[G.R. No. 117660. December 18, 2000]

AGRO CONGLOMERATES, INC. and MARIO SORIANO, petitioners, vs. THE HON. COURT OF APPEALS and REGENT SAVINGS and LOAN BANK, INC., respondents.

D E C I S I O N

QUISUMBING, J.:

This is a petition for review challenging the decision[1] dated October 17, 1994 of the Court of Appeals in CA-G.R. No. 32933, which affirmed in toto the judgment of the Manila Regional Trial Court, Branch 27, in consolidated Cases Nos. 86-37374, 86-37388, 86-37543.

This petition springs from three complaints for sums of money filed by respondent bank against herein petitioners. In the decision of the Court of Appeals, petitioners were ordered to pay respondent bank, as follows:

Wherefore, judgment is hereby rendered in favor of plaintiff and against defendants, as follows:

1) In Civil Case No. 86-37374, defendants [petitioners, herein] are ordered jointly and severally, to pay to plaintiff the amount of P78,212.29, together with interest and service charge thereon, at the rates of 14% and 3% per annum, respectively, computed from November 10, 1982, until fully paid, plus stipulated penalty on unpaid principal at the rate of 6% per annum, computed from November 10, 1982, plus 15% as liquidated damage plus 10% of the total amount due, as attorneys fees, plus costs;

2) In Civil Case No. 86-37388, defendant is ordered to pay plaintiff the amount of P632,911.39, together with interest and service charge thereon at the rate of 14% and 3% per annum, respectively, computed from January 15, 1983, until fully paid, plus stipulated penalty on unpaid principal at the rate of 6% per annum, computed from January 15, 1983, plus liquidated damages equivalent to 15% of the total amount due, plus attorneys fees equivalent to 10% of the total amount due, plus costs; and

3) In Civil Case No. 86-37543, defendant is ordered to pay plaintiff, on the first cause of action, the amount of P510,000.00, together with interest and service charge thereon, at the rates of 14% and 2% per annum, respectively, computed from March 13, 1983, until fully paid, plus a penalty of 6% per annum, based on the outstanding principal of the loan, computed from March 13, 1983, until fully paid; and on the second cause of action, the amount of P494,936.71, together with interest and service charge thereon at the rates of 14% and 2%, per annum, respectively, computed from March 30, 1983, until fully paid, plus a penalty charge of 6% per annum, based on the unpaid principal, computed from March 30, 1983, until fully paid, plus (on both causes of action) an amount equal to 15% of the total amounts due, as liquidated damages, plus attorneys fees equal to 10% of the total amounts due, plus costs.[2]

Based on the records, the following are the factual antecedents.

On July 17, 1982, petitioner Agro Conglomerates, Inc. as vendor, sold two parcels of land to Wonderland Food Industries, Inc. In their Memorandum of Agreement,[3] the parties covenanted that the purchase price of Five Million (P5,000,000.00) Pesos would be settled by the vendee, under the following terms and conditions: (1) One Million (P1,000,000.00) Pesos shall be paid in cash upon the signing of the agreement; (2) Two Million (P2,000,000.00) Pesos worth of common shares of stock of the Wonderland Food Industries, Inc.; and (3) The balance of P2,000,000.00 shall be paid in four equal installments, the first installment falling

1

due, 180 days after the signing of the agreement and every six months thereafter, with an interest rate of 18% per annum, to be advanced by the vendee upon the signing of the agreement.

On July 19, 1982, the vendor, the vendee, and the respondent bank Regent Savings & Loan Bank (formerly Summa Savings & Loan Association), executed an Addendum[4]to the previous Memorandum of Agreement. The new arrangement pertained to the revision of settlement of the initial payments of P1,000,000.00 and prepaid interest of P360,000.00 (18% of P2,000,000.00) as follows:

Whereas, the parties have agreed to qualify the stipulated terms for the payment of the said ONE MILLION THREE HUNDRED SIXTY THOUSAND (P1,360,000.00) PESOS.

WHEREFORE, in consideration of the mutual covenant and agreement of the parties, they do further covenant and agree as follows:

1. That the VENDEE instead of paying the amount of ONE MILLION THREE HUNDRED SIXTY THOUSAND (P1,360,000.00) PESOS in cash, hereby authorizes the VENDOR to obtain a loan from Summa Savings and Loan Association with office address at Valenzuela, Metro Manila, being represented herein by its President, Mr. Jaime Cario and referred to hereafter as Financier; in the amount of ONE MILLION THREE HUNDRED SIXTY THOUSAND (P1,360,000.00)PESOS, plus interest thereon at such rate as the VENDEE and the Financier may agree, which amount shall cover the ONE MILLION (P1,000,000.00) PESOS cash which was agreed to be paid upon signing of the Memorandum of Agreement, plus 18% interest on the balance of two million pesos stipulated upon in Item No. 1(c) of the said agreement; provided however, that said loan shall be made for and in the name of the VENDOR.

2. The VENDEE also agrees that the full amount of ONE MILLION THREE HUNDRED SIXTY THOUSAND (P1,360,000.00) PESOS be paid directly to the VENDOR; however, the VENDEE hereby undertakes to pay the full amount of the said loan to the Financier on such terms and conditions agreed upon by the Financier and the VENDOR, it being understood that while the loan will be secured from and in the name of the VENDOR, the VENDEE will be the one liable to pay the entire proceeds thereof including interest and other charges.[5]

This addendum was not notarized.

Consequently, petitioner Mario Soriano signed as maker several promissory notes,[6] payable to the respondent bank. Thereafter, the bank released the proceeds of the loan to petitioners. However, petitioners failed to meet their obligations as they fell due. During that time, the bank was experiencing financial turmoil and was under the supervision of the Central Bank. Central Bank examiner and liquidator Cordula de Jesus, endorsed the subject promissory notes to the banks counsel for collection. The bank gave petitioners opportunity to settle their account by extending payment due dates. Mario Soriano manifested his intention to re-structure the loan, yet did not show up nor submit his formal written request.

Respondent bank filed three separate complaints before the Regional Trial Court of Manila for Collection of Sums of money. The corresponding case histories are illustrated in the table below:

Date of Loan

Amount Payment Due Date

Payment Extension

DatesCivil Case 86-37374August 12, 1982

 P78,212.29

 Nov. 10, 1982

 Feb. 8, 1983May 9, 1983Aug. 7, 1983 

2

Civil Case 86-37388July 19, 1982

 P632,911.39

 Jan. 15, 1983

 May 16, 1983Aug. 14, 1983 

Civil Case 86-37543September 14, 1982  October 1, 1982

 P510,000.00  P494,936.71

 March 13, 1983  March 30, 1983

 June 11, 1983Sept. 9, 1983 June 28, 1983Sept. 26, 1983

In their answer, petitioners interposed the defense of novation and insisted there was a valid substitution of debtor. They alleged that the addendum specifically states that although the promissory notes were in their names, Wonderland shall be responsible for the payment thereof.

The trial court held that petitioners are liable, to wit:

The evidences, however, disclose that Wonderland did not comply with its obligation under said Addendum (Exh. S) as the agreement to turn over the farmland to it, did not materialize (57 tsn, May 29, 1990), and there was, actually no sale of the land (58 tsn, ibid). Hence, Wonderland is not answerable. And since the loans obtained under the four promissory notes (Exhs. A, C, G, and E) have not been paid, despite opportunities given by plaintiff to defendants to make payments, it stands to reason that defendants are liable to pay their obligations thereunder to plaintiff. In fact, defendants failed to file a third-party complaint against Wonderland, which shows the weakness of its stand that Wonderland is answerable to make said payments.[7]

Petitioners appealed to the Court of Appeals. The trial courts decision was affirmed by the appellate court.

Hence, this recourse, wherein petitioners raise the sole issue of:

WHETHER THE COURT OF APPEALS ERRED IN NOT FINDING THAT THE ADDENDUM, SIGNED BY THE PETITIONERS, RESPONDENT BANK AND WONDERLAND INC., CONSTITUTES A NOVATION OF THE CONTRACT BY SUBSTITUTION OF DEBTOR, WHICH EXEMPTS THE PETITIONERS FROM ANY LIABILITY OVER THE PROMISSORY NOTES.

Revealed by the facts on record, the conflict among the parties started from a contract of sale of a farmland between petitioners and Wonderland Food Industries, Inc. As found by the trial court, no such sale materialized.

A contract of sale is a reciprocal transaction. The obligation or promise of each party is the cause or consideration for the obligation or promise by the other. The vendee is obliged to pay the price, while the vendor must deliver actual possession of the land. In the instant case the original plan was that the initial payments would be paid in cash. Subsequently, the parties (with the participation of respondent bank) executed an addendum providing instead, that the petitioners would secure a loan in the name of Agro Conglomerates Inc. for the total amount of the initial payments, while the settlement of said loan would be assumed by Wonderland. Thereafter, petitioner Soriano signed several promissory notes and received the proceeds in behalf of petitioner-company.

By this time, we note a subsidiary contract of suretyship had taken effect since petitioners signed the promissory notes as maker and accommodation party for the benefit of Wonderland. Petitioners became liable as accommodation party. An accommodation party is a person who has signed the instrument as maker,

3

acceptor, or indorser, without receiving value therefor, and for the purpose of lending his name to some other person and is liable on the instrument to a holder for value, notwithstanding such holder at the time of taking the instrument knew (the signatory) to be an accommodation party. [8] He has the right, after paying the holder, to obtain reimbursement from the party accommodated, since the relation between them has in effect become one of principal and surety, the accommodation party being the surety. [9] Suretyship is defined as the relation which exists where one person has undertaken an obligation and another person is also under the obligation or other duty to the obligee, who is entitled to but one performance, and as between the two who are bound, one rather than the other should perform.[10] The suretys liability to the creditor or promisee of the principal is said to be direct, primary and absolute; in other words, he is directly and equally bound with the principal. [11] And the creditor may proceed against any one of the solidary debtors.[12]

We do not give credence to petitioners assertion that, as provided by the addendum, their obligation to pay the promissory notes was novated by substitution of a new debtor, Wonderland. Contrary to petitioners contention, the attendant facts herein do not make a case of novation.

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.[13] In order that a novation can take place, the concurrence of the following requisites[14] are indispensable:

1) There must be a previous valid obligation;

2) There must be an agreement of the parties concerned to a new contract;

3) There must be the extinguishment of the old contract; and

4) There must be the validity of the new contract.

In the instant case, the first requisite for a valid novation is lacking. There was no novation by substitution of debtor because there was no prior obligation which was substituted by a new contract. It will be noted that the promissory notes, which bound the petitioners to pay, were executed after the addendum. The addendum modified the contract of sale, not the stipulations in the promissory notes which pertain to the surety contract. At this instance, Wonderland apparently assured the payment of future debts to be incurred by the petitioners.Consequently, only a contract of surety arose. It was wrong for petitioners to presume a novation had taken place. The well-settled rule is that novation is never presumed,[15] it must be clearly and unequivocally shown.[16]

As it turned out, the contract of surety between Wonderland and the petitioners was extinguished by the rescission of the contract of sale of the farmland. With the rescission, there was confusion or merger in the persons of the principal obligor and the surety, namely the petitioners herein. The addendum which was dependent thereon likewise lost its efficacy.

It is true that the basic and fundamental rule in the interpretation of contract is that, if the terms thereof are clear and leave no doubt as to the intention of the contracting parties, the literal meaning shall control. However, in order to judge the intention of the parties, their contemporaneous and subsequent acts should be considered.[17]

The contract of sale between Wonderland and petitioners did not materialize. But it was admitted that petitioners received the proceeds of the promissory notes obtained from respondent bank.

Sec. 22 of the Civil Code provides:

Every person who through an act of performance by another, or any other means, acquires or comes into possession of something at the expense of the latter without just or legal ground, shall return the same to him.

Petitioners had no legal or just ground to retain the proceeds of the loan at the expense of private respondent. Neither could petitioners excuse themselves and hold Wonderland still liable to pay the loan upon the rescission of their sales contract. If petitioners sustained damages as a result of the rescission, they should have impleaded Wonderland and asked damages. The non-inclusion of a necessary party does not prevent

4

the court from proceeding in the action, and the judgment rendered therein shall be without prejudice to the rights of such necessary party.[18] But respondent appellate court did not err in holding that petitioners are duty-bound under the law to pay the claims of respondent bank from whom they had obtained the loan proceeds.

WHEREFORE, the petition is DENIED for lack of merit. The assailed decision of the Court of Appeals dated October 17, 1994 is AFFIRMED. Costs against petitioners.

SO ORDERED.

Bellosillo, (Chairman), Mendoza, Buena, and De Leon, Jr., JJ., concur.

5

[G.R. No. 121879. August 14, 1998]

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

D E C I S I O N

PURISIMA, J.:

This is a Petition of a surety company disowning solidary liability with its principal, a recruitment agency, on the monetary claims of an overseas contract worker for illegal dismissal, non-payment and underpayment of salaries.

The antecedent facts and proceedings can be capsulized, as follows:

Private respondent Monera Andal applied with G & M Phils., Inc. for an overseas employment as a domestic helper in Riyadh, Kingdom of Saudi Arabia. She was hired for a term of two years at a monthly basic salary of US $200.00.

She left for the said jobsite on May 17, 1991 and worked for a certain Abdullah Al Basha. But on January 11, 1992, she was repatriated. Upon her repatriation, she lost no time in bringing her complaint before the Philippine Overseas Employment Agency (POEA) for illegal dismissal, non-payment and underpayment of salaries. Impleaded as a co-respondent in the complaint was the herein petitioner, Empire Insurance Company, in its capacity as the surety of G & M Phils.

Subject complaint averred, inter alia, that:

...she was not paid for four months and underpaid for four months; that she was forced to preterminate her contract due to unbearable treatment in the hands of her employer and the non-payment and underpayment of her salaries; and that she was constructively dismissed from employment. In her affidavit, she alleged that she was unpaid for 3 1/2 months; that for four months she was paid only US $150.00 instead of the agreed rate of US $200.00; that her employer resented her effort to collect her delayed salaries and, in retaliation, made her work long hours, allowing her to sleep only five hours daily and requiring her to render services for his relatives and friends without giving her additional compensation; that after serving her employer for 7 1/2 months, she sought the help of the Philippine Embassy; that her employer terminated her employment due to her insistent demand for the payment of her claims; and that she was repatriated at her own expense. On May 14, 1992, she testified that the wife of her employer always beat her and that her employer gave her US $450.00 representing her salaries for three (3) months. In her position paper, she reiterated the sufferings she allegedly underwent in the course of her employment and alleged, further, that the efforts of the Philippine Embassy to mediate and/or to settle her claims failed; that her services were abruptly terminated by her employer; and she was forced to depart at her own expense (arriving in the Philippines with only whatever clothing she had on). (pp.2-4, NLRC decision dated November 22, 1994)

Empire Insurance Company, now the petitioner, theorized that the complainant, Monera Andal, was without any cause of action against it for the alleged reason that the liability of its principal and co-respondent had not been established. It further argued that its liability, if any, for the money claims sued upon was merely subsidiary.

In its answer to the complaint, respondent G & M (Phil.), Inc., stated that it had no knowledge of complainants unpaid and underpaid salaries, her working conditions and of the proceedings at the Philippine Embassy. It denied the charge of illegal dismissal, reasoning out that the complainant abandoned her job. In its

6

position paper, it contended that the complainants money claims in dispute are not meritorious as the same are not supported by substantial evidence. It also capitalized on what it branded as the inconsistencies in the complainants pleadings with her admission that the Philippine Embassy mediated her claims, which development could have meant that subject claims had been settled.

On July 13, 1993, POEA Administrator Felicisimo O. Joson decided the claims in question; disposing, as follows:

WHEREFORE, in the light of the foregoing premises, respondents are hereby ordered to pay complainant the following:

1. US $200.00 or its peso equivalent representing complainants salary differentials for four (4) months for the period May 17, 1991 to September 17, 1991 computed at US $50.00 a month;

2. US $3,300.00 or its peso equivalent representing the payment of salaries for 16.5 months as the unexpired portion of the contract.

SO ORDERED.

From the aforesaid decision adverse to it, petitioner Empire Insurance Company appealed to the National Labor Relations Commission; posing as issues, that:

1. Complainant (Monera Andal) had no cause of action against petitioner because the liability of petitioners principal and co-respondent (G&M) had not been established.

2. Petitioners liability, if any, was merely subsidiary.

On November 22, 1994, the NLRC came out with a judgment of affirmance, upholding the POEA, and holding, thus:

The argument that respondent Empire Insurance Company is only subsidiarily liable for the judgment award is unmeritorious. It is settled that a surety is considered in law as being the same party as the debtor in relation to whatever is adjudged touching the obligation of the latter, and their liabilities are interwoven as to be inseparable...

WHEREFORE, the decision appealed from is hereby AFFIRMED.

SO ORDERED.

Undaunted by the denial of its motion for reconsideration, petitioner found its way to this court via the present petition, raising the pivotal issue of whether or not respondent NLRC erred in adjudging it (petitioner) jointly liable with its principal, G & M Phils., Inc., for the payment of private respondents monetary claims.

Petitioner faults respondent NLRC for holding that G & M Phils., Inc. failed to comply with the rules and regulations of the Department of Labor and Employment. It is petitioners submission that there is no basis for holding it liable as surety under the premises.

Although it concedes that the burden of proof in cases of illegal dismissal rests on the employer, petitioner argues that when private respondent Monera Andal asked the Philippine Embassy in Riyadh, Saudi Arabia to mediate her claims with her employer, such a move on the part of private respondent shifted the onus probandi to her to substantiate her claim.

Private respondents Comment sought the dismissal of the petition for being a wrong mode of appeal from the NLRC decision. It is private respondents stance that appeal from decisions of the National Labor Relations Commission to the Supreme Court is by a special civil action for certiorari under Rule 65 of the Revised Rules of Court. Not a petition for review under Rule 45.

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The Solicitor General, as counsel for respondent NLRC, joined private respondent in stressing on such procedural defect. Furthermore, the Solicitor General pointed out that the errors assigned by petitioner deal primarily with factual findings and, as such, are unavailing under the well-entrenched rule that findings of fact by administrative agencies and quasi-judicial bodies are generally accorded not only respect but finality, and are not to be disturbed on appeal.

We find for respondents.

Before delving into the merits of the petition, the procedural objection of respondents should first be resolved. Private respondent and the Solicitor General have correctly pointed out the elementary rule of procedure with regard to review of decisions rendered by the National Labor Relations Commission. The only way a labor case may reach the Supreme Court is through a petition for certiorari under Rule 65 of the Revised Rules of Court.[1] A petition for certiorari which is a special civil action under Rule 65 should be distinguished from a petition for review on certiorari which is a mode of appeal under Rule 45. Under Rule 65, only questions of jurisdiction or grave abuse of discretion amounting to lack or excess of jurisdiction may be entertained by the reviewing court. Therefore, only decisions of the National Labor Relations Commission tainted with grave abuse of discretion or jurisdictional errors may be elevated to this court.

Findings and/or conclusions of fact cannot be assailed in a petition for certiorari.[2] The inquiry in such a petition is limited exclusively to the issue of whether or not the respondent official acted without or in excess of jurisdiction. Consequently, petitioner cannot assail the finding arrived at by public respondent NLRC that the employer involved violated pertinent POEA rules and regulations.

However, while an appeal to the Supreme Court from decisions of the National Labor Relations Commission should be pursued as a special civil action for certiorari, in a number of cases this court has treated as special civil actions for certiorari petitions erroneously captioned as petitions for review on certiorari in the interest of justice.[3]

In the case of Peoples Security, Inc. vs. NLRC,[4] this Court held that:

Dismissal of appeal purely on technical grounds is frowned upon where the policy of the courts is to encourage hearings of appeal on their merits. The rules of procedure ought not to be applied in a very rigid  technical sense, rules of procedure are used only to help secure, not override substantial justice. If a technical and rigid enforcement of the rules is made, their aim would be defeated. (Tamayo v. Court of Appeals, 209 SCRA 518, 522 [1992] citing Gregorio v. Court of Appeals, 72 SCRA 120 [1976] ). Consequently, in the interest of justice, the instant petition for review shall be treated as a special civil action on certiorari.

The single issue posed for resolution by this court here is - whether or not the petitioning surety company is jointly liable with its principal, G & M Phils, Inc., a recruitment agency, for the payment of respondent employees monetary claims in litigation.

We rule in the affirmative. Petitioner is solidarily liable with its principal, G & M Phils., Inc., under the attendant facts and circumstances.

Suretyship is a contractual relation resulting from an agreement whereby one person, the surety, engages to be answerable for the debt, default or miscarriage of another, known as the principal.[5]

Where the surety bound itself solidarily with the principal obligor, the former is so dependent on the principal debtor such that the surety is considered in law as being the same party as the debtor in relation to whatever is adjudged touching the obligation of the latter, and their liabilities are interwoven as to be inseparable.[6] The suretys liability is solidary but the nature of its undertaking is such that unless and until the principal debtor is held liable it does not incur liability.

When the herein petitioner, Empire Insurance Company, entered into a suretyship agreement with G & M Phils., Inc., it bound itself to answer for the debt or default of the latter. And, since the POEA and NLRC found the said recruitment agency liable to private respondent, petitioners liability likewise proceeds from such a finding. As a surety, petitioner is primarily liable to private respondent, as judgment creditor, for her monetary claims against its principal, G & M Phils., Inc., and is immediately bound to pay and satisfy the same.

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Time and again, this court has pronounced that claims of overseas workers should be acted upon with sympathy, and allowed if warranted, conformably to the constitutional mandate for the protection of the working class.[7] Private employment agencies are held to be jointly and severally liable with the foreign-based employer for any violation of the recruitment agreement or contract of employment.[8]

POEA has thus promulgated a rule requiring private recruitment agencies to set up cash and surety bonds. The purpose of the required surety bond is to insure that if the rights of overseas workers are violated by their employer, recourse would still be available to them against the local companies that  recruited them for the foreign principal.[9]

It bears stressing that surety companies may be ordered impleaded by the Philippine Overseas Employment Administration (POEA) in administrative complaints against recruitment agencies, on surety bonds posted, and are bound by the judgment of POEA.[10] This Court discerns no reason why the said rule should not apply to herein petitioner.

WHEREFORE, the petition under consideration is hereby DISMISSED and the appealed decision of respondent NLRC AFFIRMED. No pronouncement as to costs.

SO ORDERED.

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G.R. No. 84084 August 20, 1990

FINMAN GENERAL ASSURANCE CORPORATION, petitioner, vs.ABDULGANI SALIK, BALABAGAN AMPILAN ALI KUBA GANDHI PUA, DAVID MALANAO, THE ADMINISTRATOR, PHILIPPINE OVERSEAS AND EMPLOYMENT ADMINISTRATION, THE SECRETARY OF LABOR AND EMPLOYMENT, respondents.

David I. Unay, Jr. for petitioner.

Kamid D. Abdul for private respondents.

 

PARAS, J.:

This is a petition for certiorari seeking to annul 1) the Order dated March 28, 1988 of the Honorable Secretary of Labor and Employment in POEA, LRO/RRD Case No. 87-09-1022-DP entitled Abdulgani Salik, et al, v. Pan Pacific Overseas and Recruiting Services and Finman General Assurance Corporation, which directed herein petitioner to pay jointly and severally with Pan Pacific the claims of herein private respondents amounting to P25,000.00 and 2) the Order dated June 7, 1988, which denied petitioner's motion for reconsideration (Rollo, p. 2).

The facts of the case are as follows:

Abdulgani Salik et al., private respondents, allegedly applied with Pan Pacific Overseas Recruiting Services, Inc. (hereinafter referred to as Pan Pacific) on April 22, 1987 and were assured employment abroad by a certain Mrs. Normita Egil. In consideration thereof, they allegedly paid fees totalling P30,000.00. But despite numerous assurances of employment abroad given by Celia Arandia and Mrs. Egil, they were not employed (Ibid., p. 15).

Accordingly, they filed a joint complaint with the Philippine Overseas Employment Administration (herein referred to as POEA) against Pan Pacific for Violation of Articles 32 and 34(a) of the Labor Code, as amended, with claims for refund of a total amount of P30,000.00 (Ibid.).

The POEA motu proprio impleaded and summoned herein petitioner surety Finman General Assurance Corporation (hereinafter referred to as Finman), in the latter's capacity as Pan Pacific's bonding company.

Summons were served upon both Pan Pacific and Finman, but they failed to answer.

On October 9, 1987, a hearing was called, but only the private respondents appeared. Despite being deemed in default for failing to answer, both Finman and Pan Pacific were still notified of the scheduled hearing. Again they failed to appear. Thus, ex-parte proceedings ensued.

During the hearing, herein private respondents reiterated the allegations in their complaint that they first paid P20,000.00 thru Hadji Usop Kabagani for which a receipt was issued signed by Engineer Arandia and countersigned by Mrs. Egil and a certain Imelda who are allegedly employed by Pan Pacific; that they paid another P10,000.00 to Engr. Arandia who did not issue any receipt therefor; that the total payment of P30,000.00 allegedly represents payments for herein private respondents in the amount of P5,000.00 each, and Abdulnasser Ali, who did not file any complaint against Pan Pacific (Ibid., pp. 15-16).

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Herein private respondents presented as their witness, Hadji Usop Kabagani who they Identified as the one who actually financed their application and who corroborated their testimonies on all material points including the non-issuance of a receipt for P10,000.00 by Engr. Arandia.

Herein petitioner, Finman, in an answer which was not timely filed, alleged, among others, that herein private respondents do not have a valid cause of action against it; that Finman is not privy to any transaction undertaken by Pan Pacific with herein private respondents; that herein private respondents claims are barred by the statute of frauds and by the fact that they executed a waiver; that the receipts presented by herein private respondents are mere scraps of paper; that it is not liable for the acts of Mrs. Egil that Finman has a cashbond of P75,000.00 only which is less than the required amount of P100,000.00; and that herein private respondents should proceed directly against the cash bond of Pan Pacific or against Mrs. Egil (Ibid., pp. 1617).

On March 18,1988, the Honorable Franklin M. Drilon, then the Secretary of Labor and Employment, upon the recommendation of the POEA hearing officer, issued an Order, the dispositive portion of which reads:

WHEREFORE, premises considered, both respondents are hereby directed to pay jointly and severally the claims of complainants, as follows:

1. Abdulgani Salik P5,000.00

2. Balabagan Ampilan 5,000.00

3. Ali Kuba 5,000.00

4. Gandhi Dua 5,000.00

5. David Malanao 5,000.00

Based on the records of this Administration, respondent agency is presently serving a total period of suspension of seventeen (1 7) months imposed in three (3) separate orders issued on June 2, 1987, August 17, 1987 and September 23, 1987. Under the new schedule of penalties published on January 21, 1987 in the Philippine Inquirer, the penalty of cancellation shall be imposed when the offender has been previously penalized with suspension the total period of which is 12 months or more. Moreover, the penalty imposable in the case at bar is two (2) months suspension for each count of violation or a total period of suspension of ten (10) months as the acts were committed in April 1987. Thus, whether under the old schedule of penalties which required a total period of suspension of twenty-four (24) months for cancellation to be imposed or under the new schedule which provides for a twelve (12) month total suspension period, the penalty of cancellation may be properly imposed upon the herein respondent agency.

In view thereof, the license of Pan Pacific Overseas Recruiting Services is hereby cancelled, effective immediately.

SO ORDERED. (Ibid., pp. 20-21).

A motion for reconsideration having been denied (Ibid., p. 22), herein petitioner instituted the instant petition for certiorari, raising the following assigned errors:

I

THE HONORABLE ADMINISTRATOR AND THE HONORABLE, SECRETARY OF LABOR ACTED WITH GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OF JURISDICTION

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IN MOTU PROPRIO IMPLEADING FINMAN AS CO-RESPONDENT OF PAN PACIFIC IN POEA LRO/RRD CASE NO. 87-09-1022 DP WHICH WAS FILED BY ABDULGANI SALIK, ET AL.;

II

THE HONORABLE SECRETARY OF LABOR ACTED WITHOUT OR IN EXCESS OF JURISDICTION AND WITH GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OF JURISDICTION IN DIRECTING FINMAN TO PAY JOINTLY AND SEVERALLY WITH PAN PACIFIC THE CLAIMS OF PRIVATE RESPONDENTS ON THE BASIS OF THE SURETYSHIP AGREEMENT BETWEEN FINMAN AND PAN PACIFIC AND THE PHILIPPINE OVERSEAS EMPLOYMENT ADMINISTRATION (POEA FOR SHORT); AND

III

THE FINDINGS OF FACT MADE BY THE POEA AND UPON WHICH THE HONORABLE SECRETARY OF LABOR BASED ITS QUESTIONED ORDERS ARE NOT SUPPORTED BY SUBSTANTIAL EVIDENCE AND ARE CONTRARY TO LAW. (Ibid., p. 101)

As required by this Court, herein public respondents filed their memorandum on July 28, 1989 (Ibid., p. 84); while that of petitioner and private respondents were filed on September 11, 1989 (Ibid., p. 89) and March 16, 1990 (Ibid., p. 120), respectively.

The petition is devoid of merit.

In its first and second assigned errors, petitioner maintains that POEA has no jurisdiction to directly enforce the suretyship undertaking of FINMAN (herein petitioner) under the surety bond (Ibid., p. 104).

In the case at bar, it remains uncontroverted that herein petitioner and Pan Pacific entered into a suretyship agreement, with the former agreeing that the bond is conditioned upon the true and faithful performance and observance of the bonded principal (Pan Pacific) of its duties and obligations. It was also understood that under the suretyship agreement, herein petitioner undertook itself to be jointly and severally liable for all claims arising from recruitment violation of Pan Pacific (Ibid., p. 23), in keeping with Section 4, Rule V, Book I of the Implementing Rules of the Labor Code, which provides:

Section 4. Upon approval of the application, the applicant shall pay to the Ministry (now Department) a license fee of P6,000.00, post a cash bond of P50,000.00 or negotiable bonds of equivalent amount convertible to cash issued by banking or financial institution duly endorsed to the Ministry (now Department) as well as a surety bond of P150,000.00 from an accredited bonding company to answer for valid and legal claims arising from violations of the conditions of the license or the contracts of employment and guarantee compliance with the provisions of the Code, its implementing rules and regulations and appropriate issuances of the Ministry (now Department). (Emphasis supplied)

Accordingly, the nature of Finman's obligation under the suretyship agreement makes it privy to the proceedings against its principal (Pan Pacific). As such Finman is bound, in the absence of collusion, by a judgment against its principal even though it was not a party to the proceedings Leyson v. Rizal Surety and Insurance Co., 16 SCRA 551 (1966). Furthermore, in Government of the Philippines v. Tizon (20 SCRA 1182 [1967]), this Court ruled that where the surety bound itself solidarily with the principal obligor the former is so dependent on the principal debtor "that the surety is considered in law as being the same party as the debtor in relation to whatever is adjudged touching the obligation of the latter." Applying the foregoing principles to the case at bar, it can be very well said that even if herein Finman was not impleaded in the instant case, still it (petitioner) can be held jointly and severally liable for all claims arising from recruitment violation of Pan Pacific.

12

Moreover, as correctly stated by the Solicitor General, private respondents have a legal claim against Pan Pacific and its insurer for the placement and processing fees they paid, so much so that in order to provide a complete relief to private respondents, petitioner had to be impleaded in the case (Rollo, p. 87).

Furthermore, Finman contends that herein respondent Secretary of Labor cannot validly assume jurisdiction over the case at bar; otherwise, proceedings will be railroaded resulting in the deprivation of the former of any remedial measures under the law.

The records of the case reveal that herein Finman filed a motion for reconsideration of the adverse decision dated March 18, 1988 of respondent Secretary of Labor. In the said motion for reconsideration, no jurisdictional challenge was made (Ibid., p. 22). It was only when it filed this petition that it assailed the jurisdiction of the respondent Secretary of Labor, and that of the POEA. But then, it was too late. Estoppel had barred herein petitioner from raising the issue, regardless of its merits (Akay Printing Press v. Minister of Labor and Employment, 140 SCRA 381 [1985]).

Hence, Finman's contention that POEA's and respondent Secretary's actions in impleading and directing herein petitioner to pay jointly and severally with Pan Pacific the claims of private respondents constitute a grave abuse of discretion amounting to lack of jurisdiction has no basis. (Ibid., p. 101.)

As regards the third assigned error, herein petitioner maintains that the findings of fact made by the POEA upon which respondent Secretary of Labor based his questioned Orders are not supported by substantial evidence and are contrary to law, is likewise untenable.

Herein petitioner, in raising this third issue, is, in effect, asking this Court to review the respondent Secretary's findings of facts.

Well-settled is the rule that findings of facts of the respondent Secretary are generally accorded great weight unless there was grave abuse of discretion or lack of jurisdiction in arriving at such findings (Asiaworld Publishing House, Inc. vs. Ople, 152 SCRA 219 (1987).

In the case at bar, it is undisputed that when the case was first set for hearing, only the private respondents appeared, despite summons having been served upon both herein petitioner and Pan Pacific. This, notwithstanding, both herein petitioner and Pan Pacific were again notified of the scheduled hearing, but, as aforestated they also' failed to a pear (Rollo, p. 15). Accordingly, owing to the absence of any controverting evidence, respondent Secretary of Labor admitted and considered private respondents' testimonies and evidence as substantial. Under the circumstances, no justifiable reason can be found to justify disturbance of the findings of facts of the respondent Secretary of Labor, supported as they are by substantial evidence and in the absence of grave abuse of discretion (Asiaworld Publishing House, Inc. v. Ople, supra); and in line with the well established principle that the findings of administrative agencies which have acquired expertise because their jurisdiction is confined to specific matters are generally accorded not only respect but at times even finality. (National Federation of Labor Union (NAFLU) v. Ople, 143 SCRA 124 [1986])

PREMISES CONSIDERED, the questioned Orders of respondent Secretary of Labor are hereby AFFIRMED in toto,

SO ORDERED.

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G.R. No. L-22137             May 19, 1966

MANILA RAILROAD COMPANY and MANILA PORT SERVICE, petitioners, vs.HONORABLE CARMELINO ALVENDIA, Judge, Court of First Instance of Manila and BATAAN REFINING CORPORATION, respondents.

D. F. Macaranas and Amorto Cañete for petitioners.Bengzon, Villegas and Zarraga for respondents.

REYES, J.B.L., J.:

The Manila Railroad Company and the Manila Port Service petition for a writ of mandamus to compel the Court of First Instance of Manila to give due course to petitioners appeal in its Case No. 49831.

Reversing a decision of the Municipal Court of Manila duly appealed to it, the Court of First Instance, Branch XVI, with Judge Carmelino Alvendia presiding, on March 21, 1963 sentenced the defendants (petitioners herein) to pay the private respondent, Bataan Refining Corporation, the sum of P1,140.24, plus interest at the legal rate from February 11, 1961, and costs. Receiving notice of the decision on April 1, 1963, defendants, through counsel, filed notice of appeal on April 26, 1963 accompanied by an appeal bond in the sum of P60.00, followed by a record on appeal on April 30, 1963. Noticing that the appeal bond (Exh. C, petition) was executed only by "Manila Port Service by (Sgd) Julian C. Chaves, Manager", and "Standard Insurance Co., Inc., by (Sgd) Primo A. Cruz, Vice-President" the trial court, by order of May 27, 1963, rejected the tendered record on appeal, declaring that the decision had become final as to the Manila Railroad Company for failure to file its appeal bond. Motions for reconsideration having proved unavailing, the present petitioners resorted to this Supreme Court for a writ ofmandamus.1äwphï1.ñët

No issue exists is to the timeliness of the notice, bond and record of appeal.

It is contended by petitioners that the Manila Port Service, being a mere subsidiary or department of the Manila Railroad Company, without legal personality of its own, the bond filed by the former (Pet., Exh. C) should be considered as a bond for the Manila Railroad Co., and that the appeal of the latter should have been given due course.

We find no merit in this appeal. The mere recital in the body of the instrument, "We, Manila Railroad Company, et al., as principal and the Standard Insurance Co., ... as Surety", does not suffice to make the contract binding on the Manila Railroad Company unless it is shown that the same was authorized by it; and neither the signature nor the acknowledgment indicates that the act was that of the Railroad Company, or that the latter had empowered Julian C. Chaves or the Manila Port Service to execute the bond in its behalf. But there is something worse. Since the signatures to the bond are only those of the Manila Port Service and the Surety Company, and, according to paragraph 13 of the petition for mandamus —

Manila Port Service being only the name and style by which it is conducted its arrastre service with no legal personality of its own to be sued, and for the purposes of the suit can not be considered a juridical person under Art. 41 of the Civil Code of the Philippines in relation to Section 1, Rule 3.

the result would be that the appeal bond, Annex "C" of the petition, is void and unenforceable for lack of a principal debtor or obligation. While the surety bound itself to pay, jointly and severally, such an undertaking presupposes that the obligation is to be enforceable against someone else besides the surety, and the latter could always claim that it was never its intention to be the sole person obligated thereby.

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It follows that the respondent court committed no error in declaring that the judgment had become final against petitioner Manila Railroad Co., because the latter had not filed any appeal bond in due time.

Wherefore, the writ of mandamus applied for should be, and it hereby is, denied. Costs against petitioners.

Bengzon, C.J., Bautista Angelo, Concepcion, Barrera, Dizon, Regala, Makalintal, Zaldivar and Sanchez, JJ., concur.Bengzon, J.P., J., took no part.

G.R. No. L-30096 September 27, 1977

CONRADO SINGSON, plaintiff, vs.DAVID BABIDA, RAMON ANTONIO, JAIME PERALTA, FELINO GARCIA, JOSE MARCOS, RICARDO RABAGO. JAIME BIBIS, FELICIANO TUGADE, BONIFACIO CALPITO, ALFREDO PERALTA, ALFREDO GARCIA and FELICIANO GARCIA, defendants. MATIAS BABIDA, VICTOR GARCIA, JULIAN PACURSA, NICOLAS AGATEP, DOROT'EO BALLESTEROS and PEDRO AGAT'EP, bondsmen and petitioners-appellants, vs. CONRADO SINGSON and NEMESIO T. ORATE, respondents-appellees.

Conrado V. Singson for plaintiff and respondents-appellees.

Alfredo J. Donato for bonsdmen and petitioners-appellants.

Molina & Agbisit for defendants.

 

AQUINO, J.:

In a nutshell, this is a case about execution against the supersedes bonds in an ejectment suit. The bondsmen-appellants contend that the bonds are void and that the judgment in favor of the landowner had already been satisfied and, therefore, the execution, allegedly vitiated by some irregularities, was uncalled for.

Actually, as revealed in the 250-page record on appeal, the objective in this appeal of the appellants, who are poor and ignorant farmers, is to annul the execution sales of their nine parcels of agricultural land, with a total area of thirty-three (33) hectares and an aggregate assessed value of P6,190. The judicial sales (now alleged to be final by the judgment creditor) were made in order to satisfy a judgment for only P1,460, the value of 146 cavans of palay.

The gross inadequacy of the price carries with it implications of capacity and unjust enrichment. It is noteworthy that those 33 hectares, which apparently constitute appellants' only source of livelihood, would become the property of the judgment creditor in satisfaction of a judgment credit of P1,460. These aspects of the case have alerted us to be vigilant for the protection of the appellants who are disadvantaged or handicapped by their obvious indigence and ignorance (Art. 24, Civil Code).

Facts. — Conrado V. Singson, a lawyer, claims that a certain 24 hectare homestead, located at Barrio Malinta (Finugo), Lasam, formerly Gattaran, Cagayan, was conveyed to him in 1936 by Pedro Babida as payment of his attomey's fees in a murder case wherein Babida was the accused. Babida, who died in 1950, was the applicant- possessor of the homestead. He was not able to obtain a homestead patent. Singson's application for a free patent for the land was denied by the Director of Lands.

On January 22, 1957 Singson filed a forcible entry action in the justice of the peace court of Lasam against David Babida, Ramon Antonio, Jose Marcos, Ricardo Rabago, Jaime Bibis, Bonifacio Calpito, Feliciano

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Tugade Jaime Peralta, Alfredo Peralta, Alfredo Garcia, Felino Garcia, and FeWmo Garcia. He alleged that the twelve defendants entered the land in September, 1956 and by means of collective force ousted his tenants.

The defendants in their answer averred that the homestead belonged to David Babida and his coheirs who had continuously possessed it even before the war. (David was the son of Pedro Babida.)

The justice of the peace court in its decision of September 14, 1957 ordered the defendants to vacate the land and allowed Singson to withdraw from Domingo Gerardo, the depositary, "the canons of the land" or the owner's share of the harvests (Civil Case No. 34).

The defendants appealed to the Court of First Instance of Cagayn. In their answer they denied that Singson was in on of the land. They claimed to be the possessors of the land as tenants of Pedro Babida. They reiterated their defense that the land belonged to the'heirs of Pedro Babida (Civil Case No. 923-A).

To stay the execution of the inferior court's decision, while the appeal in the Court of First Instance was pending, Matias Babida, Victor Garcia, Julian Pacursa and Nicolas Agatep (who are not defendants) executed on March 27, 1958 a "counterload for the amount of P3,000 to answer for damages (which) the plaintiff might sustain by reason of the crops or produce which they pray to be disposed (of) and deposited". That counterbond is known as the "first supersedeas bond".

After a de novo, the lower court in its decision of August 4, 1958 ordered the defendants to restore the possession of the land to Singson and to deriver to him 73 cavans of palay yearly from September, 1956 until the ion is restored to Singson, and, "in default thereof, the sum of P730" as the value of 73 cavans. The depositary was ordered to deriver to Singson 55 cavans of palay to be deducted from the 73 cavans corresponding to the owner's share of the harvests for the crop-year 1956-57.

The twelve defendants appealed to the Court of Appeals. To stay execution pending appeal, Doroteo Ballesteros and Pedro Agatep (not parties to the case) separately executed supersedeas bonds in the sum of P2,000 wherein they undertook "to pay to the plaintiff whatever damages he might sustain as a result of" the case. Those under are known as the "second supersedeas bond".

On July 3, 1959 the Court of Appeals dismissed defendants' appeal because of their failure to pay the docket fee and to deposit the estimated cost of printing their record on appeal. The record was returned to the lower court which ordered the execution of its judgment. A writ of execution was issued on April 11, 1960. By virtue of that writ, the deputy sheriff on April 26, 1960 placed Singson's representative in ion of the disputed land.

In compliance with the writ of execution, Singson's representative received 20 cavans of palay from defendant Jaime Peralta on April 26, 1960 and 138 cavans on May 6, 1960 from Bonifacio Calpito, Jaime Bibis, Ramon Antonio, Fee Tugade Felino Garcia and Jaime Peralta or 158 cavans in all According to Singson's Gerardo did not deliver.the 55 cavans of palay to Singson's overseer. The sheriff's return is silent on that point. So, the defendant's remaining obligation under the judgment was to deriver the balance of 134 cavans of palay out of the 292 cavans due from them for four crop. years, 1956-57 to 1959-60.

The 134 cavans of palay had an aggregate value of P1,340 at ten a cavan, the value fixed by the trial court in its decision. That sum of P1,340 and the expenses of execution would constitute defendants' liability as of May 6, 1960.

Presumably, to enforce that remaining liability, the sheriff on May 17, 1960 levied upon the lands of defendants Ramon Antonio June Bible, Bonifacio Calpito and Alfredo Peralta. The sheriff scheduled the sale of their lands on August 31, 1960.

On August. 10, 1960 Singson ordered a motion to suspend the auction sale of the properties of Antonio, Bibis, Calpito and peralta and to include in the auction sale the properties of the six bondsmen, Victor Garcia, Matias

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Julian Pacursa, Doroteo Ballesteros, Nicolas Agatep and Pedro Agatep "on the understanding that the properties of the defendants be first sold" "and, if insufficient, then the properties of the bondmen" should be sold (89-91, Record on Appeal). did not indicate in that ration the balance still due from the defendants.

In filing that motion, Singson did not bother to consider that the lands of the said four defendants, which had already been levied upon and which have an aggregate area of ten (10) hectares and a total value of P3,590, were more than sufficient  to satisfy the sum of P1,340 as the unpaid of the judgment.

The six bondsmen opposed Simpson's motion on the grounds that the bonds are void and that execution cannot be had againts the bondsmen because no judgment against them had been "in the ordinary manner" (Green vs. Del Rosario, 43 Phil. 547).

The counsel for the bondsmen, like Singson, did not realize that an execution against them, in addition to the levy on the tenth lands of the four defendants, would be unnecessary since, as already stated, those ten are more than sufficient for the payment of the judgement.

The lower court granted Singson's motion in its order of September 10, 1960 but because neither Singson nor the sheriff informed the court of the exact balance still due from the defendants, and the sheriff's return was overred, the court acted under the impression that the amount due from the defendants and their bondsmen was in the sum of P730 only. That was the value of the owner's sham of the harvests for one crop-year.

Undoubtedly, the lower court would not have granted motion had it been apprised that the ten belonging to the aforenamed four defendants, which had already been levied upon, were more than adequate to answer for the liability of P730. The above-mentioned order of September 10, 1960, an order of execution supplementing the original order of execution of February 23, 1960, reads as follows:

As prayed for, the deputy sheriff is hereby directed to include in the notice of sale the properties of the sureties in the supersedeas bond who are held liable jointly and severally with the defendants to the plaintiff in the sum of P730 but before collecting this sum from the sureties, the properties of the principals not exempt from execution must first be exhausted and whatever amount remains unpaid shall be chargeable to the sureties but in no case shalt it exceed P731 (134, 183, Record on Appeal).

Plaintiff Singson and the defendants accepted the said order as correct. However, the sheriff did not immediately implement it.

On September 14, 1960, he asked the court that he should be to make first a levy on the properties of the bondsmen and that he be required to self the bondmen's properties only "in the event that the proceeds of the sale of the properties of the principals are not sufficient to satisfy the judgment" (94, Record on Appeal). However, the sheriff did not specify the balance of the judgment for which the levy should be made. The court did not act on the sheriff's motion.

On January 9, 1961 Singson filed a motion for execution against the first supersedeas bond which, according to him, was involuntarily omitted in the aforementioned order of September 10, 1960. Again Singson, like the sheriff, did not state how much was still due from the defendants. Singson averred in his motion that the first supersedeas bond covered "the damages occasioned to the plaintiff from the filing of the complaint in the justice of the peace court up to August 4, 1958" when the Court of First Instance rendered its decision, and that the second supesedeas bond covered the damages from August 4, 1958 up to the time the appeal was dismissed by the Court of Appeals (96-97, Record on Appeal).

The bondsmen opposed the motion on the ground that the supersedeas bond was not necessary since the justice of the peace court did not adjudge any compensation for the use and occupation of the homestead, citing Alandy vs. San Jose, 79 Phil. 811.

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The bondsmen did not invite the attention of the lower court to the misleading character of Sinson's motion. It seemed to be misleading because the order of September, 10, 1960 does not indicate that it is an order of execution against the second supersedeas bond and that it is not applicable to the first supersedeas bond.

The lower court in its order of January 28, 1961, manifestly disregarding the clarification in Singson's motion, explained that the second "Supersedes bond would answer for the value of the produce from the land during the pendency of the appeal- in the "amount of P730" (1959-1960 crop-year), while the first supersedeas bond would not answer for the produce of the land from September, 1956 but would answer only for the produce of the land from March 27, 1958 (when it was approved) up to January 13, 1959 when the second supersedeas bond was approved, or for the owner's share for the 1958-1959 crop-year.

The lower court categorically ordered the execution against the first supersedeas bond only for the sum of P730(as in the case of the second supe bond) on condition that "before the (first sure ) bond is executed, the Principals must fust be directed to pay the said sum and if they fail to pay, execution shall issue against the sureties for theamount of P730" (103, Record on Appeal).

Thus the trial court, by reason of the motion of Singson, the judgment creditor, and with his tacit acquiescence, notated its final and executory judgment by reducing the obligations covered by the two supersedeas bonds to P730 each. The trial court made it unmistakably clear that the liability of the bondsmen was only subsidiary  to that of the defendants as principals, meaning that the bondsmen are entitled to the beneficium excussionis or the right to have the properties of their principals exhausted before they could be liable on their bonds.

The trial court's act of fixing the liabilities of the six bondsmen at P1,460 is directly attributable to the failure of the sheriff and Singson (inadvertently or deliberately) to call the court's attention to the fact that 158 cavans had already been delivered to Singson and to apprise it of the exact amount still due from the twelve judgment debtors.

On March 3, 1961 another writ of execution (the first was issued on April 12, 1960 and it was supplemented by the order of September 10, 1960) was issued, directing the sheriff to require the twelve defendants to pay the sum of P730 to Singson and, should they fail to pay, to enforce payment against the so-called "first supersedeas bond" filed by Matias Babida, Victor Garcia, Julian Pacursa and Nicolas Agatep.

To do justice in this case, it is necessary to recount in detail the proceedings conducted by the sheriff under the two writs of execution so. that the validity of the execution sales on June 27 and 30, 1961, which is the main issue, may be judiciously resolved.

Execution sale on June 27, 1961 involving the first supersedeas bond.— To implement the writ of execution of March 3, 1961 against the first supersedeas bond, the sheriff served a written demand on March 8, 1961 upon the four aforenamed sureties to pay the sum of P730 plus the expenses and commission in the sum of P19.80. It should be noted that the sheriff did not comply with the mandate in the writ that he should first require the twelve defendants to pay the said sum of P730.

As the four sureties did not heed his demand, the sheriff on March 28, 1961 levied upon the lands of three of the sureties described in the first supersedeas bond and in the writ of execution.

The sheriff inexplicably did not levy on the land of Nicolas Agatep, the fourth surety. The sheriff scheduled on June 27, 1961 the sale of the lands of the three sureties, Babida, Garcia and Pacursa. In the notice of sale, announcing the auction sale on June 27, 1961, the sheriff, in quoting the writ of execution of March 3, 1961, omitted the court's order requiring him to first direct the twelve principals or defendants to pay the sum of P730 (which order is found in the writ of execution and which omission has been capital upon by the bondsmen in this appeal as an irregularity vitiating the execution proceedings).

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On June 27, 1961, the day of the auction sale, Singson was the only bidder. His bid was as follows: P300 for the land of Babida; P50 for the land of Garcia, and P569.30 for the land of Pacursa or P919.30 in all. He had adjusted his' bids in such a way that they would equal that sum of P919.30, the amount for which the execution sale was to be held, consisting of P730 as principal obligation, P167.50 as publication expenses, and P21.80 as sheriff's commission and other expenses.

Thus, the three parcels of land of the sureties, Babida, Garcia and Pacursa, with a total area of more than 21 hectares and an aggregate assessed value of P2,780, were sold to Singson for P919.30 only.

The execution sale on June 30, 1961 involving the second supersedeas bond. — The judicial sale on June 30, 1961 was based on the first or original writ of execution of April 11, 1970 (as to which the sheriff had made a return on July 16, 1960).

It should be recalled that to satisfy that writ of execution Singson was placed in ion of the 24-hectare homestead on April 12, 1960 and the defendants delivered to his overseer on April 26 and May 6, 1960 158 cavans of palay, thus leaving an unsatisfied balance of 134 cavans of palay valued at P1,340.

The life of that writ of execution was prolonged because, as noted earlier, on May 17, 1960 or within the reglementary sixty-day Period (see sec. II, Rule 39, Rules of Court), the sheriff, apparently to satisfy the said balance of P1,340 a levy on ten hectares of land belonging to defendants Antonio, Bibis, Calpito and Alfredo Peralta, with a total assessed value of P3,590.

That writ of execution was supplemented by the lower court's aforequoted order of September 10, 1960 which allowed the sheriff to make a further levy on the lands of Doroteo Ballesteros and Pedro Agatep, the sureties on the "second supersedeas bond", to satisfy an obligation amounting to P730 only, the judgment debtors' supposed liability for Singson's share of the harvests for the 1959-60 crop-year.

The confusion in the exact amount of the judgment still unsatisfied was due to the failure of the sheriff, Singson the lawyers for the defendants and the six bondsmen to call the attention of the trial court to the fact that the balance still due amounted only to P1,340.

The trial court itself was probably unaware that 158 cavans of palay (138 only according to Singson because the 20 cavans of Jaime Peralta were allegedly receipted for twice by his overseer) worth P1,580 had already been delivered to Singson's overseer.

The sheriff sent a sort of demand letter dated September 19, 1960 to Doroteo Ballesteros and Pedro Agatep, the sureties in the "second supersedeas bond", apprising them of the order of September 10, 1960 and impliedly requiring them to make a "deposit" but not particularizing on the nature of the deposit which was required. The sheriff did not specify the amount of the judgment still unpaid. In that demand letter, as in his prior actuations, the sheriff was not candid as to the exact balance of the judgment which should be satisfied. So, he did not specify what Ballesteros and Agatep should deposit or pay to his office.

For several months, the sheriff did not follow up his demand letter. The record does not show whether he made any levy on the lands of Ballesteros and Pedro Agatep.

Then, in a notice of sale dated April 25, 1961 (more than a year after the issuance of the writ of execution under which he was acting), he announced that the properties of Ballesteros, Pedro Agatep and Alfredo Peralta would be sold at public auction on June 30, 1961.

Alfredo Peralta is one of the twelve defendants. The sheriff on May 17, 1960 levied upon his riceland with an area of 26,797 square meters and on his residential land with an area of 990 square meters and on his residential land with an area of 990 square meters, or an aggregate area of 27,787 square meters. The two parcels of land have a total assessed value of P1,180 in 1961.

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As already noted, in that levy of May 17, 1960, the sheriff also levied upon (a) the sugarland and orchard of Ramon Antonio with a total area of four hectares and an assesed value of P1,000; (b) the sugariand of Jaime Bibis, with an area of two hectares and an assesed value of P850, and (c) the sugarland, orchard and riceland of Bonifacio Calpito with an area of 15,000 square meters and a total assessed valued of P560.

Without any explanation, the sheriff abandoned the levy on the lands of Antonio, Bibis and Calpito and continued with the levy on the land of Alfredo Peralta (not Garcia), which, as above stated, he advertised for sale together with the lands of Ballesteros and Pedro Agatep.

The land of Ballesteros has an area of 20,019 square meters and an assesed value of P640 while the three (3) parcels of land of Agatep have a total area of 78,380 square meters and a total assessed value of P1,590.

In the notice of sale the sheriff stated that Peralta's land was being sold "in order to satisfy the different amounts specified" in the writ of execution. He did not mention the writ of execution he was referring to nor the exact amount to be satisfied.

On the other hand, in the same notice of sale, he stated that he was going to sell the lands of Ballesteros and Pedro Agatep in order to satisfy the sum of P730, as indicated in the order of September 10, 1960. The sheriff also stated that that amount of P730 should first be collected from the twelve defendants or principal debtorsbut he did not state whether he had exhausted the properties of the said principals.

In fact, in the same notice of sale, he stated that he was going to sell the property of Alfredo Peralta, a defendant or principal debtor, which land, as already stressed, has an area of 27,787 square meters and an value of P1,180 and which, ordinarily, would suffice (even as dation in payment) to satisfy the principal obligation of P730.

On the other hand, the lands of Ballesteros and Agatep were also more than sufficient for the payment of the said sum of P730, thus rendering unnecessary the sale of Peralta's land.

In that same notice of sale the sheriff ambiguously or meaning stated that the proceeds of the execution sale on June 30, 1960 would be "applied for the judgment and order" whatever that means. In contrast, in the notice for the execution sale scheduled on June 27, 1960, the sheriff categorically stated that the properties of the sureties, Matias Babida, Victor Garcia and Julian Pacursa would be sold "to satisfy the import of the execution and other expenses incident thereto" or the sum of P730 and the costs of execution.

As repeatedly stated, the sheriff scheduled the auction sale of the lands of Peralta, Ballesteros and Agatep on June 30, 1960. At that auction sale, the only bidder was Singson. The lands were sold to him. The obligations for which the five parcels of land were to be sold amounted to P1,264.77 (not P1,254.77) consisting of (a) P730 as the value of 73 cavans of palay (the basic obligation), (b) P227.50 as publication expenses, and (c) P307.27 presumably for the other expenses of the sheriff.

As in the previous sale on June 27, 1961, Singson adjusted his bids for the five parcels of land so that his total bid would not exceed P1,264.77. Thus, he made the following bids: P394.49 for Alfredo Peralta's land; P217.57 for the land of Ballesteros and P217.57 also for each of the three parcels of land of Pedro Agatep.

Note that for the execution sale on June 27, 1960 in connection with the "first supersedeas bond", the sheriff stated with certitude that he was going to sell the lands of the three sureties, Babida, Garcia and Pacursa, to satisfy the principal obligation of P730, plus P1 67.50 as publication expenses and P21.80 as his other expenses, or for a total sum of P919.30.

In contrast, for the execution sale on June 30, 1961, which was made for the sum of P1,264.77, the sheriff specified that he was going to sell the lands of the judgment debtor Peralta and the two sureties, Ballesteros

20

and Agatep, to satisfy the principal obligation of P730 and the publication expenses amounting to P227.50. But the record does not show what expenses incurred by the sheriff constitute the remainder of P307.27.

The two notices dated April 19 and 25, 1961, scheduling the sales on June 27 and 30, 1961, respectively, were both published in the Manila Chronicle. Two publication fees in the sums of P167.50 and P227.50 were paid. Confusion could have been avoided and expenses could have been reduced if Singson, the sheriff and the lawyers of the parties had taken the trouble of apprising the trial court of the true balance still due from the twelve judgment debtors after 158 cavans of palay (138 according to Singson) had been delivered to the judgment creditor on April 26 and May 6, 1960.

The proceedings under the two exedution sales involving the nine parcels of land may be recapitulated as follows:

Owner Nature of

Area in

Assessed

Bid

Land Sq. Meters

Value

Price

       

MATIAS BARIDA - Riceland and

  P1,480.00

P300.00

Orchard

52,682

P150.00

P50.00

VICTOR GARCIA -

5,00

   

21

Riceland

0

JULIAN PACURSA - Orchard and

     

Riceland

155,320

P1,150.00

P569.30

ALFREDO PERALTA - Riceland

26,767)

  P394.49

(not Garcia) Res. land

990)

P1,180.00

 

DOROTEO

     

BALLESTEROS - Farmland

20,019

P640.00

P217.57

PEDRO AGATEP - Riceland

21,380)

P620.00

P217.57

22

Cornland

28,500)

P750.00

P217.57

Farmland

28,500)

P220.00

P217.57

  339,188

P6,190.00

P2,184.07

Other proceedings.— On June 27 and 30, 1961 the sheriff executed the respective certificates of sale in favor of Singson for the nine parcels of land. He specified that the period of redemption would expire "within one (1) year, counted from this date of sale". The two certificates of sale were registered on August 18, 1961.

The sheriffs two returns, dated July 7 and August 8, 1961, for the two execution sales, were filed in court only on August 12, 1961.

In a final certificate of sale dated July 3, 1962 the sheriff conveyed to Singson the parcels of land of the sureties Babida, Garcia and Pacursa. He noted that the one-year period of redemption had already expired and they had not made any redemption. That final deed of sale was registered on July 26, 1962. A copy of the final deed for the lands of Peralta, Ballesteros and Agatep was not included in the record on appeal.

On August 15, 1962, Singson filed an ex parte motion for a writ of possession. He alleged that the final deeds of sale for the lands sold to him on June 27 and 30, 1961 were executed in his favor by the sheriff. The twelve defendants or judgment debtors and the six bondsmen opposed that ex parte motion.

On September 5, 1962 the defendants and the bondsmen filed a lengthy "supplementary pleading" wherein they prayed that the execution sales held on June 27 and 30, 1961 be declared void because the obligations of the sureties may be regarded as extinguished with the delivery of the 158 cavans of palay to Singson's overseer and because the sureties were not given the benefit of exhaustion of the principal debtors' properties. Singson opposed that supplementary pleading.

The trial court in its order of September 20, 1962 denied the motion of the bondsmen and the defendants and granted Singson's motion for a writ of possession. The motion for the reconsideration of that order was denied by the trial court in its order of November 14, 1962. The twelve defendants did not appeal.

The six bondsmen appealed to the Court of Appeals. That Court in its resolution of November 29, 1968 certified the appeal to this Court because the appeal involves a question of law, which is the legality of the execution sales on June 27 and 30, 1961 (CA-G.R. No. 32008-R).

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Issues. — The main issue is the validity of the execution sales. The bondsmen contend that the sales are void because (1) their liabilities on their supersedeas bonds had already been extinguished before the sales were made; (2) the sheriff did not comply with the courts order that the properties of the principals should first be exhausted, and (3) the sale on June 27, 1961 was in contravention of the writ of execution while the sale on June 30, 1961 was not based at all on any writ of execution.

Singson did not file any appeflee's brief, thus giving the impression that, after he had attained his objective of recovering possession of the disputed homestead and after receiving 158 cavans of palay, any adjudication in this appeal adverse to him would not make his position worse.

That inference is strengthened by his failure to controvert the lower court's orders of September 10, 1960 and January 28, 1961, reducing his claim for the owner's share of the harvests to 146 cavans only or for only two crop-years.

Ruling. — It should be clear by now that this is not a typical ejectment suit involving urband land. This is a controversy between the person claiming to be the rightful possessor of a homestead (seventeen hectares of which are ricelands) and the cultivators thereof who claim to be tenants of the deceased former possessor and who drove away the second possessor's tenants.

The case, involving as it did the use and cultivation of agricultural land, could have come within the jurisdiction of the Court of Agrarian Relations (Sec. 7, Republic Act No. 1267; Ojo vs. Jamito 83 Phil. 764).

However, as the case was tried on the theory that it was an ordinary forcible entry case, failing within the exclusive original jurisdiction of the inferior court, it should be assumed that the lower courts had rightfully exercised jurisdiction over the case.

(1) The appeal can be disposed of by holding that the two so-called supersedeas bonds, which gave rise to the execution sales under attack, are void because they were not signed by the twelve defendants or judgment debtors as principal obligors They were signed only by the six sureties. Not having been signed by the principal debtors, the supersedeas bonds do not evidence any Principal obligation and are devoid of consideration as to the sureties who have no privity with the judgment creditor nor any liability to him. (Manila Railroad Company vs. Alvendia, L-22137, May 19, 1966, 17 SCRA 154; School Dist. No. 80 vs.Lapping too Minn. 130, 110 N.W. 849).

(2) Other reasons for holding the two supersedeas bonds void are that the first supersedeas bond was not warranted under the judgment of the justice of the peace court and the second supersedeas bond was required in the trial court's order which was issued when it had no more jurisdiction over the case.

A supersedeas bond in an ejectment case is usually filed in the inferior court and approved by it and "executed to the plaintiff to enter the action in the Court of First Instance". It covers "the rents, damages and costs down to the time of the final judgment" (Sec. 8, Rule 72, old Rules of Court, now sec. 8, Rule 70).

The supersedeas bond answers only for the rentals or the reasonable compensation for the use and occupation of the premises as fixed in the judgment of the inferior court (De Laureano vs- Adil, L-43345, July 29, 1976, 72 SCRA 148, 155).

In the instant case, the justice of the peace court did not adjudge any rentals or reasonable compensation for the use and occupation of the homestead. That court allowed "the plaintiff to withdraw the canons of the land" from the depositary. Hence, there was no occasion or justification for requiring a supersedeas bond. For that reason, the "first supersedeas bond" was not necessary and is, therefore, a nullity. Any execution against it would likewise be a nullity.

24

With respect to the "second supersedeas bond". it should be underscored that the lower court approved defendants' record on appeal in its order of September 6, 1958, wherein it directed the clerk of court to elevate the same to the Court of Appeals. The appeal was deemed perfected on that date.

On September 23, 1958, or seventeen days after the perfection of the appeal, Singson filed a motion for execution. The lower court, instead of granting that motion, required the defendants in its order of September 27, 1958 to file a supersedeas bond.

It is incontestable that the lower court had no more jurisdiction to issue that order because after the perfection of the appeal "this trial court loses its jurisdiction over the case, except to issue orders for the protection and preservation of the rights of the parties which do not involve any matter litigated by the appeal" (Sec. 9, Rule 41, Rules of Court).

Applying section 9, Rule 41, it was held that after the perfection of the appeal the trial court cannot order the execution of its judgment pending appeal because execution is a proceeding affecting the rights of the parties which are the subject matter of the judgment, from which appeal is taken, and its purpose is not to protect and preserve the subject matter of the litigation Cabilao vs. Judge of the Court of First Instance of Zamboanga, L-18454, August 29, 1966, 17 SCRA 992; 2 Moran's Comments on the Rules of Court, 1970 Edition, pp. 434-6).

It follows that the and supersedeas bond" which Doroteo Ballesteros and Pedro Agatep executed, as required in the lower court's invalid order of September 27, 1958, is void ab initio. The execution sale based on that supersedeas bond is likewise void.

(3) Other aspects of the supersedeas bonds may be pointed out to show their void character. The bonds are in English and might not have been understood by the ignorant sureties (See art. 1332, Civil Code).

The first supersedeas bond was fried "to answer for damages (which) the plaintiff might sustain by reason of the crops or produce which they (the defendants) pray to be disposed of and deposited" whatever that means. In that bond, the sureties solidarily 'undertake to pay to the plaintiff whatever damage he might sustain as a result of the produce (sic), but not to exceed the amount of P3,000", and, "for the payment thereof", the defendants "encumber and constitute a first lien in favor of the plaintiff upon" certain real properties.

In the second supersedeas bond, the sureties bound themselves 'to pay to the plaintiff whatever damages he might sustain as a result" of the ejectment case and, for that purpose, the sureties encumbered and constituted a first lien in favor of the plaintiff upon their real properties.

The two bonds were supposed to answer for the damages caused to Singson by the defendants. But the tenor and provisions of the two bonds do not define unequivocally the nature of the sureties liability to Singson. The judgments of the justice of the peace court and the Court of First Instance, which were supposed to be stayed by the said bonds, are not quoted or recited in the said bonds.

It should be home in mind that the justice of the peace court and the Court of First Instance did not require the defendants to pay "damages" to Singson. The lower court required the defendants to deriver to Singson 73 cavans yearly from September, 1956 until the possession of the homestead was restored to him. Those 73 cavans were not "damages" but Singson's share of the harvests as owner or possessor of the homestead.

It is exceedingly doubtful if the vague and uncertain provisions of the supersedeas bonds justified the execution against the properties of the sureties.

(4) There is some basis for appellant's contention that the execution sales in question were invalid because the judgment debtors' obligation was extinguished by the lower court's orders of September 10, 1960 and January 28, 1961, reducing their liability for the owner's share of the harvests to 146 cavans of palay or P1,460.

25

In those two orders, the trial court had novated its judgment without any protest on the part of the judgment creditor. It is an undisputed fact that, as heretofore repeatedly emphasized, the judgment debtors had delivered to Singson's overseer 158 cavans of palay valued at P1,580, an amount which is more than the reduced liability of P1,460. That explains why the defendants and the sureties contended in the lower court that its judgment had already been satisfied and that, therefore, further execution was not in order.

(5) But even if the supersedeas bonds could be proper bases for selling at public auction the properties of the five sureties, to satisfy the defendants' liability to deliver 146 cavans of palay to Singson or to pay him P1,460, it would not follow that the execution sales are valid.

The two execution sales are void because of gross inadequacy of price which is shocking to the conscience (Director of Lands vs. Abarca, 61 Phil. 70; Warner, Barnes 8 Co. vs. Santos, 14 Phil. 446, 449; Philippine National Bank vs. Gonzalez, 45 Phil. 693).

Nine parcels of land, with a total area of more than 33 hectares and an aggregate assessed value of P6,190 were sold to satisfy total obligations amounting to P2,184.07 (of which P1,460 constituted the main obligation). Thirty-three hectares of land were ceded to the judgment creditor to satisfy a judgment for 146 cavans of palay.

If we sustain the execution sales, the iniquitous and oppressive result would be that Singson, after recovering ion of the 24-hectare homestead and receiving 158 cavans of palay, out of the 292 cavans of palay adjudged in his favor, would, in addition, be awarded 33 hectares of land (presumably more valuable than the 24-hectare homestead in litigation to satisfy the balance of the judgment in the sum of P1,460, according to the trial court's computation).

While this Court sits that patent injustice cannot be tolerated.

WHEREFORE, the execution sales held on June 27 and 30, 1961 are declared void and the trial court's orders of September 20 and November 14, 1962, denying the petition to set aside those sales and granting Singson's motion for a writ of possession, are reversed and set aside. Costs against respondent-appellee Singson.

SO ORDERED

Fernando (Chairman), Barredo, Antonio, Concepcion Jr. and Santos, JJ., concur.

26

G.R. No. L-158025             November 5, 1920

CARMEN CASTELLVI DE HIGGINS and HORACE L. HIGGINS, plaintiffs-appellants, vs.GEORGE C. SELLNER, defendant-appellee.

Wolfson, Wolfson and Schwarzkopf for appellants.William and Ferrier for appellee.

 

MALCOLM, J.:

This is an action brought by plaintiffs to recover from defendant the sum of P10,000. The brief decision of the trial court held that the suit was premature, and absolved the defendant from the complaint, with the costs against the plaintiffs.

The basis of plaintiff's action is a letter written by defendant George C. Sellner to John T. Macleod, agent for Mrs. Horace L. Higgins, on May 31, 1915, of the following tenor:lawph!l.net

DEAR SIR: I hereby obligate and bind myself, my heirs, successors and assigns that if the promissory note executed the 29th day of May, 1915 by the Keystone Mining Co., W.H. Clarke, and John Maye, jointly and severally, in your favor and due six months after date for Pesos 10,000 is not fully paid at maturity with interest, I will, within fifteen days after notice of such default, pay you in cash the sum of P10,000 and interest upon your surrendering to me the three thousand shares of stock of the Keystone Mining Co. held by you as security for the payment of said note.

Respectfully,

(Sgd.) GEO. C. SELLNER.         

Counsel for both parties agree that the only point at issue is the determination of defendant's status in the transaction referred to. Plaintiffs contend that he is a surety; defendant contends that he is a guarantor. Plaintiffs also admit that if defendant is a guarantor, articles 1830, 1831, and 1834 of the Civil Code govern.

In the original Spanish of the Civil Code now in force in the Philippine Islands, Title XIV of Book IV is entitled "De la Fianza." The Spanish word "fianza"  is translated in the Washington and Walton editions of the Civil Code as "security." "Fianza" appears in the Fisher translation as "suretyship." The Spanish world "fiador"  is found in all of the English translations of the Civil Code as "surety." The law of guaranty is not related of by that name in the Civil Code, although indirect reference to the same is made in the Code of Commerce. In terminology at least, no distinction is made in the Civil Code between the obligation of a surety and that of a guarantor.

As has been done in the State of Louisiana, where, like in the Philippines, the substantive law has a civil law origin, we feel free to supplement the statutory law by a reference to the precepts of the law merchant.

The points of difference between a surety and a guarantor are familiar to American authorities. A surety and a guarantor are alike in that each promises to answer for the debt or default of another. A surety and a guarantor are unlike in that the surety assumes liability as a regular party to the undertaking, while the liability as a regular party to upon an independent agreement to pay the obligation if the primary pay or fails to do so. A surety is charged as an original promissory; the engagement of the guarantor is a collateral undertaking. The obligation of the surety is primary; the obligation of the guarantor is secondary. (See U.S. vs. Varadero de la

27

Quinta [1919], 40 Phil., 48; Lachman vs. Block [1894], 46 La. Ann., 649; Bedford vs. Kelley [1913], 173 Mich., 492; Brandt, on Suretyship and Guaranty, sec. 1, cited approvingly by many authorities.)

Turning back again to our Civil Code, we first note that according to article 1822 "By  fianza (security or suretyship) one person binds himself to pay or perform for a third person in case the latter should fail to do so." But "If the surety binds himself in solidum with the principal debtor, the provisions of Section fourth, Chapter third, Title first, shall be applicable." What the first portion of the cited article provides is, consequently, seen to be somewhat akin to the contract of guaranty, while what is last provided is practically equivalent to the contract of suretyship. When in subsequent articles found in section 1 of Chapter II of the title concerning  fianza, the Code speaks of the effects of suretyship between surety and creditor, it has, in comparison with the common law, the effect of guaranty between guarantor and creditor. The civil law suretyship is, accordingly, nearly synonymous with the common law guaranty; and the civil law relationship existing between codebtors liable in solidum  is similar to the common law suretyship.

It is perfectly clear that the obligation assumed by defendant was simply that of a guarantor, or, to be more precise, of the  fiador whose responsibility is fixed in the Civil Code. The letter of Mr. Sellner recites that if the promissory note is not paid at maturity, then, within fifteen days after notice of such default and upon surrender to him of the three thousand shares of Keystone Mining Company stock, he will assume responsibility. Sellner is not bound with the principals by the same instrument executed at the same time and on the same consideration, but his responsibility is a secondary one found in an independent collateral agreement, Neither is Sellner jointly and severally liable with the principal debtors.

With particular reference, therefore, to appellants assignments of error, we hold that defendant Sellner is a guarantor within the meaning of the provisions of the Civil Code.

There is also an equitable aspect to the case which reenforces this conclusion. The note executed by the Keystone Mining Company matured on November 29, 1915. Interest on the note was not accepted by the makers until September 30, 1916. When the note became due, it is admitted that the shares of stock used as collateral security were selling at par; that is, they were worth pesos 30,000. Notice that the note had not been paid was not given to and when the Keyston Mining Company stock was worthless. Defendant, consequently, through the laches of plaintiff, has lost possible chance to recoup, through the sale of the stock, any amount which he might be compelled to pay as a surety or guarantor. The "indulgence," as this word is used in the law of guaranty, of the creditors of the principal, as evidenced by the acceptance of interest, and by failure promptly to notify the guarantor, may thus have served to discharge the guarantor.

For quite different reasons, which, nevertheless, arrive at the same result, judgment is affirmed, with costs of this instance against the appellants. So ordered.

Johnson, Araullo, and Villamor, JJ., concur.Mapa, C.J. and Avanceña, J., concur in the result.

28

G.R. No. L-16666             April 10, 1922

ROMULO MACHETTI, plaintiff-appelle, vs.HOSPICIO DE SAN JOSE, defendant-appellee, and FIDELITY & SURETY COMPANY OF THE PHILIPPINE ISLANDS, defendant-appellant

Ross and Laurence and Wolfson & Scwarzkopf for appellant.Gabriel La O for appellee Hospicio de San Jose.No appearance for the other appellee.

OSTRAND, J.:

It appears from the evidence that on July 17, 1916, one Romulo Machetti, by a written agreement undertook to construct a building on Calle Rosario in the city of Manila for the Hospicio de San Jose, the contract price being P64,000. One of the conditions of the agreement was that the contractor should obtain the "guarantee" of the Fidelity and Surety Company of the Philippine Islands to the amount of P128,800 and the following endorsement in the English language appears upon the contract:

MANILA, July 15, 1916.

For value received we hereby guarantee compliance with the terms and conditions as outlined in the above contract.

FIDELITY AND SURETY COMPANY OF THE PHILIPPINE ISLANDS.

(Sgd) OTTO VORSTER, Vice-President.

Machetti constructed the building under the supervision of architects representing the Hospicio de San Jose and, as the work progressed, payments were made to him from time to time upon the recommendation of the architects, until the entire contract price, with the exception of the sum of the P4,978.08, was paid. Subsequently it was found that the work had not been carried out in accordance with the specifications which formed part of the contract and that the workmanship was not of the standard required, and the Hospicio de San Jose therefore answered the complaint and presented a counterclaim for damages for the partial noncompliance with the terms of the agreement abovementioned, in the total sum of P71,350. After issue was thus joined, Machetti, on petition of his creditors, was, on February 27, 1918, declared insolvent and on March 4, 1918, an order was entered suspending the proceeding in the present case in accordance with section 60 of the Insolvency Law, Act No. 1956.

The Hospicio de San Jose on January 29, 1919, filed a motion asking that the Fidelity and Surety Company be made cross-defendant to the exclusion of Machetti and that the proceedings be continued as to said company, but still remain suspended as to Machetti. This motion was granted and on February 7, 1920, the Hospicio filed a complaint against the Fidelity and Surety Company asking for a judgement for P12,800 against the company upon its guaranty. After trial, the Court of First Instance rendered judgment against the Fidelity and Surety Company for P12,800 in accordance with the complaint. The case is now before this court upon appeal by the Fidelity and Surety Company form said judgment.

As will be seen, the original action which Machetti was the plaintiff and the Hospicio de San Jose defendant, has been converted into an action in which the Hospicio de San Jose is plaintiff and the Fidelity and Surety Company, the original plaintiff's guarantor, is the defendant, Machetti having been practically eliminated from the case.

29

But in this instance the guarantor's case is even stronger than that of an ordinary surety. The contract of guaranty is written in the English language and the terms employed must of course be given the signification which ordinarily attaches to them in that language. In English the term "guarantor" implies an undertaking of guaranty, as distinguished from suretyship. It is very true that notwithstanding the use of the words "guarantee" or "guaranty" circumstances may be shown which convert the contract into one of suretyship but such circumstances do not exist in the present case; on the contrary it appear affirmatively that the contract is the guarantor's separate undertaking in which the principal does not join, that its rests on a separate consideration moving from the principal and that although it is written in continuation of the contract for the construction of the building, it is a collateral undertaking separate and distinct from the latter. All of these circumstances are distinguishing features of contracts of guaranty.

Now, while a surety undertakes to pay if the principal does not pay, the guarantor only binds himself to pay if the principal cannot pay. The one is the insurer of the debt, the other an insurer of the solvency of the debtor. (Saintvs. Wheeler & Wilson Mfg. Co., 95 Ala., 362; Campbell, vs. Sherman, 151 Pa. St., 70; Castellvi de Higgins and Higgins vs. Sellner, 41 Phil., 142; ;U.S. vs. Varadero de la Quinta, 40 Phil., 48.) This latter liability is what the Fidelity and Surety Company assumed in the present case. The undertaking is perhaps not exactly that of afianza under the Civil Code, but is a perfectly valid contract and must be given the legal effect if ordinarily carries. The Fidelity and Surety Company having bound itself to pay only the event its principal, Machetti, cannot pay it follows that it cannot be compelled to pay until it is shown that Machetti is unable to pay. Such ability may be proven by the return of a writ of execution unsatisfied or by other means, but is not sufficiently established by the mere fact that he has been declared insolvent in insolvency proceedings under our statutes, in which the extent of the insolvent's inability to pay is not determined until the final liquidation of his estate.

The judgment appealed from is therefore reversed without costs and without prejudice to such right of action as the cross-complainant, the Hospicio de San Jose, may have after exhausting its remedy against the plaintiff Machetti. So ordered.

Araullo, C.J., Malcolm, Villamor, Johns and Romualdez, JJ., concur.

30

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

RIZAL COMMERCIAL BANKING CORPORATION, petitioner, vs.HON. JOSE P. ARRO, Judge of the Court of First instance of Davao, and RESIDORO CHUA, respondents.

Laurente C. Ilagan for petitioner.

Victor A. Clapano for respondents.

 

DE CASTRO, J.:

Petition for certiorari to annul the orders of respondent judge dated October 6, 1978 and November 7, 1978 in Civil Case No. 11-154 of the Court of First Instance of Davao, which granted the motion filed by private respondent to dismiss the complaint of petitioner for a sum of money, on the ground that the complaint states no cause of action as against private respondent.

After the petition had been filed, petitioner, on December 14, 1978 mailed a manifestation and motion requesting the special civil action for certiorari be treated as a petition for review. 1 Said manifestation and motion was noted in the resolution of January 10, 1979. 2

It appears that on October 19, 1976 Residoro Chua and Enrique Go, Sr. executed a comprehensive surety agreements 3 to guaranty among others, any existing indebtedness of Davao Agricultural Industries Corporation (referred to therein as Borrower, and as Daicor in this decision), and/or induce the bank at any time or from time to time thereafter, to make loans or advances or to extend credit in other manner to, or at the request, or for the account of the Borrower, either with or without security, and/or to purchase on discount, or to make any loans or advances evidenced or secured by any notes, bills, receivables, drafts, acceptances, checks or other evidences of indebtedness (all hereinafter called "instruments") upon which the Borrower is or may become liable, provided that the liability shall not exceed at any one time the aggregate principal sum of P100,000.00.

On April 29, 1977 a promissory note 4 in the amount of P100,000.00 was issued in favor of petitioner payable on June 13, 1977. Said note was signed by Enrique Go, Sr. in his personal capacity and in behalf of Daicor. The promissory note was not fully paid despite repeated demands; hence, on June 30, 1978, petitioner filed a complaint for a sum of money against Daicor, Enrique Go, Sr. and Residoro Chua. A motion to dismiss dated September 23, 1978 was filed by respondent Residoro Chua on the ground that the complaint states no cause of action as against him. 5 It was alleged in the motion that he can not be held liable under the promissory note because it was only Enrique Go, Sr. who signed the same in behalf of Daicor and in his own personal capacity.

In an opposition dated September 26, 1978 6 petitioner alleged that by virtue of the execution of the comprehensive surety agreement, private respondent is liable because said agreement covers not merely the promissory note subject of the complaint, but is continuing; and it encompasses every other indebtedness the Borrower may, from time to time incur with petitioner bank.

On October 6, 1978 respondent court rendered a decision granting private respondent's motion to dismiss the complaint. 7 Petitioner filed a motion for reconsideration dated October 12, 1978 and on November 7, 1978 respondent court issued an order denying the said motion. 8

31

The sole issue resolved by respondent court was the interpretation of the comprehensive surety agreement, particularly in reference to the indebtedness evidenced by the promissory note involved in the instant case, said comprehensive surety agreement having been signed by Enrique Go, Sr. and private respondent, binding themselves as solidary debtors of said corporation not only to existing obligations but to future ones. Respondent court said that corollary to that agreement must be another instrument evidencing the obligation in a form of a promissory note or any other evidence of indebtedness without which the said agreement serves no purpose; that since the promissory notes, which is primarily the basis of the cause of action of petitioner, is not signed by private respondent, the latter can not be liable thereon.

Contesting the aforecited decision and order of respondent judge, the present petition was filed before this Court assigning the following as errors committed by respondent court:

1. That the respondent court erred in dismissing the complaint against Chua simply on the reasons that 'Chua is not a signatory to the promissory note" of April 29, 1977, or that Chua could not be held liable on the note under the provisions of the comprehensive surety agreement of October 29, 1976; and/or

2. That the respondent court erred in interpreting the provisions of the Comprehensive Surety Agreement towards the conclusion that respondent Chua is not liable on the promissory note because said note is not conformable to the Comprehensive Surety Agreement; and/or

3. That the respondent court erred in ordering that there is no cause of action against respondent Chua in the petitioner's complaint.

The main issue involved in this case is whether private respondent is liable to pay the obligation evidence by the promissory note dated April 29,1977 which he did not sign, in the light of the provisions of the comprehensive surety agreement which petitioner and private respondent had earlier executed on October 19, 1976.

We find for the petitioner. The comprehensive surety agreement was jointly executed by Residoro Chua and Enrique Go, Sr., President and General Manager, respectively of Daicor, on October 19, 1976 to cover existing as well as future obligations which Daicor may incur with the petitioner bank, subject only to the proviso that their liability shall not exceed at any one time the aggregate principal sum of P100,000.00. Thus, paragraph I of the agreement provides:

For and in consideration of any existing indebtedness to you of Davao Agricultural Industries Corporation with principal place of business and postal address at 530 J. P. Cabaguio Ave., Davao City (hereinafter called the "Borrower), and/or in order to induce, you in your discretion, at any time or from time to time hereafter, to make loans or advances or to extend credit in any other manner to, or at he request or for the account of the Borrower, either with or without security, and/or to purchase or discount or to make any loans or advances evidenced or secured by any notes, bills, receivables, drafts, acceptances, checks or other instruments or evidences of indebtedness (all hereinafter called "instruments") upon which the Borrower is or may become liable as maker, endorser, acceptor, or otherwise) the undersigned agrees to guarantee, and does hereby guarantee in joint and several capacity, the punctual payment at maturity to you of any and all such instruments, loans, advances, credits and/or other obligations herein before referred to, and also any and all other indebtedness of every kind which is now or may hereafter become due or owing to you by the Borrower, together with any and all expenses which may be incurred by you in collecting an such instruments or other indebtedness or obligations hereinbefore referred to ..., provided, however, that the liability of the undersigned shag not exceed at any one time the aggregate principal sum of P100,000.00 ...

32

The agreement was executed obviously to induce petitioner to grant any application for a loan Daicor may desire to obtain from petitioner bank. The guaranty is a continuing one which shall remain in full force and effect until the bank is notified of its termination.

This is a continuing guaranty and shall remain in fun force and effect until written notice shall have been received by you that it has been revoked by the undersigned, ... 9

At the time the loan of P100,000.00 was obtained from petitioner by Daicor, for the purpose of having an additional capital for buying and selling coco-shell charcoal and importation of activated carbon, 10 the comprehensive surety agreement was admittedly in full force and effect. The loan was, therefore, covered by the said agreement, and private respondent, even if he did not sign the promisory note, is liable by virtue of the surety agreement. The only condition that would make him liable thereunder is that the Borrower "is or may become liable as maker, endorser, acceptor or otherwise". There is no doubt that Daicor is liable on the promissory note evidencing the indebtedness.

The surety agreement which was earlier signed by Enrique Go, Sr. and private respondent, is an accessory obligation, it being dependent upon a principal one which, in this case is the loan obtained by Daicor as evidenced by a promissory note. What obviously induced petitioner bank to grant the loan was the surety agreement whereby Go and Chua bound themselves solidarily to guaranty the punctual payment of the loan at maturity. By terms that are unequivocal, it can be clearly seen that the surety agreement was executed to guarantee future debts which Daicor may incur with petitioner, as is legally allowable under the Civil Code. Thus —

Article 2053. — A guaranty may also be given as security for future debts, the amount of which is not yet known; there can be no claim against the guarantor until the debt is liquidated. A conditional obligation may also be secured.

In view of the foregoing, the decision (which should have been a mere "order"), dismissing the complaint is reversed and set side. The case is remanded to the court of origin with instructions to set aside the motion to dismiss, and to require defendant Residoro Chua to answer the complaint after which the case shall proceed as provided by the Rules of Court. No costs.

SO ORDERED.

Barredo (Chairman), Aquino, Concepcion, Jr., Guerrero, Abad Santos and Escolin, JJ., concur.

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G.R. No. L-30554 February 28, 1983

PLARIDEL SURETY & INSURANCE COMPANY, petitioner, vs.ARTEX DEVELOPMENT COMPANY, INC., and HON. JESUS P. MORFE, Presiding Judge, Branch XIII, Court of First Instance of Manila, respondents.

Bonifacio L. Hilario and Arturo Topacio, Jr., for petitioner.

Norberto Quisumbing for respondents.

 

GUTIERREZ, JR., J.:

This is a petition for review on certiorari of the orders of the respondent judge dismissing the complaint in Civil Case No. 73904 and denying a motion for reconsideration of the dismissal order. The petitioner filed with the Court of First Instance of Manila a complaint for a sum of money against respondent Artex Development Co. Inc., wherein it prayed that judgment be rendered in its favor as follows:

a) Ordering the respondent (defendant) Artex Development Co. Inc. to pay plaintiff the sum of P20,570.24, plus interest thereon at the rate of 12% per annum computed monthly and automatically accumulated to the outstanding capital and shall bear the same interests as said capital until fully paid;

b) Ordering the defendant to pay plaintiff, the sum equivalent to 15% per centum of the amount due as and for attorneys fees; and

c) For costs of suit.

The action was brought by the petitioner to recover from the respondent company P20,570.24 worth of renewal premiums and costs of documentary stamps on various surety bonds posted by petitioner Plaridel Surety and Insurance Co., in behalf of respondent Artex Development Co. Inc., as principal in favor of the Republic of the Philippines through the Bureau of Customs and the Board of Industries.

These surety bonds were posted pursuant to Republic Act No. 4086 and its implementing Rules and Regulations No. 1-64 particularly paragraph 9, which provides:

Par. 9. Withdrawal Under Bond. – Persons or firms who or which have pending applications for tax exemption privileges under the Act and whose imported raw materials, chemicals, dyestuffs and spare parts are actually within the Bureau of Customs jurisdiction, may withdraw such raw materials chemicals, dyestuffs and spare parts from the customs house upon the posting of a bond equivalent to the customs duties and taxes due thereon in accordance with the rules and regulations of the Department of Finance and the Bureau of Customs.

Consequently, the respondent withdrew from the Bureau of Customs' custody shipments of imported raw materials, chemicals, dyestuffs and spare parts which were then subject to customs duties, special import taxes, sales and/or compensating taxes because the respondent's applications for tax exemption of these items were not then approved by the Board of Industries.

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In consideration of the obligation assumed by the petitioner, the private respondent agreed to pay the premiums and cost of documentary stamps due thereon as per stipulations contained in the separate agreement of counter-guaranty:

(a) PREMIUM – To pay to the Surety Company at its principal offices in the sum of ... in advance as premiums of same for each period of (12) mos. beginning March 1965 or fraction thereof, to be computed from this date until said bonds and its renewals, extensions or substitutions be cancelled in full by the person or entity guaranteed thereby, or by a court of competent jurisdiction.

It is an admitted fact that the premiums due and costs of documentary stamps for the first year duration of the undertaking under these surety bonds, which was from March 1965 to March 1966, were paid in accordance with the agreements of counter-guaranty.

On December 19, 1966, respondent Artex Development Co. Inc., was granted tax exemption by the Board of Industries (BOI Certificate No. 22). Thereafter, the respondent stopped paying premiums and costs of documentary stamps to the petitioner.

On September 11, 1968, the private respondent filed its motion to dismiss petitioner's complaint on the ground that it states no cause of action and/or that the claim or demand setforth therein has been extinguished. The petitioner filed its opposition to the motion to dismiss followed by the respondent's filing its reply to the opposition.

Acting on the motion to dismiss, the respondent judge issued one of the assailed orders which reads as follows:

After careful consideration of defendant's motion to dismiss, dated 9 September, 1968, plaintiff's opposition thereto, dated September 12, 1968, and movant's closing written arguments (Reply to Opposition, dated 20 September 1968), this Court finds said motion to dismiss to be well taken.

WHEREFORE, said motion to dismiss, dated 9 September, 1968 is hereby granted, and plaintiff's action or complaint is hereby dismissed, without pronouncement as to costs.

The respondent judge later issued the other assailed order denying petitioner's motion for reconsideration.

The private respondent contents that the grant of tax exemption by the Board of Industries on December 19, 1966 rendered null and void and extinguished the surety bonds and agreement of counter guaranty. It argues that guaranty and suretyship are accessory to and dependent upon the principal obligation guaranteed or secured by them and cannot exist without a valid obligation. Therefore, as a necessary consequence, the obligation of defendant to pay premiums and cost of documentary stamps allegedly due on the extinguished agreements of counter guaranty has likewise been rendered of no force and effect.

Petitioner, on the other hand, maintains that, granting arguendo that the grant of tax exemption in favor of respondent corporation had the effect of releasing the surety bonds involved, still the petitioner had the valid and subsisting right to claim unpaid renewal premiums and costs of documentary stamps that had accrued in its favor prior to the grant of tax exemptions. Petitioner maintains that it had renewed the surety bonds in March 1966, more or less eight months before the application for tax exemption was granted by the Board of Industries.

With respect to accrued premiums and costs of documentary stamps on renewals of the surety bonds made after the grant of tax exemptions to the respondent corporation, the petitioner maintains that the surety bonds

35

which were renewed subsequent thereto should continue in full force and effect until the Chairman of the Board of Industries shall order their cancellation.

Petitioner submits that the mere grant of tax exemptions would not discharge the surety bonds because it is possible that the grantee may have violated some of the terms and conditions imposed by the Board of Industries in connection with authority granted to it to withdraw the items from customs' custody under bond.

We agree with the private respondents. We note that Condition No. 2 of the original surety bonds reads:

2. That in case the application (of respondent Artex Development Co. Inc. for tax exemption) is approved by the Board of Industries. then this bond shall be null and void and of no force and effect.

The petitioner could not possibly be liable for any violation under the original surety bonds which were already void and of no force and effect. Suretyship cannot exist without a valid obligation, (Municipality of Gasan v. Marasigan, et al., 63 Phil. 510). As stated in Visayan Surety and Insurance corporation v. Laperal (69 Phil. 688):

Segun el articulo 1822 del Codigo Civil la fianza es un contrato accesorio y la responsabilidad que contrae el fiador es subsidiaria.Por ella el fiador se obliga a pagar o a cumplir por un tercero, solamente en el caso de no hacerlo este. Explicando la naturaleza y efectos de la fianza Manresa en sus comentarios al Codigo Civil, Tomo XII, paginas 137, 138 y 140, dice:

Dos son las acepciones que en el tecnicismo juridico tiene la palabra fianza uno, lato, amplio y extenso que comprende, dentro de sus terminos todos los contratos de garantia; y otro restringido y estricto, que es lo que constituye la fianza propiamente dicha. En ambos sentidos, denota el aseguramiento por medios subsidiarios de una obligacion principal, que es la caracteristica de su esencia pues sin dicha obligacion principal no se concibe la existencia de la fianza, y por eso es siempre un contrato accesorio, dependiente de otro para cuya seguridad se constituye.

En este concepto puede definirse la fianza, diciendo que es un contrato mediante el cual uno de los contratantes da su garantia personal para asegurar el cumplimento de una obligacion contraida por otra distinta persona, comprometiendose a cumplirla por ella, si esta no lo hiciere en el tiempo y en la forma en que se obligo a Ilevarla a efecto.

Recordando las indicaciones consignadas en la introduccion al presente titulo, facil es precisar la naturaleza y aun la extension de la fianza en el concepto en que ha de ser objects de nuestro estudio. En cuanto a la primera, tres son los caracteres que la distinguen y diferencian determinando la razon de su especialidad, drivada del objeto mismo de dicho contrato. Esos caracteres, son: 1º , la cualidad accesoria y subsidiara de la obligacion contraida 2 º, la condicion unilateral de la misma y 3º, la circumstancia de haber ser el fiador persona distinta del principal obligado.

Es accesoria la obligacion contraida, porque careceria de objeto sin otro principal cuyo cumplimiento asegure y garantice, hasta el punto de que sin esta no se concibe su existencia. Ha de vivir pues, unida a la convencion a que debe su nacimiento y no puede asumir los caracteres de una obligacion principal, independiente y con vida propia ...

Insofar as the complaint seeks recovery of the payment for one year renewed premiums and costs of documentary stamps from March 1966 to March 1967, petitioner cannot recover for the simple reason that private respondent had already paid them in advance. Petitioner never disputed the payment made by private

36

respondent. Consequently, whatever obligation of private respondent to remit premiums and costs of documentary stamps from March 1966 to March 1967 had already been extinguished.

As to the alleged obligation to remit the premiums for the period March 1967 to March 1969, the purported renewals were without any consideration at all Petitioner incurred no risk from the time respondent's tax exemption application was approved. Any renewals were void from the beginning because the cause or object of said renewals did not exist at the time of the purported transaction (Arts, 1409, 1352, and 1353, Civil Code).

The lower court correctly ruled that "upon approval of defendant's (respondent's) application for tax exemption on December 19, 1966, any purported renewal of the original bond after that was, therefore, without consideration and will not warrant the collection of premiums and the payment of cost of documentary stamps."

We also see no need for a formal release of the surety bonds by the Board of Industries or the Bureau of Customs. By express stipulation of the parties themselves, the surety bonds became null and void upon the grant of tax exemption.

The complaint was correctly dismissed by the respondent judge.

WHEREFORE, the petition for review on certiorari is dismissed for lack of merit. The questioned orders of the respondent judge are affirmed. Costs against the petitioner.

SO ORDERED.

G.R. No. 89775 November 26, 1992

JACINTO UY DIÑO and NORBERTO UY, petitioners, vs.HON. COURT OF APPEALS and METROPOLITAN BANK AND TRUST COMPANY, respondents.

 

DAVIDE, JR., J.:

Continuing Suretyship Agreements signed by the petitioners set off this present controversy.

Petitioners assail the 22 June 1989 Decision of the Court in CA-G.R. CV No. 17724 1 which reversed the 2 December 1987 Decision of Branch 45 of the Regional Trial Court (RTC) of Manila in a collection suit entitled "Metropolitan Bank and Trust Company vs. Uy Tiam, doing business under the name of "UY TIAM ENTERPRISES & FREIGHT SERVICES," Jacinto Uy Diño and Norberto Uy" and docketed as Civil Case No. 82-9303. They likewise challenge public respondent's Resolution of 21 August 1989 2 denying their motion for the reconsideration of the former.

The impugned Decision of the Court summarizes the antecedent facts as follows:

It appears that in 1977, Uy Tiam Enterprises and Freight Services (hereinafter referred to as UTEFS), thru its representative Uy Tiam, applied for and obtained credit accommodations (letter of credit and trust receipt accommodations) from the Metropolitan Bank and Trust Company (hereinafter referred to as METROBANK) in the sum of P700,000.00 (Original Records, p. 333). To secure the aforementioned credit accommodations Norberto Uy and Jacinto Uy Diño executed separate Continuing Suretyships (Exhibits "E" and "F" respectively), dated 25 February 1977, in favor of the latter. Under the aforesaid agreements, Norberto Uy agreed to pay METROBANK any indebtedness of UTEFS up to the aggregate sum of P300,000.00 while Jacinto Uy Diño agreed to be bound up to the aggregate sum of P800,000.00.

37

Having paid the obligation under the above letter of credit in 1977, UTEFS, through Uy Tiam, obtained another credit accommodation from METROBANK in 1978, which credit accommodation was fully settled before an irrevocable letter of credit was applied for and obtained by the abovementioned business entity in 1979 (September 8, 1987, tsn, pp. 14-15).

The Irrevocable Letter of Credit No. SN-Loc-309, dated March 30, 1979, in the sum of P815, 600.00, covered UTEFS' purchase of "8,000 Bags Planters Urea and 4,000 Bags Planters 21-0-0." It was applied for and obtain by UTEFS without the participation of Norberto Uy and Jacinto Uy Diño as they did not sign the document denominated as "Commercial Letter of Credit and Application." Also, they were not asked to execute any suretyship to guarantee its payment. Neither did METROBANK nor UTEFS inform them that the 1979 Letter of Credit has been opened and the Continuing Suretyships separately executed in February, 1977 shall guarantee its payment (Appellees brief, pp. 2-3; rollo, p. 28).

The 1979 letter of credit (Exhibit "B") was negotiated. METROBANK paid Planters Products the amount of P815,600.00 which payment was covered by a Bill of Exchange (Exhibit "C"), dated 4 June 1979, in favor of (Original Records, p. 331).

Pursuant to the above commercial transaction, UTEFS executed and delivered to METROBANK and Trust Receipt (Exh. "D"), dated 4 June 1979, whereby the former acknowledged receipt in trust from the latter of the aforementioned goods from Planters Products which amounted to P815, 600.00. Being the entrusted, the former agreed to deliver to METROBANK the entrusted goods in the event of non-sale or, if sold, the proceeds of the sale thereof, on or before September 2, 1979.

However, UTEFS did not acquiesce to the obligatory stipulations in the trust receipt. As a consequence, METROBANK sent letters to the said principal obligor and its sureties, Norberto Uy and Jacinto Uy Diño, demanding payment of the amount due. Informed of the amount due, UTEFS made partial payments to the Bank which were accepted by the latter.

Answering one of the demand letters, Diño, thru counsel, denied his liability for the amount demanded and requested METROBANK to send him copies of documents showing the source of his liability. In its reply, the bank informed him that the source of his liability is the Continuing Suretyship which he executed on February 25, 1977.

As a rejoinder, Diño maintained that he cannot be held liable for the 1979 credit accommodation because it is a new obligation contracted without his participation. Besides, the 1977 credit accommodation which he guaranteed has been fully paid.

Having sent the last demand letter to UTEFS, Diño and Uy and finding resort to extrajudicial remedies to be futile, METROBANK filed a complaint for collection of a sum of money (P613,339.32, as of January 31, 1982, inclusive of interest, commission penalty and bank charges) with a prayer for the issuance of a writ of preliminary attachment, against Uy Tiam, representative of UTEFS and impleaded Diño and Uy as parties-defendants.

The court issued an order, dated 29 July 1983, granting the attachment writ, which writ was returned unserved and unsatisfied as defendant Uy Tiam was nowhere to be found at his given address and his commercial enterprise was already non-operational (Original Records, p. 37).

On April 11, 1984, Norberto Uy and Jacinto Uy Diño (sureties-defendant herein) filed a motion to dismiss the complaint on the ground of lack of cause of action. They maintained that the obligation which they guaranteed in 1977 has been extinguished since it has already been paid in the same year. Accordingly, the Continuing Suretyships executed in 1977 cannot be availed

38

of to secure Uy Tiam's Letter of Credit obtained in 1979 because a guaranty cannot exist without a valid obligation. It was further argued that they can not be held liable for the obligation contracted in 1979 because they are not privies thereto as it was contracted without their participation (Records, pp. 42-46).

On April 24, 1984, METROBANK filed its opposition to the motion to dismiss. Invoking the terms and conditions embodied in the comprehensive suretyships separately executed by sureties-defendants, the bank argued that sureties-movants bound themselves as solidary obligors of defendant Uy Tiam to both existing obligations and future ones. It relied on Article 2053 of the new Civil Code which provides: "A guaranty may also be given as security for future debts, the amount of which is not yet known; . . . ." It was further asserted that the agreement was in full force and effect at the time the letter of credit was obtained in 1979 as sureties-defendants did not exercise their right to revoke it by giving notice to the bank. (Ibid., pp. 51-54).

Meanwhile, the resolution of the aforecited motion to dismiss was held in abeyance pending the introduction of evidence by the parties as per order dated February 21, 1986 (Ibid., p. 71).

Having been granted a period of fifteen (15) days from receipt of the order dated March 7, 1986 within which to file the answer, sureties-defendants filed their responsive pleading which merely rehashed the arguments in their motion to dismiss and maintained that they are entitled to the benefit of excussion (Original Records, pp. 88-93).

On February 23, 1987, plaintiff filed a motion to dismiss the complaint against defendant Uy Tiam on the ground that it has no information as to the heirs or legal representatives of the latter who died sometime in December, 1986, which motion was granted on the following day (Ibid., pp. 180-182).

After trial, . . . the court a quo, on December 2, 198, rendered its judgment, a portion of which reads:

The evidence and the pleadings, thus, pose the querry (sic):

Are the defendants Jacinto Uy Diñoand Norberto Uy liable for the obligation contracted by Uy Tiam under the Letter of Credit (Exh. B) issued on March 30, 1987 by virtue of the Continuing Suretyships they executed on February 25, 1977?

Under the admitted proven facts, the Court finds that they are not.

a) When Uy and Diño executed the continuing suretyships, exhibits E and F, on February 25, 1977, Uy Tiam was obligated to the plaintiff in the amount of P700,000.00 — and this was the obligation which both obligation which both defendants guaranteed to pay. Uy Tiam paid this 1977 obligation –– and such payment extinguished the obligation they assumed as guarantors/sureties.

b) The 1979 Letter of Credit (Exh. B) is different from the 1977 Letter of Credit which covered the 1977 account of Uy Tiam. Thus, the obligation under either is apart and distinct from the obligation created in the other — as evidenced by the fact that Uy Tiam had to apply anew for the 1979 transaction (Exh. A). And Diño and Uy, being strangers thereto, cannot be answerable thereunder.

c) The plaintiff did not serve notice to the defendants Diño and Uy when it extended to Credit — at least to inform them that the continuing suretyships they

39

executed on February 25, 1977 will be considered by the plaintiff to secure the 1979 transaction of Uy Tiam.

d) There is no sufficient and credible showing that Diño and Uy were fully informed of the import of the Continuing Suretyships when they affixed their signatures thereon –– that they are thereby securing all future obligations which Uy Tiam may contract the plaintiff. On the contrary, Diño and Uy categorically testified that they signed the blank forms in the office of Uy Tiam at 623 Asuncion Street, Binondo, Manila, in obedience to the instruction of Uy Tiam, their former employer. They denied having gone to the office of the plaintiff to subscribe to the documents (October 1, 1987, tsn, pp. 5-7, 14; October 15, 1987, tsn, pp. 3-8, 13-16). (Records, pp. 333-334). 3

xxx xxx xxx

In its Decision, the trial court decreed as follows:

PREMISES CONSIDERED, judgment is hereby rendered:

a) dismissing the COMPLAINT against JACINTO UY DIÑO and NORBERTO UY;

b) ordering the plaintiff to pay to Diño and Uy the amount of P6,000.00 as attorney's fees and expenses of litigation; and

c) denying all other claims of the parties for want of legal and/or factual basis.

SO ORDERED. (Records, p. 336) 4

From the said Decision, the private respondent appealed to the Court of Appeals. The case was docketed as CA-G.R. CV No. 17724. In support thereof, it made the following assignment of errors in its Brief:

I. THE LOWER COURT SERIOUSLY ERRED IN NOT FINDING AND HOLDING THAT DEFENDANTS-APPELLEES JACINTO UY DIÑO AND NORBERTO UY ARE SOLIDARILY LIABLE TO PLAINTIFF-APPELLANT FOR THE OBLIGATION OF DEFENDANT UY TIAM UNDER THE LETTER OF CREDIT ISSUED ON MARCH 30, 1979 BY VIRTUE OF THE CONTINUING SURETYSHIPS THEY EXECUTED ON FEBRUARY 25, 1977.

II. THE LOWER COURT ERRED IN HOLDING THAT PLAINTIFF-APPELLANT IS ANSWERABLE TO DEFENDANTS-APPELLEES JACINTO UY DIÑO AND NORBERTO UY FOR ATTORNEY'S FEES AND EXPENSES OF LITIGATION. 5

On 22 June 1989, public respondent promulgated the assailed Decision the dispositive portion of which reads:

WHEREFORE, premises considered, the judgment appealed from is hereby REVERSED AND SET, ASIDE. In lieu thereof, another one is rendered:

1) Ordering sureties-appellees Jacinto Uy Diño and Norberto Uy to pay, jointly and severally, to appellant METROBANK the amount of P2,397,883.68 which represents the amount due as of July 17, 1987 inclusive of principal, interest and charges;

40

2) Ordering sureties-appellees Jacinto Uy Diño and Norberto Uy to pay, jointly and severally, appellant METROBANK the accruing interest, fees and charges thereon from July 18, 1987 until the whole monetary obligation is paid; and

3) Ordering sureties-appellees Jacinto Uy Diño and Norberto Uy to pay, jointly and severally, to plaintiff P20,000.00 as attorney's fees.

With costs against appellees.

SO ORDERED. 6

In ruling for the herein private respondent (hereinafter METROBANK), public respondent held that the Continuing Suretyship Agreements separately executed by the petitioners in 1977 were intended to guarantee payment of Uy Tiam's outstanding as well as future obligations; each suretyship arrangement was intended to remain in full force and effect until METROBANK would have been notified of its revocation. Since no such notice was given by the petitioners, the suretyships are deemed outstanding and hence, cover even the 1979 letter of credit issued by METROBANK in favor of Uy Tiam.

Petitioners filed a motion to reconsider the foregoing Decision. They questioned the public respondent's construction of the suretyship agreements and its ruling with respect to the extent of their liability thereunder. They argued the even if the agreements were in full force and effect when METROBANK granted Uy Tiam's application for a letter of credit in 1979, the public respondent nonetheless seriously erred in holding them liable for an amount over and above their respective face values.

In its Resolution of 21 August 1989, public respondent denied the motion:

. . . considering that the issues raised were substantially the same grounds utilized by the lower court in rendering judgment for defendants-appellees which We upon appeal found and resolved to be untenable, thereby reversing and setting aside said judgment and rendering another in favor of plaintiff, and no new or fresh issues have been posited to justify reversal of Our decision herein, . . . .7

Hence, the instant petition which hinges on the issue of whether or not the petitioners may be held liable as sureties for the obligation contracted by Uy Tiam with METROBANK on 30 May 1979 under and by virtue of the Continuing Suretyship Agreements signed on 25 February 1977.

Petitioners vehemently deny such liability on the ground that the Continuing Suretyship Agreements were automatically extinguished upon payment of the principal obligation secured thereby,  i.e., the letter of credit obtained by Uy Tiam in 1977. They further claim that they were not advised by either METROBANK or Uy Tiam that the Continuing Suretyship Agreements would stand as security for the 1979 obligation. Moreover, it is posited that to extend the application of such agreements to the 1979 obligation would amount to a violation of Article 2052 of the Civil Code which expressly provides that a guaranty cannot exist without a valid obligation. Petitioners further argue that even granting, for the sake of argument, that the Continuing Suretyship Agreements still subsisted and thereby also secured the 1979 obligations incurred by Uy Tiam, they cannot be held liable for more than what they guaranteed to pay because it s axiomatic that the obligations of a surety cannot extend beyond what is stipulated in the agreement.

On 12 February 1990, this Court resolved to give due course to the petition after considering the allegations, issues and arguments adduced therein, the Comment thereon by the private respondent and the Reply thereto by the petitioners; the parties were required to submit their respective Memoranda.

The issues presented for determination are quite simple:

41

1. Whether petitioners are liable as sureties for the 1979 obligations of Uy Tiam to METROBANK by virtue of the Continuing Suretyship Agreements they separately signed in 1977; and

2. On the assumption that they are, what is the extent of their liabilities for said 1979 obligations.

Under the Civil Code, a guaranty may be given to secure even future debts, the amount of which may not known at the time the guaranty isexecuted. 8 This is the basis for contracts denominated as continuing guaranty or suretyship. A continuing guaranty is one which is not limited to a single transaction, but which contemplates a future course of dealing, covering a series of transactions, generally for an indefinite time or until revoked. It is prospective in its operation and is generally intended to provide security with respect to future transactions within certain limits, and contemplates a succession of liabilities, for which, as they accrue, the guarantor becomes liable. 9 Otherwise stated, a continuing guaranty is one which covers all transactions, including those arising in the future, which are within the description or contemplation of the contract, of guaranty, until the expiration or termination thereof. 10 A guaranty shall be construed as continuing when by the terms thereof it is evident that the object is to give a standing credit to the principal debtor to be used from time to time either indefinitely or until a certain period, especially if the right to recall the guaranty is expressly reserved. Hence, where the contract of guaranty states that the same is to secure advances to be made "from time to time" the guaranty will be construed to be a continuing one. 11

In other jurisdictions, it has been held that the use of particular words and expressions such as payment of "any debt," "any indebtedness," "any deficiency," or "any sum," or the guaranty of "any transaction" or money to be furnished the principal debtor "at any time," or "on such time" that the principal debtor may require, have been construed to indicate a continuing guaranty. 12

In the case at bar, the pertinent portion of paragraph I of the suretyship agreement executed by petitioner Uy provides thus:

I. For and in consideration of any existing indebtedness to the BANK of UY TIAM (hereinafter called the "Borrower"), for the payment of which the SURETY is now obligated to the BANK, either as guarantor or otherwise, and/or in order to induce the BANK, in its discretion, at any time or from time to time hereafter, to make loans or advances or to extend credit in any other manner to, or at the request, or for the account of the Borrower, either with or without security, and/or to purchase or discount, or to make any loans or advances evidence or secured by any notes, bills, receivables, drafts, acceptances, checks, or other instruments or evidences of indebtedness (all hereinafter called "instruments") upon which the Borrower is or may become liable as maker, endorser, acceptor, or otherwise, the SURETY agrees to guarantee, and does hereby guarantee, the punctual payment at maturity to the loans, advances credits and/or other obligations hereinbefore referred to, and also any and all other indebtedness of every kind which is now or may hereafter become due or owing to the BANK by the Borrower, together with any and all expenses which may be incurred by the BANK in collecting all or any such instruments or other indebtedness or obligations herein before referred to, and/or in enforcing any rights hereunder, and the SURETY also agrees that the BANK may make or cause any and all such payments to be made strictly in accordance with the terms and provisions of any agreement(s) express or implied, which has (have) been or may hereafter be made or entered into by the Borrow in reference thereto, regardless of any law, regulation or decree, unless the same is mandatory and non-waivable in character, nor or hereafter in effect, which might in any manner affect any of the terms or provisions of any such agreement(s) or the Bank's rights with respect thereto as against the Borrower, or cause or permit to be invoked any alteration in the time, amount or manner of payment by the Borrower of any such instruments, obligations or indebtedness; provided, however, that the liability of the SURETY hereunder shall not exceed at any one time the aggregate principal sum of PESOS: THREE HUNDRED THOUSAND ONLY (P300,000.00) (irrespective of the currenc(ies) in which the obligations hereby guaranteed are

42

payable), and such interest as may accrue thereon either before or after any maturity(ies) thereof and such expenses as may be incurred by the BANK as referred to above. 13

Paragraph I of the Continuing Suretyship Agreement executed by petitioner Diño contains identical provisions except with respect to the guaranteed aggregate principal amount which is EIGHT THOUSAND PESOS (P800,000.00). 14

Paragraph IV of both agreements stipulate that:

VI. This is a continuing guaranty and shall remain in full force and effect until written notice shall have been received by the BANK that it has been revoked by the SURETY, but any such notice shall not release the SURETY, from any liability as to any instruments, loans, advances or other obligations hereby guaranteed, which may be held by the BANK, or in which the BANK may have any interest at the time of the receipt (sic) of such notice. No act or omission of any kind on the BANK'S part in the premises shall in any event affect or impair this guaranty, nor shall same (sic) be affected by any change which may arise by reason of the death of the SURETY, or of any partner(s) of the SURETY, or of the Borrower, or of the accession to any such partnership of any one or more new partners. 15

The foregoing stipulations unequivocally reveal that the suretyship agreement in the case at bar are continuing in nature. Petitioners do not deny this; in fact, they candidly admitted it. Neither have they denied the fact that they had not revoked the suretyship agreements. Accordingly, as correctly held by the public respondent:

Undoubtedly, the purpose of the execution of the Continuing Suretyships was to induce appellant to grant any application for credit accommodation (letter of credit/trust receipt) UTEFS may desire to obtain from appellant bank. By its terms, each suretyship is a continuing one which shall remain in full force and effect until the bank is notified of its revocation.

xxx xxx xxx

When the Irrevocable Letter of Credit No. SN-Loc-309 was obtained from appellant bank, for the purpose of obtaining goods (covered by a trust receipt) from Planters Products, the continuing suretyships were in full force and effect. Hence, even if sureties-appellees did not sign the "Commercial Letter of Credit and Application, they are still liable as the credit accommodation (letter of credit/trust receipt) was covered by the said suretyships. What makes them liable thereunder is the condition which provides that the Borrower "is or may become liable as maker, endorser, acceptor or otherwise." And since UTEFS which (sic) was liable as principal obligor for having failed to fulfill the obligatory stipulations in the trust receipt, they as insurers of its obligation, are liable thereunder. 16

Petitioners maintain, however, that their Continuing Suretyship Agreements cannot be made applicable to the 1979 obligation because the latter was not yet in existence when the agreements were executed in 1977; under Article 2052 of the Civil Code, a guaranty "cannot exist without a valid obligation." We cannot agree. First of all, the succeeding article provides that "[a] guaranty may also be given as security for future debts, the amount of which is not yet known." Secondly, Article 2052 speaks about a valid obligation, as distinguished from a void obligation, and not an existing or current obligation. This distinction is made clearer in the second paragraph of Article 2052 which reads:

Nevertheless, a guaranty may be constituted to guarantee the performance of a voidable or an unenforceable contract. It may also guarantee a natural obligation.

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As to the amount of their liability under the Continuing Suretyship Agreements, petitioners contend that the public respondent gravely erred in finding them liable for more than the amount specified in their respective agreements, to wit: (a) P800,000.00 for petitioner Diño and (b) P300,000.00 for petitioner Uy.

The limit of the petitioners respective liabilities must be determined from the suretyship agreement each had signed. It is undoubtedly true that the law looks upon the contract of suretyship with a jealous eye, and the rule is settled that the obligation of the surety cannot be extended by implication beyond its specified limits. To the extent, and in the manner, and under the circumstances pointed out in his obligation, he is bound, and no farther.17

Indeed, the Continuing Suretyship Agreements signed by petitioner Diño and petitioner Uy fix the aggregate amount of their liability, at any given time, at P800,000.00 and P300,000.00, respectively. The law is clear that a guarantor may bond himself for less, but not for more than the principal debtor, both as regards the amount and the onerous nature of the conditions. 18 In the case at bar, both agreements provide for liability for interest and expenses, to wit:

. . . and such interest as may accrue thereon either before or after any maturity(ies) thereof and such expenses as may be incurred by the BANK referred to above. 19

They further provide that:

In the event of judicial proceedings being instituted by the BANK against the SURETY to enforce any of the terms and conditions of this undertaking, the SURETY further agrees to pay the BANK a reasonable compensation for and as attorney's fees and costs of collection, which shall not in any event be less than ten per cent (10%) of the amount due (the same to be due and payable irrespective of whether the case is settled judicially or extrajudicially). 20

Thus, by express mandate of the Continuing Suretyship Agreements which they had signed, petitioners separately bound themselves to pay interest, expenses, attorney's fees and costs. The last two items are pegged at not less than ten percent (10%) of the amount due.

Even without such stipulations, the petitioners would, nevertheless, be liable for the interest and judicial costs. Article 2055 of the Civil Code provides: 21

Art. 2055. A guaranty is not presumed; it must be express and cannot extend to more than what is stipulated therein.

If it be simple or indefinite, it shall comprise not only the principal obligation, but also all its accessories, including the judicial costs, provided with respect to the latter, that the guarantor shall only be liable for those costs incurred after he has been judicially required to pay.

Interest and damages are included in the term accessories. However, such interest should run only from the date when the complaint was filed in court. Even attorney's fees may be imposed whenever appropriate, pursuant to Article 2208 of the Civil Code. Thus, in Plaridel Surety & Insurance Co., Inc. vs.P.L. Galang Machinery Co., Inc., 22 this Court held:

Petitioner objects to the payment of interest and attorney's fees because: (1) they were not mentioned in the bond; and (2) the surety would become liable for more than the amount stated in the contract of suretyship.

xxx xxx xxx

44

The objection has to be overruled, because as far back as the year 1922 this Court held in Tagawa vs. Aldanese, 43 Phil. 852, that creditors suing on a suretyship bond may recover from the surety as part of their damages, interest at the legal rate even if the surety would thereby become liable to pay more than the total amount stipulated in the bond. The theory is that interest is allowed only by way of damages for delay upon the part of the sureties in making payment after they should have done so. In some states, the interest has been charged from the date of the interest has been charged from the date of the judgment of the appellate court. In this jurisdiction, we rather prefer to follow the general practice, which is to order that interest begin to run from the date when the complaint was filed in court, . . .

Such theory aligned with sec. 510 of the Code of Civil Procedure which was subsequently recognized in the Rules of Court (Rule 53, section 6) and with Article 1108 of the Civil Code (now Art. 2209 of the New Civil Code).

In other words the surety is made to pay interest, not by reason of the contract, but by reason of its failure to pay when demanded and for having compelled the plaintiff to resort to the courts to obtain payment. It should be observed that interest does not run from the time the obligation became due, but from the  filing of the complaint.

As to attorney's fees. Before the enactment of the New Civil Code, successful litigants could not recover attorney's fees as part of the damages they suffered by reason of the litigation. Even if the party paid thousands of pesos to his lawyers, he could not charge the amount to his opponent (Tan Ti vs. Alvear, 26 Phil. 566).

However the New Civil Code permits recovery of attorney's fees in eleven cases enumerated in Article 2208, among them, "where the court deems it just and equitable that attorney's (sic) fees and expenses of litigation should be recovered" or "when the defendant acted in gross and evident bad faith in refusing to satisfy the plaintiff's plainly valid, just and demandable claim." This gives the courts discretion in apportioning attorney's fees.

The records do not reveal the exact amount of the unpaid portion of the principal obligation of Uy Tiam to MERTOBANK under Irrevocable Letter of Credit No. SN-Loc-309 dated 30 March 1979. In referring to the last demand letter to Mr. Uy Tiam and the complaint filed in Civil Case No. 82-9303, the public respondent mentions the amount of "P613,339.32, as of January 31, 1982, inclusive of interest commission penalty and bank charges."23 This is the same amount stated by METROBANK in its Memorandum. 24 However, in summarizing Uy Tiam's outstanding obligation as of 17 July 1987, public respondent states:

Hence, they are jointly and severally liable to appellant METROBANK of UTEFS' outstanding obligation in the sum of P2,397,883.68 (as of July 17, 1987) — P651,092.82 representing the principal amount, P825,133.54, for past due interest (5-31-82 to 7-17-87) and P921,657.32, for penalty charges at 12% per annum (5-31-82 to 7-17-87) as shown in the Statement of Account (Exhibit I). 25

Since the complaint was filed on 18 May 1982, it is obvious that on that date, the outstanding principal obligation of Uy Tiam, secured by the petitioners' Continuing Suretyship Agreements, was less than P613,339.32. Such amount may be fully covered by the Continuing Suretyship Agreement executed by petitioner Diño which stipulates an aggregate principal sum of not exceeding P800,000.00, and partly covered by that of petitioner Uy which pegs his maximum liability at P300,000.00.

Consequently, the judgment of the public respondent shall have to be modified to conform to the foregoing exposition, to which extent the instant petition is impressed with partial merit.

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WHEREFORE, the petition is partly GRANTED, but only insofar as the challenged decision has to be modified with respect to the extend of petitioners' liability. As modified, petitioners JACINTO UY DIÑO and NORBERTO UY are hereby declared liable for and are ordered to pay, up to the maximum limit only of their respective Continuing Suretyship Agreement, the remaining unpaid balance of the principal obligation of UY TIAM or UY TIAM ENTERPRISES & FREIGHT SERVICES under Irrevocable Letter of Credit No. SN-Loc-309, dated 30 March 1979, together with the interest due thereon at the legal rate commencing from the date of the filing of the complaint in Civil Case No. 82-9303 with Branch 45 of the Regional Trial Court of Manila, as well as the adjudged attorney's fees and costs.

All other dispositions in the dispositive portion of the challenged decision not inconsistent with the above are affirmed.

SO ORDERED.

Gutierrez, Jr., Bidin, Romero and Melo, JJ., concur.

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G.R. No. 80078 May 18, 1993

ATOK FINANCE CORPORATION, petitioner, vs.COURT OF APPEALS, SANYU CHEMICAL CORPORATION, DANILO E. ARRIETA, NENITA B. ARRIETA, PABLITO BERMUNDO and LEOPOLDO HALILI, respondents.

Syquia Law Offices for petitioner.

Batino, Angala, Allaga & Zara Law Offices for private respondents.

 

FELICIANO, J.:

Atok Finance Corporation ("Atok Finance") asks us to review and set aside the Decision of the Court of Appeals which reversed a decision of the trial court ordering private respondents to pay jointly and severally to petitioner Atok Finance certain sums of money.

On 27 July 1979, private respondents Sanyu Chemical corporation ("Sanyu Chemical") as principal and Sanyu Trading Corporation ("Sanyu Trading") along with individual private stockholders of Sanyu Chemical, namely, private respondent spouses Danilo E. Halili and Pablico Bermundo as sureties, executed in the continuing Suretyship Agreement in favor of Atok Finance as creditor. Under this Agreement, Sanyu Trading and the individual private respondents who were officers and stockholders of Sanyu Chemical did:

(1) For valuable and/or other consideration  .  .  ., jointly and severally unconditionally guarantee to ATOK FINANCE CORPORATION (hereinafter called Creditor), the full, faithful and prompt payment and discharge of any and all indebtedness of [Sanyu Chemical] . . . (hereinafter called Principal) to the Creditor. The word "indebtedness" is used herein in its most comprehensive sense and includes any and all advances, debts, obligations and liabilities of Principal or any one or more of them,here[to]fore, now or hereafter made, incurred or created, whether voluntary or involuntary andhowever arising, whether direct or acquired by the Creditor by assignment or succession, whether due or not due, absolute or contingent, liquidated or unliquidated, determined or undetermined and whether the Principal may be may be liable individually of jointly with others, or whether recovery upon such indebtedness may be or hereafter become barred by any statute of limitations, or whether such indebtedness may be or otherwise become unenforceable. 1 (Emphasis supplied)

Other relevant provisions of the Continuing Suretyship Agreement follow:

(2) This is a continuing suretyship relating to any indebtedness, including that arising under successive transactions which shall either continue the indebtedness from time to time or renew it after it has been satisfied. This suretyship is binding upon the heirs, successors, executors, administrators and assigns of the surety, and the benefits hereof shall extend to and include the successors and assigns of the Creditor.

(3) The obligations hereunder are  joint and several and independent of the obligations of the Principal. A separate action or actions may be prosecuted against the Principal and whether or not the Principal be joined in any such action or actions.

xxx xxx xxx.

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(6) In addition to liens upon, and rights of set-off against the moneys, securities or other property of the Surety given to the Creditor by law, the Creditor shall have the lien upon and a right of self-off against all moneys, securities, and other property of the Surety now and hereafter in the possession of the Creditor; and every such lien or right of self-off may be exercised without need of demands upon or notice to the Surety. No lien or right of set-off shall be deemed to have been waived by any act, omission or conduct on the part of the Creditor, or by any neglect to exercise such right of set-off or to enforce such lien, or by any delay in so doing, and every right of set-off or lien shall continue in full force and effect until such right of set-off of lien is specifically waived or released by an instrument in writing executed by the Creditor.

(7) Any indebtedness of the Principal now or hereafter held by the Surety is hereby subordinated to the indebtedness of the Principal to the Creditor; and if the Creditor so requests, such indebtedness of the Principal of the Surety shall be collected, enforced and shall be paid over to the Creditor and shall be paid over to the Creditor and shall be paid over to the Creditor on account of the indebtedness of the Principal to the Creditor but without reducing or affecting in any manner the liability of the Surety under the provisions of this suretyship.

xxx xxx xxx 2

(Emphases supplied)

On 27 November 1981, Sanyu Chemical assigned its trade receivables outstanding as of 27 November 1981 with a total face value of P125,871.00, to Atok Finance in consideration of receipt from Atok Finance of the amount of P105,000.00. The assigned receivables carried a standard term of thirty (30) days; it appeared, however, that the standard commercial practice was to grant an extension up to one hundred twenty (120) days without penalties. The relevant portions of this Deed of Assignment read as follows:

1. FOR VALUE RECEIVED, the ASSIGNOR does hereby SELL, TRANSFER and ASSIGN all his/its rights, title and interest in the contracts, receivables, accounts, notes, leases, deeds of sale with reservation of title, invoices, mortgages, checks, negotiable instruments and evidences of indebtedness listed in the schedule forming part hereinafter called "Contract" or "Contracts."

2. To induce the ASSIGNEE to purchase the above Contracts, the ASSIGNOR does hereby certify,warrant and represent that :

(a). He/It is the sole owner of the assigned Contracts free and clear of claims of any other party except the herein ASSIGNEE and has the right to transfer absolute title thereto the ASSIGNEE;

(b). Each assigned Contract is bonafide and the amount owing and to become due on each contract is correctly stated upon the schedule or other evidences of the Contract delivered pursuant thereto;

(c). Each assigned Contract arises out of the sale of merchandise/s which had been delivered and/or services which have been rendered and none of the Contract is now, nor will at any time become, contingent upon the fulfillment of any contract or condition whatsoever, or subject to any defense, offset or counterclaim;

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(d). No assigned Contract is represented by any note or other evidence of indebtness or other security document except such as may have been endorsed, assigned and delivered by the ASSIGNOR to the ASSIGNEE simultaneously with the assignment of such Contract;

(e). No agreement has been made, or will be made, with any debtor for any deduction discount or return of merchandise, except as may be specifically noted at the time of the assignment of the Contract;

(f). None of the terms or provisions of the assigned Contracts have been amended, modified or waived;

(g). The debtor/s under the assigned Contract/s are solvent and his/its/their failure to pay the assigned Contracts and/or any installment thereon upon maturity thereof shall be conclusively considered as a violation of this warranty; and

(h). Each assigned Contract is a valid obligation of the buyer of the merchandise and/or service rendered under the Contract And that no Contract is overdue.

The foregoing warranties and representations are in addition to those provided for in the Negotiable Instruments Law and other applicable laws. Any violation thereof shall render the ASSIGNOR immediately and unconditionally liable to pay the ASSIGNEE jointly and severally with the debtors under the assigned contracts, the amounts due thereon.

xxx xxx xxx

4. The ASSIGNOR shall without compensation or cost, collect and receive in trust for the ASSIGNEE all payments made upon the assigned contracts and shall remit to the ASSIGNEE all collections on the said Contracts as follows :

P5,450.00 due on January 2, 1982 on every 15th day (semi-monthly) until November 1, 1982.

P110,550.00 balloon payment after 12 months. 3 (Emphasis supplied)

Later, additional trade receivables were assigned by Sanyu Chemical to Atok Finance with a total face value of P100,378.45.

On 13 January 1984, Atok Finance commenced action against Sanyu Chemical, the Arrieta spouses, Pablito Bermundo and Leopoldo Halili before the Regional Trial Court of Manila to collect the sum of P120,240.00 plus penalty charges amounting to P0.03 for every peso due and payable for each month starting from 1 September 1983. Atok Finance alleged that Sanyu Chemical had failed to collect and remit the amount due under the trade receivables.

Sanyu Chemical and the individual private respondents sought dismissal of Atok's claim upon the ground that such claim had prescribed under Article 1629 of the Civil Code and for lack of cause of action. The private respondents contended that the Continuing Suretyship Agreement, being an accessory contract, was null and void since, at the time of its execution, Sanyu Chemical had no pre-existing obligation due to Atok Finance.

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At the trial, Sanyu Chemical and the individual private respondents failed to present any evidence on their behalf, although the individual private respondents submitted a memorandum in support of their argument. After trial, on 1 April 1985, the trial court rendered a decision in favor of Atok Finance. The dispositive portion of this decision reads as follows:

ACCORDINGLY, judgment is hereby rendered in favor of the plaintiff ATOK FINANCE CORPORATION; and against the defendants SANYU CHEMICAL CORPORATION, DANILO E. ARRIETA, NENITA B. ARRIETA, PABLITO BERMUNDO and LEOPOLDO HALILI, ordering the said defendants, jointly and severally, to pay the plaintiff:

(1) P120,240.00 plus P0.03 for each peso for each month from September 1, 1983 until the whole amount is fully paid;

(2) P50,000.00 as attorney's fees; and

(3) To pay the costs.

SO ORDERED. 4

Private respondents went on appeal before the then Intermediate Appellate Court ("IAC"), and the appeal was there docketed as AC-G.R. No. 07005-CV. The case was raffled to the Third Civil Cases Division of the IAC. In a resolution dated 21 March 1986, that Division dismissed the appeal upon the ground of abandonment, since the private respondents had failed to file their appeal brief notwithstanding receipt of the notice to do so. On 4 June 1986, entry of judgment was made by the Clerk of Court of the IAC. Accordingly, Atok Finance went before the trial court and sought a writ of execution to enforce the decision of the trial court of 1 April 1985. The trial court issued a writ of execution on 23 July 1986. 5 Petitioner alleged that the writ of execution was served on private respondents. 6

However, on 27 August 1986, private respondents filed a Petition for Relief from Judgment before the Court of Appeals. This Petition was raffled off to the 15th Division of the Court of Appeals. In that Petition, private respondents claimed that their failure to file their appeal brief was due to excusable negligence, that is, that their previous counsel had entrusted the preparation and filing of the brief to one of his associates, which associate, however, had unexpectedly resigned from the law firm without returning the records of cases he had been handling, including the appeal of private respondents. Atok Finance opposed the Petition for Relief arguing that no valid ground existed for setting aside the resolution of the Third Division of the then IAC.

The 15th Division of the Court of Appeals nonetheless granted the Petition for Relief from Judgment "in the paramount interest of justice," 7 set aside the resolution of the Third Civil Cases Division of the then IAC, and gave private respondents a non-extendible period of fifteen (15) days within which to file their appeal brief. Private respondents did file their appeal brief.

The 15th Division, on 18 August 1987, rendered a Decision on the merits of the appeal, and reversed and set aside the decision of the trial court and entered a new judgment dismissing the complaint of Atok Finance, ordering it to pay private respondents P3,000.00 as attorney's fees and to pay the costs.

Atok Finance moved to set aside the decision of the 15th Division of the Court of Appeals, inviting attention to the resolution of the IAC's Third Civil Cases Division of 21 March 1986 originally dismissing private respondent's appeal for abandonment thereof. In a resolution dated 18 August 1987, the 15th Division denied Atok Finance's motion stating that it had granted the Petition for Relief from Judgment and given private respondents herein fifteen (15) days within which to file an appeal brief, while Atok Finance did not file an appellee's brief, and that its decision was arrived at "on the basis of appellant's brief and the original records of the appeal case."

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In the present Petition for Review, Atok Finance assigns the following as errors on the part of the Court of Appeals in rendering its decision of 18 August 1987:

(1) that it had erred in ruling that a continuing suretyship agreement cannot be effected to secure future debts;

(2) that it had erred in ruling that the continuing suretyship agreement was null and void for lack of consideration without any evidence whatsoever [being] adduced by private respondents;

(3) that it had erred in granting the Petition for Relief from Judgment while execution proceedings [were] on-going on the trial court. 8 (Emphasis in the original)

As a preliminary matter, we note that a Division of the Court of Appeals is co-equal with any other Division of the same court. Accordingly, a Division of the Court of Appeals has no authority to consider and grant a petition for relief from a judgment rendered by another Division of the same court. In the case at bar, however, we must note that an intervening event had occurred between the resolution of 21 March 1986 of the Third Civil Cases Division of the IAC dismissing private respondents' appeal and the 30 September 1986 order of the 15th Division of the Court of Appeals granting the Petition for Relief from Judgment. On 28 July 1986, the old Intermediate Appellate Court went out of existence and a new court, the Court of Appeals, came into being, was organized and commenced functioning. 9 This event, and the probability that some confusion may have accompanied the period of transition from the IAC to the Court of Appeals, lead us to believe that the defect here involved should be disregarded as being of secondary importance. At the same time, nothing in this decision should be read as impliedly holding that a petition from relief judgment is available in respect of a decision rendered by the Court of Appeals; this issue is best reserved for determination in some future cases where it shall have been adequately argued by the parties.

We turn, therefore, to a consideration of the first substantive issue addressed by the Court of Appeals in rendering its Decision on the merits of the appeal: whether the individual private respondents may be held solidarily liable with Sanyu Chemical under the provisions of the Continuing Suretyship Agreement, or whether that Agreement must be held null and void as having been executed without consideration and without a pre-existing principal obligation to sustain it.

The Court of Appeals held on this first issue as follows:

It is the contention of private appellants that the suretyship agreement is null and void because it is not in consonance with the laws on guaranty and security. The said agreement was entered into by the parties two years before the Deed of Assignment was executed. Thus, allegedly, it ran counter to the provision that guaranty cannot exist independently because by nature it is merely an accessory contract. The law on guaranty is applicable to surety to some extent Manila Surety and Fidelity Co. v.Baxter Construction & Co., 53 O.G. 8836; and, Arran v. Manila Fidelity & Surety Co., 53 O.G. 7247.

We find merit in this contention.

Although obligations arising from contracts have the force of law between the contracting parties, (Article 1159 of the Civil Code) this does not mean that the law is inferior to it; the terms of the contract could not be enforces if not valid. So, even if, as in this case, the agreement was for acontinuing suretyship to include obligations enumerated in paragraph 2 of the agreement, the same could not be enforced. First, because this contract, just like guaranty, cannot exist without a valid obligation (Art. 2052, Civil Code); and, second, although it may be given as security for future debt(Art. 2053, C.C.), the obligation contemplated in the case at bar cannot be considered "future debt" as envisioned by this law.

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There is no proof that when the suretyship agreement was entered into, there was a pre-existing obligation which served the principal obligation between the parties. Furthermore, the "future debts" alluded to in Article 2053 refer to debts already existing at the time of the constitution of the agreement but the amount thereof is unknown, unlike in the case at bar where the obligation was acquired two years after the agreement. 10 (Emphasis supplied).

We consider that the Court of Appeals here was in serious error. It is true that a serious guaranty or a suretyship agreement is an accessory contract in the sense that it is entered into for the purpose of securing the performance of another obligation which is denominated as the principal obligation. It is also true that Article 2052 of the Civil Code states that "a guarantee cannot exist without a valid obligation." This legal proposition is not, however, like most legal principles, to be read in an absolute and literal manner and carried to the limit of its logic. This is clear from Article 2052 of the Civil Code itself:

Art. 2052. A guaranty cannot exist without a valid obligation.

Nevertheless, a guaranty may be constituted to guarantee the performance of a voidable or an unenforceable contract. It may also guaranty a natural obligation." (Emphasis supplied).

Moreover, Article 2053 of the Civil Code states:

Art. 2053. A guaranty may also be given as security for future debts, the amount of which is not yet known; there can be no claim against the guarantor until the debt is liquidated. A conditional obligation may also be secured. (Emphasis supplied)

The Court of Appeals apparently overlooked our caselaw interpreting Articles 2052 and 2053 of the Civil Code. InNational Rice and Corn Corporation (NARIC) v. Jose A. Fojas and Alto Surety Co., Inc., 11 the private respondents assailed the decision of the trial court holding them liable under certain surety bonds filed by private respondent Fojas and issued by private respondent Alto Surety Co. in favor of petitioner NARIC, upon the ground that those surety bonds were null and void "there being no principal obligation to be secured by said bonds." In affirming the decision of the trial court, this Court, speaking through Mr. Justice J.B.L. Reyes, made short shrift of the private respondents' doctrinaire argument:

Under his third assignment of error, appellant Fojas questions the validity of the additional bonds(Exhs. D and D-1) on the theory that when they were executed, the principal obligation referred to in said bonds had not yet been entered into, as no copy thereof was attached to the deeds of suretyship. This defense is untenable, because in its complaint the NARIC averred, and the appellant did not deny that these bonds were posted to secure the additional credit that Fojas has applied for, and the credit increase over his original contract was sufficient consideration for the bonds. That the latter were signed and filed before the additional credit was extended by the NARIC is no ground for complaint. Article 1825 of the Civil Code of 1889, in force in 1948, expressly recognized that "a guaranty may also be given as security for future debts  the amount of which is not yet known." (Emphasis supplied)

In Rizal Commercial Banking Corporation v. Arro, 12 the Court was confronted again with the same issue, that is, whether private respondent was liable to pay a promissory note dated 29 April 1977 executed by the principal debtor in the light of the provisions of a comprehensive surety agreement which petitioner bank and the private respondent had earlier entered into on 19 October 1976. Under the comprehensive surety agreement, the private respondents had bound themselves as solidary debtors of the Diacor Corporation not only in respect of existing obligations but also in respect of future ones. In holding private respondent surety (Residoro Chua) liable under the comprehensive surety agreement, the Court said:

The surety agreement which was earlier signed by Enrique Go, Sr. and private respondent, is an accessory obligation, it being dependent upon a principal one, which, in this case is the loan

52

obtained by Daicor as evidenced by a promissory note. What obviously induced petitioner bank to grant the loan was the surety agreement whereby Go and Chua bound themselves solidarily to guaranty the punctual payment of the loan at maturity. By terms that are unequivocal, it can be clearly seen thatthe surety agreement was executed to guarantee future debts which Daicor may incur with petitioner, as is legally allowable under the Civil Code. Thus —

Article 2053. — A guarantee may also be given as security for future debts, the amount of which is not yet known; there can be no claim against the guarantor until the debt is liquidated. A conditional obligation may also be secured. 13 (Emphasis supplied)

It is clear to us that the Rizal Commercial Banking Corporation and the NARIC cases rejected the distinction which the Court of Appeals in the case at bar sought to make with respect to Article 2053, that is, that the "future debts" referred to in that Article relate to "debts already existing at the time of the constitution of the agreement but the amount [of which] is unknown," and not to debts not yet incurred and existing at that time. Of course, a surety is not bound under any particular principal obligation until that principal obligation is born. But there is no theoretical or doctrinal difficulty inherent in saying that the suretyship agreement itself is valid and binding even before the principal obligation intended to be secured thereby is born, any more that there would be in saying that obligations which are subject to a condition precedent are valid and binding before the occurrence of the condition precedent. 14

Comprehensive or continuing surety agreements are in fact quite commonm place in present day financial and commercial practice. A bank or a financing company which anticipates entering into a series of credit transactions with a particular company, commonly requires the projected principal debtor to execute a continuing surety agreement along with its sureties. By executing such an agreement, the principal places itself in a position to enter into the projected series of transactions with its creditor; with such surety agreement, there would be no need to execute a separate surety contract or bond for each financing or credit accommodation extended to the principal debtor. As we understand it, this is precisely what happened in the case at bar.

We turn to the second substantive issue, that is, whether private respondents are liable under the Deed of Assignment which they, along with the principal debtor Sanyu Chemical, executed in favor of petitioner, on the receivables thereby assigned.

The contention of Sanyu Chemical was that Atok Finance had no cause of action under the Deed of Assignment for the reason that Sanyu Chemical's warranty of the debtors' solvency had ceased. In submitting this contention, Sanyu Chemical relied on Article 1629 of the Civil Code which reads as follows:

Art. 1629. In case the assignor in good faith should have made himself responsible for the solvency of the debtor, and the contracting parties should not have agreed upon the duration of the liability, it shall last for one year only, from the time of the assignment if the period had already expired.

If the credit should be payable within a term or period which has not yet expired, the liability shall cease one year after maturity.

Once more, the Court of Appeals upheld the contention of private respondents and held that Sanyu Chemical was free from liability under the Deed of Assignment. The Court of Appeals said:

. . . Article 1629 provides for the duration of assignor's warranty of debtor's solvency depending on whether there was a period agreed upon for the existence of such warranty, analyzing the law thus:

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(1) if there is a period (or length of time) agreed upon, then for such period;

(2) if no period (or length of time) was agreed upon, then:

(a) one year from assignment — if debt was due at the time of the assignment

(b) one year from maturity — if debt was not yet due at the time of the assignment..

The debt referred to in this law is the debt under the assigned contract or the original debts in favor of the assignor which were later assigned to the assignee. The debt alluded to in the law, is not the debt incurred by the assignor to the assignee as contended by the appellant.

Applying the said law to the case at bar, the records disclose that none of the assigned receivables had matured on November 27, 1981 when the Deed of Assignment was executed. The oldest debt then existing was that contracted on November 3, 1981 and the latest was contracted on December 4, 1981.

Each of the invoices assigned to the assignee contained a term of 30 days (Exhibits B-3-A to 5 and extended by the notation which appeared in the "Schedule of Assigned Receivables" which states that the ". . . the terms stated on our invoices were normally extended up to a period of 120 days. . ." (Exhibit B-2). Considering the terms in the invoices plus the ordinary practice of the company, thus, the assigned debts matured between April 3, 1982 to May 4, 1982. The assignor's warranty for debtor's warranty, in this case, would then be from the maturity period up to April 3, 1983 or May 4, 1983 to cover all of the receivables in the invoices.

The letter of demand executed by appellee was dated August 29, 1983 (Exhibit D) and the complaint was filed on January 13, 1984. Both dates were beyond the warranty period.

In effect, therefore, company-appellant was right when it claimed that appellee had no cause of action against it or had lost its cause ofaction. 15 (Emphasis supplied)

Once again, however, we consider that the Court of Appeals was in reversible error in so concluding. The relevant provision of the Deed of Assignment may be quoted again in this connection:

2. To induce the ASSIGNEE [Atok Finance] to purchase the above contracts, the ASSIGNOR [Sanyu Chemical] does hereby certify, warrant and represent that . . .

(g) the debtor/s under the assigned contract/s are solvent and his/its/their failure to pay the assigned contract/s and/or any installment thereon upon maturity thereof shall be conclusively considered as a violation of this warranty; and . . .

The foregoing warranties and representations are in addition to those provided for in the Negotiable Instruments Law and other applicable laws. Any violation thereof shall render the ASSIGNOR immediately and unconditionally liable to pay the ASSIGNEE jointly and severally with the debtors under the assigned contracts, the amounts due thereon.

xxx xxx xxx

(Emphasis supplied)54

It may be stressed as a preliminary matter that the Deed of Assignment was valid and binding upon Sanyu Chemical. Assignment of receivables is a commonplace commercial transaction today. It is an activity or operation that permits the assignee to monetize or realize the value of the receivables before the maturity thereof. In other words, Sanyu Chemical received from Atok Finance the value of its trade receivables it had assigned; Sanyu Chemical obviously benefitted from the assignment. The payments due in the first instance from the trade debtors of Sanyu Chemical would represent the return of the investment which Atok Finance had made when it paid Sanyu Chemical the transfer value of such receivables.

Article 1629 of the Civil Code invoked by private respondents and accepted by the Court of Appeals is not, in the case at bar, material. The liability of Sanyu Chemical to Atok Finance rests not on the breach of the warranty of solvency; the liability of Sanyu Chemical was not ex lege (ex Article 1629) but rather ex contractu. Under the Deed of Assignment, the effect of non-payment by the original trade debtors was breach of warranty of solvency by Sanyu Chemical, resulting in turn in the assumption of solidary liability by the assignor under the receivables assigned.  In other words,  the assignor Sanyu Chemical becomes a solidary debtor under the terms of the receivables covered and transferred by virtue of the Deed of Assignment. And because assignor Sanyu Chemical became, under the terms of the Deed of Assignment, solidary obligor under each of the assigned receivables, the other private respondents (the Arrieta spouses, Pablito Bermundo and Leopoldo Halili), became solidarily liable for that obligation of Sanyu Chemical, by virtue of the operation of the Continuing Suretyship Agreement. Put a little differently, the obligations of individual private respondent officers and stockholders of Sanyu Chemical under the Continuing Suretyship Agreement, were activated by the resulting obligations of Sanyu Chemical as solidary obligor under each of the assigned receivables by virtue of the operation of the Deed of Assignment. That solidary liability of Sanyu Chemical is not subject to the limiting period set out in Article 1629 of the Civil Code.

It follows that at the time the original complaint was filed by Atok Finance in the trial court, it had a valid and enforceable cause of action against Sanyu Chemical and the other private respondents. We also agree with the Court of Appeals that the original obligors under the receivables assigned to Atok Finance remain liable under the terms of such receivables.

WHEREFORE, for all the foregoing, the Petition for Review is hereby GRANTED DUE COURSE, and the Decision of the Court of Appeals dated 18 August 1987 and its Resolution dated 30 September 1987 are hereby REVERSED and SET ASIDE. A new judgment is hereby entered REINSTATING the Decision of the trial court in Civil Case No. 84-22198 dated 1 April 1985, except only that, in the exercise of this Court's discretionary authority equitably to mitigate the penalty clause attached to the Deed of Assignment, that penalty is hereby reduced to eighteen percent (18%) per annum (instead of P0.03 for every peso monthly [or 36% per annum]). As so modified, the Decision of the trial court is hereby AFFIRMED. Costs against private respondents.

SO ORDERED.

Bidin, Davide, Jr., Romero and Melo, JJ., concur.

55

G.R. No. L-18411      December 17, 1966

MAGDALENA ESTATES, INC., plaintiff-appellee, vs.ANTONIO A. RODRIGUEZ and HERMINIA C. RODRIGUEZ, defendants-appellants.

Roxas and Sarmiento for plaintiff-appelle.Somero, Baclig and Savello for defendants-appellants.

REGALA, J.:

Appeal from the decision of the Court of First Instance of Manila ordering the defendants-appellants to pay jointly and severally to the plaintiff-appellee the sum of P655.89, plus legal interest thereon from date of the judicial demand, the sum of P100.00 as attorney's fees, and to pay the costs.

The appellants bought from the appellee a parcel of land in Quezon City known as Lot 7-K-2-G, Psd-26193. In view of an unpaid balance of P5,000.00 on account of the purchase price of the lot, the appellants executed on January 4, 1957, the following promissory note representing the said account:

PROMISSORY NOTE

P5,000.00

Manila, January 4, 1957

We, the Spouses ANTONIO A. RODRIGUEZ and HERMINIA C. RODRIGUEZ, jointly and severally promise to pay the Magdalena Estates, Inc., or order, at its offices in the City of Manila, without any demand the sum of FIVE THOUSAND PESOS (P5,000.00), Philippine currency, with interest at the rate of Nine Per Cent 9% per annum, within sixty (60) days from January 7, 1957. The sum of P5,000.00 represents the balance of the purchase price of the parcel of land known as Lot 7-K-2-G, Psd. 26193, containing an area of 2,191 square meters, Quezon City.

(Sgd.) Antonio A. Rodriguez( T ) ANTONIO A. RODRIGUEZ

(Sgd.) Herminia C. Rodriguez( T ) HERMINIA C. RODRIGUEZ

Signed in the Presence of:

(Sgd.) ILLEGIBLE

(Sgd.) ILLEGIBLE

On the same date, the appellants and the Luzon Surety Co., Inc. executed a bond in favor of the appellee, the undertaking thereof being embodied therein as follows:

56

. . . comply with the obligation to pay the amount of P5,000.00 representing balance of the purchase price of a parcel of land known as Lot 7-K-2-G, Psd-26193, with an area of 2191 square meters, Quezon City, covered by Transfer Certificate of Title No. 13 (6947), Quezon City, within a period of sixty (60) days from January 7, 1957; That the Surety shall be notified in writing within Ten (10) days from moment of default otherwise, this undertaking is automatically null and void.

On June 20, 1958, when the obligation of the appellants became due and demandable, the Luzon Surety Co., Inc. paid to the appellee the sum of P5,000.00. Subsequently, the appellee demanded from the appellants the payment of P655.89 corresponding to the alleged accumulated interests on the principal of P5,000.00. Due to the refusal of the appellants to pay the said interest, the appellee started this suit in the Municipal Court of Manila to enforce the collection thereof. The said court, on February 5, 1959, rendered judgment in favor of the appellee and against the appellants, ordering the latter to pay jointly and severally the appellee the sum of P655.89 with interest thereon at the legal rate from November 10, 1958, the date of the filing of the complaint, until the whole amount is fully paid. Not satisfied with that judgment, appellants appealed to the Court of First Instance of Manila, where the case was submitted for decision on the pleadings. The Court of First Instance of Manila rendered the judgment stated at the outset of this decision.

On appeal directly to this Court, the following errors are assigned:

I. The lower court erred in concluding as a fact from the pleadings that the plaintiff-appellee demanded, and the Luzon Surety Co., Inc. refused, the payment of interest in the amount of P655.89, and in not finding and declaring that said plaintiff-appellee waived or condoned the said interests.

II. The lower court erred in not finding and declaring that the obligation of the defendants-appellants in favor of the plaintiff-appellee was totally extinguished by payment and/or condonation.

III. The lower court erred in not finding and declaring that the promissory note executed by the defendants-appellants in favor of the plaintiff-appellee was, insofar as the said document provided for the payment of interests, novated when the plaintiff-appellee unqualifiedly accepted the surety bond which merely guaranteed payment of the principal in the sum of P5,000.00.

Appellants claim that the pleadings do not show that there was demand made by the appellee for the payment of accrued interest and what could be deduced therefrom was merely that the appellee demanded from the Luzon Surety Co., Inc., in the capacity of the latter as surety, the payment of the obligation of the appellants, and said appellee accepted unqualifiedly the amount of P5,000.00 as performance by the obligor and/or obligors of the obligation in its favor. It is further claimed that the unqualified acceptance of payment made by the Luzon Surety Co., Inc. of P5,000.00 or only the amount of the principal obligation and without exercising its (appellee's) right to apply a portion of P655.89 thereof to the payment of the alleged interest due despite its presumed knowledge of its right to do so, the appellee showed that it waived or condoned the interests due, because Articles 1235 and 1253 of the Civil Code provide:

ART. 1235. When the obligee accepts the performance, knowing its incompleteness or irregularity, and without expressing any protest or objection, the obligation is deemed fully complied with.

ART. 1253. If the debt produces interest, payment of the principal shall not be deemed to have been made until the interests have been recovered.

We do not agree with the contention of the appellants. It is very clear in the promissory note that the principal obligation is the balance of the purchase price of the parcel of land known as Lot 7-K-2-G, Psd-26193, which is the sum of P5,000.00, and in the surety bond, the Luzon Surety Co., Inc. undertook "to pay the amount of P5,000.00 representing balance of the purchase price of a parcel of land known as Lot 7-K-2-G, Psd-26193, . . . ." The appellee did not protest nor object when it accepted the payment of P5,000.00 because it knew that that was the complete amount undertaken by the surety as appearing in the contract. The liability of

57

a surety is not extended, by implication, beyond the terms of his contract.1 It is for the same reason that the appellee cannot apply a part of the P5,000.00 as payment for the accrued interest. Appellants are relying on Article 1253 of the Civil Code, but the rules contained in Articles 1252 to 1254 of the Civil Code apply to a person owing several debts of the same kind of a single creditor. They cannot be made applicable to a person whose obligation as a mere surety is both contingent and singular; his liability is confined to such obligation, and he is entitled to have all payments made applied exclusively to said application and to no other.2 Besides, Article 1253 of the Civil Code is merely directory, and not mandatory.3 Inasmuch as the appellee cannot protest for non-payment of the interest when it accepted the amount of P5,000.00 from the Luzon Surety Co., Inc., nor apply a part of that amount as payment for the interest, we cannot now say that there was a waiver or condonation on the interest due.

It is claimed that there was a novation and/or modification of the obligation of the appellants in favor of the appellee because the appellee accepted without reservation the subsequent agreement set forth in the surety bond despite its failure to provide that it also guaranteed payment of accruing interest.

The rule is settled that novation by presumption has never been favored. To be sustained, it needs to be established that the old and new contracts are incompatible in all points, or that the will to novate appears by express agreement of the parties or in acts of similar import.4

An obligation to pay a sum of money is not novated, in a new instrument wherein the old is ratified, by changing only the terms of payment and adding other obligations not incompatible with the old one,5 or wherein the old contract is merely supplemented by the new one.6 The mere fact that the creditor receives a guaranty or accepts payments from a third person who has agreed to assume the obligation, when there is no agreement that the first debtor shall be released from responsibility does not constitute a novation, and the creditor can still enforce the obligation against the original debtor. (Straight v. Haskel, 49 Phil. 614; Pacific Commercial Co. v. Sotto, 34 Phil. 237; Estate of Mota v. Serra, 47 Phil. 464; Duñgo v. Lopena, supra ). In the instant case, the surety bond is not a new and separate contract but an accessory of the promissory note.

WHEREFORE, the judgment appealed from should be, as it is hereby, affirmed, with costs against the appellants.

Concepcion, C.J., Reyes, J.B.L., Barrera, Dizon, Makalintal, Bengzon, J.P., Zaldivar, Sanchez and Castro, JJ.,concur.

58

G.R. No. L-22209      December 17, 1966

PHILIPPINES INTERNATIONAL SURETY CO., INC., petitioner, vs.COMMISSIONER OF CUSTOMS, respondent.

Tolentino, Garcia and D. R. Cruz for petitioner.Office of the Solicitor General for respondent.

CONCEPCION, C.J.:

Appeal by the Philippines International Surety Co., Inc. from a decision of the Court of Tax Appeals.

From June to August, 1955, four (4) shipment of goods, consigned to Pablo Gonzales arrived at the Port of Manila, on board S.S. Bronnyvile, without the release certificate required by Central Bank Circular. Nos. 44 and 45. Consequently, said goods were subjected, by the Acting Collector of Customs for said port, to seizure proceedings, during the pendency of which the merchandise were, later, ordered released to Gonzales, under bonds issued by appellant surety. After due hearing, said officer rendered a decision, on April 4, 1960, ordering the forfeiture of said goods — upon the ground that the importation thereof had been made in violation of the Circulars above referred to — and, accordingly, of the aforementioned bonds and sentencing Gonzales and the surety to pay, jointly and severally, the amounts thereof, aggregating P53,434.08. On appeal, taken by Gonzales, this decision was affirmed by the Commissioner of Customs. The surety appealed from the latter's decision to the Court of Tax Appeals, which, in due course, dismissed said appeal upon the ground that said surety has no legal capacity to interpose the aforementioned appeal, and that the same is without merit. Hence, this appeal by the surety, who maintains that the Court of Tax Appeals has erred on both counts.

With respect to petitioner's capacity to appeal from the decision of the Commissioner of Customs, we note that the petition for review filed by the surety with the Court of Tax Appeals is based upon two (2) grounds, namely: (1) that the Collector of Customs had not furnished a copy of its decision to Gonzales; and (2) that Central Bank Circulars Nos. 44 and 45 are allegedly null and void.

According to the decision rendered by the Commissioner of Customs — on appeal taken, not by the surety, who did not appeal from the decision of the Collector of Customs, but by the importer, Gonzales — the latter had limited himself to assailing the validity of the aforementioned Circulars of the Central Bank. In other words, Gonzales had not impugned the decision of the Collector of Customs upon the ground of lack of notice, alleged by the surety, thus showing, either that Gonzales had really received — as the surety, evidently, had — notice of said decision, as indicated by the fact that he had appealed therefrom, or that he had waived said notice, which it is his privilege to renounce. Hence, the surety had no right to invoke in support of its own appeal, said alleged lack of notice to the importer, not only because his acts proved that there had been such notice, but, also, that he hadwaived  it, by appealing from the decision of the Collector of Customs, and by not  interposing an appeal from the decision of the Commissioner of Customs, thereby allowing the same to become  final and executory, insofar as he is concerned. It may not be amiss to add that lack of notice of a decision to a given party affects, not  thevalidity of said decision, but its  finality  insofar as such party is concerned, in the sense that his period to appeal does not begin to run until said notice, and that the decision cannot be executed against him until after the expiration of the period aforementioned.

It should, also, be pointed out that, as regards the surety herein, which had not appealed from the decision of the Collector of Customs, the same had become  final and executory upon expiration of the reglementary period to appeal therefrom. Although the appeal taken from said decision by the importer might have, perhaps, inured to the benefit of the surety, if  the result of the appeal had been  favorable  to said importer, the fact is that he hadfailed  in his appeal. Hence, there is no legal ground by which the surety may justify its alleged right

59

to appeal from the decision of the Commissioner of Customs, based upon an alleged violation, not of its right as a surety, but of those of the importer, as such.

It is true that a solidary debtor may "avail himself of all the defenses which are derived from the nature of the obligation and of those which are personal to him or pertain to his share" (Article 1222, Civil Code of the Philippines). What, then, is the nature of the obligation of the surety in the case at bar? Pertinent parts of its bonds provide:

. . . WHEREAS, the Collector of Customs is willing to release and deliver the above mentioned ———— to the Principal upon the filing of a surety bond in the amount of ———— Philippine Currency, representing the local appraised value of the merchandise to guaranty the payment of the amount that the Bureau of Customs or the courts of the Philippines may decide to collect, depending upon the final outcome of the seizure proceedings;

WHEREAS, the Principal and the Surety both agree to be bound, as they hereby do bind themselves, their heirs, executors, administrators, successors and assigns, jointly and severally, for the payment and the obligation herein mentioned; and

WHEREAS, the parties hereto have agreed that the Collector of Customs, the Commissioner of Customs, or any of their subordinates, shall not be held liable in any manner for the delivery of said merchandise;

NOW, THEREFORE, the conditions of this obligation are such that, in the event that it should be finally decided that the merchandise herein mentioned should be forfeited to the government, and/or that a fine or surcharge should be imposed, the entire amount of this bond, in case of forfeiture, or the corresponding amount of the fine or surcharge, as the case may be, shall be paid in CASH to the Bureau of Customs. PROVIDED, HOWEVER, that if within thirty (30) days from demand for payment of the liability herein mentioned the said liability is not paid, and it should be found necessary to file an action in court to effect the collection thereof, a penalty of FIVE HUNDRED PESOS (P500.00) in addition shall be imposed, otherwise, this obligation shall be void and of no effect.

Pursuant thereto, the surety bound itself to pay the sum of money specified in the bond, "in the event that it should be finally decided that the merchandise herein mentioned should be forfeited to the Government". Thus, the surety guaranteed, not  the  legality of the importation, but, merely the payment of the appraised value of the goods imported and released, in the event aforementioned. As a consequence, the surety would have a right to object and appeal if it were made to pay, either an amount exceeding its bond, or without a previous decree of forfeiture of the merchandise. The bond did not, however, give the surety a right to question the legality of the seizure or that of the aforementioned Circulars of the Central Bank. Indeed, the surety in the case at bar, stands in substantially the same position, legally, as the surety of the accused in a criminal case who is released on bail. Surely, such surety can not intervene in the proceedings, before the trial court, to establish the guilt or innocence of the accused and/or appeal from its judgment convicting him as charged.

At any rate, the authority of the Central Bank to issue Circulars Nos. 44 and 45, and the validity of these Circulars,1 as well as the propriety of the decree of confiscation and forfeiture of the goods imported in violation thereof2 are now well settled.

WHEREFORE, the appealed decision of the Court of Tax Appeals is hereby affirmed, with costs against the Philippines International Surety Co., Inc. It is so ordered.

Reyes, J.B.L., Barrera, Dizon, Regala, Makalintal, Bengzon, J.P., Zaldivar, Sanchez and Castro, JJ., concur.

60

G.R. No. L-29588          December 29, 1928

STANDARD OIL CO. OF NEW YORK, plaintiff-appellant, vs.CHO SIONG, ET AL., defendants-appellees.

------------------------------------

G.R. No. L-29753          December 29, 1928

ONG GUAN CAN, plaintiff-appellant, vs.STANDARD OIL CO. OF NEW YORK, defendant-appellee.

Powell and Hill for appellant in case No. 29588, and for appellee in case No. 29753. Padilla, Trenas and Magalona for appellees in case No. 29588 and for appellant in case No. 29753.

 

AVANCEÑA, C. J.:

These two case, 29588 and 29753 were jointly prosecuted in the court below and only one judgment was rendered in both.

In case 29588, the plaintiff, Standard Oil Co. of New York, sued the defendants, Cho Siong and Ong Guan Can, for the amount of P2,197.42, with interest, plus P750 as attorney's fees. The trial court ordered the defendants Cho Siong and Ong Guan Can to pay the plaintiff the amount of P64.46, with legal interest from the date when the complaint was filed until full payment, plus P200 by way of attorney's fees; and defendant Cho Siong to pay the plaintiff the sum of P2,132.96, with legal interest thereon from the date when the complaint was filed until fully paid, plus P500 as attorney's fees.1awphi1.net

On January 27, 1926, the plaintiff and defendant Cho Siong entered into a contract whereby Cho Siong obligated himself to sell as agent, plaintiff's petroleum products. He guaranteed the fulfilment of his obligation by giving a personal bond in the sum of P3,000, subscribed by Ong Guan Can, and with the sum of P1,000 in cash which he delivered to the plaintiff, with the right to apply it to the payment of any amount in which he might become indebted. Cho Siong also bound himself to pay such attorney's fees, costs, and other expenses, as might be occasioned the plaintiff should it be under the necessity of filing suit for the recovery of any amount to which it might be entitled pursuant to this contract in a sum equal to 10 per cent of the amount owed.

By virtue of this contract, Cho Siong received from the plaintiff petroleum to the value of P14,136.79, and made good to said plaintiff the total amount of P14,027.33, thus leaving a balance of P64.46 in favor of the plaintiff and against the defendant Cho Siong.

But it appears that on the same day (January 27, 1926), when the plaintiff and defendant Cho Siong entered into the contract to agency and when the other defendant, Ong Guan Can subscribed the P3,000 bond, the defendant Cho Siong signed an instrument in favor of the plaintiff in which he assumed responsibility for all the accounts that might be owing to the plaintiff by the former agent, Tong Kuan, and for all goods the latter might have in his possession at the time when the agency was transferred to Cho Siong. According to the plaintiff's evidence, the amount then owed by Tong Kuan was P3,132.96. Adding P64.46 to this amount, we have the total debt of P3,197.42. Deducting from this the P1,000 in cash which Cho Siong deposited with the plaintiff to be applied upon his liabilities, it leaves a debit balance of P2,197.42 which is the amount claimed in the complaint.

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According to the above, excluding the debt of the former agent Tong Kuan, the only balance against the defendant Cho Siong on his own contract of agency with the plaintiff is the sum of P64.46. Since the plaintiff has the P1,000 belonging to the defendant Cho Siong, which may be applied to the payment of the sums owed by the latter, it follows that, as to Cho Siong's agency, he has incurred no liabiliy, for out of the P1,000 deposited with the plaintiff he still has P935.54 in his favor. Consequently, Ong Guan Can, as a surety for those debts which Cho Siong might incur upon the contract of agency, does not answer for anything, the principal not having incurred any liability. It is plain under the terms of the bond signed by Ong Guan Can that he did not answer for Cho Siong, save for the latter's act by virtue of the contract of agency. He cannot be held liable for the debt of agent Tong Kuan which Cho Siong assumed by virtue of another contract of which said Ong Guan Can was not even aware. A contract of suretyship is to be strictly interpreted and is not to be extended beyond its terms.

The amount of P750 for attorney's fees and court costs, which Cho Siong bound himself to pay to the plaintiff, was agreed upon in the contract of agency, and as Cho Siong did not incur any liability with respect to this contract he cannot be ordered to pay this sum.

In the instrument by which Cho Siong assumed the debt of the former agent, Tong Kuan, no stipulation was made as to attorney's fees and as it is on this contract that Cho Siong failed to perform his obligaion it is also clear that he is not liable for any amount as attorney's fees.

In view of the foregoing, the appealed judgment is modified as to case No. 29588 and the defendant Cho Siong is ordered to pay the plaintiff the amount of P2,197.42 only, the other defendant Ong Guan Can being relieved from all liability.

In case No. 29753 Ong Guan Can claims the sum of P15,000 from the Standard Oil Co., of New York. In the former case No. 29588, the Standard Oil Co., of New York secured a preliminary attachmet against Ong Guan Can, which was levied on some of his lands. This attachment consisted simply in the annotation thereof in the transfer certificate of tile entered on November 17, 1927, which attachment was dissolved and the annotation cancelled on the 19th of the same month. The attachment, therefore, only lasted two days. The amount of P15,000 which Ong Guan Can claims of the Standard Oil Co., of New York is the amount of damages he alleges were, caused him by this attachment.

The trial court finding that no damage proven to have been suffered by Ong Guan Can on account of said attachment, absolved the Standard Oil Co., of New York from this claim in case No. 29753.

Without considering the other question raised in this case, and accepting the trial court's conclusions that no damage was occasioned Ong Guan Can by said attachment which only lasted two days, the judgment appealed from is affirmed, with costs against the appellant. So ordered.

Johnson, Street, Malcolm, Villamor, Ostrand, Romualdez and Villa-Real, JJ., concur.

62

G.R. No. L-8086           October 31, 1957

PACIFIC TOBACCO CORPORATION, plaintiff-appellee, vs.RICARDO D. LORENZANA and VISAYAN SURETY & INSURANCE CORPORATION, defendants.

VISAYAN SURETY & INSURANCE CORPORATION, cross claimant and third party plaintiff-appellant, vs.RICARDO D. LORENZANA, cross defendant, CALIXTO C. LORENZANA, JOSE M. LORENZANA and BENIGNO GUTIERREZ, third party defendants.

Sycip, Quisumbing, Solicitor Salazar & Associates for appellee.Enrico I. de la Cruz for appellant.Edgar C. Melia for cross-defendant and appellee.

FELIX, J.:

The Pacific Tobacco Corporation is a duly organized domestic corporation with offices at Grace Park, Caloocan, Rizal, engaged in the business of manufacturing and distributing cigarettes, cigars and other tobacco products.

On January 16, 1952, Ricardo D. Lorenzana and said corporation entered into an agreement, the pertinent provisions of which as follows:

WITNESSETH: That

WHEREAS, the Company manufactures cigarette, cigars, and other tobacco products which it desires to sell and distribute throughout the Philippines; .

WHEREAS, the DISTRIBUTOR (Lorenzana) is willing to sell and distribute the said products of the COMPANY in the territory of Manila and Rizal Province under the terms and conditions herein below set forth;

NOW, THEREFORE for and in consideration of the premises herein contained, the parties hereto have agreed and covenanted, as follows:

1. The DISTRIBUTOR shall sell and distribute solely the cigarettes, cigars and other tobacco products of the COMPANY in the abovementioned territory;

2. The Company shall, from time to time, deliver to the DISTRIBUTOR, for sale, cigarettes and other tobacco products, provided that the balance of the account of the DISTRIBUTOR with the COMPANY shall not at any time exceed THREE THOUSAND ONLY PESOS (3,000.00);

3. All accounts of the Distributor with the Company shall be due and payable in the office of the latter within thirty (30) days from and after the date of the sales invoice issued by the COMPANY;

xxx           xxx           xxx.

8. The DISTRIBUTOR shall only sell the products of the COMPANY and in case he sells the products of other persons or firms, the COMPANY shall be at liberty to terminate this contract;

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9. The DISTRIBUTOR binds himself for the COMPANY not less than TWENTY THOUSAND ONLY ——— PESOS (P20,000.00) worth of cigarettes and other Tobacco products every month and should be fail to meet this quota, the COMPANY shall have the opinion to terminate this contract upon twenty (20) day's notice;

xxx           xxx           xxx.

11. To guarantee the faithful performance on his part of the terms and conditions of this contract, the DISTRIBUTOR shall post a surety bond in favor of the COMPANY in the amount of EIGHT THOUSAND ONLY ——— PESOS (P8,000.00 signed by him and a reputable surety company acceptable to the COMPANY, THREE THOUSAND PESOS (P3,000.00) of which bond shall answer for the faithful settlement of the account of the DISTRIBUTOR with the COMPANY, and FIVE THOUSAND PESOS (5,000.00) for the return of the aforementioned truck to the COMPANY in the same condition that the DISTRIBUTOR received it, . . . (Exhibit A).

In accordance thereto, Lorenzana put up V.S. and I.C. bond No. E-JA-52/101 in the amount of P3,000 with the Visayan Surety and Insurance Corporation, as surety to guarantee the faithful fulfillment of the principal's (Lorenzana's) part in the contract with the Pacific Tobacco Corporation, which was "to sell and distribute the latter's cigarettes, cigar and other tobacco products subject to the terms and conditions stipulated in the said contract" (Exhibit B).

The record shows that on various occasions in 1952, The Philippine Tobacco Corporation delivered to Lorenzana for distribution cigarettes, cigars, and other tobacco products amounting to P15,645.64, but out of this amount the latters paid and was only credited with P13,559.33, leaving a balance of P2,086.31. Upon demand by the corporation. Lorenzana proposed to settle his pending obligation by giving P100 a month, which amount was later reduced to P25, to which arrangement the company apparently agreed and Lorenzana actually made installments amounting to P250 (Exhibit G-6). As he failed to make any further payment, the Philippine Tobacco Corporation filed a complaint with the Court of First Instance of Manila on October 30, 1953, against Ricardo D. Lorenzana and the Visayan Surety and Insurance Corporation for the recovery of the sum of P2,086.31, with legal interest thereon from the date of filing of the complaint until fully paid; attorney's fees in the amount of P5000.00; costs, and for such other remedy as may be deemed just and equitable in the premises.

Defendant Visayan Surety and Insurance Corporation answered this complaint, which it latter modified with leave of Court by filing an amended answer with cross-claim against Ricardo D. Lorenzana and third party complaint against Calixto D. Lorenzana, Jose Lorenzana and Benigno C. Gutierrez, denying the material allegations of the complaint and setting up the affirmative defense that the bond could not be held liable for damages and attorney's fees; that plaintiff Philippine Tobacco Corporation was bared from presenting this action against the surety due to laches, waiver of claim and estoppel. It was thus prayed that the complaint be dismissed as against said defendant; in the event that the surety would be sentenced to pay the plaintiff, that a simultaneous order be issued ordering the cross-defendant and the third-party defendants to pay the surety, jointly and severally, for whatever amount the latter may be required to satisfy, with interest thereon at 12 per cent per annum from the date of payment until it was fully reimbursed; that the said cross-defendant and third-party defendants be ordered to pay the surety, jointly and severally, in accordance with the indemnity bond executed by them as counter-guarantors, 20 per cent of the amount involved as attorney's fees, and costs.

In his answer dated December 1, 1953, Ricardo D. Lorenzana denied the allegation of the complaint that he refused or failed to pay the plaintiff, the true fact being that he had tendered to plaintiff certain sums in accordance with their verbal agreement which allowed him to settle his obligation in installments until the entire amount was fully satisfied; set up the defense that the agreement, Annex "A", was partially modified when plaintiffs agreed and allowed him to sell the tobacco products not only in the City of Manila and Rizal province but throughout the island of Luzon; that in virtue of such modification, he sold plaintiff's products in places as far as the northern provinces; the most of defendant's transactions in these provinces were on credit basis; that on August 2, 1952, when defendant arrived from his trip from the Ilocos regions, plaintiff terminated his

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services on the ground that the corporation was losing without giving him an advance notice of 30 days in accordance with the agreement; that as plaintiff took the delivery truck which he was using in the distribution of plaintiff's products he was prevented from going back to the provinces to collect from his customers their accounts; that he made several payments in small amounts to settle remaining obligation which were accepted, but in November, 1953, plaintiff refused to receive the same. Lorenzana claimed that because of plaintiff's failure to notify him in advance that his services were terminated, he incurred and was incurring transportation expenses in order to collect the accounts of hid former customers. He, therefore, prayed that the complaint be dismissed and plaintiff be ordered to pay the amount that he incurred as transportation expenses. The third-party defendants likewise filed their answer practically admitting all the averments of the third-party complaint except the claim for 20 per cent of the amount involved as attorney's fees, on the ground that it was excessive and that they should not be held liable for the payment of the pending obligation of Lorenzana.

At the hearing defendant Lorenzana failed to appear and to adduce in support of his defense inspite of the fact that he was duly notified. After hearing and after the other parts had filed their respective memoranda, the Court rendered judgment dated May 12, 1954, finding that although on one occasion plaintiff shipped cigarettes to defendant Lorenzana addressed at San Fernando, La Union (Exhibit C-18), this fact alone would not release the surety from liability, for there was nothing in the contract Exhibit A that expressly prohibited defendant Lorenzana from selling cigarettes outside Manila and Rizal. The lower Court opined that what was guaranteed by the Visayan Surety and Insurance Corporation was the faithful delivery by defendant Lorenzana of the price of the cigarettes to plaintiff within the time fixed in the contract and as the sending of some cigarettes to San Fernando, La Union, caused the surety no injury, said deviation will not relieve the surety from its liability under the bond. The court thus ordered defendants Ricardo D. Lorenzana and the Visayan Surety and Insurance Corporation to pay, jointly and severally, to the plaintiff Pacific Tobacco Corporation the sum of P2,086.31, with legal interest from the date of the filing of the complaint, plus P500 as attorney's fees and costs. On the strength of the indemnity bond (Exhibit "2") executed by the third-party defendants Calixto D. Lorenzana, Jose M. Lorenzana and Benigno C. Gutierrez as counter-guarantors, they together with Ricardo D. Lorenzana, were ordered to indemnify the Visayan Surety and Insurance Corporation for the amount which the latter would actually pay plaintiff in case defendant Ricardo D. Lorenzana should fail to make the payment himself and another sum of P500 as attorney's fees.

After the motion filed by the surety for the reconsideration of said division was denied, said defendant brought the matter to this Court on appeal ascribing to the lower Court the commission of several errors. But stripping them of unnecessaries and reducing the same to bare essentials, the only question at issue in the case at bar is whether the delivery by the company of its products to defendant Lorenzana in a place other than that mentioned in the agreement constitutes an alteration of said agreement that would release the surety from its liability under the bond.

It appears on record that cigarettes valued at P1,870 were transported to Ricardo Lorenzana, c/o of Mrs. Justo de Leon at San Fernando, Pampanga. Defendant surety tried to capitalize on this single act but it failed to present evidence that these goods were actually sold and distributed in said places. It would have been possible for the distributor to take a sojourn in that place and the company, knowing where he could be reached, sent the merchandise to him. Defendant Lorenzana also alleged in his answer that plaintiff allowed him to sell the latter's products even as far as the northern provinces but this defendant was not able to substantiate such claim due to his failure to appear and testify to his effect at the trial, despite the fact that he was duly represented by counsel. But even granting arguendo that the merchandise thus delivered and presumably received at San Fernando, La Union, was actually sold and distributed therein, this may not be considered as a deviation from the territory to be covered by the agent or distributor was not prohibited by the agreement itself, nor does the record show that such expansion of the territory was due to instructions from the plaintiff. While it is true that that contract (Exhibit A) states that the distributor is willing to sell and distribute the products of the company in Manila and Rizal, specification serves more as a manifestation that Lorenzana entered into the agreement with the understanding that his sphere of activity would be for these places. But certainly nowhere in the same agreement appears a restriction against the acceptance of additional territories, if he so desired.

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Appellant surety argues that the bond guarantees only the payment of cigarettes, cigars or other tobacco products that were delivered to and distributed by Lorenzana in Manila and Rizal and at no other place. To adopt this line of reasoning would be to harness a pliant argument to suit appellant's purpose. The agreement required the distributor to post a bond for P8,000, "P3,000 of which bond shall answer for the faithful settlement of the account of the distributor with the Company." The bond put up by Lorenzana in the amount of P3,000, undertaken by the Visayan Surety and Insurance Corporation, therefore, was only to secure the prompt and faithful payment of the accounts of the distributor to the company. The mention of Manila and Rizal in said agreement was designed more as a declaration or identification of these places wherein the distributor was expressly authorized and assigned to sell the cigar, cigarettes and tobacco products of the plaintiff, which is no obstacle to the distributor's acceptance or taking motu proprio of additional territories in order to better to fulfill his obligation to sell monthly for the Company not less than P20,000 worth of cigarettes and other tobacco products and could by no means alter his liability to turn over the to the company payments therefor, and that is precisely his obligation secured by the bond.

Appellant maintaining that the alleged modification of the agreement released the surety from its liability, invokes the rule of strictissimi juris under which, it is claimed, surety bonds must be strictly construed and cannot be extended beyond their terms. Although We might acknowledge that a surety is a favorite of the law and his contract strictissimi juris, this rule has no bearing on the case at bar. Anyway, it commonly refers to an accommodation surety and should not be extended to favor a compensated surety, as is appellant in the instant case. The rationale of this doctrine is reasonable; an accommodation surety acts without motive of pecuniary gain and, hence, should be protected against unjust pecuniary impoverishment by imposing on the principal duties akin to those of a fiduciary. This cannot be said of a compensated corporate surety which is a business association organized for the purpose of assuming classified risks in large numbers, for profit and on an impersonal basis through the medium of standardized written contractual forms drawn by its own representatives with the primary aim of protecting its own interests (See Stearn's The Law of Suretyship, 4th ed., 402-403). American courts in refusing to apply this rule on compensated sureties have expressed themselves in varying language. Sometimes it is said that a corporate compensated surety is not entitled to the benefit of the rule ofstrictissimi juris (U.S. vs. Gao, F. Pawling & Co. 297 F. 65); or that the contract is to be construed against the surety and in favor of the promise (Consolidated Indem. & Ins. Co. vs. State, 184 Ark. 581, 43 S.W. [2d] 240); or that the contract is like one of the insurance, hence one or the other of the above rules is to be applied (Lassetter vs. Backer, 26 Ariz. 224, 224 P. 810; Md. Cas. Co. vs. Dunlap, 68 F. [2d] 289), and it was even said:

The law does not have the same solicitude for corporations engaged in giving indemnity bonds for profit as it does for individual surety who voluntarily undertakes to answer for the obligations of another. Although calling themselves sureties, such corporations are in fact insurers, and in determining their rights and liabilities the rules peculiar to suretyship do not apply (Metropolitan Casualty Insurance Co. vs. United Brick & Tile Co. [1934], 29 P. [2d] 771).

Even assuming, however, for the sake of argument that the delivery of merchandise at a place other than that appearing in the contract constitutes an alteration of the same, it is a material deviation that would release the surety from its liability?.

A material alteration of a contract is such a change in the terms of the agreement as either imposes some new obligation on the party promising or takes away some obligation already imposed. A change in the form of the contract which does not affect one or the other of these results is immaterial, and will not discharge the surety (Stearn's The Law of Suretyship, 4th ed., p.98). To be material an alteration must change the legal effect of the original contract (New Amsterdam Casualty Co. vs. W.T. Taylor Const. Co., 12 F. [2d] 972).

It cannot be denied that the obligation of the principal remained the same — to settle his accounts to the company at the specified time. The addition or diminution of the territories covered by his previous assignment will not alter or affect that duty to make payments on time. Apart from the fact that the alteration in the instant case, if there was any, is not material as to relieve the surety from its liability under the bond, there is not even

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an iota to proof that such deviation caused the surety any loss or injury or that such delivery caused the distributor's failure to pay his accounts. The weight of authority is to the effect that:

A corporation engaged in the business of suretyship for profit cannot successfully defend a suit merely by showing a change in the contract, whether beneficial or otherwise, as is the rule in ordinary suretyship, but most prove that the change is material and prejudicial (City of Philadelphia vs. Ray., 266 Pa. 345; 109 Alt. 689).

It is well-settled that the rule of stricticcimi juris, ordinarily applied in relief of an individual surety, is not applied in case of compensated sureties; and that where a bonding company, for a monetary consideration, has insured against failure of performance of a contract, it must show that it has suffered some injury by reason of departure from the strict terms of contract, before it can for that reason be discharged from its liability (Pickens County vs. National Surety Co. 13 F. [2d] 758 [C.C.A.] 4th, 1926).

A departure from the terms of the contract will not have the effect of discharging a compensated surety unless it appears that such departure has resulted in injury, loss or prejudice to the surety (Chapman vs. Hoage, 296 U.S. 526).

It has been said that to allow compensated surety companies to collect and retrain premiums for their services, graded according to the nature and extent of the risk, and then to repudiate their obligations on slight pretexts which have no relation to the risk, would be most unjust and immoral, and would be a perversion of the wise and just rules designed for the protection of voluntary sureties (M. H. Waller Realty Co. vs. American Surety Co., 60 Utah, 435).

Wherefore, the decision appealed from is hereby affirmed, with costs against appellant. It is so ordered.

[G.R. No. 138544. October 3, 2000]

SECURITY BANK AND TRUST COMPANY, Inc., petitioner, vs. RODOLFO M. CUENCA, respondent.

D E C I S I O N

PANGANIBAN, J.:

Being an onerous undertaking, a surety agreement is strictly construed against the creditor, and every doubt is resolved in favor of the solidary debtor. The fundamental rules of fair play require the creditor to obtain the consent of the surety to any material alteration in the principal loan agreement, or at least to notify it thereof. Hence, petitioner bank cannot hold herein respondent liable for loans obtained in excess of the amount or beyond the period stipulated in the original agreement, absent any clear stipulation showing that the latter waived his right to be notified thereof, or to give consent thereto. This is especially true where, as in this case, respondent was no longer the principal officer or major stockholder of the corporate debtor at the time the later obligations were incurred. He was thus no longer in a position to compel the debtor to pay the creditor and had no more reason to bind himself anew to the subsequent obligations.

The Case

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This is the main principle used in denying the present Petition for Review under Rule 45 of the Rules of Court. Petitioner assails the December 22, 1998 Decision[1] of the Court of Appeals (CA) in CA-GR CV No. 56203, the dispositive portion of which reads as follows:

WHEREFORE, the judgment appealed from is hereby amended in the sense that defendant-appellant Rodolfo M. Cuenca [herein respondent] is RELEASED from liability to pay any amount stated in the judgment.

Furthermore, [Respondent] Rodolfo M. Cuencas counterclaim is hereby DISMISSED for lack of merit.

In all other respect[s], the decision appealed from is AFFIRMED.[2]

Also challenged is the April 14, 1999 CA Resolution,[3] which denied petitioners Motion for Reconsideration.

Modified by the CA was the March 6, 1997 Decision[4] of the Regional Trial Court (RTC) of Makati City (Branch 66) in Civil Case No. 93-1925, which disposed as follows:

WHEREFORE, judgment is hereby rendered ordering defendants Sta. Ines Melale Corporation and Rodolfo M. Cuenca to pay, jointly and severally, plaintiff Security Bank & Trust Company the sum ofP39,129,124.73 representing the balance of the loan as of May 10, 1994 plus 12% interest per annum until fully paid, and the sum of P100,000.00 as attorneys fees and litigation expenses and to pay the costs.

SO ORDERED.

The Facts

The facts are narrated by the Court of Appeals as follows:[5]

The antecedent material and relevant facts are that defendant-appellant Sta. Ines Melale (Sta. Ines) is a corporation engaged in logging operations. It was a holder of a Timber License Agreement issued by the Department of Environment and Natural Resources (DENR).

On 10 November 1980, [Petitioner] Security Bank and Trust Co. granted appellant Sta. Ines Melale Corporation [SIMC] a credit line in the amount of [e]ight [m]llion [p]esos (P8,000,000.00) to assist the latter in meeting the additional capitalization requirements of its logging operations.

The Credit Approval Memorandum expressly stated that the P8M Credit Loan Facility shall be effective until 30 November 1981:

JOINT CONDITIONS:

1. Against Chattel Mortgage on logging trucks and/or inventories (except logs) valued at 200% of the lines plus JSS of Rodolfo M. Cuenca.

2. Submission of an appropriate Board Resolution authorizing the borrowings, indicating therein the companys duly authorized signatory/ies;

3. Reasonable/compensating deposit balances in current account shall be maintained at all times; in this connection, a Makati account shall be opened prior to availment on lines;

4. Lines shall expire on November 30, 1981; and

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5. The bank reserves the right to amend any of the aforementioned terms and conditions upon written notice to the Borrower. (Emphasis supplied.)

To secure the payment of the amounts drawn by appellant SIMC from the above-mentioned credit line, SIMC executed a Chattel Mortgage dated 23 December 1980 (Exhibit A) over some of its machinery and equipment in favor of [Petitioner] SBTC. As additional security for the payment of the loan, [Respondent] Rodolfo M. Cuenca executed an Indemnity Agreement dated 17 December 1980 (Exhibit B) in favor of [Petitioner] SBTC whereby he solidarily bound himself with SIMC as follows:

x x x x x x x x x

Rodolfo M. Cuenca x x x hereby binds himself x x x jointly and severally with the client (SIMC) in favor of the bank for the payment, upon demand and without the benefit of excussion of whatever amount x x x the client may be indebted to the bank x x x by virtue of aforesaid credit accommodation(s) including the substitutions, renewals, extensions, increases, amendments, conversions and revivals of the aforesaid credit accommodation(s) x x x . (Emphasis supplied).

On 26 November 1981, four (4) days prior to the expiration of the period of effectivity of the P8M-Credit Loan Facility, appellant SIMC made a first drawdown from its credit line with [Petitioner] SBTC in the amount of [s]ix [m]illion [o]ne [h]undred [t]housand [p]esos (P6,100,000.00). To cover said drawdown, SIMC duly executed promissory Note No. TD/TLS-3599-81 for said amount (Exhibit C).

Sometime in 1985, [Respondent] Cuenca resigned as President and Chairman of the Board of Directors of defendant-appellant Sta. Ines. Subsequently, the shareholdings of [Respondent] Cuenca in defendant-appellant Sta. Ines were sold at a public auction relative to Civil Case No. 18021 entitled Adolfo A. Angala vs. Universal Holdings, Inc. and Rodolfo M. Cuenca. Said shares were bought by Adolfo Angala who was the highest bidder during the public auction.

Subsequently, appellant SIMC repeatedly availed of its credit line and obtained six (6) other loan[s] from [Petitioner] SBTC in the aggregate amount of [s]ix [m]illion [t]hree [h]undred [s]ixty-[n]ine [t]housand [n]ineteen and 50/100 [p]esos (P6,369,019.50). Accordingly, SIMC executed Promissory Notes Nos. DLS/74/760/85, DLS/74773/85, DLS/74/78/85, DLS/74/760/85 DLS/74/12/86, and DLS/74/47/86 to cover the amounts of the abovementioned additional loans against the credit line.

Appellant SIMC, however, encountered difficulty[6] in making the amortization payments on its loans and requested [Petitioner] SBTC for a complete restructuring of its indebtedness. SBTC accommodated appellant SIMCs request and signified its approval in a letter dated 18 February 1988 (Exhibit G) wherein SBTC and defendant-appellant Sta. Ines, without notice to or the prior consent of [Respondent] Cuenca, agreed to restructure the past due obligations of defendant-appellant Sta. Ines. [Petitioner] Security Bank agreed to extend to defendant-appellant Sta. Ines the following loans:

a. Term loan in the amount of [e]ight [m]illion [e]ight [h]undred [t]housand [p]esos (P8,800,000.00), to be applied to liquidate the principal portion of defendant-appellant Sta. Ines[] total outstanding indebtedness to [Petitioner] Security Bank (cf. P. 1 of Exhibit G, Expediente, at Vol. II, p. 336; Exhibit 5-B-Cuenca, Expediente, et Vol I, pp. 33 to 34) and

b. Term loan in the amount of [t]hree [m]illion [f]our [h]undred [t]housand [p]esos (P3,400,000.00), to be applied to liquidate the past due interest and penalty portion of the indebtedness of defendant-appellant Sta. Ines to [Petitioner] Security Bank (cf. Exhibit G, Expediente, at Vol. II, p. 336; Exhibit 5-B-Cuenca, Expediente, at Vol. II, p. 33 to 34).

It should be pointed out that in restructuring defendant-appellant Sta. Ines obligations to [Petitioner] Security Bank, Promissory Note No. TD-TLS-3599-81 in the amount of [s]ix [m]illion [o]ne [h]undred [t]housand [p]esos

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(P6,100,000.00), which was the only loan incurred prior to the expiration of the P8M-Credit Loan Facility on 30 November 1981 and the only one covered by the Indemnity Agreement dated 19 December 1980 (Exhibit 3-Cuenca, Expediente, at Vol. II, p. 331), was not segregated from, but was instead lumped together with, the other loans, i.e., Promissory Notes Nos. DLS/74/12/86, DLS/74/28/86 and DLS/74/47/86 (Exhibits D, E, and F, Expediente, at Vol. II, pp. 333 to 335) obtained by defendant-appellant Sta. Ines which were not secured by said Indemnity Agreement.

Pursuant to the agreement to restructure its past due obligations to [Petitioner] Security Bank, defendant-appellant Sta. Ines thus executed the following promissory notes, both dated 09 March 1988 in favor of [Petitioner] Security Bank:

PROMISSORY NOTE NO. AMOUNTRL/74/596/88 P8,800,000.00RL/74/597/88 P3,400,000.00-------------------

TOTAL P12,200,000.00

(Exhibits H and I, Expediente, at Vol. II, pp. 338 to 343).

To formalize their agreement to restructure the loan obligations of defendant-appellant Sta. Ines, [Petitioner] Security Bank and defendant-appellant Sta. Ines executed a Loan Agreement dated 31 October 1989 (Exhibit 5-Cuenca, Expediente, at Vol. I, pp. 33 to 41). Section 1.01 of the said Loan Agreement dated 31 October 1989 provides:

1.01 Amount - The Lender agrees to grant loan to the Borrower in the aggregate amount of TWELVE MILLION TWO HUNDRED THOUSAND PESOS (P12,200,000.00), Philippines [c]urrency (the Loan). The loan shall be released in two (2) tranches of P8,800,000.00 for the first tranche (the First Loan) and P3,400,000.00 for the second tranche (the Second Loan) to be applied in the manner and for the purpose stipulated hereinbelow.

1.02. Purpose - The First Loan shall be applied to liquidate the principal portion of the Borrowers present total outstanding indebtedness to the Lender (the indebtedness) while the Second Loan shall be applied to liquidate the past due interest and penalty portion of the Indebtedness. (Underscoring supplied.) (cf. p. 1 of Exhibit 5-Cuenca, Expediente, at Vol. I, p. 33)

From 08 April 1988 to 02 December 1988, defendant-appellant Sta. Ines made further payments to [Petitioner] Security Bank in the amount of [o]ne [m]illion [s]even [h]undred [f]ifty-[s]even [t]housand [p]esos (P1,757,000.00) (Exhibits 8, 9-P-SIMC up to 9-GG-SIMC, Expediente, at Vol. II, pp. 38, 70 to 165)

Appellant SIMC defaulted in the payment of its restructured loan obligations to [Petitioner] SBTC despite demands made upon appellant SIMC and CUENCA, the last of which were made through separate letters dated 5 June 1991 (Exhibit K) and 27 June 1991 (Exhibit L), respectively.

Appellants individually and collectively refused to pay the [Petitioner] SBTC. Thus, SBTC filed a complaint for collection of sum of money on 14 June 1993, resulting after trial on the merits in a decision by the court a quo, x x x from which [Respondent] Cuenca appealed.

Ruling of the Court of Appeals

In releasing Respondent Cuenca from liability, the CA ruled that the 1989 Loan Agreement had novated the 1980 credit accommodation earlier granted by the bank to Sta. Ines.Accordingly, such novation

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extinguished the Indemnity Agreement, by which Cuenca, who was then the Board chairman and president of Sta. Ines, had bound himself solidarily liable for the payment of the loans secured by that credit accommodation. It noted that the 1989 Loan Agreement had been executed without notice to, much less consent from, Cuenca who at the time was no longer a stockholder of the corporation.

The appellate court also noted that the Credit Approval Memorandum had specified that the credit accommodation was for a total amount of P8 million, and that its expiry date was November 30, 1981. Hence, it ruled that Cuenca was liable only for loans obtained prior to November 30, 1981, and only for an amount not exceeding P8 million.

It further held that the restructuring of Sta. Ines obligation under the 1989 Loan Agreement was tantamount to a grant of an extension of time to the debtor without the consent of the surety.  Under Article 2079 of the Civil Code, such extension extinguished the surety.

The CA also opined that the surety was entitled to notice, in case the bank and Sta. Ines decided to materially alter or modify the principal obligation after the expiry date of the credit accommodation.

Hence, this recourse to this Court.[7]

The Issues

In its Memorandum, petitioner submits the following for our consideration:[8]

A. Whether or not the Honorable Court of Appeals erred in releasing Respondent Cuenca from liability as surety under the Indemnity Agreement for the payment of the principal amount of twelve million two hundred thousand pesos (P12,200,000.00) under Promissory Note No. RL/74/596/88 dated 9 March 1988 and Promissory Note No. RL/74/597/88 dated 9 March 1988, plus stipulated interests, penalties and other charges due thereon;

i. Whether or not the Honorable Court of Appeals erred in ruling that Respondent Cuencas liability under the Indemnity Agreement covered only availments on SIMCs credit line to the extent of eight million pesos (P8,000,000.00) and made on or before 30 November 1981;

ii. Whether or not the Honorable Court of Appeals erred in ruling that the restructuring of SIMCs indebtedness under the P8 million credit accommodation was tantamount to an extension granted to SIMC without Respondent Cuencas consent, thus extinguishing his liability under the Indemnity Agreement pursuant to Article 2079 of the Civil Code;

iii. Whether or not the Honorable Court of appeals erred in ruling that the restructuring of SIMCs indebtedness under the P8 million credit accommodation constituted a novation of the principal obligation, thus extinguishing Respondent Cuencas liability under the indemnity agreement;

B. Whether or not Respondent Cuencas liability under the Indemnity Agreement was extinguished by the payments made by SIMC;

C. Whether or not petitioners Motion for Reconsideration was pro-forma;

D. Whether or not service of the Petition by registered mail sufficiently complied with Section 11, Rule 13 of the 1997 Rules of Civil Procedure.

Distilling the foregoing, the Court will resolve the following issues: (a) whether the 1989 Loan Agreement novated the original credit accommodation and Cuencas liability under the Indemnity Agreement; and (b) whether Cuenca waived his right to be notified of and to give consent to any substitution, renewal, extension, increase, amendment, conversion or revival of the said credit accommodation. As preliminary matters, the procedural questions raised by respondent will also be addressed.

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The Courts Ruling

The Petition has no merit.

Preliminary Matters: Procedural Questions

Motion for Reconsideration Not Pro Forma

Respondent contends that petitioners Motion for Reconsideration of the CA Decision, in merely rehashing the arguments already passed upon by the appellate court, was pro forma; that as such, it did not toll the period for filing the present Petition for Review.[9] Consequently, the Petition was filed out of time.[10]

We disagree. A motion for reconsideration is not pro forma just because it reiterated the arguments earlier passed upon and rejected by the appellate court. The Court has explained that a movant may raise the same arguments, precisely to convince the court that its ruling was erroneous.[11]

Moreover, there is no clear showing of intent on the part of petitioner to delay the proceedings. In Marikina Valley Development Corporation v. Flojo,[12] the Court explained that a pro forma motion had no other purpose than to gain time and to delay or impede the proceedings. Hence, where the circumstances of a case do not show an intent on the part of the movant merely to delay the proceedings, our Court has refused to characterize the motion as simply pro forma. It held:

We note finally that because the doctrine relating to pro forma motions for reconsideration impacts upon the reality and substance of the statutory right of appeal, that doctrine should be applied reasonably, rather than literally. The right to appeal, where it exists, is an important and valuable right. Public policy would be better served by according the appellate court an effective opportunity to review the decision of the trial court on the merits, rather than by aborting the right to appeal by a literal application of the procedural rules relating to pro forma motions for reconsideration.

Service by Registered Mail Sufficiently Explained

Section 11, Rule 13 of the 1997 Rules of Court, provides as follows:

SEC. 11. Priorities in modes of service and filing. -- Whenever practicable, the service and filing of pleadings and other papers shall be done personally. Except with respect to papers emanating from the court, a resort to other modes must be accompanied by a written explanation why the service or filing was not done personally. A violation of this Rule may be cause to consider the paper as not filed.

Respondent maintains that the present Petition for Review does not contain a sufficient written explanation why it was served by registered mail.

We do not think so. The Court held in Solar Entertainment v. Ricafort[13] that the aforecited rule was mandatory, and that only when personal service or filing is not practicable may resort to other modes be had, which must then be accompanied by a written explanation as to why personal service or filing was not practicable to begin with.

In this case, the Petition does state that it was served on the respective counsels of Sta. Ines and Cuenca by registered mail in lieu of personal service due to limitations in time and distance.[14] This explanation sufficiently shows that personal service was not practicable. In any event, we find no adequate reason to reject the contention of petitioner and thereby deprive it of the opportunity to fully argue its cause.

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First Issue: Original Obligation Extinguished by Novation

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

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

Novation of a contract is never presumed. It has been held that [i]n the absence of an express agreement, novation takes place only when the old and the new obligations are incompatible on every point.[15] Indeed, the following requisites must be established: (1) there is a previous valid obligation; (2) the parties concerned agree to a new contract; (3) the old contract is extinguished; and (4) there is a valid new contract.[16]

Petitioner contends that there was no absolute incompatibility between the old and the new obligations, and that the latter did not extinguish the earlier one. It further argues that the 1989 Agreement did not change the original loan in respect to the parties involved or the obligations incurred. It adds that the terms of the 1989 Contract were not more onerous.[17] Since the original credit accomodation was not extinguished, it concludes that Cuenca is still liable under the Indemnity Agreement.

We reject these contentions. Clearly, the requisites of novation are present in this case. The 1989 Loan Agreement extinguished the obligation[18] obtained under the 1980 credit accomodation.This is evident from its explicit provision to liquidate the principal and the interest of the earlier indebtedness, as the following shows:

1.02. Purpose. The First Loan shall be applied to liquidate the principal portion of the Borrowers present total outstanding Indebtedness to the Lender (the Indebtedness) while the Second Loan shall be applied to liquidate the past due interest and penalty portion of the Indebtedness.[19] (Italics supplied.)

The testimony of an officer[20] of the bank that the proceeds of the 1989 Loan Agreement were used to pay-off the original indebtedness serves to strengthen this ruling.[21]

Furthermore, several incompatibilities between the 1989 Agreement and the 1980 original obligation demonstrate that the two cannot coexist. While the 1980 credit accommodation had stipulated that the amount of loan was not to exceed P8 million,[22] the 1989 Agreement provided that the loan was P12.2 million. The periods for payment were also different.

Likewise, the later contract contained conditions, positive covenants and negative covenants not found in the earlier obligation. As an example of a positive covenant, Sta. Ines undertook from time to time and upon request by the Lender, [to] perform such further acts and/or execute and deliver such additional documents and writings as may be necessary or proper to effectively carry out the provisions and purposes of this Loan Agreement.[23] Likewise, SIMC agreed that it would not create any mortgage or encumbrance on any asset owned or hereafter acquired, nor would it participate in any merger or consolidation.[24]

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

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

Alleged Extension

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Petitioner insists that the 1989 Loan Agreement was a mere renewal or extension of the P8 million original accommodation; it was not a novation.[25]

This argument must be rejected. To begin with, the 1989 Loan Agreement expressly stipulated that its purpose was to liquidate, not to renew or extend, the outstanding indebtedness.Moreover, respondent did not sign or consent to the 1989 Loan Agreement, which had allegedly extended the original P8 million credit facility. Hence, his obligation as a surety should be deemed extinguished, pursuant to Article 2079 of the Civil Code, which specifically states that [a]n extension granted to the debtor by the creditor without the consent of the guarantor extinguishes the guaranty. x x x. In an earlier case,[26] the Court explained the rationale of this provision in this wise:

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

Binding Nature of the Credit Approval Memorandum

As noted earlier, the appellate court relied on the provisions of the Credit Approval Memorandum in holding that the credit accommodation was only for P8 million, and that it was for a period of one year ending on November 30, 1981. Petitioner objects to the appellate courts reliance on that document, contending that it was not a binding agreement because it was not signed by the parties. It adds that it was merely for its internal use.

We disagree. It was petitioner itself which presented the said document to prove the accommodation. Attached to the Complaint as Annex A was a copy thereof evidencing the accommodation.[27] Moreover, in its Petition before this Court, it alluded to the Credit Approval Memorandum in this wise:

4.1 On 10 November 1980, Sta. Ines Melale Corporation (SIMC) was granted by the Bank a credit line in the aggregate amount of Eight Million Pesos (P8,000,000.00) to assist SIMC in meeting the additional capitalization requirements for its logging operations. For this purpose, the Bank issued a Credit Approval Memorandum dated 10 November 1980.

Clearly, respondent is estopped from denying the terms and conditions of the P8 million credit accommodation as contained in the very document it presented to the courts. Indeed, it cannot take advantage of that document by agreeing to be bound only by those portions that are favorable to it, while denying those that are disadvantageous.

Second Issue: Alleged Waiver of Consent

Pursuing another course, petitioner contends that Respondent Cuenca impliedly gave his consent to any modification of the credit accommodation or otherwise waived his right to be notified of, or to give consent to, the same.[28] Respondents consent or waiver thereof is allegedly found in the Indemnity Agreement, in which he held himself liable for the credit accommodation including [its] substitutions, renewals, extensions, increases, amendments, conversions and revival. It explains that the novation of the original credit accommodation by the 1989 Loan Agreement is merely its renewal, which connotes cessation of an old contract and birth of another one x x x.[29]

At the outset, we should emphasize that an essential alteration in the terms of the Loan Agreement without the consent of the surety extinguishes the latters obligation. As the Court held in National Bank v.

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Veraguth,[30] [i]t is fundamental in the law of suretyship that any agreement between the creditor and the principal debtor which essentially varies the terms of the principal contract, without the consent of the surety, will release the surety from liability.

In this case, petitioners assertion - that respondent consented to the alterations in the credit accommodation -- finds no support in the text of the Indemnity Agreement, which isreproduced hereunder:

Rodolfo M. Cuenca of legal age, with postal address c/o Sta. Ines Malale Forest Products Corp., Alco Bldg., 391 Buendia Avenue Ext., Makati Metro Manila for and in consideration of the credit accommodation in the total amount of eight million pesos (P8,000,000.00) granted by the SECURITY BANK AND TRUST COMPANY, a commercial bank duly organized and existing under and by virtue of the laws of the Philippine, 6778 Ayala Avenue, Makati, Metro Manila hereinafter referred to as the BANK in favor of STA. INES MELALE FOREST PRODUCTS CORP., x x x ---- hereinafter referred to as the CLIENT, with the stipulated interests and charges thereon, evidenced by that/those certain PROMISSORY NOTE[(S)], made, executed and delivered by the CLIENT in favor of the BANK herebybind(s) himself/themselves jointly and severally with the CLIENT in favor of the BANK for the payment , upon demand and without benefit of excussion of whatever amount or amounts the CLIENT may be indebted to the BANK under and by virtue of aforesaid credit accommodation(s) including the substitutions, renewals, extensions, increases, amendment, conversions and revivals of the aforesaid credit accommodation(s), as well as of the amount or amounts of such other obligations that the CLIENT may owe the BANK, whether direct or indirect, principal or secondary, as appears in the accounts, books and records of the BANK, plus interest and expenses arising from any agreement or agreements that may have heretofore been made, or may hereafter be executed by and between the parties thereto, including the substitutions, renewals, extensions, increases, amendments, conversions and revivals of the aforesaid credit accommodation(s), and further bind(s) himself/themselves with the CLIENT in favor of the BANK for the faithful compliance of all the terms and conditions contained in the aforesaid credit accommodation(s), all of which are incorporated herein and made part hereof by reference.

While respondent held himself liable for the credit accommodation or any modification thereof, such clause should be understood in the context of the P8 million limit and the November 30, 1981 term. It did not give the bank or Sta. Ines any license to modify the nature and scope of the original credit accommodation, without informing or getting the consent of respondent who was solidarily liable. Taking the banks submission to the extreme, respondent (or his successors) would be liable for loans even amounting to, say, P100 billion obtained 100 years after the expiration of the credit accommodation, on the ground that he consented to all alterations and extensions thereof.

Indeed, it has been held that a contract of surety cannot extend to more than what is stipulated. It is strictly construed against the creditor, every doubt being resolved against enlarging the liability of the surety.[31] Likewise, the Court has ruled that it is a well-settled legal principle that if there is any doubt on the terms and conditions of the surety agreement, the doubt should be resolved in favor of the surety x x x. Ambiguous contracts are construed against the party who caused the ambiguity.[32] In the absence of an unequivocal provision that respondent waived his right to be notified of or to give consent to any alteration of the credit accommodation, we cannot sustain petitioners view that there was such a waiver.

It should also be observed that the Credit Approval Memorandum clearly shows that the bank did not have absolute authority to unilaterally change the terms of the loan accommodation. Indeed, it may do so only upon notice to the borrower, pursuant to this condition:

5. The Bank reserves the right to amend any of the aforementioned terms and conditions upon written notice to the Borrower.[33]

We reject petitioners submission that only Sta. Ines as the borrower, not respondent, was entitled to be notified of any modification in the original loan accommodation.[34] Following the banks reasoning, such modification would not be valid as to Sta. Ines if no notice were given; but would still be valid as to respondent to whom no notice need be given. The latters liability would thus be more burdensome than that of the

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former. Such untenable theory is contrary to the principle that a surety cannot assume an obligation more onerous than that of the principal.[35]

The present controversy must be distinguished from Philamgen v. Mutuc,[36] in which the Court sustained a stipulation whereby the surety consented to be bound not only for the specified period, but to any extension thereafter made, an extension x x x that could be had without his having to be notified.

In that case, the surety agreement contained this unequivocal stipulation: It is hereby further agreed that in case of any extension of renewal of the bond, we equally bind ourselves to the Company under the same terms and conditions as herein provided without the necessity of executing another indemnity agreement for the purpose and that we hereby equally waive our right to be notified of any renewal or extension of the bond which may be granted under this indemnity agreement.

In the present case, there is no such express stipulation. At most, the alleged basis of respondents waiver is vague and uncertain. It confers no clear authorization on the bank or Sta. Ines to modify or extend the original obligation without the consent of the surety or notice thereto.

Continuing Surety

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

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

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

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

Petitioner, however, cites the Dino ruling in which the Court found the surety liable for the loan obtained after the payment of the original one, which was covered by a continuing surety agreement. At the risk of being repetitious, we hold that in Dino, the surety Agreement specifically provided that each suretyship is a continuing one which shall remain in full force and effect until this bank is notified of its revocation. Since the bank had not been notified of such revocation, the surety was held liable even for the subsequent obligations of the principal borrower.

No similar provision is found in the present case. On the contrary, respondents liability was confined to the 1980 credit accommodation, the amount and the expiry date of which were set down in the Credit Approval Memorandum.

Special Nature of the JSS

It is a common banking practice to require the JSS (joint and solidary signature) of a major stockholder or corporate officer, as an additional security for loans granted to corporations.There are at least two reasons for this. First, in case of default, the creditors recourse, which is normally limited to the corporate properties under the veil of separate corporate personality,would extend to the personal assets of the surety. Second, such

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surety would be compelled to ensure that the loan would be used for the purpose agreed upon, and that it would be paid by the corporation.

Following this practice, it was therefore logical and reasonable for the bank to have required the JSS of respondent, who was the chairman and president of Sta. Ines in 1980 when the credit accommodation was granted. There was no reason or logic, however, for the bank or Sta. Ines to assume that he would still agree to act as surety in the 1989 Loan Agreement, because at that time, he was no longer an officer or a stockholder of the debtor-corporation. Verily, he was not in a position then to ensure the payment of the obligation. Neither did he have any reason to bind himself further to a bigger and more onerous obligation.

Indeed, the stipulation in the 1989 Loan Agreement providing for the surety of respondent, without even informing him, smacks of negligence on the part of the bank and bad faith on that of the principal debtor. Since that Loan Agreement constituted a new indebtedness, the old loan having been already liquidated, the spirit of fair play should have impelled Sta. Ines to ask somebody else to act as a surety for the new loan.

In the same vein, a little prudence should have impelled the bank to insist on the JSS of one who was in a position to ensure the payment of the loan. Even a perfunctory attempt at credit investigation would have revealed that respondent was no longer connected with the corporation at the time. As it is, the bank is now relying on an unclear Indemnity Agreement in order to collect an obligation that could have been secured by a fairly obtained surety. For its defeat in this litigation, the bank has only itself to blame.

In sum, we hold that the 1989 Loan Agreement extinguished by novation the obligation under the 1980 P8 million credit accommodation. Hence, the Indemnity Agreement, which had been an accessory to the 1980 credit accommodation, was also extinguished. Furthermore, we reject petitioners submission that respondent waived his right to be notified of, or to give consent to, any modification or extension of the 1980 credit accommodation.

In this light, we find no more need to resolve the issue of whether the loan obtained before the expiry date of the credit accommodation has been paid.

WHEREFORE, the Petition is DENIED and the assailed Decision AFFIRMED. Costs against petitioner.

SO ORDERED.

Melo, (Chairman), Vitug, Purisima, and Gonzaga-Reyes, JJ., concur.

[G.R. No. L-8437.  November 28, 1956.]ESTATE OF K. H. HEMADY, deceased, vs. LUZON SURETY CO., INC., claimant-Appellant.

 

D E C I S I O NREYES, J. B. L., J.:

Appeal by Luzon Surety Co., Inc., from an order of the Court of First Instance of Rizal, presided by Judge Hermogenes Caluag, dismissing its claim against the Estate of K. H. Hemady (Special Proceeding No. Q-293) for failure to state a cause of action.

The Luzon Surety Co. had filed a claim against the Estate based on twenty different indemnity agreements, or counter bonds, each subscribed by a distinct principal and by the deceased K. H. Hemady, a surety solidary guarantor) in all of them, in consideration of the Luzon Surety Co.’s of having guaranteed, the various principals in favor of different creditors. The twenty counterbonds, or indemnity agreements, all contained the following stipulations:chanroblesvirtuallawlibrary

“Premiums. — As consideration for this suretyship, the undersigned jointly and severally, agree to pay the COMPANY the sum of ________________ (P______) pesos, Philippines Currency, in advance as premium there of for every __________ months or fractions thereof, this ________ or any renewal or substitution thereof is in effect.

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Indemnity. — The undersigned, jointly and severally, agree at all times to indemnify the COMPANY and keep it indemnified and hold and save it harmless from and against any and all damages, losses, costs, stamps, taxes, penalties, charges, and expenses of whatsoever kind and nature which the COMPANY shall or may, at any time sustain or incur in consequence of having become surety upon this bond or any extension, renewal, substitution or alteration thereof made at the instance of the undersigned or any of them or any order executed on behalf of the undersigned or any of them; chan roblesvirtualawlibraryand to pay, reimburse and make good to the COMPANY, its successors and assigns, all sums and amount of money which it or its representatives shall pay or cause to be paid, or become liable to pay, on account of the undersigned or any of them, of whatsoever kind and nature, including 15% of the amount involved in the litigation or other matters growing out of or connected therewith for counsel or attorney’s fees, but in no case less than P25. It is hereby further agreed that in case of extension or renewal of this ________ we equally bind ourselves for the payment thereof under the same terms and conditions as above mentioned without the necessity of executing another indemnity agreement for the purpose and that we hereby equally waive our right to be notified of any renewal or extension of this ________ which may be granted under this indemnity agreement.

Interest on amount paid by the Company. — Any and all sums of money so paid by the company shall bear interest at the rate of 12%  per annum which interest, if not paid, will be accummulated and added to the capital quarterly order to earn the same interests as the capital and the total sum thereof, the capital and interest, shall be paid to the COMPANY as soon as the COMPANY shall have become liable therefore, whether it shall have paid out such sums of money or any part thereof or not.

x x x                    x x x                    x x x

Waiver. — It is hereby agreed upon by and between the undersigned that any question which may arise between them by reason of this document and which has to be submitted for decision to Courts of Justice shall be brought before the Court of competent jurisdiction in the City of Manila, waiving for this purpose any other venue. Our right to be notified of the acceptance and approval of this indemnity agreement is hereby likewise waived.

x x x                    x x x                    x x x

Our Liability Hereunder. — It shall not be necessary for the COMPANY to bring suit against the principal upon his default, or to exhaust the property of the principal, but the liability hereunder of the undersigned indemnitor shall be jointly and severally, a primary one, the same as that of the principal, and shall be exigible immediately upon the occurrence of such default.” (Rec. App. pp. 98- 102.)

The Luzon Surety Co., prayed for allowance, as a contingent claim, of the value of the twenty bonds it had executed in consideration of the counterbonds, and further asked for judgment for the unpaid premiums and documentary stamps affixed to the bonds, with 12 per cent interest thereon.

Before answer was filed, and upon motion of the administratrix of Hemady’s estate, the lower court, by order of September 23, 1953, dismissed the claims of Luzon Surety Co., on two grounds:chanroblesvirtuallawlibrary (1) that the premiums due and cost of documentary stamps were not contemplated under the indemnity agreements to be a part of the undertaking of the guarantor (Hemady), since they were not liabilities incurred after the execution of the counterbonds; chan roblesvirtualawlibraryand (2) that “whatever losses may occur after Hemady’s death, are not chargeable to his estate, because upon his death he ceased to be guarantor.”

Taking up the latter point first, since it is the one more far reaching in effects, the reasoning of the court below ran as follows:chanroblesvirtuallawlibrary

“The administratrix further contends that upon the death of Hemady, his liability as a guarantor terminated, and therefore, in the absence of a showing that a loss or damage was suffered, the claim cannot be considered contingent. This Court believes that there is merit in this contention and finds support in Article 2046 of the new Civil Code. It should be noted that a new requirement has been added for a person to qualify as a guarantor, that is:chanroblesvirtuallawlibrary integrity. As correctly pointed out by the Administratrix, integrity is something purely personal and is not transmissible. Upon the death of Hemady, his integrity was not transmitted to his estate or successors. Whatever loss therefore, may occur after Hemady’s death, are not chargeable to his estate because upon his death he ceased to be a guarantor.

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Another clear and strong indication that the surety company has exclusively relied on the personality, character, honesty and integrity of the now deceased K. H. Hemady, was the fact that in the printed form of the indemnity agreement there is a paragraph entitled ‘Security by way of first mortgage, which was expressly waived and renounced by the security company. The security company has not demanded from K. H. Hemady to comply with this requirement of giving security by way of first mortgage. In the supporting papers of the claim presented by Luzon Surety Company, no real property was mentioned in the list of properties mortgaged which appears at the back of the indemnity agreement.” (Rec. App., pp. 407-408).

We find this reasoning untenable. Under the present Civil Code (Article 1311), as well as under the Civil Code of 1889 (Article 1257), the rule is that —

“Contracts take effect only as between the parties, their assigns and heirs, except in the case where the rights and obligations arising from the contract are not transmissible by their nature, or by stipulation or by provision of law.”

While in our successional system the responsibility of the heirs for the debts of their decedent cannot exceed the value of the inheritance they receive from him, the principle remains intact that these heirs succeed not only to the rights of the deceased but also to his obligations. Articles 774 and 776 of the New Civil Code (and Articles 659 and 661 of the preceding one) expressly so provide, thereby confirming Article 1311 already quoted.

“ART. 774. — Succession is a mode of acquisition by virtue of which the property, rights and obligations to the extent of the value of the inheritance, of a person are transmitted through his death to another or others either by his will or by operation of law.”

“ART. 776. — The inheritance includes all the property, rights and obligations of a person which are not extinguished by his death.”

In Mojica vs. Fernandez, 9 Phil. 403, this Supreme Court ruled:chanroblesvirtuallawlibrary

“Under the Civil Code the heirs, by virtue of the rights of succession are subrogated to all the rights and obligations of the deceased (Article 661) and cannot be regarded as third parties with respect to a contract to which the deceased was a party, touching the estate of the deceased (Barrios vs. Dolor, 2 Phil. 44).

x x x                    x x x                    x x x

“The principle on which these decisions rest is not affected by the provisions of the new Code of Civil Procedure, and, in accordance with that principle, the heirs of a deceased person cannot be held to be “third persons” in relation to any contracts touching the real estate of their decedent which comes in to their hands by right of inheritance; chan roblesvirtualawlibrarythey take such property subject to all the obligations resting thereon in the hands of him from whom they derive their rights.”

(See also Galasinao vs. Austria, 51 Off. Gaz. (No. 6) p. 2874 and de Guzman vs. Salak, 91 Phil., 265).

The binding effect of contracts upon the heirs of the deceased party is not altered by the provision in our Rules of Court that money debts of a deceased must be liquidated and paid from his estate before the residue is distributed among said heirs (Rule 89). The reason is that whatever payment is thus made from the estate is ultimately a payment by the heirs and distributees, since the amount of the paid claim in fact diminishes or reduces the shares that the heirs would have been entitled to receive.

Under our law, therefore, the general rule is that a party’s contractual rights and obligations are transmissible to the successors. The rule is a consequence of the progressive “depersonalization” of patrimonial rights and duties that, as observed by Victorio Polacco, has characterized the history of these institutions. From the Roman concept of a relation from person to person, the obligation has evolved into a relation from patrimony to patrimony, with the persons occupying only a representative position, barring those rare cases where the obligation is strictly personal, i.e., is contracted intuitu personae, in consideration of its performance by a specific person and by no other. The transition is marked by the disappearance of the imprisonment for debt.

Of the three exceptions fixed by Article 1311, the nature of the obligation of the surety or guarantor does not warrant the conclusion that his peculiar individual qualities are contemplated as a principal inducement for the contract. What did the creditor Luzon Surety Co. expect of K. H. Hemady when it accepted the latter as surety

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in the counterbonds? Nothing but the reimbursement of the moneys that the Luzon Surety Co. might have to disburse on account of the obligations of the principal debtors. This reimbursement is a payment of a sum of money, resulting from an obligation to give; chan roblesvirtualawlibraryand to the Luzon Surety Co., it was indifferent that the reimbursement should be made by Hemady himself or by some one else in his behalf, so long as the money was paid to it.

The second exception of Article 1311, p. 1, is intransmissibility by stipulation of the parties. Being exceptional and contrary to the general rule, this intransmissibility should not be easily implied, but must be expressly established, or at the very least, clearly inferable from the provisions of the contract itself, and the text of the agreements sued upon nowhere indicate that they are non-transferable.

“(b)  Intransmisibilidad por pacto. — Lo general es la transmisibilidad de darechos y obligaciones;chan roblesvirtualawlibraryle excepcion, la intransmisibilidad. Mientras nada se diga en contrario impera el principio de la transmision, como elemento natural a toda relacion juridica, salvo las personalisimas. Asi, para la no transmision, es menester el pacto expreso, porque si no, lo convenido entre partes trasciende a sus herederos.

Siendo estos los continuadores de la personalidad del causante, sobre ellos recaen los efectos de los vinculos juridicos creados por sus antecesores, y para evitarlo, si asi se quiere, es indespensable convension terminante en tal sentido.

Por su esencia, el derecho y la obligacion tienden a ir más allá de las personas que les dieron vida, y a ejercer presion sobre los sucesores de esa persona; chan roblesvirtualawlibrarycuando no se quiera esto, se impone una estipulacion limitativa expresamente de la transmisibilidad o de cuyos tirminos claramente se deduzca la concresion del concreto a las mismas personas que lo otorgon.” (Scaevola, Codigo Civil, Tomo XX, p. 541-542) (Emphasis supplied.)

Because under the law (Article 1311), a person who enters into a contract is deemed to have contracted for himself and his heirs and assigns, it is unnecessary for him to expressly stipulate to that effect; chan roblesvirtualawlibraryhence, his failure to do so is no sign that he intended his bargain to terminate upon his death. Similarly, that the Luzon Surety Co., did not require bondsman Hemady to execute a mortgage indicates nothing more than the company’s faith and confidence in the financial stability of the surety, but not that his obligation was strictly personal.

The third exception to the transmissibility of obligations under Article 1311 exists when they are “not transmissible by operation of law”. The provision makes reference to those cases where the law expresses that the rights or obligations are extinguished by death, as is the case in legal support (Article 300), parental authority (Article 327), usufruct (Article 603), contracts for a piece of work (Article 1726), partnership (Article 1830 and agency (Article 1919). By contract, the articles of the Civil Code that regulate guaranty or suretyship (Articles 2047 to 2084) contain no provision that the guaranty is extinguished upon the death of the guarantor or the surety.

The lower court sought to infer such a limitation from Art. 2056, to the effect that “one who is obliged to furnish a guarantor must present a person who possesses integrity, capacity to bind himself, and sufficient property to answer for the obligation which he guarantees”. It will be noted, however, that the law requires these qualities to be present only at the time of the perfection of the contract of guaranty. It is self-evident that once the contract has become perfected and binding, the supervening incapacity of the guarantor would not operate to exonerate him of the eventual liability he has contracted; chan roblesvirtualawlibraryand if that be true of his capacity to bind himself, it should also be true of his integrity, which is a quality mentioned in the article alongside the capacity.

The foregoing concept is confirmed by the next Article 2057, that runs as follows:chanroblesvirtuallawlibrary

“ART. 2057. — If the guarantor should be convicted in first instance of a crime involving dishonesty or should become insolvent, the creditor may demand another who has all the qualifications required in the preceding article. The case is excepted where the creditor has required and stipulated that a specified person should be guarantor.”

From this article it should be immediately apparent that the supervening dishonesty of the guarantor (that is to say, the disappearance of his integrity after he has become bound) does not terminate the contract but merely

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entitles the creditor to demand a replacement of the guarantor. But the step remains optional in the creditor:chanroblesvirtuallawlibrary it is his right, not his duty; chan roblesvirtualawlibraryhe may waive it if he chooses, and hold the guarantor to his bargain. Hence Article 2057 of the present Civil Code is incompatible with the trial court’s stand that the requirement of integrity in the guarantor or surety makes the latter’s undertaking strictly personal, so linked to his individuality that the guaranty automatically terminates upon his death.

The contracts of suretyship entered into by K. H. Hemady in favor of Luzon Surety Co. not being rendered intransmissible due to the nature of the undertaking, nor by the stipulations of the contracts themselves, nor by provision of law, his eventual liability thereunder necessarily passed upon his death to his heirs. The contracts, therefore, give rise to contingent claims provable against his estate under section 5, Rule 87 (2 Moran, 1952 ed., p. 437; chan roblesvirtualawlibraryGaskell & Co. vs. Tan Sit, 43 Phil. 810, 814).

“The most common example of the contigent claim is that which arises when a person is bound as surety or guarantor for a principal who is insolvent or dead. Under the ordinary contract of suretyship the surety has no claim whatever against his principal until he himself pays something by way of satisfaction upon the obligation which is secured. When he does this, there instantly arises in favor of the surety the right to compel the principal to exonerate the surety. But until the surety has contributed something to the payment of the debt, or has performed the secured obligation in whole or in part, he has no right of action against anybody — no claim that could be reduced to judgment. (May vs. Vann, 15 Pla., 553; chan roblesvirtualawlibraryGibson vs. Mithell, 16 Pla., 519; chan roblesvirtualawlibraryMaxey vs. Carter, 10 Yarg. [Tenn.], 521 Reeves vs. Pulliam, 7 Baxt. [Tenn.], 119; chan roblesvirtualawlibraryErnst vs. Nou, 63 Wis., 134.)”

For Defendant administratrix it is averred that the above doctrine refers to a case where the surety files claims against the estate of the principal debtor; chan roblesvirtualawlibraryand it is urged that the rule does not apply to the case before us, where the late Hemady was a surety, not a principal debtor. The argument evinces a superficial view of the relations between parties. If under the Gaskell ruling, the Luzon Surety Co., as guarantor, could file a contingent claim against the estate of the principal debtors if the latter should die, there is absolutely no reason why it could not file such a claim against the estate of Hemady, since Hemady is a solidary co-debtor of his principals. What the Luzon Surety Co. may claim from the estate of a principal debtor it may equally claim from the estate of Hemady, since, in view of the existing solidarity, the latter does not even enjoy the benefit of exhaustion of the assets of the principal debtor.

The foregoing ruling is of course without prejudice to the remedies of the administratrix against the principal debtors under Articles 2071 and 2067 of the New Civil Code.

Our conclusion is that the solidary guarantor’s liability is not extinguished by his death, and that in such event, the Luzon Surety Co., had the right to file against the estate a contingent claim for reimbursement. It becomes unnecessary now to discuss the estate’s liability for premiums and stamp taxes, because irrespective of the solution to this question, the Luzon Surety’s claim did state a cause of action, and its dismissal was erroneous.

Wherefore, the order appealed from is reversed, and the records are ordered remanded to the court of origin, with instructions to proceed in accordance with law. Costs against the Administratrix- Appellee. SO ORDERED.Paras, C.J., Bengzon, Padilla, Montemayor, Bautista Angelo, Labrador, Concepcion, Endencia and Felix, JJ., concur.

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G.R. No. L-26449               May 15, 1969

LUZON STEEL CORPORATION, represented by TOMAS AQUINO CU, plaintiff-appellant, vs.JOSE O. SIA, defendant, TIMES SURETY & INSURANCE CO. INC., surety-appellee.

German A. Sipin for plaintiff-appellant. Galicano S. Calapatia for surety-appellee.

REYES, J.B.L., J.:

Direct appeal from two orders, dated 19 May and 5 June 1965, issued by the Court of First Instance of Manila (Judge Francisco Arca presiding), in its Civil Case No. 54913, entitled Luzon Steel Corporation, plaintiff vs. Metal Manufacturing of the Philippines, Inc., and Jose O. Sia, defendants, whereby the court aforesaid quashed a writ of execution issued against the Times Surety & Insurance Co., Inc., and cancelled the undertaking of said surety company.

The essential and uncontroverted facts of the case may be summarized as follows:

Luzon Steel Corporation has sued Metal Manufacturing of the Philippines and Jose O. Sia, the former's manager, for breach of contract and damages. It obtained a writ of preliminary attachment of the properties of the defendants, but the attachment was lifted upon a P25,000.00 counterbond executed by the defendant Sia, as principal, and the Times Surety & Insurance Co., Inc. (hereinafter designated as the surety), as solidary guarantor, in the following terms:

WHEREFORE, we JOSE O. SIA, as principal and the TIMES SURETY & INSURANCE CO., INC., as Surety, in consideration of the dissolution of attachment, hereby jointly and severally bind ourselves in the sum of Twenty Five Thousand Pesos (P25,000.00), Philippine Currency, to answer for the payment to the plaintiff of any judgment it may recover in the action in accordance with Section 12, Rule 59, of the Rules of Court. (pp. 32, 45, Rec. on Appeal.)

Issues having been joined, plaintiff and defendant (without intervention of the surety) entered into a compromise whereby defendant Sia agreed to settle the plaintiff's claim in the following manner:

1. That the defendant shall settle with the Plaintiff the amount of TWENTY FIVE THOUSAND (P25,000.00) PESOS, in the following manner: FIVE HUNDRED (P500.00) PESOS, monthly for the first six (6) months to be paid at the end of every month and to commence in January, 1965, and within one month after paying the last installment of P500.00, the balance of P22,000.00 shall be paid in lump sum, without interest. It is understood that failure of the Defendant to pay one or any installment will make the whole obligation immediately due and demandable and that a writ of execution will be issued immediately against Defendants bond.lawphi1.ñet

The compromise was submitted to the court and the latter approved it, rendered judgment in conformity therewith, and directed the parties to comply with the same (Record on Appeal, page 22).

Defendant having failed to comply, plaintiff moved for and obtained a writ of execution against defendant and the joint and several counterbond. The surety, however, moved to quash the writ of execution against it, averring that it was not a party to the compromise, and that the writ was issued without giving the surety notice and hearing. The court, overruling the plaintiff's opposition, set aside the writ of execution, and later cancelled the counterbond, and denied the motion for reconsideration. Hence this appeal.

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Main issues posed are (1) whether the judgment upon the compromise discharged the surety from its obligation under its attachment counterbond and (2) whether the writ of execution could be issued against the surety without previous exhaustion of the debtor's properties.

Both questions can be solved by bearing in mind that we are dealing with a counterbond  filed to discharge a levy on attachment. Rule 57, section 12, specifies that an attachment may be discharged upon the making of a cash deposit or filing a counterbond "in an amount equal to the value of the property attached as determined by the judge"; that upon the filing of the counterbond "the property attached ... shall be delivered to the party making the deposit or giving the counterbond, or the person appearing on his behalf, the deposit or counterbond aforesaid standing in place of the property so released".

The italicized expressions constitute the key to the entire problem. Whether the judgment be rendered after trial on the merits or upon compromise, such judgment undoubtedly may be made effective upon the property released; and since the counterbond merely stands in the place of such property, there is no reason why the judgment should not be made effective against the counterbond regardless of the manner how the judgment was obtained.

Squarely on the point, and rebutting the appellee's apprehension that the compromise could be the result of a collusion between the parties to injure the surety, is our decision in Anzures vs. Alto Surety & Insurance Co., Inc., et al., 92 Phil. 742, where this Court, through former Chief Justice Paras, ruled as follows:

Under section 12, Rule 59, of the Rules of Court, the bond filed, as in this case, for the discharge of an attachment is "to secure the payment to the plaintiff of any judgment he may recover in the action," and stands "in place of the property so released". It follows that the order of cancellation issued by the respondent judge is erroneous. Indeed, judgment had already been rendered by the Court of First Instance of Manila in civil case No. 11748, sentencing Benjamin Aguilar to pay the sum of P3,500.00 to the petitioner; and it is not pretended that said judgment is a nullity. There is no point in the contention of the respondent Surety Company that the compromise was entered into without its knowledge and consent, thus becoming as to it essentially fraudulent. The Surety is not a party to civil case No. 11748 and, therefore, need not be served with notice of the petition for judgment. As against the conjecture of said respondent that the parties may easily connive by means of a compromise to prejudice it, there is also the likelihood that the same end may be attained by parties acting in bad faith through a simulated trial. At any rate, it is within the power of the Surety Company to protect itself against a risk of the kind.

Wherefore, the order of the respondent Judge cancelling the bond in question is set aside. So ordered with costs against the respondent Alto Surety & Insurance Co., Inc.

The lower court and the appellee herein appear to have relied on doctrines of this Court concerning the liability of sureties in bonds filed by a plaintiff for the issuance of writs of attachment, without discriminating between such bonds and those filed by a defendant for the lifting of writs of attachment already issued and levied. This confusion is hardly excusable considering that this Court has already called attention to the difference between these kinds of bonds. Thus, in Cajefe vs. Judge Fernandez, et al., L-15709, 19 October 1960, this Court pointed out that —

The diverse rule in section 17 of Rule 59 for counterbonds posted to obtain the lifting of a writ of attachment is due to these bonds being security for the payment of any judgment that the attaching party may obtain; they are thus mere replacements of the property formerly attached, and just as the latter may be levied upon after final judgment in the case in order to realize the amount adjudged, so is the liability of the countersureties ascertainable after the judgment has become final. This situation does not obtain in the case of injunction counterbonds, since the sureties in the latter case merely undertake "to pay all damages that the plaintiff may suffer by reason of the continuance ... of the acts complained of" (Rule 60, section 6) and not to secure payment of the judgment recovered.1

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It was, therefore, error on the part of the court below to have ordered the surety bond cancelled, on the theory that the parties' compromise discharged the obligation of the surety.

As declared by us in Mercado vs. Macapayag, 69 Phil. 403, 405-406, in passing upon the liability of counter sureties in replevin who bound themselves to answer solidarily for the obligations of the defendants to the plaintiffs in a fixed amount of P912.04, to secure payment of the amount that said plaintiff be adjudged to recover from the defendants,2

the liability of the sureties was fixed and conditioned on the finality of the judgment rendered regardless of whether the decision was based on the consent of the parties or on the merits. A judgment entered on a stipulation is nonetheless a judgment of the court because consented to by the parties.

But the surety in the present case insists (and the court below so ruled) that the execution issued against it was invalid because the writ issued against its principal, Jose O. Sia, et al., defendants below, had not been returned unsatisfied; and the surety invoked in its favor Section 17 of Rule 57 of the Revised Rules of Court (old Rule 59), couched in the following terms:

SEC. 17. When execution returned unsatisfied, recovery had upon bond. — If the execution be returned unsatisfied in whole or in part, the surety or sureties on any counterbond given pursuant to the provisions of this rule to secure the payment of the judgment shall become charged on such counter-bond, and bound to pay to the judgment creditor upon demand, the amount due under the judgment, which amount may be recovered from such surety or sureties after notice and summary hearing in the same action.

The surety's contention is untenable. The counterbond contemplated in the rule is evidently an ordinary guaranty where the sureties assume a subsidiary liability. This is not the case here, because the surety in the present case bound itself "jointly and severally" (in solidum) with the defendant; and it is prescribed in Article 2059, paragraph 2, of the Civil Code of the Philippines that excusion (previous exhaustion of the property of the debtor) shall not take place "if he (the guarantor) has bound himself solidarily with the debtor". The rule heretofore quoted cannot be construed as requiring that an execution against the debtor be first returned unsatisfied even if  the bond were a solidary one; for a procedural rule may not amend the substantive law expressed in the Civil Code, and further would nullify the express stipulation of the parties that the surety's obligation should be solidary with that of the defendant.

A second reason against the stand of the surety and of the court below is that even if the surety's undertaking were not solidary with that of the principal debtor, still he may not demand exhaustion of the property of the latter, unless he can point out sufficient leviable property of the debtor within Philippine territory. There is no record that the appellee surety has done so. Says Article 2060 of the Civil Code of the Philippines:

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 debt.

A third reason against the thesis of appellee is that, under the rule and its own terms, the counter-bond is only conditioned upon the rendition of the judgment. Payment under the bond is not made to depend upon the delivery or availability of the property previously attached, as it was under Section 440 of the old Code of Civil Procedure. Where under the rule and the bond the undertaking is to pay the judgment, the liability of the surety or sureties attaches upon the rendition of the judgment, and the issue of an execution and its return nulla bona  is not, and should not be, a condition to the right to resort to the bond. 3

It is true that under Section 17 recovery from the surety or sureties should be "after notice and summary hearing in the same action". But this requirement has been substantially complied with from the time the surety was allowed to move for the quashal of the writ of execution and for the cancellation of their obligation.

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WHEREFORE, the orders appealed from are reversed, and the court of origin is ordered to proceed with the execution against the surety appellee, Times Surety & Insurance Co., Inc. Costs against said appellee.

Dizon, Makalintal, Zaldivar, Sanchez, Fernando, Capistrano and Barredo, JJ., concur.Teehankee, J., took no part.Concepcion, C.J., and Castro, J., are on leave.

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[G.R. No. 109941. August 17, 1999]

PACIONARIA C. BAYLON, petitioner, vs. THE HONORABLE COURT OF APPEALS (Former Ninth Division) and LEONILA TOMACRUZ, respondents.

D E C I S I O N

GONZAGA-REYES, J.:

This is a petition for review by way of certiorari under Rule 45 of the Revised Rules of Court of the decision of the Court of Appeals[1] dated November 29, 1991 in CA-G.R. CV No. 27779 affirming the decision[2] of the Regional Trial Court of Quezon City, Branch 88, dated June 14, 1990 in Civil Case No. Q-89-2483 and the Resolution of the Court of Appeals dated April 27, 1993 denying petitioner's Motion for Reconsideration.

The pertinent facts, as found by the trial court and affirmed by respondent court, are briefly narrated as follows:

Sometime in 1986, petitioner Pacionaria C. Baylon introduced private respondent Leonila Tomacruz, the co-manager of her husband at PLDT, to Rosita B. Luanzon.[3] Petitioner told private respondent that Luanzon has been engaged in business as a contractor for twenty years and she invited private respondent to lend Luanzon money at a monthly interest rate of five percent (5%), to be used as capital for the latter's business. Private respondent, persuaded by the assurances of petitioner that Luanzon's business was stable and by the high interest rate, agreed to lend Luanzon money in the amount of P150,000.On June 22, 1987, Luanzon issued and signed a promissory note acknowledging receipt of the P150,000 from private respondent and obliging herself to pay the former the said amount on or before August 22, 1987. [4] Petitioner signed the promissory note, affixing her signature under the word "guarantor." Luanzon also issued a postdated Solidbank check no. CA418437 dated August 22, 1987 payable to Leonila Tomacruz in the amount of P150,000.[5] Subsequently, Luanzon replaced this check with another postdated Solidbank check no. 432945 dated December 22, 1987, in favor of the same payee and covering the same amount. [6] Several checks in the amount of P7,500 each were also issued by Luanzon and made payable to private respondent.[7]

Private respondent made a written demand upon petitioner for payment, which petitioner did not heed. Thus, on May 8, 1989, private respondent filed a case for the collection of a sum of money with the Regional Trial Court (RTC) of Quezon City, Branch 88, against Luanzon and petitioner herein, impleading Mariano Baylon, husband of petitioner, as an additional defendant. However, summons was never served upon Luanzon.

In her answer, petitioner denied having guaranteed the payment of the promissory note issued by Luanzon. She claimed that private respondent gave Luanzon the money, not as a loan, but rather as an investment in Art Enterprises and Construction, Inc. - the construction business of Luanzon. Furthermore, petitioner avers that, granting arguendo  that there was a loan and petitioner guaranteed the same, private respondent has not exhausted the property of the principal debtor nor has she resorted to all the legal remedies against the principal debtor as required by law. Finally, petitioner claims that there was an extension of the maturity date of the loan without her consent, thus releasing her from her obligation.[8]

After trial on the merits, the lower court ruled in favor of private respondent. In its Decision dated June 14, 1990, it stated that -

The evidence and the testimonies on record clearly established a (sic) fact that the transaction between the plaintiff and defendants was a loan with five percent (5%) monthly interest and not an investment.In fact they all admitted in their testimonies that they are not given any stock certificate but only promissory notes similar to

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Exhibit B wherein it was clearly stated that defendant Luanzon would pay the amount of indebtedness on the date due. Postdated checks were issued simultaneously with the promissory notes to enable the plaintiff and others to withdraw their money on a certain fixed time. This shows that they were never participants in the business transaction of defendant Luanzon but were creditors.

The evidences presented likewise show that plaintiff and others loan their money to defendant Luanzon because of the assurance of the monthly income of five percent (5%) of their money and that they could withdraw it anytime after the due date add to it the fact that their friend, Pacionaria Baylon, expresses her unequivocal gurarantee to the payment of the amount loaned.

xxx xx xxx

WHEREFORE, premises considered, judgment is hereby rendered against the defendants Pacionaria C. Baylon and Mariano Baylon, to pay the plaintiff the sum of P150,000.00, with interest at the legal rate from the filing of this complaint until full payment thereof, to pay the total sum of P21,000.00 as attorneys fees and costs of suit.[9]

On appeal, the trial court's decision was affirmed by the Court of Appeals. Hence, this present case wherein petitioner makes the following assignment of errors -

I. RESPONDENT COURT ERRED IN HOLDING THAT THE PRIVATE RESPONDENT TOMACRUZ WAS A CREDITOR OF DEFENDANT LUANZON AND NOT AN INVESTOR IN THE CONSTRUCTION BUSINESS OF ART ENTERPRISES & CONSTRUCTION, INC.

II. GRANTING, WITHOUT ADMITTING, THAT PETITIONER-APPELLANT BAYLON WAS A "GUARANTOR" AS APPEARING IN THE NOTE (EXH. "A") THE RESPONDENT COURT ERRED IN RULING THAT PETITIONER-APPELLANT BAYLON IS LIABLE TO THE PRIVATE RESPONDENT BECAUSE THE LATTER HAS NOT TAKEN STEPS TO EXHAUST THE PROPERTY OF THE PRINCIPAL DEBTOR AND HAS NOT RESORTED TO ALL THE LEGAL REMEDIES PROVIDED BY LAW AGAINST THE DEBTOR, DEFENDANT LUANZON.

III. GRANTING, WITHOUT ADMITTING THAT PETITIONER-APPELLANT BAYLON WAS A GUARANTOR UNDER THAT NOTE (EXHIBIT "A") DATED JUNE 22, 1987, THE LOWER COURT ERRED IN RESOLVING THAT SHE WAS NOT RELEASED FROM HER GUARANTY BY THE SUBSEQUENT TRANSACTIONS BETWEEN THE RESPONDENT-APPELLANT AND DEFENDANT LUANZON.

At the outset, we note that petitioners claim that the factual findings of the lower court, which were affirmed by the Court of Appeals, were based on a misapprehension of facts and contradicted by the evidence on records[10] is a bare allegation and devoid of merit. As a rule, the conclusions of fact of the trial court, especially when affirmed by the Court of Appeals, are final and conclusive and cannot be reviewed on appeal by the Supreme Court.[11] Although this rule admits of several exceptions,[12] none of the exceptions are in point in the present case. The factual findings of the respondent court are borne out by the record and are based on substantial evidence.

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.[13] 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 Luanzons construction business.[14]

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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

G U R A R A N T O R :

(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.[16] 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. [19] 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.[20] 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 principals property - the benefit of which the guarantor claims - cannot even begin to take place before judgment has been obtained.[21] This rule is embodied in article 2062 of the Civil Code which

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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.[22]

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.

SO ORDERED.

Melo, (Chairman), Vitug, Panganiban, and Purisima, JJ., concur.

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G.R. No. L-48979            September 29, 1943

MIRA HERMANOS, INC., plaintiff-appellee, vs.MANILA TOBACCONISTS, INC., ET AL., defendants. PROVIDENT INSURANCE CO., defendant-appellant.

E. V. Filamor for appellant.Ramirez and Ortigas for appellee.Ernesto Zaragoza for defendant, Manila Compañia de Seguras.

OZAETA, J.:

This appeal has been certified to this court by the Court of Appeals because it involves only a question of law arising from the following facts:

By virtue of a written contract (Exhibit A) entered into between Mira Hermanos, Inc., and Manila Tobacconists, Inc., the former agreed to deliver to the latter merchandise for sale on consignment under certain specified terms and the latter agreed to pay to the former on or before the 20th day of each month the invoice value of all the merchandise sold during the preceding month. Mira Hermanos, Inc., required of the Manila Tobacconists, Inc., a bond of P3,000, which was executed by the Provident Insurance Co., on September 2, 1939 (Exhibit B), to secure the fulfillment of the obligation of the Tobacconists under the contract (Exhibit A) up to the sum of P3,000.

In the month of October, 1940, the volume of the business of the Tobacconists having increased so that the merchandise received by it on consignment from Mira Hermanos exceeded P3,000 in value, Mira Hermanos required of the Tobacconist an additional bond of P2,000, and in compliance with that requirement the defendant Manila Compañia de Seguros, on October 16, 1940, executed a bond of P2,000 (Exhibit C) with the same terms and conditions (except as to the amount) as the bond of the Provident Insurance Co.

On June 1, 1941, a final and complete liquidation was made of the transactions between Mira Hermanos and the Tobacconists, as a result of which there was found a balance due from the latter to the former of P2,272.79, which indebtedness the Tobacconists recognized but was unable to pay. Thereupon Mira Hermanos made a demand upon the two surety companies for the payment of said sum.

The Provident Insurance Co., paid only the sum of P1,363.67, which is 60% of the amount owned by the Tobacconists to Mira Hermanos, alleging that the remaining 40% should be paid by the other surety, Manila Compañia de Seguros, in accordance with article 8137 of the Civil Code. The Manila Compañia de Seguros refused to pay the balance, contending that so long as the liability of the Tobacconists did not exceed P3,000, it was not bound to pay anything because its bond referred only to the obligation of the Tobacconists in excess of P3,000 and up to P5,000. Hence Mira Hermanos, Inc., brought this action against the Manila Tobacconists, Inc., Provident Insurance Co., and Manila Compañia de Seguros to recover from them jointly and severally the sum of P909.12 with legal interest thereon from the date of the complaint.

The controversy is mainly between the two surety companies. In its answer the defendant Manila Compañia de Seguros alleged as a special defense:

4. — Que la fianza otorgada por esta demandada 'Manila Compania de Seguros', el Octubre de 1940 fue exigida por la demandante solo cuando el importe de las mercancias servidas por esta y pedidas por la demandada Manila Tobacconists, Inc., excedio de la suma de P3,000 garantizada por la otra demandada Provident Insurance Co.; por lo que quedo entendido entre la demandante y las tres demandadas que la fianza de P2,000 prestada el Octubre de 1940 por esta demandada, 'Manila

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Compañia de Seguros', se limitaba y era para responder solamente del importe de mercancias servidad a la demandada Manila Tobacconists, Inc., en tanto en cuanto el valor de esas mercancias excediese de P3,000 asegurada por la fianza P3,000 de la Manila Tobacconists, Inc.

To that the defendant Provident Insurance Co. replied:

Que no es verdad el hecho alegado por la demandada 'Manila Compañia de Seguros' en el parrafo 4 de su contestacion que dice: 'que quedo entendido entre la demandante y las tres demandadas que la fianza de P2,000 prestada el Octubre de 1940 por esta demandada "Manila Compañia de Seguros" se limitaba y era para responder solamente del importe de mercancias servidas a la demandada Manila Tocacconists, Inc., en tanto en cuanto el valor de esas mercancias excediese de P3,000 asegurada por la fianza de P3,000 de la "Manila Tobacconists, Inc."

Que la demandada, aqui compareciente, nunca ha tenido conocimiento ni menos prestado su consentimiento a esa supuesta inteligencia.

Que esta demandada no puede ser privada del beneficio de division a que tiene derecho como co-fiador, sin que conste expresamente, por escrito, su conformidad y consentimiento de renunciar a su derecho.

Thus there was an issue of fact between the two surety companies, viz.: whether the understanding between the plaintiff and the three defendants was, that the bond of P2,000 given by the Manila Compañia de Seguros was limited to and responded for the obligation of the Tobacconists only insofar as it might exceed the amount of P3,000 secured by the bond of the Provident Insurance Co. That issue of fact was decided by the trial court in favor of the contention of the Manila Compañia de Seguros; and judgment was rendered by it against the Provident Insurance Co. alone for the amount claimed by the plaintiff.

Appellant's first two assignments of error (the third being a mere consequence of the first two) read as follows:

1. El juzgado inferior incurrio en error al hacer caso omiso del beneficio de division reclamado por la demandada Provident Insurance Co. of the Philippines con arreglo a lo dispuesto en el Art. 1837 del Codigo Civil.

2. El juzgado erro al aplicar, en lugar de lo dispuesto en el Art. 1837 del Codigo Civil, una teoria suya, declarando que la fianza de P3,000.00 prestada por Provident Insurance Co. of the Philippines y la fianza de P2,000 de Manila Compañia de Seguros, cada una tiene una esfera de responsabilidad propia e independiente la una de la otra.

Discussing these two assignments of error jointly, counsel says:

La unica cuestion que se presenta en esta causa es puramente de derecho. Si el saldo deudor de P2,272.79 que Tobacconists ha dejado de pagar, deben pagarlo en su lugar, los dos fiadores proporcionalmente a la cuantia en que se obligaron o debe pagarlo sola y exclusivamente la fiadora Provident Insurance Co., como ordena la sentencia opelada.

Thus it appears that the issue of fact raised by and between the two surety companies before the trial court and decided by the latter in favor of the appellee Manila Compañia de Seguros is no longer raised before this Court, appellant Provident Insurance Co. having limited the issue in this appeal to whether or not it is entitled to the "benefit of division" provided in article 1837 of the Civil Code, which reads as follows:

Art. 1837. Should there be several sureties of only one debtor for the same debt, the liability therefor shall be divided among them all. The creditor can claim from each surety only his proportional part unless liabilityin solidum has been expressly stipulated.

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The right to the benefit of division against the co-sureties for their respective shares ceases in the same cases and for the same reason as that to an exhaustion of property against the principal debtor.

With particular reference to the second assignment of error, we find that the statement of the trial court to the effect that the bond of P3,000 responded for the obligation of the Tobacconists up to the sum of P3,000 and the bond of P2,000 responded for the obligation of the Tobacconists only insofar as it might exceed P3,000 and up to P5,000, is not a mere theory but a finding of fact based upon the undisputed testimony of the witnesses called by the defendant Manila Compañia de Seguros in support of its special defense hereinbefore quoted. While on its face the bond given by the Manila Compañia de Seguros contains the same terms and conditions (except as to the amount) as those of the bond given by the Provident Insurance Co., nevertheless it was pleaded by the Manila Compañia de Seguros and found proven by the trial court "que la intencion realmente que se habia perseguido, por lo menos en lo que respecta a la Manila Tobacconists, Inc., y la Manila Compañia de Seguros, era la de que esta fianza de P2,000 habria de responder solamente por todo aquello que excediera de los P3,000."

The evidence upon which that finding is based is not only undisputed but perfectly reasonable and convincing. For, as the trial court observed, there would have been no need for the additional bond of P2,000 if its purpose were to cover the first P2,000 already covered by the P3,000 bond of the Provident Insurance Co. Indeed, we might add, if the purpose of the additional bond of P2,000 were to cover not the excess over and above P3,000 but the first P2,000 of the obligation of the principal debtor like the bond of P3,000 which covered only the first P3,000 of said obligation, then it would result that had the obligation of the Tobacconists exceeded P3,000, neither of the two bonds would have responded for the excess, and that was precisely the event against which Mira Hermanos wanted to protect itself by demanding the additional bond of P2,000. For instance, suppose that the obligation of the principal debtor, the Tobacconists, amounted to P5,000; if both bonds were co-extensive up to P2,000 — as would logically follow if appellant's contention were correct — the result would be that the first P2,000 of the obligation would have to be divided between and paid equally by the two surety companies, which should pay P1,000 each, and of the balance of P3,000 the Provident Insurance Co. would have to pay only P1,000 more because its liability is limited to the first P3,000, thus leaving the plaintiff in the lurch as to the excess of P2,000. That was manifestly not the intention of the parties. As a matter of fact, when the Provident gave its bond and fixed the premiums thereon it assumed an obligation of P3,000 in solidum with the Tobacconists without any expectation of any benefit of division with any other surety. The additional bond of P2,000 was, more than a year later, required by the creditor of the principal debtor for the protection of said creditor and certainly not for the benefit of the original surety, which was not entitled to expect any such benefit.

The foregoing considerations, which fortify the trial court's conclusion as to the real intent and agreement of the parties with regard to the bond of P2,000 given by the Manila Compañia de Seguros, destroys at the same time the theory of the appellant regarding the applicability of article 1837 of the Civil Code.

That article refers to several sureties of only one debtor for the same debt. In the instant case, altho the two bonds on their face appear to guarantee the same debt co-extensively up to P2,000 — that of the Provident Insurance Co. alone extending beyond that sum up to P3,000 — it was pleaded and conclusively proven that in reality said bonds, or the two sureties, do not guarantee the same debt because the Provident Insurance Co. guarantees only the first P3,000 and the Manila Compañia de Seguros, only the excess over and above said amount up to P5,000. Article 1837 does not apply to this factual situation.

The judgment of the trial court is affirmed, with the only modification that it shall be entered against the defendants Manila Tobacconists, Inc., and Provident Insurance Co. jointly and severally. Appellant shall pay the costs of this instance.

Yulo, C.J., Moran, Paras and Bocobo, JJ., concur.

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G.R. No. L-27249 July 31, 1970

MANILA SURETY & FIDELITY CO., INC., plaintiff-appellant, vs.NOEMI ALMEDA, doing business under the name and style of ALMEDA TRADING, GENEROSO ESQUILLO and NATIONAL MARKETING CORPORATION, defendants-appellees.

De Santos & Delfino for plaintiff-appellant.

Government Corporate Counsel Leopoldo M. Abellera and Trial Attorney Arsenio J. Mepale for defendant-appellee National Marketing Corporation.

 

REYES, J.B.L., J.:

This is an appeal from the ruling of the Court of First Instance of Manila, rendered in Civil Case No. 62518, that the insolvency of a debtor-principal does not release the surety from its obligation to the creditor under the bond.

The lower court found that on 4 December 1961, Noemi Almeda, married to Generoso Esquillo, and doing business under the name and style of Almeda Trading, entered into a contract with the National Marketing Corporation (NAMARCO) for the purchase of goods on credit, payable in 30 days from the dates of deliveries thereof. As required by' the NAMARCO, a bond for P5,000.00, undertaken by the Manila Surety & Fidelity Co., Inc. (Exhibit "A"), was posted by the purchaser to secure the latter's faithful compliance with the terms of the contract. The agreement was later supplemented on 17 October 1962 and a new bond for the same amount of P5,000.00, also undertaken by the Manila Surety & Fidelity Co., Inc. (Exhibit "C"), 1 was given in favor of the NAMARCO The bonds uniformly contained the following provisions:

2. Should the Principal's account on any purchase be not paid on time, then the Surety, shall, upon demand, pay said account immediately to the NAMARCO;

3. Should the account of the Principal exceed the amount of FIVE THOUSAND (P5,000.00) PESOS, Philippine Currency, such excess up to twenty (20%) per cent of said amount shall also be deemed secured by this Bond;

4. The Surety expressly waives its right to demand payment and notice of non-payment and agreed that the liability of the Surety shall be direct and immediate and not contingent upon the exhaustion by the NAMARCO of whatever remedies it may have against the Principal and same shall be valid and continuous until the obligation so guaranteed is paid in full; and

5. The Surety also waives its right to be notified of any extension of the terms of payment which the NAMARCO may give to the Principal, it being understood that were extension is given to satisfy the account, that such extension shall not extinguish the guaranty unless the same is made against the express wish of the Surety.

The records show that on 8 June 1965, the marketing firm demanded from the purchaser Almeda Trading the settlement of its back accounts which, as of 15 May 1965, allegedly amounted to P16,335.09. Furnished with copy of the NAMARCO's demand- letter, the surety company thereafter also wrote to the said purchaser urging it to liquidate its unsettled accounts with the NAMARCO (Exhibit "E-1"). It appears, however, that previous to this, or on 26 March 1965, Generoso Esquillo instituted voluntary insolvency proceeding in the Court of First Instance of Laguna (Sp. Proc. No. SP-181), and by order of said court of 6 April 1965, he was declared

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insolvent, with listed credits amounting to P111,873.00 2 and properties valued at P39,0,00.00. In the meeting of the named creditors of the insolvent held on 14 May 1965 for the purpose of electing the assignee of his properties, the NAMARCO was represented and its contingent claim duly registered. 3

On 10 September 1965, the Manila Surety & Fidelity Co., Inc., commenced in the Court of First Instance of Manila Civil Case No. 62518 against the spouses Noemi Almeda and Generoso Esquillo, and the NAMARCO, to secure its release from liability under the bonds executed in favor of NAMARCO. The action was based on the allegation that the defendant spouses had become insolvent and that defendant NAMARCO had rescinded its agreement with them and had already demanded payment of the outstanding accounts of the couple.

Defendant NAMARCO filed its answer denying the averments of the complaint and setting up, as affirmative defenses, lack of cause of action and the court's want of jurisdiction. On 16 December 1966, the court rendered judgment sustaining NAMARCO's contention that the insolvency of the debtor-principal did not discharge the surety's liability under the bond. Thus, the complaint was dismissed and plaintiff surety company was ordered to pay off the indebtedness of the defendant spouses to the NAMARCO to the extent of its (the Surety's) undertaking, plus attorneys' fees and costs. From this decision, plaintiff surety interposed the present appeal.

Plaintiff-appellant's action to secure its discharge from the suretyship was based on Article 2071 of the Civil Code,4 Which provides the surety with certain protective remedies that may be resorted to before he has paid, but after he has become liable to do so. 5

Upon the other hand, the lower court's ruling, now on appeal, is anchored on an equally explicit provision of the Insolvency law ( Act 1956, as amended), to writ:.

SEC. 68. ...

No discharge (of the insolvent from his obligations) shall release, discharge or affect any person liable for the same debt, for or with the debtor, either as partner, joint contractor, indorser, surety, or otherwise.

The issue posed by this appeal, therefore, is whether a surety can avail itself of the relief, specifically afforded in Article 2071 of the Civil Code and be released from its liability under the bonds, notwithstanding a prior declaration of the insolvency of the debtor-principal in an insolvency proceeding.

We see no reversible error in the decision appealed.

There is no question that under the bonds posted in favor of the NAMARCO in this case, the surety company assumed to make immediate payment to said firm of any due and unsettled accounts of the debtor-principal, even without demand and notice of the debtor's non-payment, the surety, in fact, agreeing that its liability to the creditor shall be direct, without benefit of exhaustion of the debtor's properties, and to remain valid and continuous until the guaranteed obligation is fully satisfied. In short, appellant secured to the creditor not just the payment by the debtor-principal of his accounts, but the payment itself of such accounts. Clearly, a contract of suretyship was thus created, the appellant becoming the insurer, not merely of the debtor's solvency or ability to pay, but of the debt itself. 6 Under the Civil Code, with the debtor's insolvency having been judicially recognized, herein appellant's resort to the courts to be released from the undertaking thus assumed would have been appropriate. 7 Nevertheless, the guarantor's action for release can only be exercised against the principal debtor and not against the creditor, as is apparent from the precise terms of the legal provision. "The guarantor" (says Article 2071 of the Civil Code of the Philippines) "even before having paid, may proceed against the principal debtor ------------------ to obtain a release from the guaranty ---------------." The juridical rule grants no cause of action against the creditor for a release of the guaranty, before payment of the credit, for a plain reason: the creditor is not compellable to release the guaranty (which is a property right) against his will. For, the release of the guarantor imports an extinction of his obligation to the creditor; it connotes, therefore,

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either a remission or a novation by subrogation, and either operation requires the creditor's assent for its validity (See Article 1270 and Article 1301). Especially should this be the case where the principal debtor has become insolvent, for the purpose of a guaranty is exactly to protect the creditor against such a contingency.

In what manner, then, can the article operate? Where the debtor can not make full payment, the release of the guarantor can only be obtained with the assent of the creditor, by persuading the latter to accept an equally safe security, either another suitable guaranty or else a pledge or mortgage. Absent the creditor's consent, the principal debtor may only proceed to protect the demanding guarantor by a counterbond or counter guaranty, as is authorized by the codal precept (Article 2071 in fine). To this effect is the opinion of the Spanish commentator, Scaevola, in his explanations to Article 1843 of the Spanish Civil Code (from which Article 2071 of our Code is derived). Says Scaevola:

Como se prestaran tales garantias al fiador? Lo contesta el aludido parrafo final del Articulo 1843. Se hara por uno de estos dos modos: ora consiguiendo el deudor que el acreedor abandone libremente aquella fianza, lo cual ocurrira dandole el deudor otra garantia analoga, ya por razon de la persona fiadora, ya ofreciendole el deudor al mismo fiador, pero continuando este como tal, una garantia que lo ponga a cubierto de los procedimientos del acreedor y del peligro de insolvencia del deudor. (Scaevola Codigo Civil, 2d Ed., Vol. 28, pp. 651652).

The appellant's troubles are compounded by the fact that when the complaint for release from suretyship was filed in the Manila court on 10 September 1965, the insolvency case in the Laguna court was already pending and the debtor-principal Generoso Esquillo had been judicially declared an insolvent. By the time the appellant sued, therefore, the insolvency court had already acquired jurisdiction over all the debtor's properties and of all claims by and against him, to the exclusion of any other court. 8 In the circumstances, the lawful recourse of the guarantor of an obligation of the insolvent would be to file a contingent claim in the insolvency proceeding, if his rights as such guarantor or surety are not to be barred by the subsequent discharge of the insolvent debtor from all his liabilities. 9

In the case at bar, it is true that the guaranteed claim of NAMARCO was registered or filed in the insolvency proceeding. But appellant can not utilize this fact in support of its petition for release from the assumed undertaking. For one thing, it is almost a certainty that creditor NAMARCO can not secure full satisfaction of its credit out of the debtor's properties brought into the insolvency proceeding. Considering that under the contract of suretyship, which remains valid and subsisting, the entire obligation may even be demanded directly against the surety itself, the creditor's act in resorting first to the properties of the insolvent debtor is to the surety's advantage At least, the latter would be answerable only for whatever amount may remain not covered or unsatisfied by the disposition of the insolvent's properties, 1 0 with the right to go against debtor-principal after it has made the necessary payment to the creditor. For another, the fact that the debtor- principal may be discharged from all his outstanding obligations in the insolvency case would not benefit the surety, as to relieve it of its liability under the surety agreement. That is so provided in Section 68 of the Insolvency Act which shall be controlling in the case.

Finally, even supposing that the present action is not blocked by the insolvency proceedings because it does not aim at reducing the insolvent's assets, but only at having the suretyship substituted by other equivalent security, still it is difficult to see how the principal debtor, with his business, property and assets impounded by the insolvency court, can obtain other securities with which to replace the guaranty given by the plaintiff-appellant. The action at bar would seem, under the circumstances, destined to end in futility.

WHEREFORE, with the modification that appellant's liability shall be limited to the payment of whatever amount may remain due to the appellee NAMARCO and is unsatisfied in the insolvency proceeding, but not to exceed the amount of the surety's undertaking under the bonds, the decision appealed from is affirmed in all other respects. Costs against appellant surety company.

Concepcion, C.J., Dizon Makalintal, Zaldivar, Castro, Fernando, Teehankee, Barredo and Villamor, JJ., concur.

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G.R. No. L-20199           November 23, 1965

THE COSMOPOLITAN INSURANCE CO., INC., plaintiff-appellee, vs.ANGEL B. REYES, defendant-appellant.

M. Perez Cardenas and Apolonio Abola for plaintiff-appellee.Francisco de la Fuente for defendant-appellant.

REGALA, J.:

This is an appeal from a decision of the Court of First Instance of Manila and certified to us by the Court of Appeals as it involves only a question of law, ordering appellant Angel B. Reyes to pay the appellee Cosmopolitan Insurance Co., Inc., the sum of P10,645.38 plus fifteen (15) per cent thereof, for attorney's fees.

Indeed, the question presented is whether, under the Indemnity Agreement of the parties, the appellee, as surety, can demand indemnification from appellant Reyes as principal, upon the latter's default, even before the former has paid to the creditor.

It appears that appellee Cosmopolitan Insurance Co., Inc., filed a bond in favor of the Collector of Internal Revenue to secure the payment in stated installments of the total amount of P25,422.85, which appellant Reyes owed for income tax for the years, 1950, 1951, 1952 and 1953.

In consideration of the bond, appellant Reyes in turn signed an Indemnity Agreement whereby he bound himself, among other things, —

2) INDEMNITY: — To indemnify the COMPANY upon its demand and keep it indemnified for and to hold and save it harmless from and against, any and all payments, damage, cost, losses, penalties, charges and expenses of whatever kind and nature which the COMPANY as such surety shall or may, at any time make, sustain, incur and/or suffer or for which it has or may become liable to the obligee, and to pay an additional amount as attorney's fees equal to 20% of the amount due to the COMPANY by virtue hereof which in no case shall be less than P50.00 and which shall be payable whether or not the case be extrajudicially settled, it being understood that demand made upon anyone of the undersigned herein is admitted as demand made on all of the signatories hereof.

3) ACCRUAL OF ACTION: — Notwithstanding the provision of the next preceding paragraph where the obligation involves a liquidated amount for the payment of which the COMPANY has become legally liable under the terms of the obligation and its suretyship undertaking, or by the demand of the obligee or otherwise and the latter has merely allowed the COMPANY a term or extension for payment of the latter's demand the full amount necessary to discharge the COMPANY'S aforesaid liability irrespective of whether or not payment has actually been made by the COMPANY, the COMPANY for the protection of its interest may forthwith proceed against the undersigned or either of them by court action or otherwise to enforce payment, even prior to making payment to the obligee which may hereafter be done by the COMPANY;

It is not denied that because of appellant Reyes' failure, the amount of P10,645.38 became due and that, as a result, appellee Cosmopolitan Insurance Co., Inc., became liable on its bond.

Appellant Reyes assails, however, the validity of paragraph 3 of the Indemnity Agreement, which he contends is contrary to public policy. He argues that under Article 2071 of the Civil Code, when the debt has become demandable "the action of the guarantor is to obtain release from the guaranty, or to demand a security that

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shall protect him from any proceedings by the creditor and from the danger of insolvency of the debtor" but not an action for indemnification.

Elucidating further, the appellant raises the point that there is absolutely no authority in any existing law allowing any person in his capacity as guarantor, as in this case, to obtain, to recover, to receive by way of money judgment from the debtor the amount due to the creditor. The appellant further argues: What security does appellant have, once the amount has been received by appellee from appellant, that the same would be paid to the Collector of Internal Revenue?

All these points are squarely answered by the doctrine or principle laid down by this Court in the case of Security Bank vs. Globe Assurance, 58 Off. Gaz. 3708 (April 30, 1962), where a similar indemnity agreement of the parties is involved. In this case, the Supreme Court held that:

The stipulation in the indemnity agreement allowing the surety to recover even before it paid the creditor is enforceable. In accordance therewith, the surety may demand from the indemnitors even before paying the creditors.

In the case of Alto Surety and Insurance Co., Inc. vs. Aguilar, et al., G.R. No. L-5625, March 16, 1954, the Court laid down the following ruling:

The contention of appellants that the action of appellee (surety company) is premature or that complaint fails to state a cause of action because it does not allege that the appellee has paid to the bank the balance of their obligation, cannot be sustained. This is belied not only by the allegations of the complaint but also by the agreement entered into between the appellants and the appellee in favor of the bank. Thus, it appears from the complaint that the renewed promissory note became due and payable on May 27, 1950 without the spouses having paid any amount on the account in spite of the repeated demands, as a consequence of which plaintiff surety became liable to pay the bank the amount of P1,150.00 plus interests, under the terms of the Indemnity Agreement, the liability of the former as surety became immediately demandable upon occurrence of the latter's (spouses) default.

Even after analyzing the provisions of the contract entered into between the parties, we are of the opinion that they do not in any way militate against the public good or that they are contrary to the policy of the law.

The other point raised by the appellant is that the attorney's fees awarded to the plaintiff are unreasonable or unconscionable. This is also untenable. It is significant that the appellant did not raise the issue of attorney's fees in his answer. Furthermore, we are of the opinion that the award of fifteen (15) per cent attorney's fees in this case is not unreasonable. In fact, in one case before the Court of Industrial Relations (Cruz vs. Court of Industrial Relations, et al., G.R. No. L-18277, August 31, 1963), this Court sustained the award of attorney's fees to the petitioner computed at thirty (30) per cent, as reasonable.

IN VIEW OF THE FOREGOING, the decision of the Court of First Instance is hereby affirmed. Without costs.

Bengzon, C.J., Bautista Angelo, Concepcion, Dizon, Makalintal, Bengzon, J.P., and Zaldivar, JJ., concur.Barrera and Reyes, J.B.L., JJ., are on leave.

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G.R. No. L-16550             January 31, 1962

ALLEN McCONN, plaintiff-appellant, vs.PAUL HARAGAN, ET AL., defendants, ASSOCIATE INSURANCE and SURETY CO., INC., defendant-appellee.

Jose Desiderio, Jr., Andres E. Matias and Juan C. Nabong, Jr. for plaintiff-appellant.M. Perez Cardenas for defendant-appellee.

CONCEPCION, J.:

On June 30, 1955 — pending hearing of Civil Case No. 24790 of the Court of First Instance of Manila, entitled "Morris McConn v. Paul Haragan", which was scheduled to take place on September 16, 1955 — the Bureau of Immigration advised said court that defendant Paul Haragan had applied for an immigration clearance and a re-entry permit to enable him to leave the Philippines for 15 days only and requested information whether the court had any objection thereto. By an order dated July 11, 1955, the court required Haragan to file a bond of P4,000 "to answer for his return to the Philippines and the prosecution of his case against him, with the understanding, that upon his failure to return, said bond will answer pro tanto for any judgment that may be rendered against him". Thereupon, or on July 12, 1955, Haragan submitted a bond, subcribed by him and the Associated Insurance & Surety Co., as principal and surety, respectively, reading: .

WHEREAS, the above-bounden PRINCIPAL, is intending to leave the Philippines on a business trip to Hongkong and Tokyo, Japan, for a period of thirty (30) days from date of his departure, in connection with his business;

WHEREAS, the above-bounden PRINCIPAL, has a pending case before the Court of First Instance of Manila, Branch III, entitled: "Allen McConn, Plaintiff, vs. Paul Haragan, Defendant", Civil Case No. 24790, which is scheduled for hearing on September 16, 1955;

WHEREAS, before the above-bounden PRINCIPAL could leave the Philippines for Hongkong and Tokyo, Japan, the above-mentioned Court has required him to post a Surety Bond, in the amount of PESOS FOUR THOUSAND ONLY (P4,000.00) Philippine Currency, the guarantee that he will return to the Philippines on or before September 16, 1955;

NOW, THEREFORE, for and in consideration of the above premises, the PRINCIPAL and the SURETY, hereby bind themselves, jointly and severally, in favor of the Republic of the Philippines, or its authorized representatives, in the sum of PESOS FOUR THOUSAND ONLY (P4,000.00) Philippine Currency, that the herein PRINCIPAL will return to the Philippines on or before September 16, 1955 and that should he fail to do so, said bond will answer pro tanto for any judgment that may be rendered against him.

Soon thereafter, or on July 19, 1955, the court issued an order stating that "in view of said bond, it would have no objection" to Haragan's "departure from the Philippines for a short stay abroad" and that "formal leave" was thereby given him. On the date set for the hearing of the case, Haragan's counsel moved for continuance, whereupon, the hearing was postponed to November 14, 1955. On the date last mentioned, the same counsel informed the court that Haragan had been unable to return to the Philippines because the Philippine Consulate in Hongkong had advised Haragan of a communication from our Department of Foreign Affairs banning him from returning to the Philippines. The court then postponed the hearing to January 6, 1956. Subsequently, Herbert T. Fallis was impleaded as defendant and, later on, one Inocencio Ortiz Luis Jr. was allowed to intervene. In due course, thereafter, or on February 19, 1959, the court rendered judgment, which, inter alia, sentenced Haragan to pay to plaintiff the sum of P5,500, with 6% interest thereon from December 8, 1954,

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until full payment, plus P1,000 as attorney's fees and costs. After this judgment had become final and executory, plaintiff moved for the execution of the aforementioned bond to satisfy said judgment against Haragan. The surety company objected thereto upon several grounds and, after due hearing, the lower court issued an order dated October 13, 1959, releasing said company from liability under the bond aforementioned and denying plaintiff's motion. A reconsideration of this order having been denied, the case is now before us on record on appeal filed by the plaintiff.1äwphï1.ñët

The issue is whether the Surety Company is liable to plaintiff under the bond quoted above, in view of the failure of Haragan to return to the Philippines. The lower court decided the issue in the negative upon the following ground: .

... A careful reading of the surety bond, Exhibit F, indicates that the surety's principal commitment is 'to guarantee that he (Haragan) will return to the Philippines on or before September 16, 1955' (See the third 'Whereas'). In the last paragraph of said surety bond, Exhibit F, it appears that said bond was executed in favor of the Republic of the Philippines or its duly authorized representatives to guarantee 'thatthe herein principal (Haragan) will return to the Philippines on or before September 16, 1955 and that should he fail to do so, said bond will answer pro tanto for any judgment that may be rendered against him.' As the terms of the bond so state, it appears clearly that the bond will only answer for the judgment which may be rendered against defendant, should he (defendant Haragan) fail to return to the Philippines. In other words, if defendant Haragan should return to the Philippines on or before September 16, 1955, said bond will not answer for the judgment. It is now the contention of the Associated Insurance that since it was the Republic of the Philippines (obligee under the bond) who rendered the return of defendantHaragan to the Philippines impossible, said surety company is thereby released from its obligation, and cites in support thereof Articles 1266 and 2076 of the New Civil Code. Upon a consideration of this contention, the Court finds it tenable and well grounded, for as the surety company has so well stated 'where the principal obligation (of returning to the Philippines) has been extinguished by the action of the obligee, Philippine Government in preventing such return, the accessory obligation of the surety is likewise extinguished and the bond released of its liability.' Paraphrasing the last paragraph of the bond in a negative way, it will read thus: 'should he (not) fail to do so, said bond will (not) answer pro tanto for any judgment that may be rendered against him.

We are fully in agreement with the foregoing view, which is in accord with the principle that:

The debtor in obligation to do shall also be released when the prestationbecomes legally or physically impossible without the fault of the obligor. (Article 1266, Civil Code of the Philippines.).

Thus, in Tabora vs. Lazatin, (G.R. No. L-5245, May 29, 1953), we said:

This Court finds that despite his efforts to secure the necessary building permit for the reconstruction, he failed because of the disapproval or unfavorable attitude of the Urban Planning Commission toward reconstruction unless they conformed to the plan of widening the city streets. Finding that defendant had done all he could to secure the permit and to comply with his obligations, but because of the refusal of the government authorities to issue said permit, he failed to fulfill his undertaking, he should be absolved and released from said obligation.

To same effect, substantially, is the decision of this Court in House vs. De La Costa (40 Off. Gaz. [3 S] 47).

WHEREFORE, the order appealed from is hereby affirmed, with the costs of this instance against plaintiff-appellant. It is so ordered.

Padilla, Bautista Angelo, Labrador, Reyes, J.B.L. Barrera, Paredes, Dizon and De Leon, JJ., concur.Bengzon, C.J., took no part.

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101

G.R. No. L-21109             June 26, 1967

NATIONAL SHIPYARDS & STEEL CORPORATION, plaintiff-appellee, vs.CARIDAD J. TORRENTO and MUTUAL SECURITY INSURANCE CORPORATION, defendants-appellants.

Manuel A. Cammayo for defendants-appellants.Augusto D. Trinidad for plaintiff-appellee.

MAKALINTAL, J.:

On December 5, 1958 defendant Caridad J. Torrento applied with the National Shipyards & Steel Corporation (hereinafter referred to as NASSCO) for the purchase on credit of 60 tons of steel bars, 3/8" deformed or plain, at P430.00 per ton, for a 120-day period.

A contract of purchase and sale was executed on January 13, 1959, but was subsequently amended when plaintiff exhausted its stock of 3/8" plain steel bars. As amended, the quantity of steel bars stated to be 60 metric tons in the original contract was changed to 59.31 metric tons; the price was changed from P430.00 to P435.00 per metric ton; and the specification of the steel bars was also changed from "plain, round or corrugated" to "deformed."

Pursuant to the stipulation in the contract that the value of steel bars sold to defendant Torrento should be secured by a surety bond issued by a reputable bonding company, defendant Torrento as principal and Mutual Security Insurance Corporation, as surety executed in favor of plaintiff a surety bond (S. 1754) on January 23, 1960. When it was noted that the undertaking under the bond was only P25,000.00, whereas the contract called for the payment of P25,800.00, defendant surety executed a supplemental bond increasing the amount of P25,800.00.

On February 6, 1959, when NASSCO could no longer supply the steel bars called for in the contract of purchase and sale inasmuch as its stock of 3/8" deformed steel bars had been exhausted, the plaintiff and defendant Torrento executed a supplemental agreement, the pertinent provisions of which read:

. . . Whereas the NASSCO has agreed to sell to the vendee and the vendee has agreed to buy from the NASSCO . . . Fifty Nine and thirty one hundredths (59-31) metric tons of steel bars on credit basis for size and price as follows:

3/8 deformed 20 ft or

30 ft. at P435.00 per tons

Whereas, after consummation of said contract, only the following amount of steel bars were delivered to the vendee, as follows:

20-67 M.T. 3/8" deformed

and that there were no more available stock of steel bars of size 3/8" x 20' or 30' deformed.

Now therefore, for and in consideration of the foregoing premises, the parties hereby agree to modify and/or amend their said contract as follows:

1. That the NASSCO shall sell to the vendee and the vendee shall buy from the NASSCO, 38.50 tons of steel bars on credit basis subject to availability of stock in the following sizes and prices, to wit:

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25 M.T. — 1/2" x 30 deformed at P440.00 per ton.

13.50 M.T. — 5/8" x 30 deformed at P430.00 per ton

2. That aside from the above amendment and/or modification, the said contract shall not be affected, altered, or modified in any way.

Pursuant to the contract of purchase and sale and the supplemental contract, NASSCO delivered to defendant Torrento steel bars in the total value of P25,794.09. The 120-day period for payment lapsed. Demand letters were sent, but defendant surety made no reply. Defendant Torrento did not question her liability, but only asked for a 3-month extension to settle her account.

Action was brought to recover the unpaid contract price from defendant Torrento and her surety. On October 18, 1960, the lower court rendered judgment: "ordering the defendants, jointly and severally, to pay the plaintiff the sum of P25,794.09, with interest thereon at the rate of 12% per annum, from August 29, 1959 until full payment, and the costs of suit. On the cross-claim, judgment is hereby rendered, ordering the cross-defendant Caridad J. Torrento to pay the cross-plaintiff Mutual Security Insurance Corporation whatever sums the latter would pay the plaintiff by virtue of this judgment, with interest thereon at the rate of 12% per annum, from the date of payment to plaintiff, until full payment, and the costs of this suit."

Defendants interposed an appeal to the Court of Appeals, which later on certified the case to Us on the ground that the errors assigned raise only questions of law.

Appellant Torrento maintains that plaintiff has no cause of action against her for the reason that inasmuch as she had paid the corresponding premium on the surety bond, the right of action, in case of her default, is exclusively against her surety. Further, with respect to the cross-claim of the Surety, Torrento claims that it was error for the lower court to take cognizance of the same even before payment by said surety to NASSCO had been made. In other words, Torrento argues that the cause of action alleged in the cross-claim does not arise until after payment has been made by the surety to the plaintiff.

We find both arguments without merit. The surety bond (Exhibits C and C-1) states in very clear terms that both principal and surety are held and firmly bound unto the NASSCO in the sum of P25,800.00 for the payment of which they bind themselves,  jointly and severally. "If a person binds himself solidarity with the principal debtor, . . . the contract is called suretyship" (Art. 2047, C.C.) in which case the provisions of the Civil Code with respect to joint and solidary obligations apply; and Article 1216 of the Civil Code provides that "the creditor may proceed against any of the solidary debtors or all of them simultaneously. . . ." It has been repeatedly held that although as a rule sureties . . . are only subsidiarily liable for an obligation, nevertheless, if they bind themselves  jointly and severally, or in solidum, with the principal debtor, the creditor may bring an action against anyone of them, either alone or together with the principal debtor (Molina vs. de la Riva, 7 Phil. 345; Chinese Chamber vs. Pua Te Ching, 16 Phil. 406; La Yebana vs. Valenzuela, 67 Phil. 482; Chunaco vs. Tria, 63 Phil. 500).

With respect to the contention that the lower court erred in taking cognizance of the surety's cross-claim, suffice it to say that this point was not raised in the court a quo and, consequently may not be raised for the first time on appeal. Besides, as the lower court also stated in its decision, "defendant Torrento made no effort to dispute this (cross-claim) of defendant surety and did not even bother to cross-examine the witness who identified the said indemnity agreement," which is the basis of the cross-claim.1äwphï1.ñët

For its part, appellant surety company maintains that the execution of the supplemental agreement of February 6, 1959 without its knowledge and consent released it from any liability under the surety bond as there was a material alteration of the principal contract. We find the contention without merit. The court a quo analyzed the factual set-up as follow:

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x x x An examination and comparison of the contract and the supplemental agreement will reveal that the only change or alteration consists of the following: Instead of the original stipulation for the purchase and sale of 3/8, 20' or 30', deformed steel bars, at P435.00 per ton, which kind of steel bars were no longer available in stock, the supplemental agreement provides for the sale by the plaintiff to defendant Torrento of other sizes of deformed steel bars at prices of P430.00 and P440.00 per metric ton. Specifically, the changes are in the diameter of the steel bars which originally was 3/8", to 1/2 and 5/8"; and the price from P435.00 per ton, to P430.00 per ton for the 1/211 bars. The amount of steel bars to be sold to defendant Torrento remained the same. The length and the deformed quality of the bars likewise remained unchanged. It is even specifically provided in Par. 2 of the supplemental agreement that "aside from the above amendments and/or modifications, the said contract (referring to the original contract) shall not be affected, altered or modified in any way." There was no alteration in the principal condition of the contract. The period of payment was not changed, and the amount of the liability of the principal debtor and of the surety was also untouched. There was no added burden imposed upon or assumed by the buyer." (Emphasis Supplied)

x x x In short, the supplemental agreement did not result in the principal debtor's assuming more onerous conditions than those stipulated in the original contract, and for which the surety furnished the bond. There was consequently, no material or essential alteration of the original contract which could result in the release of the surety from the obligation under the said bond.

We see no error in the ruling of the lower court just quoted.

In Pacific Tobacco Corporation vs. Lorenzana, et al., G.R. L-8086, October 31, 1961 it was held: "for purposes of releasing a surety's obligation, there must be a material alteration of the contract in connection with which the bond is given, a change which imposes some new obligation on the party promising or takes away some obligation already imposed, changing the legal effect of the original contract and not merely the form thereof . . . To allow compensated surety companies to collect and retain premiums for their services and then repudiate their obligations on slight pretexts which have no relation to the risk, would be most unjust and immoral, and would be a perversion of the wise and just rules designed for the protection of voluntary sureties."

While it is the rule that the liability of a surety is limited by the terms of the surety bond fixing its liability and that such liability cannot be extended by implication, it should be noted in the present case that although the technical specifications of the items to be purchased have been changed, it clearly appears that such changes are not substantial and have not added any other liability to that originally assumed. A surety is not released by a change in the contract which does not have the effect of making its obligation more onerous (Visayan Distributors, Inc. vs. Flores, 92 Phil. 145).

Wherefore, the appealed decision is hereby affirmed, with costs against defendants-appellants.

Concepcion, C.J., Reyes, J.B.L., Dizon, Bengzon, J.P., Zaldivar, Sanchez and Castro, JJ., concur.

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G.R. No. L-30490             March 27, 1929

BANK OF THE PHILIPPINE ISLANDS, plaintiff-appellee, vs.ALBALADEJO Y CIA., S. EN C., ET AL., defendants, ISIDRO MARTINEZ, defendant-appellant.

Eduardo Gutierrez Repide and Leoncio B. Monzon for appellant.Araneta and Zaragoza for appellee.

OSTRAND, J.:

On September 27, 1919, the defendant, Albaladejo and Co., a limited copartnership, obtained a current account credit to the amount of no more than P100,000 from the Bank of the Philippine Islands at the interest rate of 8 per cent per annum. To secure that credit, Florencio Gordillo and Isidro Martinez, on September 30, 1919, executed the following bond:

BANK OF THE PHILIPPINE ISLANDS BOND

Known all men by these presents, that we, Albalajedo y Compania, S. en C., a copartnership with principal place of business in the town of Legaspi, Province of Albay, P.I., as principal, and Messrs, Gordillo and Isidro Martinez, both of legal age and residents of Manila, P.I., as sureties, are hereby held and bound into the Bank of the Philippine Islands, of Manila, P.I., in the sum of one hundred thousand pesos (P100,000), Philippine currency, for the payment of which well and truly to be made, we hereby jointly and severally, bind ourselves, our heirs, executors, administrators, and assigns, firmly by these presents.

The condition of this obligation are such, that:

Whereas the said Bank of the Philippine Islands has advanced to the said Albalajedo y Compania, S. en C., by way of a credit incurrent account, the sum of one hundred thousand pesos (P100,000);

Now therefore, if the said Albalajedo y Compania, S. en. C., shall duly pay, or cause to be paid, to the said Bank of the Philippine Islands, three months after demand, the said sum of one hundred thousands pesos (P100,000), last days of March, June, September and December of each year, until the principal and interest are paid in full, interest on said sum and all sums from time to time remaining unpaid at the rate of eight per cent (8%) per annum, then this obligation shall be void, otherwise it shall remain in full force and effect.

In witness whereof, we have hereunto set out hands at Manila, P.I., this 30th day of September, 1919.

ALBALADEJO Y COMPANIA, S. EN C.

By (Sgd.) PEDRO ALBALADEJOObligado principal

FLORENCIO GORDILLO Fiador

ISIDRO MARTINEZ Fiador

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Witnesses: EM. S. REYES V.G. OPRECIO

(ACKNOWLEDGMENT)

On April 16, 1920, the bank increased the rate of interest to 9 per cent per annum. The plaintiffs Exhibit C indicates that interest was paid up to December 31, 1920, when the capital of the debt amounted to P100,681.68, and after which date the payments ceased.

Failing to meet their obligations to the bank, the present action was brought on January 15, 1925, against Albaladejo and Co. and the members of the partnership, Pedro Albaladejo the sureties, Florencio Gordillo and Isidro Martinez, for the recovery of the sum of P136,586.26, the amount then due the bank for the capital and the accrued interest at 9 per cent.

During the pendency of the action, Albaladejo and Co., as well as the partners of the company, were declared insolvent and subsequently discharged from their debts, and as a consequence, the present case was dismissed as against Albaladejo and Co., Mariano Albaladejo, Pedro Albaladejo, and Angel Suarez, leaving only Florencio Gordillo and Isidoro Martinez as defendants.

Upon trial the court below rendered judgment in favor of the Bank of the Philippine Islands and against Florencio Gordillo and Isidoro Martinez, jointly and severally for the sum of P136,533.26, with interest at 9 per cent per annum from the 1st of January, 1921, and with the costs. From this judgment only Isidoro Martinez appealed and now presents the following assignments of error:

The lower court erred:

1. In holding that it is the duty of the sureties to investigate the account of the principal debtors with the bank and ask if it would grant an extension of time for the payment of the loan, and that if the said sureties are not agreeable to the extension they should have so informed the credit bank.

2. In not holding that the facts of the case constitute a valid novation of the contract between the debtors and the bank which releases the sureties from the obligation under the former agreement.

3. In not holding that the extension granted by the bank to the principal debtors for the payment of the loan, without the consent of the sureties extinguishes the latter's liability.

The first assignment of error is well taken but is of no importance as far as this case is concerned. The expressions referred to in the assignment are merely obiter dicta and are not the basis of the decision of the court below.

The second assignment of error is rather indefinite, but from the argument of counsel, we gather that if has reference to the fact that the plaintiff bank increased the interest rate from 8 per cent to 9 per cent per annum without the express consent of the sureties. Taking this fact in connection with the extension of time alleged to have been made by the bank, and discussed under the third assignment of error, counsel for the defendant argues that these circumstances worked a novation of the original contract and related the sureties from their obligations upon their bond.

This contention cannot be successfully maintained. There is no sufficient in the record to show that the bank actually extended the time for the payment of the debt, but the appellant maintains that the long delay on the part of the bank in enforcing its rights against the debtors is equivalent to an extension of the time. Such is not the case. Beginning with the case of Banco Espanol Filipino vs. Donaldson Sim and Co. (5 Phil., 418) this court has consistently held that delay in proceeding against the principal debtor does not discharge the

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sureties from their liability. In the case of Clark vs. Seliner (42 Phil. 384), action was deferred for over four years, but the sureties were never the less held liable. As said in 21 C. L., 1032:

It is a general principle that a creditor is under no obligation to be actively diligent in pursuit of his principal debtor. He may forbear the prosecution of his claim, and remain inactive, without impairing his right to resort to the surety, particularly when his forebearance amounts to no more than a mere inaction or passivity. Therefore the mere neglect of a creditor to sue or to attempt to collect a debt a the time it falls due does not discharge the sureties, although the principal had ample means at the time, and subsequently became insolvent. Similarly, mere passiveness or mere delay in the prosecution of an execution against the principal debtor after judgment, will not discharge the surety. The principal under consideration, however, comprehends something more than mere passivity or inaction resulting from negligence. Thus, a gratuitous indulgence of the principal, whether extended at his request or without it, and whether it is yielded by the creditor from sympathy and from an inclination to favor him, or is the result or mere passiveness, will not operate to discharge the surety, unless he omits to do, when required by the surety, what the law or his duty enjoins him to do, or unless he neglects, to the injury of the surety, to discharge his duty in any matter in which he occupies the position of a trustees for the surety. Mere delay or negligence in proceeding against the principal will not discharge a surety unless there is between the creditor and principal debtor a valid and binding agreement therefore, one which tends to prejudice him, or to deprive him of the power of obtaining indemnity by presenting a legal obstacle, for the time, to the prosecution of an action on the original security. Positive and wilful interference by a creditor, embarrassing the recovery of the claim against the principal, will, however, release the surety. In some jurisdictions, moreover, the duty of active diligence in the prosecution of suits, or of execution against the principal can be devolved on the creditor by the surety, if he desires, by requesting it. Also, of course, if a delay in calling on the principal for the money is the result of fraud, that surety will be exonerated. In extension of the principle that the mere delay of the creditor to proceed against the principal will not discharge the surety, it has been held that the surety is not discharged, even if the delay of the creditor is such that his remedy against the principal becomes barred by imitation.

It has also uniformly been held that increases of interest rates on the debt do not affect the original obligation of the sureties, though they may not be bound by the increase. Bank of the Philippine Islands vs. Gooch and Redfern (45 Phil., 514.)

From what has been said, it follows that the appellant jointly and severally with the other surety, Florencio Gordillo, is liable to the extent of P100,000, with interest at the rate of 8 per cent per annum.

The appealed judgment is therefore modified by limiting the plaintiff's recovery to the sum of P100,000 with interest at the rate of 8 per cent per annum from the first day of January, 1921, until paid. In every other respect, the judgment of the court below is affirmed with the costs of this instance against the appellant. So ordered.

Johnson, Street, Malcolm, Johns, Romualdez and Villa-Real, JJ., concur.

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G.R. No. L-20567             July 30, 1965

PHILIPPINE NATIONAL BANK, petitioner, vs.MANILA SURETY and FIDELITY CO., INC. and THE COURT OF APPEALS (Second Division), respondents.

Besa, Galang and Medina for petitioner.De Santos and Delfino for respondents.

REYES, J.B.L., J.:

The Philippine National Bank petitions for the review and reversal of the decision rendered by the Court of Appeals (Second Division), in its case CA-G.R. No. 24232-R, dismissing the Bank's complaint against respondent Manila Surety & Fidelity Co., Inc., and modifying the judgment of the Court of First Instance of Manila in its Civil Case No. 11263.

The material facts of the case, as found by the appellate Court, are as follows:

The Philippine National Bank had opened a letter of credit and advanced thereon $120,000.00 to Edgington Oil Refinery for 8,000 tons of hot asphalt. Of this amount, 2,000 tons worth P279,000.00 were released and delivered to Adams & Taguba Corporation (known as ATACO) under a trust receipt guaranteed by Manila Surety & Fidelity Co. up to the amount of P75,000.00. To pay for the asphalt, ATACO constituted the Bank its assignee and attorney-in-fact to receive and collect from the Bureau of Public Works the amount aforesaid out of funds payable to the assignor under Purchase Order No. 71947. This assignment (Exhibit "A") stipulated that:

The conditions of this assignment are as follows:

1. The same shall remain irrevocable until the said credit accomodation is fully liquidated.

2. The PHILIPPINE NATIONAL BANK is hereby appointed as our Attorney-in-Fact for us and in our name, place and stead, to collect and to receive the payments to be made by virtue of the aforesaid Purchase Order, with full power and authority to execute and deliver on our behalf, receipt for all payments made to it; to endorse for deposit or encashment checks, money order and treasury warrants which said Bank may receive, and to apply said payments to the settlement of said credit accommodation.

This power of attorney shall also remain irrevocable until our total indebtedness to the said Bank have been fully liquidated. (Exhibit E)

ATACO delivered to the Bureau of Public Works, and the latter accepted, asphalt to the total value of P431,466.52. Of this amount the Bank regularly collected, from April 21, 1948 to November 18, 1948, P106,382.01. Thereafter, for unexplained reasons, the Bank ceased to collect, until in 1952 its investigators found that more moneys were payable to ATACO from the Public Works office, because the latter had allowed mother creditor to collect funds due to ATACO under the same purchase order to a total of P311,230.41.

Its demands on the principal debtor and the Surety having been refused, the Bank sued both in the Court of First Instance of Manila to recover the balance of P158,563.18 as of February 15, 1950, plus interests and costs.

On October 4, 1958, the trial court rendered a decision, the dispositive portion of which reads:108

WHEREFORE, judgment is hereby rendered as follows:

1. Ordering defendants, Adams & Taguba Corporation and Manila Surety & Fidelity Co., Inc., to pay plaintiff, Philippines National Bank, the sum of P174,462.34 as of February 24, 1956, minus the amount of P8,000 which defendant, Manila Surety Co., Inc. paid from March, 1956 to October, 1956 with interest at the rate of 5% per annum from February 25, 1956, until fully paid provided that the total amount that should be paid by defendant Manila Surety Co., Inc., on account of this case shall not exceed P75,000.00, and to pay the costs;

2. Orderinq cross-defendant, Adams & Taguba Corporation, and third-party defendant, Pedro A. Taguba, jointly and severally, to pay cross and third-party plaintiff, Manila Surety & Fidelity Co., Inc., whatever amount the latter has paid or shall pay under this judgment;

3. Dismissing the complaint insofar as the claim for 17% special tax is concerned; and

4. Dismissing the counterclaim of defendants Adams & Taguba Corporation and Manila Surety & Fidelity Co., Inc.

From said decision, only the defendant Surety Company has duly perfected its appeal. The Central Bank of the Philippines did not appeal, while defendant ATACO failed to perfect its appeal.

The Bank recoursed to the Court of Appeals, which rendered an adverse decision and modified the judgment of the court of origin as to the surety's liability. Its motions for reconsideration having proved unavailing, the Bank appealed to this Court.

The Court of Appeals found the Bank to have been negligent in having stopped collecting from the Bureau of Public Works the moneys falling due in favor of the principal debtor, ATACO, from and after November 18, 1948, before the debt was fully collected, thereby allowing such funds to be taken and exhausted by other creditors to the prejudice of the surety, and held that the Bank's negligence resulted in exoneration of respondent Manila Surety & Fidelity Company.

This holding is now assailed by the Bank. It contends the power of attorney obtained from ATACO was merely in additional security in its favor, and that it was the duty of the surety, and not that of the creditor, owed see to it that the obligor fulfills his obligation, and that the creditor owed the surety no duty of active diligence to collect any, sum from the principal debtor, citing Judge Advocate General vs. Court of Appeals, G.R. No. L-10671, October 23, 1958.

This argument of appellant Bank misses the point. The Court of Appeals did not hold the Bank answerable for negligence in failing to collect from the principal debtor but for its neglect in collecting the sums due to the debtor from the Bureau of Public Works, contrary to its duty as holder of an exclusive and irrevocable power of attorney to make such collections, since an agent is required to act with the care of a good father of a family (Civ. Code, Art. 1887) and becomes liable for the damages which the principal may suffer through his non-performance (Civ. Code, Art. 1884). Certainly, the Bank could not expect that the Bank would diligently perform its duty under its power of attorney, but because they could not have collected from the Bureau even if they had attempted to do so. It must not be forgotten that the Bank's power to collect was expressly made irrevocable, so that the Bureau of Public Works could very well refuse to make payments to the principal debtor itself, and a fortiori reject any demands by the surety.

Even if the assignment with power of attorney from the principal debtor were considered as mere additional security still, by allowing the assigned funds to be exhausted without notifying the surety, the Bank deprived the former of any possibility of recoursing against that security. The Bank thereby exonerated the surety, pursuant to Article 2080 of the Civil Code:

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ART. 2080. — The guarantors, even though they be solidary, are released from their obligation whenever by come act of the creditor they cannot be subrogated to the rights, mortgages and preferences of the latter. (Emphasis supplied.)

The appellant points out to its letter of demand, Exhibit "K", addressed to the Bureau of Public Works, on May 5, 1949, and its letter to ATACO, Exhibit "G", informing the debtor that as of its date, October 31, 1949, its outstanding balance was P156,374.83. Said Exhibit "G" has no bearing on the issue whether the Bank has exercised due diligence in collecting from the Bureau of Public Works, since the letter was addressed to ATACO, and the funds were to come from elsewhere. As to the letter of demand on the Public Works office, it does not appear that any reply thereto was made; nor that the demand was pressed, nor that the debtor or the surety were ever apprised that payment was not being made. The fact remains that because of the Bank's inactivity the other creditors were enabled to collect P173,870.31, when the balance due to appellant Bank was only P158,563.18. The finding of negligence made by the Court of Appeals is thus not only conclusive on us but fully supported by the evidence.

Even if the Court of Appeals erred on the second reason it advanced in support of the decision now under appeal, because the rules on application of payments, giving preference to secured obligations are only operative in cases where there are several distinct debts, and not where there is only one that is partially secured, the error is of no importance, since the principal reason based on the Bank's negligence furnishes adequate support to the decision of the Court of Appeals that the surety was thereby released.

WHEREFORE, the appealed decision is affirmed, with costs against appellant Philippine National Bank.

Bengzon, C.J., Concepcion, Paredes, Dizon, Regala, Makalintal, Bengzon, J.P., and Zaldivar, JJ., concur.Bautista Angelo and Barerra, JJ., took no part.

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