[G.R. No. 117660.

December 18, 2000]

AGRO CONGLOMERATES, INC. and MARIO SORIANO, petitioners,

vs. THE HON. COURT OF APPEALS and REGENT SAVINGS and
LOAN BANK, INC.,respondents.
DECISION
QUISUMBING, J.:
This is a petition for review challenging the decision dated October 17, 1994 of the
Court of Appeals in CA-G.R. No. 32933, which affirmed in toto the judgment of the
Manila Regional Trial Court, Branch 27, in consolidated Cases Nos. 86-37374, 8637388, 86-37543.
[1]

This petition springs from three complaints for sums of money filed by respondent
bank against herein petitioners. In the decision of the Court of Appeals, petitioners were
ordered to pay respondent bank, as follows:

Wherefore, judgment is hereby rendered in favor of plaintiff and against

defendants, as follows:
1) In Civil Case No. 86-37374, defendants [petitioners, herein] are ordered jointly and
severally, to pay to plaintiff the amount of P78,212.29, together with interest and
service charge thereon, at the rates of 14% and 3% per annum, respectively,
computed from November 10, 1982, until fully paid, plus stipulated penalty on
unpaid principal at the rate of 6% per annum, computed from November 10, 1982,
plus 15% as liquidated damage plus 10% of the total amount due, as attorneys fees,
plus costs;
2) In Civil Case No. 86-37388, defendant is ordered to pay plaintiff the amount of
P632,911.39, together with interest and service charge thereon at the rate of 14%
and 3% per annum, respectively, computed from January 15, 1983, until fully paid,
plus stipulated penalty on unpaid principal at the rate of 6% per annum, computed
from January 15, 1983, plus liquidated damages equivalent to 15% of the total
amount due, plus attorneys fees equivalent to 10% of the total amount due, plus
costs; and
3) In Civil Case No. 86-37543, defendant is ordered to pay plaintiff, on the first cause of
action, the amount of P510,000.00, together with interest and service charge
thereon, at the rates of 14% and 2% per annum, respectively, computed from March
13, 1983, until fully paid, plus a penalty of 6% per annum, based on the outstanding
principal of the loan, computed from March 13, 1983, until fully paid; and on the
second cause of action, the amount of P494,936.71, together with interest and
service charge thereon at the rates of 14% and 2%, per annum, respectively,

computed from March 30, 1983, until fully paid, plus a penalty charge of 6% per
annum, based on the unpaid principal, computed from March 30, 1983, until fully
paid, plus (on both causes of action) an amount equal to 15% of the total amounts
due, as liquidated damages, plus attorneys fees equal to 10% of the total amounts
due, plus costs.[2]

Based on the records, the following are the factual antecedents.

On July 17, 1982, petitioner Agro Conglomerates, Inc. as vendor, sold two parcels
of land to Wonderland Food Industries, Inc. In their Memorandum of Agreement, the
parties covenanted that the purchase price of Five Million (P5,000,000.00) Pesos would
be settled by the vendee, under the following terms and conditions: (1) One Million
(P1,000,000.00) Pesos shall be paid in cash upon the signing of the agreement; (2) Two
Million (P2,000,000.00) Pesos worth of common shares of stock of the Wonderland
Food Industries, Inc.; and (3) The balance of P2,000,000.00 shall be paid in four equal
installments, the first installment falling due, 180 days after the signing of the agreement
and every six months thereafter, with an interest rate of 18% per annum, to be
advanced by the vendee upon the signing of the agreement.
[3]

On July 19, 1982, the vendor, the vendee, and the respondent bank Regent
Savings & Loan Bank (formerly Summa Savings & Loan Association), executed an
Addendum to the previous Memorandum of Agreement. The new arrangement
pertained to the revision of settlement of the initial payments of P1,000,000.00 and
prepaid interest of P360,000.00 (18% of P2,000,000.00) as follows:
[4]

Whereas, the parties have agreed to qualify the stipulated terms for the
payment of the said ONE MILLION THREE HUNDRED SIXTY THOUSAND
(P1,360,000.00) PESOS.
WHEREFORE, in consideration of the mutual covenant and agreement of the
parties, they do further covenant and agree as follows:
1. That the VENDEE instead of paying the amount of ONE MILLION THREE
HUNDRED SIXTY THOUSAND (P1,360,000.00) PESOS in cash, hereby authorizes
the VENDOR to obtain a loan from Summa Savings and Loan Association with
office address at Valenzuela, Metro Manila, being represented herein by its
President, Mr. Jaime Cario and referred to hereafter as Financier; in the amount of
ONE MILLION THREE HUNDRED SIXTY THOUSAND (P1,360,000.00)PESOS,
plus interest thereon at such rate as the VENDEE and the Financier may agree,
which amount shall cover the ONE MILLION (P1,000,000.00) PESOS cash which
was agreed to be paid upon signing of the Memorandum of Agreement, plus 18%
interest on the balance of two million pesos stipulated upon in Item No. 1(c) of the
said agreement; provided however, that said loan shall be made for and in the name
of the VENDOR.
2. The VENDEE also agrees that the full amount of ONE MILLION THREE HUNDRED
SIXTY THOUSAND (P1,360,000.00) PESOS be paid directly to the VENDOR;
however, the VENDEE hereby undertakes to pay the full amount of the said loan to
the Financier on such terms and conditions agreed upon by the Financier and the
VENDOR, it being understood that while the loan will be secured from and in the

name of the VENDOR, the VENDEE will be the one liable to pay the entire proceeds
thereof including interest and other charges.[5]

This addendum was not notarized.

Consequently, petitioner Mario Soriano signed as maker several promissory notes,
payable to the respondent bank. Thereafter, the bank released the proceeds of the
loan to petitioners. However, petitioners failed to meet their obligations as they fell
due. During that time, the bank was experiencing financial turmoil and was under the
supervision of the Central Bank. Central Bank examiner and liquidator Cordula de
Jesus, endorsed the subject promissory notes to the banks counsel for collection. The
bank gave petitioners opportunity to settle their account by extending payment due
dates. Mario Soriano manifested his intention to re-structure the loan, yet did not show
up nor submit his formal written request.
[6]

Respondent bank filed three separate complaints before the Regional Trial Court of
Manila for Collection of Sums of money. The corresponding case histories are illustrated
in the table below:
D APP
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3
In their answer, petitioners interposed the defense of novation and insisted there was a
valid substitution of debtor. They alleged that the addendum specifically states that
although the promissory notes were in their names, Wonderland shall be responsible for
the payment thereof.
The trial court held that petitioners are liable, to wit:

The evidences, however, disclose that Wonderland did not comply with its
obligation under said Addendum (Exh. S) as the agreement to turn over the
farmland to it, did not materialize (57 tsn, May 29, 1990), and there was,
actually no sale of the land (58 tsn, ibid). Hence, Wonderland is not
answerable. And since the loans obtained under the four promissory notes

(Exhs. A, C, G, and E) have not been paid, despite opportunities given by

plaintiff to defendants to make payments, it stands to reason that defendants
are liable to pay their obligations thereunder to plaintiff. In fact, defendants
failed to file a third-party complaint against Wonderland, which shows the
weakness of its stand that Wonderland is answerable to make said payments.
[7]

Petitioners appealed to the Court of Appeals. The trial courts decision was affirmed
by the appellate court.
Hence, this recourse, wherein petitioners raise the sole issue of:

WHETHER THE COURT OF APPEALS ERRED IN NOT FINDING THAT THE

ADDENDUM, SIGNED BY THE PETITIONERS, RESPONDENT BANK AND
WONDERLAND INC., CONSTITUTES A NOVATION OF THE CONTRACT BY
SUBSTITUTION OF DEBTOR, WHICH EXEMPTS THE PETITIONERS
FROM ANY LIABILITY OVER THE PROMISSORY NOTES.
Revealed by the facts on record, the conflict among the parties started from a
contract of sale of a farmland between petitioners and Wonderland Food Industries,
Inc. As found by the trial court, no such sale materialized.
A contract of sale is a reciprocal transaction. The obligation or promise of each party
is the cause or consideration for the obligation or promise by the other. The vendee is
obliged to pay the price, while the vendor must deliver actual possession of the land. In
the instant case the original plan was that the initial payments would be paid in
cash. Subsequently, the parties (with the participation of respondent bank) executed an
addendum providing instead, that the petitioners would secure a loan in the name of
Agro Conglomerates Inc. for the total amount of the initial payments, while the
settlement of said loan would be assumed by Wonderland. Thereafter, petitioner
Soriano signed several promissory notes and received the proceeds in behalf of
petitioner-company.
By this time, we note a subsidiary contract of suretyship had taken effect since
petitioners signed the promissory notes as maker and accommodation party for the
benefit of Wonderland. Petitioners became liable as accommodation party. An
accommodation party is a person who has signed the instrument as maker, acceptor, or
indorser, without receiving value therefor, and for the purpose of lending his name to
some other person and is liable on the instrument to a holder for value, notwithstanding
such holder at the time of taking the instrument knew (the signatory) to be an
accommodation party. He has the right, after paying the holder, to obtain
reimbursement from the party accommodated, since the relation between them has in
effect become one of principal and surety, the accommodation party being the surety.
Suretyship is defined as the relation which exists where one person has undertaken
an obligation and another person is also under the obligation or other duty to the
obligee, who is entitled to but one performance, and as between the two who are
bound, one rather than the other should perform. The suretys liability to the creditor or
[8]

[9]

[10]

promisee of the principal is said to be direct, primary and absolute; in other words, he is
directly and equally bound with the principal. And the creditor may proceed against
any one of the solidary debtors.
[11]

[12]

We do not give credence to petitioners assertion that, as provided by the

addendum, their obligation to pay the promissory notes was novated by substitution of a
new debtor, Wonderland. Contrary to petitioners contention, the attendant facts herein
do not make a case of novation.
Novation is the extinguishment of an obligation by the substitution or change of the
obligation by a subsequent one which extinguishes or modifies the first, either by
changing the object or principal conditions, or by substituting another in place of the
debtor, or by subrogating a third person in the rights of the creditor. In order that a
novation can take place, the concurrence of the following requisites are indispensable:
[13]

[14]

1) There must be a previous valid obligation;

2) There must be an agreement of the parties concerned to a new contract;
3) There must be the extinguishment of the old contract; and
4) There must be the validity of the new contract.

In the instant case, the first requisite for a valid novation is lacking. There was no
novation by substitution of debtor because there was no prior obligation which was
substituted by a new contract. It will be noted that the promissory notes, which bound
the petitioners to pay, were executed after the addendum. The addendum modified the
contract of sale, not the stipulations in the promissory notes which pertain to the surety
contract. At this instance, Wonderland apparently assured the payment of future debts
to be incurred by the petitioners.Consequently, only a contract of surety arose. It was
wrong for petitioners to presume a novation had taken place. The well-settled rule is
that novation is never presumed, it must be clearly and unequivocally shown.
[15]

[16]

As it turned out, the contract of surety between Wonderland and the petitioners was
extinguished by the rescission of the contract of sale of the farmland. With the
rescission, there was confusion or merger in the persons of the principal obligor and the
surety, namely the petitioners herein. The addendum which was dependent thereon
likewise lost its efficacy.
It is true that the basic and fundamental rule in the interpretation of contract is that,
if the terms thereof are clear and leave no doubt as to the intention of the contracting
parties, the literal meaning shall control. However, in order to judge the intention of the
parties, their contemporaneous and subsequent acts should be considered.
[17]

The contract of sale between Wonderland and petitioners did not materialize. But it
was admitted that petitioners received the proceeds of the promissory notes obtained
from respondent bank.
Sec. 22 of the Civil Code provides:

Every person who through an act of performance by another, or any other

means, acquires or comes into possession of something at the expense of the
latter without just or legal ground, shall return the same to him.
Petitioners had no legal or just ground to retain the proceeds of the loan at the
expense of private respondent. Neither could petitioners excuse themselves and hold
Wonderland still liable to pay the loan upon the rescission of their sales contract. If
petitioners sustained damages as a result of the rescission, they should have impleaded
Wonderland and asked damages. The non-inclusion of a necessary party does not
prevent the court from proceeding in the action, and the judgment rendered therein shall
be without prejudice to the rights of such necessary party. But respondent appellate
court did not err in holding that petitioners are duty-bound under the law to pay the
claims of respondent bank from whom they had obtained the loan proceeds.
[18]

WHEREFORE, the petition is DENIED for lack of merit. The assailed decision of the
Court of Appeals dated October 17, 1994 is AFFIRMED. Costs against petitioners.
SO ORDERED.
Bellosillo, (Chairman), Mendoza, Buena, and De Leon, Jr., JJ., concur.
G.R. No. 84084 August 20, 1990
FINMAN GENERAL ASSURANCE CORPORATION, petitioner,
vs.
ABDULGANI SALIK, BALABAGAN AMPILAN ALI KUBA GANDHI PUA, DAVID MALANAO, THE
ADMINISTRATOR, PHILIPPINE OVERSEAS AND EMPLOYMENT ADMINISTRATION, THE
SECRETARY OF LABOR AND EMPLOYMENT, respondents.
David I. Unay, Jr. for petitioner.
Kamid D. Abdul for private respondents.

PARAS, J.:
This is a petition for certiorari seeking to annul 1) the Order dated March 28, 1988 of the
Honorable Secretary of Labor and Employment in POEA, LRO/RRD Case No. 87-09-1022-DP
entitled Abdulgani Salik, et al, v. Pan Pacific Overseas and Recruiting Services and Finman
General Assurance Corporation, which directed herein petitioner to pay jointly and severally
with Pan Pacific the claims of herein private respondents amounting to P25,000.00 and 2) the
Order dated June 7, 1988, which denied petitioner's motion for reconsideration (Rollo, p. 2).
The facts of the case are as follows:
Abdulgani Salik et al., private respondents, allegedly applied with Pan Pacific Overseas
Recruiting Services, Inc. (hereinafter referred to as Pan Pacific) on April 22, 1987 and were

assured employment abroad by a certain Mrs. Normita Egil. In consideration thereof, they
allegedly paid fees totalling P30,000.00. But despite numerous assurances of employment
abroad given by Celia Arandia and Mrs. Egil, they were not employed (Ibid., p. 15).
Accordingly, they filed a joint complaint with the Philippine Overseas Employment
Administration (herein referred to as POEA) against Pan Pacific for Violation of Articles 32
and 34(a) of the Labor Code, as amended, with claims for refund of a total amount of
P30,000.00 (Ibid.).
The POEA motu proprio impleaded and summoned herein petitioner surety Finman General
Assurance Corporation (hereinafter referred to as Finman), in the latter's capacity as Pan
Pacific's bonding company.
Summons were served upon both Pan Pacific and Finman, but they failed to answer.
On October 9, 1987, a hearing was called, but only the private respondents appeared. Despite
being deemed in default for failing to answer, both Finman and Pan Pacific were still notified
of the scheduled hearing. Again they failed to appear. Thus, ex-parte proceedings ensued.
During the hearing, herein private respondents reiterated the allegations in their complaint
that they first paid P20,000.00 thru Hadji Usop Kabagani for which a receipt was issued
signed by Engineer Arandia and countersigned by Mrs. Egil and a certain Imelda who are
allegedly employed by Pan Pacific; that they paid another P10,000.00 to Engr. Arandia who
did not issue any receipt therefor; that the total payment of P30,000.00 allegedly represents
payments for herein private respondents in the amount of P5,000.00 each, and Abdulnasser
Ali, who did not file any complaint against Pan Pacific (Ibid., pp. 15-16).
Herein private respondents presented as their witness, Hadji Usop Kabagani who they
Identified as the one who actually financed their application and who corroborated their
testimonies on all material points including the non-issuance of a receipt for P10,000.00 by
Engr. Arandia.
Herein petitioner, Finman, in an answer which was not timely filed, alleged, among others,
that herein private respondents do not have a valid cause of action against it; that Finman is
not privy to any transaction undertaken by Pan Pacific with herein private respondents; that
herein private respondents claims are barred by the statute of frauds and by the fact that they
executed a waiver; that the receipts presented by herein private respondents are mere scraps
of paper; that it is not liable for the acts of Mrs. Egil that Finman has a cashbond of
P75,000.00 only which is less than the required amount of P100,000.00; and that herein
private respondents should proceed directly against the cash bond of Pan Pacific or against
Mrs. Egil (Ibid., pp. 1617).
On March 18,1988, the Honorable Franklin M. Drilon, then the Secretary of Labor and
Employment, upon the recommendation of the POEA hearing officer, issued an Order, the
dispositive portion of which reads:

WHEREFORE, premises considered, both respondents are hereby directed to

pay jointly and severally the claims of complainants, as follows:
1. Abdulgani Salik P5,000.00
2. Balabagan Ampilan 5,000.00
3. Ali Kuba 5,000.00
4. Gandhi Dua 5,000.00
5. David Malanao 5,000.00
Based on the records of this Administration, respondent agency is presently
serving a total period of suspension of seventeen (1 7) months imposed in
three (3) separate orders issued on June 2, 1987, August 17, 1987 and
September 23, 1987. Under the new schedule of penalties published on
January 21, 1987 in the Philippine Inquirer, the penalty of cancellation shall be
imposed when the offender has been previously penalized with suspension the
total period of which is 12 months or more. Moreover, the penalty imposable in
the case at bar is two (2) months suspension for each count of violation or a
total period of suspension of ten (10) months as the acts were committed in
April 1987. Thus, whether under the old schedule of penalties which required a
total period of suspension of twenty-four (24) months for cancellation to be
imposed or under the new schedule which provides for a twelve (12) month
total suspension period, the penalty of cancellation may be properly imposed
upon the herein respondent agency.
In view thereof, the license of Pan Pacific Overseas Recruiting Services is
hereby cancelled, effective immediately.
SO ORDERED. (Ibid., pp. 20-21).
A motion for reconsideration having been denied (Ibid., p. 22), herein petitioner instituted the
instant petition for certiorari, raising the following assigned errors:
I
THE HONORABLE ADMINISTRATOR AND THE HONORABLE, SECRETARY OF
LABOR ACTED WITH GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK
OF JURISDICTION IN MOTU PROPRIO IMPLEADING FINMAN AS CORESPONDENT OF PAN PACIFIC IN POEA LRO/RRD CASE NO. 87-09-1022 DP
WHICH WAS FILED BY ABDULGANI SALIK, ET AL.;
II

THE HONORABLE SECRETARY OF LABOR ACTED WITHOUT OR IN EXCESS

OF JURISDICTION AND WITH GRAVE ABUSE OF DISCRETION AMOUNTING TO
LACK OF JURISDICTION IN DIRECTING FINMAN TO PAY JOINTLY AND
SEVERALLY WITH PAN PACIFIC THE CLAIMS OF PRIVATE RESPONDENTS ON
THE BASIS OF THE SURETYSHIP AGREEMENT BETWEEN FINMAN AND PAN
PACIFIC AND THE PHILIPPINE OVERSEAS EMPLOYMENT ADMINISTRATION
(POEA FOR SHORT); AND
III
THE FINDINGS OF FACT MADE BY THE POEA AND UPON WHICH THE
HONORABLE SECRETARY OF LABOR BASED ITS QUESTIONED ORDERS ARE
NOT SUPPORTED BY SUBSTANTIAL EVIDENCE AND ARE CONTRARY TO
LAW. (Ibid., p. 101)
As required by this Court, herein public respondents filed their memorandum on July 28,
1989 (Ibid., p. 84); while that of petitioner and private respondents were filed on September
11, 1989 (Ibid., p. 89) and March 16, 1990 (Ibid., p. 120), respectively.
The petition is devoid of merit.
In its first and second assigned errors, petitioner maintains that POEA has no jurisdiction to
directly enforce the suretyship undertaking of FINMAN (herein petitioner) under the surety
bond (Ibid., p. 104).
In the case at bar, it remains uncontroverted that herein petitioner and Pan Pacific entered
into a suretyship agreement, with the former agreeing that the bond is conditioned upon the
true and faithful performance and observance of the bonded principal (Pan Pacific) of its
duties and obligations. It was also understood that under the suretyship agreement, herein
petitioner undertook itself to be jointly and severally liable for all claims arising from
recruitment violation of Pan Pacific (Ibid., p. 23), in keeping with Section 4, Rule V, Book I of
the Implementing Rules of the Labor Code, which provides:
Section 4. Upon approval of the application, the applicant shall pay to the
Ministry (now Department) a license fee of P6,000.00, post a cash bond of
P50,000.00 or negotiable bonds of equivalent amount convertible to cash
issued by banking or financial institution duly endorsed to the Ministry (now
Department) as well as a surety bond of P150,000.00 from an accredited
bonding company to answer for valid and legal claims arising from violations
of the conditions of the license or the contracts of employment and guarantee
compliance with the provisions of the Code, its implementing rules and
regulations and appropriate issuances of the Ministry (now
Department). (Emphasis supplied)
Accordingly, the nature of Finman's obligation under the suretyship agreement makes it privy
to the proceedings against its principal (Pan Pacific). As such Finman is bound, in the

absence of collusion, by a judgment against its principal even though it was not a party to
the proceedings Leyson v. Rizal Surety and Insurance Co., 16 SCRA 551 (1966). Furthermore,
in Government of the Philippines v. Tizon (20 SCRA 1182 [1967]), this Court ruled that where
the surety bound itself solidarily with the principal obligor the former is so dependent on the
principal debtor "that the surety is considered in law as being the same party as the debtor in
relation to whatever is adjudged touching the obligation of the latter." Applying the foregoing
principles to the case at bar, it can be very well said that even if herein Finman was not
impleaded in the instant case, still it (petitioner) can be held jointly and severally liable for all
claims arising from recruitment violation of Pan Pacific. Moreover, as correctly stated by the
Solicitor General, private respondents have a legal claim against Pan Pacific and its insurer
for the placement and processing fees they paid, so much so that in order to provide a
complete relief to private respondents, petitioner had to be impleaded in the case (Rollo, p.
87).
Furthermore, Finman contends that herein respondent Secretary of Labor cannot validly
assume jurisdiction over the case at bar; otherwise, proceedings will be railroaded resulting
in the deprivation of the former of any remedial measures under the law.
The records of the case reveal that herein Finman filed a motion for reconsideration of the
adverse decision dated March 18, 1988 of respondent Secretary of Labor. In the said motion
for reconsideration, no jurisdictional challenge was made (Ibid., p. 22). It was only when it
filed this petition that it assailed the jurisdiction of the respondent Secretary of Labor, and
that of the POEA. But then, it was too late. Estoppel had barred herein petitioner from raising
the issue, regardless of its merits (Akay Printing Press v. Minister of Labor and Employment,
140 SCRA 381 [1985]).
Hence, Finman's contention that POEA's and respondent Secretary's actions in impleading
and directing herein petitioner to pay jointly and severally with Pan Pacific the claims of
private respondents constitute a grave abuse of discretion amounting to lack of jurisdiction
has no basis. (Ibid., p. 101.)
As regards the third assigned error, herein petitioner maintains that the findings of fact made
by the POEA upon which respondent Secretary of Labor based his questioned Orders are not
supported by substantial evidence and are contrary to law, is likewise untenable.
Herein petitioner, in raising this third issue, is, in effect, asking this Court to review the
respondent Secretary's findings of facts.
Well-settled is the rule that findings of facts of the respondent Secretary are generally
accorded great weight unless there was grave abuse of discretion or lack of jurisdiction in
arriving at such findings (Asiaworld Publishing House, Inc. vs. Ople, 152 SCRA 219 (1987).
In the case at bar, it is undisputed that when the case was first set for hearing, only the
private respondents appeared, despite summons having been served upon both herein
petitioner and Pan Pacific. This, notwithstanding, both herein petitioner and Pan Pacific were
again notified of the scheduled hearing, but, as aforestated they also' failed to a pear (Rollo,

p. 15). Accordingly, owing to the absence of any controverting evidence, respondent

Secretary of Labor admitted and considered private respondents' testimonies and evidence
as substantial. Under the circumstances, no justifiable reason can be found to justify
disturbance of the findings of facts of the respondent Secretary of Labor, supported as they
are by substantial evidence and in the absence of grave abuse of discretion (Asiaworld
Publishing House, Inc. v. Ople, supra); and in line with the well established principle that the
findings of administrative agencies which have acquired expertise because their jurisdiction
is confined to specific matters are generally accorded not only respect but at times even
finality. (National Federation of Labor Union (NAFLU) v. Ople, 143 SCRA 124 [1986])
PREMISES CONSIDERED, the questioned Orders of respondent Secretary of Labor are
hereby AFFIRMED in toto,
SO ORDERED.
PHILIPPINE NATIONAL BANK, petitioner,
vs.
THE HONORABLE COURT OF APPEALS (Special Fourth Division), LUZON SURETY CO., INC.,
and ESTANISLAO E. DEPUSOY, trading under the style of E.E. DEPUSOY
CONSTRUCTION, respondents.
Domingo A. Santiago, Jr., Lucas R. Vidad, Nicolas C. Alino, Cesar T. Basa and Roland A. Niedo for
petitioner.
Tolentino, Cruz, Reyes, Lava & Manuel for respondent Luzon Surety Co., Inc.
F.M. Ejercito for respondent E.E. Depusoy Construction.

DAVIDE, JR., J.:p

Before Us is a petition for the review on certiorari of the decision of the Court of Appeals
promulgated on 12 December 1970 in CA-G.R. No. 36615-R 1 affirming, with modification, the decision
of the then Court of First Instance (now Regional Trial Court) of Manila, Branch VII, dated 30 September
1959 in Civil Case No. 35163 2 an action for collection of sum of money filed by petitioner against private
respondents. The dispositive portion of the trial court's decision reads:
IN VIEW WHEREOF:
1. The case against Luzon Surety Co. is dismissed but its counterclaim is also
dismissed for lack of sufficient merit;
2. Defendant Estanislao Depusoy is condemned to pay unto the Philippine National
Bank the respective sums as principal of P35,000.00, P30,000.00, P10,000.00, and

P25,000.00 together with the interests as outlined in the statement of account set
forth in the body of this decision. No pronouncements as to costs.
SO ORDERED. 3
The dispositive portion of the decision of respondent Court of Appeals reads:
WHEREFORE, with the modification that the defendant Depusoy shall pay 10%
interest on the amount of the judgment, the decision of the trial court is hereby
affirmed in all other respects. Without pronouncement as to costs. 4
However, immediately preceding this is a paragraph reading:
We agree with the appellant that the trial court erred in not sentencing Estanislao
Depusoy to pay attorney's fees equivalent to 10% of the amount due. This is
expressly provided for in the promissory notes, and as it does not appear to be
unreasonable, the stipulations of the parties should be given effect.
As carefully summarized by the Court of Appeals, the relevant facts in this case are as follows:
On August 6, 1955, Estanislao Depusoy, doing business under the name of E.E.
Depusoy Construction, and the Republic of the Philippines, represented by the
Director of Public Works, entered into a building contract, Exhibit 2-Luzon, for the
construction of the GSIS building at Arroceros Street, Manila, Depusoy to furnish all
materials, labor, plans, and supplies needed in the construction. Depusoy applied for
credit accommodation with the plaintiff. This was approved by the Board of Directors
in various resolutions subject to the conditions that he would assign all payments to
be received from the Bureau of Public Works of the GSIS to the bank, furnish a
surety bond, and the surety to deposit P10,000.00 to the plaintiff. The total
accommodation granted to Depusoy was P100,000.00. This was later extended by
another P10,000.00 and P25,000.00, but in no case should the loan exceed
P100,000.00, Exhibits K-1, K-2, K-3 and K-4. In compliance with these conditions,
Depusoy executed a Deed of Assignment of all money to be received by him from
the GSIS as follows:
That I, Estanislao Depusoy, of legal age, Filipino, married to Lourdes
G. Gonzales, doing business under the style of E. E. San Beda
Subdivision, Manila, for and in consideration of certain loans,
overdrafts or other credit accommodations to be granted by the
PHILIPPINE NATIONAL BANK, Manila, have assigned, transferred
and conveyed and by these presents do hereby assign, transfer and
convey unto the said PHILIPPINE NATIONAL BANK, its successors
and assigns all payment to be received from my contract with the
Bureau of Public Works, Republic of the Philippines date (sic) August
6, 1955.

By virtue of this assignment it is hereby understood that the assignor

hereby acknowledges the monies, sums or payments due from the
Bureau of Public Works, Republic of the Philippines, and which are
hereby assigned to the PHILIPPINE NATIONAL BANK as monies,
sums and payments belonging to the PHILIPPINE NATIONAL BANK,
and that any act or misappropriation or conversion which the assignor
or the latter's representatives may commit with respect to the said
sums, monies and payments will subject the assignor or the latter's
representatives to the criminal liabilities imposed by the Penal Code
and such other damages which the Civil Code provides.
It is further understood that the PHILIPPINE NATIONAL BANK can
collect and receive any and all sums, monies and payments abovementioned from the Bureau of Public Works, Republic of the
Philippines, and for that matter said bank is hereby authorized to
indorse for deposit or for encashment any and all checks, treasury
warrants, money orders, drafts and other kinds of negotiable
instruments that might be issued in connection with the payment
herein assigned.
This assignment shall be irrevocable subject to the terms and
conditions of the promissory notes, overdrafts and any other kind of
documents which the PHILIPPINE NATIONAL BANK have (sic)
required or may require the assignor to execute to evidence the
above-mentioned obligation.
Luzon thereafter executed two surety bonds, one for the sum of P40,000.00 Exhibit
D, and the other for P60,000.00, Exhibit E. Exhibit its D and E, except for the
amount, are expressed in the same words as follows:
That we, E. E. DEPUSOY CONSTRUCTION CO., of 32 2nd Street,
San Beda Subdv., Manila, as principal and LUZON SURETY
COMPANY, INC., a corporation duly organized and existing under
and by virtue of the laws of the Philippines, as surety, are held and
firmly bound unto the PHILIPPINE NATIONAL BANK of Manila in the
sum of SIXTY THOUSAND PESOS ONLY (P60,000.00), Philippine
Currency, for the payment of which sum, well and truly to be made,
we bind ourselves, our heirs, executors, administrators, successors,
and assigns, jointly and severally, firmly by these presents:
The conditions of the obligation are as follows:
WHEREAS, the above bounden principal, on the . . . . day of
September, 1956 in consideration of a certain loan of (P60,000.00)
executed a Deed of Assignment in favor of the Philippine National

Bank on all payments to be received by him from the Bureau of

Public Works in connection with a contract dated August 6, 1956.
WHEREAS, said PHILIPPINE NATIONAL BANK, requires said
principal to give a good and sufficient bond in the above stated sum
to secure the full and faithful performance on his part of said
Agreement.
NOW, THEREFORE, if the principal shall well and truly perform and
fulfill all the undertakings, covenants, terms, conditions and
agreement stipulated in said Agreement then, this obligation shall be
null and void; otherwise, it shall remain in full force and effect.
The liability of LUZON SURETY COMPANY, INC., under this bond
will expire January 31, 1957. Furthermore, it is hereby agreed and
understood that the LUZON SURETY COMPANY, INC. will not be
liable for any claim not discovered and presented to the company
within THREE (3) months from the expiration of this bond and that the
obligee hereby waives his right to file any court action against the
surety after the termination of the period of the three months above
mentioned.
With the consent of Luzon, the bond was extended for another 6 months from
January 31, 1957.
Under the credit accommodation granted by the plaintiff bank, Depusoy obtained
several amounts from the bank. On January 14, 1957, Depusoy received P50,000.00
from the bank which he promised to pay in installments on the dates therein
indicated, Exhibit A. On January 17, 1957, he received another P50,000.00 under the
same conditions as the promissory note Exhibit A, except with respect to the time of
payment. Under this arrangement all payments made by the GSIS were payable to
the Philippine National Bank. The treasury warrants or checks, however, were not
sent directly to the plaintiff. They were received by Depusoy, who in turn delivered
them to the plaintiff bank. The plaintiff then applied the money thus received, first, to
the payment of the amount due on the promissory notes at the time of the receipt of
the treasury warrants or checks, and the balance was credited to the current account
of Depusoy with the plaintiff bank. A total of P1,309,461.89 were (sic) paid by the
GSIS to the plaintiff bank for the account of Estanislao Depusoy, Exhibit 1-Luzon. Of
this amount, P246,408.91 were (sic) paid according to Exhibit 1 for the importation of
construction materials, and P1,063,408.91 were (sic) received by the Loans and
Discounts Department of the plaintiff bank. This amount was disposed off by the
plaintiffs Loans & Discounts Department as follows:
a) P795,976.64 were (sic) credited to the current account of Depusoy
with the plaintiff;

b) P20,000.00 were (sic) credited to the plaintiffs Foreign

Department;
c) P2,552.94 were (sic) credited to the payment of interest; and
d) P210,000.00 were (sic) applied to the principal of indebtedness.
(Exh. N-1).
Depusoy defaulted in his building contract with the Bureau of Public Works, and
sometime in September, 1957, the Bureau of Public Works rescinded its contract
with Depusoy. No further amounts were thereafter paid by the GSIS to the plaintiff
bank. The amount of the loan of Depusoy which remains unpaid, including interest, is
over P100,000.00. Demands for payment were made upon Depusoy and Luzon, and
as no payment was made, . . . 5
herein petitioner filed with the trial court a complaint (Civil Case No. 35163) against Estanislao
Depusoy and private respondent Luzon Surety Co. Inc. (LSCI).
After trial on the merits, the trial court rendered a decision the dispositive portion of which is above
adverted to.
In dismissing the case as against LSCI, the trial court ruled that the surety bonds it issued, Exhs. "D"
and "E";
. . . guaranteed only the faithful performance of the deed of assignments, Exhibit C,
and nothing else. That the bonds were extended by the letters Exhs. E and I did not
change their conditions. . . . 6
Petitioner appealed from said decision to the Court of Appeals, (C.A.-G.R. No. 6615-R) relying on
the following assigned errors:
I
The trial court erred in holding that defendant-appellee Luzon Surety Company, Inc.
"guaranteed only the faithful performance of the deed of assignment, Exh. "C", and
nothing else"; in holding the defense of the appellee Luzon Surety Company, Inc.,
that there has been no breach of the terms and conditions of the bonds Exhs. "D"
and "E"; in finding that the "bonds" can only be therefore understood to guarantee
that the payment due from the GSIS to Depusoy would be delivered unto the bank.
II
The trial court erred in not finding that the bonds (Exhs. "D" and "E") should be read
jointly with the resolutions approving the loan (Exhs. "K" to "K-5"), the promissory
notes and the deed of assignment in the determination of the true intent of the parties
in the execution of the bonds which are the basis of the liability of the defendant-

appellee Luzon Surety Company, Inc., in not considering resolutions Exhs. "K" to "K5"; promissory notes Exhs. "B", "G", and "H" and the deed of assignment, Exh. "C" as
integral parts of the surety bonds Exhs. "D" and "E" as therein incorporated by
reference in said surety bonds as such necessarily bound the appellee Luzon Surety
Company to their terms.
III
The trial court erred in not construing the terms of the bonds in favor of the plaintiffappellant PNB and against the defendant-appellee Luzon Surety Company, Inc.
IV
The lower court erred in not holding that the bonds Exhs. "D" and "E" and letters of
extension Exhs. "F" and "I" were compensated surety agreements executed as
required by PNB board resolution Exhs. "K" to "K-5" for the purpose of securing the
payment to the PNB of the amount advanced by the said bank to the appellee
Estanislao Depusoy to finance the construction of the GSIS building subject to the
construction contract Exh. "2-Luzon" or Exh. "O-PNB"; in not finding that Exhs. "F"
and "I" are indubitable proofs that defendant-appellee Luzon Surety Company, Inc.,
is liable for the repayment of the P100,000.00 loan and the additional
accommodations granted to the defendant-appellee Estanislao Depusoy; and in not
finding and holding that Exhs. "D" and "E" in the sense that they have been extended
so as to secure new accommodations aside from the original obligation mentioned in
said bonds.
V
The trial court erred in finding that all payments due from the GSIS construction to
Depusoy were actually delivered unto the bank; and in not finding that Depusoy
made diversions from these amounts for which the surety should be bound to answer
under the terms of its bonds.
VI
The trial court erred in not finding that when appellee Depusoy incurred breach (sic)
in his construction contract with the Bureau of Public Works said default on the part
of the principal in his contract resulted in a consequent breach of his undertaking
under the deed of assignment; and that consequently any breach in the undertaking
of the principal in said deed of assignment communicated liability to the surety; in not
finding likewise that breach on the part of the appellee Depusoy in his undertaking
under the promissory notes meant breach of the terms of the deed of assignment
which incorporated said promissory notes and that this breach in the deed of
assignment communicated liability to the surety under the terms of the bonds; and
that trial court (sic) erred in not finding that there was a breach of the bonds due to
the failure of the appellee Luzon Surety Company, Inc. to see to it that the full

amount of P1,309,461.89 remitted by the GSIS to the PNB was actually received by
the PNB; in not finding that the PNB did not receive all the amounts still due to the
said institutions as remitted by the GSIS under the terms of the deed of assignment.
VII
The trial court erred in not sentencing defendant-appellee Estanislao Depusoy to pay
the attorney's fees equivalent to 10% of the amounts due and the costs of the suit.
VIII
The trial court erred in not admitting in the evidence proof of the amount actually
received by the foreign department of the PNB and the letter of the GSIS to the PNB
as part of the rebuttal evidence of the defendant-appellee (see evidences (sic)
offered as part of the record on appeal for purposes of review).
IX
The trial court erred in relying exclusively for its decision on the relation of facts
presented by the appellee-Luzon Surety Company; disregarding evidences (sic)
presented by the PNB consist of documentary evidences (sic) disclosing patent facts
appearing on the face of said documents and that consequently the decision is not
based on the real facts and law of the case; and consequently dismissing the case
against the Luzon Surety. 7
In due course the Court of Appeals rendered the decision adverted to above. In disposing of the
assigned errors, it patiently examined and analyzed the facts and made an extensive, exhaustive
and well-reasoned disquisition thereon which We deem necessary to quote:
The assignment of error maybe (sic) reduced into one single question, what is the
obligation of Luzon under the surety bonds, or, stated otherwise, what obligation had
been guaranteed by Luzon under the terms of the surety bonds? It is the contention
of the plaintiff that the surety bonds, Exhibits D and E, guaranteed the payment of the
loans or the debt of Depusoy to the plaintiff to the extent of P100,000.00. Luzon,
however, contends that what it guaranteed was the performance of Depusoy of his
obligation under the Deed of Assignment, Exhibit C, and not other agreements
between Depusoy and the bank. This contention was upheld by the lower court. This,
we believe is the correct construction of the surety bonds. Under the surety bonds,
Depusoy and Luzon bound themselves to the plaintiff in the sum of P100,000.00. It
recited that the principal, Depusoy, and Luzon bound themselves jointly and severally
to the PNB under the following conditions: that "in consideration of a certain loan,
Depusoy executed a Deed of Assignment in favor of the PNB on all payments to be
received by him from the Bureau of Public Works in connection with a contract of
August 6, 1956"; that the PNB required the principal to give a good and sufficient
bond to secure the full and faithful performance on his part of said agreement; and
that, "if the principal shall well and truly perform and fulfill all the undertakings,

covenants, terms and conditions, and agreements stipulated in said agreement, this
obligation shall be null and void". Now, what are the undertakings, covenants, terms,
conditions, and agreements stipulated in the said agreement or Deed of Assignment?
The undertakings of the principal Depusoy, under the Deed of Assignment, Exhibit C,
were to assign, transfer, and convey to the plaintiff bank all payments to be received
by Depusoy from the Bureau of Public Works; that Depusoy acknowledged that such
sums assigned and received by the plaintiff would belong to the PNB, and if any
conversion should be made by the assignor or his representative, he would be
criminally liable; that the PNB could collect and receive all sums and monies, and
payments, and the bank was authorized to endorse for deposit or for encashment all
checks or money orders, or negotiable instruments that it might receive in connection
with the assignment. Nowhere in the Deed of Assignment nor in the bonds did Luzon
guarantee that Depusoy would pay his indebtedness to the plaintiff and that upon
Depusoy's default, Luzon would be liable. When the terms of the agreement are
clear, there can be no room for construction. If the intention of the parties, and
particularly of Luzon, was to guarantee the payment of the debt of Depusoy to the
plaintiff, the bonds would have recited in its preamble that the principal was indebted
to the PNB and that the PNB required the principal to give a good and sufficient bond
to secure the faithful performance on his part of the terms of the promissory notes.
Instead of doing so, it recited that in consideration of a certain loan, the principal had
executed a Deed of Assignment. The recital of the loan in the amount of P40,000.00,
Exhibit D and P60,000.00, Exhibit E, is merely a statement of the cause or
consideration of the Deed of Assignment and not a statement of the obligation. The
Deed of Assignment necessarily was executed for a consideration, otherwise, it
would be null and void. The obligation recited in the surety bonds, Exhibits D and E,
is not the loan, but the Deed of Assignment; and that precisely was what was
guaranteed by Luzon in the bonds, Exhibits D and E, as shown by the following:
1) Contrary to the usual practice of the plaintiff, Luzon did not sign the
promissory notes, Exhibits A and B;
2) Although the resolutions of the Board of Directors required that the
surety should make a deposit of P10,000.00, Luzon did not make
such a deposit, the verbal testimony of Delfin Santiago, Manager of
the Loans and Discounts Department, to the contrary
notwithstanding. The documentary evidence was submitted to prove
that was the fact;
3) Delfin Santiago finally admitted that what was guaranteed was not
the loan but the Deed of Assignment.
Delfin Santiago testified as follows:
Q Did you inform the Luzon Surety Company, Inc. of
your actuation on this fact, that is in your giving Mr.
Depusoy portions of the payments made by the GSIS

to the Philippine National Bank pursuant to the Deed

of Assignment?
A No, because I understand that the Luzon Surety
Company, Inc. stands as surety on that assignment
on which the full payment of the contract is assigned
to the payments. (TSN, p. 54)
xxx xxx xxx
Q Usually Mr. Santiago, it is the practice of the
Philippine National Bank in cases where a surety
company guarantees the account of the borrower, the
Philippine National Bank requires the surety company
to sign the promissory note as a co-maker, is it not?
A In case the condition is approved, the surety I
remember very well, the last accommodation given to
Mr. Depusoy . . . that was the condition, but the Luzon
Surety Company, Inc. did not want to sign, so at the
request of the Luzon Surety Company, Inc. and Mr.
Depusoy, the approved accommodation was modified
in such a way as only to the surety bond.
ATTY. NERI: If Your Honor please. We object to the
question, it was not covered by the direct
examination.
COURT: Answer.
A Well, apparently that was the intention because you
decided to sign jointly and severally the promissory
note.
Q And because that was our intention the Philippine
National Bank agreed to that desire of Luzon Surety
Company, Inc. by issuing only a similar surety bond
and not signing as co-maker, and jointly and severally
on the promissory note?
ATTY. NERI: Objection Your Honor, the contract is the
best evidence.
COURT: Answer.

A As usual, as at the beginning, we take it that your

bonding the Deed of Assignment is the understanding
that all payments for the whole contract will go to us.
(TSN, pp. 55-57, July 21, 1958)
xxx xxx xxx
Q Did you read the terms of the bond?
A Yes, sir, that's right.
Q And you further noted in the bond it merely
guaranteed the deed of assignment, is that correct? of
Mr. Depusoy?
A Yes, sir.
ATTY. CRUZ: And not this particular loan, is it not?
ATTY. NERI: We refer to the document, Your Honor.
COURT: Sustained.
(TSN, pp. 9-10, June 26, 1959)
xxx xxx xxx
ATTY. NERI: Now, Mr. Depusoy in his testimony
stated that when you received these amounts from
the GSIS and issued credit memos . . . in favor of Mr.
Depusoy, you did not notify the Luzon Surety
Company, Inc. of the fact of the issuance of this (sic)
credit memos in favor of Mr. Depusoy will you state to
this Honorable Court the reason why is that you did
not give notice to the Luzon Surety Company, Inc.?
A I did not notify the Luzon Surety Company, Inc. of
this transaction because the bond filed by the Luzon
Surety Company, Inc., but the terms of the bond filed
by Luzon Surety Company is that they understand the
transaction of Mr. Depusoy with the Philippine
National Bank.
COURT: They understand the transaction to be. . .

WITNESS: . . . The nature of the transaction with Mr.

Depusoy in the sense that as we . . . as appearing in
this bond Exhibit D . . . all payments to be received by
him from the Bureau of Public Works in connection
with the contract to secure the full and faithfully
performance on his part of the said agreement, the
agreement referred to is the assignment of payment
in connection with the contract of Mr. Depusoy with
the GSIS.
(TSN, pp. 27-29 June 1, 1959)
In support of his contention that the surety bond was intended to guarantee the loan,
the appellant gave the following grounds or reasons:
1) The resolution of the Board of Directors of the plaintiff approving
the loan or credit accommodation to Depusoy required that Depusoy
should put up a bond executed by the Luzon Surety Company, Inc.,
Exhibits K-3, K-4 and K-5. The resolutions of the Board of Directors
were unilateral acts of the plaintiff and were conditions imposed upon
the debtor, Depusoy, Luzon was not a party to these resolutions and
under the rule of res inter alios acta, they cannot bind or prejudice
Luzon in the absence of evidence that the terms of the resolutions
had been brought to the attention of Luzon and that it had acceded
thereto. All that the bond stated is that the PNB required the principal
to give a good and sufficient bond. There can be no other
consideration for the execution of the bonds other than stated
thereon in the absence of allegation that they did not express the true
intention of the parties.
2) Appellant contends that the promissory notes and the building
contract mentioned in the Deed of Assignment became part and
parcel of the Deed of Assignment under the principle of incorporation
by reference. We agree that the Deed of Assignment became part
and parcel of the bond, but to say that all promissory notes,
overdrafts, and any other kind of documents which the PNB might
require the assignor to execute to evidence the aforementioned
obligation were also incorporated by reference to the surety bond and
became obligation of Luzon is to include in the assignment,
covenants and obligations beyond the contemplation of the parties.
The appellant relies on the last paragraph of the Deed of Assignment
which reads: "This assignment shall be irrevocable and subject to the
terms and conditions of the promissory notes, overdrafts, and any
other kind of document which the PNB can require or may require the
assignor to execute to evidence the above-mentioned obligation".

It is argued that under this stipulation, Luzon guaranteed the payment of the
promissory notes which are the subject of this action and also the building contract
between Depusoy, its principal, and the Bureau of Public Works. This is a very farfetched construction. This paragraph does not impose any obligation upon Depusoy.
All that was required of Depusoy was to execute such documents which might be
required by the PNB to evidence the Deed of Assignment. The words of the phrase
"subject to" are words of qualification and not of contract (Cox vs. Vat 149, 110 pp.
96-148 CCH 147) and means subject to, meaning under the control, power or
dominion or subordinate to and not being words of contract imposing upon defendant
no contractual obligation (40 Words & Phrases 386-389). What was evidently
intended is the Deed of Assignment when it stated "subject to the terms and
conditions of the promissory notes and overdrafts" was that any amount received by
the PNB would be applied to the payment of the promissory notes and overdrafts in
accordance with their terms and conditions as they fell due because the Deed of
Assignment was executed not for the purpose of making the PNB the owner of all the
monies received from the GSIS, but as a security for the payment of the debt of
Depusoy arising from the credit accommodation granted to him by the appellant. And
that this was the intention is evident from the fact that upon receipt of the treasury
warrants and checks from the GSIS, the appellant applied the same to the payment
of the debt of Depusoy which was due with interest and the remainder was credited
to Depusoy's current account. This balance was subject to the free disposal of
Depusoy. Hence, out of the over P1 million received by the Loans & Discounts
Department of the appellant, almost P800,000.00 were credited to the current
account of Depusoy and only a little over P200,000.00 was applied to his debt.
Appellant contends that since in the Deed of Assignment, Depusoy undertook to
assign, transfer, and convey to PNB all payments to be received by him from his
contract with the Bureau of Public Works, Luzon had thereby guaranteed the faithful
performance by Depusoy of his building contract with the Bureau of Public Works,
and Depusoy having defaulted in his building contract by reason of which the Bureau
of Public Works rescinded the building contract, the PNB did not receive from the
GSIS the full contract price of over P2 million. This indeed is a very far-fetched
construction of the contract. What was transferred or assigned by Depusoy to the
PNB were all payments to be received by him under the contract with the Bureau of
Public Works. Necessarily, what was to be received by Depusoy depends upon his
performance under the contract. As long as he faithfully performed the contract, he
would receive from the GSIS the amount due him. From the moment he defaulted
and failed to comply with the terms of the contract, he would receive nothing and he
could not assign what he did not have. To argue that under the terms of the Deed of
Assignment, Luzon also guaranteed the faithful performance of the building contract
of Depusoy with the Bureau of Public Works is fanciful and wishful thinking.
3) Appellant also contends that under Exhibits F and I, it can be seen that what was
really intended to be guaranteed by the surety agreement was the payment of the
loan. We quote Exhibits F and I.

Relative to our above-captioned bonds in the amount of P40,000.00

dated May 28, 1956 and September 24, 1956, respectively, please be
advised that same is hereby extended for a further period of six (6)
months from January 31, 1957. All other terms and conditions of our
above-mentioned bonds shall remain the same except the period of
expiration herein above mentioned. These bonds also cover the new
accommodation given our Principal.
Relative to the above numbered bonds, in the amount of P40,000.00
and P60,000.00 dated May 28, 1956 and September 24, 1956,
respectively, the account secured thereby having been reduced by
virtue of payments made by our principal, which, according to him
has but a balance of P75,000.00 we have the honor to inform you
that we are agreeable to the extension of further credit to our
principal to the extent of the amount of the said bonds, under the
same terms and conditions thereof.
At first glance, from the statement in Exhibit F, which reads: "This bond also covers
the new accommodation given our principal", and in Exhibit I, that "we are agreeable
to the extension of further credit to or principal to the extent of the amount of the said
bond", it would appear that Luzon was referring to the obligation of Depusoy to pay
the loan. But particular attention must be paid to the statement in Exhibit F that "all of
the terms and conditions of our above-mentioned bonds shall remain the same
except the period of expiration herein below mentioned". What was really agreed by
Luzon was the extension of the duration of the surety bond, for under the terms of
the bonds they expired six months from their respective dates. Any statement in
Exhibit I that may be construed as referring to the debt of Depusoy was made only by
an Asst. Manager who evidently was not familiar with the terms of the surety bond. It
must be noted that the surety bond was executed by CS Rodriguez, General
Manager. Moreover, it cannot prevail over the testimony of Delfin Santiago, Manager
of the Loans & Discounts Department, that what was guaranteed by the surety bond
was the Deed of Assignment.
It is also contended that if what was intended to be guaranteed by Luzon is the Deed
of Assignment, the surety bond guaranteed nothing, because with the execution of
the Deed of Assignment, nothing thereafter remained to be done. This is not true, for
the terms of the Deed of Assignment, Depusoy authorized the PNB to receive all
monies due from the Bureau of Public Works and to endorse for deposit all
instruments of credit that might be issued in connection with the payments therein
assigned. Under this stipulation, Luzon guaranteed that all the monies due Depusoy
under his building contract with the Bureau of Public Works should be paid to the
PNB. It is true that all the checks and warrants issued by the GSIS were to be made
payable to the PNB. But under the arrangement between the PNB, GSIS, and the
Bureau of Public Works, and Depusoy, it was Depusoy who received the warrants or
checks either from the Bureau of Public Works or from the GSIS, and Depusoy
delivered the same to the PNB. The PNB did not take the trouble of going to the

GSIS or the Bureau of Public Works to get the checks. One reason because the PNB
did not know when any amount would be due. There is nothing then that could
prevent an arrangement thereafter between Depusoy and the GSIS, or the Bureau of
Public Works to make the checks payable to Depusoy, and Depusoy from forging the
signature of the PNB and appropriating the money. This would be a violation of the
Deed of Assignment for which Luzon would be liable.
It is not disputed that no payment was made directly to Depusoy after the Deed of
Assignment. All amounts due to Depusoy were paid to the PNB for the account of
Depusoy. It is true that in accordance with Exhibit M, only P1,063,408.91 were
received by the Loans and Discounts Department of the plaintiff bank, and that of the
total amount of P1,309,461.89 paid by the GSIS, P246,062.98 were paid for the
importation of construction materials. As to the so-called 10% retention fund, there is
no evidence that the Bureau of Public Works had retained any amount. In any case
what was assigned was "all payments to be received" under the building contract,
and the 10% retention was not to be received by Depusoy until certain conditions
had been met.
In its eight assignment of error, the appellant contends that the lower court in not
admitting proof of the amount actually received by the PNB and the letter of the
GSIS, Exhibit Q (sic). Aside from the purely technical reason for their rejection, their
admission cannot affect the result. Exhibit Q is a letter of the General Manager of the
GSIS to plaintiff advising plaintiff of the rescission of the building contract. Exhibits Q,
P, P-1 and P-2 are statements of the amounts received by plaintiff's foreign
department. There is no evidence that the GSIS had paid any amount to Depusoy in
violation of the Deed of Assignment. Not a single cent had been received directly by
Depusoy from the GSIS or the Bureau of Public Works.
xxx xxx xxx
We agree with the appellant that the trial court erred in not sentencing Estanislao
Depusoy to pay attorney's fees equivalent to 10% of the amount due. This is
expressly provided for in the promissory notes, and as it does not appear to be
unreasonable, the stipulation of the parties should be given effect. 8
Its motion for reconsideration 9 having been denied by the respondent Court of Appeals in its resolution
of 1 February 1971, 10 petitioner filed the instant petition on 3 March 1971 asserting therein that:
. . . the Decision and the Resolution of respondent COURT (Annexes A and B) are
both not in accord with the evidence, the law, and jurisprudence on the matter.
I. THE SURETY BONDS COVER THE PRINCIPAL LOANS, THE SURETY
THEREBY BECOMING LIABLE UPON DEFAULT OF THE LATTER.

II. EVEN ASSUMING ARGUENDO THAT THE BONDS SECURE ONLY THE DEED
OF ASSIGNMENT, STILL THE SURETY IS LIABLE FOR FAILURE OF THE
PRINCIPAL TO COMPLY WITH THE TERMS OF SUCH DEED.
III. THE DISPOSITIVE PORTION OF THE DECISION SHOULD BE AMENDED TO
THE END THAT PRIVATE RESPONDENT RESPONDENTS BE ADJUDGED LIABLE
FOR ATTORNEY'S FEES. 11
In support of its petition, petitioner practically summoned the same arguments which it relied upon
before the Court of Appeals.
On 3 March 1971 private respondent filed a motion to dismiss the petition

12

on the following grounds:

1. That the petition is without merit;

2. That the question raised therein are too unsubstantial to require consideration; and
3. That the question raised are factual.
In the resolution of 8 March 1971 this Court dismissed the petition for being factual and for lack of
merit; 13however, upon motion for reconsideration 14 this Court reconsidered the resolution and gave due
course to the petition. 15The petitioner was then required to submit its Brief, 16 which it complied with on 12
July 1971 . 17 Private respondent LSCI filed its brief on 10 August 1971. 18 Private respondent Depusoy did
not file any.
Except for the third assigned error, We find no merit in this petition. The issues raised are factual.
The findings of facts of the Court of Appeals can withstand the most incisive scrutiny. They are
sufficiently supported by the evidence on record and the conclusions drawn therefrom do not justify
a departure from the deeply rooted and well settled doctrine that findings of facts of the Court of
Appeals are conclusive on this Court,19 considering that the recognized exceptions thereto 20 do not
come to the rescue of petitioner.
We are in full accord with the conclusion of the trial court and the Court of Appeals that the bonds
executed by private respondent LSCI were to guarantee the faithful performance of Depusoy of his
obligation under the Deed of Assignment and not to guarantee the payment of the loans or the debt
of Depusoy to petitioner to the extent of P100,000.00. The language of the bonds is clear, explicit
and unequivocal. It leaves no room for interpretation. Article 1370 of the Civil Code provides:
If the terms of a contract are clear and leave no doubt upon the intention of the
contracting parties, the literal meaning of its stipulations shall control.
Besides, even if there had been any doubt on the terms and conditions of the surety agreement, the
doubt should be resolved in favor of the surety. As concretely put in Article 2055 of the Civil Code, "A
guaranty is not presumed, it must be expressed and cannot extend to more than what is stipulated
therein."

In the recent case of Umali, et al. vs. Court of Appeals, et al., 21 We reiterated the unrippled rule that
the liability of the surety is measured by the terms of the contract, and, while he is liable to the full extent
thereof, such liability is strictly limited to that assumed by its terms. 22
In La Insular vs. Machuca Go Tanco, et al., supra., this Court held:
It is undoubtedly true that the law looks upon the contract of suretyship with a jealous
eye, and the rule is settled that the obligations of the surety cannot be extended by
implication beyond its specified limits.
Article 1827 of the Civil Code so discloses (Uy Aloc vs. Cho Jan Ling, 27 Phil. Rep.,
427); and with this doctrine the common law is accordant. As was said by Justice
Story in Miller vs. Stewart (9 Wheat. 680; 6 L. ed., 189):
Nothing can be clearer, both upon principles and authority, than the doctrine that the
liability of a surety is not to be extended, by implication, beyond the terms of his
contract. To the extent and in the manner, and under the circumstances pointed out
in his obligation, he is bound, and no farther.
As earlier adverted to, there is merit in the third assigned error. The paragraph immediately
preceding the decretal portion of the decision of respondent Court of Appeals reads as follows:
We agree with the appellant that the trial court erred in not sentencing Estanislao
Depusoy to pay attorney's fees equivalent to 10% of the amount due. This is
expressly provided for in the promissory notes, and as it does not appear to be
unreasonable, the stipulation of the parties should be given effect.
The dispositive portion of the questioned decision should then be modified in the sense that the
"10% interest" indicated therein should be considered and understood as and for attorney's fees.
WHEREFORE, with the above modification, the Decision of the Court of Appeals of 12 December
1970 in CA-G.R.No. 36615-R is AFFIRMED, with costs against petitioner.
SO ORDERED.
Fernan, C.J., Gutierrez, Jr., Feliciano and Bidin, JJ., concu
G.R. No. L-45848 November 9,1977
TOWERS ASSURANCE CORPORATION, petitioner,
vs.
ORORAMA SUPERMART, ITS OWNER-PROPRIETOR, SEE HONG and JUDGE BENJAMIN K.
GOROSPE, Presiding Judge, Court of First Instance of Misamis Oriental, Branch
I, respondents.
Benjamin Tabique & Zosimo T. Vasalla for petitioner.

Rodrigo F. Lim, Jr. for private respondent.

AQUINO, J.:
This case is about the liability of a surety in a counterbond for the lifting of a writ of preliminary
attachment.
On February 17, 1976 See Hong, the proprietor of Ororama Supermart in Cagayan de Oro City,
sued the spouses Ernesto Ong and Conching Ong in the Court of First Instance of Misamis Oriental
for the collection of the sum of P 58,400 plus litigation expenses and attorney's fees (Civil Case No.
4930).
See Hong asked for a writ of preliminary attachment. On March 5, 1976, the lower court issued an
order of attachment. The deputy sheriff attached the properties of the Ong spouses in Valencia,
Bukidnon and in Cagayan de Oro City.
To lift the attachment, the Ong spouses filed on March 11, 1976 a counterbond in 'the amount of P
58,400 with Towers Assurance Corporation as surety. In that undertaking, the Ong spouses and
Towers Assurance Corporation bound themselves to pay solidarity to See Hong the sum of P
58,400.
On March 24, 1976 the Ong spouses filed an answer with a counterclaim. For non-appearance at
the pre- trial, the Ong spouses were declared in default.
On October 25, 1976, the lower court rendered a decision, ordering not only the Ong spouses but
also their surety, Towers Assurance Corporation, to pay solidarily to See Hong the sum of P 58,400.
The court also ordered the Ong spouses to pay P 10,000 as litigation expenses and attorney's fees.
Ernesto Ong manifested that he did not want to appeal. On March 8, 1977, Ororama Supermart filed
a motion for execution. The lower court granted that motion. The writ of execution was issued on
March 14 against the judgment debtors and their surety. On March 29, 1977, Towers Assurance
Corporation filed the instant petition for certiorari where it assails the decision and writ of execution.
We hold that the lower court acted with grave abuse of discretion in issuing a writ of execution
against the surety without first giving it an opportunity to be heard as required in Rule 57 of tie Rules
of Court which provides:
SEC. 17. When execution returned unsatisfied, recovery had upon bound. If the
execution be returned unsatisfied in whole or in part, the surety or sureties on any
counterbound given pursuant to the provisions of this rule to secure the payment of
the judgment shall become charged on such counterbound, and bound to pay to the
judgment creditor upon demand, the amount due under the judgment, which amount
may be recovered from such surety or sureties after notice and summary hearing in
the same action.

Under section 17, in order that the judgment creditor might recover from the surety on the
counterbond, it is necessary (1) that execution be first issued against the principal debtor and that
such execution was returned unsatisfied in whole or in part; (2) that the creditor made a demand
upon the surety for the satisfaction of the judgment, and (3) that the surety be given notice and a
summary hearing in the same action as to his liability for the judgment under his counterbond.
The first requisite mentioned above is not applicable to this case because Towers Assurance
Corporation assumed a solidary liability for the satisfaction of the judgment. A surety is not entitled to
the exhaustion of the properties of the principal debtor (Art. 2959, Civil Code; Luzon Steel
Corporation vs. Sia, L-26449, May 15, 1969, 28 SCRA 58, 63).
But certainly, the surety is entitled to be heard before an execution can be issued against him since
he is not a party in the case involving his principal. Notice and hearing constitute the essence of
procedural due process. (Martinez vs. Villacete 116 Phil. 326; Insurance & Surety Co., Inc. vs. Hon.
Piccio, 105 Phil. 1192, 1200, Luzon Surety Co., Inc. vs. Beson, L-26865-66, January 30. 1970. 31
SCRA 313).
WHEREFORE, the order and writ of execution, insofar as they concern Towers Corporation, are set
aside. The lower court is directed to conduct a summary hearing on the surety's liability on its
counterbound. No costs.
SO ORDERED.
Fernando (Chairman), Barredo, Antonio, Concepcion, Jr. and Santos, JJ., concur.
G.R. No. L-18411

December 17, 1966

MAGDALENA ESTATES, INC., plaintiff-appellee,

vs.
ANTONIO A. RODRIGUEZ and HERMINIA C. RODRIGUEZ, defendants-appellants.
Roxas and Sarmiento for plaintiff-appelle.
Somero, Baclig and Savello for defendants-appellants.
REGALA, J.:
Appeal from the decision of the Court of First Instance of Manila ordering the defendants-appellants
to pay jointly and severally to the plaintiff-appellee the sum of P655.89, plus legal interest thereon
from date of the judicial demand, the sum of P100.00 as attorney's fees, and to pay the costs.
The appellants bought from the appellee a parcel of land in Quezon City known as Lot 7-K-2-G, Psd26193. In view of an unpaid balance of P5,000.00 on account of the purchase price of the lot, the
appellants executed on January 4, 1957, the following promissory note representing the said
account:

PROMISSORY NOTE

P5,000.00

Manila, January 4, 1957

We, the Spouses ANTONIO A. RODRIGUEZ and HERMINIA C. RODRIGUEZ, jointly and severally
promise to pay the Magdalena Estates, Inc., or order, at its offices in the City of Manila, without any
demand the sum of FIVE THOUSAND PESOS (P5,000.00), Philippine currency, with interest at the rate
of Nine Per Cent 9% per annum, within sixty (60) days from January 7, 1957. The sum of P5,000.00
represents the balance of the purchase price of the parcel of land known as Lot 7-K-2-G, Psd. 26193,
containing an area of 2,191 square meters, Quezon City.

(Sgd.) Antonio A.
Rodriguez
( T ) ANTONIO A.
RODRIGUEZ
(Sgd.) Herminia C.
Rodriguez
( T ) HERMINIA C.
RODRIGUEZ

Signed in the Presence of:

(Sgd.) ILLEGIBLE
(Sgd.) ILLEGIBLE

On the same date, the appellants and the Luzon Surety Co., Inc. executed a bond in favor of the
appellee, the undertaking thereof being embodied therein as follows:
. . . comply with the obligation to pay the amount of P5,000.00 representing balance of the
purchase price of a parcel of land known as Lot 7-K-2-G, Psd-26193, with an area of 2191
square meters, Quezon City, covered by Transfer Certificate of Title No. 13 (6947), Quezon
City, within a period of sixty (60) days from January 7, 1957; That the Surety shall be notified
in writing within Ten (10) days from moment of default otherwise, this undertaking is
automatically null and void.

On June 20, 1958, when the obligation of the appellants became due and demandable, the Luzon
Surety Co., Inc. paid to the appellee the sum of P5,000.00. Subsequently, the appellee demanded
from the appellants the payment of P655.89 corresponding to the alleged accumulated interests on
the principal of P5,000.00. Due to the refusal of the appellants to pay the said interest, the appellee
started this suit in the Municipal Court of Manila to enforce the collection thereof. The said court, on
February 5, 1959, rendered judgment in favor of the appellee and against the appellants, ordering
the latter to pay jointly and severally the appellee the sum of P655.89 with interest thereon at the
legal rate from November 10, 1958, the date of the filing of the complaint, until the whole amount is
fully paid. Not satisfied with that judgment, appellants appealed to the Court of First Instance of
Manila, where the case was submitted for decision on the pleadings. The Court of First Instance of
Manila rendered the judgment stated at the outset of this decision.
On appeal directly to this Court, the following errors are assigned:
I. The lower court erred in concluding as a fact from the pleadings that the plaintiff-appellee
demanded, and the Luzon Surety Co., Inc. refused, the payment of interest in the amount of
P655.89, and in not finding and declaring that said plaintiff-appellee waived or condoned the
said interests.
II. The lower court erred in not finding and declaring that the obligation of the defendantsappellants in favor of the plaintiff-appellee was totally extinguished by payment and/or
condonation.
III. The lower court erred in not finding and declaring that the promissory note executed by
the defendants-appellants in favor of the plaintiff-appellee was, insofar as the said document
provided for the payment of interests, novated when the plaintiff-appellee unqualifiedly
accepted the surety bond which merely guaranteed payment of the principal in the sum of
P5,000.00.
Appellants claim that the pleadings do not show that there was demand made by the appellee for the
payment of accrued interest and what could be deduced therefrom was merely that the appellee
demanded from the Luzon Surety Co., Inc., in the capacity of the latter as surety, the payment of the
obligation of the appellants, and said appellee accepted unqualifiedly the amount of P5,000.00 as
performance by the obligor and/or obligors of the obligation in its favor. It is further claimed that the
unqualified acceptance of payment made by the Luzon Surety Co., Inc. of P5,000.00 or only the
amount of the principal obligation and without exercising its (appellee's) right to apply a portion of
P655.89 thereof to the payment of the alleged interest due despite its presumed knowledge of its
right to do so, the appellee showed that it waived or condoned the interests due, because Articles
1235 and 1253 of the Civil Code provide:
ART. 1235. When the obligee accepts the performance, knowing its incompleteness or
irregularity, and without expressing any protest or objection, the obligation is deemed fully
complied with.
ART. 1253. If the debt produces interest, payment of the principal shall not be deemed to
have been made until the interests have been recovered.
We do not agree with the contention of the appellants. It is very clear in the promissory note that the
principal obligation is the balance of the purchase price of the parcel of land known as Lot 7-K-2-G,
Psd-26193, which is the sum of P5,000.00, and in the surety bond, the Luzon Surety Co., Inc.
undertook "to pay the amount of P5,000.00 representing balance of the purchase price of a parcel of
land known as Lot 7-K-2-G, Psd-26193, . . . ." The appellee did not protest nor object when it

accepted the payment of P5,000.00 because it knew that that was the complete amount undertaken
by the surety as appearing in the contract. The liability of a surety is not extended, by implication,
beyond the terms of his contract.1 It is for the same reason that the appellee cannot apply a part of
the P5,000.00 as payment for the accrued interest. Appellants are relying on Article 1253 of the Civil
Code, but the rules contained in Articles 1252 to 1254 of the Civil Code apply to a person owing
several debts of the same kind of a single creditor. They cannot be made applicable to a person
whose obligation as a mere surety is both contingent and singular; his liability is confined to such
obligation, and he is entitled to have all payments made applied exclusively to said application and
to no other.2 Besides, Article 1253 of the Civil Code is merely directory, and not
mandatory.3 Inasmuch as the appellee cannot protest for non-payment of the interest when it
accepted the amount of P5,000.00 from the Luzon Surety Co., Inc., nor apply a part of that amount
as payment for the interest, we cannot now say that there was a waiver or condonation on the
interest due.
It is claimed that there was a novation and/or modification of the obligation of the appellants in favor
of the appellee because the appellee accepted without reservation the subsequent agreement set
forth in the surety bond despite its failure to provide that it also guaranteed payment of accruing
interest.
The rule is settled that novation by presumption has never been favored. To be sustained, it needs to
be established that the old and new contracts are incompatible in all points, or that the will to novate
appears by express agreement of the parties or in acts of similar import.4
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,5 or wherein the old contract is merely supplemented by the new one. 6 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.
(Straight v. Haskel, 49 Phil. 614; Pacific Commercial Co. v. Sotto, 34 Phil. 237; Estate of Mota v.
Serra, 47 Phil. 464; Dugo v. Lopena, supra ). In the instant case, the surety bond is not a new and
separate contract but an accessory of the promissory note.
WHEREFORE, the judgment appealed from should be, as it is hereby, affirmed, with costs against
the appellants.
Concepcion, C.J., Reyes, J.B.L., Barrera, Dizon, Makalintal, Bengzon, J.P., Zaldivar, Sanchez and
Castro, JJ.,concur.
G.R. No. 89775 November 26, 1992
JACINTO UY DIO and NORBERTO UY, petitioners,
vs.
HON. COURT OF APPEALS and METROPOLITAN BANK AND TRUST COMPANY, respondents.

DAVIDE, JR., J.:

Continuing Suretyship Agreements signed by the petitioners set off this present controversy.

Petitioners assail the 22 June 1989 Decision of the Court in CA-G.R. CV No. 17724 1 which reversed
the 2 December 1987 Decision of Branch 45 of the Regional Trial Court (RTC) of Manila in a collection suit entitled "Metropolitan Bank and
Trust Company vs. Uy Tiam, doing business under the name of "UY TIAM ENTERPRISES & FREIGHT SERVICES," Jacinto Uy Dio and
Norberto Uy" and docketed as Civil Case No. 82-9303. They likewise challenge public respondent's Resolution of 21 August
1989 2

denying their motion for the reconsideration of the former.

The impugned Decision of the Court summarizes the antecedent facts as follows:
It appears that in 1977, Uy Tiam Enterprises and Freight Services (hereinafter
referred to as UTEFS), thru its representative Uy Tiam, applied for and obtained
credit accommodations (letter of credit and trust receipt accommodations) from the
Metropolitan Bank and Trust Company (hereinafter referred to as METROBANK) in
the sum of P700,000.00 (Original Records, p. 333). To secure the aforementioned
credit accommodations Norberto Uy and Jacinto Uy Dio executed separate
Continuing Suretyships (Exhibits "E" and "F" respectively), dated 25 February 1977,
in favor of the latter. Under the aforesaid agreements, Norberto Uy agreed to pay
METROBANK any indebtedness of UTEFS up to the aggregate sum of P300,000.00
while Jacinto Uy 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 by the abovementioned business entity in 1979 (September
8, 1987, tsn, pp. 14-15).
The Irrevocable Letter of Credit No. SN-Loc-309, dated March 30, 1979, in the sum
of P815, 600.00, covered UTEFS' purchase of "8,000 Bags Planters Urea and 4,000
Bags Planters 21-0-0." It was applied for and obtain by UTEFS without the
participation of Norberto Uy and Jacinto Uy 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 (Appellees brief, pp. 2-3; rollo, p. 28).
The 1979 letter of credit (Exhibit "B") was negotiated. METROBANK paid Planters
Products the amount of P815,600.00 which payment was covered by a Bill of
Exchange (Exhibit "C"), dated 4 June 1979, in favor of (Original Records, p. 331).
Pursuant to the above commercial transaction, UTEFS executed and delivered to
METROBANK and Trust Receipt (Exh. "D"), dated 4 June 1979, whereby the former
acknowledged receipt in trust from the latter of the aforementioned goods from
Planters Products which amounted to P815, 600.00. Being the entrusted, the former
agreed to deliver to METROBANK the entrusted goods in the event of non-sale or, if
sold, the proceeds of the sale thereof, on or before September 2, 1979.

However, UTEFS did not acquiesce to the obligatory stipulations in the trust receipt.
As a consequence, METROBANK sent letters to the said principal obligor and its
sureties, Norberto Uy and Jacinto Uy 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 1979 credit
accommodation because it is a new obligation contracted without his participation.
Besides, the 1977 credit accommodation which he guaranteed has been fully paid.
Having sent the last demand letter to UTEFS, Dio and Uy and finding resort to
extrajudicial remedies to be futile, METROBANK filed a complaint for collection of a
sum of money (P613,339.32, as of January 31, 1982, inclusive of interest,
commission penalty and bank charges) with a prayer for the issuance of a writ of
preliminary attachment, against Uy Tiam, representative of UTEFS and impleaded
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 nonoperational (Original Records, p. 37).
On April 11, 1984, 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 (Records, pp. 42-46).
On April 24, 1984, METROBANK filed its opposition to the motion to dismiss.
Invoking the terms and conditions embodied in the comprehensive suretyships
separately executed by sureties-defendants, the bank argued that sureties-movants
bound themselves as solidary obligors of defendant Uy Tiam to both existing
obligations and future ones. It relied on Article 2053 of the new Civil Code which
provides: "A guaranty may also be given as security for future debts, the amount of
which is not yet known; . . . ." It was further asserted that the agreement was in full
force and effect at the time the letter of credit was obtained in 1979 as sureties-

defendants did not exercise their right to revoke it by giving notice to the bank. (Ibid.,
pp. 51-54).
Meanwhile, the resolution of the aforecited motion to dismiss was held in abeyance
pending the introduction of evidence by the parties as per order dated February 21,
1986 (Ibid., p. 71).
Having been granted a period of fifteen (15) days from receipt of the order dated
March 7, 1986 within which to file the answer, sureties-defendants filed their
responsive pleading which merely rehashed the arguments in their motion to dismiss
and maintained that they are entitled to the benefit of excussion (Original Records,
pp. 88-93).
On February 23, 1987, plaintiff filed a motion to dismiss the complaint against
defendant Uy Tiam on the ground that it has no information as to the heirs or legal
representatives of the latter who died sometime in December, 1986, which motion
was granted on the following day (Ibid., pp. 180-182).
After trial, . . . the court a quo, on December 2, 198, rendered its judgment, a portion of which reads:
The evidence and the pleadings, thus, pose the querry (sic):
Are the defendants Jacinto Uy Dioand Norberto Uy liable for the
obligation contracted by Uy Tiam under the Letter of Credit (Exh. B)
issued on March 30, 1987 by virtue of the Continuing Suretyships
they executed on February 25, 1977?
Under the admitted proven facts, the Court finds that they are not.
a) When Uy and 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 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 (October 1, 1987, tsn, pp. 5-7, 14;
October 15, 1987, tsn, pp. 3-8, 13-16). (Records, pp. 333-334). 3
xxx xxx xxx

In its Decision, the trial court decreed as follows:

PREMISES CONSIDERED, judgment is hereby rendered:
a) dismissing the COMPLAINT against JACINTO UY 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.
SO ORDERED. (Records, p. 336)

From the said Decision, the private respondent appealed to the Court of Appeals. The case was
docketed as CA-G.R. CV No. 17724. In support thereof, it made the following assignment of errors in
its Brief:
I. THE LOWER COURT SERIOUSLY ERRED IN NOT FINDING AND HOLDING
THAT DEFENDANTS-APPELLEES JACINTO UY DIO AND NORBERTO UY ARE
SOLIDARILY LIABLE TO PLAINTIFF-APPELLANT FOR THE OBLIGATION OF
DEFENDANT UY TIAM UNDER THE LETTER OF CREDIT ISSUED ON MARCH 30,
1979 BY VIRTUE OF THE CONTINUING SURETYSHIPS THEY EXECUTED ON
FEBRUARY 25, 1977.
II. THE LOWER COURT ERRED IN HOLDING THAT PLAINTIFF-APPELLANT IS
ANSWERABLE TO DEFENDANTS-APPELLEES JACINTO UY DIO AND
NORBERTO UY FOR ATTORNEY'S FEES AND EXPENSES OF LITIGATION. 5
On 22 June 1989, public respondent promulgated the assailed Decision the dispositive portion of
which reads:

WHEREFORE, premises considered, the judgment appealed from is hereby

REVERSED AND SET, ASIDE. In lieu thereof, another one is rendered:
1) Ordering sureties-appellees Jacinto Uy 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
3) Ordering sureties-appellees Jacinto Uy Dio and Norberto Uy to
pay, jointly and severally, to plaintiff P20,000.00 as attorney's fees.
With costs against appellees.
SO ORDERED. 6
In ruling for the herein private respondent (hereinafter METROBANK), public respondent held that
the Continuing Suretyship Agreements separately executed by the petitioners in 1977 were intended
to guarantee payment of Uy Tiam's outstanding as well as future obligations; each suretyship
arrangement was intended to remain in full force and effect until METROBANK would have been
notified of its revocation. Since no such notice was given by the petitioners, the suretyships are
deemed outstanding and hence, cover even the 1979 letter of credit issued by METROBANK in
favor of Uy Tiam.
Petitioners filed a motion to reconsider the foregoing Decision. They questioned the public
respondent's construction of the suretyship agreements and its ruling with respect to the extent of
their liability thereunder. They argued the even if the agreements were in full force and effect when
METROBANK granted Uy Tiam's application for a letter of credit in 1979, the public respondent
nonetheless seriously erred in holding them liable for an amount over and above their respective
face values.
In its Resolution of 21 August 1989, public respondent denied the motion:
. . . considering that the issues raised were substantially the same grounds utilized
by the lower court in rendering judgment for defendants-appellees which We upon
appeal found and resolved to be untenable, thereby reversing and setting aside said
judgment and rendering another in favor of plaintiff, and no new or fresh issues have
been posited to justify reversal of Our decision herein, . . . .7
Hence, the instant petition which hinges on the issue of whether or not the petitioners may be held
liable as sureties for the obligation contracted by Uy Tiam with METROBANK on 30 May 1979 under
and by virtue of the Continuing Suretyship Agreements signed on 25 February 1977.

Petitioners vehemently deny such liability on the ground that the Continuing Suretyship Agreements
were automatically extinguished upon payment of the principal obligation secured thereby, i.e., the
letter of credit obtained by Uy Tiam in 1977. They further claim that they were not advised by either
METROBANK or Uy Tiam that the Continuing Suretyship Agreements would stand as security for the
1979 obligation. Moreover, it is posited that to extend the application of such agreements to the 1979
obligation would amount to a violation of Article 2052 of the Civil Code which expressly provides that
a guaranty cannot exist without a valid obligation. Petitioners further argue that even granting, for the
sake of argument, that the Continuing Suretyship Agreements still subsisted and thereby also
secured the 1979 obligations incurred by Uy Tiam, they cannot be held liable for more than what
they guaranteed to pay because it s axiomatic that the obligations of a surety cannot extend beyond
what is stipulated in the agreement.
On 12 February 1990, this Court resolved to give due course to the petition after considering the
allegations, issues and arguments adduced therein, the Comment thereon by the private respondent
and the Reply thereto by the petitioners; the parties were required to submit their respective
Memoranda.
The issues presented for determination are quite simple:
1. Whether petitioners are liable as sureties for the 1979 obligations of Uy Tiam to
METROBANK by virtue of the Continuing Suretyship Agreements they separately
signed in 1977; and
2. On the assumption that they are, what is the extent of their liabilities for said 1979
obligations.
Under the Civil Code, a guaranty may be given to secure even future debts, the amount of which
may not known at the time the guaranty is
executed. 8 This is the basis for contracts denominated as continuing guaranty or suretyship. A continuing guaranty is one which is not
limited to a single transaction, but which contemplates a future course of dealing, covering a series of transactions, generally for an indefinite
time or until revoked. It is prospective in its operation and is generally intended to provide security with respect to future transactions within

Otherwise stated,
a continuing guaranty is one which covers all transactions, including those arising in the future, which are
within the description or contemplation of the contract, of guaranty, until the expiration or termination
thereof. 10 A guaranty shall be construed as continuing when by the terms thereof it is evident that the
object is to give a standing credit to the principal debtor to be used from time to time either indefinitely or
until a certain period, especially if the right to recall the guaranty is expressly reserved. Hence, where the
contract of guaranty states that the same is to secure advances to be made "from time to time" the
guaranty will be construed to be a continuing one. 11
certain limits, and contemplates a succession of liabilities, for which, as they accrue, the guarantor becomes liable. 9

In other jurisdictions, it has been held that the use of particular words and expressions such as
payment of "any debt," "any indebtedness," "any deficiency," or "any sum," or the guaranty of "any
transaction" or money to be furnished the principal debtor "at any time," or "on such time" that the
principal debtor may require, have been construed to indicate a continuing guaranty. 12
In the case at bar, the pertinent portion of paragraph I of the suretyship agreement executed by
petitioner Uy provides thus:

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. 13
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). 14
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. 15
The foregoing stipulations unequivocally reveal that the suretyship agreement in the case at bar are
continuing in nature. Petitioners do not deny this; in fact, they candidly admitted it. Neither have they
denied the fact that they had not revoked the suretyship agreements. Accordingly, as correctly held
by the public respondent:
Undoubtedly, the purpose of the execution of the Continuing Suretyships was to
induce appellant to grant any application for credit accommodation (letter of
credit/trust receipt) UTEFS may desire to obtain from appellant bank. By its terms,
each suretyship is a continuing one which shall remain in full force and effect until the
bank is notified of its revocation.
xxx xxx xxx
When the Irrevocable Letter of Credit No. SN-Loc-309 was obtained from appellant
bank, for the purpose of obtaining goods (covered by a trust receipt) from Planters
Products, the continuing suretyships were in full force and effect. Hence, even if
sureties-appellees did not sign the "Commercial Letter of Credit and Application, they
are still liable as the credit accommodation (letter of credit/trust receipt) was covered
by the said suretyships. What makes them liable thereunder is the condition which
provides that the Borrower "is or may become liable as maker, endorser, acceptor or
otherwise." And since UTEFS which (sic) was liable as principal obligor for having
failed to fulfill the obligatory stipulations in the trust receipt, they as insurers of its
obligation, are liable thereunder. 16
Petitioners maintain, however, that their Continuing Suretyship Agreements cannot be made
applicable to the 1979 obligation because the latter was not yet in existence when the agreements
were executed in 1977; under Article 2052 of the Civil Code, a guaranty "cannot exist without a valid
obligation." We cannot agree. First of all, the succeeding article provides that "[a] guaranty may also
be given as security for future debts, the amount of which is not yet known." Secondly, Article 2052
speaks about a valid 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.17
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. 18 In the case at bar,
both agreements provide for liability for interest and expenses, to wit:
. . . and such interest as may accrue thereon either before or after any maturity(ies)
thereof and such expenses as may be incurred by the BANK referred to above. 19
They further provide that:
In the event of judicial proceedings being instituted by the BANK against the
SURETY to enforce any of the terms and conditions of this undertaking, the SURETY
further agrees to pay the BANK a reasonable compensation for and as attorney's
fees and costs of collection, which shall not in any event be less than ten per cent
(10%) of the amount due (the same to be due and payable irrespective of whether
the case is settled judicially or extrajudicially). 20
Thus, by express mandate of the Continuing Suretyship Agreements which they had signed,
petitioners separately bound themselves to pay 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: 21
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., 22 this Court held:
Petitioner objects to the payment of interest and attorney's fees because: (1) they
were not mentioned in the bond; and (2) the surety would become liable for more
than the amount stated in the contract of suretyship.

xxx xxx xxx

The objection has to be overruled, because as far back as the year 1922 this Court
held in Tagawa vs. Aldanese, 43 Phil. 852, that creditors suing on a suretyship bond
may recover from the surety as part of their damages, interest at the legal rate even
if the surety would thereby become liable to pay more than the total amount
stipulated in the bond. The theory is that interest is allowed only by way of damages
for delay upon the part of the sureties in making payment after they should have
done so. In some states, the interest has been charged from the date of the interest
has been charged from the date of the judgment of the appellate court. In this
jurisdiction, we rather prefer to follow the general practice, which is to order that
interest begin to run from the date when the complaint was filed in court, . . .
Such theory aligned with sec. 510 of the Code of Civil Procedure which was
subsequently recognized in the Rules of Court (Rule 53, section 6) and with Article
1108 of the Civil Code (now Art. 2209 of the New Civil Code).
In other words the surety is made to pay interest, not by reason of the contract, but
by reason of its failure to pay when demanded and for having compelled the plaintiff
to resort to the courts to obtain payment. It should be observed that interest does not
run from the time the obligation became due, but from the filing of the complaint.
As to attorney's fees. Before the enactment of the New Civil Code, successful
litigants could not recover attorney's fees as part of the damages they suffered by
reason of the litigation. Even if the party paid thousands of pesos to his lawyers, he
could not charge the amount to his opponent (Tan Ti vs. Alvear, 26 Phil. 566).
However the New Civil Code permits recovery of attorney's fees in eleven cases
enumerated in Article 2208, among them, "where the court deems it just and
equitable that attorney's (sic) fees and expenses of litigation should be recovered" or
"when the defendant acted in gross and evident bad faith in refusing to satisfy the
plaintiff's plainly valid, just and demandable claim." This gives the courts discretion in
apportioning attorney's fees.
The records do not reveal the exact amount of the unpaid portion of the principal obligation of Uy
Tiam to MERTOBANK under Irrevocable Letter of Credit No. SN-Loc-309 dated 30 March 1979. In
referring to the last demand letter to Mr. Uy Tiam and the complaint filed in Civil Case No. 82-9303,
the public respondent mentions the amount of "P613,339.32, as of January 31, 1982, inclusive of
interest commission penalty and bank charges."23 This is the same amount stated by METROBANK in
its Memorandum. 24 However, in summarizing Uy Tiam's outstanding obligation as of 17 July 1987, public
respondent states:
Hence, they are jointly and severally liable to appellant METROBANK of UTEFS'
outstanding obligation in the sum of P2,397,883.68 (as of July 17, 1987)
P651,092.82 representing the principal amount, P825,133.54, for past due interest

(5-31-82 to 7-17-87) and P921,657.32, for penalty charges at 12% per annum (5-3182 to 7-17-87) as shown in the Statement of Account (Exhibit I). 25
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-Loc-309, dated 30 March 1979, together with the interest
due thereon at the legal rate commencing from the date of the filing of the complaint in Civil Case
No. 82-9303 with Branch 45 of the Regional Trial Court of Manila, as well as the adjudged attorney's
fees and costs.
All other dispositions in the dispositive portion of the challenged decision not inconsistent with the
above are affirmed.
SO ORDERED.
Gutierrez, Jr., Bidin, Romero and Melo, JJ., concur.

PACIONARIA C. BAYLON, petitioner, vs. THE HONORABLE COURT OF

APPEALS
(Former
Ninth
Division)
and
LEONILA
TOMACRUZ, respondents.
DECISION
GONZAGA-REYES, J.:

This is a petition for review by way of certiorari under Rule 45 of the Revised
Rules of Court of the decision of the Court of Appeals [1] dated November 29, 1991 in CA-G.R.
CV No. 27779 affirming the decision[2]of the Regional Trial Court of Quezon City, Branch 88,

dated June 14, 1990 in Civil Case No. Q-89-2483 and the Resolution of the Court of
Appeals dated April 27, 1993 denying petitioner's Motion for Reconsideration.
The pertinent facts, as found by the trial court and affirmed by respondent court,
are briefly narrated as follows:
Sometime in 1986, petitioner Pacionaria C. Baylon introduced private respondent
Leonila Tomacruz, the co-manager of her husband at PLDT, to Rosita B. Luanzon.
[3]
Petitioner told private respondent that Luanzon has been engaged in business as a
contractor for twenty years and she invited private respondent to lend Luanzon money
at a monthly interest rate of five percent (5%), to be used as capital for the latter's
business. Private respondent, persuaded by the assurances of petitioner that Luanzon's
business was stable and by the high interest rate, agreed to lend Luanzon money in the
amount of P150,000.On June 22, 1987, Luanzon issued and signed a promissory note
acknowledging receipt of the P150,000 from private respondent and obliging herself
to pay the former the said amount on or before August 22, 1987. [4] Petitioner signed
the promissory note, affixing her signature under the word "guarantor." Luanzon also
issued a postdated Solidbank check no. CA418437 dated August 22, 1987 payable to
Leonila Tomacruz in the amount of P150,000. [5] Subsequently, Luanzon replaced this
check with another postdated Solidbank check no. 432945 dated December 22, 1987,
in favor of the same payee and covering the same amount. [6] Several checks in the
amount of P7,500 each were also issued by Luanzon and made payable to private
respondent.[7]
Private respondent made a written demand upon petitioner for payment, which
petitioner did not heed. Thus, on May 8, 1989, private respondent filed a case for the
collection of a sum of money with the Regional Trial Court (RTC) of Quezon City,
Branch 88, against Luanzon and petitioner herein, impleading Mariano Baylon,
husband of petitioner, as an additional defendant. However, summons was never
served upon Luanzon.
In her answer, petitioner denied having guaranteed the payment of the promissory
note issued by Luanzon. She claimed that private respondent gave Luanzon the
money, not as a loan, but rather as an investment in Art Enterprises and Construction,
Inc. - the construction business of Luanzon. Furthermore, petitioner avers that,
granting arguendo that there was a loan and petitioner guaranteed the same, private
respondent has not exhausted the property of the principal debtor nor has she resorted

to all the legal remedies against the principal debtor as required by law. Finally,
petitioner claims that there was an extension of the maturity date of the loan without
her consent, thus releasing her from her obligation. [8]
After trial on the merits, the lower court ruled in favor of private respondent. In its
Decision dated June 14, 1990, it stated that The evidence and the testimonies on record clearly established a (sic) fact that the
transaction between the plaintiff and defendants was a loan with five percent (5%)
monthly interest and not an investment. In fact they all admitted in their testimonies
that they are not given any stock certificate but only promissory notes similar to
Exhibit B wherein it was clearly stated that defendant Luanzon would pay the amount
of indebtedness on the date due. Postdated checks were issued simultaneously with
the promissory notes to enable the plaintiff and others to withdraw their money on a
certain fixed time. This shows that they were never participants in the business
transaction of defendant Luanzon but were creditors.
The evidences presented likewise show that plaintiff and others loan their money to
defendant Luanzon because of the assurance of the monthly income of five percent
(5%) of their money and that they could withdraw it anytime after the due date add to
it the fact that their friend, Pacionaria Baylon, expresses her unequivocal gurarantee to
the payment of the amount loaned.
xxx xx xxx
WHEREFORE, premises considered, judgment is hereby rendered against the
defendants Pacionaria C. Baylon and Mariano Baylon, to pay the plaintiff the sum of
P150,000.00, with interest at the legal rate from the filing of this complaint until full
payment thereof, to pay the total sum of P21,000.00 as attorneys fees and costs of suit.
[9]

On appeal, the trial court's decision was affirmed by the Court of Appeals. Hence,
this present case wherein petitioner makes the following assignment of errors I. RESPONDENT COURT ERRED IN HOLDING THAT THE PRIVATE
RESPONDENT TOMACRUZ WAS A CREDITOR OF DEFENDANT LUANZON
AND NOT AN INVESTOR IN THE CONSTRUCTION BUSINESS OF ART
ENTERPRISES & CONSTRUCTION, INC.

II. GRANTING, WITHOUT ADMITTING, THAT PETITIONER-APPELLANT

BAYLON WAS A "GUARANTOR" AS APPEARING IN THE NOTE (EXH. "A")
THE RESPONDENT COURT ERRED IN RULING THAT PETITIONERAPPELLANT BAYLON IS LIABLE TO THE PRIVATE RESPONDENT BECAUSE
THE LATTER HAS NOT TAKEN STEPS TO EXHAUST THE PROPERTY OF
THE PRINCIPAL DEBTOR AND HAS NOT RESORTED TO ALL THE LEGAL
REMEDIES PROVIDED BY LAW AGAINST THE DEBTOR, DEFENDANT
LUANZON.
III. GRANTING, WITHOUT ADMITTING THAT PETITIONER-APPELLANT
BAYLON WAS A GUARANTOR UNDER THAT NOTE (EXHIBIT "A") DATED
JUNE 22, 1987, THE LOWER COURT ERRED IN RESOLVING THAT SHE WAS
NOT RELEASED FROM HER GUARANTY BY THE SUBSEQUENT
TRANSACTIONS BETWEEN THE RESPONDENT-APPELLANT AND
DEFENDANT LUANZON.
At the outset, we note that petitioners claim that the factual findings of the lower
court, which were affirmed by the Court of Appeals, were based on a misapprehension
of facts and contradicted by the evidence on records [10] is a bare allegation and devoid
of merit. As a rule, the conclusions of fact of the trial court, especially when affirmed
by the Court of Appeals, are final and conclusive and cannot be reviewed on appeal by
the Supreme Court.[11] Although this rule admits of several exceptions, [12] none of the
exceptions are in point in the present case. The factual findings of the respondent
court are borne out by the record and are based on substantial evidence.
Petitioner claims that there is no loan to begin with; that private respondent gave
Luanzon the amount of P150,000, not as a loan, but rather as an investment in the
construction project of the latter.[13] In support of her claim, petitioner cites the use by
private respondent of the words investment, dividends, and commission in her
testimony before the lower court; the fact that private respondent received monthly
checks from Luanzon in the amount of P7,500 from July to December, 1987,
representing dividends on her investment; and the fact that other employees of the
Development Bank of the Philippines made similar investments in Luanzons
construction business.[14]
However, all the circumstances mentioned by petitioner cannot override the clear
and unequivocal terms of the June 22, 1987 promissory note whereby Luanzon

promised to pay private respondent the amount of P150,000 on or before August 22,
1987. The promissory note states as follows:
June 22, 1987
To Whom It May Concern:
For value received, I hereby promise to pay Mrs. LEONILA TOMACRUZ the amount
of ONE HUNDRED FIFTY THOUSAND PESOS ONLY (P150,000.00) on or before
August 22, 1987.
The above amount is covered by _____ Check No. _____ dated August 22, 1987.
(signed)
ROSITA B. LUANZON
G U R AR AN T O R :
(signed)
PACIONARIA O. BAYLON
Tel. No. 801-28-00
18 P. Mapa St., DBP Village
Almanza, Las Pinas, M.M.[15]
If the terms of a contract are clear and leave no doubt as to the intention of the
contracting parties, the literal meaning of its stipulation shall control. [16] Resort to
extrinsic aids and other extraneous sources are not necessary in order to ascertain the
parties' intent when there is no ambiguity in the terms of the agreement. [17] Both
petitioner and private respondent do not deny the due execution and authenticity of
the June 22, 1987 promissory note. All of petitioner's arguments are directed at
uncovering the real intention of the parties in executing the promissory note, but no
amount of argumentation will change the plain import of the terms thereof, and
accordingly, no attempt to read into it any alleged intention of the parties thereto may
be justified.[18] The clear terms of the promissory note establish a creditor-debtor

relationship between Luanzon and private respondent. The transaction at bench is

therefore a loan, not an investment.
It is petitioner's contention that, even though she is held to be a guarantor under
the terms of the promissory note, she is not liable because private respondent did not
exhaust the property of the principal debtor and has not resorted to all the legal
remedies provided by the law against the debtor.[19] Petitioner is invoking the benefit of
excussion pursuant to article 2058 of the Civil Code, which provides that The guarantor cannot be compelled to pay the creditor unless the latter has exhausted
all the property of the debtor, and has resorted to all the legal remedies against the
debtor.
It is axiomatic that the liability of the guarantor is only subsidiary.[20] All the
properties of the principal debtor must first be exhausted before his own is levied
upon. Thus, the creditor may hold the guarantor liable only after judgment has been
obtained against the principal debtor and the latter is unable to pay, for obviously the
exhaustion of the principals property - the benefit of which the guarantor claims cannot even begin to take place before judgment has been obtained. [21] This rule is
embodied in article 2062 of the Civil Code which provides that the action brought by
the creditor must be filed against the principal debtor alone, except in some instances
when the action may be brought against both the debtor and the principal debtor. [22]
Under the circumstances availing in the present case, we hold that it is premature
for this Court to even determine whether or not petitioner is liable as a guarantor and
whether she is entitled to the concomitant rights as such, like the benefit of excussion,
since the most basic prerequisite is wanting - that is, no judgment was first obtained
against the principal debtor Rosita B. Luanzon. It is useless to speak of a guarantor
when no debtor has been held liable for the obligation which is allegedly secured by
such guarantee. Although the principal debtor Luanzon was impleaded as defendant,
there is nothing in the records to show that summons was served upon her. Thus, the
trial court never even acquired jurisdiction over the principal debtor. We hold that
private respondent must first obtain a judgment against the principal debtor before
assuming to run after the alleged guarantor.

IN VIEW OF THE FOREGOING, the petition is granted and the questioned

Decision of the Court of Appeals dated November 29, 1991 and Resolution dated
April 27, 1993 are SET ASIDE. No pronouncement as to costs.
SO ORDERED.
Melo, (Chairman), Vitug, Panganiban, and Purisima, JJ., concur.
G.R. No. 179628 : January 16, 2013
THE MANILA INSURANCE COMPANY, INC., Petitioner, v. SPOUSES ROBERTO and AIDA
AMURAO, Respondent.
DECISION
DEL CASTILLO, J.:
The jurisdiction of the Construction Industry Arbitration Commission (CIAC) is conferred by law. Section
41 of Executive Order (E.O.) No. I 008, otherwise known as the Construction Industry Arbitration Law, "is
broad enough to cover any dispute arising from, or connected with construction contracts, whether these
involve mere contractual money claims or execution of the works." 2
?r?l1

This Petition for Review on Certiorari3 under Rule 45 of the Rules of Court assails the Decision 4 dated June 7,
2007 and the Resolution5 dated September 7, 2007 of the Court of Appeals (CA) in CA-G.R. SP No. 96815.
Factual Antecedents
On March 7, 2000, respondent-spouses Roberto and Aida Amurao entered into a Construction Contract
Agreement (CCA)6 with Aegean Construction and Development Corporation (Aegean) for the construction of
a six-storey commercial building in Tomas Morato corner E. Rodriguez Avenue, Quezon City.7 To guarantee
its full and faithful compliance with the terms and conditions of the CCA, Aegean posted performance bonds
secured by petitioner The Manila Insurance Company, Inc.8 (petitioner) and Intra Strata Assurance
Corporation (Intra Strata).9
?r?l1

On November 15, 2001, due to the failure of Aegean to complete the project, respondent spouses filed with
the Regional Trial Court (RTC) of Quezon City, Branch 217, a Complaint, 10 docketed as Civil Case No. Q-0145573, against petitioner and Intra Strata to collect on the performance bonds they issued in the amounts
of P2,760,000.00 and P4,440,000.00, respectively.11
?r?l1

Intra Strata, for its part, filed an Answer12 and later, a Motion to Admit Third Party Complaint,13 with
attached Third Party Complaint14 against Aegean, Ronald D. Nicdao, and Arnel A. Mariano.
Petitioner, on the other hand, filed a Motion to Dismiss15 on the grounds that the Complaint states no cause
of action16 and that the filing of the Complaint is premature due to the failure of respondent-spouses to
implead the principal contractor, Aegean.17 The RTC, however, denied the motion in an Order 18 dated May 8,
2002. Thus, petitioner filed an Answer with Counterclaim and Cross-claim, 19followed by a Third Party
Complaint20 against Aegean and spouses Ronald and Susana Nicdao.

During the pre-trial, petitioner and Intra Strata discovered that the CCA entered into by respondent-spouses
and Aegean contained an arbitration clause.21
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Hence, they filed separate Motions to Dismiss22 on the grounds of lack of cause of action and lack of
jurisdiction.
Ruling of the Regional Trial Court
On May 5, 2006, the RTC denied both motions.23 Petitioner and Intra Strata separately moved for
reconsideration but their motions were denied by the RTC in its subsequent Order 24 dated September 11,
2006.
Aggrieved, petitioner elevated the case to the CA by way of special civil action for certiorari. 25

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Ruling of the Court of Appeals

On June 7, 2007, the CA rendered a Decision26 dismissing the petition. The CA ruled that the presence of an
arbitration clause in the CCA does not merit a dismissal of the case because under the CCA, it is only when
there are differences in the interpretation of Article I of the construction agreement that the parties can
resort to arbitration.27 The CA also found no grave abuse of discretion on the part of the RTC when it
disregarded the fact that the CCA was not yet signed at the time petitioner issued the performance bond on
February 29, 2000.28 The CA explained that the performance bond was intended to be coterminous with the
construction of the building.29 It pointed out that "if the delivery of the original contract is contemporaneous
with the delivery of the suretys obligation, each contract becomes completed at the same time, and the
consideration which supports the principal contract likewise supports the subsidiary one." 30 The CA likewise
said that, although the contract of surety is only an accessory to the principal contract, the suretys liability is
direct, primary and absolute.31Thus:
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WHEREFORE, we resolve to DISMISS the petition as we find that no grave abuse of discretion attended the
issuance of the order of the public respondent denying the petitioners motion to dismiss.
IT IS SO ORDERED.32

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Petitioner moved for reconsideration but the CA denied the same in a Resolution 33 dated September 7, 2007.
Issues
Hence, this petition raising the following issues:

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A.
THE HONORABLE CA ERRED WHEN IT HELD THAT IT IS ONLY WHEN THERE ARE DIFFERENCES IN THE
INTERPRETATION OF ARTICLE I OF THE CONSTRUCTION AGREEMENT THAT THE PARTIES MAY RESORT TO
ARBITRATION BY THE CIAC.
B.
THE HONORABLE CA ERRED IN TREATING PETITIONER AS A SOLIDARY DEBTOR INSTEAD OF A SOLIDARY
GUARANTOR.
C.

THE HONORABLE [CA] OVERLOOKED AND FAILED TO CONSIDER THE FACT THAT THERE WAS NO ACTUAL
AND EXISTING CONSTRUCTION AGREEMENT AT THE TIME THE MANILA INSURANCE BOND NO. G (13) 2082
WAS ISSUED ON FEBRUARY 29, 2000.34
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Petitioners Arguments
Petitioner contends that the CA erred in ruling that the parties may resort to arbitration only when there is
difference in the interpretation of the contract documents stated in Article I of the CCA. 35Petitioner insists
that under Section 4 of E.O. No. 1008, it is the CIAC that has original and exclusive jurisdiction over
construction disputes, such as the instant case.36
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Petitioner likewise imputes error on the part of the CA in treating petitioner as a solidary debtor instead of a
solidary guarantor.37 Petitioner argues that while a surety is bound solidarily with the obligor, this does not
make the surety a solidary co-debtor.38 A surety or guarantor is liable only if the debtor is himself liable. 39 In
this case, since respondent-spouses and Aegean agreed to submit any dispute for arbitration before the
CIAC, it is imperative that the dispute between respondent-spouses and Aegean must first be referred to
arbitration in order to establish the liability of Aegean.40 In other words, unless the liability of Aegean is
determined, the filing of the instant case is premature. 41
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Finally, petitioner puts in issue the fact that the performance bond was issued prior to the execution of the
CCA.42 Petitioner claims that since there was no existing contract at the time the performance bond was
executed, respondent-spouses have no cause of action against petitioner.43 Thus, the complaint should be
dismissed.44
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Respondent spouses Arguments

Respondent-spouses, on the other hand, maintain that the CIAC has no jurisdiction over the case because
there is no ambiguity in the provisions of the CCA. 45 Besides, petitioner is not a party to the CCA. 46 Hence, it
cannot invoke Article XVII of the CCA, which provides for arbitration proceedings. 47Respondent-spouses also
insist that petitioner as a surety is directly and equally bound with the principal. 48 The fact that the
performance bond was issued prior to the execution of the CCA also does not affect the latters validity
because the performance bond is coterminous with the construction of the building. 49
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Our Ruling
The petition has merit.
Nature of the liability of the surety
A contract of suretyship is defined as "an agreement whereby a party, called the surety, guarantees the
performance by another party, called the principal or obligor, of an obligation or undertaking in favor of a
third party, called the obligee. It includes official recognizances, stipulations, bonds or undertakings issued
by any company by virtue of and under the provisions of Act No. 536, as amended by Act No. 2206." 50 We
have consistently held that a suretys liability is joint and several, limited to the amount of the bond, and
determined strictly by the terms of contract of suretyship in relation to the principal contract between the
obligor and the obligee.51 It bears stressing, however, that although the contract of suretyship is secondary
to the principal contract, the suretys liability to the obligee is nevertheless direct, primary, and absolute. 52
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In this case, respondent-spouses (obligee) filed with the RTC a Complaint against petitioner (surety) to
collect on the performance bond it issued. Petitioner, however, seeks the dismissal of the Complaint on the
grounds of lack of cause of action and lack of jurisdiction.

The respondent-spouses have cause of action against the petitioner; the performance bond is coterminous
with the CCA
Petitioner claims that respondent-spouses have no cause of action against it because at the time it issued
the performance bond, the CCA was not yet signed by respondent-spouses and Aegean.
We do not agree.
A careful reading of the Performance Bond reveals that the "bond is coterminous with the final acceptance of
the project."53 Thus, the fact that it was issued prior to the execution of the CCA does not affect its validity
or effectivity.
But while there is a cause of action against petitioner, the complaint must still be dismissed for lack of
jurisdiction.
The CIAC has jurisdiction over the case
Section 4 of E.O. No. 1008 provides that:

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SEC. 4. Jurisdiction. The CIAC shall have original and exclusive jurisdiction over disputes arising from, or
connected with, contracts entered into by parties involved in construction in the Philippines, whether the
dispute arises before or after the completion of the contract, or after the abandonment or breach thereof.
These disputes may involve government or private contracts. For the Board to acquire jurisdiction, the
parties to a dispute must agree to submit the same to voluntary arbitration.
The jurisdiction of the CIAC may include but is not limited to violation of specifications for materials and
workmanship, violation of the terms of agreement, interpretation and/or application of contractual time and
delays, maintenance and defects, payment, default of employer or contractor, and changes in contract cost.
Excluded from the coverage of the law are disputes arising from employer-employee relationships which
shall continue to be covered by the Labor Code of the Philippines.
Based on the foregoing, in order for the CIAC to acquire jurisdiction two requisites must concur: "first, the
dispute must be somehow connected to a construction contract; and second, the parties must have agreed
to submit the dispute to arbitration proceedings."54
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In this case, both requisites are present.

The parties agreed to submit to arbitration proceedings "any dispute arising in the course of the execution
and performance of the CCA by reason of difference in interpretation of the Contract Documents x x x which
the parties are unable to resolve amicably between themselves." 55 Article XVII of the CCA reads:
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ARTICLE XVII ARBITRATION

17.1 Any dispute arising in the course of the execution and performance of this Agreement by reason of
difference in interpretation of the Contract Documents set forth in Article I which the OWNER and the
CONTRACTOR are unable to resolve amicably between themselves shall be submitted by either party to a
board of arbitrators composed of Three (3) members chosen as follows: One (1) member shall be chosen by
the CONTRACTOR AND One (1) member shall be chosen by the OWNER. The said Two (2) members, in turn,
shall select a third member acceptable to both of them. The decision of the Board of Arbitrators shall be
rendered within Ten (10) days from the first meeting of the board, which decision when reached through the

affirmative vote of at least Two (2) members of the board shall be final and binding upon the OWNER and
CONTRACTOR.
17.2 Matters not otherwise provided for in this Contract or by Special Agreement of the parties shall be
governed by the provisions of the Arbitration Law, Executive Order No. 1008. 56
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In William Golangco Construction Corporation v. Ray Burton Development Corporation, 57 we declared that
monetary claims under a construction contract are disputes arising from "differences in interpretation of the
contract" because "the matter of ascertaining the duties and obligations of the parties under their contract
all involve interpretation of the provisions of the contract." 58 Following our reasoning in that case, we find
that the issue of whether respondent-spouses are entitled to collect on the performance bond issued by
petitioner is a "dispute arising in the course of the execution and performance of the CCA by reason of
difference in the interpretation of the contract documents."
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The fact that petitioner is not a party to the CCA cannot remove the dispute from the jurisdiction of the CIAC
because the issue of whether respondent-spouses are entitled to collect on the performance bond, as we
have said, is a dispute arising from or connected to the CCA.
In fact, in Prudential Guarantee and Assurance, Inc. v. Anscor Land, Inc.,59 we rejected the argument that
the jurisdiction of CIAC is limited to the construction industry, and thus, cannot extend to surety contracts.
In that case, we declared that "although not the construction contract itself, the performance bond is
deemed as an associate of the main construction contract that it cannot be separated or severed from its
principal. The Performance Bond is significantly and substantially connected to the construction contract that
there can be no doubt it is the CIAC, under Section 4 of E.O. No. 1008, which has jurisdiction over any
dispute arising from or connected with it."60
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In view of the foregoing, we agree with the petitioner that juriisdiction over the instant case lies with the
CIAC, and not with the RTC. Thus, the Complaint filed by respondent-spouses with the RTC must be
dismissed.
WHEREFORE, the petition is hereby GRANTED. The Decision dated June 7, 2007 and the Resolution dated
September 7, 2007 of the Court of Appeals in CA-G.R. SP No. 96815 are hereby ANNULLED and SET ASIDE.
The Presiding Judge of the Regional Trial Court of Quezon City, Branch 217 1s DIRECTED to dismiss Civil
Case No. Q-01-45573 for lack of jurisdiction.
SO ORDERED.