G.R. No.

124049 June 30, 1999

RODOLFO P. VELASQUEZ, vs. COURT OF APPEALS, and
PHILIPPINE COMMERCIAL INTERNATIONAL BANK,
INC.
The Pick-up Fresh Farms, Inc. (PUFFI), of which Velasquez
was an officer and stockholder, filed an application for a loan
of P7,500,000.00 with PCIB under the government's
Guarantee Fund for Small Medium Enterprises (GFSME). The
parties executed the corresponding loan agreement. As
security for the loan, promissory notes for the amounts of
P4,000,000.00 and P3,500,000.00, respectively, were signed
by Inigo A. Nebrida and Mariano Canilao, Jr. as officers of
and for both PUFFI and Aircon Refrigeration Industries, Inc.
(ARII). A chattel mortgage was also executed by ARII over
its equipment and machineries in favor of PCIB. Velasquez
along with Nebrida and Canilao, Jr. also executed deeds of
suretyship in favor of PCIB. Separate deeds of suretyship
were further executed by Cesar R. Dean and Artemio L.
Raymundo.
When PUFFI defaulted in the payment of its obligations PCIB
foreclosed the chattel mortgage. The proceeds of the sale
amounted to P678,000.00. Thus, PCIB filed an action to
recover the remaining balance of the entire obligation
including interests, penalties and other charges.
Velasquez and Canilao filed their joint answer with
counterclaim denying personal liability and interposing the
defense of novation.
The trial court rendered a summary judgment in favor of
PCIB holding Velasquez and Canilao solidarily liable to pay
P7,227,624.48 plus annual interest of 17%.
On appeal, the Court of Appeals affirmed in toto the RTC
judgment. Hence this petition.

W/N Velasquez is liable in the deed of suretyship. - Yes

W/N any ambiguity in the contract should be decided against
PCIB under the contract of adhesion doctrine. - No
W/N the acceptance of royalty fees which were the fruits of
the Franchising Agreement between PUFFI and Rosales
constituted a novation of the loan agreement and deeds of
suretyship. No

No.
A mere perusals of the deed of suretyship readily shows
Velasquez personal liability under the loan contract.
Moreover, the more appropriate doctrine in this case is that
of the "complementary contracts construed together"
doctrine which we enunciated in NPC v. CA
The surety bond must be read in its entirety and
together with the contract between the NPC and the
contractors. The provisions must be construed
together to arrive at their true meaning. Certain
stipulations cannot be segregated and then made to
control.
That the "complementary contracts construed together"
doctrine applies in this case finds support in the principle
that the surety contract is merely an accessory contract and
must be interpreted with its principal contract, which in this
case was the loan agreement. This doctrine closely adheres
to the spirit of Art. 1374 of the Civil Code which states that

Art. 1374. The various stipulations of a contract shall

be interpreted together, attributing to the doubtful

ones that sense which may result from all of them

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

Petitioner also claims that PCIB's acceptance of royalty fees

which were the fruits of the Franchising Agreement between
PUFFI and Arturo Rosales constituted a novation of the loan
agreement and deeds of suretyship, therefore, a genuine
issue of fact.
This contention is untenable. Extinctive novation has these
requisites: (a) the existence of a previous valid obligation;
(b) the agreement of all the parties to the new contract; (c)

the extinguishment of the old obligation or contract; and, (d)

the validity of the new one. Thus, novation is effected only
when a new contract has extinguished an earlier contract
between the same parties. Necessarily, there is no novation
when the new contract is not between the same parties as in
the old contract.
The franchise agreement was only between PUFFI and
Rosales. PCIB was never mentioned therein; neither was
there any reference to the subject loan agreement. What
PCIB simply did was to accept royalty payments out of the
franchise an act which was already beyond the scope of
the franchise agreement but which was not in conflict with
the payment arrangement in the loan agreement. Our ruling
in the Magdalena Estates Inc. v. Rodriguez is instructive, to
wit
An obligation to pay a sum of money is not novated, in
a new instrument wherein the old is ratified, by
changing only the terms of payment and adding other
obligations not incompatible with the old one, or
wherein the old contract is merely supplemented by
the new one. The mere fact that the creditor receives
a guaranty or accepts payments from a third person
who has agreed to assume the obligation, when there
is no agreement that the first debtor shall be released
from responsibility, does not constitute a novation, and
the creditor can still enforce the obligation against the
original debtor.
WHEREFORE, the petition is DENIED. The Decision of the
Court of Appeals affirming the judgment of the RTC- Br. 61,
Makati City, ordering Rodolfo P. Velasquez and Mariano N.
Canilao, Jr. to solidarily pay Philippine Commercial and
Industrial Bank (PCIB) the amount of P7,227,624.48 with
annual interest of 17% and attorney's fees of P700,000.00
plus cost of suits as well as its Resolution of 19 February
1995 denying reconsideration, is AFFIRMED.

The document referred to as "Continuing Guaranty"

states as follows:
G.R. No. 113931 May 6, 1998
E. ZOBEL, INC., vs. THE COURT OF APPEALS,
CONSOLIDATED BANK AND TRUST CORPORATION, and
SPOUSES RAUL and ELEA R. CLAVERIA.
Spouses Raul and Elea Claveria, doing business under the
name "Agro Brokers," applied for a loan with Consolidated
Bank and Trust Corporation (now SOLIDBANK) in the amount
of P2,875,000.00 to finance the purchase of two (2)
maritime barges and one tugboat which would be used in
their molasses business. The loan was granted subject to the
condition that the spouses execute a chattel mortgage over
the three (3) vessels to be acquired and that a continuing
guarantee be executed by Ayala International Philippines,
Inc., now E. Zobel, Inc., in favor of SOLIDBANK. The spouses
agreed to the arrangement. Consequently, a chattel
mortgage and a Continuing Guaranty were executed.
Spouses defaulted in the payment of the entire obligation
upon maturity. Hence, SOLIDBANK filed a complaint for sum
of money against the spouses and Zobel, Inc.
Zobel moved to dismiss the complaint on the ground that its
liability as guarantor of the loan was extinguished pursuant
to Article 2080 of the Civil Code. It argued that it has lost its
right to be subrogated to the first chattel mortgage in view of
SOLIDBANK's failure to register the chattel mortgage with
the appropriate government agency.
SOLIDBANK opposed the motion contending that Article 2080
is not applicable because Zobel is not a guarantor but a
surety.
The trial court denied the motion to dismiss for lack of merit:

For and in consideration of any existing

indebtedness to you of Agro Brokers, a single
proprietorship owned by Mr. Raul Claveria for
the payment of which the undersigned is now
obligated to you as surety and in order to
induce you, in your discretion, at any other
manner, to, or at the request or for the account
of the borrower, . . .
The provisions of the document are clear, plain and
explicit. Zobel, Inc. signed as surety. Even though the
title of the document is "Continuing Guaranty", the
Court's interpretation is not limited to the title alone
but to the contents and intention of the parties more
specifically if the language is clear and positive. The
obligation of Zobel being that of a surety, Art. 2080
New Civil Code will not apply as it is only for those
acting as guarantor. In fact, in the letter of the
spouses and Zobel to SOLIDBANK, they requested that
the chattel mortgage on the vessels and tugboat be
waived and/or rescinded by the bank inasmuch as the
said loan is covered by the Continuing Guaranty by
Zobel in favor of the spouses, rendering the chattel
mortgage unnecessary and redundant.
With regard to the claim that the failure of the plaintiff
to register the chattel mortgage with the proper
government agency, i.e. with the Office of the
Collector of Customs or with the Register of Deeds
makes the obligation a guaranty, the same merits a
scant consideration and could not be taken by this
Court as the basis of the extinguishment of the
obligation of the corporation to the spouses as surety.
The chattel mortgage is an additional security and
should not be considered as payment of the debt in
case of failure of payment. The same is true with the

failure to register, extinction of the liability would not

lie.

Issue(s):
W/N Zobel, under the "Continuing Guaranty," obligated itself
to SOLIDBANK, as a guarantor. No.
W/N Article 2080 of the New Civil Code is applicable to Zobel.
No
Sub-Issue: If Article 2080 is applicable, W/N the
failure of SOLIDBANK to register the chattel mortgage
extinguished Zobels liability to SOLIDBANK. No.

A contract of surety is an accessory promise by which a

person binds himself for another already bound, and agrees
with the creditor to satisfy the obligation if the debtor does
not. A contract of guaranty, on the other hand, is a collateral
undertaking to pay the debt of another in case the latter
does not pay the debt.
Strictly speaking, guaranty and surety are nearly related,
and many of the principles are common to both. However,
under our civil law, they may be distinguished thus: A surety
is usually bound with his principal by the same instrument,
executed at the same time, and on the same consideration.
He is an original promissor and debtor from the beginning,
and is held, ordinarily, to know every default of his principal.
Usually, he will not be discharged, either by the mere
indulgence of the creditor to the principal, or by want of
notice of the default of the principal, no matter how much he
may be injured thereby. On the other hand, the contract of
guaranty is the guarantor's own separate undertaking, in
which the principal does not join. It is usually entered into

before or after that of the principal, and is often supported

on a separate consideration from that supporting the
contract of the principal. The original contract of his principal
is not his contract, and he is not bound to take notice of its
non-performance. He is often discharged by the mere
indulgence of the creditor to the principal, and is usually not
liable unless notified of the default of the principal.
Simply put, a surety is distinguished from a guaranty in that
a guarantor is the insurer of the solvency of the debtor and
thus binds himself to pay if the principal is unable to pay
while a surety is the insurer of the debt, and he obligates
himself to pay if the principal does not pay.
First Issue
It appears that the contract executed by Zobel in favor of
SOLIDBANK, albeit denominated as a "Continuing Guaranty,"
is a contract of surety. The terms of the contract
categorically obligates Zobel as "surety" to induce
SOLIDBANK to extend credit to spouses. This can be seen in
the following stipulations.
For and in consideration of any existing indebtedness
to you of AGRO BROKERS, a single proprietorship
owned by MR. RAUL P. CLAVERIA, (hereinafter called
the Borrower), for the payment of which the
undersigned is now obligated to you as surety and in
order to induce you, in your discretion, at any time or
from time to time hereafter, to make loans or
advances or to extend credit in any other manner to,
or at the request or for the account of the Borrower,
either with or without purchase or discount, or to
make any loans or advances evidenced or secured by
any notes, bills receivable, drafts, acceptances, checks
or other instruments or evidences of indebtedness . . .
upon which the Borrower is or may become liable as
maker, endorser, acceptor, or otherwise, the
undersigned agrees to guarantee, and does hereby
guarantee, the punctual payment, at maturity or upon

demand, to you of any and all such instruments,

loans, advances, credits and/or other obligations
herein before referred to, and also any and all other
indebtedness of every kind which is now or may
hereafter become due or owing to you by the
Borrower, together with any and all expenses which
may be incurred by you in collecting all or any such
instruments or other indebtedness or obligations
hereinbefore referred to, and or in enforcing any rights
hereunder, and also to make or cause any and all such
payments to be made strictly in accordance with the
terms and provisions of any agreement (g), express or
implied, which has (have) been or may hereafter be
made or entered into by the Borrower in reference
thereto, regardless of any law, regulation or decree,
now or hereafter in effect which might in any manner
affect any of the terms or provisions of any such
agreements(s) or your right with respect thereto as
against the Borrower, or cause or permit to be invoked
any alteration in the time, amount or manner of
payment by the Borrower of any such instruments,
obligations or indebtedness; . . . (Emphasis Ours)
One need not look too deeply at the contract to determine
the nature of the undertaking and the intention of the
parties. The contract clearly disclose that Zobel assumed
liability to SOLIDBANK, as a regular party to the undertaking
and obligated itself as an original promissor. It bound itself
jointly and severally to the obligation with the spouses.
Should the Borrower at this or at any future time
furnish, or should be heretofore have furnished,
another surety or sureties to guarantee the payment
of his obligations to you, the undersigned hereby
expressly waives all benefits to which the undersigned
might be entitled under the provisions of Article 1837
of the Civil Code (beneficio division), the liability of the
undersigned under any and all circumstances being
joint and several; (Emphasis Ours)

The use of the term "guarantee" does not ipso facto mean
that the contract is one of guaranty. Authorities recognize
that the word "guarantee" is frequently employed in business
transactions to describe not the security of the debt but an
intention to be bound by a primary or independent
obligation. As aptly observed by the trial court, the
interpretation of a contract is not limited to the title alone
but to the contents and intention of the parties.
Having thus established that Zobel is a surety, Article 2080 of
the Civil Code finds no application to the case at bar. In Bicol
Savings and Loan Association vs. Guinhawa, we have ruled
that Article 2080 of the New Civil Code does not apply where
the liability is as a surety, not as a guarantor.
But even assuming that Article 2080 is applicable,
SOLIDBANK's failure to register the chattel mortgage did not
release Zobel from the obligation. In the Continuing
Guaranty executed in favor of SOLIDBANK, Zobel bound itself
to the contract irrespective of the existence of any collateral.
It even released SOLIDBANK from any fault or negligence
that may impair the contract. The pertinent portions of the
contract so provides:
. . . the undersigned (petitioner) who hereby agrees to
be and remain bound upon this guaranty, irrespective
of the existence, value or condition of any collateral,
and notwithstanding any such change, exchange,
settlement, compromise, surrender, release, sale,
application, renewal or extension, and notwithstanding
also that all obligations of the Borrower to you
outstanding and unpaid at any time(s) may exceed the
aggregate principal sum herein above prescribed.
No act or omission of any kind on your part in the
premises shall in any event affect or impair this
guaranty, nor shall same be affected by any change
which may arise by reason of the death of the
undersigned, of any partner (s) of the undersigned, or
of the Borrower, or of the accession to any such

partnership of any
(Emphasis supplied)

one

or

more

new

partners.

G.R. No. 110086 July 19, 1999

PARAMOUNT INSURANCE CORPORATION, vs.
CA and DAGUPAN ELECTRIC CORPORATION.
McAdore Finance and Investment, Inc. (McADORE) was the
owner and operator of the McAdore International Palace
Hotel in Dagupan City. Dagupan Electric Corporation
(DECORP), on the other hand, was the grantee of a franchise
to operate and maintain electric services in the province of
Pangasinan, including Dagupan City.
McADORE and DECORP entered into a contract whereby
DECORP shall provide electric power to McADORE's Hotel.
During the term of their contract for power service, DECORP
noticed discrepancies between the actual monthly billings
and the estimated monthly billings of McADORE. Upon
inspection, it was discovered that the terminal in the
transformers connected to the meter had been interchanged
resulting in the slow rotation of the meter. Consequently,
DECORP issued a corrected bill but McADORE refused to pay.
As a result of McADORE's failure and continued refusal to pay
the corrected electric bills, DECORP disconnected power
supply to the hotel.
Aggrieved, McADORE commenced a suit against DECORP for
damages with prayer for a writ of preliminary injunction.
McADORE posted injunction bonds from several sureties, one
of which was PARAMOUNT, which issued an injunction bond
with a face amount of P500,000.00. Accordingly, a writ of
preliminary injunction was issued wherein DECORP was
ordered to continue supplying electric power to the hotel and
restrained from further disconnecting it.

After due hearing, the Regional Trial Court rendered

judgment in favor of DECORP, there being preponderance of
evidence, the court hereby dismisses the amended
complaint. Further, the court rescinds the service contract
between the parties, and orders McAdore to pay Decorp the
following:
1. Actual damages consisting of total arrearages for
electric services rendered, plus interest at the legal
rate, computed from the date of demand until full
payment;
While this case was under litigation, the court issued a
number of restraining orders or injunctions. During
these incidents, McAdore filed the following bonds:
Policy No. 8022709 by Paramount Insurance
Corporation for P500,000.00; No. 00007 and No.
00008 by Sentinel Insurance Company, Inc. for
P100,000.00 and P50,000.00; and No. 1213 by the
Travelers
Multi-Indemnity
Corporation
for
P225,000.00.
Pursuant to the dispositive portion of this decision, the
court holds that these bonding companies are jointly
and severally liable with McAdore to the extent of the
value of their bonds, to pay the damages adjudged to
Decorp.
McADORE did not appeal the above decision. PARAMOUNT,
however, appealed to the Court of Appeals for lack of due
process.
In essence, PARAMOUNT contended that it was not given its
day in court because it was not notified by DECORP of its
intention to present evidence of damages against its
injunction bond, as mandated by Sec. 9 of Rule 58, in
relation to Sec. 20 of Rule 57 of the Revised Rules of Court.
The Court of Appeals was not convinced, it affirmed the
decision of the RTC.

Hence this petition.

PARAMOUNT asserts that "(t)he bone of contention in the
instant case is the matter of evidence (or lack thereof)
presented during the hearing of the case a quo, notice (or
lack thereof) to the surety relative to the proceedings before
the court a quo during which said evidence was presented,
as well as the actual proceedings themselves." PARAMOUNT
further asseverates that "no evidence relative to damages
suffered by Decorp as a result of the injunction was ever
presented, or that if any such evidence was presented, the
same was done without notice to PARAMOUNT and in
violation of its right to due process." Moreover, PARAMOUNT
maintains that the injunction bond was issued and approved
to guarantee "actual and material damages as may be
sustained and duly proved by Decorp." Thus, it can only
cover the period prospectively from the date of its issuance
and does not retroact to the date of the initial controversy.
In its Comment, DECORP claims that PARAMOUNT
participated in the proceedings and was given its day in
court. This is evidenced by the "Notice of Hearing" addressed
to the three sureties. In fact, at the hearing, PARAMOUNT
was in attendance represented by Atty. Nonito Q. Cordero.
Likewise, PARAMOUNT was notified of the next hearing
scheduled. DECORP further stressed that the next hearing
proceeded as scheduled without any comment, objection,
opposition or reservation from PARAMOUNT.

W/N Paramount is liable on its injunction bond.

Yes. The petition is devoid of merit. Paramount's submissions

necessitates going into the nature of an injunction as well as
over the procedure in claiming, ascertaining and awarding
damages upon the injunction bond.

Injunction is an extraordinary remedy calculated to preserve

the status quo of things and to prevent actual or threatened
acts violative of the rules of equity and good conscience as
would consequently afford an injured party a cause of action
resulting from the failure of the law to provide for an
adequate or complete relief. A preliminary injunction is an
order granted at any stage of an action or proceeding prior
to the judgment or final order, requiring a party or a court,
agency or a person to refrain from a particular act or acts. It
may also require the performance of a particular act or acts,
in which case it shall be known as a preliminary mandatory
injunction. Its sole purpose is not to correct a wrong of the
past, in the sense of redress for injury already sustained, but
to prevent further injury.
A preliminary injunction or temporary restraining order may
be granted only when, among others, the applicant, unless
exempted by the court, files with the court where the action
or proceeding is pending, a bond executed to the party or
person enjoined, in an amount to be fixed by the court, to
the effect that the applicant will pay such party or person all
damages which he may sustain by reason of the injunction or
temporary restraining order if the court should finally decide
that the applicant was not entitled thereto. Upon approval of
the requisite bond, a writ of preliminary injunction shall be
issued. At the trial, the amount of damages to be awarded to
either party, upon the bond of the adverse party, shall be
claimed, ascertained, and awarded under the same
procedure prescribed in Section 20 of Rule 57.
Rule 57, Section 20, of the 1997 Rules of Civil Procedure,
which is similarly applicable to preliminary injunction,
pertinently provides:
Sec. 20. Claim for damages on account of improper,
irregular or excessive attachment. An application for
damages on account of improper, irregular or
excessive attachment must be filed before the trial or
before appeal is perfected or before the judgment
becomes executory, with due notice to the attaching

obligee or his surety or sureties, setting forth the facts

showing his right to damages and the amount thereof.
Such damages may be awarded only after proper
hearing and shall be included in the judgment on the
main case.
If the judgment of the appellate court be favorable to
the party against whom the attachment was issued, he
must claim damages sustained during the pendency of
the appeal by filing an application in the appellate
court with notice to the party in whose favor the
attachment was issued or his surety or sureties,
before the judgment of the appellate court becomes
executory. The appellate court may allow the
application to be heard and decided by the trial court.
Nothing herein contained shall prevent the party
against whom the attachment was issued from
recovering in the same action the damages awarded to
him from any property of the attaching obligee not
exempt from execution should the bond or deposit
given by the latter be insufficient or fail to fully satisfy
the award. ( mutatis mutandis ).
The above rule comes into play when McADORE for injunction
fails to sustain his action, and DECORP is thereby granted
the right to proceed against the bond posted by the former.
In the case at bench, the trial court dismissed McADORE's
action for damages with prayer for writ of preliminary
injunction and eventually adjudged the payment of actual,
moral, and exemplary damages against it. Consequently,
DECORP can proceed against the injunction bond posted by
McADORE to recover the damages occasioned by the
issuance by the trial court of the writ of injunction.
The records of this case reveal that during its pendency in
the trial court, DECORP filed its Answer raising compulsory
counterclaims for rescission of contract, moral damages,
exemplary damages, attorney's fees and litigation expenses.
During the trial, Atty. Nonito Cordero appeared as counsel for

PARAMOUNT. PARAMOUNT as well as the other sureties were

properly notified of the hearing and given their day in court.
Specifically, notice was sent to Atty. Cordero of the hearing,
which was set for the purpose of determining the liability of
the sureties. The counterclaims for damages of DECORP were
proven at the trial and yet PARAMOUNT did not exert any
effort to controvert the evidence presented by DECORP.
Given these circumstances, PARAMOUNT cannot hide under
the cloak of non-liability on its injunction bond on the mere
expediency that it was deprived of due process. It bears
stressing that what the law abhors is not the absence of
previous notice but rather the absolute lack of opportunity to
ventilate a party's side. In other words, PARAMOUNT cannot
successfully invoke denial of due process where it was given
the chance to be heard. As aptly held by the CA:
The records of the case disclose that during the trial of
the case, PARAMOUNT was present and represented
by its counsel Atty. Nonito Q. Cordero as shown in the
trial court's order. In the said order, PARAMOUNT was
duly notified of the next hearing which was scheduled.
Evidently, PARAMOUNT was well-apprised of the next
hearing and it cannot feign lack of notice. Having been
given an opportunity to be heard during the main
hearing for the matter of damages, PARAMOUNT
therefore, cannot bewail that it was not given an
opportunity to be heard upon denial of its motion to
cancel its injunction bond. Of what use, therefore, is
there to conduct another hearing when the issue of
damages has been the subject of the main action of
which PARAMOUNT had been duly notified? A new
notice and hearing prescribed by Sec. 20, Rule 57, is
therefore a repetition and a superfluity.
Moreover, PARAMOUNT has only itself to blame when it
did not make any opposition or objection during the
hearing for the reception of DECORP's evidence.
Having manifested its desire to cancel its bond, it
should have asked for a deferment of hearing on
DECORP's evidence but PARAMOUNT did not do

anything of this sort. Only when an adverse judgment

was rendered by the trial court against its principal
McAdore did it whimper a denial of procedural due
process.
On the same point, PARAMOUNT argues that contrary to the
ruling of the Court of Appeals, there is a need for a separate
hearing for the purpose of presenting evidence on the
alleged damages claimed by DECORP on petitioner's
injunction bond. PARAMOUNT contends that a separate
hearing is needed as no evidence dealing with DECORP's
claim for damages on petitioner's bond was presented during
the hearing wherein petitioner's counsel attended nor in the
next hearing wherein petitioner was notified but failed to
attend. Since no hearing was held for the purpose of
establishing its liability on the injunction bond, PARAMOUNT
concludes that it is released from its obligation as surety.
Contrary to petitioner's thesis, it is neither mandatory nor
fatal that there should be a separate hearing in order that
damages upon the bond can be claimed, ascertained and
awarded, as can be gleaned from a cursory reading of the
provisions of Rule 57, Section 20. This Court agrees with the
appellate court's ruling that:
Jurisprudential findings laid down the doctrine that a
final adjudication that the applicant is not entitled to
the injunction does not suffice to make the surety
liable. It is necessary, in addition, that the surety be
accorded due process, that is, that it be given an
opportunity to be heard on the question of its solidary
liability for damages arising from a wrongful injunction
order. Withal, the fact that the matter of damages was
among the issues tried during the hearings on the
merits will not render unnecessary or superfluous a
summary hearing to determine the extent of a surety's
liability unless of course, the surety had been
impleaded as a party, or otherwise earlier notified and
given opportunity to be present and ventilate its side
on the matter during the trial.

The exception under the doctrinal ruling above noted

is extant in the case at bar.
What is necessary only is for the attaching party and his
surety or sureties to be duly notified and given the
opportunity to be heard. In the case at bench, this Court
accords due respect to the factual finding of the Court of
Appeals that "PARAMOUNT was present and represented by
its counsel as shown in the trial court's order."
As stated, PARAMOUNT also argues that assuming it is liable
on its injunction bond, its liability should be limited only to
the amount of damages accruing from the time the
injunction bond was issued until the termination of the case,
and not from the time the suit was commenced. In short, it
claims that the injunction bond is prospective and not
retroactive in application.
This Court does not agree. Rule 58, Section 4(b), provides
that a bond is executed in favor of the party enjoined to
answer for all damages which he may sustain by reason of
the injunction. This Court already had occasion to rule on
this matter in Mendoza v. Cruz, where it held that "(t)he
injunction bond is intended as a security for damages in case
it is finally decided that the injunction ought not to have
been granted. It is designed to cover all damages which the
party enjoined can possibly suffer. Its principal purpose is to
protect the enjoined party against loss or damage by reason
of an injunction." No distinction was made as to when the
damages should have been incurred.
Moreover, when petitioner issued its injunction bond in favor
of DECORP, it was done with the full knowledge of the
relevant facts obtaining in the controversy between DECORP
and McADORE. At the time the injunction bond was issued,
DECORP was already claiming arrears in electric bills and
damages from McADORE.
It bears stressing that McADORE was found liable to pay
actual damages, moral damages, exemplary damages,

attorney's fees and costs of the suit. To argue therefore that

PARAMOUNT is only liable on its injunction bond from the
time of its issuance and not from the time the suit was
commenced is preposterous if not absurd. Indeed, it would
be impossible to determine the reckoning point when moral
damages, exemplary damages, attorney's fees and costs of
the suit were supposed to have been incurred. Consequently,
it can be safely deduced that the bond answers for any and
all damages arising from the injunction, regardless of
whether it was sustained before or after the filing of the
injunction bond.
PARAMOUNT further maintains that it is liable to pay actual
damages only. However, Rule 58, Section 4(b), clearly
provides that the injunction bond is answerable for all
damages. "The bond insures with all practicable certainty
that the defendant may sustain no ultimate loss in the event
that the injunction could finally be dissolved. Consequently,
the bond may obligate the bondsmen to account to the
defendant in the injunction suit for all: (1) such damages;
(2) costs and damages; (3) costs, damages and reasonable
attorney's fees as shall be incurred or sustained by the
person enjoined in case it is determined that the injunction
was wrongfully issued." Thus, PARAMOUNT is liable, jointly
and severally, for actual damages, moral damages,
exemplary damages, attorney's fees and costs of the suit, to
the extent of the amount of the bond.
Be that as it may, a scrutiny of petitioner's Indemnity
Agreement with McADORE shows that the former agreed "to
become surety" for the stated amount "in favor of Dagupan
Electric Corp." It should be noted that McADORE was already
in arrears starting from June 1979 up to the time it entered
into an Indemnity Agreement with PARAMOUNT.
It may not be amiss to point out that by the contract of
suretyship, it is not for the obligee to see to it that the
principal pays the debt or fulfills she contract, but for the
surety to see to it that the principal pay or perform. The
purpose of the injunction bond is to protect the defendant

against loss or damage by reason of the injunction in case

the court finally decides that the plaintiff was not entitled to
it, and the bond is usually conditioned accordingly. Thus, the
bondsmen are obligated to account to the defendant in the
injunction suit for all damages, or costs and reasonable
counsel's fees, incurred or sustained by the latter in case it is
determined that the injunction was wrongfully issued.
The posting of a bond in connection with a preliminary
injunction (or attachment under Rule 57, or receivership
under Rule 59, or seizure or delivery of personal property
under Rule 60) does not operate to relieve the party
obtaining an injunction from any and all responsibility for the
damages that the writ may thereby cause. It merely gives
additional protection to the party against whom the
injunction is directed. It gives the latter a right of recourse
against either the applicant or his surety, or against both. In
the same manner, when petitioner PARAMOUNT issued the
bond in favor of its principal, it undertook to assume all the
damages that may be suffered after finding that the principal
is not entitled to the relief being sought.
WHEREFORE, based on the foregoing, the instant petition is
DENIED. The decision of the Court of Appeals dated April 30,
1993 in CA-G.R. CV No. 11970 is AFFIRMED, With costs.

the unaccounted balance of the value of the ring with legal

interest, the further sum of P30,000.00 as and for moral
damages and the sum of P10,000.00 for attorney's fees.
G.R. No. 74231 April 10, 1987
CORAZON J. VIZCONDE, vs. INTERMEDIATE APPELLATE
COURT & PEOPLE OF THE PHILIPPINES.
Vizconde and Pilar A. Pagulayan were charged in the Trial
Court with misappropriation and conversion of an 8-carat
diamond ring belonging to Dr. Marylon J. Perlas in an
information which avers that they:
* * * wilfully, unlawfully and feloniously, with intent of
gain and with unfaithfulness and/or abuse of
confidence, defraud(ed) DRA. MARYLOU J. PERLAS in
the following manner, to wit: the said accused received
from the offended party one (1) 8-karat solo diamond
ring, white, double cut, brilliant cut with multiple
bentitos, valued at P85,000.00, to be sold by them on
commission basis, with the obligation to tum over the
proceeds of the sale to the offended party, or to return
the said ring if unsold, but the accused, once in
possession thereof, contrary to their obligation,
misapplied, misappropriated and converted the same
to their own personal use and benefit, and in spite of
repeated demands made upon them, both accused
failed, omitted and refused, and still fait omit and
refuse up to the present, to comply with their
aforesaid obligation, to the damage and prejudice of
the offended party, in the aforementioned amount of
P85,000.00, Philippine currency.
After trial both accused were convicted and each sentenced
to serve an indeterminate prison term of from eight (8)
years, four (4) months and one (1) day to ten (10) years and
two (2) months of prision mayor, with the accessory
penalties provided by law, and jointly and severally to
indemnify the offended party in the sum of P55,000.00 for

Both accused appealed to the Court of Appeals, but as Pilar

A. Pagulayan had evaded promulgation of sentence in the
Trial Court and had appealed only through counsel the
Appellate Court vacated her appeal as ineffectual. On
Vizconde's part, the Court of Appeals affirmed the judgment
of the Trial Court in all respects except the penalty of
imprisonment,
which
it
increased.
A
motion
for
reconsideration was denied. Vizconde thereafter filed the
present petition for review on certiorari.
Required to comment on the petition, the Solicitor General,
despite having argued for affirmance of Vizconde's conviction
in the Court of Appeals, now recommends that she be
acquitted, but nonetheless held civilly liable to the
complainant in the sum of P55,000.00 (the unaccounted
balance of the value of the ring as found by the Trial Court) "
* * * or whatever portion thereof which remains unpaid. * *
From the record and the findings of the courts below, it
appears that sometime in the first week of April, 1975, the
complainant, Dr. Marylon J. Perlas, called up the appellant
Vizconde, a long-time friend and former high school
classmate, asking her to sen Perlas' 8-carat diamond ring.
Shortly afterwards, Perlas delivered the ring to Vizconde to
be sold on commission for P 85,000.00. Vizconde signed a
receipt for the ring.
About a week and a half later, Vizconde returned the ring to
Perlas, who had asked for it because she needed to show it
to a cousin However, Vizconde afterwards called on Perlas at
the latter's home, with another lady, Pilar A. Pagulayan, who
claimed to have a "sure buyer" for the ring. Perlas was
initially hesitant to do so, but she eventually parted with the
ring so that it could be examined privately by Pagulayan's
buyer when the latter' gave her a postdated check for the
price (P 85,000.00) and, together with Vizconde, signed a

receipt prepared by Perlas. This receipt-people's Exhibit "A"reads as follows:

RECEIPT
Received from Dra. Marylon Javier-Perlas one (1) solo
8 karat diamond ring, white, double cut, brilliant cut
with multiple brilliantitos, which I agree to sell for
P85,000.00
(eighty-five
thousand
pesos)
on
commission basis and pay her in the following
manner:
P85,000.00 postdated check
PNB check 730297
dated April 26, 1975
for P85,000.00
It is understood that in the event the above postdated
check is dishonored for any reason whatsoever on its
due date, the total payment of the above item shall
become immediately due and demandable without
awaiting further demand.
I guarantee that the above check will be sufficiently
funded on the respective due date.
(SGD.) PILAR A. PAGULAYAN
PILAR A. PAGULAYAN
I guarantee jointly and severally
(SGD.) CORAZON J. VIZCONDE
CORAZON J. VIZCONDE
After Pagulayan's postdated check matured, Perlas deposited
it to her account at Manila Bank. It was dishonored for the

reason, "No arrangement," stated in the debit advice. Perlas

then called up Vizconde to inform her about the dishonor of
the check. The latter suggested that Perlas re-deposit the
check while she (Vizconde) followed up the sale of the ring.
Perlas re-deposited the check, but again it was dishonored
because drawn against insufficient funds. So Perlas took the
matter to counsel who sent separate letters of demand to
Vizconde and Pagulayan for return of the ring or payment of
P85,000.00.
After nine days, Vizconde and Pagulayan called on Perlas.
Pagulayan paid Perlas P5,000.00 against the value of the
ring. She also gave into Perlas' keeping three certificates of
title to real estate to guarantee delivery of the balance of
such value. A receipt for the money and the titles was typed
and signed by Perlas, which she also made the two sign. The
receipt Exhibit "D" of the prosecution reads:
Received from Mrs. Pilar Pagulayan, the sum of
P5,000.00 representing part of the proceeds of the
sale of one (1) solo 8 carat diamond ring, white,
double cut, brilliant cut w/multiple brilliantitos, given
to Mrs. Pilar Pagulayan and Mrs. Corazon de Jesus
Vizconde on 22 April 1975, to be sold on commission
basis for eighty- five thousand pesos (P85,000.00).
Received also owner's duplicate copies of TCT Nos.
434907, 434909, 434910, which will be returned upon
delivery of the remaining balance of the proceeds of
the sale of said diamond ring for eighty five thousand
pesos (P85,000.00).
This receipt is being issued without prejudice to legal
action.
(Sgd.) Marylon J. Perlas
Dra. Marylon J. Perlas
Conforme:
(Sgd.) Pilar A. Pagulayan
Pilar A. Pagulayan
(Sgd.) Corazon J. Vizconde

Corazon Vizconde
Vizconde and Pagulayan having allegedly reneged on a
promise to complete payment for the ring on the very next
day, Perlas filed with the Quezon City Fiscal's office a
complaint against them for estafa This notwithstanding,
Pagulayan still paid Perlas various sums totalling P25,000.00
which, together with the P5,000.00 earlier paid, left a
balance of P55,000.00 still owing.
Both the Trial Court and the Court of Appeals found these
facts sufficient showing that Vizconde and Pagulayan had
assumed a joint agency in favor of Perlas for the sale of the
latter's ring, which rendered them criminally liable, upon
failure to return the ring or deliver its agreed value, under
Art. 315, par. l(b), of the Revised Penal Code, for
defraudation committed " * * * with unfaithfulness or abuse
of confidence * * * by misappropriating or converting, to the
prejudice of another, * * * personal property received in
trust or on commission, or under any other obligation
involving the duty to make delivery of or to return the same,
* * * " The Solicitor General falling back, as already stated,
from an earlier stance, disagrees and submits in his
Comment that the appellant cannot be convicted of estafa
under a correct interpretation of the two principal exhibits of
the prosecution, the receipts Exhibits A" and "D". He is
correct.

W/N Vizconde guaranteed the obligation of Pagulayan to pay

Perlas. Yes. (only civil obligation)
W/N Vizconde can be held criminally liable as surety for
Pagulayan. No. (suretyship creates purely civil obligations
on the part of the guarantor or surety)

As the Solicitor General correctly puts it, the joint and

several undertaking assumed by Vizconde in a separate
writing below the main body of the receipt, Exhibit "A",
merely guaranteed the civil obligation of Pagulayan to pay
Perlas the value of the ring in the event of her (Pagulayan's)
failure to return said article. It cannot, in any sense, be
construed
as
assuming
any
criminal
responsibility
consequent upon the failure of Pagulayan to return the ring
or deliver its value. It is fundamental that criminal
responsibility is personal and that in the absence of
conspiracy, one cannot be held criminally liable for the act or
default of another.
A person to be guilty of crime, must commit the crime
himself or he must, in some manner, participate in its
commission or in the fruits thereof. * * *
Thus, the theory that by standing as surety for Pagulayan,
Vizconde assumed an obligation more than merely civil in
character, and staked her very liberty on Pagulayan's fidelity
to her trust is utterly unacceptable; it strikes at the very
essence of guaranty (or suretyship) as creating purely civil
obligations on the part of the guarantor or surety. To render
Vizconde criminally liable for the misappropriation of the
ring, more than her mere guarantee written on Exhibit "A" is
necessary. At the least, she must be shown to have acted in
concert and conspiracy with Pagulayan, either in obtaining
possession of the ring, or in undertaking to return the same
or delivery its value, or in the misappropriation or conversion
of the same.
Now, the information charges conspiracy between Vizconde
and Pagulayan, but no adequate proof thereof has been
presented. It is of course true that direct proof of conspiracy
is not essential to convict an alleged conspirator, and that
conspiracy may be established by evidence of acts done in
pursuance of a common unlawful purpose. Here, however,
the circumstances from which a reasonable inference of
conspiracy might arise, such as the fact that Vizconde and
the complainant were friends of long standing and former

classmates, that it was Vizconde who introduced Pagulayan

to Perlas, that Vizconde was present on the two occasions
when the ring was entrusted to Pagulayan and when part
payment of P5,000.00 was made, and that she signed the
receipts, Exhibits "A" and "D," on those occasions are, at
best, inconclusive. They are not inconsistent with what
Vizconde has asserted to be an innocent desire to help her
friend dispose of the ring; nor do they exclude every
reasonable hypothesis other than complicity in a
premeditated swindle.
The foregoing conclusion in nowise suffers from the fact that
the second receipt, Exhibit "D", appears to confirm that the
ring "* * * was given to Mrs. Pilar Pagulayan and Mrs.
Corazon de Jesus Vizconde on 22 April 1975, to be sold on
commission basis for eighty five thousand pesos
(P85,000.00)." The implications and probative value of this
writing must be considered in the context of what had
already transpired at the time of its making. The ring had
already been given to Pagulayan, and the check that she had
issued in payment therefor (or to secure payment, as the
complainant would have it) had already been dishonored
twice. That the complainant then already entertained serious
apprehensions about the fate of the ring is evident in her
having had her lawyers send Vizconde and Pagulayan
demands for restitution or payment, with threat of legal
action. Given that situation, Exhibit "D", insofar as it purports
to confirm that Vizconde had also received the ring in trust,
cannot be considered as anything other than an attempt to
"cure" the lack of mention of such an entrustment in the first
receipt, Exhibit "A", and thereby bind Vizconde to a
commitment far stronger and more compelling than a mere
civil guarantee for the value of the ring. There is otherwise
no explanation for requiring Vizconde and Pagulayan to sign
the receipt, which needed only the signature of Perlas as an
acknowledgment of the P5,000.00 given in part payment,
and the delivery of the land titles to secure the balance.
The conflict in the recitals of the two receipts insofar as
concerns Vizconde's part in the transaction involving Perlas'

ring is obvious and cannot be ignored. Neither, as the Court

sees it, should these writings be read together in an attempt
to reconcile what they contain, since, as already pointed out,
the later receipt was made under circumstances which leave
no little doubt of its truth and ;Integrity. What is clear from
Exhibit "A" is that the ring was entrusted to Pilar A.
Pagulayan to be sold on commission; there is no mention
therein that it was simultaneously delivered to and received
by Vizconde for the same purpose or, therefore, that
Vizconde was constituted, or agreed to act as, agent jointly
with Pagulayan for the sale of the ring. What Vizconde solely
undertook was to guarantee the obligation of Pagulayan to
return the ring or deliver its value; and that guarantee
created only a civil obligation, without more, upon default of
the principal. Exhibit "D", on the other hand, would make out
Vizconde an agent for the sale of the ring. The undisputed
fact that Exhibit "A" was executed simultaneously with the
delivery of the ring to Pagulayan compellingly argues for
accepting it as a more trustworthy memorial of the real
agreement and transaction of the parties than Exhibit "D"
which was executed at a later date and after the
supervention of events rendering it expedient or desirable to
vary the terms of that agreement or transaction.
In view of the conclusions already reached, consideration of
the Solicitor General's argument also quite persuasive
that Exhibit "D" in fact evidences a consummated sale of the
ring for an agreed price not fully paid for, which yields the
same result, is no longer necessary. It is, however, at least
another factor reinforcing the hypothesis of Vizconde's
innocence.
Upon the evidence, Vizconde was a mere guarantor, a
solidary one to be sure, of the obligation assumed by Pilar A.
Pagulayan to Marylon J. Perlas for the return of the latter's
ring or the delivery of its value. Whatever liability was
incured by Pagulayan for defaulting on such obligation and
this is not inquired into that of Vizconde consequent upon
such default was merely civil, not criminal. It was, therefore,
error to convict her of estafa.

As already stated, the Solicitor General however maintains

that the appellant should be held hable to pay the
complainant the amount of P55,000.00, or whatever part of
such amount remains unpaid, for the value of the ring.
Again, this is a correct proposition, there being no question
as in fact admitted by her that the appellant executed
the guarantee already referred to.
WHEREFORE, except insofar as it affirms the judgment of the
Trial Court ordering appellant Corazon J. Vizconde, solidarity
with Pilar A. Pagulayan, to indemnify the complainant
Marylon J. Perlas in the amount of P55,000.00 for the
unaccounted balance of the value of the latter's ring, the
appellant appealed Decision of the Court of Appeals is
reversed and set aside, and said appellant is acquitted.

G.R. No. L-16880

April 30, 1963

LUNETA MOTOR COMPANY, vs. ANTONIO MENENDEZ

and CARLOS BARANDA, LUZON SURETY CO., INC.,.
It appears that Antonio Menendez obtained a loan from the
Luneta Motor Co. in the amount of P6,200.00 with which to
complete payment for a motor vehicle which the former had
purchased. A promissory note was executed to evidence the
loan secured by a chattel mortgage on the same motor
vehicle. Of the said loan, only P3,012.00 and interest up to
July 29, 1953 was paid by Menendez, and as he failed to
settle the balance of P3,098.00, plus interest, in spite of
repeated demands, the Luneta Motor Co., instituted action
for foreclosure of the chattel mortgage to satisfy the
indebtedness and for replevin. Co-defendant of Menendez in
this action was Carlos Baranda who was in actual possession
of the car, claiming ownership thereof thru purchase prior to
the execution of the chattel mortgage in favor of the plaintiff.
For the manual delivery of the motor car, pending trial,
Luneta Motor posted a bond of P8,000.00. Hence, the Sheriff
of Manila, by order of the court, seized the said motor vehicle
for delivery to Luneta Motor. Whereupon, Baranda, to regain
possession thereof, filed a counterbond of P8,000.00
subscribed by the Luzon Surety Co., Inc. to secure delivery of
the car if adjudged, and to pay whatever amount may be
awarded in favor of Luneta Motor, plus costs of suit.
Accordingly, the order of seizure was set aside by the court
and the car was returned to Baranda. The case came up for
hearing, although, apparently, trial was had without notice to
the surety. Judgment was rendered against Menendez and
Baranda, ordering them to pay Luneta Motor Co., Inc. the
sum of P3,098.00 plus 12% interest per annum. Also, to
deliver the car in question to the Sheriff of Manila who shall
proceed to sell it as the law directs and the net proceeds of

the sale shall be paid in payment of the sum adjudged to the

plaintiff in this decision. If the proceeds of the sale is not
enough or the car cannot be delivered to the Sheriff, the
amount adjudged to Luneta Motor in this decision or any
unpaid balance, shall be satisfied by the levy on the
counterbond put up by the Baranda and subscribed by his
bondsman, Luzon Surety Co., Inc. The said Luxon Surety
Co., Inc. shall be notified and served a copy of this decision."
(Emphasis supplied.)

Appellant surety prays for the annulment of the order holding

it liable for damages upon the bond subscribed by it for
defendants on the grounds that (1) the plaintiff-appellee has
not sufficiently complied with the procedure prescribed for
the recovery of damages against sureties; and that (2) the
Court of First Instance has no jurisdiction to pass upon
appellee's claim against the said bond.

Despite the last statement in the above quotation, the Luzon

Surety was not furnished a copy of the decision.

W/N Luzon Surety is liable. No.

Not satisfied with said decision, Baranda interposed an

appeal to the Court of Appeals which affirmed the decision in
toto. Again, the record does not show that the surety was
served a copy of the same.
Pending finality of the CA decision, Luneta Motor filed with
the trial court a motion for leave to claim damages from the
Luzon Surety Co. Against the surety's opposition, the claim
was admitted by the trial court, but action thereon was held
in abeyance until the record of the case was returned from
the CA. A day before the decision was to be final and
executory, Luneta Motor filed with the CA a motion to have
the record of the case remanded to the trial court for proper
action on the claim. The said court, however, allowed first the
decision to become final and executory before remanding the
record of the case to the lower court.
Subsequently, Luzon Surety Co., Inc., moved for
reconsideration of the trial court's order admitting plaintiff's
claim for damage. The motion was denied, but movant's
attorney was allowed to file his answer to plaintiff's claim for
damages. Hearing was had after the decision in the main
case had already become final and executory, and it was only
several months thereafter that an order for damages against
the Luzon Surety Co. was issued. The said order is now the
subject of the present appeal interposed by the said surety.

We find merit in the appeal.

The procedure for the enforcement of the surety's liability
under a bond for delivery of personal property is described in
section 10, Rule 62, in connection with section 20, Rule 59 of
the Rules of Court, said provisions reading as follows:
"Judgment to include recovery against sureties.-The
amount, if any, to be awarded to either party upon any
bond filed by the other in accordance with the
provisions of this rule, shall be claimed, ascertained,
and granted under the same procedure as prescribed
in Section 20, of Rule 59." (Section 10, Rule 62)
"Claim for damages on plaintiff's bond on account of
illegal attachment.- If the judgment on the action be in
favor of the defendant, he may recover, upon the bond
given by the plaintiff, damages resulting from the
attachment. Such damages may be awarded only
upon application and after proper hearing, and shall
be included in the final judgment. The application
must be filed before the trial or, in the discretion of
the court, before entry of final judgment, with due
notice to the plaintiff and his surety or sureties,
setting forth the facts showing his right to damages

and the amount thereof. Damages sustained during

the pendency of the appeal may be claimed by the
defendant, if the judgment of the appellate court be
favorable to him, by filing an application therewith,
with notice to the plaintiff and his surety or sureties,
and the appellate court may allow the application to be
heard and decided by the trial court. (Emphasis
supplied.) (Section 20, Rule 59)

bondsman has no right to demand the exhaustion of

the property of the principal debtor, there is no
justification for the entering of separate judgments
against them. With a single judgment against principal
and sureties, the prevailing party may choose, at his
discretion to enforce the award of damages against
whomsoever he considers in a better situation to pay
it." (Alliance Insurance & Surety Co., Inc. v. Piccio).

Under these provisions, in order to recover on a replevin

bond, the following requisites must be complied with:

In other words, it is not only the filing of the claim before

final judgment that is required. The claimant on the bond
must see to it that the award against the surety be included
in the final judgment. The surety may only be held liable if,
before the judgment becomes final, an order against the
surety is entered after a hearing with notice to the surety.

1. Application for damages must be filed before trial or

before entry of final judgment;
2. Due notice must be given the other party and his
surety; and
3. There must be proper hearing and award of
damages, if any, must be included in the final
judgment (Alliance Surety Co., Inc. V. Piccio, et al.,
G.R. No L-9950, July 31, 1959.)
There is no question that the plaintiff-appellee here, in
claiming damages against the surety, has complied with the
first two requisites above stated. But although there was a
hearing on the claim, the award of damages was not included
in the decision of the Court of Appeals, which became final
and executory on September 2, 1959.
The purpose of the Rules in requiring notice and hearing
before the entry of final judgment on a bond is to include in
said judgment the award, if any, that the claimant may
recover from both or either the principal and the surety.
".. The Rule plainly calls for only one judgment for
damages against the attaching party and his sureties;
which is explained by the fact that the attachment
bond is a solidary obligation. Since a judicial

Luneta Motor could have very well obtained an award for

damages in the main decision had it taken the right step in
filing its claim against the surety. It was improper for Luneta
Motor to file its claim with the Court of Instance after the
case had been appealed to the CA. At that stage, the trial
court had no more jurisdiction over the case than to adopt
conservatory measures to protect the rights of the parties. It
has been settled that application for damages against the
surety may not be made to the CFI when the case is pending
with the CA, unless expressly allowed by the latter; and that
without express permission from, or reference by, the CA,
the CFI can not validly hear or determine such claims against
the surety.
It is true that the appealed case was, on September 5, 1959,
remanded by the CA to the trial court, upon request of
Luneta Motor, for the purpose of holding a hearing on its
claim against the Luzon Surety. But the hearing, which was
held thereafter, can have no effect on the final decision of the
CA on the main case which became final and executory on
September 2, 1959. The non-incorporation of the award for
damages against the Luzon Surety Co. in the main decision
has been brought about by Luneta Motor's own mistake of

filing its claim therefor with the CFI few days before the
finality of the decision of the CA.
In summary, the application for damages against the surety
must be filed in the CFI before trial, or even after trial, but
before judgment becomes executory; and if appeal is taken,
then application must be made in the appellate court, but
always before judgment of the latter becomes final and
executory so that the award, if any, may be included in said
judgment.
Luneta Motor having failed to comply with the procedure
above-summarized, the appealed order is declared null and
void and the same is hereby set aside. Costs against the
Luneta Motor.

G.R. No. L-9353

May 21, 1957

MANILA SURETY AND FIDELITY, INC., vs. BATU

CONSTRUCTION AND COMPANY, CARLOS N.
BAQUIRAN, GONZALO P. AMBOY and ANDRES TUNAC.
In a complaint filed in the Court of First Instance of Manila,
the plaintiff, a domestic corporation engaged in the bonding
business, hereafter called the company, alleges that the Batu
Construction & Company, a partnership the members of
which are the other three defendants, requested it to post,
as it did, a surety bond for P8,812 in favor of the
Government of the Philippines to secure the faithful
Performance of the construction of the Bacarra Bridge,
Project PR-72 (3), in Ilocos Norte, undertaken by the
partnership, as stipulated in a construction on contract
entered into on 11 July 1950 by and between the partnership
and the Government of the Philippines, on condition that the
defendants would "indemnify the COMPANY for any damage,
loss, costs, or charges, or expenses of whatever kind and
nature, including counsel or attorney's fees, which the
COMPANY may, at any time, sustain or incur, as a
consequence of having become surety upon the above
mentioned bond; said attorney's fees shall not be less than
fifteen (15%) per cent of the total amount claimed in any
action which the COMPANY may institute against the
undersigned (the defendants except Andres Tunac) in Court,"
and that "Said indemnity shall be paid to the COMPANY as
soon as it has become liable for the payment of any amount,
under the above-mentioned bond, whether or not it shall
have paid such sum or sums of money, or any part thereof,"
as stipulated in a contract executed on 8 July 1950 (Exhibit
B); that on 30 May 1951 because of the unsatisfactory
progress of the work on the bridge, the Director of Public

Works, with the approval of the Secretary of Public Works

and Communications, annulled, the construction contract
referred to and notified the plaintiff Company that the
Government would hold it (the Company) liable for any
amount incurred by the Government for the completion of
the bridge, in excess of the contract price (Exhibit D); that
on 19 December 1951 (should be 23 November 1951),
Ricardo Fernandez and 105 other persons brought an action
in the Justice of the Peace Court of Laoag, Ilocos Norte,
against the partnership, the individual partners and the
herein plaintiff Company for the collection of unpaid wages
amounting to P5,960.10, lawful interests thereon and costs
(Exhibit E); that the defendants are in imminent danger of
becoming insolvent, and are removing and disposing, or
about to remove and dispose, of their properties with intent
to defraud their creditors, particularly the plaintiff Company;
and that the latter has no other sufficient security to protect
its rights against the defendants. Upon these allegations, the
plaintiff prays that, upon the approval of a bond and on the
strength of the allegations of the verified complaint, a writ
attachment be issued and levied upon the properties of the
defendants; and that after hearing, judgment be rendered "
ordering the defendants to deliver to the plaintiff such
sufficient security as shall protect plaintiff from the any
proceedings by the creditors on the Surety Bond
aforementioned and from the danger of insolvency of the
defendants; and to allow costs to the herein plaintiff," and "
for such other measures of relief as may be proper and just
in the premises." Attached to the complaint are a verification
and affidavit of attachment; and copies of the surety bond
marked Annex A; of the indemnity contract marked Annex B;
and of the letter of the Acting Director of Public Works to the
plaintiff dated 30 May 1951, marked Annex C.
Andres Tunac admits in his answer the allegations in
paragraphs 1, 2, 3 and 4 of the complaint, but denies the
allegations in paragraphs 5, 6, 7, 8 and 9 of the complaint,
because he has never promised to put up an indemnity bond
in favor of the plaintiff nor has he ever entered into any
indemnity agreement with it; because the partnership or the

Batu Construction & Company was fulfilling its obligations in

accordance with the terms of the construction contract;
because the Republic of the Philippines, through the Director
of Public, Works, had no authority to annul the contract at its
own initiative; because the Justice of the Peace court of
Laoag, Ilocos Norte had no jurisdiction to hear and decide a
case for collection of P5,960.10; and because the defendants
were not in imminent danger of insolvency, neither did they
remove or dispose of their properties with intent to defraud
their creditors. By way of affirmative defenses, he alleges
that the signing by Carlos N. Baquiran of the indemnity
agreement for and in behalf of the partnership Batu
Construction & Company did not bind the latter to the
plaintiff and as the partnership is not bound, he (Andres
Tunac), as a member thereof, is also not bound; that he not
being a party to the said agreement, the plaintiff has no
cause of action against him; that in the event the partnership
is bound by the indemnity agreement he invokes his right of
exhaustion of the property of the partnership before the
plaintiff may proceed against his property. And as a
counterclaim he alleges that the plaintiff brought the action
against him maliciously and in bad faith for the purpose of
annoying him and damaging his professional reputation, he
having a flourishing and successful practice as engineer in
Ilocos Norte, thereby compelling him to defend himself; that
to secure the issuance of a writ of attachment the plaintiff
made false representations; and that the issuance of the writ
upon such false representations of the plaintiff caused him
damages in the sum of P10,000 including expenses of
litigation and attorney's fees. Upon the foregoing he prays
that the complaint be dismissed as to him and the defendant
Batu Construction & Company, with costs against the
plaintiff; that the latter be ordered to pay him the sum of
P10,000; and that he be granted such other remedies as
may be just, equitable and proper.
Gonzalo P. Amboy denies in his answer the allegations of the
complaint, except those that may be deemed admitted in the
special defenses, and alleges that he is not in imminent
danger of insolvency and is not removing and disposing or

about to remove and dispose of his properties, because he

has no property; that has been no liquidation of the
expenses incurred in the construction of the Bacarra Bridge,
Project PR-72(3) to determine whether there would be a
balance of the contract price which may be applied to pay
the claim for unpaid wages of Ricardo Fernandez et al.
sought to be collected in civil case No. 198 of the Justice of
the Peace Court of Laoag, Ilocos Norte, and not until after
such liquidation shall have been made could his liability and
that of his co-defendants be determined and fixed; that if
after proper liquidation's there be a deficit of the contract
price the defendants are willing to pay the claim for unpaid
wages of Ricardo Fernandez et al. Upon these allegations he
prays that the issuance of the writ of attachment prayed for
by the plaintiff be held in abeyance until after civil case No.
198 of the Justice of the Peace Court of Laoag, Ilocos Norte,
shall have been disposed of.
Carlos N. Baquiran admits in his answer the allegations in
paragraphs 1, 2, 3,4, 5, 6, and 11 of the complaint but
alleges that he has no sufficient knowledge to form a belief
as to the truth of the claim of Ricardo Fernandez et al. set
forth in paragraph 7 of the complaint, for there has never
been a liquidation between the defendants and the Bureau of
Public Works. He further denies specifically paragraphs 8, 9
and 10 of the complaint. By way of special defenses he
alleges that there has been no liquidation by and between
the defendants and the Bureau of Public Works on Project
PR-72(3) to determine whether the total amount spent for
the construction of the bridge exceeded the contract price;
that after the determination of the respective liabilities of the
parties in civil case No. 198 of the Justice of the Peace Court
of Laoag, Ilocos Norte, if any there be against the defendants
herein, and such liability could not be paid out of the balance
of the contract price of Project PR-72(3), the defendants are
ready and willing to assume their respective responsibilities.
Upon these allegations he prays that the complaint of the
plaintiff be dismissed; that the issuance of the writ of
attachment prayed for be denied; and that he be granted

such other relief as may be just and equitable, with costs

against the plaintiff.
At the hearing, the plaintiff presented its evidence. After the
plaintiff had rested its case, defendant Gonzalo P. Amboy
moved for the dismissal of the complaint, on the ground that
the remedy provided for in the last paragraph of article 2071
of the new Civil Code may be availed of by the guarantor
only and not by a surety.
Acting upon this motion to dismiss the trial court made the
following findings:
. . . That on July 8, 1950, the defendant Batu
Construction & Company, as principal, and the plaintiff
Manila Surety & Fidelity Co. Inc., as surety, executed a
surety bond for the sum of P8,812.00 to insure faithful
performance of the former's obligation as contractor
for the construction of the Bacarra Bridge, Project PR72 (No. 3) Ilocos Norte Province. On the same date,
July 8,1950, the Batu Construction & Company and
the defendants Carlos N. Baquiran and Gonzales P.
Amboy executed an indemnity agreement to protect
the Manila Surety & Fidelity Co. Inc.., against damage,
loss or expenses which it may sustain as a
consequence of the surety bond executed by it jointly
with Batu Construction & Company.
On or about May 30, 1951, the plaintiff received a
notice from the Director of Public Works (Exhibit B)
annulling its contract with the Government for the
construction of the Bacarra Bridge because of its
failure to make satisfactory progress in the execution
of the works, with the warning that ,any amount spent
by the Government in the continuation of the work, in
excess of the contract price, will be charged against
the surety bond furnished by the plaintiff. It also
appears that a complaint by the laborers in said
project of the Batu Construction & Company was filed

against it and the Manila Surety and Fidelity Co., Inc.,

for unpaid wages amounting to P5,960.10.
and, being of the opinion that the provisions of article 2071
of the new Civil Code may be availed of by a guarantor only
and not by a surety the complaint, with costs against the
plaintiff.
From this order the plaintiff Company has appealed to this
Court, because it proposes to raise only a question of law.
After the order dismissing the complaint had been entered,
on 16 and 20 July 1953, the defendants Gonzalo P. Amboy
and Andres Tunac moved for leave to prove damages they
allegedly suffered as a result of the attachment levied upon
their properties. On 15 August 1953 the Court heard the
evidence on damages. On 23 September 1953 the Court
found and held that the defendant Gonzalo P. Amboy is
entitled to recover from the plaintiff damages equivalent to 6
per cent interest per annum on the sum of P35 in possession
of the Provincial Treasurer of Ilocos Norte, which was
garnished pursuant to the writ of attachment, from the date
of garnishment until its charge; but the claims for damages
of Andres Tunac and Gonzalo P. Amboy allegedly suffered by
them in their business, moral damages and attorney's fees
were without basis in law and in fact. Hence their recovery
was denied. The Court dissolved the writ of attachment.
From this last order only the plaintiff Company has appealed.
The main question to determine is whether the last
paragraph of article 2071 of the new Civil Code taken from
article 1843 of the old Civil Code may be availed of by a
surety.
A guarantor is the insurer of the solvency of the debtor; a
surety is an insurer of the debt. A guarantor binds himself to
pay if the principal is unable to pay; a surety undertakes to
pay if the principal does not pay.1 The reason which could be
invoked for the non-availability to a surety of the provisions
of the last paragraph of article 2071 of the new Civil Code

would be the fact that guaranty like commodatum 2 is

gratuitous. But guaranty could also be for a price or
consideration as provided for in article 2048. So, even if
there should be a consideration or price paid to a guarantor
for him to insure the performance of an obligation by the
principal debtor, the provisions of article 2071 would still be
available to the guarantor. In suretyship the surety becomes
liable to the creditor without the benefit of the principal
debtor's exclusion of his properties, for he (the surety)
maybe sued independently. So, he is an insurer of the debt
and as such he has assumed or undertaken a responsibility
or obligation greater or more onerous than that of guarantor.
Such being the case, the provisions of article 2071, under
guaranty, are applicable and available to a surety. The
reference in article 2047 to, the provisions of Section 4,
Chapter 3, Title 1, Book IV of the new Civil Code, on solidary
or several obligations, does not mean that suretyship which
is a solidary obligation is withdrawn from the applicable
provisions governing guaranty.
The plaintiff's cause of action does not fall under paragraph 2
of article 2071 of the new Civil Code, because there is no
proof of the defendants' insolvency. The fact that the
contract was annulled because of lack of progress in the
construction of the bridge is no proof of such insolvency. It
does not fall under paragraph 3, because the defendants
have not bound themselves to relieve the plaintiff from the
guaranty within a specified period which already has expired,
because the surety bond does not fix any period of time and
the indemnity agreement stipulates one year extendible or
renewable until the bond be completely cancelled by the
person or entity in whose behalf the bond was executed or
by a Court of competent jurisdiction. It does not come under
paragraph 4, because the debt has not become demandable
by reason of the expiration of the period for payment. It does
not come under paragraph 5 because of the lapse of 10
years, when the principal obligation has no period for its
maturity, etc., for 10 years have not yet elapsed. It does not
fall under paragraph 6, because there is no proof that "there
are reasonable grounds to fear that the principal debtor

intends to abscond." It does not come under paragraph 7,

because the defendants, as principal debtors, are not in
imminent danger of becoming insolvent, there being no proof
to that effect.
But the plaintiff's cause of action comes under paragraph 1
of article 2071 of the new Civil Code, because the action
brought by Ricardo Fernandez and 105 persons in the Justice
of the Peace Court of Laoag, province of Ilocos Norte, for the
collection of unpaid wages amounting to P5,960.10, is in
connection with the construction of the Bacarra Bridge,
Project PR-72 (3), undertaken by the Batu Construction &
Company, and one of the defendants therein is the herein
plaintiff, the Manila Surety and Fidelity Co., Inc., and
paragraph 1 of article 2071 of the new Civil Code provides
that the guarantor, even before having paid, may proceed
against the principal debtor "to obtain release from the
guaranty, or to demand a security that shall protect him from
any proceedings by the creditor or from the danger of
insolvency of the debtor, when he (the guarantor) is sued for
payment. It does not provide that the guarantor be sued by
the creditor for the payment of the debt. It simply provides
that the guarantor of surety be sued for the payment of an
amount for which the surety bond was put up to secure the
fulfillment of the obligation undertaken by the principal
debtor. So, the suit filed by Ricardo Fernandez and 105
persons in the Justice of the Peace Court of Laoag, province
of Ilocos Norte, for the collection of unpaid wages earned in
connection with the work done by them in the construction of
the Bacarra Bridge, Project PR-72(3), is a suit for the
payment of an amount for which the surety bond was put up
or posted to secure the faithful performance of the obligation
undertaken by the principal debtors (the defendants) in favor
of the creditor, the Government of the Philippines.
The order appealed from dismissing the complaint is
reversed and set aside, and the case remanded to the court
below for determination of the amount of security that would
protect the plaintiff Company from any proceedings by the
creditor or from the danger of insolvency of the defendants,

the principal debtors, and direction to the defendants to put

up such amount of security as may be established by
competent evidence, without pronouncement as to costs.
The writ of attachment having been issued improvidently
because, although there is an allegation in the verified
complaint that the defendants were in imminent danger of
insolvency and that they were removing or disposing, or
about to remove or dispose, of their properties, with intent to
defraud their creditors, particularly the plaintiff Company,
still such allegation was not proved, the fact that a complaint
had been filed against the defendants and the plaintiff
Company in the Justice of the Peace Court of Laoag, Ilocos
Norte, for the collection of an amount for unpaid wages of
the plaintiffs therein who claimed to have worked in the
construction of the bridge, being insufficient to prove it, and
because the relief prayed for in the complaint for security
that shall protect it from any proceedings by the creditor and
from the danger of the defendants becoming insolvent is
inconsistent with the state of insolvency of the defendants or
their being in imminent danger of insolvency, the order
awarding 6 per cent on the sum of P35 in possession of the
Provincial Treasurer owned by the defendant Gonzalo P.
Amboy garnished by virtue of the writ of attachment, from
the date of the garnishment until its discharge, and denying
recovery of the amounts of damages claimed to have been
suffered by the defendants, is affirmed, the defendants not
having appealed therefrom.

P8,000,000.00 to assist the latter in meeting the additional

capitalization requirements of its logging operations.
"The Credit Approval Memorandum expressly stated that the
P8M Credit Loan Facility shall be effective until 30 November
1981:
JOINT CONDITIONS:
G.R. No. 138544

October 3, 2000

SECURITY BANK AND

RODOLFO M. CUENCA.

TRUST

COMPANY,

Inc.,

vs.

Being an onerous undertaking, a surety agreement is strictly

construed against the creditor, and every doubt is resolved in
favor of the solidary debtor. The fundamental rules of fair
play require the creditor to obtain the consent of the surety
to any material alteration in the principal loan agreement, or
at least to notify it thereof. Hence, petitioner bank cannot
hold herein respondent liable for loans obtained in excess of
the amount or beyond the period stipulated in the original
agreement, absent any clear stipulation showing that the
latter waived his right to be notified thereof, or to give
consent thereto. This is especially true where, as in this case,
respondent was no longer the principal officer or major
stockholder of the corporate debtor at the time the later
obligations were incurred. He was thus no longer in a
position to compel the debtor to pay the creditor and had no
more reason to bind himself anew to the subsequent
obligations.

1. Against Chattel Mortgage on logging trucks and/or

inventories (except logs) valued at 200% of the lines
plus JSS of Rodolfo M. Cuenca.
2. Submission of an appropriate Board Resolution
authorizing the borrowings, indicating therein the
companys duly authorized signatory/ies;
3. Reasonable/compensating deposit balances in
current account shall be maintained at all times; in
this connection, a Makati account shall be opened prior
to availment on lines;
4. Lines shall expire on November 30, 1981; and
5. The bank reserves the right to amend any of the
aforementioned terms and conditions upon written
notice to the Borrower. (Emphasis supplied.)

Sta. Ines Melale (Sta. Ines) is a corporation engaged in

logging operations. It was a holder of a Timber License
Agreement issued by the DENR.

"To secure the payment of the amounts drawn by appellant

SIMC from the above-mentioned credit line, SIMC executed a
Chattel Mortgage dated 23 December 1980 over some of its
machinery and equipment in favor of 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 as follows:

Security Bank and Trust Co. granted Sta. Ines Melale

Corporation [SIMC] a credit line in the amount of

Rodolfo M. Cuenca x x x hereby binds himself x x x

jointly and severally with the client (SIMC) in favor

of the bank for the payment, upon demand and

without the benefit of excussion of whatever amount x
x x the client may be indebted to the bank x x x by
virtue of aforesaid credit accommodation(s) including
the
substitutions,
renewals,
extensions,
increases,
amendments,
conversions
and
revivals
of
the
aforesaid
credit
accommodation(s) x x x . (Emphasis supplied).
Prior the expiration of the period of effectivity of the P8MCredit 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
No. TD/TLS-3599-81 for said amount.
Cuenca resigned as President and Chairman of the Board of
Directors of Sta. Ines. Subsequently, the shareholdings of
Cuenca in Sta. Ines were sold at a public auction. Said
shares were bought by Adolfo Angala who was the highest
bidder during the public auction.
"Subsequently, SIMC repeatedly availed of its credit line and
obtained six (6) other loan[s] from SBTC in the aggregate
amount of P6,369,019.50. Accordingly, SIMC executed
corresponding Promissory Notes to cover the amounts of the
additional loans against the credit line.
" SIMC, however, encountered difficulty in making the
amortization payments on its loans and requested SBTC for a
complete
restructuring
of
its
indebtedness.
SBTC
accommodated SIMCs request and signified its approval in a
letter dated 18 February 1988 wherein SBTC and 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 the following loans:
a. Term loan in the amount of P8,800,000.00, to be
applied to liquidate the principal portion of Sta. Ines[]
total outstanding indebtedness to Security Bank and

b. Term loan in the amount of P3,400,000.00, to be

applied to liquidate the past due interest and penalty
portion of the indebtedness of Sta. Ines to Security
Bank.
"It should be pointed out that in restructuring Sta. Ines
obligations to Security Bank, the Promissory Note in the
amount of 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, was not segregated from, but was instead
lumped together with, the other loans obtained by Sta. Ines
which were not secured by said Indemnity Agreement.
"Pursuant to the agreement to restructure its past due
obligations to Security Bank, Sta. Ines thus executed the
following promissory notes, both dated 09 March 1988 in
favor of Security Bank:
PROMISSORY NOTE NO. AMOUNT
RL/74/596/88

P8,800,000.00

RL/74/597/88

P3,400,000.00

TOTAL

P12,200,000.00

"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. Section
1.01 of the said Loan Agreement dated 31 October 1989
provides:
1.01 Amount - The Lender agrees to grant loan to the
Borrower in the aggregate amount of P12,200,000.00,
(the Loan). The loan shall be released in two (2)
tranches of P8,800,000.00 for the first tranche (the
First Loan) and P3,400,000.00 for the second tranche

(the Second Loan) to be applied in the manner and

for the purpose stipulated hereinbelow.
1.02. Purpose - The First Loan shall be applied to
liquidate the principal portion of the Borrowers
present total outstanding indebtedness to the Lender
(the indebtedness) while the Second Loan shall be
applied to liquidate the past due interest and penalty
portion of the Indebtedness. (Underscoring supplied.)
"From 08 April 1988 to 02 December 1988, Sta. Ines made
further payments to
Security Bank in the amount of
P1,757,000.00
" SIMC defaulted in the payment of its restructured loan
obligations to SBTC despite demands made upon SIMC and
CUENCA.
"Appellants individually and collectively refused to pay the
SBTC. Thus, SBTC filed a complaint for collection of sum of
money."

was November 30, 1981. Hence, it ruled that Cuenca was

liable only for loans obtained prior to November 30, 1981,
and only for an amount not exceeding P8 million.
It further held that the restructuring of Sta. Ines obligation
under the 1989 Loan Agreement was tantamount to a grant
of an extension of time to the debtor without the consent of
the surety. Under Article 2079 of the Civil Code, such
extension extinguished the surety.
The CA also opined that the surety was entitled to notice, in
case the bank and Sta. Ines decided to materially alter or
modify the principal obligation after the expiry date of the
credit accommodation.
Hence, this recourse to this Court.

W/N the 1989 Loan Agreement novated the original credit

accommodation and Cuencas liability under the Indemnity
Agreement. - Yes.

Ruling of the Court of Appeals

In releasing Cuenca from liability, the CA ruled that the 1989
Loan
Agreement
had
novated
the
1980
credit
accommodation earlier granted by the bank to Sta. Ines.
Accordingly, such novation extinguished the Indemnity
Agreement, by which Cuenca, who was then the Board
chairman and president of Sta. Ines, had bound himself
solidarily liable for the payment of the loans secured by that
credit accommodation. It noted that the 1989 Loan
Agreement had been executed without notice to, much less
consent from, Cuenca who at the time was no longer a
stockholder of the corporation.
The appellate court also noted that the Credit Approval
Memorandum had specified that the credit accommodation
was for a total amount of P8 million, and that its expiry date

W/N Cuencas liability as surety is extinguished after the

alteration of the agreement without his consent. Yes
W/N Cuenca waived his right to be notified. No.
W/N the surety is an absolutely continuing surety. No.

The Petition has no merit.

First Issue: Original Obligation Extinguished by Novation
An obligation may be extinguished by novation, pursuant to
Article 1292 of the Civil Code, which reads as follows:

"ART. 1292. In order that an obligation may be

extinguished by another which substitute the same, it
is imperative that it be so declared in unequivocal
terms, or that the old and the new obligations be on
every point incompatible with each other."
Novation of a contract is never presumed. It has been held
that "[i]n the absence of an express agreement, novation
takes place only when the old and the new obligations are
incompatible on every point." Indeed, the following requisites
must be established: (1) there is a previous valid obligation;
(2) the parties concerned agree to a new contract; (3) the
old contract is extinguished; and (4) there is a valid new
contract.
Security Bank contends that there was no absolute
incompatibility between the old and the new obligations, and
that the latter did not extinguish the earlier one. It further
argues that the 1989 Agreement did not change the original
loan in respect to the parties involved or the obligations
incurred. It adds that the terms of the 1989 Contract were
"not more onerous." Since the original credit accommodation
was not extinguished, it concludes that Cuenca is still liable
under the Indemnity Agreement.
We reject these contentions. Clearly, the requisites of
novation are present in this case. The 1989 Loan Agreement
extinguished the obligation obtained under the 1980 credit
accomodation. This is evident from its explicit provision to
"liquidate" the principal and the interest of the earlier
indebtedness, as the following shows:
"1.02. Purpose. The First Loan shall be applied to
liquidate the principal portion of the Borrowers
present total outstanding Indebtedness to the Lender
(the "Indebtedness") while the Second Loan shall be
applied to liquidate the past due interest and penalty
portion of the Indebtedness." (Italics supplied.)

The testimony of an officer of the bank that the proceeds of

the 1989 Loan Agreement were used "to pay-off" the original
indebtedness serves to strengthen this ruling.
Furthermore, several incompatibilities between the 1989
Agreement and the 1980 original obligation demonstrate that
the
two
cannot
coexist.
While
the
1980
credit
accommodation had stipulated that the amount of loan was
not to exceed P8 million, the 1989 Agreement provided that
the loan was P12.2 million. The periods for payment were
also different.
Likewise, the later contract contained conditions, "positive
covenants" and "negative covenants" not found in the earlier
obligation. As an example of a positive covenant, Sta. Ines
undertook "from time to time and upon request by the
Lender, [to] perform such further acts and/or execute and
deliver such additional documents and writings as may be
necessary or proper to effectively carry out the provisions
and purposes of this Loan Agreement." Likewise, SIMC
agreed that it would not create any mortgage or
encumbrance on any asset owned or hereafter acquired, nor
would it participate in any merger or consolidation.
Since the 1989 Loan Agreement had extinguished the
original credit accommodation, the Indemnity Agreement, an
accessory obligation, was necessarily extinguished also,
pursuant to Article 1296 of the Civil Code, which provides:
"ART. 1296. When the principal obligation is
extinguished in consequence of a novation, accessory
obligations may subsist only insofar as they may
benefit third persons who did not give their consent."
Alleged Extension
SBTC insists that the 1989 Loan Agreement was a mere
renewal or extension of the
P8 million original
accommodation; it was not a novation.

This argument must be rejected. To begin with, the 1989

Loan Agreement expressly stipulated that its purpose was to
"liquidate," not to renew or extend, the outstanding
indebtedness. Moreover, Cuenca 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 suretys consent would deprive the surety
of his right to pay the creditor and to be immediately
subrogated to the creditors remedies against the
principal debtor upon the maturity date. The surety is
said to be entitled to protect himself against the
contingency of the principal debtor or the indemnitors
becoming insolvent during the extended period."
Binding Nature of the Credit Approval Memorandum
As noted earlier, the CA relied on the provisions of the Credit
Approval Memorandum in holding that the credit
accommodation was only for P8 million, and that it was for a
period of one year ending on November 30, 1981. SBTC
objects to the CAs reliance on that document, contending
that it was not a binding agreement because it was not
signed by the parties. It adds that it was merely for its
internal use.
We disagree. It was SBTC itself which presented the said
document to prove the accommodation. Attached to the
Complaint as Annex A was a copy thereof "evidencing the
accommodation." Moreover, in its Petition, it alluded to the
Credit Approval Memorandum in this wise:

"4.1 On 10 November 1980, Sta. Ines Melale

Corporation ("SIMC") was granted by the Bank a credit
line in the aggregate amount of Eight Million Pesos
(P8,000,000.00) to assist SIMC in meeting the
additional capitalization requirements for its logging
operations. For this purpose, the Bank issued a Credit
Approval Memorandum dated 10 November 1980."
Clearly, respondent is estopped from denying the terms and
conditions of the P8 million credit accommodation as
contained in the very document it presented to the courts.
Indeed, it cannot take advantage of that document by
agreeing to be bound only by those portions that are
favorable
to
it,
while
denying
those
that
are
disadvantageous.
Second Issue: Alleged Waiver of Consent
Pursuing another course, SBTC contends that Cuenca
"impliedly gave his consent to any modification of the credit
accommodation or otherwise waived his right to be notified
of, or to give consent to, the same." Cuencas consent or
waiver thereof is allegedly found in the Indemnity
Agreement, in which he held himself liable for the "credit
accommodation including [its] substitutions, renewals,
extensions, increases, amendments, conversions and
revival." It explains that the novation of the original credit
accommodation by the 1989 Loan Agreement is merely its
"renewal," which "connotes cessation of an old contract and
birth of another one x x x."
At the outset, we should emphasize that an essential
alteration in the terms of the Loan Agreement without the
consent of the surety extinguishes the latters 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."

In this case, SBTCs assertion - that Cuenca consented to the

alterations in the credit accommodation -- finds no support in
the text of the Indemnity Agreement, which is reproduced
hereunder:
"Rodolfo M. Cuenca of legal age, with postal address c/o Sta.
Ines Malale Forest Products Corp., Alco Bldg., 391 Buendia
Avenue Ext., Makati Metro Manila for and in consideration of
the credit accommodation in the total amount of eight million
pesos (P8,000,000.00) granted by the SECURITY BANK AND
TRUST COMPANY, a commercial bank duly organized and
existing under and by virtue of the laws of the Philippine,
6778 Ayala Avenue, Makati, Metro Manila hereinafter
referred to as the BANK in favor of STA. INES MELALE
FOREST PRODUCTS CORP., x x x ---- hereinafter referred to
as the CLIENT, with the stipulated interests and charges
thereon, evidenced by that/those certain PROMISSORY
NOTE[(S)], made, executed and delivered by the CLIENT in
favor of the BANK hereby bind(s) himself/themselves jointly
and severally with the CLIENT in favor of the BANK for the
payment , upon demand and without benefit of excussion of
whatever amount or amounts the CLIENT may be indebted
to the BANK under and by virtue of aforesaid credit
accommodation(s) including the substitutions, renewals,
extensions, increases, amendment, conversions and revivals
of the aforesaid credit accommodation(s), as well as of the
amount or amounts of such other obligations that the CLIENT
may owe the BANK, whether direct or indirect, principal or
secondary, as appears in the accounts, books and records of
the BANK, plus interest and expenses arising from any
agreement or agreements that may have heretofore been
made, or may hereafter be executed by and between the
parties thereto, including the substitutions, renewals,
extensions, increases, amendments, conversions and revivals
of the aforesaid credit accommodation(s), and further
bind(s) himself/themselves with the CLIENT in favor of the
BANK for the faithful compliance of all the terms and
conditions
contained
in
the
aforesaid
credit
accommodation(s), all of which are incorporated herein and
made part hereof by reference."

While Cuenca held himself liable for the credit

accommodation or any modification thereof, such clause
should be understood in the context of the P8 million limit
and the November 30, 1981 term. It did not give the bank or
Sta. Ines any license to modify the nature and scope of the
original credit accommodation, without informing or getting
the consent of Cuenca who was solidarily liable. Taking the
banks submission to the extreme, Cuenca (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." Likewise, the
Court has ruled that "it is a well-settled legal principle that if
there is any doubt on the terms and conditions of the surety
agreement, the doubt should be resolved in favor of the
surety. Ambiguous contracts are construed against the party
who caused the ambiguity." In the absence of an unequivocal
provision that Cuenca waived his right to be notified of or to
give consent to any alteration of the credit accommodation,
we cannot sustain SBTCs view that there was such a waiver.
It should also be observed that the Credit Approval
Memorandum clearly shows that the bank did not have
absolute authority to unilaterally change the terms of the
loan accommodation. Indeed, it may do so only upon notice
to the borrower, pursuant to this condition:
"5. The Bank reserves the right to amend any of the
aforementioned terms and conditions upon written
notice to the Borrower."
We reject the banks submission that only Sta. Ines as the
borrower, not Cuenca, was entitled to be notified of any
modification in the original loan accommodation. Following
the banks reasoning, such modification would not be valid as

to Sta. Ines if no notice were given; but would still be valid

as to Cuenca to whom no notice need be given. The latters
liability would thus be more burdensome than that of the
former. Such untenable theory is contrary to the principle
that a surety cannot assume an obligation more onerous
than that of the principal.
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 respondents waiver is vague and
uncertain. It confers no clear authorization on the bank or
Sta. Ines to modify or extend the original obligation without
the consent of the surety or notice thereto.
Continuing Surety
Contending that the Indemnity Agreement was in the nature
of a continuing surety, petitioner maintains that there was no
need for respondent to execute another surety contract to
secure the 1989 Loan Agreement.
This argument is incorrect. That the Indemnity Agreement is
a continuing surety does not authorize the bank to extend
the scope of the principal obligation inordinately. In Dino v.

CA, the Court held that "a continuing guaranty is one which
covers all transactions, including those arising in the future,
which are within the description or contemplation of the
contract of guaranty, until the expiration or termination
thereof."
To repeat, in the present case, the Indemnity Agreement was
subject to the two limitations of the credit accommodation:
(1) that the obligation should not exceed 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.
SBTC, 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, Cuencas liability was confined to the 1980 credit
accommodation, the amount and the expiry date of which
were set down in the Credit Approval Memorandum.
Special Nature of the JSS

It is a common banking practice to require the JSS ("joint

and solidary signature") of a major stockholder or corporate
officer, as an additional security for loans granted to
corporations. There are at least two reasons for this. First, in
case of default, the creditors recourse, which is normally
limited to the corporate properties under the veil of separate
corporate personality, would extend to the personal assets of
the surety. Second, such surety would be compelled to
ensure that the loan would be used for the purpose agreed
upon, and that it would be paid by the corporation.
Following this practice, it was therefore logical and
reasonable for the bank to have required the JSS of Cuenca,
who was the chairman and president of Sta. Ines in 1980
when the credit accommodation was granted. There was no
reason or logic, however, for the bank or Sta. Ines to assume
that he would still agree to act as surety in the 1989 Loan
Agreement, because at that time, he was no longer an officer
or a stockholder of the debtor-corporation. Verily, he was not
in a position then to ensure the payment of the obligation.
Neither did he have any reason to bind himself further to a
bigger and more onerous obligation.
Indeed, the stipulation in the 1989 Loan Agreement
providing for the surety of respondent, without even
informing him, smacks of negligence on the part of the bank
and bad faith on that of the principal debtor. Since that Loan
Agreement constituted a new indebtedness, the old loan
having been already liquidated, the spirit of fair play should
have impelled Sta. Ines to ask somebody else to act as a
surety for the new loan.
In the same vein, a little prudence should have impelled the
bank to insist on the JSS of one who was in a position to
ensure the payment of the loan. Even a perfunctory attempt
at credit investigation would have revealed that respondent
was no longer connected with the corporation at the time. As
it is, the bank is now relying on an unclear Indemnity
Agreement in order to collect an obligation that could have

been secured by a fairly obtained surety. For its defeat in this

litigation, the bank has only itself to blame.
In sum, we hold that the 1989 Loan Agreement extinguished
by novation the obligation under the 1980 P8 million credit
accommodation. Hence, the Indemnity Agreement, which
had been an accessory to the 1980 credit accommodation,
was also extinguished. Furthermore, we reject petitioners
submission that respondent waived his right to be notified of,
or to give consent to, any modification or extension of the
1980 credit accommodation.

G.R. No. 89775 November 26, 1992

JACINTO UY DIO and NORBERTO UY, vs. CA and
METROPOLITAN BANK AND TRUST COMPANY.
It appears that Uy Tiam Enterprises and Freight Services
(UTEFS), thru its representative Uy Tiam, applied for and
obtained credit accommodations (letter of credit and trust
receipt accommodations) from the Metropolitan Bank and
Trust Company (METROBANK) in the sum of P700,000.00 (.
To secure the aforementioned credit accommodations
Norberto Uy and Jacinto Uy Dio executed separate
Continuing Suretyships 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 Dio 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

abovementioned business entity in 1979.

by

the

The Irrevocable Letter of Credit No. SN-Loc-309, 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 Dio 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.
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.
Pursuant to the above commercial transaction, UTEFS
executed and delivered to METROBANK and Trust Receipt,
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 Dio, 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, Dio, 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, Dio maintained that he cannot be held liable
for the credit accommodation because it is a new obligation
contracted without his participation. Besides, the credit
accommodation which he guaranteed has been fully paid.
Having sent the last demand letter to UTEFS, Dio and Uy
and finding resort to extrajudicial remedies to be futile,
METROBANK filed a complaint for collection of a sum of
money with a prayer for the issuance of a writ of preliminary
attachment, against Uy Tiam, representative of UTEFS and
impleaded Dio 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.
Norberto Uy and Jacinto Uy Dio (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.
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).
After trial, the court a quo, rendered its judgment:
Are the defendants Jacinto Uy Dioand Norberto Uy
liable for the obligation contracted by Uy Tiam under
the Letter of Credit issued on March 30, 1987 by virtue
of the Continuing Suretyships they executed on
February 25, 1977?

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
Dio 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, Dio 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.
In its Decision, the trial court decreed:

Under the admitted proven facts, the Court finds that

they are not.
a) When Uy and Dio 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.
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
Dio and Uy, being strangers thereto, cannot be
answerable thereunder.
c) The plaintiff did not serve notice to the defendants
Dio and Uy when it extended to Credit at least to

a) dismissing the COMPLAINT against JACINTO UY

DIO and NORBERTO UY;
b) ordering the plaintiff to pay to Dio 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.
From the said Decision, the private respondent appealed to
the Court of Appeals.
CA reversed and set aside the appealed judgment In lieu
thereof, another one is rendered:
1) Ordering sureties-appellees Jacinto Uy Dio 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 Dio 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

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.

3) Ordering sureties-appellees Jacinto Uy Dio and

Norberto Uy to pay, jointly and severally, to plaintiff
P20,000.00 as attorney's fees.

The issues presented for determination are quite simple:

In ruling for METROBANK, CA 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.
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

1. Whether petitioners are liable as sureties for the 1979

obligations of Uy Tiam to METROBANK by virtue of the
Continuing Suretyship Agreements they separately signed in
1977; and
2. On the assumption that they are, what is the extent of
their liabilities for said 1979 obligations.

Under the Civil Code, a guaranty may be given to secure

even future debts, the amount of which may not known at
the time the guaranty is executed. 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 liable. Otherwise stated, a
continuing guaranty is one which covers all transactions,
including those arising in the future, which are within the
description or contemplation of the contract, of guaranty,
until the expiration or termination thereof. A guaranty shall
be construed as continuing when by the terms thereof it is
evident that the object is to give a standing credit to the
principal debtor to be used from time to time either
indefinitely or until a certain period, especially if the right to

recall the guaranty is expressly reserved. Hence, where the

contract of guaranty states that the same is to secure
advances to be made "from time to time" the guaranty will
be construed to be a continuing one.
In other jurisdictions, it has been held that the use of
particular words and expressions such as payment of "any
debt," "any indebtedness," "any deficiency," or "any sum," or
the guaranty of "any transaction" or money to be furnished
the principal debtor "at any time," or "on such time" that the
principal debtor may require, have been construed to
indicate a continuing guaranty.
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
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
as may be incurred by the BANK as referred to above.
Paragraph I of the Continuing Suretyship Agreement
executed by petitioner Dio contains identical provisions
except with respect to the guaranteed aggregate principal
amount which 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 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.
When the Irrevocable Letter of Credit No. SN-Loc-309
was obtained from appellant bank, for the purpose of
obtaining goods (covered by a trust receipt) from
Planters Products, the continuing suretyships were in
full force and effect. Hence, even if sureties-appellees
did not sign the "Commercial Letter of Credit and
Application, they are still liable as the credit
accommodation (letter of credit/trust receipt) was
covered by the said suretyships. What makes them
liable thereunder is the condition which provides that
the Borrower "is or may become liable as maker,
endorser, acceptor or otherwise." And since UTEFS
which (sic) was liable as principal obligor for having
failed to fulfill the obligatory stipulations in the trust

receipt, they as insurers of its obligation, are liable

thereunder.
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
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 Dio and (b) P300,000.00 for
petitioner Uy.
The limit of the petitioners respective liabilities must be
determined from the suretyship agreement each had signed.
It is undoubtedly true that the law looks upon the contract of
suretyship with a jealous eye, and the rule is settled that the
obligation of the surety cannot be extended by implication
beyond its specified limits. To the extent, and in the manner,
and under the circumstances pointed out in his obligation, he
is bound, and no farther.
Indeed, the Continuing Suretyship Agreements signed by
petitioner Dio 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 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 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 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.
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., 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.
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.
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
and bank charges." 23 This is the same amount stated by
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 7-1787) and P921,657.32, for penalty charges at 12% per
annum (5-31-82 to 7-17-87) as shown in the
Statement of Account (Exhibit I).
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 Dio 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.
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 DIO 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-Loc309, 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.

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

REPUBLIC OF THE PHILIPPINES, vs. PAL-FOX LUMBER
CO., INC. AND FAR EASTERN SURETY & INSURANCE
COMPANY, INC., defendants, FAR EASTERN SURETY &
INSURANCE CO., INC.; FAR EASTERN SURETY &
INSURANCE CO., INC., third-party plaintiff-appellant,
vs. GASPAR PALANCA & JOSEPH LEE,
Claiming that the Pal-Fox Lumber Co., Inc. was indebted to
the Bureau of Internal Revenue for forest charges and
surcharges amounting to P11,851.56, and that the Far
Eastern Surety & Insurance Co., Inc. was jointly and
severally liable with the lumber company for the payment of
said forest charges up to P5,000.00 on account of a forestry
bond which the surety company executed in favor of the
plaintiff on November 27, 1946, guaranteeing faithful
compliance by the principal with all the provisions of the
Forest Law and National Internal Revenue Code, as well as
the "prompt and complete payment of all charges lawfully
accruing on the forest products cut or gathered by (Pal-Fox
Lumber Co., Inc.), and of all fines and penalties imposed in
accordance with the provisions of law," the plaintiff
commenced suit before the CFI seeking to recover, jointly
and severally, from Pal-Fox Lumber Co., Inc. and the Far
Eastern Surety & Insurance Co., Inc. the sum of P5,000.00

plus interest, and from the Pal-Fox Lumber Co., Inc. alone
the balance of P6,841.56 plus legal interest.
The Far Eastern Surety & Insurance Co., Inc. filed its answer
with a cross-claim against its co-defendant Pal-Fox Lumber
Co., Inc. which, due to the latter's failure to file an answer
despite valid service of summons, was subsequently declared
in default. With leave of court, the surety company later filed
a third-party complaint against certain persons based on a
separate indemnity agreement wherein said third-party
defendants appear to have bound themselves to indemnify
the surety company for all damages it may suffer by reason
of the execution of the forestry bond. In time, these thirdparty defendants were similarly declared in default.
After trial, the court a quo rendered a decision the dispositive
portion of which reads: .
WHEREFORE, judgment is hereby rendered ordering
defendants to pay to plaintiff, jointly and severally, the
sum of P5,000.00, with legal interest thereon from the
filing of the complaint until fully paid, and defendant
Pal-Fox Lumber Co., Inc. to pay to plaintiff the further
sum of P6,841.56, with legal interest thereon from the
filing of the complaint until fully paid, plus costs; and
likewise ordering cross-defendant Pal-Fox Lumber Co.,
Inc. and third-party defendants Gaspar G. Palanca and
Joseph Lee to pay to defendant Far Eastern Surety &
Insurance Co., Inc., jointly and severally, any amount
which the latter may pay to plaintiff under his
judgment, plus premium in the amount of P3,750.00
and stipulated attorney's fees and interest at the rate
of 15% and 12% per annum, respectively, on the total
amount due, the said interest to be compounded
quarterly from November 22, 1946, until fully paid.
The surety company appealed to the Court of Appeals (which
Court subsequently certified the case here on a finding that
the appeal involves only questions of law, to wit: .

The first legal point which arises in connection with

said exhibits is: What is the probative value of
documents which were admitted only as part of the
testimony of the witness who identified them? Do they
constitute evidence of the truth of their contents or
not? In other words, are they evidence of demands for
payment considering that Mr. Zalita merely testified
that said exhibits are certified copies of records and
documents now in the possession of the Record
Control Section of the Bureau of Internal Revenue?
The next issue to resolve is who has the burden of
proving that the claim of the plaintiff is not yet paid?
In the third assigned error, appellant raises the
question of prescription of action. ..."
During the pendency of this case before this Court, certain
pertinent developments have come about which practically
render the resolution of appellant's assigned errors
unnecessary. Thus in a manifestation filed on February 10,
1967 the surety company expressed its willingness to pay
the sum of P5,000.00 under its forestry bond anytime "that
an order is issued (by this Court) directing the defendant
surety to so pay according to this manifestation." In a
resolution dated February 22, 1967 this Court granted
appellant surety company's plea, thereby allowing it to pay
the Republic of the Philippines the sum of P5,000.00, in full
payment of its liability under Forestry Bond No. 7004, and
dismissing the case insofar as said appellant was concerned.
On March 27, 1967 the plaintiff moved for reconsideration,
pointing out that the surety company's correct liability under
the appealed decision was P5,000.00 plus legal interest from
the filing of the complaint. In other words, the plaintiff would
want the surety company to pay the legal interest adjudged
by the trial court before the case may finally be considered
dismissed insofar as appellant surety was concerned. Despite
the opposition registered by the surety company this Court
resolved on May 10, 1967 "... to MODIFY the resolution of

February 22, 1967 in that the appellant Far Eastern Surety

and Insurance Co., Inc. is further ordered to pay the Republic
of the Philippines interest on the P5,000.00 at the rate of 6%
per annum computed from April 24, 1957 when the
complaint was filed until October 3, 1966 when the appellant
offered to pay the appellee the sum of P5,000.00 in
settlement of its obligation but which offer was ignored by
the appellee; PROVIDED, that in case the appellant fails or
refuses to pay the interest herein stated the case against
him would not be considered dismissed, thereby leaving the
matter on the liability of said appellant to pay interest
subject to future orders by this Court along with the other
matters that may be resolved in this case." .
As things stand now, the contending parties are one in
conceding that the decisive issue for determination, in view
of the surety company's willingness to pay P5,000.00 under
its forestry bond, is its liability for the payment of legal
interest thereon. The said company's denial of liability for
such interest is based on the stipulation in the bond that it
was bound to the plaintiff "in the sum of P5,000.00.".
Judgment must go to the plaintiff. In the case of National
Marketing Corporation vs. Marquez:
On the third and last issue (on whether the surety's
liability can exceed the amount of its bond), it is
enough to remark that while the guarantee was for the
original amount of the debt of Gabino Marquez, the
amount of the judgment by the trial court in no way
violates the rights of the surety. The judgment on the
principal was only for P10,000.00, while the remaining
P9,990.91 represent the moratory interest due on
account of the failure to pay the principal obligation
from and after the same had fallen due, and default
had taken place. Appellant surety was fully aware that
the obligation earned interest, since the note was
annexed to its contract, Exhibit "C". The contract of
guaranty executed by the appellant Company nowhere

excludes this interest, and Article 2055, paragraph 2,

of the Civil Code of the Philippines is clearly applicable.
If it (the guaranty) be simple or indefinite, it shall
comprise not only the principal obligation but also all
its accessories, including judicial costs, provided with
respect to the latter, that the guarantor shall only be
liable for those costs incurred after he has been
judicially required to pay." (Emphasis supplied)".
WHEREFORE, the decision appealed from is affirmed.

G.R. No. 172041

December 18, 2008

GATEWAY ELECTRONICS CORPORATION and

GERONIMO B. DELOS REYES, JR., vs. ASIANBANK
CORPORATION.
Gateway Electronics Corporation (Gateway) is a domestic
corporation that used to be engaged in the semi-conductor
business. During the period material, Geronimo B. delos
Reyes, Jr. was its president and one Andrew delos Reyes its
executive vice-president.
Geronimo and Andrew executed separate but almost identical
deeds of suretyship for Gateway in favor of Asianbank
Corporation (Asianbank):
I/We Geronimo B. de los Reyes, Jr. x x x warrant to
the ASIANBANK CORPORATION, x x x due and
punctual
payment
by
the
following
individuals/companies/firms, hereinafter called the
DEBTOR(S), of such amounts whether due or not, as
indicated opposite their respective names, to wit:

owing to the said ASIANBANK CORPORATION,

hereafter called the CREDITOR, as evidenced by all
notes, drafts, overdrafts and other [credit] obligations
of every kind and nature contracted/incurred by said
DEBTOR(S) in favor of said CREDITOR.
In case of default by any and/or all of the DEBTOR(S)
to pay the whole part of said indebtedness herein
secured at maturity, I/WE severally agree and engage
to the CREDITOR, its successors and assigns, the
prompt payment, x x x of such notes, drafts,
overdrafts and other credit obligations on which the
DEBTOR(S) may now be indebted or may hereafter
become indebted to the CREDITOR, together with all
interests, penalty and other bank charges as may
accrue thereon x x x.
I/WE further warrant the due and faithful performance
by the DEBTOR(S) of all obligations to be performed
under
any
contracts
evidencing
indebtedness/obligations
and
any
supplements,
amendments, changes or modifications made thereto,
including but not limited to, the due and punctual
payment by the said DEBTOR(S).
MY/OUR liability on this Deed of Suretyship shall be
solidary, direct and immediate and not contingent
upon the pursuit by the CREDITOR x x x of whatever
remedies it or they may have against the DEBTOR(S)
or the securities or liens it or they may possess; and
I/WE hereby agree to be and remain bound upon this
suretyship, x x x and notwithstanding also that all
obligations of the DEBTOR(S) to you outstanding and
unpaid at any time may exceed the aggregate
principal sum hereinabove stated.
Later developments saw Asianbank extending to Gateway
several export packing loans in the total aggregate amount
of USD 1,700,883.48. This loan package was later
consolidated with Dollar Promissory Note (PN) No. FCD-

0599-2749 for the amount of USD 1,700,883.48 and secured

by a chattel mortgage over Gateways equipment for USD 2
million.
Gateway initially made payments on its loan obligations, but
eventually defaulted. Upon Gateways request, Asianbank
extended the maturity dates of the loan several times. These
extensions bore the conformity of three of Gateways
officers, among them Andrew.
Gateway issued two Philippine Commercial International
Bank checks as payment for its arrearages and interests; but
both checks were dishonored for insufficiency of funds.
Asianbanks demands for payment made upon Gateway and
its sureties went unheeded. Gateways obligation to
Asianbank, inclusive of principal, interest, and penalties,
totaled USD 2,235,452.17.
Thus, Asianbank filed a complaint for a sum of money
against Gateway, Geronimo, and Andrew.
Andrew filed an answer alleging, among other things, that
the deed of suretyship he executed covering the PhP 10
million-Domestic Bills Purchased Line and the USD 3 millionOmnibus Credit Line did not include PN No. FCD-0599-2749,
the payment of which was extended several times without
his consent.
Geronimo, on the other hand, alleged that the subject deed
of suretyship, assuming the authenticity of his signature on
it, was signed without his wifes consent and should, thus, be
considered as a mere continuing offer. Like Andrew,
Geronimo argued that he ought to be relieved of his liability
under the surety agreement inasmuch as he too never
consented to the repeated loan maturity date extensions
given by Asianbank to Gateway.
After due hearing, the RTC rendered judgment holding
Gateway Electronics Corporation, Geronimo De Los Reyes
and Andrew De Los Reyes jointly and severally liable.

W/N Gateway can be held liable. No.

W/N Geronimo can be held liable. Yes.
W/N the suretyship agreement is prospective in its operation.
Yes.

The Ruling of the Court

Gateway May Be Discharged from Liability But Not
Geronimo
Gateway, having been declared insolvent, argues that
jurisdiction over all claims against all of its properties and
assets properly pertains to the insolvency court. Accordingly,
Gateway adds, citing Sec. 60 of Act No. 1956, as amended,
or the Insolvency Law, any pending action against its
properties and assets must be dismissed, the claimant
relegated to the insolvency proceedings for the claimants
relief.
The contention, as formulated, is in a qualified sense
meritorious. Under Sec. 18 of Act No. 1956, as couched, the
issuance of an order declaring the petitioner insolvent after
the insolvency court finds the corresponding petition for
insolvency to be meritorious shall stay all pending civil
actions against the petitioners property. For reference, said
Sec. 18, setting forth the effects and contents of a voluntary
insolvency order, pertinently provides:
Section 18. Upon receiving and filing said petition,
schedule, and inventory, the court x x x shall make an
order declaring the petitioner insolvent, and directing
the sheriff of the province or city in which the petition
is filed to take possession of, and safely keep, until the

appointment of a receiver or assignee, all the deeds,

vouchers, books of account, papers, notes, bonds,
bills, and securities of the debtor and all his real and
personal property, estate and effects x x x. Said order
shall further forbid the payment to the creditor of any
debts due to him and the delivery to the debtor, or to
any person for him, of any property belonging to him,
and the transfer of any property by him, and shall
further appoint a time and place for a meeting of the
creditors to choose an assignee of the estate. Said
order shall [be published] x x x. Upon the granting
of said order, all civil proceedings pending
against the said insolvent shall be stayed. When a
receiver is appointed, or an assignee chosen, as
provided in this Act, the sheriff shall thereupon deliver
to such receiver or assignee, as the case may be all
the property, assets, and belongings of the insolvent
which have come into his possession x x x. (Emphasis
supplied.)
Complementing Sec. 18 which appropriately comes into play
"upon the granting of [the] order" of insolvency is the
succeeding Sec. 60 which properly applies to the period
"after the commencement of proceedings in insolvency." The
two provisions may be harmonized as follows: Upon the filing
of the petition for insolvency, pending civil actions against
the property of the petitioner are not ipso facto stayed, but
the insolvent may apply with the court in which the actions
are pending for a stay of the actions against the insolvents
property. If the court grants such application, pending civil
actions against the petitioners property shall be stayed;
otherwise, they shall continue. Once an order of insolvency
nevertheless issues, all civil proceedings against the
petitioners
property
are,
by
statutory
command,
automatically stayed. Sec. 60 is reproduced below:
SECTION 60. Creditors proving claims cannot sue;
Stay of action.No creditor, proving his debt or claim,
shall be allowed to maintain any suit therefor against
the debtor, but shall be deemed to have waived all

right of action and suit against him, and all

proceedings already commenced, or any unsatisfied
judgment already obtained thereon, shall be deemed
to be discharged and surrendered thereby; and after
the debtors discharge, upon proper application and
proof to the court having jurisdiction, all such
proceedings shall be, dismissed, and such unsatisfied
judgments satisfied of record: Provided, x x x. A
creditor proving his debt or claim shall not be held to
have waived his right of action or suit against the
debtor when a discharge has have been refused or the
proceedings have been determined to the without a
discharge. No creditor whose debt is provable
under this Act shall be allowed, after the
commencement of proceedings in insolvency, to
prosecute to final judgment any action therefor
against the debtor until the question of the
debtors discharge shall have been determined,
and any such suit proceeding shall, upon the
application of the debtor or of any creditor, or
the
assignee,
be
stayed
to
await
the
determination of the court on the question of
discharge: Provided, That if the amount due the
creditor is in dispute, the suit, by leave of the
court in insolvency, may proceed to judgment for
purpose of ascertaining the amount due, which
amount, when adjudged, may be allowed in the
insolvency proceedings, but execution shall be
stayed aforesaid. (Emphasis supplied.)
Applying the aforequoted provisions, it can rightfully be said
that the issuance of the insolvency order of December 2,
2004 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 in CA-G.R. CV No.
80734, but only insofar as the claim against Gateway was
concerned, was, or ought to have been, suspended after
December 2, 2004, Asianbank having been duly notified of
and in fact was a participant in the insolvency proceedings.
The Court of course takes stock of the proviso in Sec. 60 of

Act No. 1956 which in a way provided the CA with a

justifying tool to continue and to proceed to judgment in CAG.R. CV No. 80734, but only for the purpose of ascertaining
the amount due from Gateway. At any event, on the
postulate that jurisdiction over the properties of the
insolvent-declared Gateway lies with the insolvency court,
execution of the CA insolvency judgment against Gateway
can only be pursued before the insolvency court. Asianbank,
no less, tends to agree to this conclusion when it stated:
"[E]ven it if is assumed that the declaration of insolvency of
Gateway can be taken cognizance of, such fact does relieve
Geronimo and/or Andrew delos Reyes from performing their
obligations based on the Deeds of Suretyship x x x."
Geronimo, however, is a different story.
Asianbank argues that the stay of the collection suit against
Gateway is without bearing on the liability of Geronimo as a
surety, adding that claims against a surety may proceed
independently from that against the principal debtor.
Pursuing the point, Asianbank avers that Geronimo may not
invoke the insolvency of Gateway as a defense to evade
liability.
Geronimo counters with the argument that his liability as a
surety cannot be separated from Gateways liability. As
surety, he continues, he is entitled to avail himself of all the
defenses pertaining to Gateway, including its insolvency,
suggesting that if Gateway is eventually released from what
it owes Asianbank, he, too, should also be so relieved.
Geronimos above contention is untenable.
Suretyship is covered by Article 2047 of the Civil Code, 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.
The Courts disquisition in Palmares v. Court of Appeals on
suretyship is instructive, thus:
A surety is an insurer of the debt, whereas a guarantor
is an insurer of the solvency of the debtor. A
suretyship is an undertaking that the debt shall be
paid x x x. Stated differently, a surety promises to pay
the principals debt if the principal will not pay, while a
guarantor agrees that the creditor, after proceeding
against the principal, may proceed against the
guarantor if the principal is unable to pay. A surety
binds himself to perform if the principal does not,
without regard to his ability to do so. x x x In other
words, a surety undertakes directly for the payment
and is so responsible at once if the principal debtor
makes default x x x.
A creditors right to proceed against the surety
exists independently of his right to proceed
against the principal. Under Article 1216 of the Civil
Code, the creditor may proceed against any one of the
solidary debtors or some or all of them simultaneously.
The rule, therefore, is that if the obligation is joint
and several, the creditor has the right to proceed
even against the surety alone. Since, generally, it
is not necessary for the creditor to proceed against a
principal in order to hold the surety liable, where, by
the terms of the contract, the obligation of the surety
is the same 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, Asianbanks right to collect payment for the full
amount from Geronimo, as surety, exists independently of its
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 cogent 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 suretys 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). As we held in Commercial Banking Corporation v. CA,
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.
Geronimo also states that, 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 Civil Code, 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.
The Court is not convinced. The above article enunciates 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 plausibly 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. Geronimos position that a surety
cannot be made to pay when the principal is unable to pay is
clearly specious and must be rejected.
The CA Did Not Err in Admitting
the Deed of Suretyship as Evidence
Going to the next ground, Geronimo maintains that the CA
erred in admitting the Deed of Suretyship purportedly signed
by him, given that Asianbank failed to present its original
copy.
This contention is bereft of merit.
As may be noted, paragraph 6 of Asianbanks complaint
alleged the following:
6. The loan was secured by the Deeds of Suretyship
dated July 23, 1996 that were executed by defendants
Geronimo B. De Los Reyes, Jr. and Andrew S. De Los
Reyes. Attached as Annexes "B" and "C," respectively,
are photocopies of the Deeds of Suretyship executed
by defendants Geronimo B. De Los Reyes, Jr. and
Andrew S. De Los Reyes. Subsequently, a chattel

mortgage over defendant Gateways equipment for $2

million, United States currency, was executed.
Geronimo traversed in his answer the foregoing allegation in
the following wise: "2.5. Paragraph 6 is denied, subject to
the special and affirmative defenses and allegations
hereinafter set forth."
The ensuing special and affirmative defenses were raised in
Gateways answer:
15. Granting even that [Geronimo] signed the Deed of
Suretyship, his wife x x x had not given her consent
thereto. Accordingly, the security created by the
suretyship shall be construed only as a continuing
offer on the part of [Geronimo] and plaintiff and may
only be perfected as a binding contract upon
acceptance by Mrs. Delos Reyes. x x x
17. Moreover, assuming, gratia argumenti, that
[Geronimo] may be bound by the suretyship
agreement, there is no showing that he has consented
to the repeated extensions made by plaintiff in favor of
GEC or to a waiver of notice of such extensions. It
should be pointed out that Mr. Geronimo delos Reyes
executed the suretyship agreement in his personal
capacity and not in his capacity as Chairman of the
Board of GEC. His consent, insofar as the continuing
application of the suretyship agreement to GECs
obligations in view of the repeated extension extended
by plaintiff [is concerned], is therefore necessary.
Obviously, plaintiff cannot now hold him liable as a
surety to GECs obligations.
The Rules of Court prescribes, under its Secs. 7 and 8, Rule
8, the procedure should a suit or defense is predicated on a
written document, thus:
Sec. 7. Action or defense based on document.
Whenever an action or defense is based upon a written

instrument or document, the substance of such

instrument or document shall be set forth in the
pleading, and the original or a copy thereof shall
be attached to the pleading as an exhibit, which
shall be deemed to be a part of the pleading, or said
copy may with like effect be set forth in the pleading.
Sec. 8. How to contest such documents.When an
action or defense is founded upon a written
instrument, copied in or attached to the corresponding
pleading as provided in the preceding section, the
genuineness
and
due
execution
of
the
instrument shall be deemed admitted unless the
adverse party, under oath, specifically denies
them, and sets forth what he claims to be the
facts; but the requirement of an oath does not apply
when the adverse party does not appear to be a party
to the instrument or when compliance with an order
for an inspection of the original instrument is refused.
(Emphasis supplied.)
Given the above perspective, Asianbank, by attaching a
photocopy of the Deed of Suretyship to its underlying
complaint, hewed to the requirements of the above twin
provisions. Asianbank, thus, effectively alleged the due
execution and genuineness of the said deed. From that point,
Geronimo, if he intended to contest the surety deed, should
have specifically denied the due execution and genuineness
of the deed in the manner provided by Sec. 10, Rule 8 of the
Rules of Court, thus:
Sec. 10. Specific denial.A defendant must specify
each material allegation of fact the truth of
which he does not admit and, whenever
practicable, shall set forth the substance of the
matters upon which he relies to support his
denial. Where a defendant desires to deny only a part
of an averment, he shall specify so much of it as is
true and material and shall deny only the remainder.
Where a defendant is without knowledge or

information sufficient to form a belief as to the truth of

a material averment made in the complaint, he shall
so state, and this shall have the effect of a denial.
(Emphasis supplied.)
In the instant case, Geronimo should have categorically
stated that he did not execute the Deed of Suretyship and
that the signature appearing on it was not his or was
falsified. His Answer does not, however, contain any such
statement. Necessarily then, Geronimo had not specifically
denied, and, thus, is deemed to have admitted, the
genuineness and due execution of the deed in question. In
this regard, Sec. 11, Rule 8 of the Rules of Court states:
Sec. 11. Allegations not specifically denied deemed
admitted.Material averment in the complaint, other
than those as to the amount of unliquidated damages,
shall be deemed admitted when not specifically
denied. x x x
Owing to Geronimos virtual admission of the genuineness
and due execution of the deed of suretyship, Asianbank,
contrary to the view of Gateway and Geronimo, need not
present the original of the deed during the hearings of the
case. Sec. 4, Rule 129 of the Rules says so:
Sec. 4. Judicial admissions.An admission, verbal or
written, made by the party in the course of the
proceedings in the same case, does not require
proof. The admission may be contradicted only by
showing that it was made through palpable mistake or
that no such admission was made. (Emphasis
supplied.)
Geronimo Is Liable for PN No. FCD-0599-2749
under His Deed of Suretyship
This brings us to the third ground which involves the issue of
the coverage of the suretyship. Preliminarily, an overview on
the process of taking out loans should first be made.

Generally, especially for large loans, banks first approve a

line or facility out of which a client may avail itself of loans in
the form of promissory notes without need of further
processing and/or approval every time a draw down is made.
In the instant case, Asianbank approved in favor of Gateway
the PhP 10 million-Domestic Bills Purchased Line and the
USD 3 million-Omnibus Credit Line. Asianbank approved
these credit lines which were covered by a chattel mortgage
as well as the deeds of suretyship, such that loans extended
from these lines would already be secured and pre-approved.
In other words, these facilities are not financial obligations
yet. Asianbank did not yet lend out any money to Gateway
with the approval of these lines. The loan transaction
occurred or the principal obligation, as secured by a surety
agreement, was born after the execution of loan documents,
such as PN No. FCD-0599-2749.
Geronimo now excepts from the ruling that the deed of
suretyship he executed covered PN No. FCD-0599-2749
which embodied several export packing loans issued by
Asianbank to Gateway. He claims that the deed only secured
the PhP 10 million-Domestic Bills Purchased Line and the
USD 3 million-Omnibus Credit Line. Geronimo describes as
absurd the notion that a deed of suretyship would secure a
loan obligation contracted three (3) years after the execution
of the surety deed.
Geronimos thesis that the deed in question cannot be
accorded prospective application is erroneous. To be sure,
the provisions of the subject deed of suretyship indicate a
continuing suretyship. In Fortune Motors (Phils.) v. Court of
Appeals, the Court, citing cases, defined and upheld the
validity of a continuing suretyship in this wise:
"x x x Of course, a surety is not bound under any
particular principal obligation until that principal
obligation is born. But there is no theoretical or
doctrinal difficulty inherent in saying that the
suretyship agreement itself is valid and binding even
before the principal obligation intended to be secured

thereby is born, any more than there would be in

saying that obligations which are subject to a condition
precedent are valid and binding before the occurrence
of the condition precedent.
Comprehensive or continuing surety agreements
are in fact quite commonplace in present day
financial and commercial practice. A bank or
financing company which anticipates entering
into a series of credit transactions with a
particular company, commonly requires the
projected
principal
debtor
to
execute
a
continuing surety agreement along with its
sureties. By executing such an agreement, the
principal places itself in a position to enter into
the projected series of transactions with its
creditor; with such suretyship agreement, there
would be no need to execute a separate surety
contract or bond for each financing or credit
accommodation extended to the principal
debtor."
In Dio vs. Court of Appeals, we again had occasion to
discourse on continuing guaranty/suretyship thus:
"x x x A continuing guaranty is one which is not
limited to a single transaction, but which contemplates
a future course of dealing, covering a series of
transactions, generally for an indefinite time or until
revoked. It is prospective in its operation and is
generally intended to provide security with respect to
future transactions within certain limits, and
contemplates a succession of liabilities, for which, as
they accrue, the guarantor becomes liable. Otherwise
stated, a continuing guaranty is one which covers all
transactions, including those arising in the future,
which are within the description or contemplation of
the contract, of guaranty, until the expiration or
termination thereof. A guaranty shall be construed as
continuing when by the terms thereof it is evident that

the object is to give a standing credit to the principal

debtor to be used from time to time either indefinitely
or until a certain period x x x.
In other jurisdictions, it has been held that the use of
particular words and expressions such as payment of
any debt, any indebtedness, any deficiency, or any
sum, or the guaranty of any transaction or money to
be furnished the principal debtor at any time, or on
such time that the principal debtor may require, have
been construed to indicate a continuing guaranty."
(Emphasis supplied.)
By its nature, a continuing suretyship covers current and
future loans, provided that, with respect to future loan
transactions, they are, to borrow from Dio, as cited above,
"within the description or contemplation of the contract of
guaranty." The Deed of Suretyship Geronimo signed
envisaged a continuing suretyship when, by the express
terms of the deed, he warranted payment of the PhP 10
million-Domestic Bills Purchased Line and the USD 3 millionOmnibus Credit Line, as evidenced by:
x x x notes, drafts, overdrafts and other credit
obligations on which the DEBTOR(S) may now be
indebted or may hereafter become indebted to the
CREDITOR, together with all interests, penalty and
other bank charges as may accrue thereon and all
expenses which may be incurred by the latter in
collecting any or all such instruments.
Evidently, under the deed of suretyship, Geronimo undertook
to secure all obligations obtained under the Domestic Bills
Purchased Line and Omnibus Credit Line, without any
specification as to the period of the loan.
Geronimos application of Garcia v. Court of
covering two separate loans, denominated
and Export Loan, is quite misplaced. There,
that the continuing suretyship only covered

Appeals, a case
as SWAP Loan
the Court ruled
the SWAP Loan

as it was only this loan that was referred to in the continuing

suretyship. The Court wrote in Garcia:

allegation is not evidence. Geronimo has not discharged his

burden of proof. His contention cannot be given any weight.

Particular attention must be paid to the statement

appearing on the face of the Indemnity [Suretyship]
Agreement x x x "evidenced by those certain loan
documents dated April 20, 1982" x x x. From this
statement, it is clear that the Indemnity Agreement
refers only to the loan document of April 20, 1982
which is the SWAP loan. It did not include the EXPORT
loan. Hence, petitioner cannot be held answerable for
the EXPORT loan. (Emphasis supplied.)

As a final and major ground for his release as surety,

Geronimo alleges that Asianbank repeatedly extended the
maturity dates of the obligations of Gateway without his
knowledge and consent. Pressing this point, he avers that,
contrary to the findings of the CA, he did not waive his right
to notice of extensions of Gateways obligations.

The Indemnity Agreement in Garcia specifically identified

loan documents evidencing obligations of the debtor that the
agreement was intended to secure. In the present case,
however, the suretyship Geronimo assumed did not limit
itself to a specific loan document to the exclusion of another.
The suretyship document merely mentioned the Domestic
Bills Purchased Line and Omnibus Credit Line as evidenced
by "all notes, drafts x x x contracted/incurred by [Gateway]
in favor of [Asianbank]." As explained earlier, such credit
facilities are not loans by themselves. Thus, the Deed of
Suretyship was intended to secure future loans for which
these facilities were opened in the first place.
Lest it be overlooked, both the trial and appellate courts
found the Omnibus Credit Line referred to in the Deed of
Suretyship as covering the export packing credit loans
Asianbank extended to Gateway. We agree with this factual
determination. By the very use of the term "omnibus," and in
practice, an omnibus credit line refers to a credit facility
whence a borrower may avail of various kinds of credit loans.
Defined as such, an omnibus line is broad enough to refer to
or cover an export packing credit loan.
Geronimos allegation that an export packing credit loan is
separate and distinct from an omnibus credit line is but a
bare and self-serving assertion bereft of any factual or legal
basis. One who alleges something must prove it: a mere

Such contention is unacceptable as it glosses over the fact

that the waiver to be notified of extensions is embedded in
surety document itself, built in the ensuing provision:
In case of default by any and/or all of the DEBTOR(S)
to pay the whole part of said indebtedness herein
secured at maturity, I/WE jointly and severally, agree
and engage to the CREDITOR, its successors and
assigns, the prompt payment, without demand or
notice from said CREDITOR of such notes, drafts,
overdrafts and other credit obligations on which
the DEBTOR(S) may now be indebted or may
hereafter become indebted to the CREDITOR,
together with all interests, penalty and other bank
charges as may accrue thereon and all expenses which
may be incurred by the latter in collecting any or all
such instruments. (Emphasis supplied.)
In light of the above provision, Geronimo verily waived his
right to notice of the maturity of notes, drafts, overdraft, and
other credit obligations for which Gateway shall become
indebted. This waiver necessarily includes new agreements
resulting from the novation of previous agreements due to
changes in their maturity dates.
Additionally, Geronimos lament about losing his right to
subrogation is erroneous. He argues that by virtue of the
order of insolvency issued by the insolvency court, title and
right to possession to all the properties and assets of

Gateway were vested upon Gateways assignee

accordance with Sec. 32 of the Insolvency Law.

in

The transfer of Gateways property to the insolvency

assignee, if this be the case, does not negate Geronimos
right of subrogation, for such right may be had or exercised
in the insolvency proceedings. The possibility that he may
only recover a portion of the amount he is liable to pay is the
risk he assumed as a surety of Gateway. Such loss does not,
however, render ineffectual, let alone invalidate, his
suretyship.
Geronimos other arguments to escape liability are puerile
and really partake more of a plea for liberality. They need not
detain us long. In gist, Geronimo argues: first, that he is a
gratuitous surety of Gateway; second, Asianbank deviated
from normal banking practice, such as when it extended the
period for payment of Gateways obligation and when it
opted not to foreclose the chattel mortgage constituted as
guarantee of Gateways loan obligation; and third,
implementing the appealed CAs decision would cause him
great harm and injury.
Anent the first argument, suffice it to state that Geronimo
was then the president of Gateway and, as such, was
benefited, albeit perhaps indirectly, by the loan thus granted
by Asianbank. And as we said in Security Pacific Assurance
Corporation, the surety is liable for the debt of another
although the surety possesses no direct or personal interest
over the obligation nor does the surety receive any benefit
from it.
Whether or not Asianbank really deviated from normal
banking practice by extending the period for Gateway to
comply with its loan obligation or by not going after the
chattel mortgage adverted to is really of no moment. Banks
are primarily in the business of extending loans and earn
income from their lending operations by way of service and
interest charges. This is why Asianbank opted to give
Gateway ample opportunity to pay its obligations instead of

foreclosing the chattel mortgage and in the process holding

on to assets of which the bank has really no direct use.
The following excerpts from Palmares are in point:
We agree with respondent corporation that its mere
failure to immediately sue petitioner on her obligation
does not release her from liability. Where a creditor
refrains from proceeding against the principal, the
surety is not exonerated. In other words, mere want of
diligence or forbearance does not affect the creditors
rights vis--vis the surety, unless the surety requires
him by appropriate notice to sue on the obligation.
Such gratuitous indulgence of the principal does not
discharge the surety whether given at the principals
request or without it, and whether it is yielded by the
creditor through sympathy or from an inclination to
favor the principal x x x. The neglect of the creditor to
sue the principal at the time the debt falls due does
not discharge the surety, even if such delay continues
until the principal becomes insolvent. And, in the
absence of proof of resultant injury, a surety is not
discharged by the creditors mere statement that the
creditor will not look to the surety, or that he need not
trouble himself. The consequences of the delay, such
as the subsequent insolvency of the principal, or the
fact that the remedies against the principal may be
lost by lapse of time, are immaterial.
The Courts Equity Jurisdiction
Finds No Application to the Instant Case
Geronimo urges the Court to release and discharge him from
any liability arising from Asianbanks claims if what he terms
as "complete justice" is to be served. He cites, as supporting
reference, Agcaoili v. GSIS, presenting in the same breath
the following arguments: first, the Deed of Suretyship is a
gratuitous contract from which he did not benefit; second,
Asianbank assured him that the deed would not be enforced
against him; third, the enforcement of the judgment of the

CA would reduce Geronimo and his family to a life of penury;

and fourth, Geronimo would be unable to exercise his right of
subrogation, Gateway having already been declared as
insolvent.
The first and last arguments have already been addressed
and found to be without merit. The second argument is a
matter of defense which has remained unproved and even
belied by Asianbank by its filing of the complaint. We see no
need to further belabor any of them.
As regards the third allegation, suffice it to state that the
predicament Geronimo finds himself in is his very own doing.
His misfortune is but the result of the implementation of a
bona fide contract he freely executed, the terms of which he
is presumed to have thoroughly examined. He was not at all
compelled to act as surety; he had a choice. It may be more
offensive to public policy or good customs if he be allowed to
go back on his undertaking under the surety contract. The
Court cannot be a party to the contracts impairment and
relieve a surety from the effects of an unwise but
nonetheless a valid surety contract.
WHEREFORE, the instant petition is hereby DENIED.

G.R. No. L-8437. November 28, 1956

STATE OF K. H. HEMADY, , vs. LUZON SURETY CO. INC.
Appeal by Luzon Surety Co., Inc., from an order of the Court
of First Instance of Rizal, presided by Judge Hermogenes
Caluag, dismissing its claim against the Estate of K. H.

Hemady (Special Proceeding No. Q-293) for failure to state a

cause of action.
The Luzon Surety Co. had filed a claim against the Estate
based on twenty different indemnity agreements, or counter
bonds, each subscribed by a distinct principal and by the
deceased K. H. Hemady, a surety solidary guarantor) in all of
them, in consideration of the Luzon Surety Co.s of having
guaranteed, the various principals in favor of different
creditors.
The
twenty
counterbonds,
or
indemnity
agreements, all contained the following stipulations:
Premiums. As consideration for this suretyship, the
undersigned jointly and severally, agree to pay the
COMPANY the sum of ________________ (P______)
pesos, Philippines Currency, in advance as premium
there of for every __________ months or fractions
thereof, this ________ or any renewal or substitution
thereof is in effect.
Indemnity. The undersigned, jointly and severally,
agree at all times to indemnify the COMPANY and keep
it indemnified and hold and save it harmless from and
against any and all damages, losses, costs, stamps,
taxes, penalties, charges, and expenses of whatsoever
kind and nature which the COMPANY shall or may, at
any time sustain or incur in consequence of having
become surety upon this bond or any extension,
renewal, substitution or alteration thereof made at the
instance of the undersigned or any of them or any
order executed on behalf of the undersigned or any of
them; and to pay, reimburse and make good to the
COMPANY, its successors and assigns, all sums and
amount of money which it or its representatives shall
pay or cause to be paid, or become liable to pay, on
account of the undersigned or any of them, of
whatsoever kind and nature, including 15% of the
amount involved in the litigation or other matters
growing out of or connected therewith for counsel or
attorneys fees, but in no case less than P25. It is
hereby further agreed that in case of extension or

renewal of this ________ we equally bind ourselves

for the payment thereof under the same terms and
conditions as above mentioned 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 this
________ which may be granted under this indemnity
agreement.
Interest on amount paid by the Company. Any and
all sums of money so paid by the company shall bear
interest at the rate of 12% per annum which interest,
if not paid, will be accummulated and added to the
capital quarterly order to earn the same interests as
the capital and the total sum thereof, the capital and
interest, shall be paid to the COMPANY as soon as the
COMPANY shall have become liable therefore, whether
it shall have paid out such sums of money or any part
thereof or not.
Waiver. It is hereby agreed upon by and between
the undersigned that any question which may arise
between them by reason of this document and which
has to be submitted for decision to Courts of Justice
shall be brought before the Court of competent
jurisdiction in the City of Manila, waiving for this
purpose any other venue. Our right to be notified of
the acceptance and approval of this indemnity
agreement is hereby likewise waived.
Our Liability Hereunder. It shall not be necessary for
the COMPANY to bring suit against the principal upon
his default, or to exhaust the property of the principal,
but the liability hereunder of the undersigned
indemnitor shall be jointly and severally, a primary
one, the same as that of the principal, and shall be
exigible immediately upon the occurrence of such
default. (Rec. App. pp. 98- 102.)
The Luzon Surety Co., prayed for allowance, as a contingent
claim, of the value of the twenty bonds it had executed in
consideration of the counterbonds, and further asked for

judgment for the unpaid premiums and documentary stamps

affixed to the bonds, with 12 per cent interest thereon.
Before answer was filed, and upon motion of the
administratrix of Hemadys estate, the lower court, by order
of September 23, 1953, dismissed the claims of Luzon
Surety Co., on two grounds: (1) that the premiums due and
cost of documentary stamps were not contemplated under
the indemnity agreements to be a part of the undertaking of
the guarantor (Hemady), since they were not liabilities
incurred after the execution of the counterbonds; and (2)
that whatever losses may occur after Hemadys death, are
not chargeable to his estate, because upon his death he
ceased to be guarantor.
Taking up the latter point first, since it is the one more far
reaching in effects, the reasoning of the court below ran as
follows:
The administratrix further contends that upon the
death of Hemady, his liability as a guarantor
terminated, and therefore, in the absence of a showing
that a loss or damage was suffered, the claim cannot
be considered contingent. This Court believes that
there is merit in this contention and finds support in
Article 2046 of the new Civil Code. It should be noted
that a new requirement has been added for a person
to qualify as a guarantor, that is: integrity. As correctly
pointed out by the Administratrix, integrity is
something purely personal and is not transmissible.
Upon the death of Hemady, his integrity was not
transmitted to his estate or successors. Whatever loss
therefore, may occur after Hemadys death, are not
chargeable to his estate because upon his death he
ceased to be a guarantor.
Another clear and strong indication that the surety company
has exclusively relied on the personality, character, honesty
and integrity of the now deceased K. H. Hemady, was the
fact that in the printed form of the indemnity agreement
there is a paragraph entitled Security by way of first
mortgage, which was expressly waived and renounced by the

security company. The security company has not demanded

from K. H. Hemady to comply with this requirement of giving
security by way of first mortgage. In the supporting papers
of the claim presented by Luzon Surety Company, no real
property was mentioned in the list of properties mortgaged
which appears at the back of the indemnity agreement.
We find this reasoning untenable. Under the present Civil
Code (Article 1311), as well as under the Civil Code of 1889
(Article 1257), the rule is that
Contracts take effect only as between the parties,
their assigns and heirs, except in the case where the
rights and obligations arising from the contract are not
transmissible by their nature, or by stipulation or by
provision of law.
While in our successional system the responsibility of the
heirs for the debts of their decedent cannot exceed the value
of the inheritance they receive from him, the principle
remains intact that these heirs succeed not only to the rights
of the deceased but also to his obligations. Articles 774 and
776 of the New Civil Code (and Articles 659 and 661 of the
preceding one) expressly so provide, thereby confirming
Article 1311 already quoted.
ART. 774. Succession is a mode of acquisition by virtue of
which the property, rights and obligations to the extent of
the value of the inheritance, of a person are transmitted
through his death to another or others either by his will or by
operation of law.
ART. 776. The inheritance includes all the property, rights
and obligations of a person which are not extinguished by his
death.
In Mojica vs. Fernandez, 9 Phil. 403, this Supreme Court
ruled:
Under the Civil Code the heirs, by virtue of the rights
of succession are subrogated to all the rights and
obligations of the deceased (Article 661) and cannot
be regarded as third parties with respect to a contract

to which the deceased was a party, touching the estate

of the deceased (Barrios vs. Dolor, 2 Phil. 44).
The principle on which these decisions rest is not affected
by the provisions of the new Code of Civil Procedure, and, in
accordance with that principle, the heirs of a deceased
person cannot be held to be third persons in relation to any
contracts touching the real estate of their decedent which
comes in to their hands by right of inheritance; they take
such property subject to all the obligations resting thereon in
the hands of him from whom they derive their rights.
The binding effect of contracts upon the heirs of the
deceased party is not altered by the provision in our Rules of
Court that money debts of a deceased must be liquidated
and paid from his estate before the residue is distributed
among said heirs (Rule 89). The reason is that whatever
payment is thus made from the estate is ultimately a
payment by the heirs and distributees, since the amount of
the paid claim in fact diminishes or reduces the shares that
the heirs would have been entitled to receive.
Under our law, therefore, the general rule is that a partys
contractual rights and obligations are transmissible to the
successors. The rule is a consequence of the progressive
depersonalization of patrimonial rights and duties that, as
observed by Victorio Polacco, has characterized the history of
these institutions. From the Roman concept of a relation
from person to person, the obligation has evolved into a
relation from patrimony to patrimony, with the persons
occupying only a representative position, barring those rare
cases where the obligation is strictly personal, i.e., is
contracted intuitu personae, in consideration of its
performance by a specific person and by no other. The
transition is marked by the disappearance of the
imprisonment for debt.
Of the three exceptions fixed by Article 1311, the nature of
the obligation of the surety or guarantor does not warrant
the conclusion that his peculiar individual qualities are
contemplated as a principal inducement for the contract.
What did the creditor Luzon Surety Co. expect of K. H.

Hemady when it accepted the latter as surety in the

counterbonds? Nothing but the reimbursement of the
moneys that the Luzon Surety Co. might have to disburse on
account of the obligations of the principal debtors. This
reimbursement is a payment of a sum of money, resulting
from an obligation to give; and to the Luzon Surety Co., it
was indifferent that the reimbursement should be made by
Hemady himself or by some one else in his behalf, so long as
the money was paid to it.
The second exception of Article 1311, p. 1, is
intransmissibility by stipulation of the parties. Being
exceptional and contrary to the general rule, this
intransmissibility should not be easily implied, but must be
expressly established, or at the very least, clearly inferable
from the provisions of the contract itself, and the text of the
agreements sued upon nowhere indicate that they are nontransferable.
(b) Intransmisibilidad por pacto. Lo general es la
transmisibilidad
de
darechos
y
obligaciones;
chan
roblesvirtualawlibraryle excepcion, la intransmisibilidad.
Mientras nada se diga en contrario impera el principio de la
transmision, como elemento natural a toda relacion juridica,
salvo las personalisimas. Asi, para la no transmision, es
menester el pacto expreso, porque si no, lo convenido entre
partes trasciende a sus herederos.
Siendo estos los continuadores de la personalidad del
causante, sobre ellos recaen los efectos de los vinculos
juridicos creados por sus antecesores, y para evitarlo, si asi
se quiere, es indespensable convension terminante en tal
sentido.
Por su esencia, el derecho y la obligacion tienden a ir ms
all de las personas que les dieron vida, y a ejercer presion
sobre
los
sucesores
de
esa
persona;
chan
roblesvirtualawlibrarycuando no se quiera esto, se impone
una
estipulacion
limitativa
expresamente
de
la
transmisibilidad o de cuyos tirminos claramente se deduzca
la concresion del concreto a las mismas personas que lo

otorgon. (Scaevola, Codigo Civil, Tomo XX, p. 541-542)

(Emphasis supplied.)
Because under the law (Article 1311), a person who enters
into a contract is deemed to have contracted for himself and
his heirs and assigns, it is unnecessary for him to expressly
stipulate to that effect; hence, his failure to do so is no sign
that he intended his bargain to terminate upon his death.
Similarly, that the Luzon Surety Co., did not require
bondsman Hemady to execute a mortgage indicates nothing
more than the companys faith and confidence in the
financial stability of the surety, but not that his obligation
was strictly personal.
The third exception to the transmissibility of obligations
under Article 1311 exists when they are not transmissible
by operation of law. The provision makes reference to those
cases where the law expresses that the rights or obligations
are extinguished by death, as is the case in legal support
(Article 300), parental authority (Article 327), usufruct
(Article 603), contracts for a piece of work (Article 1726),
partnership (Article 1830 and agency (Article 1919). By
contract, the articles of the Civil Code that regulate guaranty
or suretyship (Articles 2047 to 2084) contain no provision
that the guaranty is extinguished upon the death of the
guarantor or the surety.
The lower court sought to infer such a limitation from Art.
2056, to the effect that one who is obliged to furnish a
guarantor must present a person who possesses integrity,
capacity to bind himself, and sufficient property to answer for
the obligation which he guarantees. It will be noted,
however, that the law requires these qualities to be present
only at the time of the perfection of the contract of guaranty.
It is self-evident that once the contract has become
perfected and binding, the supervening incapacity of the
guarantor would not operate to exonerate him of the
eventual liability he has contracted; and if that be true of his
capacity to bind himself, it should also be true of his
integrity, which is a quality mentioned in the article alongside
the capacity.

The foregoing concept is confirmed by the next Article 2057,

that runs as follows:
ART. 2057. If the guarantor should be convicted in first
instance of a crime involving dishonesty or should become
insolvent, the creditor may demand another who has all the
qualifications required in the preceding article. The case is
excepted where the creditor has required and stipulated that
a specified person should be guarantor.
From this article it should be immediately apparent that the
supervening dishonesty of the guarantor (that is to say, the
disappearance of his integrity after he has become bound)
does not terminate the contract but merely entitles the
creditor to demand a replacement of the guarantor. But the
step remains optional in the creditor: it is his right, not his
duty; he may waive it if he chooses, and hold the guarantor
to his bargain. Hence Article 2057 of the present Civil Code is
incompatible with the trial courts stand that the requirement
of integrity in the guarantor or surety makes the latters
undertaking strictly personal, so linked to his individuality
that the guaranty automatically terminates upon his death.
The contracts of suretyship entered into by K. H. Hemady in
favor of Luzon Surety Co. not being rendered intransmissible
due to the nature of the undertaking, nor by the stipulations
of the contracts themselves, nor by provision of law, his
eventual liability thereunder necessarily passed upon his
death to his heirs. The contracts, therefore, give rise to
contingent claims provable against his estate under section
5, Rule 87 (2 Moran, 1952 ed., p. 437; Gaskell & Co. vs. Tan
Sit, 43 Phil. 810, 814).
The most common example of the contigent claim is that
which arises when a person is bound as surety or guarantor
for a principal who is insolvent or dead. Under the ordinary
contract of suretyship the surety has no claim whatever
against his principal until he himself pays something by way
of satisfaction upon the obligation which is secured. When he
does this, there instantly arises in favor of the surety the
right to compel the principal to exonerate the surety. But
until the surety has contributed something to the payment of

the debt, or has performed the secured obligation in whole or

in part, he has no right of action against anybody no claim
that could be reduced to judgment.
For Defendant administratrix it is averred that the above
doctrine refers to a case where the surety files claims against
the estate of the principal debtor; and it is urged that the
rule does not apply to the case before us, where the late
Hemady was a surety, not a principal debtor. The argument
evinces a superficial view of the relations between parties. If
under the Gaskell ruling, the Luzon Surety Co., as guarantor,
could file a contingent claim against the estate of the
principal debtors if the latter should die, there is absolutely
no reason why it could not file such a claim against the
estate of Hemady, since Hemady is a solidary co-debtor of
his principals. What the Luzon Surety Co. may claim from the
estate of a principal debtor it may equally claim from the
estate of Hemady, since, in view of the existing solidarity, the
latter does not even enjoy the benefit of exhaustion of the
assets of the principal debtor.
The foregoing ruling is of course without prejudice to the
remedies of the administratrix against the principal debtors
under Articles 2071 and 2067 of the New Civil Code.
Our conclusion is that the solidary guarantors liability is not
extinguished by his death, and that in such event, the Luzon
Surety Co., had the right to file against the estate a
contingent claim for reimbursement. It becomes unnecessary
now to discuss the estates liability for premiums and stamp
taxes, because irrespective of the solution to this question,
the Luzon Suretys claim did state a cause of action, and its
dismissal was erroneous.
Wherefore, the order appealed from is reversed, and the
records are ordered remanded to the court of origin, with
instructions to proceed in accordance with law. Costs against
the Administratrix- Appellee. SO ORDERED.

sell the goods covered by that letter of credit and to remit

the proceeds to BPI, if sold, or to return the goods, if not
sold.
G.R. No. 145578, November 18, 2005
JOSE C. TUPAZ IV and PETRONILA C. TUPAZ, vs.
THE COURT OF APPEALS and BANK OF THE
PHILIPPINE ISLANDS.
Jose C. Tupaz IV and Petronila C. Tupaz ("petitioners") were
Vice-President for Operations and Vice-President/Treasurer,
respectively, of El Oro Engraver Corporation. El Oro
Corporation had a contract with the Philippine Army to supply
the latter with "survival bolos."
To finance the purchase of the raw materials for the survival
bolos, petitioners, on behalf of El Oro Corporation, applied
with Bank of the Philippine Islands ("BPI") for two
commercial letters of credit. The letters of credit were in
favor of El Oro Corporations suppliers, Tanchaoco
Manufacturing Incorporated ("Tanchaoco Incorporated") and
Maresco Rubber and Retreading Corporation ("Maresco
Corporation"). BPI granted petitioners application and issued
Letter of Credit No. 2-00896-3 for P564,871.05 to Tanchaoco
Incorporated and Letter of Credit No. 2-00914-5 for
P294,000 to Maresco Corporation.
Simultaneous with the issuance of the letters of credit,
petitioners signed trust receipts in favor of BPI. Jose signed,
in his personal capacity, a trust receipt corresponding to
Letter of Credit No. 2-00896-3 (for P564,871.05). He bound
himself to sell the goods covered by the letter of credit and
to remit the proceeds to BPI, if sold, or to return the goods,
if not sold.
Petitioners signed, in their capacities as officers of El Oro
Corporation, a trust receipt corresponding to Letter of Credit
No. 2-00914-5 (for P294,000). They bound themselves to

After Tanchaoco Incorporated and Maresco Corporation

delivered the raw materials to El Oro Corporation, BPI paid
the former P564,871.05 and P294,000, respectively.
Petitioners did not comply with their undertaking under the
trust receipts. BPI made several demands for payments but
El Oro Corporation made partial payments only. BPIs counsel
and its representative respectively sent final demand letters
to El Oro Corporation. El Oro Corporation replied that it could
not fully pay its debt because the Armed Forces of the
Philippines had delayed paying for the survival bolos.
BPI charged petitioners with estafa under Section 13,
Presidential Decree No. 115 ("Section 13") or Trust Receipts
Law ("PD 115"). After preliminary investigation, the then
Makati Fiscals Office found probable cause to indict
petitioners. The Makati Fiscals Office filed the corresponding
Informations with the Regional Trial Court, Makati.
Petitioners pleaded not guilty to the charges and trial
ensued.
The Trial Court rendered judgment acquitting petitioners of
estafa on reasonable doubt. However, the trial court found
petitioners solidarily liable with El Oro Corporation for the
balance of El Oro Corporations principal debt under the trust
receipts.
In holding petitioners civilly liable with El Oro Corporation,
the trial court held:
[S]ince the civil action for the recovery of the civil liability is
deemed impliedly instituted with the criminal action, as in
fact the prosecution thereof was actively handled by the
private prosecutor, the Court believes that the El Oro
Engraver Corporation and both accused Jose C. Tupaz and
Petronila Tupaz, jointly and solidarily should be held civilly

liable to the BPI. The mere fact that they were unable to
collect in full from the AFP and/or the Department of National
Defense the proceeds of the sale of the delivered survival
bolos manufactured from the raw materials covered by the
trust receipt agreements is no valid defense to the civil claim
of the said complainant and surely could not wipe out their
civil obligation. After all, they are free to institute an action
to collect the same.
Petitioners appealed to the Court of Appeals. Petitioners
contended that: (1) their acquittal "operates to extinguish
[their] civil liability" and (2) at any rate, they are not
personally liable for El Oro Corporations debts.
The Court of Appeals affirmed the trial courts ruling. The
appellate court held:
It is clear from [Section 13, PD 115] that civil liability
arising from the violation of the trust receipt
agreement is distinct from the criminal liability
imposed therein. In the case of Vintola vs. Insular
Bank of Asia and America, our Supreme Court held
that acquittal in the estafa case (P.D. 115) is no bar to
the institution of a civil action for collection. This is
because in such cases, the civil liability of the accused
does not arise ex delicto but rather based ex contractu
and as such is distinct and independent from any
criminal proceedings and may proceed regardless of
the result of the latter. Thus, an independent civil
action to enforce the civil liability may be filed against
the corporation aside from the criminal action against
the responsible officers or employees.
[W]e hereby hold that the acquittal of the accusedappellants from the criminal charge of estafa did not
operate to extinguish their civil liability under the
letter of credit-trust receipt arrangement with plaintiffappellee, with which they dealt both in their personal
capacity and as officers of El Oro Engraver

Corporation, the letter of credit applicant and principal

debtor.
Appellants argued that they cannot be held solidarily
liable with their corporation, El Oro Engraver
Corporation, alleging that they executed the subject
documents including the trust receipt agreements only
in their capacity as such corporate officers. They said
that these instruments are mere pro-forma and that
they executed these instruments on the strength of a
board resolution of said corporation authorizing them
to apply for the opening of a letter of credit in favor of
their suppliers as well as to execute the other
documents necessary to accomplish the same.
Such contention, however, is contradicted by the
evidence on record. The trust receipt agreement
indicated in clear and unmistakable terms that the
accused signed the same as surety for the corporation
and that they bound themselves directly and
immediately liable in the event of default with respect
to the obligation under the letters of credit which were
made part of the said agreement, without need of
demand. Even in the application for the letter of credit,
it is likewise clear that the undertaking of the accused
is that of a surety as indicated [in] the following
words: "In consideration of your establishing the
commercial letter of credit herein applied for
substantially in accordance with the foregoing, the
undersigned Applicant and Surety hereby agree,
jointly and severally, to each and all stipulations,
provisions and conditions on the reverse side hereof."
Having contractually agreed to hold themselves
solidarily liable with El Oro Engraver Corporation under
the subject trust receipt agreements with BPI, herein
accused-appellants may not, therefore, invoke the
separate legal personality of the said corporation to
evade their civil liability under the letter of credit-trust
receipt
arrangement
with
said
appellee,

notwithstanding their acquittal in the criminal cases

filed against them.
Hence, this petition. Petitioners contend that:
1. A JUDGMENT OF ACQUITTAL OPERATE[S] TO EXTINGUISH
THE CIVIL LIABILITY OF PETITIONERS[;]

The Ruling of the Court

The petition is partly meritorious. We affirm the Court of
Appeals ruling with the modification that Jose Tupaz is liable
as guarantor of El Oro Corporations debt under the trust
receipt dated 30 September 1981.
On Petitioners Undertaking Under the Trust Receipts

2. GRANTING WITHOUT ADMITTING THAT THE QUESTIONED

OBLIGATION WAS INCURRED BY THE CORPORATION, THE
SAME IS NOT YET DUE AND PAYABLE;
3. GRANTING THAT THE QUESTIONED OBLIGATION WAS
ALREADY DUE AND PAYABLE, xxx PETITIONERS ARE NOT
PERSONALLY LIABLE TO xxx RESPONDENT BANK, SINCE
THEY SIGNED THE LETTER[S] OF CREDIT AS SURETY AS
OFFICERS OF EL ORO, AND THEREFORE, AN EXCLUSIVE
LIABILITY OF EL ORO; [AND]
4. IN THE ALTERNATIVE, THE QUESTIONED TRANSACTIONS
ARE SIMULATED AND VOID.
The Issues
The petition raises these issues:
(1) Whether petitioners bound themselves personally liable
for El Oro Corporations debts under the trust receipts;
(2) If so
(a) whether petitioners liability is solidary with El Oro
Corporation; and
(b) whether petitioners acquittal of estafa under
Section 13, PD 115 extinguished their civil liability.

A corporation, being a juridical entity, may act only through

its directors, officers, and employees. Debts incurred by
these individuals, acting as such corporate agents, are not
theirs but the direct liability of the corporation they
represent. As an exception, directors or officers are
personally liable for the corporations debts only if they so
contractually agree or stipulate.
Here, the dorsal side of the trust receipts contains the
following stipulation:
To the Bank of the Philippine Islands
In
consideration
of
your
releasing
to
under the terms of this Trust
Receipt the goods described herein, I/We, jointly and
severally, agree and promise to pay to you, on
demand, whatever sum or sums of money which you
may call upon me/us to pay to you, arising out of,
pertaining to, and/or in any way connected with, this
Trust Receipt, in the event of default and/or nonfulfillment in any respect of this undertaking on the
part of the said . I/we further
agree that my/our liability in this guarantee shall be
DIRECT
AND
IMMEDIATE,
without
any
need
whatsoever on your part to take any steps or exhaust
any legal remedies that you may have against the said
. before making demand upon
me/us. (Capitalization in the original)

In the trust receipt dated 9 October 1981, petitioners signed

below this clause as officers of El Oro Corporation. Thus,
under Petronila Tupazs signature are the words "Vice-Pres
Treasurer" and under Jose Tupazs signature are the words
"Vice-PresOperations." By so signing that trust receipt,
petitioners did not bind themselves personally liable for El
Oro Corporations obligation. In Ong v. Court of Appeals, a
corporate representative signed a solidary guarantee clause
in two trust receipts in his capacity as corporate
representative. There, the Court held that the corporate
representative did not undertake to guarantee personally the
payment of the corporations debts, thus:
[P]etitioner did not sign in his personal capacity the
solidary guarantee clause found on the dorsal portion
of the trust receipts. Petitioner placed his signature
after the typewritten words "ARMCO INDUSTRIAL
CORPORATION" found at the end of the solidary
guarantee clause. Evidently, petitioner did not
undertake to guaranty personally the payment of the
principal and interest of ARMAGRIs debt under the
two trust receipts.

As stated, the dorsal side of the trust receipt dated 30

September 1981 provides:
To the Bank of the Philippine Islands
In
consideration
of
your
releasing
to
under the terms of this Trust
Receipt the goods described herein, I/We, jointly and
severally, agree and promise to pay to you, on
demand, whatever sum or sums of money which you
may call upon me/us to pay to you, arising out of,
pertaining to, and/or in any way connected with, this
Trust Receipt, in the event of default and/or nonfulfillment in any respect of this undertaking on the
part of the said . I/we further
agree that my/our liability in this guarantee shall be
DIRECT
AND
IMMEDIATE,
without
any
need
whatsoever on your part to take any steps or exhaust
any legal remedies that you may have against the said
. Before making demand
upon me/us. (Underlining supplied; capitalization in
the original)

Hence, for the trust receipt dated 9 October 1981, we

sustain petitioners claim that they are not personally liable
for El Oro Corporations obligation.

The lower courts interpreted this to mean that Jose bound

himself solidarily liable with El Oro Corporation for the latters
debt under that trust receipt.

For the trust receipt dated 30 September 1981, the dorsal

portion of which Jose Tupaz signed alone, we find that he did
so in his personal capacity. Jose Tupaz did not indicate that
he was signing as El Oro Corporations Vice-President for
Operations. Hence, Jose Tupaz bound himself personally
liable for El Oro Corporations debts. Not being a party to the
trust receipt dated 30 September 1981, Petronila Tupaz is
not liable under such trust receipt.

This is error.

The Nature of Petitioner Jose Tupazs Liability

Under the Trust Receipt Dated 30 September 1981

In Prudential Bank v. Intermediate Appellate Court, the Court

interpreted a substantially identical clause in a trust receipt
signed by a corporate officer who bound himself personally
liable for the corporations obligation. The petitioner in that
case contended that the stipulation "we jointly and severally
agree and undertake" rendered the corporate officer
solidarily liable with the corporation. We dismissed this claim
and held the corporate officer liable as guarantor only. The
Court further ruled that had there been more than one
signatories to the trust receipt, the solidary liability would
exist between the guarantors. We held:

Petitioner [Prudential Bank] insists that by virtue of

the clear wording of the xxx clause "x x x we jointly
and severally agree and undertake x x x," and the
concluding sentence on exhaustion, [respondent] Chis
liability therein is solidary.
Our xxx reading of the questioned solidary guaranty
clause yields no other conclusion than that the
obligation of Chi is only that of a guarantor. This is
further bolstered by the last sentence which speaks of
waiver of exhaustion, which, nevertheless, is
ineffective in this case because the space therein for
the party whose property may not be exhausted was
not filled up. Under Article 2058 of the Civil Code, the
defense of exhaustion (excussion) may be raised by a
guarantor before he may be held liable for the
obligation. Petitioner likewise admits that the
questioned provision is a solidary guaranty clause,
thereby clearly distinguishing it from a contract of
surety. It, however, described the guaranty as solidary
between the guarantors; this would have been correct
if two (2) guarantors had signed it. The clause "we
jointly and severally agree and undertake" refers to
the undertaking of the two (2) parties who are to sign
it or to the liability existing between themselves. It
does not refer to the undertaking between either one
or both of them on the one hand and the petitioner on
the other with respect to the liability described under
the trust receipt. xxx
Furthermore, any doubt as to the import or true intent
of the solidary guaranty clause should be resolved
against the petitioner. The trust receipt, together with
the questioned solidary guaranty clause, is on a form
drafted and prepared solely by the petitioner; Chis
participation therein is limited to the affixing of his
signature thereon. It is, therefore, a contract of
adhesion; as such, it must be strictly construed
against the party responsible for its preparation.
(Underlining supplied; italicization in the original)

However, BPIs suit against Jose stands despite the Courts

finding that he is liable as guarantor only. First, excussion is
not a pre-requisite to secure judgment against a guarantor.
The guarantor can still demand deferment of the execution of
the judgment against him until after the assets of the
principal debtor shall have been exhausted. Second, the
benefit of excussion may be waived. Under the trust receipt
dated 30 September 1981, Jose waived excussion when he
agreed that his "liability in [the] guaranty shall be DIRECT
AND IMMEDIATE, without any need whatsoever on xxx [the]
part [of BPI] to take any steps or exhaust any legal remedies
xxx." The clear import of this stipulation is that Jose Tupaz
waived the benefit of excussion under his guarantee.
As guarantor, Jose Tupaz is liable for El Oro Corporations
principal debt and other accessory liabilities (as stipulated in
the trust receipt and as provided by law) under the trust
receipt dated 30 September 1981. That trust receipt (and the
trust receipt dated 9 October 1981) provided for payment of
attorneys fees equivalent to 10% of the total amount due
and an "interest at the rate of 7% per annum, or at such
other rate as the bank may fix, from the date due until paid
xxx." In the applications for the letters of credit, the parties
stipulated that drafts drawn under the letters of credit are
subject to interest at the rate of 18% per annum.
The lower courts correctly applied the 18% interest rate per
annum considering that the face value of each of the trust
receipts is based on the drafts drawn under the letters of
credit. Based on the guidelines laid down in
Eastern Shipping Lines, Inc. v. Court of Appeals, the accrued
stipulated interest earns 12% interest per annum from the
time of the filing of the Informations in the Makati Regional
Trial Court. Further, the total amount due as of the date of
the finality of this Decision will earn interest at 18% per
annum until fully paid since this was the stipulated rate in
the applications for the letters of credit.

The accounting of El Oro Corporations debts as of 23

January 1992, which the trial court used, is no longer useful
as it does not specify the amounts owing under each of the
trust receipts. Hence, in the execution of this Decision, the
trial court shall compute El Oro Corporations total liability
under each of the trust receipts dated 30 September 1981
and 9 October 1981 based on the following formula:
TOTAL AMOUNT DUE = [principal + interest + interest
on interest] partial payments made
Interest = principal x 18 % per annum x no. of years
from due date until finality of judgment
Interest on interest = interest computed as of the filing of
the complaint (17 January 1984) x 12% x no. of years until
finality of judgment
Attorneys fees is 10% of the total amount computed as of
finality of judgment
Total amount due as of the date of finality of judgment will
earn an interest of 18% per annum until fully paid.
In so delegating this task, we reiterate what we said in Rizal
Commercial Banking Corporation v. Alfa RTW Manufacturing
Corporation where we also ordered the trial court to compute
the amount of obligation due based on a formula
substantially similar to that indicated above:
The total amount due xxx [under] the xxx contract[]
xxx may be easily determined by the trial court
through a simple mathematical computation based on
the formula specified above. Mathematics is an exact
science, the application of which needs no further
proof from the parties.
Jose Tupazs Acquittal did not Extinguish his Civil Liability

The rule is that where the civil action is impliedly instituted

with the criminal action, the civil liability is not extinguished
by acquittal
[w]here the acquittal is based on reasonable doubt
xxx as only preponderance of evidence is required in
civil cases; where the court expressly declares that the
liability of the accused is not criminal but only civil in
nature xxx as, for instance, in the felonies of estafa,
theft, and malicious mischief committed by certain
relatives who thereby incur only civil liability (See Art.
332, Revised Penal Code); and, where the civil liability
does not arise from or is not based upon the criminal
act of which the accused was acquitted xxx. (Emphasis
supplied)
Here, BPI chose not to file a separate civil action to recover
payment under the trust receipts. Instead, BPI sought to
recover payment in Criminal Cases. Although the trial court
acquitted Jose Tupaz, his acquittal did not extinguish his civil
liability. As the Court of Appeals correctly held, his liability
arose not from the criminal act of which he was acquitted (ex
delito) but from the trust receipt contract (ex contractu) of
30 September 1981. Jose Tupaz signed the trust receipt of
30 September 1981 in his personal capacity.
On the other Matters Petitioners Raise
Petitioners raise for the first time in this appeal the
contention that El Oro Corporations debts under the trust
receipts are not yet due and demandable. Alternatively,
petitioners assail the trust receipts as simulated. These
assertions have no merit. Under the terms of the trust
receipts dated 30 September 1981 and 9 October 1981, El
Oro Corporations debts fell due on 29 December 1981 and 8
December 1981, respectively.
Neither is there merit to petitioners claim that the trust
receipts were simulated. During the trial, petitioners did not
deny applying for the letters of credit and subsequently

executing the trust receipts to secure payment of the drafts

drawn under the letters of credit.
WHEREFORE, we GRANT the petition in part. We AFFIRM the
Decision of the Court of Appeals dated 7 September 2000
and its Resolution dated 18 October 2000 with the following
MODIFICATIONS:
1) El Oro Engraver Corporation is principally liable for
the total amount due under the trust receipts dated 30
September 1981 and 9 October 1981, based on the
formula provided above;
2) Petitioner Jose C. Tupaz IV is liable for El Oro
Engraver Corporations total debt under the trust
receipt dated 30 September 1981 as thus computed
by the Regional Trial Court, Makati, Branch 144; and
3) Petitioners Jose C. Tupaz IV and Petronila C. Tupaz
are not liable under the trust receipt dated 9 October
1981.