MARLOU L. VELASQUEZ . SOLIDBANK CORPORATION G.R. No. 157309, 28 March 2008, THIRD DIVISION Reyes, .) Wilderness Trading, as seller, undertook to sell dried sea cucumber for export to South Korea to Goldwell Trading of Pusan, South Korea, as buyer. To facilitate the payment of the products, Goldwell Trading opened a letter of credit in favor of Wilderness Trading with the Bank of Seoul, Pusan, Korea. Marlou Velasquez, the proprietor of Wilderness Trading, applied for credit accommodation with Solidbank Corporation (Solidbank) for pre-shipment financing, which was granted. The first two export transactions both drawn on the letter of credit were successful, the third shipment however, was not. For Velasquez’ th ird shipment, he negotiated for a documentary sight draft, representing the value of the shipment, to be drawn on the letter of credit, chargeable to the account of Bank of Seoul. As a condition for the issuance of the sight draft, Velasquez executed a letter of undertaking in favor of Solidbank wherein he promised to pay if the sight draft was not accepted. By virtue of which, Velasquez was able to advance the value of the shipment. Solidbank failed to collect on the sight draft when it was presented for payment as it was dishonored by nonacceptance by the Bank of Seoul for alleged breach by Wilderness Trading of certain conditions under the terms of their export agreement. Due to the dishonor, Solidbank demanded restitution of the sum advance which Velasquez failed to accomplish. Solidbank filed a complaint for recovery of sum of money before the RTC. The latter ruled in favor of Solidbank and was affirmed by the CA. ISSUE: Whether Velasquez should be held liable to respondent under the sight draft or the letter of undertaking. HELD: Petitioner, Velasquez, is not liable under the sight draft but he is liable under his letter of undertaking. It bears stressing that it is a separate contract from the sight draft. The liability of petitioner under the letter of undertaking is direct and primary. It is independent from his liability under the sight draft. Liability subsists on it even if the sight draft was dishonored for non-acceptance or non-payment. Respondent agreed to purchase the draft and credit petitioner its value upon the undertaking that he will reimburse the amount in case the sight draft is dishonored. The bank would certainly not have agreed to grant petitioner an advance export payment were it not for the letter of undertaking. The consideration for the letter of undertaking was petitioner’s promise to pay respondent the value of the sight draft if it was dishonored for any reason by the Bank of Seoul. We cannot accept petitioner’s thesis that he is only a mere guarantor under the letter of credit. Petitioner cannot be both the primary debtor and the guarantor of his own debt. This is inconsistent with the very purpose of a guarantee which is for the creditor to proceed against a third person if the debtor defaults in his obligation. Certainly, to accept such an argument would make a mockery of commercial transactions.
*AGRO CONGLOMERATES, INC. and MARIO SORIANO, petitioners, vs. THE HON. COURT OF APPEALS andREGENT SAVINGS and LOAN BANK, INC, respondents G.R. No. 117660. December 18, 2000 QUISUMBING, J.: Doctrine:An accommodation party is a person who has signed the instrument as maker, acceptor, or indorser,without receiving value therefor, and for the purpose of lending his name to some other person and isliable on the instrument to a holder for value, notwithstanding such holder at the time of taking theinstrument knew (the signatory) to be an accommodation party. Facts: Petitioner Agro-Conglomerates, Inc. as vendor, sold two parcels of land to Wonderland Food Industries,Inc. The vendor, the vendee, and the respondent bank Regent Savings & Loan Bank, executed anAddendum4 to the previous Memorandum of Agreement. It provided, among others, that the vendeeundertakes to pay the loan procured in the name of the VENDOR, the VENDEE will be the one liable topay the entire proceeds thereof including interest and other charges. Consequently, petitioner MarioSoriano signed as maker several promissory notes,6 payable to the respondent bank. Thereafter, thebank released the proceeds of the loan to petitioners. However, petitioners failed to meet theirobligations as they fell due Mario Soriano manifested his intention to re-structure the loan, yet did notshow up nor submit his formal written request. Issue: Whether or not petitioner is liable as an accommodation party. Held: By this time, we note a subsidiary contract of suretyship had taken effect since petitioners signed thepromissory notes as maker and accommodation party for the benefit of Wonderland. Petitionersbecame liable as accommodation party. He has the right, after paying the holder, to obtainreimbursement from the party accommodated, since the relation between them has in effect become one of principal and surety, the accommodation party being the surety. The surety’s liability to the creditor or promisee of the principal is said to be direct, primary and absolute; in other words, he isdirectly and equally bound with the principal. And the creditor may proceed against any one of thesolidary debtors.
FIRST DIVISION [G.R. No. 80201. November 20, 1990.] ANTONIO GARCIA, JR., Petitioner, v. COURT OF APPEALS, LASAL DEVELOPMENT CORPORATION, Respondents. Quisumbing, Torres & Evangelista for Petitioner. R .C . Domingo, Jr. & Associates for Private Respondent. SYLLABUS
1. CIVIL LAW; SPECIAL CONTRACTS; SURETYSHIP; NATURE AND PURPOSE THEREOF. — The petitioner’s first ground is that, as found by the trial court, the surety agreement was invalid because no consideration had been paid to him by PISO for executing the contract and that the amount of the entire loan had been received and enjoyed by WMC. He cites the following articles of the Civil Code in support of his contention that lack of consideration was a personal defense available to him as surety. The point is not well taken in view of the nature and purpose of a surety agreement. 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. The peculiar nature of a surety agreement is that it is regarded as valid despite the absence of any direct consideration received by the surety either from the principal obligor or from the creditor. A contract of surety, like any other contract, must generally be supported by a sufficient consideration. However, the consideration necessary to support a surety obligation need not pass directly to the surety; a consideration moving to the principal alone will suffice. It has been held that if the delivery of the original contract is contemporaneous with the delivery of the surety’s obligation, each contract becomes completed at the same time, and the consideration which supports the principal contract likewise supports the subsidiary one. (Faust v. Rodelheim, 77 NJL 740, 73 A 491; Ballard v. Burton, 64 Vt 387, 24 A 769). And this is the kind of surety contract to which the rule of strict construction applies as opposed to a compensated surety contract undertaken by surety corporations which are organized for the purpose of conducting an indemnity business at established rates and compensation unlike an ordinary surety agreement where the surety binds his name through motives of friendship and accomodation. (Pastoral v. Mutual Security Insurance Corp., 14 SCRA 1011). 2. ID.; ID.; ID.; OBLIGATION AND LIABILITY OF A SURETY. — 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; (Sykes v. Everett, 167 NC 600), in other words, he is directly and equally bound with the principal. The surety therefore becomes liable for the debt or duty of another although he possesses no direct or personal interest over the obligations nor does he receive any benefit therefrom. (Miner’s Merchants Bank v. Gidley, 150 WVa 229, 144 SE 2d 711). 3. ID.; ID.; ID.; SURETY NOT AFFECTED BY THE CHANGE IN THE RATE OF INTEREST, SUCH BEING MERELY A COLLATERAL AGREEMENT BETWEEN THE CREDITOR AND THE PRINCIPAL DEBTOR. — As for the compounded interest, we apply by analogy the case of Bank of the Philippine Islands v. Gooch and Redfern, (45 Phil. 514) which was affirmed in the later case of the Bank of the Philippine Islands v. Albaladejo & Cia (53 Phil. 141). In the said cases, the respective sureties claimed that since the creditor changed the rate of interest in the principal obligation without their knowledge or consent, they were relieved from liability under their contract. It was held, however, that the change in the rate of interest was merely a collateral agreement between the creditor bank and the principal debtor that did not affect the surety. When the debtor promised to pay the extra rate of interest on demand of the plaintiff, the liability he assumed was his alone and was separate and apart from the original contract. His agreement to pay the additional rate of interest was an additional burden upon him and him only. That obligation in no way affected the original contract of the surety, whose liability remained unchanged. (Keene’s Admr. v. Miller, 103 Ky, 628; Parson on Bills and Notes, 571, Chitty on Bills, 212; Malteson v. Ellsworth, 33 Wis 488). 4. ID.; OBLIGATIONS AND CONTRACTS; NOVATION; REQUISITES THEREOF; NOT ESTABLISHED IN THE CASE AT BAR. — The petitioner cites other supposed agreements in support of his theory of novation such as the prepayment of the restructured loans of WMC before the distribution of dividends to the common stockholders, the proposed sale on installments of its assets to Negros Occidental Copperfield Mines, and the preference given to other
creditors of WMC over PISO. But we do not think these are material as, to be so, the alteration must change the legal effects of the original contract. The alleged alterations do not have that effect. The most important argument against the alleged novation is the failure of the petitioner to establish the validity of the new contract, an essential requisite for the novation of a previous valid obligation. Petitioner insists that the various communications made by WMC with DBP, together with the memorandum of agreement (Annexes 1 to 7), are sufficient to establish the new undertaking made by WMC with all its creditors, including DBP. We do not think so. It is true as a general rule no form of words or writing is necessary to give effect to a novation. (Re Dissolution of F. Yeager Bridge Culvert Co., 150 Mich. App. 386, NW 2d 99). Nevertheless, since the parties involved here are corporations, it must first be proved that the contracts, assuming they were made, were executed by the persons possessing the proper authority to bind their respective principals. Annexes 1-4 are a mere exchange of correspondence between the officers of WMC and DBP. Although they contain the provisions and proposals that, according to petitioner, should suffice to establish that the original contract between WMC and PISO has been materially altered, they cannot be considered per se sufficient to give rise to a valid new obligation. WMC was in fact directed by Joseph W. Edralin, the Assistant Executive Officer of the DBP, to communicate with Atty. Hilario Oraolino of the Office of the Chief Legal Counsel for the preparation and execution of the necessary legal documents to cover the approval and confirmation of the several proposals made. No such documents, as duly signed by the parties, were ever presented in court. Annexes 5 to 7 are also incomplete documents and not binding without the signatures of the supposed contracting parties. We approve the following observations made by the Court of Appeals: Novation of contract cannot be presumed. In order that an obligation may be extinguished by another which substitutes the same, it is imperative that it be so declared in unequivocal terms, or that the old and the new obligations be on every point incompatible with each other (Art. 1292, Civil Code). In every novation there are four essential requisites. (1) a previous valid obligation; (2) the agreement of all the parties to the new contract; (3) the extinguishment of the old contract; and (4) validity of the new one. Novation requires the creation of new contractual relations as well as the extinguishment of the old. There must be a consent of all the parties to the substitution, resulting in the extinction of the old obligation and the creation of a valid new one (Tiu Siuco v. Habana, 45 Phil. 707). The acceptance of the promissory note by the plaintiff is not novation of the contract. The legal doctrine is that an obligation to pay a sum of money is not novated in a new instrument by changing the term of payment and adding other obligations not incompatible with the old one (Inchausti & Co. v. Yulo, 34 Phil. 978). It is not proper to consider an obligation novated as in the case at bar by the mere granting of extension of payment which did not even alter its essence. To sustain novation necessitates that the same be so declared in unequivocal terms or that there is complete and substantial incompatibility between the two obligations (Sandico v. Paquing, 42 SCRA 322). An obligation to pay a sum of money is not novated in a new instrument wherein the old is ratified by changing only the terms of payment and adding other obligations not incompatible with the old one or wherein the old contract is merely supplementing the new one (Dungo v. Lopeña, L-19377, Dec. 29, 1962, 6 SCRA 1007; Magdalena Estates, Inc. v. Rodriguez, 18 SCRA 967; Rizal Commercial Banking Corp. v. Militante, AC GR CV 04077, Sept. 20, 1985; Investors Finance Corp. v. Cruz, AC GR CV 04710, Nov. 27, 1985). 5. COMMERCIAL LAW; CORPORATIONS; LIMITED LIABILITY DOCTRINE; MAY BE WAIVED WHEN THE CORPORATE OFFICER VOLUNTARILY BINDS HIMSELF TO ANSWER FOR CORPORATE DEBTS. — Regarding the petitioner’s claim that he is liable only as a corporate officer of WMC, the surety agreement shows that he signed the same not in representation of WMC or as its president but in his personal capacity. He is therefore personally bound. There is no law that prohibits a corporate officer from binding himself personally to answer for a corporate debt. While the limited liability doctrine is intended to protect the stockholder by immunizing him from personal liability for the corporate debts, he may nevertheless divest himself of this protection by voluntarily binding himself to the payment of the corporate
debts. The petitioner cannot therefore take refuge in this doctrine that he has by his own acts effectively waived. 6. ID.; ID.; CREDITORS MUST BE PAID FIRST BEFORE DISTRIBUTION OF DIVIDENDS AMONG STOCKHOLDERS; UNSECURED CREDITORS, GIVEN PREFERENCE IN BANKRUPTCY OR INSOLVENCY PROCEEDINGS. — It is axiomatic, and only fair, that the creditors of a corporation must be paid first before dividends may be distributed among the stockholders. Unsecured creditors are given preference in bankruptcy or insolvency proceedings because secured creditors can after all go against the security given by the debtor. As for the installment sale of WMC’s assets to Negros Occidental Copperfield Mines, which might make it difficult for the petitioner to recover any amount it may have to pay on the loan of WMC, this was a risk he took when he signed the surety agreement. As it did not prohibit the alienation of the properties of the principal debtor, the sale to Negros cannot be considered a novation of the original agreement. In fact, the proposed sale was intended precisely to enable WMC to meet its pending obligations. 7. REMEDIAL LAW; ISSUE NOT RAISED IN THE COURT A QUO CANNOT BE RAISED FOR THE FIRST TIME ON APPEAL. — The argument of subrogation cannot be considered at this stage as it is being invoked only now. It is settled that an issue not raised in the court a quo cannot be raised for the first time on appeal because this would be offensive to the basic rules of fair play. (Filipino Merchants v. Court of Appeals, G.R. No. 85141, November 28, 1989; Ramos v. IAC, 175 SCRA 70). DECISION CRUZ, J.: On April 15, 1977, the Western Minolco Corporation (WMC) obtained from the Philippine Investments Systems Organization (PISO) two loans for P2,500,000.00 and P1,000,000.00 for which it issued the corresponding promissory notes payable on May 30, 1977. On the same date, Antonio Garcia and Ernest Kahn executed a surety agreement binding themselves jointly and severally for the payment of the loan of P2,500,000.00 on due date. Upon failure of WMC to pay after repeated demands, demand was made on Garcia pursuant to the surety agreement. Garcia also failed to pay. Hence, on April 5, 1983, Lasal Development Corporation (to which the credit had been assigned earlier by PISO) sued Garcia for recovery of the debt in the Regional Trial Court of Makati. On May 18, 1983, Garcia moved to dismiss on the grounds that: (a) the complaint stated no cause of action; (b) the suit would result in unjust enrichment of the plaintiff because he had not received any consideration from PISO; (c) the surety agreement violated the doctrine of the limited liability of corporations; and (d) the principal obligation had been novated. After considering the arguments and evidence of the parties, the trial court granted the motion and dismissed the complaint on the ground that the surety agreement was invalid for absence of consideration. The plaintiff moved for reconsideration and when this was denied elevated the matter to the Court of Appeals. In a decision dated June 23, 1987, the respondent court reversed Judge Jesus M. Elbinias and remanded the records of the case for trial on the merits. Garcia then came to this Court in this petition for review on certiorari, pleading the same arguments raised in the trial court.chanrobles.com:cralaw:red
The petitioner’s first ground is that, as found by the trial court, the surety agreement was invalid because no consideration had been paid to him by PISO for executing the contract and that the amount of the entire loan had been received and enjoyed by WMC. He cites the following articles of the Civil Code in support of his contention that lack of consideration was a personal defense available to him as surety:chanrob1es virtual 1aw library 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. Art. 1222. A solidary debtor may, in action filed by the creditor, avail himself of all defenses which are derived from the nature of the obligation and of those which are personal to him, or pertain to his own share. With respect to those which personally belong to the others, he may avail himself thereof only as regards that part of the debt for which the latter are responsible. The point is not well taken in view of the nature and purpose of a surety agreement.chanrobles virtualawlibrary chanrobles.com:chanrobles.com.ph 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. 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; 1 in other words, he is directly and equally bound with the principal. The surety therefore becomes liable for the debt or duty of another although he possesses no direct or personal interest over the obligations nor does he receive any benefit therefrom. 2 The peculiar nature of a surety agreement is that it is regarded as valid despite the absence of any direct consideration received by the surety either from the principal obligor or from the creditor. A contract of surety, like any other contract, must generally be supported by a sufficient consideration. However, the consideration necessary to support a surety obligation need not pass directly to the surety; a consideration moving to the principal alone will suffice. It has been held that if the delivery of the original contract is contemporaneous with the delivery of the surety’s obligation, each contract becomes completed at the same time, and the consideration which supports the principal contract likewise supports the subsidiary one. 3 And this is the kind of surety contract to which the rule of strict construction applies as opposed to a compensated surety contract undertaken by surety corporations which are organized for the purpose of conducting an indemnity business at established rates and compensation unlike an ordinary surety agreement where the surety binds his name through motives of friendship and accomodation. 4 It follows from the above principles that Lasal would not be unjustly enriched if the petitioner were to be held liable for the obligation contracted by WMC. The creditor would only be recovering the amount of its loan plus its increments. The petitioner, for his part, can still go against WMC for the amount he may have to pay Lasal as assignee of the PISO credit.
Regarding the petitioner’s claim that he is liable only as a corporate officer of WMC, the surety agreement shows that he signed the same not in representation of WMC or as its president but in his personal capacity. He is therefore personally bound. There is no law that prohibits a corporate officer from binding himself personally to answer for a corporate debt. While the limited liability doctrine is intended to protect the stockholder by immunizing him from personal liability for the corporate debts, he may nevertheless divest himself of this protection by voluntarily binding himself to the payment of the corporate debts. The petitioner cannot therefore take refuge in this doctrine that he has by his own acts effectively waived.cralawnad Concerning the issue of novation, we note first the following provisions of the memorandum of agreement supposedly entered into by WMC and its creditors which the petitioner argues had the effect of releasing him from the surety agreement:chanrob1es virtual 1aw library IV. Release of JSS The CREDITORS expressly agree to release and hereby release the Joint and Several Signatories (JSS) of MINOLCO’s officers from any liability whatsoever on the obligations which they have personally guaranteed or secured. Any action therefore against all the aforesaid signatories are waived in view of the promissory notes to be issued by NDC which are fully and unconditionally guaranteed by the Philippine Government, in payment of MINOLCO’s obligations to said CREDITORS. x
x
x
VI. The CREDITORS who have filed cases in court against MINOLCO and who are signatories to this agreement agree to dismiss the case with prejudice, accepting the repayment scheme set forth in paragraph II as a just and equitable procedure for collecting their credits. Significantly, however, the agreement (Annex 5) was signed only by Don M. Ferry as chairman of the board of directors of WMC and does not carry the signature of any of the creditors. 5 Hence, it has no binding force whatsoever on such creditors. The petitioner cites other developments or transactions between the parties to the original loans that he contends had the effect of novating the said contracts and consequently extinguished the surety agreement. Among these are the extension of the original period of payment and the compounding of the interest on the principal obligations, both of which operated to the prejudice of the petitioner. The petitioner invokes Article 2079 of the Civil Code, which provides:chanrob1es virtual 1aw library Art. 2079. An extension granted to the debtor by the creditor without the consent of the guarantor extinguishes the guaranty. The mere failure on the part of the creditor to demand payment after the debt has become due does not of itself constitute any extension of time referred to herein. However, Paragraph 5 of the surety agreement clearly stipulated as follows:chanrobles virtual lawlibrary The sureties expressly waive all rights to demand payment and notice of non-payment and protest, and agree that the securities of every kind, that now or may hereafter be left with the lender, its successors, indorsees or assigns, as collateral, for the said loan, or any evidence of debt or obligations, or upon which a lien may exist may be withdrawn or
surrendered at any time, and the time of payment thereof extended, without notice to or consent by the sureties, and the liability on this suretyship shall be solidary, direct and immediate and not contingent upon any pursuit by the lender, its successors, indorsees or assigns, of whatever remedies the lender may have against the principal or the securities or liens it may possess. (Emphasis supplied.) Since in the surety contract, the petitioner not only consented to an extension in the payment of the obligation but even waived his right to be notified of such extension, he cannot now claim that he has been released from his undertaking because of the extension granted to the principal.chanrobles.com : virtual law library As for the compounded interest, we apply by analogy the case of Bank of the Philippine Islands v. Gooch and Redfern, 6 which was affirmed in the later case of the Bank of the Philippine Islands v. Albaladejo & Cia. 7 In the said cases, the respective sureties claimed that since the creditor changed the rate of interest in the principal obligation without their knowledge or consent, they were relieved from liability under their contract. It was held, however, that the change in the rate of interest was merely a collateral agreement between the creditor bank and the principal debtor that did not affect the surety. When the debtor promised to pay the extra rate of interest on demand of the plaintiff, the liability he assumed was his alone and was separate and apart from the original contract. His agreement to pay the additional rate of interest was an additional burden upon him and him only. That obligation in no way affected the original contract of the surety, whose liability remained unchanged. 8 Thus, despite the compounding of the interest, the liability of the surety remains only up to the original uncompounded interest, as stipulated in the promissory note, that is, 17% per annum, with a penalty charge of 2 1/2% per month until full payment. The petitioner cites other supposed agreements in support of his theory of novation such as the prepayment of the restructured loans of WMC before the distribution of dividends to the common stockholders, the proposed sale on installments of its assets to Negros Occidental Copperfield Mines, and the preference given to other creditors of WMC over PISO. But we do not think these are material as, to be so, the alteration must change the legal effects of the original contract. The alleged alterations do not have that effect.chanrobles virtualawlibrary chanrobles.com:chanrobles.com.ph It is axiomatic, and only fair, that the creditors of a corporation must be paid first before dividends may be distributed among the stockholders. Unsecured creditors are given preference in bankruptcy or insolvency proceedings because secured creditors can after all go against the security given by the debtor. As for the installment sale of WMC’s assets to Negros Occidental Copperfield Mines, which might make it difficult for the petitioner to recover any amount it may have to pay on the loan of WMC, this was a risk he took when he signed the surety agreement. As it did not prohibit the alienation of the properties of the principal debtor, the sale to Negros cannot be considered a novation of the original agreement. In fact, the proposed sale was intended precisely to enable WMC to meet its pending obligations. The most important argument against the alleged novation is the failure of the petitioner to establish the validity of the new contract, an essential requisite for the novation of a previous valid obligation. Petitioner insists that the various communications made by WMC with DBP, together with the memorandum of agreement (Annexes 1 to 7), are sufficient to establish the new undertaking made by WMC with all its creditors, including DBP. We do not think so. It is true as a general rule no form of words or writing is necessary to give effect to a
novation. 9 Nevertheless, since the parties involved here are corporations, it must first be proved that the contracts, assuming they were made, were executed by the persons possessing the proper authority to bind their respective principals. Annexes 1-4 are a mere exchange of correspondence between the officers of WMC and DBP. Although they contain the provisions and proposals that, according to petitioner, should suffice to establish that the original contract between WMC and PISO has been materially altered, they cannot be considered per se sufficient to give rise to a valid new obligation. WMC was in fact directed by Joseph W. Edralin, the Assistant Executive Officer of the DBP, to communicate with Atty. Hilario Oraolino of the Office of the Chief Legal Counsel for the preparation and execution of the necessary legal documents to cover the approval and confirmation of the several proposals made. No such documents, as duly signed by the parties, were ever presented in court. Annexes 5 to 7 10 are also incomplete documents and not binding without the signatures of the supposed contracting parties.chanrobles.com.ph : virtual law library The argument of subrogation cannot be considered at this stage as it is being invoked only now. It is settled that an issue not raised in the court a quo cannot be raised for the first time on appeal because this would be offensive to the basic rules of fair play. 11 As for the alleged substitution of debtors, nowhere in the record can we find evidence of this claim. The commitment made by DBP to the creditors of WMC was that, although they had a first mortgage lien over substantially all the assets of WMC (which if foreclosed would leave most of its creditors without recourse), they would nevertheless defer proceedings against those assets and instead allow their sale to NDC (with better terms) to enable WMC to meet the obligations. 12 In effect, what DBP did was merely to restructure its credit with WMC and make additional accommodations in the form of investments on preferred and common shares of stock of WMC. It was clearly an effort to assist WMC perform its obligations with its creditors. But not more than that. Concerning the promissory notes supposedly issued by NDC to the creditors of WMC and with the full and unconditional guaranty of the Philippine Government as contained in Annex 5, suffice it to repeat that such Annex 5 (memorandum of agreement between WMC and DBP), as well as Annex 6 (addendum to Annex 5, making NOCOMIN, instead of NDC as the buyer) and Annex 7 (contract of sale between WMC and NOCOMIN), are all not signed by the contracting parties and therefore have no evidentiary weight or binding force.cralawnad We approve the following observations made by the Court of Appeals:chanrob1es virtual 1aw library Novation of contract cannot be presumed. In order that an obligation may be extinguished by another which substitutes the same, it is imperative that it be so declared in unequivocal terms, or that the old and the new obligations be on every point incompatible with each other (Art. 1292, Civil Code). In every novation there are four essential requisites. (1) a previous valid obligation; (2) the agreement of all the parties to the new contract; (3) the extinguishment of the old contract; and (4) validity of the new one. Novation requires the creation of new contractual relations as well as the extinguishment of the old. There must be a consent of all the parties to the substitution, resulting in the extinction of the old obligation and the creation of a valid new one (Tiu Siuco v. Habana, 45 Phil. 707). The acceptance of the promissory note by the plaintiff is not novation of the contract. The legal doctrine is that an obligation to pay a sum of money is not novated in a new instrument by changing the term of payment and adding other obligations not incompatible with the old one (Inchausti & Co. v. Yulo, 34 Phil. 978). It is not proper to consider an obligation novated as in the case at bar by the mere granting of extension of payment which did not even alter its essence. To sustain novation necessitates that the same be so declared in unequivocal terms or that there is complete and substantial incompatibility between the two obligations (Sandico v. Paquing, 42 SCRA 322). An obligation to pay a sum of money is not novated in a new
instrument wherein the old is ratified by changing only the terms of payment and adding other obligations not incompatible with the old one or wherein the old contract is merely supplementing the new one (Dungo v. Lopeña, L-19377, Dec. 29, 1962, 6 SCRA 1007; Magdalena Estates, Inc. v. Rodriguez, 18 SCRA 967; Rizal Commercial Banking Corp. v. Militante, AC GR CV 04077, Sept. 20, 1985; Investors Finance Corp. v. Cruz, AC GR CV 04710, Nov. 27, 1985).chanrobles.com : virtual law library WHEREFORE, the petition is DENIED and the challenged decision of the respondent court AFFIRMED, with costs against the petitioner. SO ORDERED. EN BANC [G.R. No. L-8669. May 25, 1956.] VICENTA REYES, ET AL., Petitioners, vs. GUARDALINO C. MOSQUEDA and THE COURT OF APPEALS, Respondents. DECISION MONTEMAYOR, J.: On February 18, 1949, Guardalino C. Mosqueda sold to Jose Marquez Lim his parcel of land in the City of Iloilo, containing 9,460 square meters, covered by Transfer Certificate of Title No. T-2794 issued by the Register of Deeds of the province of Iloilo, for the sum of P65,605. Claiming that Mosqueda had previously contracted her services to sell the same land with a commission of 5 per cent on the sales price, and that thru her efforts she could bring together Mosqueda and Lim who finally agreed upon and consummated the sale of the land, and because Mosqueda refused to pay her commission of 5 per cent she commenced this action in the Court of First Instance of Iloilo to recover from Mosqueda the sum of P3,280.25 representing 5 per cent of the sales price with interest from the date of the filing of the complaint. After hearing, the trial court rendered judgment in her favor ordering Defendant Mosqueda to pay to her P3,280.25 with interest of 6 per cent from March 7, 1949, with costs. On appeal to the Court of Appeals, said Tribunal reversed the appealed decision and dismissed the complaint without costs. Plaintif Reyes is now petitioning for the revision of said decision of the Court of Appeals. The Court of Appeals thru Justice Dionisio de Leon states the position taken and the evidence presented by both parties in support of their respective claims as follows:chanroblesvirtuallawlibrary “Plaintif Vicente Reyes alleges that on February 16, 1949, she was contracted by DefendantGuardalino Mosqueda to sell the land of the latter, with an area of 9,460 square meters, situated in Iloilo City, and covered by transfer certificate of title No. 2794, for the sum of P7.50 per square meter, at a commission of 5 per cent on the total purchase price (Exhibits A and D). She offered the sale of the land to Jose Marquez Lim who, after an ocular inspection of the premises, said that the price of P7.50 per square meter was high as the land was covered with water, but he was willing to buy the land for a lower price. Reyes went back to Mosqueda and informed him about what her buyer had told her about the land. Mosqueda reduced the price to P7.30 per square meter. On this occasion, Reyes told Mosqueda that inasmuch as the purchase price has already been settled, she was now free to disclose, as she did that her buyer was Jose Marquez Lim who would see Mosqueda personally about the consummation of the sale. “Appellant Mosqueda said that on February 16, 1949, he went to see Jose Marquez Lim, Manager of the Philippine-American Insurance Co. in Iloilo City, about a loan offering his land
covered by transfer certificate of title 2794 as security, as he was in urgent need of money to pay his debt with a bank which was due on February 18, 1949. Lim informed Mosqueda that only the Manila office of the Company could grant loans. Lim, however, offered to buy Mosqueda’s land as it adjoined his own land. Mosqueda replied that he was willing to sell his land to him at P8 per square meter. Lim asked for time to think it over as Mosqueda’s price was high. Anxious to buy the land, Lim requested Vicente Reyes, who, together with her husband, were employees in his office, to approach Mosqueda on his behalf and exact from him the last price he could offer for his land. Reyes went to see Dr. Mosqueda and told him that she had a buyer for his land without divulging the identity of her said buyer, resulting in the execution of Exhibits A and D. Also on that same day, Vicenta Reyes informed Lim that the price on Mosqueda was now P7.50 per square meter. Lim still considered this as high, so that he again sent Vicenta Reyes to ask for a lower price from Mosqueda. Mosqueda reduced it to P7.30. Reyes told Lim about Mosqueda’s last quotation. Apparently, Lim was still not agreeable to the price of P7.30 per square meter, so that he told Vicenta Reyes to desist from further contracting Mosqueda on his behalf as he, himself, would deal directly with Mosqueda as he had initially done earlier on the same day. Lim offered to pay P500 to Reyes for her efforts, but the latter demanded P1,000, after which she left Lim’s office evidently in an angry mood. Reyes went back to Mosqueda and told him that her buyer was not willing to buy his land at P7.30 per square meter, and that she would not sell any more the land because of the disagreement between her and her buyer, whom she disclosed for the first time to be Jose Marquez Lim. Mosqueda wanted to withdraw the authority which he had given Vicenta Reyes, but the latter pleaded that she be given until the afternoon of the following days, February 17, within which to find another buyer. The following day, due to the failure of Reyes to find another buyer for his land, Mosqueda informed Reyes that he was definitely canceling her authority to find a buyer for his land. The following day, February 18, Lim went personally to the clinic of Dr. Mosqueda, resulting in the execution of the deed of sale (Exhibit 1 or F).” Then said Court makes the following findings or observations:chanroblesvirtuallawlibrary “We have gone carefully over the evidence of record, and we have arrived at the conclusion that the same fairly preponderates in favor of the Appellant. Jose Marquez Lim and Alejandro Santiago companion of the Appellant when the latter went to see Lim about a loan, corroborated the claim of the Appellant that Lim had offered to buy the Appellant’s land. Vicenta Reyes did not testify how she came to learn that Mosqueda was looking for a buyer of his land. Perhaps, when she was requested by him to intercede in his behalf with respect to the sale of Mosqueda’s land, Vicenta Reyes grabbed this opportunity to make spare money as a sideline. It must also be noted that while Reyes said Lim was willing to buy the land for a price less than P7.50 per square meter, she did not testify that Lim was willing to buy the property for P7.30, or that Lim authorized her to close the deal with Mosqueda at any price lower than P7.50 per square meter. “There is no dispute that the Appellee was contracted by the Appellant to find a buyer for his land, with a commission of 5 per cent. Mosqueda reduced his original price of P8 to P7.80 per square meter through the intervention of Vicenta Reyes. The question, however, is whether it was also through the efforts of the Appellee that the sale (Exhibit 1 or F) was finally effected at the price of P65,605, or less than P7 per square meter, on February 18, 1949. “Vicente Reyes was hired as a broker, not as commercial agent cralaw . At the time the contract of sale (Exhibit 1 or F) was signed by the parties on February 18, 1949, the authority of Reyes as a broker for Mosqueda has already been withdrawn by the latter cralaw At the time the authority of the Appelleewas withdrawn, there was still no meeting of the minds between Mosqueda and Lim with respect to the price and terms of the sale. Again, the land was sold at price and terms arrived at by the contracting parties without the Appellee’s intervention and Lim bought the property independently of the efforts of Reyes. Vicenta Reyes was told by Lim to leave him alone in the transaction. We have
every reason to believe Lim’s testimony as this action for recovery of a sum of money is not directed against him, and he has nothing to lose or gain by telling the truth.” Accepting, as we have to, the findings of the Court of Appeals, we find its judgment of reversal to be supported by the facts and the law. If as found by the Court of Appeals Plaintif Reyes was engaged only as a broker, then in order to earn her commission, it was not sufficient for her to find a prospective buyer but to find one who will actually buy the property on the terms and conditions imposed by the owner. In the case of Danon vs. Brimo & Co., 42 Phil., 133, we said:chanroblesvirtuallawlibrary “The broker must be the efficient agent or the procuring cause of the sale. The means employed by him and his efforts must result in the sale. He must find the purchaser, and the sale must proceed from his efforts acting as a broker. (Cases cited.) Besides, according to the findings of the Court of Appeals, the actual sale was perfected and consummated without the intervention of Plaintif Reyes, and what is more, before that, her authority to sell the property had been withdrawn, at a time when there was still no meeting of the minds of buyer and seller. We realize that there are times when the owner of a property for sale may not legally cancel or revoke the authority given by him to a broker when the negotiations through the broker’s efforts have reached such a stage that it would be unfair to deny the commission earned, especially when the property owner acts in bad faith and cancels the authority only to evade the payment of said commission. Such was our holding in the same case of Danon vs. Brimo & Co., supra:chanroblesvirtuallawlibrary “ cralaw the right of the principal to terminate his authority is absolute and unrestricted, except only that he may not do it in bad faith, and as a mere device to escape the payment of the broker’s commissions. Thus, if in the midst of negotiations instituted by the broker, and which were plainly and evidently approaching success, the seller should revoke the authority of the broker, with the view of concluding the bargain without his aid, and avoiding the payment of commission about to be earned, it might be well said that the due performance of his obligation by the broker was purposely prevented by the principal. But if the latter acts in good faith, not seeking to escape the payment of commissions, but moved fairly by a view of his own interest, he has the absolute right before a bargain is made while negotiations remain unsuccessful, before commissions are earned, to revoke the broker’s authority, and the latter cannot thereafter claim compensation for a sale made by the principal even though it be to a customer with whom the broker unsuccessfully negotiated, and even though, to some extent, the seller might justly be said to have availed himself of the fruits of the broker’s labor.” (Danon vs. Brimo, 42 Phil., 133, 141-142, citing Sibbald vs. Bethlehem Iron Co., 83 N.Y. 378, 38 Am. Rep. 441, 444-446.) In the present case, there is nothing to show that bad faith was involved in the cancellation of the authority of Plaintif Reyes before the consummation of the sale. Not only this, but the actuations of Plaintif Reyes are not entirely above suspicion. As observed by the Court of Appeals she did not explain how she came to know that Defendant Mosqueda was interested in selling his land and was looking for a buyer thereof. It is highly possible that after Reyes was commissioned by her employer Lim to approached Mosqueda with a view to reducing the price of P8 per square meter, it was then and only then that Reyes came to know about the desire of Mosqueda to sell his land to cover his obligations with the bank inasmuch as he failed to secure a loan from the Insurance Company, and as said by the Court of Appeals — “ cralaw Perhaps, when she was requested by Lim to intercede in his behalf with respect to the sale of Mosqueda’s land, Vicenta Reyes grabbed this opportunity to make spare money as a sideline.” In view of the foregoing, the decision of the Court of Appeals appealed from is hereby affirmed, with costs in both instances.
Paras, C.J., Bengzon, Reyes, A., Jugo, Bautista Angelo, Labrador, Concepcion, Reyes, J.B.L., and Endencia, JJ., concur. Republic of the Philippines SUPREME COURT Manila EN BANC G.R. No. L-9353
May 21, 1957
MANILA SURETY AND FIDELITY, INC., plaintiff-appellant, vs. BATU CONSTRUCTION AND COMPANY, CARLOS N. BAQUIRAN, GONZALO P. AMBOY and ANDRES TUNAC, defendants-appellees. De Santos and Herrera for appellant. Bienvenido C. Castro and Ruiz, Ruiz, Ruiz and Ruiz for appellees. PADILLA, J.: In a complaint filed in the Court of First Instance of Manila, the plaintiff, a domestic corporation engaged in the bonding business, hereafter called the company, alleges that the Batu Construction & Company, a partnership the members of which are the other three defendants, requested it to post, as it did, a surety bond for P8,812 in favor of the Government of the Philippines to secure the faithful Performance of the construction of the Bacarra Bridge, Project PR-72 (3), in Ilocos Norte, undertaken by the partnership, as stipulated in a construction on contract entered into on 11 July 1950 by and between the partnership and the Government of the Philippines, on condition that the defendants would "indemnify the COMPANY for any damage, loss, costs, or charges, or expenses of whatever kind and nature, including counsel or attorney's fees, which the COMPANY may, at any time, sustain or incur, as a consequence of having become surety upon the above mentioned bond; said attorney's fees shall not be less than fifteen (15%) per cent of the total amount claimed in any action which the COMPANY may institute against the undersigned (the defendants except Andres Tunac) in Court," and that "Said indemnity shall be paid to the COMPANY as soon as it has become liable for the payment of any amount, under the abovementioned bond, whether or not it shall have paid such sum or sums of money, or any part thereof," as stipulated in a contract executed on 8 July 1950 (Exhibit B); that on 30 May 1951 because of the unsatisfactory progress of the work on the bridge, the Director of Public Works, with the approval of the Secretary of Public Works and Communications, annulled, the construction contract referred to and notified the plaintiff Company that the Government would hold it (the Company) liable for any amount incurred by the Government for the completion of the bridge, in excess of the contract price (Exhibit D); that on 19 December 1951 (should be 23 November 1951), Ricardo Fernandez and 105 other persons brought an action in the Justice of the Peace Court of Laoag, Ilocos Norte, against the partnership, the individual partners and the herein plaintiff Company for the collection of unpaid wages amounting to P5,960.10, lawful interests thereon and costs (Exhibit E); that the defendants are in imminent danger of becoming insolvent, and are removing and disposing, or about to remove and dispose, of their properties with intent to defraud their creditors, particularly the plaintiff Company; and that the latter has no other sufficient security to protect its rights against the defendants. Upon these allegations, the plaintiff prays that, upon the approval of
a bond and on the strength of the allegations of the verified complaint, 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; and to allow costs to the herein plaintiff," and " for such other measures of relief as may be proper and just in the premises." Attached to the complaint are a verification and affidavit of attachment; and copies of the surety bond marked Annex A; of the indemnity contract marked Annex B; and of the letter of the Acting Director of Public Works to the plaintiff dated 30 May 1951, marked Annex C. Andres Tunac admits in his answer the allegations in paragraphs 1, 2, 3 and 4 of the complaint, but denies the allegations in paragraphs 5, 6, 7, 8 and 9 of the complaint, because he has never promised to put up an indemnity bond in favor of the plaintiff nor has he ever entered into any indemnity agreement with it; because the partnership or the Batu Construction & Company was fulfilling its obligations in accordance with the terms of the construction contract; because the Republic of the Philippines, through the Director of Public, Works, had no authority to annul the contract at its own initiative; because the Justice of the Peace court of Laoag, Ilocos Norte had no jurisdiction to hear and decide a case for collection of P5,960.10; and because the defendants were not in imminent danger of insolvency, neither did they remove or dispose of their properties with intent to defraud their creditors. By way of affirmative defenses, he alleges 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 plaintiff and as the partnership is not bound, he (Andres Tunac), as a member thereof, is also not bound; that he not being a party to the said agreement, the plaintiff has no cause of action against him; that 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. And as a counterclaim he alleges that the plaintiff brought the action against him maliciously and in bad faith for the purpose of annoying him and damaging his professional reputation, he having a flourishing and successful practice as engineer in Ilocos Norte, thereby compelling him to defend himself; that to secure the issuance of a writ of attachment the plaintiff made false representations; and that the issuance of the writ upon such false representations of the plaintiff caused him damages in the sum of P10,000 including expenses of litigation and attorney's fees. Upon the foregoing he prays that the complaint be dismissed as to him and the defendant Batu Construction & Company, with costs against the plaintiff; that the latter be ordered to pay him the sum of P10,000; and that he be granted such other remedies as may be just, equitable and proper. Gonzalo P. Amboy denies in his answer the allegations of the complaint, except those that may be deemed admitted in the special defenses, and alleges that he is not in imminent danger of insolvency and is not removing and disposing or about to remove and dispose of his properties, because he has no property; that has been no liquidation of the expenses incurred in the construction of the Bacarra Bridge, Project PR-72(3) 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 in civil case No. 198 of the Justice of the Peace Court of Laoag, Ilocos Norte, and not until after such liquidation shall have been made could his liability and that of his co-defendants be determined and fixed; that if after proper liquidation's there be a deficit of the contract price the defendants are willing to pay the claim for unpaid wages of Ricardo Fernandez et al. Upon these allegations he prays that the issuance of the writ of attachment prayed for by the plaintiff be held in
abeyance until after civil case No. 198 of the Justice of the Peace Court of Laoag, Ilocos Norte, shall have been disposed of. Carlos N. Baquiran admits in his answer the allegations in paragraphs 1, 2, 3,4, 5, 6, and 11 of the complaint but alleges that he has no sufficient knowledge to form a belief as to the truth of the claim of Ricardo Fernandez et al. set forth in paragraph 7 of the complaint, for there has never been a liquidation between the defendants and the Bureau of Public Works. He further denies specifically paragraphs 8, 9 and 10 of the complaint. By way of special defenses he alleges that there has been no liquidation by and between the defendants and the Bureau of Public Works on Project PR-72(3) to determine whether the total amount spent for the construction of the bridge exceeded the contract price; that after the determination of the respective liabilities of the parties in civil case No. 198 of the Justice of the Peace Court of Laoag, Ilocos Norte, if any there be against the defendants herein, and such liability could not be paid out of the balance of the contract price of Project PR-72(3), the defendants are ready and willing to assume their respective responsibilities. Upon these allegations he prays that the complaint of the plaintiff be dismissed; that the issuance of the writ of attachment prayed for be denied; and that he be granted such other relief as may be just and equitable, with costs against the plaintiff. At the hearing, the plaintiff presented its evidence. After the plaintiff had rested its case, defendant Gonzalo P. Amboy moved for the dismissal of the complaint, on the ground that the remedy provided for in the last paragraph of article 2071 of the new Civil Code may be availed of by the guarantor only and not by a surety. Acting upon this motion to dismiss the trial court made the following findings: . . . That on July 8, 1950, the defendant 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, Project PR-72 (No. 3) Ilocos Norte Province. On the same date, July 8,1950, the 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. On or about May 30, 1951, the plaintiff received a notice from the Director of Public Works (Exhibit B) 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, with the warning 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. and, being of the opinion that the provisions of article 2071 of the new Civil Code may be availed of by a guarantor only and not by a surety the complaint, with costs against the plaintiff.
From this order the plaintiff Company has appealed to this Court, because it proposes to raise only a question of law. After the order dismissing the complaint had been entered, on 16 and 20 July 1953, the defendants Gonzalo P. Amboy and Andres Tunac moved for leave to prove damages they allegedly suffered as a result of the attachment levied upon their properties. On 15 August 1953 the Court heard the evidence on damages. On 23 September 1953 the Court found and held that the defendant Gonzalo P. Amboy is entitled to recover from the plaintiff damages equivalent to 6 per cent interest per annum on the sum of P35 in possession of the Provincial Treasurer of Ilocos Norte, which was garnished pursuant to the writ of attachment, from the date of garnishment until its charge; but the claims for damages of Andres Tunac and Gonzalo P. Amboy allegedly suffered by them in their business, moral damages and attorney's fees were without basis in law and in fact. Hence their recovery was denied. The Court dissolved the writ of attachment. From this last order only the plaintiff Company has appealed. The main question to determine is whether the last paragraph of article 2071 of the new Civil Code taken from article 1843 of the old Civil Code may be availed of by a surety. A guarantor is the insurer of the solvency of the debtor; a surety is an insurer of the debt. A guarantor binds himself to pay if the principal is unable to pay; a surety undertakes to pay if the principal does not pay.1 The reason which could be invoked for the non-availability to a surety of the provisions of the last paragraph of article 2071 of the new Civil Code would be the fact that guaranty like commodatum2 is gratuitous. But guaranty could also be for a price or consideration as provided for in article 2048. So, 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. So, he is an insurer of the debt and as such he has assumed or undertaken a responsibility or obligation greater or more onerous than that of guarantor. Such being the case, the provisions of article 2071, under guaranty, are applicable and available to a surety. The reference in article 2047 to, the provisions of Section 4, Chapter 3, Title 1, Book IV of the new Civil Code, on solidary or several obligations, does not mean that suretyship which is a solidary obligation is withdrawn from the applicable provisions governing guaranty. 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. But the plaintiff's cause of action comes under paragraph 1 of article 2071 of the new Civil Code, because the action brought by Ricardo Fernandez and 105 persons in the Justice of the Peace Court of Laoag, province of Ilocos Norte, for the collection of unpaid wages amounting to P5,960.10, is in connection with the construction of the Bacarra Bridge, Project PR-72 (3), undertaken by the Batu Construction & Company, and one of the defendants therein is the herein plaintiff, the Manila Surety and Fidelity Co., Inc., and paragraph 1 of article 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 of surety be sued for the payment of an amount for which the surety bond was put up to secure the fulfillment of the obligation undertaken by the principal debtor. So, the suit filed by Ricardo Fernandez and 105 persons in the Justice of the Peace Court of Laoag, province of Ilocos Norte, for the collection of unpaid wages earned in connection with the work done by them in the construction of the Bacarra Bridge, Project PR72(3), is a suit for the payment of an amount for which the surety bond was put up or posted to secure the faithful performance of the obligation undertaken by the principal debtors (the defendants) in favor of the creditor, the Government of the Philippines. The order appealed from dismissing the complaint is reversed and set aside, and the case remanded to the court below for determination of the amount of security that would protect the plaintiff Company from any proceedings by the creditor or from the danger of insolvency of the defendants, the principal debtors, and direction to the defendants to put up such amount of security as may be established by competent evidence, without pronouncement as to costs. The writ of attachment having been issued improvidently because, although there is an allegation in the verified complaint that the defendants were in imminent danger of insolvency and that they were removing or disposing, or about to remove or dispose, of their properties, with intent to defraud their creditors, particularly the plaintiff Company, still such allegation was not proved, the fact that a complaint had been filed against the defendants and the plaintiff Company in the Justice of the Peace Court of Laoag, Ilocos Norte, for the collection of an amount for unpaid wages of the plaintiffs therein who claimed to have worked in the construction of the bridge, being insufficient to prove it, and because the relief prayed for in the complaint for security that shall protect it from any proceedings by the creditor and from the danger of the defendants becoming insolvent is inconsistent with the state of insolvency of the defendants or their being in imminent danger of insolvency, 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. Bengzon, Montemayor, Reyes, A., Bautista Angelo, Labrador, Concepcion, Reyes, J.B.L., Endencia and Felix, JJ.,concur.
AUTOCORP vs. ISAC OCTOBER 20, 2011 ~ VBDIAZ AUTOCORP and Rodriguez vs. ISAC and BOC G.R. No. 166662 June 27, 2008 FACTS: Autocorp Group, represented by its President, Rodriguez, secured an ordinary reexport bond from private respondent Intra Strata Assurance Corporation (ISAC) in favor of public Bureau of Customs (BOC), to guarantee the re-export of 2 units of car (at 2 different dates) and/or to pay the taxes and duties thereon. Petitioners executed and signed two Indemnity Agreements with identical stipulations in favor of ISAC, agreeing to act as surety of the subject bonds In sum, ISAC issued the subject bonds to guarantee compliance by petitioners with their undertaking with the BOC to re-export the imported vehicles within the given period and pay the taxes and/or duties due thereon. In turn, petitioners agreed, as surety, to indemnify ISAC for the liability the latter may incur on the said bonds
Autocorp failed to re-export the items guaranteed by the bonds and/or liquidate the entries or cancel the bonds, and pay the taxes and duties pertaining to the said items, despite repeated demands made by the BOC, as well as by ISAC. By reason thereof, the BOC considered the two bonds forfeited.
Failing to secure from petitioners the payment of the face value of the two bonds, ISAC filed with the RTC an action against petitioners to recover a sum of money plus AF. ISAC impleaded the BOC “as a necessary party plaintiff in order that the reward of money or judgment shall be adjudged unto the said necessary plaintiff.”
Petitioners filed a MTD, which was denied. RTC ordered Autocorp to pay ISAC and/or BOC the face value of the subject bonds plus AF. Autocorp’s MR was denied. CA affirmed the trial court’s decision. MR was denied. Hence this Petition for Review on Certiorari
ISSUE: WON these bonds are now due and demandable, as there is yet no actual forfeiture of the bonds, but merely a recommendation of forfeiture, for no writ of execution has been issued against such bonds, therefore the case was prematurely filed by ISAC HELD: PETITION IS WITHOUT MERIT
YES The Indemnity Agreements give ISAC the right to recover from petitioners the face value of the subject bonds plus attorney’s fees at the time ISAC becomes liable on the said bonds to the BOC, (specifically to re-export the imported vehicles within the period of six months from their date of entry) regardless of whether the BOC had actually forfeited the bonds, demanded payment thereof and/or received such payment. It must be pointed out that the Indemnity Agreements explicitly provide that petitioners shall be liable to indemnify ISAC “whether or not payment has actually been made by the [ISAC]” and ISAC may proceed against petitioners by court action or otherwise “even prior to making payment to the [BOC] which may hereafter be done by [ISAC].”
Article 2071 of the Civil Code provides:
Art. 2071. The guarantor, even before having paid, may proceed against the principal debtor: (1) When he is sued for the payment;
(2) In case of insolvency of the principal debtor;
(3) When the debtor has bound himself to relieve him from the guaranty within a specified period, and this period has expired;
(4) When the debt has become demandable, by reason of the expiration of the period for payment;
(5) After the lapse of ten years, when the principal obligation has no fixed period for its maturity, unless it be of such nature that it cannot be extinguished except within a period longer than ten years;
(6) If there are reasonable grounds to fear that the principal debtor intends to abscond;
(7) If the principal debtor is in imminent danger of becoming insolvent.
In all these cases, the action of the guarantor is to obtain release from the guaranty, or to demand a security that shall protect him from any proceedings by the creditor and from the danger of insolvency of the debtor.
NOTES: A demand is only necessary in order to put an obligor in a due and demandable obligation in delay, which in turn is for the purpose of making the obligor liable for interests or damages for the period of delay. Thus, unless stipulated otherwise, an extrajudicial demand is not required before a judicial demand, i.e., filing a civil case for collection, can be resorted to THE MANILA INSURANCE COMPANY, INC. VS. SPOUSES ROBERTO AND AIDA AMURAO (G.R. NO. 179628, 16 JANUARY 2013, DEL CASTILLO, J.) SUBJECT/S: JURISDICTION OF CIAC; LIABILITY OF SURETY; (BRIEF TITLE: MANILA INSURANCE VS. AMURAO)
DISPOSITIVE:
WHEREFORE, the petition is hereby GRANTED. The Decision dated June 7, 2007 and the Resolution dated September 7, 2007 of the Court of Appeals in CA-G.R. SP No. 96815 are hereby ANNULLED and SET ASIDE. The Presiding Judge of the Regional Trial Court of Quezon City, Branch 217 1s DIRECTED to dismiss Civil Case No. Q-01-45573 for lack of jurisdiction.
SO ORDERED.
SUBJECTS/DOCTRINES/DIGEST:
SPOUSES AMURAO ENTERED INTO A CONSTRUCTION AGREEMENT WITH AEGEAN DEVELOPMENT CORP WHEREBY THE LATTER WAS TO CONSTRUCT A 6 STOREY COMMERCIAL BUILDING. AGEAN POSTED PERFORMANCE BOND SECURED BY PETITIONER MANILA INSURANCE COMPANY INC AND INTRA STRATA ASSURANCE CORP. WHEN AGEAN FAILED TO FINISH THE CONSTRUCTION, SPOUSES AMURAO FILED A CASE AGAINST MANILA INSURANCE AND INTRA STRATA. MANILA INSURANCE MOVED TO DISMISS THE CASE BECAUSE THERE IS AN ARBITRATION CLAUSE IN THE CONSTRUCTION AGREEMENT WHICH PROVIDES THAT ANY DISPUTE ON THE INTERPRETATION OF THE CONTRACT DOCUMENTS SHALL BE BROUGHT BEFORE THE CIAC. RTC DENIED THE MOTION TO DISMISS. CA SUSTAINED THE MOTION TO DISMISS. IS CA CORRECT.
NO. THE CASE SHOULD BE DISMISSED FOR LACK OF JURISDICTION. CIAC HAS JURISDICTION OVER THE CASE.
IN ORDER FOR THE CIAC TO ACQUIRE JURISDICTION TWO REQUISITES MUST CONCUR: “FIRST, THE DISPUTE MUST BE SOMEHOW CONNECTED TO A CONSTRUCTION CONTRACT; AND SECOND, THE PARTIES MUST HAVE AGREED TO SUBMIT THE DISPUTE TO ARBITRATION PROCEEDINGS.” IN THIS CASE, BOTH REQUISITES ARE PRESENT.
Section 4 of E.O. No. 1008 provides that:
SEC. 4. Jurisdiction. – The CIAC shall have original and exclusive jurisdiction over disputes arising from, or connected with, contracts entered into by parties involved in construction in the Philippines, whether the dispute arises before or after the completion of the contract, or after the abandonment or breach thereof. These disputes may involve government or private contracts. For the Board to acquire jurisdiction, the parties to a dispute must agree to submit the same to voluntary arbitration. The jurisdiction of the CIAC may include but is not limited to violation of specifications for materials and workmanship, violation of the terms of agreement, interpretation and/or application of contractual time and delays, maintenance and defects, payment, default of employer or contractor, and changes in contract cost. Excluded from the coverage of the law are disputes arising from employer-employee relationships which shall continue to be covered by the Labor Code of the Philippines.
. . . the issue of whether respondent-spouses are entitled to collect on the performance bond issued by petitioner is a “dispute arising in the course of the execution and performance of [the CCA] by reason of difference in the interpretation of the contract documents.”
The fact that petitioner is not a party to the CCA cannot remove the dispute from the jurisdiction of the CIAC because the issue of whether respondent spouses are entitled to collect on the performance bond, as we have said, is a dispute arising from or connected to the CCA. XXXXXXXXXXXXXXXXXXXX
MANILA INSURANCE ARGUED THAT WHEN IT EXECUTED THE SURETY AGREEMENT THE CONSTRUCTION CONTRACT WAS NOT YET SIGNED. THEREFORE SPOUSES AMURAO HAVE NO CAUSE OF ACTION AGAINST THEM. IS THIS ARGUMENT CORRECT.
NO.
A CAREFUL READING OF THE PERFORMANCE BOND REVEALS THAT THE “BOND IS COTERMINOUS WITH THE FINAL ACCEPTANCE OF THE PROJECT.”53 THUS, THE FACT THAT IT WAS ISSUED PRIOR TO THE EXECUTION OF THE CCA DOES NOT AFFECT ITS VALIDITY OR EFFECTIVITY. XXXXXXXXXXXXXXXX
WHAT IS A CONTRACT OF SURETYSHIP?
A CONTRACT OF SURETYSHIP IS DEFINED AS “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 A THIRD PARTY, CALLED THE OBLIGEE. IT INCLUDES OFFICIAL RECOGNIZANCES, STIPULATIONS, BONDS OR UNDERTAKINGS ISSUED BY ANY COMPANY BY VIRTUE OF AND UNDER THE PROVISIONS OF ACT NO. 536, AS AMENDED BY ACT NO. 2206.”50
XXXXXXXXXXXXXXXXXXXXXXXXXXXXX
WHAT IS THE NATURE OF THE SURETY’S LIABILITY?
IT IS JOINT AND SEVERAL, LIMITED TO THE AMOUNT OF THE BOND, AND DETERMINED STRICTLY BY THE TERMS OF CONTRACT OF SURETYSHIP IN RELATION TO THE PRINCIPAL CONTRACT BETWEEN THE OBLIGOR AND THE OBLIGEE.
XXXXXXXXXXXXXXXXXXXXXX
TO WHAT EXTENT IS THE LIABILITY OF THE SURETY.
IT IS DIRECT, PRIMARY AND ABSOLUTE.
It bears stressing, however, that although the contract of suretyship is secondary to the principal contract, the surety’s liability to the oblige is nevertheless direct, primary, and absolute. Castellvi de Higgins & Higgins vs. Sellner Facts: Sellner (defendant) wrote a letter to Mcleod (Castellvi’s agent) saying that he would bound himself to pay the promissory note of Mining, Clarke and Maye amounting 10K + % if not fully paid at maturity, upon the surrender 8k worth of MCM’s stock which is held by Castellvi. Issue: WON Sellner is a guarantor or surety? Held: Sellner is a GUARANTOR. Sellner was not bound with Castellvi by the same instrument executed at the time and the same consideration, but his responsibility was secondary, one founded on an independent collateral agreement. Neither was he jointly and severally liable with Castellvi. Reiss vs. Memije Facts: Memije entered into a contract with D (building contractor) for repair of a house. D has no credit line so Reiss refused to sell D lumber without an advance. Memije accompanied D and told Reiss that he would guarantee payment for lumber. The lumber extended by Reiss solely and exclusively to Memije was under a verbal agreement. Reiss brought an action for the purchase price of the lumber. Issue: WON Memije is liable as guarantor or as original promisor? Held: Memije is primarily liable. It is evident that Memije used the words “gurantor” not in a technical sense but rather that after satisfying, Reiss as to his own financial responsibility. If goods are sold upon the sole credit and responsibility of the party who makes the promise then, even though they are delivered to a 3rd person, there is no liability to the 3rd person. Promise to pay need not require a writing or memorandum to be enforceable by action. Palmares vs. CA (288 SCRA 422) Facts: Private respondent M.B. Lending Corporation extended a loan to the spouses Osmeña and Merlyn Azarraga, together with petitioner Estrella Palmares, in the amount of P30,000.00 payable on or before May 12, 1990, with compounded interest at the rate of 6% per annum to be computed every 30 days from the date thereof. 1 On four occasions after the execution of the promissory note and even after the loan matured, petitioner and the Azarraga spouses were able to pay a total of P16,300.00, thereby leaving a balance of P13,700.00. No payments were made after the last payment on September 26, 1991. 2 Consequently, on the basis of petitioner's solidary liability under the promissory note, respondent corporation filed a complaint 3 against petitioner Palmares as the lone partydefendant, to the exclusion of the principal debtors, allegedly by reason of the insolvency of the latter.
Issue: WON Palmares is liable Held: 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. 13 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. THIRD DIVISION [G.R. No. 136780. August 16, 2001] JEANETTE D. MOLINO, petitioner, CORPORATION, respondent.
vs. SECURITY
DINERS
INTERNATIONAL
DECISION GONZAGA-REYES, J.: Assailed by this petition for review on certiorari is the decision of the Court of Appeals dated September 28, 1998[1] which held petitioner liable as surety for the outstanding credit card debts of Danilo Alto with herein respondent corporation. The decision of the Court of Appeals satisfactorily sums up the facts that led to the filing of this case: The Security Diners International Corporation (“SDIC”) operates a credit card system under the name of Diners Club through which it extends credit accommodation to its cardholders for the purchase of goods and payment of services from its member establishments to be reimbursed later on by the cardholder upon proper billing. There are two types of credit cards issued: one, the Regular (Local) Card which entitles the cardholder to purchase goods and pay services from member establishments in an amount not exceeding P10,000.00; and two, the Diamond (Edition) Card which entitles the cardholder to purchase goods and pay services from member establishments in unlimited amounts. One of the requirements for the issuance of either of these cards is that an applicant should have a surety. On July 24, 1987, Danilo A. Alto applied for a Regular (Local) Card with SDIC. He got as his surety his own sister-in-law Jeanette Molino Alto. Thus, Danilo signed the printed application form (Exhibit “A”) and Jeanette signed the Surety Undertaking (Exhibit “A-5”). Attached to the Application Form was an Agreement (Use of Diners’ Club Card), paragraph 16 of which reads: “16. SURETY. The cardholder shall furnish an adequate surety or sureties acceptable to Security Diners who shall be jointly and severally liable with the cardholder to pay Security Diners all the obligations and charges incurred and credit extended on the basis of the card. In the event the surety/sureties furnished the cardholder are discharged the cardholder must furnish a new surety or sureties acceptable to Security Diners within thirty
(30) days. Otherwise the cardholder’s privileges shall be automatically terminated in accordance with Section 11 hereof.” The Surety Undertaking signed by Jeanette states: “I/WE, the undersigned, bind myself/ourselves jointly and severally with Mr. Danilo Alto to pay SECURITY DINERS INTERNATIONAL CORPORATION, hereinafter referred to as ‘Security Diners’ all the obligations and charges including but not limited to fees, interest, attorney’s fees and all other costs incurred by him/her in connection with the use of the DINERS CLUB CARD in accordance with the terms and conditions governing the issuance and use of the Diners Club Card. Any change or novation in the agreement or any extension of time granted by SECURITY DINERS to pay such obligations, charges and fees, shall not release me/us from this Surety Undertaking, it being understood that said undertaking is a continuing one and shall subsist and bind me/us until all such obligations, charges and fees have been fully paid and satisfied. It is understood that the indication of a credit limit to the cardholder shall not relieve me/us of liability for charges and all other amounts voluntarily incurred by the cardholder in excess of the credit limit.” On the basis of the completed and signed Application Form and Surety Undertaking, the SDIC issued to Danilo Diners Card No. 36510293216-0006. The latter used this card and initially paid his obligations to SDIC. On February 8, 1988, Danilo wrote SDIC a letter (Exhibit “B”) requesting it to upgrade his Regular (Local) Diners Club Card to a Diamond (Edition) one. As a requirement of SDIC, Danilo secured from Jeanette her approval. The latter obliged and so on March 2, 1988, she signed a Note (Exhibit “C”) which states: “This certifies that I, Jeanette D. Molino, approve of the request of Danilo and Gloria Alto with Card No. 3651-203216-0006 and 3651-203412-5007 to upgrade their card from regular to diamond edition.” Danilo’s request was granted and he was issued a Diamond (Edition) Diners Club Card. He used this card and made purchases (Exhibits “D”, “D-1” to “D-7”) from member establishments. On October 1, 1988 Danilo had incurred credit charged plus appropriate interest and service charges in the aggregate amount of P166,408.31. He defaulted in the payment of this obligation. SDIC demanded of Danilo and Jeanette to pay said obligation but they did not pay. So, on November 9, 1988, SDIC filed an action to collect said indebtedness against Danilo and Jeanette. This was docketed in the Regional Trial Court of Makati, Branch 145 as Civil Case No. 88-2381. xxx [2] Defendant Danilo Alto failed to file an Answer, and during the pre-trial conference respondent moved to have the complaint dismissed against him, without prejudice to a subsequent re-filing. Petitioner was left as the lone defendant, sued in her capacity as surety of Danilo. In the Answer with Compulsory Counterclaim that she filed with the RTC, petitioner claimed that her liability under the Surety Undertaking was limited to P10,000.00 and that
she did not expressly and categorically agree to act as surety for Danilo in an amount higher than P10,000.00.[3] By way of counterclaim, she asked for moral and exemplary damages. On August 19, 1991, the trial court rendered a decision dismissing the complaint for failure of respondent to prove its case by a preponderance of the evidence. It found that while petitioner clearly bound herself as surety under the terms of Danilo Alto’s Regular Diners Club Card, there was no evidence that after the card had been upgraded to Diamond (Edition) petitioner consented or agreed to act as surety for Danilo. Exhibit “C” or Exhibit “1”, inter alia, which was a note bearing petitioner’s signature certifying to her approval of Danilo’s request to have his card upgraded should be read simply as a statement of “no objection” to his request for upgrading, and not as an assumption of liability for the debts that Danilo may later owe through the said card. [4] The trial court also took note of the testimony of Alfredo Vicente, an officer of respondent, who opined that the consent to be bound as surety to an upgraded card should be categorical [5] and not in a simple “no objection” form. The trial court went on further to state that petitioner was not liable for any amount, not even for P10,000.00 which is the maximum credit limit for Regular Diners Club Cards, since at the time of the upgrading Danilo had no outstanding credit card debts. [6] This is evident from the fact that Danilo’s request for upgrading was approved, since one of the requirements for the approval of a request for the upgrading of a credit card from Regular to Diamond is that the applicant must have paid all his billings for the last three months prior to his request. Hence, the trial court disposed of the case with these pronouncements: WHEREFORE, judgment is rendered dismissing the complaint against defendant Jeanette D. Molino-Alto for failure of the plaintiff to prove its case by a clear preponderance of evidence. Said defendant’s counterclaim is also dismissed. No pronouncement as to costs. SO ORDERED.[7] The Court of Appeals found contrary to the lower court, and declared that the Surety Undertaking signed by petitioner when Danilo Alto first applied for a Regular Diners Club Card clearly applied to the unpaid purchases of Danilo Alto under the Diamond card. In holding thus, the Court of Appeals referred to the terms of the said Surety Undertaking, which stated that any change or novation in the agreement on the use of the Diners Club card does not release the surety from his obligations, it being understood that the undertaking is a continuing one which subsists until all obligations and charges under the subject credit card are paid and satisfied. It also cited Pacific Banking Corporation vs. Intermediate Appellate Court,[8] a 1991 decision which held the surety liable to the extent of the credit cardholder’s indebtedness, under the clear terms of the Guarantor’s Undertaking that the surety signed with the credit card company. The Court of Appeals further declared that it was erroneous of the trial court to conclude that petitioner was completely relieved of liability under Danilo Alto’s credit card since the Surety Undertaking she signed remained valid and enforceable even after the upgrading of
the said card; besides, petitioner herself admitted that she was liable to the extent of P10,000.00. Additionally, the Court of Appeals reduced the attorney’s fees (stipulated in the Agreement for the Use of Diners Club Card) from 25% to 10% of the amount due, judging this to be a more reasonable rate under the circumstances. The dispositive portion of the decision of the Court of Appeals reads: WHEREFORE, the appealed Decision is REVERSED and one is rendered ordering defendantappellee Jeanette D. Molino-Alto to pay plaintiff-appellant Security Diners International, Inc. the following: 1. The sum of P166,408.31 plus interest of 3% per annum and 2% per month from November 9, 1988 until the obligation is fully paid; 2. The amount equivalent to 10% of the obligation mentioned in the preceding paragraph as attorney’s fees; and 3. Costs. SO ORDERED.[9] Petitioner’s motion for reconsideration of the above decision was denied for lack of merit on December 1, 1998. Hence, the petition before us, which assigns the following errors: I The material findings of the Court of Appeals, which are contrary to those of the lower court, are erroneous. II The findings of the Court of Appeals are conflicting and/or without citation of specific evidence on which they are based. III The Court of Appeals erred in disregarding the applicable legal principle established by this Honorable Court that, unlike in ordinary solidary debtors, the surety does not incur liability unless the principal debtor is held liable. [10] Petitioner posits that she did not expressly give her consent to be bound as surety under the upgraded card. She points out that the note she signed, marked as Exhibit “C”, registering her approval of the request of Danilo Alto to upgrade his card, renders the Surety Undertaking she signed under the terms of the previous card “without probative value, immaterial and irrelevant as it covers only the liability of the surety in the use of the regular credit card by the principal debtor xxx “. [11] She argues further that because the principal
debtor, Danilo Alto, was not held liable, having been dropped as a defendant, she could not be said to have incurred liability as surety. The petition is devoid of merit. The resolution of whether petitioner is liable as surety under the Diamond card revolves around the effect of the upgrading by Danilo Alto of his card. Was the upgrading a novation of the original agreement governing the use of Danilo Alto’s first credit card, as to extinguish that obligation and the Surety Undertaking which was simply accessory to it? Novation, as a mode of extinguishing obligations, may be done in two ways: by explicit declaration, or by material incompatibility (implied novation). As we stated in Fortune Motors vs. Court of Appeals, supra: xxx The test of incompatibility is whether the two obligations can stand together, each one having its independent existence. If they cannot, they are incompatible and the latter obligation novates the first. Novation must be established either by the express terms of the new agreement or by the acts of the parties clearly demonstrating the intent to dissolve the old obligation as a consideration for the emergence of the new one. The will to novate, whether totally or partially, must appear by express agreement of the parties, or by their acts which are too clear or unequivocal to be mistaken. There is no doubt that the upgrading was a novation of the original agreement covering the first credit card issued to Danilo Alto, basically since it was committed with the intent of cancelling and replacing the said card. However, the novation did not serve to release petitioner from her surety obligations because in the Surety Undertaking she expressly waived discharge in case of change or novation in the agreement governing the use of the first credit card. The nature and extent of petitioner’s obligations are set out in clear and unmistakable terms in the Surety Undertaking. Thus: 1. She bound herself jointly and severally with Danilo Alto to pay SDIC all obligations and charges in the use of the Diners Club Card, including fees, interest, attorney’s fees, and costs; 2. She declared that “any change or novation in the Agreement or any extension of time granted by SECURITY DINERS to pay such obligation, charges, and fees, shall not release (her) from this Surety Undertaking”; 3. “(S)aid undertaking is a continuous one and shall subsist and bind (her) until all such obligations, charges and fees have been fully paid and satisfied”; and 4. “The indication of a credit limit to the cardholder shall not relieve (her) of liability for charges and all other amounts voluntarily incurred by the cardholder in excess of said credit limit.”[12] We cannot give any additional meaning to the plain language of the subject undertaking. The extent of a surety’s liability is determined by the language of the suretyship contract or bond itself.[13] Article 1370 of the Civil Code provides: “If the terms of a
contract are clear and leave no doubt upon the intention of the contracting parties, the literal meaning of its stipulations shall control.” This case is no different from Pacific Banking Corporation vs. IAC, supra, correctly applied by the Court of Appeals, which involved a Guarantor’s Undertaking (although thus denominated, it was in substance a contract of surety) signed by the husband for the credit card application of his wife. Like herein petitioner, the husband also argued that his liability should be limited to the credit limit allowed under his wife’s card but the Court declared him liable to the full extent of his wife’s indebtedness. Thus: We need not look elsewhere to determine the nature and extent of private respondent Roberto Regala, Jr.’s undertaking. As a surety he bound himself jointly and severally with the debtor Celia Regala “to pay the Pacific Banking Corporation upon demand, any and all indebtedness, obligations, charges or liabilities due and incurred by said Celia Syjuco Regala with the use of Pacificard or renewals thereof issued in (her) favor by Pacific Banking Corporation.” xxx xxxxxxxxxxx It is likewise not disputed by the parties that the credit limit granted to Celia Regala was P2,000.00 per month and that Celia Regala succeeded in using the card beyond the original period of its effectivity, October 29, 1979. We do not agree, however, that Roberto Jr.’s liability should be limited to that extent. Private respondent Roberto Regala, Jr., as surety of his wife, expressly bound himself up to the extent of the debtor’s (Celia’s) indebtedness likewise expressly waiving any “discharge in case of any change or novation of the terms and conditions in connection with the issuance of the Pacificard credit card.” Roberto, in fact, made his commitment as a surety a continuing one, binding upon himself until all the liabilities of Celia Regala have been fully paid. All these were clear under the “Guarantor’s Undertaking” Roberto signed, thus: “x x x. Any changes of or novation in the terms and conditions in connection with the issuance or use of said Pacificard, or any extension of time to pay such obligations, charges or liabilities shall not in any manner release me/us from the responsibility hereunder, it being understood that the undertaking is a continuing one and shall subsist and bind me/us until all the liabilities of the said Celia Syjuco Regala have been fully satisified or paid.” (italics supplied) As a last-ditch measure, petitioner asseverates that, being merely a surety, a pronouncement should first be made declaring the principal debtor liable before she herself can be proceeded against. The argument, which is hinged upon the dropping of Danilo as defendant in the complaint, is bereft of merit. The Surety Undertaking expressly provides that petitioner’s liability is solidary. 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.[14] Although the contract of a surety is in essence secondary only to a valid principal obligation, his liability to the creditor is direct, primary and absolute; he becomes liable for the debt and duty of another although he possesses no direct or personal interest over the obligations nor does he receive any benefit therefrom. [15] There being no question that Danilo Alto incurred debts of P166,408.31 in credit card advances, an obligation shared
solidarily by petitioner, respondent was certainly within its rights to proceed singly against petitioner, as surety and solidary debtor, without prejudice to any action it may later file against Danilo Alto, until the obligation is fully satisfied. This is so provided 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 demand made against one of them shall not be an obstacle to those which may be subsequently directed against the others, so long as the debt has not been fully collected. Petitioner is a graduate of business administration, and possesses considerable work experience in several banks. She knew the full import and consequence of the Surety Undertaking that she executed. She had the option to withdraw her suretyship when Danilo upgraded his card to one that permitted unlimited purchases, but instead she approved the upgrading. While we commiserate in the financial predicament she now faces, it is also evident that the liability she incurred is only the legitimate consequence of an undertaking that she freely and intelligently obliged to. Prospective sureties to credit card applicants would be well-advised to study carefully the terms of the agreements prepared by the credit card companies before giving their consent, and pay heed to stipulations that could lead to onerous effects, like in the present case where the credit applied for was limitless. At the same time, it bears articulating that although courts in appropriate cases may equitably reduce the award for penalty as provided under such suretyship agreements if the same is iniquitous or unconscionable,[16] we are unable to give relief to petitioner by way of reducing the amount of the principal liability as surety under the circumstances of this case. WHEREFORE, the petition is dismissed for lack of merit. The decision of the Court of Appeals is AFFIRMED in all respects. SO ORDERED. Melo, (Chairman), Panganiban, and Sandoval-Gutierrez, JJ., concur. Vitug, J., in the result, (pro hac vice). SECOND DIVISION TIU HIONG GUAN, LUISA DE VERA TIU, JUANITO RELLERA and PURITA RELLERA, Petitioners, -
versus -
METROPOLITAN BANK & TRUST COMPANY, Respondent.
G.R. No. 144339 Present: PUNO, J., Chairperson, SANDOVAL-GUTIERREZ, CORONA, AZCUNA, and GARCIA, JJ. Promulgated: August 9, 2006
x --------------------------------------------------------------------------------------- x DECISION AZCUNA, J.: This is a petition for review [1] by Tiu Hiong Guan, Luisa de Vera Tiu, Juanito Rellera, and Purita
Rellera,
assailing
the
Decision
and
Resolution of
the
Court
of
Appeals
dated May 23, 2000 and August 11, 2000, respectively, in CA-G.R. CV No. 57571 entitled “Metropolitan Bank & Trust Co. v. Tiu Hiong Guan, et al.” The facts[2] of the case are as follows: Sometime in October 1990, petitioners applied for a continuing credit facility for and in
behalf
of
themselves
and
their
corporation,
Sunta
Rubberized
Industrial
Corporation (Sunta), and executed in their personal and official capacities a Continuing Surety Agreement. In the said Agreement, petitioners jointly and severally obligated themselves to pay all loans and credit accommodations that they and Sunta may incur, supposedly not exceeding three million pesos. It was further stipulated therein that, in case of default in the payment thereof, notwithstanding Sunta's dissolution, failure in business, insolvency, and the filing of a petition for bankruptcy or suspension of payments in the proceeding related thereto, the whole obligation shall become due and payable without benefit of demand or notice of payment. On July 9, 1990, petitioners opened an irrevocable Commercial Letter of Credit (LC) for the purchase of raw materials amounting toP480,000 in favor of Sunta. These materials were delivered and custody thereof transferred to Sunta, after which a Trust Receipt Agreement was jointly and severally executed by petitioners in their personal capacities. On August 18, 1990, Sunta and petitioners also in their personal capacities obtained a loan of P350,000. After maturity of the obligation, there was both failure of payment and compliance with the surety and trust receipt agreements, sight draft, and promissory note.
The total unpaid obligation as of February 15, 1993 was P1,571,972.86. Prayed for by respondent in its complaint a quo were the payments of P741,599.64, with interest and penalties on the promissory note, per Order dated June 9, 1993; P830,373.20, with interest and penalties as stipulated in the Trust Receipt Agreement; and attorney's fees. In their Answer, petitioners admitted execution of the Continuing Surety Agreement not in their personal capacities but as officers of Sunta. It was also asserted therein that none of them personally benefited from the loan transaction, while two of them signed the LC as mereofficers of Sunta. The failure of Sunta to pay its obligation was attributed to both force majeure – when fire “gutted down” its factory buildings, equipment, machinery, raw materials and finished products – and the Order dated April 20, 1993 by the Securities and Exchange Commission (SEC) in SEC Case No. 4240 suspending all actions for claims against Sunta that are pending before any court or tribunal. It
was
contended
that
the
real
party-in-interest as far
as the
actionable
documents herein were concerned was Sunta, not petitioners who merely acted as its agents and as guarantors of its obligation. Therefore, petitioners should not be compelled to pay the obligations of Sunta, because Sunta is solvent and its assets have not yet been exhausted. Petitioners further argued that, although Sunta had possession of the finished products later destroyed by fire, respondent still retainedits ownership over them. As mere agents carrying out the orders of their principal, petitioners claimed that they could not be held responsiblefor the loss of property, unless there was negligence, deceit, fraud, or excess of authority. Hence, the said loss should fall upon its owner. In its Decision dated May 28, 1997, the Regional Trial Court (RTC) of Manila, Branch 51, ruled in favor of respondent in the following manner: IN VIEW OF THE FOREGOING, this Court believes and so [holds] that the [respondent] has established the preponderant proof to support its position as against [petitioners'] claim that they are not jointly and severally liable with SUNTA.
WHEREFORE, judgment is hereby rendered in favor of the [respondent] and against the [petitioners], ordering the [petitioners] jointly and severally to pay [respondent]: 1. The sum of P741,599.64 as of February 15, 1993 with interest at 28.792% per annum and penalty charges of 18% per annum until fully paid representing the amount due on the promissory note; 2. The sum of P830,373.20 as of February 15, 1993 with interest at the current rate [and] with penalty charges of 12% per annum until fully paid representing the value or proceeds of the amount held in trust as stipulated; 3. [A]ttorney's fees in the amount equivalent to 10% of the amount due from the [petitioners]; and 4. The costs of suit. [Petitioners'] counterclaim is hereby dismissed for lack of merit. SO ORDERED.[3]
Petitioners went on appeal asking for reversal of the RTC Decision. The Court of Appeals rendered its assailed Decision, the dispositive portion of which reads: THE FOREGOING CONSIDERED, the appealed Decision is hereby AFFIRMED. SO ORDERED.[4] As stated, reconsideration was denied. Hence, this petition positing: WHETHER PETITIONERS CAN BE HELD LIABLE FOR THE UNPAID LOAN DUE AND OWING RESPONDENT.
Petitioners should be held liable for their unpaid obligation of P1,571,972.86 as of February 15, 1993, with penalties, interest, attorney’s fees, and costs of suit, based on both the non-negotiable Promissory Note and Continuing Surety Agreement they executed. Under the Promissory Note, petitioners Tiu Hiong Guan and Juanito Rellera promised to pay respondent jointly and severally the single-payment loan of P350,000 at 28.92% interest
per annum, binding themselves in both their personal and official capacities. In case of default inter alia in the payment of any installment, interest, or charges, it is stipulated that the entire principal, as well as the interest andcharges, shall become due and payable at the option of and without notice by respondent. A penalty charge of 18% per annum and attorney's fees of 10% were also agreed upon therein. The Continuing Surety Agreement clearly states that the liability of all petitioners, as sureties, shall be solidary with Sunta, as their principal, for all of the latter's loans, credits, overdrafts,
advances,
discounts
and/or
other
credit
accommodations
not
exceeding P3,000,000. In case of default inter alia in the payment of any obligation upon maturity or any amortization thereof, it is similarly stipulated that all instruments, indebtedness, or other obligations thereby secured shall become due and payable by the sureties, at the option of and without demand or notice by respondent. In fact, their liability is expressly stated to be direct and immediate, not contingent upon the pursuit by respondent
of
whatever
remedies
it
may
have
against
Sunta. All
parties therein have agreed that the sureties shall at any time pay respondent,with or without demand upon Sunta, any of the loans, indebtedness, or other obligations secured, whether due or not. Any notice given byrespondent to any of the sureties shall be sufficient notice to all. From these two documents, the liability of petitioners is joint and several in both their personal and official capacities. They are not mere guarantors, but sureties. They do not insure the solvency of the debtor, but rather the debt itself. They obligate themselves “to pay the debt if the principal debtor will not pay, regardless of whether or not the latter is financially capable to fulfill his obligation.”[5] “Time and again, x x x the liability of a surety is determined strictly on the basis of the terms and conditions set out in the surety agreement.” [6] Solidary liability is one of its primary characteristics.[7] “The creditor may proceed against any one of the solidary debtors or some or all of them simultaneously.” [8] Thus, respondent may proceed against Sunta alone or some or all of petitioners herein. “Suretyship arises upon the solidary binding of a person — deemed the surety — with the principal debtor, for the purpose of fulfilling an obligation.” [9] “[A] suretyship is merely an accessory x x x to a principal obligation. Although a surety contract is secondary to the principal obligation, the liability of the surety is direct, primary and absolute; or equivalent to
that of a regular party to the undertaking. A surety becomes liable to the debt and duty of the principal obligor even without possessing a direct or personal interest in the obligations constituted by the latter.”[10] Petitioners are considered “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.”[11] It is irrelevant that none of petitioners personally benefited from the loan transaction between Sunta and respondent. The failure to pay attributable to either force majeure or the SEC Order does not veer away from the fact of liability as sureties. Even though ownership over the goods remains with respondent, the loss thereof has nothing to do with the loan that petitioners bound themselves to be solidarily liable with respondent. The Trust Receipt Agreement between them is a mere collateral agreement independent of the Continuing Surety Agreement, the purpose of which is to serve as additional security for the loan.[12] “[P]arties are bound by the terms of their contract, which is the law between them.”[13] WHEREFORE, the petition is DENIED. The Decision and Resolution of the Court of Appeals
in
CA-G.R.
CV
No.
57571,
May 23, 2000 and August 11, 2000, respectively, are hereby AFFIRMED. Costs against petitioners.
FIRST DIVISION
Suico Rattan & Buri Interiors,
G.R. No. 138145
Inc. and Spouses Esmeraldo and Elizabeth D. Suico
Present:
Petitioners, PANGANIBAN, CJ., Chairperson, YNARES-SANTIAGO, - versus -
AUSTRIA-MARTINEZ,
dated
CALLEJO, SR. and CHICO-NAZARIO, JJ. Court of Appeals and Metropolitan Bank and Trust
Promulgated:
Co., Inc., Respondents.
June 15, 2006
x------------------------------------------------x
DECISION
AUSTRIA-MARTINEZ, J.:
Before the Court is a petition for review on certiorari under Rule 45 of the Rules of Court assailing the Decision[1] of the Court of Appeals (CA) dated January 14, 1999 in CA-G.R. CV No. 48320, which reversed and set aside the Decision [2] of the Regional Trial Court (RTC) of Cebu in Civil Case No. CEB-13156; and the CA Resolution dated April 6, 1999, denying petitioners’ motion for reconsideration.[3]
The facts of the case are as follows:
Suico Rattan & Buri Interiors, Inc. (SRBII) is a domestic corporation engaged in the business of export of rattan and buri products. Spouses Esmeraldo and Elizabeth Suico
(Suico spouses) are officers of SRBII. On the other hand, Metropolitan Bank and Trust Co., Inc. (Metrobank) is a commercial banking corporation duly organized and existing under the laws of the Philippines.
In the course of its business, SRBII applied for a credit line with Metrobank. On September 5, 1991, SRBII and Metrobank, Mandaue branch, entered into a Credit Line Agreement (Agreement) wherein the latter granted the former a discounting line amounting toP7,000,000.00 and an export bills purchase or draft against payment line (EBP/DP line) P10,000,000.00 for a maximum aggregate principal amount of P17,000,000.00.[4] As provided for under the Agreement, drawings on the credit line are secured by a Continuing Surety Agreement for the sum of P17,500,000.00 executed by the Suico spouses, [5] a Real Estate Mortgage executed on September 5, 1991 by SRBII and the Suico spouses over properties located at Brgy. Tabok, Mandaue City, Cebu and covered by Transfer Certificate of Title (TCT) Nos. 21663 and 21665, and Fire Insurance policies over the properties duly endorsed in favor of Metrobank. The Agreement expressly provides that the EBP/DP line is “clean”.[6]
Previous to the execution of the Agreement, the Suico spouses had already incurred loan obligations from Metrobank which are secured by separate Real Estate Mortgages executed on May 8, 1986,[7] March 23, 1987[8] and August 24, 1987[9] over the same properties which are the subject of the Real Estate Mortgage executed on September 5, 1991. Between June 13, 1991 and July 11, 1991, SRBII also incurred obligations with Metrobank by entering into twelve negotiations for the purchase of export bills by the former from the latter. These obligations are evidenced by drafts drawn by SRBII in favor of Metrobank for a sum amounting to US$441,279.25 which has a peso equivalent of P12,218,866.23.[10] As a consequence of these negotiations, Metrobank issued various checks in favor of petitioners totalingP12,194,443.23,[11] the last one of which was dated July 24, 1991.[12]
Subsequently, SRBII and the Suico spouses were unable to pay their obligations prompting Metrobank to extra-judicially foreclose the four mortgages constituted over the
subject properties. Metrobank, being the lone and highest bidder, acquired the said properties during the auction sale. A Certificate of Sale dated November 18, 1992 was then issued in its favor.[13]
On November 5, 1992, Metrobank filed an action for the recovery of a sum of money arising from the obligations of SRBII and the Suico spouses on their export bills purchases incurred between June and July, 1991. [14] SRBII and the Suico spouses filed their Answer contending that their indebtedness are secured by a real estate mortgage and that the value of the mortgaged properties is more than enough to answer for all their obligations to Metrobank.[15]
On June 8, 1993, the RTC issued a pre-trial order enumerating the parties’ claims, testimonial and documentary evidence to be presented and the issues raised.[16] Thereafter, trial ensued.
After trial, the RTC rendered judgment on September 26, 1994 with the following dispositive portion:
WHEREFORE, foregoing premises considered, the Complaint is hereby dismissed. All obligations of defendants to plaintiffs incurred by the former either as principal, surety or guarantor, which matured and had become due and demandable on the date of the foreclosure of the Real Estate Mortgage are hereby declared already fully paid by the mortgage security.
SO ORDERED.[17]
Aggrieved by the decision of the RTC, Metrobank filed an appeal with the CA.
On January 14, 1999, the CA rendered a Decision disposing as follows:
WHEREFORE, the appealed decision is hereby REVERSED and SET ASIDE, and a new one rendered ordering appellees, jointly and severally, to pay appellant the sum of P16,585,286.27 representing the principal obligations and interests as of October 31, 1992, plus interest on the principal sum of P12,218,866.23 at the rate of P26% per annum from November 1, 1992 until the said amounts are fully paid, the sum equivalent to two percent (2%) of the total amount due as and for attorney’s fees, and to pay the costs.
SO ORDERED.[18]
While the CA affirmed the trial court’s ruling that under the provisions of the real estate mortgage contracts executed by herein petitioners, the clear intent of the contracting parties is that the mortgages shall not be limited to the amount secured under the said contracts but shall extend to other obligations that they may obtain from Metrobank, including renewals or extensions thereof, the CA ruled that since the proceeds from the foreclosure sale of the mortgaged properties amounted only to P10,383,141.63, the same is not sufficient to answer for the entire obligation of petitioners to Metrobank and that the latter may still recover the deficiency of P16,585,286.27 representing the value of the export bills purchased by herein petitioners.
SRBII and the Suico spouses filed a Motion for Reconsideration but the same was denied by the CA through its Resolution issued onApril 6, 1999. [19]
Hence, the present petition with the following Assignment of Errors:
I
THE RESPONDENT COURT OF APPEALS ERRED IN NOT HOLDING THAT THE REAL ESTATE MORTGAGE DATED SEPTEMBER 5, 1991 SERVED AS THE COLLATERAL FOR ALL THE OBLIGATIONS OF THE PETITIONERS.
II
THE RESPONDENT COURT OF APPEALS GRAVELY ERRED IN DECIDING THE CASE BASED ON AN ISSUE NOT RAISED IN THE PLEADINGS OR ADMISSIONS OF THE PARTIES.
III
THE RESPONDENT COURT OF APPEALS ERRED IN NOT TAKING COGNIZANCE THAT RES JUDICATA HAD ALREADY SET IN, IN VIEW OF THE TERMINATION OF THE PROCEEDINGS IN EXTRAJUDICIAL FORECLOSURE SALE.
IV
THE RESPONDENT COURT OF APPEALS ERRED IN ORDERING THE PETITIONERS TO PAY SOLIDARILY THE AMOUNT OFP16,585,286.27 REPRESENTING THE PRINCIPAL OBLIGATION AND INTEREST AS OF OCTOBER 31, 1992 AND TO PAY AN INTEREST ON THE PRINCIPAL SUM OF P12,218,866,23 AT THE RATE OF 26% PER ANNUM FROM NOVEMBER 1, 1992 UNTIL THE SAID AMOUNTS ARE FULLY PAID.
V
THE RESPONDENT COURT OF APPEALS ERRED IN HOLDING THAT PETITIONERS SUICO SPOUSES ARE SOLIDARILY LIABLE WITH PETITIONER CORPORATION FOR PAYMENT OF INTEREST PRIOR TO THE FILING OF THE COMPLAINT.
VI
THE RESPONDENT COURT OF APPEALS ERRED IN ORDERING PETITIONERS TO PAY THE SUM EQUIVALENT TO TWO PERCENT (2%) OF THE TOTAL AMOUNT DUE AS AND FOR ATTORNEY’S FEES AND TO PAY THE COSTS.[20]
As to the first assigned error, petitioners claim that the Real Estate Mortgage executed on September 5, 1991 answered for all their obligations to Metrobank. Petitioners contend that the language of the subject mortgage contract is explicit in that it shall secure all other obligations of petitioners of whatever kind or nature, whether direct or indirect, principal or secondary and whether said obligations have been contracted before, during or after the execution of the said mortgage contract. Petitioners also contend that the secured obligations shall include those which were incurred by petitioners from other branches of Metrobank because the properties covered by the subject mortgage contract had earlier been mortgaged to the other branches of Metrobank. Petitioners argue that despite the existence of prior mortgages, Metrobank’s acceptance of the mortgaged properties as collateral for their Credit Line Agreement only means that the value of the said properties is sufficient to answer for the previous and present obligations of petitioners and that Metrobank accepts the said properties as continuing collaterals. Petitioners argue that Metrobank is now estopped from claiming that the subject mortgage contract does not answer for all of petitioners’ obligations in its favor. With respect to the second assigned error, petitioners contend that the CA erred in ruling that the bank’s cause of action is based on its claim for a deficiency judgment arising from insufficient proceeds of the foreclosure sale of the mortgaged properties; Metrobank’s cause of action is for a sum of money; at the time of the filing of the complaint, there is no deficiency judgment to speak of because the complaint was filed on November 5, 1992 while the foreclosure sale was only held on November 18, 1992; the complaint was not amended to include recovery of the deficiency as part of its cause of action.
Anent the third assignment of error, petitioners assert that Metrobank is guilty of splitting a single cause of action when it filed its complaint for a sum of money on November 5, 1992 and, thereafter, on November 18, 1992, foreclosed the properties subject matter of
the mortgage. Petitioners contend that in the event that a mortgage debtor fails to pay his obligation, the mortgage creditor has the option to file an action to collect the indebtedness or to foreclose the property subject matter of the mortgage. However, the creditor may not pursue both remedies. Petitioners contend that the present action for a sum of money is already barred by res judicata by reason of the extrajudicial foreclosure sale of the mortgaged properties, as evidenced by the execution of the Definite Deed of Sale in favor of Metrobank on January 21, 1994.
As to the fourth assigned error, petitioners contend that the CA erred in holding that they are still liable to pay the deficiency in their obligation which was not covered by the proceeds of the sale of the foreclosed mortgaged properties. Petitioners assert that in bidding and in subsequently buying the subject mortgaged properties during the foreclosure sale for a price which is much lower than their market value, Metrobank effectively prevented petitioners from paying their entire obligation. Petitioners claim that they are not interested in the redemption of the foreclosed properties, rather they are more concerned with the payment of their obligation considering that these properties are the only ones with which they expect to settle their indebtedness. Hence, since Metrobank, in buying the foreclosed properties at a very low price, prevented petitioners from paying their entire obligation, it is already barred by the principle of estoppel, equity and fair play from recovering the remaining balance of petitioners’ obligation to it.
With respect to the fifth assigned error, the Suico spouses contend that the CA committed error in holding them solidarily liable with SRBII for the payment of the remaining balance of the latter’s obligation plus interest on the ground that they are mere sureties and as such they can only be held liable if the principal does not pay. Absent any showing that SRBII cannot pay, petitioners contend that they are not liable to pay. The Suico spouses also contend that, as sureties, they are liable to pay interest only at the time of the filing of the complaint.
As to the last assigned error, petitioners contend that the CA erred in awarding attorney’s fees equivalent to 2% of the total amount due because petitioners did not act in
bad faith nor did they willfully refuse to pay their obligation, which allegedly prompted Metrobank to litigate. Moreover, petitioners argue that the award of attorney’s fees by the CA is contrary to the general rule that attorney’s fees cannot be recovered as part of damages because of the policy that no premium should be placed on the right to litigate.
In its Comment, respondent bank contends that the export bills purchases made by petitioners are not secured by any real estate mortgage. To support its argument respondent bank cites the stipulation contained in the Credit Line Agreement that the export bills purchases are clean or unsecured. Respondent bank further argues that the export bills purchases were availed of by petitioners through the bank’s Cebu Downtown Center Branch (otherwise referred to in the records as the Plaridel Branch) while the other loan obligations of petitioners, which were secured by real estate mortgages, were obtained from its Mandaue City Branch. Moreover, respondent bank asserts that petitioners’ obligations with the former’s Mandaue City Branch are evidenced by documents which are distinct and separate from the documents representing petitioners’ export bills purchases with the Metrobank Cebu Downtown Center Branch. In any case, respondent bank contends that even if the real estate mortgage contracts executed by petitioners be considered as securing all of the latter’s obligations, including their export bills purchases, the fact remains that the foreclosure of the mortgaged properties generated an amount which is insufficient to answer for all the obligations of petitioners to respondent bank. Respondent bank contends that under the law, it is not prevented from claiming the balance of petitioners’ obligation which was not covered by the proceeds of the foreclosure sale. Respondent bank also argues that it is erroneous for petitioners to claim that just because it (Metrobank) did not require petitioners to put up additional security when they availed of subsequent loans, the previous mortgages are already sufficient to secure all their subsequent obligations.
Respondent bank further contends that the CA is correct in ruling that it (Metrobank) is entitled to deficiency judgment considering that petitioners themselves raised the issue that the real estate mortgages they executed secured all their obligations with respondent bank. Respondent argues that the issue on deficiency judgment necessarily arose because the proceeds of the foreclosure sale are not sufficient to answer for all the obligations of petitioners to respondent bank. In any case, respondent bank contends that the CA is
clothed with ample authority to resolve an issue even if it is not raised if such resolution is necessary in arriving at a just decision.
Respondent bank asserts that there is no splitting of cause of action because the complaint it filed against petitioners is simply for the purpose of collecting the balance of the latter’s obligation which was not covered by the proceeds of the sale of the mortgaged properties.
Respondent bank also contends that the Suico spouses are solidarily liable with SRBII because by reason of their execution of the Continuing Surety Agreement, the spouses’ liability became direct, primary and absolute.
As to the attorney’s fees awarded by the CA, respondent bank counters that petitioners are guilty of fraud and misrepresentation when they gave their assurance and warranty that documents such as letters of credit and commercial invoices are valid and existing when, in fact, they are not, thereby inducing respondent bank to grant and approve its transactions with petitioners involving the export bills purchases. By reason of such fraud and misrepresentation, respondent bank contends that it was compelled to incur expenses to protect its interest and enforce its claims.
The Court finds the petition partly meritorious.
The issues raised boil down to two basic questions: first, whether the mortgage contract executed on September 5, 1991 serves as security for all the obligations of petitioners to respondent bank; and second, whether the foreclosure of the mortgaged properties
precludes
respondent
bank
from
claiming
the
sum
of P16,585,286.27 representing the amount covered by the export bills purchased by herein petitioners between June and July 1991.
As to the first question, the Court agrees with petitioners that all their obligations, including their indebtedness arising from their purchase of export bills, are secured by the Real Estate Mortgage contract executed on September 5, 1991. We are not persuaded by respondent bank’s contention that the export bills purchases of petitioners from June 13, 1991 to July 11, 1991 were not secured by any real estate mortgage because of the stipulation in the Agreement that the export bill purchase/draft against payment (EBP/DP) line is clean, which means that it is unsecured.
The following provisions appear in the Agreement:
…
WHEREAS, the CLIENT is desirous of obtaining credit accommodations from the BANK and the latter is willing to extend such credit accommodations to the CLIENT upon the terms and conditions hereinafter stipulated.
NOW, THEREFORE, the CLIENT and the BANK, in consideration of the following terms and conditions have agreed and covenanted as follows:
1. The BANK hereby grants and shall make available to the CLIENT a credit line up to the aggregate principal amount of PESOS: SEVENTEEN MILLION ONLY (P17,000,000.00) PESOS in lawful currency of the Republic of the Philippines, to be availed as follows:
P 7,000,000.00 - DISCOUNTING LINE (REM) for one (1)
year, interest at prevailing rate, available by way of PNs not more than 360 days, discounted.
10,000,000.00 - EBP/DP LINE (CLEAN) for one (1)
year,
interest at prevailing rate.
2.
Drawings on the line shall be secured by:
1.
Continuing Suretyship of Spouses Esmeraldo Suico and Elizabeth D. Suico.
2.
REM for P7.0 MM over TCT Nos. 21663 & 21665 w/ an aggregate area of 10,318 sq. m. and situated at Brgy. Tabok, Mandaue City, for item 1 only
3.
Fire Insurance policy(ies) duly endorsed in bank’s favor.
…[21] (Emphasis supplied) It is true that the terms contained in the Agreement provide that the EBP/DP LINE is “clean” and that it is only those drawings made on the DISCOUNTING LINE which are secured by the mortgage constituted by petitioners spouses Suico over the subject properties. However, a perusal of the entire Agreement shows that the credit line extended to petitioners refers only to transactions that the
latter may enter into after the execution of the said
Agreement. There is nothing in the said document which shows that the credit line covered the export bill purchases incurred prior to the execution of the Agreement. In other words, the provision that the EBP/DP LINE is clear or not covered by real estate mortgage simply refers to credit accommodations which petitioners may avail from respondent bank subsequent to the execution of the Agreement. It does not, in any way, refer to credit accommodations which were already extended by respondent bank to petitioners prior toSeptember 5, 1991, the date the Agreement was constituted. The parties could not have intended that the Agreement shall also pertain to the export bills purchases made by petitioners prior to its execution, that is, between June and July 1991, considering that the maximum
amount
covered
by
the
EBP/DP
LINE
under
the
Agreement
is
only P10,000,000.00 while the outstanding obligation of petitioners for the export bills
purchases as of July 1991 already totaled US$441,279.25 which, at the time of the transactions, had a peso equivalent of P12,218,866.23.
On the other hand, pertinent portions of the Real Estate Mortgage executed on the same date as the Agreement provide as follows:
…
That for and in consideration of certain loans and other credit accommodations obtained from the Mortgagee amounting to SIX MILLION TWO HUNDRED FIFTY THOUSAND (P6,250,000.00) PESOS ONLY Philippine Currency, and to secure the payment of the same and those others that the Mortgagee may heretofore have extended or hereafter extend to the Mortgagor and/or SUICO RATTAN & BURI INTERIORS, INC., a domestic corporation with principal office and place of business at Tabok, Mandaue City, Philippines, hereinafter referred to, regardless of number, as the Borrower, including interest at the rate specified in the promissory note(s) or other evidence of indebtedness secured by this mortgage and expenses, and all other obligations of the Mortgagor/Borrower to the Mortgagee of whatever kind or nature, whether direct or indirect, principal or secondary, as appear in the accounts, books and records of the Mortgagee, whether such obligations have been contracted before, during or after the constitution of this mortgage, the Mortgagor does hereby transfer and convey by way of mortgage unto the Mortgagee, its successors or assigns, the parcels of land which are described in the list inserted at the back of this document, or in a supplementary list attached hereto, together with all the buildings and improvements now existing or which may hereafter be erected or constructed thereon and all easements, sugar quotas, agricultural or land indemnities, aids or subsidies, including all other rights or benefits annexed to or inherent therein, now existing or which may hereafter exist, and also other assets acquired with the proceeds of the loan hereby secured, all of which the Mortgagor declares that he is the absolute owner free from all liens and encumbrances.
…[22] (emphasis supplied)
From the language of the contract, it is clear that the mortgaged properties were intended to secure all loans, credit accommodations and all other obligations of herein petitioners to Metrobank, whether such obligations have been contracted before, during or after the constitution of the mortgage.
The Court finds no conflict between the provisions of the Agreement and the Real Estate Mortgage contract both dated September 5, 1991, insofar as the export bills purchases from June 13, 1991 to July 11, 1991 are concerned. The stipulations in the September 5, 1991 Agreement refer only to future export bill purchases, thus excluding those purchases made in June and July, 1991; even as the provisions of the subject Real Estate Mortgage pertain to all obligations of petitioners including those which were constituted even before the execution of the said mortgage. Thus, although the Agreement does not refer to export bill purchases incurred prior to the execution of said Agreement, the Real Estate Mortgage encompasses all obligations incurred by petitioners, including the June and July 1991 export bill purchases but not the purchases made after September 5, 1991 under the Agreement.
Neither is the Court persuaded by respondent bank’s contention that petitioners’ obligations arising from their purchase of export bills is separate and distinct from their other loan obligations with respondent bank because the export bills purchases were availed by petitioners through the bank’s Cebu Downtown Center/Plaridel branch while the other loan obligations of petitioners were obtained from its Mandaue City branch.
The Court quotes, with approval, the trial court’s ratiocination on this matter:
…
It matters not that the EBP/DP line was availed of by defendants with the Plaridel branch, because the Credit Line Agreement and the Real Estate Mortgages clearly indicate that defendants were indebted to plaintiff bank and
not to its Mandaue or Plaridel branch. This is clearly evident in the opening paragraph of the Credit Line Agreement and the Real Estate Mortgages when plaintiff defines itself as a “Commercial Banking Corporation organized and existing under and by virtue of the laws of the Republic of the Philippines, with principal offices and places of business at MetrobankPlaza, Gil. J. Puyat Avenue, Makati, Metro Manila.” Clearly therefore, defendants were deemed to be indebted to plaintiff with main office in Makatiand not with its Mandaue or Plaridel branch.
…[23]
It bears to note that the complaint for a sum of money was filed in the name of Metrobank alone, without impleading its Plaridel or Mandaue branches. By not impleading either of these branches, it only goes to show that respondent bank, itself, insofar as the present case is concerned, considers the whole Metrobank corporation as the aggrieved party. Hence, it is now estopped from claiming that the mortagaged properties secure only those transactions entered into with its Mandaue branch simply because the mortgage contracts were entered into through the said branch. It does not matter that the export bills purchases of petitioners were entered into through the facility of respondent bank’s Plaridel branch and evidenced by separate and distinct documents because in all these transactions there is only one creditor, which is the corporate entity known as Metrobank.
On the other hand, the Court is not persuaded by petitioners’ claim that the foreclosed properties command a market price ofP50,000,000.00 at the time of the foreclosure sale. No evidence appears on record to prove this allegation. Granting that the mortgaged properties were sold during the auction for an amount which is way below their market price, the same does not place the petitioners at a disadvantage. On the contrary, the low price works to their advantage because it would be easier for them to redeem the property sold. The Court agrees with the CA when it cited the case of Prudential Bank v. Martinez where the Court held as follows:
“Moreover, the fact that the mortgaged property is sold at an amount less than its actual market value should not militate against the right to such recovery. We fail to see any disadvantage going for the mortgagor. On the contrary, a mortgagor stands to gain with a reduced price because he possesses the right of redemption. When there is the right to redeem,
inadequacy of price should not be material, because the judgment debtor may reacquire the property or also sell his right to redeem and thus recover the loss he claims to have suffered by the reason of the price obtained at the auction sale. (De Leon v. Salvador, L-30871, December 28, 1970 and Bernabe v. Cruz, et. al., L-31603, December 28, 1970; 36 SCRA 567). Generally, in forced sales, low prices are usually offered and the mere inadequacy of the price obtained at the sheriff’s sale unless shocking to the conscience will not be sufficient to set aside a sale if there is no showing that in the event of a regular sale, a better price can be obtained (Ponce de Leon v. Rehabilitation Finance Corporation, L-24571, December 18, 1970, 36 SCRA 289). [24]
Hence, it is wrong for petitioners to conclude that when respondent bank supposedly bought the foreclosed properties at a very low price, the latter effectively prevented the former from satisfying their whole obligation. Petitioners still had the option of either redeeming the properties and, thereafter, selling the same for a price which corresponds to what they claim as the properties’ actual market value or by simply selling their right to redeem for a price which is equivalent to the difference between the supposed market value of the said properties and the price obtained during the foreclosure sale. In either case, petitioners will be able to recoup the loss they claim to have suffered by reason of the inadequate price obtained at the auction sale and, thus, enable them to settle their obligation with respondent bank. Moreover, petitioners are not justified in concluding that they should be considered as having paid their obligations in full since respondent bank was the one who acquired the mortgaged properties and that the price it paid was very inadequate. The fact that it is respondent bank, as the mortgagee, which eventually acquired the mortgaged properties and that the bid price was low is not a valid reason for petitioners to refuse to pay the remaining balance of their obligation. Settled is the rule that a mortgage is simply a security and not a satisfaction of indebtedness.[25]
As to petitioners’ contention that they are not liable to pay since there is no showing that the principal debtor cannot pay, the time-honored rule is that the surety obligates himself to pay the debt if the principal debtor will not pay, regardless of whether or not the latter is financially capable to fulfill his obligation. [26] Thus, a creditor can go directly against the surety although the principal debtor is solvent and is able to pay or no prior demand is made on the principal debtor.[27] Although a surety contract is secondary to the principal obligation, the liability of the surety is direct, primary and absolute; or equivalent to that of a regular party to the undertaking.[28] A surety is considered in law to be on the same footing as the principal debtor in relation to whatever is adjudged against the latter. [29]
Equally settled is the principle that contracts have the force of law between the parties and are to be complied with in good faith. [30] From the moment the contract is perfected, the parties are bound to comply with what is expressly stipulated as well as with what is required by the nature of the obligation in keeping with good faith, usage and the law.[31] In the present case, it is clear from the Continuing Surety Agreement [32] executed by the Suico spouses that they hold themselves solidarily liable with SRBII in the payment of the latter’s obligations to respondent bank to the extent of P17,500,000.00, plus interests and other incidental charges such as penalties, costs and expenses in collecting their obligation. The same principle applies with respect to the payment of interest. It is clear from the various letters executed by SRBII in favor of respondent bank that it agreed to pay interest in favor of respondent bank at the rate of 26% per annum based on the value of the draft, the same to be reckoned after twelve days from the date of purchase or from the date of dishonor, whichever is earlier, up to thedate of final payment. [33] Since the Suico spouses obligated themselves to be solidarily bound with SRBII, it follows that they are also liable to pay interest as stipulated in the above-cited letters.
Having settled that the mortgaged properties served as security for all the petitioners’ obligations to Metrobank and that the former’s liability is solidary, the next question to be resolved is whether, under the facts and circumstances obtaining in the present case, the respondent bank is precluded from recovering the amount representing the value of the export bills purchased by petitioners from it in June and July, 1991.
The rule is settled that a mortgage creditor may, in the recovery of a debt secured by a real estate mortgage, institute against the mortgage debtor either a personal action for debt or a real action to foreclose the mortgage. [34] These remedies available to the mortgage creditor are deemed alternative and not cumulative. An election of one remedy operates as a waiver of the other. [35] In sustaining the rule that prohibits mortgage creditors from pursuing both the remedies of a personal action for debt or a real action to foreclose the mortgage, the Court held in the case of Bachrach Motor Co., Inc. v. Esteban Icarangal, et al. that a rule which would authorize the plaintiff to bring a personal action against the debtor and simultaneously or successively another action against the mortgaged property, would result not only in multiplicity of suits so offensive to justice and obnoxious to law and equity, but also in subjecting the defendant to the vexation of being sued in the place of his residence or of the residence of the plaintiff, and then again in the place where the property lies.[36] Hence, a remedy is deemed chosen upon the filing of the suit for collection or upon
the filing of the complaint in an action for foreclosure of mortgage, pursuant to the provisions of Rule 68 of the Rules of Court. [37] As to extrajudicial foreclosure, such remedy is deemed elected by the mortgage creditor upon filing of the petition not with any court of justice but with the office of the sheriff of the province where the sale is to be made, in accordance with the provisions of Act No. 3135, as amended by Act No. 4118. [38]
Records show that the complaint for a sum of money was filed with the RTC on November 5, 1992. On the other hand, there is no direct evidence to show when respondent bank filed a petition with the provincial sheriff of Cebu for the extrajudicial foreclosure of the mortgaged properties. The petition for extrajudicial foreclosure of the mortgaged properties was not presented in evidence. What appears on record is that the auction sale of the foreclosed properties was conducted on November 17, 1992. However, as mentioned earlier, the remedy of extrajudicial foreclosure is deemed chosen not on the date of foreclosure sale but upon the filing of the petition for foreclosure with the office of the sheriff of the province where the sale is to be made. Hence, for purposes of determining which remedy was first elected – the personal action for debt or the real action for foreclosure – there is a need to determine when the respondent bank filed a petition for extrajudicial foreclosure.
The Certificate of Sale executed by the Ex-Officio Provincial Sheriff indicates that the extrajudicial foreclosure sale was conducted onNovember 17, 1992. [39] In the absence of evidence to the contrary, the Court presumes that the sheriff regularly performed his duties and that the ordinary course of business had been followed in the conduct of the auction sale.[40] Section 3 of Act No. 3135, as amended by Act No. 4118 provides:
Sec. 3. Notice shall be given by posting notices of the sale for not less than twenty days in at least three public places of the municipality or city where the property is situated and if such property is worth more than four hundred pesos, such notice shall also be published once a week for at least three consecutive weeks in a newspaper of general circulation in the municipality or city. (Emphasis supplied)
Hence, it is reasonable to assume that the requirements regarding notice and publication prior to the conduct of the sale have been complied with. Going back 20 days from November 17, 1992, which was the date the auction sale was conducted, the petition for extrajudicial foreclosure could have been filed by respondent bank not later than October
27, 1992. Considering that the complaint for a sum of money was only filed on November 5, 1992, the only conclusion that can be arrived at is that respondent bank first elected to avail of the remedy of extrajudicial foreclosure. Thus, by availing of such remedy it is deemed to have waived its right to file an ordinary case for collection.
The question that remains then is: may the complaint for a sum of money filed by respondent bank be considered as a suit for the recovery of deficiency in petitioners’ obligation?
The Court rules in the negative.
It is undisputed that the suit filed by respondent bank with the trial court was a personal action for the collection of a sum of money. The complaint was premised on the refusal of herein petitioners’ buyers to pay and accept the value of the drafts or bills of exchange and the subsequent failure of petitioners to answer for the value of the said drafts plus interest upon notice and demand sent by respondent bank. There was no mention, either in the body of the complaint or in the prayer, for the recovery of the balance of petitioners’ obligations which were not covered by the foreclosure sale. In fact, the foreclosure sale was not even mentioned. In other words, in filing the complaint with the RTC, respondent bank was not suing for any deficiency. Understandably, the respondent bank could not have claimed such deficiency because, as correctly observed by petitioners, at the time of the filing of the complaint on November 5, 1992, the foreclosure sale is yet to be conducted. Hence, the complaint cannot, in any way, be construed as an action for the recovery of deficiency in petitioners’ obligation. It is actually an ordinary action for collection which is barred by reason of respondent’s prior election of the remedy of foreclosure. Thus, the Court is left with no recourse but to sustain the dismissal of the complaint by the RTC subject to the right of Metrobank to recover the alleged deficiency, as will
be
discussed
forthwith. It
must
be
emphasized
that
petitioners, Metrobank did not amend its complaint accordingly.
as
aptly
observed
by
Given the fact that the proceeds of the auction sale were not sufficient to answer for the entire obligation of petitioners to respondent bank, the latter still has the right to recover the balance due it after applying the proceeds of the sale. We agree with the CA that where the mortgage creditor chooses the remedy of foreclosure and the proceeds of the foreclosure sale are insufficient to cover the debt, the mortgagee is entitled to claim the deficiency from the debtor.[41] The law gives the mortgagee the right to claim for the deficiency resulting from the price obtained in the sale of the property at public auction and the outstanding obligation at the time of the foreclosure proceedings. [42] This rule is based on the principle earlier mentioned that the mortgage is only a security and not a satisfaction of the mortgagor’s entire obligation. Moreover, unlike in pledge[43] and chattel mortgage on a thing sold on installment,[44] where the Civil Code expressly forecloses the right of creditors to sue for any deficiency resulting from the sale of the property given as a security for the obligation, there is nothing in Act. No. 3135,[45] the law governing extrajudicial foreclosures, which expressly or impliedly prohibits the recovery of such deficiency. If the legislature had intended to deny the creditor the right to sue for any deficiency resulting from the foreclosure of a security given to guarantee an obligation, the law would expressly so provide.[46] Absent such a provision in Act. No. 3135, as amended, the creditor is not precluded from taking action to recover any unpaid balance on the principal obligation simply because he chose to extrajudicially foreclose the real estate mortgage. [47] Hence, in the present case, the Court’s dismissal of the complaint should be without prejudice to the filing of another action for the recovery of the balance left in petitioners’ obligation after the foreclosure sale of the mortgaged properties.
The CA or this Court has no jurisdiction to rule on the amount of deficiency that is yet to be claimed and proved in the proper forum byMetrobank.
WHEREFORE, the petition is partially GRANTED. The assailed Decision and Resolution of the Court of Appeals in CA-G.R. CV No. 48320 are REVERSED and SET ASIDE. The Decision of the Regional Trial Court of Cebu, Branch 8 in Civil Case No. CEB-13156 isREINSTATED with MODIFICATION to the effect that the portion of the RTC Decision, declaring that “all obligations of defendants to plaintiffs incurred by the former either as principal, surety or guarantor, which matured and had become due and demandable on the date of the foreclosure of the Real Estate Mortgage are considered fully paid by the mortgage security”, is DELETED subject to the right of Metropolitan Bank and Trust Co., Inc. to recover the amount of deficiency in a proper action in the proper court.
No pronouncement as to cost.
SO ORDERED.
SECOND DIVISION
SECURITY PACIFIC CORPORATION,
ASSURANCE
G.R. No. 144740
Petitioner,
Present: - versus -
THE HON. AMELIA TRIA-INFANTE, In her official capacity as Presiding Judge, Regional Trial Court, Branch 9, Manila; THE PEOPLE OF THE PHILIPPINES, represented by Spouses REYNALDO and ZENAIDA ANZURES; and REYNALDO R. BUAZON, In his official capacity as Sheriff IV, Regional Trial Court, Branch 9, Manila,
PUNO, Chairman, AUSTRIA-MARTINEZ, CALLEJO, SR., TINGA, and CHICO-NAZARIO, JJ.
Respondents. Promulgated:
August 31, 2005 x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x
DECISION CHICO-NAZARIO, J.:
Before Us is a petition for review on certiorari, assailing the Decision[1] and Resolution[2] of the Court of Appeals in CA-G.R. SP No. 58147, dated 16 June 2000 and 22 August 2000, respectively. The said Decision and Resolution declared that there was no grave abuse of discretion on the part of respondent Judge in issuing the assailed order dated 31 March 2000, which was the subject in CA-G.R. SP No. 58147.
THE FACTS
The factual milieu of the instant case can be traced from this Court’s decision in G.R. No. 106214 promulgated on 05 September 1997.
On 26 August 1988, Reynaldo Anzures instituted a complaint against Teresita Villaluz (Villaluz) for violation of Batas Pambansa Blg. 22. The criminal information was brought before the Regional Trial Court, City of Manila, and raffled off to Branch 9, then presided over by Judge Edilberto G. Sandoval, docketed as Criminal Case No. 89-69257.
An Ex-Parte Motion for Preliminary Attachment[3] dated 06 March 1989 was filed by Reynaldo Anzures praying that pending the hearing on the merits of the case, a Writ of Preliminary Attachment be issued ordering the sheriff to attach the properties of Villaluz in accordance with the Rules.
On 03 July 1989, the trial court issued an Order [4] for the issuance of a writ of preliminary attachment “upon complainant’s posting of a bond which is hereby fixed
at P2,123,400.00 and the Court’s approval of the same under the condition prescribed by Sec. 4 of Rule 57 of the Rules of Court….”
An attachment bond[5] was thereafter posted by Reynaldo Anzures and approved by the court. Thereafter, the sheriff attached certain properties of Villaluz, which were duly annotated on the corresponding certificates of title.
On 25 May 1990, the trial court rendered a Decision [6] on the case acquitting Villaluz of the crime charged, but held her civilly liable. The dispositive portion of the said decision is reproduced hereunder:
WHEREFORE, premises considered, judgment is hereby rendered ACQUITTING the accused TERESITA E. VILLALUZ withcost de oficio. As to the civil aspect of the case however, accused is ordered to pay complainant Reynaldo Anzures the sum of TWO MILLION ONE HUNDRED TWENTY THREE THOUSAND FOUR HUNDRED (P2,123,400.00) PESOS with legal rate of interest from December 18, 1987 until fully paid, the sum of P50,000.00 as attorney’s fees and the cost of suit.[7]
Villaluz interposed an appeal with the Court of Appeals, and on 30 April 1992, the latter rendered its Decision,[8] the dispositive portion of which partly reads:
WHEREFORE, in CA-G.R. CV No. 28780, the Decision of the Regional Trial Court of Manila, Branch 9, dated May 25, 1990, as to the civil aspect of Criminal Case No. 89-69257, is hereby AFFIRMED, in all respects….
The case was elevated to the Supreme Court (G.R. No. 106214), and during its pendency, Villaluz posted a counter-bond in the amount of P2,500,000.00 issued by petitioner Security Pacific Assurance Corporation. [9] Villaluz, on the same date[10] of the counter-bond, filed an Urgent Motion to Discharge Attachment. [11]
On 05 September 1997, we promulgated our decision in G.R. No. 106214, affirming in toto the decision of the Court of Appeals.
In view of the finality of this Court’s decision in G.R. No. 106214, the private complainant moved for execution of judgment before the trial court. [12]
On 07 May 1999, the trial court, now presided over by respondent Judge, issued a Writ of Execution.[13]
Sheriff Reynaldo R. Buazon tried to serve the writ of execution upon Villaluz, but the latter no longer resided in her given address. This being the case, the sheriff sent a Notice of Garnishment upon petitioner at its office in Makati City, by virtue of the counter-bond posted by Villaluz with said insurance corporation in the amount of P2,500,000.00. As reported by the sheriff, petitioner refused to assume its obligation on the counter-bond it posted for the discharge of the attachment made by Villaluz. [14]
Reynaldo Anzures, through the private prosecutor, filed a Motion to Proceed with Garnishment,[15] which was opposed by petitioner[16] contending that it should not be held liable on the counter-attachment bond.
The trial court, in its Order dated 31 March 2000,[17] granted the Motion to Proceed with Garnishment. The sheriff issued a Follow-Up of Garnishment [18] addressed to the President/General Manager of petitioner dated 03 April 2000.
On 07 April 2000, petitioner filed a Petition for Certiorari with Preliminary Injunction and/or Temporary Restraining Order[19] with the Court of Appeals, seeking the nullification of the trial court’s order dated 31 March 2000 granting the motion to proceed with garnishment. Villaluz was also named as petitioner. The petitioners contended that the respondent Judge, in issuing the order dated 31 March 2000, and the sheriff committed grave abuse of discretion and grave errors of law in proceeding against the petitioner corporation on its counter-attachment bond, despite the fact that said bond was not approved by the Supreme Court, and that the condition by which said bond was issued did not happen.[20]
On 16 June 2000, the Court of Appeals rendered a Decision, [21] the dispositive portion of which reads:
WHEREFORE, premises considered, the Court finds no grave abuse of discretion on the part of respondent judge in issuing the assailed order. Hence, the petition is dismissed.
A Motion for Reconsideration [22] was filed by petitioner, but was denied for lack of merit by the Court of Appeals in its Resolution[23] dated 22 August 2000.
Undeterred, petitioner filed the instant petition under Rule 45 of the 1997 Rules of Civil Procedure, with Urgent Application for a Writ of Preliminary Injunction and/or Temporary Restraining Order.[24]
On 13 December 2000, this Court issued a Resolution [25] requiring the private respondents to file their Comment to the Petition, which they did. Petitioner was required to file its Reply[26] thereafter.
Meanwhile, on 17 January 2001, petitioner and the spouses Reynaldo and Zenaida Anzures executed a Memorandum of Understanding (MOU).[27] In it, it was stipulated that as of said date, the total amount garnished from petitioner had amounted to P1,541,063.85, and so the remaining amount still sought to be executed was P958,936.15.[28] Petitioner tendered and paid the amount of P300,000.00 upon signing of the MOU, and the balance of P658,936.15 was to be paid in installment at P100,000.00 at the end of each month from February 2001 up to July 2001. At the end of August 2001, the amount of P58,936.00 would have to be paid.
This would make the aggregate amount paid to the private
respondents P2,500,000.00.[29] There was, however, a proviso in the MOU which states that “this contract shall not be construed as a waiver or abandonment of the appellate review pending before the Supreme Court and that it will be subject to all such interim orders and final outcome of said case.”
On 13 August 2001, the instant petition was given due course, and the parties were obliged to submit their respective Memoranda.[30]
ISSUES
The petitioner raises the following issues for the resolution of this Court:
Main Issue - WHETHER OR NOT THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR IN AFFIRMING THE 31 MARCH 2000 ORDER OF PUBLIC RESPONDENT JUDGE WHICH ALLOWED EXECUTION ON THE COUNTER-BOND ISSUED BY THE PETITIONER.
Corollary Issues – (1) WHETHER OR NOT THE COURT OF APPEALS CORRECTLY RULED THAT THE ATTACHMENT ON THE PROPERTY OF VILLALUZ WAS DISCHARGED WITHOUT NEED OF COURT APPROVAL OF THE COUNTERBOND POSTED; and (2) WHETHER OR NOT THE COURT OF APPEALS CORRECTLY RULED THAT THE ATTACHMENT ON THE PROPERTY OF VILLALUZ WAS DISCHARGED BY THE MERE ACT OF POSTING THE COUNTER-BOND.
THE COURT’S RULING
Petitioner seeks to escape liability by contending, in the main, that the writ of attachment which was earlier issued against the real properties of Villaluz was not discharged. Since the writ was not discharged, then its liability did not accrue. The alleged failure of this Court in G.R. No. 106214 to approve the counter-bond and to cause the discharge of the attachment against Villaluz prevented the happening of a condition upon which the counter-bond’s issuance was premised, such that petitioner should not be held liable thereon.[31]
Petitioner further asserts that the agreement between it and Villaluz is not a suretyship agreement in the sense that petitioner has become an additional debtor in relation to private respondents. It is merely waiving its right of excussion [32] that would ordinarily apply to counter-bond guarantors as originally contemplated in Section 12, Rule 57 of the 1997 Rules.
In their Comment,[33] the private respondents assert that the filing of the counter-bond by Villaluz had already ipso facto discharged the attachment on the properties and made the petitioner liable on the bond. Upon acceptance of the premium, there was already an express contract for surety between Villaluz and petitioner in the amount of P2,500,000.00 to answer for any adverse judgment/decision against Villaluz.
Petitioner filed a Reply[34] dated 09 May 2001 to private respondents’ Comment, admitting the binding effect of the bond as between the parties thereto. What it did not subscribe to was the theory that the attachment was ipso facto or automatically discharged by the mere filing of the bond in court. Such theory, according to petitioner, has no foundation.
Without an order of discharge of attachment and approval of the bond,
petitioner submits that its stipulated liability on said bond, premised on their occurrence, could not possibly arise, for to hold otherwise would be to trample upon the statutorily guaranteed right of the parties to contractual autonomy.
Based on the circumstances present in this case, we find no compelling reason to reverse the ruling of the Court of Appeals. Over the years, in a number of cases, we have made certain pronouncements about counter-bonds.
In Tijam v. Sibonghanoy,[35] as reiterated in Vanguard Assurance Corp. v. Court of Appeals,[36] we held:
. . . [A]fter the judgment for the plaintiff has become executory and the execution is ‘returned unsatisfied,’ as in this case, the liability of the bond automatically attaches and, in failure of the surety to satisfy the judgment against the defendant despite demand therefore, writ of execution may issue against the surety to enforce the obligation of the bond.
In Luzon Steel Coporation v. Sia, et al.:
[37]
. . . [C]ounterbonds posted to obtain the lifting of a writ of attachment is due to these bonds being security for the payment of any judgment that the
attaching party may obtain; they are thus mere replacements of the property formerly attached, and just as the latter may be levied upon after final judgment in the case in order to realize the amount adjudged, so is the liability of the countersureties ascertainable after the judgment has become final. . . .
In Imperial Insurance, Inc. v. De Los Angeles,[38] we ruled:
. . . Section 17, Rule 57 of the Rules of Court cannot be construed that an “execution against the debtor be first returned unsatisfied even if the bond were a solidary one, for a procedural may not amend the substantive law expressed in the Civil Code, and further would nullify the express stipulation of the parties that the surety’s obligation should be solidary with that of the defendant.
In Philippine British Assurance Co., Inc. v. Intermediate Appellate Court,[39] we further held that “the counterbond is intended to secure the payment of ‘any judgment’ that the attaching creditor may recover in the action.”
Petitioner does not deny that the contract between it and Villaluz is one of surety. However, it points out that the kind of surety agreement between them is one that merely waives its right of excussion. This cannot be so. The counter-bond itself states that the parties jointly and severally bind themselves to secure the payment of any judgment that the plaintiff may recover against the defendant in the action. 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. [40]
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. 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 promise of the principal is said to be direct, primary and absolute; in other words, he is directly and equally bound with the principal. The surety therefore becomes liable for the debt or duty of another although he possesses no direct or personal interest over the obligations nor does he receive any benefit therefrom.[41]
In view of the nature and purpose of a surety agreement, petitioner, thus, is barred from disclaiming liability.
Petitioner’s argument that the mere filing of a counter-bond in this case cannot automatically discharge the attachment without first an order of discharge and approval of the bond, is lame.
Under the Rules, there are two (2) ways to secure the discharge of an attachment. First, the party whose property has been attached or a person appearing on his behalf may post a security. Second, said party may show that the order of attachment was improperly or irregularly issued.[42] [43]
The first applies in the instant case.
Section 12, Rule 57,
provides:
SEC. 12. Discharge of attachment upon giving counter-bond. – After a writ of attachment has been enforced, the party whose property has been attached, or the person appearing on his behalf, may move for the discharge of the attachment wholly or in part on the security given. The court shall, after due notice and hearing, order the discharge of the attachment if the movant makes a cash deposit, or files a counter-bond executed to the attaching party with the clerk of the court where the application is made, in an amount equal to that fixed by the court in the order of attachment, exclusive of costs. But if the attachment is sought to be discharged with respect to a particular property, the counter-bond shall be equal to the value of that property as determined by the court. In either case, the cash deposit or the counter-bond
shall secure the payment of any judgment that the attaching party may recover in the action. A notice of the deposit shall forthwith be served on the attaching party. Upon the discharge of an attachment in accordance with the provisions of this section, the property attached, or the proceeds of any sale thereof, shall be delivered to the party making the deposit or giving the counter-bond, or to the person appearing on his behalf, the deposit or counterbond aforesaid standing in place of the property so released. Should such counter-bond for any reason be found to be or become insufficient, and the party furnishing the same fail to file an additional counter-bond, the attaching party may apply for a new order of attachment.
It should be noted that in G.R. No. 106214, per our Resolution dated 15 January 1997, [44]
we permitted Villaluz to file a counter-attachment bond. On 17 February 1997,[45] we
required the private respondents to comment on the sufficiency of the counter-bond posted by Villaluz.
It is quite palpable that the necessary steps in the discharge of an attachment upon giving counter-bond have been taken. To require a specific order for the discharge of the attachment when this Court, in our decision in G.R. No. 106214, had already declared that the petitioner is solidarily bound with Villaluz would be mere surplusage. Thus:
During the pendency of this petition, a counter-attachment bond was filed by petitioner Villaluz before this Court to discharge the attachment earlier issued by the trial court. Said bond amounting to P2.5 million was furnished by Security Pacific Assurance, Corp. which agreed to bind itself “jointly and severally” with petitioner for “any judgment” that may be recovered by private respondent against the former.[46]
We are not unmindful of our ruling in the case of Belisle Investment and Finance Co., Inc. v. State Investment House, Inc.,[47] where we held:
. . . [T]he Court of Appeals correctly ruled that the mere posting of a counterbond does not automatically discharge the writ of attachment. It is only after hearing and after the judge has ordered the discharge of the attachment if a cash deposit is made or a counterbond is executed to the attaching creditor is filed, that the writ of attachment is properly discharged under Section 12, Rule 57 of the Rules of Court.
The ruling in Belisle, at first glance, would suggest an error in the assailed ruling of the Court of Appeals because there was no specific resolution discharging the attachment and approving the counter-bond.
As above-explained, however, consideration of our
decision in G.R. No. 106214 in its entirety will readily show that this Court has virtually discharged the attachment after all the parties therein have been heard on the matter.
On this score, we hew to the pertinent ratiocination of the Court of Appeals as regards the heretofore cited provision of Section 12, Rule 57 of the 1997 Rules of Civil Procedure, on the discharge of attachment upon giving counter-bond:
. . . The filing of the counter-attachment bond by petitioner Villaluz has discharged the attachment on the properties and made the petitioner corporation liable on the counter-attachment bond. This can be gleaned from the “DEFENDANT’S BOND FOR THE DISSOLUTION OF ATTACHMENT”, which states that Security Pacific Assurance Corporation, as surety, in consideration of the dissolution of the said attachment jointly and severally, binds itself with petitioner Villaluz for any judgment that may be recovered by private respondent Anzures against petitioner Villaluz.
The contract of surety is only between petitioner Villaluz and petitioner corporation. The petitioner corporation cannot escape liability by stating that a court approval is needed before it can be made liable. This defense can only be availed by petitioner corporation against petitioner Villaluz but not against third persons who are not parties to the contract of surety. The petitioners hold themselves out as jointly and severally liable without any conditions in the counter-attachment bond. The petitioner corporation cannot impose requisites before it can be made liable when the law clearly does not require such requisites to be fulfilled.[48] (Emphases supplied.)
Verily, a judgment must be read in its entirety, and it must be construed as a whole so as to bring all of its parts into harmony as far as this can be done by fair and reasonable interpretation and so as to give effect to every word and part, if possible, and to effectuate the intention and purpose of the Court, consistent with the provisions of the organic law. [49]
Insurance companies are prone to invent excuses to avoid their just obligation. [50] It seems that this statement very well fits the instant case.
WHEREFORE, in view of all the foregoing, the Decision and Resolution of the Court of Appeals dated 16 June 2000 and 22 August 2000, respectively, are both AFFIRMED. Costs against petitioner.
SO ORDERED.
SYNOPSIS McAdore Finance and Investment, Inc. (McAdore) was the owner and Operator of McAdore International Palace Hotel in Dagupan City. Private respondent (Decorp) was the grantee of a franchise to operate and maintain electric services in the province of Pangasinan, including Dagupan City. McAdore and Decorp entered into a contract whereby Decorp shall provide electric power to McAdore’s Hotel. During the term of their contract for power service, it was discovered that the terminal transformers connected to the meter had been interchanged thereby resulting in the slow rotation of the meter, hence, McAdore paid smaller billings. Decorp issued a corrected bill, but McAdore refused to pay. As a result, Decorp disconnected power supply to the hotel. McAdore filed a suit for damages with prayer for a writ of preliminary injunction against Decorp. McAdore posted injunction bonds taken from several sureties, one of which, is herein petitioner Paramount. Accordingly, a writ was issued ordering Decorp to continue supplying electric power to the hotel and restrained from further disconnecting it. After due hearing, the trial court rendered a judgment in favor of Decorp. McAdore was ordered to pay Decorp and held the bonding companies jointly and severally liable. McAdore did not appeal the decision; however, Paramount appealed to the Court of Appeals (CA). The CA affirmed the decision of the trial court. Hence, this appeal.
The core issue to be resolved here is whether or not petitioner was denied due process when the trial court found the injunction bond it issued in favor of McAdore liable to Decorp. According to the Supreme Court, Paramount cannot hide under the cloak of non-liability on its injunction bond on the mere expediency that it was deprived of due process. What the law abhors is not the absence of previous notice but rather the absolute lack of opportunity to ventilate a party’s side. The petitioner cannot successfully invoke denial of due process where it was given a chance to be heard. When petitioner issued the bond in favor of its principal, it undertook to assume all the damages that may be suffered after finding that the principal is not entitled to the relief being sought. The instant petition was denied. SYLLABUS 1. REMEDIAL LAW; PROVISIONAL REMEDIES; INJUNCTION, CONSTRUED; PURPOSE THEREOF. – Injunction is an extraordinary remedy calculated to preserve the status quo of things and to prevent actual or threatened acts violative of the rules of equity and good conscience as would consequently afford an injured party a cause of action resulting from the failure of the law to provide for an adequate or complete relief. A preliminary injunction is an order granted at any stage of an action or proceeding prior to the judgment or final order requiring a party or a court, agency or a person to refrain from a particular act or acts. It may also require the performance of a particular act or acts, in which case it shall be known as a preliminary mandatory injunction. Its sole purpose is not to correct a wrong of the past, in the sense of redress for injury already sustained, but to prevent further injury. 2. ID.; ID.; PRELIMINARY INJUNCTION; WHEN GRANTED. – A preliminary injunction or temporary restraining order may be granted only when, among others, the applicant, unless exempted by the court, files with the court where the action or proceeding is pending, a bond executed to the party or person enjoined, in an amount to be fixed by the court, to the effect that the applicant will pay such party or person all damages which he may sustain by reason of the injunction or temporary restraining order if the court should finally decide that the applicant was not entitled thereto. Upon approval of the requisite bond, a writ of preliminary injunction shall be issued. 3. ID.; ID.; ID.; ID.; INJUNCTION BOND; WHEN ANSWERABLE FOR CLAIMS FOR DAMAGES; APPLICATION IN CASE AT BAR. – At the trial, the amount of damages to be awarded to either party, upon the bond of the adverse party, shall be claimed, ascertained, and awarded under the same procedure prescribed in Section 20 of Rule 57. of the 1997 Rules of Civil Procedure, which is similarly applicable to preliminary injunction. The above rule comes into play when the plaintiff-applicant for injunction fails to sustain his action, and the defendant is thereby granted the right to proceed against the bond posted by the former. In the case at bench, the trial court dismissed McADORE’s action for damages with prayer for writ of preliminary injunction and eventually adjudged the payment of actual, moral, and exemplary damages against plaintiff-applicant. Consequently, private respondent DECORP can proceed against the injunction bond posted by plaintiff-applicant to recover the damages occasioned by the issuance by the trial court of the writ of injunction. In order for the injunction bond to become answerable for the above-described damages, the following requisites must concur: 1. The application for damages must be filed in the same case where the bond was issued; 2. Such application for damages must be filed before the entry of judgment;
and 3. After hearing with notice to the surety. Contrary to petitioner’s thesis, it is neither mandatory nor fatal that there should be a separate hearing in order that damages upon the bond can be claimed, ascertained and awarded, as can be gleaned from a cursory reading of the provisions of Rule 57, Section 20. What is necessary only is for the attaching party and his surety or sureties to be duly notified and given the opportunity to be heard. In the case at bench, this Court accords due respect to the factual finding of the Court of Appeals that “PARAMOUNT was present and represented by its counsel Atty. Nonito Q. Cordero as shown in the trial court’s order dated March 22, 1985 xxx.” 4. ID.; ID.; ID.; ID.; ID.; PURPOSE THEREOF; CASE AT BAR. – Rule 58, Section 4(b), provides that a bond is executed in favor of the party enjoined to answer for all damages which he may sustain by reason of the injunction. This Court already had occasion to rule on this matter in Mendoza vs. Cruz, 94 SCRA 821, at 826 (1979), where it held that “(t)he injunction bond is intended as a security for damages in case it is finally decided that the injunction ought not to have been granted. It is designed to cover all damages which the party enjoined can possibly suffer. Its principal purpose is to protect the enjoined party against loss or damage by reason of an injunction.” No distinction was made as to when the damages should have been incurred. APPEARANCES OF COUNSEL Soo Gutierrez Leogardo Lee for petitioner. Angara Abello Concepcion Regala Cruz for private respondent. Republic of the Philippines Supreme Court Baguio City
THIRD DIVISION
PHILIPPINE CHARTER INSURANCE CORPORATION,
Petitioner,
G.R. No. 180898
Present:
VELASCO, JR., J.,Chairperson,
PERALTA, - versus -
ABAD, MENDOZA, and PERLAS-BERNABE,JJ.
PETROLEUM DISTRIBUTORS & SERVICE CORPORATION Respondent.
Promulgated:
April 18, 2012
X -------------------------------------------------------------------------------------- X DECISION MENDOZA, J.:
Before the Court is a petition for review under Rule 45 of the Rules of Court seeking the reversal of the July 31, 2007 Decision [1] and the December 28, 2007 Resolution[2] of the Court of Appeals (CA) in CA-G.R. CV No. 82417, which affirmed with modification the January 12, 2004 Decision of the Regional Trial Court, Branch 111, Pasay City (RTC). The Facts: On
January
27,
1999,
respondent
Petroleum
Distributors
and
Services
Corporation (PDSC), through its president, Conrado P. Limcaco, entered into a building contract[3] with N.C. Francia Construction Corporation (FCC), represented by its president and chief executive officer, Emmanuel T. Francia, for the construction of a four-story commercial and parking complex located at MIA Road corner Domestic Road, Pasay City, known as Park ‘N Fly Building (Park ‘N Fly). Under the contract, FCC agreed to undertake the construction of Park ‘N Fly for the price of ₱45,522,197.72.
The parties agreed that the construction work would begin on February 1, 1999. Under the Project Evaluation and Review Technique Critical Path Method (PERT-CPM), the project was divided into two stages: Phase 1 [4] of the construction work would be finished on May 17, 1999 and Phase 2[5] would begin on May 18, 1999 and finish on October 20, 1999. The project should be turned over by October 21, 1999.[6] It was further stipulated that in the event FCC failed to finish the project within the period specified, liquidated damages equivalent to 1/10 of 1% of the contract price for every day of delay shall accrue in favor of PDSC.[7] To ensure compliance with its obligation, FCC’s individual officers, namely, Natividad Francia, Emmanuel C. Francia, Jr., Anna Sheila C. Francia, San Diego Felipe G. Bermudez, Emmanuel T. Francia, Charlemagne C. Francia, and Ruben G. Caperiña, signed the Undertaking of Surety[8] holding themselves personally liable for the accountabilities of FCC. Also, FCC procured Performance Bond No. 31915 amounting to ₱6,828,329.00 from petitioner Philippine Charter Insurance Corporation (PCIC) to secure full and faithful performance of its obligation under the Building Contract.[9] The construction of the Park ‘N Fly started on February 1, 1999. Pursuant to the Building Contract, PDSC sourced out construction materials and subcontracted various phases of the work to help obtain the lowest cost of the construction and speed up the work of the project. These resulted in the reduction of the contract price. [10]
During the Phase 1 of the project, PDSC noticed that FCC was sixteen (16) days behind schedule. In a Letter[11] dated March 25, 1999, it reminded FCC to catch up with the schedule of the projected work path, or it would impose the penalty of 1/10 of the 1% of the contract price. The problem, however, was not addressed, as the delay increased to 30 days[12] and ballooned to 60 days.[13] Consequently, on September 10, 1999, FCC executed a deed of assignment, [14]
assigning a portion of its receivables from Caltex Philippines, Inc. (Caltex), and a chattel
mortgage,[15] conveying some of its construction equipment to PDSC as additional security for the faithful compliance with its obligation. On even date, PDSC and FCC likewise executed a memorandum of agreement (MOA), [16]
wherein the parties agreed to revise the work schedule of the project. As a consequence,
Performance Bond No. 31915 was extended up to March 2, 2000.[17]
For failure of FCC to accomplish the project within the agreed completion period, PDSC, in a letter[18] dated December 3, 1999, informed FCC that it was terminating their contract based on Article 12, Paragraph 12.1 of the Building Contract. Subsequently, PDSC sent demand letters[19] to FCC and its officers for the payment of liquidated damages amounting to ₱9,149,962.02 for the delay. In the same manner, PDSC wrote PCIC asking for remuneration pursuant to Performance Bond No. 31915.[20] Despite notice, PDSC did not receive any reply from either FCC or PCIC, constraining it to file a complaint [21] for damages, recovery of possession of personal property and/or foreclosure of mortgage with prayer for the issuance of a writ of replevin and writ of attachment, against FCC and its officers before the RTC. PDSC later filed a supplemental complaint[22] impleading PCIC, claiming coverage under Performance Bond No. 31915 in the amount of ₱6,828,329.66. In its Amended Answer with affirmative defense and counterclaim, [23] FCC admitted that it entered into a contract with PDSC for the construction of the Park ‘N Fly building. It, however, asserted that due to outsourcing of different materials and subcontracting of various phases of works made by PDSC, the contract price was invariably reduced to ₱19,809,822.12. FCC denied any liability to PDSC claiming that any such claim by the latter had been waived, abandoned or otherwise extinguished by the execution of the September 10, 1999 MOA. FCC claimed that in the said MOA, PDSC assumed all the obligations originally reposed upon it. FCC further explained that the PERT-CPM agreed upon by the parties covering the first phase of the work project was severely affected when PDSC deleted several scopes of work and undertook to perform the same. In fact, the PERT-CPM was evaluated and it was concluded that the delay was attributable to both of them. FCC added that after Phase I of the project, it sent a progress billing in the amount of ₱939,165.00 but PDSC approved the amount of ₱639,165.00 only after deducting the cost of the attributable delay with the agreement that from then on, PDSC should shoulder all expenses in the construction of the building until completion; that FCC would provide the workers on the condition that they would be paid by PDSC; and that it would allow PDSC free use of the construction equipments that were in the project site. For its part, PCIC averred that as a surety, it was not liable as a principal obligor; that its liability under the bond was conditional and subsidiary and that it could be made liable only upon FCC’s default of its obligation in the Building Contract up to the extent of the terms and conditions of the bond. PCIC also alleged that its obligation under the
performance bond was terminated when it expired on October 15, 1999and the extension of the performance bond until March 2, 2000 was not binding as it was made without its knowledge and consent. PCIC added that PDSC’s claim against it had been waived, abandoned or extinguished by the September 10, 1999 MOA. It also argued that its obligation was indeed extinguished when PDSC terminated the contract on December 3, 1999 and took over the construction and it failed to file its claim within ten (10) days from the expiry date or from the alleged default of FCC.[24] Nonetheless, in the event that PCIC would be made liable, its liability should be in proportion to the liabilities of the other sureties. On January 12, 2004, the RTC rendered its Decision [25] in favor of PDSC. The RTC found FCC guilty of delay when it failed to finish and turn over the project on October 15, 1999. It pronounced FCC and PCIC jointly and severally liable and ordered them to pay PDSC the amount of ₱9,000,000.00 as damages and ₱50,000.00 as attorney’s fees plus interest. FCC and PCIC filed their respective notice of appeal [26] with the RTC. On February 12, 2004, the RTC issued its Order[27] giving due course to the notice of appeal. On July 31, 2007, the CA modified the RTC’s decision. [28] The CA agreed that FCC incurred delay in the construction of the project. It, however, found that the computation of the liquidated damages should be based on the reduced contract price of ₱19,809,822.12. The dispositive portion reads: WHEREFORE, the Decision dated 12 January 2004 of the Regional Trial Court of Pasay City, Branch 111 is AFFIRMED with MODIFICATION in that appellants N.C. Francia Construction Corporation, Natividad Francia, Emmanuel Francia, Jr., Anna Sheila Francia San Diego, Felipe Bermudez, Emmanuel Francia, Charlemagne Francia, Ruben Caperiña, and Philippine Charter Insurance Corporation are hereby held solidarily liable to pay appellee Petroleum Distributors & Services Corporation (1) liquidated damages in the sum of ₱3,882,725.13, which shall earn legal interest at the rate of 6% per annum from 10 January 2000 until finality of this judgment; (2) attorney’s fees amounting to ₱50,000.00; and (3) cost of suit. Pursuant to Performance Bond No. 31915, the liability of appellant Philippine Charter Insurance Corporation should not exceed ₱6,828,329.66. Appellants N.C Francia Construction Corporation, Emmanuel Francia and Natividad Francia are adjudged liable to pay appellant Philippine Charter Insurance Corporation for the amount the latter may have paid under Performance Bond No. 31915.
SO ORDERED.[29] FCC and PCIC filed their separate motions for reconsideration [30] but the CA denied them in its December 28, 2007 Resolution.[31] Hence, this petition. It is well to note that only PCIC appealed the CA’s decision. It became final and executory with regard to FCC and the other parties in the case. Hence, the Court shall limit its discussion to the liability of PCIC. In its Memorandum,[32] PCIC anchored its petition on the following issues: 1. Whether or not the Court of Appeals, in adjudging Petitioner liable for liquidated damages, expanded liability under Performance Bond No. 31915 which on its face answers only for actual and compensatory damages, not liquidated damages. Assuming arguendo liability for liquidated damages under the performance bond, whether or not the Court of Appeals erred in not declaring that the award of liquidated damages is iniquitous and unconscionable and in not applying the provisions of Article 2227, Civil Code, and Palmares v. Court of Appeals, 288 SCRA 422.
2. Whether or not the Memorandum of Agreement dated Sept. 10, 1999 entered into by respondent and Francia Construction, confirmed in a letter dated Sept. 20, 1999, --- without Petitioner’s knowledge or consent---, the effect that all costs, expenses, payments and obligations shall be deemed paid, performed and fully settled as of Sept. 10, 1999, discharged Petitioner from liability under the performance bond under Article 2079, Civil Code. 3. Whether or not the Court of Appeals, having made the finding of fact that the sums of Php2,793,000.00 and Php662,836.50 should be deducted from Php3,882,725.13, erred in not deducting the amounts in the dispositive portion of the decision. [33] In sum, the issues before the Court are (1) whether or not PCIC is liable for liquidated damages under the performance bond; (2) whether or not the September 10, 1999 MOA executed by PDSC and FCC extinguished PCIC’s liability under the performance bond; and (3) whether or not the amounts of ₱2,793,000.00 and ₱662,836.50 are deductible from the liquidated damages awarded by the CA.
PCIC argues that in case of a breach of contract, the performance bond is answerable only for actual or compensatory, not for liquidated damages. The terms of the bond are clear that the liability of the surety is determined by the contract of suretyship and cannot be extended by implication beyond the terms of the contract. Nonetheless, even assuming that it is liable under the performance bond, the liability should be based on equity. It claims that it is unlawful and iniquitous to hold FCC responsible for the delay of the subcontractor commissioned by PDSC.
PCIC adds that the act of PDSC of subcontracting the various stages of the project resulted in a revision of work schedule and extension of the completion date that ultimately released both FCC and PCIC of whatever claims PDSC may have against them. PCIC is of the impression that since the subcontracting made by PDSC was made without its consent and knowledge, its liability under the performance bond should be extinguished. PCIC also pointed out that the receivable in the amount of ₱2,793,000.00 acquired by PDSC from Caltex and the proceeds from the auction sale in the sum of ₱662,836.50 should be deducted from the award of ₱3,882,725.13. The Court finds no merit in the petition. The Building Contract entered into by PDSC and FCC provides that: Art. 2 ESSENCE OF THE CONTRACT 2.1 It is understood that time, quality of work in accordance with the OWNER’s requirements, and reduced construction costs are the essence of this Contract. 2.2 The CONTRACTOR shall commence the construction for the first two (2) levels not later than five (5) days immediately after the date of execution of this Contract and shall regularly proceed and complete the construction within Two Hundred Fifty-Nine (259) calendar days reckoned from the date of signing of this Contract or not later than October 15, 1999, whichever is earlier. To ensure completion of the work within the time given herein, construction work shall be conducted at least twenty hours each day with at least two (2) work shift for every day actually worked. 2.3 In the event that the construction is not completed within the aforesaid period of time, the OWNER is entitled and shall have the right to deduct from any amount that may be due to the CONTRACTOR the sum of one-tenth (1/10) of
one percent (1%) of the contract price for every day of delay in whatever stage of the project as liquidated damages, and not by way of penalty, and without prejudice to such other remedies as the OWNER may, in its discretion, employ including the termination of this Contract, or replacement of the CONTRACTOR. 2.4 Furthermore, the CONTRACTOR agrees not to request any extension of time due to any delay in the procurement of materials needed in the construction other than due to circumstances of “Force Majeure”. Force Majeure is hereby defined as any war, civil commotion and disturbance, acts of God or any other cause beyond the CONTRACTOR’s control and without any contributing fault on the part of the CONTRACTOR. 2.5 Contractor shall arrange, schedule and carry on the work so as not to interfere with the delivery and erection of the work of others. To facilitate the erection of such other work, the CONTRACTOR shall cease or resume work at any point or stage of the Project, when so directed by the OWNER or his duly authorized representative. [Emphasis supplied] Paragraph 2.3 of the Building Contract clearly provides a stipulation for the payment of liquidated damages in case of delay in the construction of the project. Such is in the nature of a penalty clause fixed by the contracting parties as a compensation or substitute for damages in case of breach of the obligation. [34] The contractor is bound to pay the stipulated amount without need for proof of the existence and the measures of damages caused by the breach.[35] Article 2226 of the Civil Code allows the parties to a contract to stipulate on liquidated damages to be paid in case of breach. It is attached to an obligation in order to insure performance and has a double function: (1) to provide for liquidated damages, and (2) to strengthen the coercive force of the obligation by the threat of greater responsibility in the event of breach. [36] As a general rule, contracts constitute the law between the parties, and they are bound by its stipulations. [37] For as long as they are not contrary to law, morals, good customs, public order, or public policy, the contracting parties may establish such stipulations, clauses, terms and conditions as they may deem convenient. [38] In the case at bench, the performance bond issued by PCIC specifically provides that: KNOW ALL MEN BY THESE PRESENTS: That we, N.C. FRANCIA CONSTRUCTION CORPORATION of Merryland Corporate Offices, 3250 Gracia St., cor. Edsa, Brgy. Pinagkaisahan, Makati City, as Principal and PHILIPPINE CHARTER INSURANCE CORPORATION, a corporation duly organized and existing under and by virtue of the laws of the Philippines, as Surety, are held and firmly bound unto PETROLEUM
DISTRIBUTORS & SERVICES CORPORATION, as obligee in the sum of PESOS SIX MILLION EIGHT HUNDRED TWENTY EIGHT THOUSAND THREE HUNDRED TWENTY NINE & 66/100 ONLY (₱6,828,329.66) Philippine Currency for the payment of which sum well and truly to be made, we bind ourselves, our heirs, executors, administrators, successors, and assigns, jointly and severally, firmly by these presents. THE CONDITION OF THIS OBLIGATION ARE AS FOLLOWS: WHEREAS, the above bounden principal, on the ____ day of ________ 19___ entered into an ________________ with ___________, to fully and faithfully guarantee that the above-named Principal shall furnish, deliver, place and complete any and all necessary materials, labor, plant, tools appliances and equipment, supplies, utilities transportation, superintendence, supervision and all other facilities in connection with the construction of a 4-storey commercial/parking complex situated at MIA Road cor. Domestic Road, Pasay City as per attached Building Contract dated January 27, 1999. Provided, however, that the liability of the Surety Company under this bond shall in no case exceed the face value hereof. WHEREAS, said oblige requires said principal to give a good and sufficient bond in the above stated sum to secure the full and faithful performance on its part of said undertaking.
NOW THEREFORE, if the principal shall well and truly perform and fulfill all the undertakings, covenants, terms conditions and agreements stipulated in said undertakings then this obligation shall be null and void; otherwise it shall remain in full force and effect. [Emphasis Supplied]
By the language of the performance bond issued by PCIC, it guaranteed the full and faithful compliance by FCC of its obligations in the construction of the Park ‘N Fly. In fact, the primary purpose for the acquisition of the performance bond was to guarantee to PDSC that the project would proceed in accordance with the terms and conditions of the contract and to ensure the payment of a sum of money in case the contractor would fail in the full performance of the contract.[39] This guaranty made by PCIC gave PDSC the right to proceed against it (PCIC) following FCC’s non-compliance with its obligation. 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. [40] 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. [41] This was explained in the case of Stronghold Insurance Company, Inc. v. Republic-Asahi Glass Corporation,[42] 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.
Corollary, when PDSC communicated to FCC that it was terminating the contract, PCIC’s liability, as surety, arose. The claim of PDSC against PCIC occurred from the failure of FCC to perform its obligation under the building contract. As mandated by Article 2047 of the Civil Code, to wit: Article 2047. By guaranty, a person, called the guarantor, binds himself to the creditor to fulfill the obligation of the principal debtor in case the latter should fail to do so. 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. Thus, suretyship arises upon the solidary binding of a person deemed the surety with the principal debtor for the purpose of fulfilling an obligation. [43] 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. [44]
Therefore, as surety, PCIC becomes liable for the debt or duty of FCC although it
possesses no direct or personal interest over the obligations of the latter, nor does it receive any benefit therefrom.[45] The Court also found untenable the contention of PCIC that the principal contract was novated when PDSC and FCC executed theSeptember 10, 1999 MOA, without informing the surety, which, in effect, extinguished its obligation.
A surety agreement has two types of relationship: (1) the principal relationship between the obligee and the obligor; and (2) the accessory surety relationship between the principal and the surety. The obligee accepts the surety’s solidary undertaking to pay if the obligor does not pay. Such acceptance, however, does not change in any material way the obligee’s relationship with the principal obligor. Neither does it make the surety an active party in the principal obligor-obligee relationship. It follows, therefore, that the acceptance does not give the surety the right to intervene in the principal contract. The surety’s role arises only upon the obligor’s default, at which time, it can be directly held liable by the obligee for payment as a solidary obligor.[46] Furthermore, in order that an obligation may be extinguished by another which substitutes the same, it is imperative that it be so declared in unequivocal terms, or that the old and new obligation be in every point incompatible with each other. [47] Novation of a contract is never presumed. In the absence of an express agreement, novation takes place only when the old and the new obligations are incompatible on every point. [48] Undoubtedly, a surety is released from its obligation when there is a material alteration of the principal contract in connection with which the bond is given, such as a change which imposes a new obligation on the promising party, or which takes away some obligation already imposed, or one which changes the legal effect of the original contract and not merely its form.[49] In this case, however, no new contract was concluded and perfected between PDSC and FCC. A reading of the September 10, 1999 MOA reveals that only the revision of the work schedule originally agreed upon was the subject thereof. The parties saw the need to adjust the work schedule because of the various subcontracting made by PDSC. In fact, it was specifically stated in the MOA that “all other terms and conditions of the Building Contract of27 January 1999 not inconsistent herewith shall remain in full force and efect.”[50] There was no new contract/agreement which could be considered to have substituted the Building Contract. As correctly ruled by the CA, thus: At first blush, it would seem that the parties agreed on a revised timetable for the construction of Park ‘N Fly. But then, nowhere in the voluminous records of this case could We find the Annex “A” mentioned in the above-quoted agreement which could have shed light to the question of whether a new period was indeed fixed by the parties. The testimony of appellant Emmanuel Francia, Sr., President and Chief Executive Officer of appellant N.C, Francia, candidly disclosed what truly happened to Annex “A”, as he admitted that no new PERT/CPM was actually attached to the Memorandum of Agreement. Accordingly, We find no compelling reason to declare that novation ensued under the prevailing circumstances. The execution of the Building Contract dated 27 January 1999 does not constitute a novation of the Memorandum of Agreement dated 10 September 1999. There lies no
incompatibility between the two contracts as their principal object and conditions remained the same. While there is really no hard and fast rule to determine what might constitute to be a sufficient change that can bring about novation, the touchtone for contrariety, however, would be an irreconcilable incompatibility between the old and the new obligations. [51]
It must likewise be emphasized that pursuant to the September 10, 1999 MOA, PCIC extended the coverage of the performance bond until March 2, 2000.[52] Finally, as pointed out by PCIC, the receivable in the amount of ₱2,793,000.00 acquired by PDSC from Caltex and the proceeds from the auction sale in the sum of ₱662,836.50 should be deducted from the award of ₱3,882,725.13. There is no quibble on this point. The ruling of the CA on the matter is very clear. It reads: With these points firmly in mind, We proceed to the next question raised by appellants – whether the value of the securities given as well as the proceeds of the sale of chattels should be deducted from the claim of liquidated damages. We answer in the affirmative. There is no quibble that appellant N.C Francia assigned a portion of its receivables from Caltex Philippines, Inc. in the amount of₱2,793,000.00 pursuant to the Deed of Assignment dated 10 September 1999. Upon transfer of said receivables, appellee Petroleum Distributors automatically stepped into the shoes of its transferor. It is in keeping with the demands of justice and equity that the amount of these receivables be deducted from the claim for liquidated damages. So too, vehicles and equipment owned by appellant N.C. Francia were sold at public auction at ₱1,070,000.00. After deducting storage fees, the amount of ₱662,836.50 was deposited before the court a quo. The latter amount accrues in favor of appellee Petroleum Distributors as partial payment of its claim for liquidated damages.
WHEREFORE, the petition is DENIED. The July 31, 2007 Decision and December 28, 2007 Resolution of the Court of Appeals(CA) in CA-G.R. CV No. 82417 are AFFIRMED. The receivable in the amount of ₱2,793,000.00 acquired by PDSC from Caltex and the proceeds from the auction sale in the sum of ₱662,836.50 should be deducted from the award of ₱3,882,725.13. SO ORDERED. Republic of the Philippines SUPREME COURT Manila SECOND DIVISION
G.R. No. 84526 January 28, 1991 PHILIPPINE COMMERCIAL & INDUSTRIAL BANK and JOSE HENARES, petitioners, vs. THE HON. COURT OF APPEALS and MARINDUQUE MINING AND INDUSTRIAL CORPORATION, respondents. Bengzon, Zarraga, Narciso, Cudala, Pecson & Bengson for petitioners. Rexes V. Alejano for private respondent.
SARMIENTO, J.:p This is a petition for review on certiorari which assails both the resolution 1 dated June 27, 1988 of the Court of Appeals2 which reconsidered and set aside its earlier decisions 3 dated February 26, 1988 reversing the decision 4 of the trial court and the subsequent resolution 5 dated August 3, 1988 which denied the petitioners' motion for reconsideration. The dispositive portion of the resolution in question dated June 27, 1988 reads as follows: xxx xxx xxx For the reasons above adduced, We are constrained to reconsider Our aforesaid decision and to set it aside and in lieu thereof hereby enter another decision AFFIRMING the decision dated January 15, 1985 of the Regional Trial Court of Manila, Branch 11, in Civil Case No. 103100 entitled "Marinduque Mining and Industrial Corporation (MMIC) vs. Philippine Commercial and Industrial Bank, et al." 6 The undisputed facts
7
as gathered from the findings of the trial court are as follows:
The instant case originated from an action 8 filed with the National Labor Relations Commission (NLRC) by a group of laborers who obtained therefrom a favorable judgment for the payment of backwages amounting to P205,853.00 against the private respondent. On April 26, 1976, the said Commission issued a writ of execution directing the Deputy Sheriff of Negros Occidental, one Damian Rojas, to enforce the aforementioned judgment. The pertinent portion of the said writ reads as follows: xxx xxx xxx Further, you are to collect from same respondent the total amount of P205,853.00 as their backwage (sic) for twelve (12) months and then turn over said amount to this commission for further disposition. In case you fail to collect said amount in cash, you are to cause the satisfaction of the same on the movable or immovable properties of the respondent not exempt from execution. (Exhs. G, G-1 and G-3, also Exh. 3; Emphasis supplied). 9
Accordingly, on April 28, 1976, the aforenamed deputy sheriff went to the mining site of the private respondent and served the writ of execution on the persons concerned, but nothing seemed to have happened thereat. Thereafter, the Sheriff prepared on his own a Notice of Garnishment dated April 29, 1976 addressed to six (6) banks, all located in Bacolod City, one of which being the petitioner herein, directing the bank concerned to immediately issue a check in the name of the Deputy Provincial Sheriff of Negros Occidental in an amount equivalent to the amount of the garnishment and that proper receipt would be issued therefor. Incidentally, the house lawyer of the private respondent, Atty. Rexes V. Alejano, acting on a tip regarding the existence of the said notice of garnishment, communicated with the bank manager, the petitioner Jose Henares, verbally at first at around 2:00 o'clock in the afternoon of that day, April 29, 1976, and later confirmed in a formal letter received by the petitioner Henares at about 5:00 o'clock of that same day, requesting the withholding of any release of the deposit of the private respondent with the petitioner bank. Meanwhile, at about 9:30 in the morning of April 29, 1976, the deputy sheriff presented the Notice of Garnishment and the Writ of Execution attached therewith to the petitioner Henares and later in the afternoon, demanded from the latter, under pain of contempt, the release of the deposit of the private respondent. The petitioner Henares, upon knowing from the Acting Provincial Sheriff that there was no restraining order from the National Labor Relations Commission and on the favorable advice of the bank's legal counsel, issued a debit memo for the full balance of the private respondent's account with the petitioner bank. Thereafter, he issued a manager's check in the name of the Deputy Provincial Sheriff of Negros Occidental for the amount of P37,466.18, which was the exact balance of the private respondent's account as of that day. On the following day, April 30, 1976, at about 1:00 o'clock in the afternoon, the deputy sheriff returned to the bank in order to encash the check but before the actual encashment, the petitioner Henares once again inquired about any existing restraining order from the NLRC and upon being told that there was none, the latter allowed the said encashment. On July 6, 1976, the private respondent, then plaintiff, filed a complaint before the Regional Trial Court of Manila, Branch II, against the petitioners and Damian Rojas, the Deputy Provincial Sheriff of Negros Occidental, then defendants, alleging that the former's current deposit with the petitioner bank was levied upon, garnished, and with undue haste unlawfully allowed to be withdrawn, and notwithstanding the alleged unauthorized disclosure of the said current deposit and unlawful release thereof, the latter have failed and refused to restore the amount of P37,466.18 to the former's account despite repeated demands. Both the petitioners and the Deputy Sheriff filed their respective answers denying the material averments of the said complaint and alleged that their actuations were all in accordance with law and likewise filed counterclaims for damages, including a cross-claim of the former against the latter. The third-party complaint of the petitioners against the fortynine (49) laborers in the NLRC case was, however, dismissed for failure of the sheriff to serve summons upon the latter.
On January 23, 1982, after several postponements, the pre-trial was finally conducted and terminated with only the petitioners and the private respondent participating, through their respective counsel. On January 15, 1985, the trial court rendered its judgment in favor of the private respondent, the dispositive portion of which reads: WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the three (3) defendants by ordering the latter to pay, jointly and severally, the plaintiff the following amounts, to wit: (a) the sum of P37,466.18, with interest thereon at the rate of 12% per annum from date of first demand on April 29, 1976 until the amount shall have been fully and completely restored and paid; (b) the sum of P10,000.00 as attorney's fees. Defendants are ordered to pay, jointly and severally, double costs.
10
xxx xxx xxx On appeal, the respondent court in a decision dated February 26, 1988, first reversed the said judgment of the lower court, but however, on the motion for reconsideration filed by the private respondent, subsequently annulled and set aside its said decision in the resolution dated June 27, 1988. On August 3, 1988, the respondent court denied the petitioner's own motion for reconsideration. Hence, this petition. The petitioners raise two issues,
11
to wit:
1. Whether or not petitioners had legal basis in releasing the garnished deposit of private respondent to the sheriff. 2. Whether or not petitioners violated Republic Act No. 1405, otherwise known as the Secrecy of Bank Deposits Act, when they allowed the sheriff to garnish the deposit of private respondent. The petition is impressed with merit. The crux of the instant controversy boils down to the question of whether or not a bank is liable for releasing its depositor's funds on the strength of the notice of garnishment made by the deputy sheriff pursuant to a writ of execution issued by the National Labor Relations Commission (NLRC). The respondent court in its questioned resolution dated June 27, 1988, held that the petitioners were liable, in this wise:
In the case at bar, defendant-appellant PCIB, despite vigorous objections from plaintiff-appellee, with indecent haste disclosed and released the deposit of plaintiff-appellee on the strength of a mere notice of garnishment which the Honorable Supreme Court ruled upon is no authority for the release of the deposit, thus: In the second place, the mere garnishment of funds belonging to a party upon order of the court does not have the effect of delivering the money garnished to the sheriff or to the party in whose favor the attachment is issued. The fund is retained by the garnishee or the person holding the money for the defendant. The garnishee, or one in whose hands property is attached or garnished, is universally regarded as charged with its legal custody pending outcome of the attachment or garnishment unless, by local statute and practice, he is permitted to surrender or pay the garnished property or funds into court, to the attaching officer, or to a receiver or trustee appointed to receive them. (5 Am. Jur. 14) The effect of the garnishment, therefore, was to require the Philippine Trust Company, holder of the funds of the Luzon Surety Co., to set aside said amount from the funds of the Luzon Surety Co., and keep the same subject to the final orders of the Court. In the case at bar there was never an order to deliver the full amount garnished to the plaintiff-appellee; all that was ordered to be delivered after the judgment had become final was the amount found by the Court of Appeals to be due. The balance of the amount garnished, therefore, remained all the time in the possession of the bank as part of the funds of the Luzon Surety Co. although the same could not be disposed of by the owner. (De la Rama vs. Villarosa, et al., L17927, June 29, 1963, 8 SCRA 413, 418-419; Emphasis supplied).12 The above-mentioned contention citing De la Rama is not exactly on all fours with the facts of the case at bar. In De la Rama, the amount garnished was not actually taken possession of by the sheriff, even from the time of garnishment, because the judgment debtor was able to appeal to the Court of Appeals and obtain from the Court an injunction prohibiting execution of the judgment. On the other hand, nowhere in the record of the present case is there any evidence of an appeal by the private respondent from the decision of the NLRC or the existence of any restraining order to prevent the release of the private respondent's deposit to the deputy sheriff at the time of the service of the notice of garnishment and writ of execution to the petitioners. On the contrary, the uncontroverted statements in the deposition of the petitioner Henares that he had previously sought the advice of the bank's counsel and that he had checked twice with the Acting Provincial Sheriff who had informed him of the absence of any
restraining order, belie any allegation of undue and indecent haste in the release of the said deposit in question. The cases more in point to the present controversy are the recent decisions in Engineering Construction Inc. v. National Power Corporation 13 and Rizal Commercial Banking Corporation (RCBC) vs. De Castro 14 where the Court absolved both garnishees, MERALCO and RCBC, respectively, from any liability for their prompt compliance in the release of garnished funds, The rationale behind Engineering Construction, Inc. and which was quoted in Rizal Commercial Banking Corporation is persuasive xxx xxx xxx But while partial restitution is warranted in favor of NPC, we find that the Appellate Court erred in not absolving MERALCO, the garnishee, from its obligations to NPC with respect to the payment to ECI of P1,114,543.23, thus in effect subjecting MERALCO to double liability. MERALCO should not have been faulted for its prompt obedience to a writ of garnishment. Unless there are compelling reasons such as: a defect on the face of the writ or actual knowledge on the part of the garnishee of lack of entitlement on the part of the garnisher, it is not incumbent upon the garnishee to inquire or to judge for itself whether or not the order for the advance execution of a judgment is valid. Section 8, Rule 57 of the Rules of Court provides: Effect of attachment of debts and credits. — All persons having in their possession or under their control any credits or other similar personal property belonging to the party against whom attachment is issued, or owing any debts to the same, at the time of service upon them of a copy of the order of attachment and notice as provided in the last preceding section, shall be liable to the applicant of the amount of such credits, debts or other property, until the attachment be discharged, or any judgment recovered by him be satisfied, unless such property be delivered or transferred, or such debts be paid, to the clerk, sheriff or other proper officer of the court issuing the attachment. Garnishment is considered as a specie of attachment for reaching credits belonging to the judgment debtor and owing to him from a stranger to the litigation. Under the above-cited rule, the garnishee [the third person] is obliged to deliver the credits, etc. to the proper officer issuing the writ and "the law exempts from liability the person having in his possession or under his control any credits or other personal property belonging to the defendant, . . . if such property be delivered or transferred, . . . to the clerk, sheriff, or other officer of the court in which the action is pending." Applying the foregoing to the case at bar, MERALCO, as garnishee, after having been judicially compelled to pay the amount of the judgment
represented by funds in its possession belonging to the judgment debtor or NPC, should be released from all responsibilities over such amount after delivery thereof to the sheriff. The reason for the rule is self evident. To expose garnishees to risks for obeying court orders and processes would only undermine the administration of justice. (Emphasis ours.) 15 xxx xxx xxx Moreover, there is no issue concerning the indebtedness of the petitioner bank to the private respondent since the latter has never denied the existence of its deposit with the former, the said deposit being considered a credit in favor of the depositor against the bank. 16 We therefore see no application for Sec. 39, Rule 39 of the Rules of Court invoked by the private respondent as to necessitate the "examination of the debtor of the judgment debtor." 17 Rather, we find the immediate release of the funds by the petitioners on the strength of the notice of garnishment and writ of execution, whose issuance, absent any patent defect, enjoys the presumption of regularity, sufficiently supported by Sec. 41, Rule 39 of the Rules of Court which reads: xxx xxx xxx After an execution against property has issued, a person indebted to the judgment debtor, may pay to the officer holding the execution the amount of his debt or so much thereof as may be necessary to satisfy the execution, and the officer's receipt shall be a sufficient discharge for the amount so paid or directed to be credited by the judgment creditor on the execution. xxx xxx xxx Finally, we likewise take cognizance of the subject of the judgment sought to be enforced in the writ of execution in question, namely, laborers' backwages. We believe that the petitioners should rather be commended for having acted with urgent dispatch despite attempts by the private respondent, as with so many scheming employers, to frustrate or unjustifiably delay the prompt satisfaction of final judgments which often result in undue prejudice to the legitimate claims of labor. With regard to the second issue, we find no violation whatsoever by the petitioners of Republic Act No. 1405, otherwise known as the Secrecy of Bank Deposits Act. The Court in China Banking Corporation vs. Ortega 18 had the occasion to dispose of this issue when it stated, thus: It is clear from the discussion of the conference committee report on Senate Bill No. 351 and House Bill No. 3977, which later became Republic Act 1405, that the prohibition against examination of or inquiry into a bank deposit under Republic Act 1405 does not preclude its being garnished to insure satisfaction of a judgment. Indeed there is no real inquiry in such a case, and if existence of the deposit is disclosed the disclosure is purely incidental to the execution process. It is hard to conceive that it was ever within the intention of Congress to enable debtors to evade payment of their just debts, even if
ordered by the Court, through the expedient of converting their assets into cash and depositing the same in a bank. Since there is no evidence that the petitioners themselves divulged the information that the private respondent had an account with the petitioner bank and it is undisputed that the said account was properly the object of the notice of garnishment and writ of execution carried out by the deputy sheriff, a duly authorized officer of the court, we can not therefore hold the petitioners liable under R.A. 1405. While the general rule is that the findings of fact of the appellate court are binding on this Court, the said rule however admits of exceptions, such as when the Court of Appeals clearly misconstrued and misapplied the law, drawn from the incorrect conclusions of fact established by evidence and otherwise at certain conclusions which are based on misapprehension of facts, 19 as in the case at bar. The petitioners are therefore absolved from any liability for the disclosure and release of the private respondent's deposit to the custody of the deputy sheriff in satisfaction of the final judgment for the laborers' backwages. WHEREFORE, the petition is GRANTED and the challenged Resolutions dated June 27, 1988 and August 13, 1988 of the Court of Appeals are hereby ANNULLED and SET ASIDE and its Decision dated February 26, 1988 dismissing the complaint is hereby REINSTATED. With costs against the private respondent. SO ORDERED. Melencio-Herrera, Padilla and Regalado, JJ., concur. Paras, J., ** took no part.
Intra-Strata Assurance Corporation v. Republic [G.R. No. 156571. July 09, 2008] 03OCT INTRA-STRATA ASSURANCE CORPORATION and PHILIPPINE HOME ASSURANCE CORPORATION, petitioners, vs. REPUBLIC OF THE PHILIPPINES represented by the BUREAU OF CUSTOMS, respondent. [G.R. No. 156571. July 09, 2008] FACTS: Grand textile is a local manufacturing corporation importing various articles such as dyestuffs, spare parts for warehouse machinery and filaments. Subsequent to importation, the articles were transferred to Bureau of Customs (BoC) where it required payment of tariffs
and other charges. Inter-Strata and PhilHome issued warehousing bonds in favor of BoC which provided that that the goods shall be withdrawn from the bonded warehouse “on payment of the legal customs duties, internal revenue, and other charges to which they shall then be subject.” Without payment of the taxes, customs duties, and charges due and for purposes of domestic consumption, Grand Textile withdrew the imported goods from storage. The Bureau of Customs demanded payment of the amounts due from Grand Textile as importer, and from Intra-Strata and PhilHome as sureties. All three failed to pay. The government responded by filing a collection suit against the parties with the RTC of Manila. The RTC ruled in favor of the BoC which was later affirmed by the Court of Appeals. ISSUES: Civil Law (1) Whether or not the withdrawal of the stored goods, wares and merchandise – without notice to them as sureties – released them from any liability for the duties, taxes, and charges they committed to pay under the bonds they issued. RULINGS: Civil Law (1) No. The surety does not, by reason of the surety agreement, earn the right to intervene in the principal creditor-debtor relationship; its role becomes alive only upon the debtor’s default, at which time it can be directly held liable by the creditor for payment as a solidary obligor. A surety contract is made principally for the benefit of the creditor-obligee and this is ensured by the solidary nature of the sureties’ undertaking. Under these terms, the surety is not entitled as a rule to a separate notice of default,nor to the benefit of excussion, and may be sued separately or together with the principal debtor. Republic of the Philippines SUPREME COURT Manila EN BANC G.R. No. L-22108
August 30, 1967
GOVERNMENT OF THE REPUBLIC OF THE PHILIPPINES, represented by the BUREAU OF SUPPLY COORDINATION plaintiff-appellee, vs. MARCELINO TIZON, ET AL., defendants. CAPITAL INSURANCE and SURETY CO., INC., defendant-appellant.
Achacoso, Nera and Ocampo for defendant-appellant. Office of the Solicitor General Arturo A. Alafriz, Assistant Solicitor General J.C. Borromeo and Solicitor N. P. Eduardo for plaintif-appellee. ANGELES, J.: Appeal from an order of the Court of First Instance of Manila, dated September 11, 1963, expunging from the record of the case the answer of the Capital Insurance & Surety, Co., Inc. and remanding said record to the City Court of Manila for execution against the Surety of the decision rendered by the latter court. It appears that in a bidding conducted by the Bureau of Supply Coordination of the Department of General Services, for the supply of "one (1) Baylift portable heavy-duty truck and auto lift, fully air operated, 500 lbs. capacity, and two (2) Baylift Ramps, U.S. manufacture", Tizon engineering, of which Marcelino Tizon was the sole owner and proprietor, won the bid, having offered the lowest bid of P4,000.00. To guarantee faithful performance of the conditions of the bid, the Bureau of Supply Coordination required Tizon Engineering to give a bond in the sum of P10,000.00. On September 12, 1958, the Surety issued its bond for the said amount in favor of the Republic of the Philippines. Tizon Engineering failed to comply with the conditions of the bid, failing as he did to deliver the equipment called for in the Buyer's order No. 42546 of the Bureau of Supply, constraining the latter to purchase the equipment from Fema Trading, the second lowest bidder, resulting in a loss of P2,975.00 to the Government. Notwithstanding demands made by the Bureau of Supply on defendants Marcelino Tizon and the Surety to pay said amount, they failed and refused. Hence, complaint was filed in the City Court of Manila by the Republic of the Philippines to recover the said sum with legal interests, plus attorney's fees and costs. Defendant Tizon averred in his answer that: (a) "the alleged bidding conducted by the Bureau of Supply is in utter disregard and wanton violation of the Rules and Regulations of the said office"; (b) "that assuming that a corresponding buyer's order was prepared, the same was not delivered to and duly received by him, such that there has never been a binding contract between plaintiff and the answering defendant; furthermore, the plaintiff deliberately failed to notify the answering defendant as to the acceptance of his bid, thus again violating the Rules and Regulations mentioned above"; (c) that the bond-issued by the Surety "answers only (for) those contracts legally entered into by the herein defendants with the Bureau of Supply and certainly not those contracts and/or bids which are of doubtful legality, as in the present case." The defendant Surety, in answer to the complaint, admitted having executed a bond in favor of the Republic of the Philippines for the purpose as therein stated, but denied "that it failed and refused to pay the demand (of the plaintiff), the truth of the matter being that its codefendant, Marcelino Tizon, doing business under the name of Tizon Engineering, has put it on notice not to settle the claim because he is not in any way whatsoever liable to plaintiff." As cross-claim against defendant Tizon, the Surety asserted that if it is made liable to the plaintiff on its bond, Marcelino Tizon should be ordered to make the corresponding reimbursement, with interest of 12%, plus attorney's fees. After trial, judgment was rendered in favor of the plaintiff and against the defendants, ordering the latter to pay,jointly and severally, the sum of P2,972.00 with legal interests from November 12, 1960, and the costs of suit. On the cross-claim of the Surety, defendant
Tizon was ordered to reimburse the cross-plaintiff of whatever amount the latter might have paid to the plaintiff, plus P100.00 as attorney's fees. Only defendant Tizon appealed from the decision to the Court of First Instance of Manila. Within fifteen days from receipt of notice from the clerk of the Court of First Instance of Manila, that the case has been received and docketed in said court, the defendants, Tizon and the Surety, each filed separate manifestations that they were reproducing their respective answers filed in the City Court. On August 29, 1963, the plaintiff filed a motion praying "(a) To strike out the answer filed by the Surety reproducing its answer filed in the City Court; (b) To remand the case to the City Court, as concerns the Surety, for execution of the judgment rendered in said court." The Surety opposed the motion on two grounds: (a) that although it did not appeal from the decision of the inferior court, the appeal interposed by its co-defendant inured to its benefit, because the obligation sued on "is so dependent on that of the principal debtor, that the Surety is considered in law as being the same party in relation to whatever is adjudged, touching the obligation of its co-defendant"; and (b) the appeal of its co-defendant, the principal debtor, "should be considered in law as to include the defendant Surety, in view of the latter's cross-claim against the former." The opposition was over-ruled in the order appealed from. The issue at this instance is whether an appeal by one of the parties sentenced to pay solidarily a sum of money, inures to the benefit of the other who did not appeal. The pronouncements in the case of Municipality of Orion vs. Concha, 50 Phil. 682, provide ample guideposts in the resolution of the issue at bar. In said case this Court held: The judgment was joint and several, which means that they are severally liable. We have made a careful examination of numerous authorities and believe that we are correct in saying that the effect of the appeal by one judgment debtor upon the codebtors depends upon the particular facts and conditions in each case. The difference in the apparently conflicting opinions may be well illustrated in this very case. Suppose, for example, that F. B. Concha, the contractor, had appealed from the judgment of the lower court upon the ground that he had either completed his contract within time or that the municipality had suffered no damages whatever, and the Supreme Court had reversed the judgment of the lower court on his appeal. Certainly that judgment would have the effect of relieving the bondsmen from any liability whatever, for the reason that their liability was consequent upon the liability of the contractor; and the court having declared that no liability for damages had resulted from the execution of said contract, then certainly the bondsmen would have been relieved because their liability depended upon the liability of the principal. That example gives us a clear case, showing that the effect of the appeal of the one of the judgment debtors would necessarily have the effect of releasing his co-judgment debtors. xxx
xxx
xxx
As we have already said, whether an appeal by one of several judgment debtors will affect the liability of those who did not appeal must depend upon the facts in each particular case. If the judgment can only be sustained upon the liability of the one who appeals and the liability of the other co-judgment debtors depends solely upon the question whether or not the appellant is liable, and the judgment is revoked as to that appellant, then the result of his appeal will inure to the benefit of all. . . . The rule is quite general that a reversal as to parties appealing does not necessitate a reversal as to parties not appealing, but that the judgment may be affirmed or left undisturbed as to them. An exception to the rule exists, however, where a judgment cannot be reversed as to the party appealing without afecting the rights of his codebtor. (4 C.J. 1184) A reversal of a judgment on appeal is binding on the parties to the suit, but does not inure to the benefit of parties against whom judgment was rendered in the lower court who did not join in the appeal, unless their rights and liabilities and those of the parties appealing are so interwoven and dependent as to be inseparable, in which case a reversal as to one operates as a reversal as to all. (4 C.J., 1206; Alling vs. Wenzel, 133 Ill., 264-278.) In the case of Brashear vs. Carlin, Curator (19 La. 395) a judgment was rendered in the lower court against the principal debtor and his surety to pay damages. The principal debtor alone appealed and the judgment was reversed. When the question of the liability of the surety under the judgment of the lower court was raised, the court said: "It is obvious, that the judgment of the inferior court could not be reversed as to the principal debtor in this case, and continue in force against the surety. The latter could not remain bound, after the former had been released; although the surety had not joined in the appeal, the judgment rendered in this court inured to his benefit. The obligation of a surety is so dependent on that of the principal debtor, that he is considered in law as being the same party as the debtor in relation to whatever is adjudged, touching the obligation of the latter; provided it be not on grounds personal to such principal debtor; it is for this reason, that a judgment in favor of the principal debtor can be invoked as res judicata by the surety." In the case of Schoenberger vs. White (75 Con. 605) a joint judgment was rendered against husband and wife for a sum of money in an action ex contractu. The wife appealed. As to the effect of the appeal of the wife upon the liability of both, the court said: "Such a judgment is an entirety, and upon appeal to this court must be affirmed or set aside in toto." "That the husband was not so made a party does not vary this rule. After the filing of the notice of appeal, he had the right to be heard in this court as to all the questions brought up for review. As he has not exercised this right, it may be assumed that he is content with the judgment against him as it stands; but he might complain of it, were we to modify it by reducing the amount which it requires his wife to pay, and
thus reducing the amount of the contribution which he might be able to call upon her to make, in case he paid all that it requires of him." In the case of Philippines International Surety Co., Inc. vs. Commissioner of Customs, L22790, December 17, 1966, this Court, speaking through Chief Justice Concepcion, sanctioned the view, albeit impliedly, that under a given set of facts, the appeal of the principal debtor, if successful, may inure to the benefit of the surety. Held this Court in that case: Although the appeal taken from said decision by the importer (principal debtor) might have, perhaps, inured to the benefit of the surety, if, the result of that appeal had been favorable to said importer, the fact is he had failed in his appeal.1äwphï1.ñët Solution of the question posed in this appeal hinges on the nature of the obligation assumed by the Surety under its bond. As Article 1222 of the new Civil Code provides: A solidary debtor may, in actions filed by the creditor, avail himself of all defenses which are derived from the nature of the obligation and of those which are personal to him, or pertain to his own share. With respect to those which personally belong to the others, he may avail himself thereof only as regards that part of the debt for which the latter are responsible. Pertinent parts of the surety bond provides: That we, Tizon Engineering, as principal, and the Capital Insurance & Surety Co., Inc., as surety, . . . are held and firmly bound unto the Republic of the Philippines, in the penal sum of P10,000.00, for the payment of which sum, well and truly to be made, we bind ourselves, Jointly and Severally, by these presents. Whereas, the principal agrees to comply with all the terms and conditions of the proposal with the Bureau of Supply; NOW THEREFORE, the conditions of this obligations are such that if the above bounden principal shall, in case he becomes the successful bidder in any of the proposal of the Bureau of Supply — (a) accept a contract with the Republic of the Philippines, represented by the Bureau of Supply; (b) faithfully and truly performs in good faith the contract; (c) to pay to the Republic of the Philippines, in case of delay and/or default in the execution of the contract, any loss or damages which the latter may suffer by reason thereof, not to exceed the sum of P10,000.00, Philippine currency, then this obligation shall be void, otherwise it shall remain in full force and effect. It thus appears that the Surety bound itself, jointly and severally, with the principal obligor to pay the Republic of the Philippines any loss or damage the latter may suffer, not exceeding P10,000.00, "in case of delay and/or default in the execution of the contract." However, although the defendants bound themselves in solidum, the liability of the Surety under its bond would arise only if its co-defendant, the principal obligor, should fail to comply with the contract. To paraphrase the ruling in the case of Municipality of Orion vs. Concha, the liability of the Surety is "consequent upon the liability" of Tizon, or "so
dependent on that of the principal debtor" that the Surety "is considered in law as being the same party as the debtor in relation to whatever is adjudged, touching the obligation of the latter"; or the liabilities of the two defendants herein "are so interwoven and dependent as to be inseparable." Changing the expression, if the defendants are held liable, their liability to pay the plaintiff would be solidary, but the nature of the Surety's undertaking is such that it does not incur liability unless and until the principal debtor is held liable. True, it is that the Surety did not appeal the decision of the inferior court to the Court of First Instance, and on account of its failure to appeal, it lost its personality to appear in the latter court or to file an answer therein. However this may be, it is not certain at this stage of the proceeding that the Surety's liability unto plaintiff has attached. The principal debtor has asserted on appeal that it has no liability whatsoever to the plaintiff, and, if this assertion be proven and sustained, the reversal of the judgment of the inferior court would operate as a reversal on the Surety, even though it did not appeal, in view of the dependency of its obligation upon the liability of the principal debtor. The principal debtor might succeed in his appeal; in such eventuality, the judgment of the inferior court could not continue in force against the Surety. Consequently, it is premature at this juncture to execute said judgment against the Surety. The situation of the Surety may be likened to that of a defaulting defendant whose right is protected under Section 4, Rule 18 of the Rules of Court as follows: Judgment When Some Defendants Answer and Others make Default.—When a complaint states a common cause of action against several defendants, some of whom answer, and the others fail to do so, the court shall try the case against all upon the answer thus filed and render judgment upon the evidence presented. The same procedure applies when a common cause of action is pleaded in a counterclaim, cross-claim and third-party claim. Albeit it may not personally be allowed to file an answer in the Court of First Instance, having failed to interpose an appeal, the Surety can rely on the answer of its co-defendant and derive benefit therefrom if the judgment on appeal should turn out to be favorable to the answering defendant (Castro vs. Peña, 80 Phil. 488, 502). The decision in Ishar Singh vs. Liberty Insurance Corp. and Leonardo Anne, et al., (thirdparty defendants in the third-party complaint of Liberty Insurance Corp.), L-16860, July 31, 1963, relied upon by the appellee, is not applicable to the facts of the case at bar. In said case, Liberty Insurance Corp. was the only defendant and the decision was against said defendant alone. The third party defendants were impleaded as such upon the third party complaint filed against them by the Liberty Insurance Corp. And as stated in the decision in said case, "the record does not disclose whether the third-party defendants filed an answer to the third-party complaint or not." Moreover, the liability of the third-party defendants to the third-party plaintiff stemmed from the indemnity agreement executed by them in favor of the Liberty Insurance Corp., and the third-party defendants did not have privity of contract with the creditor Ishar Singh. Upon the foregoing considerations, that portion of the appealed order remanding the record of the case to the City Court of Manila for execution of the decision of said court is hereby set aside, without costs.
Reyes, J.B.L., Dizon, Makalintal, Bengzon, J.P., Zaldivar, Sanchez, Castro and Fernando, JJ., concur. Concepcion, C.J., is on leave. THIRD DIVISION [G.R. No. 121879. August 14, 1998] EMPIRE INSURANCE COMPANY, petitioners, vs. NATIONAL COMMISSION and MONERA ANDAL,respondents.
LABOR
RELATIONS
DECISION PURISIMA, J.: This is a Petition of a surety company disowning solidary liability with its principal, a recruitment agency, on the monetary claims of an overseas contract worker for illegal dismissal, non-payment and underpayment of salaries. The antecedent facts and proceedings can be capsulized, as follows: Private respondent Monera Andal applied with G & M Phils., Inc. for an overseas employment as a domestic helper in Riyadh, Kingdom of Saudi Arabia. She was hired for a term of two years at a monthly basic salary of US $200.00. She left for the said jobsite on May 17, 1991 and worked for a certain Abdullah Al Basha. But on January 11, 1992, she was repatriated. Upon her repatriation, she lost no time in bringing her complaint before the Philippine Overseas Employment Agency (POEA) for illegal dismissal, non-payment and underpayment of salaries. Impleaded as a corespondent in the complaint was the herein petitioner, Empire Insurance Company, in its capacity as the surety of G & M Phils. Subject complaint averred, inter alia, that: “...she was not paid for four months and underpaid for four months; that she was forced to preterminate her contract due to unbearable treatment in the hands of her employer and the non-payment and underpayment of her salaries; and that she was constructively dismissed from employment. In her affidavit, she alleged that she was unpaid for 3 1/2 months; that for four months she was paid only US $150.00 instead of the agreed rate of US $200.00; that her employer resented her effort to collect her delayed salaries and, in retaliation, made her work long hours, allowing her to sleep only five hours daily and requiring her to render services for his relatives and friends without giving her additional compensation; that after serving her employer for 7 1/2 months, she sought the help of the Philippine Embassy; that her employer terminated her employment due to her insistent demand for the payment of her claims; and that she was repatriated at her own expense. On May 14, 1992, she testified that the wife of her employer always beat her and that her employer gave her US $450.00 representing her salaries for three (3) months. In her position paper, she reiterated the sufferings she allegedly underwent in the course of her employment and alleged, further, that the efforts of the Philippine Embassy to
mediate and/or to settle her claims failed; that her services were abruptly terminated by her employer; and she was forced to depart at her own expense (arriving in the Philippines with only whatever clothing she had on).” (pp.2-4, NLRC decision dated November 22, 1994) Empire Insurance Company, now the petitioner, theorized that the complainant, Monera Andal, was without any cause of action against it for the alleged reason that the liability of its principal and co-respondent had not been established. It further argued that its liability, if any, for the money claims sued upon was merely subsidiary. In its answer to the complaint, respondent G & M (Phil.), Inc., stated that it had no knowledge of 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. In its position paper, it contended that the complainant’s money claims in dispute are not meritorious as the same are not supported by substantial evidence. It also capitalized on what it branded as the inconsistencies in the complainant’s pleadings with her admission that the Philippine Embassy mediated her claims, which development could have meant that subject claims had been settled. On July 13, 1993, POEA Administrator Felicisimo O. Joson decided the claims in question; disposing, as follows: “WHEREFORE, in the light of the foregoing premises, respondents are hereby ordered to pay complainant the following: 1. US $200.00 or its peso equivalent representing complainant’s salary differentials for four (4) months for the period May 17, 1991 to September 17, 1991 computed at US $50.00 a month; 2. US $3,300.00 or its peso equivalent representing the payment of salaries for 16.5 months as the unexpired portion of the contract. SO ORDERED.” From the aforesaid decision adverse to it, petitioner Empire Insurance Company appealed to the National Labor Relations Commission; posing as issues, that: 1. Complainant (Monera Andal) had no cause of action against petitioner because the liability of petitioner’s principal and co-respondent (G&M) had not been established. 2. Petitioner’s liability, if any, was merely subsidiary. On November 22, 1994, the NLRC came out with a judgment of affirmance, upholding the POEA, and holding, thus: “The argument that respondent Empire Insurance Company is only subsidiarily liable for the judgment award is unmeritorious. It is settled that a surety is considered in law as being the same party as the debtor in relation to whatever is adjudged
touching the obligation of the latter, and their liabilities are interwoven as to be inseparable... WHEREFORE, the decision appealed from is hereby AFFIRMED. SO ORDERED.” Undaunted by the denial of its motion for reconsideration, petitioner found its way to this court via the present petition, raising the pivotal issue of whether or not respondent NLRC erred in adjudging it (petitioner) jointly liable with its principal, G & M Phils., Inc., for the payment of private respondent’s monetary claims. Petitioner faults respondent NLRC for holding that G & M Phils., Inc. failed to comply with the rules and regulations of the Department of Labor and Employment. It is petitioner’s submission that there is no basis for holding it liable as surety under the premises. Although it concedes that the burden of proof in cases of illegal dismissal rests on the employer, petitioner argues that when private respondent Monera Andal asked the Philippine Embassy in Riyadh, Saudi Arabia to mediate her claims with her employer, such a move on the part of private respondent shifted the onus probandi to her to substantiate her claim. Private respondent’s Comment sought the dismissal of the petition for being a wrong mode of appeal from the NLRC decision. It is private respondent’s stance that appeal from decisions of the National Labor Relations Commission to the Supreme Court is by a special civil action forcertiorari under Rule 65 of the Revised Rules of Court. Not a petition for review under Rule 45. The Solicitor General, as counsel for respondent NLRC, joined private respondent in stressing on such procedural defect. Furthermore, the Solicitor General pointed out that the errors assigned by petitioner deal primarily with factual findings and, as such, are unavailing under the well-entrenched rule that findings of fact by administrative agencies and quasijudicial bodies are generally accorded not only respect but finality, and are not to be disturbed on appeal. We find for respondents. Before delving into the merits of the petition, the procedural objection of respondents should first be resolved. Private respondent and the Solicitor General have correctly pointed out the elementary rule of procedure with regard to review of decisions rendered by the National Labor Relations Commission. The only way a labor case may reach the Supreme Court is through a petition for certiorari under Rule 65 of the Revised Rules of Court. [1] A petition for certiorari which is a special civil action under Rule 65 should be distinguished from a petition for review on certiorari which is a mode of appeal under Rule 45. Under Rule 65, only questions of jurisdiction or grave abuse of discretion amounting to lack or excess of jurisdiction may be entertained by the reviewing court. Therefore, only decisions of the National Labor Relations Commission tainted with grave abuse of discretion or jurisdictional errors may be elevated to this court.
Findings and/or conclusions of fact cannot be assailed in a petition for certiorari.[2] The inquiry in such a petition is limited exclusively to the issue of whether or not the respondent official acted without or in excess of jurisdiction. Consequently, petitioner cannot assail the finding arrived at by public respondent NLRC that the employer involved violated pertinent POEA rules and regulations. However, while an appeal to the Supreme Court from decisions of the National Labor Relations Commission should be pursued as a special civil action for certiorari, in a number of cases this court has treated as special civil actions for certiorari petitions erroneously captioned as petitions for review on certiorari “in the interest of justice.”[3] In the case of People’s Security, Inc. vs. NLRC,[4] this Court held that: “Dismissal of appeal purely on technical grounds is frowned upon where the policy of the courts is to encourage hearings of appeal on their merits.The rules of procedure ought not to be applied in a very rigid technical sense, rules of procedure are used only to help secure, not override substantial justice. If a technical and rigid enforcement of the rules is made, their aim would be defeated.” (Tamayo v. Court of Appeals, 209 SCRA 518, 522 [1992] citing Gregorio v. Court of Appeals, 72 SCRA 120 [1976] ). Consequently, in the interest of justice, the instant petition for review shall be treated as a special civil action on certiorari.” The single issue posed for resolution by this court here is - whether or not the petitioning surety company is jointly liable with its principal, G & M Phils, Inc., a recruitment agency, for the payment of respondent employee’s monetary claims in litigation. We rule in the affirmative. Petitioner is solidarily liable with its principal, G & M Phils., Inc., under the attendant facts and circumstances. Suretyship is a contractual relation resulting from an agreement whereby one person, the surety, engages to be answerable for the debt, default or miscarriage of another, known as the principal.[5] Where the surety bound itself solidarily with the principal obligor, the former is so dependent on the principal debtor such that the surety is considered in law as being the same party as the debtor in relation to whatever is adjudged touching the obligation of the latter, and their liabilities are interwoven as to be inseparable. [6] The 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. Time and again, this court has pronounced that claims of overseas workers should be acted upon with sympathy, and allowed if warranted, conformably to the constitutional mandate for the protection of the working class. [7] Private employment agencies are held to
be jointly and severally liable with the foreign-based employer for any violation of the recruitment agreement or contract of employment.[8] POEA has thus promulgated a rule requiring private recruitment agencies to set up cash and surety bonds. The purpose of the required surety bond is to insure that if the rights of overseas workers are violated by their employer, recourse would still be available to them against the local companies that recruited them for the foreign principal.[9] It bears stressing that surety companies may be ordered impleaded by the Philippine Overseas Employment Administration (POEA) in administrative complaints against recruitment agencies, on surety bonds posted, and are bound by the judgment of POEA. [10] This Court discerns no reason why the said rule should not apply to herein petitioner. WHEREFORE, the petition under consideration is hereby DISMISSED and the appealed decision of respondent NLRC AFFIRMED. No pronouncement as to costs. SO ORDERED. Narvasa (Chairman), CJ., Romero and Kapunan, JJ., concur. Republic of the Philippines SUPREME COURT Manila SECOND DIVISION G.R. No. 84084 August 20, 1990 FINMAN GENERAL ASSURANCE CORPORATION, petitioner, vs. ABDULGANI SALIK, BALABAGAN AMPILAN ALI KUBA GANDHI PUA, DAVID MALANAO, THE ADMINISTRATOR, PHILIPPINE OVERSEAS AND EMPLOYMENT ADMINISTRATION, THE SECRETARY OF LABOR AND EMPLOYMENT, respondents. David I. Unay, Jr. for petitioner. Kamid D. Abdul for private respondents.
PARAS, J.: This is a petition for certiorari seeking to annul 1) the Order dated March 28, 1988 of the Honorable Secretary of Labor and Employment in POEA, LRO/RRD Case No. 87-09-1022-DP entitled Abdulgani Salik, et al, v. Pan Pacific Overseas and Recruiting Services and Finman General Assurance Corporation, which directed herein petitioner to pay jointly and severally with Pan Pacific the claims of herein private respondents amounting to P25,000.00 and 2) the Order dated June 7, 1988, which denied petitioner's motion for reconsideration (Rollo, p. 2).
The facts of the case are as follows: Abdulgani Salik et al., private respondents, allegedly applied with Pan Pacific Overseas Recruiting Services, Inc. (hereinafter referred to as Pan Pacific) on April 22, 1987 and were assured employment abroad by a certain Mrs. Normita Egil. In consideration thereof, they allegedly paid fees totalling P30,000.00. But despite numerous assurances of employment abroad given by Celia Arandia and Mrs. Egil, they were not employed (Ibid., p. 15). Accordingly, they filed a joint complaint with the Philippine Overseas Employment Administration (herein referred to as POEA) against Pan Pacific for Violation of Articles 32 and 34(a) of the Labor Code, as amended, with claims for refund of a total amount of P30,000.00 (Ibid.). The POEA motu proprio impleaded and summoned herein petitioner surety Finman General Assurance Corporation (hereinafter referred to as Finman), in the latter's capacity as Pan Pacific's bonding company. Summons were served upon both Pan Pacific and Finman, but they failed to answer. On October 9, 1987, a hearing was called, but only the private respondents appeared. Despite being deemed in default for failing to answer, both Finman and Pan Pacific were still notified of the scheduled hearing. Again they failed to appear. Thus, ex-parte proceedings ensued. During the hearing, herein private respondents reiterated the allegations in their complaint that they first paid P20,000.00 thru Hadji Usop Kabagani for which a receipt was issued signed by Engineer Arandia and countersigned by Mrs. Egil and a certain Imelda who are allegedly employed by Pan Pacific; that they paid another P10,000.00 to Engr. Arandia who did not issue any receipt therefor; that the total payment of P30,000.00 allegedly represents payments for herein private respondents in the amount of P5,000.00 each, and Abdulnasser Ali, who did not file any complaint against Pan Pacific (Ibid., pp. 15-16). Herein private respondents presented as their witness, Hadji Usop Kabagani who they Identified as the one who actually financed their application and who corroborated their testimonies on all material points including the non-issuance of a receipt for P10,000.00 by Engr. Arandia. Herein petitioner, Finman, in an answer which was not timely filed, alleged, among others, that herein private respondents do not have a valid cause of action against it; that Finman is not privy to any transaction undertaken by Pan Pacific with herein private respondents; that herein private respondents claims are barred by the statute of frauds and by the fact that they executed a waiver; that the receipts presented by herein private respondents are mere scraps of paper; that it is not liable for the acts of Mrs. Egil that Finman has a cashbond of P75,000.00 only which is less than the required amount of P100,000.00; and that herein private respondents should proceed directly against the cash bond of Pan Pacific or against Mrs. Egil (Ibid., pp. 1617).
On March 18,1988, the Honorable Franklin M. Drilon, then the Secretary of Labor and Employment, upon the recommendation of the POEA hearing officer, issued an Order, the dispositive portion of which reads: WHEREFORE, premises considered, both respondents are hereby directed to pay jointly and severally the claims of complainants, as follows: 1. Abdulgani Salik P5,000.00 2. Balabagan Ampilan 5,000.00 3. Ali Kuba 5,000.00 4. Gandhi Dua 5,000.00 5. David Malanao 5,000.00 Based on the records of this Administration, respondent agency is presently serving a total period of suspension of seventeen (1 7) months imposed in three (3) separate orders issued on June 2, 1987, August 17, 1987 and September 23, 1987. Under the new schedule of penalties published on January 21, 1987 in the Philippine Inquirer, the penalty of cancellation shall be imposed when the offender has been previously penalized with suspension the total period of which is 12 months or more. Moreover, the penalty imposable in the case at bar is two (2) months suspension for each count of violation or a total period of suspension of ten (10) months as the acts were committed in April 1987. Thus, whether under the old schedule of penalties which required a total period of suspension of twenty-four (24) months for cancellation to be imposed or under the new schedule which provides for a twelve (12) month total suspension period, the penalty of cancellation may be properly imposed upon the herein respondent agency. In view thereof, the license of Pan Pacific Overseas Recruiting Services is hereby cancelled, effective immediately. SO ORDERED. (Ibid., pp. 20-21). A motion for reconsideration having been denied (Ibid., p. 22), herein petitioner instituted the instant petition for certiorari, raising the following assigned errors: I THE HONORABLE ADMINISTRATOR AND THE HONORABLE, SECRETARY OF LABOR ACTED WITH GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OF JURISDICTION IN MOTU PROPRIO IMPLEADING FINMAN AS CO-RESPONDENT OF PAN PACIFIC IN POEA LRO/RRD CASE NO. 87-091022 DP WHICH WAS FILED BY ABDULGANI SALIK, ET AL.;
II THE HONORABLE SECRETARY OF LABOR ACTED WITHOUT OR IN EXCESS OF JURISDICTION AND WITH GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OF JURISDICTION IN DIRECTING FINMAN TO PAY JOINTLY AND SEVERALLY WITH PAN PACIFIC THE CLAIMS OF PRIVATE RESPONDENTS ON THE BASIS OF THE SURETYSHIP AGREEMENT BETWEEN FINMAN AND PAN PACIFIC AND THE PHILIPPINE OVERSEAS EMPLOYMENT ADMINISTRATION (POEA FOR SHORT); AND III THE FINDINGS OF FACT MADE BY THE POEA AND UPON WHICH THE HONORABLE SECRETARY OF LABOR BASED ITS QUESTIONED ORDERS ARE NOT SUPPORTED BY SUBSTANTIAL EVIDENCE AND ARE CONTRARY TO LAW. (Ibid., p. 101) As required by this Court, herein public respondents filed their memorandum on July 28, 1989 (Ibid., p. 84); while that of petitioner and private respondents were filed on September 11, 1989 (Ibid., p. 89) and March 16, 1990 (Ibid., p. 120), respectively. The petition is devoid of merit. In its first and second assigned errors, petitioner maintains that POEA has no jurisdiction to directly enforce the suretyship undertaking of FINMAN (herein petitioner) under the surety bond (Ibid., p. 104). In the case at bar, it remains uncontroverted that herein petitioner and Pan Pacific entered into a suretyship agreement, with the former agreeing that the bond is conditioned upon the true and faithful performance and observance of the bonded principal (Pan Pacific) of its duties and obligations. It was also understood that under the suretyship agreement, herein petitioner undertook itself to be jointly and severally liable for all claims arising from recruitment violation of Pan Pacific (Ibid., p. 23), in keeping with Section 4, Rule V, Book I of the Implementing Rules of the Labor Code, which provides: Section 4. Upon approval of the application, the applicant shall pay to the Ministry (now Department) a license fee of P6,000.00, post a cash bond of P50,000.00 or negotiable bonds of equivalent amount convertible to cash issued by banking or financial institution duly endorsed to the Ministry (now Department) as well as a surety bond of P150,000.00 from an accredited bonding company to answer for valid and legal claims arising from violations of the conditions of the license or the contracts of employment and guarantee compliance with the provisions of the Code, its implementing rules and regulations and appropriate issuances of the Ministry (now Department). (Emphasis supplied)
Accordingly, the nature of Finman's obligation under the suretyship agreement makes it privy to the proceedings against its principal (Pan Pacific). As such Finman is bound, in the absence of collusion, by a judgment against its principal even though it was not a party to the proceedings Leyson v. Rizal Surety and Insurance Co., 16 SCRA 551 (1966). Furthermore, in Government of the Philippines v. Tizon (20 SCRA 1182 [1967]), this Court ruled that where the surety bound itself solidarily with the principal obligor the former is so dependent on the principal debtor "that the surety is considered in law as being the same party as the debtor in relation to whatever is adjudged touching the obligation of the latter." Applying the foregoing principles to the case at bar, it can be very well said that even if herein Finman was not impleaded in the instant case, still it (petitioner) can be held jointly and severally liable for all claims arising from recruitment violation of Pan Pacific. Moreover, as correctly stated by the Solicitor General, private respondents have a legal claim against Pan Pacific and its insurer for the placement and processing fees they paid, so much so that in order to provide a complete relief to private respondents, petitioner had to be impleaded in the case (Rollo, p. 87). Furthermore, Finman contends that herein respondent Secretary of Labor cannot validly assume jurisdiction over the case at bar; otherwise, proceedings will be railroaded resulting in the deprivation of the former of any remedial measures under the law. The records of the case reveal that herein Finman filed a motion for reconsideration of the adverse decision dated March 18, 1988 of respondent Secretary of Labor. In the said motion for reconsideration, no jurisdictional challenge was made (Ibid., p. 22). It was only when it filed this petition that it assailed the jurisdiction of the respondent Secretary of Labor, and that of the POEA. But then, it was too late. Estoppel had barred herein petitioner from raising the issue, regardless of its merits (Akay Printing Press v. Minister of Labor and Employment, 140 SCRA 381 [1985]). Hence, Finman's contention that POEA's and respondent Secretary's actions in impleading and directing herein petitioner to pay jointly and severally with Pan Pacific the claims of private respondents constitute a grave abuse of discretion amounting to lack of jurisdiction has no basis. (Ibid., p. 101.) As regards the third assigned error, herein petitioner maintains that the findings of fact made by the POEA upon which respondent Secretary of Labor based his questioned Orders are not supported by substantial evidence and are contrary to law, is likewise untenable. Herein petitioner, in raising this third issue, is, in effect, asking this Court to review the respondent Secretary's findings of facts. Well-settled is the rule that findings of facts of the respondent Secretary are generally accorded great weight unless there was grave abuse of discretion or lack of jurisdiction in arriving at such findings (Asiaworld Publishing House, Inc. vs. Ople, 152 SCRA 219 (1987).
In the case at bar, it is undisputed that when the case was first set for hearing, only the private respondents appeared, despite summons having been served upon both herein petitioner and Pan Pacific. This, notwithstanding, both herein petitioner and Pan Pacific were again notified of the scheduled hearing, but, as aforestated they also' failed to a pear (Rollo, p. 15). Accordingly, owing to the absence of any controverting evidence, respondent Secretary of Labor admitted and considered private respondents' testimonies and evidence as substantial. Under the circumstances, no justifiable reason can be found to justify disturbance of the findings of facts of the respondent Secretary of Labor, supported as they are by substantial evidence and in the absence of grave abuse of discretion (Asiaworld Publishing House, Inc. v. Ople, supra); and in line with the well established principle that the findings of administrative agencies which have acquired expertise because their jurisdiction is confined to specific matters are generally accorded not only respect but at times even finality. (National Federation of Labor Union (NAFLU) v. Ople, 143 SCRA 124 [1986]) PREMISES CONSIDERED, the questioned Orders of respondent Secretary of Labor are hereby AFFIRMED intoto, SO ORDERED. Melencio-Herrera (Chairperson), Padilla and Regalado, JJ., concur. Sarmiento, J., is on leave. Republic of the Philippines SUPREME COURT Manila THIRD DIVISION G.R. No. 155868
February 6, 2007
SPOUSES GREGORIO and JOSEFA YU, Petitioners, vs. NGO YET TE, doing business under the name and style, ESSENTIAL MANUFACTURING, Respondent. DECISION AUSTRIA-MARTINEZ, J.: Before us is a Petition for Review on Certiorari under Rule 45 of the Rules of Court assailing the March 21, 2001 Decision1 of the Court of Appeals (CA) in CA-G.R. CV No. 522462 and its October 14, 2002 Resolution.3 The antecedent facts are not disputed. Spouses Gregorio and Josefa Yu (Spouses Yu) purchased from Ngo Yet Te (Te) bars of detergent soap worthP594,240.00, and issued to the latter three postdated checks 4 as
payment of the purchase price. When Te presented the checks at maturity for encashment, said checks were returned dishonored and stamped "ACCOUNT CLOSED". 5 Te demanded6 payment from Spouses Yu but the latter did not heed her demands. Acting through her son and attorney-in-fact, Charry Sy (Sy), Te filed with the Regional Trial Court (RTC), Branch 75, Valenzuela, Metro Manila, a Complaint, 7 docketed as Civil Case No. 4061-V93, for Collection of Sum of Money and Damages with Prayer for Preliminary Attachment. In support of her prayer for preliminary attachment, Te attached to her Complaint an Affidavit executed by Sy that Spouses Yu were guilty of fraud in entering into the purchase agreement for they never intended to pay the contract price, and that, based on reliable information, they were about to move or dispose of their properties to defraud their creditors.8 Upon Te’s posting of an attachment bond,9 the RTC issued an Order of Attachment/Levy10 dated March 29, 1993 on the basis of which Sheriff Constancio Alimurung (Sheriff Alimurung) of RTC, Branch 19, Cebu City levied and attached Spouses Yu’s properties in Cebu City consisting of one parcel of land (known as Lot No. 11) 11 and four units of motor vehicle, specifically, a Toyota Ford Fierra, a jeep, a Canter delivery van, and a passenger bus.12 On April 21, 1993, Spouses Yu filed an Answer13 with counterclaim for damages arising from the wrongful attachment of their properties, specifically, actual damages amounting to P1,500.00 per day; moral damages,P1,000,000.00; and exemplary damages, P50,000.00. They also sought payment of P120,000.00 as attorney’s fees and P80,000.00 as litigation expenses.14 On the same date, Spouses Yu filed an Urgent Motion to Dissolve Writ of Preliminary Attachment.15 They also filed a Claim Against Surety Bond16 in which they demanded payment from Visayan Surety and Insurance Corporation (Visayan Surety), the surety which issued the attachment bond, of the sum of P594,240.00, representing the damages they allegedly sustained as a consequence of the wrongful attachment of their properties. While the RTC did not resolve the Claim Against Surety Bond, it issued an Order 17 dated May 3, 1993, discharging from attachment the Toyota Ford Fierra, jeep, and Canter delivery van on humanitarian grounds, but maintaining custody of Lot No. 11 and the passenger bus. Spouses Yu filed a Motion for Reconsideration18 which the RTC denied.19 Dissatisfied, they filed with the CA a Petition for Certiorari,20 docketed as CA-G.R. SP No. 31230, in which a Decision21 was rendered on September 14, 1993, lifting the RTC Order of Attachment on their remaining properties. It reads in part: In the case before Us, the complaint and the accompanying affidavit in support of the application for the writ only contains general averments. Neither pleading states in particular how the fraud was committed or the badges of fraud purportedly committed by the petitioners to establish that the latter never had an intention to pay the obligation; neither is there a statement of the particular acts committed to show that the petitioners are in fact disposing of their properties to defraud creditors. x x x. xxxx
Moreover, at the hearing on the motion to discharge the order of attachment x x x petitioners presented evidence showing that private respondent has been extending multimillion peso credit facilities to the petitioners for the past seven years and that the latter have consistently settled their obligations. This was not denied by private respondent. Neither does the private respondent contest the petitioners’ allegations that they have been recently robbed of properties of substantial value, hence their inability to pay on time. By the respondent court’s own pronouncements, it appears that the order of attachment was upheld because of the admitted financial reverses the petitioner is undergoing. This is reversible error. Insolvency is not a ground for attachment especially when defendant has not been shown to have committed any act intended to defraud its creditors x x x. For lack of factual basis to justify its issuance, the writ of preliminary attachment issued by the respondent court was improvidently issued and should be discharged. 22 From said CA Decision, Te filed a Motion for Reconsideration but to no avail. 23 Te filed with us a Petition for Review on Certiorari24 but we denied the same in a Resolution dated June 8, 1994 for having been filed late and for failure to show that a reversible error was committed by the CA.25 Entry of Judgment of our June 8, 1994 Resolution was made on July 22, 1994.26 Thus, the finding of the CA in its September 14, 1993 Decision in CA-G.R. SP No. 31230 on the wrongfulness of the attachment/levy of the properties of Spouses Yu became conclusive and binding. However, on July 20, 1994, the RTC, apparently not informed of the SC Decision, rendered a Decision, the dispositive portion of which reads: WHEREFORE, premises considered, the Court finds that the plaintiff has established a valid civil cause of action against the defendants, and therefore, renders this judgment in favor of the plaintiff and against the defendants, and hereby orders the following: 1) Defendants are hereby ordered or directed to pay the plaintiff the sum of P549,404.00, with interest from the date of the filing of this case (March 3, 1993); 2) The Court, for reasons aforestated, hereby denies the grant of damages to the plaintiff; 3) The Court hereby adjudicates a reasonable attorney’s fees and litigation expenses of P10,000.00 in favor of the plaintiff; 4) On the counterclaim, this Court declines to rule on this, considering that the question of the attachment which allegedly gave rise to the damages incurred by the defendants is being determined by the Supreme Court. SO ORDERED.27 (Emphasis ours) Spouses Yu filed with the RTC a Motion for Reconsideration28 questioning the disposition of their counterclaim. They also filed a Manifestation29 informing the RTC of our June 8, 1994 Resolution in G.R. No. 114700.
The RTC issued an Order dated August 9, 1994, which read: xxxx (2) With regard the counter claim filed by the defendants against the plaintiff for the alleged improvident issuance of this Court thru its former Presiding Judge (Honorable Emilio Leachon, Jr.), the same has been ruled with definiteness by the Supreme Court that, indeed, the issuance by the Court of the writ of preliminary attachment appears to have been improvidently done, but nowhere in the decision of the Supreme Court and for that matter, the Court of Appeal’s decision which was in effect sustained by the High Court, contains any ruling or directive or imposition, of any damages to be paid by the plaintiff to the defendants, in other words, both the High Court and the CA, merely declared the previous issuance of the writ of attachment by this Court thru its former presiding judge to be improvidently issued, but it did not award any damages of any kind to the defendants, hence, unless the High Court or the CA rules on this, this Court coud not grant any damages by virtue of the improvident attachment made by this Court thru its former presiding judge, which was claimed by the defendants in their counter claim. (3) This Court hereby reiterates in toto its Decision in this case dated July 20, 1994. 30 (Emphasis ours) The RTC also issued an Order dated December 2, 1994,31 denying the Motion for Reconsideration of Spouses Yu.32 In the same December 2, 1994 Order, the RTC granted two motions filed by Te, a Motion to Correct and to Include Specific Amount for Interest and a Motion for Execution Pending Appeal.33 The RTC also denied Spouses Yu’s Notice of Appeal34 from the July 20, 1994 Decision and August 9, 1994 Order of the RTC. From said December 2, 1994 RTC Order, Spouses Yu filed another Notice of Appeal the RTC also denied in an Order36 dated January 5, 1995.
35
which
Spouses Yu filed with the CA a Petition37 for Certiorari, Prohibition and Mandamus, docketed as CA-G.R. SP No. 36205, questioning the denial of their Notices of Appeal; and seeking the modification of the July 20, 1994 Decision and the issuance of a Writ of Execution. The CA granted the Petition in a Decision38 dated June 22, 1995. Hence, Spouses Yu filed with the CA an appeal39 docketed as CA-G.R. CV No. 52246, questioning only that portion of the July 20, 1994 Decision where the RTC declined to rule on their counterclaim for damages.40 However, Spouses Yu did not dispute the specific monetary awards granted to respondent Te; and therefore, the same have become final and executory. Although in the herein assailed Decision41 dated March 21, 2001, the CA affirmed in toto the RTC Decision, it nonetheless made a ruling on the counterclaim of Spouses Yu by declaring that the latter had failed to adduce sufficient evidence of their entitlement to damages. Spouses Yu filed a Motion for Reconsideration42 but the CA denied it in the herein assailed Resolution43 dated October 14, 2002.
Spouses Yu filed the present Petition raising the following issues: I. Whether or not the appellate court erred in not holding that the writ of attachment was procured in bad faith, after it was established by final judgment that there was no true ground therefor. II. Whether or not the appellate court erred in refusing to award actual, moral and exemplary damages after it was established by final judgment that the writ of attachment was procured with no true ground for its issuance.44 There is one preliminary matter to set straight before we resolve the foregoing issues. According to respondent Te,45 regardless of the evidence presented by Spouses Yu, their counterclaim was correctly dismissed for failure to comply with the procedure laid down in Section 20 of Rule 57. Te contends that as Visayan Surety was not notified of the counterclaim, no judgment thereon could be validly rendered. Such argument is not only flawed, it is also specious. As stated earlier, Spouses Yu filed a Claim Against Surety Bond on the same day they filed their Answer and Urgent Motion to Dissolve Writ of Preliminary Attachment. 46 Further, the records reveal that on June 18, 1993, Spouses Yu filed with the RTC a Motion to Give Notice to Surety.47 The RTC granted the Motion in an Order48 dated June 23, 1993. Accordingly, Visayan Surety was notified of the pre-trial conference to apprise it of a pending claim against its attachment bond. Visayan Surety received the notice on July 12, 1993 as shown by a registry return receipt attached to the records.49 Moreover, even if it were true that Visayan Surety was left in the proceedings a quo, such omission is not fatal to the cause of Spouses Yu. In Malayan Insurance Company, Inc. v. Salas,50 we held that "x x x if the surety was not given notice when the claim for damages against the principal in the replevin bond was heard, then as a matter of procedural due process the surety is entitled to be heard when the judgment for damages against the principal is sought to be enforced against the surety’s replevin bond." 51 This remedy is applicable for the procedures governing claims for damages on an attachment bond and on a replevin bond are the same.52 We now proceed to resolve the issues jointly. Spouses Yu contend that they are entitled to their counterclaim for damages as a matter of right in view of the finality of our June 8, 1994 Resolution in G.R. No. 114700 which affirmed the finding of the CA in its September 14, 1993 Decision in CA-G.R. SP No. 31230 that respondent Te had wrongfully caused the attachment of their properties. Citing Javellana v. D.O. Plaza Enterprises, Inc.,53 they argue that they should be awarded damages based solely on the CA finding that the attachment was illegal for it already suggests that Te acted with malice when she applied for attachment. And even if we were to assume that Te did not act with malice, still she should be held liable for the aggravation she inflicted when she applied for attachment even when she was clearly not entitled to it. 54
That is a rather limited understanding of Javellana. The counterclaim disputed therein was not for moral damages and therefore, there was no need to prove malice. As early as in Lazatin v. Twaño,55 we laid down the rule that where there is wrongful attachment, the attachment defendant may recover actual damages even without proof that the attachment plaintiff acted in bad faith in obtaining the attachment. However, if it is alleged and established that the attachment was not merely wrongful but also malicious, the attachment defendant may recover moral damages and exemplary damages as well. 56 Either way, the wrongfulness of the attachment does not warrant the automatic award of damages to the attachment defendant; the latter must first discharge the burden of proving the nature and extent of the loss or injury incurred by reason of the wrongful attachment. 57 In fine, the CA finding that the attachment of the properties of Spouses Yu was wrongful did not relieve Spouses Yu of the burden of proving the factual basis of their counterclaim for damages. To merit an award of actual damages arising from a wrongful attachment, the attachment defendant must prove, with the best evidence obtainable, the fact of loss or injury suffered and the amount thereof.58 Such loss or injury must be of the kind which is not only capable of proof but must actually be proved with a reasonable degree of certainty. As to its amount, the same must be measurable based on specific facts, and not on guesswork or speculation. 59 In particular, if the claim for actual damages covers unrealized profits, the amount of unrealized profits must be estalished and supported by independent evidence of the mean income of the business undertaking interrupted by the illegal seizure. 60 Spouses Yu insist that the evidence they presented met the foregoing standards. They point to the lists of their daily net income from the operation of said passenger bus based on used ticket stubs61 issued to their passengers. They also cite unused ticket stubs as proof of income foregone when the bus was wrongfully seized.62 They further cite the unrebutted testimony of Josefa Yu that, in the day-to-day operation of their passenger bus, they use up at least three ticket stubs and earn a minimum daily income of P1,500.00.63 In ruling that Spouses Yu failed to adduce sufficient evidence to support their counterclaim for actual damages, the CA stated, thus: In this case, the actual damages cannot be determined. Defendant-appellant Josefa Yu testified on supposed lost profits without clear and appreciable explanation. Despite her submission of the used and unused ticket stubs, there was no evidence on the daily net income, the routes plied by the bus and the average fares for each route. The submitted basis is too speculative and conjectural. No reports regarding the average actual profits and other evidence of profitability necessary to prove the amount of actual damages were presented. Thus, the Court a quodid not err in not awarding damages in favor of defendantsappellants.64 We usually defer to the expertise of the CA, especially when it concurs with the factual findings of the RTC.65Indeed, findings of fact may be passed upon and reviewed by the Supreme Court in the following instances: (1) when the conclusion is a finding grounded entirely on speculations, surmises, or conjectures; (2) when the inference made is manifestly mistaken, absurd, or impossible; (3) where there is a grave abuse of discretion in the appreciation of facts; (4) when judgment is based on a misapprehension of facts; (5) when the lower court, in making its findings, went beyond the issues of the case and such findings are contrary to the admissions of both appellant and appellee; (6) when the factual findings
of the CA are contrary to those of the trial court; (7) when the findings of fact are themselves conflicting; (8) when the findings of fact are conclusions made without a citation of specific evidence on which they are based; (9) when the facts set forth in the petition as well as in the petitioner’s main and reply briefs are not disputed by the respondents; (10) when the findings of fact of the lower court are premised on the supposed absence of evidence and are contradicted by the evidence on record.66 However, the present case does not fall under any of the exceptions. We are in full accord with the CA that Spouses Yu failed to prove their counterclaim. Spouses Yu’s claim for unrealized income of P1,500.00 per day was based on their computation of their average daily income for the year 1992. Said computation in turn is based on the value of three ticket stubs sold over only five separate days in 1992. 67 By no stretch of the imagination can we consider ticket sales for five days sufficient evidence of the average daily income of the passenger bus, much less its mean income. Not even the unrebutted testimony of Josefa Yu can add credence to such evidence for the testimony itself lacks corroboration.68 Besides, based on the August 29, 1994 Manifestation69 filed by Sheriff Alimurung, it would appear that long before the passenger bus was placed under preliminary attachment in Civil Case No. 4061-V-93, the same had been previously attached by the Sheriff of Mandaue City in connection with another case and that it was placed in the Cebu Bonded Warehousing Corporation, Cebu City. Thus, Spouses Yu cannot complain that they were unreasonably deprived of the use of the passenger bus by reason of the subsequent wrongful attachment issued in Civil Case No. 4061-V-93. Nor can they also attribute to the wrongful attachment their failure to earn income or profit from the operation of the passenger bus. Moreover, petitioners did not present evidence as to the damages they suffered by reason of the wrongful attachment of Lot No. 11. Nonetheless, we recognize that Spouses Yu suffered some form of pecuniary loss when their properties were wrongfully seized, although the amount thereof cannot be definitively ascertained. Hence, an award of temperate or moderate damages in the amount of P50,000.00 is in order.70 As to moral and exemplary damages, to merit an award thereof, it must be shown that the wrongful attachment was obtained by the attachment plaintiff with malice or bad faith, such as by appending a false affidavit to his application.71 Spouses Yu argue that malice attended the issuance of the attachment bond as shown by the fact that Te deliberately appended to her application for preliminary attachment an Affidavit where Sy perjured himself by stating that they had no intention to pay their obligations even when he knew this to be untrue given that they had always paid their obligations; and by accusing them of disposing of their properties to defraud their creditors even when he knew this to be false, considering that the location of said properties was known to him.72 The testimony of petitioner Josefa Yu herself negates their claim for moral and exemplary damages. On cross-examination she testified, thus: Q: Did you ever deposit any amount at that time to fund the check?
A: We requested that it be replaced and staggered into smaller amounts. COURT: Did you fund it or not? Atty. Ferrer: The three checks involved? Atty. Florido: Already answered. She said that they were not able to fund it. Atty. Ferrer: And as a matter of fact, you went to the bank to close your account? A: We closed account with the bank because we transferred the account to another bank. Q: How much money did you transfer from that bank to which the three checks were drawn to this new bank? A: I don’t know how much was there but we transferred already to the Solid Bank. Q: Who transferred? A: My daughter, sir.73 (Emphasis ours) Based on the foregoing testimony, it is not difficult to understand why Te concluded that Spouses Yu never intended to pay their obligation for they had available funds in their bank but chose to transfer said funds instead of cover the checks they issued. Thus, we cannot attribute malice nor bad faith to Te in applying for the attachment writ. We cannot hold her liable for moral and exemplary damages. As a rule, attorney’s fees cannot be awarded when moral and exemplary damages are not granted, the exception however is when a party incurred expenses to lift a wrongfully issued writ of attachment.1awphi1.net74 Without a doubt, Spouses Yu waged a protracted legal battle to fight off the illegal attachment of their properties and pursue their claims for damages. It is only just and equitable that they be awarded reasonable attorney’s fees in the amount ofP30,000.00. In sum, we affirm the dismissal of the counterclaim of petitioners Spouses Yu for actual, moral, and exemplary damages. However, we grant them temperate damages and attorney’s fees. WHEREFORE, the petition is partly GRANTED. The March 21, 2001 Decision of the Court of Appeals isAFFIRMED with the MODIFICATION that petitioners’ counterclaim is PARTLY GRANTED. Gregorio Yu and Josefa Yu are awarded P50,000.00 temperate damages and P30,000.00 attorney’s fees. No costs. SO ORDERED.
Republic of the Philippines SUPREME COURT Manila EN BANC G.R. No. L-21109
June 26, 1967
NATIONAL SHIPYARDS & STEEL CORPORATION, plaintiff-appellee, vs. CARIDAD J. TORRENTO and MUTUAL SECURITY INSURANCE CORPORATION, defendants-appellants. Manuel A. Cammayo for defendants-appellants. Augusto D. Trinidad for plaintif-appellee. MAKALINTAL, J.: On December 5, 1958 defendant Caridad J. Torrento applied with the National Shipyards & Steel Corporation (hereinafter referred to as NASSCO) for the purchase on credit of 60 tons of steel bars, 3/8" deformed or plain, at P430.00 per ton, for a 120-day period. A contract of purchase and sale was executed on January 13, 1959, but was subsequently amended when plaintiff exhausted its stock of 3/8" plain steel bars. As amended, the quantity of steel bars stated to be 60 metric tons in the original contract was changed to 59.31 metric tons; the price was changed from P430.00 to P435.00 per metric ton; and the specification of the steel bars was also changed from "plain, round or corrugated" to "deformed." Pursuant to the stipulation in the contract that the value of steel bars sold to defendant Torrento should be secured by a surety bond issued by a reputable bonding company, defendant Torrento as principal and Mutual Security Insurance Corporation, as surety executed in favor of plaintiff a surety bond (S. 1754) on January 23, 1960. When it was noted that the undertaking under the bond was only P25,000.00, whereas the contract called for the payment of P25,800.00, defendant surety executed a supplemental bond increasing the amount of P25,800.00. On February 6, 1959, when NASSCO could no longer supply the steel bars called for in the contract of purchase and sale inasmuch as its stock of 3/8" deformed steel bars had been exhausted, the plaintiff and defendant Torrento executed a supplemental agreement, the pertinent provisions of which read: . . . Whereas the NASSCO has agreed to sell to the vendee and the vendee has agreed to buy from the NASSCO . . . Fifty Nine and thirty one hundredths (59-31) metric tons of steel bars on credit basis for size and price as follows: 3/8 deformed 20 ft or 30 ft. at P435.00 per tons
Whereas, after consummation of said contract, only the following amount of steel bars were delivered to the vendee, as follows: 20-67 M.T. 3/8" deformed and that there were no more available stock of steel bars of size 3/8" x 20' or 30' deformed. Now therefore, for and in consideration of the foregoing premises, the parties hereby agree to modify and/or amend their said contract as follows: 1. That the NASSCO shall sell to the vendee and the vendee shall buy from the NASSCO, 38.50 tons of steel bars on credit basis subject to availability of stock in the following sizes and prices, to wit: 25 M.T. — 1/2" x 30 deformed at P440.00 per ton. 13.50 M.T. — 5/8" x 30 deformed at P430.00 per ton 2. That aside from the above amendment and/or modification, the said contract shall not be affected, altered, or modified in any way. Pursuant to the contract of purchase and sale and the supplemental contract, NASSCO delivered to defendant Torrento steel bars in the total value of P25,794.09. The 120-day period for payment lapsed. Demand letters were sent, but defendant surety made no reply. Defendant Torrento did not question her liability, but only asked for a 3-month extension to settle her account. Action was brought to recover the unpaid contract price from defendant Torrento and her surety. On October 18, 1960, the lower court rendered judgment: "ordering the defendants, jointly and severally, to pay the plaintiff the sum of P25,794.09, with interest thereon at the rate of 12% per annum, from August 29, 1959 until full payment, and the costs of suit. On the cross-claim, judgment is hereby rendered, ordering the cross-defendant Caridad J. Torrento to pay the cross-plaintiff Mutual Security Insurance Corporation whatever sums the latter would pay the plaintiff by virtue of this judgment, with interest thereon at the rate of 12% per annum, from the date of payment to plaintiff, until full payment, and the costs of this suit." Defendants interposed an appeal to the Court of Appeals, which later on certified the case to Us on the ground that the errors assigned raise only questions of law. Appellant Torrento maintains that plaintiff has no cause of action against her for the reason that inasmuch as she had paid the corresponding premium on the surety bond, the right of action, in case of her default, is exclusively against her surety. Further, with respect to the cross-claim of the Surety, Torrento claims that it was error for the lower court to take cognizance of the same even before payment by said surety to NASSCO had been made. In other words, Torrento argues that the cause of action alleged in the cross-claim does not arise until after payment has been made by the surety to the plaintiff. We find both arguments without merit. The surety bond (Exhibits C and C-1) states in very clear terms that both principal and surety are held and firmly bound unto the NASSCO in the
sum of P25,800.00 for the payment of which they bind themselves, jointly and severally. "If a person binds himself solidarity with the principal debtor, . . . the contract is called suretyship" (Art. 2047, C.C.) in which case the provisions of the Civil Code with respect to joint and solidary obligations apply; and Article 1216 of the Civil Code provides that "the creditor may proceed against any of the solidary debtors or all of them simultaneously. . . ." It has been repeatedly held that although as a rule sureties . . . are only subsidiarily liable for an obligation, nevertheless, if they bind themselves jointly and severally, or in solidum, with the principal debtor, the creditor may bring an action against anyone of them, either alone or together with the principal debtor (Molina vs. de la Riva, 7 Phil. 345; Chinese Chamber vs. Pua Te Ching, 16 Phil. 406; La Yebana vs. Valenzuela, 67 Phil. 482; Chunaco vs. Tria, 63 Phil. 500). With respect to the contention that the lower court erred in taking cognizance of the surety's cross-claim, suffice it to say that this point was not raised in the court a quo and, consequently may not be raised for the first time on appeal. Besides, as the lower court also stated in its decision, "defendant Torrento made no effort to dispute this (cross-claim) of defendant surety and did not even bother to cross-examine the witness who identified the said indemnity agreement," which is the basis of the cross-claim.1äwphï1.ñët For its part, appellant surety company maintains that the execution of the supplemental agreement of February 6, 1959 without its knowledge and consent released it from any liability under the surety bond as there was a material alteration of the principal contract. We find the contention without merit. The court a quo analyzed the factual set-up as follow: x x x An examination and comparison of the contract and the supplemental agreement will reveal that the only change or alteration consists of the following: Instead of the original stipulation for the purchase and sale of 3/8, 20' or 30', deformed steel bars, at P435.00 per ton, which kind of steel bars were no longer available in stock, the supplemental agreement provides for the sale by the plaintiff to defendant Torrento of other sizes of deformed steel bars at prices of P430.00 and P440.00 per metric ton. Specifically, the changes are in the diameter of the steel bars which originally was 3/8", to 1/2 and 5/8"; and the price from P435.00 per ton, to P430.00 per ton for the 1/211 bars. The amount of steel bars to be sold to defendant Torrento remained the same. The length and the deformed quality of the bars likewise remained unchanged. It is even specifically provided in Par. 2 of the supplemental agreement that "aside from the above amendments and/or modifications, the said contract (referring to the original contract) shall not be affected, altered or modified in any way." There was no alteration in the principal condition of the contract. The period of payment was not changed, and the amount of the liability of the principal debtor and of the surety was also untouched. There was no added burden imposed upon or assumed by the buyer." (Emphasis Supplied) x x x In short, the supplemental agreement did not result in the principal debtor's assuming more onerous conditions than those stipulated in the original contract, and for which the surety furnished the bond. There was consequently, no material or essential alteration of the original contract which could result in the release of the surety from the obligation under the said bond. We see no error in the ruling of the lower court just quoted.
In Pacific Tobacco Corporation vs. Lorenzana, et al., G.R. L-8086, October 31, 1961 it was held: "for purposes of releasing a surety's obligation, there must be a material alteration of the contract in connection with which the bond is given, a change which imposes some new obligation on the party promising or takes away some obligation already imposed, changing the legal effect of the original contract and not merely the form thereof . . . To allow compensated surety companies to collect and retain premiums for their services and then repudiate their obligations on slight pretexts which have no relation to the risk, would be most unjust and immoral, and would be a perversion of the wise and just rules designed for the protection of voluntary sureties." While it is the rule that the liability of a surety is limited by the terms of the surety bond fixing its liability and that such liability cannot be extended by implication, it should be noted in the present case that although the technical specifications of the items to be purchased have been changed, it clearly appears that such changes are not substantial and have not added any other liability to that originally assumed. A surety is not released by a change in the contract which does not have the effect of making its obligation more onerous (Visayan Distributors, Inc. vs. Flores, 92 Phil. 145). Wherefore, the appealed decision is hereby affirmed, with costs against defendantsappellants. Concepcion, C.J., Reyes, J.B.L., Dizon, Bengzon, J.P., Zaldivar, Sanchez and Castro, JJ., concur. GATEWAY VS. ASIANBANK OCTOBER 20, 2011 ~ LEAVE A COMMENT GATEWAY ELECTRONICS and GERONIMO VS. ASIANBANK G.R. No. 172041 DECEMBER 18, 2008 FACTS: Petitioner Gateway Electronics Corporation (Gateway) is a domestic corporation that used to be engaged in the semi-conductor business. During the period material, petitioner Geronimo delos Reyes was its president and one Andrew delos Reyes its executive vice-president. On July 23, 1996, Geronimo and Andrew executed separate but almost identical deeds of suretyship for Gateway in favor of respondent Asianbank for Domestic Bills Purchased Line and the Omnibus Credit Line. Later developments saw Asianbank extending to Gateway several export packing loans .This loan package was later consolidated with A Dollar Promissory Note (and secured by a chattel mortgage over Gateway’s equipment.
Gateway initially made payments on its loan obligations, but eventually defaulted. Upon Gateway’s request, Asianbank extended the maturity dates of the loan several times. These extensions bore the conformity of three of Gateway’s officers, among them Andrew.
Gateway issued two Philippine Commercial International Bank checks as payment for its arrearages and but both checks were dishonored for insufficiency of funds. Asianbank’s demands for payment made upon Gateway and its sureties went unheeded. As of November 23, 1999, Gateway’s obligation to Asianbank, inclusive of principal, interest, and penalties, totaled USD 2,235,452.17.
Thus Asianbank filed with the RTC in Makati City a complaint for a sum of money against Gateway, Geronimo, and Andrew.
In its answer to the amended complaint, Gateway traced the cause of its financial difficulties, described the steps it had taken to address its mounting problem, and faulted Asianbank for trying to undermine its efforts toward recovery.
Andrew also filed an answer alleging, among other things, that the deed of suretyship he executed covering the Domestic Bills Purchased Line and the Omnibus Credit Line did NOT include the Dollar Promissory Note, the payment of which was extended several times without his consent.
Geronimo, on the other hand, alleged that the subject deed of suretyship, assuming the authenticity of his signature on it, was signed without his wife’s consent and should, thus, be considered as a mere continuing offer. Like Andrew, Geronimo argued that he ought to be relieved of his liability under the surety agreement inasmuch as he too never consented to the repeated loan maturity date extensions given by Asianbank to Gateway.
After due hearing, the RTC rendered judgment holding Gateway, Geronimo and Andrew jointly and severally liable to pay Asianbank.
Petitioners herein appealed to the CA. Following the filing of its and Geronimo’s joint appellants’ brief, Gateway filed on a petition for voluntary insolvency 6 with the RTC in Imus, Cavite, which was granted. CA affirmed the decision of the lower court. MR denied, hence this petition for review under Rule 45.
ISSUE: is Geronimo discharged from liability because of the insolvency of Gateway, the principal HELD: petition denied NO Asianbank argues that the stay of the collection suit against Gateway (because its case is transferred to an insolvency court) is without bearing on the liability of Geronimo as a surety. Pursuing the point, Asianbank avers that Geronimo may not invoke the insolvency of Gateway as a defense to evade liability.
FIRST LEPANTO-TAISHO INSURANCE CORPORATION (now known as FLT PRIME INSURANCE CORPORATION), v.CHEVRON PHILIPPINES, INC. (formerly known as CALTEX [PHILIPPINES], INC.),
G.R. No. 177839 (January 18,2012) Villarama, J.
Bar Subject:
Commercial Law
Nature
: Rule 45
Quick Facts
:
R Chevron Philippines sued P First Lepanto for the payment of unpaid oil and petroleum purchases made by itsdistributor, Fumitechniks.
Fumitechniks had applied for and was issued a surety bond by First Lepanto for 15.7M
–
this was in compliancewith the requirement for the grant of a credit line with Chevron to guarantee payment of the cost of fuel.(Executed on Oct 15, 2001, will expire on Oct 15, 2002)
Fumitechniks defaulted on its obligation because the check it issued was dishonored Chevron then notified First Lepanto of Fumitechnik
s’ unpaid purchases (15.08M) through a letter. Chevron also sent copies of invoices
showing the deliveries of fuel as requested by First Lepanto.
Simultaneously, a letter was sent to Fumitechniks demanding that it submit to First Lepanto 1)its comment on
Chevron’s notification letter, 2) copy of the agreement secured by the Bond plus the delivery receipts, etc 3)
information on the particulars including terms and conditions.
However Fumitechniks replied that it cannot submit the requested agreement since there was no suchagreement executed between Fumitechniks and Chevron. However it enclosed a copy of another surety bondissued by CICI General Insurance Corporation in favor of Chevron to secure the obligation of Fumitechniksand/or Prime Asia Sales and Services in the amount of 15M.
First Lepanto then advised Chevron of the non-existence of the principal agreement as confirmed byFumitechniks. It explained that being an accessory contract, the bond cannot
exist without a principal agreement as it is essential that the copy of the basic contract be submitted to the surety.
Chevron then formally demanded from First Lepanto the payment of its claim under the surety bond. BecauseFirst Lepanto refused to pay, Chevron prayed for judgment ordering First Lepanto to pay the sum of
15,080,030.30 pesos plus interest, cost and attorney’s fees
RTC: dismissed the complaint. Terms and conditions of the oral credit line between Chevron and Fumitechnikshave not been relayed to First Lepanto. Since the surety bond is a mere accessory contract, the RTC concludedthat the bond cannot stand in the absence of the written agreement secured thereby.
CA:
reversed the RTC’s decision and ruled in favor of Chevron. First Lepanto is
estopped from assailing the oralcredit line agreement, having consented to the same upon presentation by Fumitechniks of the surety bond it issued. Considering that such oral contract between Fumitechniks and respondent has been partially executed,the CA ruled that the provisions of the Statute of Frauds do not apply.
Issue/ Held/ Ratio
:1)
Issue W/N a surety is liable to the creditor in the absence of a written contract with the principal
YES
Sec 175 of the Insurance Code defines suretyship as “
contract or 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 a third party, called the obligee.” The extent of the surety’s liability is determined by the language of the
suretyship contract or bond itself. It cannot be extended by implication, beyond the terms of the contract.
Surety Bond used by First Lepanto states that Fumitechniks, as principal and First Lepanto as surety are firmlybound unto Chevron in the sum of 15.7M. The rider attached to the bond that the principal has applied for acredit line in the amount of 15.7M pesos
First Lepanto argues that non-compliance with the submission of the written agreement, which by the expressterms of the surety bond, should be attached and made part thereof, rendered the bond ineffective.
Since all stipulations and provisions of the surety contract should be taken and interpreted together, in this case,the unmistakable intention of the parties was to secure only those terms and conditions of the writtenagreement.
A reading of Surety Bond shows that it secures the payment of purchases on credit by Fumitechniks inaccordance with the terms and conditions of the "agreement" it entered into with respondent. The word"agreement" has reference to the distributorship agreement, the principal contract and by implication includedthe credit agreement mentioned in the rider.
However, it turned out that Chevron has executed written agreements only with its direct customers but not distributors like Fumitechniks and it also never relayed the terms and conditions of its distributorshipagreement to the First Lepanto after the delivery of the bond.
The law is clear that a surety contract should be read and interpreted together with the contract entered intobetween the creditor and the principal.
Geronimo counters with the argument that his liability as a surety cannot be separated from Gateway’s liability. As surety, he continues, he is entitled to avail himself of all the defenses pertaining to Gateway, including its insolvency, suggesting that if Gateway is eventually released from what it owes Asianbank, he, too, should also be so relieved.
Geronimo’s above contention is untenable.
Suretyship is covered by Article 2047 of the Civil Code, which states:
By guaranty a person, called the guarantor, binds himself to the creditor to fulfill the obligation of the principal debtor in case the latter should fail to do so.
If a person binds himself solidarily with the principal debtor, the provisions of Section 4, Chapter 3, Title I of this Book shall be observed. In such case the contract is called a suretyship.
The Court’s disquisition in Palmares v. Court of Appeals on suretyship is instructive, thus: A surety is an insurer of the debt, whereas a guarantor is an insurer of the solvency of the debtor. A suretyship is an undertaking that the debt shall be paid x x x. Stated differently, a surety promises to pay the principal’s debt if the principal will not pay, while a guarantor agrees that the creditor, after proceeding against the principal, may proceed against the guarantor if the principal is unable to pay. A surety binds himself to perform if the principal does not, without regard to his ability to do so. x x xIn other words, a surety undertakes directly for the payment and is so responsible at once if the principal debtor makes default x x x. xxxx
A 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. A Suretyship contract refers to an agreement whereunder one person, the surety, engages to be answerable for the debt, default, or miscarriage of another known as the principal. Geronimo’s position that a surety cannot be made to pay when the principal is unable to pay is clearly specious and must be rejected. Republic of the Philippines SUPREME COURT Manila SECOND DIVISION
G.R. No. 89561 September 13, 1990 BUENAFLOR C. UMALI, MAURICIA M. VDA. DE CASTILLO, VICTORIA M. CASTILLO, BERTILLA C. RADA, MARIETTA C. ABAÑEZ, LEOVINA C. JALBUENA and SANTIAGO M. RIVERA, petitioners, vs. COURT OF APPEALS, BORMAHECO, INC. and PHILIPPINE MACHINERY PARTS MANUFACTURING CO., INC., respondents. Edmundo T. Zepeda for petitioners. Martin M. De Guzman for respondent BORMAHECO, Inc. Renato J. Robles for P.M. Parts Manufacturing Co., Inc.
REGALADO, J.: This is a petition to review the decision of respondent Court of Appeals, dated August 3, 1989, in CA-GR CV No. 15412, entitled "Buenaflor M. Castillo Umali, et al. vs. Philippine Machinery Parts Manufacturing Co., Inc., et al.," 1the dispositive portion whereof provides: WHEREFORE, viewed in the light of the entire record, the judgment appealed from must be, as it is hereby REVERSED. In lieu thereof, a judgment is hereby rendered1) Dismissing the complaint, with cost against plaintiffs; 2) Ordering plaintiffs-appellees to vacate the subject properties; and 3) Ordering plaintiffs-appellees to pay upon defendants' counterclaims: a) To defendant-appellant PM Parts: (i) damages consisting of the value of the fruits in the subject parcels of land of which they were deprived in the sum of P26,000.00 and (ii) attorney's fees of P15,000.00 b) To defendant-appellant Bormaheco: (i) expenses of litigation in the amount of P5,000.00 and (ii) attorney's fees of P15,000.00. SO ORDERED. The original complaint for annulment of title filed in the court a quo by herein petitioners included as party defendants the Philippine Machinery Parts Manufacturing Co., Inc. (PM Parts), Insurance Corporation of the Philippines (ICP), Bormaheco, Inc., (Bormaheco) and Santiago M. Rivera (Rivera). A Second Amended Complaint was filed, this time impleading Santiago M. Rivera as party plaintiff.
During the pre-trial conference, the parties entered into the following stipulation of facts: As between all parties: Plaintiff Buenaflor M. Castillo is the judicial administratrix of the estate of Felipe Castillo in Special Proceeding No. 4053, pending before Branch IX, CFI of Quezon (per Exhibit A) which intestate proceedings was instituted by Mauricia Meer Vda. de Castillo, the previous administratrix of the said proceedings prior to 1970 (per exhibits A-1 and A-2) which case was filed in Court way back in 1964; b) The four (4) parcels of land described in paragraph 3 of the Complaint were originally covered by TCT No. T-42104 and Tax Dec. No. 14134 with assessed value of P3,100.00; TCT No. T 32227 and Tax Dec. No. 14132, with assessed value of P5,130,00; TCT No. T-31762 and Tax Dec. No. 14135, with assessed value of P6,150.00; and TCT No. T-42103 with Tax Dec. No. 14133, with assessed value of P3,580.00 (per Exhibits A-2 and B, B-1 to B-3 C, C-1 -to C3 c) That the above-enumerated four (4) parcels of land were the subject of the Deed of Extra-Judicial Partition executed by the heirs of Felipe Castillo (per Exhibit D) and by virtue thereof the titles thereto has (sic) been cancelled and in lieu thereof, new titles in the name of Mauricia Meer Vda. de Castillo and of her children, namely: Buenaflor, Bertilla, Victoria, Marietta and Leovina, all surnamed Castillo has (sic) been issued, namely: TCT No. T-12113 (Exhibit E ); TCT No. T-13113 (Exhibit F); TCT No. T-13116 (Exhibit G ) and TCT No. T13117 (Exhibit H ) d) That mentioned parcels of land were submitted as guaranty in the Agreement of Counter-Guaranty with Chattel-Real Estate Mortgage executed on 24 October 1970 between Insurance Corporation of the Philippines and Slobec Realty Corporation represented by Santiago Rivera (Exhibit 1); e) That based on the Certificate of Sale issued by the Sheriff of the Province of Quezon in favor of Insurance Corporation of the Philippines it was able to transfer to itself the titles over the lots in question, namely: TCT No. T-23705 (Exhibit M), TCT No. T 23706 (Exhibit N ), TCT No. T-23707 (Exhibit 0) and TCT No. T 23708 (Exhibit P); f) That on 10 April 1975, the Insurance Corporation of the Philippines sold to PM Parts the immovables in question (per Exhibit 6 for PM Parts) and by reason thereof, succeeded in transferring unto itself the titles over the lots in dispute, namely: per TCT No. T-24846 (Exhibit Q ), per TCT No. T-24847 (Exhibit R ), TCT No. T-24848 (Exhibit), TCT No. T-24849 (Exhibit T );
g) On 26 August l976, Mauricia Meer Vda. de Castillo' genther letter to Modesto N. Cervantes stating that she and her children refused to comply with his demands (Exhibit V-2); h) That from at least the months of October, November and December 1970 and January 1971, Modesto N. Cervantes was the Vice-President of Bormaheco, Inc. later President thereof, and also he is one of the Board of Directors of PM Parts; on the other hand, Atty. Martin M. De Guzman was the legal counsel of Bormaheco, Inc., later Executive Vice-President thereof, and who also is the legal counsel of Insurance Corporation of the Philippines and PM Parts; that Modesto N. Cervantes served later on as President of PM Parts, and that Atty. de Guzman was retained by Insurance Corporation of the Philippines specifically for foreclosure purposes only; i) Defendant Bormaheco, Inc. on November 25, 1970 sold to Slobec Realty and Development, Inc., represented by Santiago Rivera, President, one (1) unit Caterpillar Tractor D-7 with Serial No. 281114 evidenced by a contract marked Exhibit J and Exhibit I for Bormaheco, Inc.; j) That the Surety Bond No. 14010 issued by co-defendant ICP was likewise secured by an Agreement with Counter-Guaranty with Real Estate Mortgage executed by Slobec Realty & Development, Inc., Mauricia Castillo Meer, Buenaflor Castillo, Bertilla Castillo, Victoria Castillo, Marietta Castillo and Leovina Castillo, as mortgagors in favor of ICP which document was executed and ratified before notary public Alberto R. Navoa of the City of Manila on October 24,1970; k) That the property mortgaged consisted of four (4) parcels of land situated in Lucena City and covered by TCT Nos. T-13114, T13115, T-13116 and T-13117 of the Register of Deeds of Lucena City; l) That the tractor sold by defendant Bormaheco, Inc. to Slobec Realty & Development, Inc. was delivered to Bormaheco, Inc. on or about October 2,1973, by Mr. Menandro Umali for purposes of repair; m) That in August 1976, PM Parts notified Mrs. Mauricia Meer about its ownership and the assignment of Mr. Petronilo Roque as caretaker of the subject property; n) That plaintiff and other heirs are harvest fruits of the property (daranghita) which is worth no less than Pl,000.00 per harvest.
As between plaintifs and defendant Bormaheco, Inc o) That on 25 November 1970, at Makati, Rizal, Same Rivera, in representation of the Slobec Realty & Development Corporation executed in favor of Bormaheco, Inc., represented by its VicePresident Modesto N. Cervantes a Chattel Mortgage concerning one unit model CAT D7 Caterpillar Crawler Tractor as described therein as security for the payment in favor of the mortgagee of the amount of P180,000.00 (per Exhibit K) that Id document was superseded by another chattel mortgage dated January 23, 1971 (Exhibit 15); p) On 18 December 1970, at Makati, Rizal, the Bormaheco, Inc., represented by its Vice-President Modesto Cervantes and Slobec Realty Corporation represented by Santiago Rivera executed the sales agreement concerning the sale of one (1) unit Model CAT D7 Caterpillar Crawler Tractor as described therein for the amount of P230,000.00 (per Exhibit J) which document was superseded by the Sales Agreement dated January 23,1971 (Exhibit 16); q) Although it appears on the document entitled Chattel Mortgage (per Exhibit K) that it was executed on 25 November 1970, and in the document entitled Sales Agreement (per Exhibit J) that it was executed on 18 December 1970, it appears in the notarial register of the notary public who notarized them that those two documents were executed on 11 December 1970. The certified xerox copy of the notarial register of Notary Public Guillermo Aragones issued by the Bureau of Records Management is hereto submitted as Exhibit BB That said chattel mortgage was superseded by another document dated January 23, 1971; r) That on 23 January 1971, Slobec Realty Development Corporation, represented by Santiago Rivera, received from Bormaheco, Inc. one (1) tractor Caterpillar Model D-7 pursuant to Invoice No. 33234 (Exhibits 9 and 9-A, Bormaheco, Inc.) and delivery receipt No. 10368 (per Exhibits 10 and 10-A for Bormaheco, Inc s) That on 28 September 1973, Atty. Martin M. de Guzman, as counsel of Insurance Corporation of the Philippines purchased at public auction for said corporation the four (4) parcels of land subject of tills case (per Exhibit L), and which document was presented to the Register of Deeds on 1 October 1973; t) Although it appears that the realties in issue has (sic) been sold by Insurance Corporation of the Philippines in favor of PM Parts on 1 0 April 1975, Modesto N. Cervantes, formerly VicePresident and now President of Bormaheco, Inc., sent his letter
dated 9 August 1976 to Mauricia Meer Vda. de Castillo (Exhibit V), demanding that she and her children should vacate the premises; u) That the Caterpillar Crawler Tractor Model CAT D-7 which was received by Slobec Realty Development Corporation was actually reconditioned and repainted. " 2 We cull the following antecedents from the decision of respondent Court of Appeals: Plaintiff Santiago Rivera is the nephew of plaintiff Mauricia Meer Vda. de Castillo. The Castillo family are the owners of a parcel of land located in Lucena City which was given as security for a loan from the Development Bank of the Philippines. For their failure to pay the amortization, foreclosure of the said property was about to be initiated. This problem was made known to Santiago Rivera, who proposed to them the conversion into subdivision of the four (4) parcels of land adjacent to the mortgaged property to raise the necessary fund. The Idea was accepted by the Castillo family and to carry out the project, a Memorandum of Agreement (Exh. U p. 127, Record) was executed by and between Slobec Realty and Development, Inc., represented by its President Santiago Rivera and the Castillo family. In this agreement, Santiago Rivera obliged himself to pay the Castillo family the sum of P70,000.00 immediately after the execution of the agreement and to pay the additional amount of P400,000.00 after the property has been converted into a subdivision. Rivera, armed with the agreement, Exhibit U , approached Mr. Modesto Cervantes, President of defendant Bormaheco, and proposed to purchase from Bormaheco two (2) tractors Model D-7 and D-8 Subsequently, a Sales Agreement was executed on December 28,1970 (Exh. J, p. 22, Record). On January 23, 1971, Bormaheco, Inc. and Slobec Realty and Development, Inc., represented by its President, Santiago Rivera, executed a Sales Agreement over one unit of Caterpillar Tractor D-7 with Serial No. 281114, as evidenced by the contract marked Exhibit '16'. As shown by the contract, the price was P230,000.00 of which P50,000.00 was to constitute a down payment, and the balance of P180,000.00 payable in eighteen monthly installments. On the same date, Slobec, through Rivera, executed in favor of Bormaheco a Chattel Mortgage (Exh. K, p. 29, Record) over the said equipment as security for the payment of the aforesaid balance of P180,000.00. As further security of the aforementioned unpaid balance, Slobec obtained from Insurance Corporation of the Phil. a Surety Bond, with ICP (Insurance Corporation of the Phil.) as surety and Slobec as principal, in favor of Bormaheco, as borne out by Exhibit '8' (p. 111, Record). The aforesaid surety bond was in turn secured by an Agreement of Counter-Guaranty with Real Estate Mortgage (Exhibit I, p. 24, Record) executed by Rivera as president of Slobec and Mauricia Meer Vda. de Castillo, Buenaflor Castillo Umali, Bertilla Castillo-Rada, Victoria Castillo, Marietta Castillo and Leovina Castillo Jalbuena, as mortgagors and Insurance Corporation of the Philippines (ICP) as mortgagee. In this agreement, ICP guaranteed the obligation of Slobec with Bormaheco in the amount of P180,000.00. In giving the bond, ICP required that the Castillos mortgage to them the properties in question, namely, four parcels of land covered by TCTs in the name of the
aforementioned mortgagors, namely TCT Nos. 13114, 13115, 13116 and 13117 all of the Register of Deeds for Lucena City. On the occasion of the execution on January 23, 1971, of the Sales Agreement Exhibit '16', Slobec, represented by Rivera received from Bormaheco the subject matter of the said Sales Agreement, namely, the aforementioned tractor Caterpillar Model D-7 as evidenced by Invoice No. 33234 (Exhs. 9 and 9-A, p. 112, Record) and Delivery Receipt No. 10368 (Exhs. 10 and 10-A, p. 113). This tractor was known by Rivera to be a reconditioned and repainted one [Stipulation of Facts, Pre-trial Order, par. (u)]. Meanwhile, for violation of the terms and conditions of the Counter-Guaranty Agreement (Exh. 1), the properties of the Castillos were foreclosed by ICP As the highest bidder with a bid of P285,212.00, a Certificate of Sale was issued by the Provincial Sheriff of Lucena City and Transfer Certificates of Title over the subject parcels of land were issued by the Register of Deeds of Lucena City in favor of ICP namely, TCT Nos. T-23705, T 23706, T-23707 and T-23708 (Exhs. M to P, pp. 38-45). The mortgagors had one (1) year from the date of the registration of the certificate of sale, that is, until October 1, 1974, to redeem the property, but they failed to do so. Consequently, ICP consolidated its ownership over the subject parcels of land through the requisite affidavit of consolidation of ownership dated October 29, 1974, as shown in Exh. '22'(p. 138, Rec.). Pursuant thereto, a Deed of Sale of Real Estate covering the subject properties was issued in favor of ICP (Exh. 23, p. 139, Rec.). On April 10, 1975, Insurance Corporation of the Phil. ICP sold to Phil. Machinery Parts Manufacturing Co. (PM Parts) the four (4) parcels of land and by virtue of said conveyance, PM Parts transferred unto itself the titles over the lots in dispute so that said parcels of land are now covered by TCT Nos. T24846, T-24847, T-24848 and T-24849 (Exhs. Q-T, pp. 46-49, Rec.). Thereafter, PM Parts, through its President, Mr. Modesto Cervantes, sent a letter dated August 9,1976 addressed to plaintiff Mrs. Mauricia Meer Castillo requesting her and her children to vacate the subject property, who (Mrs. Castillo) in turn sent her reply expressing her refusal to comply with his demands. On September 29, 1976, the heirs of the late Felipe Castillo, particularly plaintiff Buenaflor M. Castillo Umali as the appointed administratrix of the properties in question filed an action for annulment of title before the then Court of First Instance of Quezon and docketed thereat as Civil Case No. 8085. Thereafter, they filed an Amended Complaint on January 10, 1980 (p. 444, Record). On July 20, 1983, plaintiffs filed their Second Amended Complaint, impleading Santiago M. Rivera as a party plaintiff (p. 706, Record). They contended that all the aforementioned transactions starting with the Agreement of Counter-Guaranty with Real Estate Mortgage (Exh. I), Certificate of Sale (Exh. L) and the Deeds of Authority to Sell, Sale and the Affidavit of Consolidation of Ownership (Annexes F, G, H, I) as well as the Deed of Sale (Annexes J, K, L and M) are void for being entered into in fraud and without the consent and approval of the Court of First Instance of Quezon, (Branch IX) before whom the administration proceedings has been pending. Plaintiffs pray
that the four (4) parcels of land subject hereof be declared as owned by the estate of the late Felipe Castillo and that all Transfer Certificates of Title Nos. 13114,13115,13116,13117, 23705, 23706, 23707, 23708, 24846, 24847, 24848 and 24849 as well as those appearing as encumbrances at the back of the certificates of title mentioned be declared as a nullity and defendants to pay damages and attorney's fees (pp. 71071 1, Record). In their amended answer, the defendants controverted the complaint and alleged, by way of affirmative and special defenses that the complaint did not state facts sufficient to state a cause of action against defendants; that plaintiffs are not entitled to the reliefs demanded; that plaintiffs are estopped or precluded from asserting the matters set forth in the Complaint; that plaintiffs are guilty of laches in not asserting their alleged right in due time; that defendant PM Parts is an innocent purchaser for value and relied on the face of the title before it bought the subject property (p. 744, Record). 3 After trial, the court a quo rendered judgment, with the following decretal portion: WHEREFORE, judgment is hereby rendered in favor of the plaintiffs and against the defendants, declaring the following documents: Agreement of Counter-Guaranty with Chattel-Real Estate Mortgage dated October 24,1970 (Exhibit 1); Sales Agreement dated December 28, 1970 (Exhibit J) Chattel Mortgage dated November 25, 1970 (Exhibit K) Sales Agreement dated January 23, 1971 (Exhibit 16); Chattel Mortgage dated January 23, 1971 (Exhibit 17); Certificate of Sale dated September 28, 1973 executed by the Provincial Sheriff of Quezon in favor of Insurance Corporation of the Philippines (Exhibit L); null and void for being fictitious, spurious and without consideration. Consequently, Transfer Certificates of Title Nos. T 23705, T-23706, T23707 and T-23708 (Exhibits M, N, O and P) issued in the name of Insurance Corporation of the Philippines, are likewise null and void. The sale by Insurance Corporation of the- Philippines in favor of defendant Philippine Machinery Parts Manufacturing Co., Inc., over Id four (4) parcels of land and Transfer Certificates of Title Nos. T 24846, T-24847, T-24848 and T24849 subsequently issued by virtue of said sale in the name of Philippine Machinery Parts Manufacturing Co., Inc., are similarly declared null and void, and the Register of Deeds of Lucena City is hereby directed to issue, in lieu thereof, transfer certificates of title in the names of the plaintiffs, except Santiago Rivera.
Orders the defendants jointly and severally to pay the plaintiffs moral damages in the sum of P10,000.00, exemplary damages in the amount of P5,000.00, and actual litigation expenses in the sum of P6,500.00. Defendants are likewise ordered to pay the plaintiffs, jointly and severally, the sum of P10,000.00 for and as attomey's fees. With costs against the defendants. SO ORDERED.
4
As earlier stated, respondent court reversed the aforequoted decision of the trial court and rendered the judgment subject of this petitionPetitioners contend that respondent Court of Appeals erred: 1. In holding and finding that the actions entered into between petitioner Rivera with Cervantes are all fair and regular and therefore binding between the parties thereto; 2. In reversing the decision of the lower court, not only based on erroneous conclusions of facts, erroneous presumptions not supported by the evidence on record but also, holding valid and binding the supposed payment by ICP of its obligation to Bormaheco, despite the fact that the surety bond issued it had already expired when it opted to foreclose extrajudically the mortgage executed by the petitioners; 3. In aside the finding of the lower court that there was necessity to pierce the veil of corporate existence; and 4. In reversing the decision of the lower court of affirming the same
5
I. Petitioners aver that the transactions entered into between Santiago M. Rivera, as President of Slobec Realty and Development Company (Slobec) and Mode Cervantes, as Vice-President of Bormaheco, such as the Sales Agreement, 6 Chattel Mortgage 7 and the Agreement of Counter-Guaranty with Chattel/Real Estate Mortgage, 8 are all fraudulent and simulated and should, therefore, be declared nun and void. Such allegation is premised primarily on the fact that contrary to the stipulations agreed upon in the Sales Agreement (Exhibit J), Rivera never made any advance payment, in the alleged amount of P50,000.00, to Bormaheco; that the tractor was received by Rivera only on January 23, 1971 and not in 1970 as stated in the Chattel Mortgage (Exhibit K); and that when the Agreement of Counter-Guaranty with Chattel/Real Estate Mortgage was executed on October 24, 1970, to secure the obligation of ICP under its surety bond, the Sales Agreement and Chattel Mortgage had not as yet been executed, aside from the fact that it was Bormaheco, and not Rivera, which paid the premium for the surety bond issued by ICP At the outset, it will be noted that petitioners submission under the first assigned error hinges purely on questions of fact. Respondent Court of Appeals made several findings to the effect that the questioned documents are valid and binding upon the parties, that there was no fraud employed by private respondents in the execution thereof, and that, contrary to petitioners' allegation, the evidence on record reveals that petitioners had every intention
to be bound by their undertakings in the various transactions had with private respondents. It is a general rule in this jurisdiction that findings of fact of said appellate court are final and conclusive and, thus, binding on this Court in the absence of sufficient and convincing proof, inter alia, that the former acted with grave abuse of discretion. Under the circumstances, we find no compelling reason to deviate from this long-standing jurisprudential pronouncement. In addition, the alleged failure of Rivera to pay the consideration agreed upon in the Sales Agreement, which clearly constitutes a breach of the contract, cannot be availed of by the guilty party to justify and support an action for the declaration of nullity of the contract. Equity and fair play dictates that one who commits a breach of his contract may not seek refuge under the protective mantle of the law. The evidence of record, on an overall calibration, does not convince us of the validity of petitioners' contention that the contracts entered into by the parties are either absolutely simulated or downright fraudulent. There is absolute simulation, which renders the contract null and void, when the parties do not intend to be bound at all by the same. 9 The basic characteristic of this type of simulation of contract is the fact that the apparent contract is not really desired or intended to either produce legal effects or in any way alter the juridical situation of the parties. The subsequent act of Rivera in receiving and making use of the tractor subject matter of the Sales Agreement and Chattel Mortgage, and the simultaneous issuance of a surety bond in favor of Bormaheco, concomitant with the execution of the Agreement of Counter-Guaranty with Chattel/Real Estate Mortgage, conduce to the conclusion that petitioners had every intention to be bound by these contracts. The occurrence of these series of transactions between petitioners and private respondents is a strong indication that the parties actually intended, or at least expected, to exact fulfillment of their respective obligations from one another. Neither will an allegation of fraud prosper in this case where petitioners failed to show that they were induced to enter into a contract through the insidious words and machinations of private respondents without which the former would not have executed such contract. To set aside a document solemnly executed and voluntarily delivered, the proof of fraud must be clear and convincing. 10 We are not persuaded that such quantum of proof exists in the case at bar. The fact that it was Bormaheco which paid the premium for the surety bond issued by ICP does not per se affect the validity of the bond. Petitioners themselves admit in their present petition that Rivera executed a Deed of Sale with Right of Repurchase of his car in favor of Bormaheco and agreed that a part of the proceeds thereof shall be used to pay the premium for the bond. 11 In effect, Bormaheco accepted the payment of the premium as an agent of ICP The execution of the deed of sale with a right of repurchase in favor of Bormaheco under such circumstances sufficiently establishes the fact that Rivera recognized Bormaheco as an agent of ICP Such payment to the agent of ICP is, therefore, binding on Rivera. He is now estopped from questioning the validity of the suretyship contract. II. Under the doctrine of piercing the veil of corporate entity, when valid grounds therefore exist, the legal fiction that a corporation is an entity with a juridical personality separate and distinct from its members or stockholders may be disregarded. In such cases, the corporation will be considered as a mere association of persons. The members or
stockholders of the corporation will be considered as the corporation, that is, liability will attach directly to the officers and stockholders. 12 The doctrine applies when the corporate fiction is used to defeat public convenience, justify wrong, protect fraud, or defend crime, 13 or when it is made as a shield to confuse the legitimate issues 14 or where a corporation is the mere alter ego or business conduit of a person, or where the corporation is so organized and controlled and its affairs are so conducted as to make it merely an instrumentality, agency, conduit or adjunct of another corporation. 15 In the case at bar, petitioners seek to pierce the V621 Of corporate entity of Bormaheco, ICP and PM Parts, alleging that these corporations employed fraud in causing the foreclosure and subsequent sale of the real properties belonging to petitioners While we do not discount the possibility of the existence of fraud in the foreclosure proceeding, neither are we inclined to apply the doctrine invoked by petitioners in granting the relief sought. It is our considered opinion that piercing the veil of corporate entity is not the proper remedy in order that the foreclosure proceeding may be declared a nullity under the circumstances obtaining in the legal case at bar. In the first place, the legal corporate entity is disregarded only if it is sought to hold the officers and stockholders directly liable for a corporate debt or obligation. In the instant case, petitioners do not seek to impose a claim against the individual members of the three corporations involved; on the contrary, it is these corporations which desire to enforce an alleged right against petitioners. Assuming that petitioners were indeed defrauded by private respondents in the foreclosure of the mortgaged properties, this fact alone is not, under the circumstances, sufficient to justify the piercing of the corporate fiction, since petitioners do not intend to hold the officers and/or members of respondent corporations personally liable therefor. Petitioners are merely seeking the declaration of the nullity of the foreclosure sale, which relief may be obtained without having to disregard the aforesaid corporate fiction attaching to respondent corporations. Secondly, petitioners failed to establish by clear and convincing evidence that private respondents were purposely formed and operated, and thereafter transacted with petitioners, with the sole intention of defrauding the latter. The mere fact, therefore, that the businesses of two or more corporations are interrelated is not a justification for disregarding their separate personalities, 16 absent sufficient showing that the corporate entity was purposely used as a shield to defraud creditors and third persons of their rights. III. The main issue for resolution is whether there was a valid foreclosure of the mortgaged properties by ICP Petitioners argue that the foreclosure proceedings should be declared null and void for two reasons, viz.: (1) no written notice was furnished by Bormaheco to ICP anent the failure of Slobec in paying its obligation with the former, plus the fact that no receipt was presented to show the amount allegedly paid by ICP to Bormaheco; and (b) at the time of the foreclosure of the mortgage, the liability of ICP under the surety bond had already expired. Respondent court, in finding for the validity of the foreclosure sale, declared: Now to the question of whether or not the foreclosure by the ICP of the real estate mortgage was in the exercise of a legal right, We agree with the appellants that the foreclosure proceedings instituted by the ICP was in the exercise of a legal right. First, ICP has in its favor the legal presumption that it
had indemnified Bormaheco by reason of Slobec's default in the payment of its obligation under the Sales Agreement, especially because Bormaheco consented to ICPs foreclosure of the mortgage. This presumption is in consonance with pars. R and Q Section 5, Rule 5, * New Rules of Court which provides that it is disputably presumed that private transactions have been fair and regular. likewise, it is disputably presumed that the ordinary course of business has been followed: Second, ICP had the right to proceed at once to the foreclosure of the mortgage as mandated by the provisions of Art. 2071 Civil Code for these further reasons: Slobec, the principal debtor, was admittedly insolvent; Slobec's obligation becomes demandable by reason of the expiration of the period of payment; and its authorization to foreclose the mortgage upon Slobec's default, which resulted in the accrual of ICPS liability to Bormaheco. Third, the Agreement of Counter-Guaranty with Real Estate Mortgage (Exh. 1) expressly grants to ICP the right to foreclose the real estate mortgage in the event of 'non-payment or non-liquidation of the entire indebtedness or fraction thereof upon maturity as stipulated in the contract'. This is a valid and binding stipulation in the absence of showing that it is contrary to law, morals, good customs, public order or public policy. (Art. 1306, New Civil Code). 17 1. Petitioners asseverate that there was no notice of default issued by Bormaheco to ICP which would have entitled Bormaheco to demand payment from ICP under the suretyship contract. Surety Bond No. B-1401 0 which was issued by ICP in favor of Bormaheco, wherein ICP and Slobec undertook to guarantee the payment of the balance of P180,000.00 payable in eighteen (18) monthly installments on one unit of Model CAT D-7 Caterpillar Crawler Tractor, pertinently provides in part as follows: 1. The liability of INSURANCE CORPORATION OF THE PHILIPPINES, under this BOND will expire Twelve (I 2) months from date hereof. Furthermore, it is hereby agreed and understood that the INSURANCE CORPORATION OF THE PHILIPPINES will not be liable for any claim not presented in writing to the Corporation within THIRTY (30) DAYS from the expiration of this BOND, and that the obligee hereby waives his right to bring claim or file any action against Surety and after the termination of one (1) year from the time his cause of action accrues. 18 The surety bond was dated October 24, 1970. However, an annotation on the upper part thereof states: "NOTE: EFFECTIVITY DATE OF THIS BOND SHALL BE ON JANUARY 22, 1971." 19 On the other hand, the Sales Agreement dated January 23, 1971 provides that the balance of P180,000.00 shall be payable in eighteen (18) monthly installments. 20 The Promissory Note executed by Slobec on even date in favor of Bormaheco further provides that the obligation shall be payable on or before February 23, 1971 up to July 23, 1972, and that nonpayment of any of the installments when due shall make the entire obligation immediately due and demandable. 21 It is basic that liability on a bond is contractual in nature and is ordinarily restricted to the obligation expressly assumed therein. We have repeatedly held that the extent of a surety's
liability is determined only by the clause of the contract of suretyship as well as the conditions stated in the bond. It cannot be extended by implication beyond the terms the contract. 22 Fundamental likewise is the rule that, except where required by the provisions of the contract, a demand or notice of default is not required to fix the surety's liability. 23 Hence, where the contract of suretyship stipulates that notice of the principal's default be given to the surety, generally the failure to comply with the condition will prevent recovery from the surety. There are certain instances, however, when failure to comply with the condition will not extinguish the surety's liability, such as a failure to give notice of slight defaults, which are waived by the obligee; or on mere suspicion of possible default; or where, if a default exists, there is excuse or provision in the suretyship contract exempting the surety for liability therefor, or where the surety already has knowledge or is chargeable with knowledge of the default. 24 In the case at bar, the suretyship contract expressly provides that ICP shag not be liable for any claim not filed in writing within thirty (30) days from the expiration of the bond. In its decision dated May 25 1987, the court a quocategorically stated that '(n)o evidence was presented to show that Bormaheco demanded payment from ICP nor was there any action taken by Bormaheco on the bond posted by ICP to guarantee the payment of plaintiffs obligation. There is nothing in the records of the proceedings to show that ICP indemnified Bormaheco for the failure of the plaintiffs to pay their obligation. " 25 The failure, therefore, of Bormaheco to notify ICP in writing about Slobec's supposed default released ICP from liability under its surety bond. Consequently, ICP could not validly foreclose that real estate mortgage executed by petitioners in its favor since it never incurred any liability under the surety bond. It cannot claim exemption from the required written notice since its case does not fall under any of the exceptions hereinbefore enumerated. Furthermore, the allegation of ICP that it has paid Bormaheco is not supported by any documentary evidence. Section 1, Rule 131 of the Rules of Court provides that the burden of evidence lies with the party who asserts an affirmative allegation. Since ICP failed to duly prove the fact of payment, the disputable presumption that private transactions have been fair and regular, as erroneously relied upon by respondent Court of Appeals, finds no application to the case at bar. 2. The liability of a surety is measured by the terms of his contract, and, while he is liable to the full extent thereof, such liability is strictly limited to that assumed by its terms. 26 While ordinarily the termination of a surety's liability is governed by the provisions of the contract of suretyship, where the obligation of a surety is, under the terms of the bond, to terminate at a specified time, his obligation cannot be enlarged by an unauthorized extension thereof. 27 This is an exception to the general rule that the obligation of the surety continues for the same period as that of the principal debtor. 28 It is possible that the period of suretyship may be shorter than that of the principal obligation, as where the principal debtor is required to make payment by installments. 29 In the case at bar, the surety bond issued by ICP was to expire on January 22, 1972, twelve (1 2) months from its effectivity date, whereas Slobec's installment payment was to end on July 23, 1972. Therefore, while ICP guaranteed the payment by Slobec of the balance of P180,000.00, such guaranty was valid only for and within twelve (1 2) months from the date of effectivity of the surety bond, or until January 22, 1972. Thereafter, from January 23, 1972 up to July 23, 1972, the liability of Slobec became an unsecured obligation. The default of
Slobec during this period cannot be a valid basis for the exercise of the right to foreclose by ICP since its surety contract had already been terminated. Besides, the liability of ICP was extinguished when Bormaheco failed to file a written claim against it within thirty (30) days from the expiration of the surety bond. Consequently, the foreclosure of the mortgage, after the expiration of the surety bond under which ICP as surety has not incurred any liability, should be declared null and void. 3. Lastly, it has been held that where The guarantor holds property of the principal as collateral surety for his personal indemnity, to which he may resort only after payment by himself, until he has paid something as such guarantor neither he nor the creditor can resort to such collaterals. 30 The Agreement of Counter-Guaranty with Chattel/Real Estate Mortgage states that it is being issued for and in consideration of the obligations assumed by the Mortgagee-Surety Company under the terms and conditions of ICP Bond No. 14010 in behalf of Slobec Realty Development Corporation and in favor of Bormaheco, Inc. 31 There is no doubt that said Agreement of Counter-Guaranty is issued for the personal indemnity of ICP Considering that the fact of payment by ICP has never been established, it follows, pursuant to the doctrine above adverted to, that ICP cannot foreclose on the subject properties, IV. Private respondent PM Parts posits that it is a buyer in good faith and, therefore, it acquired a valid title over the subject properties. The submission is without merit and the conclusion is specious We have stated earlier that the doctrine of piercing the veil of corporate fiction is not applicable in this case. However, its inapplicability has no bearing on the good faith or bad faith of private respondent PM Parts. It must be noted that Modesto N. Cervantes served as Vice-President of Bormaheco and, later, as President of PM Parts. On this fact alone, it cannot be said that PM Parts had no knowledge of the aforesaid several transactions executed between Bormaheco and petitioners. In addition, Atty. Martin de Guzman, who is the Executive Vice-President of Bormaheco, was also the legal counsel of ICP and PM Parts. These facts were admitted without qualification in the stipulation of facts submitted by the parties before the trial court. Hence, the defense of good faith may not be resorted to by private respondent PM Parts which is charged with knowledge of the true relations existing between Bormaheco, ICP and herein petitioners. Accordingly, the transfer certificates of title issued in its name, as well as the certificate of sale, must be declared null and void since they cannot be considered altogether free of the taint of bad faith. WHEREFORE, the decision of respondent Court of Appeals is hereby REVERSED and SET ASIDE, and judgment is hereby rendered declaring the following as null and void: (1) Certificate of Sale, dated September 28,1973, executed by the Provincial Sheriff of Quezon in favor of the Insurance Corporation of the Philippines; (2) Transfer Certificates of Title Nos. T-23705, T-23706, T-23707 and T-23708 issued in the name of the Insurance Corporation of the Philippines; (3) the sale by Insurance Corporation of the Philippines in favor of Philippine Machinery Parts Manufacturing Co., Inc. of the four (4) parcels of land covered by the aforesaid certificates of title; and (4) Transfer Certificates of Title Nos. T-24846, T-24847, T24848 and T24849 subsequently issued by virtue of said sale in the name of the latter corporation. The Register of Deeds of Lucena City is hereby directed to cancel Transfer Certificates of Title Nos. T-24846, T-24847, T24848 and T-24849 in the name of Philippine Machinery Parts
Manufacturing Co., Inc. and to issue in lieu thereof the corresponding transfer certificates of title in the name of herein petitioners, except Santiago Rivera. The foregoing dispositions are without prejudice to such other and proper legal remedies as may be available to respondent Bormaheco, Inc. against herein petitioners. SO ORDERED. Republic of the Philippines SUPREME COURT Manila FIRST DIVISION G.R. No. L-30910 February 27, 1987 PEOPLE OF THE PHILIPPINES, plaintiff-appellee, vs. JULIA MANIEGO, accused-appellant.
NARVASA, J.: Application of the established rule in this jurisdiction, that the acquittal of an accused on reasonable doubt is not generally an impediment to the imposition, in the same criminal action, of civil liability for damages on said accused, is what is essentially called into question by the appellant in this case. The information which initiated the instant criminal proceedings in the Court of First Instance of Rizal indicted three (3) persons — Lt. Rizalino M. Ubay, Mrs. Milagros Pamintuan, and Mrs. Julia T. Maniego — for the crime of MALVERSATION committed as follows: That on or about the period covering the month of May, 1957 up to and including the month of August, 1957, in Quezon City, Philippines, the abovenamed accused, conspiring together, confederating with and helping one another, with intent of gain and without authority of law, did, then and there, willfully, unlawfully and feloniously malverse, misappropriate and misapply public funds in the amount of P 66,434.50 belonging to the Republic of the Philippines, in the following manner, to wit: the accused, Lt. RIZALINO M. Ubay, a duly appointed officer in the Armed Forces of the Philippines in active duty, who, during the period specified above, was designated as Disbursing Officer in the Office of the Chief of Finance, GHQ, Camp Murphy, Quezon City, and as such was entrusted with and had under his custody and control public funds, conspiring and confederating with co-accused, MILAGROS T. PAMINTUAN and JULIA T. MANIEGO, did then and there, unlawfully, willfully and feloniously, with intent of gain and without authority of law, and in pursuance of their conspiracy, take, receive, and accept from his said co-accused several personal checks drawn against the Philippine National Bank and the Bank of the Philippine Islands, of which the accused, MILAGROS T. PAMINTUAN is the
drawer and the accused, JULIA T. MANIEGO, is the indorser, in the total amount of P66,434.50, cashing said checks and using for this purpose the public funds entrusted to and placed under the custody and control of the said Lt. Rizalino M. Ubay, all the said accused knowing fully well that the said checks are worthless and are not covered by funds in the aforementioned banks, for which reason the same were dishonored and rejected by the said banks when presented for encashment, to the damage and prejudice of the Republic of the Philippines, in the amount of P66,434.50, Philippine currency. 1 Only Lt. Ubay and Mrs. Maniego were arraigned, Mrs. Pamintuan having apparently fled to the United States in August, 1962. 2 Both Ubay and Maniego entered a plea of not guilty. 3 After trial judgment was rendered by the Court of First Instance, whereof reads:
4
the dispositive part
There being sufficient evidence beyond reasonable doubt against the accused, Rizalino M. Ubay, the Court hereby convicts him of the crime of malversation and sentences him to suffer the penalty of reclusion temporal of TWELVE (12) YEARS, ONE (1) DAY to FOURTEEN (14) YEARS, EIGHT (8) MONTHS, and a fine of P57,434.50 which is the amount malversed, and to suffer perpetual special disqualification. In the absence of evidence against accused Julia T. Maniego, the Court hereby acquits her, but both she and Rizal T. Ubay are hereby ordered to pay jointly and severally the amount of P57,434.50 to the government. 5 Maniego sought reconsideration of the judgment, praying that she be absolved from civil liability or, at the very least, that her liability be reduced to P46,934.50. 6 The Court declined to negate her civil liability, but did reduce the amount thereof to P 46,934.50. 7 She appealed to the Court of Appeals 8 as Ubay had earlier done. 9 Ubay's appeal was subsequently dismissed by the Appellate Court because of his failure to file brief. 10 On the other hand, Maniego submitted her brief in due course, and ascribed three (3) errors to the Court a quo, to wit: 1) The Lower Court erred in holding her civilly liable to indemnify the Government for the value of the cheeks after she had been found not guilty of the crime out of which the civil liability arises. 2) Even assuming arguendo that she could properly be held civilly liable after her acquittal, it was error for the lower Court to adjudge her liable as an indorser to indemnify the government for the amount of the cheeks. 3) The Lower Court erred in declaring her civilly liable jointly and severally with her co-defendant Ubay, instead of absolving her altogether. 11 Because, in the Appellate Court's view, Maniego's brief raised only questions of law, her appeal was later certified to this Court pursuant to Section 17, in relation to Section 31, of the Judiciary Act, as amended, and Section 3, Rule 50 of the Rules of Court. 12
The verdict must go against the appellant. Well known is the principle that "any person criminally hable for felony is also civilly liable." 13 But a person adjudged not criminally responsible may still be held to be civilly liable. A person's acquittal of a crime on the ground that his guilt has not been proven beyond reasonable doubt 14 does not bar a civil action for damages founded on the same acts involved in the offense. 15 Extinction of the penal action does not carry with it extinction of the civil unless the extinction proceeds from a declaration in a final judgment that the fact from which the civil might arise did not exist. 16 Rule III SEC. 3(b) — Extinction of the penal action does not carry with it extinction of the civil, unless the extinction proceeds from a declaration in a final judgment that the fact from which the civil might arise did not exist. In other cases, the person entitled to the civil action may institute it in the jurisdiction and in the manner provided by law against the person who may be liable for restitution of the thing and reparation of indemnity for the damage suffered. (1985 Rules on Criminal Procedure). Hence, contrary to her submission, 17 Maniego's acquittal on reasonable doubt of the crime of Malversation imputed to her and her two (2) co-accused did not operate to absolve her from civil liability for reimbursement of the amount rightfully due to the Government as owner thereof. Her liability therefor could properly be adjudged, as it was so adjudged, by the Trial Court on the basis of the evidence before it, which adequately establishes that she was an indorser of several checks drawn by her sister, which were dishonored after they had been exchanged with cash belonging to the Government, then in the official custody of Lt. Ubay. Appellant's contention that as mere indorser, she may not be made liable on account of the dishonor of the checks indorsed by her, is likewise untenable. Under the law, the holder or last indorsee of a negotiable instrument has the right to "enforce payment of the instrument for the full amount thereof against all parties liable thereon." 18 Among the "parties liable thereon" is an indorser of the instrument i.e., "a person placing his signature upon an instrument otherwise than as maker, drawer, or acceptor ** unless he clearly indicates by appropriate words his intention to be bound in some other capacity. " 19 Such an indorser "who indorses without qualification," inter alia "engages that on due presentment, ** (the instrument) shall be accepted or paid, or both, as the case may be, according to its tenor, and that if it be dishonored, and the necessary proceedings on dishonor be duly taken, he will pay the amount thereof to the holder, or to any subsequent indorser who may be compelled to pay it." 20 Maniego may also be deemed an "accommodation party" in the light of the facts, i.e., a person "who has signed the instrument as maker, drawer, acceptor, or indorser, without receiving value therefor, and for the purpose of lending his name to some other person." 21 As such, she is under the law "liable on the instrument to a holder for value, notwithstanding such holder at the time of taking the instrument knew ** (her) to be only an accommodation party," 22 although she has the right, after paying the holder, to obtain reimbursement from the party accommodated, "since the relation between them is in effect that of principal and surety, the accommodation party being the surety." 23 One last word. The Trial Court acted correctly in adjudging Maniego to be civilly liable in the same criminal action in which she had been acquitted of the felony of Malversation ascribed to her, dispensing with the necessity of having a separate civil action subsequently instituted against her for the purpose. 24
WHEREFORE, the judgment of the Trial Court, being entirely in accord with the facts and the law, is hereby affirmedin toto, with costs against the appellant. SO ORDERED. Yap (Chairman), Melencio-Herrera, Cruz, Feliciano, Gancayco and Sarmiento, JJ., concur. Manila Railroad Company, et al. vs. Carmelino G. Alvendia, et al. Republic of the Philippines SUPREME COURT Manila EN BANC G.R. No. L-24262 May 24, 1967 MANILA RAILROAD COMPANY and MANILA PORT SERVICE, petitioners, vs. THE HON. CARMELINO G. ALVENDIA, Judge, Court of First Instance of Manila, THE HON. ESTRELLA ABAD SANTOS, Judge, City Court of Manila, Branch III and EMPIRE INSURANCE COMPANY, respondents. Macaranas and Enaje for petitioners. Tomacruz and Ferrer for respondents. BENGZON, J.P., J.: As subrogee of the consignees P. Austria & Co., Inc. and Apisa & Co., Inc., the Empire Insurance Co., filed suit on May 24, 1963 in the City Court of Manila to recover the sums of P186.00 and P990.48, plus attorney's fees of P100.00 and P500.00, respectively, on two alleged causes of action involving short deliveries of shipments of flavored ovaltine. Sued thereunder was the Manila Railroad Company, for transactions had with, and acts performed thru, its "agent and subsidiary" the Manila Port Service, which then handled arrastre operations in the port of Manila. A judgment against defendant Manila Railroad Company was rendered by the inferior court. Appeal therefrom to the Court of First Instance of Manila was taken by said defendant, the appeal bond however being filed by its aforesaid "agent and subsidiary", Manila Port Service. At said Court of First Instance, the complaint was reproduced.1 Answer thereto was filed by both Manila Railroad Co., and Manila Port Service as defendants.
Subsequently, the parties entered into stipulations of facts, in which the Manila Port Service was referred to as a defendant in the suit. Rendering judgment on September 18, 1964, the Court of First Instance of Manila dismissed the appeal without resolving the contentions of the parties on the merits, solely upon the ground that the only defendant before the inferior court was the Manila Railroad Company and the appeal bond not having been filed by it but by the Manila Port Service, not a party therein, no appeal was duly perfected.1äwphï1.ñët From said decision, appeal was sought to be taken. Again, however, it was the Manila Port Service which posted an appeal bond. For the same reason adverted to, appeal was refused. And, hence, Manila Railroad Co. and Manila Port Service resorted to the present action here for certiorari and mandamus with preliminary injunction to compel respondent Judge to approve and remit the appeal from his decision of September 18, 1964. The record clearly shows that the Manila Port Service litigated in the Court of First Instance as defendant. It filed an answer as such. And the parties recognized its status as defendant in the two stipulations of facts entered into. It freely submitted itself to the court's jurisdiction, with subsequent express acquiescence of the plaintiff. Plaintiff however maintained in its opposition to the motion for reconsideration before the Court of First Instance (Petition, Annex G), that "there is no showing that Manila Port Service has legal personality or is a juridical person which could be a party in a civil action. Precisely for this reason, however, the Manila Port Service must be deemed part of the Manila Railroad Co., not a separate entity, in a suit against the latter based on arrastre operations undertaken by it through its "agent and subsidiary" Manila Port Service. Not having a separate juridical personality from the Manila Railroad Co., its filing of an appeal bond is perforce an act of the Manila Railroad Co., not that of a separate and different person. Since the appeal from the decision of September 18, 1964 would raise the same point already resolved herein, the same becomes unnecessary. Respondent Judge should therefore be ordered to render a decision upon the merits in the case in question. Wherefore, the petition is hereby granted and respondent Judge's decision of September 18, 1964 is hereby set aside and the Court of First Instance of Manila is hereby ordered to decide the Civil Case No. 55268 therein on the merits. No costs. So ordered. Concepcion, C.J., Reyes, J.B.L., Dizon, Regala, Makalintal, Zaldivar, Sanchez and Castro, JJ., concur.
Republic of the Philippines SUPREME COURT Manila SECOND DIVISION G.R. No. L-30096 September 27, 1977
CONRADO SINGSON, plaintiff, vs. DAVID BABIDA, RAMON ANTONIO, JAIME PERALTA, FELINO GARCIA, JOSE MARCOS, RICARDO RABAGO. JAIME BIBIS, FELICIANO TUGADE, BONIFACIO CALPITO, ALFREDO PERALTA, ALFREDO GARCIA and FELICIANO GARCIA, defendants. MATIAS BABIDA, VICTOR GARCIA, JULIAN PACURSA, NICOLAS AGATEP, DOROT'EO BALLESTEROS and PEDRO AGAT'EP, bondsmen and petitioners-appellants, vs. CONRADO SINGSON and NEMESIO T. ORATE, respondents-appellees. Conrado V. Singson for plaintif and respondents-appellees. Alfredo J. Donato for bonsdmen and petitioners-appellants. Molina & Agbisit for defendants.
AQUINO, J.: In a nutshell, this is a case about execution against the supersedes bonds in an ejectment suit. The bondsmen-appellants contend that the bonds are void and that the judgment in favor of the landowner had already been satisfied and, therefore, the execution, allegedly vitiated by some irregularities, was uncalled for. Actually, as revealed in the 250-page record on appeal, the objective in this appeal of the appellants, who are poor and ignorant farmers, is to annul the execution sales of their nine parcels of agricultural land, with a total area of thirty-three (33) hectares and an aggregate assessed value of P6,190. The judicial sales (now alleged to be final by the judgment creditor) were made in order to satisfy a judgment for only P1,460, the value of 146 cavans of palay. The gross inadequacy of the price carries with it implications of capacity and unjust enrichment. It is noteworthy that those 33 hectares, which apparently constitute appellants' only source of livelihood, would become the property of the judgment creditor in satisfaction of a judgment credit of P1,460. These aspects of the case have alerted us to be vigilant for the protection of the appellants who are disadvantaged or handicapped by their obvious indigence and ignorance (Art. 24, Civil Code). Facts. — Conrado V. Singson, a lawyer, claims that a certain 24 hectare homestead, located at Barrio Malinta (Finugo), Lasam, formerly Gattaran, Cagayan, was conveyed to him in 1936 by Pedro Babida as payment of his attomey's fees in a murder case wherein Babida was the accused. Babida, who died in 1950, was the applicant- possessor of the homestead. He was not able to obtain a homestead patent. Singson's application for a free patent for the land was denied by the Director of Lands. On January 22, 1957 Singson filed a forcible entry action in the justice of the peace court of Lasam against David Babida, Ramon Antonio, Jose Marcos, Ricardo Rabago, Jaime Bibis, Bonifacio Calpito, Feliciano Tugade Jaime Peralta, Alfredo Peralta, Alfredo Garcia, Felino Garcia, and FeWmo Garcia. He alleged that the twelve defendants entered the land in September, 1956 and by means of collective force ousted his tenants.
The defendants in their answer averred that the homestead belonged to David Babida and his coheirs who had continuously possessed it even before the war. (David was the son of Pedro Babida.) The justice of the peace court in its decision of September 14, 1957 ordered the defendants to vacate the land and allowed Singson to withdraw from Domingo Gerardo, the depositary, "the canons of the land" or the owner's share of the harvests (Civil Case No. 34). The defendants appealed to the Court of First Instance of Cagayn. In their answer they denied that Singson was in on of the land. They claimed to be the possessors of the land as tenants of Pedro Babida. They reiterated their defense that the land belonged to the'heirs of Pedro Babida (Civil Case No. 923-A). To stay the execution of the inferior court's decision, while the appeal in the Court of First Instance was pending, Matias Babida, Victor Garcia, Julian Pacursa and Nicolas Agatep (who are not defendants) executed on March 27, 1958 a "counterload for the amount of P3,000 to answer for damages (which) the plaintiff might sustain by reason of the crops or produce which they pray to be disposed (of) and deposited". That counterbond is known as the "first supersedeas bond". After a de novo, the lower court in its decision of August 4, 1958 ordered the defendants to restore the possession of the land to Singson and to deriver to him 73 cavans of palay yearly from September, 1956 until the ion is restored to Singson, and, "in default thereof, the sum of P730" as the value of 73 cavans. The depositary was ordered to deriver to Singson 55 cavans of palay to be deducted from the 73 cavans corresponding to the owner's share of the harvests for the crop-year 1956-57. The twelve defendants appealed to the Court of Appeals. To stay execution pending appeal, Doroteo Ballesteros and Pedro Agatep (not parties to the case) separately executed supersedeas bonds in the sum of P2,000 wherein they undertook "to pay to the plaintiff whatever damages he might sustain as a result of" the case. Those under are known as the "second supersedeas bond". On July 3, 1959 the Court of Appeals dismissed defendants' appeal because of their failure to pay the docket fee and to deposit the estimated cost of printing their record on appeal. The record was returned to the lower court which ordered the execution of its judgment. A writ of execution was issued on April 11, 1960. By virtue of that writ, the deputy sheriff on April 26, 1960 placed Singson's representative in ion of the disputed land. In compliance with the writ of execution, Singson's representative received 20 cavans of palay from defendant Jaime Peralta on April 26, 1960 and 138 cavans on May 6, 1960 from Bonifacio Calpito, Jaime Bibis, Ramon Antonio, Fee Tugade Felino Garcia and Jaime Peralta or 158 cavans in all According to Singson's Gerardo did not deliver.the 55 cavans of palay to Singson's overseer. The sheriff's return is silent on that point. So, the defendant's remaining obligation under the judgment was to deriver the balance of 134 cavans of palay out of the 292 cavans due from them for four crop. years, 1956-57 to 1959-60. The 134 cavans of palay had an aggregate value of P1,340 at ten a cavan, the value fixed by the trial court in its decision. That sum of P1,340 and the expenses of execution would constitute defendants' liability as of May 6, 1960.
Presumably, to enforce that remaining liability, the sheriff on May 17, 1960 levied upon the lands of defendants Ramon Antonio June Bible, Bonifacio Calpito and Alfredo Peralta. The sheriff scheduled the sale of their lands on August 31, 1960. On August. 10, 1960 Singson ordered a motion to suspend the auction sale of the properties of Antonio, Bibis, Calpito and peralta and to include in the auction sale the properties of the six bondsmen, Victor Garcia, Matias Julian Pacursa, Doroteo Ballesteros, Nicolas Agatep and Pedro Agatep "on the understanding that the properties of the defendants be first sold" "and, if insufficient, then the properties of the bondmen" should be sold (89-91, Record on Appeal). did not indicate in that ration the balance still due from the defendants. In filing that motion, Singson did not bother to consider that the lands of the said four defendants, which had already been levied upon and which have an aggregate area of ten (10) hectares and a total value of P3,590, were more than sufficient to satisfy the sum of P1,340 as the unpaid of the judgment. The six bondsmen opposed Simpson's motion on the grounds that the bonds are void and that execution cannot be had againts the bondsmen because no judgment against them had been "in the ordinary manner" (Green vs. Del Rosario, 43 Phil. 547). The counsel for the bondsmen, like Singson, did not realize that an execution against them, in addition to the levy on the tenth lands of the four defendants, would be unnecessary since, as already stated, those ten are more than sufficient for the payment of the judgement. The lower court granted Singson's motion in its order of September 10, 1960 but because neither Singson nor the sheriff informed the court of the exact balance still due from the defendants, and the sheriff's return was overred, the court acted under the impression that the amount due from the defendants and their bondsmen was in the sum of P730 only. That was the value of the owner's sham of the harvests for one crop-year. Undoubtedly, the lower court would not have granted motion had it been apprised that the ten belonging to the aforenamed four defendants, which had already been levied upon, were more than adequate to answer for the liability of P730. The above-mentioned order of September 10, 1960, an order of execution supplementing the original order of execution of February 23, 1960, reads as follows: As prayed for, the deputy sheriff is hereby directed to include in the notice of sale the properties of the sureties in the supersedeas bond who are held liable jointly and severally with the defendants to the plaintiff in the sum of P730 but before collecting this sum from the sureties, the properties of the principals not exempt from execution must first be exhausted and whatever amount remains unpaid shall be chargeable to the sureties but in no case shalt it exceed P731 (134, 183, Record on Appeal). Plaintiff Singson and the defendants accepted the said order as correct. However, the sheriff did not immediately implement it. On September 14, 1960, he asked the court that he should be to make first a levy on the properties of the bondsmen and that he be required to self the bondmen's properties only "in the event that the proceeds of the sale of the properties of the principals are not sufficient to satisfy the judgment" (94, Record on Appeal). However, the sheriff did not
specify the balance of the judgment for which the levy should be made. The court did not act on the sheriff's motion. On January 9, 1961 Singson filed a motion for execution against the first supersedeas bond which, according to him, was involuntarily omitted in the aforementioned order of September 10, 1960. Again Singson, like the sheriff, did not state how much was still due from the defendants. Singson averred in his motion that the first supersedeas bond covered "the damages occasioned to the plaintiff from the filing of the complaint in the justice of the peace court up to August 4, 1958" when the Court of First Instance rendered its decision, and that the second supesedeas bond covered the damages from August 4, 1958 up to the time the appeal was dismissed by the Court of Appeals (96-97, Record on Appeal). The bondsmen opposed the motion on the ground that the supersedeas bond was not necessary since the justice of the peace court did not adjudge any compensation for the use and occupation of the homestead, citing Alandy vs. San Jose, 79 Phil. 811. The bondsmen did not invite the attention of the lower court to the misleading character of Sinson's motion. It seemed to be misleading because the order of September, 10, 1960 does not indicate that it is an order of execution against the second supersedeas bond and that it is not applicable to the first supersedeas bond. The lower court in its order of January 28, 1961, manifestly disregarding the clarification in Singson's motion, explained that the second "Supersedes bond would answer for the value of the produce from the land during the pendency of the appeal- in the "amount of P730" (1959-1960 crop-year), while the first supersedeas bond would not answer for the produce of the land from September, 1956 but would answer only for the produce of the land from March 27, 1958 (when it was approved) up to January 13, 1959 when the second supersedeas bond was approved, or for the owner's share for the 1958-1959 crop-year. The lower court categorically ordered the execution against the first supersedeas bond only for the sum of P730 (as in the case of the second supe bond) on condition that "before the (first sure ) bond is executed, the Principals must fust be directed to pay the said sum and if they fail to pay, execution shall issue against the sureties for the amount of P730" (103, Record on Appeal). Thus the trial court, by reason of the motion of Singson, the judgment creditor, and with his tacit acquiescence, notated its final and executory judgment by reducing the obligations covered by the two supersedeas bonds to P730 each. The trial court made it unmistakably clear that the liability of the bondsmen was only subsidiary to that of the defendants as principals, meaning that the bondsmen are entitled to the beneficium excussionis or the right to have the properties of their principals exhausted before they could be liable on their bonds. The trial court's act of fixing the liabilities of the six bondsmen at P1,460 is directly attributable to the failure of the sheriff and Singson (inadvertently or deliberately) to call the court's attention to the fact that 158 cavans had already been delivered to Singson and to apprise it of the exact amount still due from the twelve judgment debtors. On March 3, 1961 another writ of execution (the first was issued on April 12, 1960 and it was supplemented by the order of September 10, 1960) was issued, directing the sheriff to require the twelve defendants to pay the sum of P730 to Singson and, should they fail to pay, to enforce payment against the so-called "first supersedeas bond" filed by Matias Babida, Victor Garcia, Julian Pacursa and Nicolas Agatep.
To do justice in this case, it is necessary to recount in detail the proceedings conducted by the sheriff under the two writs of execution so. that the validity of the execution sales on June 27 and 30, 1961, which is the main issue, may be judiciously resolved. Execution sale on June 27, 1961 involving the first supersedeas bond.— To implement the writ of execution of March 3, 1961 against the first supersedeas bond, the sheriff served a written demand on March 8, 1961 upon the four aforenamed sureties to pay the sum of P730 plus the expenses and commission in the sum of P19.80. It should be noted that the sheriff did not comply with the mandate in the writ that he should first require the twelve defendants to pay the said sum of P730. As the four sureties did not heed his demand, the sheriff on March 28, 1961 levied upon the lands of three of the sureties described in the first supersedeas bond and in the writ of execution. The sheriff inexplicably did not levy on the land of Nicolas Agatep, the fourth surety. The sheriff scheduled on June 27, 1961 the sale of the lands of the three sureties, Babida, Garcia and Pacursa. In the notice of sale, announcing the auction sale on June 27, 1961, the sheriff, in quoting the writ of execution of March 3, 1961, omitted the court's order requiring him to first direct the twelve principals or defendants to pay the sum of P730 (which order is found in the writ of execution and which omission has been capital upon by the bondsmen in this appeal as an irregularity vitiating the execution proceedings). On June 27, 1961, the day of the auction sale, Singson was the only bidder. His bid was as follows: P300 for the land of Babida; P50 for the land of Garcia, and P569.30 for the land of Pacursa or P919.30 in all. He had adjusted his' bids in such a way that they would equal that sum of P919.30, the amount for which the execution sale was to be held, consisting of P730 as principal obligation, P167.50 as publication expenses, and P21.80 as sheriff's commission and other expenses. Thus, the three parcels of land of the sureties, Babida, Garcia and Pacursa, with a total area of more than 21 hectares and an aggregate assessed value of P2,780, were sold to Singson for P919.30 only. The execution sale on June 30, 1961 involving the second supersedeas bond. — The judicial sale on June 30, 1961 was based on the first or original writ of execution of April 11, 1970 (as to which the sheriff had made a return on July 16, 1960). It should be recalled that to satisfy that writ of execution Singson was placed in ion of the 24-hectare homestead on April 12, 1960 and the defendants delivered to his overseer on April 26 and May 6, 1960 158 cavans of palay, thus leaving an unsatisfied balance of 134 cavans of palay valued at P1,340. The life of that writ of execution was prolonged because, as noted earlier, on May 17, 1960 or within the reglementary sixty-day Period (see sec. II, Rule 39, Rules of Court), the sheriff, apparently to satisfy the said balance of P1,340 a levy on ten hectares of land belonging to defendants Antonio, Bibis, Calpito and Alfredo Peralta, with a total assessed value of P3,590. That writ of execution was supplemented by the lower court's aforequoted order of September 10, 1960 which allowed the sheriff to make a further levy on the lands of Doroteo Ballesteros and Pedro Agatep, the sureties on the "second supersedeas bond", to satisfy an obligation amounting to P730 only, the judgment debtors' supposed liability for Singson's share of the harvests for the 1959-60 crop-year.
The confusion in the exact amount of the judgment still unsatisfied was due to the failure of the sheriff, Singson the lawyers for the defendants and the six bondsmen to call the attention of the trial court to the fact that the balance still due amounted only to P1,340. The trial court itself was probably unaware that 158 cavans of palay (138 only according to Singson because the 20 cavans of Jaime Peralta were allegedly receipted for twice by his overseer) worth P1,580 had already been delivered to Singson's overseer. The sheriff sent a sort of demand letter dated September 19, 1960 to Doroteo Ballesteros and Pedro Agatep, the sureties in the "second supersedeas bond", apprising them of the order of September 10, 1960 and impliedly requiring them to make a "deposit" but not particularizing on the nature of the deposit which was required. The sheriff did not specify the amount of the judgment still unpaid. In that demand letter, as in his prior actuations, the sheriff was not candid as to the exact balance of the judgment which should be satisfied. So, he did not specify what Ballesteros and Agatep should deposit or pay to his office. For several months, the sheriff did not follow up his demand letter. The record does not show whether he made any levy on the lands of Ballesteros and Pedro Agatep. Then, in a notice of sale dated April 25, 1961 (more than a year after the issuance of the writ of execution under which he was acting), he announced that the properties of Ballesteros, Pedro Agatep and Alfredo Peralta would be sold at public auction on June 30, 1961. Alfredo Peralta is one of the twelve defendants. The sheriff on May 17, 1960 levied upon his riceland with an area of 26,797 square meters and on his residential land with an area of 990 square meters and on his residential land with an area of 990 square meters, or an aggregate area of 27,787 square meters. The two parcels of land have a total assessed value of P1,180 in 1961. As already noted, in that levy of May 17, 1960, the sheriff also levied upon (a) the sugarland and orchard of Ramon Antonio with a total area of four hectares and an assesed value of P1,000; (b) the sugariand of Jaime Bibis, with an area of two hectares and an assesed value of P850, and (c) the sugarland, orchard and riceland of Bonifacio Calpito with an area of 15,000 square meters and a total assessed valued of P560. Without any explanation, the sheriff abandoned the levy on the lands of Antonio, Bibis and Calpito and continued with the levy on the land of Alfredo Peralta (not Garcia), which, as above stated, he advertised for sale together with the lands of Ballesteros and Pedro Agatep. The land of Ballesteros has an area of 20,019 square meters and an assesed value of P640 while the three (3) parcels of land of Agatep have a total area of 78,380 square meters and a total assessed value of P1,590. In the notice of sale the sheriff stated that Peralta's land was being sold "in order to satisfy the different amounts specified" in the writ of execution. He did not mention the writ of execution he was referring to nor the exact amount to be satisfied. On the other hand, in the same notice of sale, he stated that he was going to sell the lands of Ballesteros and Pedro Agatep in order to satisfy the sum of P730, as indicated in the order of September 10, 1960. The sheriff also stated that that amount of P730 should first be collected from the twelve defendants or principal debtorsbut he did not state whether he had exhausted the properties of the said principals.
In fact, in the same notice of sale, he stated that he was going to sell the property of Alfredo Peralta, a defendant or principal debtor, which land, as already stressed, has an area of 27,787 square meters and an value of P1,180 and which, ordinarily, would suffice (even as dation in payment) to satisfy the principal obligation of P730. On the other hand, the lands of Ballesteros and Agatep were also more than sufficient for the payment of the said sum of P730, thus rendering unnecessary the sale of Peralta's land. In that same notice of sale the sheriff ambiguously or meaning stated that the proceeds of the execution sale on June 30, 1960 would be "applied for the judgment and order" whatever that means. In contrast, in the notice for the execution sale scheduled on June 27, 1960, the sheriff categorically stated that the properties of the sureties, Matias Babida, Victor Garcia and Julian Pacursa would be sold "to satisfy the import of the execution and other expenses incident thereto" or the sum of P730 and the costs of execution. As repeatedly stated, the sheriff scheduled the auction sale of the lands of Peralta, Ballesteros and Agatep on June 30, 1960. At that auction sale, the only bidder was Singson. The lands were sold to him. The obligations for which the five parcels of land were to be sold amounted to P1,264.77 (not P1,254.77) consisting of (a) P730 as the value of 73 cavans of palay (the basic obligation), (b) P227.50 as publication expenses, and (c) P307.27 presumably for the other expenses of the sheriff. As in the previous sale on June 27, 1961, Singson adjusted his bids for the five parcels of land so that his total bid would not exceed P1,264.77. Thus, he made the following bids: P394.49 for Alfredo Peralta's land; P217.57 for the land of Ballesteros and P217.57 also for each of the three parcels of land of Pedro Agatep. Note that for the execution sale on June 27, 1960 in connection with the "first supersedeas bond", the sheriff stated with certitude that he was going to sell the lands of the three sureties, Babida, Garcia and Pacursa, to satisfy the principal obligation of P730, plus P1 67.50 as publication expenses and P21.80 as his other expenses, or for a total sum of P919.30. In contrast, for the execution sale on June 30, 1961, which was made for the sum of P1,264.77, the sheriff specified that he was going to sell the lands of the judgment debtor Peralta and the two sureties, Ballesteros and Agatep, to satisfy the principal obligation of P730 and the publication expenses amounting to P227.50. But the record does not show what expenses incurred by the sheriff constitute the remainder of P307.27. The two notices dated April 19 and 25, 1961, scheduling the sales on June 27 and 30, 1961, respectively, were both published in the Manila Chronicle. Two publication fees in the sums of P167.50 and P227.50 were paid. Confusion could have been avoided and expenses could have been reduced if Singson, the sheriff and the lawyers of the parties had taken the trouble of apprising the trial court of the true balance still due from the twelve judgment debtors after 158 cavans of palay (138 according to Singson) had been delivered to the judgment creditor on April 26 and May 6, 1960. The proceedings under the two exedution sales involving the nine parcels of land may be recapitulated as follows:
Own
A
A
Bi
er Nat ure of
r e a
ss es se d
d
V al u e
Pr ic e
P 1, 4 8 0. 0 0
P3 0 0. 0 0
P 1 5 0. 0 0
P5 0. 0 0
i n
Lan d
S q . M e t e r s
MAT IAS BAR IDA Rice land and
Orc hard
5 2 , 6 8 2
VICT OR GAR CIA Rice
5 , 0 0 0
land
JULI AN PAC URS AOrc hard and
Rice land
1 5 5 , 3 2 0
ALF RED O PER ALT ARice land
2 6 , 7 6 7 )
(not Gar cia) Res. land
9 9 0 )
DOR OTE O
P 1, 1 5 0. 0 0
P5 6 9. 3 0
P3 9 4. 4 9
P 1, 1 8 0. 0 0
BAL LES TER OS Far mla nd
2 0 , 0 1 9
P 6 4 0. 0 0
P2 1 7. 5 7
PED RO AGA TEP Rice land
2 1 , 3 8 0 )
P 6 2 0. 0 0
P2 1 7. 5 7
Cor nlan d
2 8 , 5 0 0 )
P 7 5 0. 0 0
P2 1 7. 5 7
Far mla nd
2 8 , 5 0 0 )
P 2 2 0. 0 0
P2 1 7. 5 7
3 3 9 , 1 8 8
P 6, 1 9 0. 0 0
P2 ,1 8 4. 0 7
Other proceedings.— On June 27 and 30, 1961 the sheriff executed the respective certificates of sale in favor of Singson for the nine parcels of land. He specified that the
period of redemption would expire "within one (1) year, counted from this date of sale". The two certificates of sale were registered on August 18, 1961. The sheriffs two returns, dated July 7 and August 8, 1961, for the two execution sales, were filed in court only on August 12, 1961. In a final certificate of sale dated July 3, 1962 the sheriff conveyed to Singson the parcels of land of the sureties Babida, Garcia and Pacursa. He noted that the one-year period of redemption had already expired and they had not made any redemption. That final deed of sale was registered on July 26, 1962. A copy of the final deed for the lands of Peralta, Ballesteros and Agatep was not included in the record on appeal. On August 15, 1962, Singson filed an ex parte motion for a writ of possession. He alleged that the final deeds of sale for the lands sold to him on June 27 and 30, 1961 were executed in his favor by the sheriff. The twelve defendants or judgment debtors and the six bondsmen opposed that ex parte motion. On September 5, 1962 the defendants and the bondsmen filed a lengthy "supplementary pleading" wherein they prayed that the execution sales held on June 27 and 30, 1961 be declared void because the obligations of the sureties may be regarded as extinguished with the delivery of the 158 cavans of palay to Singson's overseer and because the sureties were not given the benefit of exhaustion of the principal debtors' properties. Singson opposed that supplementary pleading. The trial court in its order of September 20, 1962 denied the motion of the bondsmen and the defendants and granted Singson's motion for a writ of possession. The motion for the reconsideration of that order was denied by the trial court in its order of November 14, 1962. The twelve defendants did not appeal. The six bondsmen appealed to the Court of Appeals. That Court in its resolution of November 29, 1968 certified the appeal to this Court because the appeal involves a question of law, which is the legality of the execution sales on June 27 and 30, 1961 (CA-G.R. No. 32008-R). Issues. — The main issue is the validity of the execution sales. The bondsmen contend that the sales are void because (1) their liabilities on their supersedeas bonds had already been extinguished before the sales were made; (2) the sheriff did not comply with the courts order that the properties of the principals should first be exhausted, and (3) the sale on June 27, 1961 was in contravention of the writ of execution while the sale on June 30, 1961 was not based at all on any writ of execution. Singson did not file any appeflee's brief, thus giving the impression that, after he had attained his objective of recovering possession of the disputed homestead and after receiving 158 cavans of palay, any adjudication in this appeal adverse to him would not make his position worse. That inference is strengthened by his failure to controvert the lower court's orders of September 10, 1960 and January 28, 1961, reducing his claim for the owner's share of the harvests to 146 cavans only or for only two crop-years. Ruling. — It should be clear by now that this is not a typical ejectment suit involving urband land. This is a controversy between the person claiming to be the rightful possessor of a homestead (seventeen hectares of which are ricelands) and the cultivators thereof who
claim to be tenants of the deceased former possessor and who drove away the second possessor's tenants. The case, involving as it did the use and cultivation of agricultural land, could have come within the jurisdiction of the Court of Agrarian Relations (Sec. 7, Republic Act No. 1267; Ojo vs. Jamito 83 Phil. 764). However, as the case was tried on the theory that it was an ordinary forcible entry case, failing within the exclusive original jurisdiction of the inferior court, it should be assumed that the lower courts had rightfully exercised jurisdiction over the case. (1) The appeal can be disposed of by holding that the two so-called supersedeas bonds, which gave rise to the execution sales under attack, are void because they were not signed by the twelve defendants or judgment debtors as principal obligors They were signed only by the six sureties. Not having been signed by the principal debtors, the supersedeas bonds do not evidence any Principal obligation and are devoid of consideration as to the sureties who have no privity with the judgment creditor nor any liability to him. (Manila Railroad Company vs. Alvendia, L-22137, May 19, 1966, 17 SCRA 154; School Dist. No. 80 vs.Lapping too Minn. 130, 110 N.W. 849). (2) Other reasons for holding the two supersedeas bonds void are that the first supersedeas bond was not warranted under the judgment of the justice of the peace court and the second supersedeas bond was required in the trial court's order which was issued when it had no more jurisdiction over the case. A supersedeas bond in an ejectment case is usually filed in the inferior court and approved by it and "executed to the plaintiff to enter the action in the Court of First Instance". It covers "the rents, damages and costs down to the time of the final judgment" (Sec. 8, Rule 72, old Rules of Court, now sec. 8, Rule 70). The supersedeas bond answers only for the rentals or the reasonable compensation for the use and occupation of the premises as fixed in the judgment of the inferior court (De Laureano vs- Adil, L-43345, July 29, 1976, 72 SCRA 148, 155). In the instant case, the justice of the peace court did not adjudge any rentals or reasonable compensation for the use and occupation of the homestead. That court allowed "the plaintiff to withdraw the canons of the land" from the depositary. Hence, there was no occasion or justification for requiring a supersedeas bond. For that reason, the "first supersedeas bond" was not necessary and is, therefore, a nullity. Any execution against it would likewise be a nullity. With respect to the "second supersedeas bond". it should be underscored that the lower court approved defendants' record on appeal in its order of September 6, 1958, wherein it directed the clerk of court to elevate the same to the Court of Appeals. The appeal was deemed perfected on that date. On September 23, 1958, or seventeen days after the perfection of the appeal, Singson filed a motion for execution. The lower court, instead of granting that motion, required the defendants in its order of September 27, 1958 to file a supersedeas bond. It is incontestable that the lower court had no more jurisdiction to issue that order because after the perfection of the appeal "this trial court loses its jurisdiction over the case, except
to issue orders for the protection and preservation of the rights of the parties which do not involve any matter litigated by the appeal" (Sec. 9, Rule 41, Rules of Court). Applying section 9, Rule 41, it was held that after the perfection of the appeal the trial court cannot order the execution of its judgment pending appeal because execution is a proceeding affecting the rights of the parties which are the subject matter of the judgment, from which appeal is taken, and its purpose is not to protect and preserve the subject matter of the litigation Cabilao vs. Judge of the Court of First Instance of Zamboanga, L-18454, August 29, 1966, 17 SCRA 992; 2 Moran's Comments on the Rules of Court, 1970 Edition, pp. 434-6). It follows that the and supersedeas bond" which Doroteo Ballesteros and Pedro Agatep executed, as required in the lower court's invalid order of September 27, 1958, is void ab initio. The execution sale based on that supersedeas bond is likewise void. (3) Other aspects of the supersedeas bonds may be pointed out to show their void character. The bonds are in English and might not have been understood by the ignorant sureties (See art. 1332, Civil Code). The first supersedeas bond was fried "to answer for damages (which) the plaintiff might sustain by reason of the crops or produce which they (the defendants) pray to be disposed of and deposited" whatever that means. In that bond, the sureties solidarily 'undertake to pay to the plaintiff whatever damage he might sustain as a result of the produce (sic), but not to exceed the amount of P3,000", and, "for the payment thereof", the defendants "encumber and constitute a first lien in favor of the plaintiff upon" certain real properties. In the second supersedeas bond, the sureties bound themselves 'to pay to the plaintiff whatever damages he might sustain as a result" of the ejectment case and, for that purpose, the sureties encumbered and constituted a first lien in favor of the plaintiff upon their real properties. The two bonds were supposed to answer for the damages caused to Singson by the defendants. But the tenor and provisions of the two bonds do not define unequivocally the nature of the sureties liability to Singson. The judgments of the justice of the peace court and the Court of First Instance, which were supposed to be stayed by the said bonds, are not quoted or recited in the said bonds. It should be home in mind that the justice of the peace court and the Court of First Instance did not require the defendants to pay "damages" to Singson. The lower court required the defendants to deriver to Singson 73 cavans yearly from September, 1956 until the possession of the homestead was restored to him. Those 73 cavans were not "damages" but Singson's share of the harvests as owner or possessor of the homestead. It is exceedingly doubtful if the vague and uncertain provisions of the supersedeas bonds justified the execution against the properties of the sureties. (4) There is some basis for appellant's contention that the execution sales in question were invalid because the judgment debtors' obligation was extinguished by the lower court's orders of September 10, 1960 and January 28, 1961, reducing their liability for the owner's share of the harvests to 146 cavans of palay or P1,460. In those two orders, the trial court had novated its judgment without any protest on the part of the judgment creditor. It is an undisputed fact that, as heretofore repeatedly emphasized,
the judgment debtors had delivered to Singson's overseer 158 cavans of palay valued at P1,580, an amount which is more than the reduced liability of P1,460. That explains why the defendants and the sureties contended in the lower court that its judgment had already been satisfied and that, therefore, further execution was not in order. (5) But even if the supersedeas bonds could be proper bases for selling at public auction the properties of the five sureties, to satisfy the defendants' liability to deliver 146 cavans of palay to Singson or to pay him P1,460, it would not follow that the execution sales are valid. The two execution sales are void because of gross inadequacy of price which is shocking to the conscience (Director of Lands vs. Abarca, 61 Phil. 70; Warner, Barnes 8 Co. vs. Santos, 14 Phil. 446, 449; Philippine National Bank vs. Gonzalez, 45 Phil. 693). Nine parcels of land, with a total area of more than 33 hectares and an aggregate assessed value of P6,190 were sold to satisfy total obligations amounting to P2,184.07 (of which P1,460 constituted the main obligation). Thirty-three hectares of land were ceded to the judgment creditor to satisfy a judgment for 146 cavans of palay. If we sustain the execution sales, the iniquitous and oppressive result would be that Singson, after recovering ion of the 24-hectare homestead and receiving 158 cavans of palay, out of the 292 cavans of palay adjudged in his favor, would, in addition, be awarded 33 hectares of land (presumably more valuable than the 24-hectare homestead in litigation to satisfy the balance of the judgment in the sum of P1,460, according to the trial court's computation). While this Court sits that patent injustice cannot be tolerated. WHEREFORE, the execution sales held on June 27 and 30, 1961 are declared void and the trial court's orders of September 20 and November 14, 1962, denying the petition to set aside those sales and granting Singson's motion for a writ of possession, are reversed and set aside. Costs against respondent-appellee Singson. SO ORDERED Fernando (Chairman), Barredo, Antonio, Concepcion Jr. and Santos, JJ., concur. Republic of the Philippines SUPREME COURT Manila SECOND DIVISION G.R. No. L-45848 November 9,1977 TOWERS ASSURANCE CORPORATION, petitioner, vs. ORORAMA SUPERMART, ITS OWNER-PROPRIETOR, SEE HONG and JUDGE BENJAMIN K. GOROSPE, Presiding Judge, Court of First Instance of Misamis Oriental, Branch I, respondents. Benjamin Tabique & Zosimo T. Vasalla for petitioner.
Rodrigo F. Lim, Jr. for private respondent.
AQUINO, J.: This case is about the liability of a surety in a counterbond for the lifting of a writ of preliminary attachment. On February 17, 1976 See Hong, the proprietor of Ororama Supermart in Cagayan de Oro City, sued the spouses Ernesto Ong and Conching Ong in the Court of First Instance of Misamis Oriental for the collection of the sum of P 58,400 plus litigation expenses and attorney's fees (Civil Case No. 4930). See Hong asked for a writ of preliminary attachment. On March 5, 1976, the lower court issued an order of attachment. The deputy sheriff attached the properties of the Ong spouses in Valencia, Bukidnon and in Cagayan de Oro City. To lift the attachment, the Ong spouses filed on March 11, 1976 a counterbond in 'the amount of P 58,400 with Towers Assurance Corporation as surety. In that undertaking, the Ong spouses and Towers Assurance Corporation bound themselves to pay solidarity to See Hong the sum of P 58,400. On March 24, 1976 the Ong spouses filed an answer with a counterclaim. For nonappearance at the pre- trial, the Ong spouses were declared in default. On October 25, 1976, the lower court rendered a decision, ordering not only the Ong spouses but also their surety, Towers Assurance Corporation, to pay solidarily to See Hong the sum of P 58,400. The court also ordered the Ong spouses to pay P 10,000 as litigation expenses and attorney's fees. Ernesto Ong manifested that he did not want to appeal. On March 8, 1977, Ororama Supermart filed a motion for execution. The lower court granted that motion. The writ of execution was issued on March 14 against the judgment debtors and their surety. On March 29, 1977, Towers Assurance Corporation filed the instant petition for certiorari where it assails the decision and writ of execution. We hold that the lower court acted with grave abuse of discretion in issuing a writ of execution against the surety without first giving it an opportunity to be heard as required in Rule 57 of tie Rules of Court which provides: SEC. 17. When execution returned unsatisfied, recovery had upon bound. — If the execution be returned unsatisfied in whole or in part, the surety or sureties on any counterbound given pursuant to the provisions of this rule to secure the payment of the judgment shall become charged on such counterbound, and bound to pay to the judgment creditor upon demand, the amount due under the judgment, which amount may be recovered from such surety or sureties after notice and summary hearing in the same action.
Under section 17, in order that the judgment creditor might recover from the surety on the counterbond, it is necessary (1) that execution be first issued against the principal debtor and that such execution was returned unsatisfied in whole or in part; (2) that the creditor made a demand upon the surety for the satisfaction of the judgment, and (3) that the surety be given notice and a summary hearing in the same action as to his liability for the judgment under his counterbond. The first requisite mentioned above is not applicable to this case because Towers Assurance Corporation assumed a solidary liability for the satisfaction of the judgment. A surety is not entitled to the exhaustion of the properties of the principal debtor (Art. 2959, Civil Code; Luzon Steel Corporation vs. Sia, L-26449, May 15, 1969, 28 SCRA 58, 63). But certainly, the surety is entitled to be heard before an execution can be issued against him since he is not a party in the case involving his principal. Notice and hearing constitute the essence of procedural due process. (Martinez vs. Villacete 116 Phil. 326; Insurance & Surety Co., Inc. vs. Hon. Piccio, 105 Phil. 1192, 1200, Luzon Surety Co., Inc. vs. Beson, L26865-66, January 30. 1970. 31 SCRA 313). WHEREFORE, the order and writ of execution, insofar as they concern Towers Corporation, are set aside. The lower court is directed to conduct a summary hearing on the surety's liability on its counterbound. No costs. SO ORDERED. Fernando (Chairman), Barredo, Antonio, Concepcion, Jr. and Santos, JJ., concur. Republic of the Philippines SUPREME COURT Manila EN BANC G.R. No. L-9674
April 29, 1957
MELECIO ARRANZ, plaintiff-appellant, vs. MANILA FIDELITY AND SURETY CO., INC., defendant-appellee. Jose F. Aguirre for appellant. De Santos and Herrera for appellee. LABRADOR, J.: Appeal from an order of dismissal of the complaint rendered by the judge of the Court of First Instance, Honorable Rafael Amparo, presiding. The complaint alleges the following facts: On November 25, 1949, the defendant appellee Manila Fidelity & Surety Co., executed and delivered to the Manila Ylang Ylang Distillery a surety bond, by virtue of which defendant-appellee, as surety, understood to pay jointly and
severally with plaintiff as principal, the sum of P90,000. The surety bond executed by Arranz and the defendant-appellee contains the following stipulation: The surety hereunder waives notice of default and expressly agrees that it shall not be necessary for the Manila Ylang Ylang Distillery, Ltd. to proceed against the Principal upon his default or to exhaust the property of said Principal, before proceeding against the surety, the Surety's liability under this bond being a primary one and shall be eligible and demandable immediately upon occurrence of such default. (p. 16, R.O.A.) To secure the surety against loss arising from the surety bond, plaintiff executed a second mortgaged over the properties which were transferred by the Manila Ylang Ylang Distillery to plaintiff. When the first installment of P50,000 became due on June 30, 1950, the surety, defendant-appellee, did not have funds to pay the same, and neither did it have funds to pay the second installment of P40,000 which became due on June 30, 1951. So the complaint was filed by the Manila Ylang Ylang Distillery on November 16, 1950, and a supplemental complaint was later filed on January 2, 1952, to include the second installment of P40,000 then already due. The defendant had no funds with which to pay either the P50,000 or the P40,000 due under the agreement and the only amount it was able to raise was P20,000. And that was paid to Manila Ylang Ylang Distillery on account. As defendant surety had no money with which to respond for the obligation, plaintiff made an arrangement with the Philippine National Bank, whereby he would mortgage the same properties to the latter in order to raise the amount needed to pay the amount of the loan. The Philippine National Bank wanted that defendant surety cancel the second mortgage executed in its favor by Arranz, but the defendant refused to do so unless Arranz pay to it the following sums: (a) P20,000, the partial payment made to the Manila Ylang Ylang Distillery on account of the latter's judgment credit; (b) P3,045.12 from December 31, 1950 to December 31, 1954; (c) (c)P7,691.09, including renewal premium on Bond No. 8674, from November 25, 1950 to November 25, 1954, and incidental expenses and interests; (d) P10,000, for attorney's fees, and (e) P25,000, to be held by defendant in trust to answer for an alleged contingent liability of the Manila Ylang Ylang Distillery to it. As the plaintiff feared that the credit accommodation he sought from the Philippine National Bank could not be secured without release by the surety of its second mortgage, Arranz paid the above amounts except the P25,000, and thereupon the second mortgage executed in favor of surety, defendant-appellee, was cancelled. The complaint seeks to recover (a) P7,200, the premiums corresponding to the period from November 25, 1950 to November 25, 1954; and (b) P7,000 representing attorney's fees. Arranz claims that these two amounts were never due and owing to the defendant surety
and that he paid it against his will in order to be able to save the properties from loss and obtain the credit accommodation from the Philippine National Bank. The defendant presented a motion to dismiss the complaint on the ground that there was no cause of action and inasmuch as the sums sought to be recovered were paid by virtue of the compromise, and no allegation is made in the complaint that said compromise is vitiated by mistake, violence, intimidation, undue influence and fraud. In answer to the motion to dismiss, plaintiff alleged that he was compelled to pay the amounts. The court ruled that the payment of the sum of P14,200 demanded in plaintiff's complaint was paid as a price for the release of the properties held on second mortgage by the defendant, or that the same was the consideration for said release in order to save his properties, and therefore dismissed the complaint. We are unable to agree with the judgment of the trial court that the sum of P14,200 was paid as a consideration for the release of the mortgage. There is no allegation in the complaint to that effect. From the allegations of the complaint, we gather the following facts: (1) that the surety did not have the money with which to pay the obligation, the payment of which was guaranteed in the contract of suretyship; (2) that the premium of P7,200 sought to be collected by the defendant from the plaintiff and the P7,000 also collected as attorney's fees, were never due from the plaintiff, because the surety was not able to put up the amount that it undertook to pay if the principal did not pay the same; (3) that plaintiff was compelled against his will by the circumstances to pay the sums now sought to be recovered. The question which the motion for dismissal poses therefore is plaintiff under obligation to pay the premium on the bond because of failure of his surety to pay the indebtedness secured by it (surety)? There is no allegation in the complaint or in any other paper in the case that the surety promised the principal that it will pay the loan or obligation contracted by the principal (plaintiff herein) for the latter's account. In the contract of suretyship the creditor was given the right to sue the principal, or the latter and the surety at the same time. This does not imply, however, that the surety covenanted or agreed with the principal that it will pay the loan for the benefit of the principal. Such a promise is not implied by law either. Plaintiff, therefore, cannot claim that there has been a breach on the part of the surety of any obligation it has made or undertaken under the suretyship contract. And the failure or refusal of the surety to pay the debt for the principal's account did not have the effect of relieving the principal of his obligation to pay the premium on the bond furnished. The premium is the consideration for furnishing the bond or the guaranty. While the liability of the surety to the obligee subsists the premium is collectible from the principal. Under the terms of the contract of suretyship the surety's obligation is that the principal pay the loan and the interest thereon, and that the surety shall be relieved of his obligation when the loan or obligation secured is paid. Now, therefore, if the above abounded Principal shall pay promptly said installments and interest thereon and shall in all respects do and fully observe all and singular the covenants, agreements and conditions as provided for in the aforesaid agreement of November 21, 1949, Annexes "A" and "B" respectively, to the true intent and meaning thereof, this obligation shall be null and void, otherwise, it shall remain in full force and effect. (p. 16, R.O.A..)
As the loan and interest remained unpaid the surety continued to be bound to the creditorobligee, and as a corollary its right to collect the premium on the bond also continued. Plaintiff-appellant, therefore, cannot excuse himself from the payment of the premium on the bond upon the failure or refusal of the surety to pay the loan and the interest. Even if, therefore, the payment of the premium were against his will, still plaintiff-appellant has no cause of action for the return thereof, because the surety was entitled thereto. For the foregoing considerations, the order of dismissal is affirmed on other grounds. So ordered. Bengzon, Padilla, Montemayor, Reyes, A., Bautista Angelo, Endencia and Felix, JJ., concur. Concepcion and Reyes, J. B. L., JJ., concur in the result. Republic of the Philippines SUPREME COURT Manila SECOND DIVISION
G.R. No. 126490 March 31, 1998 ESTRELLA PALMARES, petitioner, vs. COURT OF APPEALS and M.B. LENDING CORPORATION, respondents.
REGALADO, J.: Where a party signs a promissory note as a co-maker and binds herself to be jointly and severally liable with the principal debtor in case the latter defaults in the payment of the loan, is such undertaking of the former deemed to be that of a surety as an insurer of the debt, or of a guarantor who warrants the solvency of the debtor? Pursuant to a promissory note dated March 13, 1990, private respondent M.B. Lending Corporation extended a loan to the spouses Osmeña and Merlyn Azarraga, together with petitioner Estrella Palmares, in the amount of P30,000.00 payable on or before May 12, 1990, with compounded interest at the rate of 6% per annum to be computed every 30 days from the date thereof.1 On four occasions after the execution of the promissory note and even after the loan matured, petitioner and the Azarraga spouses were able to pay a total of P16,300.00, thereby leaving a balance of P13,700.00. No payments were made after the last payment on September 26, 1991.2 Consequently, on the basis of petitioner's solidary liability under the promissory note, respondent corporation filed a complaint3 against petitioner Palmares as the lone partydefendant, to the exclusion of the principal debtors, allegedly by reason of the insolvency of the latter.
In her Amended Answer with Counterclaim,4 petitioner alleged that sometime in August 1990, immediately after the loan matured, she offered to settle the obligation with respondent corporation but the latter informed her that they would try to collect from the spouses Azarraga and that she need not worry about it; that there has already been a partial payment in the amount of P17,010.00; that the interest of 6% per month compounded at the same rate per month, as well as the penalty charges of 3% per month, are usurious and unconscionable; and that while she agrees to be liable on the note but only upon default of the principal debtor, respondent corporation acted in bad faith in suing her alone without including the Azarragas when they were the only ones who benefited from the proceeds of the loan. During the pre-trial conference, the parties submitted the following issues for the resolution of the trial court: (1) what the rate of interest, penalty and damages should be; (2) whether the liability of the defendant (herein petitioner) is primary or subsidiary; and (3) whether the defendant Estrella Palmares is only a guarantor with a subsidiary liability and not a co-maker with primary liability.5 Thereafter, the parties agreed to submit the case for decision based on the pleadings filed and the memoranda to be submitted by them. On November 26, 1992, the Regional Trial Court of Iloilo City, Branch 23, 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. 6 This was based on the findings of the court a quo that the filing of the complaint against herein petitioner Estrella Palmares, to the exclusion of the Azarraga spouses, amounted to a discharge of a prior party; that the offer made by petitioner to pay the obligation is considered a valid tender of payment sufficient to discharge a person's secondary liability on the instrument; as comaker, is only secondarily liable on the instrument; and that the promissory note is a contract of adhesion. Respondent Court of Appeals, however, reversed the decision of the trial court, and rendered judgment declaring herein petitioner Palmares liable to pay respondent corporation: 1. The sum of P13,700.00 representing the outstanding balance still due and owing with interest at six percent (6%) per month computed from the date the loan was contracted until fully paid; 2. The sum equivalent to the stipulated penalty of three percent (3%) per month, of the outstanding balance; 3. Attorney's fees at 25% of the total amount due per stipulations; 4. Plus costs of suit.7 Contrary to the findings of the trial court, respondent appellate court declared that petitioner Palmares is a surety since she bound herself to be jointly and severally or solidarily liable with the principal debtors, the Azarraga spouses, when she signed as a co-maker. As such, petitioner is primarily liable on the note and hence may be sued by the creditor corporation for the entire obligation. It also adverted to the fact that petitioner admitted her liability in her Answer although she claims that the Azarraga spouses should have been impleaded. Respondent court ordered the imposition of the stipulated 6% interest and 3% penalty charges on the ground that the Usury Law is no longer enforceable pursuant to Central Bank Circular No. 905. Finally, it rationalized that even if the promissory note were to be considered as a contract of adhesion, the same is not entirely prohibited because the one who adheres to the contract is free to reject it entirely; if he adheres, he gives his consent.
Hence this petition for review on certiorari wherein it is asserted that: A. The Court of Appeals erred in ruling that Palmares acted as surety and is therefore solidarily liable to pay the promissory note. 1. The terms of the promissory note are vague. Its conflicting provisions do not establish Palmares' solidary liability. 2. The promissory note contains provisions which establish the co-maker's liability as that of a guarantor. 3. There is no sufficient basis for concluding that Palmares' liability is solidary. 4. The promissory note is a contract of adhesion and should be construed against M. B. Lending Corporation. 5. Palmares cannot be compelled to pay the loan at this point. B. Assuming that Palmares' liability is solidary, the Court of Appeals erred in strictly imposing the interests and penalty charges on the outstanding balance of the promissory note. The foregoing contentions of petitioner are denied and contradicted in their material points by respondent corporation. They are further refuted by accepted doctrines in the American jurisdiction after which we patterned our statutory law on surety and guaranty. This case then affords us the opportunity to make an extended exposition on the ramifications of these two specialized contracts, for such guidance as may be taken therefrom in similar local controversies in the future. 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. 8 Petitioner contends that the provisions of the second and third paragraph are conflicting in that while the second paragraph seems to define her liability as that of a surety which is joint and solidary with the principal maker, on the other hand, under the third paragraph her liability is actually that of a mere guarantor because she bound herself to fulfill the obligation only in case the principal debtor should fail to do so, which is the essence of a contract of guaranty. More simply stated, although the second paragraph says that she is liable as a surety, the third paragraph defines the nature of her liability as that of a guarantor. According to petitioner, these are two conflicting provisions in the promissory note and the rule is that clauses in the contract should be interpreted in relation to one
another and not by parts. In other words, the second paragraph should not be taken in isolation, but should be read in relation to the third paragraph. In an attempt to reconcile the supposed conflict between the two provisions, petitioner avers that she could be held liable only as a guarantor for several reasons. First, the words "jointly and severally or solidarily liable" used in the second paragraph are technical and legal terms which are not fully appreciated by an ordinary layman like herein petitioner, a 65-year old housewife who is likely to enter into such transactions without fully realizing the nature and extent of her liability. On the contrary, the wordings used in the third paragraph are easier to comprehend. Second, the law looks upon the contract of suretyship with a jealous eye and the rule is that the obligation of the surety cannot be extended by implication beyond specified limits, taking into consideration the peculiar nature of a surety agreement which holds the surety liable despite the absence of any direct consideration received from either the principal obligor or the creditor. Third, the promissory note is a contract of adhesion since it was prepared by respondent M.B. Lending Corporation. The note was brought to petitioner partially filled up, the contents thereof were never explained to her, and her only participation was to sign thereon. Thus, any apparent ambiguity in the contract should be strictly construed against private respondent pursuant to Art. 1377 of the Civil Code. 9 Petitioner accordingly concludes that her liability should be deemed restricted by the clause in the third paragraph of the promissory note to be that of a guarantor. Moreover, petitioner submits that she cannot as yet be compelled to pay the loan because the principal debtors cannot be considered in default in the absence of a judicial or extrajudicial demand. It is true that the complaint alleges the fact of demand, but the purported demand letters were never attached to the pleadings filed by private respondent before the trial court. And, while petitioner may have admitted in her Amended Answer that she received a demand letter from respondent corporation sometime in 1990, the same did not effectively put her or the principal debtors in default for the simple reason that the latter subsequently made a partial payment on the loan in September, 1991, a fact which was never controverted by herein private respondent. Finally, it is argued that the Court of Appeals gravely erred in awarding the amount of P2,745,483.39 in favor of private respondent when, in truth and in fact, the outstanding balance of the loan is only P13,700.00. Where the interest charged on the loan is exorbitant, iniquitous or unconscionable, and the obligation has been partially complied with, the court may equitably reduce the penalty10 on grounds of substantial justice. More importantly, respondent corporation never refuted petitioner's allegation that immediately after the loan matured, she informed said respondent of her desire to settle the obligation. The court should, therefore, mitigate the damages to be paid since petitioner has shown a sincere desire for a compromise.11 After a judicious evaluation of the arguments of the parties, we are constrained to dismiss the petition for lack of merit, but to except therefrom the issue anent the propriety of the monetary award adjudged to herein respondent corporation. At the outset, let it here be stressed that even assuming arguendo that the promissory note executed between the parties is a contract of adhesion, it has been the consistent holding of the Court that contracts of adhesion are not invalid per se and that on numerous occasions the binding effects thereof have been upheld. The peculiar nature of such contracts necessitate a close scrutiny of the factual milieu to which the provisions are intended to apply. Hence, just as consistently and unhesitatingly, but without categorically invalidating such contracts, the Court has construed obscurities and ambiguities in the restrictive provisions of contracts of adhesion strictly albeit not unreasonably against the drafter
thereof when justified in light of the operative facts and surrounding circumstances. 12 The factual scenario obtaining in the case before us warrants a liberal application of the rule in favor of respondent corporation. 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.13 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. Her pretension that the terms "jointly and severally or solidarily liable" contained in the second paragraph of her contract are technical and legal terms which could not be easily understood by an ordinary layman like her is diametrically opposed to her manifestation in the contract that she "fully understood the contents" of the promissory note and that she is "fully aware" of her solidary liability with the principal maker. Petitioner admits that she voluntarily affixed her signature thereto; ergo, she cannot now be heard to claim otherwise. Any reference to the existence of fraud is unavailing. Fraud must be established by clear and convincing evidence, mere preponderance of evidence not even being adequate. Petitioner's attempt to prove fraud must, therefore, fail as it was evidenced only by her own uncorroborated and, expectedly, self-serving allegations.14 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.15The rule that ignorance of the contents of an instrument does not ordinarily affect the liability of one who signs it also applies to contracts of suretyship. And the mistake of a surety as to the legal effect of her obligation is ordinarily no reason for relieving her of liability. 16 Petitioner would like to make capital of the fact that although she obligated herself to be jointly and severally liable with the principal maker, her liability is deemed restricted by the provisions of the third paragraph of her contract wherein she agreed "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," which makes her contract one of guaranty and not suretyship. The purported discordance is more apparent than real. A surety is an insurer of the debt, whereas a guarantor is an insurer of the solvency of the debtor.17 A suretyship is an undertaking that the debt shall be paid; a guaranty, an undertaking that the debtor shall pay.18 Stated differently, a surety promises to pay the principal's debt if the principal will not pay, while a guarantor agrees that the creditor, after proceeding against the principal, may proceed against the guarantor if the principal is unable to pay.19 A surety binds himself to perform if the principal does not, without regard to his ability to do so. A guarantor, on the other hand, does not contract that the principal will pay, but simply that he is able to do so.20 In other words, a surety undertakes directly for the payment and is so responsible at once if the principal debtor makes default, while a
guarantor contracts to pay if, by the use of due diligence, the debt cannot be made out of the principal debtor.21 Quintessentially, the undertaking to pay upon default of the principal debtor does not automatically remove it from the ambit of a contract of suretyship. The second and third paragraphs of the aforequoted portion of the promissory note do not contain any other condition for the enforcement of respondent corporation's right against petitioner. It has not been shown, either in the contract or the pleadings, that respondent corporation agreed to proceed against herein petitioner only if and when the defaulting principal has become insolvent. A contract of suretyship, to repeat, is that wherein one lends his credit by joining in the principal debtor's obligation, so as to render himself directly and primarily responsible with him, and without reference to the solvency of the principal. 22 In a desperate effort to exonerate herself from liability, petitioner erroneously invokes the rule on strictissimi juris, which holds that when the meaning of a contract of indemnity or guaranty has once been judicially determined under the rule of reasonable construction applicable to all written contracts, then the liability of the surety, under his contract, as thus interpreted and construed, is not to be extended beyond its strict meaning. 23 The rule, however, will apply only after it has been definitely ascertained that the contract is one of suretyship and not a contract of guaranty. It cannot be used as an aid in determining whether a party's undertaking is that of a surety or a guarantor. Prescinding from these jurisprudential authorities, there can be no doubt that the stipulation contained in the third paragraph of the controverted suretyship contract merely elucidated on and made more specific the obligation of petitioner as generally defined in the second paragraph thereof. Resultantly, the theory advanced by petitioner, that she is merely a guarantor because her liability attaches only upon default of the principal debtor, must necessarily fail for being incongruent with the judicial pronouncements adverted to above. 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. 24 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 corporation. 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 Azarraga spouses.25 This can only be construed to mean that the payments made by the principal debtors were considered by respondent corporation 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. In this regard, we need only to reiterate the rule that a surety is bound equally and absolutely with the principal,26and as such is deemed an original promisor and debtor from the beginning.27 This is because in suretyship there is but one contract, and the surety is bound by the same agreement which binds the principal.28 In essence, the contract of a surety starts with the agreement,29 which is precisely the situation obtaining in this case before the Court. It will further be observed that petitioner's undertaking as co-maker immediately follows the terms and conditions stipulated between respondent corporation, 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.30 Thus, it has been held that where a written agreement on the same sheet of paper with and immediately following the principal contract between the buyer and seller is executed simultaneously therewith, providing that the signers of the agreement agreed to the terms of the principal contract, the signers were "sureties" jointly liable with the buyer.31 A surety usually enters into the same obligation as that of his principal, and the signatures of both usually appear upon the same instrument, and the same consideration usually supports the obligation for both the principal and the surety. 32 There is no merit in petitioner's contention that the complaint was prematurely filed because the principal debtors cannot as yet be considered in default, there having been no judicial or extrajudicial demand made by respondent corporation. Petitioner has agreed that respondent corporation may demand payment of the loan from her in case the principal maker defaults, subject to the same conditions expressed in the promissory note. Significantly, paragraph (G) of the note states that "should I fail to pay in accordance with the above schedule of payment, I hereby waive my right to notice and demand." Hence, demand by the creditor is no longer necessary in order that delay may exist since the contract itself already expressly so declares.33 As a surety, petitioner is equally bound by such waiver. Even if it were otherwise, demand on the sureties is not necessary before bringing suit against them, since the commencement of the suit is a sufficient demand. 34 On this point, it may be worth mentioning that a surety is not even entitled, as a matter of right, to be given notice of the principal's default. Inasmuch as the creditor owes no duty of active diligence to take care of the interest of the surety, his mere failure to voluntarily give information to the surety of the default of the principal cannot have the effect of discharging the surety. The surety is bound to take notice of the principal's default and to perform the obligation. 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. 35 The alleged failure of respondent corporation to prove the fact of demand on the principal debtors, by not attaching copies thereof to its pleadings, is likewise immaterial. In the absence of a statutory or contractual requirement, it is not necessary that payment or performance of his obligation be first demanded of the principal, especially where demand would have been useless; nor is it a requisite, before proceeding against the sureties, that the principal be called on to account.36 The underlying principle therefor is that a suretyship is a direct contract to pay the debt of another. A surety is liable as much as his principal is liable, and absolutely liable as soon as default is made, without any demand upon the principal whatsoever or any notice of default.37 As an original promisor and debtor from the beginning, he is held ordinarily to know every default of his principal. 38 Petitioner questions the propriety of the filing of a complaint solely against her to the exclusion of the principal debtors who allegedly were the only ones who benefited from the proceeds of the loan. What petitioner is trying to imply is that the creditor, herein respondent corporation, should have proceeded first against the principal before suing on her obligation as surety. We disagree. A creditor's right to proceed against the surety exists independently of his right to proceed against the principal.39Under 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.40 Since, generally, it is not necessary for the creditor to proceed against a principal in order to hold the surety liable, where, by the terms of the contract, the obligation of the surety is the same that of the principal, then soon as the principal is in default, the
surety is likewise in default, and may be sued immediately and before any proceedings are had against the principal.41 Perforce, in accordance with the rule that, in the absence of statute or agreement otherwise, a surety is primarily liable, and with the rule that his proper remedy is to pay the debt and pursue the principal for reimbursement, the surety cannot at law, unless permitted by statute and in the absence of any agreement limiting the application of the security, require the creditor or obligee, before proceeding against the surety, to resort to and exhaust his remedies against the principal, particularly where both principal and surety are equally bound.42 We agree with respondent corporation that its mere failure to immediately sue petitioner on her obligation does not release her from liability. Where a creditor refrains from proceeding against the principal, the surety is not exonerated. In other words, mere want of diligence or forbearance does not affect the creditor's rights vis-a-vis the surety, unless the surety requires him by appropriate notice to sue on the obligation. Such gratuitous indulgence of the principal does not discharge the surety whether given at the principal's request or without it, and whether it is yielded by the creditor through sympathy or from an inclination to favor the principal, or is only the result of passiveness. The neglect of the creditor to sue the principal at the time the debt falls due does not discharge the surety, even if such delay continues until the principal becomes insolvent.43 And, in the absence of proof of resultant injury, a surety is not discharged by the creditor's mere statement that the creditor will not look to the surety,44 or that he need not trouble himself.45 The consequences of the delay, such as the subsequent insolvency of the principal,46or the fact that the remedies against the principal may be lost by lapse of time, are immaterial. 47 The raison d'être for the rule is that there is nothing to prevent the creditor from proceeding against the principal at any time.48 At any rate, 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. 49 It may not be amiss to add that leniency shown to a debtor in default, by delay permitted by the creditor without change in the time when the debt might be demanded, does not constitute an extension of the time of payment, which would release the surety. 50 In order to constitute an extension discharging the surety, it should appear that the extension was for a definite period, pursuant to an enforceable agreement between the principal and the creditor, and that it was made without the consent of the surety or with a reservation of rights with respect to him. The contract must be one which precludes the creditor from, or at least hinders him in, enforcing the principal contract within the period during which he could otherwise have enforced it, and which precludes the surety from paying the debt. 51 None of these elements are present in the instant case. Verily, the mere fact that respondent corporation gave the principal debtors an extended period of time within which to comply with their obligation did not effectively absolve here in petitioner from the consequences of her undertaking. Besides, the burden is on the surety, herein petitioner, to show that she has been discharged by some act of the creditor,52 herein respondent corporation, failing in which we cannot grant the relief prayed for. As a final issue, petitioner claims that assuming that her liability is solidary, the interests and penalty charges on the outstanding balance of the loan cannot be imposed for being illegal and unconscionable. Petitioner additionally theorizes that respondent corporation intentionally delayed the collection of the loan in order that the interests and penalty charges would accumulate. The statement, likewise traversed by said respondent, is misleading.
In an affidavit53 executed by petitioner, which was attached to her petition, she stated, among others, that: 8. During the latter part of 1990, I was surprised to learn that Merlyn Azarraga's loan has been released and that she has not paid the same upon its maturity. I received a telephone call from Mr. Augusto Banusing of MB Lending informing me of this fact and of my liability arising from the promissory note which I signed. 9. I requested Mr. Banusing to try to collect first from Merlyn and Osmeña Azarraga. At the same time, I offered to pay MB Lending the outstanding balance of the principal obligation should he fail to collect from Merlyn and Osmeña Azarraga. Mr. Banusing advised me not to worry because he will try to collect first from Merlyn and Osmeña Azarraga. 10. A year thereafter, I received a telephone call from the secretary of Mr. Banusing who reminded that the loan of Merlyn and Osmeña Azarraga, together with interest and penalties thereon, has not been paid. Since I had no available funds at that time, I offered to pay MB Lending by delivering to them a parcel of land which I own. Mr. Banusing's secretary, however, refused my offer for the reason that they are not interested in real estate. 11. In March 1992, I received a copy of the summons and of the complaint filed against me by MB Lending before the RTC-Iloilo. After learning that a complaint was filed against me, I instructed Sheila Gatia to go to MB Lending and reiterate my first offer to pay the outstanding balance of the principal obligation of Merlyn Azarraga in the amount of P30,000.00. 12. Ms. Gatia talked to the secretary of Mr. Banusing who referred her to Atty. Venus, counsel of MB Lending. 13. Atty. Venus informed Ms. Gatia that he will consult Mr. Banusing if my offer to pay the outstanding balance of the principal obligation loan (sic) of Merlyn and Osmeña Azarraga is acceptable. Later, Atty. Venus informed Ms. Gatia that my offer is not acceptable to Mr. Banusing. The purported offer to pay made by petitioner can not be deemed sufficient and substantial in order to effectively discharge her from liability. There are a number of circumstances which conjointly inveigh against her aforesaid theory. 1. Respondent corporation cannot be faulted for not immediately demanding payment from petitioner. It was petitioner who initially requested that the creditor try to collect from her principal first, and she offered to pay only in case the creditor fails to collect. The delay, if any, was occasioned by the fact that respondent corporation merely acquiesced to the request of petitioner. At any rate, there was here no actual offer of payment to speak of but only a commitment to pay if the principal does not pay. 2. Petitioner made a second attempt to settle the obligation by offering a parcel of land which she owned. Respondent corporation was acting well within its rights when it refused to accept the offer. The debtor of a thing cannot compel the creditor to receive a different one, although the latter may be of the same value, or more valuable than that which is due. 54 The obligee is entitled to demand fulfillment of the obligation or performance as stipulated. A change of the object of the obligation would constitute novation requiring the express consent of the parties.55
3. After the complaint was filed against her, petitioner reiterated her offer to pay the outstanding balance of the obligation in the amount of P30,000.00 but the same was likewise rejected. Again, respondent corporation cannot be blamed for refusing the amount being offered because it fell way below the amount it had computed, based on the stipulated interests and penalty charges, as owing and due from herein petitioner. A debt shall not be understood to have been paid unless the thing or service in which the obligation consists has been completely delivered or rendered, as the case may be. 56 In other words, the prestation must be fulfilled completely. A person entering into a contract has a right to insist on its performance in all particulars.57 Petitioner cannot compel respondent corporation to accept the amount she is willing to pay because the moment the latter accepts the performance, knowing its incompleteness or irregularity, and without expressing any protest or objection, then the obligation shall be deemed fully complied with.58 Precisely, this is what respondent corporation wanted to avoid when it continually refused to settle with petitioner at less than what was actually due under their contract. This notwithstanding, however, we find and so hold that the penalty charge of 3% per month and attorney's fees equivalent to 25% of the total amount due are highly inequitable and unreasonable. It must be remembered that from the principal loan of P30,000.00, the amount of P16,300.00 had already been paid even before the filing of the present case. Article 1229 of the Civil Code provides that the court shall equitably reduce the penalty when the principal obligation has been partly or irregularly complied with by the debtor. And, even if there has been no performance, the penalty may also be reduced if it is iniquitous or leonine. In a case previously decided by this Court which likewise involved private respondent M.B. Lending Corporation, and which is substantially on all fours with the one at bar, we decided to eliminate altogether the penalty interest for being excessive and unwarranted under the following rationalization: Upon the matter of penalty interest, we agree with the Court of Appeals that the economic impact of the penalty interest of three percent (3 %) per month on total amount due but unpaid should be equitably reduced. The purpose for which the penalty interest is intended — that is, to punish the obligor — will have been sufficiently served by the effects of compounded interest. Under the exceptional circumstances in the case at bar, e.g., the original amount loaned was only P15,000.00; partial payment of P8,600.00 was made on due date; and the heavy (albeit still lawful) regular compensatory interest, the penalty interest stipulated in the parties' promissory note is iniquitous and unconscionable and may be equitably reduced further by eliminating such penalty interest altogether. 59 Accordingly, the penalty interest of 3% per month being imposed on petitioner should similarly be eliminated. Finally, with respect to the award of attorney's fees, this Court has previously ruled that even with an agreement thereon between the parties, the court may nevertheless reduce such attorney's fees fixed in the contract when the amount thereof appears to be unconscionable or unreasonable.60 To that end, it is not even necessary to show, as in other contracts, that it is contrary to morals or public policy.61 The grant of attorney's fees equivalent to 25% of the total amount due is, in our opinion, unreasonable and immoderate, considering the minimal unpaid amount involved and the extent of the work involved in this simple action for
collection of a sum of money. We, therefore, hold that the amount of P10,000.00 as and for attorney's fee would be sufficient in this case.62 WHEREFORE, the judgment appealed from is hereby AFFIRMED, subject to the MODIFICATION that the penalty interest of 3% per month is hereby deleted and the award of attorney's fees is reduced to P10,000.00. SO ORDERED. Republic of the Philippines SUPREME COURT Manila EN BANC G.R. No. 14370
September 1, 1919
THE UNITED STATES, plaintiff-appellee, vs. VARADERO DE LA QUINTA, CELERINO B. ARELLANO and CIRILO JOSE, defendantsappellants. Manuel Garcia Goyena for appellants. Assistant Attorney-General Gerkin for appellee. MALCOLM, J.: No better starting place for this opinion can be found than the decision of the Court of First Instance of Manila which awarded the plaintiff the sum of P13,961.76 with interest and costs. With difficulty could the fair and concise statement of the case and of the facts by the trial judge be improved upon. The decision, accordingly incorporated as an integral part of this opinion, quoted in full, reads as follows: This is an action to recover the sum of P13,961.76 for the non-performance of a guaranteed proposal to construct two scows for the plaintiff. It appears from the evidence that on February 23, 1916, the plaintiff, through the depot quartermaster of the United States Army at Manila, invited proposals for the construction of the two scows. In response to the invitation, the defendants Cho Chung Chac and Cho Chung Chee, doing business under the firm name of the Varadero de la Quinta, submitted a proposal to build the scows for the sum of $15,850 United States currency. The proposal by its terms was effective for 60 days after the opening of the bids, and bound the bidder to complete the construction within 90 working days after formal notification of award. It also contained the following clause: "2. This proposal is made with a full knowledge on the part of the undersigned of the kind, quantity and quality of the supplies and services required; and should the undersigned receive written notice of the acceptance of this bid, or any part thereof, within sixty (60) days after the date of opening same, he will deliver or person the accepted items within the time and in accordance with the terms of said proposal and acceptance or will if so required by the United
States enter into contracts within ten days after such notification of acceptance in accordance with the terms of said proposal and acceptance, and will give bond with good and sufficient sureties for the faithful and proper fulfillment of such contract." The proposal was guaranteed by the defendants Arellano and Jose in the following terms: "The undersigned, Celerino B. Arellano, of Manila in the county of Manila, and state of Philippine Islands and Cirilo Jose, of Manila, in the county of Manila, and state of Philippine Islands, hereby guarantee that the foregoing proposal, if not withdrawn prior to the opening thereof shall remain open for sixty (60) days thereafter, unless accepted or rejected within that time; and if it be accepted in any or all of its terms or any part or parts thereof, within said period of sixty (60) days, the said bidder will, upon written notice of such acceptance, deliver or perform the accepted items within the time and in accordance with the terms of said proposal and acceptance, or will, if required by the United States, or its legal representative, within ten (10) days after written notification of such acceptance, enter into contract with the proper officer of the United States, for the delivery or performance of the accepted items in accordance with the terms of the said proposal and acceptance and will give bond with good and sufficient sureties, for the faithful and proper fulfillment of such contract. And we bind ourselves, our heirs, executors, administrators, and successors, jointly and severally, to pay the United States in case the said bidder shall withdraw said proposal within said period of sixty (60) days or shall fail to furnish such articles and services in accordance with said proposal as accepted, or shall fail to enter into such contract and furnish such bond, if so required within ten days after said notice of acceptance, the difference in money between the amount of the proposal of Said bidder on the articles and services so accepted and the amount for which the proper office of the United States may procure the same from other parties, if the latter amount be in excess of the former. "Given under our hands and seals this 1st day of March, 1916. "Witnesses: "F. GARCIA as to CELERINO B. ARELLANO "R. OESON, as to C. JOSE." "The bids were opened March 3, 1916, and 45 days thereafter the Varadero de la Quinta was formally notified that its bid was accepted. The notification reads: "OFFICE OF DEPOT QUARTERMASTER MANILA, P. I. "April 17, 1916. "From: Depot Q. M. "To: Varadero de la Quinta, 549 Echague St., Manila.
"Subject: Construction of two scows. "1. You are informed that your bid, submitted in response to circular proposal, of this office dated February 23d, 1916, for the construction of two scows, is accepted, viz: $15,850.00, and the same to be completed in ninety (90) working days. "2. Work is to be begun immediately, and to be completed in time as stated above. "3. Formal contract covering the above work will be made in the office of the Department Quartermaster, and will be dated April 17, 1916. You are requested to advise the name and designation of the office who will sign the contract in behalf of the Corporation, and the names of the sureties who will justify in the sum of $8,000, or corporate surety may be furnished if desired. Prompt acknowledgment of this acceptance is requested.
"M. GRAY ZALINSKI, "Colonel, Q. M. Corps.
"HAT/T "L/A 74216029 Under date of April 27, 1916, the Varadero de la Quinta addressed to the Department Quartermaster a request for a six months extension of time commencing the work, on the ground that there was not a sufficient supply of suitable lumber in the local market. This request was under date of April 29 denied by the Department Quartermaster, who called attention to the fact that his office was informed that the firm of Norton & Harrison had on hand a large stock of suitable lumber which they still were willing to sell at the price quoted the Varadero de la Quinta at the time its bid was submitted. After some further correspondence, and several ineffective efforts to furnish a bond satisfactory to the Quartermaster Department, the Varadero de la Quinta was on May 17, 1916, notified that unless the work was undertaken immediately and satisfactory bond given by one o'clock in the afternoon of May 20, 1916, steps would be taken "to guard the interests of the government by either awarding the contract to the next lowest bidder, during the work by purchase of material and hiring of labor, or such other manner as is deemed necessary." The scows were finally constructed by the Insular Collector of Customs at a total cost to the United States Government of $22,830.88, United States currency, or an excess of $6,980.88, United States currency, over the defendants' bid, for the recovery of which excess this action is brought. Upon the facts stated, the defendants are clearly liable for the difference between the amount of their bid and the actual cost to the plaintiff of the construction of the scows. The defendants' contention that the plaintiff's failure to take immediate advantage of the provision in the proposal binding the bidder to enter into contract and furnish bond within ten days constituted a waiver, merits no serious consideration. Neither is their any force in the argument that the plaintiff should have waited until the termination of the 90 days period before taking the contract out of the hands of the defendants. As far as the record shows the defendants, after their bid was accepted, never offered to complete the construction of the scows within the
period specified in their proposal; in fact, the burden of their contention is that they were unable to obtain the necessary materials and hence required an extension of the time. But be this as it may, their proposal bound them to enter into a formal contract and give a satisfactory bond within ten days from the acceptance of the bid, or in default thereof to pay the difference in money between the amount of their proposal and the actual cost. There is no basis for equitable relief from this agreement; time must be regarded as of the essence in a contract for military supplies. Wherefore, it is hereby ordered and adjuged that the plaintiff have and recover judgment against the defendants Cho Chung Chac and Cho Chung Chee, jointly and severally as principals, and against the defendants Celerino B. Arellano and Cirilo Jose, jointly and severally, as sureties, for the sum of P13,961.76, with interest at the rate of 6 per cent per annum from the 7th day of August, 1917, and with the costs. Execution will not issue against the sureties until a writ of execution against the principals has been returned unsatisfied in whole or in part. Appellants' first assignment or error goes to the overruling of their demurrer by the trial court, and is to the effect that there is a misjoinder of parties defendant in that the contract of the defendants Celerino B. Arellano and Cirilo Jose being one of guaranty, the liability of the principal debtor and the guarantors cannot properly be decided in one and the same action. Appellants may be technically correct in their demonstration of the proposition that Arellano and Jose were not sureties, as stated by the trial court, but were, in fact, guarantors of the contract. The distinction made between the contract of guaranty and the contract of suretyship under the American law is, however, more shadowy than substantial and is not emphasized at all under the English law. The vital difference between the contract of a surety and that of a guarantor is sometimes said to be, that a surety is charged as an original promissor while the engagement of the guarantor is a collateral undertaking. The obligation of the surety is primary; the obligation of the guarantor is secondary. (12 R. C. L., 1057; Homewood People's Bank vs. Hastings [1919], 106 Atl., 308 and note in 89 Central Law Journal, July 4, 1919, p. 15.) It would then follow that a guarantor not being a joint contractor with his principal, cannot, as a general rule, be used with his principal. Admitting although not necessarily conceding, that this is the correct rule of pleading, yet adherence to the same at this stage of the proceedings and under the situation in which we find the case, would serve merely to delay the ultimate accounting of the guarantors. Be it remembered that the concluding sentence of the judgment reads: "Execution will not issue against the sureties (guarantors) until a writ of execution against the principals has been returned unsatisfied in whole or in part." In other words, it having been proved that the principal is not able to perform a contract which he has made and for which in a cumulative, collateral agreement, the guarantors become liable, the latter must respond for the damages if the same be not satisfied by their principal. No different result would be attained if plaintiff were forced to institute separate actions against the principal and the guarantors. (See Haldane vs. United States [1895], 69 Fed., 819.) The appellants are correct in contending that an error was committed by the lower court in finding the defendant Cho Chung Chee liable as a principal in this action. The record discloses what is styled a stipulation, by which it is admitted by the defendants that Cho Chung Chac is the sole owner of the business establishment known as the Varadero de la Quinta, and this is corroborated by defendants' exhibits which speak of the "Varadero de la Quinta, Cho Chung Chac, sole proprietor, by Cho Chung Chee, attorney-in-fact." With the modification just indicated, all the other contentious issues appear to be covered fully in the decision of the trial court. In one way or another they relate to the contract between the United States and the Varadero de la Quinta. Examining the facts as one may,
the terms of this agreement are plain and definite. Skeletonized they are — The bid of the Varadero de la Quinta accepted — bid guaranteed by Arellano and Jose — pleas for extensions of time — no modification consented to — Varadero de la Quinta fails to carry out agreement — principal liable for excess cost — guarantors notified of default although not necessary — guarantors likewise liable. With these facts, one of two hypotheses can be reasonably assumed. The first assumption is that there was an absolute impossibility of performance of the contract because of inability to secure lumber "of the kind, quantity and quality specially called for by the specifications" in the Manila market, and the second that the contractor could have secured the lumber but at such a figure as would not have permitted of a profit. On the supposition that no such lumber as was needed to construct the scows could be found in the city of Manila and that the authorities of the United States Army would not agree to an extension of time, nevertheless, the principal and the guarantors cannot escape from their agreement. This is not a case of an impossibilty existing at the time of the contract and known to both parties. It is rather a case of where two parties enter into a contract and the performance becomes impossible subsequent thereto. In such instances, the courts invariably refer to the old and leading case of Paradine vs. Jane ([1647], Aleyn, 26; 82 Eng. L. & Eq. Rep., 897). Here, the original rule of English law, with the reasons therefor, and the exceptions thereto, is made clear in its insistence that when a party by his own contract creates a duty or charge upon himself, he is bound to make it good, if he may, notwithstanding any accident by inevitable necessity, because he might have provided against it by his contract. The reason for the rule is obvious, for if one of two innocent persons must sustain a loss, the law should leave it where the agreement of the parties has put it. Although in the course of time, the rigor of this ancient doctrine has been modified, it still remains as a cornerstone in the law of contracts. Thus, the United States Supreme Court in the case of Day vs. United States ([1917], 245 U. S., 159) said; One who makes a contract never can be absolutely certain that he will be able to perform it when the time comes, and the very essence of it is that he takes the risk within the limits of his undertaking. The modern cases may have abated somewhat the absoluteness of the older ones in determining the scope of the undertaking by the literal meaning of the words alone. (The Kronprinzessin Cecilie, 244 U. S., 12, 22). But when the scope of the undertaking is fixed, that is merely another way of saying that the contractor takes the risk of the obstacles to that extent. Again, if, as argued by counsel, the war be deemed to have affected the instant contract the effect would be as summarized in a statement of the law adopted in the report of the PreWar Contract Committee of Great Britain, dated January 12, 1918, wherein it is said: Prima facie if a man binds himself by contract unconditionally to do that which turns out to be impossible, he will be held to his bargain and have to pay damages for his failure to perform. If, however, the impossibility arises from a cause that neither party can be reasonably have contemplated when the contract was made, and as to which the terms of the contract make no provision, a man will not be so bound; the matter being unforeseen, he is not taken to have promised unconditionally nor, for the same reason, has he stipulated for any condition of excuse." (Report of the Pre-War Contract Committee dated January 12, 1918, Cd. 8975 of 1918; The Law Quarterly Review, January, 1919, p. 95.) From these authorities and facts, we can reach no other conclusion than that since impossibility of performance was not known to both parties at the time of making the contract, since performance has not been prevented by the acts of the United States, since the contract related to nothing which was unlawful, and since the modificatory rules growing
out of war conditions do not affect the same, the contractor and his guarantors are not excused from the consequences of non-performance. The second assumption we have mentioned is, after all, the more tenable. We think it fairly shown from the evidence that one of the large dealers in the city of Manila had on hand a sufficient supply of Oregon pine such as was needed to construct the scows. This being so, the contractor could make propositions without number to the plaintiff, but if they were not accepted by the plaintiff, the contractor would still be held to his agreement. The excuses offered for failure to carry out the agreement while they might arouse sympathy would certainly not furnish a legal defense. Mere increase of the cost of performance or unexpectedly burdensome and oppressive war conditions are insufficient pleas. (See Blackburn, Robbin Co., Ltd., vs. Allen & Sons [1918], 2 K. B., 267.) Contracts with the Government, like other contracts, must be performed according to their tenor. Judgment is modified so that so much as adjudges Cho Chung Chee liable as principal is eliminated, and, as thus modified, judgment is affirmed with interest, and with the costs of this instance against the appellants. So ordered. Torres, Johnson, Araullo, Avanceñena, and Moir, JJ., concur. FIRST DIVISION
[G.R. No. 140047. July 13, 2004]
PHILIPPINE EXPORT AND FOREIGN LOAN GUARANTEE CORPORATION, petitioner, vs. V.P. EUSEBIO CONSTRUCTION, INC.; 3-PLEX INTERNATIONAL, INC.; VICENTE P. EUSEBIO; SOLEDAD C. EUSEBIO; EDUARDO E. SANTOS; ILUMINADA SANTOS; AND FIRST INTEGRATED BONDING AND INSURANCE COMPANY, INC.,respondents. DECISION DAVIDE, JR., C.J.: This case is an offshoot of a service contract entered into by a Filipino construction firm with the Iraqi Government for the construction of the Institute of Physical Therapy-Medical Center, Phase II, in Baghdad, Iraq, at a time when the Iran-Iraq war was ongoing. In a complaint filed with the Regional Trial Court of Makati City, docketed as Civil Case No. 91-1906 and assigned to Branch 58, petitionerPhilippine Export and Foreign Loan Guarantee Corporation[1] (hereinafter Philguarantee) sought reimbursement from the respondents of the sum of money it paid to Al Ahli Bank of Kuwait pursuant to a guarantee it issued for respondent V.P. Eusebio Construction, Inc. (VPECI). The factual and procedural antecedents in this case are as follows: On 8 November 1980, the State Organization of Buildings (SOB), Ministry of Housing and Construction, Baghdad, Iraq, awarded the construction of the Institute of Physical Therapy– Medical Rehabilitation Center, Phase II, in Baghdad, Iraq, (hereinafter the Project) to Ajyal Trading and Contracting Company (hereinafter Ajyal), a firm duly licensed with the Kuwait
Chamber of Commerce US$18,739,668).[2]
for
a
total
contract
price
of
ID5,416,089/046
(or
about
On 7 March 1981, respondent spouses Eduardo and Iluminada Santos, in behalf of respondent 3-Plex International, Inc. (hereinafter 3-Plex), a local contractor engaged in construction business, entered into a joint venture agreement with Ajyal wherein the former undertook the execution of the entire Project, while the latter would be entitled to a commission of 4% of the contract price. [3] Later, or on 8 April 1981, respondent 3-Plex, not being accredited by or registered with the Philippine Overseas Construction Board (POCB), assigned and transferred all its rights and interests under the joint venture agreement to VPECI, a construction and engineering firm duly registered with the POCB. [4] However, on 2 May 1981, 3-Plex and VPECI entered into an agreement that the execution of the Project would be under their joint management. [5] The SOB required the contractors to submit (1) a performance bond of ID271,808/610 representing 5% of the total contract price and (2) an advance payment bond of ID541,608/901 representing 10% of the advance payment to be released upon signing of the contract.[6] To comply with these requirements, respondents 3-Plex and VPECI applied for the issuance of a guarantee with petitioner Philguarantee, a government financial institution empowered to issue guarantees for qualified Filipino contractors to secure the performance of approved service contracts abroad.[7] Petitioner Philguarantee approved respondents’ application. Subsequently, letters of guarantee[8] were issued by Philguarantee to the Rafidain Bank of Baghdad covering 100% of the performance and advance payment bonds, but they were not accepted by SOB. What SOB required was a letter-guarantee from Rafidain Bank, the government bank of Iraq. Rafidain Bank then issued a performance bond in favor of SOB on the condition that another foreign bank, not Philguarantee, would issue a counter-guarantee to cover its exposure. Al Ahli Bank of Kuwait was, therefore, engaged to provide a counter-guarantee to Rafidain Bank, but it required a similar counter-guarantee in its favor from the petitioner. Thus, three layers of guarantees had to be arranged. [9] Upon the application of respondents 3-Plex and VPECI, petitioner Philguarantee issued in favor of Al Ahli Bank of Kuwait Letter of Guarantee No. 81-194-F [10] (Performance Bond Guarantee) in the amount of ID271,808/610 and Letter of Guarantee No. 81-195F[11] (Advance Payment Guarantee) in the amount of ID541,608/901, both for a term of eighteen months from 25 May 1981. These letters of guarantee were secured by (1) a Deed of Undertaking[12] executed by respondents VPECI, Spouses Vicente P. Eusebio and Soledad C. Eusebio, 3-Plex, and Spouses Eduardo E. Santos and Iluminada Santos; and (2) a surety bond[13] issued by respondent First Integrated Bonding and Insurance Company, Inc. (FIBICI). The Surety Bond was later amended on 23 June 1981 to increase the amount of coverage from P6.4 million to P6.967 million and to change the bank in whose favor the petitioner’s guarantee was issued, from Rafidain Bank to Al Ahli Bank of Kuwait.[14] On 11 June 1981, SOB and the joint venture VPECI and Ajyal executed the service contract[15] for the construction of the Institute of Physical Therapy – Medical Rehabilitation Center, Phase II, in Baghdad, Iraq, wherein the joint venture contractor undertook to complete the Project within a period of 547 days or 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 and the 75% in US dollars at the exchange rate of 1 Dinar to 3.37777 US Dollars.[16] The construction, which was supposed to start on 2 June 1981, commenced only on the last week of August 1981. Because of this delay and the slow progress of the construction work due to some setbacks and difficulties, the Project was not completed on 15 November 1982 as scheduled. But in October 1982, upon foreseeing the impossibility of meeting the deadline and upon the request of Al Ahli Bank, the joint venture contractor worked for the
renewal or extension of the Performance Bond and Advance Payment Guarantee. Petitioner’s Letters of Guarantee Nos. 81-194-F (Performance Bond) and 81-195-F (Advance Payment Bond) with expiry date of 25 November 1982 were then renewed or extended to 9 February 1983 and 9 March 1983, respectively.[17] The surety bond was also extended for another period of one year, from 12 May 1982 to 12 May 1983.[18]The Performance Bond was further extended twelve times with validity of up to 8 December 1986,[19] while the Advance Payment Guarantee was extended three times more up to 24 May 1984 when the latter was cancelled after full refund or reimbursement by the joint venture contractor. [20] The surety bond was likewise extended to 8 May 1987.[21] 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. [22] On 26 October 1986, Al Ahli Bank of Kuwait sent a telex call to the petitioner demanding full payment of its performance bond counter-guarantee. Upon receiving a copy of that telex message on 27 October 1986, respondent VPECI requested Iraq Trade and Economic Development Minister Mohammad Fadhi Hussein to recall the telex call on the performance guarantee for being a drastic action in contravention of its mutual agreement with the latter that (1) the imposition of penalty would be held in abeyance until the completion of the project; and (2) the time extension would be open, depending on the developments on the negotiations for a foreign loan to finance the completion of the project.[23] It also wrote SOB protesting the call for lack of factual or legal basis, since the failure to complete the Project was due to (1) the Iraqi government’s lack of foreign exchange with which to pay its (VPECI’s) accomplishments and (2) SOB’s noncompliance for the past several years with the provision in the contract that 75% of the billings would be paid in US dollars. [24] Subsequently, or on 19 November 1986, respondent VPECI advised the petitioner not to pay yet Al Ahli Bank because efforts were being exerted for the amicable settlement of the Project.[25] On 14 April 1987, the petitioner received another telex message from Al Ahli Bank stating that it had already paid to Rafidain Bank the sum of US$876,564 under its letter of guarantee, and demanding reimbursement by the petitioner of what it paid to the latter bank plus interest thereon and related expenses.[26] Both petitioner Philguarantee and respondent VPECI sought the assistance of some government agencies of the Philippines. On 10 August 1987, VPECI requested the Central Bank to hold in abeyance the payment by the petitioner “to allow the diplomatic machinery to take its course, for otherwise, the Philippine government , through the Philguarantee and the Central Bank, would become instruments of the Iraqi Government in consummating a clear act of injustice and inequity committed against a Filipino contractor.” [27] On 27 August 1987, the Central Bank authorized the remittance for its account of the amount of US$876,564 (equivalent to ID271, 808/610) to Al Ahli Bank representing full payment of the performance counter-guarantee for VPECI’s project in Iraq. [28] On 6 November 1987, Philguarantee informed VPECI that it would remit US$876,564 to Al Ahli Bank, and reiterated the joint and solidary obligation of the respondents to reimburse the petitioner for the advances made on its counter-guarantee.[29] The petitioner thus paid the amount of US$876,564 to Al Ahli Bank of Kuwait on 21 January 1988.[30] Then, on 6 May 1988, the petitioner paid to Al Ahli Bank of Kuwait US$59,129.83 representing interest and penalty charges demanded by the latter bank.[31] On 19 June 1991, the petitioner sent to the respondents separate letters demanding full payment of the amount of P47,872,373.98 plus accruing interest, penalty charges, and 10% attorney’s fees pursuant to their joint and solidary obligations under the deed of undertaking
and surety bond.[32]When the respondents failed to pay, the petitioner filed on 9 July 1991 a civil case for collection of a sum of money against the respondents before the RTC of Makati City. After due trial, the trial court ruled against Philguarantee and held that the latter had no valid cause of action against the respondents. It opined that at the time the call was made on the guarantee which was executed for a specific period, the guarantee had already lapsed or expired. There was no valid renewal or extension of the guarantee for failure of the petitioner to secure respondents’ express consent thereto. The trial court also found that the joint venture contractor incurred no delay in the execution of the Project. Considering the Project owner’s violations of the contract which rendered impossible the joint venture contractor’s performance of its undertaking, no valid call on the guarantee could be made. Furthermore, the trial court held that no valid notice was first made by the Project owner SOB to the joint venture contractor before the call on the guarantee. Accordingly, it dismissed the complaint, as well as the counterclaims and crossclaim, and ordered the petitioner to pay attorney’s fees of P100,000 to respondents VPECI and Eusebio Spouses and P100,000 to 3-Plex and the Santos Spouses, plus costs. [33] In its 14 June 1999 Decision,[34] the Court of Appeals affirmed the trial court’s decision, ratiocinating as follows: First, appellant cannot deny the fact that it was fully aware of the status of project implementation as well as the problems besetting the contractors, between 1982 to 1985, having sent some of its people to Baghdad during that period. The successive renewals/extensions of the guarantees in fact, was prompted by delays, not solely attributable to the contractors, and such extension understandably allowed by the SOB (project owner) which had not anyway complied with its contractual commitment to tender 75% of payment in US Dollars, and which still retained overdue amounts collectible by VPECI. … Second, appellant was very much aware of the violations committed by the SOB of its contractual undertakings with VPECI, principally, the payment of foreign currency (US$) for 75% of the total contract price, as well as of the complications and injustice that will result from its payment of the full amount of the performance guarantee, as evident in PHILGUARANTEE’s letter dated 13 May 1987 …. … Third, appellant was fully aware that SOB was in fact still obligated to the Joint Venture and there was still an amount collectible from and still being retained by the project owner, which amount can be set-off with the sum covered by the performance guarantee. … Fourth, well-apprised of the above conditions obtaining at the Project site and cognizant of the war situation at the time in Iraq, appellant, though earlier has made representations with the SOB regarding a possible amicable termination of the Project as suggested by VPECI, made a complete turn-around and insisted on acting in favor of the unjustified “call” by the foreign banks.[35] The petitioner then came to this Court via Rule 45 of the Rules of Court claiming that the Court of Appeals erred in affirming the trial court’s ruling that
I …RESPONDENTS ARE NOT LIABLE UNDER THE DEED OF UNDERTAKING THEY EXECUTED IN FAVOR OF PETITIONER IN CONSIDERATION FOR THE ISSUANCE OF ITS COUNTER-GUARANTEE AND THAT PETITIONER CANNOT PASS ON TO RESPONDENTS WHAT IT HAD PAID UNDER THE SAID COUNTER-GUARANTEE. II …PETITIONER CANNOT CLAIM SUBROGATION. III …IT IS INIQUITOUS AND UNJUST FOR PETITIONER TO HOLD RESPONDENTS LIABLE UNDER THEIR DEED OF UNDERTAKING.[36] The main issue in this case is whether the petitioner is entitled to reimbursement of what it paid under Letter of Guarantee No. 81-194-F it issued to Al Ahli Bank of Kuwait based on the deed of undertaking and surety bond from the respondents. 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. 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. [37] 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. [38]
In determining petitioner’s status, it is necessary to read Letter of Guarantee No. 81194-F, which provides in part as follows: In consideration of your issuing the above performance guarantee/counter-guarantee, we hereby unconditionally and irrevocably guarantee, under our Ref. No. LG-81-194 F to pay you on your first written or telex demand Iraq Dinars Two Hundred Seventy One Thousand Eight Hundred Eight and fils six hundred ten (ID271,808/610) representing 100% of the performance bond required of V.P. EUSEBIO for the construction of the Physical Therapy Institute, Phase II, Baghdad, Iraq, plus interest and other incidental expenses related thereto. In the event of default by V.P. EUSEBIO, we shall pay you 100% of the obligation unpaid but in no case shall such amount exceed Iraq Dinars (ID) 271,808/610 plus interest and other incidental expenses…. (Emphasis supplied) [39] Guided by the abovementioned distinctions between a surety and a guaranty, as well as the factual milieu of this case, we find 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. [40] 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.[41] 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.[42] Having determined petitioner’s liability as guarantor, the next question we have to grapple with is whether the respondent contractor hasdefaulted in its obligations that would justify resort to the guaranty. This is a mixed question of fact and law that is better addressed by the lower courts, since this Court is not a trier of facts. It is a fundamental and settled rule that the findings of fact of the trial court and the Court of Appeals are binding or conclusive upon this Court unless they are not supported by the evidence or unless strong and cogent reasons dictate otherwise. [43] The factual findings of the Court of Appeals are normally not reviewable by us under Rule 45 of the Rules of Court except when they are at variance with those of the trial court. [44] The trial court and the Court of Appeals were in unison that the respondent contractor cannot be considered to have defaulted in its obligations because the cause of the delay was not primarily attributable to it. A corollary issue is what law should be applied in determining whether the respondent contractor has defaulted in the performance of its obligations under the service contract. The question of whether there is a breach of an agreement, which includes default or mora,[45] pertains to the essential or intrinsic validity of a contract. [46]
No conflicts rule on essential validity of contracts is expressly provided for in our laws. The rule followed by most legal systems, however, is that the intrinsic validity of a contract must be governed by the lex contractus or “proper law of the contract.” This is the law voluntarily agreed upon by the parties (the lex loci voluntatis) or the law intended by them either expressly or implicitly (the lex loci intentionis). The law selected may be implied from such factors as substantial connection with the transaction, or the nationality or domicile of the parties.[47] Philippine courts would do well to adopt the first and most basic rule in most legal systems, namely, to allow the parties to select the law applicable to their contract, subject to the limitation that it is not against the law, morals, or public policy of the forum and that the chosen law must bear a substantive relationship to the transaction. [48] It must be noted that the service contract between SOB and VPECI contains no express choice of the law that would govern it. In the United States and Europe, the two rules that now seem to have emerged as “kings of the hill” are (1) the parties may choose the governing law; and (2) in the absence of such a choice, the applicable law is that of the State that “has the most significant relationship to the transaction and the parties.”[49]Another authority proposed that all matters relating to the time, place, and manner of performance and valid excuses for non-performance are determined by the law of the place of performance or lex loci solutionis, which is useful because it is undoubtedly always connected to the contract in a significant way. [50] In this case, the laws of Iraq bear substantial connection to the transaction, since one of the parties is the Iraqi Government and the place of performance is in Iraq. Hence, the issue of whether respondent VPECI defaulted in its obligations may be determined by the laws of Iraq. However, since that foreign law was not properly pleaded or proved, the presumption of identity or similarity, otherwise known as the processual presumption,comes into play. Where foreign law is not pleaded or, even if pleaded, is not proved, the presumption is that foreign law is the same as ours.[51] Our law, specifically Article 1169, last paragraph, of the Civil Code, provides: “In reciprocal obligations, neither party incurs in delay if the other party does not comply or is not ready to comply in a proper manner with what is incumbent upon him.” Default or mora on the part of the debtor is the delay in the fulfillment of the prestation by reason of a cause imputable to the former. [52] It is the non-fulfillment of an obligation with respect to time.[53] It is undisputed that only 51.7% of the total work had been accomplished. The 48.3% unfinished portion consisted in the purchase and installation of electro-mechanical equipment and materials, which were available from foreign suppliers, thus requiring US Dollars for their importation. The monthly billings and payments made by SOB [54] reveal that the agreement between the parties was a periodic payment by the Project owner to the contractor depending on the percentage of accomplishment within the period. [55] The payments were, in turn, to be used by the contractor to finance the subsequent phase of the work. [56] However, as explained by VPECI in its letter to the Department of Foreign Affairs (DFA), the payment by SOB purely in Dinars adversely affected the completion of the project; thus: 4. Despite protests from the plaintiff, SOB continued paying the accomplishment billings of the Contractor purely in Iraqi Dinars and which payment came only after some delays. 5. SOB is fully aware of the following: …
5.2 That Plaintiff is a foreign contractor in Iraq and as such, would need foreign currency (US$), to finance the purchase of various equipment, materials, supplies, tools and to pay for the cost of project management, supervision and skilled labor not available in Iraq and therefore have to be imported and or obtained from the Philippines and other sources outside Iraq. 5.3 That the Ministry of Labor and Employment of the Philippines requires the remittance into the Philippines of 70% of the salaries of Filipino workers working abroad in US Dollars; … 5.5 That the Iraqi Dinar is not a freely convertible currency such that the same cannot be used to purchase equipment, materials, supplies, etc. outside of Iraq; 5.6 That most of the materials specified by SOB in the CONTRACT are not available in Iraq and therefore have to be imported; 5.7 That the government of Iraq prohibits the bringing of local currency (Iraqui Dinars) out of Iraq and hence, imported materials, equipment, etc., cannot be purchased or obtained using Iraqui Dinars as medium of acquisition. … 8. Following the approved construction program of the CONTRACT, upon completion of the civil works portion of the installation of equipment for the building, should immediately follow, however, the CONTRACT specified that these equipment which are to be installed and to form part of the PROJECT have to be procured outside Iraq since these are not being locally manufactured. Copy f the relevant portion of the Technical Specification is hereto attached as Annex “C” and made an integral part hereof; … 10. Due to the lack of Foreign currency in Iraq for this purpose, and if only to assist the Iraqi government in completing the PROJECT, the Contractor without any obligation on its part to do so but with the knowledge and consent of SOB and the Ministry of Housing & Construction of Iraq, offered to arrange on behalf of SOB, a foreign currency loan, through the facilities of Circle International S.A., the Contractor’s Sub-contractor and SACE MEDIO CREDITO which will act as the guarantor for this foreign currency loan. Arrangements were first made with Banco di Roma. Negotiation started in June 1985. SOB is informed of the developments of this negotiation, attached is a copy of the draft of the loan Agreement between SOB as the Borrower and Agent. The Several Banks, as Lender, and counter-guaranteed by Istituto Centrale Per II Credito A Medio Termine (Mediocredito) Sezione Speciale Per L’Assicurazione Del Credito All’Exportazione (Sace). Negotiations went on and continued until it suddenly collapsed due to the reported default by Iraq in the payment of its obligations with Italian government, copy of the news clipping dated June 18, 1986 is hereto attached as Annex “D” to form an integral part hereof; 15. On September 15, 1986, Contractor received information from Circle International S.A. that because of the news report that Iraq defaulted in its obligations with European banks, the approval by Banco di Roma of the loan to SOB shall be deferred indefinitely, a copy of the letter of Circle International together with the news clippings are hereto attached as Annexes “F” and “F-1”, respectively.[57]
As found by both the Court of Appeals and the trial court, the delay or the noncompletion of the Project was caused by factors not imputable to the respondent contractor. It was rather due mainly to the persistent violations by SOB of the terms and conditions of the contract, particularly its failure to pay 75% of the accomplished work in US Dollars. Indeed, where one of the parties to a contract does not perform in a proper manner the prestation which he is bound to perform under the contract, he is not entitled to demand the performance of the other party. A party does not incur in delay if the other party fails to perform the obligation incumbent upon him. The petitioner, however, maintains that the payments by SOB of the monthly billings in purely Iraqi Dinars did not render impossible the performance of the Project by VPECI. Such posture is quite contrary to its previous representations. In his 26 March 1987 letter to the Office of the Middle Eastern and African Affairs (OMEAA), DFA, Manila, petitioner’s Executive Vice-President Jesus M. Tañedo stated that while VPECI had taken every possible measure to complete the Project, the war situation in Iraq, particularly the lack of foreign exchange, was proving to be a great obstacle; thus: VPECI has taken every possible measure for the completion of the project but the war situation in Iraq particularly the lack of foreign exchange is proving to be a great obstacle. Our performance counterguarantee was called last 26 October 1986 when the negotiations for a foreign currency loan with the Italian government through Banco de Roma bogged down following news report that Iraq has defaulted in its obligation with major European banks. Unless the situation in Iraq is improved as to allay the bank’s apprehension, there is no assurance that the project will ever be completed. [58] In order that the debtor may 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 because it must appear that the tolerance or benevolence of the creditor must have ended. [59] As stated earlier, SOB cannot yet demand complete performance from VPECI because it has not yet itself performed its obligation in a proper manner, particularly the payment of the 75% of the cost of the Project in US Dollars. The VPECI cannot yet be said to have incurred in delay. Even assuming that there was delay and that the delay was attributable to VPECI, still the effects of that delay ceased upon the renunciation by the creditor, SOB, which could be implied when the latter granted several extensions of time to the former. [60] Besides, no demand has yet been made by SOB against the respondent contractor. Demand is generally necessary even if a period has been fixed in the obligation. And default generally begins from the moment the creditor demands judicially or extrajudicially the performance of the obligation. Without such demand, the effects of default will not arise.[61] Moreover, the petitioner as a guarantor is entitled to the benefit of excussion, that is, it cannot be compelled to pay the creditor SOB unless the property of the debtor VPECI has been exhausted and all legal remedies against the said debtor have been resorted to by the creditor.[62] It could also set up compensation as regards what the creditor SOB may owe the principal debtor VPECI.[63] In this case, however, the petitioner has clearly waived these rights and remedies by making the payment of an obligation that was yet to be shown to be rightfully due the creditor and demandable of the principal debtor. As found by the Court of Appeals, the petitioner fully knew that the joint venture contractor had collectibles from SOB which could be set off with the amount covered by the performance guarantee. In February 1987, the OMEAA transmitted to the petitioner a copy of a telex dated 10 February 1987 of the Philippine Ambassador in Baghdad, Iraq, informing it of the note verbale sent by the Iraqi Ministry of Foreign Affairs stating that the past due
obligations of the joint venture contractor from the petitioner would “be deducted from the dues of the two contractors.”[64] Also, in the project situationer attached to the letter to the OMEAA dated 26 March 1987, the petitioner raised as among the arguments to be presented in support of the cancellation of the counter-guarantee the fact that the amount of ID281,414/066 retained by SOB from the Project was more than enough to cover the counter-guarantee of ID271,808/610; thus: 6.1 Present the following arguments in cancelling the counterguarantee:
The Iraqi Government does not have the foreign exchange to fulfill its contractual obligations of paying 75% of progress billings in US dollars. …
It could also be argued that the amount of ID281,414/066 retained by SOB from the proposed project is more than the amount of the outstanding counterguarantee.[65]
In a nutshell, since the petitioner was aware of the contractor’s outstanding receivables from SOB, it should have set up compensation as was proposed in its project situationer. Moreover, the petitioner was very much aware of the predicament respondents. In fact, in its 13 May 1987 letter to the OMEAA, DFA,Manila, it stated:
of
the
VPECI also maintains that the delay in the completion of the project was mainly due to SOB’s violation of contract terms and as such, call on the guarantee has no basis. While PHILGUARANTEE is prepared to honor its commitment under the guarantee, PHILGUARANTEE does not want to be an instrument in any case of inequity committed against a Filipino contractor. It is for this reason that we are constrained to seek your assistance not only in ascertaining the veracity of Al Ahli Bank’s claim that it has paid Rafidain Bank but possibly averting such an event. As any payment effected by the banks will complicate matters, we cannot help underscore the urgency of VPECI’s bid for government intervention for the amicable termination of the contract and release of the performance guarantee. [66] But surprisingly, though fully cognizant of SOB’s violations of the service contract and VPECI’s outstanding receivables from SOB, as well as the situation obtaining in the Project site compounded by the Iran-Iraq war, the petitioner opted to pay the second layer guarantor not only the full amount of the performance bond counter-guarantee but also interests and penalty charges. This brings us to the next question: May the petitioner as a guarantor secure reimbursement from the respondents for what it has paid under Letter of Guarantee No. 81194-F? As a rule, a guarantor who pays for a debtor should be indemnified by the latter [67] and would be legally subrogated to the rights which the creditor has against the debtor. [68] However, a person who makes payment without the knowledge or against the will of the debtor has the right to recover only insofar as the payment has been beneficial to the debtor.[69] If the obligation was subject to defenses on the part of the debtor, the same defenses which could have been set up against the creditor can be set up against the paying guarantor.[70]
From the findings of the Court of Appeals and the trial court, it is clear that the payment made by the petitioner guarantor did not in any way benefit the principal debtor, given the project status and the conditions obtaining at the Project site at that time. Moreover, the respondent contractor was found to have valid defenses against SOB, which are fully supported by evidence and which have been meritoriously set up against the paying guarantor, the petitioner in this case. And even if the deed of undertaking and the surety bond secured petitioner’s guaranty, the petitioner is precluded from enforcing the same by reason of the petitioner’s undue payment on the guaranty. Rights under the deed of undertaking and the surety bond do not arise because these contracts depend on the validity of the enforcement of the guaranty. The petitioner guarantor should have waited for the natural course of guaranty: the debtor VPECI should have, in the first place, defaulted in its obligation and that the creditor SOB should have first made a demand from the principal debtor. It is only when the debtor does not or cannot pay, in whole or in part, that the guarantor should pay. [71] When the petitioner guarantor in this case paid against the will of the debtor VPECI, the debtor VPECI may set up against it defenses available against the creditor SOB at the time of payment. This is the hard lesson that the petitioner must learn. As the government arm in pursuing its objective of providing “the necessary support and assistance in order to enable … [Filipino exporters and contractors to operate viably under the prevailing economic and business conditions,” [72] the petitioner should have exercised prudence and caution under the circumstances. As aptly put by the Court of Appeals, it would be the height of inequity to allow the petitioner to pass on its losses to the Filipino contractor VPECI which had sternly warned against paying the Al Ahli Bank and constantly apprised it of the developments in the Project implementation. WHEREFORE, the petition for review on certiorari is hereby DENIED for lack of merit, and the decision of the Court of appeals in CA-G.R. CV No. 39302 is AFFIRMED. No pronouncement as to costs. SO ORDERED. Panganiban, Ynares-Santiago, Carpio, and Azcuna, JJ., concur. Republic of the Philippines SUPREME COURT Manila EN BANC G.R. No. L-16666
April 10, 1922
ROMULO MACHETTI, plaintiff-appelle, vs. HOSPICIO DE SAN JOSE, defendant-appellee, and FIDELITY & SURETY COMPANY OF THE PHILIPPINE ISLANDS, defendant-appellant Ross and Laurence and Wolfson & Scwarzkopf for appellant. Gabriel La O for appellee Hospicio de San Jose. No appearance for the other appellee. OSTRAND, J.:
It appears from the evidence that on July 17, 1916, one Romulo Machetti, by a written agreement undertook to construct a building on Calle Rosario in the city of Manila for the Hospicio de San Jose, the contract price being P64,000. One of the conditions of the agreement was that the contractor should obtain the "guarantee" of the Fidelity and Surety Company of the Philippine Islands to the amount of P128,800 and the following endorsement in the English language appears upon the contract: MANILA, July 15, 1916. For value received we hereby guarantee compliance with the terms and conditions as outlined in the above contract. FIDELITY AND SURETY COMPANY OF THE PHILIPPINE ISLANDS. (Sgd) OTTO VORSTER, Vice-President. Machetti constructed the building under the supervision of architects representing the Hospicio de San Jose and, as the work progressed, payments were made to him from time to time upon the recommendation of the architects, until the entire contract price, with the exception of the sum of the P4,978.08, was paid. Subsequently it was found that the work had not been carried out in accordance with the specifications which formed part of the contract and that the workmanship was not of the standard required, and the Hospicio de San Jose therefore answered the complaint and presented a counterclaim for damages for the partial noncompliance with the terms of the agreement abovementioned, in the total sum of P71,350. After issue was thus joined, Machetti, on petition of his creditors, was, on February 27, 1918, declared insolvent and on March 4, 1918, an order was entered suspending the proceeding in the present case in accordance with section 60 of the Insolvency Law, Act No. 1956. The Hospicio de San Jose on January 29, 1919, filed a motion asking that the Fidelity and Surety Company be made cross-defendant to the exclusion of Machetti and that the proceedings be continued as to said company, but still remain suspended as to Machetti. This motion was granted and on February 7, 1920, the Hospicio filed a complaint against the Fidelity and Surety Company asking for a judgement for P12,800 against the company upon its guaranty. After trial, the Court of First Instance rendered judgment against the Fidelity and Surety Company for P12,800 in accordance with the complaint. The case is now before this court upon appeal by the Fidelity and Surety Company form said judgment. As will be seen, the original action which Machetti was the plaintiff and the Hospicio de San Jose defendant, has been converted into an action in which the Hospicio de San Jose is plaintiff and the Fidelity and Surety Company, the original plaintiff's guarantor, is the defendant, Machetti having been practically eliminated from the case. But in this instance the guarantor's case is even stronger than that of an ordinary surety. The contract of guaranty is written in the English language and the terms employed must of course be given the signification which ordinarily attaches to them in that language. In English the term "guarantor" implies an undertaking of guaranty, as distinguished from suretyship. It is very true that notwithstanding the use of the words "guarantee" or "guaranty" circumstances may be shown which convert the contract into one of suretyship
but such circumstances do not exist in the present case; on the contrary it appear affirmatively that the contract is the guarantor's separate undertaking in which the principal does not join, that its rests on a separate consideration moving from the principal and that although it is written in continuation of the contract for the construction of the building, it is a collateral undertaking separate and distinct from the latter. All of these circumstances are distinguishing features of contracts of guaranty. Now, while a surety undertakes to pay if the principal does not pay, the guarantor only binds himself to pay if the principal cannot pay. The one is the insurer of the debt, the other an insurer of the solvency of the debtor. (Saint vs.Wheeler & Wilson Mfg. Co., 95 Ala., 362; Campbell, vs. Sherman, 151 Pa. St., 70; Castellvi de Higgins and Higginsvs. Sellner, 41 Phil., 142; ;U.S. vs. Varadero de la Quinta, 40 Phil., 48.) This latter liability is what the Fidelity and Surety Company assumed in the present case. The undertaking is perhaps not exactly that of a fianza under the Civil Code, but is a perfectly valid contract and must be given the legal effect if ordinarily carries. The Fidelity and Surety Company having bound itself to pay only the event its principal, Machetti, cannot pay it follows that it cannot be compelled to pay until it is shown that Machetti is unable to pay. Such ability may be proven by the return of a writ of execution unsatisfied or by other means, but is not sufficiently established by the mere fact that he has been declared insolvent in insolvency proceedings under our statutes, in which the extent of the insolvent's inability to pay is not determined until the final liquidation of his estate. The judgment appealed from is therefore reversed without costs and without prejudice to such right of action as the cross-complainant, the Hospicio de San Jose, may have after exhausting its remedy against the plaintiff Machetti. So ordered. Araullo, C.J., Malcolm, Villamor, Johns and Romualdez, JJ., concur. SECOND DIVISION
[G.R. No. 160466. January 17, 2005]
SPOUSES ALFREDO and SUSANA ONG, petitioners, vs. PHILIPPINE COMMERCIAL INTERNATIONAL BANK,respondent. DECISION PUNO, J.: This is a petition for review on certiorari under Rule 45 of the Rules of Court to set aside the Decision of the Court of Appeals in CA-G.R. SP No. 39255, dated February 17, 2003, affirming the decision of the trial court denying petitioners’ motion to dismiss. The facts: Baliwag Mahogany Corporation (BMC) is a domestic corporation engaged in the manufacture and export of finished wood products. Petitioners-spouses Alfredo and Susana Ong are its President and Treasurer, respectively. On April 20, 1992, respondent Philippine Commercial International Bank (now EquitablePhilippine Commercial International Bank or E-PCIB) filed a case for collection of a sum of
money[1] against petitioners-spouses. Respondent bank sought to hold petitioners-spouses liable as sureties on the three (3) promissory notes they issued to secure some of BMC’s loans, totalling five million pesos (P5,000,000.00). The complaint alleged that in 1991, BMC needed additional capital for its business and applied for various loans, amounting to a total of five million pesos, with the respondent bank. Petitioners-spouses acted as sureties for these loans and issued three (3) promissory notes for the purpose. Under the terms of the notes, it was stipulated that respondent bank may consider debtor BMC in default and demand payment of the remaining balance of the loan upon the levy, attachment or garnishment of any of its properties, or upon BMC’s insolvency, or if it is declared to be in a state of suspension of payments. Respondent bank granted BMC’s loan applications. On November 22, 1991, BMC filed a petition for rehabilitation and suspension of payments with the Securities and Exchange Commission (SEC) after its properties were attached by creditors. Respondent bank considered debtor BMC in default of its obligations and sought to collect payment thereof from petitioners-spouses as sureties. In due time, petitioners-spouses filed their Answer. On October 13, 1992, a Memorandum of Agreement (MOA) [2] was executed by debtor BMC, the petitioners-spouses as President and Treasurer of BMC, and the consortium of creditor banks of BMC (of which respondent bank is included). The MOA took effect upon its approval by the SEC on November 27, 1992.[3] Thereafter, petitioners-spouses moved to dismiss[4] the complaint. They argued that as the SEC declared the principal debtor BMC in a state of suspension of payments and, under the MOA, the creditor banks, including respondent bank, agreed to temporarily suspend any pending civil action against the debtor BMC, the benefits of the MOA should be extended to petitioners-spouses who acted as BMC’s sureties in their contracts of loan with respondent bank. Petitioners-spouses averred that respondent bank is barred from pursuing its collection case filed against them. The trial court denied the motion to dismiss. Petitioners-spouses appealed to the Court of Appeals which affirmed the trial court’s ruling that a creditor can proceed against petitioners-spouses as surety independently of its right to proceed against the principal debtor BMC. Hence this appeal. Petitioners-spouses claim that the collection case filed against them by respondent bank should be dismissed for three (3) reasons: First, the MOA provided that during its effectivity, there shall be a suspension of filing or pursuing of collection cases against the BMC and this provision should benefit petitioners as sureties. Second, principal debtor BMC has been placed under suspension of payment of debts by the SEC; petitioners contend that it would prejudice them if the principal debtor BMC would enjoy the suspension of payment of its debts while petitioners, who acted only as sureties for some of BMC’s debts, would be compelled to make the payment; petitioners add that compelling them to pay is contrary to Article 2063 of the Civil Code which provides that a compromise between the creditor and principal debtor benefits the guarantor and should not prejudice the latter. Lastly, petitioners rely on Article 2081 of the Civil Code which provides that: “the guarantor may set up against the creditor all the defenses which pertain to the principal debtor and are inherent in the debt; but not those which are purely personal to the debtor.” Petitioners aver that if the principal debtor BMC can set up the defense of suspension of payment of debts and filing of collection suits against respondent bank, petitioners as sureties should likewise be allowed to avail of these defenses. We find no merit in petitioners’ contentions.
Reliance of petitioners-spouses on Articles 2063 and 2081 of the Civil Code is misplaced as these provisions refer to contracts of guaranty. They do not apply to suretyship contracts. Petitioners-spouses are not guarantors but sureties of BMC’s debts. There is a sea of difference in the rights and liabilities of a guarantor and a surety. A guarantor insures the solvency of the debtor while a surety is an insurer of the debt itself. A contract of guaranty gives rise to a subsidiary obligation on the part of the guarantor. It is only after the creditor has proceeded against the properties of the principal debtor and the debt remains unsatisfied that a guarantor can be held liable to answer for any unpaid amount. This is the principle of excussion. In a suretyship contract, however, the benefit of excussion is not available to the surety as he is principally liable for the payment of the debt. As the surety insures the debt itself, he obligates himself to pay the debt if the principal debtor will not pay, regardless of whether or not the latter is financially capable to fulfill his obligation. Thus, a creditor can go directly against the surety although the principal debtor is solvent and is able to pay or no prior demand is made on the principal debtor. A surety is directly, equally and absolutely bound with the principal debtor for the payment of the debt and is deemed as an original promissor and debtor from the beginning.[5] Under the suretyship contract entered into by petitioners-spouses with respondent bank, the former obligated themselves to be solidarily bound with the principal debtor BMC for the payment of its debts to respondent bank amounting to five million pesos (P5,000,000.00). Under Article 1216 of the Civil Code,[6] respondent bank as creditor may proceed against petitioners-spouses as sureties despite the execution of the MOA which provided for the suspension of payment and filing of collection suits against BMC. Respondent bank’s right to collect payment from the surety exists independently of its right to proceed directly against the principal debtor. In fact, the creditor bank may go against the surety alone without prior demand for payment on the principal debtor. [7] The provisions of the MOA regarding the suspension of payments by BMC and the non-filing of collection suits by the creditor banks pertain only to the property of the principal debtor BMC. Firstly, in the rehabilitation receivership filed by BMC, only the properties of BMC were mentioned in the petition with the SEC. [8] Secondly, there is nothing in the MOA that involves the liabilities of the sureties whose properties are separate and distinct from that of the debtor BMC. Lastly, it bears to stress that the MOA executed by BMC and signed by the creditor-banks was approved by the SEC whose jurisdiction is limited only to corporations and corporate assets. It has no jurisdiction over the properties of BMC’s officers or sureties. Clearly, the collection suit filed by respondent bank against petitioners-spouses as sureties can prosper. The trial court’s denial of petitioners’ motion to dismiss was proper. IN VIEW WHEREOF, the petition is DISMISSED for lack of merit. No pronouncement as to costs. SO ORDERED. Austria-Martinez, Callejo, Sr., Tinga, and Chico-Nazario, JJ., concur. Delos Santos vs. Vibar OCTOBER 20, 2011 ~ VBDIAZ Delos Santos vs. Vibar G.R. No. 150931 July 16, 2008
FACTS: De Leon borrowed P100k from Vibar. De Leon issued a promissory note and bound himself to pay the loan three months from date with a monthly interest rate. Delos Santos signed as a guarantor of de Leon’s loan.
Later, de Leon asked Vibar for another loan. Together with Delos Santos and Conte, de Leon went to Vibar’s house. After some discussion, they all agreed that the outstanding P100k loan together with the accrued interest would be deducted from the new loan of P500,000
de Leon signed a typewritten promissory note acknowledging the debt of P500k payable within 12 months. Then, Delos Santos signed as a witness under the phrase “signed in the presence of.” However, de Leon, in his own handwriting, inserted the word “guarantor” besides Delos Santos’s name, as Delos Santos nodded her head to what de Leon was doing. De Leon also added the phrase, “as security for this loan this TCT No. T-47375, Registry of Baguio City, is being submitted by way of mortgage.”
On maturity date, de Leon failed to pay any of the monthly installments. Vibar made several verbal and written demands on de Leon for payment but to no avail asDe Leon failed to respond. Vibar’s counsel again sent a demand letter not only to de Leon as principal debtor, but also to delos Santos.delosSantos was being made to answer for de Leon’s debt as the latter’s guarantor. delos Santos then remitted to Vibar P15k to pay one month’s interest on the loan. However, this was the only payment Delos Santos made to Vibar as Delos Santos claimed she had no money to pay the full amount of the loan
Vibar filed an action for recovery of money with the RTC, which although ruled that De Leon is liable, Delos Santos is not a guarantor. The trial court ruled that there was no express consent given by Delos Santos binding her as guarantor.
However, Ca ruled that Delos santos is guarantor of De Leon’s loan. Delos Santos filed an MR which was denied. Hence this petition for review on certiorari.
ISSUE: WON Delos Santos is liable as guarantor of de Leon’s loan from Vibar HELD: petition denied
YES
We are convinced that the insertion was made with the express consent of Delos Santos. Delos Santos’s act of nodding her head showed her consent to be a guarantor. Also, Vibar would not have extended a loan to de Leon without the representations of Delos Santos. Also, Delos Santos acknowledged her liability as guarantor but simply claimed that she had no money to pay Vibar. In fact, Delos Santos made an initial payment of P15K as partial compliance of her obligation as guarantor. This only shows that Delos Santos never denied her liability to Vibar as guarantor until this case was filed in court. Lastly, Delos Santos wrote a letter to the RD of Baguio City inquiring on the status of the property mentioned in the promissory note as a mortgage security for de Leon’s loan. Here, Delos Santos clearly stated that she “appears to be a guarantor” in the promissory note. This serves as a written admission that Delos Santos knew she was a guarantor. During the trial, Delos Santos did not impugn the letter or its contents.
Further, It is axiomatic that the written word “guarantor” prevails over the typewritten word “witness.” In case of conflict, the written word prevails over the printed word. Section 15 of Rule 130 provides:
Sec. 15. Written words control printed. – When an instrument consists partly of written words and partly of a printed form, and the two are inconsistent, the former controls the latter.
We agree with CA that estoppel in pais arose in this case. estoppel is a doctrine that prevents a person from adopting an inconsistent position, attitude, or action if it will result in injury to anotherOne who, by his acts, representations or admissions, or by his own silence when he ought to speak out, intentionally or through culpable negligence, induces another to believe certain facts to exist and such other rightfully relies and acts on such belief, can no longer deny the existence of such fact as it will prejudice the latter Republic of the Philippines SUPREME COURT Manila EN BANC G.R. No. L-10547
January 31, 1958
THE PHILIPPINE GUARANTY CO., INC., petitioner, vs. LAURA DINIO, PEDRO MANALASTAS, in his capacity as Administrator of the Intestate Estate of Raymundo Manalastas, and Valentina Pelayo, respondents. Ramirez and Ortigas and Ignacio B. Alcuaz for petitioner. Pacifico L. Santiago for respondent Alejandra Pelayo. Vitaliano T. Estacio for respondent Pedro Manalastas, etc. LABRADOR, J.: Appeal by certiorari from a judgment of the Court of Appeals, reversing thatof the Court of First Instance of Nueva Ecija, in favor of the petitioner andagainst Laura Dinio and Pedro Manalastas for the payment by the latter of the sum of P11,000 in favor of the plaintiff, with interests and costs. Thefacts as found by the Court of Appeals are stated by that court as follows: It appears that in Civil Case No. C-194 of the Court of First Instance of Ilocos Sur, Laura Dinio was sued by one Consolacion Nolasco. Said Court ofFirst Instance issued a writ of preliminary attachment which was levied on the property of the defendant in that case, consisting of trucks, trailers,and wreckers, all of various tonnage, to answer for the judgment that mightbe rendered against her. On December 21, 1946, defendant Laura Dinio and the Philippine GuarantyCo. Inc. filed a bond of P11,000 with the Court of First Instance of IlocosSur for the lifting of the attachment; said bond was to secure payment to theplaintiff of any judgment she may recover against the defendant. On the same day, December 21, 1946, said
Laura Dinio and Raymundo Manalastas executed acounter-guranty with mortgage (Exh. C) in favor of the Philippine Guaranty Co., Inc. (the plaintiff-appellant in the present case) in order to indemnifythe latter for any damage, prejudice, losses, costs, payments, advances, andany other expenses of whatever kind and nature, including attorney's feeswhich the said Philippine Guaranty Co., Inc. might incur as a consequenceof any execution that might be levied on said bond. The counter guarranty with mortgage above mentioned was registered and with the respective officesof the register of deeds of Ilocos Sur and Pampanga, inasmuch as the real property of Raymundo Manalastas, subject matter of the mortgage described inExhibit C, is situated in Pampanga. On June 30, 1948, judgment was rendered in said Civil Case No. C-194, ordering defendant Laura Dinio to return to plaintiff Consolacion Nolascothe sum of P10,000. Laura Dinio failed to satisfy the judgment so the Philippine Guaranty Co., Inc. with the sheriff of the City of Manila to satisfy the judgment. Thereafter, petitioner herein demanded the payment ofthe sum paid by it to satisfy the judgment in Civil Case No. C-194 and as thepayment demanded was not forthcoming, the present action was brought againstrespondents Laurs Dinio and Pedro Manalastas in executionm of the counterbondthat they had filed in favor of the petitioner. The Court of First Instanceof Nueva Ecija found for the plaintiff-petitioner but on appeal to the Courtof Apeals the latter reversed the judgment holding that the counterbond executed by Raymundo Manalastas was executed without any valuable consideration. It further held that as the property covered by the counterbond was conjugal property of Raymundo Manalastas and Valentina Pelayoand as the encumbrance created by Manalastas was in fraud of his spouse,Aricle 1413 of the Civil Code should be made applicable and in accordance therewith, as Raymundo Manalastas is already dead, an inventory of the conjugal property be made and the obligation created by the counterbond be charged against his share in the counterbond being null and void insofar as the same not be covered by the share of Manalastas in the conjugal property.The court, therefore, in a final order rendered after a motion to reconsider the original decision had been presented, ordered that the case be returnedto the Court of First instance for the reception of additional evidence andfor such other important proceedings as may be necessary and proper to determine whether or not the rights and interest of Valentina Pelayo, as surviving spouse of Raymundo Manalastas, was prejudiced by the incumbrancein question. Petition for certiorari was filed in this Court against saiddecision and the same was given due course. The important question presented to Us for decision is whether or not the counterbond, Exhibit "C," which Ramundo Manalastas, jointly with Laura Dinio,executed in favor of the petitioner, The Philippine Guaranty Co., Inc., isnull and void for lack of valuable consideration in favor of Raymundo Manalastas. It is evident that the counterbond executed jointly by Raymundoa Manalastaswith Laura Dinio, Exhibit "C," was executed by them in order to secure the bond by the Philippine Guaranty Co., Inc. in favor of Laura Dinio. The factthat the bond was for the benefit of Laura Dinio, and not for Raymundo Manalastas, jointly or singly, does not mean the counterbond was executed byManalastas without any valuable consideration. The consideration in such caseis that which suuports the principal debtor's obligation. The claim of the appellants that there was no consideration for their guarranty can not be sustained. The consideration which supports the obligation as to the principal debtor is a sufficient consideration to support the obligation of the sureties. It is not
necessary to prove anyconsideration as between them and the creditor." (Pyle vs. Johnson, et al.,9 Phil. 249, 251.). The proof shows that the money claimed in this action has never been paid and is still owing to the plaintiff; and the only defense worth nothing inthis decision is the assetion on the part of Enrique Echaus that he receivednothing for affixing the signature as guarantor to the contract which is thesubject of suit and that in effect the contract was lacking in considerationas to him. The point is not well taken. A guarantor or surety is bound by the same consideration that makes the contract effective between the principal therto.(Pyle vs. Johnson, 9 Phil. 249.) . . . . See also Enriquez de la Cavada vs. Diaz, 37 Phil. 982; Acuna vs. Veloso, 50 Phil.241. The execution of the bond in the Philippine Guaranty Co., Inc. petitionerherein, in favor of Laura Dinio, is, therefore, the consideration for theexecution of the counterbond by Raymundo Manalastas. It is not necessary thatsuch consideration, the execution of the bond by the Philippine Guaranty Co., Inc. redound directly to the benefit of Raymundo Manalastas; it isenough that it was favorable to Laura Dinio. In view of the foregoing, the decision of the Court of Appeals is hereby reversed and set aside and that of the Court of First Instance, affirmed, with costs against the respondents. Bengzon, Paras, C.J., Padilla, Montemayor, Reyes, A., Bautista Angelo, Concepcion, Reyes, J.B.L., Endencia, and Felix, JJ., concur. izal Commercial Banking Corporation, petitioner, vs. Hon. Jose P. Arro, Judge of the Court of First Instance of Davao,and Residoro Chua, respondents. Date:31 July 1982 Ponente:De Castro,J .Facts: Private respondent Residoro Chua, with Enrique Go, Sr., executed a comprehensivesurety agreement to guaranty,above all, any existing or future indebtedness of Davao Agricultural Industries Corporation (Daicor), and/or induce thebank at anytime or from time to time to make loans or advances or to extend credit to saidDaicor, provided that theliability shall not exceed ay any time Php100,000.00.A promissory note for Php100,000.00 (for additional capital to the charcoal buy andsell and the activated carbonimportation business) was issued in favor of petitionerRCBC payable a month after execution. This was signed by Go inhis personalcapacity and in behalf of Daicor. Respondent Chua did not sign in said promissorynote. As the note was notpaid despite demands, RCBC filed a complaint for a sum of money against Daicor, Go and Chua.The complaint against Chua was dismissed upon his motion, alleging that thecomplaint states no cause of actionagainst him as he was not a signatory to the noteand hence he cannot be held liable. This was s o despite RCBC’s opposition, invokingthe comprehensive surety agreement which it holds to cover not just the note inquestion but alsoevery other indebtedness that Daicor may incur from petitioner bank. RCBC moved for reconsideration of the dismissalbut to no avail. Hence, this petition. Issue: WON respondent Chua may be held liable with Go and Daicor under the promissorynote, even if he was not asignatory to it, in light of the provisions of
thecomprehensive surety agreement wherein he bound himself with Go andDaicor, assolidary debtors, to pay existing and future debts of said corporation. Held: Yes, he may be held liable. Order dismissing the complaint against respondent Chuareversed and set aside. Caseremanded to court of origin with instruction to set asidemotion to dismiss and to require defendant Chua to answer thecomplaint. Ratio: The comprehensive surety agreement executed by Chua and Go, as president andgeneral manager, respectively,of Daicor, was to cover existing as well as futureobligations which Daicor may incur with RCBC. This was only subject tothe provisothat their liability shall not exceed at any one time the aggregate principal amount of Php100,000.00. (Par.1of said agreement). The agreement was executed to induce petitioner Bank to grant any application for aloan Daicor would request for.According to said agreement, the guaranty iscontinuing and shall remain in full force or efect until the bank is notifiedof itstermination.During the time the loan under the promissory note was incurred, the agreement wasstill in full force and efect and isthus covered by the latter agreement. Thus, even if Chua did not sign the promissory note, he is still liable by virtue of the suretyagreement. The only condition necessary for him to be liable under the agreementwas that Daicor “is or maybecome liable as maker, endorser, acceptor or otherwise.” The comprehensive surety agreement signed by Go and Chua was as an accessoryobligation dependent upon theprincipal obligation, i.e., the loan obtained by Daicoras evidenced by the promissory note. The surety agreementunequivocally shows that it was executed to guarantee futuredebts that may be incurred by Daicor with petitioner, asallowed under NCC Art.2053. “A guaranty may also be given as se curity for future debts, the amount of which isnot yet known; there can be no claim against the guarantor until the debt isliquidated. A conditional obligation may also be secured.” SPS EDUARDO & EPIFANIA EVANGELISTA vs. MERCATOR FINANCE CORP. LYDIA P. SALAZAR, LAMECS REALTY & DEV’T CORP. and the REGISTER OF DEEDS OF BULACAN [G.R. No. 148864. August 21, 2003] Post under case digests, Commercial Law at Monday, February 20, 2012 Posted by Schizophrenic Mind Facts: The spouses Evangelista filed a complaint for annulment of titles against the respondents, claiming to be the registered owners of five (5) parcels of land contained in the real estate mortgage executed by them and Embassy Farms Inc. in favor of Mercator Financing Corporation (“Mercator”). The mortgage was in consideration of certain loans and credit
accommodations
amounting
to
P844,
625.78.
The spouses alleged the following: (1) that they executed the said real estate mortgage merely as officers of Embassy Farms; (2) that they did not receive the proceeds of the loan evidenced by the promissory note, as all went to Embassy Farms; (3) that the real estate mortgage is void due to absence of a principal obligation on which it rests; (4) that since the real estate mortgage is void, the foreclosure proceedings, the subsequent sale as well as the
issuance of transfer certificates of title are likewise void. Petitioners further alleged ambiguity in the wording of the promissory note, which should be resolved against Mercator who
provided
the
form
thereof.
Mercator admitted that petitioners were the owners of the subject parcels of land. It, however, contended that the spouses executed a Mortgage in favor of Mercator Finance Corporation ‘for and in consideration of certain loans, and/or other forms of credit accommodations obtained from the Mortgagee (defendant Mercator Finance Corporation) amounting to EIGHT HUNDRED FORTY-FOUR THOUSAND SIX HUNDRED TWENTY-FIVE & 78/100 (P844,625.78) and to secure the payment of the same and those others that the MORTGAGEE may extend to the MORTGAGOR (plaintiffs) x x x.’” It contended that since petitioners and Embassy Farms signed the promissory note as co-makers (the note being worded as “For value received, I/We jointly and severally promise to pay to the order of Mercator…”), aside from the Continuing Suretyship Agreement subsequently executed to guarantee the indebtedness, the petitioners are jointly and severally liable with Embassy Farms. Due to their failure to pay the obligation, the foreclosure and subsequent sale of the mortgaged properties are thus valid. Respondents Salazar and Lamecs asserted that they are
innocent
purchasers
Issue:
May
spouses
the
be
for
value
held
solidarily
and
in
liable
with
good
Embassy
faith.
Farms?
Held: YES. Courts can interpret a contract only if there is doubt in its letter. But, an examination of the promissory note shows no such ambiguity. Besides, assuming arguendo that there is an ambiguity, Section 17 of the Negotiable Instruments Law states, viz:
SECTION 17. Construction where instrument is ambiguous. – Where the language of the instrument is ambiguous or there are omissions therein, the following rules of construction apply: (g) Where an instrument containing the word “I promise to pay” is signed by two or more persons, they are deemed to be jointly and severally liable thereon.
SECOND DIVISION
[G.R. No. 103066. April 25, 1996] WILLEX PLASTIC INDUSTRIES, CORPORATION, petitioner, vs. HON. COURT OF APPEALS and INTERNATIONAL CORPORATE BANK, respondents. SYLLABUS 1. REMEDIAL LAW; EVIDENCE; PAROL EVIDENCE RULE; FAILURE TO OBJECT TO THE PRESENTATION OF PAROL EVIDENCE CONSTITUTES A WAIVER THEREOF. - It has been held that explanatory evidence may be received to show the circumstances under which a document has been made and to what debt it relates. At all events, Willex Plastic cannot now claim that its liability is limited to any amount which Interbank, as creditor, might give directly to Inter-Resin Industrial as debtor because, by failing to object to the parol evidence presented, Willex Plastic waived the protection of the parol evidence rule. 2. ID.; ID.; FINDINGS OF FACT OF THE TRIAL COURT; RULE; APPLICABLE IN CASE AT BAR. – The trial court found that it was “to secure the guarantee made by plaintiff of the credit accommodation granted to defendant IRIC [Inter-Resin Industrial] by Manilabank, [that] the plaintiff required defendant IRIC to execute a chattel mortgage in its favor and a Continuing Guaranty which was signed by the defendant Willex Plastic Industries Corporation.” Similarly, the Court of Appeals found it to be an undisputed fact that “to secure the guarantee undertaken by plaintiff-appellee [Interbank] of the credit accommodation granted to Inter-Resin Industrial by Manilabank, plaintiff-appellee required defendant-appellant to sign a Continuing Guaranty.” These factual findings of the trial court and of the Court of Appeals are binding on us not only because of the rule that on appeal to the Supreme Court such findings are entitled to great weight and respect but also because our own examination of the record of the trial court confirms these findings of the two courts. 3. CIVIL LAW; SPECIAL CONTRACTS; GUARANTY; THE CONSIDERATION NECESSARY TO SUPPORT A SURETY OBLIGATION NEED NOT PASS DIRECTLY TO THE SURETY, A CONSIDERATION MOVING TO THE PRINCIPAL ALONE IS SUFFICIENT. - Willex Plastic argues that the “Continuing Guaranty,” being an accessory contract, cannot legally exist because of the absence of a valid principal obligation. Its contention is based on the fact that it is not a party either to the “Continuing Surety Agreement” or to the loan agreement between Manilabank and Inter-Resin Industrial. Put in another way the consideration necessary to support a surety obligation need not pass directly to the surety, a consideration moving to the principal alone being sufficient. For a “guarantor or surety is bound by the same consideration that makes the contract effective between the principal parties thereto. . . . It is never necessary that a guarantor or surety should receive any part or benefit, if such there be, accruing to his principal.” 4. ID.; ID.; ID.; ALTHOUGH A CONTRACT OF SURETY IS ORDINARILY NOT TO BE CONSTRUED AS RETROSPECTIVE, IN THE END THE INTENTION OF THE PARTIES AS REVEALED BY THE EVIDENCE IS CONTROLLING. - Willex Plastic contends that the “Continuing Guaranty” cannot be retroactively applied so as to secure the payments made by Interbank under the two “Continuing Surety Agreements.” Willex Plastic invokes the ruling in El Vencedor v. Canlas (44 Phil. 699 [1923]) and Diño v. Court of Appeals (216 SCRA 9 [1992]) in support of its contention that a contract of suretyship or guaranty should be applied prospectively. The cases cited are, however, distinguishable
from the present case. InEl Vencedor v. Canlas we held that a contract of suretyship “is not retrospective and no liability attaches for defaults occurring before it is entered into unless an intent to be so liable is indicated.” There we found nothing in the contract to show that the parties intended the surety bonds to answer for the debts contracted previous to the execution of the bonds. In contrast, in this case, the parties to the “Continuing Guaranty” clearly provided that the guaranty would cover “sums obtained and/or to be obtained” by Inter-Resin Industrial from Interbank. On the other hand, in Diño v. Court of Appeals the issue was whether the sureties could be held liable for an obligation contracted after the execution of the continuing surety agreement. It was held that by its very nature a continuing suretyship contemplates a future course of dealing. “It is prospective in its operation and is generally intended to provide security with respect to future transactions.” By no means, however, was it meant in that case that in all instances a contract of guaranty or suretyship should be prospective in application. Indeed, as we also held in Bank of the Philippine Islands v. Foerster, (49 Phil. 843 [1926]) although a contract of suretyship is ordinarily not to be construed as retrospective, in the end the intention of the parties as revealed by the evidence is controlling. What was said there applies mutatis mutandis to the case at bar: In our opinion, the appealed judgment is erroneous. It is very true that bonds or other contracts of suretyship are ordinarily not to be construed as retrospective, but that rule must yield to the intention of the contracting parties as revealed by the evidence, and does not interfere with the use of the ordinary tests and canons of interpretation which apply in regard to other contracts. In the present case the circumstances so clearly indicate that the bond given by Echevarria was intended to cover all of the indebtedness of the Arrocera upon its current account with the plaintiff Bank that we cannot possibly adopt the view of the court below in regard to the effect of the bond. APPEARANCES OF COUNSEL Tangle-Chua, Cruz & Aquino for petitioner. Fe B. Macalino & Associates for respondent Interbank. DECISION MENDOZA, J.: This is a petition for review on certiorari of the decision [1] of the Court of Appeals in C.A.G.R. CV No. 19094, affirming the decision of the Regional Trial Court of the National Capital Judicial Region, Branch XLV, Manila, which ordered petitioner Willex Plastic Industries Corporation and the Inter-Resin Industrial Corporation, jointly and severally, to pay private respondent International Corporate Bank certain sums of money, and the appellate court’s resolution of October 17, 1989 denying petitioner’s motion for reconsideration. The facts are as follows: Sometime in 1978, Inter-Resin Industrial Corporation opened a letter of credit with the Manila Banking Corporation. To secure payment of the credit accommodation, Inter-Resin Industrial and the Investment and Underwriting Corporation of the Philippines (IUCP) executed two documents, both entitled “Continuing Surety Agreement” and dated December 1, 1978, whereby they bound themselves solidarily to pay Manilabank “obligations of every
kind, on which the [Inter-Resin Industrial] may now be indebted or hereafter become indebted to the [Manilabank].” The two agreements (Exhs. J and K) are the same in all respects, except as to the limit of liability of the surety, the first surety agreement being limited to US$333,830.00, while the second one is limited to US$334,087.00. On April 2, 1979, Inter-Resin Industrial, together with Willex Plastic Industries Corp., executed a “Continuing Guaranty” in favor of IUCP whereby “For and in consideration of the sum or sums obtained and/or to be obtained by Inter-Resin Industrial Corporation” from IUCP, Inter-Resin Industrial and Willex Plastic jointly and severally guaranteed “the prompt and punctual payment at maturity of the NOTE/S issued by the DEBTOR/S . . . to the extent of the aggregate principal sum of FIVE MILLION PESOS (P5,000,000.00) Philippine Currency and such interests, charges and penalties as hereafter may be specified.” On January 7, 1981, following demand upon it, IUCP paid to Manilabank the sum of P4,334,280.61 representing Inter-Resin Industrial’s outstanding obligation. (Exh. M-1) On February 23 and 24, 1981, Atrium Capital Corp., which in the meantime had succeeded IUCP, demanded from Inter-Resin Industrial and Willex Plastic the payment of what it (IUCP) had paid to Manilabank. As neither one of the sureties paid, Atrium filed this case in the court below against Inter-Resin Industrial and Willex Plastic. On August 11, 1982, Inter-Resin Industrial paid Interbank, which had in turn succeeded Atrium, the sum of P687,500.00 representing the proceeds of its fire insurance policy for the destruction of its properties. In its answer, Inter-Resin Industrial admitted that the “Continuing Guaranty” was intended to secure payment to Atrium of the amount of P4,334,280.61 which the latter had paid to Manilabank. It claimed, however, that it had already fully paid its obligation to Atrium Capital. On the other hand, Willex Plastic denied the material allegations of the complaint and interposed the following Special Affirmative Defenses: (a) Assuming arguendo that main defendant is indebted to plaintiff, the former’s liability is extinguished due to the accidental fire that destroyed its premises, which liability is covered by sufficient insurance assigned to plaintiff; (b) Again, assuming arguendo, that the main defendant is indebted to plaintiff, its account is now very much lesser than those stated in the complaint because of some payments made by the former; (c) The complaint states no cause of action against WILLEX; (d) WILLEX is only a guarantor of the principal obligor, and thus, its liability is only secondary to that of the principal; (e) Plaintiff failed to exhaust the ultimate remedy in pursuing its claim against the principal obligor; (f) Plaintiff has no personality to sue.
On April 29, 1986, Interbank was substituted as plaintiff in the action. The case then proceeded to trial. On March 4, 1988, the trial court declared Inter-Resin Industrial to have waived the right to present evidence for its failure to appear at the hearing despite due notice. On the other hand, Willex Plastic rested its case without presenting any evidence. Thereafter Interbank and Willex Plastic submitted their respective memoranda. On April 5, 1988, the trial court rendered judgment, ordering Inter-Resin Industrial and Willex Plastic jointly and severally to pay to Interbank the following amounts: (a) P3,646,780.61, representing their indebtedness to the plaintiff, with interest of 17% per annum from August 11, 1982, when Inter-Resin Industrial paid P687,500.00 to the plaintiff, until full payment of the said amount; (b) Liquidated damages equivalent to 17% of the amount due; and (c) Attorney’s fees and expenses of litigation equivalent to 20% of the total amount due. Inter-Resin Industrial and Willex Plastic appealed to the Court of Appeals. Willex Plastic filed its brief, while Inter-Resin Industrial presented a “Motion to Conduct Hearing and to Receive Evidence to Resolve Factual Issues and to Defer Filing of the Appellant’s Brief.” After its motion was denied, Inter-Resin Industrial did not file its brief anymore. On February 22, 1991, the Court of Appeals rendered a decision affirming the ruling of the trial court. Willex Plastic filed a motion for reconsideration praying that it be allowed to present evidence to show that Inter-Resin Industrial had already paid its obligation to Interbank, but its motion was denied on December 6, 1991: The motion is denied for lack of merit. We denied defendant-appellant Inter-Resin Industrial’s motion for reception of evidence because the situation or situations in which we could exercise the power under B.P. 129 did not exist. Movant here has not presented any argument which would show otherwise. Hence, this petition by Willex Plastic for the review of the decision of February 22, 1991 and the resolution of December 6,1991 of the Court of Appeals. Petitioner raises a number of issues. [1] The main issue raised is whether under the “Continuing Guaranty” signed on April 2, 1979 petitioner Willex Plastic may be held jointly and severally liable with Inter-Resin Industrial for the amount paid by Interbank to Manilabank. As already stated, the amount had been paid by Interbank’s predecessor-in-interest, Atrium Capital, to Manilabank pursuant to the “Continuing Surety Agreements” made on December 1, 1978. In denying liability to Interbank for the amount, Willex Plastic argues that under the “Continuing Guaranty,” its liability is for sums obtained by Inter-Resin Industrial from Interbank, not for sums paid by the latter to Manilabank for the account of Inter-Resin
Industrial. In support of this contention Willex Plastic cites the following portion of the “Continuing Guaranty”: For and in consideration of the sums obtained and/or to be obtained by INTER-RESIN INDUSTRIAL CORPORATION, hereinafter referred to as the DEBTOR/S, from you and/or your principal/s as may be evidenced by promissory note/s, checks, bills receivable/s and/or other evidence/s of indebtedness (hereinafter referred to as the NOTE/S), I/We hereby jointly and severally and unconditionally guarantee unto you and/or your principal/s, successor/s and assigns the prompt and punctual payment at maturity of the NOTE/S issued by the DEBTOR/S in your and/or your principal/s, successor/s and assigns favor to the extent of the aggregate principal sum of FIVE MILLION PESOS (P5,000,000.00), Philippine Currency, and such interests, charges and penalties as may hereinafter be specified. The contention is untenable. What Willex Plastic has overlooked is the fact that evidence aliunde was introduced in the trial court to explain that it was actually to secure payment to Interbank (formerly IUCP) of amounts paid by the latter to Manilabank that the “Continuing Guaranty” was executed. In its complaint below, Interbank’s predecessor-ininterest. Atrium Capital, alleged: 5. to secure the guarantee made by plaintiff of the credit accommodation granted to defendant IRIC [Inter-Resin Industrial] by Manilabank, the plaintiff required defendant IRIC [Inter-Resin Industrial] to execute a chattel mortgage in its favor and a Continuing Guaranty which was signed by the other defendant WPIC [Willex Plastic]. In its answer, Inter-Resin Industrial admitted this allegation although it claimed that it had already paid its obligation in its entirety. On the other hand, Willex Plastic, while denying the allegation in question, merely did so “for lack of knowledge or information of the same.” But, at the hearing of the case on September 16, 1986, when asked by the trial judge whether Willex Plastic had not filed a crossclaim against Inter-Resin Industrial, Willex Plastic’s counsel replied in the negative and manifested that “the plaintiff in this case [Interbank] is the guarantor and my client [Willex Plastic] only signed as a guarantor to the guarantee.”[2] For its part Interbank adduced evidence to show that the “Continuing Guaranty” had been made to guarantee payment of amounts made by it to Manilabank and not of any sums given by it as loan to Inter-Resin Industrial. Interbank’s witness testified under crossexamination by counsel for Willex Plastic that Willex “guaranteed the exposure/of whatever exposure of ACP [Atrium Capital] will later be made because of the guarantee to Manila Banking Corporation.”[3] It has been held that explanatory evidence may be received to show the circumstances under which a document has been made and to what debt it relates. [4] At all events, Willex Plastic cannot now claim that its liability is limited to any amount which Interbank, as creditor, might give directly to Inter-Resin Industrial as debtor because, by failing to object to the parol evidence presented, Willex Plastic waived the protection of the parol evidence rule. [5]
Accordingly, the trial court found that it was “to secure the guarantee made by plaintiff of the credit accommodation granted to defendant IRIC [Inter-Resin Industrial] by
Manilabank, [that] the plaintiff required defendant IRIC to execute a chattel mortgage in its favor and a Continuing Guaranty which was signed by the defendant Willex Plastic Industries Corporation.”[6] Similarly, the Court of Appeals found it to be an undisputed fact that “to secure the guarantee undertaken by plaintiff-appellee [Interbank] of the credit accommodation granted to Inter-Resin Industrial by Manilabank, plaintiff-appellee required defendant-appellants to sign a Continuing Guaranty.” These factual findings of the trial court and of the Court of Appeals are binding on us not only because of the rule that on appeal to the Supreme Court such findings are entitled to great weight and respect but also because our own examination of the record of the trial court confirms these findings of the two courts. [7] Nor does the record show any other transaction under which Inter-Resin Industrial may have obtained sums of money from Interbank. It can reasonably be assumed that InterResin Industrial and Willex Plastic intended to indemnify Interbank for amounts which it may have paid Manilabank on behalf of Inter-Resin Industrial. Indeed, in its Petition for Review in this Court, Willex Plastic admitted that it was “to secure the aforesaid guarantee, that INTERBANK required principal debtor IRIC [Inter-Resin Industrial] to execute a chattel mortgage in its favor, and so a ‘Continuing Guaranty’ was executed on April 2, 1979 by WILLEX PLASTIC INDUSTRIES CORPORATION (WILLEX for brevity) in favor of INTERBANK for and in consideration of the loan obtained by IRIC [InterResin Industrial].” [2] Willex Plastic argues that the “Continuing Guaranty,” being an accessory contract, cannot legally exist because of the absence of a valid principal obligation. [8] Its contention is based on the fact that it is not a party either to the “Continuing Surety Agreement” or to the loan agreement between Manilabank and Inter-Resin Industrial. Put in another way the consideration necessary to support a surety obligation need not pass directly to the surety, a consideration moving to the principal alone being sufficient. For a “guarantor or surety is bound by the same consideration that makes the contract effective between the principal parties thereto. . . . It is never necessary that a guarantor or surety should receive any part or benefit, if such there be, accruing to his principal.”[9] In an analogous case,[10] this Court held: At the time the loan of P100,000.00 was obtained from petitioner by Daicor, for the purpose of having an additional capital for buying and selling coco-shell charcoal and importation of activated carbon, the comprehensive surety agreement was admittedly in full force and effect. The loan was, therefore, covered by the said agreement, and private respondent, even if he did not sign the promissory note, is liable by virtue of the surety agreement. The only condition that would make him liable thereunder is that the Borrower “is or may become liable as maker, endorser, acceptor or otherwise.” There is no doubt that Daicor is liable on the promissory note evidencing the indebtedness. The surety agreement which was earlier signed by Enrique Go, Sr. and private respondent, is an accessory obligation, it being dependent upon a principal one which, in this case is the loan obtained by Daicor as evidenced by a promissory note.
[3] Willex Plastic contends that the “Continuing Guaranty” cannot be retroactively applied so as to secure the payments made by Interbank under the two “Continuing Surety Agreements.” Willex Plastic invokes the ruling m El Vencedor v. Canlas[11] and Diño v. Court of Appeals[12] in support of its contention that a contract of suretyship or guaranty should be applied prospectively. The cases cited are, however, distinguishable from the present case. In El Vencedor v. Canlas we held that a contract of suretyship “is not retrospective and no liability attaches for defaults occurring before it is entered into unless an intent to be so liable is indicated.” There we found nothing in the contract to show that the parties intended the surety bonds to answer for the debts contracted previous to the execution of the bonds. In contrast, in this case, the parties to the “Continuing Guaranty” clearly provided that the guaranty would cover “sums obtained and/or to be obtained” by Inter-Resin Industrial from Interbank. On the other hand, in Diño v. Court of Appeals the issue was whether the sureties could be held liable for an obligation contracted after the execution of the continuing surety agreement. It was held that by its very nature a continuing suretyship contemplates a future course of dealing. “It is prospective in its operation and isgenerally intended to provide security with respect to future transactions.” By no means, however, was it meant in that case that in all instances a contract of guaranty or suretyship should be prospective in application. Indeed, as we also held in Bank of the Philippine Islands v. Foerster, [13] although a contract of suretyship is ordinarily not to be construed as retrospective, in the end the intention of the parties as revealed by the evidence is controlling. What was said there[14] applies mutatis mutandis to the case at bar: In our opinion, the appealed judgment is erroneous. It is very true that bonds or other contracts of suretyship are ordinarily not to be construed as retrospective, but that rule must yield to the intention of the contracting parties as revealed by the evidence, and does not interfere with the use of the ordinary tests and canons of interpretation which apply in regard to other contracts. In the present case the circumstances so clearly indicate that the bond given by Echevarria was intended to cover all of the indebtedness of the Arrocera upon its current account with the plaintiff Bank that we cannot possibly adopt the view of the court below in regard to the effect of the bond. [4] Willex Plastic says that in any event it cannot be proceeded against without first exhausting all property of Inter-Resin Industrial. Willex Plastic thus claims the benefit of excussion. The Civil Code provides, however: Art. 2059. This excussion shall not take place: (1) If the guarantor has expressly renounced it; (2) If he has bound himself solidarily with the debtor; xxx
xxx
xxx
The pertinent portion of the “Continuing Guaranty” executed by Willex Plastic and InterResin Industrial in favor of IUCP (now Interbank) reads: If default be made in the payment of the NOTE/s herein guaranteed you and/or your principal/s may directly proceed against Me/Us without first proceeding against and exhausting DEBTOR/s properties in the same manner as if all such liabilities constituted My/Our direct and primary obligations. (italics supplied) This stipulation embodies an express renunciation of the right of excussion. In addition, Willex Plastic bound itself solidarily liable with Inter-Resin Industrial under the same agreement: For and in consideration of the sums obtained and/or to be obtained by INTER-RESIN INDUSTRIAL CORPORATION, hereinafter referred to as the DEBTOR/S, from you and/or your principal/s as may be evidenced by promissory note/s, checks, bills receivable/s and/or other evidence/s of indebtedness (hereinafter referred to as the NOTE/S), I/We hereby jointly and severally and unconditionally guarantee unto you and/ or your principal/s, successor/s and assigns the prompt and punctual payment at maturity of the NOTE/S issued by the DEBTOR/S in your and/or your principal/s, successor/s and assigns favor to the extent of the aggregate principal sum of FIVE MILLION PESOS (P5,000,000.00), Philippine Currency, and such interests, charges and penalties as may hereinafter he specified. [5] Finally it is contended that Inter-Resin Industrial had already paid its indebtedness to Interbank and that Willex Plastic should have been allowed by the Court of Appeals to adduce evidence to prove this. Suffice it to say that Inter-Resin Industrial had been given generous opportunity to present its evidence but it failed to make use of the same. On the other hand, Willex Plastic rested its case without presenting evidence. The reception of evidence of Inter-Resin Industrial was set on January 29, 1987, but because of its failure to appear on that date, the hearing was reset on March 12, 26 and April 2, 1987. On March 12, 1987 Inter-Resin Industrial again failed to appear. Upon motion of Willex Plastic, the hearings on March 12 and 26, 1987 were cancelled and “reset for the last time” on April 2 and 30, 1987. On April 2, 1987, Inter-Resin Industrial again failed to appear. Accordingly the trial court issued the following order: Considering that, as shown by the records, the Court had exerted every earnest effort to cause the service of notice or subpoena on the defendant Inter-Resin Industrial but to no avail, even with the assistance of the defendant Willex. . . the defendant Inter-Resin Industrial is hereby deemed to have waived the right to present its evidence. On the other hand, Willex Plastic announced it was resting its case without presenting any evidence. Upon motion of Inter-Resin Industrial, however, the trial court reconsidered its order and set the hearing anew on July 23, 1987. But Inter-Resin Industrial again moved for the postponement of the hearing to August 11, 1987. The hearing was, therefore, reset on
September 8 and 22, 1987 but the hearings were reset on October 13,1987, this time upon motion of Interbank. To give Interbank time to comment on a motion filed by Inter-Resin Industrial, the reception of evidence for Inter-Resin Industrial was again reset on November 17, 26 and December 11, 1987. However, Inter-Resin Industrial again moved for the postponement of the hearing. Accordingly, the hearing was reset on November 26 and December 11, 1987, with warning that the hearings were intransferrable. Again, the reception of evidence for Inter-Resin Industrial was reset on January 22, 1988 and February 5, 1988 upon motion of its counsel. As Inter-Resin Industrial still failed to present its evidence, it was declared to have waived its evidence. To give Inter-Resin Industrial a last opportunity to present its evidence, however, the hearing was postponed to March 4, 1988. Again Inter-Resin Industrial’s counsel did not appear. The trial court, therefore, finally declared Inter-Resin Industrial to have waived the right to present its evidence. On the other hand, Willex Plastic, as before, manifested that it was not presenting evidence and requested instead for time to file a memorandum. There is therefore no basis for the plea made by Willex Plastic that it be given the opportunity of showing that Inter-Resin Industrial has already paid its obligation to Interbank. WHEREFORE, the decision of the Court of Appeals is AFFIRMED, with costs against the petitioner. SO ORDERED. Regalado (Chairman), Romero, Puno, and Torres, Jr., JJ., concur.
Republic of the Philippines SUPREME COURT Manila SECOND DIVISION
G.R. No. 107062 February 21, 1994 PHILIPPINE PRYCE ASSURANCE CORPORATION, petitioner, vs. THE COURT OF APPEALS, (Fourteenth Division) and GEGROCO, INC., respondents. Ocampo, Dizon & Domingo and Rey Nathaniel C. Ifurung for petitioner. A.M. Sison, Jr. & Associates for private respondent.
NOCON, J.:
Two purely technical, yet mandatory, rules of procedure frustrated petitioner's bid to get a favorable decision from the Regional Trial Court and then again in the Court of Appeals. 1 These are non-appearance during the pre-trial despite due notice, and nonpayment of docket fees upon filing of its third-party complaint. Just how strict should these rules be applied is a crucial issue in this present dispute. Petitioner, Interworld Assurance Corporation (the company now carries the corporate name Philippine Pryce Assurance Corporation), was the butt of the complaint for collection of sum of money, filed on May 13, 1988 by respondent, Gegroco, Inc. before the Makati Regional Trial Court, Branch 138. The complaint alleged that petitioner issued two surety bonds (No. 0029, dated July 24, 1987 and No. 0037, dated October 7, 1987) in behalf of its principal Sagum General Merchandise for FIVE HUNDRED THOUSAND (P500,000.00) PESOS and ONE MILLION (1,000,000.00) PESOS, respectively. On June 16, 1988, summons, together with the copy of the complaint, was served on petitioner. Within the reglementary period, two successive motions were filed by petitioner praying for a total of thirty (30) days extention within which to file a responsible pleading. In its Answer, dated July 29, 1988, but filed only on August 4, 1988, petitioner admitted having executed the said bonds, but denied liability because allegedly 1) the checks which were to pay for the premiums bounced and were dishonored hence there is no contract to speak of between petitioner and its supposed principal; and 2) that the bonds were merely to guarantee payment of its principal's obligation, thus, excussion is necessary. After the issues had been joined, the case was set for pre-trial conference on September 29, 1988. the petitioner received its notice on September 9, 1988, while the notice addressed to its counsel was returned to the trial court with the notation "Return to Sender, Unclaimed." 2 On the scheduled date for pre-trial conference, only the counsel for petitioner appeared while both the representative of respondent and its counsel were present. The counsel for petitioner manifested that he was unable to contract the Vice-President for operations of petitioner, although his client intended to file a third party complaint against its principal. Hence, the pre-trial was re-set to October 14, 1988. 3 On October 14, 1988, petitioner filed a "Motion with Leave to Admit Third-Party Complaint" with the Third-Party Complaint attached. On this same day, in the presence of the representative for both petitioner and respondent and their counsel, the pre-trial conference was re-set to December 1, 1988. Meanwhile on November 29, 1988, the court admitted the Third Party Complaint and ordered service of summons on third party defendants. 4 On scheduled conference in December, petitioner and its counsel did not appear notwithstanding their notice in open court. 5 The pre-trial was nevertheless re-set to February 1, 1989. However, when the case was called for pre-trial conference on February 1, 1989, petitioner was again nor presented by its officer or its counsel, despite being duly notified. Hence, upon motion of respondent, petitioner was considered as in default and respondent was allowed to present evidenceex-parte, which was calendared on February 24, 1989. 6 Petitioner received a copy of the Order of Default and a copy of the Order setting the reception of respondent's evidence ex-parte, both dated February 1, 1989, on February 16, 1989. 7 On March 6, 1989, a decision was rendered by the trial court, the dispositive portion reads:
WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the defendant Interworld Assurance Corporation to pay the amount of P1,500,000.00 representing the principal of the amount due, plus legal interest thereon from April 7, 1988, until date of payment; and P20,000.00 as and for attorney's fees. 8 Petitioner's "Motion for Reconsideration and New Trial" dated April 17, 1989, having been denied it elevated its case to the Court of Appeals which however, affirmed the decision of the trial court as well as the latter's order denying petitioner's motion for reconsideration. Before us, petitioner assigns as errors the following: I. The respondent Court of Appeals gravely erred in declaring that the case was already ripe for pre-trial conference when the trial court set it for the holding thereof. II. The respondent Court of Appeals gravely erred in affirming the decision of the trial court by relying on the ruling laid down by this Honorable Court in the case of Manchester Development Corporation v. Court of Appeals, 149 SCRA 562, and disregarding the doctrine laid down in the case of Sun Insurance Office, Ltd. (SIOL) v. Asuncion, 170 SCRA 274. III. The respondent Court of Appeals gravely erred in declaring that it would be useless and a waste of time to remand the case for further proceedings as defendant-appellant has no meritorious defense. We do not find any reversible error in the conclusion reached by the court a quo. Relying on Section 1, Rule 20 of the Rules of court, petitioner argues that since the last pleading, which was supposed to be the third-party defendant's answer has not been filed, the case is not yet ripe for pre-trial. This argument must fail on three points. First, the trial court asserted, and we agree, that no answer to the third party complaint is forthcoming as petitioner never initiated the service of summons on the third party defendant. The court further said: . . . Defendant's claim that it was not aware of the Order admitting the thirdparty complaint is preposterous. Sec. 8, Rule 13 of the Rules, provides: Completeness of service — . . . Service by registered mail is complete upon actual receipt by the addressee, but if he fails to claim his mail from the post office within five (5) days from the date of first notice of the postmaster, service shall take effect at the expiration of such time. 9 Moreover, we observed that all copies of notices and orders issued by the court for petitioner's counsel were returned with the notation "Return to Sender, Unclaimed." Yet when he chose to, he would appear in court despite supposed lack of notice. Second, in the regular course of events, the third-party defendant's answer would have been regarded as the last pleading referred to in Sec. 1, Rule 20. However, petitioner cannot just
disregard the court's order to be present during the pre-trial and give a flimsy excuse, such as that the answer has yet to be filed. The pre-trial is mandatory in any action, the main objective being to simplify, abbreviate and expedite trial, if not to fully dispense with it. Hence, consistent with its mandatory character the Rules oblige not only the lawyers but the parties as well to appear for this purpose before the Court 10 and when a party fails to appear at a pre-trial conference he may be nonsuited or considered as in default. 11 Records show that even at the very start, petitioner could have been declared as in default since it was not properly presented during the first scheduled pre-trial on September 29, 1988. Nothing in the record is attached which would show that petitioner's counsel had a special authority to act in behalf of his client other than as its lawyer. We have said that in those instances where a party may not himself be present at the pretrial, and another person substitutes for him, or his lawyer undertakes to appear not only as an attorney but in substitution of the client's person, it is imperative for that representative or the lawyer to have "special authority" to enter into agreements which otherwise only the client has the capacity to make. 12 Third, the court of Appeals properly considered the third-party complaint as a mere scrap of paper due to petitioner's failure to pay the requisite docket fees. Said the court a quo: A third-party complaint is one of the pleadings for which Clerks of court of Regional Trial Courts are mandated to collect docket fees pursuant to Section 5, Rule 141 of the Rules of Court. The record is bereft of any showing tha(t) the appellant paid the corresponding docket fees on its third-party complaint. Unless and until the corresponding docket fees are paid, the trial court would not acquire jurisdiction over the third-party complaint (Manchester Development Corporation vs. Court of Appeals, 149 SCRA 562). The thirdparty complaint was thus reduced to a mere scrap of paper not worthy of the trial court's attention. Hence, the trial court can and correctly set the case for pre-trial on the basis of the complaint, the answer and the answer to the counterclaim. 13 It is really irrelevant in the instant case whether the ruling in Sun Insurance Office, Ltd. (SIOL) v. Asuncion 14 or that in Manchester Development Corp. v. C.A. 15 was applied. Sun Insurance and Manchester are mere reiteration of old jurisprudential pronouncements on the effect of non-payment of docket fees. 16 In previous cases, we have consistently ruled that the court cannot acquire jurisdiction over the subject matter of a case, unless the docket fees are paid. Moreover, the principle laid down in Manchester could have very well been applied in Sun Insurance. We then said: The principle in Manchester [Manchester Development Corp. v. C.A., 149 SCRA 562 (1987)] could very well be applied in the present case. The pattern and the intent to defraud the government of the docket fee due it is obvious not only in the filing of the original complaint but also in the filing of the second amended complaint.
xxx xxx xxx In the present case, a more liberal interpretation of the rules is called for considering that, unlike Manchester, private respondent demonstrated his willingness to abide by the rules by paying the additional docket fees as required. The promulgation of the decision in Manchester must have had that sobering influence on private respondent who thus paid the additional docket fee as ordered by the respondent court. It triggered his change of stance by manifesting his willingness to pay such additional docket fees as may be ordered. 17 Thus, we laid down the rules as follows: 1. It is not simply the filing of the complaint or appropriate initiatory pleading, but the payment of the prescribed docket fee, that vests a trial court with jurisdiction over the subject-matter or nature of the action. Where the filing of the initiatory pleading is not accompanied by payment of the docket fee, the court may allow payment of the fee within a reasonable time, but in no case beyond the applicable prescriptive or reglamentary period. 2. The same rule applies to permissive counterclaims, third-party claims and similar pleadings, which shall not be considered filed until and unless the filing fee prescribed therefor is paid. The court may also allow payment of said fee within a prescriptive or reglementary period. 3. Where the trial court acquires jurisdiction over a claim by the filing of the appropriate pleading and payment of the prescribed filing fee, but subsequently, the judgment awards a claim nor specified in the pleading, or if specified the same has not been left for determination by the court, the additional filing fee therefor shall constitute a lien on the judgment. It shall be the responsibility of the clerk of court or his duly authorized deputy to enforce said lien and assess and collect the additional fee. 18 It should be remembered that both in Manchester and Sun Insurance plaintiffs therein paid docket fees upon filing of their respective pleadings, although the amount tendered were found to be insufficient considering the amounts of the reliefs sought in their complaints. In the present case, petitioner did not and never attempted to pay the requisite docket fee. Neither is there any showing that petitioner even manifested to be given time to pay the requisite docket fee, as in fact it was not present during the scheduled pre-trial on December 1, 1988 and then again on February 1, 1989. Perforce, it is as if the third-party complaint was never filed. Finally, there is reason to believe that partitioner does not really have a good defense. Petitioner hinges its defense on two arguments, namely: a) that the checks issued by its principal which were supposed to pay for the premiums, bounced, hence there is no contract of surety to speak of; and 2) that as early as 1986 and covering the time of the Surety Bond, Interworld Assurance Company (now Phil. Pryce) was not yet authorized by the insurance Commission to issue such bonds.
The Insurance Code states that: Sec. 177. The surety is entitled to payment of the premium as soon as the contract of suretyship or bond is perfected and delivered to the obligor. No contract of suretyship or bonding shall be valid and binding unless and until the premium therefor has been paid, except where the obligee has accepted the bond, in which case the bond becomes valid and enforceable irrespective of whether or not the premium has been paid by the obligor to the surety. . . . (emphasis added) The above provision outrightly negates petitioner's first defense. In a desperate attempt to escape liability, petitioner further asserts that the above provision is not applicable because the respondent allegedly had not accepted the surety bond, hence could not have delivered the goods to Sagum Enterprises. This statement clearly intends to muddle the facts as found by the trial court and which are on record. In the first place, petitioner, in its answer, admitted to have issued the bonds subject matter of the original action. 19Secondly, the testimony of Mr. Leonardo T. Guzman, witness for the respondent, reveals the following: Q. What are the conditions and terms of sales you extended to Sagum General Merchandise? A. First, we required him to submit to us Surety Bond to guaranty payment of the spare parts to be purchased. Then we sell to them on 90 days credit. Also, we required them to issue post-dated checks. Q. Did Sagum General merchandise comply with your surety bond requirement? A. Yes. They submitted to us and which we have accepted two surety bonds. Q Will you please present to us the aforesaid surety bonds? A. Interworld Assurance Corp. Surety Bond No. 0029 for P500,000 dated July 24, 1987 and Interworld Assurance Corp. Surety Bond No. 0037 for P1,000.000 dated October 7, 1987. 20 Likewise attached to the record are exhibits C to C-18 21 consisting of delivery invoices addressed to Sagum General Merchandise proving that parts were purchased, delivered and received. On the other hand, petitioner's defense that it did not have authority to issue a Surety Bond when it did is an admission of fraud committed against respondent. No person can claim benefit from the wrong he himself committed. A representation made is rendered conclusive upon the person making it and cannot be denied or disproved as against the person relying thereon. 22
WHEREFORE, in view of the foregoing, the decision of the Court of Appeals dismissing the petition before them and affirming the decision of the trial court and its order denying petitioner's Motion for Reconsideration are hereby AFFIRMED. The present petition is DISMISSED for lack of merit. SO ORDERED. Narvasa, C.J., Padilla, Regalado and Puno, JJ., concur.
SECOND DIVISION [G.R. No. 95921. September 2, 1992.] SPOUSES ROBERT DINO and CRISTINA DINO, Petitioners, v. COURT OF APPEALS, CONSORCIA SOMBRIO and SPOUSES FROILAN PERNITO and PROSERFINA PERNITO,Respondents. SYLLABUS 1. CIVIL LAW; LAND REGISTRATION; LIS PENDENS; MAY LIE ONLY WHERE THERE IS AN ACTION IN COURT AFFECTING REAL PROPERTY; TO AFFECT THE RIGHT OF A SUBSEQUENT PURCHASER, NOTICE OF LIS PENDENS SHOULD BE ANNOTATED ON THE BACK OF THE CERTIFICATE OF TITLE. — Lis pendens may lie only where there is an action or proceeding in court, which affects title to, or possession of real property. In other words, lis pendens is the jurisdiction, power, or control which the court acquires over the property involved in the suit pending the continuance of the action; and until its final judgment therein, it has for its object the keeping of the subject or res within the power of the court until the judgment or decree shall be entered, to make it possible for courts of justice to give effect to their judgments and decrees. This, in effect, is the essence of the rule of lis pendens. When a case is commenced involving any right to land registered under the Land Registration Law, any decision therein will bind the parties only, unless a notice of the pendency of such action is registered on the title of the said land, in order to bind the whole world as well. Therefore, in order that a notice of lis pendens may affect the right of a subsequent purchaser, such notice should be annotated on the back of the certificate of title, which is not present in the case at bar. 2. INNOCENT PURCHASER HAS THE RIGHT TO RELY ON WHAT APPEARS IN THE CERTIFICATE AND HAS NO OBLIGATION TO LOOK BEYOND IT. — Where the certificate of title was already in the name of the forger when the land was sold to an innocent purchaser, the vendee had the right to rely on what appeared in the certificate and. in the absence of anything to excite suspicion, was under no obligation to look beyond the certificate and investigate the title of the vendor appearing on the face of said certificate. 3. REGISTRATION UNDER THE TORRENS SYSTEM IS THE OPERATIVE ACT THAT GIVES VALIDITY TO THE TRANSFER OR CREATION OF A LIEN UPON THE LAND; REGISTRATION
EXTINGUISHES ALL CLAIMS, LIENS AND ENCUMBRANCES ASSERTED PRIOR TO IT; EXCEPTION. — Under the Torrens system, registration is the operative act that gives validity to the transfer or creates a lien upon the land. A person dealing with registered land is not required to go behind the register to determine the condition of the property. He is only charged with notice of the burdens on the property which are noted on the face of the register or the certificate of title. To require him to do more is to defeat one of the primary objects of the Torrens System. Moreover, registration of land under the Torrens system extinguishes all claims, liens and encumbrances asserted prior to registration except statutory liens and those noted in the certificate of title. 4. PETITIONERS, WHILE INDISPENSABLE PARTIES IN CIVIL CASE NO. R-18073, ARE NOT BOUND BY THE DECISION IN SAID CASE; REASON; IMPLEADING THEM AS ADDITIONAL DEFENDANTS ONLY IN THE EXECUTION STAGE OF SAID CASE VIOLATES THEIR RIGHTS TO DUE PROCESS. — As the registered owner of the subject property, petitioners are not bound by the decision in Civil Case No. R-18073 for they were never summoned in said case and the notice of lis pendens annotated on TCT No. 73069 was already cancelled at the time petitioners purchased the subject property. While it is true that petitioners are indispensable parties in Civil Case No. R-18073, without whom no complete relief could be accorded to the private respondents, the fact still remains that petitioners were never actually joined as defendants in said case. Impleading petitioners as additional defendants only in the execution stage of said case violated petitioners’ right to due process as no notice of lis pendens was annotated on the existing certificate of title of said property nor were petitioners given notice of the pending case, therefore petitioners remain strangers in said case and the Order of the trial court involving them is null and void, considering that petitioners are innocent purchasers of the subject property for value. DECISION NOCON, J.: This is a petition to review on certiorari the decision 1 dated August 6, 1990 of the Court of Appeals affirming the decision of the trial court 2 in ordering the Register of Deeds of Cebu City to cancel TCT No. 87156 which emanated from TCT No. 73069 and to reinstate TCT No. 67441 in the name of the late Consorcia Sombrio or issue another one in lieu of the old one, as well as the resolution dated October 24, 1990 denying petitioners’ motion for reconsideration of the appealed decision.chanrobles virtual lawlibrary The facts as found by the trial court are as follows:chanrob1es virtual 1aw library On December 21, 1978, Consorcia Sombrio, an old and illiterate lady who is the registered owner of a parcel of land and its improvements covered by TCT No. 67441 located at 15 F. Gochan Street, Mabolo, Cebu City containing an area of 1,008 square meters, more or less, was made to sign a document by Maria Ching purportedly to be a letter authorizing the latter to sell said property to Benedicto. However, said document turned out to be a Deed of Sale of said property in favor of Maria Ching. 3 Consequently, TCT No. 67441 was cancelled and TCT No. 87156 was issued in the name of Maria Ching. 4 Upon Sombrio’s discovery of said fraud, she filed, on May 11, 1979, an action against Maria Ching and notary public Ciriaco Alcazar, who notarized said document without the presence of Sombrio, with the Regional Trial Court of Cebu City, Branch IV in Civil Case No. R-18073 for the annulment of the sale and the cancellation of TCT No. 87156 alleging that Maria Ching through fraudulent representations and without any consideration tricked and deceived
Sombrio into signing said Deed of Sale. Thereafter, Maria Ching mortgaged said property to petitioners spouses Robert and Cristina Dino with the notice of lis pendens annotated on the TCT No. 87156 as evidenced by Entry No. 2814-V-19-D.B. on said TCT. 5 On July 22, 1981, a decision based on a compromise agreement executed between Sombrio and Maria Ching was rendered, to wit:jgc:chanrobles.com.ph "A Compromise Agreement, duly signed by the parties, plaintiff, assisted by counsel, and defendants likewise assisted by their counsel, has been submitted to this Court with a prayer that the same be approved and that judgment he rendered in accordance with the terms and conditions thereof. The said agreement reads:chanrob1es virtual 1aw library ‘COMPROMISE AGREEMENT With the assistance of counsel, this Compromise Agreement, involving the above-entitled case, made and entered at Cebu City, Philippines, this 23rd day of June, 1981 by and between plaintiff and the defendants above-named, WITNESSETH:chanrob1es virtual 1aw library 1. That plaintiff, Consorcia Vda. de Sombrio, makes known that she has not caused the filing of the above-entitled case, the truth being that she was influenced, forced, coerced, manhandled and intimidated to sign the complaint by one Froilan Pernito who is interested in the land subject-matter of this suit; the occupancy of Froilan Pernito is merely tolerated whose right, if any, is subordinate to that of defendant Maria Buracan Ching;chanrobles law library : red 2. That right from the start or commencement of this suit, plaintiff has never engaged the services of counsel; it was Froilan Pernito who secured, shouldered and paid the services of counsel in the prosecution of the above-entitled case; just recently, without authority and consent from the plaintiff, the said Froilan Pernito has engaged the services of new counsel, Atty. Jose Batiquin, who is not personally known to the plaintiff; 3. That apart from the reason stated, supra, plaintiff hereby declares voluntarily and upon her own free will, without any mental reservation, that the deed of absolute sale dated December 2l, 1978, involving the land subject matter of this suit executed by and between her and Maria B. Ching, notarized by Ciriaco Alcazar per document No. 884, Page No. 44, Book III, Series of 1978 is regular and valid and was executed for a consideration in the amount of ONE HUNDRED THOUSAND (P100,000.00) PESOS, receipt of which was acknowledged at the time of the execution of that presents and that she was not deceived nor fraudulently induced and unlawfully influenced into signing the aforesaid deed of sale; for which reason, she freely and voluntarily DESIST from further prosecuting the aboveentitled case; 4. That plaintiff is turning over the physical or actual possession of the land in question, together with all the improvements found therein, to the defendant Maria B. Ching, entitling the latter to such writ of possession as may be necessary against parties, like Froilan Pernito, whose possession is illegal and unauthorized; 5. That defendants, on the other hand, hereby waive their right to proceed with their counterclaims against plaintiff. WHEREFORE, it is most respectfully prayed that the foregoing compromise agreement be
approved and that judgment be rendered in accordance therewith. Cebu City, Philippines, June 23, 1981 (Sgd.) CONSORCIA VDA. DE SOMBRIO Plaintiff (Sgd.) MARIA B. CHING Defendant Assisted by:chanrob1es virtual 1aw library (Sgd.) EXEQUIL L. RUBI Atty. Pablo Badong & Associates Counsel for the plaintiff counsel for defendants, By: (SGD.) MIGUEL R. ZOSA SIGNED IN THE PRESENCE OF:chanrob1es virtual 1aw library (Sgd.) CORAZON PANTINO (Sgd.) REMEDIOS SOLON Finding the Compromise Agreement quoted above to be not contrary to law, public order, public policy, morals or good customs, the same is hereby approved, and judgment is hereby rendered in accordance therewith, without pronouncement as to costs. Strict compliance with the said Compromise Agreement is hereby enjoined." 6 From said decision, Maria Ching went to the Register of Deeds of Cebu City to cancel the notice of lis pendens as evidenced by Entry No. 6008-21-D.B. dated July 27, 1981. 7 On the other hand, Sombrio appealed said decision to the Court of Appeals alleging that the Compromise Agreement was done under dubious circumstances since she was kidnapped and released only after said Compromise Agreement had been signed by her. Moreover, Atty. Jose Batiquin who was Sombrio’s counsel of record was substituted by another counsel, Atty. Exequil Rubi who was a partner of Maria Ching’s lawyer, in said Compromise Agreement.cralawnad In the meantime, on May 30, 1983, while said appeal was still pending with the appellate court, Maria Ching sold to the petitioners the subject property free from any written notice of liens or encumbrances. Thereafter, TCT No. 73069 was cancelled and a new one. TCT No. 87156, was issued in the name of the petitioners by the Register of Deeds of Cebu City. Since then, petitioners have been in continuous and peaceful possession of the subject property which they turned into a clinic and center of autistic and behaviorally handicapped children. On February 7, 1989, the Court of Appeals rendered its decision, the dispositve portion of which reads:jgc:chanrobles.com.ph "WHEREFORE, the decision approving the compromise agreement is hereby set aside and another one is rendered annulling the deed of sale of December 21, 1978 and cancelling
Transfer Certificate of Title No. 73069 of the Registry of Deeds of Cebu in the name of defendant-appellant and ordering the Register of Deeds of Cebu to reinstate Transfer Certificate of Title No. 67441 in the name of plaintiff-appellant or to issue another one in the name of said plaintiff-appellant in lieu of the old one. No pronouncement as to damages and costs." 8 On March 2, 1989, said decision became final and executory. When the records were remanded to the trial court, Sombrio filed a Motion for Execution on July 18, 1989. On July 19, 1989, the trial court ordered the issuance of a writ of execution. However, when the Deputy Provincial Sheriff went to the Register of Deeds of Cebu City to execute said writ, the latter informed the former that TCT No. 73069 was already cancelled and transferred to petitioner Dino who was not a party in Civil Case No. R-18073. On July 22, 1989, Sombrio filed a motion for the issuance of a writ of possession which was granted in an Order dated July 24, 1989, the pertinent portion of which reads:cralawnad "Finding the motion to be in order, the same is hereby granted and accordingly, the Register of Deeds for Cebu City is ordered to implement within three (3) days from receipt hereof, the said judgment of the Honorable Court of Appeals. Let a writ of Possession issue directing the Provincial Sheriff or his duly authorized representative to place plaintiff Consorcia Sombrio in actual, physical and peaceful possession of a parcel of land and the improvements thereon covered by Transfer Certificate of Title No. 67441, Lot No. 1, Block 7 of the Consolidation and Subdivision Plan Pcs-326, being a part of the Consolidation Lots Nos. 675 and 1424 of Banilad Friar Estate GLRO Record 5988 situated in Cebu City, and containing an area of ONE THOUSAND AND EIGHT (1,008) SQUARE METERS."cralaw virtua1aw library On July 26, 1989, the trial court issued a writ of possession directing the provincial sheriff of Cebu City to place Consorcia Sombrio in actual physical possession of the subject property and its improvement. 9 Upon receipt of said writ, the Register of Deeds, on July 27, 1989, filed with the trial court a motion for the issuance of an Order directing the Register of Deeds of Cebu City to perform his duty consistent with his ministerial function while petitioners, on July 31, 1989, filed with said court an Extremely Urgent Motion to Quash Writ of Possession together with an Affidavit of Third-Party claims. 10 On August 8, 1989, private respondents spouses Froilan and Proserfina Pernito filed their comments on petitioners’ Motion to Quash Writ of Execution. Said private respondents entered their appearance for the first time in Civil Case No. R-18073 claiming to be the successors-in-interest of the late Consorcia Sombrio pursuant to a Deed of Sale executed between private respondents and Sombrio during the pendency of this case, 11 to which petitioners filed its Rejoinder on August 11, 1989. 12 Acting on said motions, the trial court issued an Order dated August 17, 1989, the dispositive portion of which reads:jgc:chanrobles.com.ph "WHEREFORE, for all the foregoing considerations, the motion of spouses Robert and Cristina Dino is denied. The Register of Deeds of Cebu City is directed to follow and implement the final judgment of the Court of Appeals by cancelling Transfer Certificate of Title No. 73069 and Transfer Certificate of Title No. 87156 emanating therefrom and reinstate Transfer Certificate of Title No. 67441 in the name of plaintiff-appellant Consorcia Sombrio or issue another one in her name in lieu of the old one by annotating therein ‘issued pursuant to a
final judgment rendered by the Court of Appeals in CA-G.R. CV No. 04725, entitled Consorcia Sombrio v. Maria Buracan Ching, Et. Al. dated February 7, 1989.’" 13 From said Order, Petitioners filed their Motion for Reconsideration which was denied on September 30, 1989.chanrobles virtual lawlibrary On October 18, 1989, the trial court issued the following Order:jgc:chanrobles.com.ph "Deputy Sheriffs Rene Natividad and Jessie Belarmino in their manifestation dated October 10, 1989 declared that in compliance with their appointment as special sheriffs dated July 28, 1989, they implemented the writ of execution issued in this case but withheld delivery of possession until the rightful possessor shall have been determined on account of the fact that plaintiff Consorcia Sombrio is already deceased. The Deputy Sheriffs found themselves in a quandary as to whom to deliver the possession of the property because they received a letter dated October 4, 1989 sent by Atty. Manuelito Inso, counsel for Spouses Roberto Dino and Cristina Dino, claiming ownership of the subject property. This matter is already settled in the Order dated September 30, 1989. Spouses Froilan Pernito and Proserfina Pernito on record appear as the successors-in-interest of the deceased Consorcia Sombrio pursuant to the memorandum of agreement for the sale of said land executed on April 23, 1979 marked as Annex ‘B’ in the Sheriff’s report dated August 1, 1989. The record shows that so far no heir or successor-in-interest of the deceased Consorcia Sombrio appeared to claim possession over the property except the herein spouses Froilan Pernito and Proserfina Pernito. IN VIEW THEREOF, the above-mentioned Deputy Sheriffs are directed to deliver the property subject of the writ of execution in favor of spouses Froilan Pernito and Proserfina Pernito who are the present claimants or successor-in-interest of Consorcia Sombrio until they are lawfully dispossessed by other rightful claimant or successor-in-interest with a better right." 14 On October 23, 1989, petitioners filed with the Court of Appeals a Petition for Certiorari, Prohibition and Mandamus which was denied on August 6, 1990. Petitioners’ Motion for Reconsideration was, likewise, denied on October 24, 1990. Hence, this petition. Petitioners contend that the Court of Appeals acted with grave abuse of discretion when it ordered the cancellation of petitioners’ Transfer Certificate of Title of the subject property considering that they are not privies to Civil Case No. R-18073 and to consider them privies to the same would outrightly deny petitioners their right to due process. Petitioners also contend that they had acquired the subject property in good faith and for value because the notice of lis pendens was already cancelled at the time the Deed of Sale was executed therefore they are innocent holder for value of a certificate of title. We find the petition meritorious.chanrobles virtual lawlibrary Section 76 of P.D. 1529 provides that:jgc:chanrobles.com.ph "SEC. 76. Notice of lis pendens. — No action to recover possession of real estate, or to quiet title thereto, or to remove clouds upon the title thereof, or for partition, or other proceedings of any kind in court directly affecting the title to land or the use or occupation thereof or the buildings thereon, and no judgment, and no proceeding to vacate or reverse any judgment, shall have any affect upon registered land as against persons other than the parties thereto, unless a memorandum or notice stating the institution of such action or proceeding and the
court wherein the same is pending, as well as the date of the institution thereof, together with a reference to the number of the certificate of title, and an adequate description of the land affected and the registered owner thereof, shall have been filed and registered."cralaw virtua1aw library Under said law, lis pendens may lie only where there is an action or proceeding in court, which affects title to, or possession of real property. In other words, lis pendens is the jurisdiction, power, or control which the court acquires over the property involved in the suit pending the continuance of the action; and until its final judgment therein, it has for its object the keeping of the subject or res within the power of the court until the judgment or decree shall be entered, to make it possible for courts of justice to give effect to their judgments and decrees. 15 This, in effect, is the essence of the rule of lis pendens. When a case is commenced involving any right to land registered under the Land Registration Law, any decision therein will bind the parties only, unless a notice of the pendency of such action is registered on the title of the said land, in order to bind the whole world as well. Therefore, in order that a notice of lis pendens may affect the right of a subsequent purchaser, such notice should be annotated on the back of the certificate of title, which is not present in the case at bar. The appellate court acted without jurisdiction when it ordered the cancellation of petitioners’ title as the judgment which was rendered in Civil Case No. R-18073 and affirmed by the Court of Appeals on February 7, 1989 did not bind petitioners because at the time petitioners purchased the subject property, the vendor’s (Maria Ching) title to said property was clean and free from any lien and encumbrance since the notice of lis pendens which was annotated on said title or certificate had already been cancelled for more than a year. Where the certificate of title was already in the name of the forger when the land was sold to an innocent purchaser, the vendee had the right to rely on what appeared in the certificate and. in the absence of anything to excite suspicion, was under no obligation to look beyond the certificate and investigate the title of the vendor appearing on the face of said certificate. 16 Under the Torrens system, registration is the operative act that gives validity to the transfer or creates a lien upon the land. A person dealing with registered land is not required to go behind the register to determine the condition of the property. He is only charged with notice of the burdens on the property which are noted on the face of the register or the certificate of title. To require him to do more is to defeat one of the primary objects of the Torrens system. 17 Moreover, registration of land under the Torrens system extinguishes all claims, liens and encumbrances asserted prior to registration except statutory liens and those noted in the certificate of title. 18 As the registered owner of the subject property, petitioners are not bound by the decision in Civil Case No. R-18073 for they were never summoned in said case and the notice of lis pendens annotated on TCT No. 73069 was already cancelled at the time petitioners purchased the subject property. While it is true that petitioners are indispensable parties in Civil Case No. R-18073, without whom no complete relief could be accorded to the private respondents, the fact still remains that petitioners were never actually joined as defendants in said case. Impleading petitioners as additional defendants only in the execution stage of said case violated petitioners’ right to due process as no notice of lis pendens was annotated on the existing certificate of title of said property nor were petitioners given notice of the pending case, therefore petitioners remain strangers in said case and the Order of the trial court involving them is null and void, considering that petitioners are innocent purchasers of the subject property for value.chanroblesvirtualawlibrary Private respondents’ remedy is to file a claim for damages against Maria Ching to recover the consideration for said property.
WHEREFORE, the decision dated August 6, 1990 of the Court of Appeals and the resolution dated October 24, 1990 are annulled and set aside. TCT No. 87156 in the name of petitioners are hereby reinstated. Costs de officio. SO ORDERED. Narvasa, C.J., Padilla and Regalado, JJ., concur. Melo, J., took no part. Republic of the Philippines SUPREME COURT Manila THIRD DIVISION G.R. No. L-42449 July 5, 1989 C & C COMMERCIAL CORPORATION and CLARA REYES PASTOR and other STOCKHOLDERS OF C & C COMMERCIAL CORPORATION similarly situated, petitioners, vs. PHILIPPINE NATIONAL BANK, NATIONAL INVESTMENT DEVELOPMENT CORPORATION, PROVINCIAL SHERIFF OF RIZAL, CITY SHERIFF OF MANILA and THE HON. JUDGE AUGUSTO VALENCIA, Presiding Judge, Quezon City Branch XXXI, Court of Instance of Rizal, respondents. Raymundo A. Armovit for petitioners. Arcilla & Atencio for petitioner-movant Reyes-Pastor. Domingo A. Santiago, Jr., Tomas N. Prado and Manuel S. Abedo for respondent PNB. Rolando P. De Cuesta, Cecilio G. Parco and Gaudencio A. Palafox for respondent NIDC. CORTES, J.: The applicability to the case at bar of Presidential Decree No. 385, dated January 31, 1974, prohibiting the issuance of injunctions against foreclosure sales sought by government financial institutions is the principal problem that needs to be resolved in the instant special civil action for certiorari. The controversy now before this Court traces its roots to the period between February 27, 1957 and December 20, 1960 when petitioner C & C Commercial Corporation (now Asbestos Cements Products Phil. Inc., hereinafter referred to as ACPPI) opened seven letters of credit with the respondent Philippine National Bank (hereinafter referred to as PNB) to import machines and equipment for its plant. Since petitioner's obligations under the said letters of credit totalling five million four hundred fifty-one thousand eight hundred fifty-one pesos and eighty-three centavos (P5,451,851.83) as of January 31, 1968 were not paid, PNB instituted on March 13, 1968 a collection suit with a prayer for preliminary attachment against ACPPI,
impleading Clara Reyes Pastor as party defendant in her capacity as joint and solidary debtor and controlling stockholder. However, instead of proceeding with the collection suit, PNB agreed, at the behest of Mrs. Pastor, as majority stockholder of ACPPI, to enter into a Voting Trust Agreement on March 5, 1969 to protect PNB's interests in ACPPI. The collection suit was therefore dismissed without prejudice. Private respondents, PNB and its subsidiary or affiliate, the National Investment Development Corporation (hereinafter referred to as NIDC), as the trustees named under the said agreement, immediately proceeded to take over the management of ACPPI pursuant to the agreement which granted them "full authority, subject only to the limitations set by law and the other conditions set forth herein, to manage the affairs and the accounts and properties of C & C Commercial Corporation, Inc.; to choose its directors and key officers; to safeguard its interest and those of its creditors; and in general, to exercise all such powers and discharge such functions as inherently pertain to the ownership and/or management of such corporation" for a period of five (5) years from the date of its execution or up to March 1974 [Rollo, pp. 32-40]. During the time that the Voting Trust Agreement was in force, ACPPI executed a chattel mortgage dated September 6, 1971 over its personal properties in favor of NIDC as security for the loan of seven hundred thousand pesos (P700,000.00) granted by the latter to the former to finance the production of asbestos cement products and their exportation to Brunei and to repair/rehabilitate its plant building which had been damaged by typhoon "Yoling". On August 27,1973, the accounting firm of Sycip, Gorres and Velayo, after examining the management and operations of ACPPI for the first three years under the Voting Trust Agreement submitted a report finding that the PNB/NIDC management of ACPPI was a complete and disastrous failure. In view of this report, petitioners ACPPI (then C & C Commercial Corporation), Clara Reyes Pastor and other stockholders of ACPPI similarly situated filed a complaint on October 16, 1973 in the Quezon City Branch of the Court of First Instance of Rizal for the termination of the Voting Trust Agreement with a prayer for an award of damages in the sum of about twenty-seven million pesos (P 27 M) alleging, inter alia, that by reason of the grossly negligent or incompetent management of ACPPI by private respondents, the corporation suffered huge losses. In the aforesaid case, which was docketed as Civil Case No. Q-18176, ACPPI also sought as an ancillary remedy the appointment of a receiver. On November 27,1973, the respondents PNB and NIDC filed their answer to the complaint denying the charge of mismanagement and alleging that ACPPI's indebtedness to PNB had reached an amount of eleven million five hundred thirty-eight thousand twenty-nine pesos and sixty-three centavos (P11,538,029.63) as of August 31, 1973 excluding daily interest, and to NIDC, one million two hundred nineteen thousand nine hundred eighty-two pesos (Pl,219,982.00) as of April 15, 1973 excluding daily interest. On January 22,1974, the lower court issued an order appointing Bayani Barzaga as receiver. But subsequently, in an order dated November 13, 1974-pursuant to an agreement reached between ACPPI, PNB and NIDC to provide a mutually acceptable mechanism for management of ACPPI pending the settlement negotiations between them-the court a quo converted the one-man receivership of Barzaga into a joint receivership, with PNB-NIDC nominee Atty. Ricardo L. Sadac and ACPPI nominee Atty. Roberto L. Bautista assuming office as joint receivers together with Barzaga.
In the meantime, on December 19,1973, Development Bank of the Philippines (hereinafter referred to as DBP) executed a deed of assignment in favor of PNB whereby the former assigned to the latter its rights and interests under the promissory notes and deeds of real estate mortgages executed on May 16, 1960 and May 8, 1961 by ACPPI in favor of DBP for the principal amounts of four hundred ninety thousand pesos (P490,000.00) and seven hundred ninety-six thousand pesos (P796,000.00), respectively. On March 11, 1974, PNB filed with the Provincial Sheriff of Rizal a "PETITION FOR SALE UNDER ACT 3135 AS AMENDED". The foreclosure sale initiated by PNB was not only to recover on the allegedly defaulted secured loans of four hundred ninety thousand pesos (P 490,000.00) and seven hundred ninety-six thousand pesos (P796,000.00) assigned by DBP to PNB but also for: 1) the unsecured advances granted by PNB to ACPPI relating to the letters of credit opened sometime between 1957 and 1960; 2) the unsecured advances from PNB during the five-year period of the Voting Trust Agreement; and, 3) the interests, penalties and charges computed thereon during the same five-year period when PNB controlled and managed ACPPI. A foreclosure sale was thus sought to satisfy ACCPI's total indebtedness to PNB in the amount of fourteen million five hundred seventy-one thousand seven hundred thirty-six pesos and eighty-seven centavos (Pl4,571,736.87) as of January 31, 1974. ACPPI wrote a letter to the Board of Directors of PNB expressing its opposition to the contemplated extrajudicial foreclosure sale. In reply, PNB sent a letter agreeing to meet with ACPPI in settlement negotiations. However, ACPPI's proposals for the settlement of its accounts with PNB were rejected for not being economically feasible and so, PNB made a final demand for payment with a warning that unless full payment or other satisfactory arrangement was made, PNB would proceed with the scheduled auction sale of the mortgaged properties on September 30, 1975. On September 22,1975, Civil Case No. 22047, a suit for nullification of the extrajudicial foreclosure proceedings with prayer for a writ of injunction, was filed by ACPPI against PNB and the Provincial Sheriff of Rizal in the Pasig Branch of the Court of First Instance of Rizal, contesting PNB's foreclosure of the mortgage and the auction sale scheduled for September 30, 1975. Said court subsequently issued an order dated September 30, 1975 restraining the scheduled foreclosure sale and directing the maintenance of the status quo until further orders of the court. Meanwhile, NIDC foreclosed the chattel mortgage executed by ACPPI on September 6, 1971 and filed with the Sheriff of the City of Manila a petition for the auction sale of "all the finished products in inventory located at the MORTGAGOR's (ACPPI) plant at Barrio Napindan, Taguig, Rizal . . ." [Rollo, p. 165] in order to satisfy an alleged total indebtedness of ACPPI to NIDC amounting to one million eight hundred forty-five thousand one hundred nine pesos and twenty-two centavos (Pl,845,109.22). On October 3, 1975, ACPPI instituted with the same Pasig Branch of the Court of First Instance of Rizal Civil Case No. 22133 for the nullification of the extrajudicial foreclosure proceedings sought by NIDC scheduled for October 16,1975. The lower court also granted a temporary restraining order in the latter case. On December 17, 1975, on separate motions to dismiss filed by the respondents PNB and NIDC in Civil Cases Nos. 22047 and 22133, respectively, the Court of First Instance dismissed said civil cases in separate decisions but on the common ground that these cases violate the
procedural rule against splitting a single cause of action and also, that ACPPI, being under receivership, was without legal capacity to contest the foreclosures. On January 5, 1976, ACPPI moved for leave to file a supplemental complaint with a prayer for the issuance of a writ of preliminary injunction in Civil Case No. Q-18176, the action for termination of the Voting Trust Agreement, in order to submit for adjudication in the same proceeding and before said court the renewed threats by PNB and NIDC to effect the sale at public auction of the foreclosed properties. The lower court in an Order dated January 15,1976 admitted the supplemental complaint but denied the application for injunction on account of the provision of Presidential Decree No. 385 prohibiting the issuance of restraining orders and temporary or permanent injunctions against any government financial institution in any action taken by such institution in compliance with the mandatory foreclosure provided in said decree. Petitioners filed a motion for reconsideration of the order but the motion was denied. Hence, petitioners' recourse to this Court by way of a special civil action for certiorari with injunction, alleging grave abuse of discretion on the part of respondent Judge Augusto Valencia, Presiding Judge of the Court of First Instance of Rizal, Quezon City Branch XXXI, in issuing the aforementioned orders. In a resolution dated January 20, 1976, this Court resolved to issue a temporary restraining order to enjoin the sale by PNB and NIDC of the foreclosed properties scheduled on January 21 and 30, 1976. On October 7, 1976, petitioner-movant Clara Reyes Pastor filed in the instant case a Motion for Termination of Receivership with Alternative Motion for Substitution of Receiver. This Court however finds no legal basis for granting said motion as the receivership of ACPPI is not at all an issue in the instant case. Time and again, this Court has acknowledged that it possesses no authority to rule upon non-jurisdictional issues in a certiorari proceeding. Thus, "it is settled to the point of being elementary that the only question involved in certiorari is jurisdiction, either want of jurisdiction or excess thereof. . ." [F.S. Divinagracia AgroCommercial Inc. v. Court of Appeals, G.R. No. L- 47350, April 21, 1981, 104 SCRA 180, 191]. Besides, the said motion was premature. It must be noted that on September 25, 1975, petitioner ACPPI filed before the lower court an omnibus motion to annul the joint receivership, to which motion respondents filed their joint opposition on October 2, 1975. On October 8, 1975, the lower court issued an order denying petitioner's aforementioned omnibus motion. Petitioner moved to reconsider the said order and this motion is still awaiting resolution by the trial court. In view of the pendency of the aforesaid motion for reconsideration, it would be premature for this Court to act on the motion for termination of receivership filed before it. Petitioners should await resolution by the lower court of their omnibus motion to annul joint receivership before resorting to this Court. The crucial problem to be dealt with in this petition is whether the trial court's refusal to grant an injunction against the threatened foreclosure sales by PNB and NIDC constitutes grave abuse of judicial discretion amounting to lack or excess of jurisdiction.
The court a quo's basis for denying the injunction sought by ACPPI is P.D. 385 which makes it "mandatory for government financial institutions to foreclose the collaterals and/or securities for any loan, credit, accommodation and/or guarantees granted by them whenever the arrearages on such account, including accrued interest and other charges, amount to at least twenty percent (20%) of the total outstanding obligations, including interests and other charges, as appearing in the books of account and/or related records of the financial institution concerned". [Section 1, P.D. 385]. Pursuant to the aforesaid law: Sec. 2. No restraining order, temporary or permanent injunction shall be issued by the court against any government financial institution in any action taken by such institution in compliance with the mandatory foreclosure provided in Section I hereof, whether such restraining order, temporary or permanent injunction is sought by the borrower(s) or any third party or parties, except after due hearing in which it is established by the borrower and admitted by the government financial institution concerned that twenty percent (20%) of the outstanding arrearages had been paid after the filing of foreclosure proceedings .... [Emphasis supplied]. xxx Since the arrearages on the PNB and NIDC loans cover the entire amount of the indebtedness, thus more than satisfying the 20% arrearages requirement under the law, it would seem that this case falls within the purview of the general rule laid down in P.D. 385. Injunction will not be granted except upon payment of twenty percent (20%) of the outstanding arrearages after filing of the foreclosure proceedings. This has not been done here. Nevertheless, the Court believes that, in view of the peculiar factual circumstances obtaining in the case, P.D. 385 should not have been applied peremptorily by the respondent trial judge. I. THE PNB FORECLOSURE SALE: The extrajudicial foreclosure sale sought by PNB is based on two deeds of real estate mortgage executed on May 16,1960 and May 8, 1961, respectively, by ACPPI in favor of DBP to secure promissory notes for the principal amounts of four hundred ninety thousand pesos (P490,000.00) and seven hundred ninety-six thousand pesos (P796,000.00), respectively. PNB acquired all the rights and interests under the aforementioned deeds of mortgage by virtue of a deed of assignment executed by DBP in its favor on December 19, 1973. But the PNB foreclosure sale seeks to satisfy not only the amounts stated in the secured promissory notes but also the unsecured advances amounting to some five million four hundred thousand pesos (P5.4 M) granted by PNB on account of the opening of letters of credit by ACPPI sometime between 1957 and 1960 before DBP assigned the mortgages to PNB in 1973. The Court's inquiry is thus centered on whether the foreclosure sale pursuant to the DBP assigned mortgage should proceed as ordered by the respondent trial judge considering that the sale also seeks to satisfy previously incurred unsecured obligations. A. As to the DBP-assigned credits, there is no doubt that foreclosure can proceed as these were secured by appropriate mortgages. Moreover, contrary
to petitioner's pretensions, the validity of the assignment of the mortgage credit by DBP to PNB is beyond question. Article 1624 of the Civil Code provides that "an assignment of credits and other incorporeal rights shall be perfected in accordance with the provisions of Article 1475" which in turn states that "the contract of sale is perfected at the moment there is a meeting of the minds upon the thing which is the object of the contract and upon the price." The meeting of the minds contemplated here is that between the assignor of the credit and his assignee, there being no necessity for the consent of the debtor, contrary to petitioner's claim. It is sufficient that the assignment be brought to his knowledge in order to be binding upon him. This may be inferred from Article 1626 of the Civil Code which declares that "the debtor who, before having knowledge of the assignment, pays his creditor shall be released from the obligation." This view of Manresa was already quoted with approval by this Tribunal. Thus: xxx The above-mentioned article (Article 1527 of the Old Civil Code) states that a debtor who, before having knowledge of the assignment, should pay the creditor shall be released from the obligation. In the first place, the necessity for the notice to the debtor in order that the assignment may fully produce its legal effects may be inferred from the above. It refers to a notice and not to a petition for the consent which is not necessary. We say that the notice is not necessary in order that the legal effects may be fully produced, because if it should be omitted, such omission will not imply that the assignment will not exist legally, but that its effects will be limited to the parties thereto; at least, they will not reach the debtor [Sison v. Yap Tico, 37 Phil. 584, 587 (1918); Emphasis supplied]. As the petitioner does not claim absence of any notice of the assignment but only lack of its consent thereto, the validity of DBP's assignment of the mortgage credit as well as the right of PNB as assignee, to foreclose the assigned mortgage, cannot be doubted. B. However, petitioners question the inclusion of the unsecured obligations of ACPPI in the foreclosure sale. In this regard, petitioner advances the following proposition: The unsecured advances by PNB to ACPPI relating to the opening of letters of credit in 1957 cannot be tacked on to the mortgage loans acquired by PNB through assignment from DBP which are now being foreclosed. To do so would be to allow an originally unsecured loan to be covered by a mortgage securing another loan without the consent of the mortgagor. Since the foreclosure sale sought by PNB includes such unsecured obligations, petitioners argue that the same should be enjoined [Rollo, p. 25]. PNB sought to justify its inclusion of the unsecured obligations in the aggregate amount of indebtedness secured by the mortgages to be foreclosed by citing a provision in the assigned DBP Mortgage Contract which states: Now, therefore, for and in consideration of the premises and as security for the payment of the note or notes approved in order and other interest there
and/or other obligation arising thereunder or hereunder, the mortgagor does hereby transfer and convey by way of first mortgage, unto the Mortgagee, its successors and assigns, the real and/or personal properties described in the list appearing on the back of this document . . .[Rollo, p. 388]. However, the aforequoted terms of the mortgage contract do not support PNB's conclusions. The mortgage contract clearly secures only the amount of the promissory note executed by ACPPI and the interest thereon and other obligations which may arise under the promissory note (hence, the word "thereunder") and under the mortgage contract (hence, the word "hereunder"). Certainly, the previously incurred debt of ACPPI cannot be embraced within the terms of the DBP mortgage contract which merely extends security to future, ** but not past obligations. PNB also argues in vain that the inclusion of the unsecured obligations in the contemplated foreclosure proceedings finds support in the law which states that "(i)t shall be mandatory ... to foreclose the collaterals and/or securities for any loan, credit accommodation and/or guarantees granted by them whenever the arrearages on such account, including accrued interest and other charges, amount to at least twenty percent of the total outstanding obligations, including interest and other charges, as appearing in the books of accounts and /or related records of the government financial institution concerned. . . ." [Section 1, P.D. 385]. PNB maintains that the phrase "related records" may be interpreted to mean such records evidencing the mortgage credit assigned and other records of another government financial institution which are related to the assigned obligation. PNB's stand is that the credits appearing in the records of the mortgagor or any other government financial institution, whether secured or unsecured must necessarily be included as long as they are related to the mortgage being foreclosed. This argument must be rejected. The law, in authorizing a mandatory foreclosure by government financial institutions, contemplates secured obligations appearing in the books of accounts and/or related records of the government financial institution concerned. The clear terms of the law indicate that foreclosure shall be made on the"collaterals and/ or securities for any loan, credit accommodation and/or guarantees granted by them" [Section 1, P.D. 385]. Since the original advances by PNB were not secured by any mortgage, these cannot be included in the foreclosure proceedings sought by PNB for the simple reason that foreclosure of mortgage presupposes an unpaid obligation secured by the mortgage. In addition, the rule is well settled that an action to foreclose a mortgage must be limited to the amount mentioned in the mortgage except in mortgage contracts securing future advancements [Lim Julian v. Lutero, 49 Phil. 703 (1926)]. In view of the fact that an unsecured obligation is being included among the obligations of ACPPI sought to be satisfied by the PNB foreclosure sale, the lower court's blanket application of P.D. 385 and the consequent denial of ACPPI's application for injunction against the threatened foreclosure by PNB constitute grave abuse of discretion. P.D. 385, in laying down the prohibition on the issuance of an injunction, did not intend to make the debtor's mortgaged property answer for an unsecured obligation. Since the petition for the PNB foreclosure sale was materially defective in that it included in the amount of the total indebtedness to be satisfied by the sale previously incurred unsecured obligations, the assailed order of the respondent judge denying ACPPI's motion for the issuance of a preliminary injunction must accordingly be set aside and the extrajudicial foreclosure sale sought by PNB should be enjoined. This is without prejudice however to the right of PNB to petition for an extrajudicial foreclosure sale to satisfy the
obligations specifically secured by the DBP-assigned mortgage after due publication of an appropriate notice of sale. II. THE NIDC FORECLOSURE SALE: ACPPI challenges the right of NIDC to foreclose the chattel mortgage in its favor on the grounds that (1) part of the principal loan secured by the NIDC mortgage was not expended for the purposes for which it was intended; and (2) the subsequent advances granted by NIDC during the time that the Voting Trust Agreement was in force are merely "fictitious" amounts and therefore, do not constitute valid and demandable obligations; hence, the mortgage securing the same is likewise void [Petition, p. 21; Rollo, p. 24]. In this case, NIDC sought to include certain advances granted to ACPPI during the lifetime of the Voting Trust Agreement in the total amount of the mortgage indebtedness secured by the chattel mortgage. Such action was based on an all- embracing clause in the mortgage contract allowing said mortgage to "stand as security for said obligations and any and all other obligations of the MORTGAGOR to the MORTGAGEE of whatever kind and nature, whether such obligations have been contracted before, during or after the constitution of this mortgage" [Rollo, p. 226]. Without passing upon the validity of this clause, the Court rules that in view of the dictum laid down inFilipinas Marble Corporation v. Court of Appeals [G.R. No. 68010, May 30,1986, 142 SCRA 180], the foreclosure sale sought by NIDC should have been enjoined. The rationale for enjoining a foreclosure sale sought by a government financial institution charged with mismanagement and misappropriation of the proceeds of the loan secured by its mortgage, as aptly expressed in the aforementioned decision penned by Mr. Justice Gutierrez finds relevance in the instant case. Thus: xxx Presidential Decree No. 385 was issued primarily to see to it that government financial institutions are not denied substantial cash inflows which are necessary to finance development projects all over the country, by large borrowers, who when they become delinquent, resort to court actions in order to prevent or delay the government's collection of their debts and loans. The government however is bound by basic principles of fairness and decency under the due process clause of the Bill of Rights. P.D. 385 was never meant to protect officials of government lending institutions who take over the management of a borrower corporation, lead that corporation to bankruptcy through mismanagement or misappropriation of its funds, and who, after ruining it, use the mandatory provisions of the decree to avoid the consequences of their misdeeds. The designated officers of the government financing institution cannot simply walk away and then state that since the loans were obtained in the corporation's name, then P.D. 385 must be peremptorily applied and that
there is no way the borrower corporation can prevent the automatic foreclosure of the mortgage on its properties once the arrearages reach twenty percent (20%) of the total obligation no matter who was responsible. [At 188-189; Emphasis supplied]. xxx In the Filipinas Marble case, petitioner Filipinas Marble Corporation (FMC) applied for a loan in the amount of five million dollars ($5 M) with respondent Development Bank of the Philippines (DBP) which was granted subject to the conditions, inter alia, that petitioner shall have to enter into a management contract with respondent Bancom Systems Control, Inc. Bancom and that the key officers/executives to be chosen by Bancom for the corporation shall be appointed only with DBP's prior approval and made directly responsible to DBP. Pursuant to these conditions, FMC entered into a management contract with Bancom whereby the latter agreed to manage the company for a period of three years. Subsequently, FMC filed a complaint seeking annulment of the deeds of mortgage and deed of assignment which it executed in favor of DBP in order to secure the five million dollars ($5 M) loan, averring failure of consideration with regard to the execution of the said deeds and claiming that the respondents and their directors/officers mismanaged and misspent the loan, leaving the petitioner "desolate and devastated". It charged respondents DBP and Bancom of abandoning the petitioner's project for which the approved loan was intended. This Court ruled that it cannot make any conclusions as to whether DBP and Bancom actually misappropriated and misspent the five million dollars ($ 5 M) loan as this matter should rightfully be litigated below in the main action. It thus held that . . . (p)ending the outcome of such litigation, P.D. 385 cannot automatically be applied for if it is really proven that respondent DBP is responsible for the misappropriation of the loan, even if only in part, then the foreclosure of the petitioners' properties under the provisions of P.D. 385 to satisfy the whole amount of the loan would be a gross mistake. It would unduly prejudice the petitioner, its employees and their families. Only after trial on the merits of the case can the true amount of the loan which was applied wisely or not, for the benefit of the petitioner, be determined. Consequently, the extent of the loan where there was no failure of consideration and which may be properly satisfied by foreclosure proceedings under P.D. 385 will have to await the presentation of evidence in a trial on the merits [Id. at 189-190]. In fine, since the issue of misappropriation of the proceeds of the loan is still being litigated, the liability of FMC for the loan which was the basis of the mortgage being foreclosed was not yet settled; hence, the Court's allowance of an injunction against the foreclosure sale. In the instant controversy, the liability of ACPPI for the loans secured by the NIDC chattel mortgage is likewise still in dispute in the proceedings below inasmuch as petitioners are seeking nullification of said loans for failure or lack of consideration in the pending action before the court a quo. Petitioners contend that the portion of the principal NIDC loan supposed to be used to fund the repairs on the ACPPI plant building had not been expended
for such intended purpose. Also, they challenge the adequacy of consideration of the additional advances allegedly granted by NIDC to ACPPI for the payment of the various services availed of or utilized by NIDC/PNB which petitioners claim to be fictitious. Thus, although initially, the issue before the lower court was limited to whether petitioners herein are entitled to a termination of the Voting Trust Agreement, additional issues concerning the validity of the NIDC loans were raised in the supplemental complaint filed before said court [See Rollo, p. 179, et seq. ]. In line with the Filipinas Marble ruling, pending determination by the lower court of these issues involving the misappropriation and/or mismanagement of the proceeds of the NIDC loans and the larger issue of failure of consideration, the sale at public auction of the foreclosed chattels should be enjoined, P.D. 385 notwithstanding. IN VIEW OF THE FOREGOING, the instant petition for certiorari is hereby GRANTED and the questioned order of the respondent trial judge dated January 15, 1976 denying petitioners' application for a writ of preliminary injunction is hereby SET ASIDE. The respondent sheriffs are hereby ordered to DESIST from carrying out the extrajudicial foreclosure sales sought by PNB and NIDC in the petitions dated March 11, 1974 and September 25, 1975, respectively. The temporary restraining order issued by the Court dated January 20, 1976 is accordingly made PERMANENT, subject to the qualifications stated in the following paragraph. This judgment is without prejudice to the right of PNB, after due publication of an appropriate notice of sale specifying the amount of the secured obligations, to cause the foreclosure sale on the DBP assigned real estate mortgages dated May 6, 1960 and May 8, 1961. On the other hand, the NIDC foreclosure sale, upon filing of a bond in such amount as the trial court may deem adequate, from an indubitably solvent bonding company, shall be enjoined until the final resolution by the court a quo of Civil Case No. Q-18176. Finally, as stated at the outset, petitioner Clara Reyes Pastor's "Motion for Termination of Receivership with Alternative Motions" is DENIED. SO ORDERED. Republic of the Philippines SUPREME COURT Manila THIRD DIVISION
G.R. No. 80078 May 18, 1993 ATOK FINANCE CORPORATION, petitioner, vs. COURT OF APPEALS, SANYU CHEMICAL CORPORATION, DANILO E. ARRIETA, NENITA B. ARRIETA, PABLITO BERMUNDO and LEOPOLDO HALILI, respondents. Syquia Law Offices for petitioner.
Batino, Angala, Allaga & Zara Law Offices for private respondents.
FELICIANO, J.: Atok Finance Corporation ("Atok Finance") asks us to review and set aside the Decision of the Court of Appeals which reversed a decision of the trial court ordering private respondents to pay jointly and severally to petitioner Atok Finance certain sums of money. On 27 July 1979, private respondents Sanyu Chemical corporation ("Sanyu Chemical") as principal and Sanyu Trading Corporation ("Sanyu Trading") along with individual private stockholders of Sanyu Chemical, namely, private respondent spouses Danilo E. Halili and Pablico Bermundo as sureties, executed in the continuing Suretyship Agreement in favor of Atok Finance as creditor. Under this Agreement, Sanyu Trading and the individual private respondents who were officers and stockholders of Sanyu Chemical did: (1) For valuable and/or other consideration . . ., jointly and severally unconditionally guarantee to ATOK FINANCE CORPORATION (hereinafter called Creditor), the full, faithful and prompt payment and discharge of any and all indebtedness of [Sanyu Chemical] . . . (hereinafter called Principal) to the Creditor. The word "indebtedness" is used herein in its most comprehensive sense and includes any and all advances, debts, obligations and liabilities of Principal or any one or more of them, here[to]fore, now or hereafter made, incurred or created, whether voluntary or involuntary and however arising, whether direct or acquired by the Creditor by assignment or succession, whether due or not due, absolute or contingent, liquidated or unliquidated, determined or undetermined and whether the Principal may be may be liable individually of jointly with others, or whether recovery upon such indebtedness may be or hereafter become barred by any statute of limitations, or whether such indebtedness may be or otherwise become unenforceable. 1 (Emphasis supplied) Other relevant provisions of the Continuing Suretyship Agreement follow: (2) This is a continuing suretyship relating to any indebtedness, including that arising under successive transactions which shall either continue the indebtedness from time to time or renew it after it has been satisfied. This suretyship is binding upon the heirs, successors, executors, administrators and assigns of the surety, and the benefits hereof shall extend to and include the successors and assigns of the Creditor. (3) The obligations hereunder are joint and several and independent of the obligations of the Principal. A separate action or actions may be prosecuted against the Principal and whether or not the Principal be joined in any such action or actions. xxx xxx xxx.
(6) In addition to liens upon, and rights of set-off against the moneys, securities or other property of the Surety given to the Creditor by law, the Creditor shall have the lien upon and a right of self-off against all moneys, securities, and other property of the Surety now and hereafter in the possession of the Creditor; and every such lien or right of self-off may be exercised without need of demands upon or notice to the Surety. No lien or right of set-off shall be deemed to have been waived by any act, omission or conduct on the part of the Creditor, or by any neglect to exercise such right of set-off or to enforce such lien, or by any delay in so doing, and every right of set-off or lien shall continue in full force and effect until such right of set-off of lien is specifically waived or released by an instrument in writing executed by the Creditor. (7) Any indebtedness of the Principal now or hereafter held by the Surety is hereby subordinated to the indebtedness of the Principal to the Creditor; and if the Creditor so requests, such indebtedness of the Principal of the Surety shall be collected, enforced and shall be paid over to the Creditor and shall be paid over to the Creditor and shall be paid over to the Creditor on account of the indebtedness of the Principal to the Creditor but without reducing or affecting in any manner the liability of the Surety under the provisions of this suretyship. xxx xxx xxx 2 (Emphases supplied) On 27 November 1981, Sanyu Chemical assigned its trade receivables outstanding as of 27 November 1981 with a total face value of P125,871.00, to Atok Finance in consideration of receipt from Atok Finance of the amount of P105,000.00. The assigned receivables carried a standard term of thirty (30) days; it appeared, however, that the standard commercial practice was to grant an extension up to one hundred twenty (120) days without penalties. The relevant portions of this Deed of Assignment read as follows: 1. FOR VALUE RECEIVED, the ASSIGNOR does hereby SELL, TRANSFER and ASSIGN all his/its rights, title and interest in the contracts, receivables, accounts, notes, leases, deeds of sale with reservation of title, invoices, mortgages, checks, negotiable instruments and evidences of indebtedness listed in the schedule forming part hereinafter called "Contract" or "Contracts." 2. To induce the ASSIGNEE to purchase the above Contracts, the ASSIGNOR does hereby certify,warrant and represent that : (a). He/It is the sole owner of the assigned Contracts free and clear of claims of any other party except the herein ASSIGNEE and has the right to transfer absolute title thereto the ASSIGNEE;
(b). Each assigned Contract is bonafide and the amount owing and to become due on each contract is correctly stated upon the schedule or other evidences of the Contract delivered pursuant thereto; (c). Each assigned Contract arises out of the sale of merchandise/s which had been delivered and/or services which have been rendered and none of the Contract is now, nor will at any time become, contingent upon the fulfillment of any contract or condition whatsoever, or subject to any defense, offset or counterclaim; (d). No assigned Contract is represented by any note or other evidence of indebtness or other security document except such as may have been endorsed, assigned and delivered by the ASSIGNOR to the ASSIGNEE simultaneously with the assignment of such Contract; (e). No agreement has been made, or will be made, with any debtor for any deduction discount or return of merchandise, except as may be specifically noted at the time of the assignment of the Contract; (f). None of the terms or provisions of the assigned Contracts have been amended, modified or waived; (g). The debtor/s under the assigned Contract/s are solvent and his/its/their failure to pay the assigned Contracts and/or any installment thereon upon maturity thereof shall be conclusively considered as a violation of this warranty; and (h). Each assigned Contract is a valid obligation of the buyer of the merchandise and/or service rendered under the Contract And that no Contract is overdue. The foregoing warranties and representations are in addition to those provided for in the Negotiable Instruments Law and other applicable laws. Any violation thereof shall render the ASSIGNOR immediately and unconditionally liable to pay the ASSIGNEE jointly and severally with the debtors under the assigned contracts, the amounts due thereon. xxx xxx xxx
4. The ASSIGNOR shall without compensation or cost, collect and receive in trust for the ASSIGNEE all payments made upon the assigned contracts and shall remit to the ASSIGNEE all collections on the said Contracts as follows : P5,450.00 due on January 2, 1982 on every 15th day (semimonthly) until November 1, 1982. P110,550.00 balloon payment after 12 months. 3 (Emphasis supplied) Later, additional trade receivables were assigned by Sanyu Chemical to Atok Finance with a total face value of P100,378.45. On 13 January 1984, Atok Finance commenced action against Sanyu Chemical, the Arrieta spouses, Pablito Bermundo and Leopoldo Halili before the Regional Trial Court of Manila to collect the sum of P120,240.00 plus penalty charges amounting to P0.03 for every peso due and payable for each month starting from 1 September 1983. Atok Finance alleged that Sanyu Chemical had failed to collect and remit the amount due under the trade receivables. Sanyu Chemical and the individual private respondents sought dismissal of Atok's claim upon the ground that such claim had prescribed under Article 1629 of the Civil Code and for lack of cause of action. The private respondents contended that the Continuing Suretyship Agreement, being an accessory contract, was null and void since, at the time of its execution, Sanyu Chemical had no pre-existing obligation due to Atok Finance. At the trial, Sanyu Chemical and the individual private respondents failed to present any evidence on their behalf, although the individual private respondents submitted a memorandum in support of their argument. After trial, on 1 April 1985, the trial court rendered a decision in favor of Atok Finance. The dispositive portion of this decision reads as follows: ACCORDINGLY, judgment is hereby rendered in favor of the plaintiff ATOK FINANCE CORPORATION; and against the defendants SANYU CHEMICAL CORPORATION, DANILO E. ARRIETA, NENITA B. ARRIETA, PABLITO BERMUNDO and LEOPOLDO HALILI, ordering the said defendants, jointly and severally, to pay the plaintiff: (1) P120,240.00 plus P0.03 for each peso for each month from September 1, 1983 until the whole amount is fully paid; (2) P50,000.00 as attorney's fees; and (3) To pay the costs. SO ORDERED. 4 Private respondents went on appeal before the then Intermediate Appellate Court ("IAC"), and the appeal was there docketed as AC-G.R. No. 07005-CV. The case was raffled to the Third Civil Cases Division of the IAC. In a resolution dated 21 March 1986, that Division dismissed the appeal upon the ground of abandonment, since the private respondents had
failed to file their appeal brief notwithstanding receipt of the notice to do so. On 4 June 1986, entry of judgment was made by the Clerk of Court of the IAC. Accordingly, Atok Finance went before the trial court and sought a writ of execution to enforce the decision of the trial court of 1 April 1985. The trial court issued a writ of execution on 23 July 1986. 5 Petitioner alleged that the writ of execution was served on private respondents. 6 However, on 27 August 1986, private respondents filed a Petition for Relief from Judgment before the Court of Appeals. This Petition was raffled off to the 15th Division of the Court of Appeals. In that Petition, private respondents claimed that their failure to file their appeal brief was due to excusable negligence, that is, that their previous counsel had entrusted the preparation and filing of the brief to one of his associates, which associate, however, had unexpectedly resigned from the law firm without returning the records of cases he had been handling, including the appeal of private respondents. Atok Finance opposed the Petition for Relief arguing that no valid ground existed for setting aside the resolution of the Third Division of the then IAC. The 15th Division of the Court of Appeals nonetheless granted the Petition for Relief from Judgment "in the paramount interest of justice," 7 set aside the resolution of the Third Civil Cases Division of the then IAC, and gave private respondents a non-extendible period of fifteen (15) days within which to file their appeal brief. Private respondents did file their appeal brief. The 15th Division, on 18 August 1987, rendered a Decision on the merits of the appeal, and reversed and set aside the decision of the trial court and entered a new judgment dismissing the complaint of Atok Finance, ordering it to pay private respondents P3,000.00 as attorney's fees and to pay the costs. Atok Finance moved to set aside the decision of the 15th Division of the Court of Appeals, inviting attention to the resolution of the IAC's Third Civil Cases Division of 21 March 1986 originally dismissing private respondent's appeal for abandonment thereof. In a resolution dated 18 August 1987, the 15th Division denied Atok Finance's motion stating that it had granted the Petition for Relief from Judgment and given private respondents herein fifteen (15) days within which to file an appeal brief, while Atok Finance did not file an appellee's brief, and that its decision was arrived at "on the basis of appellant's brief and the original records of the appeal case." In the present Petition for Review, Atok Finance assigns the following as errors on the part of the Court of Appeals in rendering its decision of 18 August 1987: (1) that it had erred in ruling that a continuing suretyship agreement cannot be effected to secure future debts; (2) that it had erred in ruling that the continuing suretyship agreement was null and void for lack of consideration without any evidence whatsoever [being] adduced by private respondents; (3) that it had erred in granting the Petition for Relief from Judgment while execution proceedings [were] on-going on the trial court. 8 (Emphasis in the original)
As a preliminary matter, we note that a Division of the Court of Appeals is co-equal with any other Division of the same court. Accordingly, a Division of the Court of Appeals has no authority to consider and grant a petition for relief from a judgment rendered by another Division of the same court. In the case at bar, however, we must note that an intervening event had occurred between the resolution of 21 March 1986 of the Third Civil Cases Division of the IAC dismissing private respondents' appeal and the 30 September 1986 order of the 15th Division of the Court of Appeals granting the Petition for Relief from Judgment. On 28 July 1986, the old Intermediate Appellate Court went out of existence and a new court, the Court of Appeals, came into being, was organized and commenced functioning. 9 This event, and the probability that some confusion may have accompanied the period of transition from the IAC to the Court of Appeals, lead us to believe that the defect here involved should be disregarded as being of secondary importance. At the same time, nothing in this decision should be read as impliedly holding that a petition from relief judgment is available in respect of a decision rendered by the Court of Appeals; this issue is best reserved for determination in some future cases where it shall have been adequately argued by the parties. We turn, therefore, to a consideration of the first substantive issue addressed by the Court of Appeals in rendering its Decision on the merits of the appeal: whether the individual private respondents may be held solidarily liable with Sanyu Chemical under the provisions of the Continuing Suretyship Agreement, or whether that Agreement must be held null and void as having been executed without consideration and without a pre-existing principal obligation to sustain it. The Court of Appeals held on this first issue as follows: It is the contention of private appellants that the suretyship agreement is null and void because it is not in consonance with the laws on guaranty and security. The said agreement was entered into by the parties two years before the Deed of Assignment was executed. Thus, allegedly, it ran counter to the provision that guaranty cannot exist independently because by nature it is merely an accessory contract. The law on guaranty is applicable to surety to some extent Manila Surety and Fidelity Co. v.Baxter Construction & Co., 53 O.G. 8836; and, Arran v. Manila Fidelity & Surety Co., 53 O.G. 7247. We find merit in this contention. Although obligations arising from contracts have the force of law between the contracting parties, (Article 1159 of the Civil Code) this does not mean that the law is inferior to it; the terms of the contract could not be enforces if not valid. So, even if, as in this case, the agreement was for a continuing suretyship to include obligations enumerated in paragraph 2 of the agreement, the same could not be enforced. First, because this contract, just like guaranty, cannot exist without a valid obligation (Art. 2052, Civil Code); and, second, although it may be given as security for future debt (Art. 2053, C.C.),the obligation contemplated in the case at bar cannot be considered "future debt" as envisioned by this law. There is no proof that when the suretyship agreement was entered into, there was a pre-existing obligation which served the principal obligation between the parties. Furthermore, the "future debts" alluded to in Article 2053 refer to
debts already existing at the time of the constitution of the agreement but the amount thereof is unknown, unlike in the case at bar where the obligation was acquired two years after the agreement. 10 (Emphasis supplied). We consider that the Court of Appeals here was in serious error. It is true that a serious guaranty or a suretyship agreement is an accessory contract in the sense that it is entered into for the purpose of securing the performance of another obligation which is denominated as the principal obligation. It is also true that Article 2052 of the Civil Code states that "a guarantee cannot exist without a valid obligation." This legal proposition is not, however, like most legal principles, to be read in an absolute and literal manner and carried to the limit of its logic. This is clear from Article 2052 of the Civil Code itself: Art. 2052. A guaranty cannot exist without a valid obligation. Nevertheless, a guaranty may be constituted to guarantee the performance of a voidable or an unenforceable contract. It may also guaranty a natural obligation." (Emphasis supplied). Moreover, Article 2053 of the Civil Code states: Art. 2053. A guaranty may also be given as security for future debts, the amount of which is not yet known; there can be no claim against the guarantor until the debt is liquidated. A conditional obligation may also be secured. (Emphasis supplied) The Court of Appeals apparently overlooked our caselaw interpreting Articles 2052 and 2053 of the Civil Code. InNational Rice and Corn Corporation (NARIC) v. Jose A. Fojas and Alto Surety Co., Inc., 11 the private respondents assailed the decision of the trial court holding them liable under certain surety bonds filed by private respondent Fojas and issued by private respondent Alto Surety Co. in favor of petitioner NARIC, upon the ground that those surety bonds were null and void "there being no principal obligation to be secured by said bonds." In affirming the decision of the trial court, this Court, speaking through Mr. Justice J.B.L. Reyes, made short shrift of the private respondents' doctrinaire argument: Under his third assignment of error, appellant Fojas questions the validity of the additional bonds(Exhs. D and D-1) on the theory that when they were executed, the principal obligation referred to in said bonds had not yet been entered into, as no copy thereof was attached to the deeds of suretyship.This defense is untenable, because in its complaint the NARIC averred, and the appellant did not deny that these bonds were posted to secure the additional credit that Fojas has applied for, and the credit increase over his original contract was sufficient consideration for the bonds. That the latter were signed and filed before the additional credit was extended by the NARIC is no ground for complaint.Article 1825 of the Civil Code of 1889, in force in 1948, expressly recognized that "a guaranty may also be given as security for future debts the amount of which is not yet known." (Emphasis supplied) In Rizal Commercial Banking Corporation v. Arro, 12 the Court was confronted again with the same issue, that is, whether private respondent was liable to pay a promissory note dated 29 April 1977 executed by the principal debtor in the light of the provisions of a
comprehensive surety agreement which petitioner bank and the private respondent had earlier entered into on 19 October 1976. Under the comprehensive surety agreement, the private respondents had bound themselves as solidary debtors of the Diacor Corporation not only in respect of existing obligations but also in respect of future ones. In holding private respondent surety (Residoro Chua) liable under the comprehensive surety agreement, the Court said: The surety agreement which was earlier signed by Enrique Go, Sr. and private respondent, is an accessory obligation, it being dependent upon a principal one, which, in this case is the loan obtained by Daicor as evidenced by a promissory note. What obviously induced petitioner bank to grant the loan was the surety agreement whereby Go and Chua bound themselves solidarily to guaranty the punctual payment of the loan at maturity. By terms that are unequivocal, it can be clearly seen that the surety agreement was executed to guarantee future debts which Daicor may incur with petitioner, as is legally allowable under the Civil Code. Thus — Article 2053. — A guarantee may also be given as security for future debts, the amount of which is not yet known; there can be no claim against the guarantor until the debt is liquidated. A conditional obligation may also be secured. 13 (Emphasis supplied) It is clear to us that the Rizal Commercial Banking Corporation and the NARIC cases rejected the distinction which the Court of Appeals in the case at bar sought to make with respect to Article 2053, that is, that the "future debts" referred to in that Article relate to "debts already existing at the time of the constitution of the agreement but the amount [of which] is unknown," and not to debts not yet incurred and existing at that time. Of course, a surety is not bound under any particular principal obligation until that principal obligation is born. But there is no theoretical or doctrinal difficulty inherent in saying that the suretyship agreement itself is valid and binding even before the principal obligation intended to be secured thereby is born, any more that there would be in saying that obligations which are subject to a condition precedent are valid and binding before the occurrence of the condition precedent. 14 Comprehensive or continuing surety agreements are in fact quite commonm place in present day financial and commercial practice. A bank or a financing company which anticipates entering into a series of credit transactions with a particular company, commonly requires the projected principal debtor to execute a continuing surety agreement along with its sureties. By executing such an agreement, the principal places itself in a position to enter into the projected series of transactions with its creditor; with such surety agreement, there would be no need to execute a separate surety contract or bond for each financing or credit accommodation extended to the principal debtor. As we understand it, this is precisely what happened in the case at bar. We turn to the second substantive issue, that is, whether private respondents are liable under the Deed of Assignment which they, along with the principal debtor Sanyu Chemical, executed in favor of petitioner, on the receivables thereby assigned. The contention of Sanyu Chemical was that Atok Finance had no cause of action under the Deed of Assignment for the reason that Sanyu Chemical's warranty of the debtors' solvency
had ceased. In submitting this contention, Sanyu Chemical relied on Article 1629 of the Civil Code which reads as follows: Art. 1629. In case the assignor in good faith should have made himself responsible for the solvency of the debtor, and the contracting parties should not have agreed upon the duration of the liability, it shall last for one year only, from the time of the assignment if the period had already expired. If the credit should be payable within a term or period which has not yet expired, the liability shall cease one year after maturity. Once more, the Court of Appeals upheld the contention of private respondents and held that Sanyu Chemical was free from liability under the Deed of Assignment. The Court of Appeals said: . . . Article 1629 provides for the duration of assignor's warranty of debtor's solvency depending on whether there was a period agreed upon for the existence of such warranty, analyzing the law thus: (1) if there is a period (or length of time) agreed upon, then for such period; (2) if no period (or length of time) was agreed upon, then: (a) one year from assignment — if debt was due at the time of the assignment (b) one year from maturity — if debt was not yet due at the time of the assignment.. The debt referred to in this law is the debt under the assigned contract or the original debts in favor of the assignor which were later assigned to the assignee. The debt alluded to in the law, is not the debt incurred by the assignor to the assignee as contended by the appellant. Applying the said law to the case at bar, the records disclose that none of the assigned receivables had matured on November 27, 1981 when the Deed of Assignment was executed. The oldest debt then existing was that contracted on November 3, 1981 and the latest was contracted on December 4, 1981. Each of the invoices assigned to the assignee contained a term of 30 days (Exhibits B-3-A to 5 and extended by the notation which appeared in the "Schedule of Assigned Receivables" which states that the ". . . the terms stated on our invoices were normally extended up to a period of 120 days . . ." (Exhibit B-2). Considering the terms in the invoices plus the ordinary practice of the company, thus, the assigned debts matured between April 3, 1982 to May 4, 1982. The assignor's warranty for debtor's warranty, in this case, would then be from the maturity period up to April 3, 1983 or May 4, 1983 to cover all of the receivables in the invoices.
The letter of demand executed by appellee was dated August 29, 1983 (Exhibit D) and the complaint was filed on January 13, 1984. Both dates were beyond the warranty period. In effect, therefore, company-appellant was right when it claimed that appellee had no cause of action against it or had lost its cause of action. 15 (Emphasis supplied) Once again, however, we consider that the Court of Appeals was in reversible error in so concluding. The relevant provision of the Deed of Assignment may be quoted again in this connection: 2. To induce the ASSIGNEE [Atok Finance] to purchase the above contracts, the ASSIGNOR [Sanyu Chemical] does hereby certify, warrant and represent that . . . (g) the debtor/s under the assigned contract/s are solvent and his/its/their failure to pay the assigned contract/s and/or any installment thereon upon maturity thereof shall be conclusively considered as a violation of this warranty; and . . . The foregoing warranties and representations are in addition to those provided for in the Negotiable Instruments Law and other applicable laws. Any violation thereof shall render the ASSIGNOR immediately and unconditionally liable to pay the ASSIGNEE jointly and severally with the debtors under the assigned contracts, the amounts due thereon. xxx xxx xxx (Emphasis supplied) It may be stressed as a preliminary matter that the Deed of Assignment was valid and binding upon Sanyu Chemical. Assignment of receivables is a commonplace commercial transaction today. It is an activity or operation that permits the assignee to monetize or realize the value of the receivables before the maturity thereof. In other words, Sanyu Chemical received from Atok Finance the value of its trade receivables it had assigned; Sanyu Chemical obviously benefitted from the assignment. The payments due in the first instance from the trade debtors of Sanyu Chemical would represent the return of the investment which Atok Finance had made when it paid Sanyu Chemical the transfer value of such receivables. Article 1629 of the Civil Code invoked by private respondents and accepted by the Court of Appeals is not, in the case at bar, material. The liability of Sanyu Chemical to Atok Finance rests not on the breach of the warranty of solvency; the liability of Sanyu Chemical was not ex lege (ex Article 1629) but rather ex contractu. Under the Deed of Assignment, the efect of non-payment by the original trade debtors was breach of warranty of solvency by Sanyu Chemical, resulting in turn in the assumption of solidary liability by the assignor under the receivables assigned. In other words, the assignor Sanyu Chemical becomes a solidary debtor under the terms of the receivables covered and transferred by virtue of the
Deed of Assignment. And because assignor Sanyu Chemical became, under the terms of the Deed of Assignment, solidary obligor under each of the assigned receivables, the other private respondents (the Arrieta spouses, Pablito Bermundo and Leopoldo Halili), became solidarily liable for that obligation of Sanyu Chemical, by virtue of the operation of the Continuing Suretyship Agreement. Put a little differently, the obligations of individual private respondent officers and stockholders of Sanyu Chemical under the Continuing Suretyship Agreement, were activated by the resulting obligations of Sanyu Chemical as solidary obligor under each of the assigned receivables by virtue of the operation of the Deed of Assignment. That solidary liability of Sanyu Chemical is not subject to the limiting period set out in Article 1629 of the Civil Code. It follows that at the time the original complaint was filed by Atok Finance in the trial court, it had a valid and enforceable cause of action against Sanyu Chemical and the other private respondents. We also agree with the Court of Appeals that the original obligors under the receivables assigned to Atok Finance remain liable under the terms of such receivables. WHEREFORE, for all the foregoing, the Petition for Review is hereby GRANTED DUE COURSE, and the Decision of the Court of Appeals dated 18 August 1987 and its Resolution dated 30 September 1987 are hereby REVERSED and SET ASIDE. A new judgment is hereby entered REINSTATING the Decision of the trial court in Civil Case No. 84-22198 dated 1 April 1985, except only that, in the exercise of this Court's discretionary authority equitably to mitigate the penalty clause attached to the Deed of Assignment, that penalty is hereby reduced to eighteen percent (18%) per annum (instead of P0.03 for every peso monthly [or 36% per annum]). As so modified, the Decision of the trial court is hereby AFFIRMED. Costs against private respondents. SO ORDERED. Bidin, Davide, Jr.,Romero and Melo, JJ., concur. Republic of the Philippines SUPREME COURT Manila EN BANC G.R. No. L-9542
January 11, 1957
PLARIDEL SURETY AND INSURANCE CO., INC., petitioner-appellant, vs. P. L. GALANG MACHINERY CO., INC., respondents-appellees. Carlos, Laurea, Fernando and Padilla for petitioner. Arsenio L. Galang for respondents. BENGZON, J.: Review by certiorari of the Court of Appeals' decision affirming that of the Manila Court of First Instance which required Plaridel Surety & Insurance Company, jointly and severally with Constancio San Jose, to pay P. L. Galang Machinery Co., Inc. the sum of P30,000, with legal
interest thereon from the date of the filing of the complaint, plus 15 per cent of the said amount as attorneys' fees and the costs. It is this additional liability for interest and attorneys' fees that petitioner challenges before this Court. The facts necessary for adjudication are found by the Court of Appeals: On November 4, 1950, P. L. Galang Machinery Co., Inc. and Constancio San Jose executed an agreement (Exhibit A), whereby the latter bound himself to cut, deliver and sell to the former 2,550,000 board feet of peeler and veneer logs at the price of P60 per thousand board feet f.o.b. vessel at the port of Polillo, to be delivered in three consecutive months beginning January, 1951, each delivery consisting of 850,000 board feet. Said corporation had intended these logs for exportation to Japan. Thus, a few days later, relying upon the agreement (Exhibit A), it sold logs to Marubeni Co., Ltd., of Tokyo at P845 per thousand board feet f.o.b. vessel at Polillo (Exhibit D). To secure the performance of the obligation of Constancio San Jose, the Plaridel Surety & Insurance Co. on November 9, 1950, put up and executed a performance bond (Exhibit B) in the sum of P30,600, binding itself jointly and severally with the former as principal, for the faithful performance of the contract. In accordance with Exhibit "A", P. L. Galang Machinery Co., Inc. advanced to Constancio San Jose the sum of P15,300, with interest at 10 per cent annum (Exhibit C). As San Jose failed to deliver the corresponding quantity of logs for January, 1951, he addressed a letter to the corporation (Exhibit E), asking an extension of time "to complete the delivery of said quantity of logs" on the ground that he had just acquired the logging machineries and equipment needed for the logging operation in Polilo. The request was verbally denied. Similarly, and as no logs were delivered in the month of February, 1951, on March 7, 1951, he again wrote a letter to the corporation advising it that due to his failure to comply with the terms of the aforementioned contract, he was expecting to deposit with the Plaridel Surety & Insurance Co. the sum of P30,000 (it should be P30,600). Consequently, and for failure of Constancio San Jose to comply with the terms and stipulation of the agreement (Exhibit "A"), P. L. Galang Machinery Co., Inc. notified the surety company on February 8, 1951 (Exhibit Q) of the failure of said Constancio San Jose and demanded at the same time the payment of the amount of the performance bond (Exhibit B) in the sum of P30,360 the payment of which was refused. Upon the foregoing, P. L. Galang Machinery Co., Inc. filed a complaint on May 8, 1951, against the aforenamed principal and his surety . . . Petitioner objects to the payment of interest and attorneys' fees because: (1) they were not mentioned in the bond; and (2) the surety would become liable for more than the amount stated in the contract of suretyship. In support of its objection petitioner dwells on the proposition that a surety's liability can not be extended beyond the terms of his undertaking, citing articles 1956 and 2208 of the New Civil Code provide as follows: Art. 1956. No interest shall be due unless it has been expressly stipulated in writing.
Art. 2208. In the absence of stipulation, attorneys' fees and expenses of litigation, other than judicial costs, cannot be recovered, except: . . . . The objection has to be overruled, because as far back as the year 1922 this Court held in Tagawa vs. Aldanese, 43 Phil. 852, that creditors suing on a suretyship bond may recover from the surety as part of their damages, interest at the legal rate if the surety would thereby become liable to pay more than the total amount stipulated in the bond. "The theory is that interest is allowed only by way of damages for delay upon the part of the sureties in making payment after they should have done so. In some states, the interest has been charged from the date of the judgment of the appellate court. In this jurisdiction, we rather prefer to follow the general practice, which is to order that interest begin to run from the date when the complaint was filed in court, . . . . Such theory aligned with sec. 510 of the Code of Civil Procedure which was subsequently recognized in the Rules of Court (Rule 53, section 6) and with Article 1108 of the Civil Code (now Art. 2209 of the New Civil Code). In other words the surety is made to pay interest, not by reason of the contract, but by reason of its failure to pay when demanded and for having compelled the plaintiff to resort to the courts to obtain payment. It should be observed that interest does not run from the time the obligation became due, but from the filing of the complaint. As to attorneys' fees. Before the enactment of the New Civil Code, successful litigants could not recover attorney's fees as part of the damages they suffered by reason of the litigation. Even if the party paid thousand of pesos to his lawyers, he could not charge the amount to his opponent.1 However the New Civil Code permits recovery of attorney's fees in eleven cases enumerated in Article 2208, among them, "where the court deems it just and equitable that attorney's fees and expenses of litigation should be recovered" or "when the defendant acted in gross and evident bad faith in refusing to satisfy the plaintiff's plainly valid, just and demandable claim". This gives the courts discretion in apportioning attorney's fees. Now, considering, in the case, that the principal debtor had openly and expressly admitted his liability under the bond, and the surety knew it, (p. 123, R. A.) we can not say there was abuse of lower courts' discretion in the way of awarding fees, specially when the indemnity agreement signed by Constancio San Jose and Ramon F. Cuervo afforded the surety adequate protection. Nevertheless, in view of the principal amount to be recovered and the relatively uncomplicated work devolving upon plaintiff's counsel, the damages and expenses should be reduced to 10 per cent for attorney's compensation — as originally suggested in the complaint (p. 13 R. A.). With this modification, the decision under review is affirmed, with costs. Paras, C.J., Padilla, Montemayor, Bautista Angelo, Labrador, Concepcion, Reyes, J.B.L. and Endencia, JJ., concur.
SUPREME COURT Manila FIRST DIVSION G.R. No. L-24709 October 20, 1977 ASIAN SURETY & INSURANCE CO., INC., petitioner, vs. HON. RAMON O. NOLASCO, Presiding Judge, Branch IX, Court of First Instance of Manila and JOSE SAN AGUSTIN, Sheriff of the City of Manila and RAMON C. DY, repsondents. Santiago F. Audio & Associates for petitioner. Jose W. Diokno for respondents.
FERNANDEZ, J.:têñ.£îhqw⣠This is a petition for certiorari and/or prohibition with preliminary injunction, praying that the herein respondents Hon. Ramon O. Nolasco, Presiding Judge, Branch IX, Court of First Instance of Manila, Jose San Agustin, Sheriff of the City of Manila, and Ramon C. Dy, refrain from enforcing the orders issued by said respondent hearing, a writ of prohibition issue commanding the respondents to desist absolutely and perpetually from enforcing the judgment in against petitioner's counterbond filed therein. The facts are: 1) On May 28, 1963, the private respondent Ramon C. Dy filed a complaint with the Court of First Instance of Manila, assigned to Branch IX, and docketed as Civil Case No. 54065, entitled "Ramon C. Dy vs. Jovita Peraldodoing business under the first name of 'Nation's Pet Shop & Tinsmith' and George Uy King, doing business under the firm name of Jeorge Tinsmith Shop'." The suit was to collect from the de defendants the sum of P10,000.00 on a Promissory note plus P500.00 for and as attomey's fees and the costs of the suit; 1 2) On May 29, 1963, upon motion of Ramon C. Dy, the respondent Judge Ramon O. Nolasco issued an order of attachment against the defendants therein, Jovita Peraldo and George Uy King. On the strength of this order, the herein sent Sheriff of Manila, through his deputy Simon Castillo, attached certain properties belonging to defendants Jovita Peraldo and George Uy King; 2 3) On May 31, 1963, the herein petitioner Asian Surety & Insurance Co., Inc. executed a counterbond for the dissolution of the aforesaid writ of attachment, begin itself jointly and severally with therein defendants Jovita Peraldo and George Uy King in the sum of Ten Thousand Five Hundred Pesos (P10,500.00), Philippine Currency, under the following terms: ñé+.£ªwph!1
... that in the case the plaintiff recover judgement in the action the defendant will on the demand redeliver the attached propety so released to the officer of the Court to be applied to the judgement or in default thereof that the defendant and surety will on demand pay to the plaintiff the full value of the property released. By virtue of the aforementioned counterbond, respondent Judge issued an order on June 8, 1963, discharging the attachment. 3 4) On May 11, 1964, after hearing, respondent Judge Ramon O. Nolasco rendered his decision in Civil Case No. 54065, the dispositive portion of which reads:ñé+.£ªwph!1 IN VIEW OF THE FOREGOING CONSIDERATION, judgement is hereby rendered in favor of the plaintiff and against the defendants, ordering the said defendants, jointly and severally, to pay the plaintiff the sum of P10,000,00, with legal rate of interest from the date of filing of the conplaint until fully paid, together with the sum of P500.00 as and for attorney's fees, and to pay the cost of these SO ORDERED.
4
5) Upon the after becoming final and executory, a writ of execution was issued. The writ was returned not satisfied because the sheriff could not locate the defendants' place of business or their residence in the City of Manila and could not locate after due diligence any property of said defendants which may be levied upon to satisfy the execution. 5 6) On November 26, 1964, the herein respondent Ramon C. Dy filed a motion with the court a quo for the execution of the aforementioned decision or judgment against the herein petitioner's counterbond, which motion was opposed by petitioner Asian Surety & Insurance Co., Inc. on the ground that the property attached and released on its counterboard was then in custodia legis in another pending case and, therefore, could not be redelivered to the officer of the court in accordance with its undertaking. 6 7) On February 23, 1965, the herein private respondent Ramon C. Dy filed a reply to petitioner's opposition alleging that the property released by the latter's counterbond was different from that under custodia legis in other case; 7 8) On April 20, 1 965, the respondent Judge issued an order setting for hearing the aforementioned motion of private respondent Ramon C. Dy for execution of the judgment against the counterbond in order to determine "the existence and the contents of the Sheriff's Return allegedly" ecuted by Deputy Sheriff Simon Castillo in relation to the order of attachment issued in the case." 8 9) On June 3, 1965, respondent Judge No issued an order granting the motion for execution of petitioner's counterbond. Hence on June 15, 1965 the herein petitioner filed an "Urgent Motion for Reconsideration" of said order on the ground that it cannot be made liable on its counterbond unless the award be made after notice and hearing and before the final entry of judgment in the case, citing Section 20, Rule 57 of the Rules of Court. 9
10) On June 29, 1965, respondent Judge Ramon O. Nolasco issued an order finding no valid reason to disturb his order of June 3, 1965, considering that the order of execution in question was issued under the provisions of Section 17 and not Section 20 of Rule 57 of the Rules of Court. The urgent motion for reconsideration was denied and his order of June 17, 1965 suspending the writ of execution against the Asian Surety & Insurance Co., Inc. was set aside. Hence, this petition for certiorari and/or prohibition with preliminary injunction. 10 Assailing the orders of June 3, 1965 and June 29, 1965, the petitioner Asian Surety & Insurance Co., Inc. avers that the court a quo acted without or in excess of its jurisdiction, or with grave abuse of discretion in holding that petitioner is liable beyond the terms of its undertaking on the counterbond in question. Petitioner contends that under the terms of the surety contract, its undertaking is that, in the event that the plaintiff in the action recovers judgment against the defendants therein and the latter fail to deliver the property so released to the officer of the court, jointly and severally, it "will on demand pay to the plaintiff the full value of the property so released." It insists that its undertaking under the counterbond is to pay solidarily to the plaintiff, Ramon C. Dy, the full value of the property released under the counterbond. By the order of respondent Judge dated June 3, 1965, the counterbond is made liable for the payment of the judgment in the sum of P10,000.00, with legal interest from the filing of the complaint until fully paid, together with the sum of P500.00 as and for attomey's fees and the costs of the litigation which is, according to herein petitioner, contrary to the terms of its undertaking. Petitioner submits that submits a surety on any bond, whether judicial or otherwise, cannot be held liable beyond the terms of its undertaking, this order of respondent Judge was an act beyond or without jurisdiction, or in grave abuse of discretion. To support its stand, petitioner cited Art. 1305 of the Civil Code of the Philippines and the rulings inGerardo vs. Plaridel Surety & Ins. Co., Inc., G.R. No. L-7807, Oct. 31, 1956 and Santos and Frias vs. Hon. Mejia, et al., G.R. No. L- 6383, Dec. 29, 1953, 53 O.G. 3770. Petitioner contends that the stipulation in the counterbond is not that it is to "secure the payment of any judgment that the attaching creditor may recover in the action" as required by Section 17 of Rule 57 of the Rules of Court and insisted on by the herein respondents, but that it bound itself jointly and severally with the defendants in the action to redeliver the released property to the officer of the court to be applied to the payment of the judgment or in default thereof pay on demand to the plaintiff the full value of the property released; and that the bond filed by it is not one contemplated under Section 12 of Rule 57 of the Rules of Court but since the same was approved by respondent Judge and the other party in whose favor it was executed did not object, it is therefore accountable only according to the terms of its undertaking, citing Santos and Frias vs. Hon. Mejia, et al, G.R. No. L-6383, Dec. 29, 1953, 53 O.G. 3770. With respect to the matter of notice and hearing, petitioner claims that there must be prior notice and hearing before a surety can be held liable under the bond. It alleges that it was not given an opportunity to be heard before its counter-bond was charged. Petitioner Asian Surety & Insurance Co. contends that respondent Judge had assumed erroneously that under Section 17, Rule 57 of the Rules of Court, there is no need to file an application against the counterbond before the trial or before appeal is perfected or before judgment becomes executory as provided for under Section 20 of the same Rule 57 and hence, respondent Judge's order holding the counter-bond hable under Section 17 of said Rule 57 is an abuse of donation. It is the and of petitioner herein that under the terms of its
undertake it assumes only the payment of the 'full value of the property released and therefore takes it out of the "ambit" of said Section 17 and brings it within the contemplation of Section 20 of the same Rule 57. Considering that the prerequired of applying against the counterbond before appeal had been perfected or before the judgment becomes executory as provided for under said Section 20 had not been complete with, the petioner maintains that the respondent Judge comitted a grave abuse of discretion, or acted beyond or without jurisdiction on in holding the counterbond liable for the payment of the judgment. 11 The herein respondents countered that the real issue is not whether a bonding company may be or may not be held liable beyond the terms of its undertaking but what the herein petitioner, under the terms of the bond in question, undertook to do, considering the Rule under which the bond was issued the circumstances of its issuance and the terms of the undertaking pursuant to Section 12, Rule 57 of the Rules of Court. The respondents argue that: ñé+.£ªwph!1 The Rules simply require a bond 'in an amount equal to the value of the property attached.' Defendants and petitioner could have proved that the value of the property attack is so much. Without asking for the determination of the value of the property attached, defendants and petitioner filed the bond in question in the amount of P10,500.00. Can it not be said that defendants and petitioner voluntarily fixed the value of the Property attached at P10,500.00? 12 On the question of notice and hearing before the surety any be held liable under its bond, resents herein distinguish the Provisions of Section 20 of Rule 57 and Section 17 of the same Rule. Respondents say that Section 20 deals with the Procedure for claiming damages on a bond filed to secure the issuance of a writ of preliminary attachment whereas Section 17 provides for the procedure in executing a bond filed to lift an attachment. Hence, Section 17 of Rule 57 appellate in the present case and not Section 20 of the same Rule as contented by the petitioner. 13 Further, respondents aver:ñé+.£ªwph!1 Petitioner was duly served with a copy of the amended and supplemental motion for execution of count filed by the plaintiff (Annex "G" of the petition). Petitioner duly filed its opposition (Annex "H" of the petition). Petitioner was likewise served with a copy of plaintiffs reply (Annex "I" of the petition), and petitioner filed its rejoinder (Annex, "J" of the petition). Petitioner was likewise served with a copy of the order of respondent Judge (Annex "K" of the petition) setting case for heating on May 20, 1965 at 8:30 a.m. before the Deputy Clerk of Court, who was commissioned to receive evidence, for the parties to prove the existence and the contents of the Sheriff's return ... Neither petioner nor its counsel appeared at the of May 20, 1965. Hence, it should not now be heard to question the ruling of the Judge based on the evidence presented therein by interposing an absolution that it was not given the opportunity to be heard. 14
From the foregoing, it appears that there are only two contentious issues in this case:ñé+. £ªwph!1 1) Is petitioner Asian Surety & insurance Co., Inc. liable on its counterbond to pay the amount of P10,500.00? 2) Is prior notice and hearing essential to hold the surety liable Liner its bond? We shall first detemine the question of whether or not there had been notice to the petitioner and hearing in the present case. In Rule 57, two separate bonds are mentioned. Section 17 two separate of a counterbond filed and executed in behalf of the defendant in favor of the plaintiff to secure payment of the judgment which plaintiff may obtain should the execution be returned unsatisfied while Section 20 provides for the procedure to recover on a bond executed by the plaintiff to secure the payment of damps that the defendant may suffer by reason of the levy on his property under the writ of attachment. The counter-bond filed to lift the writ of attachment executed by the herein plaintiff Asian Surety & insurance Co., Inc., for and in behalf of the defendants below and in favor of the therein plaintiff Ramon C. Dy is curly the bond contemplated under Section 17 of said Rule 57 which reads: ñé+.£ªwph!1 SEC. 17. When execution returned unsatisfied recovery had upon bond. — If the execution be returned unsatisfied in whole or in part, the surety or sureties an any counterbond given pursuant to the provisions of this rule to secure the payment of the judgment shall become charged on such counterbond, and bound to pay to the judgment creditor upon demand, the amount due under the judgment, which amount may be recovered from such surety or sureties after notice and summary hearing in the same action. This section allows the counterbond to be charged only after notice and hearing, summary though the latter might be. This Court has ruled that the requirement of notice and hearing is substantially complied with from the time the surety was allowed to move for the quashing of the writ of execution and for the cancellation of its obligation. 15 In the present case, the petitioner Asian Surety & Insurance Co. was served with a copy of the amended and supplemental motion for execution of the counterbond and had in fact filed an opposition thereto. Petitioner was likewise served with a copy of the order of respondent court setting the date for hearing to receive evidence of the existence and contents of the Sheriffs Return with respect to the order of execution to enforce the court's decision on the principal action. Both said surety and the defendants therein, according to the records of the case, failed to attend. We are satisfied that, in accordance with the rule laid down in Luzon Steel Corp. vs. Sia, supra, the requisite of notice and summary hearing had substantially been complied with and, therefore, the herein petitioner cannot be heard to complain that it had not been notified and given its day in court. The submission of the petitioner that there being no evidence as to the full value of the property attached, it is not able on its counterbond has no merit.
The petitioner surety has the burden to prove that the value of the property attached is less than P10,500.00. When the petitioner executed the counterbond in the amount of P10,500.00, it is presumed that the full value of the property attached was P10,500.00. The petitioner cannot now complain that there was no evidence on the full value of the property attached. Precisely, under Section 12, Rule 57, Revised Rules of Court, the judge shall, after hearing, order the discharge of the attachment if a counterbond executed to the attaching creditor is filed on behalf of the adverse party with the clerk or judge Of the court where the application is made in an amount equal to the value of the property attached as determined by the judge to secure the payment of any judgment that the attaching creditor may recover n the action. The defendants in Civil Case No. 54065 and the petitioner surety must have considered the full value of the property attached when they filed the bond in the amount of P10,500.00. The defendants and the petitioner would not have filed a counterbond in the said amount if the value of the property attached were less. In view of the foregoing, the respondent Judge did not err in holding the petitioner surety liable for the full amount of the counterbond of P10,500.00 which covers the principal of P10,000.00 and the attomey's fees in the amount of P500.00. Anent the issue of interest, this Court has ruled that the surety is hable for interest on the principal obligation although that would increase the liability of the surety to more than the maximum of its undertaking under the bond.16 Citing the rulings of this Court in Tagawa vs. Aldenese, 43 Phil. 852; and Plaridel Surety & Insurance Co., vs. P.L. Galang Machinery Co., 100 Phil. 679, 682, We held: ñé+.£ªwph!1 If a surety upon demand fails to pay, he can be held liable for even if in thus paying, the liability becomes more than that in the principal obligation. The increased liability is not because of the contract but because of the default and the necessity of judicial collection. It is the holding of this Court that 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 the principal obligation. The increased liability is not because of the contract but because of the default. In the present case, the Asian Surety & insurance Co., inc., petitioner herein, is liable for interest only from the time demand was made upon it until the principal obligation is fully paid. The petitioner, however, shall not be hable to pay cost. WHREFORE, the orders of June 3, 1965 and June 29, 1965 count of P10,500.00 shall bear legal interest only from the date of the receipt by the petitioner, Asian Surety & Insurance Co., Inc., of the order of June 3, 1965 until the said amount is fully paid, without pronouncement as to costs. SO ORDERED. Teehankee (Chairman), Makasiar, Muñ;oz Palma, Martin and Guerrero, JJ., concur.1äwphï1.ñët Republic of the Philippines SUPREME COURT Manila
EN BANC G.R. No. L-13873
January 31, 1963
GENERAL INSURANCE and SURETY CORPORATION, petitioner, vs. REPUBLIC OF THE PHILIPPINES and CENTRAL LUZON EDUCATIONAL FOUNDATION, INC., respondents. Guido Advincula for petitioner. Office of the Solicitor General for respondents. REGALA, J.: On May 15, 1954, the Central Luzon Educational Foundation, Inc. and the General Insurance and Surety Corporation posted in favor of the Department of Education a bond, the terms of which read as follows: KNOW ALL MEN BY THESE PRESENTS: WHEREAS, the Department of Education has required the Central Luzon Educational Foundation, Inc., operating the Sison & Aruego Colleges, of Urdaneta, Pangasinan, Philippines, an institution of learning to file a bond to guarantee the adequate and efficient administration of said school or college and the observance of all regulations prescribed by the Secretary of Education and compliance with all obligations, including the payment of the salaries of all its teachers and employees, past, present, and future, and the payment of all other obligations incurred by, or in behalf of said school. NOW, THEREFORE, in compliance with said requirement, we, CENTRAL LUZON EDUCATIONAL FOUNDATION, INC., operating the Sison and Aruego Colleges, represented Dr. Jose Aruego, its Vice-Chairman, as principal, and the GENERAL INSURANCE AND SURETY CORPORATION, a corporation duly organized and existing under and by virtue the laws of the Philippines, as surety, are held and firmly bound, jointly and firmly, unto the Department of Education of the Republic of the Philippines in the sum of TEN THOUSAND PESOS (P10,000.00) Philippine currency, for the payment thereof we bind ourselves, our heirs, executors, administrators, successors, and assigns, jointly and severally firmly by these presents; WHEN the Secretary of Education is satisfied that said institution of learning had defaulted in any of the foregoing particulars, this bond may immediately thereafter be declared forfeited and for the payment of the amount above-specified, we bind ourselves, our heirs, executors, successors, administrators, and assigns, jointly and severally. We further bind ourselves, by these presents, to give the Department of Education at least sixty (60) days notice of the intended withdrawal or cancellation of this bond, in order that the Department can take such action as may be necessary to protect the interests of such teachers, employees or creditors of the school and of the Government.
LIABILITY of Surety under this bond will expire on June 15, 1955, unless sooner revoked. IN WITNESS WHEREOF, we signed this present guarranty at the City of Manila, Philippines, this 15th day of May, 1954. On the same day, May 15, 1954, the Central Luzon Educational Foundation, Inc., Teofilo Sison and Jose M. Aruego executed an indemnity agreement binding themselves jointly and severally to indemnify the surety of "any damages, prejudices, loss, costs, payments, advances and expenses of whatever kind and nature, including attorney's fees and legal costs, which the COMPANY may, at any time sustain or incur, as well as to reimburse to said COMPANY all sums and amounts of money which the COMPANY or its representatives shall or may pay or cause to be paid or become liable to pay, on account of or arising from the execution of the above mentioned Bond." On June 25, 1954, the surety advised the Secretary of Education that it was withdrawing and cancelling its bond. Copies of the letter were sent to the Bureau of Private Schools and to the Central Luzon Educational Foundation, Inc. It appears that on the date of execution of the bond, the Foundation was indebted to two of its teachers for salaries, to wit: to Remedios Laoag, in the sum of P685.64, and to H.B. Arandia, in the sum of P820.00, or a total of P1,505.64. Demand for the above amount having been refused, the Solicitor General, in behalf of the Republic of the Philippines, filed a complaint for the forfeiture of the bond, in the Court of First Instance of Manila on July 11, 1956. In due time, the surety filed its answer in which it set up special defenses and a cross-claim against the Foundation and prayed that the complaint be dismissed and that it be indemnified by the Foundation of any amount it might be required to pay the Government, plus attorney's fees. For its part, the Foundation denied the cross-claim and contended that, because Remedios Laoag owed Fr. Cinense the amount of P820.65, there was no basis for the action; that the bond is illegal and that the Government has no capacity to sue. The surety also filed a third-party complaint against Teofilo Sison and Jose M. Aruego on the basis of the indemnity agreement. While admitting the allegations of the third-party complaint, Sison and Aruego claimed that because of the cancellation and withdrawal of the bond, the indemnity agreement ceased to be of force and effect. Hearing was held and on December 18, 1956, the Court of First Instance rendered judgment holding the principal and the surety jointly and severally liable to the Government in the sum of P10,000.00 with legal interest from the date of filing of the complaint, until the sum is fully paid and ordering the principal to reimburse the surety whatever amount it may be compelled to pay to the Government by reason of the judgment, with costs against both principal and the surety. The surety filed a motion for reconsideration and a request to decide the third-party complaint which the trial court denied.
On appeal, the Court of Appeals rendered a decision, the dispositive portion of which reads: WHEREFORE, the appealed judgment is hereby modified in the following manner: (a) Ordering Central Luzon Educational Foundation, Inc., and General Insurance and Surety Corporation to pay jointly and severally the Republic of the Philippines the sum of P10,000.00, plus costs and legal interests from July 11, 1956 until fully paid; and (b) Ordering Central Luzon Educational Foundation, Inc., Teofilo Sison and Jose M. Aruego to reimburse, jointly an severally, the General Insurance and Surety Corporation of all amounts it may be forced to pay the Republic of the Philippines by virtue of this judgment, plus costs and P2,000.00 for counsel's fees. From this decision, the surety appealed to this Court by way of certiorari, raising questions of law.1 In its first four assignments of error, the surety contends that it was no longer liable on its bond after August 24, 1954 (when the 60-day notice of cancellation and withdrawal ended), or, at the latest, after June 15, 1955. For support, the surety invokes the following provisions of the bond: WE, further bind ourselves, by these presents to give the Department of Education at least sixty (60) days notice of the intended withdrawal or cancellation of this bond, in order that the Department can take such action as may be necessary to protect the interest of such teachers, employees, Creditors to the government. LIABILITY of the Surety under this bond will expire on June 15, 1955, unless sooner revoked. On the other hand, the Government contends that since the salaries of the teachers were due and payable when the bond was still in force, the surety has become liable on its bond from the moment of its execution on May 15,1954. We agree with this contention of the Government. It must be remembered that, by the terms of the bond the surety guaranteed to the Government "compliance (by the Foundation) with all obligations, including the payment of the salaries of its teachers and employees, past, present and future, and the payment of all other obligations incurred by, or in behalf of said school." Now, it is not disputed that even before the execution of the bond the Foundation was already indebted to two of its teachers for past salaries. From the moment, therefore, the bond was executed, the right of the Government to proceed against the bond accrued because since then, there has been violation of the terms of the bond regarding payment of past salaries of teachers at the Sison and Aruego Colleges. The fact that the action was filed only on July 11, 1956 does not militate against this position because actions based on written contracts prescribe in ten years. (Art. 1144, par. 1, Civil Code). The surety also cites our decision in the case of Jollye v. Barcelon and Luzon Surety Co., Inc., 68 Phil. 164 and National Rice & Corn Corp. (NARIC) v. Rivera, et al., G.R. No. L-4023, February 29, 1952. But there is nothing in these cases that
supports the proposition that the liability of a surety for obligations arising during the life of a bond ceases upon the expiration of the bond. In the Jollye case, the bond provided: Whereas, the above bounded principal, on 13th day of February, 1933 entered into an agreement with H. P. L. Jollye of Manila, P. I., to fully and faithfully refund to said Mr. H. P. L. Jollye the above stated sum of P7,500 representing the purchase price of the 74 shares of the capital stock of the North Electric Company (certificate No. 38) paid by said Mr. H. P. L. Jollye to the undersigned principal, Mr. Emeterio Barcelon, in the event ofthe title thereto of said Mr. Barcelon is invalidated by any judgement which may be rendered by the court of Cavite against Vicente Diosomito or in the event that any of the warranties contained in that certain deed of sale executed by the undersigned principal on this 13th day of February, 1933,be invalidated, a copy of which is hereto attached and made an integralpart hereof, market Exhibit A. Wherefore, the parties respectfully pray that the foregoing stipulation of facts be admitted and approved by this Honorable Court, without prejudice to the parties adducing other evidence to prove their case not covered by this stipulation of facts. 1äwphï1.ñët According to the bond, "the liability of Luzon Surety Company, Inc. under this bond will expire (12) months from date hereof." The date referred to was February 13, 1933. This Court absolved the surety of liability because the acts for which the bond was posted happened after its expiration. Thus, We held in that case: ... The acts provided therein by reason of which the contract of suretyship was executed could have taken place within the stipulated period twelve months. Hence, the parties fixed that period exactly at twelve months, limiting thereby the obligation of the appellee to answer for the payment to the appellant of the aforesaid sum of P7,500.00 to not more than the stipulated period. . . . Here, on the other hand, the right of the Government to collect on the bond arose while the bond was in force, because, as earlier noted, even before the execution of the bond, the principal had already been indebted to its teachers. Neither does the NARIC case support the surety's position. In that case, the bond provided that — This bond expires on March 20th, 1949 and will be cancelled TEN DAYS after the expiration, unless the surety is notified of any existing obligation thereunder, or unless the surety renews or extends it in writing for another term. and We held that giving notice of existing obligation was a condition precedent to further liability of the surety and that in default of such notice, liability on the bond automatically ceased. Similarly, in the case of Santos, et. al. v. Mejia, et al., G.R. No. L-6383, December 29, 1953, the bond provided that —
Liability of the surety on this bond will expire in THIRTEEN DAYS and said bond will be cancelled 10 DAYS after its expiration unless surety is notified of any existing obligation thereunder. and We held that the surety could not be held liable because the bond was cancelled when no notice of existing obligations was given within ten days. In the present case, there is no provision that the bond will be cancelled unless the surety is notified of any claim and so no condition precedent has to be complied with by the Government before it can bring an action. Indeed, the provision of the bond in the NARIC and Santos cases that it would be cancelled ten days after its expiration unless notice of claim was given was inserted precisely because, without such a provision, the surety's liability for obligations arising while the bond was in force would subsist even after its expiration. Thus, in Pao Chuan Wek v. Nomorosa, 54 O.G. No. 11, 3490, We held that under a provision that the surety "will not be liable for any claim not discovered and presented to the company within three months from the expiration of this bond and that the obligee hereby waives his right to file any court action against the surety after the termination of the period of three months above mentioned," the giving of notice is a condition precedent to be complied with. And suppose this action were filed while the bond was in force, as the surety would have the Government do, but the same remained pending after June 15, 1955, would the surety suggest that the judgment that may be rendered in such action could no longer be enforced against it because the bond says that its liability under it has expired? And what of the provision on 60-day notice? The surety urges that all actions on the bond must be brought within that period or they would all be barred. The surety misread the provision. The 60-day notice is not a period of prescription of action. The provision merely means that the surety can withdraw — as in fact it did in this case — even before June 15, 1955 provided it gave notice of its intention to do so at least 60 days in advance. If at all, the condition is a limitation on the right of the surety to withdraw rather than a limitation of action on the bond. This is clear also from the Manual of Information for Private Schools2 which states that "The bond furnished by a school may not be withdrawn by either or both the bondsmen except by giving the Director of Private Schools sixty days notice." In its fifth assignment of error, the surety contends: 1. That the bond is void for being contrary to public policy insofar as it requires the surety to pay P10,000.00 regardless of the amount of the salaries of the teachers. 3 It is claimed that to enforce forfeiture of the bond for the full amount would be to allow the Government to enrich itself since the unpaid salaries of the teachers amount to P1,318.84 only. 2. That, under Article 1311 of the Civil Code,4 since teachers of Sison and Aruego Colleges are not parties to the bond, "the bond is not effective, and binding upon the obligors (principal and surety) as far as it guarantees payment of the 'past salaries' of the teachers of said school." This is the same as saying that the surety is not liable to teachers of Sison and Aruego Colleges because the latter are not parties to the bond nor are they beneficiaries of a stipulation pour autrui. But this argument is based on the false premise that the teachers are trying to enforce the obligation of the bond, which is not the case here. This is not an
action filed by the teachers against the surety. This is an action brought by the Government, of which the Department of Education is an instrumentality, to hold the surety liable on its bond for the same has been violated when the principal failed to comply "with all obligations, including the payment of salaries of its teachers, past, present and future." There is nothing against public policy in forfeiting the bond for the amount. The bond is penal in nature. Article 1226 of the Code states that in obligation with a penal clause, the penalty shall substitute the indemnity for damages and the payment of interests in case of non-compliance, if there is no stipulation to the contrary, and the party to whom payment is to be made is entitled to recover the sum stipulated without need of proving damages because one of the primary purposes of a penalty clause is to avoid such necessity. (Art. 1228, Civil Code; Lambert v. Fox, 26 Phil. 588; Palacios v. Municipality of Cavite, 12 Phil. 140; Manila Racing Club v. Manila Jockey Club, 69 Phil. 55). The mere non-performance of the principal obligation gives rise to the right to the penalty, (IV Tolentino, Civil Code of the Philippines, p. 247.) In its first and second "alternative assignments of error," the surety contends that it was released from its obligation under the bond when on February 4, 1955, Remedios Laoag and the Foundation agreed that the latter would pay the former's salaries, which were then already due, on March 1, 1955. In support of this proposition, the surety cites Article 2079 of the Code which provides as follows: An extension granted to the debtor by the creditor without the consent of the guarantor extinguishes the guaranty. . . . But the above provision does not apply to this case. The supposed extension of time was granted not by the Department of Education or the Government but by the teachers. As already stated, the creditors on the bond are not the teachers but the Department of Education or the Government. Even granting that an extension of time was granted without the consent of the surety, still that fact would not help the surety, because as earlier pointed out, the Foundation was also arrears in the payment of the salaries of H. B. Arandia. The case of Arandia alone would be enough basis for the Government to proceed against the bond. Lastly, in its third and fourth "alternative assignments of error," the surety contends that it cannot be made answer for more than the unpaid salaries of H. B. Arandia, which it claimed amounted to P720.00 only, because Article 2054 states that — A guarantor may bind himself for less, but not for more than the principal debtor, both as regards the amount and the onerous nature of the conditions. Should he have bound himself for more, his obligations shall be reduced to the limits of that of the debtor. What We said about the penal nature of the bond would suffice to dispose of this claim. For whatever may be the amount of salaries due the teachers, the fact remains that the condition of the bond was violated and so the surety became liable for the penalty provided for therein.
WHEREFORE, the decision of the Court of Appeals is hereby affirmed, with costs against the surety. Padilla, Bautista Angelo, Labrador, Concepcion, Reyes, Barrera, Parades, Dizon and Makalintal, JJ., concur. Bengzon, C.J., took no part. Footnotes 1
Central Luzon Educational Foundation, Inc., Teofilo Sison and Jose M. Aruego also appealed to this Court but we dismissed their appeal in G.R. No. L-14119 for having been filed out of time. 2
Prepared by the Department of Education pursuant to Act No. 2706.
3
Article 1183 states that impossible conditions, those contrary to good customs or public policy and those prohibited by law shall annul the obligation which depends upon them. 4
Contracts take effect only between the parties, their assigns and heirs, except in case where the rights and obligations arising from the contract are not transmissible by their nature, or by stipulation or by provision of law. The heir is not liable beyond the value of the property he received from the decedent. If a contract should contain some stipulation in favor of a third person, he may demand its fulfillment provided he communicated his acceptance to the obligor before its revocation. A mere incidental benefit or interest of a person is not sufficient. The contracting parties must have clearly and deliberately conferred a favor upon a third person. Republic of the Philippines SUPREME COURT Manila EN BANC G.R. No. L-3751
October 25, 1952
VISAYAN DISTRIBUTORS, INC., plaintiff-appellee, vs. MARIANO R. FLORES, ET AL, defendants-appellants. Adriano M. Ignacio, Constantino P. Tagna, Conrado T. Castillo, and Amelito R. Mutuc for appellants. Claro M. Recto and Bausa and Ampil for appellee. PARAS, C.J.: On November 9, 1946, the plaintiff-appellee (Visayan Distributors. Inc.), herein to be referred to as appellee, and Mariano R. Flores (doing business under the name of Rizal Investment
Corporation), herein to be referred to as Flores, and Teofilo Abeto (doing business under the name of Philippine Investment Co., Ltd.), herein to be referred to as Abeto, entered into a contract whereby Abeto and Flores bound themselves to deliver on November 18, 1946, to the appellee at the port of Romblon on board the vessel to be supplied by the appellee 2,000 long tons of copra, to be paid by the appellee at $103.50 per ton f.o.b. appellee's vessel at Romblon. The contract provided that the appellee upon satisfactory inspection of the copra, would advanced to Abeto and Flores the sum of P10,000 for initial weighing and checking expenses, plus another P10,000 on the first day of loading. The contract also provided that the appellee would furnish Abeto and Flores with 15,000 empty sacks to facilitate the handling, weighing and loading of copra. The purchase price was to be paid as follows: (a) 95 per cent of the total cost of copra to be paid upon presentation of the following: Commercial Invoice. On-Board Bills of Lading. Weight Certificate and/or Survey Report. 5 per cent upon acceptance of weight in American port. xxx
xxx
xxx
(e) The balance of invoice value payable by an irrevocable confirmed letter of credit to the China Banking Corporation in favor of the sellers. The appellee, after the execution of the contract, advanced to Abeto and Flores first the sum of P10,000 and latter the sum of P10,000 and later the sum of P3,000. Under date of November 12, 1946 a surety bond was executed by Abeto and Flores as principals, and by Rizal Surety and Insurance Co. (herein to be referred to as Surety), for the sum of P30,000, to secure the full and faithful performance of the contract of Abeto and Flores with the appellee. With due notice to Abeto and Flores, the SS. PANAMAN was sent by the appellee to, and arrived at the port of Romblon on November 17, 1946, Abeto and Flores having been advised by the appellee that said steamer would be ready to load the copra on November 18, 1946. Abeto and Flores were, however, unable to deliver any amount of copra on said steamer with the result that SS. PANAMAN left Romblon without cargo. The appellee had previously sent to Abeto and Flores in Romblon 26,875 empty sacks of which 2,908 were used by the appellee for transporting copra to Cebu on the FS-156. The appellee instituted in the Court of Instance of Manila on December 14, 1946, an action against Abeto and Flores and the Surety for breach of contract. In its first amended complaint the appellee sought to recover (1) the sum of P13,000, representing advances; (2) P55,500, representing the value of empty sacks; (3) P150,000, as damages, and (4) the sum of P4,064, deposited by the appellee with the Bureau of Customs in compliance with the rules and regulations in connection with the sale and delivery of the copra in question. The Surety filed a cross-claim against Abeto and Flores and a third-party complaint against Gregorio Gutierrez, in virtue of the indemnity agreement filed by the latter three in favor of the Surety. After trial, the Court of First Instance of Manila rendered a decision the dispositive part of which read as follows: In view of all the foregoing, judgment is hereby rendered sentencing defendant Teofilo Abeto, Mariano R. Flores, and the Rizal Surety & Insurance Co., Inc., to pay
plaintiff, jointly and severally the sum of P13,000 plus the further sum P35,950 with interest on both amounts at the legal rate from the date of the filing of the complaint, as well as the further sum of P150,000 as damages, with costs of suit. The liability, however, of defendant Rizal Surety & Insurance Co., Inc., shall be limited to P30,000 only. The court, likewise, sentences defendants Abeto and Flores and third-party defendant Gregorio Gutierrez to reimburse, also jointly and severally, unto said defendant Rizal Surety & Insurance Co., Inc., whatever amount the latter may pay to plaintiff, pursuant to the foregoing judgment, with interest thereon at the rate of 12 percent per annum, plus the further sum equivalent to 15 per cent of said amount as and for attorney's fees. From this decision Abeto and Flores as well as the Surety, have appealed, the first two having filed their own brief, and the Surety having filed a separate brief. Abeto and Flores contend that they had the copra called for in their contract with the appellee on November 18, 1946, but that they refused to deliver the same on the ground that the appellee was insolvent and failed to guarantee the payment of the purchase price by a letter of credit called for in the contract, — a contention also availed of by the Surety. It is very significant, however, that Abeto and Flores had not made in their answer even the slightest hint that they had copra in the port of Romblon on November 18, 1946. Upon the other hand, they merely invoked the defense that the contract of November 9, 1946, was canceled by another agreement made on November 22, 1946, calling for the delivery of only 500 tons of copra, and that, at any rate, their failure to comply with the contract of November 9, 1946, was excused by force majeure (the abrogation of the copra trade agreement between the United States and the Philippines). Even in their letter to counsel for the appellee (Exhibit 1), Abeto and Flores absolutely failed to mention the alleged fact that they had the necessary quantity of copra on the date specified in their contract. The conspicuous circumstance that the appellee's vessel SS. PANAMAN left the port with its hold empty, without any written notice or advice from Abeto and Flores that they had the necessary copra which they would deliver only upon payment of its purchase price in accordance with the terms of their contract, militates against the contention of Abeto and Flores and the surety, that copra was available. The evidence for Abeto and Flores tends to show that they, thru Ignacio Lizo, contracted with copra suppliers for the delivery of some 2,000 tons to the port of Romblon upon the arrival of landing barges; that Lizo merely paid the necessary deposit to the suppliers who thereupon signed the necessary contracts and the corresponding receipts for the advance payment; that said copra be bought from various suppliers, which were not delivered to the appellee under their contract, were later sold to Escudero & Co., and the Nacoco. The fact, however, that none of the alleged contracts or receipts signed by the copra suppliers, and the invoices of Escudero & Co. and the Nacoco was presented in evidence during the trial, is a strong indication negating the alleged existence of copra on or about November 18, 1946. The Surety relies upon the provision in the contract between the appellee and Abeto and Flores, to the effect that the bond "can be foreclosed if copra does not exist by the time Buyer's vessel is ready to load." This is complemented by the proposition that 159,834 kilos of copra were delivered by Abeto and Flores to the appellee under their contract of sale. The Surety's position is evidently erroneous, if we bear in mind the fact that Abeto and Flores have not pretended that the said quantity of copra was a part of the sale under the contract of November 9, 1946. Indeed, in the receipt signed by Abeto and Flores for the partial payment of said 159,834 kilos of copra, it is expressly admitted that the quantity was
without prejudice to their contract of 2,000 tons of copra, dated November 18, 1946. The Surety also supposes that the 159,834 kilos of copra delivered to the appellee had been paid by the latter in the total amount of P33,000, represented, first by the sums of P10,000 and P3,000 advanced by the appellee after the execution of the contract of November 9, 1946, and, secondly, by the sum of P20,000 paid by the appellee upon loading said copra. This supposition is again at war with the theory of Abeto and Flores, who specially admitted that said copra was in virtue of a separate deal and who, as a matter of fact, still hold the appellee liable for the unpaid balance of P13,000. Indeed, the alleged failure of the appellee to pay the balance of P13,000, is taken by Abeto and Flores as evidence of appellee's insolvency which justified Abeto and Flores in refuse to deliver the copra called for in the contract of November 9, 1946. The Surety maintains that the recital in the receipt signed by Abeto and Flores covering the partial payment of 159,834 kilos of copra, to the effect that said quantity was without prejudice to their obligation to deliver 2,000 tons of copra, should be construed as meaning merely that Abeto and Flores did not waive with the stipulation requiring the appellee to obtain a letter of credit. Such construction is not borne out by the terms of the receipt which protects expressly the rights of the appellee under the contract of November 9, 1946, and would be tenable only if the receipt provided that the delivery of 159, 834 kilos of copra was without prejudice to the right of Abeto and Flores regarding the letter of credit called for in their contract. The alleged absence of a letter of credit to secure the payment of the purchase price is invoked both by Abeto and Flores and by the Surety. In the first place, there is evidence to the effect that a letter of credit was available, although it was not actually assigned to Abeto and Flores in the absence of copra ready for loading on the SS. PANAMAN. In the second place, the alleged fact, constituting a defense, was not pleaded by Abeto and Flores and the Surety, so much so that, when an attempt was made during the trial to prove the absence of the letter of credit, counsel for the appellee objected, and the objection was sustained by the trial court; and although the Surety was allowed to amend its answer to plead the absence of the letter of credit as an excuse for the failure of Abeto and Flores to comply with their contract, no amended answer was filed by the surety. The latter, however, contends that amendment was no longer necessary because its answer already alleged violation on the part of the appellee of its contract, and because counsel for the appellee admitted "that the letter of credit has not been established for lack of compliance by defendants, Mr. Mariano Flores and Mr. Teofilo Abeto and the companies they represent with the terms and conditions of the contract." The alleged violation of the appellee of its contract, set up as a defense in the surety's answer, is a mere conclusion. As to the admission of counsel for the appellee, it may be stated that the same must be taken in conjunction with the previous testimony of Peter Cang Hocho, a witness for the appellee, that the letter of credit was available though not assigned to Abeto and Flores. Moreover, it appears that under the terms of the contract of November 9, 1946, it is only the balance of the invoice value which should be payable by an irrevocable letter of credit, and the contract called for payment of 95 per cent of the total purchase price upon presentation of the commercial invoice, on board bills of lading, wage certificate and/or survey report, and 5 per cent upon acceptance of weight in American port. Said balance of the invoice value appears to be merely 5 per cent of the contract price, and the same could not of course be accurately determined before the quantity of copra to be loaded on November 18,1946, was known. At any rate, Abeto and Flores admit in, their brief (p.14) that the contract did not obligate the appellee to secure the payment of the purchase price. Abeto and Flores, on the other hand, contend that they were excused from delivering copra on November 18. 1946, because the appellee was insolvent, in that part of the purchase
price of the 159,834 kilos of copra delivered to the appellee remained unpaid, reliance being placed on Articles 1466 and 1467 of the old Civil Code. The contention is untenable, it appearing that there is no conclusive proof showing that Abeto and Flores, in definite terms, had warned the appellee that they would not deliver the copra called for in their contract until they were sure of being paid in accordance with said contract. Moreover, even assuming that the appellee still owed Abeto and Flores something upon account of the 159,834 kilos of copra delivered before November 18, 1946, said fact is not a positive evidence of insolvency,1 and to mention the circumstance that the contract is essentially a cash transaction, 95 per cent of the purchase price being required to be paid in cash and only 5 percent by an irrevocable letter of credit. Of course, the appellee was not to be expected to tender payment before the presentation of the documents called for in the contract, namely, commercial invoice, on board bills of lading, and wage certificate and/or survey report. The Surety also claims that it was released from liability under its bond because Abeto and Flores and the appellee novated their contract of November 9, 1946, without the consent of the Surety. In the main, the Surety alleges that the appellee advanced P10,00 to Abeto and Flores before the inspection of copra, and thereafter made another advance payment of P3,000, in addition to the fact that the manner of payment was changed from a letter of credit to cash, and that 26,875 empty sacks were delivered to Abeto and Flores instead of only 15,000 as stipulated in the contract. With reference to the payment of P10,000, it appears that the same was made with the knowledge of the Surety, as shown by Exhibit A which contains a recital added in the handwriting of Andres U. Cang, Treasurer and General Manager of the appellee, worded as follows: N.B. With due agreement of Rizal Investment Corp., it is agreed that upon delivery of thirty thousand pesos(P30,000) BOND, the P10,000 cash will be delivered to Mr. M. Flores of the Rizal Investment Corp. (Sgd.) A.U.C. It is noteworthy that a duplicate copy of Exhibit A (Exhibit D-1), attached to the bond Exhibit D and referred to therein as forming part thereof, contains said recital and bears the dry seal of the Surety, initialed by one of its officials. As to the advance payment of P3,000, suffice it to state that said payment could not adversely affect the position of the Surety or render the obligation more onerous, and therefore could not have the effect of releasing the bond (Bank of the Philippine Islands vs. Albaladejo y Cia, 53 Phil. 141; Bank of the Philippine Island vs. Gooch and Redfern, 45 Phil., 514). In respect of the 26,875 empty sacks, it may be pointed out that although the contract bound the appellee to furnish Abeto and Flores with only 15,000 sacks, the excess could likewise have no adverse effect insofar as the Surety was concerned, it appearing that the Surety is not being charged with the value of such excess intended to be used by the appellee for any proper purpose. Indeed, the liability of the Surety under the bond is limited to P30,000, easily covered by the first advance payment of P10,000 and the value of 15,000 empty copra sacks, at the proven price of P1.50 per sack. The allegation that the manner of payment of the purchase price was altered, is patently without merit, since as already hereinbefore noted, the payment under the contract of November 9, 1946, was essentially in cash, and the letter of credit could not be assigned to
Abeto and Flores without first determining the amount of copra to be loaded on the appellee's vessel on November 18, 1946. As to the amount of damages awarded by the lower court, there seems to be no room for controversy, the sum of P150,000 has been positively established by the testimony of Peter Cang Hocho, as profits which the appellee lost as a result of the breach of contract on the part of Abeto and Flores. The evidence for the appellee to the effect that there was already a contract of sale for the entire amount of copra which Abeto and Flores covenanted to deliver to the appellee under the contract of November 9, 1946, which would give the appellee such profits, remains uncontradicted in the record. On the other hand, the receipt by Abeto and Flores, thru their representatives Ignacio B. Lizo and Isaias Ruiz, of the 23,957 empty copra sacks, is conclusively shown by Exhibits 1 and E-2, in addition to the bills of lading covering the shipment of said sacks (Exhibits L and M) admitted by Abeto and Flores. It is contended for Abeto and Flores that their liability for damages, if any, is limited to the sum of P30,000 fixed in the Surety bond. This contention is patently without merit, because while the bond was intended to secure the full and faithful performance by Abeto and Flores of their obligations under the contract of November 9, 1946, the amount of P30,000 specified in the bond did not limit the extent of the damages to be recovered by the appellee in case of breach on the part of Abeto and Flores. However, the liability of the surety is limited to said amount. Wherefore, the appealed judgment is affirmed, and it is so ordered with costs against the appellants. Pablo, Bengzon, Padilla, Montemayor, Jugo, Bautista Angelo and Labrador, JJ., concur.
Footnotes 1
The insolvency referred to by the law may be before or after the sale, provided it is discovered after the perfection of the contract. It must be a judicially declared insolvency, or one inferred from such acts as petitioning for suspension of payments, or as a result of all his properties having been attached in a civil or criminal proceeding. Anything short of this will not be sufficient to exempt the vendor from making the delivery of the thing (Tolentino, Commentaries and Jurisprudence on the Civil Code, 1947, Vol. II, p. 862, citing Manresa, pp. 140-142.). Republic of the Philippines SUPREME COURT Manila EN BANC September 10, 1908
G.R. No. 4465 MARCELA ALVARAN, plaintiff-appellee, vs. BERNARDO MARQUEZ, defendant-appellant. F. Manalo for appellant. B. G. Zoboli for appellee. TORRES, J.: On the 5th of March, 1906, Marcela Alvaran, the wife of Isabelo Reyes, filed a written complaint while the court of First Instance of La Laguna, stating that her husband had no interest, nor could he have any right in the matter that she brought before the court of the attachment of a parcel of land that was exclusively and absolutely her property. The said land is situated in the barrio of San Gregorio, pueblo of San Pablo, and is bounded on the north by the property to the barrio of Santa Maria; on the south by the properties of Mamerto Evangelista, Tranquilino Gapuno, and Rufino Calabia; and on the west, by the properties of Maria Nieves Calabia and Leoncia Evangelista. The said parcel of land was attached by the municipal sheriff on the 17th of February, 1906, at the request of Bernardo Marquez, as being the property of the said Marcela's husband, in the conformity with the judgment entered against the latter in an oral action brought by said Marquez against Reyes, in the court of the justice of the peace, for the recovery of a certain sum of money. the creditor, Marquez, insisted upon maintaining the attachment, and furnished the necessary bond in accordance with the provision of section 451 of Act No. 190, notwithstanding the claim made by the plaintiff, and the fact that her title was entered in the registry of property in accordance with Act No, 496; therefore, she asked that judgment be rendered ordering the defendant to recognize the plaintiff as the sole owner of the land in question; that the attachment thereof be annulled, and that the defendant be sentenced to indemnify her for damages incurred and the costs of the proceedings, together with any other remedy that might be considered just and equitable. The defendant, Bernardo Marquez, on the 29th of March, 1906, answered the complaint, and denied all and each of the facts stated in the same in so far as they did not agree with those
in the answer; that in the execution of the judgment entered against Isabelo Reyes, the plaintiff's husband, the sheriff of San Pablo had not levied upon the property described in the complaint, and which does not belong to the plaintiff, since the land attached is situated in the barrio of San Gregorio, municipality of San Pablo, and is planted with 300 cocoanut trees, all of which bear more or less fruit, and the boundaries of which are; On the north, the lands of Damiana Briones and Lucio Evangelista; on the east the "Vecinal" street of said barrio; on the west of the land of Leon Briones, and on the south of the lands of Mamreto Evangelista and Tranquilino Gapuno; that the land attached was the property of Isabelo Reyes, who was in the possession and enjoyment thereof; that the execution and attachment was limited to the property of Isabelo Reyes by virtue of the obligation contracted by him while united in marriage to the plaintiff; that the plaintiff was cognizant of said obligation; that at the time her husband contracted it the plaintiff intervened and verbally guaranteed the solvency of her husband, and assured creditor that her husband was the owner of the said land with 300 cocoanut trees; that, owing to the fact that the complaint does not set forth the title of the dominion alleged by the plaintiff, the same does not contain facts sufficient to constitute a costs of action, depriving the defendant of the power to answer and refute the supposed title of dominion. therefore prayed that the complaint be dismissed with costs. Evidence have been adduced by both parties, their exhibits were made of record. On the 22d of March, 1907, judgment was rendered by the court below annulling the attachment and the adjudication of the land in controversy to the defendant, Bernardo Marquez, and sentencing the latter to return the said land described in the complaint to its owner, the plaintiff Marcela Alvaran, to pay the latter P90, received for 4,500 cocoanuts, when the costs of the proceedings. The defendant excepted to the above judgment and moved for a new trial; the motion was overruled for the 30th of April, 1907, and it does not appears that the petitioner excepted thereto. Before dealing in this decision with the main points in controversy, and should be stated that as to the form the petitioner has not excepted to the order of the 30th of April, 1907, overruling the motion for the new trial, this court can not review the evidence nor examined the findings of the court below to see if they are in accordance with the law and the merits of the case; it must limit itself to deciding only the questions of law referred to in appeal of
exceptions, contained in the assignment of errors set out in the appellant's proof. (Sec. 497 of Act No. 190 as amended by Act No. 1596 .) It is fully proven that the land in question is owned exclusively by the plaintiff, Marcela Alvaran, as duly shown by the title issued by the Court of Land Registration, and produced in due course in this litigation. The plaintiff was in possession thereof for fifteen years prior to the time when it was claimed: that is, since she inherited it from her mother, Maria Banayo, she being then already married to her present husband, Isabelo Reyes. Under these circumstances it is understood at once that the matter at issue refers to the property of the right, acquired by her during marriage, and brought into the conjugal partnership apart from the dowry and without being included therein. Said inheritance is included among the property that the law classifies as paraphernal. (Arts. 1381, 1396, No. 2 Civil Code.) Article 1823 of the Civil Code reads: The wife retains the ownership of the paraphernal property. So that, according to the provisions of article 1834 of the said code, even if the land in question was administered by Isabelo Reyes, his wife, Alvaran, has not lost her right of dominion thereto, no can it be attached for a debt contracted by her husband at the instance of a creditor of the latter. The doctrine has been established in a decision of the case of Lopez Villanueva vs. Alvarez Perez et al., (9 Phil. Rep., 28) and it is a settled rule that it is a legal condition n attachments of all kinds that the thing attached must be the property of the debtor, and from no provision of the Mortgage Law can a conclusion be derived contrary to such principle. If the aforesaid estate was not the property of Reyes, the husband, but of his wife, the plaintiff, as concluded by the court below in view of the evidence, in no manner could the same have been attached at the request of Bernardo, nor adjudicated to him, inasmuch as no legal reason existed whereby the plaintiff was obliged to make him any payment or loan; therefore, the proceedings from which it resulted that the plaintiff was unjustly deprived of her property on account of a debt for which she was not responsible are entirely null and void.
Inasmuch as in the case at bar no question has been set up relative to the nature and destination of the fruits obtained from the said land, nor in connection with the kind and the conditions of the indebtedness of Isabelo Reyes to the defendant Marquez, it is our opinion that we are not permitted to decide points of law defined by articles 1385 and 1386 of the Civil Code outside or beyond what has been decided in the judgment appealed from with respect to the value of the cocoanuts harvested by the defendant, Section 20 of the Rules of this Court provides that — No error not affecting the jurisdiction over the subject matter will be considered unless stated in the assignment of errors and relied upon the brief. The defendant alleges that the plaintiff stood as surety for her husband, but, as the judgment appealed from rightly states, there is no evidence on record that such a bond, which would be an actual contract, was ever undertaken, and without the consent of the party supposed to be bound thereby its existence can not be conceived. Moreover under article 1827 of the code security is not presumed; it must be expressed, and can not be interfered or presumed because of the existence of a contract or principal obligations. From mere presumption it is not possible to establish contractual relations and liens which presuppose a willingness to buy oneself. This requisite is not present in the case at bar, since it does not appear that Marcela Alvaran had voluntarily guaranteed the solvency of her husband, and therefore the attachment proceedings, the sale and adjudication of said land to the defendant, in payment of a debt to which the owner of the land is in no manner liable, are notoriously contrary to law. For the above reasons, and accepting the conclusions contained in the judgment appealed from, it is our opinion that the same should be affirmed with the costs against the appellant. So ordered. Arellano, C.J, Mapa, Carson, Willard and Tracey, JJ., concur. Republic of the Philippines SUPREME COURT Manila EN BANC
G.R. No. L-23181
March 16, 1925
THE BANK OF THE PHILIPPINE ISLANDS, plaintiff-appellee, vs. GABRIELA ANDREA DE COSTER Y ROXAS, ET AL., defendants. LA ORDEN DE DOMINICOS or PP. PREDICADORES DE LA PROVINCIA DEL SANTISIMO ROSARIO,defendants-appellees; GABRIELA ANDREA DE COSTER Y ROXAS, defendant-appellant. Antonio M. Opisso for appellant. Araneta and Zaragoza for the bank as appellee. Perfecto Gabriel for the Dominican Corporation as appellee. STATEMENT March 10, 1924, the plaintiff filed a complaint in which it was alleged that it was a domestic banking corporation with its principal office and place of business in the City of Manila; that the defendant Gabriela Andrea de Coster y Roxas was the wife of the defendant Jean M. Poizat, both of whom were residents of the City of Manila; that the defendant J. M. Poizat and Co. was a duly registered partnership with its principal office and place of business in the City of Manila; that the defendant La Orden de Dominicos or PP. Predicadores de la Provincia del Santisimo Rosario was a religious corporation duly organized and existing under the laws of the Philippine Islands with its principal office and place of business in the City of Manila; that on December 29, 1921, for value, the defendant Gabriela Andrea de Coster y Roxas, having the consent and permission of her husband, and he acting as her agent, said defendants made to the plaintiff a certain promissory note for P292,000, payable one year after date, with interest of 9 per cent per annum, payable monthly, in which, among other things, it is provided that in the event of a suit or action, the defendants should pay the further sum of P10,000, as attorney's fees; that the note in question was a joint and several note; that to secure the payment thereof, the defendants Jean M. Poizat and J. M. Poizat and Co. executed a chattel mortgage to the plaintiff on the steamers Roger Poizat and Gabrielle Poizat, with the machinery and materials belonging to the Poizat Vegetable Oil Mills and certain merchandise; that at the same time and for the same purpose, the defendant Gabriela Andrea de Coster y Roxas, having the consent and permission of her husband, and he acting as her agent, they acknowledged and delivered to this plaintiff a mortgage on certain real property lying and being situated in the City of Manila, which is specifically described in the mortgage; that the real property was subject to a prior mortgage in favor of La Orden de Dominicos or PP. Predicadores de la Provincia del Santisimo Rosario, hence it is made a party defendant; that the note in question is long past due and owing. The plaintiff having brought action against the defendants on the note in the Court of First Instance of the City of Manila, civil case No. 25218; that in such case the court rendered judgment against the defendants Gabriela Andrea de Coster y Roxas, Jean M. Poizat and J. M. Poizat and Co. jointly and severally for P292,000, with interest at the rate of 9 per cent per annum from the 31st of August, 1923, P10,000 as attorney's fees, and P2,500 for and in account of insurance upon the steamer Gabrielle Poizat, with interest on that amount from February 9, 1924, at the rate of 9 per cent per annum, and costs; that the said defendants have not paid the judgment or any part thereof, and that the full amount of the debt secured by the mortgaged on the property described in the complaint is now due and owing. Wherefore, plaintiff prays for an order of the court to direct the sheriff of the City of Manila to take immediate possession of the property described in the chattel mortgage and sell the same according to the Chattel Mortgage Law; that the property described in the real mortgage or
so much thereof as may be required to pay the amount due the plaintiff be sold according to law; that out of such sales plaintiff shall be paid the amount due and owing it; and that such defendants be adjudged to pay any remaining deficiency. Copies of the chattel and real mortgage are attached to, and made a part of, the complaint and marked, respectively, Exhibits A and B. On April 24, 1924, the La Orden de Dominicos or PP. Predicadores de la Provincia del Santisimo Rosario appeared in the suit and filed the following plea: The defendant corporation, La Orden de Dominicos or PP. Predicadores de la Provincia del Santisimo Rosario, for answer to the complaint, shows: I. That the encumbrance above-mentioned, but not determined in paragraph V of the complaint, consisting of a first mortgage in favor of the aforesaid religious corporation on the property described in paragraph IV of the same complaint is P125,000 with interest of 10 per cent per annum; II. That the mortgagors Jean M. Poizat and Gabriela Andrea de Coster y Roxas, have not paid the principal or the interest stipulated and agreed upon from the 16th of December, 1921 up to the present date; III. The interest due up to the 30th of April of the present year 1924 amounts to a total sum of P27,925.34. Wherefore, it is prayed that the credit above-mentioned be taken into account when the second mortgage is foreclosed. May 3, 1924, on motion of the plaintiff, for failure to appear or answer, the defendants Gabriela Andrea de Coster y Roxas and Jean M. Poizat and J.M. Poizat & Co. were declared in default. Without giving any notice of the defendants Jean M. Poizat, J.M. Poizat & Co. and Gabriela Andrea de Coster y Roxas, and after the introduction of evidence on the part of the plaintiff and the defendant Dominican Fathers, on June 24, 1924, the court rendered an opinion in substance and to the effect that the plaintiff should have judgment as prayed for in its complaint, and that the Dominican Fathers should have judgment for the amount of their claim, and that the property should be sold and the proceeds applied to satisfy the respective judgments. About August 26, although her attorney, the defendant Gabriela Andrea de Coster y Roxas filed a motion in which she recites that she is the legitimate wife of the defendant Jean M. Poizat; that she had been absent from the Philippine Islands and residing in the City of Paris from the year 1908 to April 30, 1924, when she returned to Manila; that at that time of the filing of the complaint and the issuance of the summons, she was absent from the Philippine Islands; that the summons was delivered by the sheriff of the City of Manila to her husband, and that through his malicious negligence, default was taken and judgment entered for the respective amounts; that she never had any knowledge of the actual facts until the latter part of July, 1924, when, through the local newspapers, she learned that a default judgment had been rendered against her on July 28, 1924; that when she first knew of that fact, she
was unable to obtain the rendition of accounts, because her husband had left the Philippine Islands two days previous and gone to Hongkong; that she then went to Hongkong and learned that her husband had left there under a false name and had gone to the port of Singapore from whence he went to other places unknown to thus defendant; that she then returned to Manila, and that in August, 1924, she came into possession of documents showing the illegally of the notes and mortgage in question; that she has a good and legal defense to the action, which involves the validity of the order of the Dominican Fathers in this, that their mortgage does not guarantee any loan made to this defendant; that it is a security only given for a credit of a third person; that the mortgage was executed without the marital consent of the wife; and that he did not have nay authority to make her liable as surety on the debt of a third person; that as regards the notes to the plaintiff: First, it does not represent any money paid to the defendant by the bank; second, that it is exclusively the personal debt of the defendants Jean M. Poizat and J.M. Poizat & Co., third, that it was executed by her husband, because the bank desired more security for the payment of her husband's debt to the bank; fourth, that it was executed by her husband in excess of the powers given to him under his power of attorney; fifth, that it was executed as the result of collusion between the bank and the defendant liable for the obligation of a third person. That as to the mortgage: First, it was executed to secure a void obligation; second, it does not guarantee any loan made to this defendant; third, it was executed to secure a void litigation; second, it does not guarantee any loan made to third defendant; third, it was executed without the express marital consent which the law requires; fourth, it was executed through collusion. That if the judgment is not set aside, the defendant will suffer irreparable injury; that through surprise and negligence, for which she was not responsible, this defendant was prevented from defending herself in this action; that this is a case which comes under section 113 of the Code of Civil Procedure. She prays that the judgment annulled and set aside and the case be reopened, and that she be permitted to file an answer, and that the case be tried on its merits, and that a final judgment be rendered, absolving her from all liability. The motion was based upon, and supported by, the affidavit of the defendant wife, to which was attached a large number of exhibits all of which tended to support the motion. After counter showings by the bank and the Dominican Fathers and the arguments of respective counsel, the motion to set aside and vacate the judgment was denied. A motion for a reconsideration was then made, and the motion of the defendant to file an answer and make a defense was again denied. The defendant Gabriela Andrea de Coster y Roxas appeals, assigning the following errors; PART I AS TO THE JURISDICTION I. The lower court erred in holding that it had acquired jurisdiction on the defendant Gabriela Andrea de Coster y Roxas, (1) There having been no service of the summons on her in the manner required by section 396 of the Code of Civil Procedure, she being absent from the Philippine Islands at the time of the filing of the complaint and of the issuance of the summons in this case, and a resident of Paris, France, where she had lived permanently and continuously for fifteen years prior thereof, and
(2) There having been no se rive by publication in the manner required by section 398 of the Code of Civil Procedure. II. The lower court erred in considering that in a case where the wife is the only necessary party, service of the summons on the husband, at a place which is not "the usual place of residence" of the wife and where the wife has never lived or resided, is sufficient to give the court jurisdiction on the person and property of the wife and to render judgment by default against her. III. The court erred in admitting and considering evidence, outside of the sheriff's return, of the fact that the husband of the defendant Gabriela Andrea de Coster y Roxas was her attorney in fact with power to appear for the defendant in court. IV. The court erred in holding that the non-appearance of an agent of the defendant when service of the summons has been made on him not as the agent of the defendant but in other capacity, will entitle the plaintiff who has misstated the material jurisdictional facts of the complaint to a judgment by default against the principal. V. The lower court erred in refusing to vacate a judgment by default against the defendant Gabriela Andrea de Coster y Roxas rendered on a defective summons, served in a manner not provided for by the law, and in a case where the complaint shows that plaintiff has no right of action. PART II AS TO THE MERITS OF THE DEFENSE I. The lower court erred, with abuse of discretion, in holding that the negligence, if any, of J.M. Poizat in not appearing on behalf of the defendant Gabriela Andrea de Coster y Roxas, can be imputed to this defendant, without redress, and to the advantage of the plaintiff bank who in collusion with said J.M. Poizat caused the latter to contract beyond the scope of his powers as agent of this defendant the obligation which is the subject matter of this case. II. The lower court erred in holding that the relief on the part of J.M. Poizat that there was no defense against the claim of the plaintiff on an obligation contracted by said J.M. Poizat apparently as agent of the defendant Gabriela Andrea de Coster y Roxas, but in truth beyond the scope of his authority, and with knowledge on the part of the plaintiff bank that he was so acting beyond his powers, was such an error was can be imputed to this defendant, and against which she can obtain no redress. III. The lower court erred in not holding that a principal is not liable for an obligation contracted by his agent beyond his power even when both the creditor and the agent believed that the latter was acting within the scope of his powers. IV. The lower court erred in holding that because the agent of the defendant Gabriela Andrea de Coster y Roxas had power to appear for her in court, his non-appearance could render this defendant liable to a judgment by default, when the record shows that there was no service of the summons in accordance with any of the forms of service provided by law.
V. The lower court erred in holding that J.M. Poizat was summoned as agent of hi wife, the defendant Gabriela Andrea de Coster y Roxas, and was, in that capacity, notified of all the decisions rendered in this case, there being nothing in the record to support the truth of such finding. VI. The lower court erred in holding that in contracting the obligations in favor of the plaintiff Bank of the Philippine Islands and of the defendant Orden de PP. Predicadores de la Provincia del Santisimo Rosario, the agent of the defendant Gabriela Andrea de Coster y Roxas acted within the scope of his powers. VII. The lower court erred in not holding that the plaintiff Bank of the Philippine Islands and the defendant Orden de PP. Predicadores de la Provincia del Santisimo Rosario had knowledge of the fact that J.M. Poizat in contracting the respective obligations in their favor, pretending to act as agent of the defendant Gabriela Andrea de Coster y Roxas, was acting beyond the scope of his powers as such agent. VIII. The lower court erred in making the following statement: "It is however alleged, by the petitioner, that these loans were obtained to pay debts, of strangers. Even so, this would not render the loan obtained by the attorney in fact null and void. The circumstance that the agent used the money, borrowed by him within the scope of his powers, to purposes for which he was not authorized by his principal, may entitle the latter to demand from him the corresponding liability for the damages suffered, but it cannot prejudice the creditor and cause the nullity of the loan. But, even admitting that the money borrowed was used by Poizat to pay debts which did not belong to his principal, even then, he would have acted within his powers, since his principal, together with the power to borrow money, had given her agent power to loan any amount of money, and the payment of the debts of a stranger would amount to a loan made by the agent on behalf of his principal to the person or entity whose debt was paid with the money obtained from the creditors." IX. The lower court erred in applying to this case the principle involved in the case of Palanca vs. Smith, Bell and Co., 9 Phil., 131. X. The court erred in supplying from its own imagination facts which did not take place, of which there is no evidence in the record, and which the parties never claimed to have existed, and then draw the conclusion that if under those hypothetical facts the transaction between J.M. Poizat and the Bank of the Philippine Islands might have been legal, then the transaction as it actually took place was also legal. XI. The lower court erred in holding that defendant has not alleged any of the grounds enumerated in section 113 of the Code of Civil Procedure. XII. The lower court erred in holding that this defendant-appellant has no meritorious defense against the Dominican Order and the Bank of the Philippine Islands.
XIII. The lower court erred in taking into consideration Exhibit A appearing at pages 156-165 of the bill of exceptions. XIV. The lower court erred in denying the motion filed by this defendant-appellant. XV. The lower court has acted throughout these proceedings with a clear abuse of discretion.
JOHNS, J.: We will decide the case of the bank first The petition of the appellant states under oath: II. That this defendant has been absent from the Philippine Islands and residing in the City of Paris, France, since the year 1908 (1909), up to April 30, 1924, on which date she arrived in this City of Manila, Philippine Islands. III. That at the time when the complaint in this case was filed and the summons issued, she was still absent from the Philippine Islands and had no knowledge either of the filing of this action or of the facts which led to it. Under oath the plaintiff, through its acting president, says: I-II. That it admits the allegations contained in paragraphs I and II of the aforesaid motion. III. That it admits the first part of this paragraph, to wit: That at the time that the complaint in the above entitled case was filed, the defendant Gabriela Andrea de Coster y Roxas was absent from the Philippine Islands. Paragraph 6 of section 396 of the Code of Civil Procedure provides: In all other cases, to the defendant personally, or by leaving a copy at his usual place of residence, in the hands of some person resident therein of sufficient discretion to receive the same. But service upon a corporation, as provided in subsections one and two, may be made by leaving the copy at the office of the proper officer thereof if such officer cannot be found. The return of the sheriff as to the service is as follows: On this date I have served a copy of the within summons, and of the complaint attached, upon Jean M. Poizat, personally, and the copies corresponding to J.M. Poizat and Co., a company duly organized under the laws of the Philippine Islands, by delivering said copies to its President Mr. Jean M. Poizat, personally, and the copies corresponding to Gabriela Andrea de Coster y Roxas, by leaving the same in the place of her usual residence in the City of Manila and in the hands of her husband,
Mr. J.M. Poizat, a person residing therein and of sufficient discretion to receive it, personally. Done at Manila, P.I., this 13th day of March, 1924. RICARDO SUMMERS Sherif of Manila By GREGORIO GARCIA I hereby certify that on this date I have delivered a copy of this summons and of the complaint corresponding to the "La Orden de Dominicos or PP. Predicadores de la Provincia del Santisimo Rosario," through Father Pedro Pratt, Procurador General of said Orden de Dominicos or PP. Predicadores de la Provincia del Santisimo Rosario, personally. Manila, P.I., April 1, 1924. RICARDO SUMMERS Sherif of Manila By SIMEON D. SERDEÑA It will be noted that the service of summons and complaint was made on this defendant on the 13th day of March, 1924, and that it is a stipulated fact that since the year 1908 and up to April 30, 1924, she was "residing in the City of Paris, France." Even so, it is contended that the service was valid by reason of the fact that it was made at the usual place of residence and abode of the defendant husband, and that legally the residence of the wife is that of the husband. That contention is in direct conflict with the admission of the plaintiff that since the year 1908 and up to April 30, 1924, the wife was residing in the City of Paris. The residence of the wife in the City of Paris covered a period of sixteen years. It may be that where in the ordinary course of business the wife is absent from the residence of husband on a pleasure trip or for business reasons or to visit friends or relatives that, in the nature of such things, the residence of the wife would continue and remain to be that of the husband. That is not this case. For sixteen years the residence of the husband was in the City of Manila, and the residence of the wife was in the City of Paris. Upon the admitted facts, we are clearly of the opinion that the residence of the husband was not the usual place of residence of the wife. Giving full force and effect to the legal presumption that the usual place of residence of the wife is that of her husband, that presumption is overcome by the admitted fact that the wife was "residing in the City of Paris, France, since the year 1908 up to April 30, 1924." Without placing a limitation upon the length of time sufficient to overcome the legal presumption, suffice it to say that sixteen years is amply sufficient. It follows that the substituted service attempted to be made under the provisions of section 396 of the Code of Civil Procedure is null and void, and that by such service the court never acquired jurisdiction of the person of the defendant wife. In that event the plaintiff contends that under his power of attorney, the husband was the general agent of the wife with authority to accept service of process for her and in her name, and that by reason of the fact
that the husband was duly served and that he failed or neglected to appear or answer, his actions and conduct were binding on the defendant wife. Be that as it may, there is nothing in the record tending to show that the husband accepted service of any process for or on account of his wife or as her agent, or that he was acting for or representing her in his failure and neglect to appear or answer. The first appearance in court of the defendant wife was made when she filed the motion of August 26, 1924, in which she prays in legal effect that the judgment against her be annulled and set aside and the case reopened, and that she be permitted to file an answer and to have the case tried on its merits. That was a general appearance as distinguished from a special appearance. When she filed that motion asking to be relieved from the legal force and effect of the judgment, she submitted herself to the jurisdiction of the court. If, in the first instance, she had made a special appearance to question only the jurisdiction of the court, and had not appeared for any other or different purpose, another and a different question would have been presented. Having made a general appearance for one purpose, she is now in court for all purposes. It is an elementary rule of law that as a condition precedent, to entitle a party to relief from a judgment "taken against him through his mistake, inadvertence, surprise or excusable neglect," that, among other things, he must show to the court that he has a meritorious defense. Based upon that legal principle the bank contends that no such a showing has been made by the defendant wife. That involves the legal construction of the power of attorney which, it is admitted, the wife gave to her husband on August 25, 1903, which, among other things material to this opinion, recites that she gave to him: Such full and ample power as required or necessary, to the end that he may perform on my behalf, and in my name and availing himself of all my rights and actions, the following acts: 5. Loan or borrow any sums of money or fungible things at the rate of interest and for the time and under the conditions which he might deem convenient, collecting or paying the capital or the interest on their respective due dates; executing and signing the corresponding public or private documents related thereto, and making all these transactions with or without mortgages, pledges or personal guaranty. 6. Enter into any kind of contracts whether civil or mercantile, giving due form thereof either by private documents or public deeds with all clauses and requisites provided by law for their validity and effect, having due regard to the nature of each contract. 7. Draw, endorse, accept, issue and negotiate any drafts, bills of exchange, letters of credit, letters of payment, bills, vales, promissory notes and all kinds of documents representative of value; paying or collecting the value thereof on their respective due dates, or protesting them for non-acceptance or non-payment, utilizing in this case the rights granted by the Code of Commerce now in force, in order to collect the value thereof, interests, expenses and damages against whomsoever should be liable therefor. 8. Institute before the competent courts the corresponding action in justification of the possession which I have or might have over any real estate, filing the necessary
pleadings, evidencing them by means of documentary or oral testimony admissible by law; accepting notices and summons, and instituting all necessary proceedings for the termination thereof and the consequent inscription of said action in the corresponding office of the Register of Deeds, in the same manner in which I might do if personally present and acting. 9. Represent me in all cases before the municipal courts, justice of the peace courts, courts of first instance, supreme court and all other courts of regular or any other special jurisdiction, appearing before them in any civil or criminal proceedings, instituting and filing criminal and ordinary civil actions, claims in intestate and testamentary proceedings, insolvencies and other actions provided by law; filing complaints, answers, counterclaims, cross complaints, criminal complaints and such other pleadings as might be necessary; filing demurrers, taking and offering judicial admissions, documentary, expert, oral evidence, and others provided by law, objecting to and opposing whatever contrary actions are taken, offered and presented; accepting notices, citations and summons and acknowledging their receipt to the proper judicial officials. 10. For to the end stated above and the incidents related thereto, I confer on him ample and complete power, binding myself in the most solemn manner as required by law to recognize as existing and valid all that he might do by virtue hereof. It is admitted that on December 29, 1921, the defendant husband signed the name of the defendant wife to the promissory note in question, and that to secure the payment of the note, upon the same date and as attorney in fact for his wife, the husband signed the real mortgage in question in favor of the bank, and that the mortgage was duly executed. Based upon such admissions, the bank vigorously contends that the defendant wife has not shown a meritorious defense. In fact that it appears from her own showing that she does not have a legal defense. It must be admitted that upon the face of the instruments, that fact appears to be true. To meet that contention, the defendant wife points out, first, that the note in question is a joint and several note, and, second, that it appears from the evidence, which she submitted, that she is nothing more than an accommodation maker of the note. She also submits evidence which tends to show: First. That prior to July 25, 1921, Jean M. Poizat was personally indebted to the Bank of the Philippine Islands in the sum of P290,050.02 (Exhibit H, page 66, bill of exceptions); Second. That on July 25, 1921, the personal indebtedness of Jean M. Poizat was converted into six promissory notes aggregating the sum of P308,458.58 of which P16,180 were paid, leaving an outstanding balance of P292,278.58 (Exhibits D, E, F, G, H and I, pages 75-80, bill of exceptions); Third. That on December 29, 1921, the above promissory notes were cancelled and substituted by a joint and several note signed by Jean M. Poizat in his personal capacity and as agent of Gabriela Andrea de Coster y Roxas and as member of the firm J.M. Poizat and Co.
In other words, that under the power of attorney, the husband had no authority for and on behalf of the wife to execute a joint and several note or to make her liable as an accommodation maker. That the debt in question was a preexisting debt of her husband and of the firm of J.M. Poizat and Co., to which she was not a party, and for which she was under no legal obligation to pay. That she never borrowed any money from the bank, and that previous to the signing of the note, she never had any dealings with the bank and was not indebted to the bank in any amount. That the old, original debts of her husband and J.M. Poizat and Co. to the bank, to which she was not a party, were all taken up and merged in the new note of December 29, 1921, in question, and that at the time the note was signed, she did not borrow any money, and that no money was loaned by the bank to the makers of the note. Assuming such facts to be true, it would be a valid defense by the defendant wife to the payment of the note. There is no claim or pretense that the bank was misled or deceived. If it had made an actual loan of P292,000 at the time the note was executed, another and a different question would be presented. In the ordinary course of its business, the bank knew that not a dollar was loaned or borrowed on the strength of the note. It was given at the urgent and pressing demand of the bank to obtain security for the six different notes which it held against J.M. Poizat and Co. and Jean M. Poizat of date July 25, 1921, aggregating about P292,000, and at the time it was given, those notes were taken up and merged in the note of December 29, 1921, now in question. Upon the record before us, there is no evidence that the defendant wife was a party to the notes of July 25, 1921, or that she was under any legal liability to pay them. The note and mortgage in question show upon their face that at the time they were executed, the husband was attorney in fact for the defendant wife, and the bank knew or should have known the nature and extent of his authority and the limitations upon his power. You will search the terms and provisions of the power of attorney in vain to find any authority for the husband to make his wife liable as a surety for the payment of the preexisting debt of a third person. Paragraph 5 of the power of attorney above quoted authorizes the husband for in the name of his wife to "loan or borrow any sums of money or fungible things, etc." This should be construed to mean that the husband had power only to loan his wife's money and to borrow money for or on account of his wife as her agent and attorney in fact. That does not carry with it or imply that he had the legal right to make his wife liable as a surety for the preexisting debt of a third person. Paragraph 6 authorizes him to "enter into any kind of contracts whether civil or mercantile, giving due form thereof either by private documents or public deeds, etc." Paragraph 7 authorizes him to "draw, endorse, accept, issue and negotiate any drafts, bills of exchange, letters of credit, letters of payment, bills, vales, promissory notes, etc." The foregoing are the clauses in the power of attorney upon which the bank relies for the authority of the husband to execute promissory notes for and on behalf of his wife and as her agent.
It will be noted that there is no provision in either of them which authorizes or empowers him to sign anything or to do anything which would make his wife liable as a surety for a preexisting debt. It is fundamental rule of construction that where in an instrument powers and duties are specified and defined, that all of such powers and duties are limited and confined to those which are specified and defined, and that all other powers and duties are excluded. Paragraph 8 of the power of attorney authorizes the husband to institute, prosecute and defend all actions or proceedings in a court of justice, including "accepting notices and summons." There is nothing in the record tending to show that the husband accepted the service of any notice or summons in the action on behalf of the bank, and even so, if he had, it would not be a defense to open up and vacate a judgment under section 113 of the Code of Civil Procedure. The same thing is true as to paragraph 9 of the power of attorney. The fact that an agent failed and neglected to perform his duties and to represent the interests of his principal is not a bar to the principal obtaining legal relief for the negligence of her agent, provided that the application for such a relief is duly and properly made under the provisions of section 113. It is very apparent from the face of the instrument that the whole purpose and intent of the power of attorney was to empower and authorize the husband to look after and protect the interests of the wife and for her and in her name to transact any and all of her business. But nowhere does it provide or authorize him to make her liable as a surety for the payment of the preexisting debt of a third person. Hence, it follows that the husband was not authorized or empowered to sign the note in question for and on behalf of the wife as her act and deed, and that as to her the note is void for want of power of her husband to execute it. The same thing is true as to the real mortgage to the bank. It was given to secure the note in question and was not given for any other purpose. The real property described in the mortgage to the bank was and is the property of the wife. The note being void as to her, it follows that as to her the real mortgage to the bank is also void for want of power to execute it. It appears that before the motion in question was filed, there were certain negotiations between the bank and the attorney for the wife with a view of a compromise or settlement of the bank's claim against her, and that during such negotiations, there was some evidence or admissions on the part of her attorney that she was liable for the bank's claim. It now contends that as a result of such negotiations and admissions, the wife is estopped to deny her liability. but it also appears that during such negotiations, both the wife and her attorney did not have any knowledge of the actual facts, and that she was then ignorant of the defense upon which she now relies. Be that as it may, such negotiations were more or less in the nature of a compromise which was rejected by the bank, and it appears that in any event both the wife and her attorney did not have any knowledge of the facts upon which they now rely as a defense.
There is no claim or pretense that the debt in question was contracted for or on account of the "usual daily expenses of the family, incurred by the wife or by her order, with the tacit consent of the husband," as provided for in article 1362 of the Civil Code. Neither is there any evidence tending to show that the wife was legally liable for any portion of the original debt evidence by the note in question. This decision as to the bank on this motion is based on the assumption that the facts are true as set forth and alleged in the petition to set aside and vacate the judgment as to the wife, but we are not making any finding as to the actual truth of such facts. That remains for the defendant wife to prove such alleged facts when the case is tried on its merits. It follows that the opinion of the lower court in refusing to set aside and vacate the judgment of the plaintiff bank against the defendant wife is reversed, and that judgment is vacated and set aside, and as to the bank the case is remanded to the lower court, with leave for the wife to file an answer to plaintiff's cause of action, and to have the case tried on its merits and for any further proceedings not inconsistent with this opinion. As to the judgment in favor of the Dominican Fathers, it appears that their plea above quoted in the statement of facts was filed on April 24, 1924. In that plea they say that they have a first mortgage on the property described in paragraph IV of the complaint for P125,000 with interest at 10 per cent per annum. That the mortgagors Jean M. Poizat and Gabriela Andrea de Coster y Roxas have not paid the principal or the stipulated interest from December 16, 1921, to date, which up to the 30th day of April, 1924, amounts to P27,925.34. Wherefore, it is prayed that the credit above-mentioned be taken into account when the second mortgage is foreclosed. No other plea of any kind, nature or description was filed by it. The record shows that a copy of this alleged plea was served upon the attorneys for the plaintiff bank. There is nothing in the record which shows or tends to show that a copy of it was ever served on either one of the defendants. Neither is there any evidence that either of the defendants ever appeared in the original action. In fact, judgment was rendered against them by default. Under such a state of facts, the judgment in favor of the Dominican Fathers cannot be sustained. In the first place, the plea above quoted filed on April 24, 1924, would not be sufficient to sustain a judgment. It does not even ask for a judgment of the foreclosure of its mortgage. In the second place, no copy of the plea was ever served upon either of the defendants, who were the real parties in interest, and against whom a judgment was rendered for the full amount of the note and the foreclosure of the mortgage. Such a proceeding cannot be sustained on any legal principle. Unless waived, a defendant has a legal right to service of process, to his day in court and to be heard in his defense. From what has been said, it follows that, if the transaction between the Dominican Fathers and Jean M. Poizat as attorney in fact for his wife was an original one and the P125,000 was actually loaned at the time the note and mortgage were executed and the money was in good faith delivered to the husband as the agent and attorney in fact of the wife, it would then be a valid exercise of the power given to the husband, regardless of the question as to what he may have done with the money.
Paragraph 5 of the power of attorney specifically authorizes him to borrow money for and on account of his wife and her name, "and making all these transactions with or without mortgages, pledges or personal guaranty." It follows that the judgment of the lower court in favor of La Orden de Dominicos or PP. Predicadores de la Provincia del Santisimo Rosario is reversed, without prejudice to its right to either file an original suit to foreclose its mortgage or to file a good and sufficient plea as intervenor in the instant suit, setting forth the facts upon which it relies for a judgment on its note and the foreclosure of its mortgage, copies of which should be served upon the defendants. Neither party to recover costs. So ordered. Ostrand and Romualdez, JJ., concur. Johnson and Malcolm, JJ., concur in the result. Republic of the Philippines SUPREME COURT Manila FIRST DIVISION
G.R. No. 94566 July 3, 1992 BA FINANCE CORPORATION, petitioner, vs. HON. COURT OF APPEALS and TRADERS ROYAL BANK, respondents.
MEDIALDEA, J.: This is a petition for review on certiorari of the decision of the respondent appellate court which reversed the ruling of the trial court dismissing the case against petitioner. The antecedent facts are as follows: On December 17, 1980, Renato Gaytano, doing business under the name Gebbs International, applied for and was granted a loan with respondent Traders Royal Bank in the amount of P60,000.00. As security for the payment of said loan, the Gaytano spouses executed a deed of suretyship whereby they agreed to pay jointly and severally to respondent bank the amount of the loan including interests, penalty and other bank charges. In a letter dated December 5, 1980 addressed to respondent bank, Philip Wong as credit administrator of BA Finance Corporation for and in behalf of the latter, undertook to guarantee the loan of the Gaytano spouses. The letter reads:
This is in reference to the application of Gebbs International for a twenty-five (25) month term loan of 60,000.00 with your Bank. In this connection, please be advised that we unconditionally guarantee full payment in peso value the said accommodation (sic) upon non-payment by subject up to a maximum amount of P60,000.00. Hoping this would meet your requirement and expedite the early processing of their application. Thank you. Very truly yours, BA FINAN CE CORPO RATIO N (signed ) PHILIP H. WONG Credit Admini strator (p. 12, Rollo) 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. On December 12, 1988, the trial court rendered a decision the dispositive portion of which states: IN VIEW OF THE FOREGOING, judgment is hereby rendered in favor of plaintiff and against defendants/Gaytano spouses, ordering the latter to jointly and severally pay the plaintiff the following:
1) EIGHTY FIVE THOUSAND EIGHT HUNDRED SEVEN AND 25/100 (P85,807.25), representing the total unpaid balance with accumulated interests, penalties and bank charges as of September 22, 1987, plus interests, penalties and bank charges thereafter until the whole obligation shall have been fully paid. 2) Attorney's fees at the stipulated rate of ten (10%) percent computed from the total obligation; and 3) The costs of suit. The dismissal of the case against defendant BA Finance Corporation is hereby ordered without pronouncement as to cost. SO ORDERED. (p. 31, Rollo) Not satisfied with the decision, respondent bank appealed with the Court of Appeals. On March 13, 1990, respondent appellate court rendered judgment modifying the decision of the trial court as follows: In view of the foregoing, the judgment is hereby rendered ordering the defendants Gaytano spouses and alternative defendant BA Finance Corporation, jointly and severally, to pay the plaintiff the amount of P85,807.25 as of September 8, 1987, including interests, penalties and other back (sic) charges thereon, until the full obligation shall have been fully paid. No pronouncement as to costs. SO ORDERED. (p. 27 Rollo) Hence this petition was filed with the petitioner assigning the following errors committed by respondent appellate court: 1. THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN RULING THAT PETITIONER IS JOINTLY AND SEVERALLY LIABLE WITH GAYTANO SPOUSES DESPITE ITS FINDINGS THAT THE LETTER GUARANTY (EXH. "C") IS "INVALID AT ITS INCEPTION"; 2. THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN RULING THAT THE PETITIONER WAS GUILTY OF ESTOPPEL DESPITE THE FACT THAT IT NEVER KNEW OF SUCH ALLEGED LETTER-GUARANTY; 3. THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN NOT RULING THAT SUCH LETTER GUARANTY (EXHIBIT "C") BEING PATENTLY ULTRA VIRES, IS UNENFORCEABLE; 4. THE HONORABLE COURT OF APPEALS ERRED IN NOT AWARDING RELIEF ON PETITIONER'S COUNTERCLAIM (p. 10, Rollo). Since the issues are interrelated, it would be well to discuss them jointly.
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. We find the petitioner's contentions meritorious. It is a settled rule that persons dealing with an assumed agent, whether the assumed agency be a general or special one are 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 (Harry Keeler v. Rodriguez, 4 Phil. 19). Hence, 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. The said memorandum which allegedly authorized Wong not only to approve and grant loans but also to enter into contracts of guaranty in behalf of the corporation, partly reads: To: Philip H. Wong, SAM Credit Administrator From: Hospicio B. Bayona, Jr., VP and Head of Credit Administration Re: Lending Authority I am pleased to delegate to you in your capacity as Credit Administrator the following lending limits: a) P650,000.00 — Secured Loans b) P550,000.00 — Supported Loans c) P350,000.00 — Truck Loans/Contracts/Leases d) P350,000.00 — Auto Loan Contracts/Leases e) P350,000.00 — Appliance Loan Contracts f) P350,000.00 — Unsecured Loans Total loans and/or credits [combination of (a) thru (f) extended to any one borrower including parents, affiliates and/or subsidiaries, should not exceed P750,000.00. In exercising the limits aforementioned, both direct and contingent commitments to the borrower(s) should be considered. All loans must be within the Company's established lending guideline and policies. xxx xxx xxx
LEVELS OF APPROVAL All transactions in excess of any branch's limit must be recommended to you through the Official Credit Report for approval. If the transaction exceeds your limit, you must concur in application before submitting it to the Vice President, Credit Administration for approval or concurrence. . . . (pp. 62-63, Rollo) (Emphasis ours) 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. We cannot 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 (Director v. Sing Juco, 53 Phil. 205). In one case, where it appears that a wife gave her husband power of attorney to loan money, this Court ruled that such fact did not authorize him to make her liable as a surety for the payment of the debt of a third person (Bank of Philippine Islands v. Coster, 47 Phil. 594). The sole allegation of the credit administrator in the absence of any other proof that he is authorized to bind petitioner in a contract of guaranty with third persons should not be given weight. The representation of one who acts as agent cannot by itself serve as proof of his authority to act as agent or of the extent of his authority as agent (Velasco v. La Urbana, 58 Phil. 681). 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 (National Power Corporation v. National Merchandising Corporation, Nos. L-33819 and L-33897, October 23, 1982, 117 SCRA 789). Anent the conclusion of respondent appellate court that petitioner is estopped from alleging lack of authority due to its failure to cancel or disallow the guaranty, We find that the said conclusion has no basis in fact. Respondent bank had not shown any evidence aside from the testimony of the credit administrator that the disputed transaction of guaranty was in fact entered into the official records or files of petitioner corporation, which will show notice or knowledge on the latter's part and its consequent ratification of the said transaction. In the absence of clear proof, it would be unfair to hold petitioner corporation guilty of estoppel in allowing its credit administrator to act as though the latter had power to guarantee. ACCORDINGLY, the petition is GRANTED and the assailed decision of the respondent appellate court dated March 13, 1990 is hereby REVERSED and SET ASIDE and another one is rendered dismissing the complaint for sum of money against BA Finance Corporation. SO ORDERED.
Cruz, Griño-Aquino and Bellosillo, JJ., concur. Republic of the Philippines SUPREME COURT Manila EN BANC G.R. No. L-13817
August 31, 1961
MACONDRAY AND COMPANY, INC., plaintiff-appellee, vs. PERFECTO PIÑON, ET AL., defendants. RUPERTO K. KANGLEON, deceased, substituted by VALENTINA TAGLE-KANGLEON, ET AL., defendants-appellants. Jose Agbulos for plaintif-appellee. San Juan, Africa and Benedicto for defendants-appellants. PADILLA, J.: On 11 May 1955 the plaintiff filed a complaint 1 against the defendants in the Court of First Instance of Manila alleging that upon representation and undertaking made by Ruperto K. Kangleon, then a member of the Senate, in a letter addressed to the plaintiff dated 30 January 1954, that he would guarantee payment of his co-defendants' obligation, should they fail to pay on the due date (Exhibit F), on 2 and 9 February 1954, the plaintiff sold on credit and delivered to the defendants Perfecto Piñon and Conrado Piring, known in the theater and entertainment business as "Tugak" and "Pugak", respectively and transacting business under a common name known as "All Stars Productions," 127 rolls of cinematographic films, F.G. release positive type 825B, 35 mm. x 1,000 ft., for the total sum of P6,985, payable on or before 9 May 1954, 12% interest thereon from date of maturity and 20% thereof for attorney's fee in case of suit for collection (Exhibits A, B, C, D, E; that the principal debtors have failed to pay the amount owed by them on the due date; that upon extensive investigations made by the plaintiff as to whether the principal debtors have any property, real or personal, which may be levied upon for the satisfaction of their obligation, it has found that they have none; that the defendant Kangleon could not point to the plaintiff any property of the principal debtors leviable for execution sufficient to satisfy the obligation; and that the sum of P6,985, the amount owed or part thereof, has not been paid by the defendants. It prayed that after hearing judgment be rendered ordering the defendants, jointly and severally, to pay it the sum of P6,985, 12% interest thereon from 10 May 1954 until fully paid, 20% of the amount due or P1,387 as attorney's fee, and costs, and that it be granted other just and equitable relief (civil No. 23947). On 10 November 1955 the defendant Kangleon answered the plaintiff's complaint setting up the defense that the letter he had written to the plaintiff dated 30 January 1954 (Exhibit F) was only to introduce his co-defendants; that assuming that there was an intent on his part to guarantee payment of his co-defendants' obligation, the said letter (Exhibit F) was but an offer to act as guarantor of his co-defendants; that as the acceptance of his offer to act as guarantor for his co-defendants has not been actually made known to him by the plaintiff, the contract of guaranty between them has not been perfected; and that assuming that there has been a perfected contract of guaranty between the plaintiff and the answering defendant, the latter's obligation was extinguished by the extension for payment up to 3 May 1954 granted by the plaintiff to his co-defendants. By way of counterclaim, he sought
from the plaintiff the sum of P20,000 as damages suffered by his good name and reputation caused by the plaintiff's clearly unfounded civil action, P2,000 as attorney's fee and P1000 for expenses incurred in the litigation. As cross-claim, should he be finally adjudged liable to pay the plaintiff, he prayed that his co-defendants be ordered to reimburse him whatever amount he would pay to the plaintiff, and to pay him P3,000 as attorney's fee and expenses of litigation. He further prayed that he be absolved from the plaintiff's complaint and that he be granted other just and equitable relief. The defendants Piñon and Piring did not answer the plaintiff's complaint or their codefendants' cross-claim. On 10 November 1955 the plaintiff answered the defendants defendant's counterclaim. On 25 August 1956 the plaintiff and the answering de defendant entered into a stipulation of facts and submitted the case for judgment based upon the said stipulation. Not having answered the complaint against them despite notice, the Court declared the defendants Piñon and Piring in default (p. 5, rec. on app.). At the trial of the case on 30 August 1956, the plaintiff and the answering defendant further stipulated that the former had looked for properties of his co-defendants Piñon and Piring but found none (p. 23, rec. on app.). The plaintiff presented its evidence against the defendants in default. On 30 September 1957 the Court rendered judgment, the dispositive part of which is: WHEREFORE, judgment is hereby rendered sentencing the defendants Perfecto Piñon and Conrado Piring to pay the plaintiff jointly and severally the sum of P6,985.00 plus interest at the rate of 12% per annum from May 9, 1954 until fully paid and an amount equivalent to 20% as attorney's fees and co of suit. If this judgment becomes unsatisfied by the defendants Perfecto Piñon and Conrado Piring, the defendant Ruperto Kangleon is hereby sentenced to pay the plaintiff all the amounts to which his co-defendants were sentenced to pay. (p. 29, rec. on app.). The answering defendant has appealed. From the stipulation of facts entered into by and between the appellant and the appellee and the documentary evidence submitted by the appellee against the defendants in default, the following appear: On 30 January 1954 the defendants Piring and Piñon requested the appellant, then a member of the Senate, to help them buy on credit from the appellee some cinematographic films. To accommodate them, the appellant wrote a letter to the appellee, as follows: REPUBLIC OF THE PHILIPPINES SENATE MANILA
January 30, 1954
The Manager Macondray & Company China Bank Building Manila Sir: This will introduce to you the bearers, Messrs. Conrado Piring and Perfecto Piñon both well known theater characters under the names of "Pugak" and "Tugak", respectively. I have been made to understand by them in their representations to me that they wish to place an order for the following items: 10 rolls negative at P157.00 each, and 100 rolls positive at P55.00 each . of Dupont Release Positives Safety Basis for use of their firm called "All Stars Productions" under the management and control of Pugak and Tugak payable within three (3) months time ending April, 1954 and for which by their guaranty I pledge payment. In view of the foregoing, I shall appreciate any help you can give to facilitate said purchases subject to usual business procedures.
Sincerely, (Sgd.) RUPERTO K. KANGLEON Senator
(Exhibit F) which letter the defendants in default presented to the appellee. On the strength of the appellant's letter above quoted, on 2 and 9 February 1954, the appellee sold on credit and delivered to the defendants in default 127 rolls of cinematographic films, F.G. release positive type 825B, 35 mm. x 1,000 ft., for the total sum of P6,985, excluding sales tax, which is for the buyers' account, payable on or before 9 May 1954. The parties, among others, further stipulated that the buyers would pay interest at the rate of 1% per month on all amounts not paid when due; that should a litigation arise from non-payment, the venue of action would be the courts of Manila and that the buyers would pay 20% of the amount due for attorney's fee and costs of the suit (Exhibits A, B, C, D, E). The defendants in default failed to pay their obligation on the due date. On 27 May 1954 the appellee wrote to the appellant a letter of the following tenor:
May 27 , 1954
Honorable Ruperto K. Kangleon Philippine Senate Manila
Dear Sir: On January 30th, last you requested us to give Messrs. Conrado Piring and Perfecto Piñon of "All-Stars Productions", certain rolls of negative and positive films, the cost of which was payable in three months time and payment of which you guaranteed. These films were delivered and billed at P6,985.00 on Feb. 9th last. The amount has not been paid (and) we have difficulty locating the above gentlemen as they cannot be found in their offices. In view of this we hereby request you to send us a check for the amount as it was due on May 3rd.
Yours very truly, MACONDRAY & CO., INC. s/ILLEGIBLE Collection Department
On 31 May 1954, the appellant answered the appellee as follows:
May 31, 1954
Macondray & Co., Inc. 3rd Floor, China Bank Bldg. Manila Gentlemen: This will acknowledge receipt of your letter of May 27th. Messrs. Conrado Piring and Perfecto Piñon are being contacted to invite their attention to your letter. Notwithstanding the foregoing, I have been made to understand by Messrs. Piring and Piñon that in arrangements with that Company an extension of time has been granted them; within which to settle their obligations.
Cordially yours, (Sgd.) RUPERTO K. KANGLEON
On 2 June 1954 the appellee replied to the appellant's answer to its letter thus:
June 2, 1954
Hon. Ruperto K. Kangleon Philippine Senate Manila Dear Sir: We have your letter of May 31st in reply to ours of the 7th and note that you are getting in touch with Messrs. Conrado Piring and Perfecto Piñon with regard to their account. We know of no extension of time for payment being granted these people and certainly no one in authority has made such n arrangement. For this reason, if payment is not received from them by the 15th inst. We expect to receive a remittance from you to cover the full amount.
Yours very truly, MACONDRAY & CO., INC. s/ILLEGIBLE Collection Department
On 19 July 1954 the appellee wrote the following letter to the defendants in default:
July 19, 1954
Mr. Conrado Piring Pureza Extension Sta Mesa, Manila Mr. Perfecto Piñon Pureza Extension Sta. Mesa, Manila Gentlemen: Please be advised that Macondray & Co., Inc. has turned over to me for corresponding judicial action your account for films in the amount of P6,985.00. As this obligation is now long past due, payment thereof is earnestly requested. Unless payment thereof is received from you immediately, I shall be compelled, much to my regret, to take this matter to the court.
Very truly yours, (Sgd.) JOSE AGBULOS Attorney for Macondray & Co., Inc.
which was sent to them by registered mail (Exhibits G, G-1 & G-2). Neither the defendants in default nor the appellant has paid the amount owed to the appellee. During the time this appeal was pending in this Court the appellant died. His heirs or their legal representatives were directed to appear in substitution for the deceased appellant. Attorneys San Juan, Africa & Benedicto entered their appearance for said heirs, namely: Mrs. Valentina Tagle Kangleon, Benjamin T. Kangleon, Juanita T. Kangleon, Mrs. Flora San Gabriel, Miss Corazon Kangleon, Miss Lourdes Kangleon, Mrs. Teresita Limcolioc, Mrs. Aida Rosca, Jesus Kangleon, Jose Kangleon and Miss Cecilia Kangleon. The appellant contends that although in the stipulation of facts entered into by and between him and the appellee, he had admitted the liability of his co-defendants, who were declared in default, under the principle of res inter alios acta, that an admission by a third person can not bind another, his admission cannot bind the defendants in default and no judgment against them may be rendered on the basis of the stipulation of facts referred to. Since the appellee had not established a case against the defendants a default, the principal debtors, it cannot directly held able the appellant, the guarantor, whose obligation is only subsidiary to that of the former. The appellant proceeds from the wrong premise that the case was submitted to the Court solely on the stipulation of facts entered into by and between him and the appellee. The records show that when the case was called for trial on 30 August 1956, after the appellant's co-defendants had been declared in default, the appellee presented its evidence testimonial and documentary, against them (pp. 5-18, t.s.n.; Exhibits A, B, C, D, E, F, G, G-1 & G-2), and thereby established their primary liability. The appellant claims that the letter (Exhibit F) is mere a letter of introduction and does not constitute an offer of guaranty. A cursory reading of the letter (Exhibit F) belies his assertion. While in his opening sentence he says at that "This will introduce to you the bearers, Messrs. Conrado Piring and Perfecto Piñon, . . ." who "wish to place an order for" cinematographic films, yet in the later part he says that "for which by their guaranty I pledge payment." This can only mean that he undertakes to guarantee payment of the principal debtors' obligation should they fail to pay. The appellant is a responsible man and may be presumed to mean what he says. At that time, he was occupying the exalted position of member of the Senate and his plighted word given to another would immediately be accepted. It is not, therefore, odd that upon receipt of the appellant's letter (Exhibit F), the appellee readily sold on credit to the principal debtors, the defendants in default, the cinematographic films in question. That the appellant really meant to guarantee payment of the principal debtors' obligation should they default, is patent in his answer to the appellee's letter dated 27 May 1954, reminding him that on 30 January he requested it "to give Messrs. Conrado Piring and Perfecto Piñon of 'All-Stars Productions', certain rolls of negative and positive films, the cost of which was payable in three months time and payment of which you guaranteed"; that the "films were delivered and billed at P6,985.00 on Feb. 9th last"; and that "the amount has not been paid (and) we have difficulty locating the above gentlemen as they cannot be found in
their offices," and requesting the appellant to send a check for the amount. In his answer to the foregoing letter, dated 31 May 1954, he acknowledged receipt of the appellee's letter of the 27th of the same month and informed it that the principal debtors were "being contacted to invite their attention to your letter." Had the appellant meant otherwise, he would have immediately denied that he ever guaranteed payment of the principal debtors obligation. This he did not do. The appellant's very letter (Exhibit F) constitutes his undertaking of guaranty. "Contracts shall be obligatory in whatever form they may have been entered into, provided all the essential requisites for their validity are present."2A contract of guaranty is not a formal contract and shall be valid in whatever form it may be, provided that it complies with the statute of frauds. The appellant insists that he should have been notified by the appellee of the acceptance of his offer of guaranty. In the first place, his letter (Exhibit F) already constitutes his undertaking of guaranty. In the second place, the contract entered into by and between the appellee and the defendants in default is the principal contract and the appellee is subsidiary to the principal contract. Since the principal contract had already been perfected, the subsidiary contract of guaranty became binding upon effectivity of the principal contract. Hence no notice of acceptance by the appellee to the appellant is necessary for its validity. The appellant states that assuming that the letter Exhibit F constitutes a contract of guaranty, the films actually sold to the principal debtors were 127 rolls of F.G. release positive type 825 B 35 mm. x 1,000 ft. at P55 a roll, payable 9 May 1954, while what he undertook to guarantee payment was 10 rolls negative at 157 each and 100 rolls positive at 55 each, payable within three months ending April, 1954. Citing article 2055 of the Civil Code that a guaranty cannot extend to more than what is stipulated therein, the appellant contends that he cannot be held liable for the contract in view of the variation in his undertaking. The total cost of what was actually sold to and bought by the principal debtors is P6,985, which is less than the total cost of what was originally intended to be bought by them amounting to P7,070. The variation was merely in kind and not in subject matter — cinematographic films — which did not render the appellant's obligation more burdensome. Instead his obligation was rendered less onerous by the reduction in the original price of P7,070 to P6,985. The fact that in the letter Exhibit F, the appellant mentioned that the principal debtors' obligation would be "payable within three months time ending April, 1954," while in the contract entered into by and between the appellee and the principal debtors they have stipulated that their obligation would be payable on or before 9 May 1954, is of no moment. The letter Exhibit F was dated 30 January 1954. Counted from that date, the three months period would expire on April 1954. However, actually the principal contract was consummated on 9 February 1954 (Exhibit A). It is but fair that the three month period be counted from that date ending 9 May 1954. Again, the appellants obligation has not become more onerous than what he actually bound himself. The judgment appealed from is affirmed against the heirs of the deceased appellant herein above named, with costs against them. Bengzon, C.J., Labrador, Reyes, J.B.L., Barrera, Paredes, Dizon, De Leon and Natividad, JJ., concur. Conception, J., took no part.
Footnotes 1
Third amended complaint.
2
Article 1356, Civil Code. Republic of the Philippines SUPREME COURT Manila EN BANC
G.R. No. L-13307
February 3, 1919
LA INSULAR, plaintiff-appellee, vs. RAFAEL MACHUCA GO-TAUCO and MANUEL NUBLA CO-SIONG, defendants-appellants. Williams, Ferrier & SyCip for appellants Kincaid & Perkins for appellee. STREET, J.: The plaintiff in this action, La Insular. is a commercial partnership engaged in the manufacture of cigars and cigarettes in the city of Manila. On July 15, 1913, a contract was entered into between its general agent and the two defendants, Manuel Nubla Co-Siong and Rafael Machuca Go-Tauco, whereby the plaintiff became obliged to supply cigarettes daily to Manuel Nubla Co-Siong in a quantity of not less than two nor more than five boxes of two thousand packages each The price was fixed at P172 per box, payment to be made within the first five days of the month next following the successive deliveries. Manuel Nubla CoSiong obligated himself as principal to pay for the cigarettes within said five says, while Rafael Machuca Go-Tuaco bound himself as surety, jointly and severally with Nubla, in the sum of P25,000, to satisfy an indebtedness contracted for cigarettes thus supplied. Pursuant to the provisions of this agreement cigarettes were supplied by the plaintiff to Nubla Co-Siong during the year 1913 to 1916, amounting in value to nearly P350,000. For the cigarettes so supplied payment was from time to time made by the defendant Nubla CoSiong upon bills presented by the plaintiff. It appears that when the contract above-mentioned was executed cigarettes were subject to a specific tax of the peso for each thousand cigarettes. This tax was, under the law then prevailing, paid by the manufacturer, and the liability for said tax naturally fell in the present case upon the plaintiff. By Act No. 2432, enacted December 23, 1914, the Philippine Legislature increased the specific tax on cigarettes from P1 to P1.20 per thousand cigarettes, and by amendatory Act No. 2445, effective from January 1, 1915, it was declared that, as regards contracts already made for future delivery, the burden of the increased tax should, unless the parties should have otherwise agreed, be borne by the person to whom the article taxed should be furnished.
After this provision become effective, the plaintiff continued, as before, to pay the internalrevenue taxes and in order to reimburse itself to the extent of the outlay incident to the increase in the tax added the amount of P10 per box to the price of the cigarettes. The monthly statements thereafter submitted to the purchaser by the plaintiff showed this increase; and as payments were from time to time made by Nubla, they were credited by the plaintiff upon account, with the result that, upon the showing of the plaintiff's books and assuming that Nubla had been properly charged with the increased tax, all cigarettes delivered prior to August 1, 1916, had been fully paid for. During the months of August and September, however, fifty-six cases of cigarettes were taken by Nubla, for which no payment has been made; and for the recovery of the amount alleged to be due for these cigarettes this action was instituted by the plaintiff in the Court of First Instance of the city of Manila. Judgment having been there rendered in favor of the plaintiff, both defendants have appealed. The dispute is upon the point of liability for the increased tax imposed by Act No. 2432, and the amount which the plaintiff is entitled to recover from the defendant Nubla Co-Siong, assuming that said defendant is liable for the tax at all, is P10,192 — the amount for which judgment was rendered against him by the trial court. As to the defendant Rafael Machuca Go-Tauco, the trial court held that, being a surety, his liability was limited to the payment of the price stipulated in the original contract, or P172 per box, and that he was not liable for the additional amount of P10 per box representing the increase in the tax. Judgment was, therefore, rendered against this defendant, jointly and severally with his codefendant, for the sum of P9,632 only. As regards the liability of the purchaser, Nubla Co-Siong, the case is determined adversely to his contention by the decision of this court in Mitsui Bussan Kaisaha vs. Manila Electric Railroad and Light Company (p. 624, post); and upon this branch of the present case we are content to refer to the opinion therein as embracing a sufficient statement of the grounds of the decision. As against the surety, Rafael Machuca Go-Tuaco, the case presents one or two additional features which require discussion. As already noted, the trial court held that the liability of the surety did not extend to the reimbursement of the plaintiff for the amount paid out by its satisfaction of the increased internal-revenue tax on the fifty six cases of cigarettes bought in August and September 1916. This defendant was, therefore, absolved from liability for the sum of P560, which the plaintiff had paid upon said cigarettes. As the plaintiff did not appeal from this judgment, the propriety of the action of the trial court upon this point is not now in question. It is, however, here contended for the surety that the court erred in holding him liable for any part of the debtedness which is the basis of this action. This contention is based upon two distinct arguments. The first is that, supposing Act No. 2445 to be valid, it increases from P172 to P182 per box the price which Manuel Nubla Co-Siong was obligated to pay for the cigarettes, which alteration in the contract has the effect of releasing the surety. The second is that the payments made by Nubla to the plaintiff in the entire period during which cigarettes were supplied under the contract inquisition, i.e., form July 15, 1913, to September 6, 1916, were sufficient fully to satisfy the price of P172 chargeable for the cigarettes under the contract, and that the obligation of the surety is therefore discharged. In other words this defendant insists that the application of the payments from time to time made by the principal debtor should be revised and that said payments should be reapplied exclusively to the stipulated price of the cigarettes, without reference to the additional P10
per case paid after January 1, 1915, in satisfaction of the increased internal-revenue tax. These proportions will be considered in turn. It is undoubtedly true that the law looks upon the contract of surety ship with a jealous eye, and the rule is settled that the obligation of the surety cannot be extended by implication beyond its specified limits. Article 1827 of the Civil Code so declares (Uy Aloc vs. Cho Jan Ling 27 Phil., Rep., 427); and with this doctrine the common law is accordant. As was said by Justice Story in Miller vs. Stewart (9 Wheat. 680; 6 L. ed. 189): Nothing can be clearer, both upon principle and authority, than the doctrine that the liability of a surety is not to be extended, by implication, beyond the terms of his contract. To the extent, and in the manner, and under the circumstances pointed out in his obligation, he is bound, and no farther. It is, furthermore, a well-recognized rule of jurisprudence, applied in the case just cited, that if any material alteration or change in the obligation of the principal obligator is effected by the immediate parties to the contract, without the asset of the surety, the latter is discharged. Cases could be cited to this proposition without number, one of the most common illustrations being found in the situation where the creditor, or obligee, without the assent of the surety, by a valid and binding agreement gives further time to the principal debtor for payment or performance. As is well known, the surety is thereby discharged. (32 Cyc., 191.) A statement is not infrequently found in the cases to the effect that it makes no difference whether the change in the obligation of the contract may be favorable to the surety; it is enough to release the surety that the contract was changed without his assent. Speaking generally, this last observation may be accepted, but authorities are to be found which raise a doubt as to the universality of such rule. Thus, in Preston vs. Huntington (67 Mich., 139), it was held that a surety who had obligated himself to answer for the rent reserved in a lease at the rate of $75 per month was not discharged from the obligation by the circumstances that, by a valid agreement between the landlord and his tenant (the principal obligor), the amount of the rent was reduced $25 per month, though of course the liability of the surety was held to be reduced to the same extent. The court considered the reduction of rent as being in the nature of a release pro tanto only It is to be noted that in order to effect a release of the surety, the change in the contract must, as a general rule, be made by the principal parties to the contract. Indeed, no valid or effective change in the contract can, generally speaking, be made by any other person than the actual parties thereto. A recognized exception — more apparent than real — is found in cases where sureties on official bonds have been held to be released as a result of changes effected by the Legislature in the duration of the official term or in the duties of the officer whose fidelity is intended to be secured by the bond. A line of decisions, of which Roman vs. Peters (2 Rob. [La.], 479; 38 Am. Dec., 222), is an illustration, holds that the surety is discharged by such change in the law. It appeared in the case cited, that, subsequent to the execution of the official bond of a sheriff, an Act of the Legislature was passed curtailing the duties and emoluments of the office. Said the court: The law is particularly watchful over the rights of sureties; and will not countenance any transactions between the parties, that shall lessen the ability of the principal to comply with his contract, or that shall alter the rights of the parties, or enlarge the demand to the prejudice of the sureties. To permit parties to alter and modify their
contracts as they please, and to hold the sureties answerable for the performance of such parts as were not altered, would be transferring their responsibility, without their consent, from one contract to another. The contract, by the modification and alternation, becomes a new and different contract, and one for which the sureties never become responsible. xxx
xxx
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These principles are not denied by the opposite party, but their application to official bonds given to the state by public officers is contested; and it is asserted that any change produced in the contract by the agency of a third person, causing an increased responsibility of the surety, will not discharge the latter, if the creditor has merely been inactive or passive. But we cannot regard the state as a stranger to this contract. It is not necessary here to express an opinion upon the point whether the case referred to was or was not correctly speaking, be made by any other person than the actual parties thereto. A recognized exception — more apparent than real — is found in cases where sureties on official bonds have been held to be released as a result of changes effected by the Legislature in the duration of the official term or in the duties of the officer whose fidelity is intended to be secured by the bond. A line of decisions, of which Roman vs. Peters (2 Rob [La.], 479; 38 Am. Dec., 222), is an illustration, holds that the surety is discharged by such change in the law. It appeared in the case just cited, that, subsequent to the execution of the official bond of a sheriff, an Act of the Legislature was passed curtailing the duties and emoluments of the office. Said the court: The law is particularly watchful over the rights of sureties; and will not countenance any transactions between the parties, that shall lessen the ability of the principal to comply with his contract, or that shall alter the rights of the parties, or enlarge the demand to the prejudice of the sureties. To permit parties to their and modify their contracts as they please, and to hold the sureties answerable for the performance of such parts as were not altered, would be transferring their responsibility, without their consent, form one contract to another. The contract, by the modification and alternation, becomes a new and different contract, and one for which the sureties never became responsible. xxx
xxx
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These principles are not denied by the opposite party, but their application to official bonds given to the state by public officers is contested; and it is asserted that any change produced in the contract by the agency of a third person, causing an increased responsibility of the surety, will not discharge the latter, if the creditor has merely been inactive or passive. But we cannot regard the state as a stranger to this contract. It is not necessary here to express an opinion upon the point whether the case referred to was or was not correctly decided. We observe, however, that the closing words of the passage quoted shows that the court placed the decision on the ground that the State — which entity, it should be noted, is named as the obligee in an official bond — was a party to
the contract; and when the Legislature, as one of the arms of the State, intervened to change the obligation, such change was in fact effected by the State itself. In the case at bar the Government of the Philippine Islands was in no sense a party to the contract of July 15, 1913, between the plaintiff and the defendants; and it is readily seen that when the Legislature of these Islands increased the internal revenue tax upon cigarettes, this was an act done by a stranger to the contract, and not by any person in privity therewith. The consequence is that, properly speaking, the legislative fiat, placing the burden of the tax on the purchaser, did not in any wise affect the obligation of the contract as between the parties. It was merely an external factor which, supervening upon the situation created by the contract , made it impossible for the purchaser to realize the benefit which would have accrued to him if the seller had been required to pay the tax. Nearly all changes in taxation affect existing contracts in some way or other, but this does not necessarily change such contracts in a legal sense. The question of the constitutional validity of Acts Nos. 2432 and 2445 is not under discussion in this decision; for as will be seen by reference to Mitsui Bussan Kaisaha vs. Manila Electric Railroad and Light Company, already referred to, that question was effectually settled by the Act of Congress legalizing Acts No. 2432 and 2445. But it is insisted that the Legislative Acts las mentioned so altered the obligation of the contract in question as to release the surety, and in this connection we think it well to refer to some of the American cases in which the constitutionality of such Acts as these has been discussed, for it is evident that if the imposition of the increased tax on cigarettes in the case before us could not have had the effect, in the absence of any action by Congress, of impairing the contract in the constitutional sense, it must also follow that the contract was not changed in the sense necessary to release the surety. Upon this point we quote, as pertinent, the following language used by the Supreme Court of the United States: Authorities from numerous sources are cited by the plaintiffs, but none of them show that a lawful tax on a new subject, or an increased tax on an old one, interferes with a contract or impairs its obligation, within the meaning of the Constitution, even though such taxation may affect particular contracts, as it may increase the debt of one person and lessen the security of another, or may impose additional burdens upon one class and release the burdens of another, still the tax must be paid unless prohibited by the Constitutional, nor can it be said that it impairs the obligation of any existing contract in its true legal sense. (The North Missouri R.R. Co.vs. MaGuire, 87 U.S., 46; 22 L. ed., 294.) It is has been held by the same high Tribunal that the imposition of a license tax on the resident agent of a foreign manufacturing company does not impair the obligation of the contract between the agent and his principal, although its immediate consequence is to make that contract less profitable to the agent. (Kehrer vs. Stewart, 197 U.S., 60: 49 L. ed., 663.) In Clemente National Bank vs. State of Vermont (231 U.S., 120; 58 L. ed., 148), it was held that the obligations of existing contracts between a national bank and its depositors were not constitutionally impaired by a tax imposed by the legislature of the State of Vermont upon interest bearing deposits which the bank was authorized to pay and charge to the depositors. In this case it was held, at page 140:
It cannot be doubted that the property being taxable, the state could provide, in order to secure the collection of a valid tax upon such credits, for garnishment or trustee process against the bank, or in effect constitute the bank its agent to collect the tax from the individual depositors. The point was made in this case that the statute levying the tax interfered with existing contracts between the bank and its depositors, impairing their obligation. The court overruled this contention and held that the statute merely imposed a tax upon the property of the depositors in the exercise of a power subject to which the contracts of deposits were made. It is thus seen that all contracts are made subject to the taxing powers of the state and territorial governments. In Tanner vs. Little (240 U.S., 369; 60 L. ed., 691), it was held that a state license tax on merchants using stamps, tickets, or coupons, redeemable in cash or merchandise, does not unconstitutionally impair the contract obligations of such merchants with their customers or with third parties with whom they had contracted for the use of such stamps or coupons before the Act levying the tax was passed. In Grand Trunk Western Railway Co. vs. Railroad Commission of Indiana (221 U.S., 400; 55 L. ed., 786), it was held that a contract between two intersecting railway companies imposing upon the junior road the duty of constructing and property maintaining the physical crossing of the two roads, and providing and maintaining semaphores, watchmen, etc., is not constitutionally impaired by an order of the state railroad commission prescribing other and additional duties such as the installation and use of an interlocking plant and apportioning between the two companies the expense of executing the order. In Chicago, Burlington & Quincy Railroad co. vs. State of Nebraska (170 U.S., 57; 42 L. ed., 948), it was held that a contract between a city and a railroad company to participate in the construction of a viaduct in view of their mutual duty to the public is not violated by a statute and ordinance compelling the railroad company to repair it. The court further held in this case that the maintenance of safe viaducts over railroad tracts at important street crossings cannot be taken out of the police power of the legislature by a contract between a city and a railroad company. These authorities, we think, clearly show that the Acts of the Legislature by which the increased tax on cigarettes was imposed neither impaired, in a constitutional sense, the obligation of the contract which is the basis of this action nor changed that obligation in such sense as to occasion the discharge of the surety. The point raised in behalf of the surety with respect to the application of the payments must in our opinion be likewise resolved adversely to him. The surety is clearly bound by the application of the payments made by the creditor wit the assent of the principal debtor, and we entertain no doubt that when Manuel Nubla Co-Siong from time to time paid the bills submitted by the plaintiff, and which, after January 1, 1915, showed an increased of P10 per case in the price of the cigarettes, he very well knew that this additional amount was due to the inclusion of the new tax paid by the plaintiff. We are not impressed by the suggestion contained in the appellant's brief to the effect that as the bill appear to have been rendered only for cigarettes supplied, and not for cigarettes plus the amount paid upon account of internal-revenue tax, the payments must therefore be applied exclusively to the price of the cigarettes. The fundamental rights of the parties, which are sufficiently put in issue in the complaint and answer, are not in our opinion affected by the form in which the accounts
were rendered nor by the circumstances that the plaintiff's cause of action, as stated in his complaint, purports to be based merely upon a claim for cigarettes sold. Our conclusion is that there is no error in the judgment appealed from, the same is accordingly affirmed, with costs against the appellants. So ordered. Arellano, C.J., Torres, Carson, Malcolm, Avanceña and Moir, JJ., concur. Johnson, J., reserves his vote.
El Vencedor vs. Canlas Facts: An accounting between X company and D, its agent for the sale of merchandise, showed that D had failed to pay X for the merchandise of the value of 5K. X therefore refused to continue to furnish D merchandise for sale unless he gave a bond. Canlas bound himself as surety and guarantor to D to become liable in case of his inability to pay damages. It did not appear that at the time of the execution of the bond Canlas had knowledge of the fact that D was indebted to X in any sum. Canlas had no knowledge. Issue: Should the bond respond for the debt contracted by D prior to execution? Held: No. Canlas was liable only for the value of goods furnished to D subsequent to the execution of the bond. A contract of suretyship or guaranty is ordinarily not retrospective and no liability attached for defaults occurring before it is entered into unless intent to be so liable is indicated either by express words or by necessary implication. Republic of the Philippines SUPREME COURT Manila EN BANC G.R. No. L-9073
November 17, 1958
TRADERS INSURANCE and SURETY COMPANY, plaintiff-appellant, vs. DY ENG GIOK, PEDRO LOPEZ DEE and PEDRO E. DY-LIACCO, defendants-appellees. Sycip, Salazar, Atienza, Luna and Caparas for appellant. Emigdio V. Arcilla for appellee, Dy Eng Giok. Cezar Miraflor for appellee Pedro Lopez Dee. Pascual G. Mier for appellee Pedro E. Dy-Liacco. REYES J.B.L., J.: Appeal interposed against that part of the decision of the Court of First Instance of Manila (in its civil case No. 20305) absolving Pedro Lopez Dee and Pedro E. Dy-Liacco from the obligation to reimburse the plaintiff Traders Insurance and Surety Co.
From the stipulation of facts made by the parties in the court below, it appears that from 1948 to 1952 the corporation "Destilleria Lim Tuaco & Co., Inc." had one Dy Eng Giok as its provincial sales agent, with the duty of turning over the proceeds of his sales to the principal, the distillery company. As of August 3, 1951, the agent Dy Eng Giok had an outstanding running account in favor of his principal in the sum of P12,898.61. On August 4, 1951, a surety bond (Annex A, complaint) was executed by Dy Eng Giok, as principal and appellant Traders Insurance and Surety Co., as solidary guarantor, whereby they bound themselves, jointly and severally, in the sum of P10,000.00 in favor of the Destilleria Lim Tuaco & Co., Inc., under the following terms: THE CONDITION OF THIS OBLIGATION Is SUCH THAT: Whereas, the above bounden principal has entered in to a contract with the aforementioned Company to act as their provincial sales agent and to receive goods or their products under the said Principal's credit account. The proceeds of the sales are to be turned over to the Company. WHEREAS, the contract requires the above bounden principal to give a good and sufficient bond in the above stated sum to secure the full and faithful fulfillment on its part of said contract; namely, to guarantee the full payment of the Principal's obligation not to exceed the above stated sum. NOW THEREFORE, if the above bounden principal shall in all respects duly and fully observe and perform all and singular 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. LIABILITY of surety on this bond will expire on August 4, 1952 and said bond will be cancelled TEN DAYS after its expiration, unless surety is notified in writing of any existing obligations thereunder or otherwise extended by the surety in writing. (Rec. App., pp. 7-8) (Emphasis supplied) On the same date, by Eng Giok, as principal, with Pedro Lopez Dee and Pedro Dy-Liacco, as counterboundsmen, subscribed an indemnity agreement (Annex B. of the complaint) in favor of appellant Surety Company, whereby, in consideration of its surety bond (Annex A), the three agreed to be obligated to the surety company — INDEMNITY: — To indemnify the COMPANY for any damage, prejudice, loss, costs, payments, advances and expenses of whatever kind and nature, including counsel or attorney's fees, which the Company may, at any time, sustain or incur, as a consequence of having executed the abovementioned bond, its renewals, extensions or substitutions, and said attorney's fee shall not be less than (15%) per cent of the amount claimed by the Company in each action, the same to be due and payable, irrespective of whether the case is settled judicially or extrajudicially. (Rec. App. pp. 9-10) From August 4, 1951 to August 3, 1952, agent Dy Eng Giok contracted obligations in favor of the Destilleria Lim Tuaco & Co., in the total amount of P41,449.93; and during the same period, he made remittances amounting to P41,864.49. The distillary company, however, applied said remittances first to Dy Eng Giok's outstanding balance prior to August 4, 1951
(before the suretyship agreement was executed) in the sum of P12,898.61; and the balance of P28,965.88 to Dy's obligations between August 4, 1951 and August 3, 1952. It then demanded payment of the remainder (P12,484.05) from the agent, and later, from the appellant Surety Company. The latter paid P10,000.00 (the maximum of its bond) on July 17, 1953, apparently, without questioning the demand; and then sought reimbursement from Dy Eng Giok and his counter guarantors, appellees herein. Upon their failure to pay, it began the present action to enforce collection. After trial, the Court of First Instance of Manila absolved the counter-guarantors Pedro Lopez Dee and Pedro Dy-Liacco, on the theory that in so far as they are concerned, the payments made by Dy Eng Giok from August 4, 1951 to August 3, 1952, in the sum of P41,864.49, should have been applied to his obligations during that period, which were the ones covered by the surety bond and the counter-guaranty; and as these obligations only amounted to P41,449.93, so that the payments exceeded the obligations, the court concluded that the Surety Company incurred no liability and the counterbondsmen in turn had nothing to answer for. The trial court, however, sentenced Dy Eng Giok to repay to the Surety Company P10,000 with interest at 12% per annum, plus P1,500 attorneys' fee and the costs of the suit. Not satisfied with the decision, the Traders Insurance & Surety Company appealed to this Court on points of law. We find the decision appealed from to be correct. There are two reasons why the remittances by Dy Eng Giok in the sum of P41,864.49 should be applied to the obligation of P41,449.93 contracted by him during the period covered by the suretyship agreement, Annex A. The first is that, in the absence of express stipulation, a guaranty or suretyship operates prospectively and not retroactively; that is to say, it secures only the debts contracted after the guaranty takes effect (El Vencedor vs. Canlas, 44 Phil. 699). This rule is a consequence of the statutory directive that a guaranty is not presumed, but must be express, and can not extend to more than what is stipulated. (New Civil Code, Art. 2055). To apply the payments made by the principal debtor to the obligations he contracted prior to the guaranty is, in effect, to make the surety answer for debts incurred outside of the guaranteed period, and this can not be done without the express consent of the guarantor. Note that the suretyship agreement, Annex A, did not guarantee the payment of any outstanding balance due from the principal debtor, Dy Eng Giok; but only that he would turn over the proceeds of the sales to the "Destilleria Lim Tuaco & Co., Inc.", and this he has done, since his remittances during the period of the guaranty exceed the value of his sales. There is no evidence that these remittances did not come from his sales. A similar situation was dealt with in our decision in the case of Municipality of Lemery vs. Mendoza, 48 Phil. 415, wherein we said (pp. 422-423): As we have previously stated Mendoza has paid to the municipality the full sum of P23,000. In our opinion this discharged the sureties from all further liability. The circumstance that the sum of P23,000 which Mendoza paid may have been applied by the municipality to Mendoza's indebtedness for the first year of the lease is without significance as against the sureties, since the sureties were not parties to the contract of lease (Exhibit D) and are liable only upon the contract of suretyship (Exhibit E), which calls for the payments of only P23,000 by the principal. It is, just rule of jurisprudence, recognized in article 1827 of the Civil Code, that the obligation
of a surety must be express and cannot be extended by implication beyond its specified limits. We do not overlook the fact that the obligating clause in Exhibit E binds the sureties in the amount of P46,000, but, as in all bonds, that obligation was intended as an assurance of the performance of the principal obligation and when the principal obligation was discharged, the larger obligation expressed in the contract of suretyship ceased to have any vitality. The second reason is that, since the obligations of Dy Eng Giok between August 4, 1951 to August 4, 1952, were guaranteed, while his indebtedness prior to that period was not secured, then in the absence of express application by the debtor, or of any receipt issued by the creditor specifying a particular imputation of the payment (New Civil Code, Art. 1252), any partial payments made by him should be imputed or applied to the debts that were guaranteed, since they are regarded as the more onerous debts from the standpoint of the debtor (New Civil Code, Art. 1254). ART. 1254. When the payment cannot be applied in accordance with the preceding rules, or if application can not be inferred from other circumstances, the debt which is most onerous to the debtor, among those due, shall be deemed to have been satisfied. If the debts due are of the same nature and burden, the payment shall be applied to all of them proportionately. Debts covered by a guaranty are deemed more onerous to the debtor than the simple obligations because, in their case, the debtor may be subjected to action not only by the creditor, but also by the guarantor, and this even before the guaranteed debt is paid by the guarantor (Art. 2071, New Civil Code); hence, the payment of the guaranteed debt liberates the debtor from liability to the creditor as well as to the guarantor, while payment of the unsecured obligation only discharges him from possible action by only one party, the unsecured creditor. The rule that guaranteed debts are to be deemed more onerous to the debtor than those not guaranteed, and entitled to priority in the application of the debtor's payments, was already recognized in the Roman Law (Ulpian, fr.ad Sabinum, Digest, Lib. 46, Tit 3, Law 4, in fine), and has passed to us through the Spanish Civil Code. Manresa in his Commentaries to Art. 1174 of that Code (8 Manresa, Vol. 1, 5th Ed., p. 603) expressly says: Atendiendo al gravamen, la deuda garantida es mas onerosa que la simple. And this is also the rule in Civil law countries, like France (Dalloz, Jurisprudence General Vo. obligation, sec. 2033; Planiol, Traite Elem. (2d Ed). Vol. 2, No. 454) and Louisiana (Caltex Oil & Gas, Co. vs. Smith, 175 La. 678, 144 So. 243; Everett vs. Graye, 3 La. App. 136): also Italy (7 Giorgi, Teoria delle Obbl. p. 167). It is thus clear that the payment voluntarily made by appellant was improper since it was not liable under its bond; consequently, it can not demand reimbursement from the counterbondsmen but only from Dy Eng Giok, who was anyway benefited pro tanto by the Surety Company's payment.
The present case is to be clearly distinguished from Hongkong Shanghai Bank vs. Aldanese, 48 Phil., 990, andCommonwealth vs. Far Eastern Surety & Insurance Co., 83 Phil., 305, 46 Off. Gaz. 4879 and similar rulings, wherein the debt in each case owned the creditor one single debt of which only a portion was guaranteed. In those cases, we have ruled that the guarantors had no right to demand that the partial payments made by the principal debtor should be applied precisely to the portion guaranteed. The reason is apparent: the legal rules of imputation of payments presuppose that the debtor owes several distinct debts of the same nature; and does not distinguish between portions of the same debt. Hence, where the debtor only owes one debt, all partial payments must necessarily be applied to that debt, and the guarantor answers for any unpaid balance, provided it does not exceed the limits of the guaranty. Any other solution would defeat the purpose of the security. In the case before us, however, the guaranty secured the performance by the debtor of his obligation to remit to the distillery company the proceeds of his sales during the period of the guaranty (August 4, 1951 to August 4, 1952). This obligation is entirely distinct and separate from his obligation to remit the proceeds of his sales during a different period, say before August 4, 1951. The debtor, therefore, actually owed two distinct debts: for the value of his sales before August 4, 1951 and for the import of the sales between that date and August 4, 1952. There being two debts, his partial payments had necessarily to be applied (in the absence of express imputation) first to the obligation that was more onerous for him, which was the one secured by the guaranty. It is legally unimportant that the creditor should have applied the payment to the prior indebtedness. Where the debtor has not expressly elected any particular obligation to which the payment should be applied, the application by the creditor, in order to be valid and lawful, depends: (1) upon his expressing such application in the corresponding receipt and (2) upon the debtor's assent, shown by his acceptance of the receipt without protest. This is the import of paragraph 2 of Art. 1252 of the New Civil Code: If the debtor accepts from the creditor a receipt in which an application of the payment is made, the former cannot complain of the same, unless there is a cause for invalidating the contract. Ultimately, therefore, the application by a creditor depends upon the debtor acquiescence thereto. In the present case, as already noted, there is no evidence that the receipts for payment expressed any imputation, or that the debtor agreed to the same. The appellant Surety Company avers that the counterbondsmen can not question the payment made by it to Destilleria Lim Tuaco on the debt of Dy Eng Giok, because their counterbond or indemnity agreement (Annex B, par. 7) provided that: INCONTESTABILITY OF PAYMENTS MADE BY THE COMPANY: Any payment of disbursement made by the COMPANY on account of the abovementioned Bond, its renewals, extensions or substitutions, either in the belief that the Company was obligated to make such payment or in the belief that said payment was necessary in order to avoid greater losses or obligations for which the Company might be liable by virtue of the terms of the abovementioned Bond, its renewals, extensions or substitutions shall be final and will not be disputed by the undersigned who jointly and severally bind themselves to indemnify the COMPANY for any and all such payments as stated in the preceding clauses. (Rec. App., p. 11)
We agree with the appellee that this kind of clauses are void and unenforceable, as against public policy, "because they enlarge the field for fraud, because in these instruments the promissor bargains away his right to a day in court and because the effect of the instrument is to strike down the right of appeal accorded by the statute." (see National Bank vs. Manila Oil Refining Co., 43 Phil. 467) Finding no error in the judgment appealed from, the same is affirmed. Costs against appellant. So ordered. Paras, C. J., Bengzon, Padilla, Montemayor, Bautista Angelo, Labrador and Concepcion, JJ., concur. Municipaity of Gasan vs. Marasigan Facts: Municipality of Gasan granted Marasigan fishing privileges within the jurisdictional waters. To secure payment of license fees, Marasigan filed a bond subscribed by G and H who bound themselves to pay if Marasigan failed to comply with the terms of the contract. Contract was declared illegal by the Executive Bureau therefore the Municipality awarded the privilege to another person who failed to pay the deposit and yielded the privilege to Marasigan. The municipality told Marasigan that the contract was to be effective so the municipality sought to recover from Marasigan and G and H, the amount representing the license. Issue: WON the contract and bond are valid and enforceable? Held: No. Contract was not consummated and was cancelled. It ceased to be valid when it was cancelled so Marasigsan and G&H were not bound to comply with the terms of the contract. A guaranty cannot exist without a valid obligation. FIRST DIVISION [G.R. No. 45213. May 24, 1939.] H. P. L. JOLLYE, Plaintiff-Appellant, v. EMETERIO BARCELON and LUZON SURETY COMPANY, INC., Defendants. LUZON SURETY COMPANY, INC., Appellee. Ross, Lawrence, Selph & Carrascoso for Appellant. Santiago & Vicente for Appellee. SYLLABUS 1. CONTRACTS; PACTS, CLAUSES AND CONDITIONS ESTABLISHED BY PARTIES THERETO. — It is the law that in every contract the parties may establish any pacts, clauses and conditions they may deem advisable, provided, they are not contrary to law morals or public order (art. 1255 of the Civil Code.) , and that if the terms of a contract are clear and leave no doubt the intention of the contracting parties, the literal sense of its wording shall be followed (art. 1281 of the Civil Code). 2. ID.; ID.; LIMITATION OF OBLIGATIONS. — There is certainly nothing in the clause of the surety bond, Exhibit B, that is contrary to law, morals or public order. The acts provided therein by reason of which the contract of suretyship was executed could have taken place within the stipulated period of twelve months;. Hence, the parties fixed that period exactly at twelve months, limiting thereby the obligation of the appellee to answer for the payment to the appellant of the aforesaid sum of P7,500 to not more than the stipulated period.
3. ID.; ID.; ID.; CONTRACT OF SURETYSHIP AND GUARANTY. — The clauses of a contract of suretyship, as has been said on more than one occasion, determine the degree of liability of the surety (Government of the Philippine Islands v. Herrero, 38 Phil, 410), which must not be extended by mere implications beyond the clear terms of the contract. The surety must only be bound in the manner and to the extent, and under the circumstances which are set forth or which may be inferred from the contract of suretyship (La Insular V8. Machuca Go-Tauco and Nubla Co-Siong, 39 Phil., 567; Solon v. Solon, 38 Off. Gaz., 2015). DECISION DIAZ, J.: Plaintiff attempted to recover from defendants the sum of P7,500 with legal interest from August 28, 1936, when he filed his complaint, besides the costs of the suit, basing his claim upon the facts which he averred in said pleading and hereafter to be mentioned. He contended that said defendants were bound to pay him the sum referred to, jointly and severally. Upon the trial of the case, after defendants had filed their respective answers, the Court of First Instance of Manila where it was commenced, rendered judgment, sentencing defendant Emeterio Barcelon to pay plaintiff the amount claimed, with legal interest. It, however, dismissed the case as to the defendant Luzon Surety Company, declaring that the obligation assumed by said defendant, as surety, has been extinguished, and that said defendant is accordingly no longer subject to any liability. From the judgment thus rendered by said court, plaintiff took an appeal and, in his brief, maintains that the court erred: (1) m declaring that the surety bond, Exhibit B, executed by the Luzon Surety Company in his favor, lapsed after twelve months from its execution; and (2) in denying his motion for new trial. The facts alleged by plaintiff and established at the trial are briefly as follows: Through his agent, Felicisimo Santiago, plaintiff bought from defendant Emeterio Barcelon, on February 13, 1933 seventy-five shares of stock of the North Electric Company, a corporation duly organized and engaged in business having its principal office in the City of Manila. Said 75 shares of stock were represented by two certificates, certificate No. 2 for twenty-five shares and certificate No. 19 for fifty shares. When the sale took place, defendant Barcelon executed the document appearing of record as Exhibit A, reading as follows:jgc:chanrobles.com.ph "DEED OF SALE OF SHARES OF CAPITAL STOCK OF THE NORTH ELECTRIC COMPANY "For and in consideration of the sum of seven thousand five hundred pesos (P7,500) which I have this day received from Mr. H. P. L. Jollye, I, Emeterio Barcelon, owner of seventy-five shares of capital stock of the North Electric Company (Certificate No. 38 [2-19] for 75 shares), do hereby sell, transfer and convey unto the said H. P. I. . Jollye, his heirs, successors and assigns, the aforesaid shares and do hereby warrant that I have good and sufficient title on them. "It is agreed between the parties hereto that should any judgment in the case there is against Vicente Diosomito in the Court of First Instance of Cavite invalidate my title to the shares herein sold, I hereby obligate myself to give the money back to Mr. H. P. L. Jollye; and
for the purpose of guaranteeing the fulfillment of this obligation, I have caused the Luzon Surety Company to issue in favor of the said H. P. L. Jollye, his heirs, successors and assigns, a surety bond in the sum of P7,500 a copy of which is attached hereto and made part hereof as Schedule A; it being understood, however, that all expenses in connection with the said bond shall be borne and paid by the beneficiary Mr. H. P. L. Jollye, his heirs, successors or assigns. In witness whereof, I have hereunto signed this document, in this City of Manila, this 13th day of February, 1933. (Sgd.) "EMETERIO BARCELON "In the presence of:chanrob1es virtual 1aw library (Sgd.) "R. J. GONZALEZ "F. SANTIAGO" Since according to the said document Exhibit A, the seventy-five shares of stock in question which were sold by Barcelon to plaintiff, were at the time subject of suit in civil case No. 2525 of the Court of First Instance of Cavite, entitled "Toribia Uson, Plaintif, v. Vicente Diosomito, defendant", the two, Barcelon and the herein plaintiff, agreed that the first would execute, as he in fact did, in favor of the latter a surety bond in an amount equal to what was then given to him in payment of the seventy-five shares of stock in order to secure the return of said sum in the event that Vicente Diosomito from whom Barcelon had acquired them should lose in said case. Pursuant to that agreement, Barcelon and defendant Luzon Surety Company, Inc., the latter in its capacity as surety, executed in favor of plaintiff Exhibit B, reading as follows:jgc:chanrobles.com.ph "SURETY BOND "Know all men by these presents:jgc:chanrobles.com.ph "That we, Emeterio Barcelon of No. 16 Brixton Hill, Manila, as principal, and Luzon Surety Company, Inc., a corporation duly organized and existing under and by virtue of the laws of the Philippine Islands, as sureties, are held and firmly bound unto H. P. L. Jollye of Manila, P. I. in the sum seven thousand five hundred only (P7,500), Philippine currency, for the payment of which sum, well and truly to be made, we bind ourselves, our heirs, executors, administrators, successors, and assigns, jointly and severally, firmly by these presents. ‘The conditions of this obligation are as follows:jgc:chanrobles.com.ph "Whereas, the above bounden principal, on 13th day of February, 1933 entered into an agreement with H. P. L. Jollye of Manila, P. I., to fully and faithfully refund to said Mr. H. P. L. Jollye the above stated sum of P7,500 representing the purchase price of the 75 shares of the capital stock of the North Electric Company (certificate No. 38) paid by said Mr. H. P. L. Jollye to the undersigned principal, Mr. Emeterio Barcelon, in the event the title thereto of said Mr. Barcelon is invalidated by any judgment which may be rendered by the court in the case now pending in the Court of First Instance of Cavite against Vicente Diosomito or in the event that any of the warranties contained in that certain deed of sale executed by the undersigned principal on this 13th day of February, 193~, be invalidated, a copy of which is hereto attached and made an integral part hereof, marked Exhibit A. "Whereas, said H. P. L. Jollye requires said principal to give a good and sufficient bond in the above stated sum to secure the full and faithful performance on his part of said agreement.
"Now therefore, if the principal shall well and truly perform and fulfill all the undertakings, covenants, terms, conditions and agreements stipulated in said agreement, then this obligation shall be null and void; otherwise it shall remain in full force and effect. "The liability of Luzon Surety Company, Inc., under this bond will expire twelve (12) months from date hereof. "In witness whereof, we have set our hands and signed cur names on this 13th day of February, 1933. (Sgd.) "EMETERIO BARCELON "Principal "LUZON SURETY COMPANY, INC. (Sgd.) "EULOGIO RODRIGUEZ "Manager "Surety "In the presence of:chanrob1es virtual 1aw library (Sgd.) "C . G. RAMOS "Witness to principal (Sgd.) ILLEGIBLE "Witness to surety" Upon the commencement of case No. 2626 above-mentioned in the early part of January, 1932, Toribia Uson, as plaintiff, secured a writ of preliminary attachment against Vicente Diosomito and by virtue of that writ the seventy-five shares of stock in question, which then still appeared in the books of the North Electric Company in the name of and as belonging to Diosomito, were attached. Thereafter, judgment was rendered against him in said case, sentencing him to pay the plaintiff Uson the sum of P2,300. is this judgment became final because he did not take any appeal, the corresponding writ of execution was thereafter issued. After the giving of the prescribed notices, the sheriff sold the attached seventy-five shares of stock to Toribia Uson as the highest bidder at the public sale. However, when she appeared in the offices of the North Electric Company with the certificate of sale issued in her favor by the sheriff, to ask for the transfer of her name of the aforesaid certificates Nos. 2 and 19 which represented the seventy-five shares of stock sold to her by the sheriff she discovered that the same had already been cancelled because another had been issued in their place, being at first certificate No. 38 in favor of Emeterio Barcelon subsequently, certificate No. 47 in favor of the herein plaintiff. This was due to the fact that Diosomito, the former owner of the shares of stock aforementioned, sold them to Barcelon, although he had been informed that they had been attached in the case brought against him by Toribia Uson (Civil case No. 2525) because he had been timely notified of the attachment and because that fact was also noted in certificates Nos. 2 and 19 and in the books of the North Electric Company. In view of this fact, Toribia Uson, who insisted on the validity and force of her right as a
purchaser in good faith of the aforementioned shares of stock, commenced civil case No. 2816 in the Court of First Instance of Cavite, against Vicente Diosomito, Angel Limjoco, Emeterio Barcelon, H. P. L. Jollye, and the North Electric Company, to secure a judicial determination of who among them had the right of ownership over said shares. The court decided the case in her favor, declaring that she was their real owner and ordering accordingly the North Electric Company to cancel certificate No. 47 with which certificates Nos. 2 and 19 were substituted and to issue a new one in favor of Toribia Uson as evidence of her right over said shares. The court reserved to H. P. L. Jollye, defendant and appellant in this case, the right to recover from Emeterio Barcelon the amount of P7,500 for which he had bought the shares, and to Barcelon the right in turn to recover from Vicente Diosomito what he had paid the latter therefor. The judgment by which all this was ordered, was appealed to this court, but u as affirmed in its entirety. Desiring to recover the P7,500 he had paid Barcelon, appellant now brings his action against the surety of said defendant, which is the appellee, Luzon Surety Company, Inc. It will be noted that the last clause of the surety bond executed by the appellee in favor of the appellant clearly says:jgc:chanrobles.com.ph "The liability of Luzon Surety Company, Inc., under this bond will expire twelve (12) months from date hereof." The date to which the aforecited clause refers is February 13, 1933. It is the law that in every contract, the parties may establish any pacts, clauses and conditions they may deem advisable, provided, they are not contrary to law, morals or public order (art. 1255 of the Civil Code), and that if the terms of a contract are clear and leave no doubt as to the intention of the contracting parties, the literal sense of its wording shall be followed (art. 1281 of the Civil Code). There is certainly nothing in the clause referred to of the surety bond, Exhibit B, nor in the others which it contains, that is contrary to law, morals or public order. The acts provided therein by reason of which the contract of suretyship was executed could have taken place within the stipulated period of twelve months. Hence, the parties fiscal that period exactly at twelve months, limiting thereby the obligation of the appellee to answer for the payment to the appellant of the aforesaid sum of P7,500 to not more than the stipulated period. The clauses of a contract of suretyship, as has been said on more than one occasion, determine the degree of liability of the surety (Government of the Philippine Islands v. Herrero, 38 Phil., 410), which must not be extended by mere implications beyond the clear turns of the contract. The surety must only be bound with manner and to the extent, and under the circumstances which are set forth or which may be inferred from the contract of suretyship (La Insular v. Machuca Go-Tauco and Nubla Co-Siong, 39 Phil., 567; Solon v. Solon, 38 Off. Gaz., 2015). Furthermore, as it was and is known that the appellee is a corporation created and organized exclusively to engage in the business of giving bonds upon a fixed premium or interest, which is of course limited to the rate determined by law, it must necessarily subsist on the income it derives through said means. From this it follows that it did not bind itself, which appellant knows, to answer to any one beyond the one year period of the contract. To bind it for a longer time, he should have renewed the contract, Exhibit B; and appellant neither asked for a novation nor paid the necessary premium to extend it for one, two or three more years. Accordingly, the first error attributed to the lower court has no merit, and as the second error is no more than a consequence of the first, consideration thereof is unnecessary.
The judgment appealed from being in accordance with law in view of the foregoing considerations, it is affirmed in its entirety, with costs against the appellant. So ordered. Avanceña, C.J., Villa-Real, Imperial, Laurel, Concepcion, and Moran, JJ., concur. Republic of the Philippines SUPREME COURT Manila SECOND DIVISION
G.R. No. L-19632 November 13, 1974 THE PHILIPPINE AMERICAN GENERAL INSURANCE COMPANY, INC., plaintiff-appellee, vs. MANUEL MUTUC DOROTEO Q. MOJICA, and FAUSTO S. ALBERTO, defendants, FAUSTO S. ALBERTO,defendant-appellant. Manuel Lim, Manuel Y Macias & Ricardo T. Bancod for plaintif-appellee. V. A. Francisco & Associates for defendant-appellant.
FERNANDO, J.:p There is an obstacle, rather formidable in character, that stands in the way of the plea of appellant Fausto S. Alberto, 1 to have this Court reverse a lower court decision of February 14, 1962, holding him liable on an indemnity agreement. As pointed out therein, the language of his undertaking is clear and unmistakable and, therefore, leaves no alternative for a court except to enforce its terms. The attempt to impugn such a judgment based on the ground that the stipulation relied upon is contrary to morals and to public order and policy, while vigorously pressed, is none too successful. Accordingly, we affirm. The facts as stipulated by the parties may be gleaned from the appealed decision. Thus: "On July 16, 1957, defendant Manuel C. Mutuc as principal, and plaintiff, as surety, executed a surety bond in the amount of P1,000 in behalf of defendant Mutuc and in favor of the Maersk Line, in which the surety company guaranteed the faithful performance by said Manuel C. Mutuc of his duties in connection with his employment as crewmember of the vessel of the Maersk Line, and more particularly, that he would not desert said vessel while he was engaged as such crewmember while outside of the Philippines. To protect the plaintiff company, on July 17, 1957, in consideration of plaintiff's becoming surety of the defendant Manuel C. Mutuc, under the bond, ... the defendant Manuel C. Mutuc, Doroteo Q. Mojica, and Fausto S. Alberto, executed an indemnity agreement in favor of the plaintiff, ... . The duration of the surety bond, ... was for the period beginning July 16, 1957 to July 17, 1958, but at the instance of the defendant, Manuel C. Mutuc, it was renewed for three successive one year periods, the last period of which was from July 17, 1960 to July 17, 1961. The prior consent of the defendant Fausto S. Alberto to the aforesaid renewal extension was not
obtained by the defendant Manuel C. Mutuc or by the plaintiff. According to the letter of the Immigration and Naturalization Service, United States Department of Justice, ... Manuel C. Mutuc was not aboard the vessel M/S Merit Maersk when it departed from New York at 3:00 o'clock P.M. for Charleston, South Carolina, and was presumed to be a deserter. The Compania General de Tabacos de Filipinas which represented the Maersk Lines forwarded this letter to the plaintiff and asked for the remittance of the forfeited bond of P1,000. On October 6, 1960, the plaintiff wrote a letter to the defendants Doroteo Q. Mojica and Fausto S. Alberto demanding the payment of the amount of P1,000 in accordance with the indemnity agreement. On October 25, 1960, plaintiff paid the Tabacalera the sum of P5,000 in full settlement of the latter's claim against the bond ... .This action is for the recovery of the amount of P1,000 against the defendants Mojica and Alberto based on the indemnity agreement ... . From the judgment against them by the Municipal Court, defendant Alberto appealed alleging that the renewal was made without his consent." 2 The indemnity agreement was insofar as pertinent set forth therein in this wise: "[Indemnity]:— The undersigned agree at all times to jointly and severally indemnify the [Company] and keep it indemnified and hold and save it harmless from and against any and all damages, losses, costs, stamps, taxes, penalties, charges and expenses of whatsoever kind and nature which the [Company] shall or may, at any time sustain or incur in consequence of having become surety upon this bond herein above referred to or any extension, renewal, substitution or alteration thereof, made at the instance of the undersigned or any of them, or any other bond executed on behalf of the undersigned or any of them; and to pay, reimburse and make good to the [Company] its successors and assigns, all sums and amount of money which it or its representatives shall pay or cause to be paid, or become liable to pay, on account of the undersigned or any of them, of whatsoever kind and nature, including 15% of the amount involved in the litigation or other matters growing out of or connected therewith, for and as attorney's fees, but in no case less than P25.00. It is hereby further agreed that in case of any extension or renewal of the bond we equally bind ourselves to the [Company] under the same terms and conditions as herein provided without the necessity of executing another indemnity agreement for the purpose and that we hereby equally waive our right to be notified of any renewal or extension of the bond which may be granted under this indemnity agreement. [Renewals, alterations and substitutions]:— The undersigned hereby empower and authorize the Company to grant or consent to the granting of any extension, continuation, increase modification, change, alteration, and/or renewal of the original bond herein referred to, and to execute or consent to the execution of any substitution for said Bond with the same or different conditions and parties, and the undersigned hereby hold themselves jointly and severally liable to the Company for the Original Bond herein abovementioned or for any extension, continuation, increase, modification, change, alteration, renewal or substitution thereof, until the full amount including principal, interests, premiums, costs and other expenses due to the Company thereunder is fully paid up." 3 The lower court after referring to the above stipulation as to "Renewals" which refers not to a single extension but to "any extension" agreed to in advance by defendant, now appellant, found for plaintiff, now appellee. As set forth in the decision: "The defendant having expressly empowered or authorized his principal to the granting of any extension, his liability under the indemnity agreement necessarily follows." 4 It is from that decision in favor of plaintiff that this appeal is taken. As set forth at the outset, there is no legal ground for a reversal.
1. Appellant was not compelled to enter into an indemnity agreement. He did so of his own free will. He agreed to hold himself liable for the amount therein specified. What is more, he did consent likewise to be so bound not only for the one year period specified but to any extension thereafter made, an extension moreover that could be had without his having to be notified. That was what the contract provided. He gave his plighted word. The terms were definite and certain. There was no ambiguity. All that was necessary was to see its enforcement. The Civil Code explicitly provides: "If the terms of a contract are clear and leave no doubt upon the intention of the contracting parties, the literal meaning of its interpretation shall control." 5 that was how it was worded under the Civil Code of Spain of 1899 formerly in force in this jurisdiction. 6 A provision like the above exemplifies according to the leading case of Perez v. Pomar 7 the principle that "the will of the contracting parties is law, ... ." 8 It is understandable then why in Alburo v. Villanueva, 9 this Court affirmed that where the terms of a contract are "clear and explicit," they "do not justify an attempt to read into it any alleged intention of the parties other than that which appears upon its face." 10 As was so categorically put forth in Hernandez v. Antonio: 11 "The literal sense of its stipulations must be observed." 12 It was so succinctly observed by Chief Justice Arellano in Velasco v. Lao Tam13 that such is the "first rule on the matter ... ." 14 There is this excerpt from Chinchilla v. Rafel: 15 "That the terms employed in the contract Exhibit 1 are clear and leave no doubt as to the true genuine intention of the contracting parties, it is sufficient, in the opinion of this court, to demonstrate it by a simple reading of the document Exhibit 1 from the wording of which it is not possible to find any meaning contrary or opposed to the evident intention of the contracting parties, Rafel and Verdaguer. ... From the literal wording of the document in question, it is not possible under any circumstance whatsoever to infer a contract distinct from that which really and truly appears to have been specified in the said document." 16 Thus, contracts, according to Feliciano v. Limjuco, 17 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. 18 A terse summary of the matter is that of the then Justice, later Chief Justice, Moran: "A writing must be interpreted according to the legal meaning of its language." 19 2. There was no other valid conclusion that could be reached by the lower court. Even appellant must have seen that so it ought to be. That would account for the contention in his brief 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." 20 That is a pretty tall order. There is more than just a hint of hyperbole in such a sweeping allegation. Appellant though ought to have realized that assertion is not the equivalent of proof. A little more objectivity on his part should bring the realization that no offense to law or morals could be imputed to such a contractual provision. As to good customs, that category requires something to substantiate it. A mere denunciatory characterization certainly cannot suffice. That leaves public order or public policy. It is difficult to follow appellant's train of reasoning. He would premise it on the indemnity agreement being a contract of adhesion. He was not at all compelled to agree to it. He was free to act either way. He had a choice. It may be more offensive to public policy, let alone morals or good customs, if thereafter he would be allowed to go back on his word. Besides the policy underlying such a stipulation in this litigation is clear. What was guaranteed was the faithful performance of defendant Mutuc of his employment as a member of the crew of a vessel plying overseas. What was more logical considering the difficulty of contacting him
then for the party concerned, here appellant, to agree in advance to any extension without the need for notification. So the parties agreed. There could be thus nothing that did offend public policy or public order when such an arrangement was explicitly provided for. Appellant, clearly, has not made out a case for reversal. 21 WHEREFORE, the lower court decision of February 14, 1962 is affirmed. Costs against appellant. Antonio, Fernandez and Aquino, JJ., concur. Republic of the Philippines SUPREME COURT Manila EN BANC G.R. No. L-12077
June 27, 1958
EMMANUEL C. ONGSIAKO, ET AL., plaintiffs, vs. THE WORLD WIDE INSURANCE and SURETY CO., INC., ET AL., defendants. THE WORLD WIDE INSURANCE and SURETY CO. INC.,cross-claimant-appellant, vs. CATALINA DE LEON, cross-defendant-appellee. Villareal and Amacio for appellant. Mariano M. Magsalin and Macario L. Nicolas for appellee. BAUTISTA ANGELO, J.: On November 10, 1951, Catalina de Leon executed in favor of Augusto V. Ongsiako a promissory note in the amount of P1,200.00, payable ninety (90) days after date, with interest at 1 per cent per month. On the same date, a surety bond was executed by Catalina de Leon, as principal, and the World Wide Insurance & Surety Co., Inc., as surety, whereby they bound to pay said amount jointly and severally to Augusto V. Ongsiako. As the obligation was not paid on its date of maturity either by Catalina de Leon or by the surety notwithstanding the demands made upon them, Ongsiako brought this action on March 6, 1953 in the Municipal Court of Manila to recover the same from both the principal and the surety. Judgment having been rendered for the plaintiff, both defendants appealed to the court of first instance. In the latter court, Catalina de Leon failed to answer and so she was declared in default. In due time the surety company filed its answer setting up a counterclaim against plaintiff and a cross-claim against its co-defendant. After hearing, the court rendered judgment ordering Catalina de Leon to pay plaintiff the sum of P1,200.00, with interest at the rate of 1 per cent per month from February 10, 1952, and the sum of P300.00 as attorneys' fees, and costs. Defendant surety company was likewise ordered to pay to plaintiff the same judgment but with the proviso that "execution should not issue against defendant The World-Wide Insurance & Surety Co., Inc., until a return is made by the Sheriff upon execution against defendant Catalina de Leon showing
that the judgment against her remained unsatisfied in whole or in part; and provided, further, that defendant Catalina de Leon shall reimburse to defendant Company whatever amount the latter might pay under this judgment together with such expenses as may be necessary to effectuate said reimbursement." From this judgment, the surety company appealed and the case is now before us because, as certified by the Court of Appeals, it only involves questions of law. Augusto V. Ongsiako, having died in the meantime, was substituted by his special administrators Emmanuel Ongsiako and Severino Santiangco. The surety bond in question was executed in November 10, 1951 and among the important provisions it contains is the following: that the principal and the surety "are held and firmly bound unto Dr. Augusto V. Ongsiako in the sum of One Thousand Two Hundred Pesos (P1,200.00), Philippine Currency, for the payment of which well and truly to be made, we bind ourselves ... jointly and severally, firmly by these presents" (and referring to the Promissory Note) "whose terms and conditions are made parts hereof." In said bond there also appears a special condition which recites: "The Liability of the World-Wide Insurance & Surety Co., Inc. under this bond will expire on February 10, 1952." The note therein referred to, on the other hand, provides that the obligation is payable ninety days from date of issue, November 10, 1951, which means that its date of maturity is February 10, 1952. The evidence shows that neither the principal nor the surety paid the obligation on said date of maturity and immediately thereafter demands for payment were made upon them. Thus, it appears that as early as February 12, 1952, or two days thereafter, the creditor wrote to the surety company a letter notifying it of the failure of its principal to pay the obligation and requesting that it make good its guaranty under the bond (Exhibit B), which demand was reiterated in subsequent letters (Exhibits C, D and E). To these demands, the company merely set up the defense that it only acted as a guarantor and as such its liability cannot be exacted until after the property of the principal shall have been exhausted (Exhibit G). It therefore appears that appellant has no justification whatever to resist the claim of the plaintiff for in the judgment appealed from it is precisely provided that execution of judgment should not issue against it until after it is shown that the execution of the judgment against the principal has been returned by the sheriff unsatisfied, which was the only excuse given by said appellant in not fulfilling its commitment under the bond. And yet it appealed from said judgment just to put up the additional defense that its liability under the bond has already expired because of the condition that its liability shall expire on February 10, 1952. Even if this were true, we consider however this stipulation as unfair and unreasonable for it practically nullifies the nature of the undertaking assumed by appellant. It should be noted that the principal obligation is payable ninety days from date of issue, which falls on February 10, 1952. Only on this date can demand for payment be made on the principal debtor. If the debtor should fail to pay and resort is made to the surety for payment on the next day, it would be unfair for the latter to allege that its liability has already expired. And yet such is the stand taken by appellant. As the terms of the bond should be given a reasonable interpretation, it is logical to hold that the liability of the surety attaches as soon as the principal debtor defaults, and notice thereof is given the surety within reasonable time to enable it to take steps to protect its interest. This is what was done by appellee in the present case. After all, the surety has a remedy under the law which is to foreclose the counterbond put up by the principal debtor. This is in effect what was done by the lower court. This Court has taken note of the reprehensible attitude adopted by the surety company in this case by resorting to improper means in an effort to evade its clear responsibility under the law. An instance of such attitude is the insertion in the bond of a provision which in
essence tends to nullify its commitment. This is a subtle way of making money thru trickery and deception. Such practice should be stopped if only to protect honest dealers or people in financial stress. Because of such improper conduct, this Court finds no justification for the present appeal and considers it frivolous and unnecessary. For this appellant should be made to pay treble costs. Wherefore, the decision appealed from is affirmed, with treble costs against appellant. Bengzon, Concepcion, Reyes, J. B. L., Endencia, and Felix, JJ., concur. Paras, C. J., Montemayor, and Reyes, A., JJ., concur in the result. Republic of the Philippines SUPREME COURT Manila EN BANC G.R. No. L-22209
December 17, 1966
PHILIPPINES INTERNATIONAL SURETY CO., INC., petitioner, vs. COMMISSIONER OF CUSTOMS, respondent. Tolentino, Garcia and D. R. Cruz for petitioner. Office of the Solicitor General for respondent. CONCEPCION, C.J.: Appeal by the Philippines International Surety Co., Inc. from a decision of the Court of Tax Appeals. From June to August, 1955, four (4) shipment of goods, consigned to Pablo Gonzales arrived at the Port of Manila, on board S.S. Bronnyvile, without the release certificate required by Central Bank Circular. Nos. 44 and 45. Consequently, said goods were subjected, by the Acting Collector of Customs for said port, to seizure proceedings, during the pendency of which the merchandise were, later, ordered released to Gonzales, under bonds issued by appellant surety. After due hearing, said officer rendered a decision, on April 4, 1960, ordering the forfeiture of said goods — upon the ground that the importation thereof had been made in violation of the Circulars above referred to — and, accordingly, of the aforementioned bonds and sentencing Gonzales and the surety to pay, jointly and severally, the amounts thereof, aggregating P53,434.08. On appeal, taken by Gonzales, this decision was affirmed by the Commissioner of Customs. The surety appealed from the latter's decision to the Court of Tax Appeals, which, in due course, dismissed said appeal upon the ground that said surety has no legal capacity to interpose the aforementioned appeal, and that the same is without merit. Hence, this appeal by the surety, who maintains that the Court of Tax Appeals has erred on both counts. With respect to petitioner's capacity to appeal from the decision of the Commissioner of Customs, we note that the petition for review filed by the surety with the Court of Tax Appeals is based upon two (2) grounds, namely: (1) that the Collector of Customs had not
furnished a copy of its decision to Gonzales; and (2) that Central Bank Circulars Nos. 44 and 45 are allegedly null and void. According to the decision rendered by the Commissioner of Customs — on appeal taken, not by the surety, who didnot appeal from the decision of the Collector of Customs, but by the importer, Gonzales — the latter had limited himself to assailing the validity of the aforementioned Circulars of the Central Bank. In other words, Gonzales had not impugned the decision of the Collector of Customs upon the ground of lack of notice, alleged by the surety, thus showing, either that Gonzales had really received — as the surety, evidently, had — notice of said decision, as indicated by the fact that he had appealed therefrom, or that he had waived said notice, which it is his privilege to renounce. Hence, the surety had no right to invoke in support of its own appeal, said alleged lack of notice to theimporter, not only because his acts proved that there had been such notice, but, also, that he had waived it, by appealing from the decision of the Collector of Customs, and by not interposing an appeal from the decision of the Commissioner of Customs, thereby allowing the same to become final and executory, insofar as he is concerned. It may not be amiss to add that lack of notice of a decision to a given party affects, not the validity of said decision, but its finality insofar as such party is concerned, in the sense that his period to appeal does not begin to run until said notice, and that the decision cannot be executed against him until after the expiration of the period aforementioned. It should, also, be pointed out that, as regards the surety herein, which had not appealed from the decision of the Collector of Customs, the same had become final and executory upon expiration of the reglementary period to appeal therefrom. Although the appeal taken from said decision by the importer might have, perhaps, inured to the benefit of the surety, if the result of the appeal had been favorable to said importer, the fact is that he had failed in his appeal. Hence, there is no legal ground by which the surety may justify its alleged right to appeal from the decision of the Commissioner of Customs, based upon an alleged violation, not of its right as a surety, but of those of the importer, as such. It is true that a solidary debtor may "avail himself of all the defenses which are derived from the nature of the obligation and of those which are personal to him or pertain to his share" (Article 1222, Civil Code of the Philippines). What, then, is the nature of the obligation of the surety in the case at bar? Pertinent parts of its bonds provide: . . . WHEREAS, the Collector of Customs is willing to release and deliver the above mentioned ———— to the Principal upon the filing of a surety bond in the amount of ———— Philippine Currency, representing the local appraised value of the merchandise to guaranty the payment of the amount that the Bureau of Customs or the courts of the Philippines may decide to collect, depending upon the final outcome of the seizure proceedings; WHEREAS, the Principal and the Surety both agree to be bound, as they hereby do bind themselves, their heirs, executors, administrators, successors and assigns, jointly and severally, for the payment and the obligation herein mentioned; and WHEREAS, the parties hereto have agreed that the Collector of Customs, the Commissioner of Customs, or any of their subordinates, shall not be held liable in any manner for the delivery of said merchandise;
NOW, THEREFORE, the conditions of this obligation are such that, in the event that it should be finally decided that the merchandise herein mentioned should be forfeited to the government, and/or that a fine or surcharge should be imposed, the entire amount of this bond, in case of forfeiture, or the corresponding amount of the fine or surcharge, as the case may be, shall be paid in CASH to the Bureau of Customs. PROVIDED, HOWEVER, that if within thirty (30) days from demand for payment of the liability herein mentioned the said liability is not paid, and it should be found necessary to file an action in court to effect the collection thereof, a penalty of FIVE HUNDRED PESOS (P500.00) in addition shall be imposed, otherwise, this obligation shall be void and of no effect. Pursuant thereto, the surety bound itself to pay the sum of money specified in the bond, "in the event that it should be finally decided that the merchandise herein mentioned should be forfeited to the Government". Thus, the surety guaranteed, not the legality of the importation, but, merely the payment of the appraised value of the goods imported and released, in the event aforementioned. As a consequence, the surety would have a right to object and appeal if it were made to pay, either an amount exceeding its bond, or without a previous decree of forfeiture of the merchandise. The bond did not, however, give the surety a right to question the legality of the seizure or that of the aforementioned Circulars of the Central Bank. Indeed, the surety in the case at bar, stands in substantially the same position, legally, as the surety of the accused in a criminal case who is released on bail. Surely, such surety can not intervene in the proceedings, before the trial court, to establish the guilt or innocence of the accused and/or appeal from its judgment convicting him as charged. At any rate, the authority of the Central Bank to issue Circulars Nos. 44 and 45, and the validity of these Circulars,1as well as the propriety of the decree of confiscation and forfeiture of the goods imported in violation thereof2 are now well settled. WHEREFORE, the appealed decision of the Court of Tax Appeals is hereby affirmed, with costs against the Philippines International Surety Co., Inc. It is so ordered. Reyes, J.B.L., Barrera, Dizon, Regala, Makalintal, Bengzon, J.P., Zaldivar, Sanchez and Castro, JJ., concur. Republic of the Philippines SUPREME COURT Manila EN BANC G.R. No. L-20469
August 31, 1965
PEDRO C. PASTORAL, petitioner, vs. MUTUAL SECURITY INSURANCE CORPORATION and THE HONORABLE COURT OF APPEALS,respondents. San Juan, Africa and Benedicto for petitioner. Vicente L. San Luis for respondents.
REYES, J.B.L., J.: Petition by Pedro C. Pastoral for the review and reversal of a decision of the Court of Appeals (in its Case CA-G.R. No. 29180-R), that absolved the Mutual Security Insurance Corporation of its liability to the said petitioner, reversing the decision of the Court of First Instance of Manila. The facts are stated by the Court of Appeals to be as follows: It appears that on and from October 1, 1957, plaintiff Pedro C. Pastoral leased a crane to defendant Mapada & Company, Inc., at a monthly rental of P900.00, Exhibit A. The contract provides that if the crane be not returned 10 days after notice therefor, defendant will pay plaintiff P15,000, as the value of the crane. In compliance with paragraph 2(b) of Exhibit A, defendant on October 22, 1957, put up a surety bond, Exhibit B, in the total amount of P15,000 executed by appellant Mutual Security Insurance Corporation to fully and faithfully guarantee compliance by defendant of "all the conditions and obligations" under the lease contract. Upon request of defendant which was expecting some money from the construction contract with the government about the end of November, plaintiff deferred its collection of rentals for the months of October and November, 1957 until the beginning of December; but when no payment was made despite demands, plaintiff advised, and demanded payment from, the surety company on December 5, 1957, Exhibit C. Up to the date of the trial and despite numerous demands by plaintiff, defendant failed to pay any rental (except P2,000 in March, 1958 from the Bureau of Public Highways) nor to return the crane to plaintiff. After trial, judgment was rendered in favor of plaintiff and against the defendants, ordering the latter solidarity to pay the plaintiff the sum of P7,700 as unpaid rentals up to and including the month of September, 1958 when the complaint was filed plus P900 as monthly rental from the month of October, 1958 until the crane is actually returned, or in default thereof to pay to plaintiff the sum of P15,000 for the crane, provided that the amount for which appellant Mutual Security Insurance Corporation shall be liable shall not exceed the sum of P15,000; and to pay the costs. Only the surety company appealed, urging that the trial court erred in not holding that it was released from liability under the surety bond which had become null and void from the failure of plaintiff to report within five days to appellant the violation of the lease contract. The Contract of Lease of Construction Equipment, Exhibit A, provides inter alia: "2. That the lessee obligates to pay a monthly rental of Nine Hundred Pesos (P900) Philippine Currency payable at the residence of the LESSOR ..."; while the surety bond, Exhibit B, after guaranteeing compliance with the lease contract provides: "Any violation of said contract will be reported to the herein Surety Company within (5) days, otherwise, this bond will be null and void." Upon the facts above narrated, the Court of Appeals decided that Pastoral's failure to notify the surety of the principal's defaults between October 6-10 and November 6-10, 1957, and in notifying the surety only on December 5, 1957, constituted a violation of the conditions of the bond that exonerated the surety from liability.
Unable to obtain reconsideration of the decision, Pastoral resorted to this Court. We find the appealed decision to be in error. On the basis that Pastoral received a copy of the bond (containing the requirement to notify the surety of any default within 5 days) only on November 21, 1957 — and this date is not seriously disputed — Pastoral's obligation to notify it within five (5) days of the defaults in the payment of the first two monthly rentals, falling due in early October and early November, had become impossible of performance, so that compliance with the 5-day notice requirement had become excused for those two months. No reason is shown why Pastoral should anticipate that the surety would impose this condition when the lease contract merely required that lessee Mapada & Co., Inc. should furnish a surety bond. That Pastoral knew nothing about such a condition before November 21 is further emphasized by the fact that in late October or early November he agreed with Mapada & Co., Inc., to defer payment of the October and November rentals to the end of November. By imposing on Pastoral the condition of notifying it within 5 days of default, the surety company made it necessary that Pastoral should accept the bond; and Pastoral could not do so before learning of it. This Court has ruled that where the guaranty requires action by the creditor before the obligation becomes fixed, it is not binding until accepted (National Bank vs. Garcia, 47 Phil. 63; Texas Co. [Phil.] Inc. vs. Alonzo, 73 Phil. 90). The rule is grounded on common sense; otherwise, the debtor and the guarantor could easily defraud the creditor by inserting in the bond conditions that would render it nugatory. The suretyship contract, therefore, was not perfected and was not binding on Pastoral until November 21, 1957, when he received copy thereof and tacitly accepted it. By then two defaults had already occurred (even disregarding the extension agreement of October 31, hereinafter discussed); and Pastoral was in no position to give notice of them within 5 days after default, as required by the bond, because the latest happened on November 5. The 5day period to notify expired November 10, and Pastoral only learned of the existence of the condition on November 21.Ad impossibilia nemor tenetur. In fact, by not notifying Pastoral earlier, the surety must be deemed to have waived the condition as to rentals already due, since a condition is deemed fulfilled when the obligor voluntarily prevents its fulfillment (Civ. Code, Art. 1186). The Court of Appeals held that Pastoral was duty-bound to know and secure copy of the surety contract within a reasonable time from its execution on October 22, 1957, and that not having done so, he was chargeable with its contents. We find no justification for this pronouncement. If anyone was obligated to notify Pastoral of the conditions attached to the bond, that one was the guarantor. Pastoral was not obligated to inquire, since his assent to the condition was necessary; and if no acceptable bond was forthcoming, he could always rescind the lease of the machinery to Mapada & Co., Inc., and recover his crane. The Court of Appeals further held that the act of Pastoral in granting to the debtor on October 31, 1957 time up to the end of November, 1957 to pay the rentals that fell due on the first five days of October and November, without the surety's consent, constituted a material alteration that discharged the surety. We agree with appellant that this view is untenable. When Pastoral agreed on October 31 that the October and November rentals be
paid at the end of November, he had not yet learned of them on November 21. On the latter date, the debtor was not yet in default, because the extension given had wiped out the previous failures to pay on October 5 and November 5. The first default after the bond had become effective in law (on November 21) occurred on the last day of November, and Pastoral gave notice thereof to the surety on the 5th day of December, within the five-day period prescribed by the bond. A contract of guaranty or suretyship is only prospective, and not retroactive in operation (Socony Vacuum, Corp. vs. Miraflores, 67 Phil. 304; El Venceder vs. Canlas, 44 Phil. 699; Asiastic Petroleum Co. vs. De Pio, 46 Phil. 167), unless a contrary intent is clearly shown. Consequently, Pastoral, was entitled to assume that the notice provided by the surety bond did not, and was not intended to include any defaults incurred prior to his acceptance. The surety, which drafted the bond, could have expressly provided, if it so chose, that the fiveday notice therein provided should extend to the amounts of falling due on October 5 and November 5, but the surety failed to do so, and cannot blame Pastoral therefor. The fault in the reasoning of the Court of Appeals lies in its assumption that the surety bond became effective immediately, without taking into account that the five-day notice provision required the creditor's assent to become effective and binding This assent could not be given before November 21, when Pastoral learned of the condition for the first time and tacitly agreed to it, as shown by his notice to the surety on December 5, that the principal debtor had defaulted. It is worth stressing here that this Court has repeatedly decided (Pacific Tobacco Co. vs. Lorenzana and Visayan Surety, L-8086, October 31, 1957; Phil. Surety vs. Royal Oil Products, L-9981, Oct. 31, 1957; Atkins Kroll & Co. vs. Reyes, L-11936, April 30, 1959) that the rule holding sureties to be favorites of the law, and their contracts to bestrictissimi juris, does not apply to compensated sureties, following United States Fidelity & Guaranty Co. vs. Golden Pressed & Fire Brick Co., 191 U.S. 416, 48 L. ed. 242: We are familiar with the old rule of strict construction in favor of the surety, based upon the underlying principle that formerly parties became sureties, not for hire but as a matter of accommodation, usually lending their names through motives of friendship, and hence a surety obligation would be construed most strongly in their favor. But the rule "strictissimi juris" has no application to surety companies, organized for the purpose of conducting an indemnity business at established rates of compensation. and which, it may be added, protect themselves against loss by exacting adequate counterbonds. WHEREFORE, the decision of the Court of Appeals is reversed, and that of the Court of First Instance of Manila is upheld and confirmed. Respondent-appellee Mutual Security Insurance Corporation shall pay the costs in all instances. Bengzon, C.J., Concepcion, Dizon, Regala, Makalintal, Bengzon, J.P., and Zaldivar, JJ., concur. Bautista Angelo, J., took no part.
Republic of the Philippines SUPREME COURT Manila EN BANC G.R. No. L-16716
April 28, 1962
PEDRO R. JAO and CATALINA SIA, plaintiffs-appellees, vs. ROYAL FINANCING CORPORATION, ET AL., defendants-appellees; ASSOCIATED INSURANCE and SURETY CO., INC., bondsman-appellant. Gualberto Cruz for plaintifs-appellees. Bernardo and Pelias for defendants-appellees. M. Perez Cardenas for bondsman-appellant. PAREDES, J.: On October 30, 1957, the plaintiffs spouses Pedro R. Jao and Catalina Sia, signed a promissory note in favor of the defendant Royal Financing Corporation, guaranteed by a chattel mortgage, executed on October 31, 1957. On June 27, 1958, in accordance with the extra-judicial foreclosure of chattel mortgage filed by defendant corporation on June 25, 1958, the Sheriff of Manila, announced and advertised for sale the properties of plaintiff, which were the object of the chattel mortgage, the same to take place on July 11, 1958, at plaintiffs' premises in Manila. On July 7, 1958, plaintiffs filed a complaint (Civil Case No. 36800), against the Royal Financing Corporation and the Sheriff of Manila, praying the lower court to declare the promissory note of October 30, 1957, null and void, for having allegedly paid the same; to declare the chattel mortgage of October 31, 1957 null and void, due to the payment of the obligation, and to order the Sheriff to desist from selling the properties and the corporation to pay plaintiffs the sum of P1,000.00 as attorney's fees and P5,000.00 as moral damages. In order to stop the sale of the properties at public auction, plaintiffs on July 10, 1958, filed plaintiffs' bond for preliminary injunction in the amount of P2,500.00 with plaintiffs, as principals and the defendant Associated Insurance & Surety Co., Inc., as sureties. The trial court suspended the sale scheduled for July 11, 1958. Subsequently, the defendants filed their separate Answers, which after the customary admissions and denials, interposed affirmative defenses claiming that plaintiffs have no cause of action, that plaintiffs were still indebted to defendant corporation in the sum of P1,713.30, so much so that plaintiffs and their counsel Gualberto Cruz, had on April 28, 1958, asked for an extension of 30 days within which to pay their indebtedness and set up a counterclaim praying for P15,000.00 as moral damages, P1,000.00 for attorney's fees; and to proceed with the sale of the chattels in accordance with the extra-judicial foreclosure of the chattel mortgage. On June 11, 1959, the lower court issued the following order of dismissal: — When this case was called for hearing on June 9, 1959, at 10:00 o'clock a.m. neither plaintiffs nor their counsel, appeared, although a certain Mr. Eugenio Gutierrez, not himself a lawyer, appeared for them, stating that their attorney, Mr. Gualberto Cruz,
was ill. There was no formal motion for postponement made nor was there presented a medical certificate with regard to Atty. Cruz' illness. 1äwphï1.ñët Defendants, through counsel, made an oral motion to dismiss. The Court held its ruling in abeyance until shown by the Sheriff's return that there had been due notice to said plaintiffs of the hearing set for June 9, 1959, in which case, the said oral motion to dismiss would be granted, but without prejudice. The Court has since been satisfied by the Sheriff's return that plaintiffs, through their counsel, Atty. Gualberto Cruz had been properly notified. Premises considered, the motion to dismiss is hereby granted. Let this case be dismissed without prejudice . .. On September 7, 1959, defendant corporation moved for judgment against the surety's bond (Associated Insurance & Surety Co., Inc.), as the sheriff had reported that the mortgaged properties had disappeared and were no longer in plaintiffs' possession, and no auction sale could be carried out, and that the defendant corporation desired to present evidence to prove its pending counterclaim. On September 19, 1959, counsel for the surety company opposed, alleging that the motion was premature as the counterclaim had not yet been decided, and there was no decision or ruling, subject of execution against the surety, should the plaintiffs be unable to satisfy said decision. On October 12, 1959, the lower court issued an order, the relevant portions of which are hereunder reproduced — .... Under the circumstances, and particularly because the bond in question was put up precisely to secure defendant's right, particularly in its mortgage credit, in the satisfaction of which, the sale of plaintiffs' properties was suspended, the surety cannot now be heard to claim that the bond cannot be executed either because it is premature or because it was not mentioned in the order to dismiss this action. This Court is not to be hoodwinked with such subtle legal juggling, and hereby orders: 1. That the bond of P2,500.00 put up by plaintiffs through the Associated Insurance & Surety Co., Inc. beexecuted to satisfy defendant's mortgage claim and . 2. That this case with respect to defendant's counterclaim be tried on November 3, 1959, at 9:00 o'clock in the morning. A motion for reconsideration filed by the Surety Company of the above Order was denied. Hence, the present appeal was directly elevated to this Court, the question raised being purely legal in nature. Appellant surety company alleged, that the trial court erred (1) In holding that plaintiffs' bond for preliminary injunction issued by the bondsman-appellant was to secure the defendant-appellee Royal Financing Corporation's mortgage credit; and (2) in ordering the execution of the bond on behalf of plaintiffs-appellees. The pertinent portions of the bond are quoted below: — WHEREAS, the above-named plaintiff has filed an action in the Court of First Instance of Manila against the above-named defendant and prayed for a preliminary injunction and the Court has ordered that a writ of preliminary injunction issue upon the filing of
a bond in the sum of TWO THOUSAND FIVE HUNDRED PESOS ONLY (P2,500.00) Philippine Currency; WHEREAS, we PEDRO R. JAO & CATALINA SIA as Principal and the ASSOCIATED INSURANCE & SURETY CO. INC., of Manila as Sureties, in consideration of the above and of the issuance of said writ of preliminary injunction, hereby jointly and severally, bind ourselves to herein defendants in the sum of TWO THOUSAND FIVE HUNDRED PESOS ON (P2,500.00) Philippine Currency, under the condition that we and the plaintiff will pay to herein defendants the party enjoined all such damages as surety party may sustain by reason of the injunction, if the Court should finally decide that the plaintiff was not entitled thereto. The purpose of the bond, therefore, is to secure the defendants-appellees (Corporation), for any such damages that may sustain by reason of the injunction, if the Court should finally decide that the plaintiffs-appellees (spouse Jao) were not entitled thereto. There is nothing which could even remotely be construed to mean as a security for the mortgage credit of the corporation. The bondsman-appellant has nothing to do with the mortgage credit; it did not issue the bond with the idea of securing said mortgage credit. The bond was solely and expressly issued for the purpose of securing the prayer for preliminary injunction filed by the plaintiff-appellee and to secure the defendants-appellees for whatever damage they may sustain as a result or by reason of the injunction, if the same should be declared as wrongfully issued. A guaranty can not extend to more than what is expressly stipulated there; it cannot be extended by implication beyond its specified limits (Art. 2055, new Civ. Code; Uy Aloc v. Cho Jan Ling, 27 Phil. 427; Solon v. Solon, 64 Phil. 729). We, therefore, hold that the bond in question was not put up to secure defendants' right, particularly their mortgage credit. Granting for the purpose of argument that the bond covers the mortgage credit, the defendant-appellant poses the question as to whether or not the execution of the judgment has been effected in accordance with law. It contends it is not. The plaintiffs-appellees and the trial court claim otherwise. The pertinent provision of law applicable to the matter on appeal, are section 9, of Rule 60, in connection with section 20 of Rule 59. Damages against the surety under a bond for attachment, injunction, receivership and delivery of personal property (replevin), can only be obtained or awarded, pursuant to these provisions. In order that the surety may be bound under the bond for damages, the following requisites must be fulfilled, to wit: (1) The application for damages must be filed in the same case where the bond was issued; (2) such application for damages must be filed before the entry of final judgment; and (3) after a hearing with notice to the surety (Facundo v. Tan, et al., G.R. No. L2717; Facundo vs. Santos et al., G.R. No. L-2718; Facundo v. Lim, et al., G.R. No. L-2767, prom. Dec. 29, 1949; Visayan Surety & Ins. Corp. v. Pascual, G.R. No. L-2981, March 23, 1959; Liberty Cons. Co. v. Pecson et al., G.R. No. L-3694, May 23, 1951; Abelow v. De la Riva, et al., G.R. No. L-12271, January 31, 1959). The dismissal of the case filed by the plaintiffsappellees on July 11, 1959, had become final and executory before the defendant-appellee corporation filed its motion for judgment on the bond on September 7, 1959. In the order of the trial court, dismissing the complaint, there appears no pronouncement whatsoever against the surety bond. The appellee-corporation failed to file its proper application for damages prior to the termination of the case against it. It is barred to do so now. The prevailing party, if such would be the proper term for the appellee-corporation, having failed to file its application for damages against the bond prior to the entry of final judgment, the bondsman-appellant is relieved of further liability thereunder (Del Rosario v. Nava, G. R. No. L-5513, Aug. 18, 1954).
The motion for judgment against surety's bond filed by the appellee-corporation, is not the proper application spoken of under sec. 20, Rule 59. The said motion prayed for immediate judgment, without even asking the trial court to first determine, thru proper hearing, the reasonableness or reality of the claim for damages, considering the fact that the bond held the bondsman liable for damages, if any, sustained by the corporation in or by virtue of the issuance of the injunction, and not for the mortgage credit. A claim even filed within the time is not sufficient to render the bond answerable for damages. Such claim for damages must be duly substantiated and proven by competent evidence to show that they are not merely fabricated or made on pretext. There having been no hearing, the trial court was not justified in rendering judgment against the bondsman-appellant for any amount, much less the full amount of the bond, as was adjudged in the present case by the said trial court (Jesswani v. Dialdas, G.R. No. L-4651, May 12, 1952). IN VIEW HEREOF, we reverse the orders of the trial court dated October 12, 1959 and November 17, 1959, rendering judgment against the bond in question, and enter another relieving the bondsman-appellant of further responsibility in connection therewith. No costs. Bengzon, C.J., Padilla, Bautista Angelo, Concepcion, Reyes, J.B.L. and Dizon, JJ., concur. Barrera, J., is on leave. Republic of the Philippines SUPREME COURT Manila FIRST DIVISION
G.R. No. 85296 May 14, 1990 ZENITH INSURANCE CORPORATION, petitioner, vs. COURT OF APPEALS and LAWRENCE FERNANDEZ, respondents. Vicente R. Layawen for petitioner. Lawrence L. Fernandez & Associates for private respondent.
MEDIALDEA, J.: Assailed in this petition is the decision of the Court of Appeals in CA-G.R. C.V. No. 13498 entitled, "Lawrence L. Fernandez, plaintiff-appellee v. Zenith Insurance Corp., defendantappellant" which affirmed in toto the decision of the Regional Trial Court of Cebu, Branch XX in Civil Case No. CEB-1215 and the denial of petitioner's Motion for Reconsideration. The antecedent facts are as follows:
On January 25, 1983, private respondent Lawrence Fernandez insured his car for "own damage" under private car Policy No. 50459 with petitioner Zenith Insurance Corporation. On July 6, 1983, the car figured in an accident and suffered actual damages in the amount of P3,640.00. After allegedly being given a run around by Zenith for two (2) months, Fernandez filed a complaint with the Regional Trial Court of Cebu for sum of money and damages resulting from the refusal of Zenith to pay the amount claimed. The complaint was docketed as Civil Case No. CEB-1215. Aside from actual damages and interests, Fernandez also prayed for moral damages in the amount of P10,000.00, exemplary damages of P5,000.00, attorney's fees of P3,000.00 and litigation expenses of P3,000.00. On September 28, 1983, Zenith filed an answer alleging that it offered to pay the claim of Fernandez pursuant to the terms and conditions of the contract which, the private respondent rejected. After the issues had been joined, the pre-trial was scheduled on October 17, 1983 but the same was moved to November 4, 1983 upon petitioner's motion, allegedly to explore ways to settle the case although at an amount lower than private respondent's claim. On November 14, 1983, the trial court terminated the pre-trial. Subsequently, Fernandez presented his evidence. Petitioner Zenith, however, failed to present its evidence in view of its failure to appear in court, without justifiable reason, on the day scheduled for the purpose. The trial court issued an order on August 23, 1984 submitting the case for decision without Zenith's evidence (pp. 10-11, Rollo). Petitioner filed a petition for certiorari with the Court of Appeals assailing the order of the trial court submitting the case for decision without petitioner's evidence. The petition was docketed as C.A.-G.R. No. 04644. However, the petition was denied due course on April 29, 1986 (p. 56, Rollo). On June 4, 1986, a decision was rendered by the trial court in favor of private respondent Fernandez. The dispositive portion of the trial court's decision provides: WHEREFORE, defendant is hereby ordered to pay to the plaintiff: 1. The amount of P3,640.00 representing the damage incurred plus interest at the rate of twice the prevailing interest rates; 2. The amount of P20,000.00 by way of moral damages; 3. The amount of P20,000.00 by way of exemplary damages; 4. The amount of P5,000.00 as attorney's fees; 5. The amount of P3,000.00 as litigation expenses; and 6. Costs. (p. 9, Rollo) Upon motion of Fernandez and before the expiration of the period to appeal, the trial court, on June 20, 1986, ordered the execution of the decision pending appeal. The order was assailed by petitioner in a petition for certiorariwith the Court of Appeals on October 23, 1986 in C.A. G.R. No. 10420 but which petition was also dismissed on December 24, 1986 (p. 69, Rollo).
On June 10, 1986, petitioner filed a notice of appeal before the trial court. The notice of appeal was granted in the same order granting private respondent's motion for execution pending appeal. The appeal to respondent court assigned the following errors: I. The lower court erred in denying defendant appellant to adduce evidence in its behalf. II. The lower court erred in ordering Zenith Insurance Corporation to pay the amount of P3,640.00 in its decision. III. The lower court erred in awarding moral damages, attorneys fees and exemplary damages, the worst is that, the court awarded damages more than what are prayed for in the complaint. (p. 12, Rollo) On August 17, 1988, the Court of Appeals rendered its decision affirming in toto the decision of the trial court. It also ruled that the matter of the trial court's denial of Fernandez's right to adduce evidence is a closed matter in view of its (CA) ruling in AC-G.R. 04644 wherein Zenith's petition questioning the trial court's order submitting the case for decision without Zenith's evidence, was dismissed. The Motion for Reconsideration of the decision of the Court of Appeals dated August 17, 1988 was denied on September 29, 1988, for lack of merit. Hence, the instant petition was filed by Zenith on October 18, 1988 on the allegation that respondent Court of Appeals' decision and resolution ran counter to applicable decisions of this Court and that they were rendered without or in excess of jurisdiction. The issues raised by petitioners in this petition are: a) The legal basis of respondent Court of Appeals in awarding moral damages, exemplary damages and attomey's fees in an amount more than that prayed for in the complaint. b) The award of actual damages of P3,460.00 instead of only P1,927.50 which was arrived at after deducting P250.00 and P274.00 as deductible franchise and 20% depreciation on parts as agreed upon in the contract of insurance. Petitioner contends that while the complaint of private respondent prayed for P10,000.00 moral damages, the lower court awarded twice the amount, or P20,000.00 without factual or legal basis; while private respondent prayed for P5,000.00 exemplary damages, the trial court awarded P20,000.00; and while private respondent prayed for P3,000.00 attorney's fees, the trial court awarded P5,000.00. The propriety of the award of moral damages, exemplary damages and attorney's fees is the main issue raised herein by petitioner. The award of damages in case of unreasonable delay in the payment of insurance claims is governed by the Philippine Insurance Code, which provides: Sec. 244. In case of any litigation for the enforcement of any policy or contract of insurance, it shall be the duty of the Commissioner or the Court, as the case may be, to make a finding as to whether the payment of the claim of the
insured has been unreasonably denied or withheld; and in the affirmative case, the insurance company shall be adjudged to pay damages which shall consist of attomey's fees and other expenses incurred by the insured person by reason of such unreasonable denial or withholding of payment plus interest of twice the ceiling prescribed by the Monetary Board of the amount of the claim due the insured, from the date following the time prescribed in section two hundred forty-two or in section two hundred forty-three, as the case may be, until the claim is fully satisfied;Provided, That the failure to pay any such claim within the time prescribed in said sections shall be considered prima facie evidence of unreasonable delay in payment. It is clear that under the Insurance Code, in case of unreasonable delay in the payment of the proceeds of an insurance policy, the damages that may be awarded are: 1) attorney's fees; 2) other expenses incurred by the insured person by reason of such unreasonable denial or withholding of payment; 3) interest at twice the ceiling prescribed by the Monetary Board of the amount of the claim due the injured; and 4) the amount of the claim. As regards the award of moral and exemplary damages, the rules under the Civil Code of the Philippines shall govern. "The purpose of moral damages is essentially indemnity or reparation, not punishment or correction. Moral damages are emphatically not intended to enrich a complainant at the expense of a defendant, they are awarded only to enable the injured party to obtain means, diversions or amusements that will serve to alleviate the moral suffering he has undergone by reason of the defendant's culpable action." (J. Cezar S. Sangco, Philippine Law on Torts and Damages, Revised Edition, p. 539) (See also R and B Surety & Insurance Co., Inc. v. IAC, G.R. No. 64515, June 22, 1984; 129 SCRA 745). While it is true that no proof of pecuniary loss is necessary in order that moral damages may be adjudicated, the assessment of which is left to the discretion of the court according to the circumstances of each case (Art. 2216, New Civil Code), it is equally true that in awarding moral damages in case of breach of contract, there must be a showing that the breach was wanton and deliberately injurious or the one responsible acted fraudently or in bad faith (Perez v. Court of Appeals, G.R. No. L20238, January 30,1965; 13 SCRA 137; Solis v. Salvador, G.R. No. L-17022, August 14, 1965; 14 SCRA 887). In the instant case, there was a finding that private respondent was given a "run-around" for two months, which is the basis for the award of the damages granted under the Insurance Code for unreasonable delay in the payment of the claim. However, the act of petitioner of delaying payment for two months cannot be considered as so wanton or malevolent to justify an award of P20,000.00 as moral damages, taking into consideration also the fact that the actual damage on the car was only P3,460. In the pre-trial of the case, it was shown that there was no total disclaimer by respondent. The reason for petitioner's failure to indemnify private respondent within the two-month period was that the parties could not come to an agreement as regards the amount of the actual damage on the car. The amount of P10,000.00 prayed for by private respondent as moral damages is equitable. On the other hand, exemplary or corrective damages are imposed by way of example or correction for the public good (Art. 2229, New Civil Code of the Philippines). In the case of Noda v. Cruz-Arnaldo, G.R. No. 57322, June 22,1987; 151 SCRA 227, exemplary damages were not awarded as the insurance company had not acted in wanton, oppressive or malevolent manner. The same is true in the case at bar.
The amount of P5,000.00 awarded as attomey's fees is justified under the circumstances of this case considering that there were other petitions filed and defended by private respondent in connection with this case. As regards the actual damages incurred by private respondent, the amount of P3,640.00 had been established before the trial court and affirmed by the appellate court. Respondent appellate court correctly ruled that the deductions of P250.00 and P274.00 as deductible franchise and 20% depreciation on parts, respectively claimed by petitioners as agreed upon in the contract, had no basis. Respondent court ruled: Under its second assigned error, defendant-appellant puts forward two arguments, both of which are entirely without merit. It is contented that the amount recoverable under the insurance policy defendant-appellant issued over the car of plaintiff-appellee is subject to deductible franchise, and . . . . The policy (Exhibit G, pp. 4-9, Record), does not mntion any deductible franchise, . . . (p. 13, Rollo) Therefore, the award of moral damages is reduced to P10,000.00 and the award of exemplary damages is hereby deleted. The awards due to private respondent Fernandez are as follows: 1) P3,640.00 as actual claim plus interest of twice the ceiling prescribed by the Monetary Board computed from the time of submission of proof of loss; 2) P10,000.00 as moral damages; 3) P5,000.00 as attorney's fees; 4) P3,000.00 as litigation expenses; and 5) Costs. ACCORDINGLY, the appealed decision is MODIFIED as above stated. SO ORDERED. Narvasa, Cruz and Griño-Aquino, JJ., concur. Gancayco, J., is on leave. Republic of the Philippines SUPREME COURT Manila SECOND DIVISION G.R. No. L-40334 February 28, 1985
CENTRAL SURETY and INSURANCE COMPANY, INC., petitioner, vs. Hon. ALBERTO Q. UBAY as Judge of the Court of First Instance of Rizal, Caloocan City, Branch XXXII and ONG CHI, doing business under the Firm Name. "TABLERIA DE LUXE respondents. Alfredo Feraren for petitioner. S.I.A. Gonzales for respondents.
ABAD SANTOS, J.: Ong Chi, doing business under the firm name "Tableria de Luxe sued Francisco Reyes, Jr. for a sum of money in the City Court of Caloocan City. Ong Chi applied for a writ of attachment and upon filing a bond in the amount of P6,464.18, a jeep belonging to Reyes was placed in custodia legis. Reyes moved to dissolve the writ of attachment. He posted a counterbond in the amount of P 6,465.00; his surety was Central Surety and Insurance Co., the petitioner herein. The condition of the counterbond is that "in consideration of the dissolution of said attachment, [Francisco Reyes, Jr., as principal and Central Surety and Insurance Co., as surety] hereby jointly and severally, bind ourselves in the sum of SIX THOUSAND FOUR HUNDRED SIXTY FIVE ONLY ( P 6,465.00 ) Philippine Currency, under the condition that in the case the plantiff recovers judgment in the action the defendant will on demand redeliver the attached property so released to the officer of the Court to be applied to the payment of the judgment or in default thereof that the defendant and surety will on demand pay to the plaintiff the full value of the property released." (Rollo, p. 11) The writ of attachment was thereafter lifted and the jeep was returned to Reyes. In the course of time, the City Court rendered judgment as follows: WHEREFORE, judgment is hereby rendered in favor of the Plaintiff and against the defendant, ordering said defendant to pay plaintiff the sum of P 6,964.18, with legal interests thereon from the date of the filing of this complaint until fully paid, plus the sum of P 500. 00, as and by way of attorney's fees, and the costs of the suit. (Id, p. 14.) Defendant Reyes appealed to the Court of First Instance of Rizal but said court affirmed the judgment in toto. (Rollo, p. 16.) Upon finality of the judgment, a writ of execution was issued against Reyes. The jeep which was the object of the attachment was sold by the sheriff for P4,000.00 and the amount was credited against the judgment in partial satisfaction thereof. Soon after the sale of the jeep, Central Surety and Insurance Co. filed a motion to cancel the counterbond. Ong Chi not only opposed the motion but he also asked that the surety company pay the deficiency on the judgment in the amount of P5,730. 00 (P9,730.00 as of the filing of the motion, less P4,000.00 the proceeds of the sale of the jeep). The motion for a deficiency judgment was opposed by the surety on the ground that it had fulfilled the
condition of the counterbond. Despite the opposition, the court ordered the surety to pay. A motion for reconsideration was denied which accounts for the instant petition. The issue is whether or not the petitioner surety is liable for the deficiency. The petitioner urges a negative answer; it relies on the terms of the counterbond. Upon the other hand, the private respondent claims that an affirmative answer is proper, he relies on Section 17 of Rule 57, Rules of Court which stipulates thus: SEC. 17. When execution returned unsatisfied, recovery had upon bond. — If the execution be returned unsatisfied in whole or in part, the surety or sureties on any counterbond given pursuant to the provisions of this rule to secure the payment of the judgment shall become charged on such counterbond, and bound to pay to the judgment creditor upon demand, the amount due under the judgment, which amount may be recovered from such surety or sureties after notice and summary hearing in the same action. The petition is highly impressed with merit. The stipulation in the counterbond executed by the petitioner is the law between the parties in this case and not the provisions of the Rules of Court. Under the counterbond, the petitioner surety company bound itself solidarily with the principal obligor "in the sum of P 6,465.00 under the condition that in case the plaintiff recovers judgment in the action, the defendant will, on demand, redeliver the attached property so released to the officer of the court to be applied to the payment of the judgment or in default thereof that the defendant and surety will, on demand, pay to the plaintiff the full value of the property released." The main obligation of the surety was to redeliver the jeep so that it could be sold in case execution was issued against the principal obligor. The amount of P6,465.00 was merely to fix the limit of the surety's liability in case the jeep could not be reached. In the instant case, the jeep was made available for execution of the judgment by the surety. The surety had done its part; the obligation of the bond had been discharged; the bond should be cancelled. The impropriety of the orders of the respondent judge is made more manifest by still another circumstance. The petitioner's surety bond was for the amount of P6,465.00. So even on the assumption that the bond was not discharged, since the sale of the jeep yielded P4,000.00, the surety can be held liable at most for P2,465.00. But the respondent judge ordered the surety to pay P5,730.00 which is the entire deficiency and is in excess of P2,465.00. It is axiomatic that the obligation of a surety cannot extend beyond what is stipulated. WHEREFORE, the petition is granted; the questioned orders of the respondent judge are hereby set aside and in lieu thereof another is entered cancelling the petitioner's counterbond, with costs against the private respondent. SO ORDERED. Makasiar (Chairman), Aquino, Concepcion, Jr., Escolin and Cuevas, JJ., concur.
Republic of the Philippines SUPREME COURT Manila FIRST DIVISION
G.R. No. L-29587 November 28, 1975 PHILIPPINE NATIONAL BANK, petitioner, vs. LUZON SURETY CO., INC. and THE HONORABLE COURT OF APPEALS, respondent. Medina and Magtalas for petitioner. Tolentino, Garcia, Cruz and Reyes for private respondent.
ESGUERRA, J.: Petitioner Philippine National Bank seeks a review and reversal of the decision dated June 26, 1968, of the Court of Appeals in its case CA-G.R. No. 30282-R, absolving Luzon Surety Co., Inc. of its liability to said petitioner and thus reversing the decision of the Court of First Instance of Negros Occidental, the dispositive portion of which reads as follows: IN VIEW THEREOF, judgment is hereby rendered ordering defendant Augusto R. Villarosa to pay plaintiff PHILIPPINE NATIONAL BANK the sum of P81,200.00 plus accrued interest of 5% per annum on P63,222.78 from August 31, 1959; to pay 10% of said amount as attorney's fees and to pay the costs. Defendant Luzon Surety Co., Inc. is hereby ordered to pay jointly and severally with defendant Villarosa to the plaintiff the sum of P10,000.00; defendant Central Surety and Insurance Company jointly and severally with defendant Villarosa the sum of P20,000 to the plaintiff, and Associated Surety And Insurance Co. jointly and severally with defendant Villarosa the sum of P15,000.00 to the plaintiff, with the understanding that should said bonding companies pay the aforementioned amounts of their respective bonds to the plaintiff, said amounts should be deducted from the total outstanding obligation of defendant Villarosa in favor of the plaintiff. Above-quoted decision was modified in an order of the Court of First Instance dated June 5, 1961, granting petitioner Philippine National Bank (PNB) the right to recover accrued interest at the rate of 5% per annum from December 24, 1953, from the defendants bonding companies. The facts as found by the Court of Appeals are as follows: ... sometime prior to 27 November 1951, defendant Augusto R. Villarosa, a sugar planter adhered to the Lopez Sugar Central Milling Company, Inc.
applied for a crop loan with the plaintiff, Philippine National Bank, Exhibit A; this application was approved on 6 March, 1952 in the amount of P32,400, according to the complaint; but the document of approval has not been exhibited; at any rate, the planter Villarosa executed a Chattel Mortgage on standing crops to guarantee the crop loan, Exhibit B and as shown in Exhibits C to C-30 on various dates from 28 January, 1952 to 9 January, 1953, in consideration of periodical sums of money by him received from PNB, planter Villarosa executed these promissory notes from which will be seen that the credit line was that the original amount of P32,400 and was thus maintained up to the promissory note Exhibit C-9 dated 30 May, 1952 but afterwards it was increased and promissory notes Exhibits C-10 to C-30 were based on the increased credit line; and as of 27 September, 1953 as shown in the accounts, Exhibits D and D-1, there was a balance of P63,222.78 but as of the date when the complaint was filed on 8 June, 1960, because of the interest accrued, it had reached a much higher sum; that was why due to its nonpayment, plaintiff filed this complaint, as has been said, on 8 June, 1960; now the complaint sought relief not only against the planter but also against the three (3) bondsmen, Luzon Surety, Central Surety and Associated Surety because Luzon Surety had filed the bond Exhibit E dated 18 February, 1952 in the sum of P10,000; Central Surety Exhibit F dated 24 February, 1952 in the sum of P20,000 and Associated Surety the bond Exhibit G dated 11 September, 1952 in the sum of P15,000; in gist, the obligation of each of the bondsmen being to guarantee the faithful performance of the obligation of the planter with PNB; now each of the defendants in their answers raised various defenses but as far as principal defendant Augusto R. Villarosa and other defendants Central Surety and Associated Surety are concerned, their liability is no longer material because they have not appealed; and in the trial of the case, plaintiff submitted Exhibits A to J-1 and witness Romanito Brillantes; but the defense of Luzon Surety thru its witness Jose Arroyo and Exhibits 1 to 3 being 1st that the evidence of the plaintiff did not establish a cause of action to make Luzon Surety liable and 2ndly, in any case that there had been material alteration in the principal obligation, if any, guaranteed by it; ... . Unable to obtain reconsideration of the decision of the Appellate Court, PNB came to this Court and alleged the following errors. 1. The Court of Appeals erred in the application of the law involved by invoking Article 2055 of the New Civil Code, which properly should have been the law on suretyship which are covered by Section 4, Chapter 3, Title 1, Book IV of the New Civil Code; 2. Consequently, when the Court of Appeals released the surety from liability, it committed a grave or gross misappreciation of facts amounting to an error of law; 3. The Court of Appeals erred when it held that there must have been a principal crop loan contract, guaranteed by the surety bonds; 4. The Court of Appeals erred when it released the surety from liability. The above assigned errors boil down to the single question of whether or not the Court of Appeals was justified in absolving Luzon Surety Co., Inc., from liability
to petitioner Philippine National Bank. We have examined the record thoroughly and found the appealed decision to be erroneous. Excerpt of the Chattel Mortgage executed to guarantee the crop loan clearly provided as follows: xxx xxx xxx 1. That the Mortgagor does by these presents grant, cede and convey unto the Mortgagee by way of First Mortgage free from any encumbrances, all the crops of the absolute property of the Mortgagor, corresponding to the 1952-53 and subsequent yearly sugar crops agricultural season at present growing in the Hda. known as San Antonio, Washington (P) Audit 24-124 and 24-16 la and Hda. Aliwanay (non-quota land); milling with LSMC and CAD Municipality of Sagay, and Escalante, Province of Negros Occidental covered by cadastral lots no. Various of the Cadastral Survey at the Municipality of Sagay, Escalante particularly bounded and described in Transfer Certificate of Title No. Various issued by the Register of Deeds of said province. The said mortgage crops consist of all the Mortgagor's first available entire net share of the 1952-53 and subsequent yearly sugar crops thereafter conservatively estimated at but not less than Three Thousand Four Hundred Twenty and 14/00 (3,420.14) piculs of export and domestic sugar, including whatever addition thereto, and such aids, subsidies, indemnity payments and other benefits as maybe awarded to the Mortgagor, coming from any source, governmental or otherwise. xxx xxx xxx 4. This Mortgage is executed to secure payment by the Mortgagor to the Mortgagee at the latter's office of a loan herein granted to the Mortgagor in the sum of Thirty Two Thousand Four Hundred (P32,400.00) Pesos, Philippine Currency, with interest at the rate of five per cent per annum, which loan shall be given to the Mortgagor either in lump sum or in installments as the mortgagee may determine. The Mortgagee may increase or decrease the amount of the loan as well as the installments as it may deem convenient and the Mortgagor shall submit such periodical reports on the crops mortgaged as the Mortgagee may require. In the event that the loan is increased such increase shall likewise be secured by Mortgage. This Mortgage shall also secure any other loans or advances that the Mortgagee may extend to the Mortgagor, including interest and expenses or any other obligation owing to the Mortgagee, whether direct or indirect, principal or secondary as appears in the account books and records of the Mortgagee. xxx xxx xxx Likewise an extract from the Surety Bond executed by and between the PNB on one hand and Augusto Villarosa and respondent Luzon Surety Company, Inc. on the other, is hereby reproduced, viz:
That we Augusto Villarosa of Bacolod City, as principal and Luzon Surety Company, Inc. a corporation duly organized and existing under and by virtue of the laws of the Philippines, as surety, are held firmly bound unto Philippine National Bank, Bacolod City, Philippines, in the sum of Ten Thousand Pesos (P10,000.00) Philippine Currency, for the payment of which sum, well and truly to be made, we bind ourselves, our heirs, executors, administrators, successors, and assigns jointly and severally, firmly by these presents: The condition of the obligation are as follows: WHEREAS, the above bounden principal, on the — day of February, 1952, entered into a crop loan contract with obligee Philippine National Bank, Bacolod Branch of Bacolod City, Philippines to fully and faithfully — Comply with all the terms and condition stipulated in said crop loan contract which are hereby incorporated as essential parts hereof, and principally to meet and pay from the proceeds of the sugar produced from his Hda. Antonio and Hda. Aliwanay, Escalante, Occidental Negros credit advances made by the Philippine National Bank Bacolod Branch not to exceed P32,800 as stated in said contract. Provided further that the liability under this bond shall not exceed the amount of P10,000.00 WHEREAS, said Philippine National Bank Bacolod Branch requires said principal to give a good and sufficient bond in the above stated sum to secure the full and faithful performance on his part of said crop loan contract. NOW, THEREFORE, if the principal shall well and truly perform and fulfill all the undertakings, covenants, terms and conditions and agreement stipulated in said crop loan contract then, this obligation shall be null and void, otherwise it shall remain in full force and effect. xxx xxx xxx The foregoing evidences clearly the liability of Luzon Surety to petitioner Philippine National Bank not merely as a guarantor but as surety-liable as a regular party to the undertaking (Castelvi de Higgins vs. Sellner 41 Phil. 142). The Court of Appeals, however, in absolving the bonding company ratiocinates that the Surety Bond executed on February 18, 1952, made specific references to a crop loan contract executed by Augusto Villarosa sometime in February 1952. And, therefore, the Chattel Mortgage, Exhibit B dated March 6, 1952, could not have been the obligations guaranteed by the surety bond. Thus the Court of Appeals stated: ... one is really at a loss to impose any liability upon Luzon Surety in the absence of the principal obligation which was a crop loan contract executed in February, 1952, and to which there was made an express reference in the surety bond, Exhibit E; let it not be overlooked further that one can secure a crop loan without executing a Chattel Mortgage on his crops because the crop loan is the principal obligation while the Chattel Mortgage is only an ancillary and secondary contract to guarantee fulfillment of a crop loan; stated otherwise and as Luzon Surety never intervened in the execution of the
Chattel Mortgage, Exhibit B, there is no way under the evidence from which it can be made to answer for liability to Augusto Villarosa under Exhibit E; ... " The Court of Appeals, to Our mind did not give credence to an otherwise significant and unrebutted testimony of petitioner's witness, Romanito Brillantes, that Exhibit B was the only chattel mortgage executed by Augusto Villarosa evidencing the crop loan contract and upon which Luzon Surety agreed to assume liability up to the amount of P10,000 by posting the said surety bond. Moreover Article 1354 of our New Civil Code which provides: Art. 1354.— Although the cause is not stated in the contract., it is presumed that it exist and is lawful, unless the debtor proves the contrary. bolster petitioner's stand. Considering too that Luzon Surety company is engaged in the business of furnishing guarantees, for a consideration, there is no reason that it should be 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. (Aurelio Montinola vs. Alejo Gatila, et al, G.R. No L7558, October 31, 1955). We have likewise gone over the answer of Luzon Surety Company dated June 17, 1960 (p. 73 Record on Appeal) and noted the following: xxx xxx xxx 3. Defendant LUZON admits the portion of paragraph 3 referring to the grant of P32,400 secured by a Chattel Mortgage dated March 6, 1952, copy of which is attached as Annex "A" of the complaint. xxx xxx xxx As special defenses: 8. The terms and conditions of the surety bond as well as the contract it guaranteed was materially altered and or novated without the knowledge and consent of the surety thereby releasing the latter from liability. 11. The maximum liability, if any, of defendant LUZON is P10.000.00. The principal obligation, therefore, has never been put in issue by then defendant now respondent Luzon Surety Co., Inc. On the other hand it raised as its defense the alleged material alteration of the terms and conditions of the contract as the basis of its prayer for release. Even this defense of respondent Luzon Surety Co., Inc. is untenable under the facts obtaining. As a surety, said bonding company is charged as an original promissory 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, We stress must be material. A cursory examination of the record shows that the alterations in the form of increases were made with the full consent of Luzon Surety Co., Inc. Paragraph 4 of the Chattel Mortgage explicitly provided for this increase(s), viz:
... the Mortgagee may increase or decrease the amount of the loan as well as the installment as it may deem convenient ... and this contract, Exhibit "B", was precisely referred to and mentioned in the Surety Bond itself. In the case of Lim Julian vs. Tiburcio Lutero, et al No. 25235, 49 Phil. 703, 717, 718, this Court held: It has been decided in many cases that the consideration named in a mortgage for future advancements does not limit the amount for which such contract may stand as security, if from the four corners of the document, the intent to secure future indebtedness is apparent. Where, by the plain terms of the contract, such an intent is evident, it will control. ... 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. In the cases ofTagawa vs. Aldanese, 43 Phil. 852, 859; Plaridel Surety Insurance Co. vs. P. L. Galang Machinery Co., 100 Phil. 679, 682, cited in Paras Civil Code of the Philippines, Vol. V, 7th Ed. 1972, p. 772, it was held: If a surety upon demand fails to pay, he can be held liable for interest, even if in thus paying, the liability becomes more than that in the principal obligation. The increased liability is not because of the contract but because of the default and the necessity of judicial collection. It should be noted, however, that the interest runs from the time the complaint is filed, not from the time the debt becomes due and demandable. PREMISES CONSIDERED, the judgment appealed from is reversed and set aside. In lieu thereof another is rendered reinstating the judgment of the Court of First Instance of Negros Occidental, 12th Judicial District, dated March 29, 1961, holding Luzon Surety liable for the amount of P10,000.00 with the modification that interest thereon shall be computed at the legal rate from June 8, 1960 when the complaint was filed. SO ORDERED. Teehankee, Makasiar, Muñoz Palma and Martin , JJ., concur. Castro (Chairman), J., took no part. Republic of the Philippines SUPREME COURT Manila EN BANC G.R. No. L-8086
October 31, 1957
PACIFIC TOBACCO CORPORATION, plaintiff-appellee, vs. RICARDO D. LORENZANA and VISAYAN SURETY & INSURANCE CORPORATION, defendants.
VISAYAN SURETY & INSURANCE CORPORATION, cross claimant and third party plaintiffappellant, vs. RICARDO D. LORENZANA, cross defendant, CALIXTO C. LORENZANA, JOSE M. LORENZANA and BENIGNO GUTIERREZ, third party defendants. Sycip, Quisumbing, Solicitor Salazar & Associates for appellee. Enrico I. de la Cruz for appellant. Edgar C. Melia for cross-defendant and appellee. FELIX, J.: The Pacific Tobacco Corporation is a duly organized domestic corporation with offices at Grace Park, Caloocan, Rizal, engaged in the business of manufacturing and distributing cigarettes, cigars and other tobacco products. On January 16, 1952, Ricardo D. Lorenzana and said corporation entered into an agreement, the pertinent provisions of which as follows: WITNESSETH: That WHEREAS, the Company manufactures cigarette, cigars, and other tobacco products which it desires to sell and distribute throughout the Philippines; . WHEREAS, the DISTRIBUTOR (Lorenzana) is willing to sell and distribute the said products of the COMPANY in the territory of Manila and Rizal Province under the terms and conditions herein below set forth; NOW, THEREFORE for and in consideration of the premises herein contained, the parties hereto have agreed and covenanted, as follows: 1. The DISTRIBUTOR shall sell and distribute solely the cigarettes, cigars and other tobacco products of the COMPANY in the abovementioned territory; 2. The Company shall, from time to time, deliver to the DISTRIBUTOR, for sale, cigarettes and other tobacco products, provided that the balance of the account of the DISTRIBUTOR with the COMPANY shall not at any time exceed THREE THOUSAND ONLY PESOS (3,000.00); 3. All accounts of the Distributor with the Company shall be due and payable in the office of the latter within thirty (30) days from and after the date of the sales invoice issued by the COMPANY; xxx
xxx
xxx.
8. The DISTRIBUTOR shall only sell the products of the COMPANY and in case he sells the products of other persons or firms, the COMPANY shall be at liberty to terminate this contract;
9. The DISTRIBUTOR binds himself for the COMPANY not less than TWENTY THOUSAND ONLY ——— PESOS (P20,000.00) worth of cigarettes and other Tobacco products every month and should be fail to meet this quota, the COMPANY shall have the opinion to terminate this contract upon twenty (20) day's notice; xxx
xxx
xxx.
11. To guarantee the faithful performance on his part of the terms and conditions of this contract, the DISTRIBUTOR shall post a surety bond in favor of the COMPANY in the amount of EIGHT THOUSAND ONLY ——— PESOS (P8,000.00 signed by him and a reputable surety company acceptable to the COMPANY, THREE THOUSAND PESOS (P3,000.00) of which bond shall answer for the faithful settlement of the account of the DISTRIBUTOR with the COMPANY, and FIVE THOUSAND PESOS (5,000.00) for the return of the aforementioned truck to the COMPANY in the same condition that the DISTRIBUTOR received it, . . . (Exhibit A). In accordance thereto, Lorenzana put up V.S. and I.C. bond No. E-JA-52/101 in the amount of P3,000 with the Visayan Surety and Insurance Corporation, as surety to guarantee the faithful fulfillment of the principal's (Lorenzana's) part in the contract with the Pacific Tobacco Corporation, which was "to sell and distribute the latter's cigarettes, cigar and other tobacco products subject to the terms and conditions stipulated in the said contract" (Exhibit B). The record shows that on various occasions in 1952, The Philippine Tobacco Corporation delivered to Lorenzana for distribution cigarettes, cigars, and other tobacco products amounting to P15,645.64, but out of this amount the latters paid and was only credited with P13,559.33, leaving a balance of P2,086.31. Upon demand by the corporation. Lorenzana proposed to settle his pending obligation by giving P100 a month, which amount was later reduced to P25, to which arrangement the company apparently agreed and Lorenzana actually made installments amounting to P250 (Exhibit G-6). As he failed to make any further payment, the Philippine Tobacco Corporation filed a complaint with the Court of First Instance of Manila on October 30, 1953, against Ricardo D. Lorenzana and the Visayan Surety and Insurance Corporation for the recovery of the sum of P2,086.31, with legal interest thereon from the date of filing of the complaint until fully paid; attorney's fees in the amount of P5000.00; costs, and for such other remedy as may be deemed just and equitable in the premises. Defendant Visayan Surety and Insurance Corporation answered this complaint, which it latter modified with leave of Court by filing an amended answer with cross-claim against Ricardo D. Lorenzana and third party complaint against Calixto D. Lorenzana, Jose Lorenzana and Benigno C. Gutierrez, denying the material allegations of the complaint and setting up the affirmative defense that the bond could not be held liable for damages and attorney's fees; that plaintiff Philippine Tobacco Corporation was bared from presenting this action against the surety due to laches, waiver of claim and estoppel. It was thus prayed that the complaint be dismissed as against said defendant; in the event that the surety would be sentenced to pay the plaintiff, that a simultaneous order be issued ordering the crossdefendant and the third-party defendants to pay the surety, jointly and severally, for whatever amount the latter may be required to satisfy, with interest thereon at 12 per cent per annum from the date of payment until it was fully reimbursed; that the said crossdefendant and third-party defendants be ordered to pay the surety, jointly and severally, in
accordance with the indemnity bond executed by them as counter-guarantors, 20 per cent of the amount involved as attorney's fees, and costs. In his answer dated December 1, 1953, Ricardo D. Lorenzana denied the allegation of the complaint that he refused or failed to pay the plaintiff, the true fact being that he had tendered to plaintiff certain sums in accordance with their verbal agreement which allowed him to settle his obligation in installments until the entire amount was fully satisfied; set up the defense that the agreement, Annex "A", was partially modified when plaintiffs agreed and allowed him to sell the tobacco products not only in the City of Manila and Rizal province but throughout the island of Luzon; that in virtue of such modification, he sold plaintiff's products in places as far as the northern provinces; the most of defendant's transactions in these provinces were on credit basis; that on August 2, 1952, when defendant arrived from his trip from the Ilocos regions, plaintiff terminated his services on the ground that the corporation was losing without giving him an advance notice of 30 days in accordance with the agreement; that as plaintiff took the delivery truck which he was using in the distribution of plaintiff's products he was prevented from going back to the provinces to collect from his customers their accounts; that he made several payments in small amounts to settle remaining obligation which were accepted, but in November, 1953, plaintiff refused to receive the same. Lorenzana claimed that because of plaintiff's failure to notify him in advance that his services were terminated, he incurred and was incurring transportation expenses in order to collect the accounts of hid former customers. He, therefore, prayed that the complaint be dismissed and plaintiff be ordered to pay the amount that he incurred as transportation expenses. The third-party defendants likewise filed their answer practically admitting all the averments of the third-party complaint except the claim for 20 per cent of the amount involved as attorney's fees, on the ground that it was excessive and that they should not be held liable for the payment of the pending obligation of Lorenzana. At the hearing defendant Lorenzana failed to appear and to adduce in support of his defense inspite of the fact that he was duly notified. After hearing and after the other parts had filed their respective memoranda, the Court rendered judgment dated May 12, 1954, finding that although on one occasion plaintiff shipped cigarettes to defendant Lorenzana addressed at San Fernando, La Union (Exhibit C-18), this fact alone would not release the surety from liability, for there was nothing in the contract Exhibit A that expressly prohibited defendant Lorenzana from selling cigarettes outside Manila and Rizal. The lower Court opined that what was guaranteed by the Visayan Surety and Insurance Corporation was the faithful delivery by defendant Lorenzana of the price of the cigarettes to plaintiff within the time fixed in the contract and as the sending of some cigarettes to San Fernando, La Union, caused the surety no injury, said deviation will not relieve the surety from its liability under the bond. The court thus ordered defendants Ricardo D. Lorenzana and the Visayan Surety and Insurance Corporation to pay, jointly and severally, to the plaintiff Pacific Tobacco Corporation the sum of P2,086.31, with legal interest from the date of the filing of the complaint, plus P500 as attorney's fees and costs. On the strength of the indemnity bond (Exhibit "2") executed by the third-party defendants Calixto D. Lorenzana, Jose M. Lorenzana and Benigno C. Gutierrez as counter-guarantors, they together with Ricardo D. Lorenzana, were ordered to indemnify the Visayan Surety and Insurance Corporation for the amount which the latter would actually pay plaintiff in case defendant Ricardo D. Lorenzana should fail to make the payment himself and another sum of P500 as attorney's fees. After the motion filed by the surety for the reconsideration of said division was denied, said defendant brought the matter to this Court on appeal ascribing to the lower Court the commission of several errors. But stripping them of unnecessaries and reducing the same to
bare essentials, the only question at issue in the case at bar is whether the delivery by the company of its products to defendant Lorenzana in a place other than that mentioned in the agreement constitutes an alteration of said agreement that would release the surety from its liability under the bond. It appears on record that cigarettes valued at P1,870 were transported to Ricardo Lorenzana, c/o of Mrs. Justo de Leon at San Fernando, Pampanga. Defendant surety tried to capitalize on this single act but it failed to present evidence that these goods were actually sold and distributed in said places. It would have been possible for the distributor to take a sojourn in that place and the company, knowing where he could be reached, sent the merchandise to him. Defendant Lorenzana also alleged in his answer that plaintiff allowed him to sell the latter's products even as far as the northern provinces but this defendant was not able to substantiate such claim due to his failure to appear and testify to his effect at the trial, despite the fact that he was duly represented by counsel. But even granting arguendo that the merchandise thus delivered and presumably received at San Fernando, La Union, was actually sold and distributed therein, this may not be considered as a deviation from the territory to be covered by the agent or distributor was not prohibited by the agreement itself, nor does the record show that such expansion of the territory was due to instructions from the plaintiff. While it is true that that contract (Exhibit A) states that the distributor is willing to sell and distribute the products of the company in Manila and Rizal, specification serves more as a manifestation that Lorenzana entered into the agreement with the understanding that his sphere of activity would be for these places. But certainly nowhere in the same agreement appears a restriction against the acceptance of additional territories, if he so desired. Appellant surety argues that the bond guarantees only the payment of cigarettes, cigars or other tobacco products that were delivered to and distributed by Lorenzana in Manila and Rizal and at no other place. To adopt this line of reasoning would be to harness a pliant argument to suit appellant's purpose. The agreement required the distributor to post a bond for P8,000, "P3,000 of which bond shall answer for the faithful settlement of the account of the distributor with the Company." The bond put up by Lorenzana in the amount of P3,000, undertaken by the Visayan Surety and Insurance Corporation, therefore, was only to secure the prompt and faithful payment of the accounts of the distributor to the company. The mention of Manila and Rizal in said agreement was designed more as a declaration or identification of these places wherein the distributor was expressly authorized and assigned to sell the cigar, cigarettes and tobacco products of the plaintiff, which is no obstacle to the distributor's acceptance or takingmotu proprio of additional territories in order to better to fulfill his obligation to sell monthly for the Company not less than P20,000 worth of cigarettes and other tobacco products and could by no means alter his liability to turn over the to the company payments therefor, and that is precisely his obligation secured by the bond. Appellant maintaining that the alleged modification of the agreement released the surety from its liability, invokes the rule of strictissimi juris under which, it is claimed, surety bonds must be strictly construed and cannot be extended beyond their terms. Although We might acknowledge that a surety is a favorite of the law and his contract strictissimi juris, this rule has no bearing on the case at bar. Anyway, it commonly refers to an accommodation surety and should not be extended to favor a compensated surety, as is appellant in the instant case. The rationale of this doctrine is reasonable; an accommodation surety acts without motive of pecuniary gain and, hence, should be protected against unjust pecuniary impoverishment by imposing on the principal duties akin to those of a fiduciary. This cannot
be said of a compensated corporate surety which is a business association organized for the purpose of assuming classified risks in large numbers, for profit and on an impersonal basis through the medium of standardized written contractual forms drawn by its own representatives with the primary aim of protecting its own interests (See Stearn's The Law of Suretyship, 4th ed., 402-403). American courts in refusing to apply this rule on compensated sureties have expressed themselves in varying language. Sometimes it is said that a corporate compensated surety is not entitled to the benefit of the rule of strictissimi juris (U.S. vs. Gao, F. Pawling & Co. 297 F. 65); or that the contract is to be construed against the surety and in favor of the promise (Consolidated Indem. & Ins. Co. vs. State, 184 Ark. 581, 43 S.W. [2d] 240); or that the contract is like one of the insurance, hence one or the other of the above rules is to be applied (Lassetter vs. Backer, 26 Ariz. 224, 224 P. 810; Md. Cas. Co. vs. Dunlap, 68 F. [2d] 289), and it was even said: The law does not have the same solicitude for corporations engaged in giving indemnity bonds for profit as it does for individual surety who voluntarily undertakes to answer for the obligations of another. Although calling themselves sureties, such corporations are in fact insurers, and in determining their rights and liabilities the rules peculiar to suretyship do not apply (Metropolitan Casualty Insurance Co. vs. United Brick & Tile Co. [1934], 29 P. [2d] 771). Even assuming, however, for the sake of argument that the delivery of merchandise at a place other than that appearing in the contract constitutes an alteration of the same, it is a material deviation that would release the surety from its liability?. A material alteration of a contract is such a change in the terms of the agreement as either imposes some new obligation on the party promising or takes away some obligation already imposed. A change in the form of the contract which does not affect one or the other of these results is immaterial, and will not discharge the surety (Stearn's The Law of Suretyship, 4th ed., p.98). To be material an alteration must change the legal effect of the original contract (New Amsterdam Casualty Co. vs. W.T. Taylor Const. Co., 12 F. [2d] 972). It cannot be denied that the obligation of the principal remained the same — to settle his accounts to the company at the specified time. The addition or diminution of the territories covered by his previous assignment will not alter or affect that duty to make payments on time. Apart from the fact that the alteration in the instant case, if there was any, is not material as to relieve the surety from its liability under the bond, there is not even an iota to proof that such deviation caused the surety any loss or injury or that such delivery caused the distributor's failure to pay his accounts. The weight of authority is to the effect that: A corporation engaged in the business of suretyship for profit cannot successfully defend a suit merely by showing a change in the contract, whether beneficial or otherwise, as is the rule in ordinary suretyship, but most prove that the change is material and prejudicial (City of Philadelphia vs. Ray., 266 Pa. 345; 109 Alt. 689). It is well-settled that the rule of stricticcimi juris, ordinarily applied in relief of an individual surety, is not applied in case of compensated sureties; and that where a bonding company, for a monetary consideration, has insured against failure of performance of a contract, it must show that it has suffered some injury by reason of departure from the strict terms of contract, before it can for that reason be discharged from its liability (Pickens County vs. National Surety Co. 13 F. [2d] 758 [C.C.A.] 4th, 1926).
A departure from the terms of the contract will not have the effect of discharging a compensated surety unless it appears that such departure has resulted in injury, loss or prejudice to the surety (Chapman vs. Hoage, 296 U.S. 526). It has been said that to allow compensated surety companies to collect and retrain premiums for their services, graded according to the nature and extent of the risk, and then to repudiate their obligations on slight pretexts which have no relation to the risk, would be most unjust and immoral, and would be a perversion of the wise and just rules designed for the protection of voluntary sureties (M. H. Waller Realty Co. vs. American Surety Co., 60 Utah, 435). Wherefore, the decision appealed from is hereby affirmed, with costs against appellant. It is so ordered. Paras, C.J., Padilla, Montemayor, Bautista Angelo, Labrador, Concepcion, Reyes, J.B.L., and Endencia, JJ., concur. THIRD DIVISION [G.R. No. 119121. August 14, 1998] NATIONAL POWER CORPORATION, petitioner, vs. COURT OF APPEALS, Fifteenth Division and PHESCO INCORPORATED, respondents. DECISION ROMERO, J.: On July 22, 1979, a convoy of four (4) dump trucks owned by the National Power Corporation (NPC) left Marawi city bound for Iligan city. Unfortunately, enroute to its destination, one of the trucks with plate no. RFT-9-6-673 driven by a certain Gavino Ilumba figured in a head-on-collision with a Toyota Tamaraw. The incident resulted in the death of three (3) persons riding in the Toyota Tamaraw, as well as physical injuries to seventeen other passengers. On June 10, 1980, the heirs of the victims filed a complaint for damages against National Power Corporation (NPC) and PHESCO Incorporated (PHESCO) before the then Court of First Instance of Lanao del Norte, Marawi City. When defendant PHESCO filed its answer to the complaint it contended that it was not the owner of the dump truck which collided with the Toyota Tamaraw but NPC. Moreover, it asserted that it was merely a contractor of NPC with the main duty of supplying workers and technicians for the latter’s projects. On the other hand, NPC denied any liability and countered that the driver of the dump truck was the employee of PHESCO. After trial on the merits, the trial court rendered a decision dated July 25, 1988 absolving NPC of any liability. The dispositive portion reads: “Consequently, in view of the foregoing consideration, judgment is hereby rendered ordering PHESCO, Inc. and Gavino Ilumba upon receipt hereof:
1. To pay jointly and severally the plaintiffs thru the Dansalan College the sum of P954,154.55 representing the actual or compensatory damages incurred by the plaintiffs; and 2. To pay the sum of P50,000.00 representing Attorney’s fees. SO ORDERED.” Dissatisfied, PHESCO appealed to the Court of Appeals, which on November 10, 1994 reversed the trial court’s judgment. We quote the pertinent portion of the decision: “A ‘labor only’ contractor is considered merely as an agent of the employer (Deferia vs. National Labor Relations Commission, 194 SCRA 525). A finding that a contractor is a ‘labor only’ contractor is equivalent to a finding that there is an employer-employee relationship between the owner of the project and the employees of the ‘labor only’ contractor (Industrial Timer Corporation vs. National Labor Relations Commission, 202 SCRA 465). So, even if Phesco hired driver Gavino Ilumba, as Phesco is admittedly a ‘labor only’ contractor of Napocor, the statute itself establishes an employer-employee relationship between the employer (Napocor) and the employee (driver Ilumba) of the labor only contractor (Phesco). (Ecal vs. National Labor Relations Commission, 195 SCRA 224). Consequently, we hold Phesco not liable for the tort of driver Gavino Ilumba, as there was no employment relationship between Phesco and driver Gavino Ilumba. Under Article 2180 of the Civil Code, to hold the employer liable for torts committed by his employees within the scope of their assigned task, there must exist an employer-employee relationship. (Martin vs. Court of Appeals, 205 SCRA 591). WHEREFORE, we REVERSE the appealed decision. In lieu thereof, the Court renders judgment sentencing defendant National Power Corporation to pay plaintiffs the sum of P174,889.20 plus P20,000.00 as attorney’s fees and costs. SO ORDERED.” Chagrined by the sudden turnaround, NPC filed a motion for reconsideration of said decision which was, however, denied on February 9, 1995. [1]Hence, this petition. The principal query to be resolved is, as between NPC and PHESCO, who is the employer of Ilumba, driver of the dumptruck which figured in the accident and which should, therefore, would be liable for damages to the victims. Specifically, NPC assigns the sole error that: “THE COURT OF APPEALS DECISION FINDING THAT PETITIONER NPC AS THE EMPLOYER OF THE DRIVER GAVINO ILUMBA, AND CONSEQUENTLY, SENTENCING IT TO PAY THE ACTUAL AND COMPENSATORY DAMAGES SUSTAINED BY COMPLAINANTS, IS NOT IN ACCORD WITH THE LAW OR WITH THE APPLICABLE RULINGS OF THIS HONORABLE COURT.” [2] As earlier stated, NPC denies that the driver of the dump truck was its employee. It alleges that it did not have the power of selection and dismissal nor the power of control over Ilumba.[3] PHESCO, meanwhile, argues that it merely acted as a “recruiter” of the necessary workers for and in behalf of NPC.[4]
Before we decide who is the employer of Ilumba, it is evidently necessary to ascertain the contractual relationship between NPC and PHESCO. Was the relationship one of employer and job (independent) contractor or one of employer and “labor only” contractor? Job (independent) contracting is present if the following conditions are met: (a) the contractor carries on an independent business and undertakes the contract work on his own account under his own responsibility according to his own manner and method, free from the control and direction of his employer or principal in all matters connected with the performance of the work except to the result thereof; and (b) the contractor has substantial capital or investments in the form of tools, equipment, machineries, work premises and other materials which are necessary in the conduct of his business. [5] Absent these requisites, what exists is a “labor only” contract under which the person acting as contractor is considered merely as an agent or intermediary of the principal who is responsible to the workers in the same manner and to the same extent as if they had been directly employed by him.[6] Taking into consideration the above distinction and the provisions of the “Memorandum of Understanding” entered into by PHESCO and NPC, we are convinced that PHESCO was engaged in “labor only” contracting. It must be noted that under the Memorandum, NPC had mandate to approve the “critical path network and rate of expenditure to be undertaken by PHESCO. [7] Likewise, the manning schedule and pay scale of the workers hired by PHESCO were subject to confirmation by NPC.[8] Then too, it cannot be ignored that if PHESCO enters into any subcontract or lease, again NPC’s concurrence is needed. [9] Another consideration is that even in the procurement of tools and equipment that will be used by PHESCO, NPC’s favorable recommendation is still necessary before these tools and equipment can be purchased. [10] Notably, it is NPC that will provide the money or funding that will be used by PHESCO to undertake the project.[11]Furthermore, it must be emphasized that the project being undertaken by PHESCO, i.e., construction of power energy facilities, is related to NPC’s principal business of power generation. In sum, NPC’s control over PHESCO in matters concerning the performance of the latter’s work is evident. It is enough that NPC has the right to wield such power to be considered as the employer. [12] Under this factual milieu, there is no doubt that PHESCO was engaged in “labor-only” contracting vis-à-vis NPC and as such, it is considered merely an agent of the latter. In laboronly contracting, an employer-employee relationship between the principal employer and the employees of the “labor-only” contractor is created. Accordingly, the principal employer is responsible to the employees of the “labor-only” contractor as if such employees had been directly employed by the principal employer. [13] Since PHESCO is only a “labor-only” contractor, the workers it supplied to NPC, including the driver of the ill-fated truck, should be considered as employees of NPC. [14] After all, it is axiomatic that any person (the principal employer) who enters into an agreement with a job contractor, either for the performance of a specified work or for the supply of manpower, assumes responsibility over the employees of the latter.[15] However, NPC maintains that even assuming that a “labor only” contract exists between it and PHESCO, its liability will not extend to third persons who are injured due to the tortious acts of the employee of the “labor-only” contractor. [16] Stated otherwise, its liability shall only be limited to violations of the Labor Code and not quasi-delicts. To bolster its position, NPC cites Section 9(b), Rule VII, Book III of the Omnibus Rules Implementing the Labor Code which reads:
“(b) Labor only contracting as defined herein is hereby prohibited and the person acting as contractor shall be considered merely as an agent or intermediary of the employer who shall be responsible to the workers in the same manner and extent as if the latter were directly employed by him.” In other words, NPC posits the theory that its liability is limited only to compliance with the substantive labor provisions on working conditions, rest periods, and wages and shall not extend to liabilities suffered by third parties, viz.: “Consequently, the responsibilities of the employer contemplated in a ‘labor only’ contract, should, consistent with the terms expressed in the rule, be restricted ‘to the workers.’ The same can not be expanded to cover liabilities for damages to third persons resulting from the employees’ tortious acts under Article 2180 of the Civil Code.” [17] The reliance is misplaced. It bears stressing that the action was premised on the recovery of damages as a result of quasi-delict against both NPC and PHESCO, hence, it is the Civil Code and not the Labor Code which is the applicable law in resolving this case. To be sure, the pronouncement of this Court in Filamer Christian Institute v. IAC,[18] is most instructive: “The present case does not deal with a labor dispute on conditions of employment between an alleged employee and an alleged employer. It invokes a claim brought by one for damages for injury caused by the patently negligent acts of a person, against both doeremployee and his employer. Hence, the reliance on the implementing rule on labor to disregard the primary liability of an employer under Article 2180 of the Civil Code is misplaced. An implementing rule on labor cannot be used by an employer as a shield to avoid liability under the substantive provisions of the Civil Code.” Corollarily from the above doctrine, the ruling in Cuison v. Norton & Harrison Co.,[19] finds applicability in the instant case, viz.: “It is well to repeat that under the civil law an employer is only liable for the negligence of his employees in the discharge of their respective duties. The defense of independent contractor would be a valid one in the Philippines just as it would be in the United States. Here Ora was a contractor, but it does not necessarily follow that he was an independent contractor. The reason for this distinction is that the employer retained the power of directing and controlling the work. The chauffeur and the two persons on the truck were the employees of Ora, the contractor, but Ora, the contractor, was an employee of Norton & Harrison Co., charged with the duty of directing the loading and transportation of the lumber. And it was the negligence in loading the lumber and the use of minors on the truck which caused the death of the unfortunate boy. On the facts and the law, Ora was not an independent contractor, but was the servant of the defendant, and for his negligence defendant was responsible.” Given the above considerations, it is apparent that Article 2180 of the Civil Code and not the Labor Code will determine the liability of NPC in a civil suit for damages instituted by an injured person for any negligent act of the employees of the “labor only” contractor. This is consistent with the ruling that a finding that a contractor was a “labor-only” contractor is
equivalent to a finding that an employer-employee relationship existed between the owner (principal contractor) and the “labor-only” contractor, including the latter’s workers. [20] With respect to the liability of NPC as the direct employer, Article 2180 of the Civil Code explicitly provides: “Employers shall be liable for the damages caused by their employees and household helpers acting within the scope of their assigned tasks, even though the former are not engaged in any business or industry.” In this regard, NPC’s liability is direct, primary and solidary with PHESCO and the driver. Of course, NPC, if the judgment for damages is satisfied by it, shall have recourse against PHESCO and the driver who committed the negligence which gave rise to the action. [22] [21]
Finally, NPC, even if it truly believed that it was not the employer of the driver, could still have disclaimed any liability had it raised the defense of due diligence in the selection or supervision of PHESCO and Ilumba. [23] However, for some reason or another, NPC did not invoke said defense. Hence, by opting not to present any evidence that it exercised due diligence in the supervision of the activities of PHESCO and Ilumba, NPC has foreclosed its right to interpose the same on appeal in conformity with the rule that points of law, theories, issues of facts and arguments not raised in the proceedings below cannot be ventilated for the first time on appeal.[24] Consequently, its liability stands. WHEREFORE, in view of the foregoing, the assailed decision of the Court of Appeals dated November 10, 1994 and its accompanying resolution dated February 9, 1995 are AFFIRMED without prejudice to the right of NPC to demand from PHESCO and Ilumba reimbursement of the damages it would be adjudged to pay to complainants. No costs. SO ORDERED. Narvasa, CJ., (Chairman), Kapunan and Purisima JJ. concur. Republic of the Philippines SUPREME COURT Manila EN BANC G.R. No. L-10292
February 28, 1958
PAO CHUAN WEI, plaintiff-appellant, vs. REPOSITO NOMOROSA and GENERAL INDEMNITY CO., INC., defendants-appellees. Manuel V. San Jose and Bernardo C. Tiongco for appellant. D. A. Rodriguez for appellees. BENGZON, J.:
Initiated in the Manila court of first instance, this is a suit to recover on a surety bond executed in plaintiff's favor by Reposito Nomorosa, as principal debtor and General Indemnity Co., Inc., as surety. Nomorosa died after answering the complaint, and the case against him was dismissed. General Indemnity Co., Inc., pleaded prescription. After several incidents immaterial at this stage of the proceedings, the controversy was submitted for decision upon a stipulation of facts the main terms of which ran as follows: On November 22, 1949 General Indemnity executed the bond Exh. B whereby it guaranteed, as surety, the payment by Reposito Nomorosa of the latter's mortgage debt to plaintiff Pao Chuan Wei in the amount of P2,500.00; One paragraph of said bond provides: . . . Furthermore, it is here by agreed and understood that the GENERAL INDEMNITY CO., INC., will not be liable for any claim not discovered and presented to the company within THREE (3) months from the expiration of this bond and that the obligee hereby waives his right to file any court-action against the surety after the termination of the period of three months above mentioned; Nomorosa did not pay the whole debt, there being a balance of P2,282.00; On February 29, 1950 and March 29, 1950, plaintiff demanded payment of the account from the surety; Defendant now refuses to pay on the ground that its liability under the bond extended only up to May 22, 1950, but this complaint was filed almost two years after such deadline; The parties ask the court to decide on "the question as to whether or not the plaintiff has the right to collect from the defendant General Indemnity Co., Inc., the balance remaining unpaid to defendant R. Nomorosa, in the sum of P2,282.00 with 7 percent interest from January 27, 1949, under the Surety Bond, Exhibit B." Acting upon the above submission, the trial judge dismissed the case, holding that the action had nut been filed "within three months from the expiration of the bond" on or about February 22, 1950. (The suit began in February 1952.) Pao Chuan Wei appealed in due time. He contends before this Court that his complaint had been seasonably filed, because within three months after the expiration of the bond, he presented to the surety on February 29, and March 29, 1950, the claim for non-Performance or nonpayment by the principal debtor; and that such presentation rendered the surety liable, it being sufficient compliance with the condition precedent specified in the paragraph of the bond Exh. B herein-above quoted. The appellee asserts in reply, that presentation of the claim and filing of the action in court must be made within three months after the expiration of the bond.
At first glance and without careful analysis, the last part of the paragraph of the bond hereinabove quoted seems to justify appellee's assertion and the lower court's dismissal of the proceeding. However, on second thought and on reading the whole paragraph the probability it appears that the parties meant, or the creditor understood, that he "waives his right to file any court action against the surety after the termination of the three-months above mentioned" should he present no claim to the surety within said three-month period. Observe specially that no punctuation separates the first part regarding presentation of claim and the second part regarding waiver. Which is an indication that the second part is a continuation of the first; and the two clauses must be taken together as referring to one topic: presentation of claim within three months, and effect of non-presentation. (cf. Art. 1285 of the Civil Code.) The second could not obviously have meant to amend the first part by making it not only a condition precedent but also a limitation of action. Indeed, as the parties expressly fixed the three-month period for presentation of the claim as a condition precedent, they must have intended to give the surety, if the claim is presented within that period, some time to decide whether to pay or not to pay. (Because if it agrees to pay and pays, no complaint need be filed in court.) Now then, if the claim is presented on the 90th or last day, to uphold the contention of appellee would deprive the surety of the chance to decide whether to pay or not to pay, and would compel action on that same day — regardless of the surety's attitude on the matter. That would be nonsensical, to put it strongly. Again, appellee's contention implies that as the cause of action did not arise until the claim was presented on the last day, such cause of action prescribed on that same day — if no complaint was filed on that very day. Evidently, the parties could not have contemplated — and agreed upon — such absurd result or requirement. 2 And yet, if they had knowingly agreed thereto, the agreement void because it fixed an unreasonable period of prescription for the creditor's right of action. In some cases, apparently no longer authoritative as precedents, contractual limitation have been regarded as against public policy, and therefore unenforceable in the courts. The prevailing view, however, is that unless contravenes a valid statute, or unless the time fixed is unreasonably short, such a provision is binding upon the contracting Parties. (American Jurisprudence Vol. 34 p.61 ) In holding invalid as unreasonable a provision in a bond . . . the court in Page County vs. Fidelity & D. Co. (1927) 205 Iowa, 798, 216 N. W. 957, said: "The proviso under consideration forbids an action for sixty days after default; This brings upper and forbids an action after the expiration of ninety days from the date of default. This brings upper and neither millstones into close proximity. It reduces the period of limitation to thirty days. This comes very close to an abrogation of the right of action. If the period of limitation can ever be deemed an unreasonable one, this one must be deemed such." (121 American Law Reports, Annotated p. 781.) If it should be argued that the stipulation could be interpreted either as a condition precedent only, or as both condition precedent and prescription then we would hold: it appearing that the bond was executed in a form prepared by the surety company, any ambiguity in the document must be interpreted against it.3
In the supposition, however, that the three-month time was actually intended by the parties as both a condition precedent and a limitation period, then the agreement would normally amount to: 45-days for filing claim and the other 45-days for presenting court action. Then the inquiry suggests itself whether 45-days would be a "reasonable period"; because as stated above, the authorities permit the contracting parties to fix a shorter limitation of-action-period than that fixed by the statute, provided it is reasonable. (See American Jurisprudence supra.) In an action upon a policy of insurance fixing a three month period of limitation, 4 this Court impliedly hinting some doubt concerning its reasonableness, did not pass on the point because unnecessary at that time. In a later case, a divided court declared it to be reasonable, following American precedents. (Teal Motor Co. vs. Orient Insurance Co. 59 Phil., 809.) Subsequently, however, the Legislature amended the Insurance Law by providing that "any stipulation in any policy of insurance limiting the time for commencing an action thereunder to a period of less than one year from the time the cause of action accrues is void." (See. 61-A Insurance Act.) A surety bond is not of course, an insurance. policy.5 There are similarities though, between bonding and insurance transactions; so much so that surety companies are placed under the supervision of the Insurance Commissioner. It would be an interesting matter to discuss whether the legislative view as to insurance policies (one-year minimum period) should also be applied to surety bonds issued by licensed surety companies, bearing in mind that in determining the reasonableness of the period fixed by contractual limitation courts "may resort to the standards and analogies of cognate statutes to inform their judgment". 6 This consideration all the more inclines us to the opinion that the bond here in question should receive the interpretation we give to it, namely, that the three-month period established only a condition precedent, — not a limitation of action. And in that light we must hold that inasmuch as plaintiff's claim had been presented to General Indemnity Co., Inc., within the three-months period, and as the action had been subsequently filed within the statutory time of prescription,7 the case should not have been dismissed. Wherefore, the appealed decision is reversed, and judgment is hereby entered requiring the defendant General Indemnity Co., Inc., to pay plaintiff the sum of P2,282.00 with 7% interest from January 27, 1949. Costs against appellee in both instances. So ordered. Paras, C.J., Padilla, Montemayor, Reyes, A., Bautista Angelo, Labrador, Concepcion, Reyes, J.B.L., Endencia and Felix, JJ., concur. Republic of the Philippines SUPREME COURT Manila EN BANC G.R. No. L-25553
January 31, 1969
NATIONAL MARKETING CORPORATION, plaintiff-appellee, vs. GABINO MARQUEZ, ET AL., defendants, PLARIDEL SURETY & INSURANCE COMPANY, defendant-appellant.
Benjamin M. Tan and Jose S. Valencia for plaintif-appellee. Carlos, Madarang, Carballo and Valdez for defendant-appellant. Gabino Marquez for and in his own behalf as defendant. REYES, J.B.L., J.: This Court is prayed by appellant, Plaridel Surety & Insurance Company, to reverse the decision of the Court of First Instance of Manila condemning it to pay to the appellee, National Marketing Corporation, the principal sum of P10,000.00, plus P9,990.91 in accrued interest up to 1 November 1964, and interest thereafter at 7% per annum on the principal and 6% on the accrued interest, together with 10% on the total amount due by way of attorney's fees and costs. The appeal being made directly to this Supreme Court, the facts found by the court below must be held binding upon this appellant. Such facts are stated in the appealed decision to be as follows (Record on Appeal, pages 18-21): From the evidence thus presented, it appears that under the provisions of Executive Order No. 350, Series of 1950, all the properties, rights, obligations, and contracts of the Philippine Relief and Trade Rehabilitation Administration (PRATRA) had been transferred to the Price Stabilization Corporation (PRISCO). Also by virtue of Republic Act No. 1345, as amended, all rights and contracts of the PRISCO involving real estate, fixed assets and stock in trade had been assumed by herein plaintiff, the NAMARCO. It also appears that on June 24, 1950, defendant Marquez secured from the PRATRA one (1) tractor and one (1) rice thresher, with a total value of P20,000.00 for which the said defendant paid thereon the sum of P8,000.00 as down payment, thereby leaving a balance of P12,000.00, as evidenced by an invoice marked as Exhibit A. On the same date, defendant Marquez executed a promissory note in the amount of P12,000.00 payable in installments commencing from June 24, 1951 to June 25, 1952, with interest thereon at the rate of 7% per annum from June 24, 1950 until finally paid, which promissory note is marked in this case as Exhibit B. It is further stipulated in the aforesaid promissory note that in the event of failure of the said defendant to pay the principal obligation or interest thereon when due and payable, an additional sum equivalent to 10% of the total amount due shall be paid as attorney's fees. To guarantee full compliance with the aforementioned obligation, defendant Marquez, as principal, and defendant Plaridel Surety & Insurance Company, as surety, executed Guaranty Bond P. S. & I. No. 4220 in favor of the PRATRA, wherein they bound themselves, jointly and severally, to pay the said amount of P12,000.00 (Exhibit C). In this guaranty bond, the surety expressly waives its right to demand payment and notice of non-payment and agrees that the liabilities of this guaranty shall be direct and immediate and not contingent upon the exhaustion by the PRATRA of whatever
remedies it may have against the principal, and that the same shall be valid and continuous until the obligation so guaranteed is paid in full (Exhibit C-1). After making partial payments in the sums of P2,870.19 and P326.77 on July 7, 1951 and February 23, 1952, respectively, defendant Marquez defaulted in the payment of the other installments, so that the total amount due NAMARCO as of October 31, 1964 is P19,990.91, representing principal and accrued interest, as shown in a statement of account marked as Exhibit D.1awphil.ñêt On March 22, 1956, February 16, 1963, June 10, 1964, September 18, 1964 and October 13, 1964, plaintiff demanded from defendants Marquez and Plaridel Surety & Insurance Company, payment of their outstanding obligation, as shown in Exhibits E, E- 2, E-3, E-4, E-6, E-8, E-10, and E-12. The claim, therefore, of defendant Plaridel Surety & Insurance Company that they never received a demand for payment from plaintiff must necessarily fail, considering that it is clearly shown in registry return receipts marked as Exhibits E-5, E-9, E-11, and E-13 that the same had been received by the addressee. As the said amount was not paid despite the aforementioned demands therefor upon the said defendants, the present action was instituted on December 16, 1964, to enforce collection. The appellant surety company poses three questions for our resolution: (1) Whether the Court of First Instance had original jurisdiction to take cognizance of the suit; (2) Whether the plaintiff-appellee's action is barred by prescription; (3) Whether the surety's liability can exceed the sum of P12,000.00. On the first question tendered, appellant surety company argues that since the balance due on the principal of the promissory note guaranteed by it is only P10,000.00, in view of the debtor's payment of P2,000.00 on account of the principal of the loan, jurisdiction lay with the Municipal Court, and not on the Court of First Instance, pursuant to section 44 (c) of the Judiciary Act, as amended by Republic Act No. 3828. The contention is without merit, for it ignores the fact that upon the terms of the promissory note, Exhibit "B", copy of which was attached to the guaranty bond, as its annex "A", default upon the principal or interest entitled the creditor to an additional ten per centum of the total amount due for attorneys' fees and costs of collection. Even disregarding interest overdue and payable, when the complaint was filed the creditor-appellee was entitled to collect no less than P10,000.00 on the loan plus P1,000.00 attorneys' fees, or a total of P11,000.00. The initial limit of the original jurisdiction of the Court of First Instance under Republic Act No. 3828 being — all cases in which the demand, exclusive of interest, or the value of the property in controversy, amounts to more than ten thousand pesos. the court below did not incur in this error.
The contention that plaintiff-appellee's cause of action against the surety was barred by the statute of limitations in 1964, because the face value of the promissory note fell due on 25 June 1962, is likewise untenable. The course of extinctive prescription was interrupted by the written demands for payment made upon the principal debtor on 22 March 1956, 16 February 1963, and June, September and October of 1964, copies of which were furnished the surety. Article 1115 of the Civil Code of the Philippines prescribes that "the prescription of actions is interrupted — when there is a written extrajudicial demand by the creditor". The surety avers that a demand upon the debtor is no demand upon the surety, and that the copies of the letters of demand upon the former do not constitute a demand upon the guarantor. This thesis is worthless because (a) the liability of the appellant was expressly made joint and several by the terms of the guaranty bond, and (b) for the reason that, in the latter document, "the surety also waives its right to demand payment and notice of nonpayment" (Bond, paragraph 3). The words "demand payment" vis-a-vis the creditor can only refer to "demand for payment". Laches not having been invoked as a defense in the court below, the same can not be gone into at this stage of the proceedings. At any rate, the established jurisprudence is that mere delay of the creditor in proceeding against the principal debtor does not release the guarantor (Lavides vs. Eleazar, 106 Phil. 576, 579, and cases therein cited), and much less will it relieve a surety, who is solidarily liable with the main debtor. On the third and last issue, it is enough to remark that while the guarantee was for the original amount of the debt of Gabino Marquez, the amount of the judgment by the trial court in no way violates the rights of the surety. The judgment on the principal was only for P10,000.00, while the remaining P9,990.91 represent the moratory interest due on account of the failure to pay the principal obligation from and after the same had fallen due, and default had taken place. Appellant surety was fully aware that the obligation earned interest, since the note was annexed to its contract, Exhibit "C". The contract of guaranty executed by the appellant Company nowhere excludes this interest, and Article 2055, paragraph 2, of the Civil Code of the Philippines is clearly applicable. If it (the guaranty) be simple or indefinite, it shall comprise not only the principal obligation but also all its accessories, including judicial costs, provided with respect to the latter, that the guarantor shall only be liable for those costs incurred after he has been judicially required to pay. (Emphasis supplied) Explaining the provisions of Article 1827 of the Civil Code of 1889, couched in terms similar to the one quoted, Manresa, in his Commentaries (Volume 12. Fifth Edition, page 241), says: Para dicho caso dispone el Codigo que la extension de esa clase especial de fianzas comprendera, no solo la obligacion principal, sino tambien todos sus accesorios, incluso, los gastos del juicio, con la limitacion establecida en el mismo. Cierto es que con ello se amplian los terminos de la fianza a mas de los limites de la obligacion principal, objeto y motivo de aquella, pero esto depende de los actos del fiador, pues pudiendo este precisar y determinar al constituir la fianza los limites de la misma, restringiendo su responsabilidad unica y exclusivamente a los terminos estrictos de la obligacion principal, si no lo hizo asi dejando de utilizar esa restriccion, potestativa en el, debe presumirse que quiso quedar obligado en la forma amplia que en el articulo se establece.
La responsabilidad del fiador, conforme a este precepto, se extiende incluso a los intereses por razon de mora del deudor. Asi lo ha reconocido la jurisprudencia, declarando que subrogado el fiador en el lugar del deudor para hacer efectiva la obligacion principal contraida, cuando este no la cumple, responde no solo de aquella, sino tambien de sus consecuencias legales, una de ellas, en concepto de indemnizacion de perjuicios, al abono de intereses por razon de mora del citado deudor en el pago de cantidad liquida, segun determinan los articulos 1.101 y 1.108 del Codigo civil, sin que pueda sostenerse que no naciendo la obligacion del fiador hasta que se hace la exclusion de bienes del deudor, no puede aquel incurrir en mora (sentencia de 22 de noviembre de 1916). And we have previously ruled that compensated sureties are not entitled to have their contracts interrupted strictissimi juris in their favor (Leyson vs. Rizal Surety [1966] 16 SCRA 555; Pacific Tobacco Corp. vs. Lorenzana, 102 Phil. 234, 241-242). WHEREFORE, finding no error in the judgment appealed from, the same is affirmed, with costs against appellant Plaridel Surety and Insurance Company. Concepcion, C.J., Dizon, Makalintal, Zaldivar, Sanchez, Castro, Fernando, Capistrano, Teehankee and Barredo, JJ., concur. Republic of the Philippines SUPREME COURT Manila EN BANC
G.R. No. L-24835 July 31, 1970 PREPARATIONS COMMISSION, plaintiff-appellee, vs. NORTHERN LINES INC., and FIELDMEN'S INSURANCE COMPANY, INC., defendantsappellants. Manguera, Sarmiento & Pacunayan for plaintif-appellee. Tipon, Velasco, Dizon, Rubio & Associates for defendant. San Juan, Africa & Benedicto for defendant-appellant Northern Lines, Inc.
CONCEPCION, C.J.: This appeal, taken by the Northern Lines, Inc., and Fieldmen's Insurance Co., Inc., from a decision of the Court of First Instance of Manila in Cases Nos. 50194 and 51542 thereof, which were jointly tried and disposed of, has been certified to Us by the Court of Appeals, questions purely of law having been raised in the appeal.
It appears that, pursuant to Rep. Act No. 1789, the Reparations Commission — hereinafter referred to as the Commission — had awarded two (2) vessels to the Northern Lines Inc., a corporation organized and existing under the Philippine law — hereinafter referred to as the Buyer — for use in the interisland shipping. According to the schedules of payment agreed upon between the parties, complete delivery of one of the vessels — the M/S Magsaysay, later named M/S Don Salvador — took place on April 25, 1960, and that of the other — the M/S Estancia later named M/S Don Amando — on May 26, 1960. These vessels were the object of separate deeds of conditional purchase and sale of reparations goods, executed by the Commission, as vendor, and the Buyer, as vendee, the first dated September 12, 1960, and the second October 20, 1960. In conjunction with these contracts and in line with the provisions thereof Surety Bonds Nos. 3825 and 4123 were executed, on April 25, 1960 and May 30, 1960, respectively, by the Buyer, as principal, and the Fieldmen's Insurance Co., as surety, in favor of the Commission, to guarantee the faithful compliance by the Buyer of its obligations under said contracts. The Buyer undertook therein to pay for said vessels the installments specified in a schedule of payments, appended to each contract. The schedule for the M/S Don Salvador (ex-M/S Magsaysay) reads as follows: NAME OF END-USER NORTHERN LINES, INC. ADDRESS 480 Padre Faura, Ermita, Manila NATURE OF CAPITAL GOODS/SERVICES One (1) Vessel M/S MAGSAYSAY' divested of the cannery plant DATE OF COMPLETE DELIVERY April 25, 1960 TOTAL F.O.B. COST P1,747,614.22 AMOUNT OF 1ST INSTALLMENT (10% OF F.O.B. COST) P174,761.42 . DUE DATE OF 1ST INSTALLMENT April 25, 1962 TERM: TEN (10%) EQUAL YEARLY INSTALLMENTS RATE OF INTEREST: THREE PERCENT (3%) PER ANNUM
NO. OF INSTALLMENTS
DATE DUE
AMOUNT
1
April 25, 1963.
P184,386.34
2
" " 1964
184,386.34
3
" " 1965
184,386.34
4
" " 1966
184,386.34
5
" " 1967
184,386.34
6
" " 1968
184,386.34
7
" " 1969
184,386.34
8
" " 1970
184,386.34
9
" " 1971
184,386.34
1
" " 1972
184,386.34
whereas that for M/S Don Amando (ex-M/S Estancia) was of the following tenor: NAME OF END-USER NORTHERN LINES, INC. ADDRESS 480 P. Faura, Ermita, Manila NATURE OF CAPITAL GOODS/SERVICES One vessel 'M/S Estancia' Divested of the Cannery Plant DATE OF COMPLETE DELIVERY May 26. 1960 TOTAL F.O.B. COST P1,747,614.22 AMOUNT OF 1ST INSTALLMENT (10% OF F.O.B. COST) P174,761.42 DUE DATE OF 1ST INSTALLMENT May 26, 1962 TERM: Ten (10) EQUAL YEARLY INSTALLMENTS RATE OF INTEREST: THREE PERCENT (3%) PER ANNUM
NO. OF INSTALLMENTS
DATE DUE
AMOUNT
1
May 26, 1963
184,386.34
2
" " 1964
184,386.34
3
" " 1965
184,386.34
4
" " 1966
184,386.34
5
" " 1967
184,386.34
6
" " 1968
184,386.34
7
" " 1969
184,386.34
8
" " 1970
184,386.34
9
" " 1971
184,386.34
10
" " 1972
184,386.34
On April 24, 1962, an d May 26, 1962 — or one day before the stated due date of the first installment for M/S Don Salvador (ex-M/S Magsaysay), and on the stated due date of the first installment as to M/S Don Amando (ex-M/S Estancia) — the Buyer instituted Civil Cases Nos. 50194 (regarding M/S Don Salvador, formerly Magsaysay) and 50488 (regarding M/S Don Amando, formerly Estancia) of the Court of First Instance of Manila to secure, by way of declaratory relief, a declaration to the effect that the first installments under the aforementioned contracts would be due and demandable on April 25, 1963 and May 26,
1963, respectively. Soon thereafter, or on September 10, 1962, the Commission Commenced Civil Case No. 51542 of the same Court, against the Buyer and the Surety. The Commission alleged in two separate causes of action set forth in the complaint therein — that, despite repeated demands, the defendants (Buyer and Surety) had refused to pay the first installments of P174,761.42 each, that had become due and demandable on April 25 and May 26, 1962, respectively. Hence, it prayed that the Buyer and the Surety be sentenced to pay, jointly and severally, to the Commission the aggregate sum of P349,522.84, with interest thereon at the legal rate, in addition to attorney's fees and the Costs. In its answer to the complaint, the Buyer admitted some allegations and denied other allegations thereof, and, by way of special defense, averred that the Commission has no cause of action until Civil Cases Nos. 50488 and 50194 . shall have been decided. The Surety's answer contained similar admissions and denials, apart from adopting as its own those made in the Buyer's answer, and set up a crossclaim against the Buyer, for reimbursement of whatever the Surety may have to pay to the Commission by reason of its complaint, including interests, and for the sum P10,541.68 "representing unpaid premiums and documentary stamps due on the two bonds" above-mentioned, plus attorney's fees and interests. Subsequently, or on October 29, 1962, Branch XIII of the Court of First Instance of Manila dismissed Case No. 50488 — involving the M/S Don Amando or Estancia — whereupon the Buyer appealed to this Court, where the case was docketed as L-20725. The same was, however, dismissed July 2, 1963, for failure of the Buyer, as appellant therein, to file its brief within the reglementary period. In due course thereafter, or on April 30, 1964, Branch VII of said Court of First Instance rendered, in Cases Nos. 50194 — regarding M/S Don Salvador or Magsaysay — and 51542 — the action filed by the Commission — which had been jointly tried, a decision dismissing the petition for a declaratory relief in Case No. 50194, with costs against the Buyer, as petitioner therein, and: (a) sentencing the Buyer and the Surety, as defendants in Case No. 51542, to pay jointly and severally, to the Commission, the sum of P174,761.42, under each of the two (2) causes of action alleged in the complaint, with interest thereon at the legal rate, from the date of the filing of the complaint, until fully paid — although the liability of the Surety under each cause of action was not to exceed P174,761.42 — and the sum of P1,000 as attorney's fees, apart from the costs; (b) ordering the Buyer to reimburse the Surety "whatever amount it may pay to the Reparations Commission, with interest at the rate of 12% per annum"; and (c) sentencing the Buyer to pay the Surety the sum of P10,641.68, representing unpaid premiums and documentary stamps, with interest thereon at the legal rate and P300, by way of attorney's fees. A reconsideration of this decision having been denied, the Buyer and the Surety appealed to the Court of Appeals, which later certified the appeal to this Court. The Buyer alleges that the trial court erred: (1) in interpreting the contracts in question in favor of the Commission, which drafted the same; (2) in not interpreting said contracts "in such a manner as to prevent inconsistency and absurdity"; (3) "in not taking into account the delay in the use of the goods subject matter of the contracts in question in interpreting the latter"; (4) in not holding that the action filed by the Commission (Case No. 51542) is "barred" by the actions for declaratory judgment filed by the Buyer (Civil Cases Nos. 50194 and 50488); and (5) in rendering judgment for the Commission and the Surety "on their main claims, interest, attorney's fees and costs." The Surety, in turn, contends that the trial court erred: (1) in declaring that the first installments of the purchase price "became due on April 25, 1962 and May 26, 1962, respectively"; (2) in holding the Surety jointly and severally liable with the Buyer to pay to the Commission the two first installments of said purchase price under FICI Surety Bonds Nos. 3825 and 4123; (3) in not holding the Commission liable to pay the Surety "nominal
damages, attorney's fees and costs"; and (4) in not ordering the Buyer to pay to the Surety "attorney's fees equivalent to 20% of the amount which the latter may pay" to the Commission by reason of the judgment in its favor. 1. The main issue for determination in this appeal is that raised in the Buyer's first three (3) assignments of error and in the Surety's first assignment of error, namely: when did the first installment under the two (2) contracts become due? The Buyer states that "in both contracts two due dates are given for the respective first installments. In the case of M/S 'Don Salvador,' April 25, 1962, and April 25, 1963; while in the case of M/S 'Don Amando,' May 26, 1962, and May 26, 1963. The question is, which are the correct due dates intended by the parties? The defendant-appellant" — the Buyer — "claims that they are the second and later dates given, while the plaintiff-appellee" — the Commission — claims that they are the first and earlier dates." His Honor, the trial Judge, sustained the latter contention. In support of its claim, the Buyer argues that there is an ambiguity in said contracts, with should be resolved against the Commission, "because it is the latter who caused the ambiguity"; that otherwise, "there would result an inconsistency and absurdity," because the contracts provide for ten (10) equal yearly installments, but, under the theory of the Commission, there would be two (2) first' unequal installments, one for P174,761.42 and another for P184,386.34, and the latter would be followed by nine (9) yearly installments each for P184,386.34, which, together with the first two (2), would aggregate eleven (11) installments, instead of ten (10). This contention is manifestly untenable. (a) The major premise in appellants' process of reasoning is that the installments due on April 25, 1963, and May 26, 1963, are "first" installments, although they are not so designated in the schedule appended to each of the contracts between the parties. Appellants, moreover, assume that the "first" installment is included in the "ten (10) equal yearly installments" mentioned subsequently to said "first" installment. In fact, however, only one installment is labelled as "first" in each one of said schedules, and that is the installment due on "April 25, 1962" — as regards M/S Don Salvador or Magsaysay — and that due on "May 26, 1962" — as regards M/S Don Amando or Estancia. The schedules do not describe the ten (10) equal yearly installments" — following the one characterized therein as "first" — as first, second, third, etc. installments" — meaning "number," not order or sequence of installments - and the numerals 1, 2, 3, 4, 5, 6, 7, 8, 9, 10 written before each one of said "ten (10) equal yearly installments." It is true that the one therein numbered is, in fact, the first, in the list of "ten (10) equal yearly installments" following the "first," to accrue after the due date of said "first" installment. Just the same, the parties have not so described (as "first") — in the schedules forming part of their contracts — the installments numbered "I" in the list contained in each. Moreover, considering that the words "TERM: Ten (10) EQUAL YEARLY INSTALLMENTS," appear after the lines reading: "AMOUNT OF ITS INSTALLMENT (10% OF F.O.B. COST) P174,761.42" and "DUE DATE OF 1ST INSTALLMENT April 25, 1962" (or May 26, 1962), and that subsequently to said "TERM: Ten (10) EQUAL YEARLY INSTALLMENTS," there is a list of ten (10) equal yearly installments, it is clear that the latter do not include the one designated as "first" installment. It is well settled that laws and contracts should be so construed as to harmonize and give effect to the different provisions thereof. 1 Upon the other hand, the interpretation insisted upon by the Buyer and the Surety, would, not only create the "contradictions" or "absurdities" they point out — and which, admittedly, should be avoided — but, also, render meaningless and set at naught the provisions in said schedules to the effect that the "amount of (the) 1st installment" is "P174,761.42," and that the "due date of 1st installment" would be April 25, 1962," as regards the M/S Don Salvador or Magsaysay, and
"May 26, 1962," as regards the M/S Don Amando or Estancia. In fact, the Buyer maintains that these provisions should be "treated as surplusage" and, hence, disregarded or ignored. Incidentally, thus reveals the inherent infirmity of the theory advanced by the Buyer and the Surety. (b) The pertinent part of Section 12 of Rep. Act No. 1789, pursuant to which the vessels in question were sold to the Buyer, reads: ... Capital goods ... disposed of to private parties as provided for in subsection (a) of Section two hereof shall be sold on a cash or credit basis, under rules and regulations as may be determined by the Commission. Sales on a credit basis shall be payable in installments: Provided, That the first installment shall be paid within twenty-four months after complete delivery of the capital goods and thebalance within a period not exceeding ten years, ..., plus the service provided for in section ten hereof:Provided, further, That the unpaid balance of the price thereof shall bear interest at the rate of not more than three percent per annum. .... 2 It should be noted that, pursuant to the schedules attached to the contracts with the Buyer, the "complete delivery" of the vessels took place on April 25, and May 26, 1960, respectively, so that the 24 months fixed by law for the payment of the "first" installment expired on April 25, 1962 and May 26, 1962, which are the very due dates stated in the aforementioned schedules for the payment of the respective "1st" installments. What is more, in view of said legal provision, the Commission had no authority to agree that the 1st installment be paid on any later date, and the Buyer must have been aware of this fact. Hence, the parties could not have intended the first installments to become due on April 25 and May 26, 1963. It is, likewise, obvious — particularly when considered in relation to the provision above quoted — that the "ten (10) equal yearly installments," mentioned in the schedules, refer to the "balance" of the price to be paid by the Buyer, after deducting the "first" installment, so that, altogether there would be "eleven" installments, namely, the "first," which would be 10% of F.O.B. cost of the vessel — as agreed upon between the Governments of the Philippines and Japan — and "ten (10) equal yearly installments," representing the balance of the amount due to the Commission from the Buyer, including the interest thereon. (c) The Buyer insists that the vessels were "delivered late," and that consequently, it would be more in line with the spirit of R.A. No. 1789 to declare that the "first" installments fell due on April 25 and May 26, 1963, respectively. But, the Buyer seeks, not merely the postponement of the first installment's due date, but, also, exemption from the obligation to pay its amount of P174,761.42. Besides, the dates of "complete delivery" of the vessels are explicitly stated in the schedules as being "April 25, 1960" and "May 26, 1960." The Buyer would have surely refused to sign the schedules if said entries therein were not true. The signature affixed thereon by the Buyer and the fact that April 25, and May 26, 1960 were made the basis for the date of maturity, not only of the "first" installment, but, also, of the subsequent "ten (10) equal yearly installments," clearly show that both parties were agreed that complete delivery of the vessels had been made on the dates set forth in said schedules. d) This is borne out by the fact that FICI Surety Bond's Nos. 3825 and 4123 are each for the sum P174,761.42. According to paragraph (5) of the Surety's cross-claim, which is admitted in the Buyer's answer thereto, the latter had agreed to pay the premiums and the cost of documentary stamps on said bonds "for 2 years ... from April 25, 1960 and May 30, 1960, respectively." There can thus be no doubt that the Buyer and the Surety understood that the "first" installments would fall due on April 25, and May 26, 1962 and
that the amount of each of those installment would be P174,761.42, not P184,386.34, which would be due on April 25, and May 26, 1963 as appellants would have the Court believe. (e) The Surety argues that the "first" installment is the one marked No. 1, for P184,386.34, "which if paid in (10) equal yearly installments amounts to P1,843,863.40, which is the equivalent of the total contract price with interest of the reparations goods in question." This is not true. Precisely, it is only by including the "first" installment of P174,761.42, among the obligations of the Buyer, and charging the stipulated 3% yearly interest on the balance of the cost price (of P1,747,614.22) after such payment and after the payment of each of the ten (10) equal yearly installments of P184,386.34, that the full amount of said cost price, plus interest, could be satisfied. In other words,the price agreed upon and the interest thereon would not be satisfied in full, unless the "first" installment of P174,761.42 were paid in 1962, in addition to the ten (10) installments of P184,396.34 each falling due yearly from 1963 to 1972. 2. Appellants assail the decision appealed from, upon the ground that the Commission had no cause of action against them until the cases (Nos. 50194 and 50488) for a declaratory relief shall have been decided, and that, consequently, the lower court erred in dismissing Case No. 50194 instead of Case No. 51552. As above pointed out, Case No. 50488 was dismissed by Branch XIII of the Court of First Instance of Manila, on October 29, 1962, and the order of dismissal became final and executory upon the dismissal of the appeal in L-20725 of the Supreme Court, on July 2, 1963, months before the rendition of the decision of Branch VII of the trial court, which is the object of the present appeal, on April 30, 1964. As regards Case No. 50194, which was commenced on April 24, 1962, the contract involved therein (with reference to the M/S Don Salvador or Magsaysay) was infringed by the Buyer when it failed to pay the first installment due the next day, April 25, 1962. The lower court was, accordingly, justified in dismissing that case inasmuch as an action for declaratory relief may be entertained only "before breach or violation" of the law or contract to which it refers. 3 The purpose of the action is to secure an authoritative statement of the rights and obligations of the parties under said law or contract, for their guidance in the enforcement thereof or compliance therewith not to settle issues arising from an alleged breach thereof. 4 Accordingly, after such alleged breach of the law or contract or once the aforementioned issue has arisen, an ordinary action is the proper remedy. Thus, in Salmon v. Andal, 5 this Court said: ... If there has been a violation, declaratory relief cannot be granted, for the reason that Sec. 2, Rule 666 relative to said remedy, provides that 'A contract or statute may be construed before there has been a breach thereof.' After breach, the regular remedy obtains. 7 What is more, Rule 64, Section 61 of the Rules of Court is clear and explicit about it. It provides: ... If before the final termination of case. a breach of violation of an instrument, or a statute, executive order or regulation, or ordinance, should take place, the action may thereupon be converted into an ordinary action and parties allowed to file such pleadings as may be necessary or proper. Then, too, the facts of record strongly suggest that Cases Nos. 50194 and 50488 for declaratory relief were commenced in anticipation of an action for breach of contract, said cases having been filed precisely on the eve of the due date of the "first" installment, as to, M/S Don Salvador or Magsaysay, and on the very due date of the first installment, as to M/S
Don Amando or Estancia. The situation in the case at bar is thus substantially identical to that obtaining in Teodoro v. Mirasol 8 in which the following language was used: In the case at bar, We are led to the belief that the present action in the Court of First Instance was prompted by a desire on plaintiff's part to anticipate the action for unlawful detainer, the probability of which was apparent .... plaintiff took advantage of defendant's delayed ... suit to file this case in the Court, of First Instance in anticipation of the action for unlawful detainer, in order perhaps that he may claim that the action in the Court of First Instance was prior to the unlawful detainer case, and, therefore, should enjoy preference over the action filed in the Municipal court. It is to be noted that the Rules do not require as a ground for dismissal of a complaint that there is a prior pending action. They provide that there is a pending action, not a pending prior action. The fact that the unlawful detainer suit was of a later date is no bar to the dismissal of the present action, .... ... plaintiff's action for declaratory relief is improper; this action is meant only for those cases where a contract is desired to be construed prior to its breach because of an impending controversy that the parties thereto may be informed of the rights thereunder. In the case at bar, ... there has already been a breach ... hence the action for a declaratory judgment is no longer proper. xxx xxx xxx There is no longer any need for the action, even if proper because the matter could be threshed out in the unlawful detainer suit that the defendant had instituted in the municipal court. 9 Indeed, otherwise, an action for a declaratory relief could be availed of to, in effect, suspend, during its pendency, the force and operation of the contracts in question, and thereby achieve a compulsory deferment or postponement of the maturity of the obligations therein validly contracted and assumed. Obviously, the Court cannot give the stamp of its approval thereto. 3. The Surety maintains that, pursuant to the terms of its Bonds Nos. 3825 and 4123, the same expired on April 25, and May 26, 1961, respectively, so that it was no longer liable under the Bonds when the "first" installments became due on April 25 and May 26, 1962. Suffice it to say that, not having been pleaded in the Surety's answer or otherwise raised in the lower court' such defense cannot be set up, for the first time, in this appeal. 1 0 Moreover, it, is inconsistent with the cross-claim of the Surety, against the Buyer, for the sum of P10,641.68, representing the premiums and the cost of documentary stamps on said Bonds, for a period of two (2) years from April 25, 1960 and May 30, 1960, which premiums and documentary stamps could not be due if the bonds were not in force during said period of two (2) years. Again, in said bonds, the Buyer, as principal, and the Surety, as such, firmly bound themselves unto the Reparations Commission, in the sum of P174,716.42, pursuant to the contract between the Buyer and the Commission, on condition that if the Buyer "shall well and truly keep, do and perform, each and every, all and singular, the matters and things in the contract set forth and specified to be" by the Buyer "done and performed at the time
and in the manner in said contract specified, and shall pay over, make good and otherwise satisfy the obligations required tinder the contract, then the said bond ... shall be released upon payment of all the sums due" to the Commission, "otherwise, said bond shall ipso facto be forfeited in full in favor of" said Commission. Thus, the intention of the parties was, clearly, to guarantee compliance with the aforementioned obligations. The first of such obligations, in point of time, was the payment by the Buyer of the "first" installments which were to become due on April 25 and May 26, 1962, that is, one year or about a year after the alleged expiration of the Bonds. Were We to accept the theory of the Surety, the result would be that it had never contracted any obligation or assumed any liability in favor of the Commission, in consequence of the execution of said bonds and that, for all intents and purposes, the contracts under consideration were, accordingly, devoid of any guarantee. Such result is manifestly contrary to the intention of the parties. And this explains why the Surety has not set up said defense in its answer. Referring to the stipulation in a bond to the effect that the liability thereunder would expire on the date of maturity of the principal obligation, this Court declared that said stipulation in effect nullified the nature of said bond, and was, therefore "unfair and unreasonable," as well as "a subtle way of making money thru trickery and deception." The situation in the case at bar is even worse, since the Surety contends that its bond expired about a year before the first installments had become due. It may not be amiss to note that the rule of strict construction of surety bonds "does not apply to the engagements of corporate sureties engaged in the business of furnishing bonds for compensation, and who are, furthermore, secured from all possible loss by adequate counterbonds." 1 2 4. The Surety impugns the P300 awarded thereto by way of attorney's fees, upon the ground that the fee agreed upon with the Buyer is "20% of the total amount due." It is well settled, however, that courts of justice have discretion to fix the amount of attorney's fees, 1 3 and We do not feel that such discretion has been abused by His Honor, the trial Judge, considering that the Surety had mainly relied upon the defenses set up by the Buyer, and that the ultimate liability of the Surety is principally dependent upon the amount of the principal obligation that the Buyer may be unable to satisfy. The other assignments of error made by appellants herein are mere corollaries to those already disposed of, and, hence need no further discussion. WHEREFORE, the decision appealed from is hereby affirmed in toto, with costs against appellants herein. Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Castro, Fernando, Teehankee, Barredo and Villamor, JJ., concur. SECURITY BANK AND TRUST COMPANY, Inc. vs RODOLFO M. CUENCA Panganiban, J. October 3, 2003 Extinguishment of Guaranty I. Facts * Creditor: Sccurity Bank and Trust Co.Debtor: Sta. Ines Melale Corp.Surety: Rodolfo Cuenca A.
Sta. Ines is a corporation engaged in logging operations. In 1980, it wasgranted by Security Bank a credit line in the amount of Php 8M. To securepayment, it executed a chattel mortgage over some of its machineries andequipments. And as an additional security, its President and Chairman of theBoard of Directors Rodolfo Cuenca, executed an Indemnity agreement infavor of Security Bank whereby he bound himself jointly and severally withSta. Ines. After Cuenca resigned, Sta. Ines obtained a Php 6M loan. Becauseof its difficulty in making the amortization payments, in 1989 it requestedSecurity Bank a complete restructure of its indebtedness, which wasapproved without prior notice to, or prior consent of Cuenca. Still it wasunable to pay. B. Contention of the Petitioner Security Bank insists that the 1989 Loan Agreement was a mere renewal orextension of the Php 8M original accommodation, that Cuenca waived his right tobe notified of and to give consent to any substitution, renewal, extension, increase,amendment, conversion or revival of the same, and that it was a continuing surety. C. Contention of the Respondent Cuenca argues that the 1989 agreement extinguished the obligation underthe 1980 credit accommodation by novation. II. Issues WON the 1989 Loan Agreement novated the original credit accommodationand Cuenca’s liability under the Indemnity Agreement. III. Ruling The 1989 Loan Agreement extinguished by novation the obligation under the1980 P8 million credit accommodation. It is essential in the law of suretyship thatany agreement between the creditor and the principal debtor that essentiallyvaries the terms of the principal contract without the consent of the surety, willrelease the surety from liability. The 1989 Loan Agreement expressly stipulatedthat its purpose was to liquidate, not to renew or extend, the outstandingindebted ness. Moreover, respondent did not sign or consent to the 1989 LoanAgreement, which had allegedly extended the original P8 million credit facility.
Indeed, the stipulation in the 1989 Loan Agreement providing for the suretyof respondent, without even informing him, smacks of negligence on the part of the bank and bad faith on that of the principal debtor. Since that Loan Agreementconstituted a new indebtedness, the old loan having been already liquidated, thespirit of fair play should have impelled Sta. Ines to ask somebody else to act as asurety for the new loan.
REPUBLIC v PAL-FOX LUMBER Facts: Pal-Fox Lumber Co., Inc. was indebted to the Bureau of Internal Revenue for forest charges and surcharges amounting to P11,851.56, and that the Far Eastern Surety & Insurance Co., Inc. was jointly and severally liable with the lumber company for the payment of said forest charges up to P5,000.00. Republic moved for reconsideration, pointing out that the surety company's correct liability under the appealed decision was P5,000.00 plus legal interest from the filing of the complaint. In other words,
the Republic would want the surety company to pay the legal interest adjudged by the trial court before the case may finally be considered dismissed. Far Eastern's denial of liability for such interest is based on the stipulation in the bond that it was bound to the plaintiff "in the sum of P5,000.00." Issue: W/N Far Eastern should also pay interest? Ruling: Yes. Article 2055, paragraph 2, of the Civil Code of the Philippines is clearly applicable. If it (the guaranty) be simple or indefinite, it shall comprise not only the principal obligation but also all its accessories, including judicial cost Republic of the Philippines SUPREME COURT Manila EN BANC G.R. No. L-47495
August 14, 1941
THE TEXAS COMPANY (PHIL.), INC., petitioner, vs. TOMAS ALONSO, respondent. C. D. Johnston & A. P. Deen for petitioner. Tomas Alonso in his own behalf. LAUREL, J.: On November 5, 1935 Leonor S. Bantug and Tomas Alonso were sued by the Texas Company (P.I.), Inc. in the Court of First Instance of Cebu for the recovery of the sum of P629, unpaid balance of the account of Leonora S. Bantug in connection with the agency contract with the Texas Company for the faithful performance of which Tomas Alonso signed the following: For value received, we jointly and severally do hereby bind ourselves and each of us, in solidum, with Leonor S. Bantug the agent named in the within and foregoing agreement, for full and complete performance of same hereby waiving notice of nonperformance by or demand upon said agent, and the consent to any and all extensions of time for performance. Liability under this undertaking, however, shall not exceed the sum of P2,000, Philippine currency. Witness the hand and seal of the undersigned affixed in the presence of two witness, this 12th day of August, 1929. Leonor S. Bantug was declared in default as a result of her failure to appear or answer, but Tomas Alonso filed an answer setting up a general denial and the special defenses that Leonor S. Bantug made him believe that he was merely a co-security of one Vicente Palanca and he was never notified of the acceptance of his bond by the Texas Company. After trial, the Court of First Instance of Cebu rendered judgment on July 10, 1973, which was amended on February 1, 1938, sentencing Leonor S. Bantug and Tomas Alonso to pay jointly and severally to the Texas Company the sum of P629, with interest at the rate of six per cent (6%) from the date of filing of the complaint, and with proportional costs. Upon appeal by Tomas Alonso, the Court of Appeals modified the judgment of the Court of First Instance of Cebu in the sense that Leonor S. Bantug was held solely liable for the payment of the aforesaid sum of P629 to the Texas Company, with the consequent absolution of Tomas Alonso. This case is now before us on petition for review by certiorari of the decision of the
Court of Appeals. It is contended by the petitioner that the Court of Appeals erred in holding that there was merely an offer of guaranty on the part of the respondent, Tomas Alonso, and that the latter cannot be held liable thereunder because he was never notified by the Texas Company of its acceptance. The Court of Appeals has placed reliance upon our decision in National Bank vs. Garcia (47 Phil., 662), while the petitioner invokes the case of National Bank vs. Escueta, (50 Phil., 991). In the first case, it was held that there was merely an offer to give bond and, as there was no acceptance of the offer, this court refused to give effect to the bond. In the second case, the sureties were held liable under their surety agreement which was found to have been accepted by the creditor, and it was therein ruled that an acceptance need not always be express or in writing. For the purpose of this decision, it is not indispensable for us to invoke one or the other case above cited. The Court of Appeals found as a fact, and this is conclusive in this instance, that the bond in question was executed at the request of the petitioner by virtue of the following clause of the agency contract: Additional Security. — The Agent shall whenever requested by the Company in addition to the guaranty herewith provided, furnish further guaranty or bond, conditioned upon the Agent's faithful performance of this contract, in such individuals of firms as joint and several sureties as shall be satisfactory to the Company. In view of the foregoing clause which should be the law between the parties, it is obvious that, before a bond is accepted by the petitioner, it has to be in such form and amount and with such sureties as shall be satisfactory hereto; in other words, the bond is subject to petitioner's approval. The logical implication arising from this requirement is that, if the petitioner is satisfied with any such bond, notice of its acceptance or approval should necessarily be given to the property party in interest, namely, the surety or guarantor. In this connection, we are likewise bound by the finding of the Court of Appeals that there is no evidence in this case tending to show that the respondent, Tomas Alonso, ever had knowledge of any act on the part of petitioner amounting to an implied acceptance, so as to justify the application of our decision in National Bank vs. Escueta (50 Phil., 991). While unnecessary to this decision, we choose to add a few words explanatory of the rule regarding the necessity of acceptance in case of bonds. Where there is merely an offer of, or proposition for, a guaranty, or merely a conditional guaranty in the sense that it requires action by the creditor before the obligation becomes fixed, it does not become a binding obligation until it is accepted and, unless there is a waiver of notice of such acceptance is given to, or acquired by, the guarantor, or until he has notice or knowledge that the creditor has performed the conditions and intends to act upon the guaranty. (National Bank vs. Garcia, 47 Phil., 662; C. J., sec. 21, p. 901; 24 Am. Jur., sec. 37, p. 899.) The acceptance need not necessarily be express or in writing, but may be indicated by acts amounting to acceptance. (National Bank vs. Escueta, 50 Phil., 991.) Where, upon the other hand, the transaction is not merely an offer of guaranty but amounts to direct or unconditional promise of guaranty, unless notice of acceptance is made a condition of the guaranty, all that is necessary to make the promise binding is that the promise should act upon it, and notice of acceptance is not necessary (28 C. J., sec. 25, p. 904; 24 Am. Jur., sec 37, p. 899), the reason being that the contract of guaranty is unilateral (Visayan Surety and Insurance Corporation vs. Laperal, G.R. No. 46515, promulgated June 14, 1940). The decision appealed from will be, as the same is hereby, affirmed, with costs of this instance against the petitioner. So ordered. Avanceña, C.J., Abad Santos, and Diaz, JJ., concur.
Separate Opinions OZAETA, J., with whom concur MORAN and HORRILENO, JJ., dissenting: We concede that the statement of fact made by the Court of Appeals is conclusive upon this Court in a petition for review on certiorari. But when it appears from the decision of the Court of Appeals itself that such a statement is but a conclusion drawn by that Court from the facts found by it, and that such conclusion is patently erroneous, we hold that this Court should disregard it. Of the nature, we believe, is the following statement made by the Court of Appeals in the course of its ratiocination: La fianza prestada por el apelante se otorgo a requerimiento de la demandante en virtud de la siguiente clausula (15) del contrato de agencia Exhibit A, que dice asi: "ADDITIONAL SECURITY. — The Agent shall, whenever requested by the Company in addition to the guaranty herewith provided, furnish further guaranty or bond, conditioned upon the agent's faithful performance of this contract, in such form and amount and with such bank as surety or with such individuals or firms as joint and several sureties as shall be satisfactory to the Company." (Pages 8-9, appendix to petitioner's brief.) It is important to note that the above-quoted statement forms part of the court's ratio decidendi and not of its findings of fact. Its findings of fact appear in the first three paragraphs of its decision, which we quote as follows: El 12 de agosto de 1929 la demandante y el demandado Leonor S. Bantug celebraron un contrato, (Exhibit A) por virtud del cual aquella nombro a este Agente vendedor de sus productos petroliferos en el Municipio de Maasin, Provincia de Leyte, mediante pago de una comision sobre el valor de todos los efectos que llegase a vender, obligandose por su parte Leonor S. Bantug como Agente, a ingresar y pagar a la compañia el importe neto de las ventas realizadas, despues de deducir su comision y los demas gastos de agencia que se estipularon en el referido contrato. En el mismo documento Exhibit A, el otro demandado Tomas Alonso suscribio una fianza, obligandose mancomunada y solidariamente con el Agente Leonor S. Bantug a cumplir fielmente las condiciones del contrato de Agencia hasta la suma de P2,000. El estado de cuentas de la agencia que se presento en el juicio como Exhibit B, demuestra que la ultima liquidacion arroja un balance contra el Agente Leonor S. Bantug por la cantidad de P629; y como esta suma no ha sido pagado ni por Leonor S. Bantug ni por su fiador Tomas Alonso, a pesar de los requerimientos que se les ha hecho, de ahi que la demandante, el 18 de noviembre de 1938, dedujo accion en el Juzgado de Primera Instancia de Cebu para el cobro de dicha suma y sus intereses legales desde la presentacion de la demanda. (Pages 1-3, appendix to petitioner's brief.) Now if, as found by the Court of Appeals itself, the agency contract between the petitioner and Leonor S. Bantug was Exhibit A, dated August 12, 1929, and that very same document
was on the same date signed by the respondent Tomas Alonso as bondsman or surety of the agent, how could the bond in question, which formed part of Exhibit A, be held to have been executed by virtue of clause 15 of said document providing for additional security? Indeed, that very clause says that the agent shall furnish further guaranty or bond "in addition to the guaranty herewith provided," whenever requested by the company. The "guaranty herewith provided" was obviously the bond or guaranty given by the respondent on the same date and in the same document. It appears clear to us, therefore, that the bond Exhibit A, being the original guaranty, could not be the "additional guaranty" mentioned in clause 15 of said Exhibit A. Moreover, it does not appear that any bond or guaranty, other than that of the respondent, to secure the performance of the agency contract in question was in force on and after August 12, 1929. Another illogical conclusion drawn by the Court of Appeals is this: "Por el requerimiento que contiene la clausula preinserta, de que el Agente puede prestar una garantia adicional a satisfaccion de la compañia, debe entenderse que la fianza prestada por el apelante era una oferta o proposicion de garantia, cuya efectividad dependia de la acceptacion de la compañia, comunicada al garante." (Page 9, appendix to petitioner's brief.) . If, as previously found by the Court of Appeals, the herein respondent executed the bond in question "a requerimiento de la demandante," how could said bond be understood as an "offer or proposition of guaranty" from Alonso to the plaintiff? . Yet the judgment of the Court of Appeals, as well as the affirming decision of the majority of this court, is based on the conclusion that the bond sued upon was an additional guaranty; that it constituted a mere offer of guaranty and, therefore, had to be accepted by the petitioner; and that, not having been accepted, it is inefficacious. We have shown that such conclusion is unwarranted. Our vote is to reverse the decision of the Court of Appeals and to affirm that of Judge Felix Martinez of the Court of First Instance of Cebu, who tried this case. ESTATE of K.H. Hemady v Luzon Surety Luzon Surety filed a claim against the estate of K.H. Hemady based on indemnity agreements (counterbonds) subscribed by distinct principals and by the deceased K.H. Hemady as surety (solidary guarantor). As a contingent claim, Luzon Surety prayed for the allowance of the value of the indemnity agreements it had executed. The lower court dismissed the claim of Luzon Surety on the ground that “whatever losses may occur after Hemady’s death, are not chargeable to his estate, because upon his death he ceased to be a guarantor.” ISSUES: What obligations are transmissible upon the death of the decedent? Are contingent claims chargeable against the estate? HELD: Under the present Civil Code (Article 1311), the rule is that “Contracts take effect only as between the parties, their assigns and heirs, except in case where the rights and
obligations arising from the contract are not transmissible by their nature, or by stipulation or by provision of law.” While in our successional system the responsibility of the heirs for the debts of their decedent cannot exceed the value of the inheritance they receive from him, the principle remains intact that these heirs succeed not only to the rights of the deceased but also to his obligations. Articles 774 and 776 of the New Civil Code expressly so provide, thereby confirming Article 1311. In Mojica v. Fernandez, the Supreme Court ruled — “Under the Civil Code the heirs, by virtue of the rights of succession are subrogated to all the rights and obligations of the deceased (Article 661) and can not be regarded as third parties with respect to a contract to which the deceased was a party, touching the estate of the deceased x x x which comes in to their hands by right of inheritance; they take such property subject to all the obligations resting thereon in the hands of him from whom they derive their rights.” The third exception to the transmissibility of obligations under Article 1311 exists when they are ‘not transmissible by operation of law.’ The provision makes reference to those cases where the law expresses that the rights or obligations are extinguished by death, as is the case in legal support, parental authority, usufruct, contracts for a piece of work, partnership and agency. By contrast, the articles of the Civil Code that regulate guaranty or suretyship contain no provision that the guaranty is extinguished upon the death of the guarantor or the surety. The contracts of suretyship in favor of Luzon Surety Co. not being rendered intransmissible due to the nature of the undertaking, nor by stipulations of the contracts themselves, nor by provision of law, his eventual liability therefrom necessarily passed upon his death to his heirs. The contracts, therefore, give rise to contingent claims provable against his estate. A contingent liability of a deceased person is part and parcel of the mass of obligations that must be paid if and when the contingent liability is converted into a real liability. Therefore, the settlement or final liquidation of the estate must be deferred until such time as the bonded indebtedness is paid.
