G.R. No.
34642           September 24, 1931 the detriment suffered by the plaintiffs in the former action in dismissing that proceeding, and it is
FABIOLA SEVERINO, accompanied by her husband RICARDO VERGARA, plaintiffs-appellees,
vs.
GUILLERMO SEVERINO, ET AL., defendants.
ENRIQUE ECHAUS, appellant
This action was instituted in the Court of First Instance of the Province of Iloilo by Fabiola Severino, with whom is joined
her husband Ricardo Vergara, for the purpose of recovering the sum of P20,000 from Guillermo Severino and Enrique
Echaus, the latter in the character of guarantor for the former. Upon hearing he cause the trial court gave judgment in
favor of the plaintiffs to recover the sum of P20,000 with lawful from November 15, 1929, the date of the filing of the
complaint, with costs. But it was declared that execution of this judgment should issue first against the property of
Guillermo Severino, and if no property should be found belonging to said defendant sufficient to satisfy the judgment in
whole or in part, execution for the remainder should be issued against the property of Enrique Echaus as guarantor. From
this judgment the defendant Echaus appealed, but his principal, Guillermo Severino, did not.
The plaintiff Fabiola Severino is the recognized natural daughter of Melecio Severino, deceased, former
resident of Occidental Negros. Upon the death of Melecio Severino a number of years ago, he left
considerable property and litigation ensued between his widow, Felicitas Villanueva, and Fabiola Severino,
on the one part, and other heirs of the deceased on the other part. In order to make an end of this
litigation a compromise was effected by which Guillermo Severino, a son of Melecio Severino, took over
the property pertaining to the estate of his father at the same time agreeing to pay P100,000 to Felicitas
Villanueva and Fabiola Severino. This sum of money was made payable, first, P40,000 in cash upon the
execution of the document of compromise, and the balance in three several payments of P20,000 at the
end of one year; two years, and three years respectively. To this contract the appellant Enrique Echaus
affixed his name as guarantor. The first payment of P40,000 was made on July 11, 1924, the date when
the contract of compromise was executed; and of this amount the plaintiff Fabiola Severino received the
sum of P10,000. Of the remaining P60,000, all as yet unpaid, Fabiola Severino is entitled to the sum of
P20,000.
It appears that at the time of the compromise agreement above-mentioned was executed Fabiola
Severino had not yet been judicially recognized as the natural daughter of Melecio Severino, and it was
stipulated that the last P20,000 corresponding to Fabiola and the last P5,000 corresponding to Felicitas
Villanueva should retained on deposit until the definite status of Fabiola Severino as natural daughter of
Melecio Severino should be established. The judicial decree to this effect was entered in the Court of First
Instance of Occidental Negros on June 16, 1925, and as the money which was contemplated to be held in
suspense has never in fact been paid to the parties entitled thereto, it results that the point respecting
the deposit referred to has ceased to be of moment.
The proof shows that the money claimed in this action has never been paid and is still owing to the
plaintiff; and the only defense worth noting in this decision is the assertion on the part of Enrique Echaus
that he received nothing for affixing his signature as guarantor to the contract which is the subject of suit
and that in effect the contract was lacking in consideration as to him.
The point is not well taken. A guarantor or surety is bound by the same consideration that makes the
contract effective between the principal parties thereto. (Pyle vs. Johnson, 9 Phil., 249.) The compromise
and dismissal of a lawsuit is recognized in law as a valuable consideration; and the dismissal of the action
which Felicitas Villanueva and Fabiola Severino had instituted against Guillermo Severino was an
adequate consideration to support the promise on the part of Guillermo Severino to pay the sum of
money stipulated in the contract which is the subject of this action. The promise of the appellant Echaus
as guarantor therefore binding. It is never necessary that the guarantor or surety should receive any part
of the benefit, if such there be, accruing to his principal. But the true consideration of this contract was
immaterial that no benefit may have accrued either to the principal or his guarantor.
[G.R. No. 80201. November 20, 1990.]
ANTONIO GARCIA, JR., Petitioner, v. COURT OF APPEALS, LASAL DEVELOPMENT
CORPORATION, Respondents.
Quisumbing, Torres & Evangelista for Petitioner.
1. CIVIL LAW; SPECIAL CONTRACTS; SURETYSHIP; NATURE AND PURPOSE THEREOF. — The petitioner’s first ground is
that, as found by the trial court, the surety agreement was invalid because no consideration had been paid to him by PISO
for executing the contract and that the amount of the entire loan had been received and enjoyed by WMC. He cites the
following articles of the Civil Code in support of his contention that lack of consideration was a personal defense available to
him as surety. The point is not well taken in view of the nature and purpose of a surety agreement. Suretyship is a
contractual relation resulting from an agreement whereby one person, the surety, engages to be answerable for the debt,
default or miscarriage of another, known as the principal. The peculiar nature of a surety agreement is that it is regarded
as valid despite the absence of any direct consideration received by the surety either from the principal obligor or from the
creditor. A contract of surety, like any other contract, must generally be supported by a sufficient consideration. However,
the consideration necessary to support a surety obligation need not pass directly to the surety; a consideration moving to
the principal alone will suffice. It has been held that if the delivery of the original contract is contemporaneous with the
delivery of the surety’s obligation, each contract becomes completed at the same time, and the consideration which
supports the principal contract likewise supports the subsidiary one. (Faust v. Rodelheim, 77 NJL 740, 73 A 491; Ballard v.
Burton, 64 Vt 387, 24 A 769). And this is the kind of surety contract to which the rule of strict construction applies as
opposed to a compensated surety contract undertaken by surety corporations which are organized for the purpose of
conducting an indemnity business at established rates and compensation unlike an ordinary surety agreement where the
surety binds his name through motives of friendship and accomodation.
2. ID.; ID.; ID.; OBLIGATION AND LIABILITY OF A SURETY. — The surety’s obligation is not an original and direct one for
the performance of his own act, but merely accessory or collateral to the obligation contracted by the principal.
Nevertheless, although the contract of a surety is in essence secondary only to a valid principal obligation, his liability to
the creditor or promisee of the principal is said to be direct, primary and absolute; (Sykes v. Everett, 167 NC 600), in other
words, he is directly and equally bound with the principal. The surety therefore becomes liable for the debt or duty of
another although he possesses no direct or personal interest over the obligations nor does he receive any benefit
therefrom.
3. ID.; ID.; ID.; SURETY NOT AFFECTED BY THE CHANGE IN THE RATE OF INTEREST, SUCH BEING MERELY A COLLATERAL
AGREEMENT BETWEEN THE CREDITOR AND THE PRINCIPAL DEBTOR. — As for the compounded interest, we apply by
analogy the case of Bank of the Philippine Islands v. Gooch and Redfern, (45 Phil. 514) which was affirmed in the later case
of the Bank of the Philippine Islands v. Albaladejo & Cia (53 Phil. 141). In the said cases, the respective sureties claimed
that since the creditor changed the rate of interest in the principal obligation without their knowledge or consent, they were
relieved from liability under their contract. It was held, however, that the change in the rate of interest was merely a
collateral agreement between the creditor bank and the principal debtor that did not affect the surety. When the debtor
promised to pay the extra rate of interest on demand of the plaintiff, the liability he assumed was his alone and was
separate and apart from the original contract. His agreement to pay the additional rate of interest was an additional burden
upon him and him only. That obligation in no way affected the original contract of the surety, whose liability remained
unchanged.
4. ID.; OBLIGATIONS AND CONTRACTS; NOVATION; REQUISITES THEREOF; NOT ESTABLISHED IN THE CASE AT BAR. —
The petitioner cites other supposed agreements in support of his theory of novation such as the prepayment of the
restructured loans of WMC before the distribution of dividends to the common stockholders, the proposed sale on
installments of its assets to Negros Occidental Copperfield Mines, and the preference given to other creditors of WMC over
PISO. But we do not think these are material as, to be so, the alteration must change the legal effects of the original
contract. The alleged alterations do not have that effect. The most important argument against the alleged novation is the
failure of the petitioner to establish the validity of the new contract, an essential requisite for the novation of a previous
valid obligation. Petitioner insists that the various communications made by WMC with DBP, together with the
memorandum of agreement (Annexes 1 to 7), are sufficient to establish the new undertaking made by WMC with all its
creditors, including DBP. We do not think so. It is true as a general rule no form of words or writing is necessary to give
effect to a novation. (Re Dissolution of F. Yeager Bridge Culvert Co., 150 Mich. App. 386, NW 2d 99). Nevertheless, since
the parties involved here are corporations, it must first be proved that the contracts, assuming they were made, were
executed by the persons possessing the proper authority to bind their respective principals. Annexes 1-4 are a mere
exchange of correspondence between the officers of WMC and DBP. Although they contain the provisions and proposals
that, according to petitioner, should suffice to establish that the original contract between WMC and PISO has been
materially altered, they cannot be considered per se sufficient to give rise to a valid new obligation. WMC was in fact
directed by Joseph W. Edralin, the Assistant Executive Officer of the DBP, to communicate with Atty. Hilario Oraolino of the
Office of the Chief Legal Counsel for the preparation and execution of the necessary legal documents to cover the approval
and confirmation of the several proposals made. No such documents, as duly signed by the parties, were ever presented in
court. Annexes 5 to 7 are also incomplete documents and not binding without the signatures of the supposed contracting
parties. We approve the following observations made by the Court of Appeals: Novation of contract cannot be presumed. In
order that an obligation may be extinguished by another which substitutes the same, it is imperative that it be so declared
in unequivocal terms, or that the old and the new obligations be on every point incompatible with each other (Art. 1292,
Civil Code). In every novation there are four essential requisites. (1) a previous valid obligation; (2) the agreement of all
the parties to the new contract; (3) the extinguishment of the old contract; and (4) validity of the new one. Novation
requires the creation of new contractual relations as well as the extinguishment of the old. There must be a consent of all
the parties to the substitution, resulting in the extinction of the old obligation and the creation of a valid new one (Tiu Siuco
v. Habana, 45 Phil. 707). The acceptance of the promissory note by the plaintiff is not novation of the contract. The legal
doctrine is that an obligation to pay a sum of money is not novated in a new instrument by changing the term of payment
and adding other obligations not incompatible with the old one (Inchausti & Co. v. Yulo, 34 Phil. 978). It is not proper to
consider an obligation novated as in the case at bar by the mere granting of extension of payment which did not even alter
its essence. To sustain novation necessitates that the same be so declared in unequivocal terms or that there is complete
and substantial incompatibility between the two obligations (Sandico v. Paquing, 42 SCRA 322). An obligation to pay a sum
of money is not novated in a new instrument wherein the old is ratified by changing only the terms of payment and adding
other obligations not incompatible with the old one or wherein the old contract is merely supplementing the new one.
5. COMMERCIAL LAW; CORPORATIONS; LIMITED LIABILITY DOCTRINE; MAY BE WAIVED WHEN THE CORPORATE OFFICER
VOLUNTARILY BINDS HIMSELF TO ANSWER FOR CORPORATE DEBTS. — Regarding the petitioner’s claim that he is liable
only as a corporate officer of WMC, the surety agreement shows that he signed the same not in representation of WMC or
as its president but in his personal capacity. He is therefore personally bound. There is no law that prohibits a corporate
officer from binding himself personally to answer for a corporate debt. While the limited liability doctrine is intended to
protect the stockholder by immunizing him from personal liability for the corporate debts, he may nevertheless divest
himself of this protection by voluntarily binding himself to the payment of the corporate debts. The petitioner cannot
therefore take refuge in this doctrine that he has by his own acts effectively waived.
6. ID.; ID.; CREDITORS MUST BE PAID FIRST BEFORE DISTRIBUTION OF DIVIDENDS AMONG STOCKHOLDERS;
UNSECURED CREDITORS, GIVEN PREFERENCE IN BANKRUPTCY OR INSOLVENCY PROCEEDINGS. — It is axiomatic, and
only fair, that the creditors of a corporation must be paid first before dividends may be distributed among the stockholders.
Unsecured creditors are given preference in bankruptcy or insolvency proceedings because secured creditors can after all
go against the security given by the debtor. As for the installment sale of WMC’s assets to Negros Occidental Copperfield
Mines, which might make it difficult for the petitioner to recover any amount it may have to pay on the loan of WMC, this
was a risk he took when he signed the surety agreement. As it did not prohibit the alienation of the properties of the
principal debtor, the sale to Negros cannot be considered a novation of the original agreement. In fact, the proposed sale
was intended precisely to enable WMC to meet its pending obligations.
7. REMEDIAL LAW; ISSUE NOT RAISED IN THE COURT A QUO CANNOT BE RAISED FOR THE FIRST TIME ON APPEAL. —
The argument of subrogation cannot be considered at this stage as it is being invoked only now. It is settled that an issue
not raised in the court a quo cannot be raised for the first time on appeal because this would be offensive to the basic rules
of fair play.
On April 15, 1977, the Western Minolco Corporation (WMC) obtained from the Philippine Investments
Systems Organization (PISO) two loans for P2,500,000.00 and P1,000,000.00 for which it issued the
corresponding promissory notes payable on May 30, 1977. On the same date, Antonio Garcia and Ernest
Kahn executed a surety agreement binding themselves jointly and severally for the payment of the loan
of P2,500,000.00 on due date.
Upon failure of WMC to pay after repeated demands, demand was made on Garcia pursuant to the surety
agreement. Garcia also failed to pay. Hence, on April 5, 1983, Lasal Development Corporation (to which
the credit had been assigned earlier by PISO) sued Garcia for recovery of the debt in the Regional Trial
Court of Makati.
On May 18, 1983, Garcia moved to dismiss on the grounds that: (a) the complaint stated no cause of
action; (b) the suit would result in unjust enrichment of the plaintiff because he had not received any
consideration from PISO; (c) the surety agreement violated the doctrine of the limited liability of
corporations; and (d) the principal obligation had been novated.
After considering the arguments and evidence of the parties, the trial court granted the motion and
dismissed the complaint on the ground that the surety agreement was invalid for absence of
consideration.
The plaintiff moved for reconsideration and when this was denied elevated the matter to the Court of
Appeals. In a decision dated June 23, 1987, the respondent court reversed Judge Jesus M. Elbinias and
remanded the records of the case for trial on the merits. Garcia then came to this Court in this petition for
review on certiorari, pleading the same arguments raised in the trial court.
The petitioner’s first ground is that, as found by the trial court, the surety agreement was invalid because
no consideration had been paid to him by PISO for executing the contract and that the amount of the
entire loan had been received and enjoyed by WMC. He cites the following articles of the Civil Code in
support of his contention that lack of consideration was a personal defense available to him as surety:
Art. 2047. By guaranty a person, called the guarantor, binds himself to the creditor to fulfill the
obligation of the principal debtor in case the latter should fail to do so.
If a person binds himself solidarily with the principal debtor, the provisions of Section 4, Chapter 3, Title
I of this Book shall be observed. In such case the contract is called a suretyship.
Art. 1222. A solidary debtor may, in action filed by the creditor, avail himself of all defenses which are
derived from the nature of the obligation and of those which are personal to him, or pertain to his own
share. With respect to those which personally belong to the others, he may avail himself thereof only as
regards that part of the debt for which the latter are responsible.
The point is not well taken in view of the nature and purpose of a surety agreement.
Suretyship is a contractual relation resulting from an agreement whereby one person, the surety,
engages to be answerable for the debt, default or miscarriage of another, known as the principal. The
surety’s obligation is not an original and direct one for the performance of his own act, but merely
accessory or collateral to the obligation contracted by the principal. Nevertheless, although the contract of
a surety is in essence secondary only to a valid principal obligation, his liability to the creditor or promisee
of the principal is said to be direct, primary and absolute; 1 in other words, he is directly and equally
bound with the principal. The surety therefore becomes liable for the debt or duty of another although he
possesses no direct or personal interest over the obligations nor does he receive any benefit therefrom.
The peculiar nature of a surety agreement is that it is regarded as valid despite the absence of any direct
consideration received by the surety either from the principal obligor or from the creditor. A contract of
surety, like any other contract, must generally be supported by a sufficient consideration. However, the
consideration necessary to support a surety obligation need not pass directly to the surety; a
consideration moving to the principal alone will suffice.
It has been held that if the delivery of the original contract is contemporaneous with the delivery of the
surety’s obligation, each contract becomes completed at the same time, and the consideration which
supports the principal contract likewise supports the subsidiary one. 3 And this is the kind of surety
contract to which the rule of strict construction applies as opposed to a compensated surety contract
undertaken by surety corporations which are organized for the purpose of conducting an indemnity
business at established rates and compensation unlike an ordinary surety agreement where the surety
binds his name through motives of friendship and accomodation. 4
It follows from the above principles that Lasal would not be unjustly enriched if the petitioner were to be
held liable for the obligation contracted by WMC. The creditor would only be recovering the amount of its
loan plus its increments. The petitioner, for his part, can still go against WMC for the amount he may
have to pay Lasal as assignee of the PISO credit.
Regarding the petitioner’s claim that he is liable only as a corporate officer of WMC, the surety agreement
shows that he signed the same not in representation of WMC or as its president but in his personal
capacity. He is therefore personally bound. There is no law that prohibits a corporate officer from binding
himself personally to answer for a corporate debt. While the limited liability doctrine is intended to protect
the stockholder by immunizing him from personal liability for the corporate debts, he may nevertheless
divest himself of this protection by voluntarily binding himself to the payment of the corporate debts. The
petitioner cannot therefore take refuge in this doctrine that he has by his own acts effectively waived.
Concerning the issue of novation, we note first the following provisions of the memorandum of agreement
supposedly entered into by WMC and its creditors which the petitioner argues had the effect of releasing
him from the surety agreement:
IV. Release of JSS
The CREDITORS expressly agree to release and hereby release the Joint and Several Signatories (JSS) of
MINOLCO’s officers from any liability whatsoever on the obligations which they have personally
guaranteed or secured. Any action therefore against all the aforesaid signatories are waived in view of the
promissory notes to be issued by NDC which are fully and unconditionally guaranteed by the Philippine
Government, in payment of MINOLCO’s obligations to said CREDITORS.
VI. The CREDITORS who have filed cases in court against MINOLCO and who are signatories to this
agreement agree to dismiss the case with prejudice, accepting the repayment scheme set forth in
paragraph II as a just and equitable procedure for collecting their credits.
Significantly, however, the agreement (Annex 5) was signed only by Don M. Ferry as chairman of the
board of directors of WMC and does not carry the signature of any of the creditors. 5 Hence, it has no
binding force whatsoever on such creditors.
The petitioner cites other developments or transactions between the parties to the original loans that he
contends had the effect of novating the said contracts and consequently extinguished the surety
agreement. Among these are the extension of the original period of payment and the compounding of the
interest on the principal obligations, both of which operated to the prejudice of the petitioner.
The petitioner invokes Article 2079 of the Civil Code, which provides:
Art. 2079. An extension granted to the debtor by the creditor without the consent of the guarantor
extinguishes the guaranty. The mere failure on the part of the creditor to demand payment after the
debt has become due does not of itself constitute any extension of time referred to herein.
However, Paragraph 5 of the surety agreement clearly stipulated as follows:
The sureties expressly waive all rights to demand payment and notice of non-payment and protest, and
agree that the securities of every kind, that now or may hereafter be left with the lender, its successors,
indorsees or assigns, as collateral, for the said loan, or any evidence of debt or obligations, or upon which
a lien may exist may be withdrawn or surrendered at any time, and the time of payment thereof
extended, without notice to or consent by the sureties, and the liability on this suretyship shall be
solidary, direct and immediate and not contingent upon any pursuit by the lender, its successors,
indorsees or assigns, of whatever remedies the lender may have against the principal or the securities or
liens it may possess.
Since in the surety contract, the petitioner not only consented to an extension in the payment of the
obligation but even waived his right to be notified of such extension, he cannot now claim that he has
been released from his undertaking because of the extension granted to the principal.chanroble
As for the compounded interest, we apply by analogy the case of Bank of the Philippine Islands v. Gooch
and Redfern, 6 which was affirmed in the later case of the Bank of the Philippine Islands v. Albaladejo &
Cia. 7 In the said cases, the respective sureties claimed that since the creditor changed the rate of
interest in the principal obligation without their knowledge or consent, they were relieved from liability
under their contract. It was held, however, that the change in the rate of interest was merely a collateral
agreement between the creditor bank and the principal debtor that did not affect the surety. When the
debtor promised to pay the extra rate of interest on demand of the plaintiff, the liability he assumed was
his alone and was separate and apart from the original contract. His agreement to pay the additional rate
of interest was an additional burden upon him and him only. That obligation in no way affected the
original contract of the surety, whose liability remained unchanged. 8
Thus, despite the compounding of the interest, the liability of the surety remains only up to the original
uncompounded interest, as stipulated in the promissory note, that is, 17% per annum, with a penalty
charge of 2 1/2% per month until full payment.
The petitioner cites other supposed agreements in support of his theory of novation such as the
prepayment of the restructured loans of WMC before the distribution of dividends to the common
stockholders, the proposed sale on installments of its assets to Negros Occidental Copperfield Mines, and
the preference given to other creditors of WMC over PISO. But we do not think these are material as, to
be so, the alteration must change the legal effects of the original contract. The alleged alterations do not
have that effect.
It is axiomatic, and only fair, that the creditors of a corporation must be paid first before dividends may
be distributed among the stockholders. Unsecured creditors are given preference in bankruptcy or
insolvency proceedings because secured creditors can after all go against the security given by the
debtor. As for the installment sale of WMC’s assets to Negros Occidental Copperfield Mines, which might
make it difficult for the petitioner to recover any amount it may have to pay on the loan of WMC, this was
a risk he took when he signed the surety agreement. As it did not prohibit the alienation of the properties
of the principal debtor, the sale to Negros cannot be considered a novation of the original agreement. In
fact, the proposed sale was intended precisely to enable WMC to meet its pending obligations.
The most important argument against the alleged novation is the failure of the petitioner to establish the
validity of the new contract, an essential requisite for the novation of a previous valid obligation.
Petitioner insists that the various communications made by WMC with DBP, together with the
memorandum of agreement (Annexes 1 to 7), are sufficient to establish the new undertaking made by
WMC with all its creditors, including DBP. We do not think so.
It is true as a general rule no form of words or writing is necessary to give effect to a novation. 9
Nevertheless, since the parties involved here are corporations, it must first be proved that the contracts,
assuming they were made, were executed by the persons possessing the proper authority to bind their
respective principals. Annexes 1-4 are a mere exchange of correspondence between the officers of WMC
and DBP. Although they contain the provisions and proposals that, according to petitioner, should suffice
to establish that the original contract between WMC and PISO has been materially altered, they cannot be
considered per se sufficient to give rise to a valid new obligation. WMC was in fact directed by Joseph W.
Edralin, the Assistant Executive Officer of the DBP, to communicate with Atty. Hilario Oraolino of the
Office of the Chief Legal Counsel for the preparation and execution of the necessary legal documents to
cover the approval and confirmation of the several proposals made. No such documents, as duly signed
by the parties, were ever presented in court. Annexes 5 to 7 10 are also incomplete documents and not
binding without the signatures of the supposed contracting parties.
The argument of subrogation cannot be considered at this stage as it is being invoked only now. It is
settled that an issue not raised in the court a quo cannot be raised for the first time on appeal because
this would be offensive to the basic rules of fair play. 11
As for the alleged substitution of debtors, nowhere in the record can we find evidence of this claim. The
commitment made by DBP to the creditors of WMC was that, although they had a first mortgage lien over
substantially all the assets of WMC (which if foreclosed would leave most of its creditors without
recourse), they would nevertheless defer proceedings against those assets and instead allow their sale to
NDC (with better terms) to enable WMC to meet the obligations. 12 In effect, what DBP did was merely to
restructure its credit with WMC and make additional accommodations in the form of investments on
preferred and common shares of stock of WMC. It was clearly an effort to assist WMC perform its
obligations with its creditors. But not more than that.
Concerning the promissory notes supposedly issued by NDC to the creditors of WMC and with the full and
unconditional guaranty of the Philippine Government as contained in Annex 5, suffice it to repeat that
such Annex 5 (memorandum of agreement between WMC and DBP), as well as Annex 6 (addendum to
Annex 5, making NOCOMIN, instead of NDC as the buyer) and Annex 7 (contract of sale between WMC
and NOCOMIN), are all not signed by the contracting parties and therefore have no evidentiary weight or
binding force
We approve the following observations made by the Court of Appeals:
Novation of contract cannot be presumed. In order that an obligation may be extinguished by another
which substitutes the same, it is imperative that it be so declared in unequivocal terms, or that the old
and the new obligations be on every point incompatible with each other (Art. 1292, Civil Code). In
every novation there are four essential requisites. (1) a previous valid obligation; (2) the agreement of
all the parties to the new contract; (3) the extinguishment of the old contract; and (4) validity of the
new one. Novation requires the creation of new contractual relations as well as the extinguishment of
the old. There must be a consent of all the parties to the substitution, resulting in the extinction of the
old obligation and the creation of a valid new one. The acceptance of the promissory note by the
plaintiff is not novation of the contract. The legal doctrine is that an obligation to pay a sum of money is
not novated in a new instrument by changing the term of payment and adding other obligations not
incompatible with the old one. It is not proper to consider an obligation novated as in the case at bar by
the mere granting of extension of payment which did not even alter its essence. To sustain novation
necessitates that the same be so declared in unequivocal terms or that there is complete and
substantial incompatibility between the two obligations. An obligation to pay a sum of money is not
novated in a new instrument wherein the old is ratified by changing only the terms of payment and
adding other obligations not incompatible with the old one or wherein the old contract is merely
supplementing the new on.
WHEREFORE, the petition is DENIED and the challenged decision of the respondent court AFFIRMED,
with costs against the petitioner.
G.R. No. 185945               December 05, 2012
FIDELIZA J. AGLIBOT, Petitioner,
vs.
INGERSOL L. SANTIA, Respondent.
Before the Court is a Petition for Review on Certiorari  under Rule 45 of the 1997 Rules of Civil Procedure seeking to annul and set
aside the Decision1 dated March I 8, 2008 of the Court of Appeals (CA) in CA-G.R. SP No. 100021, which reversed the Decision 2 dated
April 3, 2007 of the Regional Trial Court (RTC) of Dagupan City, Branch 40, in Criminal Case Nos. 2006-0559-D to 2006-0569-D and
entered a new judgment. The fallo  reads as follows:
WHEREFORE, the instant petition is GRANTED and the assailed Joint Decision dated April 3, 2007 of the RTC of Dagupan City,
Branch 40, and its Order dated June 12, 2007 are REVERSED AND SET ASIDE and a new one is entered ordering private
respondent Fideliza J. Aglibot to pay petitioner the total amount of ₱3,000,000.00 with 12% interest per annum from the filing of
the Informations until the finality of this Decision, the sum of which, inclusive of interest, shall be subject thereafter to 12% annual
interest until fully paid.
On December 23, 2008, the appellate court denied herein petitioner’s motion for reconsideration.
Private respondent-complainant Engr. Ingersol L. Santia (Santia) loaned the amount of ₱2,500,000.00 to
Pacific Lending & Capital Corporation (PLCC), through its Manager, petitioner Fideliza J. Aglibot (Aglibot).
The loan was evidenced by a Promissory Note dated July 1, 2003, issued by Aglibot in behalf of PLCC,
payable in one year subject to interest at 24% per annum. Allegedly as a guaranty or security for the
payment of the note, Aglibot also issued and delivered to Santia eleven (11) post-dated personal checks
drawn from her own demand account maintained at Metrobank, Camiling Branch. Aglibot is a major
stockholder of PLCC, with headquarters at 27 Casimiro Townhouse, Casimiro Avenue, Zapote, Las Piñas,
Metro Manila, where most of the stockholders also reside.4
Upon presentment of the aforesaid checks for payment, they were dishonored by the bank for having
been drawn against insufficient funds or closed account. Santia thus demanded payment from PLCC and
Aglibot of the face value of the checks, but neither of them heeded his demand. Consequently, eleven
(11) Informations for violation of Batas Pambansa Bilang 22 (B.P. 22), corresponding to the number of
dishonored checks, were filed against Aglibot before the Municipal Trial Court in Cities (MTCC), Dagupan
City, Branch 3, docketed as Criminal Case Nos. 47664 to 47674. Each Information, except as to the
amount, number and date of the checks, and the reason for the dishonor, uniformly alleged, as follows:
That sometime in the month of September, 2003 in the City of Dagupan, Philippines and within the
jurisdiction of this Honorable Court, the above-named accused, FIDELIZA J. AGLIBOT, did then and
there, willfully, unlawfully and criminally, draw, issue and deliver to one Engr. Ingersol L. Santia, a
METROBANK Check No. 0006766, Camiling Tarlac Branch, postdated November 1, 2003, in the amount
of ₱50,000.00, Philippine Currency, payable to and in payment of an obligation with the complainant,
although the said accused knew fully well that she did not have sufficient funds in or credit with the said
bank for the payment of such check in full upon its presentment, such that when the said check was
presented to the drawee bank for payment within ninety (90) days from the date thereof, the same was
dishonored for reason "DAIF", and returned to the complainant, and despite notice of dishonor, accused
failed and/or refused to pay and/or make good the amount of said check within five (5) days banking
days [sic], to the damage and prejudice of one Engr. Ingersol L. Santia in the aforesaid amount of
₱50,000.00 and other consequential damages.5
Aglibot, in her counter-affidavit, admitted that she did obtain a loan from Santia, but claimed that she did
so in behalf of PLCC; that before granting the loan, Santia demanded and obtained from her a security for
the repayment thereof in the form of the aforesaid checks, but with the understanding that upon
remittance in cash of the face amount of the checks, Santia would correspondingly return to her each
check so paid; but despite having already paid the said checks, Santia refused to return them to her,
although he gave her assurance that he would not deposit them; that in breach of his promise, Santia
deposited her checks, resulting in their dishonor; that she did not receive any notice of dishonor of the
checks; that for want of notice, she could not be held criminally liable under B.P. 22 over the said checks;
and that the reason Santia filed the criminal cases against her was because she refused to agree to his
demand for higher interest.
On August 18, 2006, the MTCC in its Joint Decision decreed as follows:
WHEREFORE, in view of the foregoing, the accused, FIDELIZA J. AGLIBOT, is hereby ACQUITTED of all counts of the
crime of violation of the bouncing checks law on reasonable doubt. However, the said accused is ordered to pay the
private complainant the sum of ₱3,000,000.00 representing the total face value of the eleven checks plus interest of
12% per annum from the filing of the cases on November 2, 2004 until fully paid, attorney’s fees of ₱30,000.00 as well
as the cost of suit.
On appeal, the RTC rendered a Decision dated April 3, 2007 in Criminal Case Nos. 2006-0559-D to 2006-0569-D, which
further absolved Aglibot of any civil liability towards Santia, to wit:
WHEREFORE, premises considered, the Joint Decision of the court a quo regarding the civil aspect of these cases is
reversed and set aside and a new one is entered dismissing the said civil aspect on the ground of failure to fulfill, a
condition precedent of exhausting all means to collect from the principal debtor.
Santia’s motion for reconsideration was denied in the RTC’s Order dated June 12, 2007. 8 On petition for
review to the CA docketed as CA-G.R. SP No. 100021, Santia interposed the following assignment of
errors, to wit:
"In brushing aside the law and jurisprudence on the matter, the Regional Trial Court seriously erred:
1. In reversing the joint decision of the trial court by dismissing the civil aspect of these cases;
2. In concluding that it is the Pacific Lending and Capital Corporation and not the private respondent
which is principally responsible for the amount of the checks being claimed by the petitioner;
3. In finding that the petitioner failed to exhaust all available legal remedies against the principal debtor
Pacific Lending and Capital Corporation;
4. In finding that the private respondent is a mere guarantor and not an accommodation party, and
thus, cannot be compelled to pay the petitioner unless all legal remedies against the Pacific Lending and
Capital Corporation have been exhausted by the petitioner;
5. In denying the motion for reconsideration filed by the petitioner."9
In its now assailed decision, the appellate court rejected the RTC’s dismissal of the civil aspect of the
aforesaid B.P. 22 cases based on the ground it cited, which is that the "failure to fulfill a condition
precedent of exhausting all means to collect from the principal debtor." The appellate court held that
since Aglibot’s acquittal by the MTCC in Criminal Case Nos. 47664 to 47674 was upon a reasonable
doubt10 on whether the prosecution was able to satisfactorily establish that she did receive a notice of
dishonor, a requisite to hold her criminally liable under B.P. 22, her acquittal did not operate to bar
Santia’s recovery of civil indemnity.
It is axiomatic that the "extinction of penal action does not carry with it the eradication of civil liability,
unless the extinction proceeds from a declaration in the final judgment that the fact from which the civil
liability might arise did not exist. Acquittal will not bar a civil action in the following cases: (1) where the
acquittal is based on reasonable doubt as only preponderance of evidence is required in civil cases; (2)
where the court declared the accused’s liability is not criminal but only civil in nature[;] and (3) where the
civil liability does not arise from or is not based upon the criminal act of which the accused was
acquitted."11 (Citation omitted)
The CA therefore ordered Aglibot to personally pay Santia ₱3,000,000.00 with interest at 12% per
annum, from the filing of the Informations until the finality of its decision. Thereafter, the sum due, to be
compounded with the accrued interest, will in turn be subject to annual interest of 12% from the finality
of its judgment until full payment. It thus modified the MTCC judgment, which simply imposed a straight
interest of 12% per annum  from the filing of the cases on November 2, 2004 until the ₱3,000,000.00 due
is fully paid, plus attorney’s fees of ₱30,000.00 and the costs of the suit.
Issue
Now before the Court, Aglibot maintains that it was error for the appellate court to adjudge her personally
liable for issuing her own eleven (11) post-dated checks to Santia, since she did so in behalf of her
employer, PLCC, the true borrower and beneficiary of the loan. Still maintaining that she was a mere
guarantor of the said debt of PLCC when she agreed to issue her own checks, Aglibot insists that Santia
failed to exhaust all means to collect the debt from PLCC, the principal debtor, and therefore he cannot
now be permitted to go after her subsidiary liability.
Ruling of the Court
The petition is bereft of merit.
Aglibot cannot invoke the benefit of excussion
The RTC in its decision held that, "It is obvious, from the face of the Promissory Note x x x that the
accused-appellant signed the same on behalf of PLCC as Manager thereof and nowhere does it appear
therein that she signed as an accommodation party." 12 The RTC further ruled that what Aglibot agreed to
do by issuing her personal checks was merely to guarantee the indebtedness of PLCC. So now petitioner
Aglibot reasserts that as a guarantor she must be accorded the benefit of excussion – prior exhaustion of
the property of the debtor – as provided under Article 2058 of the Civil Code, to wit:
Art. 2058. 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 settled that the liability of the guarantor is only subsidiary, and all the properties of the principal
debtor, the PLCC in this case, must first be exhausted before the guarantor may be held answerable for
the debt.13 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
principal’s property’ — the benefit of which the guarantor claims — cannot even begin to take place
before judgment has been obtained."14 This rule is contained in Article 206215 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 mentioned in Article 205916 when the action may be brought against both the guarantor
and the principal debtor.
The Court must, however, reject Aglibot’s claim as a mere guarantor of the indebtedness of PLCC to
Santia for want of proof, in view of Article 1403(2) of the Civil Code, embodying the Statute of Frauds,
which provides:
Art. 1403. The following contracts are unenforceable, unless they are ratified:
(2) Those that do not comply with the Statute of Frauds as set forth in this number. In the following
cases an agreement hereafter made shall be unenforceable by action, unless the same, or some note
or memorandum thereof, be in writing, and subscribed by the party charged, or by his agent;
 evidence, therefore, of the agreement cannot be received without the writing, or a secondary
evidence of its contents:
a) An agreement that by its terms is not to be performed within a year from the making thereof;
b) A special promise to answer for the debt, default, or miscarriage of another;
c) An agreement made in consideration of marriage, other than a mutual promise to marry;
d) An agreement for the sale of goods, chattels or things in action, at a price not less than five
hundred pesos, unless the buyer accept and receive part of such goods and chattels, or the
evidences, or some of them, or such things in action, or pay at the time some part of the purchase
money; but when a sale is made by auction and entry is made by the auctioneer in his sales book,
at the time of the sale, of the amount and kind of property sold, terms of sale, price, names of
purchasers and person on whose account the sale is made, it is a sufficient memorandum;
e) An agreement for the leasing of a longer period than one year, or for the sale of real property or
of an interest therein;
f) A representation to the credit of a third person. (Italics ours)
account with Metrobank. It concluded that Aglibot intended to personally assume the repayment of the
loan, pointing out that in her Counter-Affidavit, she even admitted that she was personally indebted to
Santia, and only raised payment as her defense, a clear admission of her liability for the said loan.
The appellate court refused to give credence to Aglibot’s claim that she had an understanding with Santia
that the checks would not be presented to the bank for payment, but were to be returned to her once she
had made cash payments for their face values on maturity. It noted that Aglibot failed to present any
proof that she had indeed paid cash on the above checks as she claimed. This is precisely why Santia
decided to deposit the checks in order to obtain payment of his loan.
The facts below present a clear situation where Aglibot, as the manager of PLCC, agreed to accommodate
its loan to Santia by issuing her own post-dated checks in payment thereof. She is what the Negotiable
Instruments Law calls an accommodation party. 23 Concerning the liability of an accommodation party,
Section 29 of the said law provides:

Under the above provision, concerning a guaranty agreement, which is a promise to answer for the debt
Sec. 29. Liability of an accommodation party. — An accommodation party is one who has signed the
or default of another,17 the law clearly requires that it, or some note or memorandum thereof, be in
instrument as maker, drawer, acceptor, or indorser, without receiving value therefor, and for the purpose
writing. Otherwise, it would be unenforceable unless ratified, 18 although under Article 135819 of the Civil
of lending his name to some other person. Such a person is liable on the instrument to a holder for value
Code, a contract of guaranty does not have to appear in a public document. 20 Contracts are generally
notwithstanding such holder at the time of taking the instrument knew him to be only an accommodation
obligatory in whatever form they may have been entered into, provided all the essential requisites for
party.
their validity are present, and the Statute of Frauds simply provides the method by which the contracts
enumerated in Article 1403(2) may be proved, but it does not declare them invalid just because they are
not reduced to writing. Thus, the form required under the Statute is for convenience or evidentiary As elaborated in The Phil. Bank of Commerce v. Aruego:24
purposes only.21 An accommodation party is one who has signed the instrument as maker, drawer, indorser, without
receiving value therefor and for the purpose of lending his name to some other person. Such person is
liable on the instrument to a holder for value, notwithstanding such holder, at the time of the taking of
On the other hand, Article 2055 of the Civil Code also provides that a guaranty is not presumed, but must
the instrument knew him to be only an accommodation party. In lending his name to the
be express, and cannot extend to more than what is stipulated therein. This is the obvious rationale why
accommodated party, the accommodation party is in effect a surety for the latter. He lends his name to
a contract of guarantee is unenforceable unless made in writing or evidenced by some writing. For as
enable the accommodated party to obtain credit or to raise money. He receives no part of the
pointed out by Santia, Aglibot has not shown any proof, such as a contract, a secretary’s certificate or a
consideration for the instrument but assumes liability to the other parties thereto because he wants to
board resolution, nor even a note or memorandum thereof, whereby it was agreed that she would issue
accommodate another.
her personal checks in behalf of the company to guarantee the payment of its debt to Santia. Certainly,
there is nothing shown in the Promissory Note signed by Aglibot herself remotely containing an
agreement between her and PLCC resembling her guaranteeing its debt to Santia. And neither is there a The relation between an accommodation party and the party accommodated is, in effect, one of principal
showing that PLCC thereafter ratified her act of "guaranteeing" its indebtedness by issuing her own and surety — the accommodation party being the surety. It is a settled rule that a surety is bound equally
checks to Santia. and absolutely with the principal and is deemed an original promisor and debtor from the beginning. The
liability is immediate and direct.26 It is not a valid defense that the accommodation party did not receive
any valuable consideration when he executed the instrument; nor is it correct to say that the holder for
Thus did the CA reject the RTC’s ruling that Aglibot was a mere guarantor of the indebtedness of PLCC,
value is not a holder in due course merely because at the time he acquired the instrument, he knew that
and as such could not "be compelled to pay [Santia], unless the latter has exhausted all the property of
the indorser was only an accommodation party.27 1âwphi1
PLCC, and has resorted to all the legal remedies against PLCC x x x."22

Aglibot is an accommodation party and therefore liable to Santia
Section 185 of the Negotiable Instruments Law defines a check as "a bill of exchange drawn on a bank
payable on demand," while Section 126 of the said law defines a bill of exchange as "an unconditional
order in writing addressed by one person to another, signed by the person giving it, requiring the person
to whom it is addressed to pay on demand or at a fixed or determinable future time a sum certain in
money to order or to bearer."
The appellate court ruled that by issuing her own post-dated checks, Aglibot thereby bound herself
personally and solidarily to pay Santia, and dismissed her claim that she issued her said checks in her
official capacity as PLCC’s manager merely to guarantee the investment of Santia. It noted that she could
have issued PLCC’s checks, but instead she chose to issue her own checks, drawn against her personal
Moreover, it was held in Aruego that unlike in a contract of suretyship, the liability of the accommodation
party remains not only primary but also unconditional to a holder for value, such that even if the
accommodated party receives an extension of the period for payment without the consent of the
accommodation party, the latter is still liable for the whole obligation and such extension does not release
him because as far as a holder for value is concerned, he is a solidary co-debtor.
The mere fact, then, that Aglibot issued her own checks to Santia made her personally liable to the latter
on her checks without the need for Santia to first go after PLCC for the payment of its loan.28 It would
have been otherwise had it been shown that Aglibot was a mere guarantor, except that since checks were
issued ostensibly in payment for the loan, the provisions of the Negotiable Instruments Law must take
primacy in application.
WHEREFORE, premises considered, the Petition for Review on Certiorari  is DENIED and the Decision ART. 34. Prohibited practices. —
dated March 18, 2008 of the Court of Appeals in CA-G.R. SP No. I 00021 is hereby AFFIRMED. (a) To charge or accept, directly or indirectly, any amount greater than that specified in the schedule
of allowable fees prescribed by the Secretary of Labor, or to make a worker pay any amount greater
than actually received by him as a loan or advance.

Motu proprio, POEA impleaded as party-respondent, Pan Pacific's surety. FINMAN GENERAL ASSURANCE
CORPORATION (FINMAN for brevity), which had bound itself to be jointly and severally liable for claims
that may arise should the recruitment agency violate the conditions of its license. Summons were sent to
the respondents at their respective official addresses. However, the summons for Pan Pacific was
returned unserved with a notation "Company moved out."

FINMAN filed an Answer denying liability for the claims, and alleging POEA's lack of jurisdiction to enforce
the surety's undertaking. During the hearing that followed. FINMAN further alleged that the note which
the agency issued to Bumanglag indicating her refund schedule, was not a receipt because it did not
acknowledge payment of any fee.
G.R. No. 94588 July 2, 1992
On May 31, 1989, POEA Administrator Tomas Achacoso issued an Order finding Pan Pacific liable for
FINMAN GENERAL ASSURANCE CORPORATION, petitioner, violation of Articles 32 and 34(a) of the Labor Code, as amended. He observed that the agency's note
vs. scheduling the refund of Bumanglag's P2,400 placement fees, while not strictly a receipt, was sufficient
NLRC (POEA), ROMEO GALIZA and MILAGROS BUMANGLAG, respondents. proof that she had indeed paid that amount to the agency, particularly since it had been established in
several other cases in the POEA against the respondent agency that it issued such "notes" to applicants
The petitioner seeks to annul the Order dated August 3, 1989 of the Honorable Secretary of Labor and
claiming refund of fees paid to the agency. On the other hand. a receipt for P6,000 and a similar note
Employment, denying its appeal from the Order dated May 31, 1989 of the POEA Administrator in POEA
scheduling the refund for the same amount issued by the agency to Galiza substantially established his
(L) RRB Case No. 88-03-474 entitled, "Romeo Galiza and Milagros Bumanglag vs. Pan Pacific Overseas
payment of P6,000 which was in excess of the allowable recruitment fee of P5,000 from each hired
Recruitment/Finman General Assurance Corporation" directing the respondents to pay jointly and
worker. That the agency furnished false information relating to recruitment and placement to the
severally the complainants' claims, reiterating the ban earlier imposed on Pan Pacific Overseas
complainants when it promised available employment for them, was established beyond cavil. The
Recruitment, and imposing a penalty fine of P40,000 on it.
respondents were ordered to pay jointly and severally the sum of P6,000 to Galiza and P2.400 to
Bumanglag. Pan Pacific was ordered to pay a fine of P40,000 and the ban earlier imposed upon it was
The record shows that on July 23, 1987, Romeo Galiza and Milagros Bumanglag applied with Pan Pacific
reiterated.
Overseas Recruitment, a placement agency with office registered at Feros Building, 176 Salcedo Street,
Makati, Metro Manila, for jobs as airport porter and domestic helper respectively.
FINMAN appealed the POEA Order of May 31, 1989 to the Department of Labor and Employment. On
August 3, 1989, DOLE Secretary Franklin Drilon dismissed the appeal for lack of merit. A writ of execution
Galiza was required by the agency's General Manager, Engr. Celia Aranda, to pay a placement fee of
was issued by the POEA.
P6,000 which he paid on July 23, 1987 to the Recruitment Director of the agency, Normita Egil, evidenced
by a receipt issued in his favor.
FINMAN filed this petition for certiorari with preliminary mandatory injunction and/or restraining order to
stop the implementation of the Orders of the POEA Administrator and the Secretary of Labor.
Milagros Bumanglag was required to pay P3,000 as "processing fee" for which no receipt was issued to
her by the agency.
FINMAN alleges that the POEA acted with grave abuse of discretion amounting to lack of jurisdiction:
1. in motu proprio  impleading FINHAN as a co-respondent with Pan Pacific in POEA (L) RRB Case No.
After several months, Bumanglag followed up her application with the agency. Since the latter failed to
88-03-474; and
deploy her, she withdrew her travel documents on January 23, 1988 and demanded a refund of her
2. in directing FINMAN to pay jointly and severally with Pan Pacific the claims of Galiza and Bumanglag
P3,000 placement fee. Instead of returning her money, the agency advised her to return on March 12,
on the basis of the suretyship agreement executed by FINMAN, Pan Pacific and the POEA.
1988 for the refund of P2,400 only, explaining that deductions had been made from her initial deposit of
P3,000 to cover expenses for her pictures. The agency issued in her favor a note scheduling such refund.
Petitioner alleges that the POEA has no authority under its own Rules and Regulations to implead the
surety of any recruitment or placement agency in actions and/or complaints for suspension, cancellation
When it appeared that the recruitment agency merely furnished false information relating to their
or revocation of license or authority of the latter; that on the contrary, the authority of the POEA is
recruitment and placement for jobs overseas, Galiza and Bumanglag filed individual complaints against
limited to a determination of whether there is sufficient cause for an action upon the agency's license;
Pan Pacific before the Philippine Overseas Employment Administration (POEA) [(L) RRB Case No. 88-03-
that POEA's jurisdiction to hear and decide money claims is confined to employer-employee relations
474)] for violation of Articles 32 and 34(a) of the Labor Code, as amended, which provide:
arising out of, or by virtue of, any law or contract, and not money claims arising from pre-employment or
ART. 32. Fees to be paid by workers. — Any person applying with a private fee-charging employment during recruitment conducted by the respondent agency; and finally, that if ever the surety bond may be
agency for employment assistance shall not be charged any fee until he has obtained employment held liable for infractions or violations of the Labor Code and POEA rules and regulations, it shall be
through its efforts or has actually commenced employment. Such fee shall be always covered with the answerable only for the sanctions, penalties or fines imposed upon the agency but definitely not for
approved receipt clearly showing the amount paid. The Secretary of Labor shall promulgate a schedule money claims of applicants not arising from employment contracts.
of allowable fees.
The petition for certiorari is without merit. The POEA Administrator did not exceed his jurisdiction nor act
with grave abuse of discretion in impleading FINMAN as a co-respondent in (L) RRB Case No. 88-03-474
and directing it to pay jointly and severally with Pan Pacific the claims of the private respondents, Galiza
and Bumanglag, on the basis of the surety bond it issued for Pan Pacific. Said surety bond guarantees the
faithful compliance by Pan Pacific of all laws relating to the use of its license and its recruitment activities.
The bond is conditioned upon the true and faithful performance and observance by Pan Pacific of its
duties and obligations as a licensed placement agency (Art. 31, Title I, Book One, Labor Code of the
Phils.). Accordingly, the nature of FINMAN's obligation under the suretyship agreement makes it privy to
the proceedings against its principal, Pan Pacific. FINMAN is bound by a judgment against its principal
eventhough it was not a party to the proceedings, for a surety is considered in law as being the same
party as the debtor in relation to whatever is adjudged touching the obligation of the latter, and their
liabilities are interwoven as to be inseparable
WHEREFORE, the petition is DISMISSED for lack of merit. Costs against the petitioner.
G.R. No. L-22108             August 30, 1967
GOVERNMENT OF THE REPUBLIC OF THE PHILIPPINES, represented by the BUREAU OF SUPPLY
COORDINATION plaintiff-appellee,
vs.
MARCELINO TIZON, ET AL., defendants.
CAPITAL INSURANCE and SURETY CO., INC., defendant-appellant.
It appears that in a bidding conducted by the Bureau of Supply Coordination of the Department of
General Services, for the supply of "one (1) Baylift portable heavy-duty truck and auto lift, fully air
operated, 500 lbs. capacity, and two (2) Baylift Ramps, U.S. manufacture", Tizon engineering, of which
Marcelino Tizon was the sole owner and proprietor, won the bid, having offered the lowest bid of
P4,000.00. To guarantee faithful performance of the conditions of the bid, the Bureau of Supply
Coordination required Tizon Engineering to give a bond in the sum of P10,000.00. On September 12,
1958, the Surety issued its bond for the said amount in favor of the Republic of the Philippines. Tizon
Engineering failed to comply with the conditions of the bid, failing as he did to deliver the equipment
called for in the Buyer's order No. 42546 of the Bureau of Supply, constraining the latter to purchase the
equipment from Fema Trading, the second lowest bidder, resulting in a loss of P2,975.00 to the
Government. Notwithstanding demands made by the Bureau of Supply on defendants Marcelino Tizon and
the Surety to pay said amount, they failed and refused. Hence, complaint was filed in the City Court of
Manila by the Republic of the Philippines to recover the said sum with legal interests, plus attorney's fees
and costs.
Defendant Tizon averred in his answer that: (a) "the alleged bidding conducted by the Bureau of Supply
is in utter disregard and wanton violation of the Rules and Regulations of the said office"; (b) "that
assuming that a corresponding buyer's order was prepared, the same was not delivered to and duly
received by him, such that there has never been a binding contract between plaintiff and the answering
defendant; furthermore, the plaintiff deliberately failed to notify the answering defendant as to the
acceptance of his bid, thus again violating the Rules and Regulations mentioned above"; (c) that the
bond-issued by the Surety "answers only (for) those contracts legally entered into by the herein
defendants with the Bureau of Supply and certainly not those contracts and/or bids which are of doubtful
legality, as in the present case."
The defendant Surety, in answer to the complaint, admitted having executed a bond in favor of the
Republic of the Philippines for the purpose as therein stated, but denied "that it failed and refused to pay
the demand (of the plaintiff), the truth of the matter being that its co-defendant, Marcelino Tizon, doing
business under the name of Tizon Engineering, has put it on notice not to settle the claim because he is
not in any way whatsoever liable to plaintiff." As cross-claim against defendant Tizon, the Surety asserted
that if it is made liable to the plaintiff on its bond, Marcelino Tizon should be ordered to make the
corresponding reimbursement, with interest of 12%, plus attorney's fees.
After trial, judgment was rendered in favor of the plaintiff and against the defendants, ordering the latter
to pay,  jointly and severally, the sum of P2,972.00 with legal interests from November 12, 1960, and the
costs of suit. On the cross-claim of the Surety, defendant Tizon was ordered to reimburse the cross-
plaintiff of whatever amount the latter might have paid to the plaintiff, plus P100.00 as attorney's fees.
Only defendant Tizon appealed from the decision to the Court of First Instance of Manila.
Within fifteen days from receipt of notice from the clerk of the Court of First Instance of Manila, that the
case has been received and docketed in said court, the defendants, Tizon and the Surety, each filed
separate manifestations that they were reproducing their respective answers filed in the City Court.
On August 29, 1963, the plaintiff filed a motion praying "(a) To strike out the answer filed by the Surety
reproducing its answer filed in the City Court; (b) To remand the case to the City Court, as concerns the
Surety, for execution of the judgment rendered in said court."
The Surety opposed the motion on two grounds: (a) that although it did not appeal from the decision of
the inferior court, the appeal interposed by its co-defendant inured to its benefit, because the obligation
sued on "is so dependent on that of the principal debtor, that the Surety is considered in law as being the
same party in relation to whatever is adjudged, touching the obligation of its co-defendant"; and (b) the
appeal of its co-defendant, the principal debtor, "should be considered in law as to include the defendant
Surety, in view of the latter's cross-claim against the former." The opposition was over-ruled in the order
appealed from.
The issue at this instance is whether an appeal by one of the parties sentenced to pay solidarily a sum of
money, inures to the benefit of the other who did not appeal. The pronouncements in the case
of Municipality of Orion vs. Concha, 50 Phil. 682, provide ample guideposts in the resolution of the issue
at bar. In said case this Court held:
The judgment was joint and several, which means that they are severally liable. We have made a
careful examination of numerous authorities and believe that we are correct in saying that the effect of
the appeal by one judgment debtor upon the co-debtors depends upon the particular facts and
conditions in each case. The difference in the apparently conflicting opinions may be well illustrated in
this very case.
Suppose, for example, that F. B. Concha, the contractor, had appealed from the judgment of the lower
court upon the ground that he had either completed his contract within time or that the municipality
had suffered no damages whatever, and the Supreme Court had reversed the judgment of the lower
court on his appeal. Certainly that judgment would have the effect of relieving the bondsmen from any
liability whatever, for the reason that their liability was consequent upon the liability of the contractor;
and the court having declared that no liability for damages had resulted from the execution of said
contract, then certainly the bondsmen would have been relieved because their liability depended upon
the liability of the principal. That example gives us a clear case, showing that the effect of the appeal of
the one of the judgment debtors would necessarily have the effect of releasing his co-judgment
debtors.
As we have already said, whether an appeal by one of several judgment debtors will affect the liability
of those who did not appeal must depend upon the facts in each particular case. If the judgment can
only be sustained upon the liability of the one who appeals and the liability of the other co-judgment
 debtors depends solely upon the question whether or not the appellant is liable, and the judgment is
revoked as to that appellant, then the result of his appeal will inure to the benefit of all. . . .
The rule is quite general that a reversal as to parties appealing does not necessitate a reversal as to
parties not appealing, but that the judgment may be affirmed or left undisturbed as to them. An
exception to the rule exists, however, where a judgment cannot be reversed as to the party appealing
without affecting the rights of his co-debtor. (4 C.J. 1184)
A reversal of a judgment on appeal is binding on the parties to the suit, but does not inure to the
benefit of parties against whom judgment was rendered in the lower court who did not join in the
appeal, unless their rights and liabilities and those of the parties appealing are so interwoven and
dependent as to be inseparable, in which case a reversal as to one operates as a reversal as to all.  truly performs in good faith the contract; (c) to pay to the Republic of the Philippines, in case of delay
In the case of Brashear vs. Carlin, Curator (19 La. 395) a judgment was rendered in the lower court
against the  principal debtor  and his surety to pay damages. The principal debtor alone appealed and
the judgment was reversed. When the question of the liability of the surety under the judgment of the
lower court was raised, the court said:
"It is obvious, that the judgment of the inferior court could not be reversed as to the principal debtor
in this case, and continue in force against the surety. The latter could not remain bound, after the
former had been released; although the surety had not joined in the appeal, the judgment rendered
in this court inured to his benefit. The obligation of a surety is so dependent on that of the principal
debtor, that he is considered in law as being the same party as the debtor in relation to whatever is
adjudged, touching the obligation of the latter; provided it be not on grounds personal to such
principal debtor; it is for this reason, that a judgment in favor of the principal debtor can be invoked
as res judicata by the surety."
In the case of Schoenberger vs. White (75 Con. 605) a joint judgment was rendered against husband and
wife for a sum of money in an action ex contractu. The wife appealed. As to the effect of the appeal of the
wife upon the liability of both, the court said:
"Such a judgment is an entirety, and upon appeal to this court must be affirmed or set aside in toto."
"That the husband was not so made a party does not vary this rule. After the filing of the notice of
appeal, he had the right to be heard in this court as to all the questions brought up for review. As he
has not exercised this right, it may be assumed that he is content with the judgment against him as it
stands; but he might complain of it, were we to modify it by reducing the amount which it requires his
wife to pay, and thus reducing the amount of the contribution which he might be able to call upon her
to make, in case he paid all that it requires of him."
In the case of Philippines International Surety Co., Inc. vs. Commissioner of Customs, L-22790,
December 17, 1966, this Court, speaking through Chief Justice Concepcion, sanctioned the view, albeit
impliedly, that under a given set of facts, the appeal of the principal debtor, if successful, may inure to
the benefit of the surety. Held this Court in that case:
Although the appeal taken from said decision by the importer (principal debtor) might have, perhaps,
inured to the benefit of the surety, if, the result of that appeal had been favorable to said importer, the
fact is he had failed in his appeal.1äwphï1.ñët
Solution of the question posed in this appeal hinges on the nature of the obligation assumed by the
Surety under its bond. As Article 1222 of the new Civil Code provides:
A solidary debtor may, in actions filed by the creditor, avail himself of all defenses which are derived
from the nature of the obligation and of those which are personal to him, or pertain to his own share.
With respect to those which personally belong to the others, he may avail himself thereof only as
regards that part of the debt for which the latter are responsible.
Pertinent parts of the surety bond provides:
That we, Tizon Engineering, as principal, and the Capital Insurance & Surety Co., Inc., as surety, . . .
are held and firmly bound unto the Republic of the Philippines, in the penal sum of P10,000.00, for the
payment of which sum, well and truly to be made, we bind ourselves, Jointly and Severally, by these
presents.
Whereas, the principal agrees to comply with all the terms and conditions of the proposal with the
Bureau of Supply;
NOW THEREFORE, the conditions of this obligations are such that if the above bounden principal shall,
in case he becomes the successful bidder in any of the proposal of the Bureau of Supply — (a) accept
a contract with the Republic of the Philippines, represented by the Bureau of Supply; (b) faithfully and
and/or default in the execution of the contract, any loss or damages which the latter may suffer by
reason thereof, not to exceed the sum of P10,000.00, Philippine currency, then this obligation shall
be void, otherwise it shall remain in full force and effect.
It thus appears that the Surety bound itself, jointly and severally, with the principal obligor to pay the
Republic of the Philippines any loss or damage the latter may suffer, not exceeding P10,000.00, "in case
of delay and/or default in the execution of the contract."
However, although the defendants bound themselves in solidum, the liability of the Surety under its bond
would arise only if its co-defendant, the principal obligor, should fail to comply with the contract. To
paraphrase the ruling in the case of Municipality of Orion vs. Concha, the liability of the Surety is
"consequent upon the liability" of Tizon, or "so dependent on that of the principal debtor" that the Surety
"is considered in law as being the same party as the debtor in relation to whatever is adjudged, touching
the obligation of the latter"; or the liabilities of the two defendants herein "are so interwoven and
dependent as to be inseparable." Changing the expression, if the defendants are held liable, their liability
to pay the plaintiff would be solidary, but the nature of the Surety's undertaking is such that it does not
incur liability unless and until the principal debtor is held liable.
True, it is that the Surety did not appeal the decision of the inferior court to the Court of First Instance,
and on account of its failure to appeal, it lost its personality to appear in the latter court or to file an
answer therein. However this may be, it is not certain at this stage of the proceeding that the Surety's
liability unto plaintiff has attached. The principal debtor has asserted on appeal that it has no liability
whatsoever to the plaintiff, and, if this assertion be proven and sustained, the reversal of the judgment of
the inferior court would operate as a reversal on the Surety, even though it did not appeal, in view of the
dependency of its obligation upon the liability of the principal debtor. The principal debtor might succeed
in his appeal; in such eventuality, the judgment of the inferior court could not continue in force against
the Surety. Consequently, it is premature at this juncture to execute said judgment against the Surety.
The situation of the Surety may be likened to that of a defaulting defendant whose right is protected
under Section 4, Rule 18 of the Rules of Court as follows:
Judgment When Some Defendants Answer and Others make Default.—When a complaint states a
common cause of action against several defendants, some of whom answer, and the others fail to do
so, the court shall try the case against all upon the answer thus filed and render judgment upon the
evidence presented. The same procedure applies when a common cause of action is pleaded in a
counterclaim, cross-claim and third-party claim.
Albeit it may not personally be allowed to file an answer in the Court of First Instance, having failed to
interpose an appeal, the Surety can rely on the answer of its co-defendant and derive benefit therefrom if
the judgment on appeal should turn out to be favorable to the answering defendant
The decision in Ishar Singh vs. Liberty Insurance Corp. and Leonardo Anne, et al., (third-party defendants
in the third-party complaint of Liberty Insurance Corp.), L-16860, July 31, 1963, relied upon by the
appellee, is not applicable to the facts of the case at bar. In said case, Liberty Insurance Corp. was the
only defendant and the decision was against said defendant alone. The third party defendants were
impleaded as such upon the third party complaint filed against them by the Liberty Insurance Corp. And
as stated in the decision in said case, "the record does not disclose whether the third-party defendants
filed an answer to the third-party complaint or not." Moreover, the liability of the third-party defendants
to the third-party plaintiff stemmed from the indemnity agreement executed by them in favor of the
Liberty Insurance Corp., and the third-party defendants did not have privity of contract with the creditor
Ishar Singh.
Upon the foregoing considerations, that portion of the appealed order remanding the record of the case to
the City Court of Manila for execution of the decision of said court is hereby set aside, without costs.
G.R. No. 96405 June 26, 1996
BALDOMERO INCIONG, JR., petitioner,
vs.
COURT OF APPEALS and PHILIPPINE BANK OF COMMUNICATIONS, respondents.
Petitioner's liability resulted from the promissory note in the amount of P50,000.00 which he signed with
Rene C. Naybe and Gregorio D. Pantanosas on February 3, 1983, holding themselves jointly and severally
liable to private respondent Philippine Bank of Communications, Cagayan de Oro City branch. The
promissory note was due on May 5, 1983.
Said due date expired without the promissors having paid their obligation. Consequently, on November
14, 1983 and on June 8, 1984, private respondent sent petitioner telegrams demanding payment
thereof.2 On December 11, 1984 private respondent also sent by registered mail a final letter of demand
to Rene C. Naybe. Since both obligors did not respond to the demands made, private respondent filed on
January 24, 1986 a complaint for collection of the sum of P50,000.00 against the three obligors.
On November 25, 1986, the complaint was dismissed for failure of the plaintiff to prosecute the case.
However, on January 9, 1987, the lower court reconsidered the dismissal order and required the sheriff to
serve the summonses. On January 27, 1987, the lower court dismissed the case against defendant
Pantanosas as prayed for by the private respondent herein. Meanwhile, only the summons addressed to
petitioner was served as the sheriff learned that defendant Naybe had gone to Saudi Arabia.
In his answer, petitioner alleged that sometime in January 1983, he was approached by his friend, Rudy
Campos, who told him that he was a partner of Pio Tio, the branch manager of private respondent in
Cagayan de Oro City, in the falcata logs operation business. Campos also intimated to him that Rene C.
Naybe was interested in the business and would contribute a chainsaw to the venture. He added that,
although Naybe had no money to buy the equipment, Pio Tio had assured Naybe of the approval of a loan
he would make with private respondent. Campos then persuaded petitioner to act as a "co-maker" in the
said loan. Petitioner allegedly acceded but with the understanding that he would only be a co-maker for
the loan of P50,000.00.
Petitioner alleged further that five (5) copies of a blank promissory note were brought to him by Campos
at his office. He affixed his signature thereto but in one copy, he indicated that he bound himself only for
the amount of P5,000.00. Thus, it was by trickery, fraud and misrepresentation that he was made liable
for the amount of P50,000.00.
In the aforementioned decision of the lower court, it noted that the typewritten figure "-- 50,000 --"
clearly appears directly below the admitted signature of the petitioner in the promissory note. 3 Hence,
the latter's uncorroborated testimony on his limited liability cannot prevail over the presumed regularity
and fairness of the transaction, under Sec. 5 (q) of Rule 131. The lower court added that it was "rather
odd" for petitioner to have indicated in a copy and not in the original, of the promissory note, his
supposed obligation in the amount of P5,000.00 only. Finally, the lower court held that, even granting
that said limited amount had actually been agreed upon, the same would have been merely collateral
between him and Naybe and, therefore, not binding upon the private respondent as creditor-bank.
The lower court also noted that petitioner was a holder of a Bachelor of Laws degree and a labor
consultant who was supposed to take due care of his concerns, and that, on the witness stand, Pio Tio
denied having participated in the alleged business venture although he knew for a fact that the falcata
logs operation was encouraged by the bank for its export potential.
Petitioner appealed the said decision to the Court of Appeals which, in its decision of August 31, 1990,
affirmed that of the lower court. His motion for reconsideration of the said decision having been denied,
he filed the instant petition for review on certiorari.
On February 6, 1991, the Court denied the petition for failure of petitioner to comply with the Rules of
Court and paragraph 2 of Circular No. 1-88, and to sufficiently show that respondent court had committed
any reversible error in its questioned decision.4 His motion for the reconsideration of the denial of his
petition was likewise denied with finality in the Resolution of April 24, 1991.5 Thereafter, petitioner filed a
motion for leave to file a second motion for reconsideration which, in the Resolution of May 27, 1991, the
Court denied. In the same Resolution, the Court ordered the entry of judgment in this case.6
Unfazed, petitioner filed a notion for leave to file a motion for clarification. In the latter motion, he
asserted that he had attached Registry Receipt No. 3268 to page 14 of the petition in compliance with
Circular No. 1-88. Thus, on August 7, 1991, the Court granted his prayer that his petition be given due
course and reinstated the same.7
Nonetheless, we find the petition unmeritorious.
Annexed to the petition is a copy of an affidavit executed on May 3, 1988, or after the rendition of the
decision of the lower court, by Gregorio Pantanosas, Jr., an MTCC judge and petitioner's co-maker in the
promissory note. It supports petitioner's allegation that they were induced to sign the promissory note on
the belief that it was only for P5,000.00, adding that it was Campos who caused the amount of the loan
to be increased to P50,000.00.
The affidavit is clearly intended to buttress petitioner's contention in the instant petition that the Court of
Appeals should have declared the promissory note null and void on the following grounds: (a) the
promissory note was signed in the office of Judge Pantanosas, outside the premises of the bank; (b) the
loan was incurred for the purpose of buying a second-hand chainsaw which cost only P5,000.00; (c) even
a new chainsaw would cost only P27,500.00; (d) the loan was not approved by the board or credit
committee which was the practice, as it exceeded P5,000.00; (e) the loan had no collateral; (f) petitioner
and Judge Pantanosas were not present at the time the loan was released in contravention of the bank
practice, and (g) notices of default are sent simultaneously and separately but no notice was validly sent
to him.8 Finally, petitioner contends that in signing the promissory note, his consent was vitiated by fraud
as, contrary to their agreement that the loan was only for the amount of P5,000.00, the promissory note
stated the amount of P50,000.00.
The above-stated points are clearly factual. Petitioner is to be reminded of the basic rule that this Court is
not a trier of facts. Having lost the chance to fully ventilate his factual claims below, petitioner may no
longer be accorded the same opportunity in the absence of grave abuse of discretion on the part of the
court below. Had he presented Judge Pantanosas affidavit before the lower court, it would have
strengthened his claim that the promissory note did not reflect the correct amount of the loan.
Nor is there merit in petitioner's assertion that since the promissory note "is not a public deed with the
formalities prescribed by law but . . . a mere commercial paper which does not bear the signature of . . .
attesting witnesses," parol evidence may "overcome" the contents of the promissory note. 9 The first
paragraph of the parol evidence rule 10 states:
When the terms of an agreement have been reduced to writing, it is considered as containing all the
terms agreed upon and there can be, between the parties and their successors in interest, no evidence
of such terms other than the contents of the written agreement.
Clearly, the rule does not specify that the written agreement be a public document.
What is required is that the agreement be in writing as the rule is in fact founded on "long experience
that written evidence is so much more certain and accurate than that which rests in fleeting memory
only, that it would be unsafe, when parties have expressed the terms of their contract in writing, to admit
weaker evidence to control and vary the stronger and to show that the parties intended a different
contract from that expressed in the writing signed by them." 11 Thus, for the parol evidence rule to apply,
a written contract need not be in any particular form, or be signed by both parties. 12 As a general rule,
bills, notes and other instruments of a similar nature are not subject to be varied or contradicted by parol
or extrinsic evidence. 13
By alleging fraud in his answer, 14 petitioner was actually in the right direction towards proving that he
and his co-makers agreed to a loan of P5,000.00 only considering that, where a parol contemporaneous
agreement was the inducing and moving cause of the written contract, it may be shown by parol
evidence. 15 However, fraud must be established by clear and convincing evidence, mere preponderance
of evidence, not even being adequate. 16 Petitioner's attempt to prove fraud must, therefore, fail as it was
evidenced only by his own uncorroborated and, expectedly, self-serving testimony.
By guaranty a person, called the guarantor, binds himself to the creditor to fulfill the obligation of the
principal debtor in case the latter should fail to do so.
If a person binds himself solidarily with the principal debtor, the provisions of Section 4, Chapter 3,
Title I of this Book shall be observed. In such a case the contract is called a suretyship.
While a guarantor may bind himself solidarily with the principal debtor, the liability of a guarantor is
different from that of a solidary debtor. Thus, Tolentino explains:
A guarantor who binds himself in solidum with the principal debtor under the provisions of the second
paragraph does not become a solidary co-debtor to all intents and purposes. There is a difference
between a solidary co-debtor and a fiador in solidum (surety). The latter, outside of the liability he
assumes to pay the debt before the property of the principal debtor has been exhausted, retains all
the other rights, actions and benefits which pertain to him by reason of the  fiansa; while a solidary
co-debtor has no other rights than those bestowed upon him in Section 4, Chapter 3, Title I, Book IV
of the Civil Code. 18
Section 4, Chapter 3, Title I, Book IV of the Civil Code states the law on joint and several obligations.
Under Art. 1207 thereof, when there are two or more debtors in one and the same obligation, the
presumption is that the obligation is joint so that each of the debtors is liable only for a proportionate part
of the debt. There is a solidary liability only when the obligation expressly so states, when the law so
provides or when the nature of the obligation so requires. 19
Because the promissory note involved in this case expressly states that the three signatories therein
are  jointly and severally liable, any one, some or all of them may be proceeded against for the entire
obligation. 20 The choice is left to the solidary creditor to determine against whom he will enforce
collection. 21 Consequently, the dismissal of the case against Judge Pontanosas may not be deemed as
having discharged petitioner from liability as well. As regards Naybe, suffice it to say that the court never
acquired jurisdiction over him. Petitioner, therefore, may only have recourse against his co-makers, as
provided by law.
WHEREFORE, the instant petition for review on certiorari is hereby DENIED and the questioned decision of
the Court of Appeals is AFFIRMED. Costs against petitioner.

Petitioner also argues that the dismissal of the complaint against Naybe, the principal debtor, and against
Pantanosas, his co-maker, constituted a release of his obligation, especially because the dismissal of the
case against Pantanosas was upon the motion of private respondent itself. He cites as basis for his
argument, Article 2080 of the Civil Code which provides that:
The guarantors, even though they be solidary, are released from their obligation whenever by some act
of the creditor, they cannot be subrogated to the rights, mortgages, and preferences of the latter.

It is to be noted, however, that petitioner signed the promissory note as a solidary co-maker and not as a
guarantor. This is patent even from the first sentence of the promissory note which states as follows:
Ninety one (91) days after date, for value received, I/we, JOINTLY and SEVERALLY promise to pay to
the PHILIPPINE BANK OF COMMUNICATIONS at its office in the City of Cagayan de Oro, Philippines the
sum of FIFTY THOUSAND ONLY (P50,000.00) Pesos, Philippine Currency, together with interest . . . at
the rate of SIXTEEN (16) per cent  per annum until fully paid.

A solidary or joint and several obligation is one in which each debtor is liable for the entire obligation, and
each creditor is entitled to demand the whole obligation. 17 on the other hand, Article 2047 of the Civil
Code states:
 b. Should suit be impleaded by PDCP and/or PAIC against any and/or all of OBLIGORS for collection of
said loans and/or credit facilities, SURETIES agree to defend OBLIGORS at their own expense, without
prejudice to any and/or all of OBLIGORS impleading SURETIES therein for contribution, indemnity,
subrogation or other relief in respect to any of the claims of PDCP and/or PAIC; and
c. In the event that any of [the] OBLIGORS is for any reason made to pay any amount to PDCP
and/or PAIC, SURETIES shall reimburse OBLIGORS for said amount/s within seven (7) calendar days
from such payment;
4. OBLIGORS hereby waive in favor of SURETIES any and all fees which may be due from FALCON
arising out of, or in connection with, their said guarantees[sic].8

Falcon eventually availed of the sum of US$178,655.59 from the credit line extended by PDCP. It would
also execute a Deed of Chattel Mortgage over its personal properties to further secure the loan. However,
Falcon subsequently defaulted in its payments. After PDCP foreclosed on the chattel mortgage, there
remained a subsisting deficiency of ₱5,031,004.07, which Falcon did not satisfy despite demand.9

On 28 April 1989, in order to recover the indebtedness, PDCP filed a complaint for sum of money with the
Regional Trial Court of Makati (RTC) against Falcon, Ortigas, Escaño, Silos, Silverio and Inductivo. The
case was docketed as Civil Case No. 89-5128. For his part, Ortigas filed together with his answer a cross-
claim against his co-defendants Falcon, Escaño and Silos, and also manifested his intent to file a third-
party complaint against the Scholeys and Matti.10 The cross-claim lodged against Escaño and Silos was
G.R. No. 151953              June 29, 2007
predicated on the 1982 Undertaking, wherein they agreed to assume the liabilities of Ortigas with respect
to the PDCP loan.
SALVADOR P. ESCAÑO and MARIO M. SILOS, petitioner,
vs.
Escaño, Ortigas and Silos each sought to seek a settlement with PDCP. The first to come to terms with
RAFAEL ORTIGAS, JR., respondent.
PDCP was Escaño, who in December of 1993, entered into a compromise agreement whereby he agreed
to pay the bank ₱1,000,000.00. In exchange, PDCP waived or assigned in favor of Escaño one-third (1/3)
On 28 April 1980, Private Development Corporation of the Philippines (PDCP)1 entered into a loan of its entire claim in the complaint against all of the other defendants in the case. 11 The compromise
agreement with Falcon Minerals, Inc. (Falcon) whereby PDCP agreed to make available and lend to Falcon agreement was approved by the RTC in a Judgment12 dated 6 January 1994.
the amount of US$320,000.00, for specific purposes and subject to certain terms and conditions. 2 On the
same day, three stockholders-officers of Falcon, namely: respondent Rafael Ortigas, Jr. (Ortigas), George
Then on 24 February 1994, Ortigas entered into his own compromise agreement 13 with PDCP, allegedly
A. Scholey and George T. Scholey executed an Assumption of Solidary Liability whereby they agreed "to
without the knowledge of Escaño, Matti and Silos. Thereby, Ortigas agreed to pay PDCP ₱1,300,000.00 as
assume in [their] individual capacity, solidary liability with [Falcon] for the due and punctual payment" of
"full satisfaction of the PDCP’s claim against Ortigas," 14 in exchange for PDCP’s release of Ortigas from
the loan contracted by Falcon with PDCP.3 In the meantime, two separate guaranties were executed to
any liability or claim arising from the Falcon loan agreement, and a renunciation of its claims against
guarantee the payment of the same loan by other stockholders and officers of Falcon, acting in their
Ortigas.
personal and individual capacities. One Guaranty4 was executed by petitioner Salvador Escaño (Escaño),
while the other5 by petitioner Mario M. Silos (Silos), Ricardo C. Silverio (Silverio), Carlos L. Inductivo
In 1995, Silos and PDCP entered into a Partial Compromise Agreement whereby he agreed to pay
(Inductivo) and Joaquin J. Rodriguez (Rodriguez).
₱500,000.00 in exchange for PDCP’s waiver of its claims against him.15

Two years later, an agreement developed to cede control of Falcon to Escaño, Silos and Joseph M. Matti
In the meantime, after having settled with PDCP, Ortigas pursued his claims against Escaño, Silos and
(Matti). Thus, contracts were executed whereby Ortigas, George A. Scholey, Inductivo and the heirs of
Matti, on the basis of the 1982 Undertaking. He initiated a third-party complaint against Matti and
then already deceased George T. Scholey assigned their shares of stock in Falcon to Escaño, Silos and
Silos,16 while he maintained his cross-claim against Escaño. In 1995, Ortigas filed a motion for Summary
Matti.6 Part of the consideration that induced the sale of stock was a desire by Ortigas, et al., to relieve
Judgment in his favor against Escaño, Silos and Matti. On 5 October 1995, the RTC issued the Summary
themselves of all liability arising from their previous joint and several undertakings with Falcon, including
Judgment, ordering Escaño, Silos and Matti to pay Ortigas, jointly and severally, the amount of
those related to the loan with PDCP. Thus, an Undertaking dated 11 June 1982 was executed by the
₱1,300,000.00, as well as ₱20,000.00 in attorney’s fees.17 The trial court ratiocinated that none of the
concerned parties,7 namely: with Escaño, Silos and Matti identified in the document as "SURETIES," on
third-party defendants disputed the 1982 Undertaking, and that "the mere denials of defendants with
one hand, and Ortigas, Inductivo and the Scholeys as "OBLIGORS," on the other. The Undertaking reads
respect to non-compliance of Ortigas of the terms and conditions of the Undertaking, unaccompanied by
in part:
any substantial fact which would be admissible in evidence at a hearing, are not sufficient to raise
3. That whether or not SURETIES are able to immediately cause PDCP and PAIC to release OBLIGORS
genuine issues of fact necessary to defeat a motion for summary judgment, even if such facts were raised
from their said guarantees [sic], SURETIES hereby irrevocably agree and undertake to assume all of
in the pleadings." 18 In an Order dated 7 March 1996, the trial court denied the motion for reconsideration
OBLIGORs’ said guarantees [sic] to PDCP and PAIC under the following terms and conditions:
of the Summary Judgment and awarded Ortigas legal interest of 12% per annum to be computed from 28
a. Upon receipt by any of [the] OBLIGORS of any demand from PDCP and/or PAIC for the payment of
February 1994.19
FALCON’s obligations with it, any of [the] OBLIGORS shall immediately inform SURETIES thereof so
that the latter can timely take appropriate measures;
From the Summary Judgment, recourse was had by way of appeal to the Court of Appeals. Escaño and
Silos appealed jointly while Matti appealed by his lonesome. In a Decision 20 dated 23 January 2002, the
Court of Appeals dismissed the appeals and affirmed the Summary Judgment. The appellate court found
that the RTC did not err in rendering the summary judgment since the three appellants did not effectively
deny their execution of the 1982 Undertaking. The special defenses that were raised, "payment and
excussion," were characterized by the Court of Appeals as "appear[ing] to be merely sham in the light of
the pleadings and supporting documents and affidavits." 21 Thus, it was concluded that there was no
genuine issue that would still require the rigors of trial, and that the appealed judgment was decided on
the bases of the undisputed and established facts of the case.
Hence, the present petition for review filed by Escaño and Silos. 22 Two main issues are raised. First,
petitioners dispute that they are liable to Ortigas on the basis of the 1982 Undertaking, a document which
they do not disavow and have in fact annexed to their petition. Second, on the assumption that they are
liable to Ortigas under the 1982 Undertaking, petitioners argue that they are jointly liable only, and not
solidarily. Further assuming that they are liable, petitioners also submit that they are not liable for
interest and if at all, the proper interest rate is 6% and not 12%.
Interestingly, petitioners do not challenge, whether in their petition or their memorandum before the
Court, the appropriateness of the summary judgment as a relief favorable to Ortigas. Under Section 3,
Rule 35 of the 1997 Rules of Civil Procedure, summary judgment may avail if the pleadings, supporting
affidavits, depositions and admissions on file show that, except as to the amount of damages, there is no
genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of
law. Petitioner have not attempted to demonstrate before us that there existed a genuine issue as to any
material fact that would preclude summary judgment. Thus, we affirm with ease the common rulings of
the lower courts that summary judgment is an appropriate recourse in this case.
The vital issue actually raised before us is whether petitioners were correctly held liable to Ortigas on the
basis of the 1982 Undertaking in this Summary Judgment. An examination of the document reveals
several clauses that make it clear that the agreement was brought forth by the desire of Ortigas,
Inductivo and the Scholeys to be released from their liability under the loan agreement which release
was, in turn, part of the consideration for the assignment of their shares in Falcon to petitioners and
Matti. The whereas clauses manifest that Ortigas had bound himself with Falcon for the payment of the
loan with PDCP, and that "amongst the consideration for OBLIGORS and/or their principals aforesaid
selling is SURETIES’ relieving OBLIGORS of any and all liability arising from their said joint and several
undertakings with FALCON."23 Most crucial is the clause in Paragraph 3 of the Undertaking wherein
petitioners "irrevocably agree and undertake to assume all of OBLIGORs’ said guarantees [sic] to PDCP x
x x under the following terms and conditions." 24
At the same time, it is clear that the assumption by petitioners of Ortigas’s "guarantees" [sic] to PDCP is
governed by stipulated terms and conditions as set forth in sub-paragraphs (a) to (c) of Paragraph 3.
First, upon receipt by "any of OBLIGORS" of any demand from PDCP for the payment of Falcon’s
obligations with it, "any of OBLIGORS" was to immediately inform "SURETIES" thereof so that the latter
can timely take appropriate measures. Second, should "any and/or all of OBLIGORS" be impleaded by
PDCP in a suit for collection of its loan, "SURETIES agree[d] to defend OBLIGORS at their own expense,
without prejudice to any and/or all of OBLIGORS impleading SURETIES therein for contribution,
indemnity, subrogation or other relief"25 in respect to any of the claims of PDCP. Third, if any of the
"OBLIGORS is for any reason made to pay any amount to [PDCP], SURETIES [were to] reimburse
OBLIGORS for said amount/s within seven (7) calendar days from such payment."26
Petitioners claim that, contrary to paragraph 3(c) of the Undertaking, Ortigas was not "made to pay"
PDCP the amount now sought to be reimbursed, as Ortigas voluntarily paid PDCP the amount of ₱1.3
Million as an amicable settlement of the claims posed by the bank against him. However, the subject
clause in paragraph 3(c) actually reads "[i]n the event that any of OBLIGORS is for any reason made to
pay any amount to PDCP x x x"27 As pointed out by Ortigas, the phrase "for any reason" reasonably
includes any extra-judicial settlement of obligation such as what Ortigas had undertaken to pay to PDCP,
as it is indeed obvious that the phrase was incorporated in the clause to render the eventual payment
adverted to therein unlimited and unqualified.
The interpretation posed by petitioners would have held water had the Undertaking made clear that the
right of Ortigas to seek reimbursement accrued only after he had delivered payment to PDCP as a
consequence of a final and executory judgment. On the contrary, the clear intent of the Undertaking was
for petitioners and Matti to relieve the burden on Ortigas and his fellow "OBLIGORS" as soon as possible,
and not only after Ortigas had been subjected to a final and executory adverse judgment.
Paragraph 1 of the Undertaking enjoins petitioners to "exert all efforts to cause PDCP x x x to within a
reasonable time release all the OBLIGORS x x x from their guarantees [sic] to PDCP x x x" 28 In the event
that Ortigas and his fellow "OBLIGORS" could not be released from their guaranties, paragraph 2 commits
petitioners and Matti to cause the Board of Directors of Falcon to make a call on its stockholders for the
payment of their unpaid subscriptions and to pledge or assign such payments to Ortigas, et al., as
security for whatever amounts the latter may be held liable under their guaranties. In addition, paragraph
1 also makes clear that nothing in the Undertaking "shall prevent OBLIGORS, or any one of them, from
themselves negotiating with PDCP x x x for the release of their said guarantees [sic]."29
There is no argument to support petitioners’ position on the import of the phrase "made to pay" in the
Undertaking, other than an unduly literalist reading that is clearly inconsistent with the thrust of the
document. Under the Civil Code, the various stipulations of a contract shall be interpreted together,
attributing to the doubtful ones that sense which may result from all of them taken jointly. 30 Likewise
applicable is the provision that if some stipulation of any contract should admit of several meanings, it
shall be understood as bearing that import which is most adequate to render it effectual. 31 As a means to
effect the general intent of the document to relieve Ortigas from liability to PDCP, it is his interpretation,
not that of petitioners, that holds sway with this Court.
Neither do petitioners impress us of the non-fulfillment of any of the other conditions set in paragraph 3,
as they claim. Following the general assertion in the petition that Ortigas violated the terms of the
Undertaking, petitioners add that Ortigas "paid PDCP BANK the amount of ₱1.3 million without petitioners
ESCANO and SILOS’s knowledge and consent."32 Paragraph 3(a) of the Undertaking does impose a
requirement that any of the "OBLIGORS" shall immediately inform "SURETIES" if they received any
demand for payment of FALCON’s obligations to PDCP, but that requirement is reasoned "so that the
[SURETIES] can timely take appropriate measures"33 presumably to settle the obligation without having
to burden the "OBLIGORS." This notice requirement in paragraph 3(a) is markedly way off from the
suggestion of petitioners that Ortigas, after already having been impleaded as a defendant in the
collection suit, was obliged under the 1982 Undertaking to notify them before settling with PDCP.
The other arguments petitioners have offered to escape liability to Ortigas are similarly weak.
Petitioners impugn Ortigas for having settled with PDCP in the first place. They note that Ortigas had, in
his answer, denied any liability to PDCP and had alleged that he signed the Assumption of Solidary
Liability not in his personal capacity, but as an officer of Falcon. However, such position, according to
petitioners, could not be justified since Ortigas later voluntarily paid PDCP the amount of ₱1.3 Million.
Such circumstances, according to petitioners, amounted to estoppel on the part of Ortigas.
Even as we entertain this argument at depth, its premises are still erroneous. The Partial Compromise
Agreement between PDCP and Ortigas expressly stipulated that Ortigas’s offer to pay PDCP was
conditioned "without [Ortigas’s] admitting liability to plaintiff PDCP Bank’s complaint, and to terminate
and dismiss the said case as against Ortigas solely." 34 Petitioners profess it is "unthinkable" for Ortigas to
have voluntarily paid PDCP without admitting his liability,35 yet such contention based on assumption
cannot supersede the literal terms of the Partial Compromise Agreement.
Petitioners further observe that Ortigas made the payment to PDCP after he had already assigned his
obligation to petitioners through the 1982 Undertaking. Yet the fact is PDCP did pursue a judicial claim
against Ortigas notwithstanding the Undertaking he executed with petitioners. Not being a party to such
Undertaking, PDCP was not precluded by a contract from pursuing its claim against Ortigas based on the
original Assumption of Solidary Liability.
At the same time, the Undertaking did not preclude Ortigas from relieving his distress through a
settlement with the creditor bank. Indeed, paragraph 1 of the Undertaking expressly states that "nothing
herein shall prevent OBLIGORS, or any one of them, from themselves negotiating with PDCP x x x for the
release of their said guarantees [sic]." 36 Simply put, the Undertaking did not bar Ortigas from pursuing
his own settlement with PDCP. Neither did the Undertaking bar Ortigas from recovering from petitioners
whatever amount he may have paid PDCP through his own settlement. The stipulation that if Ortigas was
"for any reason made to pay any amount to PDCP[,] x x x SURETIES shall reimburse OBLIGORS for said
amount/s within seven (7) calendar days from such payment"37 makes it clear that petitioners remain
liable to reimburse Ortigas for the sums he paid PDCP.
We now turn to the set of arguments posed by petitioners, in the alternative, that is, on the assumption
that they are indeed liable.
Petitioners submit that they could only be held jointly, not solidarily, liable to Ortigas, claiming that the
Undertaking did not provide for express solidarity. They cite Article 1207 of the New Civil Code, which
states in part that "[t]here is a solidary liability only when the obligation expressly so states, or when the
law or the nature of the obligation requires solidarity."
Ortigas in turn argues that petitioners, as well as Matti, are jointly and severally liable for the
Undertaking, as the language used in the agreement "clearly shows that it is a surety
agreement"38 between the obligors (Ortigas group) and the sureties (Escaño group). Ortigas points out
that the Undertaking uses the word "SURETIES" although the document, in describing the parties. It is
further contended that the principal objective of the parties in executing the Undertaking cannot be
attained unless petitioners are solidarily liable "because the total loan obligation can not be paid or settled
to free or release the OBLIGORS if one or any of the SURETIES default from their obligation in the
Undertaking."39
In case, there is a concurrence of two or more creditors or of two or more debtors in one and the same
obligation, Article 1207 of the Civil Code states that among them, "[t]here is a solidary liability only when
the obligation expressly so states, or when the law or the nature of the obligation requires solidarity."
Article 1210 supplies further caution against the broad interpretation of solidarity by providing: "The
indivisibility of an obligation does not necessarily give rise to solidarity. Nor does solidarity of itself imply
indivisibility."
These Civil Code provisions establish that in case of concurrence of two or more creditors or of two or
more debtors in one and the same obligation, and in the absence of express and indubitable terms
characterizing the obligation as solidary, the presumption is that the obligation is only joint. It thus
becomes incumbent upon the party alleging that the obligation is indeed solidary in character to prove
such fact with a preponderance of evidence.
The Undertaking does not contain any express stipulation that the petitioners agreed "to bind themselves
jointly and severally" in their obligations to the Ortigas group, or any such terms to that effect. Hence,
such obligation established in the Undertaking is presumed only to be joint. Ortigas, as the party alleging
that the obligation is in fact solidary, bears the burden to overcome the presumption of jointness of
obligations. We rule and so hold that he failed to discharge such burden.
Ortigas places primary reliance on the fact that the petitioners and Matti identified themselves in the
Undertaking as "SURETIES", a term repeated no less than thirteen (13) times in the document. Ortigas
claims that such manner of identification sufficiently establishes that the obligation of petitioners to him
was joint and solidary in nature.
The term "surety" has a specific meaning under our Civil Code. Article 2047 provides the statutory
definition of a surety agreement, thus:
Art. 2047. By guaranty a person, called the guarantor, binds himself to the creditor to fulfill the
obligation of the principal debtor in case the latter should fail to do so.
If a person binds himself solidarily with the principal debtor, the provisions of Section 4, Chapter 3, Title
I of this Book shall be observed. In such case the contract is called a suretyship. [Emphasis supplied]40
As provided in Article 2047 in a surety agreement the surety undertakes to be bound solidarily with the
principal debtor. Thus, a surety agreement is an ancillary contract as it presupposes the existence of a
principal contract. It appears that Ortigas’s argument rests solely on the solidary nature of the obligation
of the surety under Article 2047. In tandem with the nomenclature "SURETIES" accorded to petitioners
and Matti in the Undertaking, however, this argument can only be viable if the obligations established in
the Undertaking do partake of the nature of a suretyship as defined under Article 2047 in the first place.
That clearly is not the case here, notwithstanding the use of the nomenclature "SURETIES" in the
Undertaking.
Again, as indicated by Article 2047, a suretyship requires a principal debtor to whom the surety is
solidarily bound by way of an ancillary obligation of segregate identity from the obligation between the
principal debtor and the creditor. The suretyship does bind the surety to the creditor, inasmuch as the
latter is vested with the right to proceed against the former to collect the credit in lieu of proceeding
against the principal debtor for the same obligation. 41 At the same time, there is also a legal tie created
between the surety and the principal debtor to which the creditor is not privy or party to. The moment
the surety fully answers to the creditor for the obligation created by the principal debtor, such obligation
is extinguished.42 At the same time, the surety may seek reimbursement from the principal debtor for the
amount paid, for the surety does in fact "become subrogated to all the rights and remedies of the
creditor."43
Note that Article 2047 itself specifically calls for the application of the provisions on joint and solidary
obligations to suretyship contracts.44 Article 1217 of the Civil Code thus comes into play, recognizing the
right of reimbursement from a co-debtor (the principal debtor, in case of suretyship) in favor of the one
who paid (i.e., the surety).45 However, a significant distinction still lies between a joint and several
debtor, on one hand, and a surety on the other. Solidarity signifies that the creditor can compel any one
of the joint and several debtors or the surety alone to answer for the entirety of the principal debt. The
difference lies in the respective faculties of the joint and several debtor and the surety to seek
reimbursement for the sums they paid out to the creditor.
Dr. Tolentino explains the differences between a solidary co-debtor and a surety:
A guarantor who binds himself in solidum with the principal debtor under the provisions of the second
paragraph does not become a solidary co-debtor to all intents and purposes. There is a difference
between a solidary co-debtor and a fiador in solidum (surety). The latter, outside of the liability he
assumes to pay the debt before the property of the principal debtor has been exhausted, retains all the
other rights, actions and benefits which pertain to him by reason of the fiansa; while a solidary co-
debtor has no other rights than those bestowed upon him in Section 4, Chapter 3, Title I, Book IV of
the Civil Code.
The second paragraph of [Article 2047] is practically equivalent to the contract of suretyship. The civil law
suretyship is, accordingly, nearly synonymous with the common law guaranty; and the civil law
relationship existing between the co-debtors liable in solidum is similar to the common law suretyship.46
In the case of joint and several debtors, Article 1217 makes plain that the solidary debtor who effected
the payment to the creditor "may claim from his co-debtors only the share which corresponds to each,
with the interest for the payment already made." Such solidary debtor will not be able to recover from the
co-debtors the full amount already paid to the creditor, because the right to recovery extends only to the
proportional share of the other co-debtors, and not as to the particular proportional share of the solidary
debtor who already paid. In contrast, even as the surety is solidarily bound with the principal debtor to
the creditor, the surety who does pay the creditor has the right to recover the full amount paid, and not
just any proportional share, from the principal debtor or debtors. Such right to full reimbursement falls
within the other rights, actions and benefits which pertain to the surety by reason of the subsidiary
obligation assumed by the surety.
What is the source of this right to full reimbursement by the surety? We find the right under Article 2066
of the Civil Code, which assures that "[t]he guarantor who pays for a debtor must be indemnified by the
latter," such indemnity comprising of, among others, "the total amount of the debt." 47 Further, Article
2067 of the Civil Code likewise establishes that "[t]he guarantor who pays is subrogated by virtue thereof
to all the rights which the creditor had against the debtor."48
Articles 2066 and 2067 explicitly pertain to guarantors, and one might argue that the provisions should
not extend to sureties, especially in light of the qualifier in Article 2047 that the provisions on joint and
several obligations should apply to sureties. We reject that argument, and instead adopt Dr. Tolentino’s
observation that "[t]he reference in the second paragraph of [Article 2047] to the provisions of Section 4,
Chapter 3, Title I, Book IV, on solidary or several obligations, however, does not mean that suretyship is
withdrawn from the applicable provisions governing guaranty." 49 For if that were not the implication,
there would be no material difference between the surety as defined under Article 2047 and the joint and
several debtors, for both classes of obligors would be governed by exactly the same rules and limitations.
Accordingly, the rights to indemnification and subrogation as established and granted to the guarantor by
Articles 2066 and 2067 extend as well to sureties as defined under Article 2047. These rights granted to
the surety who pays materially differ from those granted under Article 1217 to the solidary debtor who
pays, since the "indemnification" that pertains to the latter extends "only [to] the share which
corresponds to each [co-debtor]." It is for this reason that the Court cannot accord the conclusion that
because petitioners are identified in the Undertaking as "SURETIES," they are consequently joint and
severally liable to Ortigas.
In order for the conclusion espoused by Ortigas to hold, in light of the general presumption favoring joint
liability, the Court would have to be satisfied that among the petitioners and Matti, there is one or some
of them who stand as the principal debtor to Ortigas and another as surety who has the right to full
reimbursement from the principal debtor or debtors. No suggestion is made by the parties that such is
the case, and certainly the Undertaking is not revelatory of such intention. If the Court were to give full
fruition to the use of the term "sureties" as conclusive indication of the existence of a surety agreement
that in turn gives rise to a solidary obligation to pay Ortigas, the necessary implication would be to lay
down a corresponding set of rights and obligations as between the "SURETIES" which petitioners and
Matti did not clearly intend.
It is not impossible that as between Escaño, Silos and Matti, there was an agreement whereby in the
event that Ortigas were to seek reimbursement from them per the terms of the Undertaking, one of them
was to act as surety and to pay Ortigas in full, subject to his right to full reimbursement from the other
two obligors. In such case, there would have been, in fact, a surety agreement which evinces a solidary
obligation in favor of Ortigas. Yet if there was indeed such an agreement, it does not appear on the
record. More consequentially, no such intention is reflected in the Undertaking itself, the very document
that creates the conditional obligation that petitioners and Matti reimburse Ortigas should he be made to
pay PDCP. The mere utilization of the term "SURETIES" could not work to such effect, especially as it
does not appear who exactly is the principal debtor whose obligation is "assured" or "guaranteed" by the
surety.
Ortigas further argues that the nature of the Undertaking requires "solidary obligation of the Sureties,"
since the Undertaking expressly seeks to "reliev[e] obligors of any and all liability arising from their said
joint and several undertaking with [F]alcon," and for the "sureties" to "irrevocably agree and undertake to
assume all of obligors said guarantees to PDCP."50 We do not doubt that a finding of solidary liability
among the petitioners works to the benefit of Ortigas in the facilitation of these goals, yet the
Undertaking itself contains no stipulation or clause that establishes petitioners’ obligation to Ortigas as
solidary. Moreover, the aims adverted to by Ortigas do not by themselves establish that the nature of the
obligation requires solidarity. Even if the liability of petitioners and Matti were adjudged as merely joint,
the full relief and reimbursement of Ortigas arising from his payment to PDCP would still be accomplished
through the complete execution of such a judgment.
Petitioners further claim that they are not liable for attorney’s fees since the Undertaking contained no
such stipulation for attorney’s fees, and that the situation did not fall under the instances under Article
2208 of the Civil Code where attorney’s fees are recoverable in the absence of stipulation.
We disagree. As Ortigas points out, the acts or omissions of the petitioners led to his being impleaded in
the suit filed by PDCP. The Undertaking was precisely executed as a means to obtain the release of
Ortigas and the Scholeys from their previous obligations as sureties of Falcon, especially considering that
they were already divesting their shares in the corporation. Specific provisions in the Undertaking obligate
petitioners to work for the release of Ortigas from his surety agreements with Falcon. Specific provisions
likewise mandate the immediate repayment of Ortigas should he still be made to pay PDCP by reason of
the guaranty agreements from which he was ostensibly to be released through the efforts of petitioners.
None of these provisions were complied with by petitioners, and Article 2208(2) precisely allows for the
recovery of attorney’s fees "[w]hen the defendant’s act or omission has compelled the plaintiff to litigate
with third persons or to incur expenses to protect his interest."
Finally, petitioners claim that they should not be liable for interest since the Undertaking does not contain
any stipulation for interest, and assuming that they are liable, that the rate of interest should not be 12%
per annum, as adjudged by the RTC.
The seminal ruling in Eastern Shipping Lines, Inc. v. Court of Appeals 51 set forth the rules with respect to the manner of computing
legal interest:
I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or quasi-delicts is breached, the
contravenor can be held liable for damages. The provisions under Title XVIII on "Damages" of the Civil Code govern in determining
the measure of recoverable damages.
II. With regard particularly to an award of interest in the concept of actual and compensatory damages, the rate of interest, as well
as the accrual thereof, is imposed, as follows:
1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of money, the
interest due should be that which may have been stipulated in writing. Furthermore, the interest due shall itself earn legal
interest from the time it is judicially demanded. In the absence of stipulation, the rate of interest shall be 12% per annum to be
computed from default, i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil
Code.
2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the amount of damages
awarded may be imposed at the discretion of the court at the rate of 6% per annum. No interest, however, shall be adjudged on
unliquidated claims or damages except when or until the demand can be established with reasonable certainty. Accordingly,
where the demand is established with reasonable certainty, the interest shall begin to run from the time the claim is made
judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so reasonably established at the time the
 demand is made, the interest shall begin to run only from the date the judgment of the court is made (at which time
quantification of damages may be deemed to have been reasonably ascertained). The actual base for the computation of legal
interest shall, in any case, be on the amount finally adjudged.
3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal interest, whether the
case falls under paragraph 1 or paragraph 2, above, shall be 12% per annum from such finality until its satisfaction, this interim
period being deemed to be by then an equivalent to a forbearance of credit.52
Since what was the constituted in the Undertaking consisted of a payment in a sum of money, the rate of
interest thereon shall be 12% per annum to be computed from default, i.e., from judicial or extrajudicial
demand. The interest rate imposed by the RTC is thus proper. However, the computation should be
reckoned from judicial or extrajudicial demand. Per records, there is no indication that Ortigas made any
extrajudicial demand to petitioners and Matti after he paid PDCP, but on 14 March 1994, Ortigas made a
judicial demand when he filed a Third-Party Complaint praying that petitioners and Matti be made to
reimburse him for the payments made to PDCP. It is the filing of this Third Party Complaint on 14 March
1994 that should be considered as the date of judicial demand from which the computation of interest
should be reckoned.53 Since the RTC held that interest should be computed from 28 February 1994, the
appropriate redefinition should be made.
WHEREFORE, the Petition is GRANTED in PART. The Order of the Regional Trial Court dated 5 October 1995 is modified by
declaring that petitioners and Joseph M. Matti are only jointly liable, not jointly and severally, to respondent Rafael Ortigas,
Jr. in the amount of ₱1,300,000.00. The Order of the Regional Trial Court dated 7 March 1996 is MODIFIED in that the
legal interest of 12% per annum on the amount of ₱1,300,000.00 is to be computed from 14 March 1994, the date of
judicial demand, and not from 28 February 1994 as directed in the Order of the lower court. The assailed rulings are
affirmed in all other respects. Costs against petitioners.
G.R. No. 89775 November 26, 1992
JACINTO UY DIÑO and NORBERTO UY, petitioners,
vs.
HON. COURT OF APPEALS and METROPOLITAN BANK AND TRUST COMPANY, respondents.
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 Diño 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 Diño executed separate Continuing Suretyships
(Exhibits "E" and "F" respectively), dated 25 February 1977, in favor of the latter. Under the aforesaid
agreements, Norberto Uy agreed to pay METROBANK any indebtedness of UTEFS up to the aggregate
sum of P300,000.00 while Jacinto Uy Diño agreed to be bound up to the aggregate sum of
P800,000.00.
Having paid the obligation under the above letter of credit in 1977, UTEFS, through Uy Tiam, obtained
another credit accommodation from METROBANK in 1978, which credit accommodation was fully settled
before an irrevocable letter of credit was applied for and obtained by the abovementioned business
entity in 1979 (September 8, 1987, tsn, pp. 14-15).
The Irrevocable Letter of Credit No. SN-Loc-309, dated March 30, 1979, in the sum of P815, 600.00,
covered UTEFS' purchase of "8,000 Bags Planters Urea and 4,000 Bags Planters 21-0-0." It was applied
for and obtain by UTEFS without the participation of Norberto Uy and Jacinto Uy Diño as they did not
sign the document denominated as "Commercial Letter of Credit and Application." Also, they were not
asked to execute any suretyship to guarantee its payment. Neither did METROBANK nor UTEFS inform
them that the 1979 Letter of Credit has been opened and the Continuing Suretyships separately
executed in February, 1977 shall guarantee its payment (Appellees brief, pp. 2-3; rollo, p. 28).
The 1979 letter of credit (Exhibit "B") was negotiated. METROBANK paid Planters Products the amount
of P815,600.00 which payment was covered by a Bill of Exchange (Exhibit "C"), dated 4 June 1979, in
favor of (Original Records, p. 331).
Pursuant to the above commercial transaction, UTEFS executed and delivered to METROBANK and Trust
Receipt (Exh. "D"), dated 4 June 1979, whereby the former acknowledged receipt in trust from the
latter of the aforementioned goods from Planters Products which amounted to P815, 600.00. Being the
entrusted, the former agreed to deliver to METROBANK the entrusted goods in the event of non-sale or,
if sold, the proceeds of the sale thereof, on or before September 2, 1979.
However, UTEFS did not acquiesce to the obligatory stipulations in the trust receipt. As a consequence,
METROBANK sent letters to the said principal obligor and its sureties, Norberto Uy and Jacinto Uy Diño,
demanding payment of the amount due. Informed of the amount due, UTEFS made partial payments to
the Bank which were accepted by the latter.
Answering one of the demand letters, Diño, thru counsel, denied his liability for the amount demanded
and requested METROBANK to send him copies of documents showing the source of his liability. In its
reply, the bank informed him that the source of his liability is the Continuing Suretyship which he
executed on February 25, 1977.
As a rejoinder, Diño maintained that he cannot be held liable for the 1979 credit accommodation
because it is a new obligation contracted without his participation. Besides, the 1977 credit
accommodation which he guaranteed has been fully paid.
Having sent the last demand letter to UTEFS, Diño and Uy and finding resort to extrajudicial remedies
to be futile, METROBANK filed a complaint for collection of a sum of money (P613,339.32, as of January
31, 1982, inclusive of interest, commission penalty and bank charges) with a prayer for the issuance of
a writ of preliminary attachment, against Uy Tiam, representative of UTEFS and impleaded Diño and Uy
as parties-defendants.
The court issued an order, dated 29 July 1983, granting the attachment writ, which writ was returned
unserved and unsatisfied as defendant Uy Tiam was nowhere to be found at his given address and his
commercial enterprise was already non-operational (Original Records, p. 37).
On April 11, 1984, Norberto Uy and Jacinto Uy Diño (sureties-defendant herein) filed a motion to
dismiss the complaint on the ground of lack of cause of action. They maintained that the obligation
which they guaranteed in 1977 has been extinguished since it has already been paid in the same year.
Accordingly, the Continuing Suretyships executed in 1977 cannot be availed of to secure Uy Tiam's
Letter of Credit obtained in 1979 because a guaranty cannot exist without a valid obligation. It was
further argued that they can not be held liable for the obligation contracted in 1979 because they are
not privies thereto as it was contracted without their participation (Records, pp. 42-46).
On April 24, 1984, METROBANK filed its opposition to the motion to dismiss. Invoking the terms and
conditions embodied in the comprehensive suretyships separately executed by sureties-defendants, the
bank argued that sureties-movants bound themselves as solidary obligors of defendant Uy Tiam to both
existing obligations and future ones. It relied on Article 2053 of the new Civil Code which provides: "A
guaranty may also be given as security for future debts, the amount of which is not yet known; . . . ."
 It was further asserted that the agreement was in full force and effect at the time the letter of credit
was obtained in 1979 as sureties-defendants did not exercise their right to revoke it by giving notice to
the bank. (Ibid., pp. 51-54).
Meanwhile, the resolution of the aforecited motion to dismiss was held in abeyance pending the
introduction of evidence by the parties as per order dated February 21, 1986 (Ibid., p. 71).
Having been granted a period of fifteen (15) days from receipt of the order dated March 7, 1986 within
which to file the answer, sureties-defendants filed their responsive pleading which merely rehashed the
arguments in their motion to dismiss and maintained that they are entitled to the benefit of excussion
(Original Records, pp. 88-93).
On February 23, 1987, plaintiff filed a motion to dismiss the complaint against defendant Uy Tiam on
the ground that it has no information as to the heirs or legal representatives of the latter who died
sometime in December, 1986, which motion was granted on the following day (Ibid., pp. 180-182).
After trial, . . . the court a quo, on December 2, 198, rendered its judgment, a portion of which reads:
The evidence and the pleadings, thus, pose the querry (sic):
Are the defendants Jacinto Uy Diñoand Norberto Uy liable for the obligation contracted by Uy Tiam
under the Letter of Credit (Exh. B) issued on March 30, 1987 by virtue of the Continuing Suretyships
they executed on February 25, 1977?
Under the admitted proven facts, the Court finds that they are not.
a) When Uy and Diño executed the continuing suretyships, exhibits E and F, on February 25, 1977,
Uy Tiam was obligated to the plaintiff in the amount of P700,000.00 — and this was the obligation
which both obligation which both defendants guaranteed to pay. Uy Tiam paid this 1977 obligation ––
and such payment extinguished the obligation they assumed as guarantors/sureties.
b) The 1979 Letter of Credit (Exh.  B) is different from the 1977 Letter of Credit which covered the
1977 account of Uy Tiam. Thus, the obligation under either is apart and distinct from the obligation
created in the other — as evidenced by the fact that Uy Tiam had to apply anew for the 1979
transaction (Exh. A). And Diño and Uy, being strangers thereto, cannot be answerable thereunder.
c) The plaintiff did not serve notice to the defendants Diño and Uy when it extended to Credit — at
least to inform them that the continuing suretyships they executed on February 25, 1977 will be
considered by the plaintiff to secure the 1979 transaction of Uy Tiam.
d) There is no sufficient and credible showing that Diño and Uy were fully informed of the import of
the Continuing Suretyships when they affixed their signatures thereon –– that they are thereby
securing all future obligations which Uy Tiam may contract the plaintiff. On the contrary, Diño and Uy
categorically testified that they signed the blank forms in the office of Uy Tiam at 623 Asuncion
Street, Binondo, Manila, in obedience to the instruction of Uy Tiam, their former employer. They
denied having gone to the office of the plaintiff to subscribe to the documents.
In its Decision, the trial court decreed as follows:
PREMISES CONSIDERED, judgment is hereby rendered:
a) dismissing the COMPLAINT against JACINTO UY DIÑO and NORBERTO UY;
b) ordering the plaintiff to pay to Diño and Uy the amount of P6,000.00 as attorney's fees and
expenses of litigation; and
c) denying all other claims of the parties for want of legal and/or factual basis.
From the said Decision, the private respondent appealed to the Court of Appeals. The case was docketed
as CA-G.R. CV No. 17724. In support thereof, it made the following assignment of errors in its Brief:
I. THE LOWER COURT SERIOUSLY ERRED IN NOT FINDING AND HOLDING THAT DEFENDANTS-
APPELLEES JACINTO UY DIÑO AND NORBERTO UY ARE SOLIDARILY LIABLE TO PLAINTIFF-APPELLANT
FOR THE OBLIGATION OF DEFENDANT UY TIAM UNDER THE LETTER OF CREDIT ISSUED ON MARCH 30,
1979 BY VIRTUE OF THE CONTINUING SURETYSHIPS THEY EXECUTED ON FEBRUARY 25, 1977.
II. THE LOWER COURT ERRED IN HOLDING THAT PLAINTIFF-APPELLANT IS ANSWERABLE TO
DEFENDANTS-APPELLEES JACINTO UY DIÑO AND NORBERTO UY FOR ATTORNEY'S FEES 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 Diño and Norberto Uy to pay, jointly and severally, to
appellant METROBANK the amount of P2,397,883.68 which represents the amount due as of July 17,
1987 inclusive of principal, interest and charges;
2) Ordering sureties-appellees Jacinto Uy Diño and Norberto Uy to pay, jointly and severally,
appellant METROBANK the accruing interest, fees and charges thereon from July 18, 1987 until the
whole monetary obligation is paid; and
3) Ordering sureties-appellees Jacinto Uy Diño and Norberto Uy to pay, jointly and severally, to
plaintiff P20,000.00 as attorney's fees.
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 certain limits, and contemplates a succession of
liabilities, for which, as they accrue, the guarantor becomes liable.9 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
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 Diño 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.
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 Diño and (b) P300,000.00 for petitioner Uy.
The limit of the petitioners respective liabilities must be determined from the suretyship agreement each
had signed. It is undoubtedly true that the law looks upon the contract of suretyship with a jealous eye,
and the rule is settled that the obligation of the surety cannot be extended by implication beyond its
specified limits. To the extent, and in the manner, and under the circumstances pointed out in his
obligation, he is bound, and no farther. 17
Indeed, the Continuing Suretyship Agreements signed by petitioner Diño and petitioner Uy fix the
aggregate amount of their liability, at any given time, at P800,000.00 and P300,000.00, respectively. The
law is clear that a guarantor may bond himself for less, but not for more than the principal debtor, both
as regards the amount and the onerous nature 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.
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 (5-31-82 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 Diño which stipulates an aggregate principal sum of not exceeding P800,000.00, and partly
covered by that of petitioner Uy which pegs his maximum liability at P300,000.00.
Consequently, the judgment of the public respondent shall have to be modified to conform to the
foregoing exposition, to which extent the instant petition is impressed with partial merit.
WHEREFORE, the petition is partly GRANTED, but only insofar as the challenged decision has to be
modified with respect to the extend of petitioners' liability. As modified, petitioners JACINTO UY DIÑO and
NORBERTO UY are hereby declared liable for and are ordered to pay, up to the maximum limit only of
their respective Continuing Suretyship Agreement, the remaining unpaid balance of the principal
obligation of UY TIAM or UY TIAM ENTERPRISES & FREIGHT SERVICES under Irrevocable Letter of Credit
No. SN-Loc-309, dated 30 March 1979, together with the interest due thereon at the legal rate
commencing from the date of the filing of the complaint in Civil Case No. 82-9303 with Branch 45 of the
Regional Trial Court of Manila, as well as the adjudged attorney's fees and costs.
All other dispositions in the dispositive portion of the challenged decision not inconsistent with the above
are affirmed.

G.R. No. 112191 February 7, 1997
FORTUNE MOTORS (PHILS.) CORPORATION and EDGAR L. RODRIGUEZA, petitioners,
vs.
THE HONORABLE COURT OF APPEALS and FILINVEST CREDIT CORPORATION, respondents.
To fund their acquisition of new vehicles (which are later retailed or resold to the general public), car
dealers normally enter into wholesale automotive financing schemes whereby vehicles are delivered by
the manufacturer or assembler on the strength of trust receipts or drafts executed by the car dealers,
which are backed up by sureties. These trust receipts or drafts are then assigned and/or discounted by
the manufacturer to/with financing companies, which assume payment of the vehicles but with the
corresponding right to collect such payment from the car dealers and/or the sureties. In this manner, car
dealers are able to secure delivery of their stock-in-trade without having to pay cash therefor;
manufacturers get paid without any receivables/collection problems; and financing companies earn their
margins with the assurance of payment not only from the dealers but also from the sureties. When the
vehicles are eventually resold, the car dealers are supposed to pay the financing companies — and the
business goes merrily on. However, in the event the car dealer defaults in paying the financing company,
may the surety escape liability on the legal ground that the obligations were incurred subsequent to the
execution of the surety contract?
This is the principal legal question raised in this petition for review (under Rule 45 of the Rules of Court)
seeking to set aside the Decision1 of the Court of Appeals (Tenth Division) 2 promulgated on September
30, 1993 in CA G.R. CV No. 09136 which affirmed in toto the decision3 of the Regional Trial Court of
Manila — Branch 114 in Civil Case No. 83-21994, the dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the defendants, by
ordering the latter to pay, jointly and severally, the plaintiff the following amounts:
1. The sum of P1,348,033.89, plus interest thereon at the rate of P922.53 per day starting April 1,
1985 until the said principal amount is fully paid;
2. The amount of P50,000.00 as attorney's fees and another P50,000.00 as liquidated damages; and
3. That the defendants, although spared from paying exemplary damages, are further ordered to pay,
in solidum, the costs of this suit.
Plaintiff therein was the financing company and the defendants the car dealer and its sureties.
The Facts
On or about August 4, 1981, Joseph L. G. Chua and Petitioner Edgar Lee Rodrigueza ("Petitioner
Rodrigueza") each executed an undated "Surety Undertaking"5 whereunder they "absolutely,
unconditionally and solidarily guarantee(d)" to Respondent Filinvest Credit Corporation ("Respondent
Filinvest") and its affiliated and subsidiary companies the "full, faithful and prompt performance, payment
and discharge of any and all obligations and agreements" of Fortune Motors (Phils.) Corporation
("Petitioner Fortune") "under or with respect to any and all such contracts and any and all other
agreements (whether by way of guaranty or otherwise)" of the latter with Filinvest and its affiliated and
subsidiary companies "now in force or hereafter made."
The following year or on April6 5, 1982, Petitioner Fortune, Respondent Filinvest and Canlubang
Automotive Resources Corporation ("CARCO") entered into an "Automotive Wholesale Financing
Agreement" ("Financing Agreement") under which CARCO will deliver motor vehicles to Fortune for the
purpose of resale in the latter's ordinary course of business; Fortune, in turn, will execute trust receipts
over said vehicles and accept drafts drawn by CARCO, which will discount the same together with the
trust receipts and invoices and assign them in favor of Respondent Filinvest, which will pay the motor
vehicles for Fortune. Under the same agreement, Petitioner Fortune, as trustee of the motor vehicles, was
to report and remit proceeds of any sale for cash or on terms to Respondent Filinvest immediately
without necessity of demand.
Subsequently, several motor vehicles were delivered by CARCO to Fortune, and trust receipts covered by
demand drafts and deeds of assignment were executed in favor of Respondent Filinvest. However, when
the demand drafts matured, not all the proceeds of the vehicles which Petitioner Fortune had sold were
remitted to Respondent Filinvest. Fortune likewise failed to turn over to Filinvest several unsold motor
vehicles covered by the trust receipts. Thus, Filinvest through counsel, sent a demand letter 8 dated
December 12, 1983 to Fortune for the payment of its unsettled account in the amount of P1,302,811.00.
Filinvest sent similar demand letters9 separately to Chua and Rodrigueza as sureties. Despite said
demands, the amount was not paid. Hence, Filinvest filed in the Regional Trial Court of Manila a complaint
for a sum of money with preliminary attachment against Fortune, Chua and Rodrigueza.
In an order dated September 26, 1984, the trial court declared that there was no factual issue to be
resolved except for the correct balance of defendants' account with Filinvest as agreed upon by the
parties during pre-trial. 10 Subsequently, Filinvest presented testimonial and documentary evidence.
Defendants (petitioners herein), instead of presenting their evidence, filed a "Motion for Judgment on
Demurrer to Evidence" 11 anchored principally on the ground that the Surety Undertakings were null and
void because, at the time they were executed, there was no principal obligation existing. The trial court
denied the motion and scheduled the case for reception of defendants' evidence. On two scheduled dates,
however, defendants failed to present their evidence, prompting the court to deem them to have waived
their right to present evidence. On December 17, 1985, the trial court rendered its decision earlier cited
ordering Fortune, Chua and Rodrigueza to pay Filinvest, jointly and severally, the sum of P1,348,033.83
plus interest at the rate of P922.53 per day from April 1, 1985 until fully paid, P50,000.00 in attorney's
fees, another P50,000.00 in liquidated damages and costs of suit.
As earlier mentioned, their appeal was dismissed by the Court of Appeals (Tenth Division) which affirmed
in toto the trial court's decision. Hence, this recourse.
 Issues
Petitioners assign the following errors in the appealed Decision:
1. that the Court of Appeals erred in declaring that surety can exist even if there was no existing
indebtedness at the time of its execution.
2. that the Court of Appeals erred when it declared that there was no novation.
3. that the Court of Appeals erred when it declared, that the evidence was sufficient to prove the
amount of the claim. 12
Petitioners argue that future debts which can be guaranteed under Article 2053 of the Civil Code refer
only to "debts existing at the time of the constitution of the guaranty but the amount thereof is
unknown," and that a guaranty being an accessory obligation cannot exist without a principal obligation.
Petitioners claim that the surety undertakings cannot be made to cover the Financing Agreement
executed by Fortune, Filinvest and CARCO since the latter contract was not yet in existence when said
surety contracts were entered into.
Petitioners further aver that the Financing Agreement would effect a novation of the surety contracts
since it changed the principal terms of the surety contracts and imposed additional and onerous
obligations upon the sureties.
Lastly, petitioners claim that no accounting of the payments made by Petitioner Fortune to Respondent
Filinvest was done by the latter. Hence, there could be no way by which the sureties can ascertain the
correct amount of the balance, if any.
Respondent Filinvest, on the other hand, imputes "estoppel (by pleadings or by judicial admission)" upon
petitioners when in their "Motion to Discharge Attachment," they admitted their liability as sureties thus:
Defendants Chua and Rodrigueza could not have perpetrated fraud because they are only sureties of
defendant Fortune Motors . . .;
. . . The defendants (referring to Rodrigueza and Chua) are not parties to the trust receipts agreements
since they are ONLY sureties.. . . 13
In rejecting the arguments of petitioners and in holding that they (Fortune and the sureties) were jointly
and solidarily liable to Filinvest, the trial court declared:
As to the alleged non-existence of a principal obligation when the surety agreement was signed, it is
enought (sic) to state that a guaranty may also be given as security for future debts, the amount of
which is not known (Art. 2053, New Civil Code). In the case of NARIC vs. Fojas, L-11517, promulgated
April 10, 1958, it was ruled that a bond posted to secure additional credit that the principal debtor had
applied for, is not void just because the said bond was signed and filed before the additional credit was
extended by the creditor. The obligation of the sureties on future obligations of Fortune is apparent
from a proviso under the Surety Undertakings marked Exhs. B and C that the sureties agree with the
plaintiff as follows:
In consideration of your entering into an arrangement with the party (Fortune) named above, . . . by
which you may purchase or otherwise require from, and or enter into with obligor . . . trust
receipt . . . arising out of wholesale and/or retail transactions by or with obligor, the undersigned . . .
absolutely, unconditionally, and solidarily guarantee to you . . . the full, faithful and prompt
performance, payment and discharge of any and all obligations of obligor under and with respect to
any and all such contracts and any and all agreements (whether by way of guaranty or otherwise) of
obligor with you . . . now in force or hereafter made. (Emphasis supplied).
On the matter of novation, this has already been ruled upon when this Court denied defendants' Motion
to dismiss on the argument that what happened was really an assignment of credit, and not a novation
of contract, which does not require the consent of the debtors. The fact of knowledge is enough.
Besides, as explained by the plaintiff, the mother or the principal contract was the Financing
Agreement, whereas the trust receipts, the sight drafts, as well as the Deeds of assignment were only
collaterals or accidental modifications which do not extinguish the original contract by way of novation.
This proposition holds true even if the subsequent agreement would provide for more onerous terms
for, at any rate, it is the principal or mother contract that is to be followed. When the changes refer to
secondary agreements and not to the object or principal conditions of the contract, there is no
novation; such changes will produce modifications of incidental facts, but will not extinguish the original
obligation.
On the evidence adduced by the plaintiff to show the status of defendants' accounts, which took into
consideration payments by defendants made after the filing of the case, it is enough to state that a
statement was carefully prepared showing a balance of the principal obligation plus interest totalling
P1,348,033.89 as of March 31, 1985 (Exh. M). This accounting has not been traversed nor contradicted
by defendants although they had the opportunity to do so. Likewise, there was absolute silence on the
part of defendants as to the correctness of the previous statement of account made as of December 16,
1983 (referring to Exh. I), but more important, however, is that defendants received demand letters
from the plaintiff stating that, as of December 1983 (Exhs. J, K and L), this total amount of obligation
was P1,302,811,00, and yet defendants were not heard to have responded to said demand letters, let
alone have taken any exception thereto. There is such a thing as evidence by silence.
The Court of Appeals, affirming the above decision of the trial court, further explained:
. . . In the case at bar, the surety undertakings in question unequivocally state that Chua and
Rodrigueza "absolutely, unconditionally and solidarily guarantee" to Filinvest the "full, faithful and
prompt performance, payment and discharge of any and all obligations and agreements" of Fortune
"under or with respect to any and all such contracts and any and all other agreements (whether by way
of guaranty or otherwise)" of the latter with Filinvest in force at the time of the execution of the "Surety
Undertakings" or made thereafter. Indeed, if Chua and Rodrigueza did not intend to guarantee all of
Fortune's future obligation with Filinvest, then they should have expressly stated in their respective
surety undertakings exactly what said surety agreements guaranteed or to which obligations of Fortune
the same were intended to apply. For another, if Chua and Rodrigueza truly believed that the surety
undertakings they executed should not cover Fortune's obligations under the AWFA, then why did they
not inform Filinvest of such fact when the latter sent them the aforementioned demand letters (Exhs.
'K' and 'L') urging them to pay Fortune's liability under the AWFA. Instead, quite uncharacteristic of
persons who have just been asked to pay an obligation to which they believe they are not liable, Chua
and Rodrigueza elected or chose not to answer said demand letters. Then, too, considering that
appellant Chua is the corporate president of Fortune and a signatory to the AWFA, he should have
simply had it stated in the AWFA or in a separate document that the "Surety Undertakings" do not
cover Fortune's obligations in the aforementioned AWFA, trust receipts or demand drafts.
Appellants argue that it was unfair for Filinvest to have executed the AWFA only after two (2) years
from the date of the "Surety undertakings" because Chua and Rodrigueza were thereby made to wait
for said number of years just to know what kind of obligation they had to guarantee.
The argument cannot hold water. In the first place, the "Surety Undertakings" did not provide that after
a period of time the same will lose its force and effect. In the second place, if Chua and Rodrigueza did
not want to guarantee the obligations of Fortune under the AWFA, trust receipts and demand drafts,
then why did they not simply terminate the 'Surety Undertakings' by serving ten (10) days written
notice to Filinvest as expressly allowed in said surety agreements. It is highly plausible that the reason
why the 'Surety Undertakings' were not terminated was because the execution of the same was part of
the consideration why Filinvest and CARCO agreed to enter into the AWFA with Fortune. 15
The Court's Ruling
We affirm the decisions of the trial and appellate courts.
First Issue: Surety May Secure Future Obligations
The case at bench falls on all fours with Atok Finance Corporation vs. Court of Appeals 16 which reiterated
our rulings in National Rice and Corn Corporation (NARIC) vs. Court of Appeals 17 and Rizal Commercial
Banking Corporation vs. Arro. 18 In Atok Finance, Sanyu Chemical as principal, and Sanyu Trading along
with individual private stockholders of Sanyu Chemical, namely, spouses Daniel and Nenita Arrieta,
Leopoldo Halili and Pablito Bermundo, as sureties, executed a continuing suretyship agreement in favor of
Atok Finance as creditor. Under the agreement, Sanyu Trading and the individual private stockholders
and officers of Sanyu Chemical "jointly and severally unconditionally guarantee(d) to Atok Finance
Corporation (hereinafter called Creditor), the full, faithful and prompt payment and discharge of any and
all indebtedness of [Sanyu Chemical] . . . to the Creditor." Subsequently, Sanyu Chemical assigned its
trade receivables outstanding with a total face value of P125,871.00 to Atok Finance in consideration of
receipt of the amount of P105,000.00. Later, additional trade receivables with a total face value of
P100,378.45 were also assigned. Due to nonpayment upon maturity, Atok
Finance commenced action against Sanyu Chemical, the Arrieta spouses, Bermundo and Halili to collect
the sum of P120,240.00 plus penalty charges due and payable. The individual private respondents
contended that the continuing suretyship agreement, being an accessory contract, was null and void
since, at the time of its execution, Sanyu Chemical had no pre-existing obligation due to Atok Finance.
The trial court rendered a decision in favor of Atok Finance and ordered defendants to pay, jointly and
severally, aforesaid amount to Atok.
On appeal, the then Intermediate Appellate Court reversed the trial court and dismissed the complaint on
the ground that there was "no proof that when the suretyship agreement was entered into, there was a
pre-existing obligation which served as the principal obligation between the parties. Furthermore, the
'future debts' alluded to in Article 2053 refer to debts already existing at the time of the constitution of
the agreement but the amount thereof is unknown, unlike in the case at bar where the obligation was
acquired two years after the agreement."
We ruled then that the appellate court was in serious error. The distinction which said court sought to
make with respect to Article 2053 (that "future debts" referred to therein relate to "debts already existing
at the time of the constitution of the agreement but the amount [of which] is unknown" and not to debts
not yet incurred and existing at that time) has previously been rejected, citing the RCBC and NARIC
cases. We further said:
. . . Of course, a surety is not bound under any particular principal obligation until that principal
obligation is born. But there is no theoretical or doctrinal difficulty inherent in saying that the suretyship
agreement itself is valid and binding even before the principal obligation intended to be secured thereby
is born, any more than there would be in saying that obligations which are subject to a condition
precedent are valid and binding before the occurrence of the condition precedent.
Comprehensive or continuing surety agreements are in fact quite commonplace in present day financial
and commercial practice. A bank or financing company which anticipates entering into a series of credit
transactions with a particular company, commonly requires the projected principal debtor to execute a
continuing surety agreement along with its sureties. By executing such an agreement, the principal
places itself in a position to enter into the projected series of transactions with its creditor; with such
suretyship agreement, there would be no need to execute a separate surety contract or bond for each
financing or credit accommodation extended to the principal debtor.
In Dino vs. Court of Appeals, 19 we again had occasion to discourse on continuing guaranty/suretyship
thus:
. . . A continuing guaranty is one which is not limited to a single transaction, but which contemplates a
future course of dealing, covering a series of transactions, generally for an indefinite time or until
revoked. It is prospective in its operation and is generally intended to provide security with respect to
future transactions within certain limits, and contemplates a succession of liabilities, for which, as they
accrue, the guarantor becomes liable. Otherwise stated, a continuing guaranty is one which covers all
transactions, including those arising in the future, which are within the description or contemplation of
the contract, of guaranty, until the expiration or termination thereof. A guaranty shall be construed as
continuing when by the terms thereof it is evident that the object is to give a standing credit to the
principal debtor to be used from time to time either indefinitely or until a certain period; especially if
the right to recall the guaranty is expressly reserved. Hence, where the contract of guaranty states that
the same is to secure advances to be made 'from time to time' the guaranty will be construed to be a
continuing one.
In other jurisdictions, it has been held that the use of particular words and expressions such as
payment of "any debt," "any indebtedness," "any deficiency," or "any sum," or the guaranty of "any
transaction" or money to be furnished the principal debtor "at any time," or "on such time" that the
principal debtor may require, have been construed to indicate a continuing guaranty. 20
We have no reason to depart from our uniform ruling in the above-cited cases. The facts of the instant
case bring us to no other conclusion than that the surety undertakings executed by Chua and Rodrigueza
were continuing guaranties or suretyships covering all future obligations of Fortune Motors (Phils.)
Corporation with Filinvest Credit Corporation. This is evident from the written contract itself which
contained the words "absolutely, unconditionally and solidarily guarantee(d)" to Respondent Filinvest and
its affiliated and subsidiary companies the "full, faithful and prompt performance, payment and discharge
of any and all obligations and agreements" of Petitioner Fortune "under or with respect to any and all
such contracts and any and all other agreements (whether by way of guaranty or otherwise)" of the latter
with Filinvest and its affiliated and subsidiary companies "now in force or hereafter made."
Moreover, Petitioner Rodrigueza and Joseph Chua knew exactly where they stood at the time they
executed their respective surety undertakings in favor of Fortune. As stated in the petition:
Before the execution of the new agreement, Edgar L. Rodrigueza and Joseph Chua were required to
sign blank surety agreements, without informing them how much amount they would be liable as
sureties. However, because of the desire of petitioners, Chua and Rodrigueza to have the cars delivered
to petitioner. Fortune, they signed the blank promissory notes. 21 (emphasis supplied)
It is obvious from the foregoing that Rodrigueza and Chua were fully aware of the business of Fortune, an
automobile dealer; Chua being the corporate president of Fortune and even a signatory to the Financial
Agreement with Filinvest. 22 Both sureties knew the purpose of the surety undertaking which they signed
and they must have had an estimate of the amount involved at that time. Their undertaking by way of
the surety contracts was critical in enabling Fortune to acquire credit facility from Filinvest and to procure
cars for resale, which was the business of Fortune. Respondent Filinvest, for its part, relied on the surety
contracts when it agreed to be the assignee of CARCO with respect to the liabilities of Fortune with
CARCO. After benefiting therefrom, petitioners cannot now impugn the validity of the surety contracts on
the ground that there was no preexisting obligation to be guaranteed at the time said surety contracts
were executed. They cannot resort to equity to escape liability for their voluntary acts, and to heap
injustice to Filinvest, which relied on their signed word.
This is a clear case of estoppel by deed. By the acts of petitioners, Filinvest was made to believe that it
can collect from Chua and/or Rodrigueza in case of Fortune's default. Filinvest relied upon the surety
contracts when it demanded payment from the sureties of the unsettled liabilities of Fortune. A refusal to
enforce said surety contracts would virtually sanction the perpetration of fraud or injustice. 23
Second Issue: No Novation
Neither do we find merit in the averment of petitioners that the Financing Agreement contained onerous
obligations not contemplated in the surety undertakings, thus changing the principal terms thereof and
effecting a novation.
We have ruled previously that there are only two ways to effect novation and thereby extinguish an
obligation. First, novation must be explicitly stated and declared in unequivocal terms. Novation is never
presumed. Second, the old and new obligations must be incompatible on every point. The test of
incompatibility is whether the two obligations can stand together, each one having its independent
existence. If they cannot, they are incompatible and the latter obligation novates the first. 24 Novation
must be established either by the express terms of the new agreement or by the acts of the parties
clearly demonstrating the intent to dissolve the old obligation as a consideration for the emergence of the
new one. The will to novate, whether totally or partially, must appear by express agreement of the
parties, or by their acts which are too clear and unequivocal to be mistaken. 25

Under the surety undertakings however, the obligation of the sureties referred to absolutely,
unconditionally and solidarily guaranteeing the full, faithful and prompt performance, payment and
discharge of all obligations of Petitioner Fortune with respect to any and all contracts and other
agreements with Respondent Filinvest in force at that time or thereafter made. There were to
qualifications, conditions or reservations stated therein as to the extent of the suretyship. The Financing
Agreement, on the other hand, merely detailed the obligations of Fortune to CARCO (succeeded by
Filinvest as assignee). The allegation of novation by petitioners is, therefore, misplaced. There is no
incompatibility of obligations to speak of in the two contracts. They can stand together without conflict.

Furthermore, the parties have not performed any explicit and unequivocal act to manifest their
agreement or intention to novate their contract. Neither did the sureties object to the Financing
Agreement nor try to avoid liability thereunder at the time of its execution. As aptly discussed by the
Court of Appeals:
. . . For another, if Chua and Rodrigueza truly believed that the surety undertakings they executed
should not cover Fortune's obligations under the AWFA (Financing Agreement), then why did they not
inform Filinvest of such fact when the latter sent them the aforementioned demand letters (Exhs. "K"
and "L") urging them to pay Fortune's liability under the AWFA. Instead, quite uncharacteristic of
persons who have just been asked to pay an obligation to which they are not liable, Chua and
Rodrigueza elected or chose not to answer said demand letters. Then, too, considering that appellant
Chua is the corporate president of Fortune and a signatory to the AWFA, he should have simply had it
stated in the AWFA or in a separate document that the 'Surety Undertakings' do not cover Fortune's
obligations in the aforementioned AWFA, trust receipts or demand drafts. 26

Third Issue: Amount of Claim Substantiated

G.R. No. 33174             July 4, 1991
The contest on the correct amount of the liability of petitioners is a purely factual issue. It is an oft
PHILIPPINE NATIONAL BANK, petitioner,
repeated maxim that the jurisdiction of this Court in cases brought before it from the Court of Appeals
vs.
under Rule 45 of the Rules of Court is limited to reviewing or revising errors of law. It is not the function
THE HONORABLE COURT OF APPEALS (Special Fourth Division), LUZON SURETY CO., INC., and
of this Court to analyze or weigh evidence all over again unless there is a showing that the findings of the
ESTANISLAO E. DEPUSOY, trading under the style of E.E. DEPUSOY
lower court are totally devoid of support or are glaringly erroneous as to constitute serious abuse of
CONSTRUCTION, respondents.
discretion. Factual findings of the Court of Appeals are conclusive on the parties and carry even more
weight when said court affirms the factual findings of the trial court. 27 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-R1 affirming, with modification, the decision of the then Court of
In the case at bar, the findings of the trial court and the Court of Appeals with respect to the assigned
First Instance (now Regional Trial Court) of Manila, Branch VII, dated 30 September 1959 in Civil Case
error are based on substantial evidence which were not refuted with contrary proof by petitioners. Hence,
No. 351632 an action for collection of sum of money filed by petitioner against private respondents. The
there is no necessity to depart from the above judicial dictum.
dispositive portion of the trial court's decision reads:
WHEREFORE, premises considered, the petition is DENIED and the assailed Decision of the Court of IN VIEW WHEREOF:
Appeals concurring with the decision of the trial court is hereby AFFIRMED. Costs against petitioners. 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.

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 above-mentioned 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 "K-5"; 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 plaintiff-appellant 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.1âwphi1 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)
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)
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.
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.
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 far-fetched 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.
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 petition12 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;13 however, upon motion for reconsideration 14 this Court reconsidered the resolution and gave due
course to the petition. 15 The 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 thereto20 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; and with this doctrine the common law is accordant. As was
said by Justice Story in Miller vs. Stewart:
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.1âwphi1 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.
[G.R. No. L-8437. November 28, 1956.]
ESTATE OF K. H. HEMADY, deceased, v. LUZON SURETY CO., INC., claimant-appellant.
1. CONTRACTS; BINDING EFFECT OF CONTRACTS UPON HEIRS OF DECEASED PARTY. — Whatever payment is thus made
from the estate is ultimately a payment is thus made from the estate is ultimately a payment by the heirs and distributes,
since the amount of the paid claim in fact diminishes or reduces the shares that the heirs would have been entitled to
receive. The general rule, therefore, is that a party’s contractual rights and obligations are transmissible to the successors.
2. ID.; SURETYHIP; NATURE OF OBLIGATION OF SURETY. — The nature of the obligation of the surety or guarantor does
not warrant the conclusion that his peculiar individual qualities are contemplated as a principal inducement for the contract.
The creditor expects of the surety nothing but the reimbursement of the moneys that said creditor might have to disburse
on account of the obligations of the principal debtors. This reimbursement is a payment of a sum of money, resulting from
an obligation to give; and to the creditor, it was indifferent that the reimbursement should be made by the surety himself
or by some one else in his behalf, so long as the money was paid to it.
3. ID.; ID.; QUALIFICATION OF GUARANTOR; SUPERVENING INCAPACITY OF GUARANTOR, EFFECT ON CONTRACT. — The
qualification of integrity in the guarantor or surety is required to be present only at the time of the perfection of the
contract of guaranty. Once the contract of guaranty has become perfected and binding, the supervening dishonesty of the
guarantor (that is to say, the disappearance of his integrity after he has become bound) does not terminate the contract
but merely entitles the creditor to demand a replacement of the guarantor. But the step remains optional in the creditor; it
is his right, not his duty, he may waive it if he chooses, and hold the guarantor to his bargain.
The Luzon Surety Co. had filed a claim against the Estate based on twenty different indemnity
agreements, or counter bonds, each subscribed by a distinct principal and by the deceased K. H. Hemady,
a surety solidary guarantor) in all of them, in consideration of the Luzon Surety Co.’s of having
guaranteed, the various principals in favor of different creditors. The twenty counterbonds, or indemnity
agreements, all contained the following stipulations:
"Premiums. — As consideration for this suretyship, the undersigned jointly and severally, agree to pay the COMPANY the
sum of ________________ (P______) pesos, Philippines Currency, in advance as premium there of for every
__________ months or fractions thereof, this ________ or any renewal or substitution thereof is in effect.
Indemnity. — The undersigned, jointly and severally, agree at all times to indemnify the COMPANY and keep it
indemnified and hold and save it harmless from and against any and all damages, losses, costs, stamps, taxes, penalties,
charges, and expenses of whatsoever kind and nature which the COMPANY shall or may, at any time sustain or incur in
consequence of having become surety upon this bond or any extension, renewal, substitution or alteration thereof made
at the instance of the undersigned or any of them or any order executed on behalf of the undersigned or any of them;
and to pay, reimburse and make good to the COMPANY, its successors and assigns, all sums and amount of money which
it or its representatives shall pay or cause to be paid, or become liable to pay, on account of the undersigned or any of
them, of whatsoever kind and nature, including 15% of the amount involved in the litigation or other matters growing
out of or connected therewith for counsel or attorney’s fees, but in no case less than P25. It is hereby further agreed that
in case of extension or renewal of this ________ we equally bind ourselves for the payment thereof under the same
terms and conditions as above mentioned without the necessity of executing another indemnity agreement for the
purpose and that we hereby equally waive our right to be notified of any renewal or extension of this ________ which
may be granted under this indemnity agreement.
Interest on amount paid by the Company. — Any and all sums of money so paid by the company shall bear interest at
the rate of 12% per annum which interest, if not paid, will be accummulated and added to the capital quarterly order to
earn the same interests as the capital and the total sum thereof, the capital and interest, shall be paid to the COMPANY
as soon as the COMPANY shall have become liable therefore, whether it shall have paid out such sums of money or any
part thereof or not.
Waiver. — It is hereby agreed upon by and between the undersigned that any question which may arise between them
by reason of this document and which has to be submitted for decision to Courts of Justice shall be brought before the
Court of competent jurisdiction in the City of Manila, waiving for this purpose any other venue. Our right to be notified of
the acceptance and approval of this indemnity agreement is hereby likewise waived.
Our Liability Hereunder. — It shall not be necessary for the COMPANY to bring suit against the principal upon his default,
or to exhaust the property of the principal, but the liability hereunder of the undersigned indemnitor shall be jointly and
severally, a primary one, the same as that of the principal, and shall be exigible immediately upon the occurrence of
such default." (Rec. App. pp. 98- 102.)
The Luzon Surety Co., prayed for allowance, as a contingent claim, of the value of the twenty bonds it
had executed in consideration of the counterbonds, and further asked for judgment for the unpaid
premiums and documentary stamps affixed to the bonds, with 12 per cent interest thereon.
Before answer was filed, and upon motion of the administratrix of Hemady’s estate, the lower court, by
order of September 23, 1953, dismissed the claims of Luzon Surety Co., on two grounds: (1) that the
premiums due and cost of documentary stamps were not contemplated under the indemnity agreements
to be a part of the undertaking of the guarantor (Hemady), since they were not liabilities incurred after
the execution of the counterbonds; and (2) that "whatever losses may occur after Hemady’s death, are
not chargeable to his estate, because upon his death he ceased to be guarantor."chanrob1es virtual 1aw
library
Taking up the latter point first, since it is the one more far reaching in effects, the reasoning of the court
below ran as follows:
"The administratrix further contends that upon the death of Hemady, his liability as a guarantor
terminated, and therefore, in the absence of a showing that a loss or damage was suffered, the claim
cannot be considered contingent. This Court believes that there is merit in this contention and finds
support in Article 2046 of the new Civil Code. It should be noted that a new requirement has been
added for a person to qualify as a guarantor, that is: integrity. As correctly pointed out by the
Administratrix, integrity is something purely personal and is not transmissible. Upon the death of
Hemady, his integrity was not transmitted to his estate or successors. Whatever loss therefore, may
occur after Hemady’s death, are not chargeable to his estate because upon his death he ceased to be a
guarantor.
Another clear and strong indication that the surety company has exclusively relied on the personality,
character, honesty and integrity of the now deceased K. H. Hemady, was the fact that in the printed form
of the indemnity agreement there is a paragraph entitled ‘Security by way of first mortgage, which was
expressly waived and renounced by the security company. The security company has not demanded from
K. H. Hemady to comply with this requirement of giving security by way of first mortgage. In the
supporting papers of the claim presented by Luzon Surety Company, no real property was mentioned in
the list of properties mortgaged which appears at the back of the indemnity agreement." (Rec. App., pp.
407-408).
We find this reasoning untenable. Under the present Civil Code (Article 1311), as well as under the Civil
Code of 1889 (Article 1257), the rule is that — "Contracts take effect only as between the parties, their
assigns and heirs, except in the case where the rights and obligations arising from the contract are not
transmissible by their nature, or by stipulation or by provision of law."
While in our successional system the responsibility of the heirs for the debts of their decedent cannot
exceed the value of the inheritance they receive from him, the principle remains intact that these heirs
succeed not only to the rights of the deceased but also to his obligations. Articles 774 and 776 of the New
Civil Code expressly so provide, thereby confirming Article 1311 already quoted.
"ART. 774. — Succession is a mode of acquisition by virtue of which the property, rights and obligations
to the extent of the value of the inheritance, of a person are transmitted through his death to another
or others either by his will or by operation of law."chanrob1es virtual 1aw library
"ART. 776. — The inheritance includes all the property, rights and obligations of a person which are not
extinguished by his death."chanrob1es virtual 1aw library
In Mojica v. Fernandez, 9 Phil. 403, this Supreme Court ruled:
"Under the Civil Code the heirs, by virtue of the rights of succession are subrogated to all the rights and
obligations of the deceased (Article 661) and can not be regarded as third parties with respect to a
contract to which the deceased was a party, touching the estate of the deceased
"The principle on which these decisions rest is not affected by the provisions of the new Code of Civil
Procedure, and, in accordance with that principle, the heirs of a deceased person cannot be held to be
"third persons" in relation to any contracts touching the real estate of their decedent which comes in to
their hands by right of inheritance; they take such property subject to all the obligations resting thereon
in the hands of him from whom they derive their rights."
The binding effect of contracts upon the heirs of the deceased party is not altered by the provision in our
Rules of Court that money debts of a deceased must be liquidated and paid from his estate before the
residue is distributed among said heirs (Rule 89). The reason is that whatever payment is thus made
from the estate is ultimately a payment by the heirs and distributees, since the amount of the paid claim
in fact diminishes or reduces the shares that the heirs would have been entitled to receive.
Under our law, therefore, the general rule is that a party’s contractual rights and obligations are
transmissible to the successors. The rule is a consequence of the progressive "depersonalization" of
patrimonial rights and duties that, as observed by Victorio Polacco, has characterized the history of these
institutions. From the Roman concept of a relation from person to person, the obligation has evolved into
a relation from patrimony to patrimony, with the persons occupying only a representative position,
barring those rare cases where the obligation is strictly personal, i.e., is contracted intuitu personae, in
consideration of its performance by a specific person and by no other. The transition is marked by the
disappearance of the imprisonment for debt.
Of the three exceptions fixed by Article 1311, the nature of the obligation of the surety or guarantor does
not warrant the conclusion that his peculiar individual qualities are contemplated as a principal
inducement for the contract. What did the creditor Luzon Surety Co. expect of K. H. Hemady when it
accepted the latter as surety in the counterbonds? Nothing but the reimbursement of the moneys that the
Luzon Surety Co. might have to disburse on account of the obligations of the principal debtors. This
reimbursement is a payment of a sum of money, resulting from an obligation to give; and to the Luzon
Surety Co., it was indifferent that the reimbursement should be made by Hemady himself or by some one
else in his behalf, so long as the money was paid to it.
The second exception of Article 1311, p. 1, is intransmissibility by stipulation of the parties. Being
exceptional and contrary to the general rule, this intransmissibility should not be easily implied, but must
be expressly established, or at the very least, clearly inferable from the provisions of the contract itself,
and the text of the agreements sued upon nowhere indicate that they are non-transferable.
Because under the law (Article 1311), a person who enters into a contract is deemed to have contracted
for himself and his heirs and assigns, it is unnecessary for him to expressly stipulate to that effect; hence,
his failure to do so is no sign that he intended his bargain to terminate upon his death. Similarly, that the
Luzon Surety Co., did not require bondsman Hemady to execute a mortgage indicates nothing more than
the company’s faith and confidence in the financial stability of the surety, but not that his obligation was
strictly personal.
The third exception to the transmissibility of obligations under Article 1311 exists when they are "not
transmissible by operation of law". The provision makes reference to those cases where the law expresses
that the rights or obligations are extinguished by death, as is the case in legal support (Article 300),
parental authority (Article 327), usufruct (Article 603), contracts for a piece of work (Article 1726),
partnership (Article 1830 and agency (Article 1919). By contract, the articles of the Civil Code that
regulate guaranty or suretyship (Articles 2047 to 2084) contain no provision that the guaranty is
extinguished upon the death of the guarantor or the surety.
The lower court sought to infer such a limitation from Art. 2056, to the effect that "one who is obliged to
furnish a guarantor must present a person who possesses integrity, capacity to bind himself, and
sufficient property to answer for the obligation which he guarantees". It will be noted, however, that the and the records are ordered remanded to the court of origin, with instructions to proceed in accordance with law. Costs
law requires these qualities to be present only at the time of the perfection of the contract of guaranty. It against the Administratrix- Appellee. So ordered.

is self-evident that once the contract has become perfected and binding, the supervening incapacity of
the guarantor would not operate to exonerate him of the eventual liability he has contracted; and if that G.R. No. 143382             November 29, 2006
be true of his capacity to bind himself, it should also be true of his integrity, which is a quality mentioned
in the article alongside the capacity. SECURITY BANK and TRUST COMPANY, Petitioner,
vs.
The foregoing concept is confirmed by the next Article 2057, that runs as follows: MAR TIERRA CORPORATION, WILFRIDO C. MARTINEZ, MIGUEL J. LACSON and RICARDO A.
"ART. 2057. — If the guarantor should be convicted in first instance of a crime involving dishonesty or LOPA, Respondents.
should become insolvent, the creditor may demand another who has all the qualifications required in
the preceding article. The case is excepted where the creditor has required and stipulated that a May the conjugal partnership be held liable for an indemnity agreement entered into by the husband to
specified person should be guarantor."chanrob1es virtual 1aw library accommodate a third party?

From this article it should be immediately apparent that the supervening dishonesty of the guarantor On May 7, 1980, respondent Mar Tierra Corporation, through its president, Wilfrido C. Martinez, applied
(that is to say, the disappearance of his integrity after he has become bound) does not terminate the for a ₱12,000,000 credit accommodation with petitioner Security Bank and Trust Company. Petitioner
contract but merely entitles the creditor to demand a replacement of the guarantor. But the step remains approved the application and entered into a credit line agreement with respondent corporation. It was
optional in the creditor: it is his right, not his duty; he may waive it if he chooses, and hold the guarantor secured by an indemnity agreement executed by individual respondents Wilfrido C. Martinez, Miguel J.
to his bargain. Hence Article 2057 of the present Civil Code is incompatible with the trial court’s stand Lacson and Ricardo A. Lopa who bound themselves jointly and severally with respondent corporation for
that the requirement of integrity in the guarantor or surety makes the latter’s undertaking strictly the payment of the loan.
personal, so linked to his individuality that the guaranty automatically terminates upon his death.
On July 2, 1980, the credit line agreement was amended and increased to ₱14,000,000. Individual
The contracts of suretyship entered into by K. H. Hemady in favor of Luzon Surety Co. not being rendered respondents correspondingly executed a new indemnity agreement in favor of the bank to secure the
intransmissible due to the nature of the undertaking, nor by the stipulations of the contracts themselves, increased credit line.
nor by provision of law, his eventual liability thereunder necessarily passed upon his death to his heirs.
The contracts, therefore, give rise to contingent claims provable against his estate under section 5, Rule
On September 25, 1981, respondent corporation availed of its credit line and received the sum of
87
₱9,952,000 which it undertook to pay on or before November 30, 1981. It was able to pay ₱4,648,000 for
the principal loan and ₱2,729,195.56 for the interest and other charges. However, respondent corporation
"The most common example of the contigent claim is that which arises when a person is bound as surety was not able to pay the balance as it suffered business reversals, eventually ceasing operations in 1984.
or guarantor for a principal who is insolvent or dead. Under the ordinary contract of suretyship the surety
has no claim whatever against his principal until he himself pays something by way of satisfaction upon
Unable to collect the balance of the loan, petitioner filed a complaint for a sum of money with a prayer for
the obligation which is secured. When he does this, there instantly arises in favor of the surety the right
preliminary attachment against respondent corporation and individual respondents in the Regional Trial
to compel the principal to exonerate the surety. But until the surety has contributed something to the
Court (RTC) of Makati, Branch 66. It was docketed as Civil Case No. 3947.
payment of the debt, or has performed the secured obligation in whole or in part, he has no right of
action against anybody — no claim that could be reduced to judgment.
Subsequently, however, petitioner had the case dismissed with respect to individual respondents Lacson
and Lopa,2 leaving Martinez as the remaining individual respondent.
For defendant administratrix it is averred that the above doctrine refers to a case where the surety files
claims against the estate of the principal debtor; and it is urged that the rule does not apply to the case
On August 10, 1982, the RTC issued a writ of attachment on all real and personal properties of
before us, where the late Hemady was a surety, not a principal debtor. The argument evinces a
respondent corporation and individual respondent Martinez. As a consequence, the conjugal house and lot
superficial view of the relations between parties. If under the Gaskell ruling, the Luzon Surety Co., as
of the spouses Wilfrido and Josefina Martinez in Barrio Calaanan, Caloocan City covered by Transfer
guarantor, could file a contingent claim against the estate of the principal debtors if the latter should die,
Certificate of Title (TCT) No. 49158 was levied on.
there is absolutely no reason why it could not file such a claim against the estate of Hemady, since
Hemady is a solidary co-debtor of his principals. What the Luzon Surety Co. may claim from the estate of
a principal debtor it may equally claim from the estate of Hemady, since, in view of the existing solidarity, The RTC rendered its decision3 on June 20, 1994. It held respondent corporation and individual
the latter does not even enjoy the benefit of exhaustion of the assets of the principal debtor. respondent Martinez jointly and severally liable to petitioner for ₱5,304,000 plus 12% interest per annum
and 5% penalty commencing on June 21, 1982 until fully paid, plus ₱10,000 as attorney’s fees. It,
however, found that the obligation contracted by individual respondent Martinez did not redound to the
The foregoing ruling is of course without prejudice to the remedies of the administratrix against the
benefit of his family, hence, it ordered the lifting of the attachment on the conjugal house and lot of the
principal debtors under Articles 2071 and 2067 of the New Civil Code.
spouses Martinez.

Our conclusion is that the solidary guarantor’s liability is not extinguished by his death, and that in such event, the Luzon
Surety Co., had the right to file against the estate a contingent claim for reimbursement. It becomes unnecessary now to Dissatisfied with the RTC decision, petitioner appealed to the CA but the appellate court affirmed the trial court’s decision in
discuss the estate’s liability for premiums and stamp taxes, because irrespective of the solution to this question, the Luzon toto. Petitioner sought reconsideration but it was denied. Hence, this petition. Petitioner makes two basic assertions: (1)
Surety’s claim did state a cause of action, and its dismissal was erroneous. Wherefore, the order appealed from is reversed, the RTC and CA erred in finding that respondent corporation availed of ₱9,952,000 only from its credit line and not the
entire ₱14,000,000 and (2) the RTC and CA were wrong in ruling that the conjugal partnership of the Martinez spouses
could not be held liable for the obligation incurred by individual respondent Martinez.
We uphold the CA.
Factual findings of the CA, affirming those of the trial court, will not be disturbed on appeal but must be
accorded great weight.4 These findings are conclusive not only on the parties but on this Court as well.5
The CA affirmed the finding of the RTC that the amount availed of by respondent corporation from its
credit line with petitioner was only ₱9,952,000. Both courts correctly pointed out that petitioner itself
admitted this amount when it alleged in paragraph seven of its complaint that respondent corporation
"borrowed and received the principal sum of ₱9,952,000." 6 Petitioner was therefore bound by the factual
finding of the appellate and trial courts, as well as by its own judicial admission, on this particular point.
At any rate, the issue of the amount actually availed of by respondent corporation is factual. It is not
within the ambit of this Court’s discretionary power of judicial review under Rule 45 of the Rules of Court
which is concerned solely with questions of law.7
We now move on to the principal issue in this case.
Under Article 161(1) of the Civil Code,8 the conjugal partnership is liable for "all debts and obligations
contracted by the husband for the benefit of the conjugal partnership." But when are debts and
obligations contracted by the husband alone considered for the benefit of and therefore chargeable
against the conjugal partnership? Is a surety agreement or an accommodation contract entered into by
the husband in favor of his employer within the contemplation of the said provision?
We ruled as early as 1969 in Luzon Surety Co., Inc. v. de Garcia 9 that, in acting as a guarantor or surety for another, the
husband does not act for the benefit of the conjugal partnership as the benefit is clearly intended for a third party.
In Ayala Investment and Development Corporation v. Court of Appeals,10 we ruled that, if the husband himself is the
principal obligor in the contract, i.e., the direct recipient of the money and services to be used in or for his own business or
profession, the transaction falls within the term "obligations for the benefit of the conjugal partnership." In other words,
where the husband contracts an obligation on behalf of the family business, there is a legal presumption that such
obligation redounds to the benefit of the conjugal partnership.11
On the other hand, if the money or services are given to another person or entity and the husband acted
only as a surety or guarantor, the transaction cannot by itself be deemed an obligation for the benefit of
the conjugal partnership.12 It is for the benefit of the principal debtor and not for the surety or his family.
No presumption is raised that, when a husband enters into a contract of surety or accommodation
agreement, it is for the benefit of the conjugal partnership. Proof must be presented to establish the
benefit redounding to the conjugal partnership.13 In the absence of any showing of benefit received by it,
the conjugal partnership cannot be held liable on an indemnity agreement executed by the husband to
accommodate a third party.14
In this case, the principal contract, the credit line agreement between petitioner and respondent
corporation, was solely for the benefit of the latter. The accessory contract (the indemnity agreement)
under which individual respondent Martinez assumed the obligation of a surety for respondent corporation
was similarly for the latter’s benefit. Petitioner had the burden of proving that the conjugal partnership of
the spouses Martinez benefited from the transaction. It failed to discharge that burden.
To hold the conjugal partnership liable for an obligation pertaining to the husband alone defeats the
objective of the Civil Code to protect the solidarity and well being of the family as a unit. 15 The underlying
concern of the law is the conservation of the conjugal partnership. 16 Hence, it limits the liability of the
conjugal partnership only to debts and obligations contracted by the husband for the benefit of the
conjugal partnership.
WHEREFORE, the petition is hereby DENIED.
G.R. No. 109941           August 17, 1999
PACIONARIA C. BAYLON, petitioner,
vs.
THE HONORABLE COURT OF APPEALS (Former Ninth Division) and LEONILA
TOMACRUZ, respondents.
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 P150,000.00.5 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 check 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 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 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.
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
attorney's 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 PETITIONER-
APPELLANT 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 petitioner's 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 records10 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 Luanzon's 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
GURARANTOR:
(signed)
PACIONARIA O. BAYLON
Tel. No. 801-28-00
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 principal's 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.

[G.R. No. L-9434. March 29, 1957.]
GENERAL INDEMNITY CO., INC., Plaintiff-Appellee, v. ESTANISLAO ALVAREZ, Defendant-
Appellant.
1. SURETY AND GUARANTY; ACTION BY GUARANTOR AGAINST PRINCIPAL DEBTOR WHEN PREMATURE.
— An action by the guarantor against the principal debtor for payment before the guarantor has paid the
creditor, is premature. Under Art. 2071 of the new Civil Code, a guarantor who has not paid the creditor
can proceed against the principal debtor only for the purpose of obtaining release from the guaranty or a
security against an eventual insolvency of the debtor.
Appeal taken by defendant Estanislao Alvarez from a summary judgment rendered by the Court of First
Instance of Manila.
On February 18, 1954, appellee General Indemnity Co., Inc., filed a complaint (C. C. No. 22005) in the
Court of First Instance of Manila against appellant Estanislao Alvarez for the recovery of the sum of
P2,000 representing the amount of a loan allegedly taken by the appellant from the Philippine National
Bank, the payment of which appellee guaranteed with an indemnity bond, and for which appellant, as
counter-guaranty, executed in plaintiff’s favor a mortgage on his share in a parcel of land (Annex "A" of
the complaint). The complaint further alleged that the appellant failed to pay said loan, together with
interests, to the Philippine National Bank, as a result of which the bank deducted the amount thereof from
plaintiff’s deposit. Plaintiff likewise claimed the amount of P426.07 as attorney’s fees which the defendant
agreed to pay under the mortgage annexed to the complaint.
On March 29, 1954, appellant Estanislao Alvarez, answered, admitting the fact of the loan and the
execution of the mortgage Annex "A" of the complaint, but denying knowledge of the alleged payment
made by plaintiff to the Philippine National Bank; and as affirmative defense, appellant averred that the
loan in question was secured by him only in accommodation of one Hao Lam, and that plaintiff agreed not
to take any steps against appellant and the mortgage executed by him in plaintiff’s favor until the latter
had failed to obtain payment from said Hao Lam.
Eight months later, or on November 24, 1954, plaintiff filed a motion for summary judgment, claiming
that appellant’s answer, which admitted the genuineness and due execution of the mortgage annexed to
its complaint, presented no real and meritorious defense and that it was entitled to a summary judgment
in its favor, based on the affidavit of its comptroller Pedro R. Mendiola Supporting the motion, which
states:
"That he is the Comptroller of the General Indemnity Co., Inc., plaintiff in the above-entitled case;
That he has personal knowledge of the indebtedness of the defendant as of January 31, 1954, in the
sum of P2,130.36 plus daily interest of P0.69 from February 1, 1954 until fully paid, and the additional
amount of P426.07 as attorney’s fees;
That he knows of his own personal knowledge that several demands have been made upon the
defendant for the payment of the above-mentioned obligation to the plaintiff, but notwithstanding said
demands, defendant has failed and refused and still fails and refuses to pay the same." (Rec. on
Appeal, pp. 19-20)
The lower court found the motion for summary judgment well-taken and on March 29, 1955, rendered
judgment in favor of plaintiff for the amount of P2,130.38, plus daily interest of P0.69 from February 1,
1954 until payment, and the additional sum of P426.07 attorney’s fees, and costs. Defendant filed a
motion for reconsideration to have this judgment set aside and the case set for hearing, but said motion
was denied, and so he appealed to this Court.
Insofar as appellant argues that the affirmative defense in his answer that he secured the loan in
question only to accommodate a third party and that appellee promised not to proceed against him until
it had failed to collect from said third party, tenders genuine issues on the time and manner of payment
of the indebtedness in question, appellee is correct in saying that said defense is immaterial to its right of
recovery, since the mortgage deed executed by appellant in its favor (the genuineness and due execution
of which appellant admitted in his answer) shows appellant to be the actual and only debtor, and
appellant is precluded from varying this representation by parol evidence.
However, there is merit in appellant’s contention that there exists a controversy in the complaint and
answer as to whether or not appellee had actually paid appellant’s obligation to the Philippine National
Bank, a matter which should be decided in the affirmative before appellee, as surety, can claim
reimbursement from appellant, the principal debtor. Appellee asserts that this issue was brought up by
appellant for the first time on appeal and should, therefore, be ignored; but contrary to appellee’s
assertion, this question was brought up by appellant in his answer, when he specifically denied the
allegation of the complaint that the Philippine National Bank deducted from appellee’s deposit the amount
of the loan in question, by the following allegation:
"3. that he does not have sufficient knowledge or information to form a belief as to the truth of the
allegations regarding payments made by plaintiff to the P.N.B." (Answer, Rec. App., p. 16)
And as the affidavit of plaintiff’s comptroller Pedro R Mendiola, supporting the motion for summary
judgment simply relates to the amount of the loan in question and appellant’s failure to pay the same to
appellee inspite of repeated demands, but does not touch on the alleged payment made by appellee to
the bank, there was no necessity for appellant to submit counter-affidavits to show that such payment
had not been made. Appellee likewise contends that it is immaterial to its cause of action against
appellant whether or not it had actually paid the Philippine National Bank, citing Art. 2071 of the New Civil
Code to the effect that a guarantor may proceed against the principal debtor, even before having paid,
when the debt has become demandable. The last paragraph of this same article, however, provides that
in such instance, the only action the guarantor can file against the debtor is "to obtain release from the
guaranty, or to demand a security that shall protect him from any proceeding by the creditor and from
the danger of insolvency of the debtor." An action by the guarantor against the principal debtor for
payment, before the former has paid the creditor, is premature.
The judgment appealed from is hereby set aside and the lower court is ordered to set anew this case for
trial on the sole issue of whether or not appellee General Indemnity Co, Inc., had already paid the loan in
question to the Philippine National Bank, after which a new judgment shall be rendered. Costs against
appellee General Indemnity Co., Inc. So ordered.

G.R. No. L-21109             June 26, 1967
NATIONAL SHIPYARDS & STEEL CORPORATION, plaintiff-appellee,
vs.
CARIDAD J. TORRENTO and MUTUAL SECURITY INSURANCE CORPORATION, defendants-
appellants.
On December 5, 1958 defendant Caridad J. Torrento applied with the National Shipyards & Steel
Corporation (hereinafter referred to as NASSCO) for the purchase on credit of 60 tons of steel bars, 3/8"
deformed or plain, at P430.00 per ton, for a 120-day period.
A contract of purchase and sale was executed on January 13, 1959, but was subsequently amended when
plaintiff exhausted its stock of 3/8" plain steel bars. As amended, the quantity of steel bars stated to be
60 metric tons in the original contract was changed to 59.31 metric tons; the price was changed from
P430.00 to P435.00 per metric ton; and the specification of the steel bars was also changed from "plain,
round or corrugated" to "deformed."
Pursuant to the stipulation in the contract that the value of steel bars sold to defendant Torrento should
be secured by a surety bond issued by a reputable bonding company, defendant Torrento as principal and
Mutual Security Insurance Corporation, as surety executed in favor of plaintiff a surety bond (S. 1754) on
January 23, 1960. When it was noted that the undertaking under the bond was only P25,000.00, whereas
the contract called for the payment of P25,800.00, defendant surety executed a supplemental bond
increasing the amount of P25,800.00.
On February 6, 1959, when NASSCO could no longer supply the steel bars called for in the contract of
purchase and sale inasmuch as its stock of 3/8" deformed steel bars had been exhausted, the plaintiff
and defendant Torrento executed a supplemental agreement, the pertinent provisions of which read:
. . . Whereas the NASSCO has agreed to sell to the vendee and the vendee has agreed to buy from the
NASSCO . . . Fifty Nine and thirty one hundredths (59-31) metric tons of steel bars on credit basis for
size and price as follows:
3/8 deformed 20 ft or
30 ft. at P435.00 per tons
Whereas, after consummation of said contract, only the following amount of steel bars were delivered to
the vendee, as follows:
20-67 M.T. 3/8" deformed and that there were no more available stock of steel bars of size 3/8" x 20'
or 30' deformed.
Now therefore, for and in consideration of the foregoing premises, the parties hereby agree to modify
and/or amend their said contract as follows:
1. That the NASSCO shall sell to the vendee and the vendee shall buy from the NASSCO, 38.50 tons of
steel bars on credit basis subject to availability of stock in the following sizes and prices, to wit:
25 M.T. — 1/2" x 30 deformed at P440.00 per ton.
13.50 M.T. — 5/8" x 30 deformed at P430.00 per ton
2. That aside from the above amendment and/or modification, the said contract shall not be affected,
altered, or modified in any way.
Pursuant to the contract of purchase and sale and the supplemental contract, NASSCO delivered to
defendant Torrento steel bars in the total value of P25,794.09. The 120-day period for payment lapsed.
Demand letters were sent, but defendant surety made no reply. Defendant Torrento did not question her
liability, but only asked for a 3-month extension to settle her account.
Action was brought to recover the unpaid contract price from defendant Torrento and her surety. On
October 18, 1960, the lower court rendered judgment: "ordering the defendants, jointly and severally, to
pay the plaintiff the sum of P25,794.09, with interest thereon at the rate of 12% per annum, from August
29, 1959 until full payment, and the costs of suit. On the cross-claim, judgment is hereby rendered,
ordering the cross-defendant Caridad J. Torrento to pay the cross-plaintiff Mutual Security Insurance
Corporation whatever sums the latter would pay the plaintiff by virtue of this judgment, with interest
thereon at the rate of 12% per annum, from the date of payment to plaintiff, until full payment, and the
costs of this suit."
Defendants interposed an appeal to the Court of Appeals, which later on certified the case to Us on the
ground that the errors assigned raise only questions of law.
Appellant Torrento maintains that plaintiff has no cause of action against her for the reason that
inasmuch as she had paid the corresponding premium on the surety bond, the right of action, in case of
her default, is exclusively against her surety. Further, with respect to the cross-claim of the Surety,
Torrento claims that it was error for the lower court to take cognizance of the same even before payment
by said surety to NASSCO had been made. In other words, Torrento argues that the cause of action
alleged in the cross-claim does not arise until after payment has been made by the surety to the plaintiff.
We find both arguments without merit. The surety bond (Exhibits C and C-1) states in very clear terms
that both principal and surety are held and firmly bound unto the NASSCO in the sum of P25,800.00 for
the payment of which they bind themselves,  jointly and severally. "If a person binds himself solidarity
with the principal debtor, . . . the contract is called suretyship" (Art. 2047, C.C.) in which case the
provisions of the Civil Code with respect to joint and solidary obligations apply; and Article 1216 of the
Civil Code provides that "the creditor may proceed against any of the solidary debtors or all of them
simultaneously. . . ." It has been repeatedly held that although as a rule sureties . . . are only subsidiarily
liable for an obligation, nevertheless, if they bind themselves  jointly and severally, or in solidum, with the
principal debtor, the creditor may bring an action against anyone of them, either alone or together with
the principal debtor (Molina vs. de la Riva, 7 Phil. 345; Chinese Chamber vs. Pua Te Ching, 16 Phil. 406;
La Yebana vs. Valenzuela, 67 Phil. 482; Chunaco vs. Tria, 63 Phil. 500).
With respect to the contention that the lower court erred in taking cognizance of the surety's cross-claim,
suffice it to say that this point was not raised in the court a quo and, consequently may not be raised for
the first time on appeal. Besides, as the lower court also stated in its decision, "defendant Torrento made
no effort to dispute this (cross-claim) of defendant surety and did not even bother to cross-examine the
witness who identified the said indemnity agreement," which is the basis of the cross-claim.1äwphï1.ñët

For its part, appellant surety company maintains that the execution of the supplemental agreement of
February 6, 1959 without its knowledge and consent released it from any liability under the surety bond
as there was a material alteration of the principal contract. We find the contention without merit. The
court a quo analyzed the factual set-up as follow:
x x x An examination and comparison of the contract and the supplemental agreement will reveal that
the only change or alteration consists of the following: Instead of the original stipulation for the
purchase and sale of 3/8, 20' or 30', deformed steel bars, at P435.00 per ton, which kind of steel bars
were no longer available in stock, the supplemental agreement provides for the sale by the plaintiff to
defendant Torrento of other sizes of deformed steel bars at prices of P430.00 and P440.00 per metric
ton. Specifically, the changes are in the diameter of the steel bars which originally was 3/8", to 1/2 and
5/8"; and the price from P435.00 per ton, to P430.00 per ton for the 1/211 bars. The amount of steel G.R. No. 138544               October 3, 2000
bars to be sold to defendant Torrento remained the same. The length and the deformed quality of the
bars likewise remained unchanged. It is even specifically provided in Par. 2 of the supplemental SECURITY BANK AND TRUST COMPANY, Inc., petitioner,
agreement that "aside from the above amendments and/or modifications, the said contract (referring to vs.
the original contract) shall not be affected, altered or modified in any way." There was no alteration in RODOLFO M. CUENCA, respondent.
the principal condition of the contract. The period of payment was not changed, and the amount of the
liability of the principal debtor and of the surety was also untouched. There was no added burden
Being an onerous undertaking, a surety agreement is strictly construed against the creditor, and every
imposed upon or assumed by the buyer." (Emphasis Supplied)
doubt is resolved in favor of the solidary debtor. The fundamental rules of fair play require the creditor to
obtain the consent of the surety to any material alteration in the principal loan agreement, or at least to
x x x In short, the supplemental agreement did not result in the principal debtor's assuming more notify it thereof. Hence, petitioner bank cannot hold herein respondent liable for loans obtained in excess
onerous conditions than those stipulated in the original contract, and for which the surety furnished the of the amount or beyond the period stipulated in the original agreement, absent any clear stipulation
bond. There was consequently, no material or essential alteration of the original contract which could showing that the latter waived his right to be notified thereof, or to give consent thereto. This is
result in the release of the surety from the obligation under the said bond. especially true where, as in this case, respondent was no longer the principal officer or major stockholder
of the corporate debtor at the time the later obligations were incurred. He was thus no longer in a
position to compel the debtor to pay the creditor and had no more reason to bind himself anew to the
We see no error in the ruling of the lower court just quoted.
subsequent obligations.

In Pacific Tobacco Corporation vs. Lorenzana, et al., G.R. L-8086, October 31, 1961 it was held: "for
purposes of releasing a surety's obligation, there must be a material alteration of the contract in
connection with which the bond is given, a change which imposes some new obligation on the party
promising or takes away some obligation already imposed, changing the legal effect of the original
contract and not merely the form thereof . . . To allow compensated surety companies to collect and
retain premiums for their services and then repudiate their obligations on slight pretexts which have no
relation to the risk, would be most unjust and immoral, and would be a perversion of the wise and just
rules designed for the protection of voluntary sureties."
The Case
This is the main principle used in denying the present Petition for Review under Rule 45 of the Rules of Court. Petitioner
assails the December 22, 1998 Decision 1 of the Court of Appeals (CA) in CA-GR CV No. 56203, the dispositive portion of
which reads as follows:
"WHEREFORE, the judgment appealed from is hereby amended in the sense that defendant-appellant Rodolfo M. Cuenca
[herein respondent] is RELEASED from liability to pay any amount stated in the judgment.
"Furthermore, [Respondent] Rodolfo M. Cuenca’s counterclaim is hereby DISMISSED for lack of merit.
"In all other respect[s], the decision appealed from is AFFIRMED."2

While it is the rule that the liability of a surety is limited by the terms of the surety bond fixing its liability
and that such liability cannot be extended by implication, it should be noted in the present case that
although the technical specifications of the items to be purchased have been changed, it clearly appears
that such changes are not substantial and have not added any other liability to that originally assumed. A
surety is not released by a change in the contract which does not have the effect of making its obligation
more onerous (Visayan Distributors, Inc. vs. Flores, 92 Phil. 145).
Wherefore, the appealed decision is hereby affirmed, with costs against defendants-appellants.
Also challenged is the April 14, 1999 CA Resolution,3 which denied petitioner’s Motion for Reconsideration.
Modified by the CA was the March 6, 1997 Decision 4 of the Regional Trial Court (RTC) of Makati City (Branch 66) in Civil
Case No. 93-1925, which disposed as follows:
"WHEREFORE, judgment is hereby rendered ordering defendants Sta. Ines Melale Corporation and Rodolfo M. Cuenca to
pay, jointly and severally, plaintiff Security Bank & Trust Company the sum of ₱39,129,124.73 representing the balance
of the loan as of May 10, 1994 plus 12% interest per annum until fully paid, and the sum of ₱100,000.00 as attorney’s
fees and litigation expenses and to pay the costs.
The Facts

The facts are narrated by the Court of Appeals as follows: 5

"The antecedent material and relevant facts are that defendant-appellant Sta. Ines Melale (‘Sta. Ines’) is
a corporation engaged in logging operations. It was a holder of a Timber License Agreement issued by the
Department of Environment and Natural Resources (‘DENR’).
"On 10 November 1980, [Petitioner] Security Bank and Trust Co. granted appellant Sta. Ines Melale
Corporation [SIMC] a credit line in the amount of [e]ight [m]llion [p]esos (₱8,000,000.00) to assist the
latter in meeting the additional capitalization requirements of its logging operations.
"The Credit Approval Memorandum expressly stated that the ₱8M Credit Loan Facility shall be effective
until 30 November 1981:
‘JOINT CONDITIONS:
‘1. Against Chattel Mortgage on logging trucks and/or inventories (except logs) valued at 200% of the
lines plus JSS of Rodolfo M. Cuenca.
‘2. Submission of an appropriate Board Resolution authorizing the borrowings, indicating therein the
company’s duly authorized signatory/ies;
‘3. Reasonable/compensating deposit balances in current account shall be maintained at all times; in
this connection, a Makati account shall be opened prior to availment on lines;
‘4. Lines shall expire on November 30, 1981; and
‘5. The bank reserves the right to amend any of the aforementioned terms and conditions upon written
notice to the Borrower.’ (Emphasis supplied.)
appellant SIMC’s request and signified its approval in a letter dated 18 February 1988 (Exhibit ‘G’)
wherein SBTC and defendant-appellant Sta. Ines, without notice to or the prior consent of [Respondent]
Cuenca, agreed to restructure the past due obligations of defendant-appellant Sta. Ines. [Petitioner]
Security Bank agreed to extend to defendant-appellant Sta. Ines the following loans:
a. Term loan in the amount of [e]ight [m]illion [e]ight [h]undred [t]housand [p]esos (₱8,800,000.00),
to be applied to liquidate the principal portion of defendant-appellant Sta. Ines[‘] total outstanding
indebtedness to [Petitioner] Security Bank (cf. P. 1 of Exhibit ‘G’, Expediente, at Vol. II, p. 336; Exhibit
‘5-B-Cuenca’, Expediente, et Vol I, pp. 33 to 34) and
b. Term loan in the amount of [t]hree [m]illion [f]our [h]undred [t]housand [p]esos (₱3,400,000.00),
to be applied to liquidate the past due interest and penalty portion of the indebtedness of defendant-
appellant Sta. Ines to [Petitioner] Security Bank (cf. Exhibit ‘G’, Expediente, at Vol. II, p. 336; Exhibit
‘5-B-Cuenca’, Expediente, at Vol. II, p. 33 to 34).’
"It should be pointed out that in restructuring defendant-appellant Sta. Ines’ obligations to [Petitioner]
Security Bank, Promissory Note No. TD-TLS-3599-81 in the amount of [s]ix [m]illion [o]ne [h]undred
[t]housand [p]esos (₱6,100,000.00), which was the only loan incurred prior to the expiration of the P8M-
Credit Loan Facility on 30 November 1981 and the only one covered by the Indemnity Agreement dated
19 December 1980 (Exhibit ‘3-Cuenca’, Expediente, at Vol. II, p. 331), was not segregated from, but was
instead lumped together with, the other loans, i.e., Promissory Notes Nos. DLS/74/12/86, DLS/74/28/86
and DLS/74/47/86 (Exhibits ‘D’, ‘E’, and ‘F’, Expediente, at Vol. II, pp. 333 to 335) obtained by
defendant-appellant Sta. Ines which were not secured by said Indemnity Agreement.

"Pursuant to the agreement to restructure its past due obligations to [Petitioner] Security Bank,
"To secure the payment of the amounts drawn by appellant SIMC from the above-mentioned credit line,
defendant-appellant Sta. Ines thus executed the following promissory notes, both dated 09 March 1988 in
SIMC executed a Chattel Mortgage dated 23 December 1980 (Exhibit ‘A’) over some of its machinery and
favor of [Petitioner] Security Bank:
equipment in favor of [Petitioner] SBTC. As additional security for the payment of the loan, [Respondent]
Rodolfo M. Cuenca executed an Indemnity Agreement dated 17 December 1980 (Exhibit ‘B’) in favor of PROMISSORY NOTE NO. AMOUNT
[Petitioner] SBTC whereby he solidarily bound himself with SIMC as follows:
RL/74/596/88 ₱8,800,000.00
‘Rodolfo M. Cuenca x x x hereby binds himself x x x jointly and severally with the client (SIMC) in
favor of the bank for the payment, upon demand and without the benefit of excussion of whatever RL/74/597/88 ₱3,400,000.00
amount x x x the client may be indebted to the bank x x x by virtue of aforesaid credit
accommodation(s) including the substitutions, renewals, extensions, increases, amendments,
conversions and revivals of the aforesaid credit accommodation(s) x x x .’ (Emphasis supplied). TOTAL ₱12,200,000.00

"On 26 November 1981, four (4) days prior to the expiration of the period of effectivity of the ₱8M-Credit
"To formalize their agreement to restructure the loan obligations of defendant-appellant Sta. Ines,
Loan Facility, appellant SIMC made a first drawdown from its credit line with [Petitioner] SBTC in the
[Petitioner] Security Bank and defendant-appellant Sta. Ines executed a Loan Agreement dated 31
amount of [s]ix [m]illion [o]ne [h]undred [t]housand [p]esos (₱6,100,000.00). To cover said drawdown,
October 1989 (Exhibit ‘5-Cuenca’, Expediente, at Vol. I, pp. 33 to 41). Section 1.01 of the said Loan
SIMC duly executed promissory Note No. TD/TLS-3599-81 for said amount (Exhibit ‘C’).
Agreement dated 31 October 1989 provides:
‘1.01 Amount - The Lender agrees to grant loan to the Borrower in the aggregate amount of TWELVE
"Sometime in 1985, [Respondent] Cuenca resigned as President and Chairman of the Board of Directors
MILLION TWO HUNDRED THOUSAND PESOS (₱12,200,000.00), Philippines [c]urrency (the ‘Loan’). The
of defendant-appellant Sta. Ines. Subsequently, the shareholdings of [Respondent] Cuenca in defendant-
loan shall be released in two (2) tranches of ₱8,800,000.00 for the first tranche (the ‘First Loan’) and
appellant Sta. Ines were sold at a public auction relative to Civil Case No. 18021 entitled ‘Adolfo A.
₱3,400,000.00 for the second tranche (the ‘Second Loan’) to be applied in the manner and for the
Angala vs. Universal Holdings, Inc. and Rodolfo M. Cuenca’. Said shares were bought by Adolfo Angala
purpose stipulated hereinbelow.
who was the highest bidder during the public auction.
‘1.02. Purpose - The First Loan shall be applied to liquidate the principal portion of the Borrower’s
present total outstanding indebtedness to the Lender (the ‘indebtedness’) while the Second Loan shall
"Subsequently, appellant SIMC repeatedly availed of its credit line and obtained six (6) other loan[s] from be applied to liquidate the past due interest and penalty portion of the Indebtedness.’ (Underscoring
[Petitioner] SBTC in the aggregate amount of [s]ix [m]illion [t]hree [h]undred [s]ixty-[n]ine [t]housand supplied.) (cf. p. 1 of Exhibit ‘5-Cuenca’, Expediente, at Vol. I, p. 33)
[n]ineteen and 50/100 [p]esos (₱6,369,019.50). Accordingly, SIMC executed Promissory Notes Nos.
DLS/74/760/85, DLS/74773/85, DLS/74/78/85, DLS/74/760/85 DLS/74/12/86, and DLS/74/47/86 to
"From 08 April 1988 to 02 December 1988, defendant-appellant Sta. Ines made further payments to
cover the amounts of the abovementioned additional loans against the credit line.
[Petitioner] Security Bank in the amount of [o]ne [m]illion [s]even [h]undred [f]ifty-[s]even [t]housand
[p]esos (P1,757,000.00)
"Appellant SIMC, however, encountered difficulty6 in making the amortization payments on its loans and
requested [Petitioner] SBTC for a complete restructuring of its indebtedness. SBTC accommodated
"Appellant SIMC defaulted in the payment of its restructured loan obligations to [Petitioner] SBTC despite
demands made upon appellant SIMC and CUENCA, the last of which were made through separate letters
dated 5 June 1991 (Exhibit ‘K’) and 27 June 1991 (Exhibit ‘L’), respectively.
"Appellants individually and collectively refused to pay the [Petitioner] SBTC. Thus, SBTC filed a complaint
for collection of sum of money on 14 June 1993, resulting after trial on the merits in a decision by the
court a quo, x x x from which [Respondent] Cuenca appealed."
Ruling of the Court of Appeals
In releasing Respondent Cuenca from liability, the CA ruled that the 1989 Loan Agreement had novated
the 1980 credit accommodation earlier granted by the bank to Sta. Ines. Accordingly, such novation
extinguished the Indemnity Agreement, by which Cuenca, who was then the Board chairman and
president of Sta. Ines, had bound himself solidarily liable for the payment of the loans secured by that
credit accommodation. It noted that the 1989 Loan Agreement had been executed without notice to,
much less consent from, Cuenca who at the time was no longer a stockholder of the corporation.
The appellate court also noted that the Credit Approval Memorandum had specified that the credit
accommodation was for a total amount of ₱8 million, and that its expiry date was November 30, 1981.
Hence, it ruled that Cuenca was liable only for loans obtained prior to November 30, 1981, and only for
an amount not exceeding ₱8 million.
It further held that the restructuring of Sta. Ines’ obligation under the 1989 Loan Agreement was
tantamount to a grant of an extension of time to the debtor without the consent of the surety. Under
Article 2079 of the Civil Code, such extension extinguished the surety.
The CA also opined that the surety was entitled to notice, in case the bank and Sta. Ines decided to
materially alter or modify the principal obligation after the expiry date of the credit accommodation.
Hence, this recourse to this Court.7
The Issues
In its Memorandum, petitioner submits the following for our consideration:8
"A. Whether or not the Honorable Court of Appeals erred in releasing Respondent Cuenca from liability as
surety under the Indemnity Agreement for the payment of the principal amount of twelve million two
hundred thousand pesos (₱12,200,000.00) under Promissory Note No. RL/74/596/88 dated 9 March 1988
and Promissory Note No. RL/74/597/88 dated 9 March 1988, plus stipulated interests, penalties and other
charges due thereon;
i. Whether or not the Honorable Court of Appeals erred in ruling that Respondent Cuenca’s liability
under the Indemnity Agreement covered only availments on SIMC’s credit line to the extent of eight
million pesos (P8,000,000.00) and made on or before 30 November 1981;
ii. Whether or not the Honorable Court of Appeals erred in ruling that the restructuring of SIMC’s
indebtedness under the ₱8 million credit accommodation was tantamount to an extension granted to
SIMC without Respondent Cuenca’s consent, thus extinguishing his liability under the Indemnity
Agreement pursuant to Article 2079 of the Civil Code;
iii. Whether or not the Honorable Court of appeals erred in ruling that the restructuring of SIMC’s
indebtedness under the ₱8 million credit accommodation constituted a novation of the principal
obligation, thus extinguishing Respondent Cuenca’s liability under the indemnity agreement;
B. Whether or not Respondent Cuenca’s liability under the Indemnity Agreement was extinguished by the
payments made by SIMC;
C. Whether or not petitioner’s Motion for Reconsideration was pro-forma;
D. Whether or not service of the Petition by registered mail sufficiently complied with Section 11, Rule 13
of the 1997 Rules of Civil Procedure."
Distilling the foregoing, the Court will resolve the following issues: (a) whether the 1989 Loan Agreement
novated the original credit accommodation and Cuenca’s liability under the Indemnity Agreement; and (b)
whether Cuenca waived his right to be notified of and to give consent to any substitution, renewal,
extension, increase, amendment, conversion or revival of the said credit accommodation. As preliminary
matters, the procedural questions raised by respondent will also be addressed.
The Court’s Ruling
The Petition has no merit.
Preliminary Matters: Procedural Questions
Motion for Reconsideration Not Pro Forma
Respondent contends that petitioner’s Motion for Reconsideration of the CA Decision, in merely rehashing
the arguments already passed upon by the appellate court, was pro forma; that as such, it did not toll the
period for filing the present Petition for Review.9 Consequently, the Petition was filed out of time.10
We disagree. A motion for reconsideration is not pro forma just because it reiterated the arguments
earlier passed upon and rejected by the appellate court. The Court has explained that a movant may raise
the same arguments, precisely to convince the court that its ruling was erroneous.11
Moreover, there is no clear showing of intent on the part of petitioner to delay the proceedings.
In Marikina Valley Development Corporation v. Flojo, 12 the Court explained that a pro forma motion had
no other purpose than to gain time and to delay or impede the proceedings. Hence, "where the
circumstances of a case do not show an intent on the part of the movant merely to delay the proceedings,
our Court has refused to characterize the motion as simply pro forma." It held:
"We note finally that because the doctrine relating to pro forma motions for reconsideration impacts upon
the reality and substance of the statutory right of appeal, that doctrine should be applied reasonably,
rather than literally. The right to appeal, where it exists, is an important and valuable right. Public policy
would be better served by according the appellate court an effective opportunity to review the decision of
the trial court on the merits, rather than by aborting the right to appeal by a literal application of the
procedural rules relating to pro forma motions for reconsideration."
Service by Registered Mail Sufficiently Explained
Section 11, Rule 13 of the 1997 Rules of Court, provides as follows:
"SEC. 11. Priorities in modes of service and filing. -- Whenever practicable, the service and filing of
pleadings and other papers shall be done personally. Except with respect to papers emanating from the
court, a resort to other modes must be accompanied by a written explanation why the service or filing
was not done personally. A violation of this Rule may be cause to consider the paper as not filed."
Respondent maintains that the present Petition for Review does not contain a sufficient written
explanation why it was served by registered mail.
We do not think so. The Court held in Solar Entertainment v. Ricafort13 that the aforecited rule was
mandatory, and that "only when personal service or filing is not practicable may resort to other modes be
had, which must then be accompanied by a written explanation as to why personal service or filing was
not practicable to begin with."
In this case, the Petition does state that it was served on the respective counsels of Sta. Ines and Cuenca
"by registered mail in lieu of personal service due to limitations in time and distance." 14 This explanation
sufficiently shows that personal service was not practicable. In any event, we find no adequate reason to
reject the contention of petitioner and thereby deprive it of the opportunity to fully argue its cause.
First Issue: Original Obligation Extinguished by Novation
An obligation may be extinguished by novation, pursuant to Article 1292 of the Civil Code, which reads as
follows:
"ART. 1292. In order that an obligation may be extinguished by another which substitute the same, it is
imperative that it be so declared in unequivocal terms, or that the old and the new obligations be on
every point incompatible with each other."
Novation of a contract is never presumed. It has been held that "[i]n the absence of an express
agreement, novation takes place only when the old and the new obligations are incompatible on every
point."15 Indeed, the following requisites must be established: (1) there is a previous valid obligation; (2)
the parties concerned agree to a new contract; (3) the old contract is extinguished; and (4) there is a
valid new contract.16
Petitioner contends that there was no absolute incompatibility between the old and the new obligations,
and that the latter did not extinguish the earlier one. It further argues that the 1989 Agreement did not
change the original loan in respect to the parties involved or the obligations incurred. It adds that the
terms of the 1989 Contract were "not more onerous."17 Since the original credit accomodation was not
extinguished, it concludes that Cuenca is still liable under the Indemnity Agreement.
We reject these contentions. Clearly, the requisites of novation are present in this case. The 1989 Loan
Agreement extinguished the obligation18 obtained under the 1980 credit accomodation. This is evident
from its explicit provision to "liquidate" the principal and the interest of the earlier indebtedness, as the
following shows:
"1.02. Purpose. The First Loan shall be applied to liquidate the principal portion of the Borrower’s
present total outstanding Indebtedness to the Lender (the "Indebtedness") while the Second Loan shall
be applied to liquidate the past due interest and penalty portion of the Indebtedness."19 (Italics
supplied.)
The testimony of an officer20 of the bank that the proceeds of the 1989 Loan Agreement were used "to
pay-off" the original indebtedness serves to strengthen this ruling.21
Furthermore, several incompatibilities between the 1989 Agreement and the 1980 original obligation
demonstrate that the two cannot coexist. While the 1980 credit accommodation had stipulated that the
amount of loan was not to exceed ₱8 million, 22 the 1989 Agreement provided that the loan was ₱12.2
million. The periods for payment were also different.
Likewise, the later contract contained conditions, "positive covenants" and "negative covenants" not
found in the earlier obligation. As an example of a positive covenant, Sta. Ines undertook "from time to
time and upon request by the Lender, [to] perform such further acts and/or execute and deliver such
additional documents and writings as may be necessary or proper to effectively carry out the provisions
and purposes of this Loan Agreement." 23 Likewise, SIMC agreed that it would not create any mortgage or
encumbrance on any asset owned or hereafter acquired, nor would it participate in any merger or
consolidation.24
Since the 1989 Loan Agreement had extinguished the original credit accommodation, the Indemnity
Agreement, an accessory obligation, was necessarily extinguished also, pursuant to Article 1296 of the
Civil Code, which provides:
"ART. 1296. When the principal obligation is extinguished in consequence of a novation, accessory
obligations may subsist only insofar as they may benefit third persons who did not give their consent."
Alleged Extension
Petitioner insists that the 1989 Loan Agreement was a mere renewal or extension of the ₱8 million
original accommodation; it was not a novation.25
This argument must be rejected. To begin with, the 1989 Loan Agreement expressly stipulated that its
purpose was to "liquidate," not to renew or extend, the outstanding indebtedness. Moreover, respondent
did not sign or consent to the 1989 Loan Agreement, which had allegedly extended the original ₱8 million
credit facility. Hence, his obligation as a surety should be deemed extinguished, pursuant to Article 2079
of the Civil Code, which specifically states that "[a]n extension granted to the debtor by the creditor
without the consent of the guarantor extinguishes the guaranty. x x x." In an earlier case, 26 the Court
explained the rationale of this provision in this wise:
"The theory behind Article 2079 is that an extension of time given to the principal debtor by the creditor
without the surety’s consent would deprive the surety of his right to pay the creditor and to be
immediately subrogated to the creditor’s remedies against the principal debtor upon the maturity date.
The surety is said to be entitled to protect himself against the contingency of the principal debtor or the
indemnitors becoming insolvent during the extended period."
Binding Nature of the Credit Approval Memorandum
As noted earlier, the appellate court relied on the provisions of the Credit Approval Memorandum in
holding that the credit accommodation was only for ₱8 million, and that it was for a period of one year
ending on November 30, 1981. Petitioner objects to the appellate court’s reliance on that document,
contending that it was not a binding agreement because it was not signed by the parties. It adds that it
was merely for its internal use.
We disagree. It was petitioner itself which presented the said document to prove the accommodation.
Attached to the Complaint as Annex A was a copy thereof "evidencing the accommodation." 27 Moreover, in
its Petition before this Court, it alluded to the Credit Approval Memorandum in this wise:
"4.1 On 10 November 1980, Sta. Ines Melale Corporation ("SIMC") was granted by the Bank a credit line
in the aggregate amount of Eight Million Pesos (P8,000,000.00) to assist SIMC in meeting the additional
capitalization requirements for its logging operations. For this purpose, the Bank issued a Credit Approval
Memorandum dated 10 November 1980."
Clearly, respondent is estopped from denying the terms and conditions of the ₱8 million credit
accommodation as contained in the very document it presented to the courts. Indeed, it cannot take
advantage of that document by agreeing to be bound only by those portions that are favorable to it, while
denying those that are disadvantageous.
Second Issue: Alleged Waiver of Consent
Pursuing another course, petitioner contends that Respondent Cuenca "impliedly gave his consent to any
modification of the credit accommodation or otherwise waived his right to be notified of, or to give
consent to, the same."28 Respondent’s consent or waiver thereof is allegedly found in the Indemnity
Agreement, in which he held himself liable for the "credit accommodation including [its]
substitutions, renewals, extensions, increases, amendments, conversions and revival." It explains that
the novation of the original credit accommodation by the 1989 Loan Agreement is merely its "renewal,"
which "connotes cessation of an old contract and birth of another one x x x."29
At the outset, we should emphasize that an essential alteration in the terms of the Loan Agreement
without the consent of the surety extinguishes the latter’s obligation. As the Court held in National Bank
v. Veraguth,30 "[i]t is fundamental in the law of suretyship that any agreement between the creditor and
the principal debtor which essentially varies the terms of the principal contract, without the consent of the
surety, will release the surety from liability."
In this case, petitioner’s assertion - that respondent consented to the alterations in the credit
accommodation -- finds no support in the text of the Indemnity Agreement, which is reproduced
hereunder:
"Rodolfo M. Cuenca of legal age, with postal address c/o Sta. Ines Malale Forest Products Corp., Alco
Bldg., 391 Buendia Avenue Ext., Makati Metro Manila for and in consideration of the credit
accommodation in the total amount of eight million pesos (₱8,000,000.00) granted by the SECURITY
BANK AND TRUST COMPANY, a commercial bank duly organized and existing under and by virtue of the
laws of the Philippine, 6778 Ayala Avenue, Makati, Metro Manila hereinafter referred to as the BANK in
favor of STA. INES MELALE FOREST PRODUCTS CORP., x x x ---- hereinafter referred to as the CLIENT,
with the stipulated interests and charges thereon, evidenced by that/those certain PROMISSORY
NOTE[(S)], made, executed and delivered by the CLIENT in favor of the BANK hereby bind(s)
himself/themselves jointly and severally with the CLIENT in favor of the BANK for the payment , upon
demand and without benefit of excussion of whatever amount or amounts the CLIENT may be indebted
to the BANK under and by virtue of aforesaid credit accommodation(s) including the substitutions,
renewals, extensions, increases, amendment, conversions and revivals of the aforesaid credit
accommodation(s), as well as of the amount or amounts of such other obligations that the CLIENT may
owe the BANK, whether direct or indirect, principal or secondary, as appears in the accounts, books and
records of the BANK, plus interest and expenses arising from any agreement or agreements that may
have heretofore been made, or may hereafter be executed by and between the parties thereto,
including the substitutions, renewals, extensions, increases, amendments, conversions and revivals of
the aforesaid credit accommodation(s), and further bind(s) himself/themselves with the CLIENT in favor
of the BANK for the faithful compliance of all the terms and conditions contained in the aforesaid credit
accommodation(s), all of which are incorporated herein and made part hereof by reference."
While respondent held himself liable for the credit accommodation or any modification thereof, such
clause should be understood in the context of the ₱8 million limit and the November 30, 1981 term. It did
not give the bank or Sta. Ines any license to modify the nature and scope of the original credit
accommodation, without informing or getting the consent of respondent who was solidarily liable. Taking
the bank’s submission to the extreme, respondent (or his successors) would be liable for loans even
amounting to, say, ₱100 billion obtained 100 years after the expiration of the credit accommodation, on
the ground that he consented to all alterations and extensions thereof.
Indeed, it has been held that a contract of surety "cannot extend to more than what is stipulated. It is
strictly construed against the creditor, every doubt being resolved against enlarging the liability of the
surety."31 Likewise, the Court has ruled that "it is a well-settled legal principle that if there is any doubt on
the terms and conditions of the surety agreement, the doubt should be resolved in favor of the surety x x
x. Ambiguous contracts are construed against the party who caused the ambiguity." 32 In the absence of
an unequivocal provision that respondent waived his right to be notified of or to give consent to any
alteration of the credit accommodation, we cannot sustain petitioner’s view that there was such a waiver.
It should also be observed that the Credit Approval Memorandum clearly shows that the bank did not
have absolute authority to unilaterally change the terms of the loan accommodation. Indeed, it may do so
only upon notice to the borrower, pursuant to this condition:
"5. The Bank reserves the right to amend any of the aforementioned terms and conditions upon written
notice to the Borrower."33
We reject petitioner’s submission that only Sta. Ines as the borrower, not respondent, was entitled to be
notified of any modification in the original loan accommodation. 34 Following the bank’s reasoning, such
modification would not be valid as to Sta. Ines if no notice were given; but would still be valid as to
respondent to whom no notice need be given. The latter’s liability would thus be more burdensome than
that of the former. Such untenable theory is contrary to the principle that a surety cannot assume an
obligation more onerous than that of the principal.35
The present controversy must be distinguished from Philamgen v. Mutuc,36 in which the Court sustained a
stipulation whereby the surety consented to be bound not only for the specified period, "but to any
extension thereafter made, an extension x x x that could be had without his having to be notified."
In that case, the surety agreement contained this unequivocal stipulation: "It is hereby further agreed
that in case of any extension of renewal of the bond, we equally bind ourselves to the Company under the
same terms and conditions as herein provided without the necessity of executing another indemnity
agreement for the purpose and that we hereby equally waive our right to be notified of any renewal or
extension of the bond which may be granted under this indemnity agreement."
In the present case, there is no such express stipulation.1âwphi1 At most, the alleged basis of
respondent’s waiver is vague and uncertain. It confers no clear authorization on the bank or Sta. Ines to
modify or extend the original obligation without the consent of the surety or notice thereto.
Continuing Surety
Contending that the Indemnity Agreement was in the nature of a continuing surety, petitioner maintains
that there was no need for respondent to execute another surety contract to secure the 1989 Loan
Agreement.
This argument is incorrect. That the Indemnity Agreement is a continuing surety does not authorize the
bank to extend the scope of the principal obligation inordinately. 37 In Dino v. CA,38 the Court held that "a
continuing guaranty is one which covers all transactions, including those arising in the future, which are
within the description or contemplation of the contract of guaranty, until the expiration or termination
thereof."
To repeat, in the present case, the Indemnity Agreement was subject to the two limitations of the credit
accommodation: (1) that the obligation should not exceed ₱8 million, and (2) that the accommodation
should expire not later than November 30, 1981. Hence, it was a continuing surety only in regard to loans
obtained on or before the aforementioned expiry date and not exceeding the total of ₱8 million.
Accordingly, the surety of Cuenca secured only the first loan of ₱6.1 million obtained on November 26,
1991. It did not secure the subsequent loans, purportedly under the 1980 credit accommodation, that
were obtained in 1986. Certainly, he could not have guaranteed the 1989 Loan Agreement, which was
executed after November 30, 1981 and which exceeded the stipulated P8 million ceiling.
Petitioner, however, cites the Dino ruling in which the Court found the surety liable for the loan
obtained after the payment of the original one, which was covered by a continuing surety agreement. At
the risk of being repetitious, we hold that in Dino, the surety Agreement specifically provided that "each
suretyship is a continuing one which shall remain in full force and effect until this bank is notified of its
revocation." Since the bank had not been notified of such revocation, the surety was held liable even for
the subsequent obligations of the principal borrower.
No similar provision is found in the present case. On the contrary, respondent’s liability was confined to
the 1980 credit accommodation, the amount and the expiry date of which were set down in the Credit
Approval Memorandum.
Special Nature of the JSS
It is a common banking practice to require the JSS ("joint and solidary signature") of a major stockholder
or corporate officer, as an additional security for loans granted to corporations. There are at least two
reasons for this. First, in case of default, the creditor’s recourse, which is normally limited to the
corporate properties under the veil of separate corporate personality, would extend to the personal assets
of the surety. Second, such surety would be compelled to ensure that the loan would be used for the
purpose agreed upon, and that it would be paid by the corporation.
Following this practice, it was therefore logical and reasonable for the bank to have required the JSS of
respondent, who was the chairman and president of Sta. Ines in 1980 when the credit accommodation
was granted. There was no reason or logic, however, for the bank or Sta. Ines to assume that he would
still agree to act as surety in the 1989 Loan Agreement, because at that time, he was no longer an officer
or a stockholder of the debtor-corporation. Verily, he was not in a position then to ensure the payment of
the obligation. Neither did he have any reason to bind himself further to a bigger and more onerous
obligation.
Indeed, the stipulation in the 1989 Loan Agreement providing for the surety of respondent, without even
informing him, smacks of negligence on the part of the bank and bad faith on that of the principal debtor.
Since that Loan Agreement constituted a new indebtedness, the old loan having been already liquidated,
the spirit of fair play should have impelled Sta. Ines to ask somebody else to act as a surety for the new
loan.
In the same vein, a little prudence should have impelled the bank to insist on the JSS of one who was in a
position to ensure the payment of the loan. Even a perfunctory attempt at credit investigation would have
revealed that respondent was no longer connected with the corporation at the time. As it is, the bank is
now relying on an unclear Indemnity Agreement in order to collect an obligation that could have been
secured by a fairly obtained surety. For its defeat in this litigation, the bank has only itself to blame.
In sum, we hold that the 1989 Loan Agreement extinguished by novation the obligation under the 1980
₱8 million credit accommodation. Hence, the Indemnity Agreement, which had been an accessory to the
1980 credit accommodation, was also extinguished. Furthermore, we reject petitioner’s submission that
respondent waived his right to be notified of, or to give consent to, any modification or extension of the
1980 credit accommodation.
In this light, we find no more need to resolve the issue of whether the loan obtained before the expiry
date of the credit accommodation has been paid.
WHEREFORE, the Petition is DENIED and the assailed Decision AFFIRMED. Costs against petitioner.
G.R. No. 96405 June 26, 1996
BALDOMERO INCIONG, JR., petitioner,
vs.
COURT OF APPEALS and PHILIPPINE BANK OF COMMUNICATIONS, respondents.
Petitioner's liability resulted from the promissory note in the amount of P50,000.00 which he signed with
Rene C. Naybe and Gregorio D. Pantanosas on February 3, 1983, holding themselves jointly and severally
liable to private respondent Philippine Bank of Communications, Cagayan de Oro City branch. The
promissory note was due on May 5, 1983.
Said due date expired without the promissors having paid their obligation. Consequently, on November
14, 1983 and on June 8, 1984, private respondent sent petitioner telegrams demanding payment
thereof.2 On December 11, 1984 private respondent also sent by registered mail a final letter of demand
to Rene C. Naybe. Since both obligors did not respond to the demands made, private respondent filed on
January 24, 1986 a complaint for collection of the sum of P50,000.00 against the three obligors.
On November 25, 1986, the complaint was dismissed for failure of the plaintiff to prosecute the case.
However, on January 9, 1987, the lower court reconsidered the dismissal order and required the sheriff to
serve the summonses. On January 27, 1987, the lower court dismissed the case against defendant
Pantanosas as prayed for by the private respondent herein. Meanwhile, only the summons addressed to
petitioner was served as the sheriff learned that defendant Naybe had gone to Saudi Arabia.
In his answer, petitioner alleged that sometime in January 1983, he was approached by his friend, Rudy
Campos, who told him that he was a partner of Pio Tio, the branch manager of private respondent in
Cagayan de Oro City, in the falcata logs operation business. Campos also intimated to him that Rene C.
Naybe was interested in the business and would contribute a chainsaw to the venture. He added that,
although Naybe had no money to buy the equipment, Pio Tio had assured Naybe of the approval of a loan
he would make with private respondent. Campos then persuaded petitioner to act as a "co-maker" in the
said loan. Petitioner allegedly acceded but with the understanding that he would only be a co-maker for
the loan of P50,000.00.
Petitioner alleged further that five (5) copies of a blank promissory note were brought to him by Campos
at his office. He affixed his signature thereto but in one copy, he indicated that he bound himself only for
the amount of P5,000.00. Thus, it was by trickery, fraud and misrepresentation that he was made liable
for the amount of P50,000.00.
In the aforementioned decision of the lower court, it noted that the typewritten figure "-- 50,000 --"
clearly appears directly below the admitted signature of the petitioner in the promissory note. 3 Hence,
the latter's uncorroborated testimony on his limited liability cannot prevail over the presumed regularity
and fairness of the transaction, under Sec. 5 (q) of Rule 131. The lower court added that it was "rather
odd" for petitioner to have indicated in a copy and not in the original, of the promissory note, his
supposed obligation in the amount of P5,000.00 only. Finally, the lower court held that, even granting
that said limited amount had actually been agreed upon, the same would have been merely collateral
between him and Naybe and, therefore, not binding upon the private respondent as creditor-bank.
The lower court also noted that petitioner was a holder of a Bachelor of Laws degree and a labor
consultant who was supposed to take due care of his concerns, and that, on the witness stand, Pio Tio
denied having participated in the alleged business venture although he knew for a fact that the falcata
logs operation was encouraged by the bank for its export potential.
Petitioner appealed the said decision to the Court of Appeals which, in its decision of August 31, 1990,
affirmed that of the lower court. His motion for reconsideration of the said decision having been denied,
he filed the instant petition for review on certiorari.
On February 6, 1991, the Court denied the petition for failure of petitioner to comply with the Rules of
Court and paragraph 2 of Circular No. 1-88, and to sufficiently show that respondent court had committed
any reversible error in its questioned decision.4 His motion for the reconsideration of the denial of his
petition was likewise denied with finality in the Resolution of April 24, 1991.5 Thereafter, petitioner filed a
motion for leave to file a second motion for reconsideration which, in the Resolution of May 27, 1991, the
Court denied. In the same Resolution, the Court ordered the entry of judgment in this case.6
Unfazed, petitioner filed a notion for leave to file a motion for clarification. In the latter motion, he
asserted that he had attached Registry Receipt No. 3268 to page 14 of the petition in compliance with
Circular No. 1-88. Thus, on August 7, 1991, the Court granted his prayer that his petition be given due
course and reinstated the same.7
Nonetheless, we find the petition unmeritorious.
Annexed to the petition is a copy of an affidavit executed on May 3, 1988, or after the rendition of the
decision of the lower court, by Gregorio Pantanosas, Jr., an MTCC judge and petitioner's co-maker in the
promissory note. It supports petitioner's allegation that they were induced to sign the promissory note on
the belief that it was only for P5,000.00, adding that it was Campos who caused the amount of the loan
to be increased to P50,000.00.
The affidavit is clearly intended to buttress petitioner's contention in the instant petition that the Court of
Appeals should have declared the promissory note null and void on the following grounds: (a) the
promissory note was signed in the office of Judge Pantanosas, outside the premises of the bank; (b) the
loan was incurred for the purpose of buying a second-hand chainsaw which cost only P5,000.00; (c) even
a new chainsaw would cost only P27,500.00; (d) the loan was not approved by the board or credit
committee which was the practice, as it exceeded P5,000.00; (e) the loan had no collateral; (f) petitioner
and Judge Pantanosas were not present at the time the loan was released in contravention of the bank
practice, and (g) notices of default are sent simultaneously and separately but no notice was validly sent
to him.8 Finally, petitioner contends that in signing the promissory note, his consent was vitiated by fraud
as, contrary to their agreement that the loan was only for the amount of P5,000.00, the promissory note
stated the amount of P50,000.00.
The above-stated points are clearly factual. Petitioner is to be reminded of the basic rule that this Court is
not a trier of facts. Having lost the chance to fully ventilate his factual claims below, petitioner may no
longer be accorded the same opportunity in the absence of grave abuse of discretion on the part of the
court below. Had he presented Judge Pantanosas affidavit before the lower court, it would have
strengthened his claim that the promissory note did not reflect the correct amount of the loan.
Nor is there merit in petitioner's assertion that since the promissory note "is not a public deed with the
formalities prescribed by law but . . . a mere commercial paper which does not bear the signature of . . .
attesting witnesses," parol evidence may "overcome" the contents of the promissory note.9 The first
paragraph of the parol evidence rule 10 states:
When the terms of an agreement have been reduced to writing, it is considered as containing all the
terms agreed upon and there can be, between the parties and their successors in interest, no evidence
of such terms other than the contents of the written agreement.
Clearly, the rule does not specify that the written agreement be a public document.
What is required is that the agreement be in writing as the rule is in fact founded on "long experience
that written evidence is so much more certain and accurate than that which rests in fleeting memory
only, that it would be unsafe, when parties have expressed the terms of their contract in writing, to admit
weaker evidence to control and vary the stronger and to show that the parties intended a different
contract from that expressed in the writing signed by them." 11 Thus, for the parol evidence rule to apply,
a written contract need not be in any particular form, or be signed by both parties. 12 As a general rule,
bills, notes and other instruments of a similar nature are not subject to be varied or contradicted by parol
or extrinsic evidence. 13
By alleging fraud in his answer, 14 petitioner was actually in the right direction towards proving that he
and his co-makers agreed to a loan of P5,000.00 only considering that, where a parol contemporaneous
agreement was the inducing and moving cause of the written contract, it may be shown by parol
evidence. 15 However, fraud must be established by clear and convincing evidence, mere preponderance
of evidence, not even being adequate. 16 Petitioner's attempt to prove fraud must, therefore, fail as it was
evidenced only by his own uncorroborated and, expectedly, self-serving testimony.
Petitioner also argues that the dismissal of the complaint against Naybe, the principal debtor, and against
Pantanosas, his co-maker, constituted a release of his obligation, especially because the dismissal of the
case against Pantanosas was upon the motion of private respondent itself. He cites as basis for his
argument, Article 2080 of the Civil Code which provides that:
The guarantors, even though they be solidary, are released from their obligation whenever by some act
of the creditor, they cannot be subrogated to the rights, mortgages, and preferences of the latter.
It is to be noted, however, that petitioner signed the promissory note as a solidary co-maker and not as a
guarantor. This is patent even from the first sentence of the promissory note which states as follows:
Ninety one (91) days after date, for value received, I/we, JOINTLY and SEVERALLY promise to pay to
the PHILIPPINE BANK OF COMMUNICATIONS at its office in the City of Cagayan de Oro, Philippines the
sum of FIFTY THOUSAND ONLY (P50,000.00) Pesos, Philippine Currency, together with interest . . . at
the rate of SIXTEEN (16) per cent per annum until fully paid.
A solidary or joint and several obligation is one in which each debtor is liable for the entire obligation, and
each creditor is entitled to demand the whole obligation. 17 on the other hand, Article 2047 of the Civil
Code states:
By guaranty a person, called the guarantor, binds himself to the creditor to fulfill the obligation of the
principal debtor in case the latter should fail to do so.
If a person binds himself solidarily with the principal debtor, the provisions of Section 4, Chapter 3,
Title I of this Book shall be observed. In such a case the contract is called a suretyship.
 While a guarantor may bind himself solidarily with the principal debtor, the liability of a guarantor is
different from that of a solidary debtor. Thus, Tolentino explains:
A guarantor who binds himself in solidum with the principal debtor under the provisions of the second
paragraph does not become a solidary co-debtor to all intents and purposes. There is a difference
between a solidary co-debtor and a fiador in solidum (surety). The latter, outside of the liability he
assumes to pay the debt before the property of the principal debtor has been exhausted, retains all
the other rights, actions and benefits which pertain to him by reason of the  fiansa; while a solidary
co-debtor has no other rights than those bestowed upon him in Section 4, Chapter 3, Title I, Book IV
of the Civil Code. 18
Section 4, Chapter 3, Title I, Book IV of the Civil Code states the law on joint and several obligations.
Under Art. 1207 thereof, when there are two or more debtors in one and the same obligation, the
presumption is that the obligation is joint so that each of the debtors is liable only for a proportionate part
of the debt. There is a solidary liability only when the obligation expressly so states, when the law so
provides or when the nature of the obligation so requires. 19
Because the promissory note involved in this case expressly states that the three signatories therein
are jointly and severally liable, any one, some or all of them may be proceeded against for the entire
obligation. 20 The choice is left to the solidary creditor to determine against whom he will enforce
collection. 21 Consequently, the dismissal of the case against Judge Pontanosas may not be deemed as
having discharged petitioner from liability as well. As regards Naybe, suffice it to say that the court never
acquired jurisdiction over him. Petitioner, therefore, may only have recourse against his co-makers, as
provided by law.
WHEREFORE, the instant petition for review on certiorari is hereby DENIED and the questioned decision of
the Court of Appeals is AFFIRMED. Costs against petitioner.
G.R. No. 113931 May 6, 1998
E. ZOBEL, INC., petitioner,
vs.
THE COURT OF APPEALS, CONSOLIDATED BANK AND TRUST CORPORATION, and SPOUSES
RAUL and ELEA R. CLAVERIA, respondents.
Respondent spouses Raul and Elea Claveria, doing business under the name "Agro Brokers," applied for a
loan with respondent Consolidated Bank and Trust Corporation (now SOLIDBANK) in the amount of Two
Million Eight Hundred Seventy Five Thousand Pesos (P2,875,000.00) to finance the purchase of two (2)
maritime barges and one tugboat 3 which would be used in their molasses business. The loan was granted
subject to the condition that respondent spouses execute a chattel mortgage over the three (3) vessels to
be acquired and that a continuing guarantee be executed by Ayala International Philippines, Inc., now
herein petitioner E. Zobel, Inc., in favor of SOLIDBANK. The respondent spouses agreed to the
arrangement. Consequently, a chattel mortgage and a Continuing Guaranty 4 were executed.
Respondent spouses defaulted in the payment of the entire obligation upon maturity. Hence, on January
31, 1991, SOLIDBANK filed a complaint for sum of money with a prayer for a writ of preliminary
attachment, against respondents spouses and petitioner. The case was docketed as Civil Case No. 91-
55909 in the Regional Trial Court of Manila.
Petitioner moved to dismiss the complaint on the ground that its liability as guarantor of the loan was
extinguished pursuant to Article 2080 of the Civil Code of the Philippines. It argued that it has lost its
right to be subrogated to the first chattel mortgage in view of SOLIDBANK's failure to register the chattel
mortgage with the appropriate government agency.
SOLIDBANK opposed the motion contending that Article 2080 is not applicable because petitioner is not a
guarantor but a surety.
On February 18, 1993, the trial court issued an Order, portions of which reads:
After a careful consideration of the matter on hand, the Court finds the ground of the motion to dismiss
without merit. The document referred to as "Continuing Guaranty" dated August 21, 1985 (Exh. 7)
states as follows:
For and in consideration of any existing indebtedness to you of Agro Brokers, a single proprietorship
owned by Mr. Raul Claveria for the payment of which the undersigned is now obligated to you as
surety and in order to induce you, in your discretion, at any other manner, to, or at the request or for
the account of the borrower, . . .
The provisions of the document are clear, plain and explicit.
 Clearly therefore, defendant E. Zobel, Inc. signed as surety. Even though the title of the document is
"Continuing Guaranty", the Court's interpretation is not limited to the title alone but to the contents and
intention of the parties more specifically if the language is clear and positive. The obligation of the
defendant Zobel being that of a surety, Art. 2080 New Civil Code will not apply as it is only for those
acting as guarantor. In fact, in the letter of January 31, 1986 of the defendants (spouses and Zobel) to
the plaintiff it is requesting that the chattel mortgage on the vessels and tugboat be waived and/or
rescinded by the bank inasmuch as the said loan is covered by the Continuing Guaranty by Zobel in
favor of the plaintiff thus thwarting the claim of the defendant now that the chattel mortgage is an
essential condition of the guaranty. In its letter, it said that because of the Continuing Guaranty in favor
of the plaintiff the chattel mortgage is rendered unnecessary and redundant.
With regard to the claim that the failure of the plaintiff to register the chattel mortgage with the proper
government agency, i.e. with the Office of the Collector of Customs or with the Register of Deeds
makes the obligation a guaranty, the same merits a scant consideration and could not be taken by this
Court as the basis of the extinguishment of the obligation of the defendant corporation to the plaintiff
as surety. The chattel mortgage is an additional security and should not be considered as payment of
the debt in case of failure of payment. The same is true with the failure to register, extinction of the
liability would not lie.
WHEREFORE, the Motion to Dismiss is hereby denied and defendant E. Zobel, Inc., is ordered to file its
answer to the complaint within ten (10) days from receipt of a copy of this Order. 5
Petitioner moved for reconsideration but was denied on April 26, 1993. 6
Thereafter, petitioner questioned said Orders before the respondent Court of Appeals, through a petition
for certiorari, alleging that the trial court committed grave abuse of discretion in denying the motion to
dismiss.
On July 13, 1993, the Court of Appeals rendered the assailed decision the dispositive portion of which
reads:
WHEREFORE, finding that respondent Judge has not committed any grave abuse of discretion in issuing
the herein assailed orders, We hereby DISMISS the petition.
A motion for reconsideration filed by petitioner was denied for lack of merit on February 15, 1994.
Petitioner now comes to us via this petition arguing that the respondent Court of Appeals erred in its
finding: (1) that Article 2080 of the New Civil Code which provides: "The guarantors, even though they be
solidary, are released from their obligation whenever by some act of the creditor they cannot be
subrogated to the rights, mortgages, and preferences of the latter," is not applicable to petitioner; (2)
that petitioner's obligation to respondent SOLIDBANK under the continuing guaranty is that of a surety;
and (3) that the failure of respondent SOLIDBANK to register the chattel mortgage did not extinguish
petitioner's liability to respondent SOLIDBANK.
We shall first resolve the issue of whether or not petitioner under the "Continuing Guaranty" obligated
itself to SOLIDBANK as a guarantor or a surety.
A contract of surety is an accessory promise by which a person binds himself for another already bound,
and agrees with the creditor to satisfy the obligation if the debtor does not. 7 A contract of guaranty, on
the other hand, is a collateral undertaking to pay the debt of another in case the latter does not pay the
debt. 8
Strictly speaking, guaranty and surety are nearly related, and many of the principles are common to
both. However, under our civil law, they may be distinguished thus: A surety is usually bound with his
principal by the same instrument, executed at the same time, and on the same consideration. He is an
original promissor and debtor from the beginning, and is held, ordinarily, to know every default of his
principal. Usually, he will not be discharged, either by the mere indulgence of the creditor to the principal,
or by want of notice of the default of the principal, no matter how much he may be injured thereby. On
the other hand, the contract of guaranty is the guarantor's own separate undertaking, in which the
principal does not join. It is usually entered into before or after that of the principal, and is often
supported on a separate consideration from that supporting the contract of the principal. The original
contract of his principal is not his contract, and he is not bound to take notice of its non-performance. He
is often discharged by the mere indulgence of the creditor to the principal, and is usually not liable unless
notified of the default of the principal. 9
Simply put, a surety is distinguished from a guaranty in that a guarantor is the insurer of the solvency of
the debtor and thus binds himself to pay if the principal is unable to pay while a surety is the insurer of
the debt, and he obligates himself to pay if the principal does not pay. 10
Based on the aforementioned definitions, it appears that the contract executed by petitioner in favor of
SOLIDBANK, albeit denominated as a "Continuing Guaranty," is a contract of surety. The terms of the
contract categorically obligates petitioner as "surety" to induce SOLIDBANK to extend credit to
respondent spouses. This can be seen in the following stipulations.
For and in consideration of any existing indebtedness to you of AGRO BROKERS, a single proprietorship
owned by MR. RAUL P. CLAVERIA, of legal age, married and with business address . . . (hereinafter
called the Borrower), for the payment of which the undersigned is now obligated to you as surety and
in order to induce you, in your discretion, at any time or from time to time hereafter, to make loans or
advances or to extend credit in any other manner to, or at the request or for the account of the
Borrower, either with or without purchase or discount, or to make any loans or advances evidenced or
secured by any notes, bills receivable, drafts, acceptances, checks or other instruments or evidences of
indebtedness . . . upon which the Borrower is or may become liable as maker, endorser, acceptor, or
otherwise, the undersigned agrees to guarantee, and does hereby guarantee, the punctual payment, at
maturity or upon demand, to you of any and all such instruments, loans, advances, credits and/or other
obligations herein before referred to, and also any and all other indebtedness of every kind which is
now or may hereafter become due or owing to you by the Borrower, together with any and all expenses
which may be incurred by you in collecting all or any such instruments or other indebtedness or
obligations hereinbefore referred to, and or in enforcing any rights hereunder, and also to make or
cause any and all such payments to be made strictly in accordance with the terms and provisions of any
agreement (g), express or implied, which has (have) been or may hereafter be made or entered into by
the Borrower in reference thereto, regardless of any law, regulation or decree, now or hereafter in
effect which might in any manner affect any of the terms or provisions of any such agreements(s) or
your right with respect thereto as against the Borrower, or cause or permit to be invoked any alteration
in the time, amount or manner of payment by the Borrower of any such instruments, obligations or
indebtedness; . . . (Emphasis Ours)
One need not look too deeply at the contract to determine the nature of the undertaking and the intention
of the parties. The contract clearly disclose that petitioner assumed liability to SOLIDBANK, as a regular
party to the undertaking and obligated itself as an original promissor. It bound itself jointly and severally
to the obligation with the respondent spouses. In fact, SOLIDBANK need not resort to all other legal
remedies or exhaust respondent spouses' properties before it can hold petitioner liable for the obligation.
This can be gleaned from a reading of the stipulations in the contract, to wit:
. . . If default be made in the payment of any of the instruments, indebtedness or other obligation
hereby guaranteed by the undersigned, or if the Borrower, or the undersigned should die, dissolve, fail
in business, or become insolvent, . . ., or if any funds or other property of the Borrower, or of the
 undersigned which may be or come into your possession or control or that of any third party acting in
your behalf as aforesaid should be attached of distrained, or should be or become subject to any
mandatory order of court or other legal process, then, or any time after the happening of any such
event any or all of the instruments of indebtedness or other obligations hereby guaranteed shall, at
your option become (for the purpose of this guaranty) due and payable by the undersigned forthwith
without demand of notice, and full power and authority are hereby given you, in your discretion, to sell,
assign and deliver all or any part of the property upon which you may then have a lien hereunder at
any broker's board, or at public or private sale at your option, either for cash or for credit or for future
delivery without assumption by you of credit risk, and without either the demand, advertisement or
notice of any kind, all of which are hereby expressly waived. At any sale hereunder, you may, at your
option, purchase the whole or any part of the property so sold, free from any right of redemption on the
part of the undersigned, all such rights being also hereby waived and released. In case of any sale and
other disposition of any of the property aforesaid, after deducting all costs and expenses of every kind
for care, safekeeping, collection, sale, delivery or otherwise, you may apply the residue of the proceeds
of the sale and other disposition thereof, to the payment or reduction, either in whole or in part, of any
one or more of the obligations or liabilities hereunder of the undersigned whether or not except for
disagreement such liabilities or obligations would then be due, making proper allowance or interest on
the obligations and liabilities not otherwise then due, and returning the overplus, if any, to the
undersigned; all without prejudice to your rights as against the undersigned with respect to any and all
amounts which may be or remain unpaid on any of the obligations or liabilities aforesaid at any time
(s).
Should the Borrower at this or at any future time furnish, or should be heretofore have furnished,
another surety or sureties to guarantee the payment of his obligations to you, the undersigned hereby
expressly waives all benefits to which the undersigned might be entitled under the provisions of Article
1837 of the Civil Code (beneficio division), the liability of the undersigned under any and all
circumstances being joint and several; (Emphasis Ours)
The use of the term "guarantee" does not ipso facto mean that the contract is one of guaranty.
Authorities recognize that the word "guarantee" is frequently employed in business transactions to
describe not the security of the debt but an intention to be bound by a primary or independent
obligation. 11 As aptly observed by the trial court, the interpretation of a contract is not limited to the title
alone but to the contents and intention of the parties.
Having thus established that petitioner is a surety, Article 2080 of the Civil Code, relied upon by
petitioner, finds no application to the case at bar. In Bicol Savings and Loan Association
vs. Guinhawa, 12 we have ruled that Article 2080 of the New Civil Code does not apply where the liability
is as a surety, not as a guarantor.
But even assuming that Article 2080 is applicable, SOLIDBANK's failure to register the chattel mortgage
did not release petitioner from the obligation. In the Continuing Guaranty executed in favor of
SOLIDBANK, petitioner bound itself to the contract irrespective of the existence of any collateral. It even
released SOLIDBANK from any fault or negligence that may impair the contract. The pertinent portions of
the contract so provides:
. . . the undersigned (petitioner) who hereby agrees to be and remain bound upon this guaranty,
irrespective of the existence, value or condition of any collateral, and notwithstanding any such change,
exchange, settlement, compromise, surrender, release, sale, application, renewal or extension, and
notwithstanding also that all obligations of the Borrower to you outstanding and unpaid at any time(s)
may exceed the aggregate principal sum herein above prescribed.
This is a Continuing Guaranty and shall remain in full force and effect until written notice shall have
been received by you that it has been revoked by the undersigned, but any such notice shall not be
released the undersigned from any liability as to any instruments, loans, advances or other obligations
hereby guaranteed, which may be held by you, or in which you may have any interest, at the time of
the receipt of such notice. No act or omission of any kind on your part in the premises shall in any
event affect or impair this guaranty, nor shall same be affected by any change which may arise by
reason of the death of the undersigned, of any partner (s) of the undersigned, or of the Borrower, or of
the accession to any such partnership of any one or more new partners. (Emphasis supplied)
In fine, we find the petition to be without merit as no reversible error was committed by respondent Court
of Appeals in rendering the assailed decision.
WHEREFORE, the decision of the respondent Court of Appeals is hereby AFFIRMED. Costs against the
petitioner.
G.R. No. 210542
ROSALINA CARODAN, Petitioner,
vs.
CHINA BANKING CORPORATION, Respondent.
THE ANTECEDENT FACTS
The records reveal that on 6 June 2000, China Banking Corporation (China Bank) instituted a
Complaint5 for a sum of money against Barbara Perez (Barbara), Rebecca Perez-Viloria (Rebecca),
Rosalina Carodan (Rosalina) and Madeline Carodan (Madeline). China Bank claimed that on 15 January
1998, Barbara and Rebecca, for value received, executed and delivered Promissory Note No. TLS-98/0076
to respondent bank under which they promised therein to jointly and severally pay the amount of P2.8
million.7 China Bank further claimed that as security for the payment of the loan, Barbara, Rebecca and
Rosalina also executed a Real Estate Mortgage 8 over a property registered in the name of Rosalina and
covered by Transfer Certificate Title (TCT) No. T-10216. 9 Respondent alleged that a Surety
Agreement10 in favor of China Bank as creditor was also executed by Barbara and Rebecca as principals
and Rosalina and her niece Madeline as sureties. Through that agreement, the principals and sureties
warranted the payment of the loan obligation amounting to P2.8 million including interests, penalties,
costs, expenses, and attorney's fees. 11
Barbara and Rebecca failed to pay their loan obligation despite repeated demands from China Bank. Their
failure to pay prompted the bank institute extrajudicial foreclosure proceedings on the mortgaged
property on 26 November 1999. 12 From the extrajudicial sale, it realized only Pl.5 million as evidenced by
a Certificate of Sale.13 This amount, when applied to the total outstanding loan obligation of
Pl,865,345.77, would still leave a deficiency of P365,345.77. For that reason, the bank prayed that the
court order the payment of the deficiency amount with interest at 12% per annum computed from 13
January 2000; attorney's fees equal to 10% of the deficiency amount; and litigation expenses and costs
of suit. 14
Barbara and Rebecca filed their Answer. They interposed the defense that although they both stood as
principal borrowers, they had entered into an oral agreement with Madeline and Rosalina. Under that
agreement which was witnessed by China Bank's loan officer and branch manager, they would equally
split both the proceeds of the loan and the corresponding obligation and interest pertaining thereto, and
they would secure the loan with the properties belonging to them. 15 Barbara and Rebecca used as
security their real properties covered by TCT Nos. T-93177, T-93176, T-93174, T-93167, T-93169, T-
93170, T-93171 and T-93172; while Rosalina and Madeline used for the same purpose the former's
property covered by TCTNo. T-10216. 16
Barbara and Rebecca further alleged that while Rosalina and Madeline obtained their share of Pl.4 million
of the loan amount, the latter two never complied with their obligation to pay interest. It was only
Rebecca's account with China Bank that was automatically debited in the total amount of
Pl,002,735.54. 17 Barbara and Rebecca asked China Bank for the computation of their total obligation, for
which they paid Pl.5 million aside from the interest payments, and respondent bank thereafter released
the Real Estate Mortgage over their properties.18
By way of crossclaim, Barbara and Rebecca asked Rosalina and Madeline to pay half of Pl,002,735.54 as
interest payments, as well as the deficiency amount plus 12% interest per annum and attorney's fees,
the total amount of which pertained to the loan obligation of the latter two. 19 By way of counterclaim,
Barbara and Rebecca also asked China Bank to pay Plmillion as moral damages, P500,000 as exemplary
damages, plus attorney's fees and costs of suit.20
China Bank filed its Reply and Answer to Counterclaim clarifying that it was suing Barbara and Rebecca as
debtors under the Promissory Note and as principals in the Surety Agreement, as well as Rosalina and
Madeline as sureties in the Surety Agreement. 21 It claimed that equal sharing of the proceeds of the loan
was "a bat at misrepresentation" and "a self-serving prevarication," because what was clearly written on
the note was that Rebecca and Barbara were the principal debtors. 22 It reiterated that the two were liable
for the full payment of the principal amount plus the agreed interest, charges, penalties and attorney's
fees, with recourse to reimbursement from Rosalina and Madeline.23
China Bank also disputed the claim of Rebecca and Barbara that upon their payment to the bank of Pl.5
million, the Real Estate Mortgage over their properties was cancelled. Their claim was disputed because,
even after their payment of Pl.5 million, Rebecca and Barbara were still indebted in the amount of P1.3
million exclusive of interest, charges, penalties and other legitimate fees. 24 Furthermore, respondent
stated that if there was a cancellation of mortgage, it referred to other mortgages securing other separate
loan obligations of Barbara and Rebecca; more particularly, that of Barbara.25
Rosalina filed her Answer with Counterclaim and Crossclaim.26 She alleged that on 2 July 1997, she and
Barbara executed (1) a Real Estate Mortgage covering Rosalina's lot and ancestral house, as well as
Barbara's eight residential apartments, annotated as an encumbrance at the back of the TCTs
corresponding to the properties as evidenced by the Annexes to the Answer; and (2) a Surety Agreement
to secure the credit facility granted by the bank to Barbara and Rebecca up to the principal amount of
P2.8 million.27 Rosalina further stated that the execution of the contracts was "made in consideration of
the long-time friendship" between Barbara and Rebecca, and Madeline, and that "no monetary or material
consideration whatsoever passed between [Barbara and Rebecca], on the one hand, and [Rosalina], on
the other hand."28
Rosalina acknowledged that on 15 January 1998, Barbara and Rebecca executed a Promissory Note for
the purpose of evidencing a loan charged against the loan facility secured by the mortgage.29 She
averred, though, that when Barbara and Rebecca paid half of the loan under the Promissory Note, the
properties of Barbara covered by the mortgage were released by the bank from liability. The cancellation
of the mortgage lien was effected by an instrument dated 27 May 1999 and reflected on the TCTs
evidenced by the Annexes to the Answer. 30
This cancellation, according to Rosalina, illegally and unjustly caused her property to absorb the singular
risk of foreclosure. 31 The result, according to her, was the extinguishment of the indivisible obligation
contained in the mortgage pursuant to Article 121632 of the Civil Code.33
Rosalina further averred that when the bank instituted the foreclosure proceedings, it misrepresented
that her property was the only one that was covered by the mortgage; omitted from the schedule of
mortgaged properties those of Barbara; and misrepresented that "the terms and condition of the
aforesaid mortgage have never been changed or modified whether tacitly or expressly, by any agreement
made after the execution thereof."34
Finally, Rosalina stated that she had made demands on Barbara and Rebecca to cause the rectification of
the illegal and unjust deprivation of her property in payment of the indemnity. Allegedly, Barbara and
Rebecca simply ignored her demands, so, she prayed that the two be held solidarily liable for the total
amount of damages and for the deficiency judgment sought in this Complaint.35
China Bank filed its Reply and Answer to Counterclaim.36 It alleged that the issue of whether Rosalina
obtained material benefit from the loan was not material, since she had voluntarily and willingly
encumbered her property;37 that the indivisibility of mortgage does not apply to the case at bar, since
Article 208938 of the Civil Code presupposes several heirs, a condition that is not present in this
case;39 that nothing short of payment of the debt or an express release would operate to discharge a
mortgage; 40 and that, as surety, Rosalina was equally liable as principal debtor to pay the deficiency
obligation in the sum of P365,345.77 41 The bank also filed its Comment/Opposition 42 to the Entry of
Appearance of Atty. Edwin V. Pascua as counsel for Rosalina. It said that Atty. Pascua had once been its
retained lawyer pursuant to a Retainer Agreement dated 5 September 1997.43 Because of its Opposition,
Rosalina was subsequently represented by Atty. Reynaldo A. Deray.
All the parties submitted their Pre-Trial Briefs with the exception of Madeline, whose case had been
archived by the RTC upon motion of China Bank for the court's failure to acquire jurisdiction over her
person. The issues of the case were thereafter limited to the following: (1) whether the defendants were
jointly and severally liable to pay the deficiency claim; (2) whether the surety was still liable to the bank
despite the release of the mortgage of the principal borrower; (3) whether there was a previous
agreement among the defendants that Barbara and Rebecca would receive half and Rosalina and
Madeline, the other half; and (4) whether respondent bank still had a cause of action against the surety
after the mortgage of the principal borrower had been released by the bank.44
THE RULING OF THE RTC
The RTC ruled that although no sufficient proof was adduced to show that Rosalina had obtained any pecuniary benefit
from the loan agreement between Rebecca and Barbara and China Bank, the mortgage between Rosalina and China Bank
was still valid.45 The trial court declared that respondent bank had therefore lawfully foreclosed the mortgage over the
property of Rosalina, even if she was a mere accommodation mortgagor.46
The RTC also declared Rosalina's claim to be without merit and without basis in law and jurisprudence. She claimed that
because the Real Estate Mortgage covering her property was a single and indivisible contract, China Bank's act of releasing
the principal debtors' properties resulted in the extinguishment of the obligation. 47 The trial court held that the creditor had
the right to proceed against any one of the solidary debtors, or some or all of them simultaneously; and that a creditor's
right to proceed against the surety exists independently of the creditor's right to proceed against the principal.48
Finally, the RTC ordered Rebecca, Barbara and Rosalina to be jointly and severally liable to China Bank for the deficiency
between the acquisition cost of the foreclosed real estate property and the outstanding loan obligation of Barbara and
Rebecca at the time of the foreclosure sale. Interest was set at the rate of 12% per annum from 13 January 2000 until full
payment. Rebecca and Barbara were also ordered to reimburse Rosalina for the amount of the deficiency payment charged
against her including interests thereon.49
THE RULING OF THE CA
Rosalina filed a timely Notice of Appeal and imputed error to the trial court in finding her, together with Rebecca and
Barbara, jointly and severally liable to pay the deficiency claim; in finding that she was still liable as surety even if the bank
had already released the collateral of the principal borrower; and in not annulling the foreclosure sale of the property, not
reconveying the property to her, and not awarding her damages as prayed for in her counterclaim. She said that these
were done by the court despite the fact that China Bank had deliberately and maliciously released the properties of the
principal borrowers, thereby exposing her property to risk.50
The CA found the appeal bereft of merit. 51 It qualified Rosalina as a surety who had assumed or undertaken a principal
debtor's responsibility or obligation. As such, she was supposed to be principally liable for the payment of the debt in case
the principal debtors did not pay, regardless of their financial capacity to do so.52 As for the deficiency, the CA cited BPI
Family Savings Bank v. Avenido.  53 The Supreme Court had ruled therein that the creditor was not precluded from
recovering any unpaid balance on the principal obligation if the extrajudicial foreclosure sale of the property, subject of the
real estate mortgage, would result in a deficiency. 54 The CA ultimately affirmed the RTC Decision in toto55 and denied the
Motion for Reconsideration. 56 Hence, this Petition.
Before this Court, petitioner Rosalina now imputes error to the CA' s affirmance of the RTC Decision. She says that the CA
Decision was not in accord with law and jurisprudence in holding that petitioner, jointly and severally with Barbara and
Rebecca, was liable to pay China Bank's deficiency claim after the bank's release of the collateral of the principal debtors.
Respondent bank's alleged act of exposing Rosalina's property to the risk of foreclosure despite the indivisible character of
the Real Estate Mortgage supposedly violated Article 2089 of the New Civil Code. 57
China Bank filed its Comment58 claiming that all the grounds cited by petitioner were "mere reiterations, repetitions, or
rehashed grounds and arguments raised in the Appellant's Brief x x x which were exhaustively passed upon and considered
by the CA in its Decision"; 59 and that the petition "is wanting of any new, substantial and meritorious grounds that would
justify the reversal of the CA Decision affirming the RTC decision."60
THE ISSUE
The sole issue to be resolved by this Court is whether petitioner Rosalina is liable jointly and severally
with Barbara and Rebecca for the payment of respondent China Bank's claims.
THE RULING OF THIS COURT
Loan transactions in banking institutions usually entail the execution of loan documents, typically a
promissory note, covered by a real estate mortgage and/or a surety agreement. 61 In the instant case,
petitioner Rosalina admitted that she was a party to these loan documents although she vehemently
insisted that she had received nothing from the proceeds of the loan. 62 Meanwhile, respondent bank
offered in evidence the Promissory. Note, the Real Estate Mortgage and the Surety Agreement signed by
the parties.
We find that Rosalina is liable as an accommodation mortgagor.
In Belo v. PNB,63 we had the occasion to declare:
An accommodation mortgage is not necessarily void simply because the accommodation mortgagor did
not benefit from the same. The validity of an accommodation mo1igage is allowed under Article 2085 of
the New Civil Code which provides that (t)hird persons who are not parties to the principal obligation
may secure the latter by pledging or mortgaging their own property. An accommodation mortgagor,
ordinarily, is not himself a recipient of the loan, otherwise that would be contrary to his designation as
such. 64
Apart from being an accommodation mortgagor, Rosalina is also a surety, defined under Article 2047 of
the Civil Code in this wise:
Art. 2047. By guaranty a person, called a guarantor, binds himself to the creditor to fulfill the obligation
of the principal debtor in case the latter should fail to do so.
If a person binds himself solidarily with the principal debtor, the provisions of Section 4, Chapter 3, Title
I of this Book shall be observed. In such case the contract is called a suretyship.
A contract of suretyship (second paragraph of Article 2047) has been juxtaposed against a contract of
guaranty (first paragraph of Article 2047) as follows:
A surety is an insurer of the debt, whereas a guarantor is an insurer of the solvency of the debtor. A
suretyship is an undertaking that the debt shall be paid; a guaranty, an undertaking that the debtor
shall pay. Stated differently, a surety promises to pay the principal's debt if the principal will not pay,
while a guarantor agrees that the creditor, after proceeding against the principal, may proceed against
the guarantor if the principal is unable to pay. A surety binds himself to perform if the principal does
not, without regard to his ability to do so. A guarantor, on the other hand, does not contract that the
principal will pay, but simply that he is able to do so. In other words, a surety undertakes directly for
the payment and is so responsible at once if the principal debtor makes default, while a guarantor
contracts to pay if, by the use of due diligence, the debt cannot be made out of the principal
debtor.65Citations omitted)
In Inciong, Jr. v. CA,  66 we elucidated further in this wise:
While a guarantor may bind himself solidarily with the principal debtor, the liability of a guarantor is
different from that of a solidary debtor. Thus, Tolentino explains:
A guarantor who binds himself in solidum with the principal debtor under the provisions of the second
paragraph does not become a solidary co-debtor to all intents and purposes. There is a difference
between a solidary co-debtor, and a fiador in solidum  (surety). The latter, outside of the liability he
assumes to pay the debt before the property of the principal debtor has been exhausted, retains all
the other rights, actions and benefits which pertain to him by reason of the fiansa; while a solidary
co-debtor has no other rights than those bestowed upon him in Section 4, Chapter 3, title I, Book IV
of the Civil Code.
Section 4, Chapter 3, Title I, Book IV of the Civil Code states the law on joint and several obligations.
Under Art. 1207 thereof, when there are two or more debtors in one and the same obligation, the
presumption is that the obligation is joint so that each of the debtors is liable only for a proportionate part
of the debt. There is a solidarity liability only when the obligation expressly so states, when the law so
provides or when the nature of the obligation so requires.67 (Citations omitted)
Further discussion on the same legal concept proceeded thusly:
A contract of surety is an accessory promise by which a person binds himself for another already
bound, and agrees with the creditor to satisfy the obligation if the debtor does not. A contract of
guaranty, on the other hand, is a collateral undertaking to pay the debt of another in case the latter
does not pay the debt.
Strictly speaking, guaranty and surety are nearly related, and many of the principles are common to
both. However, under our civil law, they may be distinguished thus: A surety is usually bound with his
principal by the same instrument, executed at the same time, and on the same consideration. He is an
original promissor and debtor from the beginning, and is held, ordinarily, to know every default of his
principal. Usually, he will not be discharged, either by the mere indulgence of the creditor to the
 principal, or by want of notice of the default of the principal, no matter how much he may be injured
thereby. On the other hand, the contract of guaranty is the guarantor's own separate undertaking, in
which the principal does not join. It is usually entered into before or after that of the principal, and is
often supported on a separate consideration from that supporting the contract of the principal. The
original contract of his principal is not his contract, and he is not bound to take notice of its non-
performance. He is often discharged by the mere indulgence of the creditor to the principal, and is
usually not liable unless notified of the default of the principal.
Simply put, a surety is distinguished from a guaranty in that a guarantor is the insurer of the solvency
of the debtor and thus binds himself to pay if the principal is unable to pay  while a surety is the
insurer of the debt, and he obligates himself to pay if the principal does not pay.  68(Citations omitted)
When Rosalina affixed her signature to the Real Estate Mortgage as mortgagor and to the Surety
Agreement as surety which covered the loan transaction represented by the Promissory Note, she thereby
bound herself to be liable to China Bank in case the principal debtors, Barbara and Rebecca, failed to pay.
She consequently became liable to respondent bank for the payment of the debt of Barbara and Rebecca
when the latter two actually did not pay.
China Bank, on the other hand, had a right to proceed after either the principal debtors or the surety
when the debt became due. It had a right to foreclose the mortgage involving Rosalina's property to
answer for the loan.
The proceeds from the extrajudicial foreclosure, however, did not satisfy the entire obligation. For this
reason, respondent bank instituted the present Complaint against Barbara and Rebecca as principals and
Rosalina as surety.
A mortgage is simply a security for, and not a satisfaction of indebtedness. 69 If the proceeds of the sale
are insufficient to cover the debt in an extrajudicial foreclosure of mortgage, the mortgagee is entitled to
claim the deficiency from the debtor.70 We have already recognized this rule:
While Act No. 3135, as amended, does not discuss the mortgagee's right to recover the deficiency,
neither does it contain any provision expressly or impliedly prohibiting recovery. If the legislature had
intended to deny the creditor the right to sue for any deficiency resulting from the foreclosure of a
security given to guarantee an obligation, the law would expressly so provide. Absent such a provision
in Act No. 3135, as amended, the creditor is not precluded from taking action to recover any unpaid
balance on the principal obligation simply because he chose to extrajudicially foreclose the real estate
mortgage.71
The creditor, respondent China Bank in this Petition, is therefore not precluded, from recovering any
unpaid balance on the principal obligation if the extrajudicial foreclosure sale of the property, subject of
the Real Estate Mortgage, would result in a deficiency.
Rosalina protests her liability for the deficiency. She claims that China Bank cancelled the mortgage lien
and released the. principal borrowers from liability. She contends that this act violated Article 2089 of the
Civil Code on the indivisibility of mortgage and ultimately discharged her from liability as a surety.
We disagree.
A resort to the terms of the Surety Agreement can easily settle the question of whether Rosalina should
still be held liable. The agreement expressly contains the following stipulation:
The Surety(ies) expressly waive all rights to demand for payment and notice of non-payment and
protest, and agree that the securities of every kind that are now and may hereafter be left with the
Creditor its successors, indorsees or assigns as collateral to any evidence of debt or obligation, or upon
which a lien may exist therefor, may be substituted, withdrawn or surrendered at any time, and
the time for the payment of such obligations extended, without notice to or consent by the
Surety(ies) x xx. 72 (Emphases supplied)
We therefore find no merit in Rosalina's protestations in this petition. As provided by the quoted clause in
the contract, she not only waived the rights to demand payment and to receive notice of nonpayment and
protest, but she also expressly agreed that the time for payment may be extended. More significantly,
she agreed that the securities may be "substituted, withdrawn or surrendered at any time" without her
consent or without notice to her. That China Bank indeed surrendered the properties of the principal
debtors was precisely within the ambit of this provision in the contract. Rosalina cannot now contest that
act in light of her express agreement to that stipulation.
There have been similar cases in which this Court was tasked to rule on whether a surety can be
discharged from liability due to an act or omission of the creditor. A review of these rulings reveals
though, that in the absence of an express stipulation, the surety was discharged from liability if the act of
the creditor was such as would be declared negligent or constitutive of a material alteration of the
contract. On the other hand, in the presence of an express stipulation in the surety agreement allowing
these acts, the surety was not considered discharged and was decreed to be bound by the stipulations.
In PNB v. Manila Surety,73  the Court en banc declared the surety discharged from liability on account of
the creditor's negligence. In that case, the creditor failed to collect the amounts due to the debtor
contrary to the former's duty to make collections as holder of an exclusive and irrevocable power of
attorney. The negligence of the creditor allowed the assigned funds to be exhausted without notice to the
surety and ultimately resulted in depriving the latter of any possibility of recourse against that security.
Also, in PNB v. Luzon Surety,74 the Court hinted at the possibility of the surety's discharge from
liability.1avvphi1 It was recognized in that case that in this jurisdiction, alteration can be a ground for
release. The Court clarified, though, that this principle can only be successfully invoked on the condition
that the alteration is material. Failure to comply with this requisite means that the surety cannot be freed
from liability. Applying this doctrine in that case, the Court ruled that the alterations in the form of
increases in the credit line with the full consent of the surety did not suffice to release the surety.
Meanwhile, in Palmares v. CA,  75 the Court ruled:
It may not be amiss to add that leniency shown to a debtor in default, by delay permitted by the
creditor without change in the time when the debt might be demanded, does not constitute an
extension of the time of payment, which would release the surety. In order to constitute an extension
discharging the surety, it should appear that the extension of the time was for a definite period,
pursuant to an enforceable agreement between the principal and the creditor, and that it was made
without the consent of the surety or with the reservation of rights with respect to him. The contract
must be one which precludes the creditor from, or at least hinders him in, enforcing the principal
contract with the period during which he could otherwise have enforced it, and which precludes the
surety from paying the debt. (Citations omitted)
In E. Zobel Inc. v. CA, et al.,76 the Court upheld the validity of the provision on the continuing guaranty -
which we had earlier interpreted as a surety consistent with its contents and intention of the parties. The
Court upheld the validity of the provision despite the insistence of the surety that he should be released
from liability due to the failure of the creditor to register the mortgage. In particular, the Court decreed:
 SOLIDBANK's failure to register the chattel mortgage did not release petitioner from the obligation. In of plaintiff releasing to the Tambuntings without his consent the 135 shares of the International Sports
the Continuing Guaranty executed in favor of SOLID BANK, petitioner bound itself to the contract Development Corporation pledged to plaintiff bank to secure the overdraft line. For thereby subrogation
irrespective of the existence of any collateral. It even released SOLID BANK from any fault or became meaningless. Such a provision is intended for the benefit of a surety. That was a right he could
negligence that may impair the contract. The pertinent portions of the contract so provides: avail of. He is not precluded however from waiving it. That was what appellant did precisely when he
the undersigned (petitioner) who hereby agrees to be and remain bound upon this guaranty, agreed to the contract of absolute guaranty. Again the law is clear. A right may be waived unless it
irrespective of the existence, value or condition of any collateral, and notwithstanding any such would be contrary to law, public order, public policy, morals or good customs. There is no occasion here
change, exchange, settlement, compromise, surrender, release, sale, application, renewal or for the exceptions corning into play xxx82
extension, and notwithstanding also that all obligations of the Borrower to you outstanding and
unpaid at any time(s) may exceed the aggregate principal sum herein above prescribed.
While we rule that Rosalina, along with the principal debtors, Barbara and Rebecca, is still liable as a
surety for the deficiency amount, we modify the RTC's imposition of interest rate at 12% per annum,
This is a Continuing Guaranty and shall remain in force and effect until written notice shall have been which the CA subsequently affirmed. We must modify the rates according to prevailing jurisprudence.
received by you that it has been revoked by the undersigned, but any such notice shall not be released Hence, the 12% legal interest should be imposed on the deficiency amount from 13 January 2000 until 30
the undersigned from any liability as to any instruments, loans, advances or other obligations hereby June 2013 and 6% legal interest from 1 July 2013 until full payment.
guaranteed, which may be held by you, or in which you may have any interest, at the time of the receipt
of such notice. No act or omission of any kind on your part in the premises shall in any event affect or
WHEREFORE, premises considered, the assailed CA Decision and Resolution finding Rosalina Carodan
impair this guaranty, nor shall same be affected by any change which may arise by reason of the death of
jointly and severally liable with Barbara Perez and Rebecca Perez-Viloria for the deficiency amount
the undersigned, of any partner(s) of the undersigned, or of the Borrower, or of the accession to any such
are AFFIRMED WITH MODIFICATIONS. Rebecca, Barbara and Rosalina are held jointly and severally
partnership of any one or more new partners. 77
liable to China Bank for the deficiency amount of P365,345.77 and interest thereon at the rates of 12%
per annum from 13 January 2000 until 30 June 2013 and 6% per annum from 1 July 2013 until full
Another illustrative case is Gateway Electronics Corporation and Geronimo delos Reyes v. Asianbank,  78 in payment; and that Rebecca and Barbara are also ordered to reimburse Rosalina for the amount charged
which the surety similarly asked for his discharge from liability. He invoked the creditor's repeated against her including interests thereon.83
extensions of maturity dates to the principal debtor's request, without the surety's knowledge and
consent. Still, this Court ruled:
Such contention is unacceptable as it glosses over the fact that the waiver to be notified of extensions
is embedded in surety document itself, built in the ensuing provision:
In case of default by any/or all of the DEBTOR(S) to pay the whole part of said indebtedness herein
secured at maturity, I/WE jointly and severally, agree and engage to the CREDITOR, its successors
and assigns, the prompt payment, without demand or notice from said CREDITOR of such notes,
drafts, overdrafts and other credit obligations on which the DEBTOR(S) may now be indebted or may
hereafter become indebted to the CREDITOR, together with interest, penalty and other bank charges
as may accrue thereon and all expenses which may be incurred by the latter in collecting any or all
such instruments. 79

On Rosalina's argument that the release of the mortgage violates the indivisibility of mortgage as
enunciated in Article 208980 of the Civil Code, People's Bank and Trust Company v. Tambunting et
al.  81 is most instructive. In that case, the surety likewise argued that he should be discharged from
liability. He alleged that the creditor had extended the time of payment and released the shares pledged
by the principal debtors without his consent. The Court en banc  found his argument unpersuasive and
decreed:

1. It is thus obvious that the contract of absolute guaranty executed by appellant Santana is the
measure of rights and duties. As it is with him, so it is with the plaintiff bank. What was therein
stipulated had to be complied with by both parties. Nor could appellant have any valid cause for
complaint. He had given his word; he must live up to it. Once the validity of its terms is conceded, he
cannot be indulged in his unilateral determination to disregard his commitment. A promise to which the
law accords binding force must be fulfilled. It is as simple as that. So the Civil Code explicitly requires:
"Obligations arising from contracts have the force of law between the contracting parties and should be
complied with in good faith."

2. It could have been different if there were no such contract of absolute guaranty to which appellant
was a party under the aforesaid Article 2080. He would have been freed from the obligation as a result