PART V: GUARANTY AND SURETYSHIP (ARTICLES 2047 - 2084)

NATURE AND EXTENT OF GUARANTY

14 SISON

TOPIC: Nature and Extent of Guaranty/ Characteristics/ Guaranty Strictly Construed

Philippine National Bank v. Court of Appeals, G.R. No. L- 33174, [July 4, 1991], 275 PHIL 849-869

CASE PRINCIPLE: A guaranty is not presumed; it must be express and cannot extend to more than
what is stipulated therein. (Article 2055, Civil Code)

FACTS:

· Estanislao Depusoy, doing business under the name of E. E. Depusoy Construction, and the
Republic, represented by the Director of Public Works, entered into a building contract for the
construction of a GSIS building in Manila. To this end, Depusoy applied for credit accommodation with
the Philippine National Bank (PNB, herein plaintiff). The credit accommodation was approved by the
bank’s Board of Directors subject to the conditions that Depusoy would assign all payments to be
received from the Bureau of Public Works of the GSIS to the bank, furnish a surety bond, and the
surety to deposit P10,000.00 to the plaintiff. In compliance with the conditions, Depusoy executed a
Deed of Assignment wherein all of the money to be received by him from GSIS would be payable to
PNB.

· Thereafter, Luzon Surety Company Inc. (Luzon) executed a surety bonds in order to meet the
conditions set. Such surety bonds stated that “if the principal (Depusoy) shall well and truly perform
and fulfill all the undertakings, covenants, terms, conditions and agreement stipulated in said
Agreement then, this obligation shall be null and void; otherwise, it shall remain in full force and effect.”

· With the consent of Luzon, the bond was extended for another 6 months.

· Under the credit accommodation granted by the plaintiff bank, Depusoy obtained several amounts
from the bank.

· Under this arrangement all payments made by the GSIS were payable to the Philippine National
Bank. The treasury warrants or checks, however, were not sent directly to the plaintiff. They were
received by Depusoy, who in turn delivered them to the plaintiff bank. The plaintiff then applied the
money thus received, first, to the payment of the amount due on the promissory notes at the time of
the receipt of the treasury warrants or checks, and the balance was credited to the current account of
Depusoy with the plaintiff bank.

· Depusoy defaulted in his building contract with the Bureau of Public Works, and the Bureau of
Public Works rescinded its contract with Depusoy. No further amounts were thereafter paid by the
GSIS to the plaintiff bank. The amount of the loan of Depusoy which remains unpaid, including interest,
is over P100,000.00. Demands for payment were made upon Depusoy and Luzon, and as no payment
was made.
 · Petitioner (PNB) filed a civil case against Depusoy and Luzon Inc.

· The trial court dismissed the case, ruling that the surety bonds executed by the respondents
guaranteed only the faithful performance of the deed of assignments and not the payment of debt.

· Petitioner then appealed from said decision, but the CA affirmed.

ISSUE: WON Surety Inc. guaranteed the payment of loans of Depusoy. – No, there was no such
guarantee.

RULING:

· The petition is w/o merit.

· Under Article 2055 of the New Civil Code, A guaranty is not presumed; it must be express and
cannot extend to more than what is stipulated therein.

· Applying the said provision to the case at bar, it should not be presumed that the guaranty covered
by Surety Inc. is the payment of debt in the event that the principal, Depusoy, would default in his
obligation to the debt.

· This is evidenced by taking a closer look at both the Assignment and Surety Bonds. Nowhere in
these documents did they expressly say that Surety Inc. would guarantee the payment of loans.

· What was actually and expressly guaranteed by Luzon was the “performance of Depusay in his
obligation under the Deed of Assignment.”

· Under the surety bonds, Depusoy and Luzon bound themselves to the plaintiff. It recited that
Depusoy, and Luzon bound themselves jointly and severally to the PNB under the following conditions:
that 'in consideration of a certain loan, Depusoy executed a Deed of Assignment in favor of the PNB
on all payments to be received by him from the Bureau of Public Works in connection with a contract of
August 6, 1956'; that the PNB required the principal to give a good and sufficient bond to secure the
full and faithful performance on his part of said agreement; and that, 'if the principal shall well and truly
perform and fulfill all the undertakings, covenants, terms and conditions, and agreements stipulated in
said agreement, this obligation shall be null and void'. Now, what are the undertakings, covenants,
terms, conditions, and agreements stipulated in the said agreement or Deed of Assignment? The
undertakings of the principal Depusoy, under the Deed of Assignment were to assign, transfer, and
convey to the plaintiff bank all payments to be received by Depusoy from the Bureau of Public Works;
that Depusoy acknowledged that such sums assigned and received by the plaintiff would belong to the
PNB, and if any conversion should be made by the assignor or his representative, he would be
criminally liable; that the PNB could collect and receive all sums and monies, and payments, and the
bank was authorized to endorse for deposit or for encashment all checks or money orders, or
negotiable instruments that it might receive in connection with the assignment.

SURETYSHIP

15 TALABOC

MARIANO LIM, Petitioner vs. SECURITY BANK CORPORATION

FACTS:

- Petitioner Lim executed a Continuing Suretyship in favor of Security Bank Corporation to secure "any
types of credit accommodation from the latter 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.

- 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 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
but the latter failed to comply with said demand which prompted the respondent bank to file a
complaint for collection of sum of money against him and the Arroyo spouses.
- RTC rendered judgment in favor of respondent and ordered Lim to pay:
a. The principal sum of two million pesos plus nineteen percent interest;
b. Four hundred thousand pesos as attorney's fees.
c. Thirty thousand pesos as litigation expenses.

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

RULING:

YES. In this case, what petitioner executed was a Continuing Suretyship which terms 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.

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.

RATIO

Continuing Suretyship – commercial practice wherein 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 x x x x so that there would be no need to execute a separate surety
contract or bond for each financing or credit accommodation extended to the principal
debtor.
 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 (Philippine Charter Insurance Corporation v. Petroleum
Distributors & Service Corporation).

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 (Stronghold Insurance Company, Inc. v. Republic-Asahi Glass Corporation ).

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.

16 YAP

Philippine Charter Insurance Corp vs. Philippine National Construction Corp., GR No. 185066,
[October 2, 2009]

CASE PRINCIPLE:
Liability on a bond is contractual in nature and is ordinarily restricted to the obligation expressly
assumed therein. The Supreme Court has repeatedly held that the extent of a Surety's liability is
determined only by the clause of the contract of suretyship and by the conditions stated in the bond. It
cannot be extended by implication beyond the terms of the contract. Equally basic is the principle that
obligations arising from contracts have the force of law between the parties and should be complied
with in good faith. Nothing can stop the parties from establishing stipulations, clauses, terms and
conditions as they may deem convenient, provided they are not contrary to law, morals, good customs,
public order, or public policy. Here, nothing in the records shows the invalidity of the written claim
provision; therefore, the parties must strictly and in good faith comply with this requirement.

FACTS:
Respondent PNCC is engaged in the construction business and tollway operations. They conducted a
public bidding for the supply of labor, equipment, and materials for the construction of 27 toll booths for
installation along the expressways. Orlando Kalingo won the bidding and was awarded the contract.
PNCC then issued purchase orders (POs), the first for the construction of 25 toll booths, the
second for the remaining 2.

As part of the requirements for the award of the contract and issuance of POs, Kalingo was
required to obtain a surety bond equivalent to the down payment which was 50% of the total
cost to cover each PO. Thus, Kalingo posted two surety bonds issued by petitioner PCIC,
Nos. 27546 (covering the PO for the 2 units, insuring the down payment of P84K) and 27547 (covering
the PO for the 25 units for the amount of P1.05M). The surety bonds were also subject to the following
conditions: (1) the liability of PCIC under the bonds expire on March 16, 1998; and (2) a written
extrajudicial demand must first be tendered to the surety, PCIC, within 15 days from the expiration
date; otherwise, PCIC shall not be liable, and the obligee waives the right to claim or file any
court action to collect the bond.

After having posted the bond, PNCC released the two checks covering the down payment for each of
the POs. Kalingo made an initial delivery of 4 units, which were all either incomplete or fabricated
incorrectly, and ultimately later on failed to deliver the remaining 23 toll booths. Even upon the filing of
the complaint, he failed and refused to complete the orders. Six days before the expiration of the
bonds, PNCC filed a written extrajudicial claim against PCIC notifying it of Kalingo’s default and
demanding the repayment of the down payment secured by Bond No. 27547 amounting to P1.05M,
but without including the bond amounting to P84K in the demand. When the demand went unheeded,
PNCC filed a complaint for the collection of a sum of money against Kalingo and PCIC solely on Bond
No. 27547. It did not at all raise or plead collection under Bond No. 27546.

The RTC ruled in favor of PNCC, ordering them to jointly and severally pay the amount of P1.05M
under Bond No. 27547, but on appeal, the CA held that the RTC erred in only awarding collection
under Bond No. 27547. According to the CA, PCIC, as surety, is liable jointly and severally with
Kalingo for the amount of the two bonds, so they declared them also liable for Bond No. 27546
covering the amount of P84K.

ISSUE/S:
Whether or not the CA erred in awarding the collection under Bond No. 27546 despite not being
pleaded as part of PNCC’s complaint.

RULING:
The fundamental rule is that reliefs granted a litigant are limited to those specifically prayed for in the
complaint; other reliefs prayed for may be granted only when related to those pleaded and supported
by evidence. Necessarily, any such relief may be granted only where a cause of action exists, based
on the complaint, the pleadings, and the evidence on record.

The fundamental rule is that reliefs granted a litigant are limited to those specifically prayed for in the
complaint; other reliefs prayed for may be granted only when related to those pleaded and supported
by evidence. Necessarily, any such relief may be granted only where a cause of action exists, based
on the complaint, the pleadings, and the evidence on record.

Thus, the written claim provision creates a condition precedent for the accrual of (1) PCIC’s obligation
to comply with its promise under the particular bond, and (2) PNCC’s right to collect or sue on these
bonds. PCIC’s liability to repay the bonded down payments arises only upon PNCC’s filing of the
required written claim – notifying PCIC of Kalingo’s default and demanding collection under the bond –
within 15 days from the bond’s expiry date. PNCC’s failure to comply has the effect of extinguishing
PCIC’s liability and constitutes a waiver of PNCC’s right to claim or sue under the bond.

Liability on a bond is contractual in nature and is ordinarily restricted to the obligation expressly
assumed under the contract of suretyship. The SC has repeatedly held that the extent of a surety’s
liability is determined only by the clause of the suretyship contract and by the conditions stated in the
bond. Obligations arising from contracts have the force of law between the parties and should be
complied with in good faith.

While PNCC complied with the written claim provision, it only did so with respect to Bond No. 27547.
Nothing in the records show that it did so with respect to bond No. 27546, neither did it plead collection
under the bond in its complaint. PNCC’s cause of action with respect to the latter bond did not and
cannot exist, such that no relief for collection under this bond may be validly awarded. The RTC thus
was correct in finding PCIC liable only for Bond No. 27547, not only because collection under the other
bond was not raised or pleaded in the complaint, but also because no cause of action arose in PNCC’s
favor with respect to the bond, pursuant to the written claim provision.

PNCC’s argument that the bond contract, being in the nature of a contract of adhesion having been
prepared solely by PCIC, should be construed in its favor and against PCIC, cannot be countenanced.
PNCC, having been the business of construction for so long and requiring surety bonds from every
contractor, cannot be said to be ignorant of the standard practices in surety-claimant affairs to be
entitled to the protection afforded by the principle of in strictissimi juris in interpreting contracts of
adhesion. The CA thus should have respected the contractual stipulations governing the parties, and
refrained from awarding payment under Bond No. 27546.
 Petition is partly granted. The order awarding payment under Bond No. 27546 is deleted.

17 YBAÑEZ

Empire Insurance Co. v. National Labor Relations Commission, G.R. No. 121879, [August 14,
1998], 355 PHIL 694-704

CASE PRINCIPLE:
Where the surety bound itself solidarily with the principal obligor, the former is so dependent on the
principal debtor such that the surety is considered in law as being the same party as the debtor in
relation to whatever is adjudged touching the obligation of the latter, and their liabilities are interwoven
as to be inseparable.

FACTS:
This is a Petition of a surety company disowning solidary liability with its principal, a recruitment
agency, on the monetary claims of an overseas contract worker for illegal dismissal, non-payment and
underpayment of salaries. Private respondent Monera Andal applied with G & M Phils., Inc. for an
overseas employment as a domestic helper in Riyadh, Kingdom of Saudi Arabia. She was hired for a
term of two years at a monthly basic salary of US $200.00. She left for the said jobsite on May 17,
1991 and worked for a certain Abdullah Al Basha. But on January 11, 1992, she was repatriated. Upon
her repatriation, she lost no time in bringing her complaint before the Philippine Overseas Employment
Agency (POEA) for illegal dismissal, non-payment and underpayment of salaries. Impleaded as a co-
respondent in the complaint was the herein petitioner, Empire Insurance Company, in its capacity as
the surety of G & M Phils.

Empire Insurance Company, now the petitioner, contend that complainant, Monera Andal, was without
any cause of action against it for the alleged reason that the liability of its principal and co-respondent
had not been established. It further argued that its liability, if any, for the money claims sued upon was
merely subsidiary. In its answer to the complaint, respondent G & M (Phil.), Inc., stated that it had no
knowledge of complainant's unpaid and underpaid salaries, her working conditions and of the
proceedings at the Philippine Embassy. It denied the charge of illegal dismissal, reasoning out that the
complainant abandoned her job.

ISSUE/S:
Whether or not the petitioning surety company is jointly liable with its principal, G & M Phils, Inc., a
recruitment agency, for the payment of respondent employee's monetary claims in litigation.

RULING:
Affirmative. Petitioner is solidarily liable with its principal, G & M Phils., Inc., under the attendant facts
and circumstances. Suretyship is a contractual relation resulting from an agreement whereby one
person, the surety, engages to be answerable for the debt, default or miscarriage of another, known as
the principal. Where the surety bound itself solidarily with the principal obligor, the former is so
dependent on the principal debtor such that the surety is considered in law as being the same party as
the debtor in relation to whatever is adjudged touching the obligation of the latter, and their liabilities
are interwoven as to be inseparable. The surety's liability is solidary but the nature of its undertaking is
such that unless and until the principal debtor is held liable it does not incur liability.

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

18 ALOLOR

Gilat Satellite Networks, LTD. v. UCPB General Insurance Co., Inc. G.R No. 189563 (April 7,
2014)

CASE PRINCIPLE:
-Nature of Surety’s Undertaking
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. 33 Thus, a surety is not entitled to
a separate notice of default or to the benefit of excussion. It may in fact be sued separately or together
with the principal debtor

FACTS:

On September 15, 1999, One Virtual placed with GILAT a purchase order for various
telecommunications equipment, accessories, spares, services and software, at a total purchase price
of Two Million One Hundred Twenty Eight Thousand Two Hundred Fifty Dollars (US$2,128,250.00). Of
the said purchase price for the goods delivered, One Virtual promised to pay a portion thereof totalling
US$1.2 Million in accordance with the payment schedule dated 22 November 1999. 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.

During the period between September 1999 and June 2000, GILAT shipped and delivered to One
Virtual the purchased products and equipment, as evidenced by airway bills/Bill of Lading. All of the
equipment including the software components for which payment was secured by the surety bond, was
shipped by GILAT and duly received by One Virtual. Under an endorsement dated December 23,
1999, the surety issued, with One Virtuals conformity, an amendment to the surety bond, Annex A
thereof, correcting its expiry date from May 30, 2001 to July 30, 2001.

One Virtual failed to pay GILAT the amount of Four Hundred Thousand Dollars (US$400,000.00) on
the due date of May 30, 2000 in accordance with the payment schedule to the surety bond, prompting
GILAT to write the surety defendant UCPB on June 5, 2000, a demand letter for payment of the said
amount of US$400,000.00. 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
installment 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 of
US$1,200,000.00 or a part thereof, hence, the instant complaint.
Petitioner Gilat Satellite Networks, Ltd., filed a Complaint against respondent UCPB General Insurance
Co., Inc., to recover the amounts supposedly covered by the surety bond, plus interests and expenses.
After due hearing, the RTC rendered its Decision for the plaintiff. Respondent appealed to the CA. The
appellate dismissed the case for lack of jurisdiction.

ISSUE/S:
-1. Whether or not the CA erred in dismissing the case and ordering petitioner and One Virtual to
arbitrate; and

2. Whether or not petitioner is entitled to legal interest due to the delay in the fulfilment by respondent
of its obligation under the Suretyship Agreement.

RULING:
-Yes, the CA erred in dismissing the case.

Petitioner alleges that arbitration laws mandate that no court can compel arbitration, unless a party
entitled to it applies for this relief. This referral, however, can only be demanded by one who is a party
to the arbitration agreement. Considering that neither petitioner nor One Virtual has asked for a
referral, there is no basis for the CA's order to arbitrate.

Moreover, Articles 1216 and 2047 of the Civil Code 25 clearly provide that the creditor may proceed
against the surety without having first sued the principal debtor. Even the Surety Agreement itself
states that respondent becomes liable upon "mere failure of the Principal to make such prompt
payment." Thus, petitioner should not be ordered to make a separate claim against One Virtual (via
arbitration) before proceeding against respondent.

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.

We agree with petitioner.

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. It may in fact be sued separately or together
with the principal debtor.

After a thorough examination of the pieces of evidence presented by both parties, the RTC found that
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, we cannot 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, we have held in Stronghold Insurance Co., Inc. v. Tokyu Construction Co. Ltd. ,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." Hence, the surety
remains a stranger to the Purchase Agreement. We agree 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. 39 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 42 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. At any rate, as we have held in Palmares v.
Court of Appeals, 46 "if the surety is dissatisfied with the degree of activity displayed by the creditor in
the pursuit of his principal, he may pay the debt himself and become subrogated to all the rights and
remedies of the creditor."

2. Article 2209 of the Civil Code is clear: "[i]f an obligation consists in the payment of a sum of money,
and the 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."

Delay arises from the time the obligee judicially or extrajudicially demands from the obligor the
performance of the obligation, and the latter fails to comply. Delay, as used in Article 1169, is
synonymous with default or mora, which means delay in the fulfilment of obligations. It is the
nonfulfillment of an obligation with respect to time. 52 In order for the debtor (in this case, the surety) to
be in default, it is necessary that the following requisites be present: (1) that the obligation be
demandable and already liquidated; (2) that the debtor delays performance; and (3) that the creditor
requires the performance judicially or extrajudicially. 53

Having held that a surety upon demand fails to pay, it can be held liable for interest, even if in thus
paying, its liability becomes more than the principal obligation. The increased liability is not because of
the contract, but because of the default and the necessity of judicial collection.

However, for delay to merit interest, it must be inexcusable in nature.

As to the issue of when interest must accrue, our Civil Code is explicit in stating that it accrues from the
time judicial or extrajudicial demand is made on the surety. This ruling is in accordance with the
provisions of Article 1169 of the Civil Code and of the settled rule that where there has been an extra-
judicial demand before an action for performance was filed, interest on the amount due begins to run,
not from the date of the filing of the complaint, but from the date of that extra-judicial demand.
Considering that respondent failed to pay its obligation on 30 May 2000 in accordance with the
Purchase Agreement, and that the extrajudicial demand of petitioner was sent on 5 June 2000, 61 we
agree with the latter that interest must start to run from the time petitioner sent its first demand letter (5
June 2000), because the obligation was already due and demandable.

19 CAGAANAN
ESTRELLA PALMARES V CA, G.R. NO. 126490

CASE PRINCIPLE:

Where one expressly binds herself to be jointly and severally or solidarily liable with the principal
maker of the note, her liability is that of a surety and is bound equally and absolutely with the principal .

FACTS:

Private Respondent extended a loan to the Sps. Osmena together with the Petitioner Estrella
Palmares (P30, 000 with compounded interest rate of 6 % per annum to be computed every 30 days
from the date thereof).

On the basis of Petitioner’s soliary liability under the promissory note, Respondent filed a complaint
against Petitioner as the lone party-defendant, to the exclusion of the principal debtors, allegedly by
reason of the insolvency of the latter.

During pre-trial conference, the issues are the ff:

1. W/N the liability of the defendant (herein petitioner) is primary or subsidiary; and

2. W/N the defendant Estrella Palmares is only a guarantor with a subsidiary liability and not a co-
maker with primary liability.

RTC ruled rendered judgment dismissing the complaint without prejudice to the filing of a separate
action for a sum of money against the spouses Osmeña and Merlyn Azarraga who are primarily liable
on the instrument.

Basis:

1. Exclusion of the Sps. Azarraga amounted to a discharged of a prior party.

2. Offer made by Petitioner is a valid tender of payment.

3. Petitioner, as co-maker, is only secondary liable on the instrument

4. PN is a contract of adhesion.

CA reversed RTC’s decision. Hence, declaring the Petitioner liable to pay the Respondent. Further,
Respondent appellate court declared that Petitioner is a surety since she bound herself to be jointly
and severally or solidarity liable with the principal debtors, the Azarraga spouses, when she signed as
a co-maker. As such, the petitioner is primarily liable on the note and hence may be sued by the
creditor corporation for the entire obligation.

Petitioner’s Contention:

The second paragraph defines her liability as of a surety, while the third defined her liability as a mere
guarantor. Further, the PN is a contract of adhesion. The note was brought partially filled up, the
contents were never explained to her and her participation is only to sign it. Likewise, she cannot be
compelled to pay because the principal debtors cannot be considered in default in the absence of a
judicial or extrajudicial demand.

The basis of petitioner Palmares' liability under the promissory note is expressed in this wise:
ATTENTION TO CO-MAKERS : PLEASE READ WELL

I, Mrs. Estrella Palmares, as the Co-maker of the above-quoted loan, have fully understood the
contents of this Promissory Note for Short-Term Loan:

That as Co-maker, I am fully aware that I shall be jointly and severally or solidarily liable with the above
principal maker of this note;

That in fact, I hereby agree that M.B. LENDING CORPORATION may demand payment of the above
loan from me in case the principal maker, Mrs. Merlyn Azarraga defaults in the payment of the note
subject to the same conditions above-contained.

ISSUE/S:

(1) W/N the terms of the PN are vague, hence do not establish Petitioner’s solidary liability.

(2) W/N Palmares acted as surety and is therefore solidary liable to pay the promissory note.

RULING:

The Court ruled in the negative.

(1) No. The Civil Code pertinently provides:

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.

It is a cardinal rule in the interpretation of contracts that if the terms of a contract are clear and leave
no doubt upon the intention of the contracting parties, the literal meaning of its stipulation shall control.
In the case at bar, petitioner expressly bound herself to be jointly and severally or solidarily liable with
the principal maker of the note. The terms of the contract are clear, explicit and unequivocal that
petitioner's liability is that of a surety.

Having entered into the contract with full knowledge of its terms and conditions, petitioner is estopped
to assert that she did so under a misapprehension or in ignorance of their legal effect, or as to the legal
effect of the undertaking.

(2) No. They are denied and contradicted in the material points by the Respondent. It was further
refuted by accepted doctrines in the American jurisdiction after which we patterned our statutory law on
suretyship and guaranty.

It is a well-entrenched rule that in order to judge the intention of the contracting parties, their
contemporaneous and subsequent acts shall also be principally considered. Several attendant factors
in that genre lend support to our finding that petitioner is a surety. For one, when petitioner was
informed about the failure of the principal debtor to pay the loan, she immediately offered to settle the
account with Respondent.

Obviously, in her mind, she knew that she was directly and primarily liable upon default of her principal.
 For another, and this is most revealing, petitioner presented the receipts of the payments already
made, from the time of initial payment up to the last, which were all issued in her name and of the Sps.
Azarraga. This can only be construed to mean that the payments made by the principal debtors were
considered by Respondent as creditable directly upon the account and inuring to the benefit of
petitioner.

The concomitant and simultaneous compliance of petitioner's obligation with that of her principals only
goes to show that, from the very start, petitioner considered herself equally bound by the contract of
the principal makers.

It will further be observed that petitioner's undertaking as co-maker immediately follows the terms and
conditions stipulated between Respondent, as creditor, and the principal obligors. A surety is usually
bound with his principal by the same instrument, executed at the same time and upon the same
consideration; he is an original debtor, and his liability is immediate and direct.

Moreover, creditor's right to proceed against the surety exists independently of his right to proceed
against the principal. Under Article 1216 of the Civil Code, the creditor may proceed against any one of
the solidary debtors or some or all of them simultaneously. The rule, therefore, is that if the obligation
is joint and several, the creditor has the right to proceed even against the surety alone.

The raison d'êtrefor the rule is that there is nothing to prevent the creditor from proceeding against the
principal at any time.

EXTINGUISHMENT OF GUARANTY

20 CALZADA

VILLA Y MONNA V. BOSQUE, G.R. NO. 24543, [JULY 12, 1926], 49 PHIL 126-136

CASE PRINCIPLE:
The rule that an extension of time granted to the debtor by the creditor, without the consent of the
sureties, extinguishes the latter's liability is common both to Spanish jurisprudence and the common
law; and it is well settled in English and American jurisprudence that where a surety is liable for
different payments, such as installments of rent, or upon a series of promissory notes, an extension of
time as to one or more will not affect the liability of the surety for the others. (32 Cyc., 196; Hopkirk vs.
McConico, 1 Brock., 220; 12 Fed. Cas., No. 6696; Coe vs. Cassidy, 72 N. Y., 133; Cohn vs. Spitzer,
129 N. Y. Supp., 104; Shephard Land Co. vs. Banigan, 36 R. I., 1; I. J. Cooper Rubber Co. vs.
Johnson, 133 Tenn., 562; Bleeker vs. Johnson, 190, N. W. 1010.)

FACTS:
The plaintiff, Rosa Villa y Monna, viuda de E. Bota, was the owner of a printing establishment and
bookstore located at 89 Escolta, Manila, and known as La Flor de Cataluna, Viuda de E. Bota, with the
machinery, motors, bindery, type material furniture, and stock appurtenant thereto.

The plaintiff sold the establishment above-mentioned to the defendants Guillermo Garcia Bosque and
Jose Pomar Ruiz.

The defendants France and Goulette obligated themselves as solidary sureties with the principals
Bosque and Ruiz, to answer for any balance, including interest, which should remain due and unpaid
after the dates stipulated for payment of said installments, expressly renouncing the benefit of
exhaustion of the property of the principals.

Figueras Hermanos may effect the collection of such sums of money as may be due to the plaintiff by
reason of the sale of the bookstore and printing establishment already mentioned.

When the time came for the payment of the second installment and accrued interest due at the time,
the purchasers were unable to comply with their obligation, and after certain negotiations between said
purchasers and one Alfredo Rocha, representative of Figueras Hermanos, acting as attorney in fact for
the plaintiff, an agreement was reached.

The owners of the business La Flor de Cataluña, appear to have converted it into a limited partnership
under the style of Guillermo Garcia Bosque, S. en C.;" and presently a corporation was formed to take
over the business under the name "Bota Printing Company, Inc."

The partnership appears to have conveyed all its assets to this corporation for the purported
consideration of P15,000.

Meanwhile the seven notes representing the unpaid balance of the second installment and interest
were failing due without being paid.

Figueras entered into the agreement. In this document it is recited that Guillermo Garcia Bosque. S. en
C., is indebted to Rosa Villa, viuda de E. Bota, in the amount of P32,000 for which R. G. France and F.
H. Goulette are bound as joint and several sureties, and that the partnership mentioned had
transferred all its assets to the Bota Printing Company, Inc., of which one George Andrews was a
principal stockholder.

It is then stipulated that France and Goulette shall be relieved from all liability on their contract as
sureties and that in lieu thereof the creditor, Doña Rosa Villa y Monna, accepts the Bota Printing
Company, Inc., as debtor to the extent of P20,000, which indebtedness was expressly assumed by it,
and George Andrews as debtor to the extent of P12,000, which he undertook to pay at the rate of
P200 per month thereafter.

RTC: Upon hearing the cause the trial judge gave judgment in favor of the plaintiff, requiring all of the
defendants, jointly and severally, to pay to the plaintiff. From this judgment Guillermo Garcia Bosque,
as principal, and R. G. France and F.H. Goulette, as sureties, appealed.

ISSUE/S:
WON the appellant sureties were discharged by the agreement between the principal debtor and
Figueras Hermanos, as attorney in fact for the plaintiff, whereby the period for the payment of the
second installment was extended, without the assent of the sureties, and new promissory notes for
unpaid balance were executed

RULING:
The execution of these new promissory notes undoubtedly constituted and extension of time as to the
obligation included therein, such as would release a surety, even though of the solidary type, under
article 1851 of the Civil Code. Nevertheless it is to be borne in mind that said extension and novation
related only to the second installment of the original obligation and interest accrued up to that time.
Furthermore, the total amount of these notes was afterwards paid in full, and they are not now the
subject of controversy. It results that the extension thus effected could not discharge the sureties from
their liability as to other installments upon which alone they have been sued in this action. The rule that
an extension of time granted to the debtor by the creditor, without the consent of the sureties,
extinguishes the latter's liability is common both to Spanish jurisprudence and the common law; and it
is well settled in English and American jurisprudence that where a surety is liable for different
payments, such as installments of rent, or upon a series of promissory notes, an extension of time as
to one or more will not affect the liability of the surety for the others. (32 Cyc., 196; Hopkirk vs.
McConico, 1 Brock., 220; 12 Fed. Cas., No. 6696; Coe vs. Cassidy, 72 N. Y., 133; Cohn vs. Spitzer,
129 N. Y. Supp., 104; Shephard Land Co. vs. Banigan, 36 R. I., 1; I. J. Cooper Rubber Co. vs.
Johnson, 133 Tenn., 562; Bleeker vs. Johnson, 190, N. W. 1010.) The contention of the sureties on
 this point is therefore untenable.

There is one stipulation in the contract (Exhibit A) which, at first suggests a doubt as to propriety of
applying the doctrine above stated to the case before us. We refer to cause (f) which declares that the
non-fulfillment on the part of the debtors of the stipulation with respect to the payment of any
installment of the indebtedness, with interest, will give to the creditor the right to treat and declare all of
said installments as immediately due. If the stipulation had been to the effect that the failure to pay any
installment when due would ipso facto cause to other installments to fall due at once, it might be
plausibly contended that after default of the payment of one installment the act of the creditor in
extending the time as to such installment would interfere with the right of the surety to exercise his
legal rights against the debtor, and that the surety would in such case be discharged by the extension
of time, in conformity with articles 1851 and 1852 of the Civil Code. But it will be noted that in the
contract now under consideration the stipulation is not that the maturity of the later installments shall
be ipso facto accelerated by default in the payment of a prior installment, but only that it shall give the
creditor a right to treat the subsequent installments as due, and in this case it does not appear that the
creditor has exercised this election. On the contrary, this action was not instituted until after all of the
installments had fallen due in conformity with the original contract. It results that the stipulation
contained in paragraph (f) does not affect the application of the doctrine above enunciated to the case
before us.

21 DELA CRUZ

RADIO CORPORATION OF THE PHILIPPINES, plaintiff-appellee v. JESUS ROA et. al.,

CASE PRINCIPLE:
If under the express provision of the contract, the whole unpaid balance automatically becomes due
and payable upon failure to pay one installment, an act to extend the payment of the installments,
without the consent of the guarantors, constituted in fact an extension of the payment of the whole
amount of the indebtedness.

FACTS:

This case is an appeal from the decision of the CFI of the City of Manila which rendered judgment in
favor of plaintiff Radio Corporation of the Philippines against the defendants, 1) ordering defendant
Roa to pay the plaintiff the sum of P22,935 plus P99.64 with legal interest from the date of the filing of
the complaint until fully paid; 2) that upon failure of the defendant to pay the said sum indicated, the
chatted described in the second cause of action shall be sold of public auction to be applied to the
satisfaction of the amount of this judgment; 3) that the defendants pay jointly and severally to the
plaintiff the amount P10,000; 4) and that defendant Roa pay plaintiff the amount equivalent to 10% of
P22,935, as attorney’s fees and that all the defendants pay the cost of the action.

The defendant Jesus R. Roa became indebted to the Philippine Theatrical Enterprises, Inc., in the sum
of P28,400 payable in seventy-one equal monthly installments at the rate of P400 a month
commending thirty days after December 11, 1931, with five days grace monthly until complete
payment of said sum. On that same date the Philippine Theatrical Enterprises, Inc., assigned all its
rights and interest in that contract to the Radio Corporation of the Philippines.

There was an accelerating clause in the contract which said that in case the vendee-mortgageer fails
to make any of the payments as provided, the whole amount remaining unpaid under this
mortgage shall immediately become due and payable and this mortgage on the property herein
mentioned as well as the Luzon Surety Bond may be foreclosed by the vendor-mortgagee; and such
case, the vendee-mortgagor further agrees to pay the vendor-mortgagee an additional sum equivalent
to 25% of the principal due and unpaid as costs, expenses, and liquidated damages, which said sum,
 shall be added to the principal sum for which mortgage is given as security, and shall become a part
thereof.

Erlanger & Galinger, Inc. acting in its capacity as attorney-in-fact of the Radio Corporation of the
Philippines wrote a letter to acknowledge the letter from Roa applying this amount to the balance of
your January installment and had no objection to the extension requested by you to pay the February
installment by the first week of April.

ISSUE/S:
Whether or not the extension granted in the letter by the plaintiff, without the consent of the guarantors
extinguishes the latter’s liability not only as to the installments due at that time, but to the whole
amount of the obligation

RULING:

Yes. Art. 1851 provides that an extension granted to the debtor by the creditors, without the
consent of the guarantor, extinguishes the latter's liability. The stipulation in the contract under
consideration is to the effect that upon failure to pay any installment when due the other
installments ipso facto become due and payable. In view of the fact that under the express
provision of the contract, quoted above, the whole unpaid balance automatically becomes due and
payable upon failure to pay one installment, the act of the plaintiff in extending the payment of the
installment corresponding to February, 1932, to April, 1932, without the consent of the guarantors,
constituted in fact an extension of the payment of the whole amount of the indebtedness, as by that
extension the plaintiff could not have filed an action for the collection of the whole amount until after
April, 1932. Therefore appellants' contention that after default of the payment of one installment the act
of the herein creditor in extending the time of payment discharges them as guarantors in conformity
with articles 1851 and 1852 of the Civil Code is correct.

Plaintiff's contention that the enforcement of the accelerating clause is potestative on the part of the
obligee, and not self-executing, is clearly untenable from a simple reading of the clause copied above.
What is potestative on the part of the obligee is the foreclosure of the mortgage and not the
accelerating clause. Plaintiff-appellee contends that there was no consideration for the extension
granted the principal debtor. Article 1277 of the Civil Code provides that "even though the
consideration should not be expressed in the contract, it shall be presumed that a consideration exists
and that it is licit, unless the debtor proves the contrary." It was incumbent upon the plaintiff to prove
that there was no valid consideration for the extension granted.

22. DELOS REYES

Philippine American General Insurance Co., Inc. v. Mutuc No. L-19632. November 13, 1974

CASE PRINCIPLE:
Art 1306. The contracting parties may establish stipulations not contrary to law, morals, good customs,
public order or public policy.

FACTS:
Philippine American General Insurance Co., Inc. (PAGI) executed in behalf of defendant Mutuc, as
principal, a surety bond in favor of the Maersk Line. The surety company guaranteed the faithful
performance by said Mutuc of his duties as crew member of the vessel of the Maersk Line, and more
particularly, that he would not desert said vessel while he was engaged as crewmember.
· Defendant Mutuc, Mojica, and appellant Alberto, executed an indemnity agreement in favor of PAGI.
The parties agreed to jointly and severally indemnify plaintiff PAGI for any cost incurred by the latter in
consequence of having become surety of any of them. It was further agreed that in case of any
extension or renewal of the bond, they equally bind themselves under the same terms and conditions
 without the necessity of executing another indemnity agreement and waived their right to be notified of
any renewal or extension of the bond which may be granted under the indemnity agreement.
· The duration of surety bond was only for a year but at the instance of defendant Mutuc, it was
renewed for three successive one year periods without the consent of Alberto.
· According to the letter of the Immigration and Naturalization Service, Mutuc was not aboard the
vessel M/S Merit Maersk when it departed from New York and was presumed to be a deserter. Maersk
Line asked PAGI for the remittance of the forfeited bond of P1,000. PAGI wrote a letter to the
defendants Mojica and Alberto demanding the payment of the amount of P1,000 in accordance with
the indemnity agreement. Alberto refused on the ground that the stipulation as to “any extension”
without the need for his being notified was null and void being contrary to law, morals, good customs,
public order or public policy.

ISSUE/S:
WoN the stipulation as to “any extension” without the need for his being notified was null and void
being contrary to law, morals, good customs, public order or public policy.

RULING:
No, the Supreme Court holds that there was nothing that did offend public policy or public order when
such an arrangement was explicitly provided for.

Article 1306 provides “The contracting parties may establish such stipulations, clauses, terms and
conditions as they may deem convenient, provided they are not contrary to law, morals, good customs,
public order, or public policy.”
Contracts, which are the private laws of the contracting parties, should be fulfilled according to the
literal sense of their stipulations. If their terms are clear and leave no room for doubt as to the intention
of the contracting parties, for contracts are obligatory, no matter what their form may be, whenever the
essential requisites for their validity are present.
In the case at bar, Alberto agreed in advance to any extension without the need for notification. Such
stipulation was explicitly provided for and is not against the law, morals, good customs, public policy or
public order.

Thus, the decision of the lower court is AFFIRMED.

23
DESPI

SHANNON VS. ELSER, G.R. NO. 41795, [AUGUST 30, 1935], 61 PHIL 872-879

CASE PRINCIPLE:

The mere circumstance that the creditor does not demand the compliance with the obligation
immediately upon the same becoming due, and that he more or less delays his action, does not mean
or reveal an intention to grant an extension to the debtor, as according to article 1847 the obligation of
the surety extinguishes at the same time as that of the debtor, and for the same causes as the other
obligations.

FACTS:

On March 1, 1926, the Philippine Lumber & Transportation Co., Inc., obtained a loan of P12,000
from Mrs. J. W. Shannon and executed a note promising to pay the said sum to the creditor or to her
husband on or before March 1, 1927, with interest at 10% per annum, payable monthly and in advance
on the first day of each month. The obligation with its terms was secured, jointly and severally by
Walter E. Jones and E. E. Elser who signed the note. The principal was not paid on its due date or
thereafter, but the stipulated interest up to October, 1929, inclusive, was paid. Walter E. Jones died on
November 24, 1929, and the plaintiffs filed a claim and recovered from his estate P1,062 in part
payment of accrued interest due.

On August 1, 1927, while the principal obligation was pending payment, J.W. Shannon obtained a loan
of P1,000 from Walter E. Jones; on April 9, 1928, he obtained another loan of P2,000, and on April 28,
1928, he made Jones pay on his account a certain bill of exchange drawn upon him in the sum of
P1,656, making Shannon's total loan from Jones P4,656. Both agreed that this amount should be paid
at the rate of P125 a month, with 10 per cent interest per annum, failing which, Jones was authorized
to retain and apply to the monthly payments whatever amounts he might have belonging to Shannon
or to his wife. Jones did not receive monthly payments from Shannon under this agreement, but
instead he deducted them from the monthly interest which, on the other hand, the Philippine Lumber &
Transportation Co., Inc., of which he was the president, was bound to pay.

As the Philippine Lumber & Transportation Co., Inc., and its sureties had not paid the principal and the
stipulated interest from November 1, 1929, the Shannons brought suit against the debtor corporation
and the surety, E.E. Elser, for the recovery of said amounts. The Philippine Lumber & Transportation
Co., Inc., neither appeared nor answered the complaint, and it was declared in default. Neither did it
intervene nor defend itself at the trial. E.E. Elser appealed from the judgment ordering the Philippine
Lumber & Transportation Co., Inc., to pay to the plaintiff

The appellant argues that the judgment is erroneous: in not holding that after the note became due,
the plaintiffs had received from the Philippine Lumber & Transportation Co., Inc., payments in advance
of the stipulated interest for a relatively long period of time, and that, consequently, said plaintiffs, as
creditors, extended the period fixed for the payment of the principal without his consent; in not
permitting him to adduce evidence on his defense of laches whereby he attempted to show that in
1927 and 1928 the principal debtor had property and money with which to pay its entire obligation; in
not holding that the plaintiffs were guilty of unreasonable delay in bringing their action, thereby causing
him damages, and in not absolving him from the complaint.

The first assigned error relates to the loans made by Jones to Shannon up to the amount of P4,656.
The appellant contends that these loans were in truth payments in advance of the stipulated interest
which the principal debtor had to pay monthly and which had the effect of extending the stated period
for the payment of the indebtedness, thereby relieving him of his obligation as surety under article
1851 of the Civil Code, because his consent was not first obtained; and in support of his contention
cites the decision of this court in Banco Español Filipino vs. Donaldson Sim & Co. (5 Phil., 418).

ISSUE:

Whether or not Elser liability as a surety has been extinguished. NO.

RULING:

The facts, as we find them, do not support the contention. It indisputably appears that those amounts
of money were obtained by Shannon not as payments in advance of the interest which the principal
debtor was bound to pay, but as independent loans which Jones granted to him. The only connection
of these loans with the interest of the indebtedness of the Philippine Lumber & Transportation Co.,
Inc., consisted in the agreement between Jones and Shannon to the effect that in case the latter
should fail to pay the monthly interest, the former was authorized to deduct it from any amount which
he might have at his disposal belonging to Shannon or to his wife. As, on the other hand, Jones was
the president of the principal debtor, and the latter had to pay monthly interest on its indebtedness,
Jones deducted monthly from this last interest that which Shannon failed to pay. It is therefore, evident
that neither the provisions of article 1851 of the Civil Code nor the doctrine on the matter enunciated in
the Banco Español Filipino case is squarely in point.

The appellant attempted to prove at the trial that the plaintiffs had been guilty of laches and had
brought their action against him tardily, because in 1927 and 1928 the principal debtor had sufficient
property and money with which it could have fully paid its obligation, and in so acting the plaintiffs
caused him damages. This kind of evidence was timely objected to, and the objection was sustained
by the court. This ruling is the subject of the second and third assigned errors. We hold that the
judgment is not erroneous on these grounds. True, the plaintiffs let pass some years from the maturity
of the note before bringing the action for the recovery of its amount. But we hold that the delay does
not constitute laches in the sense that it had the effect of releasing both the principal debtor and its
sureties from their obligations, nor did it occasion loss of rights and privileges of such moment as to
give rise to the discharge of the obligation contracted by the appellant. In the aforecited Banco Español
Filipino case, in ruling upon a similar question, we said: "The decision en casacion of the Supreme
Court of Spain is jurisprudence properly interpreting the Spanish Civil Code. The following doctrine is
laid down in the judgment of March 22, 1901: `The court which pronounced sentence in this case has
not violated article 1851 of the Civil Code, because the mere circumstance that the creditor does not
demand the compliance with the obligation immediately upon the same becoming due, and that he
more or less delays his action, does not mean or reveal an intention to grant an extension to the
debtor, as according to article 1847 the obligation of the surety extinguishes at the same time as that
of the debtor, and for the same causes as the other obligations. ...' Deferring the filing of the action
does not imply a change in the efficacy of the contract or liability of any kind on the part of the debtor. It
is merely, without demonstration or proof to the contrary, respite, waiting, courtesy, leniency, passivity,
inaction. It does not constitute novation, because this must be express. It does not engender liability,
because on the part of the creditor such can not arise except from delay, and for this class of delay
interpellation on the part of the party who considers himself injured thereby is necessary. In order that
this waiting or inaction, of itself beneficial to the parties obligated, can be interpreted as injurious to any
of them, it is altogether necessary that this be represented by means of a protest or interpellation
against the delay. Without action of this kind it continues to be what it is merely a failure of the creditor
to act, which it itself does not create liability. It can not do so, as we see in the aforesaid sentencia de
casacion.

In Clark vs. Sellner (42 Phil., 384), this court had occasion to reiterate the same doctrine as follows:
"The trial judge took into account the fact that at the time of the maturity of the note, the collateral
security given to guarantee the payment was worth more than what was due on the note, but is
depreciated to such an extent that, at the time of the institution of this action, it was entirely valueless.
And taking this circumstance, together with the fact that this case was not commenced until after the
lapse of four years from the date on which the payment fell due, and with the further fact that the
defendant had not received any part of the amount mentioned in the note, he was of the opinion, and
so decided, that the defendant could not be held liable. The theory of the judge a quo was that the
plaintiff's failure to enforce the guaranty for the payment of the debt, and his delay in instituting this
action constitute laches, which had the effect of extinguishing his right of action. We see no sufficient
ground for applying such a theory to the case before us. As stated, the defendant's position being, as it
is, that of a joint surety, he may, at any time after the maturity of the note, make payment, thus
subrogating himself in the place of the creditor with the right to enforce the guaranty against the other
signers of the note for the reimbursement of what he is entitled to recover from them. The mere delay
of the creditor in enforcing the guaranty has not by any means impaired his action against the
defendant. It should not be lost sight of that the defendant's signature on the note is an assurance to
the creditor that the collateral guaranty will remain good, and that otherwise, he, the defendant, will be
personally responsible for the payment. True, that if the creditor had done any act whereby the
guaranty was impaired in its value, or discharged, such an act would have wholly or partially released
the surety; but it must be borne in mind that it is a recognized doctrine in the matter of suretyship that
with respect to the surety, the creditor is under no obligation to display any diligence in the
enforcement of his rights as a creditor. His mere inaction, indulgence, passiveness, or delay in
proceeding against the principal debtor, or the fact that he did not enforce the guaranty or apply on the
payment of such funds as were available, constitute no defense at all for the surety, unless the
contract expressly requires diligence and promptness on the part of the creditor, which is not the case
in the present action. There is in some decisions a tendency toward holding that the creditor's laches
may discharge the surety, meaning by laches a negligent forbearance. This theory, however, is not
generally accepted and the courts almost universally consider it essentially inconsistent with the
relation of the parties to the note. (21 R.C.L., 1032-1034.)"

And in Ibañez de Aldecoa vs. Hongkong & Shanghai Banking Corporation (42 Phil., 1000; 246 U.S.,
627; 62 Law. ed., 907), ] `the mere failure to bring an action upon a credit, as soon as the same or any
part of it matures, does not constitute an extension of the term of the obligation.' And it was further held
that the extension, to produce the extinction of the liability, `must be based on some new agreement by
which the creditor deprives himself of the right to immediately enforce the claim.' This interpretation of
the local courts of the local law we defer to. The construction, moreover, expresses the rule that
obtains in other jurisdictions."

In view of the foregoing, the appealed judgment is affirmed, with the costs of this instance to the
appellant.