Madrigal v. Department of Justice
G.R. No 168903, June 18, 2014
Sereno, J.
Doctrine: The borrower cannot at the same time be a guarantor/surety to assure the
fulfillment of its own loan application.
Facts:
In her Complaint-Affidavit, petitioner alleged that, as president of MTI, she applied
for a loan from FEBTC in the amount of USD 10.5 million to finance the acquisition of
a feeder vessel, pursuant to a Joint Venture Agreement between Madrigal Transport,
Inc. (MTI) and the Lapanday Holdings Corporation. FEBTC sent her various
documents, such as a Loan Agreement, a Comprehensive Surety Agreement, a Notice
of Borrowing, a Promissory Note, a Certificate of Non-Default, Form of Opinion of
Counsel to the Borrower, a Deed of Chattel Mortgage, and a Letter of Undertaking
and Deed of Assignment, which she signed the documents without the material
entries and sent them back to FEBTC.
Thereafter, petitioner was advised by respondent Palma that FEBTC could only grant
MTI a loan in the amount of USD 10 million because of a lower valuation of the
vessel M/V Alicia. Thus, she reapplied for a loan for this reduced amount and signed
a second set of loan documents, which included a Comprehensive Surety Agreement
guaranteeing the USD 10 million loan, a Notice of Borrowing, a Promissory Note, a
Certificate of Non-Default and a Borrowing Certificate. She was also requested to
sign other documents, such as a Deed of Assignment over Charter Hires and a Chattel
Mortgage.
To the petitioner’s surprise, respondent Palma insisted that petitioner was personally
liable under the first Comprehensive Surety Agreement covering the USD 10.5 million
loan despite the fact that all the documents pertaining to the said loan had all been
“abandoned and considered torn.” As a result of the fraudulent act of imputing to
her a “legally inexistent” obligation, she was allegedly compelled to disburse from
her personal funds the total amount of Php5,903,172.30, which was paid to FEBTC, to
protect her reputation.
Issue:
Should the petitioner be personally liable under the Comprehensive Surety
Agreement?
Ruling:
Yes. Article 2047. By guaranty a person, called the guarantor, binds himself to the
creditor to fulfill the obligation of the principal debtor in case the latter should
fail to do so. Pursuant to Article 2047 of the Civil Code, a surety undertakes to be
bound solidarily with the principal debtor to assure the fulfillment of the
obligation. It would therefore be absurd to conclude that petitioner signed the
CSA in her capacity as president of MTI considering that the principle behind
suretyship will be negated. Otherwise stated, the borrower cannot at the same
time be a guarantor/surety to assure the fulfillment of its own loan application.
Moreover, the CSA is a continuing guarantee that the petitioner, upon executing
the said document, bound herself to the contract “until the full and due payment
and performance of all the obligations of the borrower.” Undisputedly, there was
only one loan transaction, and FEBTC does not intend to collect from both loan
documents. Therefore, the petitioner, guaranteeing the loan, shall be personally
liable.
Philippine Export and Foreign Loan Guarantee Corp. v. V.P
Eusebio Construction
G.R. No. 140047, July 13, 2004
Davide, Jr., C.J.
Doctrine: That the guarantee issued by the petitioner is unconditional and irrevocable
does not make the petitioner a surety.
Facts:
Respondent spouses Eduardo and Iluminada Santos, in behalf of respondent 3-Plex
International, Inc. entered into a joint venture agreement with Ajyal wherein the
former undertook the execution of the entire Project for the construction of the
Institute of Physical Therapy-Medical Center while the latter would be entitled to a
commission of 4% of the contract price. However, respondent 3-Plex is not
accredited by or registered with the Philippine Overseas Construction Board (POCB),
therefore it assigned and transferred all its rights and interests under the joint
venture agreement to VPECI, a construction and engineering firm duly registered
with the POCB. However, 3-Plex and VPECI entered into an agreement that the
execution of the Project would be under their joint management.
The State Organizations Building required the contractors to submit (1) a
performance bond of and (2) an advance payment bond to be released upon signing
of the contract. To comply with these requirements, respondents 3-Plex and VPECI
applied for the issuance of a guarantee with petitioner Philguarantee. Petitioner
approved the application. What SOB required was a letter-guarantee from Rafidain
Bank, the government bank of Iraq. Rafidain Bank then issued a performance bond
in favor of SOB on the condition that another foreign bank, not Philguarantee,
would issue a counter-guarantee to cover its exposure. Al Ahli Bank of Kuwait was,
therefore, engaged to provide a counter-guarantee to Rafidain Bank, but it required
a similar counter-guarantee in its favor from the petitioner. Thus, three layers of
guarantees had to be arranged.
Al Ahli Bank of Kuwait informed the petitioner of its payment to Rafidain Bank
and sought for its reimbursement. The petitioner paid the said amount. The latter
sent letters to respondents demanding the full payment of the amount pursuant
to their joint and solidary obligations.
Respondents failed to pay prompting the petitioner to file a civil case for
collection of a sum of money against the respondents before the RTC. The trial
Court ruled against PhilGuarantee and held that the latter had no cause of action
against respondents. The Court ruled there was no valid renewal or extension of
the guarantee for failure of the petitioner to secure respondents' express consent
thereto. The CA affirmed the decision of the trial court.
Issue:
1. Is the petitioner a guarantor and not a surety?
2. If yes, can the petitioner as a guarantor secure reimbursement from the
respondents for what it has paid?
Ruling:
1. YES, petitioner is a guarantor and not a surety.
By guaranty a person, called the guarantor, binds himself to the creditor to
fulfill the obligation of the principal debtor in case the latter should fail to do
so. If a person binds himself solidarily with the principal debtor, the contract
is called suretyship. It can be distinguished as follows:
1. A surety is usually bound with his principal by the same instrument
executed at the same time and on the same consideration. On the other
hand, the contract of guaranty is the guarantor's own separate undertaking
often supported by a consideration separate from that supporting the
contract of the principal; the original contract of his principal is not his
contract.
2. A surety assumes liability as a regular party to the undertaking; while
the liability of a guarantor is conditional depending on the failure of the
primary debtor to pay the obligation.
3.The obligation of a surety is primary, while that of a guarantor is
secondary.
4. A surety is an original promissor and debtor from the beginning, while a
guarantor is charged on his own undertaking.
5. A surety is, ordinarily, held to know every default of his principal;
whereas a guarantor is not bound to take notice of the non-performance of
his principal.
6. Usually, a surety will not be discharged either by the mere indulgence
of the creditor to the principal or by want of notice of the default of the
principal, no matter how much he may be injured thereby. A guarantor is
often discharged by the mere indulgence of the creditor to the principal,
and is usually not liable unless notified of the default of the principal.
It appearing that Letter of Guarantee merely stated that in the event of default by
respondent VPECI the petitioner shall pay, the obligation assumed by the
petitioner was simply that of an unconditional guaranty, not conditional guaranty.
But as earlier ruled the fact that petitioner's guaranty is unconditional does not
make it a surety. Besides, surety is never presumed. A party should not be
considered a surety where the contract itself stipulates that he is acting only as a
guarantor. It is only when the guarantor binds himself solidarily with the
principal debtor that the contract becomes one of suretyship.
Hence, the obligation assumed by the petitioner is that of an unconditional
guaranty.
2. No.
As a rule, a guarantor who pays for a debtor should be indemnified by the latter
and would be legally subrogated to the rights which the creditor has against the
debtor. However, a person who makes payment without the knowledge or against
the will of the debtor has the right to recover only insofar as the payment has
been beneficial to the debtor. If the obligation was subject to defenses on the
part of the debtor, the same defenses which could have been set up against the
creditor can be set up against the paying guarantor. It is only when the debtor
does not or cannot pay, in whole or in part, that the guarantor should pay.
When the petitioner guarantor in this case paid against the will of the debtor
VPECI, the debtor VPECI may set up against it defenses available against the
creditor SOB at the time of payment.
Hence, petitioner as the guarantor cannot seek for reimbursement.
Diamond Builders Conglomeration v. Country Bankers Insurance
Corp.
G.R. No. 171820, December 13, 2007
Nachura, J.
Doctrine: The New Civil Code recognizes the right of reimbursement from a co-debtor in
favor of a debtor who paid.
Facts:
To put an end to litigation, Petitioner Rogelio Acidre on behalf of his construction
Business which is petitioner in this case entered into a compromise agreement
approved by the Caloocan Regional Trial Court with Ferdinand Borja. In their
agreement, Acidre promised to construct the building of Borja within a certain
period of time in which failure of Petitioner to construct the building, he will not
receive any payment and the surety bond procured by Acidre from Country Bankers
Insurance Corporation in favor of Borja will be enforced. On April 23, 1992, Country
Bankers received a Motion for Execution of the surety bond filed by Borja with the
RTC Caloocan for Rogelio’s alleged violation of the Compromise Agreement. In the
meantime, after Country Bankers was compelled to pay the amount of the surety
bond, it demanded reimbursement from the petitioners under the Indemnity
Agreement. However, petitioners refused to reimburse Country Bankers contending
that they filed an Omnibus Motion to stay the execution. The latter then filed a
complaint for the sum of money but was dismissed by the RTC Manila. On appeal,
the Court of Appeals reversed the RTC decision saying that as surety of Rogelio’s
loan obligation, did not effect voluntary payment on the bond. The appellate court
found that what Country Bankers paid was an obligation legally due and
demandable. It declared that Country Bankers acted upon compulsion of a writ of
execution, which appears to have been regularly, and validly issued, and, by its very
nature, is immediately enforceable.
Issue:
Should Petitioner pay Country Bankers Insurance Corp. the amount paid by the
latter in favor of the Plaintiff’s Acidre?
Ruling:
Yes. Article 2047 of the Civil Code provides that “By guaranty a person, called
the guarantor, binds himself to the creditor to fulfill the obligation of the
principal debtor in case the latter should fail to do so. If a person binds himself
solidarily with the principal debtor, the provisions of Section 4, Chapter 3, Title I
of this Book shall be observed. In such case the contract is called a suretyship”.
In particular Article 1217 of the Civil Code which provides that “Payment made by
one of the solidary debtors extinguishes the obligation. If two or more solidary
debtors offer to pay, the creditor may choose which offer to accept.
He who made the payment may claim from his co-debtors only the share which
corresponds to each, with the interest for the payment already made. If the
payment is made before the debt is due, no interest for the intervening period
may be demanded.
When one of the solidary debtors cannot, because of his insolvency, reimburse his
share to the debtor paying the obligation, such share shall be borne by all his codebtors,
in proportion to the debt of each.”
In this case, Article 1217 of the Civil Code recognizes the right of reimbursement
from a co-debtor (the principal co-debtor, in case of suretyship) in favor of the
one who paid (i.e., the surety) which in contrast, Article 1218 of the Civil Code is
definitive on when reimbursement is unavailing, such that only those payments
made after the obligation has prescribed or became illegal shall not entitle a
solidary debtor to reimbursement. In addition, the Compromise Agreement
between Borja and Rogelio explicitly provided that the latter’s failure to
complete construction of the building within the stipulated period shall cause the
full implementation of the surety bond as a penalty for the default, and as an
award of damages to Borja. Furthermore, the Compromise Agreement contained a
default executory clause in case of a violation or avoidance of the terms and
conditions thereof. Therefore, the payment made by Country Bankers to Borja was
proper, as failure to pay would have amounted to contumacious disobedience of a
valid court order.
Thus, nowhere in the invoked CA Decision does it declare that a surety who pays,
by virtue of a writ of execution, is not entitled to reimbursement from the
principal co-debtor. Hence, Petitioner should reimburse Country Bankers for the
amount it paid as surety.
Lim v. Security Bank Corp.
G.R. No. 188539 March 12, 2014
Peralta, J.
Doctrine: A contract of suretyship is an agreement whereby a party (surety), guarantees
the performance by another party (principal or obligor) of an obligation or undertaking
in favor of another party (obligee).
Facts:
Petitioner executed a Continuing Suretyship in favor of respondents to secure any
and all types of credit accommodation that may be granted by the bank in favor of
Raul Arroyo for P2,000,000.00 which is covered by a Credit Agreement/Promissory
Note. The Agreement/Note stated the interest and penalty that will be imposed. In
turn, the Continuing Suretyship stipulated for the liability of the surety which is
“solidary and not contingent upon the pursuit of the Bank of whatever remedies it
may have against the Debtor or the collaterals/liens it may possess. If any of the
guaranteed Obligations is not paid or performed on due date, the Surety shall,
without need for any notice, demand or any other act or deed, immediately become
liable therefor and the Surety shall pay and perform the same.”
Debtor Raul Arroyo defaulted on his loan obligation. As a result, petitioner received
a Notice of Final Demand informing him that he was liable to pay the loan obtained
by Raul Arroyo including the interests and penalty fees, and demanding payment
thereof. For failure of petitioner to comply with the demand, respondent filed a
complaint for collection of sum of money against him and the principal debtor.
Issue:
May petitioner be held liable for the principal debtor’s loan obtained six months
after the execution of the Continuing Suretyship?
Ruling:
Yes. Petitioner may be held liable. A contract of suretyship is an agreement whereby
a party (surety), guarantees the performance by another party (principal or obligor) of
an obligation or undertaking in favor of another party (obligee). Although the
contract of surety is secondary only to a valid principal obligation, the surety
becomes liable for the debt or duty of another although it possesses no direct or
personal interest over the obligations nor does it receive any benefit therefrom.
Surety arises upon the solidary binding of a person deemed the surety with the
principal debtor for the purpose of fulfilling of an obligation. 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. In this case, what the petitioner executed was a Continuing
Suretyship. By executing such an agreement, the principal places itself in a
position to enter into the projected series of transactions with its creditor; with
such suretyship agreement, there would be no need to execute a separate surety
contract or bond for each financing or credit accommodation extended to the
principal debtor. The Continuing Suretyship in this case states clearly that
petitioner, as surety, shall, without need for any notice, demand or any other act
or deed, immediately become liable and shall pay all credit accommodations
extended by the Bank to the Debtor. The stipulation being valid and legal,
constitute as law between the parties. Thus, petitioner is unequivocally bound by
the terms of the Continuing Suretyship. Petitioner is liable for the principal of the
loan, together with the interest and penalties due thereon, even if said loan was
obtained by the principal debtor even after the date of execution of the
Continuing Suretyship.
Gilat Satellite Networks, Ltd. v. United Coconut Planter Bank
General Insurance Co., Inc.
GR No. 189563, April 7, 2014
Sereno, CJ.
Doctrine: Although the contract of a surety is in essence secondary only to a valid
principal obligation, its liability to the creditor or “promise” of the principal is said to
be direct, primary and absolute; in other words, a surety is directly and equally bound
with the principal.
Facts:
On September 15, 1999, One Virtual placed with GILAT a purchase order for various
telecommunications equipment (sic), accessories, spares, services and software, at a
total purchase price of US$2,128,250.00. To ensure the prompt payment of this
amount, it obtained defendant UCPB General Insurance Co., Inc.’s surety bond dated
3 December 1999, in favor of GILAT. Thereafter, One Virtual failed to pay GILAT the
amount of US$400,000.00 on the due date, prompting GILAT to write the surety
defendant UCPB, a demand letter for payment of the said amount. No part of the
amount set forth in this demand has been paid to date by either One Virtual or
defendant UCPB. One Virtual likewise failed to pay on the succeeding payment
instalment date of 30 November 2000 of the surety bond, prompting GILAT to send
a second demand letter dated January 24, 2001, for the payment of the full amount
of US$1,200,000.00 guaranteed under the surety bond, plus interests and expenses
and which letter was received by the defendant surety on January 25, 2001.
However, defendant UCPB failed to settle the amount or a part thereof, hence, the
instant complaint. RTC rendered a decision in favor of the plaintiff, GILAT. However,
the appellate court considered the Purchase Agreement entered into between
petitioner and One Virtual as the principal contract. Bearing in mind the arbitration
clause contained in the Purchase Agreement and pursuant to the policy of the
courts to encourage alternative dispute resolution methods, the trial court’s
Decision was vacated; petitioner and One Virtual were ordered to proceed to
arbitration.
Petitioner alleges that arbitration laws mandate that no court can compel
arbitration, unless a party entitled to it applies for this relief. Considering that
neither petitioner nor One Virtual has asked for a referral, there is no basis for
the CA’s order to arbitrate. They contended further that Articles 1216 and 2047 of
the Civil Code clearly provide that the creditor may proceed against the surety
without having first sued the principal debtor. On the other hand, respondent
maintains that a surety contract is merely an accessory contract, which cannot
exist without a valid obligation. Thus, the surety may avail itself of all the
defenses available to the principal debtor and inherent in the debt— that is, the
right to invoke the arbitration clause in the Purchase Agreement.
Issue:
Did the CA err in dismissing the case and ordering petitioner and One Virtual to
arbitrate
Ruling:
Yes, the CA’s dismissal of the case is not proper. The Court held that, “ In
suretyship, the oft-repeated rule is that a surety’s liability is joint and solidary
with that of the principal debtor. This undertaking makes a surety agreement an
ancillary contract, as it presupposes the existence of a principal contract.
Nevertheless, although the contract of a surety is in essence secondary only to a
valid principal obligation, its liability to the creditor or “promise” of the principal
is said to be direct, primary and absolute; in other words, a surety is directly and
equally bound with the principal. He becomes liable for the debt and duty of the
principal obligor, even without possessing a direct or personal interest in the
obligations constituted by the latter. Thus, a surety is not entitled to a separate
notice of default or to the benefit of excussion.
In this case, the RTC found that the petitioner had delivered all the goods to One
Virtual and installed them. Despite these compliances, One Virtual still failed to
pay its obligation, triggering respondent’s liability to petitioner as the former’s
surety. In other words, the failure of One Virtual, as the principal debtor, to fulfill
its monetary obligation to petitioner gave the latter an immediate right to pursue
respondent as the surety.
Consequently, the Court did not sustain respondent’s claim that the Purchase
Agreement, being the principal contract to which the Suretyship Agreement is
accessory, must take precedence over arbitration as the preferred mode of
settling disputes.
First, as held in Stronghold Insurance Co. Inc. v. Tokyu Construction., that “the
acceptance [of a surety agreement], however, does not change in any material
way the creditor’s relationship with the principal debtor nor does it make the
surety an active party to the principal creditor-debtor relationship. In other
words, the acceptance does not give the surety the right to intervene in the
principal contract. The surety’s role arises only upon the debtor’s default, at
which time, it can be directly held liable by the creditor for payment as a solidary
obligor.” The Court agreed with petitioner that respondent cannot invoke in its
favor the arbitration clause in the Purchase Agreement, because it is not a party
to that contract. An arbitration agreement being contractual in nature, it is
binding only on the parties thereto, as well as their assigns and heirs.
Second, Section 24 of Republic Act No. 9285 is clear in stating that a referral to
arbitration may only take place “if at least one party so requests not later than
the pre-trial conference, or upon the request of both parties thereafter.”
Respondent has not presented even an iota of evidence to show that either
petitioner or One Virtual submitted its contesting claim for arbitration.
Third, sureties do not insure the solvency of the debtor, but rather the debt itself.
They are contracted precisely to mitigate risks of non performance on the part of
the obligor. This responsibility necessarily places a surety on the same level as
that of the principal debtor. The effect is that the creditor is given the right to
directly proceed against either principal debtor or surety. This is the reason why
excussion cannot be invoked. To require the creditor to proceed to arbitration
would render the very essence of suretyship nugatory and diminish its value in
commerce.
Baylon v. Court of Appeals
G.R. No. 109941, August 17,1999
Gonzaga-Reyes, J.
Doctrine: All the properties of the principal debtor must first be exhausted before his
own is levied upon. Thus, the creditor may hold the guarantor liable only after
judgment has been obtained against the principal debtor and the latter is unable to
pay, "for obviously the 'exhaustion of the principal's property' — the benefit of which
the guarantor claims — cannot even begin to take place before judgment has been
obtained." This rule is embodied in article 2062 of the Civil Code which provides that
the action brought by the creditor must be filed against the principal debtor alone,
except in some instances when the action may be brought against both the debtor and
the principal debtor.
Facts:
In 1986, Petitioner Baylon introduced private respondent Leonila Tomacruz (the comanager
of her husband at PLDT) to Rosita Luanzon. Petitioner persuaded the private
respondent to lend Luanzon P150,000 to be used as capital of latter’s business and
to be paid with a monthly interest of five percent (5%). Private respondent agreed.
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. Petitioner signed the
promissory note, affixing her signature under the word "guarantor." Luanzon issued
postdated check dated August 22, 1987, replaced it on December 22, 1987. 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. However, the petitioner denied having guaranteed the payment of the
promissory note issued by Luanzon. She claimed that private respondent gave
Luanzon the money, not as loan, but rather as an investment to the latter's business.
And 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 from her obligation. The lower court
rendred a decision in favor of the private respondent. The CA affirmed. Thus, this
petition for review.
Issue:
1. Is the petitioner correct that there is no contract of loan to begin with?
2. Is the petitioner’s contention correct 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?
Ruling:
1. No.
Petitioner claims that there is no loan to begin with; that private
respondent gave Luanzon the amount of P150,000, not as a loan, but
rather as an investment in the construction project of the latter.In support
of her claim, petitioner cites the use by private respondent of the words
"investment," "dividends," and "commission" in her testimony before the
lower court; the fact that private respondent received monthly checks from
Luanzon in the amount of P7,500 from July to December, 1987,
representing dividends on her investment; and the fact that other
employees of the Development Bank of the Philippines made similar
investments in Luanzon's construction business.
However, all the circumstances mentioned by petitioner cannot override
the clear and unequivocal terms of the June 22, 1987 promissory note
whereby Luanzon promised to pay private respondent the amount of
P150,000 on or before August 22, 1987.
If the terms of a contract are clear and leave no doubt as to the intention of
the contracting parties, the literal meaning of its stipulation shall control.
Resort to extrinsic aids and other extraneous sources are not necessary in
order to ascertain the parties' intent when there is no ambiguity in the terms
of the agreement. 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. 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.
2. Yes.
Article 2058 of the Civil Code provides that he 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. Also,
article 2062 of the Civil Code which provides that the action brought by the
creditor must be filed against the principal debtor alone, except in some
instances when the action may be brought against both the debtor and the
principal debtor.
It is axiomatic that the liability of the guarantor is only subsidiary. All the
properties of the principal debtor must first be exhausted before his own is
levied upon. Thus, the creditor may hold the guarantor liable only after
judgment has been obtained against the principal debtor and the latter is
unable to pay, "for obviously the 'exhaustion of the principal's property' — the
benefit of which the guarantor claims — cannot even begin to take place
before judgment has been obtained."This rule is embodied in
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.
Thus, the decision of the CA was set aside.
Vil-Rey Planners and Builders v. Lexber, Inc.
G.R. Nos. 189401 & 189447, June 15, 2016
Sereno, C.J.
Doctrine: A surety bond is an accessory contract dependent for its existence upon the
principal obligation it guarantees.
Facts:
Vil-Rey and Lexber entered into a construction contract dated April 17, 1996: Vil-Rey
– to work on the compacted backfill of Lexber’s 56,565 sqm. Property. The former
shall complete the project in 60 days for a consideration of P5.1M. Lexber released
to Vil-Rey a mobilization down payment secured by a surety bond issued by
Stronghold. They terminated the first contract and entered into another construction
contract to cover the remaining works. On December 23, 1996 they executed a third
contract for the completion of the remaining works with a consideration of
P1,168,728.37 shall be paid on the following basis: 50% down and 50% balance upon
completion of the works. Stronghold issued the second surety bond in favor of
Lexber. However, Vil-Rey failed to complete the works. Lexber then wrote Stronghold
seeking to collect on the two surety bonds. When negotiations failed, Lexber filed a
complaint for a sum of money and damages against Vil-Rey and Stronghold.
Vil-Rey alleged that under the first contract, it was able to finish 75.33% of the
works but that Lexber paid an amount equivalent to only 50% of the contract,
thereby leaving a balance of P1,291,830 in Vil-Rey’s favor. Furthermore, considering
that almost 100% of the works were finished under the third contract, Vil-Rey had
receivables of P668/728.40 representing the contract amount of P1,168,728.37 less
the downpayment of P500,000. It also prayed for the payment of moral damages and
attorney's fees.
Stronghold alleged that its liability under the surety bonds was very specific. Under
the first surety bond, it guaranteed only the mobilization down payment of 10% of
the total consideration for the first contract. The mobilization down payment was
fully liquidated prior to the mutual termination of the first contract. Also, no
collection could be made on the second surety bond, because Lexber failed to allege
that there were defects in the materials used and workmanship utilized by Vil-Rey in
undertaking the works.
RTC adjudged Vil-Rey and Stronghold jointly and severally liable to Lexber. On
appeal, the CA rules that considering the mutual termination of the first and second
contracts, no liability could be assessed against Vil-Rey. Whatever claims Lexber had
against Vil-Rey had been deemed waived with the execution of the third contract.
Issue:
Was Stronghold’s liability under the second surety bond extinguished by the
extension of the third contract?
Ruling:
No. A surety bond is an accessory contract dependent for its existence upon the
principal obligation it guarantees. Being so associated with the third contract as a
necessary condition or component thereof, the second surety bond cannot be
separated or severed from its principal.
Considering that the third contract provided that the works shall be completed on or
before 15 January 1997, the second surety bond was deemed to have guaranteed the
completion of the works on the same date.
It is true that a surety is discharged from its obligation when there is a material
alteration of the principal contract, such as a change that imposes a new obligation
on the obligor; or takes away some obligation already imposed; or changes the legal
effect, and not merely the form, of the original contract. Nevertheless, no release
from the obligation shall take place when the change in the contract does not have
the effect of making the obligation more onerous to the surety.
In this case, the extension of the third contract for 15 days and the grant of an
additional five-day grace period did not make Stronghold's obligation more onerous.
On the contrary, the extensions were aimed at the completion of the works, which
would have been for the benefit of Stronghold. This perspective comes from the
provision of the second surety bond that "if Vil-Rey shall in all respects duly and
fully observe and perform all xxx the aforesaid covenants, conditions and
agreements to the true intent and meaning thereof, then this obligation shall be null
and void, otherwise to remain in full force and effect." The completion of the works
would have discharged Stronghold from its liability.
BA Finance Corporation v. Court of Appeals
G.R. No. 94566 | July 3, 1992
Medialdea, J.
Doctrine: Guaranty is not presumed, it must be expressed and cannot be extended
beyond its specified limits.
Facts:
On December 17, 1980, Renato Gaytano, doing business under the name Gebbs
International, applied for and was granted a loan with respondent Traders Royal
Bank in the amount of P60,000.00. As security for the payment of said loan, the
Gaytano spouses executed a deed of suretyship whereby they agreed to pay jointly
and severally to respondent bank the amount of the loan including interests,
penalty and other bank charges.
In a letter dated December 5, 1980 addressed to respondent bank, Philip Wong as
credit administrator of BA Finance Corporation for and on behalf of the latter,
undertook to guarantee the loan of the Gaytano spouses.
Partial payments were made on the loan leaving an unpaid balance in the amount
of P85,807.25. Since the Gaytano spouses refused to pay their obligation,
respondent bank filed with the trial court a complaint for sum of money against the
Gaytano spouses and petitioner corporation as alternative defendant.
The Gaytano spouses did not present evidence for their defense. Petitioner
corporation, on the other hand, raised the defense of lack of authority of its credit
administrator to bind the corporation.
Issue:
Is Traders Royal bank jointly and severally liable with Gaytano as guarantee?
Ruling:
Yes. The Supreme Court held that anent the conclusion of respondent appellate
court that petitioner is estopped from alleging lack of authority due to its failure to
cancel or disallow the guaranty, We find that the said conclusion has no basis in fact.
Respondent bank had not shown any evidence aside from the testimony of the credit
administrator that the disputed transaction of guaranty was in fact entered into the
official records or files of petitioner corporation, which will show notice or
knowledge on the latter's part and its consequent ratification of the said transaction.
In the absence of clear proof, it would be unfair to hold petitioner corporation guilty
of estoppel in allowing its credit administrator to act as though the latter had power
to guarantee. Guaranty is not presumed, it must be expressed and cannot be
extended beyond its specified limits.
Philippine National Bank v. Luzon Surety Co., Inc.
G.R. No. L-29587, November 28, 1975
Esguerra, J.
Doctrine: If a surety upon demand fails to pay, he can be held liable for interest, even if
in thus paying, the liability becomes more than that in the principal obligation. The
increased liability is not because of the contract but because of the default and the
necessity of judicial collection. It should be noted, however, that the interest runs from
the time the complaint is filed, not from the time the debt becomes due and
demandable.
Facts:
Private defendant Augusto Villarosa apple id for a crop loan from petitioner bank,
Philippine National Bank in the amount of Php 32,400.00. Villarosa then executed a
chattel mortgage on his standing crops to guarantee the payment of the loan. In
consideration of the periodical amounts received by Villarosa from PNB as part of his
loan, he executed promissory notes. It may be seen from the promissory notes that
the original amount for the loan was, indeed, Php 32,400.00 but was later on
increased which became the basis of the succeeding promissory notes. By September
27, 1953, there was a balance of Php. 63,222.78 and has reached a much higher sum
by the time the complaint was filed on June 8, 1960.
The petitioner then sought relief not only against Villarosa but against the three
bondsmen, namely: Central Surety, Associated Surety and respondent, Luzon Surety.
As bondsmen, they are obligated to guarantee the faithful performance of the
obligation of Villarosa with PNB.
Only Luzon Surety appealed, and in the trial of the case, it argued that the evidence
did not establish a cause of action to make them liable and that the principal
obligation is attended by alteration.
The Court of Appeals ruled in favor of the respondent saying that the obligation of
the latter could not be held liable for the chattel mortgage could not have been the
obligation guaranteed by the surety bond.
Issue:
Is the respondent obliged to pay the principal obligation at bar?
Ruling:
Yes. The stipulations on the Chattel Mortgage to guarantee the crop loan, the Surety
Bond executed by the parties and the condition of the obligation all leads to the
liability of Luzon Surety to petitioner PNB not merely as a guarantor but as a surety,
liable as a regular party to the undertaking. Furthermore, there is only one chattel
mortgage executed by Villarosa evidencing the crop loan contract and upon which
the respondent agreed to assume liability up to the amount of Php 10,000.00.
Moreover, the principal obligation was never been raised as an issue by the
respondent. On the other hand, what it did was to raise the defense that the terms
and conditions of the contract are attended by alterations. While the rules provide
that an alteration of a contract could be a ground for release, this alteration must be
material. As could be gleaned from the records, the increases in the amount were
made with the full consent of Luzon Surety.
Republic v. Court of Appeals
GR 103073, MArch 13, 2001
Vitug, J.
Doctrine: "SECTION 176 of the Insurance Code: The liability of the surety of sureties
shall be joint and several with the obligor and shall be limited to the amount of the
bond. It is determined strictly by the terms of the contract of suretyship in relation to
the principal contract between the obligor and the obligee, (as amended by P.D. No.
1455)."
Facts:
Endelo's license to operate was suspended sometime in 1970, claiming that its
failure to export
the imported raw materials in its original state or as finished products was due to it.
Thus the trial court held R & B Surety and Insurance, Inc. ("R & B"), (Endelo’s surety)
liable for the total amount of P4,305,017.00, representing taxes and duties due to it
in the four causes of actions covering the four embroidery bonds, which was well
above the total face value of the bonds in the sum of P3,000,000.00.
R&B argues that it should not be held liable for the payment of legal interest which
would increase its liability beyond the amount of the bonds, should not be held
liable to pay legal interest and that its interest should be prorated with other surety.
Issue:
Is R&B liable for more than value of the bond?
Ruling:
No.
A recomputation of the liability of R&B was presented amounting to P2,588, 568 plus
legal interest from the time of the filing of the complaint until fully paid. R & B's
claim that it should not be held liable to pay legal interest thereon cannot be
sustained since the payment for legal interest is for the incurrence of default and the
necessity of judicial collection.
Respondent-movant opines that its liability should be pro-rated with that of CICI
since R & B's liability is solidary with that of Endelo and not with CICI. The
contention is unacceptable considering that the joint and several liability of the
surety (R & B) and the obligor (Endelo) gave petitioner the right to compel
performance of the full obligation from both Endelo and R & B or from either of
them.
Bitanga v. Pyramid Construction Engineering Corp.
G.R. NO. 173526; 563 SCRA 544 : August 28, 2008
Chico-Nazario, J.
Doctrine: Under a contract of guarantee, the guarantor binds himself to the creditor to
fulfill the obligation of the principal debtor in case the latter should fail to do so.
Facts:
Pyramid filed with the RTC a Complaint for Specific performance and damages with
application for the issuance of a writ of preliminary attachment against the
petitioner, Bitanga and his wife Marilyn. Respondent alleged in its Complaint that it
entered into an agreement with Macrogen Realty, of which petitioner, Bitanga is the
President, to construct for the latter the Shoppers Gold Building located in
Parañaque City. Respondent commenced civil, structural, and architectural works on
the construction project. However, Macrogen failed to settle respondent’s progress
billings. Petitioner, through his representatives and agents, assured respondent that
the outstanding account of Macrogen would be paid and relying on the assurances
made by petitioner, respondent continued the construction project.
Later, respondent suspended work on the construction project since the conditions
that it imposed for the continuation thereof, including payment of unsettled
accounts, had not been complied with by Macrogen. Respondent instituted with the
Construction Industry Arbitration Commission (CIAC) a case for arbitration against
Macrogen Realty seeking payment by the latter of its unpaid billings and project
costs. Before the arbitration case could be set for trial, Pyramid and Macrogen
entered into a Compromise Agreement, with petitioner acting as signatory for and on
behalf of Macrogen Realty. Under the Compromise Agreement, Macrogen Realty
agreed to pay respondent the total amount of P6,000,000.00 by installments.
Petitioner guaranteed the obligations of Macrogen Realty under the Compromise
Agreement by executing a Contract of Guaranty in favor of respondent, by virtue of
which he irrevocably and unconditionally guaranteed the full and complete payment
of the principal amount of liability of Macrogen. However, Macrogen Realty failed
and refused to pay all the monthly installments agreed upon in the Compromise
Agreement. Hence respondent moved for the issuance of a writ of execution against
Macrogen, which CIAC granted.
Respondent then made a written demand on petitioner, as guarantor of Macrogen to
pay the liability or to point out available properties of the Macrogen within the
Philippines sufficient to cover the obligation guaranteed. It also made verbal
demands to the petitioner. But the respondent's demands were left unheeded.
Petitioner then filed with the RTC his Answer to respondent’s Complaint.
As a special and affirmative defense, petitioner argued that the benefit of excussion
was still available to him as a guarantor since he had set it up prior to any judgment
against him. According to the petitioner, respondent failed to exhaust all legal
remedies to collect from Macrogen Realty the amount due under the Compromise
Agreement, considering that Macrogen Realty still had uncollected credits which
were more than enough to pay for the same. Given these premises, the petitioner
could not be held liable as guarantor.
Issue:
Is petitioner’s contention that the special and affirmative defense of the benefit of
excussion be availed by him correct?
Ruling:
NO, Bitanga cannot avail himself of the benefit of excussion. Under a contract of
guarantee, the guarantor binds himself to the creditor to fulfill the obligation of the
principal debtor in case the latter should fail to do so. The guarantor who pays for a
debtor, in turn, must be indemnified by the latter. However, the guarantor cannot be
compelled to pay the creditor unless the latter has exhausted all the property of the
debtor and resorted to all the legal remedies against the debtor. This is what is
otherwise known as the benefit of excussion. Article 2060 of the Civil Code clearly
requires that in order for the guarantor to make use of the benefit of excussion, he
must set it up against the creditor upon the latter's demand for payment and point
out to the creditor available property of the debtor within the Philippines sufficient
to cover the amount of the debt. It must be stressed that despite having been served
a demand letter at his office, petitioner still failed to point out to the respondent
properties of Macrogen Realty sufficient to cover its debt as required under Article
2060 of the Civil Code. Such failure on petitioner's part forecloses his right to set up
the defense of excussion.
Prudential Bank v. IAC
216 SCRA 257, 1992
Davide, Jr., J.
Doctrine: The defense of excussion is not a condition sine qua non for the institution of
action against guarantor.
Facts:
In this petition for review a certiorari, petitioner assails the decision of then IAC
affirming the decision of then CFI dismissing its action for the recovery of a sum of
money. Action came after the defendant-appellant/private respondent Philippine
Rayon Mills, Inc. entered into a contract with Nissho Co., Ltd. of Japan for the
importation of textile machineries under a deferred payment plan. To effect the
payment of these machineries, the defendant-respondent applied for a letter of
credit with the petitioner bank. To enable the delivery of said machineries to them
after arrival, the defendants then rendered a trust receipt with the solidary guaranty
clause signed by its President, Mr. Chi. At the back of this receipt is a printed form to
be accomplished by two sureties who would then be liable to the petitioner in case
of failure of the respondent to complete payment. Thereafter, the defendant ceased
business operations although the trust receipts remained unpaid. After several
demands that went unheeded, petitioner then filed the original action. Petitioner
contends that the President is a guarantor of said trust receipts, and is thus liable to
it. Respondents counter that the action against Mr. Chi is premature as the
petitioners have yet to exhaust all the property of the primary debtor in Phil. Rayon
Mills.
Issue:
Is Mr. Chi liable for the trust receipts?
Ruling:
Yes. Under Article 2058 of the Civil Code, the defense of exhaustion (excussion) may
be raised by a guarantor before he may be held liable for the obligation. However,
excussion is not a condition sine qua non for the institution of an action against the
guarantor. The court in another case ruled that judgment may be made against the
guarantor before the exhaustion of the debtor’s properties, subject to its deferment
until said exhaustion. Thus, Anacleto R. Chi may be held liable as guarantor.
Philippine National Bank v. CA
147 SCRA 273, January 21,1987
Davide, Jr., J.
Doctrine: A material alteration of the principal contract, effected by the creditor and
principal debtor without the knowledge and consent of the surety, completely
discharges the surety from all liability in the contract of suretyship.
Facts:
Marino P. Rubin obtained from the Binalbagan Branch of petitioner Philippine
National Bank a 1954-1955 sugar crop loan in the amount of P40,200.00, secured
by a chattel mortgage executed by Rubin as debtor-mortgagor and Jose A. Campos
as mortgagor. As additional security, private respondent Philippine Phoenix Surety
and Insurance, Inc. (Phoenix for short) issued Surety Bond No. 88 for P10,000.00 in
favor of petitioner Bank. Three months later, petitioner Bank increased the loan
from P40,200.00 to P56,800.00, without the knowledge and consent of private
respondent Phoenix. When Rubin failed to liquidate said loan, petitioner Bank
demanded of private respondent Phoenix up to the stated amount of P10,000.00.
Private respondent Phoenix denied liability, resulting in petitioner instituting a
collection case against Rubin, his guarantors and sureties, including private
respondent Phoenix.
The trial court ruled in favor of petitioner Bank, ordering, among others, private
respondent Phoenix to pay petitioner the sum of P10,000 upon failure of the
principal debtor Rubin and his guarantors to pay the judgment amount. On appeal,
the Court of Appeals modified the trial court's decision by exonerating private
respondent Phoenix from liability under its surety bond
Issue:
Is the discharge of private respondent Phoenix from liability correct?
Ruling:
Yes, the discharge of private respondent was correct. It has been held by the Court in
Asiatic Petroleum Co. vs. Hizon and David, 45 Phil. 532 that A material alteration
of the principal contract, effected by the creditor and principal debtor without the
knowledge and consent of the surety, completely discharges the surety from all
liability in the contract of suretyship.
The contract in question is not a continuing chattel mortgage for which consent and
knowledge of the surety is unnecessary for an increase in the amount of the principal
obligation. The contract of chattel mortgage itself fixed the credits, loans,
overdrafts, etc. and other valuable consideration received thereunder at Forty
Thousand Two Hundred Pesos [P40,200.00]. The increase in the indebtedness from
P40,200.00 to P56,800.00 is material and prejudicial to private respondent Phoenix.
While the liability of private respondent under the bond is limited to P10,000.00, the
increase in the amount of the debt proportionally decreased the probability of the
principal debtor being able to liquidate the debt; thus, increasing the risk undertaken
by the surety to answer for the failure of the debtor to pay. Hence, private
respondent cannot be held liable as surety for Rubin.
Auto Group v. Intra Strata Assurance Corp.
G.R. No. 166662, June 27, 2008
Chico-Nazario, J.
Doctrine: Demand, whether judicial or extrajudicial, is not required before an
obligation becomes due and demandable. A demand is only necessary in order to put an
obligor in a due and demandable obligation in delay, which in turn is for the purpose of
making the obligor liable for interests or damages for the period of delay. Thus, unless
stipulated otherwise, an extrajudicial demand is not required before a judicial demand,
i.e., filing a civil case for collection, can be resorted to.
Facts:
On 19 August 1990, petitioner Autocorp Group, represented by its President,
petitioner Peter Y. Rodriguez, secured an ordinary re-export bond from private
respondent ISAC in favor of public respondent BOC, to guarantee the re-export of
one unit of Hyundai Excel 4-door 1.5 LS and/or to pay the taxes and duties thereon.
On 21 December 1990, petitioners obtained another ordinary re-export bond from
ISAC in favor of the BOC to guarantee the re-export of one unit of Hyundai Sonata
2.4 GLS and/or to pay the taxes and duties thereon. Petitioners executed and signed
two Indemnity Agreements with identical stipulations in favor of ISAC, agreeing to
act as surety of the subject bonds. Petitioner Rodriguez signed the Indemnity
Agreements both as President of the Autocorp Group and in his personal capacity.
ISAC issued the subject bonds to guarantee compliance by petitioners with their
undertaking with the BOC to re-export the imported vehicles within the given
period and pay the taxes and/or duties due thereon. In turn, petitioners agreed, as
surety, to indemnify ISAC for the liability the latter may incur on the said bonds.
Petitioner Autocorp Group failed to re-export the items guaranteed by the bonds
and/or liquidate the entries or cancel the bonds, and pay the taxes and duties
pertaining to the said items despite repeated demands made by the BOC, as well as
by ISAC. By reason thereof, the BOC considered the two bonds forfeited. Failing to
secure from petitioners the payment of the face value of the two bonds, despite
several demands sent to each of them as surety under the Indemnity Agreements,
ISAC filed with the RTC on 24 October 1995 an action against petitioners to recover
the sum of P1,034,649.00, plus 25% thereof or P258,662.25 as attorney's fees. ISAC
impleaded the BOC "as a necessary party plaintiff in order that the reward of money
or judgment shall be adjudged unto the said necessary plaintiff." Both the RTC and
CA ruled in favor of the respondents. Hence, this petition.
Petitioners contend that their obligation to ISAC is not yet due and demandable.
They cannot be made liable by ISAC in the absence of an actual forfeiture of the
subject bonds by the BOC and/or an explicit pronouncement by the same bureau that
ISAC is already liable on the said bonds.
Moreover, petitioner Rodriguez posits that he is merely a guarantor, and that his
liability arises only when the person with whom he guarantees the credit, Autocorp
Group in this case, fails to pay the obligation. Petitioner Rodriguez invokes Article
2079 of the Civil Code on Extinguishment of Guaranty. He further argues that there
was an amendment as to the effectivity of the bonds, and this constitutes a
modification of the agreement without his consent, thereby exonerating him from
any liability.
Issue:
1. Can ISAC be made liable in the absence of an actual forfeiture of the subject
bonds by the BOC and/or an explicit pronouncement by the same bureau?
2. Was the liability of Petitioner Rodriguez, as surety, extinguished?
Ruling:
1. Yes. Article 2071 of the Civil Code provides: The guarantor, even before having
paid, may proceed against the principal debtor: (1) When he is sued for the
payment; CAScIH (2) In case of insolvency of the principal debtor; (3) When the
debtor has bound himself to relieve him from the guaranty within a specified
period, and this period has expired; (4) When the debt has become demandable,
by reason of the expiration of the period for payment; (5) After the lapse of ten
years, when the principal obligation has no 9xed period for its maturity, unless it
be of such nature that it cannot be extinguished except within a period longer
than ten years; (6) If there are reasonable grounds to fear that the principal
debtor intends to abscond; (7) If the principal debtor is in imminent danger of
becoming insolvent. In all these cases, the action of the guarantor is to obtain
release from the guaranty, or to
demand a security that shall protect him from any proceedings by the creditor
and from the danger of insolvency of the debtor
In the case at bar, the stipulation in the Indemnity Agreements allowing ISAC to
proceed against petitioners the moment the subject bonds become due and
demandable, even prior to actual forfeiture or payment thereof is but a slightly
expanded contractual expression of the aforementioned provision. The subject
bonds, became due and demandable upon the failure of petitioner Autocorp
Group to comply with a condition set forth in its undertaking with the BOC,
specifically to re-export the imported vehicles within the period of six months
from their date of entry. Since it issued the subject bonds, ISAC then also became
liable to the BOC. At this point, the Indemnity Agreements already give ISAC the
right to proceed against petitioners via court action or otherwise. It must be
pointed out that the Indemnity Agreements explicitly provide that petitioners
shall be liable to indemnify ISAC "whether or not payment has actually been
made by the ISAC" and ISAC may proceed against petitioners by court action or
otherwise "even prior to making payment to the [BOC] which may hereafter be
done by ISAC".
Therefore, an actual forfeiture of the subject bonds is not necessary for
petitioners to be liable thereon to ISAC as surety under the Indemnity
Agreements.
2. No. In Philippine American General Insurance Co., Inc. v. Mutuc, the Court held
that an agreement whereby the sureties bound themselves to be liable in case of
an extension or renewal of the bond, without the necessity of executing another
indemnity agreement for the purpose and without the necessity of being notified
of such extension or renewal, is valid; and that there is nothing in it that
militates against the law, good customs, good morals, public order or public
policy.
In the case at bar, petitioner Rodriguez argues that there was an amendment as
to the effectivity of the bonds, and this constitutes a modification of the
agreement without his consent, thereby exonerating him from any liability.
However, he has not presented any evidence of this alleged amendment as to the
effectivity of the bonds. Be that as it may, even if there was indeed such an
amendment, such would not cause the exoneration of petitioner Rodriguez from
liability on the bonds because they had authorized ISAC to consent to the
granting of any extension, modification, alteration and/or renewal of the subject
bonds, as expressly set out in the Indemnity Agreements.
Therefore, the liability of Petitioner Rodriguez, as surety is not extinguished.
Escano v. Ortigas
G.R. No. 151953. June 29, 2007
Tinga, J.
Doctrine: The rights to indemnification and subrogation as established and granted to
the guarantor by Articles 2066 and 2067 extend as well to sureties as defined under
Article 2047. These rights granted to the surety who pays materially differ from those
granted under Article 1217 to the solidary debtor who pays, since the "indemnification"
that pertains to the latter extends "only to the share which corresponds to each codebtor.
Facts:
PDCP entered into a loan agreement with Falcon Minerals, Inc. whereby PDCP
agreed to make available and lend to Falcon the amount of US$320,000.00, for
specific purposes and subject to certain terms and conditions. Ortigas, Scholey, and
Scholey executed an Assumption of Solidary Liability. In the meantime, two
separate guaranties were executed to guarantee the payment of the same loan by
other stockholders and officers of Falcon, acting in their personal and individual
capacities. One Guaranty was executed by petitioner Escaño, while the other by
petitioner Silos, Silverio, Inductivo and Rodriguez. Two years later, an agreement
developed to cede control of Falcon to Escaño, Silos and Matti. Thus, contracts
were executed whereby Ortigas, Scholey, Inductivo and the heirs of Scholey
assigned their shares of stock in Falcon to Escaño, Silos and Matti. Part of the
consideration that induced the sale of stock was a desire by Ortigas, et al., to
relieve themselves of all liability arising from their previous joint and several
undertakings with Falcon, including those related to the loan with PDCP. Thus, an
Undertaking was executed by the concerned parties, namely: with Escaño, Silos and
Matti identified in the document as "SURETIES," on one hand, and Ortigas, Inductivo
and the Scholeys as "OBLIGORS," on the other. The Undertaking reads in part:
SURETIES hereby irrevocably agree and undertake to assume all of OBLIGORs' said
guarantees to PDCP and PAIC under the following terms and conditions.
Falcon eventually availed of the sum of US$178,655.59 from the credit line
extended by PDCP and executed a Deed of Chattel Mortgage over its personal
properties to further secure the loan. However, Falcon subsequently defaulted in its
payments. In order to recover the indebtedness, PDCP filed a complaint for sum of
money with the RTC against Falcon, Ortigas, Escaño, Silos, Silverio and Inductivo. For
his part, Ortigas filed together with his answer a cross-claim against his codefendants
Falcon, Escaño and Silos, and also manifested his intent to file a thirdparty
complaint against the Scholeys and Matti. The cross-claim lodged against
Escaño and Silos was predicated on the 1982 Undertaking, wherein they agreed to
assume the liabilities of Ortigas with respect to the PDCP loan. Escaño, Ortigas and
Silos each sought to seek a settlement with PDCP. Ortigas agreed to pay PDCP
P1,300,000.00 as "full satisfaction of the PDCP's claim against Ortigas," in exchange
for PDCP's release of Ortigas from any liability or claim arising from the Falcon loan
agreement, and a renunciation of its claims against Ortigas entered into his own
compromise agreement, allegedly without the knowledge of Escaño, Matti and Silos.
In the meantime, after having settled with PDCP, Ortigas pursued his claims against
Escaño, Silos and Matti, on the basis of the 1982 Undertaking. He initiated a thirdparty
complaint against Matti and Silos, while he maintained his cross-claim against
Escaño. Ortigas places primary reliance on the fact that the petitioners and Matti
identified themselves in the Undertaking as "SURETIES", a term repeated no less than
thirteen (13) times in the document. Ortigas claims that such manner of
identification sufficiently establishes that the obligation of petitioners to him was
solidary in nature.
Issue:
Were petitioners identified in the Undertaking as "SURETIES," consequently solidary /
joint and severally liable to Ortigas?
Ruling:
No.
Art. 2047. By guaranty a person, called the guarantor, binds himself to the creditor to
fulfill the obligation of the principal debtor in case the latter should fail to do so. If a
person binds himself solidarily with the principal debtor, the provisions of Section 4,
Chapter 3, Title I of this Book shall be observed. In such case the contract is called a
suretyship.
The rights to indemnification and subrogation as established and granted to the
guarantor by Articles 2066 and 2067 extend as well to sureties as defined under
Article 2047. These rights granted to the surety who pays materially differ from
those granted under Article 1217 to the solidary debtor who pays, since the
"indemnification" that pertains to the latter extends "only to the share which
corresponds to each co-debtor." It is for this reason that the Court cannot accord the
conclusion that because petitioners are identified in the Undertaking as "SURETIES,"
they are consequently joint and severally liable to Ortigas.
Manila Surety & Fidelity Co., Inc. v. Batu Construction
G.R. No. L-9353; 21 May 1957
Padilla, J.
Doctrine: In suretyship the surety becomes liable to the creditor without the benefit
of the principal debtor's excussion of his properties, for he (the surety) may be sued
independently. So, he is an insurer of the debt and as such he has assumed or
undertaken a responsibility or obligation greater or more onerous than that of
guarantor. Such being the case, the provisions of article 2071, under guaranty, are
applicable and available to a surety. The reference in article 2047 to the provisions
of Section 4, Chapter 3, Title I, Book IV of the new Civil Code, on solidary or several
obligations, does not mean that suretyship which is a solidary obligation is withdrawn
from the applicable provisions governing guaranty.
Facts:
Batu Construction & Company, a partnership, requested Manila Surety & Fidelity
Company, Inc. to post a surety bond for ₱8,812.00 in favor of the Government of the
Philippines, to secure the faithful performance of the construction of the Bacarra
Bridge in Ilocos Norte. Batu Construction agreed to indemnify Manila Surety for
whatever damage, loss, costs, charges, or expenses it may have incurred because of
it being a surety upon the bond, with attorney’s fees not less than 15% of the total
amount claimed in any action which Manila Surety may institute. This was accepted
by Manila Surety.
Because of the unsatisfactory progress upon the bridge, the Director of Public Works
annulled the construction contract with Batu Construction and notified Manila Surety
that the government would hold it liable for any amount incurred by the Government
for the completion of the bridge, in excess of the contract price. Due to claims for
unpaid wages by 106 persons against Batu Construction and Manila Surety, as codefendant,
the Batu Construction was in peril of becoming insolvent and started
disposing of its properties. Manila Surety then filed a complaint with the CFI of
Manila against Batu Construction, with a prayer for the issuance of a writ of
attachment on Batu Construction’s properties, based on Article 2071. Gonzalo Amboy,
one of the partners in Batu Construction, moved for the dismissal of the complaint on
the ground that the remedy provided for in the last paragraph of Article 2071 of the
Civil Code may be availed of only by a guarantor and not a surety.
The CFI of Manila dismissed the complaint, ruling that Article 2071 may only be
availed of by a guarantor, and not a surety. This prompted Manila Surety to appeal to
the Supreme Court.
Issue:
1. Is the remedy under Article 2071 of the Civil Code available to a surety such as
Manila Surety?
2. Does Manila Surety have a cause of action under Article 2071?
Ruling:
1. Yes. Article 2071 provides:
“Art. 2071. The guarantor, even before having paid, may proceed against the
principal debtor:
(1) When he is sued for the payment;
(2) In case of insolvency of the principal debtor;
(3) When the debtor has bound himself to relieve him from the guaranty
within a specified period, and this period has expired;
(4) When the debt has become demandable, by reason of the expiration of the
period for payment;
(5) After the lapse of ten years, when the principal obligation has no fixed
period for its maturity, unless it be of such nature that it cannot be
extinguished except within a period longer than ten years;
(6) If there are reasonable grounds to fear that the principal debtor intends to
abscond;
(7) If the principal debtor is in imminent danger of becoming insolvent.
“In all these cases, the action of the guarantor is to obtain release from the
guaranty, or to demand a security that shall protect him from any proceedings by
the creditor and from the danger of insolvency of the debtor.”
A guarantor is the insurer of the solvency of the debtor; a surety is an insurer of
the debt. While a guarantor binds himself to pay if the principal is unable to pay;
a surety undertakes to pay if the principal does not pay. The fact that suretyship
is a solidary obligation does not withdraw it from the scope of applicability of the
provisions governing guaranty. The contract between Manila Surety and Batu
Construction is one of suretyship, governed by the provisions of the Civil Code on
guaranty. Thus, Article 2071 is available to Manila Surety.
2. Yes. Paragraph 1 of Article 2071 gives a guarantor or surety a cause of action
against the principal debtor when he is sued for payment. Likewise, the last
paragraph of Article 2071 provides that the guarantor or surety may proceed
against the principal debtor to obtain release from the guaranty, or to demand a
security that shall protect him from any proceedings by the creditor and from the
danger of insolvency of the principal debtor. In this case, Manila Surety was sued
by 106 persons for unpaid wages as Batu Construction’s co-defendant, in
connection with the construction of Bacarra Bridge. Therefore, Manila Surety has
a cause of action under Article 2071.
