International Finance Corporation v.

Imperial Textile Mills, Inc

Facts: On Dec. 17, 1974, Philippine Polyamide Industrial Corporation (PPIC) made a
loan agreement with International Finance Corporation (IFC) in the amount of
$7,000,000.00 payable in 16 semi-annual installments beginning June 1, 1977 to Dec. 1,
1984 with an interest rate of 10% per annum. On the same date, a “Gaurantee
Agreement” was executed with Imperial Textile Mills, Inc.(ITM), Grand Textile
Manufacturing Corp (Grandtex) and IFC as parties thereto. ITM and Grandtex agreed to
guarantee PPIC’s obligations under the loan agreement. PPIC paid the first 3 installments
and asked for a rescheduling of the next installments but despite the reschedule, PPIC
defaulted. On April 1, 1985, IFC served a written notice of default to PPIC demanding
the latter to pay the outstanding principal and all the accrued interests. Despite the notice,
PPIC failed to pay.
IFC then applied for the extrajudicial foreclosure of mortgages on the real estate,
properties, etc. owned by PPIC located at Calamba, Laguna. The sheriff then issued a
notice of extrajudicial sale and IFC and DBP were the only bidders. IFC’s bid was
P99,269,100 which was equivalent to $5,250,000. The outstanding loan however
amounted to $8,083,967 thus leaving a balance of $2,833,967. PPIC failed to pay the
remaining balance. Consequently, IFC demanded ITM and Grandtex, as guarantors of
PPIC, to pay the outstanding balance but no payment was made. On May 20, 1988, IFC
filed a complaint against PPIC and ITM for the payment of the outstanding balance plus
interests and attorney’s fees. The trial court held PPIC liable for the payment of the
outstanding loan plus interest but the trial court relieved ITM of its obligation as
guarantor, dismissing IFC’s complaint against ITM. The CA reversed the decision of the
trial court in so far as the latter exonerated ITM from any obligation to IFC. Accdg. to the
CA, ITM bound itself under the “Guarantee Agreement” to pay PPIC’s obligation upon
default. ITM’s liability as guarantor would arise only if and when PPIC could not pay and
since PPIC’s inability to comply with the obligation is not sufficiently established, ITM
could not be made to assume the liability. CA denied reconsideration, hence the petition.
Issue: Whether ITM is a surety, and thus solidarily liable with PPIC for the payment of
the loan.
Held: While referring to ITM as a guarantor, the Agreement specifically stated that the
corporation was “jointly and severally” liable. To put emphasis on the nature of that
liability, the Contract further stated that ITM was a primary obligor, not a mere surety.
Those stipulations meant only one thing: that at bottom, and to all legal intents and
purposes, it was a surety. Therefore, ITM bound itself to be solidarily liable with PPIC
for the latter’s obligations under the Loan Agreement with IFC. ITM thereby brought
itself to the level of PPIC and could not be deemed merely secondarily liable. ITM’s
liability commenced only when it guaranteed PPIC’s obligation. It became a surety when
it bound itself solidarily with the principal obligor. Thus, Art. 2047 applies, “by guaranty,
a person, called the guarantor binds himself to the creditor to fulfill the obligation of the
principal in case the latter should fail to do so.xxx” and Art. 1216, “the creditor may
proceed against any one of the solidary debtors….” Contracts have the force of law
between the parties who are free to stipulate any matter not contrary to law, morals, etc.
so the Court cannot give a different meaning to the plain language of the Guarantee
Agreement. Wherefore, the petition was granted and the assailed decision and resolution
modified in the sense that ITM is declared a surety to PPIC and ITM is ordered to pay
IFC the same amounts adjudged against PPIC in the assailed decision.