GOVERNMENT OF THE REPUBLIC OF THE PHILIPPINES, represented by the
BUREAU OF SUPPLY COORDINATION vs. MARCELINO TIZON, ET AL.
[G.R. No. L-22108. August 30, 1967]
Facts:
A bidding was conducted by the Bureau of Supply Coordination of the Department
of General Services, for the supply of "one (1) Baylift portable heavy-duty truck and two (2)
Baylift Ramps, U.S. Manufacture". Marcelino Tizon won the bid, having offered the lowest
bid. To guarantee faithful performance of the conditions of the bid, the Bureau of Supply
Coordination required Tizon Engineering to give a bond in the sum of P10,000.00.
The Surety issued its bond for the said amount in favor of the Republic of the
Philippines. Tizon Engineering failed to deliver the equipment called for constraining the
Bureau to purchase the equipment from Fema Trading, the second lowest bidder.
Notwithstanding demands made by the Bureau of Supply on defendants Marcelino Tizon and
the Surety to pay said amount, they failed and refused. Hence, complaint was filed to recover
said sums with interests.
Defendant Tizon averred in his answer that: (a) "the alleged bidding conducted by
the Bureau of Supply is in utter disregard and wanton violation of the Rules and Regulations
of the said office hence not liable since the bond-issued by the Surety "answers only (for)
those contracts legally entered into by the herein defendants with the Bureau of Supply and
certainly not those contracts and/or bids which are of doubtful legality, as in the present case."
The defendant Surety, in answer to the complaint, admitted having executed a bond
in favor of the Republic of the Philippines for the purpose as therein stated, but denied "that it
failed and refused to pay the demand (of the plaintiff), the truth of the matter being that its co-
defendant, Marcelino Tizon, doing business under the name of Tizon Engineering, has put it
on notice not to settle the claim because he is not in any way whatsoever liable to plaintiff."
As cross-claim against defendant Tizon, the Surety asserted that if it is made liable to the
plaintiff on its bond, Marcelino Tizon should be ordered to make the corresponding
reimbursement, with interest of 12%, plus attorney's fees.
After trial, judgment was rendered in favor of the plaintiff and against the
defendants, ordering the latter to pay, jointly and severally.
Only defendant Tizon appealed. The plaintiff then filed a motion praying praying
among others to remand the case to the City Court, as concerns the Surety, for execution of
the judgment rendered in said court.
The Surety opposed the motion on two grounds: (a) that although it did not appeal
from the decision of the inferior court, the appeal interposed by its co-defendant inured to its
benefit, because the obligation sued on "is so dependent on that of the principal debtor, that
the Surety is considered in law as being the same party in relation to whatever is adjudged,
touching the obligation of its co-defendant"; and (b) the appeal of its co-defendant, the
principal debtor, "should be considered in law as to include the defendant Surety, in view of
the latter's cross-claim against the former." The opposition was over-ruled in the order
appealed from.
Issue:
WoN an appeal by one of the parties sentenced to pay solidarily a sum of money,
inures to the benefit of the other who did not appeal.
Held:
The pronouncements in the case of Municipality of Orion vs. Concha, 50 Phil. 682, provide
ample guideposts in the resolution of the issue at bar. In said case this Court held:
The judgment was joint and several, which means that they are severally liable. We have
made a careful examination of numerous authorities and believe that we are correct in saying
that the effect of the appeal by one judgment debtor upon the co-debtors depends upon the
particular facts and conditions in each case.
xxx xxx xxx
If the judgment can only be sustained upon the liability of the one who appeals and the
liability of the other co-judgment debtors depends solely upon the question whether or not the
appellant is liable, and the judgment is revoked as to that appellant, then the result of his
appeal will inure to the benefit of all.
The rule is quite general that a reversal as to parties appealing does not necessitate a reversal
as to parties not appealing, but that the judgment may be affirmed or left undisturbed as to
them. An exception to the rule exists, however, where a judgment cannot be reversed as to the
party appealing without affecting the rights of his co-debtor. (4 C.J. 1184)
A reversal of a judgment on appeal is binding on the parties to the suit, but does not inure to
the benefit of parties against whom judgment was rendered in the lower court who did not
join in the appeal, unless their rights and liabilities and those of the parties appealing are so
interwoven and dependent as to be inseparable, in which case a reversal as to one operates
as a reversal as to all. (4 C.J., 1206; Alling vs. Wenzel, 133 Ill., 264-278.)
Solution of the question posed in this appeal hinges on the nature of the obligation assumed
by the Surety under its bond. As Article 1222 of the new Civil Code provides:
A solidary debtor may, in actions filed by the creditor, avail himself of all defenses which are
derived from the nature of the obligation and of those which are personal to him, or pertain to
his own share. With respect to those which personally belong to the others, he may avail
himself thereof only as regards that part of the debt for which the latter are responsible.
Pertinent parts of the surety bond provides:
That we, Tizon Engineering, as principal, and the Capital Insurance & Surety Co., Inc., as
surety, . . . are held and firmly bound unto the Republic of the Philippines, in the penal sum of
P10,000.00, for the payment of which sum, well and truly to be made, we bind ourselves,
Jointly and Severally, by these presents.
Whereas, the principal agrees to comply with all the terms and conditions of the proposal with
the Bureau of Supply;
NOW THEREFORE, the conditions of this obligations are such that if the above bounden
principal shall, in case he becomes the successful bidder in any of the proposal of the Bureau
of Supply — (a) accept a contract with the Republic of the Philippines, represented by the
Bureau of Supply; (b) faithfully and truly performs in good faith the contract; (c) to pay to the
Republic of the Philippines, in case of delay and/or default in the execution of the contract,
any loss or damages which the latter may suffer by reason thereof, not to exceed the sum of
P10,000.00, Philippine currency, then this obligation shall be void, otherwise it shall remain
in full force and effect.
It thus appears that the Surety bound itself, jointly and severally, with the principal obligor to
pay the Republic of the Philippines any loss or damage the latter may suffer, not exceeding
P10,000.00, "in case of delay and/or default in the execution of the contract."
However, although the defendants bound themselves in solidum, the liability of the Surety
under its bond would arise only if its co-defendant, the principal obligor, should fail to
comply with the contract. To paraphrase the ruling in the case of Municipality of Orion vs.
Concha, the liability of the Surety is "consequent upon the liability" of Tizon, or "so
dependent on that of the principal debtor" that the Surety "is considered in law as being the
same party as the debtor in relation to whatever is adjudged, touching the obligation of the
latter"; or the liabilities of the two defendants herein "are so interwoven and dependent as to
be inseparable." Changing the expression, if the defendants are held liable, their liability to
pay the plaintiff would be solidary, but the nature of the Surety's undertaking is such that it
does not incur liability unless and until the principal debtor is held liable.
True, it is that the Surety did not appeal the decision of the inferior court to the Court of First
Instance, and on account of its failure to appeal, it lost its personality to appear in the latter
court or to file an answer therein. However this may be, it is not certain at this stage of the
proceeding that the Surety's liability unto plaintiff has attached. The principal debtor has
asserted on appeal that it has no liability whatsoever to the plaintiff, and, if this assertion be
proven and sustained, the reversal of the judgment of the inferior court would operate as a
reversal on the Surety, even though it did not appeal, in view of the dependency of its
obligation upon the liability of the principal debtor. The principal debtor might succeed in his
appeal; in such eventuality, the judgment of the inferior court could not continue in force
against the Surety. Consequently, it is premature at this juncture to execute said judgment
against the Surety.
The situation of the Surety may be likened to that of a defaulting defendant whose right is
protected under Section 4, Rule 18 of the Rules of Court as follows:
Judgment When Some Defendants Answer and Others make Default.—When a complaint
states a common cause of action against several defendants, some of whom answer, and the
others fail to do so, the court shall try the case against all upon the answer thus filed and
render judgment upon the evidence presented. The same procedure applies when a common
cause of action is pleaded in a counterclaim, cross-claim and third-party claim.
Albeit it may not personally be allowed to file an answer in the Court of First Instance, having
failed to interpose an appeal, the Surety can rely on the answer of its co-defendant and derive
benefit therefrom if the judgment on appeal should turn out to be favorable to the answering
defendant (Castro vs. Peña, 80 Phil. 488, 502).
Dispositive Portion:
Upon the foregoing considerations, that portion of the appealed order remanding the record of
the case to the City Court of Manila for execution of the decision of said court is hereby set
aside, without costs.
GARCIA V CA----NO DIGEST
G.R. No. 138544 October 3, 2000
SECURITY BANK AND TRUST COMPANY, Inc., petitioner, vs.
RODOLFO M. CUENCA, respondent.
PANGANIBAN, J.:
petitioner bank cannot hold herein respondent liable for loans obtained in excess of the
amount or beyond the period stipulated in the original agreement, absent any clear stipulation
showing that the latter waived his right to be notified thereof, or to give consent thereto.
FACTS:
Defendant-appellant Sta. Ines Melale (‘Sta. Ines’/SIMC) is a corporation engaged in logging
operations. It was a holder of a Timber License Agreement issued by the DENR
On 10 November 1980, Security Bank and Trust Co. granted appellant Sta. Ines a credit line
in the amount of (P8,000,000.00) effective til November 30, 1981 to assist the latter in
meeting the additional capitalization requirements of its logging operations.
To secure payment, it executed a chattel mortgage over some of its machineries and
equipments. And as an additional security, its President and Chairman of the Board of
Directors Rodolfo Cuenca, executed an Indemnity agreement in favor of Security Bank
whereby he bound himself jointly and severally with Sta. Ines.
Specific stipulations:
• The bank reserves the right to amend any of the aforementioned terms and
conditions upon written notice to the Borrower.
• As additional security for the payment of the loan, Rodolfo M. Cuenca executed an
Indemnity Agreement dated 17 December 1980 solidary binding himself:
• ‘Rodolfo M. Cuenca x x x hereby binds himself x x x jointly and severally with the
client (SIMC) in favor of the bank for the payment, upon demand and without the benefit of
excussion of whatever amount x x x the client may be indebted to the bank x x x by virtue of
aforesaid credit accommodation(s) including the substitutions, renewals, extensions,
increases, amendments, conversions and revivals of the aforesaid credit accommodation(s) x
x x .’
1985: Cuenca resigned as President and Chairman of the Board of Directors of defendant-
appellant Sta. Ines. Subsequently, the shareholdings of Cuenca in Sta. Ines were sold at a
public auction to Adolfo Angala. Before and after this, Sta Ines availed of its credit line.
Sta Ines encountered difficulty in making the amortization payments on its loans and
requested SBTC for a complete restructuring of its indebtedness. SBTC accommodated
SIMC’s request and signified its approval in a letter dated 18 February 1988 wherein SBTC
and Sta. Ines, without notice to or the prior consent of ] Cuenca, agreed to restructure the past
due obligations of defendant-appellant Sta. Ines. To formalize their agreement to restructure
the loan obligations of Sta. Ines, Security Bank and Sta. Ines executed a Loan Agreement
dated 31 October 1989 ‘
Sta Ines made payments up to (P1,757,000.00) The defaulted in the payment of its
restructured loan obligations to SBTC despite demands made upon appellant SIMC and
CUENCA,
SBTC filed a complaint for collection of sum of resulting after trial on the merits in a decision
by the court a quo, from which Cuenca appealed
CA: Released Cuenca from liability because 1989 Loan Agreement novated the 1980 credit
accommodation which extinguished the Indemnity Agreement for which Cuenca was liable
solidarily. No notice/consent to restructure. Since with expiration date, liable only up to that
date and up to that amount (8M). Amounted to extension.of time with no notice to suret
therefore released from liability.
ISSUES:
(a) whether the 1989 Loan Agreement novated the original credit accommodation and
Cuenca’s liability under the Indemnity Agreement YES
(b) whether Cuenca waived his right to be notified of and to give consent to any substitution,
renewal, extension, increase, amendment, conversion or revival of the said credit
accommodation. NO
HELD: Petition of Bank no merit.CA affirmed.
RATIO:
 the accommodation should expire not later than November 30, 1981. Hence, it was a
A. Original Obligation Extinguished by Novation continuing surety only in regard to loans obtained on or before the aforementioned expiry
An obligation may be extinguished by novation, pursuant to Article 1292 of the Civil Code, date and not exceeding the total of P8 million.
Novation of a contract is never presumed. Indeed, the following requisites must be NO PROVISION: ”each suretyship is a continuing one which shall remain in full force and
established: (1) there is a previous valid obligation; (2) the parties concerned agree to a new effect until this bank is notified of its revocation.
contract; (3) the old contract is extinguished; and (4) there is a valid new contract.16 2) Special Nature of the JSS
We reject these contentions. Clearly, the requisites of novation are present in this case. The It is a common banking practice to require the JSS ("joint and solidary signature") of a major
1989 Loan Agreement extinguished the obligation18 obtained under the 1980 credit stockholder or corporate officer, as an additional security for loans granted to corporations.
accomodation. This is evident from its explicit provision to "liquidate" the principal and the There are at least two reasons for this. First, in case of default, the creditor’s recourse, which
interest of the earlier indebtedness, as the following shows: is normally limited to the corporate properties under the veil of separate corporate personality,
"1.02. Purpose. The First Loan shall be applied to liquidate the principal portion of the would extend to the personal assets of the surety. Second, such surety would be compelled to
Borrower’s present total outstanding Indebtedness to the Lender (the "Indebtedness") while ensure that the loan would be used for the purpose agreed upon, and that it would be paid by
the Second Loan shall be applied to liquidatethe past due interest and penalty portion of the the corporation.
Indebtedness. Following this practice, it was therefore logical and reasonable for the bank to have required
Since the 1989 Loan Agreement had extinguished the original credit accommodation, the the JSS of respondent, who was the chairman and president of Sta. Ines in 1980 when the
Indemnity Agreement credit accommodation was granted. There was no reason or logic, however, for the bank or
1) NOT mere renewal/ Extension Sta. Ines to assume that he would still agree to act as surety in the 1989 Loan Agreement,
1989 Loan Agreement expressly stipulated that its purpose was to "liquidate," not to renew or because at that time, he was no longer an officer or a stockholder of the debtor-corporation.
extend, the outstanding indebtedness. Moreover, respondent did not sign or consent to the Verily, he was not in a position then to ensure the payment of the obligation. Neither did he
1989 Loan Agreement, which had allegedly extended the original P8 million credit facility. have any reason to bind himself further to a bigger and more onerous obligation.
Hence, his obligation as a surety should be deemed extinguished, "[a]n extension granted to
the debtor by the creditor without the consent of the guarantor extinguishes the guaranty. x x
x." PALMARES v. CA and MB LENDING
2) Binding Nature of the Credit Approval Memorandum 1998 / Regalado / Surety > Distinguished from guaranty
Bank objects to the appellate court’s reliance on that document, contending that it was not a
binding agreement because it was not signed by the parties. It adds that it was merely for its
internal use. Indeed, it cannot take advantage of that document by agreeing to be bound only SURETY / SURETYSHIP GUARANTOR / GUARANTY
by those portions that are favorable to it, while denying those that are disadvantageous. GUARANTOR: Insurer of the solvency
B. NO Waiver of Consent SURETY: Insurer of the debt
of the debtor
In the Indemnity Agreement, while respondent held himself liable for the credit A suretyship is an undertaking that A guaranty is an undertaking that the
accommodation or any modification thereof, such clause should be understood in the context the debt shall be paid debtor shall pay
of the P8 million limit and the November 30, 1981 term. It did not give the bank or Sta. Ines A guarantor agrees that the creditor,
any license to modify the nature and scope of the original credit accommodation, without A surety promises to pay the after proceeding against the
informing or getting the consent of respondent who was solidarily liable. principal's debt if the principal will principal, may proceed against the
A contract of surety "cannot extend to more than what is stipulated. It is strictly construed not pay guarantor if the principal is unable to
against the creditor, every doubt being resolved against enlarging the liability of the surety."31 pay
Likewise, the Court has ruled that "it is a well-settled legal principle that if there is any doubt
A surety binds himself to perform if A guarantor does not contract that
on the terms and conditions of the surety agreement, the doubt should be resolved in favor of
the principal does not, without the principal will pay, but simply that
the surety x x x. Ambiguous contracts are construed against the party who caused the
regard to his ability to do so he is able to do so
ambiguity.32In the absence of an unequivocal provision that respondent waived his right to be
A surety undertakes directly for the A guarantor contracts to pay if, by
notified of or to give consent to any alteration of the credit accommodation, we cannot sustain
petitioner’s view that there was such a waiver. payment and is so responsible at the use of due diligence, the debt
It should also be observed that the Credit Approval Memorandum clearly shows that the bank once if the principal debtor makes cannot be made out of the principal
did not have absolute authority to unilaterally change the terms of the loan accommodation. default debtor
At most, the alleged basis of respondent’s waiver is vague and uncertain. It confers no clear
authorization on the bank or Sta. Ines to modify or extend the original obligation without the FACTS
Pursuant to a promissory note, MB Lending extended a 30k loan to Sps. Azarraga and Estrella
consent of the surety or notice thereto.
Palmares, payable on or before 12 May 1990, with compounded interest at 6% per annum to be
1) NOT Continuing Surety computed every 30 days from the date thereof.
That the Indemnity Agreement is a continuing surety does not authorize the bank to extend
the scope of the principal obligation inordinately.
To repeat, in the present case, the Indemnity Agreement was subject to the two limitations of
the credit accommodation: (1) that the obligation should not exceed P8 million, and (2) that
 I, Mrs. Estrella Palmares, as the Co-maker of the above-
quoted loan, have fully understood the contents of this
Promissory Note for Short-Term Loan:
That as Co-maker, I am fully aware that I shall be
jointly and severally or solidarily liable with the above
principal maker of this note;
That in fact, I hereby agree that M.B. LENDING CORPORATION may
demand payment of the above loan from me in case the principal maker, Mrs.
Merlyn Azarraga defaults in the payment of the note subject to the same conditions
above-contained.
Palmares and Sps. Azarraga were only able to pay 16.3k. MB Lending filed a complaint against
Palmares as the lone party-defendant, allegedly by reason of Sps. Azarraga’s insolvency. Palmares’ main
contention was that she is to be held liable only upon default of the principal debtor Sps. Azarraga.
She avers that immediately after the loan matured, she offered to settle the obligation, but MB Lending
refused, and instead informed her that they would try to collect from Sps. Azarraga. In addition, partial
payment has been made.
RTC dismissed MB Lending’s complaint without prejudice to the filing of a separate action
for a sum of money against Sps. Azarraga. The offer Palmares made to pay the obligation is considered a
valid tender of payment sufficient to discharge her secondary liability on the instrument. As co-maker,
Palmares is only secondarily liable on the instrument.
CA reversed RTC and declared Palmares liable to pay MB Lending the outstanding
balance of 13.7k at 6% per month computed from the date the loan was contracted until fully paid,
penalty charges, attorney’s fees, and costs. Palmares is a surety since she bound herself to be jointly and
severally liable with Sps. Azarraga when she signed as co-maker. Therefore, she is primarily liable and
may be sued for the entire obligation.
ISSUE & HOLDING
WON Palmares is a guarantor or a surety. SURETY; primarily liable.
RATIO
Palmares expressly bound herself to be jointly and severally or solidarily liable with Sps. Azarraga;
therefore, her liability is that of a surety. The rule that ignorance of the contents of an instrument does not
ordinarily affect the liability of one who signs it also applies to contracts of suretyship. The mistake of a
surety as to the legal effect of her obligation is ordinarily no reason for relieving her of liability.
The undertaking to pay upon default of the principal debtor does not automatically
remove it from the ambit of a contract of suretyship. The second and third paragraphs of the
promissory note do not contain any other condition for the enforcement of MB Lending’s right against
Palmares. A contract of suretyship is that wherein one lends his credit by joining in the principal debtor's
obligation, so as to render himself directly and primarily responsible with him, and without reference to
the solvency of the principal.
Several attendant factors support the finding that Palmares is a surety.
 When she was informed about the spouses’ failure to pay, she
immediately offered to settle the account with MB Lending.
 She presented the receipts of the payments already made, which
were all issued in her name and of the Azarraga spouses. This can
only be construed to mean that the payments made by the principal
debtors were considered by MB Lending as creditable directly upon
the account and inuring to the benefit of Palmares.
A surety is bound equally and absolutely with the principal, and as such is deemed an original promisor
and debtor from the beginning. In suretyship, there is but one contract, and the surety is bound by the
same agreement which binds the principal. The contract of a surety starts with the agreement, which is
precisely the situation obtaining in this case.
A surety is usually bound with his principal by the same instrument, executed at the same time
and upon the same consideration; he is an original debtor, and his liability is immediate and direct. Where
a written agreement on the same sheet of paper with and immediately following the principal contract
between the buyer and seller is executed simultaneously therewith, providing that the signers of the
agreement agreed to the terms of the principal contract, the signers were "sureties" jointly liable with the
buyer.
Re: Palmares’ argument that the complaint was prematurely filed for lack of demand 
UNMERITORIOUS
Palmares was saying that Sps. Azarraga cannot as yet be considered in default, as MB Lending has not
yet made either a judicial or extrajudicial demand. This argument fails. Paragraph (G) of the note states
that "should I fail to pay in accordance with the above schedule of payment, I hereby waive my right to
notice and demand." Hence, demand by the creditor is no longer necessary in order that delay may exist
since the contract itself already expressly so declares. As a surety, petitioner is equally bound by such
waiver.
Even if it were otherwise, demand on the sureties is not necessary before bringing suit against
them, since the commencement of the suit is a sufficient demand. A surety is not even entitled, as a
matter of right, to be given notice of the principal's default. Inasmuch as the creditor owes no duty of
active diligence to take care of the interest of the surety, his mere failure to voluntarily give information
to the surety of the default of the principal cannot have the effect of discharging the surety. The surety is
bound to take notice of the principal's default and to perform the obligation.
The alleged failure of MB Lending to prove the fact of demand on Sps. Azarraga is
immaterial. In the absence of a statutory or contractual requirement, it is not necessary that performance
of his obligation be first demanded of the principal, especially where demand would have been useless;
nor is it a requisite that the principal be called on to account. A suretyship is a direct contract to pay the
debt of another. As an original promisor and debtor from the beginning, he is held ordinarily to
know every default of his principal.
Re: Palmares’ argument that the filing of the complaint solely against her was improper 
UNMERITORIOUS
Under NCC 1216, the creditor may proceed against any one of the solidary debtors or some or all of
them simultaneously. In accordance with the rule that, in the absence of statute or agreement otherwise,
a surety is primarily liable, and with the rule that his proper remedy is to pay the debt and pursue the
principal for reimbursement, the surety cannot at law, unless permitted by statute and in the absence of
any agreement limiting the application of the security, require the creditor or obligee, before proceeding
against the surety, to resort to and exhaust his remedies against the principal, particularly where both
principal and surety are equally bound.
MB Lending’s mere failure to immediately sue Palmares on her obligation does not release her
from liability.
Where a creditor refrains from proceeding against the principal, the surety is not exonerated. Mere
want of diligence or forbearance does not affect the creditor's rights vis-a-vis the surety, unless the
surety requires him by appropriate notice to sue on the obligation. In the absence of proof of resultant
injury, a surety is not discharged by the creditor's mere statement that the creditor will not look to the
surety, or that he need not trouble himself. The consequences of the delay, such as the subsequent
insolvency of the principal, or the fact that the remedies against the principal may be lost by lapse of time,
are immaterial. The raison d'être for the rule is that there is nothing to prevent the creditor from
proceeding against the principal at any time.
Leniency shown to a debtor in default, by delay permitted by the creditor without change in the
time when the debt might be demanded, does not constitute an extension of the time of payment,
which would release the surety.
In order to constitute an extension discharging the surety:
 It should appear that the extension was for a definite period,
pursuant to an enforceable agreement between the principal and the
creditor
  It was made without the consent of the surety or with a reservation
of rights with respect to him
 The contract must be one which precludes the creditor from
enforcing the principal contract within the period during which he
could otherwise have enforced it, and which precludes the surety
from paying the debt
None of these elements are present here. The mere fact that MB Lending gave Sps. Azarraga an extended
period of time within which to comply with their obligation did not effectively absolve Palmares from the
consequences of her undertaking. Besides, the burden is on the surety Palmares to show that she has been
discharged by some act of the creditor MB Lending.
E. ZOBEL v CA, CONSOLIDATED BANK AND TRUST CORP AND SPOUSES
CLAVERIA
FACTS:
• Spouses Claveria, doing business under the name “Agro Brokers” applied for a loan
from Respondent Consolidated Bank and Trust Corporation (Now SOLIDBANK) in the
amount of 2,875,000 to finance the purchase of two maritime barges and one tugboat.
• The loan was subject to the condition that respondent spouses execute a chattle
mortgage over the three vessels and that Ayala International PH guarantee the loan in favour
of SOLIDBANK. Spouses Claveria complied
• Spouses defaulted on their obligation. SOLIDBANK filed a complaint for sum of
money with a prayer for a writ of prelimnary attachment against respondents spouses and
petitioner Zobel of Ayala international.
• Zobel moved to dismiss the complaint on the ground that his liability as a guarantor
was extinguished pursuant to Art 2080 of the CC. He avers that Solidbank failed to register
the chattel mortgage with the appropriate govt agency.
• SOLIDBANK submits that Zobel is not a guarantor but a surety.
• RTC decided in favour of Solidbank saying that Zobel is signed as a surety even
though the title of the document signed was “Continuing Guaranty”.
o Registration should not be a basis for extinguishment of obligation, according to the
RTC.
• Zobel moved for MR but denied. CA decided in favour of Solidbank
ISSUES: WON Zobel is liable for the loan as a surety of the spouses claveria?
HELD:
• SURETY is an accessory promise by which a person binds himself for another
already bound and agrees with the creditor to satisfy the obligation if the debtor does not. A
guarantee is a collateral undertaking to pay the debt of another in case the latter does not pay
the debt.
• Under the CC:
o Surety is usually bound with his principal by the same instrument, executed at the
same times, and on the same consideration. He is an original promissory and debtor from the
beginning and is held, ordinarily to know every default of his principal. He is not discharged,
either by the mere indulgence of the creditor to the principal, of by lack of notice of default by
the principal. IN SHORT, surety is the insurer of the debt, and he obligates himself to pay if
the principal does not pay.
o Guaranty is a guantor’s own separate undertaking in which the principal does not
join. Usually entered into before or after that of the principal, and is often supported on a
separate consideration from the supporting the contract of the principal. Original contract of
his principal is not his contract and he is not bound to take notice of its non-performance. He
is often discharged by mere indulgence of the creditor to the principal and is usually not liable
unless notified of the default of the principal. IN SHORT, INSURER OF THE INSOLVENCY
OF DEBTOR and binds himself to pay if the principal is unable to pay
• In the case at hand, the court ruled that the contract “Continuing Guaranty” is a
contract of surety to induce SOLIDBANK to extend credit to spouses. The contract clearly
disclose that petitioner assumed liability to SOLIDBANK, as a regular party to the
undertaking and obligated itself as an original promissor. It bound itself jointly and severally
to the obligation with the respondent spouses
• The use of the term "guarantee" does not ipso facto mean that the contract is one of
guaranty. Authorities recognize that the word "guarantee" is frequently employed in business
transactions to describe not the security of the debt but an intention to be bound by a primary
or independent obligation.
• Article 2080 of the CC does not apply to the case at hand because ZOBEL is a
SURETY.
• Even though 2080 can be applied, failure to register the chattel mortgage did not
release petitioner from the obligation, because petitioner bound itself to the contract
irrespective of the existence of any security
SOLID BANK WON!
International Finance Corp v. Imperial Textile Mills
G.R. No. 160324. November 15, 2005
DOCTRINE: If solidary liability was instituted to "guarantee" a principal obligation, the law
deems the contract to be one of suretyship.
FACTS:
• Dec. 17, 1974: [Petitioner] International Finance Corporation (IFC) and
[Respondent] Philippine Polyamide Industrial Corporation (PPIC) entered into a loan
agreement wherein IFC extended to PPIC a loan of US$7,000,000.00, payable in 16 semi-
annual installments with 10% interest pa.
• Same day: Imperial Textile Mills, Inc. (ITM), Grand Textile Manufacturing
Corporation (Grandtex) and IFC entered into a “Guarantee Agreement” where ITM and
Grandtex agreed to guarantee PPIC’s obligations under the said loan agreement.
• PPIC managed to pay the first 3 semi-annual installments but requested a reschedule
for the payment of the next 3 payment.
• However, PPIC defaulted. IFC demanded but PPIC still failed to pay so executed an
extra-judicial foreclosure of mortgages (on buildings, real estate, machineries etc.)
• Still, the foreclosure was not enough and a balance of US$2,833,967.00 remained.
• IFC demanded from ITM and Grandtex as guarantors of PPIC, to pay the
outstanding balance.
• May 20, 1988: IFC filed a complaint with the RTC of Manila against PPIC and ITM
for the payment of the outstanding balance plus interests
• TC: held PPIC liable for the payment of the outstanding loan plus interests but
relieved ITM of its obligation as guarantor.
• CA: reversed RTC. It held that ITM was not discharged from its obligation as
guarantor when PPIC mortgaged PPIC’s properties to IFC. It also held that ITM’s liability as
a guarantor would arise only if and when PPIC could not pay.
• Arguments:
o IFC: ITM bound itself as a surety to PPIC’s obligations proceeding from the Loan
Agreement
o ITM: that under the terms of the Guarantee Agreement, it was merely a guarantor
and not a surety
ISSUE/S: Whether ITM is a surety, and thus solidarily liable with PPIC for the payment of
the loan.
HELD:
YES. ITM is a surety.
Sec 2.01 of the Guarantee Agreement states that:
The Guarantors jointly and severally, irrevocably, absolutely and unconditionally guarantee,
as primary obligors and not as sureties merely xxx.
While referring to ITM as a guarantor, the Agreement specifically stated that the corporation
was "jointly and severally" liable. To put emphasis on the nature of that liability, the Contract
further stated that ITM was a primary obligor, not a mere surety.
ITM bound itself to be solidarily liable with PPIC for the its obligations under the Loan
Agreement with IFC. ITM thereby brought itself to the level of PPIC and could not be
deemed merely secondarily liable.
ITM became a surety when it bound itself solidarily with the principal obligor which is PPIC.
Art. 2407 (2) states that: “If a person binds himself solidarily with the principal debtor, the
provisions of Section 4, Chapter 3, Title I of this Book shall be observed. In such case the
contract shall be called suretyship."
In addition, When qualified by the term "jointly and severally," the use of the word
"guarantor" to refer to a "surety" does not violate the law. As Article 2047 provides, a
suretyship is created when a guarantor binds itself solidarily with the principal obligor.
Likewise, the phrase in the Agreement -- "as primary obligor and not merely as surety" --
stresses that ITM is being placed on the same level as PPIC. Thus, the use of the word
"guarantee" does not ipso facto make the contract one of guaranty.
WHEREFORE, the Petition is hereby GRANTED. ITM is ORDERED to pay International
Finance Corporation the same amounts adjudged against PPIC in the assailed Decision.