MANILA SURETY AND FIDELITY CO., INC. V.

BATU CONSTRUCTION AND CO

FACTS: The plaintiff alleges that the Batu Construction & Company, a partnership, the members
of which are the other three defendants, requested it to post a surety bond for P8,812 in favor of
the Government of the Philippines to secure the faithful performance of the construction of the
Bacarra Bridge, Project undertaken by the partnership, as stipulated in a construction on contract
entered into
between the partnership and the Government of the Philippines, on condition that the defendants
would "indemnify the COMPANY for any damage, loss, costs, charges, or expenses of whatever
kind and nature, including counsel or attorney's fees, which the COMPANY may, at any time,
sustain or incur, as a consequence of having become surety upon the above-mentioned bond;

Because of the unsatisfactory progress of the work on the bridge, the Director of Public Works,
with the approval of the Secretary of Public Works and Communications, annulled the
construction contract referred to and notified the plaintiff Company that the Government would
hold it (the Company) liable for any amount incurred by the Government for the completion of
the bridge, in excess of the contract price

Later, Ricardo Fernandez and 105 other persons brought an action in the Justice of the Peace
Court of Laoag, Ilocos Norte, against the partnership, the individual partners and the herein
plaintiff Company for the collection of unpaid wages amounting to P5,960.10, lawful interests
thereon and costs

the plaintiff prays that a writ of attachment be issued and levied upon the properties of the
defendants; and that after hearing, judgment be rendered "ordering the defendants to deliver to
the plaintiff such sufficient security as shall protect plaintiff from any proceedings by the
creditors on the Surety Bond aforementioned and from the danger of insolvency of the
defendants; and to allow costs to the herein plaintiff," and "for such other measures of relief as
may be proper and just in the premises."

ISSUE: The main question to determine is whether the last paragraph of article 2071 of the new
Civil Code taken from article 1843 of the old Civil Code may be availed of by a surety.

RULING: The plaintiff's cause of action does not fall under paragraph 2 of article 2071 of the
new Civil Code, because there is no proof of the defendants' insolvency. The fact that the
contract was annulled because of lack of progress in the construction of the bridge is no proof of
such insolvency. It does not fall under paragraph 3,because the defendants have not bound
themselves to relieve the plaintiff from the guaranty within a specified period which already has
expired, because the surety bond does not fix any period of time and the indemnity agreement
stipulates one year extendible or renewable until the bond be completely cancelled by the person
or entity in whose behalf the bond was executed or by a Court of competent jurisdiction. It does
not come under paragraph 4, because the debt has not become demandable by reason of the
expiration of the period for payment. It does not come under paragraph 5 because of the lapse of
10 years, when the principal obligation has no period for its maturity, etc., for 10 years have not
yet elapsed. It does not fall under paragraph 6, because there is no proof that "there are
reasonable grounds to fear that the principal debtor intends to abscond." It does not come under
paragraph 7, because the defendants, as principal debtors, are not in imminent danger of
becoming insolvent, there being no proof to that effect.

But the plaintiff's cause of action comes under paragraph 1 of article 2071 of the new Civil Code,
because the action brought by Ricardo Fernandez and 105 persons is in connection with the
construction of the Bacarra Bridge, Project PR-72 (3), undertaken by the Batu Construction &
Company, and one of the defendants therein is the herein plaintiff, the Manila Surety and
Fidelity Co., Inc., and paragraph 1 of article 2071 of the new Civil Code provides that the
guarantor, even before having paid, may proceed against the principal debtor "to obtain release
from the guaranty, or to demand a security that shall protect him from any proceedings by the
creditor or from the danger of insolvency of the debtor," when he (the guarantor) is sued for
payment

So, the suit filed by Ricardo Fernandez and 105 persons in the Justice of the Peace Court of
Laoag, province of Ilocos Norte, for the collection of unpaid wagesis a suit for the payment of an
amount for which the surety bond was put up or posted to secure the faithful performance of the
obligation undertaken by the principal debtors (the defendants) in favor of the creditor, the
Government of the Philippines.

E. ZOBEL INC. VS CA

FACTS
Respondent spouses applied for a loan with respondent Consolidated Bank and Trust
Corporation (now SOLIDBANK) in the amount of Two Million Eight Hundred Seventy Five
Thousand Pesos (P2,875,000.00) to finance the purchase of two (2) maritime barges and one
tugboat  which would be used in their molasses business. The loan was granted subject to the
condition that respondent spouses execute a chattel mortgage over the three (3) vessels to be
acquired and that a continuing guarantee be executed by Ayala International Philippines, Inc.,
now herein petitioner E. Zobel, Inc., in favor of SOLIDBANK

Respondent spouses defaulted in the payment of the entire obligation upon maturity. Hence,
SOLIDBANK filed a complaint for sum of money with a prayer for a writ of preliminary
attachment, against respondents spouses and petitioner.

Petitioner moved to dismiss the complaint on the ground that its liability as guarantor of the loan
was extinguished pursuant to Article 2080 of the Civil Code of the Philippines. It argued that it
has lost its right to be subrogated to the first chattel mortgage in view of SOLIDBANK's failure
to register the chattel mortgage with the appropriate government agency.

SOLIDBANK opposed the motion contending that Article 2080 is not applicable because
petitioner is not a guarantor but a surety

ISSUE:
(1) whether or not petitioner under the "Continuing Guaranty" obligated itself to SOLIDBANK
as a guarantor or a surety;
(2) whether or not Art 2080 applies to petitioner

RULING:
(1) 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

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 isunable to pay while a surety is the insurer
of the debt, and he obligates himself to pay if the principal does not pay
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

The contract clearly disclose that petitioner assumed liability to SOLIDBANK, as a regular party
to the undertaking and obligated itself as an original promissor. It bound itself jointly and
severally to the obligation with the respondent spouses. In fact, SOLIDBANK need not resort to
all other legal remedies or exhaust respondent spouses' properties before it can hold petitioner
liable for the obligation

(2) Having thus established that petitioner is a surety, Article 2080 of the Civil Code finds no
application to the case at bar. In Bicol Savings and Loan Association vs. Guinhawa,  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.

But even assuming that Article 2080 is applicable, SOLIDBANK's failure to register the chattel
mortgage did not release petitioner from the obligation. In the Continuing Guaranty executed in
favor of SOLIDBANK, petitioner bound itself to the contract irrespective of the existence of any
collateral. It even released SOLIDBANK from any fault or negligence that may impair the
contract.

Case: Effect of extension of one installment

Villa vs Garcia Bosque, 49 Phil 126

If the debts are several, or consist of separate installments, the extension of one does not release
the guaranty for the others, unless default in the extended one automatically makes all the rest
due and payable.

Facts:
Bosque is indebted to Villa. For the amount payable, Bosque executed a promissory note payable
in three installments, with France and Goulette as sureties. The first installment was paid on
time. The second installment was paid partially, and promissory notes were executed for the
remaining balance. France and Goulette contended that they are released from liability as sureties
because of the extension of time of the second installment due.
SC Ruling:
The execution of these new promissory notes undoubtedly constituted and extension of time as to
the obligation included therein, such as would release a surety, even though of the solidary type,
under article 1851 of the Civil Code. Nevertheless it is to be borne in mind that said extension
and novation related only to the second installment of the original obligation and interest accrued
up to that time. Furthermore, the total amount of these notes was afterwards paid in full, and they
are not now the subject of controversy. It results that the extension thus effected could not
discharge the sureties from their liability as to other installments upon which alone they have
been sued in this action. The rule that an extension of time granted to the debtor by the creditor,
without the consent of the sureties, extinguishes the latter's liability is common both to Spanish
jurisprudence and the common law; and it is well settled in English and American jurisprudence
that where a surety is liable for different payments, such as installments of rent, or upon a series
of promissory notes, an extension of time as to one or more will not affect the liability of the
surety for the others.

Case: Effect of Acceleration Clause

Radio Corp. vs Roa, 52 Phil 926
An extension of time given by the creditor to the debtor to make payment without the consent of
the guarantor extinguishes the guaranty.
Facts:
Defendant Roa owed Philippine Theatrical Enterprise the sum of P28,400. PTE assigned all its
rights and interest in the contract to plaintiff RCPI subject to the condition that in case the
mortgagor defendant fails to make any of the installments, the whole amount remaining unpaid
shall immediately become due and demandable and the mortgaged property may be foreclosed.
Defendant requested an extension for the payment of one installment, which was granted.
In an action to recover the unpaid loan, the court ordered defendant and the guarantors to pay
plaintiff solidarily the sum of P10,000. Defendant guarantors appealed contending that the court
erred in not finding that the extension of time given to the defendant served as a release of
defendant guarantors from liability on all subsequent installments.

SC Ruling:
The stipulation in the contract under consideration, is to the effect that upon failure to pay any
installment when due the other installments ipso facto become due and payable.
In view of the fact that under the express provision of the contract, the whole unpaid balance
automatically becomes due and payable upon failure to pay one installment, the act of the
plaintiff in extending the payment of the installment, without the consent of the guarantors,
constituted in fact an extension of the payment of the whole amount of the indebtedness, as by
that extension the plaintiff could not have filed an action for the collection of the whole amount
until after the expiration of the period of extension.
Therefore appellants' contention that after default of the payment of one installment the act of the
herein creditor in extending the time of payment discharges them as guarantors in conformity
with articles 1851 and 1852 of the Civil Code is correct.
It is a familiar rule that if a creditor, by positive contract with the principal debtor, and without
the consent of the surety, extends the time of payment, he thereby discharges the surety. . . . The
time of payment may be quite as important a consideration to the surety as the amount he has
promised conditionally to pay. . . .Again, a surety has the right, on payment of the debt, to be
subrogated to all the rights of the creditor, and to proceed at once to collect it from the principal;
but if the creditor has tied own hands from proceeding promptly, by extending the time of
collection, the hands of the surety will equally be bound; and before they are loosed, by the
expiration of the extended credit, the principal debtor may have become insolvent and the right
of subrogation rendered worthless. It should be observed, however, that it is really unimportant
whether the extension given has actually proved prejudicial to the surety or not. The rule stated is
quite independent of the event, and the fact that the principal is insolvent or that the extension
granted promised to be beneficial to the surety would give no right to the creditor to change the
terms of the contract without the knowledge or consent of the surety. Nor does it matter for how
short a period the time of payment may be extended. The principle is the same whether the time
is long or short. The creditor must be in such a situation that when the surety comes to be
substituted in his place by paying the debt, he may have an immediate right of action against the
principal. The suspension of the right to sue for a month, or even a day, is as effectual to release
the surety as a year or two years.
Judgment reversed as to defendant guarantors.

Phil. Gen Insurance Co., vs Mutuc

61 SCRA 22

Facts:
In a surety bond, the sureties bound themselves to be liable in case of extension or renewal of the
bond, without the necessity of executing another indemnity agreement for the purpose and
without the necessity of their being notified of such extension or renewal. Is this agreement
valid?

SC Ruling:
Yes, the agreement is valid; there is nothing in it that militates against the law, good customs,
good morals, public order, or public policy.

There was no other valid conclusion that could be reached by the lower court. Even appellant
must have seen that so it ought to be. That would account for the contention in his brief that the
stipulation as to "any extension" without the need for his being notified was "null and void being
contrary to law, morals, good customs, public order or public policy." That is a pretty tall order.
There is more than just a hint of hyperbole in such a sweeping allegation. Appellant though
ought to have realized that assertion is not the equivalent of proof. A little more objectivity on
his part should bring the realization that no offense to law or morals could be imputed to such a
contractual provision. As to good customs, that category requires something to substantiate it. A
mere denunciatory characterization certainly cannot suffice. That leaves public order or public
policy. It is difficult to follow appellant's train of reasoning. He would premise it on the
indemnity agreement being a contract of adhesion. He was not at all compelled to agree to it. He
was free to act either way. He had a choice. It may be more offensive to public policy, let alone
morals or good customs, if thereafter he would be allowed to go back on his word. Besides the
policy underlying such a stipulation in this litigation is clear. What was guaranteed was the
faithful performance of defendant Mutuc of his employment as a member of the crew of a vessel
plying overseas. What was more logical considering the difficulty of contacting him then for the
party concerned, here appellant, to agree in advance to any extension without the need for
notification. So the parties agreed. There could be thus nothing that did offend public policy or
public order when such an arrangement was explicitly provided for. Appellant, clearly, has not
made out a case for reversal.

Prudencio vs CA
143 SCRA 7

Where the creditor bank is the payee of a note and assignee of a deed of assignment, its
extension of the period of payment would release the accommodation party.
Facts:
Appellants Prudencio, et al. are accommodation parties who signed on December 23, 1955 the
“Amendment of Real Estate Mortgage.” Mortgaging their property to the PNB to guaranty the
loan of P10,000 extended to the Concepcion Construction Company.
On the same date Jose Toribio, in the same capacity as attorney-in-fact of the Company,
executed also the “Deed of Assignment” assigning all payments to be made by the Bureau of
Public Works to the Concepcion Construction Company on account of the contract for the
construction of the Puerto Princesa building in favor of the PNB.

This assignment of credit to the contrary notwithstanding, the Bureau, with approval, of the PNB
made three payments to the Company on account of the contract price totaling P11,234.40.

On November 14, 1958, appellants Prudencio wrote the PNB contending that since the PNB
authorized payments to the Company instead of to PNB on account of the loan guaranteed by the
mortgage, there was a change in the conditions of the contract without the knowledge of
appellants, which entitled the latter to a cancellation of their mortgage contract.

Failing in their bid to have the real estate mortgage cancelled, appellants filed on June 27, 1959
this action against the PNB, the latter’s attorney in fact Jose Toribio, and the District Engineer of
Puerto Princesa, Palawan, seeking the cancellation of their real estate mortgage.

SC Ruling:

The Deed of Assignment notwithstanding, PNB approved the Bureau’s release of three payments
directly to the Company instead of paying the same to the Bank. This approval was in violation
of the Deed of Assignment and without any notice to the petitioners who stood to lose their
property once the promissory note falls due without the same having been paid because of the
PNB, in effect, waived payments of the first three releases.

The third payment to the Company in the amount of P4,293.60 was approved by PNB although
the promissory note was almost a month overdue, an act which is clearly detrimental to the
petitioner’s sureties.
The PNB, in authorizing the third payment to the Company after the promissory note became
due, in effect, extended the term of the payment of the note without the consent of the
accommodation makers who stand as sureties to the accommodated party and to all other parties
who are not holders in due course or who do not derive their right from the same, including PNB.
True, if the Bank had not been the assignee, then the petitioners would be obliged to pay the
Bank as their creditor on the promissory note, irrespective of whether or not the deed of
assignment had been violated. However, the assignee and the creditor in this case are one and the
same-the Bank itself. When the Bank violated the deed of assignment, it prejudiced itself
because its very violation was the reason why it was not paid on time in its capacity as creditor in
the promissory note. It would be unfair to make the petitioners now answer for the debt or to
foreclose on their property.
The petitioners who are the accommodation parties/sureties are absolved from liability on the
promissory note and under the mortgage contract. The PNB is ordered to release the real estate
mortgage constituted on the property of the petitioners.

Shannon v. Phil Lumber

Facts: Philippine Lumber & Transportation Co., Inc., obtained a loan of P12,000 from Mrs. J.W.
Shannon and executed a note promising to pay the said sum to the creditor or to her husband,
J.W. Shannon, on or before March 1, 1927, with interest at 10 per cent per annum, payable
monthly and in advance on the first day of each month. The obligation with its terms was
secured, jointly and severally, by Walter E. Jones and E.E. Elser who signed the note. This note
was ratified before the notary public, Juan L. Diaz, in the City of Manila. The principal was not
paid on its due date or thereafter, but the stipulated interest up to October, 1929, inclusive, was
paid. Walter E. Jones died on November 29, 1929 and the plaintiffs filed a claim and recovered
from his estate P1,062 in part payment of occurred interest due.

Before the death of Jones, in Aug. 1927, while the principal obligation was pending payment,
J.W. Shannon obtained a loan of P1,000 from Walter E. Jones, in 1928 he obtained another loan
of P2,000, and sometime in April 1928 he made Jones pay on his account a certain bill of
exchange drawn upon him in the sum of P1,656, making Shannon's total loan from Jones P4,656.
They agreed that this will be paid at the rate of P125 a month, with 10 per cent interest per
annum, failing which, Jones was authorized to retain and apply to the monthly payments
whatever amounts he might have belonging to Shannon or to his wife. Jones did not receive
monthly payments from Shannon but instead he deducted them from the monthly interest which,
on the other hand, the Philippine Lumber & Transportation Co., Inc., of which he was the
president, was bound to pay. These operations were entered in the books of said corporation.

PLTC and the sureties failed to pay the principal and the interest from Nov. 1, 1929, hence
Shannons. brought suit against the debtor corporation and the surety, E.E. Elser, for the recovery
of said amounts. PLTC was declared in default and a judgment against it was secured by
Shannons. The judgement was appealed by Elser arguing that Shannons received from PLTC
payments in advance of the stipulated interest for a relatively long period of time, and that,
consequently, said plaintiffs, as creditors, extended the period fixed for the payment of the
principal without his consent. Elser also argued that the court erred in not permitting him to
adduce evidence on his defense of laches whereby he attempted to show that in 1927 and 1928
the principal debtor had property and money with which to pay its entire obligation; in not
holding that the plaintiffs were guilty of unreasonable delay in bringing their action, thereby
causing him damages, and in not absolving him from the complaint.

Issue: WON the judgement is correct.

Held: Yes. The first assigned error relates to the loans made by Jones to Shannon up to the
amount of P4,656. The appellant contends that these loans were in truth payments in advance of
the stipulated interest which the principal debtor had to pay monthly and which had the effect of
extending the stated period for the payment of the indebtedness, thereby relieving him of his
obligation as surety.

SC ruled that indisputably appears that those amounts of money were obtained by Shannon not
as payments in advance of the interest which the principal debtor was bound to pay, but as
independent loans which Jones granted to him. The only connection of these loans with the
interest of the indebtedness of PLTS is that Jones is authorized to deduct, in case Shannon fails
to pay, from any amount which he might have at his disposal belonging to Shannon or to his
wife.

The appellant attempted to prove at the trial that the plaintiffs had been guilty of laches and had
brought their action against him tardily, because in 1927 and 1928 the principal debtor had
sufficient property and money with which it could have fully paid its obligation, and in so acting
the plaintiffs caused him damages. This kind of evidence was timely objected to, and the
objection was sustained by the court. This ruling is the subject of the second and third assigned
errors. We hold that the judgment is not erroneous on these grounds. True, the plaintiffs let pass
some years from the maturity of the note before bringing the action for the recovery of its
amount. But we hold that the delay does not constitute laches in the sense that it had the effect of
releasing both the principal debtor and its sureties from their obligations, nor did it occasion loss
of rights and privileges of such moment as to give rise to the discharge of the obligation
contracted by the appellant.

The mere circumstance that the creditor does not demand the compliance with the obligation
immediately upon the same becoming due, and that he more or less delays his action, does not
mean or reveal an intention to grant an extension to the debtor, as according to article 1847 the
obligation of the surety extinguishes at the same time as that of the debtor, and for the same
causes as the other obligations. ...' Deferring the filing of the action does not imply a change in
the efficacy of the contract or liability of any kind on the part of the debtor. It is merely, without
demonstration or proof to the contrary, respite, waiting, courtesy, leniency, passivity, inaction.

It does not constitute novation, because this must be express. It does not engender liability,
because on the part of the creditor such cannot arise except from delay, and for this class of delay
interpellation on the part of the party who considers himself injured thereby is necessary. In
order that this waiting or inaction, of itself beneficial to the parties obligated, can be interpreted
as injurious to any of them, it is altogether necessary that this be represented by means of a
protest or interpellation against the delay. Without action of this kind it continues to be what it is
merely a failure of the creditor to act, which it itself does not create liability.
In view of this action, which is a protection against the risk of possible insolvency on the part of
the principal debtor, it is very clearly seen that the law does not even grant the surety the right to
sue the creditor for delay, as protection against the risks of possible insolvency on the part of the
debtor; but in view of the efficacy of the action of the contract against the surety, beginning with
the date when the obligation becomes due, his vigilance must be exercised rather against the
principal debtor."

Chochingyan v. R&B Surety and Insurance Company

Facts: Pacific Agricultural Suppliers, Inc. (PAGRICO) applied for and was granted an increase
in its line of credit from P400k to P800k with the PNB. However PNB required that PAGRICO
should give a bond in the amount of 400k representing the increment to secure the faithful
compliance with the terms and conditions under which its credit line was increased. Pagrico then
submitted a surety bond R&B Surety for 400k.

Under the terms of the Surety Bond, PAGRICO and R & B Surety bound themselves jointly and
severally to comply with the "terms and conditions of the advance line [of credit] established by
the [PNB]." PNB had the right under the Surety Bond to proceed directly against R & B Surety
"without the necessity of first exhausting the assets" of the principal obligor, PAGRICO. The
Surety Bond also provided that R & B Surety's liability was not to be limited to the principal sum
of P400,000.00, but would also include "accrued interest" on the said amount "plus all expenses,
charges or other legal costs incident to collection of the obligation [of R & B Surety]" under the
Surety Bond.

In consideration of R & B Surety's issuance of the Surety Bond, two Identical indemnity
agreements were entered into with R & B Surety: (a) one agreement was executed by the
Catholic Church Mart (CCM) and by petitioner Joseph Cochingyan, Jr, the latter signed not only
as President of CCM but also in his personal and individual capacity; and (b) another agreement
was executed by PAGRICO, Pacific Copra Export Inc. (PACOCO), Jose K. Villanueva and Liu
Tua Ben. Mr. Villanueva signed both as Manager of PAGRICO and in his personal and
individual capacity; Mr. Liu signed both as President of PACOCO and in his individual and
personal capacity.

Under both indemnity agreements, the indemnitors bound themselves jointly and severally to R
& B Surety to pay an annual premium of P5,103.05 and "for the faithful compliance of the terms
and conditions set forth in said SURETY BOND until the same is CANCELLED and/or
DISCHARGED."

When PAGRICO failed to comply with its Principal Obligation to the PNB, the PNB demanded
payment from R & B Surety of the sum of P400k. R & B Surety made a series of payments to
PNB by virtue of that demand totalling P70,000.00 evidenced by detailed vouchers and receipts.

R & B Surety in turn sent formal demand letters to petitioners Joseph Cochingyan, Jr. and Jose
K. Villanueva for reimbursement of the payments made by it to the PNB and for a discharge of
its liability to the PNB under the Surety Bond. When petitioners failed to heed its demands, R &
B Surety brought suit against Joseph Cochingyan, Jr., Jose K. Villanueva and Liu Tua Ben
praying that judgement be rendered Ordering defendants (names mentioned above):

a. to pay jointly and severally, unto the plaintiff (R&B) , the sum of P20,412.20 representing the
unpaid premiums for Surety Bond from 1965 up to 1968, and the additional amount of P5,103.05
yearly until the Surety Bond No. 4765 is discharged, with interest thereon at the rate of 12% per
annum; [and]

b. Ordering the defendants to pay jointly and severally, unto the plaintiff the sum of P400,000.00
representing the total amount of the Surety Bond with interest thereon at the rate of 12% per
annum on the amount of P70,000.00 which had been paid to the Phil. National Bank already.

Chochingyan maintained that the Indemnity Agreement he executed in favor of R & B Surety: (i)
did not express the true intent of the parties thereto in that he had been asked by R & B Surety to
execute the Indemnity Agreement merely in order to make it appear that R & B Surety had
complied with the requirements of the PNB that credit lines be secured; (ii) and that R & B
Surety could show that it was complying with the regulations of the Insurance Commission
concerning bonding companies; (iii) that R & B Surety had assured him that the execution of the
agreement was a mere formality and that he was to be considered a stranger to the transaction
between the PNB and R & B Surety; and (iv) that R & B Surety was estopped from enforcing the
Indemnity Agreement as against him.

Jose K. Villanueva claimed in his answer that. (i) he had executed the Indemnity Agreement in
favor of R & B Surety only "for accommodation purposes" and that it did not express their true
intention; (ii) that the Principal Obligation of PAGRICO to the PNB secured by the Surety Bond
had already been assumed by CCM by virtue of a Trust Agreement entered into with the PNB,
where CCM represented by Joseph Cochingyan, Jr. undertook to pay the Principal Obligation of
PAGRICO to the PNB; (iii) that his obligation under the Indemnity Agreement was thereby
extinguished by novation arising from the change of debtor under the Principal Obligation; and
(iv) that the filing of the complaint was premature, considering that R & B Surety filed the case
against him as indemnitor although the PNB had not yet proceeded against R & B Surety to
enforce the latter's liability under the Surety Bond.

NOTE: The Trust Agreement referred to was executed 2 years after the Surety Bond and the
Indemnity Agreement b/w Chochingyan (as as Trustor, Tomas Tesa, PNB official as trustee, and
PNB as beneficiary. Among others the Trust Agreement contains the ff:

6. THE BENEFICIARY agrees to hold in abeyance any action to enforce its claims
against R & B and CONSOLACION, subject of the bond mentioned above. Xxxx

9. This agreement shall not in any manner release the R & B and CONSOLACION from
their respective liabilities under the bonds mentioned above.

Petitioner Cochingyan, however, did not present any evidence at all to support his asserted
defenses. Petitioner Villanueva did not submit any evidence either on his "accommodation"
defense. The trial court was therefore constrained to decide the case on the basis alone of the
terms of the Trust Agreement and other documents submitted in evidence.

CFI ruled in favor of R&B Surety but the case against Tua Ben was dismissed becaseu he was
not served summons.

ISSUES: 1. whether or not the Trust Agreement had extinguished, by novation, the obligation of
R & B Surety to the PNB under the Surety Bond which, in turn, extinguished the obligations of
the petitioners under the Indemnity Agreements;

2. whether the Trust Agreement extended the term of the Surety Bond so as to release petitioners
from their obligation as indemnitors thereof as they did not give their consent to the execution of
the Trust Agreement; and

HELD: 1. No. There is no question that the Surety Bond has not been cancelled or fully
discharged 2 by payment of the Principal Obligation. Unless, therefore, the Surety Bond has been
extinguished by another means, it must still subsist. And so must the supporting Indemnity
Agreements. Neither the Surety Bond nor the Indemnity Agreement were extinguished by
novation brought about by the subsequent execution of the Trust Agreement.

Novation through a change of the object or principal conditions of an existing obligation is

referred to as objective (or real) novation. Novation by the change of either the person of the
debtor or of the creditor is described as subjective (or personal) novation.Or it can be mixed.

If objective novation is to take place, it is imperative that the new obligation expressly declare
that the old obligation is thereby extinguished, or that the new obligation be on every point
incompatible with the old one. 6 Novation is never presumed: it must be established either by the
discharge of the old debt by the express terms of the new agreement, or by the acts of the parties
whose intention to dissolve the old obligation as a consideration of the emergence of the new one
must be clearly discernible.

If subjective novation by a change in the person of the debtor is to occur, it is not enough that the
juridical relation between the parties to the original contract is extended to a third person. It is
essential that the old debtor be released from the obligation, and the third person or new debtor
take his place in the new relation. If the old debtor is not released, no novation occurs and the
third person who has assumed the obligation of the debtor becomes merely a co-debtor or surety
or a co-surety.

Applying the above principles to the instant case, it is at once evident that the Trust Agreement
does not expressly terminate the obligation of R & B Surety under the Surety Bond. On the
contrary, the Trust Agreement expressly provides for the continuing subsistence of that
obligation by stipulating that "[the Trust Agreement] shall not in any manner release" R & B
Surety from its obligation under the Surety Bond. Here is also no implied novation because the
parties to the new obligation (referring to the Trust Agreement) expressly recognize the
continuing existence and validity of the old one.
What the trust agreement did was, at most, was to bring another person to assume the same
obligation that R & B Surety was bound to perform under the Surety Bond. So far as the PNB
was concerned, the effect of the Trust Agreement was that where there had been only two, there
would now be three obligors directly and solidarily bound in favor of the PNB: PAGRICO, R &
B Surety and the Trustor. And the PNB could proceed against any of the three, in any order or
sequence. Clearly, PNB never intended to release, and never did release, R & B Surety.

2. NO. The record is bereft of any indication that the petitioners-indemnitors in fact became co-
sureties of R & B Surety vis-a-vis the PNB. The petitioners remained simply indemnitors bound
to R & B Surety but not to PNB, such that PNB could not have directly demanded payment of
the Principal Obligation from the petitioners. Thus, we do not see how Article 2079 of the Civil
Code-which provides in part that "[a]n extension granted to the debtor by the creditor without
the consent of the guarantor extinguishes the guaranty" could apply in the instant case.

Another reason is that PNB's undertaking under the Trust Agreement "to hold in abeyance any
action to enforce its claims" against R & B Surety did not extend the maturity of R & B Surety's
obligation under the Surety Bond. The Principal Obligation had in fact already matured, along
with that of R &B Surety, by the time the Trust Agreement was entered into. Petitioner's
Obligation had in fact already matured, for those obligations were to mature as stated in the
Indemnity Agreement "as soon as [R & B Surety] became liable to make payment of any sum
under the terms of the [Surety Bond] — whether the said sum or sums or part thereof have been
actually paid or not." Thus, the situation was that precisely envisaged in Article 2079:

[t]he mere failure on the part of the creditor to demand payment after the debt
has become due does not of itself constitute any extension of the referred to
herein.(emphasis supplied)

As this Court has held,

merely delay or negligence in proceeding against the principal will not discharge
a surety unless there is between the creditor and the principal debtor a valid and
binding agreement therefor, one which tends to prejudice [the surety] or to
deprive it of the power of obtaining indemnity by presenting a legal objection for
the time, to the prosecution of an action on the original security. 12

In the instant case, there was nothing to prevent the petitioners from tendering payment, if they
were so minded, to PNB of the matured obligation on behalf of R & B Surety and thereupon
becoming subrogated to such remedies as R & B Surety may have against PAGRICO.

STRONGHOLD INSURANCE CO. V. REPUBLIC-ASAHI GLASS CORP.

FACTS:

a) Petitioner’s Arguments (Stronghold Insurance - Lost)

- Argued that it is not obliged to pay to Respondent because Jose D. Santos already died and that
JDS Construction was no longer at its address at 2nd Floor, Room 208-A, San Buena Bldg. Cor.
Pioneer St., Pasig, Metro Manila, and its whereabouts were unknown. Hence, the obligation was
extinguished

b) Respondent’s Arguments (Republic-Asahi Glass Corp. - Win)

- Filed a case against Petitioner for collection of a sum of money
-Argued that Petitioner Stronghold Insurance is a surety of Jose D. Santos, Jr., the proprietor of
JDS Construction (JDS) in a contract between Respondent Republic-Asahi and JDS for the
construction of roadways and a drainage system in Republic-Asahi’s compound in Barrio
Pinagbuhatan, Pasig City, where JDS is supposed to complete the construction within a period of
two hundred forty (240) days. However, JDS failed to comply with its obligation and Petitioner
Stronghold Insurance, as the surety, also refused to pay

ISSUE:
- Whether or not the death of Jose D. Santos, as the principal debtor, extinguished the debt of
Petitioner Stronghold Insurance, as the surety

RULING:
Conclusion:
- The death of Jose D. Santos, as the principal debtor, did not extinguish the debt of Petitioner
Stronghold Insurance, as the surety
Rule/Application:
- As a general rule, the death of either the creditor or the debtor does not extinguish the
obligation. Obligations are transmissible to the heirs, except when the transmission is prevented
by the law, the stipulations of the parties, or the nature of the obligation. Only obligations that are
personal or are identified with the persons themselves are extinguished by death
- In the present case, whatever monetary liabilities or obligations Santos had under his contracts
with respondent were not intransmissible by their nature, by stipulation, or by provision of law.
Hence, his death did not result in the extinguishment of those obligations or liabilities, which
merely passed on to his estate. Death is not a defense that he or his estate can set up to wipe out
the obligations under the performance bond. Consequently, petitioner as surety cannot use his
death to escape its monetary obligation under its performance bond.
- A surety company’s liability under the performance bond it issues is solidary. The death of the
principal obligor does not, as a rule, extinguish the obligation and the solidary nature of that
liability.