Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-9434

March 29, 1957

GENERAL INDEMNITY CO., INC., plaintiff-appellee,

vs.
ESTANISLAO ALVAREZ, defendant-appellant.
A. A. Dimaculangan for appellee.
Antonio Barredo for appellant.
REYES, J.B.L., J.:
Appeal taken by defendant Estanislao Alvarez from a summary judgment rendered by
the Court of First Instance of Manila.
On February 18, 1954, appellee General Indemnity Co., Inc., filed a complaint (C. C.
No. 22005) in the Court of First Instance of Manila against appellant Estanislao Alvarez
for the recovery of the sum of P2,000 representing the amount of a loan allegedly taken
by the appellant from the Philippine National Bank, the payment of which appellee
guaranteed with an indemnity bond, and for which appellant, as counter-guaranty,
executed in plaintiff's favor a mortgage on his share of land in a parcel of land (Annex
"A" of the complaint). The complaint further alleged that the appellant failed to pay said
loan, together with interest, to Philippine National Bank, as a result of which the bank
deducted the amount thereof plaintiff's deposit. Plaintiff likewise claimed the amount of
P426.07 as attorney's fees which the defendant agreed to pay under mortgage annexed
to the complaint.
On March 29, 1954, appellant Estanislao Alvarez, answered, admitting the fact of the
loan and the execution of the mortgage Annex "A" of the complaint, but plaintiff to the
Philippine National Bank; and as affirmative defense, appellant averred that the loan in
question was secured by him only in accommodation of one Hao Lam, and that plaintiff
agreed not to take any steps against appellant and the mortgage executed by him in
plaintiff's favor until the latter had failed to obtain payment from said Hao Lam.
Eight months later, or on November 24, 1954, plaintiff filed a motion for summary
judgment, claiming that appellant's answer the genuineness and due execution of the
mortgage annexed to its complaint, presented no real and meritorious defense and that
it was entitled to a summary judgment in its favor, based on the affidavit of its
comptroller Pedro R. Mendiola supporting the motion, which states:

That he is the Comptroller of the General Indemnity Co., Inc., plaintiff in the
above-entitled case;
That he has personal knowledge of the indebtedness of the defendant as of
January 31, 1954, in the sum of P2,130.36 plus daily interest of P0.69 from
February 1, 1954 until fully paid, and the additional amount of P426.07 as
attorney's fees;
That he knows of his own personal knowledge that several demands have been
upon the defendant for the payment of the above-mentioned obligation of the
plaintiff, but notwithstanding said demands, defendant has failed and refused and
still fails and refuses to pay the same. (Rec. on Appeal, pp. 19-20)
The lower court found the motion for summary judgment well-taken and on March 29,
1955, rendered judgment in favor of plaintiff for the amount of P2,130.38, plus daily
interest of P0.69 from February 1, 1954 until payment, and the additional sum of
P426.07 attorney's fees, and costs. Defendant filed a motion for reconsideration to have
this judgment set aside and the case set for hearing, but said motion was denied, and
so he appealed to this Court.
Insofar as appellant argues that the affirmative defense in his answer that he secured
the loan in question only to accommodate a third party and that appellee promised not
to proceed against him until it had failed to collect from said third party, tenders genuine
issues on the time and manner of payment of the indebtedness in question, appellee is
correct in saying that said defense is immaterial to its right to recovery, since the
mortgage deed executed by appellant in its favor (the genuineness and due execution
of which appellant admitted in his answer) shows appellant to be the actual and only
debtor, and appellant is precluded from varying this representation by parol evidence.
However, there is merit in appellant's contention that there exists a controversy in the
complaint and answer as to whether or not appellee had actually paid appellant's
obligation to the Philippine National Bank, a matter which should be decided in the
affirmative before appellant, as surety, can claim reimbursement from appellant, the
principal debtor. Appellee assert that this issue was brought up by appellant for the first
time on appeal and should, therefore, be ignored; but contrary to appellee's assertion,
this question was brought up by appellant in his answer, when he specifically denied the
allegation of the complaint that the Philippine National Bank deducted from appellee's
deposit the amount of the loan in question, by the following allegation:
3. . . . that he does not have sufficient knowledge or information to form a belief
as to the truth of the allegations regarding payments made by plaintiff to the
P.N.B. (Answer, Rec. App., p. 16).
And as the affidavit of plaintiff's comptroller Pedro R. Mendiola, supporting the motion
for summary judgment, simply relates to the amount of the loan in question and
appellant's failure to pay the same to appellee inspite of repeated demands, but does

not touch on the alleged payment made by appellee to the bank, there was no necessity
for appellant to submit counter-affidavits to show that such payment had not been
made. Appellee likewise contends that it is immaterial to its cause of action against
appellant whether or not it had actually paid the Philippine National Bank, citing Art.
2071 of the New Civil Code to the effect that a guarantor may proceed against the
principal debtor, even before having paid, when the debt has become demandable. The
last paragraph of this same article, however, provides that in such instance, the only
action the guarantor can file against the debtor "to obtain release from the guaranty, or
to demand a security that shall protect him from any proceeding by the creditor and
from the danger of insolvency of the debtor." An action by the guarantor against the
principal debtor for payment, before the former has paid the creditor, is premature.
The judgment appealed from is hereby set aside and the lower court is ordered to set
anew this case for trial on the sole issue of whether or not appellee General Indemnity
Co., Inc., had already paid the loan in question to the Philippine National Bank, after
which a new judgment shall be rendered. Costs against appellee General Indemnity
Co., Inc. So ordered.
Paras, C.J., Bengzon, Padilla, Reyes, A., Bautista Angelo, Labrador, Concepcion,
Endencia and Felix, JJ., concur.

The Lawphil Project - Arellano Law Foundation

ON FUTURE DEBTS:
Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION

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. 1415).
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 partiesdefendants.
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 DEFENDANTS-APPELLEES JACINTO UY DIO AND
NORBERTO UY ARE SOLIDARILY LIABLE TO PLAINTIFF-APPELLANT
FOR THE OBLIGATION OF DEFENDANT UY TIAM UNDER THE
LETTER OF CREDIT ISSUED ON MARCH 30, 1979 BY VIRTUE OF THE
CONTINUING SURETYSHIPS THEY EXECUTED ON FEBRUARY 25,
1977.
II. THE LOWER COURT ERRED IN HOLDING THAT PLAINTIFFAPPELLANT 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 defendantsappellees 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 nonwaivable 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-Loc309 dated 30 March 1979. In referring to the last demand letter to Mr. Uy Tiam and the
complaint filed in Civil Case No. 82-9303, the public respondent mentions the amount of
"P613,339.32, as of January 31, 1982, inclusive of interest commission penalty and
bank charges."23 This is the same amount stated by METROBANK in its
Memorandum. 24 However, in summarizing Uy Tiam's outstanding obligation as of 17
July 1987, public respondent states:
Hence, they are jointly and severally liable to appellant METROBANK of
UTEFS' outstanding obligation in the sum of P2,397,883.68 (as of July 17,
1987) P651,092.82 representing the principal amount, P825,133.54, for
past due interest (5-31-82 to 7-17-87) and P921,657.32, for penalty
charges at 12% per annum (5-31-82 to 7-17-87) as shown in the
Statement of Account (Exhibit I). 25

Since the complaint was filed on 18 May 1982, it is obvious that on that date, the
outstanding principal obligation of Uy Tiam, secured by the petitioners'
Continuing Suretyship Agreements, was less than P613,339.32. Such amount
may be fully covered by the Continuing Suretyship Agreement executed by
petitioner Dio which stipulates an aggregate principal sum of not exceeding
P800,000.00, and partly covered by that of petitioner Uy which pegs his
maximum liability at P300,000.00.
Consequently, the judgment of the public respondent shall have to be modified to
conform to the foregoing exposition, to which extent the instant petition is impressed
with partial merit.
WHEREFORE, the petition is partly GRANTED, but only insofar as the challenged
decision has to be modified with respect to the extend of petitioners' liability. As
modified, petitioners JACINTO UY DIO and NORBERTO UY are hereby declared
liable for and are ordered to pay, up to the maximum limit only of their respective
Continuing Suretyship Agreement, the remaining unpaid balance of the principal
obligation of UY TIAM or UY TIAM ENTERPRISES & FREIGHT SERVICES under
Irrevocable Letter of Credit No. SN-Loc-309, dated 30 March 1979, together with the
interest due thereon at the legal rate commencing from the date of the filing of the
complaint in Civil Case No. 82-9303 with Branch 45 of the Regional Trial Court of
Manila, as well as the adjudged attorney's fees and costs.
All other dispositions in the dispositive portion of the challenged decision not
inconsistent with the above are affirmed.
SO ORDERED.
Gutierrez, Jr., Bidin, Romero and Melo, JJ., concur.

Footnotes
1 Rollo, 46-56; per Associate Justice Segun Dio G.
Chua, ponente, concurred in by Associate Justices Serafin E. Camilon
and Justo P. Torres, Jr.
2 Id., 60.
3 Rollo, 46-50.
4 Id., 50.
5 Rollo, 51.

6 Rollo, 55-56.
7 Rollo, 60.
8 Article 2053, Civil Code; see Rizal Commercial Banking Corp. vs. Arro,
115 SCRA 777 [1982].
9 38 C.J.S. 1142.
10 38 C.J.S. 1206.
11 Id., 1209.
12 Id.
13 Rollo, 68-69; Emphasis supplied.
14 Rollo, 69.
15 Id., 70-71; Emphasis supplied.
16 Rollo, 52-53.
17 La Insural vs. Lachuca Go-Tauco, 39 Phil. 567, 570-71
[1919], citing Uy Aloc vs. Cho Jan Ling, 27 Phil. 427 [1914], and Miller vs.
Stewart, 9 Wheat., 680; 6 L. ed., 189. See also Magdalena Estates, Inc.
vs. Rodriguez, 18 SCRA 967 [1966]; Republic Estates, Inc. vs. Rogriguez,
18 SCRA 967 [1966]; Republic vs. Umali, 22 SCRA 922 [1968]; Zenith
Insurance Corp. vs. Court of Appeals, 119 SCRA 485 [1982]; Philippine
Commercial and Industrial Bank of vs. Court of Appeals, 159 SCRA 24
[1988]; Umali vs. Court of Appeals, 189 SCRA 529 [1990].
18 Article 2054, Civil Code.
19 Rollo, 69.
20 Id., 40.
21 See National Marketing Corp. vs. Marquez, 26 SCRA 722 [1969]
explaining the provisions; Republic vs. Pal-Fox Lumber Co., Inc., 43
SCRA 365 [1972].
22 100 Phil. 679, 681-682 [1957]; Philippine National Bank vs. Luzon
Surety Co., Inc., 68 SCRA 207 [1975].
23 Rollo, 48.

24 Id., 128.
25 Rollo, 55.

EXTINGUISHMENT:

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-16550

January 31, 1962

ALLEN McCONN, plaintiff-appellant,

vs.
PAUL HARAGAN, ET AL., defendants,
ASSOCIATE INSURANCE and SURETY CO., INC., defendant-appellee.
Jose Desiderio, Jr., Andres E. Matias and Juan C. Nabong, Jr. for plaintiff-appellant.
M. Perez Cardenas for defendant-appellee.
CONCEPCION, J.:
On June 30, 1955 pending hearing of Civil Case No. 24790 of the Court of First
Instance of Manila, entitled "Morris McConn v. Paul Haragan", which was scheduled to
take place on September 16, 1955 the Bureau of Immigration advised said court that
defendant Paul Haragan had applied for an immigration clearance and a re-entry permit
to enable him to leave the Philippines for 15 days only and requested information
whether the court had any objection thereto. By an order dated July 11, 1955, the court
required Haragan to file a bond of P4,000 "to answer for his return to the Philippines
and the prosecution of his case against him, with the understanding, that upon his
failure to return, said bond will answer pro tanto for any judgment that may be rendered
against him". Thereupon, or on July 12, 1955, Haragan submitted a bond, subcribed by
him and the Associated Insurance & Surety Co., as principal and surety, respectively,
reading: .
WHEREAS, the above-bounden PRINCIPAL, is intending to leave the Philippines
on a business trip to Hongkong and Tokyo, Japan, for a period of thirty (30) days
from date of his departure, in connection with his business;
WHEREAS, the above-bounden PRINCIPAL, has a pending case before the
Court of First Instance of Manila, Branch III, entitled: "Allen McConn, Plaintiff, vs.
Paul Haragan, Defendant", Civil Case No. 24790, which is scheduled for hearing
on September 16, 1955;
WHEREAS, before the above-bounden PRINCIPAL could leave the Philippines
for Hongkong and Tokyo, Japan, the above-mentioned Court has required him to
post a Surety Bond, in the amount of PESOS FOUR THOUSAND ONLY

(P4,000.00) Philippine Currency, the guarantee that he will return to the

Philippines on or before September 16, 1955;
NOW, THEREFORE, for and in consideration of the above premises, the
PRINCIPAL and the SURETY, hereby bind themselves, jointly and severally, in
favor of the Republic of the Philippines, or its authorized representatives, in the
sum of PESOS FOUR THOUSAND ONLY (P4,000.00) Philippine Currency, that
the herein PRINCIPAL will return to the Philippines on or before September 16,
1955 and that should he fail to do so, said bond will answer pro tanto for any
judgment that may be rendered against him.
Soon thereafter, or on July 19, 1955, the court issued an order stating that "in view of
said bond, it would have no objection" to Haragan's "departure from the Philippines for a
short stay abroad" and that "formal leave" was thereby given him. On the date set for
the hearing of the case, Haragan's counsel moved for continuance, whereupon, the
hearing was postponed to November 14, 1955. On the date last mentioned, the same
counsel informed the court that Haragan had been unable to return to the Philippines
because the Philippine Consulate in Hongkong had advised Haragan of a
communication from our Department of Foreign Affairs banning him from returning to
the Philippines. The court then postponed the hearing to January 6, 1956.
Subsequently, Herbert T. Fallis was impleaded as defendant and, later on, one
Inocencio Ortiz Luis Jr. was allowed to intervene. In due course, thereafter, or on
February 19, 1959, the court rendered judgment, which, inter alia, sentenced Haragan
to pay to plaintiff the sum of P5,500, with 6% interest thereon from December 8, 1954,
until full payment, plus P1,000 as attorney's fees and costs. After this judgment had
become final and executory, plaintiff moved for the execution of the aforementioned
bond to satisfy said judgment against Haragan. The surety company objected thereto
upon several grounds and, after due hearing, the lower court issued an order dated
October 13, 1959, releasing said company from liability under the bond aforementioned
and denying plaintiff's motion. A reconsideration of this order having been denied, the
case is now before us on record on appeal filed by the plaintiff.1wph1.t
The issue is whether the Surety Company is liable to plaintiff under the bond quoted
above, in view of the failure of Haragan to return to the Philippines. The lower court
decided the issue in the negative upon the following ground: .
... A careful reading of the surety bond, Exhibit F, indicates that the surety's
principal commitment is 'to guarantee that he (Haragan) will return to the
Philippines on or before September 16, 1955' (See the third 'Whereas'). In the
last paragraph of said surety bond, Exhibit F, it appears that said bond was
executed in favor of the Republic of the Philippines or its duly authorized
representatives to guarantee 'thatthe herein principal (Haragan) will return to the
Philippines on or before September 16, 1955 and that should he fail to do so,
said bond will answer pro tanto for any judgment that may be rendered against
him.' As the terms of the bond so state, it appears clearly that the bond will only
answer for the judgment which may be rendered against defendant, should he

(defendant Haragan) fail to return to the Philippines. In other words, if defendant

Haragan should return to the Philippines on or before September 16, 1955, said
bond will not answer for the judgment. It is now the contention of the Associated
Insurance that since it was the Republic of the Philippines (obligee under the
bond) who rendered the return of defendantHaragan to the Philippines
impossible, said surety company is thereby released from its obligation, and cites
in support thereof Articles 1266 and 2076 of the New Civil Code. Upon a
consideration of this contention, the Court finds it tenable and well grounded, for
as the surety company has so well stated 'where the principal obligation (of
returning to the Philippines) has been extinguished by the action of the obligee,
Philippine Government in preventing such return, the accessory obligation of the
surety is likewise extinguished and the bond released of its liability.' Paraphrasing
the last paragraph of the bond in a negative way, it will read thus: 'should he (not)
fail to do so, said bond will (not) answer pro tanto for any judgment that may be
rendered against him.
We are fully in agreement with the foregoing view, which is in accord with the principle
that:
The debtor in obligation to do shall also be released when the prestationbecomes
legally or physically impossible without the fault of the obligor. (Article 1266, Civil
Code of the Philippines.).
Thus, in Tabora vs. Lazatin, (G.R. No. L-5245, May 29, 1953), we said:
This Court finds that despite his efforts to secure the necessary building permit
for the reconstruction, he failed because of the disapproval or unfavorable
attitude of the Urban Planning Commission toward reconstruction unless they
conformed to the plan of widening the city streets. Finding that defendant had
done all he could to secure the permit and to comply with his obligations, but
because of the refusal of the government authorities to issue said permit, he
failed to fulfill his undertaking, he should be absolved and released from said
obligation.
To same effect, substantially, is the decision of this Court in House vs. De La Costa (40
Off. Gaz. [3 S] 47).
WHEREFORE, the order appealed from is hereby affirmed, with the costs of this
instance against plaintiff-appellant. It is so ordered.
Padilla, Bautista Angelo, Labrador, Reyes, J.B.L. Barrera, Paredes, Dizon and De Leon,
JJ., concur.
Bengzon, C.J., took no part.

The Lawphil Project - Arellano Law Foundation

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. 42829

September 30, 1935

RADIO CORPORATION OF THE PHILIPPINES, plaintiff-appellee,

vs.
JESUS R. ROA, ET AL., defendants.
RAMON CHAVES, ANDRES ROA and MANUEL ROA, appellants.
M.H. de Joya and Juan de Borja for appellants.
Barrera and Reyes for appellee.
GODDARD, J.:
This is an appeal from decision of the Court of First Instance of the City of Manila the
dispositive part of which reads:
In view of all the foregoing, judgment is hereby rendered in favor of the plaintiff
Radio Corporation of the Philippines and against the defendants Jesus R. Roa,
Ramon Chavez, Andes Roa and Manuel Roa: (a) Ordering the defendant Jesus
R. Roa to pay the plaintiff the sum of P22,935, plus P99.64, with legal interest
thereon from the date of the filing of the complaint until fully paid: (b) that upon
failure of the defendant Jesus Roa to pay the said sum indicated, the chattel
described in the second cause of action shall be sold at public auction to be
applied to the satisfaction of the amount of this judgment; (c) that the defendants
Jesus R. Roa, Ramon Chavez, Andres Roa and Manuel Roa pay jointly and
severally to the plaintiff the amount of P10,000; (d) and that Jesus R. Roa pay to
the plaintiff the amount equivalent to 10 per cent of P22,935, as attorney's fees,
and that all the defendants in this case pay the costs of this action.
The defendants Ramon Chavez, Andres Roa and Manuel Roa have appealed from the
judgment against them for P10,00 and costs. These appellants make the following
assignments of error:
1. The court below erred in not finding that the balance of the total indebtedness
became immediately due and demandable upon the failure of the defendant
Jesus R. Roa to pay any installment on his note.

2. The court below erred in not finding that defendant Jesus R. Roa defaulted in
the payment of the installment due on February 27,1932, and that plaintiff
corporation gave him an extension of time for the payment of said installment.
3. The court below erred in not finding that the extension of time given to
defendant Jesus R. Roa for the payment of an overdue installment served as a
release of defendant sureties from liability on all the subsequent installments.
4. The court below erred in not finding that the sureties were discharged from
their bond when the plaintiff authorized Jesus R. Roa to remove the photophone
equipment from Cagayan, Misamis Oriental, to Silay, Occidental Negros, without
the knowledge or consent of said sureties.
5. The court below erred in condemning Ramon Chavez, Andres Roa and
Manuel Roa to pay jointly and severally the sum of P10,000 to the Radio
Corporation of the Philippines.
The defendant Jesus R. Roa became indebted to the Philippine Theatrical Enterprises,
Inc., in the sum of P28,400 payable in seventy-one equal monthly installments at the
rate of P400 a month commencing thirty days after December 11, 1931, with five days
grace monthly until complete payment of said sum. On that same date the Philippine
Theatrical Enterprises, Inc., assigned all its right and interest in that contract to the
Radio Corporation of the Philippines.
The paragraph of that contract in which the accelerating clause appears reads as
follows:
In case the vendee-mortgagor fails to make any of the payments as hereinbefore
provided, the whole amount remaining unpaid under this mortgage shall
immediately become due and payable and this mortgage on the property herein
mentioned as well as the Luzon Surety Bond may be foreclosed by the vendormortgagee; and, in such case, the vendee-mortgager further agrees to pay the
vendor- mortgagee an additional sum equivalent to 25 per cent of the principal
due unpaid as costs, expenses and liquidated damages, which said sum, shall
be added to the principal sum for which this mortgage is given as security, and
shall become a part, thereof.
On March 15, 1932, Erlanger & Galinger, Inc., acting in its capacity as attorney-in-fact of
the Radio Corporation of the Philippines wrote the following letter (Exhibit 13) to the
principal debtor Jesus R. Roa:
Mr. JESUS R. ROA
Cagayan, Oriental Misamis
Attention of Mrs. Amparo Chavez de Roa

DEAR SIR: We acknowledge with thanks the receipt of your letter of March 9th
together with your remittance of P200 for which we enclose receipt No. 7558. We
are applying this amount to the balance of your January installment.
We have no objection to the extension requested by you to pay the February
installment by the first week of April. We would, however, urge you to make every
efforts to bring the account up-to date as we are given very little discretion by the
RCP in giving extension of payment.
Very truly yours,
RADIO CORP. OF THE PHIL.
By: ERLANGER & GALINGER, INC.
(Sgd.) H.N. SALET
Vice-President
Under the above assignments of error the principal question to be decided is whether or
not the extension granted in the above copied letter by the plaintiff, without the consent
of the guarantors, the herein appellants, extinguishes the latter's liability not only as to
the installments due at that time, as held by the trial court, but also as to the whole
amount of their obligation. Articles 1851 of the Civil Code reads as follows:
ART. 1851. An extension grated to the debtor by the creditor, without the consent
of the guarantor, extinguishes the latter's liability.
This court has held that mere delay in suing for the collection of the does not release
the sureties. (Sons of I. de la Rama vs. Estate of Benedicto, 5 Phil., 512; Banco
Espaol Filipino vs. Donaldson Sim & Co., 5 Phil., 418; Manzano vs. Tan Suanco, 13
Phil., 183; Hongkong & Shanghai Baking Corporation vs. Aldecoa & Co., 30 Phil., 255.)
In the case of Villa vs. Garcia Bosque (49 Phil., 126, 134, 135), this court stated:
. . . The rule that an extension of time granted to the debtor by the creditor,
without the consent of the sureties, extinguishes the latter's liability is common
both to Spanish jurisprudence and the common law; and it is well settled in
English and American jurisprudence that where a surety is liable for different
payments, such as installments of rent, or upon a series of promissory notes, an
extension of time as to one or more will not affect the liability of the surety for the
others. . . .
There is one stipulation in the contract (Exhibit A) which, at first blush, suggests a
doubt as to the propriety of applying the doctrine above stated to the case before
us. We refer to clause (f) which declares that the non-fulfillment on the part of the
debtors of the stipulation with respect to the payment of any installment of the
indebtedness, with interest, will give to the creditor the right to treat and declare
all of said installments as immediately due. If the stipulation had been to the
effect that the failure to pay any installment when due would ipso facto cause the
other installments to fall due at once, it might be plausibly contended that after

default of the payment of one installment the act of the creditor in extending the
time as to such installment would interfere with the right of the surety to exercise
his legal rights against the debtor, and that the surety would in such case be
discharged by the extension of time, in conformity with article 1851 and 1852 of
the Civil Code. But it will be noted that in the contract now under consideration
the stipulation is not that the maturity of the latter installments shall be ipso
facto accelerated by default in the payment of a prior installment, but only that it
shall give the creditor a right treat the subsequent installments as due; and in this
case it does not appear that the creditor has exercised this election. On the
contrary, this action was not instituted until after all of the installments had fallen
due in conformity with original contract. It results that the stipulation contained in
paragraph (f) does not effect the application of the doctrine above enunciated to
the case before us.
The stipulation in the contract under consideration, copied above, is to the effect that
upon failure to pay any installment when due the other installments ipso facto become
due and payable. In view of of the fact that under the express provision of the contract,
quoted above, the whole unpaid balance automatically becomes due and payable upon
failure to pay one installment, the act of the plaintiff in extending the payment of the
installment corresponding to February, 1932, to April, 1932, without the consent of the
guarantors, constituted in fact an extension of the payment of the whole amount of the
indebtedness, as by that extension the plaintiff could not have filed an action for the
collection of the whole amount until after April, 1932. Therefore appellants' contention
that after default of the payment of one installment the act of the herein creditor in
extending the time of payment discharges them as guarantors in conformity with articles
1851 and 1852 of the Civil Code is correct.
It is a familiar rule that if a creditor, by positive contract with the principal debtor,
and without the consent of the surety, extends the time of payment, he thereby
discharges the surety. . . . The time of payment may be quite as important a
consideration to the surety as the amount he has promised conditionally to pay. .
. .Again, a surety has the right, on payment of the debt, to be subrogated to all
the rights of the creditor, and to proceed at once to collect it from the principal;
but if the creditor has tied own hands from proceeding promptly, by extending the
time of collection, the hands of the surety will equally be bound; and before they
are loosed, by the expiration of the extended credit, the principal debtor may
have become insolvent and the right of subrogation rendered worthless. It should
be observed, however, that it is really unimportant whewther the extension given
has actually proved prejudicial to the surety or not. The rule stated is quite
independent of the event, and the fact that the principal is insolvent or that the
extension granted promised to be beneficial to the surety would give no right to
the creditor to change the terms of the contract without the knowledge or consent
of the surety. Nor does it matter for how short a period the time of payment may
be extended. The principle is the same whether the time is long or short. The
creditor must be in such a situation that when the surety comes to be substituted
in his place by paying the debt, he may have an immediate right of action against

the principal. The suspension of the right to sue for a month, or even a day, is as
effectual to release the surety as a year or two years. (21 R.C.L., 1018-1020.)
Plaintiff's contention that the enforcement of the accelerating clause is potestative on
the part of the obligee, and not self-executing, is clearly untenable from a simple
reading of the clause copied above. What is potestative on the part of the obligee is the
foreclosure of the mortgage and not the accelerating clause.
Plaintiff-appellee contends that there was no consideration for the extension granted the
principal debtor. Article 1277 of the Civil Code provides that "even though the
consideration should be expressed in the contract, it shall be presumed that a
consideration exists and that it is licit, unless the debtor proves the contrary." It was
incumbent upon the plaintiff to prove that there was no valid consideration for the
extension granted.
In view of the forgoing the judgment of the trial court is reversed as to the appellants
Ramon Chavez, Andres Roa and Manuel Roa, without costs.
Malcolm, Villa-Real, Hull, and Imperial, JJ., concur.

The Lawphil Project - Arellano Law Foundation

Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. L-47369 June 30, 1987
JOSEPH COCHINGYAN, JR. and JOSE K. VILLANUEVA, petitioners,
vs.
R & B SURETY AND INSURANCE COMPANY, INC., respondent.

FELICIANO, J.:
This case was certified to us by the Court of Appeals in its resolution dated 11
November 1977 as one involving only questions of law and, therefore, falling within the
exclusive appellate jurisdiction of this Court under Section 17, Republic Act 296, as
amended.
In November 1963, Pacific Agricultural Suppliers, Inc. (PAGRICO) applied for and was
granted an increase in its line of credit from P400,000.00 to P800,000.00 (the "Principal
Obligation"), with the Philippine National Bank (PNB). To secure PNB's approval,
PAGRICO had to give a good and sufficient bond in the amount of P400,000.00,
representing the increment in its line of credit, to secure its faithful compliance with the
terms and conditions under which its line of credit was increased. In compliance with
this requirement, PAGRICO submitted Surety Bond No. 4765, issued by the respondent
R & B Surety and Insurance Co., Inc. (R & B Surety") in the specified amount in favor of
the PNB. Under the terms of the Surety Bond, PAGRICO and R & B Surety bound
themselves jointly and severally to comply with the "terms and conditions of the
advance line [of credit] established by the [PNB]." PNB had the right under the Surety
Bond to proceed directly against R & B Surety "without the necessity of first exhausting
the assets" of the principal obligor, PAGRICO. The Surety Bond also provided that R &
B Surety's liability was not to be limited to the principal sum of P400,000.00, but would
also include "accrued interest" on the said amount "plus all expenses, charges or other
legal costs incident to collection of the obligation [of R & B Surety]" under the Surety
Bond.
In consideration of R & B Surety's issuance of the Surety Bond, two Identical indemnity
agreements were entered into with R & B Surety: (a) one agreement dated 23
December 1963 was executed by the Catholic Church Mart (CCM) and by petitioner
Joseph Cochingyan, Jr, the latter signed not only as President of CCM but also in his
personal and individual capacity; and (b) another agreement dated 24 December 1963
was executed by PAGRICO, Pacific Copra Export Inc. (PACOCO), Jose K. Villanueva
and Liu Tua Ben Mr. Villanueva signed both as Manager of PAGRICO and in his

personal and individual capacity; Mr. Liu signed both as President of PACOCO and in
his individual and personal capacity.
Under both indemnity agreements, the indemnitors bound themselves jointly and
severally to R & B Surety to pay an annual premium of P5,103.05 and "for the faithful
compliance of the terms and conditions set forth in said SURETY BOND for a period
beginning ... until the same is CANCELLED and/or DISCHARGED." The Indemnity
Agreements further provided:
(b) INDEMNITY: TO indemnify the SURETY COMPANY for any
damage, prejudice, loss, costs, payments, advances and expenses of
whatever kind and nature, including [of] attorney's fees, which the
CORPORATION may, at any time, become liable for, sustain or incur as
consequence of having executed the above mentioned Bond, its renewals,
extensions or substitutions and said attorney's fees [shall] not be less than
twenty [20%] per cent of the total amount claimed by the CORPORATION
in each action, the same to be due, demandable and payable, irrespective
of whether the case is settled judicially or extrajudicially and whether the
amount has been actually paid or not;
(c) MATURITY OF OUR OBLIGATIONS AS CONTRACTED HEREWITH:
The said indemnities will be paid to the CORPORATION as soon as
demand is received from the Creditor or upon receipt of Court order or as
soon as it becomes liable to make payment of any sum under the terms of
the above-mentioned Bond, its renewals, extensions, modifications or
substitutions, whether the said sum or sums or part thereof, have been
actually paid or not.
We authorize the SURETY COMPANY, to accept in any case and at its
entire discretion, from any of us, payments on account of the pending
obligations, and to grant extension to any of us, to liquidate said
obligations, without necessity of previous knowledge of [or] consent from
the other obligors.
xxx xxx xxx
(e) INCONTESTABILITY OF PAYMENTS MADE BY THE COMPANY.
Any payment or disbursement made by the SURETY COMPANY on
account of the above-mentioned Bonds, its renewals, extensions or
substitutions, either in the belief that the SURETY COMPANY was
obligate[d] to make such payment or in the belief that said payment was
necessary in order to avoid greater losses or obligations for which the
SURETY COMPANY might be liable by virtue of the terms of the abovementioned Bond, its renewals, extensions or substitutions, shall be final
and will not be disputed by the undersigned, who jointly and severally bind

themselves to indemnify the SURETY COMPANY of any and all such

payments as stated in the preceding clauses.
xxx xxx xxx
When PAGRICO failed to comply with its Principal Obligation to the PNB, the PNB
demanded payment from R & B Surety of the sum of P400,000.00, the full amount of
the Principal Obligation. R & B Surety made a series of payments to PNB by virtue of
that demand totalling P70,000.00 evidenced by detailed vouchers and receipts.
R & B Surety in turn sent formal demand letters to petitioners Joseph Cochingyan, Jr.
and Jose K. Villanueva for reimbursement of the payments made by it to the PNB and
for a discharge of its liability to the PNB under the Surety Bond. When petitioners failed
to heed its demands, R & B Surety brought suit against Joseph Cochingyan, Jr., Jose K.
Villanueva and Liu Tua Ben in the Court of First Instance of Manila, praying principally
that judgment be rendered:
b. Ordering defendants to pay jointly and severally, unto the plaintiff, the
sum of P20,412.20 representing the unpaid premiums for Surety Bond No.
4765 from 1965 up to 1968, and the additional amount of P5,103.05 yearly
until the Surety Bond No. 4765 is discharged, with interest thereon at the
rate of 12% per annum; [and]
c. Ordering the defendants to pay jointly and severally, unto the plaintiff
the sum of P400,000.00 representing the total amount of the Surety Bond
No. 4765 with interest thereon at the rate of 12% per annum on the
amount of P70,000.00 which had been paid to the Phil. National Bank
already, the interest to begin from the month of September, 1966;
xxx xxx xxx
Petitioner Joseph Cochingyan, Jr. in his answer maintained that the Indemnity
Agreement he executed in favor of R & B Surety: (i) did not express the true intent of
the parties thereto in that he had been asked by R & B Surety to execute the Indemnity
Agreement merely in order to make it appear that R & B Surety had complied with the
requirements of the PNB that credit lines be secured; (ii) was executed so that R & B
Surety could show that it was complying with the regulations of the Insurance
Commission concerning bonding companies; (iii) that R & B Surety had assured him
that the execution of the agreement was a mere formality and that he was to be
considered a stranger to the transaction between the PNB and R & B Surety; and (iv)
that R & B Surety was estopped from enforcing the Indemnity Agreement as against
him.
Petitioner Jose K. Villanueva claimed in his answer that. (i) he had executed the
Indemnity Agreement in favor of R & B Surety only "for accommodation purposes" and
that it did not express their true intention; (ii) that the Principal Obligation of PAGRICO

to the PNB secured by the Surety Bond had already been assumed by CCM by virtue of
a Trust Agreement entered into with the PNB, where CCM represented by Joseph
Cochingyan, Jr. undertook to pay the Principal Obligation of PAGRICO to the PNB; (iii)
that his obligation under the Indemnity Agreement was thereby extinguished by
novation arising from the change of debtor under the Principal Obligation; and (iv) that
the filing of the complaint was premature, considering that R & B Surety filed the case
against him as indemnitor although the PNB had not yet proceeded against R & B
Surety to enforce the latter's liability under the Surety Bond.
Petitioner Cochingyan, however, did not present any evidence at all to support his
asserted defenses. Petitioner Villanueva did not submit any evidence either on his
"accommodation" defense. The trial court was therefore constrained to decide the case
on the basis alone of the terms of the Trust Agreement and other documents submitted
in evidence.
In due time, the Court of First Instance of Manila, Branch 24 1 rendered a decision in
favor of R & B Surety, the dispositive portion of which reads as follows;
Premises considered, judgment is hereby rendered: (a) ordering the
defendants Joseph Cochingyan, Jr. and Jose K. Villanueva to pay, jointly
and severally, unto the plaintiff the sum of 400,000,00, representing the
total amount of their liability on Surety Bond No. 4765, and interest at the
rate of 6% per annum on the following amounts:
On P14,000.00 from September 27, 1966;
On P4,000.00 from November 28, 1966;
On P4,000.00 from December 14, 1966;
On P4,000.00 from January 19, 1967;
On P8,000.00 from February 13, 1967;
On P4,000.00 from March 6, 1967;
On P8,000.00 from June 24, 1967;
On P8,000. 00 from September 14, 1967;
On P8,000.00 from November 28, 1967; and
On P8,000. 00 from February 26, 1968
until full payment; (b) ordering said defendants to pay, jointly and
severally, unto the plaintiff the sum of P20,412.00 as the unpaid premiums

for Surety Bond No. 4765, with legal interest thereon from the filing of
plaintiff's complaint on August 1, 1968 until fully paid, and the further sum
of P4,000.00 as and for attorney's fees and expenses of litigation which
this Court deems just and equitable.
There being no showing the summons was duly served upon the
defendant Liu Tua Ben who has filed no answer in this case, plaintiff's
complaint is hereby dismissed as against defendant Liu Tua Ben without
prejudice.
Costs against the defendants Joseph Cochingyan, Jr. and Jose K.
Villanueva.
Not satisfied with the decision of the trial court, the petitioners took this appeal to the
Court of Appeals which, as already noted, certified the case to us as one raising only
questions of law.
The issues we must confront in this appeal are:
1. whether or not the Trust Agreement had extinguished, by novation, the obligation of
R & B Surety to the PNB under the Surety Bond which, in turn, extinguished the
obligations of the petitioners under the Indemnity Agreements;
2. whether the Trust Agreement extended the term of the Surety Bond so as to release
petitioners from their obligation as indemnitors thereof as they did not give their consent
to the execution of the Trust Agreement; and
3. whether or not the filing of this complaint was premature since the PNB had not yet
filed a suit against R & B Surety for the forfeiture of its Surety Bond.
We address these issues seriatim.
1. The Trust Agreement referred to by both petitioners in their separate briefs, was
executed on 28 December 1965 (two years after the Surety Bond and the Indemnity
Agreements were executed) between: (1) Jose and Susana Cochingyan, Sr., doing
business under the name and style of the Catholic Church Mart, represented by Joseph
Cochingyan, Jr., as Trustor[s]; (2) Tomas Besa, a PNB official, as Trustee; and (3) the
PNB as beneficiary. The Trust Agreement provided, in pertinent part, as follows:
WHEREAS, the TRUSTOR has guaranteed a bond in the amount of
P400,000.00 issued by the R & B Surety and Insurance Co. (R & B) at the
instance of Pacific Agricultural Suppliers, Inc. (PAGRICO) on December
21, 1963, in favor of the BENEFICIARY in connection with the application
of PAGRICO for an advance line of P400,000.00 to P800,000.00;

WHEREAS, the TRUSTOR has also guaranteed a bond issued by the

Consolacion Insurance & Surety Co., Inc. (CONSOLACION) in the amount
of P900,000.00 in favor of the BENEFICIARY to secure certain credit
facilities extended by the BENEFICIARY to the Pacific Copra Export Co.,
Inc. (PACOCO);
WHEREAS, the PAGRICO and the PACOCO have defaulted in the
payment of their respective obligations in favor of the BENEFICIARY
guaranteed by the bonds issued by the R & B and the
CONSOLACION, respectively, and by reason of said default, the
BENEFICIARY has demanded compliance by the R & B and the
CONSOLACION of their respective obligations under the aforesaid bonds;
WHEREAS, the TRUSTOR is, therefore, bound to comply with his
obligation under the indemnity agreements aforementioned executed by
him in favor of R & B and the CONSOLACION, respectively and in order
to forestall impending suits by the BENEFICIARY against said companies,
he is willing as he hereby agrees to pay the obligations of said companies
in favor of the BENEFICIARY in the total amount of P1,300,000 without
interest from the net profits arising from the procurement of reparations
consumer goods made thru the allocation of WARVETS; . . .
l. TRUSTOR hereby constitutes and appoints Atty. TOMAS BESA as
TRUSTEE for the purpose of paying to the BENEFICIARY Philippine
National Bank in the manner stated hereunder, the obligations of the R &
B under the R & B Bond No. G-4765 for P400,000.00 dated December 23,
1963, and of the CONSOLACION under The Consolacion Bond No. G5938 of June 3, 1964 for P900,000.00 or the total amount of
P1,300,000.00 without interest from the net profits arising from the
procurement of reparations consumer goods under the Memorandum of
Settlement and Deeds of Assignment of February 2, 1959 through the
allocation of WARVETS;
xxx xxx xxx
6. THE BENEFICIARY agrees to hold in abeyance any action to enforce
its claims against R & B and CONSOLACION, subject of the bond
mentioned above. In the meantime that this TRUST AGREEMENT is
being implemented, the BENEFICIARY hereby agrees to forthwith
reinstate the R & B and the CONSOLACION as among the companies
duly accredited to do business with the BENEFICIARY and its branches,
unless said companies have been blacklisted for reasons other than those
relating to the obligations subject of the herein TRUST AGREEMENT;
xxx xxx xxx

9. This agreement shall not in any manner release the R & B and
CONSOLACION from their respective liabilities under the bonds
mentioned above. (emphasis supplied)
There is no question that the Surety Bond has not been cancelled or fully
discharged 2 by payment of the Principal Obligation. Unless, therefore, the Surety Bond
has been extinguished by another means, it must still subsist. And so must the
supporting Indemnity Agreements. 3
We are unable to sustain petitioners' claim that the Surety Bond and their respective
obligations under the Indemnity Agreements were extinguished by novation brought
about by the subsequent execution of the Trust Agreement.
Novation is the extinguishment of an obligation by the substitution or change of the
obligation by a subsequent one which terminates it, either by changing its object or
principal conditions, or by substituting a new debtor in place of the old one, or by
subrogating a third person to the rights of the creditor. 4 Novation through a change of
the object or principal conditions of an existing obligation is referred to as objective (or
real) novation. Novation by the change of either the person of the debtor or of the
creditor is described as subjective (or personal) novation. Novation may also be both
objective and subjective (mixed) at the same time. In both objective and subjective
novation, a dual purpose is achieved-an obligation is extinguished and a new one is
created in lieu thereof. 5
If objective novation is to take place, it is imperative that the new obligation expressly
declare that the old obligation is thereby extinguished, or that the new obligation be on
every point incompatible with the old one. 6Novation is never presumed: it must be
established either by the discharge of the old debt by the express terms of the new
agreement, or by the acts of the parties whose intention to dissolve the old obligation as
a consideration of the emergence of the new one must be clearly discernible. 7
Again, if subjective novation by a change in the person of the debtor is to occur, it is not
enough that the juridical relation between the parties to the original contract is extended
to a third person. It is essential that the old debtor be released from the obligation, and
the third person or new debtor take his place in the new relation. If the old debtor is not
released, no novation occurs and the third person who has assumed the obligation of
the debtor becomes merely a co-debtor or surety or a co-surety. 8
Applying the above principles to the instant case, it is at once evident that the Trust
Agreement does not expressly terminate the obligation of R & B Surety under the
Surety Bond. On the contrary, the Trust Agreement expressly provides for the
continuing subsistence of that obligation by stipulating that "[the Trust Agreement] shall
not in any manner release" R & B Surety from its obligation under the Surety Bond.
Neither can the petitioners anchor their defense on implied novation. Absent an
unequivocal declaration of extinguishment of a pre-existing obligation, a showing of

complete incompatibility between the old and the new obligation (and nothing else)
would sustain a finding of novation by implication. 9 But where, as in this case, the
parties to the new obligation expressly recognize the continuing existence and validity of
the old one, where, in other words, the parties expressly negated the lapsing of the old
obligation, there can be no novation. The issue of implied novation is not reached at all.
What the trust agreement did was, at most, merely to bring in another person or
persons-the Trustor[s]-to assume the same obligation that R & B Surety was bound to
perform under the Surety Bond. It is not unusual in business for a stranger to a contract
to assume obligations thereunder; a contract of suretyship or guarantee is the classical
example. The precise legal effect is the increase of the number of persons liable to the
obligee, and not the extinguishment of the liability of the first debtor. 10 Thus,
in Magdalena Estates vs. Rodriguez, 11 we held that:
[t]he mere fact that the creditor receives a guaranty or accepts payments
from a third person who has agreed to assume the obligation, when there
is no agreement that the first debtor shall be released from responsibility,
does not constitute a novation, and the creditor can still enforce the
obligation against the original debtor.
In the present case, we note that the Trustor under the Trust Agreement, the CCM, was
already previously bound to R & B Surety under its Indemnity Agreement. Under the
Trust Agreement, the Trustor also became directly liable to the PNB. So far as the PNB
was concerned, the effect of the Trust Agreement was that where there had been
only two, there would now be three obligors directly and solidarily bound in favor of the
PNB: PAGRICO, R & B Surety and the Trustor. And the PNB could proceed against any
of the three, in any order or sequence. Clearly, PNB never intended to release, and
never did release, R & B Surety. Thus, R & B Surety, which was not a party to the Trust
Agreement, could not have intended to release any of its own indemnitors simply
because one of those indemnitors, the Trustor under the Trust Agreement, became also
directly liable to the PNB.
2. We turn to the contention of petitioner Jose K. Villanueva that his obligation as
indemnitor under the 24 December 1963 Indemnity Agreement with R & B Surety was
extinguished when the PNB agreed in the Trust Agreement "to hold in abeyance any
action to enforce its claims against R & B Surety .
The Indemnity Agreement speaks of the several indemnitors "apply[ing] jointly and
severally (in solidum) to the R & B Surety] to become SURETY upon a SURETY
BOND demanded by and in favor of [PNB] in the sum of [P400,000.00] for the faithful
compliance of the terms and conditions set forth in said SURETY BOND ." This part
of the Agreement suggests that the indemnitors (including the petitioners) would
become co-sureties on the Security Bond in favor of PNB. The record, however, is
bereft of any indication that the petitioners-indemnitors ever in fact became co-sureties
of R & B Surety vis-a-vis the PNB. The petitioners, so far as the record goes, remained
simply indemnitors bound to R & B Surety but not to PNB, such that PNB could not

have directly demanded payment of the Principal Obligation from the petitioners. Thus,
we do not see how Article 2079 of the Civil Code-which provides in part that "[a]n
extension granted to the debtor by the creditor without the consent of the guarantor
extinguishes the guaranty" could apply in the instant case.
The petitioner-indemnitors are, as, it were, second-tier parties so far as the PNB was
concerned and any extension of time granted by PNB to any of the first-tier obligators
(PAGRICO, R &B Surety and the trustors[s]) could not prejudice the second-tier parties.
There is no other reason why petitioner Villanueva's contention must fail. PNB's
undertaking under the Trust Agreement "to hold in abeyance any action to enforce its
claims" against R & B Surety did not extend the maturity of R & B Surety's obligation
under the Surety Bond. The Principal Obligation had in fact already matured, along with
that of R &B Surety, by the time the Trust Agreement was entered into. Petitioner's
Obligation had in fact already matured, for those obligations were to amture "as soon as
[R & B Surety] became liable to make payment of any sum under the terms of the
[Surety Bond] whether the said sum or sums or part thereof have been actually paid
or not." Thus, the situation was that precisely envisaged in Article 2079:
[t]he 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 the
referred to herein.(emphasis supplied)
The theory behind Article 2079 is that an extension of time given to the principal debtor
by the creditor without the surety of his right to pay the creditor and to be immediately
subrogated to the creditor's remedies against the principal debtor upon the original
maturity date. The surety is said to be entitled to protect himself against the principal
debtor upon the orginal maturity date. The surety is said to be entitled to protect himself
against the contingency of the principal debtor or the indemnitors becoming insolvent
during the extended period. The underlying rationale is not present in the instant case.
As this Court has held,
merely delay or negligence in proceeding against the principal will not
discharge a surety unless there is between the creditor and the principal
debtor a valid and binding agreement therefor, one which tends to
prejudice [the surety] or to deprive it of the power of obtaining
indemnity by presenting a legal objection for the time, to the prosecution of
an action on the original security. 12
In the instant case, there was nothing to prevent the petitioners from tendering payment,
if they were so minded, to PNB of the matured obligation on behalf of R & B Surety and
thereupon becoming subrogated to such remedies as R & B Surety may have against
PAGRICO.
3. The last issue can be disposed of quicjly, Clauses (b) and (c) of the Indemnity
Agreements (quoted above) allow R & B Surety to recover from petitioners even before

R & B Surety shall have paid the PNB. We have previously held similar indemnity
clauses to be enforceable and not violative of any public policy. 13
The petitioners lose sight of the fact that the Indemnity Agreements are contracts of
indemnification not only against actual loss but against liability as well. 14 While in a
contract of indemnity against loss as indemnitor will not be liable until the person to be
indemnified makes payment or sustains loss, in a contract of indemnity against liability,
as in this case, the indemnitor's liability arises as soon as the liability of the person to be
indemnified has arisen without regard to whether or not he has suffered actual
loss. 15 Accordingly, R & B Surety was entitled to proceed against petitioners not only
for the partial payments already made but for the full amount owed by PAGRICO to the
PNB.
Summarizing, we hold that :
(1) The Surety Bond was not novated by the Trust Agreement. Both agreements can
co-exist. The Trust Agreement merely furnished to PNB another party obligor to the
Principal Obligation in addition to PAGRICO and R & B Surety.
(2) The undertaking of the PNB to 'hold in abeyance any action to enforce its claim"
against R & B Surety did not amount to an "extension granted to the debtor" without
petitioner's consent so as to release petitioner's from their undertaking as indemnitors of
R & B Surety under the INdemnity Agreements; and
(3) Petitioner's are indemnitors of R & B Surety against both payments to and liability for
payments to the PNB. The present suit is therefore not premature despite the fact that
the PNB has not instituted any action against R & B Surety for the collection of its
matured obligation under the Surety Bond.
WHEREFORE, the petitioner's appeal is DENIED for the lack of merit and the decision
of the trial court is AFFIRMED in toto. Costs against the petitioners.
SO ORDERED.
Yap (Chairman), Narvasa, Melencio-Herrera, Cruz, Gancayco and Sarmiento, JJ.,
concur.

Footnotes
1 With then Judge Ricardo C. Puno presiding.
2 R & B Surety had earlier made partial payments thereon to PNB.
3 Manila Surety & Fidelity Co. v. Villarama, 107 Phil. 891, 899 (1960).

4 De Cortes v. Venturanza, 79 SCRA 709, 722-23 (1977).

5 Id at 723.
6 Zapanta v. Rotaeche, 21 Phil. 154, 159 (1912).
7 E.g., Tui Siuco v. Habana, 45 Phil. 707, 713 (1924); Martinez v. Cavives,
25 Phil. 581 (1913).
8 Dungo v. Lopena, 6 SCRA 1007,1015-16 (1962).
9 Guerrero v. Court of Appeals, 29 SCRA 791, 798 (1969).
10 Dungo v. Lopena, 6 SCRA 1007, at 1016 (1962).
11 18 SCRA 967, at 972 (1966).
12 Bank of the Philippine Islands v. Albaladejo y Compania, 53 Phil. 141,
at 145-146 (1929); underscoring supplied.
13 Security Bank v. Globe Assurance, 58 Off. Gaz. 3708 (30 April 1962);
Cosmopolitan Insurance v. Reyes, 15 SCRA 258, 261 (1965); Alto Surety
v. Aguilar, G.R. No. L-5625, March 16, 1954.
14 Guerrero v. Court of Appeals, 29 SCRA 791, 797 [1969], this case
involves an indemnification clause similar to the INdemnity Agreements
under consideration. See also Alto Surety & Insurance Co. v. Aguilar, L5625, March 16, 1954.
15 Guerrero v. Court of Appeals, 29 SCRA 791 (1969); Associated
Insurance & Surety Co. v. Chua, 7 SCRA 52, 54 (1963); Alto Surety &
Insurance Co. v. Andan, 100 Phil. 403, 406 (1956).

NATURE:
SURETY:
LUZON SURETY CO., INC., Plaintiff-Appellant, v. THE CITY OF BACOLOD,
ROMEO GUANZON, in his capacity as Mayor of the City of Bacolod and PORFIRIO
T. DE LEON, in his capacity as Treasurer of the City of Bacolod, DefendantsAppellees.
Tolentino & Garcia and D. R. Cruz, for Plaintiff-Appellant.
Jesus V . Ramos for defendants appellees.

DECISION

CASTRO, J.:

On July 1, 1962 the city council of the City of Bacolod approved Ordinance 158, series
of 1962. 1 Pursuant to the said ordinance the plaintiff Luzon Surety Co., Inc. was
required to pay a fixed annual license fee of P300 and to apply for and obtain from the
City Mayor a permit (upon payment of the sum of P20 to the City Treasurer). 2
In 1963 the plaintiff started to pay the said fees, but under protest.
On February 13, 1964 the plaintiff filed a complaint with the Court of First Instance of
Negros Occidental, assailing the ordinance as "illegal, invalid and unconstitutional" and
asking for the refund of the amount of P430 it had previously paid under protest. The
plaintiff alleged, inter alia, that the Bacolod city council exceeded the power and
authority granted to it by law in approving the said ordinance, as the latter contravenes
section 2, sub-section (j) of Republic Act 2264 3 which prohibits cities from taxing
insurance companies.
The defendants contended, however, that Commonwealth Act 326, as amended,
otherwise known as "The Charter of the City of Bacolod," grants the city council the
power to enact ordinances intended to regulate and fix the amounts of permit and
license fees, and that moreover the ordinance in question does not violate section 2,
sub section (j) of the Local Autonomy Act because the plaintiff is a surety company and
not an insurance company.
On July 25, 1964 the lower court adjudged the plaintiff as a surety company and not an
insurance company and, therefore, as not entitled to claim exemption from the effects of
the controverted ordinance, which it declared valid, legal and constitutional.
The plaintiffs appeal to this Court poses in issue the validity of the specific portions of

the ordinance (see footnote 22) prescribing fixed annual license and permit fees for
"Fiadores (Casas y Compaias)," insofar as these pro are construed by the City of
Bacolod to include surety companies within their purview and intendment, the plaintiff
insisting that a surety company is an insurance company, that no distinction of
consequence exists between the two, and that therefore the plaintiff falls within the
mantle of the exemption afforded by section 2, sub-section (j) of the Local Autonomy
Act, which explicitly prohibits chartered cities from levying or imposing "taxes of any kind
on banks, insurance companies and persons paying franchise tax." (Emphasis supplied)
The defendants, on the other hand, while admitting that the plaintiff is a surety
company, nevertheless insist that fundamental distinctions exist between a surety
company and an insurance company, and that the plaintiff, its principal business being
one of suretyship, does not fall under the exemption granted by section 2, sub-section
(j) of the Local Autonomy Act, the exemption exclusively being applicable only to
companies doing purely insurance business.
Resolution of this appeal requires a determination of whether a surety company is an
insurance company within the meaning and intendment of section 2, sub section (j) of
the Local Autonomy Act, both parties being in agreement that the license fee in question
is in the nature and concept of a tax.
No doubt surfaces as to the power of chartered cities to tax under the Local Autonomy
Act. This Court has consistently upheld the "doctrine that the grant of the power to tax to
chartered cities under section 2 of the Local Autonomy Act is sufficiently plenary to
cover everything, excepting those which are mentioned therein, subject only to the
limitation that the tax so levied is for public purposes, just and uniform." 4
We hereunder quote the pertinent provisions of the Local Autonomy
Act:jgc:chanrobles.com.ph
"Section 2. Any provision of the law to the contrary notwithstanding, all chartered cities .
. . shall have authority to impose municipal license taxes or fees upon persons engaged
in any occupation or business, or exercising privileges in chartered cities, . . . Provided,
however, That no city . . . may levy or impose any of the following:chanrob1es virtual
1aw library
x

"(j) Taxes of any kind on banks, insurance companies, and persons, paying franchise
tax . . ."cralaw virtua1aw library
Is the word "fiadores," as used in item B-17 of article 1 of section 3 of the ordinance,
comprehended within the meaning of the term "insurance companies" as used in
section 2(j) of the Local Autonomy Act?
To begin with we look to the provisions of Act 2427, as amended (otherwise known as

"The Insurance Act"). Section 170 thereof provides that "for the purpose of this chapter
[captioned INSURANCE COMPANIES] unless the context otherwise requires the terms
company or insurance company shall include all corporations, associations,
partnerships, or individuals engaged as principals in the insurance business, excepting
fraternal and benevolent orders and societies." Section 194 of the same Act provides as
follows: "Corporations formed or organized to save any person or persons or other
corporation harmless from loss, damage, or liability arising from any unknown or future
or contingent event, or to indemnify or to compensate any person or persons or other
corporation for any such loss, damage, or liability or to guarantee the contractual
obligations or debts of others, shall be known as Insurance Corporations for the
purposes of this chapter."cralaw virtua1aw library
Let us now examine authoritative definitions of the word "fiador." Robbs Dictionary of
Legal Terms (1966), p. 56, gives the word "fiador" this meaning: "bondsman, surety,
guarantor, bailor, backer." The New Revised Velasquez Spanish and English Dictionary
(1965) states that a "fiador" is "1. One who trusts another 2. Bondsman, guarantor,
surety, or one who becomes security for another." 36A C.J.S. 375 has this to say on the
meaning of the word "fiador" : "In Spanish law, surety." XVI Enciclopedia Juridica
Espaola 233 describes "fiador" as "El que responde de la obligacion ajena, tomando
sobre si el cumplimiento de ella para el caso de que no la cumpla el que contrajo." In
our own jurisprudence, "fiador is defined in the Real Academia Castellana as persona
que fia a otra para la seguridad de aquello a que esta obligada." 5
We now turn to American jurisprudence.
The Cyclopedia of Insurance Law 6 states:jgc:chanrobles.com.ph
"A class of contracts written by guaranty or surety companies, and generally designated
as guaranty insurance, comprises principally contract, credit, fidelity, title, bond, and
security guaranty generally. Contracts of this kind are now almost universally regarded
as those of insurance where the underwriter engages in the business for profit,
especially since the terms of such contracts usually closely resemble the essential
elements of an insurance contract."cralaw virtua1aw library
On the business of fidelity guaranty, the same authority declares that "contracts of
fidelity guaranty are contracts of indemnity, and, where the business of underwriting is
undertaken for profit, are essentially insurance contracts, which, like other contracts of
insurance, are construed against the insurer," 7 On the business of contract guaranty,
the same authority comments that "the general rule that the bonds of guaranty and
surety companies, who engage in the business for profit, are essentially insurance
contracts and are governed by the rules of construction applicable thereto, rather than
by the rules applicable to strict or pure contracts of suretyship, applies to bonds
guaranteeing the carrying out or performance of contracts to do a particular act or carry
out a particular project." 8
An American case 9 resolved, with meticulous care, the problem of whether a surety

company engages in insurance business for purposes of taxation. The American Surety
Company, required by the laws of the State of Tennessee to pay privilege taxes based
on its gross premiums, brought suit against the Insurance Commissioner denying its
liability for the payment of the taxes, contending it was not an insurance company. The
Supreme Court of Tennessee rejected this contention on the basis of its finding that the
American Surety Company was authorized to conduct the business of "guaranteeing the
fidelity of persons holding places of public and private trust, the performance of
contracts other than insurance policies, and executing or guaranteeing bonds and
undertakings required or permitted in all actions or proceedings or by law allowed," and
its ruling that the contracts thus authorized to be made by the American Surety
Company are contracts of insurance and the making of them is insurance business, as
defined by the statutes of the State and the common law. The court, in support of its
opinion, quoted Frosts Law of Guaranty Insurance, thus:jgc:chanrobles.com.ph
"In view of all that has been said in this immediate connection, can it be affirmed that
fidelity, commercial, and judicial bonds or policies, as issued by the so-called surety
companies, constitute contracts of insurance within the legal signification of that term?
The answer to the foregoing query must be unqualifiedly in the affirmative."cralaw
virtua1aw library
Thus, the conclusion seems rather irresistible that the plaintiff, which is the holder of a
"Certificate of Authority" (issued by the Insurance Commissioner) 10 as a "fire, marine,
earthquake, typhoon, tidal wave, riot, flood, civil commotion, war, civil war, revolutions,
rebellions, military or usurped power, use & occupancy, storm, bombardment, invasion,
insurrection, motor car, burglary, accident, and fidelity insurance company," and is
authorized "to become a surety upon official recognizances, stipulations, bonds and
undertakings," 11 (a) is engaged in the insurance business, and (b) is an insurance
company within the intendment of section 2(j) of the Local Autonomy Act.
We therefore hold that the plaintiff is not liable for the payment of the annual license fee
of P300 imposed by the ordinance in question.
As to the P20 annual permit fee, it is our view and we so hold that the plaintiff was
correctly adjudged liable for the payment thereof. The authority of the City of Bacolod to
require persons and entities engaged in and conducting any business within its
jurisdictional territory to obtain permits and pay the corresponding permit fees, is
specifically granted by paragraph (ee) of section 17 of Commonwealth Act 326 (known
as "The Charter of the City of Bacolod"), approved on June 18, 1938, which empowers
the city council "to enact all ordinances it may deem necessary and proper for the
sanitation and safety, the furtherance of the prosperity, and the promotion of the
morality, peace, good order, comfort, convenience, and general welfare of the city and
its inhabitants. "12 In requiring permits and the payment of nominal regulatory permit
fees, the ordinance itself invokes police power, stating explicitly that permits are
necessary "for the proper supervision and enforcement of existing laws and ordinances
governing the sanitation, security and welfare of the public and the health of the
employees engaged in the business therein specified."cralaw virtua1aw library

ACCORDINGLY, the judgment a quo is set aside, and another is hereby entered (1)
declaring that the item "B-17 Fiadores (Casas y Compaias) . . . P300.00" of Article 1 of
Section 3 of Ordinance 158, series of 1962, of the respondent City of Bacolod does not
embrace within its purview, and is not applicable to, surety companies and corporations,
such as the Luzon Surety Company, Inc. and (2) ordering the respondent City to refund
to the Luzon Surety Company, Inc. all sums of money the latter has paid in virtue of the
implementation and enforcement of the said item by the respondent City. No
pronouncement as to costs.
Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Fernando, Teehankee,
Barredo, Villamor and Makasiar, JJ., concur.
Endnotes:

1. "An Ordinance Fixing the Classification and Schedule of Fees for the Issuance of
Permits and Licenses and the Conduct Thereof for the Opening, Practice, Exercise,
Conduct and/or Establishment of any Profession, Act or Trade, Business, Occupation or
Calling or Industry Within the Jurisdictional Territory of the City of Bacolod." The
complete text of this prolix ordinance is reproduced on pp. 5 to 91 of the Record on
Appeal.
2. The pertinent portions of the ordinance read as follows:jgc:chanrobles.com.ph
"Section 1. License, Permit Fees, Application Collections thereof, and other
purposes. Article 1. A License or Permit Fee must first be paid before any business,
trade, occupation or profession, or industry hereinbelow specified can be lawfully
began, established, conducted, exercised, or pursued, said business, trade, occupation
or profession, or industry is payable for every separate or distinct establishment or place
or location where business, trade, occupation or profession, or industry, or line of any of
them, does not become exempt by being conducted with some other business, trade,
occupation or profession, or industry, for which such license has been paid.
"Article 2. Permits necessary. It shall be unlawful for any person or entity to conduct
or engage in any of the businesses, trades, or occupations enumerated herein, and
other businesses, trades, or occupations for which a permit is required for the proper
supervision and enforcement of existing laws and ordinances governing the sanitation,
security and welfare of the public and the health of the employees engaged in the
business therein specified, without first having obtained a permit therefor from the
Mayor and the necessary license from the City Treasurer.
x

"Article 4. Fees. There shall be paid to the City Treasurer for every permit issued by

the Mayor for that business, trade or occupation hereinbelow enumerated, as in this
Ordinance provided, an annual [permit] fee in accordance with the following
schedule:chanrob1es virtual 1aw library
x

83. All other business, trade or occupation not mentioned in this ordinance, except
those upon which the City is not empowered to license or to tax P20.00.
x

Section 3. Fixed Annual Fees.

"Article 1. For purpose of the collection of fixed annual fees for the exercise, conduct,
establishment, occupation or profession, or industry as hereinabove stated and which
are not subject to fees based on gross sales or output realized by the exercise or
conduct of said business, trade, occupation or profession, or industry, the following
schedule shall be observed and followed.
x

FIXED ANNUAL FEES

AGENCIAS
"P-17 Fiadores (Casas y Compaias) P300.00"
3. "An Act Amending the Laws Governing Local Governments by Increasing their
Autonomy and Reorganizing Provincial Governments" (otherwise known as the Local
Autonomy Act).
4. Nin Bay Mining Company v. Municipality of Roxas, Province of Palawan, L-20125,
July 20, 1965; C. N. Hodges v. Municipal Board of the City of Iloilo, Et Al., L-18276, Jan.
12, 1967; Ormoc Sugar Company v. Municipal Board of Ormoc City, Et Al., L-24322,
July 21, 1967.
5. Agcaoili v. Vda. de Agcaoili, 90 Phil. 100.
6. George C. Couch, Cyclopedia of Insurance Law, p. 45.
7. Ibid., pp. 40-41.
8. Ibid., p. 24.

9. American Surety Company of New York v. Folk insurance Commissioner, 135 SW

778.
10. Record on Appeal, pp. 98-99.
11. Record on Appeal, pp. 101-104.
12. Cf. section 2238 of the Revised Administrative Code which provides: "General
power of council to enact ordinances and make regulations. The municipal council
shall enact such ordinances and make such regulations, not repugnant to law, as may
be necessary to carry into effect and discharge the powers and duties conferred upon it
by law and such as shall seem necessary and proper to provide for the health and
safety, promote the prosperity, improve the morals, peace, good order, and
convenience of the municipality and the inhabitants thereof, and for the protection of
property therein." This provision of law, to the extent and scope of its terms, delegates
police power to municipal corporations.

B. ON FUTURE DEBTS

Republic of the Philippines

SUPREME COURT
Manila
THIRD DIVISION

G.R. No. 80078 May 18, 1993

ATOK FINANCE CORPORATION, petitioner,
vs.
COURT OF APPEALS, SANYU CHEMICAL CORPORATION, DANILO E. ARRIETA,
NENITA B. ARRIETA, PABLITO BERMUNDO and LEOPOLDO HALILI, respondents.
Syquia Law Offices for petitioner.
Batino, Angala, Allaga & Zara Law Offices for private respondents.

FELICIANO, J.:
Atok Finance Corporation ("Atok Finance") asks us to review and set aside the Decision
of the Court of Appeals which reversed a decision of the trial court ordering private
respondents to pay jointly and severally to petitioner Atok Finance certain sums of
money.
On 27 July 1979, private respondents Sanyu Chemical corporation ("Sanyu Chemical")
as principal and Sanyu Trading Corporation ("Sanyu Trading") along with individual
private stockholders of Sanyu Chemical, namely, private respondent spouses Danilo E.
Halili and Pablico Bermundo as sureties, executed in the continuing Suretyship
Agreement in favor of Atok Finance as creditor. Under this Agreement, Sanyu Trading
and the individual private respondents who were officers and stockholders of Sanyu
Chemical did:
(1) For valuable and/or other consideration . . ., jointly and severally
unconditionally guarantee to ATOK FINANCE
CORPORATION (hereinafter called Creditor), the full, faithful and prompt
payment and discharge of any and all indebtedness of [Sanyu Chemical] .
. . (hereinafter called Principal) to the Creditor. The word "indebtedness" is
used herein in its most comprehensive sense and includes any and all
advances, debts, obligations and liabilities of Principal or any one or more

of them,here[to]fore, now or hereafter made, incurred or created, whether

voluntary or involuntary andhowever arising, whether direct or acquired by
the Creditor by assignment or succession, whether due or not due,
absolute or contingent, liquidated or unliquidated, determined or
undetermined and whether the Principal may be may be liable individually
of jointly with others, or whether recovery upon such indebtedness may be
or hereafter become barred by any statute of limitations, or whether such
indebtedness may be or otherwise become unenforceable. 1 (Emphasis
supplied)
Other relevant provisions of the Continuing Suretyship Agreement follow:
(2) This is a continuing suretyship relating to any indebtedness, including
that arising under successive transactions which shall either continue the
indebtedness from time to time or renew it after it has been satisfied. This
suretyship is binding upon the heirs, successors, executors, administrators
and assigns of the surety, and the benefits hereof shall extend to and
include the successors and assigns of the Creditor.
(3) The obligations hereunder are joint and several and independent of the
obligations of the Principal. A separate action or actions may be
prosecuted against the Principal and whether or not the Principal be joined
in any such action or actions.
xxx xxx xxx.
(6) In addition to liens upon, and rights of set-off against the moneys,
securities or other property of the Surety given to the Creditor by law, the
Creditor shall have the lien upon and a right of self-off against all moneys,
securities, and other property of the Surety now and hereafter in the
possession of the Creditor; and every such lien or right of self-off may be
exercised without need of demands upon or notice to the Surety. No lien
or right of set-off shall be deemed to have been waived by any act,
omission or conduct on the part of the Creditor, or by any neglect to
exercise such right of set-off or to enforce such lien, or by any delay in so
doing, and every right of set-off or lien shall continue in full force and effect
until such right of set-off of lien is specifically waived or released by an
instrument in writing executed by the Creditor.
(7) Any indebtedness of the Principal now or hereafter held by the Surety
is hereby subordinated to the indebtedness of the Principal to the Creditor;
and if the Creditor so requests, such indebtedness of the Principal of the
Surety shall be collected, enforced and shall be paid over to the Creditor
and shall be paid over to the Creditor and shall be paid over to the
Creditor on account of the indebtedness of the Principal to the Creditor but

without reducing or affecting in any manner the liability of the Surety under
the provisions of this suretyship.
xxx xxx xxx 2
(Emphases supplied)
On 27 November 1981, Sanyu Chemical assigned its trade receivables outstanding as
of 27 November 1981 with a total face value of P125,871.00, to Atok Finance in
consideration of receipt from Atok Finance of the amount of P105,000.00. The assigned
receivables carried a standard term of thirty (30) days; it appeared, however, that the
standard commercial practice was to grant an extension up to one hundred twenty (120)
days without penalties. The relevant portions of this Deed of Assignment read as
follows:
1. FOR VALUE RECEIVED, the ASSIGNOR does hereby SELL,
TRANSFER and ASSIGN all his/its rights, title and interest in the
contracts, receivables, accounts, notes, leases, deeds of sale with
reservation of title, invoices, mortgages, checks, negotiable instruments
and evidences of indebtedness listed in the schedule forming part
hereinafter called "Contract" or "Contracts."
2. To induce the ASSIGNEE to purchase the above Contracts, the
ASSIGNOR does hereby certify,warrant and represent that :
(a). He/It is the sole owner of the assigned
Contracts free and clear of claims of any other
party except the herein ASSIGNEE and has
the right to transfer absolute title thereto the
ASSIGNEE;
(b). Each assigned Contract is bonafide and
the amount owing and to become due on each
contract is correctly stated upon the schedule
or other evidences of the Contract delivered
pursuant thereto;
(c). Each assigned Contract arises out of the
sale of merchandise/s which had been
delivered and/or services which have been
rendered and none of the Contract is now, nor
will at any time become, contingent upon the
fulfillment of any contract or condition
whatsoever, or subject to any defense, offset
or counterclaim;

(d). No assigned Contract is represented by

any note or other evidence of indebtness or
other security document except such as may
have been endorsed, assigned and delivered
by the ASSIGNOR to the ASSIGNEE
simultaneously with the assignment of such
Contract;
(e). No agreement has been made, or will be
made, with any debtor for any deduction
discount or return of merchandise, except as
may be specifically noted at the time of the
assignment of the Contract;
(f). None of the terms or provisions of the
assigned Contracts have been amended,
modified or waived;
(g). The debtor/s under the assigned
Contract/s are solvent and his/its/their failure to
pay the assigned Contracts and/or any
installment thereon upon maturity thereof shall
be conclusively considered as a violation of
this warranty; and
(h). Each assigned Contract is a valid
obligation of the buyer of the merchandise
and/or service rendered under the Contract
And that no Contract is overdue.
The foregoing warranties and representations are in addition to those
provided for in the Negotiable Instruments Law and other applicable
laws. Any violation thereof shall render the ASSIGNOR immediately and
unconditionally liable to pay the ASSIGNEE jointly and severally with the
debtors under the assigned contracts, the amounts due thereon.
xxx xxx xxx
4. The ASSIGNOR shall without compensation or cost, collect and receive
in trust for the ASSIGNEE all payments made upon the assigned contracts
and shall remit to the ASSIGNEE all collections on the said Contracts as
follows :
P5,450.00 due on January 2, 1982 on every 15th day (semimonthly) until November 1, 1982.

P110,550.00 balloon payment after 12 months. 3 (Emphasis

supplied)
Later, additional trade receivables were assigned by Sanyu Chemical to Atok Finance
with a total face value of P100,378.45.
On 13 January 1984, Atok Finance commenced action against Sanyu Chemical, the
Arrieta spouses, Pablito Bermundo and Leopoldo Halili before the Regional Trial Court
of Manila to collect the sum of P120,240.00 plus penalty charges amounting to P0.03
for every peso due and payable for each month starting from 1 September 1983. Atok
Finance alleged that Sanyu Chemical had failed to collect and remit the amount due
under the trade receivables.
Sanyu Chemical and the individual private respondents sought dismissal of Atok's claim
upon the ground that such claim had prescribed under Article 1629 of the Civil Code
and for lack of cause of action. The 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.
At the trial, Sanyu Chemical and the individual private respondents failed to present any
evidence on their behalf, although the individual private respondents submitted a
memorandum in support of their argument. After trial, on 1 April 1985, the trial court
rendered a decision in favor of Atok Finance. The dispositive portion of this decision
reads as follows:
ACCORDINGLY, judgment is hereby rendered in favor of the plaintiff
ATOK FINANCE CORPORATION; and against the defendants SANYU
CHEMICAL CORPORATION, DANILO E. ARRIETA, NENITA B.
ARRIETA, PABLITO BERMUNDO and LEOPOLDO HALILI, ordering the
said defendants, jointly and severally, to pay the plaintiff:
(1) P120,240.00 plus P0.03 for each peso for each month from September
1, 1983 until the whole amount is fully paid;
(2) P50,000.00 as attorney's fees; and
(3) To pay the costs.
SO ORDERED. 4
Private respondents went on appeal before the then Intermediate Appellate Court
("IAC"), and the appeal was there docketed as AC-G.R. No. 07005-CV. The case was
raffled to the Third Civil Cases Division of the IAC. In a resolution dated 21 March 1986,
that Division dismissed the appeal upon the ground of abandonment, since the private
respondents had failed to file their appeal brief notwithstanding receipt of the notice to
do so. On 4 June 1986, entry of judgment was made by the Clerk of Court of the IAC.

Accordingly, Atok Finance went before the trial court and sought a writ of execution to
enforce the decision of the trial court of 1 April 1985. The trial court issued a writ of
execution on 23 July 1986. 5 Petitioner alleged that the writ of execution was served on
private respondents. 6
However, on 27 August 1986, private respondents filed a Petition for Relief from
Judgment before the Court of Appeals. This Petition was raffled off to the 15th Division
of the Court of Appeals. In that Petition, private respondents claimed that their failure to
file their appeal brief was due to excusable negligence, that is, that their previous
counsel had entrusted the preparation and filing of the brief to one of his associates,
which associate, however, had unexpectedly resigned from the law firm without
returning the records of cases he had been handling, including the appeal of private
respondents. Atok Finance opposed the Petition for Relief arguing that no valid ground
existed for setting aside the resolution of the Third Division of the then IAC.
The 15th Division of the Court of Appeals nonetheless granted the Petition for Relief
from Judgment "in the paramount interest of justice," 7 set aside the resolution of the
Third Civil Cases Division of the then IAC, and gave private respondents a nonextendible period of fifteen (15) days within which to file their appeal brief. Private
respondents did file their appeal brief.
The 15th Division, on 18 August 1987, rendered a Decision on the merits of the appeal,
and reversed and set aside the decision of the trial court and entered a new judgment
dismissing the complaint of Atok Finance, ordering it to pay private respondents
P3,000.00 as attorney's fees and to pay the costs.
Atok Finance moved to set aside the decision of the 15th Division of the Court of
Appeals, inviting attention to the resolution of the IAC's Third Civil Cases Division of 21
March 1986 originally dismissing private respondent's appeal for abandonment thereof.
In a resolution dated 18 August 1987, the 15th Division denied Atok Finance's motion
stating that it had granted the Petition for Relief from Judgment and given private
respondents herein fifteen (15) days within which to file an appeal brief, while Atok
Finance did not file an appellee's brief, and that its decision was arrived at "on the basis
of appellant's brief and the original records of the appeal case."
In the present Petition for Review, Atok Finance assigns the following as errors on the
part of the Court of Appeals in rendering its decision of 18 August 1987:
(1) that it had erred in ruling that a continuing suretyship agreement
cannot be effected to secure future debts;
(2) that it had erred in ruling that the continuing suretyship agreement was
null and void for lack of consideration without any evidence whatsoever
[being] adduced by private respondents;

(3) that it had erred in granting the Petition for Relief from Judgment while
execution proceedings [were] on-going on the trial court. 8 (Emphasis in
the original)
As a preliminary matter, we note that a Division of the Court of Appeals is co-equal with
any other Division of the same court. Accordingly, a Division of the Court of Appeals has
no authority to consider and grant a petition for relief from a judgment rendered by
another Division of the same court. In the case at bar, however, we must note that an
intervening event had occurred between the resolution of 21 March 1986 of the Third
Civil Cases Division of the IAC dismissing private respondents' appeal and the 30
September 1986 order of the 15th Division of the Court of Appeals granting the Petition
for Relief from Judgment. On 28 July 1986, the old Intermediate Appellate Court went
out of existence and a new court, the Court of Appeals, came into being, was organized
and commenced functioning. 9 This event, and the probability that some confusion may
have accompanied the period of transition from the IAC to the Court of Appeals, lead us
to believe that the defect here involved should be disregarded as being of secondary
importance. At the same time, nothing in this decision should be read as impliedly
holding that a petition from relief judgment is available in respect of a decision rendered
by the Court of Appeals; this issue is best reserved for determination in some future
cases where it shall have been adequately argued by the parties.
We turn, therefore, to a consideration of the first substantive issue addressed by the
Court of Appeals in rendering its Decision on the merits of the appeal: whether the
individual private respondents may be held solidarily liable with Sanyu Chemical under
the provisions of the Continuing Suretyship Agreement, or whether that Agreement
must be held null and void as having been executed without consideration and without a
pre-existing principal obligation to sustain it.
The Court of Appeals held on this first issue as follows:
It is the contention of private appellants that the suretyship agreement is
null and void because it is not in consonance with the laws on guaranty
and security. The said agreement was entered into by the parties two
years before the Deed of Assignment was executed. Thus, allegedly, it ran
counter to the provision that guaranty cannot exist independently because
by nature it is merely an accessory contract. The law on guaranty is
applicable to surety to some extent Manila Surety and Fidelity
Co. v.Baxter Construction & Co., 53 O.G. 8836; and, Arran v. Manila
Fidelity & Surety Co., 53 O.G. 7247.
We find merit in this contention.
Although obligations arising from contracts have the force of law between
the contracting parties, (Article 1159 of the Civil Code) this does not mean
that the law is inferior to it; the terms of the contract could not be enforces
if not valid. So, even if, as in this case, the agreement was for acontinuing

suretyship to include obligations enumerated in paragraph 2 of the

agreement, the same could not be enforced. First, because this contract,
just like guaranty, cannot exist without a valid obligation (Art. 2052, Civil
Code); and, second, although it may be given as security for future
debt(Art. 2053, C.C.), the obligation contemplated in the case at bar
cannot be considered "future debt" as envisioned by this law.
There is no proof that when the suretyship agreement was entered into,
there was a pre-existing obligation which served 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. 10 (Emphasis supplied).
We consider that the Court of Appeals here was in serious error. It is true that a serious
guaranty or a suretyship agreement is an accessory contract in the sense that it is
entered into for the purpose of securing the performance of another obligation which is
denominated as the principal obligation. It is also true that Article 2052 of the Civil Code
states that "a guarantee cannot exist without a valid obligation." This legal proposition is
not, however, like most legal principles, to be read in an absolute and literal manner and
carried to the limit of its logic. This is clear from Article 2052 of the Civil Code itself:
Art. 2052. A guaranty cannot exist without a valid obligation.
Nevertheless, a guaranty may be constituted to guarantee the
performance of a voidable or an unenforceable contract. It may also
guaranty a natural obligation." (Emphasis supplied).
Moreover, Article 2053 of the Civil Code states:
Art. 2053. A guaranty may also be given as security for future debts, the
amount of which is not yet known; there can be no claim against the
guarantor until the debt is liquidated. A conditional obligation may also be
secured. (Emphasis supplied)
The Court of Appeals apparently overlooked our caselaw interpreting Articles 2052 and
2053 of the Civil Code. InNational Rice and Corn Corporation (NARIC) v. Jose A. Fojas
and Alto Surety Co., Inc., 11 the private respondents assailed the decision of the trial
court holding them liable under certain surety bonds filed by private respondent Fojas
and issued by private respondent Alto Surety Co. in favor of petitioner NARIC, upon the
ground that those surety bonds were null and void "there being no principal obligation to
be secured by said bonds." In affirming the decision of the trial court, this Court,
speaking through Mr. Justice J.B.L. Reyes, made short shrift of the private respondents'
doctrinaire argument:

Under his third assignment of error, appellant Fojas questions the validity
of the additional bonds(Exhs. D and D-1) on the theory that when they
were executed, the principal obligation referred to in said bonds had not
yet been entered into, as no copy thereof was attached to the deeds of
suretyship. This defense is untenable, because in its complaint the NARIC
averred, and the appellant did not deny that these bonds were posted to
secure the additional credit that Fojas has applied for, and the credit
increase over his original contract was sufficient consideration for the
bonds. That the latter were signed and filed before the additional credit
was extended by the NARIC is no ground for complaint. Article 1825 of the
Civil Code of 1889, in force in 1948, expressly recognized that "a guaranty
may also be given as security for future debts the amount of which is not
yet known." (Emphasis supplied)
In Rizal Commercial Banking Corporation v. Arro, 12 the Court was confronted again with
the same issue, that is, whether private respondent was liable to pay a promissory note
dated 29 April 1977 executed by the principal debtor in the light of the provisions of a
comprehensive surety agreement which petitioner bank and the private respondent had
earlier entered into on 19 October 1976. Under the comprehensive surety agreement,
the private respondents had bound themselves as solidary debtors of the Diacor
Corporation not only in respect of existing obligations but also in respect of future ones.
In holding private respondent surety (Residoro Chua) liable under the comprehensive
surety agreement, the Court said:
The surety agreement which was earlier signed by Enrique Go, Sr. and
private respondent, is an accessory obligation, it being dependent upon a
principal one, which, in this case is the loan obtained by Daicor as
evidenced by a promissory note. What obviously induced petitioner bank
to grant the loan was the surety agreement whereby Go and Chua bound
themselves solidarily to guaranty the punctual payment of the loan at
maturity. By terms that are unequivocal, it can be clearly seen thatthe
surety agreement was executed to guarantee future debts which Daicor
may incur with petitioner, as is legally allowable under the Civil Code.
Thus
Article 2053. A guarantee may also be given as security
for future debts, the amount of which is not yet known; there
can be no claim against the guarantor until the debt is
liquidated. A conditional obligation may also be
secured. 13 (Emphasis supplied)
It is clear to us that the Rizal Commercial Banking Corporation and the NARIC cases
rejected the distinction which the Court of Appeals in the case at bar sought to make
with respect to Article 2053, that is, that the "future debts" referred to in that Article
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. 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 that 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. 14
Comprehensive or continuing surety agreements are in fact quite commonm place in
present day financial and commercial practice. A bank or a 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 surety 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. As
we understand it, this is precisely what happened in the case at bar.
We turn to the second substantive issue, that is, whether private respondents are liable
under the Deed of Assignment which they, along with the principal debtor Sanyu
Chemical, executed in favor of petitioner, on the receivables thereby assigned.
The contention of Sanyu Chemical was that Atok Finance had no cause of action under
the Deed of Assignment for the reason that Sanyu Chemical's warranty of the debtors'
solvency had ceased. In submitting this contention, Sanyu Chemical relied on Article
1629 of the Civil Code which reads as follows:
Art. 1629. In case the assignor in good faith should have made himself
responsible for the solvency of the debtor, and the contracting parties
should not have agreed upon the duration of the liability, it shall last for
one year only, from the time of the assignment if the period had already
expired.
If the credit should be payable within a term or period which has not yet
expired, the liability shall cease one year after maturity.
Once more, the Court of Appeals upheld the contention of private respondents and held
that Sanyu Chemical was free from liability under the Deed of Assignment. The Court of
Appeals said:
. . . Article 1629 provides for the duration of assignor's warranty of debtor's
solvency depending on whether there was a period agreed upon for the
existence of such warranty, analyzing the law thus:
(1) if there is a period (or length of time) agreed upon, then for such
period;

(2) if no period (or length of time) was agreed upon, then:

(a) one year from assignment if debt was due at the time
of the assignment
(b) one year from maturity if debt was not yet due at the
time of the assignment..
The debt referred to in this law is the debt under the assigned contract or
the original debts in favor of the assignor which were later assigned to the
assignee. The debt alluded to in the law, is not the debt incurred by the
assignor to the assignee as contended by the appellant.
Applying the said law to the case at bar, the records disclose that none of
the assigned receivables had matured on November 27, 1981 when the
Deed of Assignment was executed. The oldest debt then existing was that
contracted on November 3, 1981 and the latest was contracted on
December 4, 1981.
Each of the invoices assigned to the assignee contained a term of 30 days
(Exhibits B-3-A to 5 and extended by the notation which appeared in the
"Schedule of Assigned Receivables" which states that the ". . . the terms
stated on our invoices were normally extended up to a period of 120 days
. . ." (Exhibit B-2). Considering the terms in the invoices plus the ordinary
practice of the company, thus, the assigned debts matured between April
3, 1982 to May 4, 1982. The assignor's warranty for debtor's warranty, in
this case, would then be from the maturity period up to April 3, 1983 or
May 4, 1983 to cover all of the receivables in the invoices.
The letter of demand executed by appellee was dated August 29, 1983
(Exhibit D) and the complaint was filed on January 13, 1984. Both dates
were beyond the warranty period.
In effect, therefore, company-appellant was right when it claimed that
appellee had no cause of action against it or had lost its cause of
action. 15 (Emphasis supplied)
Once again, however, we consider that the Court of Appeals was in reversible error in
so concluding. The relevant provision of the Deed of Assignment may be quoted again
in this connection:
2. To induce the ASSIGNEE [Atok Finance] to purchase the above
contracts, the ASSIGNOR [Sanyu Chemical] does hereby certify, warrant
and represent that . . .

(g) the debtor/s under the assigned contract/s are solvent

and his/its/their failure to pay the assigned contract/s and/or
any installment thereon upon maturity thereof shall be
conclusively considered as a violation of this warranty; and .
..
The foregoing warranties and representations are in addition
to those provided for in the Negotiable Instruments Law and
other applicable laws. Any violation thereof shall render the
ASSIGNOR immediately and unconditionally liable to pay
the ASSIGNEE jointly and severally with the debtors under
the assigned contracts, the amounts due thereon.
xxx xxx xxx
(Emphasis supplied)
It may be stressed as a preliminary matter that the Deed of Assignment was valid and
binding upon Sanyu Chemical. Assignment of receivables is a commonplace
commercial transaction today. It is an activity or operation that permits the assignee to
monetize or realize the value of the receivables before the maturity thereof. In other
words, Sanyu Chemical received from Atok Finance the value of its trade receivables it
had assigned; Sanyu Chemical obviously benefitted from the assignment. The
payments due in the first instance from the trade debtors of Sanyu Chemical would
represent the return of the investment which Atok Finance had made when it paid
Sanyu Chemical the transfer value of such receivables.
Article 1629 of the Civil Code invoked by private respondents and accepted by the
Court of Appeals is not, in the case at bar, material. The liability of Sanyu Chemical to
Atok Finance rests not on the breach of the warranty of solvency; the liability of Sanyu
Chemical was not ex lege (ex Article 1629) but rather ex contractu. Under the Deed of
Assignment, the effect of non-payment by the original trade debtors was breach of
warranty of solvency by Sanyu Chemical, resulting in turn in the assumption of solidary
liability by the assignor under the receivables assigned. In other words, the assignor
Sanyu Chemical becomes a solidary debtor under the terms of the receivables covered
and transferred by virtue of the Deed of Assignment. And because assignor Sanyu
Chemical became, under the terms of the Deed of Assignment, solidary obligor under
each of the assigned receivables, the other private respondents (the Arrieta spouses,
Pablito Bermundo and Leopoldo Halili), became solidarily liable for that obligation of
Sanyu Chemical, by virtue of the operation of the Continuing Suretyship Agreement. Put
a little differently, the obligations of individual private respondent officers and
stockholders of Sanyu Chemical under the Continuing Suretyship Agreement, were
activated by the resulting obligations of Sanyu Chemical as solidary obligor under each
of the assigned receivables by virtue of the operation of the Deed of Assignment. That
solidary liability of Sanyu Chemical is not subject to the limiting period set out in Article
1629 of the Civil Code.

It follows that at the time the original complaint was filed by Atok Finance in the trial
court, it had a valid and enforceable cause of action against Sanyu Chemical and the
other private respondents. We also agree with the Court of Appeals that the original
obligors under the receivables assigned to Atok Finance remain liable under the terms
of such receivables.
WHEREFORE, for all the foregoing, the Petition for Review is hereby GRANTED DUE
COURSE, and the Decision of the Court of Appeals dated 18 August 1987 and its
Resolution dated 30 September 1987 are hereby REVERSED and SET ASIDE. A new
judgment is hereby entered REINSTATING the Decision of the trial court in Civil Case
No. 84-22198 dated 1 April 1985, except only that, in the exercise of this Court's
discretionary authority equitably to mitigate the penalty clause attached to the Deed of
Assignment, that penalty is hereby reduced to eighteen percent (18%) per
annum (instead of P0.03 for every peso monthly [or 36% per annum]). As so modified,
the Decision of the trial court is hereby AFFIRMED. Costs against private respondents.
SO ORDERED.
Bidin, Davide, Jr., Romero and Melo, JJ., concur.

# Footnotes
1 Exhibit "A", Records, p. 60.
2 Id.
3 Records, p. 63.
4 Record, p. 136.
5 Annex "F" of Petition, Rollo, p. 37.
6 Rollo, p. 12.
7 See Annex "J" of Petition, Rollo, p. 56.
8 Rollo, pp. 13-14.
9 Letter of Associate Justice Reynato S. Puno, Court of Appeals, dated 14
November 1990, A.M. No. 90-11-2697-CA, 29 June 1992; 210 SCRA 589
(1992).
10 Court of Appeals' Decision, pp. 10-11; Rollo, pp. 52-53.

11 103 Phil. 1131 (1958).

12 115 SCRA 777 (1982).
13 115 SCRA at 781-782.
14 Please see Manresa, Comentarios al Codigo Civil Espanol (5th
Revised Edition, 1951), pp. 221-222. Scaevola offers the following terse
comment on this point:
Se reduce a admitir la constitucion de fianza precediendo al nacimiento de
la obligacion afianzada.Fidejussor et praecedere obligationem at sequi
potest.
Ello es de lo mas natural, porque a la manera que puede contraerse una
deuda para lo futuro, deudas sujetas a condicion suspensiva, es logico
que se admita la fianza de ahora bajo el supuesto o condicion misma de
que la deuda u obligacion principal llegue a constituirse o producirse
efectivamente. Despues de todo, aun en las obligaciones condicionales,
que pueden leegar a tener efectividad o non, segun el evento puesto en
condicion, existe ya, desde luego, una obligacion, la de estar as las
resultas del evento mismo, e igual, identicamente, ocurrira con la fianza
ofrecida en garantia de la obligacion futura.
Donde podria haber duda, si la ley no lo previese cumplidamente, seria en
el segundo inciso, en lo de poder prestarse fianza por deudas de cuantia
desconocida de momento.
xxx xxx xxx
(Vol. 28, Codigo Civil, pp. 540 [1953]; emphases supplied)
15 Court of Appeals' Decision, pp. 7-8; Rollo, pp. 49-50.

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. L-49401 July 30, 1982
RIZAL COMMERCIAL BANKING CORPORATION, petitioner,
vs.
HON. JOSE P. ARRO, Judge of the Court of First instance of Davao, and
RESIDORO CHUA, respondents.
Laurente C. Ilagan for petitioner.
Victor A. Clapano for respondents.

DE CASTRO, J.:
Petition for certiorari to annul the orders of respondent judge dated October 6, 1978 and
November 7, 1978 in Civil Case No. 11-154 of the Court of First Instance of Davao,
which granted the motion filed by private respondent to dismiss the complaint of
petitioner for a sum of money, on the ground that the complaint states no cause of
action as against private respondent.
After the petition had been filed, petitioner, on December 14, 1978 mailed a
manifestation and motion requesting the special civil action for certiorari be treated as a
petition for review. 1 Said manifestation and motion was noted in the resolution of
January 10, 1979. 2
It appears that on October 19, 1976 Residoro Chua and Enrique Go, Sr. executed a
comprehensive surety agreements 3 to guaranty among others, any existing
indebtedness of Davao Agricultural Industries Corporation (referred to therein as
Borrower, and as Daicor in this decision), and/or induce the bank at any time or from
time to time thereafter, to make loans or advances or to extend credit in other manner
to, or at the request, or for the account of the Borrower, either with or without security,
and/or to purchase on discount, or to make any loans or advances evidenced or
secured by any notes, bills, receivables, drafts, acceptances, checks or other evidences
of indebtedness (all hereinafter called "instruments") upon which the Borrower is or may
become liable, provided that the liability shall not exceed at any one time the aggregate
principal sum of P100,000.00.
On April 29, 1977 a promissory note 4 in the amount of P100,000.00 was issued in favor
of petitioner payable on June 13, 1977. Said note was signed by Enrique Go, Sr. in his

personal capacity and in behalf of Daicor. The promissory note was not fully paid
despite repeated demands; hence, on June 30, 1978, petitioner filed a complaint for a
sum of money against Daicor, Enrique Go, Sr. and Residoro Chua. A motion to dismiss
dated September 23, 1978 was filed by respondent Residoro Chua on the ground that
the complaint states no cause of action as against him. 5 It was alleged in the motion
that he can not be held liable under the promissory note because it was only Enrique
Go, Sr. who signed the same in behalf of Daicor and in his own personal capacity.
In an opposition dated September 26, 1978 6 petitioner alleged that by virtue of the
execution of the comprehensive surety agreement, private respondent is liable because
said agreement covers not merely the promissory note subject of the complaint, but is
continuing; and it encompasses every other indebtedness the Borrower may, from time
to time incur with petitioner bank.
On October 6, 1978 respondent court rendered a decision granting private respondent's
motion to dismiss the complaint. 7 Petitioner filed a motion for reconsideration dated
October 12, 1978 and on November 7, 1978 respondent court issued an order denying
the said motion. 8
The sole issue resolved by respondent court was the interpretation of the
comprehensive surety agreement, particularly in reference to the indebtedness
evidenced by the promissory note involved in the instant case, said comprehensive
surety agreement having been signed by Enrique Go, Sr. and private respondent,
binding themselves as solidary debtors of said corporation not only to existing
obligations but to future ones. Respondent court said that corollary to that agreement
must be another instrument evidencing the obligation in a form of a promissory note or
any other evidence of indebtedness without which the said agreement serves no
purpose; that since the promissory notes, which is primarily the basis of the cause of
action of petitioner, is not signed by private respondent, the latter can not be liable
thereon.
Contesting the aforecited decision and order of respondent judge, the present petition
was filed before this Court assigning the following as errors committed by respondent
court:
1. That the respondent court erred in dismissing the complaint against
Chua simply on the reasons that 'Chua is not a signatory to the promissory
note" of April 29, 1977, or that Chua could not be held liable on the note
under the provisions of the comprehensive surety agreement of October
29, 1976; and/or
2. That the respondent court erred in interpreting the provisions of the
Comprehensive Surety Agreement towards the conclusion that
respondent Chua is not liable on the promissory note because said note is
not conformable to the Comprehensive Surety Agreement; and/or

3. That the respondent court erred in ordering that there is no cause of

action against respondent Chua in the petitioner's complaint.
The main issue involved in this case is whether private respondent is liable to pay the
obligation evidence by the promissory note dated April 29,1977 which he did not sign, in
the light of the provisions of the comprehensive surety agreement which petitioner and
private respondent had earlier executed on October 19, 1976.
We find for the petitioner. The comprehensive surety agreement was jointly executed by
Residoro Chua and Enrique Go, Sr., President and General Manager, respectively of
Daicor, on October 19, 1976 to cover existing as well as future obligations which Daicor
may incur with the petitioner bank, subject only to the proviso that their liability shall not
exceed at any one time the aggregate principal sum of P100,000.00. Thus, paragraph I
of the agreement provides:
For and in consideration of any existing indebtedness to you of Davao
Agricultural Industries Corporation with principal place of business and
postal address at 530 J. P. Cabaguio Ave., Davao City (hereinafter called
the "Borrower), and/or in order to induce, you in your discretion, at any
time or from time to time hereafter, to make loans or advances or to
extend credit in any other manner to, or at he 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 evidenced 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 undersigned agrees to guarantee, and does hereby
guarantee in joint and several capacity, the punctual payment at maturity
to you of any and all such instruments, loans, advances, credits and/or
other obligations herein before referred to, and also any and all other
indebtedness of every kind which is now or may hereafter become due or
owing to you by the Borrower, together with any and all expenses which
may be incurred by you in collecting an such instruments or other
indebtedness or obligations hereinbefore referred to ..., provided,
however, that the liability of the undersigned shag not exceed at any one
time the aggregate principal sum of P100,000.00 ...
The agreement was executed obviously to induce petitioner to grant any application for
a loan Daicor may desire to obtain from petitioner bank. The guaranty is a continuing
one which shall remain in full force and effect until the bank is notified of its termination.
This is a continuing guaranty and shall remain in fun force and effect until
written notice shall have been received by you that it has been revoked by
the undersigned, ... 9

At the time the loan of P100,000.00 was obtained from petitioner by Daicor, for the
purpose of having an additional capital for buying and selling coco-shell charcoal and
importation of activated carbon, 10 the comprehensive surety agreement was admittedly
in full force and effect. The loan was, therefore, covered by the said agreement, and
private respondent, even if he did not sign the promisory note, is liable by virtue of the
surety agreement. The only condition that would make him liable thereunder is that the
Borrower "is or may become liable as maker, endorser, acceptor or otherwise". There is
no doubt that Daicor is liable on the promissory note evidencing the indebtedness.
The surety agreement which was earlier signed by Enrique Go, Sr. and private
respondent, is an accessory obligation, it being dependent upon a principal one which,
in this case is the loan obtained by Daicor as evidenced by a promissory note. What
obviously induced petitioner bank to grant the loan was the surety agreement whereby
Go and Chua bound themselves solidarily to guaranty the punctual payment of the loan
at maturity. By terms that are unequivocal, it can be clearly seen that the surety
agreement was executed to guarantee future debts which Daicor may incur with
petitioner, as is legally allowable under the Civil Code. Thus
Article 2053. A guaranty may also be given as security for future debts,
the amount of which is not yet known; there can be no claim against the
guarantor until the debt is liquidated. A conditional obligation may also be
secured.
In view of the foregoing, the decision (which should have been a mere "order"),
dismissing the complaint is reversed and set side. The case is remanded to the court of
origin with instructions to set aside the motion to dismiss, and to require defendant
Residoro Chua to answer the complaint after which the case shall proceed as provided
by the Rules of Court. No costs.
SO ORDERED.
Barredo (Chairman), Aquino, Concepcion, Jr., Guerrero, Abad Santos and Escolin, JJ.,
concur.

Footnotes
1 p. 45, Rollo.
2 p. 54, Rollo.
3 p. 67, Rollo.
4 p. 68, Rollo.

5 Annex B, Petition, p. 17, Rollo.

6 Annex C, Petition, p. 19, Rollo.
7 Annex E, Petition, p. 23, Rollo.
8 Annex H, Petition, p. 39, Rollo.
9 Par. 6, Comprehensive Surety Agreement, p. 67, Rollo.
10 p. 68, Rollo.

LIABILITY:

Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION

G.R. No. 72275 November 13, 1991

PACIFIC BANKING CORPORATION, petitioner,
vs.
HON INTERMEDIATE APPELLATE COURT AND ROBERTO REGALA,
JR., respondents.
Ocampo, Dizon & Domingo for petitioner.
Angara, Concepcion, Regala & Cruz for private respondent.

MEDIALDEA, J.:p
This is a petition for review on certiorari of the decision (pp 21-31, Rollo) of the
Intermediate Appellate Court (now Court of Appeals) in AC-G.R. C.V. No.
02753, 1 which modified the decision of the trial court against herein private respondent
Roberto Regala, Jr., one of the defendants in the case for sum of money filed by Pacific
Banking Corporation.
The facts of the case as adopted by the respondent appellant court from herein
petitioner's brief before said court are as follows:
On October 24, 1975, defendant Celia Syjuco Regala (hereinafter referred
to as Celia Regala for brevity), applied for and obtained from the plaintiff
the issuance and use of Pacificard credit card (Exhs. "A", "A-l",), under the
Terms and Conditions Governing the Issuance and Use of Pacificard
(Exh. "B" and hereinafter referred to as Terms and Conditions), a copy of
which was issued to and received by the said defendant on the date of the
application and expressly agreed that the use of the Pacificard is
governed by said Terms and Conditions. On the same date, the

defendant-appelant Robert Regala, Jr., spouse of defendant Celia Regala,

executed a "Guarantor's Undertaking" (Exh. "A-1-a") in favor of the
appellee Bank, whereby the latter agreed "jointly and severally of Celia
Aurora Syjuco Regala, to pay the Pacific Banking Corporation upon
demand, any and all indebtedness, obligations, charges or liabilities due
and incurred by said Celia Aurora Syjuco Regala with the use of the
Pacificard, or renewals thereof, issued in her favor by the Pacific Banking
Corporation". It was also agreed that "any changes of or novation in the
terms and conditions in connection with the issuance or use of the
Pacificard, or any extension of time to pay such obligations, charges or
liabilities shall not in any manner release me/us from responsibility
hereunder, it being understood that I fully agree to such charges, novation
or extension, and that this understanding is a continuing one and shall
subsist and bind me until the liabilities of the said Celia Syjuco Regala
have been fully satisfied or paid.
Plaintiff-appellee Pacific Banking Corporation has contracted with
accredited business establishments to honor purchases of goods and/or
services by Pacificard holders and the cost thereof to be advanced by the
plaintiff-appellee for the account of the defendant cardholder, and the
latter undertook to pay any statements of account rendered by the plaintiffappellee for the advances thus made within thirty (30) days from the date
of the statement, provided that any overdue account shall earn interest at
the rate of 14% per annum from date of default.
The defendant Celia Regala, as such Pacificard holder, had purchased
goods and/or services on credit (Exh. "C", "C-l" to "C-112") under her
Pacificard, for which the plaintiff advanced the cost amounting to
P92,803.98 at the time of the filing of the complaint.
In view of defendant Celia Regala's failure to settle her account for the
purchases made thru the use of the Pacificard, a written demand (Exh.
"D") was sent to the latter and also to the defendant Roberto Regala, Jr.
(Exh. " ") under his "Guarantor's Undertaking."
A complaint was subsequently filed in Court for defendant's (sic) repeated
failure to settle their obligation. Defendant Celia Regala was declared in
default for her failure to file her answer within the reglementary period.
Defendant-appellant Roberto Regala, Jr., on the other hand, filed his
Answer with Counterclaim admitting his execution of the "Guarantor's
Understanding", "but with the understanding that his liability would be
limited to P2,000.00 per month."
In view of the solidary nature of the liability of the parties, the presentation
of evidence ex-parte as against the defendant Celia Regala was jointly
held with the trial of the case as against defendant Roberto Regala.

After the presentation of plaintiff's testimonial and documentary evidence,

fire struck the City Hall of Manila, including the court where the instant
case was pending, as well as all its records.
Upon plaintiff-appellee's petition for reconstitution, the records of the
instant case were duly reconstituted. Thereafter, the case was set for pretrial conference with respect to the defendant-appellant Roberto Regala
on plaintiff-appellee's motion, after furnishing the latter a copy of the same.
No opposition thereto having been interposed by defendant-appellant, the
trial court set the case for pre-trial conference. Neither did said defendantappellant nor his counsel appear on the date scheduled by the trial court
for said conference despite due notice. Consequently, plaintiff-appellee
moved that the defendant-appellant Roberto Regala he declared as in
default and that it be allowed to present its evidence ex-parte, which
motion was granted. On July 21, 1983, plaintiff-appellee presented its
evidence ex-parte. (pp. 23-26, Rollo)
After trial, the court a quo rendered judgment on December 5, 1983, the dispositive
portion of which reads:
WHEREFORE, the Court renders judgment for the plaintiff and against the
defendants condemning the latter, jointly and severally, to pay said plaintiff
the amount of P92,803.98, with interest thereon at 14% per annum,
compounded annually, from the time of demand on November 17, 1978
until said principal amount is fully paid; plus 15% of the principal obligation
as and for attorney's fees and expense of suit; and the costs.
The counterclaim of defendant Roberto Regala, Jr. is dismissed for lack of
merit.
SO ORDERED. (pp. 22-23, Rollo)
The defendants appealed from the decision of the court a quo to the Intermediate
Appellate Court.
On August 12, 1985, respondent appellate court rendered judgment modifying the
decision of the trial court. Private respondent Roberto Regala, Jr. was made liable only
to the extent of the monthly credit limit granted to Celia Regala, i.e., at P2,000.00 a
month and only for the advances made during the one year period of the card's
effectivity counted from October 29, 1975 up to October 29, 1976. The dispositive
portion of the decision states:
WHEREFORE, the judgment of the trial court dated December 5, 1983 is
modified only as to appellant Roberto Regala, Jr., so as to make him liable
only for the purchases made by defendant Celia Aurora Syjuco Regala
with the use of the Pacificard from October 29, 1975 up to October 29,

1976 up to the amount of P2,000.00 per month only, with interest from the
filing of the complaint up to the payment at the rate of 14% per annum
without pronouncement as to costs. (p. 32, Rollo)
A motion for reconsideration was filed by Pacific Banking Corporation which the
respondent appellate court denied for lack of merit on September 19, 1985 (p.
33, Rollo).
On November 8, 1985, Pacificard filed this petition. The petitioner contends that while
the appellate court correctly recognized Celia Regala's obligation to Pacific Banking
Corp. for the purchases of goods and services with the use of a Pacificard credit card in
the total amount of P92,803.98 with 14% interest per annum, it erred in limiting private
respondent Roberto Regala, Jr.'s liability only for purchases made by Celia Regala with
the use of the card from October 29, 1975 up to October 29, 1976 up to the amount of
P2,000.00 per month with 14% interest from the filing of the complaint.
There is merit in this petition.
The pertinent portion of the "Guarantor's Undertaking" which private respondent
Roberto Regala, Jr. signed in favor of Pacific Banking Corporation provides:
I/We, the undersigned, hereby agree, jointly and severally with Celia
Syjuco Regala to pay the Pacific Banking Corporation upon demand any
and all indebtedness, obligations, charges or liabilities due and incurred by
said Celia Syjuco Regala with the use of the Pacificard or renewals
thereof issued in his favor by the Pacific Banking Corporation. Any
changes of or Novation in the terms and conditions in connection with the
issuance or use of said Pacificard, or any extension of time to pay such
obligations, charges or liabilities shall not in any manner release me/us
from the responsibility hereunder, it being understood that the undertaking
is a continuing one and shall subsist and bind me/us until all the liabilities
of the said Celia Syjuco Regala have been fully satisfied or paid. (p.
12,Rollo)
The undertaking signed by Roberto Regala, Jr. although denominated "Guarantor's
Undertaking," was in substance a contract of surety. As distinguished from a contract of
guaranty where the guarantor binds himself to the creditor to fulfill the obligation of the
principal debtor only in case the latter should fail to do so, in a contract of suretyship,
the surety binds himself solidarily with the principal debtor (Art. 2047, Civil Code of the
Philippines).
We need not look elsewhere to determine the nature and extent of private respondent
Roberto Regala, Jr.'s undertaking. As a surety he bound himself jointly and severally
with the debtor Celia Regala "to pay the Pacific Banking Corporation upon demand, any
and all indebtedness, obligations, charges or liabilities due and incurred by said Celia
Syjuco Regala with the use of Pacificard or renewals thereof issued in (her) favor by

Pacific Banking Corporation." This undertaking was also provided as a condition in the
issuance of the Pacificard to Celia Regala, thus:
5. A Pacificard is issued to a Pacificard-holder against the joint and
several signature of a third party and as such, the Pacificard holder and
the guarantor assume joint and several liabilities for any and all amount
arising out of the use of the Pacificard. (p. 14, Rollo)
The respondent appellate court held that "all the other rights of the guarantor are not
thereby lost by the guarantor becoming liable solidarily and therefore a surety." It further
ruled that although the surety's liability is like that of a joint and several debtor, it does
not make him the debtor but still the guarantor (or the surety), relying on the case of
Government of the Philippines v. Tizon. G.R. No. L-22108, August 30, 1967, 20 SCRA
1182. Consequently, Article 2054 of the Civil Code providing for a limited liability on the
part of the guarantor or debtor still applies.
It is true that under Article 2054 of the Civil Code, "(A) guarantor may bind himself for
less, but not for more than the principal debtor, both as regards the amount and the
onerous nature of the conditions. 2 It is likewise not disputed by the parties that the
credit limit granted to Celia Regala was P2,000.00 per month and that Celia Regala
succeeded in using the card beyond the original period of its effectivity, October 29,
1979. We do not agree however, that Roberto Jr.'s liability should be limited to that
extent. Private respondent Roberto Regala, Jr., as surety of his wife, expressly bound
himself up to the extent of the debtor's (Celia) indebtedness likewise expressly waiving
any "discharge in case of any change or novation of the terms and conditions in
connection with the issuance of the Pacificard credit card." Roberto, in fact, made his
commitment as a surety a continuing one, binding upon himself until all the liabilities of
Celia Regala have been fully paid. All these were clear under the "Guarantor's
Undertaking" Roberto signed, thus:
. . . Any changes of or novation in the terms and conditions in connection
with the issuance or use of said Pacificard, or any extension of time to pay
such obligations, charges or liabilities shall not in any manner release
me/us from the responsibility hereunder, it being understood that the
undertaking is a continuing one and shall subsist and bind me/us until all
the liabilities of the said Celia Syjuco Regala have been fully satisfied or
paid. (p. 12, supra; emphasis supplied)
Private respondent Roberto Regala, Jr. had been made aware by the terms of the
undertaking of future changes in the terms and conditions governing the issuance of the
credit card to his wife and that, notwithstanding, he voluntarily agreed to be bound as a
surety. As in guaranty, a surety may secure additional and future debts of the principal
debtor the amount of which is not yet known (see Article 2053, supra).
The application by respondent court of the ruling in Government v. Tizon, supra is
misplaced. It was held in that case that:

. . . although the defendants bound themselves in solidum, the liability of

the Surety under its bond would arise only if its co-defendants, 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.
A guarantor or surety does not incur liability unless the principal debtor is held liable. It
is in this sense that a surety, although solidarily liable with the principal debtor, is
different from the debtor. It does not mean, however, that the surety cannot be held
liable to the same extent as the principal debtor. The nature and extent of the liabilities
of a guarantor or a surety is determined by the clauses in the contract of suretyship(see
PCIB v. CA, L-34959, March 18, 1988, 159 SCRA 24).
ACCORDINGLY, the petition is GRANTED. The questioned decision of respondent
appellate court is SET ASIDE and the decision of the trial court is REINSTATED.
SO ORDERED.
Narvasa, CJ., Cruz, Feliciano and Grio-Aquino, JJ., concur.

# Footnotes
1 Entitled "Pacific Banking Corporation, Plaintiff-Appellee versus Celia
Aurora Syjuco Regala, et al., Defendants, versus Roberto Regala. Jr.,
Defendant-Appellant."
2 In Hospicio de San Jose v. Fidelity and Surety, Co., G.R. No. 30427,
March 11, 1929, Article 2054 of the Civil Code was applied to a contract of
surety.

The Lawphil Project - Arellano Law Foundation

Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 74231 April 10, 1987
CORAZON J. VIZCONDE, petitioner,
vs.
INTERMEDIATE APPELLATE COURT & PEOPLE OF THE
PHILIPPINES, respondents.

NARVASA, J.:
Corazon J. Vizconde has appealed as contrary to law and the evidence, the Decision of
the Court of Appeals 1affirming her conviction of the crime of estafa by the Court of First
Instance of Rizal Quezon City Branch, in Criminal Case No. Q- 5476.
Vizconde and Pilar A. Pagulayan were charged in the Trial Court with misappropriation
and conversion of an 8-carat diamond ring belonging to Dr. Marylon J. Perlas in an
information which avers that they:
* * * wilfully, unlawfully and feloniously, with intent of gain and with
unfaithfulness and/or abuse of confidence, defraud(ed) DRA. MARYLOU
J. PERLAS in the following manner, to wit: the said accused received from
the offended party one (1) 8-karat solo diamond ring, white, double cut,
brilliant cut with multiple bentitos, valued at P85,000.00, to be sold by
them on commission basis, with the obligation to tum over the proceeds of
the sale to the offended party, or to return the said ring if unsold, but the Id
accused, once in possession thereof, contrary to their obligation,
misapplied, misappropriated and converted the same to their own
personal use and benefit, and in spite of repeated demands made upon
them, both accused failed, omitted and refused, and still fait omit and
refuse up to the present, to comply with their aforesaid obligation, to the
damage and prejudice of the offended party, in the aforementioned
amount of P85,000.00, Philippine currency. 2
After trial both accused were convicted and each sentenced to serve an indeterminate
prison term of from eight (8) years, four (4) months and one (1) day to ten (10) years
and two (2) months of prision mayor, with the accessory penalties provided by law, and

jointly and severally to indemnify the offended party in the sum of P55,000.00 for the
unaccounted balance of the value of the ring with legal interest from April 22, 1975, the
further sum of P30,000.00 as and for moral damages and the sum of P10,000.00 for
attorney's fees. 3
Both accused appealed to the Court of Appeals, but as Pilar A. Pagulayan had evaded
promulgation of sentence in the Trial Court and had appealed only through counsel the
Appellate Court vacated her appeal as ineffectual. 4On Vizconde's part, the Court of
Appeals affirmed the judgment of the Trial Court in all respects except the penalty of
imprisonment, which it increased to a term of from ten (10) years and one (1) day
of prision mayor to twelve (12) years ten (10) months and twenty-one (21) days
of reclusion temporal. A motion for reconsideration was denied. Vizconde thereafter
filed the present petition for review on certiorari. 5
Required to comment on the petition, the Solicitor General, despite having argued for
affirmance of Vizconde's conviction in the Court of Appeals, now recommends that she
be acquitted, but nonetheless held civilly liable to the complainant in the sum of
P55,000.00 (the unaccounted balance of the value of the ring as found by the Trial
Court) " * * * or whatever portion thereof which remains unpaid. * * * 6
From the record and the findings of the courts below, it appears that sometime in the
first week of April, 1975, the complainant, Dr. Marylon J. Perlas, called up the appellant
Vizconde, a long-time friend and former high school classmate, asking her to sen
Perlas' 8-carat diamond ring. Shortly afterwards, Perlas delivered the ring to Vizconde
to be sold on commission for P 85,000.00. Vizconde signed a receipt for the ring. 7
About a week and a half later, Vizconde returned the ring to Perlas, who had asked for it
because she needed to show it to a cousin However, Vizconde afterwards called on
Perlas at the latter's home, with another lady, Pilar A. Pagulayan, who claimed to have a
"sure buyer" for the ring. 8 Perlas was initially hesitant to do so, but she eventually
parted with the ring so that it could be examined privately by Pagulayan's buyer when
the latter' gave her a postdated check for the price (P 85,000.00) and, together with
Vizconde, signed a receipt prepared by Perlas. This receipt-people's Exhibit "A"- reads
as follows:
RECEIPT
Received from Dra. Marylon Javier-Perlas one (1) solo 8 karat diamond
ring, white, double cut, brilliant cut with multiple brilliantitos, which I agree
to sell for P85,000.00 (eighty-five thousand pesos) on commission basis
and pay her in the following manner:
P85,000.00 postdated check
PNB check 730297

dated April 26, 1975

for P85,000.00
It is understood that in the event the above postdated check is dishonored
for any reason whatsoever on its due date, the total payment of the above
item shall become immediately due and demandable without awaiting
further demand.
I guarantee that the above check will be sufficiently funded on the
respective due date.
Quezon City, Philippines
22 April 1975
(SGD.) PILAR A.
PAGULAYAN
PILAR
A.
PAGU
LAYA
N
16 Rd.
8
Projec
t6
I guarantee jointly and severally
(SGD.) CORAZON
J. VIZCONDE
CORA
ZON
J.
VIZC
ONDE
9

After Pagulayan's postdated check matured, Perlas deposited it to her account at

Manila Bank. It was dishonored for the reason, "No arrangement," stated in the debit
advice. Perlas then called up Vizconde to inform her about the dishonor of the check.
The latter suggested that Perlas re-deposit the check while she (Vizconde) followed up

the sale of the ring. Perlas re-deposited the check, but again it was dishonored because
drawn against insufficient funds. 10 So Perlas took the matter to counsel who sent
separate letters of demand to Vizconde and Pagulayan for return of the ring or payment
of P85,000.00. 11
After nine days, Vizconde and Pagulayan called on Perlas. Pagulayan paid Perlas
P5,000.00 against the value of the ring. She also gave into Perlas' keeping three
certificates of title to real estate to guarantee delivery of the balance of such value. A
receipt for the money and the titles was typed and signed by Perlas, which she also
made the two sign. 12 The receipt Exhibit "D" of the prosecution reads:
Received from Mrs. Pilar Pagulayan, the sum of FIVE THOUSAND
PESOS ONLY (P5,000.00) representing part of the proceeds of the sale of
one (1) solo 8 carat diamond ring, white, double cut, brilliant cut w/multiple
brilliantitos, given to Mrs. Pilar Pagulayan and Mrs. Corazon de Jesus
Vizconde on 22 April 1975, to be sold on commission basis for eighty- five
thousand pesos (P85,000.00).
Received also owner's duplicate copies of TCT Nos. 434907, 434909,
434910, which will be returned upon delivery of the remaining balance of
the proceeds of the sale of said diamond ring for eighty five thousand
pesos (P85,000.00).
This receipt is being issued without prejudice to legal action.
Quezon City, Philippines
7 May 1975
(Sgd.)
Maryl
on J.
Perlas
Dra.
Maryl
on J.
Perlas
Conforme:
(Sgd.) Pilar A. Pagulayan
Pilar A. Pagulayan
(Sgd.) Corazon J. Vizconde

Corazon Vizconde 13
Vizconde and Pagulayan having allegedly reneged on a promise to complete payment
for the ring on the very next day, Perlas filed with the Quezon City Fiscal's office a
complaint against them for estafa This notwithstanding, Pagulayan stin paid Perlas
various sums totalling P25,000.00 which, together with the P5,000.00 earlier paid, left a
balance of P55,000.00 still owing. 14
Both the Trial Court and the Court of Appeals found istilln these facts sufficient showing
that Vizconde and Pagulayan had assumed a joint agency in favor of Perlas for the sale
of the latter's ring, which rendered them criminally liable, upon failure to return the ring
or deliver its agreed value, under Art. 315, par. l(b), of the Revised Penal Code, for
defraudation committed " * * * with unfaithfulness or abuse of confidence * * * by
misappropriating or converting, to the prejudice of another, * * * personal property
received in trust or on commission, or under any other obligation involving the duty to
make delivery of or to return the same, * * * " The Solicitor General falling back, as
already stated, from an earlier stance, disagrees and submits in his Comment that the
appellant cannot be convicted of estafa under a correct interpretation of the two
principal exhibits of the prosecution, the receipts Exhibits A" and "D". 15 He is correct.
Nothing in the language of the receipt, Exhibit "A", or in the proven circumstances
attending its execution can logically be considered as evidencing the creation of an
agency between Perlas, as principal, and Vizconde, as agent, for the sale of the
former's ring. True, reference to what may be taken for an agency agreement appears
in the clause " * * * which I agree to sell * * * on commission basis" in the main text of
that document. But it is clear that if any agency was established, it was one between
Perlas and Pagulayan only, this being the only logical conclusion from the use of the
singular "I" in said clause, in conjunction with the fact that the part of the receipt in which
the clause appears bears only the signature of Pagulayan. To warrant anything more
than a mere conjecture that the receipt also constituted Vizconde the agent of Perlas for
the same purpose of selling the ring, the cited clause should at least have used the
plural "we," or the text of the receipt containing that clause should also have carried
Vizconde's signature.
As the Solicitor General correctly puts it, the joint and several undertaking assumed by
Vizconde in a separate writing below the main body of the receipt, Exhibit "A", merely
guaranteed the civil obligation of Pagulayan to pay Perlas the value of the ring in the
event of her (Pagulayan's) failure to return said article. It cannot, in any sense, be
construed as assuming any criminal responsibility consequent upon the failure of
Pagulayan to return the ring or deliver its value. It is fundamental that criminal
responsibility is personal and that in the absence of conspiracy, one cannot be held
criminally liable for the act or default of another.
A person to be guilty of crime, must commit the crime himself or he must,
in some manner, participate in its commission or in the fruits thereof. * *
* 16

Thus, the theory that by standing as surety for Pagulayan, Vizconde assumed an
obligation more than merely civil in character, and staked her very liberty on
Pagulayan's fidelity to her trust is utterly unacceptable; it strikes at the very essence of
guaranty (or suretyship) as creating purely civil obligations on the part of the guarantor
or surety. To render Vizconde criminally liable for the misappropriation of the ring, more
than her mere guarantee written on Exhibit "A" is necessary. At the least, she must be
shown to have acted in concert and conspiracy with Pagulayan, either in obtaining
possession of the ring, or in undertaking to return the same or delivery its value, or in
the misappropriation or conversion of the same.
Now, the information charges conspiracy between Vizconde and Pagulayan, but no
adequate proof thereof has been presented. It is of course true that direct proof of
conspiracy is not essential to convict an alleged conspirator, and that conspiracy may
be established by evidence of acts done in pursuance of a common unlawful
purpose. 17 Here, however, the circumstances from which a reasonable inference of
conspiracy might arise, such as the fact that Vizconde and the complainant were friends
of long standing and former classmates, that it was Vizconde who introduced Pagulayan
to Perlas, that Vizconde was present on the two occasions when the ring was entrusted
to Pagulayan and when part payment of P5,000.00 was made, and that she signed the
receipts, Exhibits "A" and "D," on those occasions are, at best, inconclusive. They are
not inconsistent with what Vizconde has asserted to be an innocent desire to help her
friend dispose of the ring; nor do they exclude every reasonable hypothesis other than
complicity in a premeditated swindle. 18
The foregoing conclusion in nowise suffers from the fact that the second receipt, Exhibit
"D", appears to confirm that the ring "* * * was given to Mrs. Pilar Pagulayan and Mrs.
Corazon de Jesus Vizconde on 22 April 1975, to be sold on commission basis for eighty
five thousand pesos (P85,000.00)." 19 The implications and probative value of this
writing must be considered in the context of what had already transpired at the time of
its making. The ring had already been given to Pagulayan, and the check that she had
issued in payment therefor (or to secure payment, as the complainant would have it)
had already been dishonored twice. That the complainant then already entertained
serious apprehensions about the fate of the ring is evident in her having had her
lawyers send Vizconde and Pagulayan demands for restitution or payment, with threat
of legal action. Given that situation, Exhibit "D", insofar as it purports to confirm that
Vizconde had also received the ring in trust, cannot be considered as anything other
than an attempt to "cure" the lack of mention of such an entrustment in the first receipt,
Exhibit "A", and thereby bind Vizconde to a commitment far stronger and more
compelling than a mere civil guarantee for the value of the ring. There is otherwise no
explanation for requiring Vizconde and Pagulayan to sign the receipt, which needed
only the signature of Perlas as an acknowledgment of the P5,000.00 given in part
payment, and the delivery of the land titles to secure the balance.
The conflict in the recitals of the two receipts insofar as concerns Vizconde's part in the
transaction involving Perlas' ring is obvious and cannot be ignored. Neither, as the
Court sees it, should these writings be read together in an attempt to reconcile what

they contain, since, as already pointed out, the later receipt was made under
circumstances which leave no little doubt of its truth and ;Integrity. What is clear from
Exhibit "A" is that the ring was entrusted to Pilar A. Pagulayan to be sold on
commission; there is no mention therein that it was simultaneously delivered to and
received by Vizconde for the same purpose or, therefore, that Vizconde was
constituted, or agreed to act as, agent jointly with Pagulayan for the sale of the ring.
What Vizconde solely undertook was to guarantee the obligation of Pagulayan to return
the ring or deliver its value; and that guarantee created only a civil obligation, without
more, upon default of the principal. Exhibit "D", on the other hand, would make out
Vizconde an agent for the sale of the ring. The undisputed fact that Exhibit "A" was
executed simultaneously with the delivery of the ring to Pagulayan compellingly argues
for accepting it as a more trustworthy memorial of the real agreement and transaction of
the parties than Exhibit "D" which was executed at a later date and after the
supervention of events rendering it expedient or desirable to vary the terms of that
agreement or transaction.
In view of the conclusions already reached, consideration of the Solicitor General's
argument also quite persuasive that Exhibit "D" in fact evidences a consummated
sale of the ring for an agreed price not fully paid for, which yields the same result, is no
longer necessary. It is, however, at least another factor reinforcing the hypothesis of
Vizconde's innocence.
Upon the evidence, appellant Corazon J. Vizconde was a mere guarantor, a solidary
one to be sure, of the obligation assumed by Pilar A. Pagulayan to complainant Marylon
J. Perlas for the return of the latter's ring or the delivery of its value. Whatever liability
was incured by Pagulayan for defaulting on such obligation and this is not inquired
into that of Vizconde consequent upon such default was merely civil, not criminal. It
was, therefore, error to convict her of estafa.
As already stated, the Solicitor General however maintains, on the authority of People
vs. Padilla, 20 that the appellant should be held hable to pay the complainant the amount
of P55,000.00, or whatever part of such amount remains unpaid, for the value of the
ring. Again, this is a correct proposition, there being no question as in fact admitted
by her that the appellant executed the guarantee already referred to.
WHEREFORE, except insofar as it affirms the judgment of the Trial Court ordering
appellant Corazon J. Vizconde, solidarity with Pilar A. Pagulayan, to indemnify the
complainant Marylon J. Perlas in the amount of P55,000.00 for the unaccounted
balance of the value of the latter's ring, the appellant pealed Decision of the Court of
Appeals is reversed and set aside, and said appellant is acquitted, with costs de oficio.
As the record indicates that levies on preliminary attachment and on execution pending
appeal have been made on behalf of the complainant, 21 which may have resulted in
further reducing the abovestated balance, the appellant may, upon remand of this case
to the Trial Court, prove any reductions, by the operation of said levies or otherwise, to
which the amount of the indemnity adjudged may be justly subject.

SO ORDERED.
Melencio-Herrera, Cruz, Feliciano, Gancayco and Sarmiento, JJ., concur.
Yap (Chairman), J., is on leave.

Footnotes
1 In CA-G.R. No. 23774-CR; Mendoza, ponente, Alampay and Borromeo,
JJ.
2 Record, pp. 1-2.
3 Record, pp. 620-629.
4 Rollo, (CA-G.R. No. 23774-CR), pp. 62-63.
5 Rollo, (CA-G.R. No. 23774-CR), pp. 61-73.
6 Rollo, pp. 96-103.
7 Rollo, (CA-G.R. No. 23774-CR), p. 63.
8 Rollo, (CA-G.R. No. 23774-CR), p. 621.
9 Rollo, pp. 64-65; Record, pp. 141-142.
10 Rollo, Id.; Exhibits "B", "B-1" and "B-2"; Record, pp. 143- 145.
11 Exhibit "C-1 ";Record, pp. 148-149.
12 Rollo, p. 65.
13 Record, p. 146.
14 Exhibits "E", "F". "G" and "H"; Record, pp. 147,150-152.
15 Commnent; Rollo, p. 96.
16 U.S. vs. Acebedo, 18 Phil. 428.
17 People vs. Cadag, 2 SCRA 388; People vs. Cruz, 4 SCRA 11-14;
People vs. Belen, 9 SCRA 39; People vs. Capito, 22 SCRA 1130; People
vs. Alcantara, 33 SCRA 812.

18 People vs. Macatanaw, 62 SCRA 516, 527; People vs. Aniel, 96 SCRA
199, 208-209; People vs. Sosing, 111 SCRA 368, 377; see also Duran vs.
CA, 71 SCRA 68,84 and Borromeo vs. CA, 131 SCRA 318, 326.
19 Emphasis supplied.
20 129 SCRA 558; see also People vs. Jalandoni, 131 SCRA 454; People
vs. Maniego, G.R. No. L-30910, February 27, 1987.
21 Record, pp. 53, 181, 809, 814, 822.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-13873

January 31, 1963

GENERAL INSURANCE and SURETY CORPORATION, petitioner,

vs.
REPUBLIC OF THE PHILIPPINES and CENTRAL LUZON EDUCATIONAL
FOUNDATION, INC., respondents.
Guido Advincula for petitioner.
Office of the Solicitor General for respondents.
REGALA, J.:
On May 15, 1954, the Central Luzon Educational Foundation, Inc. and the General
Insurance and Surety Corporation posted in favor of the Department of Education a
bond, the terms of which read as follows:
KNOW ALL MEN BY THESE PRESENTS:
WHEREAS, the Department of Education has required the Central Luzon
Educational Foundation, Inc., operating the Sison & Aruego Colleges, of
Urdaneta, Pangasinan, Philippines, an institution of learning to file a bond to
guarantee the adequate and efficient administration of said school or college and
the observance of all regulations prescribed by the Secretary of Education and
compliance with all obligations, including the payment of the salaries of all its
teachers and employees, past, present, and future, and the payment of all other
obligations incurred by, or in behalf of said school.
NOW, THEREFORE, in compliance with said requirement, we, CENTRAL
LUZON EDUCATIONAL FOUNDATION, INC., operating the Sison and Aruego
Colleges, represented Dr. Jose Aruego, its Vice-Chairman, as principal, and the
GENERAL INSURANCE AND SURETY CORPORATION, a corporation duly
organized and existing under and by virtue the laws of the Philippines, as surety,
are held and firmly bound, jointly and firmly, unto the Department of Education of
the Republic of the Philippines in the sum of TEN THOUSAND PESOS
(P10,000.00) Philippine currency, for the payment thereof we bind ourselves, our
heirs, executors, administrators, successors, and assigns, jointly and severally
firmly by these presents;
WHEN the Secretary of Education is satisfied that said institution of learning had
defaulted in any of the foregoing particulars, this bond may immediately

thereafter be declared forfeited and for the payment of the amount abovespecified, we bind ourselves, our heirs, executors, successors, administrators,
and assigns, jointly and severally.
We further bind ourselves, by these presents, to give the Department of
Education at least sixty (60) days notice of the intended withdrawal or
cancellation of this bond, in order that the Department can take such action as
may be necessary to protect the interests of such teachers, employees or
creditors of the school and of the Government.
LIABILITY of Surety under this bond will expire on June 15, 1955, unless sooner
revoked.
IN WITNESS WHEREOF, we signed this present guarranty at the City of Manila,
Philippines, this 15th day of May, 1954.
On the same day, May 15, 1954, the Central Luzon Educational Foundation, Inc.,
Teofilo Sison and Jose M. Aruego executed an indemnity agreement binding
themselves jointly and severally to indemnify the surety of "any damages, prejudices,
loss, costs, payments, advances and expenses of whatever kind and nature, including
attorney's fees and legal costs, which the COMPANY may, at any time sustain or incur,
as well as to reimburse to said COMPANY all sums and amounts of money which the
COMPANY or its representatives shall or may pay or cause to be paid or become liable
to pay, on account of or arising from the execution of the above mentioned Bond."
On June 25, 1954, the surety advised the Secretary of Education that it was
withdrawing and cancelling its bond. Copies of the letter were sent to the Bureau of
Private Schools and to the Central Luzon Educational Foundation, Inc.
It appears that on the date of execution of the bond, the Foundation was indebted to two
of its teachers for salaries, to wit: to Remedios Laoag, in the sum of P685.64, and to
H.B. Arandia, in the sum of P820.00, or a total of P1,505.64.
Demand for the above amount having been refused, the Solicitor General, in behalf of
the Republic of the Philippines, filed a complaint for the forfeiture of the bond, in the
Court of First Instance of Manila on July 11, 1956.
In due time, the surety filed its answer in which it set up special defenses and a crossclaim against the Foundation and prayed that the complaint be dismissed and that it be
indemnified by the Foundation of any amount it might be required to pay the
Government, plus attorney's fees.
For its part, the Foundation denied the cross-claim and contended that, because
Remedios Laoag owed Fr. Cinense the amount of P820.65, there was no basis for the
action; that the bond is illegal and that the Government has no capacity to sue.

The surety also filed a third-party complaint against Teofilo Sison and Jose M. Aruego
on the basis of the indemnity agreement. While admitting the allegations of the thirdparty complaint, Sison and Aruego claimed that because of the cancellation and
withdrawal of the bond, the indemnity agreement ceased to be of force and effect.
Hearing was held and on December 18, 1956, the Court of First Instance rendered
judgment holding the principal and the surety jointly and severally liable to the
Government in the sum of P10,000.00 with legal interest from the date of filing of the
complaint, until the sum is fully paid and ordering the principal to reimburse the surety
whatever amount it may be compelled to pay to the Government by reason of the
judgment, with costs against both principal and the surety.
The surety filed a motion for reconsideration and a request to decide the third-party
complaint which the trial court denied.
On appeal, the Court of Appeals rendered a decision, the dispositive portion of which
reads:
WHEREFORE, the appealed judgment is hereby modified in the following
manner:
(a) Ordering Central Luzon Educational Foundation, Inc., and General Insurance
and Surety Corporation to pay jointly and severally the Republic of the
Philippines the sum of P10,000.00, plus costs and legal interests from July 11,
1956 until fully paid; and
(b) Ordering Central Luzon Educational Foundation, Inc., Teofilo Sison and Jose
M. Aruego to reimburse, jointly an severally, the General Insurance and Surety
Corporation of all amounts it may be forced to pay the Republic of the Philippines
by virtue of this judgment, plus costs and P2,000.00 for counsel's fees.
From this decision, the surety appealed to this Court by way of certiorari, raising
questions of law.1
In its first four assignments of error, the surety contends that it was no longer liable on
its bond after August 24, 1954 (when the 60-day notice of cancellation and withdrawal
ended), or, at the latest, after June 15, 1955. For support, the surety invokes the
following provisions of the bond:
WE, further bind ourselves, by these presents to give the Department of
Education at least sixty (60) days notice of the intended withdrawal or
cancellation of this bond, in order that the Department can take such action as
may be necessary to protect the interest of such teachers, employees, Creditors
to the government.

LIABILITY of the Surety under this bond will expire on June 15, 1955, unless
sooner revoked.
On the other hand, the Government contends that since the salaries of the teachers
were due and payable when the bond was still in force, the surety has become liable on
its bond from the moment of its execution on May 15,1954.
We agree with this contention of the Government.
It must be remembered that, by the terms of the bond the surety guaranteed to the
Government "compliance (by the Foundation) with all obligations, including the payment
of the salaries of its teachers and employees, past, present and future, and the payment
of all other obligations incurred by, or in behalf of said school." Now, it is not disputed
that even before the execution of the bond the Foundation was already indebted to two
of its teachers for past salaries. From the moment, therefore, the bond was executed,
the right of the Government to proceed against the bond accrued because since then,
there has been violation of the terms of the bond regarding payment of past salaries of
teachers at the Sison and Aruego Colleges. The fact that the action was filed only on
July 11, 1956 does not militate against this position because actions based on written
contracts prescribe in ten years. (Art. 1144, par. 1, Civil Code). The surety also cites our
decision in the case of Jollye v. Barcelon and Luzon Surety Co., Inc., 68 Phil.
164 and National Rice & Corn Corp. (NARIC) v. Rivera, et al., G.R. No. L-4023,
February 29, 1952. But there is nothing in these cases that supports the proposition that
the liability of a surety for obligations arising during the life of a bond ceases upon the
expiration of the bond.
In the Jollye case, the bond provided:
Whereas, the above bounded principal, on 13th day of February, 1933 entered
into an agreement with H. P. L. Jollye of Manila, P. I., to fully and faithfully refund
to said Mr. H. P. L. Jollye the above stated sum of P7,500 representing the
purchase price of the 74 shares of the capital stock of the North Electric
Company (certificate No. 38) paid by said Mr. H. P. L. Jollye to the undersigned
principal, Mr. Emeterio Barcelon, in the event ofthe title thereto of said Mr.
Barcelon is invalidated by any judgement which may be rendered by the court of
Cavite against Vicente Diosomito or in the event that any of the warranties
contained in that certain deed of sale executed by the undersigned principal on
this 13th day of February, 1933,be invalidated, a copy of which is hereto attached
and made an integralpart hereof, market Exhibit A.
Wherefore, the parties respectfully pray that the foregoing stipulation of facts be
admitted and approved by this Honorable Court, without prejudice to the parties
adducing other evidence to prove their case not covered by this stipulation of
facts. 1wph1.t

According to the bond, "the liability of Luzon Surety Company, Inc. under this bond will
expire (12) months from date hereof." The date referred to was February 13, 1933. This
Court absolved the surety of liability because the acts for which the bond was posted
happened after its expiration. Thus, We held in that case:
... The acts provided therein by reason of which the contract of suretyship was
executed could have taken place within the stipulated period twelve months.
Hence, the parties fixed that period exactly at twelve months, limiting thereby the
obligation of the appellee to answer for the payment to the appellant of the
aforesaid sum of P7,500.00 to not more than the stipulated period. . . .
Here, on the other hand, the right of the Government to collect on the bond arose while
the bond was in force, because, as earlier noted, even before the execution of the bond,
the principal had already been indebted to its teachers.
Neither does the NARIC case support the surety's position. In that case, the bond
provided that
This bond expires on March 20th, 1949 and will be cancelled TEN DAYS after
the expiration, unless the surety is notified of any existing obligation thereunder,
or unless the surety renews or extends it in writing for another term.
and We held that giving notice of existing obligation was a condition precedent to further
liability of the surety and that in default of such notice, liability on the bond automatically
ceased.
Similarly, in the case of Santos, et. al. v. Mejia, et al., G.R. No. L-6383, December 29,
1953, the bond provided that
Liability of the surety on this bond will expire in THIRTEEN DAYS and said bond
will be cancelled 10 DAYS after its expiration unless surety is notified of any
existing obligation thereunder.
and We held that the surety could not be held liable because the bond was cancelled
when no notice of existing obligations was given within ten days.
In the present case, there is no provision that the bond will be cancelled unless the
surety is notified of any claim and so no condition precedent has to be complied with by
the Government before it can bring an action. Indeed, the provision of the bond in the
NARIC and Santos cases that it would be cancelled ten days after its expiration unless
notice of claim was given was inserted precisely because, without such a provision, the
surety's liability for obligations arising while the bond was in force would subsist even
after its expiration.
Thus, in Pao Chuan Wek v. Nomorosa, 54 O.G. No. 11, 3490, We held that under a
provision that the surety "will not be liable for any claim not discovered and presented to

the company within three 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 three months above mentioned," the giving of notice is a condition
precedent to be complied with.
And suppose this action were filed while the bond was in force, as the surety would
have the Government do, but the same remained pending after June 15, 1955, would
the surety suggest that the judgment that may be rendered in such action could no
longer be enforced against it because the bond says that its liability under it has
expired?
And what of the provision on 60-day notice? The surety urges that all actions on the
bond must be brought within that period or they would all be barred. The surety misread
the provision. The 60-day notice is not a period of prescription of action. The provision
merely means that the surety can withdraw as in fact it did in this case even
before June 15, 1955 provided it gave notice of its intention to do so at least 60 days in
advance. If at all, the condition is a limitation on the right of the surety to withdraw rather
than a limitation of action on the bond. This is clear also from the Manual of Information
for Private Schools2 which states that "The bond furnished by a school may not be
withdrawn by either or both the bondsmen except by giving the Director of Private
Schools sixty days notice."
In its fifth assignment of error, the surety contends:
1. That the bond is void for being contrary to public policy insofar as it requires the
surety to pay P10,000.00 regardless of the amount of the salaries of the teachers. 3 It is
claimed that to enforce forfeiture of the bond for the full amount would be to allow the
Government to enrich itself since the unpaid salaries of the teachers amount to
P1,318.84 only.
2. That, under Article 1311 of the Civil Code,4 since teachers of Sison and Aruego
Colleges are not parties to the bond, "the bond is not effective, and binding upon the
obligors (principal and surety) as far as it guarantees payment of the 'past salaries' of
the teachers of said school." This is the same as saying that the surety is not liable to
teachers of Sison and Aruego Colleges because the latter are not parties to the bond
nor are they beneficiaries of a stipulation pour autrui. But this argument is based on the
false premise that the teachers are trying to enforce the obligation of the bond, which is
not the case here. This is not an action filed by the teachers against the surety. This is
an action brought by the Government, of which the Department of Education is an
instrumentality, to hold the surety liable on its bond for the same has been violated
when the principal failed to comply "with all obligations, including the payment of
salaries of its teachers, past, present and future."
There is nothing against public policy in forfeiting the bond for the amount. The bond is
penal in nature. Article 1226 of the Code states that in obligation with a penal clause,
the penalty shall substitute the indemnity for damages and the payment of interests in

case of non-compliance, if there is no stipulation to the contrary, and the party to whom
payment is to be made is entitled to recover the sum stipulated without need of proving
damages because one of the primary purposes of a penalty clause is to avoid such
necessity. (Art. 1228, Civil Code; Lambert v. Fox, 26 Phil. 588; Palacios v. Municipality
of Cavite, 12 Phil. 140; Manila Racing Club v. Manila Jockey Club, 69 Phil. 55). The
mere non-performance of the principal obligation gives rise to the right to the penalty,
(IV Tolentino, Civil Code of the Philippines, p. 247.)
In its first and second "alternative assignments of error," the surety contends that it was
released from its obligation under the bond when on February 4, 1955, Remedios
Laoag and the Foundation agreed that the latter would pay the former's salaries, which
were then already due, on March 1, 1955. In support of this proposition, the surety cites
Article 2079 of the Code which provides as follows:
An extension granted to the debtor by the creditor without the consent of the
guarantor extinguishes the guaranty. . . .
But the above provision does not apply to this case. The supposed extension of time
was granted not by the Department of Education or the Government but by the
teachers. As already stated, the creditors on the bond are not the teachers but the
Department of Education or the Government.
Even granting that an extension of time was granted without the consent of the surety,
still that fact would not help the surety, because as earlier pointed out, the Foundation
was also arrears in the payment of the salaries of H. B. Arandia. The case of Arandia
alone would be enough basis for the Government to proceed against the bond.
Lastly, in its third and fourth "alternative assignments of error," the surety contends that
it cannot be made answer for more than the unpaid salaries of H. B. Arandia, which it
claimed amounted to P720.00 only, because Article 2054 states that
A guarantor may bind himself for less, but not for more than the principal debtor,
both as regards the amount and the onerous nature of the conditions.
Should he have bound himself for more, his obligations shall be reduced to the
limits of that of the debtor.
What We said about the penal nature of the bond would suffice to dispose of this claim.
For whatever may be the amount of salaries due the teachers, the fact remains that the
condition of the bond was violated and so the surety became liable for the penalty
provided for therein.
WHEREFORE, the decision of the Court of Appeals is hereby affirmed, with costs
against the surety.

Padilla, Bautista Angelo, Labrador, Concepcion, Reyes, Barrera, Parades, Dizon and
Makalintal, JJ., concur.
Bengzon, C.J., took no part.
Footnotes
1Central

Luzon Educational Foundation, Inc., Teofilo Sison and Jose M. Aruego

also appealed to this Court but we dismissed their appeal in G.R. No. L-14119 for
having been filed out of time.
2Prepared

by the Department of Education pursuant to Act No. 2706.

3Article

1183 states that impossible conditions, those contrary to good customs

or public policy and those prohibited by law shall annul the obligation which
depends upon them.
4Contracts

take effect only between the parties, their assigns and heirs, except in
case where the rights and obligations arising from the contract are not
transmissible by their nature, or by stipulation or by provision of law. The heir is
not liable beyond the value of the property he received from the decedent.
If a contract should contain some stipulation in favor of a third person, he
may demand its fulfillment provided he communicated his acceptance to
the obligor before its revocation. A mere incidental benefit or interest of a
person is not sufficient. The contracting parties must have clearly and
deliberately conferred a favor upon a third person.

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. L-45848 November 9,1977
TOWERS ASSURANCE CORPORATION, petitioner,
vs.
ORORAMA SUPERMART, ITS OWNER-PROPRIETOR, SEE HONG and JUDGE
BENJAMIN K. GOROSPE, Presiding Judge, Court of First Instance of Misamis
Oriental, Branch I, respondents.
Benjamin Tabique & Zosimo T. Vasalla for petitioner.
Rodrigo F. Lim, Jr. for private respondent.

AQUINO, J.:
This case is about the liability of a surety in a counterbond for the lifting of a writ of
preliminary attachment.
On February 17, 1976 See Hong, the proprietor of Ororama Supermart in Cagayan de
Oro City, sued the spouses Ernesto Ong and Conching Ong in the Court of First
Instance of Misamis Oriental for the collection of the sum of P 58,400 plus litigation
expenses and attorney's fees (Civil Case No. 4930).
See Hong asked for a writ of preliminary attachment. On March 5, 1976, the lower court
issued an order of attachment. The deputy sheriff attached the properties of the Ong
spouses in Valencia, Bukidnon and in Cagayan de Oro City.
To lift the attachment, the Ong spouses filed on March 11, 1976 a counterbond in 'the
amount of P 58,400 with Towers Assurance Corporation as surety. In that undertaking,
the Ong spouses and Towers Assurance Corporation bound themselves to pay
solidarity to See Hong the sum of P 58,400.
On March 24, 1976 the Ong spouses filed an answer with a counterclaim. For nonappearance at the pre- trial, the Ong spouses were declared in default.
On October 25, 1976, the lower court rendered a decision, ordering not only the Ong
spouses but also their surety, Towers Assurance Corporation, to pay solidarily to See
Hong the sum of P 58,400. The court also ordered the Ong spouses to pay P 10,000 as
litigation expenses and attorney's fees.

Ernesto Ong manifested that he did not want to appeal. On March 8, 1977, Ororama
Supermart filed a motion for execution. The lower court granted that motion. The writ of
execution was issued on March 14 against the judgment debtors and their surety. On
March 29, 1977, Towers Assurance Corporation filed the instant petition for certiorari
where it assails the decision and writ of execution.
We hold that the lower court acted with grave abuse of discretion in issuing a writ of
execution against the surety without first giving it an opportunity to be heard as required
in Rule 57 of tie Rules of Court which provides:
SEC. 17. When execution returned unsatisfied, recovery had upon bound.
If the execution be returned unsatisfied in whole or in part, the surety or
sureties on any counterbound given pursuant to the provisions of this rule
to secure the payment of the judgment shall become charged on such
counterbound, and bound to pay to the judgment creditor upon demand,
the amount due under the judgment, which amount may be recovered
from such surety or sureties after notice and summary hearing in the same
action.
Under section 17, in order that the judgment creditor might recover from the surety on
the counterbond, it is necessary (1) that execution be first issued against the principal
debtor and that such execution was returned unsatisfied in whole or in part; (2) that the
creditor made a demand upon the surety for the satisfaction of the judgment, and (3)
that the surety be given notice and a summary hearing in the same action as to his
liability for the judgment under his counterbond.
The first requisite mentioned above is not applicable to this case because Towers
Assurance Corporation assumed a solidary liability for the satisfaction of the judgment.
A surety is not entitled to the exhaustion of the properties of the principal debtor (Art.
2959, Civil Code; Luzon Steel Corporation vs. Sia, L-26449, May 15, 1969, 28 SCRA
58, 63).
But certainly, the surety is entitled to be heard before an execution can be issued
against him since he is not a party in the case involving his principal. Notice and hearing
constitute the essence of procedural due process. (Martinez vs. Villacete 116 Phil. 326;
Insurance & Surety Co., Inc. vs. Hon. Piccio, 105 Phil. 1192, 1200, Luzon Surety Co.,
Inc. vs. Beson, L-26865-66, January 30. 1970. 31 SCRA 313).
WHEREFORE, the order and writ of execution, insofar as they concern Towers
Corporation, are set aside. The lower court is directed to conduct a summary hearing on
the surety's liability on its counterbound. No costs.
SO ORDERED.
Fernando (Chairman), Barredo, Antonio, Concepcion, Jr. and Santos, JJ., concur.

G.R. No. 89561 September 13, 1990

BUENAFLOR C. UMALI, MAURICIA M. VDA. DE CASTILLO, VICTORIA M.
CASTILLO, BERTILLA C. RADA, MARIETTA C. ABAEZ, LEOVINA C. JALBUENA
and SANTIAGO M. RIVERA, petitioners,
vs.
COURT OF APPEALS, BORMAHECO, INC. and PHILIPPINE MACHINERY PARTS
MANUFACTURING CO., INC., respondents.
Edmundo T. Zepeda for petitioners.
Martin M. De Guzman for respondent BORMAHECO, Inc.
Renato J. Robles for P.M. Parts Manufacturing Co., Inc.

REGALADO, J.:
This is a petition to review the decision of respondent Court of Appeals, dated August 3,
1989, in CA-GR CV No. 15412, entitled "Buenaflor M. Castillo Umali, et al. vs. Philippine
Machinery Parts Manufacturing Co., Inc., et al.," 1the dispositive portion whereof
provides:
WHEREFORE, viewed in the light of the entire record, the judgment
appealed from must be, as it is hereby REVERSED. In lieu thereof, a
judgment is hereby rendered1) Dismissing the complaint, with cost against plaintiffs;
2) Ordering plaintiffs-appellees to vacate the subject properties; and
3) Ordering plaintiffs-appellees to pay upon defendants' counterclaims:
a) To defendant-appellant PM Parts: (i) damages consisting
of the value of the fruits in the subject parcels of land of
which they were deprived in the sum of P26,000.00 and (ii)
attorney's fees of P15,000.00

b) To defendant-appellant Bormaheco: (i) expenses of

litigation in the amount of P5,000.00 and (ii) attorney's fees
of P15,000.00.
SO ORDERED.
The original complaint for annulment of title filed in the court a quo by herein petitioners
included as party defendants the Philippine Machinery Parts Manufacturing Co., Inc.
(PM Parts), Insurance Corporation of the Philippines (ICP), Bormaheco, Inc.,
(Bormaheco) and Santiago M. Rivera (Rivera). A Second Amended Complaint was
filed, this time impleading Santiago M. Rivera as party plaintiff.
During the pre-trial conference, the parties entered into the following stipulation of facts:
As between all parties: Plaintiff Buenaflor M. Castillo is the
judicial administratrix of the estate of Felipe Castillo in
Special Proceeding No. 4053, pending before Branch IX,
CFI of Quezon (per Exhibit A) which intestate proceedings
was instituted by Mauricia Meer Vda. de Castillo, the
previous administratrix of the said proceedings prior to 1970
(per exhibits A-1 and A-2) which case was filed in Court way
back in 1964;
b) The four (4) parcels of land described in paragraph 3 of
the Complaint were originally covered by TCT No. T-42104
and Tax Dec. No. 14134 with assessed value of P3,100.00;
TCT No. T 32227 and Tax Dec. No. 14132, with assessed
value of P5,130,00; TCT No. T-31762 and Tax Dec. No.
14135, with assessed value of P6,150.00; and TCT No. T42103 with Tax Dec. No. 14133, with assessed value of
P3,580.00 (per Exhibits A-2 and B, B-1 to B-3 C, C-1 -to C3
c) That the above-enumerated four (4) parcels of land were
the subject of the Deed of Extra-Judicial Partition executed
by the heirs of Felipe Castillo (per Exhibit D) and by virtue
thereof the titles thereto has (sic) been cancelled and in lieu
thereof, new titles in the name of Mauricia Meer Vda. de
Castillo and of her children, namely: Buenaflor, Bertilla,
Victoria, Marietta and Leovina, all surnamed Castillo has
(sic) been issued, namely: TCT No. T-12113 (Exhibit E );
TCT No. T-13113 (Exhibit F); TCT No. T-13116 (Exhibit G )
and TCT No. T13117 (Exhibit H )
d) That mentioned parcels of land were submitted as
guaranty in the Agreement of Counter-Guaranty with
Chattel-Real Estate Mortgage executed on 24 October 1970

between Insurance Corporation of the Philippines and

Slobec Realty Corporation represented by Santiago Rivera
(Exhibit 1);
e) That based on the Certificate of Sale issued by the Sheriff
of the Province of Quezon in favor of Insurance Corporation
of the Philippines it was able to transfer to itself the titles
over the lots in question, namely: TCT No. T-23705 (Exhibit
M), TCT No. T 23706 (Exhibit N ), TCT No. T-23707 (Exhibit
0) and TCT No. T 23708 (Exhibit P);
f) That on 10 April 1975, the Insurance Corporation of the
Philippines sold to PM Parts the immovables in question (per
Exhibit 6 for PM Parts) and by reason thereof, succeeded in
transferring unto itself the titles over the lots in dispute,
namely: per TCT No. T-24846 (Exhibit Q ), per TCT No. T24847 (Exhibit R ), TCT No. T-24848 (Exhibit), TCT No. T24849 (Exhibit T );
g) On 26 August l976, Mauricia Meer Vda. de Castillo'
genther letter to Modesto N. Cervantes stating that she and
her children refused to comply with his demands (Exhibit V2);
h) That from at least the months of October, November and
December 1970 and January 1971, Modesto N. Cervantes
was the Vice-President of Bormaheco, Inc. later President
thereof, and also he is one of the Board of Directors of PM
Parts; on the other hand, Atty. Martin M. De Guzman was
the legal counsel of Bormaheco, Inc., later Executive VicePresident thereof, and who also is the legal counsel of
Insurance Corporation of the Philippines and PM Parts; that
Modesto N. Cervantes served later on as President of PM
Parts, and that Atty. de Guzman was retained by Insurance
Corporation of the Philippines specifically for foreclosure
purposes only;
i) Defendant Bormaheco, Inc. on November 25, 1970 sold to
Slobec Realty and Development, Inc., represented by
Santiago Rivera, President, one (1) unit Caterpillar Tractor
D-7 with Serial No. 281114 evidenced by a contract marked
Exhibit J and Exhibit I for Bormaheco, Inc.;
j) That the Surety Bond No. 14010 issued by co-defendant
ICP was likewise secured by an Agreement with CounterGuaranty with Real Estate Mortgage executed by Slobec

Realty & Development, Inc., Mauricia Castillo Meer,

Buenaflor Castillo, Bertilla Castillo, Victoria Castillo, Marietta
Castillo and Leovina Castillo, as mortgagors in favor of ICP
which document was executed and ratified before notary
public Alberto R. Navoa of the City of Manila on October
24,1970;
k) That the property mortgaged consisted of four (4) parcels
of land situated in Lucena City and covered by TCT Nos. T13114, T13115,
T-13116 and T-13117 of the Register of Deeds of Lucena
City;
l) That the tractor sold by defendant Bormaheco, Inc. to
Slobec Realty & Development, Inc. was delivered to
Bormaheco, Inc. on or about October 2,1973, by Mr.
Menandro Umali for purposes of repair;
m) That in August 1976, PM Parts notified Mrs. Mauricia
Meer about its ownership and the assignment of Mr.
Petronilo Roque as caretaker of the subject property;
n) That plaintiff and other heirs are harvest fruits of the
property (daranghita) which is worth no less than Pl,000.00
per harvest.
As between plaintiffs and
defendant Bormaheco, Inc
o) That on 25 November 1970, at Makati, Rizal, Same
Rivera, in representation of the Slobec Realty &
Development Corporation executed in favor of Bormaheco,
Inc., represented by its Vice-President Modesto N.
Cervantes a Chattel Mortgage concerning one unit model
CAT D7 Caterpillar Crawler Tractor as described therein as
security for the payment in favor of the mortgagee of the
amount of P180,000.00 (per Exhibit K) that Id document was
superseded by another chattel mortgage dated January 23,
1971 (Exhibit 15);
p) On 18 December 1970, at Makati, Rizal, the Bormaheco,
Inc., represented by its Vice-President Modesto Cervantes
and Slobec Realty Corporation represented by Santiago
Rivera executed the sales agreement concerning the sale of
one (1) unit Model CAT D7 Caterpillar Crawler Tractor as
described therein for the amount of P230,000.00 (per Exhibit

J) which document was superseded by the Sales Agreement

dated January 23,1971 (Exhibit 16);
q) Although it appears on the document entitled Chattel
Mortgage (per Exhibit K) that it was executed on 25
November 1970, and in the document entitled Sales
Agreement (per Exhibit J) that it was executed on 18
December 1970, it appears in the notarial register of the
notary public who notarized them that those two documents
were executed on 11 December 1970. The certified xerox
copy of the notarial register of Notary Public Guillermo
Aragones issued by the Bureau of Records Management is
hereto submitted as Exhibit BB That said chattel mortgage
was superseded by another document dated January 23,
1971;
r) That on 23 January 1971, Slobec Realty Development
Corporation, represented by Santiago Rivera, received from
Bormaheco, Inc. one (1) tractor Caterpillar Model D-7
pursuant to Invoice No. 33234 (Exhibits 9 and 9-A,
Bormaheco, Inc.) and delivery receipt No. 10368 (per
Exhibits 10 and 10-A for Bormaheco, Inc
s) That on 28 September 1973, Atty. Martin M. de Guzman,
as counsel of Insurance Corporation of the Philippines
purchased at public auction for said corporation the four (4)
parcels of land subject of tills case (per Exhibit L), and which
document was presented to the Register of Deeds on 1
October 1973;
t) Although it appears that the realties in issue has (sic) been
sold by Insurance Corporation of the Philippines in favor of
PM Parts on 1 0 April 1975, Modesto N. Cervantes, formerly
Vice- President and now President of Bormaheco, Inc., sent
his letter dated 9 August 1976 to Mauricia Meer Vda. de
Castillo (Exhibit V), demanding that she and her children
should vacate the premises;
u) That the Caterpillar Crawler Tractor Model CAT D-7 which
was received by Slobec Realty Development Corporation
was actually reconditioned and repainted. " 2
We cull the following antecedents from the decision of respondent Court of Appeals:
Plaintiff Santiago Rivera is the nephew of plaintiff Mauricia Meer Vda. de
Castillo. The Castillo family are the owners of a parcel of land located in

Lucena City which was given as security for a loan from the Development
Bank of the Philippines. For their failure to pay the amortization,
foreclosure of the said property was about to be initiated. This problem
was made known to Santiago Rivera, who proposed to them the
conversion into subdivision of the four (4) parcels of land adjacent to the
mortgaged property to raise the necessary fund. The Idea was accepted
by the Castillo family and to carry out the project, a Memorandum of
Agreement (Exh. U p. 127, Record) was executed by and between Slobec
Realty and Development, Inc., represented by its President Santiago
Rivera and the Castillo family. In this agreement, Santiago Rivera obliged
himself to pay the Castillo family the sum of P70,000.00 immediately after
the execution of the agreement and to pay the additional amount of
P400,000.00 after the property has been converted into a subdivision.
Rivera, armed with the agreement, Exhibit U , approached Mr. Modesto
Cervantes, President of defendant Bormaheco, and proposed to purchase
from Bormaheco two (2) tractors Model D-7 and D-8 Subsequently, a
Sales Agreement was executed on December 28,1970 (Exh. J, p. 22,
Record).
On January 23, 1971, Bormaheco, Inc. and Slobec Realty and
Development, Inc., represented by its President, Santiago Rivera,
executed a Sales Agreement over one unit of Caterpillar Tractor D-7 with
Serial No. 281114, as evidenced by the contract marked Exhibit '16'. As
shown by the contract, the price was P230,000.00 of which P50,000.00
was to constitute a down payment, and the balance of P180,000.00
payable in eighteen monthly installments. On the same date, Slobec,
through Rivera, executed in favor of Bormaheco a Chattel Mortgage (Exh.
K, p. 29, Record) over the said equipment as security for the payment of
the aforesaid balance of P180,000.00. As further security of the
aforementioned unpaid balance, Slobec obtained from Insurance
Corporation of the Phil. a Surety Bond, with ICP (Insurance Corporation of
the Phil.) as surety and Slobec as principal, in favor of Bormaheco, as
borne out by Exhibit '8' (p. 111, Record). The aforesaid surety bond was in
turn secured by an Agreement of Counter-Guaranty with Real Estate
Mortgage (Exhibit I, p. 24, Record) executed by Rivera as president of
Slobec and Mauricia Meer Vda. de Castillo, Buenaflor Castillo Umali,
Bertilla Castillo-Rada, Victoria Castillo, Marietta Castillo and Leovina
Castillo Jalbuena, as mortgagors and Insurance Corporation of the
Philippines (ICP) as mortgagee. In this agreement, ICP guaranteed the
obligation of Slobec with Bormaheco in the amount of P180,000.00. In
giving the bond, ICP required that the Castillos mortgage to them the
properties in question, namely, four parcels of land covered by TCTs in
the name of the aforementioned mortgagors, namely TCT Nos. 13114,
13115, 13116 and 13117 all of the Register of Deeds for Lucena City.

On the occasion of the execution on January 23, 1971, of the Sales

Agreement Exhibit '16', Slobec, represented by Rivera received from
Bormaheco the subject matter of the said Sales Agreement, namely, the
aforementioned tractor Caterpillar Model D-7 as evidenced by Invoice No.
33234 (Exhs. 9 and 9-A, p. 112, Record) and Delivery Receipt No. 10368
(Exhs. 10 and 10-A, p. 113). This tractor was known by Rivera to be a
reconditioned and repainted one [Stipulation of Facts, Pre-trial Order, par.
(u)].
Meanwhile, for violation of the terms and conditions of the CounterGuaranty Agreement (Exh. 1), the properties of the Castillos were
foreclosed by ICP As the highest bidder with a bid of P285,212.00, a
Certificate of Sale was issued by the Provincial Sheriff of Lucena City and
Transfer Certificates of Title over the subject parcels of land were issued
by the Register of Deeds of Lucena City in favor of ICP namely, TCT Nos.
T-23705, T 23706, T-23707 and T-23708 (Exhs. M to P, pp. 38-45). The
mortgagors had one (1) year from the date of the registration of the
certificate of sale, that is, until October 1, 1974, to redeem the property,
but they failed to do so. Consequently, ICP consolidated its ownership
over the subject parcels of land through the requisite affidavit of
consolidation of ownership dated October 29, 1974, as shown in Exh.
'22'(p. 138, Rec.). Pursuant thereto, a Deed of Sale of Real Estate
covering the subject properties was issued in favor of ICP (Exh. 23, p.
139, Rec.).
On April 10, 1975, Insurance Corporation of the Phil. ICP sold to Phil.
Machinery Parts Manufacturing Co. (PM Parts) the four (4) parcels of land
and by virtue of said conveyance, PM Parts transferred unto itself the titles
over the lots in dispute so that said parcels of land are now covered by
TCT Nos. T-24846, T-24847, T-24848 and T-24849 (Exhs. Q-T, pp. 46-49,
Rec.).
Thereafter, PM Parts, through its President, Mr. Modesto Cervantes, sent
a letter dated August 9,1976 addressed to plaintiff Mrs. Mauricia Meer
Castillo requesting her and her children to vacate the subject property,
who (Mrs. Castillo) in turn sent her reply expressing her refusal to comply
with his demands.
On September 29, 1976, the heirs of the late Felipe Castillo, particularly
plaintiff Buenaflor M. Castillo Umali as the appointed administratrix of the
properties in question filed an action for annulment of title before the then
Court of First Instance of Quezon and docketed thereat as Civil Case No.
8085. Thereafter, they filed an Amended Complaint on January 10, 1980
(p. 444, Record). On July 20, 1983, plaintiffs filed their Second Amended
Complaint, impleading Santiago M. Rivera as a party plaintiff (p. 706,
Record). They contended that all the aforementioned transactions starting

with the Agreement of Counter-Guaranty with Real Estate Mortgage (Exh.

I), Certificate of Sale (Exh. L) and the Deeds of Authority to Sell, Sale and
the Affidavit of Consolidation of Ownership (Annexes F, G, H, I) as well as
the Deed of Sale (Annexes J, K, L and M) are void for being entered into
in fraud and without the consent and approval of the Court of First
Instance of Quezon, (Branch IX) before whom the administration
proceedings has been pending. Plaintiffs pray that the four (4) parcels of
land subject hereof be declared as owned by the estate of the late Felipe
Castillo and that all Transfer Certificates of Title Nos.
13114,13115,13116,13117, 23705, 23706, 23707, 23708, 24846, 24847,
24848 and 24849 as well as those appearing as encumbrances at the
back of the certificates of title mentioned be declared as a nullity and
defendants to pay damages and attorney's fees (pp. 71071 1, Record).
In their amended answer, the defendants controverted the complaint and
alleged, by way of affirmative and special defenses that the complaint did
not state facts sufficient to state a cause of action against defendants; that
plaintiffs are not entitled to the reliefs demanded; that plaintiffs are
estopped or precluded from asserting the matters set forth in the
Complaint; that plaintiffs are guilty of laches in not asserting their alleged
right in due time; that defendant PM Parts is an innocent purchaser for
value and relied on the face of the title before it bought the subject
property (p. 744, Record). 3
After trial, the court a quo rendered judgment, with the following decretal
portion:
WHEREFORE, judgment is hereby rendered in favor of the plaintiffs and
against the defendants, declaring the following documents:
Agreement of Counter-Guaranty with Chattel-Real Estate
Mortgage dated October 24,1970 (Exhibit 1);
Sales Agreement dated December 28, 1970 (Exhibit J)
Chattel Mortgage dated November 25, 1970 (Exhibit K)
Sales Agreement dated January 23, 1971 (Exhibit 16);
Chattel Mortgage dated January 23, 1971 (Exhibit 17);
Certificate of Sale dated September 28, 1973 executed by
the Provincial Sheriff of Quezon in favor of Insurance
Corporation of the Philippines (Exhibit L);

null and void for being fictitious, spurious and without consideration.
Consequently, Transfer Certificates of Title Nos. T 23705, T-23706,
T23707 and T-23708 (Exhibits M, N, O and P) issued in the name of
Insurance Corporation of the Philippines, are likewise null and void.
The sale by Insurance Corporation of the- Philippines in favor of defendant
Philippine Machinery Parts Manufacturing Co., Inc., over Id four (4)
parcels of land and Transfer Certificates of Title Nos. T 24846, T-24847,
T-24848 and T-24849 subsequently issued by virtue of said sale in the
name of Philippine Machinery Parts Manufacturing Co., Inc., are similarly
declared null and void, and the Register of Deeds of Lucena City is hereby
directed to issue, in lieu thereof, transfer certificates of title in the names of
the plaintiffs, except Santiago Rivera.
Orders the defendants jointly and severally to pay the plaintiffs moral
damages in the sum of P10,000.00, exemplary damages in the amount of
P5,000.00, and actual litigation expenses in the sum of P6,500.00.
Defendants are likewise ordered to pay the plaintiffs, jointly and severally,
the sum of P10,000.00 for and as attomey's fees. With costs against the
defendants.
SO ORDERED. 4
As earlier stated, respondent court reversed the aforequoted decision of the trial court
and rendered the judgment subject of this petitionPetitioners contend that respondent Court of Appeals erred:
1. In holding and finding that the actions entered into between petitioner
Rivera with Cervantes are all fair and regular and therefore binding
between the parties thereto;
2. In reversing the decision of the lower court, not only based on
erroneous conclusions of facts, erroneous presumptions not supported by
the evidence on record but also, holding valid and binding the supposed
payment by ICP of its obligation to Bormaheco, despite the fact that the
surety bond issued it had already expired when it opted to foreclose
extrajudically the mortgage executed by the petitioners;
3. In aside the finding of the lower court that there was necessity to pierce
the veil of corporate existence; and
4. In reversing the decision of the lower court of affirming the same

I. Petitioners aver that the transactions entered into between Santiago M. Rivera, as
President of Slobec Realty and Development Company (Slobec) and Mode Cervantes,
as Vice-President of Bormaheco, such as the Sales Agreement, 6 Chattel
Mortgage 7 and the Agreement of Counter-Guaranty with Chattel/Real Estate
Mortgage, 8 are all fraudulent and simulated and should, therefore, be declared nun and
void. Such allegation is premised primarily on the fact that contrary to the stipulations
agreed upon in the Sales Agreement (Exhibit J), Rivera never made any advance
payment, in the alleged amount of P50,000.00, to Bormaheco; that the tractor was
received by Rivera only on January 23, 1971 and not in 1970 as stated in the Chattel
Mortgage (Exhibit K); and that when the Agreement of Counter-Guaranty with
Chattel/Real Estate Mortgage was executed on October 24, 1970, to secure the
obligation of ICP under its surety bond, the Sales Agreement and Chattel Mortgage had
not as yet been executed, aside from the fact that it was Bormaheco, and not Rivera,
which paid the premium for the surety bond issued by ICP
At the outset, it will be noted that petitioners submission under the first assigned error
hinges purely on questions of fact. Respondent Court of Appeals made several findings
to the effect that the questioned documents are valid and binding upon the parties, that
there was no fraud employed by private respondents in the execution thereof, and that,
contrary to petitioners' allegation, the evidence on record reveals that petitioners had
every intention to be bound by their undertakings in the various transactions had with
private respondents. It is a general rule in this jurisdiction that findings of fact of said
appellate court are final and conclusive and, thus, binding on this Court in the absence
of sufficient and convincing proof, inter alia, that the former acted with grave abuse of
discretion. Under the circumstances, we find no compelling reason to deviate from this
long-standing jurisprudential pronouncement.
In addition, the alleged failure of Rivera to pay the consideration agreed upon in the
Sales Agreement, which clearly constitutes a breach of the contract, cannot be availed
of by the guilty party to justify and support an action for the declaration of nullity of the
contract. Equity and fair play dictates that one who commits a breach of his contract
may not seek refuge under the protective mantle of the law.
The evidence of record, on an overall calibration, does not convince us of the validity of
petitioners' contention that the contracts entered into by the parties are either absolutely
simulated or downright fraudulent.
There is absolute simulation, which renders the contract null and void, when the parties
do not intend to be bound at all by the same. 9 The basic characteristic of this type of
simulation of contract is the fact that the apparent contract is not really desired or
intended to either produce legal effects or in any way alter the juridical situation of the
parties. The subsequent act of Rivera in receiving and making use of the tractor subject
matter of the Sales Agreement and Chattel Mortgage, and the simultaneous issuance of
a surety bond in favor of Bormaheco, concomitant with the execution of the Agreement
of Counter-Guaranty with Chattel/Real Estate Mortgage, conduce to the conclusion that
petitioners had every intention to be bound by these contracts. The occurrence of these

series of transactions between petitioners and private respondents is a strong indication

that the parties actually intended, or at least expected, to exact fulfillment of their
respective obligations from one another.
Neither will an allegation of fraud prosper in this case where petitioners failed to show
that they were induced to enter into a contract through the insidious words and
machinations of private respondents without which the former would not have executed
such contract. To set aside a document solemnly executed and voluntarily delivered,
the proof of fraud must be clear and convincing. 10 We are not persuaded that such
quantum of proof exists in the case at bar.
The fact that it was Bormaheco which paid the premium for the surety bond issued by
ICP does not per se affect the validity of the bond. Petitioners themselves admit in their
present petition that Rivera executed a Deed of Sale with Right of Repurchase of his car
in favor of Bormaheco and agreed that a part of the proceeds thereof shall be used to
pay the premium for the bond. 11 In effect, Bormaheco accepted the payment of the
premium as an agent of ICP The execution of the deed of sale with a right of
repurchase in favor of Bormaheco under such circumstances sufficiently establishes the
fact that Rivera recognized Bormaheco as an agent of ICP Such payment to the agent
of ICP is, therefore, binding on Rivera. He is now estopped from questioning the validity
of the suretyship contract.
II. Under the doctrine of piercing the veil of corporate entity, when valid grounds
therefore exist, the legal fiction that a corporation is an entity with a juridical personality
separate and distinct from its members or stockholders may be disregarded. In such
cases, the corporation will be considered as a mere association of persons. The
members or stockholders of the corporation will be considered as the corporation, that
is, liability will attach directly to the officers and stockholders. 12 The doctrine applies
when the corporate fiction is used to defeat public convenience, justify wrong, protect
fraud, or defend crime, 13 or when it is made as a shield to confuse the legitimate
issues 14 or where a corporation is the mere alter ego or business conduit of a person,
or where the corporation is so organized and controlled and its affairs are so conducted
as to make it merely an instrumentality, agency, conduit or adjunct of another
corporation. 15
In the case at bar, petitioners seek to pierce the V621 Of corporate entity of Bormaheco,
ICP and PM Parts, alleging that these corporations employed fraud in causing the
foreclosure and subsequent sale of the real properties belonging to petitioners While we
do not discount the possibility of the existence of fraud in the foreclosure proceeding,
neither are we inclined to apply the doctrine invoked by petitioners in granting the relief
sought. It is our considered opinion that piercing the veil of corporate entity is not the
proper remedy in order that the foreclosure proceeding may be declared a nullity under
the circumstances obtaining in the legal case at bar.
In the first place, the legal corporate entity is disregarded only if it is sought to hold the
officers and stockholders directly liable for a corporate debt or obligation. In the instant

case, petitioners do not seek to impose a claim against the individual members of the
three corporations involved; on the contrary, it is these corporations which desire to
enforce an alleged right against petitioners. Assuming that petitioners were indeed
defrauded by private respondents in the foreclosure of the mortgaged properties, this
fact alone is not, under the circumstances, sufficient to justify the piercing of the
corporate fiction, since petitioners do not intend to hold the officers and/or members of
respondent corporations personally liable therefor. Petitioners are merely seeking the
declaration of the nullity of the foreclosure sale, which relief may be obtained without
having to disregard the aforesaid corporate fiction attaching to respondent corporations.
Secondly, petitioners failed to establish by clear and convincing evidence that private
respondents were purposely formed and operated, and thereafter transacted with
petitioners, with the sole intention of defrauding the latter.
The mere fact, therefore, that the businesses of two or more corporations are
interrelated is not a justification for disregarding their separate personalities, 16 absent
sufficient showing that the corporate entity was purposely used as a shield to defraud
creditors and third persons of their rights.
III. The main issue for resolution is whether there was a valid foreclosure of the
mortgaged properties by ICP Petitioners argue that the foreclosure proceedings should
be declared null and void for two reasons, viz.: (1) no written notice was furnished by
Bormaheco to ICP anent the failure of Slobec in paying its obligation with the former,
plus the fact that no receipt was presented to show the amount allegedly paid by ICP to
Bormaheco; and (b) at the time of the foreclosure of the mortgage, the liability of ICP
under the surety bond had already expired.
Respondent court, in finding for the validity of the foreclosure sale, declared:
Now to the question of whether or not the foreclosure by the ICP of the
real estate mortgage was in the exercise of a legal right, We agree with
the appellants that the foreclosure proceedings instituted by the ICP was
in the exercise of a legal right. First, ICP has in its favor the legal
presumption that it had indemnified Bormaheco by reason of Slobec's
default in the payment of its obligation under the Sales Agreement,
especially because Bormaheco consented to ICPs foreclosure of the
mortgage. This presumption is in consonance with pars. R and Q Section
5, Rule 5, * New Rules of Court which provides that it is disputably
presumed that private transactions have been fair and regular. likewise, it
is disputably presumed that the ordinary course of business has been
followed: Second, ICP had the right to proceed at once to the foreclosure
of the mortgage as mandated by the provisions of Art. 2071 Civil Code for
these further reasons: Slobec, the principal debtor, was admittedly
insolvent; Slobec's obligation becomes demandable by reason of the
expiration of the period of payment; and its authorization to foreclose the
mortgage upon Slobec's default, which resulted in the accrual of ICPS
liability to Bormaheco. Third, the Agreement of Counter-Guaranty with

Real Estate Mortgage (Exh. 1) expressly grants to ICP the right to

foreclose the real estate mortgage in the event of 'non-payment or nonliquidation of the entire indebtedness or fraction thereof upon maturity as
stipulated in the contract'. This is a valid and binding stipulation in the
absence of showing that it is contrary to law, morals, good customs, public
order or public policy. (Art. 1306, New Civil Code). 17
1. Petitioners asseverate that there was no notice of default issued by Bormaheco to
ICP which would have entitled Bormaheco to demand payment from ICP under the
suretyship contract.
Surety Bond No. B-1401 0 which was issued by ICP in favor of Bormaheco, wherein
ICP and Slobec undertook to guarantee the payment of the balance of P180,000.00
payable in eighteen (18) monthly installments on one unit of Model CAT D-7 Caterpillar
Crawler Tractor, pertinently provides in part as follows:
1. The liability of INSURANCE CORPORATION OF THE PHILIPPINES,
under this BOND will expire Twelve (I 2) months from date hereof.
Furthermore, it is hereby agreed and understood that the INSURANCE
CORPORATION OF THE PHILIPPINES will not be liable for any claim not
presented in writing to the Corporation within THIRTY (30) DAYS from the
expiration of this BOND, and that the obligee hereby waives his right to
bring claim or file any action against Surety and after the termination of
one (1) year from the time his cause of action accrues. 18
The surety bond was dated October 24, 1970. However, an annotation on the
upper part thereof states: "NOTE: EFFECTIVITY DATE OF THIS BOND SHALL
BE ON JANUARY 22, 1971." 19
On the other hand, the Sales Agreement dated January 23, 1971 provides that the
balance of P180,000.00 shall be payable in eighteen (18) monthly installments. 20 The
Promissory Note executed by Slobec on even date in favor of Bormaheco further
provides that the obligation shall be payable on or before February 23, 1971 up to July
23, 1972, and that non-payment of any of the installments when due shall make the
entire obligation immediately due and demandable. 21
It is basic that liability on a bond is contractual in nature and is ordinarily restricted to the
obligation expressly assumed therein. We have repeatedly held that the extent of a
surety's liability is determined only by the clause of the contract of suretyship as well as
the conditions stated in the bond. It cannot be extended by implication beyond the terms
the contract. 22
Fundamental likewise is the rule that, except where required by the provisions of the
contract, a demand or notice of default is not required to fix the surety's
liability. 23 Hence, where the contract of suretyship stipulates that notice of the
principal's default be given to the surety, generally the failure to comply with the

condition will prevent recovery from the surety. There are certain instances, however,
when failure to comply with the condition will not extinguish the surety's liability, such as
a failure to give notice of slight defaults, which are waived by the obligee; or on mere
suspicion of possible default; or where, if a default exists, there is excuse or provision in
the suretyship contract exempting the surety for liability therefor, or where the surety
already has knowledge or is chargeable with knowledge of the default. 24
In the case at bar, the suretyship contract expressly provides that ICP shag not be liable
for any claim not filed in writing within thirty (30) days from the expiration of the bond. In
its decision dated May 25 1987, the court a quocategorically stated that '(n)o evidence
was presented to show that Bormaheco demanded payment from ICP nor was there
any action taken by Bormaheco on the bond posted by ICP to guarantee the payment of
plaintiffs obligation. There is nothing in the records of the proceedings to show that ICP
indemnified Bormaheco for the failure of the plaintiffs to pay their obligation. " 25 The
failure, therefore, of Bormaheco to notify ICP in writing about Slobec's supposed default
released ICP from liability under its surety bond. Consequently, ICP could not validly
foreclose that real estate mortgage executed by petitioners in its favor since it never
incurred any liability under the surety bond. It cannot claim exemption from the required
written notice since its case does not fall under any of the exceptions hereinbefore
enumerated.
Furthermore, the allegation of ICP that it has paid Bormaheco is not supported by any
documentary evidence. Section 1, Rule 131 of the Rules of Court provides that the
burden of evidence lies with the party who asserts an affirmative allegation. Since ICP
failed to duly prove the fact of payment, the disputable presumption that private
transactions have been fair and regular, as erroneously relied upon by respondent
Court of Appeals, finds no application to the case at bar.
2. The liability of a surety is measured by the terms of his contract, and, while he is
liable to the full extent thereof, such liability is strictly limited to that assumed by its
terms. 26 While ordinarily the termination of a surety's liability is governed by the
provisions of the contract of suretyship, where the obligation of a surety is, under the
terms of the bond, to terminate at a specified time, his obligation cannot be enlarged by
an unauthorized extension thereof. 27 This is an exception to the general rule that the
obligation of the surety continues for the same period as that of the principal debtor. 28
It is possible that the period of suretyship may be shorter than that of the principal
obligation, as where the principal debtor is required to make payment by
installments. 29 In the case at bar, the surety bond issued by ICP was to expire on
January 22, 1972, twelve (1 2) months from its effectivity date, whereas Slobec's
installment payment was to end on July 23, 1972. Therefore, while ICP guaranteed the
payment by Slobec of the balance of P180,000.00, such guaranty was valid only for and
within twelve (1 2) months from the date of effectivity of the surety bond, or until January
22, 1972. Thereafter, from January 23, 1972 up to July 23, 1972, the liability of Slobec
became an unsecured obligation. The default of Slobec during this period cannot be a
valid basis for the exercise of the right to foreclose by ICP since its surety contract had

already been terminated. Besides, the liability of ICP was extinguished when
Bormaheco failed to file a written claim against it within thirty (30) days from the
expiration of the surety bond. Consequently, the foreclosure of the mortgage, after the
expiration of the surety bond under which ICP as surety has not incurred any liability,
should be declared null and void.
3. Lastly, it has been held that where The guarantor holds property of the principal as
collateral surety for his personal indemnity, to which he may resort only after payment
by himself, until he has paid something as such guarantor neither he nor the creditor
can resort to such collaterals. 30
The Agreement of Counter-Guaranty with Chattel/Real Estate Mortgage states that it is
being issued for and in consideration of the obligations assumed by the MortgageeSurety Company under the terms and conditions of ICP Bond No. 14010 in behalf of
Slobec Realty Development Corporation and in favor of Bormaheco, Inc. 31 There is no
doubt that said Agreement of Counter-Guaranty is issued for the personal indemnity of
ICP Considering that the fact of payment by ICP has never been established, it follows,
pursuant to the doctrine above adverted to, that ICP cannot foreclose on the subject
properties,
IV. Private respondent PM Parts posits that it is a buyer in good faith and, therefore, it
acquired a valid title over the subject properties. The submission is without merit and
the conclusion is specious
We have stated earlier that the doctrine of piercing the veil of corporate fiction is not
applicable in this case. However, its inapplicability has no bearing on the good faith or
bad faith of private respondent PM Parts. It must be noted that Modesto N. Cervantes
served as Vice-President of Bormaheco and, later, as President of PM Parts. On this
fact alone, it cannot be said that PM Parts had no knowledge of the aforesaid several
transactions executed between Bormaheco and petitioners. In addition, Atty. Martin de
Guzman, who is the Executive Vice-President of Bormaheco, was also the legal counsel
of ICP and PM Parts. These facts were admitted without qualification in the stipulation
of facts submitted by the parties before the trial court. Hence, the defense of good faith
may not be resorted to by private respondent PM Parts which is charged with
knowledge of the true relations existing between Bormaheco, ICP and herein
petitioners. Accordingly, the transfer certificates of title issued in its name, as well as the
certificate of sale, must be declared null and void since they cannot be considered
altogether free of the taint of bad faith.
WHEREFORE, the decision of respondent Court of Appeals is hereby REVERSED and
SET ASIDE, and judgment is hereby rendered declaring the following as null and void:
(1) Certificate of Sale, dated September 28,1973, executed by the Provincial Sheriff of
Quezon in favor of the Insurance Corporation of the Philippines; (2) Transfer Certificates
of Title Nos. T-23705, T-23706, T-23707 and T-23708 issued in the name of the
Insurance Corporation of the Philippines; (3) the sale by Insurance Corporation of the
Philippines in favor of Philippine Machinery Parts Manufacturing Co., Inc. of the four (4)

parcels of land covered by the aforesaid certificates of title; and (4) Transfer Certificates
of Title Nos. T-24846, T-24847, T-24848 and T24849 subsequently issued by virtue of
said sale in the name of the latter corporation.
The Register of Deeds of Lucena City is hereby directed to cancel Transfer Certificates
of Title Nos. T-24846, T-24847, T24848 and T-24849 in the name of Philippine
Machinery Parts Manufacturing Co., Inc. and to issue in lieu thereof the corresponding
transfer certificates of title in the name of herein petitioners, except Santiago Rivera.
The foregoing dispositions are without prejudice to such other and proper legal
remedies as may be available to respondent Bormaheco, Inc. against herein petitioners.
SO ORDERED.
Melencio-Herrera (Chairman), Paras and Padilla, JJ., concur.
Sarmiento, J., is on leave.

Footnotes
1 Associate Justice Bienvenido C. Ejercito, ponente; Associate
Justices Felipe B. Kalalo and Luis L. Victor, concurring;
Petition, Annex B Rollo, 60-74.
2 Rollo, 45-49.
3 Ibid., 61-64.
4 Ibid, 58-59.
5 Ibid., 14.
6 Exh. 15-Bormaheco; Original Record, 481.
7 Exh. 16-Bormaheco; Ibid., 482.
8 Exh. 1; Folder of Exhibits, 24.
9 Arts. 1345 and 1346, Civil Code
10 Arroyo etc. vs. Granada, et al., 18 Phil. 484 (1911).
11 Rollo, 17.

12 Agbayani, Laws of the Philippines, Vol. 3,1988 Ed., 18.

13 Koppel(Philippines), Inc. vs. Yatco, etc., 77 Phil. 496(1946).
14 Telephone Engineering & Service Co., Inc. vs. Workmen's
Compensation Commission, et al., 104 SCRA 354(1981).
15 Koppel (Philippines), Inc. vs. Yatco, etc., ante.
16 Diatagon Labor Federation vs. Ople, et al., 101 SCRA 534 (1980).
* This should be Pars. (p) and (q), Sec. 5 (now Sec. 3), Rule 131.
17 Rollo, 72-73.
18 Exh. 8-Bormaheco; Folder of Exhibits, 111.
19 Id., Ibid.
20 Exh. 16-Bormaheco; Ibid., 482.
21 Id., Ibid., 484.
22 Philippine Commercial & Industrial Bank vs. The Hon. Court of
Appeals, et al., 159 SCRA 24 (1988).
23 72 C.J.S. 577.
24 72 C.J.S. 636.
25 Original Record, 1016.
26 72 C.J.S. 569.
27 Op cit 597.
28 Op cit 588.
29 Tolentino, Civil Code of the Philippines, Vol. V, 1959 Ed., 436.
30 Osborn vs. Noble, 46 Miss, 449, cited in 38 C.J.S. 1263.
31 Exh I; Folder of Exhibits, 24-25.

EXTINGUISHMENT:

EN BANC
[G.R. No. L-8349. May 23, 1956.]
PHILIPPINE NATIONAL BANK, Plaintiff-Appellant, vs. MACAPANGA PRODUCERS
INC., Defendant. PLARIDEL SURETY AND INSURANCE CO., Defendant-Appellee.
DECISION
LABRADOR, J.:
Appeal against an order of the Court of First Instance of Manila, Hon. Bienvenido A. Tan,
presiding, dismissing the complaint as against Plaridel Surety and Insurance Company.
Complaint is by Philippine National Bank against Macapanga Producers Inc. and Plaridel
Surety and Insurance Co. Principal allegations are:chanroblesvirtuallawlibrary On
December 26, 1952, Luzon Sugar Company leased a sugar mill located at Calumpit,
Bulacan to Macapanga Producers beginning with the crop year 1952-53 at a minimum
annual royalty of P50,000, which shall be a lien on the sugar produced by the lessee and
shall be paid before sale or removal of sugar from warehouse (copy of lease contract
attached as Annex A to the Complaint); chan roblesvirtualawlibraryon December 26,
1952, Macapanga Producers, as principal, and Plaridel Surety & Insurance, as surety,
executed and delivered toPlaintiff a performance bond in the amount of P50,000 for the
full and faithful compliance by Macapanga Producers of all terms and conditions of the
lease (copy of bond attached as Annex B to Complaint); chan roblesvirtualawlibraryon
December 21, 1953, Luzon Sugar assigned to Plaintiff the payment due from Macapanga
Producers in the sum of P50,000, representing royalty for the lease of the sugar mill for
the crop year 1952-53 (deed of assignment attached as Annex C to Complaint); chan
roblesvirtualawlibraryPlaintiffnotified Macapanga Producers and Plaridel Surety &
Insurance of said assignment; chan roblesvirtualawlibraryPlaintiff had demanded from
Macapanga Producers payment of said royalty of P50,000, but the latter has refused and
refuses to make payment; chan roblesvirtualawlibraryand Plaintiff also made demand on
Plaridel Surety & Insurance for said payment, but the latter refused and refuses to make
payment.
Plaridel Surety & Insurance moved to dismiss the complaint for failure to state cause of
action, alleging that it is a guarantor and as such is responsible only if Macapanga
Producers has no property or assets to pay its obligation as lessee. Plaintiff opposed the
motion calling attention to the provision of the performance bond in which Macapanga
Producers and Plaridel Surety & Insurance, the former as principal and the latter as
surety, agreed to be held and firmly bound unto Luzon Sugar in the penal sum of P50,000,
for the payment of which, well and truly be made, we bind ourselves, our heirs, executors,
administrators, successors, and assigns, jointly and severally. Plaintiff contended that,

as Plaridel Surety & Insurance bound itself solidarily with Macapanga Producers, it
became a surety in accordance with Article 2047, par. 2 of the Civil Code.
The trial court dismissed the complaint against Plaridel Surety & Insurance and
subsequently denied a motion to reconsider the order of dismissal.
The action joining Plaridel Surety & Insurance as party Defendant is justified by the
following provisions and cases:chanroblesvirtuallawlibrary
ART. 2047. cralaw
If a person binds himself solidarily with the principal debtor, the provisions of section 4,
Charter 3, Title I of this Book shall be observed. In such case the contract is called a
suretyship. (Civil Code.)
The sureties on the superedeas bond given in this particular case, were jointly and
severally liable with principal debtor and that an execution might issue against their
property concurrently with the execution against the property of the principal. (Molina vs.
De la Riva, et al., 7 Phil., 345.)
Article 1822, invoked by the Appellant, provides that if the surety bound himself jointly
with the principal debtor, the provisions of section fourth, chapter third, title first of this
book shall be observed, that is of book fourth of the Civil Code. Section fourth of the
chapter title, and book mentioned provides that a creditor may sue any of the joint debtor
or all of them simultaneously. (Art. 1144). In conformity with this provision, the sureties
Pua Ti and Yap Chatco having bound themselves in solidum (jointly and severally) with
the principal debtor Pua Te Ching, the creditor, that is, the Chinese Chamber of
Commerce, may sue any of them or all of them simultaneously; chan
roblesvirtualawlibrarywhich is what the Chinese Chamber of Commerce did in filing suit
against the joint and several debtors. (Chinese Chamber of Commerce vs. Pua Te Ching,
16 Phil., 406.).
As the principal debtors obligation is valid and has not been satisfied by his estate, and
as theDefendant sureties bound themselves solidarily, article 1144 of the Civil Code is
applicable, which provides, as follows:chanroblesvirtuallawlibrary
The creditor may sue any of the solidary debtors or all of them simultaneously. An action
instituted against one shall not be a bar to those which may be subsequently brought
against the others, as long as the debt has not been entirely satisfied. (Molina vs. De la
Riva, 7 Phil., 345; chan roblesvirtualawlibraryChinese Chamber of Commerce vs. Pua Te
Ching, 16 Phil., 406; chan roblesvirtualawlibraryInchausti & Co. vs. Yulo, 34 Phil., 978.)
(Ferrer vs. Lopez and Santos, 56 Phil., 592.)
It is also argued on behalf of Plaridel Surety and Insurance that as it was not a party to
the assignment, and same was made without its consent, it is, therefore, discharged from
its obligation. An assignment without knowledge or consent of the surety is not a material
alteration of the contract, sufficient to discharge the surety (Stearns Law of Suretyship,
Elder, fifth edition, p. 113.) There is, besides, no allegation in the complaint, or provision
in the deed of assignment, or any change therein that makes the obligation of Plaridel
Surety & Insurance more onerous than that stated in the performance bond. Such
assignment did not, therefore, release the Plaridel Surety & Insurance from its obligation
under the surety bond. (Bank of P. I. vs. Albaladejo y Cia, 53 Phil., 141; chan

roblesvirtualawlibraryBank of P. I. vs. Gooch, et al., 45 Phil., 514; chan

roblesvirtualawlibraryVisayan Distributors, Inc. vs. Flores, et al., 92 Phil., 145, 48 Off.
Gaz., 4784; chan roblesvirtualawlibraryDel Rosario vs. Nava, 95 Phil., 637, 50 Off. Gaz.,
4189.)
It is lastly contended that as Plaintiff or the lessor had a lien in the sugar produced, and
failed to proceed against it or enforce such lien, Plaridel Surety & Insurance was released
thereby. There is no allegation to this effect in the complaint, that lessor or Plaintiff ever
had possession or control of the sugar, or ever waived or released the lien
thereon. Appellee cannot raise the issue in a motion to dismiss.
The order of dismissal is hereby reversed, and the Appellee ordered to answer the
complaint, with costs.
Paras, C.J., Bengzon, Padilla, Montemayor, Reyes, A., Jugo, Concepcion, Reyes,
J.B.L., and Endencia, JJ., concur.

Guaranty and Suretyship (Articles 2047-2084)

Chapter 1. Nature and Extent of Guaranty (Arts. 2047-2084)
Piczon vs. Piczon
Facts: Sosing-Lobos & Co. obtained loan from Piczon Co. Esteban Piczon (president of
borrowing firm) bound himself as guarantor and agreed to the use of the loan as surety
cash deposit for the registration with the SEC. Consuelo Piczon (lending firm) brought
action to recover the amount loaned. Court ruled in favor of Consuelo Piczon and
ordered Esteban Piczon and Sosing-Lobos to pay him as guarantor the amount of the
loan + interest.
Issue: WON Esteban Piczon is a surety or a guarantor?
Held: Under the terms of the contract Esteban Piczon expressly bound himself only as
guarantor. A guaranty must express, and it would be violative of the law to consider a
party to be bound as surety when the very word used in the agreement is guarantor.
Palmares vs. CA (288 SCRA 422)
Facts: Private respondent M.B. Lending Corporation extended a loan to the spouses
Osmea and Merlyn Azarraga, together with petitioner Estrella Palmares, in the amount
of P30,000.00 payable on or before May 12, 1990, with compounded interest at the rate
of 6% per annum to be computed every 30 days from the date thereof. 1 On four
occasions after the execution of the promissory note and even after the loan matured,
petitioner and the Azarraga spouses were able to pay a total of P16,300.00, thereby
leaving a balance of P13,700.00. No payments were made after the last payment on
September 26, 1991. 2
Consequently, on the basis of petitioner's solidary liability under the promissory note,
respondent corporation filed a complaint 3 against petitioner Palmares as the lone
party-defendant, to the exclusion of the principal debtors, allegedly by reason of the
insolvency of the latter.

Issue: WON Palmares is liable

Held: 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. It is a cardinal rule in the interpretation of contracts that if the terms
of a contract are clear and leave no doubt upon the intention of the contracting parties,
the literal meaning of its stipulation shall control. 13 In the case at bar, petitioner
expressly bound herself to be jointly and severally or solidarily liable with the principal
maker of the note. The terms of the contract are clear, explicit and unequivocal that
petitioner's liability is that of a surety.
Castellvi de Higgins & Higgins vs. Sellner
Facts: Sellner (defendant) wrote a letter to Mcleod (Castellvis agent) saying that he
would bound himself to pay the promissory note of Mining, Clarke and Maye amounting
10K + % if not fully paid at maturity, upon the surrender 8k worth of MCMs stock which
is held by Castellvi.
Issue: WON Sellner is a guarantor or surety?
Held: Sellner is a GUARANTOR. Sellner was not bound with Castellvi by the same
instrument executed at the time and the same consideration, but his responsibility was
secondary, one founded on an independent collateral agreement. Neither was he jointly
and severally liable with Castellvi.
Reiss vs. Memije
Facts: Memije entered into a contract with D (building contractor) for repair of a house.
D has no credit line so Reiss refused to sell D lumber without an advance. Memije
accompanied D and told Reiss that he would guarantee payment for lumber. The
lumber extended by Reiss solely and exclusively to Memije was under a verbal
agreement. Reiss brought an action for the purchase price of the lumber.
Issue: WON Memije is liable as guarantor or as original promisor?
Held: Memije is primarily liable. It is evident that Memije used the words gurantor not
in a technical sense but rather that after satisfying, Reiss as to his own financial
responsibility. If goods are sold upon the sole credit and responsibility of the party who
makes the promise then, even though they are delivered to a 3 rd person, there is no
liability to the 3rd person. Promise to pay need not require a writing or memorandum to
be enforceable by action.
Machetti vs. Hospicio de San Jose
Facts: By a written agreement, Machetti undertook to construct a building for Hospicio
de San Jose.
One of the conditions was that Machetti obtain the guarantee of Fidelity & Surety Co. to
the amount of 12K. It was subsequently found out that the work had not been carried

out in accordance with the specifications. Hospicio refused to pay therefore Machetti
brought an action to recover the amount.
Issue: WON the undertaking assumed by FSC that of guarantor or surety?
Held: Circumstances may be shown which convert the contract into one of suretyship
but that does not exist. It appears that the contract is the guarantors separate
undertaking in which the principal does not join, that it rests on a separate consideration
moving from the principal, and that although it is written in continuation of the contract
for the construction of the building, it is collateral undertaking separate and distinct from
the latter. All these are features of a contract of guaranty.
Severino vs. Severino
Facts: Melecio Severino upon his death, left considerable properties. To end litigation
among heirs a compromise was effected where defendant (son of MS) took over the
property of deceased and agreed to pay installment of 100K to plaintiff (wife of MS)
payable first in 40K cash upon execution of document in 3 equal installments. Enrique
Echauz became guarantor. Upon failure to pay the balance, plaintiff filed and action
against the defendant and Echauz. Enchauz contends that he received nothing from
affixing his signature in the document and the contract lacked the consideration as to
him.
Issue: WON there is a consideration for the guaranty?
Held: 1. The guarantor or surety is bound by the same consideration that makes the
contract effective between the principal parties thereto. 2. It is neither necessary that
guarantor or surety should receive any part of the benefit, if such there be accruing to
his principal.
Municipaity of Gasan vs. Marasigan
Facts: Municipality of Gasan granted Marasigan fishing privileges within the
jurisdictional waters. To secure payment of license fees, Marasigan filed a bond
subscribed by G and H who bound themselves to pay if Marasigan failed to comply with
the terms of the contract. Contract was declared illegal by the Executive Bureau
therefore the Municipality awarded the privilege to another person who failed to pay the
deposit and yielded the privilege to Marasigan. The municipality told Marasigan that the
contract was to be effective so the municipality sought to recover from Marasigan and G
and H, the amount representing the license.
Issue: WON the contract and bond are valid and enforceable?
Held: No. Contract was not consummated and was cancelled. It ceased to be valid
when it was cancelled so Marasigsan and G&H were not bound to comply with the
terms of the contract. A guaranty cannot exist without a valid obligation.
Plaridel Surety Insurance vs. Artex Development Co.

Facts: Artex withdrew from the Bureau of Customs shipments of imported goods which
were subject to customs duties and other taxes after posting surety bonds pursuant to
RA 4086 because its applications for tax exemptions were not approved by the Board of
Industries. In consideration of the obligation assumed by Plaridel, Artex agreed to pay
the premiums and cost of documentary stamps in advance due on bonds for each
period of 12 months until bonds and its renewals, extensions or substitutions be
cancelled in full by the person or entity guaranteed or by court of competent jurisdiction.
Artex stopped paying premiums and costs of documentary stamps after it was granted
tax exemption. Plaridel maintains that it renewed the surety bonds more or less 8
months before the tax exemption. Plaridel seeks recovery of renewal of premiums on
bonds which were already null and void upon grant of tax exemption to principal
Issue: WON Artex is liable for accrued premiums and costs of doc stamps on renewals
of the surety bonds after grant of tax exemption to Plaridel?
Held: No. Suretyship cannot exsist without valid obligation. The renewals were without
consideration. Plaridel incurred no risk from Artex tax exemption application was
approved. Any renewals were void from the beginning because the cause or object of
said renewals did not exist at the time of the transtaction. Express stipulation by parties,
surety bonds became null and void upon grant of tax exemption.
Pacific Banking Corp. vs. IAC
Facts: Cecilia Regala obtained from plaintiff the issuance and use of Pacific card credit
card. Robert
Regala Jr., spouse of Cecilia, executed a Guarantors Undertaking in favor of Pacific
wherein the Regala Jr., agreed jointly and severally with Cecilia Regala, to pay Pacific
upon demand and all indebtedness, obligations, charges or liabilities due and incurred
by her. Cecilia was declared in default for failure to pay 92K within the reglementary
period. Regala Jr. admitting the execution of the Guarantors Understanding but with
the understanding that his liability would be limited to 2K/month.
Issue: WON the Guarantors Understanding is a guaranty or suretyship?
Held: It is in substance a contract of suretyship. A contract of guaranty is where a
guarantor binds himself to pay only in case the latter should fail to do so; while a
contract of suretyship, the surety binds himself solidarily with the principal debtor. Since
Regala Jr. bound himself jointly and severally, he is bound to pay the amount of
indebtedness of his wife.
Commonwealth of the Philippines vs. Far Eastern Surety and
Insurance Facts:
Issue:
Held:

PNB vs. CA, Luzon Surety Co.

Facts: Estanislao Depusoy, and the Republic of the Philippines, represented by the
Director of Public Works, entered into a building contract, for the construction of the GSTS
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.
In compliance with these conditions, Depusoy executed a Deed of Assignment of all
money to be received by him from the GSIS to PNB. 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 Dernisoy. No furher amounts were thereafter
paid by the GSIS to lie 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, therefore herein petitioner filed with
the trial court a complaint against Estanislao Depusoy and private respondent Luzon
Surety Co. Inc. (LSCI).
Issue: WON Luzon Surety is liable
Held: 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 payment of the loans or the debt of Depusoy to petitioner to the extent of
P100,000.00. 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 2056 of the Civil Code, "A guaranty is not presumed, it must be ex-pressed
and cannot extend to more than what is stipulated therein." LSCI is liable to the full extent
thereof, such liability is strictly limited to that assumed by its terms."
El Vencedor vs. Canlas
Facts: An accounting between X company and D, its agent for the sale of merchandise,
showed that D had failed to pay X for the merchandise of the value of 5K. X therefore
refused to continue to furnish D
merchandise for sale unless he gave a bond. Canlas bound himself as surety and
guarantor to D to become liable in case of his inability to pay damages. It did not appear
that at the time of the execution of the bond Canlas had knowledge of the fact that D was
indebted to X in any sum. Canlas had no knowledge.
Issue: Should the bond respond for the debt contracted by D prior to execution?
Held: No. Canlas was liable only for the value of goods furnished to D subsequent to the
execution of the bond. A contract of suretyship or guaranty is ordinarily not retrospective
and no liability attached for defaults occurring before it is entered into unless intent to be
so liable is indicated either by express words or by necessary implication.

BPI vs. Forester

Facts: The Board of directors of corporation X authorized its treasures to obtain for them
a credit n current account for 100K from BPI. Credit was granted and X began to draw
against it even before the formal document of the agreement for the said credit was
issued. The accountant G gave a bond in his name as surety and agreed to be bound
jointly and severally in the sum of 100K. The overdraft and interest amounted to 84,900.
BPI was able to collect 43,100 as a result of an action brought against X. BPI receives
25,500 subsequently.
Issue: WON the bond covered the amounts from BPI prior to its date?
Held: Yes. It is very true that bonds or other contracts of suretyship are ordinarily not to
be construed retrospectively, but that rule must yield to the intention of the contracting
parties as revealed by the evidence. In the present case, the circumstances clearly
indicated that the bond given by G was intended to cover all of the indebtedness.
Standard Oil Co. of NY vs. Cho Siong
Facts: To guarantee the fulfillment of the obligation of D, as agent of X in the sale of the
latters petroleum products, Cho Siong subscribed to a personal bond in the sum of 3K.
Cho Siong also subscribed the 3K bond and signed an instrument in favor of X in which
he assumed responsibility for account of Xs former agent.
Isssue: WON Cho Siong is liable for the debt of the former agent of X which D assumed
in virtue of another contract of which Cho Siong was not aware?
Held: No. Under the terms of the bond, Cho Siong did not answer for D, save for the
latters acts by virtue of the contract of agreement between D and X. A contract of
suretyship or guaranty is to strictly interpreted and is not to be extended beyond its terms.
Municipality of Lemery vs. Mendoza and Blas
Facts: Municipality of Lemery granted fishing privileges to D for a period of 2 years for
the sum of 23K for each year. Mendoza and Blas as bondsmen, executed a document
which declared, among other thing, the lease by D of the privilege of fishing referred to
for the term of 2 years. In said document, Mendoza and Blass obligated themselves jointly
and severally to pay the sum of 46K in case D shall fail to comply with the conditions of
the bond of which we are informed. D failed to pay.
Issue: WON Mendoza and Blas are bound to pay 46K or 23K
Held: 23K. The obligating clause of the contract of guaranty is quite clear to the effect that
the rent to be paid for the privilege of fishery was 23K for the full term of 2 years. It is true
that Mendoza and Blas declared 46K, but it was only because the bond was required to
be made in double the amount of the principal liability as an assurance of the performance
of the principal obligation.
Wise and Co. vs. Kelly
Facts: D purchased merchandise from C on credit and agreed that D would apply the
proceeds of its sale to the discharge of his indebtedness in the amount of 13K the
purchase price. Kelly as surety for D, undertook that D would pay over to C the entire
proceeds from the sale of the merchandise.

Issue: WON Kelly is liable for the difference between the amount realized from the sale
of the merchandise and the purchase price of the same?
Held: No. Kelly did not undertake absolutely to pay the sum of 13K. His agreement was
limited to respond for the performance by D of his undertaking to deliver to C the total
proceeds of the sale of the merchandise for the invoice value of which a promissory note
was given by D.
Pacific Tobacco Corp. vs. Lorenzana
Facts: The Pacific Tobacco Corp. is engaged in the business of manufacturing and
distributing cigarettes cigars and other tobacco products. Lorenzana and PTC entered
into an agreement whereby Lorenzana will act as Distributor of PTC. Lorenzana put up
a bond in the amount of 3K with Visayan Surety & Insurance Corporation, as surety, to
guarantee the faithful fulfillment of Lorenzanas part in the contract to sell and distribute
PTCs cigarettes.
Issue: WON the delivery of merchandise to Lorenzana at a place other than that
appearing in the contract constitutes a material alteration of the same that would
release Lorenzana from liability?
Held: No. The mention of Manila and Rizal in said agreement was designed more as a
declaration or identification of the places wherein Lorenzana was expressly authorized
and assigned to sell PTCs products which is no obstacle to his acceptance of additional
territories in order to fulfill his obligation. A departure from the terms of contract will not
have the effect of discharging a compensated surety unless it appears that such departure
has resulted in injury, loss or prejudice to the surety.