CRED 1 YATANAK
. Nature and Extent
a. Escaño vs Ortigas – G.R. No. 151953 (June 29, 2007)
Escaño and Silos vs Ortigas Jr.
March 25, 2016
G.R. No. 151953 (2007)
Ponente: J. Tinga
Facts:
1. On April 28, 1980, Private Development Corp. of the
Philippines (PDCP) entered into a loan agreement
with the Falcon Minerals, Inc. (Falcon) whereby
PDCP agreed to male available and lend to Falcon
the amount of US $320, 000.00 for specific purposes
and subject to certain terms and conditions.
2. Three stockholder officers of the Falcon assumed
solidary liability, in their individual capacity, with
Falcon for the due and punctual payment of the
loan.
3. Two years later, control of Falcon was ceded to
Escaño, Silos and Matti, and the shares of deceased
Scholey, through his heirs Ortigas, Scholey and
Inductivo, were assigned to the three new stock-
holders, as well as all of their guaranteed to PDCP
and PAIC.
4. On April 28, 1989, PDCP filed a complaint for sum of
money with the RTC of Makati. A counterclaim was
filed by Ortigas.
5. The other parties entered into compromise
agreement with PDCP. Ortigas pursued his claim
against Escaño, Silos and Matti, and filing a motion
for Summary Judgement in his favor against Escaño,
Silos and Matti.
6. The RTC ruled in favor of Ortigas, ordering the three
to pay jointly and severally the amount of
P1,300,000.00 as well as P20,000.00 in attorney’s
fees.
7. On appeal, the Court of Appeals affirmed the
Summary Judgement. Hence, the present petition
for review.
Issue: Whether or not there was solidary obligation.
Ruling:
No. The obligation was joint.
In this case, there is a concurrence of two or more creditors
or of two or more debtors in one and the same obligation.
Article 1207 of the Civil Code states that among them, there
is a solidary liability only when the obligation expressly so
states, or when the law or the nature of the obligation
requires solidarity. Article 1210 supplies further caution
against the broad interpretation of solidarity by providing
that the indivisibility of an obligation does not necessarily
give rise to solidarity. Nor does solidarity of itself imply
indivisibility.
These Civil Code provisions establish that in case of
concurrence of two or more creditors or of two or more
debtors in one and the same obligation, and in the absence of
express and indubitable terms characterizing the obligation
as solidary, the presumption is that the obligation is only
joint. It thus becomes incumbent upon the party alleging that
the obligation is indeed solidary in character to prove such
fact with a preponderance of evidence.
The Undertaking does not contain any express stipulation
that the petitioners agreed to bind themselves jointly and
severally in their obligations to the Ortigas group, or any such
terms to that effect. Hence, such obligation established in the
Undertaking is presumed only to be joint. Ortigas, as the
party alleging that the obligation is in fact solidary, bears the
burden to overcome the presumption of jointness of
Page 1 of 20
obligations. The SC ruled that he failed to discharge such
burden.
b. Asset builder’s vs Stronghold – G.R. No. 187116 (October
18, 2010
Asset Builders vs Stronghold
Asset Builders Corp (ABC) – obligee, petitioner
Lucky Star Drilling & Construction Corporation (Lucky Star) -
obligor
Stronghold Insurance Company (Stronghold) – surety,
respondent
ABC entered into an agreement with Lucky Star as part of the
completion of its project to construct the ACG Commercial
Complex. Lucky Star was to supply labor, materials, tools, and
equipment including technical supervision to drill one (1)
exploratory production well on the project site.
To guarantee faithful compliance with their agreement, Lucky
Star engaged respondent Stronghold which issued two (2)
bonds in favor of petitioner ABC.
ABC paid Lucky Star P575,000.00 as advance payment,
representing 50% of the contract price. Lucky Star, thereafter,
commenced the drilling work.
On agreed completion date, Lucky Star managed to
accomplish only 10% of the drilling work. ABC sent a demand
letter to Lucky Star for the immediate completion of the
drilling work. However, Lucky Star failed to fulfill its
obligation.
ABC sent Notice of Rescission of Contract with Demand for
Damages to Lucky Star and a Notice of Claim for payment to
Stronghold to make good its obligation under its bonds.
Despite notice, ABC did not receive any reply either from
Lucky Star or Stronghold, prompting it to file its Complaint for
Rescission with Damages against both before the RTC.
RTC rendered the assailed decision ordering Lucky Star to pay
ABC but absolving Stronghold from liability. Relevant parts of
the decision reads: “The surety bond and performance bond
executed by defendants Lucky Star and Stronghold Insurance
are in the nature of accessory contracts which depend for its
existence upon another contract. Thus, when the agreement
between the plaintiff Asset Builders and defendant Lucky Star
was rescinded, the surety and performance bond were
automatically cancelled.”
Thus, Asset Builders filed this present petition for review on
certiorari assailing decision of RTC which orders defendant
Lucky Star to pay petitioner Asset Builders the sum of
P575,000.00 with damages, but absolving respondent
Stronghold Insurance of any liability on its Surety Bond and
Performance Bond.
Issue: Whether or not respondent insurance company, as
surety, can be held liable under its bonds.
Held: Yes.
As provided in Article 2047, the surety undertakes to be
bound solidarily with the principal obligor. That undertaking
makes a surety agreement an ancillary contract as it
presupposes the existence of a principal contract. Although
the contract of a surety is in essence secondary only to a valid
principal obligation, the surety becomes liable for the debt or
duty of another although it possesses no direct or personal
interest over the obligations nor does it receive any benefit
therefrom. Let it be stressed that notwithstanding the fact
that the surety contract is secondary to the principal
obligation, the surety assumes liability as a regular party to
the undertaking.
 CRED 1 YATANAK
Suretyship, in essence, contains two types of relationship –
the principal relationship between the obligee (petitioner)
and the obligor (Lucky Star), and the accessory surety
relationship between the principal (Lucky Star) and the surety
(respondent). In this arrangement, the obligee accepts the
surety’s solidary undertaking to pay if the obligor does not
pay. Such acceptance, however, does not change in any
material way the obligee’s relationship with the principal
obligor. Neither does it make the surety an active party to the
principal obligee-obligor relationship. Thus, the acceptance
does not give the surety the right to intervene in the principal
contract. The surety’s role arises only upon the obligor’s
default, at which time, it can be directly held liable by the
obligee for payment as a solidary obligor.
In the case at bench, when Lucky Star failed to finish the
drilling work within the agreed time frame despite
petitioner’s demand for completion, it was already in delay.
Due to this default, Lucky Star’s liability attached and, as a
necessary consequence, respondent’s liability under the
surety agreement arose.
Undeniably, when Lucky Star reneged on its undertaking with
the petitioner and further failed to return the P575,000.00
downpayment that was already advanced to it, respondent,
as surety, became solidarily bound with Lucky Star for the
repayment of the said amount to petitioner.
Contrary to the trial court’s ruling, respondent insurance
company was not automatically released from any liability
when petitioner resorted to the rescission of the principal
contract for failure of the other party to perform its
undertaking. Precisely, the liability of the surety arising from
the surety contracts comes to life upon the solidary obligor’s
default. It should be emphasized that petitioner had to
choose rescission in order to prevent further loss that may
arise from the delay of the progress of the project. Without a
doubt, Lucky Star’s unsatisfactory progress in the drilling
work and its failure to complete it in due time amount to
non-performance of its obligation.
In fine, respondent should be answerable to petitioner on
account of Lucky Star’s non-performance of its obligation as
guaranteed by the performance bond.
Finally, Article 1217 of the New Civil Code acknowledges the
right of reimbursement from a co-debtor (the principal co-
debtor, in case of suretyship) in favor of the one who paid
(the surety). Thus, respondent is entitled to reimbursement
from Lucky Star for the amount it may be required to pay
petitioner arising from its bonds.
WHEREFORE, Decision of the RTC, is AFFIRMED with
MODIFICATION. Respondent Stronghold Insurance is hereby
declared jointly and severally liable with Lucky Star for the
payment of P575,000.00 and the payment of P345,000.00 on
the basis of its performance bond
c. Castelvi de Higgins vs Selner – G.R. No. 15825 (November
5, 1920)
Castellvi de Higgins & Higgins vs. Sellner
Facts: Sellner (defendant) wrote a letter to Mcleod (Castellvi’s
agent) saying that he would bound himself to pay the
promissory note of Mining, Clarke and Maye amounting 10K +
% if not fully paid at maturity, upon the surrender 8k worth of
MCM’s stock which is held by Castellvi.
Issue: WON Sellner is a guarantor or surety?
Held: Sellner is a GUARANTOR. Sellner was not bound with
Castellvi by the same instrument executed at the time and
the same consideration, but his responsibility was secondary,
one founded on an independent collateral agreement.
Neither was he jointly and severally liable with Castellvi.
Page 2 of 20
Xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
MALCOLM, J. :
This is an action brought by plaintiffs to recover from
defendant from of P10.000. The brief decision of the trial
court held that the suit was premature, and absolved the
defendant from the complaint, with the costs against the
plaintiffs.
The basis of plaintiffs’ action is a letter written by defendant
George C. Sellner to John T. Macleod, agent for Mrs. Horace
L. Higgins, on May 31, 1915, of the following
tenor:jgc:chanrobles.com.ph
"DEAR SIR: I hereby obligate and bind myself, my heirs
successors and assigns that if the promissory note executed
the 29th day of May 1915 by the Keystone Mining Co W. H.
Clarke, and John Maye, jointly and severally, in your favor and
due six months after date for P10,000 is not fully paid at
maturity with interest, I will, within fifteen days after notice
of such default, pay you in cash the sum of P10,000 and
interest upon your surrendering to me the three thousand
shares of stock of the Keystone Mining Co. held by you as
security for the payment of said note.
"Respectfully,
(Sgd.) "GEO. C. SELLNER."cralaw virtua1aw library
Counsel for both parties agree that the only point at issue is
the determination of defendant’s status in the transaction
referred to. Plaintiffs contend that he is a surety; defendant
contends that he is a guarantor. Plaintiffs also admit that if
defendant is a guarantor, articles 1830, 1831, and 1834 of the
Civil Code govern.
In the original Spanish of the Civil Code now in force in the
Philippine Islands, Title XIV of Book IV is entitled "De la
Fuenza." The Spanish word "fianza" is translated in the
Washington and Walton editions of the Civil Code as
"security." "Fianza" appears in the Fisher translation as
"suretyship." The Spanish word "fador" is found in all of the
English translations of the Civil Code as "surety." The law of
guaranty is not treated of by that name in the Civil Code,
although indirect reference to the same is made in the Code
of Commerce. In terminology at least, no distinction is made
in the Civil Code between the obligation of a surety and that
of a guarantor.
As has been done in the State of Louisiana, where, like in the
Philippines, the substantive law has a civil law origin, we feel
free to supplement the statutory law by a reference to the
precepts of the law merchant.
The points-of difference between a surety and a guarantor
are familiar to American authorities. A surety and a guarantor
are alike in that each promises to answer for the debt or
default of another. A surety and a guarantor are unlike in that
the surety assumes liability as a regular party to the
undertaking, while the liability of the guarantor depends
upon an independent agreement to pay the obligation if the
primary payor fails to do so. A surety is charged as an original
promissor; the engagement of the guarantor is a collateral
undertaking. The obligation of the surety is primary; the
obligation of the guarantor is secondary. (See U. S. v.
 CRED 1 YATANAK
Varadero de la Quinta [1919], 40 Phil., 48; Lachman v. Block
[1894], 46 La. Ann., 649; Bedford v. Kelley [1913], 173 Mich.,
492; Brandt, on Suretyship and Guaranty, sec. 1, cited
approvingly by many authorities.)
Turning back again to our Civil Code, we first note that
according to article 1822 "By fianza (security or suretyship)
one person binds himself to pay or perform for a third person
in case the latter should fail to do so." But "If the surety binds
himself in solidum with the principal debtor, the provisions of
Section fourth, Chapter third, Title first, shall be applicable."
What the first portion of the cited article provides is,
consequently, seen to be somewhat akin to the contract of
guaranty, while what is last provided is practically equivalent
to the contract of suretyship. When in subsequent articles
found in section 1 of Chapter II of the title concerning fianza,
the Code speaks of the effects of Suretyship between surety
and creditor, it has, in comparison with the common law, the
effect of guaranty between guarantor and creditor. The civil
law suretyship is, accordingly, nearly synonymous with the
common law guaranty; and the civil law relationship existing
between codebtors le in solidum is similar to the common
law suretyship.
It is perfectly clear that the obligation assumed by defendant
was simply that of a guarantor, or, to be more precise, of the
fiador whose responsibility is fixed in the Civil Code. The
letter of Mr. Sellner recites that if the promissory note is not
paid at maturity, then, within fifteen days after notice of such
default and upon surrender to him if the three thousand
shares of Keystone Mining Company stock, he will assume
responsibility. Sellner is not bound with the principals by the
same instrument executed at the same time and on the same
consideration, but his responsibility is a secondary one found
in an independent collateral agreement. Neither is Sellner
jointly and severally liable with the principal debtors.
With particular reference, therefore, to appellants’
assignments of error, we hold that defendant Sellner is a
guarantor within the meaning of the provisions of the Civil
Code.
There is also an equitable aspect to the case which reenforces
this conclusion. The note executed by the Key stone Mining
Company matured on November 29, 1916. Interest on the
note was not accepted by the makers until September 30,
1916. When the note became due, it is admitted that the
shares of stock used as collateral security were selling at par;
that is, they were worth P30,000. Notice that the note had
not been paid was not given to the defendant until just about
three years, after it matured and when the Keystone Mining
Company stock was worthless. Defendant, consequently,
through the laches of plaintiff, has lost possible chance to
recoup, through the sale of the stock, any amount which he
might be compelled to pay as a surety or guarantor. The
"indulgence," as this word is used in the law of guaranty, of
the creditors of the principal, as evidenced by the acceptance
of interest, and by failure promptly to notify the guarantor,
may thus have served to discharge the guarantor.
For quite different reasons, which, nevertheless, arrive at the
same result, judgment is affirmed, with costs of this instance
against the appellants. So ordered.
Johnson, Araullo and Villamor, JJ., concur.
Page 3 of 20
d. Machttie vs Hospico de San Jose – G.R. No. L – 16666 (April
10, 1922)
Machetti vs. Hospicio de San Jose
ROMULO MACHETTI v s . HOSPICIO DE SAN JOSE and FIDELITY
& SURETY COMPANY OF THE PHILIPPINE ISLANDS
FACTS: Machetti undertook to construct a building for
Hospicio. One of the agreements condition was for the
contractor to obtain the "guarantee" of the Fidelity and
Surety Company. The guarantee was for the compliance of
Machetti to the contracts terms and conditions. Subsequently
it was found that the work had not been carried out in
accordance with the specications which formed part of the
contract. Hospicio therefore refused to pay the balance of the
contract price.Machetti thereupon brought an action to
which Hospicio presented a counterclaim. After the issue was
joined, Machetti, on petition of his creditors declared
insolvency. An order was then entered suspending the
proceeding in the case. Hospicio filed a motion asking that
the Fidelity be made cross-defendant which was granted.
Hospicio then led a complaint against the Fidelity asking for a
judgment against the company upon its guaranty. CFI
rendered judgment against the Fidelity. The case is now
before this court upon appeal by the Fidelity from said
judgment
.ISSUE: WON the contract is one of guaranty or surety.
JUDGMENT: The judgment appealed from is reversed.
HOLDING: The circumstances in the contract are
distinguishing features of contracts of guaranty. The contract
is the guarantor's separate undertaking in which the principal
does not join. It rests on a separate consideration moving
from the principal and that although it is written in
continuation of the contract for the construction of the
building, it is a collateral undertaking separate and distinct
from the latter. While a surety undertakes to pay if the
principal does not pay, the guarantor only binds himself to
pay if the principal cannot pay. The one is the insurer of the
debt, the other an insurer of the solvency of the debtor.The
Fidelity having bound itself to pay only in the event its
principal, Machetti, cannot pay it follows that it cannot be
compelled to pay until it is shown that Machetti is unable to
pay. Such inability to pay is not determined until the nal
liquidation of his estate and is not suciently established by
the mere fact that he has been declared insolvent in
insolvency proceedings.
Facts: By a written agreement, Machetti undertook to
construct a building for Hospicio de San Jose. One of the
conditions was that Machetti obtain the guarantee of Fidelity
& Surety Co. to the amount of 12K. It was subsequently found
out that the work had not been carried out in accordance
with the specifications. Hospicio refused to pay therefore
Machetti brought an action to recover the amount.
Issue: WON the undertaking assumed by FSC that of
guarantor or surety?
Held: Circumstances may be shown which convert the
contract into one of suretyship but that does not exist. It
appears that the contract is the guarantor’s separate
undertaking in which the principal does not join, that it rests
on a separate consideration moving from the principal, and
that although it is written in continuation of the contract for
the construction of the building, it is collateral undertaking
 CRED 1 YATANAK
separate and distinct from the latter. All these are features of
a contract of guaranty.
e. Palmares vs Court of Appeals – G.R. No. 126490 (March
31, 1998)
Palmares vs. CA (288 SCRA 422)
Facts: Private respondent M.B. Lending Corporation extended
a loan to the spouses Osmeña and Merlyn Azarraga, together
with petitioner Estrella Palmares, in the amount of
P30,000.00 payable on or before May 12, 1990, with
compounded interest at the rate of 6% per annum to be
computed every 30 days from the date thereof. 1 On four
occasions after the execution of the promissory note and
even after the loan matured, petitioner and the Azarraga
spouses were able to pay a total of P16,300.00, thereby
leaving a balance of P13,700.00. No payments were made
after the last payment on September 26, 1991. 2
Consequently, on the basis of petitioner's solidary liability
under the promissory note, respondent corporation filed a
complaint 3 against petitioner Palmares as the lone party-
defendant, to the exclusion of the principal debtors, allegedly
by reason of the insolvency of the latter.
Issue: WON Palmares is liable
Held: If a person binds himself solidarily with the principal
debtor, the provisions of Section 4, Chapter 3, Title I of this
Book shall be observed. In such case the contract is called a
suretyship. It is a cardinal rule in the interpretation of
contracts that if the terms of a contract are clear and leave no
doubt upon the intention of the contracting parties, the
literal meaning of its stipulation shall control. 13 In the case
at bar, petitioner expressly bound herself to be jointly and
severally or solidarily liable with the principal maker of the
note. The terms of the contract are clear, explicit and
unequivocal that petitioner's liability is that of a surety.
f. Gilat Satellite vs. UCPB – G.R. No. 189563 (April 7, 2014
On September 15, 1999, One Virtual placed with GILAT a
purchase order for various telecommunications equipment
(sic), accessories, spares, services and software, at a total
purchase price of Two Million One Hundred Twenty Eight
Thousand Two Hundred Fifty Dollars (US$2,128,250.00). Of
the said purchase price for the goods delivered, One Virtual
promised to pay a portion thereof totalling US$1.2 Million in
accordance with the payment schedule dated 22 November
1999. To ensure the prompt payment of this amount, it
obtained defendant UCPB General Insurance Co., Inc.’s surety
bond dated 3 December 1999, in favor of GILAT.
During the period between [sic] September 1999 and June
2000, GILAT shipped and delivered to One Virtual the
purchased products and equipment, as evidenced by airway
bills/Bill of Lading (Exhibits "F", "F-1" to "F-8"). All of the
equipment (including the software components for which
payment was secured by the surety bond, was shipped by
GILAT and duly received by One Virtual. Under an
endorsement dated December 23, 1999 (Exhibit "E"), the
surety issued, with One Virtual’s conformity, an amendment
to the surety bond, Annex "A" thereof, correcting its expiry
date from May 30, 2001 to July 30, 2001.
One Virtual failed to pay GILAT the amount of Four Hundred
Thousand Dollars (US$400,000.00) on the due date of May
30, 2000 in accordance with the payment schedule attached
as Annex "A" to the surety bond, prompting GILAT to write
the surety defendant UCPB on June 5, 2000, a demand letter
(Exhibit "G") for payment of the said amount of
US$400,000.00. No part of the amount set forth in this
demand has been paid to date by either One Virtual or
defendant UCPB. One Virtual likewise failed to pay on the
succeeding payment instalment date of 30 November 2000 as
Page 4 of 20
set out in Annex "A" of the surety bond, prompting GILAT to
send a second demand letter dated January 24, 2001, for the
payment of the full amount of US$1,200,000.00 guaranteed
under the surety bond, plus interests and expenses (Exhibits
"H") and which letter was received by the defendant surety
on January 25, 2001. However, defendant UCPB failed to
settle the amount of US$1,200,000.00 or a part thereof,
5
hence, the instant complaint." (Emphases in the original)
On 24 April 2002, petitioner Gilat Satellite Networks, Ltd.,
6
filed a Complaint against respondent UCPB General
Insurance Co., Inc., to recover the amounts supposedly
covered by the surety bond, plus interests and expenses.
7
After due hearing, the RTC rendered its Decision, the
dispositive portion of which is herein quoted:
WHEREFORE, premises considered, the Court hereby renders
judgment for the plaintiff, and against the defendant,
ordering, to wit:
1. The defendant surety to pay the plaintiff the amount of
One Million Two Hundred Thousand Dollars
(US$1,200,000.00) representing the principal debt under the
Surety Bond, with legal interest thereon at the rate of 12%
per annum computed from the time the judgment becomes
final and executory until the obligation is fully settled; and
2. The defendant surety to pay the plaintiff the amount of
Forty Four Thousand Four Dollars and Four Cents
(US$44,004.04) representing attorney’s fees and litigation
expenses.
Accordingly, defendant’s counterclaim is hereby dismissed for
want of merit.
SO ORDERED. (Emphasis in the original)
In so ruling, the RTC reasoned that there is "no dispute that
plaintiff [petitioner] delivered all the subject equipments [sic]
and the same was installed. Even with the delivery and
installation made, One Virtual failed to pay any of the
payments agreed upon. Demand notwithstanding, defendant
failed and refused and continued to fail and refused to settle
8
the obligation."
Considering that its liability was indeed that of a surety, as
"spelled out in the Surety Bond executed by and between
One Virtual as Principal, UCPB as Surety and GILAT as
9
Creditor/Bond Obligee," respondent agreed and bound itself
to pay in accordance with the Payment Milestones. This
obligation was not made dependent on any condition outside
the terms and conditions of the Surety Bond and Payment
10
Milestones.
Insofar as the interests were concerned, the RTC denied
petitioner’s claim on the premise that while a surety can be
held liable for interest even if it becomes more onerous than
the principal obligation, the surety shall only accrue when the
delay or refusal to pay the principal obligation is without any
11
justifiable cause. Here, respondent failed to pay its surety
obligation because of the advice of its principal (One Virtual)
12
not to pay. The RTC then obligated respondent to pay
petitioner the amount of USD1,200,000.00 representing the
principal debt under the Surety Bond, with legal interest at
the rate of 12% per annum computed from the time the
judgment becomes final and executory, and USD44,004.04
representing attorney’s fees and litigation expenses.
13
On 18 October 2007, respondent appealed to the CA. The
14
appellate court rendered a Decision in the following
manner:
WHEREFORE, this appealed case is DISMISSED for lack of
jurisdiction. The trial court’s Decision dated December 28,
2006 is VACATED. Plaintiff-appellant Gilat Satellite Networks
Ltd., and One Virtual are ordered to proceed to arbitration,
the outcome of which shall necessary bind the parties,
 CRED 1 YATANAK
including the surety, defendant-appellant United Coconut
Planters Bank General Insurance Co., Inc.
SO ORDERED. (Emphasis in the original)
The CA ruled that in "enforcing a surety contract, the
‘complementary-contracts-construed-together’ doctrine finds
application." According to this doctrine, the accessory
15
contract must be construed with the principal agreement. In
this case, the appellate court considered the Purchase
Agreement entered into between petitioner and One Virtual
16
as the principal contract, whose stipulations are also
17
binding on the parties to the suretyship. Bearing in mind the
18
arbitration clause contained in the Purchase Agreement and
pursuant to the policy of the courts to encourage alternative
19
dispute resolution methods, the trial court’s Decision was
vacated; petitioner and One Virtual were ordered to proceed
to arbitration.
On 9 September 2008, petitioner filed a Motion for
Reconsideration with Motion for Oral Argument. The motion
20
was denied for lack of merit in a Resolution issued by the CA
on 16 September 2009.
Hence, the instant Petition.
21
On 31 August 2010, respondent filed a Comment on the
Petition for Review. On 24 November 2010, petitioner filed a
22
Reply.
ISSUES
From the foregoing, we reduce the issues to the following:
1. Whether or not the CA erred in dismissing the case and
ordering petitioner and One Virtual to arbitrate; and
2. Whether or not petitioner is entitled to legal interest due
to the delay in the fulfilment by respondent of its obligation
under the Suretyship Agreement.
THE COURT’S RULING
The existence of a suretyship agreement does not give the
surety the right to intervene in the principal contract, nor can
an arbitration clause between the buyer and the seller be
invoked by a non-party such as the surety.
Petitioner alleges that arbitration laws mandate that no court
can compel arbitration, unless a party entitled to it applies for
23
this relief. This referral, however, can only be demanded by
one who is a party to the arbitration
24
agreement. Considering that neither petitioner nor One
Virtual has asked for a referral, there is no basis for the CA’s
order to arbitrate.
25
Moreover, Articles 1216 and 2047 of the Civil Code clearly
provide that the creditor may proceed against the surety
26
without having first sued the principal debtor. Even the
Surety Agreement itself states that respondent becomes
liable upon "mere failure of the Principal to make such
27
prompt payment." Thus, petitioner should not be ordered
to make a separate claim against One Virtual (via arbitration)
28
before proceeding against respondent.
On the other hand, respondent maintains that a surety
contract is merely an accessory contract, which cannot exist
29
without a valid obligation. Thus, the surety may avail itself
of all the defenses available to the principal debtor and
30
inherent in the debt – that is, the right to invoke the
arbitration clause in the Purchase Agreement.
We agree with petitioner.
In suretyship, the oft-repeated rule is that a surety’s liability is
joint and solidary with that of the principal debtor. This
undertaking makes a surety agreement an ancillary contract,
as it presupposes the existence of a principal
31
contract. Nevertheless, although the contract of a surety is
in essence secondary only to a valid principal obligation, its
liability to the creditor or "promise" of the principal is said to
be direct, primary and absolute; in other words, a surety is
Page 5 of 20
32
directly and equally bound with the principal. He becomes
liable for the debt and duty of the principal obligor, even
without possessing a direct or personal interest in the
33
obligations constituted by the latter. Thus, a surety is not
entitled to a separate notice of default or to the benefit of
34
excussion. It may in fact be sued separately or together with
35
the principal debtor.
After a thorough examination of the pieces of evidence
36
presented by both parties, the RTC found that petitioner
had delivered all the goods to One Virtual and installed them.
Despite these compliances, One Virtual still failed to pay its
37
obligation, triggering respondent’s liability to petitioner as
the former’s surety.1âwphi1 In other words, the failure of
One Virtual, as the principal debtor, to fulfill its monetary
obligation to petitioner gave the latter an immediate right to
pursue respondent as the surety.
Consequently, we cannot sustain respondent’s claim that the
Purchase Agreement, being the principal contract to which
the Suretyship Agreement is accessory, must take precedence
over arbitration as the preferred mode of settling disputes.
First, we have held in Stronghold Insurance Co. Inc. v. Tokyu
38
Construction Co. Ltd., that "[the] acceptance [of a surety
agreement], however, does not change in any material way
the creditor’s relationship with the principal debtor nor does
it make the surety an active party to the principal creditor-
debtor relationship. In other words, the acceptance does not
give the surety the right to intervene in the principal contract.
The surety’s role arises only upon the debtor’s default, at
which time, it can be directly held liable by the creditor for
payment as a solidary obligor." Hence, the surety remains a
stranger to the Purchase Agreement. We agree with
petitioner that respondent cannot invoke in its favor the
arbitration clause in the Purchase Agreement, because it is
39
not a party to that contract. An arbitration agreement being
40
contractual in nature, it is binding only on the parties
41
thereto, as well as their assigns and heirs.
42
Second, Section 24 of Republic Act No. 9285 is clear in
stating that a referral to arbitration may only take place "if at
least one party so requests not later than the pre-trial
conference, or upon the request of both parties thereafter."
Respondent has not presented even an iota of evidence to
show that either petitioner or One Virtual submitted its
contesting claim for arbitration.
Third, sureties do not insure the solvency of the debtor, but
43
rather the debt itself. They are contracted precisely to
mitigate risks of non-performance on the part of the obligor.
This responsibility necessarily places a surety on the same
44
level as that of the principal debtor. The effect is that the
creditor is given the right to directly proceed against either
principal debtor or surety. This is the reason why excussion
45
cannot be invoked. To require the creditor to proceed to
arbitration would render the very essence of suretyship
nugatory and diminish its value in commerce. At any rate, as
46
we have held in Palmares v. Court of Appeals, "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."
Interest, as a form of indemnity, may be awarded to a
creditor for the delay incurred by a debtor in the payment of
the latter’s obligation, provided that the delay is inexcusable.
Anent the issue of interests, petitioner alleges that it
deserves to be paid legal interest of 12% per annum from the
time of its first demand on respondent on 5 June 2000 or at
most, from the second demand on 24 January 2001 because
of the latter’s delay in discharging its monetary
 CRED 1 YATANAK
47
obligation. Citing Article 1169 of the Civil Code, petitioner
insists that the delay started to run from the time it
demanded the fulfilment of respondent’s obligation under
the suretyship contract. Significantly, respondent does not
contest this point, but instead argues that it is only liable for
legal interest of 6% per annum from the date of petitioner’s
last demand on 24 January 2001.
In rejecting petitioner’s position, the RTC stated that interests
may only accrue when the delay or the refusal of a party to
48
pay is without any justifiable cause. In this case,
respondent’s failure to heed the demand was due to the
advice of One Virtual that petitioner allegedly breached its
49
undertakings as stated in the Purchase Agreement. The CA,
however, made no pronouncement on this matter.
We sustain petitioner.
Article 2209 of the Civil Code is clear: "[i]f an obligation
consists in the payment of a sum of money, and the debtor
incurs a delay, the indemnity for damages, there being no
stipulation to the contrary, shall be the payment of the
interest agreed upon, and in the absence of stipulation, the
legal interest."
Delay arises from the time the obligee judicially or
extrajudicially demands from the obligor the performance of
50
the obligation, and the latter fails to comply. Delay, as used
in Article 1169, is synonymous with default or mora, which
51
means delay in the fulfilment of obligations. It is the
52
nonfulfillment of an obligation with respect to time. In
order for the debtor (in this case, the surety) to be in default,
it is necessary that the following requisites be present: (1)
that the obligation be demandable and already liquidated; (2)
that the debtor delays performance; and (3) that the creditor
53
requires the performance judicially or extrajudicially.
Having held that a surety upon demand fails to pay, it can be
held liable for interest, even if in thus paying, its liability
54
becomes more than the principal obligation. The increased
liability is not because of the contract, but because of the
55
default and the necessity of judicial collection.
However, for delay to merit interest, it must be inexcusable in
56
nature. In Guanio v. Makati-Shangri-la Hotel, citing RCPI v.
57
Verchez, we held thus:
In culpa contractual x x x the mere proof of the existence of
the contract and the failure of its compliance justify, prima
facie, a corresponding right of relief. The law, recognizing the
obligatory force of contracts, will not permit a party to be set
free from liability for any kind of misperformance of the
contractual undertaking or a contravention of the tenor
thereof. A breach upon the contract confers upon the injured
party a valid cause for recovering that which may have been
lost or suffered. The remedy serves to preserve the interests
of the promissee that may include his "expectation interest,"
which is his interest in having the benefit of his bargain by
being put in as good a position as he would have been in had
the contract been performed, or his "reliance interest," which
is his interest in being reimbursed for loss caused by reliance
on the contract by being put in as good a position as he
would have been in had the contract not been made; or his
"restitution interest," which is his interest in having restored
to him any benefit that he has conferred on the other party.
Indeed, agreements can accomplish little, either for their
makers or for society, unless they are made the basis for
action. The effect of every infraction is to create a new duty,
that is, to make RECOMPENSE to the one who has been
injured by the failure of another to observe his contractual
obligation unless he can show extenuating circumstances, like
proof of his exercise of due diligence x x x or of the
Page 6 of 20
attendance of fortuitous event, to excuse him from his
ensuing liability. (Emphasis ours)
We agree with petitioner that records are bereft of proof to
show that respondent’s delay was indeed justified by the
circumstances – that is, One Virtual’s advice regarding
petitioner’s alleged breach of obligations. The lower court’s
Decision itself belied this contention when it said that
"plaintiff is not disputing that it did not complete
commissioning work on one of the two systems because One
Virtual at that time is already in default and has not paid
58
GILAT." Assuming arguendo that the commissioning work
was not completed, respondent has no one to blame but its
principal, One Virtual; if only it had paid its obligation on
time, petitioner would not have been forced to stop
operations. Moreover, the deposition of Mr. Erez Antebi, vice
president of Gilat, repeatedly stated that petitioner had
delivered all equipment, including the licensed software; and
that the equipment had been installed and in fact, gone into
59
operation. Notwithstanding these compliances, respondent
still failed to pay.
As to the issue of when interest must accrue, our Civil Code is
explicit in stating that it accrues from the time judicial or
extrajudicial demand is made on the surety. This ruling is in
accordance with the provisions of Article 1169 of the Civil
Code and of the settled rule that where there has been an
extra-judicial demand before an action for performance was
filed, interest on the amount due begins to run, not from the
date of the filing of the complaint, but from the date of that
60
extra-judicial demand. Considering that respondent failed
to pay its obligation on 30 May 2000 in accordance with the
Purchase Agreement, and that the extrajudicial demand of
61
petitioner was sent on 5 June 2000, we agree with the latter
that interest must start to run from the time petitioner sent
its first demand letter (5 June 2000), because the obligation
was already due and demandable at that time.
With regard to the interest rate to be imposed, we take cue
62
from Nacar v. Gallery Frames, which modified the guidelines
63
established in Eastern Shipping Lines v. CA in relation to
Bangko Sentral-Monetary Board Circular No. 799 (Series of
2013), to wit:
1. When the obligation is breached, and it consists in the
payment of a sum of money, i.e., a loan or forbearance of
money, the interest due should be that which may have been
stipulated in writing. Furthermore, the interest due shall itself
earn legal interest from the time it is judicially
demanded.1âwphi1 In the absence of stipulation, the rate of
interest shall be 6% per annum to be computed from default,
i.e., from judicial or extrajudicial demand under and subject
to the provisions of Article 1169 of the Civil Code.
xxxx
3. When the judgment of the court awarding a sum of money
becomes final and executory, the rate of legal interest,
whether the case falls under paragraph 1 or paragraph 2,
above, shall be 6% per annum from such finality until its
satisfaction, this interim period being deemed to be by then
an equivalent to a forbearance of credit.
Applying the above-discussed concepts and in the absence of
an agreement as to interests, we are hereby compelled to
award petitioner legal interest at the rate of 6% per annum
from 5 June 2000, its first date of extra judicial demand, until
the satisfaction of the debt in accordance with the revised
guidelines enunciated in Nacar.
WHEREFORE, the Petition for Review on Certiorari is hereby
GRANTED. The assailed Decision and Resolution of the Court
of Appeals in CA-G.R. CV No. 89263 are REVERSED. The
Decision of the Regional Trial Court, Branch 141, Makati City
 CRED 1 YATANAK
is REINSTATED, with MODIFICATION insofar as the award of
legal interest is concerned. Respondent is hereby ordered to
pay legal interest at the rate of 6% per annum from 5 June
2000 until the satisfaction of its obligation under the
Suretyship Contract and Purchase Agreement.
SO ORDERED.
MARIA LOURDES P. A. SERENO
Chief Justice, Chairperson
WE CONCUR:
g. Willex vs CA – G.R. No. 10 103066 (April 25, 1996)
Willex Plastic, Inc. v. CA, International Corporate Bank (1996)
Doctrine: It is never necessary that a guarantor or surety
should receive any part orbenefit, if such there be, accruing
to his principal Facts: 1978: Inter-Resin took out a loan from
Manila Bank. As additional security, Inter-Resin and
Investment Underwriting (IUCP) executed a Continuing
SuretyAgreement stating that the are liable to Manila Bank
solidarily for the loan taken outby Inter-Resin 1979: Inter-
Resin and Willex Plastic executed a Continuing Guarantee for
the loanwhich Inter-Resin obtained from Investment
Underwriting to the extent of P5M. 1981: Investment
Underwriting (IUCP) paid Manila Bank P4M to satisfy Inter-
Resin’s 1978 Obligation Investment Underwriting (IUCP) then
demanded payment of the P4M from bothInter-Resin and
Willex oInter-Resin paid IUCP P600K from the proceeds of its
fire insurance Willex denied obligation, it alleged that it is
only a guarantor of the principal, henceits liability was only
secondary to the principal and that it did not
receiveconsideration nor benefit from the contract between
the bank and Inter-Resin. Willex insisted that IUCP should
pursue Inter-Resin and apply to the loan the assetsof the
latter first before going after it. Willex further alleged that it
is guarantor of a loan to Manila Bank and not toInterbank,
hence the Continuing Guaranty cannot be retroactive applied
as contractsof suretyship contemplates future dealing.
ISSUE: WON Willex is liable as guarantor for the loans
obtained by Inter-Resin to IUCP? –
Yes HELD: Intent is controlling: clear from the evidence that
the Continuing Guaranteeexecuted by Willex with Inter-
Resinwould cover sums obtained (in the past – retroactive)
and/or to be obtained by Inter-Resin Industrial from
Interbank - Although a contract of suretyship is ordinarily not
to be construed as retrospective,in the end the intention of
the parties as revealed by the evidence is controlling – apply
it to the 1978 loan. Guarantor or surety is bound by the
same consideration that makes the contracteffective
between the principal parties thereto. . . . It is never
necessary that aguarantor or surety should receive any part
or benefit, if such there be, accruing tohis principal.
h. RCBC vs Judge Arro – G.R. No. L – 49401 (July 30, 1982)
Rizal Commercial Banking Corporation, petitioner, vs. Hon.
Jose P. Arro, Judge of the Court of First Instance of Davao,and
Residoro Chua, respondents. Date:31 July 1982 Ponente:De
Castro,J
.Facts:
Private respondent Residoro Chua, with Enrique Go, Sr.,
executed a comprehensivesurety agreement to
guaranty,above all, any existing or future indebtedness of
Davao Agricultural Industries Corporation (Daicor), and/or
induce thebank at anytime or from time to time to make
loans or advances or to extend credit to saidDaicor, provided
that theliability shall not exceed ay any time Php100,000.00.A
promissory note for Php100,000.00 (for additional capital to
the charcoal buy andsell and the activated carbonimportation
business) was issued in favor of petitionerRCBC payable a
month after execution. This was signed by Go inhis
Page 7 of 20
personalcapacity and in behalf of Daicor. Respondent Chua
did not sign in said promissorynote. As the note was notpaid
despite demands, RCBC filed a complaint for a sum of money
against Daicor, Go and Chua.The complaint against Chua was
dismissed upon his motion, alleging that thecomplaint states
no cause of actionagainst him as he was not a signatory to
the noteand hence he cannot be held liable. This was s
o despite RCBC’s
opposition, invokingthe comprehensive surety agreement
which it holds to cover not just the note inquestion but
alsoevery other indebtedness that Daicor may incur from
petitioner bank. RCBC moved for reconsideration of the
dismissalbut to no avail. Hence, this petition.
Issue:
WON respondent Chua may be held liable with Go and Daicor
under the promissorynote, even if he was not asignatory to it,
in light of the provisions of thecomprehensive surety
agreement wherein he bound himself with Go andDaicor,
assolidary debtors, to pay existing and future debts of said
corporation.
Held:
Yes, he may be held liable. Order dismissing the complaint
against respondent Chuareversed and set aside.
Caseremanded to court of origin with instruction to set
asidemotion to dismiss and to require defendant Chua to
answer thecomplaint.
Ratio:
The comprehensive surety agreement executed by Chua and
Go, as president andgeneral manager, respectively,of Daicor,
was to cover existing as well as futureobligations which
Daicor may incur with RCBC. This was only subject tothe
provisothat their liability shall not exceed at any one time the
aggregate principal amount of Php100,000.00. (Par.1of said
agreement).
The agreement was executed to induce petitioner Bank to
grant any application for aloan Daicor would request
for.According to said agreement, the guaranty iscontinuing
and shall remain in full force or effect until the bank is
notifiedof itstermination.During the time the loan under the
promissory note was incurred, the agreement wasstill in full
force and effect and isthus covered by the latter agreement.
Thus, even if Chua did not sign the promissory note, he is still
liable by virtue of the suretyagreement. The only condition
necessary for him to be
liable under the agreementwas that Daicor “is or maybecome
liable as maker, endorser, acceptor or otherwise.”
The comprehensive surety agreement signed by Go and Chua
was as an accessoryobligation dependent upon theprincipal
obligation, i.e., the loan obtained by Daicoras evidenced by
the promissory note. The surety agreementunequivocally
shows that it was executed to guarantee futuredebts that
may be incurred by Daicor with petitioner, asallowed under
NCC Art.2053.
“A guaranty may also be given as security for future debts,
the amount of which isnot yet known; there can be no claim
against the guarantor until the debt isliquidated. A
conditional obligation may also be secured.
i. Atok vs CA – G.R. No. 80079 (May 18, 1993)
GR No. 80078 May 18, 1993
Atok Finance vs Court of Appeals
Facts:
 CRED 1 YATANAK
On July 27, 1979, private respondents Sanyu Chemical
Corporation as principal and Sanyu Trading Corporation along
with private individual private stock holders of Sanyu
Chemical as sureties, executed a Continuing Suretyship
Agreement in favor of Atok Finance as creditor.
In 1981, Sanyu Chemical assigned its trade receivables
outstanding to Atok Finance in consideration of receipt from
Atok Finance of the amount of 105,000. The assigned
receivables carried a standard term for thirty days; it
appeared; however that the standard commercial practice
was to grant an extension of up to 120 days without
penalties.
In 1984, the petitioner commence an action against private
respondents before the RTC of Manila to collect a sum of
money plus penalty charges starting from September 1, 1983.
The Finance Corporation alleged that he failed to collect and
remit the amounts due under the trade receivables.
Private respondents sought the dismissal of the claim on the
ground that such claim had prescribed under Art. 1629 and
lack of cause of action. They contended that the Continuing
Suretyship Agreement , being an accessory contract ,was null
and void since, at the time of its execution, Sanyu Chemical
had no pre existing obligation due to Atok Finance.
The trial court ruled in favor of the petitioners. On appeal
reversed and set aside the decision of the trial and court and
dismiss the complaint of Atok Finance.
Issues:
Whether the individual private respondents may be held
solidarity liable with Sanyu Chemical under the provisions of
the Continuing Suretyship Agreement, or whether that
Agreement must be held null and void as having been
executed without consideration and without a pre-existing
principal obligation to sustain it.
Whether private respondents are liable under the Deed of
Assignment which they, along with principal debtor Sanyu
Chemical, executed in favor of the petitioner , on the
receivables thereby assigned.
Ruling :
I. No. the Continuing Suretyship Agreement must not be held
null and void. (di ko sure unsaon pag interpret)
Article 2053. — A guarantee may also be given as security for
future debts, the amount of which is not yet known; there
can be no claim against the guarantor until the debt is
liquidated. A conditional obligation may also be secured.
the "future debts" referred to in that Article relate to "debts
already existing at the time of the constitution of the
agreement but the amount [of which] is unknown," and not
to debts not yet incurred and existing at that time. Of course,
a surety is not bound under any particular principal obligation
until that principal obligation is born. But there is no
theoretical or doctrinal difficulty inherent in saying that the
suretyship agreement itself is valid and binding even before
the principal obligation intended to be secured thereby is
born, any more that there would be in saying that obligations
which are subject to a condition precedent are valid and
binding before the occurrence of the condition precedent.
Ps. Pwede ra di ninyo kopyahon ang red just for the sake of
comprehension lang.TY
Comprehensive or continuing surety agreements are in fact
quite common place in present day financial and commercial
Page 8 of 20
practice. A bank or a financing company which anticipates
entering into a series of credit transactions with a particular
company, commonly requires the projected principal debtor
to execute a continuing surety agreement along with its
sureties. By executing such an agreement, the principal places
itself in a position to enter into the projected series of
transactions with its creditor; with such surety agreement,
there would be no need to execute a separate surety contract
or bond for each financing or credit accommodation
extended to the principal debtor. As we understand it, this is
precisely what happened in the case at bar.
II.
Yes respondents are liable under receivables assigned to atok
finance under the terms of such receivable.
Article 1629 of the Civil Code invoked by private respondents
and accepted by the Court of Appeals is not, in the case at
bar, material. The liability of Sanyu Chemical to Atok Finance
rests not on the breach of the warranty of solvency; the
liability of Sanyu Chemical was not ex lege (ex Article 1629)
but rather ex contractu. Under the Deed of Assignment, the
effect of non-payment by the original trade debtors was
breach of warranty of solvency by Sanyu Chemical, resulting
in turn in the assumption of solidary liability by the assignor
under the receivables assigned. In other words, the assignor
Sanyu Chemical becomes a solidary debtor under the terms
of the receivables covered and transferred by virtue of the
Deed of Assignment. And because assignor Sanyu Chemical
became, under the terms of the Deed of Assignment, solidary
obligor under each of the assigned receivables, the other
private respondents (the Arrieta spouses, Pablito Bermundo
and Leopoldo Halili), became solidarily liable for that
obligation of Sanyu Chemical, by virtue of the operation of
the Continuing Suretyship Agreement. Put a little differently,
the obligations of individual private respondent officers and
stockholders of Sanyu Chemical under the Continuing
Suretyship Agreement, were activated by the resulting
obligations of Sanyu Chemical as solidary obligor under each
of the assigned receivables by virtue of the operation of the
Deed of Assignment. That solidary liability of Sanyu Chemical
is not subject to the limiting period set out in Article 1629 of
the Civil Code.
j.Diñovs CA G.R. 89775 (November 26, 1992)]
G.R. No. 89775 November 26, 1992
JACINTO UY DIÑO and NORBERTO UY, petitioners,
vs.
HON. COURT OF APPEALS and METROPOLITAN BANK AND
TRUST COMPANY, respondents.
DAVIDE, JR., J.:
Continuing Suretyship Agreements signed by the petitioners
set off this present controversy.
Petitioners assail the 22 June 1989 Decision of the Court in
1
CA-G.R. CV No. 17724 which reversed the 2 December 1987
Decision of Branch 45 of the Regional Trial Court (RTC) of
Manila in a collection suit entitled "Metropolitan Bank and
Trust Company vs. Uy Tiam, doing business under the name of
"UY TIAM ENTERPRISES & FREIGHT SERVICES," Jacinto Uy
Diño and Norberto Uy" and docketed as Civil Case No. 82-
9303. They likewise challenge public respondent's Resolution
2
of 21 August 1989 denying their motion for the
reconsideration of the former.
The impugned Decision of the Court summarizes the
antecedent facts as follows:
It appears that in 1977, Uy Tiam Enterprises and Freight
Services (hereinafter referred to as UTEFS), thru its
representative Uy Tiam, applied for and obtained credit
 CRED 1 YATANAK
accommodations (letter of credit and trust receipt
accommodations) from the Metropolitan Bank and Trust
Company (hereinafter referred to as METROBANK) in the sum
of P700,000.00 (Original Records, p. 333). To secure the
aforementioned credit accommodations Norberto Uy and
Jacinto Uy Diño executed separate Continuing Suretyships
(Exhibits "E" and "F" respectively), dated 25 February 1977, in
favor of the latter. Under the aforesaid agreements, Norberto
Uy agreed to pay METROBANK any indebtedness of UTEFS up
to the aggregate sum of P300,000.00 while Jacinto Uy Diño
agreed to be bound up to the aggregate sum of P800,000.00.
Having paid the obligation under the above letter of credit in
1977, UTEFS, through Uy Tiam, obtained another credit
accommodation from METROBANK in 1978, which credit
accommodation was fully settled before an irrevocable letter
of credit was applied for and obtained by the
abovementioned business entity in 1979 (September 8, 1987,
tsn, pp. 14-15).
The Irrevocable Letter of Credit No. SN-Loc-309, dated March
30, 1979, in the sum of P815, 600.00, covered UTEFS'
purchase of "8,000 Bags Planters Urea and 4,000 Bags
Planters 21-0-0." It was applied for and obtain by UTEFS
without the participation of Norberto Uy and Jacinto Uy Diño
as they did not sign the document denominated as
"Commercial Letter of Credit and Application." Also, they
were not asked to execute any suretyship to guarantee its
payment. Neither did METROBANK nor UTEFS inform them
that the 1979 Letter of Credit has been opened and the
Continuing Suretyships separately executed in February, 1977
shall guarantee its payment (Appellees brief, pp. 2-3; rollo, p.
28).
The 1979 letter of credit (Exhibit "B") was negotiated.
METROBANK paid Planters Products the amount of
P815,600.00 which payment was covered by a Bill of
Exchange (Exhibit "C"), dated 4 June 1979, in favor of
(Original Records, p. 331).
Pursuant to the above commercial transaction, UTEFS
executed and delivered to METROBANK and Trust Receipt
(Exh. "D"), dated 4 June 1979, whereby the former
acknowledged receipt in trust from the latter of the
aforementioned goods from Planters Products which
amounted to P815, 600.00. Being the entrusted, the former
agreed to deliver to METROBANK the entrusted goods in the
event of non-sale or, if sold, the proceeds of the sale thereof,
on or before September 2, 1979.
However, UTEFS did not acquiesce to the obligatory
stipulations in the trust receipt. As a consequence,
METROBANK sent letters to the said principal obligor and its
sureties, Norberto Uy and Jacinto Uy Diño, demanding
payment of the amount due. Informed of the amount due,
UTEFS made partial payments to the Bank which were
accepted by the latter.
Answering one of the demand letters, Diño, thru counsel,
denied his liability for the amount demanded and requested
METROBANK to send him copies of documents showing the
source of his liability. In its reply, the bank informed him that
the source of his liability is the Continuing Suretyship which
he executed on February 25, 1977.
As a rejoinder, Diño maintained that he cannot be held liable
for the 1979 credit accommodation because it is a new
obligation contracted without his participation. Besides, the
1977 credit accommodation which he guaranteed has been
fully paid.
Having sent the last demand letter to UTEFS, Diño and Uy and
finding resort to extrajudicial remedies to be futile,
METROBANK filed a complaint for collection of a sum of
Page 9 of 20
money (P613,339.32, as of January 31, 1982, inclusive of
interest, commission penalty and bank charges) with a prayer
for the issuance of a writ of preliminary attachment, against
Uy Tiam, representative of UTEFS and impleaded Diño and Uy
as parties-defendants.
The court issued an order, dated 29 July 1983, granting the
attachment writ, which writ was returned unserved and
unsatisfied as defendant Uy Tiam was nowhere to be found at
his given address and his commercial enterprise was already
non-operational (Original Records, p. 37).
On April 11, 1984, Norberto Uy and Jacinto Uy Diño (sureties-
defendant herein) filed a motion to dismiss the complaint on
the ground of lack of cause of action. They maintained that
the obligation which they guaranteed in 1977 has been
extinguished since it has already been paid in the same year.
Accordingly, the Continuing Suretyships executed in 1977
cannot be availed of to secure Uy Tiam's Letter of Credit
obtained in 1979 because a guaranty cannot exist without a
valid obligation. It was further argued that they can not be
held liable for the obligation contracted in 1979 because they
are not privies thereto as it was contracted without their
participation (Records, pp. 42-46).
On April 24, 1984, METROBANK filed its opposition to the
motion to dismiss. Invoking the terms and conditions
embodied in the comprehensive suretyships separately
executed by sureties-defendants, the bank argued that
sureties-movants bound themselves as solidary obligors of
defendant Uy Tiam to both existing obligations and future
ones. It relied on Article 2053 of the new Civil Code which
provides: "A guaranty may also be given as security for future
debts, the amount of which is not yet known; . . . ." It was
further asserted that the agreement was in full force and
effect at the time the letter of credit was obtained in 1979 as
sureties-defendants did not exercise their right to revoke it by
giving notice to the bank. (Ibid., pp. 51-54).
Meanwhile, the resolution of the aforecited motion to
dismiss was held in abeyance pending the introduction of
evidence by the parties as per order dated February 21, 1986
(Ibid., p. 71).
Having been granted a period of fifteen (15) days from
receipt of the order dated March 7, 1986 within which to file
the answer, sureties-defendants filed their responsive
pleading which merely rehashed the arguments in their
motion to dismiss and maintained that they are entitled to
the benefit of excussion (Original Records, pp. 88-93).
On February 23, 1987, plaintiff filed a motion to dismiss the
complaint against defendant Uy Tiam on the ground that it
has no information as to the heirs or legal representatives of
the latter who died sometime in December, 1986, which
motion was granted on the following day (Ibid., pp. 180-182).
After trial, . . . the court a quo, on December 2, 198, rendered
its judgment, a portion of which reads:
The evidence and the pleadings, thus, pose the querry (sic):
Are the defendants Jacinto Uy Diñoand Norberto Uy liable for
the obligation contracted by Uy Tiam under the Letter of
Credit (Exh. B) issued on March 30, 1987 by virtue of the
Continuing Suretyships they executed on February 25, 1977?
Under the admitted proven facts, the Court finds that they
are not.
a) When Uy and Diño executed the continuing suretyships,
exhibits E and F, on February 25, 1977, Uy Tiam was obligated
to the plaintiff in the amount of P700,000.00 — and this was
the obligation which both obligation which both defendants
guaranteed to pay. Uy Tiam paid this 1977 obligation –– and
such payment extinguished the obligation they assumed as
guarantors/sureties.
 CRED 1 YATANAK
b) The 1979 Letter of Credit (Exh. B) is different from the
1977 Letter of Credit which covered the 1977 account of Uy
Tiam. Thus, the obligation under either is apart and distinct
from the obligation created in the other — as evidenced by
the fact that Uy Tiam had to apply anew for the 1979
transaction (Exh. A). And Diño and Uy, being strangers
thereto, cannot be answerable thereunder.
c) The plaintiff did not serve notice to the defendants Diño
and Uy when it extended to Credit — at least to inform them
that the continuing suretyships they executed on February
25, 1977 will be considered by the plaintiff to secure the 1979
transaction of Uy Tiam.
d) There is no sufficient and credible showing that Diño and
Uy were fully informed of the import of the Continuing
Suretyships when they affixed their signatures thereon ––
that they are thereby securing all future obligations which Uy
Tiam may contract the plaintiff. On the contrary, Diño and Uy
categorically testified that they signed the blank forms in the
office of Uy Tiam at 623 Asuncion Street, Binondo, Manila, in
obedience to the instruction of Uy Tiam, their former
employer. They denied having gone to the office of the
plaintiff to subscribe to the documents (October 1, 1987, tsn,
pp. 5-7, 14; October 15, 1987, tsn, pp. 3-8, 13-16). (Records,
3
pp. 333-334).
xxx xxx xxx
In its Decision, the trial court decreed as follows:
PREMISES CONSIDERED, judgment is hereby rendered:
a) dismissing the COMPLAINT against JACINTO UY DIÑO and
NORBERTO UY;
b) ordering the plaintiff to pay to Diño and Uy the amount of
P6,000.00 as attorney's fees and expenses of litigation; and
c) denying all other claims of the parties for want of legal
and/or factual basis.
4
SO ORDERED. (Records, p. 336)
From the said Decision, the private respondent appealed to
the Court of Appeals. The case was docketed as CA-G.R. CV
No. 17724. In support thereof, it made the following
assignment of errors in its Brief:
I. THE LOWER COURT SERIOUSLY ERRED IN NOT FINDING AND
HOLDING THAT DEFENDANTS-APPELLEES JACINTO UY DIÑO
AND NORBERTO UY ARE SOLIDARILY LIABLE TO PLAINTIFF-
APPELLANT FOR THE OBLIGATION OF DEFENDANT UY TIAM
UNDER THE LETTER OF CREDIT ISSUED ON MARCH 30, 1979
BY VIRTUE OF THE CONTINUING SURETYSHIPS THEY
EXECUTED ON FEBRUARY 25, 1977.
II. THE LOWER COURT ERRED IN HOLDING THAT PLAINTIFF-
APPELLANT IS ANSWERABLE TO DEFENDANTS-APPELLEES
JACINTO UY DIÑO AND NORBERTO UY FOR ATTORNEY'S FEES
5
AND EXPENSES OF LITIGATION.
On 22 June 1989, public respondent promulgated the assailed
Decision the dispositive portion of which reads:
WHEREFORE, premises considered, the judgment appealed
from is hereby REVERSED AND SET, ASIDE. In lieu thereof,
another one is rendered:
1) Ordering sureties-appellees Jacinto Uy Diño and Norberto
Uy to pay, jointly and severally, to appellant METROBANK the
amount of P2,397,883.68 which represents the amount due
as of July 17, 1987 inclusive of principal, interest and charges;
2) Ordering sureties-appellees Jacinto Uy Diño and Norberto
Uy to pay, jointly and severally, appellant METROBANK the
accruing interest, fees and charges thereon from July 18,
1987 until the whole monetary obligation is paid; and
3) Ordering sureties-appellees Jacinto Uy Diño and Norberto
Uy to pay, jointly and severally, to plaintiff P20,000.00 as
attorney's fees.
With costs against appellees.
Page 10 of 20
6
SO ORDERED.
In ruling for the herein private respondent (hereinafter
METROBANK), public respondent held that the Continuing
Suretyship Agreements separately executed by the
petitioners in 1977 were intended to guarantee payment of
Uy Tiam's outstanding as well as future obligations; each
suretyship arrangement was intended to remain in full force
and effect until METROBANK would have been notified of its
revocation. Since no such notice was given by the petitioners,
the suretyships are deemed outstanding and hence, cover
even the 1979 letter of credit issued by METROBANK in favor
of Uy Tiam.
Petitioners filed a motion to reconsider the foregoing
Decision. They questioned the public respondent's
construction of the suretyship agreements and its ruling with
respect to the extent of their liability thereunder. They
argued the even if the agreements were in full force and
effect when METROBANK granted Uy Tiam's application for a
letter of credit in 1979, the public respondent nonetheless
seriously erred in holding them liable for an amount over and
above their respective face values.
In its Resolution of 21 August 1989, public respondent denied
the motion:
. . . considering that the issues raised were substantially the
same grounds utilized by the lower court in rendering
judgment for defendants-appellees which We upon appeal
found and resolved to be untenable, thereby reversing and
setting aside said judgment and rendering another in favor of
plaintiff, and no new or fresh issues have been posited to
7
justify reversal of Our decision herein, . . . .
Hence, the instant petition which hinges on the issue of
whether or not the petitioners may be held liable as sureties
for the obligation contracted by Uy Tiam with METROBANK
on 30 May 1979 under and by virtue of the Continuing
Suretyship Agreements signed on 25 February 1977.
Petitioners vehemently deny such liability on the ground that
the Continuing Suretyship Agreements were automatically
extinguished upon payment of the principal obligation
secured thereby, i.e., the letter of credit obtained by Uy Tiam
in 1977. They further claim that they were not advised by
either METROBANK or Uy Tiam that the Continuing
Suretyship Agreements would stand as security for the 1979
obligation. Moreover, it is posited that to extend the
application of such agreements to the 1979 obligation would
amount to a violation of Article 2052 of the Civil Code which
expressly provides that a guaranty cannot exist without a
valid obligation. Petitioners further argue that even granting,
for the sake of argument, that the Continuing Suretyship
Agreements still subsisted and thereby also secured the 1979
obligations incurred by Uy Tiam, they cannot be held liable
for more than what they guaranteed to pay because it s
axiomatic that the obligations of a surety cannot extend
beyond what is stipulated in the agreement.
On 12 February 1990, this Court resolved to give due course
to the petition after considering the allegations, issues and
arguments adduced therein, the Comment thereon by the
private respondent and the Reply thereto by the petitioners;
the parties were required to submit their respective
Memoranda.
The issues presented for determination are quite simple:
1. Whether petitioners are liable as sureties for the 1979
obligations of Uy Tiam to METROBANK by virtue of the
Continuing Suretyship Agreements they separately signed in
1977; and
2. On the assumption that they are, what is the extent of
their liabilities for said 1979 obligations.
 CRED 1 YATANAK
Under the Civil Code, a guaranty may be given to secure even
future debts, the amount of which may not known at the
time the guaranty is
executed. 8 This is the basis for contracts denominated as
continuing guaranty or suretyship. A continuing guaranty is
one which is not limited to a single transaction, but which
contemplates a future course of dealing, covering a series of
transactions, generally for an indefinite time or until revoked.
It is prospective in its operation and is generally intended to
provide security with respect to future transactions within
certain limits, and contemplates a succession of liabilities, for
which, as they accrue, the guarantor becomes
9
liable. Otherwise stated, a continuing guaranty is one which
covers all transactions, including those arising in the future,
which are within the description or contemplation of the
contract, of guaranty, until the expiration or termination
10
thereof. A guaranty shall be construed as continuing when
by the terms thereof it is evident that the object is to give a
standing credit to the principal debtor to be used from time
to time either indefinitely or until a certain period, especially
if the right to recall the guaranty is expressly reserved. Hence,
where the contract of guaranty states that the same is to
secure advances to be made "from time to time" the
11
guaranty will be construed to be a continuing one.
In other jurisdictions, it has been held that the use of
particular words and expressions such as payment of "any
debt," "any indebtedness," "any deficiency," or "any sum," or
the guaranty of "any transaction" or money to be furnished
the principal debtor "at any time," or "on such time" that the
principal debtor may require, have been construed to
12
indicate a continuing guaranty.
In the case at bar, the pertinent portion of paragraph I of the
suretyship agreement executed by petitioner Uy provides
thus:
I. For and in consideration of any existing indebtedness to the
BANK of UY TIAM (hereinafter called the "Borrower"), for the
payment of which the SURETY is now obligated to the BANK,
either as guarantor or otherwise, and/or in order to induce
the BANK, in its discretion, at any time or from time to time
hereafter, to make loans or advances or to extend credit in
any other manner to, or at the request, or for the account of
the Borrower, either with or without security, and/or to
purchase or discount, or to make any loans or advances
evidence or secured by any notes, bills, receivables, drafts,
acceptances, checks, or other instruments or evidences of
indebtedness (all hereinafter called "instruments") upon
which the Borrower is or may become liable as maker,
endorser, acceptor, or otherwise, the SURETY agrees to
guarantee, and does hereby guarantee, the punctual payment
at maturity to the loans, advances credits and/or other
obligations hereinbefore referred to, and also any and all
other indebtedness of every kind which is now or may
hereafter become due or owing to the BANK by the Borrower,
together with any and all expenses which may be incurred by
the BANK in collecting all or any such instruments or other
indebtedness or obligations herein before referred to, and/or
in enforcing any rights hereunder, and the SURETY also
agrees that the BANK may make or cause any and all such
payments to be made strictly in accordance with the terms
and provisions of any agreement(s) express or implied, which
has (have) been or may hereafter be made or entered into by
the Borrow in reference thereto, regardless of any law,
regulation or decree, unless the same is mandatory and non-
waivable in character, nor or hereafter in effect, which might
in any manner affect any of the terms or provisions of any
such agreement(s) or the Bank's rights with respect thereto
Page 11 of 20
as against the Borrower, or cause or permit to be invoked any
alteration in the time, amount or manner of payment by the
Borrower of any such instruments, obligations or
indebtedness; provided, however, that the liability of the
SURETY hereunder shall not exceed at any one time the
aggregate principal sum of PESOS: THREE HUNDRED
THOUSAND ONLY (P300,000.00) (irrespective of the
currenc(ies) in which the obligations hereby guaranteed are
payable), and such interest as may accrue thereon either
before or after any maturity(ies) thereof and such expenses
13
as may be incurred by the BANK as referred to above.
Paragraph I of the Continuing Suretyship Agreement executed
by petitioner Diño contains identical provisions except with
respect to the guaranteed aggregate principal amount which
14
is EIGHT THOUSAND PESOS (P800,000.00).
Paragraph IV of both agreements stipulate that:
VI. This is a continuing guaranty and shall remain in full force
and effect until written notice shall have been received by the
BANK that it has been revoked by the SURETY, but any such
notice shall not release the SURETY, from any liability as to
any instruments, loans, advances or other obligations hereby
guaranteed, which may be held by the BANK, or in which the
BANK may have any interest at the time of the receipt (sic) of
such notice. No act or omission of any kind on the BANK'S
part in the premises shall in any event affect or impair this
guaranty, nor shall same (sic) be affected by any change
which may arise by reason of the death of the SURETY, or of
any partner(s) of the SURETY, or of the Borrower, or of the
accession to any such partnership of any one or more new
15
partners.
The foregoing stipulations unequivocally reveal that the
suretyship agreement in the case at bar are continuing in
nature. Petitioners do not deny this; in fact, they candidly
admitted it. Neither have they denied the fact that they had
not revoked the suretyship agreements. Accordingly, as
correctly held by the public respondent:
Undoubtedly, the purpose of the execution of the Continuing
Suretyships was to induce appellant to grant any application
for credit accommodation (letter of credit/trust receipt)
UTEFS may desire to obtain from appellant bank. By its terms,
each suretyship is a continuing one which shall remain in full
force and effect until the bank is notified of its revocation.
xxx xxx xxx
When the Irrevocable Letter of Credit No. SN-Loc-309 was
obtained from appellant bank, for the purpose of obtaining
goods (covered by a trust receipt) from Planters Products, the
continuing suretyships were in full force and effect. Hence,
even if sureties-appellees did not sign the "Commercial Letter
of Credit and Application, they are still liable as the credit
accommodation (letter of credit/trust receipt) was covered
by the said suretyships. What makes them liable thereunder
is the condition which provides that the Borrower "is or may
become liable as maker, endorser, acceptor or otherwise."
And since UTEFS which (sic) was liable as principal obligor for
having failed to fulfill the obligatory stipulations in the trust
receipt, they as insurers of its obligation, are liable
16
thereunder.
Petitioners maintain, however, that their Continuing
Suretyship Agreements cannot be made applicable to the
1979 obligation because the latter was not yet in existence
when the agreements were executed in 1977; under Article
2052 of the Civil Code, a guaranty "cannot exist without a
valid obligation." We cannot agree. First of all, the succeeding
article provides that "[a] guaranty may also be given as
security for future debts, the amount of which is not yet
known." Secondly, Article 2052 speaks about a valid
 CRED 1 YATANAK
obligation, as distinguished from a void obligation, and not
an existing or current obligation. This distinction is made
clearer in the second paragraph of Article 2052 which reads:
Nevertheless, a guaranty may be constituted to guarantee
the performance of a voidable or an unenforceable contract.
It may also guarantee a natural obligation.
As to the amount of their liability under the Continuing
Suretyship Agreements, petitioners contend that the public
respondent gravely erred in finding them liable for more than
the amount specified in their respective agreements, to wit:
(a) P800,000.00 for petitioner Diño and (b) P300,000.00 for
petitioner Uy.
The limit of the petitioners respective liabilities must be
determined from the suretyship agreement each had signed.
It is undoubtedly true that the law looks upon the contract of
suretyship with a jealous eye, and the rule is settled that the
obligation of the surety cannot be extended by implication
beyond its specified limits. To the extent, and in the manner,
and under the circumstances pointed out in his obligation, he
17
is bound, and no farther.
Indeed, the Continuing Suretyship Agreements signed by
petitioner Diño and petitioner Uy fix the aggregate amount of
their liability, at any given time, at P800,000.00 and
P300,000.00, respectively. The law is clear that a guarantor
may bond himself for less, but not for more than the principal
debtor, both as regards the amount and the onerous nature
18
of the conditions. In the case at bar, both agreements
provide for liability for interest and expenses, to wit:
. . . and such interest as may accrue thereon either before or
after any maturity(ies) thereof and such expenses as may be
19
incurred by the BANK referred to above.
They further provide that:
In the event of judicial proceedings being instituted by the
BANK against the SURETY to enforce any of the terms and
conditions of this undertaking, the SURETY further agrees to
pay the BANK a reasonable compensation for and as
attorney's fees and costs of collection, which shall not in any
event be less than ten per cent (10%) of the amount due (the
same to be due and payable irrespective of whether the case
20
is settled judicially or extrajudicially).
Thus, by express mandate of the Continuing Suretyship
Agreements which they had signed, petitioners separately
bound themselves to pay interest, expenses, attorney's fees
and costs. The last two items are pegged at not less than ten
percent (10%) of the amount due.
Even without such stipulations, the petitioners would,
nevertheless, be liable for the interest and judicial costs.
21
Article 2055 of the Civil Code provides:
Art. 2055. A guaranty is not presumed; it must be express and
cannot extend to more than what is stipulated therein.
If it be simple or indefinite, it shall comprise not only the
principal obligation, but also all its accessories, including the
judicial costs, provided with respect to the latter, that the
guarantor shall only be liable for those costs incurred after he
has been judicially required to pay.
Interest and damages are included in the term accessories.
However, such interest should run only from the date when
the complaint was filed in court. Even attorney's fees may be
imposed whenever appropriate, pursuant to Article 2208 of
the Civil Code. Thus, in Plaridel Surety & Insurance Co.,
22
Inc. vs. P.L. Galang Machinery Co., Inc., this Court held:
Petitioner objects to the payment of interest and attorney's
fees because: (1) they were not mentioned in the bond; and
(2) the surety would become liable for more than the
amount stated in the contract of suretyship.
xxx xxx xxx
Page 12 of 20
The objection has to be overruled, because as far back as the
year 1922 this Court held in Tagawa vs. Aldanese, 43 Phil.
852, that creditors suing on a suretyship bond may recover
from the surety as part of their damages, interest at the legal
rate even if the surety would thereby become liable to pay
more than the total amount stipulated in the bond. The
theory is that interest is allowed only by way of damages for
delay upon the part of the sureties in making payment after
they should have done so. In some states, the interest has
been charged from the date of the interest has been charged
from the date of the judgment of the appellate court. In this
jurisdiction, we rather prefer to follow the general practice,
which is to order that interest begin to run from the date
when the complaint was filed in court, . . .
Such theory aligned with sec. 510 of the Code of Civil
Procedure which was subsequently recognized in the Rules of
Court (Rule 53, section 6) and with Article 1108 of the Civil
Code (now Art. 2209 of the New Civil Code).
In other words the surety is made to pay interest, not by
reason of the contract, but by reason of its failure to pay
when demanded and for having compelled the plaintiff to
resort to the courts to obtain payment. It should be observed
that interest does not run from the time the obligation
became due, but from the filing of the complaint.
As to attorney's fees. Before the enactment of the New Civil
Code, successful litigants could not recover attorney's fees as
part of the damages they suffered by reason of the litigation.
Even if the party paid thousands of pesos to his lawyers, he
could not charge the amount to his opponent (Tan Ti vs.
Alvear, 26 Phil. 566).
However the New Civil Code permits recovery of attorney's
fees in eleven cases enumerated in Article 2208, among
them, "where the court deems it just and equitable that
attorney's (sic) fees and expenses of litigation should be
recovered" or "when the defendant acted in gross and
evident bad faith in refusing to satisfy the plaintiff's plainly
valid, just and demandable claim." This gives the courts
discretion in apportioning attorney's fees.
The records do not reveal the exact amount of the unpaid
portion of the principal obligation of Uy Tiam to MERTOBANK
under Irrevocable Letter of Credit No. SN-Loc-309 dated 30
March 1979. In referring to the last demand letter to Mr. Uy
Tiam and the complaint filed in Civil Case No. 82-9303, the
public respondent mentions the amount of "P613,339.32, as
of January 31, 1982, inclusive of interest commission penalty
23
and bank charges." This is the same amount stated by
24
METROBANK in its Memorandum. However, in
summarizing Uy Tiam's outstanding obligation as of 17 July
1987, public respondent states:
Hence, they are jointly and severally liable to appellant
METROBANK of UTEFS' outstanding obligation in the sum of
P2,397,883.68 (as of July 17, 1987) — P651,092.82
representing the principal amount, P825,133.54, for past due
interest (5-31-82 to 7-17-87) and P921,657.32, for penalty
charges at 12%per annum (5-31-82 to 7-17-87) as shown in
25
the Statement of Account (Exhibit I).
Since the complaint was filed on 18 May 1982, it is obvious
that on that date, the outstanding principal obligation of Uy
Tiam, secured by the petitioners' Continuing Suretyship
Agreements, was less than P613,339.32. Such amount may be
fully covered by the Continuing Suretyship Agreement
executed by petitioner Diño which stipulates an aggregate
principal sum of not exceeding P800,000.00, and partly
covered by that of petitioner Uy which pegs his maximum
liability at P300,000.00.
 CRED 1 YATANAK
Consequently, the judgment of the public respondent shall
have to be modified to conform to the foregoing exposition,
to which extent the instant petition is impressed with partial
merit.
WHEREFORE, the petition is partly GRANTED, but only insofar
as the challenged decision has to be modified with respect to
the extend of petitioners' liability. As modified, petitioners
JACINTO UY DIÑO and NORBERTO UY are hereby declared
liable for and are ordered to pay, up to the maximum limit
only of their respective Continuing Suretyship Agreement, the
remaining unpaid balance of the principal obligation of UY
TIAM or UY TIAM ENTERPRISES & FREIGHT SERVICES under
Irrevocable Letter of Credit No. SN-Loc-309, dated 30 March
1979, together with the interest due thereon at the legal rate
commencing from the date of the filing of the complaint in
Civil Case No. 82-9303 with Branch 45 of the Regional Trial
Court of Manila, as well as the adjudged attorney's fees and
costs.
All other dispositions in the dispositive portion of the
challenged decision not inconsistent with the above are
affirmed.
SO ORDERED.
FORTUNE MOTORS (PHILS.) CORPORATION and EDGAR L.
RODRIGUEZA, petitioners, vs. THE HONORABLE COURT OF
APPEALS and FILINVEST CREDIT CORPORATION, respondents.
G.R. No. 112191. February 7, 1997.
Art 1292 New Civil Code. 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.
Facts:
Petitioners herein executed an undated “Surety Undertaking”
where they “absolutely, unconditionally and solidarily
guarantee the “full, faithful and prompt performance,
payment and discharge of any and all obligations and
agreements” of Fortune Motor (Phils) Corporation to
Respondent and its affiliated and subsidiary companies.
Page 13 of 20
The following year, Petitioner Fortune, Respondent Filinvest
and Canlubang Automotive Resources Corporation (“CARCO”)
entered into an “Automotive Wholesale Financing
Agreement” wherein CARCO will deliver motor vehicles to
Fortune for the purpose of resale in the latter’s ordinary
course of business; Fortune, in turn, will execute trust
receipts over said vehicles and accept drafts drawn by
CARCO, which will discount the same together with the trust
receipts and invoices and assign them in favor of Respondent
Filinvest, which will pay the motor vehicles for Fortune.
Under the same agreement, Petitioner Fortune, as trustee of
the motor vehicles, was to report and remit proceeds of any
sale for cash or on terms to Respondent Filinvest immediately
without necessity of demand.
Several vehicles were delivered by CARCO to Petitioner
Fortune and trust receipts covered by demand drafts and
deeds of assignment were executed in favor of Respondent
Filinvest. But when the demand drafts matured, not all the
proceeds of the vehicles which petitioner had sold were
remitted and likewise failed to turn over several unsold
vehicles covered by the trust receipts.
Thus, Respondent Filinvest through counsel, sent a demand
letter to petitioner fortune. Despite said demands, the
amount was still not paid. Hence, respondent filed in the RTC
of Manila a complaint for a sum of money with preliminary
attachment against the petitioners.
The trial court declared that there was no factual issue to be
resolved except for the correct balance of defendant’s
account with Filinvest as agreed upon by the parties during
pre-trial.
Filinvest presented testimonial and documentary evidence
but defendants, instead of presenting their evidence filed a
“motion for judgement on demurrer to evidence” anchored
principally on the ground that the Surety Undertakings were
null and void because at the time they were executed, there
was no principal obligation existing. The trial court denied the
motion and scheduled the case for reception of defendant’s
evidence, however, defendats failed to present their
evidence prompting the court to deem them have waived
their right to present evidence.
Issue: Whether or no the Court of Appeals erred when it
declared that there was no novation?
Ruling: NO
On the matter of novation, this has already been ruled upon
when this Court denied defendants’ Motion to dismiss on the
argument that what happened was really an assignment of
credit, and not a novation of contract, which does not
require the consent of the debtors. The fact of knowledge is
enough. Besides, as explained by the plaintiff, the mother or
the principal contract was the Financing Agreement, whereas
the trust receipts, the sight drafts, as well as the Deeds of
assignment were only collaterals or accidental modifications
which do not extinguish the original contract by way of
novation. This proposition holds true even if the subsequent
agreement would provide for more onerous terms for, at any
rate, it is the principal or mother contract that is to be
followed. When the changes refer to secondary agreements
and not to the object or principal conditions of the contract,
there is no novation; such changes will produce modifications
 CRED 1 YATANAK
of incidental facts, but will not extinguish the original
obligation.
4. SOUTH CITY HOMES, INC., FORTUNE MOTORS (PHILS.),
PALAWAN LUMBER MANUFACTURING CORPORATION,
petitioners,
vs.
BA FINANCE CORPORATION, respondent.
Facts:
On January 17, 1983, Joseph L. G. Chua, President of Fortune
Motors Corporation, executed in favor of plaintiff-appellant 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 (Folder of Exhibits, pp.
19-20). 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.
Fortune Motors Corporation thereafter executed trust
receipts covering the motor vehicles delivered to it by CARCO
under which it agreed to remit to the Entruster (CARCO) the
proceeds of any sale and immediately surrender the
remaining unsold vehicles. ). The drafts and trust receipts
were assigned to plaintiff-appellant, under Deeds of
Assignment executed by CARCO.
Upon failure of the defendant-appellant Fortune Motors
Corporation to pay the amounts due under the drafts and to
remit the proceeds of motor vehicles sold or to return those
remaining unsold in accordance with the terms of the trust
receipt agreements, BA Finance Corporation sent demand
letter to Edgar C. Rodrigueza, South City Homes, Inc., Aurelio
Tablante, Palawan Lumber Manufacturing Corporation,
Joseph L. G. Chua, George D. Tan and Joselito C. Baltazar
(Folder of Exhibits, pp. 29-37). Since the defendants-
appellants failed to settle their outstanding account with
plaintiff-appellant, the latter filed on December 22, 1983 a
complaint for a sum of money with prayer for preliminary
attachment, with the Regional Trial Court of Manila.
Issue: WON respondent BAFC has a valid cause of action for a
sum of money following the drafts and trust receipts
transactions.
Held: As an entruster, respondent BAFC must first demand
the return of the unsold vehicles from Fortune Motors
Corporation, pursuant to the terms of the trust receipts.
Having failed to do so, petitioners had no cause of action
whatsoever against Fortune Motors Corporation and the
action for collection of sum of money was, therefore,
premature.
Page 14 of 20
A trust receipt is a security transaction intended to aid in
financing importers and retail dealers who do not have
sufficient funds or resources to finance the importation or
purchase of merchandise, and who may not be able to
acquire credit except through utilization, as collateral, of the
merchandise imported or purchased.9 In the event of default
by the entrustee on his obligations under the trust receipt
agreement, it is not absolutely necessary that the entruster
cancel the trust and take possession of the goods to be able
to enforce his rights thereunder.
Pacific Banking Corp vs. Intermediate Appellate Court and
Roberto Regala, Jr.
FACTS:
Petitioner bank issued a credit card to private
respondent’s wife, Celia Syjuco Regala. She applied on Oct.
24, 1975 and was issued and became effective on Oct. 29,
1975, going over the credit limit and even extending from the
Oct. 29, 1976 one-year deadline. As a condition, private
respondent, Roberto Regala, Jr., the husband, executed a
Guarantor’s Undertaking that makes him “jointly and
severally liable for any and all indebtedness, obligations,
charges or liabilities due and incurred by Celia Regala.”
Celia’s incurred charges reached up to P92,803.98
after more than one year of using the credit card but she
failed to settle her account. the bank then sent demand
letters to both Celia and Roberto. They still failed to settle,
thus the bank filed a complaint with the trial court.
In his demand letter, Roberto contended that his
liability was limited only to P2,000.00 a month, the agreed
credit limit. Celia, on the other hand, remained silent. Having
failed to appear at their pre-trial conference, they were both
declared in default by the court.
The RTC decided in favor of the petitioner bank,
declaring Roberto to be jointly and severally liable to pay the
total charges with wife Celia. Upon appeal, however,
appellant court decided in favor of Roberto in that he is liable
only for P2,000.00.
ISSUE/S: Is Roberto liable only to the extent of P2,000.00?
HELD:
No. The Guarantor’s Undertaking was, in substance,
a contract of surety. In suretyship, the surety binds himself
solidarily with the principal debtor. As provided in Roberto’s
Guarantor’s Undertaking, he bound himself “solidarily and
jointly to pay Pacific Banking Corp. any and all indebtedness,
obligations, charges or liabilities due and incurred by Celia
Regala.” This was also a condition in applying for the bank’s
credit card (#5 of the Terms and Conditions).
Art. 2054 is not applicable in this in limiting the
guarantor’s liability as Roberto expressly bound himself up to
the extent of debtor’s indebtedness, also waiving any
“discharge in case of any change or novation of the terms and
conditions in connection with the issuance of the credit card”.
He bound himself as a surety continuously until all liabilities
have been fully paid - including additional and future debts of
Celia.
Therefore, Roberto is held liable to the same extent
as Celia.
 CRED 1 YATANAK
JEANETTE D. MOLINO, petitioner, vs. SECURITY DINERS
INTERNATIONAL CORPORATION, respondent.
DECISION
GONZAGA-REYES, J.:
Assailed by this petition for review on certiorari is the
decision of the Court of Appeals dated September 28,
[1]
1998 which held petitioner liable as surety for the
outstanding credit card debts of Danilo Alto with herein
respondent corporation.
The decision of the Court of Appeals satisfactorily sums up
the facts that led to the filing of this case:
The Security Diners International Corporation (SDIC) operates
a credit card system under the name of Diners Club through
which it extends credit accommodation to its cardholders for
the purchase of goods and payment of services from its
member establishments to be reimbursed later on by the
cardholder upon proper billing. There are two types of credit
cards issued: one, the Regular (Local) Card which entitles the
cardholder to purchase goods and pay services from member
establishments in an amount not exceeding P10,000.00; and
two, the Diamond (Edition) Card which entitles the
cardholder to purchase goods and pay services from member
establishments in unlimited amounts. One of the
requirements for the issuance of either of these cards is that
an applicant should have a surety.
On July 24, 1987, Danilo A. Alto applied for a Regular (Local)
Card with SDIC. He got as his surety his own sister-in-law
Jeanette Molino Alto. Thus, Danilo signed the printed
application form (Exhibit A) and Jeanette signed the Surety
Undertaking (Exhibit A-5). Attached to the Application Form
was an Agreement (Use of Diners Club Card), paragraph 16 of
which reads:
16. SURETY. The cardholder shall furnish an adequate surety
or sureties acceptable to Security Diners who shall be jointly
and severally liable with the cardholder to pay Security Diners
all the obligations and charges incurred and credit extended
on the basis of the card. In the event the surety/sureties
furnished the cardholder are discharged the cardholder must
furnish a new surety or sureties acceptable to Security Diners
within thirty (30) days. Otherwise the cardholders privileges
shall be automatically terminated in accordance with Section
11 hereof.
The Surety Undertaking signed by Jeanette states:
I/WE, the undersigned, bind myself/ourselves jointly and
severally with Mr. Danilo Alto to pay SECURITY DINERS
INTERNATIONAL CORPORATION, hereinafter referred to as
Security Diners all the obligations and charges including but
not limited to fees, interest, attorneys fees and all other costs
incurred by him/her in connection with the use of the DINERS
CLUB CARD in accordance with the terms and conditions
governing the issuance and use of the Diners Club Card. Any
change or novation in the agreement or any extension of
time granted by SECURITY DINERS to pay such obligations,
charges and fees, shall not release me/us from this Surety
Undertaking, it being understood that said undertaking is a
continuing one and shall subsist and bind me/us until all such
obligations, charges and fees have been fully paid and
satisfied.
It is understood that the indication of a credit limit to the
cardholder shall not relieve me/us of liability for charges and
all other amounts voluntarily incurred by the cardholder in
excess of the credit limit.
On the basis of the completed and signed Application Form
and Surety Undertaking, the SDIC issued to Danilo Diners
Card No. 36510293216-0006. The latter used this card and
Page 15 of 20
initially paid his obligations to SDIC. On February 8, 1988,
Danilo wrote SDIC a letter (Exhibit B) requesting it to upgrade
his Regular (Local) Diners Club Card to a Diamond (Edition)
one. As a requirement of SDIC, Danilo secured from Jeanette
her approval. The latter obliged and so on March 2, 1988, she
signed a Note (Exhibit C) which states:
This certifies that I, Jeanette D. Molino, approve of the
request of Danilo and Gloria Alto with Card No. 3651-203216-
0006 and 3651-203412-5007 to upgrade their card from
regular to diamond edition.
Danilos request was granted and he was issued a Diamond
(Edition) Diners Club Card. He used this card and made
purchases (Exhibits D, D-1 to D-7) from member
establishments. On October 1, 1988 Danilo had incurred
credit charged plus appropriate interest and service charges
in the aggregate amount of P166,408.31. He defaulted in the
payment of this obligation.
SDIC demanded of Danilo and Jeanette to pay said obligation
but they did not pay. So, on November 9, 1988, SDIC filed an
action to collect said indebtedness against Danilo and
Jeanette. This was docketed in the Regional Trial Court of
[2]
Makati, Branch 145 as Civil Case No. 88-2381. xxx
Defendant Danilo Alto failed to file an Answer, and during the
pre-trial conference respondent moved to have the complaint
dismissed against him, without prejudice to a subsequent re-
filing. Petitioner was left as the lone defendant, sued in her
capacity as surety of Danilo.
In the Answer with Compulsory Counterclaim that she filed
with the RTC, petitioner claimed that her liability under the
Surety Undertaking was limited to P10,000.00 and that she
did not expressly and categorically agree to act as surety for
[3]
Danilo in an amount higher than P10,000.00. By way of
counterclaim, she asked for moral and exemplary damages.
On August 19, 1991, the trial court rendered a decision
dismissing the complaint for failure of respondent to prove its
case by a preponderance of the evidence. It found that while
petitioner clearly bound herself as surety under the terms of
Danilo Altos Regular Diners Club Card, there was no evidence
that after the card had been upgraded to Diamond (Edition)
petitioner consented or agreed to act as surety for
Danilo. Exhibit C or Exhibit 1, inter alia, which was a note
bearing petitioners signature certifying to her approval of
Danilos request to have his card upgraded should be read
simply as a statement of no objection to his request for
upgrading, and not as an assumption of liability for the debts
[4]
that Danilo may later owe through the said card. The trial
court also took note of the testimony of Alfredo Vicente, an
officer of respondent, who opined that the consent to be
bound as surety to an upgraded card should be
[5]
categorical and not in a simple no objection form.
The trial court went on further to state that petitioner was
not liable for any amount, not even for P10,000.00 which is
the maximum credit limit for Regular Diners Club Cards, since
at the time of the upgrading Danilo had no outstanding credit
[6]
card debts. This is evident from the fact that Danilos
request for upgrading was approved, since one of the
requirements for the approval of a request for the upgrading
of a credit card from Regular to Diamond is that the applicant
must have paid all his billings for the last three months prior
to his request.
Hence, the trial court disposed of the case with these
pronouncements:
WHEREFORE, judgment is rendered dismissing the complaint
against defendant Jeanette D. Molino-Alto for failure of the
plaintiff to prove its case by a clear preponderance of
evidence.
 CRED 1 YATANAK
Said defendants counterclaim is also dismissed.
No pronouncement as to costs.
[7]
SO ORDERED.
The Court of Appeals found contrary to the lower court, and
declared that the Surety Undertaking signed by petitioner
when Danilo Alto first applied for a Regular Diners Club Card
clearly applied to the unpaid purchases of Danilo Alto under
the Diamond card. In holding thus, the Court of Appeals
referred to the terms of the said Surety Undertaking, which
stated that any change or novation in the agreement on the
use of the Diners Club card does not release the surety from
his obligations, it being understood that the undertaking is a
continuing one which subsists until all obligations and charges
under the subject credit card are paid and satisfied. It also
cited Pacific Banking Corporation vs. Intermediate Appellate
[8]
Court, a 1991 decision which held the surety liable to the
extent of the credit cardholders indebtedness, under the
clear terms of the Guarantors Undertaking that the surety
signed with the credit card company.
The Court of Appeals further declared that it was erroneous
of the trial court to conclude that petitioner was completely
relieved of liability under Danilo Altos credit card since the
Surety Undertaking she signed remained valid and
enforceable even after the upgrading of the said card;
besides, petitioner herself admitted that she was liable to the
extent of P10,000.00.
Additionally, the Court of Appeals reduced the attorneys fees
(stipulated in the Agreement for the Use of Diners Club Card)
from 25% to 10% of the amount due, judging this to be a
more reasonable rate under the circumstances.
The dispositive portion of the decision of the Court of Appeals
reads:
WHEREFORE, the appealed Decision is REVERSED and one is
rendered ordering defendant-appellee Jeanette D. Molino-
Alto to pay plaintiff-appellant Security Diners International,
Inc. the following:
1. The sum of P166,408.31 plus interest of 3% per annum and
2% per month from November 9, 1988 until the obligation is
fully paid;
2. The amount equivalent to 10% of the obligation mentioned
in the preceding paragraph as attorneys fees; and
3. Costs.
[9]
SO ORDERED.
Petitioners motion for reconsideration of the above decision
was denied for lack of merit on December 1, 1998. Hence, the
petition before us, which assigns the following errors:
I 4. The indication of a credit limit to the cardholder shall not
The material findings of the Court of Appeals, which are
contrary to those of the lower court, are erroneous.
II
The findings of the Court of Appeals are conflicting and/or
without citation of specific evidence on which they are based.
III
The Court of Appeals erred in disregarding the applicable
legal principle established by this Honorable Court that,
unlike in ordinary solidary debtors, the surety does not incur
[10]
liability unless the principal debtor is held liable.
Petitioner posits that she did not expressly give her consent
to be bound as surety under the upgraded card. She points
out that the note she signed, marked as Exhibit C, registering
her approval of the request of Danilo Alto to upgrade his
card, renders the Surety Undertaking she signed under the
terms of the previous card without probative value,
immaterial and irrelevant as it covers only the liability of the
surety in the use of the regular credit card by the principal
[11]
debtor xxx . She argues further that because the principal
Page 16 of 20
debtor, Danilo Alto, was not held liable, having been dropped
as a defendant, she could not be said to have incurred liability
as surety.
The petition is devoid of merit.
The resolution of whether petitioner is liable as surety under
the Diamond card revolves around the effect of the
upgrading by Danilo Alto of his card. Was the upgrading a
novation of the original agreement governing the use of
Danilo Altos first credit card, as to extinguish that obligation
and the Surety Undertaking which was simply accessory to it?
Novation, as a mode of extinguishing obligations, may be
done in two ways: by explicit declaration, or by material
incompatibility (implied novation). As we stated in Fortune
Motors vs. Court of Appeals, supra:
xxx The test of incompatibility is whether the two obligations
can stand together, each one having its independent
existence. If they cannot, they are incompatible and the latter
obligation novates the first. Novation must be established
either by the express terms of the new agreement or by the
acts of the parties clearly demonstrating the intent to
dissolve the old obligation as a consideration for the
emergence of the new one. The will to novate, whether
totally or partially, must appear by express agreement of the
parties, or by their acts which are too clear or unequivocal to
be mistaken.
There is no doubt that the upgrading was a novation of the
original agreement covering the first credit card issued to
Danilo Alto, basically since it was committed with the intent
of cancelling and replacing the said card. However, the
novation did not serve to release petitioner from her surety
obligations because in the Surety Undertaking she expressly
waived discharge in case of change or novation in the
agreement governing the use of the first credit card.
The nature and extent of petitioners obligations are set out in
clear and unmistakable terms in the Surety Undertaking.
Thus:
1. She bound herself jointly and severally with Danilo Alto to
pay SDIC all obligations and charges in the use of the Diners
Club Card, including fees, interest, attorneys fees, and costs;
2. She declared that any change or novation in the
Agreement or any extension of time granted by SECURITY
DINERS to pay such obligation, charges, and fees, shall not
release (her) from this Surety Undertaking;
3. (S)aid undertaking is a continuous one and shall subsist and
bind (her) until all such obligations, charges and fees have
been fully paid and satisfied; and
relieve (her) of liability for charges and all other amounts
voluntarily incurred by the cardholder in excess of said credit
[12]
limit.
We cannot give any additional meaning to the plain language
of the subject undertaking. The extent of a suretys liability is
determined by the language of the suretyship contract or
[13]
bond itself. Article 1370 of the Civil Code provides: If the
terms of a contract are clear and leave no doubt upon the
intention of the contracting parties, the literal meaning of its
stipulations shall control.
This case is no different from Pacific Banking Corporation vs.
IAC, supra, correctly applied by the Court of Appeals, which
involved a Guarantors Undertaking (although thus
denominated, it was in substance a contract of surety) signed
by the husband for the credit card application of his wife. Like
herein petitioner, the husband also argued that his liability
should be limited to the credit limit allowed under his wifes
card but the Court declared him liable to the full extent of his
wifes indebtedness. Thus:
 CRED 1 YATANAK
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.
xxx
xxxxxxxxxxx
It is likewise not disputed by the parties that the credit limit
granted to Celia Regala was P2,000.00 per month and that
Celia Regala succeeded in using the card beyond the original
period of its effectivity, October 29, 1979. We do not agree,
however, 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
debtors (Celias) 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 Guarantors Undertaking Roberto signed,
thus:
x x x. Any changes of or novation in the terms and conditions
in connection with the issuance or use of said Pacificard, or
any extension of time to pay such obligations, charges or
liabilities shall not in any manner release me/us from the
responsibility hereunder, it being understood that the
undertaking is a continuing one and shall subsist and bind
me/us until all the liabilities of the said Celia Syjuco Regala
have been fully satisified or paid. (italics supplied)
As a last-ditch measure, petitioner asseverates that, being
merely a surety, a pronouncement should first be made
declaring the principal debtor liable before she herself can be
proceeded against. The argument, which is hinged upon the
dropping of Danilo as defendant in the complaint, is bereft of
merit.
The Surety Undertaking expressly provides that petitioners
liability is solidary. A 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, and their liabilities are
[14]
interwoven as to be inseparable. Although the contract of
a surety is in essence secondary only to a valid principal
obligation, his liability to the creditor is direct, primary and
absolute; he becomes liable for the debt and duty of another
although he possesses no direct or personal interest over the
obligations nor does he receive any benefit
[15]
therefrom. There being no question that Danilo Alto
incurred debts of P166,408.31 in credit card advances, an
obligation shared solidarily by petitioner, respondent was
certainly within its rights to proceed singly against petitioner,
as surety and solidary debtor, without prejudice to any action
it may later file against Danilo Alto, until the obligation is fully
satisfied. This is so provided 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 demand
made against one of them shall not be an obstacle to those
which may be subsequently directed against the others, so
long as the debt has not been fully collected.
Petitioner is a graduate of business administration, and
possesses considerable work experience in several banks. She
knew the full import and consequence of the Surety
Undertaking that she executed. She had the option to
Page 17 of 20
withdraw her suretyship when Danilo upgraded his card to
one that permitted unlimited purchases, but instead she
approved the upgrading. While we commiserate in the
financial predicament she now faces, it is also evident that
the liability she incurred is only the legitimate consequence of
an undertaking that she freely and intelligently obliged
to. Prospective sureties to credit card applicants would be
well-advised to study carefully the terms of the agreements
prepared by the credit card companies before giving their
consent, and pay heed to stipulations that could lead to
onerous effects, like in the present case where the credit
applied for was limitless. At the same time, it bears
articulating that although courts in appropriate cases may
equitably reduce the award for penalty as provided under
such suretyship agreements if the same is iniquitous or
[16]
unconscionable, we are unable to give relief to petitioner
by way of reducing the amount of the principal liability as
surety under the circumstances of this case.
WHEREFORE, the petition is dismissed for lack of merit. The
decision of the Court of Appeals is AFFIRMED in all respects.
SO ORDERED.
GATEWAY ELECTRONICS CORPORATION and GERONIMO B.
DELOS REYES, JR., VS. ASIANBANK CORPORATION
(574 SCRA 698, G.R. No. 172041, December
18, 2008)
FACTS: Petitioner Gateway Electronics Corporation (Gateway)
is a domestic corporation that used to be engaged in the
semi-conductor business. During the period material,
petitioner Geronimo delos Reyes, Jr. was its president and
one Andrew delos Reyes its executive vice-president. In July
1996, Geronimo and Andrew executed separate but almost
identical deeds of suretyship for Gateway in favor of
respondent Asianbank Corporation (Asianbank). Asianbank
later extended to Gateway several export packing loans in the
total aggregate amount of USD ~ 1.7Million. This loan
package was later consolidated with a Dollar Promissory
Note
(PN) for the amount of USD ~1.7Million (same amount as
above) and secured by a chattel mortgage over Gateway’s
equipment for USD 2 million.
Gateway initially made payments on its loan obligations, but
eventually defaulted. Upon Gateway’s request, Asianbank
extended the maturity dates of the loan several times. On
July 15 and 30, 1999, Gateway issued two checks as payment
for its arrearages and interests for the periods June 30 and
July 30, 1999; However, both checks were dishonored for
insufficiency of funds. Asianbank’s demands for payment
made upon Gateway and its sureties went unheeded such
that as of November 23, 1999, Gateway’s obligation to
Asianbank, inclusive of principal, interest, and penalties,
totaled USD ~2.2Million.
Thus, Asianbank later filed with the RTC Makati a complaint
for a sum of money against Gateway, Geronimo, and Andrew.
RTC held Gateway, Geronimo and Andrew jointly and
severally liable to pay Asianbank. Gateway, Geronimo and
Andrew appealed to the CA.
 CRED 1 YATANAK
During the appeal, Gateway filed a petition for voluntary
insolvency with the RTC Cavite in which Asianbank was listed
as one of the creditors.
CA affirmed the decision of the RTC Makati. Gateway,
Geronimo and Andrew filed MR stating that RTC Cavite had
issued an Order declaring Gateway insolvent.
ISSUES:
1. WON Geronimo is liable as surety to pay Asianbank –
YES
2. WON Geronimo should be liable to pay
notwithstanding
the order of insolvency of the SEC – YES
HELD:
1. Gateway may be discharged from Liability but not
Geronimo
Under this issue, SC discussed the effect of the issuance of an
order declaring Gateway insolvent under the Insolvency Law.
Here, SC ruled that in accordance with said law, the issuance
of the insolvency order had the effect of automatically
staying the civil action for a
sum of money filed by Asianbank against Gateway. In net
effect, the proceedings before the CA, but only insofar as the
claim against Gateway was concerned, was, or ought to have
been, suspended after the date of the order. But according to
SC, Geronimo’s liability is a different story. Suretyship is
covered by Article 2047 of the CC, which states:
By guaranty a person, called the guarantor, binds himself to
the creditor to fulfill the obligation of the principal debtor in
case the latter should fail to do so. If a person binds himself
solidarily with the principal debtor, the provisions of Section
4, Chapter 3, Title I of this Book shall be observed. In such
case the contract is called a suretyship.
xxx
A creditor’s right to proceed against the surety exists
independently of his right to proceed against the principal.
Under Article 1216 of the CC, 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 as 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, x x x 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.
Clearly, Asianbank’s right to collect payment for the full
amount from Geronimo, as surety, exists independently of its
Page 18 of 20
right against Gateway as principal debtor; it could thus
proceed against one of them or file separate actions against
them to recover the principal
debt covered by the deed on suretyship, subject to the rule
prohibiting double recovery from the same cause. This legal
postulate becomes all the more logical in case of an
insolvency situation where, as here, the insolvency court is
bereft of jurisdiction over the sureties of the principal
debtor.
As Asianbank aptly points out, A SUIT AGAINST THE SURETY,
INSOFAR AS THE SURETY’S SOLIDARY LIABILITY IS
CONCERNED, IS NOT AFFECTED BY AN INSOLVENCY
PROCEEDING INSTITUTED BY OR AGAINST THE PRINCIPAL
DEBTOR.
The same principle holds true with respect to the surety of a
corporation in distress which is subject of a rehabilitation
proceeding before the Securities and Exchange Commission
(SEC). A surety of the distressed corporation can be sued
separately to enforce his liability as such, notwithstanding an
SEC order declaring the former under a state of suspension of
payment.
2. Geronimo’s Argument: As things stand, his liability, as
compared to that of Gateway, is contextually more onerous
and burdensome, precluded as he is from seeking recourse
against the insolvent corporation. From this premise,
Geronimo claims that since Gateway cannot, owing to the
order of insolvency, be made to pay its obligation, he, too,
being just a surety, cannot also be made to pay, obviously
having in mind Art. 2054 of the CC, as follows:
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. Should he have bound
himself for more, his obligations shall be reduced to the limits
of that of the debtor.
SC’s Ruling:
Provision does not free surety from liability. Liability may be
less, but not free.
Art. 2054 pronounces the rule that the obligation of a
guarantor may be less, but cannot be more than the
obligation of the principal debtor. The rule, however, cannot
possibly be stretched to mean that a guarantor or surety is
freed from liability as
such guarantor or surety in the event the principal debtor
becomes insolvent or is unable to pay the obligation. This
interpretation would defeat the very essence of a suretyship
contract which, by definition, refers to an agreement
whereunder one person, the surety, engages to be
answerable for the debt, default, or miscarriage of another
known as the principal. Geronimo’s position that a surety
cannot be made to pay when the principal is unable to pay is
clearly erroneous and must be rejected.
* When a creditor goes after a debtor and its surety, and then
the debtor is subsequently declared insolvent by the
court/SEC, such declaration of insolvency neither invalidates
the suretyship nor does it mean that the surety is no longer
 CRED 1 YATANAK
liable to pay for the amount owed by the debtor to the
creditor.
SECURITY BANK AND TRUST COMPANY, Inc. vs. RODOLFO M.
CUENCA,
(341 SCRA 781, G.R. No. 138544, October 3,
2000)
FACTS: Sta. Ines Melale (‘Sta. Ines’) is a corporation engaged
in logging operations. It was a holder of a Timber License
Agreement issued by DENR. November 10, 1980, Security
Bank and Trust Co. granted Sta. Ines Melale Corporation
[SIMC] a credit line in the amount of P8,000,000.00 to assist
the latter in meeting the additional capitalization
requirements of its logging operations.
The Credit Approval Memorandum expressly stated that the
P8M Credit Loan Facility shall be effective until 30 November
1981. To secure the payment of the amounts drawn by SIMC
from the above-mentioned credit line, SIMC executed a
Chattel Mortgage over some of its machinery and equipment
in favor of SBTC. As additional security for the payment of the
loan, Rodolfo M. Cuenca executed an Indemnity Agreement
dated 17 December 1980 in favor of SBTC whereby he
solidarily bound himself with SIMC stating by virtue of
aforesaid credit accommodation(s) including the
substitutions, renewals, extensions, increases, amendments,
conversions and revivals of the aforesaid credit
accommodation(s).
On 26 November 1981, four (4) days prior to the expiration of
the period of effectivity of the P8M-Credit Loan Facility, SIMC
made a first drawdown from its credit line with SBTC in the
amount of P6,100,000.00 To cover said drawdown, SIMC duly
executed promissory note. Sometime in 1985, Cuenca
resigned as President and Chairman of the Board of Directors
of defendant-appellant Sta. Ines. Subsequently, the
shareholdings of Cuenca in Sta. Ines were sold at a public
auction.
Subsequently, appellant SIMC repeatedly availed of its credit
line and obtained six (6) other loans from SBTC in the
aggregate amount P6,369,019.50 which were covered by
promissory notes. SIMC, however, encountered difficulty in
making the amortization payments on its loans and requested
SBTC for a complete restructuring of its indebtedness. SBTC
accommodated 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 Sta.
Ines. Security Bank agreed to extend to Sta. Ines loans
amounting to 8.8M and 3.4M. It should be pointed out that in
restructuring Sta. Ines’ obligations to Security Bank,
Promissory Note in the amount P6,100,000.00, which was the
only loan incurred prior to the expiration of the P8M-Credit
Loan Facility on 30 November 1981 and the only one covered
by the Indemnity Agreement dated 19 December 1980.
Pursuant to the agreement to restructure its past due
obligations to Security Bank, Sta. Ines thus executed the 2
more promissory notes (total: 12.2M), both dated 09 March
1988 in favor of Security Bank.
To formalize their agreement to restructure the loan
obligations of Sta. Ines, Security Bank and Sta. Ines executed
a Loan Agreement dated 31 October 1989 the purpose of
which is “The First Loan shall be applied to liquidate the
Page 19 of 20
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.” SIMC
defaulted in the payment of its restructured loan obligations
to SBTC despite demands made upon appellant SIMC and
CUENCA.
Appellants individually and collectively refused to pay the
SBTC. Thus, SBTC filed a complaint for collection of sum of
money on 14 June 1993, resulting after trial on the merits in a
decision by the court a quo, x x x from which Cuenca
appealed.
The CA ruled that the 1989 Loan Agreement had novated the
1980 credit accommodation earlier granted by the bank to
Sta. Ines. 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. 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.
ISSUE: WON the liability of Mr. Cuenca was extinguished by
the extension granted to the debtor.
HELD: YES.
RELEASE WITHOUT CONSENT OF GUARANTOR
The 1989 Loan Agreement expressly stipulated that its
purpose was to “liquidate,” not to renew or extend, the
outstanding indebtedness. Moreover, respondent did not
sign or consent to the 1989 Loan Agreement, which had
allegedly extended the original P8 million credit facility.
Hence, his obligation as a surety should be deemed
extinguished, pursuant to Article 2079 of the Civil Code,
which specifically states that “*a+n extension granted to the
debtor by the creditor without the consent of the guarantor
extinguishes the guaranty. x x x.” In an earlier case, the Court
explained the rationale of this provision in this wise: “The
theory behind Article 2079 is that an extension of time given
to the principal debtor by the creditor without the 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.”
It is emphasized 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, “*i+t is fundamental in the law of suretyship that
any agreement between the creditor and the principal debtor
which essentially varies the terms of the principal contract,
without the consent of the surety, will release the surety
from liability.”
While respondent held himself liable for the credit
accommodation or any modification thereof, such clause
 CRED 1 YATANAK
should be understood in the context of the P8 million limit
and the November 30, 1981 term. It did not give the bank or
Sta. Ines any license to modify the nature and scope of the
original credit accommodation, without informing or getting
the consent of respondent who was solidarily liable.
Taking the bank’s submission to the extreme, respondent (or
his successors) would be liable for loans even amounting to,
say, P100 billion obtained 100 years after the expiration of
the credit accommodation, on the ground that he consented
to all alterations and extensions thereof. Indeed, it has been
held that a contract of surety “cannot extend to more than
what is stipulated. It is strictly construed against the creditor,
every doubt being resolved against enlarging the liability of
the surety.” 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.
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.”
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.
NOVATION
Clearly, the requisites of novation are present in this case.
The 1989 Loan Agreement extinguished the obligation
obtained under the 1980 credit accomodation. This is evident
from its explicit provision to “liquidate” the principal and the
interest of the earlier indebtedness, as the following shows:
“1.02. Purpose. The First Loan shall be applied to liquidate
the principal portion of the 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.
Furthermore, several incompatibilities between the 1989
Agreement and the 1980 original obligation demonstrate that
the two cannot coexist. While the 1980 credit
accommodation had stipulated that the amount of loan was
not to exceed P8 million, the 1989 Agreement provided that
Page 20 of 20
the loan was P12.2 million. The periods for payment were
also different.
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
that 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.”
CONTINUING SURETY
In the present case, the Indemnity Agreement was subject to
the two limitations of the credit accommodation: (1) that the
obligation should not exceed P8 million, and (2) that the
accommodation should expire not later than November 30,
1981. Hence, it was a continuing surety only in regard to
loans obtained on or before the aforementioned expiry date
and not exceeding the total of P8 million. Accordingly, the
surety of Cuenca secured only the first loan of P6.1 million
obtained on November 26, 1991. It did not secure the
subsequent loans, purportedly under the 1980 credit
accommodation, that were obtained in 1986. Certainly, he
could not have guaranteed the 1989 Loan Agreement, which
was executed after November 30, 1981 and which exceeded
the stipulated P8 million ceiling.
Petitioner, however, cites the Dino ruling in which the Court
found the surety liable for the loan obtained after the
payment of the original one, which was covered by a
continuing surety agreement. At the risk of being repetitious,
we hold that in Dino, the surety Agreement specifically
provided that “each suretyship is a continuing one which shall
remain in full force and effect until this bank is notified of its
revocation.” Since the bank had not been notified of such
revocation, the surety was held liable even for the
subsequent obligations of the principal borrower. No similar
provision is found in the present case. On the contrary,
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.