MARLOU L. VELASQUEZ . SOLIDBANK CORPORATION G.R. No.

157309, 28 March 2008, THIRD

DIVISION Reyes, .)
Wilderness Trading, as seller, undertook to sell dried sea cucumber for export to South Korea
to Goldwell Trading of Pusan, South Korea, as buyer. To facilitate the payment of the
products, Goldwell Trading opened a letter of credit in favor of Wilderness Trading with the
Bank of Seoul, Pusan, Korea. Marlou Velasquez, the proprietor of Wilderness Trading, applied
for credit accommodation with Solidbank Corporation (Solidbank) for pre-shipment financing,
which was granted. The first two export transactions both drawn on the letter of credit were
successful, the
third shipment however, was not. For Velasquez th
ird shipment, he negotiated for a documentary sight draft, representing the value of the
shipment, to be drawn on the letter of credit, chargeable to the account of Bank of Seoul. As
a condition for the issuance of the sight draft, Velasquez executed a letter of undertaking in
favor of Solidbank wherein he promised to pay if the sight draft was not accepted. By virtue
of which, Velasquez was able to advance the value of the shipment. Solidbank failed to
collect on the sight draft when it was presented for payment as it was dishonored by nonacceptance by the Bank of Seoul for alleged breach by Wilderness Trading of certain
conditions under the terms of their export agreement. Due to the dishonor, Solidbank
demanded restitution of the sum advance which Velasquez failed to accomplish. Solidbank
filed a complaint for recovery of sum of money before the RTC. The latter ruled in favor of
Solidbank and was affirmed by the CA.
ISSUE:
Whether Velasquez should be held liable to respondent under the sight draft or the letter of
undertaking.
HELD:
Petitioner, Velasquez, is not liable under the sight draft but he is liable under his letter of
undertaking. It bears stressing that it is a separate contract from the sight draft. The liability
of petitioner under the letter of undertaking is direct and primary. It is independent from his
liability under the sight draft. Liability subsists on it even if the sight draft was dishonored for
non-acceptance or non-payment. Respondent agreed to purchase the draft and credit
petitioner its value upon the undertaking that he will reimburse the amount in case the sight
draft is dishonored. The bank would certainly not have agreed to grant petitioner an
advance export payment were it not for the letter of undertaking.
The consideration for the letter of undertaking was petitioners promise to pay respondent
the value of the sight draft if it was dishonored for any reason by the Bank of Seoul.
We cannot accept petitioners thesis that he is only a mere guarantor under the letter of
credit. Petitioner cannot be both the primary debtor and the guarantor of his own debt. This
is inconsistent with the very purpose of a guarantee which is for the creditor to proceed
against a third person if the debtor defaults in his obligation. Certainly, to accept such an
argument would make a mockery of commercial transactions.

*AGRO CONGLOMERATES, INC. and MARIO SORIANO, petitioners, vs. THE HON. COURT OF
APPEALS andREGENT SAVINGS and LOAN BANK, INC, respondents
G.R. No. 117660. December 18, 2000
QUISUMBING, J.:
Doctrine:An accommodation party is a person who has signed the instrument as maker,
acceptor, or indorser,without receiving value therefor, and for the purpose of lending his
name to some other person and isliable on the instrument to a holder for value,
notwithstanding such holder at the time of taking theinstrument knew (the signatory) to be
an accommodation party.
Facts:
Petitioner Agro-Conglomerates, Inc. as vendor, sold two parcels of land to Wonderland Food
Industries,Inc. The vendor, the vendee, and the respondent bank Regent Savings & Loan
Bank, executed anAddendum4 to the previous Memorandum of Agreement. It provided,
among others, that the vendeeundertakes to pay the loan procured in the name of the
VENDOR, the VENDEE will be the one liable topay the entire proceeds thereof including
interest and other charges. Consequently, petitioner MarioSoriano signed as maker several
promissory notes,6 payable to the respondent bank. Thereafter, thebank released the
proceeds of the loan to petitioners. However, petitioners failed to meet theirobligations as
they fell due Mario Soriano manifested his intention to re-structure the loan, yet did notshow
up nor submit his formal written request.
Issue: Whether or not petitioner is liable as an accommodation party.
Held: By this time, we note a subsidiary contract of suretyship had taken effect since
petitioners signed thepromissory notes as maker and accommodation party for the benefit
of Wonderland. Petitionersbecame liable as accommodation party. He has the right, after
paying the holder, to obtainreimbursement from the party accommodated, since the relation
between them has in effect become one of principal and surety, the accommodation party
being the surety. The suretys liability to the creditor or promisee of the principal is said to
be direct, primary and absolute; in other words, he isdirectly and equally bound with the
principal. And the creditor may proceed against any one of thesolidary debtors.

FIRST DIVISION
[G.R. No. 80201. November 20, 1990.]
ANTONIO GARCIA, JR., Petitioner, v. COURT OF APPEALS, LASAL DEVELOPMENT
CORPORATION, Respondents.
Quisumbing, Torres & Evangelista for Petitioner.
R .C . Domingo, Jr. & Associates for Private Respondent.
SYLLABUS

1. CIVIL LAW; SPECIAL CONTRACTS; SURETYSHIP; NATURE AND PURPOSE THEREOF. The
petitioners first ground is that, as found by the trial court, the surety agreement was invalid
because no consideration had been paid to him by PISO for executing the contract and that
the amount of the entire loan had been received and enjoyed by WMC. He cites the following
articles of the Civil Code in support of his contention that lack of consideration was a
personal defense available to him as surety. The point is not well taken in view of the nature
and purpose of a surety agreement. Suretyship is a contractual relation resulting from an
agreement whereby one person, the surety, engages to be answerable for the debt, default
or miscarriage of another, known as the principal. The peculiar nature of a surety agreement
is that it is regarded as valid despite the absence of any direct consideration received by the
surety either from the principal obligor or from the creditor. A contract of surety, like any
other contract, must generally be supported by a sufficient consideration. However, the
consideration necessary to support a surety obligation need not pass directly to the surety; a
consideration moving to the principal alone will suffice. It has been held that if the delivery
of the original contract is contemporaneous with the delivery of the suretys obligation, each
contract becomes completed at the same time, and the consideration which supports the
principal contract likewise supports the subsidiary one. (Faust v. Rodelheim, 77 NJL 740, 73 A
491; Ballard v. Burton, 64 Vt 387, 24 A 769). And this is the kind of surety contract to which
the rule of strict construction applies as opposed to a compensated surety contract
undertaken by surety corporations which are organized for the purpose of conducting an
indemnity business at established rates and compensation unlike an ordinary surety
agreement where the surety binds his name through motives of friendship and
accomodation. (Pastoral v. Mutual Security Insurance Corp., 14 SCRA 1011).
2. ID.; ID.; ID.; OBLIGATION AND LIABILITY OF A SURETY. The suretys obligation is not an
original and direct one for the performance of his own act, but merely accessory or collateral
to the obligation contracted by the principal. Nevertheless, although the contract of a surety
is in essence secondary only to a valid principal obligation, his liability to the creditor or
promisee of the principal is said to be direct, primary and absolute; (Sykes v. Everett, 167 NC
600), in other words, he is directly and equally bound with the principal. The surety therefore
becomes liable for the debt or duty of another although he possesses no direct or personal
interest over the obligations nor does he receive any benefit therefrom. (Miners Merchants
Bank v. Gidley, 150 WVa 229, 144 SE 2d 711).
3. ID.; ID.; ID.; SURETY NOT AFFECTED BY THE CHANGE IN THE RATE OF INTEREST, SUCH
BEING MERELY A COLLATERAL AGREEMENT BETWEEN THE CREDITOR AND THE PRINCIPAL
DEBTOR. As for the compounded interest, we apply by analogy the case of Bank of the
Philippine Islands v. Gooch and Redfern, (45 Phil. 514) which was affirmed in the later case
of the Bank of the Philippine Islands v. Albaladejo & Cia (53 Phil. 141). In the said cases, the
respective sureties claimed that since the creditor changed the rate of interest in the
principal obligation without their knowledge or consent, they were relieved from liability
under their contract. It was held, however, that the change in the rate of interest was merely
a collateral agreement between the creditor bank and the principal debtor that did not affect
the surety. When the debtor promised to pay the extra rate of interest on demand of the
plaintiff, the liability he assumed was his alone and was separate and apart from the original
contract. His agreement to pay the additional rate of interest was an additional burden upon
him and him only. That obligation in no way affected the original contract of the surety,
whose liability remained unchanged. (Keenes Admr. v. Miller, 103 Ky, 628; Parson on Bills
and Notes, 571, Chitty on Bills, 212; Malteson v. Ellsworth, 33 Wis 488).
4. ID.; OBLIGATIONS AND CONTRACTS; NOVATION; REQUISITES THEREOF; NOT ESTABLISHED
IN THE CASE AT BAR. The petitioner cites other supposed agreements in support of his
theory of novation such as the prepayment of the restructured loans of WMC before the
distribution of dividends to the common stockholders, the proposed sale on installments of
its assets to Negros Occidental Copperfield Mines, and the preference given to other

creditors of WMC over PISO. But we do not think these are material as, to be so, the
alteration must change the legal effects of the original contract. The alleged alterations do
not have that effect. The most important argument against the alleged novation is the
failure of the petitioner to establish the validity of the new contract, an essential requisite for
the novation of a previous valid obligation. Petitioner insists that the various
communications made by WMC with DBP, together with the memorandum of agreement
(Annexes 1 to 7), are sufficient to establish the new undertaking made by WMC with all its
creditors, including DBP. We do not think so. It is true as a general rule no form of words or
writing is necessary to give effect to a novation. (Re Dissolution of F. Yeager Bridge Culvert
Co., 150 Mich. App. 386, NW 2d 99). Nevertheless, since the parties involved here are
corporations, it must first be proved that the contracts, assuming they were made, were
executed by the persons possessing the proper authority to bind their respective principals.
Annexes 1-4 are a mere exchange of correspondence between the officers of WMC and DBP.
Although they contain the provisions and proposals that, according to petitioner, should
suffice to establish that the original contract between WMC and PISO has been materially
altered, they cannot be considered per se sufficient to give rise to a valid new obligation.
WMC was in fact directed by Joseph W. Edralin, the Assistant Executive Officer of the DBP, to
communicate with Atty. Hilario Oraolino of the Office of the Chief Legal Counsel for the
preparation and execution of the necessary legal documents to cover the approval and
confirmation of the several proposals made. No such documents, as duly signed by the
parties, were ever presented in court. Annexes 5 to 7 are also incomplete documents and
not binding without the signatures of the supposed contracting parties. We approve the
following observations made by the Court of Appeals: Novation of contract cannot be
presumed. In order that an obligation may be extinguished by another which substitutes the
same, it is imperative that it be so declared in unequivocal terms, or that the old and the
new obligations be on every point incompatible with each other (Art. 1292, Civil Code). In
every novation there are four essential requisites. (1) a previous valid obligation; (2) the
agreement of all the parties to the new contract; (3) the extinguishment of the old contract;
and (4) validity of the new one. Novation requires the creation of new contractual relations
as well as the extinguishment of the old. There must be a consent of all the parties to the
substitution, resulting in the extinction of the old obligation and the creation of a valid new
one (Tiu Siuco v. Habana, 45 Phil. 707). The acceptance of the promissory note by the
plaintiff is not novation of the contract. The legal doctrine is that an obligation to pay a sum
of money is not novated in a new instrument by changing the term of payment and adding
other obligations not incompatible with the old one (Inchausti & Co. v. Yulo, 34 Phil. 978). It
is not proper to consider an obligation novated as in the case at bar by the mere granting of
extension of payment which did not even alter its essence. To sustain novation necessitates
that the same be so declared in unequivocal terms or that there is complete and substantial
incompatibility between the two obligations (Sandico v. Paquing, 42 SCRA 322). An
obligation to pay a sum of money is not novated in a new instrument wherein the old is
ratified by changing only the terms of payment and adding other obligations not
incompatible with the old one or wherein the old contract is merely supplementing the new
one (Dungo v. Lopea, L-19377, Dec. 29, 1962, 6 SCRA 1007; Magdalena Estates, Inc. v.
Rodriguez, 18 SCRA 967; Rizal Commercial Banking Corp. v. Militante, AC GR CV 04077,
Sept. 20, 1985; Investors Finance Corp. v. Cruz, AC GR CV 04710, Nov. 27, 1985).
5. COMMERCIAL LAW; CORPORATIONS; LIMITED LIABILITY DOCTRINE; MAY BE WAIVED WHEN
THE CORPORATE OFFICER VOLUNTARILY BINDS HIMSELF TO ANSWER FOR CORPORATE
DEBTS. Regarding the petitioners claim that he is liable only as a corporate officer of
WMC, the surety agreement shows that he signed the same not in representation of WMC or
as its president but in his personal capacity. He is therefore personally bound. There is no
law that prohibits a corporate officer from binding himself personally to answer for a
corporate debt. While the limited liability doctrine is intended to protect the stockholder by
immunizing him from personal liability for the corporate debts, he may nevertheless divest
himself of this protection by voluntarily binding himself to the payment of the corporate

debts. The petitioner cannot therefore take refuge in this doctrine that he has by his own
acts effectively waived.
6. ID.; ID.; CREDITORS MUST BE PAID FIRST BEFORE DISTRIBUTION OF DIVIDENDS AMONG
STOCKHOLDERS; UNSECURED CREDITORS, GIVEN PREFERENCE IN BANKRUPTCY OR
INSOLVENCY PROCEEDINGS. It is axiomatic, and only fair, that the creditors of a
corporation must be paid first before dividends may be distributed among the stockholders.
Unsecured creditors are given preference in bankruptcy or insolvency proceedings because
secured creditors can after all go against the security given by the debtor. As for the
installment sale of WMCs assets to Negros Occidental Copperfield Mines, which might make
it difficult for the petitioner to recover any amount it may have to pay on the loan of WMC,
this was a risk he took when he signed the surety agreement. As it did not prohibit the
alienation of the properties of the principal debtor, the sale to Negros cannot be considered
a novation of the original agreement. In fact, the proposed sale was intended precisely to
enable WMC to meet its pending obligations.
7. REMEDIAL LAW; ISSUE NOT RAISED IN THE COURT A QUO CANNOT BE RAISED FOR THE
FIRST TIME ON APPEAL. The argument of subrogation cannot be considered at this stage
as it is being invoked only now. It is settled that an issue not raised in the court a quo cannot
be raised for the first time on appeal because this would be offensive to the basic rules of
fair play. (Filipino Merchants v. Court of Appeals, G.R. No. 85141, November 28, 1989; Ramos
v. IAC, 175 SCRA 70).
DECISION
CRUZ, J.:
On April 15, 1977, the Western Minolco Corporation (WMC) obtained from the Philippine
Investments Systems Organization (PISO) two loans for P2,500,000.00 and P1,000,000.00 for
which it issued the corresponding promissory notes payable on May 30, 1977. On the same
date, Antonio Garcia and Ernest Kahn executed a surety agreement binding themselves
jointly and severally for the payment of the loan of P2,500,000.00 on due date.
Upon failure of WMC to pay after repeated demands, demand was made on Garcia pursuant
to the surety agreement. Garcia also failed to pay. Hence, on April 5, 1983, Lasal
Development Corporation (to which the credit had been assigned earlier by PISO) sued
Garcia for recovery of the debt in the Regional Trial Court of Makati.
On May 18, 1983, Garcia moved to dismiss on the grounds that: (a) the complaint stated no
cause of action; (b) the suit would result in unjust enrichment of the plaintiff because he had
not received any consideration from PISO; (c) the surety agreement violated the doctrine of
the limited liability of corporations; and (d) the principal obligation had been novated.
After considering the arguments and evidence of the parties, the trial court granted the
motion and dismissed the complaint on the ground that the surety agreement was invalid for
absence of consideration.
The plaintiff moved for reconsideration and when this was denied elevated the matter to the
Court of Appeals. In a decision dated June 23, 1987, the respondent court reversed Judge
Jesus M. Elbinias and remanded the records of the case for trial on the merits. Garcia then
came to this Court in this petition for review on certiorari, pleading the same arguments
raised in the trial court.chanrobles.com:cralaw:red

The petitioners first ground is that, as found by the trial court, the surety agreement was
invalid because no consideration had been paid to him by PISO for executing the contract
and that the amount of the entire loan had been received and enjoyed by WMC. He cites the
following articles of the Civil Code in support of his contention that lack of consideration was
a personal defense available to him as surety:chanrob1es virtual 1aw library
Art. 2047. By guaranty a person, called the guarantor, binds himself to the creditor to fulfill
the obligation of the principal debtor in case the latter should fail to do so.
If a person binds himself solidarily with the principal debtor, the provisions of Section 4,
Chapter 3, Title I of this Book shall be observed. In such case the contract is called a
suretyship.
Art. 1222. A solidary debtor may, in action filed by the creditor, avail himself of all defenses
which are derived from the nature of the obligation and of those which are personal to him,
or pertain to his own share. With respect to those which personally belong to the others, he
may avail himself thereof only as regards that part of the debt for which the latter are
responsible.
The point is not well taken in view of the nature and purpose of a surety
agreement.chanrobles virtualawlibrary chanrobles.com:chanrobles.com.ph
Suretyship is a contractual relation resulting from an agreement whereby one person, the
surety, engages to be answerable for the debt, default or miscarriage of another, known as
the principal. The suretys obligation is not an original and direct one for the performance of
his own act, but merely accessory or collateral to the obligation contracted by the principal.
Nevertheless, although the contract of a surety is in essence secondary only to a valid
principal obligation, his liability to the creditor or promisee of the principal is said to be
direct, primary and absolute; 1 in other words, he is directly and equally bound with the
principal. The surety therefore becomes liable for the debt or duty of another although he
possesses no direct or personal interest over the obligations nor does he receive any benefit
therefrom. 2
The peculiar nature of a surety agreement is that it is regarded as valid despite the absence
of any direct consideration received by the surety either from the principal obligor or from
the creditor. A contract of surety, like any other contract, must generally be supported by a
sufficient consideration. However, the consideration necessary to support a surety obligation
need not pass directly to the surety; a consideration moving to the principal alone will
suffice.
It has been held that if the delivery of the original contract is contemporaneous with the
delivery of the suretys obligation, each contract becomes completed at the same time, and
the consideration which supports the principal contract likewise supports the subsidiary one.
3 And this is the kind of surety contract to which the rule of strict construction applies as
opposed to a compensated surety contract undertaken by surety corporations which are
organized for the purpose of conducting an indemnity business at established rates and
compensation unlike an ordinary surety agreement where the surety binds his name through
motives of friendship and accomodation. 4
It follows from the above principles that Lasal would not be unjustly enriched if the petitioner
were to be held liable for the obligation contracted by WMC. The creditor would only be
recovering the amount of its loan plus its increments. The petitioner, for his part, can still go
against WMC for the amount he may have to pay Lasal as assignee of the PISO credit.

Regarding the petitioners claim that he is liable only as a corporate officer of WMC, the
surety agreement shows that he signed the same not in representation of WMC or as its
president but in his personal capacity. He is therefore personally bound. There is no law that
prohibits a corporate officer from binding himself personally to answer for a corporate debt.
While the limited liability doctrine is intended to protect the stockholder by immunizing him
from personal liability for the corporate debts, he may nevertheless divest himself of this
protection by voluntarily binding himself to the payment of the corporate debts. The
petitioner cannot therefore take refuge in this doctrine that he has by his own acts
effectively waived.cralawnad
Concerning the issue of novation, we note first the following provisions of the memorandum
of agreement supposedly entered into by WMC and its creditors which the petitioner argues
had the effect of releasing him from the surety agreement:chanrob1es virtual 1aw library
IV. Release of JSS
The CREDITORS expressly agree to release and hereby release the Joint and Several
Signatories (JSS) of MINOLCOs officers from any liability whatsoever on the obligations
which they have personally guaranteed or secured. Any action therefore against all the
aforesaid signatories are waived in view of the promissory notes to be issued by NDC which
are fully and unconditionally guaranteed by the Philippine Government, in payment of
MINOLCOs obligations to said CREDITORS.
x

VI. The CREDITORS who have filed cases in court against MINOLCO and who are signatories
to this agreement agree to dismiss the case with prejudice, accepting the repayment
scheme set forth in paragraph II as a just and equitable procedure for collecting their credits.
Significantly, however, the agreement (Annex 5) was signed only by Don M. Ferry as
chairman of the board of directors of WMC and does not carry the signature of any of the
creditors. 5 Hence, it has no binding force whatsoever on such creditors.
The petitioner cites other developments or transactions between the parties to the original
loans that he contends had the effect of novating the said contracts and consequently
extinguished the surety agreement. Among these are the extension of the original period of
payment and the compounding of the interest on the principal obligations, both of which
operated to the prejudice of the petitioner.
The petitioner invokes Article 2079 of the Civil Code, which provides:chanrob1es virtual 1aw
library
Art. 2079. An extension granted to the debtor by the creditor without the consent of the
guarantor extinguishes the guaranty. The mere failure on the part of the creditor to demand
payment after the debt has become due does not of itself constitute any extension of time
referred to herein.
However, Paragraph 5 of the surety agreement clearly stipulated as follows:chanrobles
virtual lawlibrary
The sureties expressly waive all rights to demand payment and notice of non-payment and
protest, and agree that the securities of every kind, that now or may hereafter be left with
the lender, its successors, indorsees or assigns, as collateral, for the said loan, or any
evidence of debt or obligations, or upon which a lien may exist may be withdrawn or

surrendered at any time, and the time of payment thereof extended, without notice to or
consent by the sureties, and the liability on this suretyship shall be solidary, direct and
immediate and not contingent upon any pursuit by the lender, its successors, indorsees or
assigns, of whatever remedies the lender may have against the principal or the securities or
liens it may possess. (Emphasis supplied.)
Since in the surety contract, the petitioner not only consented to an extension in the
payment of the obligation but even waived his right to be notified of such extension, he
cannot now claim that he has been released from his undertaking because of the extension
granted to the principal.chanrobles.com : virtual law library
As for the compounded interest, we apply by analogy the case of Bank of the Philippine
Islands v. Gooch and Redfern, 6 which was affirmed in the later case of the Bank of the
Philippine Islands v. Albaladejo & Cia. 7 In the said cases, the respective sureties claimed
that since the creditor changed the rate of interest in the principal obligation without their
knowledge or consent, they were relieved from liability under their contract. It was held,
however, that the change in the rate of interest was merely a collateral agreement between
the creditor bank and the principal debtor that did not affect the surety. When the debtor
promised to pay the extra rate of interest on demand of the plaintiff, the liability he assumed
was his alone and was separate and apart from the original contract. His agreement to pay
the additional rate of interest was an additional burden upon him and him only. That
obligation in no way affected the original contract of the surety, whose liability remained
unchanged. 8
Thus, despite the compounding of the interest, the liability of the surety remains only up to
the original uncompounded interest, as stipulated in the promissory note, that is, 17% per
annum, with a penalty charge of 2 1/2% per month until full payment.
The petitioner cites other supposed agreements in support of his theory of novation such as
the prepayment of the restructured loans of WMC before the distribution of dividends to the
common stockholders, the proposed sale on installments of its assets to Negros Occidental
Copperfield Mines, and the preference given to other creditors of WMC over PISO. But we do
not think these are material as, to be so, the alteration must change the legal effects of the
original contract. The alleged alterations do not have that effect.chanrobles virtualawlibrary
chanrobles.com:chanrobles.com.ph
It is axiomatic, and only fair, that the creditors of a corporation must be paid first before
dividends may be distributed among the stockholders. Unsecured creditors are given
preference in bankruptcy or insolvency proceedings because secured creditors can after all
go against the security given by the debtor. As for the installment sale of WMCs assets to
Negros Occidental Copperfield Mines, which might make it difficult for the petitioner to
recover any amount it may have to pay on the loan of WMC, this was a risk he took when he
signed the surety agreement. As it did not prohibit the alienation of the properties of the
principal debtor, the sale to Negros cannot be considered a novation of the original
agreement. In fact, the proposed sale was intended precisely to enable WMC to meet its
pending obligations.
The most important argument against the alleged novation is the failure of the petitioner to
establish the validity of the new contract, an essential requisite for the novation of a
previous valid obligation. Petitioner insists that the various communications made by WMC
with DBP, together with the memorandum of agreement (Annexes 1 to 7), are sufficient to
establish the new undertaking made by WMC with all its creditors, including DBP. We do not
think so.
It is true as a general rule no form of words or writing is necessary to give effect to a

novation. 9 Nevertheless, since the parties involved here are corporations, it must first be
proved that the contracts, assuming they were made, were executed by the persons
possessing the proper authority to bind their respective principals. Annexes 1-4 are a mere
exchange of correspondence between the officers of WMC and DBP. Although they contain
the provisions and proposals that, according to petitioner, should suffice to establish that the
original contract between WMC and PISO has been materially altered, they cannot be
considered per se sufficient to give rise to a valid new obligation. WMC was in fact directed
by Joseph W. Edralin, the Assistant Executive Officer of the DBP, to communicate with Atty.
Hilario Oraolino of the Office of the Chief Legal Counsel for the preparation and execution of
the necessary legal documents to cover the approval and confirmation of the several
proposals made. No such documents, as duly signed by the parties, were ever presented in
court. Annexes 5 to 7 10 are also incomplete documents and not binding without the
signatures of the supposed contracting parties.chanrobles.com.ph : virtual law library
The argument of subrogation cannot be considered at this stage as it is being invoked only
now. It is settled that an issue not raised in the court a quo cannot be raised for the first time
on appeal because this would be offensive to the basic rules of fair play. 11
As for the alleged substitution of debtors, nowhere in the record can we find evidence of this
claim. The commitment made by DBP to the creditors of WMC was that, although they had a
first mortgage lien over substantially all the assets of WMC (which if foreclosed would leave
most of its creditors without recourse), they would nevertheless defer proceedings against
those assets and instead allow their sale to NDC (with better terms) to enable WMC to meet
the obligations. 12 In effect, what DBP did was merely to restructure its credit with WMC and
make additional accommodations in the form of investments on preferred and common
shares of stock of WMC. It was clearly an effort to assist WMC perform its obligations with its
creditors. But not more than that.
Concerning the promissory notes supposedly issued by NDC to the creditors of WMC and
with the full and unconditional guaranty of the Philippine Government as contained in Annex
5, suffice it to repeat that such Annex 5 (memorandum of agreement between WMC and
DBP), as well as Annex 6 (addendum to Annex 5, making NOCOMIN, instead of NDC as the
buyer) and Annex 7 (contract of sale between WMC and NOCOMIN), are all not signed by the
contracting parties and therefore have no evidentiary weight or binding force.cralawnad
We approve the following observations made by the Court of Appeals:chanrob1es virtual
1aw library
Novation of contract cannot be presumed. In order that an obligation may be extinguished
by another which substitutes the same, it is imperative that it be so declared in unequivocal
terms, or that the old and the new obligations be on every point incompatible with each
other (Art. 1292, Civil Code). In every novation there are four essential requisites. (1) a
previous valid obligation; (2) the agreement of all the parties to the new contract; (3) the
extinguishment of the old contract; and (4) validity of the new one. Novation requires the
creation of new contractual relations as well as the extinguishment of the old. There must be
a consent of all the parties to the substitution, resulting in the extinction of the old obligation
and the creation of a valid new one (Tiu Siuco v. Habana, 45 Phil. 707). The acceptance of
the promissory note by the plaintiff is not novation of the contract. The legal doctrine is that
an obligation to pay a sum of money is not novated in a new instrument by changing the
term of payment and adding other obligations not incompatible with the old one (Inchausti &
Co. v. Yulo, 34 Phil. 978). It is not proper to consider an obligation novated as in the case at
bar by the mere granting of extension of payment which did not even alter its essence. To
sustain novation necessitates that the same be so declared in unequivocal terms or that
there is complete and substantial incompatibility between the two obligations (Sandico v.
Paquing, 42 SCRA 322). An obligation to pay a sum of money is not novated in a new

instrument wherein the old is ratified by changing only the terms of payment and adding
other obligations not incompatible with the old one or wherein the old contract is merely
supplementing the new one (Dungo v. Lopea, L-19377, Dec. 29, 1962, 6 SCRA 1007;
Magdalena Estates, Inc. v. Rodriguez, 18 SCRA 967; Rizal Commercial Banking Corp. v.
Militante, AC GR CV 04077, Sept. 20, 1985; Investors Finance Corp. v. Cruz, AC GR CV 04710,
Nov. 27, 1985).chanrobles.com : virtual law library
WHEREFORE, the petition is DENIED and the challenged decision of the respondent court
AFFIRMED, with costs against the petitioner.
SO ORDERED.
EN BANC
[G.R. No. L-8669. May 25, 1956.]
VICENTA REYES, ET AL., Petitioners, vs. GUARDALINO C. MOSQUEDA and THE
COURT OF APPEALS, Respondents.
DECISION
MONTEMAYOR, J.:
On February 18, 1949, Guardalino C. Mosqueda sold to Jose Marquez Lim his parcel of land in
the City of Iloilo, containing 9,460 square meters, covered by Transfer Certificate of Title No.
T-2794 issued by the Register of Deeds of the province of Iloilo, for the sum of P65,605.
Claiming that Mosqueda had previously contracted her services to sell the same land with a
commission of 5 per cent on the sales price, and that thru her efforts she could bring
together Mosqueda and Lim who finally agreed upon and consummated the sale of the land,
and because Mosqueda refused to pay her commission of 5 per cent she commenced this
action in the Court of First Instance of Iloilo to recover from Mosqueda the sum of P3,280.25
representing 5 per cent of the sales price with interest from the date of the filing of the
complaint. After hearing, the trial court rendered judgment in her favor
ordering Defendant Mosqueda to pay to her P3,280.25 with interest of 6 per cent from March
7, 1949, with costs. On appeal to the Court of Appeals, said Tribunal reversed the appealed
decision and dismissed the complaint without costs. Plaintif Reyes is now petitioning for the
revision of said decision of the Court of Appeals.
The Court of Appeals thru Justice Dionisio de Leon states the position taken and the
evidence presented by both parties in support of their respective claims as
follows:chanroblesvirtuallawlibrary
Plaintif Vicente Reyes alleges that on February 16, 1949, she was contracted
by DefendantGuardalino Mosqueda to sell the land of the latter, with an area of 9,460 square
meters, situated in Iloilo City, and covered by transfer certificate of title No. 2794, for the
sum of P7.50 per square meter, at a commission of 5 per cent on the total purchase price
(Exhibits A and D). She offered the sale of the land to Jose Marquez Lim who, after an ocular
inspection of the premises, said that the price of P7.50 per square meter was high as the
land was covered with water, but he was willing to buy the land for a lower price. Reyes
went back to Mosqueda and informed him about what her buyer had told her about the land.
Mosqueda reduced the price to P7.30 per square meter. On this occasion, Reyes told
Mosqueda that inasmuch as the purchase price has already been settled, she was now free
to disclose, as she did that her buyer was Jose Marquez Lim who would see Mosqueda
personally about the consummation of the sale.
Appellant Mosqueda said that on February 16, 1949, he went to see Jose Marquez Lim,
Manager of the Philippine-American Insurance Co. in Iloilo City, about a loan offering his land

covered by transfer certificate of title 2794 as security, as he was in urgent need of money
to pay his debt with a bank which was due on February 18, 1949. Lim informed Mosqueda
that only the Manila office of the Company could grant loans. Lim, however, offered to buy
Mosquedas land as it adjoined his own land. Mosqueda replied that he was willing to sell his
land to him at P8 per square meter. Lim asked for time to think it over as Mosquedas price
was high. Anxious to buy the land, Lim requested Vicente Reyes, who, together with her
husband, were employees in his office, to approach Mosqueda on his behalf and exact from
him the last price he could offer for his land. Reyes went to see Dr. Mosqueda and told him
that she had a buyer for his land without divulging the identity of her said buyer, resulting in
the execution of Exhibits A and D. Also on that same day, Vicenta Reyes informed Lim that
the price on Mosqueda was now P7.50 per square meter. Lim still considered this as high, so
that he again sent Vicenta Reyes to ask for a lower price from Mosqueda. Mosqueda reduced
it to P7.30. Reyes told Lim about Mosquedas last quotation. Apparently, Lim was still not
agreeable to the price of P7.30 per square meter, so that he told Vicenta Reyes to desist
from further contracting Mosqueda on his behalf as he, himself, would deal directly with
Mosqueda as he had initially done earlier on the same day. Lim offered to pay P500 to Reyes
for her efforts, but the latter demanded P1,000, after which she left Lims office evidently in
an angry mood. Reyes went back to Mosqueda and told him that her buyer was not willing to
buy his land at P7.30 per square meter, and that she would not sell any more the land
because of the disagreement between her and her buyer, whom she disclosed for the first
time to be Jose Marquez Lim. Mosqueda wanted to withdraw the authority which he had
given Vicenta Reyes, but the latter pleaded that she be given until the afternoon of the
following days, February 17, within which to find another buyer. The following day, due to
the failure of Reyes to find another buyer for his land, Mosqueda informed Reyes that he was
definitely canceling her authority to find a buyer for his land. The following day, February 18,
Lim went personally to the clinic of Dr. Mosqueda, resulting in the execution of the deed of
sale (Exhibit 1 or F).
Then said Court makes the following findings or observations:chanroblesvirtuallawlibrary
We have gone carefully over the evidence of record, and we have arrived at the conclusion
that the same fairly preponderates in favor of the Appellant. Jose Marquez Lim and Alejandro
Santiago companion of the Appellant when the latter went to see Lim about a loan,
corroborated the claim of the Appellant that Lim had offered to buy the Appellants land.
Vicenta Reyes did not testify how she came to learn that Mosqueda was looking for a buyer
of his land. Perhaps, when she was requested by him to intercede in his behalf with respect
to the sale of Mosquedas land, Vicenta Reyes grabbed this opportunity to make spare
money as a sideline. It must also be noted that while Reyes said Lim was willing to buy the
land for a price less than P7.50 per square meter, she did not testify that Lim was willing to
buy the property for P7.30, or that Lim authorized her to close the deal with Mosqueda at
any price lower than P7.50 per square meter.
There is no dispute that the Appellee was contracted by the Appellant to find a buyer for his
land, with a commission of 5 per cent. Mosqueda reduced his original price of P8 to P7.80
per square meter through the intervention of Vicenta Reyes. The question, however, is
whether it was also through the efforts of the Appellee that the sale (Exhibit 1 or F) was
finally effected at the price of P65,605, or less than P7 per square meter, on February 18,
1949.
Vicente Reyes was hired as a broker, not as commercial agent cralaw . At the time the
contract of sale (Exhibit 1 or F) was signed by the parties on February 18, 1949, the
authority of Reyes as a broker for Mosqueda has already been withdrawn by the
latter cralaw At the time the authority of the Appelleewas withdrawn, there was still no
meeting of the minds between Mosqueda and Lim with respect to the price and terms of the
sale. Again, the land was sold at price and terms arrived at by the contracting parties
without the Appellees intervention and Lim bought the property independently of the efforts
of Reyes. Vicenta Reyes was told by Lim to leave him alone in the transaction. We have

every reason to believe Lims testimony as this action for recovery of a sum of money is not
directed against him, and he has nothing to lose or gain by telling the truth.
Accepting, as we have to, the findings of the Court of Appeals, we find its judgment of
reversal to be supported by the facts and the law. If as found by the Court of
Appeals Plaintif Reyes was engaged only as a broker, then in order to earn her commission,
it was not sufficient for her to find a prospective buyer but to find one who will actually buy
the property on the terms and conditions imposed by the owner. In the case of Danon vs.
Brimo & Co., 42 Phil., 133, we said:chanroblesvirtuallawlibrary
The broker must be the efficient agent or the procuring cause of the sale. The means
employed by him and his efforts must result in the sale. He must find the purchaser, and the
sale must proceed from his efforts acting as a broker. (Cases cited.)
Besides, according to the findings of the Court of Appeals, the actual sale was perfected and
consummated without the intervention of Plaintif Reyes, and what is more, before that, her
authority to sell the property had been withdrawn, at a time when there was still no meeting
of the minds of buyer and seller.
We realize that there are times when the owner of a property for sale may not legally cancel
or revoke the authority given by him to a broker when the negotiations through the brokers
efforts have reached such a stage that it would be unfair to deny the commission earned,
especially when the property owner acts in bad faith and cancels the authority only to evade
the payment of said commission. Such was our holding in the same case of Danon vs. Brimo
& Co., supra:chanroblesvirtuallawlibrary
cralaw the right of the principal to terminate his authority is absolute and unrestricted,
except only that he may not do it in bad faith, and as a mere device to escape the payment
of the brokers commissions. Thus, if in the midst of negotiations instituted by the broker,
and which were plainly and evidently approaching success, the seller should revoke the
authority of the broker, with the view of concluding the bargain without his aid, and avoiding
the payment of commission about to be earned, it might be well said that the due
performance of his obligation by the broker was purposely prevented by the principal. But if
the latter acts in good faith, not seeking to escape the payment of commissions, but moved
fairly by a view of his own interest, he has the absolute right before a bargain is made while
negotiations remain unsuccessful, before commissions are earned, to revoke the brokers
authority, and the latter cannot thereafter claim compensation for a sale made by the
principal even though it be to a customer with whom the broker unsuccessfully negotiated,
and even though, to some extent, the seller might justly be said to have availed himself of
the fruits of the brokers labor. (Danon vs. Brimo, 42 Phil., 133, 141-142, citing Sibbald vs.
Bethlehem Iron Co., 83 N.Y. 378, 38 Am. Rep. 441, 444-446.)
In the present case, there is nothing to show that bad faith was involved in the cancellation
of the authority of Plaintif Reyes before the consummation of the sale. Not only this, but the
actuations of Plaintif Reyes are not entirely above suspicion. As observed by the Court of
Appeals she did not explain how she came to know that Defendant Mosqueda was interested
in selling his land and was looking for a buyer thereof. It is highly possible that after Reyes
was commissioned by her employer Lim to approached Mosqueda with a view to reducing
the price of P8 per square meter, it was then and only then that Reyes came to know about
the desire of Mosqueda to sell his land to cover his obligations with the bank inasmuch as he
failed to secure a loan from the Insurance Company, and as said by the Court of Appeals
cralaw Perhaps, when she was requested by Lim to intercede in his behalf with respect to
the sale of Mosquedas land, Vicenta Reyes grabbed this opportunity to make spare money
as a sideline.
In view of the foregoing, the decision of the Court of Appeals appealed from is hereby
affirmed, with costs in both instances.

Paras, C.J., Bengzon, Reyes, A., Jugo, Bautista Angelo, Labrador, Concepcion,
Reyes, J.B.L., and Endencia, JJ., concur.
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-9353

May 21, 1957

MANILA SURETY AND FIDELITY, INC., plaintiff-appellant,

vs.
BATU CONSTRUCTION AND COMPANY, CARLOS N. BAQUIRAN, GONZALO P. AMBOY
and ANDRES TUNAC, defendants-appellees.
De Santos and Herrera for appellant.
Bienvenido C. Castro and Ruiz, Ruiz, Ruiz and Ruiz for appellees.
PADILLA, J.:
In a complaint filed in the Court of First Instance of Manila, the plaintiff, a domestic
corporation engaged in the bonding business, hereafter called the company, alleges that the
Batu Construction & Company, a partnership the members of which are the other three
defendants, requested it to post, as it did, 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 PR-72 (3), in Ilocos Norte, undertaken by the partnership, as
stipulated in a construction on contract entered into on 11 July 1950 by and between the
partnership and the Government of the Philippines, on condition that the defendants would
"indemnify the COMPANY for any damage, loss, costs, or 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; said attorney's fees shall not be less than fifteen (15%) per cent of the total amount
claimed in any action which the COMPANY may institute against the undersigned (the
defendants except Andres Tunac) in Court," and that "Said indemnity shall be paid to the
COMPANY as soon as it has become liable for the payment of any amount, under the abovementioned bond, whether or not it shall have paid such sum or sums of money, or any part
thereof," as stipulated in a contract executed on 8 July 1950 (Exhibit B); that on 30 May
1951 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 (Exhibit D); that on 19 December
1951 (should be 23 November 1951), 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 (Exhibit E); that the defendants
are in imminent danger of becoming insolvent, and are removing and disposing, or about to
remove and dispose, of their properties with intent to defraud their creditors, particularly the
plaintiff Company; and that the latter has no other sufficient security to protect its rights
against the defendants. Upon these allegations, the plaintiff prays that, upon the approval of

a bond and on the strength of the allegations of the verified complaint, a writ 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 the 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." Attached to the complaint are a verification and affidavit of attachment; and
copies of the surety bond marked Annex A; of the indemnity contract marked Annex B; and
of the letter of the Acting Director of Public Works to the plaintiff dated 30 May 1951, marked
Annex C.
Andres Tunac admits in his answer the allegations in paragraphs 1, 2, 3 and 4 of the
complaint, but denies the allegations in paragraphs 5, 6, 7, 8 and 9 of the complaint,
because he has never promised to put up an indemnity bond in favor of the plaintiff nor has
he ever entered into any indemnity agreement with it; because the partnership or the Batu
Construction & Company was fulfilling its obligations in accordance with the terms of the
construction contract; because the Republic of the Philippines, through the Director of Public,
Works, had no authority to annul the contract at its own initiative; because the Justice of the
Peace court of Laoag, Ilocos Norte had no jurisdiction to hear and decide a case for collection
of P5,960.10; and because the defendants were not in imminent danger of insolvency,
neither did they remove or dispose of their properties with intent to defraud their creditors.
By way of affirmative defenses, he alleges that the signing by Carlos N. Baquiran of the
indemnity agreement for and in behalf of the partnership Batu Construction & Company did
not bind the latter to the plaintiff and as the partnership is not bound, he (Andres Tunac), as
a member thereof, is also not bound; that he not being a party to the said agreement, the
plaintiff has no cause of action against him; that in the event the partnership is bound by the
indemnity agreement he invokes his right of exhaustion of the property of the partnership
before the plaintiff may proceed against his property. And as a counterclaim he alleges that
the plaintiff brought the action against him maliciously and in bad faith for the purpose of
annoying him and damaging his professional reputation, he having a flourishing and
successful practice as engineer in Ilocos Norte, thereby compelling him to defend himself;
that to secure the issuance of a writ of attachment the plaintiff made false representations;
and that the issuance of the writ upon such false representations of the plaintiff caused him
damages in the sum of P10,000 including expenses of litigation and attorney's fees. Upon
the foregoing he prays that the complaint be dismissed as to him and the defendant Batu
Construction & Company, with costs against the plaintiff; that the latter be ordered to pay
him the sum of P10,000; and that he be granted such other remedies as may be just,
equitable and proper.
Gonzalo P. Amboy denies in his answer the allegations of the complaint, except those that
may be deemed admitted in the special defenses, and alleges that he is not in imminent
danger of insolvency and is not removing and disposing or about to remove and dispose of
his properties, because he has no property; that has been no liquidation of the expenses
incurred in the construction of the Bacarra Bridge, Project PR-72(3) to determine whether
there would be a balance of the contract price which may be applied to pay the claim for
unpaid wages of Ricardo Fernandez et al. sought to be collected in civil case No. 198 of the
Justice of the Peace Court of Laoag, Ilocos Norte, and not until after such liquidation shall
have been made could his liability and that of his co-defendants be determined and fixed;
that if after proper liquidation's there be a deficit of the contract price the defendants are
willing to pay the claim for unpaid wages of Ricardo Fernandez et al. Upon these allegations
he prays that the issuance of the writ of attachment prayed for by the plaintiff be held in

abeyance until after civil case No. 198 of the Justice of the Peace Court of Laoag, Ilocos
Norte, shall have been disposed of.
Carlos N. Baquiran admits in his answer the allegations in paragraphs 1, 2, 3,4, 5, 6, and 11
of the complaint but alleges that he has no sufficient knowledge to form a belief as to the
truth of the claim of Ricardo Fernandez et al. set forth in paragraph 7 of the complaint, for
there has never been a liquidation between the defendants and the Bureau of Public Works.
He further denies specifically paragraphs 8, 9 and 10 of the complaint. By way of special
defenses he alleges that there has been no liquidation by and between the defendants and
the Bureau of Public Works on Project PR-72(3) to determine whether the total amount spent
for the construction of the bridge exceeded the contract price; that after the determination
of the respective liabilities of the parties in civil case No. 198 of the Justice of the Peace
Court of Laoag, Ilocos Norte, if any there be against the defendants herein, and such liability
could not be paid out of the balance of the contract price of Project PR-72(3), the defendants
are ready and willing to assume their respective responsibilities. Upon these allegations he
prays that the complaint of the plaintiff be dismissed; that the issuance of the writ of
attachment prayed for be denied; and that he be granted such other relief as may be just
and equitable, with costs against the plaintiff.
At the hearing, the plaintiff presented its evidence. After the plaintiff had rested its case,
defendant Gonzalo P. Amboy moved for the dismissal of the complaint, on the ground that
the remedy provided for in the last paragraph of article 2071 of the new Civil Code may be
availed of by the guarantor only and not by a surety.
Acting upon this motion to dismiss the trial court made the following findings:
. . . That on July 8, 1950, the defendant Batu Construction & Company, as principal,
and the plaintiff Manila Surety & Fidelity Co. Inc., as surety, executed a surety bond
for the sum of P8,812.00 to insure faithful performance of the former's obligation as
contractor for the construction of the Bacarra Bridge, Project PR-72 (No. 3) Ilocos
Norte Province. On the same date, July 8,1950, the Batu Construction & Company
and the defendants Carlos N. Baquiran and Gonzales P. Amboy executed an
indemnity agreement to protect the Manila Surety & Fidelity Co. Inc.., against
damage, loss or expenses which it may sustain as a consequence of the surety bond
executed by it jointly with Batu Construction & Company.
On or about May 30, 1951, the plaintiff received a notice from the Director of Public
Works (Exhibit B) annulling its contract with the Government for the construction of
the Bacarra Bridge because of its failure to make satisfactory progress in the
execution of the works, with the warning that ,any amount spent by the Government
in the continuation of the work, in excess of the contract price, will be charged
against the surety bond furnished by the plaintiff. It also appears that a complaint by
the laborers in said project of the Batu Construction & Company was filed against it
and the Manila Surety and Fidelity Co., Inc., for unpaid wages amounting to
P5,960.10.
and, being of the opinion that the provisions of article 2071 of the new Civil Code may be
availed of by a guarantor only and not by a surety the complaint, with costs against the
plaintiff.

From this order the plaintiff Company has appealed to this Court, because it proposes to
raise only a question of law.
After the order dismissing the complaint had been entered, on 16 and 20 July 1953, the
defendants Gonzalo P. Amboy and Andres Tunac moved for leave to prove damages they
allegedly suffered as a result of the attachment levied upon their properties. On 15 August
1953 the Court heard the evidence on damages. On 23 September 1953 the Court found
and held that the defendant Gonzalo P. Amboy is entitled to recover from the plaintiff
damages equivalent to 6 per cent interest per annum on the sum of P35 in possession of the
Provincial Treasurer of Ilocos Norte, which was garnished pursuant to the writ of attachment,
from the date of garnishment until its charge; but the claims for damages of Andres Tunac
and Gonzalo P. Amboy allegedly suffered by them in their business, moral damages and
attorney's fees were without basis in law and in fact. Hence their recovery was denied. The
Court dissolved the writ of attachment. From this last order only the plaintiff Company has
appealed.
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.
A guarantor is the insurer of the solvency of the debtor; a surety is an insurer of the debt. A
guarantor binds himself to pay if the principal is unable to pay; a surety undertakes to pay if
the principal does not pay.1 The reason which could be invoked for the non-availability to a
surety of the provisions of the last paragraph of article 2071 of the new Civil Code would be
the fact that guaranty like commodatum2 is gratuitous. But guaranty could also be for a
price or consideration as provided for in article 2048. So, even if there should be a
consideration or price paid to a guarantor for him to insure the performance of an obligation
by the principal debtor, the provisions of article 2071 would still be available to the
guarantor. In suretyship the surety becomes liable to the creditor without the benefit of the
principal debtor's exclusion of his properties, for he (the surety) maybe sued independently.
So, he is an insurer of the debt and as such he has assumed or undertaken a responsibility
or obligation greater or more onerous than that of guarantor. Such being the case, the
provisions of article 2071, under guaranty, are applicable and available to a surety. The
reference in article 2047 to, the provisions of Section 4, Chapter 3, Title 1, Book IV of the
new Civil Code, on solidary or several obligations, does not mean that suretyship which is a
solidary obligation is withdrawn from the applicable provisions governing guaranty.
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 in the Justice of
the Peace Court of Laoag, province of Ilocos Norte, for the collection of unpaid wages
amounting to P5,960.10, 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. It does not provide
that the guarantor be sued by the creditor for the payment of the debt. It simply provides
that the guarantor of surety be sued for the payment of an amount for which the surety
bond was put up to secure the fulfillment of the obligation undertaken by the principal
debtor. 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 wages earned in
connection with the work done by them in the construction of the Bacarra Bridge, Project PR72(3), is 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.
The order appealed from dismissing the complaint is reversed and set aside, and the case
remanded to the court below for determination of the amount of security that would protect
the plaintiff Company from any proceedings by the creditor or from the danger of insolvency
of the defendants, the principal debtors, and direction to the defendants to put up such
amount of security as may be established by competent evidence, without pronouncement
as to costs.
The writ of attachment having been issued improvidently because, although there is an
allegation in the verified complaint that the defendants were in imminent danger of
insolvency and that they were removing or disposing, or about to remove or dispose, of their
properties, with intent to defraud their creditors, particularly the plaintiff Company, still such
allegation was not proved, the fact that a complaint had been filed against the defendants
and the plaintiff Company in the Justice of the Peace Court of Laoag, Ilocos Norte, for the
collection of an amount for unpaid wages of the plaintiffs therein who claimed to have
worked in the construction of the bridge, being insufficient to prove it, and because the relief
prayed for in the complaint for security that shall protect it from any proceedings by the
creditor and from the danger of the defendants becoming insolvent is inconsistent with the
state of insolvency of the defendants or their being in imminent danger of insolvency, the
order awarding 6 per cent on the sum of P35 in possession of the Provincial Treasurer owned
by the defendant Gonzalo P. Amboy garnished by virtue of the writ of attachment, from the
date of the garnishment until its discharge, and denying recovery of the amounts of
damages claimed to have been suffered by the defendants, is affirmed, the defendants not
having appealed therefrom.
Bengzon, Montemayor, Reyes, A., Bautista Angelo, Labrador, Concepcion, Reyes, J.B.L.,
Endencia and Felix, JJ.,concur.

AUTOCORP vs. ISAC

OCTOBER 20, 2011 ~ VBDIAZ
AUTOCORP and Rodriguez vs. ISAC and BOC
G.R. No. 166662
June 27, 2008
FACTS: Autocorp Group, represented by its President, Rodriguez, secured an ordinary reexport bond from private respondent Intra Strata Assurance Corporation (ISAC) in favor of
public Bureau of Customs (BOC), to guarantee the re-export of 2 units of car (at 2 different
dates) and/or to pay the taxes and duties thereon. Petitioners executed and signed two
Indemnity Agreements with identical stipulations in favor of ISAC, agreeing to act as surety
of the subject bonds
In sum, ISAC issued the subject bonds to guarantee compliance by petitioners with their
undertaking with the BOC to re-export the imported vehicles within the given period and pay
the taxes and/or duties due thereon. In turn, petitioners agreed, as surety, to indemnify ISAC
for the liability the latter may incur on the said bonds

Autocorp failed to re-export the items guaranteed by the bonds and/or liquidate the entries
or cancel the bonds, and pay the taxes and duties pertaining to the said items, despite
repeated demands made by the BOC, as well as by ISAC. By reason thereof, the BOC
considered the two bonds forfeited.

Failing to secure from petitioners the payment of the face value of the two bonds, ISAC filed
with the RTC an action against petitioners to recover a sum of money plus AF. ISAC
impleaded the BOC as a necessary party plaintiff in order that the reward of money or
judgment shall be adjudged unto the said necessary plaintiff.

Petitioners filed a MTD, which was denied. RTC ordered Autocorp to pay ISAC and/or BOC the
face value of the subject bonds plus AF. Autocorps MR was denied. CA affirmed the trial
courts decision. MR was denied. Hence this Petition for Review on Certiorari

ISSUE: WON these bonds are now due and demandable, as there is yet no actual forfeiture
of the bonds, but merely a recommendation of forfeiture, for no writ of execution has been
issued against such bonds, therefore the case was prematurely filed by ISAC
HELD: PETITION IS WITHOUT MERIT

YES
The Indemnity Agreements give ISAC the right to recover from petitioners the face value of
the subject bonds plus attorneys fees at the time ISAC becomes liable on the said bonds to
the BOC, (specifically to re-export the imported vehicles within the period of six months from
their date of entry) regardless of whether the BOC had actually forfeited the bonds,
demanded payment thereof and/or received such payment. It must be pointed out that the
Indemnity Agreements explicitly provide that petitioners shall be liable to indemnify ISAC
whether or not payment has actually been made by the [ISAC] and ISAC may proceed
against petitioners by court action or otherwise even prior to making payment to the [BOC]
which may hereafter be done by [ISAC].

Article 2071 of the Civil Code provides:

Art. 2071. The guarantor, even before having paid, may proceed against the
principal debtor:
(1) When he is sued for the payment;

(2) In case of insolvency of the principal debtor;

(3) When the debtor has bound himself to relieve him from the guaranty within a specified
period, and this period has expired;

(4) When the debt has become demandable, by reason of the expiration of the
period for payment;

(5) After the lapse of ten years, when the principal obligation has no fixed period for its
maturity, unless it be of such nature that it cannot be extinguished except within a period
longer than ten years;

(6) If there are reasonable grounds to fear that the principal debtor intends to abscond;

(7) If the principal debtor is in imminent danger of becoming insolvent.

In all these cases, the action of the guarantor is to obtain release from the guaranty, or to
demand a security that shall protect him from any proceedings by the creditor and from the
danger of insolvency of the debtor.

NOTES:
A demand is only necessary in order to put an obligor in a due and demandable obligation in
delay, which in turn is for the purpose of making the obligor liable for interests or damages
for the period of delay. Thus, unless stipulated otherwise, an extrajudicial demand is not
required before a judicial demand, i.e., filing a civil case for collection, can be resorted to
THE MANILA INSURANCE COMPANY, INC. VS. SPOUSES ROBERTO AND AIDA
AMURAO (G.R. NO. 179628, 16 JANUARY 2013, DEL CASTILLO, J.) SUBJECT/S:
JURISDICTION OF CIAC; LIABILITY OF SURETY; (BRIEF TITLE: MANILA INSURANCE
VS. AMURAO)

DISPOSITIVE:

WHEREFORE, the petition is hereby GRANTED. The Decision dated June 7, 2007
and the Resolution dated September 7, 2007 of the Court of Appeals in CA-G.R. SP
No. 96815 are hereby ANNULLED and SET ASIDE. The Presiding Judge of the
Regional Trial Court of Quezon City, Branch 217 1s DIRECTED to dismiss Civil Case
No. Q-01-45573 for lack of jurisdiction.

SO ORDERED.

SUBJECTS/DOCTRINES/DIGEST:

SPOUSES AMURAO ENTERED INTO A CONSTRUCTION AGREEMENT WITH AEGEAN

DEVELOPMENT CORP WHEREBY THE LATTER WAS TO CONSTRUCT A 6 STOREY
COMMERCIAL BUILDING. AGEAN POSTED PERFORMANCE BOND SECURED BY
PETITIONER MANILA INSURANCE COMPANY INC AND INTRA STRATA ASSURANCE
CORP. WHEN AGEAN FAILED TO FINISH THE CONSTRUCTION, SPOUSES AMURAO
FILED A CASE AGAINST MANILA INSURANCE AND INTRA STRATA. MANILA
INSURANCE MOVED TO DISMISS THE CASE BECAUSE THERE IS AN ARBITRATION
CLAUSE IN THE CONSTRUCTION AGREEMENT WHICH PROVIDES THAT ANY DISPUTE
ON THE INTERPRETATION OF THE CONTRACT DOCUMENTS SHALL BE BROUGHT
BEFORE THE CIAC. RTC DENIED THE MOTION TO DISMISS. CA SUSTAINED THE
MOTION TO DISMISS. IS CA CORRECT.

NO. THE CASE SHOULD BE DISMISSED FOR LACK OF JURISDICTION. CIAC HAS
JURISDICTION OVER THE CASE.

IN ORDER FOR THE CIAC TO ACQUIRE JURISDICTION TWO REQUISITES MUST

CONCUR: FIRST, THE DISPUTE MUST BE SOMEHOW CONNECTED TO A
CONSTRUCTION CONTRACT; AND SECOND, THE PARTIES MUST HAVE AGREED TO
SUBMIT THE DISPUTE TO ARBITRATION PROCEEDINGS. IN THIS CASE, BOTH
REQUISITES ARE PRESENT.

Section 4 of E.O. No. 1008 provides that:

SEC. 4. Jurisdiction. The CIAC shall have original and exclusive jurisdiction over
disputes arising from, or connected with, contracts entered into by parties
involved in construction in the Philippines, whether the dispute arises before or
after the completion of the contract, or after the abandonment or breach thereof.
These disputes may involve government or private contracts. For the Board to
acquire jurisdiction, the parties to a dispute must agree to submit the same to
voluntary arbitration. The jurisdiction of the CIAC may include but is not limited to
violation of specifications for materials and workmanship, violation of the terms
of agreement, interpretation and/or application of contractual time and delays,
maintenance and defects, payment, default of employer or contractor, and
changes in contract cost. Excluded from the coverage of the law are disputes
arising from employer-employee relationships which shall continue to be covered
by the Labor Code of the Philippines.

. . . the issue of whether respondent-spouses are entitled to collect on the

performance bond issued by petitioner is a dispute arising in the course of the
execution and performance of [the CCA] by reason of difference in the
interpretation of the contract documents.

The fact that petitioner is not a party to the CCA cannot remove the dispute from
the jurisdiction of the CIAC because the issue of whether respondent spouses are
entitled to collect on the performance bond, as we have said, is a dispute arising
from or connected to the CCA.
XXXXXXXXXXXXXXXXXXXX

MANILA INSURANCE ARGUED THAT WHEN IT EXECUTED THE SURETY AGREEMENT

THE CONSTRUCTION CONTRACT WAS NOT YET SIGNED. THEREFORE SPOUSES
AMURAO HAVE NO CAUSE OF ACTION AGAINST THEM. IS THIS ARGUMENT
CORRECT.

NO.

A CAREFUL READING OF THE PERFORMANCE BOND REVEALS THAT THE BOND IS

COTERMINOUS WITH THE FINAL ACCEPTANCE OF THE PROJECT.53 THUS, THE
FACT THAT IT WAS ISSUED PRIOR TO THE EXECUTION OF THE CCA DOES NOT
AFFECT ITS VALIDITY OR EFFECTIVITY.
XXXXXXXXXXXXXXXX

WHAT IS A CONTRACT OF SURETYSHIP?

A CONTRACT OF SURETYSHIP IS DEFINED AS AN AGREEMENT WHEREBY A PARTY,

CALLED THE SURETY, GUARANTEES THE PERFORMANCE BY ANOTHER PARTY,
CALLED THE PRINCIPAL OR OBLIGOR, OF AN OBLIGATION OR UNDERTAKING IN
FAVOR OF A THIRD PARTY, CALLED THE OBLIGEE. IT INCLUDES OFFICIAL
RECOGNIZANCES, STIPULATIONS, BONDS OR UNDERTAKINGS ISSUED BY ANY
COMPANY BY VIRTUE OF AND UNDER THE PROVISIONS OF ACT NO. 536, AS
AMENDED BY ACT NO. 2206.50

XXXXXXXXXXXXXXXXXXXXXXXXXXXXX

WHAT IS THE NATURE OF THE SURETYS LIABILITY?

IT IS JOINT AND SEVERAL, LIMITED TO THE AMOUNT OF THE BOND, AND

DETERMINED STRICTLY BY THE TERMS OF CONTRACT OF SURETYSHIP IN RELATION
TO THE PRINCIPAL CONTRACT BETWEEN THE OBLIGOR AND THE OBLIGEE.

XXXXXXXXXXXXXXXXXXXXXX

TO WHAT EXTENT IS THE LIABILITY OF THE SURETY.

IT IS DIRECT, PRIMARY AND ABSOLUTE.

It bears stressing, however, that although the contract of suretyship is secondary

to the principal contract, the suretys liability to the oblige is nevertheless direct,
primary, and absolute.
Castellvi de Higgins & Higgins vs. Sellner
Facts: Sellner (defendant) wrote a letter to Mcleod (Castellvis agent) saying that he would
bound himself to pay the promissory note of Mining, Clarke and Maye amounting 10K + % if
not fully paid at maturity, upon the surrender 8k worth of MCMs stock which is held by
Castellvi.
Issue: WON Sellner is a guarantor or surety?
Held: Sellner is a GUARANTOR. Sellner was not bound with Castellvi by the same instrument
executed at the time and the same consideration, but his responsibility was secondary, one
founded on an independent collateral agreement. Neither was he jointly and severally liable
with Castellvi.
Reiss vs. Memije
Facts: Memije entered into a contract with D (building contractor) for repair of a house. D has
no credit line so Reiss refused to sell D lumber without an advance. Memije accompanied D
and told Reiss that he would guarantee payment for lumber. The lumber extended by Reiss
solely and exclusively to Memije was under a verbal agreement. Reiss brought an action for
the purchase price of the lumber.
Issue: WON Memije is liable as guarantor or as original promisor?
Held: Memije is primarily liable. It is evident that Memije used the words gurantor not in a
technical sense but rather that after satisfying, Reiss as to his own financial responsibility. If
goods are sold upon the sole credit and responsibility of the party who makes the promise
then, even though they are delivered to a 3rd person, there is no liability to the 3rd person.
Promise to pay need not require a writing or memorandum to be enforceable by action.
Palmares vs. CA (288 SCRA 422)
Facts: Private respondent M.B. Lending Corporation extended a loan to the spouses Osmea
and Merlyn Azarraga, together with petitioner Estrella Palmares, in the amount of
P30,000.00 payable on or before May 12, 1990, with compounded interest at the rate of 6%
per annum to be computed every 30 days from the date thereof. 1 On four occasions after
the execution of the promissory note and even after the loan matured, petitioner and the
Azarraga spouses were able to pay a total of P16,300.00, thereby leaving a balance of
P13,700.00. No payments were made after the last payment on September 26, 1991. 2
Consequently, on the basis of petitioner's solidary liability under the promissory note,
respondent corporation filed a complaint 3 against petitioner Palmares as the lone partydefendant, to the exclusion of the principal debtors, allegedly by reason of the insolvency of
the latter.

Issue: WON Palmares is liable

Held: If a person binds himself solidarily with the principal debtor, the provisions of Section
4, Chapter 3, Title I of this Book shall be observed. In such case the contract is called a
suretyship. It is a cardinal rule in the interpretation of contracts that if the terms of a
contract are clear and leave no doubt upon the intention of the contracting parties, the
literal meaning of its stipulation shall control. 13 In the case at bar, petitioner expressly
bound herself to be jointly and severally or solidarily liable with the principal maker of the
note. The terms of the contract are clear, explicit and unequivocal that petitioner's liability is
that of a surety.
THIRD DIVISION
[G.R. No. 136780. August 16, 2001]
JEANETTE
D.
MOLINO, petitioner,
CORPORATION, respondent.

vs. SECURITY

DINERS

INTERNATIONAL

DECISION
GONZAGA-REYES, J.:
Assailed by this petition for review on certiorari is the decision of the Court of Appeals
dated September 28, 1998[1] which held petitioner liable as surety for the outstanding credit
card debts of Danilo Alto with herein respondent corporation.
The decision of the Court of Appeals satisfactorily sums up the facts that led to the filing
of this case:
The Security Diners International Corporation (SDIC) operates a credit card system under
the name of Diners Club through which it extends credit accommodation to its cardholders
for the purchase of goods and payment of services from its member establishments to be
reimbursed later on by the cardholder upon proper billing. There are two types of credit
cards issued: one, the Regular (Local) Card which entitles the cardholder to purchase goods
and pay services from member establishments in an amount not exceeding P10,000.00; and
two, the Diamond (Edition) Card which entitles the cardholder to purchase goods and pay
services from member establishments in unlimited amounts. One of the requirements for
the issuance of either of these cards is that an applicant should have a surety.
On July 24, 1987, Danilo A. Alto applied for a Regular (Local) Card with SDIC. He got as his
surety his own sister-in-law Jeanette Molino Alto. Thus, Danilo signed the printed application
form (Exhibit A) and Jeanette signed the Surety Undertaking (Exhibit A-5). Attached to
the Application Form was an Agreement (Use of Diners Club Card), paragraph 16 of which
reads:
16. SURETY. The cardholder shall furnish an adequate surety or sureties acceptable to
Security Diners who shall be jointly and severally liable with the cardholder to pay Security
Diners all the obligations and charges incurred and credit extended on the basis of the
card. In the event the surety/sureties furnished the cardholder are discharged the
cardholder must furnish a new surety or sureties acceptable to Security Diners within thirty

(30) days. Otherwise the cardholders privileges shall be automatically terminated in

accordance with Section 11 hereof.
The Surety Undertaking signed by Jeanette states:
I/WE, the undersigned, bind myself/ourselves jointly and severally with Mr. Danilo Alto to
pay SECURITY DINERS INTERNATIONAL CORPORATION, hereinafter referred to as Security
Diners all the obligations and charges including but not limited to fees, interest, attorneys
fees and all other costs incurred by him/her in connection with the use of the DINERS CLUB
CARD in accordance with the terms and conditions governing the issuance and use of the
Diners Club Card. Any change or novation in the agreement or any extension of time
granted by SECURITY DINERS to pay such obligations, charges and fees, shall not release
me/us from this Surety Undertaking, it being understood that said undertaking is a
continuing one and shall subsist and bind me/us until all such obligations, charges and fees
have been fully paid and satisfied.
It is understood that the indication of a credit limit to the cardholder shall not relieve me/us
of liability for charges and all other amounts voluntarily incurred by the cardholder in excess
of the credit limit.
On the basis of the completed and signed Application Form and Surety Undertaking, the
SDIC issued to Danilo Diners Card No. 36510293216-0006. The latter used this card and
initially paid his obligations to SDIC. On February 8, 1988, Danilo wrote SDIC a letter (Exhibit
B) requesting it to upgrade his Regular (Local) Diners Club Card to a Diamond (Edition)
one. As a requirement of SDIC, Danilo secured from Jeanette her approval. The latter
obliged and so on March 2, 1988, she signed a Note (Exhibit C) which states:
This certifies that I, Jeanette D. Molino, approve of the request of Danilo and Gloria Alto with
Card No. 3651-203216-0006 and 3651-203412-5007 to upgrade their card from regular to
diamond edition.
Danilos request was granted and he was issued a Diamond (Edition) Diners Club Card. He
used this card and made purchases (Exhibits D, D-1 to D-7) from member
establishments. On October 1, 1988 Danilo had incurred credit charged plus appropriate
interest and service charges in the aggregate amount of P166,408.31. He defaulted in the
payment of this obligation.
SDIC demanded of Danilo and Jeanette to pay said obligation but they did not pay. So, on
November 9, 1988, SDIC filed an action to collect said indebtedness against Danilo and
Jeanette. This was docketed in the Regional Trial Court of Makati, Branch 145 as Civil Case
No. 88-2381. xxx [2]
Defendant Danilo Alto failed to file an Answer, and during the pre-trial conference
respondent moved to have the complaint dismissed against him, without prejudice to a
subsequent re-filing. Petitioner was left as the lone defendant, sued in her capacity as
surety of Danilo.
In the Answer with Compulsory Counterclaim that she filed with the RTC, petitioner
claimed that her liability under the Surety Undertaking was limited to P10,000.00 and that

she did not expressly and categorically agree to act as surety for Danilo in an amount higher
than P10,000.00.[3] By way of counterclaim, she asked for moral and exemplary damages.
On August 19, 1991, the trial court rendered a decision dismissing the complaint for
failure of respondent to prove its case by a preponderance of the evidence. It found that
while petitioner clearly bound herself as surety under the terms of Danilo Altos Regular
Diners Club Card, there was no evidence that after the card had been upgraded to Diamond
(Edition) petitioner consented or agreed to act as surety for Danilo. Exhibit C or Exhibit
1, inter alia, which was a note bearing petitioners signature certifying to her approval of
Danilos request to have his card upgraded should be read simply as a statement of no
objection to his request for upgrading, and not as an assumption of liability for the debts
that Danilo may later owe through the said card. [4] The trial court also took note of the
testimony of Alfredo Vicente, an officer of respondent, who opined that the consent to be
bound as surety to an upgraded card should be categorical [5] and not in a simple no
objection form.
The trial court went on further to state that petitioner was not liable for any amount, not
even for P10,000.00 which is the maximum credit limit for Regular Diners Club Cards, since
at the time of the upgrading Danilo had no outstanding credit card debts. [6] This is evident
from the fact that Danilos request for upgrading was approved, since one of the
requirements for the approval of a request for the upgrading of a credit card from Regular to
Diamond is that the applicant must have paid all his billings for the last three months prior
to his request.
Hence, the trial court disposed of the case with these pronouncements:
WHEREFORE, judgment is rendered dismissing the complaint against defendant Jeanette D.
Molino-Alto for failure of the plaintiff to prove its case by a clear preponderance of evidence.
Said defendants counterclaim is also dismissed.
No pronouncement as to costs.
SO ORDERED.[7]
The Court of Appeals found contrary to the lower court, and declared that the Surety
Undertaking signed by petitioner when Danilo Alto first applied for a Regular Diners Club
Card clearly applied to the unpaid purchases of Danilo Alto under the Diamond card. In
holding thus, the Court of Appeals referred to the terms of the said Surety Undertaking,
which stated that any change or novation in the agreement on the use of the Diners Club
card does not release the surety from his obligations, it being understood that the
undertaking is a continuing one which subsists until all obligations and charges under the
subject credit card are paid and satisfied. It also cited Pacific Banking Corporation vs.
Intermediate Appellate Court,[8] a 1991 decision which held the surety liable to the extent of
the credit cardholders indebtedness, under the clear terms of the Guarantors Undertaking
that the surety signed with the credit card company.
The Court of Appeals further declared that it was erroneous of the trial court to conclude
that petitioner was completely relieved of liability under Danilo Altos credit card since the
Surety Undertaking she signed remained valid and enforceable even after the upgrading of

the said card; besides, petitioner herself admitted that she was liable to the extent of
P10,000.00.
Additionally, the Court of Appeals reduced the attorneys fees (stipulated in the
Agreement for the Use of Diners Club Card) from 25% to 10% of the amount due, judging
this to be a more reasonable rate under the circumstances.
The dispositive portion of the decision of the Court of Appeals reads:
WHEREFORE, the appealed Decision is REVERSED and one is rendered ordering defendantappellee Jeanette D. Molino-Alto to pay plaintiff-appellant Security Diners International, Inc.
the following:
1. The sum of P166,408.31 plus interest of 3% per annum and 2% per month from
November 9, 1988 until the obligation is fully paid;
2. The amount equivalent to 10% of the obligation mentioned in the preceding
paragraph as attorneys fees; and
3. Costs.
SO ORDERED.[9]
Petitioners motion for reconsideration of the above decision was denied for lack of merit
on December 1, 1998. Hence, the petition before us, which assigns the following errors:
I
The material findings of the Court of Appeals, which are contrary to those of the lower
court, are erroneous.
II
The findings of the Court of Appeals are conflicting and/or without citation of specific
evidence on which they are based.
III
The Court of Appeals erred in disregarding the applicable legal principle established by
this Honorable Court that, unlike in ordinary solidary debtors, the surety does not incur
liability unless the principal debtor is held liable. [10]
Petitioner posits that she did not expressly give her consent to be bound as surety under
the upgraded card. She points out that the note she signed, marked as Exhibit C,
registering her approval of the request of Danilo Alto to upgrade his card, renders the Surety
Undertaking she signed under the terms of the previous card without probative value,
immaterial and irrelevant as it covers only the liability of the surety in the use of the regular
credit card by the principal debtor xxx . [11] She argues further that because the principal

debtor, Danilo Alto, was not held liable, having been dropped as a defendant, she could not
be said to have incurred liability as surety.
The petition is devoid of merit.
The resolution of whether petitioner is liable as surety under the Diamond card revolves
around the effect of the upgrading by Danilo Alto of his card. Was the upgrading a novation
of the original agreement governing the use of Danilo Altos first credit card, as to extinguish
that obligation and the Surety Undertaking which was simply accessory to it?
Novation, as a mode of extinguishing obligations, may be done in two ways: by explicit
declaration, or by material incompatibility (implied novation). As we stated in Fortune
Motors vs. Court of Appeals, supra:
xxx The test of incompatibility is whether the two obligations can stand together, each
one having its independent existence. If they cannot, they are incompatible and the
latter obligation novates the first. Novation must be established either by the express
terms of the new agreement or by the acts of the parties clearly demonstrating the
intent to dissolve the old obligation as a consideration for the emergence of the new
one. The will to novate, whether totally or partially, must appear by express agreement
of the parties, or by their acts which are too clear or unequivocal to be mistaken.
There is no doubt that the upgrading was a novation of the original agreement covering the
first credit card issued to Danilo Alto, basically since it was committed with the intent of
cancelling and replacing the said card. However, the novation did not serve to release
petitioner from her surety obligations because in the Surety Undertaking she expressly
waived discharge in case of change or novation in the agreement governing the use of the
first credit card.
The nature and extent of petitioners obligations are set out in clear and unmistakable terms
in the Surety Undertaking. Thus:
1. She bound herself jointly and severally with Danilo Alto to pay SDIC all obligations and
charges in the use of the Diners Club Card, including fees, interest, attorneys fees, and
costs;
2. She declared that any change or novation in the Agreement or any extension of
time granted by SECURITY DINERS to pay such obligation, charges, and fees, shall
not release (her) from this Surety Undertaking;
3. (S)aid undertaking is a continuous one and shall subsist and bind (her) until all such
obligations, charges and fees have been fully paid and satisfied; and
4. The indication of a credit limit to the cardholder shall not relieve (her) of liability for
charges and all other amounts voluntarily incurred by the cardholder in excess of said credit
limit.[12]
We cannot give any additional meaning to the plain language of the subject
undertaking. The extent of a suretys liability is determined by the language of the
suretyship contract or bond itself.[13] Article 1370 of the Civil Code provides: If the terms of a

contract are clear and leave no doubt upon the intention of the contracting parties, the
literal meaning of its stipulations shall control.
This case is no different from Pacific Banking Corporation vs. IAC, supra, correctly
applied by the Court of Appeals, which involved a Guarantors Undertaking (although thus
denominated, it was in substance a contract of surety) signed by the husband for the credit
card application of his wife. Like herein petitioner, the husband also argued that his liability
should be limited to the credit limit allowed under his wifes card but the Court declared him
liable to the full extent of his wifes indebtedness. Thus:
We need not look elsewhere to determine the nature and extent of private respondent
Roberto Regala, Jr.s undertaking. As a surety he bound himself jointly and severally with the
debtor Celia Regala to pay the Pacific Banking Corporation upon demand, any and all
indebtedness, obligations, charges or liabilities due and incurred by said Celia Syjuco Regala
with the use of Pacificard or renewals thereof issued in (her) favor by Pacific Banking
Corporation. xxx
xxxxxxxxxxx
It is likewise not disputed by the parties that the credit limit granted to Celia Regala was
P2,000.00 per month and that Celia Regala succeeded in using the card beyond the original
period of its effectivity, October 29, 1979. We do not agree, however, that Roberto Jr.s
liability should be limited to that extent. Private respondent Roberto Regala, Jr., as surety of
his wife, expressly bound himself up to the extent of the debtors (Celias) indebtedness
likewise expressly waiving any discharge in case of any change or novation of the terms
and conditions in connection with the issuance of the Pacificard credit card. Roberto, in
fact, made his commitment as a surety a continuing one, binding upon himself until all the
liabilities of Celia Regala have been fully paid. All these were clear under the Guarantors
Undertaking Roberto signed, thus:
x x x. Any changes of or novation in the terms and conditions in connection with the
issuance or use of said Pacificard, or any extension of time to pay such obligations, charges
or liabilities shall not in any manner release me/us from the responsibility hereunder, it
being understood that the undertaking is a continuing one and shall subsist and bind me/us
until all the liabilities of the said Celia Syjuco Regala have been fully satisified or
paid. (italics supplied)
As a last-ditch measure, petitioner asseverates that, being merely a surety, a
pronouncement should first be made declaring the principal debtor liable before she herself
can be proceeded against. The argument, which is hinged upon the dropping of Danilo as
defendant in the complaint, is bereft of merit.
The Surety Undertaking expressly provides that petitioners liability is solidary. A surety
is considered in law as being the same party as the debtor in relation to whatever is
adjudged touching the obligation of the latter, and their liabilities are interwoven as to be
inseparable.[14] Although the contract of a surety is in essence secondary only to a valid
principal obligation, his liability to the creditor is direct, primary and absolute; he becomes
liable for the debt and duty of another although he possesses no direct or personal interest
over the obligations nor does he receive any benefit therefrom. [15] There being no question
that Danilo Alto incurred debts of P166,408.31 in credit card advances, an obligation shared

solidarily by petitioner, respondent was certainly within its rights to proceed singly against
petitioner, as surety and solidary debtor, without prejudice to any action it may later file
against Danilo Alto, until the obligation is fully satisfied. This is so provided under Article
1216 of the Civil Code:
The creditor may proceed against any one of the solidary debtors or some or all of them
simultaneously. The demand made against one of them shall not be an obstacle to those
which may be subsequently directed against the others, so long as the debt has not been
fully collected.
Petitioner is a graduate of business administration, and possesses considerable work
experience in several banks. She knew the full import and consequence of the Surety
Undertaking that she executed. She had the option to withdraw her suretyship when Danilo
upgraded his card to one that permitted unlimited purchases, but instead she approved the
upgrading. While we commiserate in the financial predicament she now faces, it is also
evident that the liability she incurred is only the legitimate consequence of an undertaking
that she freely and intelligently obliged to. Prospective sureties to credit card applicants
would be well-advised to study carefully the terms of the agreements prepared by the credit
card companies before giving their consent, and pay heed to stipulations that could lead to
onerous effects, like in the present case where the credit applied for was limitless. At the
same time, it bears articulating that although courts in appropriate cases may equitably
reduce the award for penalty as provided under such suretyship agreements if the same is
iniquitous or unconscionable,[16] we are unable to give relief to petitioner by way of reducing
the amount of the principal liability as surety under the circumstances of this case.
WHEREFORE, the petition is dismissed for lack of merit. The decision of the Court of
Appeals is AFFIRMED in all respects.
SO ORDERED.
Melo, (Chairman), Panganiban, and Sandoval-Gutierrez, JJ., concur.
Vitug, J., in the result, (pro hac vice).
SECOND DIVISION
TIU HIONG GUAN, LUISA DE
VERA TIU, JUANITO RELLERA
and PURITA RELLERA,
Petitioners,
-

versus -

METROPOLITAN BANK &

TRUST COMPANY,
Respondent.

G.R. No. 144339

Present:
PUNO, J., Chairperson,
SANDOVAL-GUTIERREZ,
CORONA,
AZCUNA, and
GARCIA, JJ.
Promulgated:
August 9, 2006

x --------------------------------------------------------------------------------------- x
DECISION
AZCUNA, J.:
This is a petition for review [1] by Tiu Hiong Guan, Luisa de Vera Tiu, Juanito Rellera, and
Purita

Rellera,

assailing

the

Decision

and

Resolution of

the

Court

of

Appeals

dated May 23, 2000 and August 11, 2000, respectively, in CA-G.R. CV No. 57571 entitled
Metropolitan Bank & Trust Co. v. Tiu Hiong Guan, et al.
The facts[2] of the case are as follows:
Sometime in October 1990, petitioners applied for a continuing credit facility for and
in

behalf

of

themselves

and

their

corporation,

Sunta

Rubberized

Industrial

Corporation (Sunta), and executed in their personal and official capacities a Continuing
Surety Agreement.
In the said Agreement, petitioners jointly and severally obligated themselves to pay all
loans and credit accommodations that they and Sunta may incur, supposedly not exceeding
three million pesos. It was further stipulated therein that, in case of default in the payment
thereof, notwithstanding Sunta's dissolution, failure in business, insolvency, and the filing of
a petition for bankruptcy or suspension of payments in the proceeding related thereto, the
whole obligation shall become due and payable without benefit of demand or notice of
payment.
On July 9, 1990, petitioners opened an irrevocable Commercial Letter of Credit (LC) for
the purchase of raw materials amounting toP480,000 in favor of Sunta. These materials
were delivered and custody thereof transferred to Sunta, after which a Trust Receipt
Agreement was jointly and severally executed by petitioners in their personal capacities.
On August 18, 1990, Sunta and petitioners also in their personal capacities obtained a
loan of P350,000.
After maturity of the obligation, there was both failure of payment and compliance
with the surety and trust receipt agreements, sight draft, and promissory note.

The total unpaid obligation as of February 15, 1993 was P1,571,972.86. Prayed for by
respondent in its complaint a quo were the payments of P741,599.64, with interest and
penalties on the promissory note, per Order dated June 9, 1993; P830,373.20, with interest
and penalties as stipulated in the Trust Receipt Agreement; and attorney's fees.
In their Answer, petitioners admitted execution of the Continuing Surety Agreement
not in their personal capacities but as officers of Sunta. It was also asserted therein that
none of them personally benefited from the loan transaction, while two of them signed the
LC as mereofficers of Sunta.
The failure of Sunta to pay its obligation was attributed to both force majeure when
fire gutted down its factory buildings, equipment, machinery, raw materials and finished
products and the Order dated April 20, 1993 by the Securities and Exchange Commission
(SEC) in SEC Case No. 4240 suspending all actions for claims against Sunta that are pending
before any court or tribunal.
It

was

contended

that

the

real

party-in-interest as far

as the

actionable

documents herein were concerned was Sunta, not petitioners who merely acted as its
agents and as guarantors of its obligation. Therefore, petitioners should not be compelled to
pay the obligations of Sunta, because Sunta is solvent and its assets have not yet been
exhausted.
Petitioners further argued that, although Sunta had possession of the finished
products later destroyed by fire, respondent still retainedits ownership over them. As mere
agents carrying out the orders of their principal, petitioners claimed that they could not be
held responsiblefor the loss of property, unless there was negligence, deceit, fraud, or
excess of authority. Hence, the said loss should fall upon its owner.
In its Decision dated May 28, 1997, the Regional Trial Court (RTC) of Manila, Branch
51, ruled in favor of respondent in the following manner:
IN VIEW OF THE FOREGOING, this Court believes and so [holds] that the
[respondent] has established the preponderant proof to support its position as
against [petitioners'] claim that they are not jointly and severally liable with
SUNTA.

WHEREFORE, judgment is hereby rendered in favor of the [respondent]

and against the [petitioners], ordering the [petitioners] jointly and severally to
pay [respondent]:
1. The sum of P741,599.64 as of February 15, 1993 with interest at
28.792% per annum and penalty charges of 18% per annum until fully paid
representing the amount due on the promissory note;
2. The sum of P830,373.20 as of February 15, 1993 with interest at the
current rate [and] with penalty charges of 12% per annum until fully paid
representing the value or proceeds of the amount held in trust as stipulated;
3. [A]ttorney's fees in the amount equivalent to 10% of the amount
due from the [petitioners]; and
4. The costs of suit.
[Petitioners'] counterclaim is hereby dismissed for lack of merit.
SO ORDERED.[3]

Petitioners went on appeal asking for reversal of the RTC Decision. The Court of
Appeals rendered its assailed Decision, the dispositive portion of which reads:
THE FOREGOING CONSIDERED, the appealed Decision is hereby
AFFIRMED.
SO ORDERED.[4]
As stated, reconsideration was denied.
Hence, this petition positing:
WHETHER PETITIONERS CAN BE HELD LIABLE FOR THE UNPAID LOAN
DUE AND OWING RESPONDENT.

Petitioners should be held liable for their unpaid obligation of P1,571,972.86 as

of February 15, 1993, with penalties, interest, attorneys fees, and costs of suit, based on
both the non-negotiable Promissory Note and Continuing Surety Agreement they executed.
Under the Promissory Note, petitioners Tiu Hiong Guan and Juanito Rellera promised to
pay respondent jointly and severally the single-payment loan of P350,000 at 28.92% interest

per annum, binding themselves in both their personal and official capacities. In case of
default inter alia in the payment of any installment, interest, or charges, it is stipulated
that the entire principal, as well as the interest andcharges, shall become due and payable
at the option of and without notice by respondent. A penalty charge of 18% per annum and
attorney's fees of 10% were also agreed upon therein.
The Continuing Surety Agreement clearly states that the liability of all petitioners, as
sureties, shall be solidary with Sunta, as their principal, for all of the latter's loans, credits,
overdrafts,

advances,

discounts

and/or

other

credit

accommodations

not

exceeding P3,000,000. In case of default inter alia in the payment of any obligation upon
maturity or any amortization thereof, it is similarly stipulated that all instruments,
indebtedness, or other obligations thereby secured shall become due and payable by the
sureties, at the option of and without demand or notice by respondent. In fact, their
liability is expressly stated to be direct and immediate, not contingent upon the pursuit by
respondent

of

whatever

remedies

it

may

have

against

Sunta. All

parties therein have agreed that the sureties shall at any time pay respondent,with or
without demand upon Sunta, any of the loans, indebtedness, or other obligations secured,
whether due or not. Any notice given byrespondent to any of the sureties shall be sufficient
notice to all.
From these two documents, the liability of petitioners is joint and several in both their
personal and official capacities. They are not mere guarantors, but sureties. They do not
insure the solvency of the debtor, but rather the debt itself. They obligate themselves to
pay the debt if the principal debtor will not pay, regardless of whether or not the latter is
financially capable to fulfill his obligation.[5]
Time and again, x x x the liability of a surety is determined strictly on the basis of the
terms and conditions set out in the surety agreement. [6] Solidary liability is one of its
primary characteristics.[7] The creditor may proceed against any one of the solidary debtors
or some or all of them simultaneously. [8] Thus, respondent may proceed against Sunta
alone or some or all of petitioners herein.
Suretyship arises upon the solidary binding of a person deemed the surety with
the principal debtor, for the purpose of fulfilling an obligation. [9] [A] suretyship is merely
an accessory x x x to a principal obligation. Although a surety contract is secondary to the
principal obligation, the liability of the surety is direct, primary and absolute; or equivalent to

that of a regular party to the undertaking. A surety becomes liable to the debt and duty of
the principal obligor even without possessing a direct or personal interest in the obligations
constituted by the latter.[10] Petitioners are considered as being the same party as the
debtor in relation to whatever is adjudged touching the obligation of the latter, and their
liabilities are interwoven as to be inseparable.[11]
It is irrelevant that none of petitioners personally benefited from the loan transaction
between Sunta and respondent. The failure to pay attributable to either force majeure or
the SEC Order does not veer away from the fact of liability as sureties. Even though
ownership over the goods remains with respondent, the loss thereof has nothing to do with
the loan that petitioners bound themselves to be solidarily liable with respondent. The Trust
Receipt Agreement between them is a mere collateral agreement independent of the
Continuing Surety Agreement, the purpose of which is to serve as additional security for the
loan.[12] [P]arties are bound by the terms of their contract, which is the law between
them.[13]
WHEREFORE, the petition is DENIED. The Decision and Resolution of the Court of
Appeals

in

CA-G.R.

CV

No.

57571,

May 23, 2000 and August 11, 2000, respectively, are hereby AFFIRMED.
Costs against petitioners.

FIRST DIVISION

Suico Rattan & Buri Interiors,

G.R. No. 138145

Inc. and Spouses Esmeraldo

and Elizabeth D. Suico

Present:

Petitioners,
PANGANIBAN, CJ., Chairperson,
YNARES-SANTIAGO,
- versus -

AUSTRIA-MARTINEZ,

dated

CALLEJO, SR. and

CHICO-NAZARIO, JJ.
Court of Appeals and
Metropolitan Bank and Trust

Promulgated:

Co., Inc.,
Respondents.

June 15, 2006

x------------------------------------------------x

DECISION

AUSTRIA-MARTINEZ, J.:

Before the Court is a petition for review on certiorari under Rule 45 of the Rules of
Court assailing the Decision[1] of the Court of Appeals (CA) dated January 14, 1999 in CA-G.R.
CV No. 48320, which reversed and set aside the Decision [2] of the Regional Trial Court (RTC)
of Cebu in Civil Case No. CEB-13156; and the CA Resolution dated April 6, 1999, denying
petitioners motion for reconsideration.[3]

The facts of the case are as follows:

Suico Rattan & Buri Interiors, Inc. (SRBII) is a domestic corporation engaged in the
business of export of rattan and buri products. Spouses Esmeraldo and Elizabeth Suico

(Suico spouses) are officers of SRBII. On the other hand, Metropolitan Bank and Trust Co.,
Inc. (Metrobank) is a commercial banking corporation duly organized and existing under the
laws of the Philippines.

In the course of its business, SRBII applied for a credit line with Metrobank. On
September 5, 1991, SRBII and Metrobank, Mandaue branch, entered into a Credit Line
Agreement (Agreement) wherein the latter granted the former a discounting line amounting
toP7,000,000.00 and an export bills purchase or draft against payment line (EBP/DP
line) P10,000,000.00 for a maximum aggregate principal amount of P17,000,000.00.[4] As
provided for under the Agreement, drawings on the credit line are secured by a Continuing
Surety Agreement for the sum of P17,500,000.00 executed by the Suico spouses, [5] a Real
Estate Mortgage executed on September 5, 1991 by SRBII and the Suico spouses over
properties located at Brgy. Tabok, Mandaue City, Cebu and covered by Transfer Certificate of
Title (TCT) Nos. 21663 and 21665, and Fire Insurance policies over the properties duly
endorsed in favor of Metrobank. The Agreement expressly provides that the EBP/DP line is
clean.[6]

Previous to the execution of the Agreement, the Suico spouses had already incurred
loan obligations from Metrobank which are secured by separate Real Estate Mortgages
executed on May 8, 1986,[7] March 23, 1987[8] and August 24, 1987[9] over the same
properties which are the subject of the Real Estate Mortgage executed on September 5,
1991. Between June 13, 1991 and July 11, 1991, SRBII also incurred obligations with
Metrobank by entering into twelve negotiations for the purchase of export bills by the former
from the latter. These obligations are evidenced by drafts drawn by SRBII in favor of
Metrobank for a sum amounting to US$441,279.25 which has a peso equivalent
of P12,218,866.23.[10] As a consequence of these negotiations, Metrobank issued various
checks in favor of petitioners totalingP12,194,443.23,[11] the last one of which was dated July
24, 1991.[12]

Subsequently, SRBII and the Suico spouses were unable to pay their obligations
prompting Metrobank to extra-judicially foreclose the four mortgages constituted over the

subject properties. Metrobank, being the lone and highest bidder, acquired the said
properties during the auction sale. A Certificate of Sale dated November 18, 1992 was then
issued in its favor.[13]

On November 5, 1992, Metrobank filed an action for the recovery of a sum of money
arising from the obligations of SRBII and the Suico spouses on their export bills purchases
incurred between June and July, 1991. [14] SRBII and the Suico spouses filed their Answer
contending that their indebtedness are secured by a real estate mortgage and that the value
of the mortgaged properties is more than enough to answer for all their obligations to
Metrobank.[15]

On June 8, 1993, the RTC issued a pre-trial order enumerating the parties claims,
testimonial and documentary evidence to be presented and the issues raised.[16] Thereafter,
trial ensued.

After trial, the RTC rendered judgment on September 26, 1994 with the following
dispositive portion:

WHEREFORE, foregoing premises considered, the Complaint is hereby

dismissed. All obligations of defendants to plaintiffs incurred by the former
either as principal, surety or guarantor, which matured and had become due
and demandable on the date of the foreclosure of the Real Estate Mortgage
are hereby declared already fully paid by the mortgage security.

SO ORDERED.[17]

Aggrieved by the decision of the RTC, Metrobank filed an appeal with the CA.

On January 14, 1999, the CA rendered a Decision disposing as follows:

WHEREFORE, the appealed decision is hereby REVERSED and SET

ASIDE, and a new one rendered ordering appellees, jointly and severally, to
pay appellant the sum of P16,585,286.27 representing the principal
obligations and interests as of October 31, 1992, plus interest on the principal
sum of P12,218,866.23 at the rate of P26% per annum from November 1,
1992 until the said amounts are fully paid, the sum equivalent to two percent
(2%) of the total amount due as and for attorneys fees, and to pay the costs.

SO ORDERED.[18]

While the CA affirmed the trial courts ruling that under the provisions of the real estate
mortgage contracts executed by herein petitioners, the clear intent of the contracting
parties is that the mortgages shall not be limited to the amount secured under the said
contracts but shall extend to other obligations that they may obtain from Metrobank,
including renewals or extensions thereof, the CA ruled that since the proceeds from the
foreclosure sale of the mortgaged properties amounted only to P10,383,141.63, the same is
not sufficient to answer for the entire obligation of petitioners to Metrobank and that the
latter may still recover the deficiency of P16,585,286.27 representing the value of the
export bills purchased by herein petitioners.

SRBII and the Suico spouses filed a Motion for Reconsideration but the same was
denied by the CA through its Resolution issued onApril 6, 1999. [19]

Hence, the present petition with the following Assignment of Errors:

THE RESPONDENT COURT OF APPEALS ERRED IN NOT HOLDING THAT THE

REAL ESTATE MORTGAGE DATED SEPTEMBER 5, 1991 SERVED AS THE
COLLATERAL FOR ALL THE OBLIGATIONS OF THE PETITIONERS.

II

THE RESPONDENT COURT OF APPEALS GRAVELY ERRED IN DECIDING THE

CASE BASED ON AN ISSUE NOT RAISED IN THE PLEADINGS OR ADMISSIONS OF
THE PARTIES.

III

THE RESPONDENT COURT OF APPEALS ERRED IN NOT TAKING COGNIZANCE

THAT RES JUDICATA HAD ALREADY SET IN, IN VIEW OF THE TERMINATION OF
THE PROCEEDINGS IN EXTRAJUDICIAL FORECLOSURE SALE.

IV

THE RESPONDENT COURT OF APPEALS ERRED IN ORDERING THE PETITIONERS

TO PAY SOLIDARILY THE AMOUNT OFP16,585,286.27 REPRESENTING THE
PRINCIPAL OBLIGATION AND INTEREST AS OF OCTOBER 31, 1992 AND TO PAY
AN INTEREST ON THE PRINCIPAL SUM OF P12,218,866,23 AT THE RATE OF 26%
PER ANNUM FROM NOVEMBER 1, 1992 UNTIL THE SAID AMOUNTS ARE FULLY
PAID.

THE RESPONDENT COURT OF APPEALS ERRED IN HOLDING THAT PETITIONERS

SUICO SPOUSES ARE SOLIDARILY LIABLE WITH PETITIONER CORPORATION FOR
PAYMENT OF INTEREST PRIOR TO THE FILING OF THE COMPLAINT.

VI

THE RESPONDENT COURT OF APPEALS ERRED IN ORDERING PETITIONERS TO

PAY THE SUM EQUIVALENT TO TWO PERCENT (2%) OF THE TOTAL AMOUNT
DUE AS AND FOR ATTORNEYS FEES AND TO PAY THE COSTS.[20]

As to the first assigned error, petitioners claim that the Real Estate Mortgage
executed on September 5, 1991 answered for all their obligations to Metrobank. Petitioners
contend that the language of the subject mortgage contract is explicit in that it shall secure
all other obligations of petitioners of whatever kind or nature, whether direct or indirect,
principal or secondary and whether said obligations have been contracted before, during or
after the execution of the said mortgage contract. Petitioners also contend that the secured
obligations shall include those which were incurred by petitioners from other branches of
Metrobank because the properties covered by the subject mortgage contract had earlier
been mortgaged to the other branches of Metrobank. Petitioners argue that despite the
existence of prior mortgages, Metrobanks acceptance of the mortgaged properties as
collateral for their Credit Line Agreement only means that the value of the said properties is
sufficient to answer for the previous and present obligations of petitioners and that
Metrobank accepts the said properties as continuing collaterals. Petitioners argue that
Metrobank is now estopped from claiming that the subject mortgage contract does not
answer for all of petitioners obligations in its favor.
With respect to the second assigned error, petitioners contend that the CA erred in
ruling that the banks cause of action is based on its claim for a deficiency judgment arising
from insufficient proceeds of the foreclosure sale of the mortgaged properties; Metrobanks
cause of action is for a sum of money; at the time of the filing of the complaint, there is no
deficiency judgment to speak of because the complaint was filed on November 5, 1992 while
the foreclosure sale was only held on November 18, 1992; the complaint was not amended
to include recovery of the deficiency as part of its cause of action.

Anent the third assignment of error, petitioners assert that Metrobank is guilty of
splitting a single cause of action when it filed its complaint for a sum of money on November
5, 1992 and, thereafter, on November 18, 1992, foreclosed the properties subject matter of

the mortgage. Petitioners contend that in the event that a mortgage debtor fails to pay his
obligation, the mortgage creditor has the option to file an action to collect the indebtedness
or to foreclose the property subject matter of the mortgage. However, the creditor may not
pursue both remedies. Petitioners contend that the present action for a sum of money is
already barred by res judicata by reason of the extrajudicial foreclosure sale of the
mortgaged properties, as evidenced by the execution of the Definite Deed of Sale in favor of
Metrobank on January 21, 1994.

As to the fourth assigned error, petitioners contend that the CA erred in holding that
they are still liable to pay the deficiency in their obligation which was not covered by the
proceeds of the sale of the foreclosed mortgaged properties. Petitioners assert that in
bidding and in subsequently buying the subject mortgaged properties during the foreclosure
sale for a price which is much lower than their market value, Metrobank effectively
prevented petitioners from paying their entire obligation. Petitioners claim that they are not
interested in the redemption of the foreclosed properties, rather they are more concerned
with the payment of their obligation considering that these properties are the only ones with
which they expect to settle their indebtedness. Hence, since Metrobank, in buying the
foreclosed properties at a very low price, prevented petitioners from paying their entire
obligation, it is already barred by the principle of estoppel, equity and fair play from
recovering the remaining balance of petitioners obligation to it.

With respect to the fifth assigned error, the Suico spouses contend that the CA
committed error in holding them solidarily liable with SRBII for the payment of the remaining
balance of the latters obligation plus interest on the ground that they are mere sureties and
as such they can only be held liable if the principal does not pay. Absent any showing that
SRBII cannot pay, petitioners contend that they are not liable to pay. The Suico spouses also
contend that, as sureties, they are liable to pay interest only at the time of the filing of the
complaint.

As to the last assigned error, petitioners contend that the CA erred in awarding
attorneys fees equivalent to 2% of the total amount due because petitioners did not act in

bad faith nor did they willfully refuse to pay their obligation, which allegedly prompted
Metrobank to litigate. Moreover, petitioners argue that the award of attorneys fees by the
CA is contrary to the general rule that attorneys fees cannot be recovered as part of
damages because of the policy that no premium should be placed on the right to litigate.

In its Comment, respondent bank contends that the export bills purchases made by
petitioners are not secured by any real estate mortgage. To support its argument
respondent bank cites the stipulation contained in the Credit Line Agreement that the export
bills purchases are clean or unsecured. Respondent bank further argues that the export bills
purchases were availed of by petitioners through the banks Cebu Downtown Center Branch
(otherwise referred to in the records as the Plaridel Branch) while the other loan obligations
of petitioners, which were secured by real estate mortgages, were obtained from its
Mandaue City Branch. Moreover, respondent bank asserts that petitioners obligations with
the formers Mandaue City Branch are evidenced by documents which are distinct and
separate from the documents representing petitioners export bills purchases with the
Metrobank Cebu Downtown Center Branch. In any case, respondent bank contends that
even if the real estate mortgage contracts executed by petitioners be considered as
securing all of the latters obligations, including their export bills purchases, the fact remains
that the foreclosure of the mortgaged properties generated an amount which is insufficient
to answer for all the obligations of petitioners to respondent bank. Respondent bank
contends that under the law, it is not prevented from claiming the balance of petitioners
obligation which was not covered by the proceeds of the foreclosure sale. Respondent bank
also argues that it is erroneous for petitioners to claim that just because it (Metrobank) did
not require petitioners to put up additional security when they availed of subsequent loans,
the previous mortgages are already sufficient to secure all their subsequent obligations.

Respondent bank further contends that the CA is correct in ruling that it (Metrobank)
is entitled to deficiency judgment considering that petitioners themselves raised the issue
that the real estate mortgages they executed secured all their obligations with respondent
bank. Respondent argues that the issue on deficiency judgment necessarily arose because
the proceeds of the foreclosure sale are not sufficient to answer for all the obligations of
petitioners to respondent bank. In any case, respondent bank contends that the CA is

clothed with ample authority to resolve an issue even if it is not raised if such resolution is
necessary in arriving at a just decision.

Respondent bank asserts that there is no splitting of cause of action because the
complaint it filed against petitioners is simply for the purpose of collecting the balance of the
latters obligation which was not covered by the proceeds of the sale of the mortgaged
properties.

Respondent bank also contends that the Suico spouses are solidarily liable with SRBII
because by reason of their execution of the Continuing Surety Agreement, the spouses
liability became direct, primary and absolute.

As to the attorneys fees awarded by the CA, respondent bank counters that
petitioners are guilty of fraud and misrepresentation when they gave their assurance and
warranty that documents such as letters of credit and commercial invoices are valid and
existing when, in fact, they are not, thereby inducing respondent bank to grant and approve
its transactions with petitioners involving the export bills purchases. By reason of such fraud
and misrepresentation, respondent bank contends that it was compelled to incur expenses
to protect its interest and enforce its claims.

The Court finds the petition partly meritorious.

The issues raised boil down to two basic questions: first, whether the mortgage
contract executed on September 5, 1991 serves as security for all the obligations of
petitioners to respondent bank; and second, whether the foreclosure of the mortgaged
properties

precludes

respondent

bank

from

claiming

the

sum

of P16,585,286.27 representing the amount covered by the export bills purchased by herein
petitioners between June and July 1991.

As to the first question, the Court agrees with petitioners that all their obligations,
including their indebtedness arising from their purchase of export bills, are secured by the
Real Estate Mortgage contract executed on September 5, 1991. We are not persuaded by
respondent banks contention that the export bills purchases of petitioners from June 13,
1991 to July 11, 1991 were not secured by any real estate mortgage because of the
stipulation in the Agreement that the export bill purchase/draft against payment (EBP/DP)
line is clean, which means that it is unsecured.

The following provisions appear in the Agreement:

WHEREAS, the CLIENT is desirous of obtaining credit accommodations

from the BANK and the latter is willing to extend such credit accommodations
to the CLIENT upon the terms and conditions hereinafter stipulated.

NOW, THEREFORE, the CLIENT and the BANK, in consideration of the

following terms and conditions have agreed and covenanted as follows:

1. The BANK hereby grants and shall make available to the

CLIENT a credit line up to the aggregate principal amount of PESOS:
SEVENTEEN MILLION ONLY (P17,000,000.00) PESOS in lawful currency of the
Republic of the Philippines, to be availed as follows:

P 7,000,000.00 - DISCOUNTING LINE (REM) for one (1)

year, interest at prevailing rate, available by way of PNs not more

than 360 days, discounted.

10,000,000.00 - EBP/DP LINE (CLEAN) for one (1)

year,

interest at prevailing rate.

2.

Drawings on the line shall be secured by:

1.

Continuing Suretyship of Spouses Esmeraldo Suico and

Elizabeth D. Suico.

2.

REM for P7.0 MM over TCT Nos. 21663 & 21665 w/ an

aggregate area of 10,318 sq. m. and situated at Brgy.
Tabok, Mandaue City, for item 1 only

3.

Fire Insurance policy(ies) duly endorsed in banks favor.

[21] (Emphasis supplied)

It is true that the terms contained in the Agreement provide that the EBP/DP LINE is clean
and that it is only those drawings made on the DISCOUNTING LINE which are secured by the
mortgage constituted by petitioners spouses Suico over the subject properties. However, a
perusal of the entire Agreement shows that the credit line extended to petitioners refers only
to transactions that the

latter may enter into after the execution of the said

Agreement. There is nothing in the said document which shows that the credit line covered
the export bill purchases incurred prior to the execution of the Agreement. In other words,
the provision that the EBP/DP LINE is clear or not covered by real estate mortgage simply
refers to credit accommodations which petitioners may avail from respondent bank
subsequent to the execution of the Agreement. It does not, in any way, refer to credit
accommodations which were already extended by respondent bank to petitioners prior
toSeptember 5, 1991, the date the Agreement was constituted. The parties could not have
intended that the Agreement shall also pertain to the export bills purchases made by
petitioners prior to its execution, that is, between June and July 1991, considering that the
maximum

amount

covered

by

the

EBP/DP

LINE

under

the

Agreement

is

only P10,000,000.00 while the outstanding obligation of petitioners for the export bills

purchases as of July 1991 already totaled US$441,279.25 which, at the time of the
transactions, had a peso equivalent of P12,218,866.23.

On the other hand, pertinent portions of the Real Estate Mortgage executed on the
same date as the Agreement provide as follows:

That for and in consideration of certain loans and other credit

accommodations obtained from the Mortgagee amounting to SIX
MILLION TWO HUNDRED FIFTY THOUSAND (P6,250,000.00) PESOS
ONLY Philippine Currency, and to secure the payment of the same and
those others that the Mortgagee may heretofore have extended or
hereafter extend to the Mortgagor and/or SUICO RATTAN & BURI
INTERIORS, INC., a domestic corporation with principal office and place of
business at Tabok, Mandaue City, Philippines, hereinafter referred to,
regardless of number, as the Borrower, including interest at the rate specified
in the promissory note(s) or other evidence of indebtedness secured by this
mortgage
and
expenses, and
all
other
obligations
of
the
Mortgagor/Borrower to the Mortgagee of whatever kind or nature,
whether direct or indirect, principal or secondary, as appear in the
accounts, books and records of the Mortgagee, whether such
obligations have been contracted before, during or after the
constitution of this mortgage, the Mortgagor does hereby transfer and
convey by way of mortgage unto the Mortgagee, its successors or assigns, the
parcels of land which are described in the list inserted at the back of this
document, or in a supplementary list attached hereto, together with all the
buildings and improvements now existing or which may hereafter be erected
or constructed thereon and all easements, sugar quotas, agricultural or land
indemnities, aids or subsidies, including all other rights or benefits annexed to
or inherent therein, now existing or which may hereafter exist, and also other
assets acquired with the proceeds of the loan hereby secured, all of which the
Mortgagor declares that he is the absolute owner free from all liens and
encumbrances.

[22] (emphasis supplied)

From the language of the contract, it is clear that the mortgaged properties were intended to
secure all loans, credit accommodations and all other obligations of herein petitioners to
Metrobank, whether such obligations have been contracted before, during or after the
constitution of the mortgage.

The Court finds no conflict between the provisions of the Agreement and the Real
Estate Mortgage contract both dated September 5, 1991, insofar as the export bills
purchases from June 13, 1991 to July 11, 1991 are concerned. The stipulations in the
September 5, 1991 Agreement refer only to future export bill purchases, thus excluding
those purchases made in June and July, 1991; even as the provisions of the subject Real
Estate Mortgage pertain to all obligations of petitioners including those which were
constituted even before the execution of the said mortgage. Thus, although the Agreement
does not refer to export bill purchases incurred prior to the execution of said Agreement, the
Real Estate Mortgage encompasses all obligations incurred by petitioners, including the June
and July 1991 export bill purchases but not the purchases made after September 5, 1991
under the Agreement.

Neither is the Court persuaded by respondent banks contention that petitioners

obligations arising from their purchase of export bills is separate and distinct from their
other loan obligations with respondent bank because the export bills purchases were availed
by petitioners through the banks Cebu Downtown Center/Plaridel branch while the other
loan obligations of petitioners were obtained from its Mandaue City branch.

The Court quotes, with approval, the trial courts ratiocination on this matter:

It matters not that the EBP/DP line was availed of by defendants with the
Plaridel branch, because the Credit Line Agreement and the Real Estate
Mortgages clearly indicate that defendants were indebted to plaintiff bank and

not to its Mandaue or Plaridel branch. This is clearly evident in the opening
paragraph of the Credit Line Agreement and the Real Estate Mortgages when
plaintiff defines itself as a Commercial Banking Corporation organized and
existing under and by virtue of the laws of the Republic of the Philippines, with
principal offices and places of business at MetrobankPlaza, Gil. J. Puyat
Avenue, Makati, Metro Manila. Clearly therefore, defendants were deemed to
be indebted to plaintiff with main office in Makatiand not with its Mandaue or
Plaridel branch.

[23]

It bears to note that the complaint for a sum of money was filed in the name of Metrobank
alone, without impleading its Plaridel or Mandaue branches. By not impleading either of
these branches, it only goes to show that respondent bank, itself, insofar as the present case
is concerned, considers the whole Metrobank corporation as the aggrieved party. Hence, it
is now estopped from claiming that the mortagaged properties secure only those
transactions entered into with its Mandaue branch simply because the mortgage contracts
were entered into through the said branch. It does not matter that the export bills purchases
of petitioners were entered into through the facility of respondent banks Plaridel branch
and evidenced by separate and distinct documents because in all these transactions there is
only one creditor, which is the corporate entity known as Metrobank.

On the other hand, the Court is not persuaded by petitioners claim that the
foreclosed properties command a market price ofP50,000,000.00 at the time of the
foreclosure sale. No evidence appears on record to prove this allegation. Granting that the
mortgaged properties were sold during the auction for an amount which is way below their
market price, the same does not place the petitioners at a disadvantage. On the contrary,
the low price works to their advantage because it would be easier for them to redeem the
property sold. The Court agrees with the CA when it cited the case of Prudential Bank v.
Martinez where the Court held as follows:

Moreover, the fact that the mortgaged property is sold at an amount

less than its actual market value should not militate against the right to such
recovery. We fail to see any disadvantage going for the mortgagor. On the
contrary, a mortgagor stands to gain with a reduced price because he
possesses the right of redemption. When there is the right to redeem,

inadequacy of price should not be material, because the judgment debtor may
reacquire the property or also sell his right to redeem and thus recover the
loss he claims to have suffered by the reason of the price obtained at the
auction sale. (De Leon v. Salvador, L-30871, December 28, 1970 and Bernabe
v. Cruz, et. al., L-31603, December 28, 1970; 36 SCRA 567). Generally, in
forced sales, low prices are usually offered and the mere inadequacy of the
price obtained at the sheriffs sale unless shocking to the conscience will not
be sufficient to set aside a sale if there is no showing that in the event of a
regular sale, a better price can be obtained (Ponce de Leon v. Rehabilitation
Finance Corporation, L-24571, December 18, 1970, 36 SCRA 289). [24]

Hence, it is wrong for petitioners to conclude that when respondent bank supposedly bought
the foreclosed properties at a very low price, the latter effectively prevented the former from
satisfying their whole obligation. Petitioners still had the option of either redeeming the
properties and, thereafter, selling the same for a price which corresponds to what they claim
as the properties actual market value or by simply selling their right to redeem for a price
which is equivalent to the difference between the supposed market value of the said
properties and the price obtained during the foreclosure sale. In either case, petitioners will
be able to recoup the loss they claim to have suffered by reason of the inadequate price
obtained at the auction sale and, thus, enable them to settle their obligation with
respondent bank. Moreover, petitioners are not justified in concluding that they should be
considered as having paid their obligations in full since respondent bank was the one who
acquired the mortgaged properties and that the price it paid was very inadequate. The fact
that it is respondent bank, as the mortgagee, which eventually acquired the mortgaged
properties and that the bid price was low is not a valid reason for petitioners to refuse to pay
the remaining balance of their obligation. Settled is the rule that a mortgage is simply a
security and not a satisfaction of indebtedness.[25]

As to petitioners contention that they are not liable to pay since there is no showing
that the principal debtor cannot pay, the time-honored rule is that the surety obligates
himself to pay the debt if the principal debtor will not pay, regardless of whether or not the
latter is financially capable to fulfill his obligation. [26] Thus, a creditor can go directly against
the surety although the principal debtor is solvent and is able to pay or no prior demand is
made on the principal debtor.[27] Although a surety contract is secondary to the principal
obligation, the liability of the surety is direct, primary and absolute; or equivalent to that of a
regular party to the undertaking.[28] A surety is considered in law to be on the same footing
as the principal debtor in relation to whatever is adjudged against the latter. [29]

Equally settled is the principle that contracts have the force of law between the
parties and are to be complied with in good faith. [30] From the moment the contract is
perfected, the parties are bound to comply with what is expressly stipulated as well as with
what is required by the nature of the obligation in keeping with good faith, usage and the
law.[31] In the present case, it is clear from the Continuing Surety Agreement [32] executed by
the Suico spouses that they hold themselves solidarily liable with SRBII in the payment of
the latters obligations to respondent bank to the extent of P17,500,000.00, plus interests
and other incidental charges such as penalties, costs and expenses in collecting their
obligation. The same principle applies with respect to the payment of interest. It is clear
from the various letters executed by SRBII in favor of respondent bank that it agreed to pay
interest in favor of respondent bank at the rate of 26% per annum based on the value of the
draft, the same to be reckoned after twelve days from the date of purchase or from the date
of dishonor, whichever is earlier, up to thedate of final payment. [33] Since the Suico spouses
obligated themselves to be solidarily bound with SRBII, it follows that they are also liable to
pay interest as stipulated in the above-cited letters.

Having settled that the mortgaged properties served as security for all the
petitioners obligations to Metrobank and that the formers liability is solidary, the next
question to be resolved is whether, under the facts and circumstances obtaining in the
present case, the respondent bank is precluded from recovering the amount representing
the value of the export bills purchased by petitioners from it in June and July, 1991.

The rule is settled that a mortgage creditor may, in the recovery of a debt secured by
a real estate mortgage, institute against the mortgage debtor either a personal action for
debt or a real action to foreclose the mortgage. [34] These remedies available to the
mortgage creditor are deemed alternative and not cumulative. An election of one remedy
operates as a waiver of the other. [35] In sustaining the rule that prohibits mortgage creditors
from pursuing both the remedies of a personal action for debt or a real action to foreclose
the mortgage, the Court held in the case of Bachrach Motor Co., Inc. v. Esteban Icarangal, et
al. that a rule which would authorize the plaintiff to bring a personal action against the
debtor and simultaneously or successively another action against the mortgaged property,
would result not only in multiplicity of suits so offensive to justice and obnoxious to law and
equity, but also in subjecting the defendant to the vexation of being sued in the place of his
residence or of the residence of the plaintiff, and then again in the place where the property
lies.[36] Hence, a remedy is deemed chosen upon the filing of the suit for collection or upon

the filing of the complaint in an action for foreclosure of mortgage, pursuant to the
provisions of Rule 68 of the Rules of Court. [37] As to extrajudicial foreclosure, such remedy is
deemed elected by the mortgage creditor upon filing of the petition not with any court of
justice but with the office of the sheriff of the province where the sale is to be made, in
accordance with the provisions of Act No. 3135, as amended by Act No. 4118. [38]

Records show that the complaint for a sum of money was filed with the RTC
on November 5, 1992. On the other hand, there is no direct evidence to show when
respondent bank filed a petition with the provincial sheriff of Cebu for the extrajudicial
foreclosure of the mortgaged properties. The petition for extrajudicial foreclosure of the
mortgaged properties was not presented in evidence. What appears on record is that the
auction sale of the foreclosed properties was conducted on November 17, 1992. However,
as mentioned earlier, the remedy of extrajudicial foreclosure is deemed chosen not on the
date of foreclosure sale but upon the filing of the petition for foreclosure with the office of
the sheriff of the province where the sale is to be made. Hence, for purposes of determining
which remedy was first elected the personal action for debt or the real action for
foreclosure there is a need to determine when the respondent bank filed a petition for
extrajudicial foreclosure.

The Certificate of Sale executed by the Ex-Officio Provincial Sheriff indicates that the
extrajudicial foreclosure sale was conducted onNovember 17, 1992. [39] In the absence of
evidence to the contrary, the Court presumes that the sheriff regularly performed his duties
and that the ordinary course of business had been followed in the conduct of the auction
sale.[40] Section 3 of Act No. 3135, as amended by Act No. 4118 provides:

Sec. 3. Notice shall be given by posting notices of the sale for

not less than twenty days in at least three public places of the municipality
or city where the property is situated and if such property is worth more than
four hundred pesos, such notice shall also be published once a week for at
least three consecutive weeks in a newspaper of general circulation in the
municipality or city. (Emphasis supplied)

Hence, it is reasonable to assume that the requirements regarding notice and publication
prior to the conduct of the sale have been complied with. Going back 20 days
from November 17, 1992, which was the date the auction sale was conducted, the petition
for extrajudicial foreclosure could have been filed by respondent bank not later than October

27, 1992. Considering that the complaint for a sum of money was only filed on November 5,
1992, the only conclusion that can be arrived at is that respondent bank first elected to avail
of the remedy of extrajudicial foreclosure. Thus, by availing of such remedy it is deemed to
have waived its right to file an ordinary case for collection.

The question that remains then is: may the complaint for a sum of money filed by
respondent bank be considered as a suit for the recovery of deficiency in petitioners
obligation?

The Court rules in the negative.

It is undisputed that the suit filed by respondent bank with the trial court was a
personal action for the collection of a sum of money. The complaint was premised on the
refusal of herein petitioners buyers to pay and accept the value of the drafts or bills of
exchange and the subsequent failure of petitioners to answer for the value of the said drafts
plus interest upon notice and demand sent by respondent bank. There was no mention,
either in the body of the complaint or in the prayer, for the recovery of the balance of
petitioners obligations which were not covered by the foreclosure sale. In fact, the
foreclosure sale was not even mentioned. In other words, in filing the complaint with the
RTC, respondent bank was not suing for any deficiency. Understandably, the respondent
bank could not have claimed such deficiency because, as correctly observed by petitioners,
at the time of the filing of the complaint on November 5, 1992, the foreclosure sale is yet to
be conducted. Hence, the complaint cannot, in any way, be construed as an action for the
recovery of deficiency in petitioners obligation. It is actually an ordinary action for
collection which is barred by reason of respondents prior election of the remedy of
foreclosure. Thus, the Court is left with no recourse but to sustain the dismissal of the
complaint by the RTC subject to the right of Metrobank to recover the alleged deficiency, as
will

be

discussed

forthwith. It

must

be

emphasized

that

petitioners, Metrobank did not amend its complaint accordingly.

as

aptly

observed

by

Given the fact that the proceeds of the auction sale were not sufficient to answer for
the entire obligation of petitioners to respondent bank, the latter still has the right to recover
the balance due it after applying the proceeds of the sale. We agree with the CA that where
the mortgage creditor chooses the remedy of foreclosure and the proceeds of the
foreclosure sale are insufficient to cover the debt, the mortgagee is entitled to claim the
deficiency from the debtor.[41] The law gives the mortgagee the right to claim for the
deficiency resulting from the price obtained in the sale of the property at public auction and
the outstanding obligation at the time of the foreclosure proceedings. [42] This rule is based
on the principle earlier mentioned that the mortgage is only a security and not a satisfaction
of the mortgagors entire obligation. Moreover, unlike in pledge[43] and chattel mortgage on a
thing sold on installment,[44] where the Civil Code expressly forecloses the right of creditors
to sue for any deficiency resulting from the sale of the property given as a security for the
obligation, there is nothing in Act. No. 3135,[45] the law governing extrajudicial foreclosures,
which expressly or impliedly prohibits the recovery of such deficiency. If the legislature had
intended to deny the creditor the right to sue for any deficiency resulting from the
foreclosure of a security given to guarantee an obligation, the law would expressly so
provide.[46] Absent such a provision in Act. No. 3135, as amended, the creditor is not
precluded from taking action to recover any unpaid balance on the principal obligation
simply because he chose to extrajudicially foreclose the real estate mortgage. [47] Hence, in
the present case, the Courts dismissal of the complaint should be without prejudice to the
filing of another action for the recovery of the balance left in petitioners obligation after the
foreclosure sale of the mortgaged properties.

The CA or this Court has no jurisdiction to rule on the amount of deficiency that is yet
to be claimed and proved in the proper forum byMetrobank.

WHEREFORE, the petition is partially GRANTED. The assailed Decision and

Resolution
of
the
Court
of
Appeals
in
CA-G.R.
CV
No.
48320
are REVERSED and SET ASIDE. The Decision of the Regional Trial Court of Cebu, Branch 8
in Civil Case No. CEB-13156 isREINSTATED with MODIFICATION to the effect that the
portion of the RTC Decision, declaring that all obligations of defendants to plaintiffs incurred
by the former either as principal, surety or guarantor, which matured and had become due
and demandable on the date of the foreclosure of the Real Estate Mortgage are considered
fully paid by the mortgage security, is DELETED subject to the right of Metropolitan Bank
and Trust Co., Inc. to recover the amount of deficiency in a proper action in the proper court.

No pronouncement as to cost.

SO ORDERED.

SECOND DIVISION

SECURITY
PACIFIC
CORPORATION,

ASSURANCE

G.R. No. 144740

Petitioner,

Present:
- versus -

THE HON. AMELIA TRIA-INFANTE, In

her official capacity as Presiding
Judge, Regional Trial Court, Branch 9,
Manila;
THE
PEOPLE
OF
THE
PHILIPPINES, represented by Spouses
REYNALDO and ZENAIDA ANZURES;
and REYNALDO R. BUAZON, In his
official capacity as Sheriff IV, Regional
Trial Court, Branch 9, Manila,

PUNO,
Chairman,
AUSTRIA-MARTINEZ,
CALLEJO, SR.,
TINGA, and
CHICO-NAZARIO, JJ.

Respondents.
Promulgated:

August 31, 2005

x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x

DECISION
CHICO-NAZARIO, J.:

Before Us is a petition for review on certiorari, assailing the Decision[1] and

Resolution[2] of the Court of Appeals in CA-G.R. SP No. 58147, dated 16 June 2000 and 22
August 2000, respectively. The said Decision and Resolution declared that there was no
grave abuse of discretion on the part of respondent Judge in issuing the assailed order
dated 31 March 2000, which was the subject in CA-G.R. SP No. 58147.

THE FACTS

The factual milieu of the instant case can be traced from this Courts decision in G.R.
No. 106214 promulgated on 05 September 1997.

On 26 August 1988, Reynaldo Anzures instituted a complaint against Teresita Villaluz

(Villaluz) for violation of Batas Pambansa Blg. 22. The criminal information was brought
before the Regional Trial Court, City of Manila, and raffled off to Branch 9, then presided over
by Judge Edilberto G. Sandoval, docketed as Criminal Case No. 89-69257.

An Ex-Parte Motion for Preliminary Attachment[3] dated 06 March 1989 was filed by
Reynaldo Anzures praying that pending the hearing on the merits of the case, a Writ of
Preliminary Attachment be issued ordering the sheriff to attach the properties of Villaluz in
accordance with the Rules.

On 03 July 1989, the trial court issued an Order [4] for the issuance of a writ of
preliminary attachment upon complainants posting of a bond which is hereby fixed

at P2,123,400.00 and the Courts approval of the same under the condition prescribed by
Sec. 4 of Rule 57 of the Rules of Court.

An attachment bond[5] was thereafter posted by Reynaldo Anzures and approved by

the court. Thereafter, the sheriff attached certain properties of Villaluz, which were duly
annotated on the corresponding certificates of title.

On 25 May 1990, the trial court rendered a Decision [6] on the case acquitting Villaluz of
the crime charged, but held her civilly liable. The dispositive portion of the said decision is
reproduced hereunder:

WHEREFORE, premises considered, judgment is hereby rendered

ACQUITTING the accused TERESITA E. VILLALUZ withcost de oficio. As to the
civil aspect of the case however, accused is ordered to pay complainant
Reynaldo Anzures the sum of TWO MILLION ONE HUNDRED TWENTY THREE
THOUSAND FOUR HUNDRED (P2,123,400.00) PESOS with legal rate of interest
from December 18, 1987 until fully paid, the sum of P50,000.00 as attorneys
fees and the cost of suit.[7]

Villaluz interposed an appeal with the Court of Appeals, and on 30 April 1992, the
latter rendered its Decision,[8] the dispositive portion of which partly reads:

WHEREFORE, in CA-G.R. CV No. 28780, the Decision of the Regional

Trial Court of Manila, Branch 9, dated May 25, 1990, as to the civil aspect of
Criminal Case No. 89-69257, is hereby AFFIRMED, in all respects.

The case was elevated to the Supreme Court (G.R. No. 106214), and during its
pendency, Villaluz posted a counter-bond in the amount of P2,500,000.00 issued by
petitioner Security Pacific Assurance Corporation. [9] Villaluz, on the same date[10] of the
counter-bond, filed an Urgent Motion to Discharge Attachment. [11]

On 05 September 1997, we promulgated our decision in G.R. No. 106214, affirming in

toto the decision of the Court of Appeals.

In view of the finality of this Courts decision in G.R. No. 106214, the private
complainant moved for execution of judgment before the trial court. [12]

On 07 May 1999, the trial court, now presided over by respondent Judge, issued a
Writ of Execution.[13]

Sheriff Reynaldo R. Buazon tried to serve the writ of execution upon Villaluz, but the
latter no longer resided in her given address. This being the case, the sheriff sent a Notice
of Garnishment upon petitioner at its office in Makati City, by virtue of the counter-bond
posted by Villaluz with said insurance corporation in the amount of P2,500,000.00. As
reported by the sheriff, petitioner refused to assume its obligation on the counter-bond it
posted for the discharge of the attachment made by Villaluz. [14]

Reynaldo Anzures, through the private prosecutor, filed a Motion to Proceed with
Garnishment,[15] which was opposed by petitioner[16] contending that it should not be held
liable on the counter-attachment bond.

The trial court, in its Order dated 31 March 2000,[17] granted the Motion to Proceed
with Garnishment. The sheriff issued a Follow-Up of Garnishment [18] addressed to the
President/General Manager of petitioner dated 03 April 2000.

On 07 April 2000, petitioner filed a Petition for Certiorari with Preliminary Injunction
and/or Temporary Restraining Order[19] with the Court of Appeals, seeking the nullification of
the trial courts order dated 31 March 2000 granting the motion to proceed with
garnishment. Villaluz was also named as petitioner. The petitioners contended that the
respondent Judge, in issuing the order dated 31 March 2000, and the sheriff committed
grave abuse of discretion and grave errors of law in proceeding against the petitioner
corporation on its counter-attachment bond, despite the fact that said bond was not
approved by the Supreme Court, and that the condition by which said bond was issued did
not happen.[20]

On 16 June 2000, the Court of Appeals rendered a Decision, [21] the dispositive portion
of which reads:

WHEREFORE, premises considered, the Court finds no grave abuse of

discretion on the part of respondent judge in issuing the assailed order. Hence,
the petition is dismissed.

A Motion for Reconsideration [22] was filed by petitioner, but was denied for lack of
merit by the Court of Appeals in its Resolution[23] dated 22 August 2000.

Undeterred, petitioner filed the instant petition under Rule 45 of the 1997 Rules of
Civil Procedure, with Urgent Application for a Writ of Preliminary Injunction and/or Temporary
Restraining Order.[24]

On 13 December 2000, this Court issued a Resolution [25] requiring the private
respondents to file their Comment to the Petition, which they did. Petitioner was required to
file its Reply[26] thereafter.

Meanwhile, on 17 January 2001, petitioner and the spouses Reynaldo and Zenaida
Anzures executed a Memorandum of Understanding (MOU).[27] In it, it was stipulated that as
of said date, the total amount garnished from petitioner had amounted to P1,541,063.85,
and so the remaining amount still sought to be executed was P958,936.15.[28] Petitioner
tendered and paid the amount of P300,000.00 upon signing of the MOU, and the balance
of P658,936.15 was to be paid in installment at P100,000.00 at the end of each month from
February 2001 up to July 2001. At the end of August 2001, the amount of P58,936.00 would
have to be paid.

This would make the aggregate amount paid to the private

respondents P2,500,000.00.[29] There was, however, a proviso in the MOU which states that
this contract shall not be construed as a waiver or abandonment of the appellate review
pending before the Supreme Court and that it will be subject to all such interim orders and
final outcome of said case.

On 13 August 2001, the instant petition was given due course, and the parties were
obliged to submit their respective Memoranda.[30]

ISSUES

The petitioner raises the following issues for the resolution of this Court:

Main Issue - WHETHER OR NOT THE COURT OF APPEALS COMMITTED

REVERSIBLE ERROR IN AFFIRMING THE 31 MARCH 2000 ORDER OF PUBLIC
RESPONDENT JUDGE WHICH ALLOWED EXECUTION ON THE COUNTER-BOND
ISSUED BY THE PETITIONER.

Corollary Issues (1) WHETHER OR NOT THE COURT OF APPEALS

CORRECTLY RULED THAT THE ATTACHMENT ON THE PROPERTY OF VILLALUZ
WAS DISCHARGED WITHOUT NEED OF COURT APPROVAL OF THE COUNTERBOND POSTED; and (2) WHETHER OR NOT THE COURT OF APPEALS
CORRECTLY RULED THAT THE ATTACHMENT ON THE PROPERTY OF VILLALUZ
WAS DISCHARGED BY THE MERE ACT OF POSTING THE COUNTER-BOND.

THE COURTS RULING

Petitioner seeks to escape liability by contending, in the main, that the writ of
attachment which was earlier issued against the real properties of Villaluz was not
discharged. Since the writ was not discharged, then its liability did not accrue. The alleged
failure of this Court in G.R. No. 106214 to approve the counter-bond and to cause the
discharge of the attachment against Villaluz prevented the happening of a condition upon
which the counter-bonds issuance was premised, such that petitioner should not be held
liable thereon.[31]

Petitioner further asserts that the agreement between it and Villaluz is not a
suretyship agreement in the sense that petitioner has become an additional debtor in
relation to private respondents. It is merely waiving its right of excussion [32] that would
ordinarily apply to counter-bond guarantors as originally contemplated in Section 12, Rule 57
of the 1997 Rules.

In their Comment,[33] the private respondents assert that the filing of the counter-bond
by Villaluz had already ipso facto discharged the attachment on the properties and made the
petitioner liable on the bond. Upon acceptance of the premium, there was already an
express contract for surety between Villaluz and petitioner in the amount of P2,500,000.00
to answer for any adverse judgment/decision against Villaluz.

Petitioner filed a Reply[34] dated 09 May 2001 to private respondents Comment,

admitting the binding effect of the bond as between the parties thereto. What it did not
subscribe to was the theory that the attachment was ipso facto or automatically discharged
by the mere filing of the bond in court. Such theory, according to petitioner, has no
foundation.

Without an order of discharge of attachment and approval of the bond,

petitioner submits that its stipulated liability on said bond, premised on their occurrence,
could not possibly arise, for to hold otherwise would be to trample upon the statutorily
guaranteed right of the parties to contractual autonomy.

Based on the circumstances present in this case, we find no compelling reason to

reverse the ruling of the Court of Appeals.
Over the years, in a number of cases, we have made certain pronouncements about
counter-bonds.

In Tijam v. Sibonghanoy,[35] as reiterated in Vanguard Assurance Corp. v. Court of

Appeals,[36] we held:

. . . [A]fter the judgment for the plaintiff has become executory and
the execution is returned unsatisfied, as in this case, the liability of the bond
automatically attaches and, in failure of the surety to satisfy the judgment
against the defendant despite demand therefore, writ of execution may issue
against the surety to enforce the obligation of the bond.

In Luzon Steel Coporation v. Sia, et al.:

[37]

. . . [C]ounterbonds posted to obtain the lifting of a writ of attachment

is due to these bonds being security for the payment of any judgment that the

attaching party may obtain; they are thus mere replacements of the property
formerly attached, and just as the latter may be levied upon after final
judgment in the case in order to realize the amount adjudged, so is the
liability of the countersureties ascertainable after the judgment has become
final. . . .

In Imperial Insurance, Inc. v. De Los Angeles,[38] we ruled:

. . . Section 17, Rule 57 of the Rules of Court cannot be construed that

an execution against the debtor be first returned unsatisfied even if the bond
were a solidary one, for a procedural may not amend the substantive law
expressed in the Civil Code, and further would nullify the express stipulation of
the parties that the suretys obligation should be solidary with that of the
defendant.

In Philippine British Assurance Co., Inc. v. Intermediate Appellate Court,[39] we further

held that the counterbond is intended to secure the payment of any judgment that the
attaching creditor may recover in the action.

Petitioner does not deny that the contract between it and Villaluz is one of surety.
However, it points out that the kind of surety agreement between them is one that merely
waives its right of excussion. This cannot be so. The counter-bond itself states that the
parties jointly and severally bind themselves to secure the payment of any judgment that
the plaintiff may recover against the defendant in the action. A surety is considered in law
as being the same party as the debtor in relation to whatever is adjudged touching the
obligation of the latter, and their liabilities are interwoven as to be inseparable. [40]

Suretyship is a contractual relation resulting from an agreement whereby one person,

the surety, engages to be answerable for the debt, default or miscarriage of another, known

as the principal. The suretys obligation is not an original and direct one for the performance
of his own act, but merely accessory or collateral to the obligation contracted by the
principal. Nevertheless, although the contract of a surety is in essence secondary only to a
valid principal obligation, his liability to the creditor or promise of the principal is said to be
direct, primary and absolute; in other words, he is directly and equally bound with the
principal. The surety therefore becomes liable for the debt or duty of another although he
possesses no direct or personal interest over the obligations nor does he receive any benefit
therefrom.[41]

In view of the nature and purpose of a surety agreement, petitioner, thus, is barred
from disclaiming liability.

Petitioners argument that the mere filing of a counter-bond in this case cannot
automatically discharge the attachment without first an order of discharge and approval of
the bond, is lame.

Under the Rules, there are two (2) ways to secure the discharge of an attachment.
First, the party whose property has been attached or a person appearing on his behalf may
post a security. Second, said party may show that the order of attachment was improperly
or irregularly issued.[42]
[43]

The first applies in the instant case.

Section 12, Rule 57,

provides:

SEC. 12. Discharge of attachment upon giving counter-bond. After a

writ of attachment has been enforced, the party whose property has been
attached, or the person appearing on his behalf, may move for the discharge
of the attachment wholly or in part on the security given. The court shall, after
due notice and hearing, order the discharge of the attachment if the movant
makes a cash deposit, or files a counter-bond executed to the attaching party
with the clerk of the court where the application is made, in an amount equal
to that fixed by the court in the order of attachment, exclusive of costs. But if
the attachment is sought to be discharged with respect to a particular
property, the counter-bond shall be equal to the value of that property as
determined by the court. In either case, the cash deposit or the counter-bond

shall secure the payment of any judgment that the attaching party may
recover in the action. A notice of the deposit shall forthwith be served on the
attaching party. Upon the discharge of an attachment in accordance with the
provisions of this section, the property attached, or the proceeds of any sale
thereof, shall be delivered to the party making the deposit or giving the
counter-bond, or to the person appearing on his behalf, the deposit or counterbond aforesaid standing in place of the property so released. Should such
counter-bond for any reason be found to be or become insufficient, and the
party furnishing the same fail to file an additional counter-bond, the attaching
party may apply for a new order of attachment.

It should be noted that in G.R. No. 106214, per our Resolution dated 15 January 1997,
[44]

we permitted Villaluz to file a counter-attachment bond. On 17 February 1997,[45] we

required the private respondents to comment on the sufficiency of the counter-bond posted
by Villaluz.

It is quite palpable that the necessary steps in the discharge of an attachment upon
giving counter-bond have been taken. To require a specific order for the discharge of the
attachment when this Court, in our decision in G.R. No. 106214, had already declared that
the petitioner is solidarily bound with Villaluz would be mere surplusage. Thus:

During the pendency of this petition, a counter-attachment bond was

filed by petitioner Villaluz before this Court to discharge the attachment
earlier issued by the trial court. Said bond amounting to P2.5 million was
furnished by Security Pacific Assurance, Corp. which agreed to bind itself
jointly and severally with petitioner for any judgment that may be
recovered by private respondent against the former.[46]

We are not unmindful of our ruling in the case of Belisle Investment and Finance Co.,
Inc. v. State Investment House, Inc.,[47] where we held:

. . . [T]he Court of Appeals correctly ruled that the mere posting of a

counterbond does not automatically discharge the writ of attachment. It is
only after hearing and after the judge has ordered the discharge of the
attachment if a cash deposit is made or a counterbond is executed to the
attaching creditor is filed, that the writ of attachment is properly discharged
under Section 12, Rule 57 of the Rules of Court.

The ruling in Belisle, at first glance, would suggest an error in the assailed ruling of
the Court of Appeals because there was no specific resolution discharging the attachment
and approving the counter-bond.

As above-explained, however, consideration of our

decision in G.R. No. 106214 in its entirety will readily show that this Court has virtually
discharged the attachment after all the parties therein have been heard on the matter.

On this score, we hew to the pertinent ratiocination of the Court of Appeals as

regards the heretofore cited provision of Section 12, Rule 57 of the 1997 Rules of Civil
Procedure, on the discharge of attachment upon giving counter-bond:

. . . The filing of the counter-attachment bond by petitioner Villaluz has

discharged the attachment on the properties and made the petitioner
corporation liable on the counter-attachment bond. This can be gleaned from
the DEFENDANTS BOND FOR THE DISSOLUTION OF ATTACHMENT, which
states that Security Pacific Assurance Corporation, as surety, in consideration
of the dissolution of the said attachment jointly and severally, binds itself
with petitioner Villaluz for any judgment that may be recovered by private
respondent Anzures against petitioner Villaluz.

The contract of surety is only between petitioner Villaluz and petitioner

corporation. The petitioner corporation cannot escape liability by stating that
a court approval is needed before it can be made liable. This defense can only
be availed by petitioner corporation against petitioner Villaluz but not against
third persons who are not parties to the contract of surety. The petitioners
hold themselves out as jointly and severally liable without any conditions in
the counter-attachment bond. The petitioner corporation cannot impose
requisites before it can be made liable when the law clearly does not
require such requisites to be fulfilled.[48] (Emphases supplied.)

Verily, a judgment must be read in its entirety, and it must be construed as a whole
so as to bring all of its parts into harmony as far as this can be done by fair and reasonable
interpretation and so as to give effect to every word and part, if possible, and to effectuate
the intention and purpose of the Court, consistent with the provisions of the organic law. [49]

Insurance companies are prone to invent excuses to avoid their just obligation. [50] It
seems that this statement very well fits the instant case.

WHEREFORE, in view of all the foregoing, the Decision and Resolution of the Court of
Appeals dated 16 June 2000 and 22 August 2000, respectively, are both AFFIRMED. Costs
against petitioner.

SO ORDERED.

SYNOPSIS
McAdore Finance and Investment, Inc. (McAdore) was the owner and Operator of
McAdore International Palace Hotel in Dagupan City. Private respondent (Decorp) was the
grantee of a franchise to operate and maintain electric services in the province of
Pangasinan, including Dagupan City. McAdore and Decorp entered into a contract whereby
Decorp shall provide electric power to McAdores Hotel. During the term of their contract for
power service, it was discovered that the terminal transformers connected to the meter had
been interchanged thereby resulting in the slow rotation of the meter, hence, McAdore paid
smaller billings. Decorp issued a corrected bill, but McAdore refused to pay. As a result,
Decorp disconnected power supply to the hotel. McAdore filed a suit for damages with
prayer for a writ of preliminary injunction against Decorp. McAdore posted injunction bonds
taken from several sureties, one of which, is herein petitioner Paramount. Accordingly, a writ
was issued ordering Decorp to continue supplying electric power to the hotel and restrained
from further disconnecting it. After due hearing, the trial court rendered a judgment in favor
of Decorp. McAdore was ordered to pay Decorp and held the bonding companies jointly and
severally liable. McAdore did not appeal the decision; however, Paramount appealed to the
Court of Appeals (CA). The CA affirmed the decision of the trial court. Hence, this appeal.

The core issue to be resolved here is whether or not petitioner was denied due process when
the trial court found the injunction bond it issued in favor of McAdore liable to Decorp.
According to the Supreme Court, Paramount cannot hide under the cloak of non-liability
on its injunction bond on the mere expediency that it was deprived of due process. What
the law abhors is not the absence of previous notice but rather the absolute lack of
opportunity to ventilate a partys side. The petitioner cannot successfully invoke denial of
due process where it was given a chance to be heard. When petitioner issued the bond in
favor of its principal, it undertook to assume all the damages that may be suffered after
finding that the principal is not entitled to the relief being sought. The instant petition was
denied.
SYLLABUS
1. REMEDIAL LAW; PROVISIONAL REMEDIES; INJUNCTION, CONSTRUED; PURPOSE
THEREOF. Injunction is an extraordinary remedy calculated to preserve the status
quo of things and to prevent actual or threatened acts violative of the rules of equity
and good conscience as would consequently afford an injured party a cause of action
resulting from the failure of the law to provide for an adequate or complete relief. A
preliminary injunction is an order granted at any stage of an action or proceeding prior
to the judgment or final order requiring a party or a court, agency or a person to refrain
from a particular act or acts. It may also require the performance of a particular act or
acts, in which case it shall be known as a preliminary mandatory injunction. Its sole
purpose is not to correct a wrong of the past, in the sense of redress for injury already
sustained, but to prevent further injury.
2. ID.; ID.; PRELIMINARY INJUNCTION; WHEN GRANTED. A preliminary injunction or
temporary restraining order may be granted only when, among others, the applicant,
unless exempted by the court, files with the court where the action or proceeding is
pending, a bond executed to the party or person enjoined, in an amount to be fixed by
the court, to the effect that the applicant will pay such party or person all damages
which he may sustain by reason of the injunction or temporary restraining order if the
court should finally decide that the applicant was not entitled thereto. Upon approval of
the requisite bond, a writ of preliminary injunction shall be issued.
3. ID.; ID.; ID.; ID.; INJUNCTION BOND; WHEN ANSWERABLE FOR CLAIMS FOR
DAMAGES; APPLICATION IN CASE AT BAR. At the trial, the amount of damages to
be awarded to either party, upon the bond of the adverse party, shall be claimed,
ascertained, and awarded under the same procedure prescribed in Section 20 of Rule
57. of the 1997 Rules of Civil Procedure, which is similarly applicable to preliminary
injunction. The above rule comes into play when the plaintiff-applicant for injunction
fails to sustain his action, and the defendant is thereby granted the right to proceed
against the bond posted by the former. In the case at bench, the trial court dismissed
McADOREs action for damages with prayer for writ of preliminary injunction and
eventually adjudged the payment of actual, moral, and exemplary damages against
plaintiff-applicant. Consequently, private respondent DECORP can proceed against the
injunction bond posted by plaintiff-applicant to recover the damages occasioned by the
issuance by the trial court of the writ of injunction. In order for the injunction bond to
become answerable for the above-described damages, the following requisites must
concur: 1. The application for damages must be filed in the same case where the bond
was issued; 2. Such application for damages must be filed before the entry of judgment;

and 3. After hearing with notice to the surety. Contrary to petitioners thesis, it is
neither mandatory nor fatal that there should be a separate hearing in order that
damages upon the bond can be claimed, ascertained and awarded, as can be gleaned
from a cursory reading of the provisions of Rule 57, Section 20. What is necessary only
is for the attaching party and his surety or sureties to be duly notified and given the
opportunity to be heard. In the case at bench, this Court accords due respect to the
factual finding of the Court of Appeals that PARAMOUNT was present and represented
by its counsel Atty. Nonito Q. Cordero as shown in the trial courts order dated March
22, 1985 xxx.
4. ID.; ID.; ID.; ID.; ID.; PURPOSE THEREOF; CASE AT BAR. Rule 58, Section 4(b),
provides that a bond is executed in favor of the party enjoined to answer for all
damages which he may sustain by reason of the injunction. This Court already had
occasion to rule on this matter in Mendoza vs. Cruz, 94 SCRA 821, at 826 (1979), where
it held that (t)he injunction bond is intended as a security for damages in case it is
finally decided that the injunction ought not to have been granted. It is designed to
cover all damages which the party enjoined can possibly suffer. Its principal purpose is
to protect the enjoined party against loss or damage by reason of an injunction. No
distinction was made as to when the damages should have been incurred.
APPEARANCES OF COUNSEL
Soo Gutierrez Leogardo Lee for petitioner.
Angara Abello Concepcion Regala Cruz for private respondent.
Republic of the Philippines
Supreme Court
Baguio City

THIRD DIVISION

PHILIPPINE CHARTER INSURANCE

CORPORATION,

Petitioner,

G.R. No. 180898

Present:

VELASCO, JR., J.,Chairperson,

PERALTA,
- versus -

ABAD,
MENDOZA, and
PERLAS-BERNABE,JJ.

PETROLEUM DISTRIBUTORS &

SERVICE CORPORATION
Respondent.

Promulgated:

April 18, 2012

X -------------------------------------------------------------------------------------- X
DECISION
MENDOZA, J.:

Before the Court is a petition for review under Rule 45 of the Rules of Court seeking
the reversal of the July 31, 2007 Decision [1] and the December 28, 2007 Resolution[2] of the
Court of Appeals (CA) in CA-G.R. CV No. 82417, which affirmed with modification the January
12, 2004 Decision of the Regional Trial Court, Branch 111, Pasay City (RTC).
The Facts:
On

January

27,

1999,

respondent

Petroleum

Distributors

and

Services

Corporation (PDSC), through its president, Conrado P. Limcaco, entered into a building
contract[3] with N.C. Francia Construction Corporation (FCC), represented by its president and
chief executive officer, Emmanuel T. Francia, for the construction of a four-story commercial
and parking complex located at MIA Road corner Domestic Road, Pasay City, known as Park
N Fly Building (Park N Fly). Under the contract, FCC agreed to undertake the construction of
Park N Fly for the price of 45,522,197.72.

The parties agreed that the construction work would begin on February 1, 1999.
Under the Project Evaluation and Review Technique Critical Path Method (PERT-CPM), the
project was divided into two stages: Phase 1 [4] of the construction work would be finished
on May 17, 1999 and Phase 2[5] would begin on May 18, 1999 and finish on October 20,
1999. The project should be turned over by October 21, 1999.[6] It was further stipulated that
in the event FCC failed to finish the project within the period specified, liquidated damages
equivalent to 1/10 of 1% of the contract price for every day of delay shall accrue in favor of
PDSC.[7]
To ensure compliance with its obligation, FCCs individual officers, namely, Natividad
Francia, Emmanuel C. Francia, Jr., Anna Sheila C. Francia, San Diego Felipe G. Bermudez,
Emmanuel T. Francia, Charlemagne C. Francia, and Ruben G. Caperia, signed the
Undertaking of Surety[8] holding themselves personally liable for the accountabilities of FCC.
Also, FCC procured Performance Bond No. 31915 amounting to 6,828,329.00 from
petitioner Philippine Charter Insurance Corporation (PCIC) to secure full and faithful
performance of its obligation under the Building Contract.[9]
The construction of the Park N Fly started on February 1, 1999.
Pursuant to the Building Contract, PDSC sourced out construction materials and
subcontracted various phases of the work to help obtain the lowest cost of the construction
and speed up the work of the project. These resulted in the reduction of the contract price.
[10]

During the Phase 1 of the project, PDSC noticed that FCC was sixteen (16) days
behind schedule. In a Letter[11] dated March 25, 1999, it reminded FCC to catch up with the
schedule of the projected work path, or it would impose the penalty of 1/10 of the 1% of the
contract price. The problem, however, was not addressed, as the delay increased to 30
days[12] and ballooned to 60 days.[13]
Consequently, on September 10, 1999, FCC executed a deed of assignment,
[14]

assigning a portion of its receivables from Caltex Philippines, Inc. (Caltex), and a chattel

mortgage,[15] conveying some of its construction equipment to PDSC as additional security

for the faithful compliance with its obligation.
On even date, PDSC and FCC likewise executed a memorandum of agreement (MOA),
[16]

wherein the parties agreed to revise the work schedule of the project. As a consequence,

Performance Bond No. 31915 was extended up to March 2, 2000.[17]

For failure of FCC to accomplish the project within the agreed completion period,
PDSC, in a letter[18] dated December 3, 1999, informed FCC that it was terminating their
contract based on Article 12, Paragraph 12.1 of the Building Contract. Subsequently, PDSC
sent demand letters[19] to FCC and its officers for the payment of liquidated damages
amounting to 9,149,962.02 for the delay. In the same manner, PDSC wrote PCIC asking for
remuneration pursuant to Performance Bond No. 31915.[20]
Despite notice, PDSC did not receive any reply from either FCC or PCIC, constraining
it to file a complaint [21] for damages, recovery of possession of personal property and/or
foreclosure of mortgage with prayer for the issuance of a writ of replevin and writ of
attachment, against FCC and its officers before the RTC. PDSC later filed a supplemental
complaint[22] impleading PCIC, claiming coverage under Performance Bond No. 31915 in the
amount of 6,828,329.66.
In its Amended Answer with affirmative defense and counterclaim, [23] FCC admitted
that it entered into a contract with PDSC for the construction of the Park N Fly building. It,
however, asserted that due to outsourcing of different materials and subcontracting of
various phases of works made by PDSC, the contract price was invariably reduced to
19,809,822.12.
FCC denied any liability to PDSC claiming that any such claim by the latter had been
waived, abandoned or otherwise extinguished by the execution of the September 10,
1999 MOA. FCC claimed that in the said MOA, PDSC assumed all the obligations originally
reposed upon it. FCC further explained that the PERT-CPM agreed upon by the parties
covering the first phase of the work project was severely affected when PDSC deleted
several scopes of work and undertook to perform the same. In fact, the PERT-CPM was
evaluated and it was concluded that the delay was attributable to both of them. FCC added
that after Phase I of the project, it sent a progress billing in the amount of 939,165.00 but
PDSC approved the amount of 639,165.00 only after deducting the cost of the attributable
delay with the agreement that from then on, PDSC should shoulder all expenses in the
construction of the building until completion; that FCC would provide the workers on the
condition that they would be paid by PDSC; and that it would allow PDSC free use of the
construction equipments that were in the project site.
For its part, PCIC averred that as a surety, it was not liable as a principal obligor; that
its liability under the bond was conditional and subsidiary and that it could be made liable
only upon FCCs default of its obligation in the Building Contract up to the extent of the
terms and conditions of the bond. PCIC also alleged that its obligation under the

performance bond was terminated when it expired on October 15, 1999and the extension of
the performance bond until March 2, 2000 was not binding as it was made without its
knowledge and consent.
PCIC added that PDSCs claim against it had been waived, abandoned or extinguished
by the September 10, 1999 MOA. It also argued that its obligation was indeed extinguished
when PDSC terminated the contract on December 3, 1999 and took over the construction
and it failed to file its claim within ten (10) days from the expiry date or from the alleged
default of FCC.[24]
Nonetheless, in the event that PCIC would be made liable, its liability should be in
proportion to the liabilities of the other sureties.
On January 12, 2004, the RTC rendered its Decision [25] in favor of PDSC. The RTC found
FCC guilty of delay when it failed to finish and turn over the project on October 15, 1999. It
pronounced FCC and PCIC jointly and severally liable and ordered them to pay PDSC the
amount of 9,000,000.00 as damages and 50,000.00 as attorneys fees plus interest.
FCC and PCIC filed their respective notice of appeal [26] with the RTC. On February 12,
2004, the RTC issued its Order[27] giving due course to the notice of appeal.
On July 31, 2007, the CA modified the RTCs decision. [28] The CA agreed that FCC
incurred delay in the construction of the project. It, however, found that the computation of
the liquidated damages should be based on the reduced contract price of 19,809,822.12.
The dispositive portion reads:
WHEREFORE, the Decision dated 12 January 2004 of the Regional Trial
Court of Pasay City, Branch 111 is AFFIRMED with MODIFICATION in that
appellants N.C. Francia Construction Corporation, Natividad Francia,
Emmanuel Francia, Jr., Anna Sheila Francia San Diego, Felipe Bermudez,
Emmanuel Francia, Charlemagne Francia, Ruben Caperia, and Philippine
Charter Insurance Corporation are hereby held solidarily liable to pay appellee
Petroleum Distributors & Services Corporation (1) liquidated damages in the
sum of 3,882,725.13, which shall earn legal interest at the rate of 6% per
annum from 10 January 2000 until finality of this judgment; (2) attorneys fees
amounting to 50,000.00; and (3) cost of suit. Pursuant to Performance Bond
No. 31915, the liability of appellant Philippine Charter Insurance Corporation
should not exceed 6,828,329.66.
Appellants N.C Francia Construction Corporation, Emmanuel Francia
and Natividad Francia are adjudged liable to pay appellant Philippine Charter
Insurance Corporation for the amount the latter may have paid under
Performance Bond No. 31915.

SO ORDERED.[29]
FCC and PCIC filed their separate motions for reconsideration [30] but the CA denied
them in its December 28, 2007 Resolution.[31]
Hence, this petition.
It is well to note that only PCIC appealed the CAs decision. It became final and
executory with regard to FCC and the other parties in the case. Hence, the Court shall limit
its discussion to the liability of PCIC.
In its Memorandum,[32] PCIC anchored its petition on the following issues:
1. Whether or not the Court of Appeals, in adjudging Petitioner
liable for liquidated damages, expanded liability under Performance
Bond No. 31915 which on its face answers only for actual and
compensatory damages, not liquidated damages.
Assuming arguendo liability for liquidated damages under the
performance bond, whether or not the Court of Appeals erred in not
declaring that the award of liquidated damages is iniquitous and
unconscionable and in not applying the provisions of Article 2227,
Civil Code, and Palmares v. Court of Appeals, 288 SCRA 422.

2. Whether or not the Memorandum of Agreement dated Sept.

10, 1999 entered into by respondent and Francia Construction,
confirmed in a letter dated Sept. 20, 1999, --- without Petitioners
knowledge or consent---, the effect that all costs, expenses,
payments and obligations shall be deemed paid, performed and fully
settled as of Sept. 10, 1999, discharged Petitioner from liability
under the performance bond under Article 2079, Civil Code.
3. Whether or not the Court of Appeals, having made the
finding of fact that the sums of Php2,793,000.00 and Php662,836.50
should be deducted from Php3,882,725.13, erred in not deducting
the amounts in the dispositive portion of the decision. [33]
In sum, the issues before the Court are (1) whether or not PCIC is liable for liquidated
damages under the performance bond; (2) whether or not the September 10, 1999 MOA
executed by PDSC and FCC extinguished PCICs liability under the performance bond; and
(3) whether or not the amounts of 2,793,000.00 and 662,836.50 are deductible from the
liquidated damages awarded by the CA.

PCIC argues that in case of a breach of contract, the performance bond is answerable
only for actual or compensatory, not for liquidated damages. The terms of the bond are clear
that the liability of the surety is determined by the contract of suretyship and cannot be
extended by implication beyond the terms of the contract. Nonetheless, even assuming that
it is liable under the performance bond, the liability should be based on equity. It claims that
it is unlawful and iniquitous to hold FCC responsible for the delay of the subcontractor
commissioned by PDSC.

PCIC adds that the act of PDSC of subcontracting the various stages of the project
resulted in a revision of work schedule and extension of the completion date that ultimately
released both FCC and PCIC of whatever claims PDSC may have against them. PCIC is of the
impression that since the subcontracting made by PDSC was made without its consent and
knowledge, its liability under the performance bond should be extinguished.
PCIC also pointed out that the receivable in the amount of 2,793,000.00 acquired by
PDSC from Caltex and the proceeds from the auction sale in the sum of 662,836.50 should
be deducted from the award of 3,882,725.13.
The Court finds no merit in the petition.
The Building Contract entered into by PDSC and FCC provides that:
Art. 2 ESSENCE OF THE CONTRACT
2.1 It is understood that time, quality of work in accordance with the
OWNERs requirements, and reduced construction costs are the
essence of this Contract.
2.2 The CONTRACTOR shall commence the construction for the first
two (2) levels not later than five (5) days immediately after the
date of execution of this Contract and shall regularly proceed and
complete the construction within Two Hundred Fifty-Nine (259)
calendar days reckoned from the date of signing of this Contract
or not later than October 15, 1999, whichever is earlier. To ensure
completion of the work within the time given herein, construction
work shall be conducted at least twenty hours each day with at
least two (2) work shift for every day actually worked.
2.3 In the event that the construction is not completed within
the aforesaid period of time, the OWNER is entitled and
shall have the right to deduct from any amount that may
be due to the CONTRACTOR the sum of one-tenth (1/10) of

one percent (1%) of the contract price for every day of

delay in whatever stage of the project as liquidated
damages, and not by way of penalty, and without
prejudice to such other remedies as the OWNER may, in its
discretion, employ including the termination of this
Contract, or replacement of the CONTRACTOR.
2.4 Furthermore, the CONTRACTOR agrees not to request any
extension of time due to any delay in the procurement of
materials needed in the construction other than due to
circumstances of Force Majeure. Force Majeure is hereby
defined as any war, civil commotion and disturbance, acts of God
or any other cause beyond the CONTRACTORs control and
without any contributing fault on the part of the CONTRACTOR.
2.5 Contractor shall arrange, schedule and carry on the work so as not
to interfere with the delivery and erection of the work of others.
To facilitate the erection of such other work, the CONTRACTOR
shall cease or resume work at any point or stage of the Project,
when so directed by the OWNER or his duly authorized
representative. [Emphasis supplied]
Paragraph 2.3 of the Building Contract clearly provides a stipulation for the payment
of liquidated damages in case of delay in the construction of the project. Such is in the
nature of a penalty clause fixed by the contracting parties as a compensation or substitute
for damages in case of breach of the obligation. [34] The contractor is bound to pay the
stipulated amount without need for proof of the existence and the measures of damages
caused by the breach.[35]
Article 2226 of the Civil Code allows the parties to a contract to stipulate on
liquidated damages to be paid in case of breach. It is attached to an obligation in order to
insure performance and has a double function: (1) to provide for liquidated damages, and (2)
to strengthen the coercive force of the obligation by the threat of greater responsibility in
the event of breach. [36] As a general rule, contracts constitute the law between the parties,
and they are bound by its stipulations. [37] For as long as they are not contrary to law, morals,
good customs, public order, or public policy, the contracting parties may establish such
stipulations, clauses, terms and conditions as they may deem convenient. [38]
In the case at bench, the performance bond issued by PCIC specifically provides that:
KNOW ALL MEN BY THESE PRESENTS:
That we, N.C. FRANCIA CONSTRUCTION CORPORATION of Merryland
Corporate Offices, 3250 Gracia St., cor. Edsa, Brgy. Pinagkaisahan, Makati City,
as Principal and PHILIPPINE CHARTER INSURANCE CORPORATION, a
corporation duly organized and existing under and by virtue of the laws of the
Philippines, as Surety, are held and firmly bound unto PETROLEUM

DISTRIBUTORS & SERVICES CORPORATION, as obligee in the sum of PESOS SIX

MILLION EIGHT HUNDRED TWENTY EIGHT THOUSAND THREE HUNDRED
TWENTY NINE & 66/100 ONLY (6,828,329.66) Philippine Currency for the
payment of which sum well and truly to be made, we bind ourselves, our
heirs, executors, administrators, successors, and assigns, jointly and severally,
firmly by these presents.
THE CONDITION OF THIS OBLIGATION ARE AS FOLLOWS:
WHEREAS, the above bounden principal, on the ____ day of
________ 19___ entered into an ________________ with ___________, to fully
and faithfully guarantee that the above-named Principal shall
furnish, deliver, place and complete any and all necessary materials,
labor, plant, tools appliances and equipment, supplies, utilities
transportation, superintendence, supervision and all other facilities
in connection with the construction of a 4-storey commercial/parking
complex situated at MIA Road cor. Domestic Road, Pasay City as per
attached Building Contract dated January 27, 1999.
Provided, however, that the liability of the Surety Company under this
bond shall in no case exceed the face value hereof.
WHEREAS, said oblige requires said principal to give a good and
sufficient bond in the above stated sum to secure the full and faithful
performance on its part of said undertaking.

NOW THEREFORE, if the principal shall well and truly perform and fulfill
all the undertakings, covenants, terms conditions and agreements stipulated
in said undertakings then this obligation shall be null and void; otherwise it
shall remain in full force and effect. [Emphasis Supplied]

By the language of the performance bond issued by PCIC, it guaranteed the full and
faithful compliance by FCC of its obligations in the construction of the Park N Fly. In fact, the
primary purpose for the acquisition of the performance bond was to guarantee to PDSC that
the project would proceed in accordance with the terms and conditions of the contract and
to ensure the payment of a sum of money in case the contractor would fail in the full
performance of the contract.[39] This guaranty made by PCIC gave PDSC the right to proceed
against it (PCIC) following FCCs non-compliance with its obligation.
A contract of suretyship is an agreement whereby a party, called the surety,
guarantees the performance by another party, called the principal or obligor, of an
obligation or undertaking in favor of another party, called the obligee. [40] Although the

contract of a surety is secondary only to a valid principal obligation, the surety becomes
liable for the debt or duty of another although it possesses no direct or personal interest
over the obligations nor does it receive any benefit therefrom. [41] This was explained in the
case of Stronghold Insurance Company, Inc. v. Republic-Asahi Glass Corporation,[42] where it
was written:

The suretys obligation is not an original and direct one for the
performance of his own act, but merely accessory or collateral to the
obligation contracted by the principal. Nevertheless, although the contract of
a surety is in essence secondary only to a valid principal obligation, his
liability to the creditor or promisee of the principal is said to be direct, primary
and absolute; in other words, he is directly and equally bound with the
principal.

Corollary, when PDSC communicated to FCC that it was terminating the contract,
PCICs liability, as surety, arose. The claim of PDSC against PCIC occurred from the failure of
FCC to perform its obligation under the building contract. As mandated by Article 2047 of
the Civil Code, to wit:
Article 2047. By guaranty, a person, called the guarantor, binds himself
to the creditor to fulfill the obligation of the principal debtor in case the latter
should fail to do so.
If a person binds himself solidarily with the principal debtor, the
provisions of Section 4, Chapter 3, Title I of this Book shall be observed. In
such case, the contract is called a suretyship.
Thus, suretyship arises upon the solidary binding of a person deemed the surety with
the principal debtor for the purpose of fulfilling an obligation. [43] A surety is considered in law
as being the same party as the debtor in relation to whatever is adjudged touching the
obligation of the latter, and their liabilities are interwoven as to be inseparable.
[44]

Therefore, as surety, PCIC becomes liable for the debt or duty of FCC although it

possesses no direct or personal interest over the obligations of the latter, nor does it receive
any benefit therefrom.[45]
The Court also found untenable the contention of PCIC that the principal contract was
novated when PDSC and FCC executed theSeptember 10, 1999 MOA, without informing the
surety, which, in effect, extinguished its obligation.

A surety agreement has two types of relationship: (1) the principal relationship
between the obligee and the obligor; and (2) the accessory surety relationship between the
principal and the surety. The obligee accepts the suretys solidary undertaking to pay if the
obligor does not pay. Such acceptance, however, does not change in any material way the
obligees relationship with the principal obligor. Neither does it make the surety an active
party in the principal obligor-obligee relationship. It follows, therefore, that the acceptance
does not give the surety the right to intervene in the principal contract. The suretys role
arises only upon the obligors default, at which time, it can be directly held liable by the
obligee for payment as a solidary obligor.[46]
Furthermore, in order that an obligation may be extinguished by another which
substitutes the same, it is imperative that it be so declared in unequivocal terms, or that the
old and new obligation be in every point incompatible with each other. [47] Novation of a
contract is never presumed. In the absence of an express agreement, novation takes place
only when the old and the new obligations are incompatible on every point. [48]
Undoubtedly, a surety is released from its obligation when there is a material
alteration of the principal contract in connection with which the bond is given, such as a
change which imposes a new obligation on the promising party, or which takes away some
obligation already imposed, or one which changes the legal effect of the original contract
and not merely its form.[49] In this case, however, no new contract was concluded and
perfected between PDSC and FCC. A reading of the September 10, 1999 MOA reveals that
only the revision of the work schedule originally agreed upon was the subject thereof. The
parties saw the need to adjust the work schedule because of the various subcontracting
made by PDSC. In fact, it was specifically stated in the MOA that all other terms and
conditions of the Building Contract of27 January 1999 not inconsistent herewith shall remain
in full force and efect.[50] There was no new contract/agreement which could be considered
to have substituted the Building Contract. As correctly ruled by the CA, thus:
At first blush, it would seem that the parties agreed on a revised
timetable for the construction of Park N Fly. But then, nowhere in the
voluminous records of this case could We find the Annex A mentioned in the
above-quoted agreement which could have shed light to the question of
whether a new period was indeed fixed by the parties. The testimony of
appellant Emmanuel Francia, Sr., President and Chief Executive Officer of
appellant N.C, Francia, candidly disclosed what truly happened to Annex A,
as he admitted that no new PERT/CPM was actually attached to the
Memorandum of Agreement.
Accordingly, We find no compelling reason to declare that novation
ensued under the prevailing circumstances. The execution of the Building
Contract dated 27 January 1999 does not constitute a novation of the
Memorandum of Agreement dated 10 September 1999. There lies no

incompatibility between the two contracts as their principal object and

conditions remained the same. While there is really no hard and fast rule to
determine what might constitute to be a sufficient change that can bring
about novation, the touchtone for contrariety, however, would be an
irreconcilable incompatibility between the old and the new obligations. [51]

It must likewise be emphasized that pursuant to the September 10, 1999 MOA, PCIC
extended the coverage of the performance bond until March 2, 2000.[52]
Finally, as pointed out by PCIC, the receivable in the amount of 2,793,000.00
acquired by PDSC from Caltex and the proceeds from the auction sale in the sum of
662,836.50 should be deducted from the award of 3,882,725.13. There is no quibble on
this point. The ruling of the CA on the matter is very clear. It reads:
With these points firmly in mind, We proceed to the next question
raised by appellants whether the value of the securities given as well as the
proceeds of the sale of chattels should be deducted from the claim of
liquidated damages.
We answer in the affirmative.
There is no quibble that appellant N.C Francia assigned a portion of its
receivables from Caltex Philippines, Inc. in the amount of2,793,000.00
pursuant to the Deed of Assignment dated 10 September 1999. Upon transfer
of said receivables, appellee Petroleum Distributors automatically stepped into
the shoes of its transferor. It is in keeping with the demands of justice and
equity that the amount of these receivables be deducted from the claim for
liquidated damages.
So too, vehicles and equipment owned by appellant N.C. Francia were
sold at public auction at 1,070,000.00. After deducting storage fees, the
amount of 662,836.50 was deposited before the court a quo. The latter
amount accrues in favor of appellee Petroleum Distributors as partial payment
of its claim for liquidated damages.

WHEREFORE, the petition is DENIED. The July 31, 2007 Decision and December 28,
2007 Resolution of the Court of Appeals(CA) in CA-G.R. CV No. 82417 are AFFIRMED. The
receivable in the amount of 2,793,000.00 acquired by PDSC from Caltex and the proceeds
from the auction sale in the sum of 662,836.50 should be deducted from the award of
3,882,725.13.
SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION

G.R. No. 84526 January 28, 1991

PHILIPPINE COMMERCIAL & INDUSTRIAL BANK and JOSE HENARES, petitioners,
vs.
THE HON. COURT OF APPEALS and MARINDUQUE MINING AND INDUSTRIAL
CORPORATION, respondents.
Bengzon, Zarraga, Narciso, Cudala, Pecson & Bengson for petitioners.
Rexes V. Alejano for private respondent.

SARMIENTO, J.:p
This is a petition for review on certiorari which assails both the resolution 1 dated June 27,
1988 of the Court of Appeals2 which reconsidered and set aside its earlier decisions 3 dated
February 26, 1988 reversing the decision 4 of the trial court and the subsequent
resolution 5 dated August 3, 1988 which denied the petitioners' motion for reconsideration.
The dispositive portion of the resolution in question dated June 27, 1988 reads as follows:
xxx xxx xxx
For the reasons above adduced, We are constrained to reconsider Our
aforesaid decision and to set it aside and in lieu thereof hereby enter another
decision AFFIRMING the decision dated January 15, 1985 of the Regional Trial
Court of Manila, Branch 11, in Civil Case No. 103100 entitled "Marinduque
Mining and Industrial Corporation (MMIC) vs. Philippine Commercial and
Industrial Bank, et al." 6
The undisputed facts

as gathered from the findings of the trial court are as follows:

The instant case originated from an action 8 filed with the National Labor Relations
Commission (NLRC) by a group of laborers who obtained therefrom a favorable judgment for
the payment of backwages amounting to P205,853.00 against the private respondent.
On April 26, 1976, the said Commission issued a writ of execution directing the Deputy
Sheriff of Negros Occidental, one Damian Rojas, to enforce the aforementioned judgment.
The pertinent portion of the said writ reads as follows:
xxx xxx xxx
Further, you are to collect from same respondent the total amount of
P205,853.00 as their backwage (sic) for twelve (12) months and then turn
over said amount to this commission for further disposition. In case you fail to
collect said amount in cash, you are to cause the satisfaction of the same on
the movable or immovable properties of the respondent not exempt from
execution. (Exhs. G, G-1 and G-3, also Exh. 3; Emphasis supplied). 9

Accordingly, on April 28, 1976, the aforenamed deputy sheriff went to the mining site of the
private respondent and served the writ of execution on the persons concerned, but nothing
seemed to have happened thereat.
Thereafter, the Sheriff prepared on his own a Notice of Garnishment dated April 29, 1976
addressed to six (6) banks, all located in Bacolod City, one of which being the petitioner
herein, directing the bank concerned to immediately issue a check in the name of the
Deputy Provincial Sheriff of Negros Occidental in an amount equivalent to the amount of the
garnishment and that proper receipt would be issued therefor.
Incidentally, the house lawyer of the private respondent, Atty. Rexes V. Alejano, acting on a
tip regarding the existence of the said notice of garnishment, communicated with the bank
manager, the petitioner Jose Henares, verbally at first at around 2:00 o'clock in the
afternoon of that day, April 29, 1976, and later confirmed in a formal letter received by the
petitioner Henares at about 5:00 o'clock of that same day, requesting the withholding of any
release of the deposit of the private respondent with the petitioner bank.
Meanwhile, at about 9:30 in the morning of April 29, 1976, the deputy sheriff presented the
Notice of Garnishment and the Writ of Execution attached therewith to the petitioner
Henares and later in the afternoon, demanded from the latter, under pain of contempt, the
release of the deposit of the private respondent.
The petitioner Henares, upon knowing from the Acting Provincial Sheriff that there was no
restraining order from the National Labor Relations Commission and on the favorable advice
of the bank's legal counsel, issued a debit memo for the full balance of the private
respondent's account with the petitioner bank. Thereafter, he issued a manager's check in
the name of the Deputy Provincial Sheriff of Negros Occidental for the amount of
P37,466.18, which was the exact balance of the private respondent's account as of that day.
On the following day, April 30, 1976, at about 1:00 o'clock in the afternoon, the deputy
sheriff returned to the bank in order to encash the check but before the actual encashment,
the petitioner Henares once again inquired about any existing restraining order from the
NLRC and upon being told that there was none, the latter allowed the said encashment.
On July 6, 1976, the private respondent, then plaintiff, filed a complaint before the Regional
Trial Court of Manila, Branch II, against the petitioners and Damian Rojas, the Deputy
Provincial Sheriff of Negros Occidental, then defendants, alleging that the former's current
deposit with the petitioner bank was levied upon, garnished, and with undue haste
unlawfully allowed to be withdrawn, and notwithstanding the alleged unauthorized
disclosure of the said current deposit and unlawful release thereof, the latter have failed and
refused to restore the amount of P37,466.18 to the former's account despite repeated
demands.
Both the petitioners and the Deputy Sheriff filed their respective answers denying the
material averments of the said complaint and alleged that their actuations were all in
accordance with law and likewise filed counterclaims for damages, including a cross-claim of
the former against the latter. The third-party complaint of the petitioners against the fortynine (49) laborers in the NLRC case was, however, dismissed for failure of the sheriff to serve
summons upon the latter.

On January 23, 1982, after several postponements, the pre-trial was finally conducted and
terminated with only the petitioners and the private respondent participating, through their
respective counsel.
On January 15, 1985, the trial court rendered its judgment in favor of the private respondent,
the dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against
the three (3) defendants by ordering the latter to pay, jointly and severally,
the plaintiff the following amounts, to wit:
(a) the sum of P37,466.18, with interest thereon at the rate of 12% per
annum from date of first demand on April 29, 1976 until the amount shall
have been fully and completely restored and paid;
(b) the sum of P10,000.00 as attorney's fees.
Defendants are ordered to pay, jointly and severally, double costs.

10

xxx xxx xxx

On appeal, the respondent court in a decision dated February 26, 1988, first reversed the
said judgment of the lower court, but however, on the motion for reconsideration filed by the
private respondent, subsequently annulled and set aside its said decision in the resolution
dated June 27, 1988. On August 3, 1988, the respondent court denied the petitioner's own
motion for reconsideration.
Hence, this petition.
The petitioners raise two issues,

11

to wit:

1. Whether or not petitioners had legal basis in releasing the garnished

deposit of private respondent to the sheriff.
2. Whether or not petitioners violated Republic Act No. 1405, otherwise known
as the Secrecy of Bank Deposits Act, when they allowed the sheriff to garnish
the deposit of private respondent.
The petition is impressed with merit.
The crux of the instant controversy boils down to the question of whether or not a bank is
liable for releasing its depositor's funds on the strength of the notice of garnishment made
by the deputy sheriff pursuant to a writ of execution issued by the National Labor Relations
Commission (NLRC).
The respondent court in its questioned resolution dated June 27, 1988, held that the
petitioners were liable, in this wise:

In the case at bar, defendant-appellant PCIB, despite vigorous objections from

plaintiff-appellee, with indecent haste disclosed and released the deposit of
plaintiff-appellee on the strength of a mere notice of garnishment which the
Honorable Supreme Court ruled upon is no authority for the release of the
deposit, thus:
In the second place, the mere garnishment of funds belonging
to a party upon order of the court does not have the effect of
delivering the money garnished to the sheriff or to the party in
whose favor the attachment is issued. The fund is retained by
the garnishee or the person holding the money for the
defendant.
The garnishee, or one in whose hands property is attached or
garnished, is universally regarded as charged with its legal
custody pending outcome of the attachment or garnishment
unless, by local statute and practice, he is permitted to
surrender or pay the garnished property or funds into court, to
the attaching officer, or to a receiver or trustee appointed to
receive them. (5 Am. Jur. 14)
The effect of the garnishment, therefore, was to require the
Philippine Trust Company, holder of the funds of the Luzon
Surety Co., to set aside said amount from the funds of the
Luzon Surety Co., and keep the same subject to the final orders
of the Court. In the case at bar there was never an order to
deliver the full amount garnished to the plaintiff-appellee; all
that was ordered to be delivered after the judgment had
become final was the amount found by the Court of Appeals to
be due. The balance of the amount garnished, therefore,
remained all the time in the possession of the bank as part of
the funds of the Luzon Surety Co. although the same could not
be disposed of by the owner. (De la Rama vs. Villarosa, et al., L17927, June 29, 1963, 8 SCRA 413, 418-419; Emphasis
supplied).12
The above-mentioned contention citing De la Rama is not exactly on all fours with the facts
of the case at bar. In De la Rama, the amount garnished was not actually taken possession
of by the sheriff, even from the time of garnishment, because the judgment debtor was able
to appeal to the Court of Appeals and obtain from the Court an injunction prohibiting
execution of the judgment.
On the other hand, nowhere in the record of the present case is there any evidence of an
appeal by the private respondent from the decision of the NLRC or the existence of any
restraining order to prevent the release of the private respondent's deposit to the deputy
sheriff at the time of the service of the notice of garnishment and writ of execution to the
petitioners.
On the contrary, the uncontroverted statements in the deposition of the petitioner Henares
that he had previously sought the advice of the bank's counsel and that he had checked
twice with the Acting Provincial Sheriff who had informed him of the absence of any

restraining order, belie any allegation of undue and indecent haste in the release of the said
deposit in question.
The cases more in point to the present controversy are the recent decisions in Engineering
Construction Inc. v. National Power Corporation 13 and Rizal Commercial Banking Corporation
(RCBC) vs. De Castro 14 where the Court absolved both garnishees, MERALCO and RCBC,
respectively, from any liability for their prompt compliance in the release of garnished funds,
The rationale behind Engineering Construction, Inc. and which was quoted in Rizal
Commercial Banking Corporation is persuasive
xxx xxx xxx
But while partial restitution is warranted in favor of NPC, we find that the
Appellate Court erred in not absolving MERALCO, the garnishee, from its
obligations to NPC with respect to the payment to ECI of P1,114,543.23, thus
in effect subjecting MERALCO to double liability. MERALCO should not have
been faulted for its prompt obedience to a writ of garnishment. Unless there
are compelling reasons such as: a defect on the face of the writ or actual
knowledge on the part of the garnishee of lack of entitlement on the part of
the garnisher, it is not incumbent upon the garnishee to inquire or to judge for
itself whether or not the order for the advance execution of a judgment is
valid.
Section 8, Rule 57 of the Rules of Court provides:
Effect of attachment of debts and credits. All persons having
in their possession or under their control any credits or other
similar personal property belonging to the party against whom
attachment is issued, or owing any debts to the same, at the
time of service upon them of a copy of the order of attachment
and notice as provided in the last preceding section, shall be
liable to the applicant of the amount of such credits, debts or
other property, until the attachment be discharged, or any
judgment recovered by him be satisfied, unless such property
be delivered or transferred, or such debts be paid, to the clerk,
sheriff or other proper officer of the court issuing the
attachment.
Garnishment is considered as a specie of attachment for reaching credits
belonging to the judgment debtor and owing to him from a stranger to the
litigation. Under the above-cited rule, the garnishee [the third person] is
obliged to deliver the credits, etc. to the proper officer issuing the writ and
"the law exempts from liability the person having in his possession or under
his control any credits or other personal property belonging to the defendant, .
. . if such property be delivered or transferred, . . . to the clerk, sheriff, or other
officer of the court in which the action is pending."
Applying the foregoing to the case at bar, MERALCO, as garnishee, after
having been judicially compelled to pay the amount of the judgment

represented by funds in its possession belonging to the judgment debtor or

NPC, should be released from all responsibilities over such amount after
delivery thereof to the sheriff. The reason for the rule is self evident. To
expose garnishees to risks for obeying court orders and processes would only
undermine the administration of justice. (Emphasis ours.) 15
xxx xxx xxx
Moreover, there is no issue concerning the indebtedness of the petitioner bank to the private
respondent since the latter has never denied the existence of its deposit with the former, the
said deposit being considered a credit in favor of the depositor against the bank. 16 We
therefore see no application for Sec. 39, Rule 39 of the Rules of Court invoked by the private
respondent as to necessitate the "examination of the debtor of the judgment debtor." 17
Rather, we find the immediate release of the funds by the petitioners on the strength of the
notice of garnishment and writ of execution, whose issuance, absent any patent defect,
enjoys the presumption of regularity, sufficiently supported by Sec. 41, Rule 39 of the Rules
of Court which reads:
xxx xxx xxx
After an execution against property has issued, a person indebted to the
judgment debtor, may pay to the officer holding the execution the amount of
his debt or so much thereof as may be necessary to satisfy the execution, and
the officer's receipt shall be a sufficient discharge for the amount so paid or
directed to be credited by the judgment creditor on the execution.
xxx xxx xxx
Finally, we likewise take cognizance of the subject of the judgment sought to be enforced in
the writ of execution in question, namely, laborers' backwages. We believe that the
petitioners should rather be commended for having acted with urgent dispatch despite
attempts by the private respondent, as with so many scheming employers, to frustrate or
unjustifiably delay the prompt satisfaction of final judgments which often result in undue
prejudice to the legitimate claims of labor.
With regard to the second issue, we find no violation whatsoever by the petitioners of
Republic Act No. 1405, otherwise known as the Secrecy of Bank Deposits Act. The Court
in China Banking Corporation vs. Ortega 18 had the occasion to dispose of this issue when it
stated, thus:
It is clear from the discussion of the conference committee report on Senate
Bill No. 351 and House Bill No. 3977, which later became Republic Act 1405,
that the prohibition against examination of or inquiry into a bank deposit
under Republic Act 1405 does not preclude its being garnished to insure
satisfaction of a judgment. Indeed there is no real inquiry in such a case, and
if existence of the deposit is disclosed the disclosure is purely incidental to the
execution process. It is hard to conceive that it was ever within the intention
of Congress to enable debtors to evade payment of their just debts, even if

ordered by the Court, through the expedient of converting their assets into
cash and depositing the same in a bank.
Since there is no evidence that the petitioners themselves divulged the information that the
private respondent had an account with the petitioner bank and it is undisputed that the
said account was properly the object of the notice of garnishment and writ of execution
carried out by the deputy sheriff, a duly authorized officer of the court, we can not therefore
hold the petitioners liable under R.A. 1405.
While the general rule is that the findings of fact of the appellate court are binding on this
Court, the said rule however admits of exceptions, such as when the Court of Appeals clearly
misconstrued and misapplied the law, drawn from the incorrect conclusions of fact
established by evidence and otherwise at certain conclusions which are based on
misapprehension of facts, 19 as in the case at bar.
The petitioners are therefore absolved from any liability for the disclosure and release of the
private respondent's deposit to the custody of the deputy sheriff in satisfaction of the final
judgment for the laborers' backwages.
WHEREFORE, the petition is GRANTED and the challenged Resolutions dated June 27, 1988
and August 13, 1988 of the Court of Appeals are hereby ANNULLED and SET ASIDE and its
Decision dated February 26, 1988 dismissing the complaint is hereby REINSTATED. With
costs against the private respondent.
SO ORDERED.
Melencio-Herrera, Padilla and Regalado, JJ., concur.
Paras, J., ** took no part.

Intra-Strata Assurance Corporation v. Republic [G.R. No. 156571. July 09, 2008]
03OCT
INTRA-STRATA ASSURANCE CORPORATION and PHILIPPINE HOME ASSURANCE
CORPORATION, petitioners,
vs.
REPUBLIC
OF
THE
PHILIPPINES
represented
by
the
BUREAU
OF
CUSTOMS, respondent.
[G.R. No. 156571. July 09, 2008]
FACTS:
Grand textile is a local manufacturing corporation importing various articles such as
dyestuffs, spare parts for warehouse machinery and filaments. Subsequent to importation,
the articles were transferred to Bureau of Customs (BoC) where it required payment of tariffs

and other charges. Inter-Strata and PhilHome issued warehousing bonds in favor of BoC
which provided that that the goods shall be withdrawn from the bonded warehouse on
payment of the legal customs duties, internal revenue, and other charges to which they
shall then be subject. Without payment of the taxes, customs duties, and charges due and
for purposes of domestic consumption, Grand Textile withdrew the imported goods from
storage. The Bureau of Customs demanded payment of the amounts due from Grand Textile
as importer, and from Intra-Strata and PhilHome as sureties. All three failed to pay. The
government responded by filing a collection suit against the parties with the RTC of Manila.
The RTC ruled in favor of the BoC which was later affirmed by the Court of Appeals.
ISSUES:
Civil Law
(1) Whether or not the withdrawal of the stored goods, wares and merchandise without
notice to them as sureties released them from any liability for the duties, taxes, and
charges they committed to pay under the bonds they issued.
RULINGS:
Civil Law
(1) No. The surety does not, by reason of the surety agreement, earn the right to intervene
in the principal creditor-debtor relationship; its role becomes alive only upon the debtors
default, at which time it can be directly held liable by the creditor for payment as a solidary
obligor. A surety contract is made principally for the benefit of the creditor-obligee and this
is ensured by the solidary nature of the sureties undertaking. Under these terms, the surety
is not entitled as a rule to a separate notice of default,nor to the benefit of excussion, and
may be sued separately or together with the principal debtor.
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-22108

August 30, 1967

GOVERNMENT OF THE REPUBLIC OF THE PHILIPPINES, represented by the BUREAU

OF SUPPLY COORDINATION plaintiff-appellee,
vs.
MARCELINO TIZON, ET AL., defendants.
CAPITAL INSURANCE and SURETY CO., INC., defendant-appellant.

Achacoso, Nera and Ocampo for defendant-appellant.

Office of the Solicitor General Arturo A. Alafriz, Assistant Solicitor General J.C. Borromeo and
Solicitor N. P. Eduardo for plaintif-appellee.
ANGELES, J.:
Appeal from an order of the Court of First Instance of Manila, dated September 11, 1963,
expunging from the record of the case the answer of the Capital Insurance & Surety, Co., Inc.
and remanding said record to the City Court of Manila for execution against the Surety of the
decision rendered by the latter court.
It appears that in a bidding conducted by the Bureau of Supply Coordination of the
Department of General Services, for the supply of "one (1) Baylift portable heavy-duty truck
and auto lift, fully air operated, 500 lbs. capacity, and two (2) Baylift Ramps, U.S.
manufacture", Tizon engineering, of which Marcelino Tizon was the sole owner and
proprietor, won the bid, having offered the lowest bid of P4,000.00. To guarantee faithful
performance of the conditions of the bid, the Bureau of Supply Coordination required Tizon
Engineering to give a bond in the sum of P10,000.00. On September 12, 1958, the Surety
issued its bond for the said amount in favor of the Republic of the Philippines. Tizon
Engineering failed to comply with the conditions of the bid, failing as he did to deliver the
equipment called for in the Buyer's order No. 42546 of the Bureau of Supply, constraining
the latter to purchase the equipment from Fema Trading, the second lowest bidder, resulting
in a loss of P2,975.00 to the Government. Notwithstanding demands made by the Bureau of
Supply on defendants Marcelino Tizon and the Surety to pay said amount, they failed and
refused. Hence, complaint was filed in the City Court of Manila by the Republic of the
Philippines to recover the said sum with legal interests, plus attorney's fees and costs.
Defendant Tizon averred in his answer that: (a) "the alleged bidding conducted by the
Bureau of Supply is in utter disregard and wanton violation of the Rules and Regulations of
the said office"; (b) "that assuming that a corresponding buyer's order was prepared, the
same was not delivered to and duly received by him, such that there has never been a
binding contract between plaintiff and the answering defendant; furthermore, the plaintiff
deliberately failed to notify the answering defendant as to the acceptance of his bid, thus
again violating the Rules and Regulations mentioned above"; (c) that the bond-issued by the
Surety "answers only (for) those contracts legally entered into by the herein defendants with
the Bureau of Supply and certainly not those contracts and/or bids which are of doubtful
legality, as in the present case."
The defendant Surety, in answer to the complaint, admitted having executed a bond in favor
of the Republic of the Philippines for the purpose as therein stated, but denied "that it failed
and refused to pay the demand (of the plaintiff), the truth of the matter being that its codefendant, Marcelino Tizon, doing business under the name of Tizon Engineering, has put it
on notice not to settle the claim because he is not in any way whatsoever liable to plaintiff."
As cross-claim against defendant Tizon, the Surety asserted that if it is made liable to the
plaintiff on its bond, Marcelino Tizon should be ordered to make the corresponding
reimbursement, with interest of 12%, plus attorney's fees.
After trial, judgment was rendered in favor of the plaintiff and against the defendants,
ordering the latter to pay,jointly and severally, the sum of P2,972.00 with legal interests
from November 12, 1960, and the costs of suit. On the cross-claim of the Surety, defendant

Tizon was ordered to reimburse the cross-plaintiff of whatever amount the latter might have
paid to the plaintiff, plus P100.00 as attorney's fees.
Only defendant Tizon appealed from the decision to the Court of First Instance of Manila.
Within fifteen days from receipt of notice from the clerk of the Court of First Instance of
Manila, that the case has been received and docketed in said court, the defendants, Tizon
and the Surety, each filed separate manifestations that they were reproducing their
respective answers filed in the City Court.
On August 29, 1963, the plaintiff filed a motion praying "(a) To strike out the answer filed by
the Surety reproducing its answer filed in the City Court; (b) To remand the case to the City
Court, as concerns the Surety, for execution of the judgment rendered in said court."
The Surety opposed the motion on two grounds: (a) that although it did not appeal from the
decision of the inferior court, the appeal interposed by its co-defendant inured to its benefit,
because the obligation sued on "is so dependent on that of the principal debtor, that the
Surety is considered in law as being the same party in relation to whatever is adjudged,
touching the obligation of its co-defendant"; and (b) the appeal of its co-defendant, the
principal debtor, "should be considered in law as to include the defendant Surety, in view of
the latter's cross-claim against the former." The opposition was over-ruled in the order
appealed from.
The issue at this instance is whether an appeal by one of the parties sentenced to pay
solidarily a sum of money, inures to the benefit of the other who did not appeal. The
pronouncements in the case of Municipality of Orion vs. Concha, 50 Phil. 682, provide ample
guideposts in the resolution of the issue at bar. In said case this Court held:
The judgment was joint and several, which means that they are severally liable. We
have made a careful examination of numerous authorities and believe that we are
correct in saying that the effect of the appeal by one judgment debtor upon the codebtors depends upon the particular facts and conditions in each case. The difference
in the apparently conflicting opinions may be well illustrated in this very case.
Suppose, for example, that F. B. Concha, the contractor, had appealed from the
judgment of the lower court upon the ground that he had either completed his
contract within time or that the municipality had suffered no damages whatever, and
the Supreme Court had reversed the judgment of the lower court on his appeal.
Certainly that judgment would have the effect of relieving the bondsmen from any
liability whatever, for the reason that their liability was consequent upon the liability
of the contractor; and the court having declared that no liability for damages had
resulted from the execution of said contract, then certainly the bondsmen would have
been relieved because their liability depended upon the liability of the principal. That
example gives us a clear case, showing that the effect of the appeal of the one of the
judgment debtors would necessarily have the effect of releasing his co-judgment
debtors.
xxx

xxx

xxx

As we have already said, whether an appeal by one of several judgment debtors will
affect the liability of those who did not appeal must depend upon the facts in each
particular case. If the judgment can only be sustained upon the liability of the one
who appeals and the liability of the other co-judgment debtors depends solely upon
the question whether or not the appellant is liable, and the judgment is revoked as to
that appellant, then the result of his appeal will inure to the benefit of all. . . .
The rule is quite general that a reversal as to parties appealing does not necessitate
a reversal as to parties not appealing, but that the judgment may be affirmed or left
undisturbed as to them. An exception to the rule exists, however, where a judgment
cannot be reversed as to the party appealing without afecting the rights of his codebtor. (4 C.J. 1184)
A reversal of a judgment on appeal is binding on the parties to the suit, but does not
inure to the benefit of parties against whom judgment was rendered in the lower
court who did not join in the appeal, unless their rights and liabilities and those of the
parties appealing are so interwoven and dependent as to be inseparable, in which
case a reversal as to one operates as a reversal as to all. (4 C.J., 1206; Alling vs.
Wenzel, 133 Ill., 264-278.)
In the case of Brashear vs. Carlin, Curator (19 La. 395) a judgment was rendered in
the lower court against the principal debtor and his surety to pay damages. The
principal debtor alone appealed and the judgment was reversed. When the question
of the liability of the surety under the judgment of the lower court was raised, the
court said:
"It is obvious, that the judgment of the inferior court could not be reversed as
to the principal debtor in this case, and continue in force against the surety.
The latter could not remain bound, after the former had been released;
although the surety had not joined in the appeal, the judgment rendered in
this court inured to his benefit. The obligation of a surety is so dependent on
that of the principal debtor, that he is considered in law as being the same
party as the debtor in relation to whatever is adjudged, touching the
obligation of the latter; provided it be not on grounds personal to such
principal debtor; it is for this reason, that a judgment in favor of the principal
debtor can be invoked as res judicata by the surety."
In the case of Schoenberger vs. White (75 Con. 605) a joint judgment was rendered against
husband and wife for a sum of money in an action ex contractu. The wife appealed. As to the
effect of the appeal of the wife upon the liability of both, the court said:
"Such a judgment is an entirety, and upon appeal to this court must be affirmed or
set aside in toto."
"That the husband was not so made a party does not vary this rule. After the filing of
the notice of appeal, he had the right to be heard in this court as to all the questions
brought up for review. As he has not exercised this right, it may be assumed that he
is content with the judgment against him as it stands; but he might complain of it,
were we to modify it by reducing the amount which it requires his wife to pay, and

thus reducing the amount of the contribution which he might be able to call upon her
to make, in case he paid all that it requires of him."
In the case of Philippines International Surety Co., Inc. vs. Commissioner of Customs, L22790, December 17, 1966, this Court, speaking through Chief Justice Concepcion,
sanctioned the view, albeit impliedly, that under a given set of facts, the appeal of the
principal debtor, if successful, may inure to the benefit of the surety. Held this Court in that
case:
Although the appeal taken from said decision by the importer (principal debtor) might
have, perhaps, inured to the benefit of the surety, if, the result of that appeal had
been favorable to said importer, the fact is he had failed in his appeal.1wph1.t
Solution of the question posed in this appeal hinges on the nature of the obligation assumed
by the Surety under its bond. As Article 1222 of the new Civil Code provides:
A solidary debtor may, in actions filed by the creditor, avail himself of all defenses
which are derived from the nature of the obligation and of those which are personal
to him, or pertain to his own share. With respect to those which personally belong to
the others, he may avail himself thereof only as regards that part of the debt for
which the latter are responsible.
Pertinent parts of the surety bond provides:
That we, Tizon Engineering, as principal, and the Capital Insurance & Surety Co., Inc.,
as surety, . . . are held and firmly bound unto the Republic of the Philippines, in the
penal sum of P10,000.00, for the payment of which sum, well and truly to be made,
we bind ourselves, Jointly and Severally, by these presents.
Whereas, the principal agrees to comply with all the terms and conditions of the
proposal with the Bureau of Supply;
NOW THEREFORE, the conditions of this obligations are such that if the above
bounden principal shall, in case he becomes the successful bidder in any of the
proposal of the Bureau of Supply (a) accept a contract with the Republic of the
Philippines, represented by the Bureau of Supply; (b) faithfully and truly performs in
good faith the contract; (c) to pay to the Republic of the Philippines, in case of delay
and/or default in the execution of the contract, any loss or damages which the latter
may suffer by reason thereof, not to exceed the sum of P10,000.00, Philippine
currency, then this obligation shall be void, otherwise it shall remain in full force and
effect.
It thus appears that the Surety bound itself, jointly and severally, with the principal obligor
to pay the Republic of the Philippines any loss or damage the latter may suffer, not
exceeding P10,000.00, "in case of delay and/or default in the execution of the contract."
However, although the defendants bound themselves in solidum, the liability of the Surety
under its bond would arise only if its co-defendant, the principal obligor, should fail to
comply with the contract. To paraphrase the ruling in the case of Municipality of Orion vs.
Concha, the liability of the Surety is "consequent upon the liability" of Tizon, or "so

dependent on that of the principal debtor" that the Surety "is considered in law as being the
same party as the debtor in relation to whatever is adjudged, touching the obligation of the
latter"; or the liabilities of the two defendants herein "are so interwoven and dependent as
to be inseparable." Changing the expression, if the defendants are held liable, their liability
to pay the plaintiff would be solidary, but the nature of the Surety's undertaking is such that
it does not incur liability unless and until the principal debtor is held liable.
True, it is that the Surety did not appeal the decision of the inferior court to the Court of First
Instance, and on account of its failure to appeal, it lost its personality to appear in the latter
court or to file an answer therein. However this may be, it is not certain at this stage of the
proceeding that the Surety's liability unto plaintiff has attached. The principal debtor has
asserted on appeal that it has no liability whatsoever to the plaintiff, and, if this assertion be
proven and sustained, the reversal of the judgment of the inferior court would operate as a
reversal on the Surety, even though it did not appeal, in view of the dependency of its
obligation upon the liability of the principal debtor. The principal debtor might succeed in his
appeal; in such eventuality, the judgment of the inferior court could not continue in force
against the Surety. Consequently, it is premature at this juncture to execute said judgment
against the Surety.
The situation of the Surety may be likened to that of a defaulting defendant whose right is
protected under Section 4, Rule 18 of the Rules of Court as follows:
Judgment When Some Defendants Answer and Others make Default.When a
complaint states a common cause of action against several defendants, some of
whom answer, and the others fail to do so, the court shall try the case against all
upon the answer thus filed and render judgment upon the evidence presented. The
same procedure applies when a common cause of action is pleaded in a
counterclaim, cross-claim and third-party claim.
Albeit it may not personally be allowed to file an answer in the Court of First Instance, having
failed to interpose an appeal, the Surety can rely on the answer of its co-defendant and
derive benefit therefrom if the judgment on appeal should turn out to be favorable to the
answering defendant (Castro vs. Pea, 80 Phil. 488, 502).
The decision in Ishar Singh vs. Liberty Insurance Corp. and Leonardo Anne, et al., (thirdparty defendants in the third-party complaint of Liberty Insurance Corp.), L-16860, July 31,
1963, relied upon by the appellee, is not applicable to the facts of the case at bar. In said
case, Liberty Insurance Corp. was the only defendant and the decision was against said
defendant alone. The third party defendants were impleaded as such upon the third party
complaint filed against them by the Liberty Insurance Corp. And as stated in the decision in
said case, "the record does not disclose whether the third-party defendants filed an answer
to the third-party complaint or not." Moreover, the liability of the third-party defendants to
the third-party plaintiff stemmed from the indemnity agreement executed by them in favor
of the Liberty Insurance Corp., and the third-party defendants did not have privity of
contract with the creditor Ishar Singh.
Upon the foregoing considerations, that portion of the appealed order remanding the record
of the case to the City Court of Manila for execution of the decision of said court is hereby
set aside, without costs.

Reyes, J.B.L., Dizon, Makalintal, Bengzon, J.P., Zaldivar, Sanchez, Castro and Fernando, JJ.,
concur.
Concepcion, C.J., is on leave.
THIRD DIVISION
[G.R. No. 121879. August 14, 1998]
EMPIRE INSURANCE COMPANY, petitioners, vs. NATIONAL
COMMISSION and MONERA ANDAL,respondents.

LABOR

RELATIONS

DECISION
PURISIMA, J.:
This is a Petition of a surety company disowning solidary liability with its principal, a
recruitment agency, on the monetary claims of an overseas contract worker for illegal
dismissal, non-payment and underpayment of salaries.
The antecedent facts and proceedings can be capsulized, as follows:
Private respondent Monera Andal applied with G & M Phils., Inc. for an overseas
employment as a domestic helper in Riyadh, Kingdom of Saudi Arabia. She was hired for a
term of two years at a monthly basic salary of US $200.00.
She left for the said jobsite on May 17, 1991 and worked for a certain Abdullah Al
Basha. But on January 11, 1992, she was repatriated. Upon her repatriation, she lost no
time in bringing her complaint before the Philippine Overseas Employment Agency (POEA)
for illegal dismissal, non-payment and underpayment of salaries. Impleaded as a corespondent in the complaint was the herein petitioner, Empire Insurance Company, in its
capacity as the surety of G & M Phils.
Subject complaint averred, inter alia, that:
...she was not paid for four months and underpaid for four months; that she was
forced to preterminate her contract due to unbearable treatment in the hands of
her employer and the non-payment and underpayment of her salaries; and that she
was constructively dismissed from employment. In her affidavit, she alleged that she
was unpaid for 3 1/2 months; that for four months she was paid only US $150.00
instead of the agreed rate of US $200.00; that her employer resented her effort to
collect her delayed salaries and, in retaliation, made her work long hours, allowing
her to sleep only five hours daily and requiring her to render services for his relatives
and friends without giving her additional compensation; that after serving her
employer for 7 1/2 months, she sought the help of the Philippine Embassy; that her
employer terminated her employment due to her insistent demand for the payment
of her claims; and that she was repatriated at her own expense. On May 14, 1992,
she testified that the wife of her employer always beat her and that her employer
gave her US $450.00 representing her salaries for three (3) months. In her position
paper, she reiterated the sufferings she allegedly underwent in the course of her
employment and alleged, further, that the efforts of the Philippine Embassy to

mediate and/or to settle her claims failed; that her services were abruptly terminated
by her employer; and she was forced to depart at her own expense (arriving in the
Philippines with only whatever clothing she had on). (pp.2-4, NLRC decision dated
November 22, 1994)
Empire Insurance Company, now the petitioner, theorized that the complainant, Monera
Andal, was without any cause of action against it for the alleged reason that the liability of
its principal and co-respondent had not been established. It further argued that its liability, if
any, for the money claims sued upon was merely subsidiary.
In its answer to the complaint, respondent G & M (Phil.), Inc., stated that it had no
knowledge of complainants unpaid and underpaid salaries, her working conditions and of
the proceedings at the Philippine Embassy. It denied the charge of illegal dismissal,
reasoning out that the complainant abandoned her job. In its position paper, it contended
that the complainants money claims in dispute are not meritorious as the same are not
supported by substantial evidence. It also capitalized on what it branded as the
inconsistencies in the complainants pleadings with her admission that the Philippine
Embassy mediated her claims, which development could have meant that subject claims
had been settled.
On July 13, 1993, POEA Administrator Felicisimo O. Joson decided the claims in
question; disposing, as follows:
WHEREFORE, in the light of the foregoing premises, respondents are hereby ordered
to pay complainant the following:
1. US $200.00 or its peso equivalent representing complainants salary differentials
for four (4) months for the period May 17, 1991 to September 17, 1991 computed at
US $50.00 a month;
2. US $3,300.00 or its peso equivalent representing the payment of salaries for 16.5
months as the unexpired portion of the contract.
SO ORDERED.
From the aforesaid decision adverse to it, petitioner Empire Insurance Company
appealed to the National Labor Relations Commission; posing as issues, that:
1. Complainant (Monera Andal) had no cause of action against petitioner
because the liability of petitioners principal and co-respondent (G&M) had not
been established.
2. Petitioners liability, if any, was merely subsidiary.
On November 22, 1994, the NLRC came out with a judgment of affirmance, upholding
the POEA, and holding, thus:
The argument that respondent Empire Insurance Company is only subsidiarily liable
for the judgment award is unmeritorious. It is settled that a surety is considered in
law as being the same party as the debtor in relation to whatever is adjudged

touching the obligation of the latter, and their liabilities are interwoven as to be
inseparable...
WHEREFORE, the decision appealed from is hereby AFFIRMED.
SO ORDERED.
Undaunted by the denial of its motion for reconsideration, petitioner found its way to
this court via the present petition, raising the pivotal issue of whether or not respondent
NLRC erred in adjudging it (petitioner) jointly liable with its principal, G & M Phils., Inc., for
the payment of private respondents monetary claims.
Petitioner faults respondent NLRC for holding that G & M Phils., Inc. failed to comply with
the rules and regulations of the Department of Labor and Employment. It is petitioners
submission that there is no basis for holding it liable as surety under the premises.
Although it concedes that the burden of proof in cases of illegal dismissal rests on the
employer, petitioner argues that when private respondent Monera Andal asked the
Philippine Embassy in Riyadh, Saudi Arabia to mediate her claims with her employer, such a
move on the part of private respondent shifted the onus probandi to her to substantiate her
claim.
Private respondents Comment sought the dismissal of the petition for being a wrong
mode of appeal from the NLRC decision. It is private respondents stance that appeal from
decisions of the National Labor Relations Commission to the Supreme Court is by a special
civil action forcertiorari under Rule 65 of the Revised Rules of Court. Not a petition for review
under Rule 45.
The Solicitor General, as counsel for respondent NLRC, joined private respondent in
stressing on such procedural defect. Furthermore, the Solicitor General pointed out that the
errors assigned by petitioner deal primarily with factual findings and, as such, are unavailing
under the well-entrenched rule that findings of fact by administrative agencies and quasijudicial bodies are generally accorded not only respect but finality, and are not to be
disturbed on appeal.
We find for respondents.
Before delving into the merits of the petition, the procedural objection of respondents
should first be resolved. Private respondent and the Solicitor General have correctly pointed
out the elementary rule of procedure with regard to review of decisions rendered by the
National Labor Relations Commission. The only way a labor case may reach the Supreme
Court is through a petition for certiorari under Rule 65 of the Revised Rules of Court. [1] A
petition for certiorari which is a special civil action under Rule 65 should be distinguished
from a petition for review on certiorari which is a mode of appeal under Rule 45. Under Rule
65, only questions of jurisdiction or grave abuse of discretion amounting to lack or excess
of jurisdiction may be entertained by the reviewing court. Therefore, only decisions of the
National Labor Relations Commission tainted with grave abuse of discretion or jurisdictional
errors may be elevated to this court.

Findings and/or conclusions of fact cannot be assailed in a petition for certiorari.[2] The
inquiry in such a petition is limited exclusively to the issue of whether or not the respondent
official acted without or in excess of jurisdiction. Consequently, petitioner cannot assail the
finding arrived at by public respondent NLRC that the employer involved violated pertinent
POEA rules and regulations.
However, while an appeal to the Supreme Court from decisions of the National Labor
Relations Commission should be pursued as a special civil action for certiorari, in a number
of cases this court has treated as special civil actions for certiorari petitions erroneously
captioned as petitions for review on certiorari in the interest of justice.[3]
In the case of Peoples Security, Inc. vs. NLRC,[4] this Court held that:
Dismissal of appeal purely on technical grounds is frowned upon where the policy of the
courts is to encourage hearings of appeal on their merits.The rules of procedure ought not
to be applied in a very rigid technical sense, rules of procedure are used only to help
secure, not override substantial justice. If a technical and rigid enforcement of the rules is
made, their aim would be defeated. (Tamayo v. Court of Appeals, 209 SCRA 518, 522 [1992]
citing Gregorio v. Court of Appeals, 72 SCRA 120 [1976] ). Consequently, in the interest of
justice, the instant petition for review shall be treated as a special civil action on certiorari.
The single issue posed for resolution by this court here is - whether or not the
petitioning surety company is jointly liable with its principal, G & M Phils, Inc., a recruitment
agency, for the payment of respondent employees monetary claims in litigation.
We rule in the affirmative. Petitioner is solidarily liable with its principal, G & M Phils.,
Inc., under the attendant facts and circumstances.
Suretyship is a contractual relation resulting from an agreement whereby one person,
the surety, engages to be answerable for the debt, default or miscarriage
of another, known as the principal.[5]
Where the surety bound itself solidarily with the principal obligor, the former is so
dependent on the principal debtor such that the surety is considered in law as being the
same party as the debtor in relation to whatever is adjudged touching the obligation of the
latter, and their liabilities are interwoven as to be inseparable. [6] The suretys liability is
solidary but the nature of its undertaking is such that unless and until the principal debtor is
held liable it does not incur liability.
When the herein petitioner, Empire Insurance Company, entered into a suretyship
agreement with G & M Phils., Inc., it bound itself to answer for the debt or default of the
latter. And, since the POEA and NLRC found the said recruitment agency liable to private
respondent, petitioners liability likewise proceeds from such a finding. As a surety,
petitioner is primarily liable to private respondent, as judgment creditor, for her monetary
claims against its principal, G & M Phils., Inc., and is immediately bound to pay and satisfy
the same.
Time and again, this court has pronounced that claims of overseas workers should be
acted upon with sympathy, and allowed if warranted, conformably to the constitutional
mandate for the protection of the working class. [7] Private employment agencies are held to

be jointly and severally liable with the foreign-based employer for any violation of the
recruitment agreement or contract of employment.[8]
POEA has thus promulgated a rule requiring private recruitment agencies to set up cash
and surety bonds. The purpose of the required surety bond is to insure that if the rights of
overseas workers are violated by their employer, recourse would still be available to them
against the local companies that recruited them for the foreign principal.[9]
It bears stressing that surety companies may be ordered impleaded by the Philippine
Overseas Employment Administration (POEA) in administrative complaints against
recruitment agencies, on surety bonds posted, and are bound by the judgment of POEA.
[10]
This Court discerns no reason why the said rule should not apply to herein petitioner.
WHEREFORE, the petition under consideration is hereby DISMISSED and the appealed
decision of respondent NLRC AFFIRMED. No pronouncement as to costs.
SO ORDERED.
Narvasa (Chairman), CJ., Romero and Kapunan, JJ., concur.
Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 84084 August 20, 1990
FINMAN GENERAL ASSURANCE CORPORATION, petitioner,
vs.
ABDULGANI SALIK, BALABAGAN AMPILAN ALI KUBA GANDHI PUA, DAVID
MALANAO, THE ADMINISTRATOR, PHILIPPINE OVERSEAS AND EMPLOYMENT
ADMINISTRATION, THE SECRETARY OF LABOR AND EMPLOYMENT, respondents.
David I. Unay, Jr. for petitioner.
Kamid D. Abdul for private respondents.

PARAS, J.:
This is a petition for certiorari seeking to annul 1) the Order dated March 28, 1988
of the Honorable Secretary of Labor and Employment in POEA, LRO/RRD Case No.
87-09-1022-DP entitled Abdulgani Salik, et al, v. Pan Pacific Overseas and
Recruiting Services and Finman General Assurance Corporation, which directed
herein petitioner to pay jointly and severally with Pan Pacific the claims of herein
private respondents amounting to P25,000.00 and 2) the Order dated June 7,
1988, which denied petitioner's motion for reconsideration (Rollo, p. 2).

The facts of the case are as follows:

Abdulgani Salik et al., private respondents, allegedly applied with Pan Pacific
Overseas Recruiting Services, Inc. (hereinafter referred to as Pan Pacific) on April
22, 1987 and were assured employment abroad by a certain Mrs. Normita Egil. In
consideration thereof, they allegedly paid fees totalling P30,000.00. But despite
numerous assurances of employment abroad given by Celia Arandia and Mrs. Egil,
they were not employed (Ibid., p. 15).
Accordingly, they filed a joint complaint with the Philippine Overseas Employment
Administration (herein referred to as POEA) against Pan Pacific for Violation of
Articles 32 and 34(a) of the Labor Code, as amended, with claims for refund of a
total amount of P30,000.00 (Ibid.).
The POEA motu proprio impleaded and summoned herein petitioner surety
Finman General Assurance Corporation (hereinafter referred to as Finman), in the
latter's capacity as Pan Pacific's bonding company.
Summons were served upon both Pan Pacific and Finman, but they failed to
answer.
On October 9, 1987, a hearing was called, but only the private respondents
appeared. Despite being deemed in default for failing to answer, both Finman and
Pan Pacific were still notified of the scheduled hearing. Again they failed to
appear. Thus, ex-parte proceedings ensued.
During the hearing, herein private respondents reiterated the allegations in their
complaint that they first paid P20,000.00 thru Hadji Usop Kabagani for which a
receipt was issued signed by Engineer Arandia and countersigned by Mrs. Egil and
a certain Imelda who are allegedly employed by Pan Pacific; that they paid
another P10,000.00 to Engr. Arandia who did not issue any receipt therefor; that
the total payment of P30,000.00 allegedly represents payments for herein private
respondents in the amount of P5,000.00 each, and Abdulnasser Ali, who did not
file any complaint against Pan Pacific (Ibid., pp. 15-16).
Herein private respondents presented as their witness, Hadji Usop Kabagani who
they Identified as the one who actually financed their application and who
corroborated their testimonies on all material points including the non-issuance
of a receipt for P10,000.00 by Engr. Arandia.
Herein petitioner, Finman, in an answer which was not timely filed, alleged,
among others, that herein private respondents do not have a valid cause of action
against it; that Finman is not privy to any transaction undertaken by Pan Pacific
with herein private respondents; that herein private respondents claims are
barred by the statute of frauds and by the fact that they executed a waiver; that
the receipts presented by herein private respondents are mere scraps of paper;
that it is not liable for the acts of Mrs. Egil that Finman has a cashbond of
P75,000.00 only which is less than the required amount of P100,000.00; and that
herein private respondents should proceed directly against the cash bond of Pan
Pacific or against Mrs. Egil (Ibid., pp. 1617).

On March 18,1988, the Honorable Franklin M. Drilon, then the Secretary of Labor
and Employment, upon the recommendation of the POEA hearing officer, issued an
Order, the dispositive portion of which reads:
WHEREFORE, premises considered, both respondents are hereby
directed to pay jointly and severally the claims of complainants, as
follows:
1. Abdulgani Salik P5,000.00
2. Balabagan Ampilan 5,000.00
3. Ali Kuba 5,000.00
4. Gandhi Dua 5,000.00
5. David Malanao 5,000.00
Based on the records of this Administration, respondent agency is
presently serving a total period of suspension of seventeen (1 7)
months imposed in three (3) separate orders issued on June 2, 1987,
August 17, 1987 and September 23, 1987. Under the new schedule of
penalties published on January 21, 1987 in the Philippine Inquirer,
the penalty of cancellation shall be imposed when the offender has
been previously penalized with suspension the total period of which
is 12 months or more. Moreover, the penalty imposable in the case at
bar is two (2) months suspension for each count of violation or a
total period of suspension of ten (10) months as the acts were
committed in April 1987. Thus, whether under the old schedule of
penalties which required a total period of suspension of twenty-four
(24) months for cancellation to be imposed or under the new
schedule which provides for a twelve (12) month total suspension
period, the penalty of cancellation may be properly imposed upon the
herein respondent agency.
In view thereof, the license of Pan Pacific Overseas Recruiting
Services is hereby cancelled, effective immediately.
SO ORDERED. (Ibid., pp. 20-21).
A motion for reconsideration having been denied (Ibid., p. 22), herein petitioner
instituted the instant petition for certiorari, raising the following assigned errors:
I
THE HONORABLE ADMINISTRATOR AND THE HONORABLE, SECRETARY
OF LABOR ACTED WITH GRAVE ABUSE OF DISCRETION AMOUNTING TO
LACK OF JURISDICTION IN MOTU PROPRIO IMPLEADING FINMAN AS
CO-RESPONDENT OF PAN PACIFIC IN POEA LRO/RRD CASE NO. 87-091022 DP WHICH WAS FILED BY ABDULGANI SALIK, ET AL.;

II
THE HONORABLE SECRETARY OF LABOR ACTED WITHOUT OR IN
EXCESS OF JURISDICTION AND WITH GRAVE ABUSE OF DISCRETION
AMOUNTING TO LACK OF JURISDICTION IN DIRECTING FINMAN TO PAY
JOINTLY AND SEVERALLY WITH PAN PACIFIC THE CLAIMS OF PRIVATE
RESPONDENTS ON THE BASIS OF THE SURETYSHIP AGREEMENT
BETWEEN FINMAN AND PAN PACIFIC AND THE PHILIPPINE OVERSEAS
EMPLOYMENT ADMINISTRATION (POEA FOR SHORT); AND
III
THE FINDINGS OF FACT MADE BY THE POEA AND UPON WHICH THE
HONORABLE SECRETARY OF LABOR BASED ITS QUESTIONED ORDERS
ARE NOT SUPPORTED BY SUBSTANTIAL EVIDENCE AND ARE
CONTRARY TO LAW. (Ibid., p. 101)
As required by this Court, herein public respondents filed their memorandum on
July 28, 1989 (Ibid., p. 84); while that of petitioner and private respondents were
filed on September 11, 1989 (Ibid., p. 89) and March 16, 1990 (Ibid., p. 120),
respectively.
The petition is devoid of merit.
In its first and second assigned errors, petitioner maintains that POEA has no
jurisdiction to directly enforce the suretyship undertaking of FINMAN (herein
petitioner) under the surety bond (Ibid., p. 104).
In the case at bar, it remains uncontroverted that herein petitioner and Pan
Pacific entered into a suretyship agreement, with the former agreeing that the
bond is conditioned upon the true and faithful performance and observance of the
bonded principal (Pan Pacific) of its duties and obligations. It was also understood
that under the suretyship agreement, herein petitioner undertook itself to be
jointly and severally liable for all claims arising from recruitment violation of Pan
Pacific (Ibid., p. 23), in keeping with Section 4, Rule V, Book I of the Implementing
Rules of the Labor Code, which provides:
Section 4. Upon approval of the application, the applicant shall pay
to the Ministry (now Department) a license fee of P6,000.00, post a
cash bond of P50,000.00 or negotiable bonds of equivalent amount
convertible to cash issued by banking or financial institution duly
endorsed to the Ministry (now Department) as well as a surety bond
of P150,000.00 from an accredited bonding company to answer for
valid and legal claims arising from violations of the conditions of the
license or the contracts of employment and guarantee compliance
with the provisions of the Code, its implementing rules and
regulations and appropriate issuances of the Ministry (now
Department). (Emphasis supplied)

Accordingly, the nature of Finman's obligation under the suretyship agreement

makes it privy to the proceedings against its principal (Pan Pacific). As such
Finman is bound, in the absence of collusion, by a judgment against its principal
even though it was not a party to the proceedings Leyson v. Rizal Surety and
Insurance Co., 16 SCRA 551 (1966). Furthermore, in Government of the
Philippines v. Tizon (20 SCRA 1182 [1967]), this Court ruled that where the surety
bound itself solidarily with the principal obligor the former is so dependent on the
principal debtor "that the surety is considered in law as being the same party as
the debtor in relation to whatever is adjudged touching the obligation of the
latter." Applying the foregoing principles to the case at bar, it can be very well
said that even if herein Finman was not impleaded in the instant case, still it
(petitioner) can be held jointly and severally liable for all claims arising from
recruitment violation of Pan Pacific. Moreover, as correctly stated by the Solicitor
General, private respondents have a legal claim against Pan Pacific and its insurer
for the placement and processing fees they paid, so much so that in order to
provide a complete relief to private respondents, petitioner had to be impleaded
in the case (Rollo, p. 87).
Furthermore, Finman contends that herein respondent Secretary of Labor cannot
validly assume jurisdiction over the case at bar; otherwise, proceedings will be
railroaded resulting in the deprivation of the former of any remedial measures
under the law.
The records of the case reveal that herein Finman filed a motion for
reconsideration of the adverse decision dated March 18, 1988 of respondent
Secretary of Labor. In the said motion for reconsideration, no jurisdictional
challenge was made (Ibid., p. 22). It was only when it filed this petition that it
assailed the jurisdiction of the respondent Secretary of Labor, and that of the
POEA. But then, it was too late. Estoppel had barred herein petitioner from
raising the issue, regardless of its merits (Akay Printing Press v. Minister of Labor
and Employment, 140 SCRA 381 [1985]).
Hence, Finman's contention that POEA's and respondent Secretary's actions in
impleading and directing herein petitioner to pay jointly and severally with Pan
Pacific the claims of private respondents constitute a grave abuse of discretion
amounting to lack of jurisdiction has no basis. (Ibid., p. 101.)
As regards the third assigned error, herein petitioner maintains that the findings
of fact made by the POEA upon which respondent Secretary of Labor based his
questioned Orders are not supported by substantial evidence and are contrary to
law, is likewise untenable.
Herein petitioner, in raising this third issue, is, in effect, asking this Court to
review the respondent Secretary's findings of facts.
Well-settled is the rule that findings of facts of the respondent Secretary are
generally accorded great weight unless there was grave abuse of discretion or
lack of jurisdiction in arriving at such findings (Asiaworld Publishing House, Inc.
vs. Ople, 152 SCRA 219 (1987).

In the case at bar, it is undisputed that when the case was first set for hearing,
only the private respondents appeared, despite summons having been served
upon both herein petitioner and Pan Pacific. This, notwithstanding, both herein
petitioner and Pan Pacific were again notified of the scheduled hearing, but, as
aforestated they also' failed to a pear (Rollo, p. 15). Accordingly, owing to the
absence of any controverting evidence, respondent Secretary of Labor admitted
and considered private respondents' testimonies and evidence as substantial.
Under the circumstances, no justifiable reason can be found to justify disturbance
of the findings of facts of the respondent Secretary of Labor, supported as they
are by substantial evidence and in the absence of grave abuse of discretion
(Asiaworld Publishing House, Inc. v. Ople, supra); and in line with the well
established principle that the findings of administrative agencies which have
acquired expertise because their jurisdiction is confined to specific matters are
generally accorded not only respect but at times even finality. (National
Federation of Labor Union (NAFLU) v. Ople, 143 SCRA 124 [1986])
PREMISES CONSIDERED, the questioned Orders of respondent Secretary of Labor
are hereby AFFIRMED intoto,
SO ORDERED.
Melencio-Herrera (Chairperson), Padilla and Regalado, JJ., concur.
Sarmiento, J., is on leave.
Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 155868

February 6, 2007

SPOUSES GREGORIO and JOSEFA YU, Petitioners,

vs.
NGO YET TE, doing business under the name and style, ESSENTIAL
MANUFACTURING, Respondent.
DECISION
AUSTRIA-MARTINEZ, J.:
Before us is a Petition for Review on Certiorari under Rule 45 of the Rules of Court assailing
the March 21, 2001 Decision1 of the Court of Appeals (CA) in CA-G.R. CV No. 522462 and its
October 14, 2002 Resolution.3
The antecedent facts are not disputed.
Spouses Gregorio and Josefa Yu (Spouses Yu) purchased from Ngo Yet Te (Te) bars of
detergent soap worthP594,240.00, and issued to the latter three postdated checks 4 as

payment of the purchase price. When Te presented the checks at maturity for encashment,
said checks were returned dishonored and stamped "ACCOUNT CLOSED". 5 Te
demanded6 payment from Spouses Yu but the latter did not heed her demands. Acting
through her son and attorney-in-fact, Charry Sy (Sy), Te filed with the Regional Trial Court
(RTC), Branch 75, Valenzuela, Metro Manila, a Complaint, 7 docketed as Civil Case No. 4061-V93, for Collection of Sum of Money and Damages with Prayer for Preliminary Attachment.
In support of her prayer for preliminary attachment, Te attached to her Complaint an
Affidavit executed by Sy that Spouses Yu were guilty of fraud in entering into the purchase
agreement for they never intended to pay the contract price, and that, based on reliable
information, they were about to move or dispose of their properties to defraud their
creditors.8
Upon Tes posting of an attachment bond,9 the RTC issued an Order of
Attachment/Levy10 dated March 29, 1993 on the basis of which Sheriff Constancio Alimurung
(Sheriff Alimurung) of RTC, Branch 19, Cebu City levied and attached Spouses Yus properties
in Cebu City consisting of one parcel of land (known as Lot No. 11) 11 and four units of motor
vehicle, specifically, a Toyota Ford Fierra, a jeep, a Canter delivery van, and a passenger
bus.12
On April 21, 1993, Spouses Yu filed an Answer13 with counterclaim for damages arising from
the wrongful attachment of their properties, specifically, actual damages amounting
to P1,500.00 per day; moral damages,P1,000,000.00; and exemplary damages, P50,000.00.
They also sought payment of P120,000.00 as attorneys fees and P80,000.00 as litigation
expenses.14 On the same date, Spouses Yu filed an Urgent Motion to Dissolve Writ of
Preliminary Attachment.15 They also filed a Claim Against Surety Bond16 in which they
demanded payment from Visayan Surety and Insurance Corporation (Visayan Surety), the
surety which issued the attachment bond, of the sum of P594,240.00, representing the
damages they allegedly sustained as a consequence of the wrongful attachment of their
properties.
While the RTC did not resolve the Claim Against Surety Bond, it issued an Order 17 dated May
3, 1993, discharging from attachment the Toyota Ford Fierra, jeep, and Canter delivery van
on humanitarian grounds, but maintaining custody of Lot No. 11 and the passenger bus.
Spouses Yu filed a Motion for Reconsideration18 which the RTC denied.19
Dissatisfied, they filed with the CA a Petition for Certiorari,20 docketed as CA-G.R. SP No.
31230, in which a Decision21 was rendered on September 14, 1993, lifting the RTC Order of
Attachment on their remaining properties. It reads in part:
In the case before Us, the complaint and the accompanying affidavit in support of the
application for the writ only contains general averments. Neither pleading states in
particular how the fraud was committed or the badges of fraud purportedly committed by
the petitioners to establish that the latter never had an intention to pay the obligation;
neither is there a statement of the particular acts committed to show that the petitioners are
in fact disposing of their properties to defraud creditors. x x x.
xxxx

Moreover, at the hearing on the motion to discharge the order of attachment x x x

petitioners presented evidence showing that private respondent has been extending multimillion peso credit facilities to the petitioners for the past seven years and that the latter
have consistently settled their obligations. This was not denied by private respondent.
Neither does the private respondent contest the petitioners allegations that they have been
recently robbed of properties of substantial value, hence their inability to pay on time. By
the respondent courts own pronouncements, it appears that the order of attachment was
upheld because of the admitted financial reverses the petitioner is undergoing.
This is reversible error. Insolvency is not a ground for attachment especially when defendant
has not been shown to have committed any act intended to defraud its creditors x x x.
For lack of factual basis to justify its issuance, the writ of preliminary attachment issued by
the respondent court was improvidently issued and should be discharged. 22
From said CA Decision, Te filed a Motion for Reconsideration but to no avail. 23
Te filed with us a Petition for Review on Certiorari24 but we denied the same in a Resolution
dated June 8, 1994 for having been filed late and for failure to show that a reversible error
was committed by the CA.25 Entry of Judgment of our June 8, 1994 Resolution was made on
July 22, 1994.26 Thus, the finding of the CA in its September 14, 1993 Decision in CA-G.R. SP
No. 31230 on the wrongfulness of the attachment/levy of the properties of Spouses Yu
became conclusive and binding.
However, on July 20, 1994, the RTC, apparently not informed of the SC Decision, rendered a
Decision, the dispositive portion of which reads:
WHEREFORE, premises considered, the Court finds that the plaintiff has established a valid
civil cause of action against the defendants, and therefore, renders this judgment in favor of
the plaintiff and against the defendants, and hereby orders the following:
1) Defendants are hereby ordered or directed to pay the plaintiff the sum
of P549,404.00, with interest from the date of the filing of this case (March 3, 1993);
2) The Court, for reasons aforestated, hereby denies the grant of damages to the
plaintiff;
3) The Court hereby adjudicates a reasonable attorneys fees and litigation expenses
of P10,000.00 in favor of the plaintiff;
4) On the counterclaim, this Court declines to rule on this, considering that the
question of the attachment which allegedly gave rise to the damages incurred by the
defendants is being determined by the Supreme Court.
SO ORDERED.27 (Emphasis ours)
Spouses Yu filed with the RTC a Motion for Reconsideration28 questioning the disposition of
their counterclaim. They also filed a Manifestation29 informing the RTC of our June 8, 1994
Resolution in G.R. No. 114700.

The RTC issued an Order dated August 9, 1994, which read:

xxxx
(2) With regard the counter claim filed by the defendants against the plaintiff for the
alleged improvident issuance of this Court thru its former Presiding Judge (Honorable
Emilio Leachon, Jr.), the same has been ruled with definiteness by the Supreme Court
that, indeed, the issuance by the Court of the writ of preliminary attachment appears
to have been improvidently done, but nowhere in the decision of the Supreme
Court and for that matter, the Court of Appeals decision which was in effect
sustained by the High Court, contains any ruling or directive or imposition,
of any damages to be paid by the plaintiff to the defendants, in other words,
both the High Court and the CA, merely declared the previous issuance of the writ of
attachment by this Court thru its former presiding judge to be improvidently issued,
but it did not award any damages of any kind to the defendants, hence, unless the
High Court or the CA rules on this, this Court coud not grant any damages by virtue
of the improvident attachment made by this Court thru its former presiding judge,
which was claimed by the defendants in their counter claim.
(3) This Court hereby reiterates in toto its Decision in this case dated July 20,
1994. 30 (Emphasis ours)
The RTC also issued an Order dated December 2, 1994,31 denying the Motion for
Reconsideration of Spouses Yu.32
In the same December 2, 1994 Order, the RTC granted two motions filed by Te, a Motion to
Correct and to Include Specific Amount for Interest and a Motion for Execution Pending
Appeal.33 The RTC also denied Spouses Yus Notice of Appeal34 from the July 20, 1994
Decision and August 9, 1994 Order of the RTC.
From said December 2, 1994 RTC Order, Spouses Yu filed another Notice of Appeal
the RTC also denied in an Order36 dated January 5, 1995.

35

which

Spouses Yu filed with the CA a Petition37 for Certiorari, Prohibition and Mandamus, docketed
as CA-G.R. SP No. 36205, questioning the denial of their Notices of Appeal; and seeking the
modification of the July 20, 1994 Decision and the issuance of a Writ of Execution. The CA
granted the Petition in a Decision38 dated June 22, 1995.
Hence, Spouses Yu filed with the CA an appeal39 docketed as CA-G.R. CV No. 52246,
questioning only that portion of the July 20, 1994 Decision where the RTC declined to rule on
their counterclaim for damages.40 However, Spouses Yu did not dispute the specific
monetary awards granted to respondent Te; and therefore, the same have become final and
executory.
Although in the herein assailed Decision41 dated March 21, 2001, the CA affirmed in toto the
RTC Decision, it nonetheless made a ruling on the counterclaim of Spouses Yu by declaring
that the latter had failed to adduce sufficient evidence of their entitlement to damages.
Spouses Yu filed a Motion for Reconsideration42 but the CA denied it in the herein assailed
Resolution43 dated October 14, 2002.

Spouses Yu filed the present Petition raising the following issues:

I. Whether or not the appellate court erred in not holding that the writ of attachment
was procured in bad faith, after it was established by final judgment that there was
no true ground therefor.
II. Whether or not the appellate court erred in refusing to award actual, moral and
exemplary damages after it was established by final judgment that the writ of
attachment was procured with no true ground for its issuance.44
There is one preliminary matter to set straight before we resolve the foregoing issues.
According to respondent Te,45 regardless of the evidence presented by Spouses Yu, their
counterclaim was correctly dismissed for failure to comply with the procedure laid down in
Section 20 of Rule 57. Te contends that as Visayan Surety was not notified of the
counterclaim, no judgment thereon could be validly rendered.
Such argument is not only flawed, it is also specious.
As stated earlier, Spouses Yu filed a Claim Against Surety Bond on the same day they filed
their Answer and Urgent Motion to Dissolve Writ of Preliminary Attachment. 46 Further, the
records reveal that on June 18, 1993, Spouses Yu filed with the RTC a Motion to Give Notice
to Surety.47 The RTC granted the Motion in an Order48 dated June 23, 1993. Accordingly,
Visayan Surety was notified of the pre-trial conference to apprise it of a pending claim
against its attachment bond. Visayan Surety received the notice on July 12, 1993 as shown
by a registry return receipt attached to the records.49
Moreover, even if it were true that Visayan Surety was left in the proceedings a quo, such
omission is not fatal to the cause of Spouses Yu. In Malayan Insurance Company, Inc. v.
Salas,50 we held that "x x x if the surety was not given notice when the claim for damages
against the principal in the replevin bond was heard, then as a matter of procedural due
process the surety is entitled to be heard when the judgment for damages against the
principal is sought to be enforced against the suretys replevin bond." 51 This remedy is
applicable for the procedures governing claims for damages
on an attachment bond and on a replevin bond are the same.52
We now proceed to resolve the issues jointly.
Spouses Yu contend that they are entitled to their counterclaim for damages as a matter of
right in view of the finality of our June 8, 1994 Resolution in G.R. No. 114700 which affirmed
the finding of the CA in its September 14, 1993 Decision in CA-G.R. SP No. 31230 that
respondent Te had wrongfully caused the attachment of their properties. Citing Javellana v.
D.O. Plaza Enterprises, Inc.,53 they argue that they should be awarded damages based solely
on the CA finding that the attachment was illegal for it already suggests that Te acted with
malice when she applied for attachment. And even if we were to assume that Te did not act
with malice, still she should be held liable for the aggravation she inflicted when she applied
for attachment even when she was clearly not entitled to it. 54

That is a rather limited understanding of Javellana. The counterclaim disputed therein was
not for moral damages and therefore, there was no need to prove malice. As early as in
Lazatin v. Twao,55 we laid down the rule that where there is wrongful attachment, the
attachment defendant may recover actual damages even without proof that the attachment
plaintiff acted in bad faith in obtaining the attachment. However, if it is alleged and
established that the attachment was not merely wrongful but also malicious, the attachment
defendant may recover moral damages and exemplary damages as well. 56 Either way, the
wrongfulness of the attachment does not warrant the automatic award of damages to the
attachment defendant; the latter must first discharge the burden of proving the nature and
extent of the loss or injury incurred by reason of the wrongful attachment. 57
In fine, the CA finding that the attachment of the properties of Spouses Yu was wrongful did
not relieve Spouses Yu of the burden of proving the factual basis of their counterclaim for
damages.
To merit an award of actual damages arising from a wrongful attachment, the attachment
defendant must prove, with the best evidence obtainable, the fact of loss or injury suffered
and the amount thereof.58 Such loss or injury must be of the kind which is not only capable of
proof but must actually be proved with a reasonable degree of certainty. As to its amount,
the same must be measurable based on specific facts, and not on guesswork or
speculation. 59 In particular, if the claim for actual damages covers unrealized profits, the
amount of unrealized profits must be estalished and supported by independent evidence of
the mean income of the business undertaking interrupted by the illegal seizure. 60
Spouses Yu insist that the evidence they presented met the foregoing standards. They point
to the lists of their daily net income from the operation of said passenger bus based on used
ticket stubs61 issued to their passengers. They also cite unused ticket stubs as proof of
income foregone when the bus was wrongfully seized.62 They further cite the unrebutted
testimony of Josefa Yu that, in the day-to-day operation of their passenger bus, they use up
at least three ticket stubs and earn a minimum daily income of P1,500.00.63
In ruling that Spouses Yu failed to adduce sufficient evidence to support their counterclaim
for actual damages, the CA stated, thus:
In this case, the actual damages cannot be determined. Defendant-appellant Josefa Yu
testified on supposed lost profits without clear and appreciable explanation. Despite her
submission of the used and unused ticket stubs, there was no evidence on the daily net
income, the routes plied by the bus and the average fares for each route. The submitted
basis is too speculative and conjectural. No reports regarding the average actual profits and
other evidence of profitability necessary to prove the amount of actual damages were
presented. Thus, the Court a quodid not err in not awarding damages in favor of defendantsappellants.64
We usually defer to the expertise of the CA, especially when it concurs with the factual
findings of the RTC.65Indeed, findings of fact may be passed upon and reviewed by the
Supreme Court in the following instances: (1) when the conclusion is a finding grounded
entirely on speculations, surmises, or conjectures; (2) when the inference made is manifestly
mistaken, absurd, or impossible; (3) where there is a grave abuse of discretion in the
appreciation of facts; (4) when judgment is based on a misapprehension of facts; (5) when
the lower court, in making its findings, went beyond the issues of the case and such findings
are contrary to the admissions of both appellant and appellee; (6) when the factual findings

of the CA are contrary to those of the trial court; (7) when the findings of fact are themselves
conflicting; (8) when the findings of fact are conclusions made without a citation of specific
evidence on which they are based; (9) when the facts set forth in the petition as well as in
the petitioners main and reply briefs are not disputed by the respondents; (10) when the
findings of fact of the lower court are premised on the supposed absence of evidence and
are contradicted by the evidence on record.66 However, the present case does not fall under
any of the exceptions. We are in full accord with the CA that Spouses Yu failed to prove their
counterclaim.
Spouses Yus claim for unrealized income of P1,500.00 per day was based on their
computation of their average daily income for the year 1992. Said computation in turn is
based on the value of three ticket stubs sold over only five separate days in 1992. 67 By no
stretch of the imagination can we consider ticket sales for five days sufficient evidence of
the average daily income of the passenger bus, much less its mean income. Not even the
unrebutted testimony of Josefa Yu can add credence to such evidence for the testimony itself
lacks corroboration.68
Besides, based on the August 29, 1994 Manifestation69 filed by Sheriff Alimurung, it would
appear that long before the passenger bus was placed under preliminary attachment in Civil
Case No. 4061-V-93, the same had been previously attached by the Sheriff of Mandaue City
in connection with another case and that it was placed in the Cebu Bonded Warehousing
Corporation, Cebu City. Thus, Spouses Yu cannot complain that they were unreasonably
deprived of the use of the passenger bus by reason of the subsequent wrongful attachment
issued in Civil Case No. 4061-V-93. Nor can they also attribute to the wrongful attachment
their failure to earn income or profit from the operation of the passenger bus.
Moreover, petitioners did not present evidence as to the damages they suffered by reason of
the wrongful attachment of Lot No. 11.
Nonetheless, we recognize that Spouses Yu suffered some form of pecuniary loss when their
properties were wrongfully seized, although the amount thereof cannot be definitively
ascertained. Hence, an award of temperate or moderate damages in the amount
of P50,000.00 is in order.70
As to moral and exemplary damages, to merit an award thereof, it must be shown that the
wrongful attachment was obtained by the attachment plaintiff with malice or bad faith, such
as by appending a false affidavit to his application.71
Spouses Yu argue that malice attended the issuance of the attachment bond as shown by
the fact that Te deliberately appended to her application for preliminary attachment an
Affidavit where Sy perjured himself by stating that they had no intention to pay their
obligations even when he knew this to be untrue given that they had always paid their
obligations; and by accusing them of disposing of their properties to defraud their creditors
even when he knew this to be false, considering that the location of said properties was
known to him.72
The testimony of petitioner Josefa Yu herself negates their claim for moral and exemplary
damages. On cross-examination she testified, thus:
Q: Did you ever deposit any amount at that time to fund the check?

A: We requested that it be replaced and staggered into smaller amounts.

COURT: Did you fund it or not?
Atty. Ferrer: The three checks involved?
Atty. Florido: Already answered. She said that they were not able to fund it.
Atty. Ferrer: And as a matter of fact, you went to the bank to close your account?
A: We closed account with the bank because we transferred the account to another bank.
Q: How much money did you transfer from that bank to which the three checks were drawn
to this new bank?
A: I dont know how much was there but we transferred already to the Solid Bank.
Q: Who transferred?
A: My daughter, sir.73 (Emphasis ours)
Based on the foregoing testimony, it is not difficult to understand why Te concluded that
Spouses Yu never intended to pay their obligation for they had available funds in their bank
but chose to transfer said funds instead of cover the checks they issued. Thus, we cannot
attribute malice nor bad faith to Te in applying for the attachment writ. We cannot hold her
liable for moral and exemplary damages.
As a rule, attorneys fees cannot be awarded when moral and exemplary damages are not
granted, the exception however is when a party incurred expenses to lift a wrongfully issued
writ of attachment.1awphi1.net74 Without a doubt, Spouses Yu waged a protracted legal
battle to fight off the illegal attachment of their properties and pursue their claims for
damages. It is only just and equitable that they be awarded reasonable attorneys fees in the
amount ofP30,000.00.
In sum, we affirm the dismissal of the counterclaim of petitioners Spouses Yu for actual,
moral, and exemplary damages. However, we grant them temperate damages and
attorneys fees.
WHEREFORE, the petition is partly GRANTED. The March 21, 2001 Decision of the Court of
Appeals isAFFIRMED with the MODIFICATION that petitioners counterclaim
is PARTLY GRANTED. Gregorio Yu and Josefa Yu are awarded P50,000.00 temperate
damages and P30,000.00 attorneys fees.
No costs.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-21109

June 26, 1967

NATIONAL SHIPYARDS & STEEL CORPORATION, plaintiff-appellee,

vs.
CARIDAD J. TORRENTO and MUTUAL SECURITY INSURANCE
CORPORATION, defendants-appellants.
Manuel A. Cammayo for defendants-appellants.
Augusto D. Trinidad for plaintif-appellee.
MAKALINTAL, J.:
On December 5, 1958 defendant Caridad J. Torrento applied with the National Shipyards &
Steel Corporation (hereinafter referred to as NASSCO) for the purchase on credit of 60 tons
of steel bars, 3/8" deformed or plain, at P430.00 per ton, for a 120-day period.
A contract of purchase and sale was executed on January 13, 1959, but was subsequently
amended when plaintiff exhausted its stock of 3/8" plain steel bars. As amended, the
quantity of steel bars stated to be 60 metric tons in the original contract was changed to
59.31 metric tons; the price was changed from P430.00 to P435.00 per metric ton; and the
specification of the steel bars was also changed from "plain, round or corrugated" to
"deformed."
Pursuant to the stipulation in the contract that the value of steel bars sold to defendant
Torrento should be secured by a surety bond issued by a reputable bonding company,
defendant Torrento as principal and Mutual Security Insurance Corporation, as surety
executed in favor of plaintiff a surety bond (S. 1754) on January 23, 1960. When it was noted
that the undertaking under the bond was only P25,000.00, whereas the contract called for
the payment of P25,800.00, defendant surety executed a supplemental bond increasing the
amount of P25,800.00.
On February 6, 1959, when NASSCO could no longer supply the steel bars called for in the
contract of purchase and sale inasmuch as its stock of 3/8" deformed steel bars had been
exhausted, the plaintiff and defendant Torrento executed a supplemental agreement, the
pertinent provisions of which read:
. . . Whereas the NASSCO has agreed to sell to the vendee and the vendee has
agreed to buy from the NASSCO . . . Fifty Nine and thirty one hundredths (59-31)
metric tons of steel bars on credit basis for size and price as follows:
3/8 deformed 20 ft or
30 ft. at P435.00 per tons

Whereas, after consummation of said contract, only the following amount of steel bars were
delivered to the vendee, as follows:
20-67 M.T. 3/8" deformed
and that there were no more available stock of steel bars of size 3/8" x 20' or 30' deformed.
Now therefore, for and in consideration of the foregoing premises, the parties hereby agree
to modify and/or amend their said contract as follows:
1. That the NASSCO shall sell to the vendee and the vendee shall buy from the NASSCO,
38.50 tons of steel bars on credit basis subject to availability of stock in the following sizes
and prices, to wit:
25 M.T. 1/2" x 30 deformed at P440.00 per ton.
13.50 M.T. 5/8" x 30 deformed at P430.00 per ton
2. That aside from the above amendment and/or modification, the said contract shall not be
affected, altered, or modified in any way.
Pursuant to the contract of purchase and sale and the supplemental contract, NASSCO
delivered to defendant Torrento steel bars in the total value of P25,794.09. The 120-day
period for payment lapsed. Demand letters were sent, but defendant surety made no reply.
Defendant Torrento did not question her liability, but only asked for a 3-month extension to
settle her account.
Action was brought to recover the unpaid contract price from defendant Torrento and her
surety. On October 18, 1960, the lower court rendered judgment: "ordering the defendants,
jointly and severally, to pay the plaintiff the sum of P25,794.09, with interest thereon at the
rate of 12% per annum, from August 29, 1959 until full payment, and the costs of suit. On
the cross-claim, judgment is hereby rendered, ordering the cross-defendant Caridad J.
Torrento to pay the cross-plaintiff Mutual Security Insurance Corporation whatever sums the
latter would pay the plaintiff by virtue of this judgment, with interest thereon at the rate of
12% per annum, from the date of payment to plaintiff, until full payment, and the costs of
this suit."
Defendants interposed an appeal to the Court of Appeals, which later on certified the case to
Us on the ground that the errors assigned raise only questions of law.
Appellant Torrento maintains that plaintiff has no cause of action against her for the reason
that inasmuch as she had paid the corresponding premium on the surety bond, the right of
action, in case of her default, is exclusively against her surety. Further, with respect to the
cross-claim of the Surety, Torrento claims that it was error for the lower court to take
cognizance of the same even before payment by said surety to NASSCO had been made. In
other words, Torrento argues that the cause of action alleged in the cross-claim does not
arise until after payment has been made by the surety to the plaintiff.
We find both arguments without merit. The surety bond (Exhibits C and C-1) states in very
clear terms that both principal and surety are held and firmly bound unto the NASSCO in the

sum of P25,800.00 for the payment of which they bind themselves, jointly and severally. "If
a person binds himself solidarity with the principal debtor, . . . the contract is called
suretyship" (Art. 2047, C.C.) in which case the provisions of the Civil Code with respect to
joint and solidary obligations apply; and Article 1216 of the Civil Code provides that "the
creditor may proceed against any of the solidary debtors or all of them simultaneously. . . ."
It has been repeatedly held that although as a rule sureties . . . are only subsidiarily liable for
an obligation, nevertheless, if they bind themselves jointly and severally, or in solidum, with
the principal debtor, the creditor may bring an action against anyone of them, either alone
or together with the principal debtor (Molina vs. de la Riva, 7 Phil. 345; Chinese Chamber vs.
Pua Te Ching, 16 Phil. 406; La Yebana vs. Valenzuela, 67 Phil. 482; Chunaco vs. Tria, 63 Phil.
500).
With respect to the contention that the lower court erred in taking cognizance of the surety's
cross-claim, suffice it to say that this point was not raised in the court a quo and,
consequently may not be raised for the first time on appeal. Besides, as the lower court also
stated in its decision, "defendant Torrento made no effort to dispute this (cross-claim) of
defendant surety and did not even bother to cross-examine the witness who identified the
said indemnity agreement," which is the basis of the cross-claim.1wph1.t
For its part, appellant surety company maintains that the execution of the supplemental
agreement of February 6, 1959 without its knowledge and consent released it from any
liability under the surety bond as there was a material alteration of the principal contract.
We find the contention without merit. The court a quo analyzed the factual set-up as follow:
x x x An examination and comparison of the contract and the supplemental
agreement will reveal that the only change or alteration consists of the following:
Instead of the original stipulation for the purchase and sale of 3/8, 20' or 30',
deformed steel bars, at P435.00 per ton, which kind of steel bars were no longer
available in stock, the supplemental agreement provides for the sale by the plaintiff
to defendant Torrento of other sizes of deformed steel bars at prices of P430.00 and
P440.00 per metric ton. Specifically, the changes are in the diameter of the steel bars
which originally was 3/8", to 1/2 and 5/8"; and the price from P435.00 per ton, to
P430.00 per ton for the 1/211 bars. The amount of steel bars to be sold to defendant
Torrento remained the same. The length and the deformed quality of the bars
likewise remained unchanged. It is even specifically provided in Par. 2 of the
supplemental agreement that "aside from the above amendments and/or
modifications, the said contract (referring to the original contract) shall not be
affected, altered or modified in any way." There was no alteration in the principal
condition of the contract. The period of payment was not changed, and the amount
of the liability of the principal debtor and of the surety was also untouched. There
was no added burden imposed upon or assumed by the buyer." (Emphasis Supplied)
x x x In short, the supplemental agreement did not result in the principal debtor's
assuming more onerous conditions than those stipulated in the original contract, and
for which the surety furnished the bond. There was consequently, no material or
essential alteration of the original contract which could result in the release of the
surety from the obligation under the said bond.
We see no error in the ruling of the lower court just quoted.

In Pacific Tobacco Corporation vs. Lorenzana, et al., G.R. L-8086, October 31, 1961 it was
held: "for purposes of releasing a surety's obligation, there must be a material alteration of
the contract in connection with which the bond is given, a change which imposes some new
obligation on the party promising or takes away some obligation already imposed, changing
the legal effect of the original contract and not merely the form thereof . . . To allow
compensated surety companies to collect and retain premiums for their services and then
repudiate their obligations on slight pretexts which have no relation to the risk, would be
most unjust and immoral, and would be a perversion of the wise and just rules designed for
the protection of voluntary sureties."
While it is the rule that the liability of a surety is limited by the terms of the surety bond
fixing its liability and that such liability cannot be extended by implication, it should be noted
in the present case that although the technical specifications of the items to be purchased
have been changed, it clearly appears that such changes are not substantial and have not
added any other liability to that originally assumed. A surety is not released by a change in
the contract which does not have the effect of making its obligation more onerous (Visayan
Distributors, Inc. vs. Flores, 92 Phil. 145).
Wherefore, the appealed decision is hereby affirmed, with costs against defendantsappellants.
Concepcion, C.J., Reyes, J.B.L., Dizon, Bengzon, J.P., Zaldivar, Sanchez and Castro, JJ., concur.
GATEWAY VS. ASIANBANK
OCTOBER 20, 2011 ~ LEAVE A COMMENT
GATEWAY ELECTRONICS and GERONIMO VS. ASIANBANK
G.R. No. 172041
DECEMBER 18, 2008
FACTS: Petitioner Gateway Electronics Corporation (Gateway) is a domestic corporation
that used to be engaged in the semi-conductor business. During the period material,
petitioner Geronimo delos Reyes was its president and one Andrew delos Reyes its executive
vice-president. On July 23, 1996, Geronimo and Andrew executed separate but almost
identical deeds of suretyship for Gateway in favor of respondent Asianbank for Domestic
Bills Purchased Line and the Omnibus Credit Line.
Later developments saw Asianbank extending to Gateway several export packing loans .This
loan package was later consolidated with A Dollar Promissory Note (and secured by a chattel
mortgage over Gateways equipment.

Gateway initially made payments on its loan obligations, but eventually defaulted. Upon
Gateways request, Asianbank extended the maturity dates of the loan several times. These
extensions bore the conformity of three of Gateways officers, among them Andrew.

Gateway issued two Philippine Commercial International Bank checks as payment for its
arrearages and but both checks were dishonored for insufficiency of funds. Asianbanks
demands for payment made upon Gateway and its sureties went unheeded. As of November
23, 1999, Gateways obligation to Asianbank, inclusive of principal, interest, and penalties,
totaled USD 2,235,452.17.

Thus Asianbank filed with the RTC in Makati City a complaint for a sum of money against
Gateway, Geronimo, and Andrew.

In its answer to the amended complaint, Gateway traced the cause of its financial
difficulties, described the steps it had taken to address its mounting problem, and faulted
Asianbank for trying to undermine its efforts toward recovery.

Andrew also filed an answer alleging, among other things, that the deed of suretyship he
executed covering the Domestic Bills Purchased Line and the Omnibus Credit Line did NOT
include the Dollar Promissory Note, the payment of which was extended several times
without his consent.

Geronimo, on the other hand, alleged that the subject deed of suretyship, assuming the
authenticity of his signature on it, was signed without his wifes consent and should, thus, be
considered as a mere continuing offer. Like Andrew, Geronimo argued that he ought to be
relieved of his liability under the surety agreement inasmuch as he too never consented to
the repeated loan maturity date extensions given by Asianbank to Gateway.

After due hearing, the RTC rendered judgment holding Gateway, Geronimo and Andrew
jointly and severally liable to pay Asianbank.

Petitioners herein appealed to the CA. Following the filing of its and Geronimos joint
appellants brief, Gateway filed on a petition for voluntary insolvency 6 with the RTC in Imus,
Cavite, which was granted. CA affirmed the decision of the lower court. MR denied, hence
this petition for review under Rule 45.

ISSUE: is Geronimo discharged from liability because of the insolvency of

Gateway, the principal
HELD: petition denied
NO
Asianbank argues that the stay of the collection suit against Gateway (because its case is
transferred to an insolvency court) is without bearing on the liability of Geronimo as a
surety. Pursuing the point, Asianbank avers that Geronimo may not invoke the insolvency of
Gateway as a defense to evade liability.

FIRST LEPANTO-TAISHO INSURANCE CORPORATION (now known as FLT PRIME INSURANCE

CORPORATION), v.CHEVRON PHILIPPINES, INC. (formerly known as CALTEX [PHILIPPINES],
INC.),

G.R. No. 177839 (January 18,2012) Villarama, J.

Bar Subject:

Commercial Law

Nature

: Rule 45

Quick Facts

R Chevron Philippines sued P First Lepanto for the payment of unpaid oil and petroleum
purchases made by itsdistributor, Fumitechniks.

Fumitechniks had applied for and was issued a surety bond by First Lepanto for 15.7M

this was in compliancewith the requirement for the grant of a credit line with Chevron to
guarantee payment of the cost of fuel.(Executed on Oct 15, 2001, will expire on Oct 15,
2002)

Fumitechniks defaulted on its obligation because the check it issued was dishonored
Chevron then notified First Lepanto of Fumitechnik

s unpaid purchases (15.08M) through a letter. Chevron also sent copies of invoices

showing the deliveries of fuel as requested by First Lepanto.

Simultaneously, a letter was sent to Fumitechniks demanding that it submit to First Lepanto
1)its comment on

Chevrons notification letter, 2) copy of the agreement secured by the Bond plus the delivery
receipts, etc 3)

information on the particulars including terms and conditions.

However Fumitechniks replied that it cannot submit the requested agreement since there
was no suchagreement executed between Fumitechniks and Chevron. However it enclosed a
copy of another surety bondissued by CICI General Insurance Corporation in favor of
Chevron to secure the obligation of Fumitechniksand/or Prime Asia Sales and Services in the
amount of 15M.

First Lepanto then advised Chevron of the non-existence of the principal agreement as
confirmed byFumitechniks. It explained that being an accessory contract, the bond cannot

exist without a principal agreement as it is essential that the copy of the basic contract be
submitted to the surety.

Chevron then formally demanded from First Lepanto the payment of its claim under the
surety bond. BecauseFirst Lepanto refused to pay, Chevron prayed for judgment ordering
First Lepanto to pay the sum of

15,080,030.30 pesos plus interest, cost and attorneys fees

RTC: dismissed the complaint. Terms and conditions of the oral credit line between Chevron
and Fumitechnikshave not been relayed to First Lepanto. Since the surety bond is a mere
accessory contract, the RTC concludedthat the bond cannot stand in the absence of the
written agreement secured thereby.

CA:

reversed the RTCs decision and ruled in favor of Chevron. First Lepanto is

estopped from assailing the oralcredit line agreement, having consented to the same upon
presentation by Fumitechniks of the surety bond it issued. Considering that such oral
contract between Fumitechniks and respondent has been partially executed,the CA ruled
that the provisions of the Statute of Frauds do not apply.

Issue/ Held/ Ratio

:1)

Issue W/N a surety is liable to the creditor in the absence of a written contract with the
principal

YES

Sec 175 of the Insurance Code defines suretyship as

contract or agreement whereby a party, called the surety,guarantees the performance by

another party, called the principal or obligor, of an obligation or undertaking in

favor of a third party, called the obligee. The extent of the suretys liability is determined by
the language of the

suretyship contract or bond itself. It cannot be extended by implication, beyond the terms of
the contract.

Surety Bond used by First Lepanto states that Fumitechniks, as principal and First Lepanto as
surety are firmlybound unto Chevron in the sum of 15.7M. The rider attached to the bond
that the principal has applied for acredit line in the amount of 15.7M pesos

First Lepanto argues that non-compliance with the submission of the written agreement,
which by the expressterms of the surety bond, should be attached and made part thereof,
rendered the bond ineffective.

Since all stipulations and provisions of the surety contract should be taken and interpreted
together, in this case,the unmistakable intention of the parties was to secure only those
terms and conditions of the writtenagreement.

A reading of Surety Bond shows that it secures the payment of purchases on credit by
Fumitechniks inaccordance with the terms and conditions of the "agreement" it entered into
with respondent. The word"agreement" has reference to the distributorship agreement, the
principal contract and by implication includedthe credit agreement mentioned in the rider.

However, it turned out that Chevron has executed written agreements only with its direct
customers but not distributors like Fumitechniks and it also never relayed the terms and
conditions of its distributorshipagreement to the First Lepanto after the delivery of the bond.

The law is clear that a surety contract should be read and interpreted together with the
contract entered intobetween the creditor and the principal.

Geronimo counters with the argument that his liability as a surety cannot be separated from
Gateways liability. As surety, he continues, he is entitled to avail himself of all the defenses
pertaining to Gateway, including its insolvency, suggesting that if Gateway is eventually
released from what it owes Asianbank, he, too, should also be so relieved.

Geronimos above contention is untenable.

Suretyship is covered by Article 2047 of the Civil Code, which states:

By guaranty a person, called the guarantor, binds himself to the creditor to fulfill the
obligation of the principal debtor in case the latter should fail to do so.

If a person binds himself solidarily with the principal debtor, the provisions of Section 4,
Chapter 3, Title I of this Book shall be observed. In such case the contract is called a
suretyship.

The Courts disquisition in Palmares v. Court of Appeals on suretyship is instructive, thus:

A surety is an insurer of the debt, whereas a guarantor is an insurer of the solvency of the
debtor. A suretyship is an undertaking that the debt shall be paid x x x. Stated differently, a
surety promises to pay the principals debt if the principal will not pay, while a guarantor
agrees that the creditor, after proceeding against the principal, may proceed against the
guarantor if the principal is unable to pay. A surety binds himself to perform if the principal
does not, without regard to his ability to do so. x x xIn other words, a surety undertakes
directly for the payment and is so responsible at once if the principal debtor makes default x
x x.
xxxx

A creditors right to proceed against the surety exists independently of his right
to proceed against the principal.Under Article 1216 of the Civil Code, the creditor may
proceed against any one of the solidary debtors or some or all of them simultaneously. The
rule, therefore, is that if the obligation is joint and several, the creditor has the right
to proceed even against the surety alone.
A Suretyship contract refers to an agreement whereunder one person, the surety, engages
to be answerable for the debt, default, or miscarriage of another known as the principal.
Geronimos position that a surety cannot be made to pay when the principal is unable to pay
is clearly specious and must be rejected.
Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION

G.R. No. 89561 September 13, 1990

BUENAFLOR C. UMALI, MAURICIA M. VDA. DE CASTILLO, VICTORIA M. CASTILLO,
BERTILLA C. RADA, MARIETTA C. ABAEZ, LEOVINA C. JALBUENA and SANTIAGO M.
RIVERA, petitioners,
vs.
COURT OF APPEALS, BORMAHECO, INC. and PHILIPPINE MACHINERY PARTS
MANUFACTURING CO., INC., respondents.
Edmundo T. Zepeda for petitioners.
Martin M. De Guzman for respondent BORMAHECO, Inc.
Renato J. Robles for P.M. Parts Manufacturing Co., Inc.

REGALADO, J.:
This is a petition to review the decision of respondent Court of Appeals, dated August 3,
1989, in CA-GR CV No. 15412, entitled "Buenaflor M. Castillo Umali, et al. vs. Philippine
Machinery Parts Manufacturing Co., Inc., et al.," 1the dispositive portion whereof provides:
WHEREFORE, viewed in the light of the entire record, the judgment appealed
from must be, as it is hereby REVERSED. In lieu thereof, a judgment is hereby
rendered1) Dismissing the complaint, with cost against plaintiffs;
2) Ordering plaintiffs-appellees to vacate the subject properties; and
3) Ordering plaintiffs-appellees to pay upon defendants' counterclaims:
a) To defendant-appellant PM Parts: (i) damages consisting of
the value of the fruits in the subject parcels of land of which
they were deprived in the sum of P26,000.00 and (ii) attorney's
fees of P15,000.00
b) To defendant-appellant Bormaheco: (i) expenses of litigation
in the amount of P5,000.00 and (ii) attorney's fees of
P15,000.00.
SO ORDERED.
The original complaint for annulment of title filed in the court a quo by herein petitioners
included as party defendants the Philippine Machinery Parts Manufacturing Co., Inc. (PM
Parts), Insurance Corporation of the Philippines (ICP), Bormaheco, Inc., (Bormaheco) and
Santiago M. Rivera (Rivera). A Second Amended Complaint was filed, this time impleading
Santiago M. Rivera as party plaintiff.

During the pre-trial conference, the parties entered into the following stipulation of facts:
As between all parties: Plaintiff Buenaflor M. Castillo is the
judicial administratrix of the estate of Felipe Castillo in Special
Proceeding No. 4053, pending before Branch IX, CFI of Quezon
(per Exhibit A) which intestate proceedings was instituted by
Mauricia Meer Vda. de Castillo, the previous administratrix of
the said proceedings prior to 1970 (per exhibits A-1 and A-2)
which case was filed in Court way back in 1964;
b) The four (4) parcels of land described in paragraph 3 of the
Complaint were originally covered by TCT No. T-42104 and Tax
Dec. No. 14134 with assessed value of P3,100.00; TCT No. T
32227 and Tax Dec. No. 14132, with assessed value of
P5,130,00; TCT No. T-31762 and Tax Dec. No. 14135, with
assessed value of P6,150.00; and TCT No. T-42103 with Tax Dec.
No. 14133, with assessed value of P3,580.00 (per Exhibits A-2
and B, B-1 to B-3 C, C-1 -to C3
c) That the above-enumerated four (4) parcels of land were the
subject of the Deed of Extra-Judicial Partition executed by the
heirs of Felipe Castillo (per Exhibit D) and by virtue thereof the
titles thereto has (sic) been cancelled and in lieu thereof, new
titles in the name of Mauricia Meer Vda. de Castillo and of her
children, namely: Buenaflor, Bertilla, Victoria, Marietta and
Leovina, all surnamed Castillo has (sic) been issued, namely:
TCT No. T-12113 (Exhibit E ); TCT No. T-13113 (Exhibit F); TCT
No. T-13116 (Exhibit G ) and TCT No. T13117 (Exhibit H )
d) That mentioned parcels of land were submitted as guaranty
in the Agreement of Counter-Guaranty with Chattel-Real Estate
Mortgage executed on 24 October 1970 between Insurance
Corporation of the Philippines and Slobec Realty Corporation
represented by Santiago Rivera (Exhibit 1);
e) That based on the Certificate of Sale issued by the Sheriff of
the Province of Quezon in favor of Insurance Corporation of the
Philippines it was able to transfer to itself the titles over the lots
in question, namely: TCT No. T-23705 (Exhibit M), TCT No. T
23706 (Exhibit N ), TCT No. T-23707 (Exhibit 0) and TCT No. T
23708 (Exhibit P);
f) That on 10 April 1975, the Insurance Corporation of the
Philippines sold to PM Parts the immovables in question (per
Exhibit 6 for PM Parts) and by reason thereof, succeeded in
transferring unto itself the titles over the lots in dispute,
namely: per TCT No. T-24846 (Exhibit Q ), per TCT No. T-24847
(Exhibit R ), TCT No. T-24848 (Exhibit), TCT No. T-24849 (Exhibit
T );

g) On 26 August l976, Mauricia Meer Vda. de Castillo' genther

letter to Modesto N. Cervantes stating that she and her children
refused to comply with his demands (Exhibit V-2);
h) That from at least the months of October, November and
December 1970 and January 1971, Modesto N. Cervantes was
the Vice-President of Bormaheco, Inc. later President thereof,
and also he is one of the Board of Directors of PM Parts; on the
other hand, Atty. Martin M. De Guzman was the legal counsel of
Bormaheco, Inc., later Executive Vice-President thereof, and
who also is the legal counsel of Insurance Corporation of the
Philippines and PM Parts; that Modesto N. Cervantes served
later on as President of PM Parts, and that Atty. de Guzman was
retained by Insurance Corporation of the Philippines specifically
for foreclosure purposes only;
i) Defendant Bormaheco, Inc. on November 25, 1970 sold to
Slobec Realty and Development, Inc., represented by Santiago
Rivera, President, one (1) unit Caterpillar Tractor D-7 with Serial
No. 281114 evidenced by a contract marked Exhibit J and
Exhibit I for Bormaheco, Inc.;
j) That the Surety Bond No. 14010 issued by co-defendant ICP
was likewise secured by an Agreement with Counter-Guaranty
with Real Estate Mortgage executed by Slobec Realty &
Development, Inc., Mauricia Castillo Meer, Buenaflor Castillo,
Bertilla Castillo, Victoria Castillo, Marietta Castillo and Leovina
Castillo, as mortgagors in favor of ICP which document was
executed and ratified before notary public Alberto R. Navoa of
the City of Manila on October 24,1970;
k) That the property mortgaged consisted of four (4) parcels of
land situated in Lucena City and covered by TCT Nos. T-13114,
T13115,
T-13116 and T-13117 of the Register of Deeds of Lucena City;
l) That the tractor sold by defendant Bormaheco, Inc. to Slobec
Realty & Development, Inc. was delivered to Bormaheco, Inc. on
or about October 2,1973, by Mr. Menandro Umali for purposes
of repair;
m) That in August 1976, PM Parts notified Mrs. Mauricia Meer
about its ownership and the assignment of Mr. Petronilo Roque
as caretaker of the subject property;
n) That plaintiff and other heirs are harvest fruits of the
property (daranghita) which is worth no less than Pl,000.00 per
harvest.

As between plaintifs and

defendant Bormaheco, Inc
o) That on 25 November 1970, at Makati, Rizal, Same Rivera, in
representation of the Slobec Realty & Development Corporation
executed in favor of Bormaheco, Inc., represented by its VicePresident Modesto N. Cervantes a Chattel Mortgage concerning
one unit model CAT D7 Caterpillar Crawler Tractor as described
therein as security for the payment in favor of the mortgagee of
the amount of P180,000.00 (per Exhibit K) that Id document
was superseded by another chattel mortgage dated January 23,
1971 (Exhibit 15);
p) On 18 December 1970, at Makati, Rizal, the Bormaheco, Inc.,
represented by its Vice-President Modesto Cervantes and Slobec
Realty Corporation represented by Santiago Rivera executed
the sales agreement concerning the sale of one (1) unit Model
CAT D7 Caterpillar Crawler Tractor as described therein for the
amount of P230,000.00 (per Exhibit J) which document was
superseded by the Sales Agreement dated January 23,1971
(Exhibit 16);
q) Although it appears on the document entitled Chattel
Mortgage (per Exhibit K) that it was executed on 25 November
1970, and in the document entitled Sales Agreement (per
Exhibit J) that it was executed on 18 December 1970, it appears
in the notarial register of the notary public who notarized them
that those two documents were executed on 11 December
1970. The certified xerox copy of the notarial register of Notary
Public Guillermo Aragones issued by the Bureau of Records
Management is hereto submitted as Exhibit BB That said chattel
mortgage was superseded by another document dated January
23, 1971;
r) That on 23 January 1971, Slobec Realty Development
Corporation, represented by Santiago Rivera, received from
Bormaheco, Inc. one (1) tractor Caterpillar Model D-7 pursuant
to Invoice No. 33234 (Exhibits 9 and 9-A, Bormaheco, Inc.) and
delivery receipt No. 10368 (per Exhibits 10 and 10-A for
Bormaheco, Inc
s) That on 28 September 1973, Atty. Martin M. de Guzman, as
counsel of Insurance Corporation of the Philippines purchased at
public auction for said corporation the four (4) parcels of land
subject of tills case (per Exhibit L), and which document was
presented to the Register of Deeds on 1 October 1973;
t) Although it appears that the realties in issue has (sic) been
sold by Insurance Corporation of the Philippines in favor of PM
Parts on 1 0 April 1975, Modesto N. Cervantes, formerly VicePresident and now President of Bormaheco, Inc., sent his letter

dated 9 August 1976 to Mauricia Meer Vda. de Castillo (Exhibit

V), demanding that she and her children should vacate the
premises;
u) That the Caterpillar Crawler Tractor Model CAT D-7 which was
received by Slobec Realty Development Corporation was
actually reconditioned and repainted. " 2
We cull the following antecedents from the decision of respondent Court of Appeals:
Plaintiff Santiago Rivera is the nephew of plaintiff Mauricia Meer Vda. de
Castillo. The Castillo family are the owners of a parcel of land located in
Lucena City which was given as security for a loan from the Development
Bank of the Philippines. For their failure to pay the amortization, foreclosure of
the said property was about to be initiated. This problem was made known to
Santiago Rivera, who proposed to them the conversion into subdivision of the
four (4) parcels of land adjacent to the mortgaged property to raise the
necessary fund. The Idea was accepted by the Castillo family and to carry out
the project, a Memorandum of Agreement (Exh. U p. 127, Record) was
executed by and between Slobec Realty and Development, Inc., represented
by its President Santiago Rivera and the Castillo family. In this agreement,
Santiago Rivera obliged himself to pay the Castillo family the sum of
P70,000.00 immediately after the execution of the agreement and to pay the
additional amount of P400,000.00 after the property has been converted into
a subdivision. Rivera, armed with the agreement, Exhibit U , approached Mr.
Modesto Cervantes, President of defendant Bormaheco, and proposed to
purchase from Bormaheco two (2) tractors Model D-7 and D-8 Subsequently, a
Sales Agreement was executed on December 28,1970 (Exh. J, p. 22, Record).
On January 23, 1971, Bormaheco, Inc. and Slobec Realty and Development,
Inc., represented by its President, Santiago Rivera, executed a Sales
Agreement over one unit of Caterpillar Tractor D-7 with Serial No. 281114, as
evidenced by the contract marked Exhibit '16'. As shown by the contract, the
price was P230,000.00 of which P50,000.00 was to constitute a down
payment, and the balance of P180,000.00 payable in eighteen monthly
installments. On the same date, Slobec, through Rivera, executed in favor of
Bormaheco a Chattel Mortgage (Exh. K, p. 29, Record) over the said
equipment as security for the payment of the aforesaid balance of
P180,000.00. As further security of the aforementioned unpaid balance,
Slobec obtained from Insurance Corporation of the Phil. a Surety Bond, with
ICP (Insurance Corporation of the Phil.) as surety and Slobec as principal, in
favor of Bormaheco, as borne out by Exhibit '8' (p. 111, Record). The aforesaid
surety bond was in turn secured by an Agreement of Counter-Guaranty with
Real Estate Mortgage (Exhibit I, p. 24, Record) executed by Rivera as
president of Slobec and Mauricia Meer Vda. de Castillo, Buenaflor Castillo
Umali, Bertilla Castillo-Rada, Victoria Castillo, Marietta Castillo and Leovina
Castillo Jalbuena, as mortgagors and Insurance Corporation of the Philippines
(ICP) as mortgagee. In this agreement, ICP guaranteed the obligation of
Slobec with Bormaheco in the amount of P180,000.00. In giving the bond, ICP
required that the Castillos mortgage to them the properties in question,
namely, four parcels of land covered by TCTs in the name of the

aforementioned mortgagors, namely TCT Nos. 13114, 13115, 13116 and

13117 all of the Register of Deeds for Lucena City.
On the occasion of the execution on January 23, 1971, of the Sales Agreement
Exhibit '16', Slobec, represented by Rivera received from Bormaheco the
subject matter of the said Sales Agreement, namely, the aforementioned
tractor Caterpillar Model D-7 as evidenced by Invoice No. 33234 (Exhs. 9 and
9-A, p. 112, Record) and Delivery Receipt No. 10368 (Exhs. 10 and 10-A, p.
113). This tractor was known by Rivera to be a reconditioned and repainted
one [Stipulation of Facts, Pre-trial Order, par. (u)].
Meanwhile, for violation of the terms and conditions of the Counter-Guaranty
Agreement (Exh. 1), the properties of the Castillos were foreclosed by ICP As
the highest bidder with a bid of P285,212.00, a Certificate of Sale was issued
by the Provincial Sheriff of Lucena City and Transfer Certificates of Title over
the subject parcels of land were issued by the Register of Deeds of Lucena
City in favor of ICP namely, TCT Nos. T-23705, T 23706, T-23707 and T-23708
(Exhs. M to P, pp. 38-45). The mortgagors had one (1) year from the date of
the registration of the certificate of sale, that is, until October 1, 1974, to
redeem the property, but they failed to do so. Consequently, ICP consolidated
its ownership over the subject parcels of land through the requisite affidavit of
consolidation of ownership dated October 29, 1974, as shown in Exh. '22'(p.
138, Rec.). Pursuant thereto, a Deed of Sale of Real Estate covering the
subject properties was issued in favor of ICP (Exh. 23, p. 139, Rec.).
On April 10, 1975, Insurance Corporation of the Phil. ICP sold to Phil.
Machinery Parts Manufacturing Co. (PM Parts) the four (4) parcels of land and
by virtue of said conveyance, PM Parts transferred unto itself the titles over
the lots in dispute so that said parcels of land are now covered by TCT Nos. T24846, T-24847, T-24848 and T-24849 (Exhs. Q-T, pp. 46-49, Rec.).
Thereafter, PM Parts, through its President, Mr. Modesto Cervantes, sent a
letter dated August 9,1976 addressed to plaintiff Mrs. Mauricia Meer Castillo
requesting her and her children to vacate the subject property, who (Mrs.
Castillo) in turn sent her reply expressing her refusal to comply with his
demands.
On September 29, 1976, the heirs of the late Felipe Castillo, particularly
plaintiff Buenaflor M. Castillo Umali as the appointed administratrix of the
properties in question filed an action for annulment of title before the then
Court of First Instance of Quezon and docketed thereat as Civil Case No. 8085.
Thereafter, they filed an Amended Complaint on January 10, 1980 (p. 444,
Record). On July 20, 1983, plaintiffs filed their Second Amended Complaint,
impleading Santiago M. Rivera as a party plaintiff (p. 706, Record). They
contended that all the aforementioned transactions starting with the
Agreement of Counter-Guaranty with Real Estate Mortgage (Exh. I), Certificate
of Sale (Exh. L) and the Deeds of Authority to Sell, Sale and the Affidavit of
Consolidation of Ownership (Annexes F, G, H, I) as well as the Deed of Sale
(Annexes J, K, L and M) are void for being entered into in fraud and without the
consent and approval of the Court of First Instance of Quezon, (Branch IX)
before whom the administration proceedings has been pending. Plaintiffs pray

that the four (4) parcels of land subject hereof be declared as owned by the
estate of the late Felipe Castillo and that all Transfer Certificates of Title Nos.
13114,13115,13116,13117, 23705, 23706, 23707, 23708, 24846, 24847,
24848 and 24849 as well as those appearing as encumbrances at the back of
the certificates of title mentioned be declared as a nullity and defendants to
pay damages and attorney's fees (pp. 71071 1, Record).
In their amended answer, the defendants controverted the complaint and
alleged, by way of affirmative and special defenses that the complaint did not
state facts sufficient to state a cause of action against defendants; that
plaintiffs are not entitled to the reliefs demanded; that plaintiffs are estopped
or precluded from asserting the matters set forth in the Complaint; that
plaintiffs are guilty of laches in not asserting their alleged right in due time;
that defendant PM Parts is an innocent purchaser for value and relied on the
face of the title before it bought the subject property (p. 744, Record). 3
After trial, the court a quo rendered judgment, with the following decretal
portion:
WHEREFORE, judgment is hereby rendered in favor of the plaintiffs and
against the defendants, declaring the following documents:
Agreement of Counter-Guaranty with Chattel-Real Estate
Mortgage dated October 24,1970 (Exhibit 1);
Sales Agreement dated December 28, 1970 (Exhibit J)
Chattel Mortgage dated November 25, 1970 (Exhibit K)
Sales Agreement dated January 23, 1971 (Exhibit 16);
Chattel Mortgage dated January 23, 1971 (Exhibit 17);
Certificate of Sale dated September 28, 1973 executed by the
Provincial Sheriff of Quezon in favor of Insurance Corporation of
the Philippines (Exhibit L);
null and void for being fictitious, spurious and without consideration.
Consequently, Transfer Certificates of Title Nos. T 23705, T-23706, T23707 and
T-23708 (Exhibits M, N, O and P) issued in the name of Insurance Corporation
of the Philippines, are likewise null and void.
The sale by Insurance Corporation of the- Philippines in favor of defendant
Philippine Machinery Parts Manufacturing Co., Inc., over Id four (4) parcels of
land and Transfer Certificates of Title Nos. T 24846, T-24847, T-24848 and T24849 subsequently issued by virtue of said sale in the name of Philippine
Machinery Parts Manufacturing Co., Inc., are similarly declared null and void,
and the Register of Deeds of Lucena City is hereby directed to issue, in lieu
thereof, transfer certificates of title in the names of the plaintiffs, except
Santiago Rivera.

Orders the defendants jointly and severally to pay the plaintiffs moral
damages in the sum of P10,000.00, exemplary damages in the amount of
P5,000.00, and actual litigation expenses in the sum of P6,500.00.
Defendants are likewise ordered to pay the plaintiffs, jointly and severally, the
sum of P10,000.00 for and as attomey's fees. With costs against the
defendants.
SO ORDERED.

As earlier stated, respondent court reversed the aforequoted decision of the trial court and
rendered the judgment subject of this petitionPetitioners contend that respondent Court of Appeals erred:
1. In holding and finding that the actions entered into between petitioner
Rivera with Cervantes are all fair and regular and therefore binding between
the parties thereto;
2. In reversing the decision of the lower court, not only based on erroneous
conclusions of facts, erroneous presumptions not supported by the evidence
on record but also, holding valid and binding the supposed payment by ICP of
its obligation to Bormaheco, despite the fact that the surety bond issued it
had already expired when it opted to foreclose extrajudically the mortgage
executed by the petitioners;
3. In aside the finding of the lower court that there was necessity to pierce the
veil of corporate existence; and
4. In reversing the decision of the lower court of affirming the same

I. Petitioners aver that the transactions entered into between Santiago M. Rivera, as
President of Slobec Realty and Development Company (Slobec) and Mode Cervantes, as
Vice-President of Bormaheco, such as the Sales Agreement, 6 Chattel Mortgage 7 and the
Agreement of Counter-Guaranty with Chattel/Real Estate Mortgage, 8 are all fraudulent and
simulated and should, therefore, be declared nun and void. Such allegation is premised
primarily on the fact that contrary to the stipulations agreed upon in the Sales Agreement
(Exhibit J), Rivera never made any advance payment, in the alleged amount of P50,000.00,
to Bormaheco; that the tractor was received by Rivera only on January 23, 1971 and not in
1970 as stated in the Chattel Mortgage (Exhibit K); and that when the Agreement of
Counter-Guaranty with Chattel/Real Estate Mortgage was executed on October 24, 1970, to
secure the obligation of ICP under its surety bond, the Sales Agreement and Chattel
Mortgage had not as yet been executed, aside from the fact that it was Bormaheco, and not
Rivera, which paid the premium for the surety bond issued by ICP
At the outset, it will be noted that petitioners submission under the first assigned error
hinges purely on questions of fact. Respondent Court of Appeals made several findings to
the effect that the questioned documents are valid and binding upon the parties, that there
was no fraud employed by private respondents in the execution thereof, and that, contrary
to petitioners' allegation, the evidence on record reveals that petitioners had every intention

to be bound by their undertakings in the various transactions had with private respondents.
It is a general rule in this jurisdiction that findings of fact of said appellate court are final and
conclusive and, thus, binding on this Court in the absence of sufficient and convincing
proof, inter alia, that the former acted with grave abuse of discretion. Under the
circumstances, we find no compelling reason to deviate from this long-standing
jurisprudential pronouncement.
In addition, the alleged failure of Rivera to pay the consideration agreed upon in the Sales
Agreement, which clearly constitutes a breach of the contract, cannot be availed of by the
guilty party to justify and support an action for the declaration of nullity of the contract.
Equity and fair play dictates that one who commits a breach of his contract may not seek
refuge under the protective mantle of the law.
The evidence of record, on an overall calibration, does not convince us of the validity of
petitioners' contention that the contracts entered into by the parties are either absolutely
simulated or downright fraudulent.
There is absolute simulation, which renders the contract null and void, when the parties do
not intend to be bound at all by the same. 9 The basic characteristic of this type of
simulation of contract is the fact that the apparent contract is not really desired or intended
to either produce legal effects or in any way alter the juridical situation of the parties. The
subsequent act of Rivera in receiving and making use of the tractor subject matter of the
Sales Agreement and Chattel Mortgage, and the simultaneous issuance of a surety bond in
favor of Bormaheco, concomitant with the execution of the Agreement of Counter-Guaranty
with Chattel/Real Estate Mortgage, conduce to the conclusion that petitioners had every
intention to be bound by these contracts. The occurrence of these series of transactions
between petitioners and private respondents is a strong indication that the parties actually
intended, or at least expected, to exact fulfillment of their respective obligations from one
another.
Neither will an allegation of fraud prosper in this case where petitioners failed to show that
they were induced to enter into a contract through the insidious words and machinations of
private respondents without which the former would not have executed such contract. To set
aside a document solemnly executed and voluntarily delivered, the proof of fraud must be
clear and convincing. 10 We are not persuaded that such quantum of proof exists in the case
at bar.
The fact that it was Bormaheco which paid the premium for the surety bond issued by ICP
does not per se affect the validity of the bond. Petitioners themselves admit in their present
petition that Rivera executed a Deed of Sale with Right of Repurchase of his car in favor of
Bormaheco and agreed that a part of the proceeds thereof shall be used to pay the premium
for the bond. 11 In effect, Bormaheco accepted the payment of the premium as an agent of
ICP The execution of the deed of sale with a right of repurchase in favor of Bormaheco under
such circumstances sufficiently establishes the fact that Rivera recognized Bormaheco as an
agent of ICP Such payment to the agent of ICP is, therefore, binding on Rivera. He is now
estopped from questioning the validity of the suretyship contract.
II. Under the doctrine of piercing the veil of corporate entity, when valid grounds therefore
exist, the legal fiction that a corporation is an entity with a juridical personality separate and
distinct from its members or stockholders may be disregarded. In such cases, the
corporation will be considered as a mere association of persons. The members or

stockholders of the corporation will be considered as the corporation, that is, liability will
attach directly to the officers and stockholders. 12 The doctrine applies when the corporate
fiction is used to defeat public convenience, justify wrong, protect fraud, or defend
crime, 13 or when it is made as a shield to confuse the legitimate issues 14 or where a
corporation is the mere alter ego or business conduit of a person, or where the corporation is
so organized and controlled and its affairs are so conducted as to make it merely an
instrumentality, agency, conduit or adjunct of another corporation. 15
In the case at bar, petitioners seek to pierce the V621 Of corporate entity of Bormaheco, ICP
and PM Parts, alleging that these corporations employed fraud in causing the foreclosure
and subsequent sale of the real properties belonging to petitioners While we do not discount
the possibility of the existence of fraud in the foreclosure proceeding, neither are we inclined
to apply the doctrine invoked by petitioners in granting the relief sought. It is our considered
opinion that piercing the veil of corporate entity is not the proper remedy in order that the
foreclosure proceeding may be declared a nullity under the circumstances obtaining in the
legal case at bar.
In the first place, the legal corporate entity is disregarded only if it is sought to hold the
officers and stockholders directly liable for a corporate debt or obligation. In the instant
case, petitioners do not seek to impose a claim against the individual members of the three
corporations involved; on the contrary, it is these corporations which desire to enforce an
alleged right against petitioners. Assuming that petitioners were indeed defrauded by
private respondents in the foreclosure of the mortgaged properties, this fact alone is not,
under the circumstances, sufficient to justify the piercing of the corporate fiction, since
petitioners do not intend to hold the officers and/or members of respondent corporations
personally liable therefor. Petitioners are merely seeking the declaration of the nullity of the
foreclosure sale, which relief may be obtained without having to disregard the aforesaid
corporate fiction attaching to respondent corporations. Secondly, petitioners failed to
establish by clear and convincing evidence that private respondents were purposely formed
and operated, and thereafter transacted with petitioners, with the sole intention of
defrauding the latter.
The mere fact, therefore, that the businesses of two or more corporations are interrelated is
not a justification for disregarding their separate personalities, 16 absent sufficient showing
that the corporate entity was purposely used as a shield to defraud creditors and third
persons of their rights.
III. The main issue for resolution is whether there was a valid foreclosure of the mortgaged
properties by ICP Petitioners argue that the foreclosure proceedings should be declared null
and void for two reasons, viz.: (1) no written notice was furnished by Bormaheco to ICP
anent the failure of Slobec in paying its obligation with the former, plus the fact that no
receipt was presented to show the amount allegedly paid by ICP to Bormaheco; and (b) at
the time of the foreclosure of the mortgage, the liability of ICP under the surety bond had
already expired.
Respondent court, in finding for the validity of the foreclosure sale, declared:
Now to the question of whether or not the foreclosure by the ICP of the real
estate mortgage was in the exercise of a legal right, We agree with the
appellants that the foreclosure proceedings instituted by the ICP was in the
exercise of a legal right. First, ICP has in its favor the legal presumption that it

had indemnified Bormaheco by reason of Slobec's default in the payment of

its obligation under the Sales Agreement, especially because Bormaheco
consented to ICPs foreclosure of the mortgage. This presumption is in
consonance with pars. R and Q Section 5, Rule 5, * New Rules of Court which
provides that it is disputably presumed that private transactions have been
fair and regular. likewise, it is disputably presumed that the ordinary course of
business has been followed: Second, ICP had the right to proceed at once to
the foreclosure of the mortgage as mandated by the provisions of Art. 2071
Civil Code for these further reasons: Slobec, the principal debtor, was
admittedly insolvent; Slobec's obligation becomes demandable by reason of
the expiration of the period of payment; and its authorization to foreclose the
mortgage upon Slobec's default, which resulted in the accrual of ICPS liability
to Bormaheco. Third, the Agreement of Counter-Guaranty with Real Estate
Mortgage (Exh. 1) expressly grants to ICP the right to foreclose the real estate
mortgage in the event of 'non-payment or non-liquidation of the entire
indebtedness or fraction thereof upon maturity as stipulated in the contract'.
This is a valid and binding stipulation in the absence of showing that it is
contrary to law, morals, good customs, public order or public policy. (Art.
1306, New Civil Code). 17
1. Petitioners asseverate that there was no notice of default issued by Bormaheco to ICP
which would have entitled Bormaheco to demand payment from ICP under the suretyship
contract.
Surety Bond No. B-1401 0 which was issued by ICP in favor of Bormaheco, wherein ICP and
Slobec undertook to guarantee the payment of the balance of P180,000.00 payable in
eighteen (18) monthly installments on one unit of Model CAT D-7 Caterpillar Crawler Tractor,
pertinently provides in part as follows:
1. The liability of INSURANCE CORPORATION OF THE PHILIPPINES, under this
BOND will expire Twelve (I 2) months from date hereof. Furthermore, it is
hereby agreed and understood that the INSURANCE CORPORATION OF THE
PHILIPPINES will not be liable for any claim not presented in writing to the
Corporation within THIRTY (30) DAYS from the expiration of this BOND, and
that the obligee hereby waives his right to bring claim or file any action
against Surety and after the termination of one (1) year from the time his
cause of action accrues. 18
The surety bond was dated October 24, 1970. However, an annotation on the upper
part thereof states: "NOTE: EFFECTIVITY DATE OF THIS BOND SHALL BE ON JANUARY
22, 1971." 19
On the other hand, the Sales Agreement dated January 23, 1971 provides that the balance
of P180,000.00 shall be payable in eighteen (18) monthly installments. 20 The Promissory
Note executed by Slobec on even date in favor of Bormaheco further provides that the
obligation shall be payable on or before February 23, 1971 up to July 23, 1972, and that nonpayment of any of the installments when due shall make the entire obligation immediately
due and demandable. 21
It is basic that liability on a bond is contractual in nature and is ordinarily restricted to the
obligation expressly assumed therein. We have repeatedly held that the extent of a surety's

liability is determined only by the clause of the contract of suretyship as well as the
conditions stated in the bond. It cannot be extended by implication beyond the terms the
contract. 22
Fundamental likewise is the rule that, except where required by the provisions of the
contract, a demand or notice of default is not required to fix the surety's liability. 23 Hence,
where the contract of suretyship stipulates that notice of the principal's default be given to
the surety, generally the failure to comply with the condition will prevent recovery from the
surety. There are certain instances, however, when failure to comply with the condition will
not extinguish the surety's liability, such as a failure to give notice of slight defaults, which
are waived by the obligee; or on mere suspicion of possible default; or where, if a default
exists, there is excuse or provision in the suretyship contract exempting the surety for
liability therefor, or where the surety already has knowledge or is chargeable with
knowledge of the default. 24
In the case at bar, the suretyship contract expressly provides that ICP shag not be liable for
any claim not filed in writing within thirty (30) days from the expiration of the bond. In its
decision dated May 25 1987, the court a quocategorically stated that '(n)o evidence was
presented to show that Bormaheco demanded payment from ICP nor was there any action
taken by Bormaheco on the bond posted by ICP to guarantee the payment of plaintiffs
obligation. There is nothing in the records of the proceedings to show that ICP indemnified
Bormaheco for the failure of the plaintiffs to pay their obligation. " 25 The failure, therefore,
of Bormaheco to notify ICP in writing about Slobec's supposed default released ICP from
liability under its surety bond. Consequently, ICP could not validly foreclose that real estate
mortgage executed by petitioners in its favor since it never incurred any liability under the
surety bond. It cannot claim exemption from the required written notice since its case does
not fall under any of the exceptions hereinbefore enumerated.
Furthermore, the allegation of ICP that it has paid Bormaheco is not supported by any
documentary evidence. Section 1, Rule 131 of the Rules of Court provides that the burden of
evidence lies with the party who asserts an affirmative allegation. Since ICP failed to duly
prove the fact of payment, the disputable presumption that private transactions have been
fair and regular, as erroneously relied upon by respondent Court of Appeals, finds no
application to the case at bar.
2. The liability of a surety is measured by the terms of his contract, and, while he is liable to
the full extent thereof, such liability is strictly limited to that assumed by its terms. 26 While
ordinarily the termination of a surety's liability is governed by the provisions of the contract
of suretyship, where the obligation of a surety is, under the terms of the bond, to terminate
at a specified time, his obligation cannot be enlarged by an unauthorized extension
thereof. 27 This is an exception to the general rule that the obligation of the surety continues
for the same period as that of the principal debtor. 28
It is possible that the period of suretyship may be shorter than that of the principal
obligation, as where the principal debtor is required to make payment by installments. 29 In
the case at bar, the surety bond issued by ICP was to expire on January 22, 1972, twelve (1
2) months from its effectivity date, whereas Slobec's installment payment was to end on July
23, 1972. Therefore, while ICP guaranteed the payment by Slobec of the balance of
P180,000.00, such guaranty was valid only for and within twelve (1 2) months from the date
of effectivity of the surety bond, or until January 22, 1972. Thereafter, from January 23, 1972
up to July 23, 1972, the liability of Slobec became an unsecured obligation. The default of

Slobec during this period cannot be a valid basis for the exercise of the right to foreclose by
ICP since its surety contract had already been terminated. Besides, the liability of ICP was
extinguished when Bormaheco failed to file a written claim against it within thirty (30) days
from the expiration of the surety bond. Consequently, the foreclosure of the mortgage, after
the expiration of the surety bond under which ICP as surety has not incurred any liability,
should be declared null and void.
3. Lastly, it has been held that where The guarantor holds property of the principal as
collateral surety for his personal indemnity, to which he may resort only after payment by
himself, until he has paid something as such guarantor neither he nor the creditor can resort
to such collaterals. 30
The Agreement of Counter-Guaranty with Chattel/Real Estate Mortgage states that it is being
issued for and in consideration of the obligations assumed by the Mortgagee-Surety
Company under the terms and conditions of ICP Bond No. 14010 in behalf of Slobec Realty
Development Corporation and in favor of Bormaheco, Inc. 31 There is no doubt that said
Agreement of Counter-Guaranty is issued for the personal indemnity of ICP Considering that
the fact of payment by ICP has never been established, it follows, pursuant to the doctrine
above adverted to, that ICP cannot foreclose on the subject properties,
IV. Private respondent PM Parts posits that it is a buyer in good faith and, therefore, it
acquired a valid title over the subject properties. The submission is without merit and the
conclusion is specious
We have stated earlier that the doctrine of piercing the veil of corporate fiction is not
applicable in this case. However, its inapplicability has no bearing on the good faith or bad
faith of private respondent PM Parts. It must be noted that Modesto N. Cervantes served as
Vice-President of Bormaheco and, later, as President of PM Parts. On this fact alone, it cannot
be said that PM Parts had no knowledge of the aforesaid several transactions executed
between Bormaheco and petitioners. In addition, Atty. Martin de Guzman, who is the
Executive Vice-President of Bormaheco, was also the legal counsel of ICP and PM Parts.
These facts were admitted without qualification in the stipulation of facts submitted by the
parties before the trial court. Hence, the defense of good faith may not be resorted to by
private respondent PM Parts which is charged with knowledge of the true relations existing
between Bormaheco, ICP and herein petitioners. Accordingly, the transfer certificates of title
issued in its name, as well as the certificate of sale, must be declared null and void since
they cannot be considered altogether free of the taint of bad faith.
WHEREFORE, the decision of respondent Court of Appeals is hereby REVERSED and SET
ASIDE, and judgment is hereby rendered declaring the following as null and void: (1)
Certificate of Sale, dated September 28,1973, executed by the Provincial Sheriff of Quezon
in favor of the Insurance Corporation of the Philippines; (2) Transfer Certificates of Title Nos.
T-23705, T-23706, T-23707 and T-23708 issued in the name of the Insurance Corporation of
the Philippines; (3) the sale by Insurance Corporation of the Philippines in favor of Philippine
Machinery Parts Manufacturing Co., Inc. of the four (4) parcels of land covered by the
aforesaid certificates of title; and (4) Transfer Certificates of Title Nos. T-24846, T-24847, T24848 and T24849 subsequently issued by virtue of said sale in the name of the latter
corporation.
The Register of Deeds of Lucena City is hereby directed to cancel Transfer Certificates of
Title Nos. T-24846, T-24847, T24848 and T-24849 in the name of Philippine Machinery Parts

Manufacturing Co., Inc. and to issue in lieu thereof the corresponding transfer certificates of
title in the name of herein petitioners, except Santiago Rivera.
The foregoing dispositions are without prejudice to such other and proper legal remedies as
may be available to respondent Bormaheco, Inc. against herein petitioners.
SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. L-30910 February 27, 1987
PEOPLE OF THE PHILIPPINES, plaintiff-appellee,
vs.
JULIA MANIEGO, accused-appellant.

NARVASA, J.:
Application of the established rule in this jurisdiction, that the acquittal of an accused on
reasonable doubt is not generally an impediment to the imposition, in the same criminal
action, of civil liability for damages on said accused, is what is essentially called into
question by the appellant in this case.
The information which initiated the instant criminal proceedings in the Court of First Instance
of Rizal indicted three (3) persons Lt. Rizalino M. Ubay, Mrs. Milagros Pamintuan, and Mrs.
Julia T. Maniego for the crime of MALVERSATION committed as follows:
That on or about the period covering the month of May, 1957 up to and
including the month of August, 1957, in Quezon City, Philippines, the abovenamed accused, conspiring together, confederating with and helping one
another, with intent of gain and without authority of law, did, then and there,
willfully, unlawfully and feloniously malverse, misappropriate and misapply
public funds in the amount of P 66,434.50 belonging to the Republic of the
Philippines, in the following manner, to wit: the accused, Lt. RIZALINO M.
Ubay, a duly appointed officer in the Armed Forces of the Philippines in active
duty, who, during the period specified above, was designated as Disbursing
Officer in the Office of the Chief of Finance, GHQ, Camp Murphy, Quezon City,
and as such was entrusted with and had under his custody and control public
funds, conspiring and confederating with co-accused, MILAGROS T.
PAMINTUAN and JULIA T. MANIEGO, did then and there, unlawfully, willfully and
feloniously, with intent of gain and without authority of law, and in pursuance
of their conspiracy, take, receive, and accept from his said co-accused several
personal checks drawn against the Philippine National Bank and the Bank of
the Philippine Islands, of which the accused, MILAGROS T. PAMINTUAN is the

drawer and the accused, JULIA T. MANIEGO, is the indorser, in the total
amount of P66,434.50, cashing said checks and using for this purpose the
public funds entrusted to and placed under the custody and control of the said
Lt. Rizalino M. Ubay, all the said accused knowing fully well that the said
checks are worthless and are not covered by funds in the aforementioned
banks, for which reason the same were dishonored and rejected by the said
banks when presented for encashment, to the damage and prejudice of the
Republic of the Philippines, in the amount of P66,434.50, Philippine currency. 1
Only Lt. Ubay and Mrs. Maniego were arraigned, Mrs. Pamintuan having apparently fled to
the United States in August, 1962. 2 Both Ubay and Maniego entered a plea of not guilty. 3
After trial judgment was rendered by the Court of First Instance,
whereof reads:

the dispositive part

There being sufficient evidence beyond reasonable doubt against the accused,
Rizalino M. Ubay, the Court hereby convicts him of the crime of malversation
and sentences him to suffer the penalty of reclusion temporal of TWELVE (12)
YEARS, ONE (1) DAY to FOURTEEN (14) YEARS, EIGHT (8) MONTHS, and a fine
of P57,434.50 which is the amount malversed, and to suffer perpetual special
disqualification.
In the absence of evidence against accused Julia T. Maniego, the Court hereby
acquits her, but both she and Rizal T. Ubay are hereby ordered to pay jointly
and severally the amount of P57,434.50 to the government. 5
Maniego sought reconsideration of the judgment, praying that she be absolved from civil
liability or, at the very least, that her liability be reduced to P46,934.50. 6 The Court declined
to negate her civil liability, but did reduce the amount thereof to P 46,934.50. 7 She
appealed to the Court of Appeals 8 as Ubay had earlier done. 9
Ubay's appeal was subsequently dismissed by the Appellate Court because of his failure to
file brief. 10 On the other hand, Maniego submitted her brief in due course, and ascribed
three (3) errors to the Court a quo, to wit:
1) The Lower Court erred in holding her civilly liable to indemnify the
Government for the value of the cheeks after she had been found not guilty of
the crime out of which the civil liability arises.
2) Even assuming arguendo that she could properly be held civilly liable after
her acquittal, it was error for the lower Court to adjudge her liable as an
indorser to indemnify the government for the amount of the cheeks.
3) The Lower Court erred in declaring her civilly liable jointly and severally
with her co-defendant Ubay, instead of absolving her altogether. 11
Because, in the Appellate Court's view, Maniego's brief raised only questions of law, her
appeal was later certified to this Court pursuant to Section 17, in relation to Section 31, of
the Judiciary Act, as amended, and Section 3, Rule 50 of the Rules of Court. 12

The verdict must go against the appellant.

Well known is the principle that "any person criminally hable for felony is also civilly
liable." 13 But a person adjudged not criminally responsible may still be held to be civilly
liable. A person's acquittal of a crime on the ground that his guilt has not been proven
beyond reasonable doubt 14 does not bar a civil action for damages founded on the same
acts involved in the offense. 15 Extinction of the penal action does not carry with it extinction
of the civil unless the extinction proceeds from a declaration in a final judgment that the fact
from which the civil might arise did not exist. 16
Rule III SEC. 3(b) Extinction of the penal action does not carry with it
extinction of the civil, unless the extinction proceeds from a declaration in a
final judgment that the fact from which the civil might arise did not exist. In
other cases, the person entitled to the civil action may institute it in the
jurisdiction and in the manner provided by law against the person who may be
liable for restitution of the thing and reparation of indemnity for the damage
suffered. (1985 Rules on Criminal Procedure).
Hence, contrary to her submission, 17 Maniego's acquittal on reasonable doubt of the crime
of Malversation imputed to her and her two (2) co-accused did not operate to absolve her
from civil liability for reimbursement of the amount rightfully due to the Government as
owner thereof. Her liability therefor could properly be adjudged, as it was so adjudged, by
the Trial Court on the basis of the evidence before it, which adequately establishes that she
was an indorser of several checks drawn by her sister, which were dishonored after they had
been exchanged with cash belonging to the Government, then in the official custody of Lt.
Ubay.
Appellant's contention that as mere indorser, she may not be made liable on account of the
dishonor of the checks indorsed by her, is likewise untenable. Under the law, the holder or
last indorsee of a negotiable instrument has the right to "enforce payment of the instrument
for the full amount thereof against all parties liable thereon." 18 Among the "parties liable
thereon" is an indorser of the instrument i.e., "a person placing his signature upon an
instrument otherwise than as maker, drawer, or acceptor ** unless he clearly indicates by
appropriate words his intention to be bound in some other capacity. " 19 Such an indorser
"who indorses without qualification," inter alia "engages that on due presentment, ** (the
instrument) shall be accepted or paid, or both, as the case may be, according to its tenor,
and that if it be dishonored, and the necessary proceedings on dishonor be duly taken, he
will pay the amount thereof to the holder, or to any subsequent indorser who may be
compelled to pay it." 20 Maniego may also be deemed an "accommodation party" in the light
of the facts, i.e., a person "who has signed the instrument as maker, drawer, acceptor, or
indorser, without receiving value therefor, and for the purpose of lending his name to some
other person." 21 As such, she is under the law "liable on the instrument to a holder for
value, notwithstanding such holder at the time of taking the instrument knew ** (her) to be
only an accommodation party," 22 although she has the right, after paying the holder, to
obtain reimbursement from the party accommodated, "since the relation between them is in
effect that of principal and surety, the accommodation party being the surety." 23
One last word. The Trial Court acted correctly in adjudging Maniego to be civilly liable in the
same criminal action in which she had been acquitted of the felony of Malversation ascribed
to her, dispensing with the necessity of having a separate civil action subsequently
instituted against her for the purpose. 24

WHEREFORE, the judgment of the Trial Court, being entirely in accord with the facts and the
law, is hereby affirmedin toto, with costs against the appellant.
SO ORDERED.
Yap (Chairman), Melencio-Herrera, Cruz, Feliciano, Gancayco and Sarmiento, JJ., concur.
Manila Railroad Company, et al. vs. Carmelino G. Alvendia, et al.
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-24262 &nbsp &nbsp &nbsp &nbsp &nbsp &nbsp May 24, 1967
MANILA RAILROAD COMPANY and MANILA PORT SERVICE, petitioners,
vs.
THE HON. CARMELINO G. ALVENDIA, Judge, Court of First Instance of Manila,
THE HON. ESTRELLA ABAD SANTOS, Judge, City Court of Manila, Branch III and EMPIRE
INSURANCE COMPANY, respondents.
Macaranas and Enaje for petitioners.
Tomacruz and Ferrer for respondents.
BENGZON, J.P., J.:
As subrogee of the consignees P. Austria & Co., Inc. and Apisa & Co., Inc., the Empire
Insurance Co., filed suit on May 24, 1963 in the City Court of Manila to recover the sums of
P186.00 and P990.48, plus attorney's fees of P100.00 and P500.00, respectively, on two
alleged causes of action involving short deliveries of shipments of flavored ovaltine. Sued
thereunder was the Manila Railroad Company, for transactions had with, and acts performed
thru, its "agent and subsidiary" the Manila Port Service, which then handled arrastre
operations in the port of Manila.
A judgment against defendant Manila Railroad Company was rendered by the inferior court.
Appeal therefrom to the Court of First Instance of Manila was taken by said defendant, the
appeal bond however being filed by its aforesaid "agent and subsidiary", Manila Port Service.
At said Court of First Instance, the complaint was reproduced.1 Answer thereto was filed by
both Manila Railroad Co., and Manila Port Service as defendants.

Subsequently, the parties entered into stipulations of facts, in which the Manila Port Service
was referred to as a defendant in the suit.
Rendering judgment on September 18, 1964, the Court of First Instance of Manila dismissed
the appeal without resolving the contentions of the parties on the merits, solely upon the
ground that the only defendant before the inferior court was the Manila Railroad Company
and the appeal bond not having been filed by it but by the Manila Port Service, not a party
therein, no appeal was duly perfected.1wph1.t
From said decision, appeal was sought to be taken. Again, however, it was the Manila Port
Service which posted an appeal bond. For the same reason adverted to, appeal was refused.
And, hence, Manila Railroad Co. and Manila Port Service resorted to the present action here
for certiorari and mandamus with preliminary injunction to compel respondent Judge to
approve and remit the appeal from his decision of September 18, 1964.
The record clearly shows that the Manila Port Service litigated in the Court of First Instance
as defendant. It filed an answer as such. And the parties recognized its status as defendant
in the two stipulations of facts entered into. It freely submitted itself to the court's
jurisdiction, with subsequent express acquiescence of the plaintiff.
Plaintiff however maintained in its opposition to the motion for reconsideration before the
Court of First Instance (Petition, Annex G), that "there is no showing that Manila Port Service
has legal personality or is a juridical person which could be a party in a civil action. Precisely
for this reason, however, the Manila Port Service must be deemed part of the Manila Railroad
Co., not a separate entity, in a suit against the latter based on arrastre operations
undertaken by it through its "agent and subsidiary" Manila Port Service. Not having a
separate juridical personality from the Manila Railroad Co., its filing of an appeal bond is
perforce an act of the Manila Railroad Co., not that of a separate and different person.
Since the appeal from the decision of September 18, 1964 would raise the same point
already resolved herein, the same becomes unnecessary. Respondent Judge should therefore
be ordered to render a decision upon the merits in the case in question.
Wherefore, the petition is hereby granted and respondent Judge's decision of September 18,
1964 is hereby set aside and the Court of First Instance of Manila is hereby ordered to decide
the Civil Case No. 55268 therein on the merits. No costs. So ordered.
Concepcion, C.J., Reyes, J.B.L., Dizon, Regala, Makalintal, Zaldivar, Sanchez and Castro, JJ.,
concur.

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. L-30096 September 27, 1977

CONRADO SINGSON, plaintiff,

vs.
DAVID BABIDA, RAMON ANTONIO, JAIME PERALTA, FELINO GARCIA, JOSE MARCOS,
RICARDO RABAGO. JAIME BIBIS, FELICIANO TUGADE, BONIFACIO CALPITO,
ALFREDO PERALTA, ALFREDO GARCIA and FELICIANO GARCIA, defendants. MATIAS
BABIDA, VICTOR GARCIA, JULIAN PACURSA, NICOLAS AGATEP, DOROT'EO
BALLESTEROS and PEDRO AGAT'EP, bondsmen and petitioners-appellants, vs.
CONRADO SINGSON and NEMESIO T. ORATE, respondents-appellees.
Conrado V. Singson for plaintif and respondents-appellees.
Alfredo J. Donato for bonsdmen and petitioners-appellants.
Molina & Agbisit for defendants.

AQUINO, J.:
In a nutshell, this is a case about execution against the supersedes bonds in an ejectment
suit. The bondsmen-appellants contend that the bonds are void and that the judgment in
favor of the landowner had already been satisfied and, therefore, the execution, allegedly
vitiated by some irregularities, was uncalled for.
Actually, as revealed in the 250-page record on appeal, the objective in this appeal of the
appellants, who are poor and ignorant farmers, is to annul the execution sales of their nine
parcels of agricultural land, with a total area of thirty-three (33) hectares and an aggregate
assessed value of P6,190. The judicial sales (now alleged to be final by the judgment
creditor) were made in order to satisfy a judgment for only P1,460, the value of 146 cavans
of palay.
The gross inadequacy of the price carries with it implications of capacity and unjust
enrichment. It is noteworthy that those 33 hectares, which apparently constitute appellants'
only source of livelihood, would become the property of the judgment creditor in satisfaction
of a judgment credit of P1,460. These aspects of the case have alerted us to be vigilant for
the protection of the appellants who are disadvantaged or handicapped by their obvious
indigence and ignorance (Art. 24, Civil Code).
Facts. Conrado V. Singson, a lawyer, claims that a certain 24 hectare homestead, located
at Barrio Malinta (Finugo), Lasam, formerly Gattaran, Cagayan, was conveyed to him in 1936
by Pedro Babida as payment of his attomey's fees in a murder case wherein Babida was the
accused. Babida, who died in 1950, was the applicant- possessor of the homestead. He was
not able to obtain a homestead patent. Singson's application for a free patent for the land
was denied by the Director of Lands.
On January 22, 1957 Singson filed a forcible entry action in the justice of the peace court of
Lasam against David Babida, Ramon Antonio, Jose Marcos, Ricardo Rabago, Jaime Bibis,
Bonifacio Calpito, Feliciano Tugade Jaime Peralta, Alfredo Peralta, Alfredo Garcia, Felino
Garcia, and FeWmo Garcia. He alleged that the twelve defendants entered the land in
September, 1956 and by means of collective force ousted his tenants.

The defendants in their answer averred that the homestead belonged to David Babida and
his coheirs who had continuously possessed it even before the war. (David was the son of
Pedro Babida.)
The justice of the peace court in its decision of September 14, 1957 ordered the defendants
to vacate the land and allowed Singson to withdraw from Domingo Gerardo, the depositary,
"the canons of the land" or the owner's share of the harvests (Civil Case No. 34).
The defendants appealed to the Court of First Instance of Cagayn. In their answer they
denied that Singson was in on of the land. They claimed to be the possessors of the land as
tenants of Pedro Babida. They reiterated their defense that the land belonged to the'heirs of
Pedro Babida (Civil Case No. 923-A).
To stay the execution of the inferior court's decision, while the appeal in the Court of First
Instance was pending, Matias Babida, Victor Garcia, Julian Pacursa and Nicolas Agatep (who
are not defendants) executed on March 27, 1958 a "counterload for the amount of P3,000 to
answer for damages (which) the plaintiff might sustain by reason of the crops or produce
which they pray to be disposed (of) and deposited". That counterbond is known as the "first
supersedeas bond".
After a de novo, the lower court in its decision of August 4, 1958 ordered the defendants to
restore the possession of the land to Singson and to deriver to him 73 cavans of palay yearly
from September, 1956 until the ion is restored to Singson, and, "in default thereof, the sum
of P730" as the value of 73 cavans. The depositary was ordered to deriver to Singson 55
cavans of palay to be deducted from the 73 cavans corresponding to the owner's share of
the harvests for the crop-year 1956-57.
The twelve defendants appealed to the Court of Appeals. To stay execution pending appeal,
Doroteo Ballesteros and Pedro Agatep (not parties to the case) separately executed
supersedeas bonds in the sum of P2,000 wherein they undertook "to pay to the plaintiff
whatever damages he might sustain as a result of" the case. Those under are known as the
"second supersedeas bond".
On July 3, 1959 the Court of Appeals dismissed defendants' appeal because of their failure to
pay the docket fee and to deposit the estimated cost of printing their record on appeal. The
record was returned to the lower court which ordered the execution of its judgment. A writ of
execution was issued on April 11, 1960. By virtue of that writ, the deputy sheriff on April 26,
1960 placed Singson's representative in ion of the disputed land.
In compliance with the writ of execution, Singson's representative received 20 cavans of
palay from defendant Jaime Peralta on April 26, 1960 and 138 cavans on May 6, 1960 from
Bonifacio Calpito, Jaime Bibis, Ramon Antonio, Fee Tugade Felino Garcia and Jaime Peralta or
158 cavans in all According to Singson's Gerardo did not deliver.the 55 cavans of palay to
Singson's overseer. The sheriff's return is silent on that point. So, the defendant's remaining
obligation under the judgment was to deriver the balance of 134 cavans of palay out of the
292 cavans due from them for four crop. years, 1956-57 to 1959-60.
The 134 cavans of palay had an aggregate value of P1,340 at ten a cavan, the value fixed by
the trial court in its decision. That sum of P1,340 and the expenses of execution would
constitute defendants' liability as of May 6, 1960.

Presumably, to enforce that remaining liability, the sheriff on May 17, 1960 levied upon the
lands of defendants Ramon Antonio June Bible, Bonifacio Calpito and Alfredo Peralta. The
sheriff scheduled the sale of their lands on August 31, 1960.
On August. 10, 1960 Singson ordered a motion to suspend the auction sale of the properties
of Antonio, Bibis, Calpito and peralta and to include in the auction sale the properties of the
six bondsmen, Victor Garcia, Matias Julian Pacursa, Doroteo Ballesteros, Nicolas Agatep and
Pedro Agatep "on the understanding that the properties of the defendants be first sold"
"and, if insufficient, then the properties of the bondmen" should be sold (89-91, Record on
Appeal). did not indicate in that ration the balance still due from the defendants.
In filing that motion, Singson did not bother to consider that the lands of the said four
defendants, which had already been levied upon and which have an aggregate area of ten
(10) hectares and a total value of P3,590, were more than sufficient to satisfy the sum of
P1,340 as the unpaid of the judgment.
The six bondsmen opposed Simpson's motion on the grounds that the bonds are void and
that execution cannot be had againts the bondsmen because no judgment against them had
been "in the ordinary manner" (Green vs. Del Rosario, 43 Phil. 547).
The counsel for the bondsmen, like Singson, did not realize that an execution against them,
in addition to the levy on the tenth lands of the four defendants, would be unnecessary
since, as already stated, those ten are more than sufficient for the payment of the
judgement.
The lower court granted Singson's motion in its order of September 10, 1960 but because
neither Singson nor the sheriff informed the court of the exact balance still due from the
defendants, and the sheriff's return was overred, the court acted under the impression that
the amount due from the defendants and their bondsmen was in the sum of P730 only. That
was the value of the owner's sham of the harvests for one crop-year.
Undoubtedly, the lower court would not have granted motion had it been apprised that the
ten belonging to the aforenamed four defendants, which had already been levied upon, were
more than adequate to answer for the liability of P730. The above-mentioned order of
September 10, 1960, an order of execution supplementing the original order of execution of
February 23, 1960, reads as follows:
As prayed for, the deputy sheriff is hereby directed to include in the notice of
sale the properties of the sureties in the supersedeas bond who are held liable
jointly and severally with the defendants to the plaintiff in the sum of P730 but
before collecting this sum from the sureties, the properties of the principals
not exempt from execution must first be exhausted and whatever amount
remains unpaid shall be chargeable to the sureties but in no case shalt it
exceed P731 (134, 183, Record on Appeal).
Plaintiff Singson and the defendants accepted the said order as correct. However, the sheriff
did not immediately implement it.
On September 14, 1960, he asked the court that he should be to make first a levy on the
properties of the bondsmen and that he be required to self the bondmen's properties only
"in the event that the proceeds of the sale of the properties of the principals are not
sufficient to satisfy the judgment" (94, Record on Appeal). However, the sheriff did not

specify the balance of the judgment for which the levy should be made. The court did not
act on the sheriff's motion.
On January 9, 1961 Singson filed a motion for execution against the first supersedeas
bond which, according to him, was involuntarily omitted in the aforementioned order of
September 10, 1960. Again Singson, like the sheriff, did not state how much was still due
from the defendants. Singson averred in his motion that the first supersedeas bond covered
"the damages occasioned to the plaintiff from the filing of the complaint in the justice of the
peace court up to August 4, 1958" when the Court of First Instance rendered its decision,
and that the second supesedeas bond covered the damages from August 4, 1958 up to the
time the appeal was dismissed by the Court of Appeals (96-97, Record on Appeal).
The bondsmen opposed the motion on the ground that the supersedeas bond was not
necessary since the justice of the peace court did not adjudge any compensation for the use
and occupation of the homestead, citing Alandy vs. San Jose, 79 Phil. 811.
The bondsmen did not invite the attention of the lower court to the misleading character of
Sinson's motion. It seemed to be misleading because the order of September, 10, 1960 does
not indicate that it is an order of execution against the second supersedeas bond and that it
is not applicable to the first supersedeas bond.
The lower court in its order of January 28, 1961, manifestly disregarding the clarification in
Singson's motion, explained that the second "Supersedes bond would answer for the value
of the produce from the land during the pendency of the appeal- in the "amount of P730"
(1959-1960 crop-year), while the first supersedeas bond would not answer for the produce of
the land from September, 1956 but would answer only for the produce of the land from
March 27, 1958 (when it was approved) up to January 13, 1959 when the second
supersedeas bond was approved, or for the owner's share for the 1958-1959 crop-year.
The lower court categorically ordered the execution against the first supersedeas bond only
for the sum of P730 (as in the case of the second supe bond) on condition that "before the
(first sure ) bond is executed, the Principals must fust be directed to pay the said sum and if
they fail to pay, execution shall issue against the sureties for the amount of P730" (103,
Record on Appeal).
Thus the trial court, by reason of the motion of Singson, the judgment creditor, and with his
tacit acquiescence, notated its final and executory judgment by reducing the obligations
covered by the two supersedeas bonds to P730 each. The trial court made it unmistakably
clear that the liability of the bondsmen was only subsidiary to that of the defendants as
principals, meaning that the bondsmen are entitled to the beneficium excussionis or the
right to have the properties of their principals exhausted before they could be liable on their
bonds.
The trial court's act of fixing the liabilities of the six bondsmen at P1,460 is directly
attributable to the failure of the sheriff and Singson (inadvertently or deliberately) to call the
court's attention to the fact that 158 cavans had already been delivered to Singson and to
apprise it of the exact amount still due from the twelve judgment debtors.
On March 3, 1961 another writ of execution (the first was issued on April 12, 1960 and it was
supplemented by the order of September 10, 1960) was issued, directing the sheriff to
require the twelve defendants to pay the sum of P730 to Singson and, should they fail to
pay, to enforce payment against the so-called "first supersedeas bond" filed by Matias
Babida, Victor Garcia, Julian Pacursa and Nicolas Agatep.

To do justice in this case, it is necessary to recount in detail the proceedings conducted by

the sheriff under the two writs of execution so. that the validity of the execution sales on
June 27 and 30, 1961, which is the main issue, may be judiciously resolved.
Execution sale on June 27, 1961 involving the first supersedeas bond. To implement the
writ of execution of March 3, 1961 against the first supersedeas bond, the sheriff served a
written demand on March 8, 1961 upon the four aforenamed sureties to pay the sum of P730
plus the expenses and commission in the sum of P19.80. It should be noted that the sheriff
did not comply with the mandate in the writ that he should first require the twelve
defendants to pay the said sum of P730.
As the four sureties did not heed his demand, the sheriff on March 28, 1961 levied upon the
lands of three of the sureties described in the first supersedeas bond and in the writ of
execution.
The sheriff inexplicably did not levy on the land of Nicolas Agatep, the fourth surety. The
sheriff scheduled on June 27, 1961 the sale of the lands of the three sureties, Babida, Garcia
and Pacursa. In the notice of sale, announcing the auction sale on June 27, 1961, the sheriff,
in quoting the writ of execution of March 3, 1961, omitted the court's order requiring him to
first direct the twelve principals or defendants to pay the sum of P730 (which order is found
in the writ of execution and which omission has been capital upon by the bondsmen in this
appeal as an irregularity vitiating the execution proceedings).
On June 27, 1961, the day of the auction sale, Singson was the only bidder. His bid was as
follows: P300 for the land of Babida; P50 for the land of Garcia, and P569.30 for the land of
Pacursa or P919.30 in all. He had adjusted his' bids in such a way that they would equal that
sum of P919.30, the amount for which the execution sale was to be held, consisting of P730
as principal obligation, P167.50 as publication expenses, and P21.80 as sheriff's commission
and other expenses.
Thus, the three parcels of land of the sureties, Babida, Garcia and Pacursa, with a total area
of more than 21 hectares and an aggregate assessed value of P2,780, were sold to Singson
for P919.30 only.
The execution sale on June 30, 1961 involving the second supersedeas bond. The judicial
sale on June 30, 1961 was based on the first or original writ of execution of April 11, 1970
(as to which the sheriff had made a return on July 16, 1960).
It should be recalled that to satisfy that writ of execution Singson was placed in ion of the
24-hectare homestead on April 12, 1960 and the defendants delivered to his overseer on
April 26 and May 6, 1960 158 cavans of palay, thus leaving an unsatisfied balance of 134
cavans of palay valued at P1,340.
The life of that writ of execution was prolonged because, as noted earlier, on May 17, 1960
or within the reglementary sixty-day Period (see sec. II, Rule 39, Rules of Court), the sheriff,
apparently to satisfy the said balance of P1,340 a levy on ten hectares of land belonging to
defendants Antonio, Bibis, Calpito and Alfredo Peralta, with a total assessed value of P3,590.
That writ of execution was supplemented by the lower court's aforequoted order of
September 10, 1960 which allowed the sheriff to make a further levy on the lands of Doroteo
Ballesteros and Pedro Agatep, the sureties on the "second supersedeas bond", to satisfy an
obligation amounting to P730 only, the judgment debtors' supposed liability for Singson's
share of the harvests for the 1959-60 crop-year.

The confusion in the exact amount of the judgment still unsatisfied was due to the failure of
the sheriff, Singson the lawyers for the defendants and the six bondsmen to call the
attention of the trial court to the fact that the balance still due amounted only to P1,340.
The trial court itself was probably unaware that 158 cavans of palay (138 only according to
Singson because the 20 cavans of Jaime Peralta were allegedly receipted for twice by his
overseer) worth P1,580 had already been delivered to Singson's overseer.
The sheriff sent a sort of demand letter dated September 19, 1960 to Doroteo Ballesteros
and Pedro Agatep, the sureties in the "second supersedeas bond", apprising them of the
order of September 10, 1960 and impliedly requiring them to make a "deposit" but not
particularizing on the nature of the deposit which was required. The sheriff did not specify
the amount of the judgment still unpaid. In that demand letter, as in his prior actuations, the
sheriff was not candid as to the exact balance of the judgment which should be satisfied. So,
he did not specify what Ballesteros and Agatep should deposit or pay to his office.
For several months, the sheriff did not follow up his demand letter. The record does not show
whether he made any levy on the lands of Ballesteros and Pedro Agatep.
Then, in a notice of sale dated April 25, 1961 (more than a year after the issuance of the writ
of execution under which he was acting), he announced that the properties of Ballesteros,
Pedro Agatep and Alfredo Peralta would be sold at public auction on June 30, 1961.
Alfredo Peralta is one of the twelve defendants. The sheriff on May 17, 1960 levied upon his
riceland with an area of 26,797 square meters and on his residential land with an area of
990 square meters and on his residential land with an area of 990 square meters, or an
aggregate area of 27,787 square meters. The two parcels of land have a total assessed
value of P1,180 in 1961.
As already noted, in that levy of May 17, 1960, the sheriff also levied upon (a) the sugarland
and orchard of Ramon Antonio with a total area of four hectares and an assesed value of
P1,000; (b) the sugariand of Jaime Bibis, with an area of two hectares and an assesed value
of P850, and (c) the sugarland, orchard and riceland of Bonifacio Calpito with an area of
15,000 square meters and a total assessed valued of P560.
Without any explanation, the sheriff abandoned the levy on the lands of Antonio, Bibis and
Calpito and continued with the levy on the land of Alfredo Peralta (not Garcia), which, as
above stated, he advertised for sale together with the lands of Ballesteros and Pedro Agatep.
The land of Ballesteros has an area of 20,019 square meters and an assesed value of P640
while the three (3) parcels of land of Agatep have a total area of 78,380 square meters and a
total assessed value of P1,590.
In the notice of sale the sheriff stated that Peralta's land was being sold "in order to satisfy
the different amounts specified" in the writ of execution. He did not mention the writ of
execution he was referring to nor the exact amount to be satisfied.
On the other hand, in the same notice of sale, he stated that he was going to sell the lands
of Ballesteros and Pedro Agatep in order to satisfy the sum of P730, as indicated in the order
of September 10, 1960. The sheriff also stated that that amount of P730 should first be
collected from the twelve defendants or principal debtorsbut he did not state whether he
had exhausted the properties of the said principals.

In fact, in the same notice of sale, he stated that he was going to sell the property of Alfredo
Peralta, a defendant or principal debtor, which land, as already stressed, has an area of
27,787 square meters and an value of P1,180 and which, ordinarily, would suffice (even as
dation in payment) to satisfy the principal obligation of P730.
On the other hand, the lands of Ballesteros and Agatep were also more than sufficient for
the payment of the said sum of P730, thus rendering unnecessary the sale of Peralta's land.
In that same notice of sale the sheriff ambiguously or meaning stated that the proceeds of
the execution sale on June 30, 1960 would be "applied for the judgment and order" whatever
that means. In contrast, in the notice for the execution sale scheduled on June 27, 1960, the
sheriff categorically stated that the properties of the sureties, Matias Babida, Victor Garcia
and Julian Pacursa would be sold "to satisfy the import of the execution and other expenses
incident thereto" or the sum of P730 and the costs of execution.
As repeatedly stated, the sheriff scheduled the auction sale of the lands of Peralta,
Ballesteros and Agatep on June 30, 1960. At that auction sale, the only bidder was Singson.
The lands were sold to him. The obligations for which the five parcels of land were to be sold
amounted to P1,264.77 (not P1,254.77) consisting of (a) P730 as the value of 73 cavans of
palay (the basic obligation), (b) P227.50 as publication expenses, and (c) P307.27
presumably for the other expenses of the sheriff.
As in the previous sale on June 27, 1961, Singson adjusted his bids for the five parcels of
land so that his total bid would not exceed P1,264.77. Thus, he made the following bids:
P394.49 for Alfredo Peralta's land; P217.57 for the land of Ballesteros and P217.57 also for
each of the three parcels of land of Pedro Agatep.
Note that for the execution sale on June 27, 1960 in connection with the "first supersedeas
bond", the sheriff stated with certitude that he was going to sell the lands of the three
sureties, Babida, Garcia and Pacursa, to satisfy the principal obligation of P730, plus P1
67.50 as publication expenses and P21.80 as his other expenses, or for a total sum of
P919.30.
In contrast, for the execution sale on June 30, 1961, which was made for the sum of
P1,264.77, the sheriff specified that he was going to sell the lands of the judgment debtor
Peralta and the two sureties, Ballesteros and Agatep, to satisfy the principal obligation of
P730 and the publication expenses amounting to P227.50. But the record does not show
what expenses incurred by the sheriff constitute the remainder of P307.27.
The two notices dated April 19 and 25, 1961, scheduling the sales on June 27 and 30, 1961,
respectively, were both published in the Manila Chronicle. Two publication fees in the sums
of P167.50 and P227.50 were paid. Confusion could have been avoided and expenses could
have been reduced if Singson, the sheriff and the lawyers of the parties had taken the
trouble of apprising the trial court of the true balance still due from the twelve judgment
debtors after 158 cavans of palay (138 according to Singson) had been delivered to the
judgment creditor on April 26 and May 6, 1960.
The proceedings under the two exedution sales involving the nine parcels of land may be
recapitulated as follows:

Own

Bi

er
Nat
ure
of

r
e
a

ss
es
se
d

V
al
u
e

Pr
ic
e

P
1,
4
8
0.
0
0

P3
0
0.
0
0

P
1
5
0.
0
0

P5
0.
0
0

i
n

Lan
d

S
q
.
M
e
t
e
r
s

MAT
IAS
BAR
IDA
Rice
land
and

Orc
hard

5
2
,
6
8
2

VICT
OR
GAR
CIA
Rice

5
,
0
0
0

land

JULI
AN
PAC
URS
AOrc
hard
and

Rice
land

1
5
5
,
3
2
0

ALF
RED
O
PER
ALT
ARice
land

2
6
,
7
6
7
)

(not
Gar
cia)
Res.
land

9
9
0
)

DOR
OTE
O

P
1,
1
5
0.
0
0

P5
6
9.
3
0

P3
9
4.
4
9

P
1,
1
8
0.
0
0

BAL
LES
TER
OS Far
mla
nd

2
0
,
0
1
9

P
6
4
0.
0
0

P2
1
7.
5
7

PED
RO
AGA
TEP
Rice
land

2
1
,
3
8
0
)

P
6
2
0.
0
0

P2
1
7.
5
7

Cor
nlan
d

2
8
,
5
0
0
)

P
7
5
0.
0
0

P2
1
7.
5
7

Far
mla
nd

2
8
,
5
0
0
)

P
2
2
0.
0
0

P2
1
7.
5
7

3
3
9
,
1
8
8

P
6,
1
9
0.
0
0

P2
,1
8
4.
0
7

Other proceedings. On June 27 and 30, 1961 the sheriff executed the respective
certificates of sale in favor of Singson for the nine parcels of land. He specified that the

period of redemption would expire "within one (1) year, counted from this date of sale". The
two certificates of sale were registered on August 18, 1961.
The sheriffs two returns, dated July 7 and August 8, 1961, for the two execution sales, were
filed in court only on August 12, 1961.
In a final certificate of sale dated July 3, 1962 the sheriff conveyed to Singson the parcels of
land of the sureties Babida, Garcia and Pacursa. He noted that the one-year period of
redemption had already expired and they had not made any redemption. That final deed of
sale was registered on July 26, 1962. A copy of the final deed for the lands of Peralta,
Ballesteros and Agatep was not included in the record on appeal.
On August 15, 1962, Singson filed an ex parte motion for a writ of possession. He alleged
that the final deeds of sale for the lands sold to him on June 27 and 30, 1961 were executed
in his favor by the sheriff. The twelve defendants or judgment debtors and the six bondsmen
opposed that ex parte motion.
On September 5, 1962 the defendants and the bondsmen filed a lengthy "supplementary
pleading" wherein they prayed that the execution sales held on June 27 and 30, 1961 be
declared void because the obligations of the sureties may be regarded as extinguished with
the delivery of the 158 cavans of palay to Singson's overseer and because the sureties were
not given the benefit of exhaustion of the principal debtors' properties. Singson opposed
that supplementary pleading.
The trial court in its order of September 20, 1962 denied the motion of the bondsmen and
the defendants and granted Singson's motion for a writ of possession. The motion for the
reconsideration of that order was denied by the trial court in its order of November 14, 1962.
The twelve defendants did not appeal.
The six bondsmen appealed to the Court of Appeals. That Court in its resolution of November
29, 1968 certified the appeal to this Court because the appeal involves a question of law,
which is the legality of the execution sales on June 27 and 30, 1961 (CA-G.R. No. 32008-R).
Issues. The main issue is the validity of the execution sales. The bondsmen contend that
the sales are void because (1) their liabilities on their supersedeas bonds had already been
extinguished before the sales were made; (2) the sheriff did not comply with the courts order
that the properties of the principals should first be exhausted, and (3) the sale on June 27,
1961 was in contravention of the writ of execution while the sale on June 30, 1961 was not
based at all on any writ of execution.
Singson did not file any appeflee's brief, thus giving the impression that, after he had
attained his objective of recovering possession of the disputed homestead and after
receiving 158 cavans of palay, any adjudication in this appeal adverse to him would not
make his position worse.
That inference is strengthened by his failure to controvert the lower court's orders of
September 10, 1960 and January 28, 1961, reducing his claim for the owner's share of the
harvests to 146 cavans only or for only two crop-years.
Ruling. It should be clear by now that this is not a typical ejectment suit involving urband
land. This is a controversy between the person claiming to be the rightful possessor of a
homestead (seventeen hectares of which are ricelands) and the cultivators thereof who

claim to be tenants of the deceased former possessor and who drove away the second
possessor's tenants.
The case, involving as it did the use and cultivation of agricultural land, could have come
within the jurisdiction of the Court of Agrarian Relations (Sec. 7, Republic Act No. 1267; Ojo
vs. Jamito 83 Phil. 764).
However, as the case was tried on the theory that it was an ordinary forcible entry case,
failing within the exclusive original jurisdiction of the inferior court, it should be assumed
that the lower courts had rightfully exercised jurisdiction over the case.
(1) The appeal can be disposed of by holding that the two so-called supersedeas bonds,
which gave rise to the execution sales under attack, are void because they were not signed
by the twelve defendants or judgment debtors as principal obligors They were signed only
by the six sureties. Not having been signed by the principal debtors, the supersedeas bonds
do not evidence any Principal obligation and are devoid of consideration as to the sureties
who have no privity with the judgment creditor nor any liability to him. (Manila Railroad
Company vs. Alvendia, L-22137, May 19, 1966, 17 SCRA 154; School Dist. No. 80 vs.Lapping
too Minn. 130, 110 N.W. 849).
(2) Other reasons for holding the two supersedeas bonds void are that the first supersedeas
bond was not warranted under the judgment of the justice of the peace court and the
second supersedeas bond was required in the trial court's order which was issued when it
had no more jurisdiction over the case.
A supersedeas bond in an ejectment case is usually filed in the inferior court and approved
by it and "executed to the plaintiff to enter the action in the Court of First Instance". It covers
"the rents, damages and costs down to the time of the final judgment" (Sec. 8, Rule 72, old
Rules of Court, now sec. 8, Rule 70).
The supersedeas bond answers only for the rentals or the reasonable compensation for the
use and occupation of the premises as fixed in the judgment of the inferior court (De
Laureano vs- Adil, L-43345, July 29, 1976, 72 SCRA 148, 155).
In the instant case, the justice of the peace court did not adjudge any rentals or reasonable
compensation for the use and occupation of the homestead. That court allowed "the plaintiff
to withdraw the canons of the land" from the depositary. Hence, there was no occasion or
justification for requiring a supersedeas bond. For that reason, the "first supersedeas bond"
was not necessary and is, therefore, a nullity. Any execution against it would likewise be a
nullity.
With respect to the "second supersedeas bond". it should be underscored that the lower
court approved defendants' record on appeal in its order of September 6, 1958, wherein it
directed the clerk of court to elevate the same to the Court of Appeals. The appeal was
deemed perfected on that date.
On September 23, 1958, or seventeen days after the perfection of the appeal, Singson filed
a motion for execution. The lower court, instead of granting that motion, required the
defendants in its order of September 27, 1958 to file a supersedeas bond.
It is incontestable that the lower court had no more jurisdiction to issue that order because
after the perfection of the appeal "this trial court loses its jurisdiction over the case, except

to issue orders for the protection and preservation of the rights of the parties which do not
involve any matter litigated by the appeal" (Sec. 9, Rule 41, Rules of Court).
Applying section 9, Rule 41, it was held that after the perfection of the appeal the trial court
cannot order the execution of its judgment pending appeal because execution is a
proceeding affecting the rights of the parties which are the subject matter of the judgment,
from which appeal is taken, and its purpose is not to protect and preserve the subject matter
of the litigation Cabilao vs. Judge of the Court of First Instance of Zamboanga, L-18454,
August 29, 1966, 17 SCRA 992; 2 Moran's Comments on the Rules of Court, 1970 Edition, pp.
434-6).
It follows that the and supersedeas bond" which Doroteo Ballesteros and Pedro Agatep
executed, as required in the lower court's invalid order of September 27, 1958, is void ab
initio. The execution sale based on that supersedeas bond is likewise void.
(3) Other aspects of the supersedeas bonds may be pointed out to show their void character.
The bonds are in English and might not have been understood by the ignorant sureties (See
art. 1332, Civil Code).
The first supersedeas bond was fried "to answer for damages (which) the plaintiff might
sustain by reason of the crops or produce which they (the defendants) pray to be disposed
of and deposited" whatever that means. In that bond, the sureties solidarily 'undertake to
pay to the plaintiff whatever damage he might sustain as a result of the produce (sic), but
not to exceed the amount of P3,000", and, "for the payment thereof", the defendants
"encumber and constitute a first lien in favor of the plaintiff upon" certain real properties.
In the second supersedeas bond, the sureties bound themselves 'to pay to the plaintiff
whatever damages he might sustain as a result" of the ejectment case and, for that purpose,
the sureties encumbered and constituted a first lien in favor of the plaintiff upon their real
properties.
The two bonds were supposed to answer for the damages caused to Singson by the
defendants. But the tenor and provisions of the two bonds do not define unequivocally the
nature of the sureties liability to Singson. The judgments of the justice of the peace court
and the Court of First Instance, which were supposed to be stayed by the said bonds, are not
quoted or recited in the said bonds.
It should be home in mind that the justice of the peace court and the Court of First Instance
did not require the defendants to pay "damages" to Singson. The lower court required the
defendants to deriver to Singson 73 cavans yearly from September, 1956 until the
possession of the homestead was restored to him. Those 73 cavans were not "damages" but
Singson's share of the harvests as owner or possessor of the homestead.
It is exceedingly doubtful if the vague and uncertain provisions of the supersedeas bonds
justified the execution against the properties of the sureties.
(4) There is some basis for appellant's contention that the execution sales in question were
invalid because the judgment debtors' obligation was extinguished by the lower court's
orders of September 10, 1960 and January 28, 1961, reducing their liability for the owner's
share of the harvests to 146 cavans of palay or P1,460.
In those two orders, the trial court had novated its judgment without any protest on the part
of the judgment creditor. It is an undisputed fact that, as heretofore repeatedly emphasized,

the judgment debtors had delivered to Singson's overseer 158 cavans of palay valued at
P1,580, an amount which is more than the reduced liability of P1,460. That explains why the
defendants and the sureties contended in the lower court that its judgment had already
been satisfied and that, therefore, further execution was not in order.
(5) But even if the supersedeas bonds could be proper bases for selling at public auction the
properties of the five sureties, to satisfy the defendants' liability to deliver 146 cavans of
palay to Singson or to pay him P1,460, it would not follow that the execution sales are valid.
The two execution sales are void because of gross inadequacy of price which is shocking to
the conscience (Director of Lands vs. Abarca, 61 Phil. 70; Warner, Barnes 8 Co. vs. Santos,
14 Phil. 446, 449; Philippine National Bank vs. Gonzalez, 45 Phil. 693).
Nine parcels of land, with a total area of more than 33 hectares and an aggregate assessed
value of P6,190 were sold to satisfy total obligations amounting to P2,184.07 (of which
P1,460 constituted the main obligation). Thirty-three hectares of land were ceded to the
judgment creditor to satisfy a judgment for 146 cavans of palay.
If we sustain the execution sales, the iniquitous and oppressive result would be that Singson,
after recovering ion of the 24-hectare homestead and receiving 158 cavans of palay, out of
the 292 cavans of palay adjudged in his favor, would, in addition, be awarded 33 hectares of
land (presumably more valuable than the 24-hectare homestead in litigation to satisfy the
balance of the judgment in the sum of P1,460, according to the trial court's computation).
While this Court sits that patent injustice cannot be tolerated.
WHEREFORE, the execution sales held on June 27 and 30, 1961 are declared void and the
trial court's orders of September 20 and November 14, 1962, denying the petition to set
aside those sales and granting Singson's motion for a writ of possession, are reversed and
set aside. Costs against respondent-appellee Singson.
SO ORDERED
Fernando (Chairman), Barredo, Antonio, Concepcion Jr. and Santos, JJ., concur.
Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. L-45848 November 9,1977
TOWERS ASSURANCE CORPORATION, petitioner,
vs.
ORORAMA SUPERMART, ITS OWNER-PROPRIETOR, SEE HONG and JUDGE BENJAMIN
K. GOROSPE, Presiding Judge, Court of First Instance of Misamis Oriental, Branch
I, respondents.
Benjamin Tabique & Zosimo T. Vasalla for petitioner.

Rodrigo F. Lim, Jr. for private respondent.

AQUINO, J.:
This case is about the liability of a surety in a counterbond for the lifting of a writ of
preliminary attachment.
On February 17, 1976 See Hong, the proprietor of Ororama Supermart in Cagayan de Oro
City, sued the spouses Ernesto Ong and Conching Ong in the Court of First Instance of
Misamis Oriental for the collection of the sum of P 58,400 plus litigation expenses and
attorney's fees (Civil Case No. 4930).
See Hong asked for a writ of preliminary attachment. On March 5, 1976, the lower court
issued an order of attachment. The deputy sheriff attached the properties of the Ong
spouses in Valencia, Bukidnon and in Cagayan de Oro City.
To lift the attachment, the Ong spouses filed on March 11, 1976 a counterbond in 'the
amount of P 58,400 with Towers Assurance Corporation as surety. In that undertaking, the
Ong spouses and Towers Assurance Corporation bound themselves to pay solidarity to See
Hong the sum of P 58,400.
On March 24, 1976 the Ong spouses filed an answer with a counterclaim. For nonappearance at the pre- trial, the Ong spouses were declared in default.
On October 25, 1976, the lower court rendered a decision, ordering not only the Ong
spouses but also their surety, Towers Assurance Corporation, to pay solidarily to See Hong
the sum of P 58,400. The court also ordered the Ong spouses to pay P 10,000 as litigation
expenses and attorney's fees.
Ernesto Ong manifested that he did not want to appeal. On March 8, 1977, Ororama
Supermart filed a motion for execution. The lower court granted that motion. The writ of
execution was issued on March 14 against the judgment debtors and their surety. On March
29, 1977, Towers Assurance Corporation filed the instant petition for certiorari where it
assails the decision and writ of execution.
We hold that the lower court acted with grave abuse of discretion in issuing a writ of
execution against the surety without first giving it an opportunity to be heard as required in
Rule 57 of tie Rules of Court which provides:
SEC. 17. When execution returned unsatisfied, recovery had upon bound. If
the execution be returned unsatisfied in whole or in part, the surety or
sureties on any counterbound given pursuant to the provisions of this rule to
secure the payment of the judgment shall become charged on such
counterbound, and bound to pay to the judgment creditor upon demand, the
amount due under the judgment, which amount may be recovered from such
surety or sureties after notice and summary hearing in the same action.

Under section 17, in order that the judgment creditor might recover from the surety on the
counterbond, it is necessary (1) that execution be first issued against the principal debtor
and that such execution was returned unsatisfied in whole or in part; (2) that the creditor
made a demand upon the surety for the satisfaction of the judgment, and (3) that the surety
be given notice and a summary hearing in the same action as to his liability for the
judgment under his counterbond.
The first requisite mentioned above is not applicable to this case because Towers Assurance
Corporation assumed a solidary liability for the satisfaction of the judgment. A surety is not
entitled to the exhaustion of the properties of the principal debtor (Art. 2959, Civil Code;
Luzon Steel Corporation vs. Sia, L-26449, May 15, 1969, 28 SCRA 58, 63).
But certainly, the surety is entitled to be heard before an execution can be issued against
him since he is not a party in the case involving his principal. Notice and hearing constitute
the essence of procedural due process. (Martinez vs. Villacete 116 Phil. 326; Insurance &
Surety Co., Inc. vs. Hon. Piccio, 105 Phil. 1192, 1200, Luzon Surety Co., Inc. vs. Beson, L26865-66, January 30. 1970. 31 SCRA 313).
WHEREFORE, the order and writ of execution, insofar as they concern Towers Corporation,
are set aside. The lower court is directed to conduct a summary hearing on the surety's
liability on its counterbound. No costs.
SO ORDERED.
Fernando (Chairman), Barredo, Antonio, Concepcion, Jr. and Santos, JJ., concur.
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-9674

April 29, 1957

MELECIO ARRANZ, plaintiff-appellant,

vs.
MANILA FIDELITY AND SURETY CO., INC., defendant-appellee.
Jose F. Aguirre for appellant.
De Santos and Herrera for appellee.
LABRADOR, J.:
Appeal from an order of dismissal of the complaint rendered by the judge of the Court of
First Instance, Honorable Rafael Amparo, presiding.
The complaint alleges the following facts: On November 25, 1949, the defendant appellee
Manila Fidelity & Surety Co., executed and delivered to the Manila Ylang Ylang Distillery a
surety bond, by virtue of which defendant-appellee, as surety, understood to pay jointly and

severally with plaintiff as principal, the sum of P90,000. The surety bond executed by Arranz
and the defendant-appellee contains the following stipulation:
The surety hereunder waives notice of default and expressly agrees that it shall not
be necessary for the Manila Ylang Ylang Distillery, Ltd. to proceed against the
Principal upon his default or to exhaust the property of said Principal, before
proceeding against the surety, the Surety's liability under this bond being a primary
one and shall be eligible and demandable immediately upon occurrence of such
default. (p. 16, R.O.A.)
To secure the surety against loss arising from the surety bond, plaintiff executed a second
mortgaged over the properties which were transferred by the Manila Ylang Ylang Distillery to
plaintiff. When the first installment of P50,000 became due on June 30, 1950, the surety,
defendant-appellee, did not have funds to pay the same, and neither did it have funds to
pay the second installment of P40,000 which became due on June 30, 1951. So the
complaint was filed by the Manila Ylang Ylang Distillery on November 16, 1950, and a
supplemental complaint was later filed on January 2, 1952, to include the second installment
of P40,000 then already due. The defendant had no funds with which to pay either the
P50,000 or the P40,000 due under the agreement and the only amount it was able to raise
was P20,000. And that was paid to Manila Ylang Ylang Distillery on account.
As defendant surety had no money with which to respond for the obligation, plaintiff made
an arrangement with the Philippine National Bank, whereby he would mortgage the same
properties to the latter in order to raise the amount needed to pay the amount of the loan.
The Philippine National Bank wanted that defendant surety cancel the second mortgage
executed in its favor by Arranz, but the defendant refused to do so unless Arranz pay to it
the following sums:
(a) P20,000, the partial payment made to the Manila Ylang Ylang Distillery on account
of the latter's judgment credit;
(b) P3,045.12 from December 31, 1950 to December 31, 1954;
(c) (c)P7,691.09, including renewal premium on Bond No. 8674, from November 25,
1950 to November 25, 1954, and incidental expenses and interests;
(d) P10,000, for attorney's fees, and
(e) P25,000, to be held by defendant in trust to answer for an alleged contingent
liability of the Manila Ylang Ylang Distillery to it.
As the plaintiff feared that the credit accommodation he sought from the Philippine National
Bank could not be secured without release by the surety of its second mortgage, Arranz paid
the above amounts except the P25,000, and thereupon the second mortgage executed in
favor of surety, defendant-appellee, was cancelled.
The complaint seeks to recover (a) P7,200, the premiums corresponding to the period from
November 25, 1950 to November 25, 1954; and (b) P7,000 representing attorney's fees.
Arranz claims that these two amounts were never due and owing to the defendant surety

and that he paid it against his will in order to be able to save the properties from loss and
obtain the credit accommodation from the Philippine National Bank.
The defendant presented a motion to dismiss the complaint on the ground that there was no
cause of action and inasmuch as the sums sought to be recovered were paid by virtue of the
compromise, and no allegation is made in the complaint that said compromise is vitiated by
mistake, violence, intimidation, undue influence and fraud. In answer to the motion to
dismiss, plaintiff alleged that he was compelled to pay the amounts. The court ruled that the
payment of the sum of P14,200 demanded in plaintiff's complaint was paid as a price for the
release of the properties held on second mortgage by the defendant, or that the same was
the consideration for said release in order to save his properties, and therefore dismissed
the complaint.
We are unable to agree with the judgment of the trial court that the sum of P14,200 was
paid as a consideration for the release of the mortgage. There is no allegation in the
complaint to that effect. From the allegations of the complaint, we gather the following facts:
(1) that the surety did not have the money with which to pay the obligation, the payment of
which was guaranteed in the contract of suretyship; (2) that the premium of P7,200 sought
to be collected by the defendant from the plaintiff and the P7,000 also collected as
attorney's fees, were never due from the plaintiff, because the surety was not able to put up
the amount that it undertook to pay if the principal did not pay the same; (3) that plaintiff
was compelled against his will by the circumstances to pay the sums now sought to be
recovered. The question which the motion for dismissal poses therefore is plaintiff under
obligation to pay the premium on the bond because of failure of his surety to pay the
indebtedness secured by it (surety)?
There is no allegation in the complaint or in any other paper in the case that the surety
promised the principal that it will pay the loan or obligation contracted by the principal
(plaintiff herein) for the latter's account. In the contract of suretyship the creditor was given
the right to sue the principal, or the latter and the surety at the same time. This does not
imply, however, that the surety covenanted or agreed with the principal that it will pay the
loan for the benefit of the principal. Such a promise is not implied by law either. Plaintiff,
therefore, cannot claim that there has been a breach on the part of the surety of any
obligation it has made or undertaken under the suretyship contract. And the failure or
refusal of the surety to pay the debt for the principal's account did not have the effect of
relieving the principal of his obligation to pay the premium on the bond furnished.
The premium is the consideration for furnishing the bond or the guaranty. While the liability
of the surety to the obligee subsists the premium is collectible from the principal. Under the
terms of the contract of suretyship the surety's obligation is that the principal pay the loan
and the interest thereon, and that the surety shall be relieved of his obligation when the loan
or obligation secured is paid.
Now, therefore, if the above abounded Principal shall pay promptly said installments
and interest thereon and shall in all respects do and fully observe all and singular the
covenants, agreements and conditions as provided for in the aforesaid agreement of
November 21, 1949, Annexes "A" and "B" respectively, to the true intent and
meaning thereof, this obligation shall be null and void, otherwise, it shall remain in
full force and effect. (p. 16, R.O.A..)

As the loan and interest remained unpaid the surety continued to be bound to the creditorobligee, and as a corollary its right to collect the premium on the bond also continued.
Plaintiff-appellant, therefore, cannot excuse himself from the payment of the premium on
the bond upon the failure or refusal of the surety to pay the loan and the interest. Even if,
therefore, the payment of the premium were against his will, still plaintiff-appellant has no
cause of action for the return thereof, because the surety was entitled thereto.
For the foregoing considerations, the order of dismissal is affirmed on other grounds. So
ordered.
Bengzon, Padilla, Montemayor, Reyes, A., Bautista Angelo, Endencia and Felix, JJ., concur.
Concepcion and Reyes, J. B. L., JJ., concur in the result.
Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION

G.R. No. 126490 March 31, 1998

ESTRELLA PALMARES, petitioner,
vs.
COURT OF APPEALS and M.B. LENDING CORPORATION, respondents.

REGALADO, J.:
Where a party signs a promissory note as a co-maker and binds herself to be jointly and
severally liable with the principal debtor in case the latter defaults in the payment of the
loan, is such undertaking of the former deemed to be that of a surety as an insurer of the
debt, or of a guarantor who warrants the solvency of the debtor?
Pursuant to a promissory note dated March 13, 1990, private respondent M.B. Lending
Corporation extended a loan to the spouses Osmea and Merlyn Azarraga, together with
petitioner Estrella Palmares, in the amount of P30,000.00 payable on or before May 12,
1990, with compounded interest at the rate of 6% per annum to be computed every 30 days
from the date thereof.1 On four occasions after the execution of the promissory note and
even after the loan matured, petitioner and the Azarraga spouses were able to pay a total of
P16,300.00, thereby leaving a balance of P13,700.00. No payments were made after the last
payment on September 26, 1991.2
Consequently, on the basis of petitioner's solidary liability under the promissory note,
respondent corporation filed a complaint3 against petitioner Palmares as the lone partydefendant, to the exclusion of the principal debtors, allegedly by reason of the insolvency of
the latter.

In her Amended Answer with Counterclaim,4 petitioner alleged that sometime in August
1990, immediately after the loan matured, she offered to settle the obligation with
respondent corporation but the latter informed her that they would try to collect from the
spouses Azarraga and that she need not worry about it; that there has already been a partial
payment in the amount of P17,010.00; that the interest of 6% per month compounded at the
same rate per month, as well as the penalty charges of 3% per month, are usurious and
unconscionable; and that while she agrees to be liable on the note but only upon default of
the principal debtor, respondent corporation acted in bad faith in suing her alone without
including the Azarragas when they were the only ones who benefited from the proceeds of
the loan.
During the pre-trial conference, the parties submitted the following issues for the resolution
of the trial court: (1) what the rate of interest, penalty and damages should be; (2) whether
the liability of the defendant (herein petitioner) is primary or subsidiary; and (3) whether the
defendant Estrella Palmares is only a guarantor with a subsidiary liability and not a co-maker
with primary liability.5
Thereafter, the parties agreed to submit the case for decision based on the pleadings filed
and the memoranda to be submitted by them. On November 26, 1992, the Regional Trial
Court of Iloilo City, Branch 23, rendered judgment dismissing the complaint without
prejudice to the filing of a separate action for a sum of money against the spouses Osmea
and Merlyn Azarraga who are primarily liable on the instrument. 6 This was based on the
findings of the court a quo that the filing of the complaint against herein petitioner Estrella
Palmares, to the exclusion of the Azarraga spouses, amounted to a discharge of a prior
party; that the offer made by petitioner to pay the obligation is considered a valid tender of
payment sufficient to discharge a person's secondary liability on the instrument; as comaker, is only secondarily liable on the instrument; and that the promissory note is a
contract of adhesion.
Respondent Court of Appeals, however, reversed the decision of the trial court, and rendered
judgment declaring herein petitioner Palmares liable to pay respondent corporation:
1. The sum of P13,700.00 representing the outstanding balance still due and owing
with interest at six percent (6%) per month computed from the date the loan was
contracted until fully paid;
2. The sum equivalent to the stipulated penalty of three percent (3%) per month, of
the outstanding balance;
3. Attorney's fees at 25% of the total amount due per stipulations;
4. Plus costs of suit.7
Contrary to the findings of the trial court, respondent appellate court declared that petitioner
Palmares is a surety since she bound herself to be jointly and severally or solidarily liable
with the principal debtors, the Azarraga spouses, when she signed as a co-maker. As such,
petitioner is primarily liable on the note and hence may be sued by the creditor corporation
for the entire obligation. It also adverted to the fact that petitioner admitted her liability in
her Answer although she claims that the Azarraga spouses should have been impleaded.
Respondent court ordered the imposition of the stipulated 6% interest and 3% penalty
charges on the ground that the Usury Law is no longer enforceable pursuant to Central Bank
Circular No. 905. Finally, it rationalized that even if the promissory note were to be
considered as a contract of adhesion, the same is not entirely prohibited because the one
who adheres to the contract is free to reject it entirely; if he adheres, he gives his consent.

Hence this petition for review on certiorari wherein it is asserted that:

A. The Court of Appeals erred in ruling that Palmares acted as surety and is therefore
solidarily liable to pay the promissory note.
1. The terms of the promissory note are vague. Its conflicting provisions do not
establish Palmares' solidary liability.
2. The promissory note contains provisions which establish the co-maker's liability as
that of a guarantor.
3. There is no sufficient basis for concluding that Palmares' liability is solidary.
4. The promissory note is a contract of adhesion and should be construed against M.
B. Lending Corporation.
5. Palmares cannot be compelled to pay the loan at this point.
B. Assuming that Palmares' liability is solidary, the Court of Appeals erred in strictly
imposing the interests and penalty charges on the outstanding balance of the
promissory note.
The foregoing contentions of petitioner are denied and contradicted in their material points
by respondent corporation. They are further refuted by accepted doctrines in the American
jurisdiction after which we patterned our statutory law on surety and guaranty. This case
then affords us the opportunity to make an extended exposition on the ramifications of these
two specialized contracts, for such guidance as may be taken therefrom in similar local
controversies in the future.
The basis of petitioner Palmares' liability under the promissory note is expressed in this wise:
ATTENTION TO CO-MAKERS: PLEASE READ WELL
I, Mrs. Estrella Palmares, as the Co-maker of the above-quoted loan, have fully
understood the contents of this Promissory Note for Short-Term Loan:
That as Co-maker, I am fully aware that I shall be jointly and severally or solidarily
liable with the above principal maker of this note;
That in fact, I hereby agree that M.B. LENDING CORPORATION may demand payment
of the above loan from me in case the principal maker, Mrs. Merlyn Azarraga defaults
in the payment of the note subject to the same conditions above-contained. 8
Petitioner contends that the provisions of the second and third paragraph are conflicting in
that while the second paragraph seems to define her liability as that of a surety which is
joint and solidary with the principal maker, on the other hand, under the third paragraph her
liability is actually that of a mere guarantor because she bound herself to fulfill the
obligation only in case the principal debtor should fail to do so, which is the essence of a
contract of guaranty. More simply stated, although the second paragraph says that she is
liable as a surety, the third paragraph defines the nature of her liability as that of a
guarantor. According to petitioner, these are two conflicting provisions in the promissory
note and the rule is that clauses in the contract should be interpreted in relation to one

another and not by parts. In other words, the second paragraph should not be taken in
isolation, but should be read in relation to the third paragraph.
In an attempt to reconcile the supposed conflict between the two provisions, petitioner avers
that she could be held liable only as a guarantor for several reasons. First, the words "jointly
and severally or solidarily liable" used in the second paragraph are technical and legal terms
which are not fully appreciated by an ordinary layman like herein petitioner, a 65-year old
housewife who is likely to enter into such transactions without fully realizing the nature and
extent of her liability. On the contrary, the wordings used in the third paragraph are easier to
comprehend. Second, the law looks upon the contract of suretyship with a jealous eye and
the rule is that the obligation of the surety cannot be extended by implication beyond
specified limits, taking into consideration the peculiar nature of a surety agreement which
holds the surety liable despite the absence of any direct consideration received from either
the principal obligor or the creditor. Third, the promissory note is a contract of adhesion
since it was prepared by respondent M.B. Lending Corporation. The note was brought to
petitioner partially filled up, the contents thereof were never explained to her, and her only
participation was to sign thereon. Thus, any apparent ambiguity in the contract should be
strictly construed against private respondent pursuant to Art. 1377 of the Civil Code. 9
Petitioner accordingly concludes that her liability should be deemed restricted by the clause
in the third paragraph of the promissory note to be that of a guarantor.
Moreover, petitioner submits that she cannot as yet be compelled to pay the loan because
the principal debtors cannot be considered in default in the absence of a judicial or
extrajudicial demand. It is true that the complaint alleges the fact of demand, but the
purported demand letters were never attached to the pleadings filed by private respondent
before the trial court. And, while petitioner may have admitted in her Amended Answer that
she received a demand letter from respondent corporation sometime in 1990, the same did
not effectively put her or the principal debtors in default for the simple reason that the latter
subsequently made a partial payment on the loan in September, 1991, a fact which was
never controverted by herein private respondent.
Finally, it is argued that the Court of Appeals gravely erred in awarding the amount of
P2,745,483.39 in favor of private respondent when, in truth and in fact, the outstanding
balance of the loan is only P13,700.00. Where the interest charged on the loan is exorbitant,
iniquitous or unconscionable, and the obligation has been partially complied with, the court
may equitably reduce the penalty10 on grounds of substantial justice. More importantly,
respondent corporation never refuted petitioner's allegation that immediately after the loan
matured, she informed said respondent of her desire to settle the obligation. The court
should, therefore, mitigate the damages to be paid since petitioner has shown a sincere
desire for a compromise.11
After a judicious evaluation of the arguments of the parties, we are constrained to dismiss
the petition for lack of merit, but to except therefrom the issue anent the propriety of the
monetary award adjudged to herein respondent corporation.
At the outset, let it here be stressed that even assuming arguendo that the promissory note
executed between the parties is a contract of adhesion, it has been the consistent holding of
the Court that contracts of adhesion are not invalid per se and that on numerous occasions
the binding effects thereof have been upheld. The peculiar nature of such contracts
necessitate a close scrutiny of the factual milieu to which the provisions are intended to
apply. Hence, just as consistently and unhesitatingly, but without categorically invalidating
such contracts, the Court has construed obscurities and ambiguities in the restrictive
provisions of contracts of adhesion strictly albeit not unreasonably against the drafter

thereof when justified in light of the operative facts and surrounding circumstances. 12 The
factual scenario obtaining in the case before us warrants a liberal application of the rule in
favor of respondent corporation.
The Civil Code pertinently provides:
Art. 2047. By guaranty, a person called the guarantor binds himself to the creditor to
fulfill the obligation of the principal debtor in case the latter should fail to do so.
If a person binds himself solidarily with the principal debtor, the provisions of Section
4, Chapter 3, Title I of this Book shall be observed. In such case the contract is called
a suretyship.
It is a cardinal rule in the interpretation of contracts that if the terms of a contract are clear
and leave no doubt upon the intention of the contracting parties, the literal meaning of its
stipulation shall control.13 In the case at bar, petitioner expressly bound herself to be jointly
and severally or solidarily liable with the principal maker of the note. The terms of the
contract are clear, explicit and unequivocal that petitioner's liability is that of a surety.
Her pretension that the terms "jointly and severally or solidarily liable" contained in the
second paragraph of her contract are technical and legal terms which could not be easily
understood by an ordinary layman like her is diametrically opposed to her manifestation in
the contract that she "fully understood the contents" of the promissory note and that she is
"fully aware" of her solidary liability with the principal maker. Petitioner admits that she
voluntarily affixed her signature thereto; ergo, she cannot now be heard to claim otherwise.
Any reference to the existence of fraud is unavailing. Fraud must be established by clear and
convincing evidence, mere preponderance of evidence not even being adequate. Petitioner's
attempt to prove fraud must, therefore, fail as it was evidenced only by her own
uncorroborated and, expectedly, self-serving allegations.14
Having entered into the contract with full knowledge of its terms and conditions, petitioner is
estopped to assert that she did so under a misapprehension or in ignorance of their legal
effect, or as to the legal effect of the undertaking.15The rule that ignorance of the contents
of an instrument does not ordinarily affect the liability of one who signs it also applies to
contracts of suretyship. And the mistake of a surety as to the legal effect of her obligation is
ordinarily no reason for relieving her of liability. 16
Petitioner would like to make capital of the fact that although she obligated herself to be
jointly and severally liable with the principal maker, her liability is deemed restricted by the
provisions of the third paragraph of her contract wherein she agreed "that M.B. Lending
Corporation may demand payment of the above loan from me in case the principal maker,
Mrs. Merlyn Azarraga defaults in the payment of the note," which makes her contract one of
guaranty and not suretyship. The purported discordance is more apparent than real.
A surety is an insurer of the debt, whereas a guarantor is an insurer of the solvency of the
debtor.17 A suretyship is an undertaking that the debt shall be paid; a guaranty, an
undertaking that the debtor shall pay.18 Stated differently, a surety promises to pay the
principal's debt if the principal will not pay, while a guarantor agrees that the creditor, after
proceeding against the principal, may proceed against the guarantor if the principal is
unable to pay.19 A surety binds himself to perform if the principal does not, without regard to
his ability to do so. A guarantor, on the other hand, does not contract that the principal will
pay, but simply that he is able to do so.20 In other words, a surety undertakes directly for the
payment and is so responsible at once if the principal debtor makes default, while a

guarantor contracts to pay if, by the use of due diligence, the debt cannot be made out of
the principal debtor.21
Quintessentially, the undertaking to pay upon default of the principal debtor does not
automatically remove it from the ambit of a contract of suretyship. The second and third
paragraphs of the aforequoted portion of the promissory note do not contain any other
condition for the enforcement of respondent corporation's right against petitioner. It has not
been shown, either in the contract or the pleadings, that respondent corporation agreed to
proceed against herein petitioner only if and when the defaulting principal has become
insolvent. A contract of suretyship, to repeat, is that wherein one lends his credit by joining
in the principal debtor's obligation, so as to render himself directly and primarily responsible
with him, and without reference to the solvency of the principal. 22
In a desperate effort to exonerate herself from liability, petitioner erroneously invokes the
rule on strictissimi juris, which holds that when the meaning of a contract of indemnity or
guaranty has once been judicially determined under the rule of reasonable construction
applicable to all written contracts, then the liability of the surety, under his contract, as thus
interpreted and construed, is not to be extended beyond its strict meaning. 23 The rule,
however, will apply only after it has been definitely ascertained that the contract is one of
suretyship and not a contract of guaranty. It cannot be used as an aid in
determining whether a party's undertaking is that of a surety or a guarantor.
Prescinding from these jurisprudential authorities, there can be no doubt that the stipulation
contained in the third paragraph of the controverted suretyship contract merely elucidated
on and made more specific the obligation of petitioner as generally defined in the second
paragraph thereof. Resultantly, the theory advanced by petitioner, that she is merely a
guarantor because her liability attaches only upon default of the principal debtor, must
necessarily fail for being incongruent with the judicial pronouncements adverted to above.
It is a well-entrenched rule that in order to judge the intention of the contracting parties,
their contemporaneous and subsequent acts shall also be principally considered. 24 Several
attendant factors in that genre lend support to our finding that petitioner is a surety. For one,
when petitioner was informed about the failure of the principal debtor to pay the loan, she
immediately offered to settle the account with respondent corporation. Obviously, in her
mind, she knew that she was directly and primarily liable upon default of her principal. For
another, and this is most revealing, petitioner presented the receipts of the payments
already made, from the time of initial payment up to the last, which were all issued in her
name and of the Azarraga spouses.25 This can only be construed to mean that the payments
made by the principal debtors were considered by respondent corporation as creditable
directly upon the account and inuring to the benefit of petitioner. The concomitant and
simultaneous compliance of petitioner's obligation with that of her principals only goes to
show that, from the very start, petitioner considered herself equally bound by the contract of
the principal makers.
In this regard, we need only to reiterate the rule that a surety is bound equally and
absolutely with the principal,26and as such is deemed an original promisor and debtor from
the beginning.27 This is because in suretyship there is but one contract, and the surety is
bound by the same agreement which binds the principal.28 In essence, the contract of a
surety starts with the agreement,29 which is precisely the situation obtaining in this case
before the Court.
It will further be observed that petitioner's undertaking as co-maker immediately follows the
terms and conditions stipulated between respondent corporation, as creditor, and the
principal obligors. A surety is usually bound with his principal by the same instrument,

executed at the same time and upon the same consideration; he is an original debtor, and
his liability is immediate and direct.30 Thus, it has been held that where a written agreement
on the same sheet of paper with and immediately following the principal contract between
the buyer and seller is executed simultaneously therewith, providing that the signers of the
agreement agreed to the terms of the principal contract, the signers were "sureties" jointly
liable with the buyer.31 A surety usually enters into the same obligation as that of his
principal, and the signatures of both usually appear upon the same instrument, and the
same consideration usually supports the obligation for both the principal and the surety. 32
There is no merit in petitioner's contention that the complaint was prematurely filed because
the principal debtors cannot as yet be considered in default, there having been no judicial or
extrajudicial demand made by respondent corporation. Petitioner has agreed that
respondent corporation may demand payment of the loan from her in case the principal
maker defaults, subject to the same conditions expressed in the promissory note.
Significantly, paragraph (G) of the note states that "should I fail to pay in accordance with
the above schedule of payment, I hereby waive my right to notice and demand." Hence,
demand by the creditor is no longer necessary in order that delay may exist since the
contract itself already expressly so declares.33 As a surety, petitioner is equally bound by
such waiver.
Even if it were otherwise, demand on the sureties is not necessary before bringing suit
against them, since the commencement of the suit is a sufficient demand. 34 On this point, it
may be worth mentioning that a surety is not even entitled, as a matter of right, to be given
notice of the principal's default. Inasmuch as the creditor owes no duty of active diligence to
take care of the interest of the surety, his mere failure to voluntarily give information to the
surety of the default of the principal cannot have the effect of discharging the surety. The
surety is bound to take notice of the principal's default and to perform the obligation. He
cannot complain that the creditor has not notified
him in the absence of a special agreement to that effect in the contract of suretyship. 35
The alleged failure of respondent corporation to prove the fact of demand on the principal
debtors, by not attaching copies thereof to its pleadings, is likewise immaterial. In the
absence of a statutory or contractual requirement, it is not necessary that payment or
performance of his obligation be first demanded of the principal, especially where demand
would have been useless; nor is it a requisite, before proceeding against the sureties, that
the principal be called on to account.36 The underlying principle therefor is that a suretyship
is a direct contract to pay the debt of another. A surety is liable as much as his principal is
liable, and absolutely liable as soon as default is made, without any demand upon the
principal whatsoever or any notice of default.37 As an original promisor and debtor from the
beginning, he is held ordinarily to know every default of his principal. 38
Petitioner questions the propriety of the filing of a complaint solely against her to the
exclusion of the principal debtors who allegedly were the only ones who benefited from the
proceeds of the loan. What petitioner is trying to imply is that the creditor, herein
respondent corporation, should have proceeded first against the principal before suing on
her obligation as surety. We disagree.
A creditor's right to proceed against the surety exists independently of his right to proceed
against the principal.39Under Article 1216 of the Civil Code, the creditor may proceed against
any one of the solidary debtors or some or all of them simultaneously. The rule, therefore, is
that if the obligation is joint and several, the creditor has the right to proceed even against
the surety alone.40 Since, generally, it is not necessary for the creditor to proceed against a
principal in order to hold the surety liable, where, by the terms of the contract, the obligation
of the surety is the same that of the principal, then soon as the principal is in default, the

surety is likewise in default, and may be sued immediately and before any proceedings are
had against the principal.41 Perforce, in accordance with the rule that, in the absence of
statute or agreement otherwise, a surety is primarily liable, and with the rule that his proper
remedy is to pay the debt and pursue the principal for reimbursement, the surety cannot at
law, unless permitted by statute and in the absence of any agreement limiting the
application of the security, require the creditor or obligee, before proceeding against the
surety, to resort to and exhaust his remedies against the principal, particularly where both
principal and surety are equally bound.42
We agree with respondent corporation that its mere failure to immediately sue petitioner on
her obligation does not release her from liability. Where a creditor refrains from proceeding
against the principal, the surety is not exonerated. In other words, mere want of diligence or
forbearance does not affect the creditor's rights vis-a-vis the surety, unless the surety
requires him by appropriate notice to sue on the obligation. Such gratuitous indulgence of
the principal does not discharge the surety whether given at the principal's request or
without it, and whether it is yielded by the creditor through sympathy or from an inclination
to favor the principal, or is only the result of passiveness. The neglect of the creditor to sue
the principal at the time the debt falls due does not discharge the surety, even if such delay
continues until the principal becomes insolvent.43 And, in the absence of proof of resultant
injury, a surety is not discharged by the creditor's mere statement that the creditor will not
look to the surety,44 or that he need not trouble himself.45 The consequences of the delay,
such as the subsequent insolvency of the principal,46or the fact that the remedies against
the principal may be lost by lapse of time, are immaterial. 47
The raison d'tre for the rule is that there is nothing to prevent the creditor from proceeding
against the principal at any time.48 At any rate, if the surety is dissatisfied with the degree of
activity displayed by the creditor in the pursuit of his principal, he may pay the debt himself
and become subrogated to all the rights and remedies of the creditor. 49
It may not be amiss to add that leniency shown to a debtor in default, by delay permitted by
the creditor without change in the time when the debt might be demanded, does not
constitute an extension of the time of payment, which would release the surety. 50 In order to
constitute an extension discharging the surety, it should appear that the extension was for a
definite period, pursuant to an enforceable agreement between the principal and the
creditor, and that it was made without the consent of the surety or with a reservation of
rights with respect to him. The contract must be one which precludes the creditor from, or at
least hinders him in, enforcing the principal contract within the period during which he could
otherwise have enforced it, and which precludes the surety from paying the debt. 51
None of these elements are present in the instant case. Verily, the mere fact that respondent
corporation gave the principal debtors an extended period of time within which to comply
with their obligation did not effectively absolve here in petitioner from the consequences of
her undertaking. Besides, the burden is on the surety, herein petitioner, to show that she
has been discharged by some act of the creditor,52 herein respondent corporation, failing in
which we cannot grant the relief prayed for.
As a final issue, petitioner claims that assuming that her liability is solidary, the interests and
penalty charges on the outstanding balance of the loan cannot be imposed for being illegal
and unconscionable. Petitioner additionally theorizes that respondent corporation
intentionally delayed the collection of the loan in order that the interests and penalty
charges would accumulate. The statement, likewise traversed by said respondent, is
misleading.

In an affidavit53 executed by petitioner, which was attached to her petition, she stated,
among others, that:
8. During the latter part of 1990, I was surprised to learn that Merlyn Azarraga's loan
has been released and that she has not paid the same upon its maturity. I received a
telephone call from Mr. Augusto Banusing of MB Lending informing me of this fact and
of my liability arising from the promissory note which I signed.
9. I requested Mr. Banusing to try to collect first from Merlyn and Osmea Azarraga.
At the same time, I offered to pay MB Lending the outstanding balance of the
principal obligation should he fail to collect from Merlyn and Osmea Azarraga. Mr.
Banusing advised me not to worry because he will try to collect first from Merlyn and
Osmea Azarraga.
10. A year thereafter, I received a telephone call from the secretary of Mr. Banusing
who reminded that the loan of Merlyn and Osmea Azarraga, together with interest
and penalties thereon, has not been paid. Since I had no available funds at that time,
I offered to pay MB Lending by delivering to them a parcel of land which I own. Mr.
Banusing's secretary, however, refused my offer for the reason that they are not
interested in real estate.
11. In March 1992, I received a copy of the summons and of the complaint filed
against me by MB Lending before the RTC-Iloilo. After learning that a complaint was
filed against me, I instructed Sheila Gatia to go to MB Lending and reiterate my first
offer to pay the outstanding balance of the principal obligation of Merlyn Azarraga in
the amount of P30,000.00.
12. Ms. Gatia talked to the secretary of Mr. Banusing who referred her to Atty. Venus,
counsel of MB Lending.
13. Atty. Venus informed Ms. Gatia that he will consult Mr. Banusing if my offer to pay
the outstanding balance of the principal obligation loan (sic) of Merlyn and Osmea
Azarraga is acceptable. Later, Atty. Venus informed Ms. Gatia that my offer is not
acceptable to Mr. Banusing.
The purported offer to pay made by petitioner can not be deemed sufficient and substantial
in order to effectively discharge her from liability. There are a number of circumstances
which conjointly inveigh against her aforesaid theory.
1. Respondent corporation cannot be faulted for not immediately demanding payment from
petitioner. It was petitioner who initially requested that the creditor try to collect from her
principal first, and she offered to pay only in case the creditor fails to collect. The delay, if
any, was occasioned by the fact that respondent corporation merely acquiesced to the
request of petitioner. At any rate, there was here no actual offer of payment to speak of but
only a commitment to pay if the principal does not pay.
2. Petitioner made a second attempt to settle the obligation by offering a parcel of land
which she owned. Respondent corporation was acting well within its rights when it refused to
accept the offer. The debtor of a thing cannot compel the creditor to receive a different one,
although the latter may be of the same value, or more valuable than that which is due. 54 The
obligee is entitled to demand fulfillment of the obligation or performance as stipulated. A
change of the object of the obligation would constitute novation requiring the express
consent of the parties.55

3. After the complaint was filed against her, petitioner reiterated her offer to pay the
outstanding balance of the obligation in the amount of P30,000.00 but the same was
likewise rejected. Again, respondent corporation cannot be blamed for refusing the amount
being offered because it fell way below the amount it had computed, based on the stipulated
interests and penalty charges, as owing and due from herein petitioner. A debt shall not be
understood to have been paid unless the thing or service in which the obligation consists
has been completely delivered or rendered, as the case may be. 56 In other words, the
prestation must be fulfilled completely. A person entering into a contract has a right to insist
on its performance in all particulars.57
Petitioner cannot compel respondent corporation to accept the amount she is willing to pay
because the moment the latter accepts the performance, knowing its incompleteness or
irregularity, and without expressing any protest or objection, then the obligation shall be
deemed fully complied with.58 Precisely, this is what respondent corporation wanted to avoid
when it continually refused to settle with petitioner at less than what was actually due under
their contract.
This notwithstanding, however, we find and so hold that the penalty charge of 3% per month
and attorney's fees equivalent to 25% of the total amount due are highly inequitable and
unreasonable.
It must be remembered that from the principal loan of P30,000.00, the amount of
P16,300.00 had already been paid even before the filing of the present case. Article 1229 of
the Civil Code provides that the court shall equitably reduce the penalty when the principal
obligation has been partly or irregularly complied with by the debtor. And, even if there has
been no performance, the penalty may also be reduced if it is iniquitous or leonine.
In a case previously decided by this Court which likewise involved private respondent M.B.
Lending Corporation, and which is substantially on all fours with the one at bar, we decided
to eliminate altogether the penalty interest for being excessive and unwarranted under the
following rationalization:
Upon the matter of penalty interest, we agree with the Court of Appeals that the
economic impact of the penalty interest of three percent (3 %) per month on total
amount due but unpaid should be equitably reduced. The purpose for which the
penalty interest is intended that is, to punish the obligor will have been
sufficiently served by the effects of compounded interest. Under the exceptional
circumstances in the case at bar, e.g., the original amount loaned was only
P15,000.00; partial payment of P8,600.00 was made on due date; and the heavy
(albeit still lawful) regular compensatory interest, the penalty interest stipulated in
the parties' promissory note is iniquitous and unconscionable and may be equitably
reduced further by eliminating such penalty interest altogether. 59
Accordingly, the penalty interest of 3% per month being imposed on petitioner should
similarly be eliminated.
Finally, with respect to the award of attorney's fees, this Court has previously ruled that even
with an agreement thereon between the parties, the court may nevertheless reduce such
attorney's fees fixed in the contract when the amount thereof appears to be unconscionable
or unreasonable.60 To that end, it is not even necessary to show, as in other contracts, that it
is contrary to morals or public policy.61 The grant of attorney's fees equivalent to 25% of the
total amount due is, in our opinion, unreasonable and immoderate, considering the minimal
unpaid amount involved and the extent of the work involved in this simple action for

collection of a sum of money. We, therefore, hold that the amount of P10,000.00 as and for
attorney's fee would be sufficient in this case.62
WHEREFORE, the judgment appealed from is hereby AFFIRMED, subject to the
MODIFICATION that the penalty interest of 3% per month is hereby deleted and the award of
attorney's fees is reduced to P10,000.00.
SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. 14370

September 1, 1919

THE UNITED STATES, plaintiff-appellee,

vs.
VARADERO DE LA QUINTA, CELERINO B. ARELLANO and CIRILO JOSE, defendantsappellants.
Manuel Garcia Goyena for appellants.
Assistant Attorney-General Gerkin for appellee.
MALCOLM, J.:
No better starting place for this opinion can be found than the decision of the Court of First
Instance of Manila which awarded the plaintiff the sum of P13,961.76 with interest and costs.
With difficulty could the fair and concise statement of the case and of the facts by the trial
judge be improved upon. The decision, accordingly incorporated as an integral part of this
opinion, quoted in full, reads as follows:
This is an action to recover the sum of P13,961.76 for the non-performance of a
guaranteed proposal to construct two scows for the plaintiff.
It appears from the evidence that on February 23, 1916, the plaintiff, through the
depot quartermaster of the United States Army at Manila, invited proposals for the
construction of the two scows. In response to the invitation, the defendants Cho
Chung Chac and Cho Chung Chee, doing business under the firm name of the
Varadero de la Quinta, submitted a proposal to build the scows for the sum of
$15,850 United States currency. The proposal by its terms was effective for 60 days
after the opening of the bids, and bound the bidder to complete the construction
within 90 working days after formal notification of award. It also contained the
following clause:
"2. This proposal is made with a full knowledge on the part of the undersigned
of the kind, quantity and quality of the supplies and services required; and
should the undersigned receive written notice of the acceptance of this bid, or
any part thereof, within sixty (60) days after the date of opening same, he will
deliver or person the accepted items within the time and in accordance with
the terms of said proposal and acceptance or will if so required by the United

States enter into contracts within ten days after such notification of
acceptance in accordance with the terms of said proposal and acceptance,
and will give bond with good and sufficient sureties for the faithful and proper
fulfillment of such contract."
The proposal was guaranteed by the defendants Arellano and Jose in the following
terms:
"The undersigned, Celerino B. Arellano, of Manila in the county of Manila, and
state of Philippine Islands and Cirilo Jose, of Manila, in the county of Manila,
and state of Philippine Islands, hereby guarantee that the foregoing proposal,
if not withdrawn prior to the opening thereof shall remain open for sixty (60)
days thereafter, unless accepted or rejected within that time; and if it be
accepted in any or all of its terms or any part or parts thereof, within said
period of sixty (60) days, the said bidder will, upon written notice of such
acceptance, deliver or perform the accepted items within the time and in
accordance with the terms of said proposal and acceptance, or will, if required
by the United States, or its legal representative, within ten (10) days after
written notification of such acceptance, enter into contract with the proper
officer of the United States, for the delivery or performance of the accepted
items in accordance with the terms of the said proposal and acceptance and
will give bond with good and sufficient sureties, for the faithful and proper
fulfillment of such contract. And we bind ourselves, our heirs, executors,
administrators, and successors, jointly and severally, to pay the United States
in case the said bidder shall withdraw said proposal within said period of sixty
(60) days or shall fail to furnish such articles and services in accordance with
said proposal as accepted, or shall fail to enter into such contract and furnish
such bond, if so required within ten days after said notice of acceptance, the
difference in money between the amount of the proposal of Said bidder on the
articles and services so accepted and the amount for which the proper office
of the United States may procure the same from other parties, if the latter
amount be in excess of the former.
"Given under our hands and seals this 1st day of March, 1916.
"Witnesses:
"F. GARCIA as to CELERINO B. ARELLANO
"R. OESON, as to C. JOSE."
"The bids were opened March 3, 1916, and 45 days thereafter the Varadero de la
Quinta was formally notified that its bid was accepted. The notification reads:
"OFFICE OF DEPOT QUARTERMASTER
MANILA, P. I.
"April 17, 1916.
"From: Depot Q. M.
"To: Varadero de la Quinta, 549 Echague St., Manila.

"Subject: Construction of two scows.

"1. You are informed that your bid, submitted in response to circular proposal, of this
office dated February 23d, 1916, for the construction of two scows, is accepted, viz:
$15,850.00, and the same to be completed in ninety (90) working days.
"2. Work is to be begun immediately, and to be completed in time as stated above.
"3. Formal contract covering the above work will be made in the office of the
Department Quartermaster, and will be dated April 17, 1916. You are requested to
advise the name and designation of the office who will sign the contract in behalf of
the Corporation, and the names of the sureties who will justify in the sum of $8,000,
or corporate surety may be furnished if desired. Prompt acknowledgment of this
acceptance is requested.

"M. GRAY ZALINSKI,

"Colonel, Q. M. Corps.

"HAT/T
"L/A 74216029
Under date of April 27, 1916, the Varadero de la Quinta addressed to the Department
Quartermaster a request for a six months extension of time commencing the work,
on the ground that there was not a sufficient supply of suitable lumber in the local
market. This request was under date of April 29 denied by the Department
Quartermaster, who called attention to the fact that his office was informed that the
firm of Norton & Harrison had on hand a large stock of suitable lumber which they
still were willing to sell at the price quoted the Varadero de la Quinta at the time its
bid was submitted. After some further correspondence, and several ineffective efforts
to furnish a bond satisfactory to the Quartermaster Department, the Varadero de la
Quinta was on May 17, 1916, notified that unless the work was undertaken
immediately and satisfactory bond given by one o'clock in the afternoon of May 20,
1916, steps would be taken "to guard the interests of the government by either
awarding the contract to the next lowest bidder, during the work by purchase of
material and hiring of labor, or such other manner as is deemed necessary."
The scows were finally constructed by the Insular Collector of Customs at a total cost
to the United States Government of $22,830.88, United States currency, or an excess
of $6,980.88, United States currency, over the defendants' bid, for the recovery of
which excess this action is brought.
Upon the facts stated, the defendants are clearly liable for the difference between
the amount of their bid and the actual cost to the plaintiff of the construction of the
scows. The defendants' contention that the plaintiff's failure to take immediate
advantage of the provision in the proposal binding the bidder to enter into contract
and furnish bond within ten days constituted a waiver, merits no serious
consideration. Neither is their any force in the argument that the plaintiff should have
waited until the termination of the 90 days period before taking the contract out of
the hands of the defendants. As far as the record shows the defendants, after their
bid was accepted, never offered to complete the construction of the scows within the

period specified in their proposal; in fact, the burden of their contention is that they
were unable to obtain the necessary materials and hence required an extension of
the time. But be this as it may, their proposal bound them to enter into a formal
contract and give a satisfactory bond within ten days from the acceptance of the bid,
or in default thereof to pay the difference in money between the amount of their
proposal and the actual cost. There is no basis for equitable relief from this
agreement; time must be regarded as of the essence in a contract for military
supplies.
Wherefore, it is hereby ordered and adjuged that the plaintiff have and recover
judgment against the defendants Cho Chung Chac and Cho Chung Chee, jointly and
severally as principals, and against the defendants Celerino B. Arellano and Cirilo
Jose, jointly and severally, as sureties, for the sum of P13,961.76, with interest at the
rate of 6 per cent per annum from the 7th day of August, 1917, and with the costs.
Execution will not issue against the sureties until a writ of execution against the
principals has been returned unsatisfied in whole or in part.
Appellants' first assignment or error goes to the overruling of their demurrer by the trial
court, and is to the effect that there is a misjoinder of parties defendant in that the contract
of the defendants Celerino B. Arellano and Cirilo Jose being one of guaranty, the liability of
the principal debtor and the guarantors cannot properly be decided in one and the same
action. Appellants may be technically correct in their demonstration of the proposition that
Arellano and Jose were not sureties, as stated by the trial court, but were, in fact, guarantors
of the contract. The distinction made between the contract of guaranty and the contract of
suretyship under the American law is, however, more shadowy than substantial and is not
emphasized at all under the English law. The vital difference between the contract of a
surety and that of a guarantor is sometimes said to be, that a surety is charged as an
original promissor while the engagement of the guarantor is a collateral undertaking. The
obligation of the surety is primary; the obligation of the guarantor is secondary. (12 R. C. L.,
1057; Homewood People's Bank vs. Hastings [1919], 106 Atl., 308 and note in 89 Central
Law Journal, July 4, 1919, p. 15.) It would then follow that a guarantor not being a joint
contractor with his principal, cannot, as a general rule, be used with his principal. Admitting
although not necessarily conceding, that this is the correct rule of pleading, yet adherence
to the same at this stage of the proceedings and under the situation in which we find the
case, would serve merely to delay the ultimate accounting of the guarantors. Be it
remembered that the concluding sentence of the judgment reads: "Execution will not issue
against the sureties (guarantors) until a writ of execution against the principals has been
returned unsatisfied in whole or in part." In other words, it having been proved that the
principal is not able to perform a contract which he has made and for which in a cumulative,
collateral agreement, the guarantors become liable, the latter must respond for the
damages if the same be not satisfied by their principal. No different result would be attained
if plaintiff were forced to institute separate actions against the principal and the guarantors.
(See Haldane vs. United States [1895], 69 Fed., 819.)
The appellants are correct in contending that an error was committed by the lower court in
finding the defendant Cho Chung Chee liable as a principal in this action. The record
discloses what is styled a stipulation, by which it is admitted by the defendants that Cho
Chung Chac is the sole owner of the business establishment known as the Varadero de la
Quinta, and this is corroborated by defendants' exhibits which speak of the "Varadero de la
Quinta, Cho Chung Chac, sole proprietor, by Cho Chung Chee, attorney-in-fact."
With the modification just indicated, all the other contentious issues appear to be covered
fully in the decision of the trial court. In one way or another they relate to the contract
between the United States and the Varadero de la Quinta. Examining the facts as one may,

the terms of this agreement are plain and definite. Skeletonized they are The bid of the
Varadero de la Quinta accepted bid guaranteed by Arellano and Jose pleas for
extensions of time no modification consented to Varadero de la Quinta fails to carry out
agreement principal liable for excess cost guarantors notified of default although not
necessary guarantors likewise liable.
With these facts, one of two hypotheses can be reasonably assumed. The first assumption is
that there was an absolute impossibility of performance of the contract because of inability
to secure lumber "of the kind, quantity and quality specially called for by the specifications"
in the Manila market, and the second that the contractor could have secured the lumber but
at such a figure as would not have permitted of a profit. On the supposition that no such
lumber as was needed to construct the scows could be found in the city of Manila and that
the authorities of the United States Army would not agree to an extension of time,
nevertheless, the principal and the guarantors cannot escape from their agreement.
This is not a case of an impossibilty existing at the time of the contract and known to both
parties. It is rather a case of where two parties enter into a contract and the performance
becomes impossible subsequent thereto. In such instances, the courts invariably refer to the
old and leading case of Paradine vs. Jane ([1647], Aleyn, 26; 82 Eng. L. & Eq. Rep., 897).
Here, the original rule of English law, with the reasons therefor, and the exceptions thereto,
is made clear in its insistence that when a party by his own contract creates a duty or
charge upon himself, he is bound to make it good, if he may, notwithstanding any accident
by inevitable necessity, because he might have provided against it by his contract. The
reason for the rule is obvious, for if one of two innocent persons must sustain a loss, the law
should leave it where the agreement of the parties has put it. Although in the course of time,
the rigor of this ancient doctrine has been modified, it still remains as a cornerstone in the
law of contracts. Thus, the United States Supreme Court in the case of Day vs. United States
([1917], 245 U. S., 159) said;
One who makes a contract never can be absolutely certain that he will be able to
perform it when the time comes, and the very essence of it is that he takes the risk
within the limits of his undertaking. The modern cases may have abated somewhat
the absoluteness of the older ones in determining the scope of the undertaking by
the literal meaning of the words alone. (The Kronprinzessin Cecilie, 244 U. S., 12, 22).
But when the scope of the undertaking is fixed, that is merely another way of saying
that the contractor takes the risk of the obstacles to that extent.
Again, if, as argued by counsel, the war be deemed to have affected the instant contract the
effect would be as summarized in a statement of the law adopted in the report of the PreWar Contract Committee of Great Britain, dated January 12, 1918, wherein it is said:
Prima facie if a man binds himself by contract unconditionally to do that which turns out to
be impossible, he will be held to his bargain and have to pay damages for his failure to
perform. If, however, the impossibility arises from a cause that neither party can be
reasonably have contemplated when the contract was made, and as to which the terms of
the contract make no provision, a man will not be so bound; the matter being unforeseen, he
is not taken to have promised unconditionally nor, for the same reason, has he stipulated for
any condition of excuse." (Report of the Pre-War Contract Committee dated January 12,
1918, Cd. 8975 of 1918; The Law Quarterly Review, January, 1919, p. 95.)
From these authorities and facts, we can reach no other conclusion than that since
impossibility of performance was not known to both parties at the time of making the
contract, since performance has not been prevented by the acts of the United States, since
the contract related to nothing which was unlawful, and since the modificatory rules growing

out of war conditions do not affect the same, the contractor and his guarantors are not
excused from the consequences of non-performance.
The second assumption we have mentioned is, after all, the more tenable. We think it fairly
shown from the evidence that one of the large dealers in the city of Manila had on hand a
sufficient supply of Oregon pine such as was needed to construct the scows. This being so,
the contractor could make propositions without number to the plaintiff, but if they were not
accepted by the plaintiff, the contractor would still be held to his agreement. The excuses
offered for failure to carry out the agreement while they might arouse sympathy would
certainly not furnish a legal defense. Mere increase of the cost of performance or
unexpectedly burdensome and oppressive war conditions are insufficient pleas.
(See Blackburn, Robbin Co., Ltd., vs. Allen & Sons [1918], 2 K. B., 267.) Contracts with the
Government, like other contracts, must be performed according to their tenor.
Judgment is modified so that so much as adjudges Cho Chung Chee liable as principal is
eliminated, and, as thus modified, judgment is affirmed with interest, and with the costs of
this instance against the appellants. So ordered.
Torres, Johnson, Araullo, Avanceena, and Moir, JJ., concur.
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, petitionerPhilippine Export and Foreign Loan
Guarantee Corporation[1] (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
US$18,739,668).[2]

for

total

contract

price

of

ID5,416,089/046

(or

about

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
guarantee[8] 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. 81-195F[11] (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 Undertaking[12] 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
bond[13] 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
petitioners 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
contract[15] 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. Petitioners
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 governments lack of
foreign exchange with which to pay its (VPECIs) accomplishments and (2) SOBs
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 VPECIs 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%
attorneys 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 owners violations of the contract which rendered
impossible the joint venture contractors 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 crossclaim, and ordered the petitioner to pay attorneys 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 courts 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
PHILGUARANTEEs 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 courts ruling that

I
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 petitioners status, it is necessary to read Letter of Guarantee No. 81194-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 principals 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 petitioners 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 petitioners liability as guarantor, the next question we have to
grapple with is whether the respondent contractor hasdefaulted 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 SOB [54] 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 Contractors 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 LAssicurazione Del Credito AllExportazione (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 noncompletion 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, petitioners Executive
Vice-President Jesus M. Taedo 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 banks
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 extrajudicially 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 contractors 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
respondents. In fact, in its 13 May 1987 letter to the OMEAA, DFA,Manila, it stated:

of

the

VPECI also maintains that the delay in the completion of the project was mainly due to SOBs
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 Banks 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 VPECIs bid for
government intervention for the amicable termination of the contract and release of the
performance guarantee. [66]
But surprisingly, though fully cognizant of SOBs violations of the service contract and
VPECIs 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. 81194-F?
As a rule, a guarantor who pays for a debtor should be indemnified by the latter [67] 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 petitioners guaranty, the petitioner is precluded from enforcing the same by
reason of the petitioners 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.
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-16666

April 10, 1922

ROMULO MACHETTI, plaintiff-appelle,

vs.
HOSPICIO DE SAN JOSE, defendant-appellee, and
FIDELITY & SURETY COMPANY OF THE PHILIPPINE ISLANDS, defendant-appellant
Ross and Laurence and Wolfson & Scwarzkopf for appellant.
Gabriel La O for appellee Hospicio de San Jose.
No appearance for the other appellee.
OSTRAND, J.:

It appears from the evidence that on July 17, 1916, one Romulo Machetti, by a written
agreement undertook to construct a building on Calle Rosario in the city of Manila for the
Hospicio de San Jose, the contract price being P64,000. One of the conditions of the
agreement was that the contractor should obtain the "guarantee" of the Fidelity and Surety
Company of the Philippine Islands to the amount of P128,800 and the following endorsement
in the English language appears upon the contract:
MANILA, July 15, 1916.
For value received we hereby guarantee compliance with the terms and conditions as
outlined in the above contract.
FIDELITY AND SURETY COMPANY OF THE PHILIPPINE ISLANDS.
(Sgd) OTTO VORSTER,
Vice-President.
Machetti constructed the building under the supervision of architects representing the
Hospicio de San Jose and, as the work progressed, payments were made to him from time to
time upon the recommendation of the architects, until the entire contract price, with the
exception of the sum of the P4,978.08, was paid. Subsequently it was found that the work
had not been carried out in accordance with the specifications which formed part of the
contract and that the workmanship was not of the standard required, and the Hospicio de
San Jose therefore answered the complaint and presented a counterclaim for damages for
the partial noncompliance with the terms of the agreement abovementioned, in the total
sum of P71,350. After issue was thus joined, Machetti, on petition of his creditors, was, on
February 27, 1918, declared insolvent and on March 4, 1918, an order was entered
suspending the proceeding in the present case in accordance with section 60 of the
Insolvency Law, Act No. 1956.
The Hospicio de San Jose on January 29, 1919, filed a motion asking that the Fidelity and
Surety Company be made cross-defendant to the exclusion of Machetti and that the
proceedings be continued as to said company, but still remain suspended as to Machetti.
This motion was granted and on February 7, 1920, the Hospicio filed a complaint against the
Fidelity and Surety Company asking for a judgement for P12,800 against the company upon
its guaranty. After trial, the Court of First Instance rendered judgment against the Fidelity
and Surety Company for P12,800 in accordance with the complaint. The case is now before
this court upon appeal by the Fidelity and Surety Company form said judgment.
As will be seen, the original action which Machetti was the plaintiff and the Hospicio de San
Jose defendant, has been converted into an action in which the Hospicio de San Jose is
plaintiff and the Fidelity and Surety Company, the original plaintiff's guarantor, is the
defendant, Machetti having been practically eliminated from the case.
But in this instance the guarantor's case is even stronger than that of an ordinary surety. The
contract of guaranty is written in the English language and the terms employed must of
course be given the signification which ordinarily attaches to them in that language. In
English the term "guarantor" implies an undertaking of guaranty, as distinguished from
suretyship. It is very true that notwithstanding the use of the words "guarantee" or
"guaranty" circumstances may be shown which convert the contract into one of suretyship

but such circumstances do not exist in the present case; on the contrary it appear
affirmatively that the contract is the guarantor's separate undertaking in which the principal
does not join, that its rests on a separate consideration moving from the principal and that
although it is written in continuation of the contract for the construction of the building, it is
a collateral undertaking separate and distinct from the latter. All of these circumstances are
distinguishing features of contracts of guaranty.
Now, while a surety undertakes to pay if the principal does not pay, the guarantor only binds
himself to pay if the principal cannot pay. The one is the insurer of the debt, the other an
insurer of the solvency of the debtor. (Saint vs.Wheeler & Wilson Mfg. Co., 95 Ala., 362;
Campbell, vs. Sherman, 151 Pa. St., 70; Castellvi de Higgins and Higginsvs. Sellner, 41 Phil.,
142; ;U.S. vs. Varadero de la Quinta, 40 Phil., 48.) This latter liability is what the Fidelity and
Surety Company assumed in the present case. The undertaking is perhaps not exactly that
of a fianza under the Civil Code, but is a perfectly valid contract and must be given the legal
effect if ordinarily carries. The Fidelity and Surety Company having bound itself to pay only
the event its principal, Machetti, cannot pay it follows that it cannot be compelled to pay
until it is shown that Machetti is unable to pay. Such ability may be proven by the return of a
writ of execution unsatisfied or by other means, but is not sufficiently established by the
mere fact that he has been declared insolvent in insolvency proceedings under our statutes,
in which the extent of the insolvent's inability to pay is not determined until the final
liquidation of his estate.
The judgment appealed from is therefore reversed without costs and without prejudice to
such right of action as the cross-complainant, the Hospicio de San Jose, may have after
exhausting its remedy against the plaintiff Machetti. So ordered.
Araullo, C.J., Malcolm, Villamor, Johns and Romualdez, JJ., concur.
SECOND DIVISION

[G.R. No. 160466. January 17, 2005]

SPOUSES ALFREDO and SUSANA ONG, petitioners, vs. PHILIPPINE COMMERCIAL

INTERNATIONAL BANK,respondent.
DECISION
PUNO, J.:
This is a petition for review on certiorari under Rule 45 of the Rules of Court to set aside
the Decision of the Court of Appeals in CA-G.R. SP No. 39255, dated February 17, 2003,
affirming the decision of the trial court denying petitioners motion to dismiss.
The facts: Baliwag Mahogany Corporation (BMC) is a domestic corporation engaged in
the manufacture and export of finished wood products. Petitioners-spouses Alfredo and
Susana Ong are its President and Treasurer, respectively.
On April 20, 1992, respondent Philippine Commercial International Bank (now EquitablePhilippine Commercial International Bank or E-PCIB) filed a case for collection of a sum of

money[1] against petitioners-spouses. Respondent bank sought to hold petitioners-spouses

liable as sureties on the three (3) promissory notes they issued to secure some of BMCs
loans, totalling five million pesos (P5,000,000.00).
The complaint alleged that in 1991, BMC needed additional capital for its business and
applied for various loans, amounting to a total of five million pesos, with the respondent
bank. Petitioners-spouses acted as sureties for these loans and issued three (3) promissory
notes for the purpose. Under the terms of the notes, it was stipulated that respondent bank
may consider debtor BMC in default and demand payment of the remaining balance of the
loan upon the levy, attachment or garnishment of any of its properties, or upon BMCs
insolvency, or if it is declared to be in a state of suspension of payments. Respondent bank
granted BMCs loan applications.
On November 22, 1991, BMC filed a petition for rehabilitation and suspension of
payments with the Securities and Exchange Commission (SEC) after its properties were
attached by creditors. Respondent bank considered debtor BMC in default of its obligations
and sought to collect payment thereof from petitioners-spouses as sureties. In due time,
petitioners-spouses filed their Answer.
On October 13, 1992, a Memorandum of Agreement (MOA) [2] was executed by debtor
BMC, the petitioners-spouses as President and Treasurer of BMC, and the consortium of
creditor banks of BMC (of which respondent bank is included). The MOA took effect upon its
approval by the SEC on November 27, 1992.[3]
Thereafter, petitioners-spouses moved to dismiss[4] the complaint. They argued
that as the SEC declared the principal debtor BMC in a state of suspension of payments and,
under the MOA, the creditor banks, including respondent bank, agreed to temporarily
suspend any pending civil action against the debtor BMC, the benefits of the MOA should be
extended to petitioners-spouses who acted as BMCs sureties in their contracts of loan with
respondent bank. Petitioners-spouses averred that respondent bank is barred from pursuing
its collection case filed against them.
The trial court denied the motion to dismiss. Petitioners-spouses appealed to the
Court of Appeals which affirmed the trial courts ruling that a creditor can proceed against
petitioners-spouses as surety independently of its right to proceed against the principal
debtor BMC.
Hence this appeal.
Petitioners-spouses claim that the collection case filed against them by respondent bank
should be dismissed for three (3) reasons: First, the MOA provided that during its effectivity,
there shall be a suspension of filing or pursuing of collection cases against the BMC and this
provision should benefit petitioners as sureties. Second, principal debtor BMC has been
placed under suspension of payment of debts by the SEC; petitioners contend that it would
prejudice them if the principal debtor BMC would enjoy the suspension of payment of its
debts while petitioners, who acted only as sureties for some of BMCs debts, would be
compelled to make the payment; petitioners add that compelling them to pay is contrary
to Article 2063 of the Civil Code which provides that a compromise between the creditor
and principal debtor benefits the guarantor and should not prejudice the latter. Lastly,
petitioners rely on Article 2081 of the Civil Code which provides that: the guarantor may
set up against the creditor all the defenses which pertain to the principal debtor and are
inherent in the debt; but not those which are purely personal to the debtor. Petitioners aver
that if the principal debtor BMC can set up the defense of suspension of payment of debts
and filing of collection suits against respondent bank, petitioners as sureties should likewise
be allowed to avail of these defenses.
We find no merit in petitioners contentions.

Reliance of petitioners-spouses on Articles 2063 and 2081 of the Civil Code is

misplaced as these provisions refer to contracts of guaranty. They do not apply
to suretyship contracts. Petitioners-spouses are not guarantors but sureties of BMCs
debts. There is a sea of difference in the rights and liabilities of a guarantor and a surety.
A guarantor insures the solvency of the debtor while a surety is an insurer of the
debt itself. A contract of guaranty gives rise to a subsidiary obligation on the part of
the guarantor. It is only after the creditor has proceeded against the properties of the
principal debtor and the debt remains unsatisfied that a guarantor can be held liable to
answer for any unpaid amount. This is the principle of excussion. In a suretyship contract,
however, the benefit of excussion is not available to the surety as he is principally
liable for the payment of the debt. As the surety insures the debt itself, he obligates
himself to pay the debt if the principal debtor will not pay, regardless of whether or not the
latter is financially capable to fulfill his obligation. Thus, a creditor can go directly against
the surety although the principal debtor is solvent and is able to pay or no prior demand is
made on the principal debtor. A surety is directly, equally and absolutely bound with
the principal debtor for the payment of the debt and is deemed as an original
promissor and debtor from the beginning.[5]
Under the suretyship contract entered into by petitioners-spouses with respondent bank,
the former obligated themselves to be solidarily bound with the principal debtor BMC for the
payment of its debts to respondent bank amounting to five million pesos (P5,000,000.00).
Under Article 1216 of the Civil Code,[6] respondent bank as creditor may proceed against
petitioners-spouses as sureties despite the execution of the MOA which provided for the
suspension of payment and filing of collection suits against BMC. Respondent banks right to
collect payment from the surety exists independently of its right to proceed directly against
the principal debtor. In fact, the creditor bank may go against the surety alone without prior
demand for payment on the principal debtor. [7]
The provisions of the MOA regarding the suspension of payments by BMC and
the non-filing of collection suits by the creditor banks pertain only to the property
of the principal debtor BMC. Firstly, in the rehabilitation receivership filed by BMC, only
the properties of BMC were mentioned in the petition with the SEC. [8] Secondly, there is
nothing in the MOA that involves the liabilities of the sureties whose properties are separate
and distinct from that of the debtor BMC. Lastly, it bears to stress that the MOA executed by
BMC and signed by the creditor-banks was approved by the SEC whose jurisdiction is limited
only to corporations and corporate assets. It has no jurisdiction over the properties of BMCs
officers or sureties.
Clearly, the collection suit filed by respondent bank against petitioners-spouses as
sureties can prosper. The trial courts denial of petitioners motion to dismiss was proper.
IN VIEW WHEREOF, the petition is DISMISSED for lack of merit. No pronouncement as
to costs.
SO ORDERED.
Austria-Martinez, Callejo, Sr., Tinga, and Chico-Nazario, JJ., concur.
Delos Santos vs. Vibar
OCTOBER 20, 2011 ~ VBDIAZ
Delos Santos vs. Vibar
G.R. No. 150931
July 16, 2008

FACTS: De Leon borrowed P100k from Vibar. De Leon issued a promissory note and bound
himself to pay the loan three months from date with a monthly interest rate. Delos Santos
signed as a guarantor of de Leons loan.

Later, de Leon asked Vibar for another loan. Together with Delos Santos and Conte, de Leon
went to Vibars house. After some discussion, they all agreed that the outstanding P100k
loan together with the accrued interest would be deducted from the new loan of P500,000

de Leon signed a typewritten promissory note acknowledging the debt of P500k payable
within 12 months. Then, Delos Santos signed as a witness under the phrase signed in the
presence of. However, de Leon, in his own handwriting, inserted the word guarantor
besides Delos Santoss name, as Delos Santos nodded her head to what de Leon was doing.
De Leon also added the phrase, as security for this loan this TCT No. T-47375, Registry of
Baguio City, is being submitted by way of mortgage.

On maturity date, de Leon failed to pay any of the monthly installments. Vibar made several
verbal and written demands on de Leon for payment but to no avail asDe Leon failed to
respond. Vibars counsel again sent a demand letter not only to de Leon as principal debtor,
but also to delos Santos.delosSantos was being made to answer for de Leons debt as the
latters guarantor. delos Santos then remitted to Vibar P15k to pay one months interest on
the loan. However, this was the only payment Delos Santos made to Vibar as Delos Santos
claimed she had no money to pay the full amount of the loan

Vibar filed an action for recovery of money with the RTC, which although ruled that De Leon
is liable, Delos Santos is not a guarantor. The trial court ruled that there was no express
consent given by Delos Santos binding her as guarantor.

However, Ca ruled that Delos santos is guarantor of De Leons loan. Delos Santos filed an MR
which was denied. Hence this petition for review on certiorari.

ISSUE: WON Delos Santos is liable as guarantor of de Leons loan from Vibar
HELD: petition denied

YES

We are convinced that the insertion was made with the express consent of Delos Santos.
Delos Santoss act of nodding her head showed her consent to be a guarantor. Also, Vibar
would not have extended a loan to de Leon without the representations of Delos Santos.
Also, Delos Santos acknowledged her liability as guarantor but simply claimed that she had
no money to pay Vibar. In fact, Delos Santos made an initial payment of P15K as partial
compliance of her obligation as guarantor. This only shows that Delos Santos never denied
her liability to Vibar as guarantor until this case was filed in court. Lastly, Delos Santos wrote
a letter to the RD of Baguio City inquiring on the status of the property mentioned in the
promissory note as a mortgage security for de Leons loan. Here, Delos Santos clearly stated
that she appears to be a guarantor in the promissory note. This serves as a written
admission that Delos Santos knew she was a guarantor. During the trial, Delos Santos did
not impugn the letter or its contents.

Further, It is axiomatic that the written word guarantor prevails over the typewritten word
witness. In case of conflict, the written word prevails over the printed word. Section 15 of
Rule 130 provides:

Sec. 15. Written words control printed. When an instrument consists partly of written words
and partly of a printed form, and the two are inconsistent, the former controls the latter.

We agree with CA that estoppel in pais arose in this case. estoppel is a doctrine that
prevents a person from adopting an inconsistent position, attitude, or action if it will result in
injury to anotherOne who, by his acts, representations or admissions, or by his own silence
when he ought to speak out, intentionally or through culpable negligence, induces another
to believe certain facts to exist and such other rightfully relies and acts on such belief, can
no longer deny the existence of such fact as it will prejudice the latter
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-10547

January 31, 1958

THE PHILIPPINE GUARANTY CO., INC., petitioner,

vs.
LAURA DINIO, PEDRO MANALASTAS, in his capacity as Administrator of the
Intestate Estate of Raymundo Manalastas, and Valentina Pelayo, respondents.
Ramirez and Ortigas and Ignacio B. Alcuaz for petitioner.
Pacifico L. Santiago for respondent Alejandra Pelayo.
Vitaliano T. Estacio for respondent Pedro Manalastas, etc.
LABRADOR, J.:
Appeal by certiorari from a judgment of the Court of Appeals, reversing thatof the Court of
First Instance of Nueva Ecija, in favor of the petitioner andagainst Laura Dinio and Pedro
Manalastas for the payment by the latter of the sum of P11,000 in favor of the plaintiff, with
interests and costs. Thefacts as found by the Court of Appeals are stated by that court as
follows:
It appears that in Civil Case No. C-194 of the Court of First Instance of Ilocos Sur,
Laura Dinio was sued by one Consolacion Nolasco. Said Court ofFirst Instance issued
a writ of preliminary attachment which was levied on the property of the defendant in
that case, consisting of trucks, trailers,and wreckers, all of various tonnage, to
answer for the judgment that mightbe rendered against her.
On December 21, 1946, defendant Laura Dinio and the Philippine GuarantyCo. Inc.
filed a bond of P11,000 with the Court of First Instance of IlocosSur for the lifting of
the attachment; said bond was to secure payment to theplaintiff of any judgment she
may recover against the defendant. On the same day, December 21, 1946, said

Laura Dinio and Raymundo Manalastas executed acounter-guranty with mortgage

(Exh. C) in favor of the Philippine Guaranty Co., Inc. (the plaintiff-appellant in the
present case) in order to indemnifythe latter for any damage, prejudice, losses, costs,
payments, advances, andany other expenses of whatever kind and nature, including
attorney's feeswhich the said Philippine Guaranty Co., Inc. might incur as a
consequenceof any execution that might be levied on said bond. The counter
guarranty with mortgage above mentioned was registered and with the respective
officesof the register of deeds of Ilocos Sur and Pampanga, inasmuch as the real
property of Raymundo Manalastas, subject matter of the mortgage described
inExhibit C, is situated in Pampanga.
On June 30, 1948, judgment was rendered in said Civil Case No. C-194, ordering defendant
Laura Dinio to return to plaintiff Consolacion Nolascothe sum of P10,000. Laura Dinio failed
to satisfy the judgment so the Philippine Guaranty Co., Inc. with the sheriff of the City of
Manila to satisfy the judgment. Thereafter, petitioner herein demanded the payment ofthe
sum paid by it to satisfy the judgment in Civil Case No. C-194 and as thepayment demanded
was not forthcoming, the present action was brought againstrespondents Laurs Dinio and
Pedro Manalastas in executionm of the counterbondthat they had filed in favor of the
petitioner. The Court of First Instanceof Nueva Ecija found for the plaintiff-petitioner but on
appeal to the Courtof Apeals the latter reversed the judgment holding that the counterbond
executed by Raymundo Manalastas was executed without any valuable consideration. It
further held that as the property covered by the counterbond was conjugal property of
Raymundo Manalastas and Valentina Pelayoand as the encumbrance created by Manalastas
was in fraud of his spouse,Aricle 1413 of the Civil Code should be made applicable and in
accordance therewith, as Raymundo Manalastas is already dead, an inventory of the
conjugal property be made and the obligation created by the counterbond be charged
against his share in the counterbond being null and void insofar as the same not be covered
by the share of Manalastas in the conjugal property.The court, therefore, in a final order
rendered after a motion to reconsider the original decision had been presented, ordered that
the case be returnedto the Court of First instance for the reception of additional evidence
andfor such other important proceedings as may be necessary and proper to determine
whether or not the rights and interest of Valentina Pelayo, as surviving spouse of Raymundo
Manalastas, was prejudiced by the incumbrancein question. Petition for certiorari was filed in
this Court against saiddecision and the same was given due course.
The important question presented to Us for decision is whether or not the counterbond,
Exhibit "C," which Ramundo Manalastas, jointly with Laura Dinio,executed in favor of the
petitioner, The Philippine Guaranty Co., Inc., isnull and void for lack of valuable consideration
in favor of Raymundo Manalastas.
It is evident that the counterbond executed jointly by Raymundoa Manalastaswith Laura
Dinio, Exhibit "C," was executed by them in order to secure the bond by the Philippine
Guaranty Co., Inc. in favor of Laura Dinio. The factthat the bond was for the benefit of Laura
Dinio, and not for Raymundo Manalastas, jointly or singly, does not mean the counterbond
was executed byManalastas without any valuable consideration. The consideration in such
caseis that which suuports the principal debtor's obligation.
The claim of the appellants that there was no consideration for their guarranty can
not be sustained. The consideration which supports the obligation as to the principal
debtor is a sufficient consideration to support the obligation of the sureties. It is not

necessary to prove anyconsideration as between them and the creditor." (Pyle vs.
Johnson, et al.,9 Phil. 249, 251.).
The proof shows that the money claimed in this action has never been paid and is
still owing to the plaintiff; and the only defense worth nothing inthis decision is the
assetion on the part of Enrique Echaus that he receivednothing for affixing the
signature as guarantor to the contract which is thesubject of suit and that in effect
the contract was lacking in considerationas to him.
The point is not well taken. A guarantor or surety is bound by the same consideration
that makes the contract effective between the principal therto.(Pyle vs. Johnson, 9
Phil. 249.) . . . .
See also Enriquez de la Cavada vs. Diaz, 37 Phil. 982; Acuna vs. Veloso, 50 Phil.241.
The execution of the bond in the Philippine Guaranty Co., Inc. petitionerherein, in favor of
Laura Dinio, is, therefore, the consideration for theexecution of the counterbond by
Raymundo Manalastas. It is not necessary thatsuch consideration, the execution of the bond
by the Philippine Guaranty Co., Inc. redound directly to the benefit of Raymundo Manalastas;
it isenough that it was favorable to Laura Dinio.
In view of the foregoing, the decision of the Court of Appeals is hereby reversed and set
aside and that of the Court of First Instance, affirmed, with costs against the respondents.
Bengzon, Paras, C.J., Padilla, Montemayor, Reyes, A., Bautista Angelo, Concepcion, Reyes,
J.B.L., Endencia, and Felix, JJ., concur.
izal Commercial Banking Corporation, petitioner, vs. Hon. Jose P. Arro, Judge of the Court
of First Instance of Davao,and Residoro Chua, respondents. Date:31 July 1982 Ponente:De
Castro,J
.Facts:
Private
respondent
Residoro
Chua,
with
Enrique
Go,
Sr.,
executed
a
comprehensivesurety agreement to guaranty,above all, any existing or future indebtedness
of Davao Agricultural Industries Corporation (Daicor), and/or induce thebank at anytime or
from time to time to make loans or advances or to extend credit to saidDaicor, provided that
theliability shall not exceed ay any time Php100,000.00.A promissory note for
Php100,000.00 (for additional capital to the charcoal buy andsell and the activated
carbonimportation business) was issued in favor of petitionerRCBC payable a month after
execution. This was signed by Go inhis personalcapacity and in behalf of Daicor. Respondent
Chua did not sign in said promissorynote. As the note was notpaid despite demands, RCBC
filed a complaint for a sum of money against Daicor, Go and Chua.The complaint against
Chua was dismissed upon his motion, alleging that thecomplaint states no cause of
actionagainst him as he was not a signatory to the noteand hence he cannot be held liable.
This was s
o despite RCBCs
opposition, invokingthe comprehensive surety agreement which it holds to cover not
just the note inquestion but alsoevery other indebtedness that Daicor may incur from
petitioner bank. RCBC moved for reconsideration of the dismissalbut to no avail. Hence, this
petition.
Issue:
WON respondent Chua may be held liable with Go and Daicor under the
promissorynote, even if he was not asignatory to it, in light of the provisions of

thecomprehensive surety agreement wherein he bound himself with Go andDaicor,

assolidary debtors, to pay existing and future debts of said corporation.
Held:
Yes, he may be held liable. Order dismissing the complaint against respondent
Chuareversed and set aside. Caseremanded to court of origin with instruction to set
asidemotion to dismiss and to require defendant Chua to answer thecomplaint.
Ratio:
The comprehensive surety agreement executed by Chua and Go, as president
andgeneral manager, respectively,of Daicor, was to cover existing as well as
futureobligations which Daicor may incur with RCBC. This was only subject tothe provisothat
their liability shall not exceed at any one time the aggregate principal amount of
Php100,000.00. (Par.1of said agreement).
The agreement was executed to induce petitioner Bank to grant any application for
aloan Daicor would request for.According to said agreement, the guaranty iscontinuing and
shall remain in full force or efect until the bank is notifiedof itstermination.During the time
the loan under the promissory note was incurred, the agreement wasstill in full force and
efect and isthus covered by the latter agreement. Thus, even if Chua did not sign the
promissory note, he is still liable by virtue of the suretyagreement. The only condition
necessary for him to be
liable under the agreementwas that Daicor is or maybecome liable as maker, endorser,
acceptor or otherwise.
The comprehensive surety agreement signed by Go and Chua was as an
accessoryobligation dependent upon theprincipal obligation, i.e., the loan obtained by
Daicoras evidenced by the promissory note. The surety agreementunequivocally shows that
it was executed to guarantee futuredebts that may be incurred by Daicor with petitioner,
asallowed under NCC Art.2053.
A guaranty may also be given as se
curity for future debts, the amount of which isnot yet known; there can be no claim
against the guarantor until the debt isliquidated. A conditional obligation may also be
secured.
SPS EDUARDO & EPIFANIA EVANGELISTA vs. MERCATOR FINANCE CORP. LYDIA P.
SALAZAR, LAMECS REALTY & DEVT CORP. and the REGISTER OF DEEDS OF
BULACAN [G.R. No. 148864. August 21, 2003]
Post under case digests, Commercial Law at Monday, February 20, 2012 Posted
by Schizophrenic Mind
Facts: The spouses Evangelista filed a complaint for annulment of titles against the
respondents, claiming to be the registered owners of five (5) parcels of land contained in the
real estate mortgage executed by them and Embassy Farms Inc. in favor of Mercator
Financing Corporation (Mercator). The mortgage was in consideration of certain loans and
credit

accommodations

amounting

to

P844,

625.78.

The spouses alleged the following: (1) that they executed the said real estate mortgage
merely as officers of Embassy Farms; (2) that they did not receive the proceeds of the loan
evidenced by the promissory note, as all went to Embassy Farms; (3) that the real estate
mortgage is void due to absence of a principal obligation on which it rests; (4) that since the
real estate mortgage is void, the foreclosure proceedings, the subsequent sale as well as the

issuance of transfer certificates of title are likewise void. Petitioners further alleged
ambiguity in the wording of the promissory note, which should be resolved against Mercator
who

provided

the

form

thereof.

Mercator admitted that petitioners were the owners of the subject parcels of land. It,
however, contended that the spouses executed a Mortgage in favor of Mercator Finance
Corporation for and in consideration of certain loans, and/or other forms of credit
accommodations obtained from the Mortgagee (defendant Mercator Finance Corporation)
amounting to EIGHT HUNDRED FORTY-FOUR THOUSAND SIX HUNDRED TWENTY-FIVE &
78/100 (P844,625.78) and to secure the payment of the same and those others that the
MORTGAGEE may extend to the MORTGAGOR (plaintiffs) x x x. It contended that since
petitioners and Embassy Farms signed the promissory note as co-makers (the note being
worded as For value received, I/We jointly and severally promise to pay to the order of
Mercator), aside from the Continuing Suretyship Agreement subsequently executed to
guarantee the indebtedness, the petitioners are jointly and severally liable with Embassy
Farms. Due to their failure to pay the obligation, the foreclosure and subsequent sale of the
mortgaged properties are thus valid. Respondents Salazar and Lamecs asserted that they
are

innocent

purchasers

Issue:

May

spouses

the

be

for

value

held

solidarily

and

in

liable

with

good

Embassy

faith.

Farms?

Held: YES. Courts can interpret a contract only if there is doubt in its letter. But,
an examination of the promissory note shows no such ambiguity. Besides, assuming
arguendo that there is an ambiguity, Section 17 of the Negotiable Instruments Law states,
viz:

SECTION 17. Construction where instrument is ambiguous. Where the language of the
instrument is ambiguous or there are omissions therein, the following rules of construction
apply: (g) Where an instrument containing the word I promise to pay is signed by two or
more persons, they are deemed to be jointly and severally liable thereon.

SECOND DIVISION

[G.R. No. 103066. April 25, 1996]

WILLEX PLASTIC INDUSTRIES, CORPORATION, petitioner, vs. HON. COURT OF
APPEALS and INTERNATIONAL CORPORATE BANK, respondents.
SYLLABUS
1. REMEDIAL LAW; EVIDENCE; PAROL EVIDENCE RULE; FAILURE TO OBJECT TO THE
PRESENTATION OF PAROL EVIDENCE CONSTITUTES A WAIVER THEREOF. - It has
been held that explanatory evidence may be received to show the circumstances under
which a document has been made and to what debt it relates. At all events, Willex
Plastic cannot now claim that its liability is limited to any amount which Interbank, as
creditor, might give directly to Inter-Resin Industrial as debtor because, by failing to
object to the parol evidence presented, Willex Plastic waived the protection of the parol
evidence rule.
2. ID.; ID.; FINDINGS OF FACT OF THE TRIAL COURT; RULE; APPLICABLE IN CASE AT
BAR. The trial court found that it was to secure the guarantee made by plaintiff of
the credit accommodation granted to defendant IRIC [Inter-Resin Industrial] by
Manilabank, [that] the plaintiff required defendant IRIC to execute a chattel mortgage in
its favor and a Continuing Guaranty which was signed by the defendant Willex Plastic
Industries Corporation. Similarly, the Court of Appeals found it to be an undisputed fact
that to secure the guarantee undertaken by plaintiff-appellee [Interbank] of the credit
accommodation granted to Inter-Resin Industrial by Manilabank, plaintiff-appellee
required defendant-appellant to sign a Continuing Guaranty. These factual findings of
the trial court and of the Court of Appeals are binding on us not only because of the rule
that on appeal to the Supreme Court such findings are entitled to great weight and
respect but also because our own examination of the record of the trial court confirms
these findings of the two courts.
3. CIVIL LAW; SPECIAL CONTRACTS; GUARANTY; THE CONSIDERATION NECESSARY
TO SUPPORT A SURETY OBLIGATION NEED NOT PASS DIRECTLY TO THE SURETY,
A CONSIDERATION MOVING TO THE PRINCIPAL ALONE IS SUFFICIENT. - Willex
Plastic argues that the Continuing Guaranty, being an accessory contract, cannot
legally exist because of the absence of a valid principal obligation. Its contention is
based on the fact that it is not a party either to the Continuing Surety Agreement or to
the loan agreement between Manilabank and Inter-Resin Industrial. Put in another way
the consideration necessary to support a surety obligation need not pass directly to the
surety, a consideration moving to the principal alone being sufficient. For a guarantor
or surety is bound by the same consideration that makes the contract effective between
the principal parties thereto. . . . It is never necessary that a guarantor or surety should
receive any part or benefit, if such there be, accruing to his principal.
4. ID.; ID.; ID.; ALTHOUGH A CONTRACT OF SURETY IS ORDINARILY NOT TO BE
CONSTRUED AS RETROSPECTIVE, IN THE END THE INTENTION OF THE PARTIES
AS REVEALED BY THE EVIDENCE IS CONTROLLING. - Willex Plastic contends that
the Continuing Guaranty cannot be retroactively applied so as to secure the payments
made by Interbank under the two Continuing Surety Agreements. Willex Plastic
invokes the ruling in El Vencedor v. Canlas (44 Phil. 699 [1923]) and Dio v. Court of
Appeals (216 SCRA 9 [1992]) in support of its contention that a contract of suretyship or
guaranty should be applied prospectively. The cases cited are, however, distinguishable

from the present case. InEl Vencedor v. Canlas we held that a contract of suretyship is
not retrospective and no liability attaches for defaults occurring before it is entered into
unless an intent to be so liable is indicated. There we found nothing in the contract to
show that the parties intended the surety bonds to answer for the debts contracted
previous to the execution of the bonds. In contrast, in this case, the parties to the
Continuing Guaranty clearly provided that the guaranty would cover
sums obtained and/or to be obtained by Inter-Resin Industrial from Interbank. On the
other hand, in Dio v. Court of Appeals the issue was whether the sureties could be held
liable for an obligation contracted after the execution of the continuing surety
agreement. It was held that by its very nature a continuing suretyship contemplates a
future course of dealing. It is prospective in its operation and is generally intended to
provide security with respect to future transactions. By no means, however, was it
meant in that case that in all instances a contract of guaranty or suretyship should be
prospective in application. Indeed, as we also held in Bank of the Philippine Islands v.
Foerster, (49 Phil. 843 [1926]) although a contract of suretyship is ordinarily not to be
construed as retrospective, in the end the intention of the parties as revealed by the
evidence is controlling. What was said there applies mutatis mutandis to the case at
bar: In our opinion, the appealed judgment is erroneous. It is very true that bonds or
other contracts of suretyship are ordinarily not to be construed as retrospective, but that
rule must yield to the intention of the contracting parties as revealed by the evidence,
and does not interfere with the use of the ordinary tests and canons of interpretation
which apply in regard to other contracts. In the present case the circumstances so
clearly indicate that the bond given by Echevarria was intended to cover all of the
indebtedness of the Arrocera upon its current account with the plaintiff Bank that we
cannot possibly adopt the view of the court below in regard to the effect of the bond.
APPEARANCES OF COUNSEL
Tangle-Chua, Cruz & Aquino for petitioner.
Fe B. Macalino & Associates for respondent Interbank.
DECISION
MENDOZA, J.:
This is a petition for review on certiorari of the decision [1] of the Court of Appeals in C.A.G.R. CV No. 19094, affirming the decision of the Regional Trial Court of the National Capital
Judicial Region, Branch XLV, Manila, which ordered petitioner Willex Plastic Industries
Corporation and the Inter-Resin Industrial Corporation, jointly and severally, to pay private
respondent International Corporate Bank certain sums of money, and the appellate courts
resolution of October 17, 1989 denying petitioners motion for reconsideration.
The facts are as follows:
Sometime in 1978, Inter-Resin Industrial Corporation opened a letter of credit with the
Manila Banking Corporation. To secure payment of the credit accommodation, Inter-Resin
Industrial and the Investment and Underwriting Corporation of the Philippines (IUCP)
executed two documents, both entitled Continuing Surety Agreement and dated December
1, 1978, whereby they bound themselves solidarily to pay Manilabank obligations of every

kind, on which the [Inter-Resin Industrial] may now be indebted or hereafter become
indebted to the [Manilabank]. The two agreements (Exhs. J and K) are the same in all
respects, except as to the limit of liability of the surety, the first surety agreement being
limited to US$333,830.00, while the second one is limited to US$334,087.00.
On April 2, 1979, Inter-Resin Industrial, together with Willex Plastic Industries Corp.,
executed a Continuing Guaranty in favor of IUCP whereby For and in consideration of the
sum or sums obtained and/or to be obtained by Inter-Resin Industrial Corporation from
IUCP, Inter-Resin Industrial and Willex Plastic jointly and severally guaranteed the prompt
and punctual payment at maturity of the NOTE/S issued by the DEBTOR/S . . . to the extent
of the aggregate principal sum of FIVE MILLION PESOS (P5,000,000.00) Philippine Currency
and such interests, charges and penalties as hereafter may be specified.
On January 7, 1981, following demand upon it, IUCP paid to Manilabank the sum of
P4,334,280.61 representing Inter-Resin Industrials outstanding obligation. (Exh. M-1) On
February 23 and 24, 1981, Atrium Capital Corp., which in the meantime had succeeded IUCP,
demanded from Inter-Resin Industrial and Willex Plastic the payment of what it (IUCP) had
paid to Manilabank. As neither one of the sureties paid, Atrium filed this case in the court
below against Inter-Resin Industrial and Willex Plastic.
On August 11, 1982, Inter-Resin Industrial paid Interbank, which had in turn succeeded
Atrium, the sum of P687,500.00 representing the proceeds of its fire insurance policy for the
destruction of its properties.
In its answer, Inter-Resin Industrial admitted that the Continuing Guaranty was
intended to secure payment to Atrium of the amount of P4,334,280.61 which the latter had
paid to Manilabank. It claimed, however, that it had already fully paid its obligation to Atrium
Capital.
On the other hand, Willex Plastic denied the material allegations of the complaint and
interposed the following Special Affirmative Defenses:
(a) Assuming arguendo that main defendant is indebted to plaintiff, the formers liability is
extinguished due to the accidental fire that destroyed its premises, which liability is covered
by sufficient insurance assigned to plaintiff;
(b) Again, assuming arguendo, that the main defendant is indebted to plaintiff, its account is
now very much lesser than those stated in the complaint because of some payments made
by the former;
(c) The complaint states no cause of action against WILLEX;
(d) WILLEX is only a guarantor of the principal obligor, and thus, its liability is only secondary
to that of the principal;
(e) Plaintiff failed to exhaust the ultimate remedy in pursuing its claim against the principal
obligor;
(f) Plaintiff has no personality to sue.

On April 29, 1986, Interbank was substituted as plaintiff in the action. The case then
proceeded to trial.
On March 4, 1988, the trial court declared Inter-Resin Industrial to have waived the right
to present evidence for its failure to appear at the hearing despite due notice. On the other
hand, Willex Plastic rested its case without presenting any evidence. Thereafter Interbank
and Willex Plastic submitted their respective memoranda.
On April 5, 1988, the trial court rendered judgment, ordering Inter-Resin Industrial and
Willex Plastic jointly and severally to pay to Interbank the following amounts:
(a) P3,646,780.61, representing their indebtedness to the plaintiff, with interest of 17% per
annum from August 11, 1982, when Inter-Resin Industrial paid P687,500.00 to the plaintiff,
until full payment of the said amount;
(b) Liquidated damages equivalent to 17% of the amount due; and
(c) Attorneys fees and expenses of litigation equivalent to 20% of the total amount due.
Inter-Resin Industrial and Willex Plastic appealed to the Court of Appeals. Willex Plastic
filed its brief, while Inter-Resin Industrial presented a Motion to Conduct Hearing and to
Receive Evidence to Resolve Factual Issues and to Defer Filing of the Appellants Brief. After
its motion was denied, Inter-Resin Industrial did not file its brief anymore.
On February 22, 1991, the Court of Appeals rendered a decision affirming the ruling of
the trial court.
Willex Plastic filed a motion for reconsideration praying that it be allowed to present
evidence to show that Inter-Resin Industrial had already paid its obligation to Interbank, but
its motion was denied on December 6, 1991:
The motion is denied for lack of merit. We denied defendant-appellant Inter-Resin
Industrials motion for reception of evidence because the situation or situations in which we
could exercise the power under B.P. 129 did not exist. Movant here has not presented any
argument which would show otherwise.
Hence, this petition by Willex Plastic for the review of the decision of February 22, 1991
and the resolution of December 6,1991 of the Court of Appeals.
Petitioner raises a number of issues.
[1] The main issue raised is whether under the Continuing Guaranty signed on April 2,
1979 petitioner Willex Plastic may be held jointly and severally liable with Inter-Resin
Industrial for the amount paid by Interbank to Manilabank.
As already stated, the amount had been paid by Interbanks predecessor-in-interest,
Atrium Capital, to Manilabank pursuant to the Continuing Surety Agreements made on
December 1, 1978. In denying liability to Interbank for the amount, Willex Plastic argues that
under the Continuing Guaranty, its liability is for sums obtained by Inter-Resin Industrial
from Interbank, not for sums paid by the latter to Manilabank for the account of Inter-Resin

Industrial. In support of this contention Willex Plastic cites the following portion of the
Continuing Guaranty:
For and in consideration of the sums obtained and/or to be obtained by INTER-RESIN
INDUSTRIAL CORPORATION, hereinafter referred to as the DEBTOR/S, from you and/or your
principal/s as may be evidenced by promissory note/s, checks, bills receivable/s and/or other
evidence/s of indebtedness (hereinafter referred to as the NOTE/S), I/We hereby jointly and
severally and unconditionally guarantee unto you and/or your principal/s, successor/s and
assigns the prompt and punctual payment at maturity of the NOTE/S issued by the
DEBTOR/S in your and/or your principal/s, successor/s and assigns favor to the extent of the
aggregate principal sum of FIVE MILLION PESOS (P5,000,000.00), Philippine Currency, and
such interests, charges and penalties as may hereinafter be specified.
The contention is untenable. What Willex Plastic has overlooked is the fact that
evidence aliunde was introduced in the trial court to explain that it was actually to secure
payment to Interbank (formerly IUCP) of amounts paid by the latter to Manilabank that the
Continuing Guaranty was executed. In its complaint below, Interbanks predecessor-ininterest. Atrium Capital, alleged:
5. to secure the guarantee made by plaintiff of the credit accommodation granted
to defendant IRIC [Inter-Resin Industrial] by Manilabank, the plaintiff required
defendant IRIC [Inter-Resin Industrial] to execute a chattel mortgage in its favor
and a Continuing Guaranty which was signed by the other defendant WPIC
[Willex Plastic].
In its answer, Inter-Resin Industrial admitted this allegation although it claimed that it
had already paid its obligation in its entirety. On the other hand, Willex Plastic, while
denying the allegation in question, merely did so for lack of knowledge or information of the
same. But, at the hearing of the case on September 16, 1986, when asked by the trial
judge whether Willex Plastic had not filed a crossclaim against Inter-Resin Industrial, Willex
Plastics counsel replied in the negative and manifested that the plaintiff in this case
[Interbank] is the guarantor and my client [Willex Plastic] only signed as a guarantor to the
guarantee.[2]
For its part Interbank adduced evidence to show that the Continuing Guaranty had
been made to guarantee payment of amounts made by it to Manilabank and not of any
sums given by it as loan to Inter-Resin Industrial. Interbanks witness testified under crossexamination by counsel for Willex Plastic that Willex guaranteed the exposure/of whatever
exposure of ACP [Atrium Capital] will later be made because of the guarantee to Manila
Banking Corporation.[3]
It has been held that explanatory evidence may be received to show the circumstances
under which a document has been made and to what debt it relates. [4] At all events, Willex
Plastic cannot now claim that its liability is limited to any amount which Interbank, as
creditor, might give directly to Inter-Resin Industrial as debtor because, by failing to object to
the parol evidence presented, Willex Plastic waived the protection of the parol evidence rule.
[5]

Accordingly, the trial court found that it was to secure the guarantee made by plaintiff
of the credit accommodation granted to defendant IRIC [Inter-Resin Industrial] by

Manilabank, [that] the plaintiff required defendant IRIC to execute a chattel mortgage in its
favor and a Continuing Guaranty which was signed by the defendant Willex Plastic Industries
Corporation.[6]
Similarly, the Court of Appeals found it to be an undisputed fact that to secure the
guarantee undertaken by plaintiff-appellee [Interbank] of the credit accommodation granted
to Inter-Resin Industrial by Manilabank, plaintiff-appellee required defendant-appellants to
sign a Continuing Guaranty. These factual findings of the trial court and of the Court of
Appeals are binding on us not only because of the rule that on appeal to the Supreme Court
such findings are entitled to great weight and respect but also because our own examination
of the record of the trial court confirms these findings of the two courts. [7]
Nor does the record show any other transaction under which Inter-Resin Industrial may
have obtained sums of money from Interbank. It can reasonably be assumed that InterResin Industrial and Willex Plastic intended to indemnify Interbank for amounts which it may
have paid Manilabank on behalf of Inter-Resin Industrial.
Indeed, in its Petition for Review in this Court, Willex Plastic admitted that it was to
secure the aforesaid guarantee, that INTERBANK required principal debtor IRIC [Inter-Resin
Industrial] to execute a chattel mortgage in its favor, and so a Continuing Guaranty was
executed on April 2, 1979 by WILLEX PLASTIC INDUSTRIES CORPORATION (WILLEX for
brevity) in favor of INTERBANK for and in consideration of the loan obtained by IRIC [InterResin Industrial].
[2] Willex Plastic argues that the Continuing Guaranty, being an accessory contract,
cannot legally exist because of the absence of a valid principal obligation. [8] Its contention is
based on the fact that it is not a party either to the Continuing Surety Agreement or to the
loan agreement between Manilabank and Inter-Resin Industrial.
Put in another way the consideration necessary to support a surety obligation need not
pass directly to the surety, a consideration moving to the principal alone being
sufficient. For a guarantor or surety is bound by the same consideration that makes the
contract effective between the principal parties thereto. . . . It is never necessary that a
guarantor or surety should receive any part or benefit, if such there be, accruing to his
principal.[9] In an analogous case,[10] this Court held:
At the time the loan of P100,000.00 was obtained from petitioner by Daicor, for the purpose
of having an additional capital for buying and selling coco-shell charcoal and importation of
activated carbon, the comprehensive surety agreement was admittedly in full force and
effect. The loan was, therefore, covered by the said agreement, and private respondent,
even if he did not sign the promissory note, is liable by virtue of the surety agreement. The
only condition that would make him liable thereunder is that the Borrower is or may
become liable as maker, endorser, acceptor or otherwise. There is no doubt that Daicor is
liable on the promissory note evidencing the indebtedness.
The surety agreement which was earlier signed by Enrique Go, Sr. and private respondent, is
an accessory obligation, it being dependent upon a principal one which, in this case is the
loan obtained by Daicor as evidenced by a promissory note.

[3] Willex Plastic contends that the Continuing Guaranty cannot be retroactively
applied so as to secure the payments made by Interbank under the two Continuing Surety
Agreements. Willex Plastic invokes the ruling m El Vencedor v. Canlas[11] and Dio v. Court
of Appeals[12] in support of its contention that a contract of suretyship or guaranty should be
applied prospectively.
The cases cited are, however, distinguishable from the present case. In El Vencedor v.
Canlas we held that a contract of suretyship is not retrospective and no liability attaches for
defaults occurring before it is entered into unless an intent to be so liable is indicated.
There we found nothing in the contract to show that the parties intended the surety bonds to
answer for the debts contracted previous to the execution of the bonds. In contrast, in this
case, the parties to the Continuing Guaranty clearly provided that the guaranty would
cover sums obtained and/or to be obtained by Inter-Resin Industrial from Interbank.
On the other hand, in Dio v. Court of Appeals the issue was whether the sureties could
be held liable for an obligation contracted after the execution of the continuing surety
agreement.
It was held that by its very nature a continuing suretyship contemplates a future course
of dealing. It is prospective in its operation and isgenerally intended to provide security
with respect to future transactions. By no means, however, was it meant in that case that in
all instances a contract of guaranty or suretyship should be prospective in application.
Indeed, as we also held in Bank of the Philippine Islands v. Foerster, [13] although a
contract of suretyship is ordinarily not to be construed as retrospective, in the end the
intention of the parties as revealed by the evidence is controlling. What was said
there[14] applies mutatis mutandis to the case at bar:
In our opinion, the appealed judgment is erroneous. It is very true that bonds or other
contracts of suretyship are ordinarily not to be construed as retrospective, but that rule must
yield to the intention of the contracting parties as revealed by the evidence, and does not
interfere with the use of the ordinary tests and canons of interpretation which apply in
regard to other contracts.
In the present case the circumstances so clearly indicate that the bond given by
Echevarria was intended to cover all of the indebtedness of the Arrocera upon its current
account with the plaintiff Bank that we cannot possibly adopt the view of the court below in
regard to the effect of the bond.
[4] Willex Plastic says that in any event it cannot be proceeded against without first
exhausting all property of Inter-Resin Industrial. Willex Plastic thus claims the benefit of
excussion. The Civil Code provides, however:
Art. 2059. This excussion shall not take place:
(1) If the guarantor has expressly renounced it;
(2) If he has bound himself solidarily with the debtor;
xxx

xxx

xxx

The pertinent portion of the Continuing Guaranty executed by Willex Plastic and InterResin Industrial in favor of IUCP (now Interbank) reads:
If default be made in the payment of the NOTE/s herein guaranteed you and/or your
principal/s may directly proceed against Me/Us without first proceeding against and
exhausting DEBTOR/s properties in the same manner as if all such liabilities constituted
My/Our direct and primary obligations. (italics supplied)
This stipulation embodies an express renunciation of the right of excussion. In addition,
Willex Plastic bound itself solidarily liable with Inter-Resin Industrial under the same
agreement:
For and in consideration of the sums obtained and/or to be obtained by INTER-RESIN
INDUSTRIAL CORPORATION, hereinafter referred to as the DEBTOR/S, from you and/or your
principal/s as may be evidenced by promissory note/s, checks, bills receivable/s and/or other
evidence/s of indebtedness (hereinafter referred to as the NOTE/S), I/We hereby jointly and
severally and unconditionally guarantee unto you and/ or your principal/s, successor/s and
assigns the prompt and punctual payment at maturity of the NOTE/S issued by the
DEBTOR/S in your and/or your principal/s, successor/s and assigns favor to the extent of the
aggregate principal sum of FIVE MILLION PESOS (P5,000,000.00), Philippine Currency, and
such interests, charges and penalties as may hereinafter he specified.
[5] Finally it is contended that Inter-Resin Industrial had already paid its indebtedness to
Interbank and that Willex Plastic should have been allowed by the Court of Appeals to
adduce evidence to prove this. Suffice it to say that Inter-Resin Industrial had been given
generous opportunity to present its evidence but it failed to make use of the same. On the
other hand, Willex Plastic rested its case without presenting evidence.
The reception of evidence of Inter-Resin Industrial was set on January 29, 1987, but
because of its failure to appear on that date, the hearing was reset on March 12, 26 and
April 2, 1987.
On March 12, 1987 Inter-Resin Industrial again failed to appear. Upon motion of Willex
Plastic, the hearings on March 12 and 26, 1987 were cancelled and reset for the last time
on April 2 and 30, 1987.
On April 2, 1987, Inter-Resin Industrial again failed to appear. Accordingly the trial court
issued the following order:
Considering that, as shown by the records, the Court had exerted every earnest effort to
cause the service of notice or subpoena on the defendant Inter-Resin Industrial but to no
avail, even with the assistance of the defendant Willex. . . the defendant Inter-Resin
Industrial is hereby deemed to have waived the right to present its evidence.
On the other hand, Willex Plastic announced it was resting its case without presenting any
evidence.
Upon motion of Inter-Resin Industrial, however, the trial court reconsidered its order and
set the hearing anew on July 23, 1987. But Inter-Resin Industrial again moved for the
postponement of the hearing to August 11, 1987. The hearing was, therefore, reset on

September 8 and 22, 1987 but the hearings were reset on October 13,1987, this time upon
motion of Interbank. To give Interbank time to comment on a motion filed by Inter-Resin
Industrial, the reception of evidence for Inter-Resin Industrial was again reset on November
17, 26 and December 11, 1987. However, Inter-Resin Industrial again moved for the
postponement of the hearing. Accordingly, the hearing was reset on November 26 and
December 11, 1987, with warning that the hearings were intransferrable.
Again, the reception of evidence for Inter-Resin Industrial was reset on January 22, 1988
and February 5, 1988 upon motion of its counsel. As Inter-Resin Industrial still failed to
present its evidence, it was declared to have waived its evidence.
To give Inter-Resin Industrial a last opportunity to present its evidence, however, the
hearing was postponed to March 4, 1988. Again Inter-Resin Industrials counsel did not
appear. The trial court, therefore, finally declared Inter-Resin Industrial to have waived the
right to present its evidence. On the other hand, Willex Plastic, as before, manifested that it
was not presenting evidence and requested instead for time to file a memorandum.
There is therefore no basis for the plea made by Willex Plastic that it be given the
opportunity of showing that Inter-Resin Industrial has already paid its obligation to Interbank.
WHEREFORE, the decision of the Court of Appeals is AFFIRMED, with costs against the
petitioner.
SO ORDERED.
Regalado (Chairman), Romero, Puno, and Torres, Jr., JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION

G.R. No. 107062 February 21, 1994

PHILIPPINE PRYCE ASSURANCE CORPORATION, petitioner,
vs.
THE COURT OF APPEALS, (Fourteenth Division) and GEGROCO, INC., respondents.
Ocampo, Dizon & Domingo and Rey Nathaniel C. Ifurung for petitioner.
A.M. Sison, Jr. & Associates for private respondent.

NOCON, J.:

Two purely technical, yet mandatory, rules of procedure frustrated petitioner's bid to get a
favorable decision from the Regional Trial Court and then again in the Court of
Appeals. 1 These are non-appearance during the pre-trial despite due notice, and nonpayment of docket fees upon filing of its third-party complaint. Just how strict should these
rules be applied is a crucial issue in this present dispute.
Petitioner, Interworld Assurance Corporation (the company now carries the corporate name
Philippine Pryce Assurance Corporation), was the butt of the complaint for collection of sum
of money, filed on May 13, 1988 by respondent, Gegroco, Inc. before the Makati Regional
Trial Court, Branch 138. The complaint alleged that petitioner issued two surety bonds (No.
0029, dated July 24, 1987 and No. 0037, dated October 7, 1987) in behalf of its principal
Sagum General Merchandise for FIVE HUNDRED THOUSAND (P500,000.00) PESOS and ONE
MILLION (1,000,000.00) PESOS, respectively.
On June 16, 1988, summons, together with the copy of the complaint, was served on
petitioner. Within the reglementary period, two successive motions were filed by petitioner
praying for a total of thirty (30) days extention within which to file a responsible pleading.
In its Answer, dated July 29, 1988, but filed only on August 4, 1988, petitioner admitted
having executed the said bonds, but denied liability because allegedly 1) the checks which
were to pay for the premiums bounced and were dishonored hence there is no contract to
speak of between petitioner and its supposed principal; and 2) that the bonds were merely
to guarantee payment of its principal's obligation, thus, excussion is necessary. After the
issues had been joined, the case was set for pre-trial conference on September 29, 1988. the
petitioner received its notice on September 9, 1988, while the notice addressed to its
counsel was returned to the trial court with the notation "Return to Sender, Unclaimed." 2
On the scheduled date for pre-trial conference, only the counsel for petitioner appeared
while both the representative of respondent and its counsel were present. The counsel for
petitioner manifested that he was unable to contract the Vice-President for operations of
petitioner, although his client intended to file a third party complaint against its principal.
Hence, the pre-trial was re-set to October 14, 1988. 3
On October 14, 1988, petitioner filed a "Motion with Leave to Admit Third-Party Complaint"
with the Third-Party Complaint attached. On this same day, in the presence of the
representative for both petitioner and respondent and their counsel, the pre-trial conference
was re-set to December 1, 1988. Meanwhile on November 29, 1988, the court admitted the
Third Party Complaint and ordered service of summons on third party defendants. 4
On scheduled conference in December, petitioner and its counsel did not appear
notwithstanding their notice in open court. 5 The pre-trial was nevertheless re-set to
February 1, 1989. However, when the case was called for pre-trial conference on February 1,
1989, petitioner was again nor presented by its officer or its counsel, despite being duly
notified. Hence, upon motion of respondent, petitioner was considered as in default and
respondent was allowed to present evidenceex-parte, which was calendared on February 24,
1989. 6 Petitioner received a copy of the Order of Default and a copy of the Order setting the
reception of respondent's evidence ex-parte, both dated February 1, 1989, on February 16,
1989. 7
On March 6, 1989, a decision was rendered by the trial court, the dispositive portion reads:

WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against

the defendant Interworld Assurance Corporation to pay the amount of
P1,500,000.00 representing the principal of the amount due, plus legal
interest thereon from April 7, 1988, until date of payment; and P20,000.00 as
and for attorney's fees. 8
Petitioner's "Motion for Reconsideration and New Trial" dated April 17, 1989, having been
denied it elevated its case to the Court of Appeals which however, affirmed the decision of
the trial court as well as the latter's order denying petitioner's motion for reconsideration.
Before us, petitioner assigns as errors the following:
I. The respondent Court of Appeals gravely erred in declaring that the case
was already ripe for pre-trial conference when the trial court set it for the
holding thereof.
II. The respondent Court of Appeals gravely erred in affirming the decision of
the trial court by relying on the ruling laid down by this Honorable Court in the
case of Manchester Development Corporation v. Court of Appeals, 149 SCRA
562, and disregarding the doctrine laid down in the case of Sun Insurance
Office, Ltd. (SIOL) v. Asuncion, 170 SCRA 274.
III. The respondent Court of Appeals gravely erred in declaring that it would be
useless and a waste of time to remand the case for further proceedings as
defendant-appellant has no meritorious defense.
We do not find any reversible error in the conclusion reached by the court a quo.
Relying on Section 1, Rule 20 of the Rules of court, petitioner argues that since the last
pleading, which was supposed to be the third-party defendant's answer has not been filed,
the case is not yet ripe for pre-trial. This argument must fail on three points. First, the trial
court asserted, and we agree, that no answer to the third party complaint is forthcoming as
petitioner never initiated the service of summons on the third party defendant. The court
further said:
. . . Defendant's claim that it was not aware of the Order admitting the thirdparty complaint is preposterous. Sec. 8, Rule 13 of the Rules, provides:
Completeness of service . . . Service by registered mail is
complete upon actual receipt by the addressee, but if he fails to
claim his mail from the post office within five (5) days from the
date of first notice of the postmaster, service shall take effect at
the expiration of such time. 9
Moreover, we observed that all copies of notices and orders issued by the court for
petitioner's counsel were returned with the notation "Return to Sender, Unclaimed." Yet
when he chose to, he would appear in court despite supposed lack of notice.
Second, in the regular course of events, the third-party defendant's answer would have been
regarded as the last pleading referred to in Sec. 1, Rule 20. However, petitioner cannot just

disregard the court's order to be present during the pre-trial and give a flimsy excuse, such
as that the answer has yet to be filed.
The pre-trial is mandatory in any action, the main objective being to simplify, abbreviate and
expedite trial, if not to fully dispense with it. Hence, consistent with its mandatory character
the Rules oblige not only the lawyers but the parties as well to appear for this purpose
before the Court 10 and when a party fails to appear at a pre-trial conference he may be nonsuited or considered as in default. 11
Records show that even at the very start, petitioner could have been declared as in default
since it was not properly presented during the first scheduled pre-trial on September 29,
1988. Nothing in the record is attached which would show that petitioner's counsel had a
special authority to act in behalf of his client other than as its lawyer.
We have said that in those instances where a party may not himself be present at the pretrial, and another person substitutes for him, or his lawyer undertakes to appear not only as
an attorney but in substitution of the client's person, it is imperative for that representative
or the lawyer to have "special authority" to enter into agreements which otherwise only the
client has the capacity to make. 12
Third, the court of Appeals properly considered the third-party complaint as a mere scrap of
paper due to petitioner's failure to pay the requisite docket fees. Said the court a quo:
A third-party complaint is one of the pleadings for which Clerks of court of
Regional Trial Courts are mandated to collect docket fees pursuant to Section
5, Rule 141 of the Rules of Court. The record is bereft of any showing tha(t)
the appellant paid the corresponding docket fees on its third-party complaint.
Unless and until the corresponding docket fees are paid, the trial court would
not acquire jurisdiction over the third-party complaint (Manchester
Development Corporation vs. Court of Appeals, 149 SCRA 562). The thirdparty complaint was thus reduced to a mere scrap of paper not worthy of the
trial court's attention. Hence, the trial court can and correctly set the case for
pre-trial on the basis of the complaint, the answer and the answer to the
counterclaim. 13
It is really irrelevant in the instant case whether the ruling in Sun Insurance Office, Ltd.
(SIOL) v. Asuncion 14 or that in Manchester Development Corp. v. C.A. 15 was applied. Sun
Insurance and Manchester are mere reiteration of old jurisprudential pronouncements on the
effect of non-payment of docket fees. 16 In previous cases, we have consistently ruled that
the court cannot acquire jurisdiction over the subject matter of a case, unless the docket
fees are paid.
Moreover, the principle laid down in Manchester could have very well been applied in Sun
Insurance. We then said:
The principle in Manchester [Manchester Development Corp. v. C.A., 149 SCRA
562 (1987)] could very well be applied in the present case. The pattern and
the intent to defraud the government of the docket fee due it is obvious not
only in the filing of the original complaint but also in the filing of the second
amended complaint.

xxx xxx xxx

In the present case, a more liberal interpretation of the rules is called for
considering that, unlike Manchester, private respondent demonstrated his
willingness to abide by the rules by paying the additional docket fees as
required. The promulgation of the decision in Manchester must have had that
sobering influence on private respondent who thus paid the additional docket
fee as ordered by the respondent court. It triggered his change of stance by
manifesting his willingness to pay such additional docket fees as may be
ordered. 17
Thus, we laid down the rules as follows:
1. It is not simply the filing of the complaint or appropriate initiatory pleading,
but the payment of the prescribed docket fee, that vests a trial court with
jurisdiction over the subject-matter or nature of the action. Where the filing of
the initiatory pleading is not accompanied by payment of the docket fee, the
court may allow payment of the fee within a reasonable time, but in no case
beyond the applicable prescriptive or reglamentary period.
2. The same rule applies to permissive counterclaims, third-party claims and
similar pleadings, which shall not be considered filed until and unless the
filing fee prescribed therefor is paid. The court may also allow payment of said
fee within a prescriptive or reglementary period.
3. Where the trial court acquires jurisdiction over a claim by the filing of the
appropriate pleading and payment of the prescribed filing fee, but
subsequently, the judgment awards a claim nor specified in the pleading, or if
specified the same has not been left for determination by the court, the
additional filing fee therefor shall constitute a lien on the judgment. It shall be
the responsibility of the clerk of court or his duly authorized deputy to enforce
said lien and assess and collect the additional
fee. 18
It should be remembered that both in Manchester and Sun Insurance plaintiffs therein paid
docket fees upon filing of their respective pleadings, although the amount tendered were
found to be insufficient considering the amounts of the reliefs sought in their complaints. In
the present case, petitioner did not and never attempted to pay the requisite docket fee.
Neither is there any showing that petitioner even manifested to be given time to pay the
requisite docket fee, as in fact it was not present during the scheduled pre-trial on December
1, 1988 and then again on February 1, 1989. Perforce, it is as if the third-party complaint
was never filed.
Finally, there is reason to believe that partitioner does not really have a good defense.
Petitioner hinges its defense on two arguments, namely: a) that the checks issued by its
principal which were supposed to pay for the premiums, bounced, hence there is no contract
of surety to speak of; and 2) that as early as 1986 and covering the time of the Surety Bond,
Interworld Assurance Company (now Phil. Pryce) was not yet authorized by the insurance
Commission to issue such bonds.

The Insurance Code states that:

Sec. 177. The surety is entitled to payment of the premium as soon as the
contract of suretyship or bond is perfected and delivered to the obligor. No
contract of suretyship or bonding shall be valid and binding unless and until
the premium therefor has been paid, except where the obligee has accepted
the bond, in which case the bond becomes valid and enforceable irrespective
of whether or not the premium has been paid by the obligor to the surety. . . .
(emphasis added)
The above provision outrightly negates petitioner's first defense. In a desperate attempt to
escape liability, petitioner further asserts that the above provision is not applicable because
the respondent allegedly had not accepted the surety bond, hence could not have delivered
the goods to Sagum Enterprises. This statement clearly intends to muddle the facts as found
by the trial court and which are on record.
In the first place, petitioner, in its answer, admitted to have issued the bonds subject matter
of the original action. 19Secondly, the testimony of Mr. Leonardo T. Guzman, witness for the
respondent, reveals the following:
Q. What are the conditions and terms of sales you extended to
Sagum General Merchandise?
A. First, we required him to submit to us Surety Bond to
guaranty payment of the spare parts to be purchased. Then we
sell to them on 90 days credit. Also, we required them to issue
post-dated checks.
Q. Did Sagum General merchandise comply with your surety
bond requirement?
A. Yes. They submitted to us and which we have accepted two
surety bonds.
Q Will you please present to us the aforesaid surety bonds?
A. Interworld Assurance Corp. Surety Bond No. 0029 for
P500,000 dated July 24, 1987 and Interworld Assurance Corp.
Surety Bond No. 0037 for P1,000.000 dated October 7, 1987. 20
Likewise attached to the record are exhibits C to C-18 21 consisting of delivery invoices
addressed to Sagum General Merchandise proving that parts were purchased, delivered and
received.
On the other hand, petitioner's defense that it did not have authority to issue a Surety Bond
when it did is an admission of fraud committed against respondent. No person can claim
benefit from the wrong he himself committed. A representation made is rendered conclusive
upon the person making it and cannot be denied or disproved as against the person relying
thereon. 22

WHEREFORE, in view of the foregoing, the decision of the Court of Appeals dismissing the
petition before them and affirming the decision of the trial court and its order denying
petitioner's Motion for Reconsideration are hereby AFFIRMED. The present petition is
DISMISSED for lack of merit.
SO ORDERED.
Narvasa, C.J., Padilla, Regalado and Puno, JJ., concur.

SECOND DIVISION
[G.R. No. 95921. September 2, 1992.]
SPOUSES ROBERT DINO and CRISTINA DINO, Petitioners, v. COURT OF APPEALS,
CONSORCIA SOMBRIO and SPOUSES FROILAN PERNITO and PROSERFINA
PERNITO,Respondents.
SYLLABUS
1. CIVIL LAW; LAND REGISTRATION; LIS PENDENS; MAY LIE ONLY WHERE THERE IS AN
ACTION IN COURT AFFECTING REAL PROPERTY; TO AFFECT THE RIGHT OF A SUBSEQUENT
PURCHASER, NOTICE OF LIS PENDENS SHOULD BE ANNOTATED ON THE BACK OF THE
CERTIFICATE OF TITLE. Lis pendens may lie only where there is an action or proceeding in
court, which affects title to, or possession of real property. In other words, lis pendens is the
jurisdiction, power, or control which the court acquires over the property involved in the suit
pending the continuance of the action; and until its final judgment therein, it has for its
object the keeping of the subject or res within the power of the court until the judgment or
decree shall be entered, to make it possible for courts of justice to give effect to their
judgments and decrees. This, in effect, is the essence of the rule of lis pendens. When a case
is commenced involving any right to land registered under the Land Registration Law, any
decision therein will bind the parties only, unless a notice of the pendency of such action is
registered on the title of the said land, in order to bind the whole world as well. Therefore, in
order that a notice of lis pendens may affect the right of a subsequent purchaser, such
notice should be annotated on the back of the certificate of title, which is not present in the
case at bar.
2. INNOCENT PURCHASER HAS THE RIGHT TO RELY ON WHAT APPEARS IN THE CERTIFICATE
AND HAS NO OBLIGATION TO LOOK BEYOND IT. Where the certificate of title was already
in the name of the forger when the land was sold to an innocent purchaser, the vendee had
the right to rely on what appeared in the certificate and. in the absence of anything to excite
suspicion, was under no obligation to look beyond the certificate and investigate the title of
the vendor appearing on the face of said certificate.
3. REGISTRATION UNDER THE TORRENS SYSTEM IS THE OPERATIVE ACT THAT GIVES
VALIDITY TO THE TRANSFER OR CREATION OF A LIEN UPON THE LAND; REGISTRATION

EXTINGUISHES ALL CLAIMS, LIENS AND ENCUMBRANCES ASSERTED PRIOR TO IT;

EXCEPTION. Under the Torrens system, registration is the operative act that gives validity
to the transfer or creates a lien upon the land. A person dealing with registered land is not
required to go behind the register to determine the condition of the property. He is only
charged with notice of the burdens on the property which are noted on the face of the
register or the certificate of title. To require him to do more is to defeat one of the primary
objects of the Torrens System. Moreover, registration of land under the Torrens system
extinguishes all claims, liens and encumbrances asserted prior to registration except
statutory liens and those noted in the certificate of title.
4. PETITIONERS, WHILE INDISPENSABLE PARTIES IN CIVIL CASE NO. R-18073, ARE NOT
BOUND BY THE DECISION IN SAID CASE; REASON; IMPLEADING THEM AS ADDITIONAL
DEFENDANTS ONLY IN THE EXECUTION STAGE OF SAID CASE VIOLATES THEIR RIGHTS TO
DUE PROCESS. As the registered owner of the subject property, petitioners are not bound
by the decision in Civil Case No. R-18073 for they were never summoned in said case and
the notice of lis pendens annotated on TCT No. 73069 was already cancelled at the time
petitioners purchased the subject property. While it is true that petitioners are indispensable
parties in Civil Case No. R-18073, without whom no complete relief could be accorded to the
private respondents, the fact still remains that petitioners were never actually joined as
defendants in said case. Impleading petitioners as additional defendants only in the
execution stage of said case violated petitioners right to due process as no notice of lis
pendens was annotated on the existing certificate of title of said property nor were
petitioners given notice of the pending case, therefore petitioners remain strangers in said
case and the Order of the trial court involving them is null and void, considering that
petitioners are innocent purchasers of the subject property for value.
DECISION
NOCON, J.:
This is a petition to review on certiorari the decision 1 dated August 6, 1990 of the Court of
Appeals affirming the decision of the trial court 2 in ordering the Register of Deeds of Cebu
City to cancel TCT No. 87156 which emanated from TCT No. 73069 and to reinstate TCT No.
67441 in the name of the late Consorcia Sombrio or issue another one in lieu of the old one,
as well as the resolution dated October 24, 1990 denying petitioners motion for
reconsideration of the appealed decision.chanrobles virtual lawlibrary
The facts as found by the trial court are as follows:chanrob1es virtual 1aw library
On December 21, 1978, Consorcia Sombrio, an old and illiterate lady who is the registered
owner of a parcel of land and its improvements covered by TCT No. 67441 located at 15 F.
Gochan Street, Mabolo, Cebu City containing an area of 1,008 square meters, more or less,
was made to sign a document by Maria Ching purportedly to be a letter authorizing the
latter to sell said property to Benedicto. However, said document turned out to be a Deed of
Sale of said property in favor of Maria Ching. 3 Consequently, TCT No. 67441 was cancelled
and TCT No. 87156 was issued in the name of Maria Ching. 4
Upon Sombrios discovery of said fraud, she filed, on May 11, 1979, an action against Maria
Ching and notary public Ciriaco Alcazar, who notarized said document without the presence
of Sombrio, with the Regional Trial Court of Cebu City, Branch IV in Civil Case No. R-18073 for
the annulment of the sale and the cancellation of TCT No. 87156 alleging that Maria Ching
through fraudulent representations and without any consideration tricked and deceived

Sombrio into signing said Deed of Sale.

Thereafter, Maria Ching mortgaged said property to petitioners spouses Robert and Cristina
Dino with the notice of lis pendens annotated on the TCT No. 87156 as evidenced by Entry
No. 2814-V-19-D.B. on said TCT. 5
On July 22, 1981, a decision based on a compromise agreement executed between Sombrio
and Maria Ching was rendered, to wit:jgc:chanrobles.com.ph
"A Compromise Agreement, duly signed by the parties, plaintiff, assisted by counsel, and
defendants likewise assisted by their counsel, has been submitted to this Court with a prayer
that the same be approved and that judgment he rendered in accordance with the terms
and conditions thereof. The said agreement reads:chanrob1es virtual 1aw library
COMPROMISE AGREEMENT
With the assistance of counsel, this Compromise Agreement, involving the above-entitled
case, made and entered at Cebu City, Philippines, this 23rd day of June, 1981 by and
between plaintiff and the defendants above-named,
WITNESSETH:chanrob1es virtual 1aw library
1. That plaintiff, Consorcia Vda. de Sombrio, makes known that she has not caused the filing
of the above-entitled case, the truth being that she was influenced, forced, coerced,
manhandled and intimidated to sign the complaint by one Froilan Pernito who is interested in
the land subject-matter of this suit; the occupancy of Froilan Pernito is merely tolerated
whose right, if any, is subordinate to that of defendant Maria Buracan Ching;chanrobles law
library : red
2. That right from the start or commencement of this suit, plaintiff has never engaged the
services of counsel; it was Froilan Pernito who secured, shouldered and paid the services of
counsel in the prosecution of the above-entitled case; just recently, without authority and
consent from the plaintiff, the said Froilan Pernito has engaged the services of new counsel,
Atty. Jose Batiquin, who is not personally known to the plaintiff;
3. That apart from the reason stated, supra, plaintiff hereby declares voluntarily and upon
her own free will, without any mental reservation, that the deed of absolute sale dated
December 2l, 1978, involving the land subject matter of this suit executed by and between
her and Maria B. Ching, notarized by Ciriaco Alcazar per document No. 884, Page No. 44,
Book III, Series of 1978 is regular and valid and was executed for a consideration in the
amount of ONE HUNDRED THOUSAND (P100,000.00) PESOS, receipt of which was
acknowledged at the time of the execution of that presents and that she was not deceived
nor fraudulently induced and unlawfully influenced into signing the aforesaid deed of sale;
for which reason, she freely and voluntarily DESIST from further prosecuting the aboveentitled case;
4. That plaintiff is turning over the physical or actual possession of the land in question,
together with all the improvements found therein, to the defendant Maria B. Ching, entitling
the latter to such writ of possession as may be necessary against parties, like Froilan Pernito,
whose possession is illegal and unauthorized;
5. That defendants, on the other hand, hereby waive their right to proceed with their
counterclaims against plaintiff.
WHEREFORE, it is most respectfully prayed that the foregoing compromise agreement be

approved and that judgment be rendered in accordance therewith.

Cebu City, Philippines, June 23, 1981
(Sgd.) CONSORCIA VDA. DE SOMBRIO
Plaintiff
(Sgd.) MARIA B. CHING
Defendant
Assisted by:chanrob1es virtual 1aw library
(Sgd.) EXEQUIL L. RUBI Atty. Pablo Badong & Associates
Counsel for the plaintiff counsel for defendants,
By: (SGD.) MIGUEL R. ZOSA
SIGNED IN THE PRESENCE OF:chanrob1es virtual 1aw library
(Sgd.) CORAZON PANTINO
(Sgd.) REMEDIOS SOLON
Finding the Compromise Agreement quoted above to be not contrary to law, public order,
public policy, morals or good customs, the same is hereby approved, and judgment is hereby
rendered in accordance therewith, without pronouncement as to costs. Strict compliance
with the said Compromise Agreement is hereby enjoined." 6
From said decision, Maria Ching went to the Register of Deeds of Cebu City to cancel the
notice of lis pendens as evidenced by Entry No. 6008-21-D.B. dated July 27, 1981. 7
On the other hand, Sombrio appealed said decision to the Court of Appeals alleging that the
Compromise Agreement was done under dubious circumstances since she was kidnapped
and released only after said Compromise Agreement had been signed by her. Moreover, Atty.
Jose Batiquin who was Sombrios counsel of record was substituted by another counsel, Atty.
Exequil Rubi who was a partner of Maria Chings lawyer, in said Compromise
Agreement.cralawnad
In the meantime, on May 30, 1983, while said appeal was still pending with the appellate
court, Maria Ching sold to the petitioners the subject property free from any written notice of
liens or encumbrances. Thereafter, TCT No. 73069 was cancelled and a new one. TCT No.
87156, was issued in the name of the petitioners by the Register of Deeds of Cebu City.
Since then, petitioners have been in continuous and peaceful possession of the subject
property which they turned into a clinic and center of autistic and behaviorally handicapped
children.
On February 7, 1989, the Court of Appeals rendered its decision, the dispositve portion of
which reads:jgc:chanrobles.com.ph
"WHEREFORE, the decision approving the compromise agreement is hereby set aside and
another one is rendered annulling the deed of sale of December 21, 1978 and cancelling

Transfer Certificate of Title No. 73069 of the Registry of Deeds of Cebu in the name of
defendant-appellant and ordering the Register of Deeds of Cebu to reinstate Transfer
Certificate of Title No. 67441 in the name of plaintiff-appellant or to issue another one in the
name of said plaintiff-appellant in lieu of the old one. No pronouncement as to damages and
costs." 8
On March 2, 1989, said decision became final and executory. When the records were
remanded to the trial court, Sombrio filed a Motion for Execution on July 18, 1989.
On July 19, 1989, the trial court ordered the issuance of a writ of execution. However, when
the Deputy Provincial Sheriff went to the Register of Deeds of Cebu City to execute said writ,
the latter informed the former that TCT No. 73069 was already cancelled and transferred to
petitioner Dino who was not a party in Civil Case No. R-18073.
On July 22, 1989, Sombrio filed a motion for the issuance of a writ of possession which was
granted in an Order dated July 24, 1989, the pertinent portion of which reads:cralawnad
"Finding the motion to be in order, the same is hereby granted and accordingly, the Register
of Deeds for Cebu City is ordered to implement within three (3) days from receipt hereof, the
said judgment of the Honorable Court of Appeals.
Let a writ of Possession issue directing the Provincial Sheriff or his duly authorized
representative to place plaintiff Consorcia Sombrio in actual, physical and peaceful
possession of a parcel of land and the improvements thereon covered by Transfer Certificate
of Title No. 67441, Lot No. 1, Block 7 of the Consolidation and Subdivision Plan Pcs-326,
being a part of the Consolidation Lots Nos. 675 and 1424 of Banilad Friar Estate GLRO
Record 5988 situated in Cebu City, and containing an area of ONE THOUSAND AND EIGHT
(1,008) SQUARE METERS."cralaw virtua1aw library
On July 26, 1989, the trial court issued a writ of possession directing the provincial sheriff of
Cebu City to place Consorcia Sombrio in actual physical possession of the subject property
and its improvement. 9
Upon receipt of said writ, the Register of Deeds, on July 27, 1989, filed with the trial court a
motion for the issuance of an Order directing the Register of Deeds of Cebu City to perform
his duty consistent with his ministerial function while petitioners, on July 31, 1989, filed with
said court an Extremely Urgent Motion to Quash Writ of Possession together with an Affidavit
of Third-Party claims. 10
On August 8, 1989, private respondents spouses Froilan and Proserfina Pernito filed their
comments on petitioners Motion to Quash Writ of Execution. Said private respondents
entered their appearance for the first time in Civil Case No. R-18073 claiming to be the
successors-in-interest of the late Consorcia Sombrio pursuant to a Deed of Sale executed
between private respondents and Sombrio during the pendency of this case, 11 to which
petitioners filed its Rejoinder on August 11, 1989. 12
Acting on said motions, the trial court issued an Order dated August 17, 1989, the
dispositive portion of which reads:jgc:chanrobles.com.ph
"WHEREFORE, for all the foregoing considerations, the motion of spouses Robert and Cristina
Dino is denied. The Register of Deeds of Cebu City is directed to follow and implement the
final judgment of the Court of Appeals by cancelling Transfer Certificate of Title No. 73069
and Transfer Certificate of Title No. 87156 emanating therefrom and reinstate Transfer
Certificate of Title No. 67441 in the name of plaintiff-appellant Consorcia Sombrio or issue
another one in her name in lieu of the old one by annotating therein issued pursuant to a

final judgment rendered by the Court of Appeals in CA-G.R. CV No. 04725, entitled Consorcia
Sombrio v. Maria Buracan Ching, Et. Al. dated February 7, 1989." 13
From said Order, Petitioners filed their Motion for Reconsideration which was denied on
September 30, 1989.chanrobles virtual lawlibrary
On October 18, 1989, the trial court issued the following Order:jgc:chanrobles.com.ph
"Deputy Sheriffs Rene Natividad and Jessie Belarmino in their manifestation dated October
10, 1989 declared that in compliance with their appointment as special sheriffs dated July
28, 1989, they implemented the writ of execution issued in this case but withheld delivery of
possession until the rightful possessor shall have been determined on account of the fact
that plaintiff Consorcia Sombrio is already deceased. The Deputy Sheriffs found themselves
in a quandary as to whom to deliver the possession of the property because they received a
letter dated October 4, 1989 sent by Atty. Manuelito Inso, counsel for Spouses Roberto Dino
and Cristina Dino, claiming ownership of the subject property. This matter is already settled
in the Order dated September 30, 1989.
Spouses Froilan Pernito and Proserfina Pernito on record appear as the successors-in-interest
of the deceased Consorcia Sombrio pursuant to the memorandum of agreement for the sale
of said land executed on April 23, 1979 marked as Annex B in the Sheriffs report dated
August 1, 1989. The record shows that so far no heir or successor-in-interest of the deceased
Consorcia Sombrio appeared to claim possession over the property except the herein
spouses Froilan Pernito and Proserfina Pernito.
IN VIEW THEREOF, the above-mentioned Deputy Sheriffs are directed to deliver the property
subject of the writ of execution in favor of spouses Froilan Pernito and Proserfina Pernito who
are the present claimants or successor-in-interest of Consorcia Sombrio until they are
lawfully dispossessed by other rightful claimant or successor-in-interest with a better right."
14
On October 23, 1989, petitioners filed with the Court of Appeals a Petition for Certiorari,
Prohibition and Mandamus which was denied on August 6, 1990. Petitioners Motion for
Reconsideration was, likewise, denied on October 24, 1990.
Hence, this petition.
Petitioners contend that the Court of Appeals acted with grave abuse of discretion when it
ordered the cancellation of petitioners Transfer Certificate of Title of the subject property
considering that they are not privies to Civil Case No. R-18073 and to consider them privies
to the same would outrightly deny petitioners their right to due process. Petitioners also
contend that they had acquired the subject property in good faith and for value because the
notice of lis pendens was already cancelled at the time the Deed of Sale was executed
therefore they are innocent holder for value of a certificate of title.
We find the petition meritorious.chanrobles virtual lawlibrary
Section 76 of P.D. 1529 provides that:jgc:chanrobles.com.ph
"SEC. 76. Notice of lis pendens. No action to recover possession of real estate, or to quiet
title thereto, or to remove clouds upon the title thereof, or for partition, or other proceedings
of any kind in court directly affecting the title to land or the use or occupation thereof or the
buildings thereon, and no judgment, and no proceeding to vacate or reverse any judgment,
shall have any affect upon registered land as against persons other than the parties thereto,
unless a memorandum or notice stating the institution of such action or proceeding and the

court wherein the same is pending, as well as the date of the institution thereof, together
with a reference to the number of the certificate of title, and an adequate description of the
land affected and the registered owner thereof, shall have been filed and registered."cralaw
virtua1aw library
Under said law, lis pendens may lie only where there is an action or proceeding in court,
which affects title to, or possession of real property. In other words, lis pendens is the
jurisdiction, power, or control which the court acquires over the property involved in the suit
pending the continuance of the action; and until its final judgment therein, it has for its
object the keeping of the subject or res within the power of the court until the judgment or
decree shall be entered, to make it possible for courts of justice to give effect to their
judgments and decrees. 15 This, in effect, is the essence of the rule of lis pendens. When a
case is commenced involving any right to land registered under the Land Registration Law,
any decision therein will bind the parties only, unless a notice of the pendency of such action
is registered on the title of the said land, in order to bind the whole world as well. Therefore,
in order that a notice of lis pendens may affect the right of a subsequent purchaser, such
notice should be annotated on the back of the certificate of title, which is not present in the
case at bar.
The appellate court acted without jurisdiction when it ordered the cancellation of petitioners
title as the judgment which was rendered in Civil Case No. R-18073 and affirmed by the
Court of Appeals on February 7, 1989 did not bind petitioners because at the time
petitioners purchased the subject property, the vendors (Maria Ching) title to said property
was clean and free from any lien and encumbrance since the notice of lis pendens which was
annotated on said title or certificate had already been cancelled for more than a year.
Where the certificate of title was already in the name of the forger when the land was sold to
an innocent purchaser, the vendee had the right to rely on what appeared in the certificate
and. in the absence of anything to excite suspicion, was under no obligation to look beyond
the certificate and investigate the title of the vendor appearing on the face of said
certificate. 16 Under the Torrens system, registration is the operative act that gives validity
to the transfer or creates a lien upon the land. A person dealing with registered land is not
required to go behind the register to determine the condition of the property. He is only
charged with notice of the burdens on the property which are noted on the face of the
register or the certificate of title. To require him to do more is to defeat one of the primary
objects of the Torrens system. 17 Moreover, registration of land under the Torrens system
extinguishes all claims, liens and encumbrances asserted prior to registration except
statutory liens and those noted in the certificate of title. 18
As the registered owner of the subject property, petitioners are not bound by the decision in
Civil Case No. R-18073 for they were never summoned in said case and the notice of lis
pendens annotated on TCT No. 73069 was already cancelled at the time petitioners
purchased the subject property. While it is true that petitioners are indispensable parties in
Civil Case No. R-18073, without whom no complete relief could be accorded to the private
respondents, the fact still remains that petitioners were never actually joined as defendants
in said case. Impleading petitioners as additional defendants only in the execution stage of
said case violated petitioners right to due process as no notice of lis pendens was annotated
on the existing certificate of title of said property nor were petitioners given notice of the
pending case, therefore petitioners remain strangers in said case and the Order of the trial
court involving them is null and void, considering that petitioners are innocent purchasers of
the subject property for value.chanroblesvirtualawlibrary
Private respondents remedy is to file a claim for damages against Maria Ching to recover
the consideration for said property.

WHEREFORE, the decision dated August 6, 1990 of the Court of Appeals and the resolution
dated October 24, 1990 are annulled and set aside. TCT No. 87156 in the name of
petitioners are hereby reinstated. Costs de officio.
SO ORDERED.
Narvasa, C.J., Padilla and Regalado, JJ., concur.
Melo, J., took no part.
Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. L-42449 July 5, 1989
C & C COMMERCIAL CORPORATION and CLARA REYES PASTOR and other
STOCKHOLDERS OF C & C COMMERCIAL CORPORATION similarly
situated, petitioners,
vs.
PHILIPPINE NATIONAL BANK, NATIONAL INVESTMENT DEVELOPMENT
CORPORATION, PROVINCIAL SHERIFF OF RIZAL, CITY SHERIFF OF MANILA and THE
HON. JUDGE AUGUSTO VALENCIA, Presiding Judge, Quezon City Branch XXXI, Court
of Instance of Rizal, respondents.
Raymundo A. Armovit for petitioners.
Arcilla & Atencio for petitioner-movant Reyes-Pastor.
Domingo A. Santiago, Jr., Tomas N. Prado and Manuel S. Abedo for respondent PNB.
Rolando P. De Cuesta, Cecilio G. Parco and Gaudencio A. Palafox for respondent NIDC.
CORTES, J.:
The applicability to the case at bar of Presidential Decree No. 385, dated January 31, 1974,
prohibiting the issuance of injunctions against foreclosure sales sought by government
financial institutions is the principal problem that needs to be resolved in the instant special
civil action for certiorari.
The controversy now before this Court traces its roots to the period between February 27,
1957 and December 20, 1960 when petitioner C & C Commercial Corporation (now Asbestos
Cements Products Phil. Inc., hereinafter referred to as ACPPI) opened seven letters of credit
with the respondent Philippine National Bank (hereinafter referred to as PNB) to import
machines and equipment for its plant. Since petitioner's obligations under the said letters of
credit totalling five million four hundred fifty-one thousand eight hundred fifty-one pesos and
eighty-three centavos (P5,451,851.83) as of January 31, 1968 were not paid, PNB instituted
on March 13, 1968 a collection suit with a prayer for preliminary attachment against ACPPI,

impleading Clara Reyes Pastor as party defendant in her capacity as joint and solidary
debtor and controlling stockholder.
However, instead of proceeding with the collection suit, PNB agreed, at the behest of Mrs.
Pastor, as majority stockholder of ACPPI, to enter into a Voting Trust Agreement on March 5,
1969 to protect PNB's interests in ACPPI. The collection suit was therefore dismissed without
prejudice. Private respondents, PNB and its subsidiary or affiliate, the National Investment
Development Corporation (hereinafter referred to as NIDC), as the trustees named under the
said agreement, immediately proceeded to take over the management of ACPPI pursuant to
the agreement which granted them "full authority, subject only to the limitations set by law
and the other conditions set forth herein, to manage the affairs and the accounts and
properties of C & C Commercial Corporation, Inc.; to choose its directors and key officers; to
safeguard its interest and those of its creditors; and in general, to exercise all such powers
and discharge such functions as inherently pertain to the ownership and/or management of
such corporation" for a period of five (5) years from the date of its execution or up to March
1974 [Rollo, pp. 32-40].
During the time that the Voting Trust Agreement was in force, ACPPI executed a chattel
mortgage dated September 6, 1971 over its personal properties in favor of NIDC as security
for the loan of seven hundred thousand pesos (P700,000.00) granted by the latter to the
former to finance the production of asbestos cement products and their exportation to
Brunei and to repair/rehabilitate its plant building which had been damaged by typhoon
"Yoling".
On August 27,1973, the accounting firm of Sycip, Gorres and Velayo, after examining the
management and operations of ACPPI for the first three years under the Voting Trust
Agreement submitted a report finding that the PNB/NIDC management of ACPPI was a
complete and disastrous failure. In view of this report, petitioners ACPPI (then C & C
Commercial Corporation), Clara Reyes Pastor and other stockholders of ACPPI similarly
situated filed a complaint on October 16, 1973 in the Quezon City Branch of the Court of
First Instance of Rizal for the termination of the Voting Trust Agreement with a prayer for an
award of damages in the sum of about twenty-seven million pesos (P 27 M) alleging, inter
alia, that by reason of the grossly negligent or incompetent management of ACPPI by private
respondents, the corporation suffered huge losses. In the aforesaid case, which was
docketed as Civil Case No. Q-18176, ACPPI also sought as an ancillary remedy the
appointment of a receiver.
On November 27,1973, the respondents PNB and NIDC filed their answer to the complaint
denying the charge of mismanagement and alleging that ACPPI's indebtedness to PNB had
reached an amount of eleven million five hundred thirty-eight thousand twenty-nine pesos
and sixty-three centavos (P11,538,029.63) as of August 31, 1973 excluding daily interest,
and to NIDC, one million two hundred nineteen thousand nine hundred eighty-two pesos
(Pl,219,982.00) as of April 15, 1973 excluding daily interest.
On January 22,1974, the lower court issued an order appointing Bayani Barzaga as receiver.
But subsequently, in an order dated November 13, 1974-pursuant to an agreement reached
between ACPPI, PNB and NIDC to provide a mutually acceptable mechanism for
management of ACPPI pending the settlement negotiations between them-the court a quo
converted the one-man receivership of Barzaga into a joint receivership, with PNB-NIDC
nominee Atty. Ricardo L. Sadac and ACPPI nominee Atty. Roberto L. Bautista assuming office
as joint receivers together with Barzaga.

In the meantime, on December 19,1973, Development Bank of the Philippines (hereinafter

referred to as DBP) executed a deed of assignment in favor of PNB whereby the former
assigned to the latter its rights and interests under the promissory notes and deeds of real
estate mortgages executed on May 16, 1960 and May 8, 1961 by ACPPI in favor of DBP for
the principal amounts of four hundred ninety thousand pesos (P490,000.00) and seven
hundred ninety-six thousand pesos (P796,000.00), respectively.
On March 11, 1974, PNB filed with the Provincial Sheriff of Rizal a "PETITION FOR SALE
UNDER ACT 3135 AS AMENDED". The foreclosure sale initiated by PNB was not only to
recover on the allegedly defaulted secured loans of four hundred ninety thousand pesos (P
490,000.00) and seven hundred ninety-six thousand pesos (P796,000.00) assigned by DBP
to PNB but also for: 1) the unsecured advances granted by PNB to ACPPI relating to the
letters of credit opened sometime between 1957 and 1960; 2) the unsecured advances from
PNB during the five-year period of the Voting Trust Agreement; and, 3) the interests,
penalties and charges computed thereon during the same five-year period when PNB
controlled and managed ACPPI. A foreclosure sale was thus sought to satisfy ACCPI's total
indebtedness to PNB in the amount of fourteen million five hundred seventy-one thousand
seven hundred thirty-six pesos and eighty-seven centavos (Pl4,571,736.87) as of January 31,
1974.
ACPPI wrote a letter to the Board of Directors of PNB expressing its opposition to the
contemplated extrajudicial foreclosure sale. In reply, PNB sent a letter agreeing to meet with
ACPPI in settlement negotiations. However, ACPPI's proposals for the settlement of its
accounts with PNB were rejected for not being economically feasible and so, PNB made a
final demand for payment with a warning that unless full payment or other satisfactory
arrangement was made, PNB would proceed with the scheduled auction sale of the
mortgaged properties on September 30, 1975.
On September 22,1975, Civil Case No. 22047, a suit for nullification of the extrajudicial
foreclosure proceedings with prayer for a writ of injunction, was filed by ACPPI against PNB
and the Provincial Sheriff of Rizal in the Pasig Branch of the Court of First Instance of Rizal,
contesting PNB's foreclosure of the mortgage and the auction sale scheduled for September
30, 1975. Said court subsequently issued an order dated September 30, 1975 restraining the
scheduled foreclosure sale and directing the maintenance of the status quo until further
orders of the court.
Meanwhile, NIDC foreclosed the chattel mortgage executed by ACPPI on September 6, 1971
and filed with the Sheriff of the City of Manila a petition for the auction sale of "all the
finished products in inventory located at the MORTGAGOR's (ACPPI) plant at Barrio
Napindan, Taguig, Rizal . . ." [Rollo, p. 165] in order to satisfy an alleged total indebtedness
of ACPPI to NIDC amounting to one million eight hundred forty-five thousand one hundred
nine pesos and twenty-two centavos (Pl,845,109.22). On October 3, 1975, ACPPI instituted
with the same Pasig Branch of the Court of First Instance of Rizal Civil Case No. 22133 for the
nullification of the extrajudicial foreclosure proceedings sought by NIDC scheduled for
October 16,1975. The lower court also granted a temporary restraining order in the latter
case.
On December 17, 1975, on separate motions to dismiss filed by the respondents PNB and
NIDC in Civil Cases Nos. 22047 and 22133, respectively, the Court of First Instance dismissed
said civil cases in separate decisions but on the common ground that these cases violate the

procedural rule against splitting a single cause of action and also, that ACPPI, being under
receivership, was without legal capacity to contest the foreclosures.
On January 5, 1976, ACPPI moved for leave to file a supplemental complaint with a prayer for
the issuance of a writ of preliminary injunction in Civil Case No. Q-18176, the action for
termination of the Voting Trust Agreement, in order to submit for adjudication in the same
proceeding and before said court the renewed threats by PNB and NIDC to effect the sale at
public auction of the foreclosed properties.
The lower court in an Order dated January 15,1976 admitted the supplemental complaint but
denied the application for injunction on account of the provision of Presidential Decree No.
385 prohibiting the issuance of restraining orders and temporary or permanent injunctions
against any government financial institution in any action taken by such institution in
compliance with the mandatory foreclosure provided in said decree.
Petitioners filed a motion for reconsideration of the order but the motion was denied. Hence,
petitioners' recourse to this Court by way of a special civil action for certiorari with
injunction, alleging grave abuse of discretion on the part of respondent Judge Augusto
Valencia, Presiding Judge of the Court of First Instance of Rizal, Quezon City Branch XXXI, in
issuing the aforementioned orders.
In a resolution dated January 20, 1976, this Court resolved to issue a temporary restraining
order to enjoin the sale by PNB and NIDC of the foreclosed properties scheduled on January
21 and 30, 1976.
On October 7, 1976, petitioner-movant Clara Reyes Pastor filed in the instant case a Motion
for Termination of Receivership with Alternative Motion for Substitution of Receiver.
This Court however finds no legal basis for granting said motion as the receivership of ACPPI
is not at all an issue in the instant case. Time and again, this Court has acknowledged that it
possesses no authority to rule upon non-jurisdictional issues in a certiorari proceeding. Thus,
"it is settled to the point of being elementary that the only question involved in certiorari is
jurisdiction, either want of jurisdiction or excess thereof. . ." [F.S. Divinagracia AgroCommercial Inc. v. Court of Appeals, G.R. No. L- 47350, April 21, 1981, 104 SCRA 180, 191].
Besides, the said motion was premature. It must be noted that on September 25, 1975,
petitioner ACPPI filed before the lower court an omnibus motion to annul the joint
receivership, to which motion respondents filed their joint opposition on October 2, 1975. On
October 8, 1975, the lower court issued an order denying petitioner's aforementioned
omnibus motion. Petitioner moved to reconsider the said order and this motion is still
awaiting resolution by the trial court. In view of the pendency of the aforesaid motion for
reconsideration, it would be premature for this Court to act on the motion for termination of
receivership filed before it. Petitioners should await resolution by the lower court of their
omnibus motion to annul joint receivership before resorting to this Court.
The crucial problem to be dealt with in this petition is whether the trial court's refusal to
grant an injunction against the threatened foreclosure sales by PNB and NIDC constitutes
grave abuse of judicial discretion amounting to lack or excess of jurisdiction.

The court a quo's basis for denying the injunction sought by ACPPI is P.D. 385 which makes it
"mandatory for government financial institutions to foreclose the collaterals and/or securities
for any loan, credit, accommodation and/or guarantees granted by them whenever the
arrearages on such account, including accrued interest and other charges, amount to at
least twenty percent (20%) of the total outstanding obligations, including interests and other
charges, as appearing in the books of account and/or related records of the financial
institution concerned". [Section 1, P.D. 385].
Pursuant to the aforesaid law:
Sec. 2. No restraining order, temporary or permanent injunction shall be
issued by the court against any government financial institution in any action
taken by such institution in compliance with the mandatory foreclosure
provided in Section I hereof, whether such restraining order, temporary or
permanent injunction is sought by the borrower(s) or any third party or
parties, except after due hearing in which it is established by the borrower
and admitted by the government financial institution concerned that twenty
percent (20%) of the outstanding arrearages had been paid after the filing of
foreclosure proceedings .... [Emphasis supplied].
xxx
Since the arrearages on the PNB and NIDC loans cover the entire amount of the
indebtedness, thus more than satisfying the 20% arrearages requirement under the law, it
would seem that this case falls within the purview of the general rule laid down in P.D. 385.
Injunction will not be granted except upon payment of twenty percent (20%) of the
outstanding arrearages after filing of the foreclosure proceedings. This has not been done
here. Nevertheless, the Court believes that, in view of the peculiar factual circumstances
obtaining in the case, P.D. 385 should not have been applied peremptorily by the respondent
trial judge.
I. THE PNB FORECLOSURE SALE:
The extrajudicial foreclosure sale sought by PNB is based on two deeds of real estate
mortgage executed on May 16,1960 and May 8, 1961, respectively, by ACPPI in favor of DBP
to secure promissory notes for the principal amounts of four hundred ninety thousand pesos
(P490,000.00) and seven hundred ninety-six thousand pesos (P796,000.00), respectively.
PNB acquired all the rights and interests under the aforementioned deeds of mortgage by
virtue of a deed of assignment executed by DBP in its favor on December 19, 1973.
But the PNB foreclosure sale seeks to satisfy not only the amounts stated in the secured
promissory notes but also the unsecured advances amounting to some five million four
hundred thousand pesos (P5.4 M) granted by PNB on account of the opening of letters of
credit by ACPPI sometime between 1957 and 1960 before DBP assigned the mortgages to
PNB in 1973. The Court's inquiry is thus centered on whether the foreclosure sale pursuant
to the DBP assigned mortgage should proceed as ordered by the respondent trial judge
considering that the sale also seeks to satisfy previously incurred unsecured obligations.
A. As to the DBP-assigned credits, there is no doubt that foreclosure can
proceed as these were secured by appropriate mortgages. Moreover, contrary

to petitioner's pretensions, the validity of the assignment of the mortgage

credit by DBP to PNB is beyond question. Article 1624 of the Civil Code
provides that "an assignment of credits and other incorporeal rights shall be
perfected in accordance with the provisions of Article 1475" which in turn
states that "the contract of sale is perfected at the moment there is a meeting
of the minds upon the thing which is the object of the contract and upon the
price." The meeting of the minds contemplated here is that between the
assignor of the credit and his assignee, there being no necessity for the
consent of the debtor, contrary to petitioner's claim. It is sufficient that the
assignment be brought to his knowledge in order to be binding upon him. This
may be inferred from Article 1626 of the Civil Code which declares that "the
debtor who, before having knowledge of the assignment, pays his creditor
shall be released from the obligation." This view of Manresa was already
quoted with approval by this Tribunal. Thus:
xxx
The above-mentioned article (Article 1527 of the Old Civil Code) states that a
debtor who, before having knowledge of the assignment, should pay the
creditor shall be released from the obligation.
In the first place, the necessity for the notice to the debtor in order that the
assignment may fully produce its legal effects may be inferred from the
above. It refers to a notice and not to a petition for the consent which is not
necessary. We say that the notice is not necessary in order that the legal
effects may be fully produced, because if it should be omitted, such omission
will not imply that the assignment will not exist legally, but that its effects will
be limited to the parties thereto; at least, they will not reach the debtor [Sison
v. Yap Tico, 37 Phil. 584, 587 (1918); Emphasis supplied].
As the petitioner does not claim absence of any notice of the assignment but only lack of its
consent thereto, the validity of DBP's assignment of the mortgage credit as well as the right
of PNB as assignee, to foreclose the assigned mortgage, cannot be doubted.
B. However, petitioners question the inclusion of the unsecured obligations of
ACPPI in the foreclosure sale. In this regard, petitioner advances the following
proposition: The unsecured advances by PNB to ACPPI relating to the opening
of letters of credit in 1957 cannot be tacked on to the mortgage loans
acquired by PNB through assignment from DBP which are now being
foreclosed. To do so would be to allow an originally unsecured loan to be
covered by a mortgage securing another loan without the consent of the
mortgagor. Since the foreclosure sale sought by PNB includes such unsecured
obligations, petitioners argue that the same should be enjoined [Rollo, p. 25].
PNB sought to justify its inclusion of the unsecured obligations in the aggregate amount of
indebtedness secured by the mortgages to be foreclosed by citing a provision in the
assigned DBP Mortgage Contract which states:
Now, therefore, for and in consideration of the premises and as security for
the payment of the note or notes approved in order and other interest there

and/or other obligation arising thereunder or hereunder, the mortgagor does

hereby transfer and convey by way of first mortgage, unto the Mortgagee, its
successors and assigns, the real and/or personal properties described in the
list appearing on the back of this document . . .[Rollo, p. 388].
However, the aforequoted terms of the mortgage contract do not support PNB's conclusions.
The mortgage contract clearly secures only the amount of the promissory note executed by
ACPPI and the interest thereon and other obligations which may arise under the promissory
note (hence, the word "thereunder") and under the mortgage contract (hence, the word
"hereunder"). Certainly, the previously incurred debt of ACPPI cannot be embraced within
the terms of the DBP mortgage contract which merely extends security to future, ** but not
past obligations. PNB also argues in vain that the inclusion of the unsecured obligations in
the contemplated foreclosure proceedings finds support in the law which states that "(i)t
shall be mandatory ... to foreclose the collaterals and/or securities for any loan, credit
accommodation and/or guarantees granted by them whenever the arrearages on such
account, including accrued interest and other charges, amount to at least twenty percent of
the total outstanding obligations, including interest and other charges, as appearing in the
books of accounts and /or related records of the government financial institution
concerned. . . ." [Section 1, P.D. 385]. PNB maintains that the phrase "related records" may
be interpreted to mean such records evidencing the mortgage credit assigned and other
records of another government financial institution which are related to the assigned
obligation. PNB's stand is that the credits appearing in the records of the mortgagor or any
other government financial institution, whether secured or unsecured must necessarily be
included as long as they are related to the mortgage being foreclosed.
This argument must be rejected. The law, in authorizing a mandatory foreclosure by
government financial institutions, contemplates secured obligations appearing in the books
of accounts and/or related records of the government financial institution concerned. The
clear terms of the law indicate that foreclosure shall be made on the"collaterals and/ or
securities for any loan, credit accommodation and/or guarantees granted by them" [Section
1, P.D. 385]. Since the original advances by PNB were not secured by any mortgage, these
cannot be included in the foreclosure proceedings sought by PNB for the simple reason that
foreclosure of mortgage presupposes an unpaid obligation secured by the mortgage. In
addition, the rule is well settled that an action to foreclose a mortgage must be limited to
the amount mentioned in the mortgage except in mortgage contracts securing future
advancements [Lim Julian v. Lutero, 49 Phil. 703 (1926)].
In view of the fact that an unsecured obligation is being included among the obligations of
ACPPI sought to be satisfied by the PNB foreclosure sale, the lower court's blanket
application of P.D. 385 and the consequent denial of ACPPI's application for injunction
against the threatened foreclosure by PNB constitute grave abuse of discretion. P.D. 385, in
laying down the prohibition on the issuance of an injunction, did not intend to make the
debtor's mortgaged property answer for an unsecured obligation.
Since the petition for the PNB foreclosure sale was materially defective in that it included in
the amount of the total indebtedness to be satisfied by the sale previously incurred
unsecured obligations, the assailed order of the respondent judge denying ACPPI's motion
for the issuance of a preliminary injunction must accordingly be set aside and the
extrajudicial foreclosure sale sought by PNB should be enjoined. This is without prejudice
however to the right of PNB to petition for an extrajudicial foreclosure sale to satisfy the

obligations specifically secured by the DBP-assigned mortgage after due publication of an

appropriate notice of sale.
II. THE NIDC FORECLOSURE SALE:
ACPPI challenges the right of NIDC to foreclose the chattel mortgage in its
favor on the grounds that (1) part of the principal loan secured by the NIDC
mortgage was not expended for the purposes for which it was intended; and
(2) the subsequent advances granted by NIDC during the time that the Voting
Trust Agreement was in force are merely "fictitious" amounts and therefore, do
not constitute valid and demandable obligations; hence, the mortgage
securing the same is likewise void [Petition, p. 21; Rollo, p. 24].
In this case, NIDC sought to include certain advances granted to ACPPI during
the lifetime of the Voting Trust Agreement in the total amount of the mortgage
indebtedness secured by the chattel mortgage. Such action was based on an
all- embracing clause in the mortgage contract allowing said mortgage to
"stand as security for said obligations and any and all other obligations of the
MORTGAGOR to the MORTGAGEE of whatever kind and nature, whether such
obligations have been contracted before, during or after the constitution of
this mortgage" [Rollo, p. 226].
Without passing upon the validity of this clause, the Court rules that in view of
the dictum laid down inFilipinas Marble Corporation v. Court of Appeals [G.R.
No. 68010, May 30,1986, 142 SCRA 180], the foreclosure sale sought by NIDC
should have been enjoined. The rationale for enjoining a foreclosure sale
sought by a government financial institution charged with mismanagement
and misappropriation of the proceeds of the loan secured by its mortgage, as
aptly expressed in the aforementioned decision penned by Mr. Justice
Gutierrez finds relevance in the instant case. Thus:
xxx
Presidential Decree No. 385 was issued primarily to see to it that government
financial institutions are not denied substantial cash inflows which are
necessary to finance development projects all over the country, by large
borrowers, who when they become delinquent, resort to court actions in order
to prevent or delay the government's collection of their debts and loans.
The government however is bound by basic principles of fairness and decency
under the due process clause of the Bill of Rights. P.D. 385 was never meant
to protect officials of government lending institutions who take over the
management of a borrower corporation, lead that corporation to bankruptcy
through mismanagement or misappropriation of its funds, and who, after
ruining it, use the mandatory provisions of the decree to avoid the
consequences of their misdeeds.
The designated officers of the government financing institution cannot simply
walk away and then state that since the loans were obtained in the
corporation's name, then P.D. 385 must be peremptorily applied and that

there is no way the borrower corporation can prevent the automatic

foreclosure of the mortgage on its properties once the arrearages reach
twenty percent (20%) of the total obligation no matter who was responsible.
[At 188-189; Emphasis supplied].
xxx
In the Filipinas Marble case, petitioner Filipinas Marble Corporation (FMC) applied for a loan
in the amount of five million dollars ($5 M) with respondent Development Bank of the
Philippines (DBP) which was granted subject to the conditions, inter alia, that petitioner shall
have to enter into a management contract with respondent Bancom Systems Control, Inc.
Bancom and that the key officers/executives to be chosen by Bancom for the corporation
shall be appointed only with DBP's prior approval and made directly responsible to DBP.
Pursuant to these conditions, FMC entered into a management contract with Bancom
whereby the latter agreed to manage the company for a period of three years.
Subsequently, FMC filed a complaint seeking annulment of the deeds of mortgage and deed
of assignment which it executed in favor of DBP in order to secure the five million dollars ($5
M) loan, averring failure of consideration with regard to the execution of the said deeds and
claiming that the respondents and their directors/officers mismanaged and misspent the
loan, leaving the petitioner "desolate and devastated". It charged respondents DBP and
Bancom of abandoning the petitioner's project for which the approved loan was intended.
This Court ruled that it cannot make any conclusions as to whether DBP and Bancom
actually misappropriated and misspent the five million dollars ($ 5 M) loan as this matter
should rightfully be litigated below in the main action. It thus held that
. . . (p)ending the outcome of such litigation, P.D. 385 cannot automatically be
applied for if it is really proven that respondent DBP is responsible for the
misappropriation of the loan, even if only in part, then the foreclosure of the
petitioners' properties under the provisions of P.D. 385 to satisfy the whole
amount of the loan would be a gross mistake. It would unduly prejudice the
petitioner, its employees and their families.
Only after trial on the merits of the case can the true amount of the loan
which was applied wisely or not, for the benefit of the petitioner, be
determined. Consequently, the extent of the loan where there was no failure
of consideration and which may be properly satisfied by foreclosure
proceedings under P.D. 385 will have to await the presentation of evidence in
a trial on the merits [Id. at 189-190].
In fine, since the issue of misappropriation of the proceeds of the loan is still being litigated,
the liability of FMC for the loan which was the basis of the mortgage being foreclosed was
not yet settled; hence, the Court's allowance of an injunction against the foreclosure sale.
In the instant controversy, the liability of ACPPI for the loans secured by the NIDC chattel
mortgage is likewise still in dispute in the proceedings below inasmuch as petitioners are
seeking nullification of said loans for failure or lack of consideration in the pending action
before the court a quo. Petitioners contend that the portion of the principal NIDC loan
supposed to be used to fund the repairs on the ACPPI plant building had not been expended

for such intended purpose. Also, they challenge the adequacy of consideration of the
additional advances allegedly granted by NIDC to ACPPI for the payment of the various
services availed of or utilized by NIDC/PNB which petitioners claim to be fictitious.
Thus, although initially, the issue before the lower court was limited to whether petitioners
herein are entitled to a termination of the Voting Trust Agreement, additional issues
concerning the validity of the NIDC loans were raised in the supplemental complaint filed
before said court [See Rollo, p. 179, et seq. ]. In line with the Filipinas Marble ruling, pending
determination by the lower court of these issues involving the misappropriation and/or
mismanagement of the proceeds of the NIDC loans and the larger issue of failure of
consideration, the sale at public auction of the foreclosed chattels should be enjoined, P.D.
385 notwithstanding.
IN VIEW OF THE FOREGOING, the instant petition for certiorari is hereby GRANTED and the
questioned order of the respondent trial judge dated January 15, 1976 denying petitioners'
application for a writ of preliminary injunction is hereby SET ASIDE. The respondent sheriffs
are hereby ordered to DESIST from carrying out the extrajudicial foreclosure sales sought by
PNB and NIDC in the petitions dated March 11, 1974 and September 25, 1975, respectively.
The temporary restraining order issued by the Court dated January 20, 1976 is accordingly
made PERMANENT, subject to the qualifications stated in the following paragraph.
This judgment is without prejudice to the right of PNB, after due publication of an
appropriate notice of sale specifying the amount of the secured obligations, to cause the
foreclosure sale on the DBP assigned real estate mortgages dated May 6, 1960 and May 8,
1961. On the other hand, the NIDC foreclosure sale, upon filing of a bond in such amount as
the trial court may deem adequate, from an indubitably solvent bonding company, shall be
enjoined until the final resolution by the court a quo of Civil Case No. Q-18176.
Finally, as stated at the outset, petitioner Clara Reyes Pastor's "Motion for Termination of
Receivership with Alternative Motions" is DENIED.
SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION

G.R. No. 80078 May 18, 1993

ATOK FINANCE CORPORATION, petitioner,
vs.
COURT OF APPEALS, SANYU CHEMICAL CORPORATION, DANILO E. ARRIETA, NENITA
B. ARRIETA, PABLITO BERMUNDO and LEOPOLDO HALILI, respondents.
Syquia Law Offices for petitioner.

Batino, Angala, Allaga & Zara Law Offices for private respondents.

FELICIANO, J.:
Atok Finance Corporation ("Atok Finance") asks us to review and set aside the Decision of the
Court of Appeals which reversed a decision of the trial court ordering private respondents to
pay jointly and severally to petitioner Atok Finance certain sums of money.
On 27 July 1979, private respondents Sanyu Chemical corporation ("Sanyu Chemical") as
principal and Sanyu Trading Corporation ("Sanyu Trading") along with individual private
stockholders of Sanyu Chemical, namely, private respondent spouses Danilo E. Halili and
Pablico Bermundo as sureties, executed in the continuing Suretyship Agreement in favor of
Atok Finance as creditor. Under this Agreement, Sanyu Trading and the individual private
respondents who were officers and stockholders of Sanyu Chemical did:
(1) For valuable and/or other consideration . . ., jointly and severally
unconditionally guarantee to ATOK FINANCE CORPORATION (hereinafter called
Creditor), the full, faithful and prompt payment and discharge of any and all
indebtedness of [Sanyu Chemical] . . . (hereinafter called Principal) to the
Creditor. The word "indebtedness" is used herein in its most comprehensive
sense and includes any and all advances, debts, obligations and liabilities of
Principal or any one or more of them, here[to]fore, now or hereafter made,
incurred or created, whether voluntary or involuntary and however arising,
whether direct or acquired by the Creditor by assignment or
succession, whether due or not due, absolute or contingent, liquidated or
unliquidated, determined or undetermined and whether the Principal may be
may be liable individually of jointly with others, or whether recovery upon
such indebtedness may be or hereafter become barred by any statute of
limitations, or whether such indebtedness may be or otherwise
become unenforceable. 1 (Emphasis supplied)
Other relevant provisions of the Continuing Suretyship Agreement follow:
(2) This is a continuing suretyship relating to any indebtedness, including that
arising under successive transactions which shall either continue the
indebtedness from time to time or renew it after it has been satisfied. This
suretyship is binding upon the heirs, successors, executors, administrators
and assigns of the surety, and the benefits hereof shall extend to and include
the successors and assigns of the Creditor.
(3) The obligations hereunder are joint and several and independent of the
obligations of the Principal. A separate action or actions may be prosecuted
against the Principal and whether or not the Principal be joined in any such
action or actions.
xxx xxx xxx.

(6) In addition to liens upon, and rights of set-off against the moneys,
securities or other property of the Surety given to the Creditor by law, the
Creditor shall have the lien upon and a right of self-off against all moneys,
securities, and other property of the Surety now and hereafter in the
possession of the Creditor; and every such lien or right of self-off may be
exercised without need of demands upon or notice to the Surety. No lien or
right of set-off shall be deemed to have been waived by any act, omission or
conduct on the part of the Creditor, or by any neglect to exercise such right of
set-off or to enforce such lien, or by any delay in so doing, and every right of
set-off or lien shall continue in full force and effect until such right of set-off of
lien is specifically waived or released by an instrument in writing executed by
the Creditor.
(7) Any indebtedness of the Principal now or hereafter held by the Surety is
hereby subordinated to the indebtedness of the Principal to the Creditor; and
if the Creditor so requests, such indebtedness of the Principal of the Surety
shall be collected, enforced and shall be paid over to the Creditor and shall be
paid over to the Creditor and shall be paid over to the Creditor on account of
the indebtedness of the Principal to the Creditor but without reducing or
affecting in any manner the liability of the Surety under the provisions of this
suretyship.
xxx xxx xxx 2
(Emphases supplied)
On 27 November 1981, Sanyu Chemical assigned its trade receivables outstanding as of 27
November 1981 with a total face value of P125,871.00, to Atok Finance in consideration of
receipt from Atok Finance of the amount of P105,000.00. The assigned receivables carried a
standard term of thirty (30) days; it appeared, however, that the standard commercial
practice was to grant an extension up to one hundred twenty (120) days without penalties.
The relevant portions of this Deed of Assignment read as follows:
1. FOR VALUE RECEIVED, the ASSIGNOR does hereby SELL, TRANSFER and
ASSIGN all his/its rights, title and interest in the contracts, receivables,
accounts, notes, leases, deeds of sale with reservation of title, invoices,
mortgages, checks, negotiable instruments and evidences of indebtedness
listed in the schedule forming part hereinafter called "Contract" or
"Contracts."
2. To induce the ASSIGNEE to purchase the above Contracts, the ASSIGNOR
does hereby certify,warrant and represent that :
(a). He/It is the sole owner of the assigned
Contracts free and clear of claims of any other
party except the herein ASSIGNEE and has the
right to transfer absolute title thereto the
ASSIGNEE;

(b). Each assigned Contract is bonafide and the

amount owing and to become due on each
contract is correctly stated upon the schedule or
other evidences of the Contract delivered
pursuant thereto;
(c). Each assigned Contract arises out of the sale
of merchandise/s which had been delivered
and/or services which have been rendered and
none of the Contract is now, nor will at any time
become, contingent upon the fulfillment of any
contract or condition whatsoever, or subject to
any defense, offset or counterclaim;
(d). No assigned Contract is represented by any
note or other evidence of indebtness or other
security document except such as may have
been endorsed, assigned and delivered by the
ASSIGNOR to the ASSIGNEE simultaneously with
the assignment of such Contract;
(e). No agreement has been made, or will be
made, with any debtor for any deduction discount
or return of merchandise, except as may be
specifically noted at the time of the assignment
of the Contract;
(f). None of the terms or provisions of the
assigned Contracts have been amended,
modified or waived;
(g). The debtor/s under the assigned Contract/s
are solvent and his/its/their failure to pay the
assigned Contracts and/or any installment
thereon upon maturity thereof shall
be conclusively considered as a violation of this
warranty; and
(h). Each assigned Contract is a valid obligation of
the buyer of the merchandise and/or service
rendered under the Contract And that no Contract
is overdue.
The foregoing warranties and representations are in addition to those provided
for in the Negotiable Instruments Law and other applicable laws. Any violation
thereof shall render the ASSIGNOR immediately and unconditionally liable to
pay the ASSIGNEE jointly and severally with the debtors under the assigned
contracts, the amounts due thereon.
xxx xxx xxx

4. The ASSIGNOR shall without compensation or cost, collect and receive in

trust for the ASSIGNEE all payments made upon the assigned contracts and
shall remit to the ASSIGNEE all collections on the said Contracts as follows :
P5,450.00 due on January 2, 1982 on every 15th day (semimonthly) until November 1, 1982.
P110,550.00 balloon payment after 12 months. 3 (Emphasis
supplied)
Later, additional trade receivables were assigned by Sanyu Chemical to Atok Finance with a
total face value of P100,378.45.
On 13 January 1984, Atok Finance commenced action against Sanyu Chemical, the Arrieta
spouses, Pablito Bermundo and Leopoldo Halili before the Regional Trial Court of Manila to
collect the sum of P120,240.00 plus penalty charges amounting to P0.03 for every peso due
and payable for each month starting from 1 September 1983. Atok Finance alleged that
Sanyu Chemical had failed to collect and remit the amount due under the trade receivables.
Sanyu Chemical and the individual private respondents sought dismissal of Atok's claim
upon the ground that such claim had prescribed under Article 1629 of the Civil Code and for
lack of cause of action. The private respondents contended that the Continuing Suretyship
Agreement, being an accessory contract, was null and void since, at the time of its
execution, Sanyu Chemical had no pre-existing obligation due to Atok Finance.
At the trial, Sanyu Chemical and the individual private respondents failed to present any
evidence on their behalf, although the individual private respondents submitted a
memorandum in support of their argument. After trial, on 1 April 1985, the trial court
rendered a decision in favor of Atok Finance. The dispositive portion of this decision reads as
follows:
ACCORDINGLY, judgment is hereby rendered in favor of the plaintiff ATOK
FINANCE CORPORATION; and against the defendants SANYU CHEMICAL
CORPORATION, DANILO E. ARRIETA, NENITA B. ARRIETA, PABLITO BERMUNDO
and LEOPOLDO HALILI, ordering the said defendants, jointly and severally, to
pay the plaintiff:
(1) P120,240.00 plus P0.03 for each peso for each month from September 1,
1983 until the whole amount is fully paid;
(2) P50,000.00 as attorney's fees; and
(3) To pay the costs.
SO ORDERED. 4
Private respondents went on appeal before the then Intermediate Appellate Court ("IAC"),
and the appeal was there docketed as AC-G.R. No. 07005-CV. The case was raffled to the
Third Civil Cases Division of the IAC. In a resolution dated 21 March 1986, that Division
dismissed the appeal upon the ground of abandonment, since the private respondents had

failed to file their appeal brief notwithstanding receipt of the notice to do so. On 4 June 1986,
entry of judgment was made by the Clerk of Court of the IAC. Accordingly, Atok Finance went
before the trial court and sought a writ of execution to enforce the decision of the trial court
of 1 April 1985. The trial court issued a writ of execution on 23 July 1986. 5 Petitioner alleged
that the writ of execution was served on private respondents. 6
However, on 27 August 1986, private respondents filed a Petition for Relief from Judgment
before the Court of Appeals. This Petition was raffled off to the 15th Division of the Court of
Appeals. In that Petition, private respondents claimed that their failure to file their appeal
brief was due to excusable negligence, that is, that their previous counsel had entrusted the
preparation and filing of the brief to one of his associates, which associate, however, had
unexpectedly resigned from the law firm without returning the records of cases he had been
handling, including the appeal of private respondents. Atok Finance opposed the Petition for
Relief arguing that no valid ground existed for setting aside the resolution of the Third
Division of the then IAC.
The 15th Division of the Court of Appeals nonetheless granted the Petition for Relief from
Judgment "in the paramount interest of justice," 7 set aside the resolution of the Third Civil
Cases Division of the then IAC, and gave private respondents a non-extendible period of
fifteen (15) days within which to file their appeal brief. Private respondents did file their
appeal brief.
The 15th Division, on 18 August 1987, rendered a Decision on the merits of the appeal, and
reversed and set aside the decision of the trial court and entered a new judgment dismissing
the complaint of Atok Finance, ordering it to pay private respondents P3,000.00 as attorney's
fees and to pay the costs.
Atok Finance moved to set aside the decision of the 15th Division of the Court of Appeals,
inviting attention to the resolution of the IAC's Third Civil Cases Division of 21 March 1986
originally dismissing private respondent's appeal for abandonment thereof. In a resolution
dated 18 August 1987, the 15th Division denied Atok Finance's motion stating that it had
granted the Petition for Relief from Judgment and given private respondents herein fifteen
(15) days within which to file an appeal brief, while Atok Finance did not file an appellee's
brief, and that its decision was arrived at "on the basis of appellant's brief and the original
records of the appeal case."
In the present Petition for Review, Atok Finance assigns the following as errors on the part of
the Court of Appeals in rendering its decision of 18 August 1987:
(1) that it had erred in ruling that a continuing suretyship agreement cannot
be effected to secure future debts;
(2) that it had erred in ruling that the continuing suretyship agreement was
null and void for lack of consideration without any evidence whatsoever
[being] adduced by private respondents;
(3) that it had erred in granting the Petition for Relief from Judgment while
execution proceedings [were] on-going on the trial court. 8 (Emphasis in the
original)

As a preliminary matter, we note that a Division of the Court of Appeals is co-equal with any
other Division of the same court. Accordingly, a Division of the Court of Appeals has no
authority to consider and grant a petition for relief from a judgment rendered by another
Division of the same court. In the case at bar, however, we must note that an intervening
event had occurred between the resolution of 21 March 1986 of the Third Civil Cases
Division of the IAC dismissing private respondents' appeal and the 30 September 1986 order
of the 15th Division of the Court of Appeals granting the Petition for Relief from Judgment.
On 28 July 1986, the old Intermediate Appellate Court went out of existence and a new
court, the Court of Appeals, came into being, was organized and commenced
functioning. 9 This event, and the probability that some confusion may have accompanied
the period of transition from the IAC to the Court of Appeals, lead us to believe that the
defect here involved should be disregarded as being of secondary importance. At the same
time, nothing in this decision should be read as impliedly holding that a petition from relief
judgment is available in respect of a decision rendered by the Court of Appeals; this issue is
best reserved for determination in some future cases where it shall have been adequately
argued by the parties.
We turn, therefore, to a consideration of the first substantive issue addressed by the Court of
Appeals in rendering its Decision on the merits of the appeal: whether the individual private
respondents may be held solidarily liable with Sanyu Chemical under the provisions of the
Continuing Suretyship Agreement, or whether that Agreement must be held null and void as
having been executed without consideration and without a pre-existing principal obligation
to sustain it.
The Court of Appeals held on this first issue as follows:
It is the contention of private appellants that the suretyship agreement is null
and void because it is not in consonance with the laws on guaranty and
security. The said agreement was entered into by the parties two years before
the Deed of Assignment was executed. Thus, allegedly, it ran counter to the
provision that guaranty cannot exist independently because by nature it is
merely an accessory contract. The law on guaranty is applicable to surety to
some extent Manila Surety and Fidelity Co. v.Baxter Construction & Co., 53
O.G. 8836; and, Arran v. Manila Fidelity & Surety Co., 53 O.G. 7247.
We find merit in this contention.
Although obligations arising from contracts have the force of law between the
contracting parties, (Article 1159 of the Civil Code) this does not mean that
the law is inferior to it; the terms of the contract could not be enforces if not
valid. So, even if, as in this case, the agreement was for a continuing
suretyship to include obligations enumerated in paragraph 2 of the
agreement, the same could not be enforced. First, because this contract, just
like guaranty, cannot exist without a valid obligation (Art. 2052, Civil Code);
and, second, although it may be given as security for future debt (Art. 2053,
C.C.),the obligation contemplated in the case at bar cannot be considered
"future debt" as envisioned by this law.
There is no proof that when the suretyship agreement was entered into, there
was a pre-existing obligation which served the principal obligation between
the parties. Furthermore, the "future debts" alluded to in Article 2053 refer to

debts already existing at the time of the constitution of the agreement but the
amount thereof is unknown, unlike in the case at bar where the obligation was
acquired two years after the agreement. 10 (Emphasis supplied).
We consider that the Court of Appeals here was in serious error. It is true that a serious
guaranty or a suretyship agreement is an accessory contract in the sense that it is entered
into for the purpose of securing the performance of another obligation which is denominated
as the principal obligation. It is also true that Article 2052 of the Civil Code states that "a
guarantee cannot exist without a valid obligation." This legal proposition is not, however, like
most legal principles, to be read in an absolute and literal manner and carried to the limit of
its logic. This is clear from Article 2052 of the Civil Code itself:
Art. 2052. A guaranty cannot exist without a valid obligation.
Nevertheless, a guaranty may be constituted to guarantee the performance of
a voidable or an unenforceable contract. It may also guaranty a natural
obligation." (Emphasis supplied).
Moreover, Article 2053 of the Civil Code states:
Art. 2053. A guaranty may also be given as security for future debts, the
amount of which is not yet known; there can be no claim against the
guarantor until the debt is liquidated. A conditional obligation may also be
secured. (Emphasis supplied)
The Court of Appeals apparently overlooked our caselaw interpreting Articles 2052 and 2053
of the Civil Code. InNational Rice and Corn Corporation (NARIC) v. Jose A. Fojas and Alto
Surety Co., Inc., 11 the private respondents assailed the decision of the trial court holding
them liable under certain surety bonds filed by private respondent Fojas and issued by
private respondent Alto Surety Co. in favor of petitioner NARIC, upon the ground that those
surety bonds were null and void "there being no principal obligation to be secured by said
bonds." In affirming the decision of the trial court, this Court, speaking through Mr. Justice
J.B.L. Reyes, made short shrift of the private respondents' doctrinaire argument:
Under his third assignment of error, appellant Fojas questions the validity of
the additional bonds(Exhs. D and D-1) on the theory that when they were
executed, the principal obligation referred to in said bonds had not yet been
entered into, as no copy thereof was attached to the deeds of suretyship.This
defense is untenable, because in its complaint the NARIC averred, and the
appellant did not deny that these bonds were posted to secure the additional
credit that Fojas has applied for, and the credit increase over his original
contract was sufficient consideration for the bonds. That the latter were
signed and filed before the additional credit was extended by the NARIC is no
ground for complaint.Article 1825 of the Civil Code of 1889, in force in
1948, expressly recognized that "a guaranty may also be given as security for
future debts the amount of which is not yet known." (Emphasis supplied)
In Rizal Commercial Banking Corporation v. Arro, 12 the Court was confronted again with the
same issue, that is, whether private respondent was liable to pay a promissory note dated
29 April 1977 executed by the principal debtor in the light of the provisions of a

comprehensive surety agreement which petitioner bank and the private respondent had
earlier entered into on 19 October 1976. Under the comprehensive surety agreement, the
private respondents had bound themselves as solidary debtors of the Diacor Corporation not
only in respect of existing obligations but also in respect of future ones. In holding private
respondent surety (Residoro Chua) liable under the comprehensive surety agreement, the
Court said:
The surety agreement which was earlier signed by Enrique Go, Sr. and private
respondent, is an accessory obligation, it being dependent upon a principal
one, which, in this case is the loan obtained by Daicor as evidenced by a
promissory note. What obviously induced petitioner bank to grant the loan
was the surety agreement whereby Go and Chua bound themselves solidarily
to guaranty the punctual payment of the loan at maturity. By terms that are
unequivocal, it can be clearly seen that the surety agreement was executed
to guarantee future debts which Daicor may incur with petitioner, as is legally
allowable under the Civil Code. Thus
Article 2053. A guarantee may also be given as security for
future debts, the amount of which is not yet known; there can
be no claim against the guarantor until the debt is liquidated. A
conditional obligation may also be secured. 13 (Emphasis
supplied)
It is clear to us that the Rizal Commercial Banking Corporation and the NARIC cases rejected
the distinction which the Court of Appeals in the case at bar sought to make with respect to
Article 2053, that is, that the "future debts" referred to in that Article relate to "debts already
existing at the time of the constitution of the agreement but the amount [of which] is
unknown," and not to debts not yet incurred and existing at that time. Of course, a surety is
not bound under any particular principal obligation until that principal obligation is born. But
there is no theoretical or doctrinal difficulty inherent in saying that the suretyship agreement
itself is valid and binding even before the principal obligation intended to be secured thereby
is born, any more that there would be in saying that obligations which are subject to a
condition precedent are valid and binding before the occurrence of the condition
precedent. 14
Comprehensive or continuing surety agreements are in fact quite commonm place in present
day financial and commercial practice. A bank or a financing company which anticipates
entering into a series of credit transactions with a particular company, commonly requires
the projected principal debtor to execute a continuing surety agreement along with its
sureties. By executing such an agreement, the principal places itself in a position to enter
into the projected series of transactions with its creditor; with such surety agreement, there
would be no need to execute a separate surety contract or bond for each financing or credit
accommodation extended to the principal debtor. As we understand it, this is precisely what
happened in the case at bar.
We turn to the second substantive issue, that is, whether private respondents are liable
under the Deed of Assignment which they, along with the principal debtor Sanyu Chemical,
executed in favor of petitioner, on the receivables thereby assigned.
The contention of Sanyu Chemical was that Atok Finance had no cause of action under the
Deed of Assignment for the reason that Sanyu Chemical's warranty of the debtors' solvency

had ceased. In submitting this contention, Sanyu Chemical relied on Article 1629 of the Civil
Code which reads as follows:
Art. 1629. In case the assignor in good faith should have made himself
responsible for the solvency of the debtor, and the contracting parties should
not have agreed upon the duration of the liability, it shall last for one year
only, from the time of the assignment if the period had already expired.
If the credit should be payable within a term or period which has not yet
expired, the liability shall cease one year after maturity.
Once more, the Court of Appeals upheld the contention of private respondents and held that
Sanyu Chemical was free from liability under the Deed of Assignment. The Court of Appeals
said:
. . . Article 1629 provides for the duration of assignor's warranty of debtor's
solvency depending on whether there was a period agreed upon for the
existence of such warranty, analyzing the law thus:
(1) if there is a period (or length of time) agreed upon, then for such period;
(2) if no period (or length of time) was agreed upon, then:
(a) one year from assignment if debt was due at the time of
the assignment
(b) one year from maturity if debt was not yet due at the
time of the assignment..
The debt referred to in this law is the debt under the assigned contract or the
original debts in favor of the assignor which were later assigned to the
assignee. The debt alluded to in the law, is not the debt incurred by the
assignor to the assignee as contended by the appellant.
Applying the said law to the case at bar, the records disclose that none of the
assigned receivables had matured on November 27, 1981 when the Deed of
Assignment was executed. The oldest debt then existing was that contracted
on November 3, 1981 and the latest was contracted on December 4, 1981.
Each of the invoices assigned to the assignee contained a term of 30 days
(Exhibits B-3-A to 5 and extended by the notation which appeared in the
"Schedule of Assigned Receivables" which states that the ". . . the terms
stated on our invoices were normally extended up to a period of 120 days
. . ." (Exhibit B-2). Considering the terms in the invoices plus the ordinary
practice of the company, thus, the assigned debts matured between April 3,
1982 to May 4, 1982. The assignor's warranty for debtor's warranty, in this
case, would then be from the maturity period up to April 3, 1983 or May 4,
1983 to cover all of the receivables in the invoices.

The letter of demand executed by appellee was dated August 29, 1983
(Exhibit D) and the complaint was filed on January 13, 1984. Both dates were
beyond the warranty period.
In effect, therefore, company-appellant was right when it claimed that
appellee had no cause of action against it or had lost its cause of
action. 15 (Emphasis supplied)
Once again, however, we consider that the Court of Appeals was in reversible error in so
concluding. The relevant provision of the Deed of Assignment may be quoted again in this
connection:
2. To induce the ASSIGNEE [Atok Finance] to purchase the above contracts,
the ASSIGNOR [Sanyu Chemical] does hereby certify, warrant and represent
that . . .
(g) the debtor/s under the assigned contract/s are solvent and
his/its/their failure to pay the assigned contract/s and/or any
installment thereon upon maturity thereof shall be conclusively
considered as a violation of this warranty; and . . .
The foregoing warranties and representations are in addition to
those provided for in the Negotiable Instruments Law and other
applicable laws. Any violation thereof shall render the
ASSIGNOR immediately and unconditionally liable to pay the
ASSIGNEE jointly and severally with the debtors under the
assigned contracts, the amounts due thereon.
xxx xxx xxx
(Emphasis supplied)
It may be stressed as a preliminary matter that the Deed of Assignment was valid and
binding upon Sanyu Chemical. Assignment of receivables is a commonplace commercial
transaction today. It is an activity or operation that permits the assignee to monetize or
realize the value of the receivables before the maturity thereof. In other words, Sanyu
Chemical received from Atok Finance the value of its trade receivables it had assigned;
Sanyu Chemical obviously benefitted from the assignment. The payments due in the first
instance from the trade debtors of Sanyu Chemical would represent the return of the
investment which Atok Finance had made when it paid Sanyu Chemical the transfer value of
such receivables.
Article 1629 of the Civil Code invoked by private respondents and accepted by the Court of
Appeals is not, in the case at bar, material. The liability of Sanyu Chemical to Atok Finance
rests not on the breach of the warranty of solvency; the liability of Sanyu Chemical was
not ex lege (ex Article 1629) but rather ex contractu. Under the Deed of Assignment, the
efect of non-payment by the original trade debtors was breach of warranty of solvency by
Sanyu Chemical, resulting in turn in the assumption of solidary liability by the assignor
under the receivables assigned. In other words, the assignor Sanyu Chemical becomes a
solidary debtor under the terms of the receivables covered and transferred by virtue of the

Deed of Assignment. And because assignor Sanyu Chemical became, under the terms of the
Deed of Assignment, solidary obligor under each of the assigned receivables, the other
private respondents (the Arrieta spouses, Pablito Bermundo and Leopoldo Halili), became
solidarily liable for that obligation of Sanyu Chemical, by virtue of the operation of the
Continuing Suretyship Agreement. Put a little differently, the obligations of individual private
respondent officers and stockholders of Sanyu Chemical under the Continuing Suretyship
Agreement, were activated by the resulting obligations of Sanyu Chemical as solidary obligor
under each of the assigned receivables by virtue of the operation of the Deed of
Assignment. That solidary liability of Sanyu Chemical is not subject to the limiting period set
out in Article 1629 of the Civil Code.
It follows that at the time the original complaint was filed by Atok Finance in the trial court, it
had a valid and enforceable cause of action against Sanyu Chemical and the other private
respondents. We also agree with the Court of Appeals that the original obligors under the
receivables assigned to Atok Finance remain liable under the terms of such receivables.
WHEREFORE, for all the foregoing, the Petition for Review is hereby GRANTED DUE COURSE,
and the Decision of the Court of Appeals dated 18 August 1987 and its Resolution dated 30
September 1987 are hereby REVERSED and SET ASIDE. A new judgment is hereby entered
REINSTATING the Decision of the trial court in Civil Case No. 84-22198 dated 1 April 1985,
except only that, in the exercise of this Court's discretionary authority equitably to mitigate
the penalty clause attached to the Deed of Assignment, that penalty is hereby reduced to
eighteen percent (18%) per annum (instead of P0.03 for every peso monthly [or 36% per
annum]). As so modified, the Decision of the trial court is hereby AFFIRMED. Costs against
private respondents.
SO ORDERED.
Bidin, Davide, Jr.,Romero and Melo, JJ., concur.
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-9542

January 11, 1957

PLARIDEL SURETY AND INSURANCE CO., INC., petitioner-appellant,

vs.
P. L. GALANG MACHINERY CO., INC., respondents-appellees.
Carlos, Laurea, Fernando and Padilla for petitioner.
Arsenio L. Galang for respondents.
BENGZON, J.:
Review by certiorari of the Court of Appeals' decision affirming that of the Manila Court of
First Instance which required Plaridel Surety & Insurance Company, jointly and severally with
Constancio San Jose, to pay P. L. Galang Machinery Co., Inc. the sum of P30,000, with legal

interest thereon from the date of the filing of the complaint, plus 15 per cent of the said
amount as attorneys' fees and the costs. It is this additional liability for interest and
attorneys' fees that petitioner challenges before this Court.
The facts necessary for adjudication are found by the Court of Appeals:
On November 4, 1950, P. L. Galang Machinery Co., Inc. and Constancio San Jose
executed an agreement (Exhibit A), whereby the latter bound himself to cut, deliver
and sell to the former 2,550,000 board feet of peeler and veneer logs at the price of
P60 per thousand board feet f.o.b. vessel at the port of Polillo, to be delivered in three
consecutive months beginning January, 1951, each delivery consisting of 850,000
board feet. Said corporation had intended these logs for exportation to Japan. Thus, a
few days later, relying upon the agreement (Exhibit A), it sold logs to Marubeni Co.,
Ltd., of Tokyo at P845 per thousand board feet f.o.b. vessel at Polillo (Exhibit D). To
secure the performance of the obligation of Constancio San Jose, the Plaridel Surety
& Insurance Co. on November 9, 1950, put up and executed a performance bond
(Exhibit B) in the sum of P30,600, binding itself jointly and severally with the former
as principal, for the faithful performance of the contract.
In accordance with Exhibit "A", P. L. Galang Machinery Co., Inc. advanced to
Constancio San Jose the sum of P15,300, with interest at 10 per cent annum (Exhibit
C). As San Jose failed to deliver the corresponding quantity of logs for January, 1951,
he addressed a letter to the corporation (Exhibit E), asking an extension of time "to
complete the delivery of said quantity of logs" on the ground that he had just
acquired the logging machineries and equipment needed for the logging operation in
Polilo. The request was verbally denied. Similarly, and as no logs were delivered in
the month of February, 1951, on March 7, 1951, he again wrote a letter to the
corporation advising it that due to his failure to comply with the terms of the
aforementioned contract, he was expecting to deposit with the Plaridel Surety &
Insurance Co. the sum of P30,000 (it should be P30,600).
Consequently, and for failure of Constancio San Jose to comply with the terms and
stipulation of the agreement (Exhibit "A"), P. L. Galang Machinery Co., Inc. notified the
surety company on February 8, 1951 (Exhibit Q) of the failure of said Constancio San
Jose and demanded at the same time the payment of the amount of the performance
bond (Exhibit B) in the sum of P30,360 the payment of which was refused.
Upon the foregoing, P. L. Galang Machinery Co., Inc. filed a complaint on May 8, 1951,
against the aforenamed principal and his surety . . .
Petitioner objects to the payment of interest and attorneys' fees because: (1) they were not
mentioned in the bond; and (2) the surety would become liable for more than the
amount stated in the contract of suretyship.
In support of its objection petitioner dwells on the proposition that a surety's liability can not
be extended beyond the terms of his undertaking, citing articles 1956 and 2208 of the New
Civil Code provide as follows:
Art. 1956. No interest shall be due unless it has been expressly stipulated in writing.

Art. 2208. In the absence of stipulation, attorneys' fees and expenses of litigation,
other than judicial costs, cannot be recovered, except: . . . .
The objection has to be overruled, because as far back as the year 1922 this Court held
in Tagawa vs. Aldanese, 43 Phil. 852, that creditors suing on a suretyship bond may recover
from the surety as part of their damages, interest at the legal rate if the surety would
thereby become liable to pay more than the total amount stipulated in the bond. "The theory
is that interest is allowed only by way of damages for delay upon the part of the sureties in
making payment after they should have done so. In some states, the interest has been
charged from the date of the judgment of the appellate court. In this jurisdiction, we rather
prefer to follow the general practice, which is to order that interest begin to run from the
date when the complaint was filed in court, . . . .
Such theory aligned with sec. 510 of the Code of Civil Procedure which was subsequently
recognized in the Rules of Court (Rule 53, section 6) and with Article 1108 of the Civil Code
(now Art. 2209 of the New Civil Code).
In other words the surety is made to pay interest, not by reason of the contract, but by
reason of its failure to pay when demanded and for having compelled the plaintiff to resort
to the courts to obtain payment. It should be observed that interest does not run from the
time the obligation became due, but from the filing of the complaint.
As to attorneys' fees. Before the enactment of the New Civil Code, successful litigants could
not recover attorney's fees as part of the damages they suffered by reason of the litigation.
Even if the party paid thousand of pesos to his lawyers, he could not charge the amount to
his opponent.1
However the New Civil Code permits recovery of attorney's fees in eleven cases enumerated
in Article 2208, among them, "where the court deems it just and equitable that attorney's
fees and expenses of litigation should be recovered" or "when the defendant acted in gross
and evident bad faith in refusing to satisfy the plaintiff's plainly valid, just and demandable
claim". This gives the courts discretion in apportioning attorney's fees.
Now, considering, in the case, that the principal debtor had openly and expressly admitted
his liability under the bond, and the surety knew it, (p. 123, R. A.) we can not say there was
abuse of lower courts' discretion in the way of awarding fees, specially when the indemnity
agreement signed by Constancio San Jose and Ramon F. Cuervo afforded the surety
adequate protection.
Nevertheless, in view of the principal amount to be recovered and the relatively
uncomplicated work devolving upon plaintiff's counsel, the damages and expenses should
be reduced to 10 per cent for attorney's compensation as originally suggested in the
complaint (p. 13 R. A.).
With this modification, the decision under review is affirmed, with costs.
Paras, C.J., Padilla, Montemayor, Bautista Angelo, Labrador, Concepcion, Reyes, J.B.L. and
Endencia, JJ., concur.

SUPREME COURT
Manila
FIRST DIVSION
G.R. No. L-24709 October 20, 1977
ASIAN SURETY & INSURANCE CO., INC., petitioner,
vs.
HON. RAMON O. NOLASCO, Presiding Judge, Branch IX, Court of First Instance of
Manila and JOSE SAN AGUSTIN, Sheriff of the City of Manila and RAMON C.
DY, repsondents.
Santiago F. Audio & Associates for petitioner.
Jose W. Diokno for respondents.

FERNANDEZ, J.:t.hqw
This is a petition for certiorari and/or prohibition with preliminary injunction, praying that the
herein respondents Hon. Ramon O. Nolasco, Presiding Judge, Branch IX, Court of First
Instance of Manila, Jose San Agustin, Sheriff of the City of Manila, and Ramon C. Dy, refrain
from enforcing the orders issued by said respondent hearing, a writ of prohibition issue
commanding the respondents to desist absolutely and perpetually from enforcing the
judgment in against petitioner's counterbond filed therein.
The facts are:
1) On May 28, 1963, the private respondent Ramon C. Dy filed a complaint with the Court of
First Instance of Manila, assigned to Branch IX, and docketed as Civil Case No. 54065,
entitled "Ramon C. Dy vs. Jovita Peraldodoing business under the first name of 'Nation's Pet
Shop & Tinsmith' and George Uy King, doing business under the firm name of Jeorge
Tinsmith Shop'."
The suit was to collect from the de defendants the sum of P10,000.00 on a Promissory note
plus P500.00 for and as attomey's fees and the costs of the suit; 1
2) On May 29, 1963, upon motion of Ramon C. Dy, the respondent Judge Ramon O. Nolasco
issued an order of attachment against the defendants therein, Jovita Peraldo and George Uy
King. On the strength of this order, the herein sent Sheriff of Manila, through his deputy
Simon Castillo, attached certain properties belonging to defendants Jovita Peraldo and
George Uy King; 2
3) On May 31, 1963, the herein petitioner Asian Surety & Insurance Co., Inc. executed a
counterbond for the dissolution of the aforesaid writ of attachment, begin itself jointly and
severally with therein defendants Jovita Peraldo and George Uy King in the sum of Ten
Thousand Five Hundred Pesos (P10,500.00), Philippine Currency, under the following
terms: +.wph!1

... that in the case the plaintiff recover judgement in the action the defendant
will on the demand redeliver the attached propety so released to the officer of
the Court to be applied to the judgement or in default thereof that the
defendant and surety will on demand pay to the plaintiff the full value of the
property released.
By virtue of the aforementioned counterbond, respondent Judge issued an order on June 8,
1963, discharging the attachment. 3
4) On May 11, 1964, after hearing, respondent Judge Ramon O. Nolasco rendered his
decision in Civil Case No. 54065, the dispositive portion of which reads:+.wph!1
IN VIEW OF THE FOREGOING CONSIDERATION, judgement is hereby rendered
in favor of the plaintiff and against the defendants, ordering the said
defendants, jointly and severally, to pay the plaintiff the sum of P10,000,00,
with legal rate of interest from the date of filing of the conplaint until fully
paid, together with the sum of P500.00 as and for attorney's fees, and to pay
the cost of these
SO ORDERED.

5) Upon the after becoming final and executory, a writ of execution was issued. The writ was
returned not satisfied because the sheriff could not locate the defendants' place of business
or their residence in the City of Manila and could not locate after due diligence any property
of said defendants which may be levied upon to satisfy the execution. 5
6) On November 26, 1964, the herein respondent Ramon C. Dy filed a motion with the
court a quo for the execution of the aforementioned decision or judgment against the herein
petitioner's counterbond, which motion was opposed by petitioner Asian Surety & Insurance
Co., Inc. on the ground that the property attached and released on its counterboard was
then in custodia legis in another pending case and, therefore, could not be redelivered to the
officer of the court in accordance with its undertaking. 6
7) On February 23, 1965, the herein private respondent Ramon C. Dy filed a reply to
petitioner's opposition alleging that the property released by the latter's counterbond was
different from that under custodia legis in other case; 7
8) On April 20, 1 965, the respondent Judge issued an order setting for hearing the
aforementioned motion of private respondent Ramon C. Dy for execution of the judgment
against the counterbond in order to determine "the existence and the contents of the
Sheriff's Return allegedly" ecuted by Deputy Sheriff Simon Castillo in relation to the order of
attachment issued in the case." 8
9) On June 3, 1965, respondent Judge No issued an order granting the motion for execution
of petitioner's counterbond. Hence on June 15, 1965 the herein petitioner filed an "Urgent
Motion for Reconsideration" of said order on the ground that it cannot be made liable on its
counterbond unless the award be made after notice and hearing and before the final entry of
judgment in the case, citing Section 20, Rule 57 of the Rules of Court. 9

10) On June 29, 1965, respondent Judge Ramon O. Nolasco issued an order finding no valid
reason to disturb his order of June 3, 1965, considering that the order of execution in
question was issued under the provisions of Section 17 and not Section 20 of Rule 57 of the
Rules of Court. The urgent motion for reconsideration was denied and his order of June 17,
1965 suspending the writ of execution against the Asian Surety & Insurance Co., Inc. was set
aside. Hence, this petition for certiorari and/or prohibition with preliminary injunction. 10
Assailing the orders of June 3, 1965 and June 29, 1965, the petitioner Asian Surety &
Insurance Co., Inc. avers that the court a quo acted without or in excess of its jurisdiction, or
with grave abuse of discretion in holding that petitioner is liable beyond the terms of its
undertaking on the counterbond in question.
Petitioner contends that under the terms of the surety contract, its undertaking is that, in
the event that the plaintiff in the action recovers judgment against the defendants therein
and the latter fail to deliver the property so released to the officer of the court, jointly and
severally, it "will on demand pay to the plaintiff the full value of the property so released." It
insists that its undertaking under the counterbond is to pay solidarily to the plaintiff, Ramon
C. Dy, the full value of the property released under the counterbond. By the order of
respondent Judge dated June 3, 1965, the counterbond is made liable for the payment of the
judgment in the sum of P10,000.00, with legal interest from the filing of the complaint until
fully paid, together with the sum of P500.00 as and for attomey's fees and the costs of the
litigation which is, according to herein petitioner, contrary to the terms of its undertaking.
Petitioner submits that submits a surety on any bond, whether judicial or otherwise, cannot
be held liable beyond the terms of its undertaking, this order of respondent Judge was an act
beyond or without jurisdiction, or in grave abuse of discretion. To support its stand,
petitioner cited Art. 1305 of the Civil Code of the Philippines and the rulings inGerardo vs.
Plaridel Surety & Ins. Co., Inc., G.R. No. L-7807, Oct. 31, 1956 and Santos and Frias vs. Hon.
Mejia, et al., G.R. No. L- 6383, Dec. 29, 1953, 53 O.G. 3770.
Petitioner contends that the stipulation in the counterbond is not that it is to "secure the
payment of any judgment that the attaching creditor may recover in the action" as required
by Section 17 of Rule 57 of the Rules of Court and insisted on by the herein respondents, but
that it bound itself jointly and severally with the defendants in the action to redeliver the
released property to the officer of the court to be applied to the payment of the judgment or
in default thereof pay on demand to the plaintiff the full value of the property released; and
that the bond filed by it is not one contemplated under Section 12 of Rule 57 of the Rules of
Court but since the same was approved by respondent Judge and the other party in whose
favor it was executed did not object, it is therefore accountable only according to the terms
of its undertaking, citing Santos and Frias vs. Hon. Mejia, et al, G.R. No. L-6383, Dec. 29,
1953, 53 O.G. 3770.
With respect to the matter of notice and hearing, petitioner claims that there must be prior
notice and hearing before a surety can be held liable under the bond. It alleges that it was
not given an opportunity to be heard before its counter-bond was charged.
Petitioner Asian Surety & Insurance Co. contends that respondent Judge had assumed
erroneously that under Section 17, Rule 57 of the Rules of Court, there is no need to file an
application against the counterbond before the trial or before appeal is perfected or before
judgment becomes executory as provided for under Section 20 of the same Rule 57 and
hence, respondent Judge's order holding the counter-bond hable under Section 17 of said
Rule 57 is an abuse of donation. It is the and of petitioner herein that under the terms of its

undertake it assumes only the payment of the 'full value of the property released and
therefore takes it out of the "ambit" of said Section 17 and brings it within the contemplation
of Section 20 of the same Rule 57. Considering that the prerequired of applying against the
counterbond before appeal had been perfected or before the judgment becomes executory
as provided for under said Section 20 had not been complete with, the petioner maintains
that the respondent Judge comitted a grave abuse of discretion, or acted beyond or without
jurisdiction on in holding the counterbond liable for the payment of the judgment. 11
The herein respondents countered that the real issue is not whether a bonding company
may be or may not be held liable beyond the terms of its undertaking but what the herein
petitioner, under the terms of the bond in question, undertook to do, considering the Rule
under which the bond was issued the circumstances of its issuance and the terms of the
undertaking pursuant to Section 12, Rule 57 of the Rules of Court.
The respondents argue that: +.wph!1
The Rules simply require a bond 'in an amount equal to the value of the
property attached.' Defendants and petitioner could have proved that the
value of the property attack is so much. Without asking for the determination
of the value of the property attached, defendants and petitioner filed the bond
in question in the amount of P10,500.00. Can it not be said that defendants
and petitioner voluntarily fixed the value of the Property attached at
P10,500.00? 12
On the question of notice and hearing before the surety any be held liable under its bond,
resents herein distinguish the Provisions of Section 20 of Rule 57 and Section 17 of the same
Rule.
Respondents say that Section 20 deals with the Procedure for claiming damages on a bond
filed to secure the issuance of a writ of preliminary attachment whereas Section 17 provides
for the procedure in executing a bond filed to lift an attachment. Hence, Section 17 of Rule
57 appellate in the present case and not Section 20 of the same Rule as contented by the
petitioner. 13
Further, respondents aver:+.wph!1
Petitioner was duly served with a copy of the amended and supplemental
motion for execution of count filed by the plaintiff (Annex "G" of the petition).
Petitioner duly filed its opposition (Annex "H" of the petition). Petitioner was
likewise served with a copy of plaintiffs reply (Annex "I" of the petition), and
petitioner filed its rejoinder (Annex, "J" of the petition). Petitioner was likewise
served with a copy of the order of respondent Judge (Annex "K" of the
petition) setting case for heating on May 20, 1965 at 8:30 a.m. before the
Deputy Clerk of Court, who was commissioned to receive evidence, for the
parties to prove the existence and the contents of the Sheriff's return ...
Neither petioner nor its counsel appeared at the of May 20, 1965. Hence, it
should not now be heard to question the ruling of the Judge based on the
evidence presented therein by interposing an absolution that it was not given
the opportunity to be heard. 14

From the foregoing, it appears that there are only two contentious issues in this case:+.
wph!1
1) Is petitioner Asian Surety & insurance Co., Inc. liable on its counterbond to
pay the amount of P10,500.00?
2) Is prior notice and hearing essential to hold the surety liable Liner its bond?
We shall first detemine the question of whether or not there had been notice to the
petitioner and hearing in the present case.
In Rule 57, two separate bonds are mentioned. Section 17 two separate of a counterbond
filed and executed in behalf of the defendant in favor of the plaintiff to secure payment of
the judgment which plaintiff may obtain should the execution be returned unsatisfied while
Section 20 provides for the procedure to recover on a bond executed by the plaintiff to
secure the payment of damps that the defendant may suffer by reason of the levy on his
property under the writ of attachment. The counter-bond filed to lift the writ of attachment
executed by the herein plaintiff Asian Surety & insurance Co., Inc., for and in behalf of the
defendants below and in favor of the therein plaintiff Ramon C. Dy is curly the bond
contemplated under Section 17 of said Rule 57 which reads: +.wph!1
SEC. 17. When execution returned unsatisfied recovery had upon bond. If
the execution be returned unsatisfied in whole or in part, the surety or
sureties an any counterbond given pursuant to the provisions of this rule to
secure the payment of the judgment shall become charged on such
counterbond, and bound to pay to the judgment creditor upon demand, the
amount due under the judgment, which amount may be recovered from such
surety or sureties after notice and summary hearing in the same action.
This section allows the counterbond to be charged only after notice and hearing, summary
though the latter might be.
This Court has ruled that the requirement of notice and hearing is substantially complied
with from the time the surety was allowed to move for the quashing of the writ of execution
and for the cancellation of its obligation. 15 In the present case, the petitioner Asian Surety &
Insurance Co. was served with a copy of the amended and supplemental motion for
execution of the counterbond and had in fact filed an opposition thereto. Petitioner was
likewise served with a copy of the order of respondent court setting the date for hearing to
receive evidence of the existence and contents of the Sheriffs Return with respect to the
order of execution to enforce the court's decision on the principal action. Both said surety
and the defendants therein, according to the records of the case, failed to attend. We are
satisfied that, in accordance with the rule laid down in Luzon Steel Corp. vs. Sia, supra, the
requisite of notice and summary hearing had substantially been complied with and,
therefore, the herein petitioner cannot be heard to complain that it had not been notified
and given its day in court.
The submission of the petitioner that there being no evidence as to the full value of the
property attached, it is not able on its counterbond has no merit.

The petitioner surety has the burden to prove that the value of the property attached is less
than P10,500.00. When the petitioner executed the counterbond in the amount of
P10,500.00, it is presumed that the full value of the property attached was P10,500.00. The
petitioner cannot now complain that there was no evidence on the full value of the property
attached. Precisely, under Section 12, Rule 57, Revised Rules of Court, the judge shall, after
hearing, order the discharge of the attachment if a counterbond executed to the attaching
creditor is filed on behalf of the adverse party with the clerk or judge Of the court where the
application is made in an amount equal to the value of the property attached as determined
by the judge to secure the payment of any judgment that the attaching creditor may recover
n the action. The defendants in Civil Case No. 54065 and the petitioner surety must have
considered the full value of the property attached when they filed the bond in the amount of
P10,500.00. The defendants and the petitioner would not have filed a counterbond in the
said amount if the value of the property attached were less.
In view of the foregoing, the respondent Judge did not err in holding the petitioner surety
liable for the full amount of the counterbond of P10,500.00 which covers the principal of
P10,000.00 and the attomey's fees in the amount of P500.00.
Anent the issue of interest, this Court has ruled that the surety is hable for interest on the
principal obligation although that would increase the liability of the surety to more than the
maximum of its undertaking under the bond.16 Citing the rulings of this Court in Tagawa vs.
Aldenese, 43 Phil. 852; and Plaridel Surety & Insurance Co., vs. P.L. Galang Machinery Co.,
100 Phil. 679, 682, We held: +.wph!1
If a surety upon demand fails to pay, he can be held liable for even if in thus
paying, the liability becomes more than that in the principal obligation. The
increased liability is not because of the contract but because of the default
and the necessity of judicial collection.
It is the holding of this Court that if a surety, upon demand, fails to pay, he can be held liable
for interest, even if in thus paying, the liability becomes more than the principal obligation.
The increased liability is not because of the contract but because of the default. In the
present case, the Asian Surety & insurance Co., inc., petitioner herein, is liable for interest
only from the time demand was made upon it until the principal obligation is fully paid.
The petitioner, however, shall not be hable to pay cost.
WHREFORE, the orders of June 3, 1965 and June 29, 1965 count of P10,500.00 shall bear
legal interest only from the date of the receipt by the petitioner, Asian Surety & Insurance
Co., Inc., of the order of June 3, 1965 until the said amount is fully paid, without
pronouncement as to costs.
SO ORDERED.
Teehankee (Chairman), Makasiar, Mu;oz Palma, Martin and Guerrero, JJ.,
concur.1wph1.t
Republic of the Philippines
SUPREME COURT
Manila

EN BANC
G.R. No. L-13873

January 31, 1963

GENERAL INSURANCE and SURETY CORPORATION, petitioner,

vs.
REPUBLIC OF THE PHILIPPINES and CENTRAL LUZON EDUCATIONAL FOUNDATION,
INC., respondents.
Guido Advincula for petitioner.
Office of the Solicitor General for respondents.
REGALA, J.:
On May 15, 1954, the Central Luzon Educational Foundation, Inc. and the General Insurance
and Surety Corporation posted in favor of the Department of Education a bond, the terms of
which read as follows:
KNOW ALL MEN BY THESE PRESENTS:
WHEREAS, the Department of Education has required the Central Luzon Educational
Foundation, Inc., operating the Sison & Aruego Colleges, of Urdaneta, Pangasinan,
Philippines, an institution of learning to file a bond to guarantee the adequate and
efficient administration of said school or college and the observance of all regulations
prescribed by the Secretary of Education and compliance with all obligations,
including the payment of the salaries of all its teachers and employees, past, present,
and future, and the payment of all other obligations incurred by, or in behalf of said
school.
NOW, THEREFORE, in compliance with said requirement, we, CENTRAL LUZON
EDUCATIONAL FOUNDATION, INC., operating the Sison and Aruego Colleges,
represented Dr. Jose Aruego, its Vice-Chairman, as principal, and the GENERAL
INSURANCE AND SURETY CORPORATION, a corporation duly organized and existing
under and by virtue the laws of the Philippines, as surety, are held and firmly bound,
jointly and firmly, unto the Department of Education of the Republic of the Philippines
in the sum of TEN THOUSAND PESOS (P10,000.00) Philippine currency, for the
payment thereof we bind ourselves, our heirs, executors, administrators, successors,
and assigns, jointly and severally firmly by these presents;
WHEN the Secretary of Education is satisfied that said institution of learning had
defaulted in any of the foregoing particulars, this bond may immediately thereafter
be declared forfeited and for the payment of the amount above-specified, we bind
ourselves, our heirs, executors, successors, administrators, and assigns, jointly and
severally.
We further bind ourselves, by these presents, to give the Department of Education at
least sixty (60) days notice of the intended withdrawal or cancellation of this bond, in
order that the Department can take such action as may be necessary to protect the
interests of such teachers, employees or creditors of the school and of the
Government.

LIABILITY of Surety under this bond will expire on June 15, 1955, unless sooner
revoked.
IN WITNESS WHEREOF, we signed this present guarranty at the City of Manila,
Philippines, this 15th day of May, 1954.
On the same day, May 15, 1954, the Central Luzon Educational Foundation, Inc., Teofilo
Sison and Jose M. Aruego executed an indemnity agreement binding themselves jointly and
severally to indemnify the surety of "any damages, prejudices, loss, costs, payments,
advances and expenses of whatever kind and nature, including attorney's fees and legal
costs, which the COMPANY may, at any time sustain or incur, as well as to reimburse to said
COMPANY all sums and amounts of money which the COMPANY or its representatives shall or
may pay or cause to be paid or become liable to pay, on account of or arising from the
execution of the above mentioned Bond."
On June 25, 1954, the surety advised the Secretary of Education that it was withdrawing and
cancelling its bond. Copies of the letter were sent to the Bureau of Private Schools and to the
Central Luzon Educational Foundation, Inc.
It appears that on the date of execution of the bond, the Foundation was indebted to two of
its teachers for salaries, to wit: to Remedios Laoag, in the sum of P685.64, and to H.B.
Arandia, in the sum of P820.00, or a total of P1,505.64.
Demand for the above amount having been refused, the Solicitor General, in behalf of the
Republic of the Philippines, filed a complaint for the forfeiture of the bond, in the Court of
First Instance of Manila on July 11, 1956.
In due time, the surety filed its answer in which it set up special defenses and a cross-claim
against the Foundation and prayed that the complaint be dismissed and that it be
indemnified by the Foundation of any amount it might be required to pay the Government,
plus attorney's fees.
For its part, the Foundation denied the cross-claim and contended that, because Remedios
Laoag owed Fr. Cinense the amount of P820.65, there was no basis for the action; that the
bond is illegal and that the Government has no capacity to sue.
The surety also filed a third-party complaint against Teofilo Sison and Jose M. Aruego on the
basis of the indemnity agreement. While admitting the allegations of the third-party
complaint, Sison and Aruego claimed that because of the cancellation and withdrawal of the
bond, the indemnity agreement ceased to be of force and effect.
Hearing was held and on December 18, 1956, the Court of First Instance rendered judgment
holding the principal and the surety jointly and severally liable to the Government in the
sum of P10,000.00 with legal interest from the date of filing of the complaint, until the sum
is fully paid and ordering the principal to reimburse the surety whatever amount it may be
compelled to pay to the Government by reason of the judgment, with costs against both
principal and the surety.
The surety filed a motion for reconsideration and a request to decide the third-party
complaint which the trial court denied.

On appeal, the Court of Appeals rendered a decision, the dispositive portion of which reads:
WHEREFORE, the appealed judgment is hereby modified in the following manner:
(a) Ordering Central Luzon Educational Foundation, Inc., and General Insurance and
Surety Corporation to pay jointly and severally the Republic of the Philippines the
sum of P10,000.00, plus costs and legal interests from July 11, 1956 until fully paid;
and
(b) Ordering Central Luzon Educational Foundation, Inc., Teofilo Sison and Jose M.
Aruego to reimburse, jointly an severally, the General Insurance and Surety
Corporation of all amounts it may be forced to pay the Republic of the Philippines by
virtue of this judgment, plus costs and P2,000.00 for counsel's fees.
From this decision, the surety appealed to this Court by way of certiorari, raising questions of
law.1
In its first four assignments of error, the surety contends that it was no longer liable on its
bond after August 24, 1954 (when the 60-day notice of cancellation and withdrawal ended),
or, at the latest, after June 15, 1955. For support, the surety invokes the following provisions
of the bond:
WE, further bind ourselves, by these presents to give the Department of Education at
least sixty (60) days notice of the intended withdrawal or cancellation of this bond, in
order that the Department can take such action as may be necessary to protect the
interest of such teachers, employees, Creditors to the government.
LIABILITY of the Surety under this bond will expire on June 15, 1955, unless sooner
revoked.
On the other hand, the Government contends that since the salaries of the teachers were
due and payable when the bond was still in force, the surety has become liable on its bond
from the moment of its execution on May 15,1954.
We agree with this contention of the Government.
It must be remembered that, by the terms of the bond the surety guaranteed to the
Government "compliance (by the Foundation) with all obligations, including the payment of
the salaries of its teachers and employees, past, present and future, and the payment of all
other obligations incurred by, or in behalf of said school." Now, it is not disputed that even
before the execution of the bond the Foundation was already indebted to two of its teachers
for past salaries. From the moment, therefore, the bond was executed, the right of the
Government to proceed against the bond accrued because since then, there has been
violation of the terms of the bond regarding payment of past salaries of teachers at the
Sison and Aruego Colleges. The fact that the action was filed only on July 11, 1956 does not
militate against this position because actions based on written contracts prescribe in ten
years. (Art. 1144, par. 1, Civil Code). The surety also cites our decision in the case of Jollye v.
Barcelon and Luzon Surety Co., Inc., 68 Phil. 164 and National Rice & Corn Corp. (NARIC) v.
Rivera, et al., G.R. No. L-4023, February 29, 1952. But there is nothing in these cases that

supports the proposition that the liability of a surety for obligations arising during the life of
a bond ceases upon the expiration of the bond.
In the Jollye case, the bond provided:
Whereas, the above bounded principal, on 13th day of February, 1933 entered into
an agreement with H. P. L. Jollye of Manila, P. I., to fully and faithfully refund to said
Mr. H. P. L. Jollye the above stated sum of P7,500 representing the purchase price of
the 74 shares of the capital stock of the North Electric Company (certificate No. 38)
paid by said Mr. H. P. L. Jollye to the undersigned principal, Mr. Emeterio Barcelon, in
the event ofthe title thereto of said Mr. Barcelon is invalidated by any judgement
which may be rendered by the court of Cavite against Vicente Diosomito or in the
event that any of the warranties contained in that certain deed of sale executed by
the undersigned principal on this 13th day of February, 1933,be invalidated, a copy of
which is hereto attached and made an integralpart hereof, market Exhibit A.
Wherefore, the parties respectfully pray that the foregoing stipulation of facts be
admitted and approved by this Honorable Court, without prejudice to the parties
adducing other evidence to prove their case not covered by this stipulation of
facts. 1wph1.t
According to the bond, "the liability of Luzon Surety Company, Inc. under this bond will
expire (12) months from date hereof." The date referred to was February 13, 1933. This
Court absolved the surety of liability because the acts for which the bond was posted
happened after its expiration. Thus, We held in that case:
... The acts provided therein by reason of which the contract of suretyship was
executed could have taken place within the stipulated period twelve months. Hence,
the parties fixed that period exactly at twelve months, limiting thereby the obligation
of the appellee to answer for the payment to the appellant of the aforesaid sum of
P7,500.00 to not more than the stipulated period. . . .
Here, on the other hand, the right of the Government to collect on the bond arose while the
bond was in force, because, as earlier noted, even before the execution of the bond, the
principal had already been indebted to its teachers.
Neither does the NARIC case support the surety's position. In that case, the bond provided
that
This bond expires on March 20th, 1949 and will be cancelled TEN DAYS after the
expiration, unless the surety is notified of any existing obligation thereunder, or
unless the surety renews or extends it in writing for another term.
and We held that giving notice of existing obligation was a condition precedent to further
liability of the surety and that in default of such notice, liability on the bond automatically
ceased.
Similarly, in the case of Santos, et. al. v. Mejia, et al., G.R. No. L-6383, December 29, 1953,
the bond provided that

Liability of the surety on this bond will expire in THIRTEEN DAYS and said bond will be
cancelled 10 DAYS after its expiration unless surety is notified of any existing
obligation thereunder.
and We held that the surety could not be held liable because the bond was cancelled when
no notice of existing obligations was given within ten days.
In the present case, there is no provision that the bond will be cancelled unless the surety is
notified of any claim and so no condition precedent has to be complied with by the
Government before it can bring an action. Indeed, the provision of the bond in the NARIC
and Santos cases that it would be cancelled ten days after its expiration unless notice of
claim was given was inserted precisely because, without such a provision, the surety's
liability for obligations arising while the bond was in force would subsist even after its
expiration.
Thus, in Pao Chuan Wek v. Nomorosa, 54 O.G. No. 11, 3490, We held that under a provision
that the surety "will not be liable for any claim not discovered and presented to the company
within three months from the expiration of this bond and that the obligee hereby waives his
right to file any court action against the surety after the termination of the period of three
months above mentioned," the giving of notice is a condition precedent to be complied with.
And suppose this action were filed while the bond was in force, as the surety would have the
Government do, but the same remained pending after June 15, 1955, would the surety
suggest that the judgment that may be rendered in such action could no longer be enforced
against it because the bond says that its liability under it has expired?
And what of the provision on 60-day notice? The surety urges that all actions on the bond
must be brought within that period or they would all be barred. The surety misread the
provision. The 60-day notice is not a period of prescription of action. The provision merely
means that the surety can withdraw as in fact it did in this case even before June 15,
1955 provided it gave notice of its intention to do so at least 60 days in advance. If at all,
the condition is a limitation on the right of the surety to withdraw rather than a limitation of
action on the bond. This is clear also from the Manual of Information for Private
Schools2 which states that "The bond furnished by a school may not be withdrawn by either
or both the bondsmen except by giving the Director of Private Schools sixty days notice."
In its fifth assignment of error, the surety contends:
1. That the bond is void for being contrary to public policy insofar as it requires the surety to
pay P10,000.00 regardless of the amount of the salaries of the teachers. 3 It is claimed that
to enforce forfeiture of the bond for the full amount would be to allow the Government to
enrich itself since the unpaid salaries of the teachers amount to P1,318.84 only.
2. That, under Article 1311 of the Civil Code,4 since teachers of Sison and Aruego Colleges
are not parties to the bond, "the bond is not effective, and binding upon the obligors
(principal and surety) as far as it guarantees payment of the 'past salaries' of the teachers of
said school." This is the same as saying that the surety is not liable to teachers of Sison and
Aruego Colleges because the latter are not parties to the bond nor are they beneficiaries of
a stipulation pour autrui. But this argument is based on the false premise that the teachers
are trying to enforce the obligation of the bond, which is not the case here. This is not an

action filed by the teachers against the surety. This is an action brought by the Government,
of which the Department of Education is an instrumentality, to hold the surety liable on its
bond for the same has been violated when the principal failed to comply "with all
obligations, including the payment of salaries of its teachers, past, present and future."
There is nothing against public policy in forfeiting the bond for the amount. The bond is
penal in nature. Article 1226 of the Code states that in obligation with a penal clause, the
penalty shall substitute the indemnity for damages and the payment of interests in case of
non-compliance, if there is no stipulation to the contrary, and the party to whom payment is
to be made is entitled to recover the sum stipulated without need of proving damages
because one of the primary purposes of a penalty clause is to avoid such necessity. (Art.
1228, Civil Code; Lambert v. Fox, 26 Phil. 588; Palacios v. Municipality of Cavite, 12 Phil. 140;
Manila Racing Club v. Manila Jockey Club, 69 Phil. 55). The mere non-performance of the
principal obligation gives rise to the right to the penalty, (IV Tolentino, Civil Code of the
Philippines, p. 247.)
In its first and second "alternative assignments of error," the surety contends that it was
released from its obligation under the bond when on February 4, 1955, Remedios Laoag and
the Foundation agreed that the latter would pay the former's salaries, which were then
already due, on March 1, 1955. In support of this proposition, the surety cites Article 2079 of
the Code which provides as follows:
An extension granted to the debtor by the creditor without the consent of the
guarantor extinguishes the guaranty. . . .
But the above provision does not apply to this case. The supposed extension of time was
granted not by the Department of Education or the Government but by the teachers. As
already stated, the creditors on the bond are not the teachers but the Department of
Education or the Government.
Even granting that an extension of time was granted without the consent of the surety, still
that fact would not help the surety, because as earlier pointed out, the Foundation was also
arrears in the payment of the salaries of H. B. Arandia. The case of Arandia alone would be
enough basis for the Government to proceed against the bond.
Lastly, in its third and fourth "alternative assignments of error," the surety contends that it
cannot be made answer for more than the unpaid salaries of H. B. Arandia, which it claimed
amounted to P720.00 only, because Article 2054 states that
A guarantor may bind himself for less, but not for more than the principal debtor,
both as regards the amount and the onerous nature of the conditions.
Should he have bound himself for more, his obligations shall be reduced to the limits
of that of the debtor.
What We said about the penal nature of the bond would suffice to dispose of this claim. For
whatever may be the amount of salaries due the teachers, the fact remains that the
condition of the bond was violated and so the surety became liable for the penalty provided
for therein.

WHEREFORE, the decision of the Court of Appeals is hereby affirmed, with costs against the
surety.
Padilla, Bautista Angelo, Labrador, Concepcion, Reyes, Barrera, Parades, Dizon and
Makalintal, JJ., concur.
Bengzon, C.J., took no part.
Footnotes
1

Central Luzon Educational Foundation, Inc., Teofilo Sison and Jose M. Aruego also
appealed to this Court but we dismissed their appeal in G.R. No. L-14119 for having
been filed out of time.
2

Prepared by the Department of Education pursuant to Act No. 2706.

Article 1183 states that impossible conditions, those contrary to good customs or
public policy and those prohibited by law shall annul the obligation which depends
upon them.
4

Contracts take effect only between the parties, their assigns and heirs, except in
case where the rights and obligations arising from the contract are not transmissible
by their nature, or by stipulation or by provision of law. The heir is not liable beyond
the value of the property he received from the decedent.
If a contract should contain some stipulation in favor of a third person, he may
demand its fulfillment provided he communicated his acceptance to the
obligor before its revocation. A mere incidental benefit or interest of a person
is not sufficient. The contracting parties must have clearly and deliberately
conferred a favor upon a third person.
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-3751

October 25, 1952

VISAYAN DISTRIBUTORS, INC., plaintiff-appellee,

vs.
MARIANO R. FLORES, ET AL, defendants-appellants.
Adriano M. Ignacio, Constantino P. Tagna, Conrado T. Castillo, and Amelito R. Mutuc for
appellants.
Claro M. Recto and Bausa and Ampil for appellee.
PARAS, C.J.:
On November 9, 1946, the plaintiff-appellee (Visayan Distributors. Inc.), herein to be referred
to as appellee, and Mariano R. Flores (doing business under the name of Rizal Investment

Corporation), herein to be referred to as Flores, and Teofilo Abeto (doing business under the
name of Philippine Investment Co., Ltd.), herein to be referred to as Abeto, entered into a
contract whereby Abeto and Flores bound themselves to deliver on November 18, 1946, to
the appellee at the port of Romblon on board the vessel to be supplied by the appellee 2,000
long tons of copra, to be paid by the appellee at $103.50 per ton f.o.b. appellee's vessel at
Romblon. The contract provided that the appellee upon satisfactory inspection of the copra,
would advanced to Abeto and Flores the sum of P10,000 for initial weighing and checking
expenses, plus another P10,000 on the first day of loading. The contract also provided that
the appellee would furnish Abeto and Flores with 15,000 empty sacks to facilitate the
handling, weighing and loading of copra. The purchase price was to be paid as follows:
(a) 95 per cent of the total cost of copra to be paid upon presentation of the
following: Commercial Invoice. On-Board Bills of Lading. Weight Certificate and/or
Survey Report. 5 per cent upon acceptance of weight in American port.
xxx

xxx

xxx

(e) The balance of invoice value payable by an irrevocable confirmed letter of credit
to the China Banking Corporation in favor of the sellers.
The appellee, after the execution of the contract, advanced to Abeto and Flores first the sum
of P10,000 and latter the sum of P10,000 and later the sum of P3,000.
Under date of November 12, 1946 a surety bond was executed by Abeto and Flores as
principals, and by Rizal Surety and Insurance Co. (herein to be referred to as Surety), for the
sum of P30,000, to secure the full and faithful performance of the contract of Abeto and
Flores with the appellee.
With due notice to Abeto and Flores, the SS. PANAMAN was sent by the appellee to, and
arrived at the port of Romblon on November 17, 1946, Abeto and Flores having been
advised by the appellee that said steamer would be ready to load the copra on November
18, 1946. Abeto and Flores were, however, unable to deliver any amount of copra on said
steamer with the result that SS. PANAMAN left Romblon without cargo.
The appellee had previously sent to Abeto and Flores in Romblon 26,875 empty sacks of
which 2,908 were used by the appellee for transporting copra to Cebu on the FS-156.
The appellee instituted in the Court of Instance of Manila on December 14, 1946, an action
against Abeto and Flores and the Surety for breach of contract. In its first amended
complaint the appellee sought to recover (1) the sum of P13,000, representing advances; (2)
P55,500, representing the value of empty sacks; (3) P150,000, as damages, and (4) the sum
of P4,064, deposited by the appellee with the Bureau of Customs in compliance with the
rules and regulations in connection with the sale and delivery of the copra in question.
The Surety filed a cross-claim against Abeto and Flores and a third-party complaint against
Gregorio Gutierrez, in virtue of the indemnity agreement filed by the latter three in favor of
the Surety.
After trial, the Court of First Instance of Manila rendered a decision the dispositive part of
which read as follows:
In view of all the foregoing, judgment is hereby rendered sentencing defendant
Teofilo Abeto, Mariano R. Flores, and the Rizal Surety & Insurance Co., Inc., to pay

plaintiff, jointly and severally the sum of P13,000 plus the further sum P35,950 with
interest on both amounts at the legal rate from the date of the filing of the complaint,
as well as the further sum of P150,000 as damages, with costs of suit. The liability,
however, of defendant Rizal Surety & Insurance Co., Inc., shall be limited to P30,000
only.
The court, likewise, sentences defendants Abeto and Flores and third-party defendant
Gregorio Gutierrez to reimburse, also jointly and severally, unto said defendant Rizal
Surety & Insurance Co., Inc., whatever amount the latter may pay to plaintiff,
pursuant to the foregoing judgment, with interest thereon at the rate of 12 percent
per annum, plus the further sum equivalent to 15 per cent of said amount as and for
attorney's fees.
From this decision Abeto and Flores as well as the Surety, have appealed, the first two
having filed their own brief, and the Surety having filed a separate brief.
Abeto and Flores contend that they had the copra called for in their contract with the
appellee on November 18, 1946, but that they refused to deliver the same on the ground
that the appellee was insolvent and failed to guarantee the payment of the purchase price
by a letter of credit called for in the contract, a contention also availed of by the Surety. It
is very significant, however, that Abeto and Flores had not made in their answer even the
slightest hint that they had copra in the port of Romblon on November 18, 1946. Upon the
other hand, they merely invoked the defense that the contract of November 9, 1946, was
canceled by another agreement made on November 22, 1946, calling for the delivery of only
500 tons of copra, and that, at any rate, their failure to comply with the contract of
November 9, 1946, was excused by force majeure (the abrogation of the copra trade
agreement between the United States and the Philippines). Even in their letter to counsel for
the appellee (Exhibit 1), Abeto and Flores absolutely failed to mention the alleged fact that
they had the necessary quantity of copra on the date specified in their contract.
The conspicuous circumstance that the appellee's vessel SS. PANAMAN left the port with its
hold empty, without any written notice or advice from Abeto and Flores that they had the
necessary copra which they would deliver only upon payment of its purchase price in
accordance with the terms of their contract, militates against the contention of Abeto and
Flores and the surety, that copra was available.
The evidence for Abeto and Flores tends to show that they, thru Ignacio Lizo, contracted
with copra suppliers for the delivery of some 2,000 tons to the port of Romblon upon the
arrival of landing barges; that Lizo merely paid the necessary deposit to the suppliers who
thereupon signed the necessary contracts and the corresponding receipts for the advance
payment; that said copra be bought from various suppliers, which were not delivered to the
appellee under their contract, were later sold to Escudero & Co., and the Nacoco. The fact,
however, that none of the alleged contracts or receipts signed by the copra suppliers, and
the invoices of Escudero & Co. and the Nacoco was presented in evidence during the trial, is
a strong indication negating the alleged existence of copra on or about November 18, 1946.
The Surety relies upon the provision in the contract between the appellee and Abeto and
Flores, to the effect that the bond "can be foreclosed if copra does not exist by the time
Buyer's vessel is ready to load." This is complemented by the proposition that 159,834 kilos
of copra were delivered by Abeto and Flores to the appellee under their contract of sale. The
Surety's position is evidently erroneous, if we bear in mind the fact that Abeto and Flores
have not pretended that the said quantity of copra was a part of the sale under the contract
of November 9, 1946. Indeed, in the receipt signed by Abeto and Flores for the partial
payment of said 159,834 kilos of copra, it is expressly admitted that the quantity was

without prejudice to their contract of 2,000 tons of copra, dated November 18, 1946. The
Surety also supposes that the 159,834 kilos of copra delivered to the appellee had been paid
by the latter in the total amount of P33,000, represented, first by the sums of P10,000 and
P3,000 advanced by the appellee after the execution of the contract of November 9, 1946,
and, secondly, by the sum of P20,000 paid by the appellee upon loading said copra. This
supposition is again at war with the theory of Abeto and Flores, who specially admitted that
said copra was in virtue of a separate deal and who, as a matter of fact, still hold the
appellee liable for the unpaid balance of P13,000. Indeed, the alleged failure of the appellee
to pay the balance of P13,000, is taken by Abeto and Flores as evidence of appellee's
insolvency which justified Abeto and Flores in refuse to deliver the copra called for in the
contract of November 9, 1946.
The Surety maintains that the recital in the receipt signed by Abeto and Flores covering the
partial payment of 159,834 kilos of copra, to the effect that said quantity was without
prejudice to their obligation to deliver 2,000 tons of copra, should be construed as meaning
merely that Abeto and Flores did not waive with the stipulation requiring the appellee to
obtain a letter of credit. Such construction is not borne out by the terms of the receipt which
protects expressly the rights of the appellee under the contract of November 9, 1946, and
would be tenable only if the receipt provided that the delivery of 159, 834 kilos of copra was
without prejudice to the right of Abeto and Flores regarding the letter of credit called for in
their contract.
The alleged absence of a letter of credit to secure the payment of the purchase price is
invoked both by Abeto and Flores and by the Surety. In the first place, there is evidence to
the effect that a letter of credit was available, although it was not actually assigned to Abeto
and Flores in the absence of copra ready for loading on the SS. PANAMAN. In the second
place, the alleged fact, constituting a defense, was not pleaded by Abeto and Flores and the
Surety, so much so that, when an attempt was made during the trial to prove the absence of
the letter of credit, counsel for the appellee objected, and the objection was sustained by
the trial court; and although the Surety was allowed to amend its answer to plead the
absence of the letter of credit as an excuse for the failure of Abeto and Flores to comply with
their contract, no amended answer was filed by the surety. The latter, however, contends
that amendment was no longer necessary because its answer already alleged violation on
the part of the appellee of its contract, and because counsel for the appellee admitted "that
the letter of credit has not been established for lack of compliance by defendants, Mr.
Mariano Flores and Mr. Teofilo Abeto and the companies they represent with the terms and
conditions of the contract." The alleged violation of the appellee of its contract, set up as a
defense in the surety's answer, is a mere conclusion. As to the admission of counsel for the
appellee, it may be stated that the same must be taken in conjunction with the previous
testimony of Peter Cang Hocho, a witness for the appellee, that the letter of credit was
available though not assigned to Abeto and Flores.
Moreover, it appears that under the terms of the contract of November 9, 1946, it is only the
balance of the invoice value which should be payable by an irrevocable letter of credit, and
the contract called for payment of 95 per cent of the total purchase price upon presentation
of the commercial invoice, on board bills of lading, wage certificate and/or survey report,
and 5 per cent upon acceptance of weight in American port. Said balance of the invoice
value appears to be merely 5 per cent of the contract price, and the same could not of
course be accurately determined before the quantity of copra to be loaded on November
18,1946, was known. At any rate, Abeto and Flores admit in, their brief (p.14) that the
contract did not obligate the appellee to secure the payment of the purchase price.
Abeto and Flores, on the other hand, contend that they were excused from delivering copra
on November 18. 1946, because the appellee was insolvent, in that part of the purchase

price of the 159,834 kilos of copra delivered to the appellee remained unpaid, reliance being
placed on Articles 1466 and 1467 of the old Civil Code. The contention is untenable, it
appearing that there is no conclusive proof showing that Abeto and Flores, in definite terms,
had warned the appellee that they would not deliver the copra called for in their contract
until they were sure of being paid in accordance with said contract. Moreover, even
assuming that the appellee still owed Abeto and Flores something upon account of the
159,834 kilos of copra delivered before November 18, 1946, said fact is not a positive
evidence of insolvency,1 and to mention the circumstance that the contract is essentially a
cash transaction, 95 per cent of the purchase price being required to be paid in cash and
only 5 percent by an irrevocable letter of credit. Of course, the appellee was not to be
expected to tender payment before the presentation of the documents called for in the
contract, namely, commercial invoice, on board bills of lading, and wage certificate and/or
survey report.
The Surety also claims that it was released from liability under its bond because Abeto and
Flores and the appellee novated their contract of November 9, 1946, without the consent of
the Surety. In the main, the Surety alleges that the appellee advanced P10,00 to Abeto and
Flores before the inspection of copra, and thereafter made another advance payment of
P3,000, in addition to the fact that the manner of payment was changed from a letter of
credit to cash, and that 26,875 empty sacks were delivered to Abeto and Flores instead of
only 15,000 as stipulated in the contract. With reference to the payment of P10,000, it
appears that the same was made with the knowledge of the Surety, as shown by Exhibit A
which contains a recital added in the handwriting of Andres U. Cang, Treasurer and General
Manager of the appellee, worded as follows:
N.B.
With due agreement of Rizal Investment Corp., it is agreed that upon delivery
of thirty thousand pesos(P30,000) BOND, the P10,000 cash will be delivered to Mr. M.
Flores of the Rizal Investment Corp.
(Sgd.) A.U.C.
It is noteworthy that a duplicate copy of Exhibit A (Exhibit D-1), attached to the bond Exhibit
D and referred to therein as forming part thereof, contains said recital and bears the dry seal
of the Surety, initialed by one of its officials.
As to the advance payment of P3,000, suffice it to state that said payment could not
adversely affect the position of the Surety or render the obligation more onerous, and
therefore could not have the effect of releasing the bond (Bank of the Philippine Islands vs.
Albaladejo y Cia, 53 Phil. 141; Bank of the Philippine Island vs. Gooch and Redfern, 45 Phil.,
514).
In respect of the 26,875 empty sacks, it may be pointed out that although the contract
bound the appellee to furnish Abeto and Flores with only 15,000 sacks, the excess could
likewise have no adverse effect insofar as the Surety was concerned, it appearing that the
Surety is not being charged with the value of such excess intended to be used by the
appellee for any proper purpose. Indeed, the liability of the Surety under the bond is limited
to P30,000, easily covered by the first advance payment of P10,000 and the value of 15,000
empty copra sacks, at the proven price of P1.50 per sack.
The allegation that the manner of payment of the purchase price was altered, is patently
without merit, since as already hereinbefore noted, the payment under the contract of
November 9, 1946, was essentially in cash, and the letter of credit could not be assigned to

Abeto and Flores without first determining the amount of copra to be loaded on the
appellee's vessel on November 18, 1946.
As to the amount of damages awarded by the lower court, there seems to be no room for
controversy, the sum of P150,000 has been positively established by the testimony of Peter
Cang Hocho, as profits which the appellee lost as a result of the breach of contract on the
part of Abeto and Flores. The evidence for the appellee to the effect that there was already a
contract of sale for the entire amount of copra which Abeto and Flores covenanted to deliver
to the appellee under the contract of November 9, 1946, which would give the appellee such
profits, remains uncontradicted in the record. On the other hand, the receipt by Abeto and
Flores, thru their representatives Ignacio B. Lizo and Isaias Ruiz, of the 23,957 empty copra
sacks, is conclusively shown by Exhibits 1 and E-2, in addition to the bills of lading covering
the shipment of said sacks (Exhibits L and M) admitted by Abeto and Flores.
It is contended for Abeto and Flores that their liability for damages, if any, is limited to the
sum of P30,000 fixed in the Surety bond. This contention is patently without merit, because
while the bond was intended to secure the full and faithful performance by Abeto and Flores
of their obligations under the contract of November 9, 1946, the amount of P30,000
specified in the bond did not limit the extent of the damages to be recovered by the
appellee in case of breach on the part of Abeto and Flores. However, the liability of the
surety is limited to said amount.
Wherefore, the appealed judgment is affirmed, and it is so ordered with costs against the
appellants.
Pablo, Bengzon, Padilla, Montemayor, Jugo, Bautista Angelo and Labrador, JJ., concur.

Footnotes
1

The insolvency referred to by the law may be before or after the sale, provided it is
discovered after the perfection of the contract. It must be a judicially declared
insolvency, or one inferred from such acts as petitioning for suspension of payments,
or as a result of all his properties having been attached in a civil or criminal
proceeding. Anything short of this will not be sufficient to exempt the vendor from
making the delivery of the thing (Tolentino, Commentaries and Jurisprudence on the
Civil Code, 1947, Vol. II, p. 862, citing Manresa, pp. 140-142.).
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
September 10, 1908

G.R. No. 4465

MARCELA ALVARAN, plaintiff-appellee,
vs.
BERNARDO MARQUEZ, defendant-appellant.
F. Manalo for appellant.
B. G. Zoboli for appellee.
TORRES, J.:
On the 5th of March, 1906, Marcela Alvaran, the wife of Isabelo Reyes, filed a written
complaint while the court of First Instance of La Laguna, stating that her husband had no
interest, nor could he have any right in the matter that she brought before the court of the
attachment of a parcel of land that was exclusively and absolutely her property. The said
land is situated in the barrio of San Gregorio, pueblo of San Pablo, and is bounded on the
north by the property to the barrio of Santa Maria; on the south by the properties of
Mamerto Evangelista, Tranquilino Gapuno, and Rufino Calabia; and on the west, by the
properties of Maria Nieves Calabia and Leoncia Evangelista.
The said parcel of land was attached by the municipal sheriff on the 17th of February, 1906,
at the request of Bernardo Marquez, as being the property of the said Marcela's husband, in
the conformity with the judgment entered against the latter in an oral action brought by said
Marquez against Reyes, in the court of the justice of the peace, for the recovery of a certain
sum of money. the creditor, Marquez, insisted upon maintaining the attachment, and
furnished the necessary bond in accordance with the provision of section 451 of Act No. 190,
notwithstanding the claim made by the plaintiff, and the fact that her title was entered in
the registry of property in accordance with Act No, 496; therefore, she asked that judgment
be rendered ordering the defendant to recognize the plaintiff as the sole owner of the land in
question; that the attachment thereof be annulled, and that the defendant be sentenced to
indemnify her for damages incurred and the costs of the proceedings, together with any
other remedy that might be considered just and equitable.
The defendant, Bernardo Marquez, on the 29th of March, 1906, answered the complaint, and
denied all and each of the facts stated in the same in so far as they did not agree with those

in the answer; that in the execution of the judgment entered against Isabelo Reyes, the
plaintiff's husband, the sheriff of San Pablo had not levied upon the property described in the
complaint, and which does not belong to the plaintiff, since the land attached is situated in
the barrio of San Gregorio, municipality of San Pablo, and is planted with 300 cocoanut trees,
all of which bear more or less fruit, and the boundaries of which are; On the north, the lands
of Damiana Briones and Lucio Evangelista; on the east the "Vecinal" street of said barrio; on
the west of the land of Leon Briones, and on the south of the lands of Mamreto Evangelista
and Tranquilino Gapuno; that the land attached was the property of Isabelo Reyes, who was
in the possession and enjoyment thereof; that the execution and attachment was limited to
the property of Isabelo Reyes by virtue of the obligation contracted by him while united in
marriage to the plaintiff; that the plaintiff was cognizant of said obligation; that at the time
her husband contracted it the plaintiff intervened and verbally guaranteed the solvency of
her husband, and assured creditor that her husband was the owner of the said land with 300
cocoanut trees; that, owing to the fact that the complaint does not set forth the title of the
dominion alleged by the plaintiff, the same does not contain facts sufficient to constitute a
costs of action, depriving the defendant of the power to answer and refute the supposed title
of dominion. therefore prayed that the complaint be dismissed with costs.
Evidence have been adduced by both parties, their exhibits were made of record. On the
22d of March, 1907, judgment was rendered by the court below annulling the attachment
and the adjudication of the land in controversy to the defendant, Bernardo Marquez, and
sentencing the latter to return the said land described in the complaint to its owner, the
plaintiff Marcela Alvaran, to pay the latter P90, received for 4,500 cocoanuts, when the costs
of the proceedings.
The defendant excepted to the above judgment and moved for a new trial; the motion was
overruled for the 30th of April, 1907, and it does not appears that the petitioner excepted
thereto.
Before dealing in this decision with the main points in controversy, and should be stated that
as to the form the petitioner has not excepted to the order of the 30th of April, 1907,
overruling the motion for the new trial, this court can not review the evidence nor examined
the findings of the court below to see if they are in accordance with the law and the merits
of the case; it must limit itself to deciding only the questions of law referred to in appeal of

exceptions, contained in the assignment of errors set out in the appellant's proof. (Sec. 497
of Act No. 190 as amended by Act No. 1596 .)
It is fully proven that the land in question is owned exclusively by the plaintiff, Marcela
Alvaran, as duly shown by the title issued by the Court of Land Registration, and produced in
due course in this litigation. The plaintiff was in possession thereof for fifteen years prior to
the time when it was claimed: that is, since she inherited it from her mother, Maria Banayo,
she being then already married to her present husband, Isabelo Reyes.
Under these circumstances it is understood at once that the matter at issue refers to the
property of the right, acquired by her during marriage, and brought into the conjugal
partnership apart from the dowry and without being included therein. Said inheritance is
included among the property that the law classifies as paraphernal. (Arts. 1381, 1396, No. 2
Civil Code.) Article 1823 of the Civil Code reads:
The wife retains the ownership of the paraphernal property.
So that, according to the provisions of article 1834 of the said code, even if the land in
question was administered by Isabelo Reyes, his wife, Alvaran, has not lost her right of
dominion thereto, no can it be attached for a debt contracted by her husband at the
instance of a creditor of the latter.
The doctrine has been established in a decision of the case of Lopez Villanueva vs. Alvarez
Perez et al., (9 Phil. Rep., 28) and it is a settled rule that it is a legal condition n attachments
of all kinds that the thing attached must be the property of the debtor, and from no provision
of the Mortgage Law can a conclusion be derived contrary to such principle.
If the aforesaid estate was not the property of Reyes, the husband, but of his wife, the
plaintiff, as concluded by the court below in view of the evidence, in no manner could the
same have been attached at the request of Bernardo, nor adjudicated to him, inasmuch as
no legal reason existed whereby the plaintiff was obliged to make him any payment or loan;
therefore, the proceedings from which it resulted that the plaintiff was unjustly deprived of
her property on account of a debt for which she was not responsible are entirely null and
void.

Inasmuch as in the case at bar no question has been set up relative to the nature and
destination of the fruits obtained from the said land, nor in connection with the kind and the
conditions of the indebtedness of Isabelo Reyes to the defendant Marquez, it is our opinion
that we are not permitted to decide points of law defined by articles 1385 and 1386 of the
Civil Code outside or beyond what has been decided in the judgment appealed from with
respect to the value of the cocoanuts harvested by the defendant,
Section 20 of the Rules of this Court provides that
No error not affecting the jurisdiction over the subject matter will be considered unless
stated in the assignment of errors and relied upon the brief.
The defendant alleges that the plaintiff stood as surety for her husband, but, as the
judgment appealed from rightly states, there is no evidence on record that such a bond,
which would be an actual contract, was ever undertaken, and without the consent of the
party supposed to be bound thereby its existence can not be conceived. Moreover under
article 1827 of the code security is not presumed; it must be expressed, and can not be
interfered or presumed because of the existence of a contract or principal obligations. From
mere presumption it is not possible to establish contractual relations and liens which
presuppose a willingness to buy oneself. This requisite is not present in the case at bar, since
it does not appear that Marcela Alvaran had voluntarily guaranteed the solvency of her
husband, and therefore the attachment proceedings, the sale and adjudication of said land
to the defendant, in payment of a debt to which the owner of the land is in no manner liable,
are notoriously contrary to law.
For the above reasons, and accepting the conclusions contained in the judgment appealed
from, it is our opinion that the same should be affirmed with the costs against the appellant.
So ordered.
Arellano, C.J, Mapa, Carson, Willard and Tracey, JJ., concur.
Republic of the Philippines
SUPREME COURT
Manila
EN BANC

G.R. No. L-23181

March 16, 1925

THE BANK OF THE PHILIPPINE ISLANDS, plaintiff-appellee,

vs.
GABRIELA ANDREA DE COSTER Y ROXAS, ET AL., defendants.
LA ORDEN DE DOMINICOS or PP. PREDICADORES DE LA PROVINCIA DEL SANTISIMO
ROSARIO,defendants-appellees;
GABRIELA ANDREA DE COSTER Y ROXAS, defendant-appellant.
Antonio M. Opisso for appellant.
Araneta and Zaragoza for the bank as appellee.
Perfecto Gabriel for the Dominican Corporation as appellee.
STATEMENT
March 10, 1924, the plaintiff filed a complaint in which it was alleged that it was a domestic
banking corporation with its principal office and place of business in the City of Manila; that
the defendant Gabriela Andrea de Coster y Roxas was the wife of the defendant Jean M.
Poizat, both of whom were residents of the City of Manila; that the defendant J. M. Poizat and
Co. was a duly registered partnership with its principal office and place of business in the
City of Manila; that the defendant La Orden de Dominicos or PP. Predicadores de la Provincia
del Santisimo Rosario was a religious corporation duly organized and existing under the laws
of the Philippine Islands with its principal office and place of business in the City of Manila;
that on December 29, 1921, for value, the defendant Gabriela Andrea de Coster y Roxas,
having the consent and permission of her husband, and he acting as her agent, said
defendants made to the plaintiff a certain promissory note for P292,000, payable one year
after date, with interest of 9 per cent per annum, payable monthly, in which, among other
things, it is provided that in the event of a suit or action, the defendants should pay the
further sum of P10,000, as attorney's fees; that the note in question was a joint and several
note; that to secure the payment thereof, the defendants Jean M. Poizat and J. M. Poizat and
Co. executed a chattel mortgage to the plaintiff on the steamers Roger Poizat and Gabrielle
Poizat, with the machinery and materials belonging to the Poizat Vegetable Oil Mills and
certain merchandise; that at the same time and for the same purpose, the defendant
Gabriela Andrea de Coster y Roxas, having the consent and permission of her husband, and
he acting as her agent, they acknowledged and delivered to this plaintiff a mortgage on
certain real property lying and being situated in the City of Manila, which is specifically
described in the mortgage; that the real property was subject to a prior mortgage in favor of
La Orden de Dominicos or PP. Predicadores de la Provincia del Santisimo Rosario, hence it is
made a party defendant; that the note in question is long past due and owing. The plaintiff
having brought action against the defendants on the note in the Court of First Instance of
the City of Manila, civil case No. 25218; that in such case the court rendered judgment
against the defendants Gabriela Andrea de Coster y Roxas, Jean M. Poizat and J. M. Poizat
and Co. jointly and severally for P292,000, with interest at the rate of 9 per cent per annum
from the 31st of August, 1923, P10,000 as attorney's fees, and P2,500 for and in account of
insurance upon the steamer Gabrielle Poizat, with interest on that amount from February 9,
1924, at the rate of 9 per cent per annum, and costs; that the said defendants have not paid
the judgment or any part thereof, and that the full amount of the debt secured by the
mortgaged on the property described in the complaint is now due and owing. Wherefore,
plaintiff prays for an order of the court to direct the sheriff of the City of Manila to take
immediate possession of the property described in the chattel mortgage and sell the same
according to the Chattel Mortgage Law; that the property described in the real mortgage or

so much thereof as may be required to pay the amount due the plaintiff be sold according to
law; that out of such sales plaintiff shall be paid the amount due and owing it; and that such
defendants be adjudged to pay any remaining deficiency.
Copies of the chattel and real mortgage are attached to, and made a part of, the complaint
and marked, respectively, Exhibits A and B.
On April 24, 1924, the La Orden de Dominicos or PP. Predicadores de la Provincia del
Santisimo Rosario appeared in the suit and filed the following plea:
The defendant corporation, La Orden de Dominicos or PP. Predicadores de la Provincia
del Santisimo Rosario, for answer to the complaint, shows:
I. That the encumbrance above-mentioned, but not determined in paragraph V of the
complaint, consisting of a first mortgage in favor of the aforesaid religious
corporation on the property described in paragraph IV of the same complaint is
P125,000 with interest of 10 per cent per annum;
II. That the mortgagors Jean M. Poizat and Gabriela Andrea de Coster y Roxas, have
not paid the principal or the interest stipulated and agreed upon from the 16th of
December, 1921 up to the present date;
III. The interest due up to the 30th of April of the present year 1924 amounts to a
total sum of P27,925.34.
Wherefore, it is prayed that the credit above-mentioned be taken into account when
the second mortgage is foreclosed.
May 3, 1924, on motion of the plaintiff, for failure to appear or answer, the defendants
Gabriela Andrea de Coster y Roxas and Jean M. Poizat and J.M. Poizat & Co. were declared in
default.
Without giving any notice of the defendants Jean M. Poizat, J.M. Poizat & Co. and Gabriela
Andrea de Coster y Roxas, and after the introduction of evidence on the part of the plaintiff
and the defendant Dominican Fathers, on June 24, 1924, the court rendered an opinion in
substance and to the effect that the plaintiff should have judgment as prayed for in its
complaint, and that the Dominican Fathers should have judgment for the amount of their
claim, and that the property should be sold and the proceeds applied to satisfy the
respective judgments.
About August 26, although her attorney, the defendant Gabriela Andrea de Coster y Roxas
filed a motion in which she recites that she is the legitimate wife of the defendant Jean M.
Poizat; that she had been absent from the Philippine Islands and residing in the City of Paris
from the year 1908 to April 30, 1924, when she returned to Manila; that at that time of the
filing of the complaint and the issuance of the summons, she was absent from the Philippine
Islands; that the summons was delivered by the sheriff of the City of Manila to her husband,
and that through his malicious negligence, default was taken and judgment entered for the
respective amounts; that she never had any knowledge of the actual facts until the latter
part of July, 1924, when, through the local newspapers, she learned that a default judgment
had been rendered against her on July 28, 1924; that when she first knew of that fact, she

was unable to obtain the rendition of accounts, because her husband had left the Philippine
Islands two days previous and gone to Hongkong; that she then went to Hongkong and
learned that her husband had left there under a false name and had gone to the port of
Singapore from whence he went to other places unknown to thus defendant; that she then
returned to Manila, and that in August, 1924, she came into possession of documents
showing the illegally of the notes and mortgage in question; that she has a good and legal
defense to the action, which involves the validity of the order of the Dominican Fathers in
this, that their mortgage does not guarantee any loan made to this defendant; that it is a
security only given for a credit of a third person; that the mortgage was executed without
the marital consent of the wife; and that he did not have nay authority to make her liable as
surety on the debt of a third person; that as regards the notes to the plaintiff: First, it does
not represent any money paid to the defendant by the bank; second, that it is exclusively
the personal debt of the defendants Jean M. Poizat and J.M. Poizat & Co., third, that it was
executed by her husband, because the bank desired more security for the payment of her
husband's debt to the bank; fourth, that it was executed by her husband in excess of the
powers given to him under his power of attorney; fifth, that it was executed as the result of
collusion between the bank and the defendant liable for the obligation of a third person.
That as to the mortgage: First, it was executed to secure a void obligation; second, it does
not guarantee any loan made to this defendant; third, it was executed to secure a void
litigation; second, it does not guarantee any loan made to third defendant; third, it was
executed without the express marital consent which the law requires; fourth, it was executed
through collusion. That if the judgment is not set aside, the defendant will suffer irreparable
injury; that through surprise and negligence, for which she was not responsible, this
defendant was prevented from defending herself in this action; that this is a case which
comes under section 113 of the Code of Civil Procedure. She prays that the judgment
annulled and set aside and the case be reopened, and that she be permitted to file an
answer, and that the case be tried on its merits, and that a final judgment be rendered,
absolving her from all liability.
The motion was based upon, and supported by, the affidavit of the defendant wife, to which
was attached a large number of exhibits all of which tended to support the motion.
After counter showings by the bank and the Dominican Fathers and the arguments of
respective counsel, the motion to set aside and vacate the judgment was denied. A motion
for a reconsideration was then made, and the motion of the defendant to file an answer and
make a defense was again denied. The defendant Gabriela Andrea de Coster y Roxas
appeals, assigning the following errors;
PART I
AS TO THE JURISDICTION
I. The lower court erred in holding that it had acquired jurisdiction on the defendant
Gabriela Andrea de Coster y Roxas,
(1) There having been no service of the summons on her in the manner
required by section 396 of the Code of Civil Procedure, she being absent from
the Philippine Islands at the time of the filing of the complaint and of the
issuance of the summons in this case, and a resident of Paris, France, where
she had lived permanently and continuously for fifteen years prior thereof,
and

(2) There having been no se rive by publication in the manner required by

section 398 of the Code of Civil Procedure.
II. The lower court erred in considering that in a case where the wife is the only
necessary party, service of the summons on the husband, at a place which is not "the
usual place of residence" of the wife and where the wife has never lived or resided, is
sufficient to give the court jurisdiction on the person and property of the wife and to
render judgment by default against her.
III. The court erred in admitting and considering evidence, outside of the sheriff's
return, of the fact that the husband of the defendant Gabriela Andrea de Coster y
Roxas was her attorney in fact with power to appear for the defendant in court.
IV. The court erred in holding that the non-appearance of an agent of the defendant
when service of the summons has been made on him not as the agent of the
defendant but in other capacity, will entitle the plaintiff who has misstated the
material jurisdictional facts of the complaint to a judgment by default against the
principal.
V. The lower court erred in refusing to vacate a judgment by default against the
defendant Gabriela Andrea de Coster y Roxas rendered on a defective summons,
served in a manner not provided for by the law, and in a case where the complaint
shows that plaintiff has no right of action.
PART II
AS TO THE MERITS OF THE DEFENSE
I. The lower court erred, with abuse of discretion, in holding that the negligence, if
any, of J.M. Poizat in not appearing on behalf of the defendant Gabriela Andrea de
Coster y Roxas, can be imputed to this defendant, without redress, and to the
advantage of the plaintiff bank who in collusion with said J.M. Poizat caused the latter
to contract beyond the scope of his powers as agent of this defendant the obligation
which is the subject matter of this case.
II. The lower court erred in holding that the relief on the part of J.M. Poizat that there
was no defense against the claim of the plaintiff on an obligation contracted by said
J.M. Poizat apparently as agent of the defendant Gabriela Andrea de Coster y Roxas,
but in truth beyond the scope of his authority, and with knowledge on the part of the
plaintiff bank that he was so acting beyond his powers, was such an error was can be
imputed to this defendant, and against which she can obtain no redress.
III. The lower court erred in not holding that a principal is not liable for an obligation
contracted by his agent beyond his power even when both the creditor and the agent
believed that the latter was acting within the scope of his powers.
IV. The lower court erred in holding that because the agent of the defendant Gabriela
Andrea de Coster y Roxas had power to appear for her in court, his non-appearance
could render this defendant liable to a judgment by default, when the record shows
that there was no service of the summons in accordance with any of the forms of
service provided by law.

V. The lower court erred in holding that J.M. Poizat was summoned as agent of hi wife,
the defendant Gabriela Andrea de Coster y Roxas, and was, in that capacity, notified
of all the decisions rendered in this case, there being nothing in the record to support
the truth of such finding.
VI. The lower court erred in holding that in contracting the obligations in favor of the
plaintiff Bank of the Philippine Islands and of the defendant Orden de PP. Predicadores
de la Provincia del Santisimo Rosario, the agent of the defendant Gabriela Andrea de
Coster y Roxas acted within the scope of his powers.
VII. The lower court erred in not holding that the plaintiff Bank of the Philippine
Islands and the defendant Orden de PP. Predicadores de la Provincia del Santisimo
Rosario had knowledge of the fact that J.M. Poizat in contracting the respective
obligations in their favor, pretending to act as agent of the defendant Gabriela
Andrea de Coster y Roxas, was acting beyond the scope of his powers as such agent.
VIII. The lower court erred in making the following statement:
"It is however alleged, by the petitioner, that these loans were obtained to pay
debts, of strangers. Even so, this would not render the loan obtained by the
attorney in fact null and void. The circumstance that the agent used the
money, borrowed by him within the scope of his powers, to purposes for which
he was not authorized by his principal, may entitle the latter to demand from
him the corresponding liability for the damages suffered, but it cannot
prejudice the creditor and cause the nullity of the loan. But, even admitting
that the money borrowed was used by Poizat to pay debts which did not
belong to his principal, even then, he would have acted within his powers,
since his principal, together with the power to borrow money, had given her
agent power to loan any amount of money, and the payment of the debts of a
stranger would amount to a loan made by the agent on behalf of his principal
to the person or entity whose debt was paid with the money obtained from
the creditors."
IX. The lower court erred in applying to this case the principle involved in the case of
Palanca vs. Smith, Bell and Co., 9 Phil., 131.
X. The court erred in supplying from its own imagination facts which did not take
place, of which there is no evidence in the record, and which the parties never
claimed to have existed, and then draw the conclusion that if under those
hypothetical facts the transaction between J.M. Poizat and the Bank of the Philippine
Islands might have been legal, then the transaction as it actually took place was also
legal.
XI. The lower court erred in holding that defendant has not alleged any of the
grounds enumerated in section 113 of the Code of Civil Procedure.
XII. The lower court erred in holding that this defendant-appellant has no meritorious
defense against the Dominican Order and the Bank of the Philippine Islands.

XIII. The lower court erred in taking into consideration Exhibit A appearing at pages
156-165 of the bill of exceptions.
XIV. The lower court erred in denying the motion filed by this defendant-appellant.
XV. The lower court has acted throughout these proceedings with a clear abuse of
discretion.

JOHNS, J.:
We will decide the case of the bank first
The petition of the appellant states under oath:
II. That this defendant has been absent from the Philippine Islands and residing in the
City of Paris, France, since the year 1908 (1909), up to April 30, 1924, on which date
she arrived in this City of Manila, Philippine Islands.
III. That at the time when the complaint in this case was filed and the summons
issued, she was still absent from the Philippine Islands and had no knowledge either
of the filing of this action or of the facts which led to it.
Under oath the plaintiff, through its acting president, says:
I-II. That it admits the allegations contained in paragraphs I and II of the aforesaid
motion.
III. That it admits the first part of this paragraph, to wit: That at the time that the
complaint in the above entitled case was filed, the defendant Gabriela Andrea de
Coster y Roxas was absent from the Philippine Islands.
Paragraph 6 of section 396 of the Code of Civil Procedure provides:
In all other cases, to the defendant personally, or by leaving a copy at his usual place
of residence, in the hands of some person resident therein of sufficient discretion to
receive the same. But service upon a corporation, as provided in subsections one and
two, may be made by leaving the copy at the office of the proper officer thereof if
such officer cannot be found.
The return of the sheriff as to the service is as follows:
On this date I have served a copy of the within summons, and of the complaint
attached, upon Jean M. Poizat, personally, and the copies corresponding to J.M. Poizat
and Co., a company duly organized under the laws of the Philippine Islands, by
delivering said copies to its President Mr. Jean M. Poizat, personally, and the copies
corresponding to Gabriela Andrea de Coster y Roxas, by leaving the same in the
place of her usual residence in the City of Manila and in the hands of her husband,

Mr. J.M. Poizat, a person residing therein and of sufficient discretion to receive it,
personally.
Done at Manila, P.I., this 13th day of March, 1924.
RICARDO SUMMERS
Sherif of Manila
By GREGORIO GARCIA
I hereby certify that on this date I have delivered a copy of this summons and of the
complaint corresponding to the "La Orden de Dominicos or PP. Predicadores de la
Provincia del Santisimo Rosario," through Father Pedro Pratt, Procurador General of
said Orden de Dominicos or PP. Predicadores de la Provincia del Santisimo Rosario,
personally.
Manila, P.I., April 1, 1924.
RICARDO SUMMERS
Sherif of Manila
By SIMEON D. SERDEA
It will be noted that the service of summons and complaint was made on this defendant on
the 13th day of March, 1924, and that it is a stipulated fact that since the year 1908 and up
to April 30, 1924, she was "residing in the City of Paris, France." Even so, it is contended that
the service was valid by reason of the fact that it was made at the usual place of residence
and abode of the defendant husband, and that legally the residence of the wife is that of the
husband. That contention is in direct conflict with the admission of the plaintiff that since the
year 1908 and up to April 30, 1924, the wife was residing in the City of Paris. The residence
of the wife in the City of Paris covered a period of sixteen years.
It may be that where in the ordinary course of business the wife is absent from the residence
of husband on a pleasure trip or for business reasons or to visit friends or relatives that, in
the nature of such things, the residence of the wife would continue and remain to be that of
the husband. That is not this case. For sixteen years the residence of the husband was in the
City of Manila, and the residence of the wife was in the City of Paris.
Upon the admitted facts, we are clearly of the opinion that the residence of the husband was
not the usual place of residence of the wife. Giving full force and effect to the legal
presumption that the usual place of residence of the wife is that of her husband, that
presumption is overcome by the admitted fact that the wife was "residing in the City of Paris,
France, since the year 1908 up to April 30, 1924."
Without placing a limitation upon the length of time sufficient to overcome the legal
presumption, suffice it to say that sixteen years is amply sufficient.
It follows that the substituted service attempted to be made under the provisions of section
396 of the Code of Civil Procedure is null and void, and that by such service the court never
acquired jurisdiction of the person of the defendant wife. In that event the plaintiff contends
that under his power of attorney, the husband was the general agent of the wife with
authority to accept service of process for her and in her name, and that by reason of the fact

that the husband was duly served and that he failed or neglected to appear or answer, his
actions and conduct were binding on the defendant wife. Be that as it may, there is nothing
in the record tending to show that the husband accepted service of any process for or on
account of his wife or as her agent, or that he was acting for or representing her in his failure
and neglect to appear or answer.
The first appearance in court of the defendant wife was made when she filed the motion of
August 26, 1924, in which she prays in legal effect that the judgment against her be
annulled and set aside and the case reopened, and that she be permitted to file an answer
and to have the case tried on its merits. That was a general appearance as distinguished
from a special appearance. When she filed that motion asking to be relieved from the legal
force and effect of the judgment, she submitted herself to the jurisdiction of the court. If, in
the first instance, she had made a special appearance to question only the jurisdiction of the
court, and had not appeared for any other or different purpose, another and a different
question would have been presented. Having made a general appearance for one purpose,
she is now in court for all purposes.
It is an elementary rule of law that as a condition precedent, to entitle a party to relief from
a judgment "taken against him through his mistake, inadvertence, surprise or excusable
neglect," that, among other things, he must show to the court that he has a meritorious
defense. Based upon that legal principle the bank contends that no such a showing has been
made by the defendant wife. That involves the legal construction of the power of attorney
which, it is admitted, the wife gave to her husband on August 25, 1903, which, among other
things material to this opinion, recites that she gave to him:
Such full and ample power as required or necessary, to the end that he may perform
on my behalf, and in my name and availing himself of all my rights and actions, the
following acts:
5. Loan or borrow any sums of money or fungible things at the rate of interest and for
the time and under the conditions which he might deem convenient, collecting or
paying the capital or the interest on their respective due dates; executing and signing
the corresponding public or private documents related thereto, and making all these
transactions with or without mortgages, pledges or personal guaranty.
6. Enter into any kind of contracts whether civil or mercantile, giving due form
thereof either by private documents or public deeds with all clauses and requisites
provided by law for their validity and effect, having due regard to the nature of each
contract.
7. Draw, endorse, accept, issue and negotiate any drafts, bills of exchange, letters of
credit, letters of payment, bills, vales, promissory notes and all kinds of documents
representative of value; paying or collecting the value thereof on their respective due
dates, or protesting them for non-acceptance or non-payment, utilizing in this case
the rights granted by the Code of Commerce now in force, in order to collect the
value thereof, interests, expenses and damages against whomsoever should be liable
therefor.
8. Institute before the competent courts the corresponding action in justification of
the possession which I have or might have over any real estate, filing the necessary

pleadings, evidencing them by means of documentary or oral testimony admissible

by law; accepting notices and summons, and instituting all necessary proceedings for
the termination thereof and the consequent inscription of said action in the
corresponding office of the Register of Deeds, in the same manner in which I might
do if personally present and acting.
9. Represent me in all cases before the municipal courts, justice of the peace courts,
courts of first instance, supreme court and all other courts of regular or any other
special jurisdiction, appearing before them in any civil or criminal proceedings,
instituting and filing criminal and ordinary civil actions, claims in intestate and
testamentary proceedings, insolvencies and other actions provided by law; filing
complaints, answers, counterclaims, cross complaints, criminal complaints and such
other pleadings as might be necessary; filing demurrers, taking and offering judicial
admissions, documentary, expert, oral evidence, and others provided by law,
objecting to and opposing whatever contrary actions are taken, offered and
presented; accepting notices, citations and summons and acknowledging their
receipt to the proper judicial officials.
10. For to the end stated above and the incidents related thereto, I confer on him
ample and complete power, binding myself in the most solemn manner as required
by law to recognize as existing and valid all that he might do by virtue hereof.
It is admitted that on December 29, 1921, the defendant husband signed the name of the
defendant wife to the promissory note in question, and that to secure the payment of the
note, upon the same date and as attorney in fact for his wife, the husband signed the real
mortgage in question in favor of the bank, and that the mortgage was duly executed.
Based upon such admissions, the bank vigorously contends that the defendant wife has not
shown a meritorious defense. In fact that it appears from her own showing that she does not
have a legal defense. It must be admitted that upon the face of the instruments, that fact
appears to be true. To meet that contention, the defendant wife points out, first, that the
note in question is a joint and several note, and, second, that it appears from the evidence,
which she submitted, that she is nothing more than an accommodation maker of the note.
She also submits evidence which tends to show:
First. That prior to July 25, 1921, Jean M. Poizat was personally indebted to the Bank
of the Philippine Islands in the sum of P290,050.02 (Exhibit H, page 66, bill of
exceptions);
Second. That on July 25, 1921, the personal indebtedness of Jean M. Poizat was
converted into six promissory notes aggregating the sum of P308,458.58 of which
P16,180 were paid, leaving an outstanding balance of P292,278.58 (Exhibits D, E, F,
G, H and I, pages 75-80, bill of exceptions);
Third. That on December 29, 1921, the above promissory notes were cancelled and
substituted by a joint and several note signed by Jean M. Poizat in his personal
capacity and as agent of Gabriela Andrea de Coster y Roxas and as member of the
firm J.M. Poizat and Co.

In other words, that under the power of attorney, the husband had no authority for and on
behalf of the wife to execute a joint and several note or to make her liable as an
accommodation maker. That the debt in question was a preexisting debt of her husband and
of the firm of J.M. Poizat and Co., to which she was not a party, and for which she was under
no legal obligation to pay. That she never borrowed any money from the bank, and that
previous to the signing of the note, she never had any dealings with the bank and was not
indebted to the bank in any amount. That the old, original debts of her husband and J.M.
Poizat and Co. to the bank, to which she was not a party, were all taken up and merged in
the new note of December 29, 1921, in question, and that at the time the note was signed,
she did not borrow any money, and that no money was loaned by the bank to the makers of
the note.
Assuming such facts to be true, it would be a valid defense by the defendant wife to the
payment of the note. There is no claim or pretense that the bank was misled or deceived. If
it had made an actual loan of P292,000 at the time the note was executed, another and a
different question would be presented. In the ordinary course of its business, the bank knew
that not a dollar was loaned or borrowed on the strength of the note. It was given at the
urgent and pressing demand of the bank to obtain security for the six different notes which
it held against J.M. Poizat and Co. and Jean M. Poizat of date July 25, 1921, aggregating
about P292,000, and at the time it was given, those notes were taken up and merged in the
note of December 29, 1921, now in question. Upon the record before us, there is no
evidence that the defendant wife was a party to the notes of July 25, 1921, or that she was
under any legal liability to pay them.
The note and mortgage in question show upon their face that at the time they were
executed, the husband was attorney in fact for the defendant wife, and the bank knew or
should have known the nature and extent of his authority and the limitations upon his
power.
You will search the terms and provisions of the power of attorney in vain to find any
authority for the husband to make his wife liable as a surety for the payment of the
preexisting debt of a third person.
Paragraph 5 of the power of attorney above quoted authorizes the husband for in the name
of his wife to "loan or borrow any sums of money or fungible things, etc." This should be
construed to mean that the husband had power only to loan his wife's money and to borrow
money for or on account of his wife as her agent and attorney in fact. That does not carry
with it or imply that he had the legal right to make his wife liable as a surety for the
preexisting debt of a third person.
Paragraph 6 authorizes him to "enter into any kind of contracts whether civil or mercantile,
giving due form thereof either by private documents or public deeds, etc."
Paragraph 7 authorizes him to "draw, endorse, accept, issue and negotiate any drafts, bills
of exchange, letters of credit, letters of payment, bills, vales, promissory notes, etc."
The foregoing are the clauses in the power of attorney upon which the bank relies for the
authority of the husband to execute promissory notes for and on behalf of his wife and as
her agent.

It will be noted that there is no provision in either of them which authorizes or empowers
him to sign anything or to do anything which would make his wife liable as a surety for a
preexisting debt.
It is fundamental rule of construction that where in an instrument powers and duties are
specified and defined, that all of such powers and duties are limited and confined to those
which are specified and defined, and that all other powers and duties are excluded.
Paragraph 8 of the power of attorney authorizes the husband to institute, prosecute and
defend all actions or proceedings in a court of justice, including "accepting notices and
summons."
There is nothing in the record tending to show that the husband accepted the service of any
notice or summons in the action on behalf of the bank, and even so, if he had, it would not
be a defense to open up and vacate a judgment under section 113 of the Code of Civil
Procedure. The same thing is true as to paragraph 9 of the power of attorney.
The fact that an agent failed and neglected to perform his duties and to represent the
interests of his principal is not a bar to the principal obtaining legal relief for the negligence
of her agent, provided that the application for such a relief is duly and properly made under
the provisions of section 113.
It is very apparent from the face of the instrument that the whole purpose and intent of the
power of attorney was to empower and authorize the husband to look after and protect the
interests of the wife and for her and in her name to transact any and all of her business. But
nowhere does it provide or authorize him to make her liable as a surety for the payment of
the preexisting debt of a third person.
Hence, it follows that the husband was not authorized or empowered to sign the note in
question for and on behalf of the wife as her act and deed, and that as to her the note is
void for want of power of her husband to execute it.
The same thing is true as to the real mortgage to the bank. It was given to secure the note
in question and was not given for any other purpose. The real property described in the
mortgage to the bank was and is the property of the wife. The note being void as to her, it
follows that as to her the real mortgage to the bank is also void for want of power to execute
it.
It appears that before the motion in question was filed, there were certain negotiations
between the bank and the attorney for the wife with a view of a compromise or settlement
of the bank's claim against her, and that during such negotiations, there was some evidence
or admissions on the part of her attorney that she was liable for the bank's claim. It now
contends that as a result of such negotiations and admissions, the wife is estopped to deny
her liability. but it also appears that during such negotiations, both the wife and her attorney
did not have any knowledge of the actual facts, and that she was then ignorant of the
defense upon which she now relies. Be that as it may, such negotiations were more or less in
the nature of a compromise which was rejected by the bank, and it appears that in any
event both the wife and her attorney did not have any knowledge of the facts upon which
they now rely as a defense.

There is no claim or pretense that the debt in question was contracted for or on account of
the "usual daily expenses of the family, incurred by the wife or by her order, with the tacit
consent of the husband," as provided for in article 1362 of the Civil Code. Neither is there
any evidence tending to show that the wife was legally liable for any portion of the original
debt evidence by the note in question.
This decision as to the bank on this motion is based on the assumption that the facts are
true as set forth and alleged in the petition to set aside and vacate the judgment as to the
wife, but we are not making any finding as to the actual truth of such facts. That remains for
the defendant wife to prove such alleged facts when the case is tried on its merits.
It follows that the opinion of the lower court in refusing to set aside and vacate the judgment
of the plaintiff bank against the defendant wife is reversed, and that judgment is vacated
and set aside, and as to the bank the case is remanded to the lower court, with leave for the
wife to file an answer to plaintiff's cause of action, and to have the case tried on its merits
and for any further proceedings not inconsistent with this opinion.
As to the judgment in favor of the Dominican Fathers, it appears that their plea above
quoted in the statement of facts was filed on April 24, 1924. In that plea they say that they
have a first mortgage on the property described in paragraph IV of the complaint for
P125,000 with interest at 10 per cent per annum. That the mortgagors Jean M. Poizat and
Gabriela Andrea de Coster y Roxas have not paid the principal or the stipulated interest from
December 16, 1921, to date, which up to the 30th day of April, 1924, amounts to
P27,925.34. Wherefore, it is prayed that the credit above-mentioned be taken into account
when the second mortgage is foreclosed.
No other plea of any kind, nature or description was filed by it. The record shows that a copy
of this alleged plea was served upon the attorneys for the plaintiff bank. There is nothing in
the record which shows or tends to show that a copy of it was ever served on either one of
the defendants. Neither is there any evidence that either of the defendants ever appeared in
the original action. In fact, judgment was rendered against them by default.
Under such a state of facts, the judgment in favor of the Dominican Fathers cannot be
sustained. In the first place, the plea above quoted filed on April 24, 1924, would not be
sufficient to sustain a judgment. It does not even ask for a judgment of the foreclosure of its
mortgage. In the second place, no copy of the plea was ever served upon either of the
defendants, who were the real parties in interest, and against whom a judgment was
rendered for the full amount of the note and the foreclosure of the mortgage. Such a
proceeding cannot be sustained on any legal principle.
Unless waived, a defendant has a legal right to service of process, to his day in court and to
be heard in his defense.
From what has been said, it follows that, if the transaction between the Dominican Fathers
and Jean M. Poizat as attorney in fact for his wife was an original one and the P125,000 was
actually loaned at the time the note and mortgage were executed and the money was in
good faith delivered to the husband as the agent and attorney in fact of the wife, it would
then be a valid exercise of the power given to the husband, regardless of the question as to
what he may have done with the money.

Paragraph 5 of the power of attorney specifically authorizes him to borrow money for and on
account of his wife and her name, "and making all these transactions with or without
mortgages, pledges or personal guaranty."
It follows that the judgment of the lower court in favor of La Orden de Dominicos or PP.
Predicadores de la Provincia del Santisimo Rosario is reversed, without prejudice to its right
to either file an original suit to foreclose its mortgage or to file a good and sufficient plea as
intervenor in the instant suit, setting forth the facts upon which it relies for a judgment on its
note and the foreclosure of its mortgage, copies of which should be served upon the
defendants.
Neither party to recover costs. So ordered.
Ostrand and Romualdez, JJ., concur.
Johnson and Malcolm, JJ., concur in the result.
Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION

G.R. No. 94566 July 3, 1992

BA FINANCE CORPORATION, petitioner,
vs.
HON. COURT OF APPEALS and TRADERS ROYAL BANK, respondents.

MEDIALDEA, J.:
This is a petition for review on certiorari of the decision of the respondent appellate court
which reversed the ruling of the trial court dismissing the case against petitioner.
The antecedent facts are as follows:
On December 17, 1980, Renato Gaytano, doing business under the name Gebbs
International, applied for and was granted a loan with respondent Traders Royal Bank in the
amount of P60,000.00. As security for the payment of said loan, the Gaytano spouses
executed a deed of suretyship whereby they agreed to pay jointly and severally to
respondent bank the amount of the loan including interests, penalty and other bank charges.
In a letter dated December 5, 1980 addressed to respondent bank, Philip Wong as credit
administrator of BA Finance Corporation for and in behalf of the latter, undertook to
guarantee the loan of the Gaytano spouses. The letter reads:

This is in reference to the application of Gebbs International for a twenty-five

(25) month term loan of 60,000.00 with your Bank.
In this connection, please be advised that we unconditionally guarantee full
payment in peso value the said accommodation (sic) upon non-payment by
subject up to a maximum amount of P60,000.00.
Hoping this would meet your requirement and expedite the early processing of
their application.
Thank you.
Very
truly
yours,
BA
FINAN
CE
CORPO
RATIO
N
(signed
)
PHILIP
H.
WONG
Credit
Admini
strator
(p. 12, Rollo)
Partial payments were made on the loan leaving an unpaid balance in the amount of
P85,807.25. Since the Gaytano spouses refused to pay their obligation, respondent bank
filed with the trial court complaint for sum of money against the Gaytano spouses and
petitioner corporation as alternative defendant.
The Gaytano spouses did not present evidence for their defense. Petitioner corporation, on
the other hand, raised the defense of lack of authority of its credit administrator to bind the
corporation.
On December 12, 1988, the trial court rendered a decision the dispositive portion of which
states:
IN VIEW OF THE FOREGOING, judgment is hereby rendered in favor of plaintiff
and against defendants/Gaytano spouses, ordering the latter to jointly and
severally pay the plaintiff the following:

1) EIGHTY FIVE THOUSAND EIGHT HUNDRED SEVEN AND 25/100 (P85,807.25),

representing the total unpaid balance with accumulated interests, penalties
and bank charges as of September 22, 1987, plus interests, penalties and
bank charges thereafter until the whole obligation shall have been fully paid.
2) Attorney's fees at the stipulated rate of ten (10%) percent computed from
the total obligation; and
3) The costs of suit.
The dismissal of the case against defendant BA Finance Corporation is hereby
ordered without pronouncement as to cost.
SO ORDERED. (p. 31, Rollo)
Not satisfied with the decision, respondent bank appealed with the Court of Appeals. On
March 13, 1990, respondent appellate court rendered judgment modifying the decision of
the trial court as follows:
In view of the foregoing, the judgment is hereby rendered ordering the
defendants Gaytano spouses and alternative defendant BA Finance
Corporation, jointly and severally, to pay the plaintiff the amount of
P85,807.25 as of September 8, 1987, including interests, penalties and other
back (sic) charges thereon, until the full obligation shall have been fully paid.
No pronouncement as to costs.
SO ORDERED. (p. 27 Rollo)
Hence this petition was filed with the petitioner assigning the following errors committed by
respondent appellate court:
1. THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN RULING THAT
PETITIONER IS JOINTLY AND SEVERALLY LIABLE WITH GAYTANO SPOUSES
DESPITE ITS FINDINGS THAT THE LETTER GUARANTY (EXH. "C") IS "INVALID AT
ITS INCEPTION";
2. THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN RULING THAT THE
PETITIONER WAS GUILTY OF ESTOPPEL DESPITE THE FACT THAT IT NEVER
KNEW OF SUCH ALLEGED LETTER-GUARANTY;
3. THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN NOT RULING THAT
SUCH LETTER GUARANTY (EXHIBIT "C") BEING PATENTLY ULTRA VIRES, IS
UNENFORCEABLE;
4. THE HONORABLE COURT OF APPEALS ERRED IN NOT AWARDING RELIEF ON
PETITIONER'S COUNTERCLAIM
(p. 10, Rollo).
Since the issues are interrelated, it would be well to discuss them jointly.

Petitioner contends that the letter guaranty is ultra vires, and therefore unenforceable; that
said letter-guaranty was issued by an employee of petitioner corporation beyond the scope
of his authority since the petitioner itself is not even empowered by its articles of
incorporation and by-laws to issue guaranties. Petitioner also submits that it is not guilty of
estoppel to make it liable under the letter-guaranty because petitioner had no knowledge or
notice of such letter-guaranty; that the allegation of Philip Wong, credit administrator, that
there was an audit was not supported by evidence of any audit report or record of such
transaction in the office files.
We find the petitioner's contentions meritorious. It is a settled rule that persons dealing with
an assumed agent, whether the assumed agency be a general or special one are bound at
their peril, if they would hold the principal liable, to ascertain not only the fact of agency but
also the nature and extent of authority, and in case either is controverted, the burden of
proof is upon them to establish it (Harry Keeler v. Rodriguez, 4 Phil. 19). Hence, the burden is
on respondent bank to satisfactorily prove that the credit administrator with whom they
transacted acted within the authority given to him by his principal, petitioner corporation.
The only evidence presented by respondent bank was the testimony of Philip Wong, credit
administrator, who testified that he had authority to issue guarantees as can be deduced
from the wording of the memorandum given to him by petitioner corporation on his lending
authority. The said memorandum which allegedly authorized Wong not only to approve and
grant loans but also to enter into contracts of guaranty in behalf of the corporation, partly
reads:
To: Philip H. Wong, SAM
Credit Administrator
From: Hospicio B. Bayona, Jr., VP and
Head of Credit Administration
Re: Lending Authority
I am pleased to delegate to you in your capacity as Credit Administrator the
following lending limits:
a) P650,000.00 Secured Loans
b) P550,000.00 Supported Loans
c) P350,000.00 Truck Loans/Contracts/Leases
d) P350,000.00 Auto Loan Contracts/Leases
e) P350,000.00 Appliance Loan Contracts
f) P350,000.00 Unsecured Loans
Total loans and/or credits [combination of (a) thru (f) extended to any one
borrower including parents, affiliates and/or subsidiaries, should not exceed
P750,000.00. In exercising the limits aforementioned, both direct
and contingent commitments to the borrower(s) should be considered.
All loans must be within the Company's established lending guideline and
policies.
xxx xxx xxx

LEVELS OF APPROVAL
All transactions in excess of any branch's limit must be recommended to you
through the Official Credit Report for approval. If the transaction exceeds your
limit, you must concur in application before submitting it to the Vice President,
Credit Administration for approval or concurrence.
. . . (pp. 62-63, Rollo) (Emphasis ours)
Although Wong was clearly authorized to approve loans even up to P350,000.00 without any
security requirement, which is far above the amount subject of the guaranty in the amount
of P60,000.00, nothing in the said memorandum expressly vests on the credit administrator
power to issue guarantees. We cannot agree with respondent's contention that the phrase
"contingent commitment" set forth in the memorandum means guarantees. It has been held
that a power of attorney or authority of an agent should not be inferred from the use of
vague or general words. Guaranty is not presumed, it must be expressed and cannot be
extended beyond its specified limits (Director v. Sing Juco, 53 Phil. 205). In one case, where
it appears that a wife gave her husband power of attorney to loan money, this Court ruled
that such fact did not authorize him to make her liable as a surety for the payment of the
debt of a third person (Bank of Philippine Islands v. Coster, 47 Phil. 594).
The sole allegation of the credit administrator in the absence of any other proof that he is
authorized to bind petitioner in a contract of guaranty with third persons should not be given
weight. The representation of one who acts as agent cannot by itself serve as proof of his
authority to act as agent or of the extent of his authority as agent (Velasco v. La Urbana, 58
Phil. 681). Wong's testimony that he had entered into similar transactions of guaranty in the
past for and in behalf of the petitioner, lacks credence due to his failure to show documents
or records of the alleged past transactions. The actuation of Wong in claiming and testifying
that he has the authority is understandable. He would naturally take steps to save himself
from personal liability for damages to respondent bank considering that he had exceeded his
authority. The rule is clear that an agent who exceeds his authority is personally liable for
damages (National Power Corporation v. National Merchandising Corporation, Nos. L-33819
and
L-33897, October 23, 1982, 117 SCRA 789).
Anent the conclusion of respondent appellate court that petitioner is estopped from alleging
lack of authority due to its failure to cancel or disallow the guaranty, We find that the said
conclusion has no basis in fact. Respondent bank had not shown any evidence aside from
the testimony of the credit administrator that the disputed transaction of guaranty was in
fact entered into the official records or files of petitioner corporation, which will show notice
or knowledge on the latter's part and its consequent ratification of the said transaction. In
the absence of clear proof, it would be unfair to hold petitioner corporation guilty of estoppel
in allowing its credit administrator to act as though the latter had power to guarantee.
ACCORDINGLY, the petition is GRANTED and the assailed decision of the respondent
appellate court dated March 13, 1990 is hereby REVERSED and SET ASIDE and another one
is rendered dismissing the complaint for sum of money against BA Finance Corporation.
SO ORDERED.

Cruz, Grio-Aquino and Bellosillo, JJ., concur.

Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-13817

August 31, 1961

MACONDRAY AND COMPANY, INC., plaintiff-appellee,

vs.
PERFECTO PION, ET AL., defendants.
RUPERTO K. KANGLEON, deceased, substituted by VALENTINA TAGLE-KANGLEON,
ET AL., defendants-appellants.
Jose Agbulos for plaintif-appellee.
San Juan, Africa and Benedicto for defendants-appellants.
PADILLA, J.:
On 11 May 1955 the plaintiff filed a complaint 1 against the defendants in the Court of First
Instance of Manila alleging that upon representation and undertaking made by Ruperto K.
Kangleon, then a member of the Senate, in a letter addressed to the plaintiff dated 30
January 1954, that he would guarantee payment of his co-defendants' obligation, should
they fail to pay on the due date (Exhibit F), on 2 and 9 February 1954, the plaintiff sold on
credit and delivered to the defendants Perfecto Pion and Conrado Piring, known in the
theater and entertainment business as "Tugak" and "Pugak", respectively and transacting
business under a common name known as "All Stars Productions," 127 rolls of
cinematographic films, F.G. release positive type 825B, 35 mm. x 1,000 ft., for the total sum
of P6,985, payable on or before 9 May 1954, 12% interest thereon from date of maturity and
20% thereof for attorney's fee in case of suit for collection (Exhibits A, B, C, D, E; that the
principal debtors have failed to pay the amount owed by them on the due date; that upon
extensive investigations made by the plaintiff as to whether the principal debtors have any
property, real or personal, which may be levied upon for the satisfaction of their obligation, it
has found that they have none; that the defendant Kangleon could not point to the plaintiff
any property of the principal debtors leviable for execution sufficient to satisfy the
obligation; and that the sum of P6,985, the amount owed or part thereof, has not been paid
by the defendants. It prayed that after hearing judgment be rendered ordering the
defendants, jointly and severally, to pay it the sum of P6,985, 12% interest thereon from 10
May 1954 until fully paid, 20% of the amount due or P1,387 as attorney's fee, and costs, and
that it be granted other just and equitable relief (civil No. 23947).
On 10 November 1955 the defendant Kangleon answered the plaintiff's complaint setting up
the defense that the letter he had written to the plaintiff dated 30 January 1954 (Exhibit F)
was only to introduce his co-defendants; that assuming that there was an intent on his part
to guarantee payment of his co-defendants' obligation, the said letter (Exhibit F) was but an
offer to act as guarantor of his co-defendants; that as the acceptance of his offer to act as
guarantor for his co-defendants has not been actually made known to him by the plaintiff,
the contract of guaranty between them has not been perfected; and that assuming that
there has been a perfected contract of guaranty between the plaintiff and the answering
defendant, the latter's obligation was extinguished by the extension for payment up to 3
May 1954 granted by the plaintiff to his co-defendants. By way of counterclaim, he sought

from the plaintiff the sum of P20,000 as damages suffered by his good name and reputation
caused by the plaintiff's clearly unfounded civil action, P2,000 as attorney's fee and P1000
for expenses incurred in the litigation. As cross-claim, should he be finally adjudged liable to
pay the plaintiff, he prayed that his co-defendants be ordered to reimburse him whatever
amount he would pay to the plaintiff, and to pay him P3,000 as attorney's fee and expenses
of litigation. He further prayed that he be absolved from the plaintiff's complaint and that he
be granted other just and equitable relief.
The defendants Pion and Piring did not answer the plaintiff's complaint or their codefendants' cross-claim.
On 10 November 1955 the plaintiff answered the defendants defendant's counterclaim.
On 25 August 1956 the plaintiff and the answering de defendant entered into a stipulation of
facts and submitted the case for judgment based upon the said stipulation.
Not having answered the complaint against them despite notice, the Court declared the
defendants Pion and Piring in default (p. 5, rec. on app.).
At the trial of the case on 30 August 1956, the plaintiff and the answering defendant further
stipulated that the former had looked for properties of his co-defendants Pion and Piring but
found none (p. 23, rec. on app.). The plaintiff presented its evidence against the defendants
in default.
On 30 September 1957 the Court rendered judgment, the dispositive part of which is:
WHEREFORE, judgment is hereby rendered sentencing the defendants Perfecto Pion
and Conrado Piring to pay the plaintiff jointly and severally the sum of P6,985.00 plus
interest at the rate of 12% per annum from May 9, 1954 until fully paid and an
amount equivalent to 20% as attorney's fees and co of suit.
If this judgment becomes unsatisfied by the defendants Perfecto Pion and Conrado
Piring, the defendant Ruperto Kangleon is hereby sentenced to pay the plaintiff all
the amounts to which his co-defendants were sentenced to pay. (p. 29, rec. on app.).
The answering defendant has appealed.
From the stipulation of facts entered into by and between the appellant and the appellee
and the documentary evidence submitted by the appellee against the defendants in default,
the following appear: On 30 January 1954 the defendants Piring and Pion requested the
appellant, then a member of the Senate, to help them buy on credit from the appellee some
cinematographic films. To accommodate them, the appellant wrote a letter to the appellee,
as follows:
REPUBLIC OF THE PHILIPPINES
SENATE
MANILA

January 30, 1954

The Manager
Macondray & Company
China Bank Building
Manila
Sir:
This will introduce to you the bearers, Messrs. Conrado Piring and Perfecto Pion both
well known theater characters under the names of "Pugak" and "Tugak", respectively.
I have been made to understand by them in their representations to me that they
wish to place an order for the following items:
10 rolls negative at P157.00 each, and 100 rolls positive at P55.00 each .
of Dupont Release Positives Safety Basis for use of their firm called "All Stars
Productions" under the management and control of Pugak and Tugak payable within
three (3) months time ending April, 1954 and for which by their guaranty I pledge
payment.
In view of the foregoing, I shall appreciate any help you can give to facilitate said
purchases subject to usual business procedures.

Sincerely,
(Sgd.) RUPERTO K. KANGLEON
Senator

(Exhibit F) which letter the defendants in default presented to the appellee. On the strength
of the appellant's letter above quoted, on 2 and 9 February 1954, the appellee sold on credit
and delivered to the defendants in default 127 rolls of cinematographic films, F.G. release
positive type 825B, 35 mm. x 1,000 ft., for the total sum of P6,985, excluding sales tax,
which is for the buyers' account, payable on or before 9 May 1954. The parties, among
others, further stipulated that the buyers would pay interest at the rate of 1% per month on
all amounts not paid when due; that should a litigation arise from non-payment, the venue
of action would be the courts of Manila and that the buyers would pay 20% of the amount
due for attorney's fee and costs of the suit (Exhibits A, B, C, D, E). The defendants in default
failed to pay their obligation on the due date. On 27 May 1954 the appellee wrote to the
appellant a letter of the following tenor:

May 27 , 1954

Honorable Ruperto K. Kangleon

Philippine Senate
Manila

Dear Sir:
On January 30th, last you requested us to give Messrs. Conrado Piring and Perfecto
Pion of "All-Stars Productions", certain rolls of negative and positive films, the cost of
which was payable in three months time and payment of which you guaranteed.
These films were delivered and billed at P6,985.00 on Feb. 9th last. The amount has
not been paid (and) we have difficulty locating the above gentlemen as they cannot
be found in their offices.
In view of this we hereby request you to send us a check for the amount as it was
due on May 3rd.

Yours very truly,

MACONDRAY & CO., INC.
s/ILLEGIBLE
Collection Department

On 31 May 1954, the appellant answered the appellee as follows:

May 31, 1954

Macondray & Co., Inc.

3rd Floor, China Bank Bldg.
Manila
Gentlemen:
This will acknowledge receipt of your letter of May 27th. Messrs. Conrado Piring and
Perfecto Pion are being contacted to invite their attention to your letter.
Notwithstanding the foregoing, I have been made to understand by Messrs. Piring
and Pion that in arrangements with that Company an extension of time has been
granted them; within which to settle their obligations.

Cordially yours,
(Sgd.) RUPERTO K. KANGLEON

On 2 June 1954 the appellee replied to the appellant's answer to its letter thus:

June 2, 1954

Hon. Ruperto K. Kangleon

Philippine Senate
Manila
Dear Sir:
We have your letter of May 31st in reply to ours of the 7th and note that you are
getting in touch with Messrs. Conrado Piring and Perfecto Pion with regard to their
account.
We know of no extension of time for payment being granted these people and
certainly no one in authority has made such n arrangement. For this reason, if
payment is not received from them by the 15th inst. We expect to receive a
remittance from you to cover the full amount.

Yours very truly,

MACONDRAY & CO., INC.
s/ILLEGIBLE
Collection Department

On 19 July 1954 the appellee wrote the following letter to the defendants in default:

July 19, 1954

Mr. Conrado Piring

Pureza Extension
Sta Mesa, Manila
Mr. Perfecto Pion
Pureza Extension
Sta. Mesa, Manila
Gentlemen:
Please be advised that Macondray & Co., Inc. has turned over to me for
corresponding judicial action your account for films in the amount of P6,985.00. As
this obligation is now long past due, payment thereof is earnestly requested. Unless
payment thereof is received from you immediately, I shall be compelled, much to my
regret, to take this matter to the court.

Very truly yours,

(Sgd.) JOSE AGBULOS
Attorney for Macondray & Co., Inc.

which was sent to them by registered mail (Exhibits G, G-1 & G-2). Neither the defendants in
default nor the appellant has paid the amount owed to the appellee.
During the time this appeal was pending in this Court the appellant died. His heirs or their
legal representatives were directed to appear in substitution for the deceased appellant.
Attorneys San Juan, Africa & Benedicto entered their appearance for said heirs, namely: Mrs.
Valentina Tagle Kangleon, Benjamin T. Kangleon, Juanita T. Kangleon, Mrs. Flora San Gabriel,
Miss Corazon Kangleon, Miss Lourdes Kangleon, Mrs. Teresita Limcolioc, Mrs. Aida Rosca,
Jesus Kangleon, Jose Kangleon and Miss Cecilia Kangleon.
The appellant contends that although in the stipulation of facts entered into by and between
him and the appellee, he had admitted the liability of his co-defendants, who were declared
in default, under the principle of res inter alios acta, that an admission by a third person can
not bind another, his admission cannot bind the defendants in default and no judgment
against them may be rendered on the basis of the stipulation of facts referred to. Since the
appellee had not established a case against the defendants a default, the principal debtors,
it cannot directly held able the appellant, the guarantor, whose obligation is only subsidiary
to that of the former.
The appellant proceeds from the wrong premise that the case was submitted to the Court
solely on the stipulation of facts entered into by and between him and the appellee. The
records show that when the case was called for trial on 30 August 1956, after the appellant's
co-defendants had been declared in default, the appellee presented its evidence testimonial
and documentary, against them (pp. 5-18, t.s.n.; Exhibits A, B, C, D, E, F, G, G-1 & G-2), and
thereby established their primary liability.
The appellant claims that the letter (Exhibit F) is mere a letter of introduction and does not
constitute an offer of guaranty. A cursory reading of the letter (Exhibit F) belies his assertion.
While in his opening sentence he says at that "This will introduce to you the bearers, Messrs.
Conrado Piring and Perfecto Pion, . . ." who "wish to place an order for" cinematographic
films, yet in the later part he says that "for which by their guaranty I pledge payment." This
can only mean that he undertakes to guarantee payment of the principal debtors' obligation
should they fail to pay. The appellant is a responsible man and may be presumed to mean
what he says. At that time, he was occupying the exalted position of member of the Senate
and his plighted word given to another would immediately be accepted. It is not, therefore,
odd that upon receipt of the appellant's letter (Exhibit F), the appellee readily sold on credit
to the principal debtors, the defendants in default, the cinematographic films in question.
That the appellant really meant to guarantee payment of the principal debtors' obligation
should they default, is patent in his answer to the appellee's letter dated 27 May 1954,
reminding him that on 30 January he requested it "to give Messrs. Conrado Piring and
Perfecto Pion of 'All-Stars Productions', certain rolls of negative and positive films, the cost
of which was payable in three months time and payment of which you guaranteed"; that the
"films were delivered and billed at P6,985.00 on Feb. 9th last"; and that "the amount has not
been paid (and) we have difficulty locating the above gentlemen as they cannot be found in

their offices," and requesting the appellant to send a check for the amount. In his answer to
the foregoing letter, dated 31 May 1954, he acknowledged receipt of the appellee's letter of
the 27th of the same month and informed it that the principal debtors were "being
contacted to invite their attention to your letter." Had the appellant meant otherwise, he
would have immediately denied that he ever guaranteed payment of the principal debtors
obligation. This he did not do.
The appellant's very letter (Exhibit F) constitutes his undertaking of guaranty. "Contracts
shall be obligatory in whatever form they may have been entered into, provided all the
essential requisites for their validity are present."2A contract of guaranty is not a formal
contract and shall be valid in whatever form it may be, provided that it complies with the
statute of frauds.
The appellant insists that he should have been notified by the appellee of the acceptance of
his offer of guaranty. In the first place, his letter (Exhibit F) already constitutes his
undertaking of guaranty. In the second place, the contract entered into by and between the
appellee and the defendants in default is the principal contract and the appellee is
subsidiary to the principal contract. Since the principal contract had already been perfected,
the subsidiary contract of guaranty became binding upon effectivity of the principal
contract. Hence no notice of acceptance by the appellee to the appellant is necessary for its
validity.
The appellant states that assuming that the letter Exhibit F constitutes a contract of
guaranty, the films actually sold to the principal debtors were 127 rolls of F.G. release
positive type 825 B 35 mm. x 1,000 ft. at P55 a roll, payable 9 May 1954, while what he
undertook to guarantee payment was 10 rolls negative at 157 each and 100 rolls positive at
55 each, payable within three months ending April, 1954. Citing article 2055 of the Civil
Code that a guaranty cannot extend to more than what is stipulated therein, the appellant
contends that he cannot be held liable for the contract in view of the variation in his
undertaking. The total cost of what was actually sold to and bought by the principal debtors
is P6,985, which is less than the total cost of what was originally intended to be bought by
them amounting to P7,070. The variation was merely in kind and not in subject matter
cinematographic films which did not render the appellant's obligation more burdensome.
Instead his obligation was rendered less onerous by the reduction in the original price of
P7,070 to P6,985. The fact that in the letter Exhibit F, the appellant mentioned that the
principal debtors' obligation would be "payable within three months time ending April,
1954," while in the contract entered into by and between the appellee and the principal
debtors they have stipulated that their obligation would be payable on or before 9 May
1954, is of no moment. The letter Exhibit F was dated 30 January 1954. Counted from that
date, the three months period would expire on April 1954. However, actually the principal
contract was consummated on 9 February 1954 (Exhibit A). It is but fair that the three month
period be counted from that date ending 9 May 1954. Again, the appellants obligation has
not become more onerous than what he actually bound himself.
The judgment appealed from is affirmed against the heirs of the deceased appellant herein
above named, with costs against them.
Bengzon, C.J., Labrador, Reyes, J.B.L., Barrera, Paredes, Dizon, De Leon and Natividad,
JJ., concur.
Conception, J., took no part.

Footnotes
1

Third amended complaint.

Article 1356, Civil Code.

Republic of the Philippines
SUPREME COURT
Manila
EN BANC

G.R. No. L-13307

February 3, 1919

LA INSULAR, plaintiff-appellee,
vs.
RAFAEL MACHUCA GO-TAUCO and MANUEL NUBLA CO-SIONG, defendants-appellants.
Williams, Ferrier & SyCip for appellants
Kincaid & Perkins for appellee.
STREET, J.:
The plaintiff in this action, La Insular. is a commercial partnership engaged in the
manufacture of cigars and cigarettes in the city of Manila. On July 15, 1913, a contract was
entered into between its general agent and the two defendants, Manuel Nubla Co-Siong and
Rafael Machuca Go-Tauco, whereby the plaintiff became obliged to supply cigarettes daily to
Manuel Nubla Co-Siong in a quantity of not less than two nor more than five boxes of two
thousand packages each The price was fixed at P172 per box, payment to be made within
the first five days of the month next following the successive deliveries. Manuel Nubla CoSiong obligated himself as principal to pay for the cigarettes within said five says, while
Rafael Machuca Go-Tuaco bound himself as surety, jointly and severally with Nubla, in the
sum of P25,000, to satisfy an indebtedness contracted for cigarettes thus supplied.
Pursuant to the provisions of this agreement cigarettes were supplied by the plaintiff to
Nubla Co-Siong during the year 1913 to 1916, amounting in value to nearly P350,000. For
the cigarettes so supplied payment was from time to time made by the defendant Nubla CoSiong upon bills presented by the plaintiff.
It appears that when the contract above-mentioned was executed cigarettes were subject to
a specific tax of the peso for each thousand cigarettes. This tax was, under the law then
prevailing, paid by the manufacturer, and the liability for said tax naturally fell in the present
case upon the plaintiff. By Act No. 2432, enacted December 23, 1914, the Philippine
Legislature increased the specific tax on cigarettes from P1 to P1.20 per thousand cigarettes,
and by amendatory Act No. 2445, effective from January 1, 1915, it was declared that, as
regards contracts already made for future delivery, the burden of the increased tax should,
unless the parties should have otherwise agreed, be borne by the person to whom the
article taxed should be furnished.

After this provision become effective, the plaintiff continued, as before, to pay the internalrevenue taxes and in order to reimburse itself to the extent of the outlay incident to the
increase in the tax added the amount of P10 per box to the price of the cigarettes. The
monthly statements thereafter submitted to the purchaser by the plaintiff showed this
increase; and as payments were from time to time made by Nubla, they were credited by
the plaintiff upon account, with the result that, upon the showing of the plaintiff's books and
assuming that Nubla had been properly charged with the increased tax, all cigarettes
delivered prior to August 1, 1916, had been fully paid for. During the months of August and
September, however, fifty-six cases of cigarettes were taken by Nubla, for which no payment
has been made; and for the recovery of the amount alleged to be due for these cigarettes
this action was instituted by the plaintiff in the Court of First Instance of the city of Manila.
Judgment having been there rendered in favor of the plaintiff, both defendants have
appealed.
The dispute is upon the point of liability for the increased tax imposed by Act No. 2432, and
the amount which the plaintiff is entitled to recover from the defendant Nubla Co-Siong,
assuming that said defendant is liable for the tax at all, is P10,192 the amount for which
judgment was rendered against him by the trial court. As to the defendant Rafael Machuca
Go-Tauco, the trial court held that, being a surety, his liability was limited to the payment of
the price stipulated in the original contract, or P172 per box, and that he was not liable for
the additional amount of P10 per box representing the increase in the tax. Judgment was,
therefore, rendered against this defendant, jointly and severally with his codefendant, for
the sum of P9,632 only.
As regards the liability of the purchaser, Nubla Co-Siong, the case is determined adversely to
his contention by the decision of this court in Mitsui Bussan Kaisaha vs. Manila Electric
Railroad and Light Company (p. 624, post); and upon this branch of the present case we are
content to refer to the opinion therein as embracing a sufficient statement of the grounds of
the decision. As against the surety, Rafael Machuca Go-Tuaco, the case presents one or two
additional features which require discussion.
As already noted, the trial court held that the liability of the surety did not extend to the
reimbursement of the plaintiff for the amount paid out by its satisfaction of the increased
internal-revenue tax on the fifty six cases of cigarettes bought in August and September
1916. This defendant was, therefore, absolved from liability for the sum of P560, which the
plaintiff had paid upon said cigarettes. As the plaintiff did not appeal from this judgment, the
propriety of the action of the trial court upon this point is not now in question.
It is, however, here contended for the surety that the court erred in holding him liable for
any part of the debtedness which is the basis of this action. This contention is based upon
two distinct arguments. The first is that, supposing Act No. 2445 to be valid, it increases
from P172 to P182 per box the price which Manuel Nubla Co-Siong was obligated to pay for
the cigarettes, which alteration in the contract has the effect of releasing the surety. The
second is that the payments made by Nubla to the plaintiff in the entire period during which
cigarettes were supplied under the contract inquisition, i.e., form July 15, 1913, to
September 6, 1916, were sufficient fully to satisfy the price of P172 chargeable for the
cigarettes under the contract, and that the obligation of the surety is therefore discharged.
In other words this defendant insists that the application of the payments from time to time
made by the principal debtor should be revised and that said payments should be reapplied
exclusively to the stipulated price of the cigarettes, without reference to the additional P10

per case paid after January 1, 1915, in satisfaction of the increased internal-revenue tax.
These proportions will be considered in turn.
It is undoubtedly true that the law looks upon the contract of surety ship with a jealous eye,
and the rule is settled that the obligation of the surety cannot be extended by implication
beyond its specified limits. Article 1827 of the Civil Code so declares (Uy Aloc vs. Cho Jan
Ling 27 Phil., Rep., 427); and with this doctrine the common law is accordant. As was said by
Justice Story in Miller vs. Stewart (9 Wheat. 680; 6 L. ed. 189):
Nothing can be clearer, both upon principle and authority, than the doctrine that the
liability of a surety is not to be extended, by implication, beyond the terms of his
contract. To the extent, and in the manner, and under the circumstances pointed out
in his obligation, he is bound, and no farther.
It is, furthermore, a well-recognized rule of jurisprudence, applied in the case just cited, that
if any material alteration or change in the obligation of the principal obligator is effected by
the immediate parties to the contract, without the asset of the surety, the latter is
discharged. Cases could be cited to this proposition without number, one of the most
common illustrations being found in the situation where the creditor, or obligee, without the
assent of the surety, by a valid and binding agreement gives further time to the principal
debtor for payment or performance. As is well known, the surety is thereby discharged. (32
Cyc., 191.)
A statement is not infrequently found in the cases to the effect that it makes no difference
whether the change in the obligation of the contract may be favorable to the surety; it is
enough to release the surety that the contract was changed without his assent. Speaking
generally, this last observation may be accepted, but authorities are to be found which raise
a doubt as to the universality of such rule. Thus, in Preston vs. Huntington (67 Mich., 139), it
was held that a surety who had obligated himself to answer for the rent reserved in a lease
at the rate of $75 per month was not discharged from the obligation by the circumstances
that, by a valid agreement between the landlord and his tenant (the principal obligor), the
amount of the rent was reduced $25 per month, though of course the liability of the surety
was held to be reduced to the same extent. The court considered the reduction of rent as
being in the nature of a release pro tanto only
It is to be noted that in order to effect a release of the surety, the change in the contract
must, as a general rule, be made by the principal parties to the contract. Indeed, no valid or
effective change in the contract can, generally speaking, be made by any other person than
the actual parties thereto. A recognized exception more apparent than real is found in
cases where sureties on official bonds have been held to be released as a result of changes
effected by the Legislature in the duration of the official term or in the duties of the officer
whose fidelity is intended to be secured by the bond. A line of decisions, of which
Roman vs. Peters (2 Rob. [La.], 479; 38 Am. Dec., 222), is an illustration, holds that the
surety is discharged by such change in the law. It appeared in the case cited, that,
subsequent to the execution of the official bond of a sheriff, an Act of the Legislature was
passed curtailing the duties and emoluments of the office. Said the court:
The law is particularly watchful over the rights of sureties; and will not countenance
any transactions between the parties, that shall lessen the ability of the principal to
comply with his contract, or that shall alter the rights of the parties, or enlarge the
demand to the prejudice of the sureties. To permit parties to alter and modify their

contracts as they please, and to hold the sureties answerable for the performance of
such parts as were not altered, would be transferring their responsibility, without
their consent, from one contract to another. The contract, by the modification and
alternation, becomes a new and different contract, and one for which the sureties
never become responsible.
xxx

xxx

xxx

These principles are not denied by the opposite party, but their application to official
bonds given to the state by public officers is contested; and it is asserted that any
change produced in the contract by the agency of a third person, causing an
increased responsibility of the surety, will not discharge the latter, if the creditor has
merely been inactive or passive. But we cannot regard the state as a stranger to this
contract.
It is not necessary here to express an opinion upon the point whether the case referred to
was or was not correctly speaking, be made by any other person than the actual parties
thereto. A recognized exception more apparent than real is found in cases where
sureties on official bonds have been held to be released as a result of changes effected by
the Legislature in the duration of the official term or in the duties of the officer whose fidelity
is intended to be secured by the bond. A line of decisions, of which Roman vs. Peters (2 Rob
[La.], 479; 38 Am. Dec., 222), is an illustration, holds that the surety is discharged by such
change in the law. It appeared in the case just cited, that, subsequent to the execution of the
official bond of a sheriff, an Act of the Legislature was passed curtailing the duties and
emoluments of the office. Said the court:
The law is particularly watchful over the rights of sureties; and will not countenance
any transactions between the parties, that shall lessen the ability of the principal to
comply with his contract, or that shall alter the rights of the parties, or enlarge the
demand to the prejudice of the sureties. To permit parties to their and modify their
contracts as they please, and to hold the sureties answerable for the performance of
such parts as were not altered, would be transferring their responsibility, without
their consent, form one contract to another. The contract, by the modification and
alternation, becomes a new and different contract, and one for which the sureties
never became responsible.
xxx

xxx

xxx

These principles are not denied by the opposite party, but their application to official
bonds given to the state by public officers is contested; and it is asserted that any
change produced in the contract by the agency of a third person, causing an
increased responsibility of the surety, will not discharge the latter, if the creditor has
merely been inactive or passive. But we cannot regard the state as a stranger to this
contract.
It is not necessary here to express an opinion upon the point whether the case referred to
was or was not correctly decided. We observe, however, that the closing words of the
passage quoted shows that the court placed the decision on the ground that the State
which entity, it should be noted, is named as the obligee in an official bond was a party to

the contract; and when the Legislature, as one of the arms of the State, intervened to
change the obligation, such change was in fact effected by the State itself.
In the case at bar the Government of the Philippine Islands was in no sense a party to the
contract of July 15, 1913, between the plaintiff and the defendants; and it is readily seen
that when the Legislature of these Islands increased the internal revenue tax upon
cigarettes, this was an act done by a stranger to the contract, and not by any person in
privity therewith. The consequence is that, properly speaking, the legislative fiat, placing the
burden of the tax on the purchaser, did not in any wise affect the obligation of the contract
as between the parties. It was merely an external factor which, supervening upon the
situation created by the contract , made it impossible for the purchaser to realize the benefit
which would have accrued to him if the seller had been required to pay the tax. Nearly all
changes in taxation affect existing contracts in some way or other, but this does not
necessarily change such contracts in a legal sense.
The question of the constitutional validity of Acts Nos. 2432 and 2445 is not under
discussion in this decision; for as will be seen by reference to Mitsui Bussan
Kaisaha vs. Manila Electric Railroad and Light Company, already referred to, that question
was effectually settled by the Act of Congress legalizing Acts No. 2432 and 2445. But it is
insisted that the Legislative Acts las mentioned so altered the obligation of the contract in
question as to release the surety, and in this connection we think it well to refer to some of
the American cases in which the constitutionality of such Acts as these has been discussed,
for it is evident that if the imposition of the increased tax on cigarettes in the case before us
could not have had the effect, in the absence of any action by Congress, of impairing the
contract in the constitutional sense, it must also follow that the contract was not changed in
the sense necessary to release the surety. Upon this point we quote, as pertinent, the
following language used by the Supreme Court of the United States:
Authorities from numerous sources are cited by the plaintiffs, but none of them show
that a lawful tax on a new subject, or an increased tax on an old one, interferes with
a contract or impairs its obligation, within the meaning of the Constitution, even
though such taxation may affect particular contracts, as it may increase the debt of
one person and lessen the security of another, or may impose additional burdens
upon one class and release the burdens of another, still the tax must be paid unless
prohibited by the Constitutional, nor can it be said that it impairs the obligation of
any existing contract in its true legal sense. (The North Missouri R.R. Co.vs. MaGuire,
87 U.S., 46; 22 L. ed., 294.)
It is has been held by the same high Tribunal that the imposition of a license tax on the
resident agent of a foreign manufacturing company does not impair the obligation of the
contract between the agent and his principal, although its immediate consequence is to
make that contract less profitable to the agent. (Kehrer vs. Stewart, 197 U.S., 60: 49 L. ed.,
663.)
In Clemente National Bank vs. State of Vermont (231 U.S., 120; 58 L. ed., 148), it was held
that the obligations of existing contracts between a national bank and its depositors were
not constitutionally impaired by a tax imposed by the legislature of the State of Vermont
upon interest bearing deposits which the bank was authorized to pay and charge to the
depositors. In this case it was held, at page 140:

It cannot be doubted that the property being taxable, the state could provide, in
order to secure the collection of a valid tax upon such credits, for garnishment or
trustee process against the bank, or in effect constitute the bank its agent to collect
the tax from the individual depositors.
The point was made in this case that the statute levying the tax interfered with existing
contracts between the bank and its depositors, impairing their obligation. The court
overruled this contention and held that the statute merely imposed a tax upon the property
of the depositors in the exercise of a power subject to which the contracts of deposits were
made. It is thus seen that all contracts are made subject to the taxing powers of the state
and territorial governments.
In Tanner vs. Little (240 U.S., 369; 60 L. ed., 691), it was held that a state license tax on
merchants using stamps, tickets, or coupons, redeemable in cash or merchandise, does not
unconstitutionally impair the contract obligations of such merchants with their customers or
with third parties with whom they had contracted for the use of such stamps or coupons
before the Act levying the tax was passed.
In Grand Trunk Western Railway Co. vs. Railroad Commission of Indiana (221 U.S., 400; 55 L.
ed., 786), it was held that a contract between two intersecting railway companies imposing
upon the junior road the duty of constructing and property maintaining the physical crossing
of the two roads, and providing and maintaining semaphores, watchmen, etc., is not
constitutionally impaired by an order of the state railroad commission prescribing other and
additional duties such as the installation and use of an interlocking plant and apportioning
between the two companies the expense of executing the order.
In Chicago, Burlington & Quincy Railroad co. vs. State of Nebraska (170 U.S., 57; 42 L. ed.,
948), it was held that a contract between a city and a railroad company to participate in the
construction of a viaduct in view of their mutual duty to the public is not violated by a
statute and ordinance compelling the railroad company to repair it. The court further held in
this case that the maintenance of safe viaducts over railroad tracts at important street
crossings cannot be taken out of the police power of the legislature by a contract between a
city and a railroad company.
These authorities, we think, clearly show that the Acts of the Legislature by which the
increased tax on cigarettes was imposed neither impaired, in a constitutional sense, the
obligation of the contract which is the basis of this action nor changed that obligation in
such sense as to occasion the discharge of the surety.
The point raised in behalf of the surety with respect to the application of the payments must
in our opinion be likewise resolved adversely to him. The surety is clearly bound by the
application of the payments made by the creditor wit the assent of the principal debtor, and
we entertain no doubt that when Manuel Nubla Co-Siong from time to time paid the bills
submitted by the plaintiff, and which, after January 1, 1915, showed an increased of P10 per
case in the price of the cigarettes, he very well knew that this additional amount was due to
the inclusion of the new tax paid by the plaintiff. We are not impressed by the suggestion
contained in the appellant's brief to the effect that as the bill appear to have been rendered
only for cigarettes supplied, and not for cigarettes plus the amount paid upon account of
internal-revenue tax, the payments must therefore be applied exclusively to the price of the
cigarettes. The fundamental rights of the parties, which are sufficiently put in issue in the
complaint and answer, are not in our opinion affected by the form in which the accounts

were rendered nor by the circumstances that the plaintiff's cause of action, as stated in his
complaint, purports to be based merely upon a claim for cigarettes sold.
Our conclusion is that there is no error in the judgment appealed from, the same is
accordingly affirmed, with costs against the appellants. So ordered.
Arellano, C.J., Torres, Carson, Malcolm, Avancea and Moir, JJ., concur.
Johnson, J., reserves his vote.

El Vencedor vs. Canlas

Facts: An accounting between X company and D, its agent for the sale of merchandise,
showed that D had failed to pay X for the merchandise of the value of 5K. X therefore
refused to continue to furnish D merchandise for sale unless he gave a bond. Canlas bound
himself as surety and guarantor to D to become liable in case of his inability to pay
damages. It did not appear that at the time of the execution of the bond Canlas had
knowledge of the fact that D was indebted to X in any sum. Canlas had no knowledge.
Issue: Should the bond respond for the debt contracted by D prior to execution?
Held: No. Canlas was liable only for the value of goods furnished to D subsequent to the
execution of the bond. A contract of suretyship or guaranty is ordinarily not retrospective
and no liability attached for defaults occurring before it is entered into unless intent to be so
liable is indicated either by express words or by necessary implication.
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-9073

November 17, 1958

TRADERS INSURANCE and SURETY COMPANY, plaintiff-appellant,

vs.
DY ENG GIOK, PEDRO LOPEZ DEE and PEDRO E. DY-LIACCO, defendants-appellees.
Sycip, Salazar, Atienza, Luna and Caparas for appellant.
Emigdio V. Arcilla for appellee, Dy Eng Giok.
Cezar Miraflor for appellee Pedro Lopez Dee.
Pascual G. Mier for appellee Pedro E. Dy-Liacco.
REYES J.B.L., J.:
Appeal interposed against that part of the decision of the Court of First Instance of Manila (in
its civil case No. 20305) absolving Pedro Lopez Dee and Pedro E. Dy-Liacco from the
obligation to reimburse the plaintiff Traders Insurance and Surety Co.

From the stipulation of facts made by the parties in the court below, it appears that from
1948 to 1952 the corporation "Destilleria Lim Tuaco & Co., Inc." had one Dy Eng Giok as its
provincial sales agent, with the duty of turning over the proceeds of his sales to the
principal, the distillery company. As of August 3, 1951, the agent Dy Eng Giok had an
outstanding running account in favor of his principal in the sum of P12,898.61.
On August 4, 1951, a surety bond (Annex A, complaint) was executed by Dy Eng Giok, as
principal and appellant Traders Insurance and Surety Co., as solidary guarantor, whereby
they bound themselves, jointly and severally, in the sum of P10,000.00 in favor of the
Destilleria Lim Tuaco & Co., Inc., under the following terms:
THE CONDITION OF THIS OBLIGATION Is SUCH THAT: Whereas, the above bounden
principal has entered in to a contract with the aforementioned Company to act as
their provincial sales agent and to receive goods or their products under the said
Principal's credit account. The proceeds of the sales are to be turned over to the
Company.
WHEREAS, the contract requires the above bounden principal to give a good and
sufficient bond in the above stated sum to secure the full and faithful fulfillment on
its part of said contract; namely, to guarantee the full payment of the Principal's
obligation not to exceed the above stated sum.
NOW THEREFORE, if the above bounden principal shall in all respects duly and fully
observe and perform all and singular the aforesaid covenants, conditions, and
agreements to the true intent and meaning thereof, then this obligation shall be null
and void; otherwise, to remain in full force and effect.
LIABILITY of surety on this bond will expire on August 4, 1952 and said bond will be
cancelled TEN DAYS after its expiration, unless surety is notified in writing of any
existing obligations thereunder or otherwise extended by the surety in writing. (Rec.
App., pp. 7-8) (Emphasis supplied)
On the same date, by Eng Giok, as principal, with Pedro Lopez Dee and Pedro Dy-Liacco, as
counterboundsmen, subscribed an indemnity agreement (Annex B. of the complaint) in favor
of appellant Surety Company, whereby, in consideration of its surety bond (Annex A), the
three agreed to be obligated to the surety company
INDEMNITY: To indemnify the COMPANY for any damage, prejudice, loss, costs,
payments, advances and 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 executed the abovementioned bond, its renewals, extensions
or substitutions, and said attorney's fee shall not be less than (15%) per cent of the
amount claimed by the Company in each action, the same to be due and payable,
irrespective of whether the case is settled judicially or extrajudicially. (Rec. App. pp.
9-10)
From August 4, 1951 to August 3, 1952, agent Dy Eng Giok contracted obligations in favor of
the Destilleria Lim Tuaco & Co., in the total amount of P41,449.93; and during the same
period, he made remittances amounting to P41,864.49. The distillary company, however,
applied said remittances first to Dy Eng Giok's outstanding balance prior to August 4, 1951

(before the suretyship agreement was executed) in the sum of P12,898.61; and the balance
of P28,965.88 to Dy's obligations between August 4, 1951 and August 3, 1952. It then
demanded payment of the remainder (P12,484.05) from the agent, and later, from the
appellant Surety Company. The latter paid P10,000.00 (the maximum of its bond) on July 17,
1953, apparently, without questioning the demand; and then sought reimbursement from Dy
Eng Giok and his counter guarantors, appellees herein. Upon their failure to pay, it began
the present action to enforce collection.
After trial, the Court of First Instance of Manila absolved the counter-guarantors Pedro Lopez
Dee and Pedro Dy-Liacco, on the theory that in so far as they are concerned, the payments
made by Dy Eng Giok from August 4, 1951 to August 3, 1952, in the sum of P41,864.49,
should have been applied to his obligations during that period, which were the ones covered
by the surety bond and the counter-guaranty; and as these obligations only amounted to
P41,449.93, so that the payments exceeded the obligations, the court concluded that the
Surety Company incurred no liability and the counterbondsmen in turn had nothing to
answer for. The trial court, however, sentenced Dy Eng Giok to repay to the Surety Company
P10,000 with interest at 12% per annum, plus P1,500 attorneys' fee and the costs of the
suit.
Not satisfied with the decision, the Traders Insurance & Surety Company appealed to this
Court on points of law.
We find the decision appealed from to be correct. There are two reasons why the
remittances by Dy Eng Giok in the sum of P41,864.49 should be applied to the obligation of
P41,449.93 contracted by him during the period covered by the suretyship agreement,
Annex A. The first is that, in the absence of express stipulation, a guaranty or suretyship
operates prospectively and not retroactively; that is to say, it secures only the debts
contracted after the guaranty takes effect (El Vencedor vs. Canlas, 44 Phil. 699). This rule is
a consequence of the statutory directive that a guaranty is not presumed, but must be
express, and can not extend to more than what is stipulated. (New Civil Code, Art. 2055). To
apply the payments made by the principal debtor to the obligations he contracted prior to
the guaranty is, in effect, to make the surety answer for debts incurred outside of the
guaranteed period, and this can not be done without the express consent of the guarantor.
Note that the suretyship agreement, Annex A, did not guarantee the payment of any
outstanding balance due from the principal debtor, Dy Eng Giok; but only that he would turn
over the proceeds of the sales to the "Destilleria Lim Tuaco & Co., Inc.", and this he has
done, since his remittances during the period of the guaranty exceed the value of his sales.
There is no evidence that these remittances did not come from his sales.
A similar situation was dealt with in our decision in the case of Municipality of Lemery vs.
Mendoza, 48 Phil. 415, wherein we said (pp. 422-423):
As we have previously stated Mendoza has paid to the municipality the full sum of
P23,000. In our opinion this discharged the sureties from all further liability. The
circumstance that the sum of P23,000 which Mendoza paid may have been applied
by the municipality to Mendoza's indebtedness for the first year of the lease is
without significance as against the sureties, since the sureties were not parties to the
contract of lease (Exhibit D) and are liable only upon the contract of suretyship
(Exhibit E), which calls for the payments of only P23,000 by the principal. It is, just
rule of jurisprudence, recognized in article 1827 of the Civil Code, that the obligation

of a surety must be express and cannot be extended by implication beyond its

specified limits.
We do not overlook the fact that the obligating clause in Exhibit E binds the sureties
in the amount of P46,000, but, as in all bonds, that obligation was intended as an
assurance of the performance of the principal obligation and when the principal
obligation was discharged, the larger obligation expressed in the contract of
suretyship ceased to have any vitality.
The second reason is that, since the obligations of Dy Eng Giok between August 4, 1951 to
August 4, 1952, were guaranteed, while his indebtedness prior to that period was not
secured, then in the absence of express application by the debtor, or of any receipt issued
by the creditor specifying a particular imputation of the payment (New Civil Code, Art.
1252), any partial payments made by him should be imputed or applied to the debts that
were guaranteed, since they are regarded as the more onerous debts from the standpoint of
the debtor (New Civil Code, Art. 1254).
ART. 1254. When the payment cannot be applied in accordance with the preceding
rules, or if application can not be inferred from other circumstances, the debt which is
most onerous to the debtor, among those due, shall be deemed to have been
satisfied.
If the debts due are of the same nature and burden, the payment shall be applied to
all of them proportionately.
Debts covered by a guaranty are deemed more onerous to the debtor than the simple
obligations because, in their case, the debtor may be subjected to action not only by the
creditor, but also by the guarantor, and this even before the guaranteed debt is paid by the
guarantor (Art. 2071, New Civil Code); hence, the payment of the guaranteed debt liberates
the debtor from liability to the creditor as well as to the guarantor, while payment of the
unsecured obligation only discharges him from possible action by only one party, the
unsecured creditor.
The rule that guaranteed debts are to be deemed more onerous to the debtor than those not
guaranteed, and entitled to priority in the application of the debtor's payments, was already
recognized in the Roman Law (Ulpian, fr.ad Sabinum, Digest, Lib. 46, Tit 3, Law 4, in fine),
and has passed to us through the Spanish Civil Code. Manresa in his Commentaries to Art.
1174 of that Code (8 Manresa, Vol. 1, 5th Ed., p. 603) expressly says:
Atendiendo al gravamen, la deuda garantida es mas onerosa que la simple.
And this is also the rule in Civil law countries, like France (Dalloz, Jurisprudence General Vo.
obligation, sec. 2033; Planiol, Traite Elem. (2d Ed). Vol. 2, No. 454) and Louisiana (Caltex Oil
& Gas, Co. vs. Smith, 175 La. 678, 144 So. 243; Everett vs. Graye, 3 La. App. 136): also Italy
(7 Giorgi, Teoria delle Obbl. p. 167).
It is thus clear that the payment voluntarily made by appellant was improper since it was not
liable under its bond; consequently, it can not demand reimbursement from the
counterbondsmen but only from Dy Eng Giok, who was anyway benefited pro tanto by the
Surety Company's payment.

The present case is to be clearly distinguished from Hongkong Shanghai Bank vs. Aldanese,
48 Phil., 990, andCommonwealth vs. Far Eastern Surety & Insurance Co., 83 Phil., 305, 46
Off. Gaz. 4879 and similar rulings, wherein the debt in each case owned the creditor one
single debt of which only a portion was guaranteed. In those cases, we have ruled that the
guarantors had no right to demand that the partial payments made by the principal debtor
should be applied precisely to the portion guaranteed. The reason is apparent: the legal
rules of imputation of payments presuppose that the debtor owes several distinct debts of
the same nature; and does not distinguish between portions of the same debt. Hence, where
the debtor only owes one debt, all partial payments must necessarily be applied to that
debt, and the guarantor answers for any unpaid balance, provided it does not exceed the
limits of the guaranty. Any other solution would defeat the purpose of the security. In the
case before us, however, the guaranty secured the performance by the debtor of his
obligation to remit to the distillery company the proceeds of his sales during the period of
the guaranty (August 4, 1951 to August 4, 1952). This obligation is entirely distinct and
separate from his obligation to remit the proceeds of his sales during a different period, say
before August 4, 1951. The debtor, therefore, actually owed two distinct debts: for the value
of his sales before August 4, 1951 and for the import of the sales between that date and
August 4, 1952. There being two debts, his partial payments had necessarily to be applied
(in the absence of express imputation) first to the obligation that was more onerous for him,
which was the one secured by the guaranty.
It is legally unimportant that the creditor should have applied the payment to the prior
indebtedness. Where the debtor has not expressly elected any particular obligation to which
the payment should be applied, the application by the creditor, in order to be valid and
lawful, depends: (1) upon his expressing such application in the corresponding receipt and
(2) upon the debtor's assent, shown by his acceptance of the receipt without protest. This is
the import of paragraph 2 of Art. 1252 of the New Civil Code:
If the debtor accepts from the creditor a receipt in which an application of the
payment is made, the former cannot complain of the same, unless there is a cause
for invalidating the contract.
Ultimately, therefore, the application by a creditor depends upon the debtor acquiescence
thereto. In the present case, as already noted, there is no evidence that the receipts for
payment expressed any imputation, or that the debtor agreed to the same.
The appellant Surety Company avers that the counterbondsmen can not question the
payment made by it to Destilleria Lim Tuaco on the debt of Dy Eng Giok, because their
counterbond or indemnity agreement (Annex B, par. 7) provided that:
INCONTESTABILITY OF PAYMENTS MADE BY THE COMPANY: Any payment of
disbursement made by the COMPANY on account of the abovementioned Bond, its
renewals, extensions or substitutions, either in the belief that the Company was
obligated to make such payment or in the belief that said payment was necessary in
order to avoid greater losses or obligations for which the Company might be liable by
virtue of the terms of the abovementioned Bond, its renewals, extensions or
substitutions shall be final and will not be disputed by the undersigned who jointly
and severally bind themselves to indemnify the COMPANY for any and all such
payments as stated in the preceding clauses. (Rec. App., p. 11)

We agree with the appellee that this kind of clauses are void and unenforceable, as against
public policy, "because they enlarge the field for fraud, because in these instruments the
promissor bargains away his right to a day in court and because the effect of the instrument
is to strike down the right of appeal accorded by the statute." (see National Bank vs. Manila
Oil Refining Co., 43 Phil. 467)
Finding no error in the judgment appealed from, the same is affirmed. Costs against
appellant. So ordered.
Paras, C. J., Bengzon, Padilla, Montemayor, Bautista Angelo, Labrador and Concepcion,
JJ., concur.
Municipaity of Gasan vs. Marasigan
Facts: Municipality of Gasan granted Marasigan fishing privileges within the jurisdictional
waters. To secure payment of license fees, Marasigan filed a bond subscribed by G and H
who bound themselves to pay if Marasigan failed to comply with the terms of the contract.
Contract was declared illegal by the Executive Bureau therefore the Municipality awarded
the privilege to another person who failed to pay the deposit and yielded the privilege to
Marasigan. The municipality told Marasigan that the contract was to be effective so the
municipality sought to recover from Marasigan and G and H, the amount representing the
license.
Issue: WON the contract and bond are valid and enforceable?
Held: No. Contract was not consummated and was cancelled. It ceased to be valid when it
was cancelled so Marasigsan and G&H were not bound to comply with the terms of the
contract. A guaranty cannot exist without a valid obligation.
FIRST DIVISION
[G.R. No. 45213. May 24, 1939.]
H. P. L. JOLLYE, Plaintiff-Appellant, v. EMETERIO BARCELON and LUZON SURETY
COMPANY, INC., Defendants. LUZON SURETY COMPANY, INC., Appellee.
Ross, Lawrence, Selph & Carrascoso for Appellant.
Santiago & Vicente for Appellee.
SYLLABUS
1. CONTRACTS; PACTS, CLAUSES AND CONDITIONS ESTABLISHED BY PARTIES THERETO. It
is the law that in every contract the parties may establish any pacts, clauses and conditions
they may deem advisable, provided, they are not contrary to law morals or public order (art.
1255 of the Civil Code.) , and that if the terms of a contract are clear and leave no doubt the
intention of the contracting parties, the literal sense of its wording shall be followed (art.
1281 of the Civil Code).
2. ID.; ID.; LIMITATION OF OBLIGATIONS. There is certainly nothing in the clause of the
surety bond, Exhibit B, that is contrary to law, morals or public order. The acts provided
therein by reason of which the contract of suretyship was executed could have taken place
within the stipulated period of twelve months;. Hence, the parties fixed that period exactly
at twelve months, limiting thereby the obligation of the appellee to answer for the payment
to the appellant of the aforesaid sum of P7,500 to not more than the stipulated period.

3. ID.; ID.; ID.; CONTRACT OF SURETYSHIP AND GUARANTY. The clauses of a contract of
suretyship, as has been said on more than one occasion, determine the degree of liability of
the surety (Government of the Philippine Islands v. Herrero, 38 Phil, 410), which must not be
extended by mere implications beyond the clear terms of the contract. The surety must only
be bound in the manner and to the extent, and under the circumstances which are set forth
or which may be inferred from the contract of suretyship (La Insular V8. Machuca Go-Tauco
and Nubla Co-Siong, 39 Phil., 567; Solon v. Solon, 38 Off. Gaz., 2015).
DECISION
DIAZ, J.:
Plaintiff attempted to recover from defendants the sum of P7,500 with legal interest from
August 28, 1936, when he filed his complaint, besides the costs of the suit, basing his claim
upon the facts which he averred in said pleading and hereafter to be mentioned. He
contended that said defendants were bound to pay him the sum referred to, jointly and
severally.
Upon the trial of the case, after defendants had filed their respective answers, the Court of
First Instance of Manila where it was commenced, rendered judgment, sentencing defendant
Emeterio Barcelon to pay plaintiff the amount claimed, with legal interest. It, however,
dismissed the case as to the defendant Luzon Surety Company, declaring that the obligation
assumed by said defendant, as surety, has been extinguished, and that said defendant is
accordingly no longer subject to any liability. From the judgment thus rendered by said court,
plaintiff took an appeal and, in his brief, maintains that the court erred: (1) m declaring that
the surety bond, Exhibit B, executed by the Luzon Surety Company in his favor, lapsed after
twelve months from its execution; and (2) in denying his motion for new trial.
The facts alleged by plaintiff and established at the trial are briefly as follows: Through his
agent, Felicisimo Santiago, plaintiff bought from defendant Emeterio Barcelon, on February
13, 1933 seventy-five shares of stock of the North Electric Company, a corporation duly
organized and engaged in business having its principal office in the City of Manila. Said 75
shares of stock were represented by two certificates, certificate No. 2 for twenty-five shares
and certificate No. 19 for fifty shares. When the sale took place, defendant Barcelon
executed the document appearing of record as Exhibit A, reading as
follows:jgc:chanrobles.com.ph
"DEED OF SALE OF SHARES OF CAPITAL STOCK OF THE NORTH
ELECTRIC COMPANY
"For and in consideration of the sum of seven thousand five hundred pesos (P7,500) which I
have this day received from Mr. H. P. L. Jollye, I, Emeterio Barcelon, owner of seventy-five
shares of capital stock of the North Electric Company (Certificate No. 38 [2-19] for 75
shares), do hereby sell, transfer and convey unto the said H. P. I. . Jollye, his heirs,
successors and assigns, the aforesaid shares and do hereby warrant that I have good and
sufficient title on them.
"It is agreed between the parties hereto that should any judgment in the case there is
against Vicente Diosomito in the Court of First Instance of Cavite invalidate my title to the
shares herein sold, I hereby obligate myself to give the money back to Mr. H. P. L. Jollye; and

for the purpose of guaranteeing the fulfillment of this obligation, I have caused the Luzon
Surety Company to issue in favor of the said H. P. L. Jollye, his heirs, successors and assigns,
a surety bond in the sum of P7,500 a copy of which is attached hereto and made part hereof
as Schedule A; it being understood, however, that all expenses in connection with the said
bond shall be borne and paid by the beneficiary Mr. H. P. L. Jollye, his heirs, successors or
assigns.
In witness whereof, I have hereunto signed this document, in this City of Manila, this 13th
day of February, 1933.
(Sgd.) "EMETERIO BARCELON
"In the presence of:chanrob1es virtual 1aw library
(Sgd.) "R. J. GONZALEZ
"F. SANTIAGO"
Since according to the said document Exhibit A, the seventy-five shares of stock in question
which were sold by Barcelon to plaintiff, were at the time subject of suit in civil case No.
2525 of the Court of First Instance of Cavite, entitled "Toribia Uson, Plaintif, v. Vicente
Diosomito, defendant", the two, Barcelon and the herein plaintiff, agreed that the first would
execute, as he in fact did, in favor of the latter a surety bond in an amount equal to what
was then given to him in payment of the seventy-five shares of stock in order to secure the
return of said sum in the event that Vicente Diosomito from whom Barcelon had acquired
them should lose in said case. Pursuant to that agreement, Barcelon and defendant Luzon
Surety Company, Inc., the latter in its capacity as surety, executed in favor of plaintiff Exhibit
B, reading as follows:jgc:chanrobles.com.ph
"SURETY BOND
"Know all men by these presents:jgc:chanrobles.com.ph
"That we, Emeterio Barcelon of No. 16 Brixton Hill, Manila, as principal, and Luzon Surety
Company, Inc., a corporation duly organized and existing under and by virtue of the laws of
the Philippine Islands, as sureties, are held and firmly bound unto H. P. L. Jollye of Manila, P. I.
in the sum seven thousand five hundred only (P7,500), Philippine currency, for the payment
of which sum, well and truly to be made, we bind ourselves, our heirs, executors,
administrators, successors, and assigns, jointly and severally, firmly by these presents.
The conditions of this obligation are as follows:jgc:chanrobles.com.ph
"Whereas, the above bounden principal, on 13th day of February, 1933 entered into an
agreement with H. P. L. Jollye of Manila, P. I., to fully and faithfully refund to said Mr. H. P. L.
Jollye the above stated sum of P7,500 representing the purchase price of the 75 shares of
the capital stock of the North Electric Company (certificate No. 38) paid by said Mr. H. P. L.
Jollye to the undersigned principal, Mr. Emeterio Barcelon, in the event the title thereto of
said Mr. Barcelon is invalidated by any judgment which may be rendered by the court in the
case now pending in the Court of First Instance of Cavite against Vicente Diosomito or in the
event that any of the warranties contained in that certain deed of sale executed by the
undersigned principal on this 13th day of February, 193~, be invalidated, a copy of which is
hereto attached and made an integral part hereof, marked Exhibit A.
"Whereas, said H. P. L. Jollye requires said principal to give a good and sufficient bond in the
above stated sum to secure the full and faithful performance on his part of said agreement.

"Now therefore, if the principal shall well and truly perform and fulfill all the undertakings,
covenants, terms, conditions and agreements stipulated in said agreement, then this
obligation shall be null and void; otherwise it shall remain in full force and effect.
"The liability of Luzon Surety Company, Inc., under this bond will expire twelve (12) months
from date hereof.
"In witness whereof, we have set our hands and signed cur names on this 13th day of
February, 1933.
(Sgd.) "EMETERIO BARCELON
"Principal
"LUZON SURETY COMPANY, INC.
(Sgd.) "EULOGIO RODRIGUEZ
"Manager
"Surety
"In the presence of:chanrob1es virtual 1aw library
(Sgd.) "C . G. RAMOS
"Witness to principal
(Sgd.) ILLEGIBLE
"Witness to surety"
Upon the commencement of case No. 2626 above-mentioned in the early part of January,
1932, Toribia Uson, as plaintiff, secured a writ of preliminary attachment against Vicente
Diosomito and by virtue of that writ the seventy-five shares of stock in question, which then
still appeared in the books of the North Electric Company in the name of and as belonging to
Diosomito, were attached. Thereafter, judgment was rendered against him in said case,
sentencing him to pay the plaintiff Uson the sum of P2,300. is this judgment became final
because he did not take any appeal, the corresponding writ of execution was thereafter
issued. After the giving of the prescribed notices, the sheriff sold the attached seventy-five
shares of stock to Toribia Uson as the highest bidder at the public sale. However, when she
appeared in the offices of the North Electric Company with the certificate of sale issued in
her favor by the sheriff, to ask for the transfer of her name of the aforesaid certificates Nos.
2 and 19 which represented the seventy-five shares of stock sold to her by the sheriff she
discovered that the same had already been cancelled because another had been issued in
their place, being at first certificate No. 38 in favor of Emeterio Barcelon subsequently,
certificate No. 47 in favor of the herein plaintiff. This was due to the fact that Diosomito, the
former owner of the shares of stock aforementioned, sold them to Barcelon, although he had
been informed that they had been attached in the case brought against him by Toribia Uson
(Civil case No. 2525) because he had been timely notified of the attachment and because
that fact was also noted in certificates Nos. 2 and 19 and in the books of the North Electric
Company.
In view of this fact, Toribia Uson, who insisted on the validity and force of her right as a

purchaser in good faith of the aforementioned shares of stock, commenced civil case No.
2816 in the Court of First Instance of Cavite, against Vicente Diosomito, Angel Limjoco,
Emeterio Barcelon, H. P. L. Jollye, and the North Electric Company, to secure a judicial
determination of who among them had the right of ownership over said shares. The court
decided the case in her favor, declaring that she was their real owner and ordering
accordingly the North Electric Company to cancel certificate No. 47 with which certificates
Nos. 2 and 19 were substituted and to issue a new one in favor of Toribia Uson as evidence
of her right over said shares.
The court reserved to H. P. L. Jollye, defendant and appellant in this case, the right to recover
from Emeterio Barcelon the amount of P7,500 for which he had bought the shares, and to
Barcelon the right in turn to recover from Vicente Diosomito what he had paid the latter
therefor. The judgment by which all this was ordered, was appealed to this court, but u as
affirmed in its entirety.
Desiring to recover the P7,500 he had paid Barcelon, appellant now brings his action against
the surety of said defendant, which is the appellee, Luzon Surety Company, Inc.
It will be noted that the last clause of the surety bond executed by the appellee in favor of
the appellant clearly says:jgc:chanrobles.com.ph
"The liability of Luzon Surety Company, Inc., under this bond will expire twelve (12) months
from date hereof." The date to which the aforecited clause refers is February 13, 1933.
It is the law that in every contract, the parties may establish any pacts, clauses and
conditions they may deem advisable, provided, they are not contrary to law, morals or
public order (art. 1255 of the Civil Code), and that if the terms of a contract are clear and
leave no doubt as to the intention of the contracting parties, the literal sense of its wording
shall be followed (art. 1281 of the Civil Code).
There is certainly nothing in the clause referred to of the surety bond, Exhibit B, nor in the
others which it contains, that is contrary to law, morals or public order. The acts provided
therein by reason of which the contract of suretyship was executed could have taken place
within the stipulated period of twelve months. Hence, the parties fiscal that period exactly at
twelve months, limiting thereby the obligation of the appellee to answer for the payment to
the appellant of the aforesaid sum of P7,500 to not more than the stipulated period. The
clauses of a contract of suretyship, as has been said on more than one occasion, determine
the degree of liability of the surety (Government of the Philippine Islands v. Herrero, 38 Phil.,
410), which must not be extended by mere implications beyond the clear turns of the
contract. The surety must only be bound with manner and to the extent, and under the
circumstances which are set forth or which may be inferred from the contract of suretyship
(La Insular v. Machuca Go-Tauco and Nubla Co-Siong, 39 Phil., 567; Solon v. Solon, 38 Off.
Gaz., 2015).
Furthermore, as it was and is known that the appellee is a corporation created and organized
exclusively to engage in the business of giving bonds upon a fixed premium or interest,
which is of course limited to the rate determined by law, it must necessarily subsist on the
income it derives through said means. From this it follows that it did not bind itself, which
appellant knows, to answer to any one beyond the one year period of the contract. To bind it
for a longer time, he should have renewed the contract, Exhibit B; and appellant neither
asked for a novation nor paid the necessary premium to extend it for one, two or three more
years.
Accordingly, the first error attributed to the lower court has no merit, and as the second
error is no more than a consequence of the first, consideration thereof is unnecessary.

The judgment appealed from being in accordance with law in view of the foregoing
considerations, it is affirmed in its entirety, with costs against the appellant. So ordered.
Avancea, C.J., Villa-Real, Imperial, Laurel, Concepcion, and Moran, JJ., concur.
Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION

G.R. No. L-19632 November 13, 1974

THE PHILIPPINE AMERICAN GENERAL INSURANCE COMPANY, INC., plaintiff-appellee,
vs.
MANUEL MUTUC DOROTEO Q. MOJICA, and FAUSTO S. ALBERTO, defendants,
FAUSTO S. ALBERTO,defendant-appellant.
Manuel Lim, Manuel Y Macias & Ricardo T. Bancod for plaintif-appellee.
V. A. Francisco & Associates for defendant-appellant.

FERNANDO, J.:p
There is an obstacle, rather formidable in character, that stands in the way of the plea of
appellant Fausto S. Alberto, 1 to have this Court reverse a lower court decision of February
14, 1962, holding him liable on an indemnity agreement. As pointed out therein, the
language of his undertaking is clear and unmistakable and, therefore, leaves no alternative
for a court except to enforce its terms. The attempt to impugn such a judgment based on
the ground that the stipulation relied upon is contrary to morals and to public order and
policy, while vigorously pressed, is none too successful. Accordingly, we affirm.
The facts as stipulated by the parties may be gleaned from the appealed decision. Thus: "On
July 16, 1957, defendant Manuel C. Mutuc as principal, and plaintiff, as surety, executed a
surety bond in the amount of P1,000 in behalf of defendant Mutuc and in favor of the Maersk
Line, in which the surety company guaranteed the faithful performance by said Manuel C.
Mutuc of his duties in connection with his employment as crewmember of the vessel of the
Maersk Line, and more particularly, that he would not desert said vessel while he was
engaged as such crewmember while outside of the Philippines. To protect the plaintiff
company, on July 17, 1957, in consideration of plaintiff's becoming surety of the defendant
Manuel C. Mutuc, under the bond, ... the defendant Manuel C. Mutuc, Doroteo Q. Mojica, and
Fausto S. Alberto, executed an indemnity agreement in favor of the plaintiff, ... . The
duration of the surety bond, ... was for the period beginning July 16, 1957 to July 17, 1958,
but at the instance of the defendant, Manuel C. Mutuc, it was renewed for three successive
one year periods, the last period of which was from July 17, 1960 to July 17, 1961. The prior
consent of the defendant Fausto S. Alberto to the aforesaid renewal extension was not

obtained by the defendant Manuel C. Mutuc or by the plaintiff. According to the letter of the
Immigration and Naturalization Service, United States Department of Justice, ... Manuel C.
Mutuc was not aboard the vessel M/S Merit Maersk when it departed from New York at 3:00
o'clock P.M. for Charleston, South Carolina, and was presumed to be a deserter. The
Compania General de Tabacos de Filipinas which represented the Maersk Lines forwarded
this letter to the plaintiff and asked for the remittance of the forfeited bond of P1,000. On
October 6, 1960, the plaintiff wrote a letter to the defendants Doroteo Q. Mojica and Fausto
S. Alberto demanding the payment of the amount of P1,000 in accordance with the
indemnity agreement. On October 25, 1960, plaintiff paid the Tabacalera the sum of P5,000
in full settlement of the latter's claim against the bond ... .This action is for the recovery of
the amount of P1,000 against the defendants Mojica and Alberto based on the indemnity
agreement ... . From the judgment against them by the Municipal Court, defendant Alberto
appealed alleging that the renewal was made without his consent." 2
The indemnity agreement was insofar as pertinent set forth therein in this wise:
"[Indemnity]: The undersigned agree at all times to jointly and severally indemnify the
[Company] and keep it indemnified and hold and save it harmless from and against any and
all damages, losses, costs, stamps, taxes, penalties, charges and expenses of whatsoever
kind and nature which the [Company] shall or may, at any time sustain or incur in
consequence of having become surety upon this bond herein above referred to or any
extension, renewal, substitution or alteration thereof, made at the instance of the
undersigned or any of them, or any other bond executed on behalf of the undersigned or
any of them; and to pay, reimburse and make good to the [Company] its successors and
assigns, all sums and amount of money which it or its representatives shall pay or cause to
be paid, or become liable to pay, on account of the undersigned or any of them, of
whatsoever kind and nature, including 15% of the amount involved in the litigation or other
matters growing out of or connected therewith, for and as attorney's fees, but in no case
less than P25.00. It is hereby further agreed that in case of any extension or renewal of the
bond we equally bind ourselves to the [Company] under the same terms and conditions as
herein provided without the necessity of executing another indemnity agreement for the
purpose and that we hereby equally waive our right to be notified of any renewal or
extension of the bond which may be granted under this indemnity agreement. [Renewals,
alterations and substitutions]: The undersigned hereby empower and authorize the
Company to grant or consent to the granting of any extension, continuation, increase
modification, change, alteration, and/or renewal of the original bond herein referred to, and
to execute or consent to the execution of any substitution for said Bond with the same or
different conditions and parties, and the undersigned hereby hold themselves jointly and
severally liable to the Company for the Original Bond herein abovementioned or for any
extension, continuation, increase, modification, change, alteration, renewal or substitution
thereof, until the full amount including principal, interests, premiums, costs and other
expenses due to the Company thereunder is fully paid up." 3
The lower court after referring to the above stipulation as to "Renewals" which refers not to
a single extension but to "any extension" agreed to in advance by defendant, now appellant,
found for plaintiff, now appellee. As set forth in the decision: "The defendant having
expressly empowered or authorized his principal to the granting of any extension, his
liability under the indemnity agreement necessarily follows." 4 It is from that decision in favor
of plaintiff that this appeal is taken. As set forth at the outset, there is no legal ground for a
reversal.

1. Appellant was not compelled to enter into an indemnity agreement. He did so of his own
free will. He agreed to hold himself liable for the amount therein specified. What is more, he
did consent likewise to be so bound not only for the one year period specified but to any
extension thereafter made, an extension moreover that could be had without his having to
be notified. That was what the contract provided. He gave his plighted word. The terms were
definite and certain. There was no ambiguity. All that was necessary was to see its
enforcement. The Civil Code explicitly provides: "If the terms of a contract are clear and
leave no doubt upon the intention of the contracting parties, the literal meaning of its
interpretation shall control." 5 that was how it was worded under the Civil Code of Spain of
1899 formerly in force in this jurisdiction. 6
A provision like the above exemplifies according to the leading case of Perez v. Pomar 7 the
principle that "the will of the contracting parties is law, ... ." 8 It is understandable then why
in Alburo v. Villanueva, 9 this Court affirmed that where the terms of a contract are "clear and
explicit," they "do not justify an attempt to read into it any alleged intention of the parties
other than that which appears upon its face." 10 As was so categorically put forth
in Hernandez v. Antonio: 11 "The literal sense of its stipulations must be observed." 12 It was
so succinctly observed by Chief Justice Arellano in Velasco v. Lao Tam13 that such is the "first
rule on the matter ... ." 14 There is this excerpt from Chinchilla v. Rafel: 15 "That the terms
employed in the contract Exhibit 1 are clear and leave no doubt as to the true genuine
intention of the contracting parties, it is sufficient, in the opinion of this court, to
demonstrate it by a simple reading of the document Exhibit 1 from the wording of which it is
not possible to find any meaning contrary or opposed to the evident intention of the
contracting parties, Rafel and Verdaguer. ... From the literal wording of the document in
question, it is not possible under any circumstance whatsoever to infer a contract distinct
from that which really and truly appears to have been specified in the said
document." 16 Thus, contracts, according to Feliciano v. Limjuco, 17 which are the private laws
of the contracting parties, should be fulfilled according to the literal sense of their
stipulations, if their terms are clear and leave no room for doubt as to the intention of the
contracting parties, for contracts are obligatory, no matter what their form may be,
whenever the essential requisites for their validity are present. 18 A terse summary of the
matter is that of the then Justice, later Chief Justice, Moran: "A writing must be interpreted
according to the legal meaning of its language." 19
2. 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." 20 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. 21
WHEREFORE, the lower court decision of February 14, 1962 is affirmed. Costs against
appellant.
Antonio, Fernandez and Aquino, JJ., concur.
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-12077

June 27, 1958

EMMANUEL C. ONGSIAKO, ET AL., plaintiffs,

vs.
THE WORLD WIDE INSURANCE and SURETY CO., INC., ET AL., defendants.
THE WORLD WIDE INSURANCE and SURETY CO. INC.,cross-claimant-appellant,
vs.
CATALINA DE LEON, cross-defendant-appellee.
Villareal and Amacio for appellant.
Mariano M. Magsalin and Macario L. Nicolas for appellee.
BAUTISTA ANGELO, J.:
On November 10, 1951, Catalina de Leon executed in favor of Augusto V. Ongsiako a
promissory note in the amount of P1,200.00, payable ninety (90) days after date, with
interest at 1 per cent per month. On the same date, a surety bond was executed by Catalina
de Leon, as principal, and the World Wide Insurance & Surety Co., Inc., as surety, whereby
they bound to pay said amount jointly and severally to Augusto V. Ongsiako. As the
obligation was not paid on its date of maturity either by Catalina de Leon or by the surety
notwithstanding the demands made upon them, Ongsiako brought this action on March 6,
1953 in the Municipal Court of Manila to recover the same from both the principal and the
surety. Judgment having been rendered for the plaintiff, both defendants appealed to the
court of first instance. In the latter court, Catalina de Leon failed to answer and so she was
declared in default. In due time the surety company filed its answer setting up a
counterclaim against plaintiff and a cross-claim against its co-defendant.
After hearing, the court rendered judgment ordering Catalina de Leon to pay plaintiff the
sum of P1,200.00, with interest at the rate of 1 per cent per month from February 10, 1952,
and the sum of P300.00 as attorneys' fees, and costs. Defendant surety company was
likewise ordered to pay to plaintiff the same judgment but with the proviso that "execution
should not issue against defendant The World-Wide Insurance & Surety Co., Inc., until a
return is made by the Sheriff upon execution against defendant Catalina de Leon showing

that the judgment against her remained unsatisfied in whole or in part; and provided,
further, that defendant Catalina de Leon shall reimburse to defendant Company whatever
amount the latter might pay under this judgment together with such expenses as may be
necessary to effectuate said reimbursement." From this judgment, the surety company
appealed and the case is now before us because, as certified by the Court of Appeals, it only
involves questions of law. Augusto V. Ongsiako, having died in the meantime, was
substituted by his special administrators Emmanuel Ongsiako and Severino Santiangco.
The surety bond in question was executed in November 10, 1951 and among the important
provisions it contains is the following: that the principal and the surety "are held and firmly
bound unto Dr. Augusto V. Ongsiako in the sum of One Thousand Two Hundred Pesos
(P1,200.00), Philippine Currency, for the payment of which well and truly to be made, we
bind ourselves ... jointly and severally, firmly by these presents" (and referring to the
Promissory Note) "whose terms and conditions are made parts hereof." In said bond there
also appears a special condition which recites: "The Liability of the World-Wide Insurance &
Surety Co., Inc. under this bond will expire on February 10, 1952." The note therein referred
to, on the other hand, provides that the obligation is payable ninety days from date of issue,
November 10, 1951, which means that its date of maturity is February 10, 1952. The
evidence shows that neither the principal nor the surety paid the obligation on said date of
maturity and immediately thereafter demands for payment were made upon them. Thus, it
appears that as early as February 12, 1952, or two days thereafter, the creditor wrote to the
surety company a letter notifying it of the failure of its principal to pay the obligation and
requesting that it make good its guaranty under the bond (Exhibit B), which demand was
reiterated in subsequent letters (Exhibits C, D and E). To these demands, the company
merely set up the defense that it only acted as a guarantor and as such its liability cannot be
exacted until after the property of the principal shall have been exhausted (Exhibit G).
It therefore appears that appellant has no justification whatever to resist the claim of the
plaintiff for in the judgment appealed from it is precisely provided that execution of
judgment should not issue against it until after it is shown that the execution of the
judgment against the principal has been returned by the sheriff unsatisfied, which was the
only excuse given by said appellant in not fulfilling its commitment under the bond. And yet
it appealed from said judgment just to put up the additional defense that its liability under
the bond has already expired because of the condition that its liability shall expire on
February 10, 1952. Even if this were true, we consider however this stipulation as unfair and
unreasonable for it practically nullifies the nature of the undertaking assumed by appellant.
It should be noted that the principal obligation is payable ninety days from date of issue,
which falls on February 10, 1952. Only on this date can demand for payment be made on the
principal debtor. If the debtor should fail to pay and resort is made to the surety for payment
on the next day, it would be unfair for the latter to allege that its liability has already
expired. And yet such is the stand taken by appellant. As the terms of the bond should be
given a reasonable interpretation, it is logical to hold that the liability of the surety attaches
as soon as the principal debtor defaults, and notice thereof is given the surety within
reasonable time to enable it to take steps to protect its interest. This is what was done by
appellee in the present case. After all, the surety has a remedy under the law which is to
foreclose the counterbond put up by the principal debtor. This is in effect what was done by
the lower court.
This Court has taken note of the reprehensible attitude adopted by the surety company in
this case by resorting to improper means in an effort to evade its clear responsibility under
the law. An instance of such attitude is the insertion in the bond of a provision which in

essence tends to nullify its commitment. This is a subtle way of making money thru trickery
and deception. Such practice should be stopped if only to protect honest dealers or people in
financial stress. Because of such improper conduct, this Court finds no justification for the
present appeal and considers it frivolous and unnecessary. For this appellant should be
made to pay treble costs.
Wherefore, the decision appealed from is affirmed, with treble costs against appellant.
Bengzon, Concepcion, Reyes, J. B. L., Endencia, and Felix, JJ., concur.
Paras, C. J., Montemayor, and Reyes, A., JJ., concur in the result.
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-22209

December 17, 1966

PHILIPPINES INTERNATIONAL SURETY CO., INC., petitioner,

vs.
COMMISSIONER OF CUSTOMS, respondent.
Tolentino, Garcia and D. R. Cruz for petitioner.
Office of the Solicitor General for respondent.
CONCEPCION, C.J.:
Appeal by the Philippines International Surety Co., Inc. from a decision of the Court of Tax
Appeals.
From June to August, 1955, four (4) shipment of goods, consigned to Pablo Gonzales arrived
at the Port of Manila, on board S.S. Bronnyvile, without the release certificate required by
Central Bank Circular. Nos. 44 and 45. Consequently, said goods were subjected, by the
Acting Collector of Customs for said port, to seizure proceedings, during the pendency of
which the merchandise were, later, ordered released to Gonzales, under bonds issued by
appellant surety. After due hearing, said officer rendered a decision, on April 4, 1960,
ordering the forfeiture of said goods upon the ground that the importation thereof had
been made in violation of the Circulars above referred to and, accordingly, of the
aforementioned bonds and sentencing Gonzales and the surety to pay, jointly and severally,
the amounts thereof, aggregating P53,434.08. On appeal, taken by Gonzales, this decision
was affirmed by the Commissioner of Customs. The surety appealed from the latter's
decision to the Court of Tax Appeals, which, in due course, dismissed said appeal upon the
ground that said surety has no legal capacity to interpose the aforementioned appeal, and
that the same is without merit. Hence, this appeal by the surety, who maintains that the
Court of Tax Appeals has erred on both counts.
With respect to petitioner's capacity to appeal from the decision of the Commissioner of
Customs, we note that the petition for review filed by the surety with the Court of Tax
Appeals is based upon two (2) grounds, namely: (1) that the Collector of Customs had not

furnished a copy of its decision to Gonzales; and (2) that Central Bank Circulars Nos. 44 and
45 are allegedly null and void.
According to the decision rendered by the Commissioner of Customs on appeal
taken, not by the surety, who didnot appeal from the decision of the Collector of Customs,
but by the importer, Gonzales the latter had limited himself to assailing the validity of the
aforementioned Circulars of the Central Bank. In other words, Gonzales had not impugned
the decision of the Collector of Customs upon the ground of lack of notice, alleged by the
surety, thus showing, either that Gonzales had really received as the surety, evidently,
had notice of said decision, as indicated by the fact that he had appealed therefrom, or
that he had waived said notice, which it is his privilege to renounce. Hence, the surety had
no right to invoke in support of its own appeal, said alleged lack of notice to theimporter, not
only because his acts proved that there had been such notice, but, also,
that he had waived it, by appealing from the decision of the Collector of
Customs, and by not interposing an appeal from the decision of the Commissioner of
Customs, thereby allowing the same to become final and executory, insofar as he is
concerned. It may not be amiss to add that lack of notice of a decision to a given party
affects, not the validity of said decision, but its finality insofar as such party is concerned, in
the sense that his period to appeal does not begin to run until said notice, and that the
decision cannot be executed against him until after the expiration of the period
aforementioned.
It should, also, be pointed out that, as regards the surety herein, which had not appealed
from the decision of the Collector of Customs, the same had become final and
executory upon expiration of the reglementary period to appeal therefrom. Although the
appeal taken from said decision by the importer might have, perhaps, inured to the benefit
of the surety, if the result of the appeal had been favorable to said importer, the fact is that
he had failed in his appeal. Hence, there is no legal ground by which the surety may justify
its alleged right to appeal from the decision of the Commissioner of Customs, based upon an
alleged violation, not of its right as a surety, but of those of the importer, as such.
It is true that a solidary debtor may "avail himself of all the defenses which are derived from
the nature of the obligation and of those which are personal to him or pertain to his share"
(Article 1222, Civil Code of the Philippines). What, then, is the nature of the obligation of the
surety in the case at bar? Pertinent parts of its bonds provide:
. . . WHEREAS, the Collector of Customs is willing to release and deliver the above
mentioned to the Principal upon the filing of a surety bond in the amount of
Philippine Currency, representing the local appraised value of the
merchandise to guaranty the payment of the amount that the Bureau of Customs or
the courts of the Philippines may decide to collect, depending upon the final outcome
of the seizure proceedings;
WHEREAS, the Principal and the Surety both agree to be bound, as they hereby do
bind themselves, their heirs, executors, administrators, successors and assigns,
jointly and severally, for the payment and the obligation herein mentioned; and
WHEREAS, the parties hereto have agreed that the Collector of Customs, the
Commissioner of Customs, or any of their subordinates, shall not be held liable in any
manner for the delivery of said merchandise;

NOW, THEREFORE, the conditions of this obligation are such that, in the event that it
should be finally decided that the merchandise herein mentioned should be forfeited
to the government, and/or that a fine or surcharge should be imposed, the entire
amount of this bond, in case of forfeiture, or the corresponding amount of the fine or
surcharge, as the case may be, shall be paid in CASH to the Bureau of Customs.
PROVIDED, HOWEVER, that if within thirty (30) days from demand for payment of the
liability herein mentioned the said liability is not paid, and it should be found
necessary to file an action in court to effect the collection thereof, a penalty of FIVE
HUNDRED PESOS (P500.00) in addition shall be imposed, otherwise, this obligation
shall be void and of no effect.
Pursuant thereto, the surety bound itself to pay the sum of money specified in the bond, "in
the event that it should be finally decided that the merchandise herein mentioned should be
forfeited to the Government". Thus, the surety guaranteed, not the legality of the
importation, but, merely the payment of the appraised value of the goods imported and
released, in the event aforementioned. As a consequence, the surety would have a right to
object and appeal if it were made to pay, either an amount exceeding its bond, or without a
previous decree of forfeiture of the merchandise. The bond did not, however, give the surety
a right to question the legality of the seizure or that of the aforementioned Circulars of the
Central Bank. Indeed, the surety in the case at bar, stands in substantially the same
position, legally, as the surety of the accused in a criminal case who is released on bail.
Surely, such surety can not intervene in the proceedings, before the trial court, to establish
the guilt or innocence of the accused and/or appeal from its judgment convicting him as
charged.
At any rate, the authority of the Central Bank to issue Circulars Nos. 44 and 45, and the
validity of these Circulars,1as well as the propriety of the decree of confiscation and
forfeiture of the goods imported in violation thereof2 are now well settled.
WHEREFORE, the appealed decision of the Court of Tax Appeals is hereby affirmed, with
costs against the Philippines International Surety Co., Inc. It is so ordered.
Reyes, J.B.L., Barrera, Dizon, Regala, Makalintal, Bengzon, J.P., Zaldivar, Sanchez and Castro,
JJ., concur.
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-20469

August 31, 1965

PEDRO C. PASTORAL, petitioner,

vs.
MUTUAL SECURITY INSURANCE CORPORATION and THE HONORABLE COURT OF
APPEALS,respondents.
San Juan, Africa and Benedicto for petitioner.
Vicente L. San Luis for respondents.

REYES, J.B.L., J.:

Petition by Pedro C. Pastoral for the review and reversal of a decision of the Court of Appeals
(in its Case CA-G.R. No. 29180-R), that absolved the Mutual Security Insurance Corporation
of its liability to the said petitioner, reversing the decision of the Court of First Instance of
Manila.
The facts are stated by the Court of Appeals to be as follows:
It appears that on and from October 1, 1957, plaintiff Pedro C. Pastoral leased a crane
to defendant Mapada & Company, Inc., at a monthly rental of P900.00, Exhibit A. The
contract provides that if the crane be not returned 10 days after notice therefor,
defendant will pay plaintiff P15,000, as the value of the crane. In compliance with
paragraph 2(b) of Exhibit A, defendant on October 22, 1957, put up a surety bond,
Exhibit B, in the total amount of P15,000 executed by appellant Mutual Security
Insurance Corporation to fully and faithfully guarantee compliance by defendant of
"all the conditions and obligations" under the lease contract. Upon request of
defendant which was expecting some money from the construction contract with the
government about the end of November, plaintiff deferred its collection of rentals for
the months of October and November, 1957 until the beginning of December; but
when no payment was made despite demands, plaintiff advised, and demanded
payment from, the surety company on December 5, 1957, Exhibit C. Up to the date of
the trial and despite numerous demands by plaintiff, defendant failed to pay any
rental (except P2,000 in March, 1958 from the Bureau of Public Highways) nor to
return the crane to plaintiff.
After trial, judgment was rendered in favor of plaintiff and against the defendants,
ordering the latter solidarity to pay the plaintiff the sum of P7,700 as unpaid rentals
up to and including the month of September, 1958 when the complaint was filed plus
P900 as monthly rental from the month of October, 1958 until the crane is actually
returned, or in default thereof to pay to plaintiff the sum of P15,000 for the crane,
provided that the amount for which appellant Mutual Security Insurance Corporation
shall be liable shall not exceed the sum of P15,000; and to pay the costs.
Only the surety company appealed, urging that the trial court erred in not holding
that it was released from liability under the surety bond which had become null and
void from the failure of plaintiff to report within five days to appellant the violation of
the lease contract.
The Contract of Lease of Construction Equipment, Exhibit A, provides inter alia: "2.
That the lessee obligates to pay a monthly rental of Nine Hundred Pesos (P900)
Philippine Currency payable at the residence of the LESSOR ..."; while the surety
bond, Exhibit B, after guaranteeing compliance with the lease contract provides: "Any
violation of said contract will be reported to the herein Surety Company within (5)
days, otherwise, this bond will be null and void."
Upon the facts above narrated, the Court of Appeals decided that Pastoral's failure to notify
the surety of the principal's defaults between October 6-10 and November 6-10, 1957, and
in notifying the surety only on December 5, 1957, constituted a violation of the conditions of
the bond that exonerated the surety from liability.

Unable to obtain reconsideration of the decision, Pastoral resorted to this Court.

We find the appealed decision to be in error.
On the basis that Pastoral received a copy of the bond (containing the requirement to notify
the surety of any default within 5 days) only on November 21, 1957 and this date is not
seriously disputed Pastoral's obligation to notify it within five (5) days of the defaults in
the payment of the first two monthly rentals, falling due in early October and early
November, had become impossible of performance, so that compliance with the 5-day
notice requirement had become excused for those two months. No reason is shown why
Pastoral should anticipate that the surety would impose this condition when the lease
contract merely required that lessee Mapada & Co., Inc. should furnish a surety bond. That
Pastoral knew nothing about such a condition before November 21 is further emphasized by
the fact that in late October or early November he agreed with Mapada & Co., Inc., to defer
payment of the October and November rentals to the end of November.
By imposing on Pastoral the condition of notifying it within 5 days of default, the surety
company made it necessary that Pastoral should accept the bond; and Pastoral could not do
so before learning of it.
This Court has ruled that where the guaranty requires action by the creditor before the
obligation becomes fixed, it is not binding until accepted (National Bank vs. Garcia, 47 Phil.
63; Texas Co. [Phil.] Inc. vs. Alonzo, 73 Phil. 90). The rule is grounded on common sense;
otherwise, the debtor and the guarantor could easily defraud the creditor by inserting in the
bond conditions that would render it nugatory.
The suretyship contract, therefore, was not perfected and was not binding on Pastoral until
November 21, 1957, when he received copy thereof and tacitly accepted it. By then two
defaults had already occurred (even disregarding the extension agreement of October 31,
hereinafter discussed); and Pastoral was in no position to give notice of them within 5 days
after default, as required by the bond, because the latest happened on November 5. The 5day period to notify expired November 10, and Pastoral only learned of the existence of the
condition on November 21.Ad impossibilia nemor tenetur. In fact, by not notifying Pastoral
earlier, the surety must be deemed to have waived the condition as to rentals already due,
since a condition is deemed fulfilled when the obligor voluntarily prevents its fulfillment (Civ.
Code, Art. 1186).
The Court of Appeals held that Pastoral was duty-bound to know and secure copy of the
surety contract within a reasonable time from its execution on October 22, 1957, and that
not having done so, he was chargeable with its contents. We find no justification for this
pronouncement. If anyone was obligated to notify Pastoral of the conditions attached to the
bond, that one was the guarantor. Pastoral was not obligated to inquire, since his assent to
the condition was necessary; and if no acceptable bond was forthcoming, he could always
rescind the lease of the machinery to Mapada & Co., Inc., and recover his crane.
The Court of Appeals further held that the act of Pastoral in granting to the debtor on
October 31, 1957 time up to the end of November, 1957 to pay the rentals that fell due on
the first five days of October and November, without the surety's consent, constituted a
material alteration that discharged the surety. We agree with appellant that this view is
untenable. When Pastoral agreed on October 31 that the October and November rentals be

paid at the end of November, he had not yet learned of them on November 21. On the latter
date, the debtor was not yet in default, because the extension given had wiped out the
previous failures to pay on October 5 and November 5. The first default after the bond had
become effective in law (on November 21) occurred on the last day of November, and
Pastoral gave notice thereof to the surety on the 5th day of December, within the five-day
period prescribed by the bond.
A contract of guaranty or suretyship is only prospective, and not retroactive in operation
(Socony Vacuum, Corp. vs. Miraflores, 67 Phil. 304; El Venceder vs. Canlas, 44 Phil. 699;
Asiastic Petroleum Co. vs. De Pio, 46 Phil. 167), unless a contrary intent is clearly shown.
Consequently, Pastoral, was entitled to assume that the notice provided by the surety bond
did not, and was not intended to include any defaults incurred prior to his acceptance. The
surety, which drafted the bond, could have expressly provided, if it so chose, that the fiveday notice therein provided should extend to the amounts of falling due on October 5 and
November 5, but the surety failed to do so, and cannot blame Pastoral therefor.
The fault in the reasoning of the Court of Appeals lies in its assumption that the surety bond
became effective immediately, without taking into account that the five-day notice provision
required the creditor's assent to become effective and binding This assent could not be
given before November 21, when Pastoral learned of the condition for the first time and
tacitly agreed to it, as shown by his notice to the surety on December 5, that the principal
debtor had defaulted.
It is worth stressing here that this Court has repeatedly decided (Pacific Tobacco Co. vs.
Lorenzana and Visayan Surety, L-8086, October 31, 1957; Phil. Surety vs. Royal Oil Products,
L-9981, Oct. 31, 1957; Atkins Kroll & Co. vs. Reyes, L-11936, April 30, 1959) that the rule
holding sureties to be favorites of the law, and their contracts to bestrictissimi juris, does not
apply to compensated sureties, following United States Fidelity & Guaranty Co. vs. Golden
Pressed & Fire Brick Co., 191 U.S. 416, 48 L. ed. 242:
We are familiar with the old rule of strict construction in favor of the surety, based
upon the underlying principle that formerly parties became sureties, not for hire but
as a matter of accommodation, usually lending their names through motives of
friendship, and hence a surety obligation would be construed most strongly in their
favor. But the rule "strictissimi juris" has no application to surety companies,
organized for the purpose of conducting an indemnity business at established rates
of compensation.
and which, it may be added, protect themselves against loss by exacting adequate
counterbonds.
WHEREFORE, the decision of the Court of Appeals is reversed, and that of the Court of First
Instance of Manila is upheld and confirmed. Respondent-appellee Mutual Security Insurance
Corporation shall pay the costs in all instances.
Bengzon, C.J., Concepcion, Dizon, Regala, Makalintal, Bengzon, J.P., and Zaldivar, JJ., concur.
Bautista Angelo, J., took no part.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-16716

April 28, 1962

PEDRO R. JAO and CATALINA SIA, plaintiffs-appellees,

vs.
ROYAL FINANCING CORPORATION, ET AL., defendants-appellees;
ASSOCIATED INSURANCE and SURETY CO., INC., bondsman-appellant.
Gualberto Cruz for plaintifs-appellees.
Bernardo and Pelias for defendants-appellees.
M. Perez Cardenas for bondsman-appellant.
PAREDES, J.:
On October 30, 1957, the plaintiffs spouses Pedro R. Jao and Catalina Sia, signed a
promissory note in favor of the defendant Royal Financing Corporation, guaranteed by a
chattel mortgage, executed on October 31, 1957. On June 27, 1958, in accordance with the
extra-judicial foreclosure of chattel mortgage filed by defendant corporation on June 25,
1958, the Sheriff of Manila, announced and advertised for sale the properties of plaintiff,
which were the object of the chattel mortgage, the same to take place on July 11, 1958, at
plaintiffs' premises in Manila. On July 7, 1958, plaintiffs filed a complaint (Civil Case No.
36800), against the Royal Financing Corporation and the Sheriff of Manila, praying the lower
court to declare the promissory note of October 30, 1957, null and void, for having allegedly
paid the same; to declare the chattel mortgage of October 31, 1957 null and void, due to the
payment of the obligation, and to order the Sheriff to desist from selling the properties and
the corporation to pay plaintiffs the sum of P1,000.00 as attorney's fees and P5,000.00 as
moral damages. In order to stop the sale of the properties at public auction, plaintiffs on July
10, 1958, filed plaintiffs' bond for preliminary injunction in the amount of P2,500.00 with
plaintiffs, as principals and the defendant Associated Insurance & Surety Co., Inc., as
sureties. The trial court suspended the sale scheduled for July 11, 1958. Subsequently, the
defendants filed their separate Answers, which after the customary admissions and denials,
interposed affirmative defenses claiming that plaintiffs have no cause of action, that
plaintiffs were still indebted to defendant corporation in the sum of P1,713.30, so much so
that plaintiffs and their counsel Gualberto Cruz, had on April 28, 1958, asked for an
extension of 30 days within which to pay their indebtedness and set up a counterclaim
praying for P15,000.00 as moral damages, P1,000.00 for attorney's fees; and to proceed
with the sale of the chattels in accordance with the extra-judicial foreclosure of the chattel
mortgage.
On June 11, 1959, the lower court issued the following order of dismissal:
When this case was called for hearing on June 9, 1959, at 10:00 o'clock a.m. neither
plaintiffs nor their counsel, appeared, although a certain Mr. Eugenio Gutierrez, not
himself a lawyer, appeared for them, stating that their attorney, Mr. Gualberto Cruz,

was ill. There was no formal motion for postponement made nor was there presented
a medical certificate with regard to Atty. Cruz' illness. 1wph1.t
Defendants, through counsel, made an oral motion to dismiss. The Court held its
ruling in abeyance until shown by the Sheriff's return that there had been due notice
to said plaintiffs of the hearing set for June 9, 1959, in which case, the said oral
motion to dismiss would be granted, but without prejudice.
The Court has since been satisfied by the Sheriff's return that plaintiffs, through their
counsel, Atty. Gualberto Cruz had been properly notified. Premises considered, the
motion to dismiss is hereby granted. Let this case be dismissed without prejudice . ..
On September 7, 1959, defendant corporation moved for judgment against the surety's
bond (Associated Insurance & Surety Co., Inc.), as the sheriff had reported that the
mortgaged properties had disappeared and were no longer in plaintiffs' possession, and no
auction sale could be carried out, and that the defendant corporation desired to present
evidence to prove its pending counterclaim. On September 19, 1959, counsel for the surety
company opposed, alleging that the motion was premature as the counterclaim had not yet
been decided, and there was no decision or ruling, subject of execution against the surety,
should the plaintiffs be unable to satisfy said decision.
On October 12, 1959, the lower court issued an order, the relevant portions of which are
hereunder reproduced
.... Under the circumstances, and particularly because the bond in question was put
up precisely to secure defendant's right, particularly in its mortgage credit, in the
satisfaction of which, the sale of plaintiffs' properties was suspended, the surety
cannot now be heard to claim that the bond cannot be executed either because it is
premature or because it was not mentioned in the order to dismiss this action.
This Court is not to be hoodwinked with such subtle legal juggling, and hereby orders:
1. That the bond of P2,500.00 put up by plaintiffs through the Associated Insurance &
Surety Co., Inc. beexecuted to satisfy defendant's mortgage claim and .
2. That this case with respect to defendant's counterclaim be tried on November 3,
1959, at 9:00 o'clock in the morning.
A motion for reconsideration filed by the Surety Company of the above Order was denied.
Hence, the present appeal was directly elevated to this Court, the question raised being
purely legal in nature. Appellant surety company alleged, that the trial court erred (1) In
holding that plaintiffs' bond for preliminary injunction issued by the bondsman-appellant was
to secure the defendant-appellee Royal Financing Corporation's mortgage credit; and (2) in
ordering the execution of the bond on behalf of plaintiffs-appellees. The pertinent portions of
the bond are quoted below:
WHEREAS, the above-named plaintiff has filed an action in the Court of First Instance
of Manila against the above-named defendant and prayed for a preliminary injunction
and the Court has ordered that a writ of preliminary injunction issue upon the filing of

a bond in the sum of TWO THOUSAND FIVE HUNDRED PESOS ONLY (P2,500.00)
Philippine Currency;
WHEREAS, we PEDRO R. JAO & CATALINA SIA as Principal and the ASSOCIATED
INSURANCE & SURETY CO. INC., of Manila as Sureties, in consideration of the above
and of the issuance of said writ of preliminary injunction, hereby jointly and severally,
bind ourselves to herein defendants in the sum of TWO THOUSAND FIVE HUNDRED
PESOS ON (P2,500.00) Philippine Currency, under the condition that we and the
plaintiff will pay to herein defendants the party enjoined all such damages as surety
party may sustain by reason of the injunction, if the Court should finally decide that
the plaintiff was not entitled thereto.
The purpose of the bond, therefore, is to secure the defendants-appellees (Corporation), for
any such damages that may sustain by reason of the injunction, if the Court should finally
decide that the plaintiffs-appellees (spouse Jao) were not entitled thereto. There is nothing
which could even remotely be construed to mean as a security for the mortgage credit of
the corporation. The bondsman-appellant has nothing to do with the mortgage credit; it did
not issue the bond with the idea of securing said mortgage credit. The bond was solely and
expressly issued for the purpose of securing the prayer for preliminary injunction filed by the
plaintiff-appellee and to secure the defendants-appellees for whatever damage they may
sustain as a result or by reason of the injunction, if the same should be declared as
wrongfully issued. A guaranty can not extend to more than what is expressly stipulated
there; it cannot be extended by implication beyond its specified limits (Art. 2055, new Civ.
Code; Uy Aloc v. Cho Jan Ling, 27 Phil. 427; Solon v. Solon, 64 Phil. 729). We, therefore, hold
that the bond in question was not put up to secure defendants' right, particularly their
mortgage credit.
Granting for the purpose of argument that the bond covers the mortgage credit, the
defendant-appellant poses the question as to whether or not the execution of the judgment
has been effected in accordance with law. It contends it is not. The plaintiffs-appellees and
the trial court claim otherwise. The pertinent provision of law applicable to the matter on
appeal, are section 9, of Rule 60, in connection with section 20 of Rule 59. Damages against
the surety under a bond for attachment, injunction, receivership and delivery of personal
property (replevin), can only be obtained or awarded, pursuant to these provisions. In order
that the surety may be bound under the bond for damages, the following requisites must be
fulfilled, to wit: (1) The application for damages must be filed in the same case where the
bond was issued; (2) such application for damages must be filed before the entry of final
judgment; and (3) after a hearing with notice to the surety (Facundo v. Tan, et al., G.R. No. L2717; Facundo vs. Santos et al., G.R. No. L-2718; Facundo v. Lim, et al., G.R. No. L-2767,
prom. Dec. 29, 1949; Visayan Surety & Ins. Corp. v. Pascual, G.R. No. L-2981, March 23,
1959; Liberty Cons. Co. v. Pecson et al., G.R. No. L-3694, May 23, 1951; Abelow v. De la Riva,
et al., G.R. No. L-12271, January 31, 1959). The dismissal of the case filed by the plaintiffsappellees on July 11, 1959, had become final and executory before the defendant-appellee
corporation filed its motion for judgment on the bond on September 7, 1959. In the order of
the trial court, dismissing the complaint, there appears no pronouncement whatsoever
against the surety bond. The appellee-corporation failed to file its proper application for
damages prior to the termination of the case against it. It is barred to do so now. The
prevailing party, if such would be the proper term for the appellee-corporation, having failed
to file its application for damages against the bond prior to the entry of final judgment, the
bondsman-appellant is relieved of further liability thereunder (Del Rosario v. Nava, G. R. No.
L-5513, Aug. 18, 1954).

The motion for judgment against surety's bond filed by the appellee-corporation, is not the
proper application spoken of under sec. 20, Rule 59. The said motion prayed for immediate
judgment, without even asking the trial court to first determine, thru proper hearing, the
reasonableness or reality of the claim for damages, considering the fact that the bond held
the bondsman liable for damages, if any, sustained by the corporation in or by virtue of the
issuance of the injunction, and not for the mortgage credit. A claim even filed within the
time is not sufficient to render the bond answerable for damages. Such claim for damages
must be duly substantiated and proven by competent evidence to show that they are not
merely fabricated or made on pretext. There having been no hearing, the trial court was not
justified in rendering judgment against the bondsman-appellant for any amount, much less
the full amount of the bond, as was adjudged in the present case by the said trial court
(Jesswani v. Dialdas, G.R. No. L-4651, May 12, 1952).
IN VIEW HEREOF, we reverse the orders of the trial court dated October 12, 1959 and
November 17, 1959, rendering judgment against the bond in question, and enter another
relieving the bondsman-appellant of further responsibility in connection therewith. No costs.
Bengzon, C.J., Padilla, Bautista Angelo, Concepcion, Reyes, J.B.L. and Dizon, JJ., concur.
Barrera, J., is on leave.
Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION

G.R. No. 85296 May 14, 1990

ZENITH INSURANCE CORPORATION, petitioner,
vs.
COURT OF APPEALS and LAWRENCE FERNANDEZ, respondents.
Vicente R. Layawen for petitioner.
Lawrence L. Fernandez & Associates for private respondent.

MEDIALDEA, J.:
Assailed in this petition is the decision of the Court of Appeals in CA-G.R. C.V. No. 13498
entitled, "Lawrence L. Fernandez, plaintiff-appellee v. Zenith Insurance Corp., defendantappellant" which affirmed in toto the decision of the Regional Trial Court of Cebu, Branch XX
in Civil Case No. CEB-1215 and the denial of petitioner's Motion for Reconsideration.
The antecedent facts are as follows:

On January 25, 1983, private respondent Lawrence Fernandez insured his car for "own
damage" under private car Policy No. 50459 with petitioner Zenith Insurance Corporation.
On July 6, 1983, the car figured in an accident and suffered actual damages in the amount of
P3,640.00. After allegedly being given a run around by Zenith for two (2) months, Fernandez
filed a complaint with the Regional Trial Court of Cebu for sum of money and damages
resulting from the refusal of Zenith to pay the amount claimed. The complaint was docketed
as Civil Case No. CEB-1215. Aside from actual damages and interests, Fernandez also prayed
for moral damages in the amount of P10,000.00, exemplary damages of P5,000.00,
attorney's fees of P3,000.00 and litigation expenses of P3,000.00.
On September 28, 1983, Zenith filed an answer alleging that it offered to pay the claim of
Fernandez pursuant to the terms and conditions of the contract which, the private
respondent rejected. After the issues had been joined, the pre-trial was scheduled on
October 17, 1983 but the same was moved to November 4, 1983 upon petitioner's motion,
allegedly to explore ways to settle the case although at an amount lower than private
respondent's claim. On November 14, 1983, the trial court terminated the pre-trial.
Subsequently, Fernandez presented his evidence. Petitioner Zenith, however, failed to
present its evidence in view of its failure to appear in court, without justifiable reason, on the
day scheduled for the purpose. The trial court issued an order on August 23, 1984
submitting the case for decision without Zenith's evidence (pp. 10-11, Rollo). Petitioner filed
a petition for certiorari with the Court of Appeals assailing the order of the trial court
submitting the case for decision without petitioner's evidence. The petition was docketed as
C.A.-G.R. No. 04644. However, the petition was denied due course on April 29, 1986 (p.
56, Rollo).
On June 4, 1986, a decision was rendered by the trial court in favor of private respondent
Fernandez. The dispositive portion of the trial court's decision provides:
WHEREFORE, defendant is hereby ordered to pay to the plaintiff:
1. The amount of P3,640.00 representing the damage incurred plus interest at
the rate of twice the prevailing interest rates;
2. The amount of P20,000.00 by way of moral damages;
3. The amount of P20,000.00 by way of exemplary damages;
4. The amount of P5,000.00 as attorney's fees;
5. The amount of P3,000.00 as litigation expenses; and
6. Costs. (p. 9, Rollo)
Upon motion of Fernandez and before the expiration of the period to appeal, the trial court,
on June 20, 1986, ordered the execution of the decision pending appeal. The order was
assailed by petitioner in a petition for certiorariwith the Court of Appeals on October 23,
1986 in C.A. G.R. No. 10420 but which petition was also dismissed on December 24, 1986 (p.
69, Rollo).

On June 10, 1986, petitioner filed a notice of appeal before the trial court. The notice of
appeal was granted in the same order granting private respondent's motion for execution
pending appeal. The appeal to respondent court assigned the following errors:
I. The lower court erred in denying defendant appellant to adduce evidence in
its behalf.
II. The lower court erred in ordering Zenith Insurance Corporation to pay the
amount of P3,640.00 in its decision.
III. The lower court erred in awarding moral damages, attorneys fees and
exemplary damages, the worst is that, the court awarded damages more than
what are prayed for in the complaint. (p. 12, Rollo)
On August 17, 1988, the Court of Appeals rendered its decision affirming in toto the decision
of the trial court. It also ruled that the matter of the trial court's denial of Fernandez's right
to adduce evidence is a closed matter in view of its (CA) ruling in AC-G.R. 04644 wherein
Zenith's petition questioning the trial court's order submitting the case for decision without
Zenith's evidence, was dismissed.
The Motion for Reconsideration of the decision of the Court of Appeals dated August 17,
1988 was denied on September 29, 1988, for lack of merit. Hence, the instant petition was
filed by Zenith on October 18, 1988 on the allegation that respondent Court of Appeals'
decision and resolution ran counter to applicable decisions of this Court and that they were
rendered without or in excess of jurisdiction. The issues raised by petitioners in this petition
are:
a) The legal basis of respondent Court of Appeals in awarding moral damages,
exemplary damages and attomey's fees in an amount more than that prayed
for in the complaint.
b) The award of actual damages of P3,460.00 instead of only P1,927.50 which
was arrived at after deducting P250.00 and P274.00 as deductible franchise
and 20% depreciation on parts as agreed upon in the contract of insurance.
Petitioner contends that while the complaint of private respondent prayed for P10,000.00
moral damages, the lower court awarded twice the amount, or P20,000.00 without factual or
legal basis; while private respondent prayed for P5,000.00 exemplary damages, the trial
court awarded P20,000.00; and while private respondent prayed for P3,000.00 attorney's
fees, the trial court awarded P5,000.00.
The propriety of the award of moral damages, exemplary damages and attorney's fees is the
main issue raised herein by petitioner.
The award of damages in case of unreasonable delay in the payment of insurance claims is
governed by the Philippine Insurance Code, which provides:
Sec. 244. In case of any litigation for the enforcement of any policy or contract
of insurance, it shall be the duty of the Commissioner or the Court, as the
case may be, to make a finding as to whether the payment of the claim of the

insured has been unreasonably denied or withheld; and in the affirmative

case, the insurance company shall be adjudged to pay damages which shall
consist of attomey's fees and other expenses incurred by the insured person
by reason of such unreasonable denial or withholding of payment plus interest
of twice the ceiling prescribed by the Monetary Board of the amount of the
claim due the insured, from the date following the time prescribed in section
two hundred forty-two or in section two hundred forty-three, as the case may
be, until the claim is fully satisfied;Provided, That the failure to pay any such
claim within the time prescribed in said sections shall be considered prima
facie evidence of unreasonable delay in payment.
It is clear that under the Insurance Code, in case of unreasonable delay in the payment of
the proceeds of an insurance policy, the damages that may be awarded are: 1) attorney's
fees; 2) other expenses incurred by the insured person by reason of such unreasonable
denial or withholding of payment; 3) interest at twice the ceiling prescribed by the Monetary
Board of the amount of the claim due the injured; and 4) the amount of the claim.
As regards the award of moral and exemplary damages, the rules under the Civil Code of the
Philippines shall govern.
"The purpose of moral damages is essentially indemnity or reparation, not punishment or
correction. Moral damages are emphatically not intended to enrich a complainant at the
expense of a defendant, they are awarded only to enable the injured party to obtain means,
diversions or amusements that will serve to alleviate the moral suffering he has undergone
by reason of the defendant's culpable action." (J. Cezar S. Sangco, Philippine Law on Torts
and Damages, Revised Edition, p. 539) (See also R and B Surety & Insurance Co., Inc. v. IAC,
G.R. No. 64515, June 22, 1984; 129 SCRA 745). While it is true that no proof of pecuniary
loss is necessary in order that moral damages may be adjudicated, the assessment of which
is left to the discretion of the court according to the circumstances of each case (Art. 2216,
New Civil Code), it is equally true that in awarding moral damages in case of breach of
contract, there must be a showing that the breach was wanton and deliberately injurious or
the one responsible acted fraudently or in bad faith (Perez v. Court of Appeals, G.R. No. L20238, January 30,1965; 13 SCRA 137; Solis v. Salvador, G.R. No. L-17022, August 14, 1965;
14 SCRA 887). In the instant case, there was a finding that private respondent was given a
"run-around" for two months, which is the basis for the award of the damages granted under
the Insurance Code for unreasonable delay in the payment of the claim. However, the act of
petitioner of delaying payment for two months cannot be considered as so wanton or
malevolent to justify an award of P20,000.00 as moral damages, taking into consideration
also the fact that the actual damage on the car was only P3,460. In the pre-trial of the case,
it was shown that there was no total disclaimer by respondent. The reason for petitioner's
failure to indemnify private respondent within the two-month period was that the parties
could not come to an agreement as regards the amount of the actual damage on the car.
The amount of P10,000.00 prayed for by private respondent as moral damages is equitable.
On the other hand, exemplary or corrective damages are imposed by way of example or
correction for the public good (Art. 2229, New Civil Code of the Philippines). In the case
of Noda v. Cruz-Arnaldo, G.R. No. 57322, June 22,1987; 151 SCRA 227, exemplary damages
were not awarded as the insurance company had not acted in wanton, oppressive or
malevolent manner. The same is true in the case at bar.

The amount of P5,000.00 awarded as attomey's fees is justified under the circumstances of
this case considering that there were other petitions filed and defended by private
respondent in connection with this case.
As regards the actual damages incurred by private respondent, the amount of P3,640.00 had
been established before the trial court and affirmed by the appellate court. Respondent
appellate court correctly ruled that the deductions of P250.00 and P274.00 as deductible
franchise and 20% depreciation on parts, respectively claimed by petitioners as agreed upon
in the contract, had no basis. Respondent court ruled:
Under its second assigned error, defendant-appellant puts forward two
arguments, both of which are entirely without merit. It is contented that the
amount recoverable under the insurance policy defendant-appellant issued
over the car of plaintiff-appellee is subject to deductible franchise, and . . . .
The policy (Exhibit G, pp. 4-9, Record), does not mntion any deductible
franchise, . . . (p. 13, Rollo)
Therefore, the award of moral damages is reduced to P10,000.00 and the award of
exemplary damages is hereby deleted. The awards due to private respondent Fernandez are
as follows:
1) P3,640.00 as actual claim plus interest of twice the ceiling prescribed by
the Monetary Board computed from the time of submission of proof of loss;
2) P10,000.00 as moral damages;
3) P5,000.00 as attorney's fees;
4) P3,000.00 as litigation expenses; and
5) Costs.
ACCORDINGLY, the appealed decision is MODIFIED as above stated.
SO ORDERED.
Narvasa, Cruz and Grio-Aquino, JJ., concur.
Gancayco, J., is on leave.
Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. L-40334 February 28, 1985

CENTRAL SURETY and INSURANCE COMPANY, INC., petitioner,

vs.
Hon. ALBERTO Q. UBAY as Judge of the Court of First Instance of Rizal, Caloocan
City, Branch XXXII and ONG CHI, doing business under the Firm Name. "TABLERIA
DE LUXE respondents.
Alfredo Feraren for petitioner.
S.I.A. Gonzales for respondents.

ABAD SANTOS, J.:

Ong Chi, doing business under the firm name "Tableria de Luxe sued Francisco Reyes, Jr. for
a sum of money in the City Court of Caloocan City. Ong Chi applied for a writ of attachment
and upon filing a bond in the amount of P6,464.18, a jeep belonging to Reyes was placed
in custodia legis.
Reyes moved to dissolve the writ of attachment. He posted a counterbond in the amount of
P 6,465.00; his surety was Central Surety and Insurance Co., the petitioner herein. The
condition of the counterbond is that "in consideration of the dissolution of said attachment,
[Francisco Reyes, Jr., as principal and Central Surety and Insurance Co., as surety] hereby
jointly and severally, bind ourselves in the sum of SIX THOUSAND FOUR HUNDRED SIXTY
FIVE ONLY ( P 6,465.00 ) Philippine Currency, under the condition that in the case the plantiff
recovers judgment in the action the defendant will on demand redeliver the attached
property so released to the officer of the Court to be applied to the payment of the judgment
or in default thereof that the defendant and surety will on demand pay to the plaintiff the full
value of the property released." (Rollo, p. 11) The writ of attachment was thereafter lifted
and the jeep was returned to Reyes.
In the course of time, the City Court rendered judgment as follows:
WHEREFORE, judgment is hereby rendered in favor of the Plaintiff and against
the defendant, ordering said defendant to pay plaintiff the sum of P 6,964.18,
with legal interests thereon from the date of the filing of this complaint until
fully paid, plus the sum of P 500. 00, as and by way of attorney's fees, and the
costs of the suit. (Id, p. 14.)
Defendant Reyes appealed to the Court of First Instance of Rizal but said court affirmed the
judgment in toto. (Rollo, p. 16.) Upon finality of the judgment, a writ of execution was issued
against Reyes. The jeep which was the object of the attachment was sold by the sheriff for
P4,000.00 and the amount was credited against the judgment in partial satisfaction thereof.
Soon after the sale of the jeep, Central Surety and Insurance Co. filed a motion to cancel the
counterbond. Ong Chi not only opposed the motion but he also asked that the surety
company pay the deficiency on the judgment in the amount of P5,730. 00 (P9,730.00 as of
the filing of the motion, less P4,000.00 the proceeds of the sale of the jeep). The motion for
a deficiency judgment was opposed by the surety on the ground that it had fulfilled the

condition of the counterbond. Despite the opposition, the court ordered the surety to pay. A
motion for reconsideration was denied which accounts for the instant petition.
The issue is whether or not the petitioner surety is liable for the deficiency. The petitioner
urges a negative answer; it relies on the terms of the counterbond. Upon the other hand, the
private respondent claims that an affirmative answer is proper, he relies on Section 17 of
Rule 57, Rules of Court which stipulates thus:
SEC. 17. When execution returned unsatisfied, recovery had upon bond. If
the execution be returned unsatisfied in whole or in part, the surety or
sureties on any counterbond given pursuant to the provisions of this rule to
secure the payment of the judgment shall become charged on such
counterbond, and bound to pay to the judgment creditor upon demand, the
amount due under the judgment, which amount may be recovered from such
surety or sureties after notice and summary hearing in the same action.
The petition is highly impressed with merit.
The stipulation in the counterbond executed by the petitioner is the law between the parties
in this case and not the provisions of the Rules of Court.
Under the counterbond, the petitioner surety company bound itself solidarily with the
principal obligor "in the sum of P 6,465.00 under the condition that in case the plaintiff
recovers judgment in the action, the defendant will, on demand, redeliver the attached
property so released to the officer of the court to be applied to the payment of the judgment
or in default thereof that the defendant and surety will, on demand, pay to the plaintiff the
full value of the property released." The main obligation of the surety was to redeliver the
jeep so that it could be sold in case execution was issued against the principal obligor. The
amount of P6,465.00 was merely to fix the limit of the surety's liability in case the jeep could
not be reached. In the instant case, the jeep was made available for execution of the
judgment by the surety. The surety had done its part; the obligation of the bond had been
discharged; the bond should be cancelled.
The impropriety of the orders of the respondent judge is made more manifest by still another
circumstance. The petitioner's surety bond was for the amount of P6,465.00. So even on the
assumption that the bond was not discharged, since the sale of the jeep yielded P4,000.00,
the surety can be held liable at most for P2,465.00. But the respondent judge ordered the
surety to pay P5,730.00 which is the entire deficiency and is in excess of P2,465.00. It is
axiomatic that the obligation of a surety cannot extend beyond what is stipulated.
WHEREFORE, the petition is granted; the questioned orders of the respondent judge are
hereby set aside and in lieu thereof another is entered cancelling the petitioner's
counterbond, with costs against the private respondent.
SO ORDERED.
Makasiar (Chairman), Aquino, Concepcion, Jr., Escolin and Cuevas, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION

G.R. No. L-29587 November 28, 1975

PHILIPPINE NATIONAL BANK, petitioner,
vs.
LUZON SURETY CO., INC. and THE HONORABLE COURT OF APPEALS, respondent.
Medina and Magtalas for petitioner.
Tolentino, Garcia, Cruz and Reyes for private respondent.

ESGUERRA, J.:
Petitioner Philippine National Bank seeks a review and reversal of the decision dated June
26, 1968, of the Court of Appeals in its case CA-G.R. No. 30282-R, absolving Luzon Surety
Co., Inc. of its liability to said petitioner and thus reversing the decision of the Court of First
Instance of Negros Occidental, the dispositive portion of which reads as follows:
IN VIEW THEREOF, judgment is hereby rendered ordering defendant Augusto
R. Villarosa to pay plaintiff PHILIPPINE NATIONAL BANK the sum of P81,200.00
plus accrued interest of 5% per annum on P63,222.78 from August 31, 1959;
to pay 10% of said amount as attorney's fees and to pay the costs. Defendant
Luzon Surety Co., Inc. is hereby ordered to pay jointly and severally with
defendant Villarosa to the plaintiff the sum of P10,000.00; defendant Central
Surety and Insurance Company jointly and severally with defendant Villarosa
the sum of P20,000 to the plaintiff, and Associated Surety And Insurance Co.
jointly and severally with defendant Villarosa the sum of P15,000.00 to the
plaintiff, with the understanding that should said bonding companies pay the
aforementioned amounts of their respective bonds to the plaintiff, said
amounts should be deducted from the total outstanding obligation of
defendant Villarosa in favor of the plaintiff.
Above-quoted decision was modified in an order of the Court of First Instance dated June 5,
1961, granting petitioner Philippine National Bank (PNB) the right to recover accrued interest
at the rate of 5% per annum from December 24, 1953, from the defendants bonding
companies.
The facts as found by the Court of Appeals are as follows:
... sometime prior to 27 November 1951, defendant Augusto R. Villarosa, a
sugar planter adhered to the Lopez Sugar Central Milling Company, Inc.

applied for a crop loan with the plaintiff, Philippine National Bank, Exhibit A;
this application was approved on 6 March, 1952 in the amount of P32,400,
according to the complaint; but the document of approval has not been
exhibited; at any rate, the planter Villarosa executed a Chattel Mortgage on
standing crops to guarantee the crop loan, Exhibit B and as shown in Exhibits
C to C-30 on various dates from 28 January, 1952 to 9 January, 1953, in
consideration of periodical sums of money by him received from PNB, planter
Villarosa executed these promissory notes from which will be seen that the
credit line was that the original amount of P32,400 and was thus maintained
up to the promissory note Exhibit C-9 dated 30 May, 1952 but afterwards it
was increased and promissory notes Exhibits C-10 to C-30 were based on the
increased credit line; and as of 27 September, 1953 as shown in the accounts,
Exhibits D and D-1, there was a balance of P63,222.78 but as of the date
when the complaint was filed on 8 June, 1960, because of the interest
accrued, it had reached a much higher sum; that was why due to its nonpayment, plaintiff filed this complaint, as has been said, on 8 June, 1960; now
the complaint sought relief not only against the planter but also against the
three (3) bondsmen, Luzon Surety, Central Surety and Associated Surety
because Luzon Surety had filed the bond Exhibit E dated 18 February, 1952 in
the sum of P10,000; Central Surety Exhibit F dated 24 February, 1952 in the
sum of P20,000 and Associated Surety the bond Exhibit G dated 11
September, 1952 in the sum of P15,000; in gist, the obligation of each of the
bondsmen being to guarantee the faithful performance of the obligation of the
planter with PNB; now each of the defendants in their answers raised various
defenses but as far as principal defendant Augusto R. Villarosa and other
defendants Central Surety and Associated Surety are concerned, their liability
is no longer material because they have not appealed; and in the trial of the
case, plaintiff submitted Exhibits A to J-1 and witness Romanito Brillantes; but
the defense of Luzon Surety thru its witness Jose Arroyo and Exhibits 1 to 3
being 1st that the evidence of the plaintiff did not establish a cause of action
to make Luzon Surety liable and 2ndly, in any case that there had been
material alteration in the principal obligation, if any, guaranteed by it; ... .
Unable to obtain reconsideration of the decision of the Appellate Court, PNB came to this
Court and alleged the following errors.
1. The Court of Appeals erred in the application of the law involved by
invoking Article 2055 of the New Civil Code, which properly should have been
the law on suretyship which are covered by Section 4, Chapter 3, Title 1, Book
IV of the New Civil Code;
2. Consequently, when the Court of Appeals released the surety from liability,
it committed a grave or gross misappreciation of facts amounting to an error
of law;
3. The Court of Appeals erred when it held that there must have been a
principal crop loan contract, guaranteed by the surety bonds;
4. The Court of Appeals erred when it released the surety from liability. The
above assigned errors boil down to the single question of whether or not the
Court of Appeals was justified in absolving Luzon Surety Co., Inc., from liability

to petitioner Philippine National Bank. We have examined the record

thoroughly and found the appealed decision to be erroneous.
Excerpt of the Chattel Mortgage executed to guarantee the crop loan clearly provided as
follows:
xxx xxx xxx
1. That the Mortgagor does by these presents grant, cede and convey unto
the Mortgagee by way of First Mortgage free from any encumbrances, all the
crops of the absolute property of the Mortgagor, corresponding to the 1952-53
and subsequent yearly sugar crops agricultural season at present growing in
the Hda. known as San Antonio, Washington (P) Audit 24-124 and 24-16 la and
Hda. Aliwanay (non-quota land); milling with LSMC and CAD Municipality of
Sagay, and Escalante, Province of Negros Occidental covered by cadastral lots
no. Various of the Cadastral Survey at the Municipality of Sagay, Escalante
particularly bounded and described in Transfer Certificate of Title No. Various
issued by the Register of Deeds of said province. The said mortgage crops
consist of all the Mortgagor's first available entire net share of the 1952-53
and subsequent yearly sugar crops thereafter conservatively estimated at but
not less than Three Thousand Four Hundred Twenty and 14/00 (3,420.14)
piculs of export and domestic sugar, including whatever addition thereto, and
such aids, subsidies, indemnity payments and other benefits as maybe
awarded to the Mortgagor, coming from any source, governmental or
otherwise.
xxx xxx xxx
4. This Mortgage is executed to secure payment by the Mortgagor to the
Mortgagee at the latter's office of a loan herein granted to the Mortgagor in
the sum of Thirty Two Thousand Four Hundred (P32,400.00) Pesos, Philippine
Currency, with interest at the rate of five per cent per annum, which loan shall
be given to the Mortgagor either in lump sum or in installments as the
mortgagee may determine. The Mortgagee may increase or decrease the
amount of the loan as well as the installments as it may deem convenient and
the Mortgagor shall submit such periodical reports on the crops mortgaged as
the Mortgagee may require. In the event that the loan is increased such
increase shall likewise be secured by Mortgage. This Mortgage shall also
secure any other loans or advances that the Mortgagee may extend to the
Mortgagor, including interest and expenses or any other obligation owing to
the Mortgagee, whether direct or indirect, principal or secondary as appears in
the account books and records of the Mortgagee.
xxx xxx xxx
Likewise an extract from the Surety Bond executed by and between the PNB on one hand
and Augusto Villarosa and respondent Luzon Surety Company, Inc. on the other, is hereby
reproduced, viz:

That we Augusto Villarosa of Bacolod City, as principal and Luzon Surety

Company, Inc. a corporation duly organized and existing under and by virtue
of the laws of the Philippines, as surety, are held firmly bound unto Philippine
National Bank, Bacolod City, Philippines, in the sum of Ten Thousand Pesos
(P10,000.00) Philippine Currency, for the payment of which sum, well and
truly to be made, we bind ourselves, our heirs, executors, administrators,
successors, and assigns jointly and severally, firmly by these presents:
The condition of the obligation are as follows:
WHEREAS, the above bounden principal, on the day of February, 1952,
entered into a crop loan contract with obligee Philippine National Bank,
Bacolod Branch of Bacolod City, Philippines to fully and faithfully
Comply with all the terms and condition stipulated in said crop loan contract
which are hereby incorporated as essential parts hereof, and principally to
meet and pay from the proceeds of the sugar produced from his Hda. Antonio
and Hda. Aliwanay, Escalante, Occidental Negros credit advances made by the
Philippine National Bank Bacolod Branch not to exceed P32,800 as stated in
said contract. Provided further that the liability under this bond shall not
exceed the amount of P10,000.00
WHEREAS, said Philippine National Bank Bacolod Branch requires said
principal to give a good and sufficient bond in the above stated sum to secure
the full and faithful performance on his part of said crop loan contract.
NOW, THEREFORE, if the principal shall well and truly perform and fulfill all the
undertakings, covenants, terms and conditions and agreement stipulated in
said crop loan contract then, this obligation shall be null and void, otherwise it
shall remain in full force and effect.
xxx xxx xxx
The foregoing evidences clearly the liability of Luzon Surety to petitioner Philippine National
Bank not merely as a guarantor but as surety-liable as a regular party to the undertaking
(Castelvi de Higgins vs. Sellner 41 Phil. 142). The Court of Appeals, however, in absolving
the bonding company ratiocinates that the Surety Bond executed on February 18, 1952,
made specific references to a crop loan contract executed by Augusto Villarosa sometime in
February 1952. And, therefore, the Chattel Mortgage, Exhibit B dated March 6, 1952, could
not have been the obligations guaranteed by the surety bond. Thus the Court of Appeals
stated:
... one is really at a loss to impose any liability upon Luzon Surety in the
absence of the principal obligation which was a crop loan contract executed in
February, 1952, and to which there was made an express reference in the
surety bond, Exhibit E; let it not be overlooked further that one can secure a
crop loan without executing a Chattel Mortgage on his crops because the crop
loan is the principal obligation while the Chattel Mortgage is only an ancillary
and secondary contract to guarantee fulfillment of a crop loan; stated
otherwise and as Luzon Surety never intervened in the execution of the

Chattel Mortgage, Exhibit B, there is no way under the evidence from which it
can be made to answer for liability to Augusto Villarosa under Exhibit E; ... "
The Court of Appeals, to Our mind did not give credence to an otherwise significant and
unrebutted testimony of petitioner's witness, Romanito Brillantes, that Exhibit B was the only
chattel mortgage executed by Augusto Villarosa evidencing the crop loan contract and upon
which Luzon Surety agreed to assume liability up to the amount of P10,000 by posting the
said surety bond. Moreover Article 1354 of our New Civil Code which provides:
Art. 1354. Although the cause is not stated in the contract., it is presumed
that it exist and is lawful, unless the debtor proves the contrary.
bolster petitioner's stand. Considering too that Luzon Surety company is engaged in the
business of furnishing guarantees, for a consideration, there is no reason that it should be
entitled to a rule of strictissimi juris or a strained and over-strict interpretation of its
undertaking. The presumption indulged in by the law in favor of guarantors was premised on
the fact that guarantees were originally gratuitous obligations, which is not true at present,
at least in the great majority of cases. (Aurelio Montinola vs. Alejo Gatila, et al, G.R. No L7558, October 31, 1955).
We have likewise gone over the answer of Luzon Surety Company dated June 17, 1960 (p. 73
Record on Appeal) and noted the following:
xxx xxx xxx
3. Defendant LUZON admits the portion of paragraph 3 referring to the grant
of P32,400 secured by a Chattel Mortgage dated March 6, 1952, copy of which
is attached as Annex "A" of the complaint.
xxx xxx xxx
As special defenses:
8. The terms and conditions of the surety bond as well as the contract it
guaranteed was materially altered and or novated without the knowledge and
consent of the surety thereby releasing the latter from liability.
11. The maximum liability, if any, of defendant LUZON is P10.000.00.
The principal obligation, therefore, has never been put in issue by then defendant now
respondent Luzon Surety Co., Inc. On the other hand it raised as its defense the alleged
material alteration of the terms and conditions of the contract as the basis of its prayer for
release. Even this defense of respondent Luzon Surety Co., Inc. is untenable under the facts
obtaining. As a surety, said bonding company is charged as an original promissory and is an
insurer of the debt. While it is an accepted rule in our jurisdiction that an alteration of the
contract is a ground for release, this alteration, We stress must be material. A cursory
examination of the record shows that the alterations in the form of increases were made
with the full consent of Luzon Surety Co., Inc. Paragraph 4 of the Chattel Mortgage explicitly
provided for this increase(s), viz:

... the Mortgagee may increase or decrease the amount of the loan as well as
the installment as it may deem convenient ...
and this contract, Exhibit "B", was precisely referred to and mentioned in the Surety Bond
itself. In the case of Lim Julian vs. Tiburcio Lutero, et al No. 25235, 49 Phil. 703, 717, 718,
this Court held:
It has been decided in many cases that the consideration named in a
mortgage for future advancements does not limit the amount for which such
contract may stand as security, if from the four corners of the document, the
intent to secure future indebtedness is apparent. Where, by the plain terms of
the contract, such an intent is evident, it will control. ...
The next question to take up is the liability of Luzon Surety Co. for interest which, it
contends, would increase its liability to more than P10,000 which is the maximum of its
bond. We cannot agree to this reasoning. In the cases ofTagawa vs. Aldanese, 43 Phil. 852,
859; Plaridel Surety Insurance Co. vs. P. L. Galang Machinery Co., 100 Phil. 679, 682, cited in
Paras Civil Code of the Philippines, Vol. V, 7th Ed. 1972, p. 772, it was held:
If a surety upon demand fails to pay, he can be held liable for interest, even if
in thus paying, the liability becomes more than that in the principal obligation.
The increased liability is not because of the contract but because of the
default and the necessity of judicial collection. It should be noted, however,
that the interest runs from the time the complaint is filed, not from the time
the debt becomes due and demandable.
PREMISES CONSIDERED, the judgment appealed from is reversed and set aside. In lieu
thereof another is rendered reinstating the judgment of the Court of First Instance of Negros
Occidental, 12th Judicial District, dated March 29, 1961, holding Luzon Surety liable for the
amount of P10,000.00 with the modification that interest thereon shall be computed at the
legal rate from June 8, 1960 when the complaint was filed.
SO ORDERED.
Teehankee, Makasiar, Muoz Palma and Martin , JJ., concur.
Castro (Chairman), J., took no part.
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-8086

October 31, 1957

PACIFIC TOBACCO CORPORATION, plaintiff-appellee,

vs.
RICARDO D. LORENZANA and VISAYAN SURETY & INSURANCE
CORPORATION, defendants.

VISAYAN SURETY & INSURANCE CORPORATION, cross claimant and third party plaintiffappellant,
vs.
RICARDO D. LORENZANA, cross defendant,
CALIXTO C. LORENZANA, JOSE M. LORENZANA and BENIGNO GUTIERREZ, third party
defendants.
Sycip, Quisumbing, Solicitor Salazar & Associates for appellee.
Enrico I. de la Cruz for appellant.
Edgar C. Melia for cross-defendant and appellee.
FELIX, J.:
The Pacific Tobacco Corporation is a duly organized domestic corporation with offices at
Grace Park, Caloocan, Rizal, engaged in the business of manufacturing and distributing
cigarettes, cigars and other tobacco products.
On January 16, 1952, Ricardo D. Lorenzana and said corporation entered into an agreement,
the pertinent provisions of which as follows:
WITNESSETH: That
WHEREAS, the Company manufactures cigarette, cigars, and other tobacco products
which it desires to sell and distribute throughout the Philippines; .
WHEREAS, the DISTRIBUTOR (Lorenzana) is willing to sell and distribute the said
products of the COMPANY in the territory of Manila and Rizal Province under the
terms and conditions herein below set forth;
NOW, THEREFORE for and in consideration of the premises herein contained, the
parties hereto have agreed and covenanted, as follows:
1. The DISTRIBUTOR shall sell and distribute solely the cigarettes, cigars and other
tobacco products of the COMPANY in the abovementioned territory;
2. The Company shall, from time to time, deliver to the DISTRIBUTOR, for sale,
cigarettes and other tobacco products, provided that the balance of the account of
the DISTRIBUTOR with the COMPANY shall not at any time exceed THREE THOUSAND
ONLY PESOS (3,000.00);
3. All accounts of the Distributor with the Company shall be due and payable in the
office of the latter within thirty (30) days from and after the date of the sales invoice
issued by the COMPANY;
xxx

xxx

xxx.

8. The DISTRIBUTOR shall only sell the products of the COMPANY and in case he sells
the products of other persons or firms, the COMPANY shall be at liberty to terminate
this contract;

9. The DISTRIBUTOR binds himself for the COMPANY not less than TWENTY
THOUSAND ONLY PESOS (P20,000.00) worth of cigarettes and other Tobacco
products every month and should be fail to meet this quota, the COMPANY shall have
the opinion to terminate this contract upon twenty (20) day's notice;
xxx

xxx

xxx.

11. To guarantee the faithful performance on his part of the terms and conditions of
this contract, the DISTRIBUTOR shall post a surety bond in favor of the COMPANY in
the amount of EIGHT THOUSAND ONLY PESOS (P8,000.00 signed by him and a
reputable surety company acceptable to the COMPANY, THREE THOUSAND PESOS
(P3,000.00) of which bond shall answer for the faithful settlement of the account of
the DISTRIBUTOR with the COMPANY, and FIVE THOUSAND PESOS (5,000.00) for the
return of the aforementioned truck to the COMPANY in the same condition that the
DISTRIBUTOR received it, . . . (Exhibit A).
In accordance thereto, Lorenzana put up V.S. and I.C. bond No. E-JA-52/101 in the amount of
P3,000 with the Visayan Surety and Insurance Corporation, as surety to guarantee the
faithful fulfillment of the principal's (Lorenzana's) part in the contract with the Pacific
Tobacco Corporation, which was "to sell and distribute the latter's cigarettes, cigar and other
tobacco products subject to the terms and conditions stipulated in the said contract" (Exhibit
B).
The record shows that on various occasions in 1952, The Philippine Tobacco Corporation
delivered to Lorenzana for distribution cigarettes, cigars, and other tobacco products
amounting to P15,645.64, but out of this amount the latters paid and was only credited with
P13,559.33, leaving a balance of P2,086.31. Upon demand by the corporation. Lorenzana
proposed to settle his pending obligation by giving P100 a month, which amount was later
reduced to P25, to which arrangement the company apparently agreed and Lorenzana
actually made installments amounting to P250 (Exhibit G-6). As he failed to make any
further payment, the Philippine Tobacco Corporation filed a complaint with the Court of First
Instance of Manila on October 30, 1953, against Ricardo D. Lorenzana and the Visayan
Surety and Insurance Corporation for the recovery of the sum of P2,086.31, with legal
interest thereon from the date of filing of the complaint until fully paid; attorney's fees in the
amount of P5000.00; costs, and for such other remedy as may be deemed just and equitable
in the premises.
Defendant Visayan Surety and Insurance Corporation answered this complaint, which it
latter modified with leave of Court by filing an amended answer with cross-claim against
Ricardo D. Lorenzana and third party complaint against Calixto D. Lorenzana, Jose Lorenzana
and Benigno C. Gutierrez, denying the material allegations of the complaint and setting up
the affirmative defense that the bond could not be held liable for damages and attorney's
fees; that plaintiff Philippine Tobacco Corporation was bared from presenting this action
against the surety due to laches, waiver of claim and estoppel. It was thus prayed that the
complaint be dismissed as against said defendant; in the event that the surety would be
sentenced to pay the plaintiff, that a simultaneous order be issued ordering the crossdefendant and the third-party defendants to pay the surety, jointly and severally, for
whatever amount the latter may be required to satisfy, with interest thereon at 12 per cent
per annum from the date of payment until it was fully reimbursed; that the said crossdefendant and third-party defendants be ordered to pay the surety, jointly and severally, in

accordance with the indemnity bond executed by them as counter-guarantors, 20 per cent
of the amount involved as attorney's fees, and costs.
In his answer dated December 1, 1953, Ricardo D. Lorenzana denied the allegation of the
complaint that he refused or failed to pay the plaintiff, the true fact being that he had
tendered to plaintiff certain sums in accordance with their verbal agreement which allowed
him to settle his obligation in installments until the entire amount was fully satisfied; set up
the defense that the agreement, Annex "A", was partially modified when plaintiffs agreed
and allowed him to sell the tobacco products not only in the City of Manila and Rizal province
but throughout the island of Luzon; that in virtue of such modification, he sold plaintiff's
products in places as far as the northern provinces; the most of defendant's transactions in
these provinces were on credit basis; that on August 2, 1952, when defendant arrived from
his trip from the Ilocos regions, plaintiff terminated his services on the ground that the
corporation was losing without giving him an advance notice of 30 days in accordance with
the agreement; that as plaintiff took the delivery truck which he was using in the distribution
of plaintiff's products he was prevented from going back to the provinces to collect from his
customers their accounts; that he made several payments in small amounts to settle
remaining obligation which were accepted, but in November, 1953, plaintiff refused to
receive the same. Lorenzana claimed that because of plaintiff's failure to notify him in
advance that his services were terminated, he incurred and was incurring transportation
expenses in order to collect the accounts of hid former customers. He, therefore, prayed that
the complaint be dismissed and plaintiff be ordered to pay the amount that he incurred as
transportation expenses. The third-party defendants likewise filed their answer practically
admitting all the averments of the third-party complaint except the claim for 20 per cent of
the amount involved as attorney's fees, on the ground that it was excessive and that they
should not be held liable for the payment of the pending obligation of Lorenzana.
At the hearing defendant Lorenzana failed to appear and to adduce in support of his defense
inspite of the fact that he was duly notified. After hearing and after the other parts had filed
their respective memoranda, the Court rendered judgment dated May 12, 1954, finding that
although on one occasion plaintiff shipped cigarettes to defendant Lorenzana addressed at
San Fernando, La Union (Exhibit C-18), this fact alone would not release the surety from
liability, for there was nothing in the contract Exhibit A that expressly prohibited defendant
Lorenzana from selling cigarettes outside Manila and Rizal. The lower Court opined that what
was guaranteed by the Visayan Surety and Insurance Corporation was the faithful delivery
by defendant Lorenzana of the price of the cigarettes to plaintiff within the time fixed in the
contract and as the sending of some cigarettes to San Fernando, La Union, caused the surety
no injury, said deviation will not relieve the surety from its liability under the bond. The court
thus ordered defendants Ricardo D. Lorenzana and the Visayan Surety and Insurance
Corporation to pay, jointly and severally, to the plaintiff Pacific Tobacco Corporation the sum
of P2,086.31, with legal interest from the date of the filing of the complaint, plus P500 as
attorney's fees and costs. On the strength of the indemnity bond (Exhibit "2") executed by
the third-party defendants Calixto D. Lorenzana, Jose M. Lorenzana and Benigno C. Gutierrez
as counter-guarantors, they together with Ricardo D. Lorenzana, were ordered to indemnify
the Visayan Surety and Insurance Corporation for the amount which the latter would actually
pay plaintiff in case defendant Ricardo D. Lorenzana should fail to make the payment himself
and another sum of P500 as attorney's fees.
After the motion filed by the surety for the reconsideration of said division was denied, said
defendant brought the matter to this Court on appeal ascribing to the lower Court the
commission of several errors. But stripping them of unnecessaries and reducing the same to

bare essentials, the only question at issue in the case at bar is whether the delivery by the
company of its products to defendant Lorenzana in a place other than that mentioned in the
agreement constitutes an alteration of said agreement that would release the surety from its
liability under the bond.
It appears on record that cigarettes valued at P1,870 were transported to Ricardo Lorenzana,
c/o of Mrs. Justo de Leon at San Fernando, Pampanga. Defendant surety tried to capitalize on
this single act but it failed to present evidence that these goods were actually sold and
distributed in said places. It would have been possible for the distributor to take a sojourn in
that place and the company, knowing where he could be reached, sent the merchandise to
him. Defendant Lorenzana also alleged in his answer that plaintiff allowed him to sell the
latter's products even as far as the northern provinces but this defendant was not able to
substantiate such claim due to his failure to appear and testify to his effect at the trial,
despite the fact that he was duly represented by counsel. But even granting arguendo that
the merchandise thus delivered and presumably received at San Fernando, La Union, was
actually sold and distributed therein, this may not be considered as a deviation from the
territory to be covered by the agent or distributor was not prohibited by the agreement
itself, nor does the record show that such expansion of the territory was due to instructions
from the plaintiff. While it is true that that contract (Exhibit A) states that the distributor is
willing to sell and distribute the products of the company in Manila and Rizal, specification
serves more as a manifestation that Lorenzana entered into the agreement with the
understanding that his sphere of activity would be for these places. But certainly nowhere in
the same agreement appears a restriction against the acceptance of additional territories, if
he so desired.
Appellant surety argues that the bond guarantees only the payment of cigarettes, cigars or
other tobacco products that were delivered to and distributed by Lorenzana in Manila and
Rizal and at no other place. To adopt this line of reasoning would be to harness a pliant
argument to suit appellant's purpose. The agreement required the distributor to post a bond
for P8,000, "P3,000 of which bond shall answer for the faithful settlement of the account of
the distributor with the Company." The bond put up by Lorenzana in the amount of P3,000,
undertaken by the Visayan Surety and Insurance Corporation, therefore, was only to secure
the prompt and faithful payment of the accounts of the distributor to the company. The
mention of Manila and Rizal in said agreement was designed more as a declaration or
identification of these places wherein the distributor was expressly authorized and assigned
to sell the cigar, cigarettes and tobacco products of the plaintiff, which is no obstacle to the
distributor's acceptance or takingmotu proprio of additional territories in order to better to
fulfill his obligation to sell monthly for the Company not less than P20,000 worth of
cigarettes and other tobacco products and could by no means alter his liability to turn over
the to the company payments therefor, and that is precisely his obligation secured by the
bond.
Appellant maintaining that the alleged modification of the agreement released the surety
from its liability, invokes the rule of strictissimi juris under which, it is claimed, surety bonds
must be strictly construed and cannot be extended beyond their terms. Although We might
acknowledge that a surety is a favorite of the law and his contract strictissimi juris, this rule
has no bearing on the case at bar. Anyway, it commonly refers to an accommodation surety
and should not be extended to favor a compensated surety, as is appellant in the instant
case. The rationale of this doctrine is reasonable; an accommodation surety acts without
motive of pecuniary gain and, hence, should be protected against unjust pecuniary
impoverishment by imposing on the principal duties akin to those of a fiduciary. This cannot

be said of a compensated corporate surety which is a business association organized for the
purpose of assuming classified risks in large numbers, for profit and on an impersonal basis
through the medium of standardized written contractual forms drawn by its own
representatives with the primary aim of protecting its own interests (See Stearn's The Law of
Suretyship, 4th ed., 402-403). American courts in refusing to apply this rule on compensated
sureties have expressed themselves in varying language. Sometimes it is said that a
corporate compensated surety is not entitled to the benefit of the rule of strictissimi
juris (U.S. vs. Gao, F. Pawling & Co. 297 F. 65); or that the contract is to be construed against
the surety and in favor of the promise (Consolidated Indem. & Ins. Co. vs. State, 184 Ark.
581, 43 S.W. [2d] 240); or that the contract is like one of the insurance, hence one or the
other of the above rules is to be applied (Lassetter vs. Backer, 26 Ariz. 224, 224 P. 810; Md.
Cas. Co. vs. Dunlap, 68 F. [2d] 289), and it was even said:
The law does not have the same solicitude for corporations engaged in giving
indemnity bonds for profit as it does for individual surety who voluntarily undertakes
to answer for the obligations of another. Although calling themselves sureties, such
corporations are in fact insurers, and in determining their rights and liabilities the
rules peculiar to suretyship do not apply (Metropolitan Casualty Insurance Co. vs.
United Brick & Tile Co. [1934], 29 P. [2d] 771).
Even assuming, however, for the sake of argument that the delivery of merchandise at a
place other than that appearing in the contract constitutes an alteration of the same, it is a
material deviation that would release the surety from its liability?.
A material alteration of a contract is such a change in the terms of the agreement as either
imposes some new obligation on the party promising or takes away some obligation already
imposed. A change in the form of the contract which does not affect one or the other of
these results is immaterial, and will not discharge the surety (Stearn's The Law of
Suretyship, 4th ed., p.98). To be material an alteration must change the legal effect of the
original contract (New Amsterdam Casualty Co. vs. W.T. Taylor Const. Co., 12 F. [2d] 972).
It cannot be denied that the obligation of the principal remained the same to settle his
accounts to the company at the specified time. The addition or diminution of the territories
covered by his previous assignment will not alter or affect that duty to make payments on
time. Apart from the fact that the alteration in the instant case, if there was any, is not
material as to relieve the surety from its liability under the bond, there is not even an iota to
proof that such deviation caused the surety any loss or injury or that such delivery caused
the distributor's failure to pay his accounts. The weight of authority is to the effect that:
A corporation engaged in the business of suretyship for profit cannot successfully
defend a suit merely by showing a change in the contract, whether beneficial or
otherwise, as is the rule in ordinary suretyship, but most prove that the change is
material and prejudicial (City of Philadelphia vs. Ray., 266 Pa. 345; 109 Alt. 689).
It is well-settled that the rule of stricticcimi juris, ordinarily applied in relief of an
individual surety, is not applied in case of compensated sureties; and that where a
bonding company, for a monetary consideration, has insured against failure of
performance of a contract, it must show that it has suffered some injury by reason of
departure from the strict terms of contract, before it can for that reason be
discharged from its liability (Pickens County vs. National Surety Co. 13 F. [2d] 758
[C.C.A.] 4th, 1926).

A departure from the terms of the contract will not have the effect of discharging a
compensated surety unless it appears that such departure has resulted in injury, loss
or prejudice to the surety (Chapman vs. Hoage, 296 U.S. 526).
It has been said that to allow compensated surety companies to collect and retrain
premiums for their services, graded according to the nature and extent of the risk,
and then to repudiate their obligations on slight pretexts which have no relation to
the risk, would be most unjust and immoral, and would be a perversion of the wise
and just rules designed for the protection of voluntary sureties (M. H. Waller Realty
Co. vs. American Surety Co., 60 Utah, 435).
Wherefore, the decision appealed from is hereby affirmed, with costs against appellant. It is
so ordered.
Paras, C.J., Padilla, Montemayor, Bautista Angelo, Labrador, Concepcion, Reyes, J.B.L., and
Endencia, JJ., concur.
THIRD DIVISION
[G.R. No. 119121. August 14, 1998]
NATIONAL POWER CORPORATION, petitioner, vs. COURT OF APPEALS, Fifteenth
Division and PHESCO INCORPORATED, respondents.
DECISION
ROMERO, J.:
On July 22, 1979, a convoy of four (4) dump trucks owned by the National Power
Corporation (NPC) left Marawi city bound for Iligan city. Unfortunately, enroute to its
destination, one of the trucks with plate no. RFT-9-6-673 driven by a certain Gavino Ilumba
figured in a head-on-collision with a Toyota Tamaraw. The incident resulted in the death of
three (3) persons riding in the Toyota Tamaraw, as well as physical injuries to seventeen
other passengers.
On June 10, 1980, the heirs of the victims filed a complaint for damages against
National Power Corporation (NPC) and PHESCO Incorporated (PHESCO) before the then Court
of First Instance of Lanao del Norte, Marawi City. When defendant PHESCO filed its answer
to the complaint it contended that it was not the owner of the dump truck which collided
with the Toyota Tamaraw but NPC. Moreover, it asserted that it was merely a contractor of
NPC with the main duty of supplying workers and technicians for the latters projects. On
the other hand, NPC denied any liability and countered that the driver of the dump truck was
the employee of PHESCO.
After trial on the merits, the trial court rendered a decision dated July 25, 1988 absolving
NPC of any liability. The dispositive portion reads:
Consequently, in view of the foregoing consideration, judgment is hereby rendered ordering
PHESCO, Inc. and Gavino Ilumba upon receipt hereof:

1. To pay jointly and severally the plaintiffs thru the Dansalan College the sum of
P954,154.55 representing the actual or compensatory damages incurred by the plaintiffs;
and
2. To pay the sum of P50,000.00 representing Attorneys fees.
SO ORDERED.
Dissatisfied, PHESCO appealed to the Court of Appeals, which on November 10, 1994
reversed the trial courts judgment. We quote the pertinent portion of the decision:
A labor only contractor is considered merely as an agent of the employer (Deferia vs.
National Labor Relations Commission, 194 SCRA 525). A finding that a contractor is a labor
only contractor is equivalent to a finding that there is an employer-employee relationship
between the owner of the project and the employees of the labor only contractor (Industrial
Timer Corporation vs. National Labor Relations Commission, 202 SCRA 465). So, even if
Phesco hired driver Gavino Ilumba, as Phesco is admittedly a labor only contractor of
Napocor, the statute itself establishes an employer-employee relationship between the
employer (Napocor) and the employee (driver Ilumba) of the labor only contractor
(Phesco). (Ecal vs. National Labor Relations Commission, 195 SCRA 224).
Consequently, we hold Phesco not liable for the tort of driver Gavino Ilumba, as there was no
employment relationship between Phesco and driver Gavino Ilumba. Under Article 2180 of
the Civil Code, to hold the employer liable for torts committed by his employees within the
scope of their assigned task, there must exist an employer-employee relationship. (Martin
vs. Court of Appeals, 205 SCRA 591).
WHEREFORE, we REVERSE the appealed decision. In lieu thereof, the Court renders
judgment sentencing defendant National Power Corporation to pay plaintiffs the sum of
P174,889.20 plus P20,000.00 as attorneys fees and costs.
SO ORDERED.
Chagrined by the sudden turnaround, NPC filed a motion for reconsideration of said
decision which was, however, denied on February 9, 1995. [1]Hence, this petition.
The principal query to be resolved is, as between NPC and PHESCO, who is the employer
of Ilumba, driver of the dumptruck which figured in the accident and which should, therefore,
would be liable for damages to the victims. Specifically, NPC assigns the sole error that:
THE COURT OF APPEALS DECISION FINDING THAT PETITIONER NPC AS THE EMPLOYER OF
THE DRIVER GAVINO ILUMBA, AND CONSEQUENTLY, SENTENCING IT TO PAY THE ACTUAL
AND COMPENSATORY DAMAGES SUSTAINED BY COMPLAINANTS, IS NOT IN ACCORD WITH
THE LAW OR WITH THE APPLICABLE RULINGS OF THIS HONORABLE COURT. [2]
As earlier stated, NPC denies that the driver of the dump truck was its employee. It
alleges that it did not have the power of selection and dismissal nor the power of control
over Ilumba.[3] PHESCO, meanwhile, argues that it merely acted as a recruiter of the
necessary workers for and in behalf of NPC.[4]

Before we decide who is the employer of Ilumba, it is evidently necessary to ascertain

the contractual relationship between NPC and PHESCO. Was the relationship one of employer
and job (independent) contractor or one of employer and labor only contractor?
Job (independent) contracting is present if the following conditions are met: (a) the
contractor carries on an independent business and undertakes the contract work on his own
account under his own responsibility according to his own manner and method, free from the
control and direction of his employer or principal in all matters connected with the
performance of the work except to the result thereof; and (b) the contractor has substantial
capital or investments in the form of tools, equipment, machineries, work premises and
other materials which are necessary in the conduct of his business. [5] Absent these
requisites, what exists is a labor only contract under which the person acting as contractor
is considered merely as an agent or intermediary of the principal who is responsible to the
workers in the same manner and to the same extent as if they had been directly employed
by him.[6] Taking into consideration the above distinction and the provisions of the
Memorandum of Understanding entered into by PHESCO and NPC, we are convinced that
PHESCO was engaged in labor only contracting.
It must be noted that under the Memorandum, NPC had mandate to approve the
critical path network and rate of expenditure to be undertaken by PHESCO. [7] Likewise, the
manning schedule and pay scale of the workers hired by PHESCO were subject to
confirmation by NPC.[8] Then too, it cannot be ignored that if PHESCO enters into any subcontract or lease, again NPCs concurrence is needed. [9] Another consideration is that even in
the procurement of tools and equipment that will be used by PHESCO, NPCs favorable
recommendation is still necessary before these tools and equipment can be purchased.
[10]
Notably, it is NPC that will provide the money or funding that will be used by PHESCO to
undertake the project.[11]Furthermore, it must be emphasized that the project being
undertaken by PHESCO, i.e., construction of power energy facilities, is related to NPCs
principal business of power generation. In sum, NPCs control over PHESCO in matters
concerning the performance of the latters work is evident. It is enough that NPC has the
right to wield such power to be considered as the employer. [12]
Under this factual milieu, there is no doubt that PHESCO was engaged in labor-only
contracting vis--vis NPC and as such, it is considered merely an agent of the latter. In laboronly contracting, an employer-employee relationship between the principal employer and
the employees of the labor-only contractor is created. Accordingly, the principal employer
is responsible to the employees of the labor-only contractor as if such employees had
been directly employed by the principal employer. [13] Since PHESCO is only a labor-only
contractor, the workers it supplied to NPC, including the driver of the ill-fated truck, should
be considered as employees of NPC. [14] After all, it is axiomatic that any person (the principal
employer) who enters into an agreement with a job contractor, either for the performance of
a specified work or for the supply of manpower, assumes responsibility over the employees
of the latter.[15]
However, NPC maintains that even assuming that a labor only contract exists between
it and PHESCO, its liability will not extend to third persons who are injured due to the tortious
acts of the employee of the labor-only contractor. [16] Stated otherwise, its liability shall only
be limited to violations of the Labor Code and not quasi-delicts.
To bolster its position, NPC cites Section 9(b), Rule VII, Book III of the Omnibus Rules
Implementing the Labor Code which reads:

(b)
Labor only contracting as defined herein is hereby prohibited and the person
acting as contractor shall be considered merely as an agent or intermediary of the employer
who shall be responsible to the workers in the same manner and extent as if the latter were
directly employed by him.
In other words, NPC posits the theory that its liability is limited only to compliance with
the substantive labor provisions on working conditions, rest periods, and wages and shall not
extend to liabilities suffered by third parties, viz.:
Consequently, the responsibilities of the employer contemplated in a labor only contract,
should, consistent with the terms expressed in the rule, be restricted to the workers. The
same can not be expanded to cover liabilities for damages to third persons resulting from
the employees tortious acts under Article 2180 of the Civil Code. [17]
The reliance is misplaced. It bears stressing that the action was premised on the
recovery of damages as a result of quasi-delict against both NPC and PHESCO, hence, it is
the Civil Code and not the Labor Code which is the applicable law in resolving this case.
To be sure, the pronouncement of this Court in Filamer Christian Institute v. IAC,[18] is
most instructive:
The present case does not deal with a labor dispute on conditions of employment between
an alleged employee and an alleged employer. It invokes a claim brought by one for
damages for injury caused by the patently negligent acts of a person, against both doeremployee and his employer. Hence, the reliance on the implementing rule on labor to
disregard the primary liability of an employer under Article 2180 of the Civil Code is
misplaced. An implementing rule on labor cannot be used by an employer as a shield to
avoid liability under the substantive provisions of the Civil Code.
Corollarily from the above doctrine, the ruling in Cuison v. Norton & Harrison Co.,[19] finds
applicability in the instant case, viz.:
It is well to repeat that under the civil law an employer is only liable for the negligence of
his employees in the discharge of their respective duties. The defense of independent
contractor would be a valid one in the Philippines just as it would be in the United
States. Here Ora was a contractor, but it does not necessarily follow that he was an
independent contractor. The reason for this distinction is that the employer retained the
power of directing and controlling the work. The chauffeur and the two persons on the truck
were the employees of Ora, the contractor, but Ora, the contractor, was an employee of
Norton & Harrison Co., charged with the duty of directing the loading and transportation of
the lumber. And it was the negligence in loading the lumber and the use of minors on the
truck which caused the death of the unfortunate boy. On the facts and the law, Ora was not
an independent contractor, but was the servant of the defendant, and for his negligence
defendant was responsible.
Given the above considerations, it is apparent that Article 2180 of the Civil Code and not
the Labor Code will determine the liability of NPC in a civil suit for damages instituted by an
injured person for any negligent act of the employees of the labor only contractor. This is
consistent with the ruling that a finding that a contractor was a labor-only contractor is

equivalent to a finding that an employer-employee relationship existed between the owner

(principal contractor) and the labor-only contractor, including the latters workers. [20]
With respect to the liability of NPC as the direct employer, Article 2180 of the Civil Code
explicitly provides:
Employers shall be liable for the damages caused by their employees and household
helpers acting within the scope of their assigned tasks, even though the former are not
engaged in any business or industry.
In this regard, NPCs liability is direct, primary and solidary with PHESCO and the driver.
Of course, NPC, if the judgment for damages is satisfied by it, shall have recourse against
PHESCO and the driver who committed the negligence which gave rise to the action. [22]
[21]

Finally, NPC, even if it truly believed that it was not the employer of the driver, could still
have disclaimed any liability had it raised the defense of due diligence in the selection or
supervision of PHESCO and Ilumba. [23] However, for some reason or another, NPC did not
invoke said defense. Hence, by opting not to present any evidence that it exercised due
diligence in the supervision of the activities of PHESCO and Ilumba, NPC has foreclosed its
right to interpose the same on appeal in conformity with the rule that points of law, theories,
issues of facts and arguments not raised in the proceedings below cannot be ventilated for
the first time on appeal.[24] Consequently, its liability stands.
WHEREFORE, in view of the foregoing, the assailed decision of the Court of Appeals
dated November 10, 1994 and its accompanying resolution dated February 9, 1995 are
AFFIRMED without prejudice to the right of NPC to demand from PHESCO and Ilumba
reimbursement of the damages it would be adjudged to pay to complainants. No costs.
SO ORDERED.
Narvasa, CJ., (Chairman), Kapunan and Purisima JJ. concur.
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-10292

February 28, 1958

PAO CHUAN WEI, plaintiff-appellant,

vs.
REPOSITO NOMOROSA and GENERAL INDEMNITY CO., INC., defendants-appellees.
Manuel V. San Jose and Bernardo C. Tiongco for appellant.
D. A. Rodriguez for appellees.
BENGZON, J.:

Initiated in the Manila court of first instance, this is a suit to recover on a surety bond
executed in plaintiff's favor by Reposito Nomorosa, as principal debtor and General
Indemnity Co., Inc., as surety.
Nomorosa died after answering the complaint, and the case against him was dismissed.
General Indemnity Co., Inc., pleaded prescription.
After several incidents immaterial at this stage of the proceedings, the controversy was
submitted for decision upon a stipulation of facts the main terms of which ran as follows:
On November 22, 1949 General Indemnity executed the bond Exh. B whereby it
guaranteed, as surety, the payment by Reposito Nomorosa of the latter's mortgage
debt to plaintiff Pao Chuan Wei in the amount of P2,500.00;
One paragraph of said bond provides:
. . . Furthermore, it is here by agreed and understood that the GENERAL INDEMNITY
CO., INC., will not be liable for any claim not discovered and presented to the
company within THREE (3) months from the expiration of this bond and that the
obligee hereby waives his right to file any court-action against the surety after the
termination of the period of three months above mentioned;
Nomorosa did not pay the whole debt, there being a balance of P2,282.00;
On February 29, 1950 and March 29, 1950, plaintiff demanded payment of the
account from the surety;
Defendant now refuses to pay on the ground that its liability under the bond
extended only up to May 22, 1950, but this complaint was filed almost two years
after such deadline;
The parties ask the court to decide on "the question as to whether or not the plaintiff
has the right to collect from the defendant General Indemnity Co., Inc., the balance
remaining unpaid to defendant R. Nomorosa, in the sum of P2,282.00 with 7 percent
interest from January 27, 1949, under the Surety Bond, Exhibit B."
Acting upon the above submission, the trial judge dismissed the case, holding that the
action had nut been filed "within three months from the expiration of the bond" on or about
February 22, 1950. (The suit began in February 1952.)
Pao Chuan Wei appealed in due time. He contends before this Court that his complaint had
been seasonably filed, because within three months after the expiration of the bond, he
presented to the surety on February 29, and March 29, 1950, the claim for non-Performance
or nonpayment by the principal debtor; and that such presentation rendered the surety
liable, it being sufficient compliance with the condition precedent specified in the paragraph
of the bond Exh. B herein-above quoted.
The appellee asserts in reply, that presentation of the claim and filing of the action in
court must be made within three months after the expiration of the bond.

At first glance and without careful analysis, the last part of the paragraph of the bond hereinabove quoted seems to justify appellee's assertion and the lower court's dismissal of the
proceeding.
However, on second thought and on reading the whole paragraph the probability it appears
that the parties meant, or the creditor understood, that he "waives his right to file any court
action against the surety after the termination of the three-months above
mentioned" should he present no claim to the surety within said three-month period.
Observe specially that no punctuation separates the first part regarding presentation of
claim and the second part regarding waiver. Which is an indication that the second part is a
continuation of the first; and the two clauses must be taken together as referring to one
topic: presentation of claim within three months, and effect of non-presentation. (cf. Art.
1285 of the Civil Code.) The second could not obviously have meant to amend the first
part by making it not only a condition precedent but also a limitation of action.
Indeed, as the parties expressly fixed the three-month period for presentation of the claim
as a condition precedent, they must have intended to give the surety, if the claim is
presented within that period, some time to decide whether to pay or not to pay. (Because if
it agrees to pay and pays, no complaint need be filed in court.) Now then, if the claim is
presented on the 90th or last day, to uphold the contention of appellee would deprive the
surety of the chance to decide whether to pay or not to pay, and would compel action on
that same day regardless of the surety's attitude on the matter. That would be
nonsensical, to put it strongly.
Again, appellee's contention implies that as the cause of action did not arise until the claim
was presented on the last day, such cause of action prescribed on that same day if no
complaint was filed on that very day. Evidently, the parties could not have contemplated
and agreed upon such absurd result or requirement. 2 And yet, if they had knowingly
agreed thereto, the agreement void because it fixed an unreasonable period of prescription
for the creditor's right of action.
In some cases, apparently no longer authoritative as precedents, contractual
limitation have been regarded as against public policy, and therefore unenforceable
in the courts. The prevailing view, however, is that unless contravenes a valid
statute, or unless the time fixed is unreasonably short, such a provision is binding
upon the contracting Parties. (American Jurisprudence Vol. 34 p.61 )
In holding invalid as unreasonable a provision in a bond . . . the court in Page
County vs. Fidelity & D. Co. (1927) 205 Iowa, 798, 216 N. W. 957, said: "The proviso
under consideration forbids an action for sixty days after default; This brings upper
and forbids an action after the expiration of ninety days from the date of default. This
brings upper and neither millstones into close proximity. It reduces the period of
limitation to thirty days. This comes very close to an abrogation of the right of action.
If the period of limitation can ever be deemed an unreasonable one, this one must be
deemed such." (121 American Law Reports, Annotated p. 781.)
If it should be argued that the stipulation could be interpreted either as a condition
precedent only, or as both condition precedent and prescription then we would hold: it
appearing that the bond was executed in a form prepared by the surety company, any
ambiguity in the document must be interpreted against it.3

In the supposition, however, that the three-month time was actually intended by the
parties as both a condition precedent and a limitation period, then the agreement would
normally amount to: 45-days for filing claim and the other 45-days for presenting court
action. Then the inquiry suggests itself whether 45-days would be a "reasonable period";
because as stated above, the authorities permit the contracting parties to fix a shorter
limitation of-action-period than that fixed by the statute, provided it is reasonable. (See
American Jurisprudence supra.)
In an action upon a policy of insurance fixing a three month period of limitation, 4 this Court
impliedly hinting some doubt concerning its reasonableness, did not pass on the point
because unnecessary at that time. In a later case, a divided court declared it to be
reasonable, following American precedents. (Teal Motor Co. vs. Orient Insurance Co. 59 Phil.,
809.) Subsequently, however, the Legislature amended the Insurance Law by providing that
"any stipulation in any policy of insurance limiting the time for commencing an action
thereunder to a period of less than one year from the time the cause of action accrues is
void." (See. 61-A Insurance Act.)
A surety bond is not of course, an insurance. policy.5 There are similarities though, between
bonding and insurance transactions; so much so that surety companies are placed under the
supervision of the Insurance Commissioner. It would be an interesting matter to discuss
whether the legislative view as to insurance policies (one-year minimum period) should also
be applied to surety bonds issued by licensed surety companies, bearing in mind that in
determining the reasonableness of the period fixed by contractual limitation courts "may
resort to the standards and analogies of cognate statutes to inform their judgment". 6 This
consideration all the more inclines us to the opinion that the bond here in question should
receive the interpretation we give to it, namely, that the three-month period established
only a condition precedent, not a limitation of action. And in that light we must hold that
inasmuch as plaintiff's claim had been presented to General Indemnity Co., Inc., within the
three-months period, and as the action had been subsequently filed within the statutory
time of prescription,7 the case should not have been dismissed.
Wherefore, the appealed decision is reversed, and judgment is hereby entered requiring the
defendant General Indemnity Co., Inc., to pay plaintiff the sum of P2,282.00 with 7% interest
from January 27, 1949. Costs against appellee in both instances. So ordered.
Paras, C.J., Padilla, Montemayor, Reyes, A., Bautista Angelo, Labrador, Concepcion, Reyes,
J.B.L., Endencia and Felix, JJ., concur.
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-25553

January 31, 1969

NATIONAL MARKETING CORPORATION, plaintiff-appellee,

vs.
GABINO MARQUEZ, ET AL., defendants,
PLARIDEL SURETY & INSURANCE COMPANY, defendant-appellant.

Benjamin M. Tan and Jose S. Valencia for plaintif-appellee.

Carlos, Madarang, Carballo and Valdez for defendant-appellant.
Gabino Marquez for and in his own behalf as defendant.
REYES, J.B.L., J.:
This Court is prayed by appellant, Plaridel Surety & Insurance Company, to reverse the
decision of the Court of First Instance of Manila condemning it to pay to the appellee,
National Marketing Corporation, the principal sum of P10,000.00, plus P9,990.91 in accrued
interest up to 1 November 1964, and interest thereafter at 7% per annum on the principal
and 6% on the accrued interest, together with 10% on the total amount due by way of
attorney's fees and costs.
The appeal being made directly to this Supreme Court, the facts found by the court below
must be held binding upon this appellant. Such facts are stated in the appealed decision to
be as follows (Record on Appeal, pages 18-21):
From the evidence thus presented, it appears that under the provisions of Executive
Order No. 350, Series of 1950, all the properties, rights, obligations, and contracts of
the Philippine Relief and Trade Rehabilitation Administration (PRATRA) had been
transferred to the Price Stabilization Corporation (PRISCO). Also by virtue of Republic
Act No. 1345, as amended, all rights and contracts of the PRISCO involving real
estate, fixed assets and stock in trade had been assumed by herein plaintiff, the
NAMARCO.
It also appears that on June 24, 1950, defendant Marquez secured from the PRATRA
one (1) tractor and one (1) rice thresher, with a total value of P20,000.00 for which
the said defendant paid thereon the sum of P8,000.00 as down payment, thereby
leaving a balance of P12,000.00, as evidenced by an invoice marked as Exhibit A.
On the same date, defendant Marquez executed a promissory note in the amount of
P12,000.00 payable in installments commencing from June 24, 1951 to June 25,
1952, with interest thereon at the rate of 7% per annum from June 24, 1950 until
finally paid, which promissory note is marked in this case as Exhibit B.
It is further stipulated in the aforesaid promissory note that in the event of failure of
the said defendant to pay the principal obligation or interest thereon when due and
payable, an additional sum equivalent to 10% of the total amount due shall be paid
as attorney's fees.
To guarantee full compliance with the aforementioned obligation, defendant
Marquez, as principal, and defendant Plaridel Surety & Insurance Company, as surety,
executed Guaranty Bond P. S. & I. No. 4220 in favor of the PRATRA, wherein they
bound themselves, jointly and severally, to pay the said amount of P12,000.00
(Exhibit C).
In this guaranty bond, the surety expressly waives its right to demand payment and
notice of non-payment and agrees that the liabilities of this guaranty shall be direct
and immediate and not contingent upon the exhaustion by the PRATRA of whatever

remedies it may have against the principal, and that the same shall be valid and
continuous until the obligation so guaranteed is paid in full (Exhibit C-1).
After making partial payments in the sums of P2,870.19 and P326.77 on July 7, 1951
and February 23, 1952, respectively, defendant Marquez defaulted in the payment of
the other installments, so that the total amount due NAMARCO as of October 31,
1964 is P19,990.91, representing principal and accrued interest, as shown in a
statement of account marked as Exhibit D.1awphil.t
On March 22, 1956, February 16, 1963, June 10, 1964, September 18, 1964 and
October 13, 1964, plaintiff demanded from defendants Marquez and Plaridel Surety &
Insurance Company, payment of their outstanding obligation, as shown in Exhibits E,
E- 2, E-3, E-4, E-6, E-8, E-10, and E-12. The claim, therefore, of defendant Plaridel
Surety & Insurance Company that they never received a demand for payment from
plaintiff must necessarily fail, considering that it is clearly shown in registry return
receipts marked as Exhibits E-5, E-9, E-11, and E-13 that the same had been received
by the addressee.
As the said amount was not paid despite the aforementioned demands therefor
upon the said defendants, the present action was instituted on December 16, 1964,
to enforce collection.
The appellant surety company poses three questions for our resolution:
(1) Whether the Court of First Instance had original jurisdiction to take cognizance of
the suit;
(2) Whether the plaintiff-appellee's action is barred by prescription;
(3) Whether the surety's liability can exceed the sum of P12,000.00.
On the first question tendered, appellant surety company argues that since the balance
due on the principal of the promissory note guaranteed by it is only P10,000.00, in view of
the debtor's payment of P2,000.00 on account of the principal of the loan, jurisdiction lay
with the Municipal Court, and not on the Court of First Instance, pursuant to section 44 (c) of
the Judiciary Act, as amended by Republic Act No. 3828.
The contention is without merit, for it ignores the fact that upon the terms of the
promissory note, Exhibit "B", copy of which was attached to the guaranty bond, as its annex
"A", default upon the principal or interest entitled the creditor to an additional ten per
centum of the total amount due for attorneys' fees and costs of collection. Even disregarding
interest overdue and payable, when the complaint was filed the creditor-appellee was
entitled to collect no less than P10,000.00 on the loan plus P1,000.00 attorneys' fees, or a
total of P11,000.00. The initial limit of the original jurisdiction of the Court of First Instance
under Republic Act No. 3828 being
all cases in which the demand, exclusive of interest, or the value of the property in
controversy, amounts to more than ten thousand pesos.
the court below did not incur in this error.

The contention that plaintiff-appellee's cause of action against the surety was barred by the
statute of limitations in 1964, because the face value of the promissory note fell due on 25
June 1962, is likewise untenable. The course of extinctive prescription was interrupted by the
written demands for payment made upon the principal debtor on 22 March 1956, 16
February 1963, and June, September and October of 1964, copies of which were furnished
the surety. Article 1115 of the Civil Code of the Philippines prescribes that "the prescription
of actions is interrupted when there is a written extrajudicial demand by the creditor".
The surety avers that a demand upon the debtor is no demand upon the surety, and that
the copies of the letters of demand upon the former do not constitute a demand upon the
guarantor. This thesis is worthless because (a) the liability of the appellant was expressly
made joint and several by the terms of the guaranty bond, and (b) for the reason that, in the
latter document, "the surety also waives its right to demand payment and notice of nonpayment" (Bond, paragraph 3). The words "demand payment" vis-a-vis the creditor can only
refer to "demand for payment".
Laches not having been invoked as a defense in the court below, the same can not be gone
into at this stage of the proceedings. At any rate, the established jurisprudence is that mere
delay of the creditor in proceeding against the principal debtor does not release the
guarantor (Lavides vs. Eleazar, 106 Phil. 576, 579, and cases therein cited), and much less
will it relieve a surety, who is solidarily liable with the main debtor.
On the third and last issue, it is enough to remark that while the guarantee was for the
original amount of the debt of Gabino Marquez, the amount of the judgment by the trial
court in no way violates the rights of the surety. The judgment on the principal was only for
P10,000.00, while the remaining P9,990.91 represent the moratory interest due on account
of the failure to pay the principal obligation from and after the same had fallen due, and
default had taken place. Appellant surety was fully aware that the obligation earned interest,
since the note was annexed to its contract, Exhibit "C". The contract of guaranty executed
by the appellant Company nowhere excludes this interest, and Article 2055, paragraph 2, of
the Civil Code of the Philippines is clearly applicable.
If it (the guaranty) be simple or indefinite, it shall comprise not only the principal
obligation but also all its accessories, including judicial costs, provided with respect to
the latter, that the guarantor shall only be liable for those costs incurred after he has
been judicially required to pay. (Emphasis supplied)
Explaining the provisions of Article 1827 of the Civil Code of 1889, couched in terms similar
to the one quoted, Manresa, in his Commentaries (Volume 12. Fifth Edition, page 241), says:
Para dicho caso dispone el Codigo que la extension de esa clase especial de fianzas
comprendera, no solo la obligacion principal, sino tambien todos sus accesorios,
incluso, los gastos del juicio, con la limitacion establecida en el mismo. Cierto es que
con ello se amplian los terminos de la fianza a mas de los limites de la obligacion
principal, objeto y motivo de aquella, pero esto depende de los actos del fiador, pues
pudiendo este precisar y determinar al constituir la fianza los limites de la misma,
restringiendo su responsabilidad unica y exclusivamente a los terminos estrictos de
la obligacion principal, si no lo hizo asi dejando de utilizar esa restriccion, potestativa
en el, debe presumirse que quiso quedar obligado en la forma amplia que en el
articulo se establece.

La responsabilidad del fiador, conforme a este precepto, se extiende incluso a los

intereses por razon de mora del deudor. Asi lo ha reconocido la jurisprudencia,
declarando que subrogado el fiador en el lugar del deudor para hacer efectiva la
obligacion principal contraida, cuando este no la cumple, responde no solo de
aquella, sino tambien de sus consecuencias legales, una de ellas, en concepto de
indemnizacion de perjuicios, al abono de intereses por razon de mora del citado
deudor en el pago de cantidad liquida, segun determinan los articulos 1.101 y 1.108
del Codigo civil, sin que pueda sostenerse que no naciendo la obligacion del fiador
hasta que se hace la exclusion de bienes del deudor, no puede aquel incurrir en mora
(sentencia de 22 de noviembre de 1916).
And we have previously ruled that compensated sureties are not entitled to have their
contracts interrupted strictissimi juris in their favor (Leyson vs. Rizal Surety [1966] 16 SCRA
555; Pacific Tobacco Corp. vs. Lorenzana, 102 Phil. 234, 241-242).
WHEREFORE, finding no error in the judgment appealed from, the same is affirmed, with
costs against appellant Plaridel Surety and Insurance Company.
Concepcion, C.J., Dizon, Makalintal, Zaldivar, Sanchez, Castro, Fernando, Capistrano,
Teehankee and Barredo, JJ., concur.
Republic of the Philippines
SUPREME COURT
Manila
EN BANC

G.R. No. L-24835 July 31, 1970

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

CONCEPCION, C.J.:
This appeal, taken by the Northern Lines, Inc., and Fieldmen's Insurance Co., Inc., from a
decision of the Court of First Instance of Manila in Cases Nos. 50194 and 51542 thereof,
which were jointly tried and disposed of, has been certified to Us by the Court of Appeals,
questions purely of law having been raised in the appeal.

It appears that, pursuant to Rep. Act No. 1789, the Reparations Commission hereinafter
referred to as the Commission had awarded two (2) vessels to the Northern Lines Inc., a
corporation organized and existing under the Philippine law hereinafter referred to as the
Buyer for use in the interisland shipping. According to the schedules of payment agreed
upon between the parties, complete delivery of one of the vessels the M/S Magsaysay,
later named M/S Don Salvador took place on April 25, 1960, and that of the other the
M/S Estancia later named M/S Don Amando on May 26, 1960. These vessels were the
object of separate deeds of conditional purchase and sale of reparations goods, executed by
the Commission, as vendor, and the Buyer, as vendee, the first dated September 12, 1960,
and the second October 20, 1960. In conjunction with these contracts and in line with the
provisions thereof Surety Bonds Nos. 3825 and 4123 were executed, on April 25, 1960 and
May 30, 1960, respectively, by the Buyer, as principal, and the Fieldmen's Insurance Co., as
surety, in favor of the Commission, to guarantee the faithful compliance by the Buyer of its
obligations under said contracts. The Buyer undertook therein to pay for said vessels the
installments specified in a schedule of payments, appended to each contract. The schedule
for the M/S Don Salvador (ex-M/S Magsaysay) reads as follows:
NAME OF END-USER NORTHERN LINES, INC.
ADDRESS 480 Padre Faura, Ermita, Manila
NATURE OF CAPITAL GOODS/SERVICES One (1) Vessel M/S MAGSAYSAY'
divested of the cannery plant
DATE OF COMPLETE DELIVERY April 25, 1960
TOTAL F.O.B. COST P1,747,614.22
AMOUNT OF 1ST INSTALLMENT (10% OF F.O.B. COST) P174,761.42 .
DUE DATE OF 1ST INSTALLMENT April 25, 1962
TERM: TEN (10%) EQUAL YEARLY INSTALLMENTS
RATE OF INTEREST: THREE PERCENT (3%) PER ANNUM

NO. OF INSTALLMENTS

DATE DUE

AMOUNT

April 25, 1963.

P184,386.34

" " 1964

184,386.34

" " 1965

184,386.34

" " 1966

184,386.34

" " 1967

184,386.34

" " 1968

184,386.34

" " 1969

184,386.34

" " 1970

184,386.34

" " 1971

184,386.34

" " 1972

184,386.34

whereas that for M/S Don Amando (ex-M/S Estancia) was of the following
tenor:
NAME OF END-USER NORTHERN LINES, INC.
ADDRESS 480 P. Faura, Ermita, Manila
NATURE OF CAPITAL GOODS/SERVICES One vessel 'M/S Estancia' Divested of
the Cannery Plant
DATE OF COMPLETE DELIVERY May 26. 1960
TOTAL F.O.B. COST P1,747,614.22
AMOUNT OF 1ST INSTALLMENT (10% OF F.O.B. COST) P174,761.42
DUE DATE OF 1ST INSTALLMENT May 26, 1962
TERM: Ten (10) EQUAL YEARLY INSTALLMENTS
RATE OF INTEREST: THREE PERCENT (3%) PER ANNUM

NO. OF INSTALLMENTS

DATE DUE

AMOUNT

May 26, 1963

184,386.34

" " 1964

184,386.34

" " 1965

184,386.34

" " 1966

184,386.34

" " 1967

184,386.34

" " 1968

184,386.34

" " 1969

184,386.34

" " 1970

184,386.34

" " 1971

184,386.34

10

" " 1972

184,386.34

On April 24, 1962, an d May 26, 1962 or one day before the stated due date of the first
installment for M/S Don Salvador (ex-M/S Magsaysay), and on the stated due date of the first
installment as to M/S Don Amando (ex-M/S Estancia) the Buyer instituted Civil Cases Nos.
50194 (regarding M/S Don Salvador, formerly Magsaysay) and 50488 (regarding M/S Don
Amando, formerly Estancia) of the Court of First Instance of Manila to secure, by way of
declaratory relief, a declaration to the effect that the first installments under the
aforementioned contracts would be due and demandable on April 25, 1963 and May 26,

1963, respectively. Soon thereafter, or on September 10, 1962, the Commission Commenced
Civil Case No. 51542 of the same Court, against the Buyer and the Surety. The Commission
alleged in two separate causes of action set forth in the complaint therein that, despite
repeated demands, the defendants (Buyer and Surety) had refused to pay the first
installments of P174,761.42 each, that had become due and demandable on April 25 and
May 26, 1962, respectively. Hence, it prayed that the Buyer and the Surety be sentenced to
pay, jointly and severally, to the Commission the aggregate sum of P349,522.84, with
interest thereon at the legal rate, in addition to attorney's fees and the Costs.
In its answer to the complaint, the Buyer admitted some allegations and denied other
allegations thereof, and, by way of special defense, averred that the Commission has no
cause of action until Civil Cases Nos. 50488 and 50194 . shall have been decided. The
Surety's answer contained similar admissions and denials, apart from adopting as its own
those made in the Buyer's answer, and set up a crossclaim against the Buyer, for
reimbursement of whatever the Surety may have to pay to the Commission by reason of its
complaint, including interests, and for the sum P10,541.68 "representing unpaid premiums
and documentary stamps due on the two bonds" above-mentioned, plus attorney's fees and
interests.
Subsequently, or on October 29, 1962, Branch XIII of the Court of First Instance of Manila
dismissed Case No. 50488 involving the M/S Don Amando or Estancia whereupon the
Buyer appealed to this Court, where the case was docketed as L-20725. The same was,
however, dismissed July 2, 1963, for failure of the Buyer, as appellant therein, to file its brief
within the reglementary period. In due course thereafter, or on April 30, 1964, Branch VII of
said Court of First Instance rendered, in Cases Nos. 50194 regarding M/S Don Salvador or
Magsaysay and 51542 the action filed by the Commission which had been jointly
tried, a decision dismissing the petition for a declaratory relief in Case No. 50194, with costs
against the Buyer, as petitioner therein, and: (a) sentencing the Buyer and the Surety, as
defendants in Case No. 51542, to pay jointly and severally, to the Commission, the sum of
P174,761.42, under each of the two (2) causes of action alleged in the complaint, with
interest thereon at the legal rate, from the date of the filing of the complaint, until fully paid
although the liability of the Surety under each cause of action was not to exceed
P174,761.42 and the sum of P1,000 as attorney's fees, apart from the costs; (b) ordering
the Buyer to reimburse the Surety "whatever amount it may pay to the Reparations
Commission, with interest at the rate of 12% per annum"; and (c) sentencing the Buyer to
pay the Surety the sum of P10,641.68, representing unpaid premiums and documentary
stamps, with interest thereon at the legal rate and P300, by way of attorney's fees. A
reconsideration of this decision having been denied, the Buyer and the Surety appealed to
the Court of Appeals, which later certified the appeal to this Court.
The Buyer alleges that the trial court erred: (1) in interpreting the contracts in question in
favor of the Commission, which drafted the same; (2) in not interpreting said contracts "in
such a manner as to prevent inconsistency and absurdity"; (3) "in not taking into account
the delay in the use of the goods subject matter of the contracts in question in interpreting
the latter"; (4) in not holding that the action filed by the Commission (Case No. 51542) is
"barred" by the actions for declaratory judgment filed by the Buyer (Civil Cases Nos. 50194
and 50488); and (5) in rendering judgment for the Commission and the Surety "on their
main claims, interest, attorney's fees and costs."
The Surety, in turn, contends that the trial court erred: (1) in declaring that the first
installments of the purchase price "became due on April 25, 1962 and May 26, 1962,
respectively"; (2) in holding the Surety jointly and severally liable with the Buyer to pay to
the Commission the two first installments of said purchase price under FICI Surety Bonds
Nos. 3825 and 4123; (3) in not holding the Commission liable to pay the Surety "nominal

damages, attorney's fees and costs"; and (4) in not ordering the Buyer to pay to the Surety
"attorney's fees equivalent to 20% of the amount which the latter may pay" to the
Commission by reason of the judgment in its favor.
1. The main issue for determination in this appeal is that raised in the Buyer's first three (3)
assignments of error and in the Surety's first assignment of error, namely: when did the first
installment under the two (2) contracts become due?
The Buyer states that "in both contracts two due dates are given for the respective first
installments. In the case of M/S 'Don Salvador,' April 25, 1962, and April 25, 1963; while in
the case of M/S 'Don Amando,' May 26, 1962, and May 26, 1963. The question is, which are
the correct due dates intended by the parties? The defendant-appellant" the Buyer
"claims that they are the second and later dates given, while the plaintiff-appellee" the
Commission claims that they are the first and earlier dates." His Honor, the trial Judge,
sustained the latter contention.
In support of its claim, the Buyer argues that there is an ambiguity in said contracts, with
should be resolved against the Commission, "because it is the latter who caused the
ambiguity"; that otherwise, "there would result an inconsistency and absurdity," because the
contracts provide for ten (10) equal yearly installments, but, under the theory of the
Commission, there would be two (2) first' unequal installments, one for P174,761.42 and
another for P184,386.34, and the latter would be followed by nine (9) yearly installments
each for P184,386.34, which, together with the first two (2), would aggregate eleven (11)
installments, instead of ten (10). This contention is manifestly untenable.
(a) The major premise in appellants' process of reasoning is that the installments due on
April 25, 1963, and May 26, 1963, are "first" installments, although they are not so
designated in the schedule appended to each of the contracts between the parties.
Appellants, moreover, assume that the "first" installment is included in the "ten (10) equal
yearly installments" mentioned subsequently to said "first" installment. In fact, however,
only one installment is labelled as "first" in each one of said schedules, and that is the
installment due on "April 25, 1962" as regards M/S Don Salvador or Magsaysay and
that due on "May 26, 1962" as regards M/S Don Amando or Estancia. The schedules
do not describe the ten (10) equal yearly installments" following the one characterized
therein as "first" as first, second, third, etc. installments" meaning "number," not order
or sequence of installments - and the numerals 1, 2, 3, 4, 5, 6, 7, 8, 9, 10 written before
each one of said "ten (10) equal yearly installments." It is true that the one therein
numbered is, in fact, the first, in the list of "ten (10) equal yearly installments" following the
"first," to accrue after the due date of said "first" installment. Just the same, the parties
have not so described (as "first") in the schedules forming part of their contracts the
installments numbered "I" in the list contained in each. Moreover, considering that the words
"TERM: Ten (10) EQUAL YEARLY INSTALLMENTS," appear after the lines reading: "AMOUNT OF
ITS INSTALLMENT (10% OF F.O.B. COST) P174,761.42" and "DUE DATE OF 1ST INSTALLMENT
April 25, 1962" (or May 26, 1962), and that subsequently to said "TERM: Ten (10) EQUAL
YEARLY INSTALLMENTS," there is a list of ten (10) equal yearly installments, it is clear that
the latter do not include the one designated as "first" installment.
It is well settled that laws and contracts should be so construed as to harmonize and give
effect to the different provisions thereof. 1 Upon the other hand, the interpretation insisted
upon by the Buyer and the Surety, would, not only create the "contradictions" or
"absurdities" they point out and which, admittedly, should be avoided but, also, render
meaningless and set at naught the provisions in said schedules to the effect that the
"amount of (the) 1st installment" is "P174,761.42," and that the "due date of 1st
installment" would be April 25, 1962," as regards the M/S Don Salvador or Magsaysay, and

"May 26, 1962," as regards the M/S Don Amando or Estancia. In fact, the Buyer maintains
that these provisions should be "treated as surplusage" and, hence, disregarded or ignored.
Incidentally, thus reveals the inherent infirmity of the theory advanced by the Buyer and the
Surety.
(b) The pertinent part of Section 12 of Rep. Act No. 1789, pursuant to which the vessels in
question were sold to the Buyer, reads:
... Capital goods ... disposed of to private parties as provided for in subsection
(a) of Section two hereof shall be sold on a cash or credit basis, under rules
and regulations as may be determined by the Commission. Sales on a credit
basis shall be payable in installments: Provided, That the first installment shall
be paid within twenty-four months after complete delivery of the capital goods
and thebalance within a period not exceeding ten years, ..., plus the service
provided for in section ten hereof:Provided, further, That the unpaid balance
of the price thereof shall bear interest at the rate of not more than three
percent per annum. .... 2
It should be noted that, pursuant to the schedules attached to the contracts with the Buyer,
the "complete delivery" of the vessels took place on April 25, and May 26, 1960,
respectively, so that the 24 months fixed by law for the payment of the "first" installment
expired on April 25, 1962 and May 26, 1962, which are the very due dates stated in the
aforementioned schedules for the payment of the respective "1st" installments. What is
more, in view of said legal provision, the Commission had no authority to agree that the 1st
installment be paid on any later date, and the Buyer must have been aware of this fact.
Hence, the parties could not have intended the first installments to become due on April 25
and May 26, 1963. It is, likewise, obvious particularly when considered in relation to the
provision above quoted that the "ten (10) equal yearly installments," mentioned in the
schedules, refer to the "balance" of the price to be paid by the Buyer, after deducting the
"first" installment, so that, altogether there would be "eleven" installments, namely, the
"first," which would be 10% of F.O.B. cost of the vessel as agreed upon between the
Governments of the Philippines and Japan and "ten (10) equal yearly installments,"
representing the balance of the amount due to the Commission from the Buyer, including
the interest thereon.
(c) The Buyer insists that the vessels were "delivered late," and that consequently, it would
be more in line with the spirit of R.A. No. 1789 to declare that the "first" installments fell due
on April 25 and May 26, 1963, respectively. But, the Buyer seeks, not merely
the postponement of the first installment's due date, but, also, exemption from the
obligation to pay its amount of P174,761.42. Besides, the dates of "complete delivery" of the
vessels are explicitly stated in the schedules as being "April 25, 1960" and "May 26, 1960."
The Buyer would have surely refused to sign the schedules if said entries therein were not
true. The signature affixed thereon by the Buyer and the fact that April 25, and May 26,
1960 were made the basis for the date of maturity, not only of the "first" installment, but,
also, of the subsequent "ten (10) equal yearly installments," clearly show that both parties
were agreed that complete delivery of the vessels had been made on the dates set forth in
said schedules.
d) This is borne out by the fact that FICI Surety Bond's Nos. 3825 and 4123 are each for the
sum P174,761.42. According to paragraph (5) of the Surety's cross-claim, which
is admitted in the Buyer's answer thereto, the latter had agreed to pay the premiums and
the cost of documentary stamps on said bonds "for 2 years ... from April 25, 1960 and May
30, 1960, respectively." There can thus be no doubt that the Buyer and the Surety
understood that the "first" installments would fall due on April 25, and May 26, 1962 and

that the amount of each of those installment would be P174,761.42, not P184,386.34, which
would be due on April 25, and May 26, 1963 as appellants would have the Court believe.
(e) The Surety argues that the "first" installment is the one marked No. 1, for P184,386.34,
"which if paid in (10) equal yearly installments amounts to P1,843,863.40, which is the
equivalent of the total contract price with interest of the reparations goods in question." This
is not true. Precisely, it is only by including the "first" installment of P174,761.42, among the
obligations of the Buyer, and charging the stipulated 3% yearly interest on the balance of
the cost price (of P1,747,614.22) after such payment and after the payment of each of the
ten (10) equal yearly installments of P184,386.34, that the full amount of said cost price,
plus interest, could be satisfied. In other words,the price agreed upon and the interest
thereon would not be satisfied in full, unless the "first" installment of P174,761.42 were paid
in 1962, in addition to the ten (10) installments of P184,396.34 each falling due yearly from
1963 to 1972.
2. Appellants assail the decision appealed from, upon the ground that the Commission had
no cause of action against them until the cases (Nos. 50194 and 50488) for a declaratory
relief shall have been decided, and that, consequently, the lower court erred in dismissing
Case No. 50194 instead of Case No. 51552.
As above pointed out, Case No. 50488 was dismissed by Branch XIII of the Court of First
Instance of Manila, on October 29, 1962, and the order of dismissal became final and
executory upon the dismissal of the appeal in L-20725 of the Supreme Court, on July 2,
1963, months before the rendition of the decision of Branch VII of the trial court, which is the
object of the present appeal, on April 30, 1964. As regards Case No. 50194, which was
commenced on April 24, 1962, the contract involved therein (with reference to the M/S Don
Salvador or Magsaysay) was infringed by the Buyer when it failed to pay the first installment
due the next day, April 25, 1962. The lower court was, accordingly, justified in dismissing
that case inasmuch as an action for declaratory relief may be entertained only "before
breach or violation" of the law or contract to which it refers. 3 The purpose of the action is to
secure an authoritative statement of the rights and obligations of the parties under said law
or contract, for their guidance in the enforcement thereof or compliance therewith not to
settle issues arising from an alleged breach thereof. 4 Accordingly, after such alleged breach
of the law or contract or once the aforementioned issue has arisen, an ordinary action is the
proper remedy. Thus, in Salmon v. Andal, 5 this Court said:
... If there has been a violation, declaratory relief cannot be granted, for the
reason that Sec. 2, Rule 666 relative to said remedy, provides that 'A contract
or statute may be construed before there has been a breach thereof.' After
breach, the regular remedy obtains. 7
What is more, Rule 64, Section 61 of the Rules of Court is clear and explicit about it. It
provides:
... If before the final termination of case. a breach of violation of an
instrument, or a statute, executive order or regulation, or ordinance, should
take place, the action may thereupon be converted into an ordinary action
and parties allowed to file such pleadings as may be necessary or proper.
Then, too, the facts of record strongly suggest that Cases Nos. 50194 and 50488 for
declaratory relief were commenced in anticipation of an action for breach of contract, said
cases having been filed precisely on the eve of the due date of the "first" installment, as to,
M/S Don Salvador or Magsaysay, and on the very due date of the first installment, as to M/S

Don Amando or Estancia. The situation in the case at bar is thus substantially identical to
that obtaining in Teodoro v. Mirasol 8 in which the following language was used:
In the case at bar, We are led to the belief that the present action in the Court
of First Instance was prompted by a desire on plaintiff's part to anticipate the
action for unlawful detainer, the probability of which was apparent .... plaintiff
took advantage of defendant's delayed ... suit to file this case in the Court, of
First Instance in anticipation of the action for unlawful detainer, in order
perhaps that he may claim that the action in the Court of First Instance was
prior to the unlawful detainer case, and, therefore, should enjoy preference
over the action filed in the Municipal court.
It is to be noted that the Rules do not require as a ground for dismissal of a
complaint that there is a prior pending action. They provide that there is a
pending action, not a pending prior action. The fact that the unlawful detainer
suit was of a later date is no bar to the dismissal of the present action, ....
... plaintiff's action for declaratory relief is improper; this action is meant only
for those cases where a contract is desired to be construed prior to its
breach because of an impending controversy that the parties thereto may be
informed of the rights thereunder. In the case at bar, ... there has already
been a breach ... hence the action for a declaratory judgment is no longer
proper.
xxx xxx xxx
There is no longer any need for the action, even if proper because the matter
could be threshed out in the unlawful detainer suit that the defendant had
instituted in the municipal court. 9
Indeed, otherwise, an action for a declaratory relief could be availed of to, in effect, suspend,
during its pendency, the force and operation of the contracts in question, and thereby
achieve a compulsory deferment or postponement of the maturity of the obligations therein
validly contracted and assumed. Obviously, the Court cannot give the stamp of its approval
thereto.
3. The Surety maintains that, pursuant to the terms of its Bonds Nos. 3825 and 4123, the
same expired on April 25, and May 26, 1961, respectively, so that it was no longer liable
under the Bonds when the "first" installments became due on April 25 and May 26, 1962.
Suffice it to say that, not having been pleaded in the Surety's answer or otherwise raised in
the lower court' such defense cannot be set up, for the first time, in this
appeal. 1 0 Moreover, it, is inconsistent with the cross-claim of the Surety, against the Buyer,
for the sum of P10,641.68, representing the premiums and the cost of documentary stamps
on said Bonds, for a period of two (2) years from April 25, 1960 and May 30, 1960, which
premiums and documentary stamps could not be due if the bonds were not in force during
said period of two (2) years.
Again, in said bonds, the Buyer, as principal, and the Surety, as such, firmly bound
themselves unto the Reparations Commission, in the sum of P174,716.42, pursuant to the
contract between the Buyer and the Commission, on condition that if the Buyer "shall well
and truly keep, do and perform, each and every, all and singular, the matters and things in
the contract set forth and specified to be" by the Buyer "done and performed at the time

and in the manner in said contract specified, and shall pay over, make good and otherwise
satisfy the obligations required tinder the contract, then the said bond ... shall be released
upon payment of all the sums due" to the Commission, "otherwise, said bond shall ipso
facto be forfeited in full in favor of" said Commission.
Thus, the intention of the parties was, clearly, to guarantee compliance with the
aforementioned obligations. The first of such obligations, in point of time, was the payment
by the Buyer of the "first" installments which were to become due on April 25 and May 26,
1962, that is, one year or about a year after the alleged expiration of the Bonds. Were We to
accept the theory of the Surety, the result would be that it had never contracted any
obligation or assumed any liability in favor of the Commission, in consequence of the
execution of said bonds and that, for all intents and purposes, the contracts under
consideration were, accordingly, devoid of any guarantee. Such result is manifestly contrary
to the intention of the parties. And this explains why the Surety has not set up said defense
in its answer.
Referring to the stipulation in a bond to the effect that the liability thereunder would
expire on the date of maturity of the principal obligation, this Court declared that said
stipulation in effect nullified the nature of said bond, and was, therefore "unfair and
unreasonable," as well as "a subtle way of making money thru trickery and deception." The
situation in the case at bar is even worse, since the Surety contends that its bond expired
about a year before the first installments had become due.
It may not be amiss to note that the rule of strict construction of surety bonds "does not
apply to the engagements of corporate sureties engaged in the business of furnishing bonds
for compensation, and who are, furthermore, secured from all possible loss by adequate
counterbonds." 1 2
4. The Surety impugns the P300 awarded thereto by way of attorney's fees, upon the ground
that the fee agreed upon with the Buyer is "20% of the total amount due." It is well settled,
however, that courts of justice have discretion to fix the amount of attorney's fees, 1 3 and
We do not feel that such discretion has been abused by His Honor, the trial Judge,
considering that the Surety had mainly relied upon the defenses set up by the Buyer, and
that the ultimate liability of the Surety is principally dependent upon the amount of the
principal obligation that the Buyer may be unable to satisfy.
The other assignments of error made by appellants herein are mere corollaries to those
already disposed of, and, hence need no further discussion.
WHEREFORE, the decision appealed from is hereby affirmed in toto, with costs against
appellants herein.
Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Castro, Fernando, Teehankee, Barredo and
Villamor, JJ., concur.
SECURITY BANK AND TRUST COMPANY, Inc. vs RODOLFO M. CUENCA
Panganiban, J. October 3, 2003 Extinguishment of Guaranty
I. Facts
* Creditor: Sccurity Bank and Trust Co.Debtor: Sta. Ines Melale Corp.Surety: Rodolfo Cuenca
A.

Sta. Ines is a corporation engaged in logging operations. In 1980, it wasgranted by Security

Bank a credit line in the amount of Php 8M. To securepayment, it executed a chattel
mortgage over some of its machineries andequipments. And as an additional security, its
President and Chairman of
theBoard of Directors Rodolfo Cuenca, executed an Indemnity agreement infavor of Security
Bank whereby he bound himself jointly and severally withSta. Ines. After Cuenca resigned,
Sta. Ines obtained a Php 6M loan. Becauseof its difficulty in making the amortization
payments, in 1989 it
requestedSecurity Bank a complete restructure of its indebtedness, which wasapproved
without prior notice to, or prior consent of Cuenca. Still it wasunable to pay.
B. Contention of the Petitioner
Security Bank insists that the 1989 Loan Agreement was a mere renewal orextension of the
Php 8M original accommodation, that Cuenca waived his right tobe notified of and to give
consent to any substitution, renewal, extension, increase,amendment, conversion or revival
of the same, and that it was a continuing surety.
C. Contention of the Respondent
Cuenca argues that the 1989 agreement extinguished the obligation underthe 1980 credit
accommodation by novation.
II. Issues
WON the 1989 Loan Agreement novated the original credit accommodationand Cuencas
liability under the Indemnity Agreement.
III. Ruling
The 1989 Loan Agreement extinguished by novation the obligation under the1980 P8
million credit accommodation. It is essential in the law of suretyship
thatany agreement between the creditor and the principal debtor that essentiallyvaries the
terms of the principal contract without the consent of the surety, willrelease the surety from
liability. The 1989 Loan Agreement expressly
stipulatedthat its purpose was to liquidate, not to renew or extend, the outstandingindebted
ness. Moreover, respondent did not sign or consent to the 1989 LoanAgreement, which had
allegedly extended the original P8 million credit facility.

Indeed, the stipulation in the 1989 Loan Agreement providing for the suretyof respondent,
without even informing him, smacks of negligence on the part of the bank and bad faith on
that of the principal debtor. Since that Loan Agreementconstituted a new indebtedness, the
old loan having been already liquidated, thespirit of fair play should have impelled Sta. Ines
to ask somebody else to act as asurety for the new loan.

REPUBLIC v PAL-FOX LUMBER Facts: Pal-Fox Lumber Co., Inc. was indebted to the Bureau of
Internal Revenue for forest charges and surcharges amounting to P11,851.56, and that the
Far Eastern Surety & Insurance Co., Inc. was jointly and severally liable with the lumber
company for the payment of said forest charges up to P5,000.00. Republic moved for
reconsideration, pointing out that the surety company's correct liability under the appealed
decision was P5,000.00 plus legal interest from the filing of the complaint. In other words,

the Republic would want the surety company to pay the legal interest adjudged by the trial
court before the case may finally be considered dismissed. Far Eastern's denial of liability for
such interest is based on the stipulation in the bond that it was bound to the plaintiff "in the
sum of P5,000.00." Issue: W/N Far Eastern should also pay interest? Ruling: Yes. Article 2055,
paragraph 2, of the Civil Code of the Philippines is clearly applicable. If it (the guaranty) be
simple or indefinite, it shall comprise not only the principal obligation but also all its
accessories, including judicial cost
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-47495

August 14, 1941

THE TEXAS COMPANY (PHIL.), INC., petitioner,

vs.
TOMAS ALONSO, respondent.
C. D. Johnston & A. P. Deen for petitioner.
Tomas Alonso in his own behalf.
LAUREL, J.:
On November 5, 1935 Leonor S. Bantug and Tomas Alonso were sued by the Texas Company
(P.I.), Inc. in the Court of First Instance of Cebu for the recovery of the sum of P629, unpaid
balance of the account of Leonora S. Bantug in connection with the agency contract with the
Texas Company for the faithful performance of which Tomas Alonso signed the following:
For value received, we jointly and severally do hereby bind ourselves and each of us,
in solidum, with Leonor S. Bantug the agent named in the within and foregoing
agreement, for full and complete performance of same hereby waiving notice of nonperformance by or demand upon said agent, and the consent to any and all
extensions of time for performance. Liability under this undertaking, however, shall
not exceed the sum of P2,000, Philippine currency.
Witness the hand and seal of the undersigned affixed in the presence of two witness,
this 12th day of August, 1929.
Leonor S. Bantug was declared in default as a result of her failure to appear or answer, but
Tomas Alonso filed an answer setting up a general denial and the special defenses that
Leonor S. Bantug made him believe that he was merely a co-security of one Vicente Palanca
and he was never notified of the acceptance of his bond by the Texas Company. After trial,
the Court of First Instance of Cebu rendered judgment on July 10, 1973, which was amended
on February 1, 1938, sentencing Leonor S. Bantug and Tomas Alonso to pay jointly and
severally to the Texas Company the sum of P629, with interest at the rate of six per cent
(6%) from the date of filing of the complaint, and with proportional costs. Upon appeal by
Tomas Alonso, the Court of Appeals modified the judgment of the Court of First Instance of
Cebu in the sense that Leonor S. Bantug was held solely liable for the payment of the
aforesaid sum of P629 to the Texas Company, with the consequent absolution of Tomas
Alonso. This case is now before us on petition for review by certiorari of the decision of the

Court of Appeals. It is contended by the petitioner that the Court of Appeals erred in holding
that there was merely an offer of guaranty on the part of the respondent, Tomas Alonso, and
that the latter cannot be held liable thereunder because he was never notified by the Texas
Company of its acceptance.
The Court of Appeals has placed reliance upon our decision in National Bank vs. Garcia (47
Phil., 662), while the petitioner invokes the case of National Bank vs. Escueta, (50 Phil., 991).
In the first case, it was held that there was merely an offer to give bond and, as there was no
acceptance of the offer, this court refused to give effect to the bond. In the second case, the
sureties were held liable under their surety agreement which was found to have been
accepted by the creditor, and it was therein ruled that an acceptance need not always be
express or in writing. For the purpose of this decision, it is not indispensable for us to invoke
one or the other case above cited. The Court of Appeals found as a fact, and this is
conclusive in this instance, that the bond in question was executed at the request of the
petitioner by virtue of the following clause of the agency contract:
Additional Security. The Agent shall whenever requested by the Company in
addition to the guaranty herewith provided, furnish further guaranty or bond,
conditioned upon the Agent's faithful performance of this contract, in such individuals
of firms as joint and several sureties as shall be satisfactory to the Company.
In view of the foregoing clause which should be the law between the parties, it is obvious
that, before a bond is accepted by the petitioner, it has to be in such form and amount and
with such sureties as shall be satisfactory hereto; in other words, the bond is subject to
petitioner's approval. The logical implication arising from this requirement is that, if the
petitioner is satisfied with any such bond, notice of its acceptance or approval should
necessarily be given to the property party in interest, namely, the surety or guarantor. In this
connection, we are likewise bound by the finding of the Court of Appeals that there is no
evidence in this case tending to show that the respondent, Tomas Alonso, ever had
knowledge of any act on the part of petitioner amounting to an implied acceptance, so as to
justify the application of our decision in National Bank vs. Escueta (50 Phil., 991).
While unnecessary to this decision, we choose to add a few words explanatory of the rule
regarding the necessity of acceptance in case of bonds. Where there is merely an offer of, or
proposition for, a guaranty, or merely a conditional guaranty in the sense that it requires
action by the creditor before the obligation becomes fixed, it does not become a binding
obligation until it is accepted and, unless there is a waiver of notice of such acceptance is
given to, or acquired by, the guarantor, or until he has notice or knowledge that the creditor
has performed the conditions and intends to act upon the guaranty. (National
Bank vs. Garcia, 47 Phil., 662; C. J., sec. 21, p. 901; 24 Am. Jur., sec. 37, p. 899.) The
acceptance need not necessarily be express or in writing, but may be indicated by acts
amounting to acceptance. (National Bank vs. Escueta, 50 Phil., 991.) Where, upon the other
hand, the transaction is not merely an offer of guaranty but amounts to direct or
unconditional promise of guaranty, unless notice of acceptance is made a condition of the
guaranty, all that is necessary to make the promise binding is that the promise should act
upon it, and notice of acceptance is not necessary (28 C. J., sec. 25, p. 904; 24 Am. Jur., sec
37, p. 899), the reason being that the contract of guaranty is unilateral (Visayan Surety and
Insurance Corporation vs. Laperal, G.R. No. 46515, promulgated June 14, 1940).
The decision appealed from will be, as the same is hereby, affirmed, with costs of this
instance against the petitioner. So ordered.
Avancea, C.J., Abad Santos, and Diaz, JJ., concur.

Separate Opinions
OZAETA, J., with whom concur MORAN and HORRILENO, JJ., dissenting:
We concede that the statement of fact made by the Court of Appeals is conclusive upon this
Court in a petition for review on certiorari. But when it appears from the decision of the
Court of Appeals itself that such a statement is but a conclusion drawn by that Court from
the facts found by it, and that such conclusion is patently erroneous, we hold that this Court
should disregard it.
Of the nature, we believe, is the following statement made by the Court of Appeals in the
course of its ratiocination:
La fianza prestada por el apelante se otorgo a requerimiento de la demandante en
virtud de la siguiente clausula (15) del contrato de agencia Exhibit A, que dice asi:
"ADDITIONAL SECURITY. The Agent shall, whenever requested by the
Company in addition to the guaranty herewith provided, furnish further
guaranty or bond, conditioned upon the agent's faithful performance of this
contract, in such form and amount and with such bank as surety or with such
individuals or firms as joint and several sureties as shall be satisfactory to the
Company." (Pages 8-9, appendix to petitioner's brief.)
It is important to note that the above-quoted statement forms part of the court's ratio
decidendi and not of its findings of fact. Its findings of fact appear in the first three
paragraphs of its decision, which we quote as follows:
El 12 de agosto de 1929 la demandante y el demandado Leonor S. Bantug celebraron
un contrato, (Exhibit A) por virtud del cual aquella nombro a este Agente vendedor
de sus productos petroliferos en el Municipio de Maasin, Provincia de Leyte, mediante
pago de una comision sobre el valor de todos los efectos que llegase a vender,
obligandose por su parte Leonor S. Bantug como Agente, a ingresar y pagar a la
compaia el importe neto de las ventas realizadas, despues de deducir su comision y
los demas gastos de agencia que se estipularon en el referido contrato.
En el mismo documento Exhibit A, el otro demandado Tomas Alonso suscribio una
fianza, obligandose mancomunada y solidariamente con el Agente Leonor S. Bantug
a cumplir fielmente las condiciones del contrato de Agencia hasta la suma de P2,000.
El estado de cuentas de la agencia que se presento en el juicio como Exhibit B,
demuestra que la ultima liquidacion arroja un balance contra el Agente Leonor S.
Bantug por la cantidad de P629; y como esta suma no ha sido pagado ni por Leonor
S. Bantug ni por su fiador Tomas Alonso, a pesar de los requerimientos que se les ha
hecho, de ahi que la demandante, el 18 de noviembre de 1938, dedujo accion en el
Juzgado de Primera Instancia de Cebu para el cobro de dicha suma y sus intereses
legales desde la presentacion de la demanda. (Pages 1-3, appendix to petitioner's
brief.)
Now if, as found by the Court of Appeals itself, the agency contract between the petitioner
and Leonor S. Bantug was Exhibit A, dated August 12, 1929, and that very same document

was on the same date signed by the respondent Tomas Alonso as bondsman or surety of the
agent, how could the bond in question, which formed part of Exhibit A, be held to have been
executed by virtue of clause 15 of said document providing for additional security? Indeed,
that very clause says that the agent shall furnish further guaranty or bond "in addition to the
guaranty herewith provided," whenever requested by the company. The "guaranty herewith
provided" was obviously the bond or guaranty given by the respondent on the same date
and in the same document. It appears clear to us, therefore, that the bond Exhibit A, being
the original guaranty, could not be the "additional guaranty" mentioned in clause 15 of said
Exhibit A. Moreover, it does not appear that any bond or guaranty, other than that of the
respondent, to secure the performance of the agency contract in question was in force on
and after August 12, 1929.
Another illogical conclusion drawn by the Court of Appeals is this:
"Por el requerimiento que contiene la clausula preinserta, de que el Agente puede prestar
una garantia adicional a satisfaccion de la compaia, debe entenderse que la fianza
prestada por el apelante era una oferta o proposicion de garantia, cuya efectividad dependia
de la acceptacion de la compaia, comunicada al garante." (Page 9, appendix to petitioner's
brief.) .
If, as previously found by the Court of Appeals, the herein respondent executed the bond in
question "a requerimiento de la demandante," how could said bond be understood as an
"offer or proposition of guaranty" from Alonso to the plaintiff? .
Yet the judgment of the Court of Appeals, as well as the affirming decision of the majority of
this court, is based on the conclusion that the bond sued upon was an additional guaranty;
that it constituted a mere offer of guaranty and, therefore, had to be accepted by the
petitioner; and that, not having been accepted, it is inefficacious. We have shown that such
conclusion is unwarranted.
Our vote is to reverse the decision of the Court of Appeals and to affirm that of Judge Felix
Martinez of the Court of First Instance of Cebu, who tried this case.
ESTATE of K.H. Hemady v Luzon Surety
Luzon Surety filed a claim against the estate of K.H. Hemady based on indemnity
agreements (counterbonds) subscribed by distinct principals and by the deceased K.H.
Hemady as surety (solidary guarantor). As a contingent claim, Luzon Surety prayed for the
allowance of the value of the indemnity agreements it had executed. The lower court
dismissed the claim of Luzon Surety on the ground that whatever losses may occur after
Hemadys death, are not chargeable to his estate, because upon his death he ceased to be a
guarantor.
ISSUES: What obligations are transmissible upon the death of the decedent? Are contingent
claims chargeable against the estate?
HELD: Under the present Civil Code (Article 1311), the rule is that Contracts take effect
only as between the parties, their assigns and heirs, except in case where the rights and

obligations arising from the contract are not transmissible by their nature, or by stipulation
or by provision of law. While in our successional system the responsibility of the heirs for
the debts of their decedent cannot exceed the value of the inheritance they receive from
him, the principle remains intact that these heirs succeed not only to the rights of the
deceased but also to his obligations. Articles 774 and 776 of the New Civil Code expressly
so provide, thereby confirming Article 1311.
In Mojica v. Fernandez, the Supreme Court ruled Under the Civil Code the heirs, by virtue
of the rights of succession are subrogated to all the rights and obligations of the deceased
(Article 661) and can not be regarded as third parties with respect to a contract to which
the deceased was a party, touching the estate of the deceased x x x which comes in to their
hands by right of inheritance; they take such property subject to all the obligations resting
thereon in the hands of him from whom they derive their rights. The third exception to the
transmissibility of obligations under Article 1311 exists when they are not transmissible by
operation of law. The provision makes reference to those cases where the law expresses
that the rights or obligations are extinguished by death, as is the case in legal support,
parental authority, usufruct, contracts for a piece of work, partnership and agency. By
contrast, the articles of the Civil Code that regulate guaranty or suretyship contain no
provision that the guaranty is extinguished upon the death of the guarantor or the surety.
The contracts of suretyship in favor of Luzon Surety Co. not being rendered intransmissible
due to the nature of the undertaking, nor by stipulations of the contracts themselves, nor by
provision of law, his eventual liability therefrom necessarily passed upon his death to his
heirs. The contracts, therefore, give rise to contingent claims provable against his estate. A
contingent liability of a deceased person is part and parcel of the mass of obligations that
must be paid if and when the contingent liability is converted into a real liability. Therefore,
the settlement or final liquidation of the estate must be deferred until such time as the
bonded indebtedness is paid.