ATOK FINANCE CORPORATION, petitioner, vs.
COURT and every such lien or right of set-off may be exercised without
OF APPEALS, respondents
Atok Finance Corporation ("Atok Finance") asks us to review
and set aside the Decision of the Court of Appeals which
reversed a decision of the trial court ordering private
respondents to pay jointly and severally to
petitioner Atok Finance certain sums of money.
On 27 July 1979, private respondents Sanyu Chemical
Corporation ("Sanyu Chemical") as principal and Sanyu
Trading Corporation ("Sanyu Trading") along with individual
private stockholders of Sanyu Chemical, namely, private
respondents spouses Danilo E. Arrieta and Nenita B. Arrieta,
Leopoldo G. Halili and Pablito Bermundo as sureties,
executed a Continuing Suretyship Agreement in favor
of Atok Finance as creditor. Under this Agreement, Sanyu
Trading and the individual private respondents who were
officers and stockholders of Sanyu Chemical did:
"(1) For Valuable and/or other consideration . . ., jointly and
severally unconditionally guarantee
to ATOK FINANCE CORPORATION (hereinafter called
Creditor), the full, faithful and prompt payment and discharge
of any and all indebtedness of [Sanyu Chemical] . . .
(hereinafter called Principal) to the Creditor. The
word 'indebtedness' is used herein in its most comprehensive
sense and includes any and all advances, debts, obligations
and liabilities of Principal or any one or more of
them, here[to]fore, now or hereafter made, incurred or
created, whether voluntary or involuntary and however arising,
whether direct or acquired by the Creditor by assignment or
succession, whether due or not due, absolute or contingent,
liquidated or unliquidated, determined or undetermined and
whether the Principal may be liable individually or jointly with
others, or whether recovery upon such indebtedness may be
or hereafter become barred by any statute of limitations, or
whether such indebtedness may be or otherwise
become unenforceable." 1 (Emphasis supplied).
Other relevant provisions of the Continuing Suretyship
Agreement follow:
"(2) This is a continuing suretyship relating to any
indebtedness, including that arising under successive
transactions which shall either continue the indebtedness from
time to time or renew it after it has been satisfied. This
suretyship is binding upon the heirs, successors, executors,
administrators and assigns of the surety, and the benefits
hereof shall extend to and include the successors and assigns
of the Creditor.
(3) The obligations hereunder are joint and several and
independent of the obligations of the Principal. A separate
action or actions may be brought and prosecuted against the
Principal and whether or not the Principal be joined in any such
action or actions.
xxx xxx xxx
(6) In addition to all liens upon, and rights of set-off against the
moneys, securities or other property of the Surety given to the
Creditor by law, the Creditor shall have a lien upon and a right
of set-off against all moneys, securities, and other property of
the Surety now or hereafter in the possession of the Creditor;
need of demand upon or notice to the Surety. No lien or right
of set-off shall be deemed to have been waived by any act,
omission or conduct on the part of the Creditor, or by any
neglect to exercise such right of set-off or to enforce such lien,
or by any delay in so doing, and every right of set-off or lien
shall continue in full force and effect until such right of set-off
or lien is specifically waived or released by an instrument in
writing executed by the Creditor.
(7) Any indebtedness of the Principal now or hereafter held by
the Surety is hereby subordinated to the indebtedness of the
Principal to the Creditor; and if the Creditor so requests, such
indebtedness of the Principal to the Surety shall be collected,
enforced and received by the Surety as trustee for the Creditor
and shall be paid over to the Creditor on account of the
indebtedness of the Principal to the Creditor but without
reducing or affecting in any manner the liability of the Surety
under the other provisions of this suretyship.
xxx xxx xxx 2
(Emphases supplied)
On 27 November 1981, Sanyu Chemical assigned its trade
receivables outstanding as of 27 November 1981 with a total
face value of P125,871.00, to AtokFinance in consideration of
receipt from Atok Finance of the amount of P105,000.00. The
assigned receivables carried a standard term of thirty (30)
days; it appeared, however, that the standard commercial
practice was to grant an extension of up to one hundred twenty
(120) days without penalties. The relevant portions of this
Deed of Assignment read as follows:
"1. FOR VALUE RECEIVED, the ASSIGNOR does hereby
SELL, TRANSFER and ASSIGN all his/its rights, title and
interest in the contracts, receivables, accounts, notes, leases,
deeds of sale with reservation of title, invoices, mortgages,
checks, negotiable instruments and evidences of
indebtedness listed in the schedule forming part hereinafter
called `Contract' or 'Contracts.'
2. To induce the ASSIGNEE to purchase the above
Contracts, the ASSIGNOR does hereby certify, warrant and
represent that:
(a) He/It is the sole owner of the assigned Contracts free and
clear of claims of any other party except the herein ASSIGNEE
and has the right to transfer absolute title thereto the
ASSIGNEE;
(b) Each assigned Contract is bonafide and the amount owing
and to become due on each contract is correctly stated upon
the schedule or other evidences of the Contract delivered
pursuant thereto;
(c) Each assigned Contract arises out of the sale of
merchandise/s which has been delivered and/or services
which have been rendered and none of the Contract is now,
nor will at any time become, contingent upon the fulfillment of
any contract or condition whatsoever, or subject to any
defense, offset or counterclaim;
(d) No assigned Contract is represented by any note or other
evidence of indebtedness or other security document except
such as may have been endorsed, assigned and delivered by
the ASSIGNOR to the ASSIGNEE simultaneously with the
assignment of such Contract;
(e) No agreement has been made, or will be made, with any
debtor for any deduction discount or return of merchandise,
except as may be specifically noted at the time of the
assignment of the Contract;
(f) None of the terms or provisions of the assigned Contracts
have been amended, modified or waived;
(g) The debtor/s under the assigned Contract/s are
solvent and his/its/their failure to pay the assigned
Contracts and/or any installment thereon upon maturity
thereof shall be conclusively considered as a violation of this
warranty; and
(h) Each assigned Contract is a valid obligation of the buyer of
the merchandise and/or service rendered under the Contract
and that no Contract is overdue.
The foregoing warranties and representations are in addition
to those provided for in the Negotiable Instruments Law and
other applicable laws. Any violation thereof shall render the
ASSIGNOR immediately and unconditionally liable to pay the
ASSIGNEE jointly and severally with the debtors under the
assigned contracts, the amounts due thereon.
xxx xxx xxx
4. The ASSIGNOR shall without compensation or cost, collect
and receive in trust for the ASSIGNEE all payments made
upon the assigned contracts and shall remit to the ASSIGNEE
all collections on the said Contracts as follows:
P5,450.00 due on January 2, 1982 on every 15th day (semi-
monthly) until November 1, 1982.
P110,550.00 balloon payment after 12 months." 3 (Emphases
supplied)
Later, additional trade receivables were assigned by Sanyu
Chemical to Atok Finance with a total face value of
P100,378.45.
On 13 January 1984, Atok Finance commenced action
against Sanyu Chemical, the Arrieta spouses, Pablito
Bermundo and Leopoldo Halili before the Regional Trial Court
of Manila to collect the sum of P120,240.00 plus penalty
charges amounting to P0.03 for every peso due and payable
for each month starting from 1 September
1983. Atok Finance alleged that Sanyu Chemical had failed to
collect and remit the amounts due under the trade receivables.
Sanyu Chemical and the individual private respondents sought
dismissal of Atok's claim upon the ground that such claim had
prescribed under Article 1629 of the Civil Code and for lack of
cause of action. The private respondents contended that the
Continuing Suretyship Agreement, being an accessory
contract, was null and void since, at the time of its execution,
Sanyu Chemical had no pre-existing obligation due
to Atok Finance.
At the trial, Sanyu Chemical and the individual private
respondents failed to present any evidence on their own
behalf, although the individual private respondents submitted
a memorandum in support of their argument. After trial, on 1
April 1985, the trial court rendered a decision in favor
of Atok Finance. The dispositive portion of this decision reads
as follows:
"ACCORDINGLY, judgment is hereby rendered in favor of the
plaintiff ATOK FINANCE CORPORATION; and against the
defendants SANYU CHEMICAL CORPORATION, DANILO E.
ARRIETA, NENITA B. ARRIETA, PABLITO BERMUNDO and
LEOPOLDO HALILI, ordering the said defendants, jointly and
severally, to pay the plaintiff:
(1) P120,240.00 plus P0.03 for each peso for each month from
September 1, 1983 until the whole amount is fully paid;
(2) P5,000.00 as attorney's fees; and
(3) To pay the costs.
SO ORDERED." 4
Private respondents went on appeal before the then
Intermediate Appellate Court ("IAC"), and the appeal was
there docketed as AC-G.R. No. 07005-CV. The case was
raffled to the Third Civil Cases Division of the IAC. In a
resolution dated 21 March 1986, that Division dismissed the
appeal upon the ground of abandonment, since the private
respondents had failed to file their appeal brief notwithstanding
receipt of the notice to do so. On 4 June 1986, entry of
judgment was made by the Clerk of Court of the IAC.
Accordingly, Atok Finance went before the trial court and
sought a writ of execution to enforce the decision of the trial
court of 1 April 1985. The trial court issued a writ of execution
on 23 July 1986. 5 Petitioner alleged that the writ of execution
was served on private respondents. 6
However, on 27 August 1986, private respondents filed a
Petition for Relief from Judgment before the Court of Appeals.
This Petition was raffled off to the 15th Division of the Court of
Appeals. In that Petition, private respondents claimed that
their failure to file their appeal brief was due to excusable
negligence, that is, that their previous counsel had entrusted
the preparation and filing of the brief to one of his associates,
which associate, however, had unexpectedly resigned from
the law firm without returning the records of cases he had been
handling, including the appeal of private
respondents. Atok Finance opposed the Petition for Relief
arguing that no valid ground existed for setting aside the
resolution of the Third Division of the then IAC.
The 15th Division of the Court of Appeals nonetheless granted
the Petition for Relief from Judgment "in the paramount
interest of justice," 7 set aside the resolution of the Third Civil
Cases Division of the then IAC, and gave private respondents
a non-extendible period of fifteen (15) days within which to file
their appeal brief. Private respondents did file their appeal
brief.
The 15th Division, on 18 August 1987, rendered a Decision on
the merits of the appeal, and reversed and set aside the
decision of the trial court and entered a new judgment
dismissing the complaint of Atok Finance, ordering it to pay
private respondents P3,000.00 as attorney's fees and to pay
the costs.
Atok Finance moved to set aside the decision of the 15th
Division of the Court of Appeals, inviting attention to the
resolution of the IAC's Third Civil Cases Division of 21 March
1986 originally dismissing private respondents' appeal for
abandonment thereof. In a resolution dated 18 August 1987,
the 15th Division denied Atok Finance's motion stating that it
had granted the Petition for Relief from Judgment and given
private respondents herein fifteen (15) days within which to file
an appeal brief, while Atok Finance did not file an appellee's
brief, and that its decision was arrived at "on the basis of
appellant's brief and the original records of the appeal case."
In the present Petition for Review, Atok Finance assigns the
following as errors on the part of the Court of Appeals in
rendering its decision of 18 August 1987: cdrep
"(1) that it had erred in ruling that a continuing suretyship
agreement cannot be effected to secure future debts;
(2) that it had erred in ruling that the continuing suretyship
agreement was null and void for lack of consideration without
any evidence whatsoever [being] adduced by private
respondents;
(3) that it had erred in granting the Petition for Relief from
Judgment while execution proceedings [were] on-going in the
trial court." 8 (Emphasis in the original).
WHEREFORE, for all the foregoing, the Petition for Review is
hereby GRANTED DUE COURSE, and the Decision of the
Court of Appeals dated 18 August 1987 and its Resolution
dated 30 September 1987 are hereby REVERSED and SET
ASIDE. A new judgment is hereby entered REINSTATING the
Decision of the trial court in Civil Case No. 84-22198 dated 1
April 1985, except only that, in the exercise of this Court's
discretionary authority equitably to mitigate the penalty clause
attached to the Deed of Assignment, that penalty is hereby
reduced to eighteen percent (18%) per annum (instead of
P0.03 for every peso monthly [or 36% per annum]). As so
modified, the Decision of the trial court is hereby AFFIRMED.
Costs against private respondents.
We turn, therefore, to a consideration of the first
substantive issue addressed by the Court of Appeals in
rendering its Decision on the merits of the appeal:
whether the individual private respondents may be held
solidarily liable with Sanyu Chemical under the provisions
of the Continuing Suretyship Agreement, or whether that
Agreement must be held null and void as having been
executed without consideration and without a pre-
existing principal obligation to sustain it.
The Court of Appeals held on this first issue as follows:
"It is the contention of private appellants that the
suretyship agreement is null and void because it is not in
consonance with the laws on guaranty and security. The
said agreement was entered into by the parties two years
before the Deed of Assignment was executed. Thus,
allegedly, it ran counter to the provision that guaranty
cannot exist independently because by nature it is merely
an accessory contract. The law on guaranty is applicable
to surety to some extent Manila Surety and Fidelity Co. v.
Baxter Construction & Co., 53 O.G. 8836; and, Arran v.
Manila Fidelity & Surety Co., 53 O.G. 7247.
We find merit in this contention.
Although obligations arising from contracts have the
force of law between the contracting parties, (Article 1159
of the Civil Code) this does not mean that the law is
inferior to it; the terms of the contract could not be
enforced if not valid. So, even if, as in this case, the
agreement was for a continuing suretyshipto include
obligations enumerated in paragraph 2 of the
agreement, the same could not be enforced. First,
because this contract, just like guaranty, cannot exist
without a valid obligation (Art. 2052, Civil Code);
and, second, although it may be given as security for
future debt (Art. 2053, C.C.), the obligation contemplated
in the case at bar cannot be considered 'future debt' as
envisioned by this law.
There is no proof that when the suretyship agreement was
entered into, there was a pre-existing obligation which
served as the principal obligation between the
parties. Furthermore,the 'future debts' alluded to in
Article 2053 refer to debts already existing at the time of
the constitution of the agreement but the amount thereof
is unknown, unlike in the case at bar where the obligation
was acquired two years after the
agreement." 10 (Emphasis supplied)
We consider that the Court of Appeals here was in serious
error. It is true that a guaranty or a suretyship agreement
is an accessory contract in the sense that it is entered into
for the purpose of securing the performance of another
obligation which is denominated as the principal
obligation. It is also true that Article 2052 of the Civil Code
states that "a guarantee cannot exist without a valid
obligation." This legal proposition is not, however, like
most legal principles, to be read in an absolute and literal
manner and carried to the limit of its logic. This is clear
from Article 2052 of the Civil Code itself:
"Art. 2052. A guaranty cannot exist without a valid
obligation.
Nevertheless, a guaranty may be constituted to guarantee
the performance of a voidable or an unenforceable
contract. It may also guarantee a naturalobligation."
(Emphases supplied). cdphil
Moreover, Article 2053 of the Civil Code states:
"Art. 2053. A guaranty may also be given as security for
future debts, the amount of which is not yet known; there
can be no claim against the guarantor until the debt is
liquidated. A conditional obligation may also be secured."
(Emphasis supplied)
The Court of Appeals apparently overlooked our caselaw
interpreting Articles 2052 and 2053 of the Civil Code.
In National Rice and Corn Corporation (NARIC) v. Jose A.
Fojas and Alto Surety Co., Inc., 11 the private
respondents assailed the decision of the trial court
holding them liable under certain surety bonds filed by
private respondent Fojas and issued by private
respondent Alto Surety Co. in favor of petitioner NARIC,
upon the ground that those surety bonds were null and
void "there being no principal obligation to be secured by
said bonds." In affirming the decision of the trial court,
this Court, speaking through Mr. Justice J.B.L. Reyes,
made short shrift of the private respondents' doctrinaire
argument:
"Under his third assignment of error, appellant Fojas
questions the validity of the additional bonds (Exhs. D
and D-1) on the theory that when they were executed, the
principal obligation referred to in said bonds had not yet
been entered into, as no copy thereof was attached to the
deeds of suretyship. This defense is untenable, because
in its complaint the NARIC averred, and the appellant did
not deny that these bonds were posted to secure the
additional credit that Fojas has applied for, and the credit
increase over his original contract was sufficient
consideration for the bonds. That the latter were signed
and filed before the additional credit was extended by the
NARIC is no ground for complaint. Article 1825 of the Civil
Code of 1889, in force in 1948,expressly recognized that
'a guaranty may also be given as security for future
debts the amount of which is not yet known.'" (Emphasis
supplied)
In Rizal Commercial Banking Corporation v. Arro, 12 the
Court was confronted again with the same issue, that is,
whether private respondent was liable to pay a
promissory note dated 29 April 1977 executed by the
principal debtor in the light of the provisions of a
comprehensive surety agreement which petitioner bank
and the private respondent had earlier entered into on 19
October 1976. Under the comprehensive surety
agreement, the private respondents had bound
themselves as solidary debtors of the Diacor Corporation
not only in respect of existing obligations but also in
respect of future ones. In holding private respondent
surety (Residoro Chua) liable under the comprehensive
surety agreement, the Court said:
"The surety agreement which was earlier signed by
Enrique Go., Sr. and private respondent, is an accessory
obligation, it being dependent upon a principal one which,
in this case is the loan obtained by Daicor as evidenced
by a promissory note. What obviously induced petitioner
bank to grant the loan was the surety agreement whereby
Go and Chua bound themselves solidarily to guaranty the
punctual payment of the loan at maturity. By terms that
are unequivocal, it can be clearly seen that the surety
agreement was executed to guarantee future debts which
Daicor may incur with petitioner, as is legally allowable
under the Civil Code. Thus
'Article 2053. A guarantee may also be given as security
for future debts, the amount of which is not yet known;
there can be no claim against the guarantor until the debt
is liquidated. A conditional obligation may also be
secured.'" 13 (Emphasis supplied)
It is clear to us that the Rizal Commercial Banking
Corporation and the NARIC cases rejected the distinction
which the Court of Appeals in the case at bar sought to
make with respect to Article 2053, that is, that the "future
debts" referred to in that Article relate to "debts already
existing at the time of the constitution of the agreement
but the amount [of which] is unknown," and not to debts
not yet incurred and existing at that time. Of course, a
surety is not bound under any particular principal
obligation until that principal obligation is born. But there
is no theoretical or doctrinal difficulty inherent in saying
that the suretyship agreement itself is valid and binding
even before the principal obligation intended to be
secured thereby is born, any more than there would be in
saying that obligations which are subject to a condition
precedent are valid and binding before the occurrence of
the condition precedent. 14
Comprehensive or continuing surety agreements are in
fact quite commonplace in present day financial and
commercial practice. A bank or a financing company
which anticipates entering into a series of credit
transactions with a particular company, commonly
requires the projected principal debtor to execute a
continuing surety agreement along with its sureties. By
executing such an agreement, the principal places itself
in a position to enter into the projected series of
transactions with its creditor; with such suretyship
agreement, there would be no need to execute a separate
surety contract or bond for each financing or credit
accommodation extended to the principal debtor. As we
understand it, this is precisely what happened in the case
at bar.
EMMANUEL C. ONGSIAKO, ET AL., plaintiffs, vs. THE
WORLD WIDE INSURANCE & SURETY CO., INC., ET
AL., defendants.
SURETYSHIP AND GUARANTY; UNFAIR AND
UNREASONABLE STIPULATION I THE BOND; EFFECT.
Where one of the conditions of the bond filed by the
surety provides that the latter's liability will expire on the
date of the maturity of the obligation," which it interposed
as a defense to an action instituted therefor, such
stipulation is unfair and unreasonable for it practically
nullifies the nature of the undertaking it had assumed. The
court has noted this reprehensible attitude adopted by the
surety company in the case at bar by resorting to
improper means in an effort to evade its responsibility
under the law. An instance of such attitude is the insertion
in the bond of a provision which in essence tends to
nullify its commitment. This is a subtle way of making
money thru trickery and deception. Such practice should
be stopped if only to protect honest dealers or people in
financial stress. Because of such improper conduct, the
appeal taken in the case at bar is considered frivolous and
unnecessary
On November 10, 1951, Catalina de Leon executed in favor of
Augusto V. Ongsiako a promissory note in the amount of
P1,200.00, payable ninety (90) days after date, with interest at
1 per cent per month. On the same date, a surety bond was
executed by Catalina de Leon, as principal, and the World
Wide Insurance & Surety Co., Inc., as surety, whereby they
bound to pay said amount jointly and severally to Augusto
V. Ongsiako. As the obligation was not paid on its date of
maturity either by Catalina de Leon or by the surety
notwithstanding the demands made upon
them, Ongsiako brought this action on March 6, 1953 in the
Municipal Court of Manila to recover the same from both the
principal and the surety. Judgment having been rendered for
the ,plaintiff, both defendants appealed to the court of first
instance. In the latter court, Catalina de Leon failed to answer
and so she was declared in default. In due time the surety
company filed its answer setting up a counterclaim against
plaintiff and a cross-claim against its co-defendant.
After hearing, the court rendered judgment ordering Catalina
de Leon to pay plaintiff the sum of P1,200.00, with interest at
the rate of 1 per cent per month from February 10, 1952, and
the sum of P300.00 as attorneys' fees, and costs. Defendant
surety company was likewise ordered to pay to plaintiff the
same judgment but with the proviso that "execution should not
issue against defendant The World-Wide Insurance & Surety
Co. Inc., until a return is made by the Sheriff upon execution
against defendant Catalina de Leon showing that the judgment
against her remained unsatisfied in whole or in part; and
provided, further, that defendant Catalina de Leon shall
reimburse to defendant Company whatever amount the latter
might pay under this judgment together with such expenses
as may be necessary to effectuate said reimbursement." From
this judgment, the surety company appealed and the case is
now before us because, as certified by the Court of Appeals,
it only involves questions of law. Augusto V. Ongsiako, having
died in the meantime, was substituted by his special
administrators Emmanuel Ongsiako and Severino
Santiangco. The surety bond in question was executed in
November 10, 1951 and among the important provisions it
contains is the following: that the principal and the surety "are
held and firmly bound unto Dr. Augusto V. Ongsiakoin the sum
of One Thousand Two Hundred Pesos (P1,200.00), Philippine
Currency, for the payment of which well and truly to be made,
we bind ourselves . . . jointly and severally, firmly by these
presents (and referring to the Promissory Note) "whose terms
and conditions are made parts hereof.' In said bond there also
appears a special condition which recites: The Liability of the
World-Wide Insurance & Surety Co. Inc. under this bond will
expire on February 10, 1952." The note therein referred to, on
the other hand, provides that the obligation is payable ninety
days from date of issue, November 10, 1951, which means
that its date of maturity is February 10, 1952. The evidence
shows that neither the principal nor the surety paid the
obligation on said date of maturity and immediately thereafter
demands for payment were made upon them. Thus, it appears
that as early as February 12, 1952, or two days thereafter, the
creditor wrote to the surety company a letter notifying it of the
failure of its principal to pay the obligation and requesting that
it make good its guaranty under the bond (Exhibit B), which
demand was reiterated in subsequent letters (Exhibits C, D
and E). To these demands, the company merely set up the
defense that it only acted as a guarantor and as such its
liability cannot be exacted until after the property of the
principal shall have been exhausted (Exhibit G).
It therefore appeals that appellant has no justification whatever
to resist the claim of the plaintiff for in the judgment appealed
from it is precisely provided that execution of judgment should
not issue against it until after it is shown that the execution of
the judgment against the principal has been returned by the
sheriff unsatisfied, which was the only excuse given by said
appellant in not fulfilling its commitment under the bond. And
yet it appealed from said judgment just to put up the additional
defense that its liability under the bond has already expired
because of the condition that its liability shall expire on
February 10, 1952. Even if this were true, we consider
however this stipulation as unfair and unreasonable for it
practically nullifies the nature of the undertaking assumed by
appellant. It should be noted that the principal obligation is
payable ninety days from date of issue, which falls on
February 10, 1952. Only on this date can demand for payment
be made on the principal debtor. If the debtor should fail to pay
and resort is made to the surety for payment on the next day,
it would be unfair for the latter to allege that its liability has
already expired. And yet such is the stand taken by appellant.
As the terms of the bond should be given a reasonable
interpretation, it is logical to hold that the liability of the surety
attaches as soon as the principal debtor defaults, and notice
thereof is given the surety within reasonable time to enable it
to take steps to protect its interest. This is what was done by
appellee in the present case. After all, the surety has a remedy
under the law which is to foreclose the counterbond put up by
the principal debtor. This is in effect what was done by the
lower court.
This Court has taken note of the reprehensible attitude
adopted by the surety company in this case by resorting to
improper means in an effort to evade its clear responsibility
under the law. An instance of such attitude is the insertion in
the bond of a provision which in essence tends to nullify its
commitment. This is a subtle way of making money thru
trickery and deception. Such practice should be stopped if only
to protect honest dealers or people in financial stress because
of such improper conduct, this Court finds no justification for
the present appeal and considers it frivolous and unnecessary.
For this appellant should be made to pay treble costs.
Wherefore, the decision appealed from is affirmed, with treble
costs against appellant.
CITIZENS SURETY and INSURANCE COMPANY,
INC., petitioner, vs. COURT OF APPEALS and PASCUAL
M. PEREZ, respondents.
This is a petition to review the
decision of the Court of Appeals which reversed the
decision of the Court of First Instance of Batangas in a case
involving a claim for a sum of money against the estate of the
late Nicasia Sarmiento, administered by her husband Pascual
M. Perez.
On December 4, 1959, the petitioner issued two
(2) surety bonds CSIC Nos. 2631 and 2632 to guarantee
compliance by the principal Pascual M. Perez
Enterprises of its obligation under a
"Contract of Sale of Goods" entered into with the Singer
Sewing Machine Co. In consideration of the issuance of the
aforesaid bonds, Pascual M. Perez, in his personal capacity
and as attorney-in-fact of his wife, Nicasia Sarmiento and in
behalf of the Pascual M. Perez Enterprises executed on the
same date two (2) indemnity agreements wherein he obligated
himself and the Enterprises to indemnify the petitioner jointly
and severally, whatever payments advances and damage it
may suffer or pay as a result of the
issuance of the surety bonds.
In addition to the two indemnity agreements, Pascual M. Perez
Enterprises was also required to put up a collateral security to
further insure reimbursement to the petitioner of whatever
losses or liabilities it may be made to pay under
the surety bonds. Pascual M. Perez therefore executed a
deed of assignment on the same day, December 4,
1959, of his stock of lumber with a total value of P400,000.00.
On April 12, 1960, a second real estate mortgage was further
executed in favor of the petitioner to guarantee the
fulfillment of said obligation.
Pascual M. Perez Enterprises failed to comply with its
obligation under the contract of sale of goods with Singer
Sewing Machine Co., Ltd. Consequently, the petitioner was
compelled to pay, as it did pay, the fair value of the
two surety bonds in the total amount of P144,000.00. Except
for partial payments in the total sum of P55,600.00 and
notwithstanding several demands, Pascual M. Perez
Enterprises failed to reimburse the petitioner for the losses it
sustained under the said surety bonds.
The petitioner filed a claim for sum of money against the
estate of the late Nicasia Sarmiento which was being
administered by Pascual M. Perez.
In opposing the money claim, Pascual M. Perez asserts that
the surety bonds and the indemnity agreements had been
extinguished by the execution of the deed of assignment.
After the trial on the merits, the Court of First
Instance of Batangas rendered judgment on April 15, 1968,
the dispositive portion of which reads:
"WHEREFORE, considering that the estate of the late Nicasia
Sarmiento is jointly and severally liable to
the Citizens' Surety and Insurance Co., Inc., for the amount
the latter had paid the Singer Sewing Machine Company, Ltd.,
the court hereby orders the administrator Pascual M. Perez to
pay the claimant the sum of P144,000.00, with interest at the
rate of ten (10%) per cent per annum from the date this claim
was filed, until fully paid, minus the payments already made in
the amount of P55,600.00." (pp. 97-98, Record on Appeal)
Both parties appealed to the Court of Appeals. On August 31,
1978, the Court of Appeals rendered its decision with the
following dispositive portion:
"WHEREFORE, the decision rendered by the Court of First
Instance of Batangas on April 15, 1986 is hereby reversed and
set aside and another one entered dismissing the
claim of the Citizens' Surety and Insurance Co., Inc., against
the estate of the late Nicasia Sarmiento. No pronouncement
as to costs." (p. 87, Rollo)
The petitioner raises the following alleged errors of the
respondent court as the issues in this petition for review:
I administrators or assigns the herein ASSIGNOR'S stock
RESPONDENT COURT OF APPEALS ERRED IN
CONCLUDING THAT THE OBLIGATION OF PRIVATE
RESPONDENT PASCUAL M. PEREZ HAD BEEN
EXTINGUISHED BY VIRTUE OF THE EXECUTION OF THE
DEED OF ASSIGNMENT (EXHIBIT "1") AND/OR THE
RELEASE OF THE SECOND REAL ESTATE MORTGAGE
(EXHIBIT "2").
II
RESPONDENT COURT OF APPEALS ERRED IN
CONCLUDING THAT THERE WAS DATION IN PAYMENT
BY VIRTUE OF THE EXECUTION OF THE
DEED OFASSIGNMENT (EXHIBIT "1").
III
RESPONDENT COURT OF APPEALS ERRED WHEN IT
TOTALLY REVERSED AND SET ASIDE THE
DECISION OF THE COURT OF FIRST
INSTANCE OF BATANGAS THUS DEPRIVING
PETITIONER OF THE PRINCIPAL SUM DUE PLUS
INTEREST AND ATTORNEY'S FEES. (p. 4, Petitioner's
Brief).
WHEREFORE, the petition is hereby DISMISSED. For the
reasons abovestated, the claim of Citizens' Surety and
Insurance Co., Inc., against the estate of Nicasia Sarmiento is
DISMISSED.
The main issue in this petition is whether or not the
administrator's obligation under the surety bonds and
indemnity agreements had been extinguished by
reason of the execution of the deed of assignment.
It is the general rule that when the words of a contract are
plain and readily understandable, there is no room for
construction thereof (San Mauricio Milling Co. v. Ancheta,
105 SCRA 371). However, this is only a general rule and it
admits exceptions. Cdpr
Pascual M. Perez executed an instrument denominated as
"Deed of Assignment." Pertinent portions of the deed
read as follows.
"I, Pascual M. Perez, Filipino, of legal age, married, with
residence and postal address at 115 D. Silang, Batangas,
as the owner and operator of a business styled
'PASCUAL M. PEREZ ENTERPRISES,' with office at R-31
Madrigal Building, Escolta, Manila, hereinafter referred to
as ASSIGNOR, for and in consideration of the issuance in
my behalf and in favor of the SINGER SEWING MACHINE
COMPANY, LTD., of two Surety Bonds (C.S.I.C. Bond
Nos. 2631 and 2632 each in the amount of SEVENTY TWO
THOUSAND PESOS (P72,000.00), or with a total
sum of ONE HUNDRED FORTY-FOUR THOUSAND
PESOS (P144,000.00), Philippine Currency, by
the CITIZENS' SURETY AND INSURANCE CO., INC., a
corporation duly organized and existing under and by
virtue ofthe laws of the Republic of the Philippines, with
principal office at R-306 Samanillo Building, Escolta,
Manila, Philippines, and duly represented in the act by its
Vice-President and General Manager, ARISTEO L. LAT,
hereinafter referred to as ASSIGNEE, assign by these
presents, unto said ASSIGNEE, its heirs, successors,
(Insured) of low grade lumber, class 'No. 2 COMMON' kept
and deposited at Tableria Tan Tao at Batangas, Batangas,
with a total measurement of Two Million (2,000,000.00)
board feet and valued of P0.20 per board feet or with a
total value ofP400,000.00 which lumber is intended by the
ASSIGNOR for exportation under a Commodity Trade
Permit, the condition being that in the event that the
herein assignor exports said lumber and as soon as he
gets the necessary export shipping and related and
pertinent documents therefor, the ASSIGNOR will turn
said papers over to the herein ASSIGNEE, conserving
all of the latter's dominion, rights and interests in said
exportation.
"The ASSIGNEE hereby agrees and accepts this
assignment under the conditions abovementioned." (pp.
77-79, Record on Appeal)
On its face, the document speaks of an assignment where
there seems to be a complete conveyance of the
stocks of lumber to the petitioner, as assignee. However,
in the light of the circumstances obtaining at the
time of the execution of said deed of assignment, we can
not regard the transaction as an absolute conveyance. As
held in the case of Sy v. Court of Appeals, (131 SCRA 116,
124):
"It is a basic and fundamental rule in the
interpretation of contract that if the terms thereof are
clear and leave no doubt as to the intention of the
contracting parties, then the literal meaning of the
stipulations shall control but when the words appear
contrary to the evident intention of the parties, the latter
shall prevail over the former. (Labasan v. Lacuesta, 86
SCRA 16) In order to judge the intention of the parties,
their contemporaneous and subsequent acts shall be
principally considered. (Emphasis supplied)
The petitioner issued the two (2) surety bonds on
December 4, 1959 in behalf of the Pascual M. Perez
Enterprises to guaranty fulfillment of its obligation under
the "Contract of Sale of Goods" entered into with the
Singer Sewing Machine Co. In consideration of the
two surety bonds, two indemnity agreements were
executed by Pascual M. Perez followed by a
Deed of Assignment which was also executed on the
same date.
In the case of Lopez v. Court of Appeals (114 SCRA 673),
we stated that:
"The indemnity agreement and the stock assignment
must be considered together as related transactions
because in order to judge the intention of the contracting
parties, their contemporaneous and subsequent acts
shall be principally considered. (Article 1371, New Civil
Code). Thus, considering that the indemnity agreement
connotes a continuing obligation of Lopez towards
Philamgen while the stock assignment indicates a
complete discharge of the same obligation, the
existence of the indemnity agreement whereby Lopez had
to pay a premium of P1,000.00 for a period of one year
and agreed at all times to indemnify Philamgen of any and
all kinds of losses which the latter might sustain by
reason of it becoming a surety, is inconsistent with the
theory of an absolute sale for and in consideration of the
same undertaking of Philamgen. There would have been
no necessity for the execution of the indemnity
agreement if the stock assignment was really intended as
an absolute conveyance. Hence, there are strong and
cogent reasons to conclude that the parties intended said
stock assignment to complement the indemnity
agreement and thereby sufficiently guarantee the
indemnification of Philamgen should it be required to pay
Lopez' loan to Prudential Bank. (at pp. 682-683)
The respondent court stated that "by virtue of the
execution of the deed of assignment,
ownership of administrator-appellant's lumber materials
had been transferred to the claimant-appellant and this
amounted to dation in payment whereby the former is
considered to have alienated his property in favor ofthe
latter in satisfaction of a monetary debt (Article 1245). As
a consequence thereof, administrator-appellant's
obligation under the surety bonds is thereby
extinguished upon the execution of the
deed of assignment." This statement is not sustained by
the records. LLphil
The transaction could not be dation in payment. As
pointed out in the concurring and dissenting
opinion of Justice Edgardo L. Paras and the dissenting
opinion of Justice Mariano Serrano when the
deed of assignment was executed on December 4, 1959,
the obligation of the assignor to refund the assignee had
not yet arisen. In other words, there was no obligation yet
on the part of the petitioner, Citizens' Surety and
Insurance Co., to pay Singer Sewing Machine Co. There
was nothing to be extinguished on that date, hence, there
could not have been a dation in payment.
In the case of Lopez v. Court of Appeals (supra) we had
the occasion to explain:
"Considering the above jurisprudence, We find that the
debt or obligation at bar has not matured on June 2, 1959
when Lopez 'alienated' his 4,000 shares ofstock to
Philamgen. Lopez' obligation would arise only when he
would default in the payment of the principal obligation
(the loan) to the bank and Philamgen had to pay for it.
Such fact being adverse to the nature and
concept of dation in payment, the same could not have
been constituted when the stock assignment was
executed. Moreover, there is no express provision in the
terms of the stock assignment between Philamgen and
Lopez that the principal obligation (which is the loan) is
immediately extinguished by reason of such
assignment." (at p. 686)
The deed of assignment cannot be regarded as an
absolute conveyance whereby the obligation under
the surety bonds was automatically extinguished. The
subsequent acts of the private respondent bolster the fact
that the deed of assignment was intended merely as a
security for the issuance of the two bonds. Partial
payments amounting to P55,600.00 were made after the
execution of the deed of assignment to satisfy the
obligation under the two surety bonds. Since later
payments were made to pay the indebtedness, it follows
that no debt was extinguished upon the execution of the
deed of assignment. Moreover, a second real estate
mortgage was executed on April 12, 1960 and eventually
cancelled only on May 15, 1962. If indeed the
deed of assignment extinguished the obligation, there
was no reason for a second mortgage to still have to be
executed. We agree with the two dissenting opinions in
the Court of Appealsthat the only conceivable reason for
the execution of still another mortgage on April 12, 1960
was because the obligation under the indemnity bonds
still existed. It was not yet extinguished when the
deed of assignment was executed on December 4, 1959.
The deed of assignment was therefore intended merely as
another collateral security for the issuance of the
two surety bonds.
Recapitulating the facts of the case, the records show
that the petitioner surety company paid P144,000.00
to Singer on the basis of the two surety bonds it had
issued in behalf of Pascual Perez Enterprises. Perez in
turn was able to indemnify the petitioner for its payment
to Singer in the amount of P55,600.00 thus leaving a
balance of only P88,400.00.
The petitioner surety company was more than adequately
protected. Lumber worth P400,000.00 was assigned to it
as collateral. A second real estate mortgage was also
given by Perez although it was later cancelled obviously
because the P400,000.00 worth of lumber was more than
enough guaranty for the obligations assumed by the
petitioner. As pointed out by Justice Paras in his separate
opinion, the proper procedure was for Citizens' Insurance
andSurety Co., to collect the remaining P88,400.00 from
the sales of lumber and to return whatever remained to
Perez. We cannot order the return in this decisions
because the Estate of Mrs. Perez has not asked for any
return of excess lumber or its value. There appears to
have been other transactions, suretybonds, and
performance bonds between the petitioner and Perez
Enterprises but these are extraneous matters which, the
records show, have absolutely no bearing on the
resolution of the issues in this petition.
With respect to the claim for interests and attorney's fees,
we agree with the private respondent that the petitioner is
not entitled to either one. It had the means to recoup its
investment and losses many times over, yet it chose to
litigate and delay the final determination of how much
was really owing to it. As stated by Justice Paras in his
separate opinion: cdll
"Interest will not be given the Surety because it had all the
while (or at least, it may be presumed that such was the
case) the P400,000.00 worth of lumber, from which value
the 'refunding by assignor could have been deducted if it
had so informed the assignor of the plan.
"For the same reason as in No. (5), attorney's fees cannot
be charged, for despite the express stipulation on the
matter in the contract, there was actually no failure on the
part of the assignor to comply with the
obligation of refunding. The means of compliance was
right there with the Surety itself: surely it could have
earlier conferred with the assignor on how to effect the
'refunding.'" (p. 39, Rollo)
ANTONIO GARCIA, JR., petitioner, vs. COURT OF
APPEALS, LASAL DEVELOPMENT
CORPORATION, respondents.
On April 15, 1977, the Western Minolco Corporation (WMC)
obtained from the Philippine Investments Systems
Organization (PISO) two loans for P2,500,000.00 and
P1,000,000.00 for which it issued the corresponding
promissory notes payable on May 30, 1977. On the same
date, Antonio Garcia and Ernest Kahn executed a surety
agreement binding themselves jointly and severally for the
payment of the loan of P2,500,000.00 on due date.
Upon failure of WMC to pay after repeated demands, demand
was made on Garcia pursuant to the surety
agreement. Garcia also failed to pay. Hence, on April 5, 1983,
Lasal Development Corporation (to which the credit had been
assigned earlier by PISO) sued Garcia for recovery of the debt
in the Regional Trial Court of Makati.
On May 18, 1983, Garcia moved to dismiss on the grounds
that: (a) the complaint stated no cause of action; (b) the suit
would result in unjust enrichment of the plaintiff because he
had not received any consideration from PISO; (c) the surety
agreement violated the doctrine of the limited liability of
corporations; and (d) the principal obligation had been
novated.
After considering the arguments and evidence of the parties,
the trial court granted the motion and dismissed the complaint
on the ground that the surety agreement was invalid for
absence of consideration.
The plaintiff moved for reconsideration and when this was
denied elevated the matter to the Court of Appeals. In a
decision dated June 23, 1987, the respondent court reversed
Judge Jesus M. Elbinias and remanded the records of the
case for trial on the merits. Garcia then came to this Court in
this petition for review on certiorari, pleading the same
arguments raised in the trial court. LibLex
WHEREFORE, the petition is DENIED and the challenged
decision of the respondent court AFFIRMED, with costs
against the petitioner.
CIVIL LAW; SPECIAL CONTRACTS; SURETYSHIP;
NATURE AND PURPOSE THEREOF. The petitioner's
first ground is that, as found by the trial court, the surety
agreement was invalid because no consideration had
been paid to him by PISO for executing the contract and
that the amount of the entire loan had been received and
enjoyed by WMC. He cites the following articles of the
Civil Code in support of his contention that lack of
consideration was a personal defense available to him as
surety. The point is not well taken in view of the nature
and purpose of a surety agreement. Suretyship is a
contractual relation resulting from an agreement whereby
one person, the surety, engages to be answerable for the
debt, default or miscarriage of another, known as the
principal. The peculiar nature of a surety agreement is
that it is regarded as valid despite the absence of any
direct consideration received by the surety either from the
principal obligor or from the creditor. A contract of surety,
like any other contract, must generally be supported by a
sufficient consideration. However, the consideration
necessary to support a surety obligation need not pass
directly to the surety; a consideration moving to the
principal alone will suffice. It has been held that if the
delivery of the original contract is contemporaneous with
the delivery of the surety's obligation, each contract
becomes completed at the same time, and the
consideration which supports the principal contract
likewise supports the subsidiary one. (Faust v.
Rodelheim, 77 NJL 740, 73 A 491; Ballard v. Burton, 64 Vt
387, 24 A 769). And this is the kind of surety contract to
which the rule of strict construction applies as opposed
to a compensated surety contract undertaken by surety
corporations which are organized for the purpose of
conducting an indemnity business at established rates
and compensation unlike an ordinary surety agreement
where the surety binds his name through motives of
friendship and accommodation. (Pastoral v. Mutual
Security Insurance Corp., 14 SCRA 1011).
2. ID.; ID.; ID.; OBLIGATION AND LIABILITY OF A
SURETY. The surety's obligation is not an original and
direct one for the performance of his own act, but merely
accessory or collateral to the obligation contracted by the
principal. Nevertheless, although the contract of a surety
is in essence secondary only to a valid principal
obligation, his liability to the creditor or promisee of the
principal is said to be direct, primary and absolute; (Sykes
v. Everett, 167 NC 600), in other words, he is directly and
equally bound with the principal. The surety therefore
becomes liable for the debt or duty of another although
he possesses no direct or personal interest over the
obligations nor does he receive any benefit therefrom.
(Miner's Merchants Bank v. Gidley, 150 WVa 229, 144 SE
2d 711).
3. ID.; ID.; ID.; SURETY NOT AFFECTED BY THE CHANGE
IN THE RATE OF INTEREST, SUCH BEING MERELY A
COLLATERAL AGREEMENT BETWEEN THE CREDITOR
AND THE PRINCIPAL DEBTOR. As for the compounded
interest, we apply by analogy the case of Bank of the
Philippine Islands v. Gooch and Redfern, (45 Phil. 514)
which was affirmed in the later case of the Bank of the
Philippine Islands v. Albaladejo & Cia (53 Phil. 141). In the
said cases, the respective sureties claimed that since the
creditor changed the rate of interest in the principal
obligation without their knowledge or consent, they were
relieved from liability under their contract. It was held,
however, that the change in the rate of interest was merely
a collateral agreement between the creditor bank and the
principal debtor that did not affect the surety. When the
debtor promised to pay the extra rate of interest on
demand of the plaintiff, the liability he assumed was his
alone and was separate and apart from the original
contract. His agreement to pay the additional rate of
interest was an additional burden upon him and him only.
That obligation in no way affected the original contract of
the surety, whose liability remained unchanged. (Keene's
Admr. v. Miller, 103 Ky, 628; Parson on Bills and Notes,
571, Chitty on Bills, 212; Malteson v. Ellsworth, 33 Wis
488).
VISAYAN SURETY & INSURANCE
CORPORATION, petitioner, vs. THE HONORABLE COURT
OF APPEALS, SPOUSES JUN BARTOLOME + and SUSAN
BARTOLOME and DOMINADOR V. IBAJAN, + respondents.
Spouses Danilo Ibajan and Mila Ambe Ibajan filed with the
Regional Trial Court, Bian, Laguna, a complaint against
spouses Jun and Susan Bartolome, for replevin to recover
from them the possession of an Isuzu jeepney, with damages.
Plaintiffs Ibajan alleged that they were the owners of an Isuzu
jeepney which was forcibly and unlawfully taken by defendants
Jun and Susan Bartolome on December 8, 1992 while parked
at their residence. The Ibajans also filed a replevin bond
through petitioner Visayan Surety & Insurance Corporation.
The contract of surety provided that Sps. Danilo Ibajan and
Mila Ibajan and the Visayan Surety & Insurance Corporation,
of Cebu, jointly and severally bind themselves in the sum of
Three Hundred Thousand Pesos (P300,000.00) for the return
of the property to the defendant, if the return thereof be
adjudged, and for the payment to the defendant of such sum
as he/she may recover from the plaintiff in the action.
Dominador V. Ibajan, father of plaintiff Danilo Ibajan, filed with
the trial court a motion for leave of court to intervene, stating
that he has a right superior to the plaintiffs over the ownership
and possession of the subject vehicle. The trial court granted
the motion to intervene. Intervenor Dominador Ibajan also filed
with the trial court a motion/application for judgment against
plaintiffs' bond. The trial court rendered judgment in favor of
Dominador Ibajan and against Mila Ibajan and the Visayan
Surety ordering them to pay the former jointly and severally
the value of the subject jeepney in the amount of P150,000.00
and such other damages as may be proved by Dominador
Ibajan plus costs. Visayan Surety and Mila Ibajan filed with the
trial court their respective motions for reconsideration. The trial
court denied both motions. On appeal, the Court of Appeals
promulgated its decision affirming the judgment of the trial
court. Petitioner filed a motion for reconsideration. The Court
of Appeals denied the motion for reconsideration for lack of
merit. Hence, the present petition. The issue in this case is
whether the surety is liable to an intervenor on a replevin bond
posted by petitioner in favor of respondents. Respondent
Dominador Ibajan asserted that as intervenor, he assumed the
personality of the original defendants in relation to the
plaintiff's bond for the issuance of a writ of replevin.
The Supreme Court reversed the decision of the Court of
Appeals. The Court ruled that contracts can bind only the
parties who had entered into it and cannot favor or prejudice a
third person. A contract of surety is an agreement where a
party called the surety guarantees the performance by another
party called the principal or obligor of an obligation or
undertaking in favor of a third person called the obligee. The
obligation of a surety cannot be extended by implication
beyond its specified limits. When a surety executes a bond, it
does not guarantee that the plaintiff's cause of action is
meritorious, and that it will be responsible for all the costs that
may be adjudicated against its principal in case the action fails.
The extent of a surety's liability is determined only by the
clause of the contract of suretyship. Since the obligation of the
surety cannot be extended by implication, it follows that the
surety cannot be held liable to the intervenor when the
relationship and obligation of the surety is limited to the
defeCOMMERCIAL LAW; INSURANCE; CONTRACT OF
SURETYSHIP; A SURETY CANNOT BE HELD LIABLE TO
AN INTERVENOR WHEN THE RELATIONSHIP AND
OBLIGATION OF THE SURETY IS LIMITED TO THE
DEFENDANTS SPECIFIED IN THE CONTRACT OF
SURETY; CASE AT BAR. It is a basic principle in law
that contracts can bind only the parties who had entered
into it; it cannot favor or prejudice a third person.
Contracts take effect between the parties, their assigns,
and heirs, except in cases where the rights and
obligations arising from the contract are not
transmissible by their nature, or by stipulation or by
provision of law. A contract of surety is an agreement
where a party called the surety guarantees the
performance by another party called the principal or
obligor of an obligation or undertaking in favor of a third
person called the obligee. Specifically, suretyship is a
contractual relation resulting from an agreement whereby
one person, the surety, engages to be answerable for the
debt, default or miscarriage of another, known as the
principal. The obligation of a surety cannot be extended
by implication beyond its specified limits. "When a surety
executes a bond, it does not guarantee that the plaintiff's
cause of action is meritorious, and that it will be
responsible for all the costs that may be adjudicated
against its principal in case the action fails. The extent of
a surety's liability is determined only by the clause of the
contract of suretyship." A contract of surety is not
presumed; it cannot extend to more than what is
stipulated. Since the obligation of the surety cannot be
extended by implication, it follows that the surety cannot
be held liable to the intervenor when the relationship and
obligation of the surety is limited to the defendants
specified in the contract of surety.
PHILIPPINE NATIONAL BANK, petitioner, vs. THE
HONORABLE COURT OF APPEALS (Special Fourth
Division), LUZON SURETY CO., INC., and ESTANISLAO E.
DEPUSOY, trading under the style of E.E. DEPUSOY
CONSTRUCTION, respondents.
As carefully summarized by the Court of Appeals, the relevant
facts in this case are as follows:
"On August 6, 1955, Estanislao Depusoy, doing business
under the name of E. E. Depusoy Construction, and the
Republic of the Philippines, represented by the Director of
Public Works, entered into a building contract, Exhibit 2-
Luzon, for the construction of the GSIS building at Arroceros
Street, Manila, Depusoy to furnish all materials, labor, plans,
and supplies needed in the construction. Depusoy applied for
credit accommodation with the plaintiff. This was approved by
the Board of Directors in various resolutions subject to the
conditions that he would assign all payments to be received
from the Bureau of Public Works of the GSIS to the bank,
furnish a surety bond, and the surety to deposit P10,000.00 to
the plaintiff. The total accommodation granted to Depusoy was
P100,000.00. This was later extended by another P10,000.00
and P25,000.00, but in no case should the loan exceed
P100,000.00, Exhibits K-1, K-2, K-3 and K-4. In compliance
with these conditions, Depusoy executed a Deed of
Assignment of all money to be received by him from the GSIS
as follows:
'That I, Estanislao Depusoy, of legal age, Filipino, married to
Lourdes G. Gonzales, doing business under the style of E. E.
San Beda Subdivision, Manila, for and in consideration of
certain loans, overdrafts or other credit accommodations to be
granted by the PHILIPPINE NATIONAL BANK Manila, have
assigned, transferred and conveyed and by these presents do
hereby assign, transfer and convey unto the said PHILIPPINE
NATIONAL BANK its successors and assigns all payment to
be received from my contract with the Bureau of Public Works,
Republic of the Philippines date (sic) August 6, 1955.
By virtue of this assignment it is hereby understood that the
assignor hereby acknowledges the monies, sums or payments
due from the Bureau of Public Works, Republic of the
Philippines, and which are hereby assigned to the
PHILIPPINE NATIONAL BANK, as monies, sums and
payments belonging to the PHILIPPINE NATIONAL BANK,
and that any act or misappropriation or conversion which the
assignor or the latter's representatives may commit with
respect to the said sums, monies and payments will subject
the assignor or the latter's representatives to the criminal
liabilities imposed by the Penal Code and such other damages
which the Civil Code provides.
It is further understood that the PHILIPPINE NATIONAL BANK
can collect and receive any and all sums, monies and
payments above-mentioned from the Bureau of Public Works,
Republic of the Philippines, and for that matter said bank is
hereby authorized to indorse for deposit or for encashment
any and all checks, treasury warrants, money orders, drafts
and other kinds of negotiable instruments that might be issued
in connection with the payment herein assigned.
This assignment shall be irrevocable subject to the terms and
conditions of the promissory notes, overdrafts and any other
kind of documents which the PHILIPPINE NATIONAL BANK
have (sic) required or may require the assignor to execute to
evidence the above-mentioned obligation.'
Luzon thereafter executed two surety bonds, one for the sum
of P40,000.00 Exhibit D, and the other for P60,000.00, Exhibit
E. Exhibits D and E, except for the amount, are expressed in
the same words as follows:
'That we, E.E. DEPUSOY CONSTRUCTION CO., of 32 2nd
Street, San Beda Subdv., Manila, 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 and firmly bound unto the PHILIPPINE
NATIONAL BANK of Manila in the sum of SIXTY THOUSAND
PESOS ONLY (P60,000.00), 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 conditions of the obligation are as follows:
WHEREAS, the above bounden principal, on the . . . day of
September, 1956 in consideration of a certain loan of
(P60,000.00) executed a Deed of Assignment in favor of the
Philippine National Bank on all payments to be received by
him from the Bureau of Public Works in connection with a
contract dated August 6, 1956.
WHEREAS, said PHILIPPINE NATIONAL BANK requires said
principal to give a good and sufficient bond in the above stated
sum to secure the full and faithful performance on his part of
said Agreement.
NOW, THEREFORE, if the principal shall well and truly
perform and fulfill all the undertakings, covenants, terms,
conditions and agreement stipulated in said Agreement then,
this obligation shall be null and void; otherwise, it shall remain
in full force and effect.
The liability of LUZON SURETY COMPANY, INC., under this
bond will expire January 31, 1957. Furthermore, it is hereby
agreed and understood that the LUZON SURETY COMPANY,
INC. will not be liable for any claim not discovered and
presented to the company within THREE (3) months from the
expiration of this bond and that the obligee hereby waives his
right to file any court action against the surety after the
termination of the period of the three months above
mentioned.'
With the consent of Luzon, the bond was extended for another
6 months from January 31, 1957.
Under the credit accommodation granted by the plaintiff bank,
Depusoy obtained several amounts from the bank. On
January 14, 1957, Depusoy received P50,000.00 from the
bank which he promised to pay in installments on the dates
therein indicated, Exhibit A. On January 17, 1957, he received
another P50,000.00 under the same conditions as the
promissory note Exhibit A, except with respect to the time of
payment. Under this arrangement all payments made by the
GSIS were payable to the Philippine National Bank. The
treasury warrants or checks, however, were not sent directly
to the plaintiff. They were received by Depusoy, who in turn
delivered them to the plaintiff bank. The plaintiff then applied
the money thus received, first, to the payment of the amount
due on the promissory notes at the time of the receipt of the
treasury warrants or checks, and the balance was credited to
the current account of Depusoy with the plaintiff bank. A total
of P1,309,461.89 were (sic) paid by the GSIS to the plaintiff
bank for the account of Estanislao Depusoy, Exhibit 1 -Luzon.
Of this amount, P246,408.91 were (sic) paid according to
Exhibit 1 for the importation of construction materials, and
P1,063,408.91 were (sic) received by the Loans and
Discounts Department of the plaintiff bank. This amount was
disposed off by the plaintiffs Loans & Discounts Department
as follows:
a) P795,976.64 were (sic) credited to the current account of
Depusoy with the plaintiff;
b) P20,000.00 were (sic) credited to the plaintiff's Foreign
Department;
c) P2,552.94 were (sic) credited to the payment of interest;
and
d) P210,000.00 were (sic) applied to the principal of
indebtedness. (Exh. N-1).
Depusoy defaulted in his building contract with the Bureau of
Public Works, and sometime in September, 1957, the Bureau
of Public Works rescinded its contract with Depusoy. No
further amounts were thereafter paid by the GSIS to the
plaintiff bank. The amount of the loan of Depusoy which
remains unpaid, including interest, is over P100,000.00.
Demands for payment were made upon Depusoy and Luzon,
and as no payment was made.
WHEREFORE, with the above modification, the Decision of
the Court of Appeals of 12 December 1970 in C.A.-G.R. No.
36615-R is AFFIRMED, with costs against petitioner.
We are in full accord with the conclusion of the trial court
and the Court of Appeals that the bonds executed by
private respondent LSCI were to guarantee the faithful
performance of Depusoy of his obligation under the Deed
of Assignment and not to guarantee the payment of the
loans or the debt of Depusoy to petitioner to the extent of
P100,000.00. The language of the bonds is clear, explicit
and unequivocal. It leaves no room for interpretation.
Article 1370 of the Civil Code provides. LibLex
"If the terms of a contract are clear and leave no doubt
upon the intention of the contracting parties, the literal
meaning of its stipulations shall control."
Besides, even if there had been any doubt on the terms
and conditions of the surety agreement, the doubt should
be resolved in favor of the surety. As concretely put in
Article 2055 of the Civil Code, "A guaranty is not
presumed, it must be expressed and cannot extend to
more than what is stipulated therein."
In the recent case of Umali, et al. vs. Court of Appeals, et
al., 21 We reiterated the unrippled rule that the liability of
the surety is measured by the terms of the contract, and,
while he is liable to the full extent thereof, such liability is
strictly limited to that assumed by its terms. 22
In La Insular vs. Machuca Go Tanco, et al., supra., this
Court held:
"It is undoubtedly true that the law looks upon the
contract of suretyship with a jealous eye, and the rule is
settled that the obligations of the surety cannot be
extended by implication beyond its specified limits.
Article 1827 of the Civil Code so discloses (Uy Aloc vs.
Cho Jan Ling, 27 Phil. Rep., 427); and with this doctrine
the common law is accordant. As was said by Justice
Story in Miller vs. Stewart (9 Wheat. 680; 6 L. ed., 189):
'Nothing can be clearer, both upon principles and
authority, than the doctrine that the liability of a surety is
not to be extended, by implication, beyond the terms of
his contract. To the extent and in the manner, and under
the circumstances pointed out in his obligation, he is
bound, and no farther."
MARIANO LIM, petitioner, vs. SECURITY BANK
CORPORATION, * respondent.
This deals with the Petition for Review on Certiorari under
Rule 45 of the Rules of Court praying that the Decision 1 of
the Court of Appeals (CA), promulgated on July 30, 2008, and
the Resolution 2 dated June 1, 2009, denying petitioner's
motion for reconsideration thereof, be reversed and set aside.
Petitioner executed a Continuing Suretyship in favor of
respondent to secure "any and all types of credit
accommodation that may be granted by the bank hereinto and
hereinafter" in favor of Raul Arroyo for the amount of
P2,000,000.00 which is covered by a Credit
Agreement/Promissory Note. 3 Said promissory note stated
that the interest on the loan shall be 19% per annum,
compounded monthly, for the first 30 days from the date
thereof, and if the note is not fully paid when due, an additional
penalty of 2% per month of the total outstanding principal and
interest due and unpaid, shall be imposed.
In turn, the Continuing Suretyship 4 executed by petitioner
stipulated that:
3. Liability of the Surety. The liability of the Surety is solidary
and not contingent upon the pursuit of the Bank of whatever
remedies it may have against the Debtor or the
collaterals/liens it may possess. If any of the Guaranteed
Obligations is not paid or performed on due date (at stated
maturity or by acceleration), the Surety shall, without
need for any notice, demand or any other act or deed,
immediately become liable therefor and the Surety shall
pay and perform the same. 5
Guaranteed Obligations are defined in the same document as
follows:
a) "Guaranteed Obligations" the obligations of the Debtor
arising from all credit accommodations extended by the Bank
to the Debtor, including increases, renewals, roll-overs,
extensions, restructurings, amendments or novations thereof,
as well as (i) all obligations of the Debtor presently or
hereafter owing to the Bank, as appears in the accounts,
books and records of the Bank, whether direct or indirect,
and (ii) any and all expenses which the Bank may incur in
enforcing any of its rights, powers and remedies under
the Credit Instruments as defined hereinbelow. 6
The debtor, Raul Arroyo, defaulted on his loan obligation.
Thereafter, petitioner received a Notice of Final Demand dated
August 2, 2001, informing him that he was liable to pay the
loan obtained by Raul and Edwina Arroyo, including the
interests and penalty fees amounting to P7,703,185.54, and
demanding payment thereof. For failure of petitioner to comply
with said demand, respondent filed a complaint for collection
of sum of money against him and the Arroyo spouses. Since
the Arroyo spouses can no longer be located, summons was
not served on them, hence, only petitioner actively participated
in the case.
After trial, the Regional Trial Court of Davao (RTC) rendered
judgment against petitioner. 7 The dispositive portion of the
RTC Decision reads as follows:
Wherefore, judgment is hereby rendered ordering defendant
Lim to pay the following sums.
1. The principal sum of two million pesos plus nineteen
percent interest of the outstanding principal interest due and
unpaid to be computed from January 28, 1997 until fully paid,
plus two percent interest per month as penalty to be computed
from February 28, 1997 until fully paid.
2. Four hundred thousand pesos as attorney's fees.
3. Thirty thousand pesos as litigation expenses.
SO ORDERED. 8
Petitioner appealed to the CA, but the appellate court, in its
Decision dated July 30, 2008, affirmed the RTC judgment with
the modification that interest be computed from August 1,
1997; the penalty should start only from August 28, 1997; the
award of attorney's fees is set at 10% of the total amount due;
and the award for litigation expenses increased to
P92,321.10. 9 Petitioner's motion for reconsideration of the
CA Decision was denied per Resolution dated June 1, 2009.
Petitioner then elevated the matter to this Court via a petition
for review on certiorari, where the main issue is whether
petitioner may validly be held liable for the principal debtor's
loan obtained six months after the execution of the Continuing
Suretyship.
WHEREFORE, the petition is PARTIALLY GRANTED. The
Decision of the Court of Appeals, dated July 30, 2008, in CA-
G.R. CV No. 00462, is AFFIRMED with MODIFICATION in
that the award of attorney's fees is reduced to ten percent
(10%) of the principal debt only.
The main issue deserves scant consideration, but the
matter of the award of attorney's fees deserves
reexamination.
The nature of a suretyship is elucidated in Philippine
Charter Insurance Corporation v. Petroleum Distributors
& Service Corporation 11 in this wise:
A contract of suretyship is an agreement whereby a party,
called the surety, guarantees the performance by another
party, called the principal or obligor, of an obligation or
undertaking in favor of another party, called the obligee.
Although the contract of a surety is secondary only to a
valid principal obligation, the surety becomes liable for
the debt or duty of another although it possesses no
direct or personal interest over the obligations nor does it
receive any benefit therefrom. This was explained in the
case of Stronghold Insurance Company, Inc. v. Republic-
Asahi Glass Corporation, where it was written:
The surety's obligation is not an original and direct one
for the performance of his own act, but merely accessory
or collateral to the obligation contracted by the principal.
Nevertheless, although the contract of a surety is in
essence secondary only to a valid principal obligation, his
liability to the creditor or promisee of the principal is said
to be direct, primary and absolute; in other words, he is
directly and equally bound with the principal.
xxx xxx xxx
Thus, suretyship arises upon the solidary binding of a
person deemed the surety with the principal debtor for the
purpose of fulfilling an obligation. A surety is considered
in law as being the same party as the debtor in relation to
whatever is adjudged touching the obligation of the latter,
and their liabilities are interwoven as to be inseparable. . .
. . 12
In this case, what petitioner executed was a Continuing
Suretyship, which the Court described in Saludo, Jr. v.
Security Bank Corporation 13 as follows:
The essence of a continuing surety has been highlighted
in the case of Totanes v. China Banking Corporation in
this wise:
Comprehensive or continuing surety agreements are, in
fact, quite commonplace in present day financial and
commercial practice. A bank or financing company which
anticipates entering into a series of credit transactions
with a particular company, normally requires the
projected principal debtor to execute a continuing surety
agreement along with its sureties. By executing such an
agreement, the principal places itself in a position to enter
into the projected series of transactions with its creditor;
with such suretyship agreement, there would be no need
to execute a separate surety contract or bond for each
financing or credit accommodation extended to the
principal debtor. 14
The terms of the Continuing Suretyship executed by
petitioner, quoted earlier, are very clear. It states that
petitioner, as surety, shall, without need for any notice,
demand or any other act or deed, immediately become
liable and shall pay "all credit accommodations extended
by the Bank to the Debtor, including increases, renewals,
roll-overs, extensions, restructurings, amendments or
novations thereof, as well as (i) all obligations of the
Debtor presently or hereafter owing to the Bank, as
appears in the accounts, books and records of the Bank,
whether direct or indirect, and (ii) any and all expenses
which the Bank may incur in enforcing any of its rights,
powers and remedies under the Credit Instruments as
defined hereinbelow." 15 Such stipulations are valid and
legal and constitute the law between the parties, as Article
2053 of the Civil Code provides that "[a] guaranty may
also be given as security for future debts, the amount of
which is not yet known; . . . ." Thus, petitioner is
unequivocally bound by the terms of the Continuing
Suretyship. There can be no cavil then that petitioner is
liable for the principal of the loan, together with the
interest and penalties due thereon, even if said loan was
obtained by the principal debtor even after the date of
execution of the Continuing Suretyship.
TOWERS ASSURANCE CORPORATION, petitioner, vs. OR
ORAMA SUPERMART, ITS OWNER-PROPRIETOR, SEE
HONG and JUDGE BENJAMIN K. GOROSPE, Presiding
Judge, Court of First Instance of Misamis Oriental, Branch
I, respondents.
This case is about the liability of a surety in a counterbond for
the lifting of a writ of preliminary attachment.
On February 17, 1976 See Hong, the proprietor of Ororama
Supermart in Cagayan de Oro City, sued the spouses Ernesto
Ong and Conching Ong in the Court of First Instance of
Misamis Oriental for the collection of the sum of P58,400 plus
litigation expenses and attorney's fees (Civil Case No. 4930).
See Hong asked for a writ of preliminary attachment. On
March 5, 1976, the lower court issued an order of attachment.
The deputy sheriff attached the properties of the Ong spouses
in Valencia, Bukidnon and in Cagayan de Oro City.
To lift the attachment, the Ong spouses filed on March 11,
1976 a counterbond in the amount of P58,400
with Towers Assurance Corporation as surety. In that
undertaking, the Ong spouses
and Towers Assurance Corporation bound themselves to pay
solidarily to See Hong the sum of P58,400.
On March 24, 1976 the Ong spouses filed an answer with a
counterclaim. For non-appearance at the pre-trial, the Ong
spouses were declared in default.
On October 25, 1976, the lower court rendered a decision,
ordering not only the Ong spouses but also their
surety, Towers Assurance Corporation, to pay solidarily to
See Hong the sum of P58,400. The court also ordered the Ong
spouses to pay P10,000 as litigation expenses and attorney's
fees. prLL
Ernesto Ong manifested that he did not want to appeal. On
March 8, 1977, Ororama Supermart filed a motion for
execution. The lower court granted that motion. The writ of
execution was issued on March 14 against the judgment
debtors and their surety. On March 29,
1977, Towers Assurance Corporation filed the instant petition
for certiorari where it assails the decision and writ of execution.
We hold that the lower court acted with grave abuse of
discretion in issuing a writ of execution against the surety
without first giving it an opportunity to be heard as required in
Rule 57 of the Rules of Court which provides:
"SEC. 17. When execution returned unsatisfied, recovers had
upon bond. If the execution be returned unsatisfied in whole
or in part, the surety or sureties on any counterbond given
pursuant to the provisions of this rule to secure the payment
of the judgment shall become charged on such counterbond,
and bound to pay to the judgment creditor upon demand, the
amount due under the judgment, which amount may be
recovered from such surety or sureties after notice and
summary hearing in the action."
Under section 17, in order that the judgment creditor might
recover from the surety on the counterbond, it is necessary (1)
that execution be first issued against the principal debtor and
that such execution was returned unsatisfied in whole or in
part; (2) that the creditor made a demand upon the surety for
the satisfaction of the judgment, and (3) that the surety be
given notice and a summary hearing in the same action as to
his liability for the judgment under his counterbond.
The first requisite mentioned above is not applicable to this
case because Towers Assurance Corporation assumed a
solidary liability for the satisfaction of the judgment. A surety is
not entitled to the exhaustion of the properties of the principal
debtor (Art. 2959, Civil Code; Luzon Steel Corporation vs. Sia,
L-26449, May 15, 1969, 28 SCRA 58, 63).
But certainly, the surety is entitled to be, heard before an
execution can be issued against him since he is not a party in
the case involving his principal. Notice and hearing constitute
the essence of procedural due process. (Martinez vs.
Villacete, 116 Phil. 326; Alliance Insurance & Surety Co., Inc.
vs. Hon. Piccio, 105 Phil. 1192, 1200; Luzon Surety Co., Inc.
vs. Beson, L-26865-66, January 30, 1970, 31 SCRA
313) cdrep
WHEREFORE, the order and writ of execution, insofar as they
concern Towers Assurance Corporation, are set aside. The
lower court is directed to conduct a summary hearing on the
surety's liability on its counterbond. No costs.
FINMAN GENERAL ASSURANCE
CORPORATION, petitioner, vs. ABDULGANI SALIK,
, respondents.
LABOR LAW; LABOR CODE; RECRUITMENT; SECTION 4
RULE V BOOK I OF THE IMPLEMENTING RULES;
LIABILITY OF THE SURETY THEREUNDER IS SOLIDARY
WITH ITS PRINCIPAL; CASE AT BAR. It remains
uncontroverted that herein petitioner and Pan Pacific entered
into a suretyship agreement, with the former agreeing that the
bond is conditioned upon the true and faithful performance and
observance of the bonded principal (Pan Pacific) of its duties
and obligations. It was also understood that under the
suretyship agreement, herein petitioner undertook itself to be
jointly and severally liable for all claims arising from
recruitment violation of Pan Pacific (Ibid., p. 23), in keeping
with Section 4, Rule V, Book I of the Implementing Rules of
the Labor Code. Accordingly, the nature of Finman's obligation
under the suretyship agreement makes it privy to the
proceedings against its principal (Pan Pacific). As such
Finman is bound, in the absence of collusion, by a judgment
against its principal even though it was not a party to the
proceedings (Leyson v. Rizal Surety and Insurance Co., 16
SCRA 551 (1966). Furthermore, in Government of the
Philippines v. Tizon (20 SCRA 1182 [1967]), this Court ruled
that where the surety bound itself solidarily with the principal
obligor, the former is so dependent on the principal debtor
"that the surety is considered in law as being the same party
as the debtor in relation to whatever is adjudged touching the
obligation of the latter." Applying the foregoing principles to the
case at bar, it can be very well said that even if herein Finman
was not impleaded in the instant case, still it (petitioner) can
be held jointly and severally liable for all claims arising from
recruitment violation of Pan Pacific. Moreover, as correctly
stated by the Solicitor General, private respondents have a
legal claim against Pan Pacific and its insurer for the
placement and processing fees they paid, so much so that in
order to provide a complete relief to private respondents,
petitioner had to be impleaded in the case (Rollo, p. 87).
This is a petition for certiorari seeking to annul 1 the Order
dated March 28, 1988 of the Honorable Secretary of Labor and
Employment in POEA, LRO/RRD Case No. 87-09-1022-DP
entitled Abdulgani Salik, et al. v. Pan Pacific Overseas and
Recruiting Services and Finman General Assurance
Corporation, which directed herein petitioner to pay jointly and
severally with Pan Pacific the claims of herein private
respondents amounting to P25,000.00 and 2) the Order dated
June 7, 1988, which denied petitioner's motion for
reconsideration (Rollo, p. 2).
The facts of the case are as follows:
Abdulgani Salik et al., private respondents, allegedly applied
with Pan Pacific Overseas Recruiting Services, Inc.
(hereinafter referred to as Pan Pacific) on April 22, 1987 and
were assured employment abroad by a certain Mrs. Normita
Egil. In consideration thereof, they allegedly paid fees totalling
P30,000.00. But despite numerous assurances of
employment abroad given by Celia Arandia and Mrs. Egil, they
were not employed (Ibid., p. 15).
Accordingly, they filed a joint complaint with the Philippine
Overseas Employment Administration (herein referred to as
POEA) against Pan Pacific for Violation of Articles 32 and
34(a) of the Labor Code, as amended, with claims for refund
of a total amount of P30,000.00 (Ibid.).
The POEA motu proprio impleaded and summoned herein
petitioner surety Finman General Assurance Corporation
(hereinafter referred to as Finman), in the latter's capacity as
Pan Pacific's bonding company.
Summons were served upon both Pan Pacific and Finman, but
they failed to answer.
On October 9, 1987, a hearing was called, but only the private
respondents appeared. Despite being deemed in default for
failing to answer, both Finman and Pan Pacific were still
notified of the scheduled hearing. Again they failed to appear.
Thus, ex-parte proceedings ensued.
During the hearing, herein private respondents reiterated the
allegations in their complaint that they first paid P20,000.00
thru Hadji Usop Kabagani for which a receipt was issued
signed by Engineer Arandia and countersigned by Mrs. Egil
and a certain Imelda who are allegedly employed by Pan
Pacific; that they paid another P10,000.00 to Engr. Arandia
who did not issue any receipt therefor; that the total payment
of P30,000.00 allegedly represents payments for herein
private respondents in the amount of P5,000.00 each, and
Abdulnasser Ali, who did not file any complaint against Pan
Pacific (Ibid., pp. 15-16). llcd
Herein private respondents presented as their witness, Hadji
Usop Kabagani who they identified as the one who actually
financed their application and who corroborated their
testimonies on all material points including the non-issuance
of a receipt for P10,000.00 by Engr. Arandia.
Herein petitioner, Finman, in an answer which was not timely
filed, alleged, among others, that herein private respondents
do not have a valid cause of action against it; that Finman is
not privy to any transaction undertaken by Pan Pacific with
herein private respondents; that herein private respondents
claims are barred by the statute of frauds and by the fact that
they executed a waiver; that the receipts presented by herein
private respondents are mere scraps of paper; that it is not
liable for the acts of Mrs. Egil; that Finman has a cash bond of
P75,000.00 only which is less than the required amount of
P100,000.00; and that herein private respondents should
proceed directly against the cash bond of Pan Pacific or
against Mrs. Egil (Ibid., pp. 16-17).
On March 18, 1988, the Honorable Franklin M. Drilon, then the
Secretary of Labor and Employment, upon the
recommendation of the POEA hearing officer, issued an
Order, the dispositive portion of which reads:
"WHEREFORE, premises considered, both respondents are
hereby directed to pay jointly and severally the claims of
complainants, as follows:
1. Abdulgani Salik P5,000.00
2. Balabagan Ampilan 5,000.00
3. Ali Kuba 5,000.00
4. Gandhi Dua 5,000.00
5. Daud Malanao 5,000.00
Based on the records of this Administration, respondent
agency is presently serving a total period of suspension of
seventeen (17) months imposed in three (3) separate orders
issued on June 2, 1987, August 17, 1987 and September 23,
1987. Under the new schedule of penalties published on
January 21, 1987 in the Philippine Inquirer, the penalty of
cancellation shall be imposed when the offender has been
previously penalized with suspension the total period of which
is 12 months or more. Moreover, the penalty impossible in the
case at bar is two (2) months suspension for each count of
violation or a total period of suspension of ten (10) months as
the acts were committed in April 1987. Thus, whether under
the old schedule of penalties which required a total period of
suspension of twenty-four (24) months for cancellation to be
imposed or under the new schedule which provides for a
twelve (12) month total suspension period, the penalty of
cancellation may be properly imposed upon the herein
respondent agency. prLL
In view thereof, the license of Pan Pacific Overseas Recruiting
Services is hereby cancelled, effective immediately.
SO ORDERED. (Ibid., pp. 20-21).
A motion for reconsideration having been denied (Ibid., p. 22),
herein petitioner instituted the instant petition for certiorari,
raising the following assigned errors:
I from an accredited bonding company to answer for valid and
THE HONORABLE ADMINISTRATOR AND THE
HONORABLE SECRETARY OF LABOR ACTED WITH
GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK
OF JURISDICTION IN MOTU PROPRIO IMPLEADING
FINMAN AS CO-RESPONDENT OF PAN PACIFIC IN POEA
LRO/RRD CASE NO. 87-09-1022 DP WHICH WAS FILED BY
ABDULGANI SALIK, ET AL.;
II
THE HONORABLE SECRETARY OF LABOR ACTED
WITHOUT OR IN EXCESS OF JURISDICTION AND WITH
GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK
OF JURISDICTION IN DIRECTING FINMAN TO PAY
JOINTLY AND SEVERALLY WITH PAN PACIFIC THE
CLAIMS OF PRIVATE RESPONDENTS ON THE BASIS OF
THE SURETYSHIP AGREEMENT BETWEEN FINMAN AND
PAN PACIFIC AND THE PHILIPPINE OVERSEAS
EMPLOYMENT ADMINISTRATION (POEA FOR SHORT);
AND
III
THE FINDINGS OF FACT MADE BY THE POEA AND UPON
WHICH THE HONORABLE SECRETARY OF LABOR BASED
ITS QUESTIONED ORDERS ARE NOT SUPPORTED BY
SUBSTANTIAL EVIDENCE AND ARE CONTRARY TO LAW.
(Ibid., p. 101)
As required by this Court, herein public respondents filed their
memorandum on July 28, 1989 (Ibid., p. 84); while that of
petitioner and private respondents were filed on September
11, 1989 (Ibid., p. 89) and March 16, 1990 (Ibid., p. 120),
respectively. cdrep
PREMISES CONSIDERED, the questioned Orders of
respondent Secretary of Labor are hereby AFFIRMED in toto.
The petition is devoid of merit.
In its first and second assigned errors, petitioner maintains that
POEA has no jurisdiction to directly enforce the suretyship
undertaking of FINMAN (herein petitioner) under the surety
bond (Ibid., p. 104).
In the case at bar, it remains uncontroverted that herein
petitioner and Pan Pacific entered into a suretyship
agreement, with the former agreeing that the bond is
conditioned upon the true and faithful performance and
observance of the bonded principal (Pan Pacific) of its duties
and obligations. It was also understood that under the
suretyship agreement, herein petitioner undertook itself to be
jointly and severally liable for all claims arising from
recruitment violation of Pan Pacific (Ibid., p. 23), in keeping
with Section 4, Rule V, Book I of the Implementing Rules of
the Labor Code, which provides:
"Section 4. Upon approval of the application, the applicant
shall pay to the Ministry (now Department) a license fee of
P6,000.00, post a cash bond of P50,000.00 or negotiable
bonds of equivalent amount convertible to cash issued by
banking or financial institution duly endorsed to the Ministry
(now Department) as well as a surety bond of P150,000.00
legal claims arising from violations of the conditions of the
license or the contracts of employment and guarantee
compliance with the provisions of the Code, its implementing
rules and regulations and appropriate issuances of the
Ministry (now Department)." (Emphasis Supplied)
Accordingly, the nature of Finman's obligation under the
suretyship agreement makes it privy to the proceedings
against its principal (Pan Pacific). As such Finman is bound, in
the absence of collusion, by a judgment against its principal
even though it was not a party to the proceedings (Leyson v.
Rizal Surety and Insurance Co., 16 SCRA 551 (1966).
Furthermore, in Government of the Philippines v. Tizon (20
SCRA 1182 [1967]), this Court ruled that where the surety
bound itself solidarily with the principal obligor, the former is
so dependent on the principal debtor "that the surety is
considered in law as being the same party as the debtor in
relation to whatever is adjudged touching the obligation of the
latter." Applying the foregoing principles to the case at bar, it
can be very well said that even if herein Finman was not
impleaded in the instant case, still it (petitioner) can be held
jointly and severally liable for all claims arising from
recruitment violation of Pan Pacific. Moreover, as correctly
stated by the Solicitor General, private respondents have a
legal claim against Pan Pacific and its insurer for the
placement and processing fees they paid, so much so that in
order to provide a complete relief to private respondents,
petitioner had to be impleaded in the case (Rollo, p. 87).
Furthermore, Finman contends that herein respondent
Secretary of Labor cannot validly assume jurisdiction over the
case at bar; otherwise, proceedings will be railroaded resulting
in the deprivation of the former of any remedial measures
under the law. prLL
The records of the case reveal that herein Finman filed a
motion for reconsideration of the adverse decision dated
March 18, 1988 of respondent Secretary of Labor. In the said
motion for reconsideration, no jurisdictional challenge was
made (Ibid., p. 22). It was only when it filed this petition that it
assailed the jurisdiction of the respondent Secretary of Labor,
and that of the POEA. But then, it was too late. Estoppel had
barred herein petitioner from raising the issue, regardless of
its merits (Akay Printing Press v. Minister of Labor and
Employment, 140 SCRA 381 [1985]).
Hence, Finman's contention that POEA's and respondent
Secretary's actions in impleading and directing herein
petitioner to pay jointly and severally with Pan Pacific the
claims of private respondents constitute a grave abuse of
discretion amounting to lack of jurisdiction has no basis. (Ibid.,
p. 101.)
As regards the third assigned error, herein petitioner maintains
that the findings of fact made by the POEA upon which
respondent Secretary of Labor based his questioned Orders
are not supported by substantial evidence and are contrary to
law, is likewise untenable.
Herein petitioner, in raising this third issue, is, in effect, asking
this Court to review the respondent Secretary's findings of
facts.
Well-settled is the rule that findings of facts of the respondent
Secretary are generally accorded great weight unless there
was grave abuse of discretion or lack of jurisdiction in arriving
at such findings (Asia world Publishing House, Inc. vs. Ople,
152 SCRA 219 (1987). cdphil
In the case at bar, it is undisputed that when the case was first
set for hearing, only the private respondents appeared,
despite summons having been served upon both herein
petitioner and Pan Pacific. This, notwithstanding, both herein
petitioner and Pan Pacific were again notified of the scheduled
hearing, but, as aforestated they also failed to appear (Rollo,
p. 15). Accordingly, owing to the absence of any controverting
evidence, respondent Secretary of Labor admitted and
considered private respondents' testimonies and evidence as
substantial. Under the circumstances, no justifiable reason
can be found to justify disturbance of the findings of facts of
the respondent Secretary of Labor, supported as they are by
substantial evidence and in the absence of grave abuse of
discretion (Asia world Publishing House, Inc. v. Ople, supra);
and in line with the well established principle that the findings
of administrative agencies which have acquired expertise
because their jurisdiction is confined to specific matters are
generally accorded not only respect but at times even finality.
(National Federation of Labor Union (NAFLU) v. Ople, 143
SCRA 124 [1986])
SOUTH CITY HOMES, INC., FORTUNE MOTORS (PHILS.),
PALAWAN LUMBER MANUFACTURING
CORPORATION, petitioners, vs. BA FINANCE
CORPORATION, respondent.
Joseph L.G. Chua, President of petitioner Fortune Motors
Corporation (Fortune), executed in favor of private respondent
BA Finance Corporation (BA) a Continuing Suretyship
Agreement, in which he "jointly and severally unconditionally"
guaranteed the "full, faithful and prompt payment and
discharge of any and all indebtedness" of Fortune to BA. Six
months later, Canlubang Automotive Resources Corporation
(CARCO) drew six (6) drafts in its own favor, payable thirty
(30) days after sight, charged to the account of Fortune Motors
Corporation. Fortune thereafter executed trust receipts
covering the motor vehicles delivered to it by CARCO under
which it agreed to remit to the Entruster (CARCO) the
proceeds of any sale and immediately surrender the remaining
unsold vehicles. Fortune failed to pay the amounts due under
the drafts and to remit the proceeds of motor vehicles sold or
to return those remaining unsold in accordance with the terms
of the trust receipt agreements. BA filed a complaint for a sum
of money against Fortune, South City Homes, Inc., Edgar C.
Rodrigueza, Aurelio F. Tablante, Palawan Lumber
Manufacturing Corporation, Joseph L.G. Chua, George D. Tan
and Joselito C. Baltazar. Petitioners filed a motion to dismiss
the complaint. The lower court rendered judgment ordering
petitioners jointly and severally to pay BA the amounts due
under the draft. On appeal, the Court of Appeals affirmed the
judgment of the trial court. Hence, the present petition.
The Supreme Court affirmed the decision of the Court of
Appeals. Although there was no principal obligation at the time
of signing of the suretyship agreement as the principal
obligation was signed six (6) months later, the Court upheld
the validity of the surety agreement because Article 2053 of
the Civil Code specifically allows a suretyship agreement to
secure future loans even if the amount is not yet known. The
Court also ruled that the assignment of credit of CARCO in
favor of BA did not extinguish petitioners' obligation because
in an assignment of credit the debtor's consent is not essential
for the validity of the assignment and the assignee merely
steps into the shoes of the original creditor as subrogee of the
latter and acquires the power to enforce the terms to the same
extent as the assignor could enforce it against the debtor.
CIVIL LAW; CONTRACTS; GUARANTY; THE CIVIL CODE
ALLOWS A SURETYSHIP AGREEMENT TO SECURE
FUTURE LOANS EVEN IF THE AMOUNT IS NOT YET
KNOWN. On the first issue, petitioners assert that the
suretyship agreement they signed is void because there
was no principal obligation at the time of signing as the
principal obligation was signed six (6) months later. The
Civil Code, however, allows a suretyship agreement to
secure future loans even if the amount is not yet known.
Article 2053 of the Civil Code provides that: "Art. 2053
A guaranty may also be given as security for future debts,
the amount of which is not yet known. . . ."
2. ID.; ID.; ASSIGNMENT OF CREDIT; DEBTOR'S
CONSENT IS NOT ESSENTIAL FOR THE VALIDITY OF
THE ASSIGNMENT. An assignment of credit is an
agreement by virtue of which the owner of a credit, known
as the assignor, by a legal cause, such as sale, dacion en
pago, exchange or donation, and without the consent of
the debtor, transfers his credit and accessory rights to
another, known as the assignee, who acquires the power
to enforce it to the same extent as the assignor could
enforce it against the debtor. As a consequence, the third
party steps into the shoes of the original creditor as
subrogee of the latter. Petitioners' obligations were not
extinguished. Thus: ". . . Moreover, in assignment, the
debtor's consent is not essential for the validity of the
assignment (Art. 1624 in relation to Art. 1475, Civil Code),
his knowledge thereof affecting only the validity of the
payment he might make (Article 1626, Civil Code). "Article
1626 also shows that payment of an obligation which is
already existing does not depend on the consent of the
debtor. It, in effect, mandates that such payment of the
existing obligation shall already be made to the new
creditor from the time the debtor acquires knowledge of
the assignment of the obligation. "The law is clear that the
debtor had the obligation to pay and should have paid
from the date of notice whether or not he consented."
ESTRELLA PALMARES, petitioner, vs. COURT OF
APPEALS and M.B. LENDING
CORPORATION, respondents.
Petitioner signed as co-maker in a loan. A promissory note
was executed whereby she acknowledged her joint and
several (solidary) liability with the principal, that the creditor
may demand payment in case of default, and that she fully
understood the contents thereof. Petitioner, when informed
that the debtors defaulted, requested that creditor try to collect
from her principal first and offered to settle the obligation in
case the creditor fails to collect. She also offered a parcel of
land to settle the obligation which the creditor refused.
Thereafter, a complaint was filed against petitioner to the
exclusion of the principal debtors. Again petitioner offered to
pay but the amount offered was way below the amount
computed. The trial court dismissed the complaint and ruled
that the complaint against the petitioner amounted to a
discharge of a prior party, that the offer to pay made by
petitioner who is secondarily liable to the instrument
discharged petitioner. The Court of Appeals, reversing the trial
court, ruled that petitioner is solidarily liable with the principal
debtors and may be sued for the entire obligation. Hence, this
recourse.
The Supreme Court held that it is a cardinal rule in
interpretations of contracts that if the terms of a contract are
clear and leave no doubt upon the intention of the parties, the
literal meaning of its stipulation shall control. Hence, where
petitioner expressly binds herself to be jointly and severally or
solidarily liable with the principal maker of the note, her liability
is that of a surety and is bound equally and absolutely with the
principal.
Having entered into a contract with full knowledge of its terms
and conditions, petitioner is estopped to assert that she did so
in ignorance of their legal effect.
The obligee is entitled to demand fulfillment of the obligation
or performance stipulated, hence, an offer to pay obligation in
an amount less or different from that due does not discharge
liability.
ID.; ID.; SURETY DIFFERENTIATED FROM GUARANTY.
A surety is an insurer of the debt, whereas a guarantor is an
insurer of the solvency of the debtor. A suretyship is an
undertaking that the debt shall be paid; a guaranty, an
undertaking that the debtor shall pay. 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. 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. 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.
6. ID.; ID.; INTENTION OF CONTRACTING PARTIES;
JUDGED BY THEIR CONTEMPORANEOUS AND
SUBSEQUENT ACTS. 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.
7. ID.; ID.; SURETYSHIP; SURETY IS BOUND EQUALLY
AND ABSOLUTELY WITH THE PRINCIPAL. A surety is
bound equally and absolutely with the principal, and as such
is deemed an original promisor and debtor from the beginning.
This is because in suretyship there is but one contract, and the
surety is bound by the same agreement which binds the
principal. In essence, the contract of a surety starts with the
agreement, which is precisely the situation obtaining in this
case before the Court.
8. ID.; ID.; ID.; ID.; SURETY IS AN ORIGINAL DEBTOR AND
HIS LIABILITY IS IMMEDIATE AND DIRECT. 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. 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. 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. ASDCaI
9. ID.; ID.; ID.; SURETY BOUND BY WAIVER EXECUTED BY
PRINCIPAL. 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. As a surety, petitioner is
equally bound by such waiver.
10. ID.; ID.; ID.; DEMAND ON SURETIES, NOT NECESSARY
BEFORE BRINGING SUIT AGAINST THEM; NOR ENTITLED
TO BE GIVEN NOTICE OF PRINCIPAL'S DEFAULT. 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. 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 surety. 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.
11. ID.; ID.; ID.; ID.; RATIONALE BEHIND. The underlying
principle therefor is that 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. As an original promisor and debtor from the
beginning, he is held ordinarily to know every default of his
principal. TIDcEH
12. ID.; ID.; ID.; CREDITOR, NOT REQUIRED TO EXHAUST
REMEDIES AGAINST THE PRINCIPAL BEFORE HE CAN
PROCEED AGAINST THE SURETY. A creditor's right to
proceed against the surety exists independently of his right to
proceed against the principal. Under Article 1216 of the Civil
Code, the creditor may proceed against any one of the solidary
debtors or some or all of them simultaneously. The rule,
therefore, is that if the obligation is joint and several, the
creditor has the right to proceed even against the surety alone.
Since, generally, it is not necessary for a creditor to proceed
against the principal in order to hold the surety liable, where,
by the terms of the contract, the obligation of the surety is the
same as that of the principal, then as soon as the principal in
order to hold the surety liable, where, by the terms of the
contract, the obligation of the surety is the same as that of the
principal, then as 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. 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.
13. ID.; ID.; ID.; ID.; REASON. 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. 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, or that he need not trouble himself. The consequences
of the delay, such as the subsequent insolvency of the
principal, or the fact that the remedies against the principal
may be lost by lapse of time, are immaterial. The raison d'
etre for the rule is that there is nothing to prevent the creditor
from proceeding against the principal at any time. 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 right and
remedies of the creditor.
14. ID.; ID.; ID.; EXTENSION DISCHARGING SURETY,
CONSTRUED. 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. 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.
15. ID.; ID.; ID.; ID.; CASE AT BAR. 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 herein 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, herein respondent
corporation, failing in which we cannot grant the relief prayed
for. EHSITc
16. ID.; ID.; ID.; DELAY IN DISCHARGING SURETY; THERE
MUST BE ACTUAL OFFER OF PAYMENT. 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.
ESTATE OF K. H. HEMADY, deceased, vs. LUZON
SURETY CO., INC., claimant-appellant
ID.; SURETYHIP; NATURE OF OBLIGATION OF SURETY.
The nature of the obligation of the surety or guarantor does
not warrant the conclusion that his peculiar individual qualities
are contemplated as a principal inducement for the contract.
The creditor expects of the surety nothing but the
reimbursement of the moneys that said creditor might have to
disburse on account of the obligations of the principal debtors.
This reimbursement is a payment of a sum of money, resulting
from an obligation to give; and to the creditor, it was indifferent
that the reimbursement should be made by the surety himself
or by some one else in his behalf, so long as the money was
paid to it.
3. ID.; ID.; QUALIFICATION OF GUARANTOR;
SUPERVENING INCAPACITY OF GUARANTOR, EFFECT
ON CONTRACT. The qualification of integrityin the
guarantor or surety is required to be present only at the time
of the perfection of the contract of guaranty. Once the contract
of guaranty has become perfected and binding, the
supervening dishonesty of the guarantor (that is to say, the
disappearance of his integrity after he has become bound)
does not terminate the contract but merely entitles the creditor
to demand a replacement of the guarantor. But the step
remains optional in the creditor; it is his right, not his duty, he
may waive it if he chooses, and hold the guarantor to his
bargain.
Appeal by Luzon Surety Co., Inc., from an order of the Court
of First Instance of Rizal, presided by Judge Hermogenes
Caluag, dismissing its claim against the Estate of K. H.
Hemady (Special Proceeding No. Q-293) for failure to state a
cause of action.
The Luzon Surety Co. had filed a claim against the Estate
based on twenty different indemnity agreements, or counter
bonds, each subscribed by a distinct principal and by the
deceased K. H. Hemady, a surety solidary guarantor) in all of
them, in consideration of the Luzon Surety Co.'s of having
guaranteed, the various principals in favor of different
creditors. The twenty counterbonds, or indemnity agreements,
all contained the following stipulations:
"Premiums. As consideration for this suretyship, the
undersigned jointly and severally, agree to pay the COMPANY
the sum of ________________ (P______) pesos, Philippines
Currency, in advance as premium there of for every
__________ months or fractions thereof, this ________ or any
renewal or substitution thereof is in effect.
Indemnity. The undersigned, jointly and severally, agree at
all times to indemnify the COMPANY and keep it indemnified
and hold and save it harmless from and against any and all
damages, losses, costs, stamps, taxes, penalties, charges,
and expenses of whatsoever kind and nature which the
COMPANY shall or may, at any time sustain or incur in
consequence of having become surety upon this bond or any
extension, renewal, substitution or alteration thereof made at
the instance of the undersigned or any of them or any order
executed on behalf of the undersigned or any of them; and to
pay, reimburse and make good to the COMPANY, its
successors and assigns, all sums and amount of money which
it or its representatives shall pay or cause to be paid, or
become liable to pay, on account of the undersigned or any of
them, of whatsoever kind and nature, including 15% of the
amount involved in the litigation or other matters growing out
of or connected therewith for counsel or attorney's fees, but in
no case less than P25. It is hereby further agreed that in case
of extension or renewal of this ________ we equally bind
ourselves for the payment thereof under the same terms and
conditions as above mentioned without the necessity of
executing another indemnity agreement for the purpose and
that we hereby equally waive our right to be notified of any
renewal or extension of this ________ which may be granted
under this indemnity agreement.
Interest on amount paid by the Company. Any and all sums
of money so paid by the company shall bear interest at the rate
of 12% per annumwhich interest, if not paid, will be
accummulated and added to the capital quarterly order to earn
the same interests as the capital and the total sum thereof, the
capital and interest, shall be paid to the COMPANY as soon
as the COMPANY shall have become liable therefore, whether
it shall have paid out such sums of money or any part thereof
or not.
xxx xxx xxx
Waiver. It is hereby agreed upon by and between the
undersigned that any question which may arise between them
by reason of this document and which has to be submitted for
decision to Courts of Justice shall be brought before the Court
of competent jurisdiction in the City of Manila, waiving for this
purpose any other venue. Our right to be notified of the
acceptance and approval of this indemnity agreement is
hereby likewise waived.
xxx xxx xxx
Our Liability Hereunder. It shall not be necessary for the
COMPANY to bring suit against the principal upon his default,
or to exhaust the property of the principal, but the liability
hereunder of the undersigned indemnitor shall be jointly and
severally, a primary one, the same as that of the principal, and
shall be exigible immediately upon the occurrence of such
default." (Rec. App. pp. 98- 102.)
The Luzon Surety Co., prayed for allowance, as a contingent
claim, of the value of the twenty bonds it had executed in
consideration of the counterbonds, and further asked for
judgment for the unpaid premiums and documentary stamps
affixed to the bonds, with 12 per cent interest thereon.
Before answer was filed, and upon motion of the administratrix
of Hemady's estate, the lower court, by order of September
23, 1953, dismissed the claims of Luzon Surety Co., on two
grounds: (1) that the premiums due and cost of documentary
stamps were not contemplated under the indemnity
agreements to be a part of the undertaking of the guarantor
(Hemady), since they were not liabilities incurred after the
execution of the counterbonds; and (2) that "whatever losses
may occur after Hemady's death, are not chargeable to his
estate, because upon his death he ceased to be guarantor."
Taking up the latter point first, since it is the one more far
reaching in effects, the reasoning of the court below ran as
follows:
"The administratrix further contends that upon the death of
Hemady, his liability as a guarantor terminated, and therefore,
in the absence of a showing that a loss or damage was
suffered, the claim cannot be considered contingent. This
Court believes that there is merit in this contention and finds
support in Article 2046 of the new Civil Code. It should be
noted that a new requirement has been added for a person to
qualify as a guarantor, that is: integrity. As correctly pointed
out by the Administratrix, integrity is something purely
personal and is not transmissible. Upon the death of Hemady,
his integrity was not transmitted to his estate or successors.
Whatever loss therefore, may occur after Hemady's death, are
not chargeable to his estate because upon his death he
ceased to be a guarantor.
Another clear and strong indication that the surety company
has exclusively relied on the personality, character, honesty
and integrity of the now deceased K. H. Hemady, was the fact
that in the printed form of the indemnity agreement there is a
paragraph entitled 'Security by way of first mortgage, which
was expressly waived and renounced by the security
company. The security company has not demanded from K.
H. Hemady to comply with this requirement of giving security
by way of first mortgage. In the supporting papers of the claim
presented by Luzon Surety Company, no real property was
mentioned in the list of properties mortgaged which appears
at the back of the indemnity agreement." (Rec. App., pp. 407-
408).
We find this reasoning untenable. Under the present Civil
Code (Article 1311), as well as under the Civil Code of 1889
(Article 1257), the rule is that
"Contracts take effect only as between the parties, their
assigns and heirs, except in the case where the rights and
obligations arising from the contract are not transmissible by
their nature, or by stipulation or by provision of law."
While in our successional system the responsibility of the heirs
for the debts of their decedent cannot exceed the value of the
inheritance they receive from him, the principle remains intact
that these heirs succeed not only to the rights of the deceased
but also to his obligations. Articles 774 and 776 of the New
Civil Code (and Articles 659 and 661 of the preceding one)
expressly so provide, thereby confirming Article 1311 already
quoted.
"ART. 774. Succession is a mode of acquisition by virtue of
which the property, rights and obligations to the extent of the
value of the inheritance, of a person are transmitted through
his death to another or others either by his will or by operation
of law."
"ART. 776. The inheritance includes all the property, rights
and obligations of a person which are not extinguished by his
death."
In Mojica vs. Fernandez, 9 Phil. 403, this Supreme Court
ruled:
"Under the Civil Code the heirs, by virtue of the rights of
succession are subrogated to all the rights and obligations of
the deceased (Article 661) and can not be regarded as third
parties with respect to a contract to which the deceased was
a party, touching the estate of the deceased (Barrios vs. Dolor,
2 Phil. 44).
xxx xxx xxx
"The principle on which these decisions rest is not affected by
the provisions of the new Code of Civil Procedure, and, in
accordance with that principle, the heirs of a deceased person
cannot be held to be "third persons" in relation to any contracts
touching the real estate of their decedent which comes in to
their hands by right of inheritance; they take such property
subject to all the obligations resting thereon in the hands of
him from whom they derive their rights."
(See also Galasinao vs. Austria, 51 Off. Gaz. (No. 6) p. 2874
and de Guzman vs. Salak, 91 Phil., 265).
The binding effect of contracts upon the heirs of the deceased
party is not altered by the provision in our Rules of Court that
money debts of a deceased must be liquidated and paid from
his estate before the residue is distributed among said heirs
(Rule 89). The reason is that whatever payment is thus made
from the estate is ultimately a payment by the heirs and
distributees, since the amount of the paid claim in fact
diminishes or reduces the shares that the heirs would have
been entitled to receive.
Under our law, therefore, the general rule is that a party's
contractual rights and obligations are transmissible to the
successors. The rule is a consequence of the progressive
"depersonalization" of patrimonial rights and duties that, as
observed by Victorio Polacco, has characterized the history of
these institutions. From the Roman concept of a relation from
person to person, the obligation has evolved into a relation
from patrimony to patrimony, with the persons occupying only
a representative position, barring those rare cases where the
obligation is strictly personal, i.e., is contracted intuitu
personae, in consideration of its performance by a specific
person and by no other. The transition is marked by the
disappearance of the imprisonment for debt.
Of the three exceptions fixed by Article 1311, the nature of the
obligation of the surety or guarantor does not warrant the
conclusion that his peculiar individual qualities are
contemplated as a principal inducement for the contract. What
did the creditor Luzon Surety Co. expect of K. H. Hemady
when it accepted the latter as surety in the counterbonds?
Nothing but the reimbursement of the moneys that the Luzon
Surety Co. might have to disburse on account of the
obligations of the principal debtors. This reimbursement is a
payment of a sum of money, resulting from an obligation to
give; and to the Luzon Surety Co., it was indifferent that the
reimbursement should be made by Hemady himself or by
some one else in his behalf, so long as the money was paid to
it.
The second exception of Article 1311, p. 1,
is intransmissibility by stipulation of the parties. Being
exceptional and contrary to the general rule, this
intransmissibility should not be easily implied, but must be
expressly established, or at the very least, clearly inferable
from the provisions of the contract itself, and the text of the
agreements sued upon nowhere indicate that they are non-
transferable.
"(b) Intransmisibilidad por pacto. Lo general es la
transmisibilidad de darechos y obligaciones; le excepcion, la
intransmisibilidad. Mientras nada se diga en contrario impera
el principio de la transmision, como elemento natural a toda
relacion juridica, salvo las personalisimas. Asi, para la no
transmision, es menester el pacto expreso, porque si no, lo
convenido entre partes trasciende a sus herederos.
Siendo estos los continuadores de la personalidad del
causante, sobre ellos recaen los efectos de los vinculos
juridicos creados por sus antecesores, y para evitarlo, si asi
se quiere, es indespensable convension terminante en tal
sentido.
Por su esencia, el derecho y la obligacion tienden a ir ms all
de las personas que les dieron vida, y a ejercer presion sobre
los sucesores de esa persona; cuando no se quiera esto, se
impone una estipulacion limitativa expresamente de la
transmisibilidad o de cuyos tirminos claramente se deduzcala
concresion del concreto a las mismas personas que lo
otorgon." (Scaevola, Codigo Civil, Tomo XX, p. 541-542)
(Emphasis supplied.)
Because under the law (Article 1311), a person who enters
into a contract is deemed to have contracted for himself and
his heirs and assigns, it is unnecessary for him to expressly
stipulate to that effect; hence, his failure to do so is no sign
that he intended his bargain to terminate upon his death.
Similarly, that the Luzon Surety Co., did not require bondsman
Hemady to execute a mortgage indicates nothing more than
the company's faith and confidence in the financial stability of
the surety, but not that his obligation was strictly personal.
The third exception to the transmissibility of obligations under
Article 1311 exists when they are "not transmissible by
operation of law". The provision makes reference to those
cases where the law expresses that the rights or obligations
are extinguished by death, as is the case in legal support
(Article 300), parental authority (Article 327), usufruct (Article
603), contracts for a piece of work (Article 1726), partnership
(Article 1830 and agency (Article 1919). By contract, the
articles of the Civil Code that regulate guaranty or suretyship
(Articles 2047 to 2084) contain no provision that the guaranty
is extinguished upon the death of the guarantor or the surety.
The lower court sought to infer such a limitation from Art. 2056,
to the effect that "one who is obliged to furnish a guarantor
must present a person who possesses integrity, capacity to
bind himself, and sufficient property to answer for the
obligation which he guarantees". It will be noted, however, that
the law requires these qualities to be present only at the time
of the perfection of the contract of guaranty. It is self-evident
that once the contract has become perfected and binding, the
supervening incapacity of the guarantor would not operate to
exonerate him of the eventual liability he has contracted; and
if that be true of his capacity to bind himself, it should also be
true of his integrity, which is a quality mentioned in the article
alongside the capacity.
The foregoing concept is confirmed by the next Article 2057,
that runs as follows:
"ART. 2057. If the guarantor should be convicted in first
instance of a crime involving dishonesty or should become
insolvent, the creditor may demand another who has all the
qualifications required in the preceding article. The case is
excepted where the creditor has required and stipulated that a
specified person should be guarantor."
From this article it should be immediately apparent that the
supervening dishonesty of the guarantor (that is to say, the
disappearance of his integrity after he has become bound)
does not terminate the contract but merely entitles the creditor
to demand a replacement of the guarantor. But the step
remains optional in the creditor: it is his right, not his duty; he
may waive it if he chooses, and hold the guarantor to his
bargain. Hence Article 2057 of the present Civil Code is
incompatible with the trial court's stand that the requirement of
integrity in the guarantor or surety makes the latter's
undertaking strictly personal, so linked to his individuality that
the guaranty automatically terminates upon his death.
The contracts of suretyship entered into by K. H. Hemady in
favor of Luzon Surety Co. not being rendered intransmissible
due to the nature of the undertaking, nor by the stipulations of
the contracts themselves, nor by provision of law, his eventual
liability thereunder necessarily passed upon his death to his
heirs. The contracts, therefore, give rise to contingent claims
provable against his estate under section 5, Rule 87 (2 Moran,
1952 ed., p. 437; Gaskell & Co. vs. Tan Sit, 43 Phil. 810, 814).
"The most common example of the contigent claim is that
which arises when a person is bound as surety or guarantor
for a principal who is insolvent or dead. Under the ordinary
contract of suretyship the surety has no claim whatever
against his principal until he himself pays something by way of
satisfaction upon the obligation which is secured. When he
does this, there instantly arises in favor of the surety the right
to compel the principal to exonerate the surety. But until the
surety has contributed something to the payment of the debt,
or has performed the secured obligation in whole or in part, he
has no right of action against anybody no claim that could
be reduced to judgment. (May vs. Vann, 15 Pla., 553;
Gibson vs. Mithell, 16 Pla., 519; Maxey vs. Carter, 10 Yarg.
[Tenn.], 521 Reeves vs. Pulliam, 7 Baxt. [Tenn.], 119;
Ernst vs. Nou, 63 Wis., 134.)"
For defendant administratrix it is averred that the above
doctrine refers to a case where the surety files claims against
the estate of the principal debtor; and it is urged that the rule
does not apply to the case before us, where the late Hemady
was a surety, not a principal debtor. The argument evinces a
superficial view of the relations between parties. If under the
Gaskell ruling, the Luzon Surety Co., as guarantor, could file
a contingent claim against the estate of the principal debtors if
the latter should die, there is absolutely no reason why it could
not file such a claim against the estate of Hemady, since
Hemady is a solidary co-debtor of his principals. What the
Luzon Surety Co. may claim from the estate of a principal
debtor it may equally claim from the estate of Hemady, since,
in view of the existing solidarity, the latter does not even enjoy
the benefit of exhaustion of the assets of the principal debtor.
The foregoing ruling is of course without prejudice to the
remedies of the administratrix against the principal debtors
under Articles 2071 and 2067 of the New Civil Code.
Our conclusion is that the solidary guarantor's liability is not
extinguished by his death, and that in such event, the Luzon
Surety Co., had the right to file against the estate a contingent
claim for reimbursement. It becomes unnecessary now to
discuss the estate's liability for premiums and stamp taxes,
because irrespective of the solution to this question, the Luzon
Surety's claim did state a cause of action, and its dismissal
was erroneous.
Wherefore, the order appealed from is reversed, and the
records are ordered remanded to the court of origin, with
instructions to proceed in accordance with law. Costs against
the Administratrix- Appellee. So ordered.
GENERAL INSURANCE and SURETY
CORPORATION, petitioner, vs. REPUBLIC OF THE
PHILIPPINES and CENTRAL LUZON EDUCATIONAL
FOUNDATION, INC., respondents
SURETYSHIP; ACCRUAL OF ACTION FROM EXECUTION
OF BOND IN PRESENT CASE; PRESCRIPTION OF ACTION
BASED ON WRITTEN CONTRACTS. By the terms of the
bond, the surety guaranteed to the Government compliance
by the Foundation with all obligations, including the payment
of the salaries of its teachers and employees, "past, present
and future." Before the execution of the bond, the Foundation
was already indebted to two of its teachers for past salaries.
When the bond, therefore, was executed, the right of the
Government to proceed against it on account of the unpaid
salaries of said teachers accrued. The fact that the action was
filed one year after the expiration of the bond does not militate
against the action, because actions based on written contracts
prescribe in ten years. (Article 1144, par. 1, Civil Code.)
2. ID.; ID.; SIXTY-DAY NOTICE IN PRESENT BOND NOT A
PERIOD OF PRESCRIPTION OF ACTION. The 60-day
notice required in the bond in question is not a period of
prescription of action. If at all, it is a limitation on the right of
the surety to withdraw.
On May 15, 1954, the Central Luzon Educational Foundation,
Inc. and the General Insurance and Surety Corporation posted
in favor of the Department of Education a bond, the terms of
which read as follows:
"KNOW ALL MEN BY THESE PRESENTS:
WHEREAS, the Department of Education has required the
Central Luzon Educational Foundation, Inc., operating the
Sison & Aruego Colleges, of Urdaneta, Pangasinan,
Philippines an institution of learning to file a bond to guarantee
the adequate and efficient administration of said school or
college and the observance of all regulations prescribed by the
Secretary of Education and compliance with all obligations,
including the payment of the salaries of all its teachers and
employees, past, present, and future, and the payment of all
other obligations incurred by, or in behalf of said school;
NOW, THEREFORE, in compliance with said requirement,
we, CENTRAL LUZON EDUCATIONAL FOUNDATION, INC.,
operating the Sison and Aruego Colleges, represented by Dr.
Jose Aruego, its Vice-Chairman, as principal, and the
GENERAL INSURANCE AND SURETY CORPORATION, a
corporation duly organized and existing under and by virtue of
the laws of the Philippines, as surety, are held end firmly
bound, jointly and firmly, unto the Department of Education of
the Republic of the Philippines in the sum of TEN THOUSAND
PESOS (P10,000.00) Philippine currency, for the payment
thereof we bind ourselves, our heirs, executors,
administrators, successors, and assigns, jointly and severally
firmly by these presents;
WHEN the Secretary of Education is satisfied that said
institution of learning had defaulted in any of the foregoing
particulars, this bond may immediately thereafter be declared
forfeited and for the payment of the amount above-specified,
we bind ourselves, our heirs, executors, successors,
administrators, and assigns, jointly and severally.
We further bind ourselves, by these presents, to give the
Department of Education at least sixty (60) days notice of the
intended withdrawal or cancellation of this bond, in order that
the Department can take such action as may be necessary to
protect the interests of such teachers, employees or creditors
of the school and of the Government.
LIABILITY of Surety under this bond will expire on June 15,
1955, unless sooner revoked.
IN WITNESS WHEREOF, we signed this present guaranty at
the City of Manila, Philippines, this 15th day of May, 1954."
On the same day, May 15, 1954, the Central Luzon
Educational Foundation, Inc., Teofilo Sison and Jose M.
Aruego executed an indemnity agreement binding themselves
jointly and severally to indemnify the surety of "any damages,
prejudices, loss, costs, payments, advances and expenses of
whatever kind and nature, including attorney's fees and legal
costs, which the COMPANY may, at any time sustain or incur,
as well as to reimburse to said COMPANY all sums and
amounts of money which the COMPANY or its representatives
shall or may pay or cause to be paid or become liable to pay,
on account of or arising from the execution of the above
mentioned Bond."
On June 25, 1954, the surety advised the Secretary of
Education that it was withdrawing and cancelling its bond.
Copies of the letter were sent to the Bureau of Private Schools
and to the Central Luzon Educational Foundation, Inc.
It appears that on the date of execution of the bond, the
Foundation was indebted to two of its teachers for salaries, to
wit: to Remedios Laoag, in the sum of P685.64, and to H.B.
Arandia, in the sum of P820.00, or a total of P1,505.64.
Demand for the above amount having been refused, the
Solicitor General, in behalf of the Republic of the Philippines,
filed a complaint for the forfeiture of the bond, in the Court of
First Instance of Manila on July 11, 1956.
In due to surety the Foundation and prayed that the complaint
be dismissed and that it be indemnified by the Foundation of
any amount it might be required to pay the Government, plus
attorney's fees.
For its part, the Foundation denied the cross-claim and
contended that, because Remedios Laoag owed Fr. Cinense
the amount of P820.65, there was no basis for the action; that
the bond is illegal and that the Government has no capacity to
sue.
The surety also filed a third-party complaint against Teofilo
Sison and Jose M. Aruego on the basis of the indemnity
agreement. While admitting the allegations of the third-party
complaint, Sison and Aruego claimed that because of the
cancellation and withdrawal of the bond, the indemnity
agreement ceased to be of force and effect.
Hearing was held and on December 18, 1956, the Court of
First Instance rendered judgment holding the principal and the
surety jointly and severally liable to the Government in the sum
of P10,000.00 with legal interest from the date of filing of the
complaint, until the sum is fully paid and ordering the principal
to reimburse the surety whatever amount it may be compelled
to pay to the Government by reason of the judgment, with
costs against both principal and the surety.
The surety filed a motion for reconsideration and a request to
decide the third party complaint which the trial court denied.
On appeal, the Court of Appeals rendered a decision, the
dispositive portion of which reads:
"WHEREFORE, the appealed judgment is hereby modified in
the following manner:
"(a) Ordering Central Luzon Educational Foundation, Inc., and
General Insurance and Surety Corporation to pay jointly and
severally the Republic of the Philippines the sum of
P10,000.00, plus costs and legal interests from July 11, 1956
until fully paid; and
"(b) Ordering Central Luzon Educational Foundation, Inc.,
Teofilo Sison and Jose M. Aruego to reimburse, jointly and
severally, the General Insurance and Surety Corporation of all
amounts it may be forced to pay the Republic of the Philippines
by virtue of this judgment, plus costs and P2,000 for counsel's
fees."
From this decision, the surety appealed to this Court by way
of certiorari, raising questions of law. 1
In its first four assignments of error, the surety contends that it
was no longer liable on its bond after August 24, 1954 (when
the 60-day notice of cancellation and withdrawal ended) or, at
the latest, after June 15, 1955. For support, the Surety invokes
the following provisions of the bond:
"WE further bind ourselves, by these presents to give the
Department of Education at least sixty (60) days notice of the
intended withdrawal or cancellation of this bond, in order that
the Department can take such action as may be necessary to
protect the interest of such teacher, employees Creditor to the
government.
"LIABILITY of the Surety under this bond will expire on June
15, 1955, unless sooner revoked."
On the other hand, the Government contends that since the
salaries of the teachers were due and payable when the bond
was still in force, the surety has become liable on its bond from
the moment of its execution on May 15, 1954.
We agree with this contention of the Government.
It must be remembered that, by the terms of the bond, the
surety guaranteed to the Government "compliance (by the
Foundation) with all obligations, including the payment of the
salaries of its teachers and employees, past, present and
future, and the payment of all other obligations incurred by, or
in behalf of said school." Now, it is not disputed that even
before the execution of the bond, the Foundation was already
indebted to two of its teachers for past salaries. From the
moment, therefore, the bond was executed, the right of the
Government to proceed against the bond accrued because
since then, there has been violation of the terms of the bond
regarding payment of past salaries of teachers at the Sison
and Aruego Colleges. The fact that the action was filed only
on July 11, 1956 does not militate against this position
because actions based on written contracts prescribe in ten
years. (Art. 1144, par. 1, Civil Code).
The surety also cites our decision in the cases of Jollye vs.
Barcelon and Luzon Surety Co., Inc., 68 Phil. 164 and National
Rice and Corn Corp. (NARIC) vs. Rivera, et al., G.R. No. L-
4023, February 29, 1952. But there is nothing in these cases
that supports the proposition that the liability of a surety for
obligations arising during the life of a bond ceases upon the
expiration of the bond.
In the Jollye case, the bond provided:
"Whereas, the above bounded principal, on 13th day of
February, 1933 entered into an agreement with H. P. L Jollye
of Manila, P.I., to fully and faithfully refund to said Mr. H.P.L.
Jollye the above stated sum of P7,500 representing the
purchase price of the 75 shares of the capital stock of the
North Electric Company (certificate No. 38) paid by said Mr.
H.P.L. Jollye to the undersigned principal, Mr. Emeterio
Barcelon, in the event the title thereto of said Mr. Barcelon is
invalidated by any judgment which may be rendered by the
court of Cavite against Vicente Diosomito or in the event that
any of the warranties contained in that certain deed of sale
executed by the undersigned principal on this 13th day of
February, 1933, be invalidated, a copy of which is hereto
attached and made an integral part hereof, marked Exhibit A."
According to the bond, "the liability of Luzon Surety Company,
Inc., under this bond will expire twelve (12) months from date
hereof." The date referred to was February 13, 1933. This
Court absolved the surety of liability because the acts for
which the bond was posted happened after its expiration.
Thus, We held in that case:
". . . The acts provided therein by reason of which the contract
of suretyship was executed could have taken place within the
stipulated period of twelve months. Hence, the parties fixed
that period exactly at twelve months, limiting thereby the
obligation of the appellee to answer for the payment to the
appellant of the aforesaid sum of P7,500 to not more than the
stipulated period. . . ."
Here, on the other hand, the right of the Government to collect
on the bond arose while the bond was in force, because, as
earlier noted, even before the execution of the bond, the
principal had already been in debt to its teachers.
Neither does the NARIC case support the surety's position. In
that case, the bond provided that
"This bond expires on March 20th, 1949 and will be cancelled
TEN DAYS after the expiration, unless the surety is notified of
any existing obligation thereunder, or unless the surety renews
or extends it in writing for another term."
and We held that giving notice of existing obligation was a
condition precedent to further liability of the surety and that in
default of such notice, liability on the bond automatically
ceased.
Similarly, in the case of Santos, et al. vs. Mejia, et al., G.R. No.
L-6383, December 29, 1953, the bond provided that
"Liability of the surety on this bond will expire on THIRTY
DAYS and said bond will be cancelled 10 DAYS after its
expiration unless surety is notified of any existing obligation
thereunder."
and We held that the surety could not be held liable because
the bond was cancelled when no notice of existing obligations
was given within ten days.
In the present case, there is no provision that the bond will be
cancelled unless the surety is notified of any claim and so no
condition precedent has to be complied with by the
Government before it can bring an action. Indeed, the
provision of the bond in the NARIC and Santos cases that it
would be cancelled ten days after its expiration unless notice
of claim was given was inserted precisely because, without
such a provision, the surety's liability for obligations arising
while the bond was in force would subsist even after its
expiration.
Thus, in Pao Chuan Wek vs. Nomorosa, 54 O.G. No. 11, 3490,
We held that under a provision that the surety "will not be liable
for any claim not discovered and presented to the company
within three months from the expiration of this bond and that
the obligee hereby waives his right to file any court action
against the surety after the termination of the period of three
months above mentioned," the giving of notice is a condition
precedent to be complied with.
And suppose this action were filed while the bond was in force,
as the surety would have the Government do, but the same
remained pending after June 15, 1955, would the surety
suggest that the judgment that may be rendered in such action
could not longer be enforced against it because the bond says
that its liability under it has expired?
And what of the provision on 60-day notice? The surety urges
that all actions on the bond must be brought within that period
or they would all be barred. The surety misread the provision.
The 60-day notice is not a period of prescription of action. The
provision merely means that the surety can withdraw as in
fact it did in this case even before June 15, 1955 provided
it gave notice of its intention to do so at least 60 days in
advance. If at all, the condition is a limitation on the right of the
surety to withdraw rather than a limitation of action on the
bond. This is clear also from the Manual of Information of
Private Schools 2 which states that "The bond furnished by a
school may not be withdrawn by either or both of the
bondsmen except by giving the Director of Private Schools
sixty days notice."
In its fifth assignment of error, the surety contends:
1. That the bond is void for being contrary to public policy
insofar as it requires the surety to pay P10,000.00 regardless
of the amount of the salaries of the teachers. 3 It is claimed
that to enforce forfeiture of the bond for the full amount would
be to allow the Government to enrich itself since the unpaid
salaries of the teachers amount to P1,318.84 only.
2. That, under Article 1311 of the Civil Code, 4 since teachers
of Sison and Aruego Colleges are not parties to the bond, "the
bond is not effective and binding upon the obligors (principal
and surety) as far as it guarantees payment of the 'past
salaries' of the teachers of said school." This is the same as
saying that the surety is not liable to teachers of Sison and
Aruego Colleges because the latter are not parties to the bond
nor are they the beneficiaries of a stipulation pour autrui. But
this argument is based on the false premise that the teachers
are trying to enforce the obligation of the bond, which is not
the case here. This is not an action filed by the teachers
against the surety. This is an action brought by the
Government, of which the Department of Education is an
instrumentality, to hold the surety liable on its bond for the
same has been violated when the principal failed to comply
"with all obligations, including the payment of salaries of its
teachers, past, present and future."
There is nothing against public policy in forfeiting the bond for
the full amount. The bond is penal in nature. Article 1226 of
the Code states that in obligation with a penal clause, the
penalty shall substitute the indemnity for damages and the
payment of interests in case of non-compliance, if there is no
stipulation to the contrary, and the party to whom payment is
to be made is entitled to recover the sum stipulated without
need of proving damages because one of the primary
purposes of a penalty clause is to avoid such necessity. (Art.
1228, Civil Code. Lambert vs. Fox, 26 Phil. 588; Palacios vs.
Municipality of Cavite, 12 Phil. 140; Manila Racing Club vs.
Manila Jockey Club, 69 Phil. 55). The mere non-performance
of the principal obligation gives rise to the right to the penalty
(IV Tolentino, Civil Code of the Philippines 247.)
In its first and second "alternative assignments of error," the
surety contends that it was released from its obligation under
the bond when on February 4, 1955, Remedios Laoag and the
Foundation agreed that the latter would pay the former's
salaries, which were then already due, on March 1, 1955. In
support of this proposition, the surety cites Article 2079 of the
Code which provides as follows:
"An extension granted to the debtor by the creditor with out the
consent of the guarantor extinguishes the guaranty. . . ."
But the above provision does not apply to this case. The
supposed extension of time was granted not by the
Department but by the Department of Education or the
Government but by the teachers. As already stated, the
creditors on the bond are not the teachers but the Department
of Education or the Government.
Even granting that an extension of time was granted without
the consent of the surety, still that fact would not help the
surety, because as earlier pointed out, the Foundation was
also in arrears in the payment of the salaries of H. B. Arandia.
The case of Arandia alone would be enough basis for the
Government to proceed against the bond.
Lastly, in its third and fourth "alternative assignments of error,"
the surety contends that it cannot be made to answer for more
than the unpaid salaries of H. B. Arandia, which it claimed
amounted to P720.00 only, because Article 2054 states that
"A guarantor may bind himself for less, but not for more than
the principal debtor, both as regards the amount and the
onerous nature of the conditions.
"Should he have bound himself for more, his obligations shall
be reduced to the limits of that of the debtor."
What We said about the penal nature of the bond would suffice
to dispose of this claim. For whatever may be the amount of
salaries due the teachers, the fact remains that the condition
of the bond was violated and so the surety became liable for
the penalty provided for therein.
WHEREFORE, the decision of the Court of Appeals is hereby
affirmed, with costs against the surety.
THE HONGKONG & SHANGHAI BANKING
CORPORATION, plaintiff-appellee, vs. ALDECOA & Co., in
liquidation, JOAQUIN IBAEZ DE ALDECOA Y PALET,
ZOILO IBAEZ DE ALDECOA Y PALET, CECILIA IBAEZ
DE ALDECOA Y PALET, and ISABEL PALET DE
GABARRO, defendants-appellants. WILLIAM
URQUHART, intervener-appellant.
PRINCIPAL AND SURETY; FAILURE TO MAKE PAYMENTS
WHEN DUE. The fact that the principal debtor failed to meet
the partial payments when due and the fact that the creditor
did not immediately bring an action to enforce the obligation
does not constitute an extension or modification of the
principal obligation so as to relieve the surety.||| (Hongkong &
Shanghai Banking Corp. v. Aldecoa & Co., G.R. No. 8437,
[March 23, 1915], 30 PHIL 255-283)
This action was brought on January 31, 1911, by the plaintiff
bank against the above-named defendants for the purpose of
recovering from the principal defendant, Aldecoa & Co., an
amount due from the latter as the balance to its debit in an
account current with the plaintiff, and to enforce the subsidiary
liability of the other defendants for the payment of this
indebtedness, as partners of Aldecoa & Co., and to foreclose
certain mortgages executed by the defendants to secure the
indebtedness sued upon.
Judgment was entered on the 10th of August, 1912, in favor
of the plaintiff and against the defendants for the sum of
P344,924.23, together with interest thereon at the rate of 7 per
cent per annum from the date of the judgment until paid, and
for costs, and for the foreclosure of the mortgages. The court
decreed that in the event of there being a deficiency, after the
foreclosure of the mortgages, the plaintiff must resort to and
exhaust the property of the principal defendant before taking
out execution against the individual defendants held to be
liable in solidum with the principal defendant, but subsidiarily.
Judgment was also entered denying the relief sought by the
intervener. All of the defendants and the intervener have
appealed.
The defendants, Joaquin Ibaez de Aldecoa, Zoilo Ibaez de
Aldecoa, and Cecilia Ibaez de Aldecoa, were born in the
Philippine Islands on March 27, 1884, July 4, 1885, and . . .,
1887, respectively, the legitimate children of Zoilo Ibaez de
Aldecoa and the defendant, Isabel Palet. Both parents were
natives of Spain. The father's domicile was in Manila, and he
died here on October 4, 1895. The widow, still retaining her
Manila domicile, left the Philippine Islands and went to Spain
in 1897 because of her health, and did not return until the latter
part of 1902. The firm of Aldecoa & Co., of which Zoilo Ibaez
de Aldecoa, deceased, had been a member and managing
director, was reorganized in December, 1896, and the widow
became one of the general or "capitalistic" partners of the firm.
The three children, above mentioned, appear in the articles of
agreement as industrial partners.
On July 31, 1903, Isabel Palet, the widowed mother of Joaquin
Ibaez de Aldecoa and Zoilo Ibaez de Aldecoa, who were
then over the age of 18 years, went before a notary public and
executed two instruments (Exhibits T and U), wherein and
whereby she emancipated her two sons, with their consent
and acceptance. No guardian of the person or property of
these two sons had ever been applied for or appointed under
or by virtue of the provisions of the Code of Civil Procedure
since the promulgation of that Code in 1901. After the
execution of Exhibit T and U, both Joaquin Ibaez de Aldecoa
and Zoilo Ibaez de Aldecoa participated in the management
of Aldecoa & Co. as partners by being present and voting at
meetings of the partners of the company upon matters
connected with its affairs.
On the 23d day of February, 1906, the defendant firm of
Aldecoa & Co. obtained from the bank a credit in account
current up to the sum of P450,000 upon the terms and
conditions set forth in the instrument executed on that date
(Exhibit A). Later it was agreed that the defendants, Isabel
Palet and her two sons, Joaquin and Zoilo, should mortgage,
in addition to certain securities of Aldecoa & Co., as set forth
in Exhibit A, certain of their real properties as additional
security for the obligations of Aldecoa & Co. So, on March 23,
1906, the mortgage, Exhibit B, was executed wherein certain
corrections in the description of some of the real property
mortgaged to the bank by Exhibit A were made and the
amount for which each of the mortgaged properties should be
liable was set forth. These two mortgages, Exhibits A and B,
were duly recorded in the registry of property of the city of
Manila on March 23, 1906.
On the 31st day of December, 1906, the firm of Aldecoa & Co.
went into liquidation on account of the expiration of the term
for which it had been organized, and the intervener, Urquhart,
was duly elected by the parties as liquidator, and by resolution
dated January 24, 1907, he was granted the authority
expressed in that resolution (Exhibit G).
On June 30, 1906, Aldecoa & Co. in liquidation, for the
purposes of certain litigation about to be commenced in its
behalf, required an injunction bond in the sum of P50,000,
which was furnished by the bank upon the condition that any
liability incurred on the part of the bank upon this injunction
bond would be covered by the mortgage of February 23, 1906.
An agreement to this effect was executed by Aldecoa & Co. in
liquidation, by Isabel Palet, by Joaquin Ibaez de Aldecoa,
who had then attained his full majority, and by Iloilo Ibaez de
Aldecoa, who was not yet twenty-three years of age. In 1908,
Joaquin Ibaez de Aldecoa, Zoilo Ibaez de Aldecoa, and
Cecilia Ibaez de Aldecoa commenced an action against their
mother, Isabel Palet, and Aldecoa & Co., in which the bank
was not a party, and in September of that year procured a
judgment of the Court of First Instance annulling the articles of
copartnership of Aldecoa & Co., in so far as they were
concerned, and decreeing that they were creditors and not
partners of that firm.
The real property of the defendant Isabel Palet, mortgaged to
the plaintiff corporation by the instrument March 23, 1906
(Exhibit B), was, at the instance of the defendant, registered
under the provisions of the Land Registration Act, subject to
the mortgage thereon in favor of the plaintiff, by decree of the
land court dated March 8, 1907.
On the 6th of November, 1906, the defendants, Isabel Palet
and her three children, Joaquin Ibaez de Aldecoa Zoilo
Ibaez de Aldecoa, and Cecilia Ibaez de Aldecoa applied to
the land court for the registration of their title to the real
property described in paragraph 4 of the instrument of March
23, 1906 (Exhibit B), in which application they stated that the
undivided three-fourths of said properties belonging to the
defendants, Isabel Palet, Joaquin Ibaez de Aldecoa, and
Zoilo Ibaez de Aldecoa, were subject to the mortgage in favor
of the plaintiff to secure the sum of P203,985.97 under the
terms of the instrument dated March 22, 1906. Pursuant to this
petition the Court of Land Registration, by decree dated
September 8, 1907 registered the title of the applicants to that
property subject, with respect to the undivided three-fourths
interest therein pertaining to the defendants, Isabel Palet and
her two sons, Joaquin and Zoilo, to the mortgage in favor of
the plaintiff to secure the sum of P203,985.97.
On December 22, 1906, Aldecoa & Co., by a public instrument
executed before a notary public, as additional security for the
performance of the obligations in favor of the plaintiff under the
terms of the contracts Exhibits A and B, mortgaged to the bank
the right of mortgage pertaining to Aldecoa & Co. upon certain
real property in the Province of Albay, mortgaged to said
company by one Zubeldia to secure an indebtedness to that
firm. Subsequent to the execution of this instrument, Zubeldia
caused his title to the mortgaged property to be registered
under the provisions of the Land Registration Act, subject to a
mortgage of Aldecoa & Co. to secure the sum of P103,943.84
and to the mortgage of the mortgage right of Aldecoa & Co. to
the plaintiff.
As the result of the litigation between Aldecoa & Co. and A. S.
Macleod, wherein the injunction bond of P50,000 was made
by the bank in the manner and for the purpose above set forth,
Aldecoa & Co. became the owner, through a compromise
agreement executed in Manila on the 14th of August, 1907, of
the shares of the Pasay Estate Company Limited (referred to
in the contract of March 13, 1907, Exhibit V), and on the 30th
day of August of that year Urquhart, as liquidator, under the
authority vested in him as such, and in compliance with the
terms of the contract of June 13, 1907, mortgaged to the
plaintiff, by way of additional security for the performance of
the obligations set forth in Exhibits A and B, the 312 shares of
the Pasay Estate Company, Limited, acquired by Aldecoa &
Co.
On the 31st day of March, 1907, Aldecoa & Co. mortgaged, as
additional security for the performance of those obligations, to
the plaintiff the right of mortgage, pertaining to the firm of
Aldecoa & Co., upon certain real estate in the Province of
Ambos Camarines, mortgaged to Aldecoa & Co. by one
Andres Garchitorena to secure a balance of indebtedness to
that firm of the sum of P20,280.19. The mortgage thus created
in favor of the bank was duly recorded in the registry of deeds
of that province. On the 31st day of March, 1907, Aldecoa &
Co. mortgaged as further additional security for the
performance of the obligations set forth in Exhibits A and B,
the right of mortgage pertaining to the firm of Aldecoa & Co.
upon other real property in the same province, mortgaged by
the firm of Tremoya Hermanos and Liborio Tremoya, to secure
the indebtedness of that firm to the firm of Aldecoa & Co. of
P43,117.40 and the personal debt of the latter of P75,463.54.
The mortgage thus created in favor of the bank was filed for
record with the registrar of deeds of that province.
On the 30th day of January, 1907, Aldecoa & Co. duly
authorized the bank to collect from certain persons and firms,
named in the instrument granting this authority, any and all
debts owing by them to Aldecoa & Co. and to apply all
amounts so collected to the satisfaction, pro tanto, of any
indebtedness of Aldecoa & Co. to the bank.
By a public instrument dated February 18, 1907, Aldecoa &
Co. acknowledged an indebtedness to Joaquin Ibaez de
Aldecoa in the sum of P154,689.20, a like indebtedness to
Zoilo Ibaez de Aldecoa, and an indebtedness in favor of
Cecilia Ibaez de Aldecoa in the sum of P89,177.07. On
September 30, 1908, Joaquin, Zoilo, and Cecilia recovered a
judgment in the Court of First Instance of Manila for the
payment to them of the sum of P155,127.31, as the balance
due them upon the indebtedness acknowledged in the public
instrument dated February 18, 1907.
On November 30, 1907, Joaquin, Zoilo, and Cecilia instituted
an action in the Court of First Instance of the city of Manila
against the plaintiff bank for the purpose of obtaining a judicial
declaration to the effect that the contract whereby Aldecoa &
Co. mortgaged to the bank the shares of the Pasay Estate
Company recovered from Alejandro S. Macleod, was null and
void, and for a judgment that these shares be sold and applied
to the satisfaction of their judgment obtained on September
30, 1908. Judgment was rendered by the lower court in favor
of the plaintiffs in that action in accordance with their prayer,
but upon appeal this court reversed that judgment and
declared that the mortgage of the shares of stock in the Pasay
Estate Co. to the bank was valid.
In October, 1908, Joaquin and Zoilo Ibaez de Aldecoa
instituted an action against the plaintiff bank for the purpose of
obtaining a judgment annulling the mortgages created by them
upon their interest in the properties described in Exhibits A and
B, upon the ground that the emancipation by their mother was
void and of no effect, and that, therefore, they were minors
incapable of creating a valid mortgage upon their real property.
The Court of First Instance dismissed the complaint as to
Joaquin upon the ground that he had ratified those mortgages
after becoming of age, but entered a judgment annulling said
mortgages with respect to Zoilo. Both parties appealed from
this decision and the case was given registry No. 6889 in the
Supreme Court. 1
On the 31st day of December, 1906, on which date the
defendant Aldecoa & Co. went into liquidation, the amount of
indebtedness to the bank upon the overdraft created by the
terms of the contract, Exhibit A, was P516,517.98. Neither the
defendant Aldecoa & Co., nor any of the defendants herein,
have paid or caused to be paid to the bank the yearly partial
payments due under the terms of the contract, Exhibit A. But
from time to time the bank has collected and received from
provincial debtors of Aldecoa & Co. the various sums shown
in Exhibit Q, all of which sums so received have been placed
to the credit of Aldecoa & Co. and notice duty given. Also, the
bank, from time to time, since the date upon which Aldecoa &
Co. went into liquidation, has received various other sums
from, or for the account of, Aldecoa & Co., all of which have
been duly placed to the credit of that firm, including the sum of
P22,552.63, the amount of the credit against one Achaval,
assigned to the bank by Aldecoa & Co. The balance to the
credit of the bank on the 31st day of December, 1911, as
shown on the books of Aldecoa & Co., was for the sum of
P416,853.46. It appeared that an error had been committed
by the bank in liquidating the interest charged to Aldecoa &
Co., and this error was corrected so that the actual amount of
the indebtedness of Aldecoa & Co. to the plaintiff on the 16th
of February, 1912, with interest to December 31, 1911, was
the sum of P378,212.52, and on August 10, 1912, the date of
the judgment, the amount was P344,924.23.
The trial court found that there was no competent evidence
that the bank induced, or attempted to induce, any customer
of Aldecoa & Co. to discontinue business relations with that
company. The court further found that Urquhart had failed to
show that he had any legal interest in the matter in litigation
between plaintiff and defendants, or in the success of either of
the parties, or an interest against both, as required by section
121 of the Code of Civil Procedure. No further findings, with
respect to the facts alleged in the complaint of the intervener,
were made. Aldecoa & Co. insist that the court erred:
"1. In overruling the defendant's demurrer based upon the
alleged ambiguity and vagueness of the complaint.
"2. In ruling that there was no competent evidence that the
plaintiff had induced Aldecoa & Co.'s provincial debtors to
cease making consignments to that firm.
"3. In rendering a judgment in a special proceeding for the
foreclosure of a mortgage, Aldecoa & Co. not having
mortgaged any real estate of any kind within the jurisdiction of
the trial court, and the obligation of the persons who had
signed the contract of suretyship in favor of the bank having
been extinguished by operation of law."
The argument on behalf of defendant in support of its first
assignment of error is based upon the claim that inasmuch as
it appears from the complaint that Aldecoa & Co. authorized
the plaintiff bank, by the instrument Exhibit G, to make
collections on behalf of this defendant, and that the complaint
failed to specify the amount obtained by the bank in the
exercise of the authority conferred upon it, the complaint was
thereby rendered vague and indefinite. Upon this point it is
sufficient to say that the complaint alleges that a certain
specific amount was due from the defendant firm as a balance
of its indebtedness to the plaintiff, and this necessarily implies
that there were no credits in favor of the defendant firm of any
kind whatsoever which had not already been deducted from
the original obligation.
With respect to the contention set forth in the second
assignment of error to the effect that the bank has prejudiced
Aldecoa & Co. by having induced customers of the latter to
cease their commercial relations with this defendant, the ruling
of the court that there is no evidence to show that there was
any such inducement is fully supported by the record. It may
be possible that some of Aldecoa & Co.'s customers ceased
doing business with that firm after it went into liquidation. This
is the ordinary effect of a commercial firm going into
liquidation. This is especially true in the case under
consideration, for the reason that it was a well known fact that
Aldecoa & Co. was insolvent. It is hardly probable that the
bank, with so large a claim against Aldecoa & Co. and with
unsatisfactory security for the payment of its claim, would have
taken any action whatever which might have had the effect of
diminishing Aldecoa & Co.'s ability to discharge their claim.
The contention that the customers of Aldecoa & Co. included
in the list of debtors ceased to make consignments to the firm
because they had been advised by the bank that Aldecoa &
Co. had authorized the bank to collect these credits, if true,
would not justify a holding that the bank was thereby liable for
any damages which had been suffered by the defendant firm
by reason of such customers ceasing to do business, for the
reason that the bank had been expressly authorized by the
defendant firm to collect these credits from the defendant's
provincial customers and apply the amounts so collected to
the partial discharge of the indebtedness of the defendant to
the bank. Furthermore, the bank was expressly empowered to
take any steps which might be necessary, judicially or
extrajudicially, for the collection of these credits. The real
reason which caused the defendant's provincial customers to
cease making shipments was due to the fact that the
defendant, being out of funds, could not give its customers any
further credit. It is therefore clear that the bank, having
exercised the authority conferred upon it by the company in a
legal manner, is not responsible for any damages which might
have resulted from the failure of the defendant's provincial
customers to continue doing business with that firm.
In the third assignment of errors two propositions are insisted
upon: (1) That in these foreclosure proceedings the court was
without jurisdiction to render judgment against Aldecoa & Co.
for the reason that firm had mortgaged no real property within
the city of Manila to the plaintiff; and (2) that the mortgages
given by this defendant have been extinguished by reason of
the fact that the bank extended the time within which the
defendant's provincial debtors might make their payments.
We understand that the bank is not seeking to exercise its
mortgage rights upon the mortgages which the defendant firm
holds upon certain real properties in the Provinces of Albay
and Ambos Camarines and to sell these properties at public
auction in these proceedings. Nor do we understand that the
judgment of the trial court directs that this be done. Before that
property can be sold the original mortgagors will have to be
made parties. The bank is not trying to foreclose, in this
section, any mortgages on real property executed by Aldecoa
& Co. It is true that the bank sought and obtained a money
judgment against that firm, and at the same time and in the
same action obtained a foreclosure judgment against the other
defendants. If two or more persons are in solidum the debtors
of a third person, and one or more of such debtors mortgage
any of their real property situate in the jurisdiction of the court,
the creditor, in case his obligation is not paid at maturity, may
include all of the solidary debtors in the same suit and secure
a joint and several judgment against them, as well as
judgments of foreclosure upon the respective mortgages.
The contention that the extensions granted to Aldecoa & Co.'s
debtors, with the consent and authority of that firm itself, has
resulted in extinguishment of the mortgages created by
Aldecoa & Co. or of the mortgages created by partners of that
company to secure its liabilities to the bank, is not tenable. The
record shows that all the sureties were represented by
Urquhart, the person elected by them as liquidator of the firm,
when he agreed with the bank upon the extensions granted to
those debtors. The authority to grant these extensions was
conferred upon the bank by the liquidator, and he was given
authority by all the sureties to authorize the bank to proceed in
this manner.
With respect to the contention that the bank should be required
to render an account of collections made under authority of
Exhibit G, it is sufficient to say that the bank has properly
accounted for all amounts collected from the defendant's
debtors, and has applied all such amounts to the partial
liquidation of the defendant's debt due to the bank. It is true
that the sum for which judgment was rendered against
Aldecoa & Co. is less than the amount originally demanded in
the complaint, but this difference is due to the fact that certain
amounts which had been collected from Aldecoa & Co.'s
provincial debtors by the bank were credited to the latter
between the date on which the complaint was filed and the
date when the case came on for trial, and the further fact that
it was necessary to correct an entry concerning one of the
claims inasmuch as it appears that this claim had been
assigned to the bank absolutely, and not merely for the
purposes of collection, as the bookkeeper of the bank
supposed, the result being that instead of crediting Aldecoa &
Co. with the full face value of this claim, the bookkeeper had
merely credited from time to time the amounts collected from
this debtor. We, therefore, find no error prejudicial to the rights
of this defendant.
Doa Isabel Palet makes the following assignment of errors:
"1. That the court erred in failing to hold that her obligation as
surety had been extinguished in accordance with the
provisions of article 1851 of the Civil Code.
"2. That the court erred in refusing to order for the benefit of
this appellant that the property of Aldecoa & Co. should be
exhausted before the plaintiff firm should be entitled to have
recourse to the property of this defendant and appellant for the
satisfaction of its judgment."
This appellant does not contend that she is not personally
liable in solidum with Aldecoa & Co. for the liability of the latter
firm to the plaintiff in the event that the appeal taken by
Aldecoa & Co. should be unsuccessful. We have just held that
the judgment appealed from by Aldecoa & Co. should be
affirmed. But Doa Isabel Palet does contend that her liability
as a partner for the obligations of Aldecoa & Co., although
solidary, is subsidiary, and that she is entitled to insist that the
property of Aldecoa & Co. be first applied in its entirety to the
satisfaction of the firm's obligations before the bank shall
proceed against her in the execution of its judgment.
The trial court directed that the mortgaged properties,
including the properties mortgaged by this defendant, should
be sold under foreclosure in the event that Aldecoa & Co.
should fail to pay into court the amount of the judgment within
the time designated for that purpose. The court recognized the
subsidiary character of the personal liability of Doa Isabel
Palet as a member of the firm of Aldecoa & Co. and decreed
that as to any deficiency which might result after the sale of
the mortgaged properties, execution should not issue against
the properties of Doa Isabel Palet until all the property of
Aldecoa & Co. shall have been exhausted. The properties
mortgaged by Doa Isabel Palet were so mortgaged not
merely as security for the performance of her own solidary
subsidiary obligation as a partner bound for all the debts of
Aldecoa & Co., but for the purpose of securing the direct
obligation of the firm itself to the bank. We are, therefore, of
the opinion that the trial court committed no error upon this
point.
It is urged on behalf of Doa Isabel Palet that the mortgages
executed by her upon her individual property have been
canceled. The ground for this contention is that Aldecoa & Co.
undertook by the contract of February 23, 1906, to discharge
its liability to the plaintiff bank at the rate of not less than
P50,000 per annum, and that therefore it was the duty of the
bank to sue Aldecoa & Co. as soon as that firm failed to pay
at maturity any one of the partial payments which it had
promised to make, and to apply the proceeds from the sale of
the property of Aldecoa & Co. to the satisfaction of this
indebtedness, and that the fact that the bank failed to do so is
equivalent to an extension of the term of the principal debtor,
and that the effect of this extension has been to extinguish the
obligation of this defendant as a surety of Aldecoa & Co. It is
also contended that the bank expressly extended the term
within which Aldecoa & Co. was to satisfy its obligation by
allowing Aldecoa & Co. to furnish additional security. Doa
Isabel Palet alleges that all these acts were done without her
knowledge or consent.
The extension of the term which, in accordance with the
provisions of article 1851 of the Civil Code produces the
extinction of the liability of the surety must of necessity be
based on some new agreement between the creditor and
principal debtor, by virtue of which the creditor deprives
himself of his right to immediately bring an action for the
enforcement of his claim. The mere failure to bring an action
upon a credit, as soon as the same or any part of it matures,
does not constitute an extension of the term of the obligation.
Doa Isabel Palet is a personal debtor jointly and severally
with Aldecoa & Co. for the whole indebtedness of the latter
firm to the bank, and not a mere surety for the performance of
the obligations of Aldecoa & Co. without any solidary liability.
It is true that certain additional deeds of mortgage and pledge
were executed by Aldecoa & Co. in favor of the bank as
additional security after Aldecoa & Co. had failed to meet its
obligation to pay the first installment due under the agreement
of February 23, 1906, but there is no stipulation whatever in
any of these documents or deeds which can in any way be
interpreted in the sense of constituting an extension which
would bind the bank to wait for the expiration of any new term
before suing upon its claim against Aldecoa & Co. We find
nothing in the record showing either directly or indirectly that
the bank at any time has granted any extension in favor of
Aldecoa & Co. for the performance of its obligations. The
liquidator of Aldecoa & Co. authorized the bank to grant certain
extensions to some of the provincial debtors of Aldecoa & Co.
whose debts were to be paid to the bank under the authority
conferred upon the bank by Aldecoa & Co. There is a marked
difference between the extension of time within which Aldecoa
& Co.'s debtors might pay their respective debts, and the
extension of time for the payment of Aldecoa & Co.'s own
obligation to the bank. If the bank had brought suit on its credit
against Aldecoa & Co., for the amount then due, on the day
following the extension of the time of Aldecoa & Co.'s debtors
for the payment of their debts, it is evident that the fact of such
extension having been granted could not have served in any
sense as a defense in favor of Aldecoa & Co. against the
bank's action, although this extension would have been
available to Aldecoa & Co.'s debtors if suit had been brought
to enforce their liabilities to Aldecoa & Co. We must, therefore,
conclude that the judgment appealed from, in so far as it
relates to Doa Isabel Palet, must likewise be affirmed.
The intervener, William Urquhart, assigns these errors:
"1. The court erred in holding that the proof fails to show a
case for intervention within the meaning of section 121 of the
Code of Civil Procedure.
"2. The court erred in failing to give preference to the credit of
the liquidator Urquhart for his salary."
The trial court found, as we have said, that Urquhart had failed
to show that he had any legal interest in the matter in litigation
between the plaintiffs and the defendants, or in the success of
any of the parties, or any interest against both. The proof upon
this branch of the case consists of the following agreed
statement of facts:
"Mr. Urquhart is a creditor of Aldecoa & Co. in the sum of
P21,000 due him for money loaned by him to Aldecoa Co.
before they went into liquidation.
"Aldecoa & Co., in liquidation, owe Mr. Urquhart the liquidator
P14,000 as salary."
Section 121 of the Code of Civil Procedure provides that:
"A person may, at any period of a trial, upon motion, be
permitted by the court to intervene in an action or proceeding,
if he has legal interest in the matter in litigation, or in the
success of either of the parties, or an interest against both."
The intervener is seeking to have himself declared a preferred
creditor over the bank. According to the abovequoted agreed
statement of facts, he is a mere creditor of Aldecoa & Co. for
the sum of P21,000, loaned that firm before it went into
liquidation. This amount is not evidenced by a public
document, or any document for that matter, nor secured by
pledge or mortgage, while the amount due the bank appears
in a public instrument and is also secured by pledges and
mortgages on the property of Aldecoa & Co., out of which the
intervener seeks to have his indebtedness satisfied. It is,
therefore, clear that the intervener is not entitled to the relief
sought, in so far as the P21,000 is concerned.
The bank insists that, as the intervener had been in the employ
of Aldecoa & Co. for several years prior to the time that the
latter went into liquidation, it cannot be determined what part
of the P14,000 is for salary as such employee and what part
is for salary as liquidator. We find no trouble in reaching the
conclusion that all of the P14,000 represents Urquhart's salary
as liquidator of the firm of Aldecoa & Co. The agreed statement
of facts clearly supports this view. It is there stated that
Aldecoa & Co. in liquidation owed the liquidator P14,000 as
salary. The agreement does not say, nor can it be even
inferred from the same, that Aldecoa & Co. owed Urquhart
P14,000, or any other sum for salary as an employee of that
firm before it went into liquidation. Under these facts, is the
intervener a preferred creditor over the bank for this amount?
In support of his contention that he should be declared a
preferred creditor over the bank for the P14,000, the appellant
cites the decision of the supreme court of Spain of March 16,
1897, and quotes the following from the syllabus of that case:
"That the expense of maintenance of property is bound to
affect such persons as have an interest therein, whether they
be the owners or creditors of the property; therefore payment
for this object has preference over any other debt, since such
other debts are recoverable to the extent that the property is
preserved and maintained."
There can be no question about the correctness of this ruling
of the supreme court of Spain to the effect that the fees of a
receiver, appointed by the court to preserve property in
litigation, must be paid in preference to the claims of creditors.
But this is not at all the case under consideration, for the
reason that Urquhart was elected liquidator by the members
of the firm of Aldecoa & Co. without the consent or approval of
the bank or of any other creditor. He did not receive his
employment by reason of any judicial act. Whatever may be
due him for his services as liquidator is due under a contract
of employment between himself and the members of the firm
of Aldecoa & Co. Neither do we believe that the contention of
the appellant can be sustained under article 1922 of the Civil
Code, which provides that, with regard to specified personal
property of the debtor, the following are preferred:
"1. Credits for the construction, repair, preservation, or for the
amount of the sale of personal property which may be in the
possession of the debtor to the extent of the value of the
same."
The only personal property of Aldecoa & Co. is 16 shares of
the stock of the Banco Espaol-Filipino; 450 shares of the
stock of the Compaia Maritima; 330 shares of the stock of the
Pasay Estate Co., Ltd.; and certain claims against debtors of
Aldecoa & Co., mentioned in Exhibit G.
The shares of stock in the Banco Espaol-Filipino and the
Compaia Maritima were pledged to the bank before Aldecoa
& Co. went into liquidation, so Urquhart had nothing to do with
the preservation of these. The stock of the Pasay Estate Co.,
Ltd., was pledged to the bank on August 30, 1907, on the
same day that it came into the possession of Aldecoa & Co.
and by the terms of the pledge the bank was authorized to
collect all dividends on the stock and apply the proceeds to the
satisfaction of its claim against Aldecoa & Co. The credits set
forth in Exhibit G were assigned to the bank on January 30,
1907, so, it will be seen, that the Pasay Estate shares were in
the possession of Aldecoa & Co., or its liquidator, only one
day. Urquhart had been liquidator twenty-eight days when the
credits, mentioned in Exhibit G, were assigned to the bank. If
it could be held that these two items bring him within the above
quoted provisions of article 1922, he could not be declared a
preferred creditor over the bank for the P14,000 salary for the
reason that, according to his own showing, he had been paid
for his services as liquidator up to January, 1910. It is the
salary since that date which is now in question. The only
property of Aldecoa & Co. which the liquidator had anything to
do with after 1910 was the real estate mortgages mortgaged
to the bank as additional security. These mortgages on real
property cannot be regarded as personal property, and it is
only of personal property that article 1922 speaks.
The judgment appealed from, in so far as it relates to Urquhart,
being in accordance with the law and the merits of the case, is
hereby affirmed.
The appellants, Joaquin and Zoilo Ibaez de Aldecoa, make
the following assignments of error:
"1. The court erred in not sustaining the plea of lis
pendens with respect to the validity of mortgages claimed by
the plaintiff, which plea was set up as a special defense by the
defendants Joaquin and Zoilo Ibaez de Aldecoa, and in
taking jurisdiction of the case and in deciding therein a matter
already submitted for adjudication and not yet finally disposed
of.
"2. The court erred in not sustaining the plea
of res adjudicata set up as a special defense by these
defendants with respect to the contention of plaintiff that these
defendants are industrial and general partners of the firm of
Aldecoa & Co.
"3. The court erred in holding that the defendants Joaquin and
Zoilo Ibaez de Aldecoa were general partners(socios
colectivos) of the firm of Aldecoa & Co., and in rendering
judgment against them subsidiarily for the payment of the
amount claimed in the complaint."
The basis of the first alleged error is the pendency of an action
instituted by the appellants, Joaquin and Zoilo, in 1908, to
have the mortgages which the bank seeks to foreclose in the
present action annulled in so far as their liability thereon is
concerned. That action was pending in this Supreme Court on
appeal when the present action was instituted (1911), tried,
and decided in the court below.
The principle upon which a plea of another action pending is
sustained is that the latter action is deemed unnecessary and
vexatious. (Williams vs. Gaston, 148 Ala., 214; 42 Sou., 552;
1 Cyc. 21; 1 R. C. L., sec. 1.) A statement of the rule to which
the facts of the plea must conform in order to entitle the litigant
to its benefits, and which has often met with approval, is found
in Watson vs. Jones (13 Wall., 679, 715; 20 L. ed., 666):
"But when the pendency of such a suit is set up to defeat
another, the case must be the same. There must be the same
parties, or at least such as represent the same interest, there
must be the same rights asserted, and the same relief prayed
for. This relief must be founded on the same facts, and the title
or essential basis of the relief sought must be the same. The
identity in these particulars should be such that if the pending
case had already been disposed of, it could be pleaded in bar
as a former adjudication of the same matter between the same
parties."
It will be noted that the cases must be identical in a number of
ways. It will be conceded that in so far as the plea is
concerned, the parties are the same in the case at bar as they
were in the action to have the mortgages annulled Their
position is simply reversed, the defendants there being the
plaintiffs here, and vice versa. This fact does not affect the
application of the rule. The inquiry must therefore proceed to
the other requisites demanded by the rule.
Are the same rights asserted? Is the same relief prayed for?
The test of identity in these respects is thus stated in 1 Cyc.,
28:
"A plea of the pendency of a prior action is not available unless
the prior action is of such a character that, had a judgment
been rendered therein on the merits, such a judgment would
be conclusive between the parties and could be pleaded in bar
of the second action."
This test has been approved, citing the quotation, in
Williams vs. Gaston (148 Ala., 214; 42 Sou., 552); Van
Vleck vs. Anderson (136 Iowa, 366; 113 N. W., 853);
Wetzstein vs. Mining Co. (28 Mont., 451; 72 P., 865). It seems
to us that unless the pending action, which the appellants refer
to, can be shown to approach the action at bar to this extent,
the plea ought to fail.
The former suit is one to annul the mortgages. The present
suit is one for the foreclosure of the mortgages. It may be
conceded that if the final judgment in the former action is that
the mortgages be annulled, such an adjudication will deny the
right of the bank to foreclose the mortgages. But will a decree
holding them valid prevent the bank from foreclosing them?
Most certainly not. In such an event, the judgment would not
be a bar to the prosecution of the present action. The rule is
not predicated upon such a contingency. It is applicable,
between the same parties, only when the judgment to be
rendered in the action first instituted will be such that,
regardless of which party is successful, it will amount to res
adjudicata against the second action. It has often been held
that a pending action upon an insurance policy to recover its
value is not a bar to the commencement of an action to have
the policy reformed. The effect is quite different after final
judgment has been rendered in an action upon the policy.
Such a judgment may be pleaded in bar to an action seeking
to reform the policy. The cases are collected in the note to
National Fire Insurance Co. vs. Hughes (12 L. R. A., [N. S.],
907). So, it was held in the famous case of Sharon vs. Hill (26
Fed., 337), that the action brought by Miss Hill for the purpose
of establishing the genuineness of a writing purporting to be a
declaration of marriage and thereby establishing the relation
of husband and wife between the parties could not be pleaded
in abatement of Senator Sharon's action seeking to have the
writing declared false and forged. The court said:
"This suit and the action of Sharon vs. Sharon are not brought
on the same claim or demand. The subject matter and the
relief sought are not identical. This suit is brought to cancel
and annul an alleged false and forged writing, and enjoin the
use of it by the defendant to the prejudice and injury of the
plaintiff, while the other is brought to establish the validity of
said writing as a declaration of marriage, as well as the
marriage itself, and also to procure a dissolution thereof, and
for a division of the common property, and for alimony."
Incidentally, it was held in this case that a judgment of the trial
court declaring the writing genuine was
not res adjudicata after an appeal had been taken from the
judgment of the Supreme Court. So, in the case at bar, the fact
that the trial court in the former action holds the mortgages
invalid as to one of the herein appellants is not final by reason
of the appeal entered by the bank from that judgment.
Cases are also numerous in which an action for separation
has been held not to be a bar to an action for divorce or vice
versa. (Cook vs. Cook, [N. C.], 40 L. R. A., [N. S.], 83, and
cases collected in the note.) In Cook vs. Cook it was held that
a pending action for absolute divorce was not a bar to the
commencement of an action for separation. The above
authorities are so analogous in principle to the case at bar that
we deem the conclusion irresistible, that the pending action to
annul the liability of the two appellant children on the
mortgages cannot operate as a plea in abatement in the case
in hand which seeks to foreclose these mortgages. The
subject matter and the relief asked for are entirely different.
The facts do not conform to the rule and it is therefore not
applicable.
With reference to the second alleged error, it appears that a
certified copy of the judgment entered in the former case,
wherein it was declared that these two appellants, together
with their sister Cecilia, were creditors and partners of Aldecoa
& Co., was offered in evidence and marked Exhibit 5. This
evidence was objected to by the plaintiff on the ground that is
was res inter alios acta and not competent evidence against
the plaintiff or binding upon it in any way because it was not a
party to that action. This objection was sustained and the
proffered evidence excluded. If the evidence had been
admitted, what would be its legal effect? That was an action in
personam and the bank was not a party. The judgment is,
therefore, binding only upon the parties to the suit and their
successors in interest (sec. 306, Code of Civil Procedure, No.
2).
The question raised by the third assignment of errors will be
dealt with in a separate opinion wherein the appeal of Cecilia
Ibaez de Aldecoa will be disposed of.
The appellants whose appeals are herein determined will pay
their respective portions of the cost. So ordered.
Arellano, C.J., Torres and Araullo, JJ., concur.
Moreland, J., concurs in the result.
Johnson, J., dissents.
TRENT, J.:
In Hongkong & Shanghai Banking Corporation vs. Aldecoa &
Co. et al., R. G. No. 8437, just decided, we said that the
correctness of the judgment declaring that the defendants,
Joaquin, Zoilo, and Cecilia Ibaez de Aldecoa, are subsidiarily
liable to the bank as industrial partners of Aldecoa & Co. for
the debts of the latter, would be determined in a separate
opinion.
The facts are these: Joaquin, Zoilo, and Cecilia Ibaez de
Aldecoa were born in the Philippine Islands, being the
legitimate children of Zoilo Ibaez de Aldecoa and Isabel
Palet. Both parents were natives of Spain, but domiciled in
Manila, where the father died in 1895. At the time of his death
the father was a member and managing director of an ordinary
general mercantile partnership known as Aldecoa & Co. In
December, 1896, Isabel Palet, for herself and as the parent of
her above-named three children, exercising the patria
potestad, entered into a new contract with various persons
whereby the property and good will, together with the liabilities
of the firm of which her husband was a partner, were taken
over. The new firm was also an ordinary general mercantile
partnership and likewise denominated Aldecoa & Co. Although
having the same name, the new firm was entirely distinct from
the old one and was, in fact, a new enterprise. The widow
entered into the new partnership as a capitalistic partner and
caused her three children to appear in the articles of
partnership as industrial partners. At the time of the execution
of this new contract Joaquin was twelve years of age, Zoilo
eleven, and Cecilia nine.
Clauses 9 and 12 of the new contract of partnership read:
"9. The industrial partners shall bear in proportion to the
shares the losses which may result to the partnership from bad
business, but only from the reserve fund which shall be
established, as set forth in the 12th clause, and if the loss
suffered shall exhaust said fund the balance shall fall
exclusively upon the partners furnishing the capital."
"12. The industrial partner shall likewise contribute 50 per cent
of his net profits to the formation of said reserve fund, but may
freely dispose of the other 50 per cent."
The question is presented, Could the mother of the three
children legally bind them as industrial partners of the firm of
Aldecoa & Co. under the above facts? If so, are they liable
jointly and severally with all their property, both real and
personal, for the debts of the firm? That all industrial partners
of an ordinary general mercantile partnership are liable with all
their property, both personal and real, for all the debts of the
firm owing to third parties precisely as a capitalistic partner has
long since been definitely settled in this jurisdiction,
notwithstanding provisions to the contrary in the articles of
agreement. (Compaia Maritima vs. Muoz, 9 Phil. Rep.,
326.)
There are various provisions of law, in force in 1896, which
must be considered in determining whether or not the mother
had the power to make her children industrial partners of the
new firm of Aldecoa & Co.
Article 5 of the Code of Commerce reads:
"Persons under twenty-one years of age and incapacitated
persons may continue, through their guardians, the commerce
which their parents or persons from whom the right is derived
may have been engaged in. If the guardians do not have legal
capacity to trade, or have some incompatibility, they shall be
under the obligation to appoint one or more factors who
possess the legal qualifications, and who shall take their
places in the trade."
As the firm of which it is claimed the children are industrial
partners was not a continuation of the firm of which their
deceased father was a member, but was a new partnership
operating under its own articles of agreement, it is clear that
article 5, supra, does not sustain the mother's power to bind
her children as industrial partners of the new firm.
Article 4 of the Code of Commerce reads:
"The persons having the following conditions shall have legal
capacity to customarily engage in commerce:
"1. Those who have reached the age of twenty-one years.
"2. Those who are not subject to the authority of a father or
mother or to marital authority.
"3. Those who have the free disposition of their property."
The appellant children had not a single one of these
qualifications in 1896 when the mother attempted to enter
them as industrial partners of the firm of Aldecoa & Co.
It is claimed that the power of the mother to bind her children
as industrial partners is within her parental authority as defined
by the Civil Code. Articles 159 to 166 which compose chapter
3 of the Civil Code, entitled "Effect of parental authority with
regard to the property of the children," define the extent of the
parental authority over the property of minor children. Article
159 provides that the father, or, in his absence, the mother, is
the legal administrator of the property of the children who are
under their authority. Article 160 gives to such parent the
administration and usufruct of property acquired by the child
by its work or industry or for any good consideration. We take
it that all the property possessed by the children at the time
the contract of partnership was entered into in 1896 had been
acquired by them either by their work or industry or for a good
consideration. The children were at that time under the
authority of their mother.
Article 164 reads:
"The father, or the mother in a proper case, cannot alienate
the real property of the child, the usufruct or administration of
which belongs to them, nor encumber the same, except for
sufficient reasons of utility or necessity, and after authorization
from the judge of the domicile upon hearing by the department
of public prosecution, excepting the provisions which, with
regard to the effects of transfers, the mortgage law
establishes."
The mother did not secure judicial approval to enter into the
contract of partnership on behalf of her children. Does
membership in an ordinary general mercantile partnership
alienate or encumber the real property of an industrial partner?
Clearly a partner alienates what he contributes to the firm as
capital by transferring its ownership to the firm. But this, in the
case of an industrial partner, is nothing An industrial partner
does not alienate any portion of his property by becoming a
member of such-a firm. Therefore, the mother did not violate
this prohibition of article 164 in attempting to make her children
industrial partners. But the article in question also prohibited
her from encumbering their real property. This undoubtedly
prohibits formal encumbrances such as mortgages, voluntary
easements, usufructuary rights, and others which create
specific liens upon specific real property. It has been held to
prohibit the creation of real rights, and especially registerable
leases in favor of third persons. (Res., Aug. 30, 1893.) The
same word is used in article 317 of the Civil Code in placing
restrictions upon the capacity of a child emancipated by the
concession of the parent to deal with his own property. In
commenting on this latter article, Manresa asks the question,
"To what encumbrances does the code refer in speaking of
emancipated children?" and answers it as follows:
"The prohibition against encumbering real property is so
explicit . . . that we consider it unnecessary to enumerate what
are the incumbrances to which the law refers. All that signifies
a limitation upon property, such as the creation, modification,
or extinction of the right of usufruct, use, habitation,
emphyteusis, mortgages, annuities, easements, pensions
affecting real property, bonds, etc., is, in an express manner,
prohibited to emancipated children without the express
consent of the persons who are mentioned in the said article
317." (Vol. 2, p. 689.)
In commenting upon the same article, Sanchez Roman says
practically the same thing. (Vol. 5, p. 1179.) Neither of these
commentators refers to the right of an emancipated child to
enter into a contract of partnership without the parent's
consent. The question, in so far as we have been able to
ascertain, does not appear to have ever been discussed,
either by the courts or the commentators. It is significant,
however, that a contract of surety is placed by both the above
mentioned commentators among the prohibited contracts. The
encumbrance placed upon the real property of a surety is
precisely the same as the encumbrance placed upon the real
property of an industrial partner. That is, prior to judgment on
the principal obligation or judgment against the partnership,
the property is not specifically liable, and the creditor has no
preferred lien thereon or right thereto by reason of the bond or
partnership contract, as the case may be. After judgment, the
property of the surety or of the industrial partner, both real and
personal, is subsidiarily subject to execution. The evident
purposes of both article 164, prohibiting the parent from
encumbering the real property of his child without judicial
approval, and of article 317, placing the same prohibition upon
the emancipated child in the absence of the parent's approval,
is the same. It is desired that the child's real property shall not
be frittered away by hasty and ill-advised contracts entered
into by the one having the administration thereof. Both articles
would fail of their purpose if the parent or the child, as the case
might be, could do indirectly what could not be done directly.
In other words, there would be little purpose in prohibiting a
formal encumbrance by means of a mortgage, for instance,
when a subsidiary liability by means of a bond or membership
in a partnership could as effectually deprive the child of its real
property. The mother cannot be permitted to do indirectly that
which she cannot do directly. But it is said that the prohibition
of article 164 extends to real property only and that, therefore,
the children are subsidiarily liable as industrial partners to the
extent of their personal property. This proposition rests upon
the theory that the mother could have freely disposed of the
child's personal property in 1896 and that the only recourse
open to them would have been an action against their mother
for the value of such property. If this theory be true, the result
would not be changed for the reason that the children were
either industrial partners or they were not. If they were, they
are liable to the extent of both their real and personal property
for the debts of the firm. If they were not, they are in no way
liable. There can be only two kinds or classes of partners in a
firm of this kind, capitalistic and industrial. Both are personally
liable to third persons for the debts of such a firm. To say that
the children are industrial partners, but liable only to the extent
of their personal property, would be to place them in a different
class of partners. As the mother did not secure judicial
approval, the contract wherein she attempted to make her
children industrial partners, with all the consequences flowing
therefrom, was, therefore, defective and that act of itself in no
way made the children liable for the debts of the new firm.

The question remains, Did any of the children validly ratify the
contract after acquiring capacity to do so? Cecilia was never
emancipated and there is no evidence indicating that she has
ever ratified the contract by word or deed. She is, therefore,
completely exonerated from liability for the debts of Aldecoa &
Co.

The other two children, Joaquin and Zoilo, were emancipated

by their mother after they had reached the age of eighteen and
prior to seeking annullment of the contract of partnership had
participated by vote and otherwise in the management of the
firm, as is evidenced by Exhibits W, Y, and Z. These various
acts sufficiently show a ratification of the partnership contract
and would have the effect of making the two children industrial
partners if they had been of age at that time. Ratification is in
the nature of a contract. It is the adoption of, and assent to be
bound by, the act of another. (Words and Phrases, vol 7,
p.5930.) From the effect of emancipation it cannot be doubted
that the two children had capacity, with their mother's consent,
to enter into a contract of partnership, and, by so doing, make
themselves industrial partners, thereby encumbering their
property. Conceding that the children under these
circumstances could enter into such a contract with their
mother, her express consent to the ratification of the contract
by the two children does not appear of record. The result
flowing from the ratification being the encumbrance of their
property, their mother's express consent was necessary.

For the foregoing reasons the judgment appealed from, in so

far as it holds the three children liable as industrial partners, is
reversed, without costs in so far as this branch of the case is
concerned. So ordered.