3

COLITO T. PAJUYO vs. COURT OF APPEALS, GR. No. 146364, June 3, 2004

FACTS: In June 1979, petitioner Colito T. Pajuyo purchased the rights over a property from Pedro Perez.
Thereafter, he constructed a house therein and he and his family lived there. Later, Pajuyo agreed to let private
respondent Eddie Guevarra to live in the house for free provided that the latter maintain the cleanliness and
orderliness of the house. They also agreed that Guevarra should leave the premises upon demand. Subsequently,
when Pajuyo told Guevarra that he needed the house, Guevarra refused, hence an ejectment case was filed.
Guevarra claimed that Pajuyo had no valid title or right of possession over the lot where the house stands
because the lot is within the 150 hectares set aside for socialized housing. The MTC ruled that the subject of the
agreement between Pajuyo and Guevarra is the house and not the lot. Pajuyo is the owner of the house, and he
allowed Guevarra to use the house only by tolerance. Thus, Guevarra’s refusal to vacate the house on Pajuyo’s
demand made Guevarra’s continued possession of the house illegal. Aggrieved, Guevarra appealed to the
Regional Trial Court which only affirmed the MTC decision. At the CA, the latter reversed the RTC decision.
The Court of Appeals ruled that the Kasunduan is not a lease contract but a commodatum because the
agreement is not for a price certain. Since Pajuyo admitted that he resurfaced only in 1994 to claim the property,
the appellate court held that Guevarra has a better right over the property under Proclamation No. 137. At that
time, Guevarra was in physical possession of the property.

ISSUE: Whether or not the contract between petitioner and private respondent is one of commodatum.

HELD: The Supreme Court held that the contract is not a commodatum. “In a contract of commodatum, one of
the parties delivers to another something not consumable so that the latter may use the same for a certain time
and return it. An essential feature of commodatum is that it is gratuitous. Another feature is that the use of the
thing belonging to another is for a certain period. Thus, the bailor cannot demand the return of the thing loaned
until after the expiration of the period stipulated, or after accomplishment of the use for which the commodatum
is constituted. If the bailor should have urgent need of the thing, he may demand its return for temporary use. If
the use of the thing is merely tolerated by the bailor, he can demand the return of the thing at will, in which case
the contractual relation is called a precarium. The Kasunduan reveals that the accommodation accorded by
Pajuyo to Guevarra was not essentially gratuitous. While the Kasunduan did not require Guevarra to pay rent, it
obligated him to maintain the property in good condition. The imposition of this obligation makes
the Kasunduan a contract different from a commodatum. The effects of the Kasunduan are also different from
that of a commodatum.

4
PRODUCERS BANK OF THE PHILIPPINES vs. COURT OF APPEALS, GR No. 115324

FACTS: Sometime in 1979, private respondent Franklin Vives, upon request of his friend Angeles Sanchez and
relying on the assurance that he could withdraw his money within a month’s time, issued a check in the amount
of Two Hundred Thousand Pesos in favor of Sterela Marketing and Services owned by one Col. Arturo
Doronilla. Subsequently, private respondent and his wife found out that Sterela can’t be found on the address
previously given to then, so they went to petitioner Producer’s Bank of the Philippines to verify if their money
was still intact. They were informed that part of the amount had been withdrawn by Doronilla and that the latter
instructed the bank to debit from the savings account the amount and deposit it in his current account Private
respondent filed an action for recovery of sum of money against Doronilla, Sanchez, Dumagpi and petitioner.
The trial court ruled in favour of herein private respondents. On appeal of the case, the appellate court affirmed
the decision of the RTC. Petitioner contends that the transaction between private respondent and Doronilla is a
simple loan (mutuum) since all the elements of a mutuum are present: first, what was delivered by private
respondent to Doronilla was money, a consumable thing; and second, the transaction was onerous as Doronilla
was obliged to pay interest. Hence, petitioner argues that it cannot be held liable because it is not privy to the
transaction between the latter and Doronilla. Private respondent, on the other hand, argues that the transaction
between him and Doronilla is not a mutuum but an accommodation, since he did not actually part with the
ownership of his P200,000.00 but retained some degree of control over his money through his wife who was
made a signatory to the savings account and in whose possession the savings account passbook was given.

ISSUE: Whether or not the contract between Sanchez and Doronilla and Vives is a contract of commodatum,
thus making petitioner Bank liable.

HELD: Supreme Court held that the contract is commodatum. Although in view of Article 1933 of the Civil
Code, the object in commodatum is non-consumable, but Article 1936 of the Civil Code provides “Consumable
goods may be the subject of commodatum if the purpose of the contract is not the consumption of the object, as
when it is merely for exhibition.” Thus, if consumable goods are loaned only for purposes of exhibition or when
the intention of the parties is to lend consumable goods and to have the very same goods returned at the end of
the period agreed upon, the loan is commodatum and not a mutuum. The evidence shows that private
respondent merely "accommodated" Doronilla by lending his money without consideration, as a favor to his
good friend Sanchez. It was however clear to the parties to the transaction that the money would not be removed
from Sterela’s savings account and would be returned to private respondent after thirty (30) days.

5
REPUBLIC v. BAGTAS, 116 SCRA 262

FACTS: On May 8, 1948, Jose Bagtas borrowed from the Bureau of Animal Industry three bulls for one year
for breeding purposes upon payment of a breeding fee of 10% of the book value of the bulls. After one year, the
contract was renewed but only for one bull. Bagtas offered to buy the bulls at book value less depreciation, but
the Bureau told him that he should either return the bulls or pay for their book value. Bagtas failed to pay the
book value, so the Republic filed an action with the CFI Manila to order the return of the bulls or the payment
of the book value. Felicidad Bagtas, the surviving spouse and administratrix of the decedent’s estate, said that
the two bulls have already been returned in 1952, and that the remaining one died of gunshot during a Huk raid.
It was established that the two bulls were returned, thus, there is no more obligation on the part of Bagtas. With
regards the bull not returned, Felicidad maintained that the obligation is extinguished since the contract is that
of a commodatum and that the loss through fortuitous event should be borne by the owner.

ISSUE: Whether or not the contract entered into between Bagtas and the Republic is that of commodatum
making Bagtas not liable for the death of the bull.

HELD: A contract of commodatum is essentially gratuitous. If the breeding fee be considered compensation,
then the contract would be a lease of the bull. Under article 1671 of the Civil Code the lessee would be subject
to the responsibilities of a possessor in bad faith because she had continued possession of the bull after the
expiry of the contract. Even if the contract be commodatum, still Bagtas is liable because article 1942 of the
Civil Code provides that a bailee in a contract of commodatum is liable for loss of the things even if it should be
through a fortuitous event if he keeps it longer than the period stipulated or if the thing loaned has been
delivered with appraisal of its value, unless there is a stipulation exempting the bailee from responsibility in
case of a fortuitous event. The loan of one bull was renewed for another period of one year but Bagtas kept and
used the bull more than one year where during a Huk raid it was killed by stray bullets. Furthermore, when lent
and delivered to the deceased husband of Bagtas, the bulls had each an appraised book value. It was not
stipulated that in case of loss of the bull due to fortuitous event the late husband of the appellant would be
exempt from liability.

6
QUINTOS vs. BECK, 69 Phil 108
 
FACTS: Beck is a tenant of defendant Margarita Quintos. As such, Beck occupied Quintos’ house. Quintos
granted Beck the use of the furniture found on the leased house, among these were three gas heaters and 4
electric lamps, subject to the condition that the defendant would return them to the plaintiff upon the latter's
demand. Quintos sold the pieces of furniture to Maria Lopez and Rosario Lopez and thereafter notified Beck of
the conveyance. Beck informed Quintos that the latter can get the furniture at the ground floor of the house,
however, at a later date, Beck told Quintos that he will return only the other furniture but not the gas heaters and
the electric lamps as he is to return them only after the expiration of the lease contract. When the lease contract
expires, Beck deposited the furniture to the sheriff’s warehouse. Quintos refused to get the furniture in view of
the fact that the defendant had declined to make delivery of all of them. Consequently, Quintos brought an
action to compel Beck to return her certain furniture which she lent him for his use. The trial court ruled in
favour of Beck holding that Quintos failed to comply with her obligation to get the furniture when they were
offered to her. On appeal of the case, the Court of First Instance of Manila affirmed the lower court’s decision.
Hence, this petition.

ISSUE: Whether or not the trial court erred in ruling that Quintos failed to comply with her obligation to get the
furniture when they were offered to her.

HELD: The contract entered into between the parties is one of commadatum. Under it the plaintiff gratuitously
granted the use of the furniture to the defendant, reserving for herself the ownership thereof. By this contract the
defendant bound himself to return the furniture to the plaintiff, upon the latter’s demand. The obligation
voluntarily assumed by the defendant to return the furniture upon the plaintiff's demand, means that he should
return all of them to the plaintiff at the latter's residence or house. The defendant did not comply with this
obligation when he merely placed them at the disposal of the plaintiff, retaining for his benefit the three gas
heaters and the four electric lamps. The trial court, therefore, erred when it came to the legal conclusion that the
plaintiff failed to comply with her obligation to get the furniture when they were offered to her.
7
Sy vs. Westmont Bank
Facts:
Westmont alleged that on October 21, 1997, petitioners, doing business under the trade name of Moondrops
General Merchandising (Moondrops), obtained a loan in the amount of P2,429,500.00, evidenced by
Promissory Note No. GP-52806 (PN 5280), payable on November 20, 1997. Barely a month after, or on
November 25, 1997, petitioners obtained another loan from Westmont Bank in the amount of P4,000,000.00,
evidenced by Promissory Note No. GP-52857 (PN 5285), payable on December 26, 1997. Disclosure Statements
on the Loan/Credit Transactions8 were signed by the parties.
petitioners countered that in August 1997, Ramon Sy and Richard Sy applied for a loan with Westmont Bank,
through its bank manager William Chu Lao (Lao). According to them, Lao required them to sign blank forms of
promissory notes and disclosure statements and promised that he would notify them immediately regarding
the status of their loan application.

Petitioners insisted that their loan applications from Westmont were denied and it was Chua who lent them
the money. Thus, they contended that Westmont could not demand the payment of the said loans.

RTC ruled in favor of Westmont. It held that Westmont's cause of action was based on PN 5280 and PN 5285,
the promissory notes executed by petitioners. The RTC opined that petitioners admitted the genuineness and
due execution of the said actionable documents because they failed to make a specific denial in the answer. It
added that it should be presumed that the two (2) loan transactions were fair and regular; that the ordinary
course of business was followed; and that they were issued for a sufficient consideration.

Aggrieved, petitioners elevated an appeal before the CA. the CA affirmed the ruling of the RTC, P

Issue:
WON THE HONORABLE COURT OF APPEALS ERRONEOUSLY RULED, AS A MATTER OF LAW, THAT PETITIONERS
SPS. RAMON SY AND ANITA NG, RICHARD SY, JOSIE ONG, WILLIAM SY AND JACKELINE DE LUCIA FAILED TO
SPECIFICALLY DENY THE ACTIONABLE DOCUMENTS UNDER OATH AND THUS, PETITIONERS DEEMED TO HAVE
ADMITTED THEIR GENUINENESS AND DUE EXECUTION.chanroblesvirtuallawlibrary
Held:
Westmont failed to prove that it delivered the proceeds of the loan to petitioners
8
CAROLYN M. GARCIA vs. RICA MARIE S. THIO, GR. No. 154878, March 16, 2007
FACTS: Sometime in February 1995, respondent Rica Marie S. Thio received from petitioner Carolyn M.
Garccia a crossed check in the amount of $100,000.00 payable to the order of Marilou Santiago. Thereafter,
Carolyn received from Rica payments of the sum due. In June 1995, Rica received another check in the amount
of P500,000.00 from Carolyn and payable to the order of Marilou. Payments were made by Rica representing
interests. There was failure to pay the principal amount hence a complaint for sum of money with damages was
filed by Carolyn. Rica contended that she had no obligation to petitioner as it was Marilou who was indebted as
she was merely asked to deliver the checks to the latter and that the check payments she issued were merely
intended to accommodate Marilou. The RTC ruled in favor of Carolyn but the CA reversed on the ground that
there was no contract between Rica and Carolyn as there is nothing in the record that shows that respondent
received money from petitioner and that the checks received by respondent, being crossed, may not be encashed
but only deposited in the bank by the payee thereof, that is, by Marilou Santiago herself.

ISSUE: Whether or not there was a contract of loan between petitioner and respondent.

HELD: There Court ruled in the affirmative. A loan is a real contract, not consensual, and as such is perfected
only upon the delivery of the object of the contract. Art. 1934 of the Civil Code provides that “an accepted
promise to deliver something by way of commodatum or simple loan is binding upon the parties, but the
commodatum or simple loan itself shall not be perfected until the delivery of the object of the contract.” Upon
delivery of the object of the contract of loan (in this case the money received by the debtor when the checks
were encashed the debtor acquires ownership of such money or loan proceeds and is bound to pay the creditor
an equal amount. It is undisputed that the checks were delivered to respondent. However, these checks were
crossed and payable not to the order of respondent but to the order of a certain Marilou Santiago. The Supreme
Court agrees with petitioner that delivery is the act by which the res or substance thereof is placed within the
actual or constructive possession or control of another. Although respondent did not physically receive the
proceeds of the checks, these instruments were placed in her control and possession under an arrangement
whereby she actually re-lent the amounts to Santiago. Hence, Rica is the debtor and not Marilou.

PEOPLE OF THE PHILIPPINES vs. TERESITA PUIG and ROMEO PORRAS

Facts: On 7 November 2005, the Iloilo Provincial Prosecutor's Office filed before RTC in Dumangas, Iloilo, 112
cases of Qualified Theft against respondents Teresita Puig (Puig) and Romeo Porras (Porras) who were the
Cashier and Bookkeeper, respectively, of private complainant Rural Bank of Pototan, Inc. It was alleged in the
information that Teresita Puig and Romeo Porras took away P15,000 without the consent of the owner Bank to
the prejudice and damage of the bank. The RTC dismissed the case for insufficiency of the information ruling
that the real parties in interest are the depositors-clients and not the bank because the bank does not acquire
ownership of the money deposited in it. Hence petitioner Rural Bank went directly to the court via petition for
certiorari. Petitioner explains that under Article 1980 of the New Civil Code, "fixed, savings, and current
deposits of money in banks and similar institutions shall be governed by the provisions concerning simple
loans." Corollary thereto, Article 1953 of the same Code provides that "a person who receives a loan of money
or any other fungible thing acquires the ownership thereof, and is bound to pay to the creditor an equal amount
of the same kind and quality." Thus, it posits that the depositors who place their money with the bank are
considered creditors of the bank. The bank acquires ownership of the money deposited by its clients, making the
money taken by respondents as belonging to the bank.

Issue: Whether or not the Bank acquired ownership of the money deposited in it to be able to hold the
respondents liable for qualified theft which requires that there must be taking of the money without the consent
of the owners.

Held:

The petition is meritorious. Banks where monies are deposited, are considered the owners thereof. This is very
clear not only from the express provisions of the law, but from established jurisprudence. The relationship
between banks and depositors has been held to be that of creditor and debtor. Articles 1953 and 1980 of the
New Civil Code, as appropriately pointed out by petitioner, provide as follows:

• Article 1953.A person who receives a loan of money or any other fungible thing acquires the ownership
thereof, and is bound to pay to the creditor an equal amount of the same kind and quality.

• Article 1980. Fixed, savings, and current deposits of money in banks and similar institutions shall be governed
by the provisions concerning loan.

In a long line of cases involving Qualified Theft, the Court has firmly established the nature of possession by
the Bank of the money deposits therein, and the duties being performed by its employees who have custody of
the money or have come into possession of it. The Court has consistently considered the allegations in the
Information that such employees acted with grave abuse of confidence, to the damage and prejudice of the
Bank, without particularly referring to it as owner of the money deposits, as sufficient to make out a case of
Qualified Theft. In summary, the Bank acquires ownership of the money deposited by its clients; and the
employees of the Bank, who are entrusted with the possession of money of the Bank due to the confidence
reposed in them, occupy positions of confidence. The Informations, therefore, sufficiently allege all the
essential elements constituting the crime of Qualified Theft.

WHEREFORE, premises considered, the Petition for Review on Certiorari is hereby GRANTED. The Orders
dated 30 January 2006 and 9 June 2006 of the RTC dismissing Criminal cases No. 05-3054 to 05-3165 are
REVERSED and SET ASIDE.

10

BPI FAMILY BANK vs. FRANCO

G.R. NO. 123498. NOVEMBER 23, 2007
J. NACHURA

FACTS:
On August 15, 1989, Tevesteco opened a savings and current account with BPI-FB. Soon thereafter, FMIC
also opened a time deposit account with the same branch of BPI-FB.

On August 31, 1989, Franco opened three accounts, namely, a current, savings, and time deposit, with
BPI-FB. The total amount of P 2,000,000.00 used to open these accounts is traceable to a check issued
by Tevesteco allegedly in consideration of Franco’s introduction of Eladio Teves, to Jaime Sebastian, who
was then BPI-FB SFDM’s Branch Manager. In turn, the funding for theP2,000,000.00 check was part of
the P80,000,000.00 debited by BPI-FB from FMIC’s time deposit account and credited to Tevesteco’s
current account pursuant to an Authority to Debit purportedly signed by FMIC’s officers.

It appears, however, that the signatures of FMIC’s officers on the Authority to Debit were forged. BPI-FB,
debited Franco’s savings and current accounts for the amounts remaining therein. In the meantime, two
checks drawn by Franco against his BPI-FB current account were dishonored and stamped with a
notation “account under garnishment.” Apparently, Franco’s current account was garnished by virtue of
an Order of

Notably, the dishonored checks were issued by Franco and presented for payment at BPI-FB prior to
Franco’s receipt of notice that his accounts were under garnishment. It was only on May 15, 1990, that
Franco was impleaded in the Makati case. Immediately, upon receipt of such copy, Franco filed a Motion
to Discharge Attachment. On May 17, 1990, Franco pre-terminated his time deposit account.
BPI-FB deducted the amount of P63,189.00 from the remaining balance of the time deposit account
representing advance interest paid to him. Consequently, in light of BPI-FB’s refusal to heed Franco’s
demands to unfreeze his accounts and release his deposits therein, Franco filed on June 4, 1990 with the
Manila RTC the subject suit.

ISSUE:
WON Respondent had better right to the deposits in the subject accounts which are part of the
proceeds of a forged Authority to Debit

HELD: NO
There is no doubt that BPI-FB owns the deposited monies in the accounts of Franco, but not as a legal
consequence of its unauthorized transfer of FMIC’s deposits to Tevesteco’s account. BPI-FB conveniently
forgets that the deposit of money in banks is governed by the Civil Code provisions on simple loan or
mutuum. As there is a debtor-creditor relationship between a bank and its depositor, BPI-FB ultimately
acquired ownership of Franco’s deposits, but such ownership is coupled with a corresponding obligation
to pay him an equal amount on demand. Although BPI- FB owns the deposits in Franco’s accounts, it
cannot prevent him from demanding payment of BPI-FB’s obligation by drawing checks against his
current account or asking for the release of the funds in his savings account. Thus, when Franco issued
checks drawn against his current account, he had every right as creditor to expect that those checks
would be honored by BPI-FB as debtor.

More importantly, BPI-FB does not have a unilateral right to freeze the accounts of Franco based on its
mere suspicion that the funds therein were proceeds of the multi-million-peso scam Franco was
allegedly involved in. To grant BPI-FB, or any bank for that matter, the right to take whatever action it
pleases on deposits which it supposes are derived from shady transactions, would open the floodgates
of public distrust in the banking industry.

Ineluctably, BPI-FB, as the trustee in the fiduciary relationship, is duty bound to know the signatures of
its customers. Having failed to detect the forgery in the Authority to Debit and in the process
inadvertently facilitate the FMIC-Tevesteco transfer, BPI-FB cannot now shift liability thereon to Franco
and the other payees of checks issued by Tevesteco or prevent withdrawals from their respective
accounts without the appropriate court writ or a favorable final judgment.

11
G.R. No. L-20240      December 31, 1965
REPUBLIC OF THE PHILIPPINES, plaintiff-appellee, 
vs.
JOSE GRIJALDO, defendant-appellant.
Ponente: ZALDIVAR, J.
Facts:
1. (Appellant) Jose Grijaldo obtained five loans from Bank of Taiwa (sum of P1,281.97) with
interest at the rate of 6% per annum, compounded quarterly. 
2. It is evidenced by five promissory notes executed by the appellant in favor of the Bank of
Taiwan.
a. June 1, 1943, P600.00;
b. on June 3, 1943, P159.11;
c. on June 18, 1943, P22.86;
d. on August 9, 1943,P300.00;
e. on August 13, 1943, P200.00

All notes without due dates, but because the loans were due one year after they were incurred. 
 3. As security, the appellant executed a chattel mortgage on the standing crops on his land
known as Hacienda Campugas.
4. By virtue of Vesting Order No. P-4, the assets in the Philippines of the Bank of Taiwan, Ltd.
were vested in the Government of the United States. This was subsequently transferred to the
Republic of the Philippines by the Government of the United States pursuant to Phil. Property
Act of 1946
5.  Republic of the Philippines (appellee), represented by the Chairman of the Board of
Liquidators, made a written extrajudicial demand upon the appellant for the payment of the
account in question. 
6. Appellant received demand for payment, but failed to pay.
7. The aggregate amount due was P889.64; and the interest due was P2,377.23.
8. Appellee filed a complaint in the Justice of the Peace Court to collect from the appellant the
unpaid account in question. DISMISSED- the action had prescribed. 
9. Appealed to CFI of Negros Occidental -  ordered the appellant to pay the appellee the sum of
P2,377.23
10. Appellant appealed.  During the pendency of this appeal the appellant Jose Grijaldo died. 
11. Upon motion by the Solicitor General this Court, he required Manuel Lagtapon, Jacinto
Lagtapon, Ruben Lagtapon and Anita L. Aguilar, who are the legal heirs of Jose Grijaldo to
appear and be substituted as appellants (Section 17 of Rule 3 of the ROC).
12. In the present appeal the appellant contends: (1) that the appellee has no cause of action
against the appellant; (2) that if the appellee has a cause of action at all, that action had
prescribed; and (3) that the lower court erred in ordering the appellant to pay the amount of
P2,377.23. Thus, the issues in this case.

Issues:
1. W/N the appellee has no cause of action against the appellant? YES
2. W/N action had prescribed (if there is COA)? NO
3. W/N the lower court erred in ordering the appellant to pay the amount of P2,377.23? NO.

First issue: There is COA.

This contention has no merit. It is true that the Bank of Taiwan, Ltd. was the original creditor and the
transaction between the appellant and the Bank of Taiwan was a private contract of loan. However,
pursuant to the Trading with the Enemy Act, and Executive Order No. 9095 of the United States; and
under Vesting Order No. P-4, the properties of the Bank of Taiwan, Ltd. were vested in the United
States Government and the Republic of the Philippines, the assets of the Bank of Taiwan, Ltd. were
transferred to and vested in the Republic of the Philippines. The successive transfer of the rights over
the loans in question made the Republic of the Philippines the successor of the rights in said loans,
thereby creating a privity of contract between the appellee and the appellant. In defining the word
"privy" this Court, in a case, said:
The word "privy" denotes the idea of succession ... hence an assignee of a credit, and one
subrogated to it, etc. will be privies; in short, he who by succession is placed in the position of
 one of those who contracted the judicial relation and executed the private document and
appears to be substituting him in the personal rights and obligation is a privy.
Appellants likewise maintain that there is no COA because the crops used as chattel mortgage were
lost or destroyed through enemy action; thus, his obligation to pay the loans was thereby
extinguished. UNTENABLE.
The obligation of the appellant under the five promissory notes was not to deliver the crops to be
harvested from his land. Rather, his obligation was to pay a generic thing — the amount of money
representing the total sum of the five loans, with interest. "By a contract of (simple) loan, one of the
parties delivers to another ... money or other consumable thing upon the condition that the same
amount of the same kind and quality shall be paid." (Article 1933, Civil Code)
The chattel mortgage on the crops growing on appellant's land simply stood as a security.
Second Issue: NO. Action has not yet prescribed.
The appellant points out that the loans became due on June 1, 1944; and when the complaint was
filed on January 17,1961 a period of more than 16 years had already elapsed — far beyond the
period of ten years when an action based on a written contract should be brought to court.
It has no merit. First, the complaint in the present case was brought by the Republic of the
Philippines. Under Article 1108 of the Civil Code prescription does not run against the State. Second,
the running of the period of prescription of the action to collect the loan from the appellant was
interrupted by the moratorium laws (Executive Orders No. 25; Executive Order No. 32and Republic
Act No. 342). The loan in question, as evidenced by the five promissory notes, were incurred in the
year 1943, or during the period of Japanese occupation of the Philippines. This case is squarely
covered by EO25, providing for the suspension of payments of debts incurred after December 31,
1941. The period of prescription was, therefore, suspended beginning November 18, 1944.
Computed accordingly, the prescriptive period was suspended for 8 years and 6 months. If we deduct
the period of suspension (8 years and 6 months) from the period that elapsed from the time the cause
of action arose to the time when the complaint was filed (16 years, 6 months and 16 days) there
remains a period of 8 years and 16 days. There still remained a period of one year, 11 months and 14
days of the prescriptive period when the complaint was filed.
Third issue: Lower court is correct. (NOT IMPORTANT)
It is claimed by the appellant that it was error on the part of the lower court to apply the Ballantyne
Scale of values in evaluating the Japanese war notes as of June 1943 when the loans were incurred,
because what should be done is to evaluate the loans on the basis of the Ballantyne Scale as of the
time the loans became due, and that was in June 1944. NO MERIT.
The decision of the court a quo ordered the appellant to pay the sum of P2,377.23 as of December
31, 1959, plus interest rate of 6% per annum compounded quarterly from the date of the filing of the
complaint. The sum total of the five loans obtained by the appellant from the Bank of Taiwan, Ltd. was
P1,281.97 in Japanese war notes. Computed under the Ballantyne Scale of values as of June 1943,
this sum of P1,281.97 in Japanese war notes in June 1943 is equivalent to P889.64 in genuine
Philippine currency which was considered the aggregate amount due as principal of the five loans,
and the amount of P2,377.23 as of December 31, 1959 was arrived at after computing the interest on
the principal sum of P889.64 compounded quarterly from the time the obligations were incurred in
1943.
It is the stand of the appellee that the Ballantyne scale of values should be applied as of the time the
obligation was incurred, and that was in June 1943.
12
  

13
DARIO NACAR, PETITIONER, vs. GALLERY FRAMES AND/OR FELIPE BORDEY, JR., RESPONDENTS.
G.R. No. 189871
August 13, 2013

FACTS
On January 24, 1997, Dario Nacar got dismissed by his employer, Gallery Frames. He filed a complaint; the
Labor Arbiter ruled that petitioner was dismissed without just cause. A computation for the separation pay and
back wages were made it amounted to Php 158,919.92. The respondent sought appeal to the NLRC, CA and
Supreme Court, but they were all dismissed, thus the judgment became final on April 17, 2002.
During the execution of the final judgment, the petitioner filed a motion for the re-computation of the
damages. The amount previously computed includes the separation pay and back wages up to the time of his
dismissal. The petitioner argued that the damages should cover the period until the date of final judgment. A
re-computation was made and the damages was increased to 471,320.31. Respondent prayed for the quashal
of such motion on the ground that the judgment made by the SC is already final and the amount should not be
further altered.
Petitioner also filed another motion asking the court to order the respondent to pay the appropriate legal
interest of the damages from the date of final judgment until full payment.
ISSUES
1. Whether or not a subsequent correction of the damages awarded during the final judgment of the Supreme
Court violates the rule on immutability of judgments.
2. Whether or not the re-computation made by the Labor Arbiter is correct.
3. Whether or not appropriate interests may be claimed by the petitioner.
RULING
1. Whether or not a subsequent correction of the damages awarded during the final judgment of the Supreme
Court violates the rule on immutability of judgments.

The Supreme Court ruled that a correction in the computation of the damages does not violate the rule on
immutability of judgments. The final decision made by the Supreme Court to award the petitioner with
damages with regards to the dismissal without justifiable cause can be divided into two important parts. One is
the finding that an illegal dismissal was indeed made. And the other is the computation of damages. According
to a previous case of Session Delights Ice Cream and Fast Foods v. Court of Appeals, the Supreme Court held
that the second part of the decision - being merely a computation of what the first part of the decision
established and declared - can, by its nature, be re-computed. The re-computation of the consequences of
illegal dismissal upon execution of the decision does not constitute an alteration or amendment of the final
decision being implemented. The illegal dismissal ruling stands; only the computation of monetary
consequences of this dismissal is affected, and this is not a violation of the principle of immutability of final
judgments.

2. Whether or not the re-computation made by the Labor Arbiter is correct.

The Supreme Court believes that the amount of 471,320.31 as damages is correct. According to Article 279 of
the Labor Code, reliefs in case of illegal dismissal continue to add up until its full satisfaction. The original
computation clearly includes damages only up to the finality of the labor arbiter's decision. Therefore, the
Supreme Court approves the decision confirming that a re-computation is necessary. The labor arbiter
re-computed the award to include the separation pay and the back wages due up to the finality of the decision
that fully terminated the case on the merits.
3. Whether or not appropriate interests may be claimed by the petitioner.

The Supreme Court ruled that the petitioner shall be entitled to interest. In the case of Eastern Shipping Lines,
Inc. v. Court of Appeals, among the guidelines laid down by the Supreme Court regarding the manner of
computing legal interest is - when the judgment of the court awarding a sum of money becomes final and
executory, the rate of legal interest shall be 12% per annum from such finality until its satisfaction. In addition
to this, the Bangko Sentral ng Pilipinas Monetary Board (BSP-MB), in its Resolution No. 796 dated May 16,
2013 declared that the rate of interest for the loan or forbearance of any money, goods or credits and the rate
allowed in judgments, in the absence of an express contract as to such rate of interest, shall be six percent
(6%) per annum. Consequently, the twelve percent (12%) per annum legal interest shall apply until June 30,
2013. Afterwards, the new rate of six percent (6%) per annum shall be the prevailing rate of interest when
applicable.
The respondent was ordered to pay interest of twelve percent (12%) per annum of the total monetary awards,
computed from May 27, 2002 to June 30, 2013 and six percent (6%) per annum from July 1, 2013 until their
full satisfaction.

14
194 BUENAVENTURA v METROPOLITAN BANK AND TRUST COMPANY
G.R. No. 167082 | 03 August 2016 | J. Bersamin | TIGLAO
TOPIC:
Contracts of Adhesion
DOCTRINE:
A contract of adhesion is so-called because its terms are preparedby only one party while the other party
merely affixes his signature signifying hisadhesion thereto. Such contract is just as binding as ordinary
contracts.It is true that we have, on occasion, struck down such contracts as void whenthe weaker party is
imposed upon in dealing with the dominant bargainingparty and is reduced to the alternative of taking it or
leaving it, completelydeprived of the opportunity to bargain on equal footing. Nevertheless,contracts of
adhesion are not invalid per se and they are not entirely prohibited.The one who adheres to the contract is in
reality free to reject it entirely, if headheres, he gives his consent.
FACTS:
1.
 
Buenaventure executed a PN payable to Metrobank.2.
 
For having failed to fully pay, Metrobank filed an action for collectionagainst Buenaventura.3.
 
Buenaventura argues that the PNs she executed were a contract ofadhesion because her only participation
was affixing her signature andthat the terms of the PN should be strictly construed against Metrobank.4.
 
Metrobank counters that the terms and conditions of the PNs wereclear and unambigious; hence, there was
no need or room forinterpretation.
ISSUE/S:
W/N the promissory notes were contracts of adhesion
 – 
 NO. But evenassuming that it was a contract of adhesion, such did not entitle her to bar
theirliteral enforcement.
HELD/RULING:
The promissory notes were written as follows:FOR VALUE RECEIVED, I/we jointly and severally promise to
payMetropolitan Bank and Trust Company, at its office x x x the principalsum of PESOS xx x, Philippine
currency, together with interest and credit
evaluation and supervision fee (CESF) thereon at the effective rate of•
  x x x per centum x x x per annum, inclusive, from date hereof and untilfully paid.What the petitioner
advocates is for the Court to now read into the promissorynotes terms and conditions that would contradict
their clear and unambiguousterms in the guise of such promissory notes being contracts of adhesion.
Thiscannot be permitted, for, even assuming that the promissory notes werecontracts of adhesion, such
circumstance alone did not necessarily entitle herto bar their literal enforcement against her if their terms
were unequivocal. It ispreposterous on her part to disparage the promissory notes for being contractsof
adhesion, for she thereby seems to forget that the validity and enforceabilityof contracts of adhesion were the
same as those of other valid contracts.As a rule, indeed, the contract of adhesion is no different from any
othercontract. Its interpretation still aligns with the literal meaning of its terms andconditions absent any
ambiguity, or with the intention of the parties. The termsand conditions of the promissory notes involved
herein, being clear and beyonddoubt, should then be enforced accordingly.As fittingly declared in
The Insular Life Assurance Company, Ltd. vs. Court of Appeals and Sun Brothers & Company,
 "[w]hen the language of the contract isexplicit leaving no doubt as to the intention of the drafters thereof, the
courtsmay not read into it any other intention that would contradict its plain import."Accordingly, no court,
even this Court, can "make new contracts for the partiesor ignore those already made by them, simply to avoid
seeming hardships.Neither abstract justice nor the rule of liberal construction justifies the creationof a
contract for the parties which they did not make themselves or theimposition upon one party to a contract of
an obligation not assumed.
15
AMPARO JOVEN DE CORTES v. MARY E. VENTURANZA, GR No. L-26058, 1977-10-28

Facts:

original plaintiffs in this case were Felix Cortes y Ochoa and Noel J. Cortes... original defendants were Gregorio
Venturanza, Mary E. Venturanza, Jose Oledan and Erlinda M. Oledan.
On December 11, 1967, defendant Gregorio Venturanza... died
Accordingly surviving spouse and children of the deceased Gregorio Venturanza, were substituted as
appellants, in place of... the deceased, by resolution of this Court dated February 28, 1968.
September 12, 1968, Felix Cortes y Ochoa died.
y Ochoa died
Plaintiff Felix Cortes y Ochoa and Noel J. Cortes filed the instant action for foreclosure of real estate against the
defendants... original owner of nine (9) parcels of land covered by Transfer Certificates of Title Nos. 21334 to
21342,... Noel J. Cortes... original owner of twenty-four (24) parcels of land covered by Transfer Certi­ficates of
Title Nos. 21343, 21345, 21347 to 21367

October 24, 1958 said plaintiffs sold and delivered to the defendants all the above-mentioned thirty-three (33)
parcels of land with all the improvements thereon for the total sum of P716,573.90... defendants agreed to pay
jointly and severally the plaintiffs the sum of P100,000.00 upon the signing and execution of a deed of sale and
P40,000.00 on January 1, 1959 thereby leaving a balance of P576,573.90 which the defendants agreed and
bound themselves,to pay plaintiffs jointly and severally within three (3) years from January 1, 1959 with
interest thereon at the rate of 6% per annum;... agreed and bound them­selves to secure the payment of the
said balance of P576,573.90 with a first mortgage upon the... said 33 parcels of land with improvements;...
defendants have already paid the plaintiffs the total sum of P140,000.00 that of the unpaid balance owing to
plaintiffs, P169,484.24 pertain(ing)s to plaintiff Felix Cortes and P407,089.66 pertains to plaintiff Noel
J.Cortes;... defendants have already paid the plaintiffs the total sum of P140,000.00 that of the unpaid balance
owing to plaintiffs, P169,484.24 pertain(ing)s to plaintiff Felix Cortes and P407,089.66 pertains to plaintiff Noel
J.Cortes... mortgage obligation fell due on January 1, 1962, but despite repeated demands for payment...
defendants failed and refused to pay the said balance of P576,573.90 to plaintiffs... due and demandable up to
December 1, 1962 the total... interest due from the defendants 8103,783.32 computed at the stipulated
interest of 6% per annum... obligated and bound to pay the plaintiffs' reasonable compensation for attorney's
fees which... plaintiffs fixed at P50,000.00.
Defendants... admit the allegations of the complaint regarding plaintiffs' former ownership of the lands in
question as well as their execution of the mortgage in favor of plaintiffs... allege that they are at present the
registered... owners of the same parcels of land by virtue of the sale thereof made to them... he allotment of
payment to plaintiffs of the balance of their obligation, but allege that the said balance has not yet become
due and demandable so that they have not incurred in... default.
defendants will pay the balance of the purchase price in the amount of P576,573.90 to the plaintiffs, and the
latter agreed... efendants Oledan allege that on December 28, 1958... executed and entered into an agreement
whereby they sold, transferred unto their co-defendants all their shares, ownership... and interest in the
property subject of a deed of sale with purchase money mortgage... soon as defendants will have received
from the Land Tenure Administration the purchase price of... their (defendants') hacienda in Bugo, Cagayan de
Oro in the amount of P360,000.00... the sum of P44,571.66 payable at the time and in the manner specified in
the written agreement... defendants have paid to... them the sum of P22,285.83'balance still due and unpaid
in the amount of P22,285.83... cross-defendants have failed to pay within the period stipulated in their
agreement... hall pay to them the sum of P6,367.30 for the period August 8, 1960 to August 28, 1961; another
amount of P6,367.30 for the period August 28, 1961 to August 28, 1962 and... still another amount of
P6,367.30 for the period August 28, 1963 by way of penalty,... despite repeated demands cross-defendants
have failed to pay
There is no question that defendants are indebted to plaintiffs on the mortgage executed by them contained in
the document denominated as 'Deed of Sale with Purchase Money Mortgage' (Exhibit 'A') to the tune of
P576,573.90 with interest thereon at the stipulated... rate of 6% per annum.
the event that the vendees shall fail to pay to the vendors, in the form and manner provided... or should the
vendees make... default in the performance of any one or more of the conditions stipulated herein, the
Vendors shall have the right,... to foreclos(ur)e this mortgage... the vendors are hereby... appointed the
attorneys-in-fact, for the Vendees, with full power of... substitution, to enter upon and take possession of the
mortgaged properties, without the order of any court or any other authority other than herein granted, and to
sell and dispose of the same to the highest bidder at public auction

Defendants claim that there had been a novation of the contract between them and plaintiffs on account of
the transfer made by defendants Oledans of their interest in the property in favor of their co-defendants
Venturanzas, with the knowledge and consent of the... plaintiffs.

efendants are indeed indebted to plaintiffs on the mortgage constituted by them over the parcels of land in
question, the period of payment of the obligations having become due, plaintiffs are, therefore,... entitled to a
foreclosure of the said mortgage.

This is a clear case of an obligation with a definite period ex die, which period was incidentally established for
the benefit of the defendants.

The evidence presented by the plaintiffs to substantiate these facts approaches moral certainty, not merely
preponderance of evidence. Hence, defendants' defense of novation as to the period for payment, fails.

Issues:
a. Whether, upon the filing by plaintiffs of their complaint against the defendants on December 12, 1962, the
obligation of the defendants had not yet become due and demandable and, hence, the complaint was filed
prematurely.
b. Whether the payment of P576,573.90 with interest thereon at the stipulated rate of 6% per annum was to
be made dependent upon the consummation of the sale of the two haciendas of defendants Venturanzas and,
hence, there was a novation of the... contract of sale with purchase money mortgage, Exhibit B, as a result of a
change in the manner of payment.
c. Whether the sale on December 28, 1959 by the defendants Oledans to their co-defendants Venturanzas, of
all their rights and interests in the property, subject-matter of the deed of sale with purchase money mortgage,
Exhibit B, likewise... consti­tuted a novation thereof and, therefore, had the effect of discharging the
defendants Oledans from their original obligation to the plaintiffs.

Ruling:
judgment is hereby rendered in favor of plaintiffs and against the defendants, ordering the latter jointly and
severally to pay to the former or to deposit with the clerk of court the sum of P576,573.90 with interest
thereon at the stipulated rate of 6%... per annum until fully paid, within 90 days from notice hereof. In default
of such payment the mortgaged property will be sold at public auction to realize the mortgage indebtedness
and costs, in accordance with law.

The parties will bear their own costs and expenses of litigation... judgment is hereby rendered in favor of
plaintiffs and against the defendants ordering the latter, jointly and severally, to pay the former or to deposit
with the clerk of court the sum of P576,573.90 with interest thereon at the stipulated rate of 6% per annum...
from January 1, 1959 until fully paid, within 90 days from notice hereof. In default of such payment the
mort­gaged property will be sold at public auction to realize the mortgage indebtedness and costs, in
accordance with law.

parties will bear their own costs and expenses of litigation

The Supreme Court ruled... the PARTIES OF THE FIRST PART (the Venturanzas) will pay to the PARTIES OF THE
SECOND PART (the Oledans), and the latter hereby acknowledge receipt thereof, of the sum of

P22,285.83)... shall... be paid... within eight (8) months from the date and execution of this Agreement and
Deed of Sale... on or before August 28, 1960

 
Ligutan vs CA DOCTRINE: penalty clause is an accessory undertaking to assume greater liability on the part of
the obligor in case of breach. although parties are free to stipulate in their contract the terms, courts may
reduce interest if it is unconscionable F: Ligutan and de Llana obtained a lon from Security bank and trust
company. petitioners (ligutan and de llana) executed a promissory note binding themselves solidarily to pay
with an interest of 15.189% and pay a penalty of 5% for every month in case of default and in addition, to pay
10% of the total amount due by way of attorneys fees if the matter were indorsed to a lawyer. despite several
demands, petitioner failed to pay.first demand was made on may 20 1982. bank filed a case. RTC ruling: 1. sum
of 114k with interest of 15%, 2% sservice charge, 5% penalty charge,commencing on may 20 1982 until fully
paid 2. pay further sum of 10% attorneys fees. petitioners appealed. CA affirmed except on 2% service charge
which was deleted pursuant to Cetral bank circular 783. parties filed for motion for reconsideration. petitioners
prayed for the reduction of 5%. bank on the other hand prayed that the payment of interest and penalty be
commenced not from the date of filinf but from the time of default. CA resolved the two motion thusly

16
LIGUTAN vs.  COURT OF APPEALS, GR. No. 138677, February 12, 2002
FACTS: Petitioners Tolomeo Ligutan and Leonidas dela Llana obtained a loan from private respondent
Security Bank and Trust Company.  Petitioners executed a promissory note to pay the sum loaned with an
interest of 15.189% per annum upon maturity and to pay a penalty of 5% every month on the outstanding
principal and interest in case of default.  On maturity of the obligation, petitioners failed to settle the debt
despite several demands from the bank. Consequently, the bank filed a complaint for recovery of the due
amount. After trial of the case, the Trial court ruled in favour of the Bank, ordering petitioners to pay the
respondent the sum of P114,416.00 with interest thereon at the rate of 15.189% per annum and 5% per month
penalty charge among others. On appeal of the case, petitioners prayed for the reduction of the 5% stipulated
penalty for being unconscionable.  The Court of Appeals ruled that in the interest of justice and public policy, a
penalty of 3% per month or 36% per annum would suffice. But still, petitioners dispute the said decision.

ISSUE: Whether or not the 15.189% interest and the penalty of three (3%) percent per month or thirty-six
(36%) percent per annum imposed by private respondent bank on petitioners’ loan obligation are exorbitant,
iniquitous and unconscionable.

HELD: The question of whether a penalty is reasonable or iniquitous can be partly subjective and partly
objective.  Its resolution would depend on such factors as, but not necessarily confined to, the type, extent and
purpose of the penalty, the nature of the obligation, the mode of breach and its consequences, the supervening
realities, the standing and relationship of the parties, and the like, the application of which, by and large, is
addressed to the sound discretion of the court. The essence or rationale for the payment of interest is not exactly
the same as that of a surcharge or a penalty.  A penalty stipulation is not necessarily preclusive of interest. What
may justify a court in not allowing the creditor to impose full surcharges and penalties, despite an express
stipulation therefor in a valid agreement, may not equally justify the non-payment or reduction of
interest.  Indeed, the interest prescribed in loan financing arrangements is a fundamental part of the banking
business and the core of a bank's existence. The Court of Appeals, exercising its good judgment in the instant
case, has rightly reduced the penalty interest from 5% a month to 3% a month.  

17
SPS. DELOS SANTOS VS. METROBANK
FACTS:
From 1996 to 1998, the petitioners took out several loans totaling P12,000,000.00 from Metrobank, the
proceeds of which they would use in constructing a hotel on their 305-square-meter parcel of land located in
Davao City. They executed various promissory notes covering the loans, and constituted a mortgage over their
parcel of land to secure the performance of their obligation. The stipulated interest rates were 15.75% per
annum for the long term loans (maturing on December 9, 2006) and 22.204% per annum for a short term loan
of P4,400,000.00 (maturing on March 12, 1999). The interest rates were fixed for the first year, subject to
escalation or de-escalation in certain events without advance notice to them. The loan agreements further
stipulated that the entire amount of the loans would become due and demandable upon default in the
payment of any installment, interest or other charges. The spouses defaulted and so Metrobank filed suit.

ISSUE: 
Whether or not the escalation clause is valid.
HELD: 
YES. The Court held that the escalation clauses like those affecting the petitioners were not void per se,
and that an increase in the interest rate pursuant to such clauses were not necessarily void. In Philippine
National Bank v. Rocamora, the Court has said:
Escalation clauses are valid and do not contravene public policy. These clauses are common in credit
agreements as means of maintaining fiscal stability and retaining the value of money on long-term contracts.
To avoid any resulting one-sided situation that escalation clauses may bring, we required in Banco Filipino the
inclusion in the parties’ agreement of a de-escalation clause that would authorize a reduction in the interest
rates corresponding to downward changes made by law or by the Monetary Board.
The validity of escalation clauses notwithstanding, we cautioned that these clauses do not give
creditors the unbridled right to adjust interest rates unilaterally. As we said in the same Banco Filipino case,
any increase in the rate of interest made pursuant to an escalation clause must be the result of an agreement
between the parties. The minds of all the parties must meet on the proposed modification as this modification
affects an important aspect of the agreement. There can be no contract in the true sense in the absence of the
element of an agreement, i.e., the parties’ mutual consent. Thus, any change must be mutually agreed upon,
otherwise, the change carries no binding effect. A stipulation on the validity or compliance with the contract
that is left solely to the will of one of the parties is void; the stipulation goes against the principle of mutuality
of contract under Article 1308 of the Civil Code.
18
19
BULOS, JR. VS. YASUMA
FACTS:
In 1988, Bulos, Atty. Tabalingos and Dr. Lim incurred a P2.5M loan from Yasuma, a Japanese national.
The terms of the loan provide that it is payable in 3 months at 4% interest rate; that in case of nonpayment, it
shall continue at that rate or 48% per annum; and in case of litigation, plus 20% of principal balance for
attorney’s fees.
 The 3 failed to pay upon maturity. Loan then was already P2.7M. Yasuma foreclosed the mortgaged
properties and the sale amounted to P1.6M leaving a balance of P1.06M. Interest accrued and other penalties
ballooning the balance to P2.4M.
The trial court ruled in Yasuma’s favor. On appeal, the CA affirmed the trail court’s decision. Hence, this
petition.
ISSUE:
Whether or not the stipulation of the continuing 4% interest per month in case of nonpayment is
unconscionable.
HELD:
YES. The Court held that such rate of interest is highly unconscionable and inordinate. In the case of
Ruiz v. Court of Appeals, the SC considered the 3% interest per month or 36% interest per annum as excessive
and unconscionable. Thereby, the Court, in the said case, equitably reduced the rate of interest to 1% interest
per month or 12% interest per annum. The Court also held that while the Usury Law has been suspended by
Central Bank Circular No. 905, s. 1982, effective on 1 January 1983, and parties to a loan agreement have been
given wide latitude to agree on any interest rate, still stipulated interest rates are illegal if they are
unconscionable. Nothing in the said circular grants lenders carte blanche authority to raise interest rates to
levels which will either enslave their borrowers or lead to a hemorrhaging of their assets. Surely, it is more
consonant with justice that the rate of interest in the present case, which is 4% per month or 48% per annum,
be reduced equitably. The Court found, that the reduction of the interest rate by the trial court, pegged at 21%
per annum, was not proper.
The agreed interest rate of 4% per month or 48% per annum is unconscionable and must be mitigated.
Following established jurisprudence, the legal interest rate of 12% should apply, computed from the date of
judicial demand, that is, 7 April 1990. In Eastern Shipping Lines, Inc. v. Court of Appeals , the Court enunciated
that “when the judgment of the court awarding a sum of money becomes final and executory, the rate of legal
interest, whether the case falls under paragraph 1 or paragraph 2, shall be 12% per annum from such finality
until its satisfaction, this interim period being deemed to be by then an equivalent to a forbearance of credit”
is also appropriate herein, and a 12% interest per annum is imposed on petitioner’s monetary liability to
respondent from the date of the finality of this Decision until it is fully paid.

20
SPOUSES EDUARDO & LYDIA SILOS vs. PHILIPPINE NATIONAL BANK
G.R. NO. 181045. JULY 02, 2014
DEL CASTILLO, J.

DOCTRINE:
In loan agreements, it cannot be denied that the rate of interest is a principal condition, if not the most
important component. Thus, any modification thereof must be mutually agreed upon;
otherwise, it has no binding effect.

FACTS:
Spouses Eduardo and Lydia Silos secureda revolving credit line with Philippine National Bank (PNB)
through a real estate mortgage as a security. After two years, their credit line increased. Spouses Silos
then signed a Credit Agreement, which was also amended two years later, and several Promissory Notes
(PN) as regards their Credit Agreements with PNB.The said loan was initially subjected to a 19.5% interest
rate per annum. In the Credit Agreements, Spouses Silos bound themselves to the power of PNB to
modify the interest rate depending on whatever policy that PNB may adopt in the future, without the
need of notice upon them. Thus, the said interest rates played from 16% to as high as 32% per annum.
Spouses Silos acceded to the policy by pre-signing a total of twenty-six (26) PNs leaving the individual
applicable interest rates at hand blank since it would be subject to modification by PNB.

Spouses Silos regularly renewed and made good on their PNs, religiously paid the interests without
objection or fail. However, during the 1997 Asian Financial Crisis, Spouses Silos faltered when the interest
rates soared. Spouses Silos’ 26thPN became past due, and despite repeated demands by PNB, they
failed to make good on the note. Thus, PNB foreclosed and auctioned the involved security for the
mortgage. Spouses Silos instituted an action to annul the foreclosure sale on the ground that the
succeeding interest rates used in their loan agreements was left to the sole will of PNB, the same fixed
by the latter without their prior consent and thus, void. The Regional Trial Court (RTC) ruled that such
stipulation authorizing both the increase and decrease of interest rates as may be applicable is valid. The
Court of Appeals (CA) affirmed the RTC decision.
ISSUE:
May the bank, on its own, modify the interest rate in a loan agreement without violating the mutuality of
contracts?

RULING:
No. Any modification in the contract, such as the interest rates, must be made with the consent of the
contracting parties. The minds of all the parties must meet as to the proposed modification, especially
when it affects an important aspect of the agreement. In the case of loan agreements, the rate of interest
is a principal condition, if not the most important component. UST Law Review, Vol. LIX, No. 1, May 2015

Loan and credit arrangements may be made enticing by, or "sweetened" with, offers of low initial
interest rates, but actually accompanied by provisions written in fine print that allow lenders to later on
increase or decrease interest rates unilaterally, without the consent of the borrower, and depending on
complex and subjective factors. Because they have been lured into these contracts by initially low
interest rates, borrowers get caught and stuck in the web of subsequent steep rates and penalties,
surcharges and the like. Being ordinary individuals or entities, they naturally dread legal complications
and cannot afford court litigation; they succumb to whatever charges the lenders impose. At the very
least, borrowers should be charged rightly; but then again this is not possible in a one-sided credit
system where the temptation to abuse is strong and the willingness to rectify is made weak by the
eternal desire for profit.

21
CHAN v. MACEDA
FACTS:
In 1976, Maceda obtained a P7.3 million loan from DBP for the construction of his New Gran Hotel
Project in Tacloban City. Thereafter, respondent entered into a building construction contract with Moreman
Builders. Respondent purchased various construction materials and equipment in Manila. Moreman, in turn,
deposited them in the warehouse of petitioners. The deposit was free of charge. Unfortunately, Moreman
failed to finish the construction of the hotel at the stipulated time. Consequently, Maceda filed suit for
rescission against Moreman which the trial court ruled in his favor. While pending appeal in the CA, Maceda
demanded from Chan the return of the construction materials and equipment but the latter said that said
materials had already been withdrawn by Moreman in 1977. Hence, Maceda filed with the RTC an action for
damages with an application for a writ of preliminary attachment against petitioners.
 The RTC ruled in favor of Maceda. On appeal, the CA affirmed RTC’s decision. Hence, this appeal.
ISSUE:
Whether or not there was a contract of deposit.
HELD:
NO. In an action against the depositary, the burden is on the plaintiff to prove the bailment or deposit
and the performance of conditions precedent to the right of action. A depositary is obliged to return the thing
to the depositor, or to his heirs or successors, or to the person who may have been designated in the contract.
In the present case, the record is bereft of any contract of deposit, oral or written, between petitioners
and respondent. If at all, it was only between petitioners and Moreman. And granting arguendo that there was
indeed a contract of deposit between petitioners and Moreman, it is still incumbent upon respondent to prove
its existence and that it was executed in his favor. However, respondent miserably failed to do so. The only
pieces of evidence respondent presented to prove the contract of deposit were the delivery receipts.
Significantly, they are unsigned and not duly received or authenticated by either Moreman, petitioners or
respondent or any of their authorized representatives. Hence, those delivery receipts have no probative value
at all. While our laws grant a person the remedial right to prosecute or institute a civil action against another
for the enforcement or protection of a right, or the prevention or redress of a wrong, every cause of
action ex-contractu must be founded upon a contract, oral or written, express or implied.
Moreover, respondent also failed to prove that there were construction materials and equipment in
petitioners' warehouse at the time he made a demand for their return.
Considering that respondent failed to prove (1) the existence of any contract of deposit between him
and petitioners, nor between the latter and Moreman in his favor, and (2) that there were construction
materials in petitioners' warehouse at the time of respondent's demand to return the same, the Court holds
that petitioners have no corresponding obligation or liability to respondent with respect to those
construction materials.

22

TRIPLE-V FOOD SERVICES INC. vs. FILIPINO MERCHANTS INSURANCE COMPANY, GR. No.
160554, February 21, 2005

FACTS: Mary Jo-Anne De Asis dined at petitioner's Kamayan Restaurant. De Asis was using a Mitsubishi
Galant Super Saloon Model 1995 issued by her employer Crispa Textile Inc.. On said date, De Asis availed of
the valet parking service of petitioner and entrusted her car key to petitioner's valet counter. Afterwards, a
certain Madridano, valet attendant, noticed that the car was not in its parking slot and its key no longer in the
box where valet attendants usually keep the keys of cars entrusted to them. The car was never recovered.
Thereafter, Crispa filed a claim against its insurer, herein respondent Filipino Merchants Insurance Company,
Inc. Having indemnified Crispa for the loss of the subject vehicle, FMICI, as subrogee to Crispa's rights, filed
with the RTC at Makati City an action for damages against petitioner Triple-V Food Services, Inc. Petitioner
claimed that the complaint failed to adduce facts to support the allegations of recklessness and negligence
committed in the safekeeping and custody of the subject vehicle. Besides, when De Asis availed the free
parking stab which contained a waiver of petitioner’s liability in case of loss, she had thereby waived her rights.

ISSUE: Whether or not petitioner Triple-V Food Services, Inc. is liable for the loss.

HELD: The Supreme Court ruled in the affirmative. In a contract of deposit, a person receives an object
belonging to another with the obligation of safely keeping it and returning the same. A deposit may be
constituted even without any consideration. It is not necessary that the depositary receives a fee before it
becomes obligated to keep the item entrusted for safekeeping and to return it later to the depositor. Petitioner
cannot evade liability by arguing that neither a contract of deposit nor that of insurance, guaranty or surety for
the loss of the car was constituted when De Asis availed of its free valet parking service.

23
BISHOP OF JARO VS DELA PENA, 26 Phil 144

FACTS: In 1898, Fr. Agustin Dela Pena deposited in his personal account a sum of money entrusted to him for
the construction of a leper hospital. Thereafter, Father De la Peña was arrested by the military authorities as a
political prisoner. While under detention, Fr. Dela Pea made an order on said bank in favor of the United States
Army officer under whose charge he was then for the sum thus deposited in said bank. The arrest of Father De
la Peña and the confiscation of the funds in the bank were the result of the claim of the military authorities that
he was an insurgent and that the funds thus deposited had been collected by him for revolutionary purposes. The
money was taken from the bank by the military authorities by virtue of such order and was turned over to the
Government.

ISSUE: Whether or not Father de la Peña is liable for the loss of the money under his trust.

HELD: The Supreme Court ruled in the negative. Father De la Peña's liability is determined by those portions
of the Civil Code which relate to obligations. Although the Civil Code states that "a person obliged to give
something is also bound to preserve it with the diligence pertaining to a good father of a family". It also
provides, following the principle of the Roman law, major casus est, cui humana infirmitas resistere non potest,
that "no one shall be liable for events which could not be foreseen, or which having been foreseen were
inevitable, with the exception of the cases expressly mentioned in the law or those in which the obligation so
declares."

24
CA AGRO-INDUSTRIAL DEVELOPMENT CORP. VS CA, 291 SCRA 426

FACTS: Petitioner CA Agro-Industrial Development Corp. and the spouses Ramon and Paula Pugao rented a
Safety Deposit Box Security Bank and Trust Company. Certificates of title of parcels of land were then stored
therein. Thereafter, a certain Mrs. Margarita Ramos offered to buy two lots from petitioner. Mrs. Ramos
demanded the execution of a deed of sale which necessarily entailed the production of the certificates of title. In
view thereof, Aguirre, accompanied by the Pugaos, then proceeded to the Bank to open the safety deposit box
and get the certificates of title. However, when opened in the presence of the Bank's representative, the box
yielded no such certificates. By virtue of which, petitioner filed an action against the bank for the loss. The
bank, however, contended that they are not liable for the loss because, aside from the waiver signed by the
petitioner, what transpired between them is a contract of lease and not deposit.

ISSUE: Whether or not the contractual relation between a commercial bank and another party in a contract of
rent of a safety deposit box with respect to its contents placed by the latter one of bailor and bailee or one of
lessor and lessee.

HELD: The contract for the rent of the safety deposit box is not an ordinary contract of lease as defined in
Article 1643 of the Civil Code. However, the Court do not fully subscribe to its view that the same is a contract
of deposit that is to be strictly governed by the provisions in the Civil Code on deposit; the contract in the case
at bar is a special kind of deposit. It cannot be characterized as an ordinary contract of lease under Article 1643
because the full and absolute possession and control of the safety deposit box was not given to the joint renters
— the petitioner and the Pugaos. The guard key of the box remained with the respondent Bank; without this
key, neither of the renters could open the box. On the other hand, the respondent Bank could not likewise open
the box without the renter's key. In this case, the said key had a duplicate which was made so that both renters
could have access to the box.

25
G.R. No. 4015 August 24, 1908
ANGEL JAVELLANA, plaintiff-appellee,
vs.
JOSE LIM, ET AL., defendants-appellants.

FACTS: Defendants (Jose Lim and Ceferino Domingo Lim) executed a document in favor of
plaintiff-appellee(Angel Javellana) wherein it states that they have received, as a deposit, without
interest, money(2,686.58) from plaintiff-appellee and agreed upon a date (January 20, 1898) when they will
return themoney. Upon the stipulated due date, defendants asked for an extension to pay and binding
themselvesto pay 15% interest per annum on the amount of their indebtedness, to which the
plaintiff-appelleeacceded. The defendants were not able to pay the full amount of their indebtedness (Paid
only 1,000 ininterest) notwithstanding the request made by plaintiff-appellee. The lower court ruled in favor of
plaintiff-appellee for the recovery of the amount due.

ISSUE: Whether the agreement entered into by the parties is one of loan or of deposit?

HELD: The document executed was a contract of loan. Where money, consisting of coins of legal tender,is
deposited with a person and the latter is authorized by the depositor to use and dispose of the same,the
agreement is not a contract of deposit, but a loan. A subsequent agreement between the parties as tointerest
on the amount said to have been deposited, because the same could not be returned at the timefixed
therefore, does not constitute a renewal of an agreement of deposit, but it is the best evidence thatthe
original contract entered into between therein was for a loan under the guise of a deposit

26
GAVIERES vs. TAVERA
FACTS:
Don Manuel Gavieres, plaintiff, is the successor in interest of the deceased Doña Ignacia de Gorricho,
the depositor. On the other hand, Don Trinidad Tavera, defendant, is the universal heir of the deceased Felix
Tavera, the depositary.
On Januay 10, 1900, Gavieres interposed an appeal about the collection of the balance of P1,423.75
from Tavera, which amount is the remaining balance of the original obligation amounting to P3,000. Said
P3,000 is the amount of deposit delivered by deceased Gorricho to Felix Tavera on October 31, 1859. In the
document, Tavera received from Gorricho the sum of P3,000 as a deposit payable on 2 months' notice in
advance, with interest at 6% per annum.
Trinidad contended as a defense that the agreement was a contract of loan, not a deposit and as such
the original obligation was already extinguish due to prescription.
ISSUE:
Whether or not there is a contractual relation of a contract of deposit.
HELD:
 NO. Although in the document in question a deposit is spoken of, nevertheless from an examination of
the entire document it clearly appears that the contract was a loan and that such was the intention of the
parties. It is unnecessary to recur to the canons of interpretation to arrive at this conclusion. The obligation of
the depositary to pay interest at the rate of 6 per cent to the depositor suffices to cause the obligation to be
considered as a loan and makes it likewise evident that it was the intention of the parties that the depositary
should have the right to make use of the amount deposited, since it was stimulated that the amount could be
collected after notice of two months in advance. Such being the case, the contract lost the character of a
deposit and acquired that of a loan. (Art. 1768, Civil Code.)
All personal actions, such as those which arise from a contract of loan, cease to have legal effect after
twenty years according to the former law and after fifteen years according to the Civil Code now in force.

27
BARON vs. DAVID
FACTS:
David has been engaged in running a rice mill in Pampanga. Plaintiffs Barons are the aunt and uncle of
David. In 1920, Silvestra Baron and Guillermo Baron placed a quantity of palay in the defendant's mill which
amounted to 1,012 cavans and 1,865 cavans respectively. In January 17, 1921, a fired occurred in the mill of
David which destroyed all the palays therein. Both the plaintiffs claim that the palay which was delivered by
them to the defendant was sold to the defendant; while the defendant, on the other hand, claims that the
palay was deposited subject to future withdrawal by the depositors or subject to some future sale which was
never effected. David therefore supposes himself to be relieved from all responsibility by virtue of the fire. The
trial judge dismissed the complaint.
ISSUE:
Whether or not the palay was a deposit.
HELD:
NO. It should be stated that the palay in question was place by the plaintiffs in the defendant's mill with
the understanding that the defendant was at liberty to convert it into rice and dispose of it at his pleasure. The
mill was actively running during the entire season, and as palay was daily coming in from many customers and
as rice was being constantly shipped by the defendant to Manila, or other rice markets, it was impossible to
keep the plaintiffs' palay segregated. In fact the defendant admits that the plaintiffs' palay was mixed with that
of others. In view of the nature of the defendant's activities and the way in which the palay was handled in the
defendant's mill, it is quite certain that all of the plaintiffs' palay, which was put in before June 1, 1920, been
milled and disposed of long prior to the fire of January 17, 1921. Furthermore, the proof shows that when the
fire occurred there could not have been more than about 360 cavans of palay in the mill, none of which by any
reasonable probability could have been any part of the palay delivered by the plaintiffs. Considering the fact
that the defendant had thus milled and doubtless sold the plaintiffs' palay prior to the date of the fire, it
result that he is bound to account for its value, and his liability was not extinguished by the occurence of the
fire. In the briefs before us it seems to have been assumed by the opposing attorneys that in order for the
plaintiffs to recover, it is necessary that they should be able to establish that the plaintiffs' palay was delivered
in the character of a sale, and that if, on the contrary, the defendant should prove that the delivery was made
in the character of deposit, the defendant should be absolved. But the case does not depend precisely upon
this explicit alternative; for even supposing that the palay may have been delivered in the character of deposit,
subject to future sale or withdrawal at plaintiffs' election, nevertheless if it was understood that the defendant
might mill the palay and he has in fact appropriated it to his own use, he is of course bound to account for its
value. Under article 1768 of the Civil Code, when the depository has permission to make use of the thing
deposited, the contract loses the character of mere deposit and becomes a loan or a commodatum; and of
course by appropriating the thing, the bailee becomes responsible for its value.

28
US vs. IGPAURA
FACTS:
The defendant Igpuara was charged with the crime of estafa. Defendant received P2,498 from Juana
Montilla and Eugenio Veraguth. The defendant drew up a document receiving said some of money and stated
that such is payable on demand. The money remained in the possession of defendant, with the purpose of
taking care of it, at the disposal of Veraguth.
The CFI of Ilo-Ilo sentenced the defendant to two years of presidio correccional and to pay Juana
Montilla P2,498.
Defendant appealed arguing that what he received was a loan not a deposit.
ISSUE:
Whether or not the defendant can appropriate or use the thing deposited.
HELD:
NO. It is also erroneous to assert that sum of money set forth in said instrument is, according to it, in
the defendant's possession as a loan. In a loan the lender transmits to the borrower the use of the thing lent,
while in a deposit the use of the thing is not transmitted, but merely possession for its custody or safe-keeping.
In order that the depositary may use or dispose of the things deposited, the depositor's consent is required,
and then:
The rights and obligations of the depositary and of the depositor shall cease, and the rules and provisions
applicable to commercial loans, commission, or contract which took the place of the deposit shall be observed.
(Art. 309, Code of Commerce.)
The defendant has shown no authorization whatsoever or the consent of the depositary for using or
disposing of the P2,498, which the certificate acknowledges, or any contract entered into with the depositor to
convert the deposit into a loan, commission, or other contract.
29

DURBAN APARTMENTS V. PIONEER INSURANCE

G.R. NO. 179419. JANUARY 12, 2011

FACTS:
• Jeffrey See (See) checked-in at City Garden Hotel (Durban). He gave the keys of his car to
Vicente Justimbaste (Justimbaste) for valet parking.
• The car was catnapped on the premises of Durban.
• See recovered damages from Pioneer Insurance and Surety Corporation (PIS) for the amount
of PHP 1,175,000.
• PIS, as as subrogee of See, filed an action against Durban for recovery of PHP 1,175,000 for the
value of the lost car due to the negligence of the latter.
•

ISSUE:
• Did a contract of necessary deposit existed between See and Durban?

RULING:
• YES. The contract of necessary deposit was perfected from See’s delivery, when See handed
over the keys of his car to Justimbaste, being a hotel employee of Durban, which the latter
received the obligation of safely keeping and returning it.

30
YHT REALTY CORPORATION VS. CA, GR. No. 126780, February 17, 2005

FACTS: Maurice Mcloughlin is an Australian philanthropist, businessman, and a tourist. In his various trips
from Australia going to different countries, one of which is the Philippines, he would stay in Tropicana Inn
which is owned by YHT Realty Corp. After series of transactions with the inn as depositary of his belongings,
he noticed that his money and several jewelries would be either reduced or lost. He then decided to file an
action against Tropicana and its inn-keepers. However, the latter argued that they have no liability with regard
to the loss by virtue of the undertaking signed by Mcloughlin. Such undertaking is a waiver of the inn’s liability
in case of any loss. The RTC and CA both decided that such undertaking is null and void as contrary to the
express provisions of the law. Hence, the petition.

ISSUE: Whether or not the subject undertaking is null and void

HELD: The court ruled in the affirmative. Art. 2003 of the Civil Code provides that, the hotel-keeper cannot
free himself from responsibility by posting notices to the effect that he is not liable for the articles brought by
the guest. Any stipulation between the hotel-keeper and the guest whereby the responsibility of the former as set
forth in Articles 1998 to 2001 is suppressed or diminished shall be void.
31
GAMES AND GARMENTS DEVELOPERS, INC. v. ALLIED BANKING CORP.
Details: G.R. No. 181426 | July 13, 2015 | J. Leonardo-de Castro
Topic: Guaranty / Surety
Doctrine:
Facts:
1. Bienvenida, married to Benedicto Pantaleon, agreed to purchase a parcel of land from Games and Garments
Developers, Inc. (GGDI), for the sums of P14,000,000.00.
2. Mercado (Branch Manager of Allied Bank-Pasong Tamo) wrote a letter to GGDI that the Sps. Pantaleon have
a loan of 11M with Allied Bank, and that the portion of the proceeds of which shall be used to partially
liquidate the account with GGDI.
3. To secure her loan for P14,000,000.00 approved by Allied Bank, Bienvenida executed a Real Estate Mortgage
over the subject.
4. Bienvenida paid GGDI using 2 Allied bank checks.
5. When GGDI deposited the two Allied Bank checks dated March 28, 1997 issued by Bienvenida, said
checks were dishonored for being "Drawn Against Insufficient Funds."
6. GGDI filed before the RTC a Complaint for Breach of Contract (Rescission) and Damages with prayer for
Preliminary Attachment against the spouses Pantaleon, Mercado, and Allied Bank
7. RTC ruled in favor of GGDI.
8. CA reversed RTC. The Court of Appeals adjudged that Allied Bank should not be held liable under the
MOA and Deed of Sale executed between the spouses Pantaleon and GGDI for the bank was not a party or a
witness to the said documents. Neither should Allied Bank be held liable under the letters of guaranty
Mercado executed.
9. GGDI appealed to SC.

Issue:
WON Allied Bank is liable as guarantor of Sps. Pantaleon by virtue of Mercado’s letter? – NO (It wasn’t even a
letter of guaranty)

Held:
• Sec. 74. No bank or banking institution shall enter, directly, or indirectly, into any contract of guaranty
or suretyship, or shall guarantee the interest or principal of any obligation of any person, copartnership,
association, corporation or other entity. The provisions of this section shall, however, not apply to the
following: (a) borrowing of money by banking institution through the rediscounting of receivables; (b)
acceptance of drafts or bills of exchange; (c) certification of checks; (d) transactions involving the release of
documents attached to items received for collection; (e) letters of credit transaction, including stand-by
arrangements; (f) repurchase agreements; (g) shipside bonds; (h) ordinary guarantees or indorsements in favor
of foreign creditors where the principal obligation involves loans and credits extended directly by foreign firms
or persons to domestic borrowers for capital investment purposes; and (i) other transactions which the
Monetary Board may, by regulation, define or specify as not covered by the prohibition.
• It is undisputed that Mercado wrote two "letters of guaranty". Although Mercado’s letters used the
words "guarantee" and "guaranty," the same do not constitute contracts of guaranty covered by the
prohibition under Section 74 of the General Banking Act, as amended.
• There was no express undertaking in Mercado’s letters to pay Bienvenida’s debt to GGDI in case
Bienvenida failed to do so. In said letters, Mercado merely acknowledged that Bienvenida and/or her company
had an approved real estate loan with Allied Bank and guaranteed that subsequent releases from the loan
would be made directly to GGDI provided that the certificate of title over the subject property would be
transferred to Bienvenida’s name and the real estate mortgage constituted on the subject property in favor of
Allied Bank would be annotated on the said certificate.
• Mercado, by the plain language of his letters, merely committed to the manner by which the proceeds
of Bienvenida’s approved loan from Allied Bank would be released, but did not obligate Allied Bank to be
answerable with its own money to GGDI should Bienvenida default on the payment of the purchase price for
the subject property.
• For this reason, Mercado’s letters may not be deemed as contracts of guaranty, although they may be
binding as innominate contracts. The rule is settled that a contract constitutes the law between the parties
who are bound by its stipulations which, when couched in clear and plain language, should be applied
according to their literal tenor.
32
ALLIED BANKING CORPORATION vs. COURT OFAPPEALS AND JOSELITO Z. YUJUICOGR No.: G.R. No.
L-85868Date: October 13, 1989By: Jalaine AratanTopic: DOCTRINE OF RELATIONSBACKFACTS
On April 1, 1976, Joselito Z. Yujuico obtained a loan from the General Bank and Trust Company (GENBANK) in
theamount of P500,000.00, payable on or before April 1, 1977. As evidence thereof, Yujuicoissued a
corresponding promissory note in favor of GENBANK. At the time Yujuico was then a ranking officer of
GENBANK and a memberof the family owning the controlling interest in the said bank.
On March 25,1977, the Monetary Board of the Central Bank issued Resolution No. 675 forbidding GENBANK
fromdoing business in the Philippines. This was followed by Resolution No. 677 issued by the Monetary Board
on March29, 1977 ordering the liquidation of GENBANK.


It appears that in a Memorandum of Agreement dated May 9, 1977 executed by and between Allied Banking
Corporation(ALLIED) and Arnulfo Aurellano as Liquidator of GENBANK, ALLIED acquired all the assets and
assumed theliabilities of GENBANK, which includes the receivable due from Yujuico under the promissory note.


Upon failing to comply with the obligation under the promissory note, petitioner ALLIED, on February 7,
1979,filed a complaint against Yujuico for the collection of a sum of money. This case was docketed as Civil
Case No.121474 before the then Court of First Instance of Manila.


Sometime in 1987 and in the course of the proceedings in the court below, Yujuico, then defendant in the
court below,filed a Motion to Admit Amended/Supplemental Answer and Third-Party Complaint. Yujuico
sought to implead theCentral Bank and Arnulfo Aurellano as third-party defendants.
It was alleged in the third-party complaint that byreason of the tortious interference by the Central Bank with
the affairs of GENBANK, Yujuico was preventedfrom performing his obligation under the loan such that he
should not now be held liable thereon
.


RTC denied the admission of the third- party complaint. When the case was re-raffled presiding RTC Judge
Panis, onFebruary 29, 1988, reiterated the order denying the admission of private respondent's third-party
complaint. Yujuicofiled with the Court of Appeals a petition for certiorari, but was denied and the third party
complaint was admitted.
ISSUE
Had the alleged cause of action set forth in Yujuico’s proposed third
-party complaint has already prescribed?
HELD
YES.
It is the position of petitioner that the cause of action alleged in the third-party complaint has already
prescribed. Beingfounded on what was termed as tortious interference," petitioner asserts that the action
against third-party defendantsshould have been filed within four (4) years from the date the cause of action
accrued.
On the theory that the cause of action accrued on March 25, 1977, the date when the Monetary Board
ordered GENBANKto desist from doing business in the Philippines, petitioner maintains that the claim should
have been filed at the lateston March 25, 1981. On the other hand, private respondent relies on the "Doctrine
of Relations" or "Relations BackDoctrine" to support his claim that the cause of action as against the proposed
third-party defendant accrued only onDecember 12,1986 when the decision in CA-G.R. CV No. 03642 became
final and executory. Thus, it is contended thatwhile the third party complaint was filed only on June 17, 1987, it
must be deemed to have been instituted on February7, 1979 when the complaint in the case was filed.
There can be no question in this case that the action for damages instituted by private respondent arising from
the quasi-delict or alleged tortious interference" should
be filed within four (4) years from the day the cause of action accrued(March 25, 1977).
While technically the third party complaint in this case may be admitted as above discussed, however,since the
cause of action accrued on March 25, 1980 when the Monetary Board ordered the General Bank to desist
fromdoing business in the Philippines while the third party complaint was filed only on June 17, 1987,
consequently, theaction has prescribed. The third party complaint should not be admitted.
Doctrine
Doctrine of relations back. That principle of law by which an act done atone time is considered by a fiction of
law to have been done at someantecedent period. It is a doctrine which, although of equitable origin, has
awell-recognized application to proceedings at law; a legal fiction inventedto promote the ends of justice or to
prevent injustice and the occurrence of injuries where otherwise there would be no remedy.
33
Bank of Commerce vs Flores
G.R. No. 174006
December 8, 2010

Facts:

Spouse Flores borrowed money from petitioner bank in the amount of Nine Hundred Thousand Pesos
(P900,000.00) on Oct 1993. Respondents executed a Real Estate Mortgage5 over the condominium unit as
collateral, and the same was annotated at the back of CCT No. 2130. Two years later again the spouses
borrowed One Million One Hundred Thousand Pesos (P1,100,000.00) from petitioner bank, which was also
secured by a mortgage over the same property annotated at the back of CCT No. 2130.

On Jan 1996 respondents paid One Million Eleven Thousand Five Hundred Fifty-Five Pesos and 54 centavos
(P1,011,555.54), 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 to cancel the same and demanded
payment of Four Million Six Hundred Thirty-Three Thousand Nine Hundred Sixteen Pesos and Sixty-Seven
Centavos (P4,633,916.67), then petitioner bank applied for extra-judicial foreclosure of the mortgages over
the condominium unit. The public auction sale was scheduled on September 4, 1998.

Respondents filed suit with the RTC, Quezon City, assailing the validity of the foreclosure and auction sale of
the property.

RTC granted respondents’ prayer for issuance of a writ of preliminary injunction, restraining petitioner bank
from foreclosing on the mortgage and ordered that 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.

Upon appeal, CA rendered a Decision reversing the decision and the resolution of the RTC entering a new
order:

(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.

Issue:
WON 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.

Held:
Yes, 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.

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.

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.

Decision of the CA is REVERSED and SET ASIDE. The decision of the Regional Trial Court dated December 4,
2002 is hereby REINSTATED.
34
Castellvi de Higgins & Higgins vs. Sellner [G.R. No. L-158025, November 5, 1920]
MALCOLM, J.

Facts:
● Sellner (defendant) wrote a letter to Mcleod (Castellvi’s agent) saying that he would bound himself to
pay the promissory note of Mining, Clarke and Maye amounting 10K + interest if not fully paid at
maturity, upon the surrender 3k shares of Keystone Mining Company.
● Plaintiffs contend that he is a surety; defendant contends that he is a guarantor. Plaintiffs also admit
that if defendant is a guarantor, articles 1830, 1831, and 1834 of the Civil Code govern.

Issue: WON Sellner is a guarantor or surety?

Held:
● Sellner is a GUARANTOR. The letter of Mr. Sellner recites that if the promissory note is not paid at
maturity, then, within fifteen days after notice of such default and upon surrender to him of the three
thousand shares of Keystone Mining Company stock, he will assume responsibility.
● Sellner was not bound with Castellvi by the same instrument executed at the time and the same
consideration, but his responsibility was secondary, one founded on an independent collateral
agreement. Neither was he jointly and severally liable with Castellvi.
● In the original Spanish of the Civil Code now in force in the Philippine Islands, Title XIV of Book IV is
entitled "De la Fianza." The Spanish word "fianza" is translated in the Washington and Walton editions
of the Civil Code as "security." "Fianza" appears in the Fisher translation as "suretyship." The Spanish
world "fiador" is found in all of the English translations of the Civil Code as "surety." The law of
guaranty is not related of by that name in the Civil Code, although indirect reference to the same is
made in the Code of Commerce. In terminology at least, no distinction is made in the Civil Code
between the obligation of a surety and that of a guarantor.
● A surety and a guarantor are alike in that each promises to answer for the debt or default of another. A
surety and a guarantor are unlike in that the surety assumes liability as a regular party to the
undertaking, while the liability as a regular party to upon an independent agreement to pay the
obligation if the primary pay or fails to do so. A surety is charged as an original promissory; the
engagement of the guarantor is a collateral undertaking. The obligation of the surety is primary; the
obligation of the guarantor is secondary.
● The civil law suretyship is, accordingly, nearly synonymous with the common law guaranty; and the civil
law relationship existing between codebtors liable in solidum is similar to the common law suretyship.

35
MACHETTI VS HOSPICIO

Facts:

Romulo Machetti, by a written agreement undertook to construct a building on Calle Rosario in the city of
Manila for the Hospicio de San Jose, the contract price being P64,000. One of the conditions of the agreement
was that the contractor should obtain the "guarantee" of the Fidelity and Surety Company of the Philippine
Islands to the amount of P128,800.
Subsequently it was found that the work had not been carried out in accordance with the specifications which
formed part of the contract and that the workmanship was not of the standard required, and the Hospicio de
San Jose therefore answered the complaint and presented a counterclaim for damages for the partial
noncompliance with the terms of the agreement abovementioned, in the total sum of P71,350.

After issue was thus joined, Machetti was declared insolvent so Hospicio de San Jose filed a motion asking that
the Fidelity and Surety Company be made cross-defendant.

Issue: WON Fidelity liable to pay.

Held:

Machetti’s liability is what the Fidelity and Surety Company assumed in the present case. The undertaking is
perhaps not exactly that of a fianzaunder the Civil Code, but is a perfectly valid contract and must be given the
legal effect if ordinarily carries. The Fidelity and Surety Company having bound itself to pay only the event its
principal, Machetti, cannot pay it follows that it cannot be compelled to pay until it is shown that Machetti is
unable to pay. Such ability may be proven by the return of a writ of execution unsatisfied or by other means,
but is not sufficiently established by the mere fact that he has been declared insolvent in insolvency
proceedings under our statutes, in which the extent of the insolvent's inability to pay is not determined until
the final liquidation of his estate.

The judgment appealed from is therefore reversed without costs and without prejudice to such right of action
as the cross-complainant, the Hospicio de San Jose, may have after exhausting its remedy against the plaintiff
Machetti. So ordered.
36
Consuelo Piczon
-versus-
Esteban Piczon

G.R. No. L-29139, November 15, 1974

FACTS:

Sosing-Lobos & Co. obtained loan of P12,500.00 from Piczon Co. Inc. Esteban Piczon, who is the
President of Sosing-Lobos, bound himself as guarantor and agreed to the use of the loan as surety
cash deposit for the registration with the Securities and Exchange Commission (SEC) of the
incorporation papers. He also agreed to return or pay the same amount with 12% interest per annum
commencing from the date of execution. Consuelo Piczon brought action to recover the amount
loaned. The court ruled in favour of Consuelo Piczon and ordered Esteban Piczon and Sosing-Lobos
to pay him as guarantor the amount of the loan plus interest.

ISSUE: WON Esteban Piczon is a surety or a guarantor?

HELD:
Under the terms of the contract Esteban Piczon expressly bound himself only as guarantor. There
was no other stipulation or are there any circumstances on record from which it can be deduced that
his liability could be that of surety. A guaranty must be express, and it would be in violation of the law
to consider a party to be bound as surety when the very word used in the agreement is “guarantor”.
37
International Finance vs Imperial Textile
Date: November 15, 2005
Petitioner: International Finance Corporation
Respondent: Imperial Textile Mills Inc

Ponente: Panganiban

Facts: - On December 17, 1974, IFC and Philippine Polyamide Industrial Corporation entered into a loan
agreement wherein IFC extended to PPIC a loan of US$7,000,000 payable in sixteen (16) semi-annual
installments of US$437,500.00 each, with 10% interest. The interest shall be paid in US dollars semi-annually.
A ‘Guarantee Agreement’ was executed with ITM, Grand Textile Manufacturing Corporation and IFC as parties.
ITM and Grandtex agreed to guarantee PPIC’s obligations under the loan agreement.
PPIC defaulted payments. By virtue of PPIC’s failure to pay, IFC, together with DBP, applied for the
extrajudicial foreclosure of mortgages on the real estate, buildings, machinery, equipment plant and all
improvements owned by PPIC. During the public sale, IFC’s bid was for P99,269,100 which was equivalent to
US$5,250,000. The outstanding loan, however, amounted to US$8,083,967, thus leaving a balance of
US$2,833,967 PPIC failed to pay the remaining balance. Consequently, IFC demanded ITM and Grandtex, as
guarantors of PPIC, to pay the outstanding balance. However, the two failed to pay.
- IFC filed a complaint against PPIC and ITM for the payment of the outstanding balance plus interests
and attorney’s fees. The trial court dismissed the complaint against ITM. The CA reversed and held that ITM
bound itself under the Guarantee Agreement. The CA, however, held that ITM’s liability as a guarantor would
arise only if and when PPIC could not pay. Since PPIC’s inability to comply with its obligation was not
sufficiently established, ITM could not immediately be made to assume the liability.

Issue: WON ITM and Grandtex are sureties and therefore, jointly and severally liable with PPIC, for the
payment of the loan.

Held: Yes

Ratio: - IFC claims that, under the Guarantee Agreement, ITM bound itself as a surety to PPIC’s obligations
proceeding from the Loan Agreement. For its part, ITM asserts that, by the terms of the Guarantee Agreement,
it was merely a guarantor and not a surety. Moreover, any ambiguity in the Agreement should be construed
against IFC -- the party that drafted it.
- The Agreement uses “guarantee” and “guarantors,” prompting ITM to base its argument on those
words. This Court is not convinced that the use of the two words limits the Contract to a mere guaranty. The
specific stipulations in the Contract show otherwise. While referring to ITM as a guarantor, the Agreement
specifically stated that the corporation was “jointly and severally” liable. To put emphasis on the nature of
that liability, the Contract further stated that ITM was a primary obligor, not a mere surety. Those stipulations
meant only one thing: that at bottom, and to all legal intents and purposes, it was a surety.
- Indubitably therefore, ITM bound itself to be solidarily liable with PPIC for the latter’s obligations
under the Loan Agreement with IFC. ITM thereby brought itself to the level of PPIC and could not be deemed
merely secondarily liable.
- Initially, ITM was a stranger to the Loan Agreement between PPIC and IFC. ITM’s liability commenced
only when it guaranteed PPIC’s obligation. It became a surety when it bound itself solidarily with the principal
obligor. Thus, the applicable law is Art 2047 CC. Pursuant to this provision, petitioner (as creditor) was justified
in taking action directly against respondent.
- The Court does not find any ambiguity in the provisions of the Guarantee Agreement. When qualified
by the term “jointly and severally,” the use of the word “guarantor” to refer to a “surety” does not violate the
law. As Art 2047 provides, a suretyship is created when a guarantor binds itself solidarily with the principal
obligor. Likewise, the phrase in the Agreement -- “as primary obligor and not merely as surety” -- stresses that
ITM is being placed on the same level as PPIC. Those words emphasize the nature of their liability, which the
law characterizes as a suretyship.
- The use of the word “guarantee” does not ipso facto make the contract one of guaranty. This Court
has recognized that the word is frequently employed in business transactions to describe the intention to be
bound by a primary or an independent obligation. The very terms of a contract govern the obligations of the
parties or the extent of the obligor’s liability. Thus, this Court has ruled in favor of suretyship, even though
contracts were denominated as a “Guarantor’s Undertaking” or a “Continuing Guaranty.”
- Indeed, the finding of solidary liability is in line with the premise provided in the “Whereas” clause of
the Guarantee Agreement. The execution of the Agreement was a condition precedent for the approval of
PPIC’s loan from IFC. Consistent with the position of IFC as creditor was its requirement of a higher degree of
liability from ITM in case PPIC committed a breach. ITM agreed with the stipulation in Section 2.01 and is now
estopped from feigning ignorance of its solidary liability. The literal meaning of the stipulations control when
the terms of the contract are clear and there is no doubt as to the intention of the parties.
- We note that the CA denied solidary liability, on the theory that the parties would not have executed a
Guarantee Agreement if they had intended to name ITM as a primary obligor. The appellate court opined that
ITM’s undertaking was collateral to and distinct from the Loan Agreement. On this point, the Court stresses
that a suretyship is merely an accessory or a collateral to a principal obligation. Although a surety contract is
secondary to the principal obligation, the liability of the surety is direct, primary and absolute; or equivalent to
that of a regular party to the undertaking. A surety becomes liable to the debt and duty of the principal obligor
even without possessing a direct or personal interest in the obligations constituted by the latter.
- With the present finding that ITM is a surety, it is clear that the CA erred in declaring the former
secondarily liable. A surety is considered in law to be on the same footing as the principal debtor in relation to
whatever is adjudged against the latter. Evidently, the dispositive portion of the assailed Decision should be
modified to require ITM to pay the amount adjudged in favor of IFC.

38
FABIOLA SEVERINO, plaintiff-appellee, v. GUILLERMO SEVERINO, defendant-appellant.
FELICITAS VILLANUEVA, Intervenor-Appellee.
G.R. No. 18058 || January 16, 1923 || OSTRAND, J. :

Agent: Defendant Guillermo Severino

Principal: Melecio Severino

FACTS:

Melecio Severino owned 428 hectares of land in Silay, Occidental Negros. During Melecio’s lifetime,
his brother, Guillermo, worked to administer the land for Melecio’s behalf. When Melecio died in 1915,
Guillermo continued to occupy the said land. In 1916, a parcel survey was made of the lands in the
municipality of Silay, including the land here in question, and cadastral proceedings were instituted for
the registration of the land titles within the surveyed area. In the cadastral proceedings, Roque
Hofileña, as lawyer for Guillermo, filed answers in Guillermo’s behalf, claiming the lots mentioned as
the property of his client. No opposition was presented in the proceedings, therefore, the court
decreed the title in Guillermo’s favor in 1917.

It may be further observed that at the time of the cadastral proceedings, Fabiola was a minor; that
Guillermo did not appear personally in the proceedings and did not there testify; that the only
testimony in support of his claim was that of his attorney Hofileña, who swore that he knew the land
and that he also knew that Guillermo Severino inherited the land from his father and that he, by
himself, and through his predecessors in interest, had possessed the land for thirty years.

Thus, this action brought by Fabiola, alleged natural daughter and sole heir of Melecio to compel D to
convey to her four parcels of land described in the complaint, or in default thereof to pay her the sum
of P800,000 in damages for wrongfully causing said land to be registered in his own name. Felicitas
Villanueva, in her capacity as administratrix of the estate of Melecio Severino, has filed a complaint in
intervention claiming the same relief as P, except in so far as she prays that the conveyance be
made, or damages paid, to the estate.

LC: recognized Fabiola as the natural child of Melecio; ordered Guillermo to convey the land to the
administratrix of the estate. The court did not allow Guillermo to present evidence to the effect that
the land was owned in common by all heirs of Ramon Severino (father of the Severino brothers), and
not by Melencio alone. The court also said that Guillermo was already stopped from denying
Melencio’s title (in the Ratio, there was a previous case Montelibano vs Severino wherein Guillermo
himself admitted that he was Melencio’s mere agent and that the land was Melencio’s)

ISSUES:
W/N Guillermo employed fraud in procuring title to the land - YES

RATIO:

Guillermo: Since the present action is with regard to the alleged fraud on his part in registering the
land in his name, he should have been allowed to present evidence (See LC ruling above). Also,
more than a year having elapsed since the entry of the final decree adjudicating the land to the
defendant, therefore, said decree cannot now be re-opened. Under Section 38 of the Land
Registration Act, he has an indefeasible title to the land and that the question of ownership of the land
being thus judicially settled, the question as to the previous relations between the parties cannot now
be inquired into.

SC: This is not an action under Section 38 of the LRA to reopen or set aside a decree; it is an action
in personam against an agent to compel him to return, or retransfer, to the heirs or the estate
of its principal, the property committed to his custody as such agent, to execute the
necessary documents thereof, to pay damages.

Proof of Agency

D’s testimony in the case of Montelibano v. Severino (which forms a part of the evidence in the
present case) is, in fact, conclusive in this respect. He there stated under oath that from the year
1902 up to the time the testimony was given, in the year 1913, he had been continuously in charge
and occupation of the land as the encargado or administrator of Melecio Severino; that he had always
known the land as the property of Melecio Severino; and that the possession of the latter had been
peaceful, continuous, and exclusive. In his answer filed in the same case, the same defendant,
through his attorney, disclaimed all personal interest in the land and averred that it was wholly the
property of this brother Melecio.

Neither is it disputed that the possession enjoyed by the defendant at the time of obtaining his decree
was of the same character as that held during the lifetime of his brother, except in so far as shortly
before the trial of the cadastral case the defendant had secured from his brothers and sisters a
relinquishment in his favor of such rights as they might have in the land.
Agent-Principal Relationship is Fiduciary

It is an elementary and very old rule that in regard to property forming the subject-matter of the
agency, an agent is estopped from acquiring or asserting a title adverse to that of the principal. His
position is analogous to that of a trustee and he cannot consistently, with the principles of good faith,
be allowed to create in himself an interest in opposition to that of his principal or cestui que trust. The
Court then cited several US cases to this effect.

An agent is not only estopped from denying his principal’s title to the property, but he is also disabled
from acquiring interests therein adverse to those of his principal during the term of the agency.

The decree of registration did not extinguish the principal’s personal right of action

The decree of registration determined the legal title to the land as of the date of the decree; as to that
there is no question. That, under section 38 of the LRA, this decree became conclusive after one year
from the date of the entry is not disputed and no one attempts to disturb the decree of the
proceedings upon which it is based; the plaintiff in intervention merely contends that in equity the
legal title so acquired inured to the benefit of the estate of Melecio Severino, D’s principal and cestui
que trust and asks that this superior equitable right be made effective by compelling D as the holder
of the legal title, to transfer it to the estate.

Before the issuance of the decree of registration it was the undoubted duty of the defendant to restore
the property committed to his custody to his principal, or to the latter’s estate, and that the principal
had a right of action in personam to enforce the performance of this duty and to compel the
defendant to execute the necessary conveyance to that effect. The only question remaining for
consideration is, therefore, whether the decree of registration extinguished this personal right of
action.

Turning to our own Land Registration Act, we find no indication there of an intention to cut off, through
the issuance of a decree of registration, equitable rights or remedies such as those here in question.
On the contrary, section 70 of the Act provides:

"Registered lands and ownership therein, shall in all respects be subject to the same burdens and
incidents attached by law to unregistered land. Nothing contained in this Act shall in any way be
construed to relieve registered land or the owners thereof from any rights incident to the relation of
husband and wife, or from liability to attachment on mesne process or levy on execution, or from
liability to any lien of any description established by law on land and the buildings thereon, or the
interest of the owner in such land or buildings, or to change the laws of descent, or the rights of
partition between copartners, joint tenants and other cotenants, or the right to take the same by
eminent domain, or to relieve such land from liability to be appropriated in any lawful manner for the
payment of debts, or to change or affect in any other way any other rights or liabilities created by law
and applicable to unregistered land, except as otherwise expressly provided in this Act or in the
amendments hereof."

Section 102 of the Act, after providing for actions for damages in which the Insular Treasurer, as the
Custodian of the Assurance Fund is a party, contains the following proviso:

"Provided, however, That nothing in this Act shall be construed to deprive the plaintiff of any action
which he may have against any person for such loss or damage or deprivation of land or of any
estate or interest therein without joining the Treasurer of the Philippine Archipelago as a defendant
therein."

That an action such as the present one is covered by this proviso can hardly admit of doubt. In
Cabanos v. Register of Deeds of Laguna and Obinana (40 Phil., 620), it was held that, while a
purchaser of land under a pacto de retro cannot institute a real action for the recovery thereof where
the vendor under said sale has caused such lands to be registered in his name without said vendee’s
consent, yet he may have his personal action based on the contract of sale to compel the execution
of an unconditional deed for the said lands when the period for repurchase has passed.

Torrens titles being based on judicial decrees there is, of course, a strong presumption in favor of
their regularity or validity, and in order to maintain an action such as the present the proof as to the
fiduciary relation of the parties and of the breach of trust must be clear and convincing. Such proof is,
as we have seen, not lacking in this case.

But once the relation and the breach of trust on the part of the fiduciary is thus established, there is
no reason, neither practical nor legal, why he should not be compelled to make such reparation as
may lie within his power for the injury caused by his wrong, and as long as the land stands registered
in the name of the party who is guilty of the breach of trust and no rights of innocent third parties are
adversely affected, there can be no reason why such reparation should not, in the proper case, take
the form of a conveyance or transfer of the title to the cestui que trust. No reasons of public policy
demand that a person guilty of fraud or breach of trust be permitted to use his certificate of title as a
shield against the consequences of his own wrong.

39
Municipality of Gasan vs. Marasigan
September 30, 1936
GR. No. 43486

Facts:
The Municipality of Gasan, Marinduque auctioned the privilege to gather whitefish spawn
(bangus) in its jurisdictional waters for a period of one year. Two bidders appeared, Graciano Napa
and Miguel Marasigan. The Municipality awarded the privilege to Marasigan.
To secure his compliance with the terms of the contract Marasigan filed a bond, subscribed by
the defendants-appellants Angel R. Sevilla and Gonzalo L. Luna, who bound themselves in said
document to pay to the plaintiff if Marasigan failed to deposit in advance in the municipal treasury of
Gasan. Said defendants-appellants became sureties in the contract between Marasigan and the
Municipilality.
Before the plaintiff municipality and Miguel Marasigan entered into their contract, and also
before the latter's sureties executed the above-stated bond, Graciano Napa, forwarded a protest to
the provincial board, which protest was later indorsed by said provincial board to the Chief of the
Executive Bureau. The Bureau declared the contract illegal. Graciano however failed to pay deposit
and yielded the privilege to Marasigan.
 The municipality told Marasigan that the contract was to be effective so the municipality sought
to recover from Marasigan and two other appellants the amount representing the license fee.

Issue: Whether or not the contract is enforceable and the sureties are bound to perform their
obligation as sureties.

Held:
No. It is a fact that, said contract ceased to have life or force to bind each of the contracting
parties. It ceased to be valid from the time it was cancelled and this being so, neither the appellant
Marasigan nor his sureties or the appellants were bound to comply with the terms of their respective
contracts of fishing privilege and suretyship. This is so, particularly with respect to the
sureties-appellants, because suretyship cannot exist without a valid obligation.
Therefore, after eliminating the obligation for which said sureties-appellants desired to answer
with their bond, the bond necessarily ceased and it ceases to have effects.

40
Plaridel Surety & Insurance Co. vs. Artex Dev’t Co., Inc.

FACTS:
Artex withdrew from the Bureau of Customs shipments of imported goods which were subject to
customs duties and other taxes after posting surety bonds pursuant to RA 4086 because its
applications for tax exemptions were not approved by the Board of Industries. In consideration of the
obligation assumed by Plaridel, Artex agreed to pay the premiums and cost of documentary stamps in
advance due on bonds for each period of 12 months until bonds and its renewals, extensions or
substitutions be cancelled in full by the person or entity guaranteed or by court of competent
jurisdiction. Artex stopped paying premiums and costs of documentary stamps after it was granted tax
exemption. Plaridel maintains that it renewed the surety bonds more or less 8 months before the tax
exemption. Plaridel seeks recovery from respondent company P20,570.24 worth of renewal of
premiums on bonds which were already null and void upon grant of tax exemption to principal

ISSUE:
Whether or not Artex is liable for accrued premiums and costs of doc stamps on renewals of the
surety bonds after grant of tax exemption to Plaridel?

HELD:
No. Suretyship cannot exsist without valid obligation (Art. 2052 par. 1). The renewals were without
consideration. Plaridel incurred no risk from Artex’ tax exemption application was approved. Any
renewals were void from the beginning because the cause or object of said renewals did not exist at
the time of the transtaction. Express stipulation by parties, surety bonds became null and void upon
grant of tax exemption.

41
FIDELIZA J. AGLIBOT , Petitioner, vs. INGERSOL L. SANTIA, Respondent.
G.R. No. 185945
December 05, 2012

FACTS:

Private respondent-complainant Engr. Ingersol L. Santia loaned the amount of P2,500,000.00 to Pacific Lending
& Capital Corporation (PLCC), through its Manager, petitioner Fideliza J. 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.

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. 

ISSUE: Whether or not Aglibot is an accommodation party or a guaranteeing party? If she is the latter, is she
benefitted from excussion against Santia?

HELD:
Aglibot is an accommodation party and therefore liable to Santia
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. 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.

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. 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.’

42
Standard Oil Co. of New York vs. Cho Siong

FACTS:
On January 27, 1926, Cho Siong obliged himself to sell as agent plaintiff’s petroleum products. He
guaranteed the fulfillment of his obligation by giving P3,000 personal bond subscribed by Ong Guan
Can, and with P1,000 in cash which he delivered to the plaintiff, with the right to apply it to the
payment of any amount which he might become indebted. He also bound himself to pay such
attorney’s fee, costs, and other expenses, as might be occasioned the plaintiff should it be under the
necessity of filing suit of any amount to which it might be entitled.
On the same day, Cho Siong signed an instrument in favor of the plaintiff assuming responsibility for
all accounts that might be owing to the plaintiff by former agent, Tong Kuan, and for all the latter might
have in his possession at the time when the agency was transferred to Choi Siong.
Cho Siong received from plaintiff P14,136.79 petroleum, and made good to plaintiff the total amount
of P14,027.33, leaving P64.46 in favor of the plaintiff. Adding the P3,132.96 amount owed by Tong
Kuan, Cho Siong has a total debt of P3,197.42.

ISSUE:
WON Ong Guan Can, as a surety should answer for the total amount of debt of Cho Siong.

HELD:
No. Excluding the amount of former agent, the only balance against Cho Siong is the sum of P64.46.
Considering the P1,000 cash received by plaintiff from Cho Siong which may be applied to the
payment of the sum owed by the latter, Cho Siong incurred no liability and he still has P935.54 in his
favor. Consequently, Ong Guan Can, as surety does not answer for anything, the principal not having
incurred any liability. He cannot be held for the debt of the former agent which Cho Siong assumed by
virtue of another contract of which Ong Cuan Can was not aware. A contract of suretyship is to be
strictly interpreted and is not to be extended beyond its term.

43

Municipality of Lemery vs. Mendoza and Blas

Facts: Municipality of Lemery granted fishing privileges to D for a period of 2 years for the sum of 23K for
each year. Mendoza and Blas as bondsmen, executed a document which declared, among other thing, the lease
by D of the privilege of fishing referred to for the term of 2 years. In said document, Mendoza and Blass
obligated themselves jointly and severally to pay the sum of 46K in case D shall fail to comply with the
conditions of the bond of which we are informed. D failed to pay.
Issue: WON Mendoza and Blas are bound to pay 46K or 23K

Held: 23K. The obligating clause of the contract of guaranty is quite clear to the effect that the rent to be paid
for the privilege of fishery was 23K for the full term of 2 years. It is true that Mendoza and Blas declared 46K,
but it was only because the bond was required to be made in double the amount of the principal liability as an
assurance of the performance of the principal obligation.
44

G.R. No. L-808

PACIFIC TOBACCO CORPORATION vs LORENZANA

FACTS:

The Pacific Tobacco Corporation is a duly organized domestic corporation with offices at Grace Park,
Caloocan, Rizal, engaged in the business of manufacturing and distributing cigarettes, cigars and other tobacco
products.

On January 16, 1952, Ricardo D. Lorenzana and said corporation entered into an agreement were Lorenza will
be selling and distributing the products of the COMPANY. And one of the stipulations stated :

To guarantee the faithful performance on his part of the terms and conditions of this contract, the
DISTRIBUTOR shall post a surety bond in favor of the COMPANY in the amount of EIGHT THOUSAND
ONLY ——— PESOS (P8,000.00 signed by him and a reputable surety company acceptable to the COMPANY,
THREE THOUSAND PESOS (P3,000.00) of which bond shall answer for the faithful settlement of the account
of the DISTRIBUTOR with the COMPANY, and FIVE THOUSAND PESOS (5,000.00) for the return of the
aforementioned truck to the COMPANY in the same condition that the DISTRIBUTOR received it, . . .

In accordance thereto, Lorenzana put up V.S. and I.C. bond No. E-JA-52/101 in the amount of P3,000 with the
Visayan Surety and Insurance Corporation, as surety to guarantee the faithful fulfillment of the principal's
(Lorenzana's) part in the contract with the Pacific Tobacco Corporation, which was "to sell and distribute the
latter's cigarettes, cigar and other tobacco products subject to the terms and conditions stipulated in the said
contract"

The record shows that on various occasions in 1952, The Philippine Tobacco Corporation delivered to
Lorenzana for distribution cigarettes, cigars, and other tobacco products amounting to P15,645.64, but out of
this amount the latters paid and was only credited with P13,559.33, leaving a balance of P2,086.31.

Upon demand by the corporation. Lorenzana proposed to settle his pending obligation.As he failed to make any
further payment, the Philippine Tobacco Corporation filed a complaint with the Court of First Instance of
Manila for the recovery of the sum of P2,086.31, with legal interest to with the Court of First Instance of Manila
on October 30, 1953, against Ricardo D. Lorenzana and the Visayan Surety and Insurance Corporation.

Appellant surety argues that the bond guarantees only the payment of cigarettes, cigars or other tobacco
products that were delivered to and distributed by Lorenzana in Manila and Rizal and at no other place.

ISSUE:

Whether or not strictissimi juris applies in the case at bar.

HELD :
NO

This rule has no bearing on the case at bar.

It is well-settled that the rule of stricticcimi juris, ordinarily applied in relief of an individual surety, is not
applied in case of compensated sureties; and that where a bonding company, for a monetary consideration, has
insured against failure of performance of a contract, it must show that it has suffered some injury by reason of
departure from the strict terms of contract, before it can for that reason be discharged from its liability (Pickens
County vs. National Surety Co. 13 F. [2d] 758 [C.C.A.] 4th, 1926).

A departure from the terms of the contract will not have the effect of discharging a compensated surety unless it
appears that such departure has resulted in injury, loss or prejudice to the surety (Chapman vs. Hoage, 296 U.S.
526).

It has been said that to allow compensated surety companies to collect and retrain premiums for their services,
graded according to the nature and extent of the risk, and then to repudiate their obligations on slight pretexts
which have no relation to the risk, would be most unjust and immoral, and would be a perversion of the wise
and just rules designed for the protection of voluntary sureties (M. H. Waller Realty Co. vs. American Surety
Co., 60 Utah, 435).
45

G.R. NO.: L-24835

DATE OF JUDGMENT: July 31, 1970

PARTIES INVOLVED: PREPARATIONS COMMISSION, plaintiff-appellee, 

vs.
NORTHERN LINES INC., and FIELDMEN'S INSURANCE COMPANY,
INC., defendants-appellants.
Manguera, Sarmiento & Pacunayan for plaintiff-appellee.
Tipon, Velasco, Dizon, Rubio & Associates for defendant.
San Juan, Africa & Benedicto for defendant-appellant Northern Lines,
Inc.

OVERVIEW: This appeal, taken by the Northern Lines, Inc., and Fieldmen's Insurance Co.,
Inc., from a decision of the Court of First Instance of Manila which were
jointly tried and disposed of, has been certified by the CA, questions purely
of law having been raised in the appeal.

FACTS OF THE CASE: ⮚ Reparations Commission, had awarded 2 vessels to the

Northern Lines Inc., the buyer, for the use in the interisland
shipping.
⮚ The schedules of payment agreed upon between the parties is
upon the complete delivery. One of the vessels (M/S Don
Salvador) was delivered on April 25, 1960 and that of the
other (M/S Don Amando) which was delivered on May 26,
1960.
⮚ These objects were the object of separate deeds of conditional
purchase and sale of reparation goods executed by the vendor
(commission) and the vendee (NLI).
⮚ Surety Bonds were executed by the Buyer as the principal and
Fieldmen’s Insurance Co., in favor of the Commission as
surety to guarantee faithful compliance of the obligation under
the said contracts.
⮚ The Buyer undertook to pay the said vessels the installments
specified in a schedule of payments.
⮚ One day before the stated due date of the first installment,
Buyer instituted to the CFI of Manila to secure a declaration,
by way of declaratory relief, to the effect that the first
installments would be due and demandable on April 25, 1963
and May 26, 1963, respectively.
⮚ Commission alleged in 2 separate causes of action set forth
against the buyer and surety that despite repeated demands,
 they had refused to pay first installments. It prayed that the
buyer and surety be sentenced to pay jointly and severally with
interest at the legal rate in addition to attorney’s fees and the
costs.
⮚ Buyer admitted some allegations and denied other allegations
and by way of special defense, said that the Commission has
no cause of action until Civil Cases shall have been decided.
The Surety's answer contained similar admissions and denials,
apart from adopting as its own those made in the Buyer's
answer, and set up a crossclaim against the Buyer, for
reimbursement of whatever the Surety may have to pay to the
Commission by reason of its complaint, including interests,
and for the sum representing unpaid premiums and
documentary stamps due on the two bonds plus attorney's
fees and interests. CFI of Manila dismissed the civil cases.

ISSUE/S: 1. WON the determination of the appeal raised by the Buyer’s first
assignments and in the Surety's first assignment are of error.
2. WON Commission had no cause of action to the appellants until the cases
for a declaratory relief have been decided.

RULING/S: 1.
The major premise in appellants' process of reasoning is that the
installments due on April 25, 1963, and May 26, 1963, are "first"
installments, although they are not so designated in the schedule
appended to each of the contracts between the parties. Appellants,
moreover, assume that the "first" installment is included in the "ten
(10) equal yearly installments" mentioned subsequently to said "first"
installment. In fact, however, only one installment is labelled as "first"
in each one of said schedules, and that is the installment due on
"April 25, 1962" — as regards M/S Don Salvador or Magsaysay —
and that due on "May 26, 1962" — as regards M/S Don Amando or
Estancia. The schedules do not describe the ten (10) equal yearly
installments" — following the one characterized therein as "first" — as
first, second, third, etc. installments" — meaning "number," not order
or sequence of installments.
It is true that the one therein numbered is, in fact, the first, in the
list of "ten (10) equal yearly installments" following the "first," to
accrue after the due date of said "first" installment. Just the same, the
parties have not so described (as "first") — in the schedules forming
part of their contracts — the installments numbered "I" in the list
contained in each. Moreover, considering that the words "TERM: Ten
(10) EQUAL YEARLY INSTALLMENTS," appear after the lines
reading: "AMOUNT OF ITS INSTALLMENT (10% OF F.O.B. COST)
P174,761.42" and "DUE DATE OF 1ST INSTALLMENT April 25,
1962" (or May 26, 1962), and that subsequently to said "TERM: Ten
(10) EQUAL YEARLY INSTALLMENTS," there is a list of ten (10)
 equal yearly installments, it is clear that the latter do not include
the one designated as "first" installment.
2.
The lower court was, accordingly, justified in dismissing that case
inasmuch as an action for declaratory relief may be entertained only
"before breach or violation" of the law or contract to which it refers. The
purpose of the action is to secure an authoritative statement of the rights
and obligations of the parties under said law or contract, for their guidance
in the enforcement thereof or compliance therewith not to settle
issues arising from an alleged breach thereof. Accordingly, after such alleged
breach of the law or contract or once the aforementioned issue has arisen,
an ordinary action is the proper remedy.

The declaratory relief were commenced in anticipation of an action for

breach of contract, said cases having been filed precisely on the eve of the
due date of the "first" installment, as to, M/S Don Salvador and on the very
due date of the first installment, as to M/S Don Amando.
An action for a declaratory relief could be availed of to, in effect,
suspend, during its pendency, the force and operation of the
contracts in question, and thereby achieve a compulsory deferment
or postponement of the maturity of the obligations therein validly
contracted and assumed. Obviously, the Court cannot give the stamp
of its approval thereto.
The other assignments of error made by appellants herein are mere
corollaries to those already disposed of, and, hence need no further
discussion.

46

[ GR No. 47495, Aug 14, 1941 ]

TEXAS COMPANY v. TOMAS ALONSO +

DECISION

73 Phil. 90

LAUREL, J.:
On November 5, 1935 Leonor S. Bantug and Tomas Alonso were sued by the Texas Company (P. I.),
Inc. in the Court of First Instance of Cebu for the recovery of the sum of P629, unpaid balance of the
account of Leonor S. Bantug in connection with her agency contract with the Texas Company for the
faithful performance of which Tomas Alonso signed the following:

"For value received, we jointly and severally do hereby bind ourselves and each of us, in solidum, with
Leonor S. Bantug the agent named in the within and foregoing agreement, for full and complete
performance of same hereby waiving notice of non-performance by or demand upon said agent, and
consent to any and all extensions of time for performance. Liability under this undertaking, however,
shall not exceed the sum of P2,000, Philippine currency."

"Witness the hand and seal of the undersigned affixed in the presence of two witnesses, this 12th day
of August, 1929."

Leonor S. Bantug was declared in default as a result of her failure to appear or answer, but Tomas
Alonso filed an answer setting up a general denial and the special defenses that Leonor S. Bantug
made him believe that he was merely a co-security of one Vicente Palanca and that he was never
notified of the acceptance of his bond by the Texas Company. After trial, the Court of First Instance of
Cebu rendered judgment on July 10, 1937, which was amended on February 1, 1938, sentencing
Leonor S. Bantug and Tomas Alonso to pay jointly and severally to the Texas Company the sum of
P629, with interest at the rate of six per cent (6%) from the date of the filing of the complaint, and
with proportional costs. Upon appeal by Tomas Alonso, the Court of Appeals modified the judgment
of the Court of First Instance of Cebu in the sense that Leonor S. Bantug was held solely liable for the
payment of the aforesaid sum of P629 to the Texas Company, with the consequent absolution of
Tomas Alonso. This case is now before us on petition for review by certiorari of the decision of the
Court of Appeals. It is contended by the petitioner that the Court of Appeals erred in holding that
there was merely an offer of guaranty on the part of the respondent, Tomas Alonso, and that the latter
cannot be held liable thereunder because he was never notifiad by the Texas Company of its
acceptance.

The Court of Appeals has placed reliance upon our decision in National Bank vs. Garcia (47 Phil.,
662), while the petitioner invokes the case of National Bank vs. Escueta, (50 Phil., 991). In the first
case, it was held that there was merely an offer to give bond and, as there was no acceptance of the
offer, this court refused to give effect to the bond. In the second case, the sureties were held liable
under their surety agreement which was found to have been accepted by the creditor, and it was
therein ruled that an acceptance need not always be express or in writing. For the purposes of this
decision, it is not indispensable for us to invoke one or the other case above cited. The Court of
Appeals found as a fact, and this is conclusive in this instance, that the bond in question was executed
at the request of the petitioner by virtue of the following clause of the agency contract:

"Additional Security. The Agent shall whenever requested by the Company in addition to the guaranty
herewith provided, furnish further guaranty or bond, conditioned upon the Agent's faithful
performance of this contract, in such form and amount and with such bank as surety or with such
individuals of firms as joint and several sureties as shall be satisfactory to the Company."

In view of the foregoing clause which should be the law between the parties, it is obvious that, before a
bond is accepted by the petitioner, it has to be in such form and amount and with such sureties as
shall be satisfactory thereto; in other words, the bond is subject to petitioner's approval. The logical
implication arising from this requirement is that, if the petitioner is satisfied with any such bond,
notice of its acceptance or approval should necessarily be given to the proper party in interest,
namely, the surety or guarantor. In this connection, we are likewise bound by the finding of the Court
of Appeals that there is no evidence in this case tending to show that the respondent, Tomas Alonso,
ever had knowledge of any act on the part of the petitioner amounting to an implied acceptance, so as
to justify the application of our decision in National Bank vs. Escueta (50 Phil., 991).

While unnecessary to this decision, we choose to add a few words explanatory of the rule regarding
the necessity of acceptance in case of bonds. Where there is merely an offer of, or proposition for, a
guaranty, or merely a conditional guaranty in the sense that it requires action by the creditor before
the obligation becomes fixed, it does not become a binding obligation until it is accepted and, unless
there is a waiver of notice, until notice of such acceptance is given to, or acquired by, the guarantor, or
until he has notice or knowledge that the creditor has performed the conditions and intends to act
upon the guaranty. (National Bank vs. Garcia, 47 Phil., 662; 28 C. J., sec. 21, p. 901; 24 Am. Jur., sec.
37, p. 899.) The acceptance need not necessarily be express or in writing, but may be indicated by acts
amounting to acceptance. (National Bank vs. Escueta, 50 Phil., 991.) Where, upon the other hand, the
transaction is not merely an offer of guaranty but amounts to a direct or unconditional promise of
guaranty, unless notice of acceptance is made a condition of the guaranty, all that is necessary to
make the promise binding is that the promisee should act upon it, and notice of acceptance is not
necessary (28 C. J., sec. 25, p. 904; 24 Am. Jur., sec 37, p. 899), the reason being that the contract of
guaranty is unilateral (Visayan Surety and Insurance Corporation vs. Laperal, G. R. No. 46515,
promulgated June 14, 1940).

The decision appealed from will be, as the same is hereby, affirmed, with costs of this instance against
the petitioner. So ordered.

Avanceña, C. J., Abad Santos, and Diaz, JJ., concur.

OZAETA, J., with whom concur MORAN and HORRILLENO, JJ., dissenting:

We concede that a statement of fact made by the Court of Appeals is conclusive upon this Court in a
petition for review on certiorari. But when it appears from the decision of the Court of Appeals itself
that such a statement is but a conclusion drawn by that Court from the facts found by it, and that such
conclusion is patently erroneous, we hold that this Court should disregard it.

Of that nature, we believe, is the following statement made by the Court of Appeals in the course of its
ratiocination :

"La fianza prestada por el apelante se otorgo a requerimiento de la demandante en virtud de la

siguiente clausula (15) del contrato de agencia Exhibit A, que dice asi:

" 'ADDITIONAL SECURITY. The Agent shall, whenever requested by the Company in addition to the
guaranty herewith provided, furnish further guaranty or bond, conditioned upon the agent's faithful
performance of this contract, in such form and amount and with such bank as surety or with such
individuals or firms as joint and several sureties as shall be satisfactory to the Company.' " (Pages 8-9,
appendix to petitioner's brief.)

It is important to note that the above-quoted statement forms part of the court's ratio decidendi and
not of its findings of fact. Its findings of fact appear in the first three paragraphs of its decision, which
we quote as follows:

"El 12 de agosto de 1929 la demandante y el demandado Leonor S. Bantug celebraron un contrato,

(Exhibit A) por virtud del cual aquella nombro a este Agente vendedor de sus productos petroliferos
en el Municipio de Maasin, Provincia de Leyte, mediante pago de una comision sobre el valor de todos
los efectos que llegase a vender, obligandose por su parte Leonor S. Bantug como Agente, a ingresar y
pagar a la compañia el importe neto de las ventas realizadas, despues de deducir su comision y los
demas gastos de agencia que se estipularon en el referido contrato.

"En el mismo documento Exhibit A, el otro demandado Tomas Alonso suscribio una fianza,
obligandose mancomunada y solidariamente con el Agente Leonor S. Bantug a cumplir fielmente las
condiciones del contrato de Agencia hasta la suma de P2,000.

"El estado de cuentas de la agencia que se presento en el juicio como Exhibit B, demuestra que la
ultima liquidacion arroja un balance contra el Agente Leonor S. Bantug por la cantidad de P629; y
como esta suma no ha sido pagada ni por Leonor S. Bantug ni por su fiador Tomas Alonso, a pesar de
los requerimientos que se les ha hecho, de ahi que la demandante, el 18 de noviembre de 1938, dedujo
accion en el Juzgado de Primera Instancia de Cebu para el cobro de dicha suma y sus intereses legales
desde la presentacion de la demanda." (Pages 1-3, appendix to petitioner's brief.)

Now if, as found by the Court of Appeals itself, the agency contract between the petitioner and Leonor
S. Bantug was Exhibit A, dated August 12, 1929, and that that very same document was on the same
date signed by the respondent Tomas Alonso as bondsman or surety of the agent, how could the bond
in question, which formed part of Exhibit A, be held to have been executed by virtue of clause 15 of
said document providing for additional security? Indeed, that very clause says that the agent shall
furnish further guaranty or bond "in addition to the guaranty herewith provided," whenever
requested by the company. The "guaranty herewith provided" was obviously the bond or guaranty
given by the respondent on the same date and in the same document. It appears clear to us, therefore,
that the bond Exhibit A, being the original guaranty, could not be the "additional guaranty"
mentioned in clause 15 of said Exhibit A. Moreover, it does not appear that any bond or guaranty,
other than that of the respondent, to secure the performance of the agency contract in question was in
force on and after August 12, 1929.

Another illogical conclusion drawn by the Court of Appeals is this:

"Por el requerimiento que contiene la clausula preinserta, de que el Agente puede prestar una
garantia adicional a satisfaction de la compañia, debe entenderse que la fianza prestada por el
apelante era una oferta o proposicion de garantia, cuya efectividad dependia de la acceptacion de la
compañia, comunicada al garante." (Page 9, appendix to petitioner's brief.)

If, as previously found by the Court of Appeals, the herein respondent executed the bond in question
"a requerimiento de la demandante," how could said bond be understood as an "offer or proposition
of guaranty" from Alonso to the plaintiff?

Yet the judgment of the Court of Appeals, as well as the affirming decision of the majority of this
court, is based on the conclusion that the bond sued upon was an additional guaranty; that it
constituted a mere offer of guaranty and, therefore, had to be accepted by the petitioner; and that, not
having been accepted, it is inefficacious. We have shown that such conclusion is unwarranted.

Our vote is to reverse the decision of the Court of Appeals and to affirm that of Judge Felix Martinez
of the Court of First Instance of Cebu, who tried this case.

73 Phil. 90

LAUREL, J.:

On November 5, 1935 Leonor S. Bantug and Tomas Alonso were sued by the Texas Company (P. I.), Inc. in the
Court of First Instance of Cebu for the recovery of the sum of P629, unpaid balance of the account of Leonor S.
Bantug in connection with her agency contract with the Texas Company for the faithful performance of which
Tomas Alonso signed the following:

"For value received, we jointly and severally do hereby bind ourselves and each of us, in solidum, with Leonor
S. Bantug the agent named in the within and foregoing agreement, for full and complete performance of same
hereby waiving notice of non-performance by or demand upon said agent, and consent to any and all
extensions of time for performance. Liability under this undertaking, however, shall not exceed the sum of
P2,000, Philippine currency."

"Witness the hand and seal of the undersigned affixed in the presence of two witnesses, this 12th day of
August, 1929."

Leonor S. Bantug was declared in default as a result of her failure to appear or answer, but Tomas Alonso filed
an answer setting up a general denial and the special defenses that Leonor S. Bantug made him believe that he
was merely a co-security of one Vicente Palanca and that he was never notified of the acceptance of his bond
by the Texas Company. After trial, the Court of First Instance of Cebu rendered judgment on July 10, 1937,
which was amended on February 1, 1938, sentencing Leonor S. Bantug and Tomas Alonso to pay jointly and
severally to the Texas Company the sum of P629, with interest at the rate of six per cent (6%) from the date of
the filing of the complaint, and with proportional costs. Upon appeal by Tomas Alonso, the Court of Appeals
modified the judgment of the Court of First Instance of Cebu in the sense that Leonor S. Bantug was held solely
liable for the payment of the aforesaid sum of P629 to the Texas Company, with the consequent absolution of
Tomas Alonso. This case is now before us on petition for review by certiorari of the decision of the Court of
Appeals. It is contended by the petitioner that the Court of Appeals erred in holding that there was merely an
offer of guaranty on the part of the respondent, Tomas Alonso, and that the latter cannot be held liable
thereunder because he was never notifiad by the Texas Company of its acceptance.

The Court of Appeals has placed reliance upon our decision in National Bank vs. Garcia (47 Phil., 662), while
the petitioner invokes the case of National Bank vs. Escueta, (50 Phil., 991). In the first case, it was held that
there was merely an offer to give bond and, as there was no acceptance of the offer, this court refused to give
effect to the bond. In the second case, the sureties were held liable under their surety agreement which was
found to have been accepted by the creditor, and it was therein ruled that an acceptance need not always be
express or in writing. For the purposes of this decision, it is not indispensable for us to invoke one or the other
case above cited. The Court of Appeals found as a fact, and this is conclusive in this instance, that the bond in
question was executed at the request of the petitioner by virtue of the following clause of the agency contract:

"Additional Security. The Agent shall whenever requested by the Company in addition to the guaranty
herewith provided, furnish further guaranty or bond, conditioned upon the Agent's faithful performance of
this contract, in such form and amount and with such bank as surety or with such individuals of firms as joint
and several sureties as shall be satisfactory to the Company."

In view of the foregoing clause which should be the law between the parties, it is obvious that, before a bond
is accepted by the petitioner, it has to be in such form and amount and with such sureties as shall be
satisfactory thereto; in other words, the bond is subject to petitioner's approval. The logical implication arising
from this requirement is that, if the petitioner is satisfied with any such bond, notice of its acceptance or
approval should necessarily be given to the proper party in interest, namely, the surety or guarantor. In this
connection, we are likewise bound by the finding of the Court of Appeals that there is no evidence in this case
tending to show that the respondent, Tomas Alonso, ever had knowledge of any act on the part of the
petitioner amounting to an implied acceptance, so as to justify the application of our decision in National Bank
vs. Escueta (50 Phil., 991).

While unnecessary to this decision, we choose to add a few words explanatory of the rule regarding the
necessity of acceptance in case of bonds. Where there is merely an offer of, or proposition for, a guaranty, or
merely a conditional guaranty in the sense that it requires action by the creditor before the obligation
becomes fixed, it does not become a binding obligation until it is accepted and, unless there is a waiver of
notice, until notice of such acceptance is given to, or acquired by, the guarantor, or until he has notice or
knowledge that the creditor has performed the conditions and intends to act upon the guaranty. (National
Bank vs. Garcia, 47 Phil., 662; 28 C. J., sec. 21, p. 901; 24 Am. Jur., sec. 37, p. 899.) The acceptance need not
necessarily be express or in writing, but may be indicated by acts amounting to acceptance. (National Bank vs.
Escueta, 50 Phil., 991.) Where, upon the other hand, the transaction is not merely an offer of guaranty but
amounts to a direct or unconditional promise of guaranty, unless notice of acceptance is made a condition of
the guaranty, all that is necessary to make the promise binding is that the promisee should act upon it, and
notice of acceptance is not necessary (28 C. J., sec. 25, p. 904; 24 Am. Jur., sec 37, p. 899), the reason being
that the contract of guaranty is unilateral (Visayan Surety and Insurance Corporation vs. Laperal, G. R. No.
46515, promulgated June 14, 1940).

The decision appealed from will be, as the same is hereby, affirmed, with costs of this instance against the
petitioner. So ordered.

Avanceña, C. J., Abad Santos, and Diaz, JJ., concur.

OZAETA, J., with whom concur MORAN and HORRILLENO, JJ., dissenting:

We concede that a statement of fact made by the Court of Appeals is conclusive upon this Court in a petition
for review on certiorari. But when it appears from the decision of the Court of Appeals itself that such a
statement is but a conclusion drawn by that Court from the facts found by it, and that such conclusion is
patently erroneous, we hold that this Court should disregard it.

Of that nature, we believe, is the following statement made by the Court of Appeals in the course of its
ratiocination :

"La fianza prestada por el apelante se otorgo a requerimiento de la demandante en virtud de la siguiente
clausula (15) del contrato de agencia Exhibit A, que dice asi:

" 'ADDITIONAL SECURITY. The Agent shall, whenever requested by the Company in addition to the guaranty
herewith provided, furnish further guaranty or bond, conditioned upon the agent's faithful performance of this
contract, in such form and amount and with such bank as surety or with such individuals or firms as joint and
several sureties as shall be satisfactory to the Company.' " (Pages 8-9, appendix to petitioner's brief.)

It is important to note that the above-quoted statement forms part of the court's ratio decidendi and not of its
findings of fact. Its findings of fact appear in the first three paragraphs of its decision, which we quote as
follows:
"El 12 de agosto de 1929 la demandante y el demandado Leonor S. Bantug celebraron un contrato, (Exhibit A)
por virtud del cual aquella nombro a este Agente vendedor de sus productos petroliferos en el Municipio de
Maasin, Provincia de Leyte, mediante pago de una comision sobre el valor de todos los efectos que llegase a
vender, obligandose por su parte Leonor S. Bantug como Agente, a ingresar y pagar a la compañia el importe
neto de las ventas realizadas, despues de deducir su comision y los demas gastos de agencia que se estipularon
en el referido contrato.

"En el mismo documento Exhibit A, el otro demandado Tomas Alonso suscribio una fianza, obligandose
mancomunada y solidariamente con el Agente Leonor S. Bantug a cumplir fielmente las condiciones del
contrato de Agencia hasta la suma de P2,000.

"El estado de cuentas de la agencia que se presento en el juicio como Exhibit B, demuestra que la ultima
liquidacion arroja un balance contra el Agente Leonor S. Bantug por la cantidad de P629; y como esta suma no
ha sido pagada ni por Leonor S. Bantug ni por su fiador Tomas Alonso, a pesar de los requerimientos que se les
ha hecho, de ahi que la demandante, el 18 de noviembre de 1938, dedujo accion en el Juzgado de Primera
Instancia de Cebu para el cobro de dicha suma y sus intereses legales desde la presentacion de la demanda."
(Pages 1-3, appendix to petitioner's brief.)

Now if, as found by the Court of Appeals itself, the agency contract between the petitioner and Leonor S.
Bantug was Exhibit A, dated August 12, 1929, and that that very same document was on the same date signed
by the respondent Tomas Alonso as bondsman or surety of the agent, how could the bond in question, which
formed part of Exhibit A, be held to have been executed by virtue of clause 15 of said document providing for
additional security? Indeed, that very clause says that the agent shall furnish further guaranty or bond "in
addition to the guaranty herewith provided," whenever requested by the company. The "guaranty herewith
provided" was obviously the bond or guaranty given by the respondent on the same date and in the same
document. It appears clear to us, therefore, that the bond Exhibit A, being the original guaranty, could not be
the "additional guaranty" mentioned in clause 15 of said Exhibit A. Moreover, it does not appear that any bond
or guaranty, other than that of the respondent, to secure the performance of the agency contract in question
was in force on and after August 12, 1929.

Another illogical conclusion drawn by the Court of Appeals is this:

"Por el requerimiento que contiene la clausula preinserta, de que el Agente puede prestar una garantia
adicional a satisfaction de la compañia, debe entenderse que la fianza prestada por el apelante era una oferta
o proposicion de garantia, cuya efectividad dependia de la acceptacion de la compañia, comunicada al
garante." (Page 9, appendix to petitioner's brief.)
If, as previously found by the Court of Appeals, the herein respondent executed the bond in question "a
requerimiento de la demandante," how could said bond be understood as an "offer or proposition of
guaranty" from Alonso to the plaintiff?

Yet the judgment of the Court of Appeals, as well as the affirming decision of the majority of this court, is
based on the conclusion that the bond sued upon was an additional guaranty; that it constituted a mere offer
of guaranty and, therefore, had to be accepted by the petitioner; and that, not having been accepted, it is
inefficacious. We have shown that such conclusion is unwarranted.

Our vote is to reverse the decision of the Court of Appeals and to affirm that of Judge Felix Martinez of the
Court of First Instance of Cebu, who tried this case.
47
Pedro Pastoral vs Mutual Ins. Corp.
FACTS
Petitioner Pedro Pastoral entered into a contract of lease with Mapada & Company, Inc. wherein the former
would lease to the latter a crane to be paid in the amount of P900.00 monthly. The contract stipulates that
Mapada & Company, Inc. shall pay Pedro Pastoral P15,000 if the crane is not returned 10 days after notice
therefor. To comply with the agreement, Mapada & Company, Inc. put up a surety bond of P15, 000 executed
by herein defendant Mutual Security Insurance Corporation to guarantee the compliance of Mapada &
Company of all the terms and conditions stipulated in the contract. Said company requested that, since it was
expecting money from a construction contract, petitioner defer its collection of rentals for the month of
October and November. Petitioner granted the request. However, despite repeated demands, Mapada &
Company failed to pay the rentals nor to return the crane. So petitioner demanded payment from herein
defendant Mutual Insurance Corp.
Defendant appealed arguing that petitioner failed to report to it within 5 days of the violation of the lease
contract, therefore defendant is released from its liability under the surety bond. The Court of Appeals ruled in
favor of defendants, saying that the petitioner's failure to inform the surety of the defaults is a violation of the
conditions of the bond, which releases the defendant from liability. Petitioner filed a Motion for
Reconsideration but it was dismissed. Thus, the present petition.
WON Mutual Ins. Corp. is liable to pay Pedro Pastoral
The court ruled in favor of petitioner, ordering defendant to solidarily pay the unpaid rentals until the crane
was returned, or pay in the amount of P15,000 for the crane.

48
Estate of K.H. Hemady vs Luzon Surety Co., Inc.
Facts:
The Luzon Surety Co. filed a claim against the estate of Hemady for indemnity agreements and counterbonds
filed by Hemady as a surety solidary guarantor. Before the administratix of Hemady’s Estate could file an
answer, the Lower Court dismissed it based on the premise that the losses that may have occurred after
Hemady’s death are not chargeable to his estate because he ceased to be a guarantor upon his death.
According to the Lower Court, this is supported by Art. 2046 of the New Civil Code that a new requirement has
been added for a person to qualify as a guarantor and that is INTEGRITY. This is a purely personal right that is
intransmissible.
Issue:
Can the Surety Company file a claim against the estate of Hemady?
Ruling:
YES. The heirs not only succeed the rights of the decedent but also his obligations. Art. 774 and Art. 776 state
that:
“Succession is a mode of acquisition by virtue of which property, rights and obligations to the extent of the
value of the inheritance, of a person are transmitted through his death to another or others either by his will or
by operation of law.”
“The inheritance includes all the property, rights and obligations of a person which are not extinguished by
death.”
Contracts take effect only as between parties, their assigns and heirs, except in the case where rights and
obligations arising from the contract are not transmissible by their nature, or by stipulation, or by provision of
law (Art. 13100, NCC). The only exceptions are nature of the obligation, intransmissibility by the stipulation of
parties, and intransmissibility by operation of law. For the first exception, it does not apply since the nature of
the obligation is not a purely personal obligation. The Surety Company was indifferent whether the payment
will be made by Hemady himself or by someone else, as long as money is paid to it. The second exception is
not acceptable also since when Hemady entered into the contract, he deemed contracted for himself and his
heirs and assigns. The third exception is not applicable also since it pertains to rights or obligations
extinguished by death such as legal support, parental authority, usufruct, etc.
It is not a strictly personal obligation linked only to the individuality of Hemady that the guaranty automatically
terminates upon his death. The requirement of integrity in the guarantor or surety is a quality required only at
the time of the perfection of the contract and any supervening incapacity would not exonerate him from the
liability or obligation he contracted.
Therefore, the contract of suretyship not falling in the exceptions, his eventual liability necessarily passed to
his heirs upon his death. The solidary liability of Hemady as the guarantor, is not extinguished by his death so
the Surety Company has the right to file against the estate a claim for reimbursement.

49
AUTOCORP vs. ISAC
OCTOBER 20, 2011 ~ VBDIAZ
AUTOCORP and Rodriguez vs. ISAC and BOC
G.R. No. 166662
June 27, 2008
FACTS: Autocorp Group, represented by its President, Rodriguez, secured an ordinary re-export bond from
private respondent Intra Strata Assurance Corporation (ISAC) in favor of public Bureau of Customs (BOC), to
guarantee the re-export of 2 units of car (at 2 different dates) and/or to pay the taxes and duties thereon.
Petitioners executed and signed two Indemnity Agreements with identical stipulations in favor of ISAC,
agreeing to act as surety of the subject bonds
In sum, ISAC issued the subject bonds to guarantee compliance by petitioners with their undertaking with the
BOC to re-export the imported vehicles within the given period and pay the taxes and/or duties due thereon.
In turn, petitioners agreed, as surety, to indemnify ISAC for the liability the latter may incur on the said bonds
Autocorp failed to re-export the items guaranteed by the bonds and/or liquidate the entries or cancel the
bonds, and pay the taxes and duties pertaining to the said items, despite repeated demands made by the BOC,
as well as by ISAC. By reason thereof, the BOC considered the two bonds forfeited.
Failing to secure from petitioners the payment of the face value of the two bonds, ISAC filed with the RTC an
action against petitioners to recover a sum of money plus AF. ISAC impleaded the BOC “as a necessary party
plaintiff in order that the reward of money or judgment shall be adjudged unto the said necessary plaintiff.”
Petitioners filed a MTD, which was denied. RTC ordered Autocorp to pay ISAC and/or BOC the face value of the
subject bonds plus AF. Autocorp’s MR was denied. CA affirmed the trial court’s decision. MR was denied.
Hence this Petition for Review on Certiorari
ISSUE: WON these bonds are now due and demandable, as there is yet no actual forfeiture of the bonds, but
merely a recommendation of forfeiture, for no writ of execution has been issued against such bonds, therefore
the case was prematurely filed by ISAC
HELD: PETITION IS WITHOUT MERIT
YES
The Indemnity Agreements give ISAC the right to recover from petitioners the face value of the subject bonds
plus attorney’s fees at the time ISAC becomes liable on the said bonds to the BOC, (specifically to re-export the
imported vehicles within the period of six months from their date of entry) regardless of whether the BOC had
actually forfeited the bonds, demanded payment thereof and/or received such payment. It must be pointed
out that the Indemnity Agreements explicitly provide that petitioners shall be liable to indemnify ISAC
“whether or not payment has actually been made by the [ISAC]” and ISAC may proceed against petitioners by
court action or otherwise “even prior to making payment to the [BOC] which may hereafter be done by [ISAC].”
Article 2071 of the Civil Code provides:
Art. 2071. The guarantor, even before having paid, may proceed against the principal debtor:
(1) When he is sued for the payment;
(2) In case of insolvency of the principal debtor;
(3) When the debtor has bound himself to relieve him from the guaranty within a specified period, and this
period has expired;
(4) When the debt has become demandable, by reason of the expiration of the period for payment;
(5) After the lapse of ten years, when the principal obligation has no fixed period for its maturity, unless it be of
such nature that it cannot be extinguished except within a period longer than ten years;
(6) If there are reasonable grounds to fear that the principal debtor intends to abscond;
(7) If the principal debtor is in imminent danger of becoming insolvent.
In all these cases, the action of the guarantor is to obtain release from the guaranty, or to demand a security
that shall protect him from any proceedings by the creditor and from the danger of insolvency of the debtor.
NOTES:
A demand is only necessary in order to put an obligor in a due and demandable obligation in delay, which in
turn is for the purpose of making the obligor liable for interests or damages for the period of delay. Thus,
unless stipulated otherwise, an extrajudicial demand is not required before a judicial demand, i.e., filing a civil
case for collection, can be resorted to
50
Wise & Co. Vs Tanglao
G.R. No. L-42518 August 29, 1936
AVANCEÑA, C. J.

FACTS
• In the CFI of Manila, Wise & Co filed a civil case against Cornelio C. David for the recovery of a certain sum of
money.
• David was an agent of Wise & Co. and the amount claimed from him was the result of a liquidation of
accounts showing that he was indebted in said amount.
• In said case Wise & Co. asked and obtained a preliminary attachment of David's property.
• To avoid the execution of said attachment, David succeeded in having the defendant Attorney Tanglao sign a
power of attorney in his favor, with a clause (considered a special POA to David) “ To sign as guarantor for
himself in his indebtedness to Wise & Company of Manila, and to mortgage the Attorney’s lot”
• Subsequently, David made a compromise with the petitioner by paying P340 leaving an unpaid balance of
P296 and pledged the lot owned by the Atty as a guaranty for the balance.
• Wise & Co. now institutes this case against Tanglao for the recovery of said unpaid amount.
• There is no doubt that under POA, Tanglao empowered David, in his name, to enter into a contract of
suretyship and a contract of mortgage of the property described in the document, with Wise & Co.
• However, David used said power of attorney only to mortgage the property and did not enter into contract of
suretyship.
ISSUE
Whether or not Atty. Tanglao is liable?
RULING
• NO
• The SC ruled that there is nothing stated in the Compromise Agreement to the effect that Tanglao became
David's surety for the payment of the sum in question. Neither is this inferable from any of the clauses thereof,
and even if this inference might be made, it would be insufficient to create an obligation of suretyship which,
under the law, must be express and cannot be presumed.
• The only obligation which the Compromise Agreement, in connection with POA, has created on the part of
Tanglao, is that resulting from the mortgage of a property belonging to him to secure the payment of said
P640. However, a foreclosure suit is not instituted in this case against Tanglao, but a purely personal action for
the recovery of the amount still owed by David.
• At any rate, even granting that Defendant Tanglao may be considered as a surety under the cited
Compromise the action does not yet lie against him on the ground that all the legal remedies against the
debtor have not previously been exhausted (art. 1830 of the Civil Code, and decision of the Supreme Court of
Spain of March 2, 1891).
• The Plaintiff has in its favor a judgment against debtor David for the payment of debt. It does not appear that
the execution of this judgment has been asked for and the Compromise, on the other hand, shows that David
has two pieces of property the value of which is in excess of the balance of the debt the payment of which is
sought of Tanglao in his alleged capacity as surety.
51
G.R. No. L-48979 September 29, 1943
MIRA HERMANOS, INC. vs.
MANILA TOBACCONISTS, INC., ET AL., PROVIDENT INSURANCE CO.

Facts:
• By virtue of a written contract entered into between Mira Hermanos, Inc., and Manila Tobacconists, Inc., the
former agreed to deliver to the latter merchandise for sale on consignment under certain specified terms and
the latter agreed to pay to the former on or before the 20th day of each month the invoice value of all the
merchandise sold during the preceding month.
• Mira Hermanos, Inc., required of the Manila Tobacconists, Inc., a bond of P3,000, which was executed by the
Provident Insurance Co., on September 2, 1939, to secure the fulfillment of the obligation of the Tobacconists
under the contract up to the sum of P3,000.
• In October, 1940, the volume of the business of the Tobacconists having increased so that the merchandise
received by it on consignment from Mira Hermanos exceeded P3,000 in value, Mira Hermanos required of the
Tobacconist an additional bond of P2,000, and in compliance with that requirement the defendant Manila
Compañia de Seguros, on October 16, 1940, executed a bond of P2,000 with the same terms and conditions
(except as to the amount) as the bond of the Provident Insurance Co.
• On June 1, 1941, a final and complete liquidation was made of the transactions between Mira Hermanos and
the Tobacconists, as a result of which there was found a balance due from the latter to the former of
P2,272.79, which indebtedness the Tobacconists recognized but was unable to pay. Thereupon Mira Hermanos
made a demand upon the two surety companies for the payment of said sum.
• The Provident Insurance Co., paid only the sum of P1,363.67, which is 60% of the amount owned by the
Tobacconists to Mira Hermanos, alleging that the remaining 40% should be paid by the other surety, Manila
Compañia de Seguros, in accordance with article 8137 of the Civil Code.
• The Manila Compañia de Seguros refused to pay the balance, contending that so long as the liability of the
Tobacconists did not exceed P3,000, it was not bound to pay anything because its bond referred only to the
obligation of the Tobacconists in excess of P3,000 and up to P5,000.
• Hence Mira Hermanos, Inc., brought this to recover from them jointly and severally the sum of P909.12 with
legal interest thereon from the date of the complaint.
Issue:
Whether or not Provident Insurance Co. is entitled to the "benefit of division" provided in article 1837 of the
Civil Code
Held:
• Article 1837 of the [Old] Civil Code reads as follows:
Art. 1837. Should there be several sureties of only one debtor for the same debt, the liability therefor shall be
divided among them all. The creditor can claim from each surety only his proportional part unless liabilityin
solidum has been expressly stipulated.
The right to the benefit of division against the co-sureties for their respective shares ceases in the same cases
and for the same reason as that to an exhaustion of property against the principal debtor.
• While on its face the bond given by the Manila Compañia de Seguros contains the same terms and conditions
(except as to the amount) as those of the bond given by the Provident Insurance Co., nevertheless it was
pleaded by the Manila Compañia de Seguros and found proven by the trial court.
• As the trial court observed, there would have been no need for the additional bond of P2,000 if its purpose
were to cover the first P2,000 already covered by the P3,000 bond of the Provident Insurance Co.
• Indeed, if the purpose of the additional bond of P2,000 were to cover not the excess over and above P3,000
but the first P2,000 of the obligation of the principal debtor like the bond of P3,000 which covered only the
first P3,000 of said obligation, then it would result that had the obligation of the Tobacconists exceeded
P3,000, neither of the two bonds would have responded for the excess, and that was precisely the event
against which Mira Hermanos wanted to protect itself by demanding the additional bond of P2,000.
• For instance, suppose that the obligation of the principal debtor, the Tobacconists, amounted to P5,000; if
both bonds were co-extensive up to P2,000 — as would logically follow if appellant's contention were correct
— the result would be that the first P2,000 of the obligation would have to be divided between and paid
equally by the two surety companies, which should pay P1,000 each, and of the balance of P3,000 the
Provident Insurance Co. would have to pay only P1,000 more because its liability is limited to the first P3,000,
thus leaving the plaintiff in the lurch as to the excess of P2,000.
• That was manifestly not the intention of the parties. As a matter of fact, when the Provident gave its bond
and fixed the premiums thereon it assumed an obligation of P3,000 in solidum with the Tobacconists without
any expectation of any benefit of division with any other surety. The additional bond of P2,000 was, more than
a year later, required by the creditor of the principal debtor for the protection of said creditor and certainly not
for the benefit of the original surety, which was not entitled to expect any such benefit.
• The foregoing considerations, which fortify the trial court's conclusion as to the real intent and agreement of
the parties with regard to the bond of P2,000 given by the Manila Compañia de Seguros, destroys at the same
time the theory of the appellant regarding the applicability of article 1837 of the Civil Code.
• That article refers to several sureties of only one debtor for the same debt. In the instant case, altho the two
bonds on their face appear to guarantee the same debt co-extensively up to P2,000 — that of the Provident
Insurance Co. alone extending beyond that sum up to P3,000 — it was pleaded and conclusively proven that in
reality said bonds, or the two sureties, do not guarantee the same debt because the Provident Insurance Co.
guarantees only the first P3,000 and the Manila Compañia de Seguros, only the excess over and above said
amount up to P5,000. Article 1837 does not apply to this factual situation.

52
 Tuazon, Tuazon, Inc. vs. Antonio Machuca
Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. L-22177        December 2, 1924

TUASON, TUASON, INC., plaintiff-appellee, 

vs.
ANTONIO MACHUCA, defendant-appellant.

Marcaida, Capili & Ocampo for appellant.

Antonio M. Opisso for appellee.

AVANCEÑA, J.:

By giving a bond in the sum of P9,663 executed by "Manila Compañia de Seguros," the Universal
Trading Company was allowed by the Insular Collector of Custom to withdraw from the customhouse
sundry goods imported by it and consigned through the bank of the Philippine Islands. Subsequently,
the Bank of the Philippine Islands claimed the value of the goods, and the Insular Collector of
Customs obligated the "Manila Compañia de Seguros" to pay the sum of P9,663, the amount of the
bond. Before paying this amount to the Insular Collector of Customs, the "Manila Compañia de
Seguros" obtained from the Universal Trading Company and Tuason, Tuason & Co., a solidary note
for the sum of P9,663 executed by said companies in its favor. Before signing said note, Tuason,
Tuason & Co., in turn, caused the Universal Trading Company and its president Antonio Machuca,
personally, to sign a document (Exhibit B), wherein they bound themselves solidarily to pay,
reimburse, and refund to the company all such sums or amounts of money as it, or its representative,
may pay or become bound to pay, upon its obligation with "Manila Compañia de Seguros," whether or
not it shall have actually paid such sum or sums or any part thereof. The Universal Trading Company
having been declared insolvent, "Manila Compañia de Seguros" brought an action in the lower court
against Tuason, Tuason & Co. to recover the value of the note for P9,663 and obtained final judgment
therein, which was affirmed by this court on appeal, for the total sum of P12,197.27, which includes
the value of the note with interest thereon. 1 Subsequently, all the rights of Tuason, Tuason & Co. were
transferred to the plaintiff Tuason, Tuason, Inc.

Later on Tuason, Tuason, Inc., brought this action to recover of Antonio Machuca the sum of
P12,197.27 which it was sentenced to pay in the case filed against it by "Manila Compañia de Seguros,"
plus P3,000 attorney's fees, and P155.92 court's costs and sheriff's fees, that is, a total of P15,353.19,
together with P1,180.46 as interest upon the sum of P15,353.19 at the rate of 10 per cent per annum
from October 8, 1922, to July 8, 1923, and interest on the sum of P16,535.65 at the rate of 10 per cent
from July 8, 1923, until this sum was paid, and, in addition the sum of P1,653.65 for attorney's fees in
this case. For its cause of action, the plaintiff alleges that it had paid "Manila Compañia de Seguros"
the sum of P12,197.27, the amount of the judgment against it. The dispositive part of the judgment
appealed from is as follows:
 Judgment is rendered against the defendant Antonio Machuca, and he is hereby ordered to pay
the plaintiff company the sum of fifteen thousand three hundred fifty-three pesos and nineteen
centavos (15,353.19), with compound interest thereon at the rate of ten per cent (10%) per
annum, to be computed quarterly, that is, one thousand one hundred eighty pesos and forty-six
centavos (1,180.46), which is ten per cent interest on the amount of fifteen thousand three
hundred fifty-three pesos and nineteen centavos (P15,353.19) from October 8, 1922, to July 8,
1923, and ten per cent on the sum of sixteen thousand five hundred thirty-three pesos and
sixty-five centavos (P16,533.65) from July 8, 1923, until full payment, to be computed
quarterly, besides the sum of one thousand six hundred fifty-three pesos and sixty-five
centavos (P1,653.65), which is ten per cent (10%) on the amount due and the interest thereon,
which said defendant promised to pay as penalty and attorney's fees in the event of a suit being
necessary to recover the debt, and the costs. So ordered.

It appears from the evidence that what the plaintiff alleged to be a payment made to "Manila
Compañia de Seguros", for the satisfaction of the judgment rendered in favor of the latter is the
execution by Albina Tuason of a document Exhibit D in favor of "Manila Compañia de Seguros." In
this document Albina Tuason declares that she assumes and makes hers the obligation to pay the
amount of said judgment to "Manila Compañia de Seguros" within one year and mortgages a property
described in the document as security for this obligation. This obligation of Albina Tuason was
accepted by the "Manila Compañia de Seguros," in the following terms: "I accept the foregoing
security executed by Miss Albina Tuason in favor of `Manila Compañia de Seguros.'" It, thus,
appears that the plaintiff has not in fact paid the amount of the judgment to "Manila Compañia de
Seguros." The action brought by the plaintiff is that which surety, who pays the debt of the debtor, is
entitled to bring to recover the amount thus paid (art. 1823, Civil Code). It is evidence that such a
payment not having been made the alleged cause of action does not exist.

The plaintiff company argues that, at all events, it is entitled to bring this action under article 1843 of
the Civil Code, which provides that the surety may, even before making payment, bring action against
the principal debtor. This contention of the plaintiff is untenable. The present action, according to the
terms of the complaint, is clearly based on the fact of payment. It is true that, under article 1843, an
action lies against the principal debtor even before the surety pays the debt, but it clearly appears in
the complaint that this is not the action brought by the plaintiff. Moreover this article 1843 provided
several cumulative remedies in favor of the surety, at his election, and the surety who brings an action
under this article must choose the remedy and apply for it specifically. At any rate this article does not
provide for the reimbursement of any amount, as is sought by the plaintiff.

But although the plaintiff has not as yet paid "Manila Compañia de Seguros" the amount of the
judgment against it, and even considering that this action cannot be held to come under article 1843
of the Civil Code, yet the plaintiff is entitled to the relief sought in view of the facts established by the
evidence. The plaintiff became bound, by virtue of a final judgment, to pay the value of the note
executed by it in favor of "Manila Compañia de Seguros." According to the document executed
solidarily by the defendant and the Universal Trading Company, the defendant bound himself to pay
the plaintiff as soon as the latter may have become bound and liable, whether or not it shall have
actually paid. It is indisputable that the plaintiff became bound and liable by a final judgment to pay
the value of the note to "Manila Compañia de Seguros."

The defendant also contends that the document executed by Albina Tuason in favor of "Manila
Compañia de Seguros" assuming and making hers the obligation of Tuason, Tuason & Co., was a
novation of the contract by substitution of the debtor, and relieved Tuason, Tuason & Co. from all
obligation in favor of "Manila Compañia de Seguros." As to this, it is enough to say that if this was
what Albina Tuason contemplated in signing the document, evidently it was not what "Manila
Compañia de Seguros" accepted. As above stated, "Manila Compañia de Seguros" accepted this
document only as additional security for its credit and not as a novation of the contract.

Our conclusion is that the plaintiff has the right to recover of the defendant the sum of P9,663, the
value of the note executed by the plaintiff in favor of "Manila Compañia de Seguros" which the
plaintiff is under obligation to pay by virtue of final judgment. We do not believe, however, that the
defendant must pay the plaintiff the expenses incurred by it in the litigation between it and "Manila
Compañia de Seguros." That litigation was originated by the plaintiff having failed to fulfill its
obligation with "Manila Compañia de Seguros," and it cannot charge the defendant with expenses
which it was compelled to make by reason of its own fault. It is entitled, however, to the expenses
incurred by it in this action brought against the defendant, which are fixed at P1,653.65 as attorney's
fees.

The judgment appealed from is modified, and the defendant is sentenced to pay the plaintiff the sum
of P9,663, with interest thereon at the rate of 10 per cent per annum from July 19, 1923, when the
complaint was filed until full payment thereof, plus the sum of P1,653.65 for attorney's fees, without
special pronouncement as to costs. So ordered.

Johnson, Street, Malcolm, Villamor, Ostrand and Romualdez, JJ., concur.

Footnotes

1 R. G. No. 18101, promulgated July 10, 1922, not reported.

53
Saenz vs. Yap Chuan

Facts:
By order of the court, Engracio Palanca, as judicial administrator of an estate, gave a bond to guarantee his
administration. The judicial bond was executed by Palanca, Vizmanos, and others jointly and severally in favor
of the Government for the sum of 60K. In turn, Palanca and 5 others executed in favor of Vizmanos another
bond.

As guarantor in solidum of Palanca who was replaced by Yap Chengtua as the new administrator, Vizmanos was
ordered by the court to pay to the estate the sum of 48K. Vizmanos paid 8K and still owed 40K. Palanca could
not pay Vizmanos.

Issue:
WON the other creditors should reimburse Vizmanos each or a total of
20K notwithstanding that Vizmanos had paid only 8K of his bond.
Held:
NO
1. Guarantor’s rights of reimbursement limited to amount paid
2. An action of subrogation is an action of indemnity Art. 2067 the guarantor who pays is subrogated by virtue
thereof of 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.
54
Gidwani vs. Domestic Insurance Co. of the Phils.
Facts: 2 securities were given to Domestic Insurance for the faithful compliance of the obligation of Plastic Era
to pay the promissory note that it executed in favor of Manufacturer’s Bank & Trust Co. (MBTC) the counter-
guaranty agreement jointly executed by Plastic Era and spouses Gidwani, and the second security was the
pledge of shares of stock made by Sati B. Gidwani. Domestic Insurance paid Manufactures’ bank & Trust
Company, thereby subrogating itself to the rights of the latter against Plastic Era, the maker of the note.
Domestic Insurance sued Plastic Era and Spouses Gidwani under indemnity agreement, obtaining a judgment
with partial satisfaction, by reason of which Domestic Insurance caused the sale at public auction of the
pledged shares, with Domestic Insurance acquiring them as the highest bidder.
Issue:
WON Domestic Insurance abandoned and waived its right or cause of action under the agreement when it
instituted the civil action based on guaranty-agreement and obtained a favorable judgment?
Held:
No, The indemnity agreement and pledge agreement are 2 different securities, and the creditor did not avail of
the remedy to obtain a personal judgment against the debtor. It is not barred to enforce its claim against both
securities. From the nature of the situation, Domestic Insurance cannot prosecute its claim against the 2
securities in one and the same action.

55
GENERAL INDEMNITY CO., INC. v. ESTANISLAO ALVAREZ
G.R. No. L-9434, March 29, 1957
FACTS:
On February 18, 1954, appellee General Indemnity Co., Inc., filed a complaint in the CFI of Manila against
appellant Estanislao Alvarez for the recovery of the sum of P2,000 representing the amount of a loan
allegedly taken by the appellant from the Philippine National Bank, the payment of which appellee
guaranteed with an indemnity bond, and for which appellant, as counter-guaranty, executed in plaintiff's
favor a mortgage on his share of land in a parcel of land. The complaint further alleged that Alvarez failed to
pay said loan, together with interest, to Philippine National Bank, as a result of which the bank deducted the
amount thereof plaintiff's deposit.
On March 29, 1954, appellant Estanislao Alvarez, answered, admitting the fact of the loan and the execution
of the mortgage and as affirmative defense, appellant averred that the loan in question was secured by him
only in accommodation of one Hao Lam, and that plaintiff agreed not to take any steps against appellant
and the mortgage executed by him in plaintiff's favor until the latter had failed to obtain payment from said
Hao Lam.
The lower court on March 29, 1955, rendered judgment in favor of plaintiff for the amount of P2,130.38,
plus daily interest of P0.69 from February 1, 1954 until payment, and the additional sum of P426.07
attorney's fees, and costs.
Defendant filed a motion for reconsideration to have this judgment set aside and the case set for hearing,
but said motion was denied, and so he appealed to this Court.
Appellant's contention is that, there exists a controversy in the complaint and answer as to whether
or not appellee had actually paid appellant's obligation to the Philippine National Bank.
ISSUE:
Whether the action by the guarantor (or surety) against the principal debtor for payment before the
guarantor has paid the creditor premature.

RULING:
YES. There is merit in appellant's contention that there exists a controversy in the complaint and answer as
to whether or not appellee had actually paid appellant's obligation to the Philippine National Bank, a matter
which should be decided in the affirmative before appellant, as surety, can claim reimbursement from
appellant, the principal debtor.
Appellee likewise contends that it is immaterial to its cause of action against appellant whether or not it had
actually paid the Philippine National Bank, citing Art. 2071 of the New Civil Code to the effect that a
guarantor may proceed against the principal debtor, even before having paid, when the debt has become
demandable.
The last paragraph of this same article, however, provides that in such instance, a guarantor who has not
paid the creditor can proceed against the debtor only for the purpose of obtaining release from the
guaranty, or to demand a security that shall protect him from any proceeding by the creditor and from the
danger of insolvency of the debtor.
Thus, an action by the guarantor against the principal debtor for payment, before the former has paid the
creditor, is premature.

56
G.R. No. L-46534 October 16, 1939
J.V. HOUSE, petitioner,
vs.
SIXTO DE LA COSTA, JUDGE OF FIRST INSTANCE OF MANILA, BRANCH V, ET AL., respondents.
Yuseco, Arteche and Abdon for petitioner.
Antonio Gonzalez for respondents.

AVANCEÑA, C.J.:
The petitioner, plaintiff in a civil case against C.P. Bush and George Upton for the recovery of a sum of
money, obtained a preliminary attachment of certain properties of the latter. Three days thereafter, Bush
and Upton secured the discharge of the attachment of these properties by filing a bond posted by Far
Eastern Surety & Insurance Co., Inc., on August 25, 1934, for P2,000, the condition of the bond being that,
should the plaintiff and petitioner House obtain a judgment against C.P. Bush, the latter would return to the
Sheriff of Manila the properties discharged from attachment and, should he fail to do so, the Far Eastern
Surety & Insurance Co., Inc., would pay the value thereof.
On September 1st following, the petitioner House and C.P. Bush entered into an agreement, without the
knowledge or consent of the Far Eastern Surety & Insurance Co., Inc., whereby Bush delivered to the
petitioner, together with other properties, those discharged from attachment to be sold at public auction.
The petitioner was the highest bidder in this sale and the properties were adjudicated to him.
Eventually the petitioner obtained judgment against C.P .Bush for the amount of P2,000 and the same not
having been satisfied, he asked for execution against Far Eastern Surety & Insurance Co., Inc., as surety of
C.P Bush in the discharge of the properties from the attachment. The court denied this petition.
ISSUE: Is The petitioner in alledging that the court exceeded and abused its discretion in so ruling.
Held: From the foregoing it appears that the petitioner and C.P. Bush, under the agreement of September
1st, substantially altered their judicial relations as to the properties discharged from attachment and for the
delivery of which Far Eastern Surety & Insurance Co., Inc., was a surety, which alteration necessity released
the latter from its obligations as such surety. The properties discharged from attachment having been turned
over to the petitioner and thereafter publicly sold and adjudicated to him under the said agreement, the
obligation of C.P. Bush to return the properties to the Sheriff, in satisfaction of the judgment in favor of the
petitioner, was extinguished and compliance therewith became impossible by petitioner's own act, thereby
resulting in the release of the surety from its obligation to pay the value of said properties (articles 1184 and
1847 of the Civil Code).lâwphi1.nêt
The petition is denied, with the costs to the petitioner. So ordered.
Villa-Real, Imperial, Diaz, Laurel, Concepcion, and Moran, JJ., concur.

57
CITIZENS SURETY and INSURANCE COMPANY, INC., petitioner, vs. COURT OF APPEALS and PASCUAL M.
PEREZ, respondents.
G.R. No. L-48958. June 28, 1988
Facts:
• On December 4, 1959, the petitioner issued two (2) surety bonds CSIC Nos. 2631 and 2632 to guarantee
compliance by the principal Pascual M. Perez Enterprises of its obligation under a "Contract of Sale of Goods"
entered into with the Singer Sewing Machine Co. In consideration of the issuance of the aforesaid bonds,
Pascual M. Perez, in his personal capacity and as attorney-in-fact of his wife, Nicasia Sarmiento and in behalf of
the Pascual M. Perez Enterprises executed on the same date two (2) indemnity agreements wherein he
obligated himself and the Enterprises to indemnify the petitioner jointly and severally, whatever payments
advances and damage it may suffer or pay as a result of the issuance of the surety bonds.
• In addition to the two indemnity agreements, Pascual M. Perez Enterprises was also required to put up a
collateral security to further insure reimbursement to the petitioner of whatever losses or liabilities it may be
made to pay under the surety bonds. Pascual M. Perez therefore executed a deed of assignment on the same
day, December 4, 1959, of his stock of lumber with a total value of P400,000.00. On April 12, 1960, a second
real estate mortgage was further executed in favor of the petitioner to guarantee the fulfillment of said
obligation.
• Pascual M. Perez Enterprises failed to comply with its obligation under the contract of sale of goods with
Singer Sewing Machine Co., Ltd. Consequently, the petitioner was compelled to pay, as it did pay, the fair value
of the two surety bonds in the total amount of P144,000.00. Except for partial payments in the total sum of
P55,600.00 and notwithstanding several demands, Pascual M. Perez Enterprises failed to reimburse the
petitioner for the losses it sustained under the said surety bonds.
• The petitioner filed a claim for sum of money against the estate of the late Nicasia Sarmiento which was
being administered by Pascual M. Perez.
• In opposing the money claim, Pascual M. Perez asserts that the surety bonds and the indemnity agreements
had been extinguished by the execution of the deed of assignment.
• CFI rendered that the estate of the late Sarmiento is jointly and severally liable to Citizens’ Surety and
Insurance Co Inc. for the amount it paid to Singer Sewing Machine Co. Ltd.
• CA reversed

ISSUE: whether or not the administrator's obligation under the surety bonds and indemnity agreements had
been extinguished by reason of the execution of the deed of assignment.

HELD:
• The SC reiterated in an earlier case Lopez v CA: The respondent court stated that "by virtue of the execution
of the deed of assignment, ownership of administrator-appellant's lumber materials had been transferred to
the claimant-appellant and this amounted to dation in payment whereby the former is considered to have
alienated his property in favor of the latter in satisfaction of a monetary debt (Article 1245). As a consequence
thereof, administrator-appellant's obligation under the surety bonds is thereby extinguished upon the
execution of the deed of assignment." This statement is not sustained by the records
The transaction could not be dation in payment. As pointed out in the concurring and dissenting opinion of
Justice Edgardo L. Paras and the dissenting opinion of Justice Mariano Serrano when the deed of assignment
was executed on December 4, 1959, the obligation of the assignor to refund the assignee had not yet arisen. In
other words, there was no obligation yet on the part of the petitioner, Citizens' Surety and Insurance Co., to
pay Singer Sewing Machine Co. There was nothing to be extinguished on that date, hence, there could not
have been a dation in payment.
• The deed of assignment cannot be regarded as an absolute conveyance whereby the obligation under the
surety bonds was automatically extinguished. The subsequent acts of the private respondent bolster the fact
that the deed of assignment was intended merely as a security for the issuance of the two bonds. Partial
payments amounting to P55,600.00 were made after the execution of the deed of assignment to satisfy the
obligation under the two surety bonds. Since later payments were made to pay the indebtedness, it follows
that no debt was extinguished upon the execution of the deed of assignment. Moreover, a second real estate
mortgage was executed on April 12, 1960 and eventually cancelled only on May 15, 1962. If indeed the deed of
assignment extinguished the obligation, there was no reason for a second mortgage to still have to be
executed. We agree with the two dissenting opinions in the Court of Appeals that the only conceivable reason
for the execution of still another mortgage on April 12, 1960 was because the obligation under the indemnity
bonds still existed. It was not yet extinguished when the deed of assignment was executed on December 4,
1959. The deed of assignment was therefore intended merely as another collateral security for the issuance of
the two surety bonds.
• the facts of the case, the records show that the petitioner surety company paid P144,000.00 to Singer on the
basis of the two surety bonds it had issued in behalf of Pascual Perez Enterprises. Perez in turn was able to
indemnify the petitioner for its payment to Singer in the amount of P55,600.00 thus leaving a balance of only
P88,400.00.
• The petitioner surety company was more than adequately protected. Lumber worth P400,000.00 was
assigned to it as collateral. A second real estate mortgage was also given by Perez although it was later
cancelled obviously because the P400,000.00 worth of lumber was more than enough guaranty for the
obligations assumed by the petitioner. As pointed out by Justice Paras in his separate opinion, the proper
procedure was for Citizens' Insurance and Surety Co., to collect the remaining P88,400.00 from the sales of
lumber and to return whatever remained to Perez. We cannot order the return in this decisions because the
Estate of Mrs. Perez has not asked for any return of excess lumber or its value. There appears to have been
other transactions, surety bonds, and performance bonds between the petitioner and Perez Enterprises but
these are extraneous matters which, the records show, have absolutely no bearing on the resolution of the
issues in this petition.
• DISMISSED.

58
PHILIPPINE NATIONAL BANK, petitioner,
vs.
MANILA SURETY and FIDELITY CO., INC. and THE COURT OF APPEALS (Second Division), respondents.
Facts:
The material facts of the case, as found by the appellate Court, are as follows:
The Philippine National Bank had opened a letter of credit and advanced thereon $120,000.00 to Edgington Oil
Refinery for 8,000 tons of hot asphalt. Of this amount, 2,000 tons worth P279,000.00 were released and
delivered to Adams & Taguba Corporation (known as ATACO) under a trust receipt guaranteed by Manila
Surety & Fidelity Co. up to the amount of P75,000.00. To pay for the asphalt, ATACO constituted the Bank its
assignee and attorney-in-fact to receive and collect from the Bureau of Public Works the amount aforesaid out
of funds payable to the assignor under Purchase Order No. 71947. This assignment stipulated that:
The conditions of this assignment are as follows:
1. It shall remain irrevocable until the said credit accomodation is fully liquidated.
ATACO delivered to the Bureau of Public Works, and the latter accepted, asphalt to the total value of
P431,466.52. Thereafter, for unexplained reasons, the Bank ceased to collect, until in 1952 its investigators
found that more moneys were payable to ATACO from the Public Works office, because the latter had allowed
mother creditor to collect funds due to ATACO under the same purchase order to a total of P311,230.41. Its
demands on the principal debtor and the Surety having been refused, the Bank sued both in the Court of First
Instance of Manila to recover the balance of P158,563.18 as of February 15, 1950, plus interests and costs. The
trial court rendered a decision, in favor of the defendants Adams and Taguba Corporation and Manila Surety
and Fidelity Corporation.The Bank recourse to the Court of Appeals, which affirmed CFI.
The Court of Appeals found the Bank to have been negligent in having stopped collecting from the Bureau of
Public Works the moneys falling due in favor of the principal debtor, ATACO, from and after November 18,
1948, before the debt was fully collected, thereby allowing such funds to be taken and exhausted by other
creditors to the prejudice of the surety, and held that the Bank's negligence resulted in exoneration of
respondent Manila Surety & Fidelity Company.
Hence this petition.
Issue:
Whether or not PNB neglected in collecting the sum due to the debtor.
Held:
This argument of appellant Bank misses the point. The Court of Appeals did not hold the Bank answerable for
negligence in failing to collect from the principal debtor but for its neglect in collecting the sums due to the
debtor from the Bureau of Public Works, contrary to its duty as holder of an exclusive and irrevocable power of
attorney to make such collections, since an agent is required to act with the care of a good father of a family
(Civ. Code, Art. 1887) and becomes liable for the damages which the principal may suffer through his
non-performance (Civ. Code, Art. 1884). Certainly, the Bank could not expect that the Bank would diligently
perform its duty under its power of attorney, but because they could not have collected from the Bureau even
if they had attempted to do so. It must not be forgotten that the Bank's power to collect was expressly made
irrevocable, so that the Bureau of Public Works could very well refuse to make payments to the principal
debtor itself, and a fortiori reject any demands by the surety.
Even if the assignment with power of attorney from the principal debtor were considered as mere additional
security still, by allowing the assigned funds to be exhausted without notifying the surety, the Bank deprived
the former of any possibility of recoursing against that security. The Bank thereby exonerated the surety,
pursuant to Article 2080 of the Civil Code:
ART. 2080. — The guarantors, even though they be solidary, are released from their obligation whenever by
come act of the creditor they cannot be subrogated to the rights, mortgages and preferences of the latter.
(Emphasis supplied.)
As to the letter of demand on the Public Works office, it does not appear that any reply thereto was made; nor
that the demand was pressed, nor that the debtor or the surety were ever apprised that payment was not
being made. The finding of negligence made by the Court of Appeals is thus not only conclusive on us but fully
supported by the evidence.
Even if the Court of Appeals erred on the second reason it advanced in support of the decision now under
appeal, because the rules on application of payments, giving preference to secured obligations are only
operative in cases where there are several distinct debts, and not where there is only one that is partially
secured, the error is of no importance, since the principal reason based on the Bank's negligence furnishes
adequate support to the decision of the Court of Appeals that the surety was thereby released.
WHEREFORE, the appealed decision is affirmed, with costs against appellant Philippine National Bank.

59
E Zobel, Inc. vs. CA
Facts:
Respondent spouses Raul and Elea Claveria applied for a loan with respondent SOLIDBANK. The loan was
granted subject to the condition that spouses execute a chattel mortgage over the 3 vessels to be acquired
by them and that a continuing guarantee be executed by petitioner EZ, Inc. in favor of Solid Bank. The
spouses defaulted in payment of the entire obligation upon maturity. SolidBank filed a complaint for the
sum of money against EZ Zobel. Petitioner moved to dismiss the complaint on the ground that its liability as
guarantor of the loan was extinguished pursuant to Article 2080.
Issue:
WON, Art. 2080 is applicable to petitioner;
WON, petitioner’s obligation to SOLIDBANK under the continuing guaranty is that of a surety;
Held:
A contract of surety is an accessory promise by which a person binds himself for another already bound, and
agrees with the creditor to satisfy the obligation if the debtor does not.[7] A contract of guaranty, on the
other hand, is a collateral undertaking to pay the debt of another in case the latter does not pay the debt.
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.

Based on the aforementioned definitions, it appears that the contract executed by petitioner in favor of
SOLIDBANK, albeit denominated as a "Continuing Guaranty," is a contract of surety. The terms of the
contract categorically obligates petitioner as "surety" to induce SOLIDBANK to extend credit to respondent
spouses. This can be seen in the following stipulations.

"For and in consideration of any existing indebtedness to you of AGRO BROKERS, a single proprietorship
owned by MR. RAUL P. CLAVERIA, of legal age, married and with business address x x x (hereinafter called
the Borrower), for the payment of which the undersigned is now obligated to you as surety and in order to
induce you, in your discretion, at any time or from time to time hereafter, to make loans or advances or to
extend credit in any other manner to, or at the request or for the account of the Borrower…”

Having thus established that petitioner is a surety, Article 2080 of the Civil Code, relied upon by petitioner,
finds no application to the case at bar. In Bicol Savings and Loan Association vs. Guinhawa,[12] we have
ruled that Article 2080 of the New Civil Code does not apply where the liability is as a surety, not as a
guarantor.
61
62

63
People’s Trans-east Asia Insurance Corp. vs Doctors of New Millenium Holding Inc.
GR no. 172404
August 13, 2014
Civil Law (Credit Transaction)
Leonen, J.:

Facts: Doctors of New Millennium Holdings, Inc entered into a construction and development
agreement with Million State Development Corporation for the construction of a 200-bed capacity
hospital in Cainta, Rizal. Million State Development submitted a surety bond to Doctors of New
Millennium issued by People’s Trans-East Asia Insurance Corporation, now known as People’s
General Insurance Corporation.
Million State Development, however, failed to comply with its obligation and so Doctors of New
Millennium filed a complaint for breach of contract with damages with prayerfor the issuance of
preliminary attachment against Million State Development and People’s General Insurance with the
Regional Trial Court of Pasig City.

Issue: Whether a surety bond which guarantees initial payment is impliedly novated by an insertion
of a clause in the principal contract waiving the conditions for the initial payment’s release.

Ruling: No. The obligations of the surety to the principal under the surety bond are different from the
obligations of the contractor to the client under the principal contract.

64
CASE 1: TIDCORP vs. ASPAC
G.R. No. 187403 February 12, 2014
TRADE AND INVESTMENT DEVELOPMENT CORPORATION OF THE PHILIPPINES (Formerly PHILIPPINE EXPORT
AND FOREIGN LOAN GUARANTEE CORPORATION.) 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
FACTS: Asia Paces Corporation (ASPAC) and Paces Industrial Corporation (PICO) entered into a sub-contracting
agreement with the Electrical Projects Company of Libya (ELPCO 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 were secured by several Letters of Guarantee issued by Trade and Investment Development
Corporation of the Philippines (TIDCORP), then Philippine Export and Foreign Loan Guarantee Corp. 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.
As a condition precedent to the issuance by TIDCORP of the Letters of Guarantee, ASPAC, PICO, and ASPAC’s
President, Nicolas C. Balderrama (Balderrama) had to execute several Deeds of Undertaking, binding
themselves to jointly and severally pay TIDCORP for whatever damages or liabilities it may incur under the
aforementioned letters. In the same light, ASPAC, as principal debtor, entered into surety agreements (Surety
Bonds) with Paramount, Phoenix, Mega Pacific and Fortune (bonding companies), as sureties, also holding
themselves solidarily liable to TIDCORP, as creditor, for whatever damages or liabilities the latter may incur
under the Letters of Guarantee.
ASPAC eventually defaulted on its loan obligations to Banque Indosuez and PCI Capital. Demand letters to the
bonding companies were sent but to no avail. Taking into account the moratorium request issued by the
Minister of Finance of the Republic of the Philippines, TIDCORP and its various creditor banks, such as Banque
Indosuez and PCI Capital, forged a Restructuring Agreement extending the maturity dates of the Letters of
Guarantee. The bonding companies were not privy to the Restructuring Agreement and, hence, did not give
their consent to the payment extensions. Nevertheless, following new payment schedules, TIDCORP fully
settled its obligations. Seeking payment for the damages and liabilities it had incurred under the Letters of
Guarantee and with its previous demands therefor left unheeded, TIIDCORP filed a collection case against: (a)
ASPAC, PICO, and Balderrama on account of their obligations under the deeds of undertaking; and (b) the
bonding companies on account of their obligations under the Surety Bonds.
The RTC partially granted TIDCORP’s complaint and thereby found ASPAC, PICO, and Balderrama jointly and
severally liable to TIDCORP but absolved the bonding companies from liability on the ground that the
moratorium request and the consequent payment extensions granted by Banque Indosuez and PCI Capital in
TIDCORP’s favor without their consent extinguished their obligations under the Surety Bonds. On appeal, the
CA upheld the ruling of RTC. Hence, this appeal filed by TIDCORP.

ISSUE:
Whether or not 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.

HELD:
NO. 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 as a
guarantor, 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." Verily, as the Surety
Bonds concern ASPAC’s debt to TIDCORP and not TIDCORP’s debt to the banks, the payments extensions 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.

65
Philippine Charter Insurance vs. Petroleum Distributors services and corporation
Facts:
On January 27, 1999, respondent Petroleum Distributors and Services Corporation (PDSC), through its
president, Conrado P. Limcaco, entered into a building contract 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.The project was divided into
two stages: Phase 1 of the construction work would be finished on May 17, 1999 and Phase 2 would begin on
May 18, 1999 and finish on October 20, 1999. The project should be turned over by October 21, 1999. 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.
To ensure compliance with its obligation, FCCs 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. Caperia, signed the Undertaking of Surety holding themselves personally liable for the
accountabilities of FCC. 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.
PDSC sourced out construction materials to help obtain the lowest cost and speed up the work of the project.
These resulted in the reduction of the contract price.
During the Phase 1 of the project, PDSC noticed that FCC was sixteen (16) days behind schedule. In a
Letterdated 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 daysand ballooned to 60 days.
On even date, PDSC and FCC likewise executed a memorandum of agreement (MOA), 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.
For failure of FCC to accomplish the project within the agreed completion period, PDSC, in a letter 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 letters 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.
Despite notice, PDSC did not receive any reply from either FCC or PCIC, forcing it to file a complaint 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 complaint impleading PCIC, claiming coverage under Performance Bond No. 31915 in the
amount of ₱6,828,329.66.
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. 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.
On January 12, 2004, the RTC rendered its Decision 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.
Issues:
• whether or not PCIC is liable for liquidated damages under the performance bond;
• whether or not the September 10, 1999 MOA executed by PDSC and FCC extinguished PCICs liability
under the performance bond;
• Whether or not the amounts of ₱2,793,000.00 and ₱662,836.50 are deductible from the liquidated
damages awarded by the CA.
Ruling:
Appellants FFC and PCIC are 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. And FFC liable to pay appellant Philippine
Charter Insurance Corporation for the amount the latter may have paid under Performance Bond No. 31915.

66
DURAN vs. IAC
FACTS:
Petitioner Circe S. Duran owned two (2) parcels of land.
A Deed of Sale of the two lots mentioned above was made in favor of Circe's mother, Fe S. Duran who, on
December 3, 1965, mortgaged the same property to private respondent Erlinda B. Marcelo-Tiangco.
When petitioner Circe S. Duran came to know about the mortgage made by her mother, she wrote the
Register of Deeds of Caloocan City informing the latter that she had not given her mother any authority to
sell or mortgage any of her properties in the Philippines.
Failing to get an answer from the registrar, she returned to the Philippines.
Meanwhile, when her mother, Fe S. Duran, failed to redeem the mortgage properties, foreclosure
proceedings were initiated by private respondent Erlinda B. Marcelo Tiangco and, ultimately, the sale by the
sheriff and the issuance of Certificate of Sale in favor of the latter.
Petitioner Circe S. Duran claims that the Deed of Sale in favor of her mother Fe S. Duran is a forgery, saying
that at the time of its execution in 1963 she was in the United States.
On the other hand, the adverse party alleges that the signatures of Circe S. Duran in the said Deed are
genuine and, consequently, the mortgage made by Fe S. Duran in favor of private respondent is valid.
With respect to the issue as to whether the signature of petitioner Circe S. Duran in the Deed of Sale is a
forgery or not, respondent appellate court held the same to be genuine because there is the presumption of
regularity in the case of a public document and "the fact that Circe has not been able to satisfactorily prove
that she was in the United States at the time the deed was executed in 1963. Her return in 1966 does not
prove she was not here also in 1963, and that she did not leave shortly after 1963. She should have
presented her old passport, not her new one.
ISSUE:
WON the mortgage is valid.
WON private respondent Erlinda B. Marcelo-Tiangco was a buyer in good faith and for value
RULING:
I. YES.
But even if the signatures were a forgery, and the sale would be regarded as void, still it is Our opinion that
the Deed of Mortgage is VALID, with respect to the mortgagees, the defendants-appellants.
While it is true that under Art. 2085 of the Civil Code, it is essential that the mortgagor be the absolute
owner of the property mortgaged, and while as between the daughter and the mother, it was the daughter
who still owned the lots, STILL insofar as innocent third persons are concerned the owner was already the
mother (Fe S. Duran) inasmuch as she had already become the registered owner (Transfer Certificates of
Title Nos. 2418 and 2419).
THE MORTGAGEE HAD THE RIGHT TO RELY UPON WHAT APPEARED IN THE CERTIFICATE OF TITLE, AND DID
NOT HAVE TO INQUIRE FURTHER. If the rule were otherwise, the efficacy and conclusiveness of Torrens
Certificate of Titles would be futile and nugatory. Thus the rule is simple: THE FRAUDULENT AND FORGED
DOCUMENT OF SALE MAY BECOME THE ROOT OF A VALID TITLE IF THE CERTIFICATE HAS ALREADY BEEN
TRANSFERRED FROM THE NAME OF THE TRUE OWNER TO THE NAME INDICATED BY THE FORGER (See De la
Cruz v. Fable, 35 Phil. 144; Blondeau et al. v. Nano et al., 61 Phil. 625; Fule et al. v. Legare et al., 7 SCRA 351;
see also Sec. 55 of Act No. 496, the Land Registration Act). The fact that at the time of the foreclosure sale
proceedings (1970-72) the mortgagees may have already known of the plaintiffs' claim is immaterial. WHAT
IS IMPORTANT IS THAT AT THE TIME THE MORTGAGE WAS EXECUTED, THE MORTGAGEES IN GOOD FAITH
ACTUALLY BELIEVED FE S. DURAN TO BE THE OWNER, AS EVIDENCED BY THE REGISTRATION OF THE
PROPERTY IN THE NAME OF SAID FE S. DURAN (pp. 146-147, Rollo)."
II. YES.
Guided by previous decisions of this Court, good faith consists in the possessor's belief that the person from
whom he received the thing was the owner of the same and could convey his title (Arriola vs. Gomez dela
Serna, 14 Phil. 627).
Good faith, while it is always to be presumed in the absence of proof to the contrary, requires a
well-founded belief that the person from whom title was received was himself the owner of the land, with
the right to convey it (Santiago vs. Cruz, 19 Phil. 148).
There is good faith where there is an honest intention to abstain from taking any unconscientious advantage
from another (Fule vs. Legare, 7 SCRA 351).
Otherwise stated, good faith is the opposite of fraud and it refers to the state of mind which is manifested
by the acts of the individual concerned. In the case at bar, private respondents, in good faith relied on the
certificate of title in the name of Fe S. Duran and as aptly stated by respondent appellate court "[e]ven on
the supposition that the sale was void, the general rule that the direct result of a previous illegal contract
cannot be valid (on the theory that the spring cannot rise higher than its source) cannot apply here for We
are confronted with the functionings of the Torrens System of Registration. The doctrine to follow is simple
enough: a fraudulent or forged document of sale may become the ROOT of a valid title if the certificate of
title has already been transferred from the name of the true owner to the name of the forger or the name
indicated by the forger."
Thus, where innocent third persons relying on the correctness of the certificate of title issued, acquire rights
over the property, the court cannot disregard such rights and order the total cancellation of the certificate
for that would impair public confidence in the certificate of title; otherwise everyone dealing with property
registered under the torrens system would have to inquire in every instance as to whether the title had been
regularly or irregularly issued by the court. Indeed, this is contrary to the evident purpose of the law. Every
person dealing with registered land may safely rely on the correctness of the certificate of title issued
therefor and the law will in no way oblige him to go behind the certificate to determine the condition of the
property. Stated differently, an innocent purchaser for value relying on a torrens title issued is protected. A
mortgagee has the right to rely on what appears in the certificate of title and, in the absence of anything to
excite suspicion, he is under no obligation to look beyond the certificate and investigate the title of the
mortgagor appearing on the face of said certificate.

67
68
ARENAS vs. RAYMUNDO
FACTS : Estanislaua Arenas was the owner and proprietor of the jewelry, alleged that the jewelries was delivered to Elena
de Vega to sell on commission, and that the latter, in turn, delivered it to Conception Perello, likewise to sell on commission,
but that Perello, instead of fulfilling her trust, pledged the jewelry in the defendant's pawnshop and appropriated to her own
use the money thereby obtained.
Conception Perello was prosecuted for estafa, convicted, and the judgment became final; that the said jewelry was
then under the control and in the possession of the defendant, as a result of the pledge by Perello, and that the former
refused to deliver it to the plaintiffs (owner), wherefore counsel for the plaintiffs asked that judgment be rendered sentencing
the defendant to make restitution of the said jewelry and to pay the costs.
The trial court rendered judgment sentencing the defendant to restore to the plaintiff spouses the jewelry described
in the complaint, the right being reserved to the defendant to institute his action against the proper party. The counsel for the
defendant excepted to this judgment, asked that the same be set aside, and a new trial granted. This motion was denied,
exceptions was taken by the appellant, and the proper bill of exceptions was duly approved certified to, and forwarded to the
clerkof this court.

ISSUE : WON defendant Raymundo is entitled to retain the thing pledge.

HELD : The aforementioned decision, No. 3890, Varela vs. Finnick, recites among other considerations, the following:
The exception contained in paragraph 3 of said article is not applicable to the present case because a pawnshop
does not enjoy the privilege established by article 464 of the Civil Code. The owner of the loan office of Finnick
Brothers, notwithstanding the fact that he acted in good faith, did not acquire the jewels at a public sale; it is not a
question of public property, securities, or other such effects, the transfer, sale, or disposal of which is subject to the
provisions of the Code of Commerce. Neither does a pawnshop enjoy the privilege granted to a monte de piedad;
therefore, Josefa Varela, who lost said jewels and was deprived of the same in consequence of a crime, is entitled
to the recovery thereof from the pawnshop of Finnick Brothers, where they were pledged; the latter can not lawfully
refuse to comply with the provisions of article 120 of the Penal Code, as it is a question of jewels which has been
misappropriated by the commission of the crime of estafa, and the execution of the sentence which orders the
restitution of the jewels can not be avoided because of the good faith with which the owner of the pawnshop
acquired them, inasmuch as they were delivered to the accused, who was not the owner nor authorized to dispose
of the same
Even supposing that the defendant Raymundo had acted in good faith in accepting the pledge of the jewelry in
litigation, even then he would not be entitled to retain it until the owner thereof reimburse him for the amount loaned to the
embezzler, since the said owner of the jewelry, the plaintiff, did not make any contract with the pledgee, that would obligate
him to pay the amount loaned to Perello, and the trial record does not disclose any evidence, even circumstantial, that the
plaintiff Arenas consented to or had knowledge of the pledging of her jewelry in the pawnshop of the defendant.
For this reason, and because Conception Perello was not the legitimate owner of the jewelry which she pledged to
the defendant Raymundo, for a certain sum that she received from the latter as a loan, the contract of pledge entered the
jewelry so pawned cannot serve as security for the payment of the sum loaned, nor can the latter be collected out of the
value of the said jewelry.
 Article 1857 of the Civil Code prescribes as one of the essential requisites of the contracts of pledge and of
mortgage, that the thing pledged or mortgaged must belong to the person who pledges or mortgages it. This essential
requisite for the contract of pledge between Perello and the defendant being absent as the former was not the owner of the
jewelry given in pledge, the contract is as devoid of value and force as if it had not been made, and as it was executed with
marked violation of an express provision of the law, it cannot confer upon the defendant any rights in the pledged jewelry,
nor impose any obligation toward him on the part of the owner thereof, since the latter was deprived of her possession by
means of the illegal pledging of the said jewelry, a criminal act. Between the supposed good faith of the defendant
Raymundo and the undisputed good faith of the plaintiff Arenas, the owner of the jewelry, neither law nor justice permit that
the latter, after being the victim of the embezzlement, should have to choose one of the two extremes of a dilemma, both of
which, without legal ground or reason, are injurious and prejudicial to her interest and rights, that is, she must either lose her
jewelry or pay a large sum received by the embezzler as a loan from the defendant, when the plaintiff Arenas is not related
to the latter by any legal or contractual bond out of which legal obligations arise.

69
Tabuada vs. Tabuada (2018)
Petitioners: SOFIA TABUADA, NOVEE YAP, MA. LORETA NADAL, AND GLADYS EVIDENTE
Respondents: ELEANOR TABUADA, JULIETA TRABUCO, LAURETA REDONDO, AND SPS.
BERNAN CERTEZA & ELEANOR D. CERTEZA
Ponente: Bersamin (First Division)
Topic: Remedial Law; Civil Law

SUMMARY: Petitioners filed a petition to nullify a mortgage allegedly executed by their relative and
predecessor-in-interest Loreta Tabuada four years after her death. Evidence of petitioners’
relationship with Loreta was questioned.
DOCTRINE: Although documentary evidence may be preferable as proof of a legal relationship, other
evidence of the relationship that are competent and relevant may not be excluded. The
preponderance of evidence, the rule that is applicable in civil cases, is also known as the greater
weight of evidence. There is a preponderance of evidence when the trier of facts is led to find that the
existence of the contested fact is more probable than its nonexistence. In short, the rule requires the
consideration of all the facts and circumstances of the cases, regardless of whether they are object,
documentary, or testimonial.
Under Article 2085 of the Civil Code, a mortgage, to be valid, must have the following requisites,
namely: (a) that it be constituted to secure the fulfillment of a principal obligation; (b) that the
mortgagor be the absolute owner of the thing mortgaged; and (c) that the person constituting the
mortgage has free disposal of the property, and in the absence of the right of free disposal, that the
person be legally authorized for the purpose.
The Civil Code provision under Article 309 on showing "disrespect to the dead" as a ground for the
family of the deceased to recover moral and material damages, being under the title of Funerals,
obviously envisions the commission of the disrespect during the period of mourning over the demise
of the deceased or on the occasion of the funeral of the mortal remains of the deceased. Neither was
true herein.
FACTS:
On January 27, 2005, the petitioners commenced Civil Case No. 05- 28420 in the RTC against
respondents Spouses Bernan and Eleanor Certeza (Spouses Certeza), Eleanor Tabuada, Julieta
Trabuco and Laureta Redondo. Respondents were declared in default.
At the ex parte hearing held on September 9, 2005 to receive their evidence, the petitioners
presented Sofia Tabuada, who testified:
● that her late husband was Simeon Tabuada, the son of Loreta Tabuada and the brother-in law
of defendant Eleanor Tabuada; that her co-plaintiffs were her daughters;
● that defendant Julieta Trabuco was the daughter of Eleanor Tabuada while Laureta Redondo
was the latter's neighbor;
● that Loreta Tabuada had died on April 16, 1990 while her husband had died on July 18, 1997;
that she received the notice sent by the Spouses Certeza regarding their land, known as Lot
4272-B-2, located at Barangay Tacas, Jaro, Iloilo City that her husband had inherited from his
mother, Loreta Tabuada, and where they were residing, informing them that the land had been
mortgaged to them (Spouses Certeza);
● that she immediately inquired from Eleanor Tabuada and Trabuco about the mortgage, and
both admitted that they had mortgaged the property to the Spouses Certeza;
● that she was puzzled to see the signature purportedly of Loreta Tabuada on top of the name
Loreta Tabuada printed on the Mortgage of Real Rights dated July 1, 1994 and the Promissory
Note dated July 4, 1994 despite Loreta Tabuada having died on April 16, 1990;
● that the property under mortgage was the where she and her daughters were residing; that the
notice caused her to lose her appetite and sleepless nights, and she suffered hypertension,
which entitled her to moral damages of P100,000.00;
● that she engaged her counsel to pursue the case against the defendants, paying counsel
P40,000.00; and that she further incurred litigation expenses of P5,000.00.

The RTC declared the Mortgage of Real Rights dated July 1, 1994 null and void for not
complying with the essential requisites of a real estate mortgage. It opined that based on the
complaint and the testimony of Sofia Tabuada "Eleanor Tabuada, who [was] not the absolute owner of
Lot No. 4272-B-2, and without having the legal authority to mortgage said property [had]
misrepresented herself as the deceased Loreta Tabuada and mortgaged the property without the
knowledge of herein plaintiffs, and benefited from said mortgage to the detriment of the rights and
interests of plaintiffs." It ruled that moral damages were proper under Article 309, of the Civil Code
based on the showing of disrespect to the dead.
On appeal, the CA reversed. The CA found merit in the contention that the petitioners were not
able to prove by preponderance of evidence that they were the legal heirs of the late Loreta Tabuada,
the registered holder of the title over the mortgaged real property. The CA noted that the death
certificate the petitioners presented was not an authenticated copy on security paper issued by the
National Statistics Office (now Philippine Statistics Authority); and that the name of the deceased on
the death certificate (Loreta Yulo Tabuada) did not match the name of the registered title holder
(Loreta H. Tabuada). It pointed out that the "discrepancy is material as it puts in issue the real identity
of the Loreta H. Tabuada who the plaintiffs claim is their predecessor-in-interest and the person
whose name appears in the death certificate as Loreta Yulo Tabuada. Consequently this
inconsistency puts in doubt the plaintiffs-appellees' ownership over Lot No. 4272-B-2." The CA
thereby underscored that the petitioners did not prove Sofia Tabuada's legal relationship with the late
Loreta Tabuada because she did not present documentary evidence thereof.
ISSUES:
● WoN the legal relationship of Sofia Tabuada with deceased Loreta Tabuada was established
by preponderance of evidence
o YES. The mere discrepancy – as perceived by the CA – between the name of the
deceased entered in the death certificate (Loreta Yulo Tabuada) and the name of the
titleholder (Loreta H. Tabuada) did not necessarily belie or disprove the legal
relationship between Sofia Tabuada and the late Loreta Tabuada. To establish filiation,
the courts like the RTC herein should consider and analyze not only the relevant
testimonies of witnesses who are competent but other relevant evidence as well. There
was on record herein Sofia Tabuada's unchallenged declaration of her being the
daughter-in-law of the registered titleholder. Also on record was the petitioners' being in
the actual possession of Lot No. 4272-B-2, which they had been using as the site for
their family residence. Such established circumstances indicated that the deceased
Loreta Yulo Tabuada and titleholder Loreta H. Tabuada could only be one and the same
person. Moreover, even the Spouses Certeza were aware that respondents Eleanor
Tabuada and Tabuco were the relatives of Sofia Tabuada; and that the respective
families of Eleanor Tabuada, Tabuco and Sofia Tabuada actually resided on the same
lot. Verily, the facts and circumstances sufficiently and competently affirmed the legal
relationship between Sofia Tabuada and the late titleholder Loreta H. Tabuada.

● WoN the real estate mortgage was null and void

o YES. It is uncontested that the late Loreta Tabuada had died in 1990, or four years
before the mortgage was constituted; and that Eleanor Tabuada and Trabuco admitted
to petitioner Sofia Tabuada that they had mortgaged the property to the Spouses
Certezas. Accordingly, the RTC was fully justified in declaring the nullity of the mortgage
based on its finding that Eleanor Tabuada had fraudulently represented herself to the
Spouses Certeza as the late Loreta Tabuada, the titleholder. That the titleholder had
been dead when the mortgage was constituted on the property by Eleanor Tabuada was
not even contested by Eleanor Tabuada and Tabuco. In any event, Eleanor Tabuada
had not been legally authorized to mortgage the lot to the Spouses Certeza.

● WoN Spouses Certeza were not mortgagees in good faith

o NO. The Spouses Certeza admitted that the petitioners were the relatives by blood or
affinity of their co-defendants Eleanor Tabuada, et al.; and that Sofia Tabuada, et al. and
the petitioners had been living in their respective residences built on the property
subject of the mortgage. Such admissions belied the Spouses Certeza's contention of
being mortgagees in good faith. At the very least, they should have been prudent and
cautious enough as to have inquired about Eleanor Tabuada's assertion of her capacity
and authority to mortgage in view of the actual presence of other persons like the
 petitioners herein on the property. Such prudence and caution were demanded of
persons like them who are about to deal with realty; they should not close their eyes to
facts that should put a reasonable man on his guard and still claim he acted in good
faith. Indeed, the status of a mortgagee in good faith does not apply where the title is
still in the name of the rightful owner and the mortgagor is a different person pretending
to be the owner. In such a case, the mortgagee is not an innocent mortgagee for value
and the registered owner will generally not lose his title.
● WoN petitioners are entitled to moral damages
o NO. The petitioners cannot recover moral damages from Eleanor Tabuada on the
ground of "disrespect to the dead." The Civil Code provision under Article 309 on
showing "disrespect to the dead" as a ground for the family of the deceased to recover
moral and material damages, being under the title of Funerals, obviously envisions the
commission of the disrespect during the period of mourning over the demise of the
deceased or on the occasion of the funeral of the mortal remains of the deceased.
Neither was true herein. Hence, the act of Eleanor Tabuada of fraudulently representing
the late Loreta Tabuada did not amount to disrespect to the dead as basis for the
recovery of moral damages.

NOTES: Petition for review on certiorari GRANTED.

70
ALCANTARA v. ALINEA, ET AL., (MARCH 22, 1907)

FACTS:
In 1904, the defendants, Alinea and Belarmino, borrowed from the plaintiff Alcantara P480, payable in January 1905
under the agreement that if, at the expiration of the said period, said amount should not be paid it would be understood that
the house and lot they owned be considered as absolutely sold to Alcantara for the said sum.
However, notwithstanding that the time for the payment of said sum has expired and no payment has been made, the
defendants refused to deliver to Alcantara the said property, openly violating that which they contracted to do and depriving
him to his loss of the rents which Alcantara should have received from February 1905.
Alcantara filed a complaint in the Court of First Instance of La Laguna, praying that judgment be rendered in his behalf
ordering the defendants to deliver to him the house and lot claimed, and to pay him in addition thereto as rent the sum of
pesos per month from February of that year, and to pay the costs of the action.
The defendants answered denying all the allegations, and alleged that the amount claimed included the interest; and
that the principal borrowed was only P200 and that the interest was P280, although in drawing the document by mutual
consent of the parties, the amount of indebtedness was made to appear in the sum of P480; and that as their special
defense defendants alleged that they offered to pay the plaintiff the sum of 480 pesos, but the plaintiff had refused to accept
the same.
The trial court rendered a judgment ordering the defendants to deliver to Alcantara the house and lot and to pay the costs
of the action.
ISSUES:
1. WON the contract between the parties is that of a mortgage, or a pledge, or an antichresis.
2. WON the contract is against the law.

HELD:
1. The contract was that of a loan and a promise of sale of a house and lot, with the amount loaned as the price, if
within a fixed period of time such amount should not be paid by the debtor-vendor of the property to the creditor-vendee of
same. Either one of the contracts is perfectly legal, and both are authorized respectively by articles 1451, 1740, and 1753,
and those following, of the Civil Code.
The contract was not a mortgage, because in order to constitute a valid mortgage it is indispensable that the
instrument be registered in the Register of Property, in accordance with article 1875 of the Civil Code, and the document of
contract, Exhibit A, does not constitute a mortgage, nor could it possibly be a mortgage, because said document is not
vested with the character and conditions of a public instrument.
The contract was not a pledge because the property was not a personal property and because the debtor continued in
possession thereof and the said property has never been occupied by the creditor.
The contract was not an antichresis too because the creditor has never been in possession of the property, has not enjoyed
the said property, and has not received its rents.

2. No.
The fact that the parties have agreed at the same time, in such a manner that the fulfillment of the promise of sale would
depend upon the nonpayment or return of the amount loaned, has not produced any change in the nature and legal
conditions of either contract, or any essential defect which would tend to nullify the same.
If the promise of sale is not vitiated because, according to the agreement between the parties, the price of the same
is to be the amount loaned and not repaid, neither would the loan be null or illegal, for the reason that the added agreement
provides that in the event of failure of payment the sale of property as agreed will take effect, the consideration being the
amount loaned and not paid.
The contract (pactum commissorium), indicates the existence of the contracts of mortgage or of pledge or that of
antichresis, none of which have coincided in the loan indicated herein.
It is a principle in law, that the will of the contracting parties is the law of contracts. It was agreed between plaintiff
and defendants herein that if defendants should not pay the loan of 480 pesos in January 1905, the property belonging to
the defendants and described in the contract should remain sold for the aforesaid sum.
The document of contract has been recognized by the defendant Alinea and by the witnesses who signed same with him,
being therefore an authentic and efficacious document, in accordance with article 1225 of the Civil Code; and as the amount
loaned has not been paid and continues in possession of the debtor, it is only just that the promise of sale be carried into
effect, and the necessary instrument be executed by the vendees.
Judgment of the trial court for plaintiff Alcantara was AFFIRMED
WILLARD, J., dissenting:
This contract violates the fundamental principle of the Spanish law, which does not permit a debtor, at the time he secures a
loan of money, to make an agreement whereby the mere failure to pay the loan at maturity shall divest him irrevocably or
allow his interest in the specific property mentioned in the agreement without any right on his part to redeem or to have the
property sold to pay the debt. (Civil Code, arts. 1859, 1872, and 1884.) I therefore dissent.

71
Uy Tong vs. CA
G.R. No. 77465 May 21, 1988

DOCTRINE: Two elements for pactum commissorium to exist: (1) that there should be a pledge or mortgage wherein a
property is pledged or mortgaged by way of security for the payment of the principal obligation; and (2) that there should be
a stipulation for an automatic appropriation by the creditor of the thing pledged or mortgaged in the event of non-payment of
the principal obligation within the stipulated period.

FACTS:
Spouses Uy Tong and Kho Po Giok used to be the owners of Apartment No. 307 of the Ligaya Building, together with the
leasehold right for 99 years over the land on which the building stands. The land is registered in the name of Ligaya
Investments, Inc. which owned the building but sold Apartment No. 307 and leased a portion of the land in which the
building stands to the spouses.
Spouses purchased from Bayanihan Automotive, Inc. 7 units of motor vehicles payable in 3 installments, evidenced by a
written "Agreement" with terms of payment specified:
• upon signing of Agreement, the spouses shall pay to Bayanihan P7,700.00, PI5,000.00 on or before March
30,1969, and P25.000.00 on or before April 30, 1969
• amount to be secured by another postdated check with maturity on April 30, 1969 drawn by the spouses
• should the 2 aforementioned checks be not honored on maturity, Bayanihan will give the spouses 60 days from
maturity date to pay or redeem the value of the said checks.
• If the spouses fail to pay, Bayanihan automatically becomes the owner of the Apartment No. 307, Ligava Building,
and obligated only to pay the spouses P3,536 and in such event the spouses shall execute Deed of Absolute Sale in favor
of Bayanihan and/or Assignment of Leasehold Rights.

After making a downpayment of P7,700.00, the Spouses failed to pay the balance of P40.000.00. Bayanihan filed an action
for specific performance against the spouses with CFI, which rendered in favor of Bayanihan. An order for execution
pending appeal was issued by CFI and a deed of assignment was executed by the spouses over Apartment No. 307 with
the leasehold right over the land. The spouses acknowledged receipt of the sum of P3.000.00, paid by Bayanihan.
Notwithstanding the execution of the deed of assignment, the spouses remained in possession of the premises.
Subsequently, they were allowed to remain in the premises as lessees for a stipulated monthly rental until November 30,
1972. Upon expiration of period, the spouses failed to surrender possession of the premises. Bayanihan filed an ejectment
case in the City Court of Manila but was dismissed on the ground that Bayanihan was not the real party in interest, not being
the owner of the building.

Bayanihan’s counsel made demands to vacate the subject apartment but was ignored by the spouses. Bayanihan filed an
action for recovery of possession with damages with CFI against the spouses and impleaded Ligaya Investments, Inc. as
party defendant. CFI rendered in favor of Bayanihan, ordering the spouses to vacate the premises and deliver the
apartment to Bayanihan. It also ordered Ligaya Investment, Inc. to recognize the right of ownership and possession of the
Bayanihan over Apartment No. 307, and to acknowledge Bayanihan as assignee-lessee in lieu of the spouses.
The spouses appealed to CA which affirmed in toto the CFI decision. The motion for reconsideration was likewise denied.
Hence, Petition.

ISSUE: Whether or not the deed of assignment is null and void because it is in the nature of a pactum commissorium and/or
was borne out of the same. No

HELD: The prohibition on pactum commissorium stipulations is provided for by Article 2088 of the Civil Code:
Art. 2088. The creditor cannot appropriate the things given by way of pledge or mortgage, or dispose of the same. Any
stipulation to the contrary is null and void.
The aforequoted provision furnishes the two elements for pactum commissorium to exist: (1) that there should be a pledge
or mortgage wherein a property is pledged or mortgaged by way of security for the payment of the principal obligation; and
(2) that there should be a stipulation for an automatic appropriation by the creditor of the thing pledged or mortgaged in the
event of non-payment of the principal obligation within the stipulated period.
A perusal of the terms of the questioned agreement evinces no basis for the application of the pactum commissorium
provision. First, there is no indication of any contract of mortgage entered into by the parties. It is a fact that the parties
agreed on the sale and purchase of trucks.
Second, there is no case of automatic appropriation of the property by Bayanihan. When the Spouses defaulted in their
payments of the second and third installments of the trucks they purchased, Bayanihan filed an action in court for specific
performance. The trial court rendered favorable judgment for Bayanihan and ordered the Spouses to pay the balance of
their obligation and in case of failure to do so, to execute a deed of assignment over the property involved in this case. The
Spouses elected to execute the deed of assignment pursuant to said judgment.
Clearly, there was no automatic vesting of title on Bayanihan because it took the intervention of the trial court to exact
fulfillment of the obligation, which, by its very nature is "... anathema to the concept of pacto commissorio". And even
granting that the original agreement between the parties had the badges of pactum commissorium, the deed of assignment
does not suffer the same fate as this was executed pursuant to a valid judgment in Civil Case No. 80420 as can be gleaned
from its very terms and conditions.
72
TOPIC: INTER-LOCKING DIRECTORS
CASE NO. 16
Development Bank Of The Philippines (DBP) Vs. Honorable Court Of Appeals And Remington Industrial Sales Corporation
(RISC)
G.R. No. 126200; August 16, 2001
Marinduque Mining-Industrial Co. (MMIC) obtained various loans from Philippine National Bank (PNB) and DBP secured by
Real Estate Mortgages (REM) and Chattel Mortgages (CM) over all their properties in Surigao del Norte, Negros Occidental
and Rizal as well as any assets it may subsequently acquire.
PNB and DBP instituted extrajudicial foreclosure against MMIC for failure to settle it obligations where PNB and DBP
emerged and was declared the highest bidder.
To ensure the continued operation of the refinery, PNB and DBP transferred and assigned all their right and interest to
Nonoc Mining and Industrial Co. (NMIC) and Miralcum Mining Co. (MMC).
PNB and DBP later transferred those given to NMIC and MMC to the Government thru the Asset Privatization Trust (APT)
pursuant to a proclamation.
Meanwhile, MMIC purchased and caused the delivery of construction materials from RISC. This remained unpaid, however,
which prompted Remington to file a complaint for sum of money against MMIC.
RISC later filed multiple amendments to implead PNB, DBP, NMIC, MMC, Island Cement Co. (ICC), and APT asserting that
they must all be considered as one entity by piercing the veil of corporate fiction, alleging: that NMIC, MMC, ICC are wholly
owned and managed by the officers of PNB and DBP; that the transfer of properties was made in fraud of creditors; that the
use of the same premises and hiring of the same employees and officers are badged of bad faith.
The RTC favored RISC. Which the CA affirmed.
The CA agreed with RISC that:
When a corporation is insolvent, the directors of the creditor corporation are disqualified, by reason of self-interest, from
acting as directors of the debtor corporation in the authorization of a mortgage or deed of trust to the former to secure such
indebtedness. (Interlocking directors)
When the corporation is insolvent, its directors who are its creditors cannot secure to themselves any advantage or
preference over other creditors. (directors who are creditors)
If they do, equity will set aside the transaction at the suit of creditors of the corporation or their representatives, without
reference to the question of any actual fraudulent intent on the part of the directors, for the right of the creditors does not
depend upon fraud in fact, but upon the violation of the fiduciary relation to the directors."
Hence this petition by DBP maintaining that RISC has no cause of action.
ISSUE:
1. Is there fraud so as to warrant piercing the veil of corporate fiction? NO
2. Can the claim of RISC be enforced? NO
RULING:
1. There is no fraud. The acts of PNB and DBP are justified:
• PNB and DBP has the duty under the Law on Mandatory Foreclosure (PD No. 385) to foreclose mortgages when
the due accounts incur arrears of more than 20% of the total outstanding obligations.
• The creation of NMIC, MMC, and ICC is necessary to manage and operate the business since they are not
authorized to change their charter to engage in mining. Hence, there is no bad faith.
• The hiring of MMIC employees and the use of the same premises is also justified by reason of convenience,
practicality, and efficiency.
As to transactions between corporations with interlocking directors, it cannot apply in this case. RISC is a third party and not
the one that has interlocking directors like MMIC and DBP.
As to “directors who are creditors”, it is also not applicable since the creditor of MMIC is DBP and not the directors of MMIC.
(yan lang talaga diniscuss about Interlocking directors ☹)
2. The claim of Remington cannot be enforced in absence of liquidation proceedings.
The Civil Code demands that there must be first some proceeding where the claims of all the preferred creditors may be
adjudicated, such as insolvency, the settlement of decedent's estate, or other liquidation proceedings of similar import.
Since the extrajudicial foreclosure instituted by PNB and DBP is not the liquidation proceeding contemplated by the Civil
Code, Remington cannot claim its pro rata share from DBP.

73
Bustamante vs Rosel Digest
Facts: Respondent Rosel entered into a loan agreement with petitioner spouses Bustamante wherein the
latter borrowed P100,000 payable in 2 years. To guarantee payment, the spouses put as collateral 70 sq m of
their lot inclusive of the apartment therein. In the event of borrowers default, contract states the lender has
the option to buy or purchase the collateral for P200,000.
When the loan was about to mature on March 1, 1989, respondents proposed to buy the said portion at the
pre-set price. Petitioners, however, refused and requested for extension of time to pay the loan. On the due
date, petitioners tendered payment of the loan to respondents which the latter refused to accept. On March
4, 1990, respondents sent a demand letter asking petitioner to sell the collateral pursuant to the option to
buy embodied in the loan agreement. Prior to that, they filed with the RTC an action for specific
performance in February.
Issue: Is the respondent justified in compelling petitioners to sell the portion of the lot pursuant to the
stipulation in the loan?
Held:
No as doing so is tantamount to pactum commissorium. The elements of pactum commissorium are as
follows: (1) there should be a property mortgaged by way of security for the payment of the principal
obligation, and (2) there should be a stipulation for automatic appropriation by the creditor of the thing
mortgaged in case of non-payment of the principal obligation within the stipulated period.
In this case, the intent to appropriate the property given as collateral in favor of the creditor appears to be
evident, for the debtor is obliged to dispose of the collateral at the pre-agreed consideration amounting to
practically the same amount as the loan. In effect, the creditor acquires the collateral in the event of non
payment of the loan. This is within the concept of pactum commissorium. Such stipulation is void.

74
041. Yau Chu v. Court of Appeals
G.R. No. L-78519/26 September 1989/First Division/Petition for Review on Certiorari
Victoria Yau Chu (assisted by her husband, Michael) – petitioners
Court of Appeals, Family Savings Bank, and/or CAMS Trading Enterprises, Inc. – respondents
Decision by J. Grino-Aquino, Digest by Pip
Short Version: Victoria bought cement from CAMS and secured her payments with deeds of assignment over
her time deposits in Family Savings Bank. She assigned about P320K worth but her obligations to CAMS
came up to about P404K. CAMS requested the bank to encash the time deposit certificates, which the bank
did only after calling up and obtaining Victoria’s consent. Victoria then sued the bank and CAMS for alleged
pactum commissorium. The Court ruled against her, as the prohibition on pactum commissorium was
enacted in order to protect debtors from creditors who automatically appropriate pledged or mortgaged
property which might have a higher value than the debt. Where the security for the debt is also money
deposited in a bank, the amount of which is even less than the debt, it is not illegal for the creditor to
encash the time deposit certificates to pay the debtors’ overdue obligation, with the latter’s consent.
Facts: Since 1980, Victoria Yau Chu had been purchasing cement on credit from CAMS. To guaranty payment
for her cement withdrawals, she executed in favor of CAMS deeds of assignment of her time deposits in
Family Savings Bank. The total amount came up to P320K. Except for serial numbers and the dates of the
time deposit certificates, the deeds of assignment prepared by Victoria’s lawyer uniformly read:
... That the assignment serves as a collateral or guarantee for the payment of my obligation with the said
CAMS TRADING ENTERPRISES, INC. on account of my cement withdrawal from said company, per separate
contract executed between us.
In July 1980, CAMS notified the bank that Victoria had an unpaid account with it in the sum of about
P314K and requested the encashment of the time deposit certificates assigned to it by Victoria. As proof, it
submitted to the bank a letter from Victoria admitting her outstanding account with CAMS reaching
P404.5K. The bank verbally advised Victoria of CAMS’ request and after she verbally agreed, the bank
encashed the certificates and delivered about P283K because one time deposit lacked the proper signatures.
Victoria then turned around and demanded that the bank and CAMS restore her time deposit. When
both refused, she filed a complaint to recover the sum from them before the RTC of Makati. The RTC
dismissed the complaint for lack of merit. Court of Appeals affirmed. Before the Supreme Court she argued
that the encashment of her time deposit certificates was pactum commissorium.
Issue: Did the encashment of Victoria’s time deposit certificates amount to pactum commissorium? NO.

Ruling: Petition denied.

Ratio: Since the collateral in this case was also money, there was no need to sell the thing pledged at public
auction in order to satisfy the pledgor’s obligation. All that had to be done to convert the pledgor's time
deposit certificates into cash was to present them to the bank for encashment after due notice to the
debtor.
The encashment of the deposit certificates was not a pactum commissorium as prohibited under
Article 2088 of the Civil Code. A pactum commissorium is a provision for the automatic appropriation of the
pledged or mortgaged property by the creditor in payment of the loan upon its maturity. This prohibition is
intended to protect the obligor, pledgor, or mortgagor against being overreached by his creditor who holds a
pledge or mortgage over property whose value is much more than the debt. Where, as in this case, the
security for the debt is also money deposited in a bank, the amount of which is even less than the debt, it is
not illegal for the creditor to encash the time deposit certificates to pay the debtors’ overdue obligation,
with the latter’s consent.

Voting: Narvasa, Cruz and Medialdea, JJ., concur.

Gancayco, J., no part.