3.

Guaranty
Machetti v. Hospicio de San Jose, 43 Phil 297 (1922)
FACTS: By a written agreement, Machetti undertook to construct a building for Hospicio de San
Jose. One of the conditions was that Machetti obtain the guarantee of Fidelity & Surety Co. to the
amount of P128,800. It was subsequently found out that the work had not been carried out in
accordance with the specifications.
Machetti constructed the building under the supervision of architects representing the Hospicio de
San Jose and, as the work progressed, payments were made to him from time to time upon the
recommendation of the architects, until the entire contract price, with the exception of the sum of
the P4,978.08, was paid.
Subsequently it was found that the work had not been carried out in accordance with the
specifications which formed part of the contract and that the workmanship was not of the
standard required, and the Hospicio de San Jose therefore answered the complaint and
presented a counterclaim for damages for the partial noncompliance with the terms of the
agreement abovementioned, in the total sum of P71,350. After issue was thus joined, Machetti,
on petition of his creditors, was declared insolvent and an order was entered suspending the
proceeding in the present case in accordance with section 60 of the Insolvency Law, Act No.
1956.
Hospicio de San Jose filed a motion asking that the Fidelity and Surety Company be made crossdefendant to the exclusion of Machetti and that the proceedings be continued as to said
company, but still remain suspended as to Machetti. This motion was granted and then the
Hospicio filed a complaint against the Fidelity and Surety Company asking for a judgement for
P12,800 against the company upon its guaranty.
After trial, the CFI rendered judgment against the Fidelity and Surety Company for P12,800 in
accordance with the complaint. The case is now before this court upon appeal by th e Fidelity and
Surety Company form said judgment.
ISSUE: WON the undertaking assumed by FSC that of guarantor or surety
HELD: It is a contract of guaranty.
RATIO: In this instance the guarantor's case is stronger than that of an ordinary surety. The
contract of guaranty is written in the English language and the terms employed must of course be
given the signification which ordinarily attaches to them in that language. In English the term
"guarantor" implies an undertaking of guaranty, as distinguished from suretyship. It is very true
that notwithstanding the use of the words "guarantee" or "guaranty" circumstances may be shown
which convert the contract into one of suretyship but such circumstances do not exist in the
present case; on the contrary it appear affirmatively that the contract is the guarantor's separate
undertaking in which the principal does not join, that its rests on a separate consideration moving
from the principal and that although it is written in continuation of the contract for the construction
of the building, it is a collateral undertaking separate and distinct from the latter. All of these
circumstances are distinguishing features of contracts of guaranty.
The undertaking maybe is not exactly that of a fianza under the Civil Code, but is a perfectly valid
contract and must be given the legal effect if ordinarily carries. The Fidelity and Surety Company
having bound itself to pay only if its principal, Machetti, cannot pay. It follows that it cannot be
compelled to pay until it is shown that Machetti is unable to pay. Such ability may be proven by
the return of a writ of execution unsatisfied or by other means, but is not sufficiently established
by the mere fact that he has been declared insolvent in insolvency proceedings under our

statutes, in which the extent of the insolvent's inability to pay is not determined until the final
liquidation of his estate.

Republic v. Pal-Fox Lumber Co. (1972)

FACTS: Republic claim 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 guaranteeing faithful compliance by the principal with all
the provisions of the Forest Law and National Internal Revenue Code, and of all fines and
penalties imposed in accordance with the provisions of law,"
The plaintiff commenced suit before the CFI of Manila seeking to recover, jointly and severally,
from Pal-Fox Lumber Co., Inc. and the Far Eastern Surety & Insurance Co., Inc. the sum of
P5,000.00 plus interest from the filing of the complaint, and from the Pal-Fox Lumber Co., Inc.
alone the balance of P6,841.56 plus legal interest.
The Far Eastern Surety & Insurance Co., Inc. filed its answer with a cross-claim against its codefendant Pal-Fox Lumber Co., Inc. which 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. In time, these third-party defendants were similarly declared in
default. Surety company appealed to the Court of Appeals.
On March 27, 1967, Republic 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 Republic would want the surety company to pay the legal interest
adjudged by the trial court before the case may finally beconsidered dismissed.
ISSUE: WON Far Eastern should also pay for the interest
HELD: Yes, it should.
RATIO: Article 2055, paragraph 2 of the Civil Code of the Philippines provide ,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.

International Finance Corporation v. Imperial Textile Mills, Inc. (2005)

FACTS: Petitioner International Finance Corporation (IFC) and respondent Philippine Polyamide
Industrial Corporation (PPIC) entered into a loan agreement wherein IFC extended to PPIC a
loan payable in 16 semi-annual installments with interest at the rate of 10% per annum on the
principal amount of the loan advanced and outstanding from time to time. A guarantee agreement
was executed with Imperial Textile Mills, Inc. (ITM), Grand Textile Manufacturing Corporation
(Grandtex) and IFC as parties.
ITM and Grandtex agreed to guarantee PPICs obligations under the loan agreement. There was
a reschedule of payments as requested by PPIC. Despite the rescheduling of the installment
payments, however, PPIC defaulted. Hence, IFC served a written notice of default to PPIC

demanding the latter to pay the outstanding principal loan and all its accrued interests. Despite
such notice, PPIC failed to pay the loan andits interests. IFC, together with DBP, applied for the
extrajudicial foreclosure of mortgages onthe real estate, buildings, machinery, equipment plant
and all improvements owned by PPIC. IFC and DBP were the only bidders during the auction
sale. PPIC failed to pay the remaining balance, thus, IFC demanded ITM and Grandtex, as
guarantors of PPIC, to pay the outstanding balance. However, despite the demand made by IFC,
the outstanding balance remained unpaid. Consequently, IFC filed a complaint against PPIC and
ITM for the payment of the outstanding balance plus interests and attorneys fees.
The RTC held PPIC liable for the payment of the outstanding loan plus interests and attorneys
fees. However, the trial court relieved ITM of its obligation as guarantor. On appeal of the case,
the CA reversed the decision of the trial court. The CA, however, held that ITMs liability as a
guarantor would arise only if and when PPIC could not pay. Since PPICs inability to comply with
its obligation was not sufficiently established, ITM could not immediately be made to assume the
liability. Hence, this petition.
Issue: WON ITM is a surety, and thus solidarily liable with PPIC for the payment of the loan.
Held: ITM is a surety, and thus solidarily liable with PPIC for the payment of the loan.
Ratio: As Article 2047 provides, a suretyship is created when a guarantor binds itself solidarily
with the principal obligor. While referring to ITM as a guarantor, the agreement specifically stated
that the corporation was jointly and severally liable. It further stated that ITM was a primary
obligor, not a mere surety. ITM thereby brought itself to the level of PPIC and could not be
deemed merely secondarily liable. Those words emphasize the nature of their liability, which
thelaw characterizes as a suretyship. Therefore, ITM bound itself to be solidarily liable with
PPICfor the latters obligations under the loan agreement with IFC