Guarany/Surety 

#89 Estrella Palmares Vs. Court Of Appeals And M.B. Lending Corporation
(Fran)

FACTS:

Pursuant to a promissory note dated March 13, 1990, respondent M.B. Lending Corporation (CORP.)
extended a loan to the spouses 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. On four occasions after the execution of the P.N. and
even after the loan matured, petitioner and the Azarraga spouses were able to pay a total of P16,300.00,
leaving a balance of P13,700.00. No payments were made after the last payment on September 26,
1991.

Due to petitioner's solidary liability, respondent CORP. filed a complaint against petitioner Palmares as
the lone party-defendant, to the exclusion of the principal debtors, allegedly by reason of the insolvency of
the latter.

Petitioner alleged that in August 1990, after the loan matured, she offered to settle the obligation with
respondent 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 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.

RTC: dismissed the complaint without prejudice to the filing of a separate action against the spouses
Azarraga who are primarily liable on the instrument.

CA: 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.

ISSUE:
W/N the Court of Appeals erred in ruling that Palmares acted as surety and is therefore solidarily liable to
pay the promissory note.

SC: NO. (The petition is dismissed.)

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. The factual scenario obtaining in the case before us
warrants a liberal application of the rule in favor of respondent corporation. The Civil Code 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.

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.

A surety is an insurer of the debt, whereas a guarantor is an insurer of the solvency of the debtor. 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

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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.

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 portion of the promissory note
do not contain any other condition for the enforcement of respondent’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.

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. 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. 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. This can
only be construed to mean that the payments made by the principal debtors were considered by
respondent 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.

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. As a surety, petitioner is equally bound by such waiver.

Petitioner also claims that the filing is premature and 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. Under Article 1216 NCC, the creditor may proceed against any one of the solidary debtors or
some or all of them simultaneously. 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. 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, before proceeding against the surety, to resort to and exhaust his remedies against the
principal, particularly where both principal and surety are equally bound.

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, to show that she has been discharged by some
act of the creditor.

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#90 Philippine Export And Foreign Loan Guarantee Corporation Vs. V.P. Eusebio Construction,
Inc.
(Gracey)

FACTS:

On 8 November 1980, the State Organization of Buildings (SOB), Ministry of Housing and Construction,
Baghdad, Iraq, awarded the construction of the Institute of Physical Therapy Medical Rehabilitation
Center, Phase II, in Baghdad, Iraq, (hereinafter the Project) to Ajyal, a firm duly licensed with the Kuwait
Chamber of Commerce for a total contract price of ID5,416,089/046 (or about US$18,739,668).

On 7 March 1981, respondent spouses Eduardo and Iluminada Santos, in behalf of respondent 3-Plex, a
local contractor engaged in construction business, entered into a joint venture agreement with Ajyal
wherein the former undertook the execution of the entire Project, while the latter would be entitled to a
commission of 4% of the contract price. Later, or on 8 April 1981, respondent 3-Plex, not being accredited
by or registered with the Philippine Overseas Construction Board (POCB), assigned and transferred all its
rights and interests under the joint venture agreement to VPECI, a construction and engineering firm duly
registered with the POCB. However, on 2 May 1981, 3-Plex and VPECI entered into an agreement that
the execution of the Project would be under their joint management.

The SOB required the contractors to submit (1) a performance bond of ID271,808/610 representing 5% of
the total contract price and (2) an advance payment bond of ID541,608/901 representing 10% of the
advance payment to be released upon signing of the contract. To comply with these requirements,
respondents 3-Plex and VPECI applied for the issuance of a guarantee with petitioner Philguarantee, a
government financial institution empowered to issue guarantees for qualified Filipino contractors to secure
the performance of approved service contracts abroad.

Petitioner Philguarantee approved respondents' application. Subsequently, letters of guarantee were

issued by Philguarantee to the Rafidain Bank of Baghdad covering 100% of the performance and
advance payment bonds, but they were not accepted by SOB. What SOB required was a letter-guarantee
from Rafidain Bank, the government bank of Iraq. Rafidain Bank then issued a performance bond in favor
of SOB on the condition that another foreign bank, not Philguarantee, would issue a counter-guarantee to
cover its exposure. Al Ahli Bank of Kuwait was, therefore, engaged to provide a counter-guarantee to
Rafidain Bank, but it required a similar counter-guarantee in its favor from the petitioner. Thus, three
layers of guarantees had to be arranged.

Upon the application of respondents 3-Plex and VPECI, petitioner Philguarantee issued in favor of Al Ahli
Bank of Kuwait Letter of Guarantee No. 81-194-F (Performance Bond Guarantee) in the amount of
ID271,808/610 and Letter of Guarantee No. 81-195-F (Advance Payment Guarantee) in the amount of
ID541,608/901, both for a term of eighteen months from 25 May 1981. These letters of guarantee were
secured by (1) a Deed of Undertaking executed by respondents VPECI, Spouses Vicente P. Eusebio and
Soledad C. Eusebio, 3-Plex, and Spouses Eduardo E. Santos and Iluminada Santos; and (2) a surety
bond issued by respondent First Integrated Bonding and Insurance Company, Inc. (FIBICI). The Surety
Bond was later amended on 23 June 1981 to increase the amount of coverage from P6.4 million to
P6.967 million and to change the bank in whose favor the petitioner's guarantee was issued, from
Rafidain Bank to Al Ahli Bank of Kuwait.

On 11 June 1981, SOB and the joint venture VPECI and Ajyal executed the service contract for the
construction of the Institute of Physical Therapy Medical Rehabilitation Center, Phase II, in Baghdad, Iraq,
wherein the joint venture contractor undertook to complete the Project within a period of 547 days or 18
months. Under the Contract, the Joint Venture would supply manpower and materials, and SOB would
refund to the former 25% of the project cost in Iraqi Dinar and the 75% in US dollars at the exchange rate
of 1 Dinar to 3.37777 US Dollars.

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As of March 1986, the status of the Project was 51% accomplished, meaning the structures were already
finished. The remaining 47% consisted in electro-mechanical works and the 2%, sanitary works, which
both required importation of equipment and materials.

On 26 October 1986, Al Ahli Bank of Kuwait sent a telex call to the petitioner demanding full payment of
its performance bond counter-guarantee.

Upon receiving a copy of that telex message on 27 October 1986, respondent VPECI requested Iraq
Trade and Economic Development Minister Mohammad Fadhi Hussein to recall the telex call on the
performance guarantee for being a drastic action in contravention of its mutual agreement with the latter
that (1) the imposition of penalty would be held in abeyance until the completion of the project; and (2) the
time extension would be open, depending on the developments on the negotiations for a foreign loan to
finance the completion of the project. It also wrote SOB protesting the call for lack of factual or legal
basis, since the failure to complete the Project was due to (1) the Iraqi government's lack of foreign
exchange with which to pay its (VPECI's) accomplishments and (2) SOB's noncompliance for the past
several years with the provision in the contract that 75% of the billings would be paid in US dollars.
Subsequently, or on 19 November 1986, respondent VPECI advised the petitioner not to pay yet Al Ahli
Bank because efforts were being exerted for the amicable settlement of the Project.

On 14 April 1987, the petitioner received another telex message from Al Ahli Bank stating that it had
already paid to Rafidain Bank the sum of US$876,564 under its letter of guarantee, and demanding
reimbursement by the petitioner of what it paid to the latter bank plus interest thereon and related
expenses.

Both petitioner Philguarantee and respondent VPECI sought the assistance of some government
agencies of the Philippines. On 10 August 1987, VPECI requested the Central Bank to hold in abeyance
the payment by the petitioner "to allow the diplomatic machinery to take its course, for otherwise, the
Philippine government , through the Philguarantee and the Central Bank, would become instruments of
the Iraqi Government in consummating a clear act of injustice and inequity committed against a Filipino
contractor."

On 27 August 1987, the Central Bank authorized the remittance for its account of the amount of
US$876,564 (equivalent to ID271, 808/610) to Al Ahli Bank representing full payment of the performance
counter-guarantee for VPECI's project in Iraq.

On 6 November 1987, Philguarantee informed VPECI that it would remit US$876,564 to Al Ahli Bank, and
reiterated the joint and solidary obligation of the respondents to reimburse the petitioner for the advances
made on its counter-guarantee.

When the respondents failed to pay, the petitioner filed on 9 July 1991 a civil case for collection of a sum
of money against the respondents before the RTC of Makati City.

After due trial, the trial court ruled against Philguarantee and held that the latter had no valid cause of
action against the respondents. It opined that at the time the call was made on the guarantee which was
executed for a specific period, the guarantee had already lapsed or expired. There was no valid renewal
or extension of the guarantee for failure of the petitioner to secure respondents' express consent thereto.
The trial court also found that the joint venture contractor incurred no delay in the execution of the Project.
Considering the Project owner's violations of the contract which rendered impossible the joint venture
contractor's performance of its undertaking, no valid call on the guarantee could be made. Furthermore,
the trial court held that no valid notice was first made by the Project owner SOB to the joint venture
contractor before the call on the guarantee. Accordingly, it dismissed the complaint, as well as the
counterclaims and cross-claim, and ordered the petitioner to pay attorney's fees of P100,000 to
respondents VPECI and Eusebio Spouses and P100,000 to 3-Plex and the Santos Spouses, plus costs.

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Court of Appeals affirmed the trial court's decision,

ISSUE:

Whether petitioner is a guarantor or a surety.

RULING: Guarantor

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 contract is called suretyship. 37

Strictly speaking, guaranty and surety are nearly related, and many of the principles are common to both.
In both contracts, there is a promise to answer for the debt or default of another. However, in this
jurisdiction, they may be distinguished thus:

1. A surety is usually bound with his principal by the same instrument executed at the same time
and on the same consideration. On the other hand, the contract of guaranty is the guarantor's
own separate undertaking often supported by a consideration separate from that supporting the
contract of the principal; the original contract of his principal is not his contract.

2. A surety assumes liability as a regular party to the undertaking; while the liability of a guarantor
is conditional depending on the failure of the primary debtor to pay the obligation.

3. The obligation of a surety is primary, while that of a guarantor is secondary.

4. A surety is an original promissor and debtor from the beginning, while a guarantor is charged
on his own undertaking.

5. A surety is, ordinarily, held to know every default of his principal; whereas a guarantor is not
bound to take notice of the non-performance of his principal.

6. Usually, a surety 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. A guarantor 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.

Guided by the abovementioned distinctions between a surety and a guaranty, as well as the factual milieu
of this case, we find that the Court of Appeals and the trial court were correct in ruling that the petitioner is
a guarantor and not a surety. That the guarantee issued by the petitioner is unconditional and irrevocable
does not make the petitioner a surety. As a guaranty, it is still characterized by its subsidiary and
conditional quality because it does not take effect until the fulfillment of the condition, namely, that the
40
principal obligor should fail in his obligation at the time and in the form he bound himself. In other words,
an unconditional guarantee is still subject to the condition that the principal debtor should default in his
obligation first before resort to the guarantor could be had. A conditional guaranty, as opposed to an
unconditional guaranty, is one which depends upon some extraneous event, beyond the mere default of
the principal, and generally upon notice of the principal's default and reasonable diligence in exhausting
proper remedies against the principal.

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#91 Agra Vs. Pnb

(Jovit)

Facts:

In its complaint, PNB alleged that on July 17, 1967, Fil-eastern was granted a loan in the amount of Php
2.5M with interests at 12% pa. To secure payment of the loan, Fil-eastern as principal and sureties
Atienza, Novales, Agra and Gamo executed a Surety Agreement, whereby the sureties, jointly and
severally with the principal, guaranteed and warranted to PNB, its successor or assigns, prompt payment
of the obligation.

Defendants on the other hand claimed that they only signed the agreement with the understanding that
the same was a mere formality required of the officers of the corporation, that they did not in any way
received a single centavo from the loan nor did they derive any profits therefrom. They further alleged
that the loan was approved under a highly anomalous circumstance and that it was null and void. The
defendants also claimed that the extension of time of payment of the loan in question released and
discharged the defendants from any liability under the Surety Agreement. The defendants also claimed
that the Surety Agreement is null and void due to defect in the consent of the defendants, and their
liabilities, if any, has been extinguished by novation.
Because of their failure to answer the complaint within the reglementary period, Fil-eastern was declared
in default.

The defendants filed an amended third-party complaint and alleged that they were mere employees of
Ysmael Steel Manufacturing and that they were in no position to act as securities of the loan. That they
became incorporators of Fil-eastern because of fear in losing their employment. However, third-party
defendant answered that the defendants freely and voluntarily signed the Surety Agreement. Lastly, the
defendants claimed laches on the part of PNB.

The lower court ruled in favor of PNB. The decision was affirmed by CA. Hence this petition.

Issue: W/N the sureties are liable for the loan.

Held:

Yes, they are liable for the loan.

The defense of laches claimed by the defendants cannot stand ground. The complaint was filed withint
he 10-year prescriptive period for written contracts.

On the issue of sureties, the Court held that the defendants are bound by the Surety Agreement entered
into by them. The defendants questioned the surety agreement on the ground of lack of consent.
However, the defendants failed to question this within the 4-year prescriptive period provided for by Art.
1391. In the case at bar, the contracts were signed in 1967m 1968 and 1969. It was only in 1976 that
they questioned the contract when PNB had filed the complaint. Hence, their cause of action based on
vitiated consent had prescribed.
It must be remembered that the obligation of the surety is direct, primary and absolute. According to the
SC, “ the contract of surety is in essence secondary only to a valid 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. The surety therefore becomes liable for the debt or duty of another
although he possesses no direct or personal interest over the obligation nor does he receive any benefit
therefrom.”

In the case at bar, the defendants agreed to the stipulation in the surety agreement that “the liability on
this guaranty shall be solidary, direct and immediate and not contingent upon the pursuit by the
creditor…”

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If they had mistaken the import of the agreement, they could have easily asked for its revocation.

The decision of the lower court was affirmed.

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#92 JN Development Corporation vs. Philippine Export and Foreign Loan Guarantee
Corporation
(Lyle)

Topic: Excussion

Facts:

JN Development Corporation (JN) entered into an Export Packing Credit Line for 2M pesos with
Traders Royal Bank (TRB). The loan was secured by a real estate mortgage and a letter of
guarantee from Philippine Export and Foreign Loan Guarantee Corporation (PG), now Trade
and Investment Development Corporation, covering 70% of the credit line. With PG issuing
such guarantee in favor of TRB, JN along with spouses Sta. Ana and Cruz executed an
Undertaking to assure repayment to PG.

JN failed to pay the loan. TRB sought for the enforcement of the guarantee with PG. PG paid
934k and subsequently demanded payment from JN. The demands remained unanswered by
JN. 2 months after PG paid TRB, JN through Sta. Ana proposed payment through development
and sale of the mortgaged property. PG rejected JN’s proposal.

PG filed a complaint with the RTC for collection and damages with JN, Sta. Ana and Cruz. RTC
dismissed the complaint. In its decision it ruled that petitioners JN etal were not liable to
reimburse PG for its payment with TRB since the latter was able to foreclose the mortgage by
JN. Furthermore, the court said that the guarantee was good for only a year, hence PG had no
legal duty to pay TRB when it made payment in March 10, 1981. CA reversed the RTC
decision.

Petitioners claim before the SC that they are no longer liable to pay PG. PG on the other hand
claims before the SC that the date of default and not the actual date of payment, determines the
liability of the guarantor and that having paid TRB when the loan became due, it should be
indemnified. It also claimed that their could be no waiver of the right of excussion since such
right is available as a defense of the guarantor and not by the debtor.

Issue:

W/N JN etal should reimburse PG for the payment it made with TRB

Held:

YES. Under a contract of guarantee, the guarantor binds himself to the creditor to fulfill the
obligation of the principal debtor in case the latter should fail to do so. The guarantor who pays
for the debtor, in turn, must be indemnified by the latter. However, the guarantor cannot be
compelled to pay the creditor unless the latter has exhausted all the property of the debtor and
resorted to all the legal remedies against the debtor. This is what is known as the benefit of
excussion.

It is clear that excussion may only be invoked after legal remedies against the principal debtor
have been expanded. Thus, it was held that the creditor must first obtain a judgment against
the debtor before assuming to run after the alleged guarantor.

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However, while a guarantor enjoys the benefit of excussion, nothing prevents him from paying
the obligation once demand is made on him. Excussion, after all, is the right granted to him by
law and as such he may opt to make use of it or waive it. PG’s waiver of the right of excussion
cannot prevent it from demanding reimbursement from petitioners. The law clearly requires the
debtor to indemnify the guarantor what the latter has paid.

Furthermore, petitioner’s claim that PG had no more obligation to pay TRB because of the
alleged expiration of the guarantee is untenable. The guarantee was only up to Dec 17, 1980.
JN’s obligation with TRB fell due on June 30, 1980, and demand on PG was made by TRB on
Oct 8, 1980. That payment was actually made only on March 10. 1981 does not take it out from
the terms of the guarantee. What is controlling is that default and demand on PG had taken
place while the guarantee was still in force.

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