JOSE C. TUPAZ IV and G.R. No.

145578 themselves to sell the goods covered by that letter of credit and to remit the proceeds to respondent
PETRONILA C. TUPAZ, bank, if sold, or to return the goods, if not sold, on or before 8 December 1981.
Petitioners,
Present: After Tanchaoco Incorporated and Maresco Corporation delivered the raw materials to El Oro Corporation,
Davide, Jr., C.J., respondent bank paid the former P564,871.05 and P294,000, respectively.
Chairman,
- versus - Quisumbing, Petitioners did not comply with their undertaking under the trust receipts. Respondent bank made several
Ynares-Santiago, demands for payments but El Oro Corporation made partial payments only. On 27 June 1983 and 28 June
Carpio, and 1983, respondent banks counsel[5] and its representative[6] respectively sent final demand letters to El
Azcuna, JJ. Oro Corporation. El Oro Corporation replied that it could not fully pay its debt because the Armed Forces
of the Philippines had delayed paying for the survival bolos.
THE COURT OF APPEALS and
BANK OF THE PHILIPPINE Promulgated: Respondent bank charged petitioners with estafa under Section 13, Presidential Decree No. 115 (Section
ISLANDS, 13)[7] or Trust Receipts Law (PD 115). After preliminary investigation, the then Makati Fiscals Office found
Respondents. November 18, 2005 probable cause to indict petitioners. The Makati Fiscals Office filed the corresponding Informations
(docketed as Criminal Case Nos. 8848 and 8849) with the Regional Trial Court, Makati, on 17 January
x-------------------------------------------------x 1984 and the cases were raffled to Branch 144 (trial court) on 20 January 1984. Petitioners pleaded not
guilty to the charges and trial ensued. During the trial, respondent bank presented evidence on the civil
aspect of the cases.
DECISION
The Ruling of the Trial Court
CARPIO, J.:

The Case
This is a petition for review[1] of the Decision[2] of the Court of Appeals dated 7 September 2000 and its
Resolution dated 18 October 2000. The 7 September 2000 Decision affirmed the ruling of the Regional
Trial Court, Makati, Branch 144 in a case for estafa under Section 13, Presidential Decree No. 115. The
Court of Appeals Resolution of 18 October 2000 denied petitioners motion for reconsideration.
The Facts
Petitioners Jose C. Tupaz IV and Petronila C. Tupaz (petitioners) were Vice-President for Operations and
Vice-President/Treasurer, respectively, of El Oro Engraver Corporation (El Oro Corporation). El Oro
Corporation had a contract with the Philippine Army to supply the latter with survival bolos.
To finance the purchase of the raw materials for the survival bolos, petitioners, on behalf of El Oro
Corporation, applied with respondent Bank of the Philippine Islands (respondent bank) for two commercial
letters of credit. The letters of credit were in favor of El Oro Corporations suppliers, Tanchaoco
Manufacturing Incorporated[3] (Tanchaoco Incorporated) and Maresco Rubber and Retreading
Corporation[4] (Maresco Corporation). Respondent bank granted petitioners application and issued Letter
of Credit No. 2-00896-3 for P564,871.05 to Tanchaoco Incorporated and Letter of Credit No. 2-00914-5
for P294,000 to Maresco Corporation.
Simultaneous with the issuance of the letters of credit, petitioners signed trust receipts in favor
of respondent bank. On 30 September 1981, petitioner Jose C. Tupaz IV (petitioner Jose Tupaz) signed,
in his personal capacity, a trust receipt corresponding to Letter of Credit No. 2-00896-3
(for P564,871.05). Petitioner Jose Tupaz bound himself to sell the goods covered by the letter of credit
and to remit the proceeds to respondent bank, if sold, or to return the goods, if not sold, on or before 29
December 1981.
On 9 October 1981, petitioners signed, in their capacities as officers of El Oro Corporation, a
trust receipt corresponding to Letter of Credit No. 2-00914-5 (for P294,000). Petitioners bound
On 16 July 1992, the trial court rendered judgment acquitting petitioners of estafa on reasonable doubt.
However, the trial court found petitioners solidarily liable with El Oro Corporation for the balance of El
Oro Corporations principal debt under the trust receipts. The dispositive portion of the trial courts Decision
provides:
WHEREFORE, judgment is hereby rendered ACQUITTING both accused Jose C.
Tupaz, IV and Petronila Tupaz based upon reasonable doubt.
However, El Oro Engraver Corporation, Jose C. Tupaz, IV and Petronila Tupaz, are
hereby ordered, jointly and solidarily, to pay the Bank of the Philippine Islands the
outstanding principal obligation of P624,129.19 (as of January 23, 1992) with the
stipulated interest at the rate of 18% per annum; plus 10% of the total amount due as
attorneys fees; P5,000.00 as expenses of litigation; and costs of the suit.[8]
In holding petitioners civilly liable with El Oro Corporation, the trial court held:
[S]ince the civil action for the recovery of the civil liability is deemed impliedly
instituted with the criminal action, as in fact the prosecution thereof was actively
handled by the private prosecutor, the Court believes that the El Oro Engraver
Corporation and both accused Jose C. Tupaz and Petronila Tupaz, jointly and solidarily
should be held civilly liable to the Bank of the Philippine Islands. The mere fact that
they were unable to collect in full from the AFP and/or the Department of National
Defense the proceeds of the sale of the delivered survival bolos manufactured from the
raw materials covered by the trust receipt agreements is no valid defense to the civil
claim of the said complainant and surely could not wipe out their civil obligation. After
all, they are free to institute an action to collect the same.[9]
Petitioners appealed to the Court of Appeals. Petitioners contended that: (1) their acquittal
operates to extinguish [their] civil liability and (2) at any rate, they are not personally liable for El Oro
Corporations debts.
 The Ruling of the Court of Appeals

In its Decision of 7 September 2000, the Court of Appeals affirmed the trial courts ruling. The appellate
court held:
It is clear from [Section 13, PD 115] that civil liability arising from the violation of the
trust receipt agreement is distinct from the criminal liability imposed therein. In the
case of Vintola vs. Insular Bank of Asia and America, our Supreme Court held that
acquittal in the estafa case (P.D. 115) is no bar to the institution of a civil action for
collection. This is because in such cases, the civil liability of the accused does not
arise ex delicto but rather based ex contractu and as such is distinct and independent
from any criminal proceedings and may proceed regardless of the result of the latter.
Thus, an independent civil action to enforce the civil liability may be filed against the
corporation aside from the criminal action against the responsible officers or employees.
Hence, this petition. Petitioners contend that:
1. A JUDGMENT OF ACQUITTAL OPERATE[S] TO EXTINGUISH THE CIVIL
LIABILITY OF PETITIONERS[;]
2. GRANTING WITHOUT ADMITTING THAT THE QUESTIONED OBLIGATION WAS
INCURRED BY THE CORPORATION, THE SAME IS NOT YET DUE AND PAYABLE;
3. GRANTING THAT THE QUESTIONED OBLIGATION WAS ALREADY DUE AND
PAYABLE, xxx PETITIONERS ARE NOT PERSONALLY LIABLE TO xxx RESPONDENT
BANK, SINCE THEY SIGNED THE LETTER[S] OF CREDIT AS SURETY AS OFFICERS
OF EL ORO, AND THEREFORE, AN EXCLUSIVE LIABILITY OF EL ORO; [AND]

xxx

[W]e hereby hold that the acquittal of the accused-appellants from the criminal 4. IN THE ALTERNATIVE, THE QUESTIONED TRANSACTIONS ARE SIMULATED
charge of estafa did not operate to extinguish their civil liability under the letter of AND VOID.[11]
credit-trust receipt arrangement with plaintiff-appellee, with which they dealt both in
their personal capacity and as officers of El Oro Engraver Corporation, the letter of
credit applicant and principal debtor.
Appellants argued that they cannot be held solidarily liable with their corporation, El The Issues
Oro Engraver Corporation, alleging that they executed the subject documents including
the trust receipt agreements only in their capacity as such corporate officers. They said
that these instruments are mere pro-forma and that they executed these instruments The petition raises these issues:
on the strength of a board resolution of said corporation authorizing them to apply for
the opening of a letter of credit in favor of their suppliers as well as to execute the other (1) Whether petitioners bound themselves personally liable for El Oro Corporations debts under
documents necessary to accomplish the same. the trust receipts;
(2) If so
(a) whether petitioners liability is solidary with El Oro Corporation; and
(b) whether petitioners acquittal of estafa under Section 13, PD 115 extinguished their
Such contention, however, is contradicted by the evidence on record. The trust receipt civil liability.
agreement indicated in clear and unmistakable terms that the accused signed the same
as surety for the corporation and that they bound themselves directly and immediately
liable in the event of default with respect to the obligation under the letters of credit The Ruling of the Court
which were made part of the said agreement, without need of demand. Even in the
application for the letter of credit, it is likewise clear that the undertaking of the accused
is that of a surety as indicated [in] the following words: In consideration of your The petition is partly meritorious. We affirm the Court of Appeals ruling with the modification that
establishing the commercial letter of credit herein applied for substantially in petitioner Jose Tupaz is liable as guarantor of El Oro Corporations debt under the trust receipt dated 30
accordance with the foregoing, the undersigned Applicant and Surety hereby agree, September 1981.
jointly and severally, to each and all stipulations, provisions and conditions on the
reverse side hereof.

xxx
On Petitioners Undertaking Under
Having contractually agreed to hold themselves solidarily liable with El Oro Engraver the Trust Receipts
Corporation under the subject trust receipt agreements with appellee Bank of the
Philippine Islands, herein accused-appellants may not, therefore, invoke the separate
legal personality of the said corporation to evade their civil liability under the letter of A corporation, being a juridical entity, may act only through its directors, officers, and employees. Debts
credit-trust receipt arrangement with said appellee, notwithstanding their acquittal in incurred by these individuals, acting as such corporate agents, are not theirs but the direct liability of the
the criminal cases filed against them. The trial court thus did not err in holding the corporation they represent.[12] As an exception, directors or officers are personally liable for the
appellants solidarily liable with El Oro Engraver Corporation for the outstanding principal corporations debts only if they so contractually agree or stipulate.[13]
obligation of P624,129.19 (as of January 23, 1992) with the stipulated interest at the
rate of 18% per annum, plus 10% of the total amount due as attorneys fees, P5,000.00 Here, the dorsal side of the trust receipts contains the following stipulation:
as expenses of litigation and costs of suit.[10]
 To the Bank of the Philippine Islands
In consideration of your releasing to under the terms of this Trust Receipt the goods
described herein, I/We, jointly and severally, agree and promise to pay to you, on
demand, whatever sum or sums of money which you may call upon me/us to pay to
you, arising out of, pertaining to, and/or in any way connected with, this Trust Receipt,
in the event of default and/or non-fulfillment in any respect of this undertaking on the
part of the said . I/we further agree that my/our liability in this guarantee shall be
DIRECT AND IMMEDIATE, without any need whatsoever on your part to take any steps
or exhaust any legal remedies that you may have against the said . before making
demand upon me/us.[14] (Capitalization in the original)
In the trust receipt dated 9 October 1981, petitioners signed below this clause as officers of El Oro
Corporation. Thus, under petitioner Petronila Tupazs signature are the words Vice-PresTreasurer and
under petitioner Jose Tupazs signature are the words Vice-PresOperations. By so signing that trust
receipt, petitioners did not bind themselves personally liable for El Oro Corporations obligation. In Ong
v. Court of Appeals,[15] a corporate representative signed a solidary guarantee clause in two trust
receipts in his capacity as corporate representative. There, the Court held that the corporate
representative did not undertake to guarantee personally the payment of the corporations debts, thus:
[P]etitioner did not sign in his personal capacity the solidary guarantee clause
found on the dorsal portion of the trust receipts. Petitioner placed his signature after
the typewritten words ARMCO INDUSTRIAL CORPORATION found at the end of the
solidary guarantee clause. Evidently, petitioner did not undertake to guaranty
personally the payment of the principal and interest of ARMAGRIs debt under the two
trust receipts.
Hence, for the trust receipt dated 9 October 1981, we sustain petitioners claim that they are not
personally liable for El Oro Corporations obligation.
For the trust receipt dated 30 September 1981, the dorsal portion of which petitioner Jose Tupaz
signed alone, we find that he did so in his personal capacity. Petitioner Jose Tupaz did not indicate that
he was signing as El Oro Corporations Vice-President for Operations. Hence, petitioner Jose Tupaz bound
himself personally liable for El Oro Corporations debts. Not being a party to the trust receipt dated 30
September 1981, petitioner Petronila Tupaz is not liable under such trust receipt.
The Nature of Petitioner Jose Tupazs Liability
Under the Trust Receipt Dated 30 September 1981
As stated, the dorsal side of the trust receipt dated 30 September 1981 provides:
To the Bank of the Philippine Islands
In consideration of your releasing to under the terms of this Trust Receipt the goods
described herein, I/We, jointly and severally, agree and promise to pay to you, on
demand, whatever sum or sums of money which you may call upon me/us to pay to
you, arising out of, pertaining to, and/or in any way connected with, this Trust Receipt,
in the event of default and/or non-fulfillment in any respect of this undertaking on the
part of the said . I/we further agree that my/our liability in this guarantee shall be
DIRECT AND IMMEDIATE, without any need whatsoever on your part to take any steps
or exhaust any legal remedies that you may have against the said . Before making
demand upon me/us. (Underlining supplied; capitalization in the original)
The lower courts interpreted this to mean that petitioner Jose Tupaz bound himself solidarily liable with
El Oro Corporation for the latters debt under that trust receipt.
This is error.
In Prudential Bank v. Intermediate Appellate Court,[16] the Court interpreted a
substantially identical clause[17] in a trust receipt signed by a corporate officer who bound himself
personally liable for the corporations obligation. The petitioner in that case contended that the stipulation
we jointly and severally agree and undertake rendered the corporate officer solidarily liable with the
corporation. We dismissed this claim and held the corporate officer liable as guarantor only. The Court
further ruled that had there been more than one signatories to the trust receipt, the solidary liability
would exist between the guarantors. We held:
Petitioner [Prudential Bank] insists that by virtue of the clear wording of the
xxx clause x x x we jointly and severally agree and undertake x x x, and the concluding
sentence on exhaustion, [respondent] Chis liability therein is solidary.
xxx
Our xxx reading of the questioned solidary guaranty clause yields no other
conclusion than that the obligation of Chi is only that of a guarantor. This is further
bolstered by the last sentence which speaks of waiver of exhaustion, which,
nevertheless, is ineffective in this case because the space therein for the party whose
property may not be exhausted was not filled up. Under Article 2058 of the Civil Code,
the defense of exhaustion (excussion) may be raised by a guarantor before he may be
held liable for the obligation. Petitioner likewise admits that the questioned provision is
a solidary guaranty clause, thereby clearly distinguishing it from a contract of surety.
It, however, described the guaranty as solidary between the guarantors; this would
have been correct if two (2) guarantors had signed it. The clause we jointly and
severally agree and undertake refers to the undertaking of the two (2) parties who are
to sign it or to the liability existing between themselves. It does not refer to the
undertaking between either one or both of them on the one hand and the petitioner on
the other with respect to the liability described under the trust receipt. xxx
Furthermore, any doubt as to the import or true intent of the solidary guaranty
clause should be resolved against the petitioner. The trust receipt, together with the
questioned solidary guaranty clause, is on a form drafted and prepared solely by the
petitioner; Chis participation therein is limited to the affixing of his signature thereon.
It is, therefore, a contract of adhesion; as such, it must be strictly construed against
the party responsible for its preparation.[18] (Underlining supplied; italicization in the
original)
However, 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.[19] Second, the benefit of excussion
may be waived.[20] Under the trust receipt dated 30 September 1981, petitioner Jose Tupaz waived
excussion when he agreed that his liability in [the] guaranty shall be DIRECT AND IMMEDIATE, without
any need whatsoever on xxx [the] part [of respondent bank] to take any steps or exhaust any legal
remedies xxx. The clear import of this stipulation is that petitioner Jose 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
dated 30 September 1981. That trust receipt (and the trust receipt dated 9 October 1981) provided for
payment of attorneys fees equivalent to 10% of the total amount due and an interest at the rate of
7% per annum, or at such other rate as the bank may fix, from the date due until paid xxx.[21] In the
applications for the letters of credit, the parties stipulated that drafts drawn under the letters of credit
are subject to interest at the rate of 18% per annum.[22]
The lower courts correctly applied the 18% interest rate per annum considering that the face
value of each of the trust receipts is based on the drafts drawn under the letters of credit. Based on the
guidelines laid down in
Eastern Shipping Lines, Inc. v. Court of Appeals,[23] the accrued stipulated interest earns 12%
interest per annum from the time of the filing of the Informations in the Makati Regional Trial Court on
17 January 1984. Further, the total amount due as of the date of the finality of this Decision will earn
interest at 18% per annum until fully paid since this was the stipulated rate in the applications for the
letters of credit.[24]
The accounting of El Oro Corporations debts as of 23 January 1992, which the trial court used,
is no longer useful as it does not specify the amounts owing under each of the trust receipts. Hence, in
the execution of this Decision, the trial court shall compute El Oro Corporations total liability under each
of the trust receipts dated 30 September 1981 and 9 October 1981 based on the following formula: [25]
TOTAL AMOUNT DUE = [principal + interest + interest on interest] partial
payments made[26]
Interest = principal x 18 % per annum x no. of years from due date[27] until
finality of judgment
Interest on interest = interest computed as of the filing of the complaint (17
January 1984) x 12% x no. of years until finality of judgment
Attorneys fees is 10% of the total amount computed as of finality of judgment
Total amount due as of the date of finality of judgment will earn an interest of
18% per annum until fully paid.
Here, respondent bank chose not to file a separate civil action[30] to recover payment under the
trust receipts. Instead, respondent bank sought to recover payment in Criminal Case Nos. 8848 and
8849. Although the trial court acquitted petitioner Jose Tupaz, his acquittal did not extinguish his civil
liability. As the Court of Appeals correctly held, his liability arose not from the criminal act of which he
was acquitted (ex delito) but from the trust receipt contract (ex contractu) of 30 September 1981.
Petitioner Jose Tupaz signed the trust receipt of 30 September 1981 in his personal capacity.
On the other Matters Petitioners Raise
Petitioners raise for the first time in this appeal the contention that El Oro Corporations debts under the
trust receipts are not yet due and demandable. Alternatively, petitioners assail the trust receipts as
simulated. These assertions have no merit. Under the terms of the trust receipts dated 30 September
1981 and 9 October 1981, El Oro Corporations debts fell due on 29 December 1981 and 8 December
1981, respectively.
Neither is there merit to petitioners claim that the trust receipts were simulated. During the trial,
petitioners did not deny applying for the letters of credit and subsequently executing the trust receipts to
secure payment of the drafts drawn under the letters of credit.
WHEREFORE, we GRANT the petition in part. We AFFIRM the Decision of the Court of Appeals dated 7
September 2000 and its Resolution dated 18 October 2000 with the following MODIFICATIONS:
1) El Oro Engraver Corporation is principally liable for the total amount due under the trust
receipts dated 30 September 1981 and 9 October 1981, as computed by the Regional Trial
Court, Makati, Branch 144, upon finality of this Decision, based on the formula provided
above;
2) Petitioner Jose C. Tupaz IV is liable for El Oro Engraver Corporations total debt under the
trust receipt dated 30 September 1981 as thus computed by the Regional Trial Court,
Makati, Branch 144; and

In so delegating this task, we reiterate what we said in Rizal Commercial Banking Corporation v. 3) Petitioners Jose C. Tupaz IV and Petronila C. Tupaz are not liable under the trust receipt
Alfa RTW Manufacturing Corporation[28] where we also ordered the trial court to compute the amount dated 9 October 1981.
of obligation due based on a formula substantially similar to that indicated above:
SO ORDERED.
The total amount due xxx [under] the xxx contract[] xxx may be easily
determined by the trial court through a simple mathematical computation based on the ANTONIO T. CARPIO
formula specified above. Mathematics is an exact science, the application of which Associate Justice
needs no further proof from the parties.

Petitioner Jose Tupazs Acquittal did not

Extinguish his Civil Liability

The rule is that where the civil action is impliedly instituted with the criminal action, the civil
liability is not extinguished by acquittal

[w]here the acquittal is based on reasonable doubt xxx as only preponderance of

evidence is required in civil cases; where the court expressly declares that the liability
of the accused is not criminal but only civil in nature xxx as, for instance, in the felonies
of estafa, theft, and malicious mischief committed by certain relatives who thereby
incur only civil liability (See Art. 332, Revised Penal Code); and, where the civil liability
does not arise from or is not based upon the criminal act of which the accused was
acquitted xxx.[29] (Emphasis supplied)
SECOND DIVISION
[G.R. No. 113931. May 6, 1998]
E. ZOBEL, INC., petitioner, vs. THE COURT OF APPEALS, CONSOLIDATED BANK AND TRUST
CORPORATION, and SPOUSES RAUL and ELEA R. CLAVERIA, respondents.
DECISION
MARTINEZ, J.:
This petition for review on certiorari seeks the reversal of the decision[1] of the Court of Appeals dated
July 13, 1993 which affirmed the Order of the Regional Trial Court of Manila, Branch 51, denying
petitioner's Motion to Dismiss the complaint, as well as the Resolution[2] dated February 15, 1994 denying
the motion for reconsideration thereto.
The facts are as follows:
Respondent spouses Raul and Elea Claveria, doing business under the name "Agro Brokers," applied for
a loan with respondent Consolidated Bank and Trust Corporation (now SOLIDBANK) in the amount of Two
Million Eight Hundred Seventy Five Thousand Pesos (P2, 875,000.00) to finance the purchase of two (2)
maritime barges and one tugboat[3] which would be used in their molasses business. The loan was granted
subject to the condition that respondent spouses execute a chattel mortgage over the three (3) vessels
to be acquired and that a continuing guarantee be executed by Ayala International Philippines, Inc., now
herein petitioner E. Zobel, Inc. in favor of SOLIDBANK. The respondent spouses agreed to the
arrangement. Consequently, a chattel mortgage and a Continuing Guaranty[4] were executed.
Respondent spouses defaulted in the payment of the entire obligation upon maturity. Hence, on January
31,1991, SOLIDBANK filed a complaint for sum of money with a prayer for a writ of preliminary
attachment, against respondents spouses and petitioner. The case was docketed as Civil Case No. 91-
55909 in the Regional Trial Court of Manila.
Petitioner moved to dismiss the complaint on the ground that its liability as guarantor of the loan was
extinguished pursuant to Article 2080 of the Civil Code of the Philippines. It argued that it has lost its
right to be subrogated to the first chattel mortgage in view of SOLIDBANK's failure to register the chattel
mortgage with the appropriate government agency.
SOLIDBANK opposed the motion contending that Article 2080 is not applicable because petitioner is not
a guarantor but a surety.
On February 18, 1993, the trial court issued an Order, portions of which reads:
"After a careful consideration of the matter on hand, the Court finds the ground of the motion to dismiss
without merit. The document referred to as 'Continuing Guaranty' dated August 21,1985 (Exh. 7) states
as follows:
'For and in consideration of any existing indebtedness to you of Agro Brokers, a single proprietorship
owned by Mr. Raul Claveria for the payment of which the undersigned is now obligated to you as surety
and in order to induce you, in your discretion, at any other manner, to, or at the request or for the
account of the borrower, x x x '
"The provisions of the document are clear, plain and explicit.
"Clearly therefore, defendant E. Zobel, Inc. signed as surety. Even though the title of the document is
'Continuing Guaranty', the Court's interpretation is not limited to the title alone but to the contents and
intention of the parties more specifically if the language is clear and positive. The obligation of the
defendant Zobel being that of a surety, Art. 2080 New Civil Code will not apply as it is only for those
acting as guarantor. In fact, in the letter of January 31, 1986 of the defendants (spouses and Zobel) to
the plaintiff it is requesting that the chattel mortgage on the vessels and tugboat be waived and/or
rescinded by the bank inasmuch as the said loan is covered by the Continuing Guaranty by Zobel in favor
of the plaintiff thus thwarting the claim of the defendant now that the chattel mortgage is an essential
condition of the guaranty. In its letter, it said that because of the Continuing Guaranty in favor of the
plaintiff the chattel mortgage is rendered unnecessary and redundant.
"With regard to the claim that the failure of the plaintiff to register the chattel mortgage with the proper
government agency, i.e. with the Office of the Collector of Customs or with the Register of Deeds makes
the obligation a guaranty, the same merits a scant consideration and could not be taken by this Court as
the basis of the extinguishment of the obligation of the defendant corporation to the plaintiff as surety.
The chattel mortgage is an additional security and should not be considered as payment of the debt in
case of failure of payment. The same is true with the failure to register, extinction of the liability would
not lie.
"WHEREFORE, the Motion to Dismiss is hereby denied and defendant E. Zobel, Inc., is ordered to file its
answer to the complaint within ten (10) days from receipt of a copy of this Order." [5]
Petitioner moved for reconsideration but was denied on April 26,1993.[6]
Thereafter, petitioner questioned said Orders before the respondent Court of Appeals, through a petition
for certiorari, alleging that the trial court committed grave abuse of discretion in denying the motion to
dismiss.
On July 13,1993, the Court of Appeals rendered the assailed decision the dispositive portion of which
reads:
"WHEREFORE, finding that respondent Judge has not committed any grave abuse of discretion in issuing
the herein assailed orders, We hereby DISMISS the petition."
A motion for reconsideration filed by petitioner was denied for lack of merit on February 15,1994.
Petitioner now comes to us via this petition arguing that the respondent Court of Appeals erred in its
finding: (1) that Article 2080 of the New Civil Code which provides: "The guarantors, even though they
be solidary, are released from their obligation whenever by some act of the creditor they cannot be
subrogated to the rights, mortgages, and preferences of the latter," is not applicable to petitioner; (2)
that petitioner's obligation to respondent SOLIDBANK under the continuing guaranty is that of a surety;
and (3) that the failure of respondent SOLIDBANK to register the chattel mortgage did not extinguish
petitioner's liability to respondent SOLIDBANK.
We shall first resolve the issue of whether or not petitioner under the "Continuing Guaranty" obligated
itself to SOLIDBANK as a guarantor or a surety.
A contract of surety is an accessory promise by which a person binds himself for another already bound,
and agrees with the creditor to satisfy the obligation if the debtor does not.[7] A contract of guaranty, on
the other hand, is a collateral undertaking to pay the debt of another in case the latter does not pay the
debt.[8]
Strictly speaking, guaranty and surety are nearly related, and many of the principles are common to
both. However, under our civil law, they may be distinguished thus: A surety is usually bound with his
principal by the same instrument, executed at the same time, and on the same consideration. He is an
original promissor and debtor from the beginning, and is held, ordinarily, to know every default of his
principal. Usually, he will not be discharged, either by the mere indulgence of the creditor to the principal,
or by want of notice of the default of the principal, no matter how much he may be injured thereby. On
the other hand, the contract of guaranty is the guarantor's own separate undertaking, in which the
principal does not join. It is usually entered into before or after that of the principal, and is often supported
on a separate consideration from that supporting the contract of the principal. The original contract of his
principal is not his contract, and he is not bound to take notice of its non-performance. He is often
discharged by the mere indulgence of the creditor to the principal, and is usually not liable unless notified
of the default of the principal.[9]
Simply put, a surety is distinguished from a guaranty in that a guarantor is the insurer of the solvency of
the debtor and thus binds himself to pay if the principal is unable to pay while a surety is the insurer of
the debt, and he obligates himself to pay if the principal does not pay.[10]
Based on the aforementioned definitions, it appears that the contract executed by petitioner in favor of
SOLIDBANK, albeit denominated as a "Continuing Guaranty," is a contract of surety. The terms of the
contract categorically obligates petitioner as "surety" to induce SOLIDBANK to extend credit to
respondent spouses. This can be seen in the following stipulations.
"For and in consideration of any existing indebtedness to you of AGRO BROKERS, a single proprietorship
owned by MR. RAUL P. CLAVERIA, of legal age, married and with business address x x x (hereinafter
called the Borrower), for the payment of which the undersigned is now obligated to you as surety
and in order to induce you, in your discretion, at any time or from time to time hereafter, to make
loans or advances or to extend credit in any other manner to, or at the request or for the account of the
Borrower, either with or without purchase or discount, or to make any loans or advances evidenced or
secured by any notes, bills receivable, drafts, acceptances, checks or other instruments or evidences of
indebtedness x x upon which the Borrower is or may become liable as maker, endorser, acceptor, or
otherwise, the undersigned agrees to guarantee, and does hereby guarantee, the punctual
payment, at maturity or upon demand, to you of any and all such instruments, loans, advances,
credits and/or other obligations herein before referred to, and also any and all other
indebtedness of every kind which is now or may hereafter become due or owing to you by the
Borrower, together with any and all expenses which may be incurred by you in collecting all or any such
instruments or other indebtedness or obligations hereinbefore referred to, and or in enforcing any rights
hereunder, and also to make or cause any and all such payments to be made strictly in accordance with
the terms and provisions of any agreement (g), express or implied, which has (have) been or may
hereafter be made or entered into by the Borrower in reference thereto, regardless of any law, regulation
or decree, now or hereafter in effect which might in any manner affect any of the terms or provisions of
any such agreements(s) or your right with respect thereto as against the Borrower, or cause or permit
to be invoked any alteration in the time, amount or manner of payment by the Borrower of any such
instruments, obligations or indebtedness; x x x " (Italics Ours)
One need not look too deeply at the contract to determine the nature of the undertaking and the intention
of the parties. The contract clearly disclose that petitioner assumed liability to SOLIDBANK, as a regular
party to the undertaking and obligated itself as an original promissor. It bound itself jointly and severally
to the obligation with the respondent spouses. In fact, SOLIDBANK need not resort to all other legal
remedies or exhaust respondent spouses' properties before it can hold petitioner liable for the obligation.
This can be gleaned from a reading of the stipulations in the contract, to wit:
'x x x If default be made in the payment of any of the instruments, indebtedness or other
obligation hereby guaranteed by the undersigned, or if the Borrower, or the undersigned should
die, dissolve, fail in business, or become insolvent, x x x , or if any funds or other property of
the Borrower, or of the undersigned which may be or come into your possession or control or
that of any third party acting in your behalf as aforesaid should be attached of distrained, or
should be or become subject to any mandatory order of court or other legal process, then, or
any time after the happening of any such event any or all of the instruments of indebtedness
or other obligations hereby guaranteed shall, at your option become (for the purpose of this
guaranty) due and payable by the undersigned forthwith without demand of notice, and full
power and authority are hereby given you, in your discretion, to sell, assign and deliver all or any part of
the property upon which you may then have a lien hereunder at any broker's board, or at public or private
sale at your option, either for cash or for credit or for future delivery without assumption by you of credit
risk, and without either the demand, advertisement or notice of any kind, all of which are hereby expressly
waived. At any sale hereunder, you may, at your option, purchase the whole or any part of the property
so sold, free from any right of redemption on the part of the undersigned, all such rights being also
hereby waived and released. In case of any sale and other disposition of any of the property
aforesaid, after deducting all costs and expenses of every kind for care, safekeeping,
collection, sale, delivery or otherwise, you may apply the residue of the proceeds of the sale
and other disposition thereof, to the payment or reduction, either in whole or in part, of any
one or more of the obligations or liabilities hereunder of the undersigned whether or not
except for disagreement such liabilities or obligations would then bedue, making proper
allowance or interest on the obligations and liabilities not otherwise then due, and returning
the overplus, if any, to the undersigned; all without prejudice to your rights as against the
undersigned with respect to any and all amounts which may be or remain unpaid on any of the
obligations or liabilities aforesaid at any time (s)"
xxx xxx xxx
'Should the Borrower at this or at any future time furnish, or should be heretofore have
furnished, another surety or sureties to guarantee the payment of his obligations to you, the
undersigned hereby expressly waives all benefits to which the undersigned might be entitled
under the provisions of Article 1837 of the Civil Code (beneficio division), the liability of the
undersigned under any and all circumstances being joint and several;" (Italics Ours)
The use of the term "guarantee" does not ipso facto mean that the contract is one of guaranty.
Authorities recognize that the word "guarantee" is frequently employed in business transactions to
describe not the security of the debt but an intention to be bound by a primary or independent
obligation.[11] As aptly observed by the trial court, the interpretation of a contract is not limited to the
title alone but to the contents and intention of the parties.
Having thus established that petitioner is a surety, Article 2080 of the Civil Code, relied upon by petitioner,
finds no application to the case at bar. In Bicol Savings and Loan Association vs. Guinhawa,[12] we have
ruled that Article 2080 of the New Civil Code does not apply where the liability is as a surety, not as a
guarantor.
But even assuming that Article 2080 is applicable, SOLIDBANK's failure to register the chattel mortgage
did not release petitioner from the obligation. In the Continuing Guaranty executed in favor of
SOLIDBANK, petitioner bound itself to the contract irrespective of the existence of any collateral. It even
released SOLIDBANK from any fault or negligence that may impair the contract. The pertinent portions
of the contract so provides:
"x x x the undersigned (petitioner) who hereby agrees to be and remain bound upon this guaranty,
irrespective of the existence, value or condition of any collateral, and notwithstanding any such
change, exchange, settlement, compromise, surrender, release, sale, application, renewal or extension,
and notwithstanding also that all obligations of the Borrower to you outstanding and unpaid at any time
(s) may exceed the aggregate principal sum herein above prescribed.
'This is a Continuing Guaranty and shall remain in full force and effect until written notice shall have been
received by you that it has been revoked by the undersigned, but any such notice shall not be released
the undersigned from any liability as to any instruments, loans, advances or other obligations hereby
guaranteed, which may be held by you, or in which you may have any interest, at the time of the receipt
of such notice. No act or omission of any kind on your part in the premises shall in any event
affect or impair this guaranty, nor shall same be affected by any change which may arise by reason
of the death of the undersigned, of any partner (s) of the undersigned, or of the Borrower, or of the
accession to any such partnership of any one or more new partners." (Italics supplied)
In fine, we find the petition to be without merit as no reversible error was committed by respondent Court
of Appeals in rendering the assailed decision.
WHEREFORE, the decision of the respondent Court of Appeals is hereby AFFIRMED. Costs against the
petitioner.
SO ORDERED.
THIRD DIVISION (b) Interest of 12% per annum on accrued interest, which shall be counted from the date of filing of the
instant action up to the actual payment;

(c) P73,340.00 as attorneys fees;

INTERNATIONAL FINANCE G.R. No. 160324
(d) Costs of suit.
CORPORATION,
2. The guarantor Imperial Textile Mills, Inc. together with Grandtex is HELD secondarily liable to pay the
Petitioner, Present: amount herein adjudged to [Petitioner] International Finance Corporation.[4]
Panganiban, J., The assailed Resolution denied both parties respective Motions for Reconsideration.
Chairman, The Facts

- versus - Sandoval-Gutierrez, *
The facts are narrated by the appellate court as follows:
Corona, On December 17, 1974, [Petitioner] International Finance Corporation (IFC) and [Respondent] Philippine
Polyamide Industrial Corporation (PPIC) entered into a loan agreement wherein IFC extended to PPIC a
Carpio Morales, and loan of US$7,000,000.00, payable in sixteen (16) semi-annual installments of US$437,500.00 each,
beginning June 1, 1977 to December 1, 1984, with interest at the rate of 10% per annum on the principal
Garcia, JJ
amount of the loan advanced and outstanding from time to time. The interest shall be paid in US dollars
IMPERIAL TEXTILE MILLS, Promulgated: 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 basis of a 360-day year of twelve 30-day months.
INC.,**
On December 17, 1974, a Guarantee Agreement was executed with x x x Imperial Textile Mills, Inc.
Respondent. November 15, 2005 (ITM), Grand Textile Manufacturing Corporation (Grandtex) and IFC as parties thereto. ITM and Grandtex
agreed to guarantee PPICs obligations under the loan agreement.
x -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- x
PPIC paid the installments due on June 1, 1977, December 1, 1977 and June 1, 1978. The payments due
DECISION on December 1, 1978, June 1, 1979 and December 1, 1979 were rescheduled as requested by PPIC.
Despite the rescheduling of the installment payments, however, PPIC defaulted. Hence, on April 1, 1985,
PANGANIBAN, J.: IFC served a written notice of default to PPIC demanding the latter to pay the outstanding principal loan
and all its accrued interests. Despite such notice, PPIC failed to pay the loan and its interests.

The terms of a contract govern the rights and obligations of the contracting parties. When the obligor
undertakes to be jointly and severally liable, it means that the obligation is solidary.
If solidary liability was instituted to guarantee a principal obligation, the law deems the contract to be
one of suretyship.
The creditor in the present Petition was able to show convincingly that, although denominated as a
Guarantee Agreement, the Contract was actually a surety. Notwithstanding the use of the words
guarantee and guarantor, the subject Contract was indeed a surety, because its terms were clear and
left no doubt as to the intention of the parties.
By virtue of PPICs failure to pay, IFC, together with DBP, applied for the extrajudicial foreclosure of
mortgages on the real estate, buildings, machinery, equipment plant and all improvements owned by
PPIC, located at Calamba, Laguna, with the regional sheriff of Calamba, Laguna. On July 30, 1985, the
deputy sheriff of Calamba, Laguna issued a notice of extrajudicial sale. IFC and DBP were the only bidders
during the auction sale. IFCs bid was for P99,269,100.00 which was equivalent to US$5,250,000.00 (at
the prevailing exchange rate of P18.9084 = US$1.00). The outstanding loan, however, amounted to
US$8,083,967.00 thus leaving a balance of US$2,833,967.00. PPIC failed to pay the remaining balance.
Consequently, IFC demanded ITM and Grandtex, as guarantors of PPIC, to pay the outstanding balance.
However, despite the demand made by IFC, the outstanding balance remained unpaid.

The Case
Before us is a Petition for Review[1] under Rule 45 of the Rules of Court, assailing the February 28, 2002
Decision[2] and September 30, 2003 Resolution[3] of the Court of Appeals (CA) in CA-GR CV No. 58471.
The challenged Decision disposed as follows:
WHEREFORE, the appeal is PARTIALLY GRANTED. The decision of the trial court is MODIFIED to read
as follows:
Thereafter, on May 20, 1988, IFC filed a complaint with the RTC of Manila against PPIC and ITM for the
payment of the outstanding balance plus interests and attorneys fees.
The trial court held PPIC liable for the payment of the outstanding loan plus interests. It also ordered
PPIC to pay IFC its claimed attorneys fees. However, the trial court relieved ITM of its obligation as
guarantor. Hence, the trial court dismissed IFCs complaint against ITM.
xxxxxxxxx

Thus, apropos the decision dismissing the complaint against ITM, IFC appealed [to the CA].[5]
1. Philippine Polyamide Industrial Corporation is ORDERED to pay [Petitioner] International Finance
Corporation, the following amounts:

(a) US$2,833,967.00 with accrued interests as provided in the Loan Agreement;

Ruling of the Court of Appeals
The CA reversed the Decision of the trial court, insofar as the latter exonerated ITM from any obligation
to IFC. According to the appellate court, ITM bound itself under the Guarantee Agreement to pay PPICs
obligation upon default.[6] ITM was not discharged from its obligation as guarantor when PPIC mortgaged
the latters properties to IFC.[7] The CA, however, held that ITMs liability as a guarantor would arise only
if and when PPIC could not pay. Since PPICs inability to comply with its obligation was not sufficiently
established, ITM could not immediately be made to assume the liability.[8]
The September 30, 2003 Resolution of the CA denied reconsideration.[9] Hence, this Petition.[10]
The Issues
Petitioner states the issues in this wise:
I. Whether or not ITM and Grandtex[11] are sureties and therefore, jointly and severally liable with PPIC,
for the payment of the loan.
II. Whether or not the Petition raises a question of law.
III. Whether or not the Petition raises a theory not raised in the lower court.[12]
The main issue is whether ITM is a surety, and thus solidarily liable with PPIC for the payment of the
loan.
The Courts Ruling
The Petition is meritorious.
Main Issue:
Liability of Respondent Under
the Guarantee Agreement
The present controversy arose from the following Contracts: (1) the Loan Agreement dated December
17, 1974, between IFC and PPIC;[13] and (2) the Guarantee Agreement dated December 17, 1974,
between ITM and Grandtex, on the one hand, and IFC on the other.[14]
IFC claims that, under the Guarantee Agreement, ITM bound itself as a surety to PPICs obligations
proceeding from the Loan Agreement.[15] For its part, ITM asserts that, by the terms of the Guarantee
Agreement, it was merely a guarantor[16] and not a surety. Moreover, any ambiguity in the Agreement
should be construed against IFC -- the party that drafted it.[17]
Language of the
Contract
The premise of the Guarantee Agreement is found in its preambular clause, which reads:
Whereas,
(A) By an Agreement of even date herewith between IFC and PHILIPPINE POLYAMIDE
INDUSTRIAL CORPORATION (herein called the Company), which agreement is herein called the Loan
Agreement, IFC agrees to extend to the Company a loan (herein called the Loan) of seven million dollars
($7,000,000) on the terms therein set forth, including a provision that all or part of the Loan may be
disbursed in a currency other than dollars, but only on condition that the Guarantors agree to guarantee
the obligations of the Company in respect of the Loan as hereinafter provided.
(B) The Guarantors, in order to induce IFC to enter into the Loan Agreement, and in consideration of IFC
entering into said Agreement, have agreed so to guarantee such obligations of the Company.[18]
The obligations of the guarantors are meticulously expressed in the following provision:
Section 2.01. The Guarantors jointly and severally, irrevocably, absolutely and unconditionally guarantee,
as primary obligors and not as sureties merely, the due and punctual payment of the principal of, and
interest and commitment charge on, the Loan, and the principal of, and interest on, the Notes, whether
at stated maturity or upon prematuring, all as set forth in the Loan Agreement and in the Notes. [19]
The Agreement uses guarantee and guarantors, prompting ITM to base its argument on those
words.[20] This Court is not convinced that the use of the two words limits the Contract to a mere guaranty.
The specific stipulations in the Contract show otherwise.
Solidary Liability
Agreed to by ITM
While referring to ITM as a guarantor, the Agreement specifically stated that the corporation was jointly
and severally liable. To put emphasis on the nature of that liability, the Contract further stated that ITM
was a primary obligor, not a mere surety. Those stipulations meant only one thing: that at bottom, and
to all legal intents and purposes, it was a surety.
Indubitably therefore, ITM bound itself to be solidarily[21] liable with PPIC for the latters obligations under
the Loan Agreement with IFC. ITM thereby brought itself to the level of PPIC and could not be deemed
merely secondarily liable.
Initially, ITM was a stranger to the Loan Agreement between PPIC and IFC. ITMs liability commenced
only when it guaranteed PPICs obligation. It became a surety when it bound itself solidarily with the
principal obligor. Thus, the applicable law is as follows:
Article 2047. By guaranty, a person, called the guarantor binds himself to the creditor to fulfill the
obligation of the principal in case the latter should fail to do so.
If a person binds himself solidarily with the principal debtor, the provisions of Section 4, Chapter 3, Title
I of this Book shall be observed. In such case the contract shall be called suretyship.[22]
The aforementioned provisions refer to Articles 1207 to 1222 of the Civil Code on Joint and Solidary
Obligations. Relevant to this case is Article 1216, which states:
The creditor may proceed against any one of the solidary debtors or some or all of them simultaneously.
The demand made against one of them shall not be an obstacle to those which may subsequently be
directed against the others, so long as the debt has not been fully collected.
Pursuant to this provision, petitioner (as creditor) was justified in taking action directly against
respondent.
No Ambiguity in the
Undertaking
The Court does not find any ambiguity in the provisions of the Guarantee Agreement. When qualified by
the term jointly and severally, the use of the word guarantor to refer to a surety does not violate the
law.[23] As Article 2047 provides, a suretyship is created when a guarantor binds itself solidarily with the
principal obligor. Likewise, the phrase in the Agreement -- as primary obligor and not merely as surety -
- stresses that ITM is being placed on the same level as PPIC. Those words emphasize the nature of their
liability, which the law characterizes as a suretyship.
The use of the word guarantee does not ipso facto make the contract one of guaranty.[24] This Court has
recognized that the word is frequently employed in business transactions to describe the intention to be
bound by a primary or an independent obligation.[25] The very terms of a contract govern the obligations
of the parties or the extent of the obligors liability. Thus, this Court has ruled in favor of suretyship, even
though contracts were denominated as a Guarantors Undertaking [26] or a Continuing Guaranty.[27]
Alleged Change of
Theory on Appeal
Petitioners arguments before the trial court (that ITM was a primary obligor) and before the CA (that ITM
was a surety) were related and intertwined in the action to enforce the solidary liability of ITM under the
Guarantee Agreement. We emphasize that the terms primary obligor and surety were premised on the
same stipulations in Section 2.01 of the Agreement. Besides, both terms had the same legal
consequences. There was therefore effectively no change of theory on appeal. At any rate, ITM failed to
show to this Court a disparity between IFCs allegations in the trial court and those in the CA. Bare
allegations without proof deserve no credence.

Contracts have the force of law between the parties,[28] who are free to stipulate any matter not contrary
to law, morals, good customs, public order or public policy.[29] None of these circumstances are present, Review of Factual
much less alleged by respondent. Hence, this Court cannot give a different meaning to the plain language
Findings Necessary
of the Guarantee Agreement.
As to the issue that only questions of law may be raised in a Petition for Review,[39] the Court has
Indeed, the finding of solidary liability is in line with the premise provided in the Whereas clause of the
recognized exceptions,[40] one of which applies to the present case. The assailed Decision was based on
Guarantee Agreement. The execution of the Agreement was a condition precedent for the approval of
a misapprehension of facts,[41] which particularly related to certain stipulations in the Guarantee
PPICs loan from IFC. Consistent with the position of IFC as creditor was its requirement of a higher degree
Agreement -- stipulations that had not been disputed by the parties. This circumstance compelled the
of liability from ITM in case PPIC committed a breach. ITM agreed with the stipulation in Section 2.01 and
Court to review the Contract firsthand and to make its own findings and conclusions accordingly.
is now estopped from feigning ignorance of its solidary liability. The literal meaning of the stipulations
control when the terms of the contract are clear and there is no doubt as to the intention of the parties.[30]
WHEREFORE, the Petition is hereby GRANTED, and the assailed Decision and Resolution MODIFIED in
We note that the CA denied solidary liability, on the theory that the parties would not have executed a
the sense that Imperial Textile Mills, Inc. is declared a surety to Philippine Polyamide Industrial
Guarantee Agreement if they had intended to name ITM as a primary obligor.[31] The appellate court
Corporation. ITM is ORDERED to pay International Finance Corporation the same amounts adjudged
opined that ITMs undertaking was collateral to and distinct from the Loan Agreement. On this point, the
against PPIC in the assailed Decision. No costs.
Court stresses that a suretyship is merely an accessory or a collateral to a principal obligation.[32] Although
a surety contract is secondary to the principal obligation, the liability of the surety is direct, primary and SO ORDERED.
absolute; or equivalent to that of a regular party to the undertaking.[33] A surety becomes liable to the
debt and duty of the principal obligor even without possessing a direct or personal interest in the
obligations constituted by the latter.[34]

ITMs Liability as Surety

With the present finding that ITM is a surety, it is clear that the CA erred in declaring the former
secondarily liable.[35] A surety is considered in law to be on the same footing as the principal debtor in
relation to whatever is adjudged against the latter.[36] Evidently, the dispositive portion of the assailed
Decision should be modified to require ITM to pay the amount adjudged in favor of IFC.

Peripheral Issues

In addition to the main issue, ITM raised procedural infirmities allegedly justifying the denial of the present
Petition. Before the trial court and the CA, IFC had allegedly instituted different arguments that effectively
changed the corporations theory on appeal, in violation of this Courts previous pronouncements.[37]ITM
further
claims that the main issue in the present case is a question of fact that is not cognizable by this Court.[38]

These contentions deserve little consideration.

SALVADOR P. ESCAO G. R. No. 151953
and MARIO M. SILOS,
Petitioners,
Present:
QUISUMBING,
- versus - Chairperson,
CARPIO,
CARPIO MORALES,
TINGA, and
RAFAEL ORTIGAS, JR., VELASCO, JR., JJ.
Respondent.
Promulgated:
June 29, 2007
x---------------------------------------------------------------------------------x
DECISION
TINGA, J.:
The main contention raised in this petition is that petitioners are not under obligation to reimburse respondent,
a claim that can be easily debunked. The more perplexing question is whether this obligation to repay is solidary,
as contended by respondent and the lower courts, or merely joint as argued by petitioners.
On 28 April 1980, Private Development Corporation of the Philippines (PDCP)[1] entered into a loan agreement
with Falcon Minerals, Inc. (Falcon) whereby PDCP agreed to make available and lend to Falcon the amount of
US$320,000.00, for specific purposes and subject to certain terms and conditions.[2] On the same day, three
stockholders-officers of Falcon, namely: respondent Rafael Ortigas, Jr. (Ortigas), George A. Scholey and George
T. Scholey executed an Assumption of Solidary Liability whereby they agreed to assume in [their] individual
capacity, solidary liability with [Falcon] for the due and punctual payment of the loan contracted by Falcon with
PDCP.[3] In the meantime, two separate guaranties were executed to guarantee the payment of the same loan
by other stockholders and officers of Falcon, acting in their personal and individual capacities. One
Guaranty[4] was executed by petitioner Salvador Escao (Escao), while the other[5] by petitioner Mario M. Silos
(Silos), Ricardo C. Silverio (Silverio), Carlos L. Inductivo (Inductivo) and Joaquin J. Rodriguez (Rodriguez).
Two years later, an agreement developed to cede control of Falcon to Escao, Silos and Joseph M. Matti (Matti).
Thus, contracts were executed whereby Ortigas, George A. Scholey, Inductivo and the heirs of then already
deceased George T. Scholey assigned their shares of stock in Falcon to Escao, Silos and Matti.[6] Part of the
consideration that induced the sale of stock was a desire by Ortigas, et al., to relieve themselves of all liability
arising from their previous joint and several undertakings with Falcon, including those related to the loan with
PDCP. Thus, an Undertaking dated 11 June 1982 was executed by the concerned parties,[7] namely: with Escao,
Silos and Matti identified in the document as SURETIES, on one hand, and Ortigas, Inductivo and the Scholeys
as OBLIGORS, on the other. The Undertaking reads in part:
3. That whether or not SURETIES are able to immediately cause PDCP and PAIC to release OBLIGORS from
their said guarantees [sic], SURETIES hereby irrevocably agree and undertake to assume all of
OBLIGORs said guarantees [sic] to PDCP and PAIC under the following terms and conditions:
a. Upon receipt by any of [the] OBLIGORS of any demand from PDCP and/or PAIC for the payment of FALCONs
obligations with it, any of [the] OBLIGORS shall immediately inform SURETIES thereof so that the latter can
timely take appropriate measures;
b. Should suit be impleaded by PDCP and/or PAIC against any and/or all of OBLIGORS for collection of said loans
and/or credit facilities, SURETIES agree to defend OBLIGORS at their own expense, without prejudice to any
and/or all of OBLIGORS impleading SURETIES therein for contribution, indemnity, subrogation or other relief in
respect to any of the claims of PDCP and/or PAIC; and
c. In the event that any of [the] OBLIGORS is for any reason made to pay any amount to PDCP and/or PAIC,
SURETIES shall reimburse OBLIGORS for said amount/s within seven (7) calendar days from such payment;
4. OBLIGORS hereby waive in favor of SURETIES any and all fees which may be due from FALCON arising out
of, or in connection with, their said guarantees[sic].[8]
Falcon eventually availed of the sum of US$178,655.59 from the credit line extended by PDCP. It would also
execute a Deed of Chattel Mortgage over its personal properties to further secure the loan. However, Falcon
subsequently defaulted in its payments. After PDCP foreclosed on the chattel mortgage, there remained a
subsisting deficiency of P5,031,004.07, which Falcon did not satisfy despite demand.[9]
On 28 April 1989, in order to recover the indebtedness, PDCP filed a complaint for sum of money with the
Regional Trial Court of Makati (RTC) against Falcon, Ortigas, Escao, Silos, Silverio and Inductivo. The case was
docketed as Civil Case No. 89-5128. For his part, Ortigas filed together with his answer a cross-claim against
his co-defendants Falcon, Escao and Silos, and also manifested his intent to file a third-party complaint against
the Scholeys and Matti.[10] The cross-claim lodged against Escao and Silos was predicated on the 1982
Undertaking, wherein they agreed to assume the liabilities of Ortigas with respect to the PDCP loan.
Escao, Ortigas and Silos each sought to seek a settlement with PDCP. The first to come to terms with PDCP was
Escao, who in December of 1993, entered into a compromise agreement whereby he agreed to pay the
bank P1,000,000.00. In exchange, PDCP waived or assigned in favor of Escao one-third (1/3) of its entire claim
in the complaint against all of the other defendants in the case.[11] The compromise agreement was approved
by the RTC in a Judgment[12] dated 6 January 1994.
Then on 24 February 1994, Ortigas entered into his own compromise agreement[13] with PDCP, allegedly without
the knowledge of Escao, Matti and Silos. Thereby, Ortigas agreed to pay PDCP P1,300,000.00 as full satisfaction
of the PDCPs claim against Ortigas,[14] in exchange for PDCPs release of Ortigas from any liability or claim arising
from the Falcon loan agreement, and a renunciation of its claims against Ortigas.
In 1995, Silos and PDCP entered into a Partial Compromise Agreement whereby he agreed to pay P500,000.00
in exchange for PDCPs waiver of its claims against him.[15]
In the meantime, after having settled with PDCP, Ortigas pursued his claims against Escao, Silos and Matti, on
the basis of the 1982 Undertaking. He initiated a third-party complaint against Matti and Silos,[16] while he
maintained his cross-claim against Escao. In 1995, Ortigas filed a motion for Summary Judgment in his favor
against Escao, Silos and Matti. On 5 October 1995, the RTC issued the Summary Judgment, ordering Escao,
Silos and Matti to pay Ortigas, jointly and severally, the amount of P1,300,000.00, as well as P20,000.00 in
attorneys fees.[17] The trial court ratiocinated that none of the third-party defendants disputed the 1982
Undertaking, and that the mere denials of defendants with respect to non-compliance of Ortigas of the terms
and conditions of the Undertaking, unaccompanied by any substantial fact which would be admissible in evidence
at a hearing, are not sufficient to raise genuine issues of fact necessary to defeat a motion for summary
judgment, even if such facts were raised in the pleadings.[18] In an Order dated 7 March 1996, the trial court
denied the motion for reconsideration of the Summary Judgment and awarded Ortigas legal interest of 12% per
annum to be computed from 28 February 1994.[19]
From the Summary Judgment, recourse was had by way of appeal to the Court of Appeals. Escao and Silos
appealed jointly while Matti appealed by his lonesome. In a Decision[20] dated 23 January 2002, the Court of
Appeals dismissed the appeals and affirmed the Summary Judgment. The appellate court found that the RTC
did not err in rendering the summary judgment since the three appellants did not effectively deny their execution
of the 1982 Undertaking. The special defenses that were raised, payment and excussion, were characterized by
the Court of Appeals as appear[ing] to be merely sham in the light of the pleadings and supporting documents
and affidavits.[21] Thus, it was concluded that there was no genuine issue that would still require the rigors of
trial, and that the appealed judgment was decided on the bases of the undisputed and established facts of the
case.
Hence, the present petition for review filed by Escao and Silos.[22] Two main issues are raised. First, petitioners
dispute that they are liable to Ortigas on the basis of the 1982 Undertaking, a document which they do not
disavow and have in fact annexed to their petition. Second, on the assumption that they are liable to Ortigas
under the 1982 Undertaking, petitioners argue that they are jointly liable only, and not solidarily. Further
assuming that they are liable, petitioners also submit that they are not liable for interest and if at all, the proper
interest rate is 6% and not 12%.
Interestingly, petitioners do not challenge, whether in their petition or their memorandum before the Court, the
appropriateness of the summary judgment as a relief favorable to Ortigas. Under Section 3, Rule 35 of the 1997
Rules of Civil Procedure, summary judgment may avail if the pleadings, supporting affidavits, depositions and
admissions on file show that, except as to the amount of damages, there is no genuine issue as to any material
fact and that the moving party is entitled to a judgment as a matter of law. Petitioner have not attempted to
demonstrate before us that there existed a genuine issue as to any material fact that would preclude summary
judgment. Thus, we affirm with ease the common rulings of the lower courts that summary judgment is an
appropriate recourse in this case.
The vital issue actually raised before us is whether petitioners were correctly held liable to Ortigas on the basis
of the 1982 Undertaking in this Summary Judgment. An examination of the document reveals several clauses
that make it clear that the agreement was brought forth by the desire of Ortigas, Inductivo and the Scholeys to
be released from their liability under the loan agreement which release was, in turn, part of the consideration
for the assignment of their shares in Falcon to petitioners and Matti. The whereas clauses manifest that Ortigas
had bound himself with Falcon for the payment of the loan with PDCP, and that amongst the consideration for
OBLIGORS and/or their principals aforesaid selling is SURETIES relieving OBLIGORS of any and all liability arising
from their said joint and several undertakings with FALCON.[23] Most crucial is the clause in Paragraph 3 of the
Undertaking wherein petitioners irrevocably agree and undertake to assume all of OBLIGORs said guarantees
[sic] to PDCP x x x under the following terms and conditions.[24]
At the same time, it is clear that the assumption by petitioners of Ortigass guarantees [sic] to PDCP is governed
by stipulated terms and conditions as set forth in sub-paragraphs (a) to (c) of Paragraph 3. First, upon receipt
by any of OBLIGORS of any demand from PDCP for the payment of Falcons obligations with it, any of OBLIGORS
was to immediately inform SURETIES thereof so that the latter can timely take appropriate measures. Second,
should any and/or all of OBLIGORS be impleaded by PDCP in a suit for collection of its loan, SURETIES agree[d]
to defend OBLIGORS at their own expense, without prejudice to any and/or all of OBLIGORS impleading
SURETIES therein for contribution, indemnity, subrogation or other relief[25] in respect to any of the claims of
PDCP. Third, if any of the OBLIGORS is for any reason made to pay any amount to [PDCP], SURETIES [were to]
reimburse OBLIGORS for said amount/s within seven (7) calendar days from such payment.[26]
Petitioners claim that, contrary to paragraph 3(c) of the Undertaking, Ortigas was not made to pay PDCP the
amount now sought to be reimbursed, as Ortigas voluntarily paid PDCP the amount of P1.3 Million as an amicable
settlement of the claims posed by the bank against him. However, the subject clause in paragraph 3(c) actually
reads [i]n the event that any of OBLIGORS is for any reason made to pay any amount to PDCP x x x[27] As
pointed out by Ortigas, the phrase for any reason reasonably includes any extra-judicial settlement of obligation
such as what Ortigas had undertaken to pay to PDCP, as it is indeed obvious that the phrase was incorporated
in the clause to render the eventual payment adverted to therein unlimited and unqualified.
The interpretation posed by petitioners would have held water had the Undertaking made clear that the right of
Ortigas to seek reimbursement accrued only after he had delivered payment to PDCP as a consequence of a final
and executory judgment. On the contrary, the clear intent of the Undertaking was for petitioners and Matti to
relieve the burden on Ortigas and his fellow OBLIGORS as soon as possible, and not only after Ortigas had been
subjected to a final and executory adverse judgment.
Paragraph 1 of the Undertaking enjoins petitioners to exert all efforts to cause PDCP x x x to within a reasonable
time release all the OBLIGORS x x x from their guarantees [sic] to PDCP x x x[28] In the event that Ortigas and
his fellow OBLIGORS could not be released from their guaranties, paragraph 2 commits petitioners and Matti to
cause the Board of Directors of Falcon to make a call on its stockholders for the payment of their unpaid
subscriptions and to pledge or assign such payments to Ortigas, et al., as security for whatever amounts the
latter may be held liable under their guaranties. In addition, paragraph 1 also makes clear that nothing in the
Undertaking shall prevent OBLIGORS, or any one of them, from themselves negotiating with PDCP x x x for the
release of their said guarantees [sic].[29]
There is no argument to support petitioners position on the import of the phrase made to pay in the Undertaking,
other than an unduly literalist reading that is clearly inconsistent with the thrust of the document. Under the
Civil Code, the various stipulations of a contract shall be interpreted together, attributing to the doubtful ones
that sense which may result from all of them taken jointly.[30] Likewise applicable is the provision that if some
stipulation of any contract should admit of several meanings, it shall be understood as bearing that import which
is most adequate to render it effectual.[31] As a means to effect the general intent of the document to relieve
Ortigas from liability to PDCP, it is his interpretation, not that of petitioners, that holds sway with this Court.
Neither do petitioners impress us of the non-fulfillment of any of the other conditions set in paragraph 3, as they
claim. Following the general assertion in the petition that Ortigas violated the terms of the Undertaking,
petitioners add that Ortigas paid PDCP BANK the amount of P1.3 million without petitioners ESCANO and SILOSs
knowledge and consent.[32] Paragraph 3(a) of the Undertaking does impose a requirement that any of the
OBLIGORS shall immediately inform SURETIES if they received any demand for payment of FALCONs obligations
to PDCP, but that requirement is reasoned so that the [SURETIES] can timely take appropriate
measures[33] presumably to settle the obligation without having to burden the OBLIGORS. This notice
requirement in paragraph 3(a) is markedly way off from the suggestion of petitioners that Ortigas, after already
having been impleaded as a defendant in the collection suit, was obliged under the 1982 Undertaking to notify
them before settling with PDCP.
The other arguments petitioners have offered to escape liability to Ortigas are similarly weak.
Petitioners impugn Ortigas for having settled with PDCP in the first place. They note that Ortigas had, in his
answer, denied any liability to PDCP and had alleged that he signed the Assumption of Solidary Liability not in
his personal capacity, but as an officer of Falcon. However, such position, according to petitioners, could not be
justified since Ortigas later voluntarily paid PDCP the amount of P1.3 Million. Such circumstances, according to
petitioners, amounted to estoppel on the part of Ortigas.
Even as we entertain this argument at depth, its premises are still erroneous. The Partial Compromise Agreement
between PDCP and Ortigas expressly stipulated that Ortigass offer to pay PDCP was conditioned without
[Ortigass] admitting liability to plaintiff PDCP Banks complaint, and to terminate and dismiss the said case as
against Ortigas solely.[34] Petitioners profess it is unthinkable for Ortigas to have voluntarily paid PDCP without
admitting his liability,[35] yet such contention based on assumption cannot supersede the literal terms of the
Partial Compromise Agreement.
Petitioners further observe that Ortigas made the payment to PDCP after he had already assigned his obligation
to petitioners through the 1982 Undertaking. Yet the fact is PDCP did pursue a judicial claim against Ortigas
notwithstanding the Undertaking he executed with petitioners. Not being a party to such Undertaking, PDCP was
not precluded by a contract from pursuing its claim against Ortigas based on the original Assumption of Solidary
Liability.
At the same time, the Undertaking did not preclude Ortigas from relieving his distress through a settlement with
the creditor bank. Indeed, paragraph 1 of the Undertaking expressly states that nothing herein shall prevent
OBLIGORS, or any one of them, from themselves negotiating with PDCP x x x for the release of their said
guarantees [sic].[36]Simply put, the Undertaking did not bar Ortigas from pursuing his own settlement with PDCP.
Neither did the Undertaking bar Ortigas from recovering from petitioners whatever amount he may have paid
PDCP through his own settlement. The stipulation that if Ortigas was for any reason made to pay any amount
to PDCP[,] x x x SURETIES shall reimburse OBLIGORS for said amount/s within seven (7) calendar days from
such payment[37] makes it clear that petitioners remain liable to reimburse Ortigas for the sums he paid PDCP.
We now turn to the set of arguments posed by petitioners, in the alternative, that is, on the assumption that
they are indeed liable.
Petitioners submit that they could only be held jointly, not solidarily, liable to Ortigas, claiming that the
Undertaking did not provide for express solidarity. They cite Article 1207 of the New Civil Code, which states in
part that [t]here is a solidary liability only when the obligation expressly so states, or when the law or the nature
of the obligation requires solidarity.
Ortigas in turn argues that petitioners, as well as Matti, are jointly and severally liable for the Undertaking, as
the language used in the agreement clearly shows that it is a surety agreement[38] between the obligors (Ortigas
group) and the sureties (Escao group). Ortigas points out that the Undertaking uses the word SURETIES although
the document, in describing the parties. It is further contended that the principal objective of the parties in
executing the Undertaking cannot be attained unless petitioners are solidarily liable because the total loan
obligation can not be paid or settled to free or release the OBLIGORS if one or any of the SURETIES default from
their obligation in the Undertaking.[39]
In case, there is a concurrence of two or more creditors or of two or more debtors in one and the same obligation,
Article 1207 of the Civil Code states that among them, [t]here is a solidary liability only when the obligation
expressly so states, or when the law or the nature of the obligation requires solidarity. Article 1210 supplies
further caution against the broad interpretation of solidarity by providing: The indivisibility of an obligation does
not necessarily give rise to solidarity. Nor does solidarity of itself imply indivisibility.
These Civil Code provisions establish that in case of concurrence of two or more creditors or of two or more
debtors in one and the same obligation, and in the absence of express and indubitable terms characterizing the
obligation as solidary, the presumption is that the obligation is only joint. It thus becomes incumbent upon the
party alleging that the obligation is indeed solidary in character to prove such fact with a preponderance of
evidence.
The Undertaking does not contain any express stipulation that the petitioners agreed to bind themselves jointly
and severally in their obligations to the Ortigas group, or any such terms to that effect. Hence, such obligation
established in the Undertaking is presumed only to be joint. Ortigas, as the party alleging that the obligation is
in fact solidary, bears the burden to overcome the presumption of jointness of obligations. We rule and so hold
that he failed to discharge such burden.
Ortigas places primary reliance on the fact that the petitioners and Matti identified themselves in the Undertaking
as SURETIES, a term repeated no less than thirteen (13) times in the document. Ortigas claims that such manner
of identification sufficiently establishes that the obligation of petitioners to him was joint and solidary in nature.
The term surety has a specific meaning under our Civil Code. Article 2047 provides the statutory definition of a
surety agreement, thus:
Art. 2047. By guaranty a person, called the guarantor, binds himself to the creditor to fulfill the obligation of the
principal debtor in case the latter should fail to do so.
If a person binds himself solidarily with the principal debtor, the provisions of Section 4, Chapter 3, Title I of this
Book shall be observed. In such case the contract is called a suretyship. [Emphasis supplied][40]
As provided in Article 2047 in a surety agreement the surety undertakes to be bound solidarily with the principal
debtor. Thus, a surety agreement is an ancillary contract as it presupposes the existence of a principal contract.
It appears that Ortigass argument rests solely on the solidary nature of the obligation of the surety under Article
2047. In tandem with the nomenclature SURETIES accorded to petitioners and Matti in the Undertaking,
however, this argument can only be viable if the obligations established in the
Undertaking do partake of the nature of a suretyship as defined under Article 2047 in the first place. That clearly
is not the case here, notwithstanding the use of the nomenclature SURETIES in the Undertaking.
Again, as indicated by Article 2047, a suretyship requires a principal debtor to whom the surety is solidarily
bound by way of an ancillary obligation of segregate identity from the obligation between the principal debtor
and the creditor. The suretyship does bind the surety to the creditor, inasmuch as the latter is vested with the
right to proceed against the former to collect the credit in lieu of proceeding against the principal debtor for the
same obligation.[41] At the same time, there is also a legal tie created between the surety and the principal
debtor to which the creditor is not privy or party to. The moment the surety fully answers to the creditor for the
obligation created by the principal debtor, such obligation is extinguished.[42] At the same time, the surety may
seek reimbursement from the principal debtor for the amount paid, for the surety does in fact become subrogated
to all the rights and remedies of the creditor.[43]
Note that Article 2047 itself specifically calls for the application of the provisions on joint and solidary obligations
to suretyship contracts.[44] Article 1217 of the Civil Code thus comes into play, recognizing the right of
reimbursement from a co-debtor (the principal debtor, in case of suretyship) in favor of the one who paid (i.e.,
the surety).[45]However, a significant distinction still lies between a joint and several debtor, on one hand, and
a surety on the other. Solidarity signifies that the creditor can compel any one of the joint and several debtors
or the surety alone to answer for the entirety of the principal debt. The difference lies in the respective faculties
of the joint and several debtor and the surety to seek reimbursement for the sums they paid out to the creditor.
Dr. Tolentino explains the differences between a solidary co-debtor and a surety:
A guarantor who binds himself in solidum with the principal debtor under the provisions of the second paragraph
does not become a solidary co-debtor to all intents and purposes. There is a difference between a solidary
co-debtor and a fiador in solidum (surety). The latter, outside of the liability he assumes to pay the
debt before the property of the principal debtor has been exhausted, retains all the other rights,
actions and benefits which pertain to him by reason of the fiansa; while a solidary co-debtor has no
other rights than those bestowed upon him in Section 4, Chapter 3, Title I, Book IV of the Civil Code.
The second paragraph of [Article 2047] is practically equivalent to the contract of suretyship. The civil law
suretyship is, accordingly, nearly synonymous with the common law guaranty; and the civil law relationship
existing between the co-debtors liable in solidum is similar to the common law suretyship.[46]
In the case of joint and several debtors, Article 1217 makes plain that the solidary debtor who effected the
payment to the creditor may claim from his co-debtors only the share which corresponds to each, with the
interest for the payment already made. Such solidary debtor will not be able to recover from the co-debtors the
full amount already paid to the creditor, because the right to recovery extends only to the proportional share of
the other co-debtors, and not as to the particular proportional share of the solidary debtor who already paid. In
contrast, even as the surety is solidarily bound with the principal debtor to the creditor, the surety who does
pay the creditor has the right to recover the full amount paid, and not just any proportional share, from the
principal debtor or debtors. Such right to full reimbursement falls within the other rights, actions and benefits
which pertain to the surety by reason of the subsidiary obligation assumed by the surety.
What is the source of this right to full reimbursement by the surety? We find the right under Article 2066 of the
Civil Code, which assures that [t]he guarantor who pays for a debtor must be indemnified by the latter, such
indemnity comprising of, among others, the total amount of the debt.[47] Further, Article 2067 of the Civil Code
likewise establishes that [t]he guarantor who pays is subrogated by virtue thereof to all the rights which the
creditor had against the debtor.[48]
Articles 2066 and 2067 explicitly pertain to guarantors, and one might argue that the provisions should not
extend to sureties, especially in light of the qualifier in Article 2047 that the provisions on joint and several
obligations should apply to sureties. We reject that argument, and instead adopt Dr. Tolentinos observation that
[t]he reference in the second paragraph of [Article 2047] to the provisions of Section 4, Chapter 3, Title I, Book
IV, on solidary or several obligations, however, does not mean that suretyship is withdrawn from the applicable
provisions governing guaranty.[49] For if that were not the implication, there would be no material difference
between the surety as defined under Article 2047 and the joint and several debtors, for both classes of obligors
would be governed by exactly the same rules and limitations.
Accordingly, the rights to indemnification and subrogation as established and granted to the guarantor by Articles
2066 and 2067 extend as well to sureties as defined under Article 2047. These rights granted to the surety who
pays materially differ from those granted under Article 1217 to the solidary debtor who pays, since the
indemnification that pertains to the latter extends only [to] the share which corresponds to each [co-debtor]. It
is for this reason that the Court cannot accord the conclusion that because petitioners are identified in the
Undertaking as SURETIES, they are consequently joint and severally liable to Ortigas.
In order for the conclusion espoused by Ortigas to hold, in light of the general presumption favoring joint liability,
the Court would have to be satisfied that among the petitioners and Matti, there is one or some of them who
stand as the principal debtor to Ortigas and another as surety who has the right to full reimbursement from the
principal debtor or debtors. No suggestion is made by the parties that such is the case, and certainly the
Undertaking is not revelatory of such intention. If the Court were to give full fruition to the use of the
term SURETIES as conclusive indication of the existence of a surety agreement that in turn gives rise to a
solidary obligation to pay Ortigas, the necessary implication would be to lay down a corresponding set of rights
and obligations as between the SURETIES which petitioners and Matti did not clearly intend.
It is not impossible that as between Escao, Silos and Matti, there was an agreement whereby in the event that
Ortigas were to seek reimbursement from them per the terms of the Undertaking, one of them was to act as
surety and to pay Ortigas in full, subject to his right to full reimbursement from the other two obligors. In such
case, there would have been, in fact, a surety agreement which evinces a solidary obligation in favor of Ortigas.
Yet if there was indeed such an agreement, it does not appear on the record. More consequentially, no such
intention is reflected in the Undertaking itself, the very document that creates the conditional obligation that
petitioners and Matti reimburse Ortigas should he be made to pay PDCP. The mere utilization of the term
SURETIES could not work to such effect, especially as it does not appear who exactly is the principal debtor
whose obligation is assured or guaranteed by the surety.
but when such certainty cannot be so reasonably established at the time the demand is made, the interest shall
begin to run only from the date the judgment of the court is made (at which time quantification of damages may
be deemed to have been reasonably ascertained). The actual base for the computation of legal interest shall, in
any case, be on the amount finally adjudged.
3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal
interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per annum from such
finality until its satisfaction, this interim period being deemed to be by then an equivalent to a forbearance of
credit.[52]

Ortigas further argues that the nature of the Undertaking requires solidary obligation of the Sureties, since the
Undertaking expressly seeks to reliev[e] obligors of any and all liability arising from their said joint and several
undertaking with [F]alcon, and for the sureties to irrevocably agree and undertake to assume all of obligors said
guarantees to PDCP.[50] We do not doubt that a finding of solidary liability among the petitioners works to the
benefit of Ortigas in the facilitation of these goals, yet the Undertaking itself contains no stipulation or clause
that establishes petitioners obligation to Ortigas as solidary. Moreover, the aims adverted to by Ortigas do not
by themselves establish that the nature of the obligation requires solidarity. Even if the liability of petitioners
and Matti were adjudged as merely joint, the full relief and reimbursement of Ortigas arising from his payment
to PDCP would still be accomplished through the complete execution of such a judgment.
Petitioners further claim that they are not liable for attorneys fees since the Undertaking contained no such
stipulation for attorneys fees, and that the situation did not fall under the instances under Article 2208 of the
Civil Code where attorneys fees are recoverable in the absence of stipulation.
We disagree. As Ortigas points out, the acts or omissions of the petitioners led to his being impleaded in the suit
filed by PDCP. The Undertaking was precisely executed as a means to obtain the release of Ortigas and the
Scholeys from their previous obligations as sureties of Falcon, especially considering that they were already
divesting their shares in the corporation. Specific provisions in the Undertaking obligate petitioners to work for
the release of Ortigas from his surety agreements with Falcon. Specific provisions likewise mandate the
immediate repayment of Ortigas should he still be made to pay PDCP by reason of the guaranty agreements
from which he was ostensibly to be released through the efforts of petitioners. None of these provisions were
complied with by petitioners, and Article 2208(2) precisely allows for the recovery of attorneys fees [w]hen the
defendants act or omission has compelled the plaintiff to litigate with third persons or to incur expenses to
protect his interest.
Since what was the constituted in the Undertaking consisted of a payment in a sum of money, the rate of interest
thereon shall be 12% per annum to be computed from default, i.e., from judicial or extrajudicial demand. The
interest rate imposed by the RTC is thus proper. However, the computation should be reckoned from judicial or
extrajudicial demand. Per records, there is no indication that Ortigas made any extrajudicial demand to
petitioners and Matti after he paid PDCP, but on 14 March 1994, Ortigas made a judicial demand when he filed
a Third-Party Complaint praying that petitioners and Matti be made to reimburse him for the payments made to
PDCP. It is the filing of this Third Party Complaint on 14 March 1994 that should be considered as the date of
judicial demand from which the computation of interest should be reckoned.[53] Since the RTC held that interest
should be computed from 28 February 1994, the appropriate redefinition should be made.
WHEREFORE, the Petition is GRANTED in PART. The Order of the Regional Trial Court dated 5 October
1995 is MODIFIED by declaring that petitioners and Joseph M. Matti are only jointly liable, not jointly and
severally, to respondent Rafael Ortigas, Jr. in the amount of P1,300,000.00. The Order of the Regional Trial
Court dated 7 March 1996 is MODIFIED in that the legal interest of 12% per annum on the amount
of P1,300,000.00 is to be computed from 14 March 1994, the date of judicial demand, and not from 28 February
1994 as directed in the Order of the lower court. The assailed rulings are affirmed in all other respects. Costs
against petitioners.
SO ORDERED.

Finally, petitioners claim that they should not be liable for interest since the Undertaking does not contain any
stipulation for interest, and assuming that they are liable, that the rate of interest should not be 12% per annum,
as adjudged by the RTC.

The seminal ruling in Eastern Shipping Lines, Inc. v. Court of Appeals[51] set forth the rules with respect to the
manner of computing legal interest:

I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or quasi-delicts is
breached, the contravenor can be held liable for damages. The provisions under Title XVIII on Damages of the
Civil Code govern in determining the measure of recoverable damages.

II. With regard particularly to an award of interest in the concept of actual and compensatory damages, the rate
of interest, as well as the accrual thereof, is imposed, as follows:

1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance
of money, the interest due should be that which may have been stipulated in writing. Furthermore, the interest
due shall itself earn legal interest from the time it is judicially demanded. In the absence of stipulation, the rate
of interest shall be 12% per annum to be computed from default, i.e., from judicial or extrajudicial demand
under and subject to the provisions of Article 1169 of the Civil Code.

2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the amount
of damages awarded may be imposed at the discretion of the court at the rate of 6% per annum. No interest,
however, shall be adjudged on unliquidated claims or damages except when or until the demand can be
established with reasonable certainty. Accordingly, where the demand is established with reasonable certainty,
the interest shall begin to run from the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code)
[G.R. No. 138544. October 3, 2000]
SECURITY BANK AND TRUST COMPANY, Inc., petitioner, vs. RODOLFO M. CUENCA, respondent.
DECISION
PANGANIBAN, J.:
Being an onerous undertaking, a surety agreement is strictly construed against the creditor, and every doubt is resolved
in favor of the solidary debtor. The fundamental rules of fair play require the creditor to obtain the consent of the surety
to any material alteration in the principal loan agreement, or at least to notify it thereof. Hence, petitioner bank cannot
hold herein respondent liable for loans obtained in excess of the amount or beyond the period stipulated in the original
agreement, absent any clear stipulation showing that the latter waived his right to be notified thereof, or to give consent
thereto. This is especially true where, as in this case, respondent was no longer the principal officer or major stockholder
of the corporate debtor at the time the later obligations were incurred. He was thus no longer in a position to compel
the debtor to pay the creditor and had no more reason to bind himself anew to the subsequent obligations.
The Case
This is the main principle used in denying the present Petition for Review under Rule 45 of the Rules of Court. Petitioner
assails the December 22, 1998 Decision [1] of the Court of Appeals (CA) in CA-GR CV No. 56203, the dispositive portion
of which reads as follows:
WHEREFORE, the judgment appealed from is hereby amended in the sense that defendant-appellant Rodolfo M.
Cuenca [herein respondent] is RELEASED from liability to pay any amount stated in the judgment.
Furthermore, [Respondent] Rodolfo M. Cuencas counterclaim is hereby DISMISSED for lack of merit.
In all other respect[s], the decision appealed from is AFFIRMED.[2]
Also challenged is the April 14, 1999 CA Resolution,[3] which denied petitioners Motion for Reconsideration.
Modified by the CA was the March 6, 1997 Decision [4] of the Regional Trial Court (RTC) of Makati City (Branch 66) in
Civil Case No. 93-1925, which disposed as follows:
WHEREFORE, judgment is hereby rendered ordering defendants Sta. Ines Melale Corporation and Rodolfo M. Cuenca to
pay, jointly and severally, plaintiff Security Bank & Trust Company the sum of P39,129,124.73 representing the balance
of the loan as of May 10, 1994 plus 12% interest per annum until fully paid, and the sum of P100,000.00 as attorneys
fees and litigation expenses and to pay the costs.
SO ORDERED.
The Facts
The facts are narrated by the Court of Appeals as follows:[5]
The antecedent material and relevant facts are that defendant-appellant Sta. Ines Melale (Sta. Ines) is a corporation
engaged in logging operations. It was a holder of a Timber License Agreement issued by the Department of Environment
and Natural Resources (DENR).
On 10 November 1980, [Petitioner] Security Bank and Trust Co. granted appellant Sta. Ines Melale Corporation [SIMC]
a credit line in the amount of [e]ight [m]llion [p]esos (P8,000,000.00) to assist the latter in meeting the additional
capitalization requirements of its logging operations.
The Credit Approval Memorandum expressly stated that the P8M Credit Loan Facility shall be effective until 30 November
1981:
JOINT CONDITIONS:
1. Against Chattel Mortgage on logging trucks and/or inventories (except logs) valued at 200% of the lines plus JSS of
Rodolfo M. Cuenca.
2. Submission of an appropriate Board Resolution authorizing the borrowings, indicating therein the companys duly
authorized signatory/ies;
3. Reasonable/compensating deposit balances in current account shall be maintained at all times; in this connection, a
Makati account shall be opened prior to availment on lines;
4. Lines shall expire on November 30, 1981; and
5. The bank reserves the right to amend any of the aforementioned terms and conditions upon written notice to the
Borrower. (Emphasis supplied.)
To secure the payment of the amounts drawn by appellant SIMC from the above-mentioned credit line, SIMC executed
a Chattel Mortgage dated 23 December 1980 (Exhibit A) over some of its machinery and equipment in favor of
[Petitioner] SBTC. As additional security for the payment of the loan, [Respondent] Rodolfo M. Cuenca executed an
Indemnity Agreement dated 17 December 1980 (Exhibit B) in favor of [Petitioner] SBTC whereby he solidarily bound
himself with SIMC as follows:
xxxxxxxxx
Rodolfo M. Cuenca x x x hereby binds himself x x x jointly and severally with the client (SIMC) in favor of the bank
for the payment, upon demand and without the benefit of excussion of whatever amount x x x the client may be indebted
to the bank x x x by virtue of aforesaid credit accommodation(s) including the substitutions, renewals, extensions,
increases, amendments, conversions and revivals of the aforesaid credit accommodation(s) x x x . (Emphasis
supplied).
On 26 November 1981, four (4) days prior to the expiration of the period of effectivity of the P8M-Credit Loan Facility,
appellant SIMC made a first drawdown from its credit line with [Petitioner] SBTC in the amount of [s]ix [m]illion [o]ne
[h]undred [t]housand [p]esos (P6,100,000.00). To cover said drawdown, SIMC duly executed promissory Note No.
TD/TLS-3599-81 for said amount (Exhibit C).
Sometime in 1985, [Respondent] Cuenca resigned as President and Chairman of the Board of Directors of defendant-
appellant Sta. Ines. Subsequently, the shareholdings of [Respondent] Cuenca in defendant-appellant Sta. Ines were
sold at a public auction relative to Civil Case No. 18021 entitled Adolfo A. Angala vs. Universal Holdings, Inc. and Rodolfo
M. Cuenca. Said shares were bought by Adolfo Angala who was the highest bidder during the public auction.
Subsequently, appellant SIMC repeatedly availed of its credit line and obtained six (6) other loan[s] from [Petitioner]
SBTC in the aggregate amount of [s]ix [m]illion [t]hree [h]undred [s]ixty-[n]ine [t]housand [n]ineteen and 50/100
[p]esos (P6,369,019.50). Accordingly, SIMC executed Promissory Notes Nos. DLS/74/760/85, DLS/74773/85,
DLS/74/78/85, DLS/74/760/85 DLS/74/12/86, and DLS/74/47/86 to cover the amounts of the abovementioned
additional loans against the credit line.
Appellant SIMC, however, encountered difficulty[6] in making the amortization payments on its loans and requested
[Petitioner] SBTC for a complete restructuring of its indebtedness. SBTC accommodated appellant SIMCs request and
signified its approval in a letter dated 18 February 1988 (Exhibit G) wherein SBTC and defendant-appellant Sta. Ines,
without notice to or the prior consent of [Respondent] Cuenca, agreed to restructure the past due obligations of
defendant-appellant Sta. Ines. [Petitioner] Security Bank agreed to extend to defendant-appellant Sta. Ines the following
loans:
a. Term loan in the amount of [e]ight [m]illion [e]ight [h]undred [t]housand [p]esos (P8,800,000.00), to be applied to
liquidate the principal portion of defendant-appellant Sta. Ines[] total outstanding indebtedness to [Petitioner] Security
Bank (cf. P. 1 of Exhibit G, Expediente, at Vol. II, p. 336; Exhibit 5-B-Cuenca, Expediente, et Vol I, pp. 33 to 34) and
b. Term loan in the amount of [t]hree [m]illion [f]our [h]undred [t]housand [p]esos (P3,400,000.00), to be applied to
liquidate the past due interest and penalty portion of the indebtedness of defendant-appellant Sta. Ines to [Petitioner]
Security Bank (cf. Exhibit G, Expediente, at Vol. II, p. 336; Exhibit 5-B-Cuenca, Expediente, at Vol. II, p. 33 to 34).
It should be pointed out that in restructuring defendant-appellant Sta. Ines obligations to [Petitioner] Security Bank,
Promissory Note No. TD-TLS-3599-81 in the amount of [s]ix [m]illion [o]ne [h]undred [t]housand [p]esos
(P6,100,000.00), which was the only loan incurred prior to the expiration of the P8M-Credit Loan Facility on 30 November
1981 and the only one covered by the Indemnity Agreement dated 19 December 1980 (Exhibit 3-Cuenca, Expediente,
at Vol. II, p. 331), was not segregated from, but was instead lumped together with, the other loans, i.e., Promissory
Notes Nos. DLS/74/12/86, DLS/74/28/86 and DLS/74/47/86 (Exhibits D, E, and F, Expediente, at Vol. II, pp. 333 to
335) obtained by defendant-appellant Sta. Ines which were not secured by said Indemnity Agreement.
Pursuant to the agreement to restructure its past due obligations to [Petitioner] Security Bank, defendant-appellant Sta.
Ines thus executed the following promissory notes, both dated 09 March 1988 in favor of [Petitioner] Security Bank:
PROMISSORY NOTE NO. AMOUNT
RL/74/596/88 P8,800,000.00
RL/74/597/88 P3,400,000.00
-------------------
TOTAL P12,200,000.00
(Exhibits H and I, Expediente, at Vol. II, pp. 338 to 343).
To formalize their agreement to restructure the loan obligations of defendant-appellant Sta. Ines, [Petitioner] Security
Bank and defendant-appellant Sta. Ines executed a Loan Agreement dated 31 October 1989 (Exhibit 5-Cuenca,
Expediente, at Vol. I, pp. 33 to 41). Section 1.01 of the said Loan Agreement dated 31 October 1989 provides:
1.01 Amount - The Lender agrees to grant loan to the Borrower in the aggregate amount of TWELVE MILLION TWO
HUNDRED THOUSAND PESOS (P12,200,000.00), Philippines [c]urrency (the Loan). The loan shall be released in two (2)
tranches of P8,800,000.00 for the first tranche (the First Loan) and P3,400,000.00 for the second tranche (the Second
Loan) to be applied in the manner and for the purpose stipulated hereinbelow.
1.02. Purpose - The First Loan shall be applied to liquidate the principal portion of the Borrowers present total
outstanding indebtedness to the Lender (the indebtedness) while the Second Loan shall be applied to liquidate the past
due interest and penalty portion of the Indebtedness. (Underscoring supplied.) (cf. p. 1 of Exhibit 5-Cuenca, Expediente,
at Vol. I, p. 33)
From 08 April 1988 to 02 December 1988, defendant-appellant Sta. Ines made further payments to [Petitioner] Security
Bank in the amount of [o]ne [m]illion [s]even [h]undred [f]ifty-[s]even [t]housand [p]esos (P1,757,000.00) (Exhibits
8, 9-P-SIMC up to 9-GG-SIMC, Expediente, at Vol. II, pp. 38, 70 to 165)
Appellant SIMC defaulted in the payment of its restructured loan obligations to [Petitioner] SBTC despite demands made
upon appellant SIMC and CUENCA, the last of which were made through separate letters dated 5 June 1991 (Exhibit K)
and 27 June 1991 (Exhibit L), respectively.
Appellants individually and collectively refused to pay the [Petitioner] SBTC. Thus, SBTC filed a complaint for collection
of sum of money on 14 June 1993, resulting after trial on the merits in a decision by the court a quo, x x x from which
[Respondent] Cuenca appealed.
Ruling of the Court of Appeals
In releasing Respondent Cuenca from liability, the CA ruled that the 1989 Loan Agreement had novated the 1980 credit
accommodation earlier granted by the bank to Sta. Ines.Accordingly, such novation extinguished the Indemnity
Agreement, by which Cuenca, who was then the Board chairman and president of Sta. Ines, had bound himself solidarily
liable for the payment of the loans secured by that credit accommodation. It noted that the 1989 Loan Agreement had
been executed without notice to, much less consent from, Cuenca who at the time was no longer a stockholder of the
corporation.
The appellate court also noted that the Credit Approval Memorandum had specified that the credit accommodation was
for a total amount of P8 million, and that its expiry date was November 30, 1981. Hence, it ruled that Cuenca was liable
only for loans obtained prior to November 30, 1981, and only for an amount not exceeding P8 million.
It further held that the restructuring of Sta. Ines obligation under the 1989 Loan Agreement was tantamount to a grant
of an extension of time to the debtor without the consent of the surety. Under Article 2079 of the Civil Code, such
extension extinguished the surety.
The CA also opined that the surety was entitled to notice, in case the bank and Sta. Ines decided to materially alter or
modify the principal obligation after the expiry date of the credit accommodation.
Hence, this recourse to this Court. [7]
The Issues
[8]
In its Memorandum, petitioner submits the following for our consideration:
A. Whether or not the Honorable Court of Appeals erred in releasing Respondent Cuenca from liability as surety under
the Indemnity Agreement for the payment of the principal amount of twelve million two hundred thousand pesos
(P12,200,000.00) under Promissory Note No. RL/74/596/88 dated 9 March 1988 and Promissory Note No. RL/74/597/88
dated 9 March 1988, plus stipulated interests, penalties and other charges due thereon;
i. Whether or not the Honorable Court of Appeals erred in ruling that Respondent Cuencas liability under the Indemnity
Agreement covered only availments on SIMCs credit line to the extent of eight million pesos (P8,000,000.00) and made
on or before 30 November 1981;
ii. Whether or not the Honorable Court of Appeals erred in ruling that the restructuring of SIMCs indebtedness under
the P8 million credit accommodation was tantamount to an extension granted to SIMC without Respondent Cuencas
consent, thus extinguishing his liability under the Indemnity Agreement pursuant to Article 2079 of the Civil Code;
iii. Whether or not the Honorable Court of appeals erred in ruling that the restructuring of SIMCs indebtedness under
the P8 million credit accommodation constituted a novation of the principal obligation, thus extinguishing Respondent
Cuencas liability under the indemnity agreement;
B. Whether or not Respondent Cuencas liability under the Indemnity Agreement was extinguished by the payments
made by SIMC;
C. Whether or not petitioners Motion for Reconsideration was pro-forma;
D. Whether or not service of the Petition by registered mail sufficiently complied with Section 11, Rule 13 of the 1997
Rules of Civil Procedure.
Distilling the foregoing, the Court will resolve the following issues: (a) whether the 1989 Loan Agreement novated the
original credit accommodation and Cuencas liability under the Indemnity Agreement; and (b) whether Cuenca waived
his right to be notified of and to give consent to any substitution, renewal, extension, increase, amendment, conversion
or revival of the said credit accommodation. As preliminary matters, the procedural questions raised by respondent will
also be addressed.
The Courts Ruling
The Petition has no merit.
Preliminary Matters: Procedural Questions
Motion for Reconsideration Not Pro Forma
Respondent contends that petitioners Motion for Reconsideration of the CA Decision, in merely rehashing the arguments
already passed upon by the appellate court, was pro forma; that as such, it did not toll the period for filing the present
Petition for Review.[9] Consequently, the Petition was filed out of time.[10]
We disagree. A motion for reconsideration is not pro forma just because it reiterated the arguments earlier passed upon
and rejected by the appellate court. The Court has explained that a movant may raise the same arguments, precisely to
convince the court that its ruling was erroneous.[11]
Moreover, there is no clear showing of intent on the part of petitioner to delay the proceedings. In Marikina Valley
Development Corporation v. Flojo, [12] the Court explained that a pro forma motion had no other purpose than to gain
time and to delay or impede the proceedings. Hence, where the circumstances of a case do not show an intent on the
part of the movant merely to delay the proceedings, our Court has refused to characterize the motion as simply pro
forma. It held:
We note finally that because the doctrine relating to pro forma motions for reconsideration impacts upon the reality and
substance of the statutory right of appeal, that doctrine should be applied reasonably, rather than literally. The right to
appeal, where it exists, is an important and valuable right. Public policy would be better served by according the appellate
court an effective opportunity to review the decision of the trial court on the merits, rather than by aborting the right to
appeal by a literal application of the procedural rules relating to pro forma motions for reconsideration.
Service by Registered Mail Sufficiently Explained
Section 11, Rule 13 of the 1997 Rules of Court, provides as follows:
SEC. 11. Priorities in modes of service and filing. -- Whenever practicable, the service and filing of pleadings and other
papers shall be done personally. Except with respect to papers emanating from the court, a resort to other modes must
be accompanied by a written explanation why the service or filing was not done personally.A violation of this Rule may
be cause to consider the paper as not filed.
Respondent maintains that the present Petition for Review does not contain a sufficient written explanation why it was
served by registered mail.
We do not think so. The Court held in Solar Entertainment v. Ricafort[13] that the aforecited rule was mandatory, and
that only when personal service or filing is not practicable may resort to other modes be had, which must then be
accompanied by a written explanation as to why personal service or filing was not practicable to begin with.
In this case, the Petition does state that it was served on the respective counsels of Sta. Ines and Cuenca by registered
mail in lieu of personal service due to limitations in time and distance.[14] This explanation sufficiently shows that personal
service was not practicable. In any event, we find no adequate reason to reject the contention of petitioner and thereby
deprive it of the opportunity to fully argue its cause.
First Issue: Original Obligation Extinguished by Novation
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 [i]n the absence of an express agreement, novation
takes place only when the old and the new obligations are incompatible on every point.[15] 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. [16]
Petitioner contends that there was no absolute incompatibility between the old and the new obligations, and that the
latter did not extinguish the earlier one. It further argues that the 1989 Agreement did not change the original loan in
respect to the parties involved or the obligations incurred. It adds that the terms of the 1989 Contract were not more
onerous.[17] Since the original credit accomodation was not extinguished, it concludes that Cuenca is still liable under
the Indemnity Agreement.
We reject these contentions. Clearly, the requisites of novation are present in this case. The 1989 Loan Agreement
extinguished the obligation[18] obtained under the 1980 credit accomodation.This is evident from its explicit provision to
liquidate the principal and the interest of the earlier indebtedness, as the following shows:
1.02. Purpose. The First Loan shall be applied to liquidate the principal portion of the Borrowers present total outstanding
Indebtedness to the Lender (the Indebtedness) while the Second Loan shall be applied to liquidate the past due interest
and penalty portion of the Indebtedness.[19] (Italics supplied.)
The testimony of an officer[20] of the bank that the proceeds of the 1989 Loan Agreement were used to pay-off the
original indebtedness serves to strengthen this ruling.[21]
Furthermore, several incompatibilities between the 1989 Agreement and the 1980 original obligation demonstrate that
the two cannot coexist. While the 1980 credit accommodation had stipulated that the amount of loan was not to
exceed P8 million,[22] the 1989 Agreement provided that the loan was P12.2 million. The periods for payment were also
different.
Likewise, the later contract contained conditions, positive covenants and negative covenants not found in the earlier
obligation. As an example of a positive covenant, Sta. Ines undertook from time to time and upon request by the Lender,
[to] perform such further acts and/or execute and deliver such additional documents and writings as may be necessary
or proper to effectively carry out the provisions and purposes of this Loan Agreement. [23] Likewise, SIMC agreed that it
would not create any mortgage or encumbrance on any asset owned or hereafter acquired, nor would it participate in
any merger or consolidation.[24]
Since the 1989 Loan Agreement had extinguished the original credit accommodation, the Indemnity Agreement, an
accessory obligation, was necessarily extinguished also, pursuant to Article 1296 of the Civil Code, which provides:
ART. 1296. When the principal obligation is extinguished in consequence of a novation, accessory obligations may subsist
only insofar as they may benefit third persons who did not give their consent.
Alleged Extension
Petitioner insists that the 1989 Loan Agreement was a mere renewal or extension of the P8 million original
accommodation; it was not a novation.[25]
This argument must be rejected. To begin with, the 1989 Loan Agreement expressly stipulated that its purpose was to
liquidate, not to renew or extend, the outstanding indebtedness.Moreover, respondent did not sign or consent to the
1989 Loan Agreement, which had allegedly extended the original P8 million credit facility. Hence, his obligation as a
surety should be deemed extinguished, pursuant to Article 2079 of the Civil Code, which specifically states that [a]n
extension granted to the debtor by the creditor without the consent of the guarantor extinguishes the guaranty. x x
x. In an earlier case,[26] the Court explained the rationale of this provision in this wise:
The theory behind Article 2079 is that an extension of time given to the principal debtor by the creditor without the
suretys consent would deprive the surety of his right to pay the creditor and to be immediately subrogated to the
creditors remedies against the principal debtor upon the maturity date. The surety is said to be entitled to protect himself
against the contingency of the principal debtor or the indemnitors becoming insolvent during the extended period.
Binding Nature of the Credit Approval Memorandum
As noted earlier, the appellate court relied on the provisions of the Credit Approval Memorandum in holding that the
credit accommodation was only for P8 million, and that it was for a period of one year ending on November 30,
1981. Petitioner objects to the appellate courts reliance on that document, contending that it was not a binding
agreement because it was not signed by the parties. It adds that it was merely for its internal use.
We disagree. It was petitioner itself which presented the said document to prove the accommodation. Attached to the
Complaint as Annex A was a copy thereof evidencing the accommodation.[27] Moreover, in its Petition before this Court,
it alluded to the Credit Approval Memorandum in this wise:
4.1 On 10 November 1980, Sta. Ines Melale Corporation (SIMC) was granted by the Bank a credit line in the aggregate
amount of Eight Million Pesos (P8,000,000.00) to assist SIMC in meeting the additional capitalization requirements for
its logging operations. For this purpose, the Bank issued a Credit Approval Memorandum dated 10 November 1980.
Clearly, respondent is estopped from denying the terms and conditions of the P8 million credit accommodation as
contained in the very document it presented to the courts. Indeed, it cannot take advantage of that document by
agreeing to be bound only by those portions that are favorable to it, while denying those that are disadvantageous.
Second Issue: Alleged Waiver of Consent
Pursuing another course, petitioner contends that Respondent Cuenca impliedly gave his consent to any modification of
the credit accommodation or otherwise waived his right to be notified of, or to give consent to, the same. [28] Respondents
consent or waiver thereof is allegedly found in the Indemnity Agreement, in which he held himself liable for the credit
accommodation including [its] substitutions, renewals, extensions, increases, amendments, conversions and revival. It
explains that the novation of the original credit accommodation by the 1989 Loan Agreement is merely its renewal, which
connotes cessation of an old contract and birth of another one x x x.[29]
At the outset, we should emphasize that an essential alteration in the terms of the Loan Agreement without the consent
of the surety extinguishes the latters obligation. As the Court held in National Bank v. Veraguth,[30] [i]t is fundamental
in the law of suretyship that any agreement between the creditor and the principal debtor which essentially varies the
terms of the principal contract, without the consent of the surety, will release the surety from liability.
In this case, petitioners assertion - that respondent consented to the alterations in the credit accommodation -- finds
no support in the text of the Indemnity Agreement, which isreproduced hereunder:
Rodolfo M. Cuenca of legal age, with postal address c/o Sta. Ines Malale Forest Products Corp., Alco Bldg., 391 Buendia
Avenue Ext., Makati Metro Manila for and in consideration of the credit accommodation in the total amount of eight
million pesos (P8,000,000.00) granted by the SECURITY BANK AND TRUST COMPANY, a commercial bank duly organized
and existing under and by virtue of the laws of the Philippine, 6778 Ayala Avenue, Makati, Metro Manila hereinafter
referred to as the BANK in favor of STA. INES MELALE FOREST PRODUCTS CORP., x x x ---- hereinafter referred to as
the CLIENT, with the stipulated interests and charges thereon, evidenced by that/those certain PROMISSORY NOTE[(S)],
made, executed and delivered by the CLIENT in favor of the BANK hereby bind(s) himself/themselves jointly and
severally with the CLIENT in favor of the BANK for the payment , upon demand and without benefit of excussion of
whatever amount or amounts the CLIENT may be indebted to the BANK under and by virtue of aforesaid credit
accommodation(s) including the substitutions, renewals, extensions, increases, amendment, conversions and revivals
of the aforesaid credit accommodation(s), as well as of the amount or amounts of such other obligations that the CLIENT
may owe the BANK, whether direct or indirect, principal or secondary, as appears in the accounts, books and records of
the BANK, plus interest and expenses arising from any agreement or agreements that may have heretofore been made,
or may hereafter be executed by and between the parties thereto, including the substitutions, renewals, extensions,
increases, amendments, conversions and revivals of the aforesaid credit accommodation(s), and further bind(s)
himself/themselves with the CLIENT in favor of the BANK for the faithful compliance of all the terms and conditions
contained in the aforesaid credit accommodation(s), all of which are incorporated herein and made part hereof by
reference.
While respondent held himself liable for the credit accommodation or any modification thereof, such clause should be
understood in the context of the P8 million limit and the November 30, 1981 term. It did not give the bank or Sta. Ines
any license to modify the nature and scope of the original credit accommodation, without informing or getting the
consent of respondent who was solidarily liable. Taking the banks submission to the extreme, respondent (or his
successors) would be liable for loans even amounting to, say, P100 billion obtained 100 years after the expiration of the
credit accommodation, on the ground that he consented to all alterations and extensions thereof.
No similar provision is found in the present case. On the contrary, respondents liability was confined to the 1980 credit
accommodation, the amount and the expiry date of which were set down in the Credit Approval Memorandum.
Special Nature of the JSS

Indeed, it has been held that a contract of surety cannot extend to more than what is stipulated. It is strictly construed
against the creditor, every doubt being resolved against enlarging the liability of the surety. [31] Likewise, the Court has
ruled that it is a well-settled legal principle that if there is any doubt on the terms and conditions of the surety agreement,
the doubt should be resolved in favor of the surety x x x. Ambiguous contracts are construed against the party who
caused the ambiguity.[32] In the absence of an unequivocal provision that respondent waived his right to be notified of
or to give consent to any alteration of the credit accommodation, we cannot sustain petitioners view that there was such
a waiver.
It should also be observed that the Credit Approval Memorandum clearly shows that the bank did not have absolute
authority to unilaterally change the terms of the loan accommodation. Indeed, it may do so only upon notice to the
borrower, pursuant to this condition:
5. The Bank reserves the right to amend any of the aforementioned terms and conditions upon written notice to the
Borrower.[33]
We reject petitioners submission that only Sta. Ines as the borrower, not respondent, was entitled to be notified of any
modification in the original loan accommodation.[34] Following the banks reasoning, such modification would not be valid
as to Sta. Ines if no notice were given; but would still be valid as to respondent to whom no notice need be given. The
latters liability would thus be more burdensome than that of the former. Such untenable theory is contrary to the
principle that a surety cannot assume an obligation more onerous than that of the principal. [35]
The present controversy must be distinguished from Philamgen v. Mutuc,[36] in which the Court sustained a stipulation
whereby the surety consented to be bound not only for the specified period, but to any extension thereafter made, an
extension x x x that could be had without his having to be notified.
In that case, the surety agreement contained this unequivocal stipulation: It is hereby further agreed that in case of any
extension of renewal of the bond, we equally bind ourselves to the Company under the same terms and conditions as
herein provided without the necessity of executing another indemnity agreement for the purpose and that we hereby
equally waive our right to be notified of any renewal or extension of the bond which may be granted under this indemnity
agreement.
In the present case, there is no such express stipulation. At most, the alleged basis of respondents waiver is vague and
uncertain. It confers no clear authorization on the bank or Sta. Ines to modify or extend the original obligation without
the consent of the surety or notice thereto.
Continuing Surety
It is a common banking practice to require the JSS (joint and solidary signature) of a major stockholder or corporate
officer, as an additional security for loans granted to corporations.There are at least two reasons for this. First, in case
of default, the creditors recourse, which is normally limited to the corporate properties under the veil of separate
corporate personality,would extend to the personal assets of the surety. Second, such surety would be compelled to
ensure that the loan would be used for the purpose agreed upon, and that it would be paid by the corporation.
Following this practice, it was therefore logical and reasonable for the bank to have required the JSS of respondent, who
was the chairman and president of Sta. Ines in 1980 when the credit accommodation was granted. There was no reason
or logic, however, for the bank or Sta. Ines to assume that he would still agree to act as surety in the 1989 Loan
Agreement, because at that time, he was no longer an officer or a stockholder of the debtor-corporation. Verily, he was
not in a position then to ensure the payment of the obligation. Neither did he have any reason to bind himself further
to a bigger and more onerous obligation.
Indeed, the stipulation in the 1989 Loan Agreement providing for the surety of respondent, without even informing him,
smacks of negligence on the part of the bank and bad faith on that of the principal debtor. Since that Loan Agreement
constituted a new indebtedness, the old loan having been already liquidated, the spirit of fair play should have impelled
Sta. Ines to ask somebody else to act as a surety for the new loan.
In the same vein, a little prudence should have impelled the bank to insist on the JSS of one who was in a position to
ensure the payment of the loan. Even a perfunctory attempt at credit investigation would have revealed that respondent
was no longer connected with the corporation at the time. As it is, the bank is now relying on an unclear Indemnity
Agreement in order to collect an obligation that could have been secured by a fairly obtained surety. For its defeat in
this litigation, the bank has only itself to blame.
In sum, we hold that the 1989 Loan Agreement extinguished by novation the obligation under the 1980 P8 million credit
accommodation. Hence, the Indemnity Agreement, which had been an accessory to the 1980 credit accommodation,
was also extinguished. Furthermore, we reject petitioners submission that respondent waived his right to be notified of,
or to give consent to, any modification or extension of the 1980 credit accommodation.
In this light, we find no more need to resolve the issue of whether the loan obtained before the expiry date of the credit
accommodation has been paid.
WHEREFORE, the Petition is DENIED and the assailed Decision AFFIRMED. Costs against petitioner.
SO ORDERED.

Contending that the Indemnity Agreement was in the nature of a continuing surety, petitioner maintains that there was
no need for respondent to execute another surety contract to secure the 1989 Loan Agreement.

This argument is incorrect. That the Indemnity Agreement is a continuing surety does not authorize the bank to extend
the scope of the principal obligation inordinately. [37] In Dino v. CA,[38] the Court held that a continuing guaranty is one
which covers all transactions, including those arising in the future, which are within the description or contemplation of
the contract of guaranty, until the expiration or termination thereof.

To repeat, in the present case, the Indemnity Agreement was subject to the two limitations of the credit
accommodation: (1) that the obligation should not exceed P8 million, and (2) that the accommodation should expire not
later than November 30, 1981. Hence, it was a continuing surety only in regard to loans obtained on or before the
aforementioned expiry date and not exceeding the total of P8 million.

Accordingly, the surety of Cuenca secured only the first loan of P6.1 million obtained on November 26, 1991. It did not
secure the subsequent loans, purportedly under the 1980 credit accommodation, that were obtained in 1986. Certainly,
he could not have guaranteed the 1989 Loan Agreement, which was executed after November 30, 1981 and which
exceeded the stipulated P8 million ceiling.

Petitioner, however, cites the Dino ruling in which the Court found the surety liable for the loan obtained after the
payment of the original one, which was covered by a continuing surety agreement. At the risk of being repetitious, we
hold that in Dino, the surety Agreement specifically provided that each suretyship is a continuing one which shall remain
in full force and effect until this bank is notified of its revocation. Since the bank had not been notified of such revocation,
the surety was held liable even for the subsequent obligations of the principal borrower.
G.R. No. 126490 March 31, 1998
ESTRELLA PALMARES, petitioner,
vs.
COURT OF APPEALS and M.B. LENDING CORPORATION, respondents.
REGALADO, J.:
Where a party signs a promissory note as a co-maker and binds herself to be jointly and severally liable
with the principal debtor in case the latter defaults in the payment of the loan, is such undertaking of the
former deemed to be that of a surety as an insurer of the debt, or of a guarantor who warrants the
solvency of the debtor?
Pursuant to a promissory note dated March 13, 1990, private respondent M.B. Lending Corporation
extended a loan to the spouses Osmea and Merlyn Azarraga, together with petitioner Estrella Palmares,
in the amount of P30,000.00 payable on or before May 12, 1990, with compounded interest at the rate
of 6% per annum to be computed every 30 days from the date thereof.1 On four occasions after the
execution of the promissory note and even after the loan matured, petitioner and the Azarraga spouses
were able to pay a total of P16,300.00, thereby leaving a balance of P13,700.00. No payments were
made after the last payment on September 26, 1991.2
Consequently, on the basis of petitioner's solidary liability under the promissory note, respondent
corporation filed a complaint3 against petitioner Palmares as the lone party-defendant, to the exclusion
of the principal debtors, allegedly by reason of the insolvency of the latter.
In her Amended Answer with Counterclaim,4 petitioner alleged that sometime in August 1990,
immediately after the loan matured, she offered to settle the obligation with respondent corporation but
the latter informed her that they would try to collect from the spouses Azarraga and that she need not
worry about it; that there has already been a partial payment in the amount of P17,010.00; that the
interest of 6% per month compounded at the same rate per month, as well as the penalty charges of 3%
per month, are usurious and unconscionable; and that while she agrees to be liable on the note but only
upon default of the principal debtor, respondent corporation acted in bad faith in suing her alone without
including the Azarragas when they were the only ones who benefited from the proceeds of the loan.
During the pre-trial conference, the parties submitted the following issues for the resolution of the trial
court: (1) what the rate of interest, penalty and damages should be; (2) whether the liability of the
defendant (herein petitioner) is primary or subsidiary; and (3) whether the defendant Estrella Palmares
is only a guarantor with a subsidiary liability and not a co-maker with primary liability.5
Thereafter, the parties agreed to submit the case for decision based on the pleadings filed and the
memoranda to be submitted by them. On November 26, 1992, the Regional Trial Court of Iloilo City,
Branch 23, rendered judgment dismissing the complaint without prejudice to the filing of a separate
action for a sum of money against the spouses Osmea and Merlyn Azarraga who are primarily liable on
the instrument.6 This was based on the findings of the court a quo that the filing of the complaint against
herein petitioner Estrella Palmares, to the exclusion of the Azarraga spouses, amounted to a discharge of
a prior party; that the offer made by petitioner to pay the obligation is considered a valid tender of
payment sufficient to discharge a person's secondary liability on the instrument; as co-maker, is only
secondarily liable on the instrument; and that the promissory note is a contract of adhesion.
Respondent Court of Appeals, however, reversed the decision of the trial court, and rendered judgment
declaring herein petitioner Palmares liable to pay respondent corporation:
1. The sum of P13,700.00 representing the outstanding balance still due and owing with interest at six
percent (6%) per month computed from the date the loan was contracted until fully paid;
2. The sum equivalent to the stipulated penalty of three percent (3%) per month, of the outstanding
balance;
3. Attorney's fees at 25% of the total amount due per stipulations;
4. Plus costs of suit.7
Contrary to the findings of the trial court, respondent appellate court declared that petitioner Palmares is
a surety since she bound herself to be jointly and severally or solidarily liable with the principal debtors,
the Azarraga spouses, when she signed as a co-maker. As such, petitioner is primarily liable on the note
and hence may be sued by the creditor corporation for the entire obligation. It also adverted to the fact
that petitioner admitted her liability in her Answer although she claims that the Azarraga spouses should
have been impleaded. Respondent court ordered the imposition of the stipulated 6% interest and 3%
penalty charges on the ground that the Usury Law is no longer enforceable pursuant to Central Bank
Circular No. 905. Finally, it rationalized that even if the promissory note were to be considered as a
contract of adhesion, the same is not entirely prohibited because the one who adheres to the contract is
free to reject it entirely; if he adheres, he gives his consent.
Hence this petition for review on certiorari wherein it is asserted that:
A. The Court of Appeals erred in ruling that Palmares acted as surety and is therefore solidarily liable to
pay the promissory note.
1. The terms of the promissory note are vague. Its conflicting provisions do not establish Palmares'
solidary liability.
2. The promissory note contains provisions which establish the co-maker's liability as that of a guarantor.
3. There is no sufficient basis for concluding that Palmares' liability is solidary.
4. The promissory note is a contract of adhesion and should be construed against M. B. Lending
Corporation.
5. Palmares cannot be compelled to pay the loan at this point.
B. Assuming that Palmares' liability is solidary, the Court of Appeals erred in strictly imposing the interests
and penalty charges on the outstanding balance of the promissory note.
The foregoing contentions of petitioner are denied and contradicted in their material points by respondent
corporation. They are further refuted by accepted doctrines in the American jurisdiction after which we
patterned our statutory law on surety and guaranty. This case then affords us the opportunity to make
an extended exposition on the ramifications of these two specialized contracts, for such guidance as may
be taken therefrom in similar local controversies in the future.
The basis of petitioner Palmares' liability under the promissory note is expressed in this wise:
ATTENTION TO CO-MAKERS: PLEASE READ WELL
I, Mrs. Estrella Palmares, as the Co-maker of the above-quoted loan, have fully understood the contents
of this Promissory Note for Short-Term Loan:
That as Co-maker, I am fully aware that I shall be jointly and severally or solidarily liable with the above
principal maker of this note;
That in fact, I hereby agree that M.B. LENDING CORPORATION may demand payment of the above loan
from me in case the principal maker, Mrs. Merlyn Azarraga defaults in the payment of the note subject
to the same conditions above-contained.8
Petitioner contends that the provisions of the second and third paragraph are conflicting in that while the
second paragraph seems to define her liability as that of a surety which is joint and solidary with the
principal maker, on the other hand, under the third paragraph her liability is actually that of a mere
guarantor because she bound herself to fulfill the obligation only in case the principal debtor should fail
to do so, which is the essence of a contract of guaranty. More simply stated, although the second
paragraph says that she is liable as a surety, the third paragraph defines the nature of her liability as
that of a guarantor. According to petitioner, these are two conflicting provisions in the promissory note
and the rule is that clauses in the contract should be interpreted in relation to one another and not by
parts. In other words, the second paragraph should not be taken in isolation, but should be read in
relation to the third paragraph.
In an attempt to reconcile the supposed conflict between the two provisions, petitioner avers that she
could be held liable only as a guarantor for several reasons. First, the words "jointly and severally or
solidarily liable" used in the second paragraph are technical and legal terms which are not fully
appreciated by an ordinary layman like herein petitioner, a 65-year old housewife who is likely to enter
into such transactions without fully realizing the nature and extent of her liability. On the contrary, the
wordings used in the third paragraph are easier to comprehend. Second, the law looks upon the contract
of suretyship with a jealous eye and the rule is that the obligation of the surety cannot be extended by
implication beyond specified limits, taking into consideration the peculiar nature of a surety agreement
which holds the surety liable despite the absence of any direct consideration received from either the
principal obligor or the creditor. Third, the promissory note is a contract of adhesion since it was prepared
by respondent M.B. Lending Corporation. The note was brought to petitioner partially filled up, the
contents thereof were never explained to her, and her only participation was to sign thereon. Thus, any
apparent ambiguity in the contract should be strictly construed against private respondent pursuant to
Art. 1377 of the Civil Code.9
Petitioner accordingly concludes that her liability should be deemed restricted by the clause in the third
paragraph of the promissory note to be that of a guarantor.
Moreover, petitioner submits that she cannot as yet be compelled to pay the loan because the principal
debtors cannot be considered in default in the absence of a judicial or extrajudicial demand. It is true
that the complaint alleges the fact of demand, but the purported demand letters were never attached to
the pleadings filed by private respondent before the trial court. And, while petitioner may have admitted
in her Amended Answer that she received a demand letter from respondent corporation sometime in
1990, the same did not effectively put her or the principal debtors in default for the simple reason that
the latter subsequently made a partial payment on the loan in September, 1991, a fact which was never
controverted by herein private respondent.
Finally, it is argued that the Court of Appeals gravely erred in awarding the amount of P2,745,483.39 in
favor of private respondent when, in truth and in fact, the outstanding balance of the loan is only
P13,700.00. Where the interest charged on the loan is exorbitant, iniquitous or unconscionable, and the
obligation has been partially complied with, the court may equitably reduce the penalty 10 on grounds of
substantial justice. More importantly, respondent corporation never refuted petitioner's allegation that
immediately after the loan matured, she informed said respondent of her desire to settle the obligation.
The court should, therefore, mitigate the damages to be paid since petitioner has shown a sincere desire
for a compromise.11
After a judicious evaluation of the arguments of the parties, we are constrained to dismiss the petition
for lack of merit, but to except therefrom the issue anent the propriety of the monetary award adjudged
to herein respondent corporation.
At the outset, let it here be stressed that even assuming arguendo that the promissory note executed
between the parties is a contract of adhesion, it has been the consistent holding of the Court that contracts
of adhesion are not invalid per se and that on numerous occasions the binding effects thereof have been
upheld. The peculiar nature of such contracts necessitate a close scrutiny of the factual milieu to which
the provisions are intended to apply. Hence, just as consistently and unhesitatingly, but without
categorically invalidating such contracts, the Court has construed obscurities and ambiguities in the
restrictive provisions of contracts of adhesion strictly albeit not unreasonably against the drafter thereof
when justified in light of the operative facts and surrounding circumstances.12 The factual scenario
obtaining in the case before us warrants a liberal application of the rule in favor of respondent corporation.
The Civil Code pertinently provides:
Art. 2047. By guaranty, a person called the guarantor binds himself to the creditor to fulfill the obligation
of the principal debtor in case the latter should fail to do so.
If a person binds himself solidarily with the principal debtor, the provisions of Section 4, Chapter 3, Title
I of this Book shall be observed. In such case the contract is called a suretyship.
It is a cardinal rule in the interpretation of contracts that if the terms of a contract are clear and leave no
doubt upon the intention of the contracting parties, the literal meaning of its stipulation shall control.13 In
the case at bar, petitioner expressly bound herself to be jointly and severally or solidarily liable with the
principal maker of the note. The terms of the contract are clear, explicit and unequivocal that petitioner's
liability is that of a surety.
Her pretension that the terms "jointly and severally or solidarily liable" contained in the second paragraph
of her contract are technical and legal terms which could not be easily understood by an ordinary layman
like her is diametrically opposed to her manifestation in the contract that she "fully understood the
contents" of the promissory note and that she is "fully aware" of her solidary liability with the principal
maker. Petitioner admits that she voluntarily affixed her signature thereto; ergo, she cannot now be
heard to claim otherwise. Any reference to the existence of fraud is unavailing. Fraud must be established
by clear and convincing evidence, mere preponderance of evidence not even being adequate. Petitioner's
attempt to prove fraud must, therefore, fail as it was evidenced only by her own uncorroborated and,
expectedly, self-serving allegations.14
Having entered into the contract with full knowledge of its terms and conditions, petitioner is estopped
to assert that she did so under a misapprehension or in ignorance of their legal effect, or as to the legal
effect of the undertaking.15 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.16
Petitioner would like to make capital of the fact that although she obligated herself to be jointly and
severally liable with the principal maker, her liability is deemed restricted by the provisions of the third
paragraph of her contract wherein she agreed "that M.B. Lending Corporation may demand payment of
the above loan from me in case the principal maker, Mrs. Merlyn Azarraga defaults in the payment of the
note," which makes her contract one of guaranty and not suretyship. The purported discordance is more
apparent than real.
A surety is an insurer of the debt, whereas a guarantor is an insurer of the solvency of the debtor.17 A
suretyship is an undertaking that the debt shall be paid; a guaranty, an undertaking that the debtor shall
pay.18 Stated differently, a surety promises to pay the principal's debt if the principal will not pay, while
a guarantor agrees that the creditor, after proceeding against the principal, may proceed against the
guarantor if the principal is unable to pay.19 A surety binds himself to perform if the principal does not,
without regard to his ability to do so. A guarantor, on the other hand, does not contract that the principal
will pay, but simply that he is able to do so.20 In other words, a surety undertakes directly for the payment
and is so responsible at once if the principal debtor makes default, while a guarantor contracts to pay if,
by the use of due diligence, the debt cannot be made out of the principal debtor.21
Quintessentially, the undertaking to pay upon default of the principal debtor does not automatically
remove it from the ambit of a contract of suretyship. The second and third paragraphs of the aforequoted
portion of the promissory note do not contain any other condition for the enforcement of respondent
corporation's right against petitioner. It has not been shown, either in the contract or the pleadings, that
respondent corporation agreed to proceed against herein petitioner only if and when the defaulting
principal has become insolvent. A contract of suretyship, to repeat, is that wherein one lends his credit
by joining in the principal debtor's obligation, so as to render himself directly and primarily responsible
with him, and without reference to the solvency of the principal.22
In a desperate effort to exonerate herself from liability, petitioner erroneously invokes the rule
on strictissimi juris, which holds that when the meaning of a contract of indemnity or guaranty has once
been judicially determined under the rule of reasonable construction applicable to all written contracts,
then the liability of the surety, under his contract, as thus interpreted and construed, is not to be extended
beyond its strict meaning.23 The rule, however, will apply only after it has been definitely ascertained that
the contract is one of suretyship and not a contract of guaranty. It cannot be used as an aid in
determining whether a party's undertaking is that of a surety or a guarantor.
Prescinding from these jurisprudential authorities, there can be no doubt that the stipulation contained
in the third paragraph of the controverted suretyship contract merely elucidated on and made more
specific the obligation of petitioner as generally defined in the second paragraph thereof. Resultantly, the
theory advanced by petitioner, that she is merely a guarantor because her liability attaches only upon
default of the principal debtor, must necessarily fail for being incongruent with the judicial
pronouncements adverted to above.
It is a well-entrenched rule that in order to judge the intention of the contracting parties, their
contemporaneous and subsequent acts shall also be principally considered.24 Several attendant factors in
that genre lend support to our finding that petitioner is a surety. For one, when petitioner was informed
about the failure of the principal debtor to pay the loan, she immediately offered to settle the account
with respondent corporation. Obviously, in her mind, she knew that she was directly and primarily liable
upon default of her principal. For another, and this is most revealing, petitioner presented the receipts of
the payments already made, from the time of initial payment up to the last, which were all issued in her
name and of the Azarraga spouses.25 This can only be construed to mean that the payments made by the
principal debtors were considered by respondent corporation as creditable directly upon the account and
inuring to the benefit of petitioner. The concomitant and simultaneous compliance of petitioner's
obligation with that of her principals only goes to show that, from the very start, petitioner considered
herself equally bound by the contract of the principal makers.
In this regard, we need only to reiterate the rule that a surety is bound equally and absolutely with the
principal,26 and as such is deemed an original promisor and debtor from the beginning.27 This is because
in suretyship there is but one contract, and the surety is bound by the same agreement which binds the
principal.28 In essence, the contract of a surety starts with the agreement,29 which is precisely the
situation obtaining in this case before the Court.
It will further be observed that petitioner's undertaking as co-maker immediately follows the terms and
conditions stipulated between respondent corporation, as creditor, and the principal obligors. A surety is
usually bound with his principal by the same instrument, executed at the same time and upon the same
consideration; he is an original debtor, and his liability is immediate and direct.30 Thus, it has been held
that where a written agreement on the same sheet of paper with and immediately following the principal
contract between the buyer and seller is executed simultaneously therewith, providing that the signers
of the agreement agreed to the terms of the principal contract, the signers were "sureties" jointly liable
with the buyer.31 A surety usually enters into the same obligation as that of his principal, and the
signatures of both usually appear upon the same instrument, and the same consideration usually supports
the obligation for both the principal and the surety.32
There is no merit in petitioner's contention that the complaint was prematurely filed because the principal
debtors cannot as yet be considered in default, there having been no judicial or extrajudicial demand
made by respondent corporation. Petitioner has agreed that respondent corporation may demand
payment of the loan from her in case the principal maker defaults, subject to the same conditions
expressed in the promissory note. Significantly, paragraph (G) of the note states that "should I fail to
pay in accordance with the above schedule of payment, I hereby waive my right to notice and demand."
Hence, demand by the creditor is no longer necessary in order that delay may exist since the contract
itself already expressly so declares.33 As a surety, petitioner is equally bound by such waiver.
Even if it were otherwise, demand on the sureties is not necessary before bringing suit against them,
since the commencement of the suit is a sufficient demand.34 On this point, it may be worth mentioning
that a surety is not even entitled, as a matter of right, to be given notice of the principal's default.
Inasmuch as the creditor owes no duty of active diligence to take care of the interest of the surety, his
mere failure to voluntarily give information to the surety of the default of the principal cannot have the
effect of discharging the surety. The surety is bound to take notice of the principal's default and to perform
the obligation. He cannot complain that the creditor has not notified
him in the absence of a special agreement to that effect in the contract of suretyship.35
The alleged failure of respondent corporation to prove the fact of demand on the principal debtors, by
not attaching copies thereof to its pleadings, is likewise immaterial. In the absence of a statutory or
contractual requirement, it is not necessary that payment or performance of his obligation be first
demanded of the principal, especially where demand would have been useless; nor is it a requisite, before
proceeding against the sureties, that the principal be called on to account.36 The underlying principle
therefor is that a suretyship is a direct contract to pay the debt of another. A surety is liable as much as
his principal is liable, and absolutely liable as soon as default is made, without any demand upon the
principal whatsoever or any notice of default.37 As an original promisor and debtor from the beginning,
he is held ordinarily to know every default of his principal.38
Petitioner questions the propriety of the filing of a complaint solely against her to the exclusion of the
principal debtors who allegedly were the only ones who benefited from the proceeds of the loan. What
petitioner is trying to imply is that the creditor, herein respondent corporation, should have proceeded
first against the principal before suing on her obligation as surety. We disagree.
A creditor's right to proceed against the surety exists independently of his right to proceed against the
principal.39 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.40 Since, generally, it is not
necessary for the creditor to proceed against a principal in order to hold the surety liable, where, by the
terms of the contract, the obligation of the surety is the same that of the principal, then soon as the
principal is in default, the surety is likewise in default, and may be sued immediately and before any
proceedings are had against the principal.41 Perforce, in accordance with the rule that, in the absence of
statute or agreement otherwise, a surety is primarily liable, and with the rule that his proper remedy is
to pay the debt and pursue the principal for reimbursement, the surety cannot at law, unless permitted
by statute and in the absence of any agreement limiting the application of the security, require the
creditor or obligee, before proceeding against the surety, to resort to and exhaust his remedies against
the principal, particularly where both principal and surety are equally bound.42
We agree with respondent corporation that its mere failure to immediately sue petitioner on her obligation
does not release her from liability. Where a creditor refrains from proceeding against the principal, the
surety is not exonerated. In other words, mere want of diligence or forbearance does not affect the
creditor's rights vis-a-vis the surety, unless the surety requires him by appropriate notice to sue on the
obligation. Such gratuitous indulgence of the principal does not discharge the surety whether given at
the principal's request or without it, and whether it is yielded by the creditor through sympathy or from
an inclination to favor the principal, or is only the result of passiveness. The neglect of the creditor to sue
the principal at the time the debt falls due does not discharge the surety, even if such delay continues
until the principal becomes insolvent.43 And, in the absence of proof of resultant injury, a surety is not
discharged by the creditor's mere statement that the creditor will not look to the surety,44 or that he need
not trouble himself.45 The consequences of the delay, such as the subsequent insolvency of the
principal,46 or the fact that the remedies against the principal may be lost by lapse of time, are
immaterial.47
The raison d'tre for the rule is that there is nothing to prevent the creditor from proceeding against the
principal at any time.48 At any rate, if the surety is dissatisfied with the degree of activity displayed by
the creditor in the pursuit of his principal, he may pay the debt himself and become subrogated to all the
rights and remedies of the creditor.49
It may not be amiss to add that leniency shown to a debtor in default, by delay permitted by the creditor
without change in the time when the debt might be demanded, does not constitute an extension of the
time of payment, which would release the surety.50 In order to constitute an extension discharging the
surety, it should appear that the extension was for a definite period, pursuant to an enforceable
agreement between the principal and the creditor, and that it was made without the consent of the surety
or with a reservation of rights with respect to him. The contract must be one which precludes the creditor
from, or at least hinders him in, enforcing the principal contract within the period during which he could
otherwise have enforced it, and which precludes the surety from paying the debt.51
None of these elements are present in the instant case. Verily, the mere fact that respondent corporation
gave the principal debtors an extended period of time within which to comply with their obligation did not
effectively absolve here in petitioner from the consequences of her undertaking. Besides, the burden is
on the surety, herein petitioner, to show that she has been discharged by some act of the
creditor,52 herein respondent corporation, failing in which we cannot grant the relief prayed for.
As a final issue, petitioner claims that assuming that her liability is solidary, the interests and penalty
charges on the outstanding balance of the loan cannot be imposed for being illegal and unconscionable.
Petitioner additionally theorizes that respondent corporation intentionally delayed the collection of the
loan in order that the interests and penalty charges would accumulate. The statement, likewise traversed
by said respondent, is misleading.
In an affidavit53 executed by petitioner, which was attached to her petition, she stated, among others,
that:
8. During the latter part of 1990, I was surprised to learn that Merlyn Azarraga's loan has been released
and that she has not paid the same upon its maturity. I received a telephone call from Mr. Augusto
Banusing of MB Lending informing me of this fact and of my liability arising from the promissory note
which I signed.
9. I requested Mr. Banusing to try to collect first from Merlyn and Osmea Azarraga. At the same time, I
offered to pay MB Lending the outstanding balance of the principal obligation should he fail to collect from
Merlyn and Osmea Azarraga. Mr. Banusing advised me not to worry because he will try to collect first
from Merlyn and Osmea Azarraga.
10. A year thereafter, I received a telephone call from the secretary of Mr. Banusing who reminded that
the loan of Merlyn and Osmea Azarraga, together with interest and penalties thereon, has not been
paid. Since I had no available funds at that time, I offered to pay MB Lending by delivering to them a
parcel of land which I own. Mr. Banusing's secretary, however, refused my offer for the reason that they
are not interested in real estate.
11. In March 1992, I received a copy of the summons and of the complaint filed against me by MB Lending
before the RTC-Iloilo. After learning that a complaint was filed against me, I instructed Sheila Gatia to go
to MB Lending and reiterate my first offer to pay the outstanding balance of the principal obligation of
Merlyn Azarraga in the amount of P30,000.00.
12. Ms. Gatia talked to the secretary of Mr. Banusing who referred her to Atty. Venus, counsel of MB
Lending.
13. Atty. Venus informed Ms. Gatia that he will consult Mr. Banusing if my offer to pay the outstanding
balance of the principal obligation loan (sic) of Merlyn and Osmea Azarraga is acceptable. Later, Atty.
Venus informed Ms. Gatia that my offer is not acceptable to Mr. Banusing.
The purported offer to pay made by petitioner can not be deemed sufficient and substantial in order to
effectively discharge her from liability. There are a number of circumstances which conjointly inveigh
against her aforesaid theory.
1. Respondent corporation cannot be faulted for not immediately demanding payment from petitioner. It
was petitioner who initially requested that the creditor try to collect from her principal first, and she
offered to pay only in case the creditor fails to collect. The delay, if any, was occasioned by the fact that
respondent corporation merely acquiesced to the request of petitioner. At any rate, there was here no
actual offer of payment to speak of but only a commitment to pay if the principal does not pay.
2. Petitioner made a second attempt to settle the obligation by offering a parcel of land which she owned.
Respondent corporation was acting well within its rights when it refused to accept the offer. The debtor
of a thing cannot compel the creditor to receive a different one, although the latter may be of the same
value, or more valuable than that which is due.54 The obligee is entitled to demand fulfillment of the
obligation or performance as stipulated. A change of the object of the obligation would constitute novation
requiring the express consent of the parties.55
3. After the complaint was filed against her, petitioner reiterated her offer to pay the outstanding balance
of the obligation in the amount of P30,000.00 but the same was likewise rejected. Again, respondent
corporation cannot be blamed for refusing the amount being offered because it fell way below the amount
it had computed, based on the stipulated interests and penalty charges, as owing and due from herein
petitioner. A debt shall not be understood to have been paid unless the thing or service in which the
obligation consists has been completely delivered or rendered, as the case may be.56 In other words, the
prestation must be fulfilled completely. A person entering into a contract has a right to insist on its
performance in all particulars.57
Petitioner cannot compel respondent corporation to accept the amount she is willing to pay because the
moment the latter accepts the performance, knowing its incompleteness or irregularity, and without
expressing any protest or objection, then the obligation shall be deemed fully complied with.58 Precisely,
this is what respondent corporation wanted to avoid when it continually refused to settle with petitioner
at less than what was actually due under their contract.
This notwithstanding, however, we find and so hold that the penalty charge of 3% per month and
attorney's fees equivalent to 25% of the total amount due are highly inequitable and unreasonable.
It must be remembered that from the principal loan of P30,000.00, the amount of P16,300.00 had already
been paid even before the filing of the present case. Article 1229 of the Civil Code provides that the court
shall equitably reduce the penalty when the principal obligation has been partly or irregularly complied
with by the debtor. And, even if there has been no performance, the penalty may also be reduced if it is
iniquitous or leonine.
In a case previously decided by this Court which likewise involved private respondent M.B. Lending
Corporation, and which is substantially on all fours with the one at bar, we decided to eliminate altogether
the penalty interest for being excessive and unwarranted under the following rationalization:
Upon the matter of penalty interest, we agree with the Court of Appeals that the economic impact of the
penalty interest of three percent (3 %) per month on total amount due but unpaid should be equitably
reduced. The purpose for which the penalty interest is intended that is, to punish the obligor will
have been sufficiently served by the effects of compounded interest. Under the exceptional circumstances
in the case at bar, e.g., the original amount loaned was only P15,000.00; partial payment of P8,600.00
was made on due date; and the heavy (albeit still lawful) regular compensatory interest, the penalty
interest stipulated in the parties' promissory note is iniquitous and unconscionable and may be equitably
reduced further by eliminating such penalty interest altogether.59
Accordingly, the penalty interest of 3% per month being imposed on petitioner should similarly be
eliminated.
Finally, with respect to the award of attorney's fees, this Court has previously ruled that even with an
agreement thereon between the parties, the court may nevertheless reduce such attorney's fees fixed in
the contract when the amount thereof appears to be unconscionable or unreasonable.60 To that end, it is
not even necessary to show, as in other contracts, that it is contrary to morals or public policy.61 The
grant of attorney's fees equivalent to 25% of the total amount due is, in our opinion, unreasonable and
immoderate, considering the minimal unpaid amount involved and the extent of the work involved in this
simple action for collection of a sum of money. We, therefore, hold that the amount of P10,000.00 as and
for attorney's fee would be sufficient in this case.62
WHEREFORE, the judgment appealed from is hereby AFFIRMED, subject to the MODIFICATION that the
penalty interest of 3% per month is hereby deleted and the award of attorney's fees is reduced to
P10,000.00.
SO ORDERED.
 [G.R. No. 142381. October 15, 2003]
PHILIPPINE BLOOMING MILLS, INC., and ALFREDO CHING, petitioners, vs. COURT OF APPEALS and
TRADERS ROYAL BANK, respondents.
DECISION
CARPIO, J.:
The Case
This is a petition for review on certiorari[1] to annul the Decision[2] dated 16 July 1999 of the Court of
Appeals in CA-G.R. CV No. 39690, as well as its Resolution dated 17 February 2000 denying the motion for
reconsideration. The Court of Appeals affirmed with modification the Decision[3] dated 31 August 1992 rendered
by Branch 113 of the Regional Trial Court ofPasay City (trial court). The trial courts Decision declared petitioner
Alfredo Ching (Ching) liable to respondent Traders Royal Bank (TRB) for the payment of the credit
accommodations extended to Philippine Blooming Mills, Inc. (PBM).
Antecedent Facts
This case stems from an action to compel Ching to pay TRB the following amounts:
1. P959,611.96 under Letter of Credit No. 479 AD covered by Trust Receipt No. 106;[4]
2. P1,191,137.13 under Letter of Credit No. 563 AD covered by Trust Receipt No. 113;[5] and
3. P3,500,000 under the trust loan covered by a notarized Promissory Note.[6]
Ching was the Senior Vice President of PBM. In his personal capacity and not as a corporate officer, Ching
signed a Deed of Suretyship dated 21 July 1977 binding himself as follows:
xxx as primary obligor(s) and not as mere guarantor(s), hereby warrant to the TRADERS ROYAL BANK, its
successors and assigns, the due and punctual payment by the following individuals and/or companies/firms,
hereinafter called the DEBTOR(S), of such amounts whether due or not, as indicated opposite their respective
names, to wit:
NAME OF DEBTOR(S) AMOUNT OF OBLIGATION
PHIL. BLOOMING MILLS CORP. TEN MILLION PESOS
(P 10,000,000.00)
owing to said TRADERS ROYAL BANK, hereafter called the CREDITOR, as evidenced by all notes, drafts,
overdrafts and other credit obligations of every kind and nature contracted/incurred by said DEBTOR(S) in favor
of said CREDITOR.
In case of default by any and/or all of the DEBTOR(S) to pay the whole or part of said indebtedness herein
secured at maturity, I/We, jointly and severally, agree and engage to the CREDITOR, its successors and assigns,
the prompt payment, without demand or notice from said CREDITOR, of such notes, drafts, overdrafts and other
credit obligations on which the DEBTOR(S) may now be indebted or may hereafter become indebted to
the CREDITOR, together with all interests, penalty and other bank charges as may accrue thereon and all
expenses which may be incurred by the latter in collecting any or all such instruments.
I/WE further warrant the due and faithful performance by the DEBTOR(S) of all the obligations to be performed
under any contracts, evidencing indebtedness/obligations and any supplements, amendments, charges or
modifications made thereto, including but not limited to, the due and punctual payment by the said DEBTOR(S).
I/WE hereby expressly waive notice of acceptance of this suretyship, and also presentment, demand, protest
and notice of dishonor of any and all such instruments, loans, advances, credits, or other indebtedness or
obligations hereinbefore referred to.
MY/OUR liability on this Deed of Suretyship shall be solidary, direct and immediate and not contingent upon
the pursuit by the CREDITOR, its successors or assigns, of whatever remedies it or they may have against the
DEBTOR(S) or the securities or liens it or they may possess; and I/WE hereby agree to be and remain bound
upon this suretyship, irrespective of the existence, value or condition of any collateral, and notwithstanding also
that all obligations of the DEBTOR(S) to you outstanding and unpaid at any time may exceed the aggregate
principal sum herein above stated.
In the event of judicial proceedings, I/WE hereby expressly agree to pay the creditor for and as attorneys fees
a sum equivalent to TEN PER CENTUM (10%) of the total indebtedness (principal and interest) then unpaid,
exclusive of all costs or expenses for collection allowed by law.[7] (Emphasis supplied)
On 24 March and 6 August 1980, TRB granted PBM letters of credit on application of Ching in his capacity
as Senior Vice President of PBM. Ching later accomplished and delivered to TRB trust receipts, which
acknowledged receipt in trust for TRB of the merchandise subject of the letters of credit. Under the trust receipts,
PBM had the right to sell the merchandise for cash with the obligation to turn over the entire proceeds of the
sale to TRB as payment of PBMs indebtedness. Letter of Credit No. 479 AD, covered by Trust Receipt No. 106,
has a face value of US$591,043, while Letter of Credit No. 563 AD, covered by Trust Receipt No. 113, has a face
value of US$155,460.34.
Ching further executed an Undertaking for each trust receipt, which uniformly provided that:
xxx
6. All obligations of the undersigned under the agreement of trusts shall bear interest at the rate of
__ per centum ( __%) per annum from the date due until paid.
7. [I]n consideration of the Trust Receipt, the undersigned hereby jointly and severally
undertake and agree to pay on demand on the said BANK, all sums and amounts of money
which said BANK may call upon them to pay arising out of, pertaining to, and/or in any manner
connected with this receipt. In case it is necessary to collect the draft covered by the Trust
Receipt by or through an attorney-at-law, the undersigned hereby further agree(s) to pay an
additional of 10% of the total amount due on the draft as attorneys fees, exclusive of all costs,
fees and other expenses of collection but shall in no case be less than P200.00[8] (Emphasis
supplied)
On 27 April 1981, PBM obtained a P3,500,000 trust loan from TRB. Ching signed as co-maker in the
notarized Promissory Note evidencing this trust loan. The Promissory Note reads:
FOR VALUE RECEIVED THIRTY (30) DAYS after date, I/We, jointly and severally, promise to pay the TRADERS
ROYAL BANK or order, at its Office in 4thFloor, Kanlaon Towers Bldg., Roxas Blvd., Pasay City, the sum of Pesos:
THREE MILLION FIVE HUNDRED THOUSAND ONLY (P3,500,000.00), Philippine Currency, with the interest rate
of Eighteen Percent (18%) per annum until fully paid.
In case of non-payment of this note at maturity, I/We, jointly and severally, agree to pay an
additional amount equivalent to two per cent (2%) of the principal sum per annum, as penalty and
collection charges in the form of liquidated damages until fully paid, and the further sum of ten percent
(10%) thereof in full, without any deduction, as and for attorneys fees whether actually incurred or not, exclusive
of costs and other judicial/extrajudicial expenses; moreover, I/We jointly and severally, further empower and
authorize the TRADERS ROYAL BANK at its option, and without notice to set off or to apply to the payment of
this note any and all funds, which may be in its hands on deposit or otherwise belonging to anyone or all of us,
and to hold as security therefor any real or personal property which may be in its possession or control by virtue
of any other contract.[9] (Emphasis supplied)
PBM defaulted in its payment of Trust Receipt No. 106 (Letter of Credit No. 479 AD) for P959,611.96, and
of Trust Receipt No. 113 (Letter of Credit No. 563 AD) for P1,191,137.13.PBM also defaulted on its P3,500,000
trust loan.
On 1 April 1982, PBM and Ching filed a petition for suspension of payments with the Securities and
Exchange Commission (SEC), docketed as SEC Case No. 2250.[10] The petition sought to suspend payment of
PBMs obligations and prayed that the SEC allow PBM to continue its normal business operations free from the
interference of its creditors. One of the listed creditors of PBM was TRB.[11]
On 9 July 1982, the SEC placed all of PBMs assets, liabilities, and obligations under the rehabilitation
receivership of Kalaw, Escaler and Associates.[12]
On 13 May 1983, ten months after the SEC placed PBM under rehabilitation receivership, TRB filed with
the trial court a complaint for collection against PBM and Ching. TRB asked the trial court to order defendants
to pay solidarily the following amounts:
(1) P6,612,132.74 exclusive of interests, penalties, and bank charges [representing its indebtedness
arising from the letters of credit issued to its various suppliers];
(2) P4,831,361.11, exclusive of interests, penalties, and other bank charges [due and owing from
the trust loan of 27 April 1981 evidenced by a promissory note];
(3) P783,300.00 exclusive of interests, penalties, and other bank charges [due and owing from the
money market loan of 1 April 1981 evidenced by a promissory note];
(4) To order defendant Ching to pay P10,000,000.00 under the Deed of Suretyship in the event
plaintiff can not recover the full amount of PBMs indebtedness from the latter;
(5) The sum equivalent to 10% of the total sum due as and for attorneys fees;
(6) Such other amounts that may be proven by the plaintiff during the trial, by way of damages and
expenses for litigation.[13]
On 25 May 1983, TRB moved to withdraw the complaint against PBM on the ground that the SEC had
already placed PBM under receivership.[14] The trial court thus dismissed the complaint against PBM.[15]
On 23 June 1983, PBM and Ching also moved to dismiss the complaint on the ground that the trial court
had no jurisdiction over the subject matter of the case. PBM and Ching invoked the assumption of jurisdiction
by the SEC over all of PBMs assets and liabilities.[16]
TRB filed an opposition to the Motion to Dismiss. TRB argued that (1) Ching is being sued in his personal
capacity as a surety for PBM; (2) the SEC decision declaring PBM in suspension of payments is not binding on
TRB; and (3) Presidential Decree No. 1758 (PD No. 1758),[17] which Ching relied on to support his assertion that
all claims against PBM are suspended, does not apply to Ching as the decree regulates corporate activities
only.[18]
In its order dated 15 August 1983,[19] the trial court denied the motion to dismiss with respect to Ching
and affirmed its dismissal of the case with respect to PBM. The trial court stressed that TRB was holding Ching
liable under the Deed of Suretyship. As Chings obligation was solidary, the trial court ruled that TRB could
proceed against Ching as surety upon default of the principal debtor PBM. The trial court also held that PD No.
1758 applied only to corporations, partnerships and associations and not to individuals.
Upon the trial courts denial of his Motion for Reconsideration, Ching filed a Petition for Certiorari and
Prohibition[20] before the Court of Appeals. The appellate court granted Chings petition and ordered the dismissal
of the case. The appellate court ruled that the SEC assumed jurisdiction over Ching and PBM to the exclusion of
courts or tribunals of coordinate rank.
TRB assailed the Court of Appeals Decision[21] before this Court. In Traders Royal Bank v. Court of
Appeals,[22] this Court upheld TRB and ruled that Ching was merely a nominal party in SEC Case No.
2250. Creditors may sue individual sureties of debtor corporations, like Ching, in a separate proceeding before
regular courts despite the pendency of a case before the SEC involving the debtor corporation.
In his Answer dated 6 November 1989, Ching denied liability as surety and accommodation co-maker of
PBM. He claimed that the SEC had already issued a decision[23] approving a revised rehabilitation plan for PBMs
creditors, and that PBM obtained the credit accommodations for corporate purposes that did not redound to his
personal benefit. He further claimed that even as a surety, he has the right to the defenses personal to
PBM. Thus, his liability as surety would attach only if, after the implementation of payments scheduled under
the rehabilitation plan, there would remain a balance of PBMs debt to TRB.[24] Although Ching admitted PBMs
availment of the credit accommodations, he did not show any proof of payment by PBM or by him.
TRB admitted certain partial payments on the PBM account made by PBM itself and by the SEC-appointed
receiver.[25] Thus, the trial court had to resolve the following remaining issues:
1. How much exactly is the corporate defendants outstanding obligation to the plaintiff?
2. Is defendant Alfredo Ching personally answerable, and for exactly how much?[26]
TRB presented Mr. Lauro Francisco, loan officer of the Remedial Management Department of TRB, and Ms.
Carla Pecson, manager of the International Department of TRB, as witnesses. Both witnesses testified to the
following:
1. The existence of a Deed of Suretyship dated 21 July 1977 executed by Ching for PBMs liabilities to TRB up
to P10,000,000;[27]
2. The application of PBM and grant by TRB on 13 March 1980 of Letter of Credit No. 479 AD for US$591,043,
and the actual availment by PBM of the full proceeds of the credit accommodation;[28]
3. The application of PBM and grant by TRB on 6 August 1980 of Letter of Credit No. 563 AD for
US$156,000, and the actual availment by PBM of the full proceeds of the credit accommodation;[29] and
4. The existence of a trust loan of P3,500,000 evidenced by a notarized Promissory Note dated 27 April
1981 wherein Ching bound himself solidarily with PBM;[30] and
5. Per TRBs computation, Ching is liable for P19,333,558.16 as of 31 October 1991.[31]
Ching presented Atty. Vicente Aranda, corporate secretary and First Vice President of the Human Resources
Department of TRB, as witness. Ching sought to establish that TRBs Board of Directors adopted a resolution
fixing the PBM account at an amount lower than what TRB wanted to collect from Ching. The trial court allowed
Atty. Aranda to testify over TRBs manifestation that the Answer failed to plead the subject matter of his
testimony. Atty. Aranda produced TRB Board Resolution No. 5935, series of 1990, which contained the minutes
of the special meeting of TRBs Board of Directors held on 8 June 1990.[32] In the resolution, the Board of
Directors advised TRBs Management not to release Alfredo Ching from his JSS liability to the bank. [33] The
resolution also stated the following:
a) Accept the P1.373 million deposits remitted over a period of 17 years or until 2006 which shall be
applied directly to the account (as remitted per hereto attached schedule). The amount of P1.373
million shall be considered as full payment of PBMs account. (The receiver is amenable to this
alternative)
The initial deposit/remittance which amounts to P150,000.00 shall be remitted upon approval of
the above and conforme to PISCOR and PBM. Subsequent deposits shall start on the 3rd year and
annually thereafter (every June 30th of the year) until June 30, 2006.
Failure to pay one annual installment shall make the whole obligation due and demandable.
b) Write-off immediately P4.278 million. The balance [of] P1.373 million to remain outstanding in
the books of the Bank. Said balance will equal the deposits to be remitted to the Bank for a period
of 17 years.[34]
However, Atty. Aranda himself testified that both items (a) and (b) quoted above were never complied with or
implemented. Not only was there no initial deposit of P150,000 as required in the resolution, TRB also
disapproved the document prepared by the receiver, which would have released Ching from his suretyship.[35]
The Ruling of the Trial Court
The trial court found Ching liable to TRB for P19,333,558.16 under the Deed of Suretyship. The trial court
explained:
[T]he liability of Ching as a surety attaches independently from his capacity as a stockholder of the Philippine
Blooming Mills. Indisputably, under the Deed of Suretyship defendant Ching unconditionally agreed to assume
PBMs liability to the plaintiff in the event PBM defaulted in the payment of the said obligation in addition to
whatever penalties, expenses and bank charges that may occur by reason of default. Clear enough, under the
Deed of Suretyship (Exh. J), defendant Ching bound himself jointly and severally with PBM in the payment of
the latters obligation to the plaintiff. The obligation being solidary, the plaintiff Bank can hold Ching liable upon
default of the principal debtor. This is explicitly provided in Article 1216 of the New Civil Code already quoted
above.[36]
The dispositive portion of the trial courts Decision reads:
WHEREFORE, judgment is hereby rendered declaring defendant Alfredo Ching liable to plaintiff bank in the
amount of P19,333,558.16 (NINETEEN MILLION THREE HUNDRED THIRTY THREE THOUSAND FIVE HUNDRED
FIFTY EIGHT & 16/100) as of October 31, 1991, and to pay the legal interest thereon from such date until it is
fully paid. To pay plaintiff 5% of the entire amount by way of attorneys fees.
SO ORDERED.[37]
The Ruling of the Court of Appeals
On appeal, Ching stated that as surety and solidary debtor, he should benefit from the changed nature of
the obligation as provided in Article 1222 of the Civil Code, which reads:
Article 1222. A solidary debtor may, in actions filed by the creditor, avail himself of all defenses which are derived
from the nature of the obligation and of those which are personal to him, or pertain to his own share. With
respect to those which personally belong to the others, he may avail himself thereof only as regards that part
of the debt for which the latter are responsible.
Ching claimed that his liability should likewise be reduced since the equitable apportionment of PBMs
remaining assets among its creditors under the rehabilitation proceedings would have the effect of reducing
PBMs liability. He also claimed that the amount for which he was being held liable was excessive. He contended
that the outstanding principal balance, as stated in TRB Board Resolution No. 5893-1990, was
only P5,650,749.09.[38] Ching also contended that he was not liable for interest, as the loan documents did not
stipulate the interest rate, pursuant to Article 1956 of the Civil Code.[39] Finally, Ching asserted that the Deed of
Suretyship executed on 21 July 1977 could not guarantee obligations incurred after its execution.[40]
TRB did not file its appellees brief. Thus, the Court of Appeals resolved to submit the case for decision.[41]
The Court of Appeals considered the following issues for its determination:
1. Whether the Answer of Ching amounted to an admission of liability.
2. Whether Ching can still be sued as a surety after the SEC placed PBM under rehabilitation
receivership, and if in the affirmative, for how much.[42]
The Court of Appeals resolved the first two questions in favor of TRB. The appellate court stated:
Ching did not deny under oath the genuineness and due execution of the L/Cs, Trust Receipts, Undertaking,
Deed of Surety, and the 3.5 Million Peso Promissory Note upon which TRBs action rested. He is, therefore,
presumed to be liable unless he presents evidence showing payment, partially or in full, of these obligations
(Investment and Underwriting Corporation of the Philippines v. Comptronics Philippines, Inc. and Gene v.
Tamesis, 192 SCRA 725 [1990]).
As surety of a corporation placed under rehabilitation receivership, Ching can answer separately for the
obligations of debtor PBM (Rizal Banking Corporation v. Court of Appeals, Philippine Blooming Mills, Inc., and
Alfredo Ching, 178 SCRA 738 [1990], and Traders Royal Bank v. Philippine Blooming Mills and Alfredo Ching,
177 SCRA 788 [1989]).
Even a[n] SEC injunctive order cannot suspend payment of the suretys obligation since the rehabilitation
receivers are limited to the existing assets of the corporation.[43]
The dispositive portion of the Decision of the Court of Appeals reads:
WHEREFORE, the judgment of the lower court is hereby AFFIRMED but modified with respect to the amount of
liability of defendant Alfredo Ching which is lowered from P19,333,558.16 to P15,773,708.78 with legal interest
of 12% per annum until it is fully paid.
SO ORDERED.[44]
The Court of Appeals denied Chings Motion for Reconsideration for lack of merit.
Hence, this petition.
Issues
Ching assigns the following as errors of the Court of Appeals:
1. THE COURT OF APPEALS COMMITTED AN ERROR WHEN IT RULED THAT PETITIONER ALFREDO
CHING WAS LIABLE FOR OBLIGATIONS CONTRACTED BY PBM LONG AFTER THE EXECUTION OF
THE DEED OF SURETYSHIP.
2. THE COURT OF APPEALS COMMITTED AN ERROR WHEN IT RULED THAT THE PETITIONERS WERE
LIABLE FOR THE TRUST RECEIPTS DESPITE THE FACT THAT PRIVATE RESPONDENT HAD
PREVENTED THEIR FULFILLMENT.
3. THE COURT OF APPEALS COMMITTED AN ERROR WHEN IT FOUND PETITIONER ALFREDO CHING
LIABLE FOR P15,773,708.78 WITH LEGAL INTEREST AT 12% PER ANNUM UNTIL FULLY PAID
DESPITE THE FACT THAT UNDER THE REHABILITATION PLAN OF PETITIONER PBM, WHICH WAS
APPROVED BY THE SECURITIES AND EXCHANGE COMMISSION, PRIVATE RESPONDENT IS ONLY
ENTITLED TO P1,373,415.00.[45]
Ching asserted that the Deed of Suretyship dated 21 July 1977 could not answer for obligations not yet in
existence at the time of its execution. Specifically, Ching maintained that the Deed of Suretyship could not
answer for debts contracted by PBM in 1980 and 1981. Ching contended that no accessory contract of suretyship
could arise without an existing principal contract of loan. Ching likewise argued that TRB could no longer claim
on the trust receipts because TRB had already taken the properties subject of the trust receipts. Ching likewise
maintained that his obligation as surety could not exceed the P1,373,415 apportioned to PBM under the SEC-
approved rehabilitation plan.
In its Comment, TRB asserted that the first two assigned errors raised factual issues not brought before
the trial court. Furthermore, TRB pointed out that Ching never presented PBMs rehabilitation plan before the
trial court. TRB also stated that the Supreme Court ruling in Traders Royal Bank v. Court of
Appeals[46] constitutes res judicata between the parties.Therefore, TRB could proceed against Ching separately
from PBM to enforce in full Chings liability as surety.[47]
The Ruling of the Court
The petition has no merit.
The case before us is an offshoot of the trial courts denial of Chings motion to have the case dismissed
against him. The petition is a thinly veiled attempt to make this Court reconsider its decision in the prior case
of Traders Royal Bank v. Court of Appeals.[48] This Court has already resolved the issue of Chings separate
liability as a surety despite the rehabilitation proceedings before the SEC. We held in Traders Royal Bank that:
Although Ching was impleaded in SEC Case No. 2250, as a co-petitioner of PBM, the SEC could not assume
jurisdiction over his person and properties. The Securities and Exchange Commission was empowered, as
rehabilitation receiver, to take custody and control of the assets and properties of PBM only, for the SEC has
jurisdiction over corporations only [and] not over private individuals, except stockholders in an intra-corporate
dispute (Sec. 5, P.D. 902-A and Sec. 2 of P.D. 1758). Being a nominal party in SEC Case No. 2250, Chings
properties were not included in the rehabilitation receivership that the SEC constituted to take custody of PBMs
assets. Therefore, the petitioner bank was not barred from filing a suit against Ching, as a surety for
PBM. An anomalous situation would arise if individual sureties for debtor corporations may escape liability by
simply co-filing with the corporation a petition for suspension of payments in the SEC whose jurisdiction is limited
only to corporations and their corporate assets.
xxx
Ching can be sued separately to enforce his liability as surety for PBM, as expressly provided by
Article 1216 of the New Civil Code.
xxx
It is elementary that a corporation has a personality distinct and separate from its individual stockholders and
members. Being an officer or stockholder of a corporation does not make ones property the property also of the
corporation, for they are separate entities (Adelio Cruz vs. Quiterio Dalisay, 152 SCRA 482).
Chings act of joining as a co-petitioner with PBM in SEC Case No. 2250 did not vest in the SEC jurisdiction over
his person or property, for jurisdiction does not depend on the consent or acts of the parties but upon express
provision of law (Tolentino vs. Social Security System, 138 SCRA 428; Lee vs. Municipal Trial Court of Legaspi
City, Br. I, 145 SCRA 408). (Emphasis supplied)
Traders Royal Bank has fully resolved the issue regarding Chings liability as a surety of the credit
accommodations TRB extended to PBM. The decision amounts to res judicata[49]which bars Ching from raising
the same issue again. Hence, the only question that remains is the amount of Chings liability. Nevertheless, we
shall resolve the issues Ching has raised in his attempt to escape liability under his surety.
Whether Ching is liable for obligations PBM contracted after execution of the Deed of Suretyship
Ching is liable for credit obligations contracted by PBM against TRB before and after the execution of the 21
July 1977 Deed of Suretyship. This is evident from the tenor of the deed itself, referring to amounts PBM may
now be indebted or may hereafter become indebted to TRB.
The law expressly allows a suretyship for future debts. Article 2053 of the Civil Code provides:
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)
Furthermore, this Court has ruled in Dio v. Court of Appeals[50] that:
Under the Civil Code, 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. It
is prospective in its operation and is generally intended to provide security with respect to future transactions
within certain limits, and contemplates a succession of liabilities, for which, as they accrue, the guarantor
becomes liable. Otherwise stated, a continuing guaranty is one which covers all transactions, including those
arising in the future, which are within the description or contemplation of the contract of guaranty, until the
expiration or termination thereof. A guaranty shall be construed as continuing when by the terms thereof it is
evident that the object is to give a standing credit to the principal debtor to be used from time to time either
indefinitely or until a certain period; especially if the right to recall the guaranty is expressly reserved. Hence,
where the contract states that the guaranty is to secure advances to be made from time to time, it will be
construed to be a continuing one.
In other jurisdictions, it has been held that the use of particular words and expressions such as payment of any
debt, any indebtedness, or any sum, or the guaranty of any transaction, or money to be furnished the principal
debtor at any time, or on such time that the principal debtor may require, have been construed to indicate a
continuing guaranty.
Whether Chings liability is limited
to the amount stated in PBMs rehabilitation plan
Ching would like this Court to rule that his liability is limited, at most, to the amount stated in PBMs
rehabilitation plan. In claiming this reduced liability, Ching invokes Article 1222 of the Civil Code which reads:
Art. 1222. A solidary debtor may, in actions filed by the creditor, avail himself of all defenses which are derived
from the nature of the obligation and of those which are personal to him, or pertain to his own share. With
respect to those which personally belong to the others, he may avail himself thereof only as regards that part
of the debt for which the latter are responsible.
In granting the loan to PBM, TRB required Chings surety precisely to insure full recovery of the loan in case
PBM becomes insolvent or fails to pay in full. This was the very purpose of the surety. Thus, Ching cannot use
PBMs failure to pay in full as justification for his own reduced liability to TRB. As surety, Ching agreed to pay in
full PBMs loan in case PBM fails to pay in full for any reason, including its insolvency.
TRB, as creditor, has the right under the surety to proceed against Ching for the entire amount of PBMs
loan. This is clear from Article 1216 of the Civil Code:
ART. 1216. The creditor may proceed against any one of the solidary debtors or some or all of them
simultaneously. The demand made against one of them shall not be an obstacle to those which may subsequently
be directed against the others, so long as the debt has not been fully collected. (Emphasis supplied)
 Ching further claims a reduced liability under TRB Board Resolution No. 5935. This resolution states that
PBMs outstanding loans may be reduced to P1.373 million subject to certain conditions like the payment
of P150,000 initial payment.[51] The resolution also states that TRB should not release Chings solidary liability
under his surety. The resolution even directs TRBs management to study Chings criminal liability under the trust
documents.[52]
Chings own witness testified that Resolution No. 5935 was never implemented. For one, PBM or its receiver
never paid the P150,000 initial payment to TRB. TRB also rejected the document that PBMs receiver presented
which would have released Ching from his suretyship. Clearly, Ching cannot rely on Resolution No. 5935 to
escape liability under his suretyship.
Chings attempts to have this Court review the factual issues of the case are improper. It is not a function
of the Supreme Court to assess and evaluate again the evidence, testimonial and evidentiary, adduced by the
parties particularly where the findings of both the trial court and the appellate court coincide on the matter.[53]
Whether Ching is liable for the trust receipts
Ching is still liable for the amounts stated in the letters of credit covered by the trust receipts. Other than
his bare allegations, Ching has not shown proof of payment or settlement with TRB. Atty. Vicente Aranda, TRBs
corporate secretary and First Vice President of its Human Resource Management Department, testified that the
conditions in the TRB board resolution presented by Ching were not met or implemented, thus:
ATTY. AZURA
Q Going into the resolution itself. A certain stipulation ha[s] been outlined, and may I refer you to
condition or step No. 1, which reads: a) Accept the P1.373 million deposits remitted over a
period of 17 years or until 2006 which shall be applied directly to the account (as remitted per
hereto attached schedule). The amount of P1.373 million shall be considered as full payment
of PBMs account. (The receiver is amenable to this alternative.) The initial deposit/remittance
which amounts to P150,000.00 shall be remitted upon approval of the above and conforme of
PISCOR [xxx] and PBM. Subsequent deposits shall start on the 3rd year and annually thereafter
(every June 30th of the year) until June 30, 2006.
Failure to pay one annual installment shall make the whole obligation due and
demandable. Now Mr. Witness, would you be in a position to inform [the court] if these
conditions listed in item (a) in Resolution No. 5935, series of 1990, were implemented or met?
A Yes. I know for a fact that the conditions, more particularly the initial deposit/remittance in the
amount of P150,000.00 which have to be done with approval was not remitted or met.
Q Will you clarify your answer. Would you be in a position to inform the court if those conditions were
met? Because your initial answer was yes.
A Yes sir, I am in a position to state that these conditions were not met.
Q Let me refer you to the condition listed as item (b) of the same resolution which I read and
quote: Write off immediately P4.278 million. The balance of P1.373 million to remain
outstanding in the books of the bank. Said balance will be remitted to the Bank for a period of
17 years. Mr. Witness, would you be in a position to inform the court if the bank implemented
that particular condition?
A In the implementation of this settlement the receiver prepared a document for approval and
conformity of the bank. The said document would in effect release the suretyship of Alfredo
Ching and for that reason the bank refused or denied fixing its conformity and approval with
the court.
xxx
ATTY. ATIENZA ON REDIRECT EXAMINATION
Q Mr. Witness you stated that the reason why the plaintiff bank did not implement these
conditionalities [sic] was because the former defendant corporation requested that the
suretyship of Alfredo Ching be released, is that correct?
A I did not say that. I said that in effect the document prepared by the lawyer of the receiver xxx
the bank would release the suretyship of Alfredo Ching, that is why the bank is not amenable
to such a document.
Q Despite this approved resolution the bank, because of said requirement or conformity did not seek
to implement these conditionalities [sic]?
A Yes sir because the conditions imposed by the board is not being followed in that document because
it was the condition of the board that the suretyship should not be released but the document
being presented to the bank for signature and conformity in effect if signed would release the
suretyship. So it would be a violation with the approval of the board so the bank did not sign
the conformity.[54]
Ching also claims that TRB prevented PBM from fulfilling its obligations under the trust receipts when TRB,
together with other creditor banks, took hold of PBMs inventories, including the goods covered by the trust
receipts. Ching asserts that this act of TRB released him from liability under the suretyship. Ching forgets that
he executed, on behalf of PBM, separate Undertakings for each trust receipt expressly granting to TRB the right
to take possession of the goods at any time to protect TRBs interests. TRB may exercise such right without
waiving its right to collect the full amount of the loan to PBM. The Undertakings also provide that any suspension
of payment or any assignment by PBM for the benefit of creditors renders the loan due and demandable. Thus,
the separate Undertakings uniformly provide:
2. That the said BANK may at any time cancel the foregoing trust and take possession of
said merchandise with the right to sell and dispose of the same under such terms and
conditions it may deem best, or of the proceeds of such of the same as may then have
been sold, wherever the said merchandise or proceeds may then be found and all the provisions
of the Trust Receipt shall apply to and be deemed to include said above-mentioned merchandise
if the same shall have been made up or used in the manufacture of any other goods, or
merchandise, and the said BANK shall have the same rights and remedies against the said
merchandise in its manufactured state, or the product of said manufacture as it would have had
in the event that such merchandise had remained [in] its original state and irrespective of the
fact that other and different merchandise is used in completing such manufacture. In the event
of any suspension, or failure or assignment for the benefit of creditors on the part of
the undersigned or of the non-fulfillment of any obligation, or of the non-payment at
maturity of any acceptance made under said credit, or any other credit issued by the said
BANK on account of the undersigned or of the non-payment of any indebtedness on the part
of the undersigned to the said BANK, all obligations, acceptances, indebtedness and
liabilities whatsoever shall thereupon without notice mature and become due and
payable and the BANK may avail of the remedies provided herein.[55] (Emphasis supplied)
Presidential Decree No. 115 (PD No. 115), otherwise known as the Trust Receipts Law, expressly allows
TRB to take possession of the goods covered by the trust receipts. Thus, Section of 7 of PD No. 115 states:
SECTION 7. Rights of the entruster. The entruster shall be entitled to the proceeds from the sale of the goods,
documents or instruments released under a trust receipt to the entrustee to the extent of the amount owing to
the entruster or as appears in the trust receipt, or to the return of the goods, documents or instruments in case
of non-sale, and to the enforcement of all other rights conferred on him in the trust receipt provided such are
not contrary to the provisions of this Decree.
The entruster may cancel the trust and take possession of the goods, documents or instruments
subject of the trust or of the proceeds realized therefrom at any time upon default or failure of the
entrustee to comply with any of the terms and conditions of the trust receipt or any other agreement
between the entruster and the entrustee, and the entruster in possession of the goods, documents or
instruments may, on or after default, give notice to the entrustee of the intention to sell, and may, not less than
five days after serving or sending of such notice, sell the goods, documents or instruments at public or private
sale, and the entruster may, at a public sale, become a purchaser. The proceeds of any such sale, whether
public or private, shall be applied (a) to the payment of the expenses thereof; (b) to the payment of
the expenses of re-taking, keeping and storing the goods, documents or instruments; (c) to the WHEREFORE, we AFFIRM the decision of the Court of Appeals with MODIFICATION. Petitioner Alfredo
satisfaction of the entrustees indebtedness to the entruster. The entrustee shall receive any surplus Ching shall pay respondent Traders Royal Bank the following (1) on the credit accommodations under the trust
but shall be liable to the entruster for any deficiency. Notice of sale shall be deemed sufficiently given if receipts, the total principal amount of P2,150,749.09 with legal interest at 12% per annum from 14 May 1983
in writing, and either personally served on the entrustee or sent by post-paid ordinary mail to the entrustees until full payment; (2) on the trust loan evidenced by the Promissory Note, the principal sum of P3,500,000 with
last known business address. (Emphasis supplied) 20% interest per annum from 14 May 1983 until full payment; (3) on the total accrued interest as of 13 May
1983, P2,075,058.84 with 12% interest per annum from 14 May 1983 until full payment. Petitioner Alfredo
Ching shall also pay attorneys fees to respondent Traders Royal Bank equivalent to 5% of the total principal and
Thus, even though TRB took possession of the goods covered by the trust receipts, PBM and Ching remained
interest.
liable for the entire amount of the loans covered by the trust receipts.
SO ORDERED.
Absent proof of payment or settlement of PBM and Chings credit obligations with TRB, Chings liability is
what the Deed of Suretyship stipulates, plus the applicable interest and penalties. The trust receipts, as well as
the Letter of Undertaking dated 16 April 1980[56] executed by PBM, stipulate in writing the payment of interest
without specifying the rate. In such a case, the applicable interest rate shall be the legal rate, which is now 12%
per annum.[57] This is in accordance with Central Bank Circular No. 416, which states:

By virtue of the authority granted to it under Section 1 of Act No. 2655, as amended, otherwise known as the
Usury Law, the Monetary Board, in its Resolution No. 1622 dated July 29, 1974, has prescribed that the rate
of interest for the loan or forbearance of any money, goods or credits and the rate allowed in
judgments, in the absence of express contract as to such rate of interest, shall be twelve per cent
(12%) per annum. (Emphasis supplied)

On the other hand, the Promissory Note evidencing the P3,500,000 trust loan provides for 18% interest
per annum plus 2% penalty interest per annum in case of default. This stipulated interest should continue to
run until full payment of the P3,500,000 trust loan. In addition, the accrued interest on all the credit
accommodations should earn legal interest from the date of filing of the complaint pursuant to Article 2212 of
the Civil Code.

Art. 2212. Interest due shall earn legal interest from the time it is judicially demanded, although the obligation
may be silent upon this point.

The trial court found and the appellate court affirmed that the outstanding principal amounts as of the
filing of the complaint with the trial court on 13 May 1983 were P959,611.96 under Trust Receipt No.
106, P1,191,137.13 under Trust Receipt No. 113, and P3,500,000 for the trust loan. As extracted from TRBs
Statement of Account as of 31 October 1991,[58] the accrued interest on the trust receipts and the trust loan as
of the filing of the complaint on 13 May 1983 were P311,387.51[59] under Trust Receipt No.
106, P338,739.81[60] under Trust Receipt No. 113, and P1,287,616.44[61] under the trust loan. The penalty
interest on the trust loan amounted to P137,315.07.[62] Ching did not rebut this Statement of Account which
TRB presented during trial.

Thus, the following is the summary of Chings liability under the suretyship as of 13 May 1983, the date of
filing of TRBs complaint with the trial court:

1. On Trust Receipt No. 106 (Letter of Credit No. 479 AD)

Outstanding Principal P 959,611.96
Accrued Interest (12% per annum) 311,387.51

2. On Trust Receipt No. 113 (Letter of Credit No. 563 AD)

Outstanding Principal P 1,191,137.13
Accrued Interest (12% per annum) 338,739.82

3. On the Trust Loan (Promissory Note)

Outstanding Principal P 3,500,000.00
Accrued Interest (18% per annum) 1,287,616.44
Accrued Penalty Interest (2% per annum) 137,315.07