G.R. No.
L-5447 March 1, 1910 that defendant's evidence should be stricken from the record and that defendant's answer should not be
REISS V MEMIJE
CARSON, J.:
Defendant appellant entered into a contract with one Buenaventura Kabalsa for the repair of a house in
the city of Manila. The contractor undertook to furnish the necessary materials, including a considerable
amount of lumber, to be used in the repairs. The contractor being a man of no commercial standing in the
community was unable to secure credit therefor, and was compelled to pay cash for all purchases. Having
no money and no credit he was unable to continue the purchase of the necessary lumber, plaintiffs, with
whom he was dealing, absolutely refusing to allow any lumber to leave their yard without payment in
advance. The work on the house being delayed for the lack of the necessary materials, defendant
accompanied the contractor to plaintiffs' lumber yard, and after satisfying plaintiffs as to his own financial
responsibility, and that as a property owner and an attorney in active practice in the city of Manila, he
was good for the amount of lumber needed in the repair of his house, he entered into an agreement with
them whereby they were to deliver the necessary lumber to the contractor for use in the repair of his
house.
In pursuance of and in accordance with the directions of the defendant, plaintiffs delivered to Kabalsa a
considerable amount of lumber which was used in the repairs upon defendant's house, and judgment in
this action was rendered in favor of the plaintiffs for the proven amount of the unpaid balance of the
purchase price of this lumber.
Appellant makes various assignments of error, and contends: First, that the trial court erred in declining
to allow an amendment to defendant's answer for the purpose of formally denying plaintiff's allegations
as to defendant's guaranty of payment of the purchase price of the lumber; second, that the trial court
erred in failing to set out in its decision the finding of facts upon which the judgment rests; third, that the
evidence of record does not sustain a finding that the defendant did in fact assume responsibility for the
payment of the purchase price of the lumber delivered to his contractor; and forth, that even if it be held
that he did so, then since the alleged promise, as set up by plaintiffs in their evidence, merely guaranteed
payment for the lumber and was not in writing, proof thereof was not admissible in evidence, and
defendant was not bound thereby, under the provisions of section 335 of the Code of Civil Procedure.
The alleged errors of procedures may be dismissed without much discussion. We think a reading of the
judgment itself clearly discloses that the trial judge did in fact make the necessary findings of fact, and
that he expressly held that, admitting all the evidence offered by both parties, the evidence of record
establishes the existence of defendant's promise to pay for the lumber, and discloses the existence of a
balance due on account of the lumber delivered to defendant's contractor. Without considering whether,
under the pleadings, the defendant's evidence should have been stricken out of the record and his motion
to amend his answer denied, as appears to have been the opinion of the trial court, we agree with the trial
court that even if the evidence be admitted and the complaint amended, the weight of all the evidence,
including the evidence, thus admitted, supports the plaintiffs' allegation touching defendants' promise to
pay for the lumber in question, and establishes his contention that this lumber was in fact delivered to the
defendant's contractor, and by him used in the construction of the house under the direction of the
defendant, and that the amount for which the judgment was given in the court below was the amount of
the unpaid purchase price of the lumber thus delivered. If, therefore, it was error of the trial court to rule
amended in accordance with a motion for that purpose made three weeks after judgment was rendered, it
was at most error without prejudice.
The only question that remains is defendant's contention that his alleged guaranty of payment of the
purchase price of the lumber furnished at his request to his contractor Kabalsa not being in writing, it is
unenforceable in this action.
Section 335 of Act No. 190 is as follows:
In the following cases an agreement hereafter made shall be unenforceable by action unless the same, or
some note or memorandum thereof, by in writing, and subscribed by the party charged, or by his agent;
evidence, therefore, of the agreement can not be received without the writing, or secondary evidence of
its contents:
xxx xxx xxx
2 A special promise to answer for the debt, default, or miscarriage of another;
xxx xxx xxx
An immense amount of litigation has arisen in England and the United States over the construction of
similar provisions which are found in most, if not all, of the so-called statutes of fraud which have been
enacted in those jurisdictions, and many courts and text writer have acknowledged their inability to find
anything like uniform rules of construction in the conflicting decisions which have been rendered,
applying the statute to the infinite variety of facts which have presented themselves; so that it has been
said by some that the law upon the subject is in a state of hopeless confusion.
The true test as to whether a promise is within the statute had been said to lie in the answer to the question
whether the promise is an original or a collateral one. If the promise is an original or an independent one;
that is, if the promisor becomes thereby primarily liable for the payment of the debt, the promise is not
within the statute. But, on the other hand, if the promise is collateral to the agreement of another and the
promisor becomes thereby merely a surety, the promise must be in writing. (Gull vs. Lindsay, 4 Exch.
45; and other cases cited under note 2, p. 906, Encyclopedia of Law, vol. 29.)
Just what is the character of a promise as original or collateral is a question of law and fact which must
in each case be determined from the evidence as to the language used in making the promise, and the
circumstances under which the promise was made; and, since as a general rule the parties making a
promise of this nature rarely understand the legal and technical difference between an original and a
collateral promise, the precise form of words used, even when established by undisputed testimony is not
always conclusive. So that it is said that "While, as a matter of law, a promise, absolute in form, to pay
or to be 'responsible' or to be the 'paymaster,' is an original promise, and while, on the other hand, if the
promisor says, 'I will see you paid,' or 'I will pay if he does not,' or uses equivalent words, the promise
standing alone is collateral, yet under all the circumstances of the case, an absolute promise to pay, or a
promise to be 'responsible,' may be found to be collateral, or promises deemed prima facie collateral may
be adjudged original." (Encyclopedia of Law, 2d ed., vol. 29, p. 907, and many cases there cited.)
If goods are sold upon the sole credit and responsibility of the party who make the promise, then, even Harvey vs.Mercur, 78 Pa. St., 257; Weyland vs. Critchfield, 3 Grant (Pa.), 113;
though they be delivered to a third person, there is no liability of the third person to which that of the Lakeman vs. Mountstephen, L.R. 7 H. L., 17.)
party promising can be collateral, and consequently such a promise to pay does not require a
memorandum in writing; and on the same principle it has been held that when one advances money at
Taking into consideration all the circumstances of the case at bar, we are satisfied that the credit for the
the request of another (on his promise to repay it) to pay the debt of a third party, as the payment creates
lumber delivered by the plaintiffs to defendant's contractor was extended solely and exclusively to the
no debt against such third party, not being made at all upon his credit, the liability of the party on whose
defendant under the verbal agreement had with him, and therefore, that the provisions of the statue did
request and promise it was made is original and not collateral, and not with the Statute of Frauds.
not require that it should be made in writing. Defendant admitted on the stand that his contractor had no
(Pearse vs. Blagrave, 3 Com. Law, 338; Prop'rs. of Upper Locks vs. Abbott, 14 N. H., 157.) But it has
commercial credit or standing in the community, and it appears that plaintiffs, after investigation,
been said that if the person for whose benefit the promise is made was himself liable at all, the promise
absolutely refused to extent him any credit whatever upon any conditions and that the defendant was well
of the defendant must be in writing. (Matson vs. Wharam, 2 T. R., 80.) And the text writers point out that
aware of that fact. From the testimony of the contractor himself, it seems clear that when the agreement
if this rule be understood as confined to cases where a third party and the defendant are liable in the same
for the delivery of lumber was made, the credit was extended not to the contractor but to the defendant.
way, and to do the same thing, one as principal and the other as surety, it may be accepted as the uniform
It appears that both plaintiffs and defendant exercised especial precautions to see that all the lumber was
doctrine of all the cases both in England and in the United States. (Browse on the Statute of Frauds, par.
delivered on defendant's lot, and that before each bill of lumber was delivered, defendant carefully
197, and cases there cited.) In such cases, the defendant is said to come in aid to procure the credit to be
examined the invoice, which the agreement was submitted to him, and that no lumber was delivered
given to the principal debtor, and the question, therefore, ultimate is "upon whose credit the goods were
without his approval. The precise language in which the verbal agreement was made does not appear
sold or the money advanced, or whatever other thing done which the defendant by his promise procured
from the evidence, and while it is true that one of the plaintiffs in his disposition, made in the United
to be done;" and where the defendant stands in the relation to the third party of surety to principal "if any
States, refers to the agreement as one whereby defendant "guaranteed" payment for the lumber, we are
credit at all be given to the third party, the defendant's promise is required to be in writing as collateral."
satisfied from all the evidence that the word was not used by this witness in its technical sense, and that
(Browne on the Statute of Frauds, p. 227, and notes 2 and 4.) But it must be clearly recognized that these
he did not mean thereby to say that defendant guaranteed payment by the contractor, but rather that after
principles are applicable only where the parties are liable in the same way to do the same thing, one as
satisfying plaintiffs as to his own financial responsibility, he obligated himself to pay for the lumber
principal and the other as surety, for if the credit is given to both jointly, since neither can be said to be
delivered to his contractor for use in his house. The only evidence in the whole record which tends to put
surety for the other to the creditor, their engagement need not be in writing.
our conclusion in this regard in doubt, is the testimony of plaintiffs' acting manager during plaintiffs'
absence in the United States who stated that he sent a statement of account and a bill for the lumber to
As has been said before, it is frequently a matter of difficulty to determine to whom the credit has actually the contractor; but this fact, which under ordinary circumstances would be strong evidence that the credit
been given, whether to the defendant alone, in which case the debt is his own and his promise is good was originally extended to the contractor and merely guaranteed by the defendant, was satisfactorily and
without writing; or in part to the third party, in which case the defendant's promise being collateral to and sufficiently explained by proof that plaintiffs were compelled to leave for the United States quite
in aid of the third party's liability, requires a writing to support it, or to both jointly, in which case as has unexpectedly, with no opportunity to go over the accounts with their acting manager, who was left in
been said their engagement need not be in writing. This must be determined from the language and charge, so that the latter having no knowledge whatever as to plaintiffs' agreement with defendant, and
expressions used by the parties promising, and from an examination of the circumstance showing the learning that the lumber had been delivered to the contractor, supposed that it had been sold to him, and
understanding of the parties. The unexplained fact that charges were made against a third party on the only discovered his mistake on later investigation and correspondence with his principals, after the
plaintiffs' books, or that the bill was presented to the original debtor in the first instance, unqualified by contractor had notified him as to the true nature of the transaction.
special circumstances, tends to prove that the credit was given in whole or in part to him, and that the
defendant's promise is a collateral one. (Larson vs. Wyman, 14 Wend. (N.Y.), 246; Pennell vs.Pentz, 4
The judgment appealed from should be affirmed with the costs of this instance against the appellant. So
E. D. Smith (N. Y.), 639.) But it is evidently quite impossible to specify any one fact or set of facts on
ordered.
which the question as to whom the plaintiff gave credit is to be determined. In the language of Buchanan,
C.J., in Elder vs.Warfield (7 Harris & (Md.), 397), "the extent of the understaking, the express in used,
the situation of the parties, and all the circumstances of the case should be taken into consideration." INTERNATIONAL FINANCE V IMPERIAL TEXTILE

PANGANIBAN, J.:
Application of these principles has been made in many cases where owners of buildings going up under
contract enter into agreements upon the faith of which subcontractors or other have continued to supply
labor or material after the principle contractor has become either actually or probably unable to pay. In
The terms of a contract govern the rights and obligations of the contracting parties. When the obligor
these cases, the question is whether the services for which the action is brought against the owner of the
undertakes to be jointly and severally liable, it means that the obligation is solidary.
building were performed solely upon the credit of his promise, to be himself responsible and to pay for
If solidary liability was instituted to guarantee a principal obligation, the law deems the contract to be
the materials and labor furnished, or whether the subcontractors and laborers continued to furnish labor
one of suretyship.
and materials to the principal contractor relying upon his obligation guaranteed by the promise of the
The creditor in the present Petition was able to show convincingly that, although denominated as a
owner. (Gill vs. Herrick, 11 Mass., 501; Walker vs. Hill, 119 Mass., 249; Clifford vs. Luhring, 69 Ill.,
Guarantee Agreement, the Contract was actually a surety. Notwithstanding the use of the words guarantee
401; Rawson vs. Springsteen, 2 Thomp. & C. (N. Y.), 416; Belknap vs. Bender, 6 Thomp. & C. (N.Y.),
and guarantor, the subject Contract was indeed a surety, because its terms were clear and left no doubt as
611; Jefferson County vs. Slagle, 66 Pa. St., 202. See Eshleman vs. Harnish, 76 Pa. St., 97;
to the intention of the parties.

The Case
Before us is a Petition for Review[1] under Rule 45 of the Rules of Court, assailing the
February 28, 2002 Decision[2] and September 30, 2003 Resolution[3] of the Court of Appeals (CA) in CA-
GR CV No. 58471. The challenged Decision disposed as follows:
WHEREFORE, the appeal is PARTIALLY GRANTED. The decision of the
trial court is MODIFIED to read as follows:
1. Philippine Polyamide Industrial Corporation is ORDERED to pay [Petitioner]
International Finance Corporation, the following amounts:
(a) US$2,833,967.00 with accrued interests as provided in the Loan Agreement;
(b) Interest of 12% per annum on accrued interest, which shall be counted from the date of
filing of the instant action up to the actual payment;
(c) P73,340.00 as attorneys fees;
(d) Costs of suit.
2. The guarantor Imperial Textile Mills, Inc. together with Grandtex
is HELD secondarily liable to pay the amount herein adjudged to [Petitioner] International
Finance Corporation.[4]
The assailed Resolution denied both parties respective Motions for Reconsideration.
The Facts
The facts are narrated by the appellate court as follows:
On December 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 sixteen (16)
semi-annual installments of US$437,500.00 each, beginning June 1, 1977 to December 1,
1984, with interest at the rate of 10% per annum on the principal amount of the loan advanced
and outstanding from time to time. The interest shall be paid in US dollars semi-annually on
June 1 and December 1 in each year and interest for any period less than a year shall accrue
and be pro-rated on the basis of a 360-day year of twelve 30-day months.
On December 17, 1974, a Guarantee Agreement was executed with x x x Imperial Textile
Mills, Inc. (ITM), Grand Textile Manufacturing Corporation (Grandtex) and IFC as parties
thereto. ITM and Grandtex agreed to guarantee PPICs obligations under the loan agreement.
PPIC paid the installments due on June 1, 1977, December 1, 1977 and June 1, 1978. The
payments due on December 1, 1978, June 1, 1979 and December 1, 1979 were rescheduled
as requested by PPIC. Despite the rescheduling of the installment payments, however, PPIC
defaulted. Hence, on April 1, 1985, IFC served a written notice of default to PPIC demanding
the latter to pay the outstanding principal loan and all its accrued interests. Despite such notice,
PPIC failed to pay the loan and its interests.
By virtue of PPICs failure to pay, IFC, together with DBP, applied for the extrajudicial
foreclosure of mortgages on the real estate, buildings, machinery, equipment plant and all
improvements owned by PPIC, located at Calamba, Laguna, with the regional sheriff of
Calamba, Laguna. On July 30, 1985, the deputy sheriff of Calamba, Laguna issued a notice
of extrajudicial sale. IFC and DBP were the only bidders during the auction sale. IFCs bid
was for P99,269,100.00 which was equivalent to US$5,250,000.00 (at the prevailing
exchange rate of P18.9084 = US$1.00). The outstanding loan, however, amounted to
US$8,083,967.00 thus leaving a balance of US$2,833,967.00. PPIC failed to pay the
remaining balance.
Consequently, IFC demanded ITM and Grandtex, as guarantors of PPIC, to pay the
outstanding balance. However, despite the demand made by IFC, the outstanding balance
remained unpaid.
Thereafter, on 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 and attorneys fees.
The trial court held PPIC liable for the payment of the outstanding loan plus interests. It also
ordered PPIC to pay IFC its claimed attorneys fees. However, the trial court relieved ITM of
its obligation as guarantor. Hence, the trial court dismissed IFCs complaint against ITM.
xxxxxxxxx
Thus, apropos the decision dismissing the complaint against ITM, IFC appealed [to the CA]. [5]
Ruling of the Court of Appeals
The CA reversed the Decision of the trial court, insofar as the latter exonerated ITM from any obligation to IFC.
According to the appellate court, ITM bound itself under the Guarantee Agreement to pay PPICs obligation
upon default.[6] ITM was not discharged from its obligation as guarantor when PPIC mortgaged the latters
properties to IFC.[7] The CA, however, held that ITMs liability as a guarantor would arise only if and when PPIC
could not pay. Since PPICs inability to comply with its obligation was not sufficiently established, ITM could
not immediately be made to assume the liability.[8]
The September 30, 2003 Resolution of the CA denied reconsideration. [9] Hence, this Petition.[10]
The Issues
Petitioner states the issues in this wise:
I. Whether or not ITM and Grandtex[11] are sureties and therefore, jointly and severally liable with PPIC,
for the payment of the loan.
II. Whether or not the Petition raises a question of law.
III. Whether or not the Petition raises a theory not raised in the lower court. [12]
The main issue is whether ITM is a surety, and thus solidarily liable with PPIC for the payment
of the loan.
The Courts Ruling
The Petition is meritorious.
Main Issue:
Liability of Respondent Under
the Guarantee Agreement
The present controversy arose from the following Contracts: (1) the Loan Agreement dated
December 17, 1974, between IFC and PPIC; [13] and (2) the Guarantee Agreement dated December 17,
1974, between ITM and Grandtex, on the one hand, and IFC on the other.[14]
IFC claims that, under the Guarantee Agreement, ITM bound itself as a surety to PPICs
obligations proceeding from the Loan Agreement.[15] For its part, ITM asserts that, by the terms of the
Guarantee Agreement, it was merely a guarantor[16] and not a surety. Moreover, any ambiguity in the
Agreement should be construed against IFC -- the party that drafted it.[17]
Language of the
Contract
The premise of the Guarantee Agreement is found in its preambular clause, which reads:
Whereas,
(A) By an Agreement of even date herewith between IFC and PHILIPPINE POLYAMIDE
INDUSTRIAL CORPORATION (herein called the Company), which agreement is herein
called the Loan Agreement, IFC agrees to extend to the Company a loan (herein called the
Loan) of seven million dollars ($7,000,000) on the terms therein set forth, including a
provision that all or part of the Loan may be disbursed in a currency other than dollars, but
only on condition that the Guarantors agree to guarantee the obligations of the Company in
respect of the Loan as hereinafter provided.
(B) The Guarantors, in order to induce IFC to enter into the Loan Agreement, and in consideration of
IFC entering into said Agreement, have agreed so to guarantee such obligations of the
Company.[18]
The obligations of the guarantors are meticulously expressed in the following provision:
Section 2.01. The Guarantors jointly and severally, irrevocably, absolutely and
unconditionally guarantee, as primary obligors and not as sureties merely, the due and
punctual payment of the principal of, and interest and commitment charge on, the Loan, and
the principal of, and interest on, the Notes, whether at stated maturity or upon prematuring,
all as set forth in the Loan Agreement and in the Notes.[19]
The Agreement uses guarantee and guarantors, prompting ITM to base its argument on those
words.[20] This Court is not convinced that the use of the two words limits the Contract to a mere guaranty.
The specific stipulations in the Contract show otherwise.
Solidary Liability
Agreed to by ITM
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. Those stipulations meant only one thing: that at
bottom, and to all legal intents and purposes, it was a surety.
Indubitably therefore, ITM bound itself to be solidarily[21] liable with PPIC for the latters
obligations under the Loan Agreement with IFC. ITM thereby brought itself to the level of PPIC and
could not be deemed merely secondarily liable.
Initially, ITM was a stranger to the Loan Agreement between PPIC and IFC. ITMs liability
commenced only when it guaranteed PPICs obligation. It became a surety when it bound itself solidarily
with the principal obligor. Thus, the applicable law is as follows:
Article 2047. By guaranty, a person, called the guarantor binds himself to the
creditor to fulfill the obligation of the principal in case the latter should fail to do so.
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.[22]
The aforementioned provisions refer to Articles 1207 to 1222 of the Civil Code on Joint and
Solidary Obligations. Relevant to this case is Article 1216, which states:
The creditor may proceed against any one of the solidary debtors or some or all of
them simultaneously. The demand made against one of them shall not be an obstacle to those
which may subsequently be directed against the others, so long as the debt has not been fully
collected.

Pursuant to this provision, petitioner (as creditor) was justified in taking action directly against
respondent.
No Ambiguity in the
Undertaking
The Court does not find any ambiguity in the provisions of the Guarantee Agreement. When
qualified by the term jointly and severally, the use of the word guarantor to refer to a surety does not
violate the law.[23] 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. Those words emphasize
the nature of their liability, which the law characterizes as a suretyship.
The use of the word guarantee does not ipso facto make the contract one of guaranty.[24] This Court has
recognized that the word is frequently employed in business transactions to describe the intention to be
bound by a primary or an independent obligation.[25] The very terms of a contract govern the obligations
of the parties or the extent of the obligors liability. Thus, this Court has ruled in favor of suretyship, even
though contracts were denominated as a Guarantors Undertaking [26] or a Continuing Guaranty.[27]
[28]
Contracts have the force of law between the parties, who are free to stipulate any matter
not contrary to law, morals, good customs, public order or public policy.[29] None of these circumstances
are present, much less alleged by respondent. Hence, this Court cannot give a different meaning to the
plain language of the Guarantee Agreement.
Indeed, the finding of solidary liability is in line with the premise provided in the Whereas
clause of the Guarantee Agreement. The execution of the Agreement was a condition precedent for the
approval of PPICs loan from IFC. Consistent with the position of IFC as creditor was its requirement of
a higher degree of liability from ITM in case PPIC committed a breach. ITM agreed with the stipulation
in Section 2.01 and is now estopped from feigning ignorance of its solidary liability. The literal meaning
of the stipulations control when the terms of the contract are clear and there is no doubt as to the intention
of the parties.[30]
We note that the CA denied solidary liability, on the theory that the parties would not have
executed a Guarantee Agreement if they had intended to name ITM as a primary obligor.[31] The appellate
court opined that ITMs undertaking was collateral to and distinct from the Loan Agreement. On this
point, the Court stresses that a suretyship is merely an accessory or a collateral to a principal
obligation.[32] Although a surety contract is secondary to the principal obligation, the liability of the surety
is direct, primary and absolute; or equivalent to that of a regular party to the undertaking. [33] A surety
becomes liable to the debt and duty of the principal obligor even without possessing a direct or personal
interest in the obligations constituted by the latter.[34]
ITMs Liability as Surety
With the present finding that ITM is a surety, it is clear that the CA erred in declaring the
former secondarily liable.[35] A surety is considered in law to be on the same footing as the principal
debtor in relation to whatever is adjudged against the latter. [36] Evidently, the dispositive portion of the
assailed Decision should be modified to require ITM to pay the amount adjudged in favor of IFC.
Peripheral Issues
In addition to the main issue, ITM raised procedural infirmities allegedly justifying the denial
of the present Petition. Before the trial court and the CA, IFC had allegedly instituted different arguments
that effectively changed the corporations theory on appeal, in violation of this Courts previous
pronouncements.[37]ITM further
claims that the main issue in the present case is a question of fact that is not cognizable by this Court.[38]
These contentions deserve little consideration.
Alleged Change of
Theory on Appeal
Petitioners arguments before the trial court (that ITM was a primary obligor) and before the
CA (that ITM was a surety) were related and intertwined in the action to enforce the solidary liability of
ITM under the Guarantee Agreement. We emphasize that the terms primary obligor and surety were
premised on the same stipulations in Section 2.01 of the Agreement. Besides, both terms had the same
legal consequences. There was therefore effectively no change of theory on appeal. At any rate, ITM
failed to show to this Court a disparity between IFCs allegations in the trial court and those in the CA.
Bare allegations without proof deserve no credence.
Review of Factual
Findings Necessary
As to the issue that only questions of law may be raised in a Petition for Review,[39] the Court
has recognized exceptions,[40] one of which applies to the present case. The assailed Decision was based
on a misapprehension of facts,[41] which particularly related to certain stipulations in the Guarantee
Agreement -- stipulations that had not been disputed by the parties. This circumstance compelled the
Court to review the Contract firsthand and to make its own findings and conclusions accordingly.
WHEREFORE, the Petition is hereby GRANTED, and the assailed Decision and
Resolution MODIFIED in the sense that Imperial Textile Mills, Inc. is declared a surety to Philippine
Polyamide Industrial Corporation. ITM is ORDERED to pay International Finance Corporation the same
amounts adjudged against PPIC in the assailed Decision. No costs.
SO ORDERED.
G.R. No. 185945 December 05, 2012
AGLIBOT V SANTIA
DECISION
REYES, J.:
Before the Court is a Petition for Review on Certiorari under Rule 45 of the 1997 Rules of Civil
Procedure seeking to annul and set aside the Decision 1 dated March I 8, 2008 of the Court of Appeals
(CA) in CA-G.R. SP No. 100021, which reversed the Decision2 dated April 3, 2007 of the Regional Trial
Court (RTC) of Dagupan City, Branch 40, in Criminal Case Nos. 2006-0559-D to 2006-0569-D and
entered a new judgment. The fallo reads as follows:
WHEREFORE, the instant petition is GRANTED and the assailed Joint Decision dated April 3, 2007
of the RTC of Dagupan City, Branch 40, and its Order dated June 12, 2007 are REVERSED AND SET
ASIDE and a new one is entered ordering private respondent Fideliza J. Aglibot to pay petitioner the
total amount of ₱3,000,000.00 with 12% interest per annum from the filing of the Informations until the
finality of this Decision, the sum of which, inclusive of interest, shall be subject thereafter to 12% annual
interest until fully paid.
SO ORDERED.3
On December 23, 2008, the appellate court denied herein petitioner’s motion for reconsideration.
Antecedent Facts
Private respondent-complainant Engr. Ingersol L. Santia (Santia) loaned the amount of ₱2,500,000.00 to
Pacific Lending & Capital Corporation (PLCC), through its Manager, petitioner Fideliza J. Aglibot
(Aglibot). The loan was evidenced by a Promissory Note dated July 1, 2003, issued by Aglibot in behalf
of PLCC, payable in one year subject to interest at 24% per annum. Allegedly as a guaranty or security
for the payment of the note, Aglibot also issued and delivered to Santia eleven (11) post-dated personal
checks drawn from her own demand account maintained at Metrobank, Camiling Branch. Aglibot is a
major stockholder of PLCC, with headquarters at 27 Casimiro Townhouse, Casimiro Avenue, Zapote,
Las Piñas, Metro Manila, where most of the stockholders also reside.4
Upon presentment of the aforesaid checks for payment, they were dishonored by the bank for having
been drawn against insufficient funds or closed account. Santia thus demanded payment from PLCC and
Aglibot of the face value of the checks, but neither of them heeded his demand. Consequently, eleven
(11) Informations for violation of Batas Pambansa Bilang 22 (B.P. 22), corresponding to the number of
dishonored checks, were filed against Aglibot before the Municipal Trial Court in Cities (MTCC),
Dagupan City, Branch 3, docketed as Criminal Case Nos. 47664 to 47674. Each Information, except as
to the amount, number and date of the checks, and the reason for the dishonor, uniformly alleged, as
follows:
That sometime in the month of September, 2003 in the City of Dagupan, Philippines and within the
jurisdiction of this Honorable Court, the above-named accused, FIDELIZA J. AGLIBOT, did then and
there, willfully, unlawfully and criminally, draw, issue and deliver to one Engr. Ingersol L. Santia, a
METROBANK Check No. 0006766, Camiling Tarlac Branch, postdated November 1, 2003, in the
amount of ₱50,000.00, Philippine Currency, payable to and in payment of an obligation with the
complainant, although the said accused knew fully well that she did not have sufficient funds in or credit
with the said bank for the payment of such check in full upon its presentment, such that when the said
check was presented to the drawee bank for payment within ninety (90) days from the date thereof, the
same was dishonored for reason "DAIF", and returned to the complainant, and despite notice of dishonor,
accused failed and/or refused to pay and/or make good the amount of said check within five (5) days
banking days [sic], to the damage and prejudice of one Engr. Ingersol L. Santia in the aforesaid amount
of ₱50,000.00 and other consequential damages.5
Aglibot, in her counter-affidavit, admitted that she did obtain a loan from Santia, but claimed that she did
so in behalf of PLCC; that before granting the loan, Santia demanded and obtained from her a security
for the repayment thereof in the form of the aforesaid checks, but with the understanding that upon
remittance in cash of the face amount of the checks, Santia would correspondingly return to her each
check so paid; but despite having already paid the said checks, Santia refused to return them to her,
although he gave her assurance that he would not deposit them; that in breach of his promise, Santia
deposited her checks, resulting in their dishonor; that she did not receive any notice of dishonor of the
checks; that for want of notice, she could not be held criminally liable under B.P. 22 over the said checks;
and that the reason Santia filed the criminal cases against her was because she refused to agree to his
demand for higher interest.
On August 18, 2006, the MTCC in its Joint Decision decreed as follows:
WHEREFORE, in view of the foregoing, the accused, FIDELIZA J. AGLIBOT, is
hereby ACQUITTED of all counts of the crime of violation of the bouncing checks law on reasonable
doubt. However, the said accused is ordered to pay the private complainant the sum
of ₱3,000,000.00 representing the total face value of the eleven checks plus interest of 12% per annum
from the filing of the cases on November 2, 2004 until fully paid, attorney’s fees of ₱30,000.00 as well
as the cost of suit.
SO ORDERED.6
On appeal, the RTC rendered a Decision dated April 3, 2007 in Criminal Case Nos. 2006-0559-D to
2006-0569-D, which further absolved Aglibot of any civil liability towards Santia, to wit:
WHEREFORE, premises considered, the Joint Decision of the court a quo regarding the civil aspect of
these cases is reversed and set aside and a new one is entered dismissing the said civil aspect on the
ground of failure to fulfill, a condition precedent of exhausting all means to collect from the principal
debtor.
SO ORDERED.7
Santia’s motion for reconsideration was denied in the RTC’s Order dated June 12, 2007.8 On petition for
review to the CA docketed as CA-G.R. SP No. 100021, Santia interposed the following assignment of
errors, to wit:
"In brushing aside the law and jurisprudence on the matter, the Regional Trial Court seriously erred:
Now before the Court, Aglibot maintains that it was error for the appellate court to adjudge her personally
liable for issuing her own eleven (11) post-dated checks to Santia, since she did so in behalf of her
employer, PLCC, the true borrower and beneficiary of the loan. Still maintaining that she was a mere
guarantor of the said debt of PLCC when she agreed to issue her own checks, Aglibot insists that Santia
failed to exhaust all means to collect the debt from PLCC, the principal debtor, and therefore he cannot
now be permitted to go after her subsidiary liability.

1. In reversing the joint decision of the trial court by dismissing the civil aspect of these cases;
Ruling of the Court

2. In concluding that it is the Pacific Lending and Capital Corporation and not the private respondent
The petition is bereft of merit.
which is principally responsible for the amount of the checks being claimed by the petitioner;

Aglibot cannot invoke the benefit of excussion

3. In finding that the petitioner failed to exhaust all available legal remedies against the principal debtor
Pacific Lending and Capital Corporation;
The RTC in its decision held that, "It is obvious, from the face of the Promissory Note x x x that the
accused-appellant signed the same on behalf of PLCC as Manager thereof and nowhere does it appear
4. In finding that the private respondent is a mere guarantor and not an accommodation party, and thus,
therein that she signed as an accommodation party."12 The RTC further ruled that what Aglibot agreed to
cannot be compelled to pay the petitioner unless all legal remedies against the Pacific Lending and Capital
do by issuing her personal checks was merely to guarantee the indebtedness of PLCC. So now petitioner
Corporation have been exhausted by the petitioner;
Aglibot reasserts that as a guarantor she must be accorded the benefit of excussion – prior exhaustion of
the property of the debtor – as provided under Article 2058 of the Civil Code, to wit:
5. In denying the motion for reconsideration filed by the petitioner." 9
Art. 2058. The guarantor cannot be compelled to pay the creditor unless the latter has exhausted all the
In its now assailed decision, the appellate court rejected the RTC’s dismissal of the civil aspect of the property of the debtor, and has resorted to all the legal remedies against the debtor.
aforesaid B.P. 22 cases based on the ground it cited, which is that the "failure to fulfill a condition
precedent of exhausting all means to collect from the principal debtor." The appellate court held that
It is settled that the liability of the guarantor is only subsidiary, and all the properties of the principal
since Aglibot’s acquittal by the MTCC in Criminal Case Nos. 47664 to 47674 was upon a reasonable
debtor, the PLCC in this case, must first be exhausted before the guarantor may be held answerable for
doubt10 on whether the prosecution was able to satisfactorily establish that she did receive a notice of
the debt.13 Thus, the creditor may hold the guarantor liable only after judgment has been obtained against
dishonor, a requisite to hold her criminally liable under B.P. 22, her acquittal did not operate to bar
the principal debtor and the latter is unable to pay, "for obviously the ‘exhaustion of the principal’s
Santia’s recovery of civil indemnity.
property’ — the benefit of which the guarantor claims — cannot even begin to take place before judgment
has been obtained."14 This rule is contained in Article 206215 of the Civil Code, which provides that the
It is axiomatic that the "extinction of penal action does not carry with it the eradication of civil liability, action brought by the creditor must be filed against the principal debtor alone, except in some instances
unless the extinction proceeds from a declaration in the final judgment that the fact from which the civil mentioned in Article 205916 when the action may be brought against both the guarantor and the principal
liability might arise did not exist. Acquittal will not bar a civil action in the following cases: (1) where debtor.
the acquittal is based on reasonable doubt as only preponderance of evidence is required in civil cases;
(2) where the court declared the accused’s liability is not criminal but only civil in nature[;] and (3) where
The Court must, however, reject Aglibot’s claim as a mere guarantor of the indebtedness of PLCC to
the civil liability does not arise from or is not based upon the criminal act of which the accused was
Santia for want of proof, in view of Article 1403(2) of the Civil Code, embodying the Statute of Frauds,
acquitted."11 (Citation omitted)
which provides:

The CA therefore ordered Aglibot to personally pay Santia ₱3,000,000.00 with interest at 12% per
Art. 1403. The following contracts are unenforceable, unless they are ratified:
annum, from the filing of the Informations until the finality of its decision. Thereafter, the sum due, to be
compounded with the accrued interest, will in turn be subject to annual interest of 12% from the finality
of its judgment until full payment. It thus modified the MTCC judgment, which simply imposed a straight xxxx
interest of 12% per annum from the filing of the cases on November 2, 2004 until the ₱3,000,000.00 due
is fully paid, plus attorney’s fees of ₱30,000.00 and the costs of the suit.
(2) Those that do not comply with the Statute of Frauds as set forth in this number. In the following cases
an agreement hereafter made shall be unenforceable by action, unless the same, or some note or
Issue memorandum thereof, be in writing, and subscribed by the party charged, or by his agent; evidence,
therefore, of the agreement cannot be received without the writing, or a secondary evidence of its
contents:
a) An agreement that by its terms is not to be performed within a year from the making thereof;
b) A special promise to answer for the debt, default, or miscarriage of another;
c) An agreement made in consideration of marriage, other than a mutual promise to marry;
d) An agreement for the sale of goods, chattels or things in action, at a price not less than five hundred
pesos, unless the buyer accept and receive part of such goods and chattels, or the evidences, or some of
them, or such things in action, or pay at the time some part of the purchase money; but when a sale is
made by auction and entry is made by the auctioneer in his sales book, at the time of the sale, of the
amount and kind of property sold, terms of sale, price, names of purchasers and person on whose account
the sale is made, it is a sufficient memorandum;
e) An agreement for the leasing of a longer period than one year, or for the sale of real property or of an
interest therein;
f) A representation to the credit of a third person. (Italics ours)
Under the above provision, concerning a guaranty agreement, which is a promise to answer for the debt
or default of another,17 the law clearly requires that it, or some note or memorandum thereof, be in writing.
Otherwise, it would be unenforceable unless ratified, 18 although under Article 135819 of the Civil Code,
a contract of guaranty does not have to appear in a public document.20 Contracts are generally obligatory
in whatever form they may have been entered into, provided all the essential requisites for their validity
are present, and the Statute of Frauds simply provides the method by which the contracts enumerated in
Article 1403(2) may be proved, but it does not declare them invalid just because they are not reduced to
writing. Thus, the form required under the Statute is for convenience or evidentiary purposes only.21
On the other hand, Article 2055 of the Civil Code also provides that a guaranty is not presumed, but must
be express, and cannot extend to more than what is stipulated therein. This is the obvious rationale why
a contract of guarantee is unenforceable unless made in writing or evidenced by some writing. For as
pointed out by Santia, Aglibot has not shown any proof, such as a contract, a secretary’s certificate or a
board resolution, nor even a note or memorandum thereof, whereby it was agreed that she would issue
her personal checks in behalf of the company to guarantee the payment of its debt to Santia. Certainly,
there is nothing shown in the Promissory Note signed by Aglibot herself remotely containing an
agreement between her and PLCC resembling her guaranteeing its debt to Santia. And neither is there a
showing that PLCC thereafter ratified her act of "guaranteeing" its indebtedness by issuing her own
checks to Santia.
Thus did the CA reject the RTC’s ruling that Aglibot was a mere guarantor of the indebtedness of PLCC,
and as such could not "be compelled to pay [Santia], unless the latter has exhausted all the property of
PLCC, and has resorted to all the legal remedies against PLCC x x x."22
Aglibot is an accommodation party and therefore liable to Santia
Section 185 of the Negotiable Instruments Law defines a check as "a bill of exchange drawn on a bank
payable on demand," while Section 126 of the said law defines a bill of exchange as "an unconditional
order in writing addressed by one person to another, signed by the person giving it, requiring the person
to whom it is addressed to pay on demand or at a fixed or determinable future time a sum certain in
money to order or to bearer."
The appellate court ruled that by issuing her own post-dated checks, Aglibot thereby bound herself
personally and solidarily to pay Santia, and dismissed her claim that she issued her said checks in her
official capacity as PLCC’s manager merely to guarantee the investment of Santia. It noted that she could
have issued PLCC’s checks, but instead she chose to issue her own checks, drawn against her personal
account with Metrobank. It concluded that Aglibot intended to personally assume the repayment of the
loan, pointing out that in her Counter-Affidavit, she even admitted that she was personally indebted to
Santia, and only raised payment as her defense, a clear admission of her liability for the said loan.
The appellate court refused to give credence to Aglibot’s claim that she had an understanding with Santia
that the checks would not be presented to the bank for payment, but were to be returned to her once she
had made cash payments for their face values on maturity. It noted that Aglibot failed to present any
proof that she had indeed paid cash on the above checks as she claimed. This is precisely why Santia
decided to deposit the checks in order to obtain payment of his loan.
The facts below present a clear situation where Aglibot, as the manager of PLCC, agreed to accommodate
its loan to Santia by issuing her own post-dated checks in payment thereof. She is what the Negotiable
Instruments Law calls an accommodation party.23 Concerning the liability of an accommodation party,
Section 29 of the said law provides:
Sec. 29. Liability of an accommodation party. — An accommodation party is one who has signed the
instrument as maker, drawer, acceptor, or indorser, without receiving value therefor, and for the purpose
of lending his name to some other person. Such a person is liable on the instrument to a holder for value
notwithstanding such holder at the time of taking the instrument knew him to be only an accommodation
party.
As elaborated in The Phil. Bank of Commerce v. Aruego:24
An accommodation party is one who has signed the instrument as maker, drawer, indorser, without
receiving value therefor and for the purpose of lending his name to some other person. Such person is
liable on the instrument to a holder for value, notwithstanding such holder, at the time of the taking of
the instrument knew him to be only an accommodation party. In lending his name to the accommodated
party, the accommodation party is in effect a surety for the latter. He lends his name to enable the
accommodated party to obtain credit or to raise money. He receives no part of the consideration for the
instrument but assumes liability to the other parties thereto because he wants to accommodate another. x
x x.25 (Citation omitted)
The relation between an accommodation party and the party accommodated is, in effect, one of principal
and surety — the accommodation party being the surety. It is a settled rule that a surety is bound equally
and absolutely with the principal and is deemed an original promisor and debtor from the beginning. The
liability is immediate and direct.26 It is not a valid defense that the accommodation party did not receive
any valuable consideration when he executed the instrument; nor is it correct to say that the holder for
value is not a holder in due course merely because at the time he acquired the instrument, he knew that
the indorser was only an accommodation party.27 1âwphi1
Moreover, it was held in Aruego that unlike in a contract of suretyship, the liability of the accommodation
party remains not only primary but also unconditional to a holder for value, such that even if the
accommodated party receives an extension of the period for payment without the consent of the
accommodation party, the latter is still liable for the whole obligation and such extension does not release
him because as far as a holder for value is concerned, he is a solidary co-debtor.
The mere fact, then, that Aglibot issued her own checks to Santia made her personally liable to the latter
on her checks without the need for Santia to first go after PLCC for the payment of its loan. 28 It would
have been otherwise had it been shown that Aglibot was a mere guarantor, except that since checks were
issued ostensibly in payment for the loan, the provisions of the Negotiable Instruments Law must take
primacy in application.
WHEREFORE, premises considered, the Petition for Review on Certiorari is DENIED and the
Decision dated March 18, 2008 of the Court of Appeals in CA-G.R. SP No. I 00021 is
hereby AFFIRMED.
SO ORDERED.
G.R. No. 113931 May 6, 1998
ZOBEL V CA
MARTINEZ, J.:
This petition for review on certiorari seeks the reversal of the decision 1 of the Court of Appeals dated
July 13, 1993 which affirmed the Order of the Regional Trial Court of Manila, Branch 51, denying
petitioner's Motion to Dismiss the complaint, as well as the Resolution 2 dated February 15, 1994 denying
the motion for reconsideration thereto.
The facts are as follows:
Respondent spouses Raul and Elea Claveria, doing business under the name "Agro Brokers," applied for
a loan with respondent Consolidated Bank and Trust Corporation (now SOLIDBANK) in the amount of
Two Million Eight Hundred Seventy Five Thousand Pesos (P2,875,000.00) to finance the purchase of
two (2) maritime barges and one tugboat 3 which would be used in their molasses business. The loan was
granted subject to the condition that respondent spouses execute a chattel mortgage over the three (3)
vessels to be acquired and that a continuing guarantee be executed by Ayala International Philippines,
Inc., now herein petitioner E. Zobel, Inc., in favor of SOLIDBANK. The respondent spouses agreed to
the arrangement. Consequently, a chattel mortgage and a Continuing Guaranty 4 were executed.
Respondent spouses defaulted in the payment of the entire obligation upon maturity. Hence, on January
31, 1991, SOLIDBANK filed a complaint for sum of money with a prayer for a writ of preliminary
attachment, against respondents spouses and petitioner. The case was docketed as Civil Case No. 91-
55909 in the Regional Trial Court of Manila.
Petitioner moved to dismiss the complaint on the ground that its liability as guarantor of the loan was
extinguished pursuant to Article 2080 of the Civil Code of the Philippines. It argued that it has lost its
right to be subrogated to the first chattel mortgage in view of SOLIDBANK's failure to register the chattel
mortgage with the appropriate government agency.
SOLIDBANK opposed the motion contending that Article 2080 is not applicable because petitioner is
not a guarantor but a surety.
On February 18, 1993, the trial court issued an Order, portions of which reads:
After a careful consideration of the matter on hand, the Court finds the ground of the motion to dismiss
without merit. The document referred to as "Continuing Guaranty" dated August 21, 1985 (Exh. 7) states
as follows:
For and in consideration of any existing indebtedness to you of Agro Brokers, a single proprietorship
owned by Mr. Raul Claveria for the payment of which the undersigned is now obligated to you as surety
and in order to induce you, in your discretion, at any other manner, to, or at the request or for the account
of the borrower, . . .
The provisions of the document are clear, plain and explicit.
Clearly therefore, defendant E. Zobel, Inc. signed as surety. Even though the title of the document is
"Continuing Guaranty", the Court's interpretation is not limited to the title alone but to the contents and
intention of the parties more specifically if the language is clear and positive. The obligation of the
defendant Zobel being that of a surety, Art. 2080 New Civil Code will not apply as it is only for those
acting as guarantor. In fact, in the letter of January 31, 1986 of the defendants (spouses and Zobel) to the
plaintiff it is requesting that the chattel mortgage on the vessels and tugboat be waived and/or rescinded
by the bank inasmuch as the said loan is covered by the Continuing Guaranty by Zobel in favor of the
plaintiff thus thwarting the claim of the defendant now that the chattel mortgage is an essential condition
of the guaranty. In its letter, it said that because of the Continuing Guaranty in favor of the plaintiff the
chattel mortgage is rendered unnecessary and redundant.
With regard to the claim that the failure of the plaintiff to register the chattel mortgage with the proper
government agency, i.e. with the Office of the Collector of Customs or with the Register of Deeds makes
the obligation a guaranty, the same merits a scant consideration and could not be taken by this Court as
the basis of the extinguishment of the obligation of the defendant corporation to the plaintiff as surety.
The chattel mortgage is an additional security and should not be considered as payment of the debt in
case of failure of payment. The same is true with the failure to register, extinction of the liability would
not lie.
WHEREFORE, the Motion to Dismiss is hereby denied and defendant E. Zobel, Inc., is ordered to file
its answer to the complaint within ten (10) days from receipt of a copy of this Order. 5
Petitioner moved for reconsideration but was denied on April 26, 1993. 6
Thereafter, petitioner questioned said Orders before the respondent Court of Appeals, through a petition
for certiorari, alleging that the trial court committed grave abuse of discretion in denying the motion to
dismiss.
On July 13, 1993, the Court of Appeals rendered the assailed decision the dispositive portion of which
reads:
WHEREFORE, finding that respondent Judge has not committed any grave abuse of discretion in issuing
the herein assailed orders, We hereby DISMISS the petition.
A motion for reconsideration filed by petitioner was denied for lack of merit on February 15, 1994.
Petitioner now comes to us via this petition arguing that the respondent Court of Appeals erred in its
finding: (1) that Article 2080 of the New Civil Code which provides: "The guarantors, even though they
be solidary, are released from their obligation whenever by some act of the creditor they cannot be
subrogated to the rights, mortgages, and preferences of the latter," is not applicable to petitioner; (2) that
petitioner's obligation to respondent SOLIDBANK under the continuing guaranty is that of a surety; and
(3) that the failure of respondent SOLIDBANK to register the chattel mortgage did not extinguish
petitioner's liability to respondent SOLIDBANK.
We shall first resolve the issue of whether or not petitioner under the "Continuing Guaranty" obligated
itself to SOLIDBANK as a guarantor or a surety.
A contract of 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. 7 A contract of guaranty, on
the other hand, is a collateral undertaking to pay the debt of another in case the latter does not pay the
debt. 8
Strictly speaking, guaranty and surety are nearly related, and many of the principles are common to both.
However, under our civil law, they may be distinguished thus: A surety is usually bound with his principal
by the same instrument, executed at the same time, and on the same consideration. He is an original
promissor and debtor from the beginning, and is held, ordinarily, to know every default of his principal.
Usually, he will not be discharged, either by the mere indulgence of the creditor to the principal, or by
want of notice of the default of the principal, no matter how much he may be injured thereby. On the
other hand, the contract of guaranty is the guarantor's own separate undertaking, in which the principal
does not join. It is usually entered into before or after that of the principal, and is often supported on a
separate consideration from that supporting the contract of the principal. The 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 the mere indulgence of the creditor to the principal, and is usually not liable unless notified
of the default of the principal. 9
Simply put, a surety is distinguished from a guaranty in that a guarantor is the insurer of the solvency of
the debtor and thus binds himself to pay if the principal is unable to pay while a surety is the insurer of
the debt, and he obligates himself to pay if the principal does not pay. 10
Based on the aforementioned definitions, it appears that the contract executed by petitioner in favor of
SOLIDBANK, albeit denominated as a "Continuing Guaranty," is a contract of surety. The terms of the
contract categorically obligates petitioner as "surety" to induce SOLIDBANK to extend credit to
respondent spouses. This can be seen in the following stipulations.
For and in consideration of any existing indebtedness to you of AGRO BROKERS, a single
proprietorship owned by MR. RAUL P. CLAVERIA, of legal age, married and with business address . .
. (hereinafter called the Borrower), for the payment of which the undersigned is now obligated to you as
surety and in order to induce you, in your discretion, at any 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 purchase or discount, or to make any loans or advances evidenced or
secured by any notes, bills receivable, drafts, acceptances, checks or other instruments or evidences of
indebtedness . . . upon which the Borrower is or may become liable as maker, endorser, acceptor, or
otherwise, the undersigned agrees to guarantee, and does hereby guarantee, the punctual payment, at
maturity or upon demand, to you of any and all such instruments, loans, advances, credits and/or other
obligations herein before referred to, and also any and all other indebtedness of every kind which is now
or may hereafter become due or owing to you by the Borrower, together with any and all expenses which
may be incurred by you in collecting all or any such instruments or other indebtedness or obligations
hereinbefore referred to, and or in enforcing any rights hereunder, and also to make or cause any and all
such payments to be made strictly in accordance with the terms and provisions of any agreement (g),
express or implied, which has (have) been or may hereafter be made or entered into by the Borrower in
reference thereto, regardless of any law, regulation or decree, now or hereafter in effect which might in
any manner affect any of the terms or provisions of any such agreements(s) or your right 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; . . . (Emphasis
Ours)
One need not look too deeply at the contract to determine the nature of the undertaking and the intention
of the parties. 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. In fact, SOLIDBANK need not resort to all other legal
remedies or exhaust respondent spouses' properties before it can hold petitioner liable for the obligation.
This can be gleaned from a reading of the stipulations in the contract, to wit:
. . . If default be made in the payment of any of the instruments, indebtedness or other obligation hereby . . . the undersigned (petitioner) who hereby agrees to be and remain bound upon this guaranty,
guaranteed by the undersigned, or if the Borrower, or the undersigned should die, dissolve, fail in irrespective of the existence, value or condition of any collateral, and notwithstanding any such change,
business, or become insolvent, . . ., or if any funds or other property of the Borrower, or of the undersigned exchange, settlement, compromise, surrender, release, sale, application, renewal or extension, and
which may be or come into your possession or control or that of any third party acting in your behalf as notwithstanding also that all obligations of the Borrower to you outstanding and unpaid at any time(s)
aforesaid should be attached of distrained, or should be or become subject to any mandatory order of may exceed the aggregate principal sum herein above prescribed.
court or other legal process, then, or any time after the happening of any such event any or all of the
instruments of indebtedness or other obligations hereby guaranteed shall, at your option become (for the
This is a Continuing Guaranty and shall remain in full force and effect until written notice shall have
purpose of this guaranty) due and payable by the undersigned forthwith without demand of notice, and
been received by you that it has been revoked by the undersigned, but any such notice shall not be released
full power and authority are hereby given you, in your discretion, to sell, assign and deliver all or any
the undersigned from any liability as to any instruments, loans, advances or other obligations hereby
part of the property upon which you may then have a lien hereunder at any broker's board, or at public or
guaranteed, which may be held by you, or in which you may have any interest, at the time of the receipt
private sale at your option, either for cash or for credit or for future delivery without assumption by you
of such notice. No act or omission of any kind on your part in the premises shall in any event affect or
of credit risk, and without either the demand, advertisement or notice of any kind, all of which are hereby
impair this guaranty, nor shall same be affected by any change which may arise by reason of the death
expressly waived. At any sale hereunder, you may, at your option, purchase the whole or any part of the
of the undersigned, of any partner (s) of the undersigned, or of the Borrower, or of the accession to any
property so sold, free from any right of redemption on the part of the undersigned, all such rights being
such partnership of any one or more new partners. (Emphasis supplied)
also hereby waived and released. In case of any sale and other disposition of any of the property aforesaid,
after deducting all costs and expenses of every kind for care, safekeeping, collection, sale, delivery or
otherwise, you may apply the residue of the proceeds of the sale and other disposition thereof, to the In fine, we find the petition to be without merit as no reversible error was committed by respondent Court
payment or reduction, either in whole or in part, of any one or more of the obligations or liabilities of Appeals in rendering the assailed decision.
hereunder of the undersigned whether or not except for disagreement such liabilities or obligations would
then be due, making proper allowance or interest on the obligations and liabilities not otherwise then due,
and returning the overplus, if any, to the undersigned; all without prejudice to your rights as against the WHEREFORE, the decision of the respondent Court of Appeals is hereby AFFIRMED. Costs against
undersigned with respect to any and all amounts which may be or remain unpaid on any of the obligations the petitioner.
or liabilities aforesaid at any time (s).
SO ORDERED.
xxx xxx xxx

Should the Borrower at this or at any future time furnish, or should be heretofore have furnished, another
surety or sureties to guarantee the payment of his obligations to you, the undersigned hereby expressly
waives all benefits to which the undersigned might be entitled under the provisions of Article 1837 of the
Civil Code (beneficio division), the liability of the undersigned under any and all circumstances being
joint and several; (Emphasis Ours) G.R. No. L-27249 July 31, 1970

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. 11 As aptly
observed by the trial court, the interpretation of a contract is not limited to the title alone but to the
contents and intention of the parties.
Having thus established that petitioner is a surety, Article 2080 of the Civil Code, relied upon by
petitioner, finds no application to the case at bar. In Bicol Savings and Loan Association
vs. Guinhawa, 12 we have ruled that Article 2080 of the New Civil Code does not apply where the liability
is as a surety, not as a guarantor.
But even assuming that Article 2080 is applicable, SOLIDBANK's failure to register the chattel mortgage
did not release petitioner from the obligation. In the Continuing Guaranty executed in favor of
SOLIDBANK, petitioner bound itself to the contract irrespective of the existence of any collateral. It
even released SOLIDBANK from any fault or negligence that may impair the contract. The pertinent
portions of the contract so provides:
MANILA SURETY FIDELITY CO V ALMEDA
REYES, J.B.L., J.:
This is an appeal from the ruling of the Court of First Instance of Manila, rendered in Civil Case No.
62518, that the insolvency of a debtor-principal does not release the surety from its obligation to the
creditor under the bond.
The lower court found that on 4 December 1961, Noemi Almeda, married to Generoso Esquillo, and
doing business under the name and style of Almeda Trading, entered into a contract with the National
Marketing Corporation (NAMARCO) for the purchase of goods on credit, payable in 30 days from the
dates of deliveries thereof. As required by' the NAMARCO, a bond for P5,000.00, undertaken by the
Manila Surety & Fidelity Co., Inc. (Exhibit "A"), was posted by the purchaser to secure the latter's faithful
compliance with the terms of the contract. The agreement was later supplemented on 17 October 1962
and a new bond for the same amount of P5,000.00, also undertaken by the Manila Surety & Fidelity Co.,
Inc. (Exhibit "C"),1 was given in favor of the NAMARCO The bonds uniformly contained the following
provisions:
2. Should the Principal's account on any purchase be not paid on time, then the Surety, shall, upon
demand, pay said account immediately to the NAMARCO;
3. Should the account of the Principal exceed the amount of FIVE THOUSAND (P5,000.00) PESOS,
Philippine Currency, such excess up to twenty (20%) per cent of said amount shall also be deemed
secured by this Bond;
4. The Surety expressly waives its right to demand payment and notice of non-payment and agreed that
the liability of the Surety shall be direct and immediate and not contingent upon the exhaustion by the
NAMARCO of whatever remedies it may have against the Principal and same shall be valid and
continuous until the obligation so guaranteed is paid in full; and
5. The Surety also waives its right to be notified of any extension of the terms of payment which the
NAMARCO may give to the Principal, it being understood that were extension is given to satisfy the
account, that such extension shall not extinguish the guaranty unless the same is made against the express
wish of the Surety.
The records show that on 8 June 1965, the marketing firm demanded from the purchaser Almeda Trading
the settlement of its back accounts which, as of 15 May 1965, allegedly amounted to P16,335.09.
Furnished with copy of the NAMARCO's demand- letter, the surety company thereafter also wrote to the
said purchaser urging it to liquidate its unsettled accounts with the NAMARCO (Exhibit "E-1"). It
appears, however, that previous to this, or on 26 March 1965, Generoso Esquillo instituted voluntary
insolvency proceeding in the Court of First Instance of Laguna (Sp. Proc. No. SP-181), and by order of
said court of 6 April 1965, he was declared insolvent, with listed credits amounting to P111,873.00 2 and
properties valued at P39,0,00.00. In the meeting of the named creditors of the insolvent held on 14 May
1965 for the purpose of electing the assignee of his properties, the NAMARCO was represented and its
contingent claim duly registered.3
On 10 September 1965, the Manila Surety & Fidelity Co., Inc., commenced in the Court of First Instance
of Manila Civil Case No. 62518 against the spouses Noemi Almeda and Generoso Esquillo, and the
NAMARCO, to secure its release from liability under the bonds executed in favor of NAMARCO. The
action was based on the allegation that the defendant spouses had become insolvent and that defendant
NAMARCO had rescinded its agreement with them and had already demanded payment of the
outstanding accounts of the couple.
Defendant NAMARCO filed its answer denying the averments of the complaint and setting up, as
affirmative defenses, lack of cause of action and the court's want of jurisdiction. On 16 December 1966,
the court rendered judgment sustaining NAMARCO's contention that the insolvency of the debtor-
principal did not discharge the surety's liability under the bond. Thus, the complaint was dismissed and
plaintiff surety company was ordered to pay off the indebtedness of the defendant spouses to the
NAMARCO to the extent of its (the Surety's) undertaking, plus attorneys' fees and costs. From this
decision, plaintiff surety interposed the present appeal.
Plaintiff-appellant's action to secure its discharge from the suretyship was based on Article 2071 of the
Civil Code,4Which provides the surety with certain protective remedies that may be resorted to before he
has paid, but after he has become liable to do so.5
Upon the other hand, the lower court's ruling, now on appeal, is anchored on an equally explicit provision
of the Insolvency law ( Act 1956, as amended), to writ:.
SEC. 68. ...
No discharge (of the insolvent from his obligations) shall release, discharge or affect any person liable
for the same debt, for or with the debtor, either as partner, joint contractor, indorser, surety, or otherwise.
The issue posed by this appeal, therefore, is whether a surety can avail itself of the relief, specifically
afforded in Article 2071 of the Civil Code and be released from its liability under the bonds,
notwithstanding a prior declaration of the insolvency of the debtor-principal in an insolvency proceeding.
We see no reversible error in the decision appealed.
There is no question that under the bonds posted in favor of the NAMARCO in this case, the surety
company assumed to make immediate payment to said firm of any due and unsettled accounts of the
debtor-principal, even without demand and notice of the debtor's non-payment, the surety, in fact,
agreeing that its liability to the creditor shall be direct, without benefit of exhaustion of the debtor's
properties, and to remain valid and continuous until the guaranteed obligation is fully satisfied. In short,
appellant secured to the creditor not just the payment by the debtor-principal of his accounts, but the
payment itself of such accounts. Clearly, a contract of suretyship was thus created, the appellant
becoming the insurer, not merely of the debtor's solvency or ability to pay, but of the debt itself.6 Under
the Civil Code, with the debtor's insolvency having been judicially recognized, herein appellant's resort
to the courts to be released from the undertaking thus assumed would have been
appropriate.7 Nevertheless, the guarantor's action for release can only be exercised against the principal
debtor and not against the creditor, as is apparent from the precise terms of the legal provision. "The
guarantor" (says Article 2071 of the Civil Code of the Philippines) "even before having paid,
may proceed against the principal debtor ------------------ to obtain a release from the guaranty -----------
----." The juridical rule grants no cause of action against the creditor for a release of the guaranty, before
payment of the credit, for a plain reason: the creditor is not compellable to release the guaranty (which is
a property right) against his will. For, the release of the guarantor imports an extinction of his obligation
to the creditor; it connotes, therefore, either a remission or a novation by subrogation, and either operation
requires the creditor's assent for its validity (See Article 1270 and Article 1301). Especially should this
be the case where the principal debtor has become insolvent, for the purpose of a guaranty is exactly to
protect the creditor against such a contingency.
In what manner, then, can the article operate? Where the debtor can not make full payment, the release
of the guarantor can only be obtained with the assent of the creditor, by persuading the latter to accept an
equally safe security, either another suitable guaranty or else a pledge or mortgage. Absent the creditor's
consent, the principal debtor may only proceed to protect the demanding guarantor by a counterbond or
counter guaranty, as is authorized by the codal precept (Article 2071 in fine). To this effect is the opinion
of the Spanish commentator, Scaevola, in his explanations to Article 1843 of the Spanish Civil Code
(from which Article 2071 of our Code is derived). Says Scaevola:
Como se prestaran tales garantias al fiador? Lo contesta el aludido parrafo final del Articulo 1843. Se
hara por uno de estos dos modos: ora consiguiendo el deudor que el acreedor abandone libremente aquella
fianza, lo cual ocurrira dandole el deudor otra garantia analoga, ya por razon de la persona fiadora, ya
ofreciendole el deudor al mismo fiador, pero continuando este como tal, una garantia que lo ponga a
cubierto de los procedimientos del acreedor y del peligro de insolvencia del deudor. (Scaevola Codigo
Civil, 2d Ed., Vol. 28, pp. 651652).
The appellant's troubles are compounded by the fact that when the complaint for release from suretyship
was filed in the Manila court on 10 September 1965, the insolvency case in the Laguna court was already
pending and the debtor-principal Generoso Esquillo had been judicially declared an insolvent. By the
time the appellant sued, therefore, the insolvency court had already acquired jurisdiction over all the
debtor's properties and of all claims by and against him, to the exclusion of any other court. 8 In the
circumstances, the lawful recourse of the guarantor of an obligation of the insolvent would be to file a
contingent claim in the insolvency proceeding, if his rights as such guarantor or surety are not to be barred
by the subsequent discharge of the insolvent debtor from all his liabilities. 9
In the case at bar, it is true that the guaranteed claim of NAMARCO was registered or filed in the
insolvency proceeding. But appellant can not utilize this fact in support of its petition for release from
the assumed undertaking. For one thing, it is almost a certainty that creditor NAMARCO can not secure
full satisfaction of its credit out of the debtor's properties brought into the insolvency proceeding.
Considering that under the contract of suretyship, which remains valid and subsisting, the entire
obligation may even be demanded directly against the surety itself, the creditor's act in resorting first to
the properties of the insolvent debtor is to the surety's advantage At least, the latter would be answerable
only for whatever amount may remain not covered or unsatisfied by the disposition of the insolvent's
properties, 1 0 with the right to go against debtor-principal after it has made the necessary payment to the
creditor. For another, the fact that the debtor- principal may be discharged from all his outstanding
obligations in the insolvency case would not benefit the surety, as to relieve it of its liability under the
surety agreement. That is so provided in Section 68 of the Insolvency Act which shall be controlling in
the case.
Finally, even supposing that the present action is not blocked by the insolvency proceedings because it
does not aim at reducing the insolvent's assets, but only at having the suretyship substituted by other
equivalent security, still it is difficult to see how the principal debtor, with his business, property and
assets impounded by the insolvency court, can obtain other securities with which to replace the guaranty
given by the plaintiff-appellant. The action at bar would seem, under the circumstances, destined to end
in futility.
WHEREFORE, with the modification that appellant's liability shall be limited to the payment of whatever
amount may remain due to the appellee NAMARCO and is unsatisfied in the insolvency proceeding, but
not to exceed the amount of the surety's undertaking under the bonds, the decision appealed from is
affirmed in all other respects. Costs against appellant surety company.
Concepcion, C.J., Dizon Makalintal, Zaldivar, Castro, Fernando, Teehankee, Barredo and Villamor, JJ.,
concur.
G.R. No. 126490 March 31, 1998
PALMARES V CA
REGALADO, J.:
Where a party signs a promissory note as a co-maker and binds herself to be jointly and severally liable
with the principal debtor in case the latter defaults in the payment of the loan, is such undertaking of the
former deemed to be that of a surety as an insurer of the debt, or of a guarantor who warrants the solvency
of the debtor?
Pursuant to a promissory note dated March 13, 1990, private respondent M.B. Lending Corporation
extended a loan to the spouses Osmeña and Merlyn Azarraga, together with petitioner Estrella Palmares,
in the amount of P30,000.00 payable on or before May 12, 1990, with compounded interest at the rate of
6% per annum to be computed every 30 days from the date thereof.1 On four occasions after the execution
of the promissory note and even after the loan matured, petitioner and the Azarraga spouses were able to
pay a total of P16,300.00, thereby leaving a balance of P13,700.00. No payments were made after the
last payment on September 26, 1991.2
Consequently, on the basis of petitioner's solidary liability under the promissory note, respondent
corporation filed a complaint3 against petitioner Palmares as the lone party-defendant, to the
exclusion of the principal debtors, allegedly by reason of the insolvency of the latter.
In her Amended Answer with Counterclaim,4 petitioner alleged that sometime in August 1990,
immediately after the loan matured, she offered to settle the obligation with respondent
corporation but the latter informed her that they would try to collect from the spouses Azarraga
and that she need not worry about it; that there has already been a partial payment in the amount
of P17,010.00; that the interest of 6% per month compounded at the same rate per month, as well
as the penalty charges of 3% per month, are usurious and unconscionable; and that while she
agrees to be liable on the note but only upon default of the principal debtor, respondent corporation
acted in bad faith in suing her alone without including the Azarragas when they were the only ones
who benefited from the proceeds of the loan.
During the pre-trial conference, the parties submitted the following issues for the resolution of the
trial court: (1) what the rate of interest, penalty and damages should be; (2) whether the liability
of the defendant (herein petitioner) is primary or subsidiary; and (3) whether the defendant
Estrella Palmares is only a guarantor with a subsidiary liability and not a co-maker with primary
liability.5
Thereafter, the parties agreed to submit the case for decision based on the pleadings filed and the
memoranda to be submitted by them. On November 26, 1992, the Regional Trial Court of Iloilo
City, Branch 23, rendered judgment dismissing the complaint without prejudice to the filing of a
separate action for a sum of money against the spouses Osmeña and Merlyn Azarraga who are
primarily liable on the instrument.6 This was based on the findings of the court a quo that the filing
of the complaint against herein petitioner Estrella Palmares, to the exclusion of the Azarraga
spouses, amounted to a discharge of a prior party; that the offer made by petitioner to pay the
obligation is considered a valid tender of payment sufficient to discharge a person's secondary
liability on the instrument; as co-maker, is only secondarily liable on the instrument; and that the
promissory note is a contract of adhesion.
Respondent Court of Appeals, however, reversed the decision of the trial court, and rendered
judgment declaring herein petitioner Palmares liable to pay respondent corporation:
1. The sum of P13,700.00 representing the outstanding balance still due and owing with interest at
six percent (6%) per month computed from the date the loan was contracted until fully paid;
2. The sum equivalent to the stipulated penalty of three percent (3%) per month, of the outstanding
balance;
3. Attorney's fees at 25% of the total amount due per stipulations;
7
4. Plus costs of suit.
Contrary to the findings of the trial court, respondent appellate court declared that petitioner
Palmares is a surety since she bound herself to be jointly and severally or solidarily liable with the
principal debtors, the Azarraga spouses, when she signed as a co-maker. As such, petitioner is
primarily liable on the note and hence may be sued by the creditor corporation for the entire
obligation. It also adverted to the fact that petitioner admitted her liability in her Answer although
she claims that the Azarraga spouses should have been impleaded. Respondent court ordered the
imposition of the stipulated 6% interest and 3% penalty charges on the ground that the Usury Law
is no longer enforceable pursuant to Central Bank Circular No. 905. Finally, it rationalized that
even if the promissory note were to be considered as a contract of adhesion, the same is not entirely
prohibited because the one who adheres to the contract is free to reject it entirely; if he adheres, he
gives his consent.
Hence this petition for review on certiorari wherein it is asserted that:
A. The Court of Appeals erred in ruling that Palmares acted as surety and is therefore solidarily
liable to pay the promissory note.
1. The terms of the promissory note are vague. Its conflicting provisions do not establish Palmares'
solidary liability.
2. The promissory note contains provisions which establish the co-maker's liability as that of a
guarantor.
3. There is no sufficient basis for concluding that Palmares' liability is solidary.
4. The promissory note is a contract of adhesion and should be construed against M. B. Lending
Corporation.
5. Palmares cannot be compelled to pay the loan at this point.
B. Assuming that Palmares' liability is solidary, the Court of Appeals erred in strictly imposing the
interests and penalty charges on the outstanding balance of the promissory note.
The foregoing contentions of petitioner are denied and contradicted in their material points by
respondent corporation. They are further refuted by accepted doctrines in the American
jurisdiction after which we patterned our statutory law on surety and guaranty. This case then
affords us the opportunity to make an extended exposition on the ramifications of these two
specialized contracts, for such guidance as may be taken therefrom in similar local controversies
in the future.
The basis of petitioner Palmares' liability under the promissory note is expressed in this wise:
ATTENTION TO CO-MAKERS: PLEASE READ WELL
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.8
Petitioner contends that the provisions of the second and third paragraph are conflicting in that
while the second paragraph seems to define her liability as that of a surety which is joint and
solidary with the principal maker, on the other hand, under the third paragraph her liability is
actually that of a mere guarantor because she bound herself to fulfill the obligation only in case the
principal debtor should fail to do so, which is the essence of a contract of guaranty. More simply
stated, although the second paragraph says that she is liable as a surety, the third paragraph defines
the nature of her liability as that of a guarantor. According to petitioner, these are two conflicting
provisions in the promissory note and the rule is that clauses in the contract should be interpreted
in relation to one another and not by parts. In other words, the second paragraph should not be
taken in isolation, but should be read in relation to the third paragraph.
In an attempt to reconcile the supposed conflict between the two provisions, petitioner avers that
she could be held liable only as a guarantor for several reasons. First, the words "jointly and
severally or solidarily liable" used in the second paragraph are technical and legal terms which are
not fully appreciated by an ordinary layman like herein petitioner, a 65-year old housewife who is
likely to enter into such transactions without fully realizing the nature and extent of her liability.
On the contrary, the wordings used in the third paragraph are easier to comprehend. Second, the
law looks upon the contract of suretyship with a jealous eye and the rule is that the obligation of
the surety cannot be extended by implication beyond specified limits, taking into consideration the
peculiar nature of a surety agreement which holds the surety liable despite the absence of any direct
consideration received from either the principal obligor or the creditor. Third, the promissory note
is a contract of adhesion since it was prepared by respondent M.B. Lending Corporation. The note
was brought to petitioner partially filled up, the contents thereof were never explained to her, and
her only participation was to sign thereon. Thus, any apparent ambiguity in the contract should be
strictly construed against private respondent pursuant to Art. 1377 of the Civil Code.9
Petitioner accordingly concludes that her liability should be deemed restricted by the clause in the
third paragraph of the promissory note to be that of a guarantor.
Moreover, petitioner submits that she cannot as yet be compelled to pay the loan because the
principal debtors cannot be considered in default in the absence of a judicial or extrajudicial
demand. It is true that the complaint alleges the fact of demand, but the purported demand letters
were never attached to the pleadings filed by private respondent before the trial court. And, while
petitioner may have admitted in her Amended Answer that she received a demand letter from
respondent corporation sometime in 1990, the same did not effectively put her or the principal
debtors in default for the simple reason that the latter subsequently made a partial payment on the
loan in September, 1991, a fact which was never controverted by herein private respondent.
Finally, it is argued that the Court of Appeals gravely erred in awarding the amount of
P2,745,483.39 in favor of private respondent when, in truth and in fact, the outstanding balance of
the loan is only P13,700.00. Where the interest charged on the loan is exorbitant, iniquitous or
unconscionable, and the obligation has been partially complied with, the court may equitably
reduce the penalty10 on grounds of substantial justice. More importantly, respondent corporation
never refuted petitioner's allegation that immediately after the loan matured, she informed said
respondent of her desire to settle the obligation. The court should, therefore, mitigate the damages
to be paid since petitioner has shown a sincere desire for a compromise. 11
After a judicious evaluation of the arguments of the parties, we are constrained to dismiss the
petition for lack of merit, but to except therefrom the issue anent the propriety of the monetary
award adjudged to herein respondent corporation.
At the outset, let it here be stressed that even assuming arguendo that the promissory note executed
between the parties is a contract of adhesion, it has been the consistent holding of the Court that
contracts of adhesion are not invalid per se and that on numerous occasions the binding effects
thereof have been upheld. The peculiar nature of such contracts necessitate a close scrutiny of the
factual milieu to which the provisions are intended to apply. Hence, just as consistently and
unhesitatingly, but without categorically invalidating such contracts, the Court has construed
obscurities and ambiguities in the restrictive provisions of contracts of adhesion strictly albeit not
unreasonably against the drafter thereof when justified in light of the operative facts and
surrounding circumstances.12 The factual scenario obtaining in the case before us warrants a
liberal application of the rule in favor of respondent corporation.
The Civil Code pertinently provides:
Art. 2047. By guaranty, a person called the guarantor binds himself to the creditor to fulfill the
obligation of the principal debtor in case the latter should fail to do so.
If a person binds himself solidarily with the principal debtor, the provisions of Section 4, Chapter
3, Title I of this Book shall be observed. In such case the contract is called a suretyship.
It is a cardinal rule in the interpretation of contracts that if the terms of a contract are clear and
leave no doubt upon the intention of the contracting parties, the literal meaning of its stipulation
shall control.13 In the case at bar, petitioner expressly bound herself to be jointly and severally or
solidarily liable with the principal maker of the note. The terms of the contract are clear, explicit
and unequivocal that petitioner's liability is that of a surety.
Her pretension that the terms "jointly and severally or solidarily liable" contained in the second
paragraph of her contract are technical and legal terms which could not be easily understood by
an ordinary layman like her is diametrically opposed to her manifestation in the contract that she
"fully understood the contents" of the promissory note and that she is "fully aware" of her solidary
liability with the principal maker. Petitioner admits that she voluntarily affixed her signature
thereto; ergo, she cannot now be heard to claim otherwise. Any reference to the existence of fraud
is unavailing. Fraud must be established by clear and convincing evidence, mere preponderance of
evidence not even being adequate. Petitioner's attempt to prove fraud must, therefore, fail as it was
evidenced only by her own uncorroborated and, expectedly, self-serving allegations.14
Having entered into the contract with full knowledge of its terms and conditions, petitioner is
estopped to assert that she did so under a misapprehension or in ignorance of their legal effect, or
as to the legal effect of the undertaking.15 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.
And the mistake of a surety as to the legal effect of her obligation is ordinarily no reason for
relieving her of liability.16
Petitioner would like to make capital of the fact that although she obligated herself to be jointly
and severally liable with the principal maker, her liability is deemed restricted by the provisions of
the third paragraph of her contract wherein she agreed "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," which makes her contract one of guaranty and not suretyship.
The purported discordance is more apparent than real.
A surety is an insurer of the debt, whereas a guarantor is an insurer of the solvency of the
debtor.17 A suretyship is an undertaking that the debt shall be paid; a guaranty, an undertaking
that the debtor shall pay.18 Stated differently, a surety promises to pay the principal's debt if the
principal will not pay, while a guarantor agrees that the creditor, after proceeding against the
principal, may proceed against the guarantor if the principal is unable to pay. 19 A surety binds
himself to perform if the principal does not, without regard to his ability to do so. A guarantor, on
the other hand, does not contract that the principal will pay, but simply that he is able to do so.20 In
other words, a surety undertakes directly for the payment and is so responsible at once if the
principal debtor makes default, while a guarantor contracts to pay if, by the use of due diligence,
the debt cannot be made out of the principal debtor.21
Quintessentially, 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 aforequoted portion of the promissory note do not contain any other condition
for the enforcement of respondent corporation's right against petitioner. It has not been shown,
either in the contract or the pleadings, that respondent corporation agreed to proceed against
herein petitioner only if and when the defaulting principal has become insolvent. A contract of
suretyship, to repeat, 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.22
In a desperate effort to exonerate herself from liability, petitioner erroneously invokes the rule
on strictissimi juris, which holds that when the meaning of a contract of indemnity or guaranty has
once been judicially determined under the rule of reasonable construction applicable to all written
contracts, then the liability of the surety, under his contract, as thus interpreted and construed, is
not to be extended beyond its strict meaning.23 The rule, however, will apply only after it has been
definitely ascertained that the contract is one of suretyship and not a contract of guaranty. It cannot
be used as an aid in determining whether a party's undertaking is that of a surety or a guarantor.
Prescinding from these jurisprudential authorities, there can be no doubt that the stipulation
contained in the third paragraph of the controverted suretyship contract merely elucidated on and
made more specific the obligation of petitioner as generally defined in the second paragraph
thereof. Resultantly, the theory advanced by petitioner, that she is merely a guarantor because her
liability attaches only upon default of the principal debtor, must necessarily fail for being
incongruent with the judicial pronouncements adverted to above.
It is a well-entrenched rule that in order to judge the intention of the contracting parties, their
contemporaneous and subsequent acts shall also be principally considered. 24 Several attendant
factors in that genre lend support to our finding that petitioner is a surety. For one, when petitioner
was informed about the failure of the principal debtor to pay the loan, she immediately offered to
settle the account with respondent corporation. Obviously, in her mind, she knew that she was
directly and primarily liable upon default of her principal. For another, and this is most revealing,
petitioner presented the receipts of the payments already made, from the time of initial payment
up to the last, which were all issued in her name and of the Azarraga spouses.25 This can only be
construed to mean that the payments made by the principal debtors were considered by respondent
corporation as creditable directly upon the account and inuring to the benefit of petitioner. The
concomitant and simultaneous compliance of petitioner's obligation with that of her principals only
goes to show that, from the very start, petitioner considered herself equally bound by the contract
of the principal makers.
In this regard, we need only to reiterate the rule that a surety is bound equally and absolutely with
the principal,26 and as such is deemed an original promisor and debtor from the beginning. 27 This
is because in suretyship there is but one contract, and the surety is bound by the same agreement
which binds the principal.28 In essence, the contract of a surety starts with the agreement, 29 which
is precisely the situation obtaining in this case before the Court.
It will further be observed that petitioner's undertaking as co-maker immediately follows the terms
and conditions stipulated between respondent corporation, as creditor, and the principal obligors.
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.30 Thus, it has been held that 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. 31 A surety usually
enters into the same obligation as that of his principal, and the signatures of both usually appear
upon the same instrument, and the same consideration usually supports the obligation for both the
principal and the surety.32
There is no merit in petitioner's contention that the complaint was prematurely filed because the
principal debtors cannot as yet be considered in default, there having been no judicial or
extrajudicial demand made by respondent corporation. Petitioner has agreed that respondent
corporation may demand payment of the loan from her in case the principal maker defaults,
subject to the same conditions expressed in the promissory note. Significantly, 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. 33 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. 34 On this point, it may be worth
mentioning that 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. He cannot complain that the creditor has not notified
him in the absence of a special agreement to that effect in the contract of suretyship. 35
The alleged failure of respondent corporation to prove the fact of demand on the principal debtors,
by not attaching copies thereof to its pleadings, is likewise immaterial. In the absence of a statutory
or contractual requirement, it is not necessary that payment or performance of his obligation be
first demanded of the principal, especially where demand would have been useless; nor is it a
requisite, before proceeding against the sureties, that the principal be called on to account. 36 The
underlying principle therefor is that a suretyship is a direct contract to pay the debt of another. A
surety is liable as much as his principal is liable, and absolutely liable as soon as default is made,
without any demand upon the principal whatsoever or any notice of default. 37 As an original
promisor and debtor from the beginning, he is held ordinarily to know every default of his
principal.38
Petitioner questions the propriety of the filing of a complaint solely against her to the exclusion of
the principal debtors who allegedly were the only ones who benefited from the proceeds of the loan.
What petitioner is trying to imply is that the creditor, herein respondent corporation, should have
proceeded first against the principal before suing on her obligation as surety. We disagree.
A creditor's right to proceed against the surety exists independently of his right to proceed against
the principal.39 Under Article 1216 of the Civil Code, the creditor may proceed against any one of
the solidary debtors or some or all of them simultaneously. The rule, therefore, is that if the
obligation is joint and several, the creditor has the right to proceed even against the surety
alone.40 Since, generally, it is not necessary for the creditor to proceed against a principal in order
to hold the surety liable, where, by the terms of the contract, the obligation of the surety is the same
that of the principal, then soon as the principal is in default, the surety is likewise in default, and
may be sued immediately and before any proceedings are had against the principal.41 Perforce, 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. 42
We agree with respondent corporation that its mere failure to immediately sue petitioner on her
obligation does not release her from liability. Where a creditor refrains from proceeding against
the principal, the surety is not exonerated. In other words, 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. Such gratuitous indulgence of the principal does not
discharge the surety whether given at the principal's request or without it, and whether it is yielded
by the creditor through sympathy or from an inclination to favor the principal, or is only the result
of passiveness. The neglect of the creditor to sue the principal at the time the debt falls due does
not discharge the surety, even if such delay continues until the principal becomes insolvent.43 And,
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, 44 or that he need not trouble himself.45 The
consequences of the delay, such as the subsequent insolvency of the principal, 46 or the fact that the
remedies against the principal may be lost by lapse of time, are immaterial.47
The raison d'être for the rule is that there is nothing to prevent the creditor from proceeding against
the principal at any time.48 At any rate, if the surety is dissatisfied with the degree of activity
displayed by the creditor in the pursuit of his principal, he may pay the debt himself and become
subrogated to all the rights and remedies of the creditor. 49
It may not be amiss to add that 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.50 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, and that 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, or at least hinders him in, enforcing the principal
contract within the period during which he could otherwise have enforced it, and which precludes
the surety from paying the debt.51
None of these elements are present in the instant case. Verily, the mere fact that respondent
corporation gave the principal debtors an extended period of time within which to comply with
their obligation did not effectively absolve here in petitioner from the consequences of her
undertaking. Besides, the burden is on the surety, herein petitioner, to show that she has been
discharged by some act of the creditor,52 herein respondent corporation, failing in which we cannot
grant the relief prayed for.
As a final issue, petitioner claims that assuming that her liability is solidary, the interests and
penalty charges on the outstanding balance of the loan cannot be imposed for being illegal and
unconscionable. Petitioner additionally theorizes that respondent corporation intentionally
delayed the collection of the loan in order that the interests and penalty charges would accumulate.
The statement, likewise traversed by said respondent, is misleading.
In an affidavit53 executed by petitioner, which was attached to her petition, she stated, among
others, that:
8. During the latter part of 1990, I was surprised to learn that Merlyn Azarraga's loan has been
released and that she has not paid the same upon its maturity. I received a telephone call from Mr.
Augusto Banusing of MB Lending informing me of this fact and of my liability arising from the
promissory note which I signed.
9. I requested Mr. Banusing to try to collect first from Merlyn and Osmeña Azarraga. At the same
time, I offered to pay MB Lending the outstanding balance of the principal obligation should he
fail to collect from Merlyn and Osmeña Azarraga. Mr. Banusing advised me not to worry because
he will try to collect first from Merlyn and Osmeña Azarraga.
10. A year thereafter, I received a telephone call from the secretary of Mr. Banusing who reminded
that the loan of Merlyn and Osmeña Azarraga, together with interest and penalties thereon, has
not been paid. Since I had no available funds at that time, I offered to pay MB Lending by
delivering to them a parcel of land which I own. Mr. Banusing's secretary, however, refused my
offer for the reason that they are not interested in real estate.
11. In March 1992, I received a copy of the summons and of the complaint filed against me by MB
Lending before the RTC-Iloilo. After learning that a complaint was filed against me, I instructed
Sheila Gatia to go to MB Lending and reiterate my first offer to pay the outstanding balance of the
principal obligation of Merlyn Azarraga in the amount of P30,000.00.
12. Ms. Gatia talked to the secretary of Mr. Banusing who referred her to Atty. Venus, counsel of
MB Lending.
13. Atty. Venus informed Ms. Gatia that he will consult Mr. Banusing if my offer to pay the
outstanding balance of the principal obligation loan (sic) of Merlyn and Osmeña Azarraga is
acceptable. Later, Atty. Venus informed Ms. Gatia that my offer is not acceptable to Mr. Banusing.
The purported offer to pay made by petitioner can not be deemed sufficient and substantial in
order to effectively discharge her from liability. There are a number of circumstances which
conjointly inveigh against her aforesaid theory.
1. Respondent corporation cannot be faulted for not immediately demanding payment from
petitioner. It was petitioner who initially requested that the creditor try to collect from her
principal first, and she offered to pay only in case the creditor fails to collect. The delay, if any, was
occasioned by the fact that respondent corporation merely acquiesced to the request of petitioner.
At any rate, there was here no actual offer of payment to speak of but only a commitment to pay if
the principal does not pay.
2. Petitioner made a second attempt to settle the obligation by offering a parcel of land which she
owned. Respondent corporation was acting well within its rights when it refused to accept the offer.
The debtor of a thing cannot compel the creditor to receive a different one, although the latter may
be of the same value, or more valuable than that which is due. 54 The obligee is entitled to demand
fulfillment of the obligation or performance as stipulated. A change of the object of the obligation
would constitute novation requiring the express consent of the parties. 55
3. After the complaint was filed against her, petitioner reiterated her offer to pay the outstanding
balance of the obligation in the amount of P30,000.00 but the same was likewise rejected. Again,
respondent corporation cannot be blamed for refusing the amount being offered because it fell way
below the amount it had computed, based on the stipulated interests and penalty charges, as owing
and due from herein petitioner. A debt shall not be understood to have been paid unless the thing
or service in which the obligation consists has been completely delivered or rendered, as the case
may be.56 In other words, the prestation must be fulfilled completely. A person entering into a
contract has a right to insist on its performance in all particulars. 57
Petitioner cannot compel respondent corporation to accept the amount she is willing to pay because
the moment the latter accepts the performance, knowing its incompleteness or irregularity, and
without expressing any protest or objection, then the obligation shall be deemed fully complied
with.58 Precisely, this is what respondent corporation wanted to avoid when it continually refused
to settle with petitioner at less than what was actually due under their contract.
This notwithstanding, however, we find and so hold that the penalty charge of 3% per month and
attorney's fees equivalent to 25% of the total amount due are highly inequitable and unreasonable.
It must be remembered that from the principal loan of P30,000.00, the amount of P16,300.00 had
already been paid even before the filing of the present case. Article 1229 of the Civil Code provides
that the court shall equitably reduce the penalty when the principal obligation has been partly or
irregularly complied with by the debtor. And, even if there has been no performance, the penalty
may also be reduced if it is iniquitous or leonine.
In a case previously decided by this Court which likewise involved private respondent M.B.
Lending Corporation, and which is substantially on all fours with the one at bar, we decided to
eliminate altogether the penalty interest for being excessive and unwarranted under the following
rationalization:
Upon the matter of penalty interest, we agree with the Court of Appeals that the economic impact
of the penalty interest of three percent (3 %) per month on total amount due but unpaid should be
equitably reduced. The purpose for which the penalty interest is intended — that is, to punish the
obligor — will have been sufficiently served by the effects of compounded interest. Under the
exceptional circumstances in the case at bar, e.g., the original amount loaned was only P15,000.00;
partial payment of P8,600.00 was made on due date; and the heavy (albeit still lawful) regular
compensatory interest, the penalty interest stipulated in the parties' promissory note is iniquitous
and unconscionable and may be equitably reduced further by eliminating such penalty interest
altogether.59
Accordingly, the penalty interest of 3% per month being imposed on petitioner should similarly be
eliminated.
Finally, with respect to the award of attorney's fees, this Court has previously ruled that even with
an agreement thereon between the parties, the court may nevertheless reduce such attorney's fees
fixed in the contract when the amount thereof appears to be unconscionable or unreasonable. 60 To
that end, it is not even necessary to show, as in other contracts, that it is contrary to morals or
public policy.61 The grant of attorney's fees equivalent to 25% of the total amount due is, in our
opinion, unreasonable and immoderate, considering the minimal unpaid amount involved and the
extent of the work involved in this simple action for collection of a sum of money. We, therefore,
hold that the amount of P10,000.00 as and for attorney's fee would be sufficient in this case. 62
WHEREFORE, the judgment appealed from is hereby AFFIRMED, subject to the
MODIFICATION that the penalty interest of 3% per month is hereby deleted and the award of
attorney's fees is reduced to P10,000.00.
SO ORDERED.
G.R. No. 154183 August 7, 2003
SPS. TOH V SOLID BANK
BELLOSILLO, J.:
RESPONDENT SOLID BANK CORPORATION AGREED TO EXTEND an "omnibus line" credit
facility worth P10 million in favor of respondent First Business Paper Corporation (FBPC). The terms
and conditions of the agreement as well as the checklist of documents necessary to open the credit line
were stipulated in a "letter-advise" of the Bank dated 16 May 1993 addressed to FBPC and to its
President, respondent Kenneth Ng Li.1 The "letter-advise"2was effective upon "compliance with the
documentary requirements."3
The documents essential for the credit facility and submitted for this purpose were the (a) Board
Resolution or excerpts of the Board of Directors Meeting, duly ratified by a Notary Public, authorizing
the loan and security arrangement as well as designating the officers to negotiate and sign for FBPC
specifically stating authority to mortgage, pledge and/or assign the properties of the corporation; (b)
agreement to purchase Domestic Bills; and, (c) Continuing Guaranty for any and all amounts signed by
petitioner-spouses Luis Toh and Vicky Tan Toh, and respondent-spouses Kenneth and Ma. Victoria Ng
Li.4 The spouses Luis Toh and Vicky Tan Toh were then Chairman of the Board and Vice-President,
respectively, of FBPC, while respondent-spouses Kenneth Ng Li and Ma. Victoria Ng Li were President
and General Manager, respectively, of the same corporation.5
It is not disputed that the credit facility as well as its terms and conditions was not cancelled or terminated,
and that there was no prior notice of such fact as required in the "letter-advise," if any was done.
On 10 May 1993, more than thirty (30) days from date of the "letter-advise," petitioner-spouses Luis Toh
and Vicky Tan Toh and respondent-spouses Kenneth Ng Li and Ma. Victoria Ng Li signed the required
Continuing Guaranty, which was embodied in a public document prepared solely by respondent
Bank.6 The terms of the instrument defined the contract arising therefrom as a surety agreement and
provided for the solidary liability of the signatories thereto for and in consideration of "loans or advances"
and "credit in any other manner to, or at the request or for the account" of FBPC.
The Continuing Guaranty set forth no maximum limit on the indebtedness that respondent FBPC may
incur and for which the sureties may be liable, stating that the credit facility "covers any and all existing
indebtedness of, and such other loans and credit facilities which may hereafter be granted to FIRST
BUSINESS PAPER CORPORATION." The surety also contained a de facto acceleration clause if
"default be made in the payment of any of the instruments, indebtedness, or other obligation" guaranteed
by petitioners and respondents. So as to strengthen this security, the Continuing Guaranty waived rights
of the sureties against delay or absence of notice or demand on the part of respondent Bank, and gave
future consent to the Bank's action to "extend or change the time payment, and/or the manner, place or
terms of payment," including renewal, of the credit facility or any part thereof in such manner and upon
such terms as the Bank may deem proper without notice to or further assent from the sureties.
The effectivity of the Continuing Guaranty was not contingent upon any event or cause other than the
written revocation thereof with notice to the Bank that may be executed by the sureties.
On 16 June 1993 respondent FBPC started to avail of the credit facility and procure letters of credit. 7 On
17 November 1993 FBPC opened thirteen (13) letters of credit and obtained loans totaling
P15,227,510.00.8 As the letters of credit were secured, FBPC through its officers Kenneth Ng Li, Ma.
Victoria Ng Li and Redentor Padilla as signatories executed a series of trust receipts over the goods
allegedly purchased from the proceeds of the loans.9
On 13 January 1994 respondent Bank received information that respondent-spouses Kenneth Ng Li and
Ma. Victoria Ng Li had fraudulently departed from their conjugal home. 10 On 14 January 1994 the Bank
served a demand letter upon FBPC and petitioner Luis Toh invoking the acceleration clause11 in the trust
receipts of FBPC and claimed payment for P10,539,758.68 as unpaid overdue accounts on the letters of
credit plus interests and penalties within twenty-four (24) hours from receipt thereof.12 The Bank also
invoked the Continuing Guaranty executed by petitioner-spouses Luis Toh and Vicky Tan Toh who were
the only parties known to be within national jurisdiction to answer as sureties for the credit facility of
FBPC.13
On 17 January 1994 respondent Bank filed a complaint for sum of money with ex parte application for a
writ of preliminary attachment against FBPC, spouses Kenneth Ng Li and Ma. Victoria Ng Li, and
spouses Luis Toh and Vicky Tan Toh, docketed as Civil Case No. 64047 of RTC-Br. 161, Pasig
City.14 Alias summonses were served upon FBPC and spouses Luis Toh and Vicky Tan Toh but not upon
Kenneth Ng Li and Ma. Victoria Ng Li who had apparently absconded. 15
Meanwhile, with the implementation of the writ of preliminary attachment resulting in the impounding
of purported properties of FBPC, the trial court was deluged with third-party claims contesting the
propriety of the attachment.16In the end, the Bank relinquished possession of all the attached properties
to the third-party claimants except for two (2) insignificant items as it allegedly could barely cope with
the yearly premiums on the attachment bonds.17
Petitioner-spouses Luis Toh and Vicky Tan Toh filed a joint answer to the complaint where they admitted
being part of FBPC from its incorporation on 29 August 1991, which was then known as "MNL Paper,
Inc.," until its corporate name was changed to "First Business Paper Corporation." 18 They also
acknowledged that on 6 March 1992 Luis Toh was designated as one of the authorized corporate
signatories for transactions in relation to FBPC's checking account with respondent Bank.19 Meanwhile,
for failing to file an answer, respondent FBPC was declared in default. 20
Petitioner-spouses however could not be certain whether to deny or admit the due execution and
authenticity of the Continuing Guaranty.21 They could only allege that they were made to sign papers in
blank and the Continuing Guaranty could have been one of them.
Still, as petitioners asserted, it was impossible and absurd for them to have freely and consciously
executed the surety on 10 May 1993, the date appearing on its face22 since beginning March of that year
they had already divested their shares in FBPC and assigned them in favor of respondent Kenneth Ng Li
although the deeds of assignment were notarized only on 14 June 1993.23 Petitioners also contended that
through FBPC Board Resolution dated 12 May 1993 petitioner Luis Toh was removed as an authorized
signatory for FBPC and replaced by respondent-spouses Kenneth Ng Li and Ma. Victoria Ng Li and
Redentor Padilla for all the transactions of FBPC with respondent Bank.24 They even resigned from their
respective positions in FBPC as reflected in the 12 June 1993 Secretary's Certificate submitted to the
Securities and Exchange Commission25 as petitioner Luis Toh was succeeded as Chairman by respondent
Ma. Victoria Ng Li, while one Mylene C. Padilla took the place of petitioner Vicky Tan Toh as Vice-
President.26
Finally, petitioners averred that sometime in June 1993 they obtained from respondent Kenneth Ng Li
their exclusion from the several surety agreements they had entered into with different banks, i.e.,
Hongkong and Shanghai Bank, China Banking Corporation, Far East Bank and Trust Company, and
herein respondent Bank.27 As a matter of record, these other banks executed written surety agreements
that showed respondent Kenneth Ng Li as the only surety of FBPC's indebtedness. 28
On 16 May 1996 the trial court promulgated its Decision in Civil Case No. 64047 finding respondent
FBPC liable to pay respondent Solid Bank Corporation the principal of P10,539,758.68 plus twelve
percent (12%) interest per annum from finality of the Decision until fully paid, but absolving petitioner-
spouses Luis Toh and Vicky Tan Toh of any liability to respondent Bank.29 The court a quo found that
petitioners "voluntarily affixed their signature[s]" on the Continuing Guaranty and were thus "at some
given point in time willing to be liable under those forms,"30 although it held that petitioners were not
bound by the surety contract since the letters of credit it was supposed to secure were opened long after
petitioners had ceased to be part of FBPC.31
The trial court described the Continuing Guaranty as effective only while petitioner-spouses were
stockholders and officers of FBPC since respondent Bank compelled petitioners to underwrite FBPC's
indebtedness as sureties without the requisite investigation of their personal solvency and capability to
undertake such risk.32 The lower court also believed that the Bank knew of petitioners' divestment of their
shares in FBPC and their subsequent resignation as officers thereof as these facts were obvious from the
numerous public documents that detailed the changes and substitutions in the list of authorized signatories
for transactions between FBPC and the Bank, including the many trust receipts being signed by persons
other than petitioners,33 as well as the designation of new FBPC officers which came to the notice of the
Bank's Vice-President Jose Chan Jr. and other officers.34
On 26 September 1996 the RTC-Br. 161 of Pasig City denied reconsideration of its Decision.35
On 9 October 1996 respondent Bank appealed the Decision to the Court of Appeals, docketed as CA-
G.R. CV No. 55957.36 Petitioner-spouses did not move for reconsideration nor appeal the finding of the
trial court that they voluntarily executed the Continuing Guaranty.
The appellate court modified the Decision of the trial court and held that by signing the Continuing
Guaranty, petitioner-spouses became solidarily liable with FBPC to pay respondent Bank the amount of
P10,539,758.68 as principal with twelve percent (12%) interest per annum from finality of the judgment
until completely paid.37 The Court of Appeals ratiocinated that the provisions of the surety agreement did
not "indicate that Spouses Luis and Vicky Toh x x x signed the instrument in their capacities as Chairman
of the Board and Vice-President, respectively, of FBPC only."38 Hence, the court a quo deduced,
"[a]bsent any such indication, it was error for the trial court to have presumed that the appellees indeed
signed the same not in their personal capacities."39 The appellate court also ruled that as petitioners failed
to execute any written revocation of the Continuing Guaranty with notice to respondent Bank, the
instrument remained in full force and effect when the letters of credit were availed of by respondent
FBPC.40
Finally, the Court of Appeals rejected petitioners' argument that there were "material alterations" in the
provisions of the "letter-advise," i.e., that only domestic letters of credit were opened when the credit
facility was for importation of papers and other materials, and that marginal deposits were not paid,
contrary to the requirements stated in the "letter-advise."41 The simple response of the appellate court to
this challenge was, first, the "letter-advise" itself authorized the issuance of domestic letters of credit, and
second, the several waivers extended by petitioners in the Continuing Guaranty, which included changing
the time and manner of payment of the indebtedness, justified the action of respondent Bank not to charge
marginal deposits.42
Petitioner-spouses moved for reconsideration of the Decision, and after respondent Bank's comment,
filed a lengthy Reply with Motion for Oral Argument.43 On 2 July 2002 reconsideration of the Decision
was denied on the ground that no new matter was raised to warrant the reversal or modification
thereof.44 Hence, this Petition for Review.
Petitioner-spouses Luis Toh and Vicky Tan Toh argue that the Court of Appeals denied them due process
when it did not grant their motion for reconsideration and without "bother[ing] to consider
[their] Reply with Motion for Oral Argument." They maintain that the Continuing Guaranty is not legally
valid and binding against them for having been executed long after they had withdrawn from FBPC.
Lastly, they claim that the surety agreement has been extinguished by the material alterations thereof and
of the "letter-advise" which were allegedly brought about by (a) the provision of an acceleration clause
in the trust receipts; (b) the flight of their co-sureties, respondent-spouses Kenneth Ng Li and Ma. Victoria
Ng Li; (c) the grant of credit facility despite the non-payment of marginal deposits in an amount beyond
the credit limit of P10 million pesos; (d) the inordinate delay of the Bank in demanding the payment of
the indebtedness; (e) the presence of ghost deliveries and fictitious purchases using the Bank's letters of
credit and trust receipts; (f) the extension of the due dates of the letters of credit without the required 25%
partial payment per extension; (g) the approval of another letter of credit, L/C 93-0042, even after
respondent-spouses Kenneth Ng Li and Ma. Victoria Ng Li had defaulted on their previous obligations;
and, (h) the unmistakable pattern of fraud.
Respondent Solid Bank maintains on the other hand that the appellate court is presumed to have passed
upon all points raised by petitioners' Reply with Motion for Oral Argument as this pleading formed part
of the records of the appellate court. It also debunks the claim of petitioners that they were inexperienced
and ignorant parties who were taken advantage of in the Continuing Guaranty since petitioners are astute
businessmen who are very familiar with the "ins" and "outs" of banking practice. The Bank further argues
that the notarization of the Continuing Guaranty discredits the uncorroborated assertions against the
authenticity and due execution thereof, and that the Decision of the trial court in the civil case finding the
surety agreement to be valid and binding is now res judicata for failure of petitioners to appeal therefrom.
As a final point, the Bank refers to the various waivers made by petitioner-spouses in the Continuing
Guaranty to justify the extension of the due dates of the letters of credit.
To begin with, we find no merit in petitioners' claim that the Court of Appeals deprived them of their
right to due process when the court a quo did not address specifically and explicitly
their Reply with Motion for Oral Argument. While the Resolution of the appellate court of 2 July 2002
made no mention thereof in disposing of their arguments on reconsideration, it is presumed that "all
matters within an issue raised in a case were laid before the court and passed upon it."45 In the absence
of evidence to the contrary, we must rule that the court a quo discharged its task properly. Moreover, a
reading of the assailed Resolution clearly makes reference to a "careful review of the records," which
undeniably includes the Reply with Motion for Oral Argument, hence there is no reason for petitioners to
asseverate otherwise.
This Court holds that the Continuing Guaranty is a valid and binding contract of petitioner-spouses as it
is a public document that enjoys the presumption of authenticity and due execution. Although petitioners
as appellees may raise issues that have not been assigned as errors by respondent Bank as party-appellant,
i.e., unenforceability of the surety contract, we are bound by the consistent finding of the courts a quo
that petitioner-spouses Luis Toh and Vicky Tan Toh "voluntarily affixed their signature[s]" on the surety
agreement and were thus "at some given point in time willing to be liable under those forms." 46 In the
absence of clear, convincing and more than preponderant evidence to the contrary, our ruling cannot be
otherwise.
Similarly, there is no basis for petitioners to limit their responsibility thereon so long as they were
corporate officers and stockholders of FBPC. Nothing in the Continuing Guaranty restricts their
contractual undertaking to such condition or eventuality. In fact the obligations assumed by them therein
subsist "upon the undersigned, the heirs, executors, administrators, successors and assigns of the
undersigned, and shall inure to the benefit of, and be enforceable by you, your successors, transferees
and assigns," and that their commitment "shall remain in full force and effect until written notice shall
have been received by [the Bank] that it has been revoked by the undersigned." Verily, if petitioners
intended not to be charged as sureties after their withdrawal from FBPC, they could have simply
terminated the agreement by serving the required notice of revocation upon the Bank as expressly allowed
therein.47 In Garcia v. Court of Appeals[48] we ruled –
Regarding the petitioner's claim that he is liable only as a corporate officer of WMC, the surety agreement
shows that he signed the same not in representation of WMC or as its president but in his personal
capacity. He is therefore personally bound. There is no law that prohibits a corporate officer from binding indispensable marginal deposit of fifteen percent (15%) and the twenty-five percent (25%) prerequisite
himself personally to answer for a corporate debt. While the limited liability doctrine is intended to for each extension of thirty (30) days. It bears stressing that the requisite marginal deposit and security
protect the stockholder by immunizing him from personal liability for the corporate debts, he may for every thirty (30) - day extension specified in the "letter-advise" were not set aside or abrogated nor
nevertheless divest himself of this protection by voluntarily binding himself to the payment of the was there any prior notice of such fact, if any was done.
corporate debts. The petitioner cannot therefore take refuge in this doctrine that he has by his own acts
effectively waived.
Moreover, these irregular extensions were candidly admitted by Victor Ruben L. Tuazon, an account
officer and manager of respondent Bank and its lone witness in the civil case –
But as we bind the spouses Luis Toh and Vicky Tan Toh to the surety agreement they signed so must we
also hold respondent Bank to its representations in the "letter-advise" of 16 May 1993. Particularly, as to
Q: You extended it even if there was no marginal deposit?
the extension of the due dates of the letters of credit, we cannot exclude from the Continuing Guaranty
the preconditions of the Bank that were plainly stipulated in the "letter-advise." Fairness and justice
dictate our doing so, for the Bank itself liberally applies the provisions of cognate agreements whenever A: Yes.
convenient to enforce its contractual rights, such as, when it harnessed a provision in the trust receipts
executed by respondent FBPC to declare its entire indebtedness as due and demandable and thereafter to
exact payment thereof from petitioners as sureties.49 In the same manner, we cannot disregard the Q: And even if partial payment is less than 25%?
provisions of the "letter-advise" in sizing up the panoply of commercial obligations between the parties
herein. A: Yes x x x x

Insofar as petitioners stipulate in the Continuing Guaranty that respondent Bank "may at any time, or
from time to time, in [its] discretion x x x extend or change the time payment," this provision even if
understood as a waiver is confined per se to the grant of an extension and does not surrender the
prerequisites therefor as mandated in the "letter-advise." In other words, the authority of the Bank to defer
collection contemplates only authorized extensions, that is, those that meet the terms of the "letter-
advise."
Certainly, while the Bank may extend the due date at its discretion pursuant to the Continuing Guaranty,
it should nonetheless comply with the requirements that domestic letters of credit be supported by fifteen
percent (15%) marginal deposit extendible three (3) times for a period of thirty (30) days for each
extension, subject to twenty-five percent (25%) partial payment per extension. This reading of the
Continuing Guaranty is consistent with Philippine National Bank v. Court of Appeals50 that any doubt on
the terms and conditions of the surety agreement should be resolved in favor of the surety.
Q: You have repeatedly extended despite the insufficiency partial payment requirement?
A: I would say yes.53
The foregoing extensions of the letters of credit made by respondent Bank without observing the rigid
restrictions for exercising the privilege are not covered by the waiver stipulated in the Continuing
Guaranty. Evidently, they constitute illicit extensions prohibited under Art. 2079 of the Civil Code, "[a]n
extension granted to the debtor by the creditor without the consent of the guarantor extinguishes the
guaranty." This act of the Bank is not mere failure or delay on its part to demand payment after the debt
has become due, as was the case in unpaid five (5) letters of credit which the Bank did not extend, defer
or put off,54 but comprises conscious, separate and binding agreements to extend the due date, as was
admitted by the Bank itself –

Furthermore, the assurance of the sureties in the Continuing Guaranty that "[n]o act or omission of any Q: How much was supposed to be paid on 14 September 1993, the original LC of P1,655,675.13?
kind on [the Bank's] part in the premises shall in any event affect or impair this guaranty" 51 must also be
read "strictissimi juris" for the reason that petitioners are only accommodation sureties, i.e., they received A: Under LC 93-0017 first matured on 14 September 1993. We rolled it over, extended it to
nothing out of the security contract they signed.52 Thus said, the acts or omissions of the Bank conceded December 13, 1993 but they made partial payment that is why we extended it.
by petitioners as not affecting nor impairing the surety contract refer only to those occurring "in the
premises," or those that have been the subject of the waiver in the Continuing Guaranty, and stretch to
no other. Stated otherwise, an extension of the period for enforcing the indebtedness does not Q: The question to you now is how much was paid? How much is supposed to be paid on September
by itself bring about the discharge of the sureties unless the extra time is not permitted within the terms 14, 1993 on the basis of the original amount of P1,655,675.13?
of the waiver, i.e., where there is no payment or there is deficient settlement of the marginal deposit and
the twenty-five percent (25%) consideration, in which case the illicit extension releases the sureties. A: Whenever this obligation becomes due and demandable except when you roll it over so there is
Under Art. 2055 of the Civil Code, the liability of a surety is measured by the terms of his contract, and novation there on the original obligations55 (underscoring supplied).
while he is liable to the full extent thereof, his accountability is strictly limited to that assumed by its
terms.
As a result of these illicit extensions, petitioner-spouses Luis Toh and Vicky Tan Toh are relieved of their
obligations as sureties of respondent FBPC under Art. 2079 of the Civil Code.
It is admitted in the Complaint of respondent Bank before the trial court that several letters of credit were
irrevocably extended for ninety (90) days with alarmingly flawed and inadequate consideration - the
Further, we note several suspicious circumstances that militate against the enforcement of the Continuing
Guaranty against the accommodation sureties. Firstly, the guaranty was executed more than thirty (30)
days from the original acceptance period as required in the "letter-advise." Thereafter, barely two (2)
days after the Continuing Guaranty was signed, corporate agents of FBPC were replaced on 12 May 1993
and other adjustments in the corporate structure of FBPC ensued in the month of June 1993, which the
Bank did not investigate although such were made known to it.
By the same token, there is no explanation on record for the utter worthlessness of the trust receipts in
favor of the Bank when these documents ought to have added more security to the indebtedness of FBPC.
The Bank has in fact no information whether the trust receipts were indeed used for the purpose for which
they were obtained.56 To be sure, the goods subject of the trust receipts were not entirely lost since the
security officer of respondent Bank who conducted surveillance of FBPC even had the chance to intercept
the surreptitious transfer of the items under trust: "We saw two (2) delivery vans with Plates Nos. TGH
257 and PAZ 928 coming out of the compound x x x [which were] taking out the last supplies stored in
the compound."57 In addition, the attached properties of FBPC, except for two (2) of them, were
perfunctorily abandoned by respondent Bank although the bonds therefor were considerably reduced by
the trial court.58
WHEREFORE, the instant Petition for Review is GRANTED. The Decision of the Court of Appeals
dated 12 December 2001 in CA-G.R. CV No. 55957, Solid Bank Corporation v. First Business Paper
Corporation, Kenneth Ng Li, Ma. Victoria Ng Li, Luis Toh and Vicky Tan Toh, holding petitioner-
spouses Luis Toh and Vicky Tan Toh solidarily liable with First Business Paper Corporation to pay Solid
Bank Corporation the amount of P10,539,758.68 as principal with twelve percent (12%) interest per
annum until fully paid, and its Resolution of 2 July 2002 denying reconsideration thereof are REVERSED
and SET ASIDE.
The Decision dated 16 May 1996 of RTC-Br. 161 of Pasig City in Civil Case No. 64047, Solid Bank
Corporation v. First Business Paper Corporation, Kenneth Ng Li, Ma. Victoria Ng Li, Luis Toh and
Vicky Tan Toh, finding First Business Paper Corporation liable to pay respondent Solid Bank
Corporation the principal of P10,539,758.68 plus twelve percent (12%) interest per annum until fully
paid, but absolving petitioner-spouses Luis Toh and Vicky Tan Toh of any liability to respondent Solid
Bank Corporation is REINSTATED and AFFIRMED. No costs.
SO ORDERED.

ASSET BUILDERS CORP V STRONGHOLD INSURANCE

The consequence of these omissions is to discharge the surety, petitioners herein, under Art. 2080 of
the Civil Code,59 or at the very least, mitigate the liability of the surety up to the value of the property or
lien released – MENDOZA, J.:

If the creditor x x x has acquired a lien upon the property of a principal, the creditor at once becomes
charged with the duty of retaining such security, or maintaining such lien in the interest of the surety, and
any release or impairment of this security as a primary resource for the payment of a debt, will discharge
the surety to the extent of the value of the property or lien released x x x x [for] there immediately arises This petition for review on certiorari under Rule 45 of the 1997 Rules of Civil Procedure assails the
a trust relation between the parties, and the creditor as trustee is bound to account to the surety for the
value of the security in his hands.60 February 27, 2009 Decision[1] of the Regional Trial Court, Pasig City, Branch 71 (RTC), in Civil Case

No. 71034, ordering defendant Lucky Star to pay petitioner Asset Builders Corporation the sum
For the same reason, the grace period granted by respondent Bank represents unceremonious
abandonment and forfeiture of the fifteen percent (15%) marginal deposit and the twenty-five percent of P575,000.00 with damages, but absolving respondent Stronghold Insurance Company, Incorporated
(25%) partial payment as fixed in the "letter-advise." These payments are unmistakably additional
securities intended to protect both respondent Bank and the sureties in the event that the principal debtor (Stronghold) of any liability on its Surety Bond and Performance Bond.
FBPC becomes insolvent during the extension period. Compliance with these requisites was not waived
by petitioners in the Continuing Guaranty. For this unwarranted exercise of discretion, respondent Bank
bears the loss; due to its unauthorized extensions to pay granted to FBPC, petitioner-spouses Luis Toh
and Vicky Tan Toh are discharged as sureties under the Continuing Guaranty.

Finally, the foregoing omission or negligence of respondent Bank in failing to safe-keep the security THE FACTS
provided by the marginal deposit and the twenty-five percent (25%) requirement results in the material
alteration of the principal contract, i.e., the "letter-advise," and consequently releases the surety.61 This
inference was admitted by the Bank through the testimony of its lone witness that "[w]henever this On April 28, 2006, Asset Builders Corporation (ABC) entered into an agreement with Lucky Star Drilling
obligation becomes due and demandable, except when you roll it over, (so) there is novation there on the
original obligations." As has been said, "if the suretyship contract was made upon the condition that the & Construction Corporation (Lucky Star) as part of the completion of its project to construct the ACG
principal shall furnish the creditor additional security, and the security being furnished under these
Commercial Complex on NHA Avenue corner Olalia Street, Barangay Dela Paz, Antipolo City.[2] As can
conditions is afterwards released by the creditor, the surety is wholly discharged, without regard to the
value of the securities released, for such a transaction amounts to an alteration of the main contract."62
be gleaned from the Purchase Order,[3] Lucky Star was to supply labor, materials, tools, and equipment

including technical supervision to drill one (1) exploratory production well on the project site. The total
contract price for the said project was P1,150,000.00. The salient terms and conditions of said agreement
are as follows:
i. Lump sum price--------PHP1,150,000.00;
ii. 50% downpayment---upon submission of surety bond in an equivalent amount and
performance bond equivalent to 30 % of contract amount;
iii. Completion date-----60 calendar days;
iv. Penalty----2/10 of 1% of total contract amount for every day of delay;
v. Terms---50% down payment to be released after submission of bonds;
vi. RetentionSubject to 10% retention to be released after the project is accepted by the owner;
To guarantee faithful compliance with their agreement, Lucky Star engaged respondent
Stronghold which issued two (2) bonds in favor of petitioner. The first, SURETY BOND G(16) No.
141558, dated May 9, 2006, covers the sum of P575,000.00[4] or the required downpayment for the
drilling work. The full text of the surety bond is herein quoted:
KNOW ALL MEN BY THESE PRESENTS:
That we, LUCKY STAR DRILLING & CONSTRUCTION CORP., 168
ACACIA St., Octagon Industrial Estate Subd., Pasig City as principal, and STRONGHOLD
INSURANCE COMPANY, INC., a corporation duly organized and existing under and by
virtue of laws of the Philippines, as surety, are held and firmly bound unto ASSET
BUILDERS CORPORATION to the sum of Pesos FIVE HUNDRED SEVENTY FIVE
THOUSAND ONLY (P575,000.00) Philippine Currency, for the payment of which, 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 THIS OBLIGATION ARE AS FOLLOWS:
To fully and faithfully guarantee the repayment to be done through
deductions from periodic billings of the advance payment made or to be made by the
Obligee to the Principal in connection with the supply of labor, materials, tools and
equipment including technical supervision to drill one (1) exploratory production well
located at NIA Ave. cor. Olalia St., Brgy. dela Paz, Antipolo City. This bond is callable
on demand.
The liability of the surety company upon determination under this bond
shall in no case exceed the penal sum of PESOS: FIVE HUNDRED SEVENTY FIVE
THOUSAND (P575,000.00) only, Philippine Currency.
WHEREAS, the Obligee 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
undertakings.
NOW, THEREFORE, if the above bounden principal shall in all respects duly and
fully observe and perform all and singular the aforesaid [co]-venants, conditions and
agreements to the true intent and meaning thereof, then this obligation shall be null and void,
otherwise to remain in full force and effect.
Liability of surety on this bond will expire on May 09, 2007 and said bond will be
cancelled five DAYS after its expiration, unless surety is notified of and existing obligations
hereunder.
x x x[5]
With respect to the second contract, PERFORMANCE BOND G(13) No. 115388, dated May
09, 2006, it covers the sum of P345,000.00.[6] Thus:
KNOW ALL MEN BY THESE PRESENTS:
That we, LUCKY STAR DRILLING & CONSTRUCTION of 168 Acacia St., Octagon Indl.,
contractor, of Estate, Sub., Pasig City Philippines, as principal and the STRONGHOLD
INSURANCE COMPANY, INC. a corporation duly organized and existing under and by
virtue of the laws of the Philippines, with head office at Makati, as Surety, are held and firmly
bound unto the ASSET BUILDERS CORPORATION and to any individual, firm,
partnership, corporation or association supplying the principal with labor or materials in the
penal sum of THREE HUNDRED FORTY FIVE THOUSAND ONLY (P345,000.00),
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 THIS OBLIGATION are as follows;
WHEREAS the above bounden principal on the ___ day of __________, 19__ entered into a
contract with the ASSET BUILDERS CORPORATION represented by _________________,
to fully and faithfully.
Comply with the supply of labor, materials, tools and equipment including technical
supervision to drill one (1) exploratory production well located at NIA Ave. cor. Olalia
St., Brgy. Dela Paz, Antipolo City. This bond is callable on demand.
WHEREAS, the liability of the Surety Company under this bond shall in no case exceed the
sum of PESOS THREE HUNDRED FORTY FIVE THOUSAND ONLY (P345,000.00) (2) to pay liquidated damages equivalent to 2/10 of 1% of the contract price for every day of
Philippine Currency, inclusive of interest, attorneys fee, and other damages, and shall not be delay, or a total of PHP138,000.00;
liable for any advances of the obligee to the principal.
(3) to pay the amount guaranteed by your performance bond in the amount of PHP345,000.00;
WHEREAS, said contract requires the said principal to give a good and sufficient bond in the
above-stated sum to secure the full and faithfull performance on its part of said contract, and (4) to pay PHP150,000.00 in other consequential damages;
the satisfaction of obligations for materials used and labor employed upon the work;
(5) to pay exemplary damages in the amount of PHP150,000.00;
NOW THEREFORE, if the principal shall perform well and truly and fulfill all
the undertakings, covenants, terms, conditions, and agreements of said contract during the (6) to vacate the project site, together with all your men and equipment.
original term of said contract and any extension thereof that may be granted by the obligee,
with notice to the surety and during the life of any guaranty required under the contract, and Should you refuse to comply with our demand within the above period, we shall be
shall also perform well and truly and fulfill all the undertakings, covenants, terms, conditions, constrained to sue you in court, in which event we shall demand payment of attorneys fees in
and agreements of any and all duly authorized modifications of said contract that may the amount of at least PHP100,000.0.
hereinafter be made, without notice to the surety except when such modifications increase the
contract price; and such principal contractor or his or its sub-contractors shall promptly make
payment to any individual, firm, partnership, corporation or association supplying the
principal of its sub-contractors with labor and materials in the prosecution of the work On August 16, 2006, ABC sent a Notice of Claim for payment to Stronghold to make good its obligation
provided for in the said contract, then, this obligation shall be null and void; otherwise it shall
remain in full force and effect. Any extension of the period of time which may be granted by under its bonds.[10]
the obligee to the contractor shall be considered as given, and any modifications of said
contract shall be considered as authorized, with the express consent of the Surety.
Despite notice, ABC did not receive any reply either from Lucky Star or Stronghold, prompting it to file
The right of any individual, firm, partnership, corporation or association supplying the
contractor with labor or materials for the prosecution of the work hereinbefore stated, to its Complaint for Rescission with Damages against both before the RTC[11] on November 21, 2006.
institute action on the penal bond, pursuant to the provision of Act No. 3688, is hereby
acknowledge and confirmed. x x x
In its Answer (with Complusory Counterclaim and Cross-Claim), dated January 24, 2007,
On May 20, 2006, ABC paid Lucky Star P575,000.00 (with 2% withholding tax) as advance payment,
Stronghold denied any liability arguing that ABC had not shown any proof that it made an advance
representing 50% of the contract price.[7] Lucky Star, thereafter, commenced the drilling work. By July

18, 2006, just a few days before the agreed completion date of 60 calendar days, Lucky Star managed to payment of 50% of the contract price of the project. It further averred that ABCs rescission of its contract

accomplish only ten (10) % of the drilling work. On the same date, petitioner sent a demand letter to with Lucky Star virtually revoked the claims against the two bonds and absolved them from further
[8]
Lucky Star for the immediate completion of the drilling work with a threat to cancel the agreement and
liability.[12]
forfeit the bonds should it still fail to complete said project within the agreed period.

Lucky Star, on the other hand, failed to file a responsive pleading within the prescribed period
On August 3, 2006, ABC sent a Notice of Rescission of Contract with Demand for Damages to Lucky
and, thus, was declared in default by the RTC in its Order dated August 24, 2007.[13]
Star.[9] Pertinent portions of said notice read:

Pursuant to paragraph 1 of the Terms and Conditions of the service contract, notice is hereby On February 27, 2009, the RTC rendered the assailed decision ordering Lucky Star to pay ABC but
made on you of the rescission of the contract and accordingly demand is hereby made on you,
within seven (7) days from receipt hereof: absolving Stronghold from liability.[14] Relevant parts of the decision, including the decretal portion, read:

(1) to refund the down payment of PHP563,500.00, plus legal interest thereon;
 On the liability of defendant Stronghold Insurance, the Court rules on the negative.
The surety bond and performance bond executed by defendants Lucky Star and
Stronghold Insurance are in the nature of accessory contracts which depend for its existence
upon another contract. Thus, when the agreement (Exhibit A) between the plaintiff and
defendant Asset Builders was rescinded, the surety and performance bond were automatically
cancelled.
WHEREFORE, in view of the foregoing, judgment is hereby rendered in favor of
the plaintiff and against defendant Lucky Star Drilling & Construction, ordering the latter as
follows:
1. to pay plaintiff in the amount of PHP575,000.00 as actual damages plus legal interest
from the filing of the complaint;
2. to pay plaintiff in the amount of PHP100,000.00 as liquidated damages;
3. to pay plaintiff in the amount of PHP50,000.00 as exemplary damages;
4. to pay plaintiff in the amount of PHP 50,000.00 as attorneys fees;
5. to pay the costs of the suit.
Defendant Stronghold Insurance Company, Inc.s compulsory counterclaim and cross-claim
are dismissed.[15]
Hence, this petition.
Petitioner ABC prays for the reversal of the challenged decision based on the following
GROUNDS
A. The Lower Court seriously erred and unjustly ACTED ARBITRARILY with
manifest bias and grave abuse of discretion, CONTRARY to applicable
lawsand established jurisprudence in declaring the automatic CANCELLATION of
respondent Strongholds Surety Bond and Performance Bond, because:
(a) Despite rescission, there exists a continuing VALID PRINCIPAL
OBLIGATION guaranteed by Respondents Bonds, arising out of the
Contractors DEFAULT and Non-performance.
(b) Upon breach by its Principal/contractor, the LIABILITIES of
Respondents bonds had already ACCRUED, automatically attached, and had
become already DIRECT, PRIMARY and ABSOLUTE, even before Petitioners
legitimate exercise of its option under Art. 1191 of the New Civil Code.
(c) Rescission does NOT AFFECT the liabilities of the Respondent
Stronghold as its LIABILITIES on its subject bonds have already
become INTERWOVEN and INSEPARABLE with the liabilities of its Principal,
the Contractor Lucky Star.
B. With the Lower Courts completely erroneous ruling on the liabilities of
Respondents bonds, the Lower Court equally ERRED with manifest bias and grave
abuse, in its FAILURE to comply with the duty of court to make a finding of
unreasonable denial or withholding by Respondent Stronghold or Petitioners claims and
impose upon the Respondent the penalties provided for under Section 241 and 244 of
the Insurance Code.[16]
Essentially, the primary issue is whether or not respondent insurance company, as surety, can
be held liable under its bonds.
The Court rules in the affirmative.
Respondent, along with its principal, Lucky Star, bound itself to the petitioner when it
executed in its favor surety and performance bonds. The contents of the said contracts clearly establish
that the parties entered into a surety agreement as defined under Article 2047 of the New Civil Code. Thus:
Art. 2047. By guaranty a person, called the guarantor, binds himself to the creditor
to fulfill the obligation of the principal debtor in case the latter should fail to do so.
If a person binds himself solidarily with the principal debtor, the provisions of
Section 4, Chapter 3, Title I of this Book shall be observed. In such case the contract is
called a suretyship. [Emphasis supplied]
As provided in Article 2047, the surety undertakes to be bound solidarily with the principal
obligor. That undertaking makes a surety agreement an ancillary contract as it presupposes the existence
of a principal contract. Although the contract of a surety is in essence secondary only to a valid principal
obligation, the surety becomes liable for the debt or duty of another although it possesses no direct or
personal interest over the obligations nor does it receive any benefit therefrom. [17] Let it be stressed that
notwithstanding the fact that the surety contract is secondary to the principal obligation, the surety
assumes liability as a regular party to the undertaking.[18]
Stronghold Insurance Company, Inc. v. Republic-Asahi Glass Corporation,[19] reiterating the
ruling in Garcia v. Court of Appeals,[20] expounds on the nature of the suretys liability:
 X x x. The suretys obligation is not an original and direct one for the performance
of his own act, but merely accessory or collateral to the obligation contracted by the Contrary to the trial courts ruling, respondent insurance company was not automatically
principal. Nevertheless, although the contract of a surety is in essence secondary only to a
valid principal obligation, his liability to the creditor or promisee of the principal is said released from any liability when petitioner resorted to the rescission of the principal contract for failure
to be direct, primary and absolute; in other words, he is directly and equally bound with
the principal. of the other party to perform its undertaking. Precisely, the liability of the surety arising from the surety

contracts comes to life upon the solidary obligors default. It should be emphasized that petitioner had to
Suretyship, in essence, contains two types of relationship the principal relationship between
choose rescission in order to prevent further loss that may arise from the delay of the progress of the
the obligee (petitioner) and the obligor (Lucky Star), and the accessory surety relationship between the
project.Without a doubt, Lucky Stars unsatisfactory progress in the drilling work and its failure to
principal (Lucky Star) and the surety (respondent). In this arrangement, the obligee accepts the suretys
complete it in due time amount to non-performance of its obligation.
solidary undertaking to pay if the obligor does not pay. Such acceptance, however, does not change in

any material way the obligees relationship with the principal obligor. Neither does it make the surety an In fine, respondent should be answerable to petitioner on account of Lucky Stars non-

active party to the principal obligee-obligor relationship. Thus, the acceptance does not give the surety performance of its obligation as guaranteed by the performance bond.

the right to intervene in the principal contract. The suretys role arises only upon the obligors default, at
Finally, Article 1217[22] of the New Civil Code acknowledges the right of reimbursement from
which time, it can be directly held liable by the obligee for payment as a solidary obligor. [21]
a co-debtor (the principal co-debtor, in case of suretyship) in favor of the one who paid (the
In the case at bench, when Lucky Star failed to finish the drilling work within the agreed time
surety). Thus, respondent is entitled to reimbursement from Lucky Star for the amount it may be required
frame despite petitioners demand for completion, it was already in delay. Due to this default, Lucky Stars
to pay petitioner arising from its bonds.
liability attached and, as a necessary consequence, respondents liability under the surety agreement arose.

Undeniably, when Lucky Star reneged on its undertaking with the petitioner and further failed WHEREFORE, the February 27, 2009 Decision of the Regional Trial Court, Pasig City,

to return the P575,000.00 downpayment that was already advanced to it, respondent, as surety, became Branch 71, is AFFIRMED with MODIFICATION. Respondent Stronghold Insurance is hereby

solidarily bound with Lucky Star for the repayment of the said amount to petitioner. The clause, this bond declared jointly and severally liable with Lucky Star for the payment of P575,000.00 and the payment

is callable on demand, strongly speaks of respondents primary and direct responsibility to the petitioner. of P345,000.00 on the basis of its performance bond.

Accordingly, after liability has attached to the principal, the obligee or, in this case, the SO ORDERED.
petitioner, can exercise the right to proceed against Lucky Star or respondent or both. Article 1216 of the

New Civil Code states:

The creditor may proceed against any one of the solidary debtors or some or all of
them simultaneously. The demand made against one of them shall not be an obstacle to those
which may subsequently be directed against the others, so long as the debt has not been fully
collected.