G.R. No. 147561 June 22, 2006 one pesos and one centavo (P274,621.
one pesos and one centavo (P274,621.01) were submitted by x x x JDS to
STRONGHOLD INSURANCE COMPANY, INC., Petitioner,
vs.
REPUBLIC-ASAHI GLASS CORPORATION, Respondent.
PANGANIBAN, CJ:
Asurety company’s liability under the performance bond it issues is solidary.
The death of the principal obligor does not, as a rule, extinguish the
obligation and the solidary nature of that liability.
The Case
Before us is a Petition for Review1 under Rule 45 of the Rules of Court,
seeking to reverse the March 13, 2001 Decision2 of the Court of Appeals
(CA) in CA-GR CV No. 41630. The assailed Decision disposed as follows:
"WHEREFORE, the Order dated January 28, 1993 issued by the lower court
is REVERSED and SET ASIDE. Let the records of the instant case be
REMANDED to the lower court for the reception of evidence of all parties."3
The Facts
The facts of the case are narrated by the CA in this wise:
"On May 24, 1989, [respondent] Republic-Asahi Glass Corporation
(Republic-Asahi) entered into a contract with x x x Jose D. Santos, Jr., the
proprietor of JDS Construction (JDS), for the construction of roadways and
a drainage system in Republic-Asahi’s compound in Barrio Pinagbuhatan,
Pasig City, where [respondent] was to pay x x x JDS five million three
hundred thousand pesos (P5,300,000.00) inclusive of value added tax for
said construction, which was supposed to be completed within a period of
two hundred forty (240) days beginning May 8, 1989. In order ‘to guarantee
the faithful and satisfactory performance of its undertakings’ x x x JDS, shall
post a performance bond of seven hundred ninety five thousand pesos
(P795,000.00). x x x JDS executed, jointly and severally with [petitioner]
Stronghold Insurance Co., Inc. (SICI) Performance Bond No. SICI-
25849/g(13)9769.
"On May 23, 1989, [respondent] paid to x x x JDS seven hundred ninety
five thousand pesos (P795,000.00) by way of downpayment.
"Two progress billings dated August 14, 1989 and September 15, 1989, for
the total amount of two hundred seventy four thousand six hundred twenty
"On July 10, 1991, [petitioner] SICI filed its answer, alleging that the
[respondent], which the latter paid. According to [respondent], these two
progress billings accounted for only 7.301% of the work supposed to be
undertaken by x x x JDS under the terms of the contract.
"Several times prior to November of 1989, [respondent’s] engineers called
the attention of x x x JDS to the alleged alarmingly slow pace of the
construction, which resulted in the fear that the construction will not be
finished within the stipulated 240-day period. However, said reminders went
unheeded by x x x JDS.
"On November 24, 1989, dissatisfied with the progress of the work
undertaken by x x x JDS, [respondent] Republic-Asahi extrajudicially
rescinded the contract pursuant to Article XIII of said contract, and wrote a
letter to x x x JDS informing the latter of such rescission. Such rescission,
according to Article XV of the contract shall not be construed as a waiver of
[respondent’s] right to recover damages from x x x JDS and the latter’s
sureties.
"[Respondent] alleged that, as a result of x x x JDS’s failure to comply with
the provisions of the contract, which resulted in the said contract’s
rescission, it had to hire another contractor to finish the project, for which
it incurred an additional expense of three million two hundred fifty six
thousand, eight hundred seventy four pesos (P3,256,874.00).
"On January 6, 1990, [respondent] sent a letter to [petitioner] SICI filing its
claim under the bond for not less than P795,000.00. On March 22, 1991,
[respondent] again sent another letter reiterating its demand for payment
under the aforementioned bond. Both letters allegedly went unheeded.
"[Respondent] then filed [a] complaint against x x x JDS and SICI. It sought
from x x x JDS payment of P3,256,874.00 representing the additional
expenses incurred by [respondent] for the completion of the project using
another contractor, and from x x x JDS and SICI, jointly and severally,
payment of P750,000.00 as damages in accordance with the performance
bond; exemplary damages in the amount of P100,000.00 and attorney’s
fees in the amount of at least P100,000.00.
"According to the Sheriff’s Return dated June 14, 1991, submitted to the
lower court by Deputy Sheriff Rene R. Salvador, summons were duly served
on defendant-appellee SICI. However, x x x Jose D. Santos, Jr. died the
previous year (1990), and x x x JDS Construction was no longer at its
address at 2nd Floor, Room 208-A, San Buena Bldg. Cor. Pioneer St., Pasig,
Metro Manila, and its whereabouts were unknown.
[respondent’s] money claims against [petitioner and JDS] have been
extinguished by the death of Jose D. Santos, Jr. Even if this were not the
case, [petitioner] SICI had been released from its liability under the
performance bond because there was no liquidation, with the active
participation and/or involvement, pursuant to procedural due process, of
herein surety and contractor Jose D. Santos, Jr., hence, there was no
ascertainment of the corresponding liabilities of Santos and SICI under the
performance bond. At this point in time, said liquidation was impossible
because of the death of Santos, who as such can no longer participate in
any liquidation. The unilateral liquidation on the party (sic) of [respondent]
of the work accomplishments did not bind SICI for being violative of
procedural due process. The claim of [respondent] for the forfeiture of the
performance bond in the amount of P795,000.00 had no factual and legal
basis, as payment of said bond was conditioned on the payment of damages
which [respondent] may sustain in the event x x x JDS failed to complete
the contracted works. [Respondent] can no longer prove its claim for
damages in view of the death of Santos. SICI was not informed by
[respondent] of the death of Santos. SICI was not informed by [respondent]
of the unilateral rescission of its contract with JDS, thus SICI was deprived
of its right to protect its interests as surety under the performance bond,
and therefore it was released from all liability. SICI was likewise denied due
process when it was not notified of plaintiff-appellant’s process of
determining and fixing the amount to be spent in the completion of the
unfinished project. The procedure contained in Article XV of the contract is
against public policy in that it denies SICI the right to procedural due
process. Finally, SICI alleged that [respondent] deviated from the terms and
conditions of the contract without the written consent of SICI, thus the
latter was released from all liability. SICI also prayed for the award
of P59,750.00 as attorney’s fees, and P5,000.00 as litigation expenses.
"On August 16, 1991, the lower court issued an order dismissing the
complaint of [respondent] against x x x JDS and SICI, on the ground that
the claim against JDS did not survive the death of its sole proprietor, Jose
D. Santos, Jr. The dispositive portion of the [O]rder reads as follows:
‘ACCORDINGLY, the complaint against the defendants Jose D. Santos, Jr.,
doing business under trade and style, ‘JDS Construction’ and Stronghold
Insurance Company, Inc. is ordered DISMISSED.
‘SO ORDERED.’
"On September 4, 1991, [respondent] filed a Motion for Reconsideration
seeking reconsideration of the lower court’s August 16, 1991 order
dismissing its complaint. [Petitioner] SICI field its ‘Comment and/or
Opposition to the Motion for Reconsideration.’ On October 15, 1991, the
lower court issued an Order, the dispositive portion of which reads as
follows:
‘WHEREFORE, premises considered, the Motion for Reconsideration is
hereby given due course. The Order dated 16 August 1991 for the dismissal
of the case against Stronghold Insurance Company, Inc., is reconsidered
and hereby reinstated (sic). However, the case against defendant Jose D.
Santos, Jr. (deceased) remains undisturbed.
‘Motion for Preliminary hearing and Manifestation with Motion filed by
[Stronghold] Insurance Company Inc., are set for hearing on November 7,
1991 at 2:00 o’clock in the afternoon.
‘SO ORDERED.’
"On June 4, 1992, [petitioner] SICI filed its ‘Memorandum for
Bondsman/Defendant SICI (Re: Effect of Death of defendant Jose D.
Santos, Jr.)’ reiterating its prayer for the dismissal of [respondent’s]
complaint.
"On January 28, 1993, the lower court issued the assailed Order
reconsidering its Order dated October 15, 1991, and ordered the case,
insofar as SICI is concerned, dismissed. [Respondent] filed its motion for
reconsideration which was opposed by [petitioner] SICI. On April 16, 1993,
the lower court denied [respondent’s] motion for reconsideration. x x x."4
Ruling of the Court of Appeals
The CA ruled that SICI’s obligation under the surety agreement was not
extinguished by the death of Jose D. Santos, Jr. Consequently, Republic-
Asahi could still go after SICI for the bond.
The appellate court also found that the lower court had erred in
pronouncing that the performance of the Contract in question had become
impossible by respondent’s act of rescission. The Contract was rescinded
because of the dissatisfaction of respondent with the slow pace of work and
pursuant to Article XIII of its Contract with JDS.
The CA ruled that "[p]erformance of the [C]ontract was impossible, not
because of [respondent’s] fault, but because of the fault of JDS Construction
and Jose D. Santos, Jr. for failure on their part to make satisfactory progress
on the project, which amounted to non-performance of the same. x x x
[P]ursuant to the [S]urety [C]ontract, SICI is liable for the non-performance
of said [C]ontract on the part of JDS Construction."5
Hence, this Petition.6
Issue
Petitioner states the issue for the Court’s consideration in the following
manner:
"Death is a defense of Santos’ heirs which Stronghold could also adopt as
its defense against obligee’s claim."7
More precisely, the issue is whether petitioner’s liability under the
performance bond was automatically extinguished by the death of Santos,
the principal.
The Court’s Ruling
The Petition has no merit.
Sole Issue:
Effect of Death on the Surety’s Liability
Petitioner contends that the death of Santos, the bond principal,
extinguished his liability under the surety bond. Consequently, it says, it is
automatically released from any liability under the bond.
As a general rule, the death of either the creditor or the debtor does not
extinguish the obligation.8 Obligations are transmissible to the heirs, except
when the transmission is prevented by the law, the stipulations of the
parties, or the nature of the obligation.9 Only obligations that are
personal10 or are identified with the persons themselves are extinguished
by death.11
Section 5 of Rule 8612 of the Rules of Court expressly allows the prosecution
of money claims arising from a contract against the estate of a deceased
debtor. Evidently, those claims are not actually extinguished.13 What is
extinguished is only the obligee’s action or suit filed before the court, which
is not then acting as a probate court.14
In the present case, whatever monetary liabilities or obligations Santos had
under his contracts with respondent were not intransmissible by their
nature, by stipulation, or by provision of law. Hence, his death did not result
in the extinguishment of those obligations or liabilities, which merely passed
on to his estate.15 Death is not a defense that he or his estate can set up to
wipe out the obligations under the performance bond. Consequently,
petitioner as surety cannot use his death to escape its monetary obligation
under its performance bond.
The liability of petitioner is contractual in nature, because it executed a
performance bond worded as follows:
"KNOW ALL MEN BY THESE PRESENTS:
"That we, JDS CONSTRUCTION of 208-A San Buena Building, contractor, of
Shaw Blvd., Pasig, MM 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 REPUBLIC ASAHI GLASS
CORPORATION and to any individual, firm, partnership, corporation or
association supplying the principal with labor or materials in the penal sum
of SEVEN HUNDRED NINETY FIVE THOUSAND (P795,000.00), 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 REPUBLIC ASAHI GLASS
CORPORATION represented by _________________, to fully and faithfully.
Comply with the site preparation works road and drainage system of
Philippine Float Plant at Pinagbuhatan, Pasig, Metro Manila.
"WHEREAS, the liability of the Surety Company under this bond shall in no
case exceed the sum of PESOS SEVEN HUNDRED NINETY FIVE THOUSAND
(P795,000.00) Philippine Currency, inclusive of interest, attorney’s fee, and
other damages, and shall not be liable for any advances of the obligee to
the principal.
"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 the satisfaction of obligations
for materials used and labor employed upon the work;
"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 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 shall also perform
well and truly and fulfill all the undertakings, covenants, terms, conditions,
and agreements of any and all duly authorized modifications of said contract
that may 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
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 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.
"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 institute action on the penal bond, pursuant to
the provision of Act No. 3688, is hereby acknowledge and confirmed."16
As a surety, petitioner is solidarily liable with Santos in accordance with the
Civil Code, which provides as follows:
"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 4,17 Chapter 3, Title I of this Book shall be observed. In such case
the contract is called a suretyship."
xxxxxxxxx
"Art. 1216. 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."
Elucidating on these provisions, the Court in Garcia v. Court of
Appeals18 stated thus:
"x x x. The surety’s 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 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 to be direct,
primary and absolute; in other words, he is directly and equally bound with
the principal. x x x."19
Under the law and jurisprudence, respondent may sue, separately or
together, the principal debtor and the petitioner herein, in view of the
solidary nature of their liability. The death of the principal debtor will not
work to convert, decrease or nullify the substantive right of the solidary
creditor. Evidently, despite the death of the principal debtor, respondent
may still sue petitioner alone, in accordance with the solidary nature of the
latter’s liability under the performance bond.
WHEREFORE, the Petition is DENIED and the Decision of the Court of
Appeals AFFIRMED. Costs against petitioner.
SO ORDERED.
G.R. No. 154183 August 7, 2003
SPOUSES VICKY TAN TOH and LUIS TOH, petitioners,
vs.
SOLID BANK CORPORATION, FIRST BUSINESS PAPER
CORPORATION, KENNETH NG LI and MA. VICTORIA NG
LI, respondents.
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
himself personally to answer for a corporate debt. While the
limited liability doctrine is intended to protect the stockholder by
immunizing him from personal liability for the corporate debts, he
may nevertheless divest himself of this protection by voluntarily
binding himself to the payment of the corporate debts. The
petitioner cannot therefore take refuge in this doctrine that he
has by his own acts effectively waived.
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 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 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 provisions of the "letter-advise" in sizing up the
panoply of commercial obligations between the parties herein.
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.
Furthermore, the assurance of the sureties in the Continuing Guaranty that
"[n]o act or omission of any 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 nothing out of the security contract they signed.52 Thus said,
the acts or omissions of the Bank conceded 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
by itself bring about the discharge of the sureties unless the extra time
is not permitted within the terms 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. Under Art. 2055 of the Civil Code, the liability of a
surety is measured by the terms of his contract, and while he is liable to the
full extent thereof, his accountability is strictly limited to that assumed by
its terms.
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 indispensable
marginal deposit of fifteen percent (15%) and the twenty-five percent
(25%) prerequisite for each extension of thirty (30) days. It bears stressing
that the requisite marginal deposit and security for every thirty (30) - day
extension specified in the "letter-advise" were not set aside or abrogated
nor was there any prior notice of such fact, if any was done.
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 –
Q: You extended it even if there was no marginal deposit?
A: Yes.
Q: And even if partial payment is less than 25%?
A: Yes x x x x
 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 –
Q: How much was supposed to be paid on 14 September
1993, the original LC of P1,655,675.13?
A: Under LC 93-0017 first matured on 14 September 1993.
We rolled it over, extended it to December 13, 1993 but they
made partial payment that is why we extended it.
Q: The question to you now is how much was paid? How
much is supposed to be paid on September 14, 1993 on the basis
of the original amount of P1,655,675.13?
A: Whenever this obligation becomes due and demandable
except when you roll it over so there is novation there on the
original obligations55 (underscoring supplied).
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.
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
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 –
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 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
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 (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 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 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 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 principal shall furnish the creditor
additional security, and the security being furnished under these 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
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.
G.R. No. 187403 February 12, 2014
TRADE AND INVESTMENT DEVELOPMENT CORPORATION OF THE
PHILIPPINES (Formerly PHILIPPINE EXPORT AND FOREIGN
LOAN GUARANTEE CORPORATION.), Petitioner,
vs.
ASIA PACES CORPORATION, PACES INDUSTRIAL CORPORATION,
NICOLAS C. BALDERRAMA, SIDDCOR INSURANCE CORPORATION
(now MEGA PACIFIC INSURANCE CORPORATION), PHILIPPINE
PHOENIX SURETY AND INSURANCE, INC., PARAMOUNT
INSURANCE CORPORATION,* AND FORTUNE LIFE AND GENERAL
INSURANCE COMPANY, Respondents.
DECISION
PERLAS-BERNABE, J.:
LETTER OF GUARANTEE LOAN AGREEMENT SECURED CREDITOR Surety Bond
Mega September 28,
No. ₱5,030,000.00
Pacific 198522
Assailed in this petition for review on certiorari are the Decision dated April
1 2
Letter of Guarantee No. 82- Loan Agreement dated March 9, Banque G(16)0149721

30, 2008 and Resolution3 dated March 27, 2009 of the Court of Appeals 446 F 1982 (with an extension dated Indosuez
dated March 11, 1982 March 25, 1983), in the amount of
(CA) in CA-G.R. CV No. 86558 which affirmed the Decision4 dated April 29,
(LG No. 82-446 F) US$250,000.00 ASPAC eventually defaulted on its loan obligations to Banque Indosuez and
2005 of the Regional Trial Court of Makati, Branch 132 (RTC) in Civil Case
PCI Capital, prompting them to demand payment from TIDCORP under the
No. 95-1812. The CA upheld the RTC’s finding that the liabilities of Letter of Guarantee No. 82- Loan Agreement dated June 10, PCI Letters of Guarantee. The demand letter of Banque Indosuez was sent to
Paramount Insurance Corporation (Paramount), and respondents Philippine 498 F 1982, in the amount of Capital
TIDCORP on March 5, 1984,23 while that of PCI Capital was sent on February
Phoenix Surety and Insurance, Inc. (Phoenix), Mega Pacific Insurance dated June 10, 1982 US$250,000.00
(LG No. 82-498 F) 21, 1985.24 In turn, TIDCORP demanded payment from
Corporation5 (Mega Pacific), and Fortune Life and General Insurance
Paramount,25 Phoenix,26 Mega Pacific,27 and Fortune28 under the Surety
Company (Fortune) on their respective counter-surety bonds have been
Letter of Guarantee No. 82- Loan Agreement dated October 5, PCI Bonds. TIDCORP’s demand letters to the bonding companies were sent on
extinguished due to the extension of the principal obligations these bonds
548 F 1982, in the amount of Capital May 28, 1985, or before the final expiration dates of all the Surety Bonds,
covered, to which said respondents did not give their consent. dated October 5, 1982 US$2,000,000.00
but to no avail.29
(LG No. 82-548 F)

The Facts
Taking into account the moratorium request30 issued by the Minister of
As a condition precedent to the issuance by TIDCORP of the Letters of Finance of the Republic of the Philippines (whereby members of the
On January 19, 1981, respondents Asia Paces Corporation (ASPAC) and Guarantee, ASPAC, PICO, and ASPAC’s President, respondent Nicolas C. international banking community were requested to grant government
Paces Industrial Corporation (PICO) entered into a sub-contracting Balderrama (Balderrama) had to execute several Deeds of financial institutions,31 such as TIDCORP, among others, a 90-day roll over
agreement, denominated as "200 KV Transmission Lines Contract No. 20- Undertaking,10 binding themselves to jointly and severally pay TIDCORP for from their foreign debts beginning October 17, 1983), TIDCORP and its
/80-II Civil Works & Electrical Erection," with the Electrical Projects whatever damages or liabilities it may incur under the aforementioned various creditor banks, such as Banque Indosuez and PCI Capital, forged a
Company of Libya (ELPCO), as main contractor, for the construction and letters. In the same light, ASPAC, as principal debtor, entered into surety Restructuring Agreement32 on April 16, 1986, extending the maturity dates
erection of a double circuit bundle phase conductor transmission line in the agreements (Surety Bonds) with Paramount, Phoenix, Mega Pacific and of the Letters of Guarantee.33 The bonding companies were not privy to the
country of Libya. To finance its working capital requirements, ASPAC Fortune (bonding companies), as sureties, also holding themselves solidarily Restructuring Agreement and, hence, did not give their consent to the
obtained loans from foreign banks Banque Indosuez and PCI Capital (Hong liable to TIDCORP, as creditor, for whatever damages or liabilities the latter payment extensions granted by Banque Indosuez and PCI Capital, among
Kong) Limited (PCI Capital) which, upon the latter’s request, were secured may incur under the Letters of Guarantee.11 The details of said bonds, others, in favor of TIDCORP. Nevertheless, following new payment
by several Letters of Guarantee issued by petitioner Trade and Investment including their respective coverage amounts and expiration dates, among schedules,34 TIDCORP fully settled its obligations under the Letters of
Development Corporation of the Philippines (TIDCORP),6then Philippine others, are as follows: Guarantee to both Banque Indosuez and PCI Capital on December 1, 1992,
Export and Foreign Loan Guarantee Corp., a government owned and and April 19 and June 4, 1991, respectively.35 Seeking payment for the
controlled corporation created for the primary purpose of, among others, damages and liabilities it had incurred under the Letters of Guarantee and
"guarantee[ing], with the prior concurrence of the Monetary Board, subject SURETY LETTER OF COVERAGE BONDING FINAL
with its previous demands therefor left unheeded, TIIDCORP filed a
to the rules and regulations that the Monetary Board may prescribe, BOND GUARANTEE AMOUNT12 COMPANY/ EXPIRATION
COVERED SURETY DATE
collection case36 against: (a) ASPAC, PICO, and Balderrama on account of
approved foreign loans, in whole or in part, granted to any entity, enterprise their obligations under the deeds of undertaking; and (b) the bonding
or corporation organized or licensed to engage in business in the companies on account of their obligations under the Surety Bonds.
Surety Bond
Philippines."7Under the Letters of Guarantee, TIDCORP irrevocably and No.
LG No. 82-
₱2,752,000.00 Paramount March 5, 198614
unconditionally guaranteed full payment of ASPAC’s loan obligations to 446 F
G(16)0194313
The RTC Ruling
Banque Indosuez and PCI Capital in the event of default by the latter.8 The
denominations of these letters, including the loan agreements secured by Surety Bond
each, are detailed as follows:9 No. ₱1,845,000.00 Paramount June 4, 198616 In a Decision37 dated April 29, 2005, the RTC partially granted TIDCORP’s
G(16)0190615 complaint and thereby found ASPAC, PICO, and Balderrama jointly and
LG No. 82-
498 F severally liable to TIDCORP in the sum of ₱277,891,359.66 pursuant to the
Surety Bond
November 21, terms of the Deeds of Undertaking, but absolved the bonding companies
No. ₱1,849,000.00 Fortune
198518 from liability on the ground that the moratorium request and the
G(16)1549517
consequent payment extensions granted by Banque Indosuez and PCI
Surety Bond Capital in TIDCORP’s favor without their consent extinguished their
LG No. 82- September 28,
No.
548 F
₱11,970,000.00 Phoenix
198520 obligations under the Surety Bonds. As basis, the RTC cited Article 2079 of
G(16)0190319
the Civil Code which provides that an extension granted to the debtor by
the creditor without the consent of the guarantor/surety extinguishes the
guaranty/suretyship, and, in this relation, added that the bonding
companies "should not be held liable as sureties for the extended period."38
Dissatisfied, TIDCORP and Balderrama filed separate appeals before the
CA.39 For its part, TIDCORP averred, among others, that Article 2079 of the
Civil Code is only limited to contracts of guaranty, and, hence, should not
apply to contracts of suretyship. Meanwhile, Balderrama theorized that the
main contractor’s (i.e., ELPCO) failure to pay ASPAC due to the war/political
upheaval in Libya which further resulted in the latter’s inability to pay
Banque Indosuez and PCI Capital had the effect of releasing him from his
obligations under the Deeds of Undertaking.
The CA Ruling
In a Decision40 dated April 30, 2008, the CA upheld the RTC’s ruling that the
moratorium request "had the effect of an extension granted to a debtor,
which extension was without the consent of the guarantor, and thus
released the surety companies from their respective liabilities under the
issued surety bonds" pursuant to Article 2079 of the Civil Code.41 To this
end, it noted that "the maturity of the foreign loans was extended to
December 31, 1989 or up to December 31, 1994 as provided under Section
4.01 of the Restructuring Agreement," and that "said extension is beyond
the expiry date[s] of the surety bonds x x x and the maturity date of the
principal obligations it purportedly secured, which extension was without
[the bonding companies’] consent,"42 It further discredited TIDCORP’s
contention that Article 2079 of the Civil Code is only limited to contracts of
guaranty by citing the Court’s pronouncement on the provision’s
applicability to suretyships in the case of Security Bank and Trust Co., Inc.
v. Cuenca43 (Security Bank). As for Balderrama, the CA debunked his
assignment of error, ratiocinating that "[h]is undertaking to pay is not
dependent upon the payment to be made by ELPCO to ASPAC."44 The CA,
however, modified the RTC decision to the extent of holding ASPAC, PICO,
and Balderrama liable to TIDCORP for attorney’s fees in the reasonable
amount of ₱2,000,000.00 since the payment of attorney’s fees was
stipulated by the parties in the Deed of Undertaking dated April 2, 1982.45
Aggrieved, TIDCORP and Balderrama filed separate motions for
reconsideration,46 which were, however, denied in a Resolution47 dated
March 27, 2009. Only TIDCORP elevated the matter to the Court on appeal.
Pending resolution thereof, or on October 6, 2010, TIDCORP filed a Motion
for Partial Withdrawal48 of its claim against Paramount in view of their
Compromise Agreement49 dated June 24, 2010 which was approved50 by
the CA in CA-G.R. CV No. 92818, entitled "Trade & Investment Corporation
of the Phils., et al. v. Roblet Industrial Construction Corp. and Paramount
Insurance Corp., et al."51
The Issue Before the Court
The essential issue raised for the Court’s resolution is whether or not the
CA erred in holding that the bonding companies’ liabilities to TIDCORP under
the Surety Bonds have been extinguished by the payment extensions
granted by Banque Indosuez and PCI Capital to TIDCORP under the
Restructuring Agreement.
The Court’s Ruling
The petition is granted.
A surety is considered in law as being the same party as the debtor in
relation to whatever is adjudged touching the obligation of the latter, and
their liabilities are interwoven as to be inseparable. Although the contract
of a surety is in essence secondary only to a valid principal obligation, his
liability to the creditor is direct, primary and absolute; he becomes liable for
the debt and duty of another although he possesses no direct or personal
interest over the obligations nor does he receive any benefit
therefrom.52 The fundamental reason therefor is that a contract of
suretyship effectively binds the surety as a solidary debtor. This is provided
under Article 2047 of the Civil Code which states:
Article 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 and underscoring supplied)
Thus, since the surety is a solidary debtor, it is not necessary that the
original debtor first failed to pay before the surety could be made liable; it
is enough that a demand for payment is made by the creditor for the
surety’s liability to attach.53
Article 1216 of the Civil Code provides that:
Article 1216. 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.
Comparing a surety’s obligations with that of a guarantor, the Court, in the
case of Palmares v. CA,54 illumined that a surety is responsible for the debt’s
payment at once if the principal debtor makes default, whereas a guarantor
pays only if the principal debtor is unable to pay, viz.:55
A surety is an insurer of the debt, whereas a guarantor is an insurer of the
solvency of the debtor.1âwphi1 A suretyship is an undertaking that the debt
shall be paid; a guaranty, an undertaking that the debtor shall pay. 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. 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. 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.
(Emphases and underscoring supplied; citations omitted)
Despite these distinctions, the Court in Cochingyan, Jr. v. R&B Surety &
Insurance Co., Inc.,56 and later in the case of Security Bank, held that Article
2079 of the Civil Code, which pertinently provides that "[a]n extension
granted to the debtor by the creditor without the consent of the guarantor
extinguishes the guaranty," equally applies to both contracts of guaranty
and suretyship. The rationale therefor was explained by the Court as
follows:57
The theory behind Article 2079 is that an extension of time given to the
principal debtor by the creditor without the surety’s consent would deprive
the surety of his right to pay the creditor and to be immediately subrogated
to the creditor’s remedies against the principal debtor upon the maturity
date. The surety is said to be entitled to protect himself against the
contingency of the principal debtor or the indemnitors becoming insolvent
during the extended period. (Emphasis and underscoring supplied; citations
omitted)
Applying these principles, the Court finds that the payment extensions
granted by Banque Indosuez and PCI Capital to TIDCORP under the
Restructuring Agreement did not have the effect of extinguishing the
bonding companies’ obligations to TIDCORP under the Surety Bonds,
notwithstanding the fact that said extensions were made without their
consent. This is because Article 2079 of the Civil Code refers to a payment
extension granted by the creditor to the principal debtor without the consent
of the guarantor or surety. In this case, the Surety Bonds are suretyship
contracts which secure the debt of ASPAC, the principal debtor, under the
Deeds of Undertaking to pay TIDCORP, the creditor, the damages and
liabilities it may incur under the Letters of Guarantee, within the bounds of
the bonds’ respective coverage periods and amounts. No payment
extension was, however, granted by TIDCORP in favor of ASPAC in this
regard; hence, Article 2079 of the Civil Code should not be applied with
respect to the bonding companies’ liabilities to TIDCORP under the Surety
Bonds.
The payment extensions granted by Banque Indosuez and PCI Capital
pertain to TIDCORP’s own debt under the Letters of Guarantee wherein it
(TIDCORP) irrevocably and unconditionally guaranteed full payment of
ASPAC’s loan obligations to the banks in the event of its (ASPAC) default.
In other words, the Letters of Guarantee secured ASPAC’s loan agreements
to the banks. Under this arrangement, TIDCORP therefore acted 58 as a
guarantor,59 with ASPAC as the principal debtor, and the banks as creditors.
Proceeding from the foregoing discussion, it is quite clear that there are two
sets of transactions that should be treated separately and distinctly from
one another following the civil law principle of relativity of contracts "which
provides that contracts can only bind the parties who entered into it, and it
cannot favor or prejudice a third person, even if he is aware of such contract
and has acted with knowledge thereof."60 Verily, as the Surety Bonds
concern ASPAC’s debt to TIDCORP and not TIDCORP’s debt to the banks,
the payments extensions (which conversely concern TIDCORP’s debt to the
banks and not ASPAC’s debt to TIDCORP) would not deprive the bonding
companies of their right to pay their creditor (TIDCORP) and to be
immediately subrogated to the latter’s remedies against the principal debtor
(ASPAC) upon the maturity date. It must be stressed that these payment
extensions did not modify the terms of the Letters of Guarantee but only
provided for a new payment scheme covering TIDCORP’s liability to the
banks. In fine, considering the inoperability of Article 2079 of the Civil Code
in this case, the bonding companies’ liabilities to TIDCORP under the Surety
Bonds – except those issued by Paramount and covered by its Compromise
Agreement with TIDCORP – have not been extinguished. Since these
obligations arose and have been duly demanded within the coverage
periods of all the Surety Bonds,61 TIDCORP’s claim is hereby granted and
the CA’s ruling on this score consequently reversed. Nevertheless, given
that no appeal has been filed on Balderrama’s adjudged liability or on the
award of attorney's fees, the CA's dispositions on these matters are now
deemed as final and executory.
WHEREFORE, the petition is GRANTED. The Decision dated April 30, 2008
and Resolution dated March 27, 2009 of the Court of Appeals in CA-G.R. CV
No. 86558 are MODIFIED in that respondents Philippine Phoenix Surety and
Insurance, Inc., Mega Pacific Insurance Corporation, Fortune Life and
General Insurance Company are ORDERED to fulfill their respective
obligations to petitioner Trade and Investment Development Corporation of
the Philippines (TIDCORP) under the Surety Bonds subject of this case,
discounting the obligations arising from the Surety Bonds issued by
Paramount Insurance Corporation and covered by its Compromise
Agreement with TIDCORP. SO ORDERED.
G.R. No. L-20567 July 30, 1965
PHILIPPINE NATIONAL BANK, petitioner,
vs.
MANILA SURETY and FIDELITY CO., INC. and THE COURT OF
APPEALS (Second Division), respondents.
REYES, J.B.L., J.:
The Philippine National Bank petitions for the review and reversal of the
decision rendered by the Court of Appeals (Second Division), in its case CA-
G.R. No. 24232-R, dismissing the Bank's complaint against respondent
Manila Surety & Fidelity Co., Inc., and modifying the judgment of the Court
of First Instance of Manila in its Civil Case No. 11263.
The material facts of the case, as found by the appellate Court, are as
follows:
The Philippine National Bank had opened a letter of credit and advanced
thereon $120,000.00 to Edgington Oil Refinery for 8,000 tons of hot asphalt.
Of this amount, 2,000 tons worth P279,000.00 were released and delivered
to Adams & Taguba Corporation (known as ATACO) under a trust receipt
guaranteed by Manila Surety & Fidelity Co. up to the amount of P75,000.00.
To pay for the asphalt, ATACO constituted the Bank its assignee and
attorney-in-fact to receive and collect from the Bureau of Public Works the
amount aforesaid out of funds payable to the assignor under Purchase
Order No. 71947. This assignment (Exhibit "A") stipulated that:
The conditions of this assignment are as follows:
1. The same shall remain irrevocable until the said credit
accomodation is fully liquidated.
2. The PHILIPPINE NATIONAL BANK is hereby appointed as our
Attorney-in-Fact for us and in our name, place and stead, to
collect and to receive the payments to be made by virtue of the
aforesaid Purchase Order, with full power and authority to
execute and deliver on our behalf, receipt for all payments made
to it; to endorse for deposit or encashment checks, money order
and treasury warrants which said Bank may receive, and to apply
said payments to the settlement of said credit accommodation.
This power of attorney shall also remain irrevocable until our total
indebtedness to the said Bank have been fully liquidated. (Exhibit
E)
ATACO delivered to the Bureau of Public Works, and the latter accepted,
asphalt to the total value of P431,466.52. Of this amount the Bank regularly
collected, from April 21, 1948 to November 18, 1948, P106,382.01.
Thereafter, for unexplained reasons, the Bank ceased to collect, until in
1952 its investigators found that more moneys were payable to ATACO from
the Public Works office, because the latter had allowed mother creditor to
collect funds due to ATACO under the same purchase order to a total of
P311,230.41.
Its demands on the principal debtor and the Surety having been refused,
the Bank sued both in the Court of First Instance of Manila to recover the
balance of P158,563.18 as of February 15, 1950, plus interests and costs.
On October 4, 1958, the trial court rendered a decision, the dispositive
portion of which reads:
WHEREFORE, judgment is hereby rendered as follows:
1. Ordering defendants, Adams & Taguba Corporation and Manila
Surety & Fidelity Co., Inc., to pay plaintiff, Philippines National
Bank, the sum of P174,462.34 as of February 24, 1956, minus
the amount of P8,000 which defendant, Manila Surety Co., Inc.
paid from March, 1956 to October, 1956 with interest at the rate
of 5% per annum from February 25, 1956, until fully paid
provided that the total amount that should be paid by defendant
Manila Surety Co., Inc., on account of this case shall not exceed
P75,000.00, and to pay the costs;
2. Orderinq cross-defendant, Adams & Taguba Corporation, and
third-party defendant, Pedro A. Taguba, jointly and severally, to
pay cross and third-party plaintiff, Manila Surety & Fidelity Co.,
Inc., whatever amount the latter has paid or shall pay under this
judgment;
3. Dismissing the complaint insofar as the claim for 17% special
tax is concerned; and
4. Dismissing the counterclaim of defendants Adams & Taguba
Corporation and Manila Surety & Fidelity Co., Inc.
From said decision, only the defendant Surety Company has duly perfected
its appeal. The Central Bank of the Philippines did not appeal, while
defendant ATACO failed to perfect its appeal.
The Bank recoursed to the Court of Appeals, which rendered an adverse
decision and modified the judgment of the court of origin as to the surety's
liability. Its motions for reconsideration having proved unavailing, the Bank
appealed to this Court.
The Court of Appeals found the Bank to have been negligent in having
stopped collecting from the Bureau of Public Works the moneys falling due
in favor of the principal debtor, ATACO, from and after November 18, 1948,
before the debt was fully collected, thereby allowing such funds to be taken
and exhausted by other creditors to the prejudice of the surety, and held
that the Bank's negligence resulted in exoneration of respondent Manila
Surety & Fidelity Company.
This holding is now assailed by the Bank. It contends the power of attorney
obtained from ATACO was merely in additional security in its favor, and that
it was the duty of the surety, and not that of the creditor, owed see to it
that the obligor fulfills his obligation, and that the creditor owed the surety
no duty of active diligence to collect any, sum from the principal debtor,
citing Judge Advocate General vs. Court of Appeals, G.R. No. L-10671,
October 23, 1958.
This argument of appellant Bank misses the point. The Court of Appeals did
not hold the Bank answerable for negligence in failing to collect from the
principal debtor but for its neglect in collecting the sums due to the debtor
from the Bureau of Public Works, contrary to its duty as holder of an
exclusive and irrevocable power of attorney to make such collections, since
an agent is required to act with the care of a good father of a family (Civ.
Code, Art. 1887) and becomes liable for the damages which the principal
may suffer through his non-performance (Civ. Code, Art. 1884). Certainly,
the Bank could not expect that the Bank would diligently perform its duty
under its power of attorney, but because they could not have collected from
the Bureau even if they had attempted to do so. It must not be forgotten
that the Bank's power to collect was expressly made irrevocable, so that the
Bureau of Public Works could very well refuse to make payments to the
principal debtor itself, and a fortiori reject any demands by the surety.
"G", informing the debtor that as of its date, October 31, 1949, its
outstanding balance was P156,374.83. Said Exhibit "G" has no bearing on
the issue whether the Bank has exercised due diligence in collecting from
the Bureau of Public Works, since the letter was addressed to ATACO, and
the funds were to come from elsewhere. As to the letter of demand on the
Public Works office, it does not appear that any reply thereto was made;
nor that the demand was pressed, nor that the debtor or the surety were
ever apprised that payment was not being made. The fact remains that
because of the Bank's inactivity the other creditors were enabled to collect
P173,870.31, when the balance due to appellant Bank was only
P158,563.18. The finding of negligence made by the Court of Appeals is
thus not only conclusive on us but fully supported by the evidence.
Even if the Court of Appeals erred on the second reason it advanced in
support of the decision now under appeal, because the rules on application
of payments, giving preference to secured obligations are only operative in
cases where there are several distinct debts, and not where there is only
one that is partially secured, the error is of no importance, since the
principal reason based on the Bank's negligence furnishes adequate support
to the decision of the Court of Appeals that the surety was thereby released.
WHEREFORE, the appealed decision is affirmed, with costs against appellant
Philippine National Bank.

Even if the assignment with power of attorney from the principal debtor
were considered as mere additional security still, by allowing the assigned
funds to be exhausted without notifying the surety, the Bank deprived the
former of any possibility of recoursing against that security. The Bank
thereby exonerated the surety, pursuant to Article 2080 of the Civil Code:

ART. 2080. — The guarantors, even though they be solidary, are

released from their obligation whenever by come act of the
creditor they cannot be subrogated to the rights, mortgages and
preferences of the latter. (Emphasis supplied.)

The appellant points out to its letter of demand, Exhibit "K", addressed to
the Bureau of Public Works, on May 5, 1949, and its letter to ATACO, Exhibit