Republic of the Philippines Undertaking of Surety 8 holding themselves personally liable for the accountabilities of
SUPREME COURT FCC.
Baguio
THIRD DIVISION
G.R. No. 180898               April 18, 2012
PHILIPPINE CHARTER INSURANCE CORPORATION, Petitioner,
vs.
PETROLEUM DISTRIBUTORS & SERVICE CORPORATION Respondent.
DECISION
MENDOZA, J.:
Before the Court is a petition for review under Rule 45 of the Rules of Court seeking the
reversal of the July 31, 2007 Decision 1 and the December 28, 2007 Resolution2 of the
Court of Appeals (CA) in CA-G.R. CV No. 82417, which affirmed with modification the
January 12, 2004 Decision of the Regional Trial Court, Branch 111, Pasay City (RTC).
The Facts:
On January 27, 1999, respondent Petroleum Distributors and Services Corporation (PDSC),
through its president, Conrado P. Limcaco, entered into a building contract 3 with N.C.
Francia Construction Corporation (FCC), represented by its president and chief executive
officer, Emmanuel T. Francia, for the construction of a four-story commercial and parking
complex located at MIA Road corner Domestic Road, Pasay City, known as Park ‘N Fly
Building (Park ‘N Fly). Under the contract, FCC agreed to undertake the construction of
Park ‘N Fly for the price of ₱ 45,522,197.72.
The parties agreed that the construction work would begin on February 1, 1999. Under
the Project Evaluation and Review Technique Critical Path Method (PERT-CPM), the
project was divided into two stages: Phase 1 4 of the construction work would be finished
on May 17, 1999 and Phase 2 5 would begin on May 18, 1999 and finish on October 20,
1999. The project should be turned over by October 21, 1999. 6 It was further stipulated
that in the event FCC failed to finish the project within the period specified, liquidated
damages equivalent to 1/10 of 1% of the contract price for every day of delay shall accrue
in favor of PDSC.7
To ensure compliance with its obligation, FCC’s individual officers, namely, Natividad
Francia, Emmanuel C. Francia, Jr., Anna Sheila C. Francia, San Diego Felipe G. Bermudez,
Emmanuel T. Francia, Charlemagne C. Francia, and Ruben G. Caperiña, signed the
Also, FCC procured Performance Bond No. 31915 amounting to ₱ 6,828,329.00 from
petitioner Philippine Charter Insurance Corporation (PCIC) to secure full and faithful
performance of its obligation under the Building Contract. 9
The construction of the Park ‘N Fly started on February 1, 1999.
Pursuant to the Building Contract, PDSC sourced out construction materials and
subcontracted various phases of the work to help obtain the lowest cost of the
construction and speed up the work of the project. These resulted in the reduction of the
contract price.10
During the Phase 1 of the project, PDSC noticed that FCC was sixteen (16) days behind
schedule. In a Letter 11 dated March 25, 1999, it reminded FCC to catch up with the
schedule of the projected work path, or it would impose the penalty of 1/10 of the 1% of
the contract price. The problem, however, was not addressed, as the delay increased to
30 days12 and ballooned to 60 days.13
Consequently, on September 10, 1999, FCC executed a deed of assignment, 14 assigning a
portion of its receivables from Caltex Philippines, Inc. (Caltex), and a chattel mortgage, 15 
conveying some of its construction equipment to PDSC as additional security for the
faithful compliance with its obligation.
On even date, PDSC and FCC likewise executed a memorandum of agreement (MOA),16 
wherein the parties agreed to revise the work schedule of the project. As a consequence,
Performance Bond No. 31915 was extended up to March 2, 2000. 17
For failure of FCC to accomplish the project within the agreed completion period, PDSC, in
a letter18 dated December 3, 1999, informed FCC that it was terminating their contract
based on Article 12, Paragraph 12.1 of the Building Contract. Subsequently, PDSC sent
demand letters19 to FCC and its officers for the payment of liquidated damages amounting
to ₱ 9,149,962.02 for the delay. In the same manner, PDSC wrote PCIC asking for
remuneration pursuant to Performance Bond No. 31915. 20
Despite notice, PDSC did not receive any reply from either FCC or PCIC, constraining it to
file a complaint21 for damages, recovery of possession of personal property and/or
foreclosure of mortgage with prayer for the issuance of a writ of replevin and writ of
attachment, against FCC and its officers before the RTC. PDSC later filed a supplemental
complaint22 impleading PCIC, claiming coverage under Performance Bond No. 31915 in the
amount of ₱ 6,828,329.66.
In its Amended Answer with affirmative defense and counterclaim, 23 FCC admitted that it
entered into a contract with PDSC for the construction of the Park ‘N Fly building. It,
however, asserted that due to outsourcing of different materials and subcontracting of
various phases of works made by PDSC, the contract price was invariably reduced to ₱
19,809,822.12.
FCC denied any liability to PDSC claiming that any such claim by the latter had been
waived, abandoned or otherwise extinguished by the execution of the September 10,
1999 MOA. FCC claimed that in the said MOA, PDSC assumed all the obligations originally
reposed upon it. FCC further explained that the PERT-CPM agreed upon by the parties
covering the first phase of the work project was severely affected when PDSC deleted
several scopes of work and undertook to perform the same. In fact, the PERT-CPM was
evaluated and it was concluded that the delay was attributable to both of them. FCC
added that after Phase I of the project, it sent a progress billing in the amount of ₱
939,165.00 but PDSC approved the amount of ₱ 639,165.00 only after deducting the cost
of the attributable delay with the agreement that from then on, PDSC should shoulder all
expenses in the construction of the building until completion; that FCC would provide the
workers on the condition that they would be paid by PDSC; and that it would allow PDSC
free use of the construction equipments that were in the project site.
For its part, PCIC averred that as a surety, it was not liable as a principal obligor; that its
liability under the bond was conditional and subsidiary and that it could be made liable
only upon FCC’s default of its obligation in the Building Contract up to the extent of the
terms and conditions of the bond. PCIC also alleged that its obligation under the
performance bond was terminated when it expired on October 15, 1999 and the
extension of the performance bond until March 2, 2000 was not binding as it was made
without its knowledge and consent.
PCIC added that PDSC’s claim against it had been waived, abandoned or extinguished by
the September 10, 1999 MOA. It also argued that its obligation was indeed extinguished
when PDSC terminated the contract on December 3, 1999 and took over the construction
and it failed to file its claim within ten (10) days from the expiry date or from the alleged
default of FCC.24
Nonetheless, in the event that PCIC would be made liable, its liability should be in
proportion to the liabilities of the other sureties.
On January 12, 2004, the RTC rendered its Decision 25 in favor of PDSC. The RTC found FCC
guilty of delay when it failed to finish and turn over the project on October 15, 1999. It
pronounced FCC and PCIC jointly and severally liable and ordered them to pay PDSC the
amount of ₱ 9,000,000.00 as damages and ₱ 50,000.00 as attorney’s fees plus interest.
FCC and PCIC filed their respective notice of appeal 26 with the RTC. On February 12, 2004,
the RTC issued its Order27 giving due course to the notice of appeal.
On July 31, 2007, the CA modified the RTC’s decision. 28 The CA agreed that FCC incurred
delay in the construction of the project. It, however, found that the computation of the
liquidated damages should be based on the reduced contract price of ₱ 19,809,822.12.
The dispositive portion reads:
WHEREFORE, the Decision dated 12 January 2004 of the Regional Trial Court of Pasay City,
Branch 111 is AFFIRMED with MODIFICATION in that appellants N.C. Francia Construction
Corporation, Natividad Francia, Emmanuel Francia, Jr., Anna Sheila Francia San Diego,
Felipe Bermudez, Emmanuel Francia, Charlemagne Francia, Ruben Caperiña, and
Philippine Charter Insurance Corporation are hereby held solidarily liable to pay appellee
Petroleum Distributors & Services Corporation (1) liquidated damages in the sum of ₱
3,882,725.13, which shall earn legal interest at the rate of 6% per annum from 10 January
2000 until finality of this judgment; (2) attorney’s fees amounting to ₱ 50,000.00; and (3)
cost of suit. Pursuant to Performance Bond No. 31915, the liability of appellant Philippine
Charter Insurance Corporation should not exceed ₱ 6,828,329.66.
Appellants N.C Francia Construction Corporation, Emmanuel Francia and Natividad Francia
are adjudged liable to pay appellant Philippine Charter Insurance Corporation for the
amount the latter may have paid under Performance Bond No. 31915.
SO ORDERED.29
FCC and PCIC filed their separate motions for reconsideration 30 but the CA denied them in
its December 28, 2007 Resolution.31
Hence, this petition.
It is well to note that only PCIC appealed the CA’s decision. It became final and executory
with regard to FCC and the other parties in the case. Hence, the Court shall limit its
discussion to the liability of PCIC.
In its Memorandum,32 PCIC anchored its petition on the following issues:
1. Whether or not the Court of Appeals, in adjudging Petitioner liable for liquidated
damages, expanded liability under Performance Bond No. 31915 which on its face
answers only for actual and compensatory damages, not liquidated damages.
Assuming arguendo liability for liquidated damages under the performance bond,
whether or not the Court of Appeals erred in not declaring that the award of liquidated
damages is iniquitous and unconscionable and in not applying the provisions of Article
2227, Civil Code, and Palmares v. Court of Appeals, 288 SCRA 422.
2. Whether or not the Memorandum of Agreement dated Sept. 10, 1999 entered into by
respondent and Francia Construction, confirmed in a letter dated Sept. 20, 1999, ---
without Petitioner’s knowledge or consent---, the effect that all costs, expenses, payments
and obligations shall be deemed paid, performed and fully settled as of Sept. 10, 1999,
discharged Petitioner from liability under the performance bond under Article 2079, Civil
Code.
3. Whether or not the Court of Appeals, having made the finding of fact that the sums of
Php2,793,000.00 and Php662,836.50 should be deducted from Php3,882,725.13, erred in
not deducting the amounts in the dispositive portion of the decision. 33
In sum, the issues before the Court are (1) whether or not PCIC is liable for liquidated
damages under the performance bond; (2) whether or not the September 10, 1999 MOA
executed by PDSC and FCC extinguished PCIC’s liability under the performance bond; and
(3) whether or not the amounts of ₱ 2,793,000.00 and ₱ 662,836.50 are deductible from
the liquidated damages awarded by the CA.
PCIC argues that in case of a breach of contract, the performance bond is answerable only
for actual or compensatory, not for liquidated damages. The terms of the bond are clear
that the liability of the surety is determined by the contract of suretyship and cannot be
extended by implication beyond the terms of the contract. Nonetheless, even assuming
that it is liable under the performance bond, the liability should be based on equity. It
claims that it is unlawful and iniquitous to hold FCC responsible for the delay of the
subcontractor commissioned by PDSC.
PCIC adds that the act of PDSC of subcontracting the various stages of the project resulted
in a revision of work schedule and extension of the completion date that ultimately
released both FCC and PCIC of whatever claims PDSC may have against them. PCIC is of
the impression that since the subcontracting made by PDSC was made without its consent
and knowledge, its liability under the performance bond should be extinguished.
PCIC also pointed out that the receivable in the amount of ₱ 2,793,000.00 acquired by
PDSC from Caltex and the proceeds from the auction sale in the sum of ₱ 662,836.50
should be deducted from the award of ₱ 3,882,725.13.
The Court finds no merit in the petition.
The Building Contract entered into by PDSC and FCC provides that:
Art. 2 ESSENCE OF THE CONTRACT
2.1 It is understood that time, quality of work in accordance with the OWNER’s
requirements, and reduced construction costs are the essence of this Contract.
2.2 The CONTRACTOR shall commence the construction for the first two (2) levels not
later than five (5) days immediately after the date of execution of this Contract and shall
regularly proceed and complete the construction within Two Hundred Fifty-Nine (259)
calendar days reckoned from the date of signing of this Contract or not later than October
15, 1999, whichever is earlier. To ensure completion of the work within the time given
herein, construction work shall be conducted at least twenty hours each day with at least
two (2) work shift for every day actually worked.
2.3 In the event that the construction is not completed within the aforesaid period of
time, the OWNER is entitled and shall have the right to deduct from any amount that may
be due to the CONTRACTOR the sum of one-tenth (1/10) of one percent (1%) of the
contract price for every day of delay in whatever stage of the project as liquidated
damages, and not by way of penalty, and without prejudice to such other remedies as the
OWNER may, in its discretion, employ including the termination of this Contract, or
replacement of the CONTRACTOR.
2.4 Furthermore, the CONTRACTOR agrees not to request any extension of time due to
any delay in the procurement of materials needed in the construction other than due to
circumstances of "Force Majeure". Force Majeure is hereby defined as any war, civil
commotion and disturbance, acts of God or any other cause beyond the CONTRACTOR’s
control and without any contributing fault on the part of the CONTRACTOR.
2.5 Contractor shall arrange, schedule and carry on the work so as not to interfere with
the delivery and erection of the work of others. To facilitate the erection of such other
work, the CONTRACTOR shall cease or resume work at any point or stage of the Project,
when so directed by the OWNER or his duly authorized representative. [Emphasis
supplied]
Paragraph 2.3 of the Building Contract clearly provides a stipulation for the payment of
liquidated damages in case of delay in the construction of the project. Such is in the
nature of a penalty clause fixed by the contracting parties as a compensation or substitute
for damages in case of breach of the obligation. 34 The contractor is bound to pay the
stipulated amount without need for proof of the existence and the measures of damages
caused by the breach.35
Article 2226 of the Civil Code allows the parties to a contract to stipulate on liquidated
damages to be paid in case of breach. It is attached to an obligation in order to insure
performance and has a double function: (1) to provide for liquidated damages, and (2) to
strengthen the coercive force of the obligation by the threat of greater responsibility in
the event of breach.36 As a general rule, contracts constitute the law between the parties,
and they are bound by its stipulations.37 For as long as they are not contrary to law,
morals, good customs, public order, or public policy, the contracting parties may establish
such stipulations, clauses, terms and conditions as they may deem convenient. 38
In the case at bench, the performance bond issued by PCIC specifically provides that:
KNOW ALL MEN BY THESE PRESENTS:
That we, N.C. FRANCIA CONSTRUCTION CORPORATION of Merryland
Corporate Offices, 3250 Gracia St., cor. Edsa, Brgy. Pinagkaisahan,
Makati City, as Principal and PHILIPPINE CHARTER INSURANCE
CORPORATION, a corporation duly organized and existing under and
by virtue of the laws of the Philippines, as Surety, are held and firmly
bound unto PETROLEUM DISTRIBUTORS & SERVICES CORPORATION,
as obligee in the sum of PESOS SIX MILLION EIGHT HUNDRED
TWENTY EIGHT THOUSAND THREE HUNDRED TWENTY NINE &
66/100 ONLY (₱ 6,828,329.66) 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 CONDITION OF THIS OBLIGATION ARE AS FOLLOWS:
WHEREAS, the above bounden principal, on the ____ day of
________ 19___ entered into an ________________ with
___________, to fully and faithfully guarantee that the above-named
Principal shall furnish, deliver, place and complete any and all
necessary materials, labor, plant, tools appliances and equipment,
supplies, utilities transportation, superintendence, supervision and all
other facilities in connection with the construction of a 4-storey
commercial/parking complex situated at MIA Road cor. Domestic
Road, Pasay City as per attached Building Contract dated January 27,
1999.
Provided, however, that the liability of the Surety Company under
this bond shall in no case exceed the face value hereof.
WHEREAS, said oblige requires said principal to give a good and
sufficient bond in the above stated sum to secure the full and faithful
performance on its part of said undertaking.
NOW THEREFORE, if the principal shall well and truly perform and
fulfill all the undertakings, covenants, terms conditions and
agreements stipulated in said undertakings then this obligation shall
be null and void; otherwise it shall remain in full force and effect.
[Emphasis Supplied]
By the language of the performance bond issued by PCIC, it guaranteed the full and
faithful compliance by FCC of its obligations in the construction of the Park ‘N Fly. In fact,
the primary purpose for the acquisition of the performance bond was to guarantee to
PDSC that the project would proceed in accordance with the terms and conditions of the
contract and to ensure the payment of a sum of money in case the contractor would fail in
the full performance of the contract. 39 This guaranty made by PCIC gave PDSC the right to
proceed against it (PCIC) following FCC’s non-compliance with its obligation.
A contract of suretyship is an agreement whereby a party, called the surety, guarantees
the performance by another party, called the principal or obligor, of an obligation or
undertaking in favor of another party, called the obligee. 40 Although the contract of a
surety is secondary only to a valid principal obligation, the surety becomes liable for the
debt or duty of another although it possesses no direct or personal interest over the
obligations nor does it receive any benefit therefrom. 41 This was explained in the case
of Stronghold Insurance Company, Inc. v. Republic-Asahi Glass Corporation,42 where it was
written:
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.
Corollary, when PDSC communicated to FCC that it was terminating the contract, PCIC’s
liability, as surety, arose. The claim of PDSC against PCIC occurred from the failure of FCC
to perform its obligation under the building contract. As mandated by Article 2047 of the
Civil Code, to wit:
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.
Thus, suretyship arises upon the solidary binding of a person deemed the surety with the
principal debtor for the purpose of fulfilling an obligation. 43 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. 44  shed light to the question of whether a new period was indeed fixed by the parties. The
Therefore, as surety, PCIC becomes liable for the debt or duty of FCC although it possesses
no direct or personal interest over the obligations of the latter, nor does it receive any
benefit therefrom.45
The Court also found untenable the contention of PCIC that the principal contract was
novated when PDSC and FCC executed the September 10, 1999 MOA, without informing
the surety, which, in effect, extinguished its obligation.
A surety agreement has two types of relationship: (1) the principal relationship between
the obligee and the obligor; and (2) the accessory surety relationship between the
principal and the surety. The obligee accepts the surety’s solidary undertaking to pay if
the obligor does not pay. Such acceptance, however, does not change in any material way
the obligee’s relationship with the principal obligor. Neither does it make the surety an
active party in the principal obligor-obligee relationship. It follows, therefore, that the
acceptance does not give the surety the right to intervene in the principal contract. The
surety’s role arises only upon the obligor’s default, at which time, it can be directly held
liable by the obligee for payment as a solidary obligor.46
Furthermore, in order that an obligation may be extinguished by another which
substitutes the same, it is imperative that it be so declared in unequivocal terms, or that
the old and new obligation be in every point incompatible with each other. 47 Novation of a
contract is never presumed. In the absence of an express agreement, novation takes place
only when the old and the new obligations are incompatible on every point. 48
Undoubtedly, a surety is released from its obligation when there is a material alteration of
the principal contract in connection with which the bond is given, such as a change which
imposes a new obligation on the promising party, or which takes away some obligation
already imposed, or one which changes the legal effect of the original contract and not
merely its form.49 In this case, however, no new contract was concluded and perfected
between PDSC and FCC. A reading of the September 10, 1999 MOA reveals that only the
revision of the work schedule originally agreed upon was the subject thereof. The parties
saw the need to adjust the work schedule because of the various subcontracting made by
PDSC. In fact, it was specifically stated in the MOA that "all other terms and conditions of
the Building Contract of 27 January 1999 not inconsistent herewith shall remain in full
force and effect."50 There was no new contract/agreement which could be considered to
have substituted the Building Contract. As correctly ruled by the CA, thus:
At first blush, it would seem that the parties agreed on a revised timetable for the
construction of Park ‘N Fly. But then, nowhere in the voluminous records of this case
could We find the Annex "A" mentioned in the above-quoted agreement which could have
testimony of appellant Emmanuel Francia, Sr., President and Chief Executive Officer of
appellant N.C, Francia, candidly disclosed what truly happened to Annex "A", as he
admitted that no new PERT/CPM was actually attached to the Memorandum of
Agreement.
Accordingly, We find no compelling reason to declare that novation ensued under the proceeds from the auction sale in the sum of ₱ 662,836.50 should be deducted from the
prevailing circumstances. The execution of the Building Contract dated 27 January 1999 award of ₱ 3,882,725.13.
does not constitute a novation of the Memorandum of Agreement dated 10 September
1999. There lies no incompatibility between the two contracts as their principal object and SO ORDERED.
conditions remained the same. While there is really no hard and fast rule to determine
what might constitute to be a sufficient change that can bring about novation, the
touchtone for contrariety, however, would be an irreconcilable incompatibility between
the old and the new obligations.51

It must likewise be emphasized that pursuant to the September 10, 1999 MOA, PCIC
extended the coverage of the performance bond until March 2, 2000. 52

Finally, as pointed out by PCIC, the receivable in the amount of ₱ 2,793,000.00 acquired
by PDSC from Caltex and the proceeds from the auction sale in the sum of ₱ 662,836.50
should be deducted from the award of ₱ 3,882,725.13. There is no quibble on this point.
The ruling of the CA on the matter is very clear. It reads:

With these points firmly in mind, We proceed to the next question raised by appellants –
whether the value of the securities given as well as the proceeds of the sale of chattels
should be deducted from the claim of liquidated damages.

We answer in the affirmative.

There is no quibble that appellant N.C Francia assigned a portion of its receivables from
Caltex Philippines, Inc. in the amount of ₱ 2,793,000.00 pursuant to the Deed of
Assignment dated 10 September 1999. Upon transfer of said receivables, appellee
Petroleum Distributors automatically stepped into the shoes of its transferor. It is in
keeping with the demands of justice and equity that the amount of these receivables be
deducted from the claim for liquidated damages.

So too, vehicles and equipment owned by appellant N.C. Francia were sold at public
auction at ₱ 1,070,000.00. After deducting storage fees, the amount of ₱ 662,836.50 was
deposited before the court a quo. The latter amount accrues in favor of appellee
Petroleum Distributors as partial payment of its claim for liquidated damages.

WHEREFORE, the petition is DENIED. The July 31, 2007 Decision and December 28, 2007
Resolution of the Court of Appeals (CA) in CA-G.R. CV No. 82417 are AFFIRMED. The
receivable in the amount of ₱ 2,793,000.00 acquired by PDSC from Caltex and the
 2110006344 499,890.00 12/04/2000 03/12/2001

2110006557 798,010.00 12/18/2000 04/23/2001

2110100189 496,521.00 01/11/2001 05/07/20016

Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 203133               February 18, 2015
YULIM INTERNATIONAL COMPANY LTD., JAMES YU, JONATHAN YU, and ALMERICK
TIENG LIM, Petitioners,
vs.
INTERNATIONAL EXCHANGE BANK (now Union Bank of the Philippines), Respondent.
DECISION
REYES, J.:
In the assailed Decision1 dated February 1, 2012 in CA-G.R. CV No. 95522, the Court of
Appeals (CA) modified the Decision 2 dated December 21, 2009 of the Regional Trial Court
(RTC) of Makati City, Branch 145, in Civil Case No. 02-749, holding that James Yu (James),
Jonathan Yu (Jonathan) and Almerick Tieng Lim (Almerick), who were capitalist partners in
Yulim International Company Ltd. (Yulim), collectively called as the petitioners, were
jointly and severally liable with Yulim for its loan obligations with respondent International
Exchange Bank (iBank).
The Facts
On June 2, 2000, iBank, a commercial bank, granted Yulim, a domestic partnership, a
credit facility in the form of an Omnibus Loan Line for ₱5,000,000.00, as evidenced by a
Credit Agreement3 which was secured by a Chattel Mortgage 4 over Yulim’s inventories in
its merchandise warehouse at 106 4th Street, 9th Avenue, Caloocan City. As further
guarantee, the partners, namely, James, Jonathan and Almerick, executed a Continuing
Surety Agreement5 in favor of iBank.
The above promissory notes (PN) were later consolidated under a single promissory note,
PN No. SADDK001014188, for ₱4,246,310.00, to mature on February 28, 2002. 7 Yulim
defaulted on the said note. On April 5, 2002, iBank sent demand letters to Yulim, through
its President, James, and through Almerick, 8 but without success. iBank then filed a
Complaint for Sum of Money with Replevin 9 against Yulim and its sureties. On August 8,
2002, the Court granted the application for a writ of replevin. Pursuant to the Sheriff’s
Certificate of Sale dated November 7, 2002, 10 the items seized from Yulim’s warehouse
were worth only ₱140,000.00, not ₱500,000.00 as the petitioners have insisted. 11
On October 2, 2002, the petitioners moved to dismiss the complaint insisting that their
loan had been fully paid after they assigned to iBank their Condominium Unit No. 141,
with parking space, at 20 Landsbergh Place in Tomas Morato Avenue, Quezon City. 12 They
claimed that while the pre-selling value of the condominium unit was ₱3.3 Million, its
market value has since risen to 5.5 Million. 13 The RTC, however, did not entertain the
motion to dismiss for non-compliance with Rule 15 of the Rules of Court.
On May 16, 2006, the petitioners filed their Answer reiterating that they have paid their
loan by way of assignment of a condominium unit to iBank, as well as insisting that iBank’s
penalties and charges were exorbitant, oppressive and unconscionable. 14
Ruling of the RTC
After trial on the merits, the RTC rendered judgment on December 21, 2009, the
dispositive portion of which reads, as follows:

Yulim availed of its aforesaid credit facility with iBank, as follows: WHEREFORE, in view of the foregoing considerations, the Court finds the individual
defendants James Yu, Jonathan Yu and Almerick Tieng Lim, not liable to the plaintiff,
iBank, hence the complaint against them is hereby DISMISSED for insufficiency of
Promissory Note No. Face Value PN Date Date of Maturity
evidence, without pronouncement as to cost.
2110005852 ₱1,298,926.00 10/26/2000 01/29/2001

2110006026 1,152,963.00 11/18/2000 02/05/2001

This court, however, finds defendant corporation Yulim International Company Ltd. liable;
and it hereby orders defendant corporation to pay plaintiff the sum of ₱4,246,310.00 with
interest at 16.50% per annum from February 28, 2002 until fully paid plus cost of suit.
The counterclaims of defendants against plaintiff iBank are hereby DISMISSED for
insufficiency of evidence. SO ORDERED.15
Thus, the RTC ordered Yulim alone to pay iBank the amount of ₱4,246,310.00, plus
interest at 16.50% per annum from February 28, 2002 until fully paid, plus costs of suit,
and dismissed the complaint against petitioners James, Jonathan and Almerick, stating
that there was no iota of evidence that the loan proceeds benefited their families. 16
The petitioners moved for reconsideration on January 12, 2010; 17 iBank on January 19,
2010 likewise filed a motion for partial reconsideration.18 In its Joint Order19 dated March
8, 2010, the RTC denied both motions.
Ruling of the CA
On March 23, 2010, Yulim filed a Notice of Partial Appeal, followed on March 30, 2010 by
iBank with a Notice of Appeal.
Yulim interposed the following as errors of the court a quo:
I. THE LOWER COURT ERRED IN ORDERING [YULIM] TO PAY [iBANK] THE AMOUNT OF
₱4,246,310.00 WITH INTEREST AT 16.5% PER ANNUMFROM FEBRUARY 28, 2002 UNTIL
FULLY PAID.
II. THE LOWER COURT ERRED IN NOT ORDERING [iBANK] TO PAY ATTORNEY’S FEES,
MORAL DAMAGES AND EXEMPLARY DAMAGES.20
For its part, iBank raised the following as errors of the RTC:
I. THE TRIAL COURT ERRED IN NOT HOLDING INDIVIDUAL [PETITIONERS JAMES,
JONATHAN AND ALMERICK] SOLIDARILY LIABLE WITH [YULIM] ON THE BASIS OF THE
CONTINUING SURETYSHIP AGREEMENT EXECUTED BY THEM.
II. THE TRIAL COURT ERRED IN NOT HOLDING ALL THE [PETITIONERS] LIABLE FOR PENALTY
CHARGES UNDER THE CREDIT AGREEMENT AND PROMISSORY NOTES SUED UPON.
III. THE TRIAL COURT ERRED IN NOT HOLDING [THE PETITIONERS] LIABLE TO [iBANK] FOR
ATTORNEY’S FEES AND INDIVIDUAL [PETITIONERS] JOINTLY AND SEVERALLY LIABLE WITH
[YULIM] FOR COSTS OF SUIT INCURRED BY [iBANK] IN ORDER TO PROTECT ITS RIGHTS.21
Chiefly, the factual issue on appeal to the CA, raised by petitioners James, Jonathan and
Almerick, was whether Yulim’s loans have in fact been extinguished with the execution of
a Deed of Assignment of their condominium unit in favor of iBank, while the corollary
legal issue, raised by iBank, was whether they should be held solidarily liable with Yulim
for its loans and other obligations to iBank.
The CA ruled that the petitioners failed to prove that they have already paid Yulim’s
consolidated loan obligations totaling 4,246,310.00, for which it issued to iBank PN No.
SADDK001014188 for the said amount. It held that the existence of a debt having been
established, the burden to prove with legal certainty that it has been extinguished by
payment devolves upon the debtors who have offered such defense. The CA found the
records bereft of any evidence to show that Yulim had fully settled its obligation to iBank,
further stating that the so-called assignment by Yulim of its condominium unit to iBank
was nothing but a mere temporary arrangement to provide security for its loan pending
the subsequent execution of a real estate mortgage. Specifically, the CA found nothing in
the Deed of Assignment which could signify that iBank had accepted the said property as
full payment of the petitioners’ loan. The CA cited Manila Banking Corporation v. Teodoro,
Jr.22 which held that an assignment to guarantee an obligation is in effect a mortgage and
not an absolute conveyance of title which confers ownership on the assignee.
Concerning the solidary liability of petitioners James, Jonathan and Almerick, the CA
disagreed with the trial court’s ruling that it must first be shown that the proceeds of the
loan redounded to the benefit of the family of the individual petitioners before they can
be held liable. Article 161 of the Civil Code and Article 121 of the Family Code cited by the
RTC apply only where the liability is sought to be enforced against the conjugal
partnership itself. In this case, regardless of whether the loan benefited the family of the
individual petitioners, they signed as sureties, and iBank sought to enforce the loan
obligation against them as sureties of Yulim.
Thus, the appellate court granted the appeal of iBank, and denied that of the petitioners,
as follows:
WHEREFORE, the foregoing considered, [iBank’s] appeal is PARTLY GRANTED while [the
petitioners’] appeal is DENIED. Accordingly, the appealed decision is hereby MODIFIED in
that [petitioners] James Yu, Jonathan Yu and A[l]merick Tieng Lim are hereby held jointly
and severally liable with defendant-appellant Yulim for the payment of the monetary
awards. The rest of the assailed decision is AFFIRMED. SO ORDERED.23
Petition for Review to the Supreme Court
In the instant petition, the following assigned errors are before this Court:
1. The CA erred in ordering petitioners James, Jonathan and Almerick jointly and severally
liable with petitioner Yulim to pay iBank the amount of ₱4,246,310.00 with interest at
16.5% per annum from February 28, 2002 until fully paid.
2. The CA erred in not ordering iBank to pay the petitioners moral damages, exemplary
damages, and attorney’s fees.24
The petitioners insist that they have paid their loan to iBank. They maintain that the letter
of iBank to them dated May 4, 2001, which "expressly stipulated that the petitioners shall
execute a Deed of Assignment over one condominium unit No. 141, 3rd Floor and a
parking slot located at 20 Landsbergh Place, Tomas Morato Avenue, Quezon City," was
with the understanding that the Deed of Assignment, which they in fact executed,
delivering also to iBank all the pertinent supporting documents, would serve to totally
extinguish their loan obligation to iBank. In particular, the petitioners state that it was
their understanding that upon approval by iBank of their Deed of Assignment, the same
"shall be considered as full and final payment of the petitioners’ obligation." They further
assert that iBank’s May 4, 2001 letter expressly carried the said approval.
The petitioner invoked Article1255 of the Civil Code, on payment by cession, which
provides: Art. 1255. The debtor may cede or assign his property to his creditors in
payment of his debts. This cession, unless there is stipulation to the contrary, shall only
release the debtor from responsibility for the net proceeds of the thing assigned. The
agreements which, on the effect of the cession, are made between the debtor and his
creditors shall be governed by special laws.
Ruling of the Court
The petition is bereft of merit. Firstly, the individual petitioners do not deny that they
executed the Continuing Surety Agreement, wherein they "jointly and severally with the
PRINCIPAL [Yulim], hereby unconditionally and irrevocably guarantee full and complete
payment when due, whether at stated maturity, by acceleration, or otherwise, of any and
all credit accommodations that have been granted" to Yulim by iBank, including interest,
fees, penalty and other charges. 25 Under Article 2047 of the Civil Code, these words are
said to describe a contract of suretyship. It states: 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 a contract of suretyship, one lends his credit by joining in the principal debtor’s
obligation so as to render himself directly and primarily responsible with him without
reference to the solvency of the principal. 26 According to the above Article, if a person
binds himself solidarily with the principal debtor, the provisions of Articles 1207 to 1222,
or Section 4, Chapter 3, Title I, Book IV of the Civil Code on joint and solidary obligations,
shall be observed. Thus, where there is a concurrence of two or more creditors or of two
or more debtors in one and the same obligation, Article 1207 provides that among them,
"[t]here is a solidary liability only when the obligation expressly so states, or when the law
or the nature of the obligation requires solidarity."
"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." 27 And it is well settled that when the obligor or obligors
undertake to be "jointly and severally" liable, it means that the obligation is solidary, 28 as
in this case. There can be no mistaking the same import of Article I of the Continuing
Surety Agreement executed by the individual petitioners:
ARTICLE I
LIABILITIES OF SURETIES
SECTION 1.01. The SURETIES, jointly and severally with the PRINCIPAL, hereby
unconditionally and irrevocably guarantee full and complete payment when due, whether
at stated maturity, by acceleration, or otherwise, of any and all credit accommodations
that have been granted or may be granted, renewed and/or extended by the BANK to the
PRINCIPAL. The liability of the SURETIES shall not be limited to the maximum principal
amount of FIVE MILLION PESOS (₱5,000,000.00) but shall include interest, fees, penalty
and other charges due thereon.
SECTION 1.02. This INSTRUMENT is a guarantee of payment and not merely of collection
and is intended to be a perfect and continuing indemnity in favor of the BANK for the
amounts and to the extent stated above.
The liability of the SURETIES shall be direct, immediate and not contingent upon the
pursuit of the BANK of whatever remedies it may have against the PRINCIPAL of the other
securities for the Accommodation.29
Thereunder, in addition to binding themselves "jointly and severally" with Yulim to
"unconditionally and irrevocably guarantee full and complete payment" of any and all
credit accommodations that have been granted to Yulim, the petitioners further warrant
that their liability as sureties "shall be direct, immediate and not contingent upon the
pursuit [by] the BANK of whatever remedies it may have against the PRINCIPAL of other
securities." There can thus be no doubt that the individual petitioners have bound
themselves to be solidarily liable with Yulim for the payment of its loan with iBank.
As regards the petitioners’ contention that iBank in its letter dated May 4, 2001 had
"accepted/approved" the assignment of its condominium unit in Tomas Morato Avenue as
full and final payment of their various loan obligations, the Court is far from persuaded.
On the contrary, what the letter accepted was only the collaterals provided for the loans,
as well as the consolidation of the petitioners’ various PN’s under one PN for their
aggregate amount of ₱4,246,310.00. The letter goes on to spell out the terms of the new
PN, such as, that its expiry would be February 28, 2002 or a term of 360 days, that interest
would be due every 90 days, and that the rate would be based on the 91-day Treasury Bill
rate or other market reference.
Nowhere can it be remotely construed that the letter even intimates an understanding by
iBank that the Deed of Assignment would serve to extinguish the petitioners’ loan.
Otherwise, there would have been no need for iBank to mention therein the three
"collaterals" or "supports" provided by the petitioners, namely, the Deed of Assignment,
the Chattel Mortgage and the Continuing Surety Agreement executed by the individual
petitioners. In fact, Section 2.01 of the Deed of Assignment expressly acknowledges that it
is a mere "interim security for the repayment of any loan granted and those that may be
granted in the future by the BANK to the ASSIGNOR and/or the BORROWER, for
compliance with the terms and conditions of the relevant credit and/or loan documents
thereof."30 The condominium unit, then, is a mere temporary security, not a payment to
settle their promissory notes.31
Even more unmistakably, Section 2.02 of the Deed of Assignment provides that as soon as
title to the condominium unit is issued in its name, Yulim shall "immediately execute the
necessary Deed of Real Estate Mortgage in favor of the BANK to secure the loan
obligations of the ASSIGNOR and/or the BORROWER." 32 This is a plain and direct
acknowledgement that the parties really intended to merely constitute a real estate
mortgage over the property.1âwphi1 In fact, the Deed of Assignment expressly states, by
way of a resolutory condition concerning the purpose or use of the Deed of Assignment,
that after the petitioners have delivered or caused the delivery of their title to iBank, the
Deed of Assignment shall then become null and void. Shorn of its legal efficacy as an
interim security, the Deed of Assignment would then become functus officio once title to
the condominium unit has been delivered to iBank. This is so because the petitioners
would then execute a Deed of Real Estate Mortgage over the property in favor of iBank as
security for their loan obligations.
Respondent iBank certainly does not share the petitioners’ interpretation of its May
4,2001 letter. Joy Valerie Gatdula, Senior Bank Officer of iBank and the Vice President of
iBank’s Commercial Banking Group, declared in her testimony that the purpose of the
Deed of Assignment was merely to serve as collateral for their loan:
Q: And during the time that the defendant[,] James Yu[,] was negotiating with your bank,
[is it] not a fact that the defendant offered to you a [condominium] unit so that – that will
constitute full payment of his obligation?
A: No ma’am. It was not offered that way. It was offered as security or collateral to pay
the outstanding loans. But the premise is, that he will pay x x x in cash. So, that property
was offered as a security or collateral.
Q: That was your position?
A: That was the agreement and that was how the document was signed. It was worded
out[.]
xxxx
Q: Do you remember if a real estate mortgage was executed over this property that was
being assigned to the plaintiff?
A: To my recollection, none at all.
Q: Madam Witness, this Deed of Assignment was considered as full payment by the
plaintiff bank, what document was executed by the plaintiff bank?
A: It should have been a Dacion en Pago.
Q: Was there such document executed in this account?
A: None.33
To stress, the assignment being in its essence a mortgage, it was but a security and not a
satisfaction of the petitioners’ indebtedness. 34 Article 125535 of the Civil Code invoked by
the petitioners contemplates the existence of two or more creditors and involves the
assignment of the entire debtor’s property, not a dacion en pago. 36 Under Article 1245 of
the Civil Code, "[d]ationin payment, whereby property is alienated to the creditor in
satisfaction of a debt in money, shall be governed by the law on sales." Nowhere in the
Deed of Assignment can it be remotely said that a sale of the condominium unit was
contemplated by the parties, the consideration for which would consist of the amount of
outstanding loan due to iBank from the petitioners. WHEREFORE, premises considered,
the petition is DENIED. SO ORDERED.
FIRST DIVISION
February 24, 2016
G.R. No. 210542
ROSALINA CARODAN, Petitioner,
vs.
CHINA BANKING CORPORATION, Respondent.
DECISION
SERENO, CJ:
This is a Petition for Review on Certiorari1  seeking to set aside the Decision2 dated 9 July
2013 and the Resolution3 dated 29 November 2013 rendered by the Court of Appeals
(CA), Ninth Division, Manila, in CA-G.R. CV No. 95835. The CA denied petitioner's appeal
assailing the Decision4 dated 23 June 2010 issued by the Regional Trial Court (RTC) of
Tuguegarao City, Branch 2, in Civil Case No. 5692.
THE ANTECEDENT FACTS
The records reveal that on 6 June 2000, China Banking Corporation (China Bank) instituted
a Complaint5 for a sum of money against Barbara Perez (Barbara), Rebecca Perez-Viloria
(Rebecca), Rosalina Carodan (Rosalina) and Madeline Carodan (Madeline). China Bank
claimed that on 15 January 1998, Barbara and Rebecca, for value received, executed and
delivered Promissory Note No. TLS-98/0076 to respondent bank under which they
promised therein to jointly and severally pay the amount of P2.8 million. 7 China Bank
further claimed that as security for the payment of the loan, Barbara, Rebecca and
Rosalina also executed a Real Estate Mortgage 8 over a property registered in the name of
Rosalina and covered by Transfer Certificate Title (TCT) No. T-10216. 9 Respondent alleged
that a Surety Agreement10 in favor of China Bank as creditor was also executed by Barbara
and Rebecca as principals and Rosalina and her niece Madeline as sureties. Through that
agreement, the principals and sureties warranted the payment of the loan obligation
amounting to P2.8 million including interests, penalties, costs, expenses, and attorney's
fees. 11
Barbara and Rebecca failed to pay their loan obligation despite repeated demands from
China Bank. Their failure to pay prompted the bank institute extrajudicial foreclosure
proceedings on the mortgaged property on 26 November 1999. 12 From the extrajudicial
sale, it realized only Pl.5 million as evidenced by a Certificate of Sale. 13 This amount, when
applied to the total outstanding loan obligation of Pl,865,345.77, would still leave a
deficiency of P365,345.77. For that reason, the bank prayed that the court order the
payment of the deficiency amount with interest at 12% per annum computed from 13
January 2000; attorney's fees equal to 10% of the deficiency amount; and litigation
expenses and costs of suit. 14
Barbara and Rebecca filed their Answer. They interposed the defense that although they
both stood as principal borrowers, they had entered into an oral agreement with
Madeline and Rosalina. Under that agreement which was witnessed by China Bank's loan
officer and branch manager, they would equally split both the proceeds of the loan and
the corresponding obligation and interest pertaining thereto, and they would secure the
loan with the properties belonging to them. 15 Barbara and Rebecca used as security their
real properties covered by TCT Nos. T-93177, T-93176, T-93174, T-93167, T-93169, T-
93170, T-93171 and T-93172; while Rosalina and Madeline used for the same purpose the
former's property covered by TCTNo. T-10216. 16
Barbara and Rebecca further alleged that while Rosalina and Madeline obtained their
share of Pl.4 million of the loan amount, the latter two never complied with their
obligation to pay interest. It was only Rebecca's account with China Bank that was
automatically debited in the total amount of Pl,002,735.54. 17 Barbara and Rebecca asked
China Bank for the computation of their total obligation, for which they paid Pl.5 million
aside from the interest payments, and respondent bank thereafter released the Real
Estate Mortgage over their properties.18
By way of crossclaim, Barbara and Rebecca asked Rosalina and Madeline to pay half of
Pl,002,735.54 as interest payments, as well as the deficiency amount plus 12% interest per
annum and attorney's fees, the total amount of which pertained to the loan obligation of
the latter two. 19 By way of counterclaim, Barbara and Rebecca also asked China Bank to
pay Plmillion as moral damages, P500,000 as exemplary damages, plus attorney's fees and
costs of suit.20
China Bank filed its Reply and Answer to Counterclaim clarifying that it was suing Barbara
and Rebecca as debtors under the Promissory Note and as principals in the Surety
Agreement, as well as Rosalina and Madeline as sureties in the Surety Agreement. 21 It
claimed that equal sharing of the proceeds of the loan was "a bat at misrepresentation"
and "a self-serving prevarication," because what was clearly written on the note was that
Rebecca and Barbara were the principal debtors. 22 It reiterated that the two were liable
for the full payment of the principal amount plus the agreed interest, charges, penalties
and attorney's fees, with recourse to reimbursement from Rosalina and Madeline. 23
China Bank also disputed the claim of Rebecca and Barbara that upon their payment to
the bank of Pl.5 million, the Real Estate Mortgage over their properties was cancelled.
Their claim was disputed because, even after their payment of Pl.5 million, Rebecca and
Barbara were still indebted in the amount of P1.3 million exclusive of interest, charges,
penalties and other legitimate fees. 24 Furthermore, respondent stated that if there was a
cancellation of mortgage, it referred to other mortgages securing other separate loan
obligations of Barbara and Rebecca; more particularly, that of Barbara. 25
Rosalina filed her Answer with Counterclaim and Crossclaim. 26 She alleged that on 2 July
1997, she and Barbara executed (1) a Real Estate Mortgage covering Rosalina's lot and
ancestral house, as well as Barbara's eight residential apartments, annotated as an
encumbrance at the back of the TCTs corresponding to the properties as evidenced by the
Annexes to the Answer; and (2) a Surety Agreement to secure the credit facility granted by
the bank to Barbara and Rebecca up to the principal amount of P2.8 million. 27 Rosalina
further stated that the execution of the contracts was "made in consideration of the long-
time friendship" between Barbara and Rebecca, and Madeline, and that "no monetary or
material consideration whatsoever passed between [Barbara and Rebecca], on the one
hand, and [Rosalina], on the other hand." 28
Rosalina acknowledged that on 15 January 1998, Barbara and Rebecca executed a
Promissory Note for the purpose of evidencing a loan charged against the loan facility
secured by the mortgage.29 She averred, though, that when Barbara and Rebecca paid half
of the loan under the Promissory Note, the properties of Barbara covered by the
mortgage were released by the bank from liability. The cancellation of the mortgage lien
was effected by an instrument dated 27 May 1999 and reflected on the TCTs evidenced by
the Annexes to the Answer. 30
This cancellation, according to Rosalina, illegally and unjustly caused her property to
absorb the singular risk of foreclosure. 31 The result, according to her, was the
extinguishment of the indivisible obligation contained in the mortgage pursuant to Article
121632 of the Civil Code.33
Rosalina further averred that when the bank instituted the foreclosure proceedings, it
misrepresented that her property was the only one that was covered by the mortgage;
omitted from the schedule of mortgaged properties those of Barbara; and misrepresented
that "the terms and condition of the aforesaid mortgage have never been changed or
modified whether tacitly or expressly, by any agreement made after the execution
thereof."34
Finally, Rosalina stated that she had made demands on Barbara and Rebecca to cause the
rectification of the illegal and unjust deprivation of her property in payment of the
indemnity. Allegedly, Barbara and Rebecca simply ignored her demands, so, she prayed
that the two be held solidarily liable for the total amount of damages and for the
deficiency judgment sought in this Complaint. 35
China Bank filed its Reply and Answer to Counterclaim. 36 It alleged that the issue of
whether Rosalina obtained material benefit from the loan was not material, since she had
voluntarily and willingly encumbered her property; 37 that the indivisibility of mortgage
does not apply to the case at bar, since Article 208938 of the Civil Code presupposes
several heirs, a condition that is not present in this case; 39 that nothing short of payment
of the debt or an express release would operate to discharge a mortgage; 40 and that, as
surety, Rosalina was equally liable as principal debtor to pay the deficiency obligation in
the sum of P365,345.77 41 The bank also filed its Comment/Opposition 42 to the Entry of
Appearance of Atty. Edwin V. Pascua as counsel for Rosalina. It said that Atty. Pascua had
once been its retained lawyer pursuant to a Retainer Agreement dated 5 September
1997.43 Because of its Opposition, Rosalina was subsequently represented by Atty.
Reynaldo A. Deray.
All the parties submitted their Pre-Trial Briefs with the exception of Madeline, whose case
had been archived by the RTC upon motion of China Bank for the court's failure to acquire
jurisdiction over her person. The issues of the case were thereafter limited to the
following: (1) whether the defendants were jointly and severally liable to pay the
deficiency claim; (2) whether the surety was still liable to the bank despite the release of
the mortgage of the principal borrower; (3) whether there was a previous agreement
among the defendants that Barbara and Rebecca would receive half and Rosalina and
Madeline, the other half; and (4) whether respondent bank still had a cause of action
against the surety after the mortgage of the principal borrower had been released by the
bank.44
THE RULING OF THE RTC
The RTC ruled that although no sufficient proof was adduced to show that Rosalina had
obtained any pecuniary benefit from the loan agreement between Rebecca and Barbara
and China Bank, the mortgage between Rosalina and China Bank was still valid. 45 The trial
court declared that respondent bank had therefore lawfully foreclosed the mortgage over
the property of Rosalina, even if she was a mere accommodation mortgagor. 46
The RTC also declared Rosalina's claim to be without merit and without basis in law and
jurisprudence. She claimed that because the Real Estate Mortgage covering her property
was a single and indivisible contract, China Bank's act of releasing the principal debtors'
properties resulted in the extinguishment of the obligation. 47 The trial court held that the
creditor had the right to proceed against any one of the solidary debtors, or some or all of
them simultaneously; and that a creditor's right to proceed against the surety exists
independently of the creditor's right to proceed against the principal. 48
Finally, the RTC ordered Rebecca, Barbara and Rosalina to be jointly and severally liable to
China Bank for the deficiency between the acquisition cost of the foreclosed real estate
property and the outstanding loan obligation of Barbara and Rebecca at the time of the
foreclosure sale. Interest was set at the rate of 12% per annum from 13 January 2000 until
full payment. Rebecca and Barbara were also ordered to reimburse Rosalina for the
amount of the deficiency payment charged against her including interests thereon. 49
THE RULING OF THE CA
Rosalina filed a timely Notice of Appeal and imputed error to the trial court in finding her,
together with Rebecca and Barbara, jointly and severally liable to pay the deficiency claim;
in finding that she was still liable as surety even if the bank had already released the
collateral of the principal borrower; and in not annulling the foreclosure sale of the
property, not reconveying the property to her, and not awarding her damages as prayed
for in her counterclaim. She said that these were done by the court despite the fact that
China Bank had deliberately and maliciously released the properties of the principal
borrowers, thereby exposing her property to risk. 50
The CA found the appeal bereft of merit. 51 It qualified Rosalina as a surety who had
assumed or undertaken a principal debtor's responsibility or obligation. As such, she was
supposed to be principally liable for the payment of the debt in case the principal debtors
did not pay, regardless of their financial capacity to do so. 52 As for the deficiency, the CA
cited BPI Family Savings Bank v. Avenido.  53 The Supreme Court had ruled therein that the
creditor was not precluded from recovering any unpaid balance on the principal obligation
if the extrajudicial foreclosure sale of the property, subject of the real estate mortgage,
would result in a deficiency. 54 The CA ultimately affirmed the RTC Decision in toto55  and
denied the Motion for Reconsideration. 56 Hence, this Petition.
Before this Court, petitioner Rosalina now imputes error to the CA' s affirmance of the RTC
Decision. She says that the CA Decision was not in accord with law and jurisprudence in
holding that petitioner, jointly and severally with Barbara and Rebecca, was liable to pay
China Bank's deficiency claim after the bank's release of the collateral of the principal
debtors. Respondent bank's alleged act of exposing Rosalina's property to the risk of
foreclosure despite the indivisible character of the Real Estate Mortgage supposedly
violated Article 2089 of the New Civil Code. 57
China Bank filed its Comment58 claiming that all the grounds cited by petitioner were
"mere reiterations, repetitions, or rehashed grounds and arguments raised in the
Appellant's Brief x x x which were exhaustively passed upon and considered by the CA in
its Decision";59 and that the petition "is wanting of any new, substantial and meritorious
grounds that would justify the reversal of the CA Decision affirming the RTC decision." 60
THE ISSUE
The sole issue to be resolved by this Court is whether petitioner Rosalina is liable jointly
and severally with Barbara and Rebecca for the payment of respondent China Bank's
claims.
THE RULING OF THIS COURT
Loan transactions in banking institutions usually entail the execution of loan documents,
typically a promissory note, covered by a real estate mortgage and/or a surety
agreement.61 In the instant case, petitioner Rosalina admitted that she was a party to
these loan documents although she vehemently insisted that she had received nothing
from the proceeds of the loan. 62 Meanwhile, respondent bank offered in evidence the
Promissory. Note, the Real Estate Mortgage and the Surety Agreement signed by the
parties.
We find that Rosalina is liable as an accommodation mortgagor.
In Belo v. PNB,63  we had the occasion to declare:
An accommodation mortgage is not necessarily void simply because the accommodation
mortgagor did not benefit from the same. The validity of an accommodation mo1igage is
allowed under Article 2085 of the New Civil Code which provides that (t)hird persons who
are not parties to the principal obligation may secure the latter by pledging or mortgaging
their own property. An accommodation mortgagor, ordinarily, is not himself a recipient of
the loan, otherwise that would be contrary to his designation as such. 64
Apart from being an accommodation mortgagor, Rosalina is also a surety, defined under
Article 2047 of the Civil Code in this wise:
Art. 2047. By guaranty a person, called a 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.
A contract of suretyship (second paragraph of Article 2047) has been juxtaposed against a
contract of guaranty (first paragraph of Article 2047) as follows:
A surety is an insurer of the debt, whereas a guarantor is an insurer of the solvency of the
debtor. 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. 65Citations omitted)
In Inciong, Jr. v. CA,  66 we elucidated further in this wise:
While a guarantor may bind himself solidarily with the principal debtor, the liability of a
guarantor is different from that of a solidary debtor. Thus, Tolentino explains:
A guarantor who binds himself in solidum  with the principal debtor under the provisions
of the second paragraph does not become a solidary co-debtor to all intents and
purposes. There is a difference between a solidary co-debtor, and  a fiador in
solidum  (surety). The latter, outside of the liability he assumes to pay the debt before the
property of the principal debtor has been exhausted, retains all the other rights, actions
and benefits which pertain to him by reason of the fiansa;  while a solidary co-debtor has
no other rights than those bestowed upon him in Section 4, Chapter 3, title I, Book IV of
the Civil Code.
Section 4, Chapter 3, Title I, Book IV of the Civil Code states the law on joint and several
obligations. Under Art. 1207 thereof, when there are two or more debtors in one and the
same obligation, the presumption is that the obligation is joint so that each of the debtors
is liable only for a proportionate part of the debt. There is a solidarity liability only when
the obligation expressly so states, when the law so provides or when the nature of the
obligation so requires.67 (Citations omitted)
Further discussion on the same legal concept proceeded thusly:
A contract of surety is an accessory promise by which a person binds himself for another
already bound, and agrees with the creditor to satisfy the obligation if the debtor does
not. A contract of guaranty, on the other hand, is a collateral undertaking to pay the debt
of another in case the latter does not pay the debt.
Strictly speaking, guaranty and surety are nearly related, and many of the principles are
common to both. However, under our civil law, they may be distinguished thus: A surety is
usually bound with his principal by the same instrument, executed at the same time, and
on the same consideration. He is an original promissor and debtor from the beginning,
and is held, ordinarily, to know every default of his principal. Usually, he will not be
discharged, either by the mere indulgence of the creditor to the principal, or by want of
notice of the default of the principal, no matter how much he may be injured thereby. On
the other hand, the contract of guaranty is the guarantor's own separate undertaking, in
which the principal does not join. It is usually entered into before or after that of the
principal, and is often supported on a separate consideration from that supporting the
contract of the principal. The original contract of his principal is not his contract, and he is
not bound to take notice of its non-performance. He is often discharged by the mere
indulgence of the creditor to the principal, and is usually not liable unless notified of the
default of the principal.
Simply put, a surety is distinguished from a guaranty in that a guarantor is the insurer of
the solvency of the debtor and thus binds himself to pay if the principal is  unable to
pay  while a surety is the insurer of the debt, and he obligates himself to pay if the
principal does not pay.  68(Citations omitted)
When Rosalina affixed her signature to the Real Estate Mortgage as mortgagor and to the
Surety Agreement as surety which covered the loan transaction represented by the
Promissory Note, she thereby bound herself to be liable to China Bank in case the
principal debtors, Barbara and Rebecca, failed to pay. She consequently became liable to
respondent bank for the payment of the debt of Barbara and Rebecca when the latter two
actually did not pay.
China Bank, on the other hand, had a right to proceed after either the principal debtors or
the surety when the debt became due. It had a right to foreclose the mortgage involving
Rosalina's property to answer for the loan.
The proceeds from the extrajudicial foreclosure, however, did not satisfy the entire
obligation. For this reason, respondent bank instituted the present Complaint against
Barbara and Rebecca as principals and Rosalina as surety.
A mortgage is simply a security for, and not a satisfaction of indebtedness. 69 If the
proceeds of the sale are insufficient to cover the debt in an extrajudicial foreclosure of
mortgage, the mortgagee is entitled to claim the deficiency from the debtor. 70 We have
already recognized this rule:
While Act No. 3135, as amended, does not discuss the mortgagee's right to recover the
deficiency, neither does it contain any provision expressly or impliedly prohibiting
recovery. If the legislature had intended to deny the creditor the right to sue for any
deficiency resulting from the foreclosure of a security given to guarantee an obligation,
the law would expressly so provide. Absent such a provision in Act No. 3135, as amended,
the creditor is not precluded from taking action to recover any unpaid balance on the
principal obligation simply because he chose to extrajudicially foreclose the real estate
mortgage.71
The creditor, respondent China Bank in this Petition, is therefore not precluded, from
recovering any unpaid balance on the principal obligation if the extrajudicial foreclosure
sale of the property, subject of the Real Estate Mortgage, would result in a deficiency.
Rosalina protests her liability for the deficiency. She claims that China Bank cancelled the
mortgage lien and released the. principal borrowers from liability. She contends that this
act violated Article 2089 of the Civil Code on the indivisibility of mortgage and ultimately
discharged her from liability as a surety.
We disagree.
A resort to the terms of the Surety Agreement can easily settle the question of whether
Rosalina should still be held liable. The agreement expressly contains the following
stipulation:
The Surety(ies) expressly waive all rights to demand for payment and notice of non-
payment and protest, and agree that the securities of every kind that are now and may
hereafter be left with the Creditor its successors, indorsees or assigns as collateral to any
evidence of debt or obligation, or upon which a lien may exist therefor, may be
substituted, withdrawn or surrendered at any time, and the time for the payment of
such obligations extended, without notice to or consent by the Surety(ies) x
xx. 72 (Emphases supplied)
We therefore find no merit in Rosalina's protestations in this petition. As provided by the
quoted clause in the contract, she not only waived the rights to demand payment and to
receive notice of nonpayment and protest, but she also expressly agreed that the time for
payment may be extended. More significantly, she agreed that the securities may be
"substituted, withdrawn or surrendered at any time" without her consent or without
notice to her. That China Bank indeed surrendered the properties of the principal debtors
was precisely within the ambit of this provision in the contract. Rosalina cannot now
contest that act in light of her express agreement to that stipulation.
There have been similar cases in which this Court was tasked to rule on whether a surety
can be discharged from liability due to an act or omission of the creditor. A review of
these rulings reveals though, that in the absence of an express stipulation, the surety was
discharged from liability if the act of the creditor was such as would be declared negligent
or constitutive of a material alteration of the contract. On the other hand, in the presence
of an express stipulation in the surety agreement allowing these acts, the surety was not
considered discharged and was decreed to be bound by the stipulations.
In PNB v. Manila Surety, 73  the Court en banc  declared the surety discharged from liability
on account of the creditor's negligence. In that case, the creditor failed to collect the
amounts due to the debtor contrary to the former's duty to make collections as holder of
an exclusive and irrevocable power of attorney. The negligence of the creditor allowed the
assigned funds to be exhausted without notice to the surety and ultimately resulted in
depriving the latter of any possibility of recourse against that security.
Also, in PNB v. Luzon Surety, 74  the Court hinted at the possibility of the surety's discharge
from liability.1avvphi1 It was recognized in that case that in this jurisdiction, alteration can
be a ground for release. The Court clarified, though, that this principle can only be
successfully invoked on the condition that the alteration is material. Failure to comply
with this requisite means that the surety cannot be freed from liability. Applying this
doctrine in that case, the Court ruled that the alterations in the form of increases in the
credit line with the full consent of the surety did not suffice to release the surety.
Meanwhile, in Palmares v. CA,  75 the Court ruled:
It may not be amiss to add that leniency shown to a debtor in default, by delay permitted
by the creditor without change in the time when the debt might be demanded, does not
constitute an extension of the time of payment, which would release the surety. In order
to constitute an extension discharging the surety, it should appear that the extension of
the time was for a definite period, pursuant to an enforceable agreement between the
principal and the creditor, and that it was made without the consent of the surety or with
the reservation of rights with respect to him. The contract must be one which precludes
the creditor from, or at least hinders him in, enforcing the principal contract with the
period during which he could otherwise have enforced it, and which precludes the surety
from paying the debt. (Citations omitted)
In E. Zobel Inc. v. CA, et al.,76  the Court upheld the validity of the provision on the
continuing guaranty - which we had earlier interpreted as a surety consistent with its
contents and intention of the parties. The Court upheld the validity of the provision
despite the insistence of the surety that he should be released from liability due to the
failure of the creditor to register the mortgage. In particular, the Court decreed:
SOLIDBANK's failure to register the chattel mortgage did not release petitioner from the
obligation. In the Continuing Guaranty executed in favor of SOLID BANK, petitioner bound
itself to the contract irrespective of the existence of any collateral. It even released SOLID
BANK from any fault or negligence that may impair the contract. The pertinent portions of
the contract so provides:
the undersigned (petitioner) who hereby agrees to be and remain bound upon this
guaranty, irrespective of the existence, value or condition of any collateral, and
notwithstanding any such change, exchange, settlement, compromise, surrender, release,
sale, application, renewal or extension, and notwithstanding also that all obligations of
the Borrower to you outstanding and unpaid at any time(s) may exceed the aggregate
principal sum herein above prescribed.
This is a Continuing Guaranty and shall remain in force and effect until written notice shall
have been received by you that it has been revoked by the undersigned, but any such
notice shall not be released the undersigned from any liability as to any instruments,
loans, advances or other obligations hereby guaranteed, which may be held by you, or in
which you may have any interest, at the time of the receipt of such notice. No act or
omission of any kind on your part in the premises shall in any event affect or impair this
guaranty, nor shall same be affected by any change which may arise by reason of the
death of the undersigned, of any partner(s) of the undersigned, or of the Borrower, or of
the accession to any such partnership of any one or more new partners. 77
Another illustrative case is Gateway Electronics Corporation and Geronimo delos Reyes v.
Asianbank,  78 in which the surety similarly asked for his discharge from liability. He
invoked the creditor's repeated extensions of maturity dates to the principal debtor's
request, without the surety's knowledge and consent. Still, this Court ruled:
Such contention is unacceptable as it glosses over the fact that the waiver to be notified of
extensions is embedded in surety document itself, built in the ensuing provision:
In case of default by any/or all of the DEBTOR(S) to pay the whole part of said
indebtedness herein secured at maturity, I/WE jointly and severally, agree and engage to
the CREDITOR, its successors and assigns, the prompt payment, without demand or notice
from said CREDITOR of such notes, drafts, overdrafts and other credit obligations on which
the DEBTOR(S) may now be indebted or may hereafter become indebted to the
CREDITOR, together with interest, penalty and other bank charges as may accrue thereon
and all expenses which may be incurred by the latter in collecting any or all such
instruments. 79
On Rosalina's argument that the release of the mortgage violates the indivisibility of
mortgage as enunciated in Article 208980 of the Civil Code, People's Bank and Trust
Company v. Tambunting et al.  81 is most instructive. In that case, the surety likewise
argued that he should be discharged from liability. He alleged that the creditor had
extended the time of payment and released the shares pledged by the principal debtors
without his consent. The Court en banc  found his argument unpersuasive and decreed:
1. It is thus obvious that the contract of absolute guaranty executed by appellant Santana
is the measure of rights and duties. As it is with him, so it is with the plaintiff bank. What
was therein stipulated had to be complied with by both parties. Nor could appellant have
any valid cause for complaint. He had given his word; he must live up to it. Once the
validity of its terms is conceded, he cannot be indulged in his unilateral determination to
disregard his commitment. A promise to which the law accords binding force must be
fulfilled. It is as simple as that. So the Civil Code explicitly requires: "Obligations arising
from contracts have the force of law between the contracting parties and should be
complied with in good faith."

2. It could have been different if there were no such contract of absolute guaranty to
which appellant was a party under the aforesaid Article 2080. He would have been freed
from the obligation as a result of plaintiff releasing to the Tambuntings without his
consent the 135 shares of the International Sports Development Corporation pledged to
plaintiff bank to secure the overdraft line. For thereby subrogation became meaningless.
Such a provision is intended for the benefit of a surety. That was a right he could avail of.
He is not precluded however from waiving it. That was what appellant did precisely when
he agreed to the contract of absolute guaranty. Again the law is clear. A right may be
waived unless it would be contrary to law, public order, public policy, morals or good
customs. There is no occasion here for the exceptions corning into play xxx 82

While we rule that Rosalina, along with the principal debtors, Barbara and Rebecca, is still
liable as a surety for the deficiency amount, we modify the RTC's imposition of interest
rate at 12% per annum, which the CA subsequently affirmed. We must modify the rates
according to prevailing jurisprudence. Hence, the 12% legal interest should be imposed on
the deficiency amount from 13 January 2000 until 30 June 2013 and 6% legal interest from
1 July 2013 until full payment.

WHEREFORE, premises considered, the assailed CA Decision and Resolution finding

Rosalina Carodan jointly and severally liable with Barbara Perez and Rebecca Perez-Viloria
for the deficiency amount are AFFIRMED WITH MODIFICATIONS. Rebecca, Barbara and
Rosalina are held jointly and severally liable to China Bank for the deficiency amount of
P365,345.77 and interest thereon at the rates of 12% per annum from 13 January 2000
until 30 June 2013 and 6% per annum from 1 July 2013 until full payment; and that
Rebecca and Barbara are also ordered to reimburse Rosalina for the amount charged
against her including interests thereon. 83

SO ORDERED.
 called the DEBTOR(S), of such amounts whether due or not, as indicated opposite their
respective names, to wit:

NAME OF DEBTOR(S) AMOUNT OF OBLIGATION

GATEWAY *P10,000,000.00 *US$3,000,000.00

ELECTRONICS *DOMESTIC BILLS *OMNIBUS CREDIT LINE
CORPORATION [PURCHASED LINE]
Republic of the Philippines
SUPREME COURT
Manila owing to the said ASIANBANK CORPORATION, hereafter called the CREDITOR, as
SECOND DIVISION evidenced by all notes, drafts, overdrafts and other [credit] obligations of every kind and
G.R. No. 172041             December 18, 2008 nature contracted/incurred by said DEBTOR(S) in favor of said CREDITOR.
GATEWAY ELECTRONICS CORPORATION and GERONIMO B. DELOS REYES,
JR., petitioners,
In case of default by any and/or all of the DEBTOR(S) to pay the whole part of said indebt            
vs.
nbsp         nbsp         nbsp         nbsp         erein secured at maturity, I/WE BR
ASIANBANK CORPORATION, respondent.
vs.
and severally agree and engage to the CREDITOR, its successors and assigns, the prompt
DECISION
payment, x x x of such notes, drafts, overdrafts and other credit obligations on which the
VELASCO, JR., J.:
DEBTOR(S) may now be indebted or may hereafter become indebted to the CREDITOR,
This petition for review under Rule 45 seeks to nullify and set aside the Decision 1 dated
together with all interests, penalty and other bank charges as may accrue thereon x x x.
October 28, 2005 of the Court of Appeals (CA) in CA-G.R. CV No. 80734 and its
Resolution2 of March 17, 2006 denying petitioners’ motion for reconsideration.
I/WE further warrant the due and faithful performance by the DEBTOR(S) of all obligations
to be performed under any contracts evidencing indebtedness/obligations and any
The Facts
supplements, amendments, changes or modifications made thereto, including but not
limited to, the due and punctual payment by the said DEBTOR(S).
Petitioner Gateway Electronics Corporation (Gateway) is a domestic corporation that used
to be engaged in the semi-conductor business. During the period material, petitioner
MY/OUR liability on this Deed of Suretyship shall be solidary, direct and immediate and
Geronimo B. delos Reyes, Jr. was its president and one Andrew delos Reyes its executive
not contingent upon the pursuit by the CREDITOR x x x of whatever remedies it or they
vice-president.
may have against the DEBTOR(S) or the securities or liens it or they may possess; and I/WE
hereby agree to be and remain bound upon this suretyship, x x x and notwithstanding also
On July 23, 1996, Geronimo and Andrew executed separate but almost identical deeds of that all obligations of the DEBTOR(S) to you outstanding and unpaid at any time may
suretyship for Gateway in favor of respondent Asianbank Corporation (Asianbank), exceed the aggregate principal sum hereinabove stated. 3
pertinently providing:
Later developments saw Asianbank extending to Gateway several export packing loans in
I/We Geronimo B. de los Reyes, Jr. x x x warrant to the ASIANBANK CORPORATION, x x x the total aggregate amount of USD 1,700,883.48. This loan package was later consolidated
due and punctual payment by the following individuals/companies/firms, hereinafter with Dollar Promissory Note (PN) No. FCD-0599-2749 4 for the amount of USD
1,700,883.48 and secured by a chattel mortgage over Gateway’s equipment for USD 2
million.
Gateway initially made payments on its loan obligations, but eventually defaulted. Upon
Gateway’s request, Asianbank extended the maturity dates of the loan several times.
These extensions bore the conformity of three of Gateway’s officers, among them
Andrew.
On July 15 and 30, 1999, Gateway issued two Philippine Commercial International Bank
checks for the amounts of USD 40,000 and USD 20,000, respectively, as payment for its
arrearages and interests for the periods June 30 and July 30, 1999; but both checks were
dishonored for insufficiency of funds. Asianbank’s demands for payment made upon
Gateway and its sureties went unheeded. As of November 23, 1999, Gateway’s obligation
to Asianbank, inclusive of principal, interest, and penalties, totaled USD 2,235,452.17.
Thus, on December 15, 1999, Asianbank filed with the Regional Trial Court (RTC) in Makati
City a complaint for a sum of money against Gateway, Geronimo, and Andrew. The
complaint, as later amended, was eventually raffled to Branch 60 of the court and
docketed as Civil Case No. 99-2102 entitled Asian Bank Corporation v. Gateway Electronics
Corporation, Geronimo B. De Los Reyes, Jr. and Andrew S. De Los Reyes.
In its answer to the amended complaint, Gateway traced the cause of its financial
difficulties, described the steps it had taken to address its mounting problem, and faulted
Asianbank for trying to undermine its efforts toward recovery.
Andrew also filed an answer alleging, among other things, that the deed of suretyship he
executed covering the PhP 10 million-Domestic Bills Purchased Line and the USD 3 million-
Omnibus Credit Line did not include PN No. FCD-0599-2749, the payment of which was
extended several times without his consent.
Geronimo, on the other hand, alleged that the subject deed of suretyship, assuming the
authenticity of his signature on it, was signed without his wife’s consent and should, thus,
be considered as a mere continuing offer. Like Andrew, Geronimo argued that he ought to
be relieved of his liability under the surety agreement inasmuch as he too never
consented to the repeated loan maturity date extensions given by Asianbank to Gateway.
After due hearing, the RTC rendered judgment dated October 7, 2003 5 in favor of
Gateway, the dispositive portion of which states:
WHEREFORE then, in view of the foregoing, judgment is rendered holding defendants
Gateway Electronics Corporation, Geronimo De Los Reyes and Andrew De Los Reyes
jointly and severally liable to pay the plaintiff the following:
a) The sum of $2,235,452.17 United States Currency with interest to be added on at the
prevailing market rate over a given thirty day London Interbank Offered Rate (LIBOR) plus
a spread of 5.5358 percent or ten and [45,455/100,000] percent per annum for the first 35
days and every thirty days beginning November 23, 1999 until fully paid;
b) a penalty charge after November 23, 1999 of two percent (2%) per month until fully
paid;
c) attorney’s fees of twenty percent (20%) of the total amount due and unpaid; and
d) costs of the suit.
SO ORDERED.
Thereafter, Gateway, Geronimo, and Andrew appealed to the CA, their recourse docketed
as CA-G.R. CV No. 80734. Following the filing of its and Geronimo’s joint appellants’ brief,
Gateway filed on November 10, 2004 a petition for voluntary insolvency 6 with the RTC in
Imus, Cavite, Branch 22, docketed as SEC Case No. 037-04, in which Asianbank was listed
in the attached Schedule of Obligations as one of the creditors. On March 16, 2005,
Metrobank, as successor-in-interest of Asianbank, via a Notice of Creditor’s Claim, prayed
that it be allowed to participate in the Gateways’s creditors’ meeting.
In its Decision dated October 28, 2005, the CA affirmed the decision of the Makati City
RTC. In time, Gateway and Geronimo interposed a motion for reconsideration. This was
followed by a Supplemental Motion for Reconsideration dated January 20, 2006, stating
that in SEC Case No. 037-04, the RTC in Imus, Cavite had issued an Order dated December
2, 2004, declaring Gateway insolvent and directing all its creditors to appear before the
court on a certain date for the purpose of choosing among themselves the assignee of
Gateway’s estate which the court’s sheriff has meanwhile placed in custodia
legis.7 Gateway and Geronimo thus prayed that the assailed decision of the Makati City
RTC be set aside, the insolvency court having acquired exclusive jurisdiction over the
properties of Gateway by virtue of Section 60 of Act No. 1956, without prejudice to
Asianbank pursuing its claim in the insolvency proceedings.
In its March 17, 2006 Resolution, however, the CA denied the motion for reconsideration
and its supplement.
Hence, Gateway and Geronimo filed this petition anchored on the following grounds:
I occasion to them. Upon a balancing of interests of both petitioner GBR and respondent
The [CA] erred in disregarding the established rule that an action commenced by a
creditor against a judicially declared insolvent for the recovery of his claim should be
dismissed and referred to the insolvency court. Where, therefore, as in this case,
petitioner GEC [referring to Gateway] has been declared insolvent x x x, respondent
Asianbank’s claim for the payment of GEC’s loans should be ventilated before the
insolvency court x x x.
II
The [CA] erred in admitting as evidence the Deed of Surety purportedly signed by
petitioner GBR [referring to Geronimo] despite the unexplained failure of respondent
Asianbank to present the originals of the Deed of Surety during the trial.
III
The [CA] erred in holding that the repeated extensions granted by respondent Asianbank
to GEC without notice to and the express consent of petitioner GBR did not discharge
petitioner GBR from his liabilities as surety GEC in that:
A. An extension granted to the debtor by the creditor without the consent of the
guarantor extinguishes the guaranty.
B. The [CA] interpreted the supposed Deed of Surety of petitioner GBR as "too
comprehensive and all encompassing as to amount to absurdity."
C. The repeated extensions granted by Asianbank to GEC prevented petitioner GBR from
exercising his right of subrogation under Article 2080 of the Civil Code. As such, petitioner
GBR should be released from his obligations as surety of GEC.
IV
It is a well-settled rule that when a bank deviates from normal banking practice in a
transaction and sustains injury as a result thereof, the bank is deemed to have assumed
the risk and no right of payment accrues to the latter against any party to the transaction.
By repeatedly extending the period for the payment of GEC’s obligations and granting GEC
other loans after the suretyship agreement despite GEC’s default and in failing to
foreclose the chattel mortgage constituted as security for GEC’s loan contrary to normal
banking practices, Asianbank failed to exercise reasonable caution for its own protection
and assumed the risk of non-payment through its own acts, and thus has no right to
proceed against petitioner GBR as surety for the payment of GEC’s loans.
V
In Agcaoili v. GSIS, this Honorable Court had occasion to state that in determining the
precise relief to give, the court will "balance the equities" or the respective interests of
the parties and take into account the relative hardship that one relief or another may
Asianbank, greater and irreparable harm and injury would be suffered by petitioner GBR
than respondent Asianbank if the assailed Decision and Resolution of the [CA] would be
upheld x x x. This Honorable Court x x x should thus exercise its equity jurisdiction in the
instant case to the end that it may render complete justice to both parties and declare
petitioner GBR as released and discharged from any liability in respect of respondent
Asianbank’s claims.8
The Ruling of the Court
Gateway May Be Discharged from Liability But Not Geronimo
Gateway, having been declared insolvent, argues that jurisdiction over all claims against
all of its properties and assets properly pertains to the insolvency court. Accordingly,
Gateway adds, citing Sec. 60 of Act No. 1956, 9 as amended, or the Insolvency Law, any
pending action against its properties and assets must be dismissed, the claimant relegated
to the insolvency proceedings for the claimant’s relief.
The contention, as formulated, is in a qualified sense meritorious. Under Sec. 18 of Act No.
1956, as couched, the issuance of an order declaring the petitioner insolvent after the
insolvency court finds the corresponding petition for insolvency to be meritorious shall
stay all pending civil actions against the petitioner’s property. For reference, said Sec. 18,
setting forth the effects and contents of a voluntary insolvency order, 10 pertinently
provides:
Section 18. Upon receiving and filing said petition, schedule, and inventory, the court x x x
shall make an order declaring the petitioner insolvent, and directing the sheriff of the
province or city in which the petition is filed to take possession of, and safely keep, until
the appointment of a receiver or assignee, all the deeds, vouchers, books of account,
papers, notes, bonds, bills, and securities of the debtor and all his real and personal
property, estate and effects x x x. Said order shall further forbid the payment to the
creditor of any debts due to him and the delivery to the debtor, or to any person for him,
of any property belonging to him, and the transfer of any property by him, and shall
further appoint a time and place for a meeting of the creditors to choose an assignee of
the estate. Said order shall [be published] x x x. Upon the granting of said order, all civil
proceedings pending against the said insolvent shall be stayed. When a receiver is
appointed, or an assignee chosen, as provided in this Act, the sheriff shall thereupon
deliver to such receiver or assignee, as the case may be all the property, assets, and
belongings of the insolvent which have come into his possession x x x. (Emphasis
supplied.)
Complementing Sec. 18 which appropriately comes into play "upon the granting of [the]
order" of insolvency is the succeeding Sec. 60 which properly applies to the period "after
the commencement of proceedings in insolvency." The two provisions may be
harmonized as follows: Upon the filing of the petition for insolvency, pending civil actions
against the property of the petitioner are not ipso facto stayed, but the insolvent may
apply with the court in which the actions are pending for a stay of the actions against the
insolvent’s property. If the court grants such application, pending civil actions against the
petitioner’s property shall be stayed; otherwise, they shall continue. Once an order of
insolvency nevertheless issues, all civil proceedings against the petitioner’s property are,
by statutory command, automatically stayed. Sec. 60 is reproduced below:
SECTION 60. Creditors proving claims cannot sue; Stay of action.–No creditor, proving his
debt or claim, shall be allowed to maintain any suit therefor against the debtor, but shall
be deemed to have waived all right of action and suit against him, and all proceedings
already commenced, or any unsatisfied judgment already obtained thereon, shall be
deemed to be discharged and surrendered thereby; and after the debtor’s discharge,
upon proper application and proof to the court having jurisdiction, all such proceedings
shall be, dismissed, and such unsatisfied judgments satisfied of record: Provided, x x x. A
creditor proving his debt or claim shall not be held to have waived his right of action or
suit against the debtor when a discharge has have been refused or the proceedings have
been determined to the without a discharge. No creditor whose debt is provable under
this Act shall be allowed, after the commencement of proceedings in insolvency, to
prosecute to final judgment any action therefor against the debtor until the question of
the debtor’s discharge shall have been determined, and any such suit proceeding shall,
upon the application of the debtor or of any creditor, or the assignee, be stayed to await
the determination of the court on the question of discharge: Provided, That if the
amount due the creditor is in dispute, the suit, by leave of the court in insolvency, may
proceed to judgment for purpose of ascertaining the amount due, which amount, when
adjudged, may be allowed in the insolvency proceedings, but execution shall be stayed
aforesaid. (Emphasis supplied.)
Applying the aforequoted provisions, it can rightfully be said that the issuance of the
insolvency order of December 2, 2004 had the effect of automatically staying the civil
action for a sum of money filed by Asianbank against Gateway. In net effect, the
proceedings before the CA in CA-G.R. CV No. 80734, but only insofar as the claim against
Gateway was concerned, was, or ought to have been, suspended after December 2, 2004,
Asianbank having been duly notified of and in fact was a participant in the insolvency
proceedings. The Court of course takes stock of the proviso in Sec. 60 of Act No. 1956
which in a way provided the CA with a justifying tool to continue and to proceed to
judgment in CA-G.R. CV No. 80734, but only for the purpose of ascertaining the amount
due from Gateway. At any event, on the postulate that jurisdiction over the properties of
the insolvent-declared Gateway lies with the insolvency court, execution of the CA
insolvency judgment against Gateway can only be pursued before the insolvency court.
Asianbank, no less, tends to agree to this conclusion when it stated: "[E]ven it if is
assumed that the declaration of insolvency of petitioner Gateway can be taken cognizance
of, such fact does relieve petitioner Geronimo and/or Andrew delos Reyes from
performing their obligations based on the Deeds of Suretyship x x x." 11
Geronimo, however, is a different story.
Asianbank argues that the stay of the collection suit against Gateway is without bearing
on the liability of Geronimo as a surety, adding that claims against a surety may proceed
independently from that against the principal debtor. Pursuing the point, Asianbank avers
that Geronimo may not invoke the insolvency of Gateway as a defense to evade liability.
Geronimo counters with the argument that his liability as a surety cannot be separated
from Gateway’s liability. As surety, he continues, he is entitled to avail himself of all the
defenses pertaining to Gateway, including its insolvency, suggesting that if Gateway is
eventually released from what it owes Asianbank, he, too, should also be so relieved.
Geronimo’s above contention is untenable.
Suretyship is covered by Article 2047 of the Civil Code, which states:
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.
The Court’s disquisition in Palmares v. Court of Appeals on suretyship is instructive, thus:
A surety is an insurer of the debt, whereas a guarantor is an insurer of the solvency of the
debtor. A suretyship is an undertaking that the debt shall be paid x x x.  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. x x x  In other words, a surety
undertakes directly for the payment and is so responsible at once if the principal debtor
makes default x x x.
xxxx
A creditor’s right to proceed against the surety exists independently of his right to
proceed against the principal. Under Article 1216 of the Civil Code, the creditor may
proceed against any one of the solidary debtors or some or all of them simultaneously.
The rule, therefore, is that if the obligation is joint and several, the creditor has the right
to proceed even against the surety alone. 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 as 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. Perforce, x x x a
surety is primarily liable, and with the rule that his proper remedy is to pay the debt and
pursue the principal for reimbursement, the surety cannot at law, unless permitted by
statute and in the absence of any agreement limiting the application of the security,
require the creditor or obligee, before proceeding against the surety, to resort to and
exhaust his remedies against the principal, particularly where both principal and surety
are equally bound.12
Clearly, Asianbank’s right to collect payment for the full amount from Geronimo, as
surety, exists independently of its right against Gateway as principal debtor; 13 it could thus
proceed against one of them or file separate actions against them to recover the principal
debt covered by the deed on suretyship, subject to the rule prohibiting double recovery
from the same cause.14 This legal postulate becomes all the more cogent in case of an
insolvency situation where, as here, the insolvency court is bereft of jurisdiction over the
sureties of the principal debtor. As Asianbank aptly points out, a suit against the surety,
insofar as the surety’s solidary liability is concerned, is not affected by an insolvency
proceeding instituted by or against the principal debtor. The same principle holds true
with respect to the surety of a corporation in distress which is subject of a rehabilitation
proceeding before the Securities and Exchange Commission (SEC). As we held
in Commercial Banking Corporation v. CA, a surety of the distressed corporation can be
sued separately to enforce his liability as such, notwithstanding an SEC order declaring the
former under a state of suspension of payment. 15
Geronimo also states that, as things stand, his liability, as compared to that of Gateway, is
contextually more onerous and burdensome, precluded as he is from seeking recourse
against the insolvent corporation. From this premise, Geronimo claims that since Gateway
cannot, owing to the order of insolvency, be made to pay its obligation, he, too, being just
a surety, cannot also be made to pay, obviously having in mind Art. 2054 of the Civil Code,
as follows:
A guarantor may bind himself for less, but not for more than the principal debtor, both as
regards the amount and the onerous nature of the conditions.
Should he have bound himself for more, his obligations shall be reduced to the limits of
that of the debtor.
The Court is not convinced. The above article enunciates the rule that the obligation of a
guarantor may be less, but cannot be more than the obligation of the principal debtor.
The rule, however, cannot plausibly be stretched to mean that a guarantor or surety is
freed from liability as such guarantor or surety in the event the principal debtor becomes
insolvent or is unable to pay the obligation. This interpretation would defeat the very
essence of a suretyship contract which, by definition, refers to an agreement whereunder
one person, the surety, engages to be answerable for the debt, default, or miscarriage of
another known as the principal. 16 Geronimo’s position that a surety cannot be made to
pay when the principal is unable to pay is clearly specious and must be rejected.
The CA Did Not Err in Admitting
the Deed of Suretyship as Evidence
Going to the next ground, Geronimo maintains that the CA erred in admitting the Deed of
Suretyship purportedly signed by him, given that Asianbank failed to present its original
copy.
This contention is bereft of merit.
As may be noted, paragraph 6 of Asianbank’s complaint alleged the following:
6. The loan was secured by the Deeds of Suretyship dated July 23, 1996 that were
executed by defendants Geronimo B. De Los Reyes, Jr. and Andrew S. De Los Reyes.
Attached as Annexes "B" and "C," respectively, are photocopies of the Deeds of Suretyship
executed by defendants Geronimo B. De Los Reyes, Jr. and Andrew S. De Los Reyes.
Subsequently, a chattel mortgage over defendant Gateway’s equipment for $2 million,
United States currency, was executed.17
Geronimo traversed in his answer the foregoing allegation in the following wise: "2.5.
Paragraph 6 is denied, subject to the special and affirmative defenses and allegations
hereinafter set forth."
The ensuing special and affirmative defenses were raised in Gateway’s answer:
15. Granting even that [Geronimo] signed the Deed of Suretyship, his wife x x x had not
given her consent thereto. Accordingly, the security created by the suretyship shall be
construed only as a continuing offer on the part of [Geronimo] and plaintiff and may only
be perfected as a binding contract upon acceptance by Mrs. Delos Reyes. x x x
17. Moreover, assuming, gratia argumenti, that [Geronimo] may be bound by the
suretyship agreement, there is no showing that he has consented to the repeated
extensions made by plaintiff in favor of GEC or to a waiver of notice of such extensions. It
should be pointed out that Mr. Geronimo delos Reyes executed the suretyship agreement
in his personal capacity and not in his capacity as Chairman of the Board of GEC. His
consent, insofar as the continuing application of the suretyship agreement to GEC’s
obligations in view of the repeated extension extended by plaintiff [is concerned], is
therefore necessary. Obviously, plaintiff cannot now hold him liable as a surety to GEC’s
obligations.18
The Rules of Court prescribes, under its Secs. 7 and 8, Rule 8, the procedure should a suit
or defense is predicated on a written document, thus:
Sec. 7. Action or defense based on document.–Whenever an action or defense is based
upon a written instrument or document, the substance of such instrument or document
shall be set forth in the pleading, and the original or a copy thereof shall be attached to
the pleading as an exhibit, which shall be deemed to be a part of the pleading, or said
copy may with like effect be set forth in the pleading.
Sec. 8. How to contest such documents.–When an action or defense is founded upon a
written instrument, copied in or attached to the corresponding pleading as provided in the
preceding section, the genuineness and due execution of the instrument shall be
deemed admitted unless the adverse party, under oath, specifically denies them, and
sets forth what he claims to be the facts; but the requirement of an oath does not apply
when the adverse party does not appear to be a party to the instrument or when
compliance with an order for an inspection of the original instrument is refused.
(Emphasis supplied.)
Given the above perspective, Asianbank, by attaching a photocopy of the Deed of
Suretyship to its underlying complaint, hewed to the requirements of the above twin
provisions. Asianbank, thus, effectively alleged the due execution and genuineness of the
said deed. From that point, Geronimo, if he intended to contest the surety deed, should
have specifically denied the due execution and genuineness of the deed in the manner
provided by Sec. 10, Rule 8 of the Rules of Court, thus:
Sec. 10. Specific denial.–A defendant must specify each material allegation of fact the
truth of which he does not admit and, whenever practicable, shall set forth the
substance of the matters upon which he relies to support his denial. Where a defendant
desires to deny only a part of an averment, he shall specify so much of it as is true and
material and shall deny only the remainder. Where a defendant is without knowledge or
information sufficient to form a belief as to the truth of a material averment made in the
complaint, he shall so state, and this shall have the effect of a denial. (Emphasis supplied.)
In the instant case, Geronimo should have categorically stated that he did not execute the
Deed of Suretyship and that the signature appearing on it was not his or was falsified. His
Answer does not, however, contain any such statement. Necessarily then, Geronimo had
not specifically denied, and, thus, is deemed to have admitted, the genuineness and due
execution of the deed in question. In this regard, Sec. 11, Rule 8 of the Rules of Court
states:
Sec. 11. Allegations not specifically denied deemed admitted.–Material averment in the
complaint, other than those as to the amount of unliquidated damages, shall be deemed
admitted when not specifically denied. x x x
Owing to Geronimo’s virtual admission of the genuineness and due execution of the deed
of suretyship, Asianbank, contrary to the view of Gateway and Geronimo, need not
present the original of the deed during the hearings of the case. Sec. 4, Rule 129 of the
Rules says so:
Sec. 4. Judicial admissions.–An admission, verbal or written, made by the party in the
course of the proceedings in the same case, does not require proof.  The admission may
be contradicted only by showing that it was made through palpable mistake or that no
such admission was made. (Emphasis supplied.)
Geronimo Is Liable for PN No. FCD-0599-2749
under His Deed of Suretyship
This brings us to the third ground which involves the issue of the coverage of the
suretyship. Preliminarily, an overview on the process of taking out loans should first be
made. Generally, especially for large loans, banks first approve a line or facility out of
which a client may avail itself of loans in the form of promissory notes without need of
further processing and/or approval every time a draw down is made. In the instant case,
Asianbank approved in favor of Gateway the PhP 10 million-Domestic Bills Purchased Line
and the USD 3 million-Omnibus Credit Line. Asianbank approved these credit lines which
were covered by a chattel mortgage as well as the deeds of suretyship, such that loans
extended from these lines would already be secured and pre-approved. In other words,
these facilities are not financial obligations yet. Asianbank did not yet lend out any money
to Gateway with the approval of these lines. The loan transaction occurred or the principal
obligation, as secured by a surety agreement, was born after the execution of loan
documents, such as PN No. FCD-0599-2749.
Geronimo now excepts from the ruling that the deed of suretyship he executed covered
PN No. FCD-0599-2749 which embodied several export packing loans issued by Asianbank
to Gateway. He claims that the deed only secured the PhP 10 million-Domestic Bills
Purchased Line and the USD 3 million-Omnibus Credit Line. Geronimo describes as absurd
the notion that a deed of suretyship would secure a loan obligation contracted three (3)
years after the execution of the surety deed.
Geronimo’s thesis that the deed in question cannot be accorded prospective application is
erroneous. To be sure, the provisions of the subject deed of suretyship indicate a
continuing suretyship. In Fortune Motors (Phils.) v. Court of Appeals,19 the Court, citing
cases, defined and upheld the validity of a continuing suretyship in this wise:
"x x x Of course, a surety is not bound under any particular principal obligation until that
principal obligation is born. But there is no theoretical or doctrinal difficulty inherent in
saying that the suretyship agreement itself is valid and binding even before the principal
obligation intended to be secured thereby is born, any more than there would be in saying
that obligations which are subject to a condition precedent are valid and binding before
the occurrence of the condition precedent.
Comprehensive or continuing surety agreements are in fact quite commonplace in
present day financial and commercial practice. A bank or financing company which
anticipates entering into a series of credit transactions with a particular company,
commonly requires the projected principal debtor to execute a continuing surety
agreement along with its sureties. By executing such an agreement, the principal places
itself in a position to enter into the projected series of transactions with its creditor;
with such suretyship agreement, there would be no need to execute a separate surety
contract or bond for each financing or credit accommodation extended to the principal
debtor."20
In Diño vs. Court of Appeals,21 we again had occasion to discourse on continuing
guaranty/suretyship thus:
"x x x A continuing guaranty is one which is not limited to a single transaction, but which
contemplates a future course of dealing, covering a series of transactions, generally for an
indefinite time or until revoked. It is prospective in its operation and is generally intended
to provide security with respect to future transactions within certain limits, and
contemplates a succession of liabilities, for which, as they accrue, the guarantor becomes
liable. Otherwise stated, a continuing guaranty is one which covers all transactions,
including those arising in the future, which are within the description or contemplation of
the contract, of guaranty, until the expiration or termination thereof. A guaranty shall be
construed as continuing when by the terms thereof it is evident that the object is to give a
standing credit to the principal debtor to be used from time to time either indefinitely or
until a certain period x x x.
In other jurisdictions, it has been held that the use of particular words and expressions
such as payment of ‘any debt,’ ‘any indebtedness,’ ‘any deficiency,’ or ‘any sum,’ or the
guaranty of ‘any transaction’ or money to be furnished the principal debtor ‘at any time,’
or ‘on such time’ that the principal debtor may require, have been construed to indicate a
continuing guaranty." (Emphasis supplied.)
By its nature, a continuing suretyship covers current and future loans, provided that, with
respect to future loan transactions, they are, to borrow from Diño, as cited above, "within
the description or contemplation of the contract of guaranty." The Deed of Suretyship
Geronimo signed envisaged a continuing suretyship when, by the express terms of the
deed, he warranted payment of the PhP 10 million-Domestic Bills Purchased Line and the
USD 3 million-Omnibus Credit Line, as evidenced by:
x x x notes, drafts, overdrafts and other credit obligations on which the DEBTOR(S) may
now be indebted or may hereafter become indebted to the CREDITOR, together with all
interests, penalty and other bank charges as may accrue thereon and all expenses which
may be incurred by the latter in collecting any or all such instruments. 22
Evidently, under the deed of suretyship, Geronimo undertook to secure all obligations
obtained under the Domestic Bills Purchased Line and Omnibus Credit Line, without any
specification as to the period of the loan.
Geronimo’s application of Garcia v. Court of Appeals, a case covering two separate loans,
denominated as SWAP Loan and Export Loan, is quite misplaced. There, the Court ruled
that the continuing suretyship only covered the SWAP Loan as it was only this loan that
was referred to in the continuing suretyship. The Court wrote in Garcia:
Particular attention must be paid to the statement appearing on the face of the Indemnity
[Suretyship] Agreement x x x "evidenced by those certain loan documents dated April 20,
1982" x x x. From this statement, it is clear that the Indemnity Agreement refers only to
the loan document of April 20, 1982 which is the SWAP loan. It did not include the
EXPORT loan. Hence, petitioner cannot be held answerable for the EXPORT
loan.23 (Emphasis supplied.)
The Indemnity Agreement in Garcia specifically identified loan documents evidencing
obligations of the debtor that the agreement was intended to secure. In the present case,
however, the suretyship Geronimo assumed did not limit itself to a specific loan document
to the exclusion of another. The suretyship document merely mentioned the Domestic
Bills Purchased Line and Omnibus Credit Line as evidenced by "all notes, drafts x x x
contracted/incurred by [Gateway] in favor of [Asianbank]." 24 As explained earlier, such
credit facilities are not loans by themselves. Thus, the Deed of Suretyship was intended to
secure future loans for which these facilities were opened in the first place.
Lest it be overlooked, both the trial and appellate courts found the Omnibus Credit Line
referred to in the Deed of Suretyship as covering the export packing credit loans
Asianbank extended to Gateway. We agree with this factual determination. By the very
use of the term "omnibus," and in practice, an omnibus credit line refers to a credit facility
whence a borrower may avail of various kinds of credit loans. Defined as such, an omnibus
line is broad enough to refer to or cover an export packing credit loan.
Geronimo’s allegation that an export packing credit loan is separate and distinct from an
omnibus credit line is but a bare and self-serving assertion bereft of any factual or legal
basis. One who alleges something must prove it: a mere allegation is not
evidence.25 Geronimo has not discharged his burden of proof. His contention cannot be
given any weight.
As a final and major ground for his release as surety, Geronimo alleges that Asianbank
repeatedly extended the maturity dates of the obligations of Gateway without his
knowledge and consent. Pressing this point, he avers that, contrary to the findings of the
CA, he did not waive his right to notice of extensions of Gateway’s obligations.
Such contention is unacceptable as it glosses over the fact that the waiver to be notified of
extensions is embedded in surety document itself, built in the ensuing provision:
In case of default by any and/or all of the DEBTOR(S) to pay the whole part of said
indebtedness herein secured at maturity, I/WE jointly and severally, agree and engage to
the CREDITOR, its successors and assigns, the prompt payment, without demand or
notice from said CREDITOR of such notes, drafts, overdrafts and other credit obligations
on which the DEBTOR(S) may now be indebted or may hereafter become indebted to
the CREDITOR, together with all interests, penalty and other bank charges as may accrue
thereon and all expenses which may be incurred by the latter in collecting any or all such
instruments.26 (Emphasis supplied.)
In light of the above provision, Geronimo verily waived his right to notice of the maturity
of notes, drafts, overdraft, and other credit obligations for which Gateway shall become
indebted. This waiver necessarily includes new agreements resulting from the novation of
previous agreements due to changes in their maturity dates.
Additionally, Geronimo’s lament about losing his right to subrogation is erroneous. He
argues that by virtue of the order of insolvency issued by the insolvency court, title and
right to possession to all the properties and assets of Gateway were vested upon
Gateway’s assignee in accordance with Sec. 32 of the Insolvency Law.
The transfer of Gateway’s property to the insolvency assignee, if this be the case, does not
negate Geronimo’s right of subrogation, for such right may be had or exercised in the
insolvency proceedings. The possibility that he may only recover a portion of the amount
he is liable to pay is the risk he assumed as a surety of Gateway. Such loss does not,
however, render ineffectual, let alone invalidate, his suretyship.
Geronimo’s other arguments to escape liability are puerile and really partake more of a
plea for liberality. They need not detain us long. In gist, Geronimo argues:  first, that he is a
gratuitous surety of Gateway; second, Asianbank deviated from normal banking practice,
such as when it extended the period for payment of Gateway’s obligation and when it
opted not to foreclose the chattel mortgage constituted as guarantee of Gateway’s loan
obligation; and third, implementing the appealed CA’s decision would cause him great
harm and injury.
Anent the first argument, suffice it to state that Geronimo was then the president of
Gateway and, as such, was benefited, albeit perhaps indirectly, by the loan thus granted
by Asianbank. And as we said in Security Pacific Assurance Corporation, the surety is liable
for the debt of another although the surety possesses no direct or personal interest over
the obligation nor does the surety receive any benefit from it. 27
Whether or not Asianbank really deviated from normal banking practice by extending the
period for Gateway to comply with its loan obligation or by not going after the chattel
mortgage adverted to is really of no moment. Banks are primarily in the business of
extending loans and earn income from their lending operations by way of service and
interest charges. This is why Asianbank opted to give Gateway ample opportunity to pay
its obligations instead of foreclosing the chattel mortgage and in the process holding on to
assets of which the bank has really no direct use.
The following excerpts from Palmares  are in point:
We agree with respondent corporation that its mere failure to immediately sue petitioner
on her obligation does not release her from liability. Where a creditor refrains from
proceeding against the principal, the surety is not exonerated. In other words, mere want
of diligence or forbearance does not affect the creditor’s rights vis-à-vis the surety, unless
the surety requires him by appropriate notice to sue on the obligation. Such gratuitous
indulgence of the principal does not discharge the surety whether given at the principal’s
request or without it, and whether it is yielded by the creditor through sympathy or from
an inclination to favor the principal x x x. The neglect of the creditor to sue the principal at
the time the debt falls due does not discharge the surety, even if such delay continues
until the principal becomes insolvent.  And, in the absence of proof of resultant injury, a
surety is not discharged by the creditor’s mere statement that the creditor will not look to
the surety, or that he need not trouble himself.  The consequences of the delay, such as
the subsequent insolvency of the principal,  or the fact that the remedies against the
principal may be lost by lapse of time, are immaterial.28
The Court’s Equity Jurisdiction
Finds No Application to the Instant Case
Geronimo urges the Court to release and discharge him from any liability arising from
Asianbank’s claims if what he terms as "complete justice" is to be served. He cites, as
supporting reference, Agcaoili v. GSIS,29 presenting in the same breath the following
arguments: first, the Deed of Suretyship is a gratuitous contract from which he did not
benefit; second, Asianbank assured him that the deed would not be enforced against
him;  third, the enforcement of the judgment of the CA would reduce Geronimo and his
family to a life of penury; and fourth, Geronimo would be unable to exercise his right of
subrogation, Gateway having already been declared as insolvent.
The first and last arguments have already been addressed and found to be without merit.
The second argument is a matter of defense which has remained unproved and even
belied by Asianbank by its filing of the complaint. We see no need to further belabor any
of them.
As regards the third allegation, suffice it to state that the predicament Geronimo finds
himself in is his very own doing. His misfortune is but the result of the implementation of
a bona fide contract he freely executed, the terms of which he is presumed to have
thoroughly examined. He was not at all compelled to act as surety; he had a choice. It may
be more offensive to public policy or good customs if he be allowed to go back on his
undertaking under the surety contract. The Court cannot be a party to the contract’s
impairment and relieve a surety from the effects of an unwise but nonetheless a valid
surety contract.
WHEREFORE, the instant petition is hereby DENIED. The appealed Decision dated October
28, 2005 of the CA and its March 17, 2006 Resolution in CA-G.R. CV No. 80734 are
hereby AFFIRMED with the modification that any claim of Asianbank or its successor-in-
interest against Gateway, if any, arising from the judgment in this suit shall be pursued
before the RTC, Branch 22 in Imus, Cavite as the insolvency court.
Costs against petitioners.
SO ORDERED.
 Mortgage5 over the condominium unit as collateral, and the same was annotated at the
back of CCT No. 2130.

On October 3, 1995, respondents again borrowed One Million One Hundred Thousand
Pesos (₱1,100,000.00) from petitioner bank, which was also secured by a mortgage over
the same property annotated at the back of CCT No. 2130.6

On January 2, 1996, respondents paid One Million Eleven Thousand Five Hundred Fifty-
Five Pesos and 54 centavos (₱1,011,555.54), as evidenced by Official Receipt No.
1477417 issued by petitioner bank. On the face of the receipt, it was written that the
payment was "in full payment of the loan and interest." Respondents then asked
petitioner bank to cancel the mortgage annotations on CCT No. 2130 since the loans
secured by the real estate mortgage were already paid in full. However, the bank refused
Republic of the Philippines to cancel the same and demanded payment of Four Million Six Hundred Thirty-Three
SUPREME COURT Thousand Nine Hundred Sixteen Pesos and Sixty-Seven Centavos (₱ 4,633,916.67),
Manila representing the outstanding obligation of respondents as of February 27, 1998.
SECOND DIVISION Respondents requested for an accounting which would explain how the said amount was
G.R. No. 174006               December 8, 2010 arrived at. However, instead of heeding respondents’ request, petitioner bank applied for
BANK OF COMMERCE and STEPHEN Z. TAALA, Petitioners, extra-judicial foreclosure of the mortgages over the condominium unit. The public auction
vs. sale was scheduled on September 4, 1998. Petitioner Stephen Z. Taala, a notary public,
Spouses ANDRES and ELIZA FLORES, Respondents. was tasked to preside over the auction sale. 8

DECISION
NACHURA, J.:
Before the Court is a petition for review on certiorari under Rule 45 of the Rules of Court,
assailing the Decision1 dated February 28, 2006 and the Resolution 2 dated August 9, 2006
of the Court of Appeals (CA) in CA-G.R. CV No. 80362.
The facts of the case are as follows:
Respondents filed a case for specific performance against petitioners before the Regional
Trial Court (RTC) of Quezon City, docketed as Civil Case No. Q-98-35425. Respondents are
the registered owners of a condominium unit in Embassy Garden Homes, West Triangle,
Quezon City, registered under Condominium Certificate of Title (CCT) No. 2130, 3 issued by
the Register of Deeds of Quezon City.4
On October 22, 1993, respondents borrowed money from petitioner bank in the amount
of Nine Hundred Thousand Pesos (₱900,000.00). Respondents executed a Real Estate
Respondents filed suit with the RTC, Quezon City, assailing the validity of the foreclosure
and auction sale of the property. They averred that the loans secured by the property had
already been paid in full. Furthermore, they claimed that the Notice of Auction Sale by
Notary Public9 failed to comply with the provisions of Act No. 3135, as amended by Act
No. 4118, requiring the publication and posting of the notice of auction sale in at least
three (3) public places in Quezon City. 10 Respondents likewise prayed for the payment of
moral and exemplary damages, and attorney’s fees, and for the issuance of a temporary
restraining order and/or writ of preliminary injunction to enjoin the extra-judicial
foreclosure sale of the property. 11
On October 23, 1998, the RTC granted respondents’ prayer for issuance of a writ of
preliminary injunction, restraining petitioner bank from foreclosing on the mortgage. 12
Petitioner bank admitted that there were only two (2) mortgage loans annotated at the
back of CCT No. 2130, but denied that respondents had already fully settled their
outstanding obligations with the bank. 13 It averred that several credit lines were granted
to respondent Andres Flores by petitioner bank that were secured by promissory notes
executed by him, and which were either increased or extended from time to time. The
loan that was paid on January 2, 1996, in the amount of ₱1,011,555.54, was only one of
his loans with the bank. There were remaining loans already due and demandable, and
had not been paid by respondents despite repeated demands by petitioner bank. The
remaining loans, although not availed of at the same time, were similarly secured by the
subject real estate mortgage as provided in the continuing guaranty agreement therein. 14
Petitioner bank alleged that respondents requested and were granted an increase in their
Bills Discounted Line from Nine Hundred Thousand Pesos (₱900,000.00) to Two Million
Pesos (₱2,000,000.00), which was secured by the same real estate mortgage on CCT No.
2130. However, the subject condominium unit commanded only a market value of One
Million Seven Hundred Twenty-Three Thousand Six Hundred Pesos (₱1,723,600.00), and a
loan value of Nine Hundred Fifty-Nine Thousand Six Hundred Sixteen Pesos (₱959,616.00).
Since the market value of the condominium unit was lower than the combined loans, the
parties agreed to fix the amount of the real estate mortgage at ₱1,100,000.00. Moreover,
petitioner bank stressed that under the terms of the two real estate mortgages, future
loans of respondents were also covered. 151avvphi1
On December 4, 2002, the RTC rendered a resolution,16 the fallo of which reads:
FROM THE FOREGOING MILIEU, the present case for specific performance with damages
and injunction filed by plaintiffs, Sps. Andres and Eliza Flores against defendants, Bank of
Commerce and Stephen Z. Taala, is hereby DISMISSED. Likewise, the counterclaim filed by
defendants, Bank of Commerce and Stephen Z. Taala against plaintiffs, Sps. Andres and
Eliza Flores is DISMISSED for insufficiency of evidence.
SO ORDERED.17
In denying respondents’ complaint for specific performance, the RTC ratiocinated that
respondents’ right of action hinged mainly on the veracity of their claim that they
faithfully complied with their loan obligations and had fully paid them in January 1996.
The RTC stated that the evidence submitted by petitioner bank, specifically the promissory
notes and statement of account dated February 27, 1998, negated this contention. The
RTC declared that respondents incurred other debts from petitioner bank, which must be
paid first before they could be absolved of liability, and, consequently, demand the
release of the mortgage. The RTC also struck down respondents’ assertion that petitioner
bank did not comply with the posting and publication requirements under Act No. 3135,
as amended.
Respondents filed a motion for reconsideration, which was, however, denied by the RTC in
a decision18 dated August 8, 2003.
Aggrieved, respondents appealed to the CA.
Meanwhile, on March 25, 2004, the auction sale of the subject property was conducted,
and petitioner bank was awarded the property, as the highest bidder.
On February 28, 2006, the CA rendered a Decision 19 reversing the decision and the
resolution of the RTC. The dispositive portion of the CA Decision reads:
IN VIEW OF ALL THE FOREGOING, the instant appeal is GRANTED; the challenged Decision
dated December 4, 2002, is REVERSED and SET ASIDE; and a new one entered:
(a) ordering the cancellation of the real estate mortgage annotations on the dorsal side of
CCT No. 2130 of the Registry of Deeds of Quezon City;
(b) ordering appellee Bank to issue a corresponding release of mortgages to plaintiffs-
appellants’ CCT No. 2130;
(c) declaring null and void the challenged extra-judicial foreclosure and public auction sale
held on March 25, 2004 together with the Certificate of Sale dated April 14, 2004 issued in
favor of appellee Bank; and,
(d) appellees’ counterclaims are ordered dismissed, for lack of sufficient basis therefor.
No costs. SO ORDERED.20
The CA ratiocinated that the principal obligation or loan was already extinguished by the
full payment thereof. Consequently, the real estate mortgages securing the principal
obligation were also extinguished. A real estate mortgage, being an accessory contract,
cannot survive without the principal obligation it secures. The CA also noted that the two
mortgages were individually annotated at the back of CCT No. 2130. Thus, the CA opined
that the individual annotations clearly indicated that the said mortgages were not meant
to serve as a continuing guaranty for any future loan that respondents would obtain from
petitioner bank.
Petitioners filed a motion for reconsideration. On August 9, 2006, the CA issued a
Resolution21 denying the same.
Hence, the instant petition.
The sole issue for resolution is whether the real estate mortgage over the subject
condominium unit is a continuing guaranty for the future loans of respondent spouses
despite the full payment of the principal loans annotated on the title of the subject
property.
We resolve this issue in the affirmative.
The contested portion of the Deed of Real Estate Mortgage dated October 22, 1993 for
the principal obligation of ₱900,000.00 and of the second one dated October 3, 1995 for
the sum of ₱1,100,000.00, uniformly read:
WITNESSETH: That
for and in consideration of the credit accommodations granted by
the MORTGAGEE [Bank of Commerce] to the MORTGAGOR [Andres
Flores] and/or _____________________ hereby initially fixed at
_____________________________PESOS: (P____________),
Philippine Currency, and as security for the payment of the same, on
demand or at maturity as the case may be, be the interest accruing
thereon, the cost of collecting the same, the cost of keeping the
mortgaged property(ies), of all amounts now owed or hereafter
owing by the MORTGAGOR to the MORTGAGEE under this or
separate instruments and agreements, or in respect of any bill, note,
check, draft accepted, paid or discounted, or advances made and all
other obligations to every kind already incurred or which may
hereafter be incurred, for the use or accommodation of the
MORTGAGOR, as well as the faithful performance of the terms and
conditions of this mortgage and of the separate instruments and/or
documents under which credits have been or may hereafter be
advanced by the MORTGAGEE to the MORTGAGOR, including their
renewals, extensions and substitutions, any and all of which separate
instruments and/or documents and their renewals, extensions and
substitutions are hereunto incorporated and made integral parts
hereof, the MORTGAGOR [Andres Flores] has transferred and
conveyed, as by these presents it/he does hereby transfer and
convey, by way of First Mortgage, to the MORTGAGEE [Bank of
Commerce], its successors and assigns, all its/ his rights, title and
interest to that parcel(s) of land, together with all the buildings and
improvements now existing or which may hereafter be erected or
constructed thereon, including all other rights or benefits annexed to
or inherent therein now existing or which may hereafter exist,
situated in Embassy Garden Homes, Quezon City, Philippines, and
more particularly described in Original/Transfer Certificate(s) of Title
No. CCT No. 2130 of the Registry of Deeds [of] Quezon City, as
follows:
CCT No. 2130
Unit No. L-2, located on Building L, consisting of Ninety Five point
Twenty (95.20) Square Meters, more of less, with Parking Space No.
L-2.22
It is petitioner bank’s contention that the said undertaking, stipulated in the Deed of Real
Estate Mortgage dated October 22, 1993 and October 3, 1995, is a continuing guaranty
meant to secure future debts or credit accommodations granted by petitioner bank in
favor of respondents. On the other hand, respondents posit that, since they have already
paid the loans secured by the real estate mortgages, the mortgage should not be
foreclosed because it does not include future debts of the spouses or debts not annotated
at the back of CCT No. 2130.
A continuing guaranty is a recognized exception to the rule that an action to foreclose a
mortgage must be limited to the amount mentioned in the mortgage contract. 23 Under
Article 2053 of the Civil Code, a guaranty may be given to secure even future debts, the
amount of which may not be known at the time the guaranty is executed. This is the basis
for contracts denominated as a continuing guaranty or suretyship. A continuing guaranty
is not limited to a single transaction, but contemplates a future course of dealing, covering
a series of transactions, generally for an indefinite time or until revoked. It is prospective
in its operation and is generally intended to provide security with respect to future
transactions within certain limits, and contemplates a succession of liabilities, for which,
as they accrue, the guarantor becomes liable. In other words, a continuing guaranty is one
that covers all transactions, including those arising in the future, which are within the
description or contemplation of the contract of guaranty, until the expiration or
termination thereof.24
A guaranty shall be construed as continuing when, by the terms thereof, it is evident that
the object is to give a standing credit to the principal debtor to be used from time to time
either indefinitely or until a certain period, especially if the right to recall the guaranty is
expressly reserved. In other jurisdictions, it has been held that the use of particular words
and expressions, such as payment of "any debt," "any indebtedness," "any deficiency," or
"any sum," or the guaranty of "any transaction" or money to be furnished the principal
debtor "at any time" or "on such time" that the principal debtor may require, has been
construed to indicate a continuing guaranty. 25

In the instant case, the language of the real estate mortgage unambiguously reveals that
the security provided in the real estate mortgage is continuing in nature. Thus, it was
intended as security for the payment of the loans annotated at the back of CCT No. 2130,
and as security for all amounts that respondents may owe petitioner bank. It is well
settled that mortgages given to secure future advance or loans are valid and legal
contracts, and that the amounts named as consideration in said contracts do not limit the
amount for which the mortgage may stand as security if from the four corners of the
instrument the intent to secure future and other indebtedness can be gathered. 26

A mortgage given to secure advancements is a continuing security and is not discharged

by repayment of the amount named in the mortgage until the full amounts of the
advancements are paid.27 Respondents’ full payment of the loans annotated on the title of
the property shall not effect the release of the mortgage because, by the express terms of
the mortgage, it was meant to secure all future debts of the spouses and such debts had
been obtained and remain unpaid. Unless full payment is made by the spouses of all the
amounts that they have incurred from petitioner bank, the property is burdened by the
mortgage.

WHEREFORE, in view of the foregoing, the Decision dated February 28, 2006 and the
Resolution dated August 9, 2006 of the Court of Appeals in CA-G.R. CV No. 80362 are
hereby REVERSED and SET ASIDE. The decision of the Regional Trial Court dated December
4, 2002 is hereby REINSTATED.

SO ORDERED.
 In turn, the Continuing Suretyship4 executed by petitioner stipulated that:

3. Liability of the Surety. - The liability of the Surety is solidary and not contingent upon
the pursuit of the Bank of whatever remedies it may have against the Debtor or the
collaterals/liens it may possess. If any of the Guaranteed Obligations is not paid or
performed on due date (at stated maturity or by acceleration), the Surety shall, without
need for any notice, demand or any other act or deed, immediately become liable
therefor and the Surety shall pay and perform the same. 5

Guaranteed Obligations are defined in the same document as follows:

a) "Guaranteed Obligations" - the obligations of the Debtor arising from all credit
accommodations extended by the Bank to the Debtor, including increases, renewals, roll-
overs, extensions, restructurings, amendments or novations thereof, as well as (i) all
obligations of the Debtor presently or hereafter owing to the Bank, as appears in the
accounts, books and records of the Bank, whether direct or indirect, and (ii) any and all
Republic of the Philippines expenses which the Bank may incur in enforcing any of its rights, powers and remedies
SUPREME COURT under the Credit Instruments as defined hereinbelow. 6
Manila
THIRD DIVISION The debtor, Raul Arroyo, defaulted on his loan obligation. Thereafter, petitioner received a
G.R. No. 188539               March 12, 2014 Notice of Final Demand dated August 2, 2001, informing him that he was liable to pay the
MARIANO LIM, Petitioner, loan obtained by Raul and Edwina Arroyo, including the interests and penalty fees
vs. amounting to ₱7,703,185.54, and demanding payment thereof. For failure of petitioner to
SECURITY BANK CORPORATION,* Respondent. comply with said demand, respondent filed a complaint for collection of sum of money
against him and the Arroyo spouses. Since the Arroyo spouses can no longer be located,
DECISION summons was not served on them, hence, only petitioner actively participated in the case.
PERALTA, J.:
This deals with the Petition for Review on Certiorari under Rule 45 of the Rules of Court
praying that the Decision 1 of the Court of Appeals (CA), promulgated on July 30, 2008, and After trial, the Regional Trial Court of Davao (RTC) rendered judgment against
the Resolution2 dated June 1, 2009, denying petitioner's motion for reconsideration petitioner.7 The dispositive portion of the RTC Decision reads as follows:
thereof, be reversed and set aside.
Wherefore, judgment is hereby rendered ordering defendant Lim to pay the following
Petitioner executed a Continuing Suretyship in favor of respondent to secure "any and all sums.
types of credit accommodation that may be granted by the bank hereinto and
hereinafter" in favor of Raul Arroyo for the amount of ₱2,000,000.00 which is covered by 1. The principal sum of two million pesos plus nineteen percent interest of the
a Credit Agreement/Promissory Note. 3 Said promissory note stated that the interest on outstanding principal interest due and unpaid to be computed from January 28, 1997 until
the loan shall be 19% per annum, compounded monthly, for the first 30 days from the fully paid, plus two percent interest per month as penalty to be computed from February
date thereof, and if the note is not fully paid when due, an additional penalty of 2% per 28, 1997 until fully paid.
month of the total outstanding principal and interest due and unpaid, shall be imposed. 2. Four hundred thousand pesos as attorney's fees.
3. Thirty thousand pesos as litigation expenses.
SO ORDERED.8
Petitioner appealed to the CA, but the appellate court, in its Decision dated July 30, 2008,
affirmed the RTC judgment with the modification that interest be computed from August
1, 1997; the penalty should start only from August 28, 1997; the award of attorney's fees
is set at 10% of the total amount due; and the award for litigation expenses increased to
₱92,321.10.9
Petitioner's motion for reconsideration of the CA Decision was denied per Resolution
dated June 1, 2009.
Petitioner then elevated the matter to this Court via a petition for review on certiorari,
where the main issue is whether petitioner may validly be held liable for the principal
debtor's loan obtained six months after the execution of the Continuing Suretyship.
The other issues, such as the proper computation of the total indebtedness and the
amount of litigation expenses are factual matters that had been satisfactorily addressed
by the CA, to wit: (1) the CA ruled that respondent should recompute the total amount
due, since the proceeds from the foreclosure of the real estate and chattel mortgages
were deducted only on June 20, 2001, when the public auctions were conducted on
August 26, 1998 and September 7, 1999, respectively, thus, the amount of the proceeds
from the foreclosure of the mortgaged properties should have been deducted from the
amount of indebtedness on the date the public auction was held; and (2) the CA likewise
pointed out that as can be seen from the Legal Fees Form, 10 the litigation expense
incurred by respondent was ₱92,321.10, the amount it paid as filing fee. It is hornbook
principle that this Court is not a trier of facts, hence, such issues will not be revisited by
this Court in the present petition. With regard to the propriety of making petitioner a
hostile witness, respondent is correct that the issue cannot be raised for the first time on
appeal. Thus, the Court will no longer address these issues which had been improperly
raised in this petition for review on certiorari.
The main issue deserves scant consideration, but the matter of the award of attorney's
fees deserves reexamination.
The nature of a suretyship is elucidated in Philippine Charter Insurance Corporation v.
Petroleum Distributors & Service Corporation 11 in this wise:
A contract of suretyship is an agreement whereby a party, called the surety, guarantees
the performance by another party, called the principal or obligor, of an obligation or
undertaking in favor of another party, called the obligee. Although the contract of a surety
is secondary only to a valid principal obligation, the surety becomes liable for the debt or
duty of another although it possesses no direct or personal interest over the obligations
nor does it receive any benefit therefrom. This was explained in the case of Stronghold
Insurance Company, Inc. v. Republic-Asahi Glass Corporation, where it was written:
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.
xxxx
Thus, suretyship arises upon the solidary binding of a person deemed the surety with the
principal debtor for the purpose of fulfilling an obligation. 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. x x x. 12
In this case, what petitioner executed was a Continuing Suretyship, which the Court
described in Saludo, Jr. v. Security Bank Corporation13 as follows:
The essence of a continuing surety has been highlighted in the case of Totanes v. China
Banking Corporation in this wise:
Comprehensive or continuing surety agreements are, in fact, quite commonplace in
present day financial and commercial practice. A bank or financing company which
anticipates entering into a series of credit transactions with a particular company,
normally requires the projected principal debtor to execute a continuing surety
agreement along with its sureties. By executing such an agreement, the principal places
itself in a position to enter into the projected series of transactions with its creditor; with
such suretyship agreement, there would be no need to execute a separate surety contract
or bond for each financing or credit accommodation extended to the principal debtor. 14
The terms of the Continuing Suretyship executed by petitioner, quoted earlier, are very
clear.1âwphi1 It states that petitioner, as surety, shall, without need for any notice,
demand or any other act or deed, immediately become liable and shall pay "all credit
accommodations extended by the Bank to the Debtor, including increases, renewals, roll-
overs, extensions, restructurings, amendments or novations thereof, as well as (i) all
obligations of the Debtor presently or hereafter owing to the Bank, as appears in the
accounts, books and records of the Bank, whether direct or indirect, and
(ii) any and all expenses which the Bank may incur in enforcing any of its rights, powers
and remedies under the Credit Instruments as defined hereinbelow." 15 Such stipulations
are valid and legal and constitute the law between the parties, as Article 2053 of the Civil
Code provides that "[a] guaranty may also be given as security for future debts, the
amount of which is not yet known; x x x." Thus, petitioner is unequivocally bound by the
terms of the Continuing Suretyship. There can be no cavil then that petitioner is liable for
the principal of the loan, together with the interest and penalties due thereon, even if said
loan was obtained by the principal debtor even after the date of execution of the
Continuing Suretyship.
However, even if such attorney's fees are allowed by law, the courts still have the power
to reduce the same if it is unreasonable. In Trade & Investment Corporation of the
Philippines v. Roblett Industrial Construction Corp., 19 the Court equitably reduced the
amount of attorney's fees to be paid since interests and penalties had ballooned to thrice
as much as the principal debt. That is also the case here. The award of attorney's fees
amounting to ten percent (10%) of the principal debt, plus interest and penalty charges,
would definitely exceed the principal amount; thus, making the attorney's fees manifestly
exorbitant. Hence, we reduce the amount of attorney's fees to ten percent (10%) of the
principal debt only.
WHEREFORE, the petition is PARTIALLY GRANTED. The Decision of the Court of Appeals,
dated July 30, 2008, in CA-G.R. CV No. 00462, is AFFIRMED with MODIFICATION in that the
award of attorney's fees is reduced to ten percent (10%) of the principal debt only.
SO ORDERED.

With regard to the award of attorney's fees, it should be noted that Article 2208 of the
Civil Code does not prohibit recovery of attorney's fees if there is a stipulation in the
contract for payment of the same. Thus, in Asian Construction and Development
Corporation v. Cathay Pacific Steel Corporation (CAPASCO), 16 the Court, citing Titan
Construction Corporation v. Uni-Field Enterprises, Inc., 17 expounded as follows:

The law allows a party to recover attorney's fees under a written agreement. In Barons
Marketing Corporation v. Court of Appeals, the Court ruled that:

[T]he attorney's fees here are in the nature of liquidated damages and the stipulation
therefor is aptly called a penal clause. It has been said that so long as such stipulation does
not contravene law, morals, or public order, it is strictly binding upon defendant. The
attorney's fees so provided are awarded in favor of the litigant, not his counsel.

On the other hand, the law also allows parties to a contract to stipulate on liquidated
damages to be paid in case of breach. A stipulation on liquidated damages is a penalty
clause where the obligor assumes a greater liability in case of breach of an obligation. The
obligor is bound to pay the stipulated amount without need for proof on the existence
and on the measure of damages caused by the breach. 18

Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 185945               December 05, 2012
FIDELIZA J. AGLIBOT, Petitioner,
vs.
INGERSOL L. SANTIA, Respondent.
DECISION
REYES, J.:
Before the Court is a Petition for Review on Certiorari  under Rule 45 of the 1997 Rules of
Civil Procedure seeking to annul and set aside the Decision 1 dated March I 8, 2008 of the
Court of Appeals (CA) in CA-G.R. SP No. 100021, which reversed the Decision 2 dated April
3, 2007 of the Regional Trial Court (RTC) of Dagupan City, Branch 40, in Criminal Case Nos.
2006-0559-D to 2006-0569-D and entered a new judgment. The fallo  reads as follows:
WHEREFORE, the instant petition is GRANTED and the assailed Joint Decision dated April
3, 2007 of the RTC of Dagupan City, Branch 40, and its Order dated June 12, 2007
are REVERSED AND SET ASIDE and a new one is entered ordering private respondent
Fideliza J. Aglibot to pay petitioner the total amount of ₱3,000,000.00 with 12% interest
per annum from the filing of the Informations until the finality of this Decision, the sum of
which, inclusive of interest, shall be subject thereafter to 12% annual interest until fully
paid. SO ORDERED.3
On December 23, 2008, the appellate court denied herein petitioner’s motion for
reconsideration.
Antecedent Facts
Private respondent-complainant Engr. Ingersol L. Santia (Santia) loaned the amount of
₱2,500,000.00 to Pacific Lending & Capital Corporation (PLCC), through its Manager,
petitioner Fideliza J. Aglibot (Aglibot). The loan was evidenced by a Promissory Note dated
July 1, 2003, issued by Aglibot in behalf of PLCC, payable in one year subject to interest at
24% per annum. Allegedly as a guaranty or security for the payment of the note, Aglibot
also issued and delivered to Santia eleven (11) post-dated personal checks drawn from her
own demand account maintained at Metrobank, Camiling Branch. Aglibot is a major
stockholder of PLCC, with headquarters at 27 Casimiro Townhouse, Casimiro Avenue,
Zapote, Las Piñas, Metro Manila, where most of the stockholders also reside. 4
Upon presentment of the aforesaid checks for payment, they were dishonored by the
bank for having been drawn against insufficient funds or closed account. Santia thus
demanded payment from PLCC and Aglibot of the face value of the checks, but neither of
them heeded his demand. Consequently, eleven (11) Informations for violation of Batas
Pambansa Bilang 22 (B.P. 22), corresponding to the number of dishonored checks, were
filed against Aglibot before the Municipal Trial Court in Cities (MTCC), Dagupan City,
Branch 3, docketed as Criminal Case Nos. 47664 to 47674. Each Information, except as to
the amount, number and date of the checks, and the reason for the dishonor, uniformly
alleged, as follows:
That sometime in the month of September, 2003 in the City of Dagupan, Philippines and
within the jurisdiction of this Honorable Court, the above-named accused,  FIDELIZA J.
AGLIBOT, did then and there, willfully, unlawfully and criminally, draw, issue and deliver
to one Engr. Ingersol L. Santia, a METROBANK Check No. 0006766, Camiling Tarlac Branch,
postdated November 1, 2003, in the amount of ₱50,000.00, Philippine Currency, payable
to and in payment of an obligation with the complainant, although the said accused knew
fully well that she did not have sufficient funds in or credit with the said bank for the
payment of such check in full upon its presentment, such that when the said check was
presented to the drawee bank for payment within ninety (90) days from the date thereof,
the same was dishonored for reason "DAIF", and returned to the complainant, and
despite notice of dishonor, accused failed and/or refused to pay and/or make good the
amount of said check within five (5) days banking days [sic], to the damage and prejudice
of one Engr. Ingersol L. Santia in the aforesaid amount of ₱50,000.00 and other
consequential damages.5
Aglibot, in her counter-affidavit, admitted that she did obtain a loan from Santia, but
claimed that she did so in behalf of PLCC; that before granting the loan, Santia demanded
and obtained from her a security for the repayment thereof in the form of the aforesaid
checks, but with the understanding that upon remittance in cash of the face amount of
the checks, Santia would correspondingly return to her each check so paid; but despite
having already paid the said checks, Santia refused to return them to her, although he
gave her assurance that he would not deposit them; that in breach of his promise, Santia
deposited her checks, resulting in their dishonor; that she did not receive any notice of
dishonor of the checks; that for want of notice, she could not be held criminally liable
under B.P. 22 over the said checks; and that the reason Santia filed the criminal cases
against her was because she refused to agree to his demand for higher interest.
On August 18, 2006, the MTCC in its Joint Decision decreed as follows:
WHEREFORE, in view of the foregoing, the accused, FIDELIZA J. AGLIBOT, is
hereby ACQUITTED of all counts of the crime of violation of the bouncing checks law on
reasonable doubt. However, the said accused is ordered to pay the private complainant
the sum of ₱3,000,000.00 representing the total face value of the eleven checks plus
interest of 12% per annum from the filing of the cases on November 2, 2004 until fully
paid, attorney’s fees of ₱30,000.00 as well as the cost of suit. SO ORDERED.6
On appeal, the RTC rendered a Decision dated April 3, 2007 in Criminal Case Nos. 2006-
0559-D to 2006-0569-D, which further absolved Aglibot of any civil liability towards Santia,
to wit:
WHEREFORE, premises considered, the Joint Decision of the court a quo  regarding the
civil aspect of these cases is reversed and set aside and a new one is entered dismissing
the said civil aspect on the ground of failure to fulfill, a condition precedent of exhausting
all means to collect from the principal debtor. SO ORDERED.7
Santia’s motion for reconsideration was denied in the RTC’s Order dated June 12, 2007. 8  12% per annum, from the filing of the Informations until the finality of its decision.
On petition for review to the CA docketed as CA-G.R. SP No. 100021, Santia interposed the
following assignment of errors, to wit:
"In brushing aside the law and jurisprudence on the matter, the Regional Trial Court
seriously erred:
1. In reversing the joint decision of the trial court by dismissing the civil aspect of these
cases;
2. In concluding that it is the Pacific Lending and Capital Corporation and not the private
respondent which is principally responsible for the amount of the checks being claimed by
the petitioner;
3. In finding that the petitioner failed to exhaust all available legal remedies against the
principal debtor Pacific Lending and Capital Corporation;
4. In finding that the private respondent is a mere guarantor and not an accommodation
party, and thus, cannot be compelled to pay the petitioner unless all legal remedies
against the Pacific Lending and Capital Corporation have been exhausted by the
petitioner;
5. In denying the motion for reconsideration filed by the petitioner."9
In its now assailed decision, the appellate court rejected the RTC’s dismissal of the civil
aspect of the aforesaid B.P. 22 cases based on the ground it cited, which is that the
"failure to fulfill a condition precedent of exhausting all means to collect from the
principal debtor." The appellate court held that since Aglibot’s acquittal by the MTCC in
Criminal Case Nos. 47664 to 47674 was upon a reasonable doubt 10 on whether the
prosecution was able to satisfactorily establish that she did receive a notice of dishonor, a
requisite to hold her criminally liable under B.P. 22, her acquittal did not operate to bar
Santia’s recovery of civil indemnity.
It is axiomatic that the "extinction of penal action does not carry with it the eradication of
civil liability, unless the extinction proceeds from a declaration in the final judgment that
the fact from which the civil liability might arise did not exist. Acquittal will not bar a civil
action in the following cases: (1) where the acquittal is based on reasonable doubt as only
preponderance of evidence is required in civil cases; (2) where the court declared the
accused’s liability is not criminal but only civil in nature[;] and (3) where the civil liability
does not arise from or is not based upon the criminal act of which the accused was
acquitted."11 (Citation omitted)
The CA therefore ordered Aglibot to personally pay Santia ₱3,000,000.00 with interest at
Thereafter, the sum due, to be compounded with the accrued interest, will in turn be
subject to annual interest of 12% from the finality of its judgment until full payment. It
thus modified the MTCC judgment, which simply imposed a straight interest of 12% per
annum  from the filing of the cases on November 2, 2004 until the ₱3,000,000.00 due is
fully paid, plus attorney’s fees of ₱30,000.00 and the costs of the suit.
Issue
Now before the Court, Aglibot maintains that it was error for the appellate court to
adjudge her personally liable for issuing her own eleven (11) post-dated checks to Santia,
since she did so in behalf of her employer, PLCC, the true borrower and beneficiary of the
loan. Still maintaining that she was a mere guarantor of the said debt of PLCC when she
agreed to issue her own checks, Aglibot insists that Santia failed to exhaust all means to
collect the debt from PLCC, the principal debtor, and therefore he cannot now be
permitted to go after her subsidiary liability.
Ruling of the Court
The petition is bereft of merit.
Aglibot cannot invoke the benefit of excussion
The RTC in its decision held that, "It is obvious, from the face of the Promissory Note x x x
that the accused-appellant signed the same on behalf of PLCC as Manager thereof and
nowhere does it appear therein that she signed as an accommodation party." 12 The RTC
further ruled that what Aglibot agreed to do by issuing her personal checks was merely to
guarantee the indebtedness of PLCC. So now petitioner Aglibot reasserts that as a
guarantor she must be accorded the benefit of excussion – prior exhaustion of the
property of the debtor – as provided under Article 2058 of the Civil Code, to wit:
Art. 2058. The guarantor cannot be compelled to pay the creditor unless the latter has
exhausted all the property of the debtor, and has resorted to all the legal remedies
against the debtor.
It is settled that the liability of the guarantor is only subsidiary, and all the properties of
the principal debtor, the PLCC in this case, must first be exhausted before the guarantor
may be held answerable for the debt. 13 Thus, the creditor may hold the guarantor liable
only after judgment has been obtained against the principal debtor and the latter is
unable to pay, "for obviously the ‘exhaustion of the principal’s property’ — the benefit of
which the guarantor claims — cannot even begin to take place before judgment has been
obtained."14 This rule is contained in Article 206215 of the Civil Code, which provides that
the action brought by the creditor must be filed against the principal debtor alone, except
in some instances mentioned in Article 2059 16 when the action may be brought against
both the guarantor and the principal debtor.
The Court must, however, reject Aglibot’s claim as a mere guarantor of the indebtedness
of PLCC to Santia for want of proof, in view of Article 1403(2) of the Civil Code, embodying
the Statute of Frauds, which provides:
Art. 1403. The following contracts are unenforceable, unless they are ratified:
xxxx
(2) Those that do not comply with the Statute of Frauds as set forth in this number. In the
following cases an agreement hereafter made shall be unenforceable by action, unless the
same, or some note or memorandum thereof, be in writing, and subscribed by the party
charged, or by his agent; evidence, therefore, of the agreement cannot be received
without the writing, or a secondary evidence of its contents:
a) An agreement that by its terms is not to be performed within a year from the making
thereof;
b) A special promise to answer for the debt, default, or miscarriage of another;
c) An agreement made in consideration of marriage, other than a mutual promise to
marry;
d) An agreement for the sale of goods, chattels or things in action, at a price not less than
five hundred pesos, unless the buyer accept and receive part of such goods and chattels,
or the evidences, or some of them, or such things in action, or pay at the time some part
of the purchase money; but when a sale is made by auction and entry is made by the
auctioneer in his sales book, at the time of the sale, of the amount and kind of property
sold, terms of sale, price, names of purchasers and person on whose account the sale is
made, it is a sufficient memorandum;
e) An agreement for the leasing of a longer period than one year, or for the sale of real
property or of an interest therein;
f) A representation to the credit of a third person. (Italics ours)
Under the above provision, concerning a guaranty agreement, which is a promise to
answer for the debt or default of another, 17 the law clearly requires that it, or some note
or memorandum thereof, be in writing. Otherwise, it would be unenforceable unless
ratified,18 although under Article 135819 of the Civil Code, a contract of guaranty does not
have to appear in a public document. 20 Contracts are generally obligatory in whatever
form they may have been entered into, provided all the essential requisites for their
validity are present, and the Statute of Frauds simply provides the method by which the
contracts enumerated in Article 1403(2) may be proved, but it does not declare them
invalid just because they are not reduced to writing. Thus, the form required under the
Statute is for convenience or evidentiary purposes only. 21
On the other hand, Article 2055 of the Civil Code also provides that a guaranty is not
presumed, but must be express, and cannot extend to more than what is stipulated
therein. This is the obvious rationale why a contract of guarantee is unenforceable unless
made in writing or evidenced by some writing. For as pointed out by Santia, Aglibot has
not shown any proof, such as a contract, a secretary’s certificate or a board resolution,
nor even a note or memorandum thereof, whereby it was agreed that she would issue her
personal checks in behalf of the company to guarantee the payment of its debt to Santia.
Certainly, there is nothing shown in the Promissory Note signed by Aglibot herself
remotely containing an agreement between her and PLCC resembling her guaranteeing its
debt to Santia. And neither is there a showing that PLCC thereafter ratified her act of
"guaranteeing" its indebtedness by issuing her own checks to Santia.
Thus did the CA reject the RTC’s ruling that Aglibot was a mere guarantor of the
indebtedness of PLCC, and as such could not "be compelled to pay [Santia], unless the
latter has exhausted all the property of PLCC, and has resorted to all the legal remedies
against PLCC x x x."22
Aglibot is an accommodation party and therefore liable to Santia
Section 185 of the Negotiable Instruments Law defines a check as "a bill of exchange
drawn on a bank payable on demand," while Section 126 of the said law defines a bill of
exchange as "an unconditional order in writing addressed by one person to another,
signed by the person giving it, requiring the person to whom it is addressed to pay on
demand or at a fixed or determinable future time a sum certain in money to order or to
bearer."
The appellate court ruled that by issuing her own post-dated checks, Aglibot thereby
bound herself personally and solidarily to pay Santia, and dismissed her claim that she
issued her said checks in her official capacity as PLCC’s manager merely to guarantee the
investment of Santia. It noted that she could have issued PLCC’s checks, but instead she
chose to issue her own checks, drawn against her personal account with Metrobank. It
concluded that Aglibot intended to personally assume the repayment of the loan, pointing
out that in her Counter-Affidavit, she even admitted that she was personally indebted to
Santia, and only raised payment as her defense, a clear admission of her liability for the
said loan.
The appellate court refused to give credence to Aglibot’s claim that she had an
understanding with Santia that the checks would not be presented to the bank for
payment, but were to be returned to her once she had made cash payments for their face
values on maturity. It noted that Aglibot failed to present any proof that she had indeed
paid cash on the above checks as she claimed. This is precisely why Santia decided to
deposit the checks in order to obtain payment of his loan.
The facts below present a clear situation where Aglibot, as the manager of PLCC, agreed
to accommodate its loan to Santia by issuing her own post-dated checks in payment
thereof. She is what the Negotiable Instruments Law calls an accommodation party. 23 
Concerning the liability of an accommodation party, Section 29 of the said law provides:
Sec. 29. Liability of an accommodation party. — An accommodation party is one who has
signed the instrument as maker, drawer, acceptor, or indorser, without receiving value
therefor, and for the purpose of lending his name to some other person. Such a person is
liable on the instrument to a holder for value notwithstanding such holder at the time of
taking the instrument knew him to be only an accommodation party.
As elaborated in The Phil. Bank of Commerce v. Aruego:24
An accommodation party is one who has signed the instrument as maker, drawer,
indorser, without receiving value therefor and for the purpose of lending his name to
some other person. Such person is liable on the instrument to a holder for value,
notwithstanding such holder, at the time of the taking of the instrument knew him to be
only an accommodation party. In lending his name to the accommodated party, the
accommodation party is in effect a surety for the latter. He lends his name to enable the
accommodated party to obtain credit or to raise money. He receives no part of the
consideration for the instrument but assumes liability to the other parties thereto because
he wants to accommodate another. x x x.25 (Citation omitted)
The relation between an accommodation party and the party accommodated is, in effect,
one of principal and surety — the accommodation party being the surety. It is a settled
rule that a surety is bound equally and absolutely with the principal and is deemed an
original promisor and debtor from the beginning. The liability is immediate and direct. 26 It
is not a valid defense that the accommodation party did not receive any valuable
consideration when he executed the instrument; nor is it correct to say that the holder for
value is not a holder in due course merely because at the time he acquired the
instrument, he knew that the indorser was only an accommodation party. 27 1âwphi1
Moreover, it was held in Aruego  that unlike in a contract of suretyship, the liability of the
accommodation party remains not only primary but also unconditional to a holder for
value, such that even if the accommodated party receives an extension of the period for
payment without the consent of the accommodation party, the latter is still liable for the
whole obligation and such extension does not release him because as far as a holder for
value is concerned, he is a solidary co-debtor. The mere fact, then, that Aglibot issued her
own checks to Santia made her personally liable to the latter on her checks without the
need for Santia to first go after PLCC for the payment of its loan. 28 It would have been
otherwise had it been shown that Aglibot was a mere guarantor, except that since checks
were issued ostensibly in payment for the loan, the provisions of the Negotiable
Instruments Law must take primacy in application. WHEREFORE, premises considered, the
Petition for Review on Certiorari  is DENIED and the Decision dated March 18, 2008 of the
Court of Appeals in CA-G.R. SP No. I 00021 is hereby AFFIRMED. SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 173526             August 28, 2008
BENJAMIN BITANGA, petitioner,
vs.
PYRAMID CONSTRUCTION ENGINEERING CORPORATION, respondent.
DECISION
CHICO-NAZARIO, J.:
Assailed in this Petition for Review under Rule 45 1 of the Revised Rules of Court are: (1)
the Decision2 dated 11 April 2006 of the Court of Appeals in CA-G.R. CV No. 78007 which
affirmed with modification the partial Decision 3 dated 29 November 2002 of the Regional
Trial Court (RTC), Branch 96, of Quezon City, in Civil Case No. Q-01-45041, granting the
motion for summary judgment filed by respondent Pyramid Construction and Engineering
Corporation and declaring petitioner Benjamin Bitanga and his wife, Marilyn Bitanga
(Marilyn), solidarily liable to pay P6,000,000.000 to respondent; and (2) the
Resolution4 dated 5 July 2006 of the appellate court in the same case denying petitioner’s
Motion for Reconsideration.
The generative facts are:
On 6 September 2001, respondent filed with the RTC a Complaint for specific performance
and damages with application for the issuance of a writ of preliminary attachment against
the petitioner and Marilyn. The Complaint was docketed as Civil Case No. Q-01-45041.
Respondent alleged in its Complaint that on 26 March 1997, it entered into an agreement
with Macrogen Realty, of which petitioner is the President, to construct for the latter the
Shoppers Gold Building, located at Dr. A. Santos Avenue corner Palayag Road, Sucat,
Parañaque City. Respondent commenced civil, structural, and architectural works on the
construction project by May 1997. However, Macrogen Realty failed to settle
respondent’s progress billings. Petitioner, through his representatives and agents, assured
respondent that the outstanding account of Macrogen Realty would be paid, and
requested respondent to continue working on the construction project. Relying on the
assurances made by petitioner, who was no less than the President of Macrogen Realty,
respondent continued the construction project.
In August 1998, respondent suspended work on the construction project since the
conditions that it imposed for the continuation thereof, including payment of unsettled
accounts, had not been complied with by Macrogen Realty. On 1 September 1999,
respondent instituted with the Construction Industry Arbitration Commission (CIAC) a
case for arbitration against Macrogen Realty  seeking payment by the latter of its unpaid
billings and project costs. Petitioner, through counsel, then conveyed to respondent his
purported willingness to amicably settle the arbitration case. On 17 April 2000, before the
arbitration case could be set for trial, respondent and Macrogen Realty entered into a
Compromise Agreement,5 with petitioner acting as signatory for and in behalf of
Macrogen Realty. Under the Compromise Agreement, Macrogen Realty agreed to pay
respondent the total amount of P6,000,000.00 in six equal monthly installments, with
each installment to be delivered on the 15 th day of the month, beginning 15 June 2000.
Macrogen Realty also agreed that if it would default in the payment of two successive
monthly installments, immediate execution could issue against it for the unpaid balance,
without need of judgment or decree from any court or tribunal. Petitioner guaranteed the
obligations of Macrogen Realty under the Compromise Agreement by executing a
Contract of Guaranty6 in favor of respondent, by virtue of which he irrevocably and
unconditionally guaranteed the full and complete payment of the principal amount of
liability of Macrogen Realty in the sum of P6,000,000.00. Upon joint motion of respondent
and Macrogen Realty, the CIAC approved the Compromise Agreement on 25 April 2000. 7
However, contrary to petitioner’s assurances, Macrogen Realty failed and refused to pay
all the monthly installments agreed upon in the Compromise Agreement. Hence, on 7
September 2000, respondent moved for the issuance of a writ of execution 8 against
Macrogen Realty, which CIAC granted.
On 29 November 2000, the sheriff 9 filed a return stating that he was unable to locate any
property of Macrogen Realty, except its bank deposit of P20,242.33, with the Planters
Bank, Buendia Branch.
Respondent then made, on 3 January 2001, a written demand 10 on petitioner, as
guarantor of Macrogen Realty, to pay the P6,000,000.00, or to point out available
properties of the Macrogen Realty within the Philippines sufficient to cover the obligation
guaranteed. It also made verbal demands on petitioner. Yet, respondent’s demands were
left unheeded.
Thus, according to respondent, petitioner’s obligation as guarantor was already due and
demandable. As to Marilyn’s liability, respondent contended that Macrogen Realty was
owned and controlled by petitioner and Marilyn and/or by corporations owned and
controlled by them. Macrogen Realty is 99% owned by the Asian Appraisal Holdings, Inc.
(AAHI), which in turn is 99% owned by Marilyn. Since the completion of the construction
project would have redounded to the benefit of both petitioner and Marilyn and/or their
corporations; and considering, moreover, Marilyn’s enormous interest in AAHI, the
corporation which controls Macrogen Realty, Marilyn cannot be unaware of the
obligations incurred by Macrogen Realty and/or petitioner in the course of the business
operations of the said corporation.
Respondent prayed in its Complaint that the RTC, after hearing, render a judgment
ordering petitioner and Marilyn to comply with their obligation under the Contract of
Guaranty by paying respondent the amount of P6,000,000.000 (less the bank deposit of
Macrogen Realty with Planter’s Bank in the amount of P20,242.23) and P400,000.000 for
attorneys fees and expenses of litigation. Respondent also sought the issuance of a writ of
preliminary attachment as security for the satisfaction of any judgment that may be
recovered in the case in its favor.
Marilyn filed a Motion to Dismiss, 11 asserting that respondent had no cause of action
against her, since she did not co-sign the Contract of Guaranty with her husband; nor was
she a party to the Compromise Agreement between respondent and Macrogen Realty.
She had no part at all in the execution of the said contracts. Mere ownership by a single
stockholder or by another corporation of all or nearly all of the capital stock of another
corporation is not by itself a sufficient ground for disregarding the separate personality of
the latter corporation. Respondent misread Section 4, Rule 3 of the Revised Rules of
Court.
The RTC denied Marilyn’s Motion to Dismiss for lack of merit, and in its Order dated 24
January 2002 decreed that:
The Motion To Dismiss Complaint Against Defendant Marilyn Andal Bitanga filed on
November 12, 2001 is denied for lack of merit considering that Sec. 4, Rule 3, of the Rules
of Court (1997) specifically provides, as follows:
"SEC. 4. Spouses as parties. – Husband and wife shall sue or be sued jointly, except as
provided by law."
and that this case does not come within the exception. 12
Petitioner filed with the RTC on 12 November 2001, his Answer 13 to respondent’s
Complaint averring therein that he never made representations to respondent that
Macrogen Realty would faithfully comply with its obligations under the Compromise
Agreement. He did not offer to guarantee the obligations of Macrogen Realty to entice
respondent to enter into the Compromise Agreement but that, on the contrary, it was
respondent that required Macrogen Realty to offer some form of security for its
obligations before agreeing to the compromise. Petitioner further alleged that his wife
Marilyn was not aware of the obligations that he assumed under both the Compromise
Agreement and the Contract of Guaranty as he did not inform her about said contracts,
nor did he secure her consent thereto at the time of their execution.
As a special and affirmative defense, petitioner argued that the benefit of excussion was
still available to him as a guarantor since he had set it up prior to any judgment against
him. According to petitioner, respondent failed to exhaust all legal remedies to collect
from Macrogen Realty the amount due under the Compromise Agreement, considering
that Macrogen Realty still had uncollected credits which were more than enough to pay
for the same. Given these premise, petitioner could not be held liable as guarantor.
Consequently, petitioner presented his counterclaim for damages.
At the pre-trial held on 5 September 2002, the parties submitted the following issues for
the resolution of the RTC:
(1) whether the defendants were liable under the contract of guarantee dated April 17,
2000 entered into between Benjamin Bitanga and the plaintiff;
(2) whether defendant wife Marilyn Bitanga is liable in this action;
(3) whether the defendants are entitled to the benefit of excussion, the plaintiff on the
one hand claiming that it gave due notice to the guarantor, Benjamin Bitanga, and the
defendants contending that no proper notice was received by Benjamin Bitanga;
(4) if damages are due, which party is liable; and
(5) whether the benefit of excussion can still be invoked by the defendant guarantor even
after the notice has been allegedly sent by the plaintiff although proper receipt is
denied.14
On 20 September 2002, prior to the trial proper, respondent filed a Motion for Summary
Judgment.15 Respondent alleged therein that it was entitled to a summary judgment on
account of petitioner’s admission during the pre-trial of the genuineness and due
execution of the Contract of Guaranty. The contention of petitioner and Marilyn that they
were entitled to the benefit of excussion was not a genuine issue. Respondent had already
exhausted all legal remedies to collect from Macrogen Realty, but its efforts proved
unsuccessful. Given that the inability of Macrogen Realty as debtor to pay the amount of
its debt was already proven by the return of the writ of execution to CIAC unsatisfied, the
liability of petitioner as guarantor already arose. 16 In any event, petitioner and Marilyn
were deemed to have forfeited their right to avail themselves of the benefit of excussion
because they failed to comply with Article 2060 17 of the Civil Code when petitioner
ignored respondent’s demand letter dated 3 January 2001 for payment of the amount he
guaranteed.18 The duty to collect the supposed receivables of Macrogen Realty from its
creditors could not be imposed on respondent, since petitioner and Marilyn never
informed respondent about such uncollected credits even after receipt of the demand
letter for payment. The allegation of petitioner and Marilyn that they could not respond to
respondent’s demand letter since they did not receive the same was unsubstantiated and
insufficient to raise a genuine issue of fact which could defeat respondent’s Motion for
Summary Judgment. The claim that Marilyn never participated in the transactions that
culminated in petitioner’s execution of the Contract of Guaranty was nothing more than a
sham.
In opposing respondent’s foregoing Motion for Summary Judgment, petitioner and
Marilyn countered that there were genuinely disputed facts that would require trial on
the merits. They appended thereto an affidavit executed by petitioner, in which he
declared that his spouse Marilyn could not be held personally liable under the Contract of
Guaranty or the Compromise Agreement, nor should her share in the conjugal partnership
be made answerable for the guaranty petitioner assumed, because his undertaking of the
guaranty did not in any way redound to the benefit of their family. As guarantor,
petitioner was entitled to the benefit of excussion, and he did not waive his right thereto.
He never received the respondent’s demand letter dated 3 January 2001, as Ms. Dette
Ramos, the person who received it, was not an employee of Macrogen Realty nor was she
authorized to receive the letter on his behalf. As a guarantor, petitioner could resort to
the benefit of excussion at any time before judgment was rendered against
him.19 Petitioner reiterated that Macrogen Realty had uncollected credits which were
more than sufficient to satisfy the claim of respondent.
On 29 November 2002, the RTC rendered a partial Decision, the dispositive portion of
which provides:
WHEREFORE, summary judgment is rendered ordering defendants SPOUSES BENJAMIN
BITANGA and MARILYN ANDAL BITANGA to pay the [herein respondent], jointly and
severally, the amount of P6,000,000.00, less P20,242.23 (representing the amount
garnished bank deposit of MACROGEN in the Planters Bank, Buendia Branch); and the
costs of suit.
Within 10 days from receipt of this partial decision, the [respondent] shall inform the
Court whether it shall still pursue the rest of the claims against the defendants. Otherwise,
such claims shall be considered waived.20
Petitioner and Marilyn filed a Motion for Reconsideration of the afore-quoted Decision,
which the RTC denied in an Order dated 26 January 2003.21
In time, petitioner and Marilyn filed an appeal with the Court of Appeals, docketed as CA-
G.R. CV 78007. In its Decision dated 11 April 2006, the appellate court held:
UPON THE VIEW WE TAKE OF THIS CASE, THUS, the judgment appealed from must be, as
it hereby is, MODIFIED to the effect that defendant-appellant Marilyn Bitanga is adjudged
not liable, whether solidarily or otherwise, with her husband the defendant-appellant
Benjamin Bitanga, under the compromise agreement or the contract of guaranty. No costs
in this instance.22
In holding that Marilyn Bitanga was not liable, the Court of Appeals cited Ramos v. Court
of Appeals,23 in which it was declared that a contract cannot be enforced against one who
is not a party to it. The Court of Appeals stated further that the substantial ownership of
shares in Macrogen Realty by Marilyn Bitanga was not enough basis to hold her liable.
The Court of Appeals, in its Resolution dated 5 July 2006, denied petitioner’s Motion for
Reconsideration24 of its earlier Decision.
Petitioner is now before us via  the present Petition with the following assignment of
errors:
I
THE COURT OF APPEALS GRAVELY ERRED IN AFFIRMING THE VALIDITY OF THE PARTIAL
SUMMARY JUDGMENT BY THE REGIONAL TRIAL COURT OF QUEZON CITY, BRANCH 96,
DESPITE THE CLEAR EXISTENCE OF DISPUTED GENUINE AND MATERIAL FACTS OF THE
CASE THAT SHOULD HAVE REQUIRED A TRIAL ON THE MERITS.
II
THE COURT OF APPEALS GRAVELY ERRED IN NOT UPHOLDING THE RIGHT OF PETITIONER
BENJAMIN M. BITANGA AS A MERE GUARANTOR TO THE BENEFIT OF EXCUSSION UNDER
ARTICLES 2058, 2059, 2060, 2061, AND 2062 OF THE CIVIL CODE OF THE PHILIPPINES.25
As in the two courts below, it is petitioner’s position that summary judgment is improper
in Civil Case No. Q-01-45041 because there are genuine issues of fact which have to be
threshed out during trial, to wit:
(A) Whether or not there was proper service of notice to petitioner considering the said
letter of demand was allegedly received by one Dette Ramos at Macrogen office and not
by him at his residence.
(B) Whether or not petitioner is entitled to the benefit of excussion?26
We are not persuaded by petitioner’s arguments.
Rule 35 of the Revised Rules of Civil Procedure provides:
Section 1. Summary judgment for claimant. – A party seeking to recover upon a claim,
counterclaim, or cross-claim or to obtain a declaratory relief may, at any time after the
pleading in answer thereto has been served, move with supporting affidavits, depositions
or admissions for a summary judgment in his favor upon all or any part thereof.
For a summary judgment to be proper, the movant must establish two requisites: (a)
there must be no genuine issue as to any material fact, except for the amount of
damages; and (b) the party presenting the motion for summary judgment must be entitled
to a judgment as a matter of law. Where, on the basis of the pleadings of a moving party,
including documents appended thereto, no genuine issue as to a material fact exists, the
burden to produce a genuine issue shifts to the opposing party. If the opposing party fails,
the moving party is entitled to a summary judgment. 27
In a summary judgment, the crucial question is: are the issues raised by the opposing
party not genuine so as to justify a summary judgment? 28
First off, we rule that the issue regarding the propriety of the service of a copy of the
demand letter on the petitioner in his office is a sham issue. It is not a bar to the issuance
of a summary judgment in respondent’s favor.
A genuine issue is an issue of fact which requires the presentation of evidence as
distinguished from an issue which is a sham, fictitious, contrived or false claim. To forestall
summary judgment, it is essential for the non-moving party to confirm the existence of
genuine issues, as to which he has substantial, plausible and fairly arguable
defense, i.e.,29 issues of fact calling for the presentation of evidence upon which
reasonable findings of fact could return a verdict for the non-moving party, although a
mere scintilla of evidence in support of the party opposing summary judgment will be
insufficient to preclude entry thereof.
Significantly, petitioner does not deny the receipt of the demand letter from the
respondent. He merely raises a howl on the impropriety of service thereof, stating that
"the address to which the said letter was sent was not his residence but the office of
Macrogen Realty, thus it cannot be considered as the correct manner of conveying a letter
of demand upon him in his personal capacity." 30
Section 6, Rule 13 of the Rules of Court states:
SEC. 6. Personal service. – Service of the papers may be made by delivering personally a
copy to the party or his counsel, or by leaving it in his office with his clerk or with a
person having charge thereof. If no person is found in his office, or his office is not known,
or he has no office, then by leaving the copy, between the hours of eight in the morning
and six in the evening, at the party’s or counsel’s residence, if known, with a person of
sufficient age and discretion then residing therein.
The affidavit of Mr. Robert O. Pagdilao, messenger of respondent’s counsel states in part:
2. On 4 January 2001, Atty. Jose Vicente B. Salazar, then one of the Associates of the
ACCRA Law Offices, instructed me to deliver to the office of Mr. Benjamin Bitanga a letter
dated 3 January 2001, pertaining to Construction Industry Arbitration Commission
(hereafter, "CIAC") Case No. 99-56, entitled "Pyramid Construction Engineering
Corporation vs. Macrogen Realty Corporation."
3. As instructed, I immediately proceeded to the office of Mr. Bitanga located at the
12th Floor, Planters Development Bank Building, 314 Senator Gil Puyat Avenue, Makati
City. I delivered the said letter to Ms. Dette Ramos, a person of sufficient age and
discretion, who introduced herself as one of the employees of Mr. Bitanga and/or of the
latter’s companies.31 (Emphasis supplied.)
We emphasize that when petitioner signed the Contract of Guaranty and assumed
obligation as guarantor, his address in the said contract was the same address where the
demand letter was served.32 He does not deny that the said place of service, which is the
office of Macrogen, was also the address that he used when he signed as guarantor in the
Contract of Guaranty. Nor does he deny that this is his office address; instead, he merely
insists that the person who received the letter and signed the receiving copy is not an
employee of his company. Petitioner could have easily substantiated his allegation by a
submission of an affidavit of the personnel manager of his office that no such person is
indeed employed by petitioner in his office, but that evidence was not submitted. 33 All
things are presumed to have been done correctly and with due formality until the
contrary is proved. This juris tantum presumption stands even against the most well-
reasoned allegation pointing to some possible irregularity or anomaly. 34 It is petitioner’s
burden to overcome the presumption by sufficient evidence, and so far we have not seen
anything in the record to support petitioner’s charges of anomaly beyond his bare
allegation. Petitioner cannot now be heard to complain that there was an irregular service
of the demand letter, as it does not escape our attention that petitioner himself indicated
"314 Sen. Gil Puyat Avenue, Makati City" as his office address in the Contract of Guaranty.
Moreover, under Section 6, Rule 13 of the Rules of Court, there is sufficiency of service
when the papers, or in this case, when the demand letter is personally delivered to the
party or his counsel, or by leaving it in his office with his clerk or with a person having
charge thereof, such as what was done in this case.
We have consistently expostulated that in summary judgments, the trial court can
determine a genuine issue on the basis of the pleadings, admissions, documents, affidavits
or counter affidavits submitted by the parties. When the facts as pleaded appear
uncontested or undisputed, then there is no real or genuine issue or question as to any
fact, and summary judgment is called for.35
The Court of Appeals was correct in holding that:
Here, the issue of non-receipt of the letter of demand is a sham or pretended issue, not a
genuine and substantial issue. Indeed, against the positive assertion of Mr. Roberto O.
Pagdilao (the private courier) in his affidavit that he delivered the subject letter to a
certain Ms. Dette Ramos who introduced herself as one of the employees of [herein
petitioner] Mr. Benjamin Bitanga and/or of the latter’s companies, said [petitioner] merely
offered a bare denial. But bare denials, unsubstantiated by facts, which would be
admissible in evidence at a hearing,  are not sufficient to raise a genuine issue of fact
sufficient to defeat a motion for summary judgment. 36
We further affirm the findings of both the RTC and the Court of Appeals that, given the
settled facts of this case, petitioner cannot avail himself of the benefit of excussion.
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 a 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
otherwise known as the benefit of excussion. 37
Article 2060 of the Civil Code reads:
Art. 2060. In order that the guarantor may make use of the benefit of excussion, he must
set it up against the creditor upon the latter’s demand for payment from him, and point
out to the creditor available property of the debtor within Philippine territory, sufficient to
cover the amount of the debt.38
The afore-quoted provision imposes a condition for the invocation of the defense of
excussion. Article 2060 of the Civil Code clearly requires that in order for the guarantor to
make use of the benefit of excussion, he must set it up against the creditor upon the
latter’s demand for payment and point out to the creditor available property of the debtor
within the Philippines sufficient to cover the amount of the debt. 39
It must be stressed that despite having been served a demand letter at his office,
petitioner still failed to point out to the respondent properties of Macrogen Realty
sufficient to cover its debt as required under Article 2060 of the Civil Code. Such failure on
petitioner’s part forecloses his right to set up the defense of excussion.
Worthy of note as well is the Sheriff’s return stating that the only property of Macrogen
Realty which he found was its deposit of P20,242.23 with the Planters Bank.
Article 2059(5) of the Civil Code thus finds application and precludes petitioner from
interposing the defense of excussion. We quote:
Art. 2059. This excussion shall not take place:

xxxx

(5) If it may be presumed that an execution on the property of the principal debtor would
not result in the satisfaction of the obligation.

As the Court of Appeals correctly ruled:

We find untenable the claim that the [herein petitioner] Benjamin Bitanga cannot be
compelled to pay Pyramid because the Macrogen Realty has allegedly sufficient assets.
Reason: The said [petitioner] had not genuinely controverted the return made by Sheriff
Joseph F. Bisnar, who affirmed that, after exerting diligent efforts, he was not able to
locate any property belonging to the Macrogen Realty, except for a bank deposit with the
Planter’s Bank at Buendia, in the amount of P20,242.23. It is axiomatic that the liability of
the guarantor arises when the insolvency or inability of the debtor to pay the amount of
debt is proven by the return of the writ of execution that had not been unsatisfied. 40

WHEREFORE, premises considered, the instant petition is DENIED for lack of merit. The
Decision of the Court of Appeals dated 11 April 2006 and its Resolution dated 5 July 2006
are AFFIRMED. Costs against petitioner.

SO ORDERED.

SECOND DIVISION
G.R. No. 160466             January 17, 2005
SPOUSES ALFREDO and SUSANA ONG, petitioners,
vs.
PHILIPPINE COMMERCIAL INTERNATIONAL BANK, respondent.
DECISION
PUNO, J.:
This is a petition for review on certiorari under Rule 45 of the Rules of Court to set aside
the Decision of the Court of Appeals in CA-G.R. SP No. 39255, dated February 17, 2003,
affirming the decision of the trial court denying petitioners’ motion to dismiss.
The facts: Baliwag Mahogany Corporation (BMC) is a domestic corporation engaged in the
manufacture and export of finished wood products. Petitioners-spouses Alfredo and
Susana Ong are its President and Treasurer, respectively.
On April 20, 1992, respondent Philippine Commercial International Bank (now Equitable-
Philippine Commercial International Bank or E-PCIB) filed a case for collection of a sum of
money1 against petitioners-spouses. Respondent bank sought to hold petitioners-spouses
liable as sureties on the three (3) promissory notes they issued to secure some of BMC’s
loans, totalling five million pesos (₱5,000,000.00).
The complaint alleged that in 1991, BMC needed additional capital for its business and
applied for various loans, amounting to a total of five million pesos, with the respondent
bank. Petitioners-spouses acted as sureties for these loans and issued three (3)
promissory notes for the purpose. Under the terms of the notes, it was stipulated that
respondent bank may consider debtor BMC in default and demand payment of the
remaining balance of the loan upon the levy, attachment or garnishment of any of its
properties, or upon BMC’s insolvency, or if it is declared to be in a state of suspension of
payments. Respondent bank granted BMC’s loan applications.
On November 22, 1991, BMC filed a petition for rehabilitation and suspension of
payments with the Securities and Exchange Commission (SEC) after its properties were
attached by creditors. Respondent bank considered debtor BMC in default of its
obligations and sought to collect payment thereof from petitioners-spouses as sureties. In
due time, petitioners-spouses filed their Answer.1awphi1.nét
On October 13, 1992, a Memorandum of Agreement (MOA) 2 was executed by debtor
BMC, the petitioners-spouses as President and Treasurer of BMC, and the consortium of
creditor banks of BMC (of which respondent bank is included). The MOA took effect upon
its approval by the SEC on November 27, 1992.3
Thereafter, petitioners-spouses moved to dismiss 4 the complaint. They argued that as
the SEC declared the principal debtor BMC in a state of suspension of payments and,
under the MOA, the creditor banks, including respondent bank, agreed to temporarily
suspend any pending civil action against the debtor BMC, the benefits of the MOA should
be extended to petitioners-spouses who acted as BMC’s sureties in their contracts of loan
with respondent bank. Petitioners-spouses averred that respondent bank is barred from
pursuing its collection case filed against them.
The trial court denied the motion to dismiss. Petitioners-spouses appealed to the Court
of Appeals which affirmed the trial court’s ruling that a creditor can proceed against
petitioners-spouses as surety independently of its right to proceed against the principal
debtor BMC.
Hence this appeal.
Petitioners-spouses claim that the collection case filed against them by respondent bank
should be dismissed for three (3) reasons: First, the MOA provided that during its
effectivity, there shall be a suspension of filing or pursuing of collection cases against the
BMC and this provision should benefit petitioners as sureties. Second, principal debtor
BMC has been placed under suspension of payment of debts by the SEC; petitioners
contend that it would prejudice them if the principal debtor BMC would enjoy the
suspension of payment of its debts while petitioners, who acted only as sureties for some
of BMC’s debts, would be compelled to make the payment; petitioners add that
compelling them to pay is contrary to Article 2063 of the Civil Code which provides that a
compromise between the creditor and principal debtor benefits the guarantor and should
not prejudice the latter. Lastly, petitioners rely on Article 2081 of the Civil Code which
provides that: "the guarantor may set up against the creditor all the defenses which
pertain to the principal debtor and are inherent in the debt; but not those which are
purely personal to the debtor." Petitioners aver that if the principal debtor BMC can set
up the defense of suspension of payment of debts and filing of collection suits against
respondent bank, petitioners as sureties should likewise be allowed to avail of these
defenses.
We find no merit in petitioners’ contentions.
The provisions of the MOA regarding the suspension of payments by BMC and the non-
filing of collection suits by the creditor banks pertain only to the property of the
principal debtor BMC. Firstly, in the rehabilitation receivership filed by BMC, only the
properties of BMC were mentioned in the petition with the SEC. 8 Secondly, there is
nothing in the MOA that involves the liabilities of the sureties whose properties are
separate and distinct from that of the debtor BMC. Lastly, it bears to stress that the MOA
executed by BMC and signed by the creditor-banks was approved by the SEC whose
jurisdiction is limited only to corporations and corporate assets. It has no jurisdiction over
the properties of BMC’s officers or sureties.1awphi1.nét

Reliance of petitioners-spouses on Articles 2063 and 2081 of the Civil Code is misplaced Clearly, the collection suit filed by respondent bank against petitioners-spouses as sureties
as these provisions refer to contracts of guaranty. They do not apply to suretyship can prosper. The trial court’s denial of petitioners’ motion to dismiss was proper.
contracts. Petitioners-spouses are not guarantors but sureties of BMC’s debts. There is a
sea of difference in the rights and liabilities of a guarantor and a surety. A guarantor IN VIEW WHEREOF, the petition is DISMISSED for lack of merit. No pronouncement as to
insures the solvency of the debtor while a surety is an insurer of the debt itself. A costs.
contract of guaranty gives rise to a subsidiary obligation on the part of the guarantor. It is
only after the creditor has proceeded against the properties of the principal debtor and SO ORDERED.
the debt remains unsatisfied that a guarantor can be held liable to answer for any unpaid
amount. This is the principle of excussion. In a suretyship contract, however, the benefit
of excussion is not available to the surety as he is principally liable for the payment of
the debt. As the surety insures the debt itself, he obligates himself to pay the debt if the
principal debtor will not pay, regardless of whether or not the latter is financially capable
to fulfill his obligation. Thus, a creditor can go directly against the surety although the
principal debtor is solvent and is able to pay or no prior demand is made on the principal
debtor. A surety is directly, equally and absolutely bound with the principal debtor for
the payment of the debt and is deemed as an original promissor and debtor from the
beginning.5

Under the suretyship contract entered into by petitioners-spouses with respondent bank,
the former obligated themselves to be solidarily bound with the principal debtor BMC for
the payment of its debts to respondent bank amounting to five million pesos
(₱5,000,000.00). Under Article 1216 of the Civil Code,6 respondent bank as creditor may
proceed against petitioners-spouses as sureties despite the execution of the MOA which
provided for the suspension of payment and filing of collection suits against BMC.
Respondent bank’s right to collect payment from the surety exists independently of its
right to proceed directly against the principal debtor. In fact, the creditor bank may go
against the surety alone without prior demand for payment on the principal debtor. 7

Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 152313               October 19, 2011
REPUBLIC FLOUR MILLS CORPORATION, Petitioner,
vs.
FORBES FACTORS, INC. Respondent.
DECISION
SERENO, J.:
Petitioner filed this present Petition for Review 1 under Rule 45 of the Rules of Court,
seeking a reversal of the Court of Appeals Decision, 2 the dispositive portion of which
states:
WHEREFORE, premises considered, the Decision dated April 15, 1996 rendered by the
Regional Trial Court of Makati City, Branch 60, is hereby AFFIRMED, with MODIFICATIONS,
as follows:
1) The legal interest rate of six percent (6%) per annum should be computed from the
date of the filing of the complaint which shall become twelve percent (12%) per annum
from the time the judgment becomes final and executory until its satisfaction.
2) The award of ₱300,000.00 as exemplary damages is reduced to ₱50,000.00;
3) The award of ₱400,00.00 as attorney’s fees is likewise reduced to ₱75,000.00;
4) The Decision is hereby affirmed in all other respects.
SO ORDERED.
The case arose when petitioner refused to pay the demurrage being collected by
respondent.
The facts are as follows:
In a contract dated 26 April 1983, respondent was appointed as the exclusive Philippine
indent representative of Richco Rotterdam B.V. (Richco), a foreign corporation, in the sale
of the latter’s commodities. Under one of the terms of the contract, respondent was to
assume the liabilities of all the Philippine buyers, should they fail to honor the
commitments on the discharging operations of each vessel, including the payment of
demurrage and other penalties. In such instances, Richco shall have the option to debit
the account of respondent corresponding to the liabilities of the buyers, and respondent
shall then be deemed to be subrogated to all the rights of Richco against these defaulting
buyers.3
Sometime in 1987, petitioner purchased Canadian barley and soybean meal from Richco.
The latter thereafter chartered four (4) vessels to transport the products to the
Philippines. Each of the carrier bulk cargoes was covered by a Contract of Sale executed
between respondent as the seller and duly authorized representative of Richco and
petitioner as the buyer. The four contracts specifically referred to the charter party in
determining demurrage or dispatch rate. The contract further provided that petitioner
guarantees to settle any demurrage due within one (1) month from respondent’s
presentation of the statement.
Upon delivery of the barley and soybean meal, petitioner failed to discharge the cargoes
from the four (4) vessels at the computed allowable period to do so. Thus, it incurred a
demurrage amounting to a total of US$193,937.41.
On numerous occasions, on behalf of Richco, respondent demanded from petitioner the
payment of the demurrage, to no avail. Consequently, on 20 October 1991, Richco sent a
communication to respondent, informing it that the demurrage due from petitioner had
been debited from the respondent’s account.
Thereafter, on 12 February 1992, respondent filed with the Regional Trial Court (RTC),
National Capital Judicial Region, Makati City, a Complaint for demurrage and damages
against petitioner. Meanwhile, the latter raised the defense that the delay was due to
respondent’s inefficiency in unloading the cargo.
On 15 April 1996, after trial on the merits, the RTC rendered a Decision 4 holding petitioner
liable to pay demurrage and damages to respondent, to wit:
34. WHEREFORE, the Court hereby renders judgment as follows:
34.1 The defendant REPUBLIC FLOUR MILLS CORPORATION is ordered to pay the plaintiff
FORBES FACTORS, INC. the following:
34.1.1. US$193,937.41 or its Philippine PESO equivalent at the rate of exchange at the
time of payment – As demurrage.
34.1.2 Six (6) percent of the amount in the preceding paragraph 34.1.1 – Per annum from
October 29, 1991 until the said amount is fully paid – As damages.
34.1.3. ₱300,000.00 – As exemplary damages.
34.1.4. ₱ 400,000.00 – As attorney’s fees.
34.2. The COUNTERCLAIM is DISMISSED; and
34.3. Cost is taxed against the defendant.
The RTC found that the delay in discharging the cargoes within the allowable period was
due to petitioner’s failure to provide enough barges on which to load the goods. It
likewise found that petitioner in fact acknowledged that the latter had incurred
demurrage when it alleged that the computation was bloated. Petitioner was thus liable
to pay demurrage based on the sales contracts executed with respondent and on the
contract executed between respondent and Richco.
Finally, the court ruled that respondent was entitled to damages from petitioner’s
"wanton, fraudulent, reckless, oppressive or malevolent" refusal to pay the latter’s
liabilities despite repeated demands.
Subsequently, petitioner appealed to the Court of Appeals (CA), alleging that respondent
was not a real party-in-interest to bring the collection suit. Petitioner insisted that the
payment of demurrage should be made to the owner of the vessels that transported the
goods, and not to respondent who was merely the indent representative of Richco, the
charterer of the vessel. In addition, petitioner claimed that it was denied due process
when the RTC refused to reset the hearing for the presentation of Reynaldo Santos,
petitioner’s witness and export manager. Finally, petitioner contested the RTC’s award of
exemplary damages and attorney’s fees.
On 18 February 2002, the CA promulgated the assailed Decision. It upheld the validity of
the Contracts of Sale and held that these had the force of law between the contracting
parties and must be complied with in good faith. However, the appellate court modified
the trial court’s award of damages. It held that exemplary damages are not intended to
enrich anyone, thus, reducing the amount from ₱300,000 to ₱50,000. It also found the
award of attorney’s fees to be excessive, and consequently reduced it from ₱400,000 to
₱75,000.
Hence this Petition.
Three issues are raised for the resolution by this Court. First, petitioner assails the right of
respondent to demand payment of demurrage. Petitioner asserts that, by definition,
demurrage is the sum fixed by the contract of carriage as remuneration to the ship owner
for the detention of the vessel beyond the number of days allowed by the charter
party.5 Thus, since respondent is not the ship owner, it has no right to demand the
payment of demurrage and has no personality to bring the claim against petitioner.
Second, petitioner questions the propriety of the award of damages in favor of
respondent. And third, the former insists that it was denied due process when the RTC
denied its Motion to reset the hearing to present its witness.
We find the petition without merit.
The facts are undisputed. The delay incurred by petitioner in discharging the cargoes from
the vessels was due to its own fault. Its obligation to demurrage is established by the
Contracts of Sale it executed, wherein it agreed to the conditions to provide all
discharging facilities at its expense in order to effect the immediate discharge of cargo;
and to place for its account all discharging costs, fees, taxes, duties and all other charges
incurred due to the nature of the importation. 6
Meanwhile, respondent unequivocally established that Richco charged to it the
demurrage due from petitioner. Thus, at the moment that Richco debited the account of
respondent, the latter is deemed to have subrogated to the rights of the former, who in
turn, paid demurrage to the ship owner. It is therefore immaterial that respondent is not
the ship owner, since it has been able to prove that it has stepped into the shoes of the
creditor.
Subrogation is either "legal" or "conventional." Legal subrogation is an equitable doctrine
and arises by operation of the law, without any agreement to that effect executed
between the parties; conventional subrogation rests on a contract, arising where "an
agreement is made that the person paying the debt shall be subrogated to the rights and
remedies of the original creditor." 7 The case at bar is an example of legal subrogation, the
petitioner and respondent having no express agreement on the right of subrogation. Thus,
it is of no moment that the Contracts of Sale did not expressly state that demurrage shall
be paid to respondent. By operation of law, respondent has become the real party-in-
interest to pursue the payment of demurrage. As aptly stated by the RTC:
19. True it is that demurrage is, as a rule, an amount payable to a shipowner by a
charterer for the detention of the vessel beyond the period allowed for the loading or
unloading or sailing. This however, does not mean that a party cannot stipulate with
another who is not a shipowner, on demurrage. In this case, FORBES stipulated under the
charter parties on demurrage with the shipowners. This stipulation could be the basis of
the provisions on demurrage in the four (4) Contracts of Sale (Exhs. B, N, X, and CC) and
contract between FORBES and RICHCO (Exh. A).
x x x           x x x          x x x
20. RICHCO debited the US$193,937.41 from the accounts of FORBES as evidenced by Exh.
OO. Hence, FORBES was subrogated to the right of RICHCO to collect the said amount
from RFM pursuant to the contract between RICHCO and FORBES (Exh. A).
21. Under Exh. A, FORBES guaranteed its "…buyers (sic) payment schedule…"
Consequently, it was subrogated to the rights of RICHCO arising from the failure of RFM to
pay its demurrage and FORBES paid for it. The subrogation was pursuant to Articles 1302
and 2067, New Civil Code, which read:
"Art. 1302. It is presumed that there is legal subrogation:
(1) When a creditor pays another creditor who is preferred, even without the debtor’s
knowledge;
(2) When a third person, not interested in the obligation, pays with the express or tacit
approval of the debtor;
(3) When, even without the knowledge of the debtor, a person interested in the
fulfillment of the obligation pays, without prejudice to the effects of confusion as to the
latter’s share."
"Art. 2067. The guarantor who pays is subrogated by virtue thereof to all the rights which
the creditor had against the debtor.
If the guarantor has compromised with the creditor, he cannot demand of the debtor
more than what he has really paid."
As we held in Fireman’s Fund Insurance Company v. Jamila & Company, Inc.:
…Subrogation has been referred to as the doctrine of substitution. It "is an arm of equity
that may guide or even force one to pay a debt for which an obligation was incurred but
which was in whole or in part paid by another" (83 C.J.S. 576, 678, note 16, citing
Fireman's Fund Indemnity Co. vs. State Compensation Insurance Fund, 209 Pac. 2d 55).
"Subrogation is founded on principles of justice and equity, and its operation is governed
by principles of equity. It rests on the principle that substantial justice should be attained
regardless of form, that is, its basis is the doing of complete, essential, and perfect justice
between all the parties without regard to form"(83 C.J.S. 579- 80)81avvphi1
Anent the second issue, we have previously held in Pepsi Cola Products Phil., Inc. v. Court
of Appeals,9 that a motion for continuance of postponement is not a matter of right.
Rather, the motion is addressed to the sound discretion of the court, whose action
thereon will not be disturbed by appellate courts in the absence of clear and manifest
abuse of discretion, resulting in a denial of substantial justice.
On the last issue, we find that the award of exemplary damages proper. Petitioner refused
to honor the contract despite respondent’s repeated demands and its proof of payment
to Richco; and despite its repeated promise to settle its outstanding obligations in the
span of almost five years. Petitioner indeed acted in a wanton, fraudulent, reckless,
oppressive or malevolent manner. Because respondent was also forced to initiate the
present Complaint, it was only proper that it was awarded attorney’s fees. Lastly, the CA
was correct in reducing the award of exemplary damages or attorney’s fees, since neither
is meant to enrich anyone.
WHEREFORE, in view of the foregoing, the assailed Decision of the Court of Appeals is
hereby AFFIRMED. The present Petition is DENIED.
SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 151133             June 30, 2008
AFP GENERAL INSURANCE CORPORATION, petitioner,
vs.
NOEL MOLINA, JUANITO ARQUEZA, LEODY VENANCIO, JOSE OLAT, ANGEL CORTEZ,
PANCRASIO SIMPAO, CONRADO CALAPON AND NATIONAL LABOR RELATIONS
COMMISSION (FIRST DIVISION), respondents.
DECISION
QUISUMBING, J.:
This is a petition for review on certiorari of the Decision 1 dated August 20, 2001 of the
Court of Appeals in CA-G.R. SP No. 58763 which dismissed herein petitioner’s special civil
action for certiorari. Before the appellate court, petitioner AFP General Insurance
Corporation (AFPGIC) sought to reverse the Resolution 2 dated October 5, 1999 of the
National Labor Relations Commission (NLRC) in NLRC NCR CA-011705-96 for having been
issued with grave abuse of discretion. The NLRC affirmed the Order 3 dated March 30, 1999
of Labor Arbiter Edgardo Madriaga in NLRC NCR Case No. 02-00672-90 which had denied
AFPGIC’s Omnibus Motion to Quash Notice/Writ of Garnishment and Discharge AFPGIC’s
appeal bond for failure of Radon Security & Allied Services Agency (Radon Security) to pay
the premiums on said bond. Equally challenged is the Resolution 4 dated December 14,
2001 of the appellate court in CA-G.R. SP No. 58763 which denied herein petitioner’s
motion for reconsideration.
The facts of this case are not disputed.
The private respondents are the complainants in a case for illegal dismissal, docketed as
NLRC NCR Case No. 02-00672-90, filed against Radon Security & Allied Services Agency
and/or Raquel Aquias and Ever Emporium, Inc. In his Decision dated August 20, 1996, the
Labor Arbiter ruled that the private respondents were illegally dismissed and ordered
Radon Security to pay them separation pay, backwages, and other monetary claims.
Radon Security appealed the Labor Arbiter’s decision to public respondent NLRC and
posted a supersedeas bond, issued by herein petitioner AFPGIC as surety. The appeal was
docketed as NLRC NCR CA-011705-96.
On April 6, 1998, the NLRC affirmed with modification the decision of the Labor Arbiter.
The NLRC found the herein private respondents constructively dismissed and ordered
Radon Security to pay them their separation pay, in lieu of reinstatement with backwages,
as well as their monetary benefits limited to three years, plus attorney’s fees equivalent to
10% of the entire amount, with Radon Security and Ever Emporium, Inc. adjudged jointly
and severally liable.
Radon Security duly moved for reconsideration, but this was denied by the NLRC in its
Resolution dated June 22, 1998.
Radon Security then filed a Petition for Certiorari docketed as G.R. No. 134891 with this
Court, but we dismissed this petition in our Resolution of August 31, 1998.
When the Decision dated April 6, 1998 of the NLRC became final and executory, private
respondents filed an Urgent Motion for Execution. As a result, the NLRC Research and
Information Unit submitted a Computation of the Monetary Awards in accordance with
the NLRC decision. Radon Security opposed said computation in its Motion for
Recomputation.
On February 5, 1999, the Labor Arbiter issued a Writ of Execution 5 incorporating the
computation of the NLRC Research and Information Unit. That same date, the Labor
Arbiter dismissed the Motion for Recomputation filed by Radon Security. By virtue of the
writ of execution, the NLRC Sheriff issued a Notice of Garnishment 6 against
the supersedeas bond.
Both Ever Emporium, Inc. and Radon Security moved to quash the writ of execution.
On March 30, 1999, the Labor Arbiter denied both motions, and Radon Security appealed
to the NLRC.
On April 14, 1999, AFPGIC entered the fray by filing before the Labor Arbiter an Omnibus
Motion to Quash Notice/Writ of Garnishment and to Discharge AFPGIC’s Appeal Bond on
the ground that said bond "has been cancelled and thus non-existent in view of the failure
of Radon Security to pay the yearly premiums."7
On April 30, 1999, the Labor Arbiter denied AFPGIC’s Omnibus Motion for lack of
merit.8 The Labor Arbiter pointed out that the question of non-payment of premiums is a
dispute between the party who posted the bond and the insurer; to allow the bond to be
cancelled because of the non-payment of premiums would result in a factual and legal
absurdity wherein a surety will be rendered nugatory by the simple expedient of non-
payment of premiums.
The petitioner then appealed the Labor Arbiter’s order to the NLRC. The appeals of Radon
Security and AFPGIC were jointly heard as NLRC NCR CA-011705-96.
On October 5, 1999, the NLRC disposed of NLRC NCR CA-011705-96 in this wise:
WHEREFORE, premises considered, the appeals under consideration are hereby
DISMISSED for lack of merit.
SO ORDERED.9
In dismissing the appeal of AFPGIC, the NLRC pointed out that AFPGIC’s theory that the
bond cannot anymore be proceeded against for failure of Radon Security to pay the
premium is untenable, considering that the bond is effective until the finality of the
decision.10 The NLRC stressed that a contrary ruling would allow respondents to simply
stop paying the premium to frustrate satisfaction of the money judgment. 11
AFPGIC then moved for reconsideration, but the NLRC denied the motion in its
Resolution12 dated February 29, 2000.
AFPGIC then filed a special civil action for certiorari, docketed as CA-G.R. SP No. 58763,
with the Court of Appeals, on the ground that the NLRC committed a grave abuse of
discretion in affirming the Order dated March 30, 1999 of the Labor Arbiter.
On August 20, 2001, the appellate court dismissed CA-G.R. SP No. 58763, disposing as
follows:
WHEREFORE, the foregoing considered, the petition is denied due course and
accordingly DISMISSED. SO ORDERED.13
AFPGIC seasonably moved for reconsideration, but this was denied by the appellate court
in its Resolution14 of December 14, 2001.
Hence, the instant case anchored on the lone assignment of error that:
THE COURT OF APPEALS SERIOUSLY ERRED IN SUSTAINING THE PUBLIC RESPONDENT
NLRC ALTHOUGH THE LATTER GRAVELY ABUSED ITS DISCRETION WHEN IT ARBITRARILY
IGNORED THE FACT THAT SUBJECT APPEAL BOND WAS ALREADY CANCELLED FOR NON-
PAYMENT OF PREMIUM AND THUS IT COULD NOT BE SUBJECT OF EXECUTION OR
GARNISHMENT.15
The petitioner contends that under Section 64 16 of the Insurance Code, which is deemed
written into every insurance contract or contract of surety, an insurer may cancel a policy
upon non-payment of the premium. Said cancellation is binding upon the beneficiary as
the right of a beneficiary is subordinate to that of the insured. Petitioner points out that
in South Sea Surety & Insurance Co., Inc. v. CA, 17 this Court held that payment of premium
is a condition precedent to and essential for the efficaciousness of a contract of
insurance.18 Hence, following UCPB General Ins. Co., Inc. v. Masagana Telamart, Inc., 19 no
insurance policy, other than life, issued originally or on renewal is valid and binding until
actual payment of the premium. 20 The petitioner also points to Malayan Insurance Co.,
Inc. v. Cruz Arnaldo,21 which reiterated that an insurer may cancel an insurance policy for
non-payment of premium.22 Hence, according to petitioner, the Court of Appeals
committed a reversible error in not holding that under Section 77 23 of the Insurance Code,
the surety bond between it and Radon Security was not valid and binding for non-
payment of premiums, even as against a third person who was intended to benefit
therefrom.
The private respondents adopted in toto the ratiocinations of the Court of Appeals that
inasmuch as a supersedeas bond was posted for the benefit of a third person to guarantee
that the money judgment will be satisfied in case it is affirmed on appeal, the third person
who stands to benefit from said bond is entitled to notice of its cancellation for any
reason. Likewise, the NLRC should have been notified to enable it to take the proper
action under the circumstances. The respondents submit that from its very nature,
a supersedeas bond remains effective and the surety liable thereon until formally
discharged from said liability. To hold otherwise would enable a losing party to frustrate a
money judgment by the simple expedient of ceasing to pay premiums.
We find merit in the submissions of the private respondents.
The controversy before the Court involves more than just the mere application of the
provisions of the Insurance Code to the factual circumstances. This instant case, after all,
traces its roots to a labor controversy involving illegally dismissed workers. It thus entails
the application of labor laws and regulations. Recall that the heart of the dispute is not an
ordinary contract of property or life insurance, but an appeal bond required by both
substantive and adjective law in appeals in labor disputes, specifically Article 223 24 of the
Labor Code, as amended by Republic Act No. 6715, 25 and Rule VI, Section 626 of the
Revised NLRC Rules of Procedure. Said provisions mandate that in labor cases where the
judgment appealed from involves a monetary award, the appeal may be perfected only
upon the posting of a cash or surety bond issued by a reputable bonding company
accredited by the NLRC.27 The perfection of an appeal by an employer "only" upon the
posting of a cash or surety bond clearly and categorically shows the intent of the
lawmakers to make the posting of a cash or surety bond by the employer to be the
exclusive means by which an employer’s appeal may be perfected. 28 Additionally, the filing
of a cash or surety bond is a jurisdictional requirement in an appeal involving a money
judgment to the NLRC.29 In addition, Rule VI, Section 6 of the Revised NLRC Rules of
Procedure is a contemporaneous construction of Article 223 by the NLRC. As an
interpretation of a law by the implementing administrative agency, it is accorded great
respect by this Court.30 Note that Rule VI, Section 6 categorically states that the cash or
surety bond posted in appeals involving monetary awards in labor disputes "shall be in
effect until final disposition of the case." This could only be construed to mean that the
surety bond shall remain valid and in force until finality and execution of judgment, with
the resultant discharge of the surety company only thereafter, if we are to give teeth to
the labor protection clause of the Constitution. To construe the provision any other way
would open the floodgates to unscrupulous and heartless employers who would simply
forego paying premiums on their surety bond in order to evade payment of the monetary
judgment. The Court cannot be a party to any such iniquity.
Moreover, the Insurance Code supports the private respondents’ arguments. The
petitioner’s reliance on Sections 64 and 77 of the Insurance Code is misplaced. The said
provisions refer to insurance contracts in general. The instant case pertains to a surety
bond; thus, the applicable provision of the Insurance Code is Section 177, 31 which
specifically governs suretyship. It provides that a surety bond, once accepted by the
obligee becomes valid and enforceable, irrespective of whether or not the premium has
been paid by the obligor. The private respondents, the obligees here, accepted the bond
posted by Radon Security and issued by the petitioner. Hence, the bond is both valid and
enforceable. A verbis legis non est recedendum (from the language of the law there must
be no departure).32
When petitioner surety company cancelled the surety bond because Radon Security failed
to pay the premiums, it gave due notice to the latter but not to the NLRC. By its failure to
give notice to the NLRC, AFPGIC failed to acknowledge that the NLRC had jurisdiction not
only over the appealed case, but also over the appeal bond. This oversight amounts to
disrespect and contempt for a quasi-judicial agency tasked by law with resolving labor
disputes. Until the surety is formally discharged, it remains subject to the jurisdiction of
the NLRC.
Our ruling, anchored on concern for the employee, however, does not in any way seek to
derogate the rights and interests of the petitioner as against Radon Security. The former is
not devoid of remedies against the latter. Under Section 176 33 of the Insurance Code, the
liability of petitioner and Radon Security is solidary in nature. There is solidary liability only
when the obligation expressly so states, or when the law so provides, or when the nature
of the obligation so requires. 34 Since the law provides that the liability of the surety
company and the obligor or principal is joint and several, then either or both of them may
be proceeded against for the money award.
The Labor Arbiter directed the NLRC Sheriff to garnish the surety bond issued by the
petitioner. The latter, as surety, is mandated to comply with the writ of garnishment, for
as earlier pointed out, the bond remains enforceable and under the jurisdiction of the
NLRC until it is discharged. In turn, the petitioner may proceed to collect the amount it
paid on the bond, plus the premiums due and demandable, plus any interest owing from
Radon Security. This is pursuant to the principle of subrogation enunciated in Article
206735 of the Civil Code which we apply to the suretyship agreement between AFPGIC and
Radon Security, in accordance with Section 178 36 of the Insurance Code. Finding no
reversible error committed by the Court of Appeals in CA-G.R. SP No. 58763, we sustain
the challenged decision.
WHEREFORE, the instant petition is DENIED for lack of merit. The assailed Decision dated
August 20, 2001 of the Court of Appeals in CA-G.R. SP No. 58763 and the Resolution dated
December 14, 2001, of the appellate court denying the herein petitioner’s motion for
reconsideration are AFFIRMED. Costs against the petitioner.
SO ORDERED.
SECOND DIVISION
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"2 was 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 clause 11 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. 16 In 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 face 22 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 Commission 25 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 Appeals 50 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 SO ORDERED.
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.

Republic of the Philippines
SUPREME COURT
SECOND DIVISION
G.R. No. 151060. August 31, 2005
JN DEVELOPMENT CORPORATION, and SPS. RODRIGO and LEONOR STA.
ANA, Petitioners,
vs.
PHILIPPINE EXPORT AND FOREIGN LOAN GUARANTEE CORPORATION, respondent.
G.R. No. 151311. August 31, 2005
NARCISO V. CRUZ, Petitioners,
vs.
PHILIPPINE EXPORT and FOREIGN LOAN GUARANTEE CORPORATION, Respondent.
DECISION
TINGA, J.:
Before us are consolidated petitions questioning the Decision1 of the Court of Appeals
(CA) in CA-G.R. CV No. 61318, entitled Philippine Export and Foreign Loan Guarantee
Corporation v. JN Development Corporation, et al.,  which reversed the Decision of the
Regional Trial Court (RTC) of Makati, Branch 60.
On 13 December 1979, petitioner JN Development Corporation ("JN") and Traders Royal
Bank (TRB) entered into an agreement whereby TRB would extend to JN an Export Packing
Credit Line for Two Million Pesos (₱2,000,000.00). The loan was covered by several
securities, including a real estate mortgage 2 and a letter of guarantee from respondent
Philippine Export and Foreign Loan Guarantee Corporation ("PhilGuarantee"), now Trade
and Investment Development Corporation of the Philippines, covering seventy percent
(70%) of the credit line.3 With PhilGuarantee issuing a guarantee in favor of TRB, 4 JN,
petitioner spouses Rodrigo and Leonor Sta. Ana 5 and petitioner Narciso Cruz 6 executed
a Deed of Undertaking7 (Undertaking) to assure repayment to PhilGuarantee.
It appears that JN failed to pay the loan to TRB upon its maturity; thus, on 8 October 1980
TRB requested PhilGuarantee to make good its guarantee. 8 PhilGuarantee informed JN
about the call made by TRB, and inquired about the action of JN to settle the loan. 9 Having
received no response from JN, on 10 March 1981 PhilGuarantee paid TRB Nine Hundred
Thirty Four Thousand Eight Hundred Twenty Four Pesos and Thirty Four Centavos
(₱934,824.34).10 Subsequently, PhilGuarantee made several demands on JN, but the latter
failed to pay. On 30 May 1983, JN, through Rodrigo Sta. Ana, proposed to settle the
obligation "by way of development and sale" of the mortgaged property. 11 PhilGuarantee,
however, rejected the proposal.
PhilGuarantee thus filed a Complaint12 for collection of money and damages against
herein petitioners.
In its Decision dated 20 August 1998, the RTC dismissed PhilGuarantee’s Complaint as well
as the counterclaim of petitioners. It ruled that petitioners are not liable to reimburse
PhilGuarantee what it had paid to TRB. Crucial to this holding was the court’s finding that
TRB was able to foreclose the real estate mortgage executed by JN, thus extinguishing
petitioners’ obligation.13 Moreover, there was no showing that after the said foreclosure,
TRB had demanded from JN any deficiency or the payment of the difference between the
proceeds of the foreclosure sale and the actual loan. 14 In addition, the RTC held that since
PhilGuarantee’s guarantee was good for only one year from 17 December 1979, or until
17 December 1980, and since it was not renewed after the expiry of said period,
PhilGuarantee had no more legal duty to pay TRB on 10 March 1981. 15 The RTC likewise
ruled that Cruz cannot be held liable under the Undertaking since he was not the one who
signed the document, in line with its finding that his signature found in the records is
totally different from the signature on the Undertaking. 16
According to the RTC, the failure of TRB to sue JN for the recovery of the loan precludes
PhilGuarantee from seeking recoupment from the spouses Sta. Ana and Cruz what it paid
to TRB. Thus, PhilGuarantee’s payment to TRB amounts to a waiver of its right under Art.
2058 of the Civil Code.17
Aggrieved by the RTC Decision, PhilGuarantee appealed to the CA. The appellate court
reversed the RTC and ordered petitioners to pay PhilGuarantee Nine Hundred Thirty Four
Thousand Six Hundred Twenty Four Pesos and Thirty Four Centavos (₱934,624.34), plus
service charge and interest.18
In reaching its denouement, the CA held that the RTC’s finding that the loan was
extinguished by virtue of the foreclosure sale of the mortgaged property had no factual
support,19 and that such finding is negated by Rodrigo Sta. Ana’s testimony that JN did not
receive any notice of foreclosure from PhilGuarantee or from TRB. 20 Moreover, Sta. Ana
even offered the same mortgaged property to PhilGuarantee to settle its obligations with
the latter.21
The CA also ruled that JN’s obligation had become due and demandable within the one-
year period of effectivity of the guarantee; thus, PhilGuarantee’s payment to TRB
conformed with its guarantee, although the payment itself was effected one year after the
maturity date of the loan.22 Contrary to the trial court’s finding, the CA ruled that the
contract of guarantee was not extinguished by the alleged lack of evidence on
PhilGuarantee’s consent to the extensions granted by TRB to JN. 23 Interpreting Art. 2058
of the Civil Code,24 the appellate court explained that while the provision states that the
guarantor cannot be compelled to pay unless the properties of the debtor are exhausted,
the guarantor is not precluded from waiving the benefit of excussion and paying the
obligation altogether.25
Finally, the CA found that Narciso Cruz was unable to prove the alleged forgery of his
signature in the Undertaking, the evidence presented not being sufficient to overcome the
presumption of regularity of the Undertaking which is a notarized document. 26
Petitioners sought reconsideration of the Decision  and prayed for the  admission of
documents evidencing the foreclosure of the real estate mortgage, but the motion for
reconsideration was denied by the CA for lack of merit. The CA ruled that the
documentary evidence presented by petitioners cannot be considered as newly
discovered evidence, it being already in existence while the case was pending before the
trial court, the very forum before which it should have been presented. Besides, a
foreclosure sale per se is not proof of petitioners’ payment of the loan to PhilGuarantee,
the CA added.27
So now before the Court are the separate petitions for review of the CA Decision. JN and
the spouses Sta. Ana, petitioners in G.R. No. 151060, posit that the CA erred in
interpreting Articles 2079, 2058, and 2059 of the Civil Code in its Decision.28 Meanwhile,
petitioner Narciso Cruz in G.R. No. 151311 claims that the CA erred when it held that
petitioners are liable to PhilGuarantee despite its payment after the expiration of its
contract of guarantee and the lack of PhilGuarantee’s consent to the extensions granted
by TRB to JN. Moreover, Cruz questions the reversal of the ruling of the trial court anent
his liability as a signatory to the Undertaking.29
On the other hand, PhilGuarantee maintains that the date of default, 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 by petitioners. 30 It argues that, contrary to
petitioners’ claim, there could be no waiver of its right to excussion more explicit than its
act of payment to TRB very directly.31 Besides, the right to excussion is for the benefit of
the guarantor and is not a defense for the debtor to raise and use to evade liability. 32 
Finally, PhilGuarantee maintains that there is no sufficient evidence proving the alleged
forgery of Cruz’s signature on the Undertaking, which is a notarized document and as such
must be accorded the presumption of regularity. 33
The Court finds for PhilGuarantee.
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. 34 The guarantor
who pays for a debtor, in turn, must be indemnified by the latter. 35 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. 36 This is
what is otherwise 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 principal debtor before assuming to run after the alleged guarantor,
"for obviously the ‘exhaustion of the principal’s property’ cannot even begin to take place
before judgment has been obtained."37 The law imposes conditions precedent for the
invocation of the defense. Thus, in order that the guarantor may make use of the benefit
of excussion, he must set it up against the creditor upon the latter’s demand for payment
and point out to the creditor available property of the debtor within the Philippines
sufficient to cover the amount of the debt. 38
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 a right granted to him by
law and as such he may opt to make use of it or waive it. PhilGuarantee’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. 39
Petitioners’ claim that PhilGuarantee had no more obligation to pay TRB because of the
alleged expiration of the contract of guarantee is untenable. The guarantee, dated17
December 1979, states:
In the event of default by JNDC and as a consequence thereof, PHILGUARANTEE is made
to pay its obligation arising under the aforesaid guarantee PHILGUARANTEE shall pay the
BANK the amount of ₱1.4 million or 70% of the total obligation unpaid…
....
This guarantee shall be valid for a period of one (1) year from date hereof but may be
renewed upon payment by JNDC of the guarantee fee at the same rate of 1.5% per
annum.40
The guarantee was only up to 17 December 1980. JN’s obligation with TRB fell due on 30
June 1980, and demand on PhilGuarantee was made by TRB on 08 October 1980. That
payment was actually made only on 10 March 1981 does not take it out of the terms of
the guarantee. What is controlling is that default and demand on PhilGuarantee had taken
place while the guarantee was still in force.
There is likewise no merit in petitioners’ claim that PhilGuarantee’s failure to give its
express consent to the alleged extensions granted by TRB to JN had extinguished the
guarantee. The requirement that the guarantor should consent to any extension granted
by the creditor to the debtor under Art. 2079 is for the benefit of the guarantor. As such,
it is likewise waivable by the guarantor. Thus, even assuming that extensions were indeed
granted by TRB to JN, PhilGuarantee could have opted to waive the need for consent to
such extensions. Indeed, a guarantor is not precluded from waiving his right to be notified
of or to give his consent to extensions obtained by the debtor. Such waiver is not contrary
to public policy as it is purely personal and does not affect public interest. 41 In the instant
case, PhilGuarantee’s waiver can be inferred from its actual payment to TRB after the
latter’s demand, despite JN’s failure to pay the renewal/guarantee fee as indicated in the
guarantee.42
For the above reasons, there is no basis for petitioner’s claim that PhilGuarantee was a
mere volunteer payor and had no legal obligation to pay TRB. The law does not prohibit
the payment by a guarantor on his own volition, heedless of the benefit of excussion. In
fact, it recognizes the right of a guarantor to recover what it has paid, even if payment
was made before the debt becomes due, 43 or if made without notice to the debtor, 44 
subject of course to some conditions.
Petitioners’ invocation of our ruling in Willex Plastic Industries, Corp. v. Court of Appeals 45 
is misplaced, if not irrelevant. In the said case, the guarantor claimed that it could not be
proceeded against without first exhausting all of the properties of the debtor. The Court,
finding that there was an express renunciation of the benefit of excussion in the contract
of guarantee, ruled against the guarantor.
The cited case finds no application in the case a quo. PhilGuarantee is not invoking the
benefit of excussion. It cannot be overemphasized that excussion is a right granted to the
guarantor and, therefore, only he may invoke it at his discretion.
The benefit of excussion, as well as the requirement of consent to extensions of payment,
is a protective device pertaining to and conferred on the guarantor. These may be invoked
by the guarantor against the creditor as defenses to bar the unwarranted enforcement of
the guarantee. However, PhilGuarantee did not avail of these defenses when it paid its
obligation according to the tenor of the guarantee once demand was made on it. What is
peculiar in the instant case is that petitioners, the principal debtors themselves, are
muddling the issues and raising the same defenses against the guarantor, which only the
guarantor may invoke against the creditor, to avoid payment of their own obligation to
the guarantor. The Court cannot countenance their self-seeking desire to be exonerated
from the duty to reimburse PhilGuarantee after it had paid TRB on their behalf and to
unjustly enrich themselves at the expense of PhilGuarantee.
Petitioners assert that TRB’s alleged foreclosure of the real estate mortgage over the land
executed as security for the loan agreement had extinguished PhilGuarantee’s obligation;
thus, PhilGuarantee’s recourse should be directed against TRB, as per the pari-
passu provision46 in the contract of guarantee. 47 We disagree.
The foreclosure was made on 27 August 1993, "after the case was submitted for decision
in 1992 and before the issuance of the decision of the court a quo in 1998". 48 Thus,
foreclosure was resorted to by TRB against JN when they both had become aware that
PhilGuarantee had already paid TRB and that there was a pending case filed by
PhilGuarantee against petitioners. This matter was not raised and proved in the trial court,
nor in the appeal before the CA, but raised for the first time in petitioners’ motion for
reconsideration in the CA. In their appellants’ Brief, petitioners claimed that "there was no
need for the defendant-appellee JNDC to present any evidence before the lower court to
show that indeed foreclosure of the REM took place." 49 As properly held by the CA,
… Firstly, the documents evidencing foreclosure of mortgage cannot be considered as
newly discovered evidence. The said documents were already subsisting and should have
been presented during the trial of the case. The alleged foreclosure sale was made on
August 23, 1993 … while the decision was rendered by the trial court on August 20, 1998
about five (5) years thereafter. These documents were likewise not submitted by the
defendants-appellees when they submitted their appellees’ Brief to this Court. Thus, these
cannot be considered as newly discovered evidence but are more correctly ascribed as
suppressed forgotten evidence… Secondly, the alleged foreclosure sale is not proof of
payment of the loan by defendant-appellees to the plaintiffs-appellants. 50
The Court notes the letter 51 of Rodrigo Sta. Ana offering, by way of settlement of JN’s
obligations to PhilGuarantee, the very same parcel of land mortgaged as security for the
loan agreement. This further weakens the position of petitioners, since it becomes
obvious that they acknowledged the payment made by PhilGuarantee on their behalf and
that they were in fact willing to negotiate with PhilGuarantee for the settlement of the
said obligation before the filing of the complaint a quo.
Anent the issue of forgery, the CA is correct in reversing the decision of the trial court.
Save for the denial of Narciso Cruz that it was not his signature in the Undertaking and the
perfunctory comparison of the signatures, nothing in the records would support the claim
of forgery. Forgery cannot be presumed and must be proved by clear, positive and
convincing evidence and the burden of proof lies on the party alleging forgery. 52 Mere
denial will not suffice to overcome the positive value of the Undertaking, which is a
notarized document, has in its favor the presumption of regularity, and carries the
evidentiary weight conferred upon it with respect to its due execution. 53 Even in cases
where the alleged forged signature was compared to samples of genuine signatures to
show its variance therefrom, this Court still found such evidence insufficient. 54 Mere
variance of the signatures cannot be considered as conclusive proof that the same were
forged.55
WHEREFORE, the consolidated petitions are DENIED. The Decision  of the Court of Appeals
in CA-G.R. CV No. 61318 is AFFIRMED.
No pronouncement as to costs.

Besides, the complaint a quo was filed by PhilGuarantee as guarantor for JN, and its cause SO ORDERED.
of action was premised on its payment of JN’s obligation after the latter’s default.
PhilGuarantee was well within its rights to demand reimbursement for such payment
made, regardless of whether the creditor, TRB, was subsequently able to obtain payment
from JN. If double payment was indeed made, then it is JN which should go after TRB, and
not PhilGuarantee. Petitioners have no one to blame but themselves, having allowed the
foreclosure of the property for the full value of the loan despite knowledge of
PhilGuarantee’s payment to TRB. Having been aware of such payment, they should have
opposed the foreclosure, or at the very least, filed a supplemental pleading with the trial
court informing the same of the foreclosure sale.

Likewise, petitioners cannot invoke the pari-passu  clause in the guarantee, not being
parties to the said agreement. The clause is clearly for the benefit of the guarantor and no
other.

Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
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.:
Assailed in this petition for review on certiorari 1 are the Decision2 dated April 30, 2008 and
Resolution3 dated March 27, 2009 of the Court of Appeals (CA) in CA-G.R. CV No. 86558
which affirmed the Decision4 dated April 29, 2005 of the Regional Trial Court of Makati,
Branch 132 (RTC) in Civil Case No. 95-1812. The CA upheld the RTC’s finding that the
liabilities of Paramount Insurance Corporation (Paramount), and respondents Philippine
Phoenix Surety and Insurance, Inc. (Phoenix), Mega Pacific Insurance Corporation 5 (Mega
Pacific), and Fortune Life and General Insurance Company (Fortune) on their respective
counter-surety bonds have been extinguished due to the extension of the principal
obligations these bonds covered, to which said respondents did not give their consent.
The Facts
On January 19, 1981, respondents Asia Paces Corporation (ASPAC) and Paces Industrial
Corporation (PICO) entered into a sub-contracting agreement, denominated as "200 KV
Transmission Lines Contract No. 20-/80-II Civil Works & Electrical Erection," with the
Electrical Projects Company of Libya (ELPCO), as main contractor, for the construction and
erection of a double circuit bundle phase conductor transmission line in the country of
Libya. To finance its working capital requirements, ASPAC obtained loans from foreign
banks Banque Indosuez and PCI Capital (Hong Kong) Limited (PCI Capital) which, upon the
latter’s request, were secured by several Letters of Guarantee issued by petitioner Trade
and Investment Development Corporation of the Philippines (TIDCORP), 6 then Philippine
Export and Foreign Loan Guarantee Corp., a government owned and controlled
corporation created for the primary purpose of, among others, "guarantee[ing], with the
prior concurrence of the Monetary Board, subject to the rules and regulations that the
Monetary Board may prescribe, approved foreign loans, in whole or in part, granted to
any entity, enterprise or corporation organized or licensed to engage in business in the
Philippines."7 Under the Letters of Guarantee, TIDCORP irrevocably and unconditionally
guaranteed full payment of ASPAC’s loan obligations to 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 each, are detailed as follows: 9
LETTER OF GUARANTEE LOAN AGREEMENT SECURED CREDITOR
 Letter of Guarantee No. 82-446 F Loan Agreement dated March 9, 1982 G(16)0190319
Banque
dated March 11, 1982 (with an extension dated March 25,
Indosuez 548 F
(LG No. 82-446 F) 1983), in the amount of US$250,000.00 Surety Bond No. Mega
₱5,030,000.00 September 28, 198522
G(16)0149721 Pacific
Letter of Guarantee No. 82-498 F
Loan Agreement dated June 10, 1982, in PCI
dated June 10, 1982
the amount of US$250,000.00 Capital ASPAC eventually defaulted on its loan obligations to Banque Indosuez and PCI Capital,
(LG No. 82-498 F)
prompting them to demand payment from TIDCORP under the Letters of Guarantee. The
Letter of Guarantee No. 82-548 F demand letter of Banque Indosuez was sent to TIDCORP on March 5, 1984, 23 while that of
Loan Agreement dated October 5, 1982, PCI
dated October 5, 1982 PCI Capital was sent on February 21, 1985. 24 In turn, TIDCORP demanded payment from
in the amount of US$2,000,000.00 Capital
(LG No. 82-548 F) Paramount,25 Phoenix,26 Mega Pacific,27 and Fortune28 under the Surety Bonds. TIDCORP’s
demand letters to the bonding companies were sent on May 28, 1985, or before the final
expiration dates of all the Surety Bonds, but to no avail. 29
As a condition precedent to the issuance by TIDCORP of the Letters of Guarantee, ASPAC,
PICO, and ASPAC’s President, respondent Nicolas C. Balderrama (Balderrama) had to
Taking into account the moratorium request 30 issued by the Minister of Finance of the
execute several Deeds of Undertaking,10 binding themselves to jointly and severally pay
Republic of the Philippines (whereby members of the international banking community
TIDCORP for whatever damages or liabilities it may incur under the aforementioned
were requested to grant government financial institutions, 31 such as TIDCORP, among
letters. In the same light, ASPAC, as principal debtor, entered into surety agreements
others, a 90-day roll over from their foreign debts beginning October 17, 1983), TIDCORP
(Surety Bonds) with Paramount, Phoenix, Mega Pacific and Fortune (bonding companies),
and its various creditor banks, such as Banque Indosuez and PCI Capital, forged a
as sureties, also holding themselves solidarily liable to TIDCORP, as creditor, for whatever
Restructuring Agreement32 on April 16, 1986, extending the maturity dates of the Letters
damages or liabilities the latter may incur under the Letters of Guarantee. 11 The details of
of Guarantee.33 The bonding companies were not privy to the Restructuring Agreement
said bonds, including their respective coverage amounts and expiration dates, among
and, hence, did not give their consent to the payment extensions granted by Banque
others, are as follows:
Indosuez and PCI Capital, among others, in favor of TIDCORP. Nevertheless, following new
payment schedules,34 TIDCORP fully settled its obligations under the Letters of Guarantee
to both Banque Indosuez and PCI Capital on December 1, 1992, and April 19 and June 4,
1991, respectively.35 Seeking payment for the damages and liabilities it had incurred under
the Letters of Guarantee and with its previous demands therefor left unheeded, TIIDCORP
LETTER OF BONDING FINAL filed a collection case36 against: (a) ASPAC, PICO, and Balderrama on account of their
COVERAGE
SURETY BOND GUARANTE COMPANY/ EXPIRATION obligations under the deeds of undertaking; and (b) the bonding companies on account of
AMOUNT12
E COVERED SURETY DATE their obligations under the Surety Bonds.
Surety Bond No. LG No. 82-
₱2,752,000.00 Paramount March 5, 198614 The RTC Ruling
G(16)0194313 446 F

Surety Bond No. In a Decision37 dated April 29, 2005, the RTC partially granted TIDCORP’s complaint and
₱1,845,000.00 Paramount June 4, 198616
G(16)0190615 thereby found ASPAC, PICO, and Balderrama jointly and severally liable to TIDCORP in the
LG No. 82-
498 F sum of ₱277,891,359.66 pursuant to the terms of the Deeds of Undertaking, but absolved
Surety Bond No. the bonding companies from liability on the ground that the moratorium request and the
₱1,849,000.00 Fortune November 21, 198518
G(16)1549517 consequent payment extensions granted by Banque Indosuez and PCI Capital in TIDCORP’s
favor without their consent extinguished their obligations under the Surety Bonds. As
Surety Bond No. LG No. 82- ₱11,970,000.00 Phoenix September 28, 198520
basis, the RTC cited Article 2079 of 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
40
In a Decision  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. Cuenca 43 (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 Resolution 47 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 Withdrawal 48 of its claim against Paramount in view of
their Compromise Agreement49 dated June 24, 2010 which was approved 50 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.
Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 156162               June 22, 2015
CCC INSURANCE CORPORATION, Petitioner,
vs.
KAWASAKI STEEL CORPORATION, F.F. MAÑACOP CONSTRUCTION CO., INC., and
FLORANTE F. MAÑACOP, Respondents.
DECISION
LEONARDO-DE CASTRO, J.:
Assailed in this Petition for Review on Certiorari are: (1) the Decision 1 dated May 30, 2002
of the Court of Appeals in CA-G.R. CV No. 54066, which reversed and set aside the
Decision2 dated May 2, 1996 of the Regional Trial Court (RTC), Makati City, Branch 66, and
held petitioner CCC Insurance Corporation (CCCIC) liable under its Surety and Performance
Bonds to respondent Kawasaki Steel Corporation (Kawasaki); and (2) the
Resolution3 dated November 14, 2002 of the appellate court in the same case which
denied the Motion for Reconsideration of CCCIC.
The antecedents of this case are as follows:
On August 16, 1988, Kawasaki, represented by its Manager, Yoshimitsu Hosoya, and F .F.
Mañacop Construction Company, Inc. (FFMCCI), represented by its President, Florante F.
Mañacop (Mañacop ), executed a Consortium Agreement for Pangasinan Fishing Port
Network Project (Consortium Agreement). 4 Kawasaki and FFMCCI formed a consortium
(Kawasaki-FFMCCI Consortium) for the purpose of contracting with the Philippine
Government for the construction of a fishing port network in Pangasinan (Project).
According to their Consortium Agreement, Kawasaki and FFMCIA undertook to perform
and accomplish their respective and specific portions of work in the intended contract
with the Philippine Government.5
The Project was awarded to the Kawasaki-FFMCCI Consortium for the contract price of
₱62,000,441.00, 33 .3 7% of which or ₱20,692,026.00 was the price of work of FFMCCI. On
October 4, 1988, the Republic of the Philippines (Republic), through the Department of
Public Works and Highways (DPWH), represented by former Secretary Romulo M. del
Rosario, as owner, and the Kawasaki-FFMCCI Consortium, represented by Shigeru Kohda,
as contractor, entered into a Contract Agreement entitled Stage I-A Construction of
Pangasinan Fishing Port Network (Construction Contract). 6
In accordance with Article 10 of the Consortium Agreement, 7 "Consortium Leader"
Kawasaki, on behalf of the Consortium, secured from the Philippine Commercial
International Bank (PCIB) Letter of Credit No. 38-001-183617 8 in the amount of
₱6,200,044.10 in favor of DPWH, available from September 9, 1988 to November 19,
1990. Said Letter of Credit guaranteed the faithful performance by Kawasaki-FFMCCI
Consortium of its obligation under the Construction Contract.
The Republic made an advance payment for the Project to the Kawasaki-FFMCCI
Consortium in the amount of ₱9,300,066.15, representing 15% of the contract price of:
₱62,000,441.00.
For the release of its share in the advance payment made by the Republic, and also
pursuant to Article 10 of the Consortium Agreement, FFMCCI secured from CCCIC the
following bonds in favor of Kawasaki: (a) Surety Bond No. B-88/11191 9 in the amount of
₱3,103,803.90 (equivalent to 15% of the price of work of FFMCCI), effective from October
26, 1988 to October 26, 1989, to counter guarantee the amount of advance payment
FFMCCI would receive from Kawasaki; and (b) Performance Bond B-88/11193 10 in the
amount of ₱2,069,202.60 (equivalent to 10% of the price of work of FFMCCI), effective
from October 27, 1988 to October 27, 1989, to guarantee completion by FFMCCI of its
scope of work in the Project. In turn, FFMCCI and Mañacop executed two Indemnity
Agreements11 promising to compensate CCCIC for any damages the insurance company
might incur from issuing the Surety and Performance Bonds.
In two letters dated October 27, 1998, 12 FFMCCI submitted the Surety and Performance
Bonds to Kawasaki and requested Kawasaki to release the advance payment in the
amount of ₱3,103,803.90. FFMCCI eventually received the amount of advance payment it
requested on a staggered basis.13
The Project commenced in November 1988. 14 Sometime in April 1989, FFMCCI ceased
performing its work in the Project after suffering financial problems and/or business
reverses. After discussions, Kawasaki and FFMCCI then executed a new Agreement 15 on
August 24, 1989 wherein Kawasaki recognized the "Completed Portion of Work" of
FFMCCI as of April 25, 1989, and agreed to take over the unfinished portion of work of
FFMCCI, referred to as "Transferred Portion of Work." Kawasaki and FFMCCI further
agreed that "[a]ny profit or benefit arising from the performance by [Kawasaki] of the
Transferred Portion of Work shall accrue to [Kawasaki]."
In a letter dated September 14, 1989,16 Kawasaki informed CCCIC about the cessation of
operations of FFMCCI, and the failure of FFMCCI to perform its obligations in the Project
and repay the advance payment made by Kawasaki. Consequently, Kawasaki formally
demanded that CCCIC, as surety, pay Kawasaki the amounts covered by the Surety and
Performance Bonds. Because CCCIC did not act upon its demand, Kawasaki filed on
November 6, 1989 before the RTC a Complaint 17 against CCCIC to collect on Surety Bond
No. B-88/11191 and Performance Bond No. B-88/11193.
In its Answer with Counterclaims, 18 CCCIC denied any liability on its Surety and
Performance Bonds on the following grounds: (a) the rights of Kawasaki under the Surety
and Performance Bonds had not yet accrued since the said Bonds were mere counter-
guarantees, for which CCCIC could only be held liable upon the filing of a claim by the
Republic against the Kawasaki-FFMCCI Consortium; (b) Kawasaki and FFMCCI, without the
consent of CCCIC, executed a new Agreement dated August 24, 1989 novating the terms
of the Consortium Agreement, which prevented CCCIC from being subrogated to the right
of Kawasaki against FFMCCI; (c) Kawasaki, in completing the Transferred Portion of Work
was correspondingly compensated, which negated any allegation of loss on the part of
Kawasaki; and (d) the obligation of CCCIC was extinguished when the Republic granted the
Kawasaki-FFMCCI Consortium an extension of time to complete the Project, without the
consent of CCCIC.
CCCIC subsequently filed on August 19, 1991 before the RTC a Third-Party
Complaint19 against FFMCCI and its President Mañacop based on the two Indemnity
Agreements which FFMCCI and Mañacop executed in favor of CCCIC. The RTC issued
summonses but FFMCCI and Mañacop failed to file any responsive pleading to the Third-
Party Complaint of CCCIC. Upon motion of CCCIC, the RTC issued an Order 20 dated
December 2, 1991 declaring FFMCCI and Mañacop in default.
After trial, the RTC rendered a Decision on May 2, 1996 dismissing the Complaint of
Kawasaki and the counterclaim of CCCIC. The RTC agreed with CCCIC that the Surety and
Performance Bonds issued by the insurance company were mere counter-guarantees and
the cause of action of Kawasaki based on said Bonds had not yet accrued. Since the
Republic did not exercise its right to claim against the PCIB Letter of Credit No. 38-001-
183617, nor compelled Kawasaki to perform the unfinished work of FFMCCI, Kawasaki
could not claim indemnification from CCCIC. Moreover, the RTC, citing Article 2079 of the
Civil Code, ruled that the obligations of CCCIC under the Surety and Performance Bonds
were extinguished when the Republic granted the Kawasaki-FFMCCI Consortium a 43-day
extension to finish the Project, absent the consent of CCCIC. The RTC found no deliberate
intent on the part of Kawasaki to cause prejudice to CCCIC, so it did not grant the
counterclaims for moral and exemplary damages and attorney's fees of CCCIC against
Kawasaki.
Kawasaki appealed before the Court of Appeals assigning the following errors on the part
of the RTC:
I. THE COURT A QUO GROSSLY ERRED IN HOLDING THAT [CCCIC] CAN BE HELD LIABLE TO
[Kawasaki] UNDER THE SUBJECT BONDS ONLY "IF THE GOVERNMENT EXERCISES ITS
RIGHTS AGAINST THE GUARANTEE-BONDS ISSUED TO IT BY [Kawasaki]" ON THE THEORY
ADVANCED BY [CCCIC], WHICH THE COURT A QUO FULLY EMBRACED AND ADOPTED,
THAT THE BONDS ARE MERE "COUNTER-GUARANTEES."
II. THE COURT A QUO GROSSLY ERRED IN HOLDING THAT THE EXTENSION GRANTED BY
THE GOVERNMENT TO THE CONSORTIUM FOR THE CONSTRUCTION OF THE PANGASINAN
FISHING PORT NETWORK PROJECT EXTINGUISHED THE LIABILITY OF [CCCIC].
III. THE COURT A QUO GROSSLY ERRED IN HOLDING THAT ARTICLE 2079 OF THE CIVIL
CODE OF THE PHILIPPINES APPLIES TO THE CASE AT BAR. IN A LONG LINE OF DECISIONS,
THE SUPREME COURT HAS HELD THAT THE RULE OF "STRICTISSIMI JURIS" DOES NOT
APPLY TO SURETY COMPANIES SUCH AS [CCCIC] HEREIN.
IV. THE SUBJECT BONDS ARE FIXED UNTIL OCTOBER 26 AND 27, 1989 RESPECTIVELY
WHILE THE ORIGINAL PERIOD OF THE CONTRACT WITH THE GOVERNMENT, THE
PERFORMANCE OF WHICH BY [CCCIC] ARE PRECISELY GUARANTEED BY THESE BONDS, IS
UNTIL DECEMBER 30, 1989. ON THE OTHER HAND, THE DEF AULT BY [FFMCCI] WHICH THE
BONDS GUARANTEED AGAINST OCCURRED ON [OR] ABOUT AUGUST 24, 1989.
THEREFORE, IRRESPECTIVE OF WHETHER THERE WAS AN EXTENSION OR NOT AT THE END
OF THE ORIGINAL CONTRACT PERIOD AND IRRESPECTIVE OF WHETHER THIS EXTENSION IS
KNOWN OR UNKNOWN TO [CCCIC], THE LIABILITY THAT IT BOUND ITSELF UNTO UNDER
THE BONDS IS VERY CLEARLY AND UNEQUIVOCALLY FIXED UNTIL OCTOBER 26 AND 27,
1989 RESPECTIVELY. THEREFORE, ARTICLE 2079 WILL NOT APPLY. HENCE, THE COURT A
QUO GROSSLY ERRED IN HOLDING OTHERWISE.21
The Court of Appeals, in its Decision dated May 30, 2002, reversed the appealed RTC
Decision, reasoning as follows:21
From the language of the aforesaid bonds, it is clear that, in the case of the surety bond,
the same was posted, jointly and severally, by [FFMCCI] and CCCIC "to fully and faithfully
guarantee the repayment of the downpayment made by the principal ([FFMCCI]) to the
obligee (KAWASAKI) in connection with the construction of the Pangasinan Fishing Port
Network Project at Pangasin.an" subject only to the condition that "the liability of the
[herein] surety shall in no case exceed the amount of Pesos: THREE MILLION ONE
HUNDRED THREE THOUSAND EIGHT HUNDRED THREE & 90/100 (₱3,103,803.90)
Philippine currency; and in the case of the performance bond, the same was posted,
jointly and severally by [FFMCCI] and CCCIC "to guarantee the full and faithful
performance of the principal ([FFMCCI]) of its obligation in connection with the project for
the construction of the Pangasinan Fishing Port Network located at Pangasinan in
accordance with the plans and specifications of the contract" subject only to the condition
that "the liability of the [herein] surety shall in no case exceed the amount of Pesos: TWO
MILLION SIXTY-NINE THOUSAND TWO HUNDRED TWO & 60/100 (₱2,069,202.60)
Philippine currency."
The right of KAW AS AKI as the obligee/creditor of the said bonds was not made subject to
any other condition expressly so provided in the Consortium Agreement, which was the
reason for the bonds posted by [FFMCCI] and CCCIC, or in the subject bonds themselves.
Hence, this Court finds that the court a quo did err in ruling that "[u]nder the Consortium
Agreement, the bonds are counter-guarantees which only guarantee the plaintiff
KAWASAKI for reimbursement to the extent of the value of the bonds in case the
employer (government) successfully exercised its rights under the bonds issued to it by
plaintiff KAW AS AKI;" and that "[ c]onsidering that the government did not exercise its
rights against the bond issued to it by the Consortium Leader, it follows that the
Consortium Leader cannot collect from the counter-guarantees furnished by [FFMCCI]."
Time and again, the Supreme Court has stressed the rule that a contract is the law
between the parties, and courts have no choice but to enforce such contract so long as
they are not contrary to law, morals, good customs or public policy.
With respect to the second, third and fourth issues raised, suffice it to say that this Court
finds Article 2079 of the Civil Code of the Philippines not applicable. [Kawasaki] claims that
since the issue in this case is the liability of CCCIC to KAWASAKI, the extension of forty-
three (43) days within which to complete the Pangasinan Fishing Port Network Project
granted by the Philippine government, who is not a party to the two (2) bonds posted by
[FFMCCI] and CCCIC, to the consortium, does not absolve CCCI C's liabilities to KAWASAKI
under the subject bonds.
We agree.
As stated earlier, the parties insofar as the surety bond and performance bond are
concerned are: KAWASAKI, as obligee, [FFMCCI], as principal; and CCCIC, as surety.
Considering therefore that the extension of time within which to complete the
construction of the Pangasinan Fishing Port Network Project was granted by the Philippine
government, who is not the creditor of the bonds, this Court finds that Article 2079 of the
Civil Code of the Philippines does not apply and the extension of time granted by the
Philippine government, contrary to the ruling of the trial court, does not absolve the
surety of its liabilities to KAWASAKI under the subject bonds.
The principle of relativity of contracts provides that contracts can only bind the parties
who entered into it.
Finally, this Court finds the award of attorney's fees in favor of the appellant warranted
under the circumstance, pursuant to paragraph (2) of Article 2208 of the Civil Code of the
Philippines.22
In the end, the Court of Appeals decreed:
WHEREFORE, the instant appeal is hereby GRANTED. Accordingly, the assailed decision of
the Regional Trial Court of Makati City, Branch 66, is hereby REVERSED and SET ASIDE. CCC
Insurance Corporation is hereby ordered to pay KAWASAKI the following:
1. The amount of ₱3,103,803.90 representing its liability to Kawasaki Steel Corporation
under Surety Bond No. B-88/11191, plus legal interest at the rate of 12% per annum
computed from 15 September 1989, until fully paid;
2. The amount of ₱2,069,202.80 representing its liability to Kawasaki Steel Corporation
under Performance Bond No. B-88/11193, plus legal interest at the rate of 12% per
annum computed from 15 September 1989, until fully paid; and
3. 15% of the total amount due as and for attorney's fees. 23 In its Resolution dated
November 14, 2002, the Court of Appeals denied the Motion for Reconsideration of
CCCIC. However, in the same Resolution, the appellate court partially granted the Third-
Party Complaint of CCCIC by holding Mañacop liable under the Indemnity Agreements he
executed in favor of the insurance company, while declaring the RTC was without
jurisdiction over FFMCCI due to invalid service of summons. The Court of Appeals
ultimately resolved:
WHEREFORE, judgment is hereby rendered in favor of third-party plaintiff CCC Insurance
Corporation and against third-party defendant Florante F. Mañacop, ordering the latter to
indemnify the former the total amount paid by the former to Kawasaki Steel Corporation
representing CCC Insurance Corporation's liabilities under Surety Bond No. B-88/11191
and Performance Bond No. B88/11193 and to pay CCC Insurance Corporation 25% of the
total amount due, as and for attorney's fees. 24
In the instant Petition for Review on Certiorari, CCCIC assails the aforementioned Decision
and Resolution of the Court of Appeals on six grounds, viz.:
A.
THE COURT OF APPEALS, CONTRARY TO LAW, FAILED TO CONSIDER
THE TRUE NATURE OF THE TRANSACTION BETWEEN THE PARTIES
AND THE TRUE NATURE OF A COUNTER-GUARANTEE.
B.
THE COURT OF APPEALS, CONTRARY TO LAW, FAILED TO APPRECIATE
THE APPLICABILITY OF ARTICLE 2079 OF THE CIVIL CODE, WHICH
PROVIDES THAT AN EXTENSION GRANTED TO THE DEBTOR BY THE
CREDITOR WITHOUT THE CONSENT OF THE GUARANTOR
EXTINGUISHES THE GUARANTY.
C.
THE COURT OF APPEALS, CONTRARY TO LAW, ERRONEOUSLY FAILED
TO CONSIDER THE FACT THAT KAWASAKI AND FFMCCI HAVE
NOVATED THEIR ORIGINAL AGREEMENT
WITHOUT THE KNOWLEDGE AND CONSENT OF CCCIC, THEREBY
RELEASING THE LATTER FROM ANY OBLIGATION UNDER THE BONDS
IT ISSUED.
D.
THE COURT OF APPEALS, CONTRARY TO LAW, ERRONEOUSLY
RENDERED CCCIC LIABLE TO PAY THE FULL AMOUNT OF THE SURETY
AND PERFORMANCE BONDS DESPITE THE FACT THAT FFMCCI WAS
ABLE TO PARTIALLY EXECUTE ITS PORTION OF THE WORK AND THAT
KAWASAKI HAD BEEN FULLY COMPENSATED FOR TAKING OVER THE
UNFINISHED PORTION.
E.
 THE COURT OF APPEALS, CONTRARY TO LAW, ERRONEOUSLY
AWARDED ATTORNEY'S FEES TO KAWASAKI UNDER PARAGRAPH 2 OF
ARTICLE 2208 OF THE CIVIL CODE.
F.
THE COURT OF APPEALS, CONTRARY TO LAW, ERRONEOUSLY RULED
THAT THER WAS NO VALID SERVICE OF SUMMONS UPON FFMCCI. 25
CCCIC avers that its liabilities under the Surety and Performance Bonds are directly linked
with the obligation of the Kawasaki-FFMCCI Consortium to finish the Project for the
Republic, so that its liability as surety of FFMCCI will only arise if the Republic made a
claim on the PCIB Letter of Credit furnished by Kawasaki, on behalf of the Consortium.
Since the Republic has not exercised its right against said Letter of Credit, Kawasaki does
not have a cause of action against CCCIC.
CCCIC also maintains that its obligations under the Surety and Performance Bonds had
been extinguished when (a) the Republic extended the completion period for the Project
upon the request of Kawasaki but without the knowledge or consent of CCCIC, based on
Article 2079 of the Civil Code; and (b) when Kawasaki and FFMCCI executed the
Agreement dated August 24, 1989, without the consent of CCCIC, there being a novation
of the Consortium Agreement.
CCCIC further argues that when Kawasaki, under the Agreement dated August 24, 1989,
voluntarily took over the Transferred Portion of Work from FFMCCI, it resulted in the
reduction of revenue of FFMCCI on which CCCIC relied upon as a source of
indemnification. CCCIC additionally posits that Kawasaki already received compensation
for doing the Transferred Portion of Work, so the Court of Appeals had no basis for still
ordering Kawasaki to pay the full value of the Surety and Performance Bonds, plus
interest.
Moreover, CCCIC contends that the Court of Appeals erred in awarding attorney's fees in
favor of Kawasaki based on paragraph 2 of Article 2208 of the Civil Code as it is not a
sound policy to place a penalty on the right to litigate.
Lastly, CCCIC insists that there was proper service of summons upon FFMCCI, through one
of its directors, as authorized by the Rules of Court.
The Petition is partly meritorious.
The liability of CCCIC under the
Surety and Performance Bonds is
dependent on the fulfillment and/or
non-fulfillment of the obligation of
FFMCCI to KAWASAKI under the
Consortium Agreement.
The statutory definition of suretyship is found in Article 204 7 of the Civil Code, thus:
Art. 2047. By guaranty a person, called the guarantor, binds himself to the creditor to
fulfill the obligation of the principal debtor in case the latter should fail to do so.
If a person binds himself solidarily with the principal debtor, the provisions of Section 4,
Chapter 3, Title I of this Book shall be observed. In such case the contract is called a
suretyship. (Emphasis supplied.)
Jurisprudence also defines a contract of suretyship as "an agreement where a party called
the surety guarantees the performance by another party called the principal or obligor of
an obligation or undertaking in favor of a third person called the obligee. Specifically,
suretyship is a contractual relation resulting from an agreement whereby one person, the
surety, engages to be answerable for the debt, default or miscarriage of another, known
as the principal." 26 The Court expounds that "a surety's liability is joint and several, limited
to the amount of the bond, and determined strictly by the terms of contract of suretyship
in relation to the principal contract between the obligor and the obligee. It bears
stressing, however, that although the contract of suretyship is secondary to the principal
contract, the surety's liability to the obligee is nevertheless direct, primary, and
absolute."27
At the outset, the Court ascertains that there are two principal contracts in this case: (1)
the Consortium Agreement wherein Kawasaki and FFMCCI agreed to jointly enter into a
contract with the Republic for the Project, each assuming the performance of specific
scopes of work in said Project; and (2) the Construction Contract whereby the Republic
awards the Project to the Kawasaki-FFMCCI Consortium. While there is a connection
between these two contracts, they are each distinguishable from and enforceable
independently of one another: the first governs the rights and obligations between
Kawasaki and FFMCCI, while the second covers contractual relations between the
Republic and the Kawasaki-FFMCCI Consortium. The Surety and Performance Bonds from
CCCIC guaranteed the performance by FFMCCI of its obligations under the Consortium
Agreement; whereas the Letter of Credit from PCIB warranted the completion of the
Project by the Kawasaki FFMCCI Consortium. At the crux of the instant controversy are the
Surety and Performance Bonds issued by CCCIC in relation to the Consortium Agreement.
FFMCCI secured the Surety and Performance Bonds from CCCIC in compliance with Article
10 of the Consortium Agreement which provided:
ARTICLE 10 - BONDS
10.1 The CONSORTIUM LEADER [Kawasaki] shall arrange, at [its] own cost, all necessary
bonds or guarantees as required under the CONTRACT on behalf of the CONSORTIUM.
[FFMCCI] shall, at its own cost, furnish the CONSORTIUM LEADER [Kawasaki] with a
suitable counter guarantees of its advance payment under the CONTRACT and the
performance of its PORTION OF WORK in the amount of fifteen (15%) percent (in the case
of the repayment guarantee for the advance) and ten (10%) percent (in the case of the
performance guarantee) of the price of its PORTION OF THE WORK.
10.2 If the EMPLOYER [Republic] exercises its right on the bonds or guarantees furnished
by the CONSORTIUM LEADER, the PARTIES shall decide the respective responsibilities
according to the provisions of this AGREEMENT and the necessary reimbursement or
compensation shall be made also according to the provisions of this AGREEMENT.
Pertinent portions of Surety Bond No. B-88/11191 read:
SURETY BOND
KNOW ALL MEN BY THESE PRESENTS:
That we, F.F. MANACOP CONSTRUCTION CO., INC., x xx, as principal,
and CCC Insurance Corporation, x x x, as SURETY, are held and firmly
bound unto KAWASAKI STEEL CORPORATION, hereinafter referred to
as the OBLIGEE: in the sum of PESOS: THREE MILLION ONE HUNDRED
THREE THOUSAND EIGHT HUNDRED THREE & 90/100 ONLY
(₱3,103,803.90), Philippine currency, for the payment of which, well
and truly to be made, we bind ourselves, our heirs, executors,
administrators, successors and assigns, jointly and severally, firmly
bound from notice of acceptance, by these presents.
THE CONDITIONS OF THIS OBLIGATION ARE AS FOLLOWS:
TO FULLY AND FAITHFULLY GUARANTEE THE REPAYMENT OF THE
DOWNPAYMENT MADE BY THE PRINCIPAL TO THE OBLIGEE IN
CONNECTION WITH THE CONSTRUCTION OF THE PANGASINAN
FISHING PORT NETWORK PROJECT AT PANGASINAN; AND PROVIDED
HOWEVER, THAT THE LIABILITY OF THE HEREIN SURETY SHALL IN NO
CASE EXCEED THE AMOUNT OF PESOS: THREE MILLION ONE
HUNDRED THREE THOUSAND EIGHT HUNDRED THREE & 90/100
ONLY (₱3,103,803.90) PHILIPPINE CURRENCY.
xxxx
WHEREAS, the said OBLIGEE requires said Principal to give a good
and sufficient bond in the above-stated sum to secure the full and
faithful performance on his part of said UNDERTAKING. NOW,
THEREFORE, if the above bounden principal shall in all respects duly
and fully observe and perform all and singular the aforesaid
covenants, conditions and agreements to the true intent and
meaning thereof, then this obligation shall be null and void,
otherwise to remain in full force and effect.
The liability of the Surety under this bond shall expire on October 26, 1989 and the Surety
does not assume responsibility for any liability incurred or created after said date. Any
claims against this bond must be presented to the Surety in writing not later than ten (10)
days after said expiry date; otherwise, failure to do so shall forthwith release the Surety
from all liabilities under this bond and shall be a bar to any court action against it and
which right to sue is hereby waived by the Obligee after the lapse of said period often (10)
days above cited.29
(Emphases supplied.)
Performance Bond No. B-88111193 contains the following terms and conditions:
PERFORMANCE BOND
KNOW ALL MEN BY THESE PRESENTS:
 That we, F.F. MANACOP CONSTRUCTION CO., INC., xx x, as principal,
and CCC Insurance Corporation, x x x, as SURETY, are held and firmly
bound unto KAWASAKI STEEL CORPORATION, hereinafter referred to
as the OBLIGEE: in the sum of PESOS: TWO MILLION SIXTY-NINE
THOUSAND TWO HUNDRED TWO & 60/100 ONLY (₱2,069,202.60),
Philippine currency, for the payment of which, well and truly to be
made, we bind ourselves, our heirs, executors, administrators,
successors and assigns, jointly and severally, firmly bound from
notice of acceptance, by these presents.
THE CONDITIONS OF THIS OBLIGATION ARE AS FOLLOWS:
TO GUARANTEE THE FULL AND FAITHFUL PERFORMANCE OF THE
PRINCIPAL OF ITS OBLIGATION IN CONNECTION WITH THE PROJECT
FOR THE CONSTRUCTION OF PANGASINAN FISHING PORT NETWORK
LOCATED AT PANGASINAN IN ACCORDANCE WITH THE PLANS AND
SPECIFICATION OF THE CONTRACT, AND; PROVIDED HOWEVER, THAT
THE LIABILITY OF THE HEREIN SURETY SHALL IN NO CASE EXCEED THE
AMOUNT OF PESOS: TWO MILLION SIXTY-NINE THOUSAND TWO
HUNDRED TWO & 60/100 ONLY (₱2,069,202.60) PHILIPPINE
CURRENCY.
xxxx
WHEREAS, the said OBLIGEE requires said Principal to give a good
and sufficient bond in the above-stated sum to secure the full and
faithful performance on his part of said UNDERTAKING.
NOW, THEREFORE, if the above bounden principal shall in all respects
duly and fully observe and perform all and singular the aforesaid
covenants, conditions and agreements to the true intent and
meaning thereof, then this obligation shall be null and void,
otherwise to remain in full force and effect.
The liability of the Surety under this bond shall expire on October 27, 1989 and the Surety
does not assume responsibility for any liability incurred or created after said date. Any
claims against this bond must be presented to the Surety in writing not later than ten (10)
days after said expiry date; otherwise, failure to do so shall forthwith release the Surety
from all liabilities under this bond and shall be a bar to any court action against it and
which right to sue is hereby waived by the Obligee after the lapse of said period of ten
( 10) days above cited. 30
(Emphasis supplied.)
The Court reiterates that a surety's liability is determined strictly by the terms of contract
of suretyship, in relation to the principal contract between the obligor and the obligee.
Hence, the Court looks at the Surety and Performance Bonds, in relation to the
Consortium Agreement.
According to the principle of relativity of contracts in Article 1311 of the Civil Code, 31 a
contract takes effect only between the parties, their assigns, and heirs; except when the
contract contains a stipulation in favor of a third person, which gives said person the right
to demand fulfillment of said stipulation. In this case, the Surety and Performance Bonds
are enforceable by and against the parties FFMCCI (the obligor) and CCCIC (the surety), as
well as the third person Kawasaki (the obligee) in whose favor said bonds had been
explicitly constituted; while the related Consortium Agreement binds the parties Kawasaki
and FFMCCI. Since the Republic is neither a party to the Surety and Performance Bonds
nor the Consortium Agreement, any action or omission on its part has no effect on the
liability of CCCIC under said bonds.
The Surety and Performance Bonds state that their purpose was "to secure the full and
faithful performance on [FFMCCI' s] part of said undertaking," particularly, the repayment
by FFMCCI of the downpayment advanced to it by Kawasaki (in the case of the Surety
Bond) and the full and faithful performance by FFMCCI of its portion of work in the Project
(in the case of the Performance Bond).These are the only undertakings expressly
guaranteed by the bonds, the fulfillment of which by FFMCCI would release CCCIC from its
obligations as surety; or conversely, the non-performance of which would give rise to the
liabilities of CCCIC as a surety.
The Surety and Performance Bonds do not contain any condition that CCCIC would be
liable only if, in addition to the default on its undertakings by FFMCCI, the Republic also
made a claim against the PCIB Letter of Credit furnished by Kawasaki, on behalf of the
Kawasaki-FFMCCI Consortium. The Court agrees with the observation of the Court of
Appeals that "it is not provided, neither in the Consortium Agreement nor in the subject
bonds themselves that before KAWASAKI may proceed against the bonds posted by
[FFMCCI] and CCCIC, the Philippine government as employer must first exercise its rights
against the bond issued in its favor by the consortium." 32
The Court cannot give any additional meaning to the plain language of the undertakings in
the Surety and Performance Bonds. The extent of a surety's liability is determined by the
language of the suretyship contract or bond itself. Article 1370 of the Civil Code provides
that "[i]f the terms of a contract are clear and leave no doubt upon the intention of the
contracting parties, the literal meaning of its stipulations shall control. " 33
There is no basis for the interpretation by CCCIC of the word "counter-guarantee" in
Article 10 of the Consortium Agreement. The first paragraph of Article 10 of the
Consortium Agreement provides that Kawasaki, as the Consortium Leader, shall arrange,
at its own cost but on behalf of the Kawasaki-FFMCCI Consortium, for all necessary bonds
and guarantees under the Construction Contract with the Republic. The same paragraph
requires, in turn, that FFMCCI, at its own cost, to furnish Kawasaki with suitable counter-
guarantees for the repayment by FFMCCI for the advance payment from Kawasaki and
performance by FFMCCI of its portion of work in the Project. Clearly, the "guarantees" and
"counter-guarantees" were securities for the fulfillment of the obligations of the
Kawasaki-FFMCCI Consortium to the Republic under the Construction Contract and of
FFMCCI to the Consortium Leader Kawasaki under the Consortium Agreement,
respectively. The CCCIC Surety and Performance Bonds were not counter-guarantees to
the PCIB Letter of Credit. In fact, in the event that the Republic did make a claim on the
PCIB Letter of Credit, the second paragraph of Article 10 of the Consortium Agreement
stipulates
that Kawasaki and FFMCCI would still have to determine their respective
responsibilities, reimbursements, and/or compensations according to the provisions of
the Consortium Agreement, instead of simply allowing Kawasaki to recover on the
"counter-guarantees" of FFMCCI.
It is not disputed that FFMCCI, due to financial difficulties, was unable to repay the
advance payment it received from Kawasaki and to finish its scope of work in the Project,
thus, FFMCCI defaulted on its obligations to Kawasaki. Given the default of FFMCCI, CCCIC
as surety
became directly, primarily, and absolutely liable to Kawasaki as the obligee under the
Surety and Performance Bonds. The following pronouncements of the Court in Asset
Builders Corporation v. Stronghold Insurance Company, Inc. 34 are relevant herein:
Respondent, along with its principal, Lucky Star, bound itself to the petitioner when it
executed in its favor surety and performance bonds. The contents of the said contracts
clearly establish that the parties entered into a surety agreement as defined under Article
2047 of the New Civil Code. x x x.
xxxx
As provided in Article 204 7, the surety undertakes to be bound solidarily with the
principal obligor. That undertaking makes a surety agreement an ancillary contract as it
presupposes the existence of a principal contract. Although the contract of a surety is in
essence secondary only to a valid principal obligation, the surety becomes liable for the
debt or duty of another although it possesses no direct or personal interest over the
obligations nor does it receive any benefit therefrom. Let it be stressed that
notwithstanding the fact that the surety contract is secondary to the principal obligation,
the surety assumes liability as a regular party to the undertaking.
Stronghold Insurance Company, Inc. v. Republic-Asahi Glass Corporation, reiterating the
ruling in Garcia v. Court of Appeals, expounds on the nature of the surety's liability:
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.
Suretyship, in essence, contains two types of relationship - the principal relationship
between the obligee (petitioner) and the obligor (Lucky Star), and the accessory surety
relationship between the principal (Lucky Star) and the surety (respondent). In this
arrangement, the obligee accepts the surety's solidary undertaking to pay if the obligor
does not pay. Such acceptance, however, does not change in any material way the
obligee's relationship with the principal obligor. Neither does it make the surety an active
party to the principal obligee-obligor relationship. Thus, the acceptance does not give the
surety the right to intervene in the principal contract. The surety's role arises only upon
the obligor's default, at which time, it can be directly held liable by the obligee for
payment as a solidary obligor.
In the case at bench, when Lucky Star failed to finish the drilling work within the agreed
time frame despite petitioner's demand for completion, it was already in delay. Due to
this default, Lucky Star's liability attached and, as a necessary consequence, respondent's
liability under the surety agreement arose. Undeniably, when Lucky Star reneged on its
undertaking with the petitioner and further failed to return the ₱575,000.00
downpayment that was already advanced to it, respondent, as surety, became solidarily
bound with Lucky Star for the repayment of the said amount to petitioner. The clause,
"this bond is callable on demand," strongly speaks of respondent's primary and direct
responsibility to the petitioner.
Accordingly, after liability has attached to the principal, the obligee or, in this case, the
petitioner, can exercise the right to proceed against Lucky Star or respondent or both. x x
x. (Emphases supplied, citations omitted.)
Article 2079 of the New Civil Code is not applicable to the instant case.
To free itself from its liabilities under the Surety and Performance Bonds, CCCIC cites
Article 2079 of the Civil Code, which reads: Art. 2079. An extension granted to the debtor
by the creditor without the consent of the guarantor extinguishes the guaranty. The mere
failure on the part of the creditor to demand payment after the debt has become due
does not of itself constitute any extension of time referred to herein.
The aforequoted provision clearly speaks of an extension for the payment of a debt
granted by the creditor to a debtor without the consent of the surety. The theory behind
Article 2079 was further explained by the Court in Trade and Investment Development
Corporation of the Philippines (Formerly Philippine Export and Foreign Loan Guarantee
Corporation) v. Asia Paces Corporation, 35 thus: Comparing a surety's obligations with that
of a guarantor, the Court, in the case of Palmares v. CA, 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.:
A surety is an insurer of the debt, whereas a guarantor is an insurer of the solvency of the
debtor. 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.
xxx.
Despite these distinctions, the Court in Cochingyan, Jr. v. R&B Surety & Insurance Co., Inc.,
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 therefore was explained by the Court as follows:
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.
Applying these principles, the Court finds that the payment extensions granted by Banque
Indosuez and PCI Capital to TIDCORP under the Restructuring Agreement did riot 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 ASP AC, 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 ASP AC 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 (ASP AC) default. In other words, the Letters of Guarantee secured ASPAC's
loan agreements to the banks. Under this arrangement, TIDCORP therefore acted as a
guarantor, with ASP AC 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." 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 ASP
A C'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 (ASP AC) 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, TIDCORP's claim is hereby granted.
Similarly, there are two sets of transactions in the present case covered by two different
contracts: the Consortium Agreement between Kawasaki and FFMCCI and the
Construction Contract between the Republic and the Kawasaki-FFMCCI Consortium. The
Surety and Performance Bonds guaranteed the performance of the obligations of FFMCCI
to Kawasaki under the Consortium Agreement. The Republic was not a party in either the
Surety and Performance Bonds or the Consortium Agreement. Under these
circumstances, there was no creditor-debtor relationship between the Republic and
FFMCCI and Article 2079 of the Civil Code did not apply. The extension granted by the
Republic to Kawasaki modified the deadline for the completion of the Project under the
Construction Contract, but had no effect on the obligations of FFMCCI to Kawasaki under
the Consortium Agreement, much less, on the liabilities of CCCIC under the
Surety and Performance Bonds.
CCCIC failed to discharge the
burden of proving the novation of
the Consortium Agreement which
would have extinguished its
obligations under the Surety and
Performance Bonds.
CCCIC argues that it was released from its obligations as surety under the Surety and
Performance Bonds because of the novation of the Consortium Agreement by the
subsequent Agreement dated August 24, 1989 executed between Kawasaki and FFMCCI,
without the consent of CCCIC.
The Court first notes that the default of FFMCCI preceded the execution of the Agreement
on August 24, 1989 which purportedly novated the Consortium Agreement and, in effect,
extinguished the Surety and Performance Bonds. As early as his letter dated July 20, 1989,
Mañacop, FFMCCI President, already admitted the inability of FFMCCI to continue with its
portion of work in the Project and authorized Kawasaki to continue the same. It was
precisely because FFMCCI defaulted on its obligations under the Consortium Agreement
that necessitated the execution of the Agreement dated August 24, 1989 between
Kawasaki and FFMCCI, and this is evident from one of the "whereas" clauses in the said
Agreement which says that "due to some financial reverses[, FFMCCI] can no longer do its
portion of the work under the Contract." The liabilities of CCCIC as surety to Kawasaki
under the Surety and Performance Bonds had already attached upon the default of
FFMCCI while the said bonds were still in effect and prior to the alleged novation of the
Consortium Agreement by the Agreement dated August 24, 1989 which resulted in the
extinguishment of the bonds.
The Court expounded on the concept of novation in Reyes v. BPI Family Savings Bank,
Inc.36
Novation is defined as the extinguishment of an obligation by the substitution or change
of the obligation by a subsequent one which terminates the first, either by changing the
object or principal conditions, or by substituting the person of the debtor, or subrogating a
third person in the rights of the creditor.
Article 1292 of the Civil Code on novation further provides:
Article 1292. In order that an obligation may be extinguished by another which substitute
the same, it is imperative that it be so declared in unequivocal terms, or that the old and
the new obligations be on every point incompatible with each other.
The cancellation of the old obligation by the new one is a necessary element of novation
which may be effected either expressly or impliedly. While there is really no hard and fast
rule to determine what might constitute sufficient change resulting in novation, the
touchstone, however, is irreconcilable incompatibility between the old and the new
obligations.
In Garcia, Jr. v. Court of Appeals, we held that:
In every novation there are four essential requisites: (1) a previous valid obligation; (2) the
agreement of all the parties to the new contract; (3) the extinguishment of the old
contract; and (4) validity of the new one. There must be consent of all the parties to the
substitution, resulting in the extinction of the old obligation and the creation of a valid
new one .xx x. (Citations omitted.)
It is well-settled that novation is never presumed - novatio non praesumitur. As the party
alleging novation, the onus of showing clearly and unequivocally that novation had indeed
taken place rests on CCCIC.The Court laid down guidelines in establishing novation, viz.:
Novation is never presumed, and the animus novandi, whether totally or partially, must
appear by express agreement of the parties, or by their acts that are too clear and
unequivocal to be mistaken.
The extinguishment of the old obligation by the new one is a necessary element of
novation which may be effected either expressly or impliedly. The term "expressly" means
that the contracting parties incontrovertibly disclose that their object in executing the
new contract is to extinguish the old one. Upon the other hand, no specific form is
required for an implied novation, and all that is prescribed by law would be an
incompatibility between the two contracts. While there is really no hard and fast rule to
determine what might constitute to be a sufficient change that can bring about novation,
the touchstone for contrariety,
however, would be an irreconcilable incompatibility between the old and the new
obligations.
There are two ways which could indicate, in fine, the presence of novation and thereby
produce the effect of extinguishing an obligation by another which substitutes the same.
The first is when novation has been explicitly stated and declared in unequivocal terms.
The second is when the old and the new obligations are incompatible on every point. The
test of incompatibility is whether or not the two obligations can stand together, each one
having its independent existence. If they cannot, they are incompatible and the latter
obligation novates the first. Corollarily, changes that breed incompatibility must be
essential in nature and not merely accidental. The incompatibility must take place in any
of the essential elements of the obligation, such as its object, cause or principal conditions
thereof; otherwise, the change would be merely modificatory in nature and insufficient to
extinguish the original obligation.38 (Citations omitted.)
CCCIC failed to discharge the burden of proving novation of the Consortium Agreement by
the Agreement dated August 24, 1989. The Court failed to see the presence of the
essential requisites for a novation of contract, specifically, the irreconcilable
incompatibility between the old and new contracts. Indeed, Kawasaki and FFMCCI
executed the Agreement dated August 24, 1989 pursuant to Article 8.3 of the Consortium
Agreement:
8.3 If, for any reason, any PARTY should fail in the performance of its PORTION OF WORK
or contractual obligations and if such defaulting PAR TY refuses to cure or makes no
remedial action, without presenting any valid cause, within fifteen (15) days following
demand of rectification by registered letter sent by the other PARTY, the defaulting
PARTY's PORTION OF WORK may be performed at the account and responsibility of the
defaulting PARTY, by the non-defaulting PARTY or by any other contractor selected by the
non-defaulting PARTY and approved by the EMPLOYER. In such event, the defaulting
PARTY or its representative shall, in no way, interfere with the performance of the
CONTRACT or impede the progress thereof, on any ground, and shall allow such
performing PARTY or the said contractor to use the materials and equipment of such
defaulting PARTY, for the purpose of remedial action.
FFMCCI was unable to finish its portion of work in the Project because of business
reverses, and by the Agreement dated August 24, 1989, Kawasaki assumed the
Transferred Portion of Work from FFMCCI and was accorded the right to receive the
profits and benefits corresponding to said portion. Although the Agreement dated August
24, 1989 resulted in the reallocation of the respective portions of work of Kawasaki and
FFMCCI, as well as their corresponding shares in the profits and benefits under the
Consortium Agreement, such changes were not incompatible with the object, cause, and
principal conditions of the Consortium Agreement. Consequently, the changes under the
Agreement dated August 24, 1989 were only modificatory and did not extinguish the
original obligations under the Consortium Agreement.
Even granting that there is novation, the Court in Stronghold Insurance Company,
Incorporated v. Tokyu Construction Company, Ltd., 39 held that to release the surety, the
material change in the principal contract must make the obligation of the surety more
onerous. The Court ratiocinated in Stronghold as follows:
Petitioner's liability was not affected by the revision of the contract price, scope of work,
and contract schedule. Neither was it extinguished because of the issuance of new bonds
procured from Tico.
As early as February 10, 1997, respondent already sent a letter to Gabriel informing the
latter of the delay incurred in the performance of the work, and of the former's intention
to terminate the subcontract agreement to prevent further losses. Apparently, Gabriel
had already been in default even prior to the aforesaid letter; and demands had been
previously made but to no avail. By reason of said default, Gabriel's liability had arisen; as
a consequence, so also did the liability of petitioner as a surety arise.
xxxx
By the language of the bonds issued by petitioner, it guaranteed the full and faithful
compliance by Gabriel of its obligations in the construction of the SDS and STP specifically
set forth in the subcontract agreement, and the repayment of the 15% advance payment
given by respondent. These guarantees made by petitioner gave respondent the right to
proceed against the former following Gabriel's non-compliance with her obligation.
Confusion, however, transpired when Gabriel and respondent agreed, on February 26,
1997, to reduce the scope of work and, consequently, the contract price. Petitioner
viewed such revision as novation of the original subcontract agreement; and since no
notice was given to it as a surety, it resulted in the extinguishment of its obligation.
We wish to stress herein the nature of suretyship, which actually involves two types of
relationship --the underlying principal relationship between the creditor (respondent) and
the debtor (Gabriel), and the accessory surety relationship between the principal (Gabriel)
and the surety (petitioner). The creditor accepts the surety's solidary undertaking to pay if
the debtor does not pay. Such acceptance, however, does not change in any material way
the creditor's relationship with the principal debtor nor does it make the surety an active
party to the principal creditor-debtor relationship. In other words, the acceptance does
not give the surety the right to intervene in the principal contract. The surety's role arises
only upon the debtor's default, at which time, it can be directly held liable by the creditor
for payment as a solidary obliger.
The surety is considered in law as possessed of the identity of the debtor in relation to
whatever is adjudged touching upon the obligation of the latter. Their liabilities are so
interwoven as to be inseparable. Although the contract of a surety is, in essence,
secondary only to a valid principal
obligation, the surety's 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.
Indeed, a surety is released from its obligation when there is a material alteration of the
principal contract in connection with which the bond is given, such as a change which
imposes a new obligation on the promising party, or which takes away some obligation
already imposed, or one which changes the legal effect of the original contract and not
merely its form. However, a surety is not released by a change in the contract, which does
not have the effect of making its obligation more onerous.
In the instant case, the revision of the subcontract agreement did not in any way make the
obligations of both the principal and the surety more onerous. To be sure, petitioner
never assumed added obligations, nor were there any additional obligations imposed, due
to the modification of the terms of the contract. Failure to receive any notice of such
change did
not, therefore, exonerate petitioner from its liabilities as surety. (Emphasis supplied,
citations omitted.)
There is no showing herein that the obligations of CCCIC as surety had become more
onerous with the execution of the Agreement dated August 24, 1989 between Kawasaki
and FFMCCI. The Agreement dated August 24, 1989 did not alter in any way the original
coverage and the terms and conditions of the Surety and Performance Bonds of CCCIC. If
truth be told, the Agreement dated August 24, 1989 made it more onerous for Kawasaki
which had to take over the Transferred Portion of Work from FFMCCI.
That Kawasaki was to receive the profits and benefits corresponding to the Transferred
Portion of Work would not extinguish the liabilities of CCCIC under the Surety and
Performance Bonds. The right of Kawasaki to the profits and benefits corresponding to the
Transferred Portion of Work was granted under the Agreement dated August 24, 1989
because Kawasaki was the one that would actually perform the remaining portion of work
and complete the Project and should be duly compensated for the same. It is separate and
distinct from the right of Kawasaki to demand payment of the amounts guaranteed by
CCCIC as surety upon the default of FFMCCI on its undertakings under the Surety and
Performance Bonds. CCCIC cannot standby passively and be benefitted by payments made
by the Republic, as owner of the Project, to Kawasaki, as contractor, for the Transferred
Portion of Work. The only way CCCIC can extinguish its liabilities as surety, which
already attached upon the default of FFMCCI, is to make its own payments to Kawasaki of
the amounts guaranteed under the Surety and Performance Bonds.
Equally without merit is the averment of CCCIC that by executing the Agreement dated
August 24, 1989, which gave Kawasaki the right to the profits and benefits corresponding
to the Transferred Portion of Work, Kawasaki and FFMCCI colluded or connived to deprive
CCCIC of its source of indemnification. Other than its allegation, CCCIC failed to present
any evidence of collusion or connivance between Kawasaki and FFMCCI to intentionally
prejudice CCCIC. The Court reiterates that the execution of the Agreement dated August
24, 1989 was actually authorized under Article 8.3 of the Consortium Agreement.
Kawasaki was given the right to the profits and benefits corresponding to the Transferred
Portion of Work because it would be the one to perform the same. It would be the height
of inequity to allow FFMCCI to continue collecting payments for work it was not able to
do. Besides, there is utter lack of basis for the claim of CCCIC that without the
compensation for the Transferred Portion of Work, FFMCCI would have no means to
indemnify CCCIC for any payments the latter would have to make to Kawasaki under the
Surety and Performance Bonds. As the succeeding discussion will show, it is premature for
CCCIC to question the capacity of FFMCCI to indemnify it.
CCCIC must first pay its liabilities to
Kawasaki under the Surety and
Performance Bonds before it could
be indemnified and subrogated to the
rights of Kawasaki against FFMCCI.
The rights of a guarantor who pays for the debt of the debtor are governed by the
following provisions of the Civil Code:
Art. 2066. The guarantor who pays for a debtor must be indemnified by the latter.
The indemnity comprises:
(1) The total amount of the debt;
(2) The legal interests thereon from the time the payment was made known to the debtor,
even though it did not earn interest for the creditor;
(3) The expenses incurred by the guarantor after having notified the debtor that payment
had been demanded of him;
(4) Damages, if they are due. Art. 2067. The guarantor who pays is subrogated by virtue
thereof to all the rights which the creditor had against the debtor.
If the guarantor has compromised with the creditor, he cannot demand of the debtor
more than what he has really paid.
Although the foregoing provisions only speak of a guarantor, they also apply to a surety,
as the Court held in Escano v. Ortigas, Jr. 40
What is the source of this right to full reimbursement by the surety? We find the right
under Article 2066 of the Civil Code, which assures that "[t]he guarantor who pays for a
debtor must be indemnified by the latter," such indemnity comprising of, among others,
"the total amount of the debt." Further, Article 2067 of the Civil Code likewise establishes
that "[t]he guarantor who pays is subrogated by virtue thereof to all the rights which the
creditor had against the debtor."
Articles 2066 and 2067 explicitly pertain to guarantors, and one might argue that the
provisions should not extend to sureties, especially in light of the qualifier in Article 2047
that the provisions on joint and several obligations should apply to sureties. We reject
that argument, and instead adopt Dr. Tolentino's observation that "[t]he reference in the
second paragraph of [Article 2047] to the provisions of Section 4, Chapter 3, Title I, Book
IV, on solidary or several obligations, however, does not mean that suretyship is
withdrawn from the applicable provisions governing guaranty." For if that were not the
implication, there would be no material difference between the surety as defined under
Article 204 7 and the joint and several debtors, for both classes of obligors would be
governed by exactly the same rules and limitations.
Accordingly, the rights to indemnification and subrogation as established and granted to
the guarantor by Articles 2066 and 2067 extend as well to sureties as defined under
Article 2047. x x x. (Citations omitted.)
Pursuant to Articles 2066 and 2067, the rights of CCCIC as surety to indemnification and
subrogation will arise only after it has paid its obligations to Kawasaki as the debtor-
obligee. In Autocorp Group v. Intra Strata Assurance Corporation, 41 the Court ruled that:
The benefit of subrogation, an extinctive subjective novation by a change of creditor,
which "transfers to the person subrogated, the credit and all the rights thereto
appertaining, either against the debtor or against third persons," is granted by the Article
2067 of the Civil Code only to the "guarantor (or surety) who pays." (Emphases supplied,
citations omitted.)
In the present case, CCCIC has yet to pay Kawasaki.
While summons was validly served
upon FFMCCI, the Third-Party
Complaint of CCCJC against
FFMCCI is dismissed on the ground
of lack of cause of action.
The Court disagrees with the ruling of the Court of Appeals that there was no proper
service of summons upon FFMCCI. The appellate court overlooked the fact that the
service of summons on FFMCCI at its principal address at #86 West A venue, Quezon City
failed because FFMCCI had already vacated said premises without notifying anyone as to
where it transferred. For this reason, the RTC, upon the motion of CCCIC, issued an
Order42 dated September 4, 1991, directing the issuance and service of Alias Summons to
the individual directors of FFMCCI. Eventually, the Alias Summons was personally served
upon FFMCCI director Vicente Concepcion on September 25, 1991.43
Rule 14, Section 13 of the 1964 Rules of Court, which was then in force, allowed the
service of summons upon a director of a private domestic corporation:
Sec. 13. Service upon private domestic corporation or partnership. - If the defendant is a
corporation organized under the laws of the Philippines or a partnership duly registered,
service may be made on the president, manager, secretary, cashier, agent, or any of its
directors.
The aforementioned rule does not require that service on the private domestic
corporation be served at its principal office in order for the court to acquire jurisdiction
over the same. The Court, in Talsan Enterprises, Inc. vs. Baliwag Transit, lnc., 44 citing
Baltazar v. Court of Appeals,45 affirmed that:
[S]ervice on respondent's bus terminal at the address stated in the summons and not in its
main office in Baliwag do not render the service of summons invalid. 1âwphi1 In Artemio
Baltazar v. Court of Appeals, we held:
"The regular mode, in other words, of serving summons upon a private Philippine
Corporation is by personal service upon one of the officers of such corporation identified
in Section 13. Ordinarily, such personal service may be expected to be made at the
principal office of the corporation. Section 13, does not, however, impose such
requirement, and so personal service upon the corporation may be effected through
service upon, for instance, the president of the corporation at his office or residential
address." xx x.
In fine, the service of summons upon respondent Baliwag Transit is proper. Consequently,
the trial court validly acquired jurisdiction over respondent Baliwag. (Citation omitted.)
Hence, the personal service of the Alias Summons on an FFMCCI director was sufficient for
the RTC to acquire jurisdiction over FFMCCI itself.
Nevertheless, the Third-Party Complaint filed by CCCIC against FFMCCI and Mañacop must
be dismissed on the ground of lack of cause of action.
A cause of action is defined as the act or omission by which a party violates a right of
another. The essential elements of a cause of action are: (a) the existence of a legal right
in favor of the plaintiff; (b) a correlative legal duty of the defendant to respect such right;
and ( c) an act or omission by such defendant in violation of the right of the plaintiff with a
resulting injury or damage to the plaintiff for which the latter may maintain an action for
the recovery of relief from the defendant. 46
As discussed earlier, the rights to indemnification and subrogation of a surety only arise
upon its payment of the obligation to the obligee. In the case at bar, since CCCIC up to this
point refuses to acknowledge and pay its obligation to Kawasaki under the Surety and
Performance Bonds, it has not yet acquired the rights to seek indemnification from
FFMCCI and subrogation to Kawasaki as against FFMCCI. In the same vein, the
corresponding obligation of FFMCCI to indemnify CCCIC under the Indemnity Agreements
has yet to accrue. Thus far, there is no act or omission on the part of FFMCCI which
violated the right of CCCIC and for which CCCIC may seek relief from the courts. In the
absence of these elements, CCCIC has no cause of action against FFMCCI and/or FFMCCI
President Mañacop. Resultantly, the Third-Party Complaint of CCCIC should be dismissed.
There is no basis for awarding
attorney's fees in favor of Kawasaki.
In addition, the rate of legal interest
imposed shall conform with latest
jurisprudence.
Article 2208(2) of the Civil Code allows the award of attorney's fees "[w]hen the
defendant's act or omission has compelled the plaintiff to litigate with third persons or to
incur expenses to protect his interest[.]" In Servicewide Specialists, Incorporated v. Court
of Appeals,47 the Court declared that:
Article 2208 of the Civil Code allows attorney's fees to be awarded by a court when its
claimant is compelled to litigate with third persons or to incur expenses to protect his
interest by reason of an unjustified act or omission on the part of the party from whom it
is sought. To be sure, private respondents were forced to litigate to protect their rights
but as we have previously held: "where no sufficient showing of bad faith would be
reflected in a party's persistence in a case other than an erroneous conviction of the
righteousness of his cause, attorney's fee shall not be recovered as cost." (Citation
omitted.)
1) The Third-Party Complaint filed by CCC Insurance Corporation against F.F. Mañacop
Construction Company, Inc. and Mr. Florante F. Mañacop is DISMISSED on the ground of
lack of cause of action;
2) The award of attorney's fees in favor of Kawasaki Steel Corporation is DELETED; and
3) In addition to the amounts CCC Insurance Corporation is ordered to pay Kawasaki Steel
Corporation under Surety Bond No. B-88/11191 and Performance Bond No. B-88/11193,
CCC Insurance Corporation is further ORDERED to pay Kawasaki Steel Corporation legal
interest on said amounts at the rates of 12% per annum from September 15, 1989 to June
30, 2013 and 6% per annum from July 1, 2013 until full payment thereof.
SO ORDERED.

Bad faith has been defined as "a breach of a known duty through some motive of interest
or ill will. It must, however, be substantiated by evidence. Bad faith under the law cannot
be presumed, it must be established by clear and convincing evidence." 48 There is no
evidence in this case to show bad faith on the part of CCCIC. CCCIC, in refusing the claim of
Kawasaki, was merely acting based on its belief in the righteousness of its defense. Hence,
even though Kawasaki was compelled to litigate to enforce its claim against CCCIC, the
award of attorney's fees is not proper.

Finally, the Court, in Nacar v. Gallery Frames, 49 modified the guidelines in imposing
interests, taking into account Bangko Sentral ng Pilipinas-Monetary Board Resolution No.
796 dated May 16, 2013 and Circular No. 799, series of 2013, which fixed the legal rate at
6% per annum effective July 1, 2013. In the absence of stipulated interest in the present
case, the Court imposes upon the amounts covered by the Surety and Performance Bonds
the legal rate of 12% per annum from September 15, 1989, the date of demand, until June
30, 2013; and then the legal rate of6% per annum from July 1, 2013 until full payment of
the same.

WHEREFORE, premises considered, the instant Petition for Review on Certiorari is PARTLY
GRANTED. The Decision dated May 30, 2002 and Resolution dated November 14, 2002 of
the Court of Appeals are AFFIRMED with the following MODIFICATIONS: