06 Allied Banking Corporation V CA

ALLIED BANKING CORPORATION, petitioner, vs.
COURT OF APPEALS
Facts:
 Petitioner Allied Bank, Manila (ALLIED) purchased Export Bill No. BDO-81-002 in the amount of P151,474.52
from respondent G.G. Sportswear Mfg. Corporation (GGS). The bill was drawn under a letter of credit hat was in
transit to West Germany. The export bill was issued by Chekiang First Bank Ltd., Hongkong.
 On the same date, respondents Nari Gidwani and Alcron International Ltd. (Alcron) executed their respective
Letters of Guaranty, holding themselves liable on the export bill if it should be dishonored or retired by the
drawee for any reason.
 The spouses Leon and Leticia de Villa and Nari Gidwani also executed a Continuing Guaranty/Comprehensive
Surety (surety, for brevity), guaranteeing payment of any and all such credit accommodations which ALLIED may
extend to GGS. When ALLIED negotiated the export bill to Chekiang, payment was refused due to some material
discrepancies in the documents submitted by GGS relative to the exportation covered by the letter of credit.
ALLIED demanded payment from all the respondents based on the Letters of Guaranty and Surety executed in
favor of ALLIED. However, respondents refused to pay, prompting ALLIED to file an action for a sum of money.
 GGS and Nari Gidwani admitted the due execution of the export bill and the Letters of Guaranty in favor of
ALLIED, but claimed that they signed blank forms of the Letters of Guaranty and the Surety, and the blanks were
only filled up by ALLIED after they had affixed their signatures. They also added that the documents did not
cover the transaction involving the subject export bill.
 On the other hand, the respondents, spouses de Villa, claimed that they were not aware of the existence of the
export bill; they signed blank forms of the surety; and averred that the guaranty was not meant to secure the
export bill.
 Respondent Alcron, for its part, alleged that as a foreign corporation doing business in the Philippines, its branch
in the Philippines is merely a liaison office confined to the following duties and responsibilities, to wit: (1) acting
as a message center between its office in Hongkong and its clients in the Philippines; (2) conducting credit
investigations on Filipino clients; (3) and providing its office in Hongkong with shipping arrangements and other
details in connection with its office in Hongkong
 GGS and Nari Gidwani filed a Motion for Summary Judgment on the ground that since the plaintiff admitted not
having protested the dishonor of the export bill, it thereby discharged GGS from liability. But the trial court
denied the motion.
 Court of Appeals modified the ruling of the trial court holding respondent GGS liable to reimburse petitioner
ALLIED the peso equivalent of the export bill, but it exonerated the guarantors from their liabilities under the
Letters of Guaranty.
Issue: Whether or not respondents are liable under the letters of guaranty and the continuing guaranty / comprehensive
surety notwithstanding the fact that no protest was made after the bill, a foreign bill of exchange, was dishonored
(rephrased: Can respondents, in their capacity as guarantors and surety, be held jointly and severally liable under the
Letters of Guaranty and Continuing Guaranty/Comprehensive Surety, in the absence of protest on the bill in accordance
with Section 152 of the Negotiable Instruments Law?)
Held: Yes (Yes)

 what transpired in this case is a discounting arrangement of the subject export bill, between petitioner ALLIED
and respondent GGS
 that in a letter of credit transaction, once the credit is established, the seller ships the goods to the buyer and in
the process secures the required shipping documents of title. To get paid, the seller executes a draft and
presents it together with the required documents to the issuing bank. The issuing bank redeems the draft and
pays cash to the seller if it finds that the documents submitted by the seller conform with what the letter of
credit requires. The bank then obtains possession of the documents upon paying the seller. The transaction is
completed when the buyer reimburses the issuing bank and acquires the documents entitling him to the goods.
 However, in most cases, instead of going to the issuing bank to claim payment, the buyer (or the beneficiary of
the draft) may approach another bank, termed the negotiating bank, to have the draft discounted. While the
negotiating bank owes no contractual duty toward the beneficiary of the draft to discount or purchase it, it may
still do so. Nothing can prevent the negotiating bank from requiring additional requirements, like contracts of
guaranty and surety, in consideration of the discounting arrangement.
 In this case, respondent GGS, as the beneficiary of the export bill, instead of going to Chekiang First Bank Ltd.
(issuing bank), went to petitioner ALLIED, to have the export bill purchased or discounted. Before ALLIED agreed
to purchase the subject export bill, it required respondents Nari Gidwani and Alcron to execute Letters of
Guaranty, holding them liable on demand, in case the subject export bill was dishonored or retired for any
reason.
 Likewise, respondents Nari Gidwani and spouses Leon and Leticia de Villa executed Continuing
Guaranty/Comprehensive Surety, holding themselves jointly and severally liable on any and all credit
accommodations, instruments, loans, advances, credits and/or other obligation that may be granted by the
petitioner ALLIED to respondent GGS. The surety also contained a clause whereby said sureties waive protest
and notice of dishonor of any and all such instruments, loans, advances, credits and/or obligations.10 These
letters of guaranty and surety are now the basis of the petitioner's action.
 At this juncture, we must stress 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.
 Art. 2047 of the New Civil Code is pertinent: 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.
 In this case, the Letters of Guaranty and Surety clearly show that respondents undertook and bound themselves
as guarantors and surety to pay the full amount of the export bill.
 Respondents claim that the petitioner did not protest13 upon dishonor of the export bill by Chekiang First Bank,
Ltd. According to respondents, since there was no protest made upon dishonor of the export bill, all of them, as
indorsers were discharged under Section 152 of the Negotiable Instruments Law. Section 152 of the Negotiable
Instruments Law pertaining to indorsers, relied on by respondents, is not pertinent to this case.
 There are well-defined distinctions between the contract of an indorser and that of a guarantor/surety of a
commercial paper, which is what is involved in this case. The contract of indorsement is primarily that of
transfer, while the contract of guaranty is that of personal security. The liability of a guarantor/surety is broader
than that of an indorser.
o Unless the bill is promptly presented for payment at maturity and due notice of dishonor given to the
indorser within a reasonable time, he will be discharged from liability thereon.
o Except where required by the provisions of the contract of suretyship, a demand or notice of default is
not required to fix the surety's liability.16 He cannot complain that the creditor has not notified him in
the absence of a special agreement to that effect in the contract of suretyship. Therefore, no protest on
the export bill is necessary to charge all the respondents jointly and severally liable with G.G. Sportswear
since the respondents held themselves liable upon demand in case the instrument was dishonored and
on the surety, they even waived notice of dishonor as stipulated in their Letters of Guarantee.
 As to respondent Alcron, it is bound by the Letter of Guaranty executed by its representative Hans-Joachim
Schloer. As to the other respondents, not to be overlooked is the fact that, the "Suretyship Agreement" they
executed, expressly contemplated a solidary obligation, providing as it did that "… the sureties hereby guarantee
jointly and severally the punctual payment of any and all such credit accommodations, instruments, loans, …
which is/are now or may hereafter become due or owing … by the borrower". It is a cardinal rule that if the
terms of a contract are clear and leave no doubt as to the intention of the contracting parties, the literal
meaning of its stipulation shall control. In the present case, there can be no mistaking about respondents' intent,
as sureties, to be jointly and severally obligated with respondent G.G. Sportswear.

06 Allied Banking Corporation V CA

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ALLIED BANKING CORPORATION, petitioner, vs.

Held: Yes (Yes)

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