computed from March 13, 1983, until fully paid; and on the second cause
of action, the amount of P494,936.71, together with interest and service
[G.R. No. 117660. December 18, 2000]
AGRO CONGLOMERATES, INC. and MARIO SORIANO, petitioners, vs. THE HON.
COURT OF APPEALS and REGENT SAVINGS and LOAN BANK,
INC., respondents.
DECISION
QUISUMBING, J.:
[1]
This is a petition for review challenging the decision dated October 17, 1994 of
the Court of Appeals in CA-G.R. No. 32933, which affirmed in toto the judgment of the
Manila Regional Trial Court, Branch 27, in consolidated Cases Nos. 86-37374, 86-
37388, 86-37543.
This petition springs from three complaints for sums of money filed by respondent
bank against herein petitioners. In the decision of the Court of Appeals, petitioners were
ordered to pay respondent bank, as follows:
Wherefore, judgment is hereby rendered in favor of plaintiff and against defendants,
as follows:
1) In Civil Case No. 86-37374, defendants [petitioners, herein] are ordered
jointly and severally, to pay to plaintiff the amount of P78,212.29,
together with interest and service charge thereon, at the rates of 14%
and 3% per annum, respectively, computed from November 10, 1982,
until fully paid, plus stipulated penalty on unpaid principal at the rate of
6% per annum, computed from November 10, 1982, plus 15% as
liquidated damage plus 10% of the total amount due, as attorneys fees,
plus costs;
2) In Civil Case No. 86-37388, defendant is ordered to pay plaintiff the
amount of P632,911.39, together with interest and service charge
thereon at the rate of 14% and 3% per annum, respectively, computed
from January 15, 1983, until fully paid, plus stipulated penalty on unpaid
principal at the rate of 6% per annum, computed from January 15, 1983,
plus liquidated damages equivalent to 15% of the total amount due, plus
attorneys fees equivalent to 10% of the total amount due, plus costs; and
3) In Civil Case No. 86-37543, defendant is ordered to pay plaintiff, on the
first cause of action, the amount of P510,000.00, together with interest
and service charge thereon, at the rates of 14% and 2% per annum,
respectively, computed from March 13, 1983, until fully paid, plus a
penalty of 6% per annum, based on the outstanding principal of the loan,
charge thereon at the rates of 14% and 2%, per annum, respectively,
computed from March 30, 1983, until fully paid, plus a penalty charge of
6% per annum, based on the unpaid principal, computed from March 30,
1983, until fully paid, plus (on both causes of action) an amount equal to
15% of the total amounts due, as liquidated damages, plus attorneys
[2]
fees equal to 10% of the total amounts due, plus costs.
Based on the records, the following are the factual antecedents.
On July 17, 1982, petitioner Agro Conglomerates, Inc. as vendor, sold two parcels
[3]
of land to Wonderland Food Industries, Inc. In their Memorandum of Agreement, the
parties covenanted that the purchase price of Five Million (P5,000,000.00) Pesos would
be settled by the vendee, under the following terms and conditions: (1) One Million
(P1,000,000.00) Pesos shall be paid in cash upon the signing of the agreement;
(2) Two Million (P2,000,000.00) Pesos worth of common shares of stock of the
Wonderland Food Industries, Inc.; and(3) The balance of P2,000,000.00 shall be paid
in four equal installments, the first installment falling due, 180 days after the signing of
the agreement and every six months thereafter, with an interest rate of 18% per annum,
to be advanced by the vendee upon the signing of the agreement.
On July 19, 1982, the vendor, the vendee, and the respondent bank Regent
Savings & Loan Bank (formerly Summa Savings & Loan Association), executed an
[4]
Addendum to the previous Memorandum of Agreement. The new arrangement
pertained to the revision of settlement of the initial payments of P1,000,000.00 and
prepaid interest of P360,000.00 (18% of P2,000,000.00) as follows:
Whereas, the parties have agreed to qualify the stipulated terms for the payment of
the said ONE MILLION THREE HUNDRED SIXTY THOUSAND (P1,360,000.00)
PESOS.
WHEREFORE, in consideration of the mutual covenant and agreement of the parties,
they do further covenant and agree as follows:
1. That the VENDEE instead of paying the amount of ONE MILLION THREE
HUNDRED SIXTY THOUSAND (P1,360,000.00) PESOS in cash,
hereby authorizes the VENDOR to obtain a loan from Summa Savings
and Loan Association with office address at Valenzuela, Metro Manila,
being represented herein by its President, Mr. Jaime Cario and referred
to hereafter as Financier; in the amount of ONE MILLION THREE
HUNDRED SIXTY THOUSAND (P1,360,000.00)PESOS, plus interest
thereon at such rate as the VENDEE and the Financier may agree, which
amount shall cover the ONE MILLION (P1,000,000.00) PESOS
cash which was agreed to be paid upon signing of the Memorandum of
Agreement, plus 18% interest on the balance of two million pesos
stipulated upon in Item No. 1(c) of the said agreement; provided however,
that said loan shall be made for and in the name of the VENDOR.
 2. The VENDEE also agrees that the full amount of ONE MILLION THREE
HUNDRED SIXTY THOUSAND (P1,360,000.00) PESOS be paid
directly to the VENDOR; however, the VENDEE hereby undertakes to
pay the full amount of the said loan to the Financier on such terms and
conditions agreed upon by the Financier and the VENDOR, it being
understood that while the loan will be secured from and in the name of
the VENDOR, the VENDEE will be the one liable to pay the entire
[5]
proceeds thereof including interest and other charges.
This addendum was not notarized.
The evidences, however, disclose that Wonderland did not comply with its obligation
under said Addendum (Exh. S) as the agreement to turn over the farmland to it, did
not materialize (57 tsn, May 29, 1990), and there was, actually no sale of the land (58
tsn, ibid). Hence, Wonderland is not answerable. And since the loans obtained under
the four promissory notes (Exhs. A, C, G, and E) have not been paid, despite
opportunities given by plaintiff to defendants to make payments, it stands to reason
that defendants are liable to pay their obligations thereunder to plaintiff. In fact,
defendants failed to file a third-party complaint against Wonderland, which shows the
[7]
weakness of its stand that Wonderland is answerable to make said payments.

Consequently, petitioner Mario Soriano signed as maker several promissory Petitioners appealed to the Court of Appeals. The trial courts decision was
[6]
notes, payable to the respondent bank. Thereafter, the bank released the proceeds affirmed by the appellate court.
of the loan to petitioners. However, petitioners failed to meet their obligations as they
fell due. During that time, the bank was experiencing financial turmoil and was under Hence, this recourse, wherein petitioners raise the sole issue of:
the supervision of the Central Bank. Central Bank examiner and liquidator Cordula de
Jesus, endorsed the subject promissory notes to the banks counsel for collection. The WHETHER THE COURT OF APPEALS ERRED IN NOT FINDING THAT THE
bank gave petitioners opportunity to settle their account by extending payment due ADDENDUM, SIGNED BY THE PETITIONERS, RESPONDENT BANK AND
dates. Mario Soriano manifested his intention to re-structure the loan, yet did not show WONDERLAND INC., CONSTITUTES A NOVATION OF THE CONTRACT BY
up nor submit his formal written request. SUBSTITUTION OF DEBTOR, WHICH EXEMPTS THE PETITIONERS FROM ANY
LIABILITY OVER THE PROMISSORY NOTES.
Respondent bank filed three separate complaints before the Regional Trial Court
of Manila for Collection of Sums of money. The corresponding case histories are
Revealed by the facts on record, the conflict among the parties started from a
illustrated in the table below:
contract of sale of a farmland between petitioners and Wonderland Food Industries,
Date of Loan Amount Payment Due Payment Inc. As found by the trial court, no such sale materialized.
Date Extension Dates
A contract of sale is a reciprocal transaction. The obligation or promise of each
Civil Case 86-
party is the cause or consideration for the obligation or promise by the other. The
37374 P78,212.29 Nov. 10, 1982 Feb. 8, 1983
vendee is obliged to pay the price, while the vendor must deliver actual possession of
August 12, 1982 May 9, 1983
the land. In the instant case the original plan was that the initial payments would be
Aug. 7, 1983
paid in cash.Subsequently, the parties (with the participation of respondent bank)
executed an addendum providing instead, that the petitioners would secure a loan in
Civil Case 86- the name of Agro Conglomerates Inc. for the total amount of the initial payments, while
37388 P632,911.39 Jan. 15, 1983 May 16, 1983 the settlement of said loan would be assumed by Wonderland. Thereafter, petitioner
July 19, 1982 Aug. 14, 1983 Soriano signed several promissory notes and received the proceeds in behalf of
petitioner-company.
Civil Case 86-
37543 P510,000.00 March 13, 1983 June 11, 1983 By this time, we note a subsidiary contract of suretyship had taken effect since
September 14, 1982 Sept. 9, 1983 petitioners signed the promissory notes as maker and accommodation party for the
benefit of Wonderland. Petitioners became liable as accommodation party. An
P494,936.71 March 30, 1983 June 28, 1983 accommodation party is a person who has signed the instrument as maker, acceptor,
October 1, 1982 Sept. 26, 1983 or indorser, without receiving value therefor, and for the purpose of lending his name
In their answer, petitioners interposed the defense of novation and insisted there was to some other person and is liable on the instrument to a holder for value,
a valid substitution of debtor. They alleged that the addendum specifically states that notwithstanding such holder at the time of taking the instrument knew (the signatory) to
[8]
although the promissory notes were in their names, Wonderland shall be responsible be an accommodation party. He has the right, after paying the holder, to obtain
for the payment thereof. reimbursement from the party accommodated, since the relation between them has in
effect become one of principal and surety, the accommodation party being the
The trial court held that petitioners are liable, to wit: [9]
surety. Suretyship is defined as the relation which exists where one person has
undertaken an obligation and another person is also under the obligation or other duty
to the obligee, who is entitled to but one performance, and as between the two who are
[10]
bound, one rather than the other should perform. The suretys liability to the creditor
or promisee of the principal is said to be direct, primary and absolute; in other words, Every person who through an act of performance by another, or any other means,
[11]
he is directly and equally bound with the principal. And the creditor may proceed acquires or comes into possession of something at the expense of the latter without
[12]
against any one of the solidary debtors. just or legal ground, shall return the same to him.

We do not give credence to petitioners assertion that, as provided by the

addendum, their obligation to pay the promissory notes was novated by substitution of
a new debtor, Wonderland. Contrary to petitioners contention, the attendant facts
herein do not make a case of novation.
Novation is the extinguishment of an obligation by the substitution or change of
the obligation by a subsequent one which extinguishes or modifies the first, either by
changing the object or principal conditions, or by substituting another in place of the
[13]
debtor, or by subrogating a third person in the rights of the creditor. In order that a
[14]
novation can take place, the concurrence of the following requisites are
indispensable:
Petitioners had no legal or just ground to retain the proceeds of the loan at the
expense of private respondent. Neither could petitioners excuse themselves and hold
Wonderland still liable to pay the loan upon the rescission of their sales contract. If
petitioners sustained damages as a result of the rescission, they should have
impleaded Wonderland and asked damages. The non-inclusion of a necessary party
does not prevent the court from proceeding in the action, and the judgment rendered
[18]
therein shall be without prejudice to the rights of such necessary party. But
respondent appellate court did not err in holding that petitioners are duty-bound under
the law to pay the claims of respondent bank from whom they had obtained the loan
proceeds.

1) There must be a previous valid obligation; WHEREFORE, the petition is DENIED for lack of merit. The assailed decision of
the Court of Appeals dated October 17, 1994 is AFFIRMED. Costs against petitioners.
2) There must be an agreement of the parties concerned to a new contract;
SO ORDERED.
3) There must be the extinguishment of the old contract; and
Bellosillo, (Chairman), Mendoza, Buena, and De Leon, Jr., JJ., concur.
4) There must be the validity of the new contract.

In the instant case, the first requisite for a valid novation is lacking. There was no
novation by substitution of debtor because there was no prior obligation which was
substituted by a new contract. It will be noted that the promissory notes, which bound [1]
Rollo, pp. 49-55.
the petitioners to pay, were executed after the addendum. The addendum modified the
[2]
contract of sale, not the stipulations in the promissory notes which pertain to the surety Id.at 68 - 70.
contract. At this instance, Wonderland apparently assured the payment of future debts [3]
to be incurred by the petitioners. Consequently, only a contract of surety arose. It was Id. at 71 - 73.
wrong for petitioners to presume a novation had taken place. The well-settled rule is [4]
Id. at 74 - 75.
[15] [16]
that novation is never presumed, it must be clearly and unequivocally shown.
[5]
Id. at 74 only.
As it turned out, the contract of surety between Wonderland and the petitioners
[6]
was extinguished by the rescission of the contract of sale of the farmland. With the Records, pp. 159, 162,167, 171.
rescission, there was confusion or merger in the persons of the principal obligor and [7]
the surety, namely the petitioners herein. The addendum which was dependent thereon Rollo, p. 68.
likewise lost its efficacy. [8]
The Negotiable Instruments Law, Section 29.
It is true that the basic and fundamental rule in the interpretation of contract is that, [9]
People vs. Maniego, 148 SCRA 30, 35 (1987); Philippine National Bank vs. Maza
if the terms thereof are clear and leave no doubt as to the intention of the contracting and Mecenas, 48 Phil. 207 (1925).
parties, the literal meaning shall control. However, in order to judge the intention of the
[17] [10]
parties, their contemporaneous and subsequent acts should be considered. 74 Am Jur 2d, Suretyship, Sec. 1.
[11]
The contract of sale between Wonderland and petitioners did not materialize. But Garcia, Jr. vs. Court of Appeals, 191 SCRA 493, 496 (1990).
it was admitted that petitioners received the proceeds of the promissory notes obtained [12]
from respondent bank. Civil Code of the Philippines, Art. 1216.
[13]
Sec. 22 of the Civil Code provides: Ajax Marketing & Development Corporation vs. Court of Appeals, 248 SCRA 222,
226 (1995); citing FRANCISCO, V. J. Civil Code of the Philippines Annotated and
Commented, Bk IV Part 1, p. 676, citing 8 Manresa 417; De Cortes vs. Venturanza, 79
SCRA 709, 722-723 (1977).
[14]
Reyes vs. Court of Appeals 264 SCRA 35, 43 (1996).
[15]
Ajax Marketing and Development Corporation vs. Court of Appeals, 248 SCRA 222,
227 (1995); Goi vs. Court of Appeals 144 SCRA 222, (1986).
[16]
Mercantile Insurance Co., Inc., vs. Court of Appeals, 196 SCRA 197, 204 (1991).
[17]
Manila Surety & Fidelity Co., Inc. vs. Court of Appeals, 191 SCRA 805, 812 (1990);
citing Mercantile Insurance Co., Inc. vs. Felipe Ysmael, Jr. & Co. Inc., 169 SCRA 66,
74 (1989); Sy vs. Court of Appeals, 131 SCRA 116 (1984); GSIS vs. Court of
Appeals, et al., 145 SCRA 311 (1986).
[18]
Revised Rules of Court, Civil Procedure, Sec. 9, Rule 3, par. 3.
[G.R. No. 138737. July 12, 2001]
FINMAN GENERAL ASSURANCE CORPORATION, petitioner, vs. COURT OF
APPEALS and USIPHIL INCORPORATED, respondents.
DECISION
KAPUNAN, J.:
Through this petition for review on certiorari Finman General Assurance
Corporation (petitioner) seeks to reverse and set aside the Decision, dated January 14,
1999, of the Court of Appeals (CA) in CA-G.R. CV No. 46721 directing petitioner to pay
the insurance claim of Usiphil Incorporated (private respondent). The appellate courts
Resolution, dated May 13, 1999, which denied petitioners motion for reconsideration,
is likewise sought to be reversed and set aside.
The antecedent facts, as culled from the decision of the trial court and the CA, are
as follows:
On September 15, 1981, private respondent obtained a fire insurance policy from
petitioner (then doing business under the name Summa Insurance Corporation)
covering certain properties, e.g., office, furniture, fixtures, shop machinery and other
trade equipment. Under Policy No. F3100 issued to private respondent, petitioner
undertook to indemnify private respondent for any damage to or loss of said properties
arising from fire.
Sometime in 1982, private respondent filed with petitioner an insurance claim
amounting to P987,126.11 for the loss of the insured properties due to fire. Acting
thereon, petitioner appointed Adjuster H.H. Bayne to undertake the valuation and
adjustment of the loss. H.H. Bayne then required private respondent to file a formal
claim and submit proof of loss. In compliance therewith, private respondent submitted
its Sworn Statement of Loss and Formal Claim, dated July 22, 1982, signed by
Reynaldo Cayetano, private respondents Manager. Respondent likewise submitted
Proof of Loss signed by its Accounting Manager Pedro Palallos and countersigned by
H.H. Baynes Adjuster F.C. Medina.
Palallos personally followed-up private respondents claim with petitioners
President Joaquin Ortega. During their meeting, Ortega instructed their Finance
Manager, Rosauro Maghirang, to reconcile the records. Thereafter, Maghirang and
Palallos signed a Statement/Agreement, dated February 28, 1985, which indicated that
the amount due respondent was P842,683.40.
Despite repeated demands by private respondent, petitioner refused to pay the
insurance claim. Thus, private respondent was constrained to file a complaint against
petitioner for the unpaid insurance claim. In its Answer, petitioner maintained that the
claim of private respondent could not be allowed because it failed to comply with Policy
Condition No. 13 regarding the submission of certain documents to prove the loss.
Trial ensued. On July 6, 1994, the trial court rendered judgment in favor of private
respondent. The dispositive portion of the decision reads:
WHEREFORE, in view of the above observations and findings, judgment is hereby
rendered in favor of the plaintiff and against the defendant, ordering the latter:
1. To pay the plaintiff the sum of P842,683.40 and to pay 24% interest per annum
from February 28, 1985 until fully paid (par. 29 of Exh. K);
2. To pay the plaintiff the sum equivalent to 10% of the principal obligation as and for
attorneys fees, plus P1,500.00 per court appearance of counsel;
3. To pay the plaintiff the amount of P30,000.00 as exemplary damages in addition to
the actual and compensatory damages awarded;
4. Dismissing the claim of P30,000.00 for actual damages under par. 4 of the prayer,
since the actual damages has been awarded under par. 1 of the decisions dispositive
portion;
5. Dismissing the claim of interest under par. 2 of the prayer, there being no
agreement to such effect;
6. Dismissing the counter-claim for lack of merit;
7. Ordering the defendant to pay the cost of suit.
SO ORDERED.
[1]
On appeal, the CA substantially affirmed the decision of the trial court. The
dispositive portion of the CA decision reads:
WHEREFORE, the appealed decision is hereby AFFIRMED with the modification that
defendant-appellant is ordered to pay plaintiff-appellee the sum of P842,683.40 and
to pay 24% interest per annum from 03 May 1985 until fully paid. In all other respects,
the appealed decision is AFFIRMED IN TOTO.
[2]
SO ORDERED.
Petitioner now comes to this Court assailing the decision of the appellate
court. Petitioner alleges that:
Respondent Court of Appeals erred in finding that there is evidence sufficient to justify
the Decision of the lower court;
Respondent Court of Appeals erred in failing to consider the fact that Private
Respondent committed a violation of the Insurance Policy which justifies the denial of
the claim by Petitioner;
Respondent Court of Appeals further erred in finding that Petitioner is liable to pay the
respondent, Usiphil, Inc., an interest of 24% per annum in addition to the principal
amount of P842,683.40.
[3]
Essentially, petitioner argues that the disallowance of private respondents claim
is justified by its failure to submit the required documents in accordance with Policy
Condition No. 13. Said requirements were allegedly communicated to private
respondent in the two letters of H.H. Bayne to private respondent. The first letter stated:
To be able to expedite adjustment of this case, please submit to us without delay the
following documents and/or particulars:
For FFF, Machineries/Equipment Claims
1. Your formal claim (which may be accomplished in the enclosed form) accompanied
by a detailed inventory of the documents submitted.
2. Certification from the appropriate government office indicating the date of the
occurrence of the fire, the property involved, its location and possible point of origin.
3. Proof of premium payment.
4. Three color photographs of the debris properly captioned/identified/dated and
initiated by the claimant at the back.
4.1 Close-up (not more than 2 meters away) of the most severely damaged.
4.2 Close-up (not more than 2 meters away) of the least damaged.
4.3. Original view of the debris (may be from farther than 2 meters away); splice two
or more frames if necessary.
Though our adjusters will also take photographs in the manner prescribed above,
please do not rely on his photographs in the preservations of your evidence of loss
thru pictures.
5. Copies of purchase invoices.
6. In the absence of No. 5, suppliers certificates of sales and delivery.
7. Appraisal report, if any.
8. Where initial estimated loss is exceeding P20,000.00, submit estimate by at least 2
contractors/suppliers.
9. Others (to be specified)
1. Repairs cost of the affected items including quotation or invoices in support thereof;
2. Complete lists of furniture, fixtures & fittings including date and cost of acquisition,
and;
3. Statement of salvage on burned items.
[4]
Your preferential attention to this request will be fully appreciated.
While the other letter stated:
Please submit to us without delay the following documents and/or particulars.
For Stock Claim
1. Your formal claim (which may be accomplished in the enclosed), accompanied by a
detailed inventory of the documents submitted.
2. Certification from the appropriate government office showing that the Insureds
property was involved in the fire as a consequence of which the claim is being filed.
3. Proof of premium payment.
4. Three colored photographs of the debris, property captioned/identified/dated and
initiated by the claimant at the back; in a floor plan, indicate the point from where the
picture was taken and by an arrow where the camera was facing.
4.1. Close-up (not more than 2 meters away) of the most severely damaged.
4.2. Close-up (not more than 2 meters away) of the least damaged.
4.3. Overall view of the debris (may be from farther than 2 meters away); splice two or
more frames if necessary.
Our adjuster will also take photographs.
5. Books of accounts bill, invoices and other vouchers, or certified copies thereof if
originals be lost. This requirement includes, but is not limited to, purchase and sales
invoices, delivery
6. Certified copies of income tax returns for the last three years and the
accompanying financial statements.
7. Latest inventory of merchandise filed with a financial institution, the Bureau of
Internal Revenue or any government entity prior to the loss.
8. A detailed inventory of the articles damaged or destroyed, showing the cost price of
each, extent of loss, if any, if the risk sustained partial or water damaged.
9. Certificates of registration.
10. Bank Statements.
11. For losses where the estimated value of stocks claimed which are burned out of
sight and/or which may no longer be subject to actual physical count exceeds
P50,000.00, a CPAs detailed computations in support of such estimated value.
12. In the absence of purchase invoices/delivery receipts (state reason for absence),
submit suppliers certificate of sales and delivery.
13. Others (to be specified).
Statement of salvage of the affected stocks in trade.
Your compliance with this request will enable us to expedite adjustment of the loss in
[5]
caption.
According to petitioner, in complete disregard of the foregoing requirements,
private respondent never submitted any of the documents mentioned therein. Further,
petitioner assails the award in favor of private respondent of an interest rate of 24% per
annum. Since there was allegedly no express finding that petitioner unreasonably
denied or withheld the payment of the subject insurance claim, then the award of 24%
per annum is not proper. Petitioner opines that the judgment should only bear the legal
interest rate of 12% per annum for the delay in the payment of the claim.
The petition is bereft of merit.
Well-settled is the rule that factual findings and conclusions of the trial court and
the CA are entitled to great weight and respect, and will not be disturbed on appeal in
the absence of any clear showing that the trial court overlooked certain facts or
[6]
circumstances which would substantially affect the disposition of the case. There is
no cogent reason to deviate from this salutary rule in the present case.
Both the trial court and the CA concur in holding that private respondent had
substantially complied with Policy Condition No. 13 which reads:
13. The insured shall give immediate written notice to the Company of any loss,
protect the property from further damage, forthwith separate the damaged and
undamaged personal property, put it in the best possible order, furnish a complete
inventory of the destroyed, damaged, and undamaged property, showing in detail
quantities, costs, actual cash value and the amount of loss claimed; AND WITHIN
SIXTY DAYS AFTER THE LOSS, UNLESS SUCH TIME IS EXTENDED IN WRITING
BY THE COMPANY, THE INSURED SHALL RENDER TO THE COMPANY A
PROOF OF LOSS, signed and sworn to by the insured, stating the knowledge and
belief of the insured as to the following: the time and origin of the loss, the interest of
the insured and of all others in the property, the actual cash value of each item
thereof and the amount of loss thereto, all encumbrances thereon, all other contracts
of insurance, whether valid or not, covering any of said property, any changes in the
title, use, occupation, location, possession or exposures of said property since the
issuing of this policy by whom and for what purpose any buildings herein described
and the several parts thereof were occupied at the time of loss and whether or not it
then stood on leased ground, and shall furnish a copy of all the descriptions and
schedules in all policies, and if required verified plans and specifications of any
building, fixtures, or machinery destroyed or damaged. The insured, as often as may
be reasonably required, shall exhibit to any person designated by the company all
that remains of any property herein described, and submit to examination under oath
by any person named by the Company, and subscribe the same; and, as often as
may be reasonably required, shall produce for examination all books of account, bills,
invoices, and other vouchers or certified copies thereof if originals be lost, at such
reasonable time and place as may be designated by the Company or its
representative and shall permit extracts and copies thereof to be made.
No claim under this policy shall be payable unless the terms of this condition have
[7]
been complied with.
A perusal of the records shows that private respondent, after the occurrence of
the fire, immediately notified petitioner thereof. Thereafter, private respondent
submitted the following documents: (1) Sworn Statement of Loss and Formal Claim
(Exhibit C) and; (2) Proof of Loss (Exhibit D). The submission of these documents, to
the Courts mind, constitutes substantial compliance with the above provision. Indeed,
as regards the submission of documents to prove loss, substantial, not strict as urged
[8]
by petitioner, compliance with the requirements will always be deemed sufficient.
 In any case, petitioner itself acknowledged its liability when through its Finance
Manager, Rosauro Maghirang, it signed the document indicating that the amount due
private respondent is P842,683.40 (Exhibit E). As correctly held by the appellate court:
Under the aforequoted provision of the insurance policy, the insured was required to
submit to the insurer written notice of the loss; and a complete inventory of the
properties damaged within 60 days after the fire, as well as a signed and sworn
statement of Proof of Loss. It is admitted by all parties that plaintiff-appellee notified
the insurer Summa Corporation of the fire which occurred on 27 May 1982. It is
likewise admitted by all parties that plaintiff-appellee submitted the following
documents in support of its claim: (1) Sworn Statement of Loss (Exhibit C); (2) formal
claim dated 22 July 1982; (3) unnotarized sworn statement of proof of loss (Exhibit
D). There was, therefore, sufficient compliance with the requirements in Section 13 of
the policy. But, even assuming that plaintiff-appellee indeed failed to submit certain
required documents as proof of loss per Section 13, such violation was waived by the
insurer Summa when it signed the document marked Exhibit E, a breakdown of the
amount due to plaintiff-appellee as of February 1985 on the insurance claim. By such
act, defendant-appellant acknowledged its liability under the insurance policy.
Antecedent to the execution of Exhibit E, there was a conference between Pallalos,
representing plaintiff-appellee and Ortega representing Summa Insurance. There is
no evidence that in that meeting, Summa Insurance questioned plaintiff-appellees
submission of the required documents. What happened was that Ortega summoned
Maghirang so that he could settle with Pallalos regarding the amount due to plaintiff-
appellee from insurance claim. The result is a reconciliation of claim in Exhibit E
which shows that as of February 1985, the net due sum is P842,683.49.
Defendant-appellant alleges that Maghirang was without authority to sign Exhibit E,
and therefore without authority to bind defendant-appellant corporation. We do not
agree. The evidence indicate that at a meeting between plaintiff-appellees corporate
president Pedro Pallalos and his counterpart in defendant-appellant corporation,
Joaquin Ortega, the latter summoned Rosauro Maghirang to reconcile the claims of
plaintiff-appellee. One who clothes another with apparent authority as his agent and
holds him to the public as such, cannot later be allowed to deny the authority of such
person to act as his agent when such third person entered into the contract in good
faith and in an honest belief that he is such agent. Witness for defendant-appellant
Luis Manapats testimony that Maghirang was without authority to bind the defendant-
appellant cannot be given credence because, as he himself testified, he was not yet
part of the Summa Corporation at the time the negotiations in question were going
[9]
on.
Anent the payment of 24% interest per annum computed from May 3, 1985 until
fully paid, suffice it to say that the same is authorized by Sections 243 and 244 of the
Insurance Code:
Sec. 243. The amount of any loss or damage for which an insurer may be liable,
under any policy other than life insurance policy, shall be paid within thirty days after
proof of loss is received by the insurer and ascertainment of the loss or damage is
made either by agreement between the insured and the insurer or by arbitration; but if
such ascertainment is not had or made within sixty days after such receipt by the
insurer of the proof of loss, then the loss or damage shall be paid within ninety days
after such receipt. Refusal or failure to pay the loss or damage within the time
prescribed herein will entitle the assured to collect interest on the proceeds of the
policy for the duration of the delay at the rate of twice the ceiling prescribed by the
Monetary Board, unless such failure or refusal to pay is based on the ground that the
claim is fraudulent.
Sec. 244. In case of any litigation for the enforcement of any policy or contract of
insurance, it shall be the duty of the Commissioner or the Court, as the case may be,
to make a finding as to whether the payment of the claim of the insured has been
unreasonably denied or withheld; and in the affirmative case, the insurance company
shall be adjudged to pay damages which shall consist of attorneys fees and other
expenses incurred by the insured person by reason of such unreasonable denial or
withholding of payment plus interest of twice the ceiling prescribed by the Monetary
Board of the amount of the claim due the insured, from the date following the time
prescribed in section two hundred forty-two or in section two hundred forty-three, as
the case may be, until the claim is fully satisfied: Provided, That the failure to pay any
such claim within the time prescribed in said sections shall be considered prima
facie evidence of reasonable delay in payment.
Notably, under Section 244, a prima facie evidence of unreasonable delay in
payment of the claim is created by the failure of the insurer to pay the claim within the
[10]
time fixed in both Sections 243 and 244. Further, Section 29 of the policy itself
provides for the payment of such interest:
29. Settlement of claim clause. The amount of any loss or damage for which the
company may be liable, under this policy shall be paid within thirty days after proof of
loss is received by the company and ascertainment of the loss or damage is made
either in an agreement between the insured and the company or by arbitration; but if
such ascertainment is not had or made within sixty days after such receipt by the
company of the proof of loss, then the loss or damage shall be paid within ninety days
after such receipt. Refusal or failure to pay the loss or damage within the time
prescribed herein will entitle the assured to collect interest on the proceeds of the
policy for the duration of the delay at the rate of twice the ceiling prescribed by the
Monetary Board, unless such failure or refusal to pay is based on the grounds (sic)
[11]
that the claim is fraudulent.
The policy itself obliges petitioner to pay the insurance claim within thirty days
after proof of loss and ascertainment of the loss made in an agreement between private
respondent and petitioner.In this case, as found by the CA, petitioner and private
respondent signed the agreement (Exhibit E) indicating that the amount due private
respondent was P842,683.40 on April 2, 1985. Petitioner thus had until May 2, 1985 to
[12]
pay private respondents insurance. For its failure to do so, the CA and the trial court
rightfully directed petitioner to pay, inter alia, 24% interest per annum in accordance
with the above quoted provisions.
 WHEREFORE, the instant petition is hereby DENIED for lack of merit. The
Decision, dated January 14, 1999, of the Court of Appeals in CA-G.R. CV No. 46721
and its Resolution, dated May 13, 1999, are AFFIRMED IN TOTO. DAVIDE, JR., J.:p
SO ORDERED.
Before Us is a petition for the review on certiorari of the decision of the Court of
Davide, Jr., C.J., (Chairman), Puno, Pardo, and Ynares-Santiago, JJ., concur. 1
Appeals promulgated on 12 December 1970 in CA-G.R. No. 36615-R affirming, with
modification, the decision of the then Court of First Instance (now Regional Trial
2
Court) of Manila, Branch VII, dated 30 September 1959 in Civil Case No. 35163 an
action for collection of sum of money filed by petitioner against private respondents.
[1]
Rollo,, pp. 35-36. The dispositive portion of the trial court's decision reads:
[2]
Id., at 80. IN VIEW WHEREOF:
[3]
Id., at 13.
[4]
1. The case against Luzon Surety Co. is dismissed but its
Id., at 15-16. counterclaim is also dismissed for lack of sufficient merit;
[5]
Id., at 16-17.
2. Defendant Estanislao Depusoy is condemned to pay unto the
[6]
American Home Assurance Company vs. Chua, 309 SCRA 250, 260 (1999). Philippine National Bank the respective sums as principal of
[7] P35,000.00, P30,000.00, P10,000.00, and P25,000.00 together
Rollo, p. 76.
with the interests as outlined in the statement of account set forth in
[8] the body of this decision. No pronouncements as to costs.
Noda vs. Cruz-Arnaldo, 151 SCRA 227, 231 (1987) citing VANCE, HANDBOOK ON
rd
THE LAW OF INSURANCE, 3 Ed., p. 897.
3
[9] SO ORDERED.
Rollo, p. 77.
[10]
Cathay Insurance Co., Inc. vs. Court of Appeals, 174 SCRA 11, 18 (1989). The dispositive portion of the decision of respondent Court of Appeals reads:
[11]
Rollo, p. 78. (Underscoring supplied.)
WHEREFORE, with the modification that the defendant Depusoy
[12]
Id., at 78-79. shall pay 10% interest on the amount of the judgment, the decision
of the trial court is hereby affirmed in all other respects. Without
4
pronouncement as to costs.

G.R. No. 33174 July 4, 1991 However, immediately preceding this is a paragraph reading:

PHILIPPINE NATIONAL BANK, petitioner, We agree with the appellant that the trial court erred in not
vs. sentencing Estanislao Depusoy to pay attorney's fees equivalent to
THE HONORABLE COURT OF APPEALS (Special Fourth Division), LUZON 10% of the amount due. This is expressly provided for in the
SURETY CO., INC., and ESTANISLAO E. DEPUSOY, trading under the style of promissory notes, and as it does not appear to be unreasonable,
E.E. DEPUSOY CONSTRUCTION, respondents. the stipulations of the parties should be given effect.

Domingo A. Santiago, Jr., Lucas R. Vidad, Nicolas C. Alino, Cesar T. Basa and As carefully summarized by the Court of Appeals, the relevant facts in this case are
Roland A. Niedo for petitioner. as follows:

Tolentino, Cruz, Reyes, Lava & Manuel for respondent Luzon Surety Co., Inc. On August 6, 1955, Estanislao Depusoy, doing business under the
name of E.E. Depusoy Construction, and the Republic of the
F.M. Ejercito for respondent E.E. Depusoy Construction. Philippines, represented by the Director of Public Works, entered
into a building contract, Exhibit 2-Luzon, for the construction of the
GSIS building at Arroceros Street, Manila, Depusoy to furnish all
materials, labor, plans, and supplies needed in the construction.
Depusoy applied for credit accommodation with the plaintiff. This
was approved by the Board of Directors in various resolutions
subject to the conditions that he would assign all payments to be
received from the Bureau of Public Works of the GSIS to the bank,
furnish a surety bond, and the surety to deposit P10,000.00 to the
plaintiff. The total accommodation granted to Depusoy was
P100,000.00. This was later extended by another P10,000.00 and
P25,000.00, but in no case should the loan exceed P100,000.00,
Exhibits K-1, K-2, K-3 and K-4. In compliance with these conditions,
Depusoy executed a Deed of Assignment of all money to be
received by him from the GSIS as follows:
That I, Estanislao Depusoy, of legal age, Filipino,
married to Lourdes G. Gonzales, doing business
under the style of E. E. San Beda Subdivision,
Manila, for and in consideration of certain loans,
overdrafts or other credit accommodations to be
granted by the PHILIPPINE NATIONAL BANK,
Manila, have assigned, transferred and conveyed
and by these presents do hereby assign, transfer
and convey unto the said PHILIPPINE
NATIONAL BANK, its successors and assigns all
payment to be received from my contract with the
Bureau of Public Works, Republic of the
Philippines date (sic) August 6, 1955.
By virtue of this assignment it is hereby
understood that the assignor hereby
acknowledges the monies, sums or payments
due from the Bureau of Public Works, Republic of
the Philippines, and which are hereby assigned to
the PHILIPPINE NATIONAL BANK as monies,
sums and payments belonging to the
PHILIPPINE NATIONAL BANK, and that any act
or misappropriation or conversion which the
assignor or the latter's representatives may
commit with respect to the said sums, monies
and payments will subject the assignor or the
latter's representatives to the criminal liabilities
imposed by the Penal Code and such other
damages which the Civil Code provides.
It is further understood that the PHILIPPINE
NATIONAL BANK can collect and receive any
and all sums, monies and payments above-
mentioned from the Bureau of Public Works,
Republic of the Philippines, and for that matter
said bank is hereby authorized to indorse for
deposit or for encashment any and all checks,
treasury warrants, money orders, drafts and other
kinds of negotiable instruments that might be
issued in connection with the payment herein
assigned.
This assignment shall be irrevocable subject to
the terms and conditions of the promissory notes,
overdrafts and any other kind of documents
which the PHILIPPINE NATIONAL BANK have
(sic) required or may require the assignor to
execute to evidence the above-mentioned
obligation.
Luzon thereafter executed two surety bonds, one for the sum of
P40,000.00 Exhibit D, and the other for P60,000.00, Exhibit E.
Exhibit its D and E, except for the amount, are expressed in the
same words as follows:
That we, E. E. DEPUSOY CONSTRUCTION
CO., of 32 2nd Street, San Beda Subdv., Manila,
as principal and LUZON SURETY COMPANY,
INC., a corporation duly organized and existing
under and by virtue of the laws of the Philippines,
as surety, are held and firmly bound unto the
PHILIPPINE NATIONAL BANK of Manila in the
sum of SIXTY THOUSAND PESOS ONLY
(P60,000.00), Philippine Currency, for the
payment of which sum, well and truly to be made,
we bind ourselves, our heirs, executors,
administrators, successors, and assigns, jointly
and severally, firmly by these presents:
The conditions of the obligation are as follows:
WHEREAS, the above bounden principal, on
the . . . . day of September, 1956 in consideration
of a certain loan of (P60,000.00) executed a
Deed of Assignment in favor of the Philippine
National Bank on all payments to be received by
him from the Bureau of Public Works in
connection with a contract dated August 6, 1956.
WHEREAS, said PHILIPPINE NATIONAL BANK,
requires said principal to give a good and
sufficient bond in the above stated sum to secure
 the full and faithful performance on his part of
said Agreement.
NOW, THEREFORE, if the principal shall well
and truly perform and fulfill all the undertakings,
covenants, terms, conditions and agreement
stipulated in said Agreement then, this obligation
shall be null and void; otherwise, it shall remain in
full force and effect.
The liability of LUZON SURETY COMPANY,
INC., under this bond will expire January 31,
1957. Furthermore, it is hereby agreed and
understood that the LUZON SURETY
COMPANY, INC. will not be liable for any claim
not discovered and presented to the company
within THREE (3) months from the expiration of
this bond and that the obligee hereby waives his
right to file any court action against the surety
after the termination of the period of the three
months above mentioned.
With the consent of Luzon, the bond was extended for another 6
months from January 31, 1957.
Under the credit accommodation granted by the plaintiff bank,
Depusoy obtained several amounts from the bank. On January 14,
1957, Depusoy received P50,000.00 from the bank which he
promised to pay in installments on the dates therein indicated,
Exhibit A. On January 17, 1957, he received another P50,000.00
under the same conditions as the promissory note Exhibit A, except
with respect to the time of payment. Under this arrangement all
payments made by the GSIS were payable to the Philippine
National Bank. The treasury warrants or checks, however, were not
sent directly to the plaintiff. They were received by Depusoy, who in
turn delivered them to the plaintiff bank. The plaintiff then applied
the money thus received, first, to the payment of the amount due on
the promissory notes at the time of the receipt of the treasury
warrants or checks, and the balance was credited to the current
account of Depusoy with the plaintiff bank. A total of P1,309,461.89
were (sic) paid by the GSIS to the plaintiff bank for the account of
Estanislao Depusoy, Exhibit 1-Luzon. Of this amount, P246,408.91
were (sic) paid according to Exhibit 1 for the importation of
construction materials, and P1,063,408.91 were (sic) received by
the Loans and Discounts Department of the plaintiff bank. This
amount was disposed off by the plaintiffs Loans & Discounts
Department as follows:
a) P795,976.64 were (sic) credited to the current
account of Depusoy with the plaintiff;
b) P20,000.00 were (sic) credited to the plaintiffs
Foreign Department;
c) P2,552.94 were (sic) credited to the payment
of interest; and
d) P210,000.00 were (sic) applied to the principal
of indebtedness. (Exh. N-1).
Depusoy defaulted in his building contract with the Bureau of Public
Works, and sometime in September, 1957, the Bureau of Public
Works rescinded its contract with Depusoy. No further amounts
were thereafter paid by the GSIS to the plaintiff bank. The amount
of the loan of Depusoy which remains unpaid, including interest, is
over P100,000.00. Demands for payment were made upon
5
Depusoy and Luzon, and as no payment was made, . . .
herein petitioner filed with the trial court a complaint (Civil Case No. 35163) against
Estanislao Depusoy and private respondent Luzon Surety Co. Inc. (LSCI).
After trial on the merits, the trial court rendered a decision the dispositive portion of
which is above adverted to.
In dismissing the case as against LSCI, the trial court ruled that the surety bonds it
issued, Exhs. "D" and "E";
. . . guaranteed only the faithful performance of the deed of
assignments, Exhibit C, and nothing else. That the bonds were
extended by the letters Exhs. E and I did not change their
6
conditions. . . .
Petitioner appealed from said decision to the Court of Appeals, (C.A.-G.R. No. 6615-
R) relying on the following assigned errors:
I
The trial court erred in holding that defendant-appellee Luzon
Surety Company, Inc. "guaranteed only the faithful performance of
the deed of assignment, Exh. "C", and nothing else"; in holding the
defense of the appellee Luzon Surety Company, Inc., that there has
been no breach of the terms and conditions of the bonds Exhs. "D"
and "E"; in finding that the "bonds" can only be therefore
understood to guarantee that the payment due from the GSIS to
Depusoy would be delivered unto the bank.
II
The trial court erred in not finding that the bonds (Exhs. "D" and
"E") should be read jointly with the resolutions approving the loan
(Exhs. "K" to "K-5"), the promissory notes and the deed of
assignment in the determination of the true intent of the parties in
the execution of the bonds which are the basis of the liability of the
defendant-appellee Luzon Surety Company, Inc., in not considering
resolutions Exhs. "K" to "K-5"; promissory notes Exhs. "B", "G", and
"H" and the deed of assignment, Exh. "C" as integral parts of the
surety bonds Exhs. "D" and "E" as therein incorporated by
reference in said surety bonds as such necessarily bound the
appellee Luzon Surety Company to their terms.
III
The trial court erred in not construing the terms of the bonds in
favor of the plaintiff-appellant PNB and against the defendant-
appellee Luzon Surety Company, Inc.
IV
The lower court erred in not holding that the bonds Exhs. "D" and
"E" and letters of extension Exhs. "F" and "I" were compensated
surety agreements executed as required by PNB board resolution
Exhs. "K" to "K-5" for the purpose of securing the payment to the
PNB of the amount advanced by the said bank to the appellee
Estanislao Depusoy to finance the construction of the GSIS building
subject to the construction contract Exh. "2-Luzon" or Exh. "O-
PNB"; in not finding that Exhs. "F" and "I" are indubitable proofs that
defendant-appellee Luzon Surety Company, Inc., is liable for the
repayment of the P100,000.00 loan and the additional
accommodations granted to the defendant-appellee Estanislao
Depusoy; and in not finding and holding that Exhs. "D" and "E" in
the sense that they have been extended so as to secure new
accommodations aside from the original obligation mentioned in
said bonds.
V relation of facts presented by the appellee-Luzon Surety Company;
The trial court erred in finding that all payments due from the GSIS
construction to Depusoy were actually delivered unto the bank; and
in not finding that Depusoy made diversions from these amounts for
which the surety should be bound to answer under the terms of its
bonds.
VI
The trial court erred in not finding that when appellee Depusoy
incurred breach (sic) in his construction contract with the Bureau of
Public Works said default on the part of the principal in his contract
resulted in a consequent breach of his undertaking under the deed
of assignment; and that consequently any breach in the undertaking
of the principal in said deed of assignment communicated liability to
the surety; in not finding likewise that breach on the part of the
appellee Depusoy in his undertaking under the promissory notes
meant breach of the terms of the deed of assignment which
incorporated said promissory notes and that this breach in the deed
of assignment communicated liability to the surety under the terms
of the bonds; and that trial court (sic) erred in not finding that there
was a breach of the bonds due to the failure of the appellee Luzon
Surety Company, Inc. to see to it that the full amount of
P1,309,461.89 remitted by the GSIS to the PNB was actually
received by the PNB; in not finding that the PNB did not receive all
the amounts still due to the said institutions as remitted by the GSIS
under the terms of the deed of assignment.
VII
The trial court erred in not sentencing defendant-appellee
Estanislao Depusoy to pay the attorney's fees equivalent to 10% of
the amounts due and the costs of the suit.
VIII
The trial court erred in not admitting in the evidence proof of the
amount actually received by the foreign department of the PNB and
the letter of the GSIS to the PNB as part of the rebuttal evidence of
the defendant-appellee (see evidences (sic) offered as part of the
record on appeal for purposes of review).
IX
The trial court erred in relying exclusively for its decision on the
disregarding evidences (sic) presented by the PNB consist of
documentary evidences (sic) disclosing patent facts appearing on
the face of said documents and that consequently the decision is
not based on the real facts and law of the case; and consequently
7
dismissing the case against the Luzon Surety.
In due course the Court of Appeals rendered the decision adverted to above. In
disposing of the assigned errors, it patiently examined and analyzed the facts and
made an extensive, exhaustive and well-reasoned disquisition thereon which We
deem necessary to quote:
The assignment of error maybe (sic) reduced into one single
question, — what is the obligation of Luzon under the surety bonds,
or, stated otherwise, what obligation had been guaranteed by
Luzon under the terms of the surety bonds? It is the contention of
the plaintiff that the surety bonds, Exhibits D and E, guaranteed the
payment of the loans or the debt of Depusoy to the plaintiff to the
extent of P100,000.00. Luzon, however, contends that what it
guaranteed was the performance of Depusoy of his obligation
under the Deed of Assignment, Exhibit C, and not other
agreements between Depusoy and the bank. This contention was
upheld by the lower court. This, we believe is the correct
construction of the surety bonds. Under the surety bonds, Depusoy
and Luzon bound themselves to the plaintiff in the sum of
P100,000.00. It recited that the principal, Depusoy, and Luzon
bound themselves jointly and severally to the PNB under the
following conditions: that "in consideration of a certain loan,
Depusoy executed a Deed of Assignment in favor of the PNB on all
payments to be received by him from the Bureau of Public Works in
connection with a contract of August 6, 1956"; that the PNB
required the principal to give a good and sufficient bond to secure
the full and faithful performance on his part of said agreement; and
that, "if the principal shall well and truly perform and fulfill all the
undertakings, covenants, terms and conditions, and agreements
stipulated in said agreement, this obligation shall be null and void".
Now, what are the undertakings, covenants, terms, conditions, and
agreements stipulated in the said agreement or Deed of
Assignment? The undertakings of the principal Depusoy, under the
Deed of Assignment, Exhibit C, were to assign, transfer, and
convey to the plaintiff bank all payments to be received by Depusoy
from the Bureau of Public Works; that Depusoy acknowledged that
such sums assigned and received by the plaintiff would belong to
the PNB, and if any conversion should be made by the assignor or
his representative, he would be criminally liable; that the PNB could
collect and receive all sums and monies, and payments, and the
bank was authorized to endorse for deposit or for encashment all
checks or money orders, or negotiable instruments that it might
receive in connection with the assignment. Nowhere in the Deed of
Assignment nor in the bonds did Luzon guarantee that Depusoy
would pay his indebtedness to the plaintiff and that upon Depusoy's
default, Luzon would be liable. When the terms of the agreement
are clear, there can be no room for construction. If the intention of
the parties, and particularly of Luzon, was to guarantee the
payment of the debt of Depusoy to the plaintiff, the bonds would
have recited in its preamble that the principal was indebted to the
PNB and that the PNB required the principal to give a good and
sufficient bond to secure the faithful performance on his part of the
terms of the promissory notes. Instead of doing so, it recited that in
consideration of a certain loan, the principal had executed a Deed
of Assignment. The recital of the loan in the amount of P40,000.00,
Exhibit D and P60,000.00, Exhibit E, is merely a statement of the
cause or consideration of the Deed of Assignment and not a
statement of the obligation. The Deed of Assignment necessarily
was executed for a consideration, otherwise, it would be null and
void. The obligation recited in the surety bonds, Exhibits D and E, is
not the loan, but the Deed of Assignment; and that precisely was
what was guaranteed by Luzon in the bonds, Exhibits D and E, as
shown by the following:
1) Contrary to the usual practice of the plaintiff,
Luzon did not sign the promissory notes, Exhibits
A and B;
2) Although the resolutions of the Board of
Directors required that the surety should make a
deposit of P10,000.00, Luzon did not make such
a deposit, the verbal testimony of Delfin Santiago,
Manager of the Loans and Discounts
Department, to the contrary notwithstanding. The
documentary evidence was submitted to prove
that was the fact;
3) Delfin Santiago finally admitted that what was
guaranteed was not the loan but the Deed of
Assignment.
Delfin Santiago testified as follows:
Q Did you inform the Luzon
Surety Company, Inc. of your
actuation on this fact, that is in
your giving Mr. Depusoy
portions of the payments made
by the GSIS to the Philippine
National Bank pursuant to the
Deed of Assignment?
A No, because I understand
that the Luzon Surety
Company, Inc. stands as surety
on that assignment on which
the full payment of the contract
 is assigned to the payments.
(TSN, p. 54)
xxx xxx xxx
Q Usually Mr. Santiago, it is the
practice of the Philippine
National Bank in cases where a
surety company guarantees the
account of the borrower, the
Philippine National Bank
requires the surety company to
sign the promissory note as a
co-maker, is it not?
A In case the condition is
approved, the surety I
remember very well, the last
accommodation given to Mr.
Depusoy . . . that was the
condition, but the Luzon Surety
Company, Inc. did not want to
sign, so at the request of the
Luzon Surety Company, Inc.
and Mr. Depusoy, the approved
accommodation was modified
in such a way as only to the
surety bond.
ATTY. NERI: If Your Honor
please. We object to the
question, it was not covered by
the direct examination.
COURT: Answer.
A Well, apparently that was the
intention because you decided
to sign jointly and severally the
promissory note.
Q And because that was our
intention the Philippine National
Bank agreed to that desire of
Luzon Surety Company, Inc. by
issuing only a similar surety
bond and not signing as co-
maker, and jointly and severally
on the promissory note?
ATTY. NERI: Objection Your
Honor, the contract is the best
evidence.
COURT: Answer.
A As usual, as at the
beginning, we take it that your
bonding the Deed of
Assignment is the
understanding that all
payments for the whole
contract will go to us. (TSN, pp.
55-57, July 21, 1958)
xxx xxx xxx
Q Did you read the terms of the
bond?
A Yes, sir, that's right.
Q And you further noted in the
bond it merely guaranteed the
deed of assignment, is that
correct? of Mr. Depusoy?
A Yes, sir.
ATTY. CRUZ: And not this
particular loan, is it not?
ATTY. NERI: We refer to the
document, Your Honor.
COURT: Sustained.
(TSN, pp. 9-10, June 26, 1959)
xxx xxx xxx
ATTY. NERI: Now, Mr.
Depusoy in his testimony
stated that when you received
these amounts from the GSIS
and issued credit memos . . . in
favor of Mr. Depusoy, you did
not notify the Luzon Surety
Company, Inc. of the fact of the
issuance of this (sic) credit
memos in favor of Mr. Depusoy
will you state to this Honorable
Court the reason why is that
you did not give notice to the
Luzon Surety Company, Inc.?
A I did not notify the Luzon
Surety Company, Inc. of this
transaction because the bond
filed by the Luzon Surety
Company, Inc., but the terms of
the bond filed by Luzon Surety
Company is that they
understand the transaction of
Mr. Depusoy with the Philippine
National Bank.
COURT: They understand the
transaction to be. . .
WITNESS: . . . The nature of
the transaction with Mr.
Depusoy in the sense that as
we . . . as appearing in this
bond Exhibit D . . . all
payments to be received by
him from the Bureau of Public
Works in connection with the
contract to secure the full and
faithfully performance on his
part of the said agreement, the
agreement referred to is the
assignment of payment in
connection with the contract of
Mr. Depusoy with the GSIS.
(TSN, pp. 27-29 June 1, 1959)
In support of his contention that the surety bond was intended to
guarantee the loan, the appellant gave the following grounds or
reasons:
1) The resolution of the Board of Directors of the
plaintiff approving the loan or credit
accommodation to Depusoy required that
Depusoy should put up a bond executed by the
Luzon Surety Company, Inc., Exhibits K-3, K-4
and K-5. The resolutions of the Board of Directors
were unilateral acts of the plaintiff and were
conditions imposed upon the debtor, Depusoy,
Luzon was not a party to these resolutions and
under the rule of res inter alios acta, they cannot
bind or prejudice Luzon in the absence of
evidence that the terms of the resolutions had
been brought to the attention of Luzon and that it
had acceded thereto. All that the bond stated is
that the PNB required the principal to give a good
and sufficient bond. There can be no other
consideration for the execution of the bonds other
than stated thereon in the absence of allegation
that they did not express the true intention of the
parties.
2) Appellant contends that the promissory notes
and the building contract mentioned in the Deed
of Assignment became part and parcel of the
Deed of Assignment under the principle of
incorporation by reference. We agree that the
Deed of Assignment became part and parcel of
the bond, but to say that all promissory notes,
overdrafts, and any other kind of documents
which the PNB might require the assignor to
execute to evidence the aforementioned
obligation were also incorporated by reference to
the surety bond and became obligation of Luzon
is to include in the assignment, covenants and
obligations beyond the contemplation of the
parties. The appellant relies on the last paragraph
of the Deed of Assignment which reads: "This
assignment shall be irrevocable and subject to
the terms and conditions of the promissory notes,
overdrafts, and any other kind of document which
the PNB can require or may require the assignor
to execute to evidence the above-mentioned
obligation".
It is argued that under this stipulation, Luzon guaranteed the
payment of the promissory notes which are the subject of this
action and also the building contract between Depusoy, its
principal, and the Bureau of Public Works. This is a very far-fetched
construction. This paragraph does not impose any obligation upon
Depusoy. All that was required of Depusoy was to execute such
documents which might be required by the PNB to evidence the
Deed of Assignment. The words of the phrase "subject to" are
words of qualification and not of contract (Cox vs. Vat 149, 110 pp.
96-148 CCH 147) and means subject to, meaning under the
control, power or dominion or subordinate to and not being words of
contract imposing upon defendant no contractual obligation (40
Words & Phrases 386-389). What was evidently intended is the
Deed of Assignment when it stated "subject to the terms and
conditions of the promissory notes and overdrafts" was that any
amount received by the PNB would be applied to the payment of
the promissory notes and overdrafts in accordance with their terms
and conditions as they fell due because the Deed of Assignment
was executed not for the purpose of making the PNB the owner of
all the monies received from the GSIS, but as a security for the
payment of the debt of Depusoy arising from the credit
accommodation granted to him by the appellant. And that this was
the intention is evident from the fact that upon receipt of the
treasury warrants and checks from the GSIS, the appellant applied
the same to the payment of the debt of Depusoy which was due
with interest and the remainder was credited to Depusoy's current
account. This balance was subject to the free disposal of Depusoy.
Hence, out of the over P1 million received by the Loans &
Discounts Department of the appellant, almost P800,000.00 were
credited to the current account of Depusoy and only a little over
P200,000.00 was applied to his debt. Appellant contends that since
in the Deed of Assignment, Depusoy undertook to assign, transfer,
and convey to PNB all payments to be received by him from his
contract with the Bureau of Public Works, Luzon had thereby
guaranteed the faithful performance by Depusoy of his building
contract with the Bureau of Public Works, and Depusoy having
defaulted in his building contract by reason of which the Bureau of
Public Works rescinded the building contract, the PNB did not
receive from the GSIS the full contract price of over P2 million. This
indeed is a very far-fetched construction of the contract. What was
transferred or assigned by Depusoy to the PNB were all payments
to be received by him under the contract with the Bureau of Public
Works. Necessarily, what was to be received by Depusoy depends
upon his performance under the contract. As long as he faithfully
performed the contract, he would receive from the GSIS the amount
due him. From the moment he defaulted and failed to comply with
the terms of the contract, he would receive nothing and he could
not assign what he did not have. To argue that under the terms of
the Deed of Assignment, Luzon also guaranteed the faithful
performance of the building contract of Depusoy with the Bureau of
Public Works is fanciful and wishful thinking.
3) Appellant also contends that under Exhibits F and I, it can be
seen that what was really intended to be guaranteed by the surety
agreement was the payment of the loan. We quote Exhibits F and I.
Relative to our above-captioned bonds in the
amount of P40,000.00 dated May 28, 1956 and
September 24, 1956, respectively, please be
advised that same is hereby extended for a
further period of six (6) months from January 31,
1957. All other terms and conditions of our
above-mentioned bonds shall remain the same
except the period of expiration herein above
mentioned. These bonds also cover the new
accommodation given our Principal.
Relative to the above numbered bonds, in the
amount of P40,000.00 and P60,000.00 dated
May 28, 1956 and September 24, 1956,
respectively, the account secured thereby having
been reduced by virtue of payments made by our
principal, which, according to him has but a
balance of P75,000.00 we have the honor to
inform you that we are agreeable to the extension
of further credit to our principal to the extent of
the amount of the said bonds, under the same
terms and conditions thereof.
At first glance, from the statement in Exhibit F, which reads: "This
bond also covers the new accommodation given our principal", and
in Exhibit I, that "we are agreeable to the extension of further credit
to or principal to the extent of the amount of the said bond", it would
appear that Luzon was referring to the obligation of Depusoy to pay
the loan. But particular attention must be paid to the statement in
Exhibit F that "all of the terms and conditions of our above-
mentioned bonds shall remain the same except the period of
expiration herein below mentioned". What was really agreed by
Luzon was the extension of the duration of the surety bond, for
under the terms of the bonds they expired six months from their
respective dates. Any statement in Exhibit I that may be construed
as referring to the debt of Depusoy was made only by an Asst.
Manager who evidently was not familiar with the terms of the surety
bond. It must be noted that the surety bond was executed by CS
Rodriguez, General Manager. Moreover, it cannot prevail over the
testimony of Delfin Santiago, Manager of the Loans & Discounts
Department, that what was guaranteed by the surety bond was the
Deed of Assignment.
It is also contended that if what was intended to be guaranteed by
Luzon is the Deed of Assignment, the surety bond guaranteed
nothing, because with the execution of the Deed of Assignment,
nothing thereafter remained to be done. This is not true, for the
terms of the Deed of Assignment, Depusoy authorized the PNB to
receive all monies due from the Bureau of Public Works and to
endorse for deposit all instruments of credit that might be issued in
connection with the payments therein assigned. Under this
stipulation, Luzon guaranteed that all the monies due Depusoy
under his building contract with the Bureau of Public Works should
be paid to the PNB. It is true that all the checks and warrants issued
by the GSIS were to be made payable to the PNB. But under the
arrangement between the PNB, GSIS, and the Bureau of Public
Works, and Depusoy, it was Depusoy who received the warrants or
checks either from the Bureau of Public Works or from the GSIS,
and Depusoy delivered the same to the PNB. The PNB did not take
the trouble of going to the GSIS or the Bureau of Public Works to
get the checks. One reason because the PNB did not know when
any amount would be due. There is nothing then that could prevent
an arrangement thereafter between Depusoy and the GSIS, or the
Bureau of Public Works to make the checks payable to Depusoy,
and Depusoy from forging the signature of the PNB and
appropriating the money. This would be a violation of the Deed of
Assignment for which Luzon would be liable.
It is not disputed that no payment was made directly to Depusoy
after the Deed of Assignment. All amounts due to Depusoy were
paid to the PNB for the account of Depusoy. It is true that in
accordance with Exhibit M, only P1,063,408.91 were received by
the Loans and Discounts Department of the plaintiff bank, and that
of the total amount of P1,309,461.89 paid by the GSIS,
P246,062.98 were paid for the importation of construction materials.
As to the so-called 10% retention fund, there is no evidence that the
Bureau of Public Works had retained any amount. In any case what
was assigned was "all payments to be received" under the building
contract, and the 10% retention was not to be received by Depusoy
until certain conditions had been met.
In its eight assignment of error, the appellant contends that the
lower court in not admitting proof of the amount actually received by
the PNB and the letter of the GSIS, Exhibit Q (sic). Aside from the
purely technical reason for their rejection, their admission cannot
affect the result. Exhibit Q is a letter of the General Manager of the
GSIS to plaintiff advising plaintiff of the rescission of the building
contract. Exhibits Q, P, P-1 and P-2 are statements of the amounts
received by plaintiff's foreign department. There is no evidence that
the GSIS had paid any amount to Depusoy in violation of the Deed
of Assignment. Not a single cent had been received directly by
Depusoy from the GSIS or the Bureau of Public Works.
xxx xxx xxx
We agree with the appellant that the trial court erred in not
sentencing Estanislao Depusoy to pay attorney's fees equivalent to
10% of the amount due. This is expressly provided for in the
promissory notes, and as it does not appear to be unreasonable,
the stipulation of the parties should be given effect.
8
9
Its motion for reconsideration having been denied by the respondent Court of
10
Appeals in its resolution of 1 February 1971, petitioner filed the instant petition on 3
March 1971 asserting therein that:
. . . the Decision and the Resolution of respondent COURT
(Annexes A and B) are both not in accord with the evidence, the
law, and jurisprudence on the matter.
I. THE SURETY BONDS COVER THE PRINCIPAL LOANS, THE
SURETY THEREBY BECOMING LIABLE UPON DEFAULT OF
THE LATTER.
II. EVEN ASSUMING ARGUENDO THAT THE BONDS SECURE
ONLY THE DEED OF ASSIGNMENT, STILL THE SURETY IS
LIABLE FOR FAILURE OF THE PRINCIPAL TO COMPLY WITH
THE TERMS OF SUCH DEED.
III. THE DISPOSITIVE PORTION OF THE DECISION SHOULD BE
AMENDED TO THE END THAT PRIVATE RESPONDENT
RESPONDENTS BE ADJUDGED LIABLE FOR ATTORNEY'S
11
FEES.
In support of its petition, petitioner practically summoned the same arguments which it
relied upon before the Court of Appeals.
12
On 3 March 1971 private respondent filed a motion to dismiss the petition on the
following grounds:
1. That the petition is without merit;
2. That the question raised therein are too unsubstantial to require
consideration; and
3. That the question raised are factual.
In the resolution of 8 March 1971 this Court dismissed the petition for being factual
13 14
and for lack of merit; however, upon motion for reconsideration this Court
15
reconsidered the resolution and gave due course to the petition. The petitioner was
16 17
then required to submit its Brief, which it complied with on 12 July 1971 . Private
18
respondent LSCI filed its brief on 10 August 1971. Private respondent Depusoy did
not file any.
Except for the third assigned error, We find no merit in this petition. The issues raised
are factual.
The findings of facts of the Court of Appeals can withstand the most incisive scrutiny.
They are sufficiently supported by the evidence on record and the conclusions drawn
therefrom do not justify a departure from the deeply rooted and well settled doctrine
that findings of facts of the Court of Appeals are conclusive on this
19 20
Court, considering that the recognized exceptions thereto do not come to the
rescue of petitioner.
We are in full accord with the conclusion of the trial court and the Court of Appeals
that the bonds executed by private respondent LSCI were to guarantee the faithful
performance of Depusoy of his obligation under the Deed of Assignment and not to
guarantee the payment of the loans or the debt of Depusoy to petitioner to the extent
of P100,000.00. The language of the bonds is clear, explicit and unequivocal. It
leaves no room for interpretation. Article 1370 of the Civil Code provides:
If the terms of a contract are clear and leave no doubt upon the
intention of the contracting parties, the literal meaning of its
stipulations shall control.
Besides, even if there had been any doubt on the terms and conditions of the surety
agreement, the doubt should be resolved in favor of the surety. As concretely put in
Article 2055 of the Civil Code, "A guaranty is not presumed, it must be expressed and
cannot extend to more than what is stipulated therein."
accordant. As was said by Justice Story in Miller vs. Stewart (9
Wheat. 680; 6 L. ed., 189):
Nothing can be clearer, both upon principles and authority, than the
doctrine that the liability of a surety is not to be extended, by
implication, beyond the terms of his contract. To the extent and in
the manner, and under the circumstances pointed out in his
obligation, he is bound, and no farther.
As earlier adverted to, there is merit in the third assigned error. The paragraph
immediately preceding the decretal portion of the decision of respondent Court of
Appeals reads as follows:
We agree with the appellant that the trial court erred in not
sentencing Estanislao Depusoy to pay attorney's fees equivalent to
10% of the amount due. This is expressly provided for in the
promissory notes, and as it does not appear to be unreasonable,
the stipulation of the parties should be given effect.
The dispositive portion of the questioned decision should then be modified in the
sense that the "10% interest" indicated therein should be considered and understood
as and for attorney's fees.
WHEREFORE, with the above modification, the Decision of the Court of Appeals of
12 December 1970 in CA-G.R.No. 36615-R is AFFIRMED, with costs against
petitioner.
SO ORDERED.
Fernan, C.J., Gutierrez, Jr., Feliciano and Bidin, JJ., concur.

21
In the recent case of Umali, et al. vs. Court of Appeals, et al., We reiterated the
unrippled rule that the liability of the surety is measured by the terms of the contract, Footnotes
and, while he is liable to the full extent thereof, such liability is strictly limited to that
22
assumed by its terms. 1 Annex "A" of Petition; Rollo, 63-82; per Associate Justice Jose N.
Leuterio, concurred in by Associate Justices Antonio G. Lucero and
In La Insular vs. Machuca Go Tanco, et al., supra., this Court held: Edilberto Soriano.

It is undoubtedly true that the law looks upon the contract of 2 Per then Judge Magno S. Gatmaitan; Record on Appeal, 42-54.
suretyship with a jealous eye, and the rule is settled that the
obligations of the surety cannot be extended by implication beyond 3 Record on Appeal, 54.
its specified limits.
4 Rollo, 84.
Article 1827 of the Civil Code so discloses (Uy Aloc vs. Cho Jan
Ling, 27 Phil. Rep., 427); and with this doctrine the common law is
5 Rollo, 66-69. 22 Government vs. Herrera 38 Phil. 410; La Insular vs. Machuca
Go-Tanco et al., 39 Phil. 571; Luzon Surety Co., Inc. vs. Teodoro,
6 Record on Appeal, 49-50. 101 Phil. 684; Magdalena Estates Inc. vs. Rodriguez et al., 125
Phil. 115; Zenith Insurance Corporation vs. Court of Appeals, et al,
119 SCRA 485; and Philippine Commercial and Industrial Bank vs.
7 Rollo, 63-65. Court of Appeals, et al., 159 SCRA 24.

8 Rollo, 70-82.

9 Id., 91-105.
G.R. No. L-45848 November 9,1977

10 Id., 84. TOWERS ASSURANCE CORPORATION, petitioner,

vs.
11 Id., 22-23. ORORAMA SUPERMART, ITS OWNER-PROPRIETOR, SEE HONG and JUDGE
BENJAMIN K. GOROSPE, Presiding Judge, Court of First Instance of Misamis
12 Rollo, 6-11. Oriental, Branch I, respondents.

13 Id., 130. Benjamin Tabique & Zosimo T. Vasalla for petitioner.

14 Id., 139. Rodrigo F. Lim, Jr. for private respondent.

15 Resolution of 13 April 1971.

16 Id., 159. AQUINO, J.:

17 Id., 164.
18 Id., 167.
19 Chan vs. Court of Appeals, 33 SCRA 737; Manlapaz vs. Court of
Appeals, 147 SCRA 236; Chua Giok Ong vs. Court of Appeals, 149
SCRA 119; Francisco vs. Mandi, 152 SCRA 711; Dihiansan vs.
Court of Appeals, 153 SCRA 712; Remalante vs. Tibe, et al., 158
SCRA 138.
20 Summarized in Remalante vs. Tibe et al.; supra., as enunciated
in Joaquin vs. Navarro, 93 Phil. 257; Luna vs. Linatok, 74 Phil. 15;
Buyco vs. People, 95 Phil. 253; De la Cruz vs. Sosing, 94 Phil. 26;
Castillo vs. Court of Appeals, 124 SCRA 808; Casica vs. Villaseca,
101 Phil. 1205; Evangelista vs. Alto Surety and Ins. Co. Inc., 103
Phil. 401; Sacay vs. Sandiganbayan, 142 SCRA 593; Salazar vs,
Gutierrez, 33 SCRA 242.
21 G.R. No. 89561, 13 September 1990.
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 non-
appearance 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 SO ORDERED.
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 Fernando (Chairman), Barredo, Antonio, Concepcion, Jr. and Santos, JJ., concur.
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. G.R. No. L-18411 December 17, 1966
On March 29, 1977, Towers Assurance Corporation filed the instant petition for
certiorari where it assails the decision and writ of execution. MAGDALENA ESTATES, INC., plaintiff-appellee,
vs.
ANTONIO A. RODRIGUEZ and HERMINIA C. RODRIGUEZ, defendants-appellants.
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: Roxas and Sarmiento for plaintiff-appelle.
Somero, Baclig and Savello for defendants-appellants.
SEC. 17. When execution returned unsatisfied, recovery had upon
bound. — If the execution be returned unsatisfied in whole or in REGALA, J.:
part, the surety or sureties on any counterbound given pursuant to
the provisions of this rule to secure the payment of the judgment Appeal from the decision of the Court of First Instance of Manila ordering the
shall become charged on such counterbound, and bound to pay to defendants-appellants to pay jointly and severally to the plaintiff-appellee the sum of
the judgment creditor upon demand, the amount due under the P655.89, plus legal interest thereon from date of the judicial demand, the sum of
judgment, which amount may be recovered from such surety or P100.00 as attorney's fees, and to pay the costs.
sureties after notice and summary hearing in the same action.
The appellants bought from the appellee a parcel of land in Quezon City known as Lot
Under section 17, in order that the judgment creditor might recover from the surety on 7-K-2-G, Psd-26193. In view of an unpaid balance of P5,000.00 on account of the
the counterbond, it is necessary (1) that execution be first issued against the principal purchase price of the lot, the appellants executed on January 4, 1957, the following
debtor and that such execution was returned unsatisfied in whole or in part; (2) that promissory note representing the said account:
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. PROMISSORY NOTE

The first requisite mentioned above is not applicable to this case because Towers
Assurance Corporation assumed a solidary liability for theP5,000.00
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, January 4, 1957
Manila,
1969, 28 SCRA 58, 63).

We, the Spouses

But certainly, the surety is entitled to be heard before an execution ANTONIO A. RODRIGUEZ and HERMINIA C. RODRIGUEZ, jointly and severally promise to pay the Magdalena Es
can be issued
offices
against him since he is not a party in the case involving his in theNotice
principal. City ofand
Manila, without any demand the sum of FIVE THOUSAND PESOS (P5,000.00), Philippine currency, with interest
hearing constitute the essence of procedural due process. 9% per annum,
(Martinez within sixty
vs. Villacete 116(60) days from January 7, 1957. The sum of P5,000.00 represents the balance of the purchase price of the
Phil. 326; Insurance & Surety Co., Inc. vs. Hon. Piccio, 1057-K-2-G, Psd. 1200,
Phil. 1192, 26193,Luzon
containing an area of 2,191 square meters, Quezon City.
Surety Co., Inc. vs. Beson, L-26865-66, January 30. 1970. 31 SCRA 313).
(Sgd.) Antonio A. Rodriguez
WHEREFORE, the order and writ of execution, insofar as they concern Towers ( T ) ANTONIO A. RODRIGUEZ
Corporation, are set aside. The lower court is directed to conduct a summary hearing
on the surety's liability on its counterbound. No costs. (Sgd.) Herminia C. Rodriguez
( T ) HERMINIA C. RODRIGUEZ

On the same date, the appellants and the Luzon Surety Co., Inc. executed a bond in
favor of the appellee, the undertaking thereof being embodied therein as follows:
. . . comply with the obligation to pay the amount of P5,000.00 representing
balance of the purchase price of a parcel of land known as Lot 7-K-2-G, Psd-
26193, with an area of 2191 square meters, Quezon City, covered by
Transfer Certificate of Title No. 13 (6947), Quezon City, within a period of
sixty (60) days from January 7, 1957; That the Surety shall be notified in
writing within Ten (10) days from moment of default otherwise, this
undertaking is automatically null and void.
On June 20, 1958, when the obligation of the appellants became due and
demandable, the Luzon Surety Co., Inc. paid to the appellee the sum of P5,000.00.
Subsequently, the appellee demanded from the appellants the payment of P655.89
corresponding to the alleged accumulated interests on the principal of P5,000.00. Due
to the refusal of the appellants to pay the said interest, the appellee started this suit in
the Municipal Court of Manila to enforce the collection thereof. The said court, on
February 5, 1959, rendered judgment in favor of the appellee and against the
appellants, ordering the latter to pay jointly and severally the appellee the sum of
P655.89 with interest thereon at the legal rate from November 10, 1958, the date of
the filing of the complaint, until the whole amount is fully paid. Not satisfied with that
judgment, appellants appealed to the Court of First Instance of Manila, where the
case was submitted for decision on the pleadings. The Court of First Instance of
Manila rendered the judgment stated at the outset of this decision.
On appeal directly to this Court, the following errors are assigned:
I. The lower court erred in concluding as a fact from the pleadings that the
plaintiff-appellee demanded, and the Luzon Surety Co., Inc. refused, the
payment of interest in the amount of P655.89, and in not finding and
declaring that said plaintiff-appellee waived or condoned the said interests.
II. The lower court erred in not finding and declaring that the obligation of the
defendants-appellants in favor of the plaintiff-appellee was totally
extinguished by payment and/or condonation.
III. The lower court erred in not finding and declaring that the promissory
note executed by the defendants-appellants in favor of the plaintiff-appellee
was, insofar as the said document provided for the payment of interests,
novated when the plaintiff-appellee unqualifiedly accepted the surety bond
which merely guaranteed payment of the principal in the sum of P5,000.00.
Appellants claim that the pleadings do not show that there was demand made by the
appellee for the payment of accrued interest and what could be deduced therefrom
was merely that the appellee demanded from the Luzon Surety Co., Inc., in the
capacity of the latter as surety, the payment of the obligation of the appellants, and
said appellee accepted unqualifiedly the amount of P5,000.00 as performance by the
obligor and/or obligors of the obligation in its favor. It is further claimed that the
unqualified acceptance of payment made by the Luzon Surety Co., Inc. of P5,000.00
or only the amount of the principal obligation and without exercising its (appellee's)
right to apply a portion of P655.89 thereof to the payment of the alleged interest due
despite its presumed knowledge of its right to do so, the appellee showed that it
waived or condoned the interests due, because Articles 1235 and 1253 of the Civil
Code provide:
ART. 1235. When the obligee accepts the performance, knowing its
incompleteness or irregularity, and without expressing any protest or
objection, the obligation is deemed fully complied with.
ART. 1253. If the debt produces interest, payment of the principal shall not
be deemed to have been made until the interests have been recovered.
We do not agree with the contention of the appellants. It is very clear in the
promissory note that the principal obligation is the balance of the purchase price of
the parcel of land known as Lot 7-K-2-G, Psd-26193, which is the sum of P5,000.00,
and in the surety bond, the Luzon Surety Co., Inc. undertook "to pay the amount of
P5,000.00 representing balance of the purchase price of a parcel of land known as
Lot 7-K-2-G, Psd-26193, . . . ." The appellee did not protest nor object when it
accepted the payment of P5,000.00 because it knew that that was the complete
amount undertaken by the surety as appearing in the contract. The liability of a surety
1
is not extended, by implication, beyond the terms of his contract. It is for the same
reason that the appellee cannot apply a part of the P5,000.00 as payment for the
accrued interest. Appellants are relying on Article 1253 of the Civil Code, but the rules
contained in Articles 1252 to 1254 of the Civil Code apply to a person owing several
debts of the same kind of a single creditor. They cannot be made applicable to a
person whose obligation as a mere surety is both contingent and singular; his liability
is confined to such obligation, and he is entitled to have all payments made applied
2
exclusively to said application and to no other. Besides, Article 1253 of the Civil
3
Code is merely directory, and not mandatory. Inasmuch as the appellee cannot
protest for non-payment of the interest when it accepted the amount of P5,000.00
from the Luzon Surety Co., Inc., nor apply a part of that amount as payment for the
interest, we cannot now say that there was a waiver or condonation on the interest
due.
It is claimed that there was a novation and/or modification of the obligation of the
appellants in favor of the appellee because the appellee accepted without reservation
the subsequent agreement set forth in the surety bond despite its failure to provide
that it also guaranteed payment of accruing interest.
G.R. No. 89775 November 26, 1992
The rule is settled that novation by presumption has never been favored. To be
sustained, it needs to be established that the old and new contracts are incompatible JACINTO UY DIÑO and NORBERTO UY, petitioners,
in all points, or that the will to novate appears by express agreement of the parties or vs.
4
in acts of similar import. HON. COURT OF APPEALS and METROPOLITAN BANK AND TRUST
COMPANY, respondents.
An obligation to pay a sum of money is not novated, in a new instrument wherein the
old is ratified, by changing only the terms of payment and adding other obligations not
5
incompatible with the old one, or wherein the old contract is merely supplemented by
6
the new one. The 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 DAVIDE, JR., J.:
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 Continuing Suretyship Agreements signed by the petitioners set off this present
original debtor. (Straight v. Haskel, 49 Phil. 614; Pacific Commercial Co. v. Sotto, 34 controversy.
Phil. 237; Estate of Mota v. Serra, 47 Phil. 464; Duñgo v. Lopena, supra ). In the
instant case, the surety bond is not a new and separate contract but an accessory of Petitioners assail the 22 June 1989 Decision of the Court in CA-G.R. CV No.
the promissory note. 1
17724 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
WHEREFORE, the judgment appealed from should be, as it is hereby, affirmed, with Company vs. Uy Tiam, doing business under the name of "UY TIAM ENTERPRISES
costs against the appellants. & FREIGHT SERVICES," Jacinto Uy Diño and Norberto Uy" and docketed as Civil
Case No. 82-9303. They likewise challenge public respondent's Resolution of 21
2
August 1989 denying their motion for the reconsideration of the former.
Concepcion, C.J., Reyes, J.B.L., Barrera, Dizon, Makalintal, Bengzon, J.P., Zaldivar,
Sanchez and Castro, JJ.,concur.
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,
Footnotes applied for and obtained credit accommodations (letter of credit and
trust receipt accommodations) from the Metropolitan Bank and
1
Trust Company (hereinafter referred to as METROBANK) in the
La Insular v. Machuaca Go Tauco, 39 Phil. 567. sum of P700,000.00 (Original Records, p. 333). To secure the
aforementioned credit accommodations Norberto Uy and Jacinto
2
Socony-Vacuum Corp. v. Miraflores, 67 Phil. 304. Uy Diño executed separate Continuing Suretyships (Exhibits "E"
and "F" respectively), dated 25 February 1977, in favor of the latter.
3
Baltazar v. Lingayen Gulf Electric Co., Inc., G.R. Nos. L-16236-38, June Under the aforesaid agreements, Norberto Uy agreed to pay
30, 1965. METROBANK any indebtedness of UTEFS up to the aggregate
sum of P300,000.00 while Jacinto Uy Diño agreed to be bound up
4 to the aggregate sum of P800,000.00.
Martinez v. Cavives, 25 Phil. 581; Tiu Sinco v. Havana, 45 Phil. 417; Asia
Banking Corporation v. Lacson, 48 Phil. 482; Pascual v. Lacsamana, 53
O.G. 2467; Duñgo v. Lopena, et al., G.R. No. L-18377, Dec. 29, 1962. Having paid the obligation under the above letter of credit in 1977,
UTEFS, through Uy Tiam, obtained another credit accommodation
5 from METROBANK in 1978, which credit accommodation was fully
Inchausti v. Yulo, 34 Phil. 978; Pablo v. Sapungan, 71 Phil. 145.
settled before an irrevocable letter of credit was applied for and
obtained by the abovementioned business entity in 1979
6
Ramos v. Gibbon, 67 Phil. 371; Duñgo v. Lopena, supra. (September 8, 1987, tsn, pp. 14-15).
The Irrevocable Letter of Credit No. SN-Loc-309, dated March 30,
1979, in the sum of P815, 600.00, covered UTEFS' purchase of
"8,000 Bags Planters Urea and 4,000 Bags Planters 21-0-0." It was
applied for and obtain by UTEFS without the participation of
Norberto Uy and Jacinto Uy Diño as they did not sign the document
denominated as "Commercial Letter of Credit and Application."
Also, they were not asked to execute any suretyship to guarantee
its payment. Neither did METROBANK nor UTEFS inform them that
the 1979 Letter of Credit has been opened and the Continuing
Suretyships separately executed in February, 1977 shall guarantee
its payment (Appellees brief, pp. 2-3; rollo, p. 28).
The 1979 letter of credit (Exhibit "B") was negotiated.
METROBANK paid Planters Products the amount of P815,600.00
which payment was covered by a Bill of Exchange (Exhibit "C"),
dated 4 June 1979, in favor of (Original Records, p. 331).
Pursuant to the above commercial transaction, UTEFS executed
and delivered to METROBANK and Trust Receipt (Exh. "D"), dated
4 June 1979, whereby the former acknowledged receipt in trust
from the latter of the aforementioned goods from Planters Products
which amounted to P815, 600.00. Being the entrusted, the former
agreed to deliver to METROBANK the entrusted goods in the event
of non-sale or, if sold, the proceeds of the sale thereof, on or before
September 2, 1979.
However, UTEFS did not acquiesce to the obligatory stipulations in
the trust receipt. As a consequence, METROBANK sent letters to
the said principal obligor and its sureties, Norberto Uy and Jacinto
Uy Diño, demanding payment of the amount due. Informed of the
amount due, UTEFS made partial payments to the Bank which
were accepted by the latter.
Answering one of the demand letters, Diño, thru counsel, denied his
liability for the amount demanded and requested METROBANK to
send him copies of documents showing the source of his liability. In
its reply, the bank informed him that the source of his liability is the
Continuing Suretyship which he executed on February 25, 1977.
As a rejoinder, Diño maintained that he cannot be held liable for the
1979 credit accommodation because it is a new obligation
contracted without his participation. Besides, the 1977 credit
accommodation which he guaranteed has been fully paid.
Having sent the last demand letter to UTEFS, Diño and Uy and
finding resort to extrajudicial remedies to be futile, METROBANK
filed a complaint for collection of a sum of money (P613,339.32, as
of January 31, 1982, inclusive of interest, commission penalty and
bank charges) with a prayer for the issuance of a writ of preliminary
attachment, against Uy Tiam, representative of UTEFS and
impleaded Diño and Uy as parties-defendants.
The court issued an order, dated 29 July 1983, granting the
attachment writ, which writ was returned unserved and unsatisfied
as defendant Uy Tiam was nowhere to be found at his given
address and his commercial enterprise was already non-operational
(Original Records, p. 37).
On April 11, 1984, Norberto Uy and Jacinto Uy Diño (sureties-
defendant herein) filed a motion to dismiss the complaint on the
ground of lack of cause of action. They maintained that the
obligation which they guaranteed in 1977 has been extinguished
since it has already been paid in the same year. Accordingly, the
Continuing Suretyships executed in 1977 cannot be availed of to
secure Uy Tiam's Letter of Credit obtained in 1979 because a
guaranty cannot exist without a valid obligation. It was further
argued that they can not be held liable for the obligation contracted
in 1979 because they are not privies thereto as it was contracted
without their participation (Records, pp. 42-46).
On April 24, 1984, METROBANK filed its opposition to the motion
to dismiss. Invoking the terms and conditions embodied in the
comprehensive suretyships separately executed by sureties-
defendants, the bank argued that sureties-movants bound
themselves as solidary obligors of defendant Uy Tiam to both
existing obligations and future ones. It relied on Article 2053 of the
new Civil Code which provides: "A guaranty may also be given as
security for future debts, the amount of which is not yet
known; . . . ." It was further asserted that the agreement was in full
force and effect at the time the letter of credit was obtained in 1979
as sureties-defendants did not exercise their right to revoke it by
giving notice to the bank. (Ibid., pp. 51-54).
Meanwhile, the resolution of the aforecited motion to dismiss was
held in abeyance pending the introduction of evidence by the
parties as per order dated February 21, 1986 (Ibid., p. 71).
Having been granted a period of fifteen (15) days from receipt of
the order dated March 7, 1986 within which to file the answer,
sureties-defendants filed their responsive pleading which merely
rehashed the arguments in their motion to dismiss and maintained
that they are entitled to the benefit of excussion (Original Records,
pp. 88-93).
On February 23, 1987, plaintiff filed a motion to dismiss the
complaint against defendant Uy Tiam on the ground that it has no
 information as to the heirs or legal representatives of the latter who
died sometime in December, 1986, which motion was granted on
the following day (Ibid., pp. 180-182).
After trial, . . . the court a quo, on December 2, 198, rendered its judgment, a portion
of which reads:
The evidence and the pleadings, thus, pose the querry (sic):
Are the defendants Jacinto Uy Diñoand Norberto
Uy liable for the obligation contracted by Uy Tiam
under the Letter of Credit (Exh. B) issued on
March 30, 1987 by virtue of the Continuing
Suretyships they executed on February 25,
1977?
Under the admitted proven facts, the Court finds
that they are not.
a) When Uy and Diño executed the continuing
suretyships, exhibits E and F, on February 25,
1977, Uy Tiam was obligated to the plaintiff in the
amount of P700,000.00 — and this was the
obligation which both obligation which both
defendants guaranteed to pay. Uy Tiam paid this
1977 obligation –– and such payment
extinguished the obligation they assumed as
guarantors/sureties.
b) The 1979 Letter of Credit (Exh. B) is different
from the 1977 Letter of Credit which covered the
1977 account of Uy Tiam. Thus, the obligation
under either is apart and distinct from the
obligation created in the other — as evidenced by
the fact that Uy Tiam had to apply anew for the
1979 transaction (Exh. A). And Diño and Uy,
being strangers thereto, cannot be answerable
thereunder.
c) The plaintiff did not serve notice to the
defendants Diño and Uy when it extended to
Credit — at least to inform them that the
continuing suretyships they executed on
February 25, 1977 will be considered by the
plaintiff to secure the 1979 transaction of Uy
Tiam.
d) There is no sufficient and credible showing that
Diño and Uy were fully informed of the import of
the Continuing Suretyships when they affixed
their signatures thereon –– that they are thereby
securing all future obligations which Uy Tiam may
contract the plaintiff. On the contrary, Diño and
Uy categorically testified that they signed the
blank forms in the office of Uy Tiam at 623
Asuncion Street, Binondo, Manila, in obedience
to the instruction of Uy Tiam, their former
employer. They denied having gone to the office
of the plaintiff to subscribe to the documents
(October 1, 1987, tsn, pp. 5-7, 14; October 15,
1987, tsn, pp. 3-8, 13-16). (Records, pp. 333-
3
334).
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 DIÑO and
NORBERTO UY;
b) ordering the plaintiff to pay to Diño and Uy the amount of
P6,000.00 as attorney's fees and expenses of litigation; and
c) denying all other claims of the parties for want of legal and/or
factual basis.
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
DIÑO AND NORBERTO UY ARE SOLIDARILY LIABLE TO
PLAINTIFF-APPELLANT FOR THE OBLIGATION OF
DEFENDANT UY TIAM UNDER THE LETTER OF CREDIT
ISSUED ON MARCH 30, 1979 BY VIRTUE OF THE CONTINUING
SURETYSHIPS THEY EXECUTED ON FEBRUARY 25, 1977.
II. THE LOWER COURT ERRED IN HOLDING THAT PLAINTIFF-
APPELLANT IS ANSWERABLE TO DEFENDANTS-APPELLEES
 JACINTO UY DIÑO AND NORBERTO UY FOR ATTORNEY'S
5
FEES AND EXPENSES OF LITIGATION.
On 22 June 1989, public respondent promulgated the assailed Decision the
dispositive portion of which reads:
WHEREFORE, premises considered, the judgment appealed from
is hereby REVERSED AND SET, ASIDE. In lieu thereof, another
one is rendered:
1) Ordering sureties-appellees Jacinto Uy Diño
and Norberto Uy to pay, jointly and severally, to
appellant METROBANK the amount of
P2,397,883.68 which represents the amount due
as of July 17, 1987 inclusive of principal, interest
and charges;
2) Ordering sureties-appellees Jacinto Uy Diño
and Norberto Uy to pay, jointly and severally,
appellant METROBANK the accruing interest,
fees and charges thereon from July 18, 1987 until
the whole monetary obligation is paid; and
3) Ordering sureties-appellees Jacinto Uy Diño
and Norberto Uy to pay, jointly and severally, to
plaintiff P20,000.00 as attorney's fees.
With costs against appellees.
6
SO ORDERED.
In ruling for the herein private respondent (hereinafter METROBANK), public
respondent held that the Continuing Suretyship Agreements separately executed by
the petitioners in 1977 were intended to guarantee payment of Uy Tiam's outstanding
as well as future obligations; each suretyship arrangement was intended to remain in
full force and effect until METROBANK would have been notified of its revocation.
Since no such notice was given by the petitioners, the suretyships are deemed
outstanding and hence, cover even the 1979 letter of credit issued by METROBANK
in favor of Uy Tiam.
Petitioners filed a motion to reconsider the foregoing Decision. They questioned the
public respondent's construction of the suretyship agreements and its ruling with
respect to the extent of their liability thereunder. They argued the even if the
agreements were in full force and effect when METROBANK granted Uy Tiam's
application for a letter of credit in 1979, the public respondent nonetheless seriously
erred in holding them liable for an amount over and above their respective face
values.
In its Resolution of 21 August 1989, public respondent denied the motion:
. . . considering that the issues raised were substantially the same
grounds utilized by the lower court in rendering judgment for
defendants-appellees which We upon appeal found and resolved to
be untenable, thereby reversing and setting aside said judgment
and rendering another in favor of plaintiff, and no new or fresh
issues have been posited to justify reversal of Our decision
7
herein, . . . .
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
9
guarantor becomes liable. Otherwise stated, a continuing guaranty is one which
covers all transactions, including those arising in the future, which are within the
description or contemplation of the contract, of guaranty, until the expiration or
10
termination thereof. A guaranty shall be construed as continuing when by the terms
thereof it is evident that the object is to give a standing credit to the principal debtor to
be used from time to time either indefinitely or until a certain period, especially if the
right to recall the guaranty is expressly reserved. Hence, where the contract of
guaranty states that the same is to secure advances to be made "from time to time"
11
the guaranty will be construed to be a continuing one.
In other jurisdictions, it has been held that the use of particular words and expressions
such as payment of "any debt," "any indebtedness," "any deficiency," or "any sum," or
the guaranty of "any transaction" or money to be furnished the principal debtor "at any
time," or "on such time" that the principal debtor may require, have been construed to
12
indicate a continuing guaranty.
In the case at bar, the pertinent portion of paragraph I of the suretyship agreement
executed by petitioner Uy provides thus:
I. For and in consideration of any existing indebtedness to the
BANK of UY TIAM (hereinafter called the "Borrower"), for the
payment of which the SURETY is now obligated to the BANK,
either as guarantor or otherwise, and/or in order to induce the
BANK, in its discretion, at any time or from time to time hereafter, to
make loans or advances or to extend credit in any other manner to,
or at the request, or for the account of the Borrower, either with or
without security, and/or to purchase or discount, or to make any
loans or advances evidence or secured by any notes, bills,
receivables, drafts, acceptances, checks, or other instruments or
evidences of indebtedness (all hereinafter called "instruments")
upon which the Borrower is or may become liable as maker,
endorser, acceptor, or otherwise, the SURETY agrees to
guarantee, and does hereby guarantee, the punctual payment at
maturity to the loans, advances credits and/or other obligations
hereinbefore referred to, and also any and all other indebtedness of
every kind which is now or may hereafter become due or owing to
the BANK by the Borrower, together with any and all expenses
which may be incurred by the BANK in collecting all or any such
instruments or other indebtedness or obligations herein before
referred to, and/or in enforcing any rights hereunder, and the
SURETY also agrees that the BANK may make or cause any and
all such payments to be made strictly in accordance with the terms
and provisions of any agreement(s) express or implied, which has
(have) been or may hereafter be made or entered into by the
Borrow in reference thereto, regardless of any law, regulation or
decree, unless the same is mandatory and non-waivable in
character, nor or hereafter in effect, which might in any manner
affect any of the terms or provisions of any such agreement(s) or
the Bank's rights with respect thereto as against the Borrower, or
cause or permit to be invoked any alteration in the time, amount or
manner of payment by the Borrower of any such instruments,
obligations or indebtedness; provided, however, that the liability of
the SURETY hereunder shall not exceed at any one time the
aggregate principal sum of PESOS: THREE HUNDRED
THOUSAND ONLY (P300,000.00) (irrespective of the currenc(ies)
in which the obligations hereby guaranteed are payable), and such
interest as may accrue thereon either before or after any
maturity(ies) thereof and such expenses as may be incurred by the
13
BANK as referred to above.
Paragraph I of the Continuing Suretyship Agreement executed by petitioner Diño
contains identical provisions except with respect to the guaranteed aggregate
14
principal amount which is EIGHT THOUSAND PESOS (P800,000.00).
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
15
partners.
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 Diño and (b) P300,000.00 for petitioner Uy.
The limit of the petitioners respective liabilities must be determined from the
suretyship agreement each had signed. It is undoubtedly true that the law looks upon
the contract of suretyship with a jealous eye, and the rule is settled that the obligation
of the surety cannot be extended by implication beyond its specified limits. To the
extent, and in the manner, and under the circumstances pointed out in his obligation,
17
he is bound, and no farther.
Indeed, the Continuing Suretyship Agreements signed by petitioner Diño and
petitioner Uy fix the aggregate amount of their liability, at any given time, at
P800,000.00 and P300,000.00, respectively. The law is clear that a guarantor may
bond himself for less, but not for more than the principal debtor, both as regards the
18
amount and the onerous nature of the conditions. 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
19
the BANK referred to above.
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
21
interest and judicial costs. Article 2055 of the Civil Code provides:
Art. 2055. A guaranty is not presumed; it must be express and
cannot extend to more than what is stipulated therein.
If it be simple or indefinite, it shall comprise not only the principal
obligation, but also all its accessories, including the judicial costs,
provided with respect to the latter, that the guarantor shall only be
liable for those costs incurred after he has been judicially required
to pay.
Interest and damages are included in the term accessories. However, such
interest should run only from the date when the complaint was filed in court.
Even attorney's fees may be imposed whenever appropriate, pursuant to
Article 2208 of the Civil Code. Thus, in Plaridel Surety & Insurance Co.,
22
Inc. vs. P.L. Galang Machinery Co., Inc., this Court held:
Petitioner objects to the payment of interest and attorney's fees
because: (1) they were not mentioned in the bond; and (2) the
surety would become liable for more than the amount stated in the
contract of suretyship.
xxx xxx xxx
The objection has to be overruled, because as far back as the year
1922 this Court held in Tagawa vs. Aldanese, 43 Phil. 852, that
 creditors suing on a suretyship bond may recover from the surety
as part of their damages, interest at the legal rate even if the surety
would thereby become liable to pay more than the total amount
stipulated in the bond. The theory is that interest is allowed only by
way of damages for delay upon the part of the sureties in making
payment after they should have done so. In some states, the
interest has been charged from the date of the interest has been
charged from the date of the judgment of the appellate court. In this
jurisdiction, we rather prefer to follow the general practice, which is
to order that interest begin to run from the date when the complaint
was filed in court, . . .
Such theory aligned with sec. 510 of the Code of Civil Procedure
which was subsequently recognized in the Rules of Court (Rule 53,
section 6) and with Article 1108 of the Civil Code (now Art. 2209 of
the New Civil Code).
In other words the surety is made to pay interest, not by reason of
the contract, but by reason of its failure to pay when demanded and
for having compelled the plaintiff to resort to the courts to obtain
payment. It should be observed that interest does not run from the
time the obligation became due, but from the filing of the complaint.
As to attorney's fees. Before the enactment of the New Civil Code,
successful litigants could not recover attorney's fees as part of the
damages they suffered by reason of the litigation. Even if the party
paid thousands of pesos to his lawyers, he could not charge the
amount to his opponent (Tan Ti vs. Alvear, 26 Phil. 566).
However the New Civil Code permits recovery of attorney's fees in
eleven cases enumerated in Article 2208, among them, "where the
court deems it just and equitable that attorney's (sic) fees and
expenses of litigation should be recovered" or "when the defendant
acted in gross and evident bad faith in refusing to satisfy the
plaintiff's plainly valid, just and demandable claim." This gives the
courts discretion in apportioning attorney's fees.
The records do not reveal the exact amount of the unpaid portion of the principal
obligation of Uy Tiam to MERTOBANK under Irrevocable Letter of Credit No. SN-Loc-
309 dated 30 March 1979. In referring to the last demand letter to Mr. Uy Tiam and
the complaint filed in Civil Case No. 82-9303, the public respondent mentions the
amount of "P613,339.32, as of January 31, 1982, inclusive of interest commission
23
penalty and bank charges." This is the same amount stated by METROBANK in its
24
Memorandum. 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
25
(Exhibit I).
Since the complaint was filed on 18 May 1982, it is obvious that on that date,
the outstanding principal obligation of Uy Tiam, secured by the petitioners'
Continuing Suretyship Agreements, was less than P613,339.32. Such
amount may be fully covered by the Continuing Suretyship Agreement
executed by petitioner Diño which stipulates an aggregate principal sum of
not exceeding P800,000.00, and partly covered by that of petitioner Uy
which pegs his maximum liability at P300,000.00.
Consequently, the judgment of the public respondent shall have to be modified to
conform to the foregoing exposition, to which extent the instant petition is impressed
with partial merit.
WHEREFORE, the petition is partly GRANTED, but only insofar as the challenged
decision has to be modified with respect to the extend of petitioners' liability. As
modified, petitioners JACINTO UY DIÑO and NORBERTO UY are hereby declared
liable for and are ordered to pay, up to the maximum limit only of their respective
Continuing Suretyship Agreement, the remaining unpaid balance of the principal
obligation of UY TIAM or UY TIAM ENTERPRISES & FREIGHT SERVICES under
Irrevocable Letter of Credit No. SN-Loc-309, dated 30 March 1979, together with the
interest due thereon at the legal rate commencing from the date of the filing of the
complaint in Civil Case No. 82-9303 with Branch 45 of the Regional Trial Court of
Manila, as well as the adjudged attorney's fees and costs.
All other dispositions in the dispositive portion of the challenged decision not
inconsistent with the above are affirmed.
SO ORDERED.
Gutierrez, Jr., Bidin, Romero and Melo, JJ., concur.
Footnotes
1 Rollo, 46-56; per Associate Justice Segun Diño G.
Chua, ponente, concurred in by Associate Justices Serafin E.
Camilon and Justo P. Torres, Jr.
2 Id., 60.
3 Rollo, 46-50. 21 See National Marketing Corp. vs. Marquez, 26 SCRA 722 [1969]
explaining the provisions; Republic vs. Pal-Fox Lumber Co., Inc., 43
4 Id., 50. SCRA 365 [1972].

5 Rollo, 51. 22 100 Phil. 679, 681-682 [1957]; Philippine National Bank vs.
Luzon Surety Co., Inc., 68 SCRA 207 [1975].
6 Rollo, 55-56.
23 Rollo, 48.
7 Rollo, 60.
24 Id., 128.
8 Article 2053, Civil Code; see Rizal Commercial Banking Corp. vs.
Arro, 115 SCRA 777 [1982]. 25 Rollo, 55.

9 38 C.J.S. 1142.

10 38 C.J.S. 1206.

[G.R. No. 109941. August 17, 1999]

11 Id., 1209.

12 Id.
PACIONARIA C. BAYLON, petitioner, vs. THE HONORABLE COURT OF
13 Rollo, 68-69; Emphasis supplied. APPEALS (Former Ninth Division) and LEONILA
TOMACRUZ, respondents.
14 Rollo, 69.
DECISION
15 Id., 70-71; Emphasis supplied.
GONZAGA-REYES, J.:

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.
This is a petition for review by way of certiorari under Rule 45 of the Revised Rules
[1]
of Court of the decision of the Court of Appeals dated November 29, 1991 in CA-G.R.
[2]
CV No. 27779 affirming the decision of the Regional Trial Court of Quezon City,
Branch 88, dated June 14, 1990 in Civil Case No. Q-89-2483 and the Resolution of the
Court of Appeals dated April 27, 1993 denying petitioner's Motion for Reconsideration.
The pertinent facts, as found by the trial court and affirmed by respondent court,
are briefly narrated as follows:
Sometime in 1986, petitioner Pacionaria C. Baylon introduced private respondent
Leonila Tomacruz, the co-manager of her husband at PLDT, to Rosita B.
[3]
Luanzon. Petitioner told private respondent that Luanzon has been engaged in
business as a contractor for twenty years and she invited private respondent to lend
Luanzon money at a monthly interest rate of five percent (5%), to be used as capital for
the latter's business. Private respondent, persuaded by the assurances of petitioner
that Luanzon's business was stable and by the high interest rate, agreed to lend
Luanzon money in the amount of P150,000. On June 22, 1987, Luanzon issued and
signed a promissory note acknowledging receipt of the P150,000 from private
respondent and obliging herself to pay the former the said amount on or before August
 [4]
22, 1987. Petitioner signed the promissory note, affixing her signature under the word
"guarantor." Luanzon also issued a postdated Solidbank check no. CA418437 dated
August 22, 1987 payable to Leonila Tomacruz in the amount of
[5]
P150,000. Subsequently, Luanzon replaced this check with another postdated
Solidbank check no. 432945 dated December 22, 1987, in favor of the same payee and
[6]
covering the same amount. Several checks in the amount of P7,500 each were also
[7]
issued by Luanzon and made payable to private respondent.
Private respondent made a written demand upon petitioner for payment, which
petitioner did not heed. Thus, on May 8, 1989, private respondent filed a case for the
collection of a sum of money with the Regional Trial Court (RTC) of Quezon City,
Branch 88, against Luanzon and petitioner herein, impleading Mariano Baylon,
husband of petitioner, as an additional defendant. However, summons was never
served upon Luanzon.
In her answer, petitioner denied having guaranteed the payment of the promissory
note issued by Luanzon. She claimed that private respondent gave Luanzon the money,
not as a loan, but rather as an investment in Art Enterprises and Construction, Inc. -
the construction business of Luanzon. Furthermore, petitioner avers that,
granting arguendo that there was a loan and petitioner guaranteed the same, private
respondent has not exhausted the property of the principal debtor nor has she resorted
to all the legal remedies against the principal debtor as required by law. Finally,
petitioner claims that there was an extension of the maturity date of the loan without
[8]
her consent, thus releasing her from her obligation.
After trial on the merits, the lower court ruled in favor of private respondent. In its
Decision dated June 14, 1990, it stated that -
The evidence and the testimonies on record clearly established a (sic) fact that the
transaction between the plaintiff and defendants was a loan with five percent (5%)
monthly interest and not an investment. In fact they all admitted in their testimonies
that they are not given any stock certificate but only promissory notes similar to
Exhibit B wherein it was clearly stated that defendant Luanzon would pay the amount
of indebtedness on the date due. Postdated checks were issued simultaneously with
the promissory notes to enable the plaintiff and others to withdraw their money on a
certain fixed time. This shows that they were never participants in the business
transaction of defendant Luanzon but were creditors.
The evidences presented likewise show that plaintiff and others loan their money to
defendant Luanzon because of the assurance of the monthly income of five percent
(5%) of their money and that they could withdraw it anytime after the due date add to
it the fact that their friend, Pacionaria Baylon, expresses her unequivocal gurarantee
to the payment of the amount loaned.
xxx xx xxx
WHEREFORE, premises considered, judgment is hereby rendered against the
defendants Pacionaria C. Baylon and Mariano Baylon, to pay the plaintiff the sum of
P150,000.00, with interest at the legal rate from the filing of this complaint until full
payment thereof, to pay the total sum of P21,000.00 as attorneys fees and costs of
[9]
suit.
On appeal, the trial court's decision was affirmed by the Court of Appeals. Hence,
this present case wherein petitioner makes the following assignment of errors -
I. RESPONDENT COURT ERRED IN HOLDING THAT THE PRIVATE
RESPONDENT TOMACRUZ WAS A CREDITOR OF DEFENDANT LUANZON AND
NOT AN INVESTOR IN THE CONSTRUCTION BUSINESS OF ART ENTERPRISES
& CONSTRUCTION, INC.
II. GRANTING, WITHOUT ADMITTING, THAT PETITIONER-APPELLANT BAYLON
WAS A "GUARANTOR" AS APPEARING IN THE NOTE (EXH. "A") THE
RESPONDENT COURT ERRED IN RULING THAT PETITIONER-APPELLANT
BAYLON IS LIABLE TO THE PRIVATE RESPONDENT BECAUSE THE LATTER
HAS NOT TAKEN STEPS TO EXHAUST THE PROPERTY OF THE PRINCIPAL
DEBTOR AND HAS NOT RESORTED TO ALL THE LEGAL REMEDIES PROVIDED
BY LAW AGAINST THE DEBTOR, DEFENDANT LUANZON.
III. GRANTING, WITHOUT ADMITTING THAT PETITIONER-APPELLANT BAYLON
WAS A GUARANTOR UNDER THAT NOTE (EXHIBIT "A") DATED JUNE 22, 1987,
THE LOWER COURT ERRED IN RESOLVING THAT SHE WAS NOT RELEASED
FROM HER GUARANTY BY THE SUBSEQUENT TRANSACTIONS BETWEEN THE
RESPONDENT-APPELLANT AND DEFENDANT LUANZON.
At the outset, we note that petitioners claim that the factual findings of the lower
court, which were affirmed by the Court of Appeals, were based on a misapprehension
[10]
of facts and contradicted by the evidence on records is a bare allegation and devoid
of merit. As a rule, the conclusions of fact of the trial court, especially when affirmed by
the Court of Appeals, are final and conclusive and cannot be reviewed on appeal by
[11] [12]
the Supreme Court. Although this rule admits of several exceptions, none of the
exceptions are in point in the present case. The factual findings of the respondent court
are borne out by the record and are based on substantial evidence.
Petitioner claims that there is no loan to begin with; that private respondent gave
Luanzon the amount of P150,000, not as a loan, but rather as an investment in the
[13]
construction project of the latter. In support of her claim, petitioner cites the use by
private respondent of the words investment, dividends, and commission in her
testimony before the lower court; the fact that private respondent received monthly
checks from Luanzon in the amount of P7,500 from July to December, 1987,
representing dividends on her investment; and the fact that other employees of the
Development Bank of the Philippines made similar investments in Luanzons
[14]
construction business.
However, all the circumstances mentioned by petitioner cannot override the clear
and unequivocal terms of the June 22, 1987 promissory note whereby Luanzon
promised to pay private respondent the amount of P150,000 on or before August 22,
1987. The promissory note states as follows:
 June 22, 1987 The guarantor cannot be compelled to pay the creditor unless the latter has
exhausted all the property of the debtor, and has resorted to all the legal remedies
To Whom It May Concern: against the debtor.

[20]
For value received, I hereby promise to pay Mrs. LEONILA TOMACRUZ the amount It is axiomatic that the liability of the guarantor is only subsidiary. All the
of ONE HUNDRED FIFTY THOUSAND PESOS ONLY (P150,000.00) on or before properties of the principal debtor must first be exhausted before his own is levied
August 22, 1987. upon. Thus, the creditor may hold the guarantor liable only after judgment has been
obtained against the principal debtor and the latter is unable to pay, for obviously the
exhaustion of the principals property - the benefit of which the guarantor claims - cannot
The above amount is covered by _____ Check No. _____ dated August 22, 1987. [21]
even begin to take place before judgment has been obtained. This rule is embodied
in article 2062 of the Civil Code which provides that the action brought by the creditor
(signed) must be filed against the principal debtor alone, except in some instances when the
[22]
action may be brought against both the debtor and the principal debtor.
ROSITA B. LUANZON
Under the circumstances availing in the present case, we hold that it is premature
for this Court to even determine whether or not petitioner is liable as a guarantor and
GURARANTOR: whether she is entitled to the concomitant rights as such, like the benefit of excussion,
since the most basic prerequisite is wanting - that is, no judgment was first obtained
(signed) against the principal debtor Rosita B. Luanzon. It is useless to speak of a guarantor
when no debtor has been held liable for the obligation which is allegedly secured by
PACIONARIA O. BAYLON such guarantee. Although the principal debtor Luanzon was impleaded as defendant,
there is nothing in the records to show that summons was served upon her. Thus, the
trial court never even acquired jurisdiction over the principal debtor. We hold that
Tel. No. 801-28-00 private respondent must first obtain a judgment against the principal debtor before
assuming to run after the alleged guarantor.
18 P. Mapa St., DBP Village
IN VIEW OF THE FOREGOING, the petition is granted and the questioned
[15] Decision of the Court of Appeals dated November 29, 1991 and Resolution dated April
Almanza, Las Pinas, M.M. 27, 1993 are SET ASIDE.No pronouncement as to costs.

If the terms of a contract are clear and leave no doubt as to the intention of the SO ORDERED.
[16]
contracting parties, the literal meaning of its stipulation shall control. Resort to
Melo, (Chairman), Vitug, Panganiban, and Purisima, JJ., concur.
extrinsic aids and other extraneous sources are not necessary in order to ascertain the
[17]
parties' intent when there is no ambiguity in the terms of the agreement. Both
petitioner and private respondent do not deny the due execution and authenticity of the
June 22, 1987 promissory note. All of petitioner's arguments are directed at uncovering
[1]
the real intention of the parties in executing the promissory note, but no amount of Ninth Division, composed of Associate Justices Serafin V.C. Guingona (ponente),
argumentation will change the plain import of the terms thereof, and accordingly, no Luis A. Javellana and Jorge S. Imperial.
[18]
attempt to read into it any alleged intention of the parties thereto may be justified. The [2]
clear terms of the promissory note establish a creditor-debtor relationship between Penned by Judge Tirso D.C. Velasco.
Luanzon and private respondent. The transaction at bench is therefore a loan, not an [3]
Petition, p. 4; Rollo, p. 28.
investment.
[4]
Exhibit A.
It is petitioner's contention that, even though she is held to be a guarantor under
[5]
the terms of the promissory note, she is not liable because private respondent did not Exhibit B.
exhaust the property of the principal debtor and has not resorted to all the legal [6]
[19]
remedies provided by the law against the debtor. Petitioner is invoking the benefit of Exhibit 15.
excussion pursuant to article 2058 of the Civil Code, which provides that - [7]
Exhibits E, F, G, H, I, J, and K.
[8]
Answer, pp. 2-3; Rollo, pp. 26-27.
[9]
RTC Records, pp. 128-133. DEL CASTILLO, J.:
[10]
Petition, p. 9; Rollo, p. 33.
The jurisdiction of the Construction Industry Arbitration Commission (CIAC) is
[11] 1
Fortune Motors Phils. Corp. vs. Court of Appeals, 267 SCRA 653 [1997]; conferred by law. Section 4 of Executive Order (E.O.) No. I 008, otherwise known as
Meneses vs. Court of Appeals, 246 SCRA 162 [1995]; Tan Chun Suy vs. Court of the Construction Industry Arbitration Law, "is broad enough to cover any dispute
Appeals, 229 SCRA 151 [1994]. arising from, or connected with construction contracts, whether these involve mere
2
[12]
contractual money claims or execution of the works."
Commissioner of Internal Revenue vs. Embroidery and Garments Industries, G.R.
No. 96262 [1999]; Mangahas vs. Court of Appeals, G.R. No. 95815 [1999]; Diaz vs. 3
Sandiganbayan, G.R. No. 125213 [1999]. This Petition for Review on Certiorari under Rule 45 of the Rules of Court assails the
4 5
Decision dated June 7, 2007 and the Resolution dated September 7, 2007 of the
[13]
Petition, p. 4; Rollo, p. 28. Court of Appeals (CA) in CA-G.R. SP No. 96815.
[14]
Petition, pp. 3-9; Rollo, pp. 27-33.
Factual Antecedents
[15]
Exhibit A.
[16] On March 7, 2000, respondent-spouses Roberto and Aida Amurao entered into a
Civil Code, Art. 1370; Cebu Shipyard and Engineering Works, Inc. vs. William Lines, 6
Construction Contract Agreement (CCA) with Aegean Construction and
Inc. and Prudential Guarantee and Assurance Company, Inc., G.R. No. 132607 [1999];
Development Corporation (Aegean) for the construction of a six-storey commercial
Rizal Commercial Banking Corporation vs. Court of Appeals and Lustre, G.R. No. 7
building in Tomas Morato corner E. Rodriguez Avenue, Quezon City. To guarantee
133107 [1999]; Salvatierra vs. Court of Appeals, 261 SCRA 45 (1996); Abella vs. Court
its full and faithful compliance with the terms and conditions of the CCA, Aegean
of Appeals, 257 SCRA 482 (1996).
posted performance bonds secured by petitioner The Manila Insurance Company,
[17] 8 9
Inter-Asia Services Corp. vs. Court of Appeals, 263 SCRA 408 [1996]. Inc. (petitioner) and Intra Strata Assurance Corporation (Intra Strata).
[18]
Ascalon vs. Court of Appeals, 158 SCRA 542 [1988]; Pichel vs. Alonzo, 111 SCRA
On November 15, 2001, due to the failure of Aegean to complete the project,
341 [1982]; San Mauricio Mining Company vs. Ancheta, 105 SCRA 371 [1981].
respondent spouses filed with the Regional Trial Court (RTC) of Quezon City, Branch
[19] 10
Petition, p. 9; Rollo, p. 33. 217, a Complaint, docketed as Civil Case No. Q-01-45573, against petitioner and
Intra Strata to collect on the performance bonds they issued in the amounts
[20] 11
World Wide Ins. and Surety Corp vs. Jose, 96 Phil 45 (1954); Visayan Surety and of P2,760,000.00 and P4,440,000.00, respectively.
Ins. Corp. vs. De Laperal, 69 Phil 688 (1940).
12
[21]
Vda. de Syquia vs. Jacinto, 60 Phil 861 (1934). Intra Strata, for its part, filed an Answer and later, a Motion to Admit Third Party
13 14
Complaint, with attached Third Party Complaint against Aegean, Ronald D.
[22]
Civil Code, article 2062 provides - Nicdao, and Arnel A. Mariano.
In every action by the creditor, which must be against the principal debtor alone, except 15
in the cases mentioned in article 2059, the former shall ask the court to notify the Petitioner, on the other hand, filed a Motion to Dismiss on the grounds that the
16
guarantor of the action. The guarantor may appear so that he may, if he so desire, set Complaint states no cause of action and that the filing of the Complaint is premature
up such defenses as are granted him by law. The benefit of excussion mentioned in due to the failure of respondent-spouses to implead the principal contractor,
17 18
article 2058 shall always be unimpaired, even if judgment should be rendered against Aegean. The RTC, however, denied the motion in an Order dated May 8, 2002.
19
the principal debtor and the guarantor in case of appearance by the latter. Thus, petitioner filed an Answer with Counterclaim and Cross-claim, followed by a
20
Third Party Complaint against Aegean and spouses Ronald and Susana Nicdao.

During the pre-trial, petitioner and Intra Strata discovered that the CCA entered into
21
G.R. No. 179628 January 16, 2013 by respondent-spouses and Aegean contained an arbitration clause.

22
THE MANILA INSURANCE COMPANY, INC., Petitioner, Hence, they filed separate Motions to Dismiss on the grounds of lack of cause of
vs. action and lack of jurisdiction.
SPOUSES ROBERTO and AIDA AMURAO, Respondents.
Ruling of the Regional Trial Court
DECISION
 23
On May 5, 2006, the RTC denied both motions. Petitioner and Intra Strata
separately moved for reconsideration but their motions were denied by the RTC in its
24
subsequent Order dated September 11, 2006.
Aggrieved, petitioner elevated the case to the CA by way of special civil action for
25
certiorari.
Ruling of the Court of Appeals
26
On June 7, 2007, the CA rendered a Decision dismissing the petition. The CA ruled
that the presence of an arbitration clause in the CCA does not merit a dismissal of the
case because under the CCA, it is only when there are differences in the
interpretation of Article I of the construction agreement that the parties can resort to
27
arbitration. The CA also found no grave abuse of discretion on the part of the RTC
when it disregarded the fact that the CCA was not yet signed at the time petitioner
28
issued the performance bond on February 29, 2000. The CA explained that the
performance bond was intended to be coterminous with the construction of the
29
building. It pointed out that "if the delivery of the original contract is
contemporaneous with the delivery of the surety’s obligation, each contract becomes
completed at the same time, and the consideration which supports the principal
30
contract likewise supports the subsidiary one." The CA likewise said that, although
the contract of surety is only an accessory to the principal contract, the surety’s
31
liability is direct, primary and absolute. Thus:
WHEREFORE, we resolve to DISMISS the petition as we find that no grave abuse of
discretion attended the issuance of the order of the public respondent denying the
petitioner’s motion to dismiss.
32
IT IS SO ORDERED.
Petitioner moved for reconsideration but the CA denied the same in a
33
Resolution dated September 7, 2007.
Issues
Hence, this petition raising the following issues:
A.
THE HONORABLE CA ERRED WHEN IT HELD THAT IT IS ONLY WHEN THERE
ARE DIFFERENCES IN THE INTERPRETATION OF ARTICLE I OF THE
CONSTRUCTION AGREEMENT THAT THE PARTIES MAY RESORT TO
ARBITRATION BY THE CIAC.
B.
THE HONORABLE CA ERRED IN TREATING PETITIONER AS A SOLIDARY
DEBTOR INSTEAD OF A SOLIDARY GUARANTOR.
C.
THE HONORABLE [CA] OVERLOOKED AND FAILED TO CONSIDER THE FACT
THAT THERE WAS NO ACTUAL AND EXISTING CONSTRUCTION AGREEMENT
AT THE TIME THE MANILA INSURANCE BOND NO. G (13) 2082 WAS ISSUED ON
34
FEBRUARY 29, 2000.
Petitioner’s Arguments
Petitioner contends that the CA erred in ruling that the parties may resort to arbitration
only when there is difference in the interpretation of the contract documents stated in
35
Article I of the CCA. Petitioner insists that under Section 4 of E.O. No. 1008, it is the
CIAC that has original and exclusive jurisdiction over construction disputes, such as
the instant case.
36
Petitioner likewise imputes error on the part of the CA in treating petitioner as a
37
solidary debtor instead of a solidary guarantor. Petitioner argues that while a surety
is bound solidarily with the obligor, this does not make the surety a solidary co-
38 39
debtor. A surety or guarantor is liable only if the debtor is himself liable. In this
case, since respondent-spouses and Aegean agreed to submit any dispute for
arbitration before the CIAC, it is imperative that the dispute between respondent-
spouses and Aegean must first be referred to arbitration in order to establish the
40
liability of Aegean. In other words, unless the liability of Aegean is determined, the
filing of the instant case is premature.
41
Finally, petitioner puts in issue the fact that the performance bond was issued prior to
42
the execution of the CCA. Petitioner claims that since there was no existing contract
at the time the performance bond was executed, respondent-spouses have no cause
43 44
of action against petitioner. Thus, the complaint should be dismissed.
Respondent spouses’ Arguments
Respondent-spouses, on the other hand, maintain that the CIAC has no jurisdiction
45
over the case because there is no ambiguity in the provisions of the CCA. Besides,
46
petitioner is not a party to the CCA. Hence, it cannot invoke Article XVII of the CCA,
47
which provides for arbitration proceedings. Respondent-spouses also insist that
48
petitioner as a surety is directly and equally bound with the principal. The fact that
the performance bond was issued prior to the execution of the CCA also does not
affect the latter’s validity because the performance bond is coterminous with the
49
construction of the building.
Our Ruling
The petition has merit.
Nature of the liability of the surety
A contract of suretyship is defined as "an agreement whereby a party, called the
surety, guarantees the performance by another party, called the principal or obligor, of
an obligation or undertaking in favor of a third party, called the obligee. It includes
official recognizances, stipulations, bonds or undertakings issued by any company by
50
virtue of and under the provisions of Act No. 536, as amended by Act No. 2206." We
have consistently held that a surety’s liability is joint and several, limited to the amount
of the bond, and determined strictly by the terms of contract of suretyship in relation to
51
the principal contract between the obligor and the obligee. It bears stressing,
however, that although the contract of suretyship is secondary to the principal
contract, the surety’s liability to the obligee is nevertheless direct, primary, and
52
absolute.
In this case, respondent-spouses (obligee) filed with the RTC a Complaint against
petitioner (surety) to collect on the performance bond it issued. Petitioner, however,
seeks the dismissal of the Complaint on the grounds of lack of cause of action and
lack of jurisdiction.
The respondent-spouses have cause of action against the petitioner; the performance
bond is coterminous with the CCA
Petitioner claims that respondent-spouses have no cause of action against it because
at the time it issued the performance bond, the CCA was not yet signed by
respondent-spouses and Aegean.
We do not agree.
A careful reading of the Performance Bond reveals that the "bond is coterminous with
53
the final acceptance of the project." Thus, the fact that it was issued prior to the
execution of the CCA does not affect its validity or effectivity.
But while there is a cause of action against petitioner, the complaint must still be
dismissed for lack of jurisdiction.
The CIAC has jurisdiction over the case
Section 4 of E.O. No. 1008 provides that:
SEC. 4. Jurisdiction. – The CIAC shall have original and exclusive jurisdiction over
disputes arising from, or connected with, contracts entered into by parties involved in
construction in the Philippines, whether the dispute arises before or after the
completion of the contract, or after the abandonment or breach thereof. These
disputes may involve government or private contracts. For the Board to acquire
jurisdiction, the parties to a dispute must agree to submit the same to voluntary
arbitration.
The jurisdiction of the CIAC may include but is not limited to violation of specifications
for materials and workmanship, violation of the terms of agreement, interpretation
and/or application of contractual time and delays, maintenance and defects, payment,
default of employer or contractor, and changes in contract cost.
Excluded from the coverage of the law are disputes arising from employer-employee
relationships which shall continue to be covered by the Labor Code of the Philippines.
Based on the foregoing, in order for the CIAC to acquire jurisdiction two requisites
must concur: "first, the dispute must be somehow connected to a construction
contract; and second, the parties must have agreed to submit the dispute to
arbitration proceedings."
54
In this case, both requisites are present.
The parties agreed to submit to arbitration proceedings "any dispute arising in the
course of the execution and performance of the CCA by reason of difference in
interpretation of the Contract Documents x x x which the parties are unable to resolve
55
amicably between themselves." Article XVII of the CCA reads:
ARTICLE XVII – ARBITRATION
17.1 Any dispute arising in the course of the execution and performance of this
Agreement by reason of difference in interpretation of the Contract Documents set
forth in Article I which the OWNER and the CONTRACTOR are unable to resolve
amicably between themselves shall be submitted by either party to a board of
arbitrators composed of Three (3) members chosen as follows: One (1) member shall
be chosen by the CONTRACTOR AND One (1) member shall be chosen by the
OWNER. The said Two (2) members, in turn, shall select a third member acceptable
to both of them. The decision of the Board of Arbitrators shall be rendered within Ten
(10) days from the first meeting of the board, which decision when reached through
the affirmative vote of at least Two (2) members of the board shall be final and
binding upon the OWNER and CONTRACTOR.1âwphi1
17.2 Matters not otherwise provided for in this Contract or by Special Agreement of
the parties shall be governed by the provisions of the Arbitration Law, Executive
56
Order No. 1008.
In William Golangco Construction Corporation v. Ray Burton Development
57
Corporation, we declared that monetary claims under a construction contract are
disputes arising from "differences in interpretation of the contract" because "the
matter of ascertaining the duties and obligations of the parties under their contract all
58
involve interpretation of the provisions of the contract." Following our reasoning in
that case, we find that the issue of whether respondent-spouses are entitled to collect
on the performance bond issued by petitioner is a "dispute arising in the course of the
execution and performance of the CCA by reason of difference in the interpretation of
the contract documents."
The fact that petitioner is not a party to the CCA cannot remove the dispute from the I attest that the conclusions in the above Decision had been reached in consultation
jurisdiction of the CIAC because the issue of whether respondent-spouses are entitled before the case was assigned to the writer of the opinion of the Court's Division.
to collect on the performance bond, as we have said, is a dispute arising from or
connected to the CCA. ANTONIO T. CARPIO
Associate Justice
59
In fact, in Prudential Guarantee and Assurance, Inc. v. Anscor Land, Inc., we Chairperson
rejected the argument that the jurisdiction of CIAC is limited to the construction
industry, and thus, cannot extend to surety contracts. In that case, we declared that CERTIFICATION
"although not the construction contract itself, the performance bond is deemed as an
associate of the main construction contract that it cannot be separated or severed
Pursuant to Section 13, Article VIII of the Constitution and the Division Chairperson's
from its principal. The Performance Bond is significantly and substantially connected
Attestation, I certify that the conclusions in the above Decision had been reached in
to the construction contract that there can be no doubt it is the CIAC, under Section 4
consultation before the case was assigned to the writer of the opinion of the Court's
of E.O. No. 1008, which has jurisdiction over any dispute arising from or connected
60 Division.
with it."

In view of the foregoing, we agree with the petitioner that juriisdiction over the instant MARIA LOURDES P. A. SERENO
case lies with the CIAC, and not with the RTC. Thus, the Complaint filed by Chief Justice
respondent-spouses with the RTC must be dismissed.

WHEREFORE, the petition is hereby GRANTED. The Decision dated June 7, 2007
and the Resolution dated September 7, 2007 of the Court of Appeals in CA-G.R. SP
No. 96815 are hereby ANNULLED and SET ASIDE. The Presiding Judge of the Footnotes
Regional Trial Court of Quezon City, Branch 217 1s DIRECTED to dismiss Civil Case
No. Q-01-45573 for lack of jurisdiction. *
Per raffle dated January 14.2013.

SO ORDERED. **
Per Special Order No. 1408 dated January 15, 2013.

MARIANO C. DEL CASTILLO 1

SEC. 4. Jurisdiction. -The ClAC shall have original and exclusive
Associate Justice jurisdiction over disputes arising from. or connected with. contracts entered
into by parties involved in construction in the Philippines. whether the dispute
WE CONCUR: arises before or after the completion of the contract, or after the
abandonment or breach thereof. These disputes may involve government or
ANTONIO T. CARPIO private contracts. For the Board to acquire jurisdiction. the parties to a
Associate Justice dispute must agree to submit the same to voluntary arbitration.
Chairperson
The jurisdiction of the ClAC may include but is not limited to
violation of specifications for materials and workmanship. violation
TERESITA J. LEONARDO-DE of the terms of agreement, interpretation and/or application of
* JOSE PORTUGAL PEREZ
CASTRO contractual time and delays. maintenance and defects. payment.
Associate Justice
Associate Justice default of employer or contractor, and changes in contract cost.

**
MARVIC MARIO VICTOR F. LEONEN Excluded from the coverage of this law are disputes arising from
Associate Justice employer-employee relationships which shall continue to be
covered by the Labor Code of the Philippines.
ATTESTATION
2
LICOMCEN, lncorporated v. Foundation Specialists, Inc., G.R. Nos.
167022 and 169678. April 4, 2011, 647 SCRA 83, 91.
3 24
Rollo, pp. 13-37. Id. at 589.

4 25
Id. at 39-47; penned by Associate Justice Apolinario D. Bruselas, Jr. and CA rollo, pp. 2-22.
concurred in by Associate Justices Bienvenido L. Reyes (now a member of
this Court) and Aurora Santiago-Lagman. 26
Rollo, pp. 39-47.
5
Id. at 49. 27
Id. at 42-44.
6
Id. at 72-85. 28
Id. at 45-46.
7
Id. at 39-40. 29
Id. at 46.
8
Id. at 68-69. 30
Id.
9
Id. at 70-71. 31
Id. at 45.
10
Id. at 63-67. 32
Id. at 46-47.
11
Id. at 66. 33
Id. at 49.
12
Records, Volume I, pp. 29-32. 34
Id. at 168-169.
13
Id. at 38-39. 35
Id. at 169.
14
Id. at 40-42. 36
Id. at 171.
15
Id. at 26-28. 37
Id. at 174.
16
Id. at 26. 38
Id. at 175.
17
Id. at 27. 39
Id.
18
Id. at 49-50; penned by Judge Lydia Querubin Layosa. 40
Id. at 180.
19
Rollo, pp. 88-94. 41
Id. at 182.
20
Id. at 97-100. 42
Id. at 183.
21
Id. at 40. 43
Id. at 185.
22
Id. at 117-124 and 110-116. 44
Id. at 186.
23
Records, Volume II, pp. 544-546. 45
Id. at 192-193.
46
Id. at 193.

47
Id.

48
Id. at 195.

49
Id. at 196.

50
INSURANCE CODE, Section 175.

51
Intra-Strata Assurance Corporation v. Republic, G.R. No. 156571, July 9,
2008, 557 SCRA 363, 369.

52
Prudential Guarantee and Assurance, Inc. v. Equinox Land Corporation,
G.R. Nos. 152505-06, September 13, 2007, 533 SCRA 257, 268.

53
Rollo, p. 86.

54
Prudential Guarantee and Assurance, Inc. v. Anscor Land, Inc., G.R. No.
177240, September 8, 2010, 630 SCRA 368, 376.

55
Rollo, p. 83.

56
Id.

57
G.R. No. 163582, August 9, 2010, 627 SCRA 74.

58
Id. at 85.

59
Supra note 54 at 373-379.

60
Id. at 377.