G.R. No.

34642
September 24, 1931
FABIOLA SEVERINO, accompanied by her husband RICARDO VERGARA, plaintiffs-appellees,
vs.
GUILLERMO SEVERINO, ET AL., defendants.
ENRIQUE ECHAUS, appellant.
R. Nepomuceno for appellant.
Jacinto E. Evidente for appellees.
STREET, J.:
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 the detriment suffered by the plaintiffs in the former action in dismissing that proceeding, and it is
immaterial that no benefit may have accrued either to the principal or his guarantor.
The judgment appealed from is in all respects correct, and the same will be affirmed, with costs against the appellant. So ordered.
[G.R. No. 80201. November 20, 1990.]
ANTONIO GARCIA, JR., Petitioner, v. COURT OF APPEALS, LASAL DEVELOPMENT CORPORATION, Respondents.
Quisumbing, Torres & Evangelista for Petitioner.
R .C . Domingo, Jr. & Associates for Private Respondent.
SYLLABUS
1. CIVIL LAW; SPECIAL CONTRACTS; SURETYSHIP; NATURE AND PURPOSE THEREOF. The petitioners 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 suretys 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. (Pastoral v. Mutual Security Insurance Corp., 14 SCRA 1011).
2. ID.; ID.; ID.; OBLIGATION AND LIABILITY OF A SURETY. The suretys 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. (Miners Merchants Bank v. Gidley, 150 WVa 229, 144 SE 2d 711).
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. (Keenes Admr. v. Miller, 103 Ky, 628; Parson on Bills and Notes, 571,
Chitty on Bills, 212; Malteson v. Ellsworth, 33 Wis 488).
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 (Dungo v. Lopea, L-19377, Dec. 29, 1962, 6 SCRA 1007; Magdalena Estates, Inc. v. Rodriguez,
18 SCRA 967; Rizal Commercial Banking Corp. v. Militante, AC GR CV 04077, Sept. 20, 1985; Investors Finance Corp. v. Cruz, AC
GR CV 04710, Nov. 27, 1985).
5. COMMERCIAL LAW; CORPORATIONS; LIMITED LIABILITY DOCTRINE; MAY BE WAIVED WHEN THE CORPORATE
OFFICER VOLUNTARILY BINDS HIMSELF TO ANSWER FOR CORPORATE DEBTS. Regarding the petitioners 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 WMCs 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.
(Filipino Merchants v. Court of Appeals, G.R. No. 85141, November 28, 1989; Ramos v. IAC, 175 SCRA 70).
DECISION
CRUZ, J.:
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.chanrobles.com:cralaw:red
The petitioners 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:chanrob1es virtual 1aw library
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.chanrobles virtualawlibrary
chanrobles.com:chanrobles.com.ph
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 suretys 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. 2
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 suretys 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 petitioners 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.cralawnad
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:chanrob1es virtual 1aw
library
IV. Release of JSS
The CREDITORS expressly agree to release and hereby release the Joint and Several Signatories (JSS) of MINOLCOs 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 MINOLCOs obligations to said CREDITORS.
x
x
x
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:chanrob1es virtual 1aw library
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:chanrobles virtual lawlibrary
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. (Emphasis supplied.)
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.chanrobles.com : virtual law library
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.chanrobles virtualawlibrary chanrobles.com:chanrobles.com.ph
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 WMCs 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.chanrobles.com.ph : virtual law library
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.cralawnad
We approve the following observations made by the Court of Appeals:chanrob1es virtual 1aw library
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 (Dungo v. Lopea, L-19377, Dec. 29, 1962, 6 SCRA 1007; Magdalena Estates, Inc. v. Rodriguez,
18 SCRA 967; Rizal Commercial Banking Corp. v. Militante, AC GR CV 04077, Sept. 20, 1985; Investors Finance Corp. v. Cruz, AC
GR CV 04710, Nov. 27, 1985).chanrobles.com : virtual law library
WHEREFORE, the petition is DENIED and the challenged decision of the respondent court AFFIRMED, with costs against the
petitioner.
SO ORDERED.

G.R. No. 94588 July 2, 1992

FINMAN GENERAL ASSURANCE CORPORATION, petitioner,
vs.
NLRC (POEA), ROMEO GALIZA and MILAGROS BUMANGLAG, respondents.
GRIO-AQUINO, J.:
The petitioner seeks to annul the Order dated August 3, 1989 of the Honorable Secretary of Labor and Employment, denying its
appeal from the Order dated May 31, 1989 of the POEA Administrator in POEA (L) RRB Case No. 88-03-474 entitled, "Romeo
Galiza and Milagros Bumanglag vs. Pan Pacific Overseas Recruitment/Finman General Assurance Corporation" directing the
respondents to pay jointly and severally the complainants' claims, reiterating the ban earlier imposed on Pan Pacific Overseas
Recruitment, and imposing a penalty fine of P40,000 on it.

The record shows that on July 23, 1987, Romeo Galiza and Milagros Bumanglag applied with Pan Pacific 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.
Galiza was required by the agency's General Manager, Engr. Celia Aranda, to pay a placement fee of 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.
Milagros Bumanglag was required to pay P3,000 as "processing fee" for which no receipt was issued to her by the agency.
After several months, Bumanglag followed up her application with the agency. Since the latter failed to deploy her, she withdrew her
travel documents on January 23, 1988 and demanded a refund of her P3,000 placement fee. Instead of returning her money, the agency
advised her to return on March 12, 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.
When it appeared that the recruitment agency merely furnished false information relating to their recruitment and placement for jobs
overseas, Galiza and Bumanglag filed individual complaints against Pan Pacific before the Philippine Overseas Employment
Administration (POEA) [(L) RRB Case No. 88-03-474)] for violation of Articles 32 and 34(a) of the Labor Code, as amended, which
provide:
ART. 32. Fees to be paid by workers. Any person applying with a private fee-charging employment agency for
employment assistance shall not be charged any fee until he has obtained employment through its efforts or has
actually commenced employment. Such fee shall be always covered with the approved receipt clearly showing the
amount paid. The Secretary of Labor shall promulgate a schedule of allowable fees.
ART. 34. Prohibited practices.
(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.
On May 31, 1989, POEA Administrator Tomas Achacoso issued an Order finding Pan Pacific liable for violation of Articles 32 and
34(a) of the Labor Code, as amended. He observed that the agency's note scheduling the refund of Bumanglag's P2,400 placement
fees, while not strictly a receipt, was sufficient 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 claiming refund
of fees paid to the agency. On the other hand. a receipt for P6,000 and a similar note scheduling the refund for the same amount issued
by the agency to Galiza substantially established his payment of P6,000 which was in excess of the allowable recruitment fee of
P5,000 from each hired worker. That the agency furnished false information relating to recruitment and placement to the complainants
when it promised available employment for them, was established beyond cavil. The 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 reiterated.
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 was issued by the POEA.
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.
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. 88-03-474;
and
2. in directing FINMAN to pay jointly and severally with Pan Pacific the claims of Galiza and Bumanglag on the
basis of the suretyship agreement executed by FINMAN, Pan Pacific and the POEA.
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 or revocation of license or authority of the latter; that on
the contrary, the authority of the POEA is limited to a determination of whether there is sufficient cause for an action upon the
agency's license; that POEA's jurisdiction to hear and decide money claims is confined to employer-employee relations arising out of,
or by virtue of, any law or contract, and not money claims arising from pre-employment or during recruitment conducted by the
respondent agency; and finally, that if ever the surety bond may be held liable for infractions or violations of the Labor Code and
POEA rules and regulations, it shall be answerable only for the sanctions, penalties or fines imposed upon the agency but definitely
not for money claims of applicants not arising from employment contracts.
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 (PNB vs. Hon. Pineda.197 SCRA 1, citing Lirag Textile Mills. Inc. vs. SSS, 153 SCRA 338 and Gov't. of the Phil. vs.
Tizon, 20 SCRA 1187 Finman General Assurance Corporation vs. Salik, 188 SCRA 740).

WHEREFORE, the petition is DISMISSED for lack of merit. Costs against the petitioner.
SO ORDERED
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.
Achacoso, Nera and Ocampo for defendant-appellant.
Office of the Solicitor General Arturo A. Alafriz, Assistant Solicitor General J.C. Borromeo and Solicitor N. P. Eduardo for plaintiffappellee.
ANGELES, J.:
Appeal from an order of the Court of First Instance of Manila, dated September 11, 1963, expunging from the record of the case the
answer of the Capital Insurance & Surety, Co., Inc. and remanding said record to the City Court of Manila for execution against the
Surety of the decision rendered by the latter court.
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 codefendant"; 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.
xxx
xxx
xxx
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. (4 C.J., 1206; Alling vs. Wenzel, 133 Ill., 264-278.)
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.1wph1.t
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 truly performs in good faith the contract; (c) to pay to the
Republic of the Philippines, in case of delay 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 codefendant, 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

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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 (Castro vs. Pea, 80 Phil. 488, 502).
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.
ESCANO and SILOS vs. ORTIGAS, Jr., GR. No. 151953, June 29, 2007

FACTS:
Private Development Corporation of the Philippines (PDCP) entered into a loan agreement with Falcon Minerals, Inc. whereby PDCP
agreed to make available and lend to Falcon a sum certain. Respondent Rafael Ortigas, Jr., et al., stockholder officers of
Falcon,executed an Assumption of Solidary Liability whereby they agreed to assume in their individual capacity, solidary liability
with Falcon for the due and punctual payment of the loan contracted by Falcon with PDCP. Two separate guaranties were executed to
guarantee the payment of the same loan by other stockholders and officers of Falcon, acting in their personal and individual capacities.
One Guaranty was executed by petitioner Salvador Escao, while the other by petitioners Mario M. Silos, Ricardo C. Silverio, et al.
Two years later, an agreement developed to cede control of Falcon to Escao, Silos and Joseph M. Matti. Thus, contracts were
executed whereby Ortigas, George A. Scholey, Inductivo and the heirs of then already deceased George T. Scholey assigned their
shares of stock in Falcon to Escao, Silos and Matti. Part of the consideration that induced the sale of stock was a desire by Ortigas, et
al., to relieve themselves of all liability arising from their previous joint and several undertakings with Falcon, including those related
to the loan with PDCP. Thus, an Undertaking was executed by the concerned parties with Escao, Silos and Matti identified in the
document as sureties, on one hand, and Ortigas, Inductivo and the Scholeys as obligors, on the other. However, Falcon
subsequently defaulted in its payments. After PDCP foreclosed on the chattel mortgage, there remained a subsisting deficiency of
P5,000,000, which Falcon did not satisfy despite demand. In order to recover the indebtedness, PDCP filed a complaint for sum of
money against Falcon, Ortigas, Escao, Silos, Silverio and Inductivo. Ortigas filed together with his answer a cross-claim against his
co-defendants Falcon, Escao and Silos, and also manifested his intent to file a third- party complaint against the Scholeys and Matti.
The cross-claim lodged against Escao and Silos was predicated on the 1982 Undertaking, wherein they agreed to assume the
liabilities of Ortigas with respect to the PDCP loan. Escao, Ortigas and Silos each sought to seek a settlement with PDCP. The first to
come to terms with PDCP was Escao, who entered into a compromise agreement. In exchange, PDCP waived or assigned in favor of
Escao 1/3 of its entire claim inthe complaint against all of the other defendants in the case. Then Ortigas entered into his own
compromise agreement with PDCP, allegedly without the knowledge of Escao, Matti and Silos. Thereby, Ortigas agreed to pay
PDCP P1.3M as full satisfaction of the PDCPs claim against Ortigas. Silos and PDCP entered into a Partial Compromise Agreement
whereby he agreed to pay P500k in exchange for PDCPs waiver of its claims against him. In the meantime, after having settled with
PDCP, Ortigas pursued his claims against Escao, Silos and Matti, on the basis of the 1982 Undertaking. He initiated a third-party
complaint against Matti and Silos, whilehe maintained his cross-claim against Escao. RTC issued the Summary Judgment, ordering
Escao, Silos and Matti to pay Ortigas, jointly and severally, the amount of P1.3M, as well as P20K in attorneys fees. The trial court
ratiocinated that none of the third-party defendants disputed the 1982 Undertaking.
ISSUE:
Whether or not petitioners are solidarily liable to respondent Ortigas.
Held:

Petitioners are not solidarily liable to respondent Ortigas. 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, there is a solidary liability only when
the obligation expressly so states, or when the law or the nature of the obligation requires solidarity. Article1210 supplies further that
the indivisibility of an obligation does not necessarily give rise to solidarity. Nor does solidarity of itself imply indivisibility. Thus, 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. He has failed to discharge such
burden. The termsurety has a specific meaning under our Civil Code. 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 argument rests solely on the solidary nature of the obligation of the surety
under Article2047. In tandem with the nomenclature sureties accorded to petitioners and Mattiin 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.
G.R. No. 89775 November 26, 1992
JACINTO UY DIO and NORBERTO UY, petitioners,
vs.
HON. COURT OF APPEALS and METROPOLITAN BANK AND TRUST COMPANY, respondents.
DAVIDE, JR., J.:
Continuing Suretyship Agreements signed by the petitioners set off this present controversy.
Petitioners assail the 22 June 1989 Decision of the Court in CA-G.R. CV No. 17724 1 which reversed the 2 December 1987 Decision
of Branch 45 of the Regional Trial Court (RTC) of Manila in a collection suit entitled "Metropolitan Bank and Trust Company vs. Uy
Tiam, doing business under the name of "UY TIAM ENTERPRISES & FREIGHT SERVICES," Jacinto Uy Dio and Norberto Uy" and
docketed as Civil Case No. 82-9303. They likewise challenge public respondent's Resolution of 21 August 1989 2 denying their
motion for the reconsideration of the former.
The impugned Decision of the Court summarizes the antecedent facts as follows:
It appears that in 1977, Uy Tiam Enterprises and Freight Services (hereinafter referred to as UTEFS), thru its
representative Uy Tiam, applied for and obtained credit accommodations (letter of credit and trust receipt
accommodations) from the Metropolitan Bank and Trust Company (hereinafter referred to as METROBANK) in the
sum of P700,000.00 (Original Records, p. 333). To secure the aforementioned credit accommodations Norberto Uy
and Jacinto Uy Dio executed separate Continuing Suretyships (Exhibits "E" and "F" respectively), dated 25
February 1977, in favor of the latter. Under the aforesaid agreements, Norberto Uy agreed to pay METROBANK
any indebtedness of UTEFS up to the aggregate sum of P300,000.00 while Jacinto Uy Dio agreed to be bound up
to the aggregate sum of P800,000.00.
Having paid the obligation under the above letter of credit in 1977, UTEFS, through Uy Tiam, obtained another
credit accommodation from METROBANK in 1978, which credit accommodation was fully settled before an
irrevocable letter of credit was applied for and obtained by the abovementioned business entity in 1979 (September
8, 1987, tsn, pp. 14-15).
The Irrevocable Letter of Credit No. SN-Loc-309, dated March 30, 1979, in the sum of P815, 600.00, covered
UTEFS' purchase of "8,000 Bags Planters Urea and 4,000 Bags Planters 21-0-0." It was applied for and obtain by
UTEFS without the participation of Norberto Uy and Jacinto Uy Dio as they did not sign the document
denominated as "Commercial Letter of Credit and Application." Also, they were not asked to execute any suretyship
to guarantee its payment. Neither did METROBANK nor UTEFS inform them that the 1979 Letter of Credit has
been opened and the Continuing Suretyships separately executed in February, 1977 shall guarantee its payment
(Appellees brief, pp. 2-3; rollo, p. 28).
The 1979 letter of credit (Exhibit "B") was negotiated. METROBANK paid Planters Products the amount of
P815,600.00 which payment was covered by a Bill of Exchange (Exhibit "C"), dated 4 June 1979, in favor of
(Original Records, p. 331).
Pursuant to the above commercial transaction, UTEFS executed and delivered to METROBANK and Trust Receipt
(Exh. "D"), dated 4 June 1979, whereby the former acknowledged receipt in trust from the latter of the
aforementioned goods from Planters Products which amounted to P815, 600.00. Being the entrusted, the former
agreed to deliver to METROBANK the entrusted goods in the event of non-sale or, if sold, the proceeds of the sale
thereof, on or before September 2, 1979.
However, UTEFS did not acquiesce to the obligatory stipulations in the trust receipt. As a consequence,
METROBANK sent letters to the said principal obligor and its sureties, Norberto Uy and Jacinto Uy Dio,
demanding payment of the amount due. Informed of the amount due, UTEFS made partial payments to the Bank
which were accepted by the latter.
Answering one of the demand letters, Dio, thru counsel, denied his liability for the amount demanded and
requested METROBANK to send him copies of documents showing the source of his liability. In its reply, the bank
informed him that the source of his liability is the Continuing Suretyship which he executed on February 25, 1977.
As a rejoinder, Dio maintained that he cannot be held liable for the 1979 credit accommodation because it is a new
obligation contracted without his participation. Besides, the 1977 credit accommodation which he guaranteed has
been fully paid.
Having sent the last demand letter to UTEFS, Dio and Uy and finding resort to extrajudicial remedies to be futile,
METROBANK filed a complaint for collection of a sum of money (P613,339.32, as of January 31, 1982, inclusive
of interest, commission penalty and bank charges) with a prayer for the issuance of a writ of preliminary attachment,
against Uy Tiam, representative of UTEFS and impleaded Dio and Uy as parties-defendants.
The court issued an order, dated 29 July 1983, granting the attachment writ, which writ was returned unserved and
unsatisfied as defendant Uy Tiam was nowhere to be found at his given address and his commercial enterprise was
already non-operational (Original Records, p. 37).
On April 11, 1984, Norberto Uy and Jacinto Uy Dio (sureties-defendant herein) filed a motion to dismiss the
complaint on the ground of lack of cause of action. They maintained that the obligation which they guaranteed in

1977 has been extinguished since it has already been paid in the same year. Accordingly, the Continuing Suretyships
executed in 1977 cannot be availed of to secure Uy Tiam's Letter of Credit obtained in 1979 because a guaranty
cannot exist without a valid obligation. It was further argued that they can not be held liable for the obligation
contracted in 1979 because they are not privies thereto as it was contracted without their participation (Records, pp.
42-46).
On April 24, 1984, METROBANK filed its opposition to the motion to dismiss. Invoking the terms and conditions
embodied in the comprehensive suretyships separately executed by sureties-defendants, the bank argued that
sureties-movants bound themselves as solidary obligors of defendant Uy Tiam to both existing obligations and
future ones. It relied on Article 2053 of the new Civil Code which provides: "A guaranty may also be given as
security for future debts, the amount of which is not yet known; . . . ." It was further asserted that the agreement was
in full force and effect at the time the letter of credit was obtained in 1979 as sureties-defendants did not exercise
their right to revoke it by giving notice to the bank. (Ibid., pp. 51-54).
Meanwhile, the resolution of the aforecited motion to dismiss was held in abeyance pending the introduction of
evidence by the parties as per order dated February 21, 1986 (Ibid., p. 71).
Having been granted a period of fifteen (15) days from receipt of the order dated March 7, 1986 within which to file
the answer, sureties-defendants filed their responsive pleading which merely rehashed the arguments in their motion
to dismiss and maintained that they are entitled to the benefit of excussion (Original Records, pp. 88-93).
On February 23, 1987, plaintiff filed a motion to dismiss the complaint against defendant Uy Tiam on the ground
that it has no information as to the heirs or legal representatives of the latter who died sometime in December, 1986,
which motion was granted on the following day (Ibid., pp. 180-182).
After trial, . . . the court a quo, on December 2, 198, rendered its judgment, a portion of which reads:
The evidence and the pleadings, thus, pose the querry (sic):
Are the defendants Jacinto Uy Dioand Norberto Uy liable for the obligation contracted by Uy
Tiam under the Letter of Credit (Exh. B) issued on March 30, 1987 by virtue of the Continuing
Suretyships they executed on February 25, 1977?
Under the admitted proven facts, the Court finds that they are not.
a) When Uy and Dio executed the continuing suretyships, exhibits E and F, on February 25,
1977, Uy Tiam was obligated to the plaintiff in the amount of P700,000.00 and this was the
obligation which both obligation which both defendants guaranteed to pay. Uy Tiam paid this
1977 obligation and such payment extinguished the obligation they assumed as
guarantors/sureties.
b) The 1979 Letter of Credit (Exh. B) is different from the 1977 Letter of Credit which covered the
1977 account of Uy Tiam. Thus, the obligation under either is apart and distinct from the
obligation created in the other as evidenced by the fact that Uy Tiam had to apply anew for the
1979 transaction (Exh. A). And Dio and Uy, being strangers thereto, cannot be answerable
thereunder.
c) The plaintiff did not serve notice to the defendants Dio and Uy when it extended to Credit
at least to inform them that the continuing suretyships they executed on February 25, 1977 will be
considered by the plaintiff to secure the 1979 transaction of Uy Tiam.
d) There is no sufficient and credible showing that Dio and Uy were fully informed of the import
of the Continuing Suretyships when they affixed their signatures thereon that they are thereby
securing all future obligations which Uy Tiam may contract the plaintiff. On the contrary, Dio
and Uy categorically testified that they signed the blank forms in the office of Uy Tiam at 623
Asuncion Street, Binondo, Manila, in obedience to the instruction of Uy Tiam, their former
employer. They denied having gone to the office of the plaintiff to subscribe to the documents
(October 1, 1987, tsn, pp. 5-7, 14; October 15, 1987, tsn, pp. 3-8, 13-16). (Records, pp. 333-334). 3
xxx xxx xxx
In its Decision, the trial court decreed as follows:
PREMISES CONSIDERED, judgment is hereby rendered:
a) dismissing the COMPLAINT against JACINTO UY DIO and NORBERTO UY;
b) ordering the plaintiff to pay to Dio and Uy the amount of P6,000.00 as attorney's fees and expenses of litigation;
and
c) denying all other claims of the parties for want of legal and/or factual basis.
SO ORDERED. (Records, p. 336) 4
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 DEFENDANTSAPPELLEES JACINTO UY DIO AND NORBERTO UY ARE SOLIDARILY LIABLE TO PLAINTIFFAPPELLANT FOR THE OBLIGATION OF DEFENDANT UY TIAM UNDER THE LETTER OF CREDIT
ISSUED ON MARCH 30, 1979 BY VIRTUE OF THE CONTINUING SURETYSHIPS THEY EXECUTED ON
FEBRUARY 25, 1977.
II. THE LOWER COURT ERRED IN HOLDING THAT PLAINTIFF-APPELLANT IS ANSWERABLE TO
DEFENDANTS-APPELLEES JACINTO UY DIO AND NORBERTO UY FOR ATTORNEY'S FEES AND
EXPENSES OF LITIGATION. 5
On 22 June 1989, public respondent promulgated the assailed Decision the dispositive portion of which reads:
WHEREFORE, premises considered, the judgment appealed from is hereby REVERSED AND SET, ASIDE. In lieu
thereof, another one is rendered:

1) Ordering sureties-appellees Jacinto Uy Dio and Norberto Uy to pay, jointly and severally, to
appellant METROBANK the amount of P2,397,883.68 which represents the amount due as of
July 17, 1987 inclusive of principal, interest and charges;
2) Ordering sureties-appellees Jacinto Uy Dio and Norberto Uy to pay, jointly and severally,
appellant METROBANK the accruing interest, fees and charges thereon from July 18, 1987 until
the whole monetary obligation is paid; and
3) Ordering sureties-appellees Jacinto Uy Dio and Norberto Uy to pay, jointly and severally, to
plaintiff P20,000.00 as attorney's fees.
With costs against appellees.
SO ORDERED. 6
In ruling for the herein private respondent (hereinafter METROBANK), public respondent held that the Continuing Suretyship
Agreements separately executed by the petitioners in 1977 were intended to guarantee payment of Uy Tiam's outstanding as well as
future obligations; each suretyship arrangement was intended to remain in full force and effect until METROBANK would have been
notified of its revocation. Since no such notice was given by the petitioners, the suretyships are deemed outstanding and hence, cover
even the 1979 letter of credit issued by METROBANK in favor of Uy Tiam.
Petitioners filed a motion to reconsider the foregoing Decision. They questioned the public respondent's construction of the suretyship
agreements and its ruling with respect to the extent of their liability thereunder. They argued the even if the agreements were in full
force and effect when METROBANK granted Uy Tiam's application for a letter of credit in 1979, the public respondent nonetheless
seriously erred in holding them liable for an amount over and above their respective face values.
In its Resolution of 21 August 1989, public respondent denied the motion:
. . . considering that the issues raised were substantially the same grounds utilized by the lower court in rendering
judgment for defendants-appellees which We upon appeal found and resolved to be untenable, thereby reversing and
setting aside said judgment and rendering another in favor of plaintiff, and no new or fresh issues have been posited
to justify reversal of Our decision herein, . . . . 7
Hence, the instant petition which hinges on the issue of whether or not the petitioners may be held liable as sureties for the obligation
contracted by Uy Tiam with METROBANK on 30 May 1979 under and by virtue of the Continuing Suretyship Agreements signed on
25 February 1977.
Petitioners vehemently deny such liability on the ground that the Continuing Suretyship Agreements were automatically extinguished
upon payment of the principal obligation secured thereby, i.e., the letter of credit obtained by Uy Tiam in 1977. They further claim that
they were not advised by either METROBANK or Uy Tiam that the Continuing Suretyship Agreements would stand as security for
the 1979 obligation. Moreover, it is posited that to extend the application of such agreements to the 1979 obligation would amount to a
violation of Article 2052 of the Civil Code which expressly provides that a guaranty cannot exist without a valid obligation.
Petitioners further argue that even granting, for the sake of argument, that the Continuing Suretyship Agreements still subsisted and
thereby also secured the 1979 obligations incurred by Uy Tiam, they cannot be held liable for more than what they guaranteed to pay
because it s axiomatic that the obligations of a surety cannot extend beyond what is stipulated in the agreement.
On 12 February 1990, this Court resolved to give due course to the petition after considering the allegations, issues and arguments
adduced therein, the Comment thereon by the private respondent and the Reply thereto by the petitioners; the parties were required to
submit their respective Memoranda.
The issues presented for determination are quite simple:
1. Whether petitioners are liable as sureties for the 1979 obligations of Uy Tiam to METROBANK by virtue of the
Continuing Suretyship Agreements they separately signed in 1977; and
2. On the assumption that they are, what is the extent of their liabilities for said 1979 obligations.
Under the Civil Code, a guaranty may be given to secure even future debts, the amount of which may not known at the time the
guaranty is
executed. 8 This is the basis for contracts denominated as continuing guaranty or suretyship. A continuing guaranty is one which is not
limited to a single transaction, but which contemplates a future course of dealing, covering a series of transactions, generally for an
indefinite time or until revoked. It is prospective in its operation and is generally intended to provide security with respect to future
transactions within 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 Dio contains identical provisions except with respect to
the guaranteed aggregate principal amount which is EIGHT THOUSAND PESOS (P800,000.00). 14
Paragraph IV of both agreements stipulate that:
VI. This is a continuing guaranty and shall remain in full force and effect until written notice shall have been
received by the BANK that it has been revoked by the SURETY, but any such notice shall not release the
SURETY, from any liability as to any instruments, loans, advances or other obligations hereby guaranteed, which
may be held by the BANK, or in which the BANK may have any interest at the time of the receipt (sic) of such
notice. No act or omission of any kind on the BANK'S part in the premises shall in any event affect or impair this
guaranty, nor shall same (sic) be affected by any change which may arise by reason of the death of the SURETY, or
of any partner(s) of the SURETY, or of the Borrower, or of the accession to any such partnership of any one or more
new partners. 15
The foregoing stipulations unequivocally reveal that the suretyship agreement in the case at bar are continuing in nature. Petitioners do
not deny this; in fact, they candidly admitted it. Neither have they denied the fact that they had not revoked the suretyship agreements.
Accordingly, as correctly held by the public respondent:
Undoubtedly, the purpose of the execution of the Continuing Suretyships was to induce appellant to grant any
application for credit accommodation (letter of credit/trust receipt) UTEFS may desire to obtain from appellant
bank. By its terms, each suretyship is a continuing one which shall remain in full force and effect until the bank is
notified of its revocation.
xxx xxx xxx
When the Irrevocable Letter of Credit No. SN-Loc-309 was obtained from appellant bank, for the purpose of
obtaining goods (covered by a trust receipt) from Planters Products, the continuing suretyships were in full force and
effect. Hence, even if sureties-appellees did not sign the "Commercial Letter of Credit and Application, they are still
liable as the credit accommodation (letter of credit/trust receipt) was covered by the said suretyships. What makes
them liable thereunder is the condition which provides that the Borrower "is or may become liable as maker,
endorser, acceptor or otherwise." And since UTEFS which (sic) was liable as principal obligor for having failed to
fulfill the obligatory stipulations in the trust receipt, they as insurers of its obligation, are liable thereunder. 16
Petitioners maintain, however, that their Continuing Suretyship Agreements cannot be made applicable to the 1979 obligation because
the latter was not yet in existence when the agreements were executed in 1977; under Article 2052 of the Civil Code, a guaranty
"cannot exist without a valid obligation." We cannot agree. First of all, the succeeding article provides that "[a] guaranty may also be
given as security for future debts, the amount of which is not yet known." Secondly, Article 2052 speaks about a valid obligation, as
distinguished from a void obligation, and not an existing or current obligation. This distinction is made clearer in the second
paragraph of Article 2052 which reads:
Nevertheless, a guaranty may be constituted to guarantee the performance of a voidable or an unenforceable
contract. It may also guarantee a natural obligation.
As to the amount of their liability under the Continuing Suretyship Agreements, petitioners contend that the public respondent gravely
erred in finding them liable for more than the amount specified in their respective agreements, to wit: (a) P800,000.00 for petitioner
Dio and (b) P300,000.00 for petitioner Uy.
The limit of the petitioners respective liabilities must be determined from the suretyship agreement each had signed. It is undoubtedly
true that the law looks upon the contract of suretyship with a jealous eye, and the rule is settled that the obligation of the surety cannot
be extended by implication beyond its specified limits. To the extent, and in the manner, and under the circumstances pointed out in
his obligation, he is bound, and no farther. 17
Indeed, the Continuing Suretyship Agreements signed by petitioner Dio and petitioner Uy fix the aggregate amount of their liability,
at any given time, at P800,000.00 and P300,000.00, respectively. The law is clear that a guarantor may bond himself for less, but not
for more than the principal debtor, both as regards the amount and the onerous nature of the conditions. 18 In the case at bar, both
agreements provide for liability for interest and expenses, to wit:
. . . and such interest as may accrue thereon either before or after any maturity(ies) thereof and such expenses as may
be incurred by the BANK referred to above. 19
They further provide that:
In the event of judicial proceedings being instituted by the BANK against the SURETY to enforce any of the terms
and conditions of this undertaking, the SURETY further agrees to pay the BANK a reasonable compensation for and
as attorney's fees and costs of collection, which shall not in any event be less than ten per cent (10%) of the amount
due (the same to be due and payable irrespective of whether the case is settled judicially or extrajudicially). 20

Thus, by express mandate of the Continuing Suretyship Agreements which they had signed, petitioners separately bound
themselves to pay interest, expenses, attorney's fees and costs. The last two items are pegged at not less than ten percent
(10%) of the amount due.
Even without such stipulations, the petitioners would, nevertheless, be liable for the interest and judicial costs. Article 2055 of the
Civil Code provides: 21
Art. 2055. A guaranty is not presumed; it must be express and cannot extend to more than what is stipulated therein.
If it be simple or indefinite, it shall comprise not only the principal obligation, but also all its accessories, including
the judicial costs, provided with respect to the latter, that the guarantor shall only be liable for those costs incurred
after he has been judicially required to pay.
Interest and damages are included in the term accessories. However, such interest should run only from the date when the
complaint was filed in court. Even attorney's fees may be imposed whenever appropriate, pursuant to Article 2208 of the
Civil Code. Thus, in Plaridel Surety & Insurance Co., Inc. vs. P.L. Galang Machinery Co., Inc., 22 this Court held:
Petitioner objects to the payment of interest and attorney's fees because: (1) they were not mentioned in the bond;
and (2) the surety would become liable for more than the amount stated in the contract of suretyship.
xxx xxx xxx
The objection has to be overruled, because as far back as the year 1922 this Court held in Tagawa vs. Aldanese, 43
Phil. 852, that creditors suing on a suretyship bond may recover from the surety as part of their damages, interest at
the legal rate even if the surety would thereby become liable to pay more than the total amount stipulated in the
bond. The theory is that interest is allowed only by way of damages for delay upon the part of the sureties in making
payment after they should have done so. In some states, the interest has been charged from the date of the interest
has been charged from the date of the judgment of the appellate court. In this jurisdiction, we rather prefer to follow
the general practice, which is to order that interest begin to run from the date when the complaint was filed in court, .
..
Such theory aligned with sec. 510 of the Code of Civil Procedure which was subsequently recognized in the Rules
of Court (Rule 53, section 6) and with Article 1108 of the Civil Code (now Art. 2209 of the New Civil Code).
In other words the surety is made to pay interest, not by reason of the contract, but by reason of its failure to pay
when demanded and for having compelled the plaintiff to resort to the courts to obtain payment. It should be
observed that interest does not run from the time the obligation became due, but from the filing of the complaint.
As to attorney's fees. Before the enactment of the New Civil Code, successful litigants could not recover attorney's
fees as part of the damages they suffered by reason of the litigation. Even if the party paid thousands of pesos to his
lawyers, he could not charge the amount to his opponent (Tan Ti vs. Alvear, 26 Phil. 566).
However the New Civil Code permits recovery of attorney's fees in eleven cases enumerated in Article 2208, among
them, "where the court deems it just and equitable that attorney's (sic) fees and expenses of litigation should be
recovered" or "when the defendant acted in gross and evident bad faith in refusing to satisfy the plaintiff's plainly
valid, just and demandable claim." This gives the courts discretion in apportioning attorney's fees.
The records do not reveal the exact amount of the unpaid portion of the principal obligation of Uy Tiam to MERTOBANK under
Irrevocable Letter of Credit No. SN-Loc-309 dated 30 March 1979. In referring to the last demand letter to Mr. Uy Tiam and the
complaint filed in Civil Case No. 82-9303, the public respondent mentions the amount of "P613,339.32, as of January 31, 1982,
inclusive of interest commission penalty and bank charges." 23This 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 Dio which stipulates an aggregate principal sum of
not exceeding P800,000.00, and partly covered by that of petitioner Uy which pegs his maximum liability at P300,000.00.
Consequently, the judgment of the public respondent shall have to be modified to conform to the foregoing exposition, to which extent
the instant petition is impressed with partial merit.
WHEREFORE, the petition is partly GRANTED, but only insofar as the challenged decision has to be modified with respect to the
extend of petitioners' liability. As modified, petitioners JACINTO UY DIO and NORBERTO UY are hereby declared liable for and
are ordered to pay, up to the maximum limit only of their respective Continuing Suretyship Agreement, the remaining unpaid balance
of the principal obligation of UY TIAM or UY TIAM ENTERPRISES & FREIGHT SERVICES under Irrevocable Letter of Credit
No. SN-Loc-309, dated 30 March 1979, together with the interest due thereon at the legal rate commencing from the date of the filing
of the complaint in Civil Case No. 82-9303 with Branch 45 of the Regional Trial Court of Manila, as well as the adjudged attorney's
fees and costs.
All other dispositions in the dispositive portion of the challenged decision not inconsistent with the above are affirmed.
SO ORDERED.
[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.
DECISION

PANGANIBAN, J.:
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 stockin-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
Decision[1] 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 decision[3] of the Regional Trial Court of Manila - Branch 11 [4] 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 attorneys 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 April [6] 5, 1982, Petitioner Fortune, Respondent Filinvest and Canlubang Automotive Resources
Corporation (CARCO) entered into an Automotive Wholesale Financing Agreement [7] (Financing Agreement) under which CARCO
will deliver motor vehicles to Fortune for the purpose of resale in the latters 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
letters[9] 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 attorneys 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 courts
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 x x x;
x x x The defendants (referring to Rodrigueza and Chua) are not parties to the trust receipts agreements since they are ONLY sureties
x x x.[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, x x x x by which you may purchase or
otherwise require from, and or enter into with obligor x x x trust receipt x x x arising out of wholesale and/or retail transactions by or
with obligor, the undersigned x x x absolutely, unconditionally, and solidarily guarantee to you x x x the full, faithful and prompt
performance, payment and discharge of any and all obligations x x x 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 x x x now in force or hereafter
made. (Underlinings 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 (Tolentino, Commentaries on
Jurisprudence of the Civil Code of the Philippines, 1973 Edition, Vol. IV, page 367; cited in plaintiffs Memorandum of September 6,
1985, p. 3).
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 wasP1,302,811,00, 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 (Sec. 23, Rule 130, Revised Rules of Court).[14]
The Court of Appeals, affirming the above decision of the trial court, further explained:
x x x 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 Fortunes 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 Fortunes 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 Fortunes 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 Fortunes 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 Courts 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] x x x 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:
x x x Of course, a surety is not bound under any particular principal obligation until that principal obligation is born. But there is no
theoretical or doctrinal difficulty inherent in saying that the suretyship agreement itself is valid and binding even before the principal
obligation intended to be secured thereby is born, any more than there would be in saying that obligations which are subject to a
condition precedent are valid and binding before the occurrence of the condition precedent.
Comprehensive or continuing surety agreements are in fact quite commonplace in present day financial and commercial practice. A
bank or financing company which anticipates entering into a series of credit transactions with a particular company, commonly
requires the projected principal debtor to execute a continuing surety agreement along with its sureties. By executing such an
agreement, the principal places itself in a position to enter into the projected series of transactions with its creditor; with such
suretyship agreement, there would be no need to execute a separate surety contract or bond for each financing or credit
accommodation extended to the principal debtor.
In Dio vs. Court of Appeals,[19] we again had occasion to discourse on continuing guaranty/suretyship thus:
x x x A continuing guaranty is one which is not limited to a single transaction, but which contemplates a future course of dealing,
covering a series of transactions, generally for an indefinite time or until revoked. It is prospective in its operation and is generally
intended to provide security with respect to future transactions within certain limits, and contemplates a succession of liabilities, for
which, as they accrue, the guarantor becomes liable. Otherwise stated, a continuing guaranty is one which covers all transactions,
including those arising in the future, which are within the description or contemplation of the contract, of guaranty, until the expiration
or termination thereof. A guaranty shall be construed as continuing when by the terms thereof it is evident that the object is to give a
standing credit to the principal debtor to be used from time to time either indefinitely or until a certain period; 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] (underscoring 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 pre-existing 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 Fortunes 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 no
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:
x x x For another, if Chua and Rodrigueza truly believed that the surety undertakings they executed should not cover Fortunes
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 Fortunes 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
Fortunes obligations in the aforementioned AWFA, trust receipts or demand drafts.[26]
Third Issue: Amount of Claim Substantiated

The contest on the correct amount of the liability of petitioners is a purely factual issue. It is an oft repeated maxim that the
jurisdiction of this Court in cases brought before it from the Court of Appeals under Rule 45 of the Rules of Court is limited to
reviewing or revising errors of law. It is not the function of this Court to analyze or weigh evidence all over again unless there is a
showing that the findings of the lower court are totally devoid of support or are glaringly erroneous as to constitute serious abuse of
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]
In the case at bar, the findings of the trial court and the Court of Appeals with respect to the assigned error are based on
substantial evidence which were not refuted with contrary proof by petitioners. Hence, there is no necessity to depart from the above
judicial dictum.
WHEREFORE, premises considered, the petition is DENIED and the assailed Decision of the Court of Appeals concurring with
the decision of the trial court is hereby AFFIRMED.Costs against petitioners.
SO ORDERED.
G.R. No. 33174 July 4, 1991
PHILIPPINE NATIONAL BANK, petitioner,
vs.
THE HONORABLE COURT OF APPEALS (Special Fourth Division), LUZON SURETY CO., INC., and ESTANISLAO E.
DEPUSOY, trading under the style of E.E. DEPUSOY CONSTRUCTION, respondents.
Domingo A. Santiago, Jr., Lucas R. Vidad, Nicolas C. Alino, Cesar T. Basa and Roland A. Niedo for petitioner.
Tolentino, Cruz, Reyes, Lava & Manuel for respondent Luzon Surety Co., Inc.
F.M. Ejercito for respondent E.E. Depusoy Construction.
DAVIDE, JR., J.:p
Before Us is a petition for the review on certiorari of the decision of the Court of Appeals promulgated on 12 December 1970 in CAG.R. No. 36615-R 1 affirming, with modification, the decision of the then Court of First Instance (now Regional Trial Court) of
Manila, Branch VII, dated 30 September 1959 in Civil Case No. 35163 2 an action for collection of sum of money filed by petitioner
against private respondents. The dispositive portion of the trial court's decision reads:
IN VIEW WHEREOF:
1. The case against Luzon Surety Co. is dismissed but its counterclaim is also dismissed for lack of sufficient merit;
2. Defendant Estanislao Depusoy is condemned to pay unto the Philippine National Bank the respective sums as
principal of P35,000.00, P30,000.00, P10,000.00, and P25,000.00 together with the interests as outlined in the
statement of account set forth in the body of this decision. No pronouncements as to costs.
SO ORDERED. 3
The dispositive portion of the decision of respondent Court of Appeals reads:
WHEREFORE, with the modification that the defendant Depusoy shall pay 10% interest on the amount of the
judgment, the decision of the trial court is hereby affirmed in all other respects. Without pronouncement as to costs. 4
However, immediately preceding this is a paragraph reading:
We agree with the appellant that the trial court erred in not sentencing Estanislao Depusoy to pay attorney's fees
equivalent to 10% of the amount due. This is expressly provided for in the promissory notes, and as it does not
appear to be unreasonable, the stipulations of the parties should be given effect.
As carefully summarized by the Court of Appeals, the relevant facts in this case are as follows:
On August 6, 1955, Estanislao Depusoy, doing business under the name of E.E. Depusoy Construction, and the
Republic of the Philippines, represented by the Director of Public Works, entered into a building contract, Exhibit 2Luzon, 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 defendantappellee 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 defendantappellee (see evidences (sic) offered as part of the record on appeal for purposes of review).
IX
The trial court erred in relying exclusively for its decision on the relation of facts presented by the appellee-Luzon
Surety Company; disregarding evidences (sic) presented by the PNB consist of documentary evidences (sic)
disclosing patent facts appearing on the face of said documents and that consequently the decision is not based on
the real facts and law of the case; and consequently dismissing the case against the Luzon Surety. 7
In due course the Court of Appeals rendered the decision adverted to above. In disposing of the assigned errors, it patiently examined
and analyzed the facts and made an extensive, exhaustive and well-reasoned disquisition thereon which We deem necessary to quote:
The assignment of error maybe (sic) reduced into one single question, what is the obligation of Luzon under the
surety bonds, or, stated otherwise, what obligation had been guaranteed by Luzon under the terms of the surety
bonds? It is the contention of the plaintiff that the surety bonds, Exhibits D and E, guaranteed the payment of the
loans or the debt of Depusoy to the plaintiff to the extent of P100,000.00. Luzon, however, contends that what it
guaranteed was the performance of Depusoy of his obligation under the Deed of Assignment, Exhibit C, and not
other agreements between Depusoy and the bank. This contention was upheld by the lower court. This, we believe is
the correct construction of the surety bonds. Under the surety bonds, Depusoy and Luzon bound themselves to the
plaintiff in the sum of P100,000.00. It recited that the principal, Depusoy, and Luzon bound themselves jointly and
severally to the PNB under the following conditions: that "in consideration of a certain loan, Depusoy executed a
Deed of Assignment in favor of the PNB on all payments to be received by him from the Bureau of Public Works in
connection with a contract of August 6, 1956"; that the PNB required the principal to give a good and sufficient
bond to secure the full and faithful performance on his part of said agreement; and that, "if the principal shall well
and truly perform and fulfill all the undertakings, covenants, terms and conditions, and agreements stipulated in said
agreement, this obligation shall be null and void". Now, what are the undertakings, covenants, terms, conditions, and
agreements stipulated in the said agreement or Deed of Assignment? The undertakings of the principal Depusoy,
under the Deed of Assignment, Exhibit C, were to assign, transfer, and convey to the plaintiff bank all payments to
be received by Depusoy from the Bureau of Public Works; that Depusoy acknowledged that such sums assigned and

received by the plaintiff would belong to the PNB, and if any conversion should be made by the assignor or his
representative, he would be criminally liable; that the PNB could collect and receive all sums and monies, and
payments, and the bank was authorized to endorse for deposit or for encashment all checks or money orders, or
negotiable instruments that it might receive in connection with the assignment. Nowhere in the Deed of Assignment
nor in the bonds did Luzon guarantee that Depusoy would pay his indebtedness to the plaintiff and that upon
Depusoy's default, Luzon would be liable. When the terms of the agreement are clear, there can be no room for
construction. If the intention of the parties, and particularly of Luzon, was to guarantee the payment of the debt of
Depusoy to the plaintiff, the bonds would have recited in its preamble that the principal was indebted to the PNB
and that the PNB required the principal to give a good and sufficient bond to secure the faithful performance on his
part of the terms of the promissory notes. Instead of doing so, it recited that in consideration of a certain loan, the
principal had executed a Deed of Assignment. The recital of the loan in the amount of P40,000.00, Exhibit D and
P60,000.00, Exhibit E, is merely a statement of the cause or consideration of the Deed of Assignment and not a
statement of the obligation. The Deed of Assignment necessarily was executed for a consideration, otherwise, it
would be null and void. The obligation recited in the surety bonds, Exhibits D and E, is not the loan, but the Deed of
Assignment; and that precisely was what was guaranteed by Luzon in the bonds, Exhibits D and E, as shown by the
following:
1) Contrary to the usual practice of the plaintiff, Luzon did not sign the promissory notes, Exhibits
A and B;
2) Although the resolutions of the Board of Directors required that the surety should make a
deposit of P10,000.00, Luzon did not make such a deposit, the verbal testimony of Delfin
Santiago, Manager of the Loans and Discounts Department, to the contrary notwithstanding. The
documentary evidence was submitted to prove that was the fact;
3) Delfin Santiago finally admitted that what was guaranteed was not the loan but the Deed of
Assignment.
Delfin Santiago testified as follows:
Q Did you inform the Luzon Surety Company, Inc. of your actuation on this
fact, that is in your giving Mr. Depusoy portions of the payments made by the
GSIS to the Philippine National Bank pursuant to the Deed of Assignment?
A No, because I understand that the Luzon Surety Company, Inc. stands as
surety on that assignment on which the full payment of the contract is assigned
to the payments. (TSN, p. 54)
xxx xxx xxx
Q Usually Mr. Santiago, it is the practice of the Philippine National Bank in
cases where a surety company guarantees the account of the borrower, the
Philippine National Bank requires the surety company to sign the promissory
note as a co-maker, is it not?
A In case the condition is approved, the surety I remember very well, the last
accommodation given to Mr. Depusoy . . . that was the condition, but the Luzon
Surety Company, Inc. did not want to sign, so at the request of the Luzon Surety
Company, Inc. and Mr. Depusoy, the approved accommodation was modified in
such a way as only to the surety bond.
ATTY. NERI: If Your Honor please. We object to the question, it was not
covered by the direct examination.
COURT: Answer.
A Well, apparently that was the intention because you decided to sign jointly and
severally the promissory note.
Q And because that was our intention the Philippine National Bank agreed to
that desire of Luzon Surety Company, Inc. by issuing only a similar surety bond
and not signing as co-maker, and jointly and severally on the promissory note?
ATTY. NERI: Objection Your Honor, the contract is the best evidence.
COURT: Answer.
A As usual, as at the beginning, we take it that your bonding the Deed of
Assignment is the understanding that all payments for the whole contract will go
to us. (TSN, pp. 55-57, July 21, 1958)
xxx xxx xxx
Q Did you read the terms of the bond?
A Yes, sir, that's right.
Q And you further noted in the bond it merely guaranteed the deed of
assignment, is that correct? of Mr. Depusoy?
A Yes, sir.
ATTY. CRUZ: And not this particular loan, is it not?
ATTY. NERI: We refer to the document, Your Honor.
COURT: Sustained.
(TSN, pp. 9-10, June 26, 1959)
xxx xxx xxx
ATTY. NERI: Now, Mr. Depusoy in his testimony stated that when you received
these amounts from the GSIS and issued credit memos . . . in favor of Mr.
Depusoy, you did not notify the Luzon Surety Company, Inc. of the fact of the
issuance of this (sic) credit memos in favor of Mr. Depusoy will you state to this

Honorable Court the reason why is that you did not give notice to the Luzon
Surety Company, Inc.?
A I did not notify the Luzon Surety Company, Inc. of this transaction because
the bond filed by the Luzon Surety Company, Inc., but the terms of the bond
filed by Luzon Surety Company is that they understand the transaction of Mr.
Depusoy with the Philippine National Bank.
COURT: They understand the transaction to be. . .
WITNESS: . . . The nature of the transaction with Mr. Depusoy in the sense that
as we . . . as appearing in this bond Exhibit D . . . all payments to be received by
him from the Bureau of Public Works in connection with the contract to secure
the full and faithfully performance on his part of the said agreement, the
agreement referred to is the assignment of payment in connection with the
contract of Mr. Depusoy with the GSIS.
(TSN, pp. 27-29 June 1, 1959)
In support of his contention that the surety bond was intended to guarantee the loan, the appellant gave the following
grounds or reasons:
1) The resolution of the Board of Directors of the plaintiff approving the loan or credit
accommodation to Depusoy required that Depusoy should put up a bond executed by the Luzon
Surety Company, Inc., Exhibits K-3, K-4 and K-5. The resolutions of the Board of Directors were
unilateral acts of the plaintiff and were conditions imposed upon the debtor, Depusoy, Luzon was
not a party to these resolutions and under the rule of res inter alios acta, they cannot bind or
prejudice Luzon in the absence of evidence that the terms of the resolutions had been brought to
the attention of Luzon and that it had acceded thereto. All that the bond stated is that the PNB
required the principal to give a good and sufficient bond. There can be no other consideration for
the execution of the bonds other than stated thereon in the absence of allegation that they did not
express the true intention of the parties.
2) Appellant contends that the promissory notes and the building contract mentioned in the Deed
of Assignment became part and parcel of the Deed of Assignment under the principle of
incorporation by reference. We agree that the Deed of Assignment became part and parcel of the
bond, but to say that all promissory notes, overdrafts, and any other kind of documents which the
PNB might require the assignor to execute to evidence the aforementioned obligation were also
incorporated by reference to the surety bond and became obligation of Luzon is to include in the
assignment, covenants and obligations beyond the contemplation of the parties. The appellant
relies on the last paragraph of the Deed of Assignment which reads: "This assignment shall be
irrevocable and subject to the terms and conditions of the promissory notes, overdrafts, and any
other kind of document which the PNB can require or may require the assignor to execute to
evidence the above-mentioned obligation".
It is argued that under this stipulation, Luzon guaranteed the payment of the promissory notes which are the subject
of this action and also the building contract between Depusoy, its principal, and the Bureau of Public Works. This is
a very 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 abovementioned bonds shall remain the same except the period of expiration herein above mentioned.
These bonds also cover the new accommodation given our Principal.
Relative to the above numbered bonds, in the amount of P40,000.00 and P60,000.00 dated May
28, 1956 and September 24, 1956, respectively, the account secured thereby having been reduced
by virtue of payments made by our principal, which, according to him has but a balance of
P75,000.00 we have the honor to inform you that we are agreeable to the extension of further
credit to our principal to the extent of the amount of the said bonds, under the same terms and
conditions thereof.
At first glance, from the statement in Exhibit F, which reads: "This bond also covers the new accommodation given
our principal", and in Exhibit I, that "we are agreeable to the extension of further credit to or principal to the extent
of the amount of the said bond", it would appear that Luzon was referring to the obligation of Depusoy to pay the
loan. But particular attention must be paid to the statement in Exhibit F that "all of the terms and conditions of our
above-mentioned bonds shall remain the same except the period of expiration herein below mentioned". What was
really agreed by Luzon was the extension of the duration of the surety bond, for under the terms of the bonds they
expired six months from their respective dates. Any statement in Exhibit I that may be construed as referring to the
debt of Depusoy was made only by an Asst. Manager who evidently was not familiar with the terms of the surety
bond. It must be noted that the surety bond was executed by CS Rodriguez, General Manager. Moreover, it cannot
prevail over the testimony of Delfin Santiago, Manager of the Loans & Discounts Department, that what was
guaranteed by the surety bond was the Deed of Assignment.
It is also contended that if what was intended to be guaranteed by Luzon is the Deed of Assignment, the surety bond
guaranteed nothing, because with the execution of the Deed of Assignment, nothing thereafter remained to be done.
This is not true, for the terms of the Deed of Assignment, Depusoy authorized the PNB to receive all monies due
from the Bureau of Public Works and to endorse for deposit all instruments of credit that might be issued in
connection with the payments therein assigned. Under this stipulation, Luzon guaranteed that all the monies due
Depusoy under his building contract with the Bureau of Public Works should be paid to the PNB. It is true that all
the checks and warrants issued by the GSIS were to be made payable to the PNB. But under the arrangement
between the PNB, GSIS, and the Bureau of Public Works, and Depusoy, it was Depusoy who received the warrants
or checks either from the Bureau of Public Works or from the GSIS, and Depusoy delivered the same to the PNB.
The PNB did not take the trouble of going to the GSIS or the Bureau of Public Works to get the checks. One reason
because the PNB did not know when any amount would be due. There is nothing then that could prevent an
arrangement thereafter between Depusoy and the GSIS, or the Bureau of Public Works to make the checks payable
to Depusoy, and Depusoy from forging the signature of the PNB and appropriating the money. This would be a
violation of the Deed of Assignment for which Luzon would be liable.
It is not disputed that no payment was made directly to Depusoy after the Deed of Assignment. All amounts due to
Depusoy were paid to the PNB for the account of Depusoy. It is true that in accordance with Exhibit M, only
P1,063,408.91 were received by the Loans and Discounts Department of the plaintiff bank, and that of the total
amount of P1,309,461.89 paid by the GSIS, P246,062.98 were paid for the importation of construction materials. As
to the so-called 10% retention fund, there is no evidence that the Bureau of Public Works had retained any amount.
In any case what was assigned was "all payments to be received" under the building contract, and the 10% retention
was not to be received by Depusoy until certain conditions had been met.
In its eight assignment of error, the appellant contends that the lower court in not admitting proof of the amount
actually received by the PNB and the letter of the GSIS, Exhibit Q (sic). Aside from the purely technical reason for
their rejection, their admission cannot affect the result. Exhibit Q is a letter of the General Manager of the GSIS to
plaintiff advising plaintiff of the rescission of the building contract. Exhibits Q, P, P-1 and P-2 are statements of the
amounts received by plaintiff's foreign department. There is no evidence that the GSIS had paid any amount to
Depusoy in violation of the Deed of Assignment. Not a single cent had been received directly by Depusoy from the
GSIS or the Bureau of Public Works.
xxx xxx xxx
We agree with the appellant that the trial court erred in not sentencing Estanislao Depusoy to pay attorney's fees
equivalent to 10% of the amount due. This is expressly provided for in the promissory notes, and as it does not
appear to be unreasonable, the stipulation of the parties should be given effect. 8
Its motion for reconsideration 9 having been denied by the respondent Court of Appeals in its resolution of 1 February
1971, 10 petitioner filed the instant petition on 3 March 1971 asserting therein that:
. . . the Decision and the Resolution of respondent COURT (Annexes A and B) are both not in accord with the
evidence, the law, and jurisprudence on the matter.
I. THE SURETY BONDS COVER THE PRINCIPAL LOANS, THE SURETY THEREBY BECOMING LIABLE
UPON DEFAULT OF THE LATTER.
II. EVEN ASSUMING ARGUENDO THAT THE BONDS SECURE ONLY THE DEED OF ASSIGNMENT,
STILL THE SURETY IS LIABLE FOR FAILURE OF THE PRINCIPAL TO COMPLY WITH THE TERMS OF
SUCH DEED.
III. THE DISPOSITIVE PORTION OF THE DECISION SHOULD BE AMENDED TO THE END THAT
PRIVATE RESPONDENT RESPONDENTS BE ADJUDGED LIABLE FOR ATTORNEY'S FEES. 11

In support of its petition, petitioner practically summoned the same arguments which it relied upon before the Court of Appeals.
On 3 March 1971 private respondent filed a motion to dismiss the petition 12 on the following grounds:
1. That the petition is without merit;
2. That the question raised therein are too unsubstantial to require consideration; and
3. That the question raised are factual.
In the resolution of 8 March 1971 this Court dismissed the petition for being factual and for lack of merit; 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 thereto 20 do not come to
the rescue of petitioner.
We are in full accord with the conclusion of the trial court and the Court of Appeals that the bonds executed by private respondent
LSCI were to guarantee the faithful performance of Depusoy of his obligation under the Deed of Assignment and not to guarantee the
payment of the loans or the debt of Depusoy to petitioner to the extent of P100,000.00. The language of the bonds is clear, explicit and
unequivocal. It leaves no room for interpretation. Article 1370 of the Civil Code provides:
If the terms of a contract are clear and leave no doubt upon the intention of the contracting parties, the literal
meaning of its stipulations shall control.
Besides, even if there had been any doubt on the terms and conditions of the surety agreement, the doubt should be resolved in favor
of the surety. As concretely put in Article 2055 of the Civil Code, "A guaranty is not presumed, it must be expressed and cannot extend
to more than what is stipulated therein."
In the recent case of Umali, et al. vs. Court of Appeals, et al., 21 We reiterated the unrippled rule that the liability of the surety is
measured by the terms of the contract, and, while he is liable to the full extent thereof, such liability is strictly limited to that assumed
by its terms. 22
In La Insular vs. Machuca Go Tanco, et al., supra., this Court held:
It is undoubtedly true that the law looks upon the contract of suretyship with a jealous eye, and the rule is settled that
the obligations of the surety cannot be extended by implication beyond its specified limits.
Article 1827 of the Civil Code so discloses (Uy Aloc vs. Cho Jan Ling, 27 Phil. Rep., 427); and with this doctrine
the common law is accordant. As was said by Justice Story in Miller vs. Stewart (9 Wheat. 680; 6 L. ed., 189):
Nothing can be clearer, both upon principles and authority, than the doctrine that the liability of a surety is not to be
extended, by implication, beyond the terms of his contract. To the extent and in the manner, and under the
circumstances pointed out in his obligation, he is bound, and no farther.
As earlier adverted to, there is merit in the third assigned error. The paragraph immediately preceding the decretal portion of the
decision of respondent Court of Appeals reads as follows:
We agree with the appellant that the trial court erred in not sentencing Estanislao Depusoy to pay attorney's fees
equivalent to 10% of the amount due. This is expressly provided for in the promissory notes, and as it does not
appear to be unreasonable, the stipulation of the parties should be given effect.
The dispositive portion of the questioned decision should then be modified in the sense that the "10% interest" indicated therein
should be considered and understood as and for attorney's fees.
WHEREFORE, with the above modification, the Decision of the Court of Appeals of 12 December 1970 in CA-G.R.No. 36615-R is
AFFIRMED, with costs against petitioner.
SO ORDERED.
[G.R. No. L-8437. November 28, 1956.]
ESTATE OF K. H. HEMADY, deceased, vs. LUZON SURETY CO., INC., claimant-Appellant.
DECISION
REYES, J. B. L., J.:
Appeal by Luzon Surety Co., Inc., from an order of the Court of First Instance of Rizal, presided by Judge Hermogenes Caluag,
dismissing its claim against the Estate of K. H. Hemady (Special Proceeding No. Q-293) for failure to state a cause of action.
The Luzon Surety Co. had filed a claim against the Estate based on twenty different indemnity agreements, or counter bonds, each
subscribed by a distinct principal and by the deceased K. H. Hemady, a surety solidary guarantor) in all of them, in consideration of
the Luzon Surety Co.s of having guaranteed, the various principals in favor of different creditors. The twenty counterbonds, or
indemnity agreements, all contained the following stipulations:chanroblesvirtuallawlibrary
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; chan roblesvirtualawlibraryand to pay, reimburse and make good to the
COMPANY, its successors and assigns, all sums and amount of money which it or its representatives shall pay or cause to be paid, or
become liable to pay, on account of the undersigned or any of them, of whatsoever kind and nature, including 15% of the amount
involved in the litigation or other matters growing out of or connected therewith for counsel or attorneys fees, but in no case less than
P25. It is hereby further agreed that in case of extension or renewal of this ________ we equally bind ourselves for the payment
thereof under the same terms and conditions as above mentioned without the necessity of executing another indemnity agreement for
the purpose and that we hereby equally waive our right to be notified of any renewal or extension of this ________ which may be
granted under this indemnity agreement.

Interest on amount paid by the Company. Any and all sums of money so paid by the company shall bear interest at the rate of
12% per annum which interest, if not paid, will be accummulated and added to the capital quarterly order to earn the same interests as
the capital and the total sum thereof, the capital and interest, shall be paid to the COMPANY as soon as the COMPANY shall have
become liable therefore, whether it shall have paid out such sums of money or any part thereof or not.
xxx
xxx
xxx
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.
xxx
xxx
xxx
Our Liability Hereunder. It shall not be necessary for the COMPANY to bring suit against the principal upon his default, or to
exhaust the property of the principal, but the liability hereunder of the undersigned indemnitor shall be jointly and severally, a primary
one, the same as that of the principal, and shall be exigible immediately upon the occurrence of such default. (Rec. App. pp. 98- 102.)
The Luzon Surety Co., prayed for allowance, as a contingent claim, of the value of the twenty bonds it had executed in consideration
of the counterbonds, and further asked for judgment for the unpaid premiums and documentary stamps affixed to the bonds, with 12
per cent interest thereon.
Before answer was filed, and upon motion of the administratrix of Hemadys estate, the lower court, by order of September 23, 1953,
dismissed the claims of Luzon Surety Co., on two grounds:chanroblesvirtuallawlibrary (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; chan roblesvirtualawlibraryand (2) that
whatever losses may occur after Hemadys death, are not chargeable to his estate, because upon his death he ceased to be guarantor.
Taking up the latter point first, since it is the one more far reaching in effects, the reasoning of the court below ran as
follows:chanroblesvirtuallawlibrary
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:chanroblesvirtuallawlibrary integrity. As correctly pointed out by the
Administratrix, integrity is something purely personal and is not transmissible. Upon the death of Hemady, his integrity was not
transmitted to his estate or successors. Whatever loss therefore, may occur after Hemadys death, are not chargeable to his estate
because upon his death he ceased to be a guarantor.
Another clear and strong indication that the surety company has exclusively relied on the personality, character, honesty and integrity
of the now deceased K. H. Hemady, was the fact that in the printed form of the indemnity agreement there is a paragraph entitled
Security by way of first mortgage, which was expressly waived and renounced by the security company. The security company has
not demanded from K. H. Hemady to comply with this requirement of giving security by way of first mortgage. In the supporting
papers of the claim presented by Luzon Surety Company, no real property was mentioned in the list of properties mortgaged which
appears at the back of the indemnity agreement. (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 (and Articles 659 and 661 of the preceding one) expressly so provide,
thereby confirming Article 1311 already quoted.
ART. 774. Succession is a mode of acquisition by virtue of which the property, rights and obligations to the extent of the value of
the inheritance, of a person are transmitted through his death to another or others either by his will or by operation of law.
ART. 776. The inheritance includes all the property, rights and obligations of a person which are not extinguished by his death.
In Mojica vs. Fernandez, 9 Phil. 403, this Supreme Court ruled:chanroblesvirtuallawlibrary
Under the Civil Code the heirs, by virtue of the rights of succession are subrogated to all the rights and obligations of the deceased
(Article 661) and cannot be regarded as third parties with respect to a contract to which the deceased was a party, touching the estate
of the deceased (Barrios vs. Dolor, 2 Phil. 44).
xxx
xxx
xxx
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; chan roblesvirtualawlibrarythey take such property
subject to all the obligations resting thereon in the hands of him from whom they derive their rights.
(See also Galasinao vs. Austria, 51 Off. Gaz. (No. 6) p. 2874 and de Guzman vs. Salak, 91 Phil., 265).
The binding effect of contracts upon the heirs of the deceased party is not altered by the provision in our Rules of Court that money
debts of a deceased must be liquidated and paid from his estate before the residue is distributed among said heirs (Rule 89). The
reason is that whatever payment is thus made from the estate is ultimately a payment by the heirs and distributees, since the amount of
the paid claim in fact diminishes or reduces the shares that the heirs would have been entitled to receive.
Under our law, therefore, the general rule is that a partys contractual rights and obligations are transmissible to the successors. The
rule is a consequence of the progressive depersonalization of patrimonial rights and duties that, as observed by Victorio Polacco, has
characterized the history of these institutions. From the Roman concept of a relation from person to person, the obligation has evolved
into a relation from patrimony to patrimony, with the persons occupying only a representative position, barring those rare cases where
the obligation is strictly personal, i.e., is contracted intuitu personae, in consideration of its performance by a specific person and by no
other. The transition is marked by the disappearance of the imprisonment for debt.
Of the three exceptions fixed by Article 1311, the nature of the obligation of the surety or guarantor does not warrant the conclusion
that his peculiar individual qualities are contemplated as a principal inducement for the contract. What did the creditor Luzon Surety
Co. expect of K. H. Hemady when it accepted the latter as surety in the counterbonds? Nothing but the reimbursement of the moneys
that the Luzon Surety Co. might have to disburse on account of the obligations of the principal debtors. This reimbursement is a
payment of a sum of money, resulting from an obligation to give; chan roblesvirtualawlibraryand to the Luzon Surety Co., it was
indifferent that the reimbursement should be made by Hemady himself or by some one else in his behalf, so long as the money was
paid to it.

The second exception of Article 1311, p. 1, is intransmissibility by stipulation of the parties. Being exceptional and contrary to the
general rule, this intransmissibility should not be easily implied, but must be expressly established, or at the very least, clearly
inferable from the provisions of the contract itself, and the text of the agreements sued upon nowhere indicate that they are nontransferable.
(b) Intransmisibilidad por pacto. Lo general es la transmisibilidad de darechos y obligaciones; chan roblesvirtualawlibraryle
excepcion, la intransmisibilidad. Mientras nada se diga en contrario impera el principio de la transmision, como elemento natural a
toda relacion juridica, salvo las personalisimas. Asi, para la no transmision, es menester el pacto expreso, porque si no, lo convenido
entre partes trasciende a sus herederos.
Siendo estos los continuadores de la personalidad del causante, sobre ellos recaen los efectos de los vinculos juridicos creados por sus
antecesores, y para evitarlo, si asi se quiere, es indespensable convension terminante en tal sentido.
Por su esencia, el derecho y la obligacion tienden a ir ms all de las personas que les dieron vida, y a ejercer presion sobre los
sucesores de esa persona; chan roblesvirtualawlibrarycuando no se quiera esto, se impone una estipulacion limitativa expresamente de
la transmisibilidad o de cuyos tirminos claramente se deduzca la concresion del concreto a las mismas personas que lo otorgon.
(Scaevola, Codigo Civil, Tomo XX, p. 541-542) (Emphasis supplied.)
Because under the law (Article 1311), a person who enters into a contract is deemed to have contracted for himself and his heirs and
assigns, it is unnecessary for him to expressly stipulate to that effect; chan roblesvirtualawlibraryhence, his failure to do so is no sign
that he intended his bargain to terminate upon his death. Similarly, that the Luzon Surety Co., did not require bondsman Hemady to
execute a mortgage indicates nothing more than the companys faith and confidence in the financial stability of the surety, but not that
his obligation was strictly personal.
The third exception to the transmissibility of obligations under Article 1311 exists when they are not transmissible by operation of
law. The provision makes reference to those cases where the law expresses that the rights or obligations are extinguished by death, as
is the case in legal support (Article 300), parental authority (Article 327), usufruct (Article 603), contracts for a piece of work (Article
1726), partnership (Article 1830 and agency (Article 1919). By contract, the articles of the Civil Code that regulate guaranty or
suretyship (Articles 2047 to 2084) contain no provision that the guaranty is extinguished upon the death of the guarantor or the surety.
The lower court sought to infer such a limitation from Art. 2056, to the effect that one who is obliged to furnish a guarantor must
present a person who possesses integrity, capacity to bind himself, and sufficient property to answer for the obligation which he
guarantees. It will be noted, however, that the law requires these qualities to be present only at the time of the perfection of the
contract of guaranty. It is self-evident that once the contract has become perfected and binding, the supervening incapacity of the
guarantor would not operate to exonerate him of the eventual liability he has contracted; chan roblesvirtualawlibraryand if that be true
of his capacity to bind himself, it should also be true of his integrity, which is a quality mentioned in the article alongside the capacity.
The foregoing concept is confirmed by the next Article 2057, that runs as follows:chanroblesvirtuallawlibrary
ART. 2057. If the guarantor should be convicted in first instance of a crime involving dishonesty or should become insolvent, the
creditor may demand another who has all the qualifications required in the preceding article. The case is excepted where the creditor
has required and stipulated that a specified person should be guarantor.
From this article it should be immediately apparent that the supervening dishonesty of the guarantor (that is to say, the disappearance
of his integrity after he has become bound) does not terminate the contract but merely entitles the creditor to demand a replacement of
the guarantor. But the step remains optional in the creditor:chanroblesvirtuallawlibrary it is his right, not his duty; chan
roblesvirtualawlibraryhe may waive it if he chooses, and hold the guarantor to his bargain. Hence Article 2057 of the present Civil
Code is incompatible with the trial courts stand that the requirement of integrity in the guarantor or surety makes the latters
undertaking strictly personal, so linked to his individuality that the guaranty automatically terminates upon his death.
The contracts of suretyship entered into by K. H. Hemady in favor of Luzon Surety Co. not being rendered intransmissible due to the
nature of the undertaking, nor by the stipulations of the contracts themselves, nor by provision of law, his eventual liability thereunder
necessarily passed upon his death to his heirs. The contracts, therefore, give rise to contingent claims provable against his estate under
section 5, Rule 87 (2 Moran, 1952 ed., p. 437; chan roblesvirtualawlibraryGaskell & Co. vs. Tan Sit, 43 Phil. 810, 814).
The most common example of the contigent claim is that which arises when a person is bound as surety or guarantor for a principal
who is insolvent or dead. Under the ordinary contract of suretyship the surety has no claim whatever against his principal until he
himself pays something by way of satisfaction upon the obligation which is secured. When he does this, there instantly arises in favor
of the surety the right to compel the principal to exonerate the surety. But until the surety has contributed something to the payment of
the debt, or has performed the secured obligation in whole or in part, he has no right of action against anybody no claim that could
be reduced to judgment. (May vs. Vann, 15 Pla., 553; chan roblesvirtualawlibraryGibson vs. Mithell, 16 Pla., 519; chan
roblesvirtualawlibraryMaxey vs. Carter, 10 Yarg. [Tenn.], 521 Reeves vs. Pulliam, 7 Baxt. [Tenn.], 119; chan
roblesvirtualawlibraryErnst vs. Nou, 63 Wis., 134.)
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; chan roblesvirtualawlibraryand it is urged that the rule does not apply to the case before us, where the late Hemady
was a surety, not a principal debtor. The argument evinces a superficial view of the relations between parties. If under the Gaskell
ruling, the Luzon Surety Co., as guarantor, could file a contingent claim against the estate of the principal debtors if the latter should
die, there is absolutely no reason why it could not file such a claim against the estate of Hemady, since Hemady is a solidary co-debtor
of his principals. What the Luzon Surety Co. may claim from the estate of a principal debtor it may equally claim from the estate of
Hemady, since, in view of the existing solidarity, the latter does not even enjoy the benefit of exhaustion of the assets of the principal
debtor.
The foregoing ruling is of course without prejudice to the remedies of the administratrix against the principal debtors under Articles
2071 and 2067 of the New Civil Code.
Our conclusion is that the solidary guarantors liability is not extinguished by his death, and that in such event, the Luzon Surety Co.,
had the right to file against the estate a contingent claim for reimbursement. It becomes unnecessary now to discuss the estates
liability for premiums and stamp taxes, because irrespective of the solution to this question, the Luzon Suretys claim did state a cause
of action, and its dismissal was erroneous.
Wherefore, the order appealed from is reversed, and the records are ordered remanded to the court of origin, with instructions to
proceed in accordance with law. Costs against the Administratrix- Appellee. SO ORDERED.

G.R. No. 143382

November 29, 2006
SECURITY BANK and TRUST COMPANY, Petitioner,
vs.
MAR TIERRA CORPORATION, WILFRIDO C. MARTINEZ, MIGUEL J. LACSON and RICARDO A. LOPA,Respondents.

DECISION
CORONA, J.:
May the conjugal partnership be held liable for an indemnity agreement entered into by the husband to accommodate a third party?
This issue confronts us in this petition for review on certiorari assailing the November 9, 1999 decision 1 of the Court of Appeals (CA)
in CA-G.R. CV No. 48107.
On May 7, 1980, respondent Mar Tierra Corporation, through its president, Wilfrido C. Martinez, applied for aP12,000,000 credit
accommodation with petitioner Security Bank and Trust Company. Petitioner approved the application and entered into a credit line
agreement with respondent corporation. It was secured by an indemnity agreement executed by individual respondents Wilfrido C.
Martinez, Miguel J. Lacson and Ricardo A. Lopa who bound themselves jointly and severally with respondent corporation for the
payment of the loan.
On July 2, 1980, the credit line agreement was amended and increased to P14,000,000. Individual respondents correspondingly
executed a new indemnity agreement in favor of the bank to secure the increased credit line.
On September 25, 1981, respondent corporation availed of its credit line and received the sum of P9,952,000 which it undertook to
pay on or before November 30, 1981. It was able to pay P4,648,000 for the principal loan andP2,729,195.56 for the interest and other
charges. However, respondent corporation was not able to pay the balance as it suffered business reversals, eventually ceasing
operations in 1984.
Unable to collect the balance of the loan, petitioner filed a complaint for a sum of money with a prayer for preliminary attachment
against respondent corporation and individual respondents in the Regional Trial Court (RTC) of Makati, Branch 66. It was docketed as
Civil Case No. 3947.
Subsequently, however, petitioner had the case dismissed with respect to individual respondents Lacson and Lopa, 2 leaving Martinez
as the remaining individual respondent.
On August 10, 1982, the RTC issued a writ of attachment on all real and personal properties of respondent corporation and individual
respondent Martinez. As a consequence, the conjugal house and lot of the spouses Wilfrido and Josefina Martinez in Barrio Calaanan,
Caloocan City covered by Transfer Certificate of Title (TCT) No. 49158 was levied on.
The RTC rendered its decision3 on June 20, 1994. It held respondent corporation and individual respondent Martinez jointly and
severally liable to petitioner for P5,304,000 plus 12% interest per annum and 5% penalty commencing on June 21, 1982 until fully
paid, plus P10,000 as attorneys fees. It, however, found that the obligation contracted by individual respondent Martinez did not
redound to the benefit of his family, hence, it ordered the lifting of the attachment on the conjugal house and lot of the spouses
Martinez.
Dissatisfied with the RTC decision, petitioner appealed to the CA but the appellate court affirmed the trial courts decision in toto.
Petitioner sought reconsideration but it was denied. Hence, this petition.
Petitioner makes two basic assertions: (1) the RTC and CA erred in finding that respondent corporation availed ofP9,952,000 only
from its credit line and not the entire P14,000,000 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 P9,952,000. 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 ofP9,952,000."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 Courts
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 Garcia9 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 latters 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.
Costs against petitioner.
SO ORDERED.
[G.R. No. 109941. August 17, 1999]
PACIONARIA C. BAYLON, petitioner, vs. THE HONORABLE COURT OF APPEALS (Former Ninth Division) and
LEONILA TOMACRUZ, respondents.
DECISION
GONZAGA-REYES, J.:
This is a petition for review by way of certiorari under Rule 45 of the Revised Rules of Court of the decision of the Court of
Appeals[1] dated November 29, 1991 in CA-G.R. CV No. 27779 affirming the decision [2]of the Regional Trial Court of Quezon City,
Branch 88, dated June 14, 1990 in Civil Case No. Q-89-2483 and the Resolution of the Court of Appeals dated April 27, 1993 denying
petitioner's Motion for Reconsideration.
The pertinent facts, as found by the trial court and affirmed by respondent court, are briefly narrated as follows:
Sometime in 1986, petitioner Pacionaria C. Baylon introduced private respondent Leonila Tomacruz, the co-manager of her
husband at PLDT, to Rosita B. Luanzon.[3] Petitioner told private respondent that Luanzon has been engaged in business as a
contractor for twenty years and she invited private respondent to lend Luanzon money at a monthly interest rate of five percent (5%),
to be used as capital for the latter's business. Private respondent, persuaded by the assurances of petitioner that Luanzon's business was
stable and by the high interest rate, agreed to lend Luanzon money in the amount of P150,000.On June 22, 1987, Luanzon issued and
signed a promissory note acknowledging receipt of the P150,000 from private respondent and obliging herself to pay the former the
said amount on or before August 22, 1987.[4] Petitioner signed the promissory note, affixing her signature under the word "guarantor."
Luanzon also issued a postdated Solidbank check no. CA418437 dated August 22, 1987 payable to Leonila Tomacruz in the amount of
P150,000.[5] Subsequently, Luanzon replaced this check with another postdated Solidbank check no. 432945 dated December 22, 1987,
in favor of the same payee and covering the same amount. [6] Several checks in the amount of P7,500 each were also issued by Luanzon
and made payable to private respondent.[7]
Private respondent made a written demand upon petitioner for payment, which petitioner did not heed. Thus, on May 8, 1989,
private respondent filed a case for the collection of a sum of money with the Regional Trial Court (RTC) of Quezon City, Branch 88,
against Luanzon and petitioner herein, impleading Mariano Baylon, husband of petitioner, as an additional defendant. However,
summons was never served upon Luanzon.
In her answer, petitioner denied having guaranteed the payment of the promissory note issued by Luanzon. She claimed that
private respondent gave Luanzon the money, not as a loan, but rather as an investment in Art Enterprises and Construction, Inc. - the
construction business of Luanzon. Furthermore, petitioner avers that, granting arguendo that there was a loan and petitioner
guaranteed the same, private respondent has not exhausted the property of the principal debtor nor has she resorted to all the legal
remedies against the principal debtor as required by law. Finally, petitioner claims that there was an extension of the maturity date of
the loan without her consent, thus releasing her from her obligation.[8]
After trial on the merits, the lower court ruled in favor of private respondent. In its Decision dated June 14, 1990, it stated that The evidence and the testimonies on record clearly established a (sic) fact that the transaction between the plaintiff and defendants was
a loan with five percent (5%) monthly interest and not an investment. In fact they all admitted in their testimonies that they are not
given any stock certificate but only promissory notes similar to Exhibit B wherein it was clearly stated that defendant Luanzon would
pay the amount of indebtedness on the date due. Postdated checks were issued simultaneously with the promissory notes to enable the
plaintiff and others to withdraw their money on a certain fixed time. This shows that they were never participants in the business
transaction of defendant Luanzon but were creditors.
The evidences presented likewise show that plaintiff and others loan their money to defendant Luanzon because of the assurance of
the monthly income of five percent (5%) of their money and that they could withdraw it anytime after the due date add to it the fact
that their friend, Pacionaria Baylon, expresses her unequivocal gurarantee to the payment of the amount loaned.
xxx xx xxx
WHEREFORE, premises considered, judgment is hereby rendered against the defendants Pacionaria C. Baylon and Mariano Baylon,
to pay the plaintiff the sum of P150,000.00, with interest at the legal rate from the filing of this complaint until full payment thereof, to
pay the total sum of P21,000.00 as attorneys fees and costs of suit.[9]
On appeal, the trial court's decision was affirmed by the Court of Appeals. Hence, this present case wherein petitioner makes the
following assignment of errors I. RESPONDENT COURT ERRED IN HOLDING THAT THE PRIVATE RESPONDENT TOMACRUZ WAS A CREDITOR OF
DEFENDANT LUANZON AND NOT AN INVESTOR IN THE CONSTRUCTION BUSINESS OF ART ENTERPRISES &
CONSTRUCTION, INC.

II. GRANTING, WITHOUT ADMITTING, THAT PETITIONER-APPELLANT BAYLON WAS A "GUARANTOR" AS

APPEARING IN THE NOTE (EXH. "A") THE RESPONDENT COURT ERRED IN RULING THAT 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 RESPONDENTAPPELLANT AND DEFENDANT LUANZON.
At the outset, we note that petitioners claim that the factual findings of the lower court, which were affirmed by the Court of
Appeals, were based on a misapprehension of facts and contradicted by the evidence on records [10] is a bare allegation and devoid of
merit. As a rule, the conclusions of fact of the trial court, especially when affirmed by the Court of Appeals, are final and conclusive
and cannot be reviewed on appeal by the Supreme Court.[11] Although this rule admits of several exceptions,[12] none of the exceptions
are in point in the present case. The factual findings of the respondent court are borne out by the record and are based on substantial
evidence.
Petitioner claims that there is no loan to begin with; that private respondent gave Luanzon the amount of P150,000, not as a loan,
but rather as an investment in the construction project of the latter. [13] In support of her claim, petitioner cites the use by private
respondent of the words investment, dividends, and commission in her testimony before the lower court; the fact that private
respondent received monthly checks from Luanzon in the amount of P7,500 from July to December, 1987, representing dividends on
her investment; and the fact that other employees of the Development Bank of the Philippines made similar investments in Luanzons
construction business.[14]
However, all the circumstances mentioned by petitioner cannot override the clear and unequivocal terms of the June 22, 1987
promissory note whereby Luanzon promised to pay private respondent the amount of P150,000 on or before August 22, 1987. The
promissory note states as follows:
June 22, 1987
To Whom It May Concern:
For value received, I hereby promise to pay Mrs. LEONILA TOMACRUZ the amount of ONE HUNDRED FIFTY THOUSAND
PESOS ONLY (P150,000.00) on or before August 22, 1987.
The above amount is covered by _____ Check No. _____ dated August 22, 1987.
(signed)
ROSITA B. LUANZON
G U R AR AN T O R :
(signed)
PACIONARIA O. BAYLON
Tel. No. 801-28-00
18 P. Mapa St., DBP Village
Almanza, Las Pinas, M.M.[15]
If the terms of a contract are clear and leave no doubt as to the intention of the contracting parties, the literal meaning of its
stipulation shall control.[16] Resort to extrinsic aids and other extraneous sources are not necessary in order to ascertain the parties'
intent when there is no ambiguity in the terms of the agreement. [17] Both petitioner and private respondent do not deny the due
execution and authenticity of the June 22, 1987 promissory note. All of petitioner's arguments are directed at uncovering the real
intention of the parties in executing the promissory note, but no amount of argumentation will change the plain import of the terms
thereof, and accordingly, no attempt to read into it any alleged intention of the parties thereto may be justified. [18] The clear terms of
the promissory note establish a creditor-debtor relationship between Luanzon and private respondent. The transaction at bench is
therefore a loan, not an investment.
It is petitioner's contention that, even though she is held to be a guarantor under the terms of the promissory note, she is not liable
because private respondent did not exhaust the property of the principal debtor and has not resorted to all the legal remedies provided
by the law against the debtor.[19] Petitioner is invoking the benefit of excussion pursuant to article 2058 of the Civil Code, which
provides that The guarantor cannot be compelled to pay the creditor unless the latter has exhausted all the property of the debtor, and has resorted to
all the legal remedies against the debtor.
It is axiomatic that the liability of the guarantor is only subsidiary. [20] All the properties of the principal debtor must first be
exhausted before his own is levied upon. Thus, the creditor may hold the guarantor liable only after judgment has been obtained
against the principal debtor and the latter is unable to pay, for obviously the exhaustion of the principals property - the benefit of
which the guarantor claims - cannot even begin to take place before judgment has been obtained. [21] This rule is embodied in article
2062 of the Civil Code which provides that the action brought by the creditor must be filed against the principal debtor alone, except
in some instances when the action may be brought against both the debtor and the principal debtor.[22]
Under the circumstances availing in the present case, we hold that it is premature for this Court to even determine whether or not
petitioner is liable as a guarantor and whether she is entitled to the concomitant rights as such, like the benefit of excussion, since the
most basic prerequisite is wanting - that is, no judgment was first obtained against the principal debtor Rosita B. Luanzon. It is useless
to speak of a guarantor when no debtor has been held liable for the obligation which is allegedly secured by such guarantee. Although
the principal debtor Luanzon was impleaded as defendant, there is nothing in the records to show that summons was served upon

her. Thus, the trial court never even acquired jurisdiction over the principal debtor. We hold that private respondent must first obtain a
judgment against the principal debtor before assuming to run after the alleged guarantor.
IN VIEW OF THE FOREGOING, the petition is granted and the questioned Decision of the Court of Appeals dated November
29, 1991 and Resolution dated April 27, 1993 are SET ASIDE. No pronouncement as to costs.
SO ORDERED.