Title Security Bank and Trust Company, Inc. vs. Cuenca, G.R. No.

138544, 3 October 2000

Ponente PANGANIBAN, J.:
Doctrine Being an onerous undertaking, a surety agreement is strictly construed against the
creditor, and every doubt is resolved in favor of the solidary debtor. The fundamental
rules of fair play require the creditor to obtain the consent of the surety to any material
alteration in the principal loan agreement, or at least to notify it thereof. Hence, petitioner
bank cannot hold herein respondent liable for loans obtained in excess of the amount or
beyond the period stipulated in the original agreement, absent any clear stipulation
showing that the latter waived his right to be notified thereof, or to give consent thereto.
This is especially true where, as in this case, respondent was no longer the principal
officer or major stockholder of the corporate debtor at the time the later obligations were
incurred. He was thus no longer in a position to compel the debtor to pay the creditor
and had no more reason to bind himself anew to the subsequent obligations.
Facts  Sta. Ines Melale (‘SIMC’) is a corporation engaged in logging operations, obtained a
credit line from Petitioner Security Bank (Bank) in the amount of Php 8 Million for their
additional business capital.
 The conditions of credit line are as follows:
1. As security for payment, execution of chattel mortgage over Sta Ines machineries
and equipment
2. As additional security, execution of Indemnity Agreement by Respondent Rodolfo
Cuenca in favor petitioner, and it was read as:

“‘Rodolfo M. Cuenca x x x hereby binds himself x x x jointly and severally

with the client (SIMC) in favor of the bank for the payment, upon demand and
without the benefit of excussion of whatever amount x x x the client may be
indebted to the bank x x x by virtue of aforesaid credit accommodation(s)
including the substitutions, renewals, extensions, increases, amendments,
conversions and revivals of the aforesaid credit accommodation(s) x xx .”

 SIMC made a first drawdown from its credit line with the Bank in the amount of Php
6 Million, and executed a promissory note.
 Due to difficulty in payment of monthly amortization due to loan obtained, SIMC
requested for reconstructure the payment in which the Bank agreed.
 SIMC defaulted in the payment of its restructured loan obligations

: Petitioner Respondent
the Indemnity Agreement was in the  
nature of a continuing surety
Lower Courts Ordered SIMC and Respondent Cuenca to pay the BANK jointly and severally.
Appellate Court Absolved Cuenca from the liability
Issue Whether or not the CA was correct in absolving Mr Cuenca from liability, that the Indemnity
Agreement is not continuing surety

SC Ruling The CA was correct.

The Indemnity Agreement is a continuing surety does not authorize the bank to extend
the scope of the principal obligation inordinately. 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.

To repeat, in the present case, the Indemnity Agreement was subject to the two
limitations of the credit accommodation: (1) that the obligation should not exceed ₱8
million, and (2) that the accommodation should expire not later than November 30, 1981.
Hence, it was a continuing surety only in regard to loans obtained on or before the
aforementioned expiry date and not exceeding the total of ₱8 million.

Accordingly, the surety of Cuenca secured only the first loan of ₱6.1 million obtained on
November 26, 1991. It did not secure the subsequent loans, purportedly under the 1980
credit accommodation, that were obtained in 1986. Certainly, he could not have
guaranteed the 1989 Loan Agreement, which was executed after November 30, 1981 and
which exceeded the stipulated P8 million ceiling.