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We find no merit in petitioners contentions.

[G.R. No. 160466. January 17, 2005] Reliance of petitioners-spouses on Articles 2063 and
2081 of the Civil Code is misplaced as these provisions refer
SPOUSES ALFREDO and SUSANA ONG, petitioners, to contracts of guaranty. They do not apply to suretyship
vs. PHILIPPINE COMMERCIAL INTERNATIONAL contracts. Petitioners-spouses are not guarantors but sureties of
BANK, respondent. BMCs debts. There is a sea of difference in the rights and liabilities
of a guarantor and a surety. A guarantor insures the solvency of
the debtor while a surety is an insurer of the debt itself. A
contract of guaranty gives rise to a subsidiary obligation on the
Facts: Baliwag Mahogany Corporation (BMC) is a domestic part of the guarantor. It is only after the creditor has proceeded
corporation engaged in the manufacture and export of finished against the properties of the principal debtor and the debt remains
wood products. Petitioners-spouses Alfredo and Susana Ong are unsatisfied that a guarantor can be held liable to answer for any
its President and Treasurer, respectively. unpaid amount. This is the principle of excussion. In a suretyship
contract, however, the benefit of excussion is not available to
Respondent Philippine Commercial International Bank (now the surety as he is principally liable for the payment of the debt.
Equitable-Philippine Commercial International Bank or E-PCIB)
As the surety insures the debt itself, he obligates himself to pay the
filed a case for collection of a sum of money against petitioners- debt if the principal debtor will not pay, regardless of whether or not
spouses. Respondent bank sought to hold petitioners-spouses the latter is financially capable to fulfill his obligation. Thus, a
liable as sureties on the three (3) promissory notes they issued to
creditor can go directly against the surety although the principal
secure some of BMCs loans, totalling five million pesos
debtor is solvent and is able to pay or no prior demand is made on
(P5,000,000.00). the principal debtor. A surety is directly, equally and absolutely
BMC needed additional capital for its business and applied for bound with the principal debtor for the payment of the debt and
various loans, amounting to a total of five million pesos, with the is deemed[5]as an original promissor and debtor from the
respondent bank. Petitioners-spouses acted as sureties for these beginning.
loans and issued three (3) promissory notes for the purpose. Under Under the suretyship contract entered into by petitioners-
the terms of the notes, it was stipulated that respondent bank
spouses with respondent bank, the former obligated themselves to
may consider debtor BMC in default and demand payment of
be solidarily bound with the principal debtor BMC for the payment
the remaining balance of the loan upon the levy, attachment or
of its debts to respondent bank amounting to five million pesos
garnishment of any of its properties, or upon BMCs (P5,000,000.00). Under Article 1216 of the Civil
insolvency, or if it is declared to be in a state of suspension of Code,[6] respondent bank as creditor may proceed against
payments. Respondent bank granted BMCs loan applications.
petitioners-spouses as sureties despite the execution of the MOA
BMC filed a petition for rehabilitation and suspension of which provided for the suspension of payment and filing of collection
payments with the Securities and Exchange Commission (SEC) suits against BMC. Respondent banks right to collect payment from
after its properties were attached by creditors. Respondent bank the surety exists independently of its right to proceed directly
considered debtor BMC in default of its obligations and sought to against the principal debtor. In fact, the creditor bank may go
collect payment thereof from petitioners-spouses as sureties. against the surety alone without prior demand for payment on the
principal debtor.[7]
A Memorandum of Agreement (MOA) was executed by debtor
BMC, the petitioners-spouses as President and Treasurer of BMC, The provisions of the MOA regarding the suspension of
and the consortium of creditor banks of BMC (of which respondent payments by BMC and the non-filing of collection suits by the
bank is included). The MOA took effect upon its approval by the creditor banks pertain only to the property of the principal
SEC. debtor BMC. Firstly, in the rehabilitation receivership filed by BMC,
only the properties of BMC were mentioned in the petition with the
Thereafter, petitioners-spouses moved to dismiss[4] the SEC.[8] Secondly, there is nothing in the MOA that involves the
complaint. They argued that as the SEC declared the principal liabilities of the sureties whose properties are separate and distinct
debtor BMC in a state of suspension of payments and, under the from that of the debtor BMC. Lastly, it bears to stress that the MOA
MOA, the creditor banks, including respondent bank, agreed to executed by BMC and signed by the creditor-banks was approved
temporarily suspend any pending civil action against the debtor by the SEC whose jurisdiction is limited only to corporations and
BMC, the benefits of the MOA should be extended to petitioners- corporate assets. It has no jurisdiction over the properties of BMCs
spouses who acted as BMCs sureties in their contracts of loan with officers or sureties.
respondent bank. Petitioners-spouses averred that respondent
bank is barred from pursuing its collection case filed against them. Clearly, the collection suit filed by respondent bank against
petitioners-spouses as sureties can prosper. The trial courts denial
The trial court denied the motion to dismiss. Petitioners- of petitioners motion to dismiss was proper.
spouses appealed to the Court of Appeals which affirmed the trial
courts ruling that a creditor can proceed against petitioners- G.R. No. L-16666 April 10, 1922
spouses as surety independently of its right to proceed against the
principal debtor BMC.
ROMULO MACHETTI, plaintiff-appelle,
Petitioners-spouses claim that the collection case filed against vs.
them by respondent bank should be dismissed for three (3) HOSPICIO DE SAN JOSE, defendant-appellee, and
reasons: First, the MOA provided that during its effectivity, there FIDELITY & SURETY COMPANY OF THE PHILIPPINE
shall be a suspension of filing or pursuing of collection cases ISLANDS, defendant-appellant
against the BMC and this provision should benefit petitioners
as sureties. Second, principal debtor BMC has been placed under One Romulo Machetti, by a written agreement undertook to
suspension of payment of debts by the SEC; petitioners contend construct a building on Calle Rosario in the city of Manila for the
that it would prejudice them if the principal debtor BMC would enjoy Hospicio de San Jose, the contract price being P64,000. One of the
the suspension of payment of its debts while petitioners, who acted conditions of the agreement was that the contractor should obtain
only as sureties for some of BMCs debts, would be compelled to the "guarantee" of the Fidelity and Surety Company of the
make the payment; petitioners add that compelling them to pay is Philippine Islands to the amount of P128,800 and the following
contrary to Article 2063 of the Civil Code which provides that a endorsement in the English language appears upon the contract:
compromise between the creditor and principal debtor
benefits the guarantor and should not prejudice the latter.
Lastly, petitioners rely on Article 2081 of the Civil Code which For value received we hereby guarantee compliance with
provides that: the guarantor may set up against the creditor all the terms and conditions as outlined in the above contract.
the defenses which pertain to the principal debtor and are
inherent in the debt; but not those which are purely personal Machetti constructed the building under the supervision of
to the debtor. Petitioners aver that if the principal debtor BMC can architects representing the Hospicio de San Jose and, as the work
set up the defense of suspension of payment of debts and filing of progressed, payments were made to him from time to time upon the
collection suits against respondent bank, petitioners as sureties recommendation of the architects, until the entire contract price,
should likewise be allowed to avail of these defenses. with the exception of the sum of the P4,978.08, was paid.

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Subsequently it was found that the work had not been carried DEAR SIR: I hereby obligate and bind myself, my
out in accordance with the specifications which formed part of heirs, successors and assigns that if the
the contract and that the workmanship was not of the standard promissory note executed by the Keystone
required, and the Hospicio de San Jose therefore answered the Mining Co., W.H. Clarke, and John Maye, jointly
complaint and presented a counterclaim for damages for the and severally, in your favor and due six months
partial noncompliance with the terms of the agreement after date for Pesos 10,000 is not fully paid at
abovementioned, in the total sum of P71,350. After issue was maturity with interest, I will, within fifteen days
thus joined, Machetti, on petition of his creditors, was, on February after notice of such default, pay you in cash the
27, 1918, declared insolvent and on March 4, 1918, an order was sum of P10,000 and interest upon your
entered suspending the proceeding in the present case in surrendering to me the three thousand shares of
accordance with section 60 of the Insolvency Law, Act No. 1956. stock of the Keystone Mining Co. held by you as
security for the payment of said note.
The Hospicio de San Jose on January 29, 1919, filed a motion
asking that the Fidelity and Surety Company be made cross- Counsel for both parties agree that the only point at issue is the
defendant to the exclusion of Machetti and that the proceedings be determination of defendant's status in the transaction referred to.
continued as to said company, but still remain suspended as to Plaintiffs contend that he is a surety; defendant contends that he is
Machetti. This motion was granted and on February 7, 1920, the a guarantor. Plaintiffs also admit that if defendant is a guarantor,
Hospicio filed a complaint against the Fidelity and Surety Company articles 1830, 1831, and 1834 of the Civil Code govern.
asking for a judgement for P12,800 against the company upon its
guaranty. After trial, the Court of First Instance rendered judgment Held:
against the Fidelity and Surety Company for P12,800 in accordance
with the complaint. The case is now before this court upon appeal
by the Fidelity and Surety Company form said judgment. In the original Spanish of the Civil Code now in force in the
Philippine Islands, Title XIV of Book IV is entitled "De la Fianza."
The Spanish word "fianza" is translated in the Washington and
As will be seen, the original action which Machetti was the plaintiff Walton editions of the Civil Code as "security." "Fianza" appears in
and the Hospicio de San Jose defendant, has been converted into the Fisher translation as "suretyship." The Spanish world "fiador" is
an action in which the Hospicio de San Jose is plaintiff and the found in all of the English translations of the Civil Code as "surety."
Fidelity and Surety Company, the original plaintiff's guarantor, is the The law of guaranty is not related of by that name in the Civil Code,
defendant, Machetti having been practically eliminated from the although indirect reference to the same is made in the Code of
case. Commerce. In terminology at least, no distinction is made in the
Civil Code between the obligation of a surety and that of a
But in this instance the guarantor's case is even stronger than that guarantor.
of an ordinary surety. The contract of guaranty is written in the
English language and the terms employed must of course be given As has been done in the State of Louisiana, where, like in the
the signification which ordinarily attaches to them in that language. Philippines, the substantive law has a civil law origin, we feel free
In English the term "guarantor" implies an undertaking of guaranty, to supplement the statutory law by a reference to the precepts of
as distinguished from suretyship. It is very true that notwithstanding the law merchant.
the use of the words "guarantee" or "guaranty" circumstances may
be shown which convert the contract into one of suretyship but such
circumstances do not exist in the present case; on the contrary it The points of difference between a surety and a guarantor are
appear affirmatively that the contract is the guarantor's separate familiar to American authorities. A surety and a guarantor are alike
undertaking in which the principal does not join, that its rests on a in that each promises to answer for the debt or default of another.
separate consideration moving from the principal and that although A surety and a guarantor are unlike in that the surety assumes
it is written in continuation of the contract for the construction of the liability as a regular party to the undertaking, while the liability as a
building, it is a collateral undertaking separate and distinct from the regular party to upon an independent agreement to pay the
latter. All of these circumstances are distinguishing features of obligation if the primary pay or fails to do so. A surety is charged as
contracts of guaranty. an original promissory; the engagement of the guarantor is a
collateral undertaking. The obligation of the surety is primary; the
obligation of the guarantor is secondary. (See U.S. vs. Varadero de
Now, while a surety undertakes to pay if the principal does not pay, la Quinta [1919], 40 Phil., 48; Lachman vs. Block [1894], 46 La.
the guarantor only binds himself to pay if the principal cannot pay. Ann., 649; Bedford vs. Kelley [1913], 173 Mich., 492; Brandt, on
The one is the insurer of the debt, the other an insurer of the Suretyship and Guaranty, sec. 1, cited approvingly by many
solvency of the debtor. (Saint vs.Wheeler & Wilson Mfg. Co., 95 authorities.)
Ala., 362; Campbell, vs. Sherman, 151 Pa. St., 70; Castellvi de
Higgins and Higgins vs. Sellner, 41 Phil., 142; ;U.S. vs. Varadero
de la Quinta, 40 Phil., 48.) This latter liability is what the Fidelity and Turning back again to our Civil Code, we first note that according to
Surety Company assumed in the present case. The undertaking is article 1822 "By fianza (security or suretyship) one person binds
perhaps not exactly that of a fianza under the Civil Code, but is a himself to pay or perform for a third person in case the latter should
perfectly valid contract and must be given the legal effect if fail to do so." But "If the surety binds himself in solidum with the
ordinarily carries. The Fidelity and Surety Company having bound principal debtor, the provisions of Section fourth, Chapter third, Title
itself to pay only the event its principal, Machetti, cannot pay it first, shall be applicable." What the first portion of the cited article
follows that it cannot be compelled to pay until it is shown that provides is, consequently, seen to be somewhat akin to the contract
Machetti is unable to pay. Such ability may be proven by the return of guaranty, while what is last provided is practically equivalent to
of a writ of execution unsatisfied or by other means, but is not the contract of suretyship. When in subsequent articles found in
sufficiently established by the mere fact that he has been declared section 1 of Chapter II of the title concerning fianza, the Code
insolvent in insolvency proceedings under our statutes, in which the speaks of the effects of suretyship between surety and creditor, it
extent of the insolvent's inability to pay is not determined until the has, in comparison with the common law, the effect of guaranty
final liquidation of his estate. between guarantor and creditor. The civil law suretyship is,
accordingly, nearly synonymous with the common law guaranty;
and the civil law relationship existing between codebtors liable in
G.R. No. L-158025 November 5, 1920 solidum is similar to the common law suretyship.

CARMEN CASTELLVI DE HIGGINS and HORACE L. It is perfectly clear that the obligation assumed by defendant was
HIGGINS, plaintiffs-appellants, simply that of a guarantor, or, to be more precise, of
vs. the fiador whose responsibility is fixed in the Civil Code. The letter
GEORGE C. SELLNER, defendant-appellee. of Mr. Sellner recites that if the promissory note is not paid at
maturity, then, within fifteen days after notice of such default and
The basis of plaintiff's action is a letter written by defendant George upon surrender to him of the three thousand shares of Keystone
C. Sellner to John T. Macleod, agent for Mrs. Horace L. Higgins, on Mining Company stock, he will assume responsibility. Sellner is not
May 31, 1915, of the following tenor:lawph! bound with the principals by the same instrument executed at the
same time and on the same consideration, but his responsibility is
a secondary one found in an independent collateral agreement,

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Neither is Sellner jointly and severally liable with the principal referred to as 'Continuing Guaranty' dated August 21,1985 (Exh. 7)
debtors. states as follows:

With particular reference, therefore, to appellants assignments of 'For and in consideration of any existing indebtedness to you of
error, we hold that defendant Sellner is a guarantor within the Agro Brokers, a single proprietorship owned by Mr. Raul Claveria
meaning of the provisions of the Civil Code. for the payment of which the undersigned is now obligated to you
as surety and in order to induce you, in your discretion, at any other
There is also an equitable aspect to the case which reenforces this manner, to, or at the request or for the account of the borrower, x x
conclusion. The note executed by the Keystone Mining Company x'
matured on November 29, 1915. Interest on the note was not
accepted by the makers until September 30, 1916. When the note "The provisions of the document are clear, plain and explicit.
became due, it is admitted that the shares of stock used as
collateral security were selling at par; that is, they were worth pesos "Clearly therefore, defendant E. Zobel, Inc. signed as surety. Even
30,000. Notice that the note had not been paid was not given to and though the title of the document is 'Continuing Guaranty', the
when the Keyston Mining Company stock was worthless. Court's interpretation is not limited to the title alone but to the
Defendant, consequently, through the laches of plaintiff, has lost contents and intention of the parties more specifically if the
possible chance to recoup, through the sale of the stock, any language is clear and positive. The obligation of the defendant
amount which he might be compelled to pay as a surety or Zobel being that of a surety, Art. 2080 New Civil Code will not apply
guarantor. The "indulgence," as this word is used in the law of as it is only for those acting as guarantor. In fact, in the letter of
guaranty, of the creditors of the principal, as evidenced by the January 31, 1986 of the defendants (spouses and Zobel) to the
acceptance of interest, and by failure promptly to notify the plaintiff it is requesting that the chattel mortgage on the vessels and
guarantor, may thus have served to discharge the guarantor. tugboat be waived and/or rescinded by the bank inasmuch as the
said loan is covered by the Continuing Guaranty by Zobel in favor
For quite different reasons, which, nevertheless, arrive at the same of the plaintiff thus thwarting the claim of the defendant now that the
result, judgment is affirmed, with costs of this instance against the chattel mortgage is an essential condition of the guaranty. In its
appellants. So ordered. letter, it said that because of the Continuing Guaranty in favor of the
plaintiff the chattel mortgage is rendered unnecessary and
E. ZOBEL, INC., petitioner, vs. THE COURT OF APPEALS,
CONSOLIDATED BANK AND TRUST CORPORATION, "With regard to the claim that the failure of the plaintiff to register
and SPOUSES RAUL and ELEA R. the chattel mortgage with the proper government agency, i.e. with
CLAVERIA, respondents. the Office of the Collector of Customs or with the Register of Deeds
makes the obligation a guaranty, the same merits a scant
DECISION consideration and could not be taken by this Court as the basis of
the extinguishment of the obligation of the defendant corporation to
MARTINEZ, J.: the plaintiff as surety. The chattel mortgage is an additional security
and should not be considered as payment of the debt in case of
This petition for review on certiorari seeks the reversal of the failure of payment. The same is true with the failure to register,
decision[1] of the Court of Appeals dated July 13, 1993 which extinction of the liability would not lie.
affirmed the Order of the Regional Trial Court of Manila, Branch 51,
denying petitioner's Motion to Dismiss the complaint, as well as the
"WHEREFORE, the Motion to Dismiss is hereby denied and
Resolution[2] dated February 15, 1994 denying the motion for
defendant E. Zobel, Inc., is ordered to file its answer to the
reconsideration thereto.
complaint within ten (10) days from receipt of a copy of this Order." [5]
The facts are as follows:
Petitioner moved for reconsideration but was denied on April
Respondent spouses Raul and Elea Claveria, doing business 26,1993.
under the name "Agro Brokers," applied for a loan with respondent
Thereafter, petitioner questioned said Orders before the
Consolidated Bank and Trust Corporation (now SOLIDBANK) in the
respondent Court of Appeals, through a petition for certiorari,
amount of Two Million Eight Hundred Seventy Five Thousand
alleging that the trial court committed grave abuse of discretion in
Pesos (P2, 875,000.00) to finance the purchase of two (2) maritime
[3] denying the motion to dismiss.
barges and one tugboat which would be used in their molasses
business. The loan was granted subject to the condition that On July 13,1993, the Court of Appeals rendered the assailed
respondent spouses execute a chattel mortgage over the three (3) decision the dispositive portion of which reads:
vessels to be acquired and that a continuing guarantee be executed
by Ayala International Philippines, Inc., now herein petitioner E.
Zobel, Inc. in favor of SOLIDBANK. The respondent spouses "WHEREFORE, finding that respondent Judge has not committed
agreed to the arrangement. Consequently, a chattel mortgage and any grave abuse of discretion in issuing the herein assailed orders,
a Continuing Guaranty[4] were executed. We hereby DISMISS the petition."

Respondent spouses defaulted in the payment of the entire A motion for reconsideration filed by petitioner was denied for
obligation upon maturity. Hence, on January 31,1991, SOLIDBANK lack of merit on February 15,1994.
filed a complaint for sum of money with a prayer for a writ of Petitioner now comes to us via this petition arguing that the
preliminary attachment, against respondents spouses and respondent Court of Appeals erred in its finding: (1) that Article 2080
petitioner. The case was docketed as Civil Case No. 91-55909 in of the New Civil Code which provides: "The guarantors, even
the Regional Trial Court of Manila. though they be solidary, are released from their obligation
Petitioner moved to dismiss the complaint on the ground that whenever by some act of the creditor they cannot be subrogated to
its liability as guarantor of the loan was extinguished pursuant to the rights, mortgages, and preferences of the latter," is not
Article 2080 of the Civil Code of the Philippines. It argued that it has applicable to petitioner; (2) that petitioner's obligation to respondent
lost its right to be subrogated to the first chattel mortgage in view of SOLIDBANK under the continuing guaranty is that of a surety; and
SOLIDBANK's failure to register the chattel mortgage with the (3) that the failure of respondent SOLIDBANK to register the chattel
appropriate government agency. mortgage did not extinguish petitioner's liability to respondent
SOLIDBANK opposed the motion contending that Article 2080
is not applicable because petitioner is not a guarantor but a surety. We shall first resolve the issue of whether or not petitioner
under the "Continuing Guaranty" obligated itself to SOLIDBANK as
On February 18, 1993, the trial court issued an Order, portions a guarantor or a surety.
of which reads:
A contract of surety is an accessory promise by which a
person binds himself for another already bound, and agrees with
"After a careful consideration of the matter on hand, the Court finds the creditor to satisfy the obligation if the debtor does not. [7] A
the ground of the motion to dismiss without merit. The document contract of guaranty, on the other hand, is a collateral undertaking
to pay the debt of another in case the latter does not pay the debt. [8]

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Strictly speaking, guaranty and surety are nearly related, and your possession or control or that of any third party acting in
many of the principles are common to both. However, under our civil your behalf as aforesaid should be attached of distrained, or
law, they may be distinguished thus: A surety is usually bound with should be or become subject to any mandatory order of court
his principal by the same instrument, executed at the same time, or other legal process, then, or any time after the happening of
and on the same consideration. He is an original promissor and any such event any or all of the instruments of indebtedness
debtor from the beginning, and is held, ordinarily, to know every or other obligations hereby guaranteed shall, at your option
default of his principal. Usually, he will not be discharged, either bybecome (for the purpose of this guaranty) due and payable by
the mere indulgence of the creditor to the principal, or by want of the undersigned forthwith without demand of notice, and full
notice of the default of the principal, no matter how much he may power and authority are hereby given you, in your discretion, to sell,
be injured thereby. On the other hand, the contract of guaranty is assign and deliver all or any part of the property upon which you
the guarantor's own separate undertaking, in which the principal may then have a lien hereunder at any broker's board, or at public
does not join. It is usually entered into before or after that of the or private sale at your option, either for cash or for credit or for future
principal, and is often supported on a separate consideration from delivery without assumption by you of credit risk, and without either
that supporting the contract of the principal. The original contract ofthe demand, advertisement or notice of any kind, all of which are
his principal is not his contract, and he is not bound to take notice hereby expressly waived. At any sale hereunder, you may, at your
of its non-performance. He is often discharged by the mere option, purchase the whole or any part of the property so sold, free
indulgence of the creditor to the principal, and is usually not liable from any right of redemption on the part of the undersigned, all such
unless notified of the default of the principal.[9] rights being also hereby waived and released. In case of any sale
and other disposition of any of the property aforesaid, after
Simply put, a surety is distinguished from a guaranty in that a deducting all costs and expenses of every kind for care,
guarantor is the insurer of the solvency of the debtor and thus binds safekeeping, collection, sale, delivery or otherwise, you may
himself to pay if the principal is unable to pay while a surety is the apply the residue of the proceeds of the sale and other
insurer of the debt, and he obligates himself to pay if the disposition thereof, to the payment or reduction, either in
principal does not pay.[10] whole or in part, of any one or more of the obligations or
Based on the aforementioned definitions, it appears that the liabilities hereunder of the undersigned whether or not except
contract executed by petitioner in favor of SOLIDBANK, albeit for disagreement such liabilities or obligations would then
denominated as a "Continuing Guaranty," is a contract of surety. be due, making proper allowance or interest on the obligations
The terms of the contract categorically obligates petitioner as and liabilities not otherwise then due, and returning the
"surety" to induce SOLIDBANK to extend credit to respondent overplus, if any, to the undersigned; all without prejudice to
spouses. This can be seen in the following stipulations. your rights as against the undersigned with respect to any and
all amounts which may be or remain unpaid on any of the
obligations or liabilities aforesaid at any time (s)"
"For and in consideration of any existing indebtedness to you of
AGRO BROKERS, a single proprietorship owned by MR. RAUL P. xxx xxx xxx
CLAVERIA, of legal age, married and with business address x x x
(hereinafter called the Borrower), for the payment of which 'Should the Borrower at this or at any future time furnish, or
the undersigned is now obligated to you as surety and in order should be heretofore have furnished, another surety or
to induce you, in your discretion, at any time or from time to time sureties to guarantee the payment of his obligations to you,
hereafter, to make loans or advances or to extend credit in any other the undersigned hereby expressly waives all benefits to which
manner to, or at the request or for the account of the Borrower, the undersigned might be entitled under the provisions of
either with or without purchase or discount, or to make any loans or Article 1837 of the Civil Code (beneficio division), the liability
advances evidenced or secured by any notes, bills receivable, of the undersigned under any and all circumstances being joint
drafts, acceptances, checks or other instruments or evidences of and several;" (Italics Ours)
indebtedness x x upon which the Borrower is or may become liable
as maker, endorser, acceptor, or otherwise, the undersigned The use of the term "guarantee" does not ipso facto mean
agrees to guarantee, and does hereby guarantee, the punctual that the contract is one of guaranty. Authorities recognize that the
payment, at maturity or upon demand, to you of any and all word "guarantee" is frequently employed in business transactions
such instruments, loans, advances, credits and/or other to describe not the security of the debt but an intention to be bound
obligations herein before referred to, and also any and all other by a primary or independent obligation. [11]As aptly observed by the
indebtedness of every kind which is now or may hereafter trial court, the interpretation of a contract is not limited to the title
become due or owing to you by the Borrower, together with any alone but to the contents and intention of the parties.
and all expenses which may be incurred by you in collecting all or
any such instruments or other indebtedness or obligations Having thus established that petitioner is a surety, Article 2080
hereinbefore referred to, and or in enforcing any rights hereunder, of the Civil Code, relied upon by petitioner, finds no application to
and also to make or cause any and all such payments to be made the case [12] at bar. In Bicol Savings and Loan Association vs.
strictly in accordance with the terms and provisions of any Guinhawa, we have ruled that Article 2080 of the New Civil Code
agreement (g), express or implied, which has (have) been or may does not apply where the liability is as a surety, not as a guarantor.
hereafter be made or entered into by the Borrower in reference But even assuming that Article 2080 is applicable,
thereto, regardless of any law, regulation or decree, now or SOLIDBANK's failure to register the chattel mortgage did not
hereafter in effect which might in any manner affect any of the terms release petitioner from the obligation. In the Continuing Guaranty
or provisions of any such agreements(s) or your right with respect executed in favor of SOLIDBANK, petitioner bound itself to the
thereto as against the Borrower, or cause or permit to be invoked contract irrespective of the existence of any collateral. It even
any alteration in the time, amount or manner of payment by the released SOLIDBANK from any fault or negligence that may impair
Borrower of any such instruments, obligations or indebtedness; x x the contract. The pertinent portions of the contract so provides:
x " (Italics Ours)
One need not look too deeply at the contract to determine the "x x x the undersigned (petitioner) who hereby agrees to be and
nature of the undertaking and the intention of the parties. The remain bound upon this guaranty, irrespective of the
contract clearly disclose that petitioner assumed liability to existence, value or condition of any collateral, and
SOLIDBANK, as a regular party to the undertaking and obligated notwithstanding any such change, exchange, settlement,
itself as an original promissor. It bound itself jointly and severally to compromise, surrender, release, sale, application, renewal or
the obligation with the respondent spouses. In fact, SOLIDBANK extension, and notwithstanding also that all obligations of the
need not resort to all other legal remedies or exhaust respondent Borrower to you outstanding and unpaid at any time (s) may exceed
spouses' properties before it can hold petitioner liable for the the aggregate principal sum herein above prescribed.
obligation. This can be gleaned from a reading of the stipulations in
the contract, to wit: 'This is a Continuing Guaranty and shall remain in full force and
effect until written notice shall have been received by you that it has
'x x x If default be made in the payment of any of the been revoked by the undersigned, but any such notice shall not be
instruments, indebtedness or other obligation hereby released the undersigned from any liability as to any instruments,
guaranteed by the undersigned, or if the Borrower, or the loans, advances or other obligations hereby guaranteed, which may
undersigned should die, dissolve, fail in business, or become be held by you, or in which you may have any interest, at the time
insolvent, x x x , or if any funds or other property of the of the receipt of such notice. No act or omission of any kind on
Borrower, or of the undersigned which may be or come into your part in the premises shall in any event affect or impair this

Page 4 of 10
guaranty, nor shall same be affected by any change which may For purposes of a motion to dismiss, allegations of the complaint
arise by reason of the death of the undersigned, of any partner (s) are deemed true (Castelvi Raquiza vs. Ofilada, L-17182,
of the undersigned, or of the Borrower, or of the accession to any September 30, 1963). Assuming, therefore, that, as alleged in the
such partnership of any one or more new partners." (Italics amended complaint, the parties concerned executed the
supplied) agreements of surety (Schedule A), indemnity (Schedule B) and
counter-guaranty with real estate mortgage (Schedule C) that the
In fine, we find the petition to be without merit as no reversible principal obligation consisting in the promissory note was not paid
error was committed by respondent Court of Appeals in rendering upon maturity; and that plaintiff as surety had paid the obligation
the assailed decision. thereunder, does plaintiff have a cause of action so as to proceed
against defendants without first proceeding against Associated
G.R. No. L-20978 February 28, 1966 Reclamation & Development Corporation?

THE PHILIPPINE AMERICAN GENERAL INSURANCE Schedule B, the indemnity agreement, reads in part as follows:
COMPANY, INC., plaintiff-appellant,
We, the undersigned ASSOCIATED RECLAMATION &
DEVELOPMENT CORP. represented by its President,
M. Macias for the plaintiff-appellant. Antonio R. Banzon; and Eugenio B. Ramos and P.
A. D. Gumulad for the defendants-appellees. Miranda, jointly and severally bind ourselves unto the
BENGZON, J.P. J.: COMPANY, INC., a corporation duly organized and
existing under and by virtue of the laws of the Philippines,
Associated Reclamation & Development Corporation executed on with head office at Manila, Philippines, hereinafter called
March 29, 1961 a promissory note for P11,765.00 in favor of the COMPANY, in the consideration of it having become
General Acceptance & Finance Corporation. Philippine American SURETY upon a bond in the sum of Pesos ELEVEN
General Insurance Co., Inc., on the same date, executed a surety THOUSAND SEVEN HUNDRED SIXTY-FIVE . . .
bond in the amount of P11,765.00 to secure payment of the (P11,765.00), Philippine Currency, in favor of GENERAL
aforementioned promissory note. Subsequently, on April 5, 1961, ACCEPTANCE & FINANCING CORPORATION in behalf
the spouses Eugenio Ramos and Pilar Miranda signed a counter- of ASSOCIATED RECLAMATION & DEVELOPMENT
guaranty agreement with real estate mortgage, in favor of Philippine CORPORATION . . . subject to the following terms and
American General Insurance Co., Inc., against its liability under the conditions:
surety bond. The next day, April 6, 1961, the Ramos spouses and
Associated Reclamation & Development Corporation executed an xxx xxx xxx
indemnity agreement in favor of Philippine American General
Insurance Co., Inc., thereunder binding themselves "jointly and INDEMNITY:—The undersigned agree at all times to
severally" to indemnify the Philippine American General Insurance jointly and severally indemnify the COMPANY and keep it
Co., Inc., for whatever it may suffer under its aforesaid surety bond. indemnified and hold and save it harmless from and
against any and all damages, losses, costs, stamps, taxes,
Philippine American General Insurance Co., Inc., on November 3, penalties, charges and expenses of whatsoever kind and
1961, filed a complaint in the Court of First Instance of Bataan nature which the COMPANY shall or may at any time
against the Ramos spouses. Attached to the complaint, as parts sustain or incur in consequence of having become surety
thereof, were (1) the surety bond agreement of March 29, 1961 and upon the bond hereinabove referred to . . . .
(2) the counter guaranty with real estate mortgage agreement of
April 5, 1961. Plaintiff alleged that Associated Reclamation & xxx xxx xxx
Development Corporation failed to pay its obligation under the
promissory note, as a result of which plaintiff paid its liability under
its surety bond in the sum of P11,765. It therefore asked that OUR LIABILITY THEREUNDER: — It shall not be
defendants be ordered jointly and severally to pay plaintiff P11,765 necessary for the COMPANY to bring suit against the
with the stipulated 12% per annum interest, plus attorney's fees and principal upon his default, or exhaust the property of the
costs. In the event of non-payment thereof within 90 days from principal, but the liability hereunder of the undersigned
service of judgment, it was further prayed that the mortgaged indemnitors shall be jointly and severally, a primary one,
property be sold to realize the aforesaid sum and costs, with a the same as that of the principal, and shall be exigible
deficiency judgment if necessary.1äwphï1.ñët immediately upon the occurrence of such default. (Record
on Appeal, pp. 48-50, 53-54, Emphasis supplied.)
Defendants on January 26, 1962 filed a motion to dismiss, asserting
that the complaint stated no cause of action. It was contended that It is clear from the foregoing that the amended complaint sufficiently
under the Agreement of Counter-Guaranty with Real Estate states a cause of action against defendants. For the creditor may
Mortgage, the defendants were guarantors only so that plaintiff proceed against any one of the solidary debtors or some or all of
must first exhaust the properties of the principal debtor, Associated them simultaneously (Art. 1216, New Civil Code). It should not be
Reclamation & Development Corporation, before proceeding overlooked, also, that the above-quoted indemnity agreement could
against defendants. not have been modified by Schedule C, the counter-guaranty
agreement, since the former was executed one day after the latter.
Plaintiff thereafter filed, on February 10, 1962, an amended
complaint. Incorporated thereto and made parts of said amended Finally, even under Schedule C, the defendants as counter-
complaint were (1) the surety bond agreement, as Schedule A; (2) guarantors are not entitled to demand exhaustion of the properties
the indemnity agreement of April 6, 1961, as Schedule B; and (3) of the principal debtor. For Schedule C is a counter-guaranty with
the Agreement of Counter-Guaranty with Real Estate Mortgage, as real estate mortgage. It is accepted that guarantors have no right to
Schedule C. It prayed for the same relief as the original complaint. demand exhaustion of the properties of the principal debtor, under
Article 2058 of the New Civil Code, where a pledge or mortgage has
been given as a special security (Saavedra vs. Price, 68 Phil. 688;
Sustaining the ground of defendants' motion, the Court of First Southern Motors vs. Barbosa, 53 O.G. 137).
Instance issued an order on August 31, 1962 dismissing the case.
Said court ruled that, under Schedules B and C of the amended
complaint, defendants cannot be made liable without first Wherefore, the order appealed from is hereby reversed and set
proceeding against Associated Reclamation and Development aside and the case is remanded to the court a quo for further
Corporation. proceedings. Costs against defendants-appellees. So ordered.
Plaintiff appealed directly to this Court, no factual question being CORPORATION, petitioner, vs. V.P. EUSEBIO

Page 5 of 10
EDUARDO E. SANTOS; ILUMINADA SANTOS; AND amended on 23 June 1981 to increase the amount of coverage
FIRST INTEGRATED BONDING AND INSURANCE from P6.4 million to P6.967 million and to change the bank in whose
COMPANY, INC., respondents. favor the petitioners guarantee was issued, from Rafidain Bank to
Al Ahli Bank of Kuwait.[14]
DECISION On 11 June 1981, SOB and the joint venture VPECI and Ajyal
DAVIDE, JR., C.J.: executed the service contract[15] for the construction of
the Institute of Physical Therapy Medical Rehabilitation Center,
This case is an offshoot of a service contract entered into by Phase II, in Baghdad, Iraq, wherein the joint venture contractor
a Filipino construction firm with the Iraqi Government for the undertook to complete the Project within a period of 547 days or 18
construction of the Institute of Physical Therapy-Medical Center, months. Under the Contract, the Joint Venture would supply
Phase II, in Baghdad,Iraq, at a time when the Iran-Iraq war was manpower and materials, and SOB would refund to the former 25%
ongoing. of the project cost in Iraqi Dinar and the 75% in US dollars at the
exchange rate of 1 Dinar to 3.37777 US Dollars.[16]
In a complaint filed with the Regional Trial Court of Makati City,
docketed as Civil Case No. 91-1906 and assigned to Branch 58, The construction, which was supposed to start on 2 June
petitioner Philippine Export and Foreign Loan Guarantee 1981, commenced only on the last week of August 1981. Because
Corporation[1](hereinafter Philguarantee) sought reimbursement of this delay and the slow progress of the construction work due to
from the respondents of the sum of money it paid to Al Ahli Bank of some setbacks and difficulties, the Project was not completed on 15
Kuwait pursuant to a guarantee it issued for respondent V.P. November 1982 as scheduled. But in October 1982, upon
Eusebio Construction, Inc. (VPECI). foreseeing the impossibility of meeting the deadline and upon the
request of Al Ahli Bank, the joint venture contractor worked for the
The factual and procedural antecedents in this case are as renewal or extension of the Performance Bond and Advance
follows: Payment Guarantee. Petitioners Letters of Guarantee Nos. 81-194-
F (Performance Bond) and 81-195-F (Advance Payment Bond) with
On 8 November 1980, the State Organization of Buildings
expiry date of 25 November 1982 were then renewed or extended
(SOB), Ministry of Housing and Construction, Baghdad, Iraq,
to 9 February 1983and 9 March 1983, respectively.[17] The surety
awarded the construction of the Institute of Physical
bond was also extended for another period of one year, from 12
TherapyMedical Rehabilitation Center, Phase II, in Baghdad, Iraq,
May 1982 to 12 May 1983.[18] The Performance Bond was further
(hereinafter the Project) to Ajyal Trading and Contracting Company
extended twelve times with validity of up to 8 December
(hereinafter Ajyal), a firm duly licensed with the Kuwait Chamber of
1986,[19] while the Advance Payment Guarantee was extended
Commerce for a total contract price of ID5,416,089/046 (or about
three times more up to 24 May 1984 when the latter was cancelled
after full refund or reimbursement by the joint venture
On 7 March 1981, respondent spouses Eduardo and contractor. The surety bond was likewise extended to 8 May
Iluminada Santos, in behalf of respondent 3-Plex International, Inc. 1987.
(hereinafter 3-Plex), a local contractor engaged in construction
As of March 1986, the status of the Project was 51%
business, entered into a joint venture agreement with Ajyal wherein
accomplished, meaning the structures were already finished. The
the former undertook the execution of the entire Project, while the
remaining 47% consisted in electro-mechanical works and the 2%,
latter would be entitled to a commission of 4% of the contract
sanitary works, which both required importation of equipment and
price.[3] Later, or on 8 April 1981, respondent 3-Plex, not being
accredited by or registered with the Philippine Overseas
Construction Board (POCB), assigned and transferred all its rights On 26 October 1986, Al Ahli Bank of Kuwait sent a telex call
and interests under the joint venture agreement to VPECI, a to the petitioner demanding full payment of its performance bond
construction and engineering firm duly registered with the counter-guarantee.
POCB.[4] However, on 2 May 1981, 3-Plex and VPECI entered into
an agreement that the execution of the Project would be under their Upon receiving a copy of that telex message on 27 October
joint management.[5] 1986, respondent VPECI requested Iraq Trade and Economic
Development Minister Mohammad Fadhi Hussein to recall the telex
The SOB required the contractors to submit (1) a performance call on the performance guarantee for being a drastic action in
bond of ID271,808/610 representing 5% of the total contract price contravention of its mutual agreement with the latter that (1) the
and (2) an advance payment bond of ID541,608/901 representing imposition of penalty would be held in abeyance until the completion
10% of the advance payment to be released upon signing of the of the project; and (2) the time extension would be open, depending
contract.[6] To comply with these requirements, respondents 3-Plex on the developments on the negotiations for a foreign loan to
and VPECI applied for the issuance of a guarantee with petitioner finance the completion of the project.[23] It also wrote SOB
Philguarantee, a government financial institution empowered to protesting the call for lack of factual or legal basis, since the failure
issue guarantees for qualified Filipino contractors to secure the to complete the Project was due to (1) the Iraqi governments lack
performance of approved service contracts abroad.[7] of foreign exchange with which to pay its (VPECIs)
accomplishments and (2) SOBs noncompliance for the past several
Petitioner Philguarantee approved respondents
[8] years with the provision in the contract that 75% of the billings would
application. Subsequently, letters of guarantee were issued by
be paid in US dollars.[24]Subsequently, or on 19 November 1986,
Philguarantee to the Rafidain Bank of Baghdad covering 100% of
respondent VPECI advised the petitioner not to pay yet Al Ahli Bank
the performance and advance payment bonds, but they were not
because efforts were being exerted for the amicable settlement of
accepted by SOB. What SOB required was a letter-guarantee from
the Project.[25]
Rafidain Bank, the government bank of Iraq. Rafidain Bank then
issued a performance bond in favor of SOB on the condition that On 14 April 1987, the petitioner received another telex
another foreign bank, not Philguarantee, would issue a counter- message from Al Ahli Bank stating that it had already paid to
guarantee to cover its exposure. Al Ahli Bank of Kuwait was, Rafidain Bank the sum of US$876,564 under its letter of guarantee,
therefore, engaged to provide a counter-guarantee to Rafidain and demanding reimbursement by the petitioner of what it paid to
Bank, but it required a similar counter-guarantee in its favor from the latter bank plus interest thereon and related expenses. [26]
the petitioner. Thus, three layers of guarantees had to be
arranged.[9] Both petitioner Philguarantee and respondent VPECI sought
the assistance of some government agencies of
Upon the application of respondents 3-Plex and VPECI, the Philippines. On 10 August 1987, VPECI requested the Central
petitioner Philguarantee issued in favor of Al Ahli Bank of Kuwait Bank to hold in abeyance the payment by the petitioner to allow the
Letter of Guarantee No. 81-194-F [10] (Performance Bond diplomatic machinery to take its course, for otherwise, the Philippine
Guarantee) in the amount of ID271,808/610 and Letter of government , through the Philguarantee and the Central Bank,
Guarantee No. 81-195-F[11] (Advance Payment Guarantee) in the would become instruments of the Iraqi Government in
amount ofID541,608/901, both for a term of eighteen months from consummating a clear act of injustice and inequity committed
25 May 1981. These letters of guarantee were secured by (1) a against a Filipino contractor.[27]
Deed of Undertaking[12] executed by respondents VPECI, Spouses
Vicente P. Eusebio and Soledad C. Eusebio, 3-Plex, and Spouses On 27 August 1987, the Central Bank authorized the
Eduardo E. Santos and Iluminada Santos; and (2) a surety remittance for its account of the amount of US$876,564 (equivalent
bond[13] issued by respondent First Integrated Bonding and to ID271, 808/610) to Al Ahli Bank representing full payment of the
Insurance Company, Inc. (FIBICI). The Surety Bond was later performance counter-guarantee for VPECIs project in Iraq. [28]

Page 6 of 10
On 6 November 1987, Philguarantee informed VPECI that it II
would remit US$876,564 to Al Ahli Bank, and reiterated the joint and
solidary obligation of the respondents to reimburse the petitioner for PETITIONER CANNOT CLAIM SUBROGATION.
the advances made on its counter-guarantee.[29]
The petitioner thus paid the amount of US$876,564 to Al Ahli
Bank of Kuwait on 21 January 1988.[30]Then, on 6 May 1988, the
petitioner paid to Al Ahli Bank of Kuwait US$59,129.83 representing IT IS INIQUITOUS AND UNJUST FOR PETITIONER TO HOLD
interest and penalty charges demanded by the latter bank. [31] RESPONDENTS LIABLE UNDER THEIR DEED OF
On 19 June 1991, the petitioner sent to the respondents
separate letters demanding full payment of the amount The main issue in this case is whether the petitioner is entitled
of P47,872,373.98 plus accruing interest, penalty charges, and to reimbursement of what it paid under Letter of Guarantee No. 81-
10% attorneys fees pursuant to their joint and solidary obligations 194-F it issued to Al Ahli Bank of Kuwait based on the deed of
under the deed of undertaking and surety bond.[32] When the undertaking and surety bond from the respondents.
respondents failed to pay, the petitioner filed on 9 July 1991 a civil The petitioner asserts that since the guarantee it issued was
case for collection of a sum of money against the respondents absolute, unconditional, and irrevocable the nature and extent of its
before the RTC of Makati City. liability are analogous to those of suretyship. Its liability accrued
After due trial, the trial court ruled against Philguarantee and upon the failure of the respondents to finish the construction of
held that the latter had no valid cause of action against the the Institute of Physical Therapy Buildings in Baghdad.
respondents. It opined that at the time the call was made on the By guaranty a person, called the guarantor, binds himself to
guarantee which was executed for a specific period, the guarantee the creditor to fulfill the obligation of the principal debtor in case the
had already lapsed or expired. There was no valid renewal or latter should fail to do so. If a person binds himself solidarily with
extension of the guarantee for failure of the petitioner to secure the principal debtor, the contract is called suretyship. [37]
respondents express consent thereto. The trial court also found that
the joint venture contractor incurred no delay in the execution of the Strictly speaking, guaranty and surety are nearly related, and
Project.Considering the Project owners violations of the contract many of the principles are common to both. In both contracts, there
which rendered impossible the joint venture contractors is a promise to answer for the debt or default of another. However,
performance of its undertaking, no valid call on the guarantee could in this jurisdiction, they may be distinguished thus:
be made. Furthermore, the trial court held that no valid notice was
first made by the Project owner SOB to the joint venture contractor 1. A surety is usually bound with his principal by the
before the call on the guarantee. Accordingly, it dismissed the same instrument executed at the same time and on
complaint, as well as the counterclaims and cross-claim, and the same consideration. On the other hand, the
ordered the petitioner to pay attorneys fees of P100,000 to contract of guaranty is the guarantor's own separate
respondents VPECI and Eusebio Spouses and P100,000 to 3-Plex undertaking often supported by a consideration
and the Santos Spouses, plus costs. [33] separate from that supporting the contract of the
principal; the original contract of his principal is not
In its 14 June 1999 Decision,[34] the Court of Appeals affirmed his contract.
the trial courts decision, ratiocinating as follows:
2. A surety assumes liability as a regular party to the
undertaking; while the liability of a guarantor is
First, appellant cannot deny the fact that it was fully aware of the status of
conditional depending on the failure of the primary
project implementation as well as the problems besetting the contractors,
debtor to pay the obligation.
between 1982 to 1985, having sent some of its people to Baghdad during
that period. The successive renewals/extensions of the guarantees in fact, 3. The obligation of a surety is primary, while that of a
was prompted by delays, not solely attributable to the contractors, and such guarantor is secondary.
extension understandably allowed by the SOB (project owner) which had
not anyway complied with its contractual commitment to tender 75% of 4. A surety is an original promissor and debtor from the
payment in US Dollars, and which still retained overdue amounts beginning, while a guarantor is charged on his own
collectible by VPECI. undertaking.
5. A surety is, ordinarily, held to know every default of his
Second, appellant was very much aware of the violations committed by the principal; whereas a guarantor is not bound to take
SOB of its contractual undertakings with VPECI, principally, the payment notice of the non-performance of his principal.
of foreign currency (US$) for 75% of the total contract price, as well as of
the complications and injustice that will result from its payment of the full 6. Usually, a surety will not be discharged either by the
amount of the performance guarantee, as evident in PHILGUARANTEEs mere indulgence of the creditor to the principal or by
letter dated 13 May 1987 . want of notice of the default of the principal, no matter
how much he may be injured thereby. A guarantor is
often discharged by the mere indulgence of the
Third, appellant was fully aware that SOB was in fact still obligated to the
creditor to the principal, and is usually not liable
Joint Venture and there was still an amount collectible from and still being
unless notified of the default of the principal. [38]
retained by the project owner, which amount can be set-off with the sum
covered by the performance guarantee. In determining petitioners status, it is necessary to read Letter
of Guarantee No. 81-194-F, which provides in part as follows:
Fourth, well-apprised of the above conditions obtaining at the Project site
and cognizant of the war situation at the time in Iraq, appellant, though In consideration of your issuing the above performance guarantee/counter-
earlier has made representations with the SOB regarding a possible guarantee, we hereby unconditionally and irrevocably guarantee, under
amicable termination of the Project as suggested by VPECI, made a our Ref. No. LG-81-194 F to pay you on your first written or telex demand
complete turn-around and insisted on acting in favor of the unjustified call Iraq Dinars Two Hundred Seventy One Thousand Eight Hundred Eight
by the foreign banks.[35] and fils six hundred ten (ID271,808/610) representing 100% of the
performance bond required of V.P. EUSEBIO for the construction of the
The petitioner then came to this Court via Rule 45 of the Rules
Physical Therapy Institute, Phase II, Baghdad, Iraq, plus interest and other
of Court claiming that the Court of Appeals erred in affirming the
incidental expenses related thereto.
trial courts ruling that
I In the event of default by V.P. EUSEBIO, we shall pay you 100% of
the obligation unpaid but in no case shall such amount exceed Iraq Dinars
RESPONDENTS ARE NOT LIABLE UNDER THE DEED OF (ID) 271,808/610 plus interest and other incidental expenses. (Emphasis
Guided by the abovementioned distinctions between a surety
and a guaranty, as well as the factual milieu of this case, we find
that the Court of Appeals and the trial court were correct in ruling
that the petitioner is a guarantor and not a surety. That the
guarantee issued by the petitioner is unconditional and irrevocable

Page 7 of 10
does not make the petitioner a surety. As a guaranty, it is still Our law, specifically Article 1169, last paragraph, of the Civil
characterized by its subsidiary and conditional quality because it Code, provides: In reciprocal obligations, neither party incurs in
does not take effect until the fulfillment of the condition, namely, that delay if the other party does not comply or is not ready to comply in
the principal obligor should fail in his obligation at the time and in a proper manner with what is incumbent upon him.
the form he bound himself.[40] In other words, an unconditional
guarantee is still subject to the condition that the principal debtor Default or mora on the part of the debtor is the delay in the
should default in his obligation first before resort to the guarantor fulfillment of the prestation by reason of a cause imputable to the
could be had. A conditional guaranty, as opposed to an former. [52] It is the non-fulfillment of an obligation with respect to
unconditional guaranty, is one which depends upon some time.[53]
extraneous event, beyond the mere default of the principal, and It is undisputed that only 51.7% of the total work had been
generally upon notice of the principals default and reasonable accomplished. The 48.3% unfinished portion consisted in the
diligence in exhausting proper remedies against the principal.[41] purchase and installation of electro-mechanical equipment and
It appearing that Letter of Guarantee No. 81-194-F merely materials, which were available from foreign suppliers, thus
stated that in the event of default by respondent VPECI the requiring US Dollars for their importation. The monthly billings and
petitioner shall pay, the obligation assumed by the petitioner was payments made by SOB[54] reveal that the agreement between the
simply that of an unconditional guaranty, not conditional parties was a periodic payment by the Project owner to the
guaranty. But as earlier ruled the fact that petitioners guaranty is contractor depending on the percentage of accomplishment within
unconditional does not make it a surety. Besides, surety is never the period. [55]The payments were, in turn, to be used by the
presumed. A party should not be considered a surety where the contractor to finance the subsequent phase of the
contract itself stipulates that he is acting only as a guarantor. It is work. [56]However, as explained by VPECI in its letter to the
only when the guarantor binds himself solidarily with the principal Department of Foreign Affairs (DFA), the payment by SOB purely
debtor that the contract becomes one of suretyship.[42] in Dinars adversely affected the completion of the project; thus:

Having determined petitioners liability as guarantor, the next 4. Despite protests from the plaintiff, SOB continued paying the
question we have to grapple with is whether the respondent accomplishment billings of the Contractor purely in Iraqi Dinars and
contractor has defaulted in its obligations that would justify resort which payment came only after some delays.
to the guaranty.This is a mixed question of fact and law that is better
addressed by the lower courts, since this Court is not a trier of facts.
5. SOB is fully aware of the following:
It is a fundamental and settled rule that the findings of fact of
the trial court and the Court of Appeals are binding or conclusive 5.2 That Plaintiff is a foreign contractor in Iraq and as such, would need
upon this Court unless they are not supported by the evidence or foreign currency (US$), to finance the purchase of various equipment,
unless strong and cogent reasons dictate otherwise. [43] The factual materials, supplies, tools and to pay for the cost of project management,
findings of the Court of Appeals are normally not reviewable by us supervision and skilled labor not available in Iraq and therefore have to be
under Rule 45 of the Rules of Court except when they are at imported and or obtained from the Philippines and other sources outside
variance with those of the trial court. [44] The trial court and the Court Iraq.
of Appeals were in unison that the respondent contractor cannot be
considered to have defaulted in its obligations because the cause
of the delay was not primarily attributable to it. 5.3 That the Ministry of Labor and Employment of
the Philippines requires the remittance into the Philippines of 70% of the
A corollary issue is what law should be applied in determining salaries of Filipino workers working abroad in US Dollars;
whether the respondent contractor has defaulted in the
performance of its obligations under the service contract. The 5.5 That the Iraqi Dinar is not a freely convertible currency such that the
question of whether there is a breach of an agreement, which same cannot be used to purchase equipment, materials, supplies, etc.
includes default or mora,[45] pertains to the essential or intrinsic outside of Iraq;
validity of a contract. [46]
No conflicts rule on essential validity of contracts is expressly 5.6 That most of the materials specified by SOB in the CONTRACT are
provided for in our laws. The rule followed by most legal systems, not available in Iraq and therefore have to be imported;
however, is that the intrinsic validity of a contract must be governed
by the lex contractus or proper law of the contract. This is the law 5.7 That the government of Iraq prohibits the bringing of local currency
voluntarily agreed upon by the parties (the lex loci voluntatis) or the (Iraqui Dinars) out of Iraq and hence, imported materials, equipment, etc.,
law intended by them either expressly or implicitly (the lex loci cannot be purchased or obtained using Iraqui Dinars as medium of
intentionis). The law selected may be implied from such factors as acquisition.
substantial connection with the transaction, or the nationality or
domicile of the parties.[47] Philippine courts would do well to adopt
the first and most basic rule in most legal systems, namely, to allow 8. Following the approved construction program of the CONTRACT,
the parties to select the law applicable to their contract, subject to upon completion of the civil works portion of the installation of equipment
the limitation that it is not against the law, morals, or public policy of for the building, should immediately follow, however, the CONTRACT
the forum and that the chosen law must bear a substantive specified that these equipment which are to be installed and to form part
relationship to the transaction. [48] of the PROJECT have to be procured outside Iraq since these are not being
locally manufactured. Copy f the relevant portion of the Technical
It must be noted that the service contract between SOB and Specification is hereto attached as Annex C and made an integral part
VPECI contains no express choice of the law that would govern it. In hereof;
the United States and Europe, the two rules that now seem to have
emerged as kings of the hill are (1) the parties may choose the 10. Due to the lack of Foreign currency in Iraq for this purpose, and if only
governing law; and (2) in the absence of such a choice, the to assist the Iraqi government in completing the PROJECT, the Contractor
applicable law is that of the State that has the most significant without any obligation on its part to do so but with the knowledge and
relationship to the transaction and the parties. [49] Another authority consent of SOB and the Ministry of Housing & Construction of Iraq,
proposed that all matters relating to the time, place, and manner of offered to arrange on behalf of SOB, a foreign currency loan, through the
performance and valid excuses for non-performance are facilities of Circle International S.A., the Contractors Sub-contractor and
determined by the law of the place of performance or lex loci SACE MEDIO CREDITO which will act as the guarantor for this foreign
solutionis, which is useful because it is undoubtedly always currency loan.
connected to the contract in a significant way.[50]
In this case, the laws of Iraq bear substantial connection to the Arrangements were first made with Banco di Roma. Negotiation started in
transaction, since one of the parties is the Iraqi Government and the June 1985. SOB is informed of the developments of this negotiation,
place of performance is in Iraq. Hence, the issue of whether attached is a copy of the draft of the loan Agreement between SOB as the
respondent VPECI defaulted in its obligations may be determined Borrower and Agent. The Several Banks, as Lender, and counter-
by the laws of Iraq. However, since that foreign law was not properly guaranteed by Istituto Centrale Per II Credito A Medio Termine
pleaded or proved, the presumption of identity or similarity, (Mediocredito) Sezione Speciale Per LAssicurazione Del Credito
otherwise known as the processual presumption, comes into AllExportazione (Sace). Negotiations went on and continued until it
play. Where foreign law is not pleaded or, even if pleaded, is not suddenly collapsed due to the reported default by Iraq in the payment of
proved, the presumption is that foreign law is the same as ours. [51] its obligations with Italian government, copy of the news clipping dated

Page 8 of 10
June 18, 1986 is hereto attached as Annex D to form an integral part Also, in the project situationer attached to the letter to the
hereof; OMEAA dated 26 March 1987, the petitioner raised as among the
arguments to be presented in support of the cancellation of the
15. On September 15, 1986, Contractor received information from Circle counter-guarantee the fact that the amount of ID281,414/066
International S.A. that because of the news report that Iraq defaulted in its retained by SOB from the Project was more than enough to cover
obligations with European banks, the approval by Banco di Roma of the the counter-guarantee of ID271,808/610; thus:
loan to SOB shall be deferred indefinitely, a copy of the letter of Circle
International together with the news clippings are hereto attached as 6.1 Present the following arguments in cancelling the counterguarantee:
Annexes F and F-1, respectively.[57]
As found by both the Court of Appeals and the trial court, the The Iraqi Government does not have the foreign
delay or the non-completion of the Project was caused by factors exchange to fulfill its contractual obligations of
not imputable to the respondent contractor. It was rather due mainly paying 75% of progress billings in US dollars.
to the persistent violations by SOB of the terms and conditions of
the contract, particularly its failure to pay 75% of the accomplished It could also be argued that the amount of
work in US Dollars. Indeed, where one of the parties to a contract ID281,414/066 retained by SOB from the proposed
does not perform in a proper manner the prestation which he is project is more than the amount of the outstanding
bound to perform under the contract, he is not entitled to demand counterguarantee.[65]
the performance of the other party. A party does not incur in delay
if the other party fails to perform the obligation incumbent upon him. In a nutshell, since the petitioner was aware of the contractors
outstanding receivables from SOB, it should have set up
The petitioner, however, maintains that the payments by SOB compensation as was proposed in its project situationer.
of the monthly billings in purely Iraqi Dinars did not render
impossible the performance of the Project by VPECI. Such posture Moreover, the petitioner was very much aware of the
is quite contrary to its previous representations. In his 26 March predicament of the respondents. In fact, in its 13 May 1987 letter to
1987 letter to the Office of the Middle Eastern and African Affairs the OMEAA, DFA, Manila, it stated:
(OMEAA), DFA, Manila, petitioners Executive Vice-President Jesus
M. Taedo stated that while VPECI had taken every possible VPECI also maintains that the delay in the completion of the project was
measure to complete the Project, the war situation in Iraq, mainly due to SOBs violation of contract terms and as such, call on the
particularly the lack of foreign exchange, was proving to be a great guarantee has no basis.
obstacle; thus:
While PHILGUARANTEE is prepared to honor its commitment under the
VPECI has taken every possible measure for the completion of the project guarantee, PHILGUARANTEE does not want to be an instrument in any
but the war situation in Iraq particularly the lack of foreign exchange is case of inequity committed against a Filipino contractor. It is for this
proving to be a great obstacle. Our performance counterguarantee was reason that we are constrained to seek your assistance not only in
called last 26 October 1986 when the negotiations for a foreign currency ascertaining the veracity of Al Ahli Banks claim that it has paid Rafidain
loan with the Italian government through Banco de Roma bogged down Bank but possibly averting such an event. As any payment effected by the
following news report that Iraq has defaulted in its obligation with major banks will complicate matters, we cannot help underscore the urgency of
European banks. Unless the situation in Iraq is improved as to allay the VPECIs bid for government intervention for the amicable termination of
banks apprehension, there is no assurance that the project will ever be the contract and release of the performance guarantee. [66]
completed. [58]
But surprisingly, though fully cognizant of SOBs violations of
In order that the debtor may be in default it is necessary that the service contract and VPECIs outstanding receivables from
the following requisites be present: (1) that the obligation be SOB, as well as the situation obtaining in the Project site
demandable and already liquidated; (2) that the debtor delays compounded by the Iran-Iraq war, the petitioner opted to pay the
performance; and (3) that the creditor requires the performance second layer guarantor not only the full amount of the performance
because it must appear that the tolerance or benevolence of the bond counter-guarantee but also interests and penalty charges.
creditor must have ended. [59]
This brings us to the next question: May the petitioner as a
As stated earlier, SOB cannot yet demand complete guarantor secure reimbursement from the respondents for what it
performance from VPECI because it has not yet itself performed its has paid under Letter of Guarantee No. 81-194-F?
obligation in a proper manner, particularly the payment of the 75%
of the cost of the Project in US Dollars. The VPECI cannot yet be As a rule, a guarantor who pays for a debtor should be
said to have incurred in delay. Even assuming that there was delay indemnified by the latter[67] and would be legally subrogated to the
and that the delay was attributable to VPECI, still the effects of that rights which the creditor has against the debtor.[68] However, a
delay ceased upon the renunciation by the creditor, SOB, which person who makes payment without the knowledge or against the
could be implied when the latter granted several extensions of time will of the debtor has the right to recover only insofar as the payment
to the former. [60] Besides, no demand has yet been made by SOB has been beneficial to the debtor.[69] If the obligation was subject to
against the respondent contractor.Demand is generally necessary defenses on the part of the debtor, the same defenses which could
even if a period has been fixed in the obligation. And default have been set up against the creditor can be set up against the
generally begins from the moment the creditor demands judicially paying guarantor.[70]
or extra-judicially the performance of the obligation. Without such
From the findings of the Court of Appeals and the trial court, it
demand, the effects of default will not arise.[61]
is clear that the payment made by the petitioner guarantor did not
Moreover, the petitioner as a guarantor is entitled to the in any way benefit the principal debtor, given the project status and
benefit of excussion, that is, it cannot be compelled to pay the the conditions obtaining at the Project site at that time. Moreover,
creditor SOB unless the property of the debtor VPECI has been the respondent contractor was found to have valid defenses against
exhausted and all legal remedies against the said debtor have been SOB, which are fully supported by evidence and which have been
resorted to by the creditor.[62] It could also set up compensation as meritoriously set up against the paying guarantor, the petitioner in
regards what the creditor SOB may owe the principal debtor this case. And even if the deed of undertaking and the surety bond
VPECI.[63] In this case, however, the petitioner has clearly waived secured petitioners guaranty, the petitioner is precluded from
these rights and remedies by making the payment of an obligation enforcing the same by reason of the petitioners undue payment on
that was yet to be shown to be rightfully due the creditor and the guaranty. Rights under the deed of undertaking and the surety
demandable of the principal debtor. bond do not arise because these contracts depend on the validity
of the enforcement of the guaranty.
As found by the Court of Appeals, the petitioner fully knew that
the joint venture contractor had collectibles from SOB which could The petitioner guarantor should have waited for the natural
be set off with the amount covered by the performance course of guaranty: the debtor VPECI should have, in the first place,
guarantee. In February 1987, the OMEAA transmitted to the defaulted in its obligation and that the creditor SOB should have first
petitioner a copy of a telex dated 10 February 1987 of the Philippine made a demand from the principal debtor. It is only when the debtor
Ambassador in Baghdad, Iraq, informing it of the note verbale sent does not or cannot pay, in whole or in part, that the guarantor should
by the Iraqi Ministry of Foreign Affairs stating that the past due pay.[71] When the petitioner guarantor in this case paid against the
obligations of the joint venture contractor from the petitioner would will of the debtor VPECI, the debtor VPECI may set up against it
be deducted from the dues of the two contractors. [64]

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defenses available against the creditor SOB at the time of
payment. This is the hard lesson that the petitioner must learn.
As the government arm in pursuing its objective of providing
the necessary support and assistance in order to enable [Filipino
exporters and contractors to operate viably under the prevailing
economic and business conditions,[72] the petitioner should have
exercised prudence and caution under the circumstances. As aptly
put by the Court of Appeals, it would be the height of inequity to
allow the petitioner to pass on its losses to the Filipino contractor
VPECI which had sternly warned against paying the Al Ahli Bank
and constantly apprised it of the developments in the Project
WHEREFORE, the petition for review on certiorari is
hereby DENIED for lack of merit, and the decision of the Court of
appeals in CA-G.R. CV No. 39302 is AFFIRMED.
No pronouncement as to costs.

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