Case Digest: Guaranty

Baylon v. Court of Appeals, G.R. No. 109941, August 17, 1999, When Excussion Not Required

Facts: 

• Pacionaria C. Baylon facilitated a business arrangement between Leonila Tomacruz and Rosita B. Luanzon, encouraging Tomacruz to lend money to Luanzon at a five percent monthly interest rate for her contracting business. Tomacruz agreed, providing a loan of P150,000 backed by a promissory note with Baylon's signature as a guarantor, but when Luanzon failed to repay despite demands, Tomacruz filed a lawsuit for the collection of the owed sum, with Baylon denying her guarantee and claiming the transaction was an investment rather than a loan.
• Pacionaria C. Baylon introduced Leonila Tomacruz, the co-manager of her husband at PLDT, to Rosita B. Luanzon for a business deal.
• Petitioner told Tomacruz that Luanzon has been engaged in business as a contractor for twenty years and she invited Tomacruz to lend Luanzon money at a monthly interest rate of five percent (5%), to be used as capital for the latter's business.
• Tomacruz agreed to lend Luanzon P150,000, backed by a promissory note and postdated checks.
• Baylon signed the promissory note, affixing her signature under the word "guarantor." 
• Luanzon also issued a postdated check in the amount of P150,000.00.
• Despite demands, Luanzon did not repay.
• Tomacruz filed a case for the collection of a sum of money against Luanzon and Baylon.
• Baylon denied guaranteeing the promissory note, claiming it was an investment in Art Enterprises and Construction, Inc., not a loan.
• RTC-Quezon City:
• Ruled in favor of Tomacruz, stating it was indeed a loan based on evidence.
• Court of Appeals: Upheld the trial court's decision.

Issue: 

• Whether Baylon is liable as a guarantor. NO

Held:

Petitioner claims that there is no loan to begin with; that private respondent gave Luanzon the amount of P150,000, not as a loan, but rather as an investment in the construction project of the latter.

In support of her claim, petitioner cites the use by private respondent of the words "investment," "dividends," and "commission" in her testimony before the lower court; the fact that private respondent received monthly checks from Luanzon in the amount of P7,500 from July to December, 1987, representing dividends on her investment; and the fact that other employees of the Development Bank of the Philippines made similar investments in Luanzon's construction business.

However, all the circumstances mentioned by petitioner cannot override the clear and unequivocal terms of the June 22, 1987 promissory note whereby Luanzon promised to pay private respondent the amount of P150,000 on or before August 22, 1987. The promissory note states as follows:

June 22, 1987

To Whom It May Concern:

For value received, I hereby promise to pay Mrs. LEONILA TOMACRUZ the amount of ONE HUNDRED FIFTY THOUSAND PESOS ONLY (P150,000.00) on or before August 22, 1987.

The above amount is covered by __________ Check No. _______ dated August 22, 1987.

(signed)

ROSITA B. LUANZON

GURARANTOR:

(signed)

PACIONARIA O. BAYLON

Tel. No. 801-28-00

18 P. Mapa St., DBP Village

Almanza, Las Pinas, M.M.15

If the terms of a contract are clear and leave no doubt as to the intention of the contracting parties, the literal meaning of its stipulation shall control. Resort to extrinsic aids and other extraneous sources are not necessary in order to ascertain the parties' intent when there is no ambiguity in the terms of the agreement.17 Both petitioner and private respondent do not deny the due execution and authenticity of the June 22, 1987 promissory note. All of petitioner's arguments are directed at uncovering the real intention of the parties in executing the promissory note, but no amount of argumentation will change the plain import of the terms thereof, and accordingly, no attempt to read into it any alleged intention of the parties thereto may be justified.18 The clear terms of the promissory note establish a creditor-debtor relationship between Luanzon and private respondent. The transaction at bench is therefore a loan, not an investment.

It is petitioner's contention that, even though she is held to be a guarantor under the terms of the promissory note, she is not liable because private respondent did not exhaust the property of the principal debtor and has not resorted to all the legal remedies provided by the law against the debtor.  Petitioner is invoking the benefit of excussion pursuant to article 2058 of the Civil Code, which provides that —

The guarantor cannot be compelled to pay the creditor unless the latter has exhausted all the property of the debtor, and has resorted to all the legal remedies against the debtor.

It is axiomatic that the liability of the guarantor is only subsidiary.  All the properties of the principal debtor must first be exhausted before his own is levied upon. Thus, the creditor may hold the guarantor liable only after judgment has been obtained against the principal debtor and the latter is unable to pay, "for obviously the 'exhaustion of the principal's property' — the benefit of which the guarantor claims — cannot even begin to take place before judgment has been obtained." This rule is embodied in article 2062 of the Civil Code which provides that the action brought by the creditor must be filed against the principal debtor alone, except in some instances when the action may be brought against both the debtor and the principal debtor. 

Under the circumstances availing in the present case, we hold that it is premature for this Court to even determine whether or not petitioner is liable as a guarantor and whether she is entitled to the concomitant rights as such, like the benefit of excussion, since the most basic prerequisite is wanting — that is, no judgment was first obtained against the principal debtor Rosita B. Luanzon. It is useless to speak of a guarantor when no debtor has been held liable for the obligation which is allegedly secured by such guarantee. Although the principal debtor Luanzon was impleaded as defendant, there is nothing in the records to show that summons was served upon her. Thus, the trial court never even acquired jurisdiction over the principal debtor. We hold that private respondent must first obtain a judgment against the principal debtor before assuming to run after the alleged guarantor.

IN VIEW OF THE FOREGOING, the petition is granted and the questioned Decision of the Court of Appeals dated November 29, 1991 and Resolution dated April 27, 1993 are SET ASIDE. No pronouncement as to costs.

Prudential Bank v Intermediate Appellate Court, et al., G.R. No. 74886, December 8, 1992

Facts: 

• Philippine Rayon Mills, Inc. entered into a contract with Nissho Co., Ltd. of Japan for textile machinery importation under a five-year deferred payment plan.
• Prudential Bank issued a Letter of Credit for $128,548.78 in favor of Nissho.
• Against this letter of credit, drafts were drawn and issued by Nissho which were all paid by the Prudential Bank through its correspondent in Japan, the Bank of Tokyo, Ltd. 
• As indicated on their faces, two of these drafts were accepted by the Philippine Rayon Mills through its president, Anacleto R. Chi, while the others were not.
• Upon the arrival of the machineries, the Prudential Bank indorsed the shipping documents to the Philippine Rayon Mills.
• To take delivery of the machineries, Philippine Rayon Mills executed, by prior arrangement with the Prudential Bank, a trust receipt which was signed by Anacleto R. Chi in his capacity as President.
• At the back of the trust receipt is a printed form to be accomplished by two sureties who, by the very terms and conditions thereof, were to be jointly and severally liable to the Prudential Bank should the Philippine Rayon Mills fail to pay the total amount or any portion of the drafts issued by Nissho and paid for by Prudential Bank. 
• In 1967, the Philippine Rayon Mills, Inc. ceased operations, leasing its factory in 1969 to Yupangco Cotton Mills and selling machinery in 1974 to AIC Development Corporation.
• The obligation of the Philippine Rayon Mills, Inc.  arising from the letter of credit and the trust receipt remained unpaid and unliquidated despite repeated formal demands.
• An action for the collection of the principal amount of P956,384.95 was filed against the Philippine Rayon Mills, Inc. and Anacleto R. Chi.
• CFI-Rizal: Ordered defendant to pay P153,645.22 for accepted drafts with interest and dismissed the case against Chi.
• Intermediate Appellate Court: Upheld the trial court's decision.

Issue: 

• Whether private respondent Chi is solidarily liable with Philippine Rayon. NO
• Whether the case should have been dismissed on the ground of lack of cause of action as there was no prior exhaustion of Philippine Rayon's properties. NO

Held:

As We see it, the issues may be reduced as follows:

1. Whether presentment for acceptance of the drafts was indispensable to make Philippine Rayon liable thereon;

2. Whether Philippine Rayon is liable on the basis of the trust receipt;

3. Whether private respondent Chi is jointly and severally liable with Philippine Rayon for the obligation sought to be enforced and if not, whether he may be considered a guarantor; in the latter situation, whether the case should have been dismissed on the ground of lack of cause of action as there was no prior exhaustion of Philippine Rayon's properties.

Both the trial court and the public respondent ruled that Philippine Rayon could be held liable for the two (2) drafts, Exhibits "X" and "X-1", because only these appear to have been accepted by the latter after due presentment. The liability for the remaining ten (10) drafts (Exhibits "X-2" to "X-11" inclusive) did not arise because the same were not presented for acceptance. In short, both courts concluded that acceptance of the drafts by Philippine Rayon was indispensable to make the latter liable thereon. We are unable to agree with this proposition. The transaction in the case at bar stemmed from Philippine Rayon's application for a commercial letter of credit with the petitioner in the amount of $128,548.78 to cover the former's contract to purchase and import loom and textile machinery from Nissho Company, Ltd. of Japan under a five-year deferred payment plan. Petitioner approved the application. As correctly ruled by the trial court in its Order of 6 March 1975: 

. . . By virtue of said Application and Agreement for Commercial Letter of Credit, plaintiff bank 10 was under obligation to pay through its correspondent bank in Japan the drafts that Nisso (sic) Company, Ltd., periodically drew against said letter of credit from 1963 to 1968, pursuant to plaintiff's contract with the defendant Philippine Rayon Mills, Inc. In turn, defendant Philippine Rayon Mills, Inc., was obligated to pay plaintiff bank the amounts of the drafts drawn by Nisso (sic) Company, Ltd. against said plaintiff bank together with any accruing commercial charges, interest, etc. pursuant to the terms and conditions stipulated in the Application and Agreement of Commercial Letter of Credit Annex "A".

A letter of credit is defined as an engagement by a bank or other person made at the request of a customer that the issuer will honor drafts or other demands for payment upon compliance with the conditions specified in the credit. Through a letter of credit, the bank merely substitutes its own promise to pay for one of its customers who in return promises to pay the bank the amount of funds mentioned in the letter of credit plus credit or commitment fees mutually agreed upon. In the instant case then, the drawee was necessarily the herein petitioner. It was to the latter that the drafts were presented for payment. In fact, there was no need for acceptance as the issued drafts are sight drafts. Presentment for acceptance is necessary only in the cases expressly provided for in Section 143 of the Negotiable Instruments Law (NIL).  The said section reads:

Sec. 143. When presentment for acceptance must be made. — Presentment for acceptance must be made:

(a) Where the bill is payable after sight, or in any other case, where presentment for acceptance is necessary in order to fix the maturity of the instrument; or

(b) Where the bill expressly stipulates that it shall be presented for acceptance; or

(c) Where the bill is drawn payable elsewhere than at the residence or place of business of the drawee.

In no other case is presentment for acceptance necessary in order to render any party to the bill liable.

Obviously then, sight drafts do not require presentment for acceptance.

The acceptance of a bill is the signification by the drawee of his assent to the order of the drawer;  this may be done in writing by the drawee in the bill itself, or in a separate instrument. 

The parties herein agree, and the trial court explicitly ruled, that the subject, drafts are sight drafts. Said the latter:

. . . In the instant case the drafts being at sight, they are supposed to be payable upon acceptance unless plaintiff bank has given the Philippine Rayon Mills Inc. time within which to pay the same. The first two drafts (Annexes C & D, Exh. X & X-1) were duly accepted as indicated on their face (sic), and upon such acceptance should have been paid forthwith. These two drafts were not paid and although Philippine Rayon Mills

ought to have paid the same, the fact remains that until now they are still unpaid. 

Corollarily, they are, pursuant to Section 7 of the NIL, payable on demand. Section 7 provides:

Sec. 7. When payable on demand. — An instrument is payable on demand —

(a) When so it is expressed to be payable on demand, or at sight, or on presentation; or

(b) In which no time for payment in expressed.

Where an instrument is issued, accepted, or indorsed when overdue, it is, as regards the person so issuing, accepting, or indorsing it, payable on demand. 

Paragraph 8 of the Trust Receipt which reads: "My/our liability for payment at maturity of any accepted draft, bill of exchange or indebtedness shall not be extinguished or modified" 17 does not, contrary to the holding of the public respondent, contemplate prior acceptance by Philippine Rayon, but by the petitioner. Acceptance, however, was not even necessary in the first place because the drafts which were eventually issued were sight drafts And even if these were not sight drafts, thereby necessitating acceptance, it would be the petitioner — and not Philippine Rayon — which had to accept the same for the latter was not the drawee. Presentment for acceptance is defined an the production of a bill of exchange to a drawee for acceptance.  The trial court and the public respondent, therefore, erred in ruling that presentment for acceptance was an indispensable requisite for Philippine Rayon's liability on the drafts to attach. Contrary to both courts' pronouncements, Philippine Rayon immediately became liable thereon upon petitioner's payment thereof. Such is the essence of the letter of credit issued by the petitioner. A different conclusion would violate the principle upon which commercial letters of credit are founded because in such a case, both the beneficiary and the issuer, Nissho Company Ltd. and the petitioner, respectively, would be placed at the mercy of Philippine Rayon even if the latter had already received the imported machinery and the petitioner had fully paid for it. The typical setting and purpose of a letter of credit are described in Hibernia Bank and Trust Co. vs. J. Aron & Co., Inc.,  thus:

Commercial letters of credit have come into general use in international sales transactions where much time necessarily elapses between the sale and the receipt by a purchaser of the merchandise, during which interval great price changes may occur. Buyers and sellers struggle for the advantage of position. The seller is desirous of being paid as surely and as soon as possible, realizing that the vendee at a distant point has it in his power to reject on trivial grounds merchandise on arrival, and cause considerable hardship to the shipper. Letters of credit meet this condition by affording celerity and certainty of payment. Their purpose is to insure to a seller payment of a definite amount upon presentation of documents. The bank deals only with documents. It has nothing to do with the quality of the merchandise. Disputes as to the merchandise shipped may arise and be litigated later between vendor and vendee, but they may not impede acceptance of drafts and payment by the issuing bank when the proper documents are presented.

The trial court and the public respondent likewise erred in disregarding the trust receipt and in not holding that Philippine Rayon was liable thereon. In People vs. Yu Chai Ho,  this Court explains the nature of a trust receipt by quoting In re Dunlap Carpet Co.,  thus:

By this arrangement a banker advances money to an intending importer, and thereby lends the aid of capital, of credit, or of business facilities and agencies abroad, to the enterprise of foreign commerce. Much of this trade could hardly be carried on by any other means, and therefore it is of the first importance that the fundamental factor in the transaction, the banker's advance of money and credit, should receive the amplest protection. Accordingly, in order to secure that the banker shall be repaid at the critical point — that is, when the imported goods finally reach the hands of the intended vendee — the banker takes the full title to the goods at the very beginning; he takes it as soon as the goods are bought and settled for by his payments or acceptances in the foreign country, and he continues to hold that title as his indispensable security until the goods are sold in the United States and the vendee is called upon to pay for them. This security is not an ordinary pledge by the importer to the banker, for the importer has never owned the goods, and moreover he is not able to deliver the possession; but the security is the complete title vested originally in the bankers, and this characteristic of the transaction has again and again been recognized and protected by the courts. Of course, the title is at bottom a security title, as it has sometimes been called, and the banker is always under the obligation to reconvey; but only after his advances have been fully repaid and after the importer has fulfilled the other terms of the contract.

As further stated in National Bank vs. Viuda e Hijos de Angel Jose, trust receipts:

. . . [I]n a certain manner, . . . partake of the nature of a conditional sale as provided by the Chattel Mortgage Law, that is, the importer becomes absolute owner of the imported merchandise as soon an he has paid its price. The ownership of the merchandise continues to be vested in the owner thereof or in the person who has advanced payment, until he has been paid in full, or if the merchandise has already been sold, the proceeds of the sale should be turned over to him by the importer or by his representative or successor in interest.

Under P.D. No. 115, otherwise known an the Trust Receipts Law, which took effect on  January 1973, a trust receipt transaction is defined as "any transaction by and between a person referred to in this Decree as the entruster, and another person referred to in this Decree as the entrustee, whereby the entruster, who owns or holds absolute title or security interests' over certain specified goods, documents or instruments, releases the same to the possession of the entrustee upon the latter's execution and delivery to the entruster of a signed document called the "trust receipt" wherein the entrustee binds himself to hold the designated goods, documents or instruments in trust for the entruster and to sell or otherwise dispose of the goods, documents or instruments with the obligation to turn over to the entruster the proceeds thereof to the extent of the amount owing to the entruster or as appears in the trust receipt or the goods, instruments themselves if they are unsold or not otherwise disposed of, in accordance with the terms and conditions specified in the trusts receipt, or for other purposes substantially equivalent to any one of the following: . . ."

It is alleged in the complaint that private respondents "not only have presumably put said machinery to good use and have profited by its operation and/or disposition but very recent information that (sic) reached plaintiff bank that defendants already sold the machinery covered by the trust receipt to Yupangco Cotton Mills," and that "as trustees of the property covered by the trust receipt, . . . and therefore acting in fiduciary (sic) capacity, defendants have willfully violated their duty to account for the whereabouts of the machinery covered by the trust receipt or for the proceeds of any lease, sale or other disposition of the same that they may have made, notwithstanding demands therefor; defendants have fraudulently misapplied or converted to their own use any money realized from the lease, sale, and other disposition of said machinery." While there is no specific prayer for the delivery to the petitioner by Philippine Rayon of the proceeds of the sale of the machinery covered by the trust receipt, such relief is covered by the general prayer for "such further and other relief as may be just and equitable on the premises." And although it is true that the petitioner commenced a criminal action for the violation of the Trust Receipts Law, no legal obstacle prevented it from enforcing the civil liability arising out of the trust, receipt in a separate civil action. Under Section 13 of the Trust Receipts Law, the failure of an entrustee to turn over the proceeds of the sale of goods, documents or instruments covered by a trust receipt to the extent of the amount owing to the entruster or as appear in the trust receipt or to return said goods, documents or instruments if they were not sold or disposed of in accordance with the terms of the trust receipt shall constitute the crime of estafa, punishable under the provisions of Article 315, paragraph 1(b) of the Revised Penal Code. 25 Under Article 33 of the Civil Code, a civil action for damages, entirely separate and distinct from the criminal action, may be brought by the injured party in cases of defamation, fraud and physical injuries. Estafa falls under fraud.

We also conclude, for the reason hereinafter discussed, and not for that adduced by the public respondent, that private respondent Chi's signature in the dorsal portion of the trust receipt did not bind him solidarily with Philippine Rayon. The statement at the dorsal portion of the said trust receipt, which petitioner describes as a "solidary guaranty clause", reads:

In consideration of the PRUDENTIAL BANK AND TRUST COMPANY complying with the foregoing, we jointly and severally agree and undertake to pay on demand to the PRUDENTIAL BANK AND TRUST COMPANY all sums of money which the said PRUDENTIAL BANK AND TRUST COMPANY may call upon us to pay arising out of or pertaining to, and/or in any event connected with the default of and/or non-fulfillment in any respect of the undertaking of the aforesaid:

PHILIPPINE RAYON MILLS, INC.

We further agree that the PRUDENTIAL BANK AND TRUST COMPANY does not have to take any steps or exhaust its remedy against aforesaid:

before making demand on me/us.

(Sgd.) Anacleto R. Chi

ANACLETO R. CHI 

Petitioner insists that by virtue of the clear wording of the statement, specifically the clause ". . . we jointly and severally agree and undertake . . .," and the concluding sentence on exhaustion, Chi's liability therein is solidary.

In holding otherwise, the public respondent ratiocinates as follows:

With respect to the second argument, we have our misgivings as to whether the mere signature of defendant-appellee Chi of (sic) the guaranty agreement, Exhibit "C-1", will make it an actionable document. It should be noted that Exhibit "C-1" was prepared and printed by the plaintiff-appellant. A perusal of Exhibit "C-1" shows that it was to be signed and executed by two persons. It was signed only by defendant-appellee Chi. Exhibit "C-1" was to be witnessed by two persons, but no one signed in that capacity. The last sentence of the guaranty clause is incomplete. Furthermore, the plaintiff-appellant also failed to have the purported guarantee clause acknowledged before a notary public. All these show that the alleged guaranty provision was disregarded and, therefore, not consummated.

But granting arguendo that the guaranty provision in Exhibit "C-1" was fully executed and acknowledged still defendant-appellee Chi cannot be held liable thereunder because the records show that the plaintiff-appellant had neither exhausted the property of the defendant-appellant nor had it resorted to all legal remedies against the said defendant-appellant as provided in Article 2058 of the Civil Code. The obligation of a guarantor is merely accessory under Article 2052 of the Civil Code and subsidiary under Article 2054 of the Civil Code. Therefore, the liability of the defendant-appellee arises only when the principal debtor fails to comply with his obligation. 

Our own reading of the questioned solidary guaranty clause yields no other conclusion than that the obligation of Chi is only that of a guarantor. This is further bolstered by the last sentence which speaks of waiver of exhaustion, which, nevertheless, is ineffective in this case because the space therein for the party whose property may not be exhausted was not filled up. Under Article 2058 of the Civil Code, the defense of exhaustion (excussion) may be raised by a guarantor before he may be held liable for the obligation. Petitioner likewise admits that the questioned provision is a solidary guaranty clause, thereby clearly distinguishing it from a contract of surety. It, however, described the guaranty as solidary between the guarantors; this would have been correct if two (2) guarantors had signed it. The clause "we jointly and severally agree and undertake" refers to the undertaking of the two (2) parties who are to sign it or to the liability existing between themselves. It does not refer to the undertaking between either one or both of them on the one hand and the petitioner on the other with respect to the liability described under the trust receipt. Elsewise stated, their liability is not divisible as between them, i.e., it can be enforced to its full extent against any one of them.

Furthermore, any doubt as to the import, or true intent of the solidary guaranty clause should be resolved against the petitioner. The trust receipt, together with the questioned solidary guaranty clause, is on a form drafted and prepared solely by the petitioner; Chi's participation therein is limited to the affixing of his signature thereon. It is, therefore, a contract of adhesion;  as such, it must be strictly construed against the party responsible for its preparation. 

Neither can We agree with the reasoning of the public respondent that this solidary guaranty clause was effectively disregarded simply because it was not signed and witnessed by two (2) persons and acknowledged before a notary public. While indeed, the clause ought to have been signed by two (2) guarantors, the fact that it was only Chi who signed the same did not make his act an idle ceremony or render the clause totally meaningless. By his signing, Chi became the sole guarantor. The attestation by witnesses and the acknowledgement before a notary public are not required by law to make a party liable on the instrument. The rule is that contracts shall be obligatory in whatever form they may have been entered into, provided all the essential requisites for their validity are present; however, when the law requires that a contract be in some form in order that it may be valid or enforceable, or that it be proved in a certain way, that requirement is absolute and indispensable.  With respect to a guaranty,  which is a promise to answer for the debt or default of another, the law merely requires that it, or some note or memorandum thereof, be in writing. Otherwise, it would be unenforceable unless ratified. While the acknowledgement of a surety before a notary public is required to make the same a public document, under Article 1358 of the Civil Code, a contract of guaranty does not have to appear in a public document.

And now to the other ground relied upon by the petitioner as basis for the solidary liability of Chi, namely the criminal proceedings against the latter for the violation of P.D. No. 115. Petitioner claims that because of the said criminal proceedings, Chi would be answerable for the civil liability arising therefrom pursuant to Section 13 of P.D. No. 115. Public respondent rejected this claim because such civil liability presupposes prior conviction as can be gleaned from the phrase "without prejudice to the civil liability arising from the criminal offense." Both are wrong. The said section reads:

Sec. 13. Penalty Clause. — The failure of an entrustee to turn over the proceeds of the sale of the goods, documents or instruments covered by a trust receipt to the extent of the amount owing to the entruster or as appears in the trust receipt or to return said goods, documents or instruments if they were not sold or disposed of in accordance with the terms of the trust receipt shall constitute the crime of estafa, punishable under the provisions of Article Three hundred and fifteen, paragraph one (b) of Act Numbered Three thousand eight hundred and fifteen, as amended, otherwise known as the Revised Penal Code. If the violation or offense is committed by a corporation, partnership, association or other juridical entities, the penalty provided for in this Decree shall be imposed upon the directors, officers, employees or other officials or persons therein responsible for the offense, without prejudice to the civil liabilities arising from the criminal offense.

A close examination of the quoted provision reveals that it is the last sentence which provides for the correct solution. It is clear that if the violation or offense is committed by a corporation, partnership, association or other juridical entities, the penalty shall be imposed upon the directors, officers, employees or other officials or persons therein responsible for the offense. The penalty referred to is imprisonment, the duration of which would depend on the amount of the fraud as provided for in Article 315 of the Revised Penal Code. The reason for this is obvious: corporations, partnerships, associations and other juridical entities cannot be put in jail. However, it is these entities which are made liable for the civil liability arising from the criminal offense. This is the import of the clause "without prejudice to the civil liabilities arising from the criminal offense." And, as We stated earlier, since that violation of a trust receipt constitutes fraud under Article 33 of the Civil Code, petitioner was acting well within its rights in filing an independent civil action to enforce the civil liability arising therefrom against Philippine Rayon.

The remaining issue to be resolved concerns the propriety of the dismissal of the case against private respondent Chi. The trial court based the dismissal, and the respondent Court its affirmance thereof, on the theory that Chi is not liable on the trust receipt in any capacity — either as surety or as guarantor — because his signature at the dorsal portion thereof was useless; and even if he could be bound by such signature as a simple guarantor, he cannot, pursuant to Article 2058 of the Civil Code, be compelled to pay until

after petitioner has exhausted and resorted to all legal remedies against the principal debtor, Philippine Rayon. The records fail to show that petitioner had done so Reliance is thus placed on Article 2058 of the Civil Code which provides:

Art. 2056. The guarantor cannot be compelled to pay the creditor unless the latter has exhausted all the property of the debtor, and has resorted to all the legal remedies against the debtor.

Simply stated, there is as yet no cause of action against Chi.

We are not persuaded. Excussion is not a condition sine qua non for the institution of an action against a guarantor. In Southern Motors, Inc. vs. Barbosa, this Court stated:

4. Although an ordinary personal guarantor — not a mortgagor or pledgor — may demand the aforementioned exhaustion, the creditor may, prior thereto, secure a judgment against said guarantor, who shall be entitled, however, to a deferment of the execution of said judgment against him until after the properties of the principal debtor shall have been exhausted to satisfy the obligation involved in the case.

There was then nothing procedurally objectionable in impleading private respondent Chi as a co-defendant in Civil Case No. Q-19312 before the trial court. As a matter of fact, Section 6, Rule 3 of the Rules of Court on permissive joinder of parties explicitly allows it. It reads:

Sec. 6. Permissive joinder of parties. — All persons in whom or against whom any right to relief in respect to or arising out of the same transaction or series of transactions is alleged to exist, whether jointly, severally, or in the alternative, may, except as otherwise provided in these rules, join as plaintiffs or be joined as defendants in one complaint, where any question of law or fact common to all such plaintiffs or to all such defendants may arise in the action; but the court may make such orders as may be just to prevent any plaintiff or defendant from being embarrassed or put to expense in connection with any proceedings in which he may have no interest.

This is the equity rule relating to multifariousness. It is based on trial convenience and is designed to permit the joinder of plaintiffs or defendants whenever there is a common question of law or fact. It will save the parties unnecessary work, trouble and expense.

However, Chi's liability is limited to the principal obligation in the trust receipt plus all the accessories thereof including judicial costs; with respect to the latter, he shall only be liable for those costs incurred after being judicially required to pay.  Interest and damages, being accessories of the principal obligation, should also be paid; these, however, shall run only from the date of the filing of the complaint. Attorney's fees may even be allowed in appropriate cases.

In the instant case, the attorney's fees to be paid by Chi cannot be the same as that to be paid by Philippine Rayon since it is only the trust receipt that is covered by the guaranty and not the full extent of the latter's liability. All things considered, he can be held liable for the sum of P10,000.00 as attorney's fees in favor of the petitioner.

Thus, the trial court committed grave abuse of discretion in dismissing the complaint as against private respondent Chi and condemning petitioner to pay him P20,000.00 as attorney's fees.

In the light of the foregoing, it would no longer necessary to discuss the other issues raised by the petitioner

WHEREFORE, the instant Petition is hereby GRANTED.

The appealed Decision of 10 March 1986 of the public respondent in AC-G.R. CV No. 66733 and, necessarily, that of Branch 9 (Quezon City) of the then Court of First Instance of Rizal in Civil Case No. Q-19312 are hereby REVERSED and SET ASIDE and another is hereby entered:

1. Declaring private respondent Philippine Rayon Mills, Inc. liable on the twelve drafts in question (Exhibits "X", "X-1" to "X-11", inclusive) and on the trust receipt (Exhibit "C"), and ordering it to pay petitioner: (a) the amounts due thereon in the total sum of P956,384.95 as of 15 September 1974, with interest thereon at six percent (6%) per annum from 16 September 1974 until it is fully paid, less whatever may have been applied thereto by virtue of foreclosure of mortgages, if any; (b) a sum equal to ten percent (10%) of the aforesaid amount as attorney's fees; and (c) the costs.

2. Declaring private respondent Anacleto R. Chi secondarily liable on the trust receipt and ordering him to pay the face value thereof, with interest at the legal rate, commencing from the date of the filing of the complaint in Civil Case No. Q-19312 until the same is fully paid as well as the costs and attorney's fees in the sum of P10,000.00 if the writ of execution for the enforcement of the above awards against Philippine Rayon Mills, Inc. is returned unsatisfied.

Philippine Export and Foreign Loan Guarantee Corp v V.P. Eusebio Construction Corp., et al., G.R. No. 140047, July 13, 2004

Facts: 

• In 1980, the State Organization of Buildings (SOB) of Iraq, awarded the construction of the Institute of Physical Therapy–Medical Rehabilitation Center to Ajyal Trading and Contracting Company, a Kuwaiti firm for US$18,739,668.
• In 1981, spouses Eduardo and Iluminada Santos, in behalf of 3-Plex International, Inc., a local contractor engaged in construction business, entered into a joint venture agreement with Ajyal .
• Under the agreement, 3-Plex would handle the Project execution, and Ajyal would receive a 4% commission. 
• 3-Plex, not being accredited by or registered with the Philippine Overseas Construction Board (POCB), assigned and transferred all its rights and interests under the joint venture agreement to V.P. Eusebio Construction, Inc. (VPECI), a construction and engineering firm duly registered with the POCB.
• However, 3-Plex and VPECI entered into an agreement that the execution of the Project would be under their joint management.
• The SOB required the contractors to submit:
1. a performance bond representing 5% of the total contract price and 
2. an advance payment bond representing 10% of the advance payment to be released upon signing of the contract.
• To comply with these requirements, 3-Plex and VPECI applied for the issuance of a guarantee with  Philippine Export and Foreign Loan Guarantee Corporation (Philguarantee), a government financial institution empowered to issue guarantees for qualified Filipino contractors to secure the performance of approved service contracts abroad.
• Philguarantee issued letters of guarantee to the Rafidain Bank of Baghdad covering 100% of the performance and advance payment bonds, but they were not accepted by SOB. 
• SOB required was a letter-guarantee from Rafidain Bank, the government bank of Iraq. 
• Rafidain Bank then issued a performance bond in favor of SOB on the condition that another foreign bank, not Philguarantee, would issue a counter-guarantee.
• Al Ahli Bank of Kuwait then provided a counter-guarantee to Rafidain Bank, but it required a similar counter-guarantee in its favor from the petitioner. 
• Thus, three layers of guarantees had to be arranged.
• Upon the application, Philguarantee issued in favor of Al Ahli Bank of Kuwait Performance Bond Guarantee and Advance Payment Guarantee, both for a term of 18 months from 25 May 1981. 
• These letters of guarantee were secured by:
1. a Deed of Undertaking executed by respondents VPECI, Spouses Vicente P. Eusebio and Soledad C. Eusebio, 3-Plex, and Spouses Eduardo E. Santos and Iluminada Santos; and 
2. a surety bond issued by respondent First Integrated Bonding and Insurance Company, Inc. (FIBICI).
• SOB and the joint venture VPECI and Ajyal executed the service contract for the construction of the Institute of Physical Therapy – Medical Rehabilitation Center, to be completed within 18 months. 
• Under the Contract, the Joint Venture would supply manpower and materials, and SOB would refund 25% of the project cost in Iraqi Dinar and the 75% in US dollars at the exchange rate of 1 Dinar to 3.37777 US Dollars.
• The construction, which was supposed to start on 2 June 1981, commenced only on the last week of August 1981. 
• Because of this delay and the slow progress of the construction work due to some setbacks and difficulties, the Project was not completed as scheduled. 
• Upon foreseeing the impossibility of meeting the deadline and upon the request of Al Ahli Bank, the joint venture contractor worked for the renewal or extension of the Performance Bond and Advance Payment Guarantee. 
• The letters of guarantee with expiry date of 25 November 1982 were then renewed or extended to 9 February 1983 and 9 March 1983, respectively.
• The surety bond was also extended for another period of one year, from 12 May 1982 to 12 May 1983.
• The Performance Bond was further extended twelve times with validity of up to 8 December 1986, while the Advance Payment Guarantee was extended three times more up to 24 May 1984 when the latter was cancelled after full refund or reimbursement by the joint venture contractor.
• The surety bond was likewise extended to 8 May 1987.
• As of March 1986, the status of the Project was 51% accomplished, meaning the structures were already finished. The remaining 47% consisted in electro-mechanical works and the 2%, sanitary works, which both required importation of equipment and materials.
• In October 1986, Al Ahli Bank of Kuwait sent a telex call to the petitioner demanding full payment of its performance bond counter-guarantee.
• VPECI requested Iraq Trade and Economic Development Minister to recall the telex call for being a drastic action in contravention of its mutual agreement with the latter that:
1. the imposition of penalty would be held in abeyance until the completion of the project; and
2. the time extension would be open, depending on the developments on the negotiations for a foreign loan to finance the completion of the project.
• It also wrote SOB protesting the call for lack of factual or legal basis, since the failure to complete the Project was due to:
1. the Iraqi government's lack of foreign exchange with which to pay its (VPECI's) accomplishments and 
2. SOB's noncompliance for the past several years with the provision in the contract that 75% of the billings would be paid in US dollars.
• VPECI advised the Philguarantee not to pay yet Al Ahli Bank because efforts were being exerted for the amicable settlement of the Project.
• In April 1987, Philguarantee received another telex message from Al Ahli Bank stating that it had already paid to Rafidain Bank the sum under its letter of guarantee, and demanding reimbursement by the petitioner of what it paid to the latter bank plus interest thereon and related expenses.
• Both Philguarantee and respondent VPECI sought the assistance of some government agencies of the Philippines.
• VPECI requested the Central Bank to hold in abeyance the payment by the petitioner "to allow the diplomatic machinery to take its course, for otherwise, the Philippine government , through the Philguarantee and the Central Bank, would become instruments of the Iraqi Government in consummating a clear act of injustice and inequity committed against a Filipino contractor."
• The Central Bank authorized the remittance for its account of the amount of US$876,564 to Al Ahli Bank representing full payment of the performance counter-guarantee for VPECI's project in Iraq. 
• Philguarantee informed VPECI that it would remit US$876,564 to Al Ahli Bank, and reiterated the joint and solidary obligation of the respondents to reimburse the petitioner for the advances made on its counter-guarantee.
• In 1988, Philguarantee thus paid the amount of US$876,564 to Al Ahli Bank of Kuwait and the interest and penalty charges demanded by the latter bank.
• In 1991, the Philguarantee sent to the respondents separate letters demanding full payment of the amount of P47,872,373.98 plus accruing interest, penalty charges, and 10% attorney's fees pursuant to their joint and solidary obligations under the deed of undertaking and surety bond.
• When the respondents failed to pay, the petitioner filed on a civil case for collection of a sum of money against the respondents.
• RTC-Makati City: Ruled against Philguarantee and held that the latter had no valid cause of action against the respondents.
• At the time the call was made on the guarantee which was executed for a specific period, the guarantee had already lapsed or expired. 
• There was no valid renewal or extension of the guarantee for failure of the petitioner to secure respondents' express consent thereto. 
• Considering the Project owner's violations of the contract which rendered impossible the joint venture contractor's performance of its undertaking, no valid call on the guarantee could be made. 
• Court of Appeals: Affirmed the decision.

Issue: 

• Whether the petitioner is entitled to reimbursement of what it paid under Letter of Guarantee No. 81-194-F it issued to Al Ahli Bank of Kuwait based on the deed of undertaking and surety bond from the respondents. NO

Held:

The petitioner asserts that since the guarantee it issued was absolute, unconditional, and irrevocable the nature and extent of its liability are analogous to those of suretyship. Its liability accrued upon the failure of the respondents to finish the construction of the Institute of Physical Therapy Buildings in Baghdad.

By guaranty a person, called the guarantor, binds himself to the creditor to fulfill the obligation of the principal debtor in case the latter should fail to do so. If a person binds himself solidarily with the principal debtor, the contract is called suretyship. 

Strictly speaking, guaranty and surety are nearly related, and many of the principles are common to both. In both contracts, there is a promise to answer for the debt or default of another. However, in this jurisdiction, they may be distinguished thus:

1. A surety is usually bound with his principal by the same instrument executed at the same time and on the same consideration. On the other hand, the contract of guaranty is the guarantor's own separate undertaking often supported by a consideration separate from that supporting the contract of the principal; the original contract of his principal is not his contract.

2. A surety assumes liability as a regular party to the undertaking; while the liability of a guarantor is conditional depending on the failure of the primary debtor to pay the obligation.

3. The obligation of a surety is primary, while that of a guarantor is secondary.

4. A surety is an original promissor and debtor from the beginning, while a guarantor is charged on his own undertaking.

5. A surety is, ordinarily, held to know every default of his principal; whereas a guarantor is not bound to take notice of the non-performance of his principal.

6. Usually, a surety will not be discharged either by the mere indulgence of the creditor to the principal or by want of notice of the default of the principal, no matter how much he may be injured thereby. A guarantor is often discharged by the mere indulgence of the creditor to the principal, and is usually not liable unless notified of the default of the principal. 38

In determining petitioner's status, it is necessary to read Letter of Guarantee No. 81-194-F, which provides in part as follows:

In consideration of your issuing the above performance guarantee/counter-guarantee, we hereby unconditionally and irrevocably guarantee, under our Ref. No. LG-81-194 F to pay you on your first written or telex demand Iraq Dinars Two Hundred Seventy One Thousand Eight Hundred Eight and fils six hundred ten (ID271,808/610) representing 100% of the performance bond required of V.P. EUSEBIO for the construction of the Physical Therapy Institute, Phase II, Baghdad, Iraq, plus interest and other incidental expenses related thereto.

In the event of default by V.P. EUSEBIO, we shall pay you 100% of the obligation unpaid but in no case shall such amount exceed Iraq Dinars (ID) 271,808/610 plus interest and other incidental expenses…. 

Guided by the abovementioned distinctions between a surety and a guaranty, as well as the factual milieu of this case, we find that the Court of Appeals and the trial court were correct in ruling that the petitioner is a guarantor and not a surety. That the guarantee issued by the petitioner is unconditional and irrevocable does not make the petitioner a surety. As a guaranty, it is still characterized by its subsidiary and conditional quality because it does not take effect until the fulfillment of the condition, namely, that the principal obligor should fail in his obligation at the time and in the form he bound himself.

In other words, an unconditional guarantee is still subject to the condition that the principal debtor should default in his obligation first before resort to the guarantor could be had. A conditional guaranty, as opposed to an unconditional guaranty, is one which depends upon some extraneous event, beyond the mere default of the principal, and generally upon notice of the principal's default and reasonable diligence in exhausting proper remedies against the principal.

It appearing that Letter of Guarantee No. 81-194-F merely stated that in the event of default by respondent VPECI the petitioner shall pay, the obligation assumed by the petitioner was simply that of an unconditional guaranty, not conditional guaranty. But as earlier ruled the fact that petitioner's guaranty is unconditional does not make it a surety. Besides, surety is never presumed. A party should not be considered a surety where the contract itself stipulates that he is acting only as a guarantor. It is only when the guarantor binds himself solidarily with the principal debtor that the contract becomes one of suretyship.

Having determined petitioner's liability as guarantor, the next question we have to grapple with is whether the respondent contractor has defaulted in its obligations that would justify resort to the guaranty. This is a mixed question of fact and law that is better addressed by the lower courts, since this Court is not a trier of facts.

It is a fundamental and settled rule that the findings of fact of the trial court and the Court of Appeals are binding or conclusive upon this Court unless they are not supported by the evidence or unless strong and cogent reasons dictate otherwise. The factual findings of the Court of Appeals are normally not reviewable by us under Rule 45 of the Rules of Court except when they are at variance with those of the trial court. The trial court and the Court of Appeals were in unison that the respondent contractor cannot be considered to have defaulted in its obligations because the cause of the delay was not primarily attributable to it.

A corollary issue is what law should be applied in determining whether the respondent contractor has defaulted in the performance of its obligations under the service contract. The question of whether there is a breach of an agreement, which includes default or mora, pertains to the essential or intrinsic validity of a contract. 

No conflicts rule on essential validity of contracts is expressly provided for in our laws. The rule followed by most legal systems, however, is that the intrinsic validity of a contract must be governed by the lex contractus or "proper law of the contract." This is the law voluntarily agreed upon by the parties (the lex loci voluntatis) or the law intended by them either expressly or implicitly (the lex loci intentionis). The law selected may be implied from such factors as substantial connection with the transaction, or the nationality or domicile of the parties. Philippine courts would do well to adopt the first and most basic rule in most legal systems, namely, to allow the parties to select the law applicable to their contract, subject to the limitation that it is not against the law, morals, or public policy of the forum and that the chosen law must bear a substantive relationship to the transaction. 

It must be noted that the service contract between SOB and VPECI contains no express choice of the law that would govern it. In the United States and Europe, the two rules that now seem to have emerged as "kings of the hill" are:

1. the parties may choose the governing law; and
2. in the absence of such a choice, the applicable law is that of the State that "has the most significant relationship to the transaction and the parties." 

Another authority proposed that all matters relating to the time, place, and manner of performance and valid excuses for non-performance are determined by the law of the place of performance or lex loci solutionis, which is useful because it is undoubtedly always connected to the contract in a significant way.50

In this case, the laws of Iraq bear substantial connection to the transaction, since one of the parties is the Iraqi Government and the place of performance is in Iraq. Hence, the issue of whether respondent VPECI defaulted in its obligations may be determined by the laws of Iraq. However, since that foreign law was not properly pleaded or proved, the presumption of identity or similarity, otherwise known as the processual presumption, comes into play. Where foreign law is not pleaded or, even if pleaded, is not proved, the presumption is that foreign law is the same as ours. 

Our law, specifically Article 1169, last paragraph, of the Civil Code, provides: "In reciprocal obligations, neither party incurs in delay if the other party does not comply or is not ready to comply in a proper manner with what is incumbent upon him."

Default or mora on the part of the debtor is the delay in the fulfillment of the prestation by reason of a cause imputable to the former. It is the non-fulfillment of an obligation with respect to time.

It is undisputed that only 51.7% of the total work had been accomplished. The 48.3% unfinished portion consisted in the purchase and installation of electro-mechanical equipment and materials, which were available from foreign suppliers, thus requiring US Dollars for their importation. The monthly billings and payments made by SOB  reveal that the agreement between the parties was a periodic payment by the Project owner to the contractor depending on the percentage of accomplishment within the period.  The payments were, in turn, to be used by the contractor to finance the subsequent phase of the work.  However, as explained by VPECI in its letter to the Department of Foreign Affairs (DFA), the payment by SOB purely in Dinars adversely affected the completion of the project; thus:

4. Despite protests from the plaintiff, SOB continued paying the accomplishment billings of the Contractor purely in Iraqi Dinars and which payment came only after some delays.

5. SOB is fully aware of the following:

…

5.2 That Plaintiff is a foreign contractor in Iraq and as such, would need foreign currency (US$), to finance the purchase of various equipment, materials, supplies, tools and to pay for the cost of project management, supervision and skilled labor not available in Iraq and therefore have to be imported and or obtained from the Philippines and other sources outside Iraq.

5.3 That the Ministry of Labor and Employment of the Philippines requires the remittance into the Philippines of 70% of the salaries of Filipino workers working abroad in US Dollars;

…

5.5 That the Iraqi Dinar is not a freely convertible currency such that the same cannot be used to purchase equipment, materials, supplies, etc. outside of Iraq;

5.6 That most of the materials specified by SOB in the CONTRACT are not available in Iraq and therefore have to be imported;

5.7 That the government of Iraq prohibits the bringing of local currency (Iraqui Dinars) out of Iraq and hence, imported materials, equipment, etc., cannot be purchased or obtained using Iraqui Dinars as medium of acquisition.

…

8. Following the approved construction program of the CONTRACT, upon completion of the civil works portion of the installation of equipment for the building, should immediately follow, however, the CONTRACT specified that these equipment which are to be installed and to form part of the PROJECT have to be procured outside Iraq since these are not being locally manufactured. Copy f the relevant portion of the Technical Specification is hereto attached as Annex "C" and made an integral part hereof;

…

10. Due to the lack of Foreign currency in Iraq for this purpose, and if only to assist the Iraqi government in completing the PROJECT, the Contractor without any obligation on its part to do so but with the knowledge and consent of SOB and the Ministry of Housing & Construction of Iraq, offered to arrange on behalf of SOB, a foreign currency loan, through the facilities of Circle International S.A., the Contractor's Sub-contractor and SACE MEDIO CREDITO which will act as the guarantor for this foreign currency loan.

Arrangements were first made with Banco di Roma. Negotiation started in June 1985. SOB is informed of the developments of this negotiation, attached is a copy of the draft of the loan Agreement between SOB as the Borrower and Agent. The Several Banks, as Lender, and counter-guaranteed by Istituto Centrale Per II Credito A Medio Termine (Mediocredito) Sezione Speciale Per L'Assicurazione Del Credito All'Exportazione (Sace). Negotiations went on and continued until it suddenly collapsed due to the reported default by Iraq in the payment of its obligations with Italian government, copy of the news clipping dated June 18, 1986 is hereto attached as Annex "D" to form an integral part hereof;

15. On September 15, 1986, Contractor received information from Circle International S.A. that because of the news report that Iraq defaulted in its obligations with European banks, the approval by Banco di Roma of the loan to SOB shall be deferred indefinitely, a copy of the letter of Circle International together with the news clippings are hereto attached as Annexes "F" and "F-1", respectively.

As found by both the Court of Appeals and the trial court, the delay or the non-completion of the Project was caused by factors not imputable to the respondent contractor. It was rather due mainly to the persistent violations by SOB of the terms and conditions of the contract, particularly its failure to pay 75% of the accomplished work in US Dollars. Indeed, where one of the parties to a contract does not perform in a proper manner the prestation which he is bound to perform under the contract, he is not entitled to demand the performance of the other party. A party does not incur in delay if the other party fails to perform the obligation incumbent upon him.

The petitioner, however, maintains that the payments by SOB of the monthly billings in purely Iraqi Dinars did not render impossible the performance of the Project by VPECI. Such posture is quite contrary to its previous representations. In his 26 March 1987 letter to the Office of the Middle Eastern and African Affairs (OMEAA), DFA, Manila, petitioner's Executive Vice-President Jesus M. Tañedo stated that while VPECI had taken every possible measure to complete the Project, the war situation in Iraq, particularly the lack of foreign exchange, was proving to be a great obstacle; thus:

VPECI has taken every possible measure for the completion of the project but the war situation in Iraq particularly the lack of foreign exchange is proving to be a great obstacle. Our performance counterguarantee was called last 26 October 1986 when the negotiations for a foreign currency loan with the Italian government through Banco de Roma bogged down following news report that Iraq has defaulted in its obligation with major European banks. Unless the situation in Iraq is improved as to allay the bank's apprehension, there is no assurance that the project will ever be completed. 

In order that the debtor may be in default it is necessary that the following requisites be present: 

1. that the obligation be demandable and already liquidated;
2. that the debtor delays performance; and 
3. that the creditor requires the performance because it must appear that the tolerance or benevolence of the creditor must have ended. 

As stated earlier, SOB cannot yet demand complete performance from VPECI because it has not yet itself performed its obligation in a proper manner, particularly the payment of the 75% of the cost of the Project in US Dollars. The VPECI cannot yet be said to have incurred in delay. Even assuming that there was delay and that the delay was attributable to VPECI, still the effects of that delay ceased upon the renunciation by the creditor, SOB, which could be implied when the latter granted several extensions of time to the former.  Besides, no demand has yet been made by SOB against the respondent contractor. Demand is generally necessary even if a period has been fixed in the obligation. And default generally begins from the moment the creditor demands judicially or extra-judicially the performance of the obligation. Without such demand, the effects of default will not arise.

Moreover, the petitioner as a guarantor is entitled to the benefit of excussion, that is, it cannot be compelled to pay the creditor SOB unless the property of the debtor VPECI has been exhausted and all legal remedies against the said debtor have been resorted to by the creditor. It could also set up compensation as regards what the creditor SOB may owe the principal debtor VPECI. In this case, however, the petitioner has clearly waived these rights and remedies by making the payment of an obligation that was yet to be shown to be rightfully due the creditor and demandable of the principal debtor.

As found by the Court of Appeals, the petitioner fully knew that the joint venture contractor had collectibles from SOB which could be set off with the amount covered by the performance guarantee. In February 1987, the OMEAA transmitted to the petitioner a copy of a telex dated 10 February 1987 of the Philippine Ambassador in Baghdad, Iraq, informing it of the note verbale sent by the Iraqi Ministry of Foreign Affairs stating that the past due obligations of the joint venture contractor from the petitioner would "be deducted from the dues of the two contractors."

Also, in the project situationer attached to the letter to the OMEAA dated 26 March 1987, the petitioner raised as among the arguments to be presented in support of the cancellation of the counter-guarantee the fact that the amount of ID281,414/066 retained by SOB from the Project was more than enough to cover the counter-guarantee of ID271,808/610; thus:

6.1 Present the following arguments in cancelling the counterguarantee:

· The Iraqi Government does not have the foreign exchange to fulfill its contractual obligations of paying 75% of progress billings in US dollars.

…

· It could also be argued that the amount of ID281,414/066 retained by SOB from the proposed project is more than the amount of the outstanding counterguarantee.

In a nutshell, since the petitioner was aware of the contractor's outstanding receivables from SOB, it should have set up compensation as was proposed in its project situationer.

Moreover, the petitioner was very much aware of the predicament of the respondents. In fact, in its 13 May 1987 letter to the OMEAA, DFA, Manila, it stated:

VPECI also maintains that the delay in the completion of the project was mainly due to SOB's violation of contract terms and as such, call on the guarantee has no basis.

While PHILGUARANTEE is prepared to honor its commitment under the guarantee, PHILGUARANTEE does not want to be an instrument in any case of inequity committed against a Filipino contractor. It is for this reason that we are constrained to seek your assistance not only in ascertaining the veracity of Al Ahli Bank's claim that it has paid Rafidain Bank but possibly averting such an event. As any payment effected by the banks will complicate matters, we cannot help underscore the urgency of VPECI's bid for government intervention for the amicable termination of the contract and release of the performance guarantee. 

But surprisingly, though fully cognizant of SOB's violations of the service contract and VPECI's outstanding receivables from SOB, as well as the situation obtaining in the Project site compounded by the Iran-Iraq war, the petitioner opted to pay the second layer guarantor not only the full amount of the performance bond counter-guarantee but also interests and penalty charges.

This brings us to the next question: May the petitioner as a guarantor secure reimbursement from the respondents for what it has paid under Letter of Guarantee No. 81-194-F?

As a rule, a guarantor who pays for a debtor should be indemnified by the latter and would be legally subrogated to the rights which the creditor has against the debtor. However, a person who makes payment without the knowledge or against the will of the debtor has the right to recover only insofar as the payment has been beneficial to the debtor. If the obligation was subject to defenses on the part of the debtor, the same defenses which could have been set up against the creditor can be set up against the paying guarantor.

From the findings of the Court of Appeals and the trial court, it is clear that the payment made by the petitioner guarantor did not in any way benefit the principal debtor, given the project status and the conditions obtaining at the Project site at that time. Moreover, the respondent contractor was found to have valid defenses against SOB, which are fully supported by evidence and which have been meritoriously set up against the paying guarantor, the petitioner in this case. And even if the deed of undertaking and the surety bond secured petitioner's guaranty, the petitioner is precluded from enforcing the same by reason of the petitioner's undue payment on the guaranty. Rights under the deed of undertaking and the surety bond do not arise because these contracts depend on the validity of the enforcement of the guaranty.

The petitioner guarantor should have waited for the natural course of guaranty: the debtor VPECI should have, in the first place, defaulted in its obligation and that the creditor SOB should have first made a demand from the principal debtor. It is only when the debtor does not or cannot pay, in whole or in part, that the guarantor should pay. When the petitioner guarantor in this case paid against the will of the debtor VPECI, the debtor VPECI may set up against it defenses available against the creditor SOB at the time of payment. This is the hard lesson that the petitioner must learn.

As the government arm in pursuing its objective of providing "the necessary support and assistance in order to enable … [Filipino exporters and contractors to operate viably under the prevailing economic and business conditions," the petitioner should have exercised prudence and caution under the circumstances. As aptly put by the Court of Appeals, it would be the height of inequity to allow the petitioner to pass on its losses to the Filipino contractor VPECI which had sternly warned against paying the Al Ahli Bank and constantly apprised it of the developments in the Project implementation.

WHEREFORE, the petition for review on certiorari is hereby DENIED for lack of merit, and the decision of the Court of appeals in CA-G.R. CV No. 39302 is AFFIRMED.

No pronouncement as to costs.

Philippine American General Insurance Company, Inc. v Ramos, G.R. No. L-20978, February 28, 1966

Facts: 

• On March 29, 1961, Associated Reclamation & Development Corporation issued a promissory note for P11,765.00 to General Acceptance & Finance Corporation.
• Philippine American General Insurance Co., Inc. issued a surety bond on the same date to secure payment of the promissory note.
• On April 5, 1961, spouses Eugenio Ramos and Pilar Miranda signed a counter-guaranty agreement with real estate mortgage in favor of Philippine American General Insurance Co., Inc.
• The next day, April 6, 1961, the Ramos spouses and Associated Reclamation & Development Corporation executed an indemnity agreement in favor of Philippine American General Insurance Co., Inc.
• Philippine American General Insurance Co., Inc. filed a complaint against the Ramos spouses for non-payment of the promissory note.
• The Ramos spouses filed a motion to dismiss, arguing that plaintiff must first pursue Associated Reclamation & Development Corporation.
• CFI-Bataan: Dismissed the case, stating that the defendants could not be held liable without first proceeding against Associated Reclamation and Development Corporation.

Issue: 

• Whether plaintiff have a cause of action so as to proceed against defendants without first proceeding against ARD Co. YES

Held:

For purposes of a motion to dismiss, allegations of the complaint are deemed true (Castelvi Raquiza vs. Ofilada, L-17182, September 30, 1963). Assuming, therefore, that, as alleged in the amended complaint, the parties concerned executed the agreements of surety (Schedule A), indemnity (Schedule B) and counter-guaranty with real estate mortgage (Schedule C) that the principal obligation consisting in the promissory note was not paid upon maturity; and that plaintiff as surety had paid the obligation thereunder, does plaintiff have a cause of action so as to proceed against defendants without first proceeding against Associated Reclamation & Development Corporation?

Schedule B, the indemnity agreement, reads in part as follows:

KNOW ALL MEN BY THESE PRESENTS, THAT,

We, the undersigned ASSOCIATED RECLAMATION & DEVELOPMENT CORP. represented by its President, Antonio R. Banzon; and Eugenio B. Ramos and P. Miranda, jointly and severally bind ourselves unto the PHILIPPINE AMERICAN GENERAL INSURANCE COMPANY, INC., a corporation duly organized and existing under and by virtue of the laws of the Philippines, with head office at Manila, Philippines, hereinafter called the COMPANY, in the consideration of it having become SURETY upon a bond in the sum of Pesos ELEVEN THOUSAND SEVEN HUNDRED SIXTY-FIVE . . . (P11,765.00), Philippine Currency, in favor of GENERAL ACCEPTANCE & FINANCING CORPORATION in behalf of ASSOCIATED RECLAMATION & DEVELOPMENT CORPORATION . . . subject to the following terms and conditions:

x x x           x x x           x x x

INDEMNITY:—The undersigned agree at all times to jointly and severally indemnify the COMPANY and keep it indemnified and hold and save it harmless from and against any and all damages, losses, costs, stamps, taxes, penalties, charges and expenses of whatsoever kind and nature which the COMPANY shall or may at any time sustain or incur in consequence of having become surety upon the bond hereinabove referred to . . . .

x x x           x x x           x x x

OUR LIABILITY THEREUNDER: — It shall not be necessary for the COMPANY to bring suit against the principal upon his default, or exhaust the property of the principal, but the liability hereunder of the undersigned indemnitors shall be jointly and severally, a primary one, the same as that of the principal, and shall be exigible immediately upon the occurrence of such default. (Record on Appeal, pp. 48-50, 53-54, Emphasis supplied.)

It is clear from the foregoing that the amended complaint sufficiently states a cause of action against defendants. For the creditor may proceed against any one of the solidary debtors or some or all of them simultaneously (Art. 1216, New Civil Code). It should not be overlooked, also, that the above-quoted indemnity agreement could not have been modified by Schedule C, the counter-guaranty agreement, since the former was executed one day after the latter.

Finally, even under Schedule C, the defendants as counter-guarantors are not entitled to demand exhaustion of the properties of the principal debtor. For Schedule C is a counter-guaranty with real estate mortgage. It is accepted that guarantors have no right to demand exhaustion of the properties of the principal debtor, under Article 2058 of the New Civil Code, where a pledge or mortgage has been given as a special security (Saavedra vs. Price, 68 Phil. 688; Southern Motors vs. Barbosa, 53 O.G. 137).

Wherefore, the order appealed from is hereby reversed and set aside and the case is remanded to the court a quo for further proceedings. Costs against defendants-appellees. So ordered.

Bitanga v. Pyramid Construction Engineering Corporation, G.R. No. 173526, August 28, 2008

Facts: 

• Respondent Pyramid Construction and Engineering Corporation filed a Complaint against the Benjamin Bitanga and his wife, Marilyn Bitanga for specific performance and damages, with an application for a writ of preliminary attachment.
• Pyramid Construction and Engineering Corporation entered into an agreement with Macrogen Realty, of which Benjamin Bitanga is the President, to construct the Shoppers Gold Building in Parañaque City.
• Macrogen Realty failed to settle respondent's progress billings.
• Pyramid Construction and Engineering Corporation assured Benjamin Bitanga that the outstanding account would be paid, prompting respondent to continue construction.
• Despite assurances, Macrogen Realty failed to pay the agreed installments under the Compromise Agreement, leading respondent to move for a writ of execution, which was granted by Construction Industry Arbitration Commission.
• The sheriff reported inability to locate Macrogen Realty's properties, except for a bank deposit of P20,242.33.
• Respondent demanded payment from petitioner as guarantor, but it was left unheeded.
• Marilyn filed a Motion to Dismiss, arguing she had no part in the Contract of Guaranty and Compromise Agreement.
• RTC: Denied Marilyn's Motion to Dismiss, citing Rule 3, Section 4 of the Revised Rules of Court.
• "SEC. 4. Spouses as parties. – Husband and wife shall sue or be sued jointly, except as provided by law."
• Petitioner filed an Answer, that respondent failed to exhaust all legal remedies to collect from Macrogen the amount due under the Compromise Agreement, considering that Macrogen Realty still had uncollected credits which were more than enough to pay for the same. Given these premise, petitioner could not be held liable as guarantor.
• RTC: Rendered a partial Decision ordering both defendants to pay the respondent, subject to respondent's decision on pursuing other claims.
• CA: Held Marilyn not liable based on the principle that a contract cannot be enforced against one who is not a party to it.

Issue: 

• Whether petitioner is entitled to the benefit of excussion. NO

Held:

We are not persuaded by petitioner’s arguments.

Rule 35 of the Revised Rules of Civil Procedure provides:

Section 1. Summary judgment for claimant. – A party seeking to recover upon a claim, counterclaim, or cross-claim or to obtain a declaratory relief may, at any time after the pleading in answer thereto has been served, move with supporting affidavits, depositions or admissions for a summary judgment in his favor upon all or any part thereof.

For a summary judgment to be proper, the movant must establish two requisites: (a) there must be no genuine issue as to any material fact, except for the amount of damages; and (b) the party presenting the motion for summary judgment must be entitled to a judgment as a matter of law. Where, on the basis of the pleadings of a moving party, including documents appended thereto, no genuine issue as to a material fact exists, the burden to produce a genuine issue shifts to the opposing party. If the opposing party fails, the moving party is entitled to a summary judgment.

In a summary judgment, the crucial question is: are the issues raised by the opposing party not genuine so as to justify a summary judgment?

First off, we rule that the issue regarding the propriety of the service of a copy of the demand letter on the petitioner in his office is a sham issue. It is not a bar to the issuance of a summary judgment in respondent’s favor.

A genuine issue is an issue of fact which requires the presentation of evidence as distinguished from an issue which is a sham, fictitious, contrived or false claim. To forestall summary judgment, it is essential for the non-moving party to confirm the existence of genuine issues, as to which he has substantial, plausible and fairly arguable defense, i.e., issues of fact calling for the presentation of evidence upon which reasonable findings of fact could return a verdict for the non-moving party, although a mere scintilla of evidence in support of the party opposing summary judgment will be insufficient to preclude entry thereof.

Significantly, petitioner does not deny the receipt of the demand letter from the respondent. He merely raises a howl on the impropriety of service thereof, stating that "the address to which the said letter was sent was not his residence but the office of Macrogen Realty, thus it cannot be considered as the correct manner of conveying a letter of demand upon him in his personal capacity."

Section 6, Rule 13 of the Rules of Court states:

SEC. 6. Personal service. – Service of the papers may be made by delivering personally a copy to the party or his counsel, or by leaving it in his office with his clerk or with a person having charge thereof. If no person is found in his office, or his office is not known, or he has no office, then by leaving the copy, between the hours of eight in the morning and six in the evening, at the party’s or counsel’s residence, if known, with a person of sufficient age and discretion then residing therein.

The affidavit of Mr. Robert O. Pagdilao, messenger of respondent’s counsel states in part:

2. On 4 January 2001, Atty. Jose Vicente B. Salazar, then one of the Associates of the ACCRA Law Offices, instructed me to deliver to the office of Mr. Benjamin Bitanga a letter dated 3 January 2001, pertaining to Construction Industry Arbitration Commission (hereafter, "CIAC") Case No. 99-56, entitled "Pyramid Construction Engineering Corporation vs. Macrogen Realty Corporation."

3. As instructed, I immediately proceeded to the office of Mr. Bitanga located at the 12th Floor, Planters Development Bank Building, 314 Senator Gil Puyat Avenue, Makati City. I delivered the said letter to Ms. Dette Ramos, a person of sufficient age and discretion, who introduced herself as one of the employees of Mr. Bitanga and/or of the latter’s companies.

We emphasize that when petitioner signed the Contract of Guaranty and assumed obligation as guarantor, his address in the said contract was the same address where the demand letter was served.

 He does not deny that the said place of service, which is the office of Macrogen, was also the address that he used when he signed as guarantor in the Contract of Guaranty. Nor does he deny that this is his office address; instead, he merely insists that the person who received the letter and signed the receiving copy is not an employee of his company. Petitioner could have easily substantiated his allegation by a submission of an affidavit of the personnel manager of his office that no such person is indeed employed by petitioner in his office, but that evidence was not submitted.33 All things are presumed to have been done correctly and with due formality until the contrary is proved. This juris tantum presumption stands even against the most well-reasoned allegation pointing to some possible irregularity or anomaly.34 It is petitioner’s burden to overcome the presumption by sufficient evidence, and so far we have not seen anything in the record to support petitioner’s charges of anomaly beyond his bare allegation. Petitioner cannot now be heard to complain that there was an irregular service of the demand letter, as it does not escape our attention that petitioner himself indicated "314 Sen. Gil Puyat Avenue, Makati City" as his office address in the Contract of Guaranty.

Moreover, under Section 6, Rule 13 of the Rules of Court, there is sufficiency of service when the papers, or in this case, when the demand letter is personally delivered to the party or his counsel, or by leaving it in his office with his clerk or with a person having charge thereof, such as what was done in this case.

We have consistently expostulated that in summary judgments, the trial court can determine a genuine issue on the basis of the pleadings, admissions, documents, affidavits or counter affidavits submitted by the parties. When the facts as pleaded appear uncontested or undisputed, then there is no real or genuine issue or question as to any fact, and summary judgment is called for.35

The Court of Appeals was correct in holding that:

Here, the issue of non-receipt of the letter of demand is a sham or pretended issue, not a genuine and substantial issue. Indeed, against the positive assertion of Mr. Roberto O. Pagdilao (the private courier) in his affidavit that he delivered the subject letter to a certain Ms. Dette Ramos who introduced herself as one of the employees of [herein petitioner] Mr. Benjamin Bitanga and/or of the latter’s companies, said [petitioner] merely offered a bare denial. But bare denials, unsubstantiated by facts, which would be admissible in evidence at a hearing, are not sufficient to raise a genuine issue of fact sufficient to defeat a motion for summary judgment.36

We further affirm the findings of both the RTC and the Court of Appeals that, given the settled facts of this case, petitioner cannot avail himself of the benefit of excussion.

Under a contract of guarantee, the guarantor binds himself to the creditor to fulfill the obligation of the principal debtor in case the latter should fail to do so. The guarantor who pays for a debtor, in turn, must be indemnified by the latter. However, the guarantor cannot be compelled to pay the creditor unless the latter has exhausted all the property of the debtor and resorted to all the legal remedies against the debtor. This is what is otherwise known as the benefit of excussion.

Article 2060 of the Civil Code reads:

Art. 2060. In order that the guarantor may make use of the benefit of excussion, he must set it up against the creditor upon the latter’s demand for payment from him, and point out to the creditor available property of the debtor within Philippine territory, sufficient to cover the amount of the deb 

The afore-quoted provision imposes a condition for the invocation of the defense of excussion. Article 2060 of the Civil Code clearly requires that in order for the guarantor to make use of the benefit of excussion, he must set it up against the creditor upon the latter’s demand for payment and point out to the creditor available property of the debtor within the Philippines sufficient to cover the amount of the debt.

It must be stressed that despite having been served a demand letter at his office, petitioner still failed to point out to the respondent properties of Macrogen Realty sufficient to cover its debt as required under Article 2060 of the Civil Code. Such failure on petitioner’s part forecloses his right to set up the defense of excussion.

Worthy of note as well is the Sheriff’s return stating that the only property of Macrogen Realty which he found was its deposit of P20,242.23 with the Planters Bank.

Article 2059(5) of the Civil Code thus finds application and precludes petitioner from interposing the defense of excussion. We quote:

Art. 2059. This excussion shall not take place:

x x x x

(5) If it may be presumed that an execution on the property of the principal debtor would not result in the satisfaction of the obligation.

As the Court of Appeals correctly ruled:

We find untenable the claim that the [herein petitioner] Benjamin Bitanga cannot be compelled to pay Pyramid because the Macrogen Realty has allegedly sufficient assets. Reason: The said [petitioner] had not genuinely controverted the return made by Sheriff Joseph F. Bisnar, who affirmed that, after exerting diligent efforts, he was not able to locate any property belonging to the Macrogen Realty, except for a bank deposit with the Planter’s Bank at Buendia, in the amount of P20,242.23. It is axiomatic that the liability of the guarantor arises when the insolvency or inability of the debtor to pay the amount of debt is proven by the return of the writ of execution that had not been unsatisfied.

WHEREFORE, premises considered, the instant petition is DENIED for lack of merit. The Decision of the Court of Appeals dated 11 April 2006 and its Resolution dated 5 July 2006 are AFFIRMED. Costs against petitioner.

SO ORDERED.

Arroyo v. Jungsay, G.R. No. L-10168, July 22, 1916, When Excussion Not Required

Facts: 

• Jose M. A. Arroyo is the guardian of Tito Jocsing, an imbecile, appointed by court after former guardian, Florentino H. Jungsay, absconded with ward's funds.
• Arroyo won judgment of P6,000 plus interest and costs against defendants.
• The defendants are Jungsay and his bondsmen.

Issue: 

• Whether the bondsmen should be credited with P4,400, the alleged value of certain property attached as that of the absconding guardian, all of which is in the exclusive possession of third parties under claim of ownership. NO

Held:

The appellants in contending for the credit, rely upon article 1834 of the Civil Code, which gives to the surety the benefit of a levy (excusion), even when a judgment is rendered against both the surety and the principal. But, according to article 1832, before the surety is entitled to this benefit, he must point out to the creditor property of the principal debtor which can be sold and which is sufficient to cover the amount of the debt. Upon this point Manresa, in vol. 12, pp. 263-265, says:

As explicitly stated in the article under consideration, it is not sufficient that the surety claim the benefit of discussion in time, nor that is so doing he designate property of the debtor wherein to satisfy the debt. 

It is also necessary that another condition be fulfilled, to wit, that such property be realizable and that it be situated in Spanish territory. 

This is not only logical, but just, because the attachment of property situated a great distance away would be a lengthy and extremely difficult proceeding and one that, if actually not opposed to, yet does not very well accord with the purpose of the bond, that is, to insure the fulfillment of the obligation and at the same time furnish the creditor with the means of obtaining its fulfillment without hindrance or delays. The same may be said of property that is not readily realizable, and as the surety is the sole person who benefits by the discussion and the one most interested in avoiding difficulties in its execution, it is he, therefore, who should designate the property out of which the recovery is to be made, it being unquestionably convenient for him that the property he designates unite the conditions indicated in order to facilitate the payment of the debt, whereby he will be freed from the subsidiary obligation inherent in the bond.

In Hill & Co. vs. Bourcier and Pond (29 La. Ann., 841), where provisions similar to our Civil Code were under consideration, the court said:

The surety has the right, under certain circumstances, to demand the discussion of the property of the principal debtor. Where suit is brought against the surety alone, he may interpose the plea, and compel the creditor to discuss the principal debtor. The effect of this is to stay proceedings against the surety until judgment has been obtained against the principal debtor, and execution against his property has proved insufficient. When the suit is brought against the surety and the principal debtor the plea of discussion does not require or authorize any suspension of the proceedings; but the judgment will be so modified as to require the creditor to proceed by execution against the property of the principal, and to exhaust it before resorting to the property of the surety. (Bernard vs. Custis, 4 Martin, 215; Banks vs. Brander, 13 La., 276.)

In either case, the surety who desires to avail himself of this right must demand it in limine, `on the institution of proceedings against him.' He must, moreover, point out to the creditor property of the principal debtor, not incumbered, subject to seizure; and must furnish a sufficient sum to have the discussion carried into effect. 

A plea which does not meet these requirements must be disregarded. 

The property pointed out by the sureties is not sufficient to pay the indebtedness; it is not salable; it is so incumbered that third parties have, as we have indicated, full possession under claim of ownership without leaving to the absconding guardian a fractional or reversionary interest without determining first whether the claim of one or more of the occupants is well founded. In all these respects the sureties have failed to meet the requirements of article 1832 of the Civil Code.

Where a guardian absconds or is beyond the jurisdiction of the court, the proper method, under article 1834 of the Civil Code and section 577 of the Code of Civil Procedure, in order to ascertain whether such guardian is liable and to what extent, in order to bind the sureties on his official bond, is by a proceeding in the nature of a civil action wherein the sureties are made parties and given an opportunity to be heard. All this was done in the instant case.

The judgment appealed from, being in accordance with the law, the same is hereby affirmed, with costs against the appellants. So ordered.

Intestate Estate of Victor Sevilla, Simeon Sadaya v. Sevilla, G.R. No. L-17845, April 27, 1967,  Liability of Guarantors Among Themselves, Accommodation Party

Facts: 

• On March 28, 1949, Victor Sevilla, Oscar Varona, and Simeon Sadaya, jointly and severally, executed a promissory note for P15,000 with interest at 8% per annum, payable on demand, in favor of the Bank of the Philippine Islands (BPI).
• Sevilla and Sadaya signed the note as co-makers as a favor to Varona, who alone received the proceeds.
• Payments were made, and as of June 15, 1950, the outstanding balance was P4,850.
• On October 6, 1952, BPI collected the remaining balance from Sadaya, totaling P5,416.12.
• Varona failed to reimburse Sadaya despite demands.
• Victor Sevilla died intestate.
• Sadaya filed a creditor's claim in the estate proceedings, seeking P5,746.12 plus attorney's fees.
• The administrator resisted the claim, stating that Victor Sevilla signed the note only as a surety for Varona.

• CFI-Rizal: Admitted the claim of Simeon Sadaya in the amount of P5,746.12, and directing the administrator to pay the same from any available funds belonging to the estate of the deceased Victor Sevilla.

• CA: Set aside the order appealed and disallowed "appellee's claim of P5,746.12 against the intestate estate.".

Issue: 

• Whether the claim "in the amount of 50% of P5,746.12, or P2,873.06, against the intestate estate of the deceased Victor Sevilla," may be approved. NO

Held:

1. That Victor Sevilla and Simeon Sadaya were joint and several accommodation makers of the 15,000.00-peso promissory note in favor of the Bank of the Philippine Islands, need not be essayed. As such accommodation the makers, the individual obligation of each of them to the bank is no different from, and no greater and no less than, that contract by Oscar Varona. For, while these two did not receive value on the promissory note, they executed the same with, and for the purpose of lending their names to, Oscar Varona. Their liability to the bank upon the explicit terms of the promissory note is joint and several. Better yet, the bank could have pursued its right to collect the unpaid balance against either Sevilla or Sadaya. And the fact is that one of the last two, Simeon Sadaya, paid that balance.

2. It is beyond debate that Simeon Sadaya could have sought reimbursement of the total amount paid from Oscar Varona. This is but right and just. Varona received full value of the promissory note. Sadaya received nothing therefrom. He paid the bank because he was a joint and several obligor. The least that can be said is that, as between Varona and Sadaya, there is an implied contract of indemnity. And Varona is bound by the obligation to reimburse Sadaya.

3. The common creditor, the Bank of the Philippine Islands, now out of the way, we first look into the relations inter se amongst the three consigners of the promissory note. Their relations vis-a-vis the Bank, we repeat, is that of joint and several obligors. But can the same thing be said about the relations of the three consigners, in respect to each other?

Surely enough, as amongst the three, the obligation of Varona and Sevilla to Sadaya who paid can not be joint and several. For, indeed, had payment been made by Oscar Varona, instead of Simeon Sadaya, Varona could not have had reason to seek reimbursement from either Sevilla or Sadaya, or both. After all, the proceeds of the loan went to Varona and the other two received nothing therefrom.

4. On principle, a solidary accommodation maker — who made payment — has the right to contribution, from his co-accommodation maker, in the absence of agreement to the contrary between them, and subject to conditions imposed by law. This right springs from an implied promise between the accommodation makers to share equally the burdens that may ensue from their having consented to stamp their signatures on the promissory note. For having lent their signatures to the principal debtor, they clearly placed themselves — in so far as payment made by one may create liability on the other — in the category of mere joint grantors of the former. This is as it should be. Not one of them benefited by the promissory note. They stand on the same footing. In misfortune, their burdens should be equally spread.

Manresa, commenting on Article 1844 of the Civil Code of Spain,7 which is substantially reproduced in Article 20738 of our Civil Code, on this point stated:

Others, like Pothier, understand that, although the principle is evident in a strict legal sense, its consequences have been exaggerated to the point where they are contrary, not only to logic but also to equity, which should be the soul of the Law, as Laurent has said.

They argue that this action does not arise from the surety, since, indeed, the act of guaranteeing the same debt does not create any legal bond or reason to bind among the co-sureties. Instead, it stems from a subsequent act, namely the payment of the entire debt made by one of them. Equity does not allow the other co-sureties, who were equally obligated to said payment, to benefit from this act to the detriment of the one who made it.

The fact is that this action granted to the surety does arise from the act of payment, but it is a consequence of the benefit or right to division, as we have already stated. Indeed, by virtue of this, all co-sureties are obligated to contribute to the payment of the part that corresponds to each one. From this obligation, contracted by all of them, those who have not paid are relieved by the act performed by the one who paid. And although this individual only fulfilled the duty imposed by the surety contract to be responsible for the entire debt when he did not limit his obligation to any part of it, this act benefits the other co-sureties, who take advantage of it to be released from any commitment to the creditor.

5. And now, to the requisites before one accommodation maker can seek reimbursement from a co-accommodation maker.

By Article 18 of the Civil Code in matters not covered by the special laws, "their deficiency shall be supplied by the provisions of this Code". Nothing extant in the Negotiable Instruments Law would define the right of one accommodation maker to seek reimbursement from another. Perforce, we must go to the Civil Code. 

Because Sevilla and Sadaya, in themselves, are but co-guarantors of Varona, their case comes within the ambit of Article 2073 of the Civil Code which reads:

ART. 2073. When there are two or more guarantors of the same debtor and for the same debt, the one among them who has paid may demand of each of the others the share which is proportionally owing from him.

If any of the guarantors should be insolvent, his share shall be borne by the others, including the payer, in the same proportion.

The provisions of this article shall not be applicable, unless the payment has been made in virtue of a judicial demand or unless the principal debtor is insolvent.

As Mr. Justice Street puts it: "That article deals with the situation which arises when one surety has paid the debt to the creditor and is seeking contribution from his cosureties."

Not that the requirements in paragraph 3, Article 2073, just quoted, are devoid of cogent reason. Says Manresa:12

6. All of the foregoing postulate the following rules: 

1. A joint and several accommodation maker of a negotiable promissory note may demand from the principal debtor reimbursement for the amount that he paid to the payee; and 
2. a joint and several accommodation maker who pays on the said promissory note may directly demand reimbursement from his co-accommodation maker without first directing his action against the principal debtor provided that 
1. he made the payment by virtue of a judicial demand, or 
2. a principal debtor is insolvent.

The Court of Appeals found that Sadaya's payment to the bank "was made voluntarily and without any judicial demand," and that "there is an absolute absence of evidence showing that Varona is insolvent". This combination of fact and lack of fact epitomizes the fatal distance between payment by Sadaya and Sadaya's right to demand of Sevilla "the share which is proportionately owing from him."

For the reasons given, the judgment of the Court of Appeals under review is hereby affirmed. No costs. So ordered.

Prudencio, et al. v.  The Honorable Court of Appeals, G.R. No. L-34539, July 14, 1986, Liability of Guarantors Among Themselves, Accommodation Party

Facts: 

• In 1954, Spouses Eulalio and Elisa Prudencio mortgaged their land in Sampaloc, Manila to Philippine National Bank for P1,000 to guarantee a loan for Domingo Prudencio.
• In 1955, they mortgaged the same property to secure a P10,000 loan for Concepcion & Tamayo Construction Company (Company), represented by Jose Toribio.
• The Concepcion & Tamayo Construction Company had a pending contract with the Bureau of Public Works for the construction of the municipal building in Puerto Princesa, Palawan, in the amount of P36,800.00.
• Spouses Prudencio signed an 'Amendment of Real Estate Mortgage,' incorporating terms from the original mortgage.
• Jose Toribio, acting as Company's attorney-in-fact, also executed a 'Deed of Assignment', assigning Bureau payments to PNB.
• Despite an assignment of credit to PNB, the Bureau, with approval of the PNB, made payments totaling P11,234.40 directly to the Company on account of the contract price.
• The Bureau's last request was denied by the PNB for the reason that since the loan was already overdue, the remaining balance of the contract price should be applied to the loan.
• The Company abandoned the project, and the Bureau rescinded the contract in 1956.
• In 1958, Spouses Prudencio sought to cancel the mortgage.
• Since the PNB authorized payments to the Company instead of on account of the loan guaranteed by the mortgage there was a change in the conditions of the contract without the knowledge of appellants, which entitled the latter to a cancellation of their mortgage contract.
• In 1959, Spouses Prudencio filed an action to cancel the real estatate mortgage against PNB, Company, Toribio and the District Engineer of Puerto Princesa, Palawan.

Trial Court: Ordered the spouses to pay jointly and severally with their co-makers Ramon C. Concepcion and Manuel M. Tamayo the sum of P11,900.19 with interest at the rate of 6% per annum from the date of the filing of the complaint on June 27, 1959.

CA: Affirmed in toto.

• PNB had no obligation to notify the petitioners of its authorizing the three payments because aside from the fact that the petitioners were not parties to the deed of assignment, there was no stipulation in said deed making it obligatory on the part of the PNB to notify the petitioners every time it authorizes payment to the Company.

Issue: 

• Whether the Spouses Prudencio were released from their obligation as sureties and, therefore, the real estate mortgage executed by them should have been cancelled when respondent PNB did not apply the initial and subsequent payments to the petitioners' debt as provided for in the deed of assignment. YES 

Held:

Section 29 of the Negotiable Instrument Law provides:

Liability of accommodation party. —An accommodation party is one who has signed the instrument as maker, drawer, acceptor, or indorser, without receiving value therefor, and for the purpose of lending his name to some other person. Such a person is liable on the instrument to a holder for value, notwithstanding such holder at the time of taking the instrument knew him to be only an accommodation party.

In the case of Philippine Bank of Commerce v. Aruego (102 SCRA 530, 539), we held that "... in lending his name to the accommodated party, the accommodation party is in effect a surety. ... . " However, unlike in a contract of suretyship, the liability of the accommodation party remains not only primary but also unconditional to a holder for value such that even if the accommodated party receives an extension of the period for payment without the consent of the accommodation party, the latter is still liable for the whole obligation and such extension does not release him because as far as a holder for value is concerned, he is a solidary co- debtor.

Expounding on the nature of the liability of an accommodation petition party under the aforequoted section, we ruled in Ang Tiong v. Ting (22 SCRA 713, 716):

3. That the appellant, again assuming him to be an accommodation indorser, may obtain security from the maker to protect himself against the danger of insolvency of the latter, cannot in any manner affect his liability to the appellee, as the said remedy is a matter of concern exclusively between accommodation indorser and accommodated party. So that the appellant stands only as a surety in relation to the maker, granting this to be true for the sake of argument, is immaterial to the claim of the appellee, and does not a whit diminish nor defeat the rights of the latter who is a holder for value. The liability of the appellant remains primary and unconditional. To sanction the appellant's theory is to give unwarranted legal recognition to the patent absurdity of a situation where an indorser, when sued on an instrument by a holder in due course and for value, can escape liability on his indorsement by the convenient expedient of interposing the defense that he is a mere accommodation indorser.

There is, therefore, no question that as accommodation makers, petitioners would be primarily and unconditionally liable on the promissory note to a holder for value, regardless of whether they stand as sureties or solidary co-debtors since such distinction would be entirely immaterial and inconsequential as far as a holder for value is concerned. Consequently, the petitioners cannot claim to have been released from their obligation simply because the time of payment of such obligation was temporarily deferred by PNB without their knowledge and consent. There has to be another basis for their claim of having been freed from their obligation. The question which should be resolved in this instant petition, therefore, is whether or not PNB can be considered a holder for value under Section 29 of the Negotiable Instruments Law such that the petitioners must be necessarily barred from setting up the defense of want of consideration or some other personal defenses which may be set up against a party who is not a holder in due course.

A holder for value under Section 29 of the Negotiable Instruments Law is one who must meet all the requirements of a holder in due course under Section 52 of the same law except notice of want of consideration.  If he does not qualify as a holder in due course then he holds the instrument subject to the same defenses as if it were non-negotiable  

In the case at bar, can PNB, the payee of the promissory note be considered a holder in due course?

Petitioners contend that the payee PNB is an immediate party and, therefore, is not a holder in due course and stands on no better footing than a mere assignee.

In those cases where a payee was considered a holder in due course, such payee either acquired the note from another holder or has not directly dealt with the maker thereof. As was held in the case of Bank of Commerce and Savings v. Randell:

We conclude, therefore, that a payee who receives a negotiable promissory note, in good faith, for value, before maturity, and without any notice of any infirmity, from a holder, not the maker. to whom it was negotiated as a completed instrument, is a holder in due course within the purview of a Negotiable Instruments law, so as to preclude the defense of fraud and failure of consideration between the maker and the holder to whom the instrument, was delivered.

Similarly, in the case of Stone v. Goldberg & Lewis on rehearing and quoting Daniel on Negotiable Instruments, it was held:

It is a general principle of the law merchant that, as between the immediate parties to a negotiable instrument-the parties between whom there is a privity-the consideration may be inquired into; and as to them the only superiority of a bill or note over other unsealed evidence of debt is that it prima facie imports a consideration.

Although as a general rule, a payee may be considered a holder in due course we think that such a rule cannot apply with respect to the respondent PNB. Not only was PNB an immediate party or in privy to the promissory note, that is, it had dealt directly with the petitioners knowing fully well that the latter only signed as accommodation makers but more important, it was the Deed of Assignment executed by the Construction Company in favor of PNB which principally moved the petitioners to sign the promissory note also in favor of PNB. Petitioners were made to believe and on that belief entered into the agreement that no other conditions would alter the terms thereof and yet, PNB altered the same. The Deed of Assignment specifically provided that Jose F. Toribio, on behalf of the Company, "have assigned, transferred and conveyed and by these presents, do assign, transfer and convey unto the said Philippine National Bank, its successors and assigns all payments to be received from the Bureau of Public Works on account of contract for the construction of the Puerto Princesa Municipal Building in Palawan, involving the total amount of P 36,000.00" and that "This assignment shall be irrevocable and subject to the terms and conditions of the promissory note and or any other kind of documents which the Philippine National Bank have required or may require the assignor to execute to evidence the above-mentioned obligation."

Under the terms of the above Deed, it is clear that there are no further conditions which could possibly alter the agreement without the consent of the petitioners such as the grant of greater priority to obligations other than the payment of the loan due to the PNB and part of which loan was guaranteed by the petitioners in the amount of P10,000.00.

This, notwithstanding, PNB approved the Bureau's release of three payments directly to the Company instead of paying the same to the Bank. This approval was in violation of the Deed of Assignment and without any notice to the petitioners who stood to lose their property once the promissory note falls due without the same having been paid because the PNB, in effect, waived payments of the first three releases. From the foregoing circumstances, PNB can not be regarded as having acted in good faith which is also one of the requisites of a holder in due course under Section 52 of the Negotiable Instruments Law. The PNB knew that the promissory note which it took from the accommodation makers was signed by the latter because of full reliance on the Deed of Assignment, which, PNB had no intention to comply with strictly. Worse, the third payment to the Company in the amount of P4,293.60 was approved by PNB although the promissory note was almost a month overdue, an act which is clearly detrimental to the petitioners.

We, therefore, hold that respondent PNB is not a holder in due course. Thus, the petitioners can validly set up their personal defense of release from the real estate mortgage against PNB. The latter, in authorizing the third payment to the Company after the promissory note became due, in effect, extended the term of the payment of the note without the consent of the accommodation makers who stand as sureties to the accommodated party and to all other parties who are not holders in due course or who do not derive their right from the same, including PNB.

It may be argued that the Prudencios could have mortgaged their property even without the promissory note. The records show, however, that they would not have mortgaged the lot were it not for the sake of the Company whose attorney-in-fact was their relative. The spouses did not need the money for themselves.

The attorney-in-fact tried twice to convince the Prudencios to mortgage their property in order to secure a loan in favor of the Company but the Prudencios refused. It was only when the deed of assignment was shown to the spouses that they consented to the mortgage and signed the promissory note in the Bank's favor.

Article 2085 of the Civil Code enumerates the requisites of a valid mortgage contract. Petitioners do not dispute the validity of the mortgage. They only want to have it cancelled because the Bank violated the deed of assignment and extended the period of time of payment of the promissory note without the petitioners' consent and to the latter's detriment.

The mortgage cannot be separated from the promissory note for it is the latter which is the basis of determining whether the mortgage should be foreclosed or cancelled. Without the promissory note which determines the amount of indebtedness there would have been no basis for the mortgage.

True, if the Bank had not been the assignee, then the petition petitioners would be obliged to pay the Bank as their creditor on the promissory note, irrespective of whether or not the deed of assignment had been violated. However, the assignee and the creditor in this case are one and the same—the Bank itself. When the Bank violated the deed of assignment, it prejudiced itself because its very violation was the reason why it was not paid on time in its capacity as creditor in the promissory note. It would be unfair to make the petitioners now answer for the debt or to foreclose on their property.

Neither can PNB justify its acts on the ground that the Bureau of Public Works approved the deed of assignment with the condition that the wages of laborers and materials needed in the construction work must take precedence over the payment of the promissory note. In the first place, PNB did not need the approval of the Bureau. But even if it did, it should have informed the petitioners about the amendment of the deed of assignment. Secondly, the wages and materials have already been paid. That issue is academic. What is in dispute is who should bear the loss in this case. As between the petitioners and the Bank, the law and the equities of the case favor the petitioners, And thirdly, the wages and materials constitute a lien only on the constructed building but do not enjoy preference over the loan unless there is a liquidation proceeding such as in insolvency or settlement of estate. (See Philippine Savings Bank v. Lantin, 124 SCRA 476). There were remedies available at the time if the laborers and the creditors had not been paid. The fact is, they have been paid. Hence, when the PNB accepted the condition imposed by the Bureau without the knowledge or consent of the petitioners, it amended the deed of assignment which, as stated earlier, was the principal reason why the petitioners consented to become accommodation makers.

Security Bank and Trust Company, Inc. v. Cuenca, G.R. No. 138544, October 3, 2000, Novation

Facts: 

• Sta. Ines Melale Corporation (Sta. Ines) is engaged in logging operations with a Timber License Agreement from DENR.
• On November 10, 1980, Security Bank and Trust Co. granted Sta. Ines a ₱8 million credit line for logging operations.
• The Credit Approval Memorandum specified terms and joint  conditions, valid until November 30, 1981.
• Sta. Ines and Rodolfo M. Cuenca, President and Chairman of the Board of Directors, executed Chattel Mortgage and Indemnity Agreement to secure the loan.
• The Agreement states that:
• Rodolfo M. Cuenca binds himself  jointly and severally with the client (SIMC) in favor of the bank for the payment, upon demand and without the benefit of excussion of whatever amount the client may be indebted to the bank by virtue of aforesaid credit accommodation(s) including the substitutions, renewals, extensions, increases, amendments, conversions and revivals of the aforesaid credit accommodation(s).
• On November 26, 1981, Sta. Ines drew ₱6.1 million from the credit line.
• Sta. Ines duly executed a promissory note for said amount.
• In 1985, Cuenca resigned from Sta. Ines and his shares were sold to Adolfo Angala in a public auction.
• Sta. Ines obtained six additional loans totaling ₱6,369,019.50 from Security Bank.
• Sta. Ines also executed a promissory notes to cover said amount.
• However, Sta. Ines encountered difficulty in making the amortization payments on its loans and requested Security Bank. for a complete restructuring of its indebtedness
• In February 1988, Security Bank approved a restructuring of Sta. Ines' debts without Cuenca's notice or consent.
• Sta. Ines executed promissory notes totaling to ₱12.2 million dated March 9, 1988.
• ₱8.8 million + ₱3.4 million
• A Loan Agreement dated October 31, 1989, formalized the restructuring.
• Sta. Ines defaulted on restructured loans despite demands from Security Bank upon Sta. Ines and Cuenca.
• Sta. Ines was able to pay ₱1.757 million.
• Security Bank filed a complaint for sum of money.

RTC-Makati: Ordered Sta. Ines Melale Corporation and Rodolfo M. Cuenca to pay, jointly and severally, Security Bank & Trust Company the sum of ₱39,129,124.73.

CA: Modified the decision of RTC, Ruled that the 1989 Loan Agreement novated the 1980 credit accommodation, extinguishing Cuenca's liability.

• Cuenca held liable only for loans obtained before November 30, 1981, up to ₱8 million.
• Restructuring without Cuenca's consent was tantamount to a grant of an extension of time to the debtor without the consent of the surety and extinguished the surety agreement under Article 2079 of the Civil Code.

Issue: 

• Whether the 1989 Loan Agreement novated the original credit accommodation and Cuenca’s liability under the Indemnity Agreement. YES 

Held:

First Issue: Original Obligation Extinguished by Novation

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

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

Novation of a contract is never presumed. It has been held that "[i]n the absence of an express agreement, novation takes place only when the old and the new obligations are incompatible on every point."

Indeed, the following requisites must be established:

1. there is a previous valid obligation;
2. the parties concerned agree to a new contract;
3. the old contract is extinguished; and
4. there is a valid new contract. 

Petitioner contends that there was no absolute incompatibility between the old and the new obligations, and that the latter did not extinguish the earlier one. It further argues that the 1989 Agreement did not change the original loan in respect to the parties involved or the obligations incurred. It adds that the terms of the 1989 Contract were "not more onerous."  Since the original credit accomodation was not extinguished, it concludes that Cuenca is still liable under the Indemnity Agreement.

We reject these contentions. Clearly, the requisites of novation are present in this case. The 1989 Loan Agreement extinguished the obligation obtained under the 1980 credit accomodation. This is evident from its explicit provision to "liquidate" the principal and the interest of the earlier indebtedness, as the following shows:

"1.02. Purpose. The First Loan shall be applied to liquidate the principal portion of the Borrower’s present total outstanding Indebtedness to the Lender (the "Indebtedness") while the Second Loan shall be applied to liquidate the past due interest and penalty portion of the Indebtedness."

The testimony of an officer of the bank that the proceeds of the 1989 Loan Agreement were used "to pay-off" the original indebtedness serves to strengthen this ruling.

Furthermore, several incompatibilities between the 1989 Agreement and the 1980 original obligation demonstrate that the two cannot coexist. While the 1980 credit accommodation had stipulated that the amount of loan was not to exceed ₱8 million, the 1989 Agreement provided that the loan was ₱12.2 million. The periods for payment were also different.

Likewise, the later contract contained conditions, "positive covenants" and "negative covenants" not found in the earlier obligation. As an example of a positive covenant, Sta. Ines undertook "from time to time and upon request by the Lender, [to] perform such further acts and/or execute and deliver such additional documents and writings as may be necessary or proper to effectively carry out the provisions and purposes of this Loan Agreement."  Likewise, SIMC agreed that it would not create any mortgage or encumbrance on any asset owned or hereafter acquired, nor would it participate in any merger or consolidation. 

Since the 1989 Loan Agreement had extinguished the original credit accommodation, the Indemnity Agreement, an accessory obligation, was necessarily extinguished also, pursuant to Article 1296 of the Civil Code, which provides:

"ART. 1296. When the principal obligation is extinguished in consequence of a novation, accessory obligations may subsist only insofar as they may benefit third persons who did not give their consent."

Alleged Extension

Petitioner insists that the 1989 Loan Agreement was a mere renewal or extension of the ₱8 million original accommodation; it was not a novation. 

This argument must be rejected. To begin with, the 1989 Loan Agreement expressly stipulated that its purpose was to "liquidate," not to renew or extend, the outstanding indebtedness. Moreover, respondent did not sign or consent to the 1989 Loan Agreement, which had allegedly extended the original ₱8 million credit facility. Hence, his obligation as a surety should be deemed extinguished, pursuant to Article 2079 of the Civil Code, which specifically states that "[a]n extension granted to the debtor by the creditor without the consent of the guarantor extinguishes the guaranty. x x x." In an earlier case,26 the Court explained the rationale of this provision in this wise:

"The theory behind Article 2079 is that an extension of time given to the principal debtor by the creditor without the surety’s consent would deprive the surety of his right to pay the creditor and to be immediately subrogated to the creditor’s remedies against the principal debtor upon the maturity date. The surety is said to be entitled to protect himself against the contingency of the principal debtor or the indemnitors becoming insolvent during the extended period."

Country Bankers Insurance Corp. v. Lagman, G.R. No. 165487, July 13, 2011,  Novation

Facts: 

• Nelson Santos applied for a license with the National Food Authority (NFA) to store not more than 30,000 sacks of palay in his warehouse in Tarlac.
• Under General Bonded Warehouse Act, the approval for said license was conditioned upon posting of a cash bond secured by real estate signed by a duly authorized bonding company, the amount of which shall be fixed by the NFA Administrator at not less than thirty-three and one third percent (33 1/3%) of the market value of the maximum quantity of rice to be received. 
• In 1989, Country Bankers Insurance Corporation issued Warehouse Bonds for Santos, secured by an indemnity agreements.
• Value:
• Warehouse Bond No. 033044 — ₱1,749,825.00
• Warehouse Bond No. 023555 —₱749,925.00
• Parties:
• Nelson Santos — bond principal
• Antonio Lagman, agent of Country Bankers — surety 
• Republic of the Philippines, through the NFA  —  obligee
• Indemnity Agreements:
• Executed by Santos, as bond principal, together with Ban Lee Lim Santos, Rhosemelita Reguine and Antonio Lagman, as co-signors binding themselves jointly and severally liable to Country Bankers.
• In 1990, Santos alleged that Country Bankers issued another warehouse bond which was also valid for one year without Indemnity Agreement.
• Santos then secured a loan using his warehouse receipts as collateral. Santos defaulted in his payment. The sacks of palay covered by the warehouse receipts were no longer found in the bonded warehouse.
• By virtue of the surety bonds, Country Bankers was compelled to pay ₱1,166,750.37.
• Santos defaulted on a loan, and the palay covered by the bonds was missing, leading Country Bankers to pay ₱1,166,750.37.
• Country Bankers filed a complaint for sum of money against Lagman and Reguine, seeking reimbursement.
• Lagman claimed that the bonds expired after a year and the 1990 Bond superseded them.
• RTC-Manila: Held Lagman and Reguine jointly and severally liable based on the indemnity agreement.
• The bonds remained in force unless cancelled by the NFA Administrator.
• CA: Reversed the decision of the RTC, ordering the dismissal of the complaint filed against Lagman.
• The 1990 Bond superseded the 1989 Bonds. 
• The 1990 Bond covers 33.3% of the market value of the palay, thereby manifesting the intention of the parties to make the latter bond more comprehensive.

Issue: 

• Whether the subject surety bonds were superseded by a subsequent bond notwithstanding the non-cancellation thereof by the bond obligee. YES 

Held:

A continuing bond, as in this case where there is no fixed expiration date, may be cancelled only by the obligee, which is the NFA, by the Insurance Commissioner, and by the court. Thus:

In case of a continuing bond, the obligor shall pay the subsequent annual premium as it falls due until the contract of suretyship is cancelled by the obligee or by the Commissioner or by a court of competent jurisdiction, as the case may be.

By law and by the specific contract involved in this case, the effectivity of the bond required for the obtention of a license to engage in the business of receiving rice for storage is determined not alone by the payment of premiums but principally by the Administrator of the NFA. From beginning to end, the Administrator’s brief is the enabling or disabling document.

The clear import of these provisions is that the surety bonds in question cannot be unilaterally cancelled by Lagman. The same conclusion was reached by the trial court and we quote:

As there appears no record of cancellation of the Warehouse Bonds No. 03304 and No. 02355 either by the administrator of the NFA or by the Insurance Commissioner or by the Court, the Warehouse Bonds are valid and binding and cannot be unilaterally cancelled by defendant Lagman as general agent of the plaintiff. 

xxx 

A photocopy, being a mere secondary evidence, is not admissible unless it is shown that the original is unavailable.

When more than one original copy exists, it must appear that all of them have been lost, destroyed, or cannot be produced in court before secondary evidence can be given of any one. A photocopy may not be used without accounting for the other originals.

Despite knowledge of the existence and whereabouts of these duplicate originals, Lagman merely presented a photocopy. He admitted that he kept a copy of the 1990 Bond but he could no longer produce it because he had already severed his ties with Country Bankers. However, he did not explain why severance of ties is by itself reason enough for the non-availability of his copy of the bond considering that, as it appears from the 1989 Bonds, Lagman himself is a bondsman. Neither did Lagman explain why he failed to secure the original from any of the three other custodians he mentioned in his testimony. While he apparently was able to find the original with the NFA Loan Officer, he was merely contented with producing its photocopy. Clearly, Lagman failed to exert diligent efforts to produce the original.

Fueling further suspicion regarding the existence of the 1990 Bond is the absence of an Indemnity Agreement. While Lagman argued that a 1990 Bond novates the 1989 Bonds, he raises the defense of "non-existence of an indemnity agreement" which would conveniently exempt him from liability. The trial court deemed this defense as indicia of bad faith, thus:

xxx

Having discounted the existence and/or validity of the 1990 Bond, there can be no novation to speak of. Novation is the extinguishment of an obligation by the substitution or change of the obligation by a subsequent one which extinguishes or modifies the first, either by changing the object or principal conditions, or by substituting another in place of the debtor, or by subrogating a third person in the rights of the creditor. 

For novation to take place, the following requisites must concur: 

1. There must be a previous valid obligation;
2. The parties concerned must agree to a new contract;
3. The old contract must be extinguished; and 
4. There must be a valid new contract.

In this case, only the first element of novation exists. 

Indeed, there is a previous valid obligation, i.e., the 1989 Bonds. There is however neither a valid new contract nor a clear agreement between the parties to a new contract since the very existence of the 1990 Bond has been rendered dubious. Without the new contract, the old contract is not extinguished.

Implied novation necessitates a new obligation with which the old is in total incompatibility such that the old obligation is completely superseded by the new one. Quite obviously, neither can there be implied novation. In this case, there is no new obligation.

The liability of Lagman is expressed in Indemnity Agreements executed in consideration of the 1989 Bonds which we have considered as continuing contracts. Under both Indemnity Agreements, Lagman, as co-signor, together with Santos, Ban Lee Lim and Reguine, bound themselves jointly and severally to Country Bankers to indemnify it for any damage or loss sustained on the account of the execution of the bond, among others.

Lagman is bound by these Indemnity Agreements. Payments made by Country Bankers by virtue of the 1989 Bonds gave rise to Lagman’s obligation to reimburse it under the Indemnity Agreements. Lagman, being a solidary debtor, is liable for the entire obligation.

Philippine Charter Insurance Corp. v Petroleum Distributors & Service Corp., G.R. No. 138544, October 3, 2000, Novation

Facts: 

• On January 27, 1999, Petroleum Distributors and Services Corporation (PDSC) contracted N.C. Francia Construction Corporation (FCC) for the construction of Park 'N Fly Building for P45,522,197.72.
• The project was divided into two stages: 
1. Phase 1 to finish by May 17, 1999
2. Phase 2 by October 20, 1999.
• The project should be turned over by October 21, 1999.
• If FCC failed to finish the project within the period specified, liquidated damages equivalent to 1/10 of 1% of the contract price for every day of delay shall accrue in favor of PDSC.
• To ensure compliance, FCC's individual officers signed the Undertaking of Surety holding themselves personally liable for the accountabilities of FCC.
• FCC also procured a performance bond amounting to P6,828,329.00 from petitioner Philippine Charter Insurance Corporation (PCIC).
• During the Phase 1, FCC was sixteen days delayed.
• On March 25, 1999, PDSC reminded FCC to catch up with the schedule of the projected work path, or it would impose the penalty.
• However, was not addressed, as the delay ballooned to 60 days.
• FCC executed a deed of assignment as additional security:
• a portion of its receivables from Caltex Philippines, Inc. and 
• a chattel mortgage.
• PDSC and FCC executed a memorandum of agreement (MOA), revising the work schedule of the project. The performance bond was extended up to March 2, 2000.
• However, FCC still failed to accomplish the project within the agreed completion period.
• On December 3, 1999, PDSC terminated the contract.
• PDSC sent demand letters to FCC and its officers for the payment of liquidated damages amounting to P 9,149,962.02 for the delay. 
• PDSC wrote PCIC asking for remuneration pursuant to the performance bond.
• PDSC did not receive any reply from either FCC or PCIC, constraining it to file a complaint for damages, recovery of possession of personal property and/or foreclosure of mortgage with prayer for the issuance of a writ of replevin and writ of attachment, against FCC and its officers.

Arguments:

• FCC: Denied any liability to PDSC claiming that any such claim by the latter had been waived, abandoned or otherwise extinguished by the execution of the September 10, 1999 MOA. In the said MOA, PDSC assumed all the obligations originally reposed upon it.
• PCIC: As a surety, it was not liable as a principal obligor; that its liability under the bond was conditional and subsidiary and that it could be made liable only upon FCC's default of its obligation in the Building Contract up to the extent of the terms and conditions of the bond. Its obligation under the performance bond was terminated when it expired on October 15, 1999 and the extension of the performance bond until March 2, 2000 was not binding as it was made without its knowledge and consent.

RTC: Found FCC guilty of delay when it failed to finish and turn over the project. It pronounced FCC and PCIC jointly and severally liable and ordered them to pay PDSC the amount of P9,000,000.00 as damages.

CA: Modified the RTC's decision. The computation of the liquidated damages should be based on the reduced contract price of P19,809,822.12. 

Issues: 

• Whether the September 10, 1999 MOA executed by PDSC and FCC extinguished PCIC's liability under the performance bond. NO

Held:

A surety agreement has two types of relationship: 

1. the principal relationship between the obligee and the obligor; and
2. the accessory surety relationship between the principal and the surety.

The obligee accepts the surety's solidary undertaking to pay if the obligor does not pay. Such acceptance, however, does not change in any material way the obligee's relationship with the principal obligor. Neither does it make the surety an active party in the principal obligor-obligee relationship. It follows, therefore, that the acceptance does not give the surety the right to intervene in the principal contract. The surety's role arises only upon the obligorï's default, at which time, it can be directly held liable by the obligee for payment as a solidary obligor. 

Furthermore, in order that an obligation may be extinguished by another which substitutes the same, it is imperative that it be so declared in unequivocal terms, or that the old and new obligation be in every point incompatible with each other. Novation of a contract is never presumed. In the absence of an express agreement, novation takes place only when the old and the new obligations are incompatible on every point. 

Undoubtedly, a surety is released from its obligation when there is a material alteration of the principal contract in connection with which the bond is given, such as a change which imposes a new obligation on the promising party, or which takes away some obligation already imposed, or one which changes the legal effect of the original contract and not merely its form. In this case, however, no new contract was concluded and perfected between PDSC and FCC. A reading of the September 10, 1999 MOA reveals that only the revision of the work schedule originally agreed upon was the subject thereof. The parties saw the need to adjust the work schedule because of the various subcontracting made by PDSC. In fact, it was specifically stated in the MOA that "all other terms and conditions of the Building Contract of 27 January 1999 not inconsistent herewith shall remain in full force and effect" There was no new contract/agreement which could be considered to have substituted the Building Contract. As correctly ruled by the CA, thus:

At first blush, it would seem that the parties agreed on a revised timetable for the construction of Park 'N Fly. But then, nowhere in the voluminous records of this case could We find the Annex "A" mentioned in the above-quoted agreement which could have shed light to the question of whether a new period was indeed fixed by the parties. The testimony of appellant Emmanuel Francia, Sr., President and Chief Executive Officer of appellant N.C, Francia, candidly disclosed what truly happened to Annex "A", as he admitted that no new PERT/CPM was actually attached to the Memorandum of Agreement.

Accordingly, We find no compelling reason to declare that novation ensued under the prevailing circumstances. The execution of the Building Contract dated 27 January 1999 does not constitute a novation of the Memorandum of Agreement dated 10 September 1999. There lies no incompatibility between the two contracts as their principal object and conditions remained the same. While there is really no hard and fast rule to determine what might constitute to be a sufficient change that can bring about novation, the touchtone for contrariety, however, would be an irreconcilable incompatibility between the old and the new obligations. 

Philippine National Bank v The Honorable Court of Appeals, G.R. No. L-30937, January 21, 1987, Increase of Indebtedness

Facts: 

• Marino P. Rubin obtained a sugar crop loan of P40,200.00 from Philippine National Bank (PNB)-Binalbagan secured by a chattel mortgage.
• As additional security, Philippine Phoenix Surety and Insurance, Inc. (Phoenix) issued Surety Bond No. 88 for P10,000.00 in favor of PNB.
• The said bond was to expire one (1) year from the date thereof, unless within ten (10) days from its expiration, the surety is notified of any existing obligations thereunder
• Three months later, PNB increased the loan to P56,800.00 without the knowledge and consent of Phoenix.
• Rubin failed to liquidate said loan. 
• PNB demanded of Phoenix that it make good its undertaking as surety for Rubin up to the stated amount of P10,000.00.
• Phoenix denied liability.
• PNB to filed a collection case against Rubin, his guarantors, and sureties, including Phoenix.
• CFI: Ruled in favor of PNB, ordering Phoenix to pay P10,000.00 if Rubin and his guarantors failed to settle the judgment amount.
• CA: Modified the decision, exonerating Phoenix from liability under the surety bond.

Issue: 

• Whether the the private respondent Phoenix is exonerated from liability under its surety bond. YES 

Held:

The discharge of private respondent Phoenix from liability under Surety Bond No. 88 is correct. Contrary to petitioner's thinking, the contract in question is not a continuing chattel mortgage for which consent and knowledge of the surety is unnecessary for an increase in the amount of the principal obligation. 

The contract of chattel mortgage itself fixed the credits, loans, overdrafts, etc. and other valuable consideration received thereunder at Forty Thousand Two Hundred Pesos [P40,200,00]. The undertaking under said contract was "for the purpose of securing their payment including the interest thereon, the cost of collection and other obligations owing by the Debtor-Mortgagor to the mortgagee, whether direct or indirect, principal or secondary as appears in the accounts, books and records of the mortgagee ... . " [p. 179, Record on Appeal].

Applying the principle of ejusdem generis, the term "other obligations" must be limited to such as are of the same nature as interest and costs of collection. The term cannot be enlarged to include future additional advances to debtor-mortgagor, much less be interpreted as a previous authorization from the surety to increase the principal amount fixed in the contract.

The increase in the indebtedness from P40,200.00 to P56,800.00 is material and prejudicial to private respondent Phoenix. While the liability of private respondent under the bond is limited to P10,000.00, the increase in the amount of the debt proportionally decreased the probability of the principal debtor being able to liquidate the debt; thus, increasing the risk undertaken by the surety to answer for the failure of the debtor to pay. "A material alteration of the principal contract, effected by the creditor and principal debtor without the knowledge and consent of the surety, completely discharges the surety from all liability in the contract of suretyship."

 

Cochingyan, Jr. v R&B Surety and Insurance Company, Inc. G.R. No. L-47369, June 30, 1987, Extension

Facts: 

• Pacific Agricultural Suppliers, Inc. (PAGRICO) obtained an increase in its line of credit from Philippine National Bank (PNB) from P400,000.00 to P800,000.00, 
• To secure compliance with the bond requirement of P400,000.00, R & B Surety and Insurance Co., Inc. (R & B Surety) issued Surety Bond No. 4765 in favor of PNB, with PAGRICO and R & B Surety jointly and severally bound to comply with the "terms and conditions of the advance line [of credit] established by the [PNB]." 
• PNB had the right under the Surety Bond to proceed directly against R & B Surety "without the necessity of first exhausting the assets" of the principal obligor, PAGRICO. 
• The Surety Bond also provided that R & B Surety's liability was not to be limited to the principal sum of P400,000.00, but would also include "accrued interest" on the said amount "plus all expenses, charges or other legal costs incident to collection of the obligation [of R & B Surety]" under the Surety Bond.
• Two identical indemnity agreements were made with R & B Surety:
1. One dated December 23, 1963, signed by Catholic Church Mart (CCM) and Joseph Cochingyan, Jr.
2. Another dated December 24, 1963, signed by PAGRICO, Pacific Copra Export Inc. (PACOCO), Jose K. Villanueva, and Liu Tua Ben.
• Both agreements bound indemnitors jointly and severally to pay an annual premium of P5,103.05.
• Indemnity agreements state obligations to indemnify R & B Surety for damages, costs, attorney's fees, etc., related to the Surety Bond.
• Obligations mature upon demand from the creditor or court order, or when R & B Surety becomes liable to make payments under the Bond terms.
• R & B Surety is authorized to accept payments and grant extensions without consent from other obligors.
• Any payments made by R & B Surety under the Bond terms are final and not dispuable by the undersigned indemnitors.
• Two years after the Surety Bond and the Indemnity Agreements were executed, a Trust Agreement was entered to address default by PAGRICO and PACOCO on obligations guaranteed by bonds issued by R & B Surety and Consolacion Insurance & Surety Co., Inc., respectively with the trustor obligated to comply with indemnity agreements in favor of R & B and Consolacion to avoid impending suits by PNB.
• Trustors: Jose and Susana Cochingyan, Sr., doing business as Catholic Church Mart, represented by Joseph Cochingyan, Jr.
• Trustee: Tomas Besa, a PNB official
• Beneficiary: Philippine National Bank (PNB)
• PAGRICO failed to fulfill its obligation to the PNB. PNB demanded payment from R & B Surety of the sum of P400,000.00, the full amount of the Principal Obligation.
• R & B Surety made payments totaling P70,000.00 to PNB in response to the demand.
• R & B Surety sent formal demand letters to Joseph Cochingyan, Jr. and Jose K. Villanueva for reimbursement and discharge of liability under the Surety Bond. R & B Surety then filed a lawsuit against Cochingyan, Jr., Villanueva, and Liu Tua Ben seeking reimbursement and discharge of liability.
• Villanueva claimed in his answer that the Principal Obligation of PAGRICO to the PNB secured by the Surety Bond had already been assumed by CCM by virtue of a Trust Agreement entered into with the PNB and that his obligation under the Indemnity Agreement was thereby extinguished by novation arising from the change of debtor under the Principal Obligation.
• CFI-Manila: Ruled in favor of R & B Surety, ordering Cochingyan and Villanueva to pay P400,000.00 plus interest and other fees.

Issues: 

• Whether the Trust Agreement extended the term of the Surety Bond so as to release petitioners from their obligation as indemnitors thereof as they did not give their consent to the execution of the Trust Agreement. NO

Held:

We turn to the contention of petitioner Jose K. Villanueva that his obligation as indemnitor under the 24 December 1963 Indemnity Agreement with R & B Surety was extinguished when the PNB agreed in the Trust Agreement "to hold in abeyance any action to enforce its claims against R & B Surety .

The Indemnity Agreement speaks of the several indemnitors "apply[ing] jointly and severally (in solidum) to the R & B Surety] — to become SURETY upon a SURETY BOND demanded by and in favor of [PNB] in the sum of [P400,000.00] for the faithful compliance of the terms and conditions set forth in said SURETY BOND — ." This part of the Agreement suggests that the indemnitors (including the petitioners) would become co-sureties on the Security Bond in favor of PNB. The record, however, is bereft of any indication that the petitioners-indemnitors ever in fact became co-sureties of R & B Surety vis-a-vis the PNB. The petitioners, so far as the record goes, remained simply indemnitors bound to R & B Surety but not to PNB, such that PNB could not have directly demanded payment of the Principal Obligation from the petitioners. Thus, we do not see how Article 2079 of the Civil Code-which provides in part that "[a]n extension granted to the debtor by the creditor without the consent of the guarantor extinguishes the guaranty" could apply in the instant case.

The petitioner-indemnitors are, as, it were, second-tier parties so far as the PNB was concerned and any extension of time granted by PNB to any of the first-tier obligators (PAGRICO, R &B Surety and the trustors[s]) could not prejudice the second-tier parties.

There is no other reason why petitioner Villanueva's contention must fail. PNB's undertaking under the Trust Agreement "to hold in abeyance any action to enforce its claims" against R & B Surety did not extend the maturity of R & B Surety's obligation under the Surety Bond. The Principal Obligation had in fact already matured, along with that of R &B Surety, by the time the Trust Agreement was entered into. Petitioner's Obligation had in fact already matured, for those obligations were to mature "as soon as [R & B Surety] became liable to make payment of any sum under the terms of the [Surety Bond] — whether the said sum or sums or part thereof have been actually paid or not." Thus, the situation was that precisely envisaged in Article 2079:

[t]he mere failure on the part of the creditor to demand payment after the debt has become due does not of itself constitute any extension of the referred to herein.

The theory behind Article 2079 is that an extension of time given to the principal debtor by the creditor without the surety of his right to pay the creditor and to be immediately subrogated to the creditor's remedies against the principal debtor upon the original maturity date. The surety is said to be entitled to protect himself against the principal debtor upon the orginal maturity date. The surety is said to be entitled to protect himself against the contingency of the principal debtor or the indemnitors becoming insolvent during the extended period. The underlying rationale is not present in the instant case. As this Court has held,

merely delay or negligence in proceeding against the principal will not discharge a surety unless there is between the creditor and the principal debtor a valid and binding agreement therefor, one which tends to prejudice [the surety] or to deprive it of the power of obtaining indemnity by presenting a legal objection for the time, to the prosecution of an action on the original security. 

In the instant case, there was nothing to prevent the petitioners from tendering payment, if they were so minded, to PNB of the matured obligation on behalf of R & B Surety and thereupon becoming subrogated to such remedies as R & B Surety may have against PAGRICO.

Palmares v Court of Appeals, G.R. No. 126490, March 31, 1998, Failure or delay to demand

Facts: 

• M.B. Lending Corporation extended a loan of P30,000.00 to the spouses Osmeña and Merlyn Azarraga, along with petitioner Estrella Palmares, under a promissory note.
• The loan was payable by May 12, 1990, with compounded interest at 6% per annum computed every 30 days.
• Despite four partial payments after the execution of the promissory note and loan maturity, the spouses were only able to pay P16,300.00 and a balance of P13,700.00 remained, with no further payments made after September 26, 1991.
• On the basis of petitioner's solidary liability under the promissory note, the corporation filed a complaint against petitioner Palmares alone, excluding the principal debtors, due to their alleged insolvency.
• Petitioner claimed that she offered to settle the obligation in August 1990 but was told by the corporation not worry about it and to wait for collection from the spouses Azarraga. 
• RTC-Iloilo: Dismissed the complaint without prejudice, without prejudice to the filing of a separate action for a sum of money against the spouses Osmeña and Merlyn Azarraga who are primarily liable on the instrument. 
• It recognized petitioner's secondary liability as a co-maker and upheld her offer to pay as valid tender of payment.
• CA: Reversed the decision, declaring petitioner liable to the promissory note as a surety.
• The Court of Appeals justified its decision by stating that petitioner admitted her liability in her Answer and that the promissory note, even if a contract of adhesion, was not entirely prohibited as petitioner could have rejected it.

Issue: 

• Whether the petitioner cannot as yet be compelled to pay the loan because the principal debtors cannot be considered in default in the absence of a judicial or extrajudicial demand. YES

Held:

A surety is an insurer of the debt, whereas a guarantor is an insurer of the solvency of the debtor. A suretyship is an undertaking that the debt shall be paid; a guaranty, an undertaking that the debtor shall pay. Stated differently, a surety promises to pay the principal's debt if the principal will not pay, while a guarantor agrees that the creditor, after proceeding against the principal, may proceed against the guarantor if the principal is unable to pay.

xxx

There is no merit in petitioner's contention that the complaint was prematurely filed because the principal debtors cannot as yet be considered in default, there having been no judicial or extrajudicial demand made by respondent corporation. Petitioner has agreed that respondent corporation may demand payment of the loan from her in case the principal maker defaults, subject to the same conditions expressed in the promissory note. Significantly, paragraph (G) of the note states that "should I fail to pay in accordance with the above schedule of payment, I hereby waive my right to notice and demand." Hence, demand by the creditor is no longer necessary in order that delay may exist since the contract itself already expressly so declares. As a surety, petitioner is equally bound by such waiver.

Even if it were otherwise, demand on the sureties is not necessary before bringing suit against them, since the commencement of the suit is a sufficient demand. On this point, it may be worth mentioning that a surety is not even entitled, as a matter of right, to be given notice of the principal's default. Inasmuch as the creditor owes no duty of active diligence to take care of the interest of the surety, his mere failure to voluntarily give information to the surety of the default of the principal cannot have the effect of discharging the surety. The surety is bound to take notice of the principal's default and to perform the obligation. He cannot complain that the creditor has not notified him in the absence of a special agreement to that effect in the contract of suretyship. 

The alleged failure of respondent corporation to prove the fact of demand on the principal debtors, by not attaching copies thereof to its pleadings, is likewise immaterial. In the absence of a statutory or contractual requirement, it is not necessary that payment or performance of his obligation be first demanded of the principal, especially where demand would have been useless; nor is it a requisite, before proceeding against the sureties, that the principal be called on to account. The underlying principle therefor is that a suretyship is a direct contract to pay the debt of another. A surety is liable as much as his principal is liable, and absolutely liable as soon as default is made, without any demand upon the principal whatsoever or any notice of default. As an original promisor and debtor from the beginning, he is held ordinarily to know every default of his principal.

xxx

We agree with respondent corporation that its mere failure to immediately sue petitioner on her obligation does not release her from liability. Where a creditor refrains from proceeding against the principal, the surety is not exonerated. In other words, mere want of diligence or forbearance does not affect the creditor's rights vis-a-vis the surety, unless the surety requires him by appropriate notice to sue on the obligation. Such gratuitous indulgence of the principal does not discharge the surety whether given at the principal's request or without it, and whether it is yielded by the creditor through sympathy or from an inclination to favor the principal, or is only the result of passiveness. The neglect of the creditor to sue the principal at the time the debt falls due does not discharge the surety, even if such delay continues until the principal becomes insolvent. And, in the absence of proof of resultant injury, a surety is not discharged by the creditor's mere statement that the creditor will not look to the surety, or that he need not trouble himself. The consequences of the delay, such as the subsequent insolvency of the principal, or the fact that the remedies against the principal may be lost by lapse of time, are immaterial. 

The raison d'être for the rule is that there is nothing to prevent the creditor from proceeding against the principal at any time.  At any rate, if the surety is dissatisfied with the degree of activity displayed by the creditor in the pursuit of his principal, he may pay the debt himself and become subrogated to all the rights and remedies of the creditor. 

It may not be amiss to add that leniency shown to a debtor in default, by delay permitted by the creditor without change in the time when the debt might be demanded, does not constitute an extension of the time of payment, which would release the surety. In order to constitute an extension discharging the surety, it should appear that the extension was for a definite period, pursuant to an enforceable agreement between the principal and the creditor, and that it was made without the consent of the surety or with a reservation of rights with respect to him. The contract must be one which precludes the creditor from, or at least hinders him in, enforcing the principal contract within the period during which he could otherwise have enforced it, and which precludes the surety from paying the debt.

None of these elements are present in the instant case. Verily, the mere fact that respondent corporation gave the principal debtors an extended period of time within which to comply with their obligation did not effectively absolve here in petitioner from the consequences of her undertaking. Besides, the burden is on the surety, herein petitioner, to show that she has been discharged by some act of the creditor, herein respondent corporation, failing in which we cannot grant the relief prayed for.

Sps Toh v. Solid Bank Corporation, G.R. No. 154183, August 7, 2003, Release for Deprivation of Subrogation. 

Facts: 

• Solid Bank Corporation agreed to extend an "omnibus line" credit facility worth P10 million to First Business Paper Corporation (FBPC).
• The terms and conditions were stipulated in a "letter-advise," which became effective upon compliance with documentary requirements.
• The submitted documents essential for the credit facility were:
1. Board Resolution or excerpts of the Board of Directors Meeting, duly ratified by a Notary Public, authorizing the loan and security arrangement as well as designating the officers to negotiate and sign for FBPC specifically stating authority to mortgage, pledge and/or assign the properties of the corporation;
2. agreement to purchase Domestic Bills; and, 
3. Continuing Guaranty for any and all amounts signed by petitioner-spouses Luis Toh and Vicky Tan Toh, and respondent-spouses Kenneth and Ma. Victoria Ng Li.
• Luis Toh — then Chairman of the Board (FBPC)
• Vicky Tan Toh — then Vice-President (FBPC)
• Kenneth Ng Li — President (FBPC)
• Ma. Victoria Ng Li — General Manager (FBPC)
• The Continuing Guaranty was embodied in a public document prepared solely by respondent Bank. 
• The terms of the instrument defined the contract arising therefrom as a surety agreement and provided for the solidary liability of the signatories thereto for and in consideration of "loans or advances" and "credit in any other manner to, or at the request or for the account" of FBPC.
• The Continuing Guaranty set forth no maximum limit on the indebtedness that respondent FBPC may incur and for which the sureties may be liable, stating that the credit facility "covers any and all existing indebtedness of, and such other loans and credit facilities which may hereafter be granted to FIRST BUSINESS PAPER CORPORATION." 
• The surety also contained a de facto acceleration clause if "default be made in the payment of any of the instruments, indebtedness, or other obligation" guaranteed by petitioners and respondents. 
• To strengthen this security, the Continuing Guaranty waived rights of the sureties against delay or absence of notice or demand on the part of respondent Bank, and gave future consent to the Bank's action to "extend or change the time payment, and/or the manner, place or terms of payment," including renewal, of the credit facility or any part thereof in such manner and upon such terms as the Bank may deem proper without notice to or further assent from the sureties. 
• FBPC opened thirteen (13) letters of credit obtained loans totaling P15,227,510.00 by November 17, 1993.
• As the letters of credit were secured, FBPC through its officers Kenneth Ng Li, Ma. Victoria Ng Li and Redentor Padilla as signatories executed a series of trust receipts over the goods allegedly purchased from the proceeds of the loans. 
• On January 13, 1994, the Bank received information that respondent-spouses Kenneth Ng Li and Ma. Victoria Ng Li had fraudulently departed from their conjugal home. 
• On January 14, 1994, the Bank demanded payment from FBPC and petitioners Luis Toh and Vicky Tan Toh invoking the acceleration clause in the trust receipts of FBPC and claimed payment for unpaid overdue accounts on the letters of credit plus interests and penalties.
• The Bank also invoked the Continuing Guaranty executed by petitioner-spouses Luis Toh and Vicky Tan Toh who were the only parties known to be within national jurisdiction to answer as sureties for the credit facility of FBPC.
• The Bank filed a complaint for sum of money against FBPC and the spouses.

• RTC-Pasig: Found FBPC liable to pay respondent Solid Bank Corporation the principal of P10,539,758.68 plus twelve percent (12%) interest per annum from finality of the Decision until fully paid, and absolving petitioner-spouses Luis Toh and Vicky Tan Toh of any liability.

• CA: Held that by signing the Continuing Guaranty, petitioner-spouses became solidarily liable with FBPC to pay respondent Bank the amount of P10,539,758.68 as principal with twelve percent (12%) interest per annum from finality of the judgment until completely paid. 
• The provisions of the surety agreement did not "indicate that Spouses Luis and Vicky Toh x x x signed the instrument in their capacities as Chairman of the Board and Vice-President, respectively, of FBPC only." 

Issues: 

• Whether there was a novation of the original obligation. YES
• Whether Spouses Toh are relieved of their obligations as sureties. YES

Held:

This Court holds that the Continuing Guaranty is a valid and binding contract of petitioner-spouses as it is a public document that enjoys the presumption of authenticity and due execution. Although petitioners as appellees may raise issues that have not been assigned as errors by respondent Bank as party-appellant, i.e., unenforceability of the surety contract, we are bound by the consistent finding of the courts a quo that petitioner-spouses Luis Toh and Vicky Tan Toh "voluntarily affixed their signature[s]" on the surety agreement and were thus "at some given point in time willing to be liable under those forms." In the absence of clear, convincing and more than preponderant evidence to the contrary, our ruling cannot be otherwise.

Similarly, there is no basis for petitioners to limit their responsibility thereon so long as they were corporate officers and stockholders of FBPC. Nothing in the Continuing Guaranty restricts their contractual undertaking to such condition or eventuality. In fact the obligations assumed by them therein subsist "upon the undersigned, the heirs, executors, administrators, successors and assigns of the undersigned, and shall inure to the benefit of, and be enforceable by you, your successors, transferees and assigns," and that their commitment "shall remain in full force and effect until written notice shall have been received by [the Bank] that it has been revoked by the undersigned." Verily, if petitioners intended not to be charged as sureties after their withdrawal from FBPC, they could have simply terminated the agreement by serving the required notice of revocation upon the Bank as expressly allowed therein. 

But as we bind the spouses Luis Toh and Vicky Tan Toh to the surety agreement they signed so must we also hold respondent Bank to its representations in the "letter-advise" of 16 May 1993. Particularly, as to the extension of the due dates of the letters of credit, we cannot exclude from the Continuing Guaranty the preconditions of the Bank that were plainly stipulated in the "letter-advise." 

Fairness and justice dictate our doing so, for the Bank itself liberally applies the provisions of cognate agreements whenever convenient to enforce its contractual rights, such as, when it harnessed a provision in the trust receipts executed by respondent FBPC to declare its entire indebtedness as due and demandable and thereafter to exact payment thereof from petitioners as sureties. In the same manner, we cannot disregard the provisions of the "letter-advise" in sizing up the panoply of commercial obligations between the parties herein.

Insofar as petitioners stipulate in the Continuing Guaranty that respondent Bank "may at any time, or from time to time, in [its] discretion x x x extend or change the time payment," this provision even if understood as a waiver is confined per se to the grant of an extension and does not surrender the prerequisites therefor as mandated in the "letter-advise." In other words, the authority of the Bank to defer collection contemplates only authorized extensions, that is, those that meet the terms of the "letter-advise."

Certainly, while the Bank may extend the due date at its discretion pursuant to the Continuing Guaranty, it should nonetheless comply with the requirements that domestic letters of credit be supported by fifteen percent (15%) marginal deposit extendible three (3) times for a period of thirty (30) days for each extension, subject to twenty-five percent (25%) partial payment per extension. This reading of the Continuing Guaranty is consistent with Philippine National Bank v. Court of Appeals that any doubt on the terms and conditions of the surety agreement should be resolved in favor of the surety.

Furthermore, the assurance of the sureties in the Continuing Guaranty that "[n]o act or omission of any kind on [the Bank's] part in the premises shall in any event affect or impair this guaranty" must also be read "strictissimi juris" for the reason that petitioners are only accommodation sureties, i.e., they received nothing out of the security contract they signed. Thus said, the acts or omissions of the Bank conceded by petitioners as not affecting nor impairing the surety contract refer only to those occurring "in the premises," or those that have been the subject of the waiver in the Continuing Guaranty, and stretch to no other. 

Stated otherwise, an extension of the period for enforcing the indebtedness does not by itself bring about the discharge of the sureties unless the extra time is not permitted within the terms of the waiver, i.e., where there is no payment or there is deficient settlement of the marginal deposit and the twenty-five percent (25%) consideration, in which case the illicit extension releases the sureties. Under Art. 2055 of the Civil Code, the liability of a surety is measured by the terms of his contract, and while he is liable to the full extent thereof, his accountability is strictly limited to that assumed by its terms.

It is admitted in the Complaint of respondent Bank before the trial court that several letters of credit were irrevocably extended for ninety (90) days with alarmingly flawed and inadequate consideration - the indispensable marginal deposit of fifteen percent (15%) and the twenty-five percent (25%) prerequisite for each extension of thirty (30) days. It bears stressing that the requisite marginal deposit and security for every thirty (30) - day extension specified in the "letter-advise" were not set aside or abrogated nor was there any prior notice of such fact, if any was done.

Moreover, these irregular extensions were candidly admitted by Victor Ruben L. Tuazon, an account officer and manager of respondent Bank and its lone witness in the civil case –

Q:         You extended it even if there was no marginal deposit?

A:         Yes.

Q:         And even if partial payment is less than 25%?

A:         Yes x x x x

Q:         You have repeatedly extended despite the insufficiency partial payment requirement?

A:         I would say yes.

The foregoing extensions of the letters of credit made by respondent Bank without observing the rigid restrictions for exercising the privilege are not covered by the waiver stipulated in the Continuing Guaranty. Evidently, they constitute illicit extensions prohibited under Art. 2079 of the Civil Code, "[a]n extension granted to the debtor by the creditor without the consent of the guarantor extinguishes the guaranty." 

This act of the Bank is not mere failure or delay on its part to demand payment after the debt has become due, as was the case in unpaid five (5) letters of credit which the Bank did not extend, defer or put off, but comprises conscious, separate and binding agreements to extend the due date, as was admitted by the Bank itself –

Q:         How much was supposed to be paid on 14 September 1993, the original LC of P1,655,675.13?

A:         Under LC 93-0017 first matured on 14 September 1993. We rolled it over, extended it to December 13, 1993 but they made partial payment that is why we extended it.

Q:         The question to you now is how much was paid? How much is supposed to be paid on September 14, 1993 on the basis of the original amount of P1,655,675.13?

A:         Whenever this obligation becomes due and demandable except when you roll it over so there is novation there on the original obligations (underscoring supplied).

As a result of these illicit extensions, petitioner-spouses Luis Toh and Vicky Tan Toh are relieved of their obligations as sureties of respondent FBPC under Art. 2079 of the Civil Code.

xxx

Finally, the foregoing omission or negligence of respondent Bank in failing to safe-keep the security provided by the marginal deposit and the twenty-five percent (25%) requirement results in the material alteration of the principal contract, i.e., the "letter-advise," and consequently releases the surety.

This inference was admitted by the Bank through the testimony of its lone witness that "[w]henever this obligation becomes due and demandable, except when you roll it over, (so) there is novation there on the original obligations." As has been said, "if the suretyship contract was made upon the condition that the principal shall furnish the creditor additional security, and the security being furnished under these conditions is afterwards released by the creditor, the surety is wholly discharged, without regard to the value of the securities released, for such a transaction amounts to an alteration of the main contract."

 

People Bank and Trust Company v. Tambunting, G.R. No. L-29666, October 29, 1971,  Release for Deprivation of Subrogation

• Francisco D. Santana was sued by Peoples Bank & Trust Company, along with Jose Maria Tambunting and Maria Paz Tambunting, his son-in-law and his daughter, for the recovery of sum of money.
• On September 9, 1963, plaintiff and defendants executed a contract denominated ‘overdraft agreement and pledge.’
• Santana acted as a surety for the Tambunting couple, who were the principal debtors.
• The overdraft agreement granted the Tambuntings an overdraft up to P200,000.00 with interest at the rate of 9% per annum until September 10, 1964 from the bank for logging operations.
• Santana, as guarantor, and the spouses Tambuntings, conveyed to the bank shares of capital stock of the International Sports Development Corporation as collateral security.
• Santana also executed a document denominated as absolute guaranty in which, in consideration of the ‘overdraft agreement and pledge,’ he bound himself to the bank, jointly and severally, with the Tambunting spouses for the full and prompt payment of all the indebtedness incurred or to be incurred by said spouses on account of the overdraft line.
• The agreement was extended multiple times with the bank's approval.
• On May 11, 1965, the Manager of the Credit Department advised Tambunting of the approval for another year extension and the release of the pledge of 135 shares of stocks.
• However, the defendants failed to repay the debt. Demand letters sent to Santana and Tambuntings.
• Santana plead Article 2080 of the Civil Code:
• "The guarantors, even though they be solidary, are released from their obligation whenever by some act of the creditor they cannot be subrogated to the rights, mortgages, and preferences of the latter."

Lower Court:  Found the defense untenable. In a "contract of absolute guaranty", appellant had waived his rights to the benefit conferred by such a provision.  

Issue:  Whether in the release of the pledge without his consent, Santana was released as a guarantor. NO

Held:

The contract of absolute guaranty, . . ., expressly authorized the plaintiff bank to extend the time of payment and to release or surrender any security or part thereof held by it without notice to, or the consent of, Santana. 

He had consented in advance to the release of the guaranty which the bank might make, Santana cannot now complain that the release of the pledge was without his consent, and that it deprived him of the right to be subrogated to the rights of the creditor. 

The waiver is not contrary to law, nor is it contrary to public policy. 

The law does not prohibit the debtor-guarantor from agreeing in advance and without notice to the release of any security which had been given to assure payment of the obligation. 

The waiver is not contrary to public policy, because the right is purely personal, and does not affect public interest nor does it violate any public policy. 

Neither does the return of the shares of stocks novate the original contract for the obligation remains the same; and if it is a novation, it is a novation made with the consent of Santana. 

Moreover, the pledge is merely an accessory obligation, and its release does not vary the terms of the principal obligation. 

xxx

It could have been different if there were no such contract of absolute guaranty to which appellant was a party under the aforesaid Article 2080. He would have been freed from the obligation as a result of plaintiff releasing to the Tambuntings without his consent the 135 shares of the International Sports Development Corporation pledged to plaintiff bank to secure the overdraft line. For thereby subrogation became meaningless. Such a provision is intended for the benefit of a surety. That was a right he could avail of. 

He is not precluded however from waiving it. That was what appellant did precisely when he agreed to the contract of absolute guaranty. Again the law is clear. A right may be waived unless it would be contrary to law, public order, public policy, morals or good customs.