Madrigal v.

Department of Justice
G.R. No. 168903, June 18,2014

FACTS:
Petitioner filed with the Office of the City Prosecutor of Manila a Complaint-Affidavit charging
respondent Palma with the crime of estafa. Later on, respondent Chua was named as additional
respondent.

According to petitioner, as president of MTI, she applied for a loan from FEBTC in the amount of
10.5 million USD to finance the acquisition of a feeder vessel. FEBTC sent her various loan
documents. Petitioner was advised by respondent Palma that FEBTC could only grant MTI a loan
in the amount of 10 million USD because of a lower valuation of the vessel. Hence, petitioner
reapplied for a loan in the amount of 10 million USD for this reduced amount and signed a second
set of loan documents. Petitioner noticed that respondent Palma was imposing additional
obligations not originally contemplated. Respondent Palma insisted that petitioner was personally
liable under the first Comprehensive Surety Agreement covering the 10.5 million USD despite the
fact that all the documents were torn and abandoned. She was then compelled to disburse an
amount of 5.9 million pesos to protect her reputation.

On the other hand, respondent Palma averred that MTI had applied for a loan from FEBTC in the
amount of 11 million USD. Respondent maintains that FEBTC considered the immediate release
of the proceeds of the loan provided that the petitioner together with Lorenzo Jr. would execute
personal undertakings as sureties for the loan of the MTI. To secure the immediate release of the
proceeds of the loan, petitioner and Lorenzo Jr. agreed to this condition and consequently
executed a Comprehensive Surety Agreement as security for the release of the loan to MTI.
Respondent alleged that the institution of the criminal complaint was merely a ploy resorted to by
petitioner to question the due execution of the Comprehensive Surety Agreement to evade her
personal liability for MTI’s loan.

ISSUE:
Whether or not there exist two sets of loan documents that show respondents’ ruse to deceive
petitioner, thereby ignoring unmistakable evidence which abrogate petitioner’s property rights.
RULING:
NO. Considering that the loan of 10 million USD was approved and released to petitioner prior to
the execution of the second set of documents, it is more sensible to believe that the bank
approved the loan upon her personal guarantee and execution of the first Comprehensive Surety
Agreement. Any intent to deceive through concealment was also negated when FEBTC is willing
to present the documents pertaining to the loan upon the request of petitioner.

The existence of two (2) documents is irrelevant in this case as the original intention of the parties
is evident that petitioner and Lorenzo Jr. in their personal capacities are co-sureties of MTI’s loan.
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 be absurd to conclude that
petitioner signed the Comprehensive Surety Agreement in her capacity as president of MTI
considered that the principle behind suretyship will be negated.

The Supreme Court stated that the borrower cannot at the same time be a guarantor/ surety to
assure the fulfillment of its own loan application. The Comprehensive Surety Agreement is a
continuing guarantee that petitioner bound herself to the contract “until the full and due payment
and performance of all the obligations of the borrower”. In conclusion, there was only one load
transaction, and FEBTC does not intend to collect from both loan documents

The type of this contract is called an unsecured transaction or contracts of personal security
wherein the fulfillment of which by the principal debtor is secured or supported only by a promise
to pay or the personal commitment of another such as a guarantor or surety.
 PHILIPPINE EXPORT v. EUSEBIO CONSTRUCTION

2004

FACTS: State Organization of Buildings (SOB) of Iraq awarded the construction of the
Institute of physical Therapy-Medical Rehabilitation Center in Iraq to Ayjal Trading and
Contracting Company. 3-Plex International, Inc., a local contractor engaged in the
construction business, entered into a joint
venture agreement with Ayjal where the former would undertook the execution of the
entire project, while Ayjal would be entitled to 4% commission. Since 3-Plex was not
accredited by the Phil. Overseas Construction Board (POCB), it assigned and
transferred all its rights to V.P. Eusebio Const. Inc (VPECI). The SOB then required the
submission of a performance bond. To comply with this requirement, 3-Plex and VPECI
applied for a guarantee with Philguarantee, a government financial institution
empowered to issue guarantee for qualified Filipino contractors.
VPECI and the Ayjal Trading and Contracting Co. (joint venture) entered into a service
contract with the SOB for the construction of the Institute of Physical Therapy Medical
Center Phase 2 to be completed within a period of 18 months. Under the contract, the
joint venture would supply manpower and materials, and SOB would refund to the
former 25% of the project cost in Iraqi Dinar.

The construction delayed in commencing due to some setbacks and difficulties. Upon
foreseeing the impossibility of meeting the deadline, the joint venture contractor worked
for the renewal of the Performance Bond up to December 1986. As of March 1986, the
status of the Project was 51% accomplished, meaning the structures were already
finished. The remaining 47% consisted in electro-mechanical works and the 2%,
sanitary works, which both required importation of equipment and materials.
On October 1986, Al Ahli Bank of Kuwait Sent a telex to Philguarantee demanding full
payment of its performance counter-guarantee.

Philguarantee received another telex from Al Ahli stating that it already paid to Rafidian
Bank. The Central Bank then authorized the remittance to Al Ahli Bank representing the
full payment of the performance counter-guarantee for VPECI’s project. Philguarantee
then sent letters to VPECI
demanding the full payment of the amount it paid pursuant to Al Ahli pursuant to their
joint and solidary obligation under the deed of undertaking and surety bond. VPECI
failed to pay prompting Philguarantee to file the case.

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

ISSUE: WON the agreement of the parties is that of suretyship.

HELD: No. By guaranty a person, called the guarantor, binds himself to the creditor to
fulfill the obligation of the principal debtor in case the latter should fail to do so. If a
person binds himself solidarily with the principal debtor, the contract is called suretyship.
Strictly speaking, guaranty and surety are nearly related, and many of the principles are
common to both. In both contracts, there is a promise to answer for the debt or default
of another. However, in this jurisdiction, they may be distinguished thus:
1. A surety is usually bound with his principal by the same instrument executed at
the same time and on the same consideration. On the other hand, the contract of
guaranty is the guarantor's own separate undertaking often supported by a
consideration separate from that supporting the contract of the principal; the
original contract of his principal is not his contract.
2. A surety assumes liability as a regular party to the undertaking; while the
liability of a guarantor is conditional depending on the failure of the primary
debtor to pay the obligation.
3. The obligation of a surety is primary, while that of a guarantor is secondary.
4. A surety is an original promissor and debtor from the beginning, while a
guarantor is charged on his own undertaking.
5. A surety is, ordinarily, held to know every default of his principal; whereas a
guarantor is not bound to take notice of the non-performance of his principal.
6. Usually, a surety will not be discharged either by the mere indulgence of the
creditor to the principal or by want of notice of the default of the principal, no
matter how much he may be injured thereby. A guarantor is often discharged by
the mere indulgence of the creditor to the principal, and is usually not liable
unless notified of the default of the principal.
Guided by the abovementioned distinctions between a surety and a guaranty, as well as
the factual milieu of this case, the Court found that the Court of Appeals and the trial
court were correct in ruling that the petitioner is a guarantor and not a surety. That the
guarantee issued by the petitioner is unconditional and irrevocable does not make the
petitioner a surety. As a guaranty, it is still characterized by its subsidiary and
conditional quality because it does not take effect until the fulfillment of the condition,
namely, that the principal obligor should fail in his obligation at the time and in the form
he bound himself. In other words, an unconditional guarantee is still subject to the
condition that the principal debtor should default in his obligation first before resort to
the guarantor could be had. A conditional guaranty, as opposed to an unconditional
guaranty, is one which depends upon some extraneous event, beyond the mere default
of the principal, and generally upon notice of the principal's default and reasonable
diligence in exhausting proper remedies against the principal.
It appearing that Letter of Guarantee No. 81-194-F merely stated that in the event of
default by respondent VPECI the petitioner shall pay, the obligation assumed by the
petitioner was simply that of an unconditional guaranty, not conditional guaranty. But as
earlier ruled the fact that petitioner's guaranty is unconditional does not make it a surety.
Besides, surety is never presumed. A party should not be considered a surety where
the contract itself stipulates that he is acting only as a guarantor. It is only when the
guarantor binds himself solidarily with the principal debtor that the contract becomes
one of suretyship.
 Diamond Builders Conglomeration v. Country Bankers
G.R. No. 171820; December 13, 2007

FACTS: Marceliano Borja filed a petition in RTC against Rogelio S. Acidre (Rogelio) for the latter’s breach
of his obligation to construct a residential and commercial building. Rogelio is the sole proprietor of
petitioner Diamond Builders Conglomeration (DBC). To end the litigation, the parties entered into a
Compromise Agreement. The RTC Caloocan approved the Compromise Agreement and rendered a
Decision in accordance with the terms and conditions contained therein. The Compromise Agreement
provides that [Petitioner Rogelio] admits full payment of plaintiff to him the amount of P1,530,000.00
leaving the balance of P570,000.00 of the contractual price of P2,100,000.00 for the construction of the
buildings. P370,000.00 shall be paid on the 5th day from approval of this compromise agreement by the
Court and also the start of the 75 days for [petitioner Rogelio] to complete the construction of the building.
The remaining 200k shall be paid out when the building is fully constructed. However, in the event
[petitioner Rogelio] shall fail to fully complete the construction of the building within 75 days he shall not
be entitled to any further payments and the performance of a surety bond shall be fully implemented by
way of penalizing [petitioner Rogelio] and/or as award for damages in favor of plaintiff. That any violation
and/or avoidance of the terms and conditions of this Compromise Agreement by either of the parties
herein shall forthwith entitle the aggrieved party to an immediate execution hereof.
DBC obtained a Surety Bond from Country Bankers in favor of the spouses Borja. In this regard, Rogelio
and his spouse, petitioner Teresita P. Acidre, together with DBC employees Grace C. Osias, Violeta S. Faiyaz
and Emma S. Cutillar (the other petitioners herein), signed an Indemnity Agreement consenting to their
joint and several liability to Country Bankers should the surety bond be executed upon. On April 23, 1992,
Country Bankers received a Motion for Execution of the surety bond filed by Borja with the RTC Caloocan
e Agreement. Rogelio then filed an Urgent Omnibus
Motion to suspend the Writ of Execution, it was not immediately acted upon and so DBP was constrained
to pay the amount of the surety bond.
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. In addition, upon the dismissal of their petition in CA, petitioners
wrote Country Bankers and informed the latter that the voluntary payment of the bond effectively
prevented them from contesting the validity of the issuance of the Writ of Execution.
As a result, Country Bankers filed a complaint for sum of money against the petitioners which the RTC
Manila dismissed. 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 is validly issued. Hence this appeal.

ISSUE: Whether petitioners should indemnify Country Bankers for the payment of the surety bond.

HELD: YES. 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.
Article 2047 of the Civil Code specifically calls for the application of the provisions on solidary obligations
to suretyship contracts. In particular, 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).
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. 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 codebtor.
More importantly, the Indemnity Agreement signed by Rogelio and the other petitioners explicitly
provided for an incontestability clause on payments made by Country Bankers.
In case [Country Bankers] shall have paid, settled or compromised any liability, loss, costs, damages,
attorney’s fees, expenses, claims, demands, suits, or judgments as above-stated, arising out of or in
connection with said bond, an itemized statement thereof, signed by an officer of [Country Bankers] and
other evidence to show said payment, settlement or compromise, shall be prima facie evidence of said
payment, settlement or compromise, as well as the liability of [petitioners] in any and all suits and claims
against [petitioners] arising out of said bond or this bond application. Ineluctably, petitioners are obligated
to reimburse Country Bankers the amount of ₱370,000.00.

Finally, petitioners desperately attempt to inveigle out of this burden, which is of their own making, by
imputing a lack of initiative on Country Banker’s part to intervene in the execution proceedings before the
RTC. This contention, as with the rest of petitioners’ arguments, deserves scant consideration. Suffice it
to state that Country Bankers is a surety of the obligation with a penal clause, constituted in the
compromise judgment; it is not a joint and solidary co-debtor of Rogelio. In the recent case of Escaňo v.
Ortigas,39 we elucidated on the distinction between a surety as a co-debtor under a suretyship agreement
and a joint and solidary co-debtor, thus:

(A)s indicated by Article 2047, a suretyship requires a principal debtor to whom the surety is solidarily
bound by way of an ancillary obligation of segregate identity from the obligation between the principal
debtor and the creditor. The suretyship does not bind the surety to the creditor, inasmuch as the latter is
vested with the right to proceed against the former to collect the credit in lieu of proceeding against the
principal debtor for the same obligation. At the same time, there is also a legal tie created between the
surety and the principal debtor to which the creditor is not privy or party to. The moment the surety fully
answers to the creditor for the obligation created by the principal debtor, such obligation is extinguished.
At the same time, the surety may seek reimbursement from the principal debtor for the amount paid, for
the surety does in fact "become subrogated to all the rights and remedies of the creditor."

Note: A compromise judgment is a decision rendered by a court sanctioning the agreement between the parties
concerning the determination of the controversy at hand. Essentially, it is a contract, stamped with judicial
imprimatur, between two or more persons, who, for preventing or putting an end to a lawsuit, adjust their difficulties
by mutual consent in the manner which they agree on, and which each of them prefers in the hope of gaining,
balanced by the danger of losing.22 Upon court approval of a compromise agreement, it transcends its identity as a
mere contract binding only upon the parties thereto, as it becomes a judgment that is subject to execution in
accordance with Rule 39 of the Rules of Court.2 Ordinarily, a judgment based on compromise is not appealable.
 MARIANO LIM, Petitioner, vs. SECURITY BANK CORPORATION,* Respondent
G.R. No. 188539 March 12, 2014

DOCTRINE: By executing a continuing suretyship, 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.

FACTS: Petitioner executed a Continuing Suretyship in favor of respondent to secure "any and all types of
credit accommodation that may be granted by the bank hereinto and hereinafter" in favor of Raul Arroyo
for the amount of ₱2,000,000.00 which is covered by a Credit Agreement/Promissory Note. Said
promissory note stated that the interest on the loan shall be 19% per annum, compounded monthly, for
the first 30 days from the date thereof, and if the note is not fully paid when due, an additional penalty of
2% per month of the total outstanding principal and interest due and unpaid, shall be imposed.

In turn, the Continuing Suretyship executed by petitioner stipulated that:

3. Liability of the Surety. - The liability of the Surety 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 (at stated
maturity or by acceleration), 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.

The debtor, Raul Arroyo, defaulted on his loan obligation. Thereafter, petitioner received a Notice of Final
Demand dated August 2, 2001, informing him that he was liable to pay the loan obtained by Raul and
Edwina Arroyo, including the interests and penalty fees amounting to ₱7,703,185.54, and demanding
payment thereof. For failure of petitioner to comply with said demand, respondent filed a complaint for
collection of sum of money against him and the Arroyo spouses. Since the Arroyo spouses can no longer
be located, summons was not served on them, hence, only petitioner actively participated in the case.

After trial, the Regional Trial Court of Davao (RTC) rendered judgment against petitioner. The CA affirmed
the RTC’s judgement.

ISSUE: WON petitioner may validly be held liable for the principal debtor's loan obtained six months after
the execution of the Continuing Suretyship.

HELD: YES. A contract of suretyship is an agreement whereby a party, called the surety, guarantees the
performance by another party, called the principal or obligor, of an obligation or undertaking in favor of
another party, called the obligee. Although the contract of a 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.

This was explained in the case of Stronghold Insurance Company, Inc. v. Republic-Asahi Glass Corporation,
where it was written:

The surety's obligation is not an original and direct one for the performance of his own
act, but merely accessory or collateral to the obligation contracted by the principal. Nevertheless,
although the contract of a surety is in essence secondary only to a valid principal obligation, his
 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.

Thus, suretyship arises upon the solidary binding of a person deemed the surety with the
principal debtor for the purpose of fulfilling 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. x x x.

In this case, what petitioner executed was a Continuing Suretyship. A bank or financing company which
anticipates entering into a series of credit transactions with a particular company, normally requires the
projected principal debtor to execute a continuing surety agreement along with its sureties. By executing
such an agreement, the principal places itself in a position to enter into the projected series of transactions
with its creditor; with such suretyship agreement, there would be no need to execute a separate surety
contract or bond for each financing or credit accommodation extended to the principal debtor.

The terms of the Continuing Suretyship executed by petitioner, quoted earlier, are very clear. It states
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,
including increases, renewals, roll-overs, extensions, restructurings, amendments or novations thereof,
as well as

i. all obligations of the Debtor presently or hereafter owing to the Bank, as appears in the
accounts, books and records of the Bank, whether direct or indirect, and
ii. any and all expenses which the Bank may incur in enforcing any of its rights, powers and
remedies under the Credit Instruments as defined hereinbelow."15 Such stipulations are
valid and legal and constitute the law between the parties

Thus, petitioner is unequivocally bound by the terms of the Continuing Suretyship. There can be no cavil
then that 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.

WHEREFORE, the petition is PARTIALLY GRANTED. The Decision of the Court of Appeals, dated July 30,
2008, in CA-G.R. CV No. 00462, is AFFIRMED with MODIFICATION in that the award of attorney's fees is
reduced to ten percent (10%) of the principal debt only.

SO ORDERED.
GILAT SATELLITE NETWORKS, LTD. VS UNITED COCONUT PLANTERS BANK
GENERAL INSURANCE CO., INC.
G.R. No. 189563
April 07, 2014

FACTS:

On Sept 15 1999, One Virtual placed a purchase order with petitioner (Gilat) for various
telecommunications equipment amounting to US$ 2,128,250.00. One Virtual promised to pay
a portion amounting to US$ 1.2 Million and to ensure prompt payment it obtained
respondent’s (UPCB) surety bond in favor of Gilat.

During period of 1999 to 2000, Gilat shipped and delivered to One Virtual the equipments
evidenced by airway bill of lading and all were duly received by One Virtual. However, One
Virtual failed to pay the amount of US$400,000.00 on the due date prompting Gilat to write
a demand letter to UPCB for the payment of the said amount being the surety but there was
no payment made by either One Virtual or UPCB. Also, the succeeding installments were not
paid which resulted to a second demand letter for the full amount of US$1.2 Million under the
surety bond which was not settled by UPCB resulting to the filing of the complaint.

RTC ruled in favor of the petitioner and ordered the payment of US$1.2 Million with “Legal
Interest” for the reason due to the failure of the respondent being the surety to pay or settle
the agreed surety bond even after the delivery and installation made by Gilat for One Virtual
who failed to pay the agreed payments. Respondent’s contends the legal interest

CA dismissed the appeal and vacated the decision and ruled that in enforcing a contract,
“complementary-contracts-construed-together” doctrine should be applied which states that
accessory contracts must be construed with the principal contract. The Purchase Agreement
being the principal contract, its stipulation would be binding upon the parties of suretyship
and the based on the arbitration clause contained in the Purchase Agreement, the trial court’s
decision is vacated and petitioner and One Virtual were to proceed to arbitration.

ISSUE:

Whether or not CA erred in dismissing the case and ordering petitioner and One Virtual to
arbitrate?

Whether or not petitioner is entitled to legal interest due to delay of fulfillment by respondent
of its obligation under Suretyship Agreement?

HELD:

Yes. Despite the suretyship agreement being ancillary contract, which follows the principal
contract and being a secondary contract, such liability to the creditor is direct, primary and
absolute, in other words, a surety is directly and equally bound with the principal. Respondent
cannot invoke in its favor the arbitration clause in the Purchase Agreement because it is not
a party to the contract, arbitration clause being contractual in nature is only binding upon the
parties thereto as well as its assigns and heirs

Yes. Article 2209 of the Civil Code is clear that if an obligation consists in the payment of sum
of money, and debtor incurs a delay, the indemnity for damages, there being no stipulation
to the contrary, shall be the payment of the interest agreed upon, and in the absence of
stipulation, the legal interest.
 PACIONARIA C. BAYLON vs. CA & LEONILA TOMACRUZ
G.R. No. 109941 | August 17, 1999 | GONZAGA-REYES, J.

DOCTRINE: 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.

FACTS: Pacionaria C. Baylon introduced private respondent Leonila Tomacruz, the co-manager of her husband
at PLDT, to Rosita B. Luanzon. Petitioner told Tomaceuz that Luanzon has been engaged in business as a
contractor for 20 yrs and she invited private respondent to lend Luanzon money at a monthly interest rate of
(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 P150k. Luanzon issued and signed a promissory note acknowledging receipt of the P150k 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."

Private respondent made a written demand upon petitioner for payment, which petitioner did not heed. Thus,
on, private respondent filed a case for the collection of a sum of money with the (RTC) against Luanzon and
petitioner herein, impleading Mariano Baylon, husband of petitioner. 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 loan, but rather as an
investment in Art Enterprises and Construction, Inc. 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.

The lower court ruled in favor of private respondent. On appeal, the trial court's decision was affirmed by the
CA. Hence, this present case.

ISSUE: W/N Baylon should be liable for the amount of the Promissory Note - NO

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

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

It is premature for this Court to even determine w/n 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 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 CA are SET ASIDE.
Vil-Rey Planners and Builders v. Lexber, Inc.,

G.R. No. 189401, June 15, 2016

FACTS: Vil-Rey and Lexber entered into a Construction Contract dated 17 April 1996 (first contract)
whereby the former undertook to work on the compacted backfill of the latter's 56,565-square-meter
property in Barangay Bangad, Cabanatuan City. Based on the first contract, Vil-Rey shall complete
the project in 60 days for a consideration of P5,100,000. Lexber released to Vil-Rey a mobilization
downpayment of P500,000 secured by Surety Bond G(16) No. 066915 (first surety bond) issued by
Stronghold. For its part, Vil-Rey agreed to indemnify Stronghold for whatever amount the latter
might be adjudged to pay Lexber under the surety bond.

Vil-Rey and Lexber mutually terminated the first contract and entered into a Construction
Contract dated 1 July 1996 (second contract) to cover the remaining works, but under revised terms
and conditions. The contract amount was P2,988,700.20, and the scope of work was required to be
completed in 60 days.

On 23 December 1996, Vil-Rey and Lexber executed Work Order No. CAB-96-09 (third
contract) for the completion of the remaining works by 15 January 1997. Under the third contract, a
consideration of P1,168,728.37 shall be paid on the following basis: 50% downpayment to be secured
by a surety bond in the same amount issued by Stronghold upon approval of the work order and 50%
balance upon completion of the works. Accordingly, Stronghold, issued Surety Bond G(16) No.
077258 (second surety bond) in the amount of P584,364.19 in favor of Lexber. Vil-Rey again
obligated itself to indemnify Stronghold for whatever amount the latter might be held to pay under
the surety bond.

In a letter dated 21 January 1997 addressed to Lexber, Vil-Rey requested the extension of the
contract period to 31 January 1997. Lexber granted the request for extension. However, Vil-Rey failed
to complete the works by the end of the extended period, or even after Lexber gave it another five
days to finish the works. Lexber then wrote Stronghold seeking to collect on the two surety bonds
issued in favor of the former.

When negotiations failed, Lexber filed a Complaint for sum of money and damages against
Vil-Rey and Stronghold before the Regional Trial Court of Quezon City, Branch 93 (RTC).

In its Answer (with Counterclaim), Vil-Rey denied that it was guilty of breach of contract and
insisted that it was Lexber that owed the amount of P1,960,558.40 to the former. 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 PI,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 filed its Answer alleging 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 downpayment 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. Stronghold put forward its counterclaim against Lexber
for attorney's fees, litigation expenses, and cross-claim against Vil-Rey for any and all amounts
Stronghold may be ordered to pay under the surety bonds pursuant to the indemnity agreements.

ISSUE: Whether Stronghold's liability under the second surety bond was 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.

We find no merit in the contention of Stronghold that the extensions extinguished its
obligation as a surety. We note that it also realized the importance of the completion of the works as
far as it was concerned, as shown in its letter to Vil-Rey dated 25 March 1997:

Enclosed is a copy of the letter dated February 18, 1997 we received on February 20,
1997 from Lexber, Inc., posting formal claim against our bonds at caption due to your failure
to complete your contracted project within the stipulated period.

Please take appropriate action to make good your commitment and contractual
obligations to the Obligee within five (5) days from receipt hereof and advise us on any
development you have with them on the matter for our guidance.
 Even as late as 25 March 1997, Stronghold still sought the completion of the works to the
point of giving Vil-Rey a period of five days to fulfill its commitments. Clearly, it cannot now claim
that it was prejudiced by the extensions given by Lexber, when it was prepared to give an extension
of its own just so Vil-Rey could finish the works.

Stronghold contends that the extension of time for the completion of the third contract
without its knowledge discharged it from its obligation under the second surety bond. What further
militates against this contention is the fact that it was raised for the first time in the Motion for Partial
Reconsideration of the CA Decision dated 16 April 2009. Prior to the filing of that motion by
Stronghold, its consistent argument before the RTC and even before the CA was that the second
surety bond guaranteed only the materials and the workmanship utilized by Vil-Rey; and that the
absence of any complaint from Lexber in this regard discharged Stronghold.

We have ruled that issues, grounds, points of law, or theories not brought to the attention of
the trial courts cannot be passed upon by reviewing courts. Thus, when a party deliberately adopts a
certain theory, which becomes the basis for the manner on which the case is tried and decided, the
party will not be permitted to change that theory on appeal; otherwise, it would be unfair to the
adverse party.

At any rate, as surety, Stronghold has the right to be indemnified for whatever it may be
ordered to pay Lexber. This right is provided in the law and not merely based on the indemnity
agreement Stronghold executed with Vil-Rey.
BA FINANCE CORP. v. COURT OF APPEALS
GR No. 94566 July 3, 1992

FACTS: On December 17, 1980, Renato Gaytano 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 in 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 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.

Petitioner contends that the letter guaranty is ultra vires, and therefore unenforceable; that said letter-
guaranty was issued by an employee of petitioner corporation beyond the scope of his authority since the
petitioner itself is not even empowered by its articles of incorporation and by-laws to issue guaranties.
Petitioner also submits that it is not guilty of estoppel to make it liable under the letter-guaranty because
petitioner had no knowledge or notice of such letter-guaranty; that the allegation of Philip Wong, credit
administrator, that there was an audit was not supported by evidence of any audit report or record of such
transaction in the office files.

ISSUE: Whether or not petitioner BA Finance Corp. is jointly and severally liable

HELD: NO. Persons dealing with an assumed agent, whether the assumed agency be a general or special
one is bound at their peril, if they would hold the principal liable, to ascertain not only the fact of agency but
also the nature and extent of authority, and in case either is controverted, the burden of proof is upon them
to establish it.

The burden is on respondent bank to satisfactorily prove that the credit administrator with whom they
transacted acted within the authority given to him by his principal, petitioner corporation. The only evidence
presented by respondent bank was the testimony of Philip Wong, credit administrator, who testified that he
had authority to issue guarantees as can be deduced from the wording of the memorandum given to him
by petitioner corporation on his lending authority. Although Wong was clearly authorized to approve loans
even up to P350,000.00 without any security requirement, which is far above the amount subject of the
guaranty in the amount of P60,000.00, nothing in the said memorandum expressly vests on the credit
administrator power to issue guarantees.

The Supreme Court also did not agree with respondent's contention that the phrase "contingent
commitment" set forth in the memorandum means guarantees. It has been held that a power of attorney or
authority of an agent should not be inferred from the use of vague or general words. Guaranty is not
presumed; it must be expressed and cannot be extended beyond its specified limits. Wong's testimony that
he had entered into similar transactions of guaranty in the past for and in behalf of the petitioner, lacks
credence due to his failure to show documents or records of the alleged past transactions. The actuation
of Wong in claiming and testifying that he has the authority is understandable. He would naturally take steps
to save himself from personal liability for damages to respondent bank considering that he had exceeded
his authority. The rule is clear that an agent who exceeds his authority is personally liable for damages.

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.
Philippine National Bank v. Luzon Surety Co., 68 SCRA 207 (1975)
DOCTRINE: A bonding company engaged in the business of furnishing guarantees, for a consideration, is
not entitled to a rule of strictissimi juris or a strained and over-strict interpretation of its undertaking. The
presumption indulged in by the law in favor of guarantors was premised on the fact that guarantees were
originally gratuitous obligations, which is not true at present, at least in the great majority of cases.

FACTS: Prior to 1951, Augusto Villarosa, a sugar planter adhered to the Lopez Sugar Central Milling
Company, Inc. applied for crop loan with petitioner Philippine National Bank (PNB) which later approved
in the amount of P32, 400. To guarantee said crop-loan, Villarosa, as principal, and respondent Luzon
Surety, as surety, executed a P10,000-bond in favor of said bank. Later Villarosa executed a chattel
mortgage in favor of PNB in consideration of periodical sums of money received by him. The chattel
mortgage stipulated that the "mortgagee may increase or decrease the amount of the loan as well as the
installments as it may deem convenient," and that "in the event the loan is increased such increase shall
likewise be secured by Mortgage." The bond executed by Luzon Surety undertook to "comply with all the
terms and conditions stipulated in said crop loan contract," the same being incorporated in the bond as
essential part thereof. The credit line of P32,400 was later increased, so that as of Sept, 1953, there was
a balance of P63,222.75. For failure of Villarosa to pay the obligation, PNB sued him and his sureties,
including the Luzon Surety.

The trial court adjudged in favor of the PNB. On appeal, Court of Appeals (CA) however, reversed it by,
absolving respondent of its liability to said petitioner on the ground that PNB's evidence did not establish
a cause of action, since the bond made references to a crop loan contract executed in February, 1952, and
therefore the chattel mortgage dated March 6, 1962 could not have been the obligation guaranteed by
the surety bond; and that there had been material alterations in the principal obligation, if any,
guaranteed by it. Hence, this petition.

ISSUE: Whether or not respondent CA justified in absolving Luzon Surety Co. Inc. from liability to PNB.

RULING: NO. The Supreme Court reversed the appealed judgment and held that CA erred in not
considering the unrebutted testimony of PNB's witness that the chattel mortgage was the only contract
executed by Villarosa evidencing the crop loan and upon which Luzon Surety agreed to assume liability up
to the amount of P10,000. And as to the alteration, the Court held that the defense is untenable because
as a surety, said bonding company is charged as an original promissor and is an insurer of debt, and that
the increases were made with the full consent of Luzon Surety.

Where the surety bond executed between the creditor on one hand and the debtor and the bonding
company of the other stipulated that the debtor and the bonding company "are held and firmly bound
unto" the creditor "in the sum of ten Thousand Pesos (P10,000)" for payment of which sum, well and truly
to be made, we bind ourselves, our heirs, executors, administrators, successors, and assigns jointly and
severally, firmly," to comply with all the terms and conditions stipulated in said crop loan contract which
are hereby incorporated as essential part hereof" the liability of the bonding company to the creditor is
not merely as a guarantor but as surety — liable as a regular party to the undertaking.

A bonding company engaged in the business of furnishing guarantees, for a consideration, is not entitled
to a rule of strictissimi juris or a strained and over-strict interpretation of its undertaking. The presumption
indulged in by the law in favor of guarantors was premised on the fact that guarantees were originally
gratuitous obligations, which is not true at present, at least in the great majority of cases.
As a surety, a bonding company is charged as an original promissor and is an insurer of the debt. While it
is an accepted rule in our jurisdiction that an alteration of the contract is a ground for release, this
alteration must be material. Alterations in the form of increases in the credit line made with the full
consent of the bonding company cannot be the basis of the company's claim for release.

The next question to take up is the liability of Luzon Surety Co. for interest which, it contends, would
increase its liability to more than P10,000 which is the maximum of its bond. We cannot agree to this
reasoning.

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 in the principal obligation. The increased liability is not because of the contract but
because of the default and the necessity of judicial collection. The interest however, runs from the time
the complaint is filed, not from the time the debt becomes due and demandable.

PREMISES CONSIDERED, judgment appealed from is reversed and set aside. In lieu thereof another is
rendered reinstating the judgment of CFI, holding Luzon Surety liable for P10,000 with the modification
that interest thereon shall be computed at the legal rate from June 8, 1960 when the complaint was filed.
 BENJAMIN BITANGA v. . PYRAMID CONSTRUCTION
ENGINEERING CORPORATION
G.R. NO. 173526
August 28, 2008

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. 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.

FACTS: Respondent entered into an agreement with Macrogen Realty, petitioner is the President, to construct for the latter
the Shoppers Gold Building. Respondent commenced works on the construction project . However, Macrogen Realty failed
to settle respondent's progress billings. Petitioner, assured respondent that the outstanding account of Macrogen Realty
would be paid, and requested respondent to continue working on the construction project.

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. Respondent instituted with the CIAC a case for
arbitration against Macrogen Realty seeking payment by the latter of its unpaid billings and project costs. Petitioner then
conveyed to respondent his purported willingness to amicably settle the arbitration case.

respondent and Macrogen Realty entered into a Compromise Agreement.,under the Compromise Agreement, Macrogen
Realty agreed to pay respondent the total amount of 6million in 6 equal monthly installments. Macrogen Realty also agreed
that if it would default in the payment of two successive monthly installments, immediate execution could issue against it
for the unpaid balance, without need of judgment or decree from any court or tribunal. Petitioner guaranteed the
obligations 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 .

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 Realty, which CIAC granted. the sheriff filed a
return stating that he was unable to locate any property of Macrogen Realty, except its bank deposit of P20,242.33, with the
Planters Bank.

Petitioner averred therein that he never made representations to respondent that Macrogen Realty would faithfully comply
with its obligations under the Compromise Agreement. He did not offer to guarantee the obligations of Macrogen Realty to
entice respondent to enter into the Compromise Agreement but that, on the contrary, it was respondent that required
Macrogen Realty to offer some form of security for its obligations before agreeing to the compromise.

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 petitioner, respondent failed to exhaust all legal remedies to collect from Macrogen
Realty the amount due, considering that Macrogen Realty still had uncollected credits which were more than enough to pay
for the same. Given these premise, petitioner could not be held liable as guarantor.

According to respondent, it had already exhausted all legal remedies to collect from Macrogen Realty, but its efforts proved
unsuccessful. Given that the inability of Macrogen Realty as debtor to pay the amount of its debt was already proven by the
return of the writ of execution to CIAC unsatisfied, the liability of petitioner as guarantor already arose. 16 In any event,
petitioner and Marilyn (petitioner’s wife) were deemed to have forfeited their right to avail themselves of the benefit of
excussion because they failed to comply with Article 2060 of the Civil Code when petitioner ignored respondent's demand
letter for payment of the amount he guaranteed. The duty to collect the supposed receivables of Macrogen Realty from its
creditors could not be imposed on respondent, since petitioner and Marilyn never informed respondent about such
uncollected credits even after receipt of the demand letter for payment.

Peitioner averred that he never received the respondent's demand letter dated 3 January 2001, as Ms. Dette Ramos, the
person who received it, was not an employee of Macrogen Realty nor was she authorized to receive the letter on his behalf.
As a guarantor, petitioner could resort to the benefit of excussion at any time before judgment was rendered against him.
Petitioner reiterated that Macrogen Realty had uncollected credits which were more than sufficient to satisfy the claim of
respondent.
ISSUE: Whether or not petitioner can avail of the benefits of excussion.

RULING: No. 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.

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.38

The afore-quoted provision imposes a condition for the invocation of the defense of excussion,it 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.39

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

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

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

Art. 2059. This excussion shall not take place:

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

As the Court of Appeals correctly ruled: We find untenable the claim that the [herein petitioner] Benjamin Bitanga cannot
be compelled to pay Pyramid because the Macrogen Realty has allegedly sufficient assets. Reason: The said [petitioner] had
not genuinely controverted the return made by Sheriff Joseph F. Bisnar, who affirmed that, after exerting diligent efforts,
he was not able to locate any property belonging to the Macrogen Realty, except for a bank deposit with the Planter's Bank
at Buendia, in the amount of P20,242.23. It is axiomatic that the liability of the guarantor arises when the insolvency or
inability of the debtor to pay the amount of debt is proven by the return of the writ of execution that had not been
unsatisfied.40
 PRUDENTIAL BANK vs. INTERMEDIATE APPELLATE COURT
G.R. No. 74886; December 8, 1992
Facts:
On August 8, 1962, private respondent Philippine Rayon Mills, Inc. entered into a contract with
Nissho Co., Ltd. of Japan for the importation of textile machineries under a five-year deferred
payment plan. To effect payment for said machineries, the defendant-appellant applied for a
commercial letter of credit with the Prudential Bank and Trust Company in favor of Nissho. By virtue
of the application petitioner opened a Letter of Credit for $128,548.78.
Against this letter of credit, drafts were drawn and issued by Nissho, which were all paid by the
Prudential Bank through its correspondent in Japan, the Bank of Tokyo, Ltd. As indicated on their
faces, two of these drafts accepted by the private respondent through its president, Anacleto R. Chi,
while the others were not.
Upon the arrival of the machineries, the Prudential Bank indorsed the shipping documents to the
private respondent which accepted delivery of the same. To enable the respondent to take delivery
of the machineries, it executed, by prior arrangement with the Prudential Bank, a trust receipt which
was signed by Anacleto R. Chi in his capacity as President of the respondent company.
At the back of the trust receipt is a printed form to be accomplished by two sureties who, by the very
terms and conditions thereof, were to be jointly and severally liable to the Prudential Bank should
the defendant-appellant fail to pay the total amount or any portion of the drafts issued by Nissho and
paid for by Prudential Bank. The defendant-appellant was able to take delivery of the textile
machineries and installed the same at its factory site at 69 Obudan Street, Quezon City.
Sometime in 1967, the respondent company ceased its business operation. On December 29, 1969,
the factory was leased by Yupangco Cotton Mills. The lease was renewed on January 3, 1973. On
January 5, 1974, all the textile machineries in the factory were sold to AIC Development Corporation.
The obligation of the defendant-appellant arising from the letter of credit and the trust receipt
remained unpaid and unliquidated. Petitioner issued multiple formal demands for the payment of
the said trust receipt but yielded no result. Hence, an action for the collection of the principal amount
of P956,384.95 was filed on October 3, 1974 against the defendant-appellant and Anacleto R. Chi.
In their respective answers, the defendants interposed identical special defenses, viz., the complaint
states no cause of action; if there is, the same has prescribed; and the plaintiff is guilty of laches.
The Trial Court ruled that only the accepted drafts amounting to P 153,645.22 was demandable; there
was no cause of action for the remaining drafts since they were not accepted. The case against Chi
was also dismissed. The IAC affirmed the decision of the Trial Court.
Issue:
W/N private respondent Chi is solidarily liable with Philippine Rayon Mills, Inc.
Ruling:
No. The Supreme Court ruled that private respondent Chi was not solidarily liable with Philippine
Rayon Mills, Inc.; his liability was in the nature of a guarantor. Under Article 2058 of the Civil Code, a
guarantor may set up the defense of excussion (exhaustion of all legal remedies against, or the
exhaustion of the properties of the principal debtor) before he may be made liable for the obligation.
In the case at bar, the Court ruled that despite Chi’s signing of the solidary liability clause with a
waiver of the exhaustion of properties/legal remedies, his obligation was nevertheless only that of a
guarantor as there were various formal issues in the contract that the Court pointed out such as the
space for the party whose property may not be exhausted was not filled up and that there was only
one guarantor who signed the supposedly joint and several contract. The Court, stating that such
contract was a contract of adhesion, interpreted the same in favor of Chi.
The Court, however, reversed the ruling of the public respondent with regards to the dismissal of the
case against Chi. The Court ruled that excussion is not a sine qua non requirement for the institution
of an action against a guarantor. Thus, Chi is still liable as a guarantor if Philippine Rayon Mills, Inc.
fails to satisfy the obligation.

Notes:
Letter of credit – a letter of credit is defined as an engagement by a bank or other person made at the
request of a customer that the issuer will honor drafts or other demands for payment upon
compliance with the conditions specified in the credit. Through a letter of credit, the bank merely
substitutes its own promise to pay for one of its customers who in return promises to pay the bank
the amount of funds mentioned in the letter of credit plus credit or commitment fees mutually agreed
upon.
Sight draft – the Court ruled that the drafts issued by petitioner were sight drafts. Sight drafts do not
need presentment for acceptance in order to render any party to the bill liable. (See sec. 143 of the
NIL)
13. Philippine National Bank v. Court of Appeals (1978)

Doctrine: Considering that all the accounts of Rita Gueco Tapnio with the Bank were secured by
chattel mortgage on standing crops, assignment of leasehold rights and interests on her properties,
and surety bonds and that she had apparently "the means to pay her obligation to the Bank, as
shown by the fact that she has been granted several sugar crop loans of the total value of almost
P80,000.00 for the agricultural years from 1952 to 1956", there was no reasonable basis for the
Board of Directors of petitioner to have rejected the lease agreement because of a measly sum of
P200.00.

Facts: Plaintiff executed its bondwith Rita Gueco Tapnio (Tapnio) as principal, in favor of the PNB, to
guarantee the payment of Tapnio’s obligation to PNB amounting to Php2, 371 plus 12%. Through an
indemnity agreement, Philamgen paid the said amount to PNB and seek indemnity from Tapnio.
Tapnio refused to pay alleging that he was not liable to the bank because due to negligence of the
latter, the contract of lease with Tuazon was rescind which amounts to Php2,800.

Tapnio mortgage his standing crops and sugar quota to PNB. Tapnio agreed to leased the sugar
quota, in excess of his need to Tuazon which was approved by the branch and vice president of PNB
in the amount of Php2.80/picul. However, the bank’s board of directors disapproved the lease,
stating that the amount should be Php3.00/picul, its market value. Tuazon ask for reconsideration
to the board which was not acted by the board, so the lease was not consummated resulting to the
loss of P2,800, which could have been earned by Tapnio.

Issue: Whether or not PNB is liable for the damage

Ruling: Yes. While petitioner had the ultimate authority of approving or disapproving the proposed
lease since the quota was mortgaged to the Bank, the latter certainly cannot escape its
responsibility of observing, for the protection of the interest of private respondents, that degree of
care, precaution and vigilance which the circumstances justly demand in approving or disapproving
the lease of said sugar quota. The law makes it imperative that every person "must in the exercise
of his rights and in the performance of his duties, act with justice, give everyone his due, and
observe honesty and good faith." This petitioner failed to do. Certainly, it knew that the agricultural
year was about to expire, that by its disapproval of the lease private respondents would be unable
to utilize the sugar quota in question. In failing to observe the reasonable degree of care and
vigilance which the surrounding circumstances reasonably impose, petitioner is consequently liable
for the damages caused on private respondents.

A corporation is civilly liable in the same manner as natural persons for torts, because "generally
speaking, the rules governing the liability of a principal or master for a tort committed by an agent
or servant are the same whether the principal or master be a natural person or a corporation, and
whether the servant or agent be a natural or artificial person. All of the authorities agree that a
principal or master is liable for every tort which he expressly directs or authorizes, and this is just as
true of a corporation as of a natural person. A corporation is liable, therefore, whenever a tortious
act is committed by an officer or agent under express direction or authority from the stockholders
or members acting as a body, or, generally, from the directors as the governing body."
 AUTOCORP GROUP and PETER RODRIGUEZ V INTRA STRATA ASSURANCE
CORPORATION and BUREAU OF CUSTOMS
G. R. No. 166662 ; 27 June 2008

FACTS:
Autocorp Group, represented by its President, Peter Rodriguez, secured two ordinary re-
export bonds from Intra Strata in favor of Bureau of Customs to guarantee the re-export of one
unit of Hyundai Excel and one unit of Hyundai Sonata and/or to pay the taxes and duties thereon.
In turn, Rodriguez, both acting in his personal capacity and as President of Autocorp, signed two
Indemnity Agreements in favor of Intra Strata agreeing to act as surety of the subject bonds. The
Indemnity Agreements provide for the same stipulations and one of them is that: where the
obligation involves a liquidated amount which Intra Strata may become legally liable under its
suretyship undertaking, Intra Strata may proceed against Autocorp or Rodriguez by court action
or otherwise, to enforce payment, and irrespective of whether or not payment has actually been
made by Intra Strata. In short, Intra Strata issued the bonds to guarantee compliance of Autocorp
of its obligations and Autocorp acted as surety, to indemnify Intra Strata for the liability the latter
may incur on the bonds.
Thereafter, Autocorp failed in its obligations and the Bureau of Customs considered the
two bonds forfeited but without actually forfeiting the bonds. On the other hand, Intra Strata
demanded from Autocorp the payment of the face value of the bonds plus attorney’s fees but
failed contending that Intra Strata’s demand is premature as the obligation is not yet due and
demandable. The Regional Trial Court then rendered its decision in favor of Intra Strata and/or
Bureau of Customs which was affirmed by the Court of Appeals except as to the amount of
attorney’s fees.

ISSUE:
Whether or not Autocorp’s obligation, as surety, is already due and demandable when
Intra Strata, as guarantor, did not yet pay its obligation and despite absence of actual forfeiture of
the bonds.

HELD:
The Supreme Court held in the affirmative.
Under the Indemnity Agreement signed by petitioners, where the obligation involves a
liquidated amount for the payment of which Intra Strata has become legally liable under its
suretyship undertaking or by demand of BOC, Intra Strata may proceed against Autocorp or
Rodriguez by court action or otherwise, to enforce payment, and irrespective of whether or not
payment has actually been made by Intra Strata. The said Agreement is clear that petitioners’
obligation to indemnify Intra Strata is already due and demandable as the same became such the
moment the bonds issued by Intra Strata became answerable for petitioners’ non-compliance
with its undertaking. As such, Intra Strata may proceed directly against Autocorp regardless of
whether the BOC had actually forfeited the bonds, demanded payment thereof and/or received
such payment because the acts mentioned are not necessary to enforce the obligation of
Autocorp.
 Furthermore, Art. 2071(4) of the New Civil Code provides that the guarantor, even before
having paid, may proceed against the principal debtor when the debt has become demandable, by
reason of the expiration of the period of payment. Art. 2071 of the New Civil Code may be
resorted to by the guarantor to obtain release from the guaranty, or to demand a security that shall
protect him from any proceedings by the creditor and from danger of insolvency by the debtor.
 Escano vs. Ortigas, Jr.
G.R. no. 151953. June 29, 2007. Tinga, J.

FACTS: Private Development Corporation of the Philippines (PDCP) entered into a loan
agreement with Falcon Minerals, Inc. (Falcon) whereby PDCP agreed to make available and
lend to Falcon the amount of US$320,000.00, for specific purposes and subject to certain
terms and conditions. On the very same day, Respondents Rafael Ortigas, Jr., George A.
Scholey and George T. Scholey, stockholders-officers of Falcon, executed an Assumption of
Solidary Liability whereby they agreed to assume the payment of loan in their individual
capacity, solidary liability with Falcon. Two separate guaranties for payment were also
executed by other stockholders-officers of Falcon, namely: petitioner Salvador Escaño and
the other by Mario M. Silos, Ricardo C. Silverio, Carlos L. Inductivo, and Joaquin J.
Rodriguez. Two years later, control of Falcon was ceded to Escaño, Silos, Joseph M. Matti
(Escaño group). Respondents Ortigas, Jr. and the Scholeys then assigned their share of
stocks over to Escaño group with the intent of relieving themselves of liability regarding the
loan. The 1982 Undertaking was executed wherein the Escaño group were identified sureties
while respondents Ortigas, Jr., the Scholeys, and Inductivo were obligors. Among the
stipulations contained therein are as follows: (par. 3)

a. Upon receipt by any of [the] OBLIGORS of any demand from PDCP and/or PAIC for
the payment of FALCON’s obligations with it, any of [the] OBLIGORS shall
immediately inform SURETIES thereof so that the latter can timely take
appropriate measures;

c. In the event that any of [the] OBLIGORS is for any reason made to pay any amount
to PDCP and/or PAIC, SURETIES shall reimburse OBLIGORS for said amount/s
within seven (7) calendar days from such payment;

Falcon eventually availed of the sum of US$178,655.59 from the credit line extended by
PDCP. However, Falcon defaulted in their payments, so, PDCP filed a complaint for sum of
money against Falcon, Ortigas, Escaño, Silos, Silverio and Inductivo. Ortigas entered into a
compromise agreement with PDCP wherein he paid P1,300,000 to release him from any
liability or claim arising from the Falcon loan agreement, and a renunciation of its claims
against Ortigas. After the settlement with PDCP, Ortigas pursued his claims against Escaño,
Silos and Matti, on the basis of the 1982 Undertaking.

ISSUE:
1. Whether or not the petitioners herein (Escaño and Silos) are liable to Ortigas by
virtue of the 1982 undertaking.
2. Whether or not petitioners could be held jointly and solidary liable to Ortigas.
RULING:
1. Yes. Petitioners claim that Ortigas was not “made to pay” as required by par. 3(c) but
that he voluntarily paid, so he cannot demand from petitioners (sureties)
reimbursement. But that argument does not hold water for it would mean that Ortigas
may only seek reimbursement after he delivered payment as a result of a final and
executory judgment. The clear intent of the Undertaking was for petitioners to relieve
the burden on Ortigas (obligor) as soon as possible and not only after he is subject to
a final judgment.

Petitioners also claim that Ortigas violated par. 3(a) when he made the payment
without their knowledge and consent. But SC ruled that such requirement is reasoned so that
the sureties can timely take appropriate measures presumably to settle the obligation
without having to burden the obligors. This notice requirement in paragraph 3(a) is
markedly way off from the suggestion of petitioners that Ortigas, after already having been
impleaded as a defendant in the collection suit, was obliged under the 1982 Undertaking to
notify them before settling with PDCP.

2. No. Ortigas’ argues that since the document used the term “sureties”, under Article
2047(2), petitioners are jointly and solidarily liable to him. Article 2047 provides, “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.” But the use of nomenclature “sureties” could not work to establish that
the obligation of petitioners to him was joint and solidary.

Note that Article 2047 itself specifically calls for the application of the provisions on joint
and solidary obligations to suretyship contracts. Article 1217 thus comes into play,
recognizing the right of reimbursement from a co-debtor (the principal debtor, in case of
suretyship) in favor of the one who paid (i.e., the surety). Under Article 1207 establishes the
presumption of joint liability in case of concurrence of two or more creditors or two or more
debtors in one and the same obligation. The Undertaking does not contain any express
stipulation that the petitioners agreed "to bind themselves jointly and severally" in their
obligations to the Ortigas group, or any such terms to that effect. Hence, such obligation
established in the Undertaking is presumed only to be joint. Ortigas, as the party alleging that
the obligation is in fact solidary, bears the burden to overcome the presumption of jointness
of obligations. We rule and so hold that he failed to discharge such burden.
MANILA SURETY AND FIDELITY, INC. vs. BATU CONSTRUCTION AND
COMPANY, CARLOS N. BAQUIRAN, GONZALO P. AMBOY and
ANDRES TUNAC
G.R. No. L-9353
May 21, 1957

FACTS:

On 8 July 1950, Batu Construction & Company, as principal, and the plaintiff Manila Surety & Fidelity Co.
Inc., as surety, executed a surety bond for the sum of P8,812.00 to insure faithful performance of the
former's obligation as contractor for the construction of the Bacarra Bridge in Ilocos Norte. On the same
day, Batu Construction & Company and the defendants Carlos N. Baquiran and Gonzales P. Amboy
executed an indemnity agreement to protect the Manila Surety & Fidelity Co. Inc.., against damage, loss
or expenses which it may sustain as a consequence of the surety bond executed by it jointly with Batu
Construction & Company. The defendants would indemnify the Company for any damage, loss, costs, or
expenses of any kind, including attorney’s fees, which the company may at any time sustain or incur as a
consequence of having become surety upon the bond.

On 30 May 1951, the Company received a notice from the Director of Public Works annulling its contract
with the Government for the construction of the Bacarra Bridge because of its failure to make satisfactory
progress in the execution of the works. Additionally, the notice warned that any amount spent by the
Government in the continuation of the work, in excess of the contract price, will be charged against the
surety bond furnished by the plaintiff. It also appears that a complaint by the laborers in said project of
the Batu Construction & Company was filed against it and the Manila Surety and Fidelity Co., Inc., for
unpaid wages amounting to P5,960.10. It was found that Batu were in imminent danger of becoming
insolvent, and are removing and disposing of their properties with intent to defraud their creditors,
particularly the plaintiff Company. Due to this, the Company prays that a writ attachment be issued and
levied upon the properties of the defendants; and that after hearing, judgment be rendered "ordering the
defendants to deliver to the plaintiff such sufficient security as shall protect plaintiff from the any
proceedings by the creditors on the Surety Bond aforementioned and from the danger of insolvency of
the defendants.

Defendants Tunac claims that the signing by Carlos N. Baquiran of the indemnity agreement for and in
behalf of the partnership Batu Construction & Company did not bind the latter to the Company; as the
Batu is not bound, he, as a member thereof, is also not bound. In the event the partnership is bound by
the indemnity agreement he invokes his right of exhaustion of the property of the partnership before the
plaintiff may proceed against his property. Defendants Amboy and Baquiran allege that there has been
no liquidation of the expenses incurred in the construction of the Bacarra Bridge to determine whether
there would be a balance of the contract price which may be applied to pay the claim for unpaid wages
of Ricardo Fernandez et al. sought to be collected. Only until after such liquidation shall have been made
could his liability and that of his co-defendants be determined and fixed.

The trial court ruled in favor of the defendants. Thereafter, the defendants moved for leave to prove
damages they allegedly suffered as a result of the attachment levied upon their properties. However, it
was only Aboy who recovered damages.
ISSUE: WON the last paragraph of Art. 2071 may by availed of by a surety.

RULING:

Yes. While guaranties are essentially gratuitous, it could also be for a price or consideration as provided
for in article 2048. Even if there should be a consideration or price paid to a guarantor for him to insure
the performance of an obligation by the principal debtor, the provisions of article 2071 would still be
available to the guarantor. In suretyship, the surety becomes liable to the creditor without the benefit of
the principal debtor's exclusion of his properties, for he (the surety) maybe sued independently. Thus, 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 plaintiff's cause of action does not fall under
paragraph 2 of article 2071 of the new Civil Code, because there is no proof of the defendants' insolvency.
The fact that the contract was annulled because of lack of progress in the construction of the bridge is no
proof of such insolvency. It does not fall under paragraph 3, because the defendants have not bound
themselves to relieve the plaintiff from the guaranty within a specified period which already has expired,
because the surety bond does not fix any period of time and the indemnity agreement stipulates one year
extendible or renewable until the bond be completely cancelled by the person or entity in whose behalf
the bond was executed or by a Court of competent jurisdiction. It does not come under paragraph 4,
because the debt has not become demandable by reason of the expiration of the period for payment. It
does not come under paragraph 5 because of the lapse of 10 years, when the principal obligation has no
period for its maturity, etc., for 10 years have not yet elapsed. It does not fall under paragraph 6, because
there is no proof that "there are reasonable grounds to fear that the principal debtor intends to abscond."
It does not come under paragraph 7, because the defendants, as principal debtors, are not in imminent
danger of becoming insolvent, there being no proof to that effect.

However, it comes under paragraph 1 (when he is sued for payment) because the action brought
by laborers for the collection of unpaid wages is in connection with the construction of the Bacarra Bridge.
Art. 2071 of the new Civil Code provides that the guarantor, even before having paid, 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 or from the danger of insolvency of the debtor, when he (the
guarantor) is sued for payment. It does not provide that the guarantor be sued by the creditor for the
payment of the debt. It simply provides that the guarantor or surety be sued for the payment of an amount
for which the surety bond was put up to secure the fulfilment of the obligation undertaken by the principal
debtor. The case was remanded to the lower court for determination of the amount of security that would
protect the Company from any proceedings by the creditor or from the danger of insolvency of the
defendants. The order awarding 6 per cent on the sum of P35 in possession of the Provincial Treasurer
owned by the defendant Gonzalo P. Amboy garnished by virtue of the writ of attachment, from the date
of the garnishment until its discharge, and denying recovery of the amounts of damages claimed to have
been suffered by the defendants, is affirmed, the defendants not having appealed therefrom.