G.R. No. 89775 November 26, 1992
Neither did METROBANK nor UTEFS inform them
JACINTO UY DIÑO and NORBERTO UY, petitioners,
vs.
HON. COURT OF APPEALS and METROPOLITAN BANK
AND TRUST COMPANY, respondents.
DAVIDE, JR., J.:
Continuing Suretyship Agreements signed by the petitioners
set off this present controversy.
Petitioners assail the 22 June 1989 Decision of the Court in
CA-G.R. CV No. 17724 1 which reversed the 2 December
1987 Decision of Branch 45 of the Regional Trial Court
(RTC) of Manila in a collection suit entitled "Metropolitan
Bank and Trust Company vs. Uy Tiam, doing business under
the name of "UY TIAM ENTERPRISES & FREIGHT SERVICES,"
Jacinto Uy Diño and Norberto Uy" and docketed as Civil Case
No. 82-9303. They likewise challenge public respondent's
Resolution of 21 August 1989 2 denying their motion for the
reconsideration of the former.
The impugned Decision of the Court summarizes the
antecedent facts as follows:
It appears that in 1977, Uy Tiam Enterprises and Freight
Services (hereinafter referred to as UTEFS), thru its
representative Uy Tiam, applied for and obtained credit
accommodations (letter of credit and trust receipt
accommodations) from the Metropolitan Bank and Trust
Company (hereinafter referred to as METROBANK) in the
sum of P700,000.00 (Original Records, p. 333). To secure the
aforementioned credit accommodations Norberto Uy and
Jacinto Uy Diño executed separate Continuing Suretyships
(Exhibits "E" and "F" respectively), dated 25 February 1977,
in favor of the latter. Under the aforesaid agreements,
Norberto Uy agreed to pay METROBANK any indebtedness
of UTEFS up to the aggregate sum of P300,000.00 while
Jacinto Uy Diño agreed to be bound up to the aggregate sum
of P800,000.00.
Having paid the obligation under the above letter of credit in
1977, UTEFS, through Uy Tiam, obtained another credit
accommodation from METROBANK in 1978, which credit
accommodation was fully settled before an irrevocable letter
of credit was applied for and obtained by the
abovementioned business entity in 1979 (September 8,
1987, tsn, pp. 14-15).
The Irrevocable Letter of Credit No. SN-Loc-309, dated
March 30, 1979, in the sum of P815, 600.00, covered UTEFS'
purchase of "8,000 Bags Planters Urea and 4,000 Bags
Planters 21-0-0." It was applied for and obtain by UTEFS
without the participation of Norberto Uy and Jacinto Uy Diño
as they did not sign the document denominated as
"Commercial Letter of Credit and Application." Also, they
were not asked to execute any suretyship to guarantee its
payment.
that the 1979 Letter of Credit has been opened and the
Continuing Suretyships separately executed in February,
1977 shall guarantee its payment (Appellees brief, pp. 2-
3; rollo, p. 28).
The 1979 letter of credit (Exhibit "B") was negotiated.
METROBANK paid Planters Products the amount of
P815,600.00 which payment was covered by a Bill of
Exchange (Exhibit "C"), dated 4 June 1979, in favor of
(Original Records, p. 331).
Pursuant to the above commercial transaction, UTEFS
executed and delivered to METROBANK and Trust Receipt
(Exh. "D"), dated 4 June 1979, whereby the former
acknowledged receipt in trust from the latter of the
aforementioned goods from Planters Products which
amounted to P815, 600.00. Being the entrusted, the former
agreed to deliver to METROBANK the entrusted goods in the
event of non-sale or, if sold, the proceeds of the sale thereof,
on or before September 2, 1979.
However, UTEFS did not acquiesce to the obligatory
stipulations in the trust receipt. As a consequence,
METROBANK sent letters to the said principal obligor and its
sureties, Norberto Uy and Jacinto Uy Diño, demanding
payment of the amount due. Informed of the amount due,
UTEFS made partial payments to the Bank which were
accepted by the latter.
Answering one of the demand letters, Diño, thru counsel,
denied his liability for the amount demanded and requested
METROBANK to send him copies of documents showing the
source of his liability. In its reply, the bank informed him
that the source of his liability is the Continuing Suretyship
which he executed on February 25, 1977.
As a rejoinder, Diño maintained that he cannot be held liable
for the 1979 credit accommodation because it is a new
obligation contracted without his participation. Besides, the
1977 credit accommodation which he guaranteed has been
fully paid.
Having sent the last demand letter to UTEFS, Diño and Uy
and finding resort to extrajudicial remedies to be futile,
METROBANK filed a complaint for collection of a sum of
money (P613,339.32, as of January 31, 1982, inclusive of
interest, commission penalty and bank charges) with a
prayer for the issuance of a writ of preliminary attachment,
against Uy Tiam, representative of UTEFS and impleaded
Diño and Uy as parties-defendants.
The court issued an order, dated 29 July 1983, granting the
attachment writ, which writ was returned unserved and
unsatisfied as defendant Uy Tiam was nowhere to be found
at his given address and his commercial enterprise was
already non-operational (Original Records, p. 37).
On April 11, 1984, Norberto Uy and Jacinto Uy Diño
(sureties-defendant herein) filed a motion to dismiss the
complaint on the ground of lack of cause of action. They
maintained that the obligation which they guaranteed in
1977 has been extinguished since it has already been paid in
the same year. Accordingly, the Continuing Suretyships
executed in 1977 cannot be availed of to secure Uy Tiam's
Letter of Credit obtained in 1979 because a guaranty cannot
exist without a valid obligation. It was further argued that
they can not be held liable for the obligation contracted in
1979 because they are not privies thereto as it was
contracted without their participation (Records, pp. 42-46).
On April 24, 1984, METROBANK filed its opposition to the
motion to dismiss. Invoking the terms and conditions
embodied in the comprehensive suretyships separately
executed by sureties-defendants, the bank argued that
sureties-movants bound themselves as solidary obligors of
defendant Uy Tiam to both existing obligations and future
ones. It relied on Article 2053 of the new Civil Code which
provides: "A guaranty may also be given as security for
future debts, the amount of which is not yet known; . . . ." It
was further asserted that the agreement was in full force
and effect at the time the letter of credit was obtained in
1979 as sureties-defendants did not exercise their right to
revoke it by giving notice to the bank. (Ibid., pp. 51-54).
Meanwhile, the resolution of the aforecited motion to
dismiss was held in abeyance pending the introduction of
evidence by the parties as per order dated February 21,
1986 (Ibid., p. 71).
Having been granted a period of fifteen (15) days from
receipt of the order dated March 7, 1986 within which to file
the answer, sureties-defendants filed their responsive
pleading which merely rehashed the arguments in their
motion to dismiss and maintained that they are entitled to
the benefit of excussion (Original Records, pp. 88-93).
On February 23, 1987, plaintiff filed a motion to dismiss the
complaint against defendant Uy Tiam on the ground that it
has no information as to the heirs or legal representatives of
the latter who died sometime in December, 1986, which
motion was granted on the following day (Ibid., pp. 180-
182).
After trial, . . . the court a quo, on December 2, 198, rendered
its judgment, a portion of which reads:
The evidence and the pleadings, thus, pose
the querry (sic):
Are the defendants Jacinto Uy Diñoand Norberto Uy liable
for the obligation contracted by Uy Tiam under the Letter of
Credit (Exh. B) issued on March 30, 1987 by virtue of the
Continuing Suretyships they executed on February 25,
1977?
Under the admitted proven facts, the Court finds that they
are not.
a) When Uy and Diño executed the continuing suretyships,
exhibits E and F, on February 25, 1977, Uy Tiam was
obligated to the plaintiff in the amount of P700,000.00 —
and this was the obligation which both obligation which
both defendants guaranteed to pay. Uy Tiam paid this 1977
obligation –– and such payment extinguished the obligation
they assumed as guarantors/sureties.
b) The 1979 Letter of Credit (Exh. B) is different from the
1977 Letter of Credit which covered the 1977 account of Uy
Tiam. Thus, the obligation under either is apart and distinct
from the obligation created in the other — as evidenced by
the fact that Uy Tiam had to apply anew for the 1979
transaction (Exh. A). And Diño and Uy, being strangers
thereto, cannot be answerable thereunder.
c) The plaintiff did not serve notice to the defendants Diño
and Uy when it extended to Credit — at least to inform them
that the continuing suretyships they executed on February
25, 1977 will be considered by the plaintiff to secure the
1979 transaction of Uy Tiam.
d) There is no sufficient and credible showing that Diño and
Uy were fully informed of the import of the Continuing
Suretyships when they affixed their signatures thereon ––
that they are thereby securing all future obligations which
Uy Tiam may contract the plaintiff. On the contrary, Diño
and Uy categorically testified that they signed the blank
forms in the office of Uy Tiam at 623 Asuncion Street,
Binondo, Manila, in obedience to the instruction of Uy Tiam,
their former employer. They denied having gone to the office
of the plaintiff to subscribe to the documents (October 1,
1987, tsn, pp. 5-7, 14; October 15, 1987, tsn, pp. 3-8, 13-16).
(Records, pp. 333-334). 3
xxx xxx xxx
In its Decision, the trial court decreed as follows:
PREMISES CONSIDERED, judgment is hereby rendered:
a) dismissing the COMPLAINT against JACINTO UY DIÑO and
NORBERTO UY;
b) ordering the plaintiff to pay to Diño and Uy the amount of
P6,000.00 as attorney's fees and expenses of litigation; and
c) denying all other claims of the parties for want of legal
and/or factual basis.
SO ORDERED. (Records, p. 336) 4
From the said Decision, the private respondent appealed to
the Court of Appeals. The case was docketed as CA-G.R. CV
No. 17724. In support thereof, it made the following
assignment of errors in its Brief:
I. THE LOWER COURT SERIOUSLY ERRED IN NOT FINDING
AND HOLDING THAT DEFENDANTS-APPELLEES JACINTO
UY DIÑO AND NORBERTO UY ARE SOLIDARILY LIABLE TO
PLAINTIFF-APPELLANT FOR THE OBLIGATION OF
DEFENDANT UY TIAM UNDER THE LETTER OF CREDIT
ISSUED ON MARCH 30, 1979 BY VIRTUE OF THE
CONTINUING SURETYSHIPS THEY EXECUTED ON
FEBRUARY 25, 1977.
II. THE LOWER COURT ERRED IN HOLDING THAT
PLAINTIFF-APPELLANT IS ANSWERABLE TO
DEFENDANTS-APPELLEES JACINTO UY DIÑO AND
NORBERTO UY FOR ATTORNEY'S FEES AND EXPENSES OF
LITIGATION. 5
On 22 June 1989, public respondent promulgated the
assailed Decision the dispositive portion of which reads:
WHEREFORE, premises considered, the judgment appealed
from is hereby REVERSED AND SET, ASIDE. In lieu thereof,
another one is rendered:
1) Ordering sureties-appellees Jacinto Uy Diño and Norberto
Uy to pay, jointly and severally, to appellant METROBANK
the amount of P2,397,883.68 which represents the amount
due as of July 17, 1987 inclusive of principal, interest and
charges;
2) Ordering sureties-appellees Jacinto Uy Diño and Norberto
Uy to pay, jointly and severally, appellant METROBANK the
accruing interest, fees and charges thereon from July 18,
1987 until the whole monetary obligation is paid; and
3) Ordering sureties-appellees Jacinto Uy Diño and Norberto
Uy to pay, jointly and severally, to plaintiff P20,000.00 as
attorney's fees.
With costs against appellees.
SO ORDERED. 6
In ruling for the herein private respondent (hereinafter
METROBANK), public respondent held that the Continuing
Suretyship Agreements separately executed by the
petitioners in 1977 were intended to guarantee payment of
Uy Tiam's outstanding as well as future obligations; each
suretyship arrangement was intended to remain in full force
and effect until METROBANK would have been notified of its
revocation. Since no such notice was given by the
petitioners, the suretyships are deemed outstanding and
hence, cover even the 1979 letter of credit issued by
METROBANK in favor of Uy Tiam.
Petitioners filed a motion to reconsider the foregoing
Decision. They questioned the public respondent's
construction of the suretyship agreements and its ruling
with respect to the extent of their liability thereunder. They
argued the even if the agreements were in full force and
effect when METROBANK granted Uy Tiam's application for
a letter of credit in 1979, the public respondent nonetheless
seriously erred in holding them liable for an amount over
and above their respective face values.
In its Resolution of 21 August 1989, public respondent
denied the motion:
. . . considering that the issues raised were substantially the
same grounds utilized by the lower court in rendering
judgment for defendants-appellees which We upon appeal
found and resolved to be untenable, thereby reversing and
setting aside said judgment and rendering another in favor
of plaintiff, and no new or fresh issues have been posited to
justify reversal of Our decision herein, . . . . 7
Hence, the instant petition which hinges on the issue of
whether or not the petitioners may be held liable as sureties
for the obligation contracted by Uy Tiam with METROBANK
on 30 May 1979 under and by virtue of the Continuing
Suretyship Agreements signed on 25 February 1977.
Petitioners vehemently deny such liability on the ground
that the Continuing Suretyship Agreements were
automatically extinguished upon payment of the principal
obligation secured thereby, i.e., the letter of credit obtained
by Uy Tiam in 1977. They further claim that they were not
advised by either METROBANK or Uy Tiam that the
Continuing Suretyship Agreements would stand as security
for the 1979 obligation. Moreover, it is posited that to
extend the application of such agreements to the 1979
obligation would amount to a violation of Article 2052 of the
Civil Code which expressly provides that a guaranty cannot
exist without a valid obligation. Petitioners further argue
that even granting, for the sake of argument, that the
Continuing Suretyship Agreements still subsisted and
thereby also secured the 1979 obligations incurred by Uy
Tiam, they cannot be held liable for more than what they
guaranteed to pay because it s axiomatic that the obligations
of a surety cannot extend beyond what is stipulated in the
agreement.
On 12 February 1990, this Court resolved to give due course
to the petition after considering the allegations, issues and
arguments adduced therein, the Comment thereon by the
private respondent and the Reply thereto by the petitioners;
the parties were required to submit their respective
Memoranda.
The issues presented for determination are quite simple:
1. Whether petitioners are liable as sureties
for the 1979 obligations of Uy Tiam to
METROBANK by virtue of the Continuing
Suretyship Agreements they separately
signed in 1977; and
2. On the assumption that they are, what is
the extent of their liabilities for said 1979
obligations.
Under the Civil Code, a guaranty may be given to secure
even future debts, the amount of which may not known at
the time the guaranty is
executed. 8 This is the basis for contracts denominated as
continuing guaranty or suretyship. A continuing guaranty is
one which is not limited to a single transaction, but which
contemplates a future course of dealing, covering a series of
transactions, generally for an indefinite time or until
revoked. It is prospective in its operation and is generally
intended to provide security with respect to future
transactions within certain limits, and contemplates a
succession of liabilities, for which, as they accrue, the
guarantor becomes liable.9 Otherwise stated, a continuing
guaranty is one which covers all transactions, including
those arising in the future, which are within the description
or contemplation of the contract, of guaranty, until the
expiration or termination thereof. 10 A guaranty shall be
construed as continuing when by the terms thereof it is
evident that the object is to give a standing credit to the
principal debtor to be used from time to time either
indefinitely or until a certain period, especially if the right to
recall the guaranty is expressly reserved. Hence, where the
contract of guaranty states that the same is to secure
advances to be made "from time to time" the guaranty will
be construed to be a continuing one. 11
In other jurisdictions, it has been held that the use of
particular words and expressions such as payment of "any
debt," "any indebtedness," "any deficiency," or "any sum," or
the guaranty of "any transaction" or money to be furnished
the principal debtor "at any time," or "on such time" that the
principal debtor may require, have been construed to
indicate a continuing guaranty. 12
In the case at bar, the pertinent portion of paragraph I of the
suretyship agreement executed by petitioner Uy provides
thus:
I. For and in consideration of any existing indebtedness to
the BANK of UY TIAM (hereinafter called the "Borrower"),
for the payment of which the SURETY is now obligated to
the BANK, either as guarantor or otherwise, and/or in order
to induce the BANK, in its discretion, at any time or from time
to time hereafter, to make loans or advances or to extend
credit in any other manner to, or at the request, or for the
account of the Borrower, either with or without security,
and/or to purchase or discount, or to make any loans or
advances evidence or secured by any notes, bills,
receivables, drafts, acceptances, checks, or other
instruments or evidences of indebtedness (all hereinafter
called "instruments") upon which the Borrower is or may
become liable as maker, endorser, acceptor, or otherwise,
the SURETY agrees to guarantee, and does hereby guarantee,
the punctual payment at maturity to the loans, advances
credits and/or other obligations hereinbefore referred to, and
also any and all other indebtedness of every kind which is now
or may hereafter become due or owing to the BANK by the
Borrower, together with any and all expenses which may be
incurred by the BANK in collecting all or any such
instruments or other indebtedness or obligations herein
before referred to, and/or in enforcing any rights hereunder,
and the SURETY also agrees that the BANK may make or
cause any and all such payments to be made strictly in
accordance with the terms and provisions of any
agreement(s) express or implied, which has (have) been or
may hereafter be made or entered into by the Borrow in
reference thereto, regardless of any law, regulation or
decree, unless the same is mandatory and non-waivable in
character, nor or hereafter in effect, which might in any
manner affect any of the terms or provisions of any such
agreement(s) or the Bank's rights with respect thereto as
against the Borrower, or cause or permit to be invoked any
alteration in the time, amount or manner of payment by the
Borrower of any such instruments, obligations or
indebtedness; provided, however, that the liability of the
SURETY hereunder shall not exceed at any one time the
aggregate principal sum of PESOS: THREE HUNDRED
THOUSAND ONLY (P300,000.00) (irrespective of the
currenc(ies) in which the obligations hereby guaranteed are
payable), and such interest as may accrue thereon either
before or after any maturity(ies) thereof and such expenses
as may be incurred by the BANK as referred to above. 13
Paragraph I of the Continuing Suretyship Agreement
executed by petitioner Diño contains identical provisions
except with respect to the guaranteed aggregate principal
amount which is EIGHT THOUSAND PESOS (P800,000.00). 14
Paragraph IV of both agreements stipulate that:
VI. This is a continuing guaranty and shall remain in full force
and effect until written notice shall have been received by the
BANK that it has been revoked by the SURETY, but any such
notice shall not release the SURETY, from any liability as to
any instruments, loans, advances or other obligations
hereby guaranteed, which may be held by the BANK, or in
which the BANK may have any interest at the time of the
receipt (sic) of such notice. No act or omission of any kind on
the BANK'S part in the premises shall in any event affect or
impair this guaranty, nor shall same (sic) be affected by any
change which may arise by reason of the death of the
SURETY, or of any partner(s) of the SURETY, or of the
Borrower, or of the accession to any such partnership of any
one or more new partners. 15
The foregoing stipulations unequivocally reveal that the
suretyship agreement in the case at bar are continuing in
nature. Petitioners do not deny this; in fact, they candidly
admitted it. Neither have they denied the fact that they had
not revoked the suretyship agreements. Accordingly, as
correctly held by the public respondent:
Undoubtedly, the purpose of the execution of the Continuing
Suretyships was to induce appellant to grant any application
for credit accommodation (letter of credit/trust receipt)
UTEFS may desire to obtain from appellant bank. By its
terms, each suretyship is a continuing one which shall
remain in full force and effect until the bank is notified of its
revocation.
xxx xxx xxx
When the Irrevocable Letter of Credit No. SN-Loc-309 was
obtained from appellant bank, for the purpose of obtaining
goods (covered by a trust receipt) from Planters Products,
the continuing suretyships were in full force and effect.
Hence, even if sureties-appellees did not sign the
"Commercial Letter of Credit and Application, they are still
liable as the credit accommodation (letter of credit/trust
receipt) was covered by the said suretyships. What makes
them liable thereunder is the condition which provides that
the Borrower "is or may become liable as maker, endorser,
acceptor or otherwise." And since UTEFS which (sic) was
liable as principal obligor for having failed to fulfill the
obligatory stipulations in the trust receipt, they as insurers
of its obligation, are liable thereunder. 16
Petitioners maintain, however, that their Continuing
Suretyship Agreements cannot be made applicable to the
1979 obligation because the latter was not yet in existence
when the agreements were executed in 1977; under Article
2052 of the Civil Code, a guaranty "cannot exist without a
valid obligation." We cannot agree. First of all, the
succeeding article provides that "[a] guaranty may also be
given as security for future debts, the amount of which is not
yet known." Secondly, Article 2052 speaks about a valid
obligation, as distinguished from a void obligation, and not
an existing or current obligation. This distinction is made
clearer in the second paragraph of Article 2052 which reads:
Nevertheless, a guaranty may be
constituted to guarantee the performance
of a voidable or an unenforceable contract.
It may also guarantee a natural obligation.
As to the amount of their liability under the Continuing
Suretyship Agreements, petitioners contend that the public
respondent gravely erred in finding them liable for more
than the amount specified in their respective agreements, to
wit: (a) P800,000.00 for petitioner Diño and (b)
P300,000.00 for petitioner Uy.
The limit of the petitioners respective liabilities must be
determined from the suretyship agreement each had signed.
It is undoubtedly true that the law looks upon the contract of
suretyship with a jealous eye, and the rule is settled that the
obligation of the surety cannot be extended by implication
beyond its specified limits. To the extent, and in the manner,
and under the circumstances pointed out in his obligation,
he is bound, and no farther. 17
Indeed, the Continuing Suretyship Agreements signed by
petitioner Diño and petitioner Uy fix the aggregate amount
of their liability, at any given time, at P800,000.00 and
P300,000.00, respectively. The law is clear that a guarantor
may bond himself for less, but not for more than the
principal debtor, both as regards the amount and the
onerous nature of the conditions. 18 In the case at bar, both
agreements provide for liability for interest and expenses, to
wit:
. . . and such interest as may accrue thereon
either before or after any maturity(ies)
thereof and such expenses as may be
incurred by the BANK referred to above.19
They further provide that:
In the event of judicial proceedings being instituted by the
BANK against the SURETY to enforce any of the terms and
conditions of this undertaking, the SURETY further agrees to
pay the BANK a reasonable compensation for and as
attorney's fees and costs of collection, which shall not in any
event be less than ten per cent (10%) of the amount due (the
same to be due and payable irrespective of whether the case
is settled judicially or extrajudicially). 20
Thus, by express mandate of the Continuing Suretyship
Agreements which they had signed, petitioners separately
bound themselves to pay interest, expenses, attorney's fees
and costs. The last two items are pegged at not less than ten
percent (10%) of the amount due.
Even without such stipulations, the petitioners would,
nevertheless, be liable for the interest and judicial costs.
Article 2055 of the Civil Code provides: 21
Art. 2055. A guaranty is not presumed; it must be express
and cannot extend to more than what is stipulated therein.
If it be simple or indefinite, it shall comprise not only the
principal obligation, but also all its accessories, including the
judicial costs, provided with respect to the latter, that the
guarantor shall only be liable for those costs incurred after
he has been judicially required to pay.
Interest and damages are included in the term accessories.
However, such interest should run only from the date when
the complaint was filed in court. Even attorney's fees may be
imposed whenever appropriate, pursuant to Article 2208 of
the Civil Code. Thus, in Plaridel Surety & Insurance Co.,
Inc. vs. P.L. Galang Machinery Co., Inc., 22 this Court held:
Petitioner objects to the payment of
interest and attorney's fees because: (1)
they were not mentioned in the bond; and
(2) the surety would become liable
for more than the amount stated in the
contract of suretyship.
xxx xxx xxx
The objection has to be overruled, because as far back as the
year 1922 this Court held in Tagawa vs. Aldanese, 43 Phil.
852, that creditors suing on a suretyship bond may recover
from the surety as part of their damages, interest at the legal
rate even if the surety would thereby become liable to pay
more than the total amount stipulated in the bond. The
theory is that interest is allowed only by way of damages for
delay upon the part of the sureties in making payment after
they should have done so. In some states, the interest has
been charged from the date of the interest has been charged
from the date of the judgment of the appellate court. In this
jurisdiction, we rather prefer to follow the general practice,
which is to order that interest begin to run from the date
when the complaint was filed in court, . . .
Such theory aligned with sec. 510 of the
Code of Civil Procedure which was
subsequently recognized in the Rules of
Court (Rule 53, section 6) and with Article
 1108 of the Civil Code (now Art. 2209 of the
New Civil Code).
In other words the surety is made to pay interest, not by
reason of the contract, but by reason of its failure to pay
when demanded and for having compelled the plaintiff to
resort to the courts to obtain payment. It should be observed
that interest does not run from the time the obligation
became due, but from the filing of the complaint.
As to attorney's fees. Before the enactment of the New Civil
Code, successful litigants could not recover attorney's fees
as part of the damages they suffered by reason of the
litigation. Even if the party paid thousands of pesos to his
lawyers, he could not charge the amount to his opponent
(Tan Ti vs. Alvear, 26 Phil. 566).
However the New Civil Code permits recovery of attorney's
fees in eleven cases enumerated in Article 2208, among
them, "where the court deems it just and equitable that
attorney's (sic) fees and expenses of litigation should be
recovered" or "when the defendant acted in gross and
evident bad faith in refusing to satisfy the plaintiff's plainly
valid, just and demandable claim." This gives the courts
discretion in apportioning attorney's fees.
The records do not reveal the exact amount of the unpaid
portion of the principal obligation of Uy Tiam to
MERTOBANK under Irrevocable Letter of Credit No. SN-Loc-
309 dated 30 March 1979. In referring to the last demand
letter to Mr. Uy Tiam and the complaint filed in Civil Case No.
82-9303, the public respondent mentions the amount of
"P613,339.32, as of January 31, 1982, inclusive of interest
commission penalty and bank charges." 23This is the same
amount stated by METROBANK in its
Memorandum. 24 However, in summarizing Uy Tiam's
outstanding obligation as of 17 July 1987, public respondent
states:
Hence, they are jointly and severally liable to appellant
METROBANK of UTEFS' outstanding obligation in the sum of
P2,397,883.68 (as of July 17, 1987) — P651,092.82
representing the principal amount, P825,133.54, for past
due interest (5-31-82 to 7-17-87) and P921,657.32, for
penalty charges at 12%per annum (5-31-82 to 7-17-87) as
shown in the Statement of Account (Exhibit I). 25
Since the complaint was filed on 18 May 1982, it is obvious
that on that date, the outstanding principal obligation of Uy
Tiam, secured by the petitioners' Continuing Suretyship
Agreements, was less than P613,339.32. Such amount may
be fully covered by the Continuing Suretyship Agreement
executed by petitioner Diño which stipulates an aggregate
principal sum of not exceeding P800,000.00, and partly
covered by that of petitioner Uy which pegs his maximum
liability at P300,000.00.
Consequently, the judgment of the public respondent shall
have to be modified to conform to the foregoing exposition,
to which extent the instant petition is impressed with partial
merit.
WHEREFORE, the petition is partly GRANTED, but only
insofar as the challenged decision has to be modified with
respect to the extend of petitioners' liability. As modified,
petitioners JACINTO UY DIÑO and NORBERTO UY are
hereby declared liable for and are ordered to pay, up to the
maximum limit only of their respective Continuing
Suretyship Agreement, the remaining unpaid balance of the
principal obligation of UY TIAM or UY TIAM ENTERPRISES &
FREIGHT SERVICES under Irrevocable Letter of Credit No.
SN-Loc-309, dated 30 March 1979, together with the
interest due thereon at the legal rate commencing from the
date of the filing of the complaint in Civil Case No. 82-9303
with Branch 45 of the Regional Trial Court of Manila, as well
as the adjudged attorney's fees and costs.
All other dispositions in the dispositive portion of the
challenged decision not inconsistent with the above are
affirmed.
SO ORDERED.
[G. R. No. 135462. December 7, 2001]
SOUTH CITY HOMES, INC., FORTUNE MOTORS (PHILS.),
PALAWAN LUMBER MANUFACTURING
CORPORATION, petitioners, vs. BA FINANCE
CORPORATION, respondent.
DECISION
PARDO, J.:
The Case
The case is a petition to set aside the decision[1] of the
Court of Appeals, the dispositive portion of which reads:
WHEREFORE, premises considered, the appealed Decision
(as amended by that Order of July 22, 1992) of the lower
court in Civil Case No. 21944 is hereby AFFIRMED with the
MODIFICATION that defendant-appellee South City Homes,
Inc. is hereby ordered to pay, jointly and severally, with
Fortune Motors Corporation, Palawan Lumber
Manufacturing Corporation and Joseph L. G. Chua, the
outstanding amounts due under the six (6) drafts and trust
receipts, with interest thereon at the legal rate from the date
of filing of this case until said amounts shall have been fully
paid, as follows:
Date of Draft Amount Balance Due
July 26, 1983 P 244,269.00 P 198,659.52
July 27, 1983 967,765.50 324,767.41
July 28, 1983 1,138,941.00 1,138,941.00
August 2, 1983 244,269.00 244,269.00
August 5, 1983 275,079.00 275,079.60
August 8, 1983 475,046.10 475,046.10
and the attorneys fees and costs of suit.
SO ORDERED.[2]
The Facts
The facts, as found by the Court of Appeals, are as
follows:
The present controversy relates to the rights of an assignee
(financing company) of drafts and trust receipts backed up
by sureties, in the event of default by the debtor (car dealer)
to whom the assignor creditor (car manufacturer) sold and
delivered motor vehicles for resale. A consistent ruling on
these cases is hereby reiterated: that a surety may secure
obligations incurred subsequent to the execution of the
surety contract.
Prior to the transactions covered by the subject drafts and
trust receipts, defendant-appellant Fortune Motors
Corporation (Phils.) has been availing of the credit facilities
of plaintiff-appellant BA Finance Corporation. On January 17,
1983, Joseph L. G. Chua, President of Fortune Motors
Corporation, executed in favor of plaintiff-appellant a
Continuing Suretyship Agreement, in which he jointly and
severally unconditionally guaranteed the full, faithful and
prompt payment and discharge of any and all indebtedness
of Fortune Motors Corporation to BA Finance Corporation
(Folder of Exhibits, pp. 21-22).
On February 3, 1983, Palawan Lumber Manufacturing
Corporation represented by Joseph L.G. Chua, George D. Tan,
Edgar C. Rodrigueza and Joselito C. Baltazar, executed in
favor of plaintiff-appellant a Continuing Suretyship
Agreement in which, said corporation jointly and severally
unconditionally guaranteed the full, faithful and prompt
payment and discharge of any and all indebtedness of
Fortune Motors Corporation to BA Finance Corporation
(Folder of Exhibits, pp. 19-20). On the same date, South City
Homes, Inc. represented by Edgar C. Rodrigueza and Aurelio
F. Tablante, likewise executed a Continuing Suretyship
Agreement in which said corporation jointly and severally
unconditionally guaranteed the full, faithful and prompt
payment and discharge of any and all indebtedness of
Fortune Motors Corporation to BA Finance Corporation
(Folder of Exhibits, pp. 17-18).
Subsequently, Canlubang Automotive Resources
Corporation (CARCO) drew six (6) Drafts in its own favor,
payable thirty (30) days after sight, charged to the account
of Fortune Motors Corporation, as follows:
Date of Draft Amount
July 26, 1983 P 244,269.00
July 27, 1983 967,765.50
July 28, 1983 1,138,941.00
August 2, 1983 244,269.00
August 5, 1983 275,079.00
August 8, 1983 475,046.10
(Folder of Exhibits, pp. 1, 4, 7, 8, 11 and 14).
Fortune Motors Corporation thereafter executed trust
receipts covering the motor vehicles delivered to it by
CARCO under which it agreed to remit to the Entruster
(CARCO) the proceeds of any sale and immediately
surrender the remaining unsold vehicles (Folder of Exhibits,
pp. 2, 5, 7-A, 9, 12 and 15). The drafts and trust receipts
were assigned to plaintiff-appellant, under Deeds of
Assignment executed by CARCO (Folder of Exhibits, pp. 3, 6,
7-B, 10, 13 and 16).
Upon failure of the defendant-appellant Fortune Motors
Corporation to pay the amounts due under the drafts and to
remit the proceeds of motor vehicles sold or to return those
remaining unsold in accordance with the terms of the trust
receipt agreements, BA Finance Corporation sent demand
letter to Edgar C. Rodrigueza, South City Homes, Inc., Aurelio
Tablante, Palawan Lumber Manufacturing Corporation,
Joseph L. G. Chua, George D. Tan and Joselito C. Baltazar
(Folder of Exhibits, pp. 29-37). Since the defendants-
appellants failed to settle their outstanding account with
plaintiff-appellant, the latter filed on December 22, 1983 a
complaint for a sum of money with prayer for preliminary
attachment, with the Regional Trial Court of Manila, Branch
1, which was docketed as Civil Case No. 83-21944 (Record,
pp. 1-12). Plaintiff-appellant filed a surety bond in the
amount of P3,391,546.56 and accordingly, Judge Rosalio C.
Segundo ordered the issuance of a writ of preliminary
attachment on January 3, 1984 (Record, pp. 37-47).
Defendants Fortune Motors Corporation, South City Homes,
Inc., Edgar C. Rodrigueza, Aurelio F. Tablante, Palawan
Lumber Manufacturing Corporation, Joseph L. G. Chua,
George D. Tan and Joselito C. Baltazar filed a Motion to
Discharge Attachment, which was opposed by plaintiff-
appellant (Record, pp. 49-56). In an Order dated January 11,
1984, Judge Segundo dissolved the writ of attachment
except as against defendant Fortune Motors Corporation
and set the said incident for hearing (Record, p. 57). On
January 19, 1984, the defendants filed a Motion to
Dismiss. Therein, they alleged that conventional subrogation
effected a novation without the consent of the debtor
(Fortune Motors Corporation) and thereby extinguished the
latters liability; that pursuant to the trust receipt
transaction, it was premature under P. D. No. 115 to
immediately file a complaint for a sum of money as the
remedy of the entruster is an action for specific
performance; that the suretyship agreements are null and
void for having been entered into without an existing
principal obligation; and that being such sureties does not
make them solidary debtors (Record, pp. 58-64).
After due hearing, the court denied the motion to discharge
attachment with respect to defendant Fortune Motors
Corporation as well as the motion to dismiss by the
defendants (Record, pp. 68 and 87). In their Answer,
defendants stressed that their obligations to the creditor
(CARCO) was extinguished by the assignment of the drafts
and trust receipts to plaintiff-appellant without their
knowledge and consent, and pursuant to legal provision on
conventional subrogation a novation was effected, thereby
extinguishing the liability of the sureties; that plaintiff-
appellant failed to immediately demand the return of the
goods under the trust receipt agreements or exercise the
courses of action by the entruster as provided for under P. D.
No. 115; and that at the time the suretyship agreements
were entered into, there were no principal obligations, thus
rendering them null and void. A counterclaim for the award
of actual, moral and exemplary damages was prayed for by
defendants (Record, pp. 91-110).
During the pre-trial, efforts to reach a compromise was not
successful, and in view of the retirement of Judge Rosalio C.
Segundo of RTC Manila, Branch 1, the case was-re-raffled off
to Branch XXXIII, presided over by Judge Felix V. Barbers
(Record, pp. 155-160).
Fortune Motors Corporation filed a motion to lift the writ of
attachment covering three (3) vehicles described in the
Third-Party Claim filed with the Office of Deputy Sheriff
Jorge C. Victorino (RTC, Branch 1) by Fortune Equipment,
Inc. which was opposed by plaintiff-appellant (Record, pp.
173-181). On June 15, 1984, Deputy Sheriff Jorge C.
Victorino issued a Notice of Levy Upon Personal Properties
Pursuant to Order of Attachment which was duly served on
defendant Fortune Motors Corporation (Record, pp. 191-
199). In an Order dated April 28, 1986, the
court a quo denied the motion to lift the writ of attachment
on three (3) vehicles described in the Third-Party Claim filed
by Fortune Equipment Inc. (Record, p. 207). On motion of
their respective counsel, the trial court granted the parties
time to sit down and appraise the machineries and spare
parts owned by defendant Fortune Motors Corporation
which are now in the possession of plaintiff corporation by
virtue of the attachment. A series of conferences was
allowed by the court, as means toward possible compromise
agreement. In an Order dated June 2, 1987, the case was
returned to Branch I, now presided over by Judge Rebecca G.
Salvador (Record, p. 237).The pre-trial period was
terminated and the case was set for trial on the merits
(Record, p. 259).
Acting on the motion to sell levied properties filed by
defendant George D. Tan, the trial court ordered the public
sale of the attached properties (Record, p. 406). The court
likewise allowed the complaint-in-intervention filed by
Fortune Equipment Inc. and South Fortune Motors
Corporation who claimed ownership of four (4) vehicles
earlier seized and attached (Record, p. 471-475). Plaintiff
corporation admitted the allegations contained in the
complaint-in-intervention only with respect to one truck so
attached but denied the rest of intervenors allegations
(Record, pp. 479-482). Thereafter, the parties submitted
their respective pre-trial briefs on the complaint-in-
intervention, and after the submission of evidence thereon,
the case was submitted for decision (Record, pp. 573-577).
On November 25, 1991, the lower court rendered its
judgment, the dispositive portion of which reads as follows:
WHEREFORE, judgment is hereby rendered:
1. Ordering defendants Fortune Motors, Palawan Lumber
Manufacturing Corporation and Joseph Chua, jointly and
severally to pay the plaintiff on the July 27, 1983 Draft, the
sum of P324,767.41 with the interest thereon at the legal
rate from the date of filing of this case, December 21, 1983
until the amount shall have been fully paid;
2. Ordering defendants Fortune Motors, Palawan
Manufacturing Corporation and Joseph Chua jointly and
severally to pay to the plaintiff on the July 26, 1983 Draft,
the sum of P198,659.52 with interest thereon at the legal
rate from the date of filing of this case, until the amount shall
have been fully paid;
3. Ordering defendant Fortune Motors, Palawan
Manufacturing Corporation and Joseph Chua jointly and
severally to pay to the plaintiff on the July 28, 1983 Draft the
sum of P1,138,941.00 with interest thereon at the legal rate
from the date of filing of this case, until the amount shall
have been fully paid;
4. Ordering defendants Fortune Motors, Palawan Lumber
Manufacturing Corporation and Joseph Chua jointly and
severally to pay to the plaintiff on the August 2, 1983 Draft,
the sum of P244,269.00 with interest thereon at the legal
rate from the date of filing of this case, until the amount shall
have been fully paid;
5. Ordering defendants Fortune Motors, Palawan Lumber
Manufacturing Corporation and Joseph Chua jointly and
severally to pay to the plaintiff on the August 5, 1983 Draft
the sum of P275,079.60 with interest thereon at the legal
rate from the date of the filing of this case, until the amount
shall have been fully paid;
6. Ordering defendants Fortune Motors, Palawan Lumber
Manufacturing Corporation and Joseph Chua jointly and
severally to pay to the plaintiff on the August 8, 1983 Draft
the sum of P475,046.10 with interest thereon at legal rate
from the date of the filing of this case, until the amount shall
been fully paid;
7. Ordering defendant Fortune Motors, Palawan Lumber
Manufacturing Corporation and Joseph Chua jointly and
severally to pay the sum of P300,000.00 as attorneys fees
and the costs of this suit;
8. Dismissing plaintiffs complaint against South City Homes,
Aurelio Tablante, Joselito Baltazar, George Tan and Edgar
Rodrigueza and the latters counterclaim for lack of basis;
9. Ordering Deputy Sheriff Jorge Victorino to return to
Intervenor Fortune Equipment the Mitsubishi Truck Canter
with Motor No. 310913 and Chassis No. 513234;
10. Dismissing the complaint-in-intervention in so far as the
three other vehicles mentioned in the complaint-in-
intervention are concerned for lack of cause of action;
11. Dismissing the complaint-in-intervention against
Fortune Motor for lack of basis; and
12. Ordering the parties-in-intervention to bear their
respective damages, attorneys fees and the costs of the suit.
Upon execution, the sheriff may cause the judgment to be
satisfied out of the properties attached with the exception of
one (1) unit Mitsubishi Truck Canter with Motor No. 310913
and Chassis No. 513234, if they be sufficient for that
purpose. The officer shall make a return in writing to the
court of his proceedings. Whenever the judgment shall have
been paid, the officer, upon reasonable demand must return
to the judgment debtor the attached properties remaining in
his hand, and any of the proceeds of the properties not
applied to the judgment.
SO ORDERED.
On two (2) separate motions for reconsideration, one filed
by plaintiffs-intervenors dated December 18, 1991 and the
other by plaintiff dated December 26, 1991, the trial court
issued an Order dated July 22, 1992 amending its Decision
dated November 25, 1991. Specifically, said Order amended
paragraphs 9 and 10 thereof and deleted the last paragraph
of the said Decision.
Paragraphs 9 and 10 now read:
9. Ordering Deputy Sheriff Jorge C. Victorino to return to
Intervenor Fortune Equipment, Inc. the Mitsubishi Truck
Canter with Motor No. 310913 and Chassis No.
513234; Mitsubishi Truck Canter with Motor No. 4D30-
313012 and Chassis No. 513696, and Fuso Truck with Motor
No. 006769 and Chassis No. 20756, and to Intervenor South
Fortune Motors Corporation the Cimaron Jeepney with Plate
No. NET-849;
10. Ordering the plaintiff, in the event the motor vehicles
could no longer be returned to pay the estimated value
thereof, i.e., P750,000.00 for the three trucks, and P5,000.00
for the Cimaron Jeepney, to the plaintiffs-intervenors.
x x x (Records, pp. 664-665)
Plaintiffs BA Finance Corporation, defendants Fortune
Motors Corp. (Phils.) and Palawan Lumber Manufacturing
Corporation, and intervenors Fortune Equipment and South
Fortune Motors, interposed the present appeal and filed
their respective Briefs.[3]
On September 8, 1998, the Court of Appeals
promulgated a decision, the dispositive portion of which is
quoted in the opening paragraph of this decision.
Hence, this appeal.[4]
The Issues
The issues presented are: (1) whether the suretyship
agreement is valid; (2) whether there was a novation of the
obligation so as to extinguish the liability of the sureties; and
(3) whether respondent BAFC has a valid cause of action for
a sum of money following the drafts and trust receipts
transactions.[5]
The Courts Ruling
On the first issue, petitioners assert that the suretyship
agreement they signed is void because there was no
principal obligation at the time of signing as the principal
obligation was signed six (6) months later. The Civil Code,
however, allows a suretyship agreement to secure future
loans even if the amount is not yet known.
Article 2053 of the Civil Code provides that:
Art. 2053 A guaranty may also be given as security for future
debts, the amount of which is not yet known. x x x
In Fortune Motors (Phils.) Corporation v. Court of
Appeals,[6] we held:
To fund their acquisition of new vehicles (which are later
retailed or resold to the general public), car dealers
normally enter into wholesale automotive financing
schemes whereby vehicles are delivered by the
manufacturer or assembler on the strength of trust receipts
or drafts executed by the car dealers, which are backed up
by sureties. These trust receipts or drafts are then assigned
and/or discounted by the manufacturer to/with financing
companies, which assume payment of the vehicles but with
the corresponding right to collect such payment from the car
dealers and/or the sureties. In this manner, car dealers are
able to secure delivery of their stock-in-trade without
having to pay cash therefor; manufacturers get paid without
any receivables/collection problems; and financing
companies earn their margins with the assurance of
payment not only from the dealers but also from the
sureties. When the vehicles are eventually resold, the car
dealers are supposed to pay the financing companies -- and
the business goes merrily on. However, in the event the car
dealer defaults in paying the financing company, may the
surety escape liability on the legal ground that the
obligations were incurred subsequent to the execution of the
surety contract?
x x x Of course, a surety is not bound under any particular
principal obligation until that principal obligation is
born. But there is no theoretical or doctrinal difficulty
inherent in saying that the suretyship agreement itself is
valid and binding even before the principal obligation
intended to be secured thereby is born, any more than there
would be in saying that obligations which are subject to a
condition precedent are valid and binding before the
occurrence of the condition precedent.
Comprehensive or continuing surety agreements are in fact
quite commonplace in present day financial and commercial
practice. A bank or financing company which anticipates
entering into a series of credit transactions with a particular
company, commonly requires the projected principal debtor
to execute a continuing surety agreement along with its
sureties. By executing such an agreement, the principal
places itself in a position to enter into the projected series of
transactions with its creditor; with such suretyship
agreement, there would be no need to execute a separate
surety contract or bond for each financing or credit
accommodation extended to the principal debtor.
Petitioners next posit (second issue) that a novation, as
a result of the assignment of the drafts and trust receipts by
the creditor (CARCO) in favor of respondent BAFC without
the consent of the principal debtor (Fortune Motors),
extinguished their liabilities.
An assignment of credit is an agreement by virtue of
which the owner of a credit, known as the assignor, by a
legal cause, such as sale, dacion en pago, exchange or
donation, and without the consent of the debtor, transfers
his credit and accessory rights to another, known as the
assignee, who acquires the power to enforce it to the same
extent as the assignor could enforce it against the
debtor.[7] As a consequence, the third party steps into the
shoes of the original creditor as subrogee of the
latter. Petitioners obligations were not extinguished. Thus:
x x x Moreover, in assignment, the debtors consent is not
essential for the validity of the assignment (Art. 1624 in
relation to Art. 1475, Civil Code), his knowledge thereof
affecting only the validity of the payment he might make
(Article 1626, Civil Code).
Article 1626 also shows that payment of an obligation which
is already existing does not depend on the consent of the
debtor. It, in effect, mandates that such payment of the
existing obligation shall already be made to the new creditor
from the time the debtor acquires knowledge of the
assignment of the obligation.
The law is clear that the debtor had the obligation to pay and
should have paid from the date of notice whether or not he
consented.
We have ruled in Sison & Sison vs. Yap Tico and Avancea, 37
Phil. 587 [1918] that definitely, consent is not necessary in
order that assignment may fully produce legal effects. Hence,
the duty to pay does not depend on the consent of the
debtor. Otherwise, all creditors would be prevented from
assigning their credits because of the possibility of the
debtors refusal to give consent.
What the law requires in an assignment of credit is not the
consent of the debtor but merely notice to him. A creditor
may, therefore, validly assign his credit and its accessories
without the debtors consent (National Investment and
Development Co. v. De Los Angeles, 40 SCRA 489
[1971]. The purpose of the notice is only to inform that
debtor from the date of the assignment, payment should be
made to the assignee and not to the original creditor.[8]
Petitioners finally posit (third issue) that as an
entruster, respondent BAFC must first demand the return of
the unsold vehicles from Fortune Motors Corporation,
pursuant to the terms of the trust receipts.Having failed to
do so, petitioners had no cause of action whatsoever against
Fortune Motors Corporation and the action for collection of
sum of money was, therefore, premature. A trust receipt is a
security transaction intended to aid in financing importers
and retail dealers who do not have sufficient funds or
resources to finance the importation or purchase of
merchandise, and who may not be able to acquire credit
except through utilization, as collateral, of the merchandise
imported or purchased.[9] In the event of default by the
entrustee on his obligations under the trust receipt
agreement, it is not absolutely necessary that the entruster
cancel the trust and take possession of the goods to be able
to enforce his rights thereunder. We ruled:
x x x Significantly, the law uses the word may in granting to
the entruster the right to cancel the trust and take
possession of the goods. Consequently, petitioner has the
discretion to avail of such right or seek any alternative
action, such as a third party claim or a separate civil action
which it deems best to protect its right, at any time upon
default or failure of the entrustee to comply with any of the
terms and conditions of the trust agreement.[10]
The Judgment
WHEREFORE, the appealed decision is hereby
AFFIRMED. However, the award of attorneys fees is deleted.
No costs.
SO ORDERED.
[G.R. No. 103066. April 25, 1996]
WILLEX PLASTIC INDUSTRIES,
CORPORATION, petitioner, vs. HON. COURT OF
APPEALS and INTERNATIONAL CORPORATE
BANK, respondents.
SYLLABUS
1. REMEDIAL LAW; EVIDENCE; PAROL EVIDENCE RULE;
FAILURE TO OBJECT TO THE PRESENTATION OF
PAROL EVIDENCE CONSTITUTES A WAIVER
THEREOF. - It has been held that explanatory evidence
may be received to show the circumstances under
which a document has been made and to what debt it
relates. At all events, Willex Plastic cannot now claim
that its liability is limited to any amount which
Interbank, as creditor, might give directly to Inter-
Resin Industrial as debtor because, by failing to object
to the parol evidence presented, Willex Plastic waived
the protection of the parol evidence rule.
2. ID.; ID.; FINDINGS OF FACT OF THE TRIAL COURT;
RULE; APPLICABLE IN CASE AT BAR. The trial court
found that it was to secure the guarantee made by
plaintiff of the credit accommodation granted to
defendant IRIC [Inter-Resin Industrial] by Manilabank,
[that] the plaintiff required defendant IRIC to execute a
chattel mortgage in its favor and a Continuing Guaranty
which was signed by the defendant Willex Plastic
Industries Corporation. Similarly, the Court of Appeals
found it to be an undisputed fact that to secure the
 guarantee undertaken by plaintiff-appellee [Interbank]
of the credit accommodation granted to Inter-Resin
Industrial by Manilabank, plaintiff-appellee required
defendant-appellant to sign a Continuing Guaranty.
These factual findings of the trial court and of the Court
of Appeals are binding on us not only because of the
rule that on appeal to the Supreme Court such findings
are entitled to great weight and respect but also
because our own examination of the record of the trial
court confirms these findings of the two courts.
3. CIVIL LAW; SPECIAL CONTRACTS; GUARANTY; THE
CONSIDERATION NECESSARY TO SUPPORT A
SURETY OBLIGATION NEED NOT PASS DIRECTLY TO
THE SURETY, A CONSIDERATION MOVING TO THE
PRINCIPAL ALONE IS SUFFICIENT. - Willex Plastic
argues that the Continuing Guaranty, being an
accessory contract, cannot legally exist because of the
absence of a valid principal obligation. Its contention is
based on the fact that it is not a party either to the
Continuing Surety Agreement or to the loan agreement
between Manilabank and Inter-Resin Industrial. Put in
another way the consideration necessary to support a
surety obligation need not pass directly to the surety, a
consideration moving to the principal alone being
sufficient. For a guarantor or surety is bound by the
same consideration that makes the contract effective
between the principal parties thereto. . . . It is never
necessary that a guarantor or surety should receive any
part or benefit, if such there be, accruing to his
principal.
4. ID.; ID.; ID.; ALTHOUGH A CONTRACT OF SURETY IS
ORDINARILY NOT TO BE CONSTRUED AS
RETROSPECTIVE, IN THE END THE INTENTION OF
THE PARTIES AS REVEALED BY THE EVIDENCE IS
CONTROLLING. - Willex Plastic contends that the
Continuing Guaranty cannot be retroactively applied so
as to secure the payments made by Interbank under the
two Continuing Surety Agreements. Willex Plastic
invokes the ruling in El Vencedor v. Canlas (44 Phil. 699
[1923]) and Dio v. Court of Appeals (216 SCRA 9
[1992]) in support of its contention that a contract of
suretyship or guaranty should be applied
prospectively. The cases cited are, however,
distinguishable from the present case. In El Vencedor v.
Canlas we held that a contract of suretyship is not
retrospective and no liability attaches for defaults
occurring before it is entered into unless an intent to be
so liable is indicated.There we found nothing in the
contract to show that the parties intended the surety
bonds to answer for the debts contracted previous to
the execution of the bonds. In contrast, in this case, the
parties to the Continuing Guaranty clearly provided
that the guaranty would cover sums obtained and/or to
be obtained by Inter-Resin Industrial from Interbank.
On the other hand, in Dio v. Court of Appeals the issue
was whether the sureties could be held liable for an
obligation contracted after the execution of the
continuing surety agreement. It was held that by its
very nature a continuing suretyship contemplates a
future course of dealing. It is prospective in its
operation and is generally intended to provide security
with respect to future transactions. By no means,
however, was it meant in that case that in all instances
a contract of guaranty or suretyship should be
prospective in application. Indeed, as we also held
in Bank of the Philippine Islands v. Foerster, (49 Phil.
843 [1926]) although a contract of suretyship is
ordinarily not to be construed as retrospective, in the
end the intention of the parties as revealed by the
evidence is controlling. What was said there applies
mutatis mutandis to the case at bar: In our opinion, the
appealed judgment is erroneous. It is very true that
bonds or other contracts of suretyship are ordinarily
not to be construed as retrospective, but that rule must
yield to the intention of the contracting parties as
revealed by the evidence, and does not interfere with
the use of the ordinary tests and canons of
interpretation which apply in regard to other
contracts. In the present case the circumstances so
clearly indicate that the bond given by Echevarria was
intended to cover all of the indebtedness of the
Arrocera upon its current account with the plaintiff
Bank that we cannot possibly adopt the view of the
court below in regard to the effect of the bond.
APPEARANCES OF COUNSEL
Tangle-Chua, Cruz & Aquino for petitioner.
Fe B. Macalino & Associates for respondent Interbank.
DECISION
MENDOZA, J.:
This is a petition for review on certiorari of the
decision[1] of the Court of Appeals in C.A.-G.R. CV No. 19094,
affirming the decision of the Regional Trial Court of the
National Capital Judicial Region, Branch XLV, Manila, which
ordered petitioner Willex Plastic Industries Corporation and
the Inter-Resin Industrial Corporation, jointly and severally,
to pay private respondent International Corporate Bank
certain sums of money, and the appellate courts resolution
of October 17, 1989 denying petitioners motion for
reconsideration.
The facts are as follows:
Sometime in 1978, Inter-Resin Industrial Corporation
opened a letter of credit with the Manila Banking
Corporation. To secure payment of the credit
accommodation, Inter-Resin Industrial and the Investment
and Underwriting Corporation of the Philippines (IUCP)
executed two documents, both entitled Continuing Surety
Agreement and dated December 1, 1978, whereby they
bound themselves solidarily to pay Manilabank obligations
of every kind, on which the [Inter-Resin Industrial] may now
be indebted or hereafter become indebted to the
[Manilabank]. The two agreements (Exhs. J and K) are the
same in all respects, except as to the limit of liability of the
surety, the first surety agreement being limited to
US$333,830.00, while the second one is limited to
US$334,087.00.
On April 2, 1979, Inter-Resin Industrial, together with
Willex Plastic Industries Corp., executed a Continuing
Guaranty in favor of IUCP whereby For and in consideration
of the sum or sums obtained and/or to be obtained by Inter-
Resin Industrial Corporation from IUCP, Inter-Resin
Industrial and Willex Plastic jointly and severally
guaranteed the prompt and punctual payment at maturity of
the NOTE/S issued by the DEBTOR/S . . . to the extent of the
aggregate principal sum of FIVE MILLION PESOS
(P5,000,000.00) Philippine Currency and such interests,
charges and penalties as hereafter may be specified.
On January 7, 1981, following demand upon it, IUCP
paid to Manilabank the sum of P4,334,280.61 representing
Inter-Resin Industrials outstanding obligation. (Exh. M-1)
On February 23 and 24, 1981, Atrium Capital Corp., which in
the meantime had succeeded IUCP, demanded from Inter-
Resin Industrial and Willex Plastic the payment of what it
(IUCP) had paid to Manilabank. As neither one of the
sureties paid, Atrium filed this case in the court below
against Inter-Resin Industrial and Willex Plastic.
On August 11, 1982, Inter-Resin Industrial paid
Interbank, which had in turn succeeded Atrium, the sum of
P687,500.00 representing the proceeds of its fire insurance
policy for the destruction of its properties.
In its answer, Inter-Resin Industrial admitted that the
Continuing Guaranty was intended to secure payment to
Atrium of the amount of P4,334,280.61 which the latter had
paid to Manilabank. It claimed, however, that it had already
fully paid its obligation to Atrium Capital.
On the other hand, Willex Plastic denied the material
allegations of the complaint and interposed the following
Special Affirmative Defenses:
(a) Assuming arguendo that main defendant is indebted to
plaintiff, the formers liability is extinguished due to the
accidental fire that destroyed its premises, which liability is
covered by sufficient insurance assigned to plaintiff;
(b) Again, assuming arguendo, that the main defendant is
indebted to plaintiff, its account is now very much lesser
than those stated in the complaint because of some
payments made by the former;
(c) The complaint states no cause of action against WILLEX;
(d) WILLEX is only a guarantor of the principal obligor, and
thus, its liability is only secondary to that of the principal;
(e) Plaintiff failed to exhaust the ultimate remedy in
pursuing its claim against the principal obligor;
(f) Plaintiff has no personality to sue.
On April 29, 1986, Interbank was substituted as
plaintiff in the action. The case then proceeded to trial.
On March 4, 1988, the trial court declared Inter-Resin
Industrial to have waived the right to present evidence for
its failure to appear at the hearing despite due notice. On the
other hand, Willex Plastic rested its case without presenting
any evidence. Thereafter Interbank and Willex Plastic
submitted their respective memoranda.
On April 5, 1988, the trial court rendered judgment,
ordering Inter-Resin Industrial and Willex Plastic jointly and
severally to pay to Interbank the following amounts:
(a) P3,646,780.61, representing their indebtedness to the
plaintiff, with interest of 17% per annum from August 11,
1982, when Inter-Resin Industrial paid P687,500.00 to the
plaintiff, until full payment of the said amount;
(b) Liquidated damages equivalent to 17% of the amount
due; and
(c) Attorneys fees and expenses of litigation equivalent to
20% of the total amount due.
Inter-Resin Industrial and Willex Plastic appealed to
the Court of Appeals. Willex Plastic filed its brief, while
Inter-Resin Industrial presented a Motion to Conduct
Hearing and to Receive Evidence to Resolve Factual Issues
and to Defer Filing of the Appellants Brief. After its motion
was denied, Inter-Resin Industrial did not file its brief
anymore.
On February 22, 1991, the Court of Appeals rendered a
decision affirming the ruling of the trial court.
Willex Plastic filed a motion for reconsideration
praying that it be allowed to present evidence to show that
Inter-Resin Industrial had already paid its obligation to
Interbank, but its motion was denied on December 6, 1991:
The motion is denied for lack of merit. We denied defendant-
appellant Inter-Resin Industrials motion for reception of
evidence because the situation or situations in which we
could exercise the power under B.P. 129 did not
exist. Movant here has not presented any argument which
would show otherwise.
Hence, this petition by Willex Plastic for the review of
the decision of February 22, 1991 and the resolution of
December 6,1991 of the Court of Appeals.
Petitioner raises a number of issues.
[1] The main issue raised is whether under the
Continuing Guaranty signed on April 2, 1979 petitioner
Willex Plastic may be held jointly and severally liable with
Inter-Resin Industrial for the amount paid by Interbank to
Manilabank.
As already stated, the amount had been paid by
Interbanks predecessor-in-interest, Atrium Capital, to
Manilabank pursuant to the Continuing Surety Agreements
made on December 1, 1978. In denying liability to Interbank
for the amount, Willex Plastic argues that under the
Continuing Guaranty, its liability is for sums obtained by
Inter-Resin Industrial from Interbank, not for sums paid by
the latter to Manilabank for the account of Inter-Resin
Industrial. In support of this contention Willex Plastic cites
the following portion of the Continuing Guaranty:
For and in consideration of the sums obtained and/or to be
obtained by INTER-RESIN INDUSTRIAL CORPORATION,
hereinafter referred to as the DEBTOR/S, from you and/or
your principal/s as may be evidenced by promissory note/s,
checks, bills receivable/s and/or other evidence/s of
indebtedness (hereinafter referred to as the NOTE/S), I/We
hereby jointly and severally and unconditionally guarantee
unto you and/or your principal/s, successor/s and assigns
the prompt and punctual payment at maturity of the
NOTE/S issued by the DEBTOR/S in your and/or your
principal/s, successor/s and assigns favor to the extent of
the aggregate principal sum of FIVE MILLION PESOS
(P5,000,000.00), Philippine Currency, and such interests,
charges and penalties as may hereinafter be specified.
The contention is untenable. What Willex Plastic has
overlooked is the fact that evidence aliunde was introduced
in the trial court to explain that it was actually to secure
payment to Interbank (formerly IUCP) of amounts paid by
the latter to Manilabank that the Continuing Guaranty was
executed. In its complaint below, Interbanks predecessor-in-
interest. Atrium Capital, alleged:
5. to secure the guarantee made by plaintiff of the
credit accommodation granted to defendant
IRIC [Inter-Resin Industrial] by Manilabank,
the plaintiff required defendant IRIC [Inter-
Resin Industrial] to execute a chattel mortgage
in its favor and a Continuing Guaranty which
was signed by the other defendant WPIC
[Willex Plastic].
In its answer, Inter-Resin Industrial admitted this
allegation although it claimed that it had already paid its
obligation in its entirety. On the other hand, Willex Plastic,
while denying the allegation in question, merely did so for
lack of knowledge or information of the same. But, at the
hearing of the case on September 16, 1986, when asked by
the trial judge whether Willex Plastic had not filed a
crossclaim against Inter-Resin Industrial, Willex Plastics
counsel replied in the negative and manifested that the
plaintiff in this case [Interbank] is the guarantor and my
client [Willex Plastic] only signed as a guarantor to the
guarantee.[2]
For its part Interbank adduced evidence to show that
the Continuing Guaranty had been made to guarantee
payment of amounts made by it to Manilabank and not of
any sums given by it as loan to Inter-Resin
Industrial. Interbanks witness testified under cross-
examination by counsel for Willex Plastic that Willex
guaranteed the exposure/of whatever exposure of ACP
[Atrium Capital] will later be made because of the guarantee
to Manila Banking Corporation.[3]
It has been held that explanatory evidence may be
received to show the circumstances under which a
document has been made and to what debt it relates. [4] At all
events, Willex Plastic cannot now claim that its liability is
limited to any amount which Interbank, as creditor, might
give directly to Inter-Resin Industrial as debtor because, by
failing to object to the parol evidence presented, Willex
Plastic waived the protection of the parol evidence rule.[5]
Accordingly, the trial court found that it was to secure
the guarantee made by plaintiff of the credit accommodation
granted to defendant IRIC [Inter-Resin Industrial] by
Manilabank, [that] the plaintiff required defendant IRIC to
execute a chattel mortgage in its favor and a Continuing
Guaranty which was signed by the defendant Willex Plastic
Industries Corporation.[6]
Similarly, the Court of Appeals found it to be an
undisputed fact that to secure the guarantee undertaken by
plaintiff-appellee [Interbank] of the credit accommodation
granted to Inter-Resin Industrial by Manilabank, plaintiff-
appellee required defendant-appellants to sign a Continuing
Guaranty. These factual findings of the trial court and of the
Court of Appeals are binding on us not only because of the
rule that on appeal to the Supreme Court such findings are
entitled to great weight and respect but also because our
own examination of the record of the trial court confirms
these findings of the two courts.[7]
Nor does the record show any other transaction under
which Inter-Resin Industrial may have obtained sums of
money from Interbank. It can reasonably be assumed that
Inter-Resin Industrial and Willex Plastic intended to
indemnify Interbank for amounts which it may have paid
Manilabank on behalf of Inter-Resin Industrial.
Indeed, in its Petition for Review in this Court, Willex
Plastic admitted that it was to secure the aforesaid
guarantee, that INTERBANK required principal debtor IRIC
[Inter-Resin Industrial] to execute a chattel mortgage in its
favor, and so a Continuing Guaranty was executed on April 2,
1979 by WILLEX PLASTIC INDUSTRIES CORPORATION
(WILLEX for brevity) in favor of INTERBANK for and in
consideration of the loan obtained by IRIC [Inter-Resin
Industrial].
[2] Willex Plastic argues that the Continuing Guaranty,
being an accessory contract, cannot legally exist because of
the absence of a valid principal obligation.[8] Its contention is
based on the fact that it is not a party either to the
Continuing Surety Agreement or to the loan agreement
between Manilabank and Inter-Resin Industrial.
Put in another way the consideration necessary to
support a surety obligation need not pass directly to the
surety, a consideration moving to the principal alone being
sufficient. For a guarantor or surety is bound by the same
consideration that makes the contract effective between the
principal parties thereto. . . . It is never necessary that a
guarantor or surety should receive any part or benefit, if
such there be, accruing to his principal.[9] In an analogous
case,[10] this Court held:
At the time the loan of P100,000.00 was obtained from
petitioner by Daicor, for the purpose of having an additional
capital for buying and selling coco-shell charcoal and
importation of activated carbon, the comprehensive surety
agreement was admittedly in full force and effect. The loan
was, therefore, covered by the said agreement, and private
respondent, even if he did not sign the promissory note, is
liable by virtue of the surety agreement. The only condition
that would make him liable thereunder is that the Borrower
is or may become liable as maker, endorser, acceptor or
otherwise. There is no doubt that Daicor is liable on the
promissory note evidencing the indebtedness.
The surety agreement which was earlier signed by Enrique
Go, Sr. and private respondent, is an accessory obligation, it
being dependent upon a principal one which, in this case is
the loan obtained by Daicor as evidenced by a promissory
note.
[3] Willex Plastic contends that the Continuing
Guaranty cannot be retroactively applied so as to secure the
payments made by Interbank under the two Continuing
Surety Agreements. Willex Plastic invokes the ruling m
El Vencedor v. Canlas[11] and Dio v. Court of Appeals[12] in
support of its contention that a contract of suretyship or
guaranty should be applied prospectively.
The cases cited are, however, distinguishable from the
present case. In El Vencedor v. Canlas we held that a contract
of suretyship is not retrospective and no liability attaches
for defaults occurring before it is entered into unless an
intent to be so liable is indicated. There we found nothing in
the contract to show that the parties intended the surety
bonds to answer for the debts contracted previous to the
execution of the bonds. In contrast, in this case, the parties
to the Continuing Guaranty clearly provided that the
guaranty would cover sums obtained and/or to be obtained
by Inter-Resin Industrial from Interbank.
On the other hand, in Dio v. Court of Appeals the issue
was whether the sureties could be held liable for an
obligation contracted after the execution of the continuing
surety agreement.
It was held that by its very nature a continuing
suretyship contemplates a future course of dealing. It is
prospective in its operation and is generally intended to
provide security with respect to future transactions. By no
means, however, was it meant in that case that in all
instances a contract of guaranty or suretyship should be
prospective in application.
Indeed, as we also held in Bank of the Philippine Islands
v. Foerster,[13] although a contract of suretyship is ordinarily
not to be construed as retrospective, in the end the intention
of the parties as revealed by the evidence is controlling.
What was said there[14] applies mutatis mutandis to the case
at bar:
In our opinion, the appealed judgment is erroneous. It
is very true that bonds or other contracts of suretyship are
ordinarily not to be construed as retrospective, but that rule
must yield to the intention of the contracting parties as
revealed by the evidence, and does not interfere with the use
of the ordinary tests and canons of interpretation which
apply in regard to other contracts.
In the present case the circumstances so clearly
indicate that the bond given by Echevarria was intended to
cover all of the indebtedness of the Arrocera upon its
current account with the plaintiff Bank that we cannot
possibly adopt the view of the court below in regard to the
effect of the bond.
[4] Willex Plastic says that in any event it cannot be
proceeded against without first exhausting all property of
Inter-Resin Industrial. Willex Plastic thus claims the benefit
of excussion.The Civil Code provides, however:
Art. 2059. This excussion shall not take place:
(1) If the guarantor has expressly renounced it;
(2) If he has bound himself solidarily with the debtor;
xxxxxxxxx
The pertinent portion of the Continuing Guaranty
executed by Willex Plastic and Inter-Resin Industrial in favor
of IUCP (now Interbank) reads:
If default be made in the payment of the NOTE/s herein
guaranteed you and/or your principal/s may directly
proceed against Me/Us without first proceeding against and
exhausting DEBTOR/s properties in the same manner as if all
such liabilities constituted My/Our direct and primary
obligations. (italics supplied)
This stipulation embodies an express renunciation of
the right of excussion. In addition, Willex Plastic bound itself
solidarily liable with Inter-Resin Industrial under the same
agreement:
For and in consideration of the sums obtained and/or
to be obtained by INTER-RESIN INDUSTRIAL
CORPORATION, hereinafter referred to as the DEBTOR/S,
from you and/or your principal/s as may be evidenced by
promissory note/s, checks, bills receivable/s and/or other
evidence/s of indebtedness (hereinafter referred to as the
NOTE/S), I/We hereby jointly and severally and
unconditionally guarantee unto you and/ or your principal/s,
successor/s and assigns the prompt and punctual payment
at maturity of the NOTE/S issued by the DEBTOR/S in your
and/or your principal/s, successor/s and assigns favor to
the extent of the aggregate principal sum of FIVE MILLION
PESOS (P5,000,000.00), Philippine Currency, and such
interests, charges and penalties as may hereinafter he
specified.
[5] Finally it is contended that Inter-Resin Industrial
had already paid its indebtedness to Interbank and that
Willex Plastic should have been allowed by the Court of
Appeals to adduce evidence to prove this. Suffice it to say
that Inter-Resin Industrial had been given generous
opportunity to present its evidence but it failed to make use
of the same. On the other hand, Willex Plastic rested its case
without presenting evidence.
The reception of evidence of Inter-Resin Industrial was
set on January 29, 1987, but because of its failure to appear
on that date, the hearing was reset on March 12, 26 and
April 2, 1987.
On March 12, 1987 Inter-Resin Industrial again failed
to appear. Upon motion of Willex Plastic, the hearings on
March 12 and 26, 1987 were cancelled and reset for the last
time on April 2 and 30, 1987.
 On April 2, 1987, Inter-Resin Industrial again failed to
appear. Accordingly the trial court issued the following
order:
Considering that, as shown by the records, the Court had
exerted every earnest effort to cause the service of notice or
subpoena on the defendant Inter-Resin Industrial but to no
avail, even with the assistance of the defendant Willex. . . the
defendant Inter-Resin Industrial is hereby deemed to have
waived the right to present its evidence.
On the other hand, Willex Plastic announced it was resting
its case without presenting any evidence.
Upon motion of Inter-Resin Industrial, however, the
trial court reconsidered its order and set the hearing anew
on July 23, 1987. But Inter-Resin Industrial again moved for
the postponement of the hearing to August 11, 1987. The
hearing was, therefore, reset on September 8 and 22, 1987
but the hearings were reset on October 13,1987, this time
upon motion of Interbank. To give Interbank time to
comment on a motion filed by Inter-Resin Industrial, the
reception of evidence for Inter-Resin Industrial was again
reset on November 17, 26 and December 11, 1987. However,
Inter-Resin Industrial again moved for the postponement of
the hearing. Accordingly, the hearing was reset on
November 26 and December 11, 1987, with warning that the
hearings were intransferrable.
Again, the reception of evidence for Inter-Resin
Industrial was reset on January 22, 1988 and
February 5, 1988 upon motion of its counsel. As Inter-Resin
Industrial still failed to present its evidence, it was declared
to have waived its evidence.
To give Inter-Resin Industrial a last opportunity to
present its evidence, however, the hearing was postponed to
March 4, 1988. Again Inter-Resin Industrials counsel did not
appear. The trial court, therefore, finally declared Inter-
Resin Industrial to have waived the right to present its
evidence. On the other hand, Willex Plastic, as before,
manifested that it was not presenting evidence and
requested instead for time to file a memorandum.
There is therefore no basis for the plea made by Willex
Plastic that it be given the opportunity of showing that Inter-
Resin Industrial has already paid its obligation to Interbank.
WHEREFORE, the decision of the Court of Appeals is
AFFIRMED, with costs against the petitioner.
SO ORDERED.
G.R. No. 160408
SPOUSES ROBERTO and ADELAIDA PEN, Petitioners,
vs.
SPOUSES SANTOS and LINDA JULIAN, Respondents.
DECISION
BERSAMIN, J.:
The petitioners who were the buyers of the mortgaged
property of the respondents seek the reversal of the decision
promulgated on October 20, 2003,1 whereby the Court of
Appeals (CA) affirmed with modification the adverse
judgment rendered on August 30, 1999 by the Regional Trial
Court (RTC), Branch 77, in Quezon City.2 In their respective
rulings, the CA and the RTC both declared the deed of sale
respecting the respondents' property as void and inexistent,
albeit premised upon different reasons.
Antecedents
The CA summarized the antecedent facts and procedural
matters in its assailed decision as follows:
On April 9, 1986, the appellees (the Julians) obtained a
P60,000.00 loan from appellant Adelaida Pen. On May 23,
1986 and on the (sic) May 27, 1986, they were again
extended loans in the amounts of P50,000.00 and
P10,000.00, respectively by appellant Adelaida. The initial
interests were deducted by appellant Adelaida, (1)
P3,600.00 from the P60,000.00 loan; (2) P2,400.00 from the
P50,000.00 loan; and (3) P600.00 from the P10,000.00 loan.
Two (2) promissory notes were executed by the appellees in
favor of appellant Adelaida to evidence the foregoing loans,
one dated April 9, 1986 and payable on June 15, 1986 for the
P60,000.00 loan and another dated May 22, 1986 payable on
July 22, 1986 for the P50,000.00 loan. Both Joans were
charged interest at 6% per month. As security, on May 23,
1986, the appellees executed a Real Estate Mortgage over
their property covered by TCT No. 327733 registered under
the name of appellee Santos Julian, Jr. The owner's duplicate
of TCT No. 327733 was delivered to the appellants.
Appellant's version of the subsequent events run as follows:
When the loans became due and demandable, appellees
failed to pay despite several demands. As such, appellant
Adelaida decided to institute foreclosure proceedings.
However, she was prevailed upon by appellee Linda not to
foreclose the property because of the cost of litigation and
since it would cause her embarrassment as the proceedings
will be announced in public places at the City Hall, where
she has many friends. Instead, appellee Linda offered their
mortgaged property as payment in kind. After the ocular
inspection, the parties agreed to have the property valued at
P70,000.00. Thereafter, on October 22, 1986 appellee
executed a two (2) page Deed of Sale duly signed by her on
the left margin and over her printed name. After the
execution of the Deed of Sale, appellant Pen paid the capital
gains tax and the required real property tax. Title to the
property was transferred to the appellants by the issuance
of TCT No. 364880 on July 17, 1987. A reconstituted title
was also issued to the appellants on July 09, 1994 when the
Quezon City Register of Deeds was burned (sic).
On July 1989, appellants allege that appellee Linda offered to
repurchase the property to which the former agreed at the
repurchase price of P436,l 15.00 payable in cash on July 31,
1989. The appellees failed to repurchase on the agreed date.
On February 1990, appellees again offered to repurchase the
property for the same amount, but they still failed to
repurchase. On June 28, 1990, another offer was made to
repurchase the property for the same amount. Appellee
Linda offered to pay P100,000.00 in cash as sign of good
faith. The offer was rejected by appellant Adelaida. The
latter held the money only for safekeeping upon the
pleading of appellee Linda. Upon the agreement of the
parties, the amount of P100,000.00 was deducted from the
balance of the appellees' indebtedness, so that as of October
15, 1997, their unpaid balance amounted to P319,065.00.
Appellants allege that instead of paying lthe] said balance,
the appellees instituted on September 8, 1994 the civil
complaint and filed an adverse claim and lis pendens which
were annotated at the back of the title to the property.
On the other hand, the appellees aver the following: At the
time the mortgage was executed, they were likewise
required by the appellant Adelaida to sign a one (1) page
document purportedly an "Absolute Deed of Sale". Said
document did not contain any consideration, and was
"undated, unfilled and unnotarized". They allege that their
total payments amounted to P115,400.00 and that their last
payment was on June 28, 1990 in the amount of
P100,000.00.
In December 1992, appellee Linda Julian offered to pay
appellant Adelaida the amount of P150,000.00. The latter
refused to accept the offer and demanded that she be paid
the amount of P250,000.00. Unable to meet the demand,
appellee Linda desisted from the offer and requested that
she be shown the land title which she conveyed to the
appellee Adelaida, but the latter refused. Upon verification
with the Registry of Deeds of Quezon City, she was informed
that the title to the mortgaged property had already been
registered in the name of appellee Adelaida under TCT No.
364880, and that the transfer was entered on July 17, 1987.
A reconstituted title, TCT No. RT-45272 (364880), also
appeared on file in the Registry of Deeds replacing TCT No.
364880.
By reason of the foregoing discoveries, appellee filed an
Affidavit of Adverse Claim on January
1993.1avvphi1 Counsel for the appellees, on August 12,
1994, formally demanded the reconveyance of the title
and/or the property to them, but the appellants refused. In
the process of obtaining other documents; the appellees also
discovered that the appellants have obtained several
Declarations of Real Property, and a Deed of Sale consisting
of two (2) pages which was notarized by one Atty. Cesar
Ching. Said document indicates a consideration of
P70,000.00 for the lot, and was made to appear as having
been executed on October 22, 1986. On September 8, 1994,
appellees filed a suit for the Cancellation of Sale,
Cancellation of Title issued to the appellants; Recovery of
Possession; Damages with Prayer for Preliminary Injunction.
The complaint alleged that appellant Adelaida, through
obvious bad faith, maliciously typed, unilaterally filled up,
and caused to be notarized the Deed of Sale earlier signed by
appellee Julian, and used this spurious deed of sale as the
vehicle for her fraudulent transfer unto herself the parcel of
land covered by TCT No. 327733.3
Judgment of the RTC
In its judgment rendered on August 30, 1999,4 the RTC ruled
in favor of the respondents. According greater credence to
the version of the respondents on the true nature of their
transaction, the trial court concluded that they had not
agreed on the consideration for the sale at the time they
signed the deed of sale; that in the absence of the
consideration, the sale lacked one of the essential requisites
of a valid contract; that the defense of prescription was
rejected because the action to impugn the void contract was
imprescriptible; and that the promissory notes and the real
estate mortgage in favor of the petitioners were nonetheless
valid, rendering the respondents liable to still pay their
outstanding obligation with interest.
The RTC disposed thusly:
WHEREFORE, judgment is hereby rendered:
1. Declaring the Deed of Sale, dated October 22,
1986, void or inexistent;
2. Cancelling TCT No. RT-45272 (364480) and
declaring it to be of no further legal force and effect;
3. Ordering the defendants to reconvey the subject
property to the plaintiffs and to deliver to them the
possession thereof; and
4. Ordering the plaintiffs to pay to the defendants
the unpaid balance of their indebtedness plus
accrued interest totaling P,319,065.00 as of October
15, 1997, plus interests at the legal rate counted
from the date of filing of the complaint and until the
full payment thereof, without prejudice to the right
of the defendants to foreclose the mortgage in the
event that plaintiffs will fail to pay their obligation.
No pronouncement as to cost.
SO ORDERED.5
Decision of the CA
On appeal by the petitioners, the CA affirmed the RTC with
modification under its assailed decision of October 20,
2003,6 decreeing:
WHEREFORE, premises considered, the Decision of the
Regional Trial Court of Quezon City is AFFIRMED WITH
modification. Judgement is hereby rendered:
1. Declaring the Deed of Sale, dated October 22,
1986, void or inexistent;
2. Cancelling TCT No. RT-45272 (364880) and
declaring it to be of no further legal force and effect;
 3. Ordering the appellants-defendants to reconvey
the subject property to the plaintiffs-appellees and
to deliver to them the possession thereof; and
4. Ordering the plaintiffs-appellces to pay to the
defendants the unpaid balance of their
indebtedness, P43,492.15 as of June 28, 1990, plus
interests at the legal rate of 12% per annum from
said date and until the full payment thereof, without
prejudice to the right of the defendants to foreclose
the mortgage in the event that plaintiffs-appellees
will fail to pay their obligation.
SO ORDERED.7
The CA pronounced the deed of sale as void but not because
of the supposed lack of consideration as the R TC had
indicated, but because of the deed of sale having been
executed at the same time as the real estate mortgage, which
rendered the sale as a prohibited pactum commissorium in
light of the fact that the deed of sale was blank as to the
consideration and the date, which details would be filled out
upon the default by the respondents; that the promissory
notes contained no stipulation on the payment of interest on
the obligation, for which reason no monetary interest could
be imposed for the use of money; and that compensatory
interest should instead be imposed as a form of damages
arising from Linda's failure to pay the outstanding
obligation.
Issues
In this appeal, the petitioners posit the following issues,
namely: (1) whether or not the CA erred in ruling against the
validity of the deed of sale; and (2) whether or not the CA
erred in ruling that no monetary interest was due for Linda's
use of Adelaida's money.
Ruling of the Court
The appeal is partly meritorious.
That the petitioners are raising factual issues about the true
nature of their transaction with the respondent is already of
itself, sufficient reason to forthwith deny due course to the
petition for review on certiorari. They cannot ignore that
any appeal to the Court is limited to questions of law
because the Court is not a trier of facts. As such, the factual
findings of the CA should be respected and accorded great
weight, and even finality when supported by the substantial
evidence on record.8 Moreover, in view of the unanimity
between the RTC and the CA on the deed of sale being void,
varying only in their justifications, the Court affirms the CA,
and adopts its conclusions on the invalidity of the deed of
sale.
Nonetheless, We will take the occasion to explain why we
concur with the CA's justification in discrediting the deed of
sale between the parties as pactum commissorium.
Article 2088 of the Civil Code prohibits the creditor from
appropriating the things given by way of pledge or
mortgage, or from disposing of them; any stipulation to the
contrary is null and void. The elements for pactum
commissorium to exist are as follows, to wit: (a) that there
should be a pledge or mortgage wherein property is pledged
or mortgaged by way of security for the payment of the
principal obligation; and (b) that there should be a
stipulation for an automatic appropriation by the creditor of
the thing pledged or mortgaged in the event of non-payment
of the principal obligation within the stipulated period.9 The
first element was present considering that the property of
the respondents was mortgaged by Linda in favor of
Adelaida as security for the farmer's indebtedness. As to the
second, the authorization for Adelaida to appropriate the
property subject of the mortgage upon Linda's default was
implied from Linda's having signed the blank deed of sale
simultaneously with her signing of the real estate mortgage.
The haste with which the transfer of property was made
upon the default by Linda on her obligation, and the
eventual transfer of the property in a manner not in the
form of a valid dacion en pago ultimately confirmed the
nature of the transaction as a pactum commissorium.
It is notable that in reaching its conclusion that Linda's deed
of sale had been executed simultaneously with the real
estate mortgage, the CA first compared the unfilled deed of
sale presented by Linda with the notarized deed of sale
adduced by Adelaida. The CA justly deduced that the
completion and execution of the deed of sale had been
conditioned on the non-payment of the debt by Linda, and
reasonably pronounced that such circumstances rendered
the transaction pactum commissorium. The Court should not
disturb or undo the CA's conclusion in the absence of the
clear showing of abuse, arbitrariness or capriciousness on
the part of the CA.10
The petitioners have theorized that their transaction with
the respondents was a valid dacion en pago by highlighting
that it was Linda who had offered to sell her property upon
her default. Their theory cannot stand scrutiny. Dacion en
pago is in the nature of a sale because property is alienated
in favor of the creditor in satisfaction of a debt in
money.11 For a valid dacion en pago to transpire, however,
the attendance of the following elements must be
established, namely: (a) the existence of a money
obligation; (b) the alienation to the creditor of a property by
the debtor with the consent of the former; and (c) the
satisfaction of the money obligation of the debtor.12 To have
a valid dacion en pago, therefore, the alienation of the
property must fully extinguish the debt. Yet, the debt of the
respondents subsisted despite the transfer of the property in
favor of Adelaida.
The petitioners insist that the parties agreed that the deed of
sale would not yet contain the date and the consideration
because they had still to agree on the price.13 Their
insistence is not supported by the established
circumstances. It appears that two days after the loan fell
due on October 15, 1986,14 Linda offered to sell the
mortgaged property;15 hence, the parties made the ocular
inspection of the premises on October 18, 1986. By that
time, Adelaida had already become aware that the appraiser
had valued the property at P70,000.00. If that was so, there
was no plausible reason for still leaving the consideration on
the deed of sale blank if the deed was drafted by Adelaida on
October 20, 1986, especially considering that they could
have conveniently communicated with each other in the
meanwhile on this significant aspect of their transaction. It
was also improbable for Adelaida to still hand the unfilled
deed of sale to Linda as her copy if, after all, the deed of sale
would be eventually notarized on October 22, 1986.
According to Article 1318 of the Civil Code, the requisites for
any contract to be valid are, namely: (a) the consent of the
contracting parties; (b) the object; and (c) the consideration.
There is a perfection of a contract when there is a meeting of
the minds of the parties on each of these requisites.16 The
following passage has fittingly discussed the process of
perfection in Moreno, Jr. v. Private Management Office:17
To reach that moment of perfection, the parties must agree
on the same thing in the same sense, so that their minds
meet as to all the terms. They must have a distinct intention
common to both and without doubt or difference; until all
understand alike, there can be no assent, and therefore no
contract. The minds of parties must meet at every point;
nothing can be left open for further arrangement. So long as
there is any uncertainty or indefiniteness, or future
negotiations or considerations to be had between the
parties, there is not a completed contract, and in fact, there
is no contract at all.18
In a sale, the contract is perfected at the moment when the
seller obligates herself to deliver and to transfer ownership
of a thing or right to the buyer for a price certain, as to which
the latter agrees.19 The absence of the consideration from
Linda's copy of the deed of sale was credible proof of the
lack of an essential requisite for the sale. In other words, the
meeting of the minds of the parties so vital in the perfection
of the contract of sale did not transpire. And, even assuming
that Linda's leaving the consideration blank implied the
authority of Adelaida to fill in that essential detail in the
deed of sale upon Linda's default on the loan, the conclusion
of the CA that the deed of sale was a pactum
commisorium still holds, for, as earlier mentioned, all the
elements of pactum commisorium were present.
Anent interest, the CA deleted the imposition of monetary
interest but decreed compensatory interest of 12% per
annum.
Interest that is the compensation fixed by the parties for the
use or forbearance of money is referred to as monetary
interest.1âwphi1 On the other hand, interest that may be
imposed by law or by the courts as penalty or indemnity for
damages is called compensatory interest. In other words, the
right to recover interest arises only either by vi11ue of a
contract or as damages for delay or failure to pay the
principal loan on which the interest is demanded.20
The CA correctly deleted the monetary interest from the
judgment. Pursuant to Article 1956 of the Civil Code, no
interest shall be due unless it has been expressly stipulated
in writing. In order for monetary interest to be imposed,
therefore, two requirements must be present,
specifically: (a) that there has been an express stipulation
for the payment of interest; and (b) that the agreement for
the payment of interest has been reduced in
writing.21Considering that the promissory notes contained
no stipulation on the payment of monetary interest,
monetary interest cannot be validly imposed.
The CA properly imposed compensatory interest to offset
the delay in the respondents' performance of their
obligation. Nonetheless, the imposition of the legal rate of
interest should be modified to conform to the prevailing
jurisprudence. The rate of 12% per annum imposed by the
CA was the rate set in accordance with Eastern Shipping
Lines, Inc., v. Court of Appeals.22 In the meanwhile, Bangko
Sentral ng Pilipinas Monetary Board Resolution No. 796
dated May 16, 2013, amending Section 2 of Circular No. 905,
Series of 1982, and Circular No. 799, Series of 2013, has
lowered to 6% per annum the legal rate of interest for a loan
or forbearance of money, goods or credit starting July 1,
2013. This revision is expressly recognized in Nacar v.
Gallery Frames.23 It should be noted, however, that
imposition of the legal rate of interest at 6% per annum is
prospective in application.
Accordingly, the legal rate of interest on the outstanding
obligation of P43,492.15 as of June 28, 1990, as the CA
found, should be as follows: (a) from the time of demand on
October 13, 1994 until June 30, 2013, the legal rate of
interest was 12% per annum conformably with Eastern
Shipping lines; and (b) following Nacar, from July 1, 2013
until full payment, the legal interest is 6% per annum.
WHEREFORE, the Court AFFIRMS the decision promulgated
on October 20, 2003 subject to the MODIFICATION that the
amount of P43,492.l5 due from the respondents shall earn
legal interest of 12% per annum reckoned from October 13,
1994 until June 30, 2013, and 6% per annum from July 1,
2013 until full payment.
Without pronouncement on costs of suit.
SO ORDERED.