Case

Facts/ Issues/ Ruling

Machetti vs. Hospicio Facts: Petitioner Machetti in a written agreement
de San Jose
undertook to construct a building for respondent. Under
the conditions, Machetti should obtain the guarantee of
the Fidelity and Surety Company. The latter agreed. By
the terms of the promissory note, it expressly stated
that it will guarantee compliance with the terms and
conditions of the contract. Machetti then constructed
the building but later it was found out that Machetti did
not comply with the specifications in the contract.
Respondent then filed a claim for damages for partial
non-compliance. Because petitioner was declared
insolvent, respondent filed a motion asking Fidelity and
Surety for its guaranty. The issue to be resolved is
whether Fidelity is liable as a guarantor.
Held: The court ruled in the affirmative. While a surety
undertakes to pay if the principal does not pay, the
guarantor only binds himself to pay if the principal
cannot pay. The one is the insurer of the debt, the other
an insurer of the solvency of the debtor.
This latter liability is what the Fidelity and Surety
Company assumed in the present case. The Fidelity and
Surety Company having bound itself to pay only the
event its principal, Machetti, cannot pay it follows that it
cannot be compelled to pay until it is shown that
Machetti is unable to pay. Such ability may be proven by
the return of a writ of execution unsatisfied or by other
means, but is not sufficiently established by the mere
fact that he has been declared insolvent in insolvency
proceedings under our statutes, in which the extent of
the insolvent's inability to pay is not determined until
the final liquidation of his estate.
Macondry & Co. vs. Facts: The defendants Piring and Pion requested the
Pinon,
Piring
and appellant, Kangleon, then a member of the Senate, to
Kangleon
help them buy on credit from the appellee some
cinematographic films. To accommodate them, the
appellant wrote a letter to the appellee, pertinent part
of which states that
"This will introduce to you the bearers, Messrs. Conrado
Piring and Perfecto Pion, . . ." who "wish to place an
order for" cinematographic films, yet in the later part he

says that "for which by their guaranty I pledge

payment."
Petitioner accepted the request. When the debtors failed
to pay, petitioner demanded payment from Kangleon
but the latter refused claiming that the letter is a mere
letter of introduction and even if there was intent to
guarantee payment, it was still an offer to act as
guarantor; and since acceptance of his offer has not
been made known to him, the contract of guaranty has
not been perfected. Moreover, he insists that he should
have been notified by the appellee of the acceptance of
his offer of guaranty.
Held. The contention is untenable. The appellant's very
letter constitutes his undertaking of guaranty.
"Contracts shall be obligatory in whatever form they
may have been entered into, provided all the essential
requisites for their validity are present." 2 A contract of
guaranty is not a formal contract and shall be valid in
whatever form it may be, provided that it complies with
the statute of frauds.
In the case at bar, his letter already constitutes his
undertaking of guaranty. The contract entered into by
and between the appellee and the defendants in default
is the principal contract and the appellee is subsidiary to
the principal contract. Since the principal contract had
already been perfected, the subsidiary contract of
guaranty became binding upon effectivity of the
principal contract. Hence no notice of acceptance by the
appellee to the appellant is necessary for its validity.
Southern
Barbosa

Motors

vs. Facts: Brillantes is a debtor of herein Southern Motors.

When the former defaulted, the latter brought an action
to foreclose the real estate mortgage constituted by
Barbosa in favor of plaintiff. Barbosa alleged that he
executed the deed only for the purpose of guaranteeingas a surety and/ guarantor- the payment of the above
mentioned debt of Brillante, and that plaintiff has no
right of action for failure to exhaust all recourse to
collect from the true debtor, Brillantes, notwithstanding
that the latter is solvent and has many properties. Now
the issue brought to the fore is whether the mortgage in
question could be foreclosed although plaintiff had not

exhausted and did not intend to exhaust the properties

of his principal debtor Brillantes.
Held: the Supreme Court said ruled for the plaintiff.
The right of guarantors, under Article 2058 of the Civil
Code of the Philippines, to demand exhaustion of the
property of the principal debtor, exists only when a
pledge or a mortgage has not been given as special
security for the payment of the principal obligation.
Guarantees, without any such pledge or mortgage, are
governed by Title XV of said Code, whereas pledges and
mortgages fall under Title XVI of the same Code, in
which the following provisions, among others, are found:
ART. 2087. It is also of the essence of these
contracts that when the principal obligation
becomes due, the things in which the pledge or
mortgage consists may be alienated for the
payment to the creditor.
ART.
2126. The
mortgage
directly
and
immediately subjects the property upon which it
is imposed, whoever the possessor may be, to the
fulfillment of the obligation for whose security it
was constituted.
It has been held already that a mortgagor is not
entitled to the exhaustion of the property of the
principal debtor.
Although an ordinary personal guarantor not a
mortgagor
or
pledgor

may
demand
the
aforementioned exhaustion, the creditor may, prior
thereto, secure a judgment against said guarantor, who
shall be entitled, however, to a deferment of the
execution of said judgment against him until after the
properties of the principal debtor shall have been
exhausted to satisfy the obligation involved in the case.
Dino vs CA
Note: See full text for the
meaning of Continuing
Suretyship
Agreement
(CSA) and terms that

Facts: In 1977 Uy Tiam Enterprises and Freight Services

(UTEFS), thru its representative Uy Tiam, applied for and
obtained credit accommodations from the Metropolitan
for 700,000. To secure the credit accommodations,
petitioners executed separate Continuing Suretyships.
Under the aforesaid agreements, Norberto Uy agreed to

would indicate it is a
CSA.

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.
Paragraph IV of two Continuing Suretyship 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..
After the 1977 obligation was paid by petitioner, UTEFS
obtained another letter of credit in 1979. The
petitioners did not sign said credit nor were they
informed that the continuing suretyship on 1977 will
guaranty its payment. In one of their transactions, when
UTEFS did not acquiesce to the obligatory stipulations in
the trust receipt, Metrobank demanded payment from
petitioners. Petitioners argue that they cannot be made
liable because the 1979 letter of credit 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." 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.
Issue:
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 197
2. Whether the Continuing Suretyship Agreement
applies to the 1979 letter of credit which did not
exist at the time the agreement was contracted.
3. Whether petitioners are liable more than the
amount specified in their respective agreement.
Held:
1. Yes.
Under the Civil Code, a guaranty may be given to
secure even future debts, the amount of which may
not be known at the time the guaranty is executed.
In the case at bar, the stipulations unequivocally

reveal that the suretyship agreement 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.
Undoubtedly, the purpose of the execution of the
Continuing Suretyships was to induce appellant to
grant any application for credit accommodation
(letter of credit/trust receipt) UTEFS may desire to
obtain from appellant bank. By its terms, each
suretyship is a continuing one which shall
remain in full force and effect until the bank is
notified of its revocation.
When the Irrevocable Letter of Credit No. SN-Loc-309
was obtained from appellant bank, for the purpose of
obtaining goods (covered by a trust receipt) from
Planters Products, the continuing suretyships were in
full force and effect. Hence, even if suretiesappellees 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.
2.

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.
3. The limit of the petitioners respective liabilities must
be determined from the suretyship agreement each

Security
Cuenca
Notes:
See

Bank

theory

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.
Here, 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
But even without such stipulations, the petitioners
would, nevertheless, be liable for the interest and
judicial costs. Article 2055 of the Civil Code
provides:
Art. 2055. A guaranty is not presumed; it must be
express and cannot extend to more than what is
stipulated therein.
If it be simple or indefinite, it shall comprise not
only the principal obligation, but also all its
accessories, including the judicial costs, provided
with respect to the latter, that the guarantor shall
only be liable for those costs incurred after he has
been judicially required to pay.
Interest and damages are included in the
term accessories. However, such interest should
run only from the date when the complaint was
filed in court.

vs Facts: Defendant-appellant Sta. Ines Malale Corporation

engaged in logging operation. Petitioner granted
appellant a credit line in the amount of 8M to assist the
latter in meeting its capitalization requirements. The
behind Credit Approval Memorandum expressly stated that the

2079
Compare this case
with the Dino case

8M Credit Loan Facility shall be effective until November

30, 1981. The respondent herein Rodolfo Cuenca
executed an Indemnity Agreement dates December 17,
1980 in favor of petitioner SBTC whereby he solidarily
bound himself with SIMC as follows:
Rodolfo M. Cuenca x x x hereby binds himself x x
x jointly and severally with the client (SIMC) in
favor of the bank
for the payment, upon demand and without the b
enefit of excussion of whatever amount x x x the
client may be indebted
to the bank x x x by virtue of aforesaid credit acc
ommodation(s) including the substitutions, re
newals, extensions,
increases, amendments, conversions and re
vivals of the aforesaid credit accommodatio
n(s).
Cuenca resigned as President of SIMC. But SIMC
repeatedly availed of its credit line and obtained other
loans from the bank. When SIMC encountered difficulty
in making payments, it requested the bank for a
complete restructuring of its indebtedness. SBTC
approved the request without notice or prior consent
from Cuenca. To formalize their agreement to
restructure the loan obligations of SIMC, SBTC executed
a Loan Agreement dated October 31, 1989 which
provides that the first loan shall be applied to liquidate
the Borrowers present total
outstanding indebtedness to the Lender while the Secon
d Loan shall be applied to liquidate the past
due interest and penalty portion of the Indebtedness.
SIMC defaulted in the payment of its restructured
obligations despite demands from SIMC and Cuenca. So
the bank filed a complaint for collection of sum of
money. The CA ruled in favor of respondent hence this
petition.
Issues:
1. Whether the 1989 Loan Agreement novated the
original credit accommodation and Cuencas
liability under the Indemnity Agreement

2. Whether Cuenca waived his right to be notified of

the and to give consent to any substitution,
renewal,
extension,
increase,
amendment,
conversion or revival of the said credit
accommodation.
Held:
1. Yes
ART. 1292. In order that an obligation may be exti
nguished by another which substitute the same, it
is imperative that itbe so declared in unequivocal
terms, or that the old and the new obligations be
on every point incompatible with eachother.Novat
ion of a contract is never presumed. It has been h
eld that [i]n the absence of an expressagreement,
novation takes place only when the old and the n
ew obligations are incompatible on everypoint.
Indeed, the following requisites must be
established: (1) there is a previous valid
obligation
(2)
the partiesconcerned agree to a new contract (3)
the old contract is extinguished and (4) there is a
valid new contract.
In the case at bar, the requisites of novation are
present. The 1989 Loan Agreement extinguished
the obligation obtained under the 1980 credit
accommodation. This is evident form its explicit
provision to liquidate the principal and the
interest of the earlier indebtedness. Furthermore,
several incompatibilities between the 1989
agreement and 1980 obligation demonstrate that
the two cannot coexist. While 1980 credit
accommodation stipulated that the amount of
loan was not to exceed 8M, the 1989 agreement
provided that the loan was for 12.2 M. The
periods of payment were moreover different.
Since the 1989 Loan Agreement had extinguished
the original credit accommodation, the Indemnity
Agreeement, an accessory obligation, was
necessarilu extinguished also, pursuant to Article
1296 of the CC:
ART. 1296. When the principal obligation is exting

uished in consequence of a novation, accessory o

bligations may
subsist only insofar as they may benefit third pers
ons who did not give their consent.
Alleged Extension
Petitioner insists that the 1989 Loan Agreement
was a mere renewal or extension of the P8 million
original accommodation; it was not a novation.
This argument must be rejected. To begin with,
the 1989 Loan Agreement expressly stipulated
that its purpose was to liquidate, not to renew or
extend, the outstanding indebtedness. Moreover,
respondent did not sign or consent to the 1989
Loan Agreement, which had allegedly extended
the original P8 million credit facility.
Hence, his obligation as a surety should be
deemed extinguished, pursuant to Article 2079 of
the Civil Code, which specifically states that [a]n
extension granted to the debtor by the creditor
without the consent of the guarantor extinguishes
the guaranty.
2. Cuenca did not waive his right to be notified of
any modification of the credit accommodation.
It is fundamental in the law of suretyship that any
agreement between the creditor and the principal
debtor which essentially varies the terms of the
principal contract, without the consent of the
surety, will release the surety from liability.
In
this
case, petitioners
assertionthat
respondent consented to the alterations in the
credit accommodation- finds no support in the
text of the Indemnity Agreement. While
respondent held himself liable for the credit
accommodation or any modification thereof, such
clause should be understood in the context of the
8M limit and the November 30, 1981 term. It did
not give the bank or Sta. Ines any license to
modify the nature and scope of the original credit

accommodation, without informing or getting the

consent of respondent who was solidarily liable.
Continuing Surety Issue
Petitioner asserts that the Indemnity Agreement
was in the nature of a continuing surety hence
there was no need for respondent to execute
another surety contract to secure the 1989 loan
agreement.
This argument is incorrect. That the Indemnity
Agreement is a continuing surety does not
authorize the bank to extend the scope of the
principal obligation inordinately.[37] In Dino v. CA,
the Court held that a continuing guaranty is one
which covers all transactions, including those
arising in the future, which are within the
description or contemplation of the contract of
guaranty, until the expiration or termination
thereof.
To repeat, in the present case, the Indemnity
Agreement was subject to the two limitations of
the credit accommodation: (1) that the obligation
should not exceed P8 million, and (2) that the
accommodation should expire not later than
November 30, 1981. Hence, it was a continuing
surety only in regard to loans obtained on or
before the aforementioned expiry date and not
exceeding the total of P8 million.
In this case, the surety of Cuenca secured only
the first loan of P6.1 million obtained on
November 26, 1991. It did not secure the
subsequent loans, purportedly under the 1980
credit accommodation, that were obtained
in 1986. Certainly, he could not have guaranteed
the 1989 Loan Agreement, which was executed
after November 30, 1981 and which exceeded the
stipulated P8 million ceiling.
Versus Dino Case
Petitioner, however, cites the Dino ruling in which
the Court found the surety liable for the loan

obtained after the payment of the original one,

which was covered by a continuing surety
agreement.
In Dino, the surety Agreement specifically
provided that each suretyship is a continuing one
which shall remain in full force and effect until
this bank is notified of its revocation. Since the
bank had not been notified of such revocation,
the surety was held liable even for the
subsequent obligations of the principal borrower.
No similar provision is found in the present
case. On the contrary, respondents liability was
confined to the 1980 credit accommodation, the
amount and the expiry date of which were set
down in the Credit Approval Memorandum.
Palmares vs CA