G.R. No.

L-29139 November 15, 1974

CONSUELO P. PICZON, RUBEN O. PICZON and AIDA P. ALCANTARA, plaintiffs-appellants,
vs.
ESTEBAN PICZON and SOSING-LOBOS & CO., INC., defendants-appellees.
Vicente C. Santos for plaintiffs-appellants.
Jacinto R. Bohol for defendant-appellee Sosing-Lobos & Co., Inc.
Vicente M. Macabidang for defendant-appellee Esteban Piczon.

BARREDO, J.:p
Appeal from the decision of the Court of First Instance of Samar in its Civil Case No. 5156, entitled
Consuelo P. Piczon, et al. vs. Esteban Piczon, et al., sentencing defendants-appellees, Sosing Lobos and
Co., Inc., as principal, and Esteban Piczon, as guarantor, to pay plaintiffs-appellants "the sum of
P12,500.00 with 12% interest from August 6, 1964 until said principal amount of P12,500.00 shall have
been duly paid, and the costs."
After issues were joined and at the end of the pre-trial held on August 22, 1967, the trial court issued the
following order:
"When this case was called for pre-trial, plaintiffs and defendants through their lawyers,
appeared and entered into the following agreement:
1. That defendants admit the due execution of Annexes "A" and "B" of the complaint;
2. That consequently defendant Sosing-Lobos and Co., Inc. binds itself to the plaintiffs for
P12,500.00, the same to be paid on or before October 31, 1967 together with the interest
that this court may determine.
That the issues in this case are legal ones namely:
(a) Will the payment of twelve per cent interest of P12,500.00 commence to run from August
6, 1964 when plaintiffs made the first demand or from August 29, 1956 when the obligation
becomes due and demandable?
(b) Is defendant Esteban Piczon liable as a guarantor or a surety?
That the parties are hereby required to file their respective memorandum if they so desire
on or before September 15, 1967 to discuss the legal issues and therewith the case will be
considered submitted for decision.
WHEREFORE, the instant case is hereby considered submitted based on the aforesaid facts
agreed upon and upon submission of the parties of their respective memorandum on or
before September 15, 1967.
SO ORDERED. 1 (Record on Appeal pp. 28-30.)
Annex "A", the actionable document of appellants reads thus:

AGREEMENT OF LOAN
KNOW YE ALL MEN BY THESE PRESENTS:
That I, ESTEBAN PICZON, of legal age, married, Filipino, and resident of and with postal
address in the municipality of Catbalogan, Province of Samar, Philippines, in my capacity as
the President of the corporation known as the "SOSING-LOBOS and CO., INC.," as controlling
stockholder, and at the same time as guarantor for the same, do by these presents contract
a loan of Twelve Thousand Five Hundred Pesos (P12,500.00), Philippine Currency, the receipt
of which is hereby acknowledged, from the "Piczon and Co., Inc." another corporation, the
main offices of the two corporations being in Catbalogan, Samar, for which I undertake, bind
and agree to use the loan as surety cash deposit for registration with the Securities and
Exchange Commission of the incorporation papers relative to the "Sosing-Lobos and Co.,
Inc.," and to return or pay the same amount with Twelve Per Cent (12%) interest per annum,
commencing from the date of execution hereof, to the "Piczon and Co., Inc., as soon as the
said incorporation papers are duly registered and the Certificate of Incorporation issued by
the aforesaid Commission.
IN WITNESS WHEREOF, I hereunto signed my name in Catbalogan, Samar, Philippines, this
28th day of September, 1956.
(Sgd.) ESTEBAN
PICZON
(Record on Appeal, pp. 6-7.)
The trial court having rendered judgment in the tenor aforequoted, appellants assign the following alleged
errors:
I
THE TRIAL COURT ERRED IN ORDERING THE PAYMENT OF 12% INTEREST ON THE PRINCIPAL
OF P12,500.00 FROM AUGUST 6, 1964, ONLY, INSTEAD OF FROM SEPTEMBER 28, 1956,
WHEN ANNEX "A" WAS DULY EXECUTED.
II
THE TRIAL COURT ERRED IN CONSIDERING DEFENDANT ESTEBAN PICZON AS GUARANTOR
ONLY AND NOT AS SURETY.
III
THE TRIAL COURT ERRED IN NOT ADJUDICATING DAMAGES IN FAVOR OF THE PLAINTIFFSAPPELLANTS. (Appellants' Brief, pp. a to b.)
Appellants' first assignment of error is well taken. Instead of requiring appellees to pay interest at 12%
only from August 6, 1964, the trial court should have adhered to the terms of the agreement
which plainly provides that Esteban Piczon had obligated Sosing-Lobos and Co., Inc. and
himself to "return or pay (to Piczon and Co., Inc.) the same amount (P12,500.00) with Twelve
Per Cent (12%) interest per annum commencing from the date of the execution hereof", Annex
A, which was on September 28, 1956. Under Article 2209 of the Civil Code "(i)f the obligation
consists in the payment of a sum of money, and the debtor incurs in delay, the indemnity for
damages, there being no stipulation to the contrary, shall be the payment of the interest
agreed upon, and in the absence of stipulation, the legal interest, which is six per cent per

annum." In the case at bar, the "interest agreed upon" by the parties in Annex A was to
commence from the execution of said document.
Appellees' contention that the reference in Article 2209 to delay incurred by the debtor which can serve as
the basis for liability for interest is to that defined in Article 1169 of the Civil Code reading thus:
Those obliged to deliver or to do something incur in delay from the time the obligee
judicially or extrajudicially demands from them the fulfillment of their obligation.
However, the demand by the creditor shall not be necessary in order that delay may exist:
(1) When the obligation or the law expressly so declares; or
(2) When from the nature and the circumstances of the obligation it appears that the
designation of the time when the thing is to be delivered or the service is to be rendered
was a controlling motive for the establishment of the contract; or
(3) When demand would be useless, as when the obligor has rendered it beyond his power
to perform.
In reciprocal obligations, neither party incurs in delay if the other does not comply or is not
ready to comply in a proper manner with what is incumbent upon him. From the moment
one of the parties fulfills his obligation, delay by the other begins.
is untenable. In Quiroz vs. Tan Guinlay, 5 Phil. 675, it was held that the article cited by appellees (which
was Article 1100 of the Old Civil Code read in relation to Art. 1101) is applicable only when the obligation is
to do something other than the payment of money. And in Firestone Tire & Rubber Co. (P.I.) vs. Delgado,
104 Phil. 920, the Court squarely ruled that if the contract stipulates from what time interest will be
counted, said stipulated time controls, and, therefore interest is payable from such time, and not from the
date of the filing of the complaint (at p. 925). Were that not the law, there would be no basis for the
provision of Article 2212 of the Civil Code providing that "(I)nterest due shall earn legal interest from the
time it is judicially demanded, although the obligation may be silent upon this point." Incidentally,
appellants would have been entitled to the benefit of this article, had they not failed to plead the same in
their complaint. Their prayer for it in their brief is much too late. Appellees had no opportunity to meet the
issue squarely at the pre-trial.
As regards the other two assignments of error, appellants' pose cannot be sustained. Under the terms of
the contract, Annex A, Esteban Piczon expressly bound himself only as guarantor, and there are no
circumstances in the record from which it can be deduced that his liability could be that of a surety. A
guaranty must be express, (Article 2055, Civil Code) and it would be violative of the law to consider a party
to be bound as a surety when the very word used in the agreement is "guarantor."
Moreover, as well pointed out in appellees' brief, under the terms of the pre-trial order,
appellants accepted the express assumption of liability by Sosing-Lobos & Co., Inc. for the
payment of the obligation in question, thereby modifying their original posture that inasmuch
as that corporation did not exist yet at the time of the agreement, Piczon necessarily must
have bound himself as insurer.
As already explained earlier, appellants' prayer for payment of legal interest upon interest due from the
filing of the complaint can no longer be entertained, the same not having been made an issue in the
pleadings in the court below. We do not believe that such a substantial matter can be deemed included in
a general prayer for "any other relief just and equitable in the premises", especially when, as in this case,
the pre-trial order does not mention it in the enumeration of the issues to be resolved by the court.

PREMISES CONSIDERED, the judgment of the trial court is modified so as to make appellees liable for the
stipulated interest of 12% per annum from September 28, 1956, instead of August 6, 1964. In all other
respects, said judgment is affirmed. Costs against appellees.
Fernando (Chairman), Antonio, Fernandez and Aquino, JJ., concur.

Footnotes
1 Annex "B" is a document entitled "Mutual Quit Claims. Cessions and Amicable Settlement"
under which the right of action of Piczon and Co., Inc. under Annex "A" was transferred to
the heirs of Alejandro Piczon who are the appellants.
Severino and Vergara vs. Severino, 56 Phil. 185, No. 34642, September 24, 1931
G.R. No. 34642
September 24, 1931
FABIOLA SEVERINO, accompanied by her husband RICARDO VERGARA, plaintiffs-appellees,
vs.
GUILLERMO SEVERINO, ET AL., defendants.
ENRIQUE ECHAUS, appellant.
R. Nepomuceno for appellant.
Jacinto E. Evidente for appellees.
STREET, J.:
This action was instituted in the Court of First Instance of the Province of Iloilo by Fabiola Severino,
with whom is joined her husband Ricardo Vergara, for the purpose of recovering the sum of
P20,000 from Guillermo Severino and Enrique Echaus, the latter in the character of guarantor
for the former. Upon hearing he cause the trial court gave judgment in favor of the plaintiffs to
recover the sum of P20,000 with lawful from November 15, 1929, the date of the filing of the complaint,
with costs. But it was declared that execution of this judgment should issue first against the
property of Guillermo Severino, and if no property should be found belonging to said
defendant sufficient to satisfy the judgment in whole or in part, execution for the remainder
should be issued against the property of Enrique Echaus as guarantor. From this judgment the
defendant Echaus appealed, but his principal, Guillermo Severino, did not.
The plaintiff Fabiola Severino is the recognized natural daughter of Melecio Severino, deceased, former
resident of Occidental Negros. Upon the death of Melecio Severino a number of years ago, he left
considerable property and litigation ensued between his widow, Felicitas Villanueva, and Fabiola Severino,
on the one part, and other heirs of the deceased on the other part. In order to make an end of this
litigation a compromise was effected by which Guillermo Severino, a son of Melecio Severino, took
over the property pertaining to the estate of his father at the same time agreeing to pay
P100,000 to Felicitas Villanueva and Fabiola Severino. This sum of money was made payable, first,
P40,000 in cash upon the execution of the document of compromise, and the balance in three
several payments of P20,000 at the end of one year; two years, and three years respectively. To this
contract the appellant Enrique Echaus affixed his name as guarantor. The first payment of
P40,000 was made on July 11, 1924, the date when the contract of compromise was executed; and of this
amount the plaintiff Fabiola Severino received the sum of P10,000. Of the remaining P60,000, all as
yet unpaid, Fabiola Severino is entitled to the sum of P20,000.
It appears that at the time of the compromise agreement above-mentioned was executed
Fabiola Severino had not yet been judicially recognized as the natural daughter of Melecio
Severino, and it was stipulated that the last P20,000 corresponding to Fabiola and the last
P5,000 corresponding to Felicitas Villanueva should retained on deposit until the definite
status of Fabiola Severino as natural daughter of Melecio Severino should be established. The
judicial decree to this effect was entered in the Court of First Instance of Occidental Negros on June 16,
1925, and as the money which was contemplated to be held in suspense has never in fact been paid to the
parties entitled thereto, it results that the point respecting the deposit referred to has ceased to be of
moment.
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 noting in this decision is the assertion on the part of
Enrique Echaus that he received nothing for affixing his signature as guarantor to the contract
which is the subject of suit and that in effect the contract was lacking in consideration as 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 parties thereto. (Pyle vs. Johnson, 9 Phil., 249.) The
compromise and dismissal of a lawsuit is recognized in law as a valuable consideration; and
the dismissal of the action which Felicitas Villanueva and Fabiola Severino had instituted
against Guillermo Severino was an adequate consideration to support the promise on the part
of Guillermo Severino to pay the sum of money stipulated in the contract which is the subject
of this action. The promise of the appellant Echaus as guarantor therefore binding. It is never
necessary that the guarantor or surety should receive any part of the benefit, if such there be,
accruing to his principal. But the true consideration of this contract was the detriment
suffered by the plaintiffs in the former action in dismissing that proceeding, and it is
immaterial that no benefit may have accrued either to the principal or his guarantor.
The judgment appealed from is in all respects correct, and the same will be affirmed, with costs against the
appellant. So ordered.
Avancea, C.J., Johnson, Malcolm, Villamor, Ostrand, Romualdez, Villa-Real and Imperial, JJ., concur.
Rizal Commercial Banking Corp. vs. Arro, 115 SCRA 777, No. L-49401, July 30, 1982
G.R. No. L-49401 July 30, 1982
RIZAL COMMERCIAL BANKING CORPORATION, petitioner,
vs.
HON. JOSE P. ARRO, Judge of the Court of First instance of Davao, and RESIDORO
CHUA,respondents.
Laurente C. Ilagan for petitioner.
Victor A. Clapano for respondents.
DE CASTRO, J.:
Petition for certiorari to annul the orders of respondent judge dated October 6, 1978 and November 7,
1978 in Civil Case No. 11-154 of the Court of First Instance of Davao, which granted the motion filed by
private respondent to dismiss the complaint of petitioner for a sum of money, on the ground that the
complaint states no cause of action as against private respondent.
After the petition had been filed, petitioner, on December 14, 1978 mailed a manifestation and motion
requesting the special civil action for certiorari be treated as a petition for review. 1 Said manifestation and
motion was noted in the resolution of January 10, 1979. 2
It appears that on October 19, 1976 Residoro Chua and Enrique Go, Sr. executed a
comprehensive surety agreements 3 to guaranty among others, any existing indebtedness of
Davao Agricultural Industries Corporation (referred to therein as Borrower, and as Daicor in
this decision), and/or induce the bank at any time or from time to time thereafter, to make
loans or advances or to extend credit in other manner to, or at the request, or for the account
of the Borrower, either with or without security, and/or to purchase on discount, or to make
any loans or advances evidenced or secured by any notes, bills, receivables, drafts,
acceptances, checks or other evidences of indebtedness (all hereinafter called "instruments")
upon which the Borrower is or may become liable, provided that the liability shall not exceed
at any one time the aggregate principal sum of P100,000.00.
On April 29, 1977 a promissory note 4 in the amount of P100,000.00 was issued in favor of
petitioner payable on June 13, 1977. Said note was signed by Enrique Go, Sr. in his personal
capacity and in behalf of Daicor. The promissory note was not fully paid despite repeated
demands; hence, on June 30, 1978, petitioner filed a complaint for a sum of money against
Daicor, Enrique Go, Sr. and Residoro Chua. A motion to dismiss dated September 23, 1978 was filed
by respondent Residoro Chua on the ground that the complaint states no cause of action as against
him. 5 It was alleged in the motion that he can not be held liable under the promissory note because it was
only Enrique Go, Sr. who signed the same in behalf of Daicor and in his own personal capacity.
In an opposition dated September 26, 1978 6 petitioner alleged that by virtue of the execution of the
comprehensive surety agreement, private respondent is liable because said agreement covers not merely
the promissory note subject of the complaint, but is continuing; and it encompasses every other
indebtedness the Borrower may, from time to time incur with petitioner bank.
On October 6, 1978 respondent court rendered a decision granting private respondent's
motion to dismiss the complaint. 7 Petitioner filed a motion for reconsideration dated October 12, 1978
and on November 7, 1978 respondent court issued an order denying the said motion. 8
The sole issue resolved by respondent court was the interpretation of the comprehensive
surety agreement, particularly in reference to the indebtedness evidenced by the promissory
note involved in the instant case, said comprehensive surety agreement having been signed by

Enrique Go, Sr. and private respondent, binding themselves as solidary debtors of said corporation
not only to existing obligations but to future ones. Respondent court said that corollary to that
agreement must be another instrument evidencing the obligation in a form of a promissory note or any
other evidence of indebtedness without which the said agreement serves no purpose; that
since the promissory notes, which is primarily the basis of the cause of action of petitioner, is
not signed by private respondent, the latter can not be liable thereon.
Contesting the aforecited decision and order of respondent judge, the present petition was filed before this
Court assigning the following as errors committed by respondent court:
1. That the respondent court erred in dismissing the complaint against Chua simply on the reasons that
'Chua is not a signatory to the promissory note" of April 29, 1977, or that Chua could not be held liable on
the note under the provisions of the comprehensive surety agreement of October 29, 1976; and/or
2. That the respondent court erred in interpreting the provisions of the Comprehensive Surety Agreement
towards the conclusion that respondent Chua is not liable on the promissory note because said note is not
conformable to the Comprehensive Surety Agreement; and/or
3. That the respondent court erred in ordering that there is no cause of action against respondent Chua in
the petitioner's complaint.
The main issue involved in this case is whether private respondent is liable to pay the
obligation evidence by the promissory note dated April 29,1977 which he did not sign, in the
light of the provisions of the comprehensive surety agreement which petitioner and private
respondent had earlier executed on October 19, 1976.
We find for the petitioner. The comprehensive surety agreement was jointly executed by Residoro Chua
and Enrique Go, Sr., President and General Manager, respectively of Daicor, on October 19, 1976 to cover
existing as well as future obligations which Daicor may incur with the petitioner bank, subject only to the
proviso that their liability shall not exceed at any one time the aggregate principal sum of P100,000.00.
Thus, paragraph I of the agreement provides:
For and in consideration of any existing indebtedness to you of Davao Agricultural Industries Corporation
with principal place of business and postal address at 530 J. P. Cabaguio Ave., Davao City (hereinafter
called the "Borrower), and/or in order to induce, you in your discretion, at any time or from time to time
hereafter, to make loans or advances or to extend credit in any other manner to, or at he request or for the
account of the Borrower, either with or without security, and/or to purchase or discount or to make any
loans or advances evidenced or secured by any notes, bills, receivables, drafts, acceptances, checks or
other instruments or evidences of indebtedness (all hereinafter called "instruments") upon which the
Borrower is or may become liable as maker, endorser, acceptor, or otherwise) the undersigned agrees to
guarantee, and does hereby guarantee in joint and several capacity, the punctual payment at maturity to
you of any and all such instruments, loans, advances, credits and/or other obligations herein before
referred to, and also any and all other indebtedness of every kind which is now or may hereafter become
due or owing to you by the Borrower, together with any and all expenses which may be incurred by you in
collecting an such instruments or other indebtedness or obligations hereinbefore referred to ..., provided,
however, that the liability of the undersigned shag not exceed at any one time the aggregate principal sum
of P100,000.00 ...
The agreement was executed obviously to induce petitioner to grant any application for a loan
Daicor may desire to obtain from petitioner bank. The guaranty is a continuing one which shall
remain in full force and effect until the bank is notified of its termination.
This is a continuing guaranty and shall remain in fun force and effect until written notice shall have been
received by you that it has been revoked by the undersigned, ... 9
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, 10 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 promisory
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. 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 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.
In view of the foregoing, the decision (which should have been a mere "order"), dismissing the complaint is
reversed and set side. The case is remanded to the court of origin with instructions to set aside the motion
to dismiss, and to require defendant Residoro Chua to answer the complaint after which the case shall
proceed as provided by the Rules of Court. No costs.
SO ORDERED.
Barredo (Chairman), Aquino, Concepcion, Jr., Guerrero, Abad Santos and Escolin, JJ., concur.
Footnotes
1 p. 45, Rollo.
2 p. 54, Rollo.
3 p. 67, Rollo.
4 p. 68, Rollo.
5 Annex B, Petition, p. 17, Rollo.
6 Annex C, Petition, p. 19, Rollo.
7 Annex E, Petition, p. 23, Rollo.
8 Annex H, Petition, p. 39, Rollo.
9 Par. 6, Comprehensive Surety Agreement, p. 67, Rollo.
10 p. 68, Rollo.

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 non-payment,
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 L-7558, 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.

G.R. No. 89775 November 26, 1992

JACINTO UY DIO and NORBERTO UY, petitioners,

vs.
HON. COURT OF APPEALS and METROPOLITAN BANK AND TRUST COMPANY, respondents.

DAVIDE, JR., J.:

Continuing Suretyship Agreements signed by the petitioners set off this present controversy.
Petitioners assail the 22 June 1989 Decision of the Court in CA-G.R. CV No. 17724 1 which reversed the
2 December 1987 Decision of Branch 45 of the Regional Trial Court (RTC) of Manila in a collection suit
entitled "Metropolitan Bank and Trust Company vs. Uy Tiam, doing business under the name of "UY TIAM
ENTERPRISES & FREIGHT SERVICES," Jacinto Uy Dio and Norberto Uy" and docketed as Civil Case No. 829303. They likewise challenge public respondent's Resolution of 21 August 1989 2 denying their motion for
the reconsideration of the former.
The impugned Decision of the Court summarizes the antecedent facts as follows:
It appears that in 1977, Uy Tiam Enterprises and Freight Services (hereinafter referred to as
UTEFS), thru its representative Uy Tiam, applied for and obtained credit accommodations
(letter of credit and trust receipt accommodations) from the Metropolitan Bank and Trust
Company (hereinafter referred to as METROBANK) in the sum of P700,000.00 (Original
Records, p. 333). To secure the aforementioned credit accommodations Norberto Uy and
Jacinto Uy Dio executed separate Continuing Suretyships (Exhibits "E" and "F"
respectively), dated 25 February 1977, in favor of the latter. Under the aforesaid
agreements, Norberto Uy agreed to pay METROBANK any indebtedness of UTEFS up to the
aggregate sum of P300,000.00 while Jacinto Uy Dio agreed to be bound up to the
aggregate sum of P800,000.00.
Having paid the obligation under the above letter of credit in 1977, UTEFS, through Uy Tiam,
obtained another credit accommodation from METROBANK in 1978, which credit
accommodation was fully settled before an irrevocable letter of credit was applied for and
obtained by the abovementioned business entity in 1979 (September 8, 1987, tsn, pp. 1415).
The Irrevocable Letter of Credit No. SN-Loc-309, dated March 30, 1979, in the sum of P815,
600.00, covered UTEFS' purchase of "8,000 Bags Planters Urea and 4,000 Bags Planters 210-0." It was applied for and obtain by UTEFS without the participation of Norberto Uy and
Jacinto Uy Dio as they did not sign the document denominated as "Commercial Letter of
Credit and Application." Also, they were not asked to execute any suretyship to guarantee its
payment. Neither did METROBANK nor UTEFS inform them that the 1979 Letter of Credit has
been opened and the Continuing Suretyships separately executed in February, 1977 shall
guarantee its payment (Appellees brief, pp. 2-3; rollo, p. 28).
The 1979 letter of credit (Exhibit "B") was negotiated. METROBANK paid Planters Products
the amount of P815,600.00 which payment was covered by a Bill of Exchange (Exhibit "C"),
dated 4 June 1979, in favor of (Original Records, p. 331).
Pursuant to the above commercial transaction, UTEFS executed and delivered to
METROBANK and Trust Receipt (Exh. "D"), dated 4 June 1979, whereby the former
acknowledged receipt in trust from the latter of the aforementioned goods from Planters
Products which amounted to P815, 600.00. Being the entrusted, the former agreed to deliver
to METROBANK the entrusted goods in the event of non-sale or, if sold, the proceeds of the
sale thereof, on or before September 2, 1979.

However, UTEFS did not acquiesce to the obligatory stipulations in the trust receipt. As a
consequence, METROBANK sent letters to the said principal obligor and its sureties, Norberto
Uy and Jacinto Uy Dio, demanding payment of the amount due. Informed of the amount
due, UTEFS made partial payments to the Bank which were accepted by the latter.
Answering one of the demand letters, Dio, thru counsel, denied his liability for the amount
demanded and requested METROBANK to send him copies of documents showing the source
of his liability. In its reply, the bank informed him that the source of his liability is the
Continuing Suretyship which he executed on February 25, 1977.
As a rejoinder, Dio maintained that he cannot be held liable for the 1979 credit
accommodation because it is a new obligation contracted without his participation. Besides,
the 1977 credit accommodation which he guaranteed has been fully paid.
Having sent the last demand letter to UTEFS, Dio and Uy and finding resort to extrajudicial
remedies to be futile, METROBANK filed a complaint for collection of a sum of money
(P613,339.32, as of January 31, 1982, inclusive of interest, commission penalty and bank
charges) with a prayer for the issuance of a writ of preliminary attachment, against Uy Tiam,
representative of UTEFS and impleaded Dio and Uy as parties-defendants.
The court issued an order, dated 29 July 1983, granting the attachment writ, which writ was
returned unserved and unsatisfied as defendant Uy Tiam was nowhere to be found at his
given address and his commercial enterprise was already non-operational (Original Records,
p. 37).
On April 11, 1984, Norberto Uy and Jacinto Uy Dio (sureties-defendant herein) filed a
motion to dismiss the complaint on the ground of lack of cause of action. They maintained
that the obligation which they guaranteed in 1977 has been extinguished since it has
already been paid in the same year. Accordingly, the Continuing Suretyships executed in
1977 cannot be availed of to secure Uy Tiam's Letter of Credit obtained in 1979 because a
guaranty cannot exist without a valid obligation. It was further argued that they can not be
held liable for the obligation contracted in 1979 because they are not privies thereto as it
was contracted without their participation (Records, pp. 42-46).
On April 24, 1984, METROBANK filed its opposition to the motion to dismiss. Invoking the
terms and conditions embodied in the comprehensive suretyships separately executed by
sureties-defendants, the bank argued that sureties-movants bound themselves as solidary
obligors of defendant Uy Tiam to both existing obligations and future ones. It relied on
Article 2053 of the new Civil Code which provides: "A guaranty may also be given as security
for future debts, the amount of which is not yet known; . . . ." It was further asserted that the
agreement was in full force and effect at the time the letter of credit was obtained in 1979
as sureties-defendants did not exercise their right to revoke it by giving notice to the bank.
(Ibid., pp. 51-54).
Meanwhile, the resolution of the aforecited motion to dismiss was held in abeyance pending
the introduction of evidence by the parties as per order dated February 21, 1986 (Ibid., p.
71).
Having been granted a period of fifteen (15) days from receipt of the order dated March 7,
1986 within which to file the answer, sureties-defendants filed their responsive pleading
which merely rehashed the arguments in their motion to dismiss and maintained that they
are entitled to the benefit of excussion (Original Records, pp. 88-93).
On February 23, 1987, plaintiff filed a motion to dismiss the complaint against defendant Uy
Tiam on the ground that it has no information as to the heirs or legal representatives of the

latter who died sometime in December, 1986, which motion was granted on the following
day (Ibid., pp. 180-182).
After trial, . . . the court a quo, on December 2, 198, rendered its judgment, a portion of which reads:
The evidence and the pleadings, thus, pose the querry (sic):
Are the defendants Jacinto Uy Dioand Norberto Uy liable for the obligation
contracted by Uy Tiam under the Letter of Credit (Exh. B) issued on March 30,
1987 by virtue of the Continuing Suretyships they executed on February 25,
1977?
Under the admitted proven facts, the Court finds that they are not.
a) When Uy and Dio executed the continuing suretyships, exhibits E and F,
on February 25, 1977, Uy Tiam was obligated to the plaintiff in the amount of
P700,000.00 and this was the obligation which both obligation which both
defendants guaranteed to pay. Uy Tiam paid this 1977 obligation and such
payment extinguished the obligation they assumed as guarantors/sureties.
b) The 1979 Letter of Credit (Exh. B) is different from the 1977 Letter of Credit
which covered the 1977 account of Uy Tiam. Thus, the obligation under either
is apart and distinct from the obligation created in the other as evidenced
by the fact that Uy Tiam had to apply anew for the 1979 transaction (Exh. A).
And Dio and Uy, being strangers thereto, cannot be answerable thereunder.
c) The plaintiff did not serve notice to the defendants Dio and Uy when it
extended to Credit at least to inform them that the continuing suretyships
they executed on February 25, 1977 will be considered by the plaintiff to
secure the 1979 transaction of Uy Tiam.
d) There is no sufficient and credible showing that Dio and Uy were fully
informed of the import of the Continuing Suretyships when they affixed their
signatures thereon that they are thereby securing all future obligations
which Uy Tiam may contract the plaintiff. On the contrary, Dio and Uy
categorically testified that they signed the blank forms in the office of Uy Tiam
at 623 Asuncion Street, Binondo, Manila, in obedience to the instruction of Uy
Tiam, their former employer. They denied having gone to the office of the
plaintiff to subscribe to the documents (October 1, 1987, tsn, pp. 5-7, 14;
October 15, 1987, tsn, pp. 3-8, 13-16). (Records, pp. 333-334). 3
xxx xxx xxx
In its Decision, the trial court decreed as follows:
PREMISES CONSIDERED, judgment is hereby rendered:
a) dismissing the COMPLAINT against JACINTO UY DIO and NORBERTO UY;
b) ordering the plaintiff to pay to Dio and Uy the amount of P6,000.00 as attorney's fees
and expenses of litigation; and
c) denying all other claims of the parties for want of legal and/or factual basis.
SO ORDERED. (Records, p. 336)

From the said Decision, the private respondent appealed to the Court of Appeals. The case was docketed
as CA-G.R. CV No. 17724. In support thereof, it made the following assignment of errors in its Brief:
I. THE LOWER COURT SERIOUSLY ERRED IN NOT FINDING AND HOLDING THAT DEFENDANTSAPPELLEES JACINTO UY DIO AND NORBERTO UY ARE SOLIDARILY LIABLE TO PLAINTIFFAPPELLANT FOR THE OBLIGATION OF DEFENDANT UY TIAM UNDER THE LETTER OF CREDIT
ISSUED ON MARCH 30, 1979 BY VIRTUE OF THE CONTINUING SURETYSHIPS THEY EXECUTED
ON FEBRUARY 25, 1977.
II. THE LOWER COURT ERRED IN HOLDING THAT PLAINTIFF-APPELLANT IS ANSWERABLE TO
DEFENDANTS-APPELLEES JACINTO UY DIO AND NORBERTO UY FOR ATTORNEY'S FEES AND
EXPENSES OF LITIGATION. 5
On 22 June 1989, public respondent promulgated the assailed Decision the dispositive portion of which
reads:
WHEREFORE, premises considered, the judgment appealed from is hereby REVERSED AND
SET, ASIDE. In lieu thereof, another one is rendered:
1) Ordering sureties-appellees Jacinto Uy Dio and Norberto Uy to pay, jointly
and severally, to appellant METROBANK the amount of P2,397,883.68 which
represents the amount due as of July 17, 1987 inclusive of principal, interest
and charges;
2) Ordering sureties-appellees Jacinto Uy Dio and Norberto Uy to pay, jointly
and severally, appellant METROBANK the accruing interest, fees and charges
thereon from July 18, 1987 until the whole monetary obligation is paid; and
3) Ordering sureties-appellees Jacinto Uy Dio and Norberto Uy to pay, jointly
and severally, to plaintiff P20,000.00 as attorney's fees.
With costs against appellees.
SO ORDERED.

In ruling for the herein private respondent (hereinafter METROBANK), public respondent held that the
Continuing Suretyship Agreements separately executed by the petitioners in 1977 were intended to
guarantee payment of Uy Tiam's outstanding as well as future obligations; each suretyship arrangement
was intended to remain in full force and effect until METROBANK would have been notified of its
revocation. Since no such notice was given by the petitioners, the suretyships are deemed outstanding and
hence, cover even the 1979 letter of credit issued by METROBANK in favor of Uy Tiam.
Petitioners filed a motion to reconsider the foregoing Decision. They questioned the public respondent's
construction of the suretyship agreements and its ruling with respect to the extent of their liability
thereunder. They argued the even if the agreements were in full force and effect when METROBANK
granted Uy Tiam's application for a letter of credit in 1979, the public respondent nonetheless seriously
erred in holding them liable for an amount over and above their respective face values.
In its Resolution of 21 August 1989, public respondent denied the motion:
. . . considering that the issues raised were substantially the same grounds utilized by the
lower court in rendering judgment for defendants-appellees which We upon appeal found
and resolved to be untenable, thereby reversing and setting aside said judgment and
rendering another in favor of plaintiff, and no new or fresh issues have been posited to
justify reversal of Our decision herein, . . . . 7

Hence, the instant petition which hinges on the issue of whether or not the petitioners may be held liable
as sureties for the obligation contracted by Uy Tiam with METROBANK on 30 May 1979 under and by virtue
of the Continuing Suretyship Agreements signed on 25 February 1977.
Petitioners vehemently deny such liability on the ground that the Continuing Suretyship Agreements were
automatically extinguished upon payment of the principal obligation secured thereby, i.e., the letter of
credit obtained by Uy Tiam in 1977. They further claim that they were not advised by either METROBANK
or Uy Tiam that the Continuing Suretyship Agreements would stand as security for the 1979 obligation.
Moreover, it is posited that to extend the application of such agreements to the 1979 obligation would
amount to a violation of Article 2052 of the Civil Code which expressly provides that a guaranty cannot
exist without a valid obligation. Petitioners further argue that even granting, for the sake of argument, that
the Continuing Suretyship Agreements still subsisted and thereby also secured the 1979 obligations
incurred by Uy Tiam, they cannot be held liable for more than what they guaranteed to pay because it s
axiomatic that the obligations of a surety cannot extend beyond what is stipulated in the agreement.
On 12 February 1990, this Court resolved to give due course to the petition after considering the
allegations, issues and arguments adduced therein, the Comment thereon by the private respondent and
the Reply thereto by the petitioners; the parties were required to submit their respective Memoranda.
The issues presented for determination are quite simple:
1. Whether petitioners are liable as sureties for the 1979 obligations of Uy Tiam to
METROBANK by virtue of the Continuing Suretyship Agreements they separately signed in
1977; and
2. On the assumption that they are, what is the extent of their liabilities for said 1979
obligations.
Under the Civil Code, a guaranty may be given to secure even future debts, the amount of which may not
known at the time the guaranty is
executed. 8 This is the basis for contracts denominated as continuing guaranty or suretyship. A continuing
guaranty is one which is not limited to a single transaction, but which contemplates a future course of
dealing, covering a series of transactions, generally for an indefinite time or until revoked. It is prospective
in its operation and is generally intended to provide security with respect to future transactions within
certain limits, and contemplates a succession of liabilities, for which, as they accrue, the guarantor
becomes liable. 9 Otherwise stated, a continuing guaranty is one which covers all transactions, including
those arising in the future, which are within the description or contemplation of the contract, of guaranty,
until the expiration or termination thereof. 10 A guaranty shall be construed as continuing when by the
terms thereof it is evident that the object is to give a standing credit to the principal debtor to be used
from time to time either indefinitely or until a certain period, especially if the right to recall the guaranty is
expressly reserved. Hence, where the contract of guaranty states that the same is to secure advances to
be made "from time to time" the guaranty will be construed to be a continuing one. 11
In other jurisdictions, it has been held that the use of particular words and expressions such as payment of
"any debt," "any indebtedness," "any deficiency," or "any sum," or the guaranty of "any transaction" or
money to be furnished the principal debtor "at any time," or "on such time" that the principal debtor may
require, have been construed to indicate a continuing guaranty. 12
In the case at bar, the pertinent portion of paragraph I of the suretyship agreement executed by petitioner
Uy provides thus:
I. For and in consideration of any existing indebtedness to the BANK of UY TIAM (hereinafter
called the "Borrower"), for the payment of which the SURETY is now obligated to the BANK,
either as guarantor or otherwise, and/or in order to induce the BANK, in its discretion, at any
time or from time to time hereafter, to make loans or advances or to extend credit in any
other manner to, or at the request, or for the account of the Borrower, either with or without

security, and/or to purchase or discount, or to make any loans or advances evidence or

secured by any notes, bills, receivables, drafts, acceptances, checks, or other instruments or
evidences of indebtedness (all hereinafter called "instruments") upon which the Borrower is
or may become liable as maker, endorser, acceptor, or otherwise, the SURETY agrees to
guarantee, and does hereby guarantee, the punctual payment at maturity to the loans,
advances credits and/or other obligations hereinbefore referred to, and also any and all
other indebtedness of every kind which is now or may hereafter become due or owing to the
BANK by the Borrower, together with any and all expenses which may be incurred by the
BANK in collecting all or any such instruments or other indebtedness or obligations herein
before referred to, and/or in enforcing any rights hereunder, and the SURETY also agrees
that the BANK may make or cause any and all such payments to be made strictly in
accordance with the terms and provisions of any agreement(s) express or implied, which has
(have) been or may hereafter be made or entered into by the Borrow in reference thereto,
regardless of any law, regulation or decree, unless the same is mandatory and non-waivable
in character, nor or hereafter in effect, which might in any manner affect any of the terms or
provisions of any such agreement(s) or the Bank's rights with respect thereto as against the
Borrower, or cause or permit to be invoked any alteration in the time, amount or manner of
payment by the Borrower of any such instruments, obligations or indebtedness; provided,
however, that the liability of the SURETY hereunder shall not exceed at any one time the
aggregate principal sum of PESOS: THREE HUNDRED THOUSAND ONLY (P300,000.00)
(irrespective of the currenc(ies) in which the obligations hereby guaranteed are payable),
and such interest as may accrue thereon either before or after any maturity(ies) thereof and
such expenses as may be incurred by the BANK as referred to above. 13
Paragraph I of the Continuing Suretyship Agreement executed by petitioner Dio contains identical
provisions except with respect to the guaranteed aggregate principal amount which is EIGHT THOUSAND
PESOS (P800,000.00). 14
Paragraph IV of both agreements stipulate that:
VI. This is a continuing guaranty and shall remain in full force and effect until written notice
shall have been received by the BANK that it has been revoked by the SURETY, but any such
notice shall not release the SURETY, from any liability as to any instruments, loans, advances
or other obligations hereby guaranteed, which may be held by the BANK, or in which the
BANK may have any interest at the time of the receipt (sic) of such notice. No act or
omission of any kind on the BANK'S part in the premises shall in any event affect or impair
this guaranty, nor shall same (sic) be affected by any change which may arise by reason of
the death of the SURETY, or of any partner(s) of the SURETY, or of the Borrower, or of the
accession to any such partnership of any one or more new partners. 15
The foregoing stipulations unequivocally reveal that the suretyship agreement in the case at bar are
continuing in nature. Petitioners do not deny this; in fact, they candidly admitted it. Neither have they
denied the fact that they had not revoked the suretyship agreements. Accordingly, as correctly held by the
public respondent:
Undoubtedly, the purpose of the execution of the Continuing Suretyships was to induce
appellant to grant any application for credit accommodation (letter of credit/trust receipt)
UTEFS may desire to obtain from appellant bank. By its terms, each suretyship is a
continuing one which shall remain in full force and effect until the bank is notified of its
revocation.
xxx xxx xxx
When the Irrevocable Letter of Credit No. SN-Loc-309 was obtained from appellant bank, for
the purpose of obtaining goods (covered by a trust receipt) from Planters Products, the
continuing suretyships were in full force and effect. Hence, even if sureties-appellees did not

sign the "Commercial Letter of Credit and Application, they are still liable as the credit
accommodation (letter of credit/trust receipt) was covered by the said suretyships. What
makes them liable thereunder is the condition which provides that the Borrower "is or may
become liable as maker, endorser, acceptor or otherwise." And since UTEFS which (sic) was
liable as principal obligor for having failed to fulfill the obligatory stipulations in the trust
receipt, they as insurers of its obligation, are liable thereunder. 16
Petitioners maintain, however, that their Continuing Suretyship Agreements cannot be made applicable to
the 1979 obligation because the latter was not yet in existence when the agreements were executed in
1977; under Article 2052 of the Civil Code, a guaranty "cannot exist without a valid obligation." We cannot
agree. First of all, the succeeding article provides that "[a] guaranty may also be given as security for
future debts, the amount of which is not yet known." Secondly, Article 2052 speaks about a valid
obligation, as distinguished from a void obligation, and not an existing or current obligation. This
distinction is made clearer in the second paragraph of Article 2052 which reads:
Nevertheless, a guaranty may be constituted to guarantee the performance of a voidable or
an unenforceable contract. It may also guarantee a natural obligation.
As to the amount of their liability under the Continuing Suretyship Agreements, petitioners contend that
the public respondent gravely erred in finding them liable for more than the amount specified in their
respective agreements, to wit: (a) P800,000.00 for petitioner Dio and (b) P300,000.00 for petitioner Uy.
The limit of the petitioners respective liabilities must be determined from the suretyship agreement each
had signed. It is undoubtedly true that the law looks upon the contract of suretyship with a jealous eye,
and the rule is settled that the obligation of the surety cannot be extended by implication beyond its
specified limits. To the extent, and in the manner, and under the circumstances pointed out in his
obligation, he is bound, and no farther. 17
Indeed, the Continuing Suretyship Agreements signed by petitioner Dio and petitioner Uy fix the
aggregate amount of their liability, at any given time, at P800,000.00 and P300,000.00, respectively. The
law is clear that a guarantor may bond himself for less, but not for more than the principal debtor, both as
regards the amount and the onerous nature of the conditions. 18 In the case at bar, both agreements
provide for liability for interest and expenses, to wit:
. . . and such interest as may accrue thereon either before or after any maturity(ies) thereof
and such expenses as may be incurred by the BANK referred to above. 19
They further provide that:
In the event of judicial proceedings being instituted by the BANK against the SURETY to
enforce any of the terms and conditions of this undertaking, the SURETY further agrees to
pay the BANK a reasonable compensation for and as attorney's fees and costs of collection,
which shall not in any event be less than ten per cent (10%) of the amount due (the same to
be due and payable irrespective of whether the case is settled judicially or extrajudicially). 20
Thus, by express mandate of the Continuing Suretyship Agreements which they had signed,
petitioners separately bound themselves to pay interest, expenses, attorney's fees and costs. The
last two items are pegged at not less than ten percent (10%) of the amount due.
Even without such stipulations, the petitioners would, nevertheless, be liable for the interest and judicial
costs. Article 2055 of the Civil Code provides: 21
Art. 2055. A guaranty is not presumed; it must be express and cannot extend to more than
what is stipulated therein.

If it be simple or indefinite, it shall comprise not only the principal obligation, but also all its
accessories, including the 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.
Interest and damages are included in the term accessories. However, such interest should run only
from the date when the complaint was filed in court. Even attorney's fees may be imposed
whenever appropriate, pursuant to Article 2208 of the Civil Code. Thus, in Plaridel Surety &
Insurance Co., Inc. vs. P.L. Galang Machinery Co., Inc., 22 this Court held:
Petitioner objects to the payment of interest and attorney's 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.
xxx xxx xxx
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 even 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 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 attorney's 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 thousands of pesos to his lawyers, he could not charge the amount to
his opponent (Tan Ti vs. Alvear, 26 Phil. 566).
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
(sic) 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.
The records do not reveal the exact amount of the unpaid portion of the principal obligation of Uy Tiam to
MERTOBANK under Irrevocable Letter of Credit No. SN-Loc-309 dated 30 March 1979. In referring to the last
demand letter to Mr. Uy Tiam and the complaint filed in Civil Case No. 82-9303, the public respondent
mentions the amount of "P613,339.32, as of January 31, 1982, inclusive of interest commission penalty
and bank charges." 23This is the same amount stated by METROBANK in its Memorandum. 24 However, in
summarizing Uy Tiam's outstanding obligation as of 17 July 1987, public respondent states:
Hence, they are jointly and severally liable to appellant METROBANK of UTEFS' outstanding
obligation in the sum of P2,397,883.68 (as of July 17, 1987) P651,092.82 representing the
principal amount, P825,133.54, for past due interest (5-31-82 to 7-17-87) and P921,657.32,

for penalty charges at 12%per annum (5-31-82 to 7-17-87) as shown in the Statement of
Account (Exhibit I). 25
Since the complaint was filed on 18 May 1982, it is obvious that on that date, the outstanding
principal obligation of Uy Tiam, secured by the petitioners' Continuing Suretyship Agreements, was
less than P613,339.32. Such amount may be fully covered by the Continuing Suretyship Agreement
executed by petitioner Dio which stipulates an aggregate principal sum of not exceeding
P800,000.00, and partly covered by that of petitioner Uy which pegs his maximum liability at
P300,000.00.
Consequently, the judgment of the public respondent shall have to be modified to conform to the foregoing
exposition, to which extent the instant petition is impressed with partial merit.
WHEREFORE, the petition is partly GRANTED, but only insofar as the challenged decision has to be
modified with respect to the extend of petitioners' liability. As modified, petitioners JACINTO UY DIO and
NORBERTO UY are hereby declared liable for and are ordered to pay, up to the maximum limit only of their
respective Continuing Suretyship Agreement, the remaining unpaid balance of the principal obligation of
UY TIAM or UY TIAM ENTERPRISES & FREIGHT SERVICES under Irrevocable Letter of Credit No. SN-Loc-309,
dated 30 March 1979, together with the interest due thereon at the legal rate commencing from the date
of the filing of the complaint in Civil Case No. 82-9303 with Branch 45 of the Regional Trial Court of Manila,
as well as the adjudged attorney's fees and costs.
All other dispositions in the dispositive portion of the challenged decision not inconsistent with the above
are affirmed.
SO ORDERED.
Gutierrez, Jr., Bidin, Romero and Melo, JJ., concur.
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? - ISSUE
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 co-maker, 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.

G.R. No. 185945

December 05, 2012

FIDELIZA J. AGLIBOT, Petitioner,

vs.
INGERSOL L. SANTIA, Respondent.
DECISION
REYES, J.:
Before the Court is a Petition for Review on Certiorari under Rule 45 of the 1997 Rules of Civil Procedure
seeking to annul and set aside the Decision1 dated March I 8, 2008 of the Court of Appeals (CA) in CA-G.R.
SP No. 100021, which reversed the Decision2 dated April 3, 2007 of the Regional Trial Court (RTC) of
Dagupan City, Branch 40, in Criminal Case Nos. 2006-0559-D to 2006-0569-D and entered a new
judgment. The fallo reads as follows:
WHEREFORE, the instant petition is GRANTED and the assailed Joint Decision dated April 3, 2007 of the
RTC of Dagupan City, Branch 40, and its Order dated June 12, 2007 are REVERSED AND SET ASIDE and a
new one is entered ordering private respondent Fideliza J. Aglibot to pay petitioner the total amount
of P3,000,000.00 with 12% interest per annum from the filing of the Informations until the finality of this
Decision, the sum of which, inclusive of interest, shall be subject thereafter to 12% annual interest until
fully paid.
SO ORDERED.3
On December 23, 2008, the appellate court denied herein petitioners motion for reconsideration.
Antecedent Facts
Private respondent-complainant Engr. Ingersol L. Santia (Santia) loaned the amount of P2,500,000.00 to
Pacific Lending & Capital Corporation (PLCC), through its Manager, petitioner Fideliza J. Aglibot (Aglibot).
The loan was evidenced by a Promissory Note dated July 1, 2003, issued by Aglibot in behalf of PLCC,
payable in one year subject to interest at 24% per annum. Allegedly as a guaranty or security for the
payment of the note, Aglibot also issued and delivered to Santia eleven (11) post-dated personal checks
drawn from her own demand account maintained at Metrobank, Camiling Branch. Aglibot is a major
stockholder of PLCC, with headquarters at 27 Casimiro Townhouse, Casimiro Avenue, Zapote, Las Pias,
Metro Manila, where most of the stockholders also reside.4
Upon presentment of the aforesaid checks for payment, they were dishonored by the bank for having been
drawn against insufficient funds or closed account. Santia thus demanded payment from PLCC and Aglibot
of the face value of the checks, but neither of them heeded his demand. Consequently, eleven (11)
Informations for violation of Batas Pambansa Bilang 22 (B.P. 22), corresponding to the number of
dishonored checks, were filed against Aglibot before the Municipal Trial Court in Cities (MTCC), Dagupan
City, Branch 3, docketed as Criminal Case Nos. 47664 to 47674. Each Information, except as to the
amount, number and date of the checks, and the reason for the dishonor, uniformly alleged, as follows:
That sometime in the month of September, 2003 in the City of Dagupan, Philippines and within the
jurisdiction of this Honorable Court, the above-named accused, FIDELIZA J. AGLIBOT, did then and there,
willfully, unlawfully and criminally, draw, issue and deliver to one Engr. Ingersol L. Santia, a METROBANK
Check No. 0006766, Camiling Tarlac Branch, postdated November 1, 2003, in the amount of P50,000.00,
Philippine Currency, payable to and in payment of an obligation with the complainant, although the said
accused knew fully well that she did not have sufficient funds in or credit with the said bank for the
payment of such check in full upon its presentment, such that when the said check was presented to the
drawee bank for payment within ninety (90) days from the date thereof, the same was dishonored for
reason "DAIF", and returned to the complainant, and despite notice of dishonor, accused failed and/or
refused to pay and/or make good the amount of said check within five (5) days banking days [sic], to the

damage and prejudice of one Engr. Ingersol L. Santia in the aforesaid amount of P50,000.00 and other
consequential damages.5
Aglibot, in her counter-affidavit, admitted that she did obtain a loan from Santia, but claimed that she did
so in behalf of PLCC; that before granting the loan, Santia demanded and obtained from her a security for
the repayment thereof in the form of the aforesaid checks, but with the understanding that upon
remittance in cash of the face amount of the checks, Santia would correspondingly return to her each
check so paid; but despite having already paid the said checks, Santia refused to return them to her,
although he gave her assurance that he would not deposit them; that in breach of his promise, Santia
deposited her checks, resulting in their dishonor; that she did not receive any notice of dishonor of the
checks; that for want of notice, she could not be held criminally liable under B.P. 22 over the said checks;
and that the reason Santia filed the criminal cases against her was because she refused to agree to his
demand for higher interest.
On August 18, 2006, the MTCC in its Joint Decision decreed as follows:
WHEREFORE, in view of the foregoing, the accused, FIDELIZA J. AGLIBOT, is hereby ACQUITTED of all
counts of the crime of violation of the bouncing checks law on reasonable doubt. However, the said
accused is ordered to pay the private complainant the sum of P3,000,000.00 representing the total face
value of the eleven checks plus interest of 12% per annum from the filing of the cases on November 2,
2004 until fully paid, attorneys fees ofP30,000.00 as well as the cost of suit.
SO ORDERED.6
On appeal, the RTC rendered a Decision dated April 3, 2007 in Criminal Case Nos. 2006-0559-D to 20060569-D, which further absolved Aglibot of any civil liability towards Santia, to wit:
WHEREFORE, premises considered, the Joint Decision of the court a quo regarding the civil aspect of these
cases is reversed and set aside and a new one is entered dismissing the said civil aspect on the ground of
failure to fulfill, a condition precedent of exhausting all means to collect from the principal debtor.
SO ORDERED.7
Santias motion for reconsideration was denied in the RTCs Order dated June 12, 2007. 8 On petition for
review to the CA docketed as CA-G.R. SP No. 100021, Santia interposed the following assignment of errors,
to wit:
"In brushing aside the law and jurisprudence on the matter, the Regional Trial Court seriously erred:
1. In reversing the joint decision of the trial court by dismissing the civil aspect of these cases;
2. In concluding that it is the Pacific Lending and Capital Corporation and not the private respondent
which is principally responsible for the amount of the checks being claimed by the petitioner;
3. In finding that the petitioner failed to exhaust all available legal remedies against the principal
debtor Pacific Lending and Capital Corporation;
4. In finding that the private respondent is a mere guarantor and not an accommodation party, and
thus, cannot be compelled to pay the petitioner unless all legal remedies against the Pacific Lending
and Capital Corporation have been exhausted by the petitioner;
5. In denying the motion for reconsideration filed by the petitioner." 9
In its now assailed decision, the appellate court rejected the RTCs dismissal of the civil aspect of the
aforesaid B.P. 22 cases based on the ground it cited, which is that the "failure to fulfill a condition

precedent of exhausting all means to collect from the principal debtor." The appellate court held that since
Aglibots acquittal by the MTCC in Criminal Case Nos. 47664 to 47674 was upon a reasonable doubt 10 on
whether the prosecution was able to satisfactorily establish that she did receive a notice of dishonor, a
requisite to hold her criminally liable under B.P. 22, her acquittal did not operate to bar Santias recovery of
civil indemnity.
It is axiomatic that the "extinction of penal action does not carry with it the eradication of civil liability,
unless the extinction proceeds from a declaration in the final judgment that the fact from which the civil
liability might arise did not exist. Acquittal will not bar a civil action in the following cases: (1) where the
acquittal is based on reasonable doubt as only preponderance of evidence is required in civil cases; (2)
where the court declared the accuseds liability is not criminal but only civil in nature[;] and (3) where the
civil liability does not arise from or is not based upon the criminal act of which the accused was
acquitted."11 (Citation omitted)
The CA therefore ordered Aglibot to personally pay Santia P3,000,000.00 with interest at 12% per annum,
from the filing of the Informations until the finality of its decision. Thereafter, the sum due, to be
compounded with the accrued interest, will in turn be subject to annual interest of 12% from the finality of
its judgment until full payment. It thus modified the MTCC judgment, which simply imposed a straight
interest of 12% per annum from the filing of the cases on November 2, 2004 until the P3,000,000.00 due is
fully paid, plus attorneys fees of P30,000.00 and the costs of the suit.
Issue
Now before the Court, Aglibot maintains that it was error for the appellate court to adjudge her personally
liable for issuing her own eleven (11) post-dated checks to Santia, since she did so in behalf of her
employer, PLCC, the true borrower and beneficiary of the loan. Still maintaining that she was a mere
guarantor of the said debt of PLCC when she agreed to issue her own checks, Aglibot insists that Santia
failed to exhaust all means to collect the debt from PLCC, the principal debtor, and therefore he cannot
now be permitted to go after her subsidiary liability.
Ruling of the Court
The petition is bereft of merit.
Aglibot cannot invoke the benefit of excussion
The RTC in its decision held that, "It is obvious, from the face of the Promissory Note x x x that the
accused-appellant signed the same on behalf of PLCC as Manager thereof and nowhere does it appear
therein that she signed as an accommodation party." 12 The RTC further ruled that what Aglibot agreed to
do by issuing her personal checks was merely to guarantee the indebtedness of PLCC. So now petitioner
Aglibot reasserts that as a guarantor she must be accorded the benefit of excussion prior exhaustion of
the property of the debtor as provided under Article 2058 of the Civil Code, to wit:
Art. 2058. The guarantor cannot be compelled to pay the creditor unless the latter has exhausted all the
property of the debtor, and has resorted to all the legal remedies against the debtor.
It is settled that the liability of the guarantor is only subsidiary, and all the properties of the principal
debtor, the PLCC in this case, must first be exhausted before the guarantor may be held answerable for
the debt.13 Thus, the creditor may hold the guarantor liable only after judgment has been obtained against
the principal debtor and the latter is unable to pay, "for obviously the exhaustion of the principals
property the benefit of which the guarantor claims cannot even begin to take place before judgment
has been obtained."14 This rule is contained in Article 206215 of the Civil Code, which provides that the
action brought by the creditor must be filed against the principal debtor alone, except in some instances
mentioned in Article 205916 when the action may be brought against both the guarantor and the principal
debtor.

The Court must, however, reject Aglibots claim as a mere guarantor of the indebtedness of PLCC to Santia
for want of proof, in view of Article 1403(2) of the Civil Code, embodying the Statute of Frauds, which
provides:
Art. 1403. The following contracts are unenforceable, unless they are ratified:
xxxx
(2) Those that do not comply with the Statute of Frauds as set forth in this number. In the following cases
an agreement hereafter made shall be unenforceable by action, unless the same, or some note or
memorandum thereof, be in writing, and subscribed by the party charged, or by his agent; evidence,
therefore, of the agreement cannot be received without the writing, or a secondary evidence of its
contents:
a) An agreement that by its terms is not to be performed within a year from the making thereof;
b) A special promise to answer for the debt, default, or miscarriage of another;
c) An agreement made in consideration of marriage, other than a mutual promise to marry;
d) An agreement for the sale of goods, chattels or things in action, at a price not less than five
hundred pesos, unless the buyer accept and receive part of such goods and chattels, or the
evidences, or some of them, or such things in action, or pay at the time some part of the purchase
money; but when a sale is made by auction and entry is made by the auctioneer in his sales book,
at the time of the sale, of the amount and kind of property sold, terms of sale, price, names of
purchasers and person on whose account the sale is made, it is a sufficient memorandum;
e) An agreement for the leasing of a longer period than one year, or for the sale of real property or
of an interest therein;
f) A representation to the credit of a third person. (Italics ours)
Under the above provision, concerning a guaranty agreement, which is a promise to answer for the debt or
default of another,17 the law clearly requires that it, or some note or memorandum thereof, be in writing.
Otherwise, it would be unenforceable unless ratified,18 although under Article 135819 of the Civil Code, a
contract of guaranty does not have to appear in a public document. 20 Contracts are generally obligatory in
whatever form they may have been entered into, provided all the essential requisites for their validity are
present, and the Statute of Frauds simply provides the method by which the contracts enumerated in
Article 1403(2) may be proved, but it does not declare them invalid just because they are not reduced to
writing. Thus, the form required under the Statute is for convenience or evidentiary purposes only. 21
On the other hand, Article 2055 of the Civil Code also provides that a guaranty is not presumed, but must
be express, and cannot extend to more than what is stipulated therein. This is the obvious rationale why a
contract of guarantee is unenforceable unless made in writing or evidenced by some writing. For as
pointed out by Santia, Aglibot has not shown any proof, such as a contract, a secretarys certificate or a
board resolution, nor even a note or memorandum thereof, whereby it was agreed that she would issue her
personal checks in behalf of the company to guarantee the payment of its debt to Santia. Certainly, there
is nothing shown in the Promissory Note signed by Aglibot herself remotely containing an agreement
between her and PLCC resembling her guaranteeing its debt to Santia. And neither is there a showing that
PLCC thereafter ratified her act of "guaranteeing" its indebtedness by issuing her own checks to Santia.
Thus did the CA reject the RTCs ruling that Aglibot was a mere guarantor of the indebtedness of PLCC, and
as such could not "be compelled to pay [Santia], unless the latter has exhausted all the property of PLCC,
and has resorted to all the legal remedies against PLCC x x x."22

Aglibot is an accommodation party and therefore liable to Santia

Section 185 of the Negotiable Instruments Law defines a check as "a bill of exchange drawn on a bank
payable on demand," while Section 126 of the said law defines a bill of exchange as "an unconditional
order in writing addressed by one person to another, signed by the person giving it, requiring the person to
whom it is addressed to pay on demand or at a fixed or determinable future time a sum certain in money
to order or to bearer."
The appellate court ruled that by issuing her own post-dated checks, Aglibot thereby bound herself
personally and solidarily to pay Santia, and dismissed her claim that she issued her said checks in her
official capacity as PLCCs manager merely to guarantee the investment of Santia. It noted that she could
have issued PLCCs checks, but instead she chose to issue her own checks, drawn against her personal
account with Metrobank. It concluded that Aglibot intended to personally assume the repayment of the
loan, pointing out that in her Counter-Affidavit, she even admitted that she was personally indebted to
Santia, and only raised payment as her defense, a clear admission of her liability for the said loan.
The appellate court refused to give credence to Aglibots claim that she had an understanding with Santia
that the checks would not be presented to the bank for payment, but were to be returned to her once she
had made cash payments for their face values on maturity. It noted that Aglibot failed to present any proof
that she had indeed paid cash on the above checks as she claimed. This is precisely why Santia decided to
deposit the checks in order to obtain payment of his loan.
The facts below present a clear situation where Aglibot, as the manager of PLCC, agreed to accommodate
its loan to Santia by issuing her own post-dated checks in payment thereof. She is what the Negotiable
Instruments Law calls an accommodation party.23 Concerning the liability of an accommodation party,
Section 29 of the said law provides:
Sec. 29. Liability of an accommodation party. An accommodation party is one who has signed the
instrument as maker, drawer, acceptor, or indorser, without receiving value therefor, and for the purpose
of lending his name to some other person. Such a person is liable on the instrument to a holder for value
notwithstanding such holder at the time of taking the instrument knew him to be only an accommodation
party.
As elaborated in The Phil. Bank of Commerce v. Aruego:24
An accommodation party is one who has signed the instrument as maker, drawer, indorser, without
receiving value therefor and for the purpose of lending his name to some other person. Such person is
liable on the instrument to a holder for value, notwithstanding such holder, at the time of the taking of the
instrument knew him to be only an accommodation party. In lending his name to the accommodated party,
the accommodation party is in effect a surety for the latter. He lends his name to enable the
accommodated party to obtain credit or to raise money. He receives no part of the consideration for the
instrument but assumes liability to the other parties thereto because he wants to accommodate another. x
x x.25 (Citation omitted)
The relation between an accommodation party and the party accommodated is, in effect, one of principal
and surety the accommodation party being the surety. It is a settled rule that a surety is bound equally
and absolutely with the principal and is deemed an original promisor and debtor from the beginning. The
liability is immediate and direct.26 It is not a valid defense that the accommodation party did not receive
any valuable consideration when he executed the instrument; nor is it correct to say that the holder for
value is not a holder in due course merely because at the time he acquired the instrument, he knew that
the indorser was only an accommodation party.271wphi1
Moreover, it was held in Aruego that unlike in a contract of suretyship, the liability of the accommodation
party remains not only primary but also unconditional to a holder for value, such that even if the
accommodated party receives an extension of the period for payment without the consent of the

accommodation party, the latter is still liable for the whole obligation and such extension does not release
him because as far as a holder for value is concerned, he is a solidary co-debtor.
The mere fact, then, that Aglibot issued her own checks to Santia made her personally liable to the latter
on her checks without the need for Santia to first go after PLCC for the payment of its loan. 28 It would have
been otherwise had it been shown that Aglibot was a mere guarantor, except that since checks were
issued ostensibly in payment for the loan, the provisions of the Negotiable Instruments Law must take
primacy in application.
WHEREFORE, premises considered, the Petition for Review on Certiorari is DENIED and the Decision
dated March 18, 2008 of the Court of Appeals in CA-G.R. SP No. I 00021 is hereby AFFIRMED.
SO ORDERED.
Art. 2062. In every action by the creditor, which must be against the principal debtor alone, except in the
cases mentioned in Article 2059, the former shall ask the court to notify the guarantor of the action. The
guarantor may appear so that he may, if he so desire, set up such defenses as are granted him by law. The
benefit of excussion mentioned in Article 2058 shall always be unimpaired, even if judgment should be
rendered against the principal debtor and the guarantor in case of appearance by the latter.
16

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;
(3) In case of insolvency of the debtor;
(4) When he has absconded, or cannot be sued within the Philippines unless he has left manager or
representative;
(5) If it may be presumed that an execution on the property of the principal debtor would not result
in the satisfaction of the obligation.

17

Article 2047 of the Civil Code defines it as follows:

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.

18

Prudential Bank v. Intermediate Appellate Court, G.R. No. 74886, December 8, 1992, 216 SCRA 257, 275276.
19

Art. 1358. The following must appear in a public document:

(1) Acts and contracts which have for their object the creation, transmission, modification or
extinguishment of real rights over immovable property; sales of real property or of an interest
therein are governed by Articles 1403, No. 2 and 1405;
(2) The cession, repudiation or renunciation of hereditary rights or of those of the conjugal
partnership of gains;
(3) The power to administer property, or any other power which has for its object an act appearing
or which should appear in a public document, or should prejudice a third person; and

(4) The cession of actions or rights proceeding from an act appearing in a public document. All
other contracts where the amount involved exceeds five hundred pesos must appear in writing,
even a private one. But sales of goods, chattels or things in action are governed by Articles 1403,
No. 2 and 1405.