the contract itself already expressly so declares.
 As a surety, petitioner is equally bound by such waiver.
 Even if it were otherwise, demand on the sureties is not necessary before bringing suit against
them, since the commencement of the suit is a sufficient demand.
 On this point, it may be worth mentioning that a surety is not even entitled, as a matter of
right, to be given notice of the principal's default.
 Inasmuch as the creditor owes no duty of active diligence to take care of the interest of the
surety, his mere failure to voluntarily give information to the surety of the default of the principal
cannot have the effect of discharging the surety.
 The surety is bound to take notice of the principal's default and to perform the obligation.
 He cannot complain that the creditor has not notified
him in the absence of a special agreement to that effect in the contract of suretyship.

ISSUE: Whether or not the creditor may proceed directly against the surety?
RULING:
 A creditor's right to proceed against the surety exists independently of his right to
proceed against the principal.
 Under Article 1216 of the Civil Code, the creditor may proceed against any one of the
solidary debtors or some or all of them simultaneously.
 The rule, therefore, is that if the obligation is joint and several, the creditor has the right to
proceed even against the surety alone.
 Since, generally, it is not necessary for the creditor to proceed against a principal in order to hold
the surety liable, where, by the terms of the contract, the obligation of the surety is the same that
of the principal, then soon as the principal is in default, the surety is likewise in default, and may
be sued immediately and before any proceedings are had against the principal.
 Perforce, in accordance with the rule that, in the absence of statute or agreement otherwise, a
surety is primarily liable, and with the rule that his proper remedy is to pay the debt and pursue
the principal for reimbursement, the surety cannot at law, unless permitted by statute and in the
 absence of any agreement limiting the application of the security, require the creditor or obligee,
before proceeding against the surety, to resort to and exhaust his remedies against the principal,
particularly where both principal and surety are equally bound.
 We agree with respondent corporation that its mere failure to immediately sue petitioner
on her obligation does not release her from liability.
 Where a creditor refrains from proceeding against the principal, the surety is not exonerated.
 In other words, mere want of diligence or forbearance does not affect the creditor's rights vis-a-
visthe surety, unless the surety requires him by appropriate notice to sue on the obligation.
 Such gratuitous indulgence of the principal does not discharge the surety whether given at the
principal's request or without it, and whether it is yielded by the creditor through sympathy or from
an inclination to favor the principal, or is only the result of passiveness.
 The neglect of the creditor to sue the principal at the time the debt falls due does not
discharge the surety, even if such delay continues until the principal becomes insolvent.
 And, in the absence of proof of resultant injury, a surety is not discharged by the creditor's mere
statement that the creditor will not look to the surety, or that he need not trouble himself.
 The consequences of the delay, such as the subsequent insolvency of the principal, or the fact
that the remedies against the principal may be lost by lapse of time, are immaterial.
 The raison d'être for the rule is that there is nothing to prevent the creditor from
proceeding against the principal at any time.
 At any rate, if the surety is dissatisfied with the degree of activity displayed by the creditor in the
pursuit of his principal, he may pay the debt himself and become subrogated to all the rights and
remedies of the creditor.
 It may not be amiss to add that leniency shown to a debtor in default, by delay permitted by the
creditor without change in the time when the debt might be demanded, does not constitute an
extension of the time of payment, which would release the surety.
 In order to constitute an extension discharging the surety, it should appear that the extension was
for a definite period, pursuant to an enforceable agreement between the principal and the
creditor, and that it was made without the consent of the surety or with a reservation of rights with
respect to him.
 The contract must be one which precludes the creditor from, or at least hinders him in, enforcing
the principal contract within the period during which he could otherwise have enforced it, and
which precludes the surety from paying the debt.
 None of these elements are present in the instant case.
 Verily, the mere fact that respondent corporation gave the principal debtors an extended period of
time within which to comply with their obligation did not effectively absolve here in petitioner
from the consequences of her undertaking.
 Besides, the burden is on the surety, herein petitioner, to show that she has been discharged by
some act of the creditor, herein respondent corporation, failing in which we cannot grant the relief
prayed for.

DISPOSITIVE PORTION: WHEREFORE, the judgment appealed from is hereby AFFIRMED, subject
to the MODIFICATION that the penalty interest of 3% per month is hereby deleted and the award of
attorney's fees is reduced to P10,000.00. SO ORDERED.

4. VIZCONDE vs. INTERMEDIATE APPELLATE COURT & PEOPLE OF THE PHILIPPINES (April 10,
1987)

FACTS:

 Corazon J. Vizconde has appealed as contrary to law and the evidence, the Decision of the Court
of Appeals affirming her conviction of the crime of estafa.
 Vizconde and Pilar A. Pagulayan were charged in the Trial Court with misappropriation and
conversion of an 8-carat diamond ring belonging to Dr. Marylon J. Perlas.
 After trial both accused were convicted and each sentenced to serve an indeterminate prison
term of from 8 years, 4 months and 1 day to 10 years and 2 months of prision mayor, with the
accessory penalties provided by law, and jointly and severally to indemnify the offended party in
the sum of P55,000.00 for the unaccounted balance of the value of the ring with legal interest
from April 22, 1975, the further sum of P30,000.00 as and for moral damages and the sum of
P10,000.00 for attorney's fees.
 Both accused appealed to the Court of Appeals, but as Pilar A. Pagulayan had evaded
promulgation of sentence in the Trial Court and had appealed only through counsel the Appellate
Court vacated her appeal as ineffectual.
 On Vizconde's part, the Court of Appeals affirmed the judgment of the Trial Court in all respects
except the penalty of imprisonment, which it increased to a term of from 10 years and 1 day
of prision mayor to 12 years 10 months and 21 days of reclusion temporal. A motion for
reconsideration was denied.
 Vizconde thereafter filed the present petition for review on certiorari.
 Required to comment on the petition, the Solicitor General, despite having argued for affirmance
of Vizconde's conviction in the Court of Appeals, now recommends that she be acquitted, but
nonetheless held civilly liable to the complainant in the sum of P55,000.00 (the unaccounted
balance of the value of the ring as found by the Trial Court) " * * * or whatever portion thereof
which remains unpaid. * * *
 It appears that sometime in the first week of April, 1975, the complainant, Dr. Marylon J. Perlas,
called up the appellant Vizconde, a long-time friend and former high school classmate, asking her
to sell Perlas' 8-carat diamond ring.
o Shortly afterwards, Perlas delivered the ring to Vizconde to be sold on commission for P
85,000.00.
o Vizconde signed a receipt for the ring.
 About a week and a half later, Vizconde returned the ring to Perlas, who had asked for it because
she needed to show it to a cousin.
 However, Vizconde afterwards called on Perlas at the latter's home, with another lady, Pilar A.
Pagulayan, who claimed to have a "sure buyer" for the ring.
 Perlas was initially hesitant to do so, but she eventually parted with the ring so that it could be
examined privately by Pagulayan's buyer when the latter' gave her a postdated check for the
price (P 85,000.00) and, together with Vizconde, signed a receipt prepared by Perlas.
 This receipt-people's Exhibit "A"- reads as follows:

RECEIPT

Received from Dra. Marylon Javier-Perlas one (1) solo 8 karat diamond ring, white,
double cut, brilliant cut with multiple brilliantitos, which I agree to sell for P85,000.00
(eighty-five thousand pesos) on commission basis and pay her in the following manner:

P85,000.00 — postdated check

It is understood that in the event the above postdated check is dishonored for any reason
whatsoever on its due date, the total payment of the above item shall become
immediately due and demandable without awaiting further demand.

I guarantee that the above check will be sufficiently funded on the respective due date.

Quezon City, Philippines

22 April 1975
 (SGD.) PILAR A.
PAGULAYAN

I guarantee jointly and severally —

(SGD.) CORAZON J.
VIZCONDE

 After Pagulayan's postdated check matured, Perlas deposited it to her account at Manila Bank.
 It was dishonored for the reason, "No arrangement," stated in the debit advice.
 Perlas then called up Vizconde to inform her about the dishonor of the check.
 The latter suggested that Perlas re-deposit the check while she (Vizconde) followed up the sale of
the ring.
 Perlas re-deposited the check, but again it was dishonored because drawn against insufficient
funds.
 So Perlas took the matter to counsel who sent separate letters of demand to Vizconde and
Pagulayan for return of the ring or payment of P85,000.00.
 After nine days, Vizconde and Pagulayan called on Perlas.
 Pagulayan paid Perlas P5,000.00 against the value of the ring.
 She also gave into Perlas' keeping three certificates of title to real estate to guarantee delivery of
the balance of such value.
 A receipt for the money and the titles was typed and signed by Perlas, which she also made the
two sign.
 Vizconde and Pagulayan having allegedly reneged on a promise to complete payment for the ring
on the very next day, Perlas filed with the Quezon City Fiscal's office a complaint against them
for estafa
 This notwithstanding, Pagulayan still paid Perlas various sums totalling P25,000.00 which,
together with the P5,000.00 earlier paid, left a balance of P55,000.00 still owing.
 Both the Trial Court and the Court of Appeals found in these facts sufficient showing that
Vizconde and Pagulayan had assumed a joint agency in favor of Perlas for the sale of the latter's
ring, which rendered them criminally liable, upon failure to return the ring or deliver its agreed
value.
 The Solicitor General falling back, as already stated, from an earlier stance, disagrees and
submits in his Comment that the appellant cannot be convicted of estafa under a correct
interpretation of the two principal exhibits of the prosecution, the receipts Exhibits A" and "D".
 He is correct.

ISSUE: Was Visconde an agent of Perlas?

RULING: No. She merely guaranteed the obligation of Pagulayan to pay Perlas

 Nothing in the language of the receipt, Exhibit "A", or in the proven circumstances attending its
execution can logically be considered as evidencing the creation of an agency between Perlas,
as principal, and Vizconde, as agent, for the sale of the former's ring.
 True, reference to what may be taken for an agency agreement appears in the clause " * * *
which I agree to sell * * * on commission basis" in the main text of that document.
 But it is clear that if any agency was established, it was one between Perlas and Pagulayan only,
this being the only logical conclusion from the use of the singular "I" in said clause, in conjunction
with the fact that the part of the receipt in which the clause appears bears only the signature of
Pagulayan.
 To warrant anything more than a mere conjecture that the receipt also constituted Vizconde the
agent of Perlas for the same purpose of selling the ring, the cited clause should at least have
 used the plural "we," or the text of the receipt containing that clause should also have carried
Vizconde's signature.
 As the Solicitor General correctly puts it, the joint and several undertaking assumed by Vizconde
in a separate writing below the main body of the receipt, Exhibit "A", merely guaranteed the civil
obligation of Pagulayan to pay Perlas the value of the ring in the event of her (Pagulayan's)
failure to return said article.
 It cannot, in any sense, be construed as assuming any criminal responsibility consequent upon
the failure of Pagulayan to return the ring or deliver its value. It is fundamental that criminal
responsibility is personal and that in the absence of conspiracy, one cannot be held criminally
liable for the act or default of another.

A person to be guilty of crime, must commit the crime himself or he must, in some
manner, participate in its commission or in the fruits thereof.

 Thus, the theory that by standing as surety for Pagulayan, Vizconde assumed an obligation more
than merely civil in character, and staked her very liberty on Pagulayan's fidelity to her trust is
utterly unacceptable; it strikes at the very essence of guaranty (or suretyship) as creating purely
civil obligations on the part of the guarantor or surety.
o To render Vizconde criminally liable for the misappropriation of the ring, more than her
mere guarantee written on Exhibit "A" is necessary.
o At the least, she must be shown to have acted in concert and conspiracy with Pagulayan,
either in obtaining possession of the ring, or in undertaking to return the same or delivery
its value, or in the misappropriation or conversion of the same.
 Now, the information charges conspiracy between Vizconde and Pagulayan, but no adequate
proof thereof has been presented.
 It is of course true that direct proof of conspiracy is not essential to convict an alleged conspirator,
and that conspiracy may be established by evidence of acts done in pursuance of a common
unlawful purpose.
 Here, however, the circumstances from which a reasonable inference of conspiracy might arise,
such as the fact that Vizconde and the complainant were friends of long standing and former
classmates, that it was Vizconde who introduced Pagulayan to Perlas, that Vizconde was present
on the two occasions when the ring was entrusted to Pagulayan and when part payment of
P5,000.00 was made, and that she signed the receipts, Exhibits "A" and "D," on those occasions
are, at best, inconclusive.
 They are not inconsistent with what Vizconde has asserted to be an innocent desire to help her
friend dispose of the ring; nor do they exclude every reasonable hypothesis other than complicity
in a premeditated swindle.
 The foregoing conclusion in nowise suffers from the fact that the second receipt, Exhibit "D",
appears to confirm that the ring "* * * was given to Mrs. Pilar Pagulayan and Mrs. Corazon de
Jesus Vizconde on 22 April 1975, to be sold on commission basis for eighty five thousand pesos
(P85,000.00)."
 The implications and probative value of this writing must be considered in the context of what had
already transpired at the time of its making. The ring had already been given to Pagulayan, and
the check that she had issued in payment therefor (or to secure payment, as the complainant
would have it) had already been dishonored twice.
 That the complainant then already entertained serious apprehensions about the fate of the ring is
evident in her having had her lawyers send Vizconde and Pagulayan demands for restitution or
payment, with threat of legal action.
 Given that situation, Exhibit "D", insofar as it purports to confirm that Vizconde had also received
the ring in trust, cannot be considered as anything other than an attempt to "cure" the lack of
mention of such an entrustment in the first receipt, Exhibit "A", and thereby bind Vizconde to a
commitment far stronger and more compelling than a mere civil guarantee for the value of the
ring.
  There is otherwise no explanation for requiring Vizconde and Pagulayan to sign the receipt, which
needed only the signature of Perlas as an acknowledgment of the P5,000.00 given in part
payment, and the delivery of the land titles to secure the balance.
 The conflict in the recitals of the two receipts insofar as concerns Vizconde's part in the
transaction involving Perlas' ring is obvious and cannot be ignored.
 Neither, as the Court sees it, should these writings be read together in an attempt to reconcile
what they contain, since, as already pointed out, the later receipt was made under circumstances
which leave no little doubt of its truth and integrity.
 What is clear from Exhibit "A" is that the ring was entrusted to Pilar A. Pagulayan to be sold on
commission; there is no mention therein that it was simultaneously delivered to and received by
Vizconde for the same purpose or, therefore, that Vizconde was constituted, or agreed to act as,
agent jointly with Pagulayan for the sale of the ring.
 What Vizconde solely undertook was to guarantee the obligation of Pagulayan to return
the ring or deliver its value; and that guarantee created only a civil obligation, without
more, upon default of the principal.
 Exhibit "D", on the other hand, would make out Vizconde an agent for the sale of the ring. The
undisputed fact that Exhibit "A" was executed simultaneously with the delivery of the ring to
Pagulayan compellingly argues for accepting it as a more trustworthy memorial of the real
agreement and transaction of the parties than Exhibit "D" which was executed at a later date and
after the supervention of events rendering it expedient or desirable to vary the terms of that
agreement or transaction.
 In view of the conclusions already reached, consideration of the Solicitor General's argument —
also quite persuasive — that Exhibit "D" in fact evidences a consummated sale of the ring for an
agreed price not fully paid for, which yields the same result, is no longer necessary.
 It is, however, at least another factor reinforcing the hypothesis of Vizconde's innocence.
 Upon the evidence, appellant Corazon J. Vizconde was a mere guarantor, a solidary one to be
sure, of the obligation assumed by Pilar A. Pagulayan to complainant Marylon J. Perlas for the
return of the latter's ring or the delivery of its value.
 Whatever liability was incured by Pagulayan for defaulting on such obligation — and this is not
inquired into — that of Vizconde consequent upon such default was merely civil, not criminal.
It was, therefore, error to convict her of estafa.
 As already stated, the Solicitor General however maintains, on the authority of People vs. Padilla,
that the appellant should be held liable to pay the complainant the amount of P55,000.00, or
whatever part of such amount remains unpaid, for the value of the ring. Again, this is a correct
proposition, there being no question — as in fact admitted by her — that the appellant executed
the guarantee already referred to.

DISPOSITION: WHEREFORE, except insofar as it affirms the judgment of the Trial Court ordering
appellant Corazon J. Vizconde, solidarity with Pilar A. Pagulayan, to indemnify the complainant Marylon
J. Perlas in the amount of P55,000.00 for the unaccounted balance of the value of the latter's ring, the
appellant pealed Decision of the Court of Appeals is reversed and set aside, and said appellant is
acquitted, with costs de oficio. As the record indicates that levies on preliminary attachment and on
execution pending appeal have been made on behalf of the complainant, 21 which may have resulted in
further reducing the above stated balance, the appellant may, upon remand of this case to the Trial Court,
prove any reductions, by the operation of said levies or otherwise, to which the amount of the indemnity
adjudged may be justly subject. SO ORDERED.

5. Visayan Surety & Insurance Corporation vs. Court of Appeals

G.R. No. 127261. September 7, 2001.
PARDO, J.:

FACTS:
  On February 2, 1993, the spouses Danilo Ibajan and Mila Ambe Ibajan filed with the Regional
Trial Court, Laguna, Biñan a complaint against spouses Jun and Susan Bartolome, for replevin to
recover from them the possession of an Isuzu jeepney, with damages.
 Plaintiffs Ibajan alleged that they were the owners of an Isuzu jeepney which was forcibly and
unlawfully taken by defendants Jun and Susan Bartolome on December 8, 1992, while parked at
their residence.
 On February 8, 1993, plaintiffs filed a replevin bond through petitioner Visayan Surety &
Insurance Corporation. (Contract of Surety: check with notes)
 On February 8, 1993, the trial court granted issuance of a writ of replevin directing the sheriff to
take the Isuzu jeepney into his custody.
 Consequently, on February 22, 1993, Sheriff Arnel Magat seized the subject vehicle and turned
over the same to plaintiff spouses Ibajan.
 On February 15, 1993, the spouses Bartolome filed with the trial court a motion to quash the writ
of replevin and to order the return of the jeepney to them.
 On May 3, 1993, Dominador V. Ibajan, father of plaintiff Danilo Ibajan, filed with the trial court a
motion for leave of court to intervene, stating that he has a right superior to the plaintiffs over the
ownership and possession of the subject vehicle.
o On June 1, 1993, the trial court granted the motion to intervene.
 On August 8, 1993, the trial court issued an order granting the motion to quash the writ of replevin
and ordering plaintiff Mila Ibajan to return the subject jeepney to the intervenor Dominador Ibajan.
 On August 31, 1993, the trial court ordered the issuance of a writ of replevin directing the sheriff
to take into his custody the subject motor vehicle and to deliver the same to the intervenor who
was the registered owner.
 On September 1, 1993, the trial court issued a writ of replevin in favor of intervenor Dominador
Ibajan but it was returned unsatisfied.
 On March 7, 1994, intervenor Dominador Ibajan filed with the trial court a motion/application for
judgment against plaintiffs’ bond.
 On June 6, 1994, the trial court rendered judgement in favor of Dominador Ibajan and against
Mila Ibajan and the Visayan Surety and Insurance Corporation ordering them to pay the former
jointly and severally the value of the subject jeepney in the amount of P150,000.00 and such
other damages as may be proved by Dominador Ibajan plus costs."
 On June 28, 1994, Visayan Surety and Insurance Corporation and Mila Ibajan filed with the trial
court their respective motions for reconsideration.
 On August 16, 1994, the trial court denied both motions.
 On November 24, 1995, Visayan Surety and Insurance Corporation (hereafter Visayan Surety)
appealed the decision to the Court of Appeals.
 On August 30, 1996, the Court of Appeals promulgated its decision affirming the judgment of the
trial court.
 On September 19, 1996, petitioner filed a motion for reconsideration.
 On December 2, 1996, the Court of Appeals denied the motion for reconsideration for lack of
merit.
 Hence, this petition.

ISSUE: whether or not the surety is liable to an intervenor on a replevin bond posted by petitioner in favor
of respondents?
RULING:

 No, the surety is not liable to an intervenor on a replevin bond.

  It is a basic principle in law that contracts can bind only the parties who had entered into it; it
cannot favor or prejudice a third person.
 Contracts take effect between the parties, their assigns, and heirs, except in cases where the
rights and obligations arising from the contract are not transmissible by their nature, or by
stipulation or by provision of law.
 A contract of surety is an agreement where a party called the surety guarantees the performance
by another party called the principal or obligor of an obligation or undertaking in favor of a third
person called the obligee.
 Specifically, suretyship is a contractual relation resulting from an agreement whereby one person,
the surety, engages to be answerable for the debt, default or miscarriage of another, known as
the principal.
 The obligation of a surety cannot be extended by implication beyond its specified limits.
 "When a surety executes a bond, it does not guarantee that the plaintiff’s cause of action
is meritorious, and that it will be responsible for all the costs that may be adjudicated
against its principal in case the action fails.
 The extent of a surety’s liability is determined only by the clause of the contract of suretyship."
 A contract of surety is not presumed; it cannot extend to more than what is stipulated.
 Since the obligation of the surety cannot be extended by implication, it follows that the surety
cannot be held liable to the intervenor when the relationship and obligation of the surety is
limited to the defendants specified in the contract of surety.

DISPOSITIVE PORTION: WHEREFORE, the Court REVERSES and sets aside the decision of the Court
of Appeals in CA-G. R. CV No. 49094. The Court rules that petitioner Visayan Surety & Insurance
Corporation is not liable under the replevin bond to the intervenor, respondent Dominador V. Ibajan.

NOTES:

"WHEREFORE, we, sps. Danilo Ibajan and Mila Ibajan and the VISAYAN SURETY & INSURANCE
CORP., of Cebu, Cebu, with branch office at Manila, jointly and severally bind ourselves in the sum of
Three Hundred Thousand Pesos (P300,000.00) for the return of the property to the defendant, if the
return thereof be adjudged, and for the payment to the defendant of such sum as he/she may recover
from the plaintiff in the action."

6. SECURITY BANK AND TRUST COMPANY, Inc., petitioner, vs. RODOLFO M.

CUENCA, respondent. G.R. No. 138544 October 3, 2000
Facts:
 Being an onerous undertaking, a surety agreement is strictly construed against the creditor, and
every doubt is resolved in favor of the solidary debtor. The fundamental rules of fair play require
the creditor to obtain the consent of the surety to any material alteration in the principal loan
agreement, or at least to notify it thereof. Hence, petitioner bank cannot hold herein respondent
liable for loans obtained in excess of the amount or beyond the period stipulated in the original
agreement, absent any clear stipulation showing that the latter waived his right to be notified
thereof, or to give consent thereto. This is especially true where, as in this case, respondent was
no longer the principal officer or major stockholder of the corporate debtor at the time the later
obligations were incurred. He was thus no longer in a position to compel the debtor to pay the
creditor and had no more reason to bind himself anew to the subsequent obligations.
 This is the main principle used in denying the present Petition for Review under Rule 45 of the
ROC. Petitioner assails the December 22, 1998 Decision of the CA. Also challenged is the April
14, 1999 CA Resolution, which denied petitioner’s MR. Modified by the CA was the March 6, 1997
Decision4 of the RTC of Makati City (Branch 66)

 Facts narrated by the CA:

o Defendant-appellant Sta. Ines Melale (‘Sta. Ines’) is a corporation engaged in logging
operations. It was a holder of a Timber License Agreement issued by the DENR
o 10 November 1980, Petitioner Security Bank and Trust Co (SBTC). granted appellant Sta.
Ines Melale Corporation [SIMC] a credit line in the amount of ₱8,000,000.00 to assist the
latter in meeting the additional capitalization requirements of its logging operations.
o The Credit Approval Memorandum expressly stated that the ₱8M Credit Loan Facility shall
be effective until 30 November 1981
o To secure the payment of the amounts drawn by appellant SIMC from the above-
mentioned credit line, SIMC executed a Chattel Mortgage dated 23 December 1980 over
some of its machinery and equipment in favor of Petitioner SBTC.
o As additional security for the payment of the loan, Respondent Rodolfo M. Cuenca
executed an Indemnity Agreement dated 17 December 1980 in favor of Petitioner SBTC
whereby he solidarily bound himself with SIMC
o 26 November 1981 - 4 days prior to the expiration of the period of effectivity of the ₱8M-
Credit Loan Facility, appellant SIMC made a first drawdown from its credit line with
Petitioner SBTC in the amount of ₱6,100,000.00. To cover said drawdown, SIMC duly
executed promissory Note No. TD/TLS-3599-81 for said amount.
o Sometime in 1985, Respondent Cuenca resigned as President and Chairman of the Board
of Directors of defendant-appellant Sta. Ines. Subsequently, the shareholdings of Cuenca
in defendant-appellant Sta. Ines were sold at a public auction. Said shares were bought by
Adolfo Angala who was the highest bidder during the public auction.
o Subsequently, appellant SIMC repeatedly availed of its credit line and obtained 6 other
loans from Petitioner SBTC in the aggregate amount of ₱6,369,019.50. SIMC executed
Promissory Notes to cover the amounts of the abovementioned additional loans against
the credit line.
o Appellant SIMC, however, encountered difficulty in making the amortization payments on
its loans and requested SBTC for a complete restructuring of its indebtedness. SBTC
accommodated appellant SIMC’s request and signified its approval in a letter dated 18
February 1988 wherein SBTC and defendant-appellant Sta. Ines, without notice to or the
prior consent of Cuenca, agreed to restructure the past due obligations of defendant-
appellant Sta. Ines. Petitioner Security Bank agreed to extend to defendant-appellant Sta.
Ines the following loans:
 a. Term loan in the amount of ₱8,800,000.00, to be applied to liquidate the principal
portion of defendant-appellant Sta. Ines total outstanding indebtedness to Security
Bank and
 b. Term loan in the amount of ₱3,400,000.00, to be applied to liquidate the past
due interest and penalty portion of the indebtedness of defendant-appellant Sta.
Ines to Security Bank
o It should be pointed out that in restructuring defendant-appellant Sta. Ines’ obligations to
Security Bank, Promissory Note No. TD-TLS-3599-81 in the amount of ₱6,100,000.00,
which was the only loan incurred prior to the expiration of the P8M-Credit Loan Facility on
30 November 1981 and the only one covered by the Indemnity Agreement dated 19
December 1980 was not segregated from, but was instead lumped together with, the other
loans, i.e., Promissory Notes Nos. DLS/74/12/86, DLS/74/28/86 and DLS/74/47/86
obtained by defendant-appellant Sta. Ines which were not secured by said Indemnity
Agreement.
o Pursuant to the agreement to restructure its past due obligations to Security Bank,
defendant-appellant Sta. Ines thus executed the following promissory notes, both dated 09
March 1988 in favor of Security Bank:
PROMISSORY NOTE NO. AMOUNT

RL/74/596/88 ₱8,800,000.00

RL/74/597/88 ₱3,400,000.00

TOTAL ₱12,200,000.00
  To formalize their agreement to restructure the loan obligations of defendant-appellant Sta. Ines,
Security Bank and defendant-appellant Sta. Ines executed a Loan Agreement dated 31 October
1989. Section 1.01 of the said Loan Agreement dated 31 October 1989 provides:
o ‘1.01 Amount - The Lender agrees to grant loan to the Borrower in the aggregate amount
of ₱12,200,000.00, Philippines currency (the ‘Loan’). The loan shall be released in two (2)
tranches of ₱8,800,000.00 for the first tranche (the ‘First Loan’) and ₱3,400,000.00 for the
second tranche (the ‘Second Loan’) to be applied in the manner and for the purpose
stipulated hereinbelow.
o ‘1.02. Purpose - The First Loan shall be applied to liquidate the principal portion of the
Borrower’s present total outstanding indebtedness to the Lender (the ‘indebtedness’) while
the Second Loan shall be applied to liquidate the past due interest and penalty portion of
the Indebtedness.’ (Underscoring supplied.)
 From 08 April 1988 to 02 December 1988, defendant-appellant Sta. Ines made further payments
to Security Bank in the amount of P1,757,000.00
 Appellant SIMC defaulted in the payment of its restructured loan obligations to SBTC despite
demands made upon appellant SIMC and CUENCA, the last of which were made through separate
letters dated 5 June 1991 and 27 June 1991, respectively.
 Appellants individually and collectively refused to pay the SBTC. SBTC filed a complaint for
collection of sum of money on 14 June 1993, resulting after trial on the merits in a decision by the
court a quo, x x x from which Cuenca appealed.

Ruling of the CA
 In releasing Respondent Cuenca from liability, the CA ruled that the 1989 Loan Agreement had
novated the 1980 credit accommodation earlier granted by the bank to Sta. Ines. Accordingly, such
novation extinguished the Indemnity Agreement, by which Cuenca, who was then the Board
chairman and president of Sta. Ines, had bound himself solidarily liable for the payment of the loans
secured by that credit accommodation. It noted that the 1989 Loan Agreement had been executed
without notice to, much less consent from, Cuenca who at the time was no longer a stockholder of
the corporation.
 Also noted that the Credit Approval Memorandum had specified that the credit accommodation was
for a total amount of ₱8 million, and that its expiry date was November 30, 1981. Hence, it ruled
that Cuenca was liable only for loans obtained prior to November 30, 1981, and only for an amount
not exceeding ₱8 million.
 It further held that the restructuring of Sta. Ines’ obligation under the 1989 Loan Agreement was
tantamount to a grant of an extension of time to the debtor without the consent of the surety. Under
Article 2079 of the Civil Code, such extension extinguished the surety.
 The CA also opined that the surety was entitled to notice, in case the bank and Sta. Ines decided
to materially alter or modify the principal obligation after the expiry date of the credit
accommodation.
 Hence, this recourse to this Court.

Issue #1: Whether the 1989 Loan Agreement novated the original credit accommodation and Cuenca’s
liability under the Indemnity Agreement?
Ruling #1: YES.

First Issue: Original Obligation Extinguished by Novation

 An obligation may be extinguished by novation, pursuant to Article 1292 of the Civil Code, which
reads as follows:
o "ART. 1292. In order that an obligation may be extinguished by another which substitute
the same, it is imperative that it be so declared in unequivocal terms, or that the old and
the new obligations be on every point incompatible with each other."
 Novation of a contract is never presumed. It has been held that "in the absence of an express
agreement, novation takes place only when the old and the new obligations are incompatible on
every point.”
  Indeed, the following requisites must be established:
o (1) there is a previous valid obligation;
o (2) the parties concerned agree to a new contract;
o (3) the old contract is extinguished; and
o (4) there is a valid new contract.

 Petitioner contends that there was no absolute incompatibility between the old and the new
obligations, and that the latter did not extinguish the earlier one. It further argues that the 1989
Agreement did not change the original loan in respect to the parties involved or the obligations
incurred. It adds that the terms of the 1989 Contract were "not more onerous." Since the original
credit accomodation was not extinguished, it concludes that Cuenca is still liable under the
Indemnity Agreement.
o We reject these contentions.

 Clearly, the requisites of novation are present in this case.

 The 1989 Loan Agreement extinguished the obligation obtained under the 1980 credit
accommodation.
 This is evident from its explicit provision to "liquidate" the principal and the interest of the earlier
indebtedness, as the following shows:
o "1.02. Purpose. The First Loan shall be applied to liquidate the principal portion of the
Borrower’s present total outstanding Indebtedness to the Lender (the "Indebtedness")
while the Second Loan shall be applied to liquidate the past due interest and penalty
portion of the Indebtedness."
 The testimony of an officer of the bank that the proceeds of the 1989 Loan Agreement were used
"to pay-off" the original indebtedness serves to strengthen this ruling.
 Furthermore, several incompatibilities between the 1989 Agreement and the 1980 original
obligation demonstrate that the two cannot coexist.
o While the 1980 credit accommodation had stipulated that the amount of loan was not to
exceed ₱8 million, the 1989 Agreement provided that the loan was ₱12.2 million.
o The periods for payment were also different.
o The later contract contained conditions, "positive covenants" and "negative covenants" not
found in the earlier obligation. As an example of a positive covenant, Sta. Ines undertook
"from time to time and upon request by the Lender, to perform such further acts and/or
execute and deliver such additional documents and writings as may be necessary or proper
to effectively carry out the provisions and purposes of this Loan Agreement." Likewise,
SIMC agreed that it would not create any mortgage or encumbrance on any asset owned
or hereafter acquired, nor would it participate in any merger or consolidation.
 Since the 1989 Loan Agreement had extinguished the original credit accommodation, the Indemnity
Agreement, an accessory obligation, was necessarily extinguished also, pursuant to Article 1296
of the Civil Code, which provides:
o "ART. 1296. When the principal obligation is extinguished in consequence of a novation,
accessory obligations may subsist only insofar as they may benefit third persons who did
not give their consent."

Alleged Extension
 Petitioner insists that the 1989 Loan Agreement was a mere renewal or extension of the ₱8 million
original accommodation; it was not a novation.
o This argument must be rejected.
 To begin with, the 1989 Loan Agreement expressly stipulated that its purpose was to "liquidate,"
not to renew or extend, the outstanding indebtedness.
 Moreover, respondent did not sign or consent to the 1989 Loan Agreement, which had allegedly
extended the original ₱8 million credit facility.
 Hence, his obligation as a surety should be deemed extinguished, pursuant to Article 2079
of the Civil Code, which specifically states that "[a]n extension granted to the debtor by the creditor
without the consent of the guarantor extinguishes the guaranty. x x x."
  In an earlier case, the Court explained the rationale of this provision in this wise:
o "The theory behind Article 2079 is that an extension of time given to the principal debtor by
the creditor without the surety’s consent would deprive the surety of his right to pay the
creditor and to be immediately subrogated to the creditor’s remedies against the principal
debtor upon the maturity date. The surety is said to be entitled to protect himself against
the contingency of the principal debtor or the indemnitors becoming insolvent during the
extended period."

Binding Nature of the Credit Approval Memorandum

 The appellate court relied on the provisions of the Credit Approval Memorandum in holding that the
credit accommodation was only for ₱8 million, and that it was for a period of one year ending on
November 30, 1981.
 Petitioner objects to the appellate court’s reliance on that document, contending that it was not a
binding agreement because it was not signed by the parties. It adds that it was merely for its internal
use.
o We disagree.
 It was petitioner itself which presented the said document to prove the accommodation. Moreover,
in its Petition before this Court, it alluded to the Credit Approval Memorandum in this wise:
o "4.1 On 10 November 1980, SIMC was granted by the Bank a credit line in the aggregate
amount of P8,000,000.00 to assist SIMC in meeting the additional capitalization
requirements for its logging operations. For this purpose, the Bank issued a Credit Approval
Memorandum dated 10 November 1980."
 Clearly, respondent is estopped from denying the terms and conditions of the ₱8 million credit
accommodation as contained in the very document it presented to the courts. Indeed, it cannot
take advantage of that document by agreeing to be bound only by those portions that are favorable
to it, while denying those that are disadvantageous.

Issue #2: Whether Cuenca waived his right to be notified of and to give consent to any substitution, renewal,
extension, increase, amendment, conversion or revival of the said credit accommodation?
Ruling #2: No.

Second Issue: Alleged Waiver of Consent

 Petitioner contends that Respondent Cuenca "impliedly gave his consent to any modification of the
credit accommodation or otherwise waived his right to be notified of, or to give consent to, the
same." Respondent’s consent or waiver thereof is allegedly found in the Indemnity Agreement, in
which he held himself liable for the "credit accommodation including [its] substitutions, renewals,
extensions, increases, amendments, conversions and revival." It explains that the novation of the
original credit accommodation by the 1989 Loan Agreement is merely its "renewal," which
"connotes cessation of an old contract and birth of another one x x x."

 At the outset, we should emphasize that an essential alteration in the terms of the Loan Agreement
without the consent of the surety extinguishes the latter’s obligation. As the Court held in National
Bank v. Veraguth "it is fundamental in the law of suretyship that any agreement between the creditor
and the principal debtor which essentially varies the terms of the principal contract, without the
consent of the surety, will release the surety from liability."
 In this case, petitioner’s assertion - that respondent consented to the alterations in the credit
accommodation -- finds no support in the text of the Indemnity Agreement, which is reproduced
hereunder:
o "Rodolfo M. Cuenca xxx for and in consideration of the credit accommodation in the total
amount of ₱8,000,000.00 granted by the SECURITY BANK AND TRUST COMPANY,
hereinafter referred to as the BANK in favor of STA. INES MELALE FOREST PRODUCTS
CORP., x x x hereinafter referred to as the CLIENT, xxx hereby bind(s) himself/themselves
jointly and severally with the CLIENT in favor of the BANK for the payment , upon demand
and without benefit of excussion of whatever amount or amounts the CLIENT may be
indebted to the BANK under and by virtue of aforesaid credit accommodation(s) including
 the substitutions, renewals, extensions, increases, amendment, conversions and revivals
of the aforesaid credit accommodation(s), as well as of the amount or amounts of such
other obligations that the CLIENT may owe the BANK, xxx plus interest and expenses
arising from any agreement or agreements that may have heretofore been made, or may
hereafter be executed by and between the parties thereto, including the substitutions,
renewals, extensions, increases, amendments, conversions and revivals of the aforesaid
credit accommodation(s), and further bind(s) himself/themselves with the CLIENT in favor
of the BANK for the faithful compliance of all the terms and conditions contained in the
aforesaid credit accommodation(s), xxx."

 While respondent held himself liable for the credit accommodation or any modification
thereof, such clause should be understood in the context of the ₱8 million limit and the
November 30, 1981 term. It did not give the bank or Sta. Ines any license to modify the nature and
scope of the original credit accommodation, without informing or getting the consent of respondent
who was solidarily liable.
 Taking the bank’s submission to the extreme, respondent (or his successors) would be liable for
loans even amounting to, say, ₱100 billion obtained 100 years after the expiration of the credit
accommodation, on the ground that he consented to all alterations and extensions thereof.

Contract of Surety
 Indeed, it has been held that a contract of surety "cannot extend to more than what is stipulated.
 It is strictly construed against the creditor, every doubt being resolved against enlarging the liability
of the surety."
 Likewise, the Court has ruled that "it is a well-settled legal principle that if there is any doubt on the
terms and conditions of the surety agreement, the doubt should be resolved in favor of the surety
x x x. Ambiguous contracts are construed against the party who caused the ambiguity."
 In the absence of an unequivocal provision that respondent waived his right to be notified of or to
give consent to any alteration of the credit accommodation, we cannot sustain petitioner’s view that
there was such a waiver.
 It should also be observed that the Credit Approval Memorandum clearly shows that the bank did
not have absolute authority to unilaterally change the terms of the loan accommodation. Indeed, it
may do so only upon notice to the borrower, pursuant to this condition.
 We reject petitioner’s submission that only Sta. Ines as the borrower, not respondent, was entitled
to be notified of any modification in the original loan accommodation.
 Following the bank’s reasoning, such modification would not be valid as to Sta. Ines if no notice
were given; but would still be valid as to respondent to whom no notice need be given. The latter’s
liability would thus be more burdensome than that of the former. Such untenable theory is contrary
to the principle that a surety cannot assume an obligation more onerous than that of the principal.
 The present controversy must be distinguished from Philamgen v. Mutuc, in which the Court
sustained a stipulation whereby the surety consented to be bound not only for the specified period,
"but to any extension thereafter made, an extension x x x that could be had without his having to
be notified."
o In that case, the surety agreement contained this unequivocal stipulation: "It is hereby
further agreed that in case of any extension of renewal of the bond, we equally bind
ourselves to the Company under the same terms and conditions as herein provided without
the necessity of executing another indemnity agreement for the purpose and that we
hereby equally waive our right to be notified of any renewal or extension of the bond which
may be granted under this indemnity agreement."
 In the present case, there is no such express stipulation. At most, the alleged basis of respondent’s
waiver is vague and uncertain. It confers no clear authorization on the bank or Sta. Ines to modify
or extend the original obligation without the consent of the surety or notice thereto.

Continuing Surety
  Contending that the Indemnity Agreement was in the nature of a continuing surety, petitioner
maintains that there was no need for respondent to execute another surety contract to secure the
1989 Loan Agreement.
o This argument is incorrect.
 That the Indemnity Agreement is a continuing surety does not authorize the bank to extend the
scope of the principal obligation inordinately.
 In Dino v. CA, the Court held that "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."
 To repeat, in the present case, the Indemnity Agreement was subject to the two limitations of the
credit accommodation: (1) that the obligation should not exceed ₱8 million, and (2) that the
accommodation should expire not later than November 30, 1981.
 Hence, it was a continuing surety only in regard to loans obtained on or before the aforementioned
expiry date and not exceeding the total of ₱8 million.
 Accordingly, the surety of Cuenca secured only the first loan of ₱6.1 million obtained on November
26, 1991. It did not secure the subsequent loans, purportedly under the 1980 credit
accommodation, that were obtained in 1986. Certainly, he could not have guaranteed the 1989
Loan Agreement, which was executed after November 30, 1981 and which exceeded the stipulated
P8 million ceiling.
 Petitioner, however, cites the Dino ruling in which the Court found the surety liable for the loan
obtained after the payment of the original one, which was covered by a continuing surety
agreement. At the risk of being repetitious, we hold that in Dino, the surety Agreement specifically
provided that "each suretyship is a continuing one which shall remain in full force and effect until
this bank is notified of its revocation." Since the bank had not been notified of such revocation, the
surety was held liable even for the subsequent obligations of the principal borrower.
o No similar provision is found in the present case. On the contrary, respondent’s liability was
confined to the 1980 credit accommodation, the amount and the expiry date of which were
set down in the Credit Approval Memorandum.

Special Nature of the JSS

 It is a common banking practice to require the JSS ("joint and solidary signature") of a major
stockholder or corporate officer, as an additional security for loans granted to corporations. There
are at least two reasons for this.
o First, in case of default, the creditor’s recourse, which is normally limited to the corporate
properties under the veil of separate corporate personality, would extend to the personal
assets of the surety.
o Second, such surety would be compelled to ensure that the loan would be used for the
purpose agreed upon, and that it would be paid by the corporation.
 Following this, it was therefore logical and reasonable for the bank to have required the JSS of
respondent, who was the chairman and president of Sta. Ines in 1980 when the credit
accommodation was granted. There was no reason or logic, however, for the bank or Sta. Ines to
assume that he would still agree to act as surety in the 1989 Loan Agreement, because at that
time, he was no longer an officer or a stockholder of the debtor-corporation. Verily, he was not in a
position then to ensure the payment of the obligation. Neither did he have any reason to bind
himself further to a bigger and more onerous obligation.
 Indeed, the stipulation in the 1989 Loan Agreement providing for the surety of respondent, without
even informing him, smacks of negligence on the part of the bank and bad faith on that of the
principal debtor. Since that Loan Agreement constituted a new indebtedness, the old loan having
been already liquidated, the spirit of fair play should have impelled Sta. Ines to ask somebody else
to act as a surety for the new loan.
 In the same vein, a little prudence should have impelled the bank to insist on the JSS of one who
was in a position to ensure the payment of the loan. Even a perfunctory attempt at credit
investigation would have revealed that respondent was no longer connected with the corporation
at the time.
  As it is, the bank is now relying on an unclear Indemnity Agreement in order to collect an obligation
that could have been secured by a fairly obtained surety. For its defeat in this litigation, the bank
has only itself to blame.
 In sum,
o we hold that the 1989 Loan Agreement extinguished by novation the obligation
under the 1980 ₱8 million credit accommodation.
o Hence, the Indemnity Agreement, which had been an accessory to the 1980 credit
accommodation, was also extinguished.
o Furthermore, we reject petitioner’s submission that respondent waived his right to
be notified of, or to give consent to, any modification or extension of the 1980 credit
accommodation.
 In this light, we find no more need to resolve the issue of whether the loan obtained before the
expiry date of the credit accommodation has been paid.
 WHEREFORE, the Petition is DENIED and the assailed Decision AFFIRMED. Costs against
petitioner. SO ORDERED.

Other Rulings:
Preliminary Matters: Procedural Questions Motion for Reconsideration Not Pro Forma
 A motion for reconsideration is not pro forma just because it reiterated the arguments earlier passed
upon and rejected by the appellate court. The Court has explained that a movant may raise the
same arguments, precisely to convince the court that its ruling was erroneous. Moreover, there is
no clear showing of intent on the part of petitioner to delay the proceedings.

Service by Registered Mail Sufficiently Explained

 Respondent maintains that the present Petition for Review does not contain a sufficient written
explanation why it was served by registered mail.
 We do not think so. The Court held in Solar Entertainment v. Ricafort that the aforecited rule was
mandatory, and that "only when personal service or filing is not practicable may resort to other
modes be had, which must then be accompanied by a written explanation as to why personal
service or filing was not practicable to begin with."
 In this case, the Petition does state that it was served on the respective counsels of Sta. Ines and
Cuenca "by registered mail in lieu of personal service due to limitations in time and distance." This
explanation sufficiently shows that personal service was not practicable. In any event, we find no
adequate reason to reject the contention of petitioner and thereby deprive it of the opportunity to
fully argue its cause.

7. Manila Surety & Fidelity Co., Inc. vs. Batu Construction & Co., et al., No. L-9353, 21 May 1957

Ponente: Padilla, J.

Nature of the case: This case is an appeal from an order of the CFI of Manila.

Plaintiff-appellant: Manila Surety & Fidelity Co., Inc. (company)

Defendants-appellees: Batu Construction & Co., Carlos N. Baquiran, Gonzalo P. Amboy And Andrés
Tunac

FACTS:
 Manila Surety & Fidelity Co., Inc. (plaintiff) was a domestic corporation engaged in bonding
business

Plaintiff’s allegations:
 That defendant Batu Construction & Co, a partnership (the members of which are the other three
defendants) requested plaintiff to post, as it did, a surety bond for P8,812 in favor of the
Government of the Philippines
 o In order to secure the faithful performance of the construction of the Bacarra Bridge, Project
PR-72(3), in Ilocos Norte, undertaken by the partnership, as stipulated in a construction
on contract entered into on July 11, 1950 by and between the partnership and the
Government of the Philippines
 On condition that the defendants would "indemnify the COMPANY for any damage, loss, costs,
charges, or 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 become surety upon
the abovementioned bond;
o Said attorney's fees shall not be less than 15% of the total amount claimed in any action
which the COMPANY may institute against the undersigned (the defendants except Andrés
Tunac) in Court," and that
o "Said indemnity shall be paid to the COMPANY as soon as it has become liable for the
payment of any amount, under the above-mentioned bond, whether or not it shall have
paid such sum or sums of money, or any part thereof," as stipulated in a contract executed
on July 8, 1950

 On May 30, 1951, because of the unsatisfactory progress of the work on the bridge, the
Director of Public Works, with the approval of the Secretary of Public Works and Communications,
annulled the construction contract referred to and notified the plaintiff Company that the
Government would hold it (the Company) liable for any amount incurred by the Government
for the completion of the bridge, in excess of the contract price
 On December 19, 1951 (should be November 23, 1951), Ricardo Fernandez and 105 other
persons brought an action in the Justice of the Peace Court of Laoag, Ilocos Norte, against the
partnership, the individual partners and the herein plaintiff Company for the collection of
unpaid wages amounting to P5,960, lawful interests thereon and costs
 That the defendants are in imminent danger of becoming insolvent, and are removing and
disposing, or about to remove and dispose, of their properties with intent to defraud their creditors,
particularly the plaintiff Company; and
 That the latter has no other sufficient security to protect its rights against the defendants.

Plaintiff’s prayer:
 That, upon the approval of a bond and on the strength of the allegations of the verified complaint,
a writ of attachment be issued and levied upon the properties of the defendants; and
 That after hearing, judgment be rendered "ordering the defendants to deliver to the plaintiff such
sufficient security as shall protect plaintiff from any proceedings by the creditors on the Surety Bond
aforementioned and from the danger of insolvency of the defendants; and
 To allow costs to the herein plaintiff, and for such other measures of relief as may be proper and
just in the premises

 Attached to the complaint are a verification and affidavit of attachment; and copies of the surety
bond marked Annex A; of the indemnity contract marked Annex B; and of the letter of the Acting
Director of Public Works to the plaintiff dated 30 May 1951, marked Annex C.

Andrés Tunac’s Answer:

 Admits some allegations in the complaint
 But also denies other allegations because:
o He had never promised to put up an indemnity bond in favor of the plaintiff nor has he ever
entered into any indemnity agreement with it;
o The partnership or the Batu Construction & Company was fulfilling its obligations in
accordance with the terms of the construction contract;
o The Republic of the Philippines, through the Director of Public Works, had no authority to
annul the contract at its own initiative;
o The Justice of the Peace court of Laoag, Ilocos Norte had no jurisdiction to hear and decide
a case for collection of P5,960.10; and
 o The defendants were not in imminent danger of insolvency, neither did they remove or
dispose of their properties with intent to defraud their creditors.
 By way of affirmative defenses, he alleges that the signing by Carlos N. Baquiran of the indemnity
agreement for and in behalf of the partnership Batu Construction & Company did not bind the latter
to the plaintiff and as the partnership is not bound, he (Andrés Tunac), as a member thereof, is also
not bound;
 That he not being a party to the said agreement, the plaintiff has no cause of action against him;
 That in the event the partnership is bound by the indemnity agreement he invokes his right of
exhaustion of the property of the partnership before the plaintiff may proceed against his property.
 And as a counterclaim he alleges that the plaintiff brought the action against him maliciously and
in bad faith for the purpose of annoying him and damaging his professional reputation, he having
a flourishing and successful practice as engineer in Ilocos Norte, thereby compelling him to defend
himself;
 That to secure the issuance of a writ of attachment the plaintiff made false representations; and
 That the issuance of the writ upon such false representations of the plaintiff caused him damages
in the sum of P10,000 including expenses of litigation and attorney's fees.

Andrés Tunac’s Prayer:

 That the complaint be dismissed as to him and the defendant Batu Construction & Company, with
costs against the plaintiff;
 That the latter be ordered to pay him the sum of P10,000; and
 That he be granted such other remedies as may be just, equitable and proper

Gonzalo P. Amboy’s Answer:

 Denies the allegations in the complaint, except those that may be deemed admitted in the special
defenses, and
 Alleges that he is not in imminent danger of insolvency and is not removing and disposing or about
to remove and dispose of his properties, because he has no property;
 That there has been no liquidation of the expenses incurred in the construction of the Bacarra
Bridge, Project PR-72(3), to determine whether there would be a balance of the contract price
which may be applied to pay the claim for unpaid wages of 'Ricardo Fernandez et al. sought to be
collected in civil case No. 198 of the Justice of the Peace Court of Laoag, Ilocos Norte, and not
until after such liquidation shall have been made could his liability and that of his co-defendants be
determined and fixed;
 That if after proper liquidations there be a deficit of the contract price the defendants are willing to
pay the claim for unpaid wages of Ricardo Fernandez et al.

Gonzalo P. Amboy’s Prayer:

 That the issuance of the writ of attachment prayed for by the plaintiff be held in abeyance until
after civil case No. 198 of the Justice of the Peace Court of Laoag, Ilocos Norte, shall have been
disposed of

Carlos N. Baquiran’s Answer:

 Admits some allegations of the complaint
 But alleges that he has no sufficient knowledge to form a belief as to the truth of the claim of
Ricardo Fernandez et al. set forth in paragraph 7 of the complaint, for there has never been a
liquidation between the defendants and the Bureau of Public Works
 Also, he specifically denies some paragraphs of the complaint
 By way of special defenses he alleges that there has been no liquidation by and between the
defendants and the Bureau of Public Works on Project PR-72(3) to determine whether the total
amount spent for the construction of the bridge exceeded the contract price;
 That after the determination of the respective liabilities of the parties in civil case No. 198 of the
Justice of the Peace Court of Laoag, Ilocos Norte, if any there be against the defendants herein,
and such liability could not be paid out of the balance of the contract price of Project PR-72(3), the
defendants are ready and willing to assume their respective responsibilities.
Carlos N. Baquiran’s Prayer:
 That the complaint of the plaintiff be dismissed;
 That the issuance of the writ of attachment prayed for be denied; and
 That he be granted such other relief as may be just and equitable, with costs against the plaintiff

 Plaintiff presented its evidence at the hearing.

 After the plaintiff had rested its case, defendant Gonzalo P. Amboy moved for the dismissal of
the complaint, on the ground that:
o The remedy provided for in the last paragraph of Article 2071 of the new Civil Code
may be availed of by the guarantor only and not by a surety.

Trial Court’s Findings, among others:

 Dismissed the complaint – being of the opinion that the provisions of Article 2071 of the new Civil
Code may be availed of by a guarantor only and not by a surety – with costs against the plaintiff
 Hence, the plaintiff Company appealed

 Re: damages, defendant Gonzalo P. Amboy is entitled to recover from the plaintiff damages
equivalent to 6% interest per annum on the sum of P35 in possession of the Provincial Treasurer
of Ilocos Norte, which was garnished pursuant to the writ of attachment, from the date of
garnishment until its discharge;
 But that the claims for damages of Andrés Tunac and Gonzalo P. Amboy allegedly suffered by
them in their business, moral damages and attorney's fees were without basis in law and in fact.
o Hence their recovery was denied.
 SC dissolved the writ of attachment.

ISSUE: May a surety avail of the last paragraph of Article 2071 of the New Civil Code?

(Refer to Notes below for Article 2071, NCC)

RULING:
 Yes. A surety may avail of the last paragraph of Article 2071 of the New Civil Code.
 A guarantor is the insurer of the solvency of the debtor; a surety is an insurer of the debt.
 A guarantor binds himself to pay if the principal is unable to pay; a surety undertakes to pay if the
principal does not pay.
 The reason which could be invoked for the non-availability to a surety of the provisions of the
last paragraph of Article 2071 of the New Civil Code would be the fact that guaranty like
commodatum is gratuitous.
o But guaranty could also be for a price or consideration as provided for in article 2048.
o So, even if there should be a consideration or price paid to a guarantor for him to insure
the performance of an obligation by the principal debtor, the provisions of Article 2071
would still be available to the guarantor.
 In suretyship, the surety becomes liable to the creditor without the benefit of the principal debtor's
excussion of his properties, for he (the surety) may be sued independently.
 So, he is an insurer of the debt and as such he has assumed or undertaken a responsibility or
obligation greater or more onerous than that of guarantor.

 Such being the case, the provisions of Article 2071, under guaranty, are applicable and
available to a surety.
 The reference in article 2047 to the provisions of Section 4, Chapter 3, Title I, Book IV of the New
Civil Code, on solidary or several obligations, does not mean that suretyship which is a solidary
obligation is withdrawn from the applicable provisions governing guaranty.

Application
  In this case, the plaintiff's cause of action does not fall under paragraph 2 of article 2071 of the
new Civil Code, because there is no proof of the defendants' insolvency.
 The fact that the contract was annulled because of lack of progress in the construction of the bridge
is no proof of such insolvency.
 It does not fall under paragraph 3, because the defendants have not bound themselves to relieve
the plaintiff from the guaranty within a specified period which already has expired, because the
surety bond does not fix any period of time and the indemnity agreement stipulates one year
extendible or renewable until the bond be completely cancelled by the person or entity in whose
behalf the bond was executed or by a Court of competent jurisdiction.
 It does not come under paragraph 4, because the debt has not become demandable by reason
of the expiration of the period for payment.
 It does not come under paragraph 5 because of the lapse of 10 years, when the principal
obligation has no period for its maturity, etc., for 10 years have not yet elapsed.
 It does not fall under paragraph 6, because there is no proof that "there are reasonable grounds
to fear that the principal debtor intends to abscond."
 It does not come under paragraph 7, because the defendants, as principal debtors, are not in
imminent danger of becoming insolvent, there being no proof to that effect.

 BUT, the plaintiff's cause of action comes under paragraph 1 of article 2071 of the new Civil Code,
because the action brought by Ricardo Fernandez and 105 persons in the Justice of the Peace
Court of Laoag, province of Ilocos Norte, for the collection of unpaid wages amounting to
P5,960.10, is in connection with the construction of the Bacarra Bridge, Project PR-72(3),
undertaken by the Batu Construction & Company, and one of the defendants therein is the
herein plaintiff, the Manila Surety and Fidelity Co., Inc., and

 Paragraph 1 of Article 2071 of the new Civil Code provides that:

o The guarantor, even before having paid, may proceed against the principal debtor:
 To obtain release from the guaranty, or
 To demand a security that shall protect him from any proceedings by the creditor
or from the danger of insolvency of the debtor, when he (the guarantor) is sued for
payment.
 It does not provide that the guarantor be sued by the creditor for the payment of the debt.
 It simply provides that the guarantor of surety be sued for the payment of an amount for which
the surety bond was put up to secure the fulfillment of the obligation undertaken by the principal
debtor.
 So, the suit filed by Ricardo Fernandez and 105 persons in the Justice of the Peace Court of Laoag,
province of Ilocos Norte, for the collection of unpaid wages earned in connection with the work
done by them in the construction of the Bacarra Bridge, Project PR-72(3), is a suit for the payment
of an amount for which the surety bond was put up or posted to secure the faithful
performance of the obligation undertaken by the principal debtors (the defendants) in favor
of the creditor, the Government of the Philippines.

Disposition:
 The order appealed from dismissing the complaint is reversed and set aside
 And the case remanded to the court below for determination of the amount of security that would
protect the plaintiff Company from any proceedings by the creditor or from the danger of insolvency
of the defendants, the principal debtors, and
 Direction to the defendants to put up such amount of security as may be established by competent
evidence, without pronouncement as to costs.

Notes:
Art. 2071. The guarantor, even before having paid, may proceed against the principal debtor:
(1) When he is sued for the payment;
(2) In case of insolvency of the principal debtor;
 (3) When the debtor has bound himself to relieve him from the guaranty within a specified period, and
this period has expired;
(4) When the debt has become demandable, by reason of the expiration of the period for payment;
(5) After the lapse of ten years, when the principal obligation has no fixed period for its maturity, unless
it be of such nature that it cannot be extinguished except within a period longer than ten years;
(6) If there are reasonable grounds to fear that the principal debtor intends to abscond;
(7) If the principal debtor is in imminent danger of becoming insolvent.

In all these cases, the action of the guarantor is to obtain release from the guaranty, or to demand a
security that shall protect him from any proceedings by the creditor and from the danger of insolvency
of the debtor. (1834a)

Re: the Writ of Attachment

 The writ of attachment having been issued improvidently because, although there is an allegation
in the verified complaint that the defendants were in imminent danger of insolvency and that they
were removing or disposing, or about to remove or dispose, of their properties, with intent to defraud
their creditors, particularly the plaintiff Company, still such allegation was not proved, the fact
that a complaint had been filed against the defendants and the plaintiff Company in the Justice of
the Peace Court of Laoag, Ilocos Norte, for the collection of an amount for unpaid wages of the
plaintiffs therein who claimed to have worked in the construction of the bridge, being insufficient to
prove it, and because the relief prayed for in the complaint for security that shall protect it from any
proceedings by the creditor and from the danger of the defendants becoming insolvent is
inconsistent with the state of insolvency of the defendants or their being in imminent danger of
insolvency, the order awarding 6% on the sum of P35 in possession of the Provincial Treasurer
owned by the defendant Gonzalo P. Amboy garnished by virtue of the writ of attachment, from the
date of the garnishment until its discharge, and denying recovery of the amounts of damages
claimed to have been suffered by the defendants, is affirmed, the defendants not having appealed
therefrom.

8. Merchant v International Bank

Facts:
 The plaintiff Merchant brought this action in the CFI to recover the principal and certain interest
upon the following document:
o MANILA, P. I., January 5, 1904

For value received in the purchase of a boat named Oregon we bind ourselves to pay to
E. B. Merchant or order, within two years from date, the sum of seven thousand five
hundred dollars ($7,500), United States currency, with interest at the rate of 10 percent
per annum, payable semiannually; the city of Manila, Philippine Islands, being designated
as the peace for the payment of both the principal and interest

P. P. DE LA CASA
COMISION,
VICENTE G. AZAOLA.
[SEAL]

We hereby guarantee the payment of the above obligation, for the sum of seven
thousand five hundred dollars ($7,500), United States currency, with interest at the rate
therein specified.
 For the International Banking Corporation,
R. W. BROWN

 The defendant denied all the allegations of the complaint, denied that it ever executed the
instrument in question, alleged that the guaranty was an accommodation one, and set forth two
additional defenses as follows:
o That the International Banking Corporation cannot and could not, during any of the
periods mentioned in the complaint, under its charter, enter into an accommodation
guaranty nor any such contract of guaranty as referred to in paragraphs 4 and 5 of the
said complaint.
o That neither R. W. Brown nor any other person or persons, was or were, at any time,
authorized by this defendant to enter into such a contract of guaranty as mentioned in
the complaint, or into any accommodation guaranty.
 Also defendant argues that:
o There was no proof of any demand upon the Casa Comision, the principal debtor
o No proof that it had not paid, and no proof of its insolvency. It is true that the only
evidence in the case on these points was the presentation at the trial by the plaintiff of
the note in question.
 At the trial the defendant offered no evidence and judgment was entered in favor of the plaintiff
for $8,937

Issue: WON International Banking Corp can be held liable despite the absence of demand on the principal
debtor

Ruling:
 YES
 The guaranty in this case was a guaranty of payment (meaning this was a surety)
 In all respects it is the same as the guaranty considered in the case of Pyle vs. Johnson1 (5 Off.
Gaz., 1121). In that case we held that in order to charge the sureties it was it was not necessary
that any demand be made upon the principal debtor, nor that any demand be made upon the
principal debtor, nor that the note be protested, and that it was sufficient to show that it had
never been paid by the principal debtor.
 It was therefore necessary in this case only to present evidence that the note had not been paid.
 So far as payment by the defendant itself is concerned, the burden of showing it rested upon the
defendant, and it was not necessary for the plaintiff to present any evidence. (Behn, Meyer & Co.
vs. Rosatzin, 5 Phil. Rep., 660.)
 So far as the payment by the principal debtor is concerned, we hold that the possession of the
note by the plaintiff and its production at the trial by him constituted prima facie evidence that it
had not been paid either by the principal debtor or by anyone else.

9. PNB vs. LUZON SURETY CO., INC. and THE HONORABLE COURT OF APPEALS (Nov 28, 1975)

FACTS:

 Petitioner Philippine National Bank seeks a review and reversal of the decision dated June 26,
1968, of the Court of Appeals in its case CA-G.R. No. 30282-R, absolving Luzon Surety Co., Inc.
 of its liability to said petitioner and thus reversing the decision of the Court of First Instance of
Negros Occidental
 The decision was modified in an order of the Court of First Instance dated June 5, 1961, granting
petitioner Philippine National Bank (PNB) the right to recover accrued interest at the rate of 5%
per annum from December 24, 1953, from the defendants bonding companies.
 The facts as found by the Court of Appeals are as follows:
o ... sometime prior to 27 November 1951, defendant Augusto R. Villarosa, a sugar planter
adhered to the Lopez Sugar Central Milling Company, Inc. applied for a crop loan with
the plaintiff, Philippine National Bank, Exhibit A;
o this application was approved on 6 March, 1952 in the amount of P32,400, according to
the complaint;
o but the document of approval has not been exhibited;
o at any rate, the planter Villarosa executed a Chattel Mortgage on standing crops to
guarantee the crop loan, Exhibit B and as shown in Exhibits C to C-30 on various dates
from 28 January, 1952 to 9 January, 1953, in consideration of periodical sums of money
by him received from PNB, planter Villarosa executed these promissory notes from which
will be seen that the credit line was that the original amount of P32,400 and was thus
maintained up to the promissory note Exhibit C-9 dated 30 May, 1952 but afterwards it
was increased and promissory notes Exhibits C-10 to C-30 were based on the increased
credit line;
o and as of 27 September, 1953 as shown in the accounts, Exhibits D and D-1, there was a
balance of P63,222.78 but as of the date when the complaint was filed on 8 June, 1960,
because of the interest accrued, it had reached a much higher sum;
o that was why due to its non-payment, plaintiff filed this complaint, as has been said, on 8
June, 1960;
o now the complaint sought relief not only against the planter but also against the three (3)
bondsmen, Luzon Surety, Central Surety and Associated Surety because Luzon Surety
had filed the bond Exhibit E dated 18 February, 1952 in the sum of P10,000;
o Central Surety Exhibit F dated 24 February, 1952 in the sum of P20,000 and Associated
Surety the bond Exhibit G dated 11 September, 1952 in the sum of P15,000;
o in gist, the obligation of each of the bondsmen being to guarantee the faithful
performance of the obligation of the planter with PNB;
o now each of the defendants in their answers raised various defenses but as far as
principal defendant Augusto R. Villarosa and other defendants Central Surety and
Associated Surety are concerned, their liability is no longer material because they have
not appealed;
o and in the trial of the case, plaintiff submitted Exhibits A to J-1 and witness Romanito
Brillantes;
o but the defense of Luzon Surety thru its witness Jose Arroyo and Exhibits 1 to 3 being 1st
that the evidence of the plaintiff did not establish a cause of action to make Luzon Surety
liable and 2ndly, in any case that there had been material alteration in the principal
obligation, if any, guaranteed by it
 Unable to obtain reconsideration of the decision of the Appellate Court, PNB came to this Court

ISSUE: WON the Court of Appeals was justified in absolving Luzon Surety Co., Inc., from liability to
petitioner Philippine National Bank.

RULING: NO

 We have examined the record thoroughly and found the appealed decision to be erroneous.
 Excerpt of the Chattel Mortgage executed to guarantee the crop loan clearly provided as follows:

xxx xxx xxx

 1. That the Mortgagor does by these presents grant, cede and convey unto the
Mortgagee by way of First Mortgage free from any encumbrances, all the crops of the
absolute property of the Mortgagor, corresponding to the 1952-53 and subsequent yearly
sugar crops agricultural season at present growing in the Hda. known as San Antonio,
Washington (P) Audit 24-124 and 24-16 la and Hda. Aliwanay (non-quota land); milling
with LSMC and CAD Municipality of Sagay, and Escalante, Province of Negros
Occidental covered by cadastral lots no. Various of the Cadastral Survey at the
Municipality of Sagay, Escalante particularly bounded and described in Transfer
Certificate of Title No. Various issued by the Register of Deeds of said province. The said
mortgage crops consist of all the Mortgagor's first available entire net share of the 1952-
53 and subsequent yearly sugar crops thereafter conservatively estimated at but not less
than Three Thousand Four Hundred Twenty and 14/00 (3,420.14) piculs of export and
domestic sugar, including whatever addition thereto, and such aids, subsidies, indemnity
payments and other benefits as maybe awarded to the Mortgagor, coming from any
source, governmental or otherwise.

xxx xxx xxx

4. This Mortgage is executed to secure payment by the Mortgagor to the Mortgagee at

the latter's office of a loan herein granted to the Mortgagor in the sum of Thirty Two
Thousand Four Hundred (P32,400.00) Pesos, Philippine Currency, with interest at the
rate of five per cent per annum, which loan shall be given to the Mortgagor either in lump
sum or in installments as the mortgagee may determine. The Mortgagee may increase or
decrease the amount of the loan as well as the installments as it may deem
convenient and the Mortgagor shall submit such periodical reports on the crops
mortgaged as the Mortgagee may require. In the event that the loan is increased such
increase shall likewise be secured by Mortgage. This Mortgage shall also secure any
other loans or advances that the Mortgagee may extend to the Mortgagor, including
interest and expenses or any other obligation owing to the Mortgagee, whether direct or
indirect, principal or secondary as appears in the account books and records of the
Mortgagee.

xxx xxx xxx

 Likewise an extract from the Surety Bond executed by and between the PNB on one hand and
Augusto Villarosa and respondent Luzon Surety Company, Inc. on the other, is hereby
reproduced, viz:

That we Augusto Villarosa of Bacolod City, as principal and Luzon Surety Company, Inc.
a corporation duly organized and existing under and by virtue of the laws of the
Philippines, as surety, are held firmly bound unto Philippine National Bank, Bacolod City,
Philippines, in the sum of Ten Thousand Pesos (P10,000.00) Philippine Currency, for the
payment of which sum, well and truly to be made, we bind ourselves, our heirs,
executors, administrators, successors, and assigns jointly and severally, firmly by these
presents:

 The condition of the obligation are as follows:

WHEREAS, the above bounden principal, on the — day of February, 1952, entered into a
crop loan contract with obligee Philippine National Bank, Bacolod Branch of Bacolod City,
Philippines to fully and faithfully —

Comply with all the terms and condition stipulated in said crop loan contract which are
hereby incorporated as essential parts hereof, and principally to meet and pay from the
 proceeds of the sugar produced from his Hda. Antonio and Hda. Aliwanay, Escalante,
Occidental Negros credit advances made by the Philippine National Bank Bacolod
Branch not to exceed P32,800 as stated in said contract. Provided further that the liability
under this bond shall not exceed the amount of P10,000.00

WHEREAS, said Philippine National Bank Bacolod Branch requires said principal to give
a good and sufficient bond in the above stated sum to secure the full and faithful
performance on his part of said crop loan contract.

NOW, THEREFORE, if the principal shall well and truly perform and fulfill all the
undertakings, covenants, terms and conditions and agreement stipulated in said crop
loan contract then, this obligation shall be null and void, otherwise it shall remain in full
force and effect.

xxx xxx xxx

 The foregoing evidences clearly the liability of Luzon Surety to petitioner Philippine National Bank
not merely as a guarantor but as surety-liable as a regular party to the undertaking (Castelvi
de Higgins vs. Sellner 41 Phil. 142).
 The Court of Appeals, however, in absolving the bonding company ratiocinates that the Surety
Bond executed on February 18, 1952, made specific references to a crop loan contract executed
by Augusto Villarosa sometime in February 1952. And, therefore, the Chattel Mortgage, Exhibit B
dated March 6, 1952, could not have been the obligations guaranteed by the surety bond. Thus
the Court of Appeals stated:

... one is really at a loss to impose any liability upon Luzon Surety in the absence of the
principal obligation which was a crop loan contract executed in February, 1952, and to
which there was made an express reference in the surety bond, Exhibit E; let it not be
overlooked further that one can secure a crop loan without executing a Chattel Mortgage
on his crops because the crop loan is the principal obligation while the Chattel Mortgage
is only an ancillary and secondary contract to guarantee fulfillment of a crop loan; stated
otherwise and as Luzon Surety never intervened in the execution of the Chattel
Mortgage, Exhibit B, there is no way under the evidence from which it can be made to
answer for liability to Augusto Villarosa under Exhibit E; ... "

 The Court of Appeals, to Our mind did not give credence to an otherwise significant and
unrebutted testimony of petitioner's witness, Romanito Brillantes, that Exhibit B was the only
chattel mortgage executed by Augusto Villarosa evidencing the crop loan contract and upon
which Luzon Surety agreed to assume liability up to the amount of P10,000 by posting the said
surety bond.
 Moreover Article 1354 of our New Civil Code which provides:

Art. 1354.— Although the cause is not stated in the contract., it is presumed that it exist
and is lawful, unless the debtor proves the contrary.

 bolster petitioner's stand. Considering too that Luzon Surety company is engaged in the business
of furnishing guarantees, for a consideration, there is no reason that it should be entitled to a rule
of strictissimi juris or a strained and over-strict interpretation of its undertaking.
 The presumption indulged in by the law in favor of guarantors was premised on the fact that
guarantees were originally gratuitous obligations, which is not true at present, at least in the great
majority of cases.
 We have likewise gone over the answer of Luzon Surety Company dated June 17, 1960 (p. 73
Record on Appeal) and noted the following:
 xxx xxx xxx

3. Defendant LUZON admits the portion of paragraph 3 referring to the grant of P32,400
secured by a Chattel Mortgage dated March 6, 1952, copy of which is attached as Annex
"A" of the complaint.

xxx xxx xxx

 As special defenses:

8. The terms and conditions of the surety bond as well as the contract it guaranteed was
materially altered and or novated without the knowledge and consent of the surety
thereby releasing the latter from liability.

11. The maximum liability, if any, of defendant LUZON is P10.000.00.

 The principal obligation, therefore, has never been put in issue by then defendant now
respondent Luzon Surety Co., Inc.
 On the other hand it raised as its defense the alleged material alteration of the terms and
conditions of the contract as the basis of its prayer for release.
 Even this defense of respondent Luzon Surety Co., Inc. is untenable under the facts obtaining.
 As a surety, said bonding company is charged as an original promissory and is an insurer of the
debt.
 While it is an accepted rule in our jurisdiction that an alteration of the contract is a ground for
release, this alteration, We stress must be material.
 A cursory examination of the record shows that the alterations in the form of increases were
made with the full consent of Luzon Surety Co., Inc. Paragraph 4 of the Chattel Mortgage
explicitly provided for this increase(s), viz:

... the Mortgagee may increase or decrease the amount of the loan as well as the
installment as it may deem convenient ...

 and this contract, Exhibit "B", was precisely referred to and mentioned in the Surety Bond itself. In
the case of Lim Julian vs. Tiburcio Lutero, et al, this Court held:

It has been decided in many cases that the consideration named in a mortgage for future
advancements does not limit the amount for which such contract may stand as security, if
from the four corners of the document, the intent to secure future indebtedness is
apparent. Where, by the plain terms of the contract, such an intent is evident, it will
control. ...

 The next question to take up is the liability of Luzon Surety Co. for interest which, it contends,
would increase its liability to more than P10,000 which is the maximum of its bond. We cannot
agree to this reasoning.
 In the cases of Tagawa vs. Aldanese; Plaridel Surety Insurance Co. vs. P. L. Galang Machinery
Co., , cited in Paras Civil Code of the Philippines, Vol. V, 7th Ed. 1972, p. 772, it was held:

If a surety upon demand fails to pay, he can be held liable for interest, even if in thus
paying, the liability becomes more than that in the principal obligation. The increased
liability is not because of the contract but because of the default and the necessity of
judicial collection. It should be noted, however, that the interest runs from the time the
complaint is filed, not from the time the debt becomes due and demandable.
DISPOSITION: PREMISES CONSIDERED, the judgment appealed from is reversed and set aside. In lieu
thereof another is rendered reinstating the judgment of the Court of First Instance of Negros Occidental,
12th Judicial District, dated March 29, 1961, holding Luzon Surety liable for the amount of P10,000.00
with the modification that interest thereon shall be computed at the legal rate from June 8, 1960 when the
complaint was filed. SO ORDERED.

10. NPC vs. CA and PHILIPPINE AMERICAN GENERAL INSURANCE CO., INC., (November 14, 1986)

FACTS:

 The National Power Corporation (NPC) entered into a contract with the Far Eastern Electric, Inc.
(FFEI) on December 26, 1962 for the erection of the Angat Balintawak 115-KW-3-Phase
transmission lines for the Angat Hydroelectric Project.
 FEEI agreed to complete the work within 120 days from the signing of the contract, otherwise it
would pay NPC P200.00 per calendar day as liquidated damages, while NPC agreed to pay the
sum of P97,829.00 as consideration.
 On the other hand, Philippine American General Insurance Co., Inc. (Philamgen) issued a surety
bond in the amount of P30,672.00 for the faithful performance of the undertaking by FEEI, as
required.
 The condition of the bond reads:

The liability of the PHILIPPINE AMERICAN GENERAL INSURANCE COMPANY, INC.

under this bond will expire One (1) year from final Completion and Acceptance and said
bond will be cancelled 30 days after its expiration, unless surety is notified of any existing
obligation thereunder. (Exhibit 1-a)

 in correlation with the provisions of the construction contract between Petitioner and Far Eastern
Electric, Inc. particularly the following provisions of the Specifications. to wit:

1. Par. 1B-2l Release of Bond

1B-21 Release of Bond

The Contractor's performance bond will be released by the National Power Corporation
at the expiration of one (1) year from the completion and final acceptance of the work,
pursuant to the provisions of Act No. 3959, and subject to the General Conditions of this
contract. (Page 49, Printed Record on Appeal); and

2. GP-19 of Specifications, which reads:

(a) Should the Contractor fail to complete the construction of the work as herein specified
and agreed upon, or if the work is abandoned, ... the Corporation shall have the power to
take over the work by giving notice in writing to that effect to the Contractor and his
sureties of its intention to take over the construction work.

(b) ... It is expressly agreed that in the event the corporation takes over the work from the
Contractor, the latter and his bondsmen shall continue to be liable under this contract for
 any expense in the completion of the work in excess of the contract price and the bond
filed by the Contractor shall be answerable for the same and for any and all damages that
the Corporation may suffer as a result thereof. (pp. 76-78, Printed Record on Appeal)

 FEEI started construction on December 26, 1962 but on May 30, 1963, both FEEI and Philamgen
wrote NPC requesting the assistance of the latter to complete the project due to unavailability of
the equipment of FEEI.
 The work was abandoned on June 26, 1963, leaving the construction unfinished.
 On July 19, 1963, in a joint letter, Philamgen and FEEI informed NPC that FEEI was giving up the
construction due to financial difficulties.
 On the same date, NPC wrote Philamgen informing it of the withdrawal of FEEI from the work and
formally holding both FEEI and Philamgen liable for the cost of the work to be completed as of
July 20, 1962 plus damages.
 The work was completed by NPC on September 30, 1963.
 On January 30, 1967 NPC notified Philamgen that FEEI had an outstanding obligation in the
amount of P75,019.85, exclusive of interest and damages, and demanded the remittance of the
amount of the surety bond the answer for the cost of completion of the work.
 In reply, Philamgen requested for a detailed statement of account, but after receipt of the same,
Philamgen did not pay as demanded but contended instead that its liability under the bond has
expired on September 20, 1964 and claimed that no notice of any obligation of the surety was
made within 30 days after its expiration.
 NPC filed Civil Case No. 70811 for collection of the amount of P75,019.89 spent to complete the
work abandoned; P144,000.00 as liquidated damages and P20,000.00 as attorney's fees.
 Only Philamgen answered while FEEI was declared in default.
 The trial court rendered judgment in favor of NPC
 Both defendants are also ordered to pay plaintiff the sum of P3,000.00 as attorney's fees and
costs.
 On appeal by Philamgen, the Court of Appeals reversed the lower court's decision and dismissed
the complaint
 Hence this petition.
 Respondent Philamgen filed its comment on the petition in compliance with the resolution while
petitioner NPC filed its Reply to the comment of respondent as required in the resolution of this
Court of August 16, 1976
 In the resolution of September 20, 1976, the petition for certiorari was given due course.
 Petitioner's brief was filed on November 27, 1976 while Philamgen failed to file brief within the
required period and this case was submitted for decision without respondent's brief in the
resolution of this Court of February 25. 1977.

ISSUE: Is Philmagen liable under the surety bond?

 Petitioner claims that it has already complied with such requirement by virtue of its notice dated
July 19, 1963 of abandonment of work by FEEI and of its takeover to finish the construction, at
the same time formally holding both FEEI and Philamgen liable for the uncompleted work and
damages.
o It further argued that the notice required in the bond within 30 days after its expiration of
any existing obligation, is applicable only in case the contractor itself had completed the
contract and not when the contractor failed to complete the work, from which arises the
continued liability of the surety under its bond as expressly provided for in the contract.
o Petitioner's contention was sustained by the trial court.
 On the other hand, private respondent insists that petitioner's notice dated July 19, 1983 is not
sufficient despite previous events that it had knowledge of FEEI's failure to comply with the
contract and claims that it cannot be held liable under the bond without notice within thirty days
from the expiration of the bond, that there is a subsisting obligation.
 Private respondent's contention is sustained by the Court of Appeals.
RULING: YES

 As correctly assessed by the trial court, the evidence on record shows that as early as May 30,
1963, Philamgen was duly informed of the failure of its principal to comply with its undertaking.
 In fact, said notice of failure was also signed by its Assistant Vice President.
 On July 19, 1963, when FEEI informed NPC that it was abandoning the construction job, the
latter forthwith informed Philamgen of the fact on the same date.
 Moreover, on August 1, 1963, the fact that Philamgen was seasonably notified, was even
bolstered by its request from NPC for information of the percentage completed by the bond
principal prior to the relinquishment of the job to the latter and the reason for said relinquishment.
 The 30-day notice adverted to in the surety bond applies to the completion of the work by the
contractor.
 This completion by the contractor never materialized.
 The surety bond must be read in its entirety and together with the contract between NPC and the
contractors.
 The provisions must be construed together to arrive at their true meaning. Certain stipulations
cannot be segregated and then made to control.
 Furthermore, it is well settled that contracts of insurance are to be construed liberally in favor of
the insured and strictly against the insurer.
 Thus ambiguity in the words of an insurance contract should be interpreted in favor of its
beneficiary.
 In the case at bar, it cannot be denied that the breach of contract in this case, that is, the
abandonment of the unfinished work of the transmission line of the petitioner by the
contractor Far Eastern Electric, Inc. was within the effective date of the contract and the
surety bond.
 Such abandonment gave rise to the continuing liability of the bond as provided for in the contract
which is deemed incorporated in the surety bond executed for its completion.
 To rule therefore that private respondent was not properly notified would be gross error.

DISPOSITION: PREMISES CONSIDERED, the decision dated March 25, 1976 and the resolution dated
April 19, 1976 of the Court of Appeals are hereby SET ASIDE, and a new one is hereby rendered
reinstating the decision of the Court of First Instance of Manila in Civil Case No. 70811 entitled "National
Power Corporation v. Far Eastern Electric, Inc., et al." SO ORDERED.

11. PYLE vs. JOHNSON ET AL.

G.R. No. L-3755. November 23, 1907.
WILLARD, J.:

FACTS:
 The plaintiff brought this action in the Court of First Instance of the Province of Pangasinan upon
the following document

I hereby promise to pay to the order of Mr. C. C. Pyle, of Dagupan, on or

before the first day of April, 1906, the sum of two thousand eight hundred
and ninety-eight pesos (P2,898), value received, for business purposes.

Dagupan, P. I., the 16th day of January, 1906. ROY W. JOHNSON.

We guarantee payment:
MANUEL CORPUS.
MARIANO PADILLA.
  Judgment was entered in that court to the effect that the plaintiff recover of the defendant
Johnson the amount named in the note, with interest thereon and costs, and that the defendants
Manuel Corpus and Mariano Padilla each play to the plaintiff one-half of any amount which Roy
W. Johnson should fail to pay, with interest and costs, and the execution be issued.
 From this judgment the defendants Manuel Corpus and Mariano Padilla have appealed.
 The principal defense is that the appellants never signed the document in question.
 There is attached to it a certificate by a notary public to the effect that the three defendants
appeared before him and acknowledged that the signatures attached thereto were their genuine
signatures.
 As to the appellant Manuel Corpus, in addition to the evidence of the notary public who received
his acknowledgment, there is the testimony of the plaintiff to the effect that this appellant and
Johnson personally delivered the note to him after its execution.
 There is other testimony to the effect that this appellant on several occasions after the date of the
note admitted his liability thereon.

ISSUE: whether or not the claim of the appellants that there was no consideration for their guaranty can
be sustained?
RULING:

 No, the claim cannot be sustained.

 The evidence is not so strong against the appellant Mariano Padilla, but after an examination of it
we cannot say that it preponderates against the finding of the court below.
 The signature of Padilla on the note is very similar to his genuine signature as it appears upon his
personal cedula of the year 1905.
 The testimony of the notary was positive to the effect that he went to Padilla's office with the note
and asked him if his signature thereon was genuine, to which Padilla answered that it was.
 The notary public who protested the note testified that he sent by mail a notification of the protest
to Padilla, but did not send him a copy of the protest.
 Padilla testified that he never received any copy of the protest, but he did not testify that he did
not receive any notification of the protest, and there is a presumption that the notice then sent by
mail arrived at its destination. (Sec. 334, Code of Civil Procedure. par. 22.)
 Padilla never made any claim that he did not sign the note until after suit was brought thereon.
 Practically the only evidence in his favor is his own statement.
 This ought not to prevail against the disinterested evidence of the notary public and the other
proof in the case.
 The claim of the appellants that there was no consideration for their guaranty cannot be
sustained.
 The consideration which supports the obligation as to the principal debtor is a sufficient
consideration to support the obligation of the sureties.
 It is not necessary to prove any consideration as between them and the creditor.
 Whether the protest was sufficient or not is immaterial.
 If the document is not a mercantile one, and is, therefore, governed by the provisions of the Civil
Code, no protest was necessary; nor, if it be a mercantile instrument, was it necessary to protest
it as against the defendant Johnson. (Arts. 459, 460, 483, and 517, Code of Commerce.)
 If it was not necessary to protest the note as against the maker, it was not necessary to protest it
as against his sureties. (Art. 487, Code of Commerce.)

DISPOSITIVE PORTION: The judgment of the court below is affirmed, with the costs of this instance
against the appellants. So ordered.
12. FLORENTINA DE GUZMAN, administratrix of deceased Santiago Lucero, plaintiff-appellee, vs.
ANASTACIO R. SANTOS, defendant-appellant. G.R. No. L-45571 June 30, 1939

Facts:
 October 28, 1924, Jerry O. Toole, Antonio K. Abad and Anastacio R. Santos, the defendant, formed
a general mercantile partnership under the style Philippine-American Construction Company, with
a capital of P14,000, P10,000 of which were taken by way of loan from Paulino Candelaria.
The partnership and the co-partners undertook and bound themselves to pay, jointly and severally,
the said indebtedness in or before June, 1925.
 Having violated the conditions of the contract executed for the purpose, Paulino Candelaria brought
civil case No. 3838 of the CFI of Nueva Ecija on May 15, 1925, against the Philippine-American
Construction Company and its co-partners, for the recovery of the loan, interest and stipulated
attorney's fees.
 CFI Decision: January 25, 1926, the said court rendered judgment sentencing all the defendants
to pay the plaintiff, jointly and severally, the sum of P9,317, with legal interest thereon from the
filing of the complaint, plus P500 as liquidated damages and P1,000 as attorney's fees.
 On appeal this judgment was affirmed by this court on December 17, 1926 (G.R. No. 26131).
 A writ of execution of the affirmed judgment having been issued, the herein plaintiff, in her
capacity as judicial administratrix of the deceased Santiago Lucero, on February 10, 1932,
paid to be creditor Paulino Candelaria the sum of P5,665.55 on account of the judgment.
 Upon filing of the complaint in civil case No. 3838, Paulino Candeleria obtained a writ of attachment
against the then defendants by virtue of which the sheriff attached properties of Jerry O. Toole
valued at P50; of Antonio K. Abad valued at P12,150; and of Anastacio R. Santos valued at P2,733.
No property of the partnership Philippine-American Construction Company was attached.
o In view of these attachments, the Philippine-American Construction Company moved for
the discharge of the attached properties and offered to post a bond for P10,000. The court
granted the motion and fixed the bond at the amount offered.
 May 29, 1925, the Philippine-American Construction Company, as principal, then represented by
the partner Antonio K. Abad, and Santiago Lucero and Meliton Carlos, as guarantors, executed a
bond for P10,000 in favor of Paulino Candelaria for the lifting of the attachment under section 440
of the Code of Civil Procedure.
 In the bond thus executed, the defendant Anastacio R. Santos neither intervened nor signed
individually, but Abad testified that the former was the one who induced him to get the signature of
Lucero by taking advantage of his good relations with him. Upon the approval of the bond, the
attachment was discharged and the attached properties were returned to their owners.
 After the issuance of the writ for the execution of the judgment rendered in civil case No. 3838, the
sheriff returned the same with the statement that the writ could not be executed as he found no
property of the judgment debtors.
 In view of this, Paulino Candelaria moved for the issuance of a writ of execution against the
guarantors of the defendants. The court granted the motion and issued a writ of execution against
the plaintiff, as judicial administratrix of the deceased Santiago Lucero, and the other guarantor
Meliton Carlos. The plaintiff tenaciously refused to pay the judgment obtained by Paulino
Candelaria, but after all her efforts had failed, she was eventually compelled to pay to said creditor
the sum of P5,565.55, the co-guarantor Meliton Carlos also paid upon the bond signed by him the
sum of P5,135.
 The plaintiff and Carlos later recovered from Antonio K. Abad, one of the defendants in the said
civil case, the sum of P3,800 which they divided equally. It thus appears that the payment made by
the plaintiff to Candelaria was reduced to the sum of P3,665.55.
  The plaintiff, in her said capacity, demanded of the defendant Anastacio R. Santos the return of the
aforesaid sum and, upon the latter's refusal, she brought the action which culminated in the
appealed judgment.

Issue: Whether under the proven facts admitted by the parties, defendant Santos is bound to pay to the
plaintiff what the latter had advanced to Paulino Candelaria upon the bond which the deceased Santiago
Lucero had executed.

Ruling: YES.

Appellant’s contention
 The appellant vigorously insists that he is not so bound under the law, because he neither applied
for nor intervened in the bond in any capacity.

 It is beyond question that the appellant neither intervened nor signed the bond which was filed to
discharge the attachment of the properties of the judgment debtors, but it is clear, and this is
admitted, that the bond was filed to release the attached properties, it was approved by the court
and it resulted in the discharge of the attachment and the return of the attached properties to their
respective owners. When the sheriff attempted to execute judgment and looked for the discharged
properties, he found that they had disappeared, for which reason the court subsequently issued a
writ of execution against the guarantors. As a result of this last execution, the plaintiff was forced
to pay and in fact paid the said sum to the creditor Candelaria.

 Now, then, under article 1822 of the Civil Code, by guaranty one person binds himself to pay or
perform for a third person in case the latter should fail to do so; and
 the article 1838 provides that any guarantor who pays for the debtor shall be indemnified by the
latter even should the guaranty have been undertaken without the knowledge of the debtor.

 In the present case, the guarantor was the deceased Santiago Lucero, now represented by the
plaintiff in her capacity as judicial administratrix, and the debtor is the defendant-appellant.
 Applying the provision of the last cited article, it is obvious that the appellant is legally bound to pay
what the plaintiff had advanced to the creditor upon the judgment, notwithstanding the fact that the
bond had given without his knowledge.
 The obligation of the appellant to pay the plaintiff what the latter had advanced is further sanctioned
by the general provisions of the Civil Code regarding obligations.
o Article 1158 provides that "payment may be made by any person, whether he has an
interest in the performance of the obligation or not, and whether the payment is known and
approved by the debtor or whether he is unaware of it. Any person who makes a payment
for the account of another may recover from the debtor the amount of the payment, unless
it was made against the express will of the latter. In the latter case he can only recover
from the debtor in so far as the payment has been beneficial to the latter."
 According to this legal provision, it is evident that the plaintiff-appellant is bound to pay to the plaintiff
what the latter had advanced to the creditor upon the judgment, and this is the more so because it
appears that although Lucero executed the bond without his knowledge, nevertheless he did not
object thereto or repudiate the same at any time.
 From the proven facts it cannot logically be deduced that the appellant did not have knowledge of
the bond,
o first, because his properties were attached and the attachment could not have been levied
without his knowledge, and
o secondly, because the said properties were returned to him and in receiving them he was
necessarily apprised of the fact that a bond had been filed to discharge the attachment.
 The appellant questions the application by the court of article 127 of the Code of Commerce,
overlooking article 128. This assignment of error is of no consequence and does not affect the
result of the case. As already stated, the rights of the parties must be governed by the aforesaid
 articles of the Civil Code. Assuming the inapplicability of article 127 of the Code of Commerce, in
view of the fact that the action is not addressed to the appellant as general partner of the Philippine-
American Construction Company, it nevertheless appears that his liability to the plaintiff, as
debtor in solidum of Paulino Candelaria, is recognized and countenanced by articles 1158 and
1838 of the Civil Code.
 In view of the foregoing, the appealed judgment is affirmed, with costs of this instance to the
defendant appellant. So ordered.

13. Pacific Banking Corp. vs. Intermediate Appellate Court, G.R. No. 72275, November 13, 1991

Ponente: Medialdea, J.

Nature of the case: This case is a petition for certiorari to review the decision of the then Intermediate
Appellate Court (now, CA) – which modified the trial court’s decision against herein private respondent
Roberto Regala, Jr., one of the defendants in the case for sum of money filed by Pacific Banking
Corporation (petitioner)

FACTS: (As adopted by respondent appellate court from petitioner’s brief)

 On October 24, 1975, defendant Celia Syjuco Regala (Celia Regala), applied for and obtained
from the plaintiff the issuance and use of Pacificard credit card, under the “Terms and
Conditions Governing the Issuance and Use of Pacificard”
o A copy of which was issued to and received by the said defendant on the date of the
application and expressly agreed that the use of the Pacificard is governed by said Terms
and Conditions.
 On the same date, the defendant-appellant Robert Regala, Jr., spouse of defendant Celia
Regala, executed a ‘Guarantor’s Undertaking’ in favor of the appellee Bank, whereby the latter
agreed ‘jointly and severally of Celia Regala, to pay the Pacific Banking Corporation upon
demand –
o Any and all indebtedness, obligations, charges or liabilities due and incurred by said Celia
Regala with the use of the Pacificard, or renewals thereof, issued in her favor by the Pacific
Banking Corporation’.
o Also agreed that ‘any changes of or novation in the terms and conditions in connection with
the issuance or use of the Pacificard, or any extension of time to pay such obligations,
charges or liabilities shall not in any manner release me/us from responsibility hereunder,
it being understood that I fully agree to such charges, novation or extension, and that this
understanding is a continuing one and shall subsist and bind me until the liabilities of the
said Celia Syjuco Regala have been fully satisfied or paid’

 Plaintiff-appellee (herein petitioner) Pacific Banking Corporation has contracted with accredited
business establishments to honor purchases of goods and/or services by Pacificard holders
o The cost thereof to be advanced by the plaintiff-appellee for the account of the defendant
cardholder, and
o The latter undertook to pay any statements of account rendered by the plaintiff-appellee
for the advances thus made within thirty (30) days from the date of the statement,
o Provided that any overdue account shall earn interest at the rate of 14% per annum from
date of default

 The defendant Celia Regala, as such Pacificard holder, had purchased goods and/or services on
credit under her Pacificard, for which the plaintiff advanced the cost amounting to P92,803.98 at
the time of the filing of the complaint
o In view of defendant Celia Regala’s failure to settle her account for the purchases made
thru the use of the Pacificard, a written demand was sent to the latter and also to the
defendant Roberto Regala, Jr. under his ‘Guarantor’s Undertaking’
  A complaint was subsequently filed in Court for defendants’ repeated failure to settle their
obligation.
 Defendant Celia Regala was declared in default for her failure to file her answer within the
reglementary period.
 Defendant-appellant Roberto Regala, Jr., on the other hand, filed his Answer with Counterclaim
admitting his execution of the ‘Guarantor’s Understanding, ‘but with the understanding that his
liability would be limited to P2,000 per month
 In view of the solidary nature of the liability of the parties, the presentation of evidence ex-parte as
against the defendant Celia Regala was jointly held with the trial of the case as against the
defendant Roberto Regala

 After the presentation of plaintiff’s testimonial and documentary evidence, fire struck the City Hall
of Manila, including the court where the instant case was pending, as well as all its records.
 Upon plaintiff-appellee’s petition for reconstitution, the records of the instant case were duly
reconstituted.
 Thereafter, the case was set for pre-trial conference with respect to the defendant-appellant
Roberto Regala on plaintiff-appellee’s motion, after furnishing the latter a copy of the same.
 No opposition thereto having been interposed by defendant-appellant, the trial court set the case
for pre-trial conference.
 Neither did said defendant-appellant nor his counsel appear on the date scheduled by the trial court
for said conference despite due notice.
 Consequently, plaintiff-appellee moved that the defendant- appellant Roberto Regala be declared
as in default and that it be allowed to present its evidence ex-parte, which motion was granted
 On July 21, 1983, plaintiff-appellee presented its evidence ex-parte.

Trial Court’s Ruling:

 Rendered judgment in favor of plaintiff and against defendants
 To solidarily pay said plaintiff the amount of P92,803.98, with interest thereon at 14% per annum,
compounded annually, from the time of demand on November 17, 1978 until said principal amount
is fully paid;
 Plus 15% of the principal obligation as and for attorney’s fees and expense of suit; and
 The costs

IAC’s Ruling:
 Modified the trial court’s decision
 It held that “all the other rights of the guarantor are not thereby lost by the guarantor becoming
liable solidarily and therefore a surety.”
 Further ruled that although the surety’s liability is like that of a joint and several debtor, it does not
make him the debtor but still the guarantor (or the surety), relying on the case of Government of
the Philippines v. Tizon
 Consequently, Article 2054 of the Civil Code providing for a limited liability on the part of the
guarantor or debtor still applies.
 Private respondent Roberto Regala, Jr. was made liable only to the extent of the monthly credit
limit granted to Celia Regala, i.e., at P2,000.00 a month and only for the advances made during
the one year period of the card’s effectivity counted from October 29, 1975 up to October 29, 1976

 It also denied petitioner’s MR

 Hence, this petition.

Petitioner’s Contentions:
 That while the appellate court correctly recognized Celia Regala’s obligation to Pacific Banking
Corp. for the purchases of goods and services with the use of a Pacificard credit card in the total
amount of P92,803.98 with 14% interest per annum, it erred in limiting private respondent
Roberto Regala, Jr.’s liability only for purchases made by Celia Regala with the use of the card
 from October 29, 1975 up to October 29, 1976 up to the amount of P2,000.00 per month with 14%
interest from the filing of the complaint

ISSUE: Should the liability of private respondent be limited only to the extent of the monthly credit limit
granted to Celia Regala?

RULING:
 No.
 The undertaking signed by Roberto Regala, Jr. although denominated “Guarantor’s
Undertaking,” was in substance a contract of surety.
 As distinguished from a contract of guaranty where the guarantor binds himself to the creditor
to fulfill the obligation of the principal debtor only in case the latter should fail to do so, in a contract
of suretyship, the surety binds himself solidarily with the principal debtor (Art. 2047, Civil
Code of the Philippines)

Application:
 We need not look elsewhere to determine the nature and extent of private respondent Roberto
Regala, Jr.’s undertaking.
 As a surety, he bound himself jointly and severally with the debtor Celia Regala “to pay the
Pacific Banking Corporation upon demand, any and all indebtedness, obligations, charges or
liabilities due and incurred by said Celia Syjuco Regala with the use of Pacificard or renewals
thereof issued in (her) favor by Pacific Banking Corporation.”
 This undertaking was also provided as a condition in the issuance of the Pacificard to Celia Regala,
thus:
o “5. A Pacificard is issued to a Pacificard-holder against the joint and several signature of a
third party and as such, the Pacificard-holder and the guarantor assume joint and several
liabilities for any and all amount arising out of the use of the Pacificard.”

 It is true that under Article 2054 of the Civil Code:

o 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.
 It is likewise not disputed by the parties that the credit limit granted to Celia Regala was P2,000 per
month and that Celia Regala succeeded in using the card beyond the original period of its effectivity,
October 29, 1979
 HOWEVER, we do not agree that Roberto Jr.’s liability should be limited to that extent.

 Private respondent Roberto Regala, Jr., as surety of his wife, expressly bound himself up to the
extent of the debtor’s (Celia) indebtedness likewise expressly waiving any “discharge in case of
any change or novation of the terms and conditions in connection with the issuance of the Pacificard
credit card.”
 Roberto, in fact, made his commitment as a surety a continuing one, binding upon himself until all
the liabilities of Celia Regala have been fully paid.
 All these were clear under the “Guarantor’s Undertaking” Roberto signed

 Private respondent Roberto Regala, Jr. had been made aware by the terms of the undertaking of
future changes in the terms and conditions governing the issuance of the credit card to his wife and
that notwithstanding, he voluntarily agreed to be bound as a surety.
 As in guaranty, a surety may secure additional and future debts of the principal debtor the
amount of which is not yet known (see Article 2053, NCC)

 A guarantor or surety does not incur liability unless the principal debtor is held liable.
 It is in this sense that a surety, although solidarily liable with the principal debtor, is different from
the debtor.
 It does not mean, however, that the surety cannot be held liable to the same extent as the principal
debtor.
  The nature and extent of the liabilities of a guarantor or a surety is determined by the clauses in
the contract of suretyship.

Disposition: Petition granted. Appellate court’s decision is set aside, and reinstated trial court’s decision.

Notes:
 Also, the application by respondent court of the ruling in Government v. Tizon, supra is misplaced.
 It was held in that case that:
o “xxx, although the defendants bound themselves in solidum, the liability of the Surety under
its bond would arise only if its co-defendants, the principal obligor, should fail to comply
with the contract.
o To paraphrase the ruling in the case of Municipality of Orion vs. Concha, the liability of
the Surety is ‘consequent upon the liability’ of Tizon, or ‘so dependent on that of 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’; or the liabilities of
the two defendants herein ‘are so interwoven and dependent as to be inseparable.’
o Changing the expression, if the defendants are held liable, their liability to pay the plaintiff
would be solidary, but the nature of the Surety’s undertaking is such that it does not incur
liability unless and until the principal debtor is held liable.”

14. South City Homes, Fortune Motors, Palawan Lumber v BA Finance Corp.

Facts:
 On January 17, 1983, Joseph L. G. Chua, President of Fortune Motors Corporation, executed in
favor of plaintiff-appellant BA Finance Corp a Continuing Suretyship Agreement, in which he
"jointly and severally unconditionally" guaranteed the "full, faithful and prompt payment and
discharge of any and all indebtedness" of Fortune Motors Corporation to BA Finance Corporation
 On February 3, 1983, Palawan Lumber Manufacturing Corporation represented by Joseph L.G.
Chua, George D. Tan, Edgar C. Rodrigueza and Joselito C. Baltazar, executed in favor of plaintiff-
appellant a Continuing Suretyship Agreement in which, said corporation "jointly and severally
unconditionally" guaranteed the "full, faithful and prompt payment and discharge of any and all
indebtedness of Fortune Motors Corporation to BA Finance Corporation.
 On the same date, South City Homes, Inc. represented by Edgar C. Rodrigueza and Aurelio F.
Tablante, likewise executed a Continuing Suretyship Agreement in which said corporation "jointly
and severally unconditionally" guaranteed the "full, faithful and prompt payment and discharge
of any and all indebtedness" of Fortune Motors Corporation to BA Finance Corporation.
 Motor vehicles were delivered by Canlubang Automotive Resources Corporation (CARCO) (Car
Supplier of Fortune Motors) to Fortune Motors Corporation on the strength of trust receipts or
drafts executed by Fortune, with South City Homes, Palawan Lumber Manufacturing
Corporation and Fortune’s President Joseph Chua as sureties under which it agreed to remit to
the Entruster (CARCO) the proceeds of any sale and immediately surrender the remaining unsold
vehicles.
 The Trust Receipts or draft were assigned/ discounted by CARCO to BA Finance Corporation, which
assumed payment of the vehicles but with the corresponding right to collect such payment from
Fortune and the Sureties.
 When Fortune failed to pay the amounts due under the drafts and remit the proceeds of motor
vehicles sold or return those remaining unsold in accordance with the terms of the trust receipts
agreements, BA Finance demanded from the sureties.
  When the account remained unsettled, BA Finance filed a complaint for sum of money with
preliminary attachment.
 A motion to dismiss was filed, defendant contending that their obligations to the creditor (CARCO)
were extinguished by the assignment of the drafts and trust receipts to BA Finance without their
knowledge and consent and pursuant to the legal provision on conventional subrogation a
novation was effected, thereby extinguishing the liability of the sureties;
o That BA Finance failed to immediately demand the return of the goods under the trust
receipt agreements or exercise the courses of action by entruster as provided for under
PD 115; and
o That at the time the suretyship agreement agreements were entered into, there were no
principal obligations, thus rendering them null and void.
 The motion to dismiss was denied.
 RTC and CA ruled that South City Homes is ordered to pay, jointly and severally, with Fortune
Motors, Palawan Lumber and Joseph Chua amounts due under the 6 drafts and Trust receipts.
 Hence, this petition.

MAIN ISSUE: WON the suretyship agreement is valid

Ruling:
 YASSS
 Art. 2053 of the Civil Code provides that a guaranty may also be given as security for future debts,
the amount of which is not yet known. Of course, a surety is not bound under any particular
principal obligation until that principal obligation is born. But there is no theoretical or doctrinal
difficulty inherent in saying that the suretyship agreement itself is valid and binding even before
the principal obligation intended to be secured thereby is born, any more than there would be in
saying that obligations which are subject to a condition precedent are valid and binding before
the occurrence of the condition precedent.
 In Fortune Motors (Phils.) Corporation v. Court of Appeals,6 we held:
o "To fund their acquisition of new vehicles (which are later retailed or resold to the general
public), car dealers normally enter into wholesale automotive financing schemes whereby
vehicles are delivered by the manufacturer or assembler on the strength of trust receipts
or drafts executed by the car dealers, which are backed up by sureties.
o These trust receipts or drafts are then assigned and/or discounted by the manufacturer
to/with financing companies, which assume payment of the vehicles but with the
corresponding right to collect such payment from the car dealers and/or the sureties.
o In this manner, car dealers are able to secure delivery of their stock-in-trade without
having to pay cash therefor; manufacturers get paid without any receivables/collection
problems; and financing companies earn their margins with the assurance of payment not
only from the dealers but also from the sureties.
o When the vehicles are eventually resold, the car dealers are supposed to pay the financing
companies — and the business goes merrily on. However, in the event the car dealer
defaults in paying the financing company, may the surety escape liability on the legal
ground that the obligations were incurred subsequent to the execution of the surety
contract?
o "x x x Of course, a surety is not bound under any particular principal obligation until that
principal obligation is born. But there is no theoretical or doctrinal difficulty inherent in
saying that the suretyship agreement itself is valid and binding even before the principal
 obligation intended to be secured thereby is born, any more than there would be in saying
that obligations which are subject to a condition precedent are valid and binding before
the occurrence of the condition precedent.
o "Comprehensive or continuing surety agreements are in fact quite commonplace in
present day financial and commercial practice. A bank or financing company which
anticipates entering into a series of credit transactions with a particular company,
commonly requires the projected principal debtor to execute a continuing surety
agreement along with its sureties. By executing such an agreement, the principal places
itself in a position to enter into the projected series of transactions with its creditor; with
such suretyship agreement, there would be no need to execute a separate surety contract
or bond for each financing or credit accommodation extended to the principal debtor."

Sub Issue no. 1: WON there was a novation of the obligation so as to extinguish the liability of the sureties.

Ruling:
 Nu-uh!
 An assignment of credit is an agreement by virtue of which the owner of a credit, known as the
assignor, by a legal cause, such as sale, dacion en pago, exchange or donation, and without the
consent of the debtor, transfers his credit and accessory rights to another, known as the assignee,
who acquires the power to enforce it to the same extent as the assignor could enforce it against
the debtor. As a consequence, the third party steps into the shoes of the original creditor as
subrogee of the latter. Petitioners obligations were not extinguished.
 Moreover, in assignment, the debtors consent is not essential for the validity of the assignment
(Art. 1624 in relation to Art. 1475, Civil Code), his knowledge thereof affecting only the validity of
the payment he might make (Article 1626, Civil Code). Article 1626 also shows that payment of
an obligation which is already existing does not depend on the consent of the debtor. It, in effect,
mandates that such payment of the existing obligation shall already be made to the new creditor
from the time the debtor acquires knowledge of the assignment of the obligation.
 What the law requires in an assignment of credit is not the consent of the debtor but merely
notice to him. A creditor may, therefore, validly assign his credit and its accessories without the
debtors consent.The purpose of the notice is only to inform that debtor from the date of the
assignment, payment should be made to the assignee and not to the original creditor

Sub-Issue No. 2: WON BA Finance Corp has a valid cause of action for a sum of money following the drafts
and trust receipts transactions.

 YES, without a doubt

 Significantly, the law uses the word may in granting to the entruster the right to cancel the trust
and take possession of the goods.
 Consequently, petitioner has the discretion to avail of such right or seek any alternative action,
such as a third party claim or a separate civil action which it deems best to protect its right, at any
time upon default or failure of the entrustee to comply with any of the terms and conditions of
the trust agreement.
15. Smith, Bell & Co. vs. Philippine National Bank, No. 16482, February 1, 1922

Ponente: Street, J.

Plaintiff-appellant: Smith, Bell & Company, Ltd.

Defendant-appellee: Philippine National Bank (PNB)

Nature of the case: This case is an appeal from a judgment of the CFI of Manila.

FACTS:
 In the month of April 1918, one Fred M. Harden, being desirous of obtaining eight expellers
adopted to the extraction of coconut oil, applied to Smith, Bell & Co., Ltd., importers, of
Manila, and ordered said expellers through this house
 By the contract signed for this purpose between said Harden and Smith, Bell & Co., on April 25,
1918, the latter "sold" to Harden eight (8) Anderson expellers, end-drive, latest model, for the price
of P80,000, to be paid on delivery
 It was understood that these expellers would be manufactured in the United States
 And it was stipulated that shipment would be made from the United States in the month of February
or March of the ensuing year
 In order to assure the prompt payment of the price upon delivery, an arrangement was made
between Harden and the Philippine National Bank whereby the latter bound itself to Smith,
Bell & Co. for the payment of the contract price, according to the terms of the following letter
dated April 27, 1918, which was addressed by the bank to the latter firm:
o “Messrs. SMITH, BELL & CO.,
"Manila, P. I.
"GENTLEMEN: In connection with the 8 expellers purchased by Mr. F. M. Harden,
amounting to P80,000 please be advised that this institution will pay the above amount
upon delivery of the expellers to us, upon condition that these are new Anderson expellers
and are laid down in Manila in first class working order. "Yours very truly,

"J. ELMER DELANEY,

"Acting President."

 Shortly after the contract for the purchase of these expellers had been thus made, and on or about
May 9, 1918, Harden appeared in the office of Smith, Bell & Co. and requested them to change
the order for the expellers from "end-drive" to "side-drive"
 And in obedience to this instruction, the house cabled to its agent in New York to change the order
accordingly, which was done.
o This fact is in our opinion clearly established by the concurring testimony of J. H. Schmidt,
plaintiff's sales manager, and one J. C. Cowper, who accompanied Harden on the mission
to get the order changed.
 In addition to this, it appears that the side-drive expeller represents an improvement over the end-
drive and is of a newer type;
 And upon the occasion mentioned, Harden exhibited to the manager of Messrs. Smith, Bell & Co.,
a catalogue from the Anderson factory showing this fact, as explanatory of his change in the order.

 On July 2, 1919, Smith, Bell & Co. informed both Harden and the bank that the expellers had
arrived.
 Shortly thereafter Harden, having examined the machinery in the plaintiff's bodega, advised
the bank that the expellers were not as ordered
 Upon this, the bank naturally refused to accept and pay for the machinery, and the plaintiff disposed
of them to the best advantage in the Manila market at a price, which was below the price at which
Harden had agreed to take them
 The ground upon which the defense is chiefly rested is that the expellers tendered by the plaintiff
were "side- drive" instead of "end-drive" expellers, and in support of this contention Harden was
 produced by the defendant as a witness, and he denied that the order for expellers had been
changed upon his instructions.
o As we have already, stated, this contention is untenable; and we do not hesitate to find
upon the proof before us that the order was changed at Harden's request.
o For the rest, it is shown that the expellers tendered by the plaintiff were new Anderson
expellers, in all respects in first-class working order.
 This action was brought by Messrs. Smith, Bell & Co., Ltd., to recover a sum of money of the
defendant, the Philippine National Bank, as damages for its failure to accept delivery of certain
machinery which had been ordered from the plaintiff by one F. M. Harden, and for the purchase
price of which the bank had obligated itself
 After the hearing the trial judge absolved the defendant
 Hence, the plaintiff appealed.

ISSUE: Whether the plaintiff Smith, Bell & Co. has the right to recover.

RULING:
 Yes.
 In the light of these facts the right of the plaintiff to recover is clear.
 The contract by which the bank obligated itself is both in form and effect an independent
undertaking on the part of the bank directly to the plaintiff;
 And inasmuch as the plaintiff has complied, or offered to comply, with the terms of said contract,
the bank is bound by its promise to pay the purchase price.
 The consideration for this promise is to be found in the credit extended to Harden by the plaintiff
and in the fact that the plaintiff, relying upon the bank's promise, has gone to the expense of bringing
to these Islands the expellers which Harden had ordered.

Sub-issue: Whether defendant PNB is liable.

Ruling:
 Yes. Defendant PNB is liable.
 The act of Harden in changing the order could not affect the liability of the defendant bank.
 A bank which makes itself independently responsible to an importing establishment for the
purchase price of machinery to be imported upon an order already given by a third person is not
released from its obligation by the circumstance that the person giving the order thereafter
causes a change to be made in the specifications for the machinery, it appearing that such change
is not incompatible with the bank's obligation.

 It is undeniable that the contract sued on had its origin and explanation in the contract between
Harden and the plaintiff, and the bank of course obligated itself solely for the purpose of
assuring the payment of the purchase price of the expellers to the plaintiff
 But this does not make the bank subsidiarily liable as regards the contract, which is the subject of
this suit.

 Its obligation to the plaintiff is direct and independent.

Re: Liquidated debt

 Moreover, the debt must be considered a liquidated debt, in the sense intended in article 1825 of
the Civil Code (now, Article 2053, NCC);
o And the action is now maintainable by the plaintiff directly against the bank without regard
to the position of Harden.
o A debt for the price of goods to be delivered in the future must be considered liquidated
within the meaning of article 1825 (now, Article 2053, NCC) of the Civil Code for the
purposes of maintaining an action against a guarantor of such debt when the price of the
goods to be delivered is fixed by the contract and the seller offers to deliver within the time
stipulated and according to the terms of the contract.
  At this point, the thought may possibly suggest itself that if the view above indicated is correct, and
the bank is to be considered strictly in the light of an independent promisor, a consequence would
be that Harden had no authority to change the order from end-drive to side-drive expellers;
 In other words, that the bank should be held to be obligated according to the terms of the order as
it stood when the bank entered into the undertaking which is the subject of the suit
 However, having regard to the situation as all parties understood it, we are of opinion that the act
of Harden in changing the order could not affect the liability of the defendant bank, especially
since the specification in the bank's letter calls for "new" Anderson expellers and the change made
was rather in furtherance of this specification than prejudicial to it.
 The real purpose of the bank, as all parties were well aware, was to supply its credit to enable
Harden to obtain the expellers ordered by himself, and for his purposes, and it would tend to
frustrate the intention of the parties to hold that Harden had no authority to change the order to the
extent stated.

Re: Damages / Legitimate Charges:

 We observe that in the second amended complaint of March 8, 1920, which was the first complaint
in which the plaintiff signified his election to claim damages for breach of contract, the damages
are alleged to have been in the sum of P26,339.55, upon which it is asked that interest be allowed
at the legal rate from the date of this complaint.
 Upon examining the several items which go to compose the damages, as indicated in the
statement, prepared by the plaintiff's department of accounts, we consider the following to be
legitimate charges, namely:
o First, the difference between the contract price and the amount realized from the sale of
the expellers, P22,400;
o Secondly, various charges for storage, insurance, etc., while the machinery remained in
the plaintiff's hands after it should have been delivered to the defendant, P665.34; and,
o Thirdly, expenses actually paid out by the plaintiff in moving the expellers, and for coolie
hire, P640.
 In the itemized statement of damages submitted by the plaintiff, interest has been compounded
monthly at 8%, but in the absence of express stipulation this cannot be allowed;
 And we are the more disposed to eliminate this charge for interest, for the reason that the plaintiff's
sales manager has in effect admitted that the terms imposed by the plaintiff on Harden were severe.

Disposition: Judgment reversed.

 Plaintiff will recover of the defendant bank the sum of P23,705.34, with legal interest from March 8,
1920

Notes:

Article 2053. A guaranty may also be given as security for future debts, the amount of which is not yet
known; there can be no claim against the guarantor until the debt is liquidated. A conditional obligation
may also be secured. (1825a)

16. PHILIPPINE TRUST CO., vs ECHAUS TAN SIUA (February 28, 1929)

FACTS:

 This action was instituted in the Court of First Instance of Occidental Negros by the Philippine Trust
Co., hereinafter called the bank, for the purpose of foreclosing a mortgage on five parcels of real
property belonging to the appellant, Lucio Echaus Tan Siua, given as security for a debt owing to
the bank by the Visayan General Supply Co., Inc., hereinafter referred to as the debtor.
 Upon hearing the cause the trial judge entered judgment declaring the defendant herein to be
indebted to the bank in the amount of P53,741.82, with interest at the rate of P10 per cent per
annum, to be capitalized monthly, also declaring the defendant to be indebted to the bank in the
 sum of P4,000 for stipulated attorney's fee, with the requirement that said sums be deposited in
court within three months from the date of the judgment, in default of which the mortagaged property
to be sold in ordinary course of foreclosure; and with further provision that execution should issue
against the defendant for any balance of the aforesaid indebtedness which should not be satisfied
from the proceeds of the sale.
 From this judgment the defendant, Lucio Echaus Tan Siua, appealed.
 It appears that by agreement dated May 18, 1923, the plaintiff bank granted to the Visayan General
Supply Co., Inc., credit in current account to the extent of P40,000, which credit was, in ordinary
course, utilized by the debtor party.
 Among the stipulations of this contract material to be here noted, we find the following, namely:
First, that the Visayan General Supply Co., Inc., should pay interest on the average daily debit
balances of its said current account at the rate of 10 per cent annum, or at such other time as the
party of the second part might deem expedient, and the amount thereof debited in said current
account; secondly, it was agreed that the debit balance shown in said current account by the books
of the bank should be taken and held to be the true and correct amount owing by the debtor; thirdly,
the debtor party agreed to furnish for the payment of any sum advanced by the bank to debtor.
 Pursuant, apparently, to the agreement of the debtor to furnish security for said indebtedness, the
defendant, Lucio Echaus Tan Siua, on August 2, 1923, mortgaged to the bank the five parcels of
land which are the subject of this proceeding for the purpose of securing the aforesaid
indebtedness.
 From this mortgage we reproduce two provisions which are partinent to the present contoversy, as
follows:

This mortgage is given as security for the payment on demand of a credit in current
account in the sum of forty thousand pesos (P40,000), Philippine currency, granted by the
mortgagee to the Visayan General Supply Co., Inc., together with interest on the average
daily debit balances of said current account at the rate of ten per cent (10%) per annum,
payable quarterly, all in accordance with the terms and conditions of a certain agreement
for the credit in current account entered into by and between the said Visayan General
Supply Company, Inc., under date of May 18, 1923, a copy of which said agreement is
attached hereto, marked A, and made a part hereof.

xxx xxx xxx

The conditions of this obligation are such that if the mortgagor shall well and truly pay, or
caused to be paid, any sum or sums that may be done to the mortgagee by the Visayan
General Supply Company, Inc., under and by virtue of the terms of that certain agreement
for credit in current account entered into by between the said Visayan General Supply
Company, Inc., and the Philippine Trust Company, under date of May 18, 1923, a copy of
said agreement is attached hereto, marked A, and made a part hereof; and shall comply
with all terms and conditions set forth in this mortgage, then this obligation shall be void;
otherwise it shall remain in full force and effect.

ISSUE: Whether the defendant did not assume personal liability for the debt but only mortgaged his
property in security therefor.

RULING: YES

 It will be observed that in the first of the two paragraphs above quoted the credit in current account
granted by the bank is described as bearing interest at the rate of 10 per centum per annum,
payable "quarterly;" and from this the appellant contends, with some plausibility, that the interest
due to the bank cannot be capitalized monthly but only quarterly.
  On the part of the appellee it is claimed that the word "quarterly" was used in the mortgage by
manifest error and that the word "quarterly" should be read "monthly," as stated in the contract of
May 18, 1923.
 We are of the opinion that the position taken by the appellee on this point is correct and that the
error is manifest and apparent from the mortgage itself in relation with the principal contract.
 The reasons that conduct us to this conclusion are these:

First, the mortgage was evidently given pursuant to that clause of the original contract by which
the debtor had agreed furnish security to the bank for any sum for which the debtor might become
obligated to the bank under the terms of the original agreement;

secondly, the paragraph of the mortgage in which the word "quarterly" is used explicitly states that
the terms and conditions" of the original agreement;

thirdly, the same paragraph of the mortgage makes express reference to the original agreement
for the granting of credit in current account by the bank to the debtor and said contract is
incorporated in the mortgage by reference;

fourthly, in the defeasance clause of the mortgage, which is the second of the two paragraphs
above qouted from the mortgage, the debt secured is not described as being one for the payment
of interest quarterly, but the original contract is again referred to and incorporated in the said clause
without specifying how the interest should be paid.

 The last error assigned is directed to that feature of the appealed decision in which the trial court
ordered that execution should issue personally against the defendant for any deficiency that might
result from the failure of the mortgaged property to bring the full amount of the indebtedness due
to the creditor. It is admitted by the appellee that this feature of the judgment must be eliminated,
since the defendant did not assume personal liability for the debt but only mortgaged his property
in security therefor.
 From what has been said it follows that that portion of the dispositive part of the appealed judgment
which purports to make the defendant liable for any deficiency must be eliminated.

17. Poblete vs. Lo Singco

G.R. No. 19439. January 17, 1923
STREET J.:

FACTS:
 Plaintiff Mauro Malang Santos designed for former Ambassador Felino Neri, for his personal
Christmas Card greetings for the year 1959, the artistic motif in question.
 The following year the defendant McCullough Printing Company, without the knowledge and
authority of plaintiff, displayed the very design in its album of Christmas cards and offered it for
sale, for a price.
 For such unauthorized act of defendant, plaintiff suffered moral damages to the tune of
P16,000.00, because it has placed plaintiff's professional integrity and ethics under serious
question and caused him grave embarrassment before Ambassador Neri.
 He further prayed for the additional sum of P3,000.00 by way of attorney's fee.
 Defendant in answer to the complaint, after some denials and admissions, moved for a dismissal
of the action claiming that —
o (1) The design claimed does not contain a clear notice that it belonged to him and that he
prohibited its use by others;
 o (2) The design in question has been published but does not contain a notice of copyright,
as in fact it had never been copyrighted by the plaintiff, for which reason this action is
barred by the Copyright Law;
o (3) The complaint does not state a cause of action.
 The documentary evidence submitted were the Christmas cards, as originally designed by
plaintiff, the design as printed for Ambassador Neri, and the subsequent reprints ordered by other
parties.
 Upon the basis of the facts stipulated, the lower court rendered judgment on December 1, 1961.
o The court ruled that the plaintiff in this case did not choose to protect his intellectual
creation by a copyright. The fact that the design was used in the Christmas card of
Ambassador Neri who distributed eight hundred copies thereof among his friends during
the Christmas season of 1959, shows that the, same was published.
o Unless satisfactorily explained a delay in applying for a copyright, of more than thirty days
from the date of its publication, converts the property to one of public domain.
o Since the name of the author appears in each of the alleged infringing copies of the
intellectual creation, the defendant may not be said to have pirated the work nor guilty of
plagiarism Consequently, the complaint does not state a cause of action against the
defendant.
o WHEREFORE, the Court dismisses the complaint without pronouncement as to costs.

ISSUE: whether or not the provisions of the Civil Code or the Copyright Law should apply in the case?
RULING:
 We find that plaintiff is not entitled to a protection, the provision of the Civil Code, notwithstanding,
Paragraph 33 of Patent Office Administrative Order No. 3 (as amended dated September 18,
1947) entitled "Rules of Practice in the Philippines Patent Office relating to the Registration of
Copyright Claims"
o promulgated pursuant to Republic Act 165, provides, among others, that an intellectual
creation should be copyrighted thirty (30) days after its publication, if made in Manila, or
within sixty (60) day's if made elsewhere, failure of which renders such creation public
property.
 In the case at bar, even as of this moment, there is no copyright for the design in question.
 We are not also prepared to accept the contention of appellant that the publication of the design
was a limited one, or that there was an understanding that only Ambassador Neri should, have
absolute right to use the same.
 In the first place, if such were the condition then Ambassador Neri would be the aggrieved party,
and not the appellant.
 In the second place, if there was such a limited publication or prohibition, the same was not
shown on the face of the design.
 When the purpose is a limited publication, but the effect is general publication, irrevocable rights
thereupon become vested in the public, in consequence of which enforcement of the restriction
becomes impossible (Nutt vs. National Institute, 31 F [2d] 236).
 It has been held that the effect of offering for sale a dress, for example manufactured in
accordance with an original design which is not protected by either a copyright or a patent, is to
divest the owner of his common law rights therein by virtue of the publication of a 'copy' and
thereafter anyone is free to copy the design or the dress (Fashion Originators Guild of America v.
Federal Trade Commission, 114 F [2d] 80).
 When Ambassador Neri distributed 800 copies of the design in controversy, the plaintiff lost
control of his design and the necessary implication was that there had been a general publication,
there having been no showing of a clear indication that a limited publication was intended.
 The author of a literary composition has a light to the first publication thereof.
 He has a right to determine whether it shall be published at all, and if published, when, where, by
whom, and in what form.
 This exclusive right is confined to the first publication.
 When once published, it is dedicated to the public, and the author loses the exclusive right to
control subsequent publication by others, unless the work is placed under the protection of the
 copyright law. (See II Tolentino's Comments on the Civil Code, p. 433, citing Wright v. Eisle 83
N.Y. Supp. 887.)

DISPOSITIVE PORTION: CONFORMABLY WITH ALL THE FOREGOING, We find that the errors
assigned have not been committed by the lower court. The decision appealed from, therefore, should be,
as it is hereby affirmed. Costs taxed against plaintiff-appellant.

18. M. TAGAWA, plaintiff-appellee, vs. V. ALDANESE, Insular Collector of Customs, and THE
UNION GUARANTEE COMPANY, LTD., defendant-appellants. G.R. No. 18636 September 28, 1922

Facts:
 This is another of a series of cases arising out of indemnity bonds given for the delivery of
merchandise without the production of bills of lading. It is, moreover, a case brought in the name
of the real party in interest against the Insular Collector of Customs who delivered the merchandise
without the surrender of the proper bills of lading, and the Union Guarantee Company, Ltd., which
executed the indemnity bonds for the production of the bills of lading covering the shipments of
merchandise. And, lastly, it is a case properly tried, with the necessary witnesses testifying, and
with the necessary witnesses testifying, and with the necessary documents introduced in evidence.
 Jap Hoo and Co. of Manila ordered of M. Tagawa and Co. of Manila, later succeeded by the Nanyo
Shioji Kaisha, 2,500 crates of potatoes and 174 crates of onions. Tagawa in turn instructed his
Kobe office in Japan to purchase the merchandise.
 The merchandise was purchased of Otogosha and Yoshida, with direction to ship direct to Manila.
Otogosha and Yoshida, did in fact ship the potatoes and onions from Japan to Manila upon bills of
lading which stated, that the goods were received from Otogosha and Yoshida to be delivered "unto
order, notify Jap Hoo Co."
 The bills of lading were indorsed in blank by Otogosha and Yoshida and delivered by them to
Tagawa's representative in Kobe. They were then attached to drafts drawn by M. Tagawa on Jap
Hoo and Co., Manila, payable thirty days after date to the order of the Yokohama Specie Bank, Ltd.
On each of the drafts, with the possible exception of one, were written the marks "D. P," which
meant that the bills of lading were not to be delivered until the drafts were paid. Upon dishonor of
the drafts accepted by Jap Hoo and Co., M. Tagawa and Co. was so notified, and the drafts were
document were indorsed and delivered to the latter company.
 It should further be mentioned that when the potatoes and onions reached Manila, they were
delivered by the Collector of Customs to the consignee, Jap Hoo and Co., notwithstanding this
company did not have the bills of lading, after requiring it to file indemnity bonds, with the Union
Guarantee Company, Ltd., as surety, guaranteeing the production of the bills of lading within a
period of four months, and undertaking to pay P17,950 to the Collector of Customs in case of
default.
 Out of the foregoing situation arose the present action, originally brought by M. Tagawa for whom
later, as above said, there was substituted as plaintiff, the Nanyo Shioji Kaisha, against Vicente
Aldanese, Insular Collector of Customs, to recover P16,700, with legal interest and costs. At the
instance of the Collector of Customs, the Union Guarantee Company, Ltd., was later joined as a
party defendant.
 At the trial, the plaintiff presented as witnesses Mischuchi Toshimura of the Nanyo Shioji Kaisha,
Elias Buñe, customs broker, Emilio Velez, secretary of the board of protests and appeals of the
Bureau of Customs, and Gerardo Cruz, an employee of the Yokohama Specie Bank. The plaintiff
also introduced the applications to enter goods without bills of lading, including the bonds to
produced the bills of lading, executed by Jap Hoo and Company and the Union Guarantee
Company, Ltd., the bills of lading and the drafts.
 The defendants waived their right to present evidence.

CFI Decision
 The judgment handed down by the Honorable Pedro Concepcion, Judge of First Instance, was that
the Insular Collector of Customs pay the plaintiff the sum of P16,700, with legal interest, beginning
with March 30, 1920, and that the Union Guarantee Company in turn pay the Government of the
 Philippine Islands the same sum of P16,700, with legal interest from the said date, and the costs,
with the understanding that the liability of the Union Guarantee Company was limited to P17,950,
the total amount of the bonds.

Issue: Whether or not an indemnitee may recover from the indemnitor interest and costs although the total
sum exceeds the bond?
Ruling: YES.

 There remains for resolution the last assignment of error made by the Attorney-General relating to
the judgment of the trial court circumscribing the responsibility of the Union Guarantee Company,
with reference to the payment of interest and costs, to P17,950, the total amount of the indemnity
bonds.
 As a necessary part of his damages, an indemnitee may also recover against his indemnitor
interests and costs.
 However, the early cases did not allow interest where the damages were thereby made to exceed
amount of the indemnity bond.
 The modern cases announce the generally accepted rule that interest may be added to the
amount of recovery on a bond, although the total sum is thereby made to exceed the penalty
of the bond. (American Surety Co. vs. Pacific Surety Co. [1908]) This is the rule which we adopt
for the Philippines.
 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, in this instance, when the Union
Guarantee Company was made a defendant, on May 22, 1910.
 The result is, that the judgement is affirmed, with the modification that interest shall begin to run
from May 22, 1920, and that no mentioned shall be made of the limitation of the liability of the Union
Guarantee Company, to the total amount of the bonds. The costs of this instance shall be taxed
against the Union Guarantee Company. So ordered.

Other ruling:
 First of all, it is well to have before us the controlling provisions of law which permit the Collector of
Customs to deliver merchandise to a consignee without the surrender of the bill of lading. Section
1316 of the Administrative Code provides:
o When a collector of customs delivers merchandise without the surrender of the proper bill
of lading, he may protect himself from any liability to the rightful holder of the bill by requiring
the person to whom delivery is made to execute a sufficient bond in an amount greater
than the invoice, or manifest, or in the absence of both, greater than the appraised value
of the merchandise. Such bond shall run to the Government of the Philippine Islands, for
the benefit of whom it may concern, and shall be conditioned for the production of the
proper bill of lading or for the satisfaction of any damages occasioned to its lawful holder
by reason of wrongful delivery.
 It was pursuant to the above quoted provision of law that the Insular Collector of Customs
authorized seven bonds to be executed in this case.
 Passing now from the facts, and the law, and the bonds, we note that this court has heretofore
applied the rule, that no action can be brought upon an indemnity bond until it is shown that some
person has been damaged by reason of a failure to comply with its terms.
 Without attempting to differentiate between a simple contract of indemnity against damages and a
contract of indemnity against liability for damages, the court has accepted the general common-
law rule, that, to authorize a recovery upon a bond of indemnity, actual damage must be shown.
(Government of the Philippine Islands vs. Union Guarantee Company; Government of the
Philippine Islands vs. Tan Liuan and Co. and Union Guarantee Company; Hongkong and Shanghai
 Banking Corporation vs. Aldanese and Union Guarantee Company; Government of the Philippine
Island vs. Aw Yong Chiong Soo and Union Guarantee Company)
 As said by the United States Supreme Court, in the cases of indemnity contracts "the obligee
cannot recover until he has been actually damnified, and he can recover only to the extent of the
injury he has sustained up to the time of the institution of the suit." (Wicker vs. Hoppock [1867])
 This view, we take it, is correct under Philippine law, because the amount of the bond is made
greater than the value of the merchandise as disclosed by the invoice or manifest or by the
appraised value, while the purpose of the bond is simply to protect the Collector of Customs from
liability.
 The liability of the Collector of Customs is determined not by the sum named in the indemnity bond,
but by the value of the merchandise which he has surrendered without the proper bill of lading, and
this latter sum in turn fixes the damages which the principal and surety on the indemnity bond
should make good to the Collector of Customs so that he can reimburse the holder of the bill of
lading.
 In addition, therefore, to proving the execution of the bonds, the delivery of the merchandise, the
non-presentation of the bills of lading within the four months' period, and the presentation of the
bills of lading by the holder, the plaintiff should establish his actual damages by means of proof
showing either the invoice, or the manifest, or the appraised value of the merchandise, or all of
these together, the amount of the draft where the bill of lading is not to be delivered until the draft
is paid, and the dishonoring of the draft.
 Unfortunately, in none of the previous cases which are herein cited, has the plaintiff made out a
case.
o For instance, in the case of the Government of the Philippine Island vs. Union Guarantee
Company, at the time the action was brought no bill of lading had been presented to the
Insular Collector of Customs by any person, so that the Collector of Customs could not
have suffered damage by a failure of the delivery of the bill of lading; result, the sustaining
of the demurrer presented by the Union Guarantee Company.
o Again, in the case of the Government of the Philippine Islands vs. Tan Liuan and Co. and
Union Guarantee Company, while a bill of lading was presented by the Yokohama Specie
Bank, yet there was not a word of testimony to show the amount of damages suffered by
the bank, the holder of the bill of lading; result, judgment reversed, and the complaint
dismissed without prejudice.
o Again, in the case of the Hongkong and Shanghai Banking Corporation vs. Aldanese and
Union Guarantee Company, the only attempt at proof was by way of a so-called stipulation
which represented the conversation between the presiding judge and counsel; result,
judgment reversed with instructions.
o Again, in the case of the Government of the Philippine Islands vs. Aw Yong Chiong Soo
and Union Guarantee Company, the plaintiff failed to prove the amount of his damages
with any degree of certainty; result, judgment reversed without prejudice.
 In pleasing contrast with the case above-mentioned, is the one before us. The insinuation of
counsel that there was a conspiracy between M. Tagawa and Co. and Jap Hoo and Co. to defraud
the Union Guarantee Company, is unsupported by either proof or logic.
 The value of the merchandise is proved by the admission of the Attorney-General alleging a
stipulation, by the drafts, and by the shipping documents. The protests of the drafts, and by the
Yokohama Specie Bank is shown by the charges for protest fees and by the testimony. M. Tagawa,
with the drafts and bills of lading in his possession, was entitled to possession of the merchandise.

19. Hongkong & Shanghai Banking Corporation vs. Aldanese, No. 22071, October 9, 1924

Ponente: Romualdez, J.

Nature of the case: This case is an appeal from a judgment of the CFI of Manila.

Plaintiff and cross-defendant: HSBC

Defendant, cross-plaintiff and appellee: Vicente Aldanese
Cross-defendants: Vamenta & Co., Isidoro Vamenta and The Union Guarantee Co., Ltd.
Appellant: The Union Guarantee Co., Ltd

FACTS:
 On October 15, 1919, there arrived at the port of Manila, certain merchandise consigned to the
Hongkong & Shanghai Banking Corporation (HSBC)
 Before the receipt of the bill of lading of the merchandise, Messrs. Vamenta & Co. and Isidoro
Vamenta declared that the value of said merchandise was P6,854.40, and succeeded in
withdrawing the merchandise from the custom-house by giving a bond executed by the
Union Guarantee Co., Ltd., as surety for the sum of P9,450, promising to present the bill of
lading within four months from the date of said bond
 This period expired without said bill of lading having been presented, notwithstanding the repeated
demands made for the purpose.

 The herein plaintiff corporation presented said bill of lading, with the invoice annexed thereto,
according to which the value of the merchandise in question was P18,681.60, and claimed it
from the Collector of Customs (Vicente Aldanese)
o But the latter could not deliver the same, having delivered it previously to Vamenta & Co.
and Isidoro Vamenta as above stated, and an action was brought against him by the herein
plaintiff
 At the instance of the Collector of Customs, Vamenta & Co., Isidoro Vamenta and the surety
company, the Union Guarantee Co., Ltd., were included as defendants, against whom, as well
as against the plaintiff, said Collector of Customs filed a cross-complaint
 After trial, the Court of First Instance of Manila rendered judgment.

CFI’s Ruling, among others:

 The defendant Vicente Aldanese, in his capacity as Collector of Customs, is sentenced to pay
HSBC the sum of $9,340.80, United States currency, with costs
 Messrs. Vamenta & Co., Isidoro Vamenta and Union Guarantee Co., Ltd., are sentenced to pay
the same sum to Mr. Vicente Aldanese in his aforesaid capacity, with the costs.
 In the event that the Union Guarantee Co., Ltd., be compelled to pay the whole or any part of the
said sum to the defendant Mr. Aldanese by reason of insolvency or inability to pay of Messrs.
Vamenta & Co. and Isidoro Vamenta, the latter are sentenced to pay said surety company all such
sum as it may have paid as aforesaid, together with the costs xxx
 This judgment became final, except as to the Union Guarantee Co., Ltd., which appealed from
said judgment

 The Collector of Customs had already paid to the herein plaintiff the sum of P20,334.91 as the
value of the merchandise in question, with interest thereon In compliance with the judgment above
set out.
 The cause having been remanded to the court below, according to the judgment of this court, new
trial was held there, where the bond given by Vamenta & Co. and Isidoro Vamenta and the Union
Guarantee Co., Ltd., was presented as evidence
 The latter company did not introduce any evidence.
 In compliance with the judgment rendered against him, Isidoro Vamenta paid the Collector of
Customs P8,000 on account.

 After a hearing, the court sentenced Vamenta & Co., Isidoro Vamenta and the Union Guarantee
Co., Ltd., to pay the CoIIector of Customs jointly and severally the balance of P20,334.91
paid by said Collector of Customs, after deducting the P8,000 paid to the latter by Isidoro Vamenta,
that is the sum of P12,334.91 with legal interest upon the P20,334.91 paid by the Collector of
Customs, computed from October 24, 1921, when said payment was made, and with interest also
at the legal rate on the sum of P12,334.91 from August 30, 1922, the day next following the payment
of the P8,000 by Isidoro Vamenta
  The appellant Union Guarantee Co., Ltd., was sentenced as aforesaid, but only up to the
amount of the bond given, that is, up to the sum of P9,450

Appellant’s arguments:
 That the defendant Aldanese is not entitled to recover, because the money paid by him is not his
but of the Government.
 That the liability of Vamenta & Co. and Isidoro Vamenta being joint and several, the P8,000 paid
by Isidoro Vamenta must be applied upon the bond for P9,450 by them.
o And deducting said P8,000 from the amount of the bond, there remains only the sum of
P1,450 to be paid by the appellant.

ISSUE: Was defendant Aldanese entitled to recover?

RULING:
 Yes.
 That the defendant Aldanese is not entitled to recover, because the money paid by him is not his
but of the Government is untenable.
 It must be noted that the judgment appealed from is in favor of “Mr. Aldanese in his capacity as
Collector of Customs," and not as a private individual.

 The fact, however, is that Vamenta & Co. and Isidoro Vamenta incurred and recognized the
obligation to indemnify the Collector of Customs, defendant herein, for what he has paid,
amounting to P20,334.91
 And on account of said liability, Isidoro Vamenta paid said Collector of Customs the sum of P8,000
 There remains, therefore, the sum of P12,334.91 for which the Collector of Customs has the right
to be reimbursed

Sub-issue: Should the appellant “the Union Guarantee Co., Ltd” be held liable for the amount of the bond
given?

Ruling:
 Yes.
 Where in a bond the debtor and surety have bound themselves solidarily, but limiting the liability
of the surety to a lesser amount than that due from the principal debtor, any such payment as the
latter may have made on account of such obligation must be applied first to the unsecured portion
of the debt, for, as regards the principal debtor, the obligation is more onerous as to the amount
not secured. 

 The principal debtor having paid an amount on account of the debt, the surety is under obligation
to pay the balance up to the amount secured by the bond executed by him. 


Application
 To determine who are liable for this sum and to what extent, the following must be borne in mind:
o For the total sum of P20,334.91, Vamenta & Co. and Isidoro Vamenta are liable although
jointly and severally with the herein appellant up to the sum of P9,450, the amount of
the bond given by them.

 From the standpoint of view of Vamenta & Co. and Isidoro Vamenta, their liability in connection
with said total sum is more onerous with regard to the amount for which they are liable alone and
separately from the surety the Union Guarantee Co., Ltd., that is, the sum of P10,884.91.
 To this amount, therefore, must the payment of P8,000 made by them be applied, for it is so
provided by Article 1174 of the Civil Code (now, Article 1254, NCC)
 Therefore, Vamenta & Co., Isidoro Vamenta and the Union Guarantee Co., Ltd., are jointly and
severally liable for the balance of P12,334.91 up to the sum of P9,450
 Vamenta & Co. and Isidoro Vamenta being liable only for the remaining sum, that is, P2,884.91
  As this is the result arrived at in the judgment appealed from, we see no reason for altering it.

Disposition: Judgment appealed from is affirmed.

20. Southern Motors v Barbosa

Facts:

 Plaintiff, Southern Motors, Inc., brought this action against Eliseo Barbosa, to foreclose a real
estate mortgage, constituted by the latter in favor of the former, as security for the payment of
the sum of P2,889.53 due to said Plaintiff from one Alfredo Brillantes, who had failed to settle his
obligation in accordance with the terms and conditions of the corresponding deed of mortgage.
 Defendant Eliseo Barbosa filed an answer admitting the allegations of the complaint and alleging,
by way of “special and affirmative” defense:
o “That the Defendant herein has executed the deed of mortgage Annex A for the only
purpose of guaranteeing — as surety and/or guarantor — the payment of the above
mentioned debt of Mr. Alfredo Brillantes in favor of the Plaintiff.
o “That the Plaintiff until now has no right action against the herein Defendant on the
ground that said Plaintiff, without motive whatsoever, did not intent or intent to exhaust
all recourses to collect from the true debtor Mr. Alfredo Brillantes the debt contracted by
the latter in favor of said Plaintiff, and did not resort nor intends to resort all the legal
remedies against the true debtor Mr. Alfredo Brillantes, notwithstanding the fact that said
Mr. Alfredo Brillantes is solvent and has many properties within the Province of Iloilo.”

ISSUE: WON the Southern Motors can secure a judgment against Mr. Barbosa, despite non exhaustion of
all remedies against principal borrower

Ruling:
 YES
 The right of guarantors, under Article 2058 of the Civil Code of the Philippines, to demand
exhaustion of the property of the principal debtor, exists only when a pledge or a mortgage has
not been given as special security for the payment of the principal obligation.
 Guarantees, without any such pledge or mortgage, are governed by Title XV of said Code, whereas
pledges and mortgages fall under Title XVI of the same Code, in which the following provisions,
among others, are found:
 ART. 2087.
o “It is also of the essence of these contracts that when the principal obligation becomes
due, the things in which the pledge or mortgage consists may be alienated for the
payment to the creditor.”
 ART. 2126.
o “The mortgage directly and immediately subjects the property upon which it is imposed,
whoever the possessor may be, to the fulfillment of the obligation for whose security it
was constituted.”
 It has been held already (Saavedra vs. Price, 68 Phil., 688), that a mortgagor is not entitled to the
exhaustion of the property of the principal debtor.
  Although an ordinary personal guarantor — not a mortgagor or pledgor — may demand the
aforementioned exhaustion, the creditor may, prior thereto, secure a judgment against said
guarantor, who shall be entitled, however, to a deferment of the execution of said judgment
against him until after the properties of the principal debtor shall have been exhausted to satisfy
the obligation involved in the case.

21. PHILIPPINE EXPORT AND FOREIGN LOAN GUARANTEE CORPORATION, petitioner, vs. V.P.
EUSEBIO CONSTRUCTION, INC.; 3-PLEX INTERNATIONAL, INC.; VICENTE P. EUSEBIO;
SOLEDAD C. EUSEBIO; EDUARDO E. SANTOS; ILUMINADA SANTOS; AND FIRST INTEGRATED
BONDING AND INSURANCE COMPANY, INC., respondents. G.R. No. 140047 July 13, 2004

Facts:
 This case is an offshoot of a service contract entered into by a Filipino construction firm with the
Iraqi Government for the construction of the Institute of Physical Therapy-Medical Center, Phase
II, in Baghdad, Iraq, at a time when the Iran-Iraq war was ongoing.
 In a complaint filed with the RTC of Makati City, petitioner Philguarantee sought reimbursement
from the respondents of the sum of money it paid to Al Ahli Bank of Kuwait pursuant to a guarantee
it issued for respondent V.P. Eusebio Construction, Inc. (VPECI).

 November 8, 1980 - the State Organization of Buildings (SOB), Ministry of Housing and
Construction, Baghdad, Iraq, awarded the construction of the Institute of Physical Therapy–Medical
Rehabilitation Center, Phase II, in Baghdad, Iraq, (the Project) to Ajyal Trading and Contracting
Company (Ajyal), a firm duly licensed with the Kuwait Chamber of Commerce for a total contract
price of ID5,416,089/046 (US$18,739,668).
 March 7, 1981 - respondent spouses Eduardo and Iluminada Santos, in behalf of respondent 3-
Plex International, Inc. (3-Plex), a local contractor engaged in construction business, entered into
a joint venture agreement with Ajyal wherein the former undertook the execution of the entire
Project, while the latter would be entitled to a commission of 4% of the contract price. On 8 April
1981, respondent 3-Plex, not being accredited by or registered with the Philippine Overseas
Construction Board (POCB), assigned and transferred all its rights and interests under the joint
venture agreement to VPECI, a construction and engineering firm duly registered with the POCB.
However, on 2 May 1981, 3-Plex and VPECI entered into an agreement that the execution of the
Project would be under their joint management.
 The SOB required the contractors to submit:
o (1) a performance bond of ID271,808/610 representing 5% of the total contract price and
o (2) an advance payment bond of ID541,608/901 representing 10% of the advance payment
to be released upon signing of the contract.
o To comply with these requirements, respondents 3-Plex and VPECI applied for the
issuance of a guarantee with petitioner Philguarantee, a government financial
institution empowered to issue guarantees for qualified Filipino contractors to secure the
performance of approved service contracts abroad.
 Petitioner Philguarantee approved respondents' application. Subsequently, letters of guarantee
were issued by Philguarantee to the Rafidain Bank of Baghdad covering 100% of the performance
and advance payment bonds, but they were not accepted by SOB. What SOB required was a letter-
guarantee from Rafidain Bank, the government bank of Iraq.
 Rafidain Bank then issued a performance bond in favor of SOB on the condition that another foreign
bank, not Philguarantee, would issue a counter-guarantee to cover its exposure. Al Ahli Bank of
Kuwait was, therefore, engaged to provide a counter-guarantee to Rafidain Bank, but it required a
similar counter-guarantee in its favor from the petitioner. Thus, three layers of guarantees had
to be arranged.
 Upon the application of respondents 3-Plex and VPECI, petitioner Philguarantee issued in favor of
Al Ahli Bank of Kuwait Letter of Guarantee No. 81-194-F (Performance Bond Guarantee) in the
 amount of ID271,808/610 and Letter of Guarantee No. 81-195-F (Advance Payment Guarantee) in
the amount of ID541,608/901, both for a term of 18 months from 25 May 1981. These letters of
guarantee were secured by
o (1) a Deed of Undertaking executed by respondents VPECI, Spouses Vicente P. Eusebio
and Soledad C. Eusebio, 3-Plex, and Spouses Eduardo E. Santos and Iluminada Santos;
and
o (2) a surety bond issued by respondent First Integrated Bonding and Insurance Company,
Inc. (FIBICI).
o The Surety Bond was later amended on 23 June 1981 to increase the amount of coverage
from P6.4 million to P6.967 million and to change the bank in whose favor the petitioner's
guarantee was issued, from Rafidain Bank to Al Ahli Bank of Kuwait.
 June 11, 1981, SOB and the joint venture VPECI and Ajyal executed the service contract for the
construction of the Institute of Physical Therapy – Medical Rehabilitation Center, Phase II, in
Baghdad, Iraq, wherein the joint venture contractor undertook to complete the Project within a
period of 547 days or 18 months. Under the Contract, the Joint Venture would supply manpower
and materials, and SOB would refund to the former 25% of the project cost in Iraqi Dinar and the
75% in US dollars at the exchange rate of 1 Dinar to 3.37777 US Dollars.
 The construction, which was supposed to start on June 2, 1981, commenced only on the last week
of August 1981. Because of this delay and the slow progress of the construction work due to some
setbacks and difficulties, the Project was not completed on 15 November 1982 as scheduled. But
in October 1982, upon foreseeing the impossibility of meeting the deadline and upon the request
of Al Ahli Bank, the joint venture contractor worked for the renewal or extension of the Performance
Bond and Advance Payment Guarantee. Petitioner's Letters of Guarantee Nos. 81-194-F
(Performance Bond) and 81-195-F (Advance Payment Bond) with expiry date of 25 November 1982
were then renewed or extended to 9 February 1983 and 9 March 1983, respectively. The surety
bond was also extended for another period of one year, from 12 May 1982 to 12 May 1983. The
Performance Bond was further extended twelve times with validity of up to 8 December 1986, while
the Advance Payment Guarantee was extended three times more up to 24 May 1984 when the
latter was cancelled after full refund or reimbursement by the joint venture contractor. The surety
bond was likewise extended to 8 May 1987.
 As of March 1986, the status of the Project was 51% accomplished, meaning the structures were
already finished. The remaining 47% consisted in electro-mechanical works and the 2%, sanitary
works, which both required importation of equipment and materials.
 October 26, 1986, Al Ahli Bank of Kuwait sent a telex call to the petitioner demanding full payment
of its performance bond counter-guarantee. Upon receiving a copy of that telex message on 27
October 1986, respondent VPECI requested Iraq Trade and Economic Development Minister
Mohammad Fadhi Hussein to recall the telex call on the performance guarantee for being a drastic
action in contravention of its mutual agreement with the latter that (1) the imposition of penalty
would be held in abeyance until the completion of the project; and (2) the time extension would be
open, depending on the developments on the negotiations for a foreign loan to finance the
completion of the project. It also wrote SOB protesting the call for lack of factual or legal basis,
since the failure to complete the Project was due to (1) the Iraqi government's lack of foreign
exchange with which to pay its (VPECI's) accomplishments and (2) SOB's noncompliance for the
past several years with the provision in the contract that 75% of the billings would be paid in US
dollars.
 Subsequently, or on 19 November 1986, respondent VPECI advised the petitioner not to pay
yet Al Ahli Bank because efforts were being exerted for the amicable settlement of the
Project.
 14 April 1987, the petitioner received another telex message from Al Ahli Bank stating that it had
already paid to Rafidain Bank the sum of US$876,564 under its letter of guarantee, and demanding
reimbursement by the petitioner of what it paid to the latter bank plus interest thereon and related
expenses.
 Both petitioner Philguarantee and respondent VPECI sought the assistance of some government
agencies of the Philippines. On 10 August 1987, VPECI requested the Central Bank to hold in
abeyance the payment by the petitioner "to allow the diplomatic machinery to take its course, for
 otherwise, the Philippine government , through the Philguarantee and the Central Bank, would
become instruments of the Iraqi Government in consummating a clear act of injustice and inequity
committed against a Filipino contractor."
 27 August 1987, the Central Bank authorized the remittance for its account of the amount of
US$876,564 (equivalent to ID271, 808/610) to Al Ahli Bank representing full payment of the
performance counter-guarantee for VPECI's project in Iraq.
 6 November 1987, Philguarantee informed VPECI that it would remit US$876,564 to Al Ahli Bank,
and reiterated the joint and solidary obligation of the respondents to reimburse the petitioner for the
advances made on its counter-guarantee.
o The petitioner thus paid the amount of US$876,564 to Al Ahli Bank of Kuwait on 21 January
1988. Then, on 6 May 1988, the petitioner paid to Al Ahli Bank of Kuwait US$59,129.83
representing interest and penalty charges demanded by the latter bank.
 19 June 1991, the petitioner sent to the respondents separate letters demanding full payment of
the amount of P47,872,373.98 plus accruing interest, penalty charges, and 10% attorney's fees
pursuant to their joint and solidary obligations under the deed of undertaking and surety bond.
When the respondents failed to pay, the petitioner filed on 9 July 1991 a civil case for collection of
a sum of money against the respondents before the RTC Makati.

RTC Decision
 Ruled against Philguarantee
 Held that the latter had no valid cause of action against the respondents.
 It opined that at the time the call was made on the guarantee which was executed for a specific
period, the guarantee had already lapsed or expired. There was no valid renewal or extension of
the guarantee for failure of the petitioner to secure respondents' express consent thereto.
 Also found that the joint venture contractor incurred no delay in the execution of the Project.
Considering the Project owner's violations of the contract which rendered impossible the joint
venture contractor's performance of its undertaking, no valid call on the guarantee could be made.
 Furthermore, the trial court held that no valid notice was first made by the Project owner SOB to
the joint venture contractor before the call on the guarantee.

CA Decision
 CA affirmed the trial court's decision:
o First, appellant cannot deny the fact that it was fully aware of the status of project
implementation as well as the problems besetting the contractors, between 1982 to 1985,
having sent some of its people to Baghdad during that period. The successive
renewals/extensions of the guarantees in fact, was prompted by delays, not solely
attributable to the contractors, and such extension understandably allowed by the SOB
(project owner) which had not anyway complied with its contractual commitment to tender
75% of payment in US Dollars, and which still retained overdue amounts collectible by
VPECI.
o Second, appellant was very much aware of the violations committed by the SOB of its
contractual undertakings with VPECI, principally, the payment of foreign currency (US$)
for 75% of the total contract price, as well as of the complications and injustice that will
result from its payment of the full amount of the performance guarantee, as evident in
PHILGUARANTEE's letter dated 13 May 1987 ….
o Third, appellant was fully aware that SOB was in fact still obligated to the Joint Venture
and there was still an amount collectible from and still being retained by the project owner,
which amount can be set-off with the sum covered by the performance guarantee.
o Fourth, well-apprised of the above conditions obtaining at the Project site and cognizant
of the war situation at the time in Iraq, appellant, though earlier has made representations
with the SOB regarding a possible amicable termination of the Project as suggested by
VPECI, made a complete turn-around and insisted on acting in favor of the unjustified "call"
by the foreign banks.
 Hence, this petition
Issue #1: WON the contract was a guaranty?
Ruling #1: Guaranty.

Petitioner’s assertion
 The petitioner asserts that since the guarantee it issued was absolute, unconditional, and
irrevocable the nature and extent of its liability are analogous to those of suretyship. Its liability
accrued upon the failure of the respondents to finish the construction of the Institute of Physical
Therapy Buildings in Baghdad.

Guaranty and Suretyship

 By guaranty a person, called the guarantor, binds himself to the creditor to fulfill the obligation of
the principal debtor in case the latter should fail to do so.
 If a person binds himself solidarily with the principal debtor, the contract is called suretyship.
 Strictly speaking, guaranty and surety are nearly related, and many of the principles are common
to both. In both contracts, there is a promise to answer for the debt or default of another. However,
in this jurisdiction, they may be distinguished thus:
o 1. A surety is usually bound with his principal by the same instrument executed at the same
time and on the same consideration. On the other hand, the contract of guaranty is the
guarantor's own separate undertaking often supported by a consideration separate from
that supporting the contract of the principal; the original contract of his principal is not his
contract.
o 2. A surety assumes liability as a regular party to the undertaking; while the liability of a
guarantor is conditional depending on the failure of the primary debtor to pay the obligation.
o 3. The obligation of a surety is primary, while that of a guarantor is secondary.
o 4. A surety is an original promissor and debtor from the beginning, while a guarantor is
charged on his own undertaking.
o 5. A surety is, ordinarily, held to know every default of his principal; whereas a guarantor
is not bound to take notice of the non-performance of his principal.
o 6. Usually, a surety will not be discharged either by the mere indulgence of the creditor to
the principal or by want of notice of the default of the principal, no matter how much he
may be injured thereby. A guarantor is often discharged by the mere indulgence of the
creditor to the principal, and is usually not liable unless notified of the default of the
principal.

 In determining petitioner's status, it is necessary to read Letter of Guarantee No. 81-194-F, which
provides in part as follows:
o In consideration of your issuing the above performance guarantee/counter-guarantee, we
hereby unconditionally and irrevocably guarantee, under our Ref. No. LG-81-194 F to pay
you on your first written or telex demand Iraq Dinars Two Hundred Seventy One Thousand
Eight Hundred Eight and fils six hundred ten (ID271,808/610) representing 100% of the
performance bond required of V.P. EUSEBIO for the construction of the Physical Therapy
Institute, Phase II, Baghdad, Iraq, plus interest and other incidental expenses related
thereto.
o In the event of default by V.P. EUSEBIO, we shall pay you 100% of the obligation
unpaid but in no case shall such amount exceed Iraq Dinars (ID) 271,808/610 plus interest
and other incidental expenses…. (Emphasis supplied)
 Guided by the abovementioned distinctions between a surety and a guaranty, as well as the factual
milieu of this case, we find that the Court of Appeals and the trial court were correct in ruling
that the petitioner is a guarantor and not a surety. That the guarantee issued by the petitioner
is unconditional and irrevocable does not make the petitioner a surety.
 As a guaranty, it is still characterized by its subsidiary and conditional quality because it does not
take effect until the fulfillment of the condition, namely, that the principal obligor should fail in his
obligation at the time and in the form he bound himself. In other words, an unconditional guarantee
is still subject to the condition that the principal debtor should default in his obligation first before
resort to the guarantor could be had.
  A conditional guaranty, as opposed to an unconditional guaranty, is one which depends upon some
extraneous event, beyond the mere default of the principal, and generally upon notice of the
principal's default and reasonable diligence in exhausting proper remedies against the principal.
 It appearing that Letter of Guarantee No. 81-194-F merely stated that in the event of default by
respondent VPECI the petitioner shall pay, the obligation assumed by the petitioner was simply
that of an unconditional guaranty, not conditional guaranty. But as earlier ruled the fact that
petitioner's guaranty is unconditional does not make it a surety. Besides, surety is never presumed.
A party should not be considered a surety where the contract itself stipulates that he is acting only
as a guarantor. It is only when the guarantor binds himself solidarily with the principal debtor that
the contract becomes one of suretyship.

Issue #2: Whether the respondent contractor has defaulted in its obligations that would justify resort to the
guaranty?
Ruling #2: NO. The delay or the non-completion of the Project was caused by factors not imputable to the
respondent contractor. It was rather due mainly to the persistent violations by SOB of the terms and
conditions of the contract, particularly its failure to pay 75% of the accomplished work in US Dollars.

 This is a mixed question of fact and law that is better addressed by the lower courts, since this
Court is not a trier of facts. The trial court and the CA were in unison that the respondent contractor
cannot be considered to have defaulted in its obligations because the cause of the delay was not
primarily attributable to it.

What law should be applied

 A corollary issue is what law should be applied in determining whether the respondent contractor
has defaulted in the performance of its obligations under the service contract. The question of
whether there is a breach of an agreement, which includes default or mora, pertains to the essential
or intrinsic validity of a contract.
 The rule followed by most legal systems, however, is that the intrinsic validity of a contract must be
governed by the lex contractus or "proper law of the contract." This is the law voluntarily agreed
upon by the parties (the lex loci voluntatis) or the law intended by them either expressly or implicitly
(the lex loci intentionis). The law selected may be implied from such factors as substantial
connection with the transaction, or the nationality or domicile of the parties. Philippine courts would
do well to adopt the first and most basic rule in most legal systems, namely, to allow the parties to
select the law applicable to their contract, subject to the limitation that it is not against the law,
morals, or public policy of the forum and that the chosen law must bear a substantive relationship
to the transaction.

 It must be noted that the service contract between SOB and VPECI contains no express choice of
the law that would govern it. In the United States and Europe, the two rules that now seem to have
emerged as "kings of the hill" are (1) the parties may choose the governing law; and (2) in the
absence of such a choice, the applicable law is that of the State that "has the most significant
relationship to the transaction and the parties." Another authority proposed that all matters relating
to the time, place, and manner of performance and valid excuses for non-performance are
determined by the law of the place of performance or lex loci solutionis, which is useful because it
is undoubtedly always connected to the contract in a significant way.
 In this case, the laws of Iraq bear substantial connection to the transaction, since one of the parties
is the Iraqi Government and the place of performance is in Iraq.
 Hence, the issue of whether respondent VPECI defaulted in its obligations may be determined by
the laws of Iraq. However, since that foreign law was not properly pleaded or proved, the
presumption of identity or similarity, otherwise known as the processual presumption, comes into
play. Where foreign law is not pleaded or, even if pleaded, is not proved, the presumption is that
foreign law is the same as ours.
 Our law, specifically Article 1169, last paragraph, of the Civil Code, provides: "In reciprocal
obligations, neither party incurs in delay if the other party does not comply or is not ready to comply
in a proper manner with what is incumbent upon him." Default or mora on the part of the debtor is
 the delay in the fulfillment of the prestation by reason of a cause imputable to the former. It is the
non-fulfillment of an obligation with respect to time.

 It is undisputed that only 51.7% of the total work had been accomplished. The 48.3% unfinished
portion consisted in the purchase and installation of electro-mechanical equipment and materials,
which were available from foreign suppliers, thus requiring US Dollars for their importation. The
monthly billings and payments made by SOB reveal that the agreement between the parties was a
periodic payment by the Project owner to the contractor depending on the percentage of
accomplishment within the period. The payments were, in turn, to be used by the contractor to
finance the subsequent phase of the work. However, as explained by VPECI in its letter to the DFA,
the payment by SOB purely in Dinars adversely affected the completion of the project

 As found by both the CA and the trial court, the delay or the non-completion of the Project was
caused by factors not imputable to the respondent contractor. It was rather due mainly to the
persistent violations by SOB of the terms and conditions of the contract, particularly its failure to
pay 75% of the accomplished work in US Dollars. Indeed, where one of the parties to a contract
does not perform in a proper manner the prestation which he is bound to perform under the contract,
he is not entitled to demand the performance of the other party. A party does not incur in delay if
the other party fails to perform the obligation incumbent upon him.

 The petitioner maintains that the payments by SOB of the monthly billings in purely Iraqi Dinars did
not render impossible the performance of the Project by VPECI. Such posture is quite contrary to
its previous representations. In his 26 March 1987 letter to the Office of the Middle Eastern and
African Affairs (OMEAA), DFA, petitioner's Executive Vice-President Jesus M. Tañedo stated that
while VPECI had taken every possible measure to complete the Project, the war situation in Iraq,
particularly the lack of foreign exchange, was proving to be a great obstacle; thus:
o VPECI has taken every possible measure for the completion of the project but the war
situation in Iraq particularly the lack of foreign exchange is proving to be a great obstacle.
Our performance counter-guarantee was called last 26 October 1986 when the
negotiations for a foreign currency loan with the Italian government through Banco de
Roma bogged down following news report that Iraq has defaulted in its obligation with
major European banks. Unless the situation in Iraq is improved as to allay the bank's
apprehension, there is no assurance that the project will ever be completed.

 In order that the debtor may be in default it is necessary that the following requisites be present:
o (1) that the obligation be demandable and already liquidated;
o (2) that the debtor delays performance; and
o (3) that the creditor requires the performance because it must appear that the tolerance or
benevolence of the creditor must have ended.

 As stated earlier, SOB cannot yet demand complete performance from VPECI because it has not
yet itself performed its obligation in a proper manner, particularly the payment of the 75% of the
cost of the Project in US Dollars. The VPECI cannot yet be said to have incurred in delay. Even
assuming that there was delay and that the delay was attributable to VPECI, still the effects of that
delay ceased upon the renunciation by the creditor, SOB, which could be implied when the latter
granted several extensions of time to the former. Besides, no demand has yet been made by SOB
against the respondent contractor.
 Demand is generally necessary even if a period has been fixed in the obligation. And default
generally begins from the moment the creditor demands judicially or extra-judicially the
performance of the obligation. Without such demand, the effects of default will not arise.

 Moreover, the petitioner as a guarantor is entitled to the benefit of excussion, that is, it cannot be
compelled to pay the creditor SOB unless the property of the debtor VPECI has been exhausted
and all legal remedies against the said debtor have been resorted to by the creditor. It could also
set up compensation as regards what the creditor SOB may owe the principal debtor VPECI. In
 this case, however, the petitioner has clearly waived these rights and remedies by making the
payment of an obligation that was yet to be shown to be rightfully due the creditor and demandable
of the principal debtor.
 As found by the CA, the petitioner fully knew that the joint venture contractor had collectibles from
SOB which could be set off with the amount covered by the performance guarantee. In February
1987, the OMEAA transmitted to the petitioner a copy of a telex dated 10 February 1987 of the
Philippine Ambassador in Baghdad, Iraq, informing it of the note verbale sent by the Iraqi Ministry
of Foreign Affairs stating that the past due obligations of the joint venture contractor from the
petitioner would "be deducted from the dues of the two contractors."
 Also, in the project situationer attached to the letter to the OMEAA dated 26 March 1987, the
petitioner raised as among the arguments to be presented in support of the cancellation of the
counter-guarantee the fact that the amount of ID281,414/066 retained by SOB from the Project was
more than enough to cover the counter-guarantee of ID271,808/610; thus:
o 6.1 Present the following arguments in cancelling the counter-guarantee:
 · The Iraqi Government does not have the foreign exchange to fulfill its contractual
obligations of paying 75% of progress billings in US dollars. …
 · It could also be argued that the amount of ID281,414/066 retained by SOB from
the proposed project is more than the amount of the outstanding
counterguarantee.65

 In a nutshell, since the petitioner was aware of the contractor's outstanding receivables from SOB, it
should have set up compensation as was proposed in its project situationer.
 Moreover, the petitioner was very much aware of the predicament of the respondents. In fact, in its 13
May 1987 letter to the OMEAA, DFA, Manila, it stated:
o VPECI also maintains that the delay in the completion of the project was mainly due to SOB's
violation of contract terms and as such, call on the guarantee has no basis.
o While PHILGUARANTEE is prepared to honor its commitment under the guarantee,
PHILGUARANTEE does not want to be an instrument in any case of inequity committed against
a Filipino contractor. It is for this reason that we are constrained to seek your assistance not
only in ascertaining the veracity of Al Ahli Bank's claim that it has paid Rafidain Bank but
possibly averting such an event. As any payment effected by the banks will complicate matters,
we cannot help underscore the urgency of VPECI's bid for government intervention for the
amicable termination of the contract and release of the performance guarantee.
 But surprisingly, though fully cognizant of SOB's violations of the service contract and VPECI's
outstanding receivables from SOB, as well as the situation obtaining in the Project site compounded
by the Iran-Iraq war, the petitioner opted to pay the second layer guarantor not only the full amount of
the performance bond counter-guarantee but also interests and penalty charges.

Issue #3: May the petitioner as a guarantor secure reimbursement from the respondents for what it has
paid under Letter of Guarantee No. 81-194-F?
Ruling #3: NO.

 As a rule, a guarantor who pays for a debtor should be indemnified by the latter and would be legally
subrogated to the rights which the creditor has against the debtor. However, a person who makes
payment without the knowledge or against the will of the debtor has the right to recover only insofar as
the payment has been beneficial to the debtor. If the obligation was subject to defenses on the part of
the debtor, the same defenses which could have been set up against the creditor can be set up against
the paying guarantor.
 From the findings of the CA and the trial court, it is clear that the payment made by the petitioner
guarantor did not in any way benefit the principal debtor, given the project status and the conditions
obtaining at the Project site at that time.
 Moreover, the respondent contractor was found to have valid defenses against SOB, which are fully
supported by evidence and which have been meritoriously set up against the paying guarantor, the
petitioner in this case. And even if the deed of undertaking and the surety bond secured petitioner's
guaranty, the petitioner is precluded from enforcing the same by reason of the petitioner's undue
 payment on the guaranty. Rights under the deed of undertaking and the surety bond do not arise
because these contracts depend on the validity of the enforcement of the guaranty.
 The petitioner guarantor should have waited for the natural course of guaranty: the debtor VPECI
should have, in the first place, defaulted in its obligation and that the creditor SOB should have first
made a demand from the principal debtor.
 It is only when the debtor does not or cannot pay, in whole or in part, that the guarantor should pay.
When the petitioner guarantor in this case paid against the will of the debtor VPECI, the debtor VPECI
may set up against it defenses available against the creditor SOB at the time of payment. This is the
hard lesson that the petitioner must learn.
 As the government arm in pursuing its objective of providing "the necessary support and assistance in
order to enable … [Filipino exporters and contractors to operate viably under the prevailing economic
and business conditions," the petitioner should have exercised prudence and caution under the
circumstances.
 As aptly put by the Court of Appeals, it would be the height of inequity to allow the petitioner to pass on
its losses to the Filipino contractor VPECI which had sternly warned against paying the Al Ahli Bank
and constantly apprised it of the developments in the Project implementation.
 WHEREFORE, the petition for review on certiorari is hereby DENIED for lack of merit, and the decision
of the Court of appeals in CA-G.R. CV No. 39302 is AFFIRMED. No pronouncement as to costs. SO
ORDERED.

22. TUPAZ IV vs.CA (November 18, 2005)

FACTS:

 Petitioners Jose C. Tupaz IV and Petronila C. Tupaz ("petitioners") were Vice-President for
Operations and Vice-President/Treasurer, respectively, of El Oro Engraver Corporation ("El Oro
Corporation"). El Oro Corporation had a contract with the Philippine Army to supply the latter with
"survival bolos."
 To finance the purchase of the raw materials for the survival bolos, petitioners, on behalf of El Oro
Corporation, applied with respondent Bank of the Philippine Islands ("respondent bank") for two
commercial letters of credit.
 The letters of credit were in favor of El Oro Corporation’s suppliers, Tanchaoco Manufacturing
Incorporated ("Tanchaoco Incorporated") and Maresco Rubber and Retreading Corporation
("Maresco Corporation").
 Respondent bank granted petitioners’ application and issued Letter of Credit for ₱564,871.05 to
Tanchaoco Incorporated and Letter of Credit for ₱294,000 to Maresco Corporation.
 Simultaneous with the issuance of the letters of credit, petitioners signed trust receipts in favor of
respondent bank.
 On 30 September 1981, petitioner Jose C. Tupaz IV signed, in his personal capacity, a trust receipt
corresponding to Letter of Credit for ₱564,871.05. Petitioner Jose Tupaz bound himself to sell the
goods covered by the letter of credit and to remit the proceeds to respondent bank, if sold, or to
return the goods, if not sold, on or before 29 December 1981.
 On 9 October 1981, petitioners signed, in their capacities as officers of El Oro Corporation, a trust
receipt corresponding to Letter of Credit for ₱294,000. Petitioners bound themselves to sell the
goods covered by that letter of credit and to remit the proceeds to respondent bank, if sold, or to
return the goods, if not sold, on or before 8 December 1981.
 After Tanchaoco Incorporated and Maresco Corporation delivered the raw materials to El Oro
Corporation, respondent bank paid the former ₱564,871.05 and ₱294,000, respectively.
 Petitioners did not comply with their undertaking under the trust receipts.
 Respondent bank made several demands for payments but El Oro Corporation made partial
payments only.
 On 27 June 1983 and 28 June 1983, respondent bank’s counsel and its representative respectively
sent final demand letters to El Oro Corporation.
  El Oro Corporation replied that it could not fully pay its debt because the Armed Forces of the
Philippines had delayed paying for the survival bolos.
 Respondent bank charged petitioners with estafa under Section 13, Presidential Decree No. 115
("Section 13") or Trust Receipts Law ("PD 115").
 After preliminary investigation, the then Makati Fiscal’s Office found probable cause to indict
petitioners.

RULING OF THE RTC:

 On 16 July 1992, the trial court rendered judgment acquitting petitioners of estafa on reasonable
doubt.
 However, the trial court found petitioners solidarily liable with El Oro Corporation for the balance of
El Oro Corporation’s principal debt under the trust receipts.

RULING OF THE CA:

 Petitioners appealed to the Court of Appeals. Petitioners contended that: (1) their acquittal
"operates to extinguish [their] civil liability" and (2) at any rate, they are not personally liable for El
Oro Corporation’s debts.
 The CA affirmed the trial court’s ruling. The appellate court held:

The trust receipt agreement indicated in clear and unmistakable terms that the accused signed the
same as surety for the corporation and that they bound themselves directly and immediately liable
in the event of default with respect to the obligation under the letters of credit which were made
part of the said agreement, without need of demand.

Even in the application for the letter of credit, it is likewise clear that the undertaking of the accused
is that of a surety as indicated in the following words: "In consideration of your establishing the
commercial letter of credit herein applied for substantially in accordance with the foregoing, the
undersigned Applicant and Surety hereby agree, jointly and severally, to each and all stipulations,
provisions and conditions on the reverse side hereof."

xxx

 Hence, this petition. Petitioners contend that:

ISSUE: Whether petitioners bound themselves personally liable for El Oro Corporation’s debts under the
trust receipts.

RULING: YES but only for the trust receipt dated Sept 30, 1981

the Trust Receipts

 A corporation, being a juridical entity, may act only through its directors, officers, and employees.
Debts incurred by these individuals, acting as such corporate agents, are not theirs but the direct
liability of the corporation they represent.
 As an exception, directors or officers are personally liable for the corporation’s debts only if they so
contractually agree or stipulate.
 Here, the dorsal side of the trust receipts contains the following stipulation:

To the Bank of the Philippine Islands

 In consideration of your releasing to ………………………………… under the terms of this Trust
Receipt the goods described herein, I/We, jointly and severally, agree and promise to pay to you,
on demand, whatever sum or sums of money which you may call upon me/us to pay to you, arising
out of, pertaining to, and/or in any way connected with, this Trust Receipt, in the event of default
and/or non-fulfillment in any respect of this undertaking on the part of the said
……………………………………. I/we further agree that my/our liability in this guarantee shall be
DIRECT AND IMMEDIATE, without any need whatsoever on your part to take any steps or exhaust
any legal remedies that you may have against the said …………………………………. before
making demand upon me/us.14 (Capitalization in the original)

 In the trust receipt, petitioners signed below this clause as officers of El Oro Corporation. Thus,
under petitioner Petronila Tupaz’s signature are the words "Vice-Pres–Treasurer" and under
petitioner Jose Tupaz’s signature are the words "Vice-Pres–Operations."
 By so signing that trust receipt, petitioners did not bind themselves personally liable for El Oro
Corporation’s obligation.
 In Ong v. Court of Appeals, a corporate representative signed a solidary guarantee clause in two
trust receipts in his capacity as corporate representative. There, the Court held that the corporate
representative did not undertake to guarantee personally the payment of the corporation’s debts.
 Hence, for the trust receipt dated 9 October 1981, we sustain petitioners’ claim that they are NOT
personally liable for El Oro Corporation’s obligation.
 For the trust receipt dated 30 September 1981, the dorsal portion of which petitioner Jose Tupaz
signed alone, we find that he did so in his personal capacity.
o Petitioner Jose Tupaz did not indicate that he was signing as El Oro Corporation’s Vice-
President for Operations.
o Hence, petitioner Jose Tupaz bound himself personally liable for El Oro Corporation’s
debts.
o Not being a party to the trust receipt dated 30 September 1981, petitioner Petronila Tupaz
is not liable under such trust receipt.

The Nature of Petitioner Jose Tupaz’s Liability Under the Trust Receipt Dated 30 September 1981

 As stated, the dorsal side of the trust receipt dated 30 September 1981 provides:

To the Bank of the Philippine Islands

In consideration of your releasing to ………………………………… under the terms of this Trust

Receipt the goods described herein, I/We, jointly and severally, agree and promise to pay to you,
on demand, whatever sum or sums of money which you may call upon me/us to pay to you, arising
out of, pertaining to, and/or in any way connected with, this Trust Receipt, in the event of default
and/or non-fulfillment in any respect of this undertaking on the part of the said
……………………………………. I/we further agree that my/our liability in this guarantee shall be
DIRECT AND IMMEDIATE, without any need whatsoever on your part to take any steps or exhaust
any legal remedies that you may have against the said …………………………………………….
Before making demand upon me/us. (Underlining supplied; capitalization in the original)

 The lower courts interpreted this to mean that petitioner Jose Tupaz bound himself solidarily liable
with El Oro Corporation for the latter’s debt under that trust receipt.
 This is error.
 In Prudential Bank v. Intermediate Appellate Court, the Court interpreted a substantially
identical clause in a trust receipt signed by a corporate officer who bound himself personally liable
for the corporation’s obligation. The petitioner in that case contended that the stipulation "we jointly
and severally agree and undertake" rendered the corporate officer solidarily liable with the
corporation. We dismissed this claim and held the corporate officer liable as guarantor only.
 The Court further ruled that had there been more than one signatories to the trust receipt, the
solidary liability would exist between the guarantors. We held:

Petitioner [Prudential Bank] insists that by virtue of the clear wording of the xxx clause "x x
x we jointly and severally agree and undertake x x x," and the concluding sentence on exhaustion,
[respondent] Chi’s liability therein is solidary.

xxx

Under Article 2058 of the Civil Code, the defense of exhaustion (excussion) may be raised
by a guarantor before he may be held liable for the obligation. Petitioner likewise admits that the
questioned provision is a solidary guaranty clause, thereby clearly distinguishing it from a contract
of surety. It, however, described the guaranty as solidary between the guarantors; this would have
been correct if two (2) guarantors had signed it. The clause "we jointly and severally agree and
undertake" refers to the undertaking of the two (2) parties who are to sign it or to the liability existing
between themselves. It does not refer to the undertaking between either one or both of them on
the one hand and the petitioner on the other with respect to the liability described under the trust
receipt. xxx

Furthermore, any doubt as to the import or true intent of the solidary guaranty clause should be
resolved against the petitioner. The trust receipt, together with the questioned solidary guaranty
clause, is on a form drafted and prepared solely by the petitioner; Chi’s participation therein is
limited to the affixing of his signature thereon. It is, therefore, a contract of adhesion; as such, it
must be strictly construed against the party responsible for its preparation. 18(Underlining supplied;
italicization in the original)

 However, respondent bank’s suit against petitioner Jose Tupaz stands despite the Court’s finding
that he is liable as guarantor only.
 First, excussion is not a pre-requisite to secure judgment against a guarantor. The guarantor can
still demand deferment of the execution of the judgment against him until after the assets of the
principal debtor shall have been exhausted.
 Second, the benefit of excussion may be waived.
 Under the trust receipt dated 30 September 1981, petitioner Jose Tupaz waived excussion when
he agreed that his "liability in the guaranty shall be DIRECT AND IMMEDIATE, without any need
whatsoever on xxx the part of respondent bank to take any steps or exhaust any legal remedies
xxx."
 The clear import of this stipulation is that petitioner Jose Tupaz waived the benefit of excussion
under his guarantee.
 As guarantor, petitioner Jose Tupaz is liable for El Oro Corporation’s principal debt and other
accessory liabilities (as stipulated in the trust receipt and as provided by law) under the trust receipt
dated 30 September 1981.
 That trust receipt (and the trust receipt dated 9 October 1981) provided for payment of attorney’s
fees equivalent to 10% of the total amount due and an "interest at the rate of 7% per annum, or at
such other rate as the bank may fix, from the date due until paid xxx." In the applications for the
letters of credit, the parties stipulated that drafts drawn under the letters of credit are subject to
interest at the rate of 18% per annum.
 The lower courts correctly applied the 18% interest rate per annum considering that the face value
of each of the trust receipts is based on the drafts drawn under the letters of credit.
 Petitioners raise for the first time in this appeal the contention that El Oro Corporation’s debts under
the trust receipts are not yet due and demandable. These assertions have no merit. Under the
terms of the trust receipts dated 30 September 1981 and 9 October 1981, El Oro Corporation’s
debts fell due on 29 December 1981 and 8 December 1981, respectively.
DISPOSITION: WHEREFORE, we GRANT the petition in part. We AFFIRM the Decision of the Court of
Appeals dated 7 September 2000 and its Resolution dated 18 October 2000 with the
following MODIFICATIONS:

2) Petitioner Jose C. Tupaz IV is liable for El Oro Engraver Corporation’s total debt under the trust receipt
dated 30 September 1981 as thus computed by the Regional Trial Court, Makati, Branch 144

23. Araneta and Uy vs. Commonwealth Ins. Co., et al.

G.R. No. L-11584. April 28, 1958
REYES, J. B. L., J.:

FACTS:
 Defendant-appellee Commonwealth Insurance Co. is a domestic corporation engaged in the
insurance and bonding business.
 On April 2, 1949, said corporation issued a shipments of scrap steel on said vessel, and a surety
bond, with appellants Manuel Araneta and Jose L. Uy as principals and the corporation as surety,
in favor of the De la Rama Steamship Co., Inc., to secure the payment, within twenty days from
the departure of the vessel S.S. "Doña Aurora" from Manila to Formosa on April 12, 1949, of the
balance due on the freight of certain amount not exceeding P20,000.
 Plaintiffs-appellants Araneta and Uy in turn executed, together with Messrs. Cathay Co. and Ang
Lam and Sons Co., an indemnity agreement in favor of the appellee corporation binding
themselves to indemnify the latter for any such sums as, it might be made to pay to the De la
Rama Steamship Co. under the aforementioned surety bond.
 Plaintiffs-appellants Araneta and Uy failed to pay the balance of the freight charges due on the
shipment in question, and upon demand by the De la Rama Steamship Co., the appellee
corporation paid to it the sum of P15,000 on May 1, 1949.
 After such payment, the guarantors Cathay Co. and Ang Lam and Sons Co. reimbursed or
indemnified the appellee corporation the sum of P12,000, on condition, however, that both
Cathay Co. and Ang Lam and Sons Co., would not be liable anymore for the payment of the
uncollected balance of P3,000.
 Having thus released the guarantors from the balance of its credit of P3,000, the appellee
corporation filed suit against appellants Manuel Araneta and Jose L. Uy for the payment of the
uncollected balance of P3,000 (Civil Case No. 12276 of the Court of First Instance of Manila).
 After trial, the court, through Judge Bienvenido A. Tan, rendered judgment in favor of the plaintiff
corporation and against defendants Araneta and Uy, "ordering said defendants to pay jointly and
severally to plaintiff the sum of P3,000 plus P600 as attorney's fees, and the costs".
 Defendants Araneta and Uy did not appeal from this judgment.
 Instead, filed a special civil action in the Court of Appeals for the issuance of a writ of certiorari to
annul the judgment (C.A.-G.R. No. 1144-R).
o The said action was, however, dismissed by the appellate court on the ground that
appeal was the proper remedy.
 The judgment in Civil Case No. 12276, therefore, became final and executory and on July 23,
1954, the court, with Judge Edilberto Barot presiding, issued a writ of execution.
 To restrain the execution, defendants Araneta and Uy filed on July 21, 1955 the present
complaint for injunction, also in the Court of First Instance of Manila, alleging that the decision of
Judge Bienvenido A. Tan in Civil Case, No. 12276 is a nullity and asking that execution thereof
be enjoined.
 After trial, the court below, presided over by Judge Bonifacio Isip, dismissed the complaint
injunction on the ground of res judicata, from which dismissal plaintiffs Araneta and Uy appealed
to this court.


ISSUE: Whether or not the decision rendered by Judge Tan was binding?
RULING:
 Yes, the decision rendered by Judge Tan was binding.
  Under Art. 2078 of the Civil Code, a release made by the creditor in favor of one of the
guarantors, without the consent of the others, benefits all the extent of the share of the guarantor
to whom it has been granted.
 This supposed error attributed to Judge Tan is not an error of jurisdiction, but, if at all, an error of
judgement (because appellants were the principal debtors whose obligation was guaranteed by
the Commonwealth Insurance Co., and were liable to it by virtue of its payment to the creditor) or
of such application of the law.
 Not being jurisdictional, such an error, even if committed, does not render the decision in
Civil Case No. 12276 void.
 Where the court has jurisdiction, over the parties and the subject-matter, and the court commits
the error of judgment in the exercise of its jurisdiction, said errors are mere errors of judgment,
correctible and reviewable only by appeal, and if no appeal is taken, the decision, erroneous or
not, becomes final and executory, and is valid and binding upon the parties (Vicente vs. Lucas,
95 Phil., 716; Daquis vs. Bustos, 94 Phil., 913; 50 Off. Gaz. No. 5, 1964).
 There is no question that Judge Tan had jurisdiction over the parties and the subject-matter in
Civil Case No. 12276.
 If appellants had believe that his judgment therein was erroneous, they should have sought its
review by appeal.
 Appellants did not appeal from the decision, hence it became final and executory, and is now fully
binding upon them.
 At the present stage, therefore, it is already too late to have said judgment corrected and
modified.
 As the lower court correctly held, appellants' present complaint is barred by res judicata.

ISSUE: Whether or not a court can issue an injunction over the decision issued by a judge of
another court?
RULING:
 No, this is contrary to the doctrine of coordinate jurisdiction.
 In the first place, Judge Isip of the lower court did well in refusing to enjoin a writ of execution
issued by a judge of another branch of the same court.
 "It is settled by an overwhelming weight of authority that no court has power to interfere by
injunction with the judgments or decree of a court of concurrent or coordinate jurisdiction having
equal power to grant the relief sought by injunction. . . .
 The various branches of the Court of First Instance of Manila are in a sense coordinate courts
and to allow them to interfere with each other's judgments or decrees by injunctions would
obviously lead to confusion and might seriously hinder the administration of justice."
(Cabigao vs. Del Rosario, 44 Phil., 182; See also Philippine National Bank vs. Javellana, 92 Phil.,
525; 49 Off. Gaz., 124; Montesa vs. Manila Cordage Company, 92 Phil., 25; 48 Off. Gaz., [9],
3063; Ongsingco vs. Hon. Bienvenido A. Tan, 97 Phil., 330).

DISPOSITIVE PORTION: The decision appealed from is, therefore affirmed, and the present appeal
dismissed, with costs against appellants Manuel Araneta and Jose L. Uy. So ordered.

24. ENRIQUE F. SOMES, plaintiff-appellant, vs. RAFAEL MOLINA Y SALVADOR, ET

AL., defendants-appellees. G.R. No. L-4149 January 20, 1908

Facts:
 This is an action which was commenced in the CFI of Manila by virtue of a complaint filed on April
26, 1907, by the plaintiff, Enrique F. Somes, against Rafael Molina y Salvador, Aniceto Ruiz,
Antonio de la Riva, and other defendants, case No. 5448
 By virtue of a written contract, dated Manila, July 27, 1903, Antonio de la Riva became debtor in
the sum of $134,636.12, Mexican currency, the price agreed upon for the purchase of certain
business in the Island of Catanduanes, belonging to Rafael Molina. This amount was to be paid in
installments.
 On or about the month of January, 1905, Molina filed a complaint in the CFI of the city of Manila
against De la Riva for the recovery of the sum of P33,659.03, one of the installments, which action
was registered under No. 3402, and later was brought to this court under No. 2721.
 On approval of the bill of exceptions in the said case by the lower court, in order to suspend the
execution of the sentence of the said court, the defendant Antonio de la Riva, perfected a bond,
which was signed by De la Riva as principal and Enrique Somes and Roberto Spalding, jointly, as
sureties for the sum of P35,000.

 22nd of March, 1906, this court rendered its decision in the said case No. 3402 of the court below
(No. 2721 of the Supreme Court) affirming the sentence appealed from and the case was
remanded to the lower court.
o In the said court the plaintiff, Molina, asked that execution be issued against the said
defendant, De la Riva, which execution was returned by the sheriff with the statement that
no property belonging to the defendant, De la Riva, could be found within his jurisdiction.
The plaintiff then asked the lower court for an alias execution against the sureties, Enrique
Somes and Roberto Spalding, and these persons were cited to appear and show cause
why such execution should not issue against them upon their obligation upon the said
bond.
o These sureties alleged that the debtor, De la Riva, had property to the value of more than
P200,000 in the Island of Catanduanes, but it appeared that such property was in the hands
of a receiver duly appointed, and the lower court therefore issued the order of execution
against the said sureties. From this order they appealed to this court.
 The registered number of that case is 3412 in this court. This court decided that appeal (January
19, 1907) affirming the order of the court below and the case was returned to the said lower court,
ordering the execution of the former judgment of this court in case No. 3402 (No. 2721 of this court).
 At the same time this court affirmed another judgment in favor of Molina and against De la Riva
(No. 3829 of the court below and No. 3097 of this court, 5 Off. Gaz., 102) and in this last decision
of the Supreme Court the appointment of the said receiver of the property belonging to De la Riva
was declared null and void.
 Those cases having been returned to the court below, Molina asked for an execution against the
sureties of Dela Riva and these sureties appeared before the court and asked that the execution
be directed against the property of the debtor, for the reason that this court had already declared
null the appointment of the receiver of the property of the said debtor.
 After various orders had been issued by the court below, the court ordered execution against the
sureties.
 By virtue of the said order of execution, the property of the surety, Enrique Somes, was attached
and notice of the public sale of the same was given, which sale was had on the 19th of April, 1907,
said property being sold to the creditor Molina for the amount of his claim against De la Riva and
in satisfaction of the judgment in the said case No. 3402 of the court below (No. 2721 of this court.)
 One of the sureties, Somes, attempted to have suspended the said execution because of
exemption from responsibility as a surety in accordance with article 1852 [Civil Code] which was
denied by the lower court. From this order the said Somes attempted to appeal, but the lower court
refused to certify the bill of exceptions presented by the said surety, wherefore the said surety then
brought an action in this court praying that a mandamus issue (No. 3965 of this court) and in these
proceedings also prayed that a preliminary injunction be issued, which last prayer was denied.
Subsequently this court also held that there were no grounds for the issuance of a writ
of mandamus.

 Six days after the sale of the property of the said surety, Somes, to the creditor, Molina, in
satisfaction of his judgment against the said de la Riva, the said surety, Somes, filed in the CFI of
Manila a sworn complaint or petition (No. 5448 of the court below) in which was asked the following
relief:
o 1. That the court adjudge, decree, and decide that this plaintiff has the right of preference
to levy upon the property of Antonio de la Riva and to be paid from the said property, or
 the value of the same, the sum of P33,978.70, and costs and expenses, in view of the right
of subrogation derived by the judgment rendered in case No. 3402. (No. 2721 of this court.)
o 2. That the court in issue an injunction against all and each of the defendants, restraining
from executing or performing any act in connection to the judgment or parts thereof
rendered in the cases numbered 2944, 3829, 3863, and 4766, prior to the execution of the
judgment rendered in the case numbered 3402, herein referred to, and prohibiting them in
the conclusion from excluding, depriving or dispossessing the plaintiff of his right of
preference in accordance with the law as a preferred judgment credible in relation to the
property the subject of the execution which they are now selling or attempting to convert
into money.
o 3. That for the protection and security of the rights of the plaintiff and for the reasons herein
stated, the court, pending the proceedings in this case, issue a preliminary injunction
against all and each of the defendants, restraining them from performing any act, as prayed
for in the preceding paragraph, and that notice of such restraining order or preliminary
injunction be communicated as quickly as possible to the defendant, the sheriff of Albay,
as sheriff, and his deputies.
o 4. The plaintiff asks for any other just and equitable remedy, and for any speedy and
adequate protection of his rights.
 On the 9th day of May, the court below denied the petition for an injunction in the above complaint
and ordered instead —
o That the proceeds of the sale by virtue of the executions now pending in this court, and in
the possession of the sheriff of the Province of Albay, be deposited in the office of the clerk
of this court, subject to the order of said court, upon the execution by the plaintiff of a bond
for the sum of P10,000, to be approved by that court, as security for the payment of
whatever damage may arise from failure to apply the proceeds of said sale to the payments
of the above-mentioned executions.

 This order of the court below gave rise to a complaint brought by E. Somes against the judge asking
for a writ of certiorari. In said complaint (No. 4052 of this court) the petitioner asked and obtained
an injunction for the suspension of the sale of the property of the debtor, De la Riva, but later in
this injunction was dissolved and the petition for a writ of certiorari was denied (No. 4052).

 About the 25th of May, 1907, the attorneys for Rafael Molina, and Messrs. Rosado, Sanz & Opisso,
representing the other defendant, Aniceto Ruiz filed demurrers to the above-mentioned complaint
of E. F. Somes (No. 5448 of the court below).
 The grounds upon which the first of said demurrers is based are:
o That the complaint does not state fact sufficient to constitute a cause of action against the
defendant Molina;
o that the complaint in this case is mostly conclusions of law, and that the allegations of facts
set forth is said complaint do not justify the remedy prayed for by the plaintiff, but on the
contrary show by themselves that the complaint should be dismissed
o And that in the second demurrer the complaint does not contain facts sufficient to constitute
a cause of action
 The court, after hearing both parties, sustained the demurrers against which orders the plaintiff
excepted.
 The plaintiff then filed a motion asking the court below to amend its order on the ground therein
stated. This motion was denied, the plaintiff taking an exception, and the complaint not having been
amended, the court afterwards made the following order:
o The demurrers filed by the defendants in the above-entitled case have been sustained,
and the plaintiff in a written statement dated June 12, 1907, informed the court of his
intention not to amend his complaint.
o The remedies prayed for by plaintiff in his complaint are therefore denied, and the costs
are adjudged to the defendants and against the plaintiff. After the costs have been taxed,
the clerk will issue the necessary execution at the request of any of the defendants. So
ordered.
  And finally on June 22, 1907, the court below allowed the bill of exceptions by means of which the
case was sent up to this court and registered under the number of 4149.
 On the 3rd day of August, 1907, the plaintiff filed in this court a sworn petition asking that the same
be considered as a part of the original complaint, and that for the reasons therein set forth and
those stated in the original complaint, the court issue an order for a preliminary injunction, pending
the action against all and each of the defendants, restraining them from carrying out or performing
any act which may tend to execute the judgments rendered in cases numbered 3944, 3829, 3963,
and 4766, before the execution of that entered in the case No. 3402, which order for an injunction
was issued by this court on the same day and is at present in force, this court having denied the
motion of the defendants Molina and Ruiz to set aside said injunction (October 10, 1907).

 The question brought before this court now by the said complaint is, whether or not the complaint
filed in said case No. 5448 of the court below contains facts sufficient to constitute a cause of action
against the defendants:

Issue: WON plaintiff is the surety of Dela Riva and thus entitled to be subrogated to the rights of the
Creditor?
Ruling: Yes.

 From this complaint it is clear that the following facts are alleged:
o First. That Antonio de la Riva was the debtor of Rafael Molina y Salvador in the sum of
P33,659.03.
o Second. That Enrique Somes was a surety on a bond for the payment of the said debt.
o Third. That as such surety Enrique F. Somes was compelled to pay the said debt between
the said Molina and De la Riva.

 The claim of the plaintiff is that, by virtue of having paid the debt of De la Riva to the said Molina,
he is entitled to be subrogated to the rights of the said Molina against the said De la Riva, and to
support this claim the plaintiff calls our attention to the provisions of Section II of Chapter II of Title
XIV of the Civil Code, and especially to article 1839 of said Section II. Article 1839 provides:
o By virtue of such payment (by the surety) the surety is subrogated in all the rights which
the creditor had against the debtor.
 The doctrine established by this article and one contended for the plaintiff is not new. It has been
thoroughly established for centuries in both civil and common law. It has been the subject of
discussion by the courts and eminent law writers for many years and so far as we have been able
to find the doctrine has never been doubted or denied.
 In the present case the attorney for the defendant, in the argument of the cause before the court,
admitted that a surety who paid the debt of his principal was entitled to be subrogated to the rights
of the creditor, but denied that the facts in the present complaint were sufficient to entitle the plaintiff
to be subrogated in the present action.
 The law is well established that a surety is entitled to every remedy which the creditor has against
the principal debtor, to enforce every security and all means of payment; to stand in the place of
the creditor, not only through the medium of the contract but even by means of the securities
entered into without the knowledge of the surety; having a right to have those securities transferred
to him, though there was no stipulation for it, and to avail himself of all securities against the debtor.
(Hampton vs. Levy)
 As regards the rights of a surety against his principal, he is plainly entitled to expect, not only that
the principal shall save him from harm by exempting him from payment of the debt, or, if that is
done, by reimbursing him when he has paid it, but, moreover, that the principal shall allow him the
benefit of the means of payment which he has placed in the hands or within the power of the
creditor. (Johnson vs. Young)
 The right of subrogation is not a contractual right. The right of a surety who has paid a debt to
subrogation stands, not upon contract but upon the principles of natural justice.
(Craythorne vs. Sweinburn; Hayers vs. Ward)
 In this latter case Chancellor Kent in discussing this question said, in effect, that a surety who pays
the debt is entitled to be substituted in the place of the creditor as to all the security or means
possessed by the creditor, to enforce payment of the principal debtor.
 Lord Chief Justice Eyre, in the case of Deering vs. Winchelsea said:
o The obligation of sureties is not founded in contract but stands upon a principle of equity.
 The whole doctrine of subrogation as to principal and surety is raised upon the established
principles of equity and not upon contract, except as it may be represented to be made with the
implied knowledge of the existence of those principles.
 The doctrine of subrogation is enforced solely for the purpose of accomplishing the ends of
substantial justice and independent of any contractual relation between the parties. (Memphis, etc.,
Co. vs. Dow)
 In the case of Furnold vs. Bank of State, the supreme court of Missouri said:
o The practice of subrogation or substitution or cession of remedies is borrowed from the
civil law, and, under the guidance of Chancellor Kent, has gone further in this country than
in England. It is a creation of equity and is administered so as to secure real and essential
justice, without regard to form.
 Bispham, in his excellent work on the Principles of Equity, in section 336, says:
o This equity of subrogation is one eminently calculated to do the exact justice between
persons who are bound for the performance of the same duty or obligation, and is one,
therefore, which is much encouraged and protected. This may be seen from the rule which
allows the surety to keep alive a judgment for the purpose of obtaining satisfaction out of
a principal. Ordinarily the payment of a debt operates as its extinguishment and the
payment of a judgment obtained for a debt would necessarily extinguish it. To apply this
rule to the case of a surety paying the debt would obviously work injustice in many
instances; for, coming in as a simple-contract creditor, the surety might lose his chance of
reimbursement. It has, accordingly, been held, and must be considered to be generally
received doctrine, that a surety, who pays a debt which has been reduced to a judgment,
is entitled to have the judgment kept alive for his benefit, and to enjoy, as against the
principal debtor, exactly the same advantages which could have been claimed by the
judgment creditor.
 Sheldon, in his valuable work on Subrogation, at section 11 says:
o . . . The doctrine of subrogation is that one who has been compelled to pay a debt which
ought to have been paid by another is entitled to exercise all the remedies which the
creditor possessed against that other, and to indemnity from the fund out of which should
have been made the payment which he has made. . . . It is a mode which equity adopts to
compel the ultimate discharge of debt by him who in equity and good conscience ought to
pay it, and to relieve him whom only a creditor would ask to pay. Although, as between the
debtor and creditor, the debt may be extinguished, yet as between the person who has
paid the debt and the other parties, the debt is kept alive, so far as may be necessary to
preserve the securities.
 See also Arnold vs. Green, where Judge Vann made the following observation:
o The remedy of subrogation is no longer limited to securities and quasi securities, but
includes so wide a range of subjects that it has been called the "mode which equity adopts
to compel the ultimate payment of a debt by the one who in justice, equity, and good
conscience ought to pay it.
 In the case of Smith vs, National Surety Company, the supreme court of the State of New York
held that a surety on appeal, who has been compelled to pay a judgment, against several
defendants, is entitled to be subrogated to the plaintiff's rights, under a contract with one of them,
made pending the appeal, without the surety's knowledge or consent, binding the said defendant
to pay part of the judgment on the condition of his release therefrom. Where the surety on appeal
has been obliged to pay plaintiff's judgment, the latter can not question the surety's right to be
subrogated to plaintiff's right, under the judgment or any security held against said defendant.
  The surety who pays a judgment after it has been affirmed on appeal will be subrogated to the
rights of the judgment creditor against the lands of the principal in the hands of one who purchased
from the principal, pending the appeal, and will have priority over the assignee of a mortgage given
by such purchaser to secure the purchase money. (Hill vs. King)
 The foregoing doctrine of subrogation is also well established under Spanish jurisprudence. In the
sentence of the supreme court of Spain of the 23d of September, 1865, that court laid down the
following doctrine:
o Credits may be transferred by sale, by cession in payment or by any of the other methods
recognized by the law, without the knowledge of the debtor and even against his will,
inasmuch as the grantor and the grantee only intervene in the contract, and the grantee
being subrogated to the former by virtue of the cession, all the rights and actions belonging
to said grantor are transferred to him with respect to the credit and the bonds and pledges.
 This doctrine of subrogation in no way can be prejudicial to the rights of subsequent creditors. It
simply substitutes the surety of the debtor for that of the creditor and the property which the creditor
might have used in the liquidation of his debt is given for the liquidation of the debt transferred by
subrogation to the surety.

 We are of the opinion and so hold that the facts stated in the complaint show that the plaintiff
herein was the surety of the debtor, De la Riva, and had paid the said debt of such surety,
and is therefore entitled to be subrogated to the rights of the defendant, the said Molina.
 The judgment of the lower court is therefore hereby reversed, without costs to the plaintiff.
 After the expiration of ten days let a judgment be entered in accordance herewith, and after the
expiration of twenty days let the record herein be returned to the lower court with permission to the
defendants to file an answer to the complaint in said cause, within a period of ten days thereafter.
If however, within the period of ten days the defendants do not present an answer in said cause, it
is hereby ordered that the lower court render a final judgment, reversing its former judgment and
ordering that the plaintiff herein be subrogated to the rights of the said Molina in the judgment in
cause No. 2721 of this court, corresponding to the cause No. 3402 of the court below. So ordered.

25. Kuenzle & Streiff vs. Tan Sunco, No. 5208, December 1, 1909

Ponente: Moreland, J.

Plaintiff-appellant: Kuenzle & Streiff

Defendants-appellees: Jose Tan Sunco, et. al. (Tan Sunco)

Nature of the case: This case is an appeal from a judgment of the CFI of Manila.
 An action to set aside four judgments rendered by a justice of the peace of the city of Manila upon
the ground that they were procured by collusion and fraud, to the injury and damage of the plaintiff.

FACTS:
 Tan Sunco was a surety for Chung Chu Sing for the payment by the latter of the purchase price
of certain merchandise purchased by said Chung Chu Sing of Ed. A. Keller & Co.
 The time within which said merchandise was to be paid for under the terms of its purchase had
expired long before said four judgments were obtained, and that the debt remained unpaid
 The total debt was composed of four invoices of varying amounts—P395.50, P450, P565, and
P320.20
 An action had been commenced against the said debtor, Chung Chu Sing, by the present plaintiff
for the recovery of the indebtedness due it
 Shortly before judgment was secured in that action the said Tan Sunco began four separate actions
against the said debtor upon the said invoices in the court of the justice of the peace of the city of
Manila
 Soon thereafter the said Sunco and the said debtor appeared before said court
o The said debtor then and there confessed judgment in favor of said Tan Sunco in each one
of said actions
  Tan Sunco thereby obtaining against the said debtor four separate judgments
 Immediately upon the recovery of said judgments the plaintiff in those actions, Sunco caused to be
levied thereunder executions upon all of the property of said debtor, which property was not more
than sufficient to pay the judgments under which the levies were made
 Thereupon the action at bar was begun and the sales under said executions were enjoined pending
the determination thereof. These are the admitted facts.
 The plaintiff in this action contends that said four judgments ought to be set wholly aside
on account of their having been obtained, as he claims, by collusion and fraud, because the
debtor did not owe anything to Sunco at the time the four judgments were secured, basing
that contention on the fact, which is admitted, that Sunco had not yet paid the sums for
which he had become surety and in connection with which he obtained the judgments.

Assailed decision
 The court, having hearing the evidence offered upon the trial, found against the plaintiff and
rendered a judgment in favor of the defendant dismissing the plaintiff’s complaint, with costs
 The plaintiff did not make a motion for a new trial in the court below and this court can not, therefore,
look into the evidence but must confine itself to the facts stated in the opinion of the court below for
the purpose of ascertaining whether or not the judgment of that court can be sustained.

Re: Right of Surety to obtain judgments against debtor before he has paid the debt; Execution restrained
until debt is paid.

ISSUE: Did the defendant Sunco, as surety, validly availed of his right under Article 1843 of the Civil Code
(now, Article 2071, NCC) against the debtor in this case?

RULING:
 Yes.
 We think that article 1843 of the Civil Code is applicable to this case.
 In their purposes, Articles 1838 (now, Article 2066) and 1843 (now, Article 2071) are quite distinct,
although in perfect harmony, the latter making more clearly effective the purpose of the former.
 Article 1838 provides for the enforcement of the rights of the surety against the debtor after he has
paid the debt.
 Article 1843 provides for his protection before he has paid but after he has become liable to do so.
 The one gives a right of action after payment, the other a protective remedy before payment.
 The one is a substantive right, the other of the nature of a preliminary remedy.
 The one gives a right of action, which, without the provisions of the other, might be worthless.
 The remedy given in article 1843 purposes to obtain for the surety "relief from the burden of his
suretyship or a guaranty to defend him against any proceedings of the creditor and from the danger
of insolvency of the debtor." (Last paragraph of art. 1843)
 Article 1838, speaking strictly, has no such purpose.
 When the surety's rights under this article become available, he is past the point where a
preliminary protective remedy is of any value to him.
 It being evident that the purpose of article 1843 is to give to the surety a remedy in anticipation of
the payment of the debt, which debt, being due, he could be called upon to pay at any time, it
remains only to say, in this connection, that the only procedure known under our present practice
to enforce that right is by action

Application
 In this case, the defendant Sunco availed himself of that right against the debtor
 The methods employed by him to realize his end were unusual but not of themselves fraudulent.
 We agree with the trial court that the evidence adduced is entirely insufficient to establish such
fraud and collusion as would justify a decision setting aside the judgments assailed.
 The facts stated in the opinion of the court below abundantly justify the conclusion.
  But while the surety has the right to obtain as he did the judgments against the principal debtor, he
ought not to be allowed to realize on said judgments to the point of actual collection of the same
until he has satisfied or caused to be satisfied the obligation the payment of which he assures.
 Otherwise, a great opportunity for collusion and improper practices between the surety and his
principal would be offered which might result to the injury and prejudice of the creditor who holds
the claim against them.

Disposition:
 The judgment of the court is affirmed, with costs against the appellant
 But the said Sunco shall not execute said judgments against the property of the judgment debtor
until he has paid the debt for which he stands surety

Notes:

Art. 2066. The guarantor who pays for a debtor must be indemnified by the latter.

The indemnity comprises:

(1) The total amount of the debt;
(2) The legal interests thereon from the time the payment was made known to the debtor, even though
it did not earn interest for the creditor;
(3) The expenses incurred by the guarantor after having notified the debtor that payment had been
demanded of him;
(4) Damages, if they are due. (1838a)

Art. 2071. The guarantor, even before having paid, may proceed against the principal debtor:
(1) When he is sued for the payment;
(2) In case of insolvency of the principal debtor;
(3) When the debtor has bound himself to relieve him from the guaranty within a specified period, and
this period has expired;
(4) When the debt has become demandable, by reason of the expiration of the period for payment;
(5) After the lapse of ten years, when the principal obligation has no fixed period for its maturity, unless
it be of such nature that it cannot be extinguished except within a period longer than ten years;
(6) If there are reasonable grounds to fear that the principal debtor intends to abscond;
(7) If the principal debtor is in imminent danger of becoming insolvent.

In all these cases, the action of the guarantor is to obtain release from the guaranty, or to demand a
security that shall protect him from any proceedings by the creditor and from the danger of insolvency
of the debtor. (1834a)

26. Manila Surety v Almeda

Facts:
 On 4 December 1961, Noemi Almeda, married to Generoso Esquillo, and doing business under
the name and style of Almeda Trading, entered into a contract with the National Marketing
Corporation (NAMARCO) for the purchase of goods on credit, payable in 30 days from the dates
of deliveries thereof.
 As required by' the NAMARCO, a bond for P5,000.00, undertaken by the Manila Surety & Fidelity
Co., Inc. (Exhibit "A"), was posted by the purchaser to secure the latter's faithful compliance with
the terms of the contract.
  The agreement was later supplemented on 17 October 1962 and a new bond for the same amount
of P5,000.00, also undertaken by the Manila Surety & Fidelity Co., Inc. (Exhibit "C"), was given in
favor of the NAMARCO The bonds uniformly contained the following provisions:
2. Should the Principal's account on any purchase be not paid on time, then the
Surety, shall, upon demand, pay said account immediately to the NAMARCO;
3. Should the account of the Principal exceed the amount of FIVE THOUSAND
(P5,000.00) PESOS, Philippine Currency, such excess up to twenty (20%) per cent
of said amount shall also be deemed secured by this Bond;
4. The Surety expressly waives its right to demand payment and notice of non-
payment and agreed that the liability of the Surety shall be direct and immediate
and not contingent upon the exhaustion by the NAMARCO of whatever remedies
it may have against the Principal and same shall be valid and continuous until the
obligation so guaranteed is paid in full; and
5. The Surety also waives its right to be notified of any extension of the terms of
payment which the NAMARCO may give to the Principal, it being understood
that were extension is given to satisfy the account, that such extension shall not
extinguish the guaranty unless the same is made against the express wish of the
Surety.
 On 8 June 1965, the marketing firm demanded from the purchaser Almeda Trading the settlement
of its back accounts which, as of 15 May 1965, allegedly amounted to P16,335.09.
 Furnished with copy of the NAMARCO's demand- letter, the surety company thereafter also wrote
to the said purchaser urging it to liquidate its unsettled accounts with the NAMARCO
 It appears, however, that previous to this, or on 26 March 1965, Generoso Esquillo instituted
voluntary insolvency proceeding in the Court of First Instance of Laguna and by order of said
court, he was declared insolvent, with listed credits amounting to P111,873.00 and properties
valued at P39,0,00.00.
 In the meeting of the named creditors of the insolvent held on 14 May 1965 for the purpose of
electing the assignee of his properties, the NAMARCO was represented and its contingent claim
duly registered.
 On 10 September 1965, the Manila Surety & Fidelity Co., Inc., commenced in the Court of First
Instance of Manila a case against the spouses Noemi Almeda and Generoso Esquillo, and the
NAMARCO, to secure its release from liability under the bonds executed in favor of NAMARCO
 The action was based on the allegation that the defendant spouses had become insolvent and
that defendant NAMARCO had rescinded its agreement with them and had already demanded
payment of the outstanding accounts of the couple
 Defendant NAMARCO filed its answer denying the averments of the complaint and setting up, as
affirmative defenses, lack of cause of action and the court's want of jurisdiction.
 Plaintiff-appellant's action to secure its discharge from the suretyship was based on Article 2071
of the Civil Code, Which provides the surety with certain protective remedies that may be resorted
to before he has paid, but after he has become liable to do so.

ISSUE: WON a surety can avail itself of the relief, specifically afforded in Article 2071 of the Civil
Code and be released from its liability under the bonds, notwithstanding a prior declaration of
the insolvency of the debtor-principal in an insolvency proceeding
Ruling:
 Sorry, but NO Sir
 There is no question that under the bonds posted in favor of the NAMARCO in this case, the surety
company assumed to make immediate payment to said firm of any due and unsettled accounts
of the debtor-principal, even without demand and notice of the debtor's non-payment, the
surety, in fact, agreeing that its liability to the creditor shall be direct, without benefit of
exhaustion of the debtor's properties, and to remain valid and continuous until the guaranteed
obligation is fully satisfied.
 In short, appellant secured to the creditor not just the payment by the debtor-principal of his
accounts, but the payment itself of such accounts.
 Clearly, a contract of suretyship was thus created, the appellant becoming the insurer, not merely
of the debtor's solvency or ability to pay, but of the debt itself.
 Under the Civil Code, with the debtor's insolvency having been judicially recognized, herein
appellant's resort to the courts to be released from the undertaking thus assumed would have
been appropriate.
 Nevertheless, the guarantor's action for release can only be exercised against the principal debtor
and not against the creditor, as is apparent from the precise terms of the legal provision.
 "The guarantor" (says Article 2071 of the Civil Code of the Philippines) "even before having paid,
may proceed against the principal debtor ------------------ to obtain a release from the guaranty ----
-----------." The juridical rule grants no cause of action against the creditor for a release of the
guaranty, before payment of the credit, for a plain reason: the creditor is not compellable to
release the guaranty (which is a property right) against his will. For, the release of the guarantor
imports an extinction of his obligation to the creditor; it connotes, therefore, either a remission
or a novation by subrogation, and either operation requires the creditor's assent for its validity
(See Article 1270 and Article 1301).
 Especially should this be the case where the principal debtor has become insolvent, for the
purpose of a guaranty is exactly to protect the creditor against such a contingency
 In what manner, then, can the article operate?
 Where the debtor can not make full payment, the release of the guarantor can only be obtained
with the assent of the creditor, by persuading the latter to accept an equally safe security, either
another suitable guaranty or else a pledge or mortgage.
 Absent the creditor's consent, the principal debtor may only proceed to protect the demanding
guarantor by a counterbond or counter guaranty, as is authorized by the codal precept (Article
2071 in fine)
 The appellant's troubles are compounded by the fact that when the complaint for release from
suretyship was filed in the Manila court on 10 September 1965, the insolvency case in the Laguna
court was already pending and the debtor-principal Generoso Esquillo had been judicially
declared an insolvent.
 By the time the appellant sued, therefore, the insolvency court had already acquired jurisdiction
over all the debtor's properties and of all claims by and against him, to the exclusion of any other
court.
 In the circumstances, the lawful recourse of the guarantor of an obligation of the insolvent would
be to file a contingent claim in the insolvency proceeding, if his rights as such guarantor or surety
are not to be barred by the subsequent discharge of the insolvent debtor from all his liabilities.

Application
  In the case at bar, it is true that the guaranteed claim of NAMARCO was registered or filed in the
insolvency proceeding.
 But appellant can not utilize this fact in support of its petition for release from the assumed
undertaking.
 For one thing, it is almost a certainty that creditor NAMARCO can not secure full satisfaction of its
credit out of the debtor's properties brought into the insolvency proceeding.
 Considering that under the contract of suretyship, which remains valid and subsisting, the entire
obligation may even be demanded directly against the surety itself, the creditor's act in resorting
first to the properties of the insolvent debtor is to the surety's advantage At least, the latter would
be answerable only for whatever amount may remain not covered or unsatisfied by the
disposition of the insolvent's properties, with the right to go against debtor-principal after it has
made the necessary payment to the creditor.
 For another, the fact that the debtor- principal may be discharged from all his outstanding
obligations in the insolvency case would not benefit the surety, as to relieve it of its liability under
the surety agreement.
 That is so provided in Section 68 of the Insolvency Act which shall be controlling in the case.
 Finally, even supposing that the present action is not blocked by the insolvency proceedings
because it does not aim at reducing the insolvent's assets, but only at having the suretyship
substituted by other equivalent security, still it is difficult to see how the principal debtor, with his
business, property and assets impounded by the insolvency court, can obtain other securities with
which to replace the guaranty given by the plaintiff-appellant. The action at bar would seem,
under the circumstances, destined to end in futility.

27. JOSEPH COCHINGYAN, JR. and JOSE K. VILLANUEVA, v. R & B SURETY AND INSURANCE
COMPANY, INC., respondent.

Facts:
 Pacific Agricultural Suppliers, Inc. (PAGRICO) applied for and was granted an increase in its line of
credit from P400,000 to P800,000 (the "Principal Obligation"), with the Philippine National Bank
(PNB)
 To secure PNB's approval, PAGRICO had to give a good and sufficient bond in the amount of
P400,000, representing the increment in its line of credit, to secure its faithful compliance with
the terms and conditions under which its line of credit was increased
 In compliance with this requirement, PAGRICO submitted Surety Bond No. 4765, issued by the
respondent R & B Surety in the specified amount in favor of the PNB
 Under the terms of the Surety Bond, PAGRICO and R & B Surety bound themselves jointly and
severally to comply with the "terms and conditions of the advance line [of credit] established by
the [PNB]."
 PNB had the right under the Surety Bond to proceed directly against R & B Surety "without the
necessity of first exhausting the assets" of the principal obligor, PAGRICO
 The Surety Bond also provided that R & B Surety's liability was not to be limited to the principal
sum of P400,000, but would also include "accrued interest" on the said amount "plus all expenses,
charges or other legal costs incident to collection of the obligation [of R & B Surety]" under the
Surety Bond.
 In consideration of R & B Surety's issuance of the Surety Bond, two Identical indemnity
agreements were entered into with R & B Surety: (a) one agreement was executed by the Catholic
 Church Mart (CCM) and by petitioner Joseph Cochingyan, Jr, and (b) another agreement was
executed by PAGRICO, Pacific Copra Export Inc. (PACOCO), Jose K. Villanueva and Liu Tua Ben.
 Under both indemnity agreements, the indemnitors bound themselves jointly and severally to R
& B Surety to pay an annual premium of P5,103.05 and for the faithful compliance of the terms
and conditions set forth in said SURETY BOND for a period beginning until the same is CANCELLED
and/or DISCHARGED
 When PAGRICO failed to comply with its Principal Obligation to the PNB, the PNB demanded
payment from R & B Surety of the sum of P400,000.00, the full amount of the Principal Obligation.
 R & B Surety made a series of payments to PNB by virtue of that demand totalling P70,000.00
evidenced by detailed vouchers and receipts. R & B Surety in turn sent formal demand letters to
petitioners Cochingyan, Jr. and Villanueva for reimbursement of the payments made by it to the
PNB and for a discharge of its liability to the PNB under the Surety Bond
 When petitioners failed to heed its demands, R & B Surety brought suit against Cochingyan, Jr.,
Villanueva and Liu Tua Ben in the CFI of Manila.
 Petitioner Cochingyan, Jr. in his answer maintained that the Indemnity Agreement he executed in
favor of R & B Surety. Petitioner Cochingyan, however, did not present any evidence at all to
support his asserted defenses. Petitioner Villanueva did not submit any evidence either on his
"accommodation" defense. The trial court was therefore constrained to decide the case on the
basis alone of the terms of the Trust Agreement and other documents submitted in evidence.
 The CFI decided in favor of R & B Surety and the CA affirmed the CFI’s decision.

ISSUES: WON the Trust Agreement had extinguished, by novation, the obligation of R&B Surety
to the PNB under the Surety Bond which in turn extinguished the obligations of the petitioners
under the indemnity agreements
Ruling
 NO
 The Trust Agreement referred to by both petitioners in their separate briefs, was executed on 28
December 1965 (two years after the Surety Bond and the Indemnity Agreements were executed)
between: (1) Jose and Susana Cochingyan, Sr., doing business under the name and style of the
Catholic Church Mart, represented by Joseph Cochingyan, Jr., as Trustor[s]; (2) Tomas Besa, a PNB
official, as Trustee; and (3) the PNB as beneficiary
 There is no question that the Surety Bond has not been cancelled or fully discharged by payment
of the Principal Obligation. Unless, therefore, the Surety Bond has been extinguished by another
means, it must still subsist. And so must the supporting Indemnity Agreements.
 We are unable to sustain petitioners' claim that the Surety Bond and their respective obligations
under the Indemnity Agreements were extinguished by novation brought about by the
subsequent execution of the Trust Agreement.
 Novation is the extinguishment of an obligation by the substitution or change of the obligation by
a subsequent one which terminates it, either by changing its object or principal conditions, or by
substituting a new debtor in place of the old one, or by subrogating a third person to the rights of
the creditor.
 Novation through a change of the object or principal conditions of an existing obligation is
referred to as objective (or real) novation. Novation by the change of either the person of the
debtor or of the creditor is described as subjective (or personal) novation. Novation may also be
both objective and subjective (mixed) at the same time. In both objective and subjective novation,
a dual purpose is achieved-an obligation is extinguished and a new one is created in lieu thereof.
  If objective novation is to take place, it is imperative that the new obligation expressly declare
that the old obligation is thereby extinguished, or that the new obligation be on every point
incompatible with the old one.
 Novation is never presumed: it must be established either by the discharge of the old debt by the
express terms of the new agreement, or by the acts of the parties whose intention to dissolve the
old obligation as a consideration of the emergence of the new one must be clearly discernible.
 Again, if subjective novation by a change in the person of the debtor is to occur, it is not enough
that the juridical relation between the parties to the original contract is extended to a third
person. It is essential that the old debtor be released from the obligation, and the third person or
new debtor take his place in the new relation. If the old debtor is not released, no novation occurs
and the third person who has assumed the obligation of the debtor becomes merely a co-debtor
or surety or a co-surety
Application:
 Applying the above principles to the instant case, it is at once evident that the Trust Agreement
does not expressly terminate the obligation of R & B Surety under the Surety Bond. On the
contrary, the Trust Agreement expressly provides for the continuing subsistence of that obligation
by stipulating that "[the Trust Agreement] shall not in any manner release" R & B Surety from its
obligation under the Surety Bond.
 Neither can the petitioners anchor their defense on implied novation. Absent an unequivocal
declaration of extinguishment of a pre-existing obligation, a showing of complete incompatibility
between the old and the new obligation (and nothing else) would sustain a finding of novation by
implication.
 But where, as in this case, the parties to the new obligation expressly recognize the continuing
existence and validity of the old one, where, in other words, the parties expressly negated the
lapsing of the old obligation, there can be no novation. The issue of implied novation is not
reached at all.
 What the trust agreement did was, at most, merely to bring in another person or persons-the
Trustor[s]-to assume the same obligation that R & B Surety was bound to perform under the
Surety Bond.
 It is not unusual in business for a stranger to a contract to assume obligations thereunder; a
contract of suretyship or guarantee is the classical example. The precise legal effect is the increase
of the number of persons liable to the obligee, and not the extinguishment of the liability of the
first debtor.
 Thus, in Magdalena Estates vs. Rodriguez, 11 we held that:
o [t]he mere fact that the creditor receives a guaranty or accepts payments from a third
person who has agreed to assume the obligation, when there is no agreement that the
first debtor shall be released from responsibility, does not constitute a novation, and the
creditor can still enforce the obligation against the original debtor.
 In the present case, we note that the Trustor under the Trust Agreement, the CCM, was already
previously bound to R & B Surety under its Indemnity Agreement. Under the Trust Agreement,
the Trustor also became directly liable to the PNB. So far as the PNB was concerned, the effect of
the Trust Agreement was that where there had been only two, there would now be three obligors
directly and solidarily bound in favor of the PNB: PAGRICO, R & B Surety and the Trustor. And the
PNB could proceed against any of the three, in any order or sequence. Clearly, PNB never intended
to release, and never did release, R & B Surety. Thus, R & B Surety, which was not a party to the
Trust Agreement, could not have intended to release any of its own indemnitors simply because
 one of those indemnitors, the Trustor under the Trust Agreement, became also directly liable to
the PNB

Issue no. 2: Whether the Trust Agreement extended the term of the Surety Bond so as to release
petitioners from their obligation as indemnitors thereof as they did not give their consent to the
execution of the Trust Agreement

Ruling:
 NO
 The Indemnity Agreement speaks of the several indemnitors "apply[ing] jointly and severally (in
solidum) to the R & B Surety] — to become SURETY upon a SURETY BOND demanded by and in
favor of [PNB] in the sum of [P400,000.00] for the faithful compliance of the terms and conditions
set forth in said SURETY BOND — ."
 This part of the Agreement suggests that the indemnitors (including the petitioners) would
become co-sureties on the Security Bond in favor of PNB. The record, however, is bereft of any
indication that the petitioners-indemnitors ever in fact became co-sureties of R & B Surety vis-a-
vis the PNB.
 The petitioners, so far as the record goes, remained simply indemnitors bound to R & B Surety
but not to PNB, such that PNB could not have directly demanded payment of the Principal
Obligation from the petitioners.
 Thus, we do not see how Article 2079 of the Civil Code-which provides in part that "[a]n extension
granted to the debtor by the creditor without the consent of the guarantor extinguishes the
guaranty" could apply in the instant case.
 The petitioner-indemnitors are, as, it were, second-tier parties so far as the PNB was concerned
and any extension of time granted by PNB to any of the first-tier obligators (PAGRICO, R &B Surety
and the trustors[s]) could not prejudice the second-tier parties.
 There is no other reason why petitioner Villanueva's contention must fail. PNB's undertaking
under the Trust Agreement "to hold in abeyance any action to enforce its claims" against R & B
Surety did not extend the maturity of R & B Surety's obligation under the Surety Bond.
 The Principal Obligation had in fact already matured, along with that of R &B Surety, by the time
the Trust Agreement was entered into. Petitioner's Obligation had in fact already matured, for
those obligations were to amture "as soon as [R & B Surety] became liable to make payment of
any sum under the terms of the [Surety Bond] — whether the said sum or sums or part thereof
have been actually paid or not."
 Thus, the situation was that precisely envisaged in Article 2079:
o [t]he mere failure on the part of the creditor to demand payment after the debt has
become due does not of itself constitute any extension of the referred to
herein.(emphasis supplied)
 The theory behind Article 2079 is that an extension of time given to the principal debtor by the
creditor without the surety of his right to pay the creditor and to be immediately subrogated to
the creditor's remedies against the principal debtor upon the original maturity date.
 The surety is said to be entitled to protect himself against the principal debtor upon the orginal
maturity date. The surety is said to be entitled to protect himself against the contingency of the
principal debtor or the indemnitors becoming insolvent during the extended period. The
underlying rationale is not present in the instant case. As this Court has held,
o merely delay or negligence in proceeding against the principal will not discharge a surety
unless there is between the creditor and the principal debtor a valid and binding
 agreement therefor, one which tends to prejudice [the surety] or to deprive it of the
power of obtaining indemnity by presenting a legal objection for the time, to the
prosecution of an action on the original security.12
 In the instant case, there was nothing to prevent the petitioners from tendering payment, if they
were so minded, to PNB of the matured obligation on behalf of R & B Surety and thereupon
becoming subrogated to such remedies as R & B Surety may have against PAGRICO.

Issue no. 2: Whether or not the filing of this complaint was premature since the PNB had not yet
filed a suit against R & B Surety for the forfeiture of its Surety Bond.

Ruling:
 Clauses (b) and (c) of the Indemnity Agreements (quoted above) allow R & B Surety to recover
from petitioners even before R & B Surety shall have paid the PNB.
 We have previously held similar indemnity clauses to be enforceable and not violative of any
public policy.
 The petitioners lose sight of the fact that the Indemnity Agreements are contracts of
indemnification not only against actual loss but against liability as well.
 While in a contract of indemnity against loss as indemnitor will not be liable until the person to
be indemnified makes payment or sustains loss, in a contract of indemnity against liability, as in
this case, the indemnitor's liability arises as soon as the liability of the person to be indemnified
has arisen without regard to whether or not he has suffered actual loss.
 Accordingly, R & B Surety was entitled to proceed against petitioners not only for the partial
payments already made but for the full amount owed by PAGRICO to the PNB
Summary:
1. The Surety Bond was not novated by the Trust Agreement. Both agreements can co-exist. The
Trust Agreement merely furnished to PNB another party obligor to the Principal Obligation in
addition to PAGRICO and R & B Surety
2. The undertaking of the PNB to 'hold in abeyance any action to enforce its claim" against R & B
Surety did not amount to an "extension granted to the debtor" without petitioner's consent so as
to release petitioner's from their undertaking as indemnitors of R & B Surety under the INdemnity
Agreements
3. Petitioner's are indemnitors of R & B Surety against both payments to and liability for payments
to the PNB. The present suit is therefore not premature despite the fact that the PNB has not
instituted any action against R & B Surety for the collection of its matured obligation under the
Surety Bond.