REVIEWER IN CREDIT TRANSACTIONS

CASES ON GUARANTY

Philippine National Bank vs. Macapanga Producers, Inc.

G.R. No. L-8349, May 23, 1956

Facts: Luzon Sugar Company leased a sugar mill to Macapanga Producers at a minimum
annual royalty of P 50,000, which constituted a lien on the sugar produced by the lessee and shall be
paid before sale or removal of sugar from warehouse. Macapanga Producers and Plaridel Surety &
Insurance executed and delivered to PNB a performance bond of 50,000 for the full and faithful
compliance by Macapanga Producers of all terms and conditions of the lease. Thereafter, Luzon
Sugar assigned to PNB the payment due from Macapanga Producers in the sum of P50,000,
representing royalty for the lease of the sugar. PNB notified Macapanga Producers and Plaridel Surety
& Insurance of said assignment. However, when PNB demanded payment from Macapanga
producers, the latter refused to make payment. PNB sought payment of the same from Plaridel
Surety & Insurance but the latter also refused to pay and alleged that it is a guarantor and as such is
responsible only if Macapanga Producers has no property or assets to pay its obligation as lessee.
Plaridel Surety and Insurance also contended that as it was not a party to the assignment, and was
made without its consent, it is, therefore, discharged from its obligation. On the other hand, PNB
contended that Macapanga Producers, as principal, and Plaridel Surety & Insurance Company, as
surety, agreed to be held and firmly bound unto Luzon Sugar as stated in their performance bond,
and argued that since Plaridel Surety & Insurance bound itself solidarily with Macapanga Producers, it
became a surety in accordance with Article 2047, paragraph 2 of the Civil Code which provides that if
a person binds himself solidarily with the principal debtor, the provisions on joint and solidary
obligations shall be observed. In such case the contract is called a suretyship.

Issues:

(1) Whether Plaridel Surety and Insurance Company is a guarantor or a surety?

(2) Whether Plaridel Surety and Inusrance Company is released from the obligation by the
assignment or not?

Ruling:

(1) Plaridel Surety and Insurance Company is a surety. The second paragraph of Article 2047 states
the law applicable to the contract of suretyship. If a person binds himself solidarily with the principal
debtor, the contract is called suretyship and the guarantor is called surety. As such, Plaridel Surety
and Insurance Complany is also a principal debtor. The creditor may sue any of the solidary debtors
or all of them simultaneously.
(2) No. An assignment by the creditor without the knowledge or consent of the surety is not a
material alteration of the contract sufficient to discharge the surety. Besides, there is no allegation in
the complaint, or provision in the deed of assignment, or any change therein that makes the
obligation of Plaridel Surety & Insurance more onerous than that stated in the performance bond.
Such assignment did not, therefore, release the Plaridel Surety & Insurance from its obligation under
the surety bond.

Manila Surety vs. Batu Construction

G.R. No L-9353, May 21, 1957

Facts: Batu Construction & Company, as principal, and Manila Surety & Fidelity Co. Inc., as
surety, executed a surety bond in favor of the Government of the Philippines to insure faithful
performance of Batu Construction's obligation as contractor for the construction of Bacarra Bridge.
Manila Surety received a notice from the Director of Public Works annulling its contract because of
Batu Constructions failure to make satisfactory progress in the execution of the works, with the
warning that any amount spent by the Government in the continuation of the work, in excess of the
contract price, will be charged against the surety bond furnished by Manila Surety. It also appears
that a complaint by the laborers in said project was filed against Batu Construction and the Manila
Surety, for unpaid wages.

Manila Surety filed a complaint against Batu Construction, et al. praying, among others, that
defendants deliver sufficient security to protect it from any proceedings by the creditors on the
Surety Bond and from the danger of insolvency of the defendants. Amboy moved for the dismissal of
the complaint, on the ground that the remedy provided for in the last paragraph of Article 2071 of
the new Civil Code may be availed of by the guarantor only and not by a surety.

Issue: Whether the last paragraph of Article 2071 of the new Civil Code may be availed of by a
guarantor only and not by a surety.

Ruling: No.

Article 2071 of the NCC may be availed of by a guarantor and by a surety.

A guarantor is the insurer of the solvency of the debtor; a surety is an insurer of the debt. A
guarantor binds himself to pay if the principal is unable to pay; a surety undertakes to pay if the
principal does not pay. In suretyship, the surety becomes liable to the creditor without the benefit of
the principal debtor's exclusion of his properties, for the surety maybe sued independently. A surety
has assumed a responsibility more onerous than that of guarantor. Such being the case, the
provisions of article 2071, under guaranty, are applicable and available to a surety.

Manila Suretys cause of action comes under paragraph 1 of article 2071 of the NCC, because
the action brought by the laborers for the collection of unpaid wages in connection with the
construction of the Bacarra Bridge is a suit for the payment of an amount for which the surety bond
was posted. Paragraph 1 of article 2071 of NCC provides that the guarantor, even before having paid,
may proceed against the principal debtor "to obtain release from the guaranty, or to demand a
security that shall protect him from any proceedings by the creditor or from the danger of insolvency
of the debtor, when he (the guarantor) is sued for payment. It does not provide that the guarantor
be sued by the creditor for the payment of the debt. It simply provides that the guarantor of surety
be sued for the payment of an amount for which the surety bond was put up to secure the fulfillment
of the obligation undertaken by the principal debtor.

ESTRELLA PALMARES, petitioner, vs

COURT OF APPEALS and M.B. LENDING CORPORATION, respondents.
G.R. No. 126490 March 31, 1998
Facts:
Pursuant to a promissory note dated March 13, 1990, M.B. Lending Corporation extended a loan to
the spouses Osmea and Merlyn Azarraga, together with Estrella Palmares, in the amount of
P30,000.00 payable on or before May 12, 1990, with compounded interest at the rate of 6% per
annum to be computed every 30 days from the date thereof. On four occasions after the execution of
the promissory note and even after the loan matured, petitioner and the Azarraga spouses were able
to pay a total of P16, 300.00, thereby leaving a balance of P13,700.00. No payments were made
after the last payment on September 26, 1991.
Consequently, on the basis of petitioner's solidary liability under the promissory note, M.B. Lending
Corporation filed a complaint against Palmares as the lone party- defendant, to the exclusion of the
principal debtors, allegedly by reason of the insolvency of the latter.
Issue:
Whether or not a party who signed a promissory note as a co-maker and bound herself to be jointly
and severally liable with the principal debtor in case the latter defaults in the payment of the loan, is
deemed to be that of a surety as an insurer of the debt, or of a guarantor who warrants the solvency
of the debtor?
Ruling:
He is a surety because a surety is an insurer of the debt. 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.
Here, Palmares expressly bound herself to be jointly and severally or solidarily liable with the principal
maker of the note. The terms of the contract are clear, explicit and unequivocal that her liability is
that of a surety. Having entered into the contract with full knowledge of its terms and conditions,
Palmares is estopped to assert that she did so under a misapprehension or in ignorance of their legal
effect, or as to the legal effect of the undertaking. The rule that ignorance of the contents of an
instrument does not ordinarily affect the liability of one who signs it also applies to contracts of
suretyship. And the mistake of a surety as to the legal effect of her obligation is ordinarily no reason
for relieving her of liability.

JEANETTE D. MOLINO vs. SECURITY DINERS INTERNATIONAL CORPORATION

G.R. NO. 136780 August 16, 2001

FACTS: On 24 July 1987, Jeanette Molino acted as a surety for her brother-in-law, Danilo Alto, in his
application for a local credit card (P10,000.00 credit limit) with the Security Diners International
Corporation (SDIC).
A Surety Undertaking was signed by Jeanette which states that she bound herself jointly and
severally with Danilo to pay SDIC all obligations and charges in the use of the credit card; and she
declared that "any change or novation in the Agreement shall not release her from the Surety
Undertaking," it being understood that said Undertaking is a continuing one and shall subsist and
bind her until all such obligations, charges, and fees have been fully paid and satisfied.

The application of Danilo was approved by SDIC. On 8 February 1988, he requested SDIC to upgrade
his Regular Card to Diamond Card (no credit limit). As a requirement, Danilo secured the approval of
Jeanette who then signed a note indicating her approval to the said request.

On 01 October 1988, Danilo defaulted in the payment of P166,408.31. SDIC filed an action for
collection against Danilo and Jeanette before the RTC of Makati. Jeanette claimed that the Surety
Undertaking only applies to the original agreement covering the Regular Card first issued to Danilo
and incurred no liability under the Diamond Card because she did not expressly give her consent to
be a surety thereto; and the upgrading of the card extinguishes her obligation under the original
agreement and Surety Undertaking.

ISSUE: Whether the upgrading of the card constituted a novation that will extinguish Jeanettes
obligation under the original agreement and Surety Undertaking.

HELD: The upgrading was a novation because it was committed with the intent of cancelling and
replacing the first card. However, the novation did not serve to release petitioner from her
surety obligations because in the Surety Undertaking she expressly waived discharge in
case of change or novation in the agreement governing the use of the first credit card.

The extent of a suretys liability is determined by the language of the suretyship contract or bond
itself. The Surety Undertaking expressly provides that petitioners liability is solidary. A surety is
considered in law as being the same party as the debtor in relation to whatever is adjudged touching
the obligation of the latter, and their liabilities are interwoven as to be inseparable. Although the
contract of a surety is in essence secondary only to a valid principal obligation, his liability to the
creditor is direct, primary and absolute; he becomes liable for the debt and duty of another although
he possesses no direct or personal interest over the obligations nor does he receive any benefit
therefrom.

The petition filed by Jeanette was dismissed for lack of merit.

Paramount Insurance vs. Court of Appeals

G.R. No. 110086 July 19, 1999

Facts: McAdore Finance and Investment, Inc. (McADORE) and Dagupan Electric Corporation
(DECORP) entered into a contract whereby DECORP shall provide electric power to McADORE's Hotel.
During the term of their contract for power service, DECORP noticed discrepancies between the
actual monthly billing of McADORE and this was subsequently affirmed upon investigation. DECORP
sent a corrected electric bill to McADORE's Hotel but the latter refused to pay, prompting DECORP to
cut off its electric services to the hotel. Aggrieved, McADORE commenced a suit against DECORP for
damages with prayer for a writ of preliminary injunction. McADORE posted injunction bonds from
several sureties, one of which was Paramount Insurance Corporation, which issued an injunction
bond with a face amount of P500,000.00. The RTC of Quezon City ruled in favor of DECORP; the
court rescinded the contract between McADORE and held that all the bonding companies are jointly
and severally liable with McAdore, to the extent of the value of their bonds, to pay actual, moral, and
exemplary damages adjudged to DECORP. Paramount appealed the decision to the Court of Appeals
asserting that it is only liable to pay actual damages, aside from its contention that it was denied due
process because it was not notified by DECORP of its intention to present evidence of damages
against its injunction bond.

Issue: Whether or not Paramount is correct in maintaining that it is only liable to pay actual
damages?

Ruling: No. Paramount is not correct in maintaining that it is only liable to pay actual damages.

A scrutiny of petitioner's Indemnity Agreement with McADORE shows that the former agreed "to
become surety" for the stated amount "in favor of DECORP. By the contract of suretyship, it is not for
the obligee to see to it that the principal pays the debt or fulfills the contract, but for the surety to
see to it that the principal pay or perform. The purpose of the injunction bond is to protect the
defendant against loss or damage by reason of the injunction in case the court finally decides that
the plaintiff was not entitled to it, and the bond is usually conditioned accordingly. Thus, the
bondsmen are obligated to account to the defendant in the injunction suit for all damages, or costs
and reasonable counsel's fees, incurred or sustained by the latter in case it is determined that the
injunction was wrongfully issued.

Trade & Investment (Philguarantee) vs. Roblett et al., and Paramount Insurance Corp.
G.R. No 139290, November 11, 2005

Facts: The general contractor of a foreign oil company (KNPC) opened for bidding in 1984 a
subcontract for the supply of workers for a project in Kuwait. Roblett, to qualify as a bidder, was
required to post a bid bond. Consequently, Roblett applied withthe Bank of Kuwait (BKME) for a letter
of guarantee to cover the amount. The bank consented on the condition that Roblett would obtain a
counterguarantee to secure bond. Roblett then obtained from Philguarantee a counterguarantee in
favor of BKME, however, its issuance was conditioned upon the execution by Roblett of a Deed of
Undertaking. Under the terms of the Deed, Roblett bound itself to keep petitioner free and harmless
from any damage or liability which may arise out of the issuance of its bid bond guaranteeand to give
their irrevocable consent and approval to any and all extensions of the period of the guarantee.

The Deed required that the counterguarantee be secured by a surety bond equivalent to
100% of the guarantee accommodation. The instrument had to be in the form of a surety bond; the
same must be issued by an insurance company acceptable to Philguarantee and must be coterminous
with the guarantee to be issued. Roblett was awarded the subcontract by KNPC. The required
performance bond was pending with the Central Bank, however, its application was disapproved. As
a result, Roblett was not able to post the bond and was deemed by KNPC to have breached the
subcontract. KNPC confiscated BKMEs bid bond, which in turn called on petitioner Philguarantees
counterguarantee. Thus, Philguarantee notified Paramount of the payment it had made to BKME.
Paramount again contended that the bond it issued was in the nature of a bidders bond and not a
performance bond. It argued that when the subcontract was awarded to and was entered into by
Roblett, its liability on the Surety Bond, which was actually a bidders bond, already ceased, hence,
this petition.

Issue: Whether or not Paramount was liable as surety to the petitioner.

Ruling: Yes.

A perusal of the Surety Bond reveals that Paramount bound itself jointly and severally with
Roblett to pay petitioner to the extent of P11, 775,611.35 whatever damages and liabilities the latter
may incur by virtue of its guarantee. This liability on the part of Paramount obtains upon the
occurrence of one condition: that petitioners counterguarantee be called upon by BKME. What is
actually secured by Paramounts bond is not Robletts bid with KNPC, but rather the guarantee put up
by petitioner to secure BKMEs bidders bond. Paramounts Surety Bond guarantees indemnification to
petitioner for whatever it may pay by virtue of its counterguarantee. Time and again, we have ruled
that the liability of a surety is determined strictly on the basis of the terms and conditions set out in
the surety agreement. Hence, we need not look beyond the contract to determine the nature and
scope of Paramounts undertaking.

G.R. No. 121879 August 14, 1998

EMPIRE INSURANCE COMPANY, petitioners, vs
NATIONAL LABOR RELATIONS COMMISSION and MONERA ANDAL, respondents.

Facts:
Monera Andal applied with G & M Phils., Inc. for an overseas employment as a domestic helper in
Riyadh, Kingdom of Saudi Arabia. She was hired for a term of two years at a monthly basic salary of
US $200.00. After serving 7 years and half, she sought help from the Philippine Embassy contending
that she was illegally dismissed, non-payment and underpaid of salaries, by her employer. She also
claims that she was abused by her employer and was given $450 representing her three (3) months.
Impleaded as a co-respondent in the complaint was the herein petitioner, Empire Insurance
Company, in its capacity as the surety of G & M Phils.
Empire Insurance Company, now the petitioner, theorized that Monera Andal was without any cause
of action against it for the alleged reason that the liability of its principal and co-respondent had not
been established. It further argued that its liability, if any, for the money claims sued upon was
merely subsidiary. In its answer to the complaint, respondent G & M (Phils.), Inc., stated that it had
no knowledge of complainants unpaid and underpaid salaries, her working conditions and of the
proceedings at the Philippine Embassy. NLRC held that the Empire Insurance is liable as it is settled
that a surety is considered in law as being the same party as the debtor in relation to whatever is
adjudged touching the obligation of the latter, and their liabilities are interwoven as to be
inseparable.
Issue:
Whether or not the petitioning surety company is jointly liable with its principal, G & M Phils., Inc., a
recruitment agency, for the payment of respondent employees monetary claims in litigation.
Ruling:
The surety company is solidarily liable with its principal. Suretyship is a contractual relation resulting
from an agreement whereby one person, the surety, engages to be answerable for the debt, default
or miscarriage of another, known as the principal. The suretys liability is solidary but the nature of its
undertaking is such that unless and until the principal debtor is held liable it does not incur liability.
When the herein petitioner, Empire Insurance Company, entered into a suretyship agreement with G
& M Phils., Inc., it bound itself to answer for the debt or default of the latter. And, since the POEA
and NLRC found the said recruitment agency liable to private respondent, petitioners liability likewise
proceeds from such a finding. As a surety, Empire Insurance Company is primarily liable to Monera
Andal, as judgment creditor, for her monetary claims against its principal, G & M Phils., Inc., and is
immediately bound to pay and satisfy the same.

PEOPLE OF THE PHILIPPINES vs. JULIA MANIEGO

G.R. NO. L-30910 February 27, 1987

FACTS: In 1957, Lt. Rizalino M. Ubay, Disbursing Officer in the Office of the Chief of Finance, was
convicted of the crime of malversation in conspiracy with Julia T. Maniego, the indorser of personal
checks drawn against the PNB and BPI. Maniego was acquitted on reasonable doubt but both she
and Ubay are ordered to pay jointly and severally the amount of P57,434.50 (the amount malversed)
to the Government.

Maniego argued that her acquittal absolved her from civil liability to indemnify the Government; and
as a mere indorser, she cannot be made liable on account of the dishonor of the checks indorsed by
her.

ISSUE: Whether or not Maniegos acquittal absolved her from any civil liability; and
Whether or not Maniego is liable as indorser to indemnify the Government.

HELD: The Supreme Court ruled that the Trial Court was correct in adjudging Maniego to be civilly
liable in the same criminal action in which she had been acquitted of the felony of Malversation.
Extinction of the penal action does not carry with it extinction of the civil unless the extinction
proceeds from a declaration in a final judgment that the fact from which the civil might arise did not
exist.

The Court also ruled that Maniego is liable as indorser. Under the law, the holder or last indorsee of a
negotiable instrument has the right to "enforce payment of the instrument for the full amount thereof
against all parties (including the indorser) liable thereon." Such an indorser "who indorses without
qualification," inter alia "engages that on due presentment, ** (the instrument) shall be accepted or
paid, or both, as the case may be, according to its tenor, and that if it be dishonored, and the
necessary proceedings on dishonor be duly taken, he will pay the amount thereof to the holder, or to
any subsequent indorser who may be compelled to pay it."

Maniego may also be deemed an "accommodation party" in the light of the facts, i.e., a person "who
has signed the instrument as maker, drawer, acceptor, or indorser, without receiving value therefor,
and for the purpose of lending his name to some other person." As such, she is under the law "liable
on the instrument to a holder for value, notwithstanding such holder at the time of taking the
instrument knew ** (her) to be only an accommodation party, although she has the right, after
paying the holder, to obtain reimbursement from the party accommodated, "since the relation
between them is in effect that of principal and surety, the accommodation party being the surety."
The judgment of the Trial Court was affirmed in toto.

Philippine Export and Foreign Loan Guarantee Corporation vs. VP Eusebio Construction
G.R. No. 140047 July 23, 2004

Facts: 3-Plex International, Inc., a local contractor, entered into a joint venture agreement with Ajyal
Trading and Contracting Company, a duly licensed firm in Kuwait, for the construction of the Institute
of Physical Therapy-Medical Center in Baghdad, Iraq. 3-Plex then entered into a joint management
agreement with V.P. Eusebio Construction, Inc. (VPECI) for the execution of the project. Since the
State Organization of Buildings (SOB) of the Iraqi Government required contractors to submit a
performance and advance payment bonds, 3-Plex and VPECI applied for the issuance of a guarantee
with Philguarantee. Letters of guarantee were then issued by Philguarantee to the Rafidain Bank of
Baghdad, the government bank of Iraq, covering 100% of the performance and advance payment
bonds, but these were not accepted by SOB. What SOB required was a letter-guarantee from
Rafidain Bank, Rafidain Bank then issued a performance bond in favor of SOB on the condition that
another foreign bank, not Philguarantee, would issue a counter-guarantee to cover its exposure. Al
Ahli Bank of Kuwait was, therefore, engaged to provide a counter-guarantee to Rafidain Bank, but it
required a similar counter-guarantee in its favor from Philguarantee. Due to the slow progress of the
construction, Al Ahli Bank sent a telex call to the Philguarantee demanding full payment of its
performance bond counter-guarantee. Philguarantee then paid Al Ahli Bank and accordingly, sent to
VPECI and 3-Plex separate letters demanding full payment. Due to failure of the latter to pay,
Philguarantee commenced a collection suit against them. The trial court dismissed the complaint after
finding that the joint venture contractor incurred no delay in the execution of the Project. It was held
that it is the project owner's violations of the contract which rendered impossible the contractor's
performance of its undertaking, thus, no valid call on the guarantee could be made. It also held that
no valid notice was first made by the project owner (SOB) to the joint venture contractor before the
call on the guarantee.

Issue: Whether or not Philguarantee is entitled to reimbursement of what it paid to Al Ahli Bank of
Kuwait based on the deed of undertaking and surety bond?

Ruling: No. First, the petitioner is not a surety rather he is a guarantor whereby he binds himself to
the creditor to fulfill the obligation of the principal debtor in case the latter should fail to do so. If a
person binds himself solidarily with the principal debtor, the contract is called suretyship. The
guarantee issued by the petitioner is unconditional and irrevocable does not make the petitioner a
surety. As a guaranty, it is still characterized by its subsidiary and conditional quality because it does
not take effect until the fulfillment of the condition, namely, that the principal obligor should fail in his
obligation at the time and in the form he bound himself. In his obligation first before resort to the
guarantor could be had. However, a person who makes payment without the knowledge or against
the will of the debtor has the right to recover only insofar as the payment has been beneficial to the
debtor. If the obligation was subject to defenses on the part of the debtor, the same defenses which
could have been set up against the creditor can be set up against the paying guarantor. But as to the
findings of the trial court, it is clear that the payment made by the petitioner guarantor did not in any
way benefit the principal debtor, given the project status and the conditions obtaining at the Project
site.

International Finance Corporation vs. Imperial Textile Mills, Inc.

G.R. No 160324, November 15, 2005

Facts: Petitioner Finance Corporation (IFC) and respondent Philippine Polyamide Industrial
Corporation (PPIC) entered into a loan agreement where IFC extended to PPIC a loan of 7 Million US
Dollars payable in 16 semi-annual installments beginning June 1, 1977 to December 1. 1984 with
10% interest per annum. Interest shall be paid in US Dollars semi-annually on June 1 and December
1 in each year and interest for any period less than a year shall accrue and be pro-rated on the bases
of 360-day year of 12 30-day month basis. A Guarantee Agreement was executed with Imperial
Textile Mills (ITM), Grand Textile Manufacturing Corporation (Grandtex) and IFC as parties. ITM and
Grandtex agreed to guarantee PPICs obligation under the loan. But thereafter, despite notice, PPIC
failed to the loan and its interests. Hence, IFC, with DBP, applied for extrajudicial foreclosure of
mortgages on the real estate, buildings, machinery, equipment, plant and all improvements owned by
PPIC at Calamba, Laguna. The deputy sheriff issued a notice of extrajudicial sale. IFC and DBP were
the only bidders. IFCs bid is not enough to cover the whole amount, leaving a balance of 283, 967
US Dollars. Again, PPIC failed to pay the balance. So IFC demanded ITM and Grandtex, as
guarantors. But despite demand, the balance remained unpaid. The trial court held PPIC liable for the
balance plus interest but relieved ITM of its obligation as guarantor. On the other hand, CA held
otherwise, but ITMs liability as guarantor would arise only if and when PPIC could not pay. Since
PPICs inability to pay was not sufficiently established, ITM could not immediately be made to assume
the liability.

Issue: Whether or not ITM and Grandtex are sureties and therefore jointly and severally liable
with PPIC.

Ruling: Yes.

According to the language of the contract of guaranty between the parties, the guarantors
jointly and severally, irrevocably, absolutely and unconditionally, guaranty, as primary obligors and
not as sureties merely. While referring to ITM as guarantor, the agreement specifically stated that the
corporation was jointly and severally liable. The contract further stated that ITM was a primary
obligor, not a mere surety. Those stipulations meant that it was a surety.The use of the word
guarantee does not ipso facto make the contract one of guaranty. The very terms of the contract
govern the obligation of the parties.

G.R. No. 148864 August 21, 2003

SPOUSES EDUARDO B. EVANGELISTA and EPIFANIA C. EVANGELISTA, Petitioners, vs.
MERCATOR FINANCE CORP., LYDIA P. SALAZAR, LAMEC'S** REALTY AND DEVELOPMENT
CORP. and the REGISTER OF DEEDS OF BULACAN, Respondents.

Facts:
Spouses Evangelista executed a Mortgage in favor of Mercator for and in consideration of certain
loans and other forms of credit accommodations given by Mercator, amounting to P844,625. Spouses
Evangelista and Embassy Farms signed the promissory note as co-makers, aside from the Continuing
Suretyship and the succeeding promissory notes restructuring the loan. Due to their failure to pay the
obligation, the mortgaged properties were foreclosed and sold.
Spouses Evangelista are assailing the validity of the foreclosure proceedings by Mercator, the sale in
the public auction, new TCTs, and subsequent sale to Salazar, and the subsequent sale and transfer
to herein respondent Lamecs. They claimed being the registered owners of five (5) parcels of land
contained in the Real Estate Mortgage executed by them and Embassy Farms, Inc. They did not
receive the proceeds of the loan evidenced by a promissory note, as all of it went to Embassy Farms
so the mortgage was without any consideration as to them since they did not personally obtain any
loan or credit accommodations. There being no principal obligation on which the mortgage rests, the
real estate mortgage is void.
Issue:
Whether or not Spouses Evangelista are jointly and severally liable to pay Mercator for affixing their
signatures in the promissory note as officers of Embassy Farms, Inc..
Ruling:
Yes, Spouses Evangelista are jointly and severally liable. Even if the spouses intended to sign the
note merely as officers of Embassy Farms, still this does not erase the fact that they subsequently
executed a continuing suretyship agreement. A surety is one who is solidarily liable with the principal.
The spouses cannot claim that they did not personally receive any consideration for the contract for
well-entrenched is the rule that the consideration necessary to support a surety obligation need not
pass directly to the surety, a consideration moving to the principal alone being sufficient. A surety is
bound by the same consideration that makes the contract effective between the principal parties
thereto. Having executed the suretyship agreement, there can be no dispute on the personal liability
of petitioners.

PHILIPPINE PRYCE v. CA
G.R. NO. 107062 February 21, 1994

FACTS: Gegroco, Inc filed before the Makati Regional Trial Court, Branch 138 complaint for collection
of sum of money. The complaint alleged that petitioner issued two surety bonds (No. 0029, dated
July 24, 1987 and No. 0037, dated October 7, 1987) in behalf of its principal Sagum General
Merchandise for FIVE HUNDRED THOUSAND (P500,000.00) PESOS and ONE MILLION (1,000,000.00)
PESOS, respectively. The trial court favored Gegroco, Inc. Upon appeal to the CA, it affirmed RTC
decision.
Interworld Assurance Corporation checks issued by its principal which were supposed to pay for the
premiums, which bounced and it was not yet authorized by the Insurance Commission to issue surety
bonds.

ISSUE: Whether or not Interworld Assurance Corporation should be liable for the surety bond that it
issued as payment for the premium.

HELD: The Court ruled in the affirmative. Interworld Assurance Corporation is liable for the surety
bond it issued as payment for the premium.

Under Sec. 177 of the Insurance Code: The surety is entitled to payment of the premium as soon as
the contract of suretyship or bond is perfected and delivered to the obligor. No contract of suretyship
or bonding shall be valid and binding unless and until the premium therefor has been paid, except
where the obligee has accepted the bond, in which case the bond becomes valid and enforceable
irrespective of whether or not the premium has been paid by the obligor to the surety.
Interworld's defense that it did not have authority to issue a Surety Bond when it did is an admission
of fraud committed against Gegroco. No person can claim benefit from the wrong he himself
committed. A representation made is rendered conclusive upon the person making it and cannot be
denied or disproved as against the person relying thereon.

Jacinto Uy Dino vs. Court of Appeals

G.R. No. 89775 November 26, 1992

Facts: In 1977, Uy Tiam Enterprises and Freight Services (UTEFS), through its representative Uy
Tiam, applied for and obtained credit accommodations from Metropolitan Bank and Trust Company
(Metrobank). To secure the same, Norberto Uy and Jacinto Uy Dino executed a separate Continuing
Suretyships, in favor of the latter. UTEFS was able to pay the 1977 obligation. It obtained another
credit accommodation from Metrobank in 1979, which covered the purchase of goods from Planters
Products. UTEFS executed and delivered to Metrobank a trust receipt, whereby the former
acknowledged in receipt in trust from the latter of the aforementioned goods from Planters Products.
Being the entrusted, UTEFS agreed to deliver to Metrobank the entrusted goods in the event of non-
sale or, if sold, the proceeds of the sale thereof. UTEFS failed to deliver to Metrobank, which
prompted the latter to send demand letters to the former and the sureties, Uy and Dino, for the
payment of the sum. UTEFS made partial payments to the bank which was accepted by the latter.
Having sent the last demand letter to UTEFS, Dino and Uy, and finding resort to extrajudicial
remedies to be futile, Metrobank filed a complaint for collection of a sum of money against the three.
Dino and Uy filed a Motion to Dismiss the complaint on the ground of lack of cause of action,
contending that the 1977 credit accommodation secured by their 1977 Continuing Suretyship has
already been paid, thus dissolving the suretyship. Moreover, the contend that the continuing
suretyship agreement cannot be made applicable to the 1979 obligation because the latter was not
yet in existence when the agreements were executed in 1977; thus they cannot exist without a valid
obligation.

Issue: Whether or not the petitioners are liable as sureties for the 1979 obligations of Uy Tiam to
Metrobank by virtue of the Continuing Suretyship Agreements they separately signed in 1977?

Ruling: Yes. Dino and Uy are liable as sureties for the 1979 obligations by virtue of the 1977
Continuing Suretyship Agreements. Article 2053 of the Civil Code provides that a guaranty may be
given to secure even future debts, the amount of which may not be known at the time the guaranty
is executed. This is the basis for contracts denominated as continuing guaranty or suretyship. A
continuing guaranty is one which is not limited to a single transaction, but which contemplates a
future course of dealing, covering a series of transactions, generally for an indefinite time or until
revoked. Furthermore, it also stated that a guaranty shall be construed as continuing when by the
terms thereof it is evident that the object is to give a standing credit to the principal debtor to be
used from time to time either indefinitely or until a certain period, especially if the right to recall the
guaranty is expressly reserved. In this case, the provisions of the contracts unequivocally reveal that
the suretyship agreement are continuing in nature. And since no notice was given by the petitioners
to Metrobank, the suretyships are deemed outstanding. On the contention that Continuing Suretyship
Agreements cannot be made applicable to the 1979 obligation because the latter was not yet in
existence when the agreements were executed in 1977, the law speaks of a valid obligation, as
distinguished from a void obligation, and not an existing or current obligation. Therefore, the
agreements cover even the 1979 obligation, making Dino and Uy liable to pay Metrobank the
remaining unpaid balance of the obligation together with the interest due, attorneys fees and costs.

RCBC vs. Cerro

G.R. No L-49401, July 30, 1982

Facts: Private respondent Residoro Chua, with Enrique Go, Sr., executed a comprehensive surety
agreement to guaranty, above all, any existing or future indebtedness of Davao Agricultural
Industries Corporation (Daicor), and/or induce the bank at any time or from time to time to make
loans or advances or to extend credit to said Daicor, provided that the liability shall not exceed at any
time Php100,000.00. A promissory note for Php100,000.00 (for additional capital to the charcoal buy
and sell and the activated carbon importation business) was issued in favor of petitioner RCBC
payable a month after execution. This was signed by Go in his personal capacity and in behalf of
Daicor. Respondent Chua did not sign in said promissory note. As the note was not paid despite
demands, RCBC filed a complaint for a sum of money against Daicor, Go and Chua. The complaint
against Chua was dismissed upon his motion, alleging that the complaint states no cause of action
against him as he was not a signatory to the note and hence he cannot be held liable. This was so
despite RCBCs opposition, invoking the comprehensive surety agreement which it holds to cover not
just the note in question but also every other indebtedness that Daicor may incur from petitioner
bank. RCBC moved for reconsideration of the dismissal but to no avail, hence, this petition.

Issue: Whether or not respondent Chua may be held liable with Go and Daicor under the promissory
note, even if he was not a signatory to it.

Ruling: Yes.

The comprehensive surety agreement executed by Chua and Go, as president and general
manager, respectively, of Daicor, was to cover existing as well as future obligations which Daicor may
incur with RCBC. This was only subject to the proviso that their liability shall not exceed at any one
time the aggregate principal amount of Php100,000.00. (Par.1of said agreement). The agreement
was executed to induce petitioner Bank to grant any application for a loan Daicor would request for.
According to said agreement, the guaranty is continuing and shall remain in full force or effect until
the bank is notified of its termination. During the time the loan under the promissory note was
incurred, the agreement was still in full force and effect and is thus covered by the latter agreement.
Thus, even if Chua did not sign the promissory note, he is still liable by virtue of the surety
agreement. The only condition necessary for him to be liable under the agreement was that Daicor
is or may become liable as maker, endorser, and accept or otherwise. The comprehensive surety
agreement signed by Go and Chua was as an accessory obligation dependent upon the principal
obligation, i.e., the loan obtained by Daicor as evidenced by the promissory note. The surety
agreement unequivocally shows that it was executed to guarantee future debts that may be incurred
by Daicor with petitioner, as allowed under NCC 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.

Case No. 37
G.R. No. L-3751 October 25, 1952
VISAYAN DISTRIBUTORS, INC., plaintiff-appellee, vs
MARIANO R. FLORES, ET AL, defendants-appellants.
Facts:
Visayan Distribution Incorporation and Mariano Flores and Teofilo Abeto entered into a Contract
whereby Abeto and Flores bound themselves to deliver to Visayan at the port of Romblon the 2,000
long tons of copra. The parties agreed that upon satisfactory inspection of the copra, Visayan would
advance to Aberto and Flores the sum of Php10,000.00 for initial weighing and checking expenses,
plus another Php10,000.00 on the first day of loading, and that Visayan would provide vessel, among
others. Also surety bond was executed by Abeto and Flores as principals and by Rizal Surety and
Insurance Co. (Rizal Surety, for brevity), the sum of Php30,000 to secure the performance of the
subject contract. With due notice to Abeto and Flores, Visayan sent SS PANAMAN to the port of
Romblon however, Flores and Abeto failed to deliver any amount of copra. SS PANAMAN left the port
without cargo. Consequently, Visayan field a complaint at the Court of Instance of Manila against
Aberto, Flores and Rizal Surety for breach of contract.
The Court of First Instance rendered an Order ordering Abeto and Flores and Rizal Surety liable to
pay jointly and severally liable to pay Visayan. The liability however of Rizal Surety was limited to the
Php30,000.00 only subject to reimbursement from Abeto and Flores. All parties filed their Appeals.
The Surety claims that it was released from liability under its bond because Abeto and Flores and the
appellee novated their contract of November 9, 1946, without the consent of the Surety. In the main,
the Surety alleges that the appellee advanced P10,000 to Abeto and Flores before the inspection of
copra, and thereafter made another advance payment of P3,000, in addition to the fact that the
manner of payment was changed from a letter of credit to cash, and that 26,875 empty sacks were
delivered to Abeto and Flores instead of only 15,000 as stipulated in the contract.
Issue:
Whether nor not Surety was released from its liabilities given the circumstances.
Ruling:
No. The claim of Rizal Surety that it was released from liability under its bond because Abeto and
Flores and Visayan novated their contract without its consent is not proper. With reference to the
payment of P10,000, it appears that the same was made with the knowledge of the Surety as shown
on the duplicate copy. As to the advance payment of P3,000, suffice it to state that said payment
could not adversely affect the position of the Surety or render the obligation more onerous, and
therefore could not have the effect of releasing the bond. In respect of the 26,875 empty sacks, it
may be pointed out that although the contract bound the appellee to furnish Abeto and Flores with
only 15,000 sacks, the excess could likewise have no adverse effect insofar as the Surety was
concerned, it appearing that the Surety is not being charged with the value of such excess intended
to be used by the appellee for any proper purpose. Indeed, the liability of the Surety under the bond
is limited to P30,000, easily covered by the first advance payment of P10,000 and the value of 15,000
empty copra sacks, at the proven price of P1.50 per sack.

BA FINANCE CORP v. CA
GR 94566, July 3, 1992
FACTS: On December 17, 1980, Renato Gaytano, doing business under the name Gebbs
International, applied for and was granted a loan with respondent Traders Royal Bank in the amount
of P60,000.00. As security for the payment of said loan, the Gaytano spouses executed a deed of
suretyship whereby they agreed to pay jointly and severally to respondent bank the amount of the
loan including interests, penalty and other bank charges. In a letter dated December 5, 1980
addressed to respondent bank, Philip Wong as credit administrator of BA Finance Corporation for and
in behalf of the latter, undertook to guarantee the loan of the Gaytano spouses. Partial payments
were made on the loan leaving an unpaid balance in the amount of P85, 807.25. Since the Gaytan
spouses refused to pay their obligation, respondent bank filed with the trial court complaint for sum
of money against the Gaytano spouses and petitioner as alternative defendant. The Gaytano spouses
did not present evidence for their defense. Petitioner, on the other hand, raised the defense of lack
of authority of its credit administrator to bind the corporation. On December 12, 1988, the trial court
rendered a decision in favor of plaintiff and against defendants/Gaytano spouses, ordering the latter
to jointly and severally pay the plaintiff. Not satisfied with the decision, respondent bank appealed
with the Court of Appeals. On March 13, 1990, respondent appellate court rendered judgment
modifying the decision of the trial court. Hence, this petition.

ISSUE: Whether or not the letter of guaranty of Wong is ultra vires act.

HELD: Wong acts beyond his authority.

Although Wong was clearly authorized to approve loans even up to P350,000.00 without any security
requirement, which is far above the amount subject of the guaranty in the amount of P60,000.00,
nothing in the said memorandum expressly vests on the credit administrator power to issue
guarantees. We cannot agree with respondent's contention that the phrase "contingent commitment"
set forth in the memorandum means guarantees. It has been held that a power of attorney or
authority of an agent should not be inferred from the use of vague or general words. Guaranty is not
presumed, it must be expressed and cannot be extended beyond its specified limits. In one case,
where it appears that a wife gave her husband power of attorney to loan money, this Court ruled that
such fact did not authorize him to make her liable as a surety for the payment of the debt of a third
person.
The sole allegation of the credit administrator in the absence of any other proof that he is authorized
to bind petitioner in a contract of guaranty with third persons should not be given weight. The
representation of one who acts as agent cannot by itself serve as proof of his authority to act as
agent or of the extent of his authority as agent. Wong's testimony that he had entered into similar
transactions of guaranty in the past for and in behalf of the petitioner, lacks credence due to his
failure to show documents or records of the alleged past transactions. The actuation of Wong in
claiming and testifying that he has the authority is understandable. He would naturally take steps to
save himself from personal liability for damages to respondent bank considering that he had
exceeded his authority. The rule is clear that an agent who exceeds his authority is personally liable
for damages

Willex Plastic Industries Corp. vs. Court of Appeals

G.R. No. 103066 April 25, 1996

Facts: Inter-Resin Industrial Corporation opened a letter of credit with the Manila Banking
Corporation. As a security, Inter-Resin Industrial and the Investment and Underwriting Corporation of
the Philippines (IUCP) executed separate Continuing Surety Agreements whereby they bound
themselves solidarily to pay Manilabank obligations of every kind, on which the Inter-Resin Industrial
may now be indebted or hereafter become indebted to the Manilabank. Inter-Resin Industrial,
together with Willex Plastic Industries Corp., executed a Continuing Guaranty in favor of IUCP for the
sum or sums obtained and/or to be obtained by Inter-Resin Industrial Corporation from IUCP, Inter-
Resin Industrial and Willex Plastic jointly and severally guaranteed the prompt and punctual payment
at maturity of the notes. When Manilabank demanded from IUCP, the latter paid the sum of
P4,334,280.61 representing Inter-Resin Industrials outstanding obligation. Atrium Capital Corp., which
in the meantime had succeeded IUCP, demanded from Inter-Resin Industrial and Willex Plastic the
payment of what it (IUCP) had paid to Manilabank. As neither one of the sureties paid, Atrium filed a
collection case against Inter-Resin Industrial and Willex Plastic. One of Willex Plastic's contentions
was that the Continuing Guaranty cannot be retroactively applied so as to secure the payments made
by Interbank (successor of Atrium) under the two Continuing Surety Agreements.
Issue: Whether or not the Continuing Guaranty Agreement can be applied retroactively?
Ruling: Yes. By its very nature a continuing suretyship contemplates a future course of dealing. It is
prospective in its operation and is generally intended to provide security with respect to future
transactions. However, this rule must yield to the intention of the contracting parties as revealed by
the evidence. In the end, the intention of the parties as revealed by the evidence is controlling. And
in this case, the parties to the Continuing Guaranty clearly provided that the guaranty would cover
sums obtained and/or to be obtained by Inter-Resin Industrial from Interbank. Thus, the Continuing
Guaranty Agreement should apply retroactively.

Tupaz vs. CA
G.R. No 145578, November 18, 2005

Facts: Petitioners Jose Tupaz IV and Petronila Tupaz were the Vice-President for Operations
and Vice-President/Treasurer, respectively, of El Oro Engraver Corporation. The said corporation had
a contract with the Philippine Army to supply the latter with survival bolos. To finance the purchase
of the raw material for the said bolos, the petitioners, on behalf of the corporation, applied with
respondent Bank of the Philippines (BPI) for two commercial letters of credit in favor of El Oro
Corporations suppliers, Tanchaoco Manufacturing Incorporated (Tanchaoco Incorporated) and
Maresco Rubber and Retreading Corporation (Maresco Corporation). Respondent BPI granted
petitioners application and issued a letter of credit for P564,871.05 to Tanchaoco Incorporated and
another letter of credit for P294,000 to Maresco Corporation. Thereafter, the petitioners signed trust
receipts in favor of BPI. Petitioner Tupaz signed, in his personal capacity, a trust receipt
corresponding to the letter of credit to Tanchaoco Inc. and bound himself to sell the goods covered
by the said letter of credit and to remit the proceeds to BPI, if sold, or to return the goods, if not sold
on or before 29 December 1981. On 9 October 1981, the petitioners signed, in their capacities as
officers of the corporation, a trust receipt corresponding to the letter of credit to Maresco Corporation
and bound themselves to sell the goods and to remit the proceeds to BPI if sold, or to return the
goods if not sold, on or before 8 December 1981. After Tanchaoco Inc. and Maresco Inc. delivered
the raw materials to the corporation, BPI paid for the letters of credit. The petitioners did not comply
with their undertaking under the trust receipts so BPI made several demands for payment but the
corporation made partial payments. BPIs counsel and its representative sent final demand letters to
the corporation but the latter said that it could not pay fully because the Armed Forces of the
Philippines (AFP) delayed payment for the bolos. BPI charged the petitioners with estafa under the
Trust Receipts Law (PD 115) to which the petitioners pleaded not guilty to the charges. The trial
court acquitted the petitioners but rendered them solidarily liable with the corporation for the balance
of the principal debt under trust receipts. The petitioners appealed to the Court of Appeals but the
latter affirmed the trial courts ruling, hence, this petition.

Issue: Whether or not the petitioners are liable as guarantor under the trust receipt.

Ruling: Yes.

Respondent banks suit against petitioner Jose Tupaz stands despite the Courts finding that he
is liable as guarantor only. First, excussion is not a pre-requisite to secure judgment against a
guarantor. The guarantor can still demand deferment of the execution of the judgment against him
until after the assets of the principal debtor shall have been exhausted. Second, the benefit of
excussion may be waived. Under the trust receipt, petitioner Tupaz waived excussion when he
agreed that his liability in the guaranty shall be direct and immediate, without any need whatsoever
on the part of BPI to take any steps or exhaust any legal remedies. The clear import of this
stipulation is that petitioner Tupaz waived the benefit of excussion under his guarantee.

As guarantor, petitioner Jose Tupaz is liable for El Oro Corporations principal debt and other
accessory liabilities (as stipulated in the trust receipt and as provided by law) under the trust receipt.

G.R. No. L-43862 January 13, 1989

MERCANTILE INSURANCE CO., INC., plaintiff-appellee, vs.
FELIPE YSMAEL, JR., & CO., INC., defendants-appellants.
Facts:
Felipe Ysmael, Jr. & Co., Inc., filed an application for an overdraft line and credit line both of
P1,000,000 with the PNB upon the condition that the former shall have filed a bond in the sum of
P140,000 to guarantee the payment of the said amount. Accordingly, Ysmael Jr. & Co. as principal
and Mercantile Insurance Co. executed two surety bonds with the condition that if Ysmael, Jr. & Co.
shall perform and fulfill its undertakings with the PNB, then the surety bonds shall be null and void.
As security and in consideration of the execution of the surety bonds, Ysmael, Jr. & Co. and Felipe
executed with the Mercantile indemnity agreements which provide, among others that payment of
indemnity or compensation may be claimed irrespective of whether or not Mercantile has actually
paid the same. When Ysmael, Jr. & Co. failed to settle their obligation with the PNB, Mercantile
brought an action wherein Ysmael, Jr. & Co. and Felipe were ordered to pay jointly and severally
Mercantile.
Ysmael, Jr. & Co. and Felipe maintain that the indemnity agreements are void for being contrary to
law, public policy and good morals. They argued that to allow surety to receive indemnity or
compensation for something it has not paid in its capacity as surety would constitute unjust
enrichment at the expense of another.
Issue:
Whether or not the surety (Mercantile) can demand indemnification from the principal (Ysmael, Jr. &
Co. and Felipe), upon the latter's default, even before the former has paid to the creditor (PNB).
Ruling:
Yes. The stipulation in the indemnity agreement allowing the surety to recover even before it paid
the creditor is enforceable. An indemnity agreement was not executed for the benefit of the creditors
but rather for the benefit of the surety; and if the principal debtor voluntarily agrees to the terms and
conditions, the obligation arising from the contract have the force of law.
Further, it was also discussed that the principal debtors, Ysmael, Jr. & Co. and Felipe, are
simultaneously the same persons who executed the Indemnity Agreement. Thus, the position
occupied by them is that of a principal debtor and indemnitor at the same time, and their liability
being joint and several with the surety, the creditor may proceed against either for fulfillment of the
obligation as covered by the surety bonds. The provision of Article 2071 of the Civil Code does not
apply. There is no more need for the surety to exhaust all the properties of the principal debtors
before it may proceed against them.

SBTC v. Cuenca
GR 138544 October 3, 2000

FACTS: Defendant-appellant Sta. Ines Melale (Sta. Ines/SIMC) is a corporation engaged in logging
operations. It was a holder of a Timber License Agreement issued by the DENR. On 10 November
1980, Security Bank and Trust Co. granted appellant Sta. Ines a credit line in the amount of
(P8,000,000.00) effective until November 30, 1981 to assist the latter in meeting the additional
capitalization requirements of its logging operations. To secure payment, it executed a chattel
mortgage over some of its machineries and equipments. And as an additional security, its President
and Chairman of the Board of Directors Rodolfo Cuenca, executed an Indemnity agreement in favor
of Security Bank whereby he bound himself jointly and severally with Sta. Ines. Cuenca resigned as
President and Chairman of the Board of Directors of defendant-appellant Sta. Ines. Subsequently, the
shareholdings of Cuenca in Sta. Ines were sold at a public auction to Adolfo Angala. Before and after
this, Sta. Ines availed of its credit line. Sta. Ines encountered difficulty in making the amortization
payments on its loans and requested SBTC for a complete restructuring of its indebtedness. SBTC
accommodated SIMCs request and signified its approval in a letter dated February 18, 1988 wherein
SBTC and Sta. Ines, without notice to or the prior consent of Cuenca, agreed to restructure the past
due obligations of defendant-appellant Sta. Ines. To formalize their agreement to restructure the loan
obligations of Sta. Ines, Security Bank and Sta. Ines executed a Loan Agreement dated October 31,
1989 Sta. Ines made payments up to (P1,757,000.00). The defaulted in the payment of its
restructured loan obligations to SBTC despite demands made upon appellant SIMC and CUENCA,
SBTC filed a complaint for collection of sum of resulting after trial on the merits in a decision by the
court a quo, from which Cuenca appealed. Cuenca was released from liability because 1989 Loan
Agreement novated the 1980 credit accommodation which extinguished the Indemnity Agreement for
which Cuenca was liable solidarily.

ISSUE/S: Whether the 1989 Loan Agreement novated the original credit accommodation and
Cuencas liability under the Indemnity Agreement.

HELD: YES. An obligation may be extinguished by novation, pursuant to Article 1292 of the Civil
Code, which reads as follows:

ART. 1292. In order that an obligation may be extinguished by another which substitute the same, it
is imperative that it be so declared in unequivocal terms, or that the old and the new obligations be
on every point incompatible with each other.

Novation of a contract is never presumed. It has been held that in the absence of an express
agreement, novation takes place only when the old and the new obligations are incompatible on
every point. Indeed, the following requisites must be established: (1) there is a previous valid
obligation; (2) the parties concerned agree to a new contract; (3) the old contract is extinguished;
and (4) there is a valid new contract.