Republic of the Philippines

SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 138814               April 16, 2009

MAKATI STOCK EXCHANGE, INC., MA. VIVIAN YUCHENGCO, ADOLFO M. DUARTE, MYRON C. PAPA,
NORBERTO C. NAZARENO, GEORGE UY-TIOCO, ANTONIO A. LOPA, RAMON B. ARNAIZ, LUIS J.L. VIRATA,
and ANTONIO GARCIA, JR. Petitioners,
vs.
MIGUEL V. CAMPOS, substituted by JULIA ORTIGAS VDA. DE CAMPOS,1 Respondent.

DECISION

CHICO-NAZARIO, J.:

This is a Petition for Review on Certiorari under Rule 45 seeking the reversal of the Decision2 dated 11 February
1997 and Resolution dated 18 May 1999 of the Court of Appeals in CA-G.R. SP No. 38455.

The facts of the case are as follows:

SEC Case No. 02-94-4678 was instituted on 10 February 1994 by respondent Miguel V. Campos, who filed with the
Securities, Investigation and Clearing Department (SICD) of the Securities and Exchange Commission (SEC), a
Petition against herein petitioners Makati Stock Exchange, Inc. (MKSE) and MKSE directors, Ma. Vivian Yuchengco,
Adolfo M. Duarte, Myron C. Papa, Norberto C. Nazareno, George Uy-Tioco, Antonio A, Lopa, Ramon B. Arnaiz, Luis
J.L. Virata, and Antonio Garcia, Jr. Respondent, in said Petition, sought: (1) the nullification of the Resolution dated 3
June 1993 of the MKSE Board of Directors, which allegedly deprived him of his right to participate equally in the
allocation of Initial Public Offerings (IPO) of corporations registered with MKSE; (2) the delivery of the IPO shares he
was allegedly deprived of, for which he would pay IPO prices; and (3) the payment of ₱2 million as moral damages,
₱1 million as exemplary damages, and ₱500,000.00 as attorney’s fees and litigation expenses.

On 14 February 1994, the SICD issued an Order granting respondent’s prayer for the issuance of a Temporary
Restraining Order to enjoin petitioners from implementing or enforcing the 3 June 1993 Resolution of the MKSE
Board of Directors.

The SICD subsequently issued another Order on 10 March 1994 granting respondent’s application for a Writ of
Preliminary Injunction, to continuously enjoin, during the pendency of SEC Case No. 02-94-4678, the implementation
or enforcement of the MKSE Board Resolution in question. Petitioners assailed this SICD Order dated 10 March
1994 in a Petition for Certiorari filed with the SEC en banc, docketed as SEC-EB No. 393.

On 11 March 1994, petitioners filed a Motion to Dismiss respondent’s Petition in SEC Case No. 02-94-4678, based
on the following grounds: (1) the Petition became moot due to the cancellation of the license of MKSE; (2) the SICD
had no jurisdiction over the Petition; and (3) the Petition failed to state a cause of action.

The SICD denied petitioner’s Motion to Dismiss in an Order dated 4 May 1994. Petitioners again challenged the 4
May 1994 Order of SICD before the SEC en banc through another Petition for Certiorari, docketed as SEC-EB No.
403.
In an Order dated 31 May 1995 in SEC-EB No. 393, the SEC en banc nullified the 10 March 1994 Order of SICD in
SEC Case No. 02-94-4678 granting a Writ of Preliminary Injunction in favor of respondent. Likewise, in an Order
dated 14 August 1995 in SEC-EB No. 403, the SEC en banc annulled the 4 May 1994 Order of SICD in SEC Case
No. 02-94-4678 denying petitioners’ Motion to Dismiss, and accordingly ordered the dismissal of respondent’s
Petition before the SICD.

Respondent filed a Petition for Certiorari with the Court of Appeals assailing the Orders of the SEC en banc dated 31
May 1995 and 14 August 1995 in SEC-EB No. 393 and SEC-EB No. 403, respectively. Respondent’s Petition before
the appellate court was docketed as CA-G.R. SP No. 38455.

On 11 February 1997, the Court of Appeals promulgated its Decision in CA-G.R. SP No. 38455, granting
respondent’s Petition for Certiorari, thus:

WHEREFORE, the petition in so far as it prays for annulment of the Orders dated May 31, 1995 and August 14, 1995
in SEC-EB Case Nos. 393 and 403 is GRANTED. The said orders are hereby rendered null and void and set aside.

Petitioners filed a Motion for Reconsideration of the foregoing Decision but it was denied by the Court of Appeals in a
Resolution dated 18 May 1999.

Hence, the present Petition for Review raising the following arguments:

I.

THE SEC EN BANC DID NOT COMMIT GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR EXCESS
OF JURISDICTION WHEN IT DISMISSED THE PETITION FILED BY RESPONDENT BECAUSE ON ITS FACE, IT
FAILED TO STATE A CAUSE OF ACTION.

II.

THE GRANT OF THE IPO ALLOCATIONS IN FAVOR OF RESPONDENT WAS A MERE ACCOMMODATION
GIVEN TO HIM BY THE BOARD OF [DIRECTORS] OF THE MAKATI STOCK EXCHANGE, INC.

III.

THE COURT OF APPEALS ERRED IN HOLDING THAT THE SEC EN BANC COMMITTED GRAVE ABUSE OF
DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION WHEN IT MADE AN EXTENDED INQUIRY
AND PROCEEDED TO MAKE A DETERMINATION AS TO THE TRUTH OF RESPONDENT’S ALLEGATIONS IN
HIS PETITION AND USED AS BASIS THE EVIDENCE ADDUCED DURING THE HEARING ON THE
APPLICATION FOR THE WRIT OF PRELIMINARY INJUNCTION TO DETERMINE THE EXISTENCE OR VALIDITY
OF A STATED CAUSE OF ACTION.

IV.

IPO ALLOCATIONS GRANTED TO BROKERS ARE NOT TO BE BOUGHT BY THE BROKERS FOR
THEMSELVES BUT ARE TO BE DISTRIBUTED TO THE INVESTING PUBLIC. HENCE, RESPONDENT’S CLAIM
FOR DAMAGES IS ILLUSORY AND HIS PETITION A NUISANCE SUIT.3
On 18 September 2001, counsel for respondent manifested to this Court that his client died on 7 May 2001. In a
Resolution dated 24 October 2001, the Court directed the substitution of respondent by his surviving spouse, Julia
Ortigas vda. de Campos.

Petitioners want this Court to affirm the dismissal by the SEC en banc of respondent’s Petition in SEC Case No. 02-
94-4678 for failure to state a cause of action. On the other hand, respondent insists on the sufficiency of his Petition
and seeks the continuation of the proceedings before the SICD.

A cause of action is the act or omission by which a party violates a right of another.4 A complaint states a cause of
action where it contains three essential elements of a cause of action, namely: (1) the legal right of the plaintiff, (2)
the correlative obligation of the defendant, and (3) the act or omission of the defendant in violation of said legal right.
If these elements are absent, the complaint becomes vulnerable to dismissal on the ground of failure to state a cause
of action.

If a defendant moves to dismiss the complaint on the ground of lack of cause of action, he is regarded as having
hypothetically admitted all the averments thereof. The test of sufficiency of the facts found in a complaint as
constituting a cause of action is whether or not admitting the facts alleged, the court can render a valid judgment
upon the same in accordance with the prayer thereof. The hypothetical admission extends to the relevant and
material facts well pleaded in the complaint and inferences fairly deducible therefrom. Hence, if the allegations in the
complaint furnish sufficient basis by which the complaint can be maintained, the same should not be dismissed
regardless of the defense that may be assessed by the defendant.5

Given the foregoing, the issue of whether respondent’s Petition in SEC Case No. 02-94-4678 sufficiently states a
cause of action may be alternatively stated as whether, hypothetically admitting to be true the allegations in
respondent’s Petition in SEC Case No. 02-94-4678, the SICD may render a valid judgment in accordance with the
prayer of said Petition.

A reading of the exact text of respondent’s Petition in SEC Case No. 02-94-4678 is, therefore, unavoidable. Pertinent
portions of the said Petition reads:

7. In recognition of petitioner’s invaluable services, the general membership of respondent corporation [MKSE]
passed a resolution sometime in 1989 amending its Articles of Incorporation, to include the following provision
therein:

"ELEVENTH – WHEREAS, Mr. Miguel Campos is the only surviving incorporator of the Makati Stock Exchange, Inc.
who has maintained his membership;

"WHEREAS, he has unselfishly served the Exchange in various capacities, as governor from 1977 to the present and
as President from 1972 to 1976 and again as President from 1988 to the present;

"WHEREAS, such dedicated service and leadership which has contributed to the advancement and well being not
only of the Exchange and its members but also to the Securities industry, needs to be recognized and appreciated;

"WHEREAS, as such, the Board of Governors in its meeting held on February 09, 1989 has correspondingly adopted
a resolution recognizing his valuable service to the Exchange, reward the same, and preserve for posterity such
recognition by proposing a resolution to the membership body which would make him as Chairman Emeritus for life
and install in the Exchange premises a commemorative bronze plaque in his honor;

"NOW, THEREFORE, for and in consideration of the above premises, the position of the "Chairman Emeritus" to be
occupied by Mr. Miguel Campos during his lifetime and irregardless of his continued membership in the Exchange
with the Privilege to attend all membership meetings as well as the meetings of the Board of Governors of the
Exchange, is hereby created."

8. Hence, to this day, petitioner is not only an active member of the respondent corporation, but its Chairman
Emeritus as well.

9. Correspondingly, at all times material to this petition, as an active member and Chairman Emeritus of respondent
corporation, petitioner has always enjoyed the right given to all the other members to participate equally in the Initial
Public Offerings (IPOs for brevity) of corporations.

10. IPOs are shares of corporations offered for sale to the public, prior to the listing in the trading floor of the
country’s two stock exchanges. Normally, Twenty Five Percent (25%) of these shares are divided equally between
the two stock exchanges which in turn divide these equally among their members, who pay therefor at the offering
price.

11. However, on June 3, 1993, during a meeting of the Board of Directors of respondent-corporation, individual
respondents passed a resolution to stop giving petitioner the IPOs he is entitled to, based on the ground that these
shares were allegedly benefiting Gerardo O. Lanuza, Jr., who these individual respondents wanted to get even with,
for having filed cases before the Securities and Exchange (SEC) for their disqualification as member of the Board of
Directors of respondent corporation.

12. Hence, from June 3, 1993 up to the present time, petitioner has been deprived of his right to subscribe to the
IPOs of corporations listing in the stock market at their offering prices.

13. The collective act of the individual respondents in depriving petitioner of his right to a share in the IPOs for the
aforementioned reason, is unjust, dishonest and done in bad faith, causing petitioner substantial financial damage.6

There is no question that the Petition in SEC Case No. 02-94-4678 asserts a right in favor of respondent, particularly,
respondent’s alleged right to subscribe to the IPOs of corporations listed in the stock market at their offering prices;
and stipulates the correlative obligation of petitioners to respect respondent’s right, specifically, by continuing to allow
respondent to subscribe to the IPOs of corporations listed in the stock market at their offering prices.

However, the terms right and obligation in respondent’s Petition are not magic words that would automatically lead to
the conclusion that such Petition sufficiently states a cause of action. Right and obligation are legal terms with
specific legal meaning. A right is a claim or title to an interest in anything whatsoever that is enforceable by law.7 An
obligation is defined in the Civil Code as a juridical necessity to give, to do or not to do.8 For every right enjoyed by
any person, there is a corresponding obligation on the part of another person to respect such right. Thus, Justice
J.B.L. Reyes offers9 the definition given by Arias Ramos as a more complete definition:

An obligation is a juridical relation whereby a person (called the creditor) may demand from another (called the
debtor) the observance of a determinative conduct (the giving, doing or not doing), and in case of breach, may
demand satisfaction from the assets of the latter.

The Civil Code enumerates the sources of obligations:

Art. 1157. Obligations arise from:

(1) Law;
 (2) Contracts;

(3) Quasi-contracts;

(4) Acts or omissions punished by law; and

(5) Quasi-delicts.

Therefore, an obligation imposed on a person, and the corresponding right granted to another, must be rooted in at
least one of these five sources. The mere assertion of a right and claim of an obligation in an initiatory pleading,
whether a Complaint or Petition, without identifying the basis or source thereof, is merely a conclusion of fact and
law. A pleading should state the ultimate facts essential to the rights of action or defense asserted, as distinguished
from mere conclusions of fact or conclusions of law.10 Thus, a Complaint or Petition filed by a person claiming a right
to the Office of the President of this Republic, but without stating the source of his purported right, cannot be said to
have sufficiently stated a cause of action. Also, a person claiming to be the owner of a parcel of land cannot merely
state that he has a right to the ownership thereof, but must likewise assert in the Complaint either a mode of
acquisition of ownership or at least a certificate of title in his name.

In the case at bar, although the Petition in SEC Case No. 02-94-4678 does allege respondent’s right to subscribe to
the IPOs of corporations listed in the stock market at their offering prices, and petitioners’ obligation to continue
respecting and observing such right, the Petition utterly failed to lay down the source or basis of respondent’s right
and/or petitioners’ obligation.

Respondent merely quoted in his Petition the MKSE Board Resolution, passed sometime in 1989, granting him the
position of Chairman Emeritus of MKSE for life. However, there is nothing in the said Petition from which the Court
can deduce that respondent, by virtue of his position as Chairman Emeritus of MKSE, was granted by law, contract,
or any other legal source, the right to subscribe to the IPOs of corporations listed in the stock market at their offering
prices.

A meticulous review of the Petition reveals that the allocation of IPO shares was merely alleged to have been done in
accord with a practice normally observed by the members of the stock exchange, to wit:

IPOs are shares of corporations offered for sale to the public, prior to their listing in the trading floor of the country’s
two stock exchanges. Normally, Twenty-Five Percent (25%) of these shares are divided equally between the two
stock exchanges which in turn divide these equally among their members, who pay therefor at the offering
price.11 (Emphasis supplied)

A practice or custom is, as a general rule, not a source of a legally demandable or enforceable right.12 Indeed, in
labor cases, benefits which were voluntarily given by the employer, and which have ripened into company practice,
are considered as rights that cannot be diminished by the employer.13 Nevertheless, even in such cases, the source
of the employees’ right is not custom, but ultimately, the law, since Article 100 of the Labor Code explicitly prohibits
elimination or diminution of benefits.

There is no such law in this case that converts the practice of allocating IPO shares to MKSE members, for
subscription at their offering prices, into an enforceable or demandable right. Thus, even if it is hypothetically
admitted that normally, twenty five percent (25%) of the IPOs are divided equally between the two stock exchanges --
which, in turn, divide their respective allocation equally among their members, including the Chairman Emeritus, who
pay for IPO shares at the offering price -- the Court cannot grant respondent’s prayer for damages which allegedly
resulted from the MKSE Board Resolution dated 3 June 1993 deviating from said practice by no longer allocating any
shares to respondent.1avvphi1
Accordingly, the instant Petition should be granted. The Petition in SEC Case No. 02-94-4678 should be dismissed
for failure to state a cause of action. It does not matter that the SEC en banc, in its Order dated 14 August 1995 in
SEC-EB No. 403, overstepped its bounds by not limiting itself to the issue of whether respondent’s Petition before the
SICD sufficiently stated a cause of action. The SEC en banc may have been mistaken in considering extraneous
evidence in granting petitioners’ Motion to Dismiss, but its discussion thereof are merely superfluous and obiter
dictum. In the main, the SEC en banc did correctly dismiss the Petition in SEC Case No. 02-94-4678 for its failure to
state the basis for respondent’s alleged right, to wit:

Private respondent Campos has failed to establish the basis or authority for his alleged right to participate equally in
the IPO allocations of the Exchange. He cited paragraph 11 of the amended articles of incorporation of the Exchange
in support of his position but a careful reading of the said provision shows nothing therein that would bear out his
claim. The provision merely created the position of chairman emeritus of the Exchange but it mentioned nothing
about conferring upon the occupant thereof the right to receive IPO allocations.14

With the dismissal of respondent’s Petition in SEC Case No. 02-94-4678, there is no more need for this Court to
resolve the propriety of the issuance by SCID of a writ of preliminary injunction in said case.

WHEREFORE, the Petition is GRANTED. The Decision of the Court of Appeals dated 11 February 1997 and its
Resolution dated 18 May 1999 in CA-G.R. SP No. 38455 are REVERSED and SET ASIDE. The Orders dated 31
May 1995 and 14 August 1995 of the Securities and Exchange Commission en banc in SEC-EB Case No. 393 and
No. 403, respectively, are hereby reinstated. No pronouncement as to costs.

SO ORDERED.

MINITA V. CHICO-NAZARIO
Associate Justice

WE CONCUR:

CONSUELO YNARES-SANTIAGO
Associate Justice
Chairperson

MA. ALICIA AUSTRIA-MARTINEZ ANTONIO EDUARDO B. NACHURA

Associate Justice Associate Justice

DIOSDADO M. PERALTA
Associate Justice

Republic of the Philippines

SUPREME COURT
Manila
 Republic of the Philippines
SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 82146               January 22, 1990

EULOGIO OCCENA, petitioner,
vs.
HON. PEDRO M. ICAMINA, Presiding Judge, Branch X of the Regional Trial Court Sixth Judicial Region, San Jose,
Antique; THE PEOPLE OF THE PHILIPPINES, represented by the Honorable Provincial Fiscal of Antique; and
CRISTINA VEGAFRIA, respondents.

Comelec Legal Assistance Office for petitioner.

Comelec Legal Assistance Officer for private respondent.

FERNAN, C.J.:

On May 31, 1979, herein petitioner Eulogio Occena instituted before the Second Municipal Circuit Trial Court of
Sibalom, San Remigio — Belison, Province of Antique, Criminal Case No. 1717, a criminal complaint for Grave Oral
Defamation against herein private respondent Cristina Vegafria for allegedly openly, publicly and maliciously uttering
the following insulting words and statements: "Gago ikaw nga Barangay Captain, montisco, traidor, malugus, Hudas,"
which, freely translated, mean: "You are a foolish Barangay Captain, ignoramus, traitor, tyrant, Judas" and other
words and statements of similar import which caused great and irreparable damage and injury to his person and
honor.

Private respondent as accused therein entered a plea of not guilty. Trial thereafter ensued, at which petitioner,
without reserving his right to file a separate civil action for damages actively intervened thru a private prosecutor.

After trial, private respondent was convicted of the offense of Slight Oral Defamation and was sentenced to pay a fine
of Fifty Pesos (P50.00) with subsidiary imprisonment in case of insolvency and to pay the costs. No damages were
awarded to petitioner in view of the trial court's opinion that "the facts and circumstances of the case as adduced by
the evidence do not warrant the awarding of moral damages." 1

Disagreeing, petitioner sought relief from the Regional Trial Court, which in a decision dated March 16, 1987
disposed of petitioner's appeal as follows:

IN VIEW OF ALL THE FOREGOING, the civil aspect of the lower court's decision of April 20, 1981 subject
of this appeal, for lack of merit, is hereby DENIED.

After the decision shall have become final, remand the records of this case to the court of origin, Second
Municipal Circuit Trial Court of Sibalom, San Remigio-Belison, Antique, for the execution of its decision on
the criminal aspect.

SO ORDERED. 2

Petitioner is now before us by way of a petition for review on certiorari seeking to annul the RTC decision for being
contrary to Article 100 of the Revised Penal Code providing that every person criminally liable for a felony is also
civilly liable, and Article 2219 of the New Civil Code providing that moral damages may be recovered in libel, slander
or any other form of defamation. He submits that public respondent RTC erred in relying on the cases of Roa vs. de
la Cruz, 107 Phil. 10 and Tan vs. Standard Vacuum Oil Co., et al., 91 Phil. 672 cited therein. He differentiates said
cases from the case at bar by saying that in the case of Roa, the decision of the trial court had become final before
Maria C. Roa instituted a civil action for damages; whereas in the instant case, the decision of the trial court has not
yet become final by reason of the timely appeal interposed by him and no civil action for damages has been instituted
by petitioner against private respondent for the same cause. Tan, on the other hand, contemplates of two actions,
one criminal and one civil, and the prosecution of the criminal case had resulted in the acquittal of the accused, which
is not the situation here where the civil aspect was impliedly instituted with the criminal action in accordance with
Section 1, Rule 111, of the Rules of Court.

Private respondent for her part argues that the decision of the trial court carries with it the final adjudication of her
civil liability. Since petitioner chose to actively intervene in the criminal action without reserving his right to file a
separate civil action for damages, he assumed the risk that in the event he failed to recover damages he cannot
appeal from the decision of the lower court.

We find merit in the petition.

The issues confronting us in the instant petition is whether or not the decision of the Second Municipal Trial Court of
Sibalom, San-Remigio-Belison, Province of Antique constitutes the final adjudication on the merits of private
respondent's civil liability; and whether or not petitioner is entitled to an award of damages arising from the remarks
uttered by private respondent and found by the trial court to be defamatory.

The decision of the Municipal Circuit Trial Court as affirmed by the Regional Trial Court in Criminal Case No. 1709
cannot be considered as a final adjudication on the civil liability of private respondent simply because said decision
has not yet become final due to the timely appeal filed by petitioner with respect to the civil liability of the accused in
said case. It was only the unappealed criminal aspect of the case which has become final.

In the case of People vs. Coloma, 105 Phil. 1287, we categorically stated that from a judgment convicting the
accused, two (2) appeals may, accordingly, be taken. The accused may seek a review of said judgment, as regards
both civil and criminal actions; while the complainant may appeal with respect only to the civil action, either because
the lower court has refused to award damages or because the award made is unsatisfactory to him. The right of
either to appeal or not to appeal in the event of conviction of the accused is not dependent upon the other. Thus,
private respondent's theory that in actively intervening in the criminal action, petitioner waived his right to appeal from
the decision that may be rendered therein, is incorrect and inaccurate. Petitioner may, as he did, appeal from the
decision on the civil aspect which is deemed instituted with the criminal action and such appeal, timely taken,
prevents the decision on the civil liability from attaining finality.

We tackle the second issue by determining the basis of civil liability arising from crime. Civil obligations arising from
criminal offenses are governed by Article 100 of the Revised Penal Code which provides that "(E)very person
criminally liable for a felony is also civilly liable," in relation to Article 2177 of the Civil Code on quasi-delict, the
provisions for independent civil actions in the Chapter on Human Relations and the provisions regulating damages,
also found in the Civil Code.

Underlying the legal principle that a person who is criminally liable is also civilly liable is the view that from the
standpoint of its effects, a crime has dual character: (1) as an offense against the state because of the disturbance of
the social order; and (2) as an offense against the private person injured by the crime unless it involves the crime of
treason, rebellion, espionage, contempt and others wherein no civil liability arises on the part of the offender either
because there are no damages to be compensated or there is no private person injured by the crime. 3
In the ultimate analysis, what gives rise to the civil liability is really the obligation of everyone to repair or to make
whole the damage caused to another by reason of his act or omission, whether done intentional or negligently and
whether or not punishable by law. 4

In the case at bar, private respondent was found guilty of slight oral defamation and sentenced to a fine of P50.00
with subsidiary imprisonment in case of insolvency, but no civil liability arising from the felonious act of the accused
was adjudged. This is erroneous. As a general rule, a person who is found to be criminally liable offends two (2)
entities: the state or society in which he lives and the individual member of the society or private person who was
injured or damaged by the punishable act or omission. The offense of which private respondent was found guilty is
not one of those felonies where no civil liability results because either there is no offended party or no damage was
caused to a private person. There is here an offended party, whose main contention precisely is that he suffered
damages in view of the defamatory words and statements uttered by private respondent, in the amount of Ten
Thousand Pesos (P10,000.00) as moral damages and the further sum of Ten Thousand Pesos (P10,000) as
exemplary damages.

Article 2219, par. (7) of the Civil Code allows the recovery of moral damages in case of libel, slander or any other
form of defamation This provision of law establishes the right of an offended party in a case for oral defamation to
recover from the guilty party damages for injury to his feelings and reputation. The offended party is likewise allowed
to recover punitive or exemplary damages.

It must be remembered that every defamatory imputation is presumed to be malicious, even if it be true, if no good
intention and justifiable motive for making it is shown. And malice may be inferred from the style and tone of
publication 5 subject to certain exceptions which are not present in the case at bar.

Calling petitioner who was a barangay captain an ignoramus, traitor, tyrant and Judas is clearly an imputation of
defects in petitioner's character sufficient to cause him embarrassment and social humiliation. Petitioner testified to
the feelings of shame and anguish he suffered as a result of the incident complained of. 6 It is patently error for the
trial court to overlook this vital piece of evidence and to conclude that the "facts and circumstances of the case as
adduced by the evidence do not warrant the awarding of moral damages." Having misapprehended the facts, the trial
court's findings with respect thereto is not conclusive upon us.

From the evidence presented, we rule that for the injury to his feelings and reputation, being a barangay captain,
petitioner is entitled to moral damages in the sum of P5,000.00 and a further sum of P5,000.00 as exemplary
damages.

WHEREFORE, the petition is hereby GRANTED. The decision of the Regional Trial Court is hereby MODIFIED and
private respondent is ordered to pay petitioner the amount of P5,000.00 as moral damages and another P5,000.00
as exemplary damages. Costs against private respondent.

SO ORDERED.

Gutierrez, Jr., Feliciano, Bidin and Cortés JJ., concur

 Republic of the Philippines

SUPREME COURT

FIRST DIVISION

G.R. No. 140047             July 13, 2004

PHILIPPINE EXPORT AND FOREIGN LOAN GUARANTEE CORPORATION, petitioner,

vs.
V.P. EUSEBIO CONSTRUCTION, INC.; 3-PLEX INTERNATIONAL, INC.; VICENTE P. EUSEBIO; SOLEDAD C.
EUSEBIO; EDUARDO E. SANTOS; ILUMINADA SANTOS; AND FIRST INTEGRATED BONDING AND
INSURANCE COMPANY, INC., respondents.

DECISION

DAVIDE, JR., C.J.:

This case is an offshoot of a service contract entered into by a Filipino construction firm with the Iraqi Government for
the construction of the Institute of Physical Therapy-Medical Center, Phase II, in Baghdad, Iraq, at a time when the
Iran-Iraq war was ongoing.

In a complaint filed with the Regional Trial Court of Makati City, docketed as Civil Case No. 91-1906 and assigned to
Branch 58, petitioner Philippine Export and Foreign Loan Guarantee Corporation1 (hereinafter Philguarantee) sought
reimbursement from the respondents of the sum of money it paid to Al Ahli Bank of Kuwait pursuant to a guarantee it
issued for respondent V.P. Eusebio Construction, Inc. (VPECI).

The factual and procedural antecedents in this case are as follows:

On 8 November 1980, the State Organization of Buildings (SOB), Ministry of Housing and Construction, Baghdad,
Iraq, awarded the construction of the Institute of Physical Therapy–Medical Rehabilitation Center, Phase II, in
Baghdad, Iraq, (hereinafter the Project) to Ajyal Trading and Contracting Company (hereinafter Ajyal), a firm duly
licensed with the Kuwait Chamber of Commerce for a total contract price of ID5,416,089/046 (or about
US$18,739,668).2

On 7 March 1981, respondent spouses Eduardo and Iluminada Santos, in behalf of respondent 3-Plex International,
Inc. (hereinafter 3-Plex), a local contractor engaged in construction business, entered into a joint venture agreement
with Ajyal wherein the former undertook the execution of the entire Project, while the latter would be entitled to a
commission of 4% of the contract price.3 Later, or on 8 April 1981, respondent 3-Plex, not being accredited by or
registered with the Philippine Overseas Construction Board (POCB), assigned and transferred all its rights and
interests under the joint venture agreement to VPECI, a construction and engineering firm duly registered with the
POCB.4 However, on 2 May 1981, 3-Plex and VPECI entered into an agreement that the execution of the Project
would be under their joint management.5

The SOB required the contractors to submit (1) a performance bond of ID271,808/610 representing 5% of the total
contract price and (2) an advance payment bond of ID541,608/901 representing 10% of the advance payment to be
released upon signing of the contract.6 To comply with these requirements, respondents 3-Plex and VPECI applied
for the issuance of a guarantee with petitioner Philguarantee, a government financial institution empowered to issue
guarantees for qualified Filipino contractors to secure the performance of approved service contracts abroad.7

Petitioner Philguarantee approved respondents' application. Subsequently, letters of guarantee8 were issued by

Philguarantee to the Rafidain Bank of Baghdad covering 100% of the performance and advance payment bonds, but
they were not accepted by SOB. What SOB required was a letter-guarantee from Rafidain Bank, the government
bank of Iraq. Rafidain Bank then issued a performance bond in favor of SOB on the condition that another foreign
bank, not Philguarantee, would issue a counter-guarantee to cover its exposure. Al Ahli Bank of Kuwait was,
therefore, engaged to provide a counter-guarantee to Rafidain Bank, but it required a similar counter-guarantee in its
favor from the petitioner. Thus, three layers of guarantees had to be arranged.9

Upon the application of respondents 3-Plex and VPECI, petitioner Philguarantee issued in favor of Al Ahli Bank of
Kuwait Letter of Guarantee No. 81-194-F 10 (Performance Bond Guarantee) in the amount of ID271,808/610 and
Letter of Guarantee No. 81-195-F11 (Advance Payment Guarantee) in the amount of ID541,608/901, both for a term
of eighteen months from 25 May 1981. These letters of guarantee were secured by (1) a Deed of
Undertaking12 executed by respondents VPECI, Spouses Vicente P. Eusebio and Soledad C. Eusebio, 3-Plex, and
Spouses Eduardo E. Santos and Iluminada Santos; and (2) a surety bond13 issued by respondent First Integrated
Bonding and Insurance Company, Inc. (FIBICI). The Surety Bond was later amended on 23 June 1981 to increase
the amount of coverage from P6.4 million to P6.967 million and to change the bank in whose favor the petitioner's
guarantee was issued, from Rafidain Bank to Al Ahli Bank of Kuwait.14

On 11 June 1981, SOB and the joint venture VPECI and Ajyal executed the service contract15 for the construction of
the Institute of Physical Therapy – Medical Rehabilitation Center, Phase II, in Baghdad, Iraq, wherein the joint
venture contractor undertook to complete the Project within a period of 547 days or 18 months. Under the Contract,
the Joint Venture would supply manpower and materials, and SOB would refund to the former 25% of the project cost
in Iraqi Dinar and the 75% in US dollars at the exchange rate of 1 Dinar to 3.37777 US Dollars.16

The construction, which was supposed to start on 2 June 1981, commenced only on the last week of August 1981.
Because of this delay and the slow progress of the construction work due to some setbacks and difficulties, the
Project was not completed on 15 November 1982 as scheduled. But in October 1982, upon foreseeing the
impossibility of meeting the deadline and upon the request of Al Ahli Bank, the joint venture contractor worked for the
renewal or extension of the Performance Bond and Advance Payment Guarantee. Petitioner's Letters of Guarantee
Nos. 81-194-F (Performance Bond) and 81-195-F (Advance Payment Bond) with expiry date of 25 November 1982
were then renewed or extended to 9 February 1983 and 9 March 1983, respectively.17 The surety bond was also
extended for another period of one year, from 12 May 1982 to 12 May 1983.18 The Performance Bond was further
extended twelve times with validity of up to 8 December 1986,19 while the Advance Payment Guarantee was
extended three times more up to 24 May 1984 when the latter was cancelled after full refund or reimbursement by
the joint venture contractor.20 The surety bond was likewise extended to 8 May 1987.21

As of March 1986, the status of the Project was 51% accomplished, meaning the structures were already finished.
The remaining 47% consisted in electro-mechanical works and the 2%, sanitary works, which both required
importation of equipment and materials.22

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

Upon receiving a copy of that telex message on 27 October 1986, respondent VPECI requested Iraq Trade and
Economic Development Minister Mohammad Fadhi Hussein to recall the telex call on the performance guarantee for
being a drastic action in contravention of its mutual agreement with the latter that (1) the imposition of penalty would
be held in abeyance until the completion of the project; and (2) the time extension would be open, depending on the
developments on the negotiations for a foreign loan to finance the completion of the project.23 It also wrote SOB
protesting the call for lack of factual or legal basis, since the failure to complete the Project was due to (1) the Iraqi
government's lack of foreign exchange with which to pay its (VPECI's) accomplishments and (2) SOB's
noncompliance for the past several years with the provision in the contract that 75% of the billings would be paid in
US dollars.24 Subsequently, or on 19 November 1986, respondent VPECI advised the petitioner not to pay yet Al Ahli
Bank because efforts were being exerted for the amicable settlement of the Project.25

On 14 April 1987, the petitioner received another telex message from Al Ahli Bank stating that it had already paid to
Rafidain Bank the sum of US$876,564 under its letter of guarantee, and demanding reimbursement by the petitioner
of what it paid to the latter bank plus interest thereon and related expenses.26

Both petitioner Philguarantee and respondent VPECI sought the assistance of some government agencies of the
Philippines. On 10 August 1987, VPECI requested the Central Bank to hold in abeyance the payment by the
petitioner "to allow the diplomatic machinery to take its course, for otherwise, the Philippine government , through the
Philguarantee and the Central Bank, would become instruments of the Iraqi Government in consummating a clear act
of injustice and inequity committed against a Filipino contractor."27

On 27 August 1987, the Central Bank authorized the remittance for its account of the amount of US$876,564
(equivalent to ID271, 808/610) to Al Ahli Bank representing full payment of the performance counter-guarantee for
VPECI's project in Iraq. 28

On 6 November 1987, Philguarantee informed VPECI that it would remit US$876,564 to Al Ahli Bank, and reiterated
the joint and solidary obligation of the respondents to reimburse the petitioner for the advances made on its counter-
guarantee.29

The petitioner thus paid the amount of US$876,564 to Al Ahli Bank of Kuwait on 21 January 1988.30 Then, on 6 May
1988, the petitioner paid to Al Ahli Bank of Kuwait US$59,129.83 representing interest and penalty charges
demanded by the latter bank.31

On 19 June 1991, the petitioner sent to the respondents separate letters demanding full payment of the amount
of P47,872,373.98 plus accruing interest, penalty charges, and 10% attorney's fees pursuant to their joint and
solidary obligations under the deed of undertaking and surety bond.32 When the respondents failed to pay, the
petitioner filed on 9 July 1991 a civil case for collection of a sum of money against the respondents before the RTC of
Makati City.

After due trial, the trial court ruled against Philguarantee and held that the latter had no valid cause of action against
the respondents. It opined that at the time the call was made on the guarantee which was executed for a specific
period, the guarantee had already lapsed or expired. There was no valid renewal or extension of the guarantee for
failure of the petitioner to secure respondents' express consent thereto. The trial court also found that the joint
venture contractor incurred no delay in the execution of the Project. Considering the Project owner's violations of the
contract which rendered impossible the joint venture contractor's performance of its undertaking, no valid call on the
guarantee could be made. Furthermore, the trial court held that no valid notice was first made by the Project owner
SOB to the joint venture contractor before the call on the guarantee. Accordingly, it dismissed the complaint, as well
as the counterclaims and cross-claim, and ordered the petitioner to pay attorney's fees of P100,000 to respondents
VPECI and Eusebio Spouses and P100,000 to 3-Plex and the Santos Spouses, plus costs. 33

In its 14 June 1999 Decision,34 the Court of Appeals affirmed the trial court's decision, ratiocinating as follows:

First, appellant cannot deny the fact that it was fully aware of the status of project implementation as well as
the problems besetting the contractors, between 1982 to 1985, having sent some of its people to Baghdad
 during that period. The successive renewals/extensions of the guarantees in fact, was prompted by delays,
not solely attributable to the contractors, and such extension understandably allowed by the SOB (project
owner) which had not anyway complied with its contractual commitment to tender 75% of payment in US
Dollars, and which still retained overdue amounts collectible by VPECI.

Second, appellant was very much aware of the violations committed by the SOB of its contractual
undertakings with VPECI, principally, the payment of foreign currency (US$) for 75% of the total contract
price, as well as of the complications and injustice that will result from its payment of the full amount of the
performance guarantee, as evident in PHILGUARANTEE's letter dated 13 May 1987 ….

Third, appellant was fully aware that SOB was in fact still obligated to the Joint Venture and there was still
an amount collectible from and still being retained by the project owner, which amount can be set-off with
the sum covered by the performance guarantee.

Fourth, well-apprised of the above conditions obtaining at the Project site and cognizant of the war situation
at the time in Iraq, appellant, though earlier has made representations with the SOB regarding a possible
amicable termination of the Project as suggested by VPECI, made a complete turn-around and insisted on
acting in favor of the unjustified "call" by the foreign banks.35

The petitioner then came to this Court via Rule 45 of the Rules of Court claiming that the Court of Appeals erred in
affirming the trial court's ruling that

…RESPONDENTS ARE NOT LIABLE UNDER THE DEED OF UNDERTAKING THEY EXECUTED IN
FAVOR OF PETITIONER IN CONSIDERATION FOR THE ISSUANCE OF ITS COUNTER-GUARANTEE
AND THAT PETITIONER CANNOT PASS ON TO RESPONDENTS WHAT IT HAD PAID UNDER THE
SAID COUNTER-GUARANTEE.

II

…PETITIONER CANNOT CLAIM SUBROGATION.

III

…IT IS INIQUITOUS AND UNJUST FOR PETITIONER TO HOLD RESPONDENTS LIABLE UNDER THEIR
DEED OF UNDERTAKING.36

The main issue in this case is whether the petitioner is entitled to reimbursement of what it paid under Letter of
Guarantee No. 81-194-F it issued to Al Ahli Bank of Kuwait based on the deed of undertaking and surety bond from
the respondents.
The petitioner asserts that since the guarantee it issued was absolute, unconditional, and irrevocable the nature and
extent of its liability are analogous to those of suretyship. Its liability accrued upon the failure of the respondents to
finish the construction of the Institute of Physical Therapy Buildings in Baghdad.

By guaranty a person, called the guarantor, binds himself to the creditor to fulfill the obligation of the principal debtor
in case the latter should fail to do so. If a person binds himself solidarily with the principal debtor, the contract is
called suretyship. 37

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

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

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

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

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

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

6. Usually, a surety will not be discharged either by the mere indulgence of the creditor to the principal or by
want of notice of the default of the principal, no matter how much he may be injured thereby. A guarantor is
often discharged by the mere indulgence of the creditor to the principal, and is usually not liable unless
notified of the default of the principal. 38

In determining petitioner's status, it is necessary to read Letter of Guarantee No. 81-194-F, which provides in part as
follows:

In consideration of your issuing the above performance guarantee/counter-guarantee, we hereby

unconditionally and irrevocably guarantee, under our Ref. No. LG-81-194 F to pay you on your first written
or telex demand Iraq Dinars Two Hundred Seventy One Thousand Eight Hundred Eight and fils six hundred
ten (ID271,808/610) representing 100% of the performance bond required of V.P. EUSEBIO for the
construction of the Physical Therapy Institute, Phase II, Baghdad, Iraq, plus interest and other incidental
expenses related thereto.

In the event of default by V.P. EUSEBIO, we shall pay you 100% of the obligation unpaid but in no case
shall such amount exceed Iraq Dinars (ID) 271,808/610 plus interest and other incidental expenses….
(Emphasis supplied)39

Guided by the abovementioned distinctions between a surety and a guaranty, as well as the factual milieu of this
case, we find that the Court of Appeals and the trial court were correct in ruling that the petitioner is a guarantor and
not a surety. That the guarantee issued by the petitioner is unconditional and irrevocable does not make the
petitioner a surety. As a guaranty, it is still characterized by its subsidiary and conditional quality because it does not
take effect until the fulfillment of the condition, namely, that the principal obligor should fail in his obligation at the time
and in the form he bound himself.40 In other words, an unconditional guarantee is still subject to the condition that the
principal debtor should default in his obligation first before resort to the guarantor could be had. A conditional
guaranty, as opposed to an unconditional guaranty, is one which depends upon some extraneous event, beyond the
mere default of the principal, and generally upon notice of the principal's default and reasonable diligence in
exhausting proper remedies against the principal.41

It appearing that Letter of Guarantee No. 81-194-F merely stated that in the event of default by respondent VPECI
the petitioner shall pay, the obligation assumed by the petitioner was simply that of an unconditional guaranty, not
conditional guaranty. But as earlier ruled the fact that petitioner's guaranty is unconditional does not make it a surety.
Besides, surety is never presumed. A party should not be considered a surety where the contract itself stipulates that
he is acting only as a guarantor. It is only when the guarantor binds himself solidarily with the principal debtor that the
contract becomes one of suretyship.42

Having determined petitioner's liability as guarantor, the next question we have to grapple with is whether the
respondent contractor has defaulted in its obligations that would justify resort to the guaranty. This is a mixed
question of fact and law that is better addressed by the lower courts, since this Court is not a trier of facts.

It is a fundamental and settled rule that the findings of fact of the trial court and the Court of Appeals are binding or
conclusive upon this Court unless they are not supported by the evidence or unless strong and cogent reasons
dictate otherwise.43 The factual findings of the Court of Appeals are normally not reviewable by us under Rule 45 of
the Rules of Court except when they are at variance with those of the trial court. 44 The trial court and the Court of
Appeals were in unison that the respondent contractor cannot be considered to have defaulted in its obligations
because the cause of the delay was not primarily attributable to it.

A corollary issue is what law should be applied in determining whether the respondent contractor has defaulted in the
performance of its obligations under the service contract. The question of whether there is a breach of an agreement,
which includes default or mora,45 pertains to the essential or intrinsic validity of a contract. 46

No conflicts rule on essential validity of contracts is expressly provided for in our laws. The rule followed by most
legal systems, however, is that the intrinsic validity of a contract must be governed by the lex contractus or "proper
law of the contract." This is the law voluntarily agreed upon by the parties (the lex loci voluntatis) or the law intended
by them either expressly or implicitly (the lex loci intentionis). The law selected may be implied from such factors as
substantial connection with the transaction, or the nationality or domicile of the parties.47 Philippine courts would do
well to adopt the first and most basic rule in most legal systems, namely, to allow the parties to select the law
applicable to their contract, subject to the limitation that it is not against the law, morals, or public policy of the forum
and that the chosen law must bear a substantive relationship to the transaction. 48

It must be noted that the service contract between SOB and VPECI contains no express choice of the law that would
govern it. In the United States and Europe, the two rules that now seem to have emerged as "kings of the hill" are (1)
the parties may choose the governing law; and (2) in the absence of such a choice, the applicable law is that of the
State that "has the most significant relationship to the transaction and the parties."49 Another authority proposed that
all matters relating to the time, place, and manner of performance and valid excuses for non-performance are
determined by the law of the place of performance or lex loci solutionis, which is useful because it is undoubtedly
always connected to the contract in a significant way.50

In this case, the laws of Iraq bear substantial connection to the transaction, since one of the parties is the Iraqi
Government and the place of performance is in Iraq. Hence, the issue of whether respondent VPECI defaulted in its
obligations may be determined by the laws of Iraq. However, since that foreign law was not properly pleaded or
proved, the presumption of identity or similarity, otherwise known as the processual presumption, comes into play.
Where foreign law is not pleaded or, even if pleaded, is not proved, the presumption is that foreign law is the same as
ours.51

Our law, specifically Article 1169, last paragraph, of the Civil Code, provides: "In reciprocal obligations, neither party
incurs in delay if the other party does not comply or is not ready to comply in a proper manner with what is incumbent
upon him."

Default or mora on the part of the debtor is the delay in the fulfillment of the prestation by reason of a cause
imputable to the former. 52 It is the non-fulfillment of an obligation with respect to time.53

It is undisputed that only 51.7% of the total work had been accomplished. The 48.3% unfinished portion consisted in
the purchase and installation of electro-mechanical equipment and materials, which were available from foreign
suppliers, thus requiring US Dollars for their importation. The monthly billings and payments made by SOB54 reveal
that the agreement between the parties was a periodic payment by the Project owner to the contractor depending on
the percentage of accomplishment within the period. 55 The payments were, in turn, to be used by the contractor to
finance the subsequent phase of the work. 56 However, as explained by VPECI in its letter to the Department of
Foreign Affairs (DFA), the payment by SOB purely in Dinars adversely affected the completion of the project; thus:

4. Despite protests from the plaintiff, SOB continued paying the accomplishment billings of the Contractor
purely in Iraqi Dinars and which payment came only after some delays.

5. SOB is fully aware of the following:

5.2 That Plaintiff is a foreign contractor in Iraq and as such, would need foreign currency (US$), to finance
the purchase of various equipment, materials, supplies, tools and to pay for the cost of project management,
supervision and skilled labor not available in Iraq and therefore have to be imported and or obtained from
the Philippines and other sources outside Iraq.

5.3 That the Ministry of Labor and Employment of the Philippines requires the remittance into the Philippines
of 70% of the salaries of Filipino workers working abroad in US Dollars;

5.5 That the Iraqi Dinar is not a freely convertible currency such that the same cannot be used to purchase
equipment, materials, supplies, etc. outside of Iraq;

5.6 That most of the materials specified by SOB in the CONTRACT are not available in Iraq and therefore
have to be imported;

5.7 That the government of Iraq prohibits the bringing of local currency (Iraqui Dinars) out of Iraq and hence,
imported materials, equipment, etc., cannot be purchased or obtained using Iraqui Dinars as medium of
acquisition.

…
 8. Following the approved construction program of the CONTRACT, upon completion of the civil works
portion of the installation of equipment for the building, should immediately follow, however, the CONTRACT
specified that these equipment which are to be installed and to form part of the PROJECT have to be
procured outside Iraq since these are not being locally manufactured. Copy f the relevant portion of the
Technical Specification is hereto attached as Annex "C" and made an integral part hereof;

10. Due to the lack of Foreign currency in Iraq for this purpose, and if only to assist the Iraqi government in
completing the PROJECT, the Contractor without any obligation on its part to do so but with the knowledge
and consent of SOB and the Ministry of Housing & Construction of Iraq, offered to arrange on behalf of
SOB, a foreign currency loan, through the facilities of Circle International S.A., the Contractor's Sub-
contractor and SACE MEDIO CREDITO which will act as the guarantor for this foreign currency loan.

Arrangements were first made with Banco di Roma. Negotiation started in June 1985. SOB is informed of
the developments of this negotiation, attached is a copy of the draft of the loan Agreement between SOB as
the Borrower and Agent. The Several Banks, as Lender, and counter-guaranteed by Istituto Centrale Per II
Credito A Medio Termine (Mediocredito) Sezione Speciale Per L'Assicurazione Del Credito All'Exportazione
(Sace). Negotiations went on and continued until it suddenly collapsed due to the reported default by Iraq in
the payment of its obligations with Italian government, copy of the news clipping dated June 18, 1986 is
hereto attached as Annex "D" to form an integral part hereof;

15. On September 15, 1986, Contractor received information from Circle International S.A. that because of
the news report that Iraq defaulted in its obligations with European banks, the approval by Banco di Roma of
the loan to SOB shall be deferred indefinitely, a copy of the letter of Circle International together with the
news clippings are hereto attached as Annexes "F" and "F-1", respectively.57

As found by both the Court of Appeals and the trial court, the delay or the non-completion of the Project was caused
by factors not imputable to the respondent contractor. It was rather due mainly to the persistent violations by SOB of
the terms and conditions of the contract, particularly its failure to pay 75% of the accomplished work in US Dollars.
Indeed, where one of the parties to a contract does not perform in a proper manner the prestation which he is bound
to perform under the contract, he is not entitled to demand the performance of the other party. A party does not incur
in delay if the other party fails to perform the obligation incumbent upon him.

The petitioner, however, maintains that the payments by SOB of the monthly billings in purely Iraqi Dinars did not
render impossible the performance of the Project by VPECI. Such posture is quite contrary to its previous
representations. In his 26 March 1987 letter to the Office of the Middle Eastern and African Affairs (OMEAA), DFA,
Manila, petitioner's Executive Vice-President Jesus M. Tañedo stated that while VPECI had taken every possible
measure to complete the Project, the war situation in Iraq, particularly the lack of foreign exchange, was proving to be
a great obstacle; thus:

VPECI has taken every possible measure for the completion of the project but the war situation in Iraq
particularly the lack of foreign exchange is proving to be a great obstacle. Our performance
counterguarantee was called last 26 October 1986 when the negotiations for a foreign currency loan with
the Italian government through Banco de Roma bogged down following news report that Iraq has defaulted
in its obligation with major European banks. Unless the situation in Iraq is improved as to allay the bank's
apprehension, there is no assurance that the project will ever be completed. 58

In order that the debtor may be in default it is necessary that the following requisites be present: (1) that the
obligation be demandable and already liquidated; (2) that the debtor delays performance; and (3) that the creditor
requires the performance because it must appear that the tolerance or benevolence of the creditor must have
ended. 59

As stated earlier, SOB cannot yet demand complete performance from VPECI because it has not yet itself performed
its obligation in a proper manner, particularly the payment of the 75% of the cost of the Project in US Dollars. The
VPECI cannot yet be said to have incurred in delay. Even assuming that there was delay and that the delay was
attributable to VPECI, still the effects of that delay ceased upon the renunciation by the creditor, SOB, which could be
implied when the latter granted several extensions of time to the former. 60 Besides, no demand has yet been made
by SOB against the respondent contractor. Demand is generally necessary even if a period has been fixed in the
obligation. And default generally begins from the moment the creditor demands judicially or extra-judicially the
performance of the obligation. Without such demand, the effects of default will not arise.61

Moreover, the petitioner as a guarantor is entitled to the benefit of excussion, that is, it cannot be compelled to pay
the creditor SOB unless the property of the debtor VPECI has been exhausted and all legal remedies against the
said debtor have been resorted to by the creditor.62 It could also set up compensation as regards what the creditor
SOB may owe the principal debtor VPECI.63 In this case, however, the petitioner has clearly waived these rights and
remedies by making the payment of an obligation that was yet to be shown to be rightfully due the creditor and
demandable of the principal debtor.

As found by the Court of Appeals, the petitioner fully knew that the joint venture contractor had collectibles from SOB
which could be set off with the amount covered by the performance guarantee. In February 1987, the OMEAA
transmitted to the petitioner a copy of a telex dated 10 February 1987 of the Philippine Ambassador in Baghdad, Iraq,
informing it of the note verbale sent by the Iraqi Ministry of Foreign Affairs stating that the past due obligations of the
joint venture contractor from the petitioner would "be deducted from the dues of the two contractors."64

Also, in the project situationer attached to the letter to the OMEAA dated 26 March 1987, the petitioner raised as
among the arguments to be presented in support of the cancellation of the counter-guarantee the fact that the
amount of ID281,414/066 retained by SOB from the Project was more than enough to cover the counter-guarantee of
ID271,808/610; thus:

6.1 Present the following arguments in cancelling the counterguarantee:

· The Iraqi Government does not have the foreign exchange to fulfill its contractual obligations of
paying 75% of progress billings in US dollars.

· It could also be argued that the amount of ID281,414/066 retained by SOB from the proposed
project is more than the amount of the outstanding counterguarantee.65

In a nutshell, since the petitioner was aware of the contractor's outstanding receivables from SOB, it should have set
up compensation as was proposed in its project situationer.

Moreover, the petitioner was very much aware of the predicament of the respondents. In fact, in its 13 May 1987
letter to the OMEAA, DFA, Manila, it stated:

VPECI also maintains that the delay in the completion of the project was mainly due to SOB's violation of
contract terms and as such, call on the guarantee has no basis.
 While PHILGUARANTEE is prepared to honor its commitment under the guarantee, PHILGUARANTEE
does not want to be an instrument in any case of inequity committed against a Filipino contractor. It is for
this reason that we are constrained to seek your assistance not only in ascertaining the veracity of Al Ahli
Bank's claim that it has paid Rafidain Bank but possibly averting such an event. As any payment effected by
the banks will complicate matters, we cannot help underscore the urgency of VPECI's bid for government
intervention for the amicable termination of the contract and release of the performance guarantee. 66

But surprisingly, though fully cognizant of SOB's violations of the service contract and VPECI's outstanding
receivables from SOB, as well as the situation obtaining in the Project site compounded by the Iran-Iraq war, the
petitioner opted to pay the second layer guarantor not only the full amount of the performance bond counter-
guarantee but also interests and penalty charges.

This brings us to the next question: May the petitioner as a guarantor secure reimbursement from the respondents for
what it has paid under Letter of Guarantee No. 81-194-F?

As a rule, a guarantor who pays for a debtor should be indemnified by the latter67 and would be legally subrogated to
the rights which the creditor has against the debtor.68 However, a person who makes payment without the knowledge
or against the will of the debtor has the right to recover only insofar as the payment has been beneficial to the
debtor.69 If the obligation was subject to defenses on the part of the debtor, the same defenses which could have
been set up against the creditor can be set up against the paying guarantor.70

From the findings of the Court of Appeals and the trial court, it is clear that the payment made by the petitioner
guarantor did not in any way benefit the principal debtor, given the project status and the conditions obtaining at the
Project site at that time. Moreover, the respondent contractor was found to have valid defenses against SOB, which
are fully supported by evidence and which have been meritoriously set up against the paying guarantor, the petitioner
in this case. And even if the deed of undertaking and the surety bond secured petitioner's guaranty, the petitioner is
precluded from enforcing the same by reason of the petitioner's undue payment on the guaranty. Rights under the
deed of undertaking and the surety bond do not arise because these contracts depend on the validity of the
enforcement of the guaranty.

The petitioner guarantor should have waited for the natural course of guaranty: the debtor VPECI should have, in the
first place, defaulted in its obligation and that the creditor SOB should have first made a demand from the principal
debtor. It is only when the debtor does not or cannot pay, in whole or in part, that the guarantor should pay.71 When
the petitioner guarantor in this case paid against the will of the debtor VPECI, the debtor VPECI may set up against it
defenses available against the creditor SOB at the time of payment. This is the hard lesson that the petitioner must
learn.

As the government arm in pursuing its objective of providing "the necessary support and assistance in order to
enable … [Filipino exporters and contractors to operate viably under the prevailing economic and business
conditions,"72 the petitioner should have exercised prudence and caution under the circumstances. As aptly put by the
Court of Appeals, it would be the height of inequity to allow the petitioner to pass on its losses to the Filipino
contractor VPECI which had sternly warned against paying the Al Ahli Bank and constantly apprised it of the
developments in the Project implementation.

WHEREFORE, the petition for review on certiorari is hereby DENIED for lack of merit, and the decision of the Court
of appeals in CA-G.R. CV No. 39302 is AFFIRMED.

No pronouncement as to costs.

SO ORDERED. Panganiban, Ynares-Santiago, Carpio, and Azcuna, JJ., concur.